url,title,description,date,text,author
https://www.bis.org/review/r250107c.htm,Lisa D Cook: An assessment of the economy and financial stability,"Speech by Ms Lisa D Cook, Member of the Board of Governors of the Federal Reserve System, at the Seventh Conference on Law and Macroeconomics, University of Michigan Law School, Ann Arbor, Michigan, 6 January 2025.",2025-01-06 00:00:00,"For release on delivery 9:15 a.m. EST January 6, 2025

An Assessment of the Economy and Financial Stability

Remarks by

Lisa D. Cook

Member

Board of Governors of the Federal Reserve System

at the

Seventh Conference on Law and Macroeconomics, University of Michigan Law School

Ann Arbor, Michigan

January 6, 2025

Thank you, Dean Logue.  It is wonderful to be back in my adopted home state of Michigan and on the University of Michigan's beautiful campus.  The fact that you got this Georgia native to visit in the first week of January shows you just how much I love it here.  But, seriously, the program committee for the University of Michigan Law School's Seventh Conference on Law and Macroeconomics has put together an impressive program.  I am grateful for the opportunity to present my views and to learn from all of you. 1

Today, I would like to speak about the Federal Reserve Board's work on financial stability.  It is a topic that holds special importance to me, because I am the chair of the Board of Governors' Committee on Financial Stability.  But before speaking on financial stability, given that it is the beginning of a new year, I thought it would be helpful to share my economic outlook and my views on appropriate monetary policy.

Overall, the U.S. economy starts the year in good shape.  Economic growth was quite strong in 2024.  Inflation has fallen considerably from its peak two and a half years ago, though it remains somewhat above the Fed's 2 percent objective.  The labor market is solid, with the unemployment rate still relatively low and Americans, on average, bringing home paychecks that are growing faster than inflation.

My focus, and that of my colleagues on the Federal Open Market Committee (FOMC), is on our dual-mandate goals of price stability and maximum employment. This year, I will continue to work on calibrating monetary policy to ensure inflation returns sustainably to our 2 percent target while maintaining a solid labor market.  I will also carefully monitor financial stability risks and vulnerabilities and work with my

1 The views expressed here are my own and not necessarily those of my colleagues on the Board of Governors or the Federal Open Market Committee

colleagues at the Fed and other agencies to reduce the likelihood that financial stability problems will disrupt the economy.

## Economic Activity

As I stated, the economy grew at a strong pace recently.  Gross domestic product expanded at a 3.1 percent annual rate in the third quarter of last year, and many forecasters estimate growth of about 2.5 percent in the fourth quarter.  Those readings indicate that 2024 growth was just below the pace in 2023.  That is notable, because many forecasters were anticipating a much more significant slowdown at this time last year.

That raises an important question:  How has the economy maintained this pace of growth in recent years?  For that, I look mainly to the supply side of the economy.  Labor supply has been boosted by a rebound in labor force participation, especially for workers aged 25 to 54.  Since February 2023, labor force participation for these workers equaled or exceeded its peak just before the pandemic of 83.1 percent and was 83.5 percent in November.  Another contribution to labor supply came from the post-pandemic increase in immigration.  Faster productivity growth also has supported economic growth.  Labor productivity rose at an annual rate of 1.8 percent since the end of 2019, higher than the average 1.5 percent growth over the previous 12 years.

Although the rapid growth in labor supply is unlikely to persist in coming years, I see several reasons to expect that productivity growth will remain strong. 2 The U.S. experienced a surge in new business formation since the start of the pandemic.  These

2 See Lisa D. Cook (2024), 'Entrepreneurs, Innovation, and Participation,' speech delivered at the 2024 Women for Women Summit, Charleston, South Carolina, October 10,

https://www.federalreserve.gov/newsevents/speech/cook20241010a.htm.

newer firms are more likely to innovate and adopt new technologies and business processes, thus boosting productivity.  Another factor likely to boost productivity growth is the high rate of investment among U.S. firms in artificial intelligence and other new technologies.  Generative AI, in particular, may significantly increase the arrival rate of ideas, which should support productivity and growth.

On the demand side, American households' robust spending has driven the economy, and that has continued in recent months.  Retail sales outside of gasoline stations rose 4.4 percent in November from a year earlier, an acceleration from the previous month's reading.  While the unusually large savings balances built up during the pandemic have shrunk for many households, strong labor income growth continues to underpin consumer spending.  That income growth is due both to solid job growth and to rising inflation-adjusted wages.

## Inflation

Price increases have cooled notably over the past two and a half years, but, despite this significant progress on disinflation, there is still further to go before reaching our inflation target of 2 percent.

Annual inflation, as measured by the personal consumption expenditures (PCE) price index, has eased to 2.4 percent in November 2024, the latest available reading, from a peak of 7.2 percent in June 2022.  When excluding often volatile food and energy costs, core PCE was down to 2.8 percent in November from 5.6 percent in September 2022. Inflation readings can be volatile month to month, and the path of disinflation has been bumpy and may continue to be.  Monthly readings earlier in the fall were slightly

stronger than expected.  However, November's monthly change was lower than expected and consistent with a 2 percent inflation trend.

Over the past year, core goods prices decelerated, reflecting that supply and demand have come into better alignment.  Meanwhile, the more modest wage growth I mentioned has contributed to downward pressure on services inflation, outside of housing.  Rent growth and other measures of housing inflation remain elevated but stepped down in the November report.  I expect more progress in reducing housing services inflation this year as the earlier slowing in growth of rents charged to new tenants feeds through into the growth of average rents.  I continue to see inflation as gradually-if unevenly-returning over time to our goal of 2 percent in a sustainable manner.

## Labor Market

Turning to the labor market, I see it as solid, though as having cooled over the past year.  The U.S. labor market has come into better balance after a period of being very tight, with high turnover, during the initial recovery from the pandemic.

The unemployment rate was 4.2 percent in November.  While the latest reading is still below historical averages, it has risen from the multidecade low of 3.4 percent in April 2023. New applications for unemployment benefits and other measures of layoffs also remain low, but the rate of hiring has slowed to below the pace recorded in the years before the pandemic.  The number of open jobs has essentially come back in line with the number of unemployed Americans seeking work.  The ratio of job vacancies to unemployed workers has fallen to 1.1 from a peak of 2.0 in 2022.  I will continue to

monitor developments in the labor market closely, including continuing claims, which have risen in recent months.

After a period of elevated job-switching early in the recovery, workers are voluntarily leaving their jobs at lower rates.  And the gap between wage growth for job switchers and job stayers has largely gone away.  Thus, I do not see the labor market as a source of significant inflationary pressure.

## Monetary Policy

Thinking of how the economy has evolved over the past year, at the start of 2024 the federal funds rate was at its highest level in more than two decades, providing notable restraint.  Over the course of last year, inflation made gradual progress toward our objective, while the labor market gradually cooled.  Thus, in September, I voted along with my FOMC colleagues to reduce the target range for the federal funds rate half a point after maintaining it at a peak of 5-1/4 to 5-1/2 percent for more than a year, and we subsequently approved two more quarter-point cuts in November and December.

I continue to view the risks to achieving the two sides of the Federal Reserve's dual mandate of price stability and maximum employment as being roughly in balance. Over time, I still think it will likely be appropriate to move the policy rate toward a more neutral stance.  However, the 100 basis points of rate cuts since September have notably reduced the restrictiveness of monetary policy.  All along, I envisioned moving more quickly in the early stages of our easing campaign and then easing more gradually as the policy rate came closer to neutral.  In addition, since September, the labor market has been somewhat more resilient, while inflation has been stickier than I assumed at that time.  Thus, I think we can afford to proceed more cautiously with further cuts.

Policy is not on a preset course.  The magnitude and timing of future changes to policy rates will depend on incoming data, the evolving outlook, and the balance of risks. My policy decisions will be guided by our dual mandate of stable prices and maximum employment, and I know delivering on those goals will produce the best economic outcomes for all Americans.

## Overview of Financial Stability

Now, I would like to move from a discussion of monetary policy to a description of the Board's work on financial stability.  It is a core part of the Fed's mission, because a stable financial system provides financing and services to allow households, communities, and businesses to invest, grow, and participate in a well-functioning economy.

To begin that discussion, I will start by saying that I assess the financial system as being sound and resilient.  I will share the evidence I believe supports this view and raise a few potential vulnerabilities that will require close monitoring.

Since November 2018, the Fed has published the semiannual Financial Stability Report, which provides assessments of key vulnerabilities, with an emphasis on four broad categories:  household and business borrowing, financial-sector leverage, funding risks, and asset valuations. 3 It also looks at some potential shocks.  An important distinction exists between shocks and vulnerabilities.  Shocks are adverse events, such as the pandemic, that by their nature are difficult to predict.  Vulnerabilities-aspects of the financial system that would exacerbate stress-tend to build up over time and can be

3 The Financial Stability Report is available on the Board's website at

https://www.federalreserve.gov/publications/financial-stability-report.htm.

identified, assessed, and monitored.  Policies to build resilience in the financial system are appropriately targeted at reducing vulnerabilities.

I am sure many in the room have reviewed the most recent report released in November, but I will briefly summarize some key findings.  Households and businesses appear to be in good shape and can service their debt, which is at manageable levels overall.  In terms of financial-sector leverage, high levels of capital and liquidity in the banking system are a key source of resilience.  Funding risks in the banking system have declined somewhat:  Smaller banks have replaced some of their uninsured deposit funding with brokered and reciprocal deposits, which are less prone to runs but are still less stable than core bank deposits.  Some nonbank financial intermediaries (NBFIs), including some large hedge funds, do have high leverage.  NBFIs may also be exposed to liquidity stress that could be brought on by, among other things, bouts of market volatility.  Valuations are elevated in a number of asset classes, including equity and corporate debt markets, where estimated risk premia are near the bottom of their historical distributions, suggesting that markets may be priced to perfection and, therefore, susceptible to large declines, which could result from bad economic news or a change in investor sentiment.  Prices of some commercial properties have fallen substantially since 2022, particularly office buildings.  I continue to be attentive to developments here.

## Identifying Areas to Monitor

I would like to use the remainder of my time today to talk about a few areas that I am paying close attention to, specifically private credit, stablecoins, cyber events, and AI. The rapid growth of novel products, business models, or technologies can lead to a

buildup of familiar vulnerabilities by, for example, promoting excessive leverage or increasing interconnectedness.  They can also bring novel shocks.  But I want to stress that experience has also taught us that financial and technological innovations are hallmarks of a healthy financial system, and my remarks today should be viewed in that context.

Let me start with private credit, which generally refers to direct loans made to businesses, mostly middle-market firms, by nonbank entities such as private debt funds and business development companies.  Private credit has grown quite rapidly in the U.S., from around $500 billion in 2016 to more than $1.5 trillion at the end of 2023, making it comparable in size to both the high-yield bond and leveraged loan markets. 4 Private credit funds appear well positioned to hold the riskiest parts of corporate lending.  These intermediaries generally use little leverage and are organized as closed-end funds, which means that investors-including pension funds, insurers, sovereign wealth funds, and certain retail investors-cannot redeem their fund shares, which limits the potential for runs.

At the same time, it is important to monitor and emphasize proper risk management of rapidly growing products or business models, especially those that have not been tested through a full credit cycle. For instance, because of its role in credit creation, private credit has become a more macro-relevant sector that can transmit shocks

4 See International Monetary Fund (2024), Global Financial Stability Report:  The Last Mile:  Financial Vulnerabilities and Risks (Washington:  IMF, April),

https://www.imf.org/en/Publications/GFSR/Issues/2024/04/16/global-financial-stability-report-april-2024.

through the real economy in the same way as shocks to other material sources of nonfinancial credit.

We also need to look at private credit in the context of the overall private finance ecosystem.  Opacity and complexity can obscure buildups of operating leverage when borrowing by multiple entities in an intermediation chain is not apparent.  Vulnerabilities due to this stacking of leverage may be exacerbated by interconnections within intermediation chains.  Those could include overlapping management of private credit and private equity, private credit being provided to businesses sponsored by private equity, and unobserved provision of leverage to private credit funds by other financial intermediaries.  Moreover, few private credit providers have experienced a complete credit cycle, which makes it difficult to predict how the industry might respond to a negative shock.

I will now move to a discussion of stablecoins, which are digital assets that seek to maintain a stable value relative to a reference asset such as a national currency.  They may also be accepted in different parts of the payment system.  With assets under management of around $170 billion, stablecoins have a relatively small footprint in the U.S. 5 They are not widely used as a cash-management vehicle or for transactions for real economic activity but are generally used for digital asset investments.  Stablecoins lack a comprehensive federal regulatory framework, and many U.S. dollar-denominated

5 See figure 4.5 in Board of Governors of the Federal Reserve System (2024), Financial Stability Report (Washington:  Board of Governors, November), p. 41,

https://www.federalreserve.gov/publications/files/financial-stability-report-20241122.pdf.

stablecoins operate abroad.  Stablecoins could scale quickly, particularly if the stablecoin is supported by access to an existing customer base.

The fact that stablecoins are pegged to a reference asset makes them structurally vulnerable to runs.  If a run on a large stablecoin were to occur, liquidation of the assets backing the stablecoin could be disruptive, especially if those assets were linked to other funding markets, like commercial paper or certificates of deposit.  Some stablecoins have restrictions on redemptions, which can help reduce vulnerabilities, assuming that investors alter their expectations to reflect such restrictions.  Questions have emerged about the role of stablecoins in intermediation chains, including the use of leverage by stablecoin investors and the use of stablecoins to obtain leverage-for example, by serving as loan collateral.  I will continue to monitor developments in these areas.

Now, I would like to move to cyberattacks and similar events-such as hardware or software failures-which are becoming more common.  The number of cyberattacks on financial institutions and insurers more than doubled from 2014 and 2015 to 2020, and more than doubled again from 2020 to 2022 and 2023. 6 To be affected by a cyberattack, a financial institution need not be the direct target of a cyber event.  In fact, the target of the cyberattack does not itself need to be a financial institution to have the potential to impose business disruptions and losses on the financial system.

As an example, a recent study analyzed a cyber event at a technology service provider that ended up preventing its bank customers from sending payments to other

6 See Center for International and Security Studies at Maryland, 'Cyber Events Database Home,' webpage, https://cissm.umd.edu/research-impact/publications/cyber-events-database-home.

banks. 7 The inability to make payments caused reserves at the technology provider's bank clients to increase, but reserves declined at the banks not receiving the payments they were owed.  Many of these banks managed their reserves by borrowing in the fed funds market or requesting discount window loans that were granted by the Federal Reserve Banks.  This incident did not become systemic for a few reasons.  First, the technology service provider was not a dominant player in the market.  Second, the Federal Reserve extended hours for banks to send payments to each other.  And, third, liquidity buffers and reliable external liquidity sources were available for banks that experienced material declines in reserves.  Nonetheless, the incident underscores how operational dependencies with nonfinancial service providers or between financial institutions can be a source of stress to the broader financial system.

Two other recent cyberattacks against private entities bring home this point.  A 2022 ransomware attack on a third-party service provider in derivatives markets caused material business disruptions at their clients, which included more than one-fourth of the registered futures commission merchants in the U.S.  These clients had to manually perform trade execution and matching, settlement and clearing, margin calculations, and reporting functions.  The delays disrupted the business operations of their clients and spilled over to operations at some derivatives exchanges.  A 2023 event at an institution involved in clearing in the U.S. Treasury and Treasury repo markets delayed payments to its customers and counterparties, disrupted clearing, and caused a significant jump in failed trades.

7 See Antonis Kotidis and Stacey L. Schreft (2022), 'Cyberattacks and Financial Stability:  Evidence from a Natural Experiment,' Finance and Economics Discussion Series 2022-025 (Washington:  Board of Governors of the Federal Reserve System, May), https://doi.org/10.17016/FEDS.2022.025.

The fact that these events did not do more damage to the system does not reduce our efforts to make sure we have a fuller understanding of how attacks can affect the financial system, and we will continue to invest in data and expand our expertise.  The Fed's role in promoting resilience to cyber vulnerabilities is focused primarily on ensuring the institutions we supervise effectively manage the cyber risks they face.  We also work with our partners across the government, including the U.S. Department of the Treasury, and with the private sector to understand and address cyber risks.

The final area I will discuss is AI, specifically generative artificial intelligence, or GenAI.  In previous speeches, I have discussed the potential benefits of GenAI for economic outcomes at both the individual and macroeconomic levels, and I have also enumerated some risks that will need to be managed. 8 AI use cases and its adoption in finance have jumped with advances in data management, deep learning, computing power, and experience with previous generations of AI models.  As I mentioned earlier, the use of technological innovation in finance is nothing new.  As an example, I think about the progression of transitions at banks, going from physically processing checks to electronic payments processing and direct deposit, to online banking, to mobile banking and mobile check clearing, and now to digital wallets.  Similar examples exist in finance. So when we think about GenAI, it is important to orient ourselves in a way that is both

8 See Lisa D. Cook (2024), 'Artificial Intelligence, Big Data, and the Path Ahead for Productivity,' speech delivered at 'Technology-Enabled Disruption:  Implications of AI, Big Data, and Remote Work,' a conference organized by the Federal Reserve Banks of Atlanta, Boston, and Richmond, Atlanta, Georgia, October 1, https://www.federalreserve.gov/newsevents/speech/cook20241001a.htm; Lisa D. Cook (2024),

'What Will Artificial Intelligence Mean for America's Workers?' speech delivered at The Ohio State

University, Columbus, Ohio, September 26, https://www.federalreserve.gov/newsevents/speech/cook20240926a.htm; and Lisa D. Cook (2023),

'Generative AI, Productivity, the Labor Market, and Choice Behavior,' speech delivered at the National Bureau of Economic Research economics of Artificial Intelligence Conference, Fall 2023, Toronto, Canada, September 22, https://www.federalreserve.gov/newsevents/speech/cook20230922a.htm.

curious and open to the significant benefits it can bring to the financial system while staying cognizant of the need to identify and manage various risks.

The risks I will mention today are grounded in the same vulnerabilities I have been discussing from the outset.  While GenAI may trigger vulnerabilities in novel ways, the vulnerabilities themselves are not new.  As I mentioned earlier, dependencies and interconnections within and outside of the financial system are a prime factor that can transmit and amplify shocks, including through the use of AI in decision making.

At a high level, concentrations relating to the use of specific pre-trained models and accompanying data, third-party service providers, and business strategies can push AIs toward the same outcome, and that can be a source of systemic risk as AIs become more widely used.  For example, GenAI can be a powerful tool for executing different trading strategies, including momentum trading, and could generate or exacerbate the same dynamics seen during the flash crash of 2010 and similar crashes that occurred before recent advances in GenAI.

Errors or biases in AI models or unrepresentative data sets can also induce correlated behaviors that push financial markets into unstable territory.  To put it another way, what happens when one or more of the models gets it wrong if everyone relies on just a couple of models?  And 'getting it wrong' might simply mean relying on historical data to analyze a situation where there are no analogues in the historical record, such as during the early days of the COVID-19 pandemic.  Relatedly, one might question if historical evidence is valid, because the data used by AIs to analyze various market strategies, for example, were not generated by the current version of the AIs. 9

9 See Jon Danielsson, Robert Macrae, and Andreas Uthemann (2022), 'Artificial Intelligence and Systemic Risk,' Journal of Banking &amp; Finance, vol. 140 (July), article 106290.

## Conclusion

Let me conclude by reiterating that technological innovation and resilience are both attributes of a healthy financial system.  I will, of course, remain vigilant with respect to vulnerabilities that appear to be evolving as well as emerging risks, but I see a system that is sound, resilient, and able to support the needs of households, communities, and businesses.  The good position of the financial system is consistent with a broader economy that is strong, with a solid labor market and moderating inflation.

Thank you for your indulgence and thanks, again, to Dean Logue and the University of Michigan Law School for hosting this conference.  I look forward to our discussion.",Lisa D Cook
https://www.bis.org/review/r250107d.htm,Chang Yong Rhee: New Year Speech,"New Year's speech by Mr Chang Yong Rhee, Governor of the Bank of Korea, at the Bank of Korea, Seoul, 2 January 2025.",2025-01-02 00:00:00,"## Chang Yong Rhee: New Year Speech

New Year's speech by Mr Chang Yong Rhee, Governor of the Bank of Korea, at the Bank of Korea, Seoul, 2 January 2025.

* * *

Ladies and gentlemen,

Before delivering my New Year's speech, I would first like to express my deepest condolences and sympathy to the victims and their families affected by the tragic plane crash.

Today marks the beginning of our first day of work in 2025. I had hoped to greet you with a message of hope and a bright future, but recent events have put a damper on that. I now stand before you with a very heavy heart due to the recent political upheavals and the tragic incident. Amid these circumstances, I would be grateful if you could listen to my speech with an understanding of the difficulties.

My dear colleagues at the Bank of Korea,

Today, we welcome the new year with renewed determination. Let me begin by expressing my heartfelt gratitude to all of you for your best efforts at fulfilling your duties in your respective roles despite challenging circumstances over the past year. I would also like to extend my appreciation to all the members of the Monetary Policy Board for their dedication to the conduct of monetary policy. I also thank your families for their unwavering support for your hard work here.

As we embark on the Year of the Blue Snake, a symbol of wisdom and transformation, I wish all of you will achieve your aspirations and build a healthy and happy home.

Last year, the Bank of Korea concluded its fight against high inflation and shifted away from a prolonged period of tight monetary policy stance, with the Base Rate cuts starting from October. As consumer price inflation, which peaked at 6.3% in July 2022, has stabilized below 2% since September 2024, price stability became evident. However, there was no time to rest as new challenges emerged, including downside risks to the growth and increased exchange rate volatility. The growth contribution of exports weakened due to intensifying competition in key export items, and concerns over the policy direction of the new U.S. administration following the presidential election led to a continued strengthening of the U.S. dollar, increasing exchange rate volatility. In December, the martial law crisis added political unrest on top of this situation, causing the exchange rate to rise significantly again and dampening economic sentiment. Although the government and the Bank of Korea are responding with aggressive market stabilization measures, escalating political conflicts and concerns about a leadership vacuum in the state governance are further intensifying instability in the financial and foreign exchange markets.

This year, the conditions surrounding our economy are expected to be more challenging than ever. Externally, the implementation of the new US administration's protectionist trade policies could make exports more difficult as global trade contracts.

The continued economic boom in the United States may lead to a slower-than-expected rate cut by the Federal Reserve, potentially prolonging the volatility in exchange rates for some time. Additionally, global economic conditions, such as in China and Europe, are not favorable.

The domestic situation is even more serious. While household debt trends have stabilized due to the strengthening of macroprudential policies, continued rate cuts could develop into a risk factor. Thus, constant monitoring with vigilance is required. If uncertainty persists due to political developments, this may intensify the negative impact on the economy, overlapping with already challenging external conditions.

Given the unprecedented rise in political and economic uncertainties, monetary policy needs to be managed with flexibility and agility in response to changing circumstances. We expect to see more trade-offs between policy variables such as inflation, growth, the exchange rate, and household debt. Therefore, the Bank of Korea will continue to flexibly determine the pace of rate cuts in the future while closely examining the development of internal and external risk factors and the resulting changes in economic movements based on incoming data.

However, in the current situation, it is hard to stabilize the Korean economy by monetary policy alone. Recently, the international attention shifted beyond the turmoil in the financial and foreign exchange markets to whether the nation's control tower of governance can regain stability. It is of the utmost importance that the leadership in governance remains stable, as a prolonged government vacuum in the midst of political conflict can have a negative impact on the country's credibility and directly or indirectly contribute to the overall shock to the economy. As emphasized in the recent report of the Bank of Korea, minimizing the negative impact of political uncertainty requires building confidence that the economic system, including monetary policy, operates independently and properly without being affected by political processes (Bank of Korea, 2024a).

The evaluations may differ depending on political interests, but Acting Authority Choi Sang-mok has made a difficult but unavoidable decision based on economics rather than politics to prevent a loss of external credibility and a government vacuum. This decision will mark the starting point of signaling domestically and internationally that our economic system will continue to function normally, independent of political processes. It is time for the parties to work together to ensure the stability of the nation's leadership.

## My dear colleagues,

While maintaining a flexible approach to monetary policy in the short term, some of us in the Bank must also reflect on why the trade-offs between monetary policy objectives have increasingly deepened to the point of constraining the policy.

Let us take exports as an example. Concerns are growing about sluggish export growth as a major factor in the economic slowdown of the year, despite exports reaching an alltime high in terms of value last year. The underlying reason lies in the lack of diversification in our export structure, which remains heavily reliant on a few flagship products, such as semiconductors and automobiles. This concentration has made the overall export performance closely tied to the cycles of specific industries and therefore

highly volatile. In addition, China, as a latecomer, has rapidly caught up with us in our major industries. In contrast, we have failed to develop new industries which can drive our future export growth. A stark illustration of this challenge is the comparison of the top 15 companies by revenue in Korea and in the United States: over the past decade, seven new enterprises entered the U.S. list, whereas Korea added only two. And among them, only one seems to be grown through emerging industries, which means that, in effect, there were almost no new entries.

Schumpeter's concept of ""creative destruction,"" which he identified as the major driving force of capitalism, emphasizes destruction as much as creation. The birth of innovative companies inherently involves the exit of those that fail to innovate. The lack of emerging companies and industries in Korea raises a critical question: have we avoided addressing the social conflicts that accompany the process of creative destruction under the disguise of pursuing stability?

Currently, there is significant discussion about increasing corporate value, so-called value-up program, to revitalize the stock market. Measures such as raising dividend payouts and improving corporate governance are undoubtedly important. However, it is more essential that new companies lead the stock market through competition and the process of creative destruction, much like how the ""Magnificent Seven"" companies now drive the U.S. stock market. At least in the economic sector, we must lift the regulations that hinder creative destruction by protecting vested interests and stifling innovation.

The value-up issue is also related to the recently increased level of exchange rates. Although last year's current account surplus is about $90 billion, the USD/KRW exchange rate increased significantly. This was because foreign and domestic investors moved funds equivalent to the current account surplus out of the Korean stock market. The increase in overseas investments has transformed Korea into a net external financial asset holder, bringing positive effects such as portfolio diversification and reduced default risk from external debt burdens. However, it also reflects the unfortunate reality that the Korean market is no longer attractive, so it is prompting investors to leave. If capital outflows continue, it could prolong a vicious cycle where financing difficulty hampers the growth of new businesses. Without fostering new industries and deregulation to create and nurture emerging companies, there is a risk that the value-up program could end up as empty talk.

The household debt issue is no exception. There has been some criticism regarding why the Bank of Korea takes household debt into account and appears overly cautious when deciding the Base Rate. However, as you know, household debt has steadily increased over the past 18 years closely linked to real estate loans. Fortunately, thanks to restrictive monetary policy and macroprudential measures, the household debt-toGDP ratio has declined, for the first time in 18 years, to 91%. Despite this progress, it remains still high  compared to other major economies. 1

This year, growing concerns over an economic slowdown have led to stronger calls for prioritizing economic stimulus over household debt management. However, this approach risks repeating the past mistakes of ignoring future risks to reduce immediate pains caused by an economic slowdown. Although micro-level adjustments might be considered for non-real estate related household debt or real estate loans in nonmetropolitan areas to address the slowing economy, it is essential to adhere to the

macroprudential policy stance that aims to manage household debt growth rate within the nominal GDP growth rate from a macro perspective. Only in this way will we be able to ensure that financial resources are directed away from the real estate sector and into productive sectors, particularly into innovative companies that will drive our future.

## Dear colleagues!

The structural issues mentioned here are not recently emerged but have been raised repeatedly over the years. However, delaying their resolution has led to a decline in Korea's potential growth rate, now down to 2%. It could fall to as low as the 0% range by the late 2040s if we fail to address these issues (Lee ., 2024). The fact that the et al potential growth rate is falling below 2% holds significant implications. When assessing economic conditions, we must now set aside memories of past high growth rates and evaluate our economic capacity objectively.

As of last November, the Bank of Korea forecast this year's growth rate to be 1.9%; however, downside risks have since grown. Although it is certainly a historically low figure, it is similar to Korea's current potential growth rate of 2% or the average growth rate of 1.8% 2  for the 26 countries with per capita GDP exceeding $30,000. It would be an overstatement to equate the current situation to the Asian Financial Crisis, the Global Financial Crisis, or the COVID-19 pandemic.

Of particular note, support for self-employed individuals and small business owners is urgently needed, given the significant challenges they face. However, if we use monetary and fiscal policies as a mere painkiller by simply comparing the absolute growth figure lower than 2% to the past growth rates, it may lead to larger negative sideeffects. Alongside short-term stimulus measures, painful but necessary structural adjustments must also be pursued to raise our potential growth rate in the medium to long term. For instance, supplementary budget support for self-employed individuals or small businesses should not focus merely on helping them maintain the status quo. In Korea, the share of the self-employed of all employed persons (23.2% ) is excessively 3 higher compared to countries like the United States (6.1%) or the Euro area (14.1%). To make this share decline gradually, the restructuring measures, such as debt restructuring, vocational training, and offering reemployment opportunities for retirees, which would support the self-employed in transitioning to more productive sectors, should be implemented simultaneously. The Bank of Korea, for our society to identify and implement the structural reform measures it needs, will continue to conduct relevant research and present policy alternatives that can garner public consensus. 4

In addition to monetary policy issues, the Bank of Korea has many tasks to complete this year. It will review and seek improvements to the ""Korean dot plot,"" which reflects the Monetary Policy Committee members' Base Rate forecasts for the next three months, as well as to quarterly economic outlook. The Bank will explore improvements in institutional measures to strengthen the financial stability role of its lending facilities. At the same time, it will focus on promoting the risk-free reference rate (Korea Overnight Financing Repo Rate, or ""KOFR"") in the short-term financial market, while introducing AI models, and conducting the pilot project on Central Bank Digital Currency (CBDC) and related global projects (Bank of Korea, 2024b; Bank of Korea, 2024c; BIS, 2024).

We need to ensure that changes in organizational culture and internal management take root deeply within the organization. In particular, this year, let's create a culture that values the ""quality"" of work over the ""quantity."" It is not just about working hard and doing a lot, but about presenting high-quality results. To achieve this, we must streamline our work processes to reduce working overtime and evaluate based on the impact of reports rather than the quantity. Employees who propose and test new ideas should be encouraged accordingly. Just as it is important to recruit top talent, it is also essential to create a system that fosters the development of incoming employees to help them grow into skilled and capable professionals. Accordingly, we will ensure that the performance evaluation system that was introduced last year becomes wellestablished, and we will also explore ways to provide the necessary support for nurturing talent.

## My dear colleagues,

Let me extend my heartfelt gratitude once again to all our staff for doing their utmost in their respective areas despite many challenges last year. I would like to express my appreciation to all our staff at regional branches for working for balanced regional development and for fulfilling the roles of ambassadors, and to our staff at overseas representative offices for promptly conveying information about local affairs.

I have not forgotten the hard work of those handling tasks such as customer service, cash processing, security management, and administrative support, all of whom contribute to ensuring that the Bank of Korea fulfills its role. My thanks also go to all the janitorial staff who strive to maintain a clean working environment, to the daycare teachers who provide a comfortable care environment for our employees' children, and to the doctors who take care of our employees' health.

At the Bank of Korea, which is made up of such a diverse group of members, it fills me with immense pride to see over 75% of our staff participate in the year-end voluntary donation event, demonstrating warmth and unity. It was truly meaningful to take a brief break from the pressures of work and share the joy of giving together during our yearend event that celebrated the achievement of the goal. I think it is possible to achieve an 80% donation rate in this year.

Recently, I have been feeling the transformation of our organization into a ""louder"" Bank of Korea, as employees freely engage in discussions and present research results to the public. I am proud that, as a result of our efforts in communicating with the public through visual contents, such as ""Easy-to-Understand Economic Indicator Explanation"" and ""BOK Market Briefing,"" our YouTube subscriber count has increased to almost 90 thousand and garnered a lot of attention. Let's continue to work hard and aim to increase the number of our subscribers to hundreds of thousands and to receive the Silver Play Button this year. I have been feeling the change of our organization into a ""louder"" Bank of Korea in daily life as well. When I see employees who would previously hesitate to take the elevator with me now boarding without hesitation, I sense that the horizontal organizational culture is slowly taking root.

As I said in the beginning, the environment we face in the new year will not be easy. However, just as we have done in the past, I believe we can overcome these challenges once again. Sun Tzu says in the Art of War, ""turn adversity into an

advantage,"" and the Western proverb goes, ""never waste the opportunity offered by a good crisis,"" teaching us the universal truth that a crisis is also an opportunity. If we do not fear adversity, but instead create new opportunities from it by calmly practicing what we can do and what we must do, our economy will be able to leap forward once again.

I sincerely wish you and your precious family all the very best of health and happiness. Thank you.

I would like to thank Hwayun Lee, Seungmoon Park, and Youngrae Kim for their help in preparing this speech. * This is an unofficial translation of the original speech released on 2 January 2025.

## REFERENCES

Bank for International Settlements (BIS) (2024), ""Private sector partners join Project AgorÆ"", , https://www.bis.org/about/bisih/topics/fmis/agora. BIS Innovation Hub projects htm.

Bank of Korea (2024a), ""Assessment of Financial and Economic Impacts Following the Declaration of Martial Law and Approach to Response"", . Press Release

\_\_\_\_\_\_\_\_\_\_\_\_ (2024b), ""Plan for Promoting the Benchmark Rate Reform in 2025"", . Press Release

\_\_\_\_\_\_\_\_\_\_\_\_ (2024c), ""Signing a MoU for Demonstration of CBDC and Deposit Token-Based Digital Financial Services for Public Experience"", (In Press Release Korean).

Chae, M., Lee, S. &amp; Lee, H. (2024), ""Mitigating Labor Shortage and Cost Burden in Care Service Sector"", . BOK Issue Note No. 2024-6

Chung, J., Lee, D. &amp; Kim, H. (2024a), ""Social Issues Caused by Overheated Entrance Exam Competition and Countermeasures"", (In Korean). BOK Issue Note No. 2024-26

Chung, M., Lee, Y., Yoo, J. &amp; Kim, U. (2024b), ""Analysis of Regional Economic Growth Factors and Balanced Development Focused on Core Cities"", BOK Issue Note No. (In Korean). 2024-15

Im, W., Lee, D., Lee, Y. &amp; Park, C. (2024), ""Stylized Facts and Implications of the Price Level in Korea: With a Focus on Comparisons with Other Major Countries"", BOK Issue . Note No. 2024-14

Jung, S., Lee, A., Jung, D., Choi, J. &amp; Ahn, B. (2024), ""Structural Changes in the Korean Economy and Policy Implications in Relation to Global Supply Chains"", BOK . Issue Note No. 2024-28

Kim, J., Ryu, G., Hwang, J., Kim, H. J., Kim, H. N., Lee, H. &amp; Shim, S. (2024), ""Impact of Climate Change Risks on the Real Economy: Analysis by Climate Response Scenarios"", (In Korean). BOK Issue Note No. 2024-30

Kim, K. &amp; Na, H. (2024), ""Study on Ways to Activate Housing Finance Using REITs (Asset Investment-Based Korean Style New REITs), Bank of Korea (In Korean).

- Lee, E., Chun, D., Kim, J. &amp; Lee, D. (2024), ""Potential Growth Rate and Future Outlook of the Korean Economy"", (In Korean). BOK Issue Note No. 2024-33
- 1  Korea's household debt-to-GDP ratio stood at 91.1% in the second quarter of 2024, ranking 5th out of 44 countries for which the BIS compiles data.
- 2  Based on the IMF's October 2024 Economic Outlook
- 3  The proportion of the self-employed was calculated using the OECD's criteria (2023) for international comparison, which includes unpaid family workers who can be considered de facto self-employed.
- 4  The structural reform report released by the Bank of Korea last year references various studies, including: low birth rates and aging populations (Chae .  2024), et al , balanced regional development and college entrance systems (Chung ., 2024a; et al Chung ., 2024b), household debt (Kim &amp; Na, 2024), and challenges including et al climate change and global supply chains (Kim ., 2024; Jung ., 2024; Im ., et al et al et al 2024).",Chang Yong Rhee
https://www.bis.org/review/r250107b.htm,Gan Kim Yong: Re-positioning SGX for Asia's growth opportunities,"Keynote address by Mr Gan Kim Yong, Deputy Prime Minister and Minister for Trade and Industry, and Chairman of the Monetary Authority of Singapore, at the SGX Group 25th Anniversary Securities Market Open, Singapore, 2 January 2025. ",2025-01-02 00:00:00,"## Gan Kim Yong: Re-positioning SGX for Asia's growth opportunities

Keynote address by Mr Gan Kim Yong, Deputy Prime Minister and Minister for Trade and Industry, and Chairman of the Monetary Authority of Singapore, at the SGX Group 25th Anniversary Securities Market Open, Singapore, 2 January 2025.

* * *

Mr. Koh Boon Hwee, SGX Group Chairman Mr. Michael Syn, SGX Group President, Distinguished guests, Ladies and gentlemen,

## Introduction

1. Good morning. I am happy to join all of you here on the 1st trading day of 2025 to celebrate SGX Group's 25th anniversary. This is a significant milestone in SGX's history.
2. SGX has come a long way since its establishment on 1 December 1999 through a merger of three entities - namely, the Stock Exchange of Singapore, the Singapore International Monetary Exchange, and the Securities Clearing and Computer Services.
- a. From its initial days as a demutualised and integrated exchange, it has grown into a leading multi-asset exchange, offering a wide range of products including equities, fixed income, currencies, commodities and derivatives.
- b. In recent years, SGX has also expanded its international presence through collaborations with key regional exchanges. These include exchange-traded fund Product Links with the Shanghai Stock Exchange and Shenzhen Stock Exchange; Depository Receipts linkage with Thailand; and the SGX-NSE GIFT Connect.
- c. The accolades that SGX has received over the years are testament to its innovation, product leadership and commitment to excellence; these include the 'Asia Pacific Derivatives Exchange of the Year' at the GlobalCapital Derivatives Awards, the 'Asia Pacific's Best FX Exchange' at the Euromoney Foreign Exchange Awards, and the 'Best Exchange' at the FX Markets Asia Awards.
3. As the emblem of our local equities market, SGX has also enabled the growth of several well-known Singapore companies by facilitating access to global capital and broadening their investor base.
- a. These range from
- i. Financial institutions such as our three key local banks - namely, DBS, OCBC and UOB - as well as newer digital wealth management platforms like iFAST;
- ii. National champions like Singapore Airlines; and
- iii. Household names like supermarket chain Sheng Siong.

- b. During the recent COVID-19 pandemic, our equity market ecosystem also served the liquidity needs of these companies.
- i. For example, Singapore Airlines successfully raised over S$5.3 billion in shares rights issuances to tide over the disruptions resulting from the pandemic.
- ii. It is notable that equity fund raising in our market reached a 10-year high of S$12 billion in 2020, as issuers tapped on our stock market to strengthen their balance sheet for continued business operations, as well as to pursue expansion and acquisition opportunities.
4. As we mark SGX's silver jubilee, we should not only celebrate how far we have come and what we have achieved, but also reflect on how we can better position SGX for the opportunities that lie ahead.

## Re-positioning SGX for Asia's Growth Opportunities

5. Amidst an increasingly fragmented trade and investment environment globally, Asia remains a bright spot.
- a. Against the backdrop of a 10% decline in global Foreign Direct Investment (FDI) flows, FDI flows to ASEAN held strong, and reached a high of US$230 billion in 2023. Furthermore, as production and supply chains re-structure in the years ahead, there is opportunity to further attract more FDIs into ASEAN.
- b. This is underpinned by strong growth fundamentals, such as a relatively young population, growing middle class and good digital infrastructure.
- c. By 2030, India and Southeast Asia are expected to be the 3rd and 4th largest economies in the world respectively. China will also remain a big part of Asia's growth story.
6. Singapore is well-positioned to support and benefit from the growth of our region.
- a. We are a leading hub for start-ups in Asia, with over 4,500 tech start-ups, 400 venture capital firms, as well as 250 incubators and accelerators. Our vibrant innovation ecosystem, pro-business environment and strong connectivity have allowed start-ups to access resources and networks and tap on market opportunities, talent and capital here.
- b. As a global financial centre, we are also poised to serve as a trusted and efficient marketplace for growing enterprises to raise capital and grow their businesses.
- i. Singapore's asset management industry has grown in breadth and depth over the years. Assets under management (AUM) reached S$5.4 trillion as of 2023, a 10% growth from the previous year.
- ii. We have also grown into a key node for private equity and venture capitalist (PE/VC) managers seeking growth opportunities in the region. The total AUM managed by PE/VC players in Singapore has increased more than four times

since 2015 to over S$650bn as of 2023.

- iii. We can position Singapore as a good venue for successful IPO exits, to allow companies to access growth capital and asset owners to recycle capital, creating a virtuous cycle of growth, innovation and a vibrant financial market.
7. To do so, we must strengthen our local stock market. Indeed, as Boon Hwee mentioned earlier and in his letter to shareholders last September, a vibrant and liquid stock market is one of the key pillars of our financial ecosystem.
- a. Last year was a mixed picture for our local equities market.
- i. On one hand, the Straits Times Index was Southeast Asia's best-performing stock market index. It has gained more than 15 per cent - driven primarily by our three local banks - which marks its best annual performance since 2017. Daily average volumes also grew in tandem, rebounding by more than 50% compared to previous year.
- ii. On the other, a combination of global economic uncertainties, high interest rates and competition from regional exchanges as well as alternative fundraising methods had resulted in a dearth of new listings.
- b. The establishment of the Equities Market Review Group last August is timely to build on Singapore's strengths and ensure we remain an attractive venue for enterprises to raise capital.
8. As we seek to revitalise our local equities market, we will need to address three key issues.
- a. First, on the supply-side, we need to better define the profile of companies we want to attract.
- i. The success of our REIT market is a good example of this.
- I. Since the launch of the first REIT - namely, CapitaMallTrust - in 2002, SGX has grown to become the largest REITs market in Asia ex-Japan.
- II. And with a healthy IPO pipeline comprising data centres, healthcare, industrial and accommodation assets, there is good reason to be optimistic that we will continue to be a preferred listing destination for REITs in Asia.
- ii. With exchanges and equities trading becoming a lot more cross-border, it is not surprising that companies are enticed to list on foreign venues where liquidity is concentrated. The Review Group and SGX will therefore need to define the space where Singapore can be attractive to growth companies.
- I. Minister Chee Hong Tat had previously shared that the Review Group is looking at companies which are already based in Singapore, as well as companies from emerging markets and in areas such as FinTech, Innovation and Sustainability.

- II. In addition to this, the Review Group, informed by market feedback, is studying how we can better position our equities market to attract high quality mid-cap growth companies that are likely to be less visible on larger exchanges in the US, China and Japan, but can benefit from being listed on SGX due to brand familiarity with investors in the region.
- iii. By being clear with the profile of companies we want to attract, we can better design our incentives for these companies to consider Singapore as a listing venue, as well as for fund managers to launch products that invest in the local equities market.
- b. Second, on the demand side, we need to not only jump start interest but also make it sustainable. This will require a range of measures to attract capital and sustain post-IPO liquidity and trading volumes, so that listee companies have confidence to list, market interest is raised, and trading liquidity is maintained.
- i. While it is inevitable that a sizeable proportion of liquidity will be concentrated in a number of well-known counters, we must aim to broaden liquidity beyond these counters. This will be especially critical for smaller counters, for example those with market cap between $500 million and $3 billion.
- ii. We must also crowd in commercial capital on a sustained basis, such as institutional wealth, individual investors and family offices. While there have been suggestions to channel sovereign monies into our equities market, it is not practical to rely on sovereign monies alone to sustain these funds and to support the equity market. Instead, any use of public funding has to catalyse commercial capital for trading interest in our equities market to be sustained over the long term.
- iii. To this end, I note that the Review Group is studying how we can make optimum use of seed capital to draw in more commercial capital to ensure that Government developmental capital is deployed on a fiscally prudent basis.
- iv. We must also strengthen the larger ecosystem to build a stronger pipeline of quality listings, catalyse investor interest and sustain liquidity. For example, we can explore enhancing research coverage into the types of pre-IPO growth companies we want to attract, be it small and mid-caps or specific sectors that we want to grow.
- c. Lastly, we should review our regulatory framework to ensure that we do not impose unnecessary friction, but empower good companies to list, and enable consumers to make informed investment decisions.
- i. There has been feedback from some market observers that the current regulatory regime can be cumbersome and restrictive in certain aspects for issuers, as well as overly protective of investors.
- ii. On the other hand, other commentators have highlighted how investors have suffered losses in some past episodes of market misconduct. These voices

emphasise the importance of strengthening investor confidence in our market.

- iii. We should streamline and review our regulation to ensure a supportive trading and settlement environment. This should not only reduce friction and compliance burden, but uplift investor confidence such as through strengthening avenues for investor recourse.
9. I am glad to note that the Review Group is studying a combination of demand-side, supply-side and ecosystem-level measures as part of its review. Such a holistic approach will be critical to ensuring that we can put our equities market on a stronger footing for the years ahead. The Review Group is consulting widely, and will share more in due course.

## Conclusion

10. Once again, let me congratulate SGX on this occasion of its silver jubilee.
11. With Asia's continuing growth story, the prospects for SGX and Singapore's capital markets remains promising. I am confident that through this multi-stakeholder effort to revitalise and grow our local equities market, we can look forward to a stronger SGX and celebrate an even more vibrant exchange on its golden jubilee 25 years later.
12. Happy 25th anniversary, SGX; and cheers to an exciting year ahead!
13. Thank you.",Gan Kim Yong
https://www.bis.org/review/r250109c.htm,François Villeroy de Galhau: New Year wishes to the Paris financial centre,"New Year wishes to the Paris financial centre by Mr François Villeroy de Galhau, Governor of the Bank of France and Chairman of the Autorité de contrôle prudentiel et de resolution (ACPR), Paris, 8 January 2025.",2025-01-08 00:00:00,"## François Villeroy de Galhau: New Year wishes to the Paris financial centre

New Year wishes to the Paris financial centre by Mr François Villeroy de Galhau, Governor of the Bank of France and Chairman of the AutoritØ de contrôle prudentiel et de resolution (ACPR), Paris, 8 January 2025.

* * *

Dear Minister, Ladies and Gentlemen,

I would like to start by extending, on behalf of the Banque de France and the ACPR, our warmest wishes to you our partners - elected representatives and public officials, financial centre players, and journalists - as well as to your loved ones. The current climate is considered bad, or at best uncertain, but I wish you good life. Every philosopher since Socrates has sought to define what exactly this means but I simply wish that you find the right balance between professional endeavour and personal roots.

The 2020 to 2023 period had already witnessed a series of shocks, but 2024 was especially turbulent and bumpy so I will not risk wishing you a more peaceful 2025. However, I would like to highlight two more positive aspects. The first is that this year on 18 January to be precise - marks the 225 th   anniversary of the Banque de France. On this occasion, on 20 March, we are organising the symposium ""A mass of granite"", an allusion to our founder Bonaparte who wished to ""set down some masses of granite on the soil of France"" to stabilise the scattered ""grains of sand"" of the nation. This provides an opportunity for recalling that we are an old and a great country that has managed to bounce back from tricky economic and financial situations on a number of occasions. Over the last century, France has managed to do this in 1926 with Raymond PoincarØ; in 1958 with Charles De Gaulle, Antoine Pinay and then Wilfrid Baumgartner; and in 1983 with Jacques Delors, another famous son of the Banque de France. Each of those people I've just mentioned acquired a strong political and historical stature as a result, proof that French people appreciate seriousness in public management.

Secondly, not everything was bad in 2024. Inflation, which is our main mandate as a central bank, fell by even more than expected, although our fellow citizens remain sensitive to past rises in the level of prices. Inflation across the euro area has moved back towards our 2% target, to 2.4% at end-2024. The slight increase in December i was expected and does not call into question our continuing victory over inflation. In France, inflation was even lower at 1.8% according to the harmonised index,   and we ii expect it to average 1.6% in 2025. This has already enabled us at the ECB Governing Council, headed up by Christine Lagarde, to lower our key interest rates on four separate occasions, from 4% to 3% between June and December. As a result, property lending was able to recover, with new loans totalling EUR 10.1 billion in November compared with a low of EUR 7 billion in March - and the French economy was well financed thanks to your commitment: private sector loans grew by 1.3% over the year.

French economic growth of 1.1% was higher than that of the euro area and higher than our initial forecast of 0.9%, due in particular to the impact of the Olympic Games, which will go down as an example of the major successes France can achieve when everyone

works together. Lastly, employment has held up relatively well so far, with 2.2 million jobs created over the last ten years and 1.2 million in the last five... even if, with the unemployment rate at 7.4%, we are still too far from the goal of full employment.

Clearly, we are moving into 2025 in a position of greater uncertainty, and thus with potentially more of the wait-and-see attitude on the part of businesses and their investment, and households, whose savings rate is at an all-time high. And yet, I feel iii that the word 'hope' has never been so present in the air, like some rare and yet indispensable resource. In French, the beautiful word "" "" can express at least espØrance two expectations: the vital need for trust - and the Banque de France remains more than ever an institution built on trust; but also - if I am speaking, in front of insurers, of mathematical expectancy - a probability. So, please allow me to present you with four lucid , beginning with the most probable. espØrances

## 1. A year of falling key interest rates in Europe

At 3%, our key interest rate is well below those of the US Federal Reserve (Fed) (4.25% -4.50%) and the Bank of England (4.75%), however it is still significantly above the neutral interest rate, which marks the boundary between a restrictive and an accommodative policy. While this rate is not directly observable, the ECB estimates that it stands at around 2% in the euro area. If the fall in inflation is confirmed over the next few quarters as we expect, good sense dictates that we move steadily towards this neutral rate by next summer.

This will facilitate effective financing of the economy and lower the household savings rate. The real estate sector will benefit as it gradually recovers. I will submit my proposal to the Minister concerning the interest rate on Livret A passbook accounts on 15 January, but I would like to draw the attention of the banks this evening to another type of passbook account, the Livret d'Epargne Populaire (LEP), which is the savings product that affords the greatest protection to those with the lowest incomes. The number of these accounts has grown by over four million over the last four years, to 11.7 million at the end of October. We can and must do even better, given that more than 19 million French people could potentially be interested, and that the interest rate on LEP passbook accounts from 1 February will be even higher than that on Livret A accounts, well ahead of the inflation rate.

All of this concerns short-term rates; long-term interest rates are set by international markets and are not unaffected by our fiscal policy.

## 2. A year of deficit reduction in France

Our country has overcome the acute illness of inflation; the chronic illness of our public finances remains. In 1984, our public debt represented just 30% of gross domestic product (GDP); today, it has almost quadrupled to 113% of GDP at end-September. The disease is very old, but there is no reason to become accustomed to it. On the contrary, everything indicates that it has now crossed several critical thresholds: this year, France will have the highest deficit in the euro area and remains among the few countries whose debt ratio continues to rise. Our bond yields have moved perilously away from Germany's and closer to Italy's. The interest burden will soon exceed the budget for the Ministry of Education.

The seriousness of our fiscal situation has at least one silver lining: our country no longer has to choose between recovery and growth. Reducing the budgetary and tax uncertainty that weighs on businesses and households has become a condition for trust and therefore growth. And it means preventing the monetary policy support for the financing of the economy from being obliterated by the higher interest rates that result from our fiscal drift.

It is a difficult path, but it is possible if we aim for two benchmarks, two anchors. The first significant step towards credibility must be taken in 2025: we must return this year to a deficit as close as possible to 5% of GDP, and clearly below 5.5%. We also need to set a medium-term target of a 3% deficit in 2029. This figure aligns with our European commitments, but most importantly, it also corresponds to the level that will finally enable us to stabilise our debt ratio. The first step may partially consist of targeted tax rises, but the second step will have to rely essentially on more effectively controlled and more efficient spending, not only by central government departments but by local authorities and social security bodies, which together account for 64% of total expenditure. Across the board, France spends more than its neighbours - over 9% of GDP more in total; this effort to generate fair savings will be more effective if it is prepared, documented and shared as of now. I believe, Minister, that these are indeed your intentions in the ongoing dialogue, and that this is in the national interest, which must come before any individual or partisan interests.

## 3. A year without recession and paving the way for a recovery

My third wish is in response to the return of a spectre to Europe: the fear of recession. It is haunting Europe once again, as it did in late 2022, but more in words than in figures.

Our forecast for growth is 0.9%.

iv   True, the risks to this figure are on the downside;

true, the French economy is growing at a slower pace; but no, we do not currently foresee a recession. While there are objective reasons for the collective gloom, it

should not give rise to excessive pessimism. The expected recovery should take place in 2026 and 2027, with growth of around 1.3% - provided there is a gradual reduction in

uncertainty this year.

Indeed, wages are now rising faster than inflation, which will generate gains in purchasing power that are more evenly distributed across the population. Consumption should therefore pick up, and the aggregate savings rate should fall, while remaining above its pre-Covid level.

## 4. A year for architects in Europe

Calling now for a time of architects possibly crosses the line between probability and hope. Nevertheless, it would be highly desirable to have them take over from the firefighters, who have been the omnipresent crisis managers up to now, and at the same time to combat the arsonists who are calling - more noisily than coherently - for dangerous retrograde steps in trade, climate and finance. But, while we cannot change what happens on the other side of the Atlantic, we can change what happens on our side.

2024 has witnessed abundant reflections on how to pivot towards structural policies in Europe. The reports by former Italian prime ministers Enrico Letta   and Mario Draghi v vi and, more modestly, the Franco-German appeal that I launched with my colleague and friend from the Bundesbank, Joachim Nagel, in November, vii   set out a roadmap for breaking free from two forms of tyranny: the short term and the outside world. The facts are clear: Europe has effective levers for controlling its economic future and strengthening its growth, but if it doesn't wake up and act now, it risks a long period of economic slumber.

The remedies draw largely on the best America has to offer, in the form of three ""I's"". Europe needs to (i) its single market more closely; (ii) more, primarily integrate invest from its private resources mobilised as part of a Savings and Investments Union; and (iii) more - and above all more quickly - by reducing its bureaucracy. In other innovate words, we have to multiply size by financial muscle and by speed, without the need for costly fiscal excess weight. Let me stress the importance of simplification within this European agenda, particularly in terms of financial regulation. viii   It is no longer enough for the regulatory principles themselves to be sound - we also need to ensure that the complexity of our existing regulation or oversight does not constitute an obstacle to achieving our goals. The ACPR is committed to this. But we also need to be clear regarding the temptations expressed elsewhere: European-style simplification is not American-style deregulation. The Basel III framework must continue to form the international basis for banking regulation. Moreover, failing to regulate non-banks and crypto-assets today would just sow the seeds for tomorrow's financial crisis.

I would like to conclude with a beautiful quote from Albert Camus : 'True generosity toward the future consists in giving everything to the present'. Not sacrificing the long term to the 'tyranny of urgency', but preparing for the future unencumbered by the present. This sums up the professional commitment of each and every one of you, and our responsibility. You can count on the Banque de France to support these wishes of lucid so that in 2025, more than ever, it can reduce uncertainty and act as a espØrance beacon of stability. Happy New Year to you all, and to our dear country!

i Eurostat,  flash estimate - December 2024

ii Insee,  Consumer price index -  provisional results for December 2024

- iii 18,2% for the third quarter of 2024
- iv Banque de France, Macroeconomic projections, December 2024, 16 December 2024
- v Letta (E.), , report published on 17 April 2024 Much more than a Market
- vi Draghi (M.), , report published on 9 The future of European competitiveness September 2024

- vii Nagel (J.), Villeroy de Galhau (F.), A common call for a Franco-German revival, Tribune, 22 November 2024
- viii

Villeroy de Galhau (F.), ""Towards a realistic simplification: untying some of the knots , Speech, 26 November 2024 in European banking regulations ""

- ix Camus (A.), The Rebel, 1951",François Villeroy de Galhau
https://www.bis.org/review/r250114d.htm,"Olli Rehn: Global economy - fragmentation, decoupling or slowbalisation?","Keynote speech by Mr Olli Rehn, Governor of the Bank of Finland, at a conference co-organised by the European Central Bank, Hong Kong Institute for Monetary and Financial Research and Bank of Finland Institute for Emerging economies, Hong Kong, 13 January 2025.",2025-01-13 00:00:00,"## Olli Rehn: Global economy - fragmentation, decoupling or slowbalisation?

Keynote speech by Mr Olli Rehn, Governor of the Bank of Finland, at a  conference coorganised by the European Central Bank, Hong Kong Institute for Monetary and Financial Research and Bank of Finland Institute for Emerging economies, Hong Kong, 13 January 2025.

* * *

## Presentation accompanying the speech

Distinguished Guests, Ladies and Gentlemen, Dear Friends,

Let me start by thanking the Hong Kong Monetary Authority for hosting this topical and thought-provoking conference. Discussing the changing global economy in ""Asia's World City"" is, of course, very appropriate.

I would also like to thank the representatives of the European Central Bank for their involvement in putting together the programme for this excellent event. This conference is a good example of fruitful cooperation between central banking authorities from different parts of the world, and certainly a tradition worth preserving.

As the title of the conference implies, the global economy is undergoing a transformation. In my talk today I would like to address a key aspect of this transformation, namely decoupling and fragmentation in the global economy.

Is there evidence of geoeconomic fragmentation in the global trade and investment data? Or is global trade simply following the same trajectory as global economic output? There is, of course, an important difference between the paths of global trade and global output.

## Slide 2. A period of normalisation after hyper-globalisation?

We can, in my view, reasonably start the analysis of any decoupling or fragmentation with a slide like this, which shows the value of the global goods trade in relation to the global gross domestic product (GDP).

We can observe how this percentage climbs in the late 1990s and 2000s, pushed by the integration of China and former socialist countries into the global economy and global value chains. In the early 1990s global trade was roughly 30% of the global GDP, and by 2008 this had increased to over 50%.

As the graph shows, the global financial crisis marked a clear turning point. Since then, the level of global trade in relation to global GDP has fluctuated between 45% and 50%. Should we call it 'slowbalisation'?

There are of course many reasons for this relative stagnation, but here in Hong Kong we should note at least one factor. Whereas in the early 2000s many value chains in East Asia were international, by the 2010s a larger share of production had moved into one country: China.

If, for example, a component had previously crossed national borders, say, eight times, by the 2010s more of the value-added was accruing to Chinese companies, and the component would cross national borders only five times.

What is the main implication of this in terms of globalisation currently? So far, various trade restrictions and higher tariffs have not been enough to reverse the gains in globalisation.

## Slide 3.  Or a period of structural change?

Another aspect of the transformation of world trade is sectoral. We typically look at the trade in goods, but the is often neglected in public debate. The share trade in services of services in total international trade is already about one quarter, and this has been increasing. I am confident that this trend will continue in the coming years.

In many OECD countries, including the United States and Finland, services already account for one third of their total external trade.

With telecommunications costs falling, many companies even in middle-income countries can participate effectively in the global trade in services. This is hopefully and perhaps also likely an area where trade barriers of various kinds will be more difficult to implement.

## Slide 4. Geopolitical risks can materialise: Russia's invasion of Ukraine also harmed the euro area economy

Trade restrictions and tariffs are not the only geopolitical factors that can affect trade and economic development. Clearly, major geopolitical events and shocks can have huge consequences.

Russia's illegal and brutal invasion of Ukraine has been devastating for Ukraine and the Ukrainian people. At the same time, it has also been a massive negative supply shock and an adverse geopolitical shock for the euro area. According to the Bank of Finland's analysis, this shock caused the inflation rate in the euro area to be 2 percentage points higher, and GDP to be correspondingly lower, than would otherwise have been the case.

It is also worth noting that the energy price shock following Russia's invasion was not limited to Europe. Global energy prices went up, and this had a negative effect in Asia too. What happens in Europe doesn't stay in Europe.

## Slide 5.  How do geopolitics and tariffs show up in trade data?

Furthermore, even if tariffs and protectionism have not yet led to a decline in total global trade, this may not be the case in the future.

We are already witnessing signs of trade fragmentation, primarily in two significant ways.

Firstly, bilateral trade between the US and China has stalled, and some supply chains have been relocated from China to Southeast Asia, Mexico and emerging economies in Europe. These shifts aim to mitigate supply chain disruption risks and avoid import tariffs or export restrictions.

Secondly, Russia's war in Ukraine has effectively isolated Russia from the European Union, the G7 countries and their allies. This has resulted in a dramatic reduction in trade between the EU and Russia since February 2022. The goal of the sanctions is clear: to cause damage to the Russian war machine and its imperialistic invasion.

## Slide 6. Domestic value-added has decreased in the EU

In this complex environment, it is useful to examine whether production is being reshored  transferred back home  at significant levels. In other words, is globalisation truly reversing?

Our staff analysis of the origins of value-added in manufacturing indicates that in the United States, the share of domestically produced value-added increased between 2018 and 2023. Conversely, in the EU, there was a small decrease in domestic valueadded. This suggests some reshoring dynamics in the US and the opposite in Europe.

## Slide 7. Chinese value-added has increased in the EU and remains unchanged in the US

Our findings also highlight the challenges of decoupling or de-risking from China, due to the deeply integrated nature of global production networks. Even though direct trade between China and the United States shows signs of a modest decline, the share of Chinese value-added in US manufacturing imports remained stable during the period examined. It appears that value chains are simply being re-routed through connector countries like Mexico and Vietnam.

In the European Union, Chinese value-added in manufacturing has in fact increased since 2018. This illustrates the challenges related to even moderate decoupling, which in Europe is seen as necessary de-risking in today's geopolitical context.

In this challenging global context, the European Central Bank's monetary policy aims at ensuring price stability, which also supports the EU's general economic policies.

## Slide 8. EU free trade agreements in 2024: status report

In this challenging global context, the European Central Bank's monetary policy aims at ensuring price stability, which also supports the EU's general economic policies.

## Slide 9. Euro area inflation is stabilising at the 2% target

In the euro area, disinflation is well on track. Wage pressures have also somewhat receded. Meanwhile the growth outlook has weakened. This has prompted us at the ECB's Governing Council to cut interest rates four times in the last six months.

Going forward, the direction of our monetary policy is clear. The scope and speed of rate cuts will depend on incoming data regarding three factors, in particular: the inflation outlook, the underlying inflation dynamics and monetary policy transmission.

The Governing Council will decide on interest rates in each of its monetary policy meetings, taking into account all the new information and analysis that has accrued since the previous meeting. In the forthcoming meetings we should also have more information on the policies of the incoming US administration and on the European response to those policies.

In light of the current economic outlook and our reaction functions, I would assume that our monetary policy will leave restrictive territory in the coming months, at the latest by midsummer.

## Slide 10. Concluding remarks

So, is the glass of global trade half empty or half full?

Total trade has held up so far, perhaps surprisingly well. Services have become more and more important in global trade, and this trend will continue.

But we must not be complacent. Geopolitical shocks, like Russia's invasion of Ukraine or higher barriers to trade, can have negative effects on our economies.

Tariffs between any two countries, like the US and China, may often be circumvented one way or another. Companies are nimble in moving production to avoid tariffs. This kind of adaptation makes economies more resilient, but at the same time it does add to the costs of doing business. If considerably higher tariffs or other trade restrictions were introduced, these costs of doing business would increase more significantly - for all of us.

Furthermore, such a trade war could have a negative impact in other areas as well. Fraying and frozen international relations would, in turn, make ending a trade war more difficult. There are no winners in a trade war.

This is the reason why we in Finland and Europe continue to defend the rules-based international order in security and trade and the legal rights of independent nations - in Europe, in the global South and across the world. In my view, this is crucial for global peace and development of the humankind.

Thank you for your attention!",Olli Rehn
https://www.bis.org/review/r250114c.htm,Pan Gongsheng: Speech - opening ceremony of the Asian Financial Forum,"Speech by Mr Pan Gongsheng, Governor of the People's Bank of China, at the opening ceremony of the Asian Financial Forum, Hong Kong, 13 January 2025.",2025-01-13 00:00:00,"## Pan Gongsheng: Speech - opening ceremony of the Asian Financial Forum

Speech by Mr Pan Gongsheng, Governor of the People's Bank of China, at the opening ceremony of the Asian Financial Forum, Hong Kong, 13 January 2025.

* * *

Honorable Chief Executive John Lee Ka-chiu,

Distinguished guests,

Good morning!

It's a great pleasure to attend Asian Financial Forum and get together with leaders from the global financial community in Hong Kong.

In recent years, with the strong support of the central government and under the guidance of Hong Kong SAR government, Hong Kong has actively embraced new development opportunities while upgrading its traditional advantages. The remarkable creativity and vitality hence stimulated have helped further consolidate and enhance the status of Hong Kong as an international financial center. We believe, with the ""one country, two systems"" policy as a strong guarantee and with the joint efforts made by people from all walks of life, Hong Kong will continue to leverage its unique advantage of enjoying the backing of its motherland and being open to the world, and enjoy longterm prosperity and stability.

On this occasion, I'd like to exchange views with you on China's economic development, macroeconomic policies as well as the efforts to help develop Hong Kong as an international financial center.

## First, about China's economic situations and macroeconomic policies

Since 2024, the Chinese economy has picked up admist fluctuations. The target of 5 percent growth throughout the year is estimated to be achievable. In the first three quarters, China's GDP grew 4.8 percent year on year. Since late September, the CPC Central Committee has arranged a package of incremental policies and thus promoted a remarkable pickup of the economy. the Chinese economy On the whole, has managed to address a variety of risks and challenges in recent years, and proved to be strongly resilient. It has contributed approximately 30 percent to the global economic growth for years.

Currently, as the external environment is complicated and volatile, challenges remain in China's economic development. Externally, as the world pattern is becoming increasingly chaotic and intertwined, geopolitical conflicts continue, and trade protectionism prevails, challenges and uncertainties loom over global economic recovery, exerting a spillover effect on the Chinese economy. we still face Internally, problems such as insufficient domestic demand, especially consumption demand, weak social expectations, low price levels, etc.

The Chinese economy is blessed with powerful innovation capability, a super-large market, a complete industrial system, sophisticated infrastructure, and abundant highquality human resources. We have confidence, capability, and means to overcome difficulties, resolve challenges, and achieve sustained growth. In 2025, China is expected to continuously inject strong growth momentum and stable force to the world. China will respond to the expectation of the international community with responsibility and courage, and it will continue to play its important role as the engine of the world economy.

Not long ago, the Central Economic Work Conference was convened. It made clear the target, macro policies and key tasks for the economic work in 2025. We will implement more proactive macroeconomic policies, and further improve the economic governance approach.

The first is to strengthen counter-cyclical adjustments in macroeconomic policies, and tune the trajectory of economic growth and functioning so as to maintain stable economic growth. We will implement more proactive fiscal policies, raise fiscal deficit ratio, expand fiscal expenditure, and adjust and improve the structure and distribution of fiscal expenditure. We will also implement an appropriately accommodative monetary policy, adopt a mix of monetary policy instruments including interest rates and required reserve ratio to bolster adequate liquidity and a favorable social financing environment.

The second is to proactively promote the transition of China's economic growth model to enhance the quality and sustainability of economic growth. It was made clear at the Central Economic Work Conference convened last month that we should focus on boosting domestic demand, especially the consumption demand of residents, and vigorously boosting consumption would be the top priority of the economic work for this year. The priority of macroeconomic policies should shift from promoting more investment in the past to promoting both consumption and investment, with more importance attached to consumption. By increasing residents' income, enhancing consumption subsidy support, innovating consumption supply, and improving social security, we will effectively expand consumption, give better play to the role of consumption in driving up economic growth, and promote high-quality development of the Chinese economy.

We will improve our approach to economic governance on an ongoing basis. We will handle the relations between the government and the market in a better way, scientifically balance their boundaries, and respect and leverage the decisive role of the market in resource allocation. We will speed up the building of a unified national market, foster a sound law-based economic environment, and create a more fair and vital market environment.

The third is to focus on addressing risks in economic functioning. The Chinese government has taken a series of policies to effectively mitigate risks related to local government debt and the real estate market. Up to now, these risks are contracting on the whole.

In terms of local government debt, the Chinese government debt level is in the middle-to-lower range internationally. The debt burden on the central government is not

heavy while the debt risks of the local governments are mainly concentrated in some less-developed regions. In recent years, we have taken a series of measures to enforce strict financial discipline and control new debts. We have guided financial institutions to, following the market principle and the rule of law, consult on an equal footing with financing vehicles, and restructure their debts through rollover, paying off old debts with new loans, and debt swap. The aim is to gradually transform those financing vehicles into market-oriented enterprises. Up to now, the number of local government financing vehicles and their debt scale have both plunged, indicating a contraction of risks. To further defuse risks related to local government debt, the CPC Central Committee has decided to raise the debt ceiling of local government by RMB6 trillion, and allocate RMB4 trillion in the newly-issued local government special bond to swap the existing implicit debts. The two combined will provide funds worth of RMB10 trillion, which will significantly reduce the pressures on local governments in defusing debts, and mitigate the debt risks of local financing vehicles.

In terms of the real estate market, after long-cycle prosperity for nearly three decades, China's real estate market has experienced a fundamental shift and is now looking for a new point of equilibrium. We have implemented a mix of policies from both demand and supply sides, such as removing restrictions on housing purchase in medium- and large-sized cities, optimizing real estate financial policies (lowering the down payment ratio and mortgage rates, and establishing a financing coordination mechanism), and improving relevant tax policies. Meanwhile, the market entities worked hard to heal and improve themselves by adjusting their operation strategies and restructuring their debts. With these efforts, the risks of the real estate market have been greatly mitigated and the transactions increased overall.  Since October 2024, the floor area of for-profit housing sold in 30 medium- and large-sized cities has grown for three consecutive months on a month-on-month basis and for two straight months on a year-on-year basis. The CPC Central Committee has made it clear that local government special bonds are allowed to be used for idle existing land buyback, new land acquisition and reserve, and for-profit housing purchasing. This will further accelerate the de-stocking of the real estate market and enable the real estate market to stop declining and stabilize.

The fourth is to lay emphasis on the internal and external equilibria in the economic growth. In recent years, the external equilibrium of the Chinese economy has been effectively improved. The current account surplus-to-GDP ratio dropped from around 10 percent in 2007 to around 2 percent in 2011, and remains within the range of 1 to 2 percent in recent years, which is generally considered as reasonable by the international community. The current geopolitical tensions have led to economic deglobalization as well as politicalization and instrumentalization of international trade, which hampers sustained growth of the world economy and the increase in the global welfare. We will firmly follow the path of reform and opening up and the path of multilateralism, advocate free trade and fair competition, and make better use of both international and domestic markets and resources, so as to accelerate the building of a new development paradigm.

Recently, the US Dollar Index has remained high, and most non-USD currencies have depreciated. The RMB has also depreciated moderately against the USD, but overall shows strong resilience. After years of endeavor, China's foreign exchange market has achieved remarkable development. Market participants are more mature and the

trading activities are more rational. The RMB cross-border payments and receipts have reached 30 percent in goods trade, lowering the exchange risk exposure faced by enterprises in production and operation. As the regulators of the foreign exchange market, the People's Bank of China (PBOC) and the State Administration of Foreign Exchange (SAFE) are now more composed and experienced in the face of market changes. We are confident and capable of maintaining stable functioning of the foreign exchange market. We will pursue the principle of letting the market play a decisive role in exchange rate formation, and leverage the role of exchange rate as an auto stabilizer in macroeconomic management and for the balance of payments. Meanwhile, we will firmly correct pro-cyclical behaviours, fight against conduct that disrupts market order, and prevent the risk of exchange rate overshooting, so as to keep the RMB exchange rate basically stable at an adaptive and equilibrium level.

## Second, about deepening the financial cooperation between the Chinese mainland and Hong Kong

Hong Kong is a major international financial center, boasting a highly open business environment, a developed financial market system, sophisticated financial infrastructure, enormous human resources advantages, a sound legal system, and an internationalized financial regulation system. In November, Vice Premier He Lifeng explicitly pointed out in Hong Kong that effectively building, strengthening, and developing Hong Kong as an international financial center is not only what Hong Kong needs, but also what matters to our country.

In recent years, the PBOC, together with other relevant authorities and departments, has promoted the implementation of a series of practical measures, including Bond Connect, Shanghai-Hong Kong Stock Connect, Shenzhen-Hong Kong Stock Connect, Cross-boundary Wealth Management Connect, Swap Connect, and signing currency swap agreement with the Hong Kong Monetary Authority (HKMA), to bolster development of the offshore RMB market in Hong Kong, which has achieved remarkable progress. The efforts injected new momentum into the development of Hong Kong as an international financial center. In 2024, the financial markets in Hong Kong witnessed more brisk activities, with RMB deposits, loans, Dim Sum bond issuance, and foreign exchange trading maintaining good momentum.

Going forward, we will continue to extend full support to develop Hong Kong as an international financial center with our efforts focused on four areas.

Firstly, we will support the development of the capital market in Hong Kong and deepen connectivity between the financial markets in Hong Kong and the mainland. A thriving capital market serves as the core and backbone of Hong Kong as an international financial center. We will explore to expand the role of central bank in macro-prudential management and financial stability, and coordinate and cooperate with financial regulatory authorities in Hong Kong to support the stable and healthy development of capital markets in both mainland and Hong Kong. We will encourage quality enterprises to get listed and issue bonds in Hong Kong, and expand the connectivity mechanisms between the mainland and Hong Kong for stocks, bonds, wealth management products and interest rate swaps. Also we will deepen the financial

cooperation within the Guangdong-Hong Kong-Macao Greater Bay Area, and increase the allocation of China's foreign exchange reserves in assets in Hong Kong, so that the financial development in Hong Kong will embrace a broader future.

Secondly, we will expand and strengthen the status of Hong Kong as an offshore RMB business hub. Hong Kong is an offshore RMB business hub with the largest business volume in the world. The PBOC and the HKMA have signed a currency swap agreement in the amount of RMB800 billion. Giving play to the role of currency swap arrangements and RMB clearing banks in a coordinated way, we will support the HKMA in supplementing RMB liquidity on the offshore market by drawing on the swap line. We will issue RMB government bonds, central bank bills in Hong Kong on a regular basis, and enrich the products and services provided on the offshore RMB market in Hong Kong. The PBOC and the HKMA have set up a specific working group committed to the study, research and design of relevant policies and products.

Thirdly, we will strengthen Hong Kong's function as an international asset management and wealth management center. Hong Kong is the largest global asset management center and private wealth management center in Asia. We will further optimize the Cross-Boundary Wealth Management Connect and QDII scheme, and solidly implement Mutual Recognition of Funds enhancements, to better meet the needs of residents in both the mainland and Hong Kong for cross-market and diversified asset allocation. We will attract more inflow of funds from the mainland and the world to Hong Kong, and continuously enrich the diversity of financial businesses in Hong Kong, such as private equity, venture capital, private bank, family office, and hedge fund, thereby amplifying the influence of Hong Kong influence on global asset and wealth management markets.

Fourthly, we will resolutely safeguard Hong Kong's financial stability and security. Over the years, with the strong support from the country, Hong Kong has successfully navigated multiple financial crises and external shocks, maintaining overall resilience in its financial system and accumulating extensive experience in preventing and defusing major risks. At the crucial moment in 1998 when Hong Kong was struggling with the impact of the Asian Financial Crisis, Mr. Zhu Rongji, the then Premier firmly declared to the whole world that the central government will resolutely safeguard the prosperity and stability of Hong Kong. Today, China is even more robust in its financial strength, with its size of foreign exchange reserves ranking safely at the top of the world, which will surely provide strong backing for the financial stability and safety of Hong Kong.

Recently, the PBOC is in close communication with the HKMA and the securities regulators of both sides. Relevant policy measures will be introduced in three key areas, namely enhancing the development of the offshore RMB market, optimizing financial market connectivity, and improving payment and settlement convenience.

In terms of enhancing the development of the offshore RMB market, firstly, we will support the HKMA in launching RMB trade financing liquidity arrangements. On the basis of the existing framework of RMB liquidity arrangements, the swap line will be used to launch new RMB trade financing liquidity arrangements, with terms of

one month, three months and six months, with a total quota of RMB100 billion, aiming to provide a stable and cost-effective source of funding for RMB trade financing of commercial banks in Hong Kong.

Secondly, we will support the launch of offshore bond repo transactions under the Bond Connect. The measure will enrich the liquidity management tools for investors and enhance the appeal of RMB-denominated bond assets. Additionally, cross-border bond repo transactions will also be introduced at an opportune time.

Thirdly, we will actively support the launch of offshore RMB government bond futures in Hong Kong. The measure will play a significant role in consolidating and enhancing Hong Kong's status as an international financial center, a global risk management center and an offshore RMB business hub. Regulatory authorities from both sides are working in close cooperation to advance the preparatory work in an orderly manner.

In terms of improving the mutual access between financial markets, firstly, we will support the use of bonds under Bond Connect as qualified collateral in financial markets in Hong Kong. Previously, we announced to support overseas institutions in using bonds held under Bond Connect as margin collateral for Swap Connect transactions. The arrangement will come into effect today. Moving forward, we will support a wider use of bonds held under Bond Connect as qualified collateral in financial markets in Hong Kong.

Secondly, we will improve the operation mechanism for Southbound Trading under Bond Connect. Domestic investors will be supported in buying bonds denominated in various currencies more conveniently, and the settlement hours will be extended. Moving forward, we will expand the coverage of investors in an orderly manner and increase custodians.

In terms of facilitating payment and settlement, we will accelerate the crossborder interlinkage of fast payment systems. We will promote the interlinkage between the fast payment system of the Chinese mainland and that of Hong Kong, which will support residents of the two places in real-time cross-border remittance, thus providing safer, more efficient and more convenient cross-border payment services for economic and trading activities and personnel exchanges between the two sides. Also, we will further expand the list of participating banks offering residents of Hong Kong and Macao agency account opening witness services.

Thanks to Hong Kong's unique advantages and its industrious residents, we believe its status as an international financial center will continue to be consolidated and strengthened.

Last but not least, financial leaders around the world are welcome to invest in China's financial market, sharing together with us the development opportunities. I wish this forum a complete success!

Thank you!",Pan Gongsheng
https://www.bis.org/review/r250114a.htm,Ryozo Himino: Japan's economy and monetary policy,"Speech by Mr Ryozo Himino, Deputy Governor of the Bank of Japan, at a meeting with local leaders, Kanagawa, 14 January 2025.",2025-01-14 00:00:00,"

January  14,  2025

Bank  of  Japan

## Japan's Economy and Monetary Policy

Speech at a Meeting with Local Leaders in Kanagawa

## HIMINO Ryozo

Deputy Governor of the Bank of Japan

(English translation based on the Japanese original)

## Introduction

Thank you for joining us today. Thank you also for your support for the Bank of Japan and its Yokohama Branch.

## Kanagawa and the Modernization of Japan

In 1853, awakened by the blasts of cannons which Commodore Perry's fleet fired near Uraga, Japan started the process of modernization, opening the port of Yokohama and its window to the world. Yokohama  was  at  the forefront of Japan's drive for ""civilization and enlightenment,"" building steel mills, laying down railroads, and installing gas lamps. Since then, the Japanese economy has surprised the world with two miracles and has retreated from these miracles as a result of two major setbacks (Chart 1).

The first miracle was the modernization achieved for the first time in the non-Western world. Within only half a century, a small agricultural nation on the eastern edge of Asia became one of the world's five major powers. However, this achievement was reduced to ashes by World War II. The central area of Yokohama city, for example, was razed to the ground in a major air raid on May 29, 1945.

The  second  miracle  was  Japan's  subsequent  post-war  reconstruction  and  rapid  economic growth, and the industrial zone between Tokyo and Yokohama played a central role in this. Japan came to dominate world markets, one after another, starting with textiles and spreading to  steel,  electrical  equipment, automobiles, machinery, and semiconductors. The Japanese economy survived the two oil shocks, and in the latter half of the 1980s, Japan was the world's largest creditor, the world's eight largest banks were Japanese, and the world's largest and third largest stock exchanges were those in Tokyo and Osaka.

In 1988, I accompanied Toyoo Gyohten, vice-minister of finance for international affairs at the time, who is from Yokohama, to the annual meetings of the IMF-World Bank in Berlin. It is said that Japan played a leading role in these meetings. Gyohten-san said at the press conference after the meetings, ""I have never seen Japan attracting so much attention as this time."" To resolve the debt problems of developing countries, Japan put forward the Miyazawa

Plan, which aimed to substitute the Baker Plan initiated by the United States, signaling that it was prepared to contribute to the governance of the global economy.

I was fortunate enough at the beginning of my career to have the opportunity to get a glimpse of the pinnacle of Japan's economic and financial influence and its leadership in the global economy.  However,  after  that,  most  of  my  professional  life  overlapped  with  the  second setback to the Japanese economy.

Some argue that the performance of the Japanese economy during this period was not too bad, given the declining population and other headwinds. Since the rapid progress made up to that point  had  been  remarkable,  however,  the  setback  made  many  people  in  other  countries wonder why it had occurred.

The Japanese economy was 73% of the size of the United States economy in 1995, but today it is 14%. In terms of per capita GDP, Japan was overtaken by Singapore in 2007, Hong Kong in 2014, South Korea in 2022, and is expected to be overtaken by Taiwan in 2024 (Chart 2). When we visit these countries and regions, we often get the sense that the people living there are  wealthier  than  those  living  in  Japan.  Having  been  involved  in  economic  policy formulation during this period, when Japan lagged behind its peers, I feel that I should share some of the blame.

## I. Economic Activity and Prices

## Review of Monetary Policy from a Broad Perspective

In  April  2023,  the  Bank  of  Japan  launched  a  review  of  monetary  policy  from  a  broad perspective. The summary of the outcome of the exercise was published in December last year. In addition, the Bank has posted on its website 46 staff papers and the reports of six conferences attended by experts from Japan and abroad.

The review covers the quarter century since the late 1990s, when Japan's period of deflation started. The review was designed to be from a broad perspective and analyzes a wide range of topics from multiple perspectives. I would argue that the rich contents of the review help

us explore why the Japanese economy failed to revive even after the bursting of the bubble and subsequent banking crisis had passed.

From a monetary policy perspective, the history of the quarter century could be summarized as  follows:  In  the  1990s,  the  economy  fell  into  stagnation  and  moderate  deflation  due  to various factors, on both the supply and the demand sides, and monetary policy was faced with the zero lower bound of nominal interest rates. In the 2010s, the quantitative and qualitative monetary  easing  (QQE)  was  initiated,  and  the  economy  recovered  and  ceased  to  be deflationary, but the 2 percent price stability target was not achieved, and the behavior based on the belief that wages and prices do not change persisted. However, since the COVID-19 pandemic, the rapid rise in import prices, the economic recovery, and the tightening of the labor market have triggered a virtuous cycle between wages and prices. It has now become possible to envision achieving the price stability target in a sustainable and stable manner.

The review cites various factors on both the supply and the demand sides as reasons for the moderate but prolonged deflation. Looking ahead, it is important to identify which of these factors have been resolved and which remain (Chart 3).

First,  the  burst  of  the  bubble  in  the  early  1990s  forced  firms  to  adjust  their  excess  debt, capacity and employment. Banking crises, a credit crunch, and credit withdrawal ensued. These issues, however, were largely resolved in the 2000s.

In  addition,  the  Japanese  economy  suffered  from  various  exogenous  shocks,  such  as  the global financial crisis, the Great East Japan Earthquake and the COVID-19 pandemic, but the direct effects of these shocks to the Japanese economy have largely dissipated, though the impact of the Noto earthquake and flood last year continues to be felt. In the wake of the global financial crisis, the Japanese economy suffered from an extreme appreciation of the yen, caused by monetary easing in the United States and Europe among other factors, but from  2022  onward,  the  yen  saw  a  rapid  depreciation  as  these  countries  tightened  their monetary policy.

The review also points out that the conventional monetary policy tool, i.e., the adjustment of short-term rates, ceased to stimulate the economy adequately. There were three reasons: First, the short-term interest rate reached its zero lower bound. Second, real interest rates, or the nominal rates minus the expected inflation rates, rose as the inflation rate turned negative. Third, as a result of the decline in the potential growth rate and other factors, lower real rates than before were needed to stimulate the economy. A combination of the three made the conventional monetary policy tool ineffective.

The first of the above three reasons still applies: The level of the short-term rate is still at 0.25 percent and without much room for reduction. However, the second reason no longer applies: with positive inflation rates, it has become possible to keep real interest rates at a reasonably low level. In fact, real interest rates are currently the lowest they have been for 25 years. I would like to discuss the third reason later.

The review also cites the behavior based on the belief that wages and prices do not move, as background to the persistence of deflation. Firms prioritized cost cutting in their business strategies and kept prices unchanged even when costs rose. Society prioritized employment stability  over  wage  increases.  The  public  sector  provided  subsidies  to  prevent  rises  in administered prices.

I  believe,  however,  that  behavior  and  mindset  will  change  in  line  with  changes  in  the economic  structure.  If  behavior  and  mindset  that  are  inconsistent  with  the  new  structure persist, reforms will be attempted. Indeed, firms' wage- and price-setting behavior has been changing since the beginning of the 2020s, with the import price shock working as a catalyst and thanks to the efforts of the government, businesses and unions.

I would argue that the deflationary factors I have mentioned so far have been largely resolved or are in the process of being resolved. On the other hand, there are some other factors which still  linger  on.  Firstly,  the  declining  birthrate  and  aging  and  shrinking  population,  and secondly, economic globalization.

The first factor is becoming more acute. 25 years ago, around 1.2 million babies were born every year, but the number is now 0.7 million, and the decline is accelerating. The baby boomer generation has entered the ""late elderly stage,"" becoming over 75 years old, and the second generation baby boomers are now in their 50s.

On the other hand, there are divergent views about the future of globalization. Some argue that globalization in economic activity, which had accelerated since the 1990s, began to slow down after the global financial crisis in 2008, and might have started to unwind in the wake of the COVID-19 pandemic and the escalation of geopolitical tensions. Whatever the pace of change may be, however, the level of economic globalization will remain elevated. Moreover, cyberspace is breaking down national borders and language barriers, and digital globalization may have a bigger impact than the globalization in trade and finance. Japan, however, does not seem to be in the vanguard of the IT revolution. In short, globalization, or the increasing degree of exposure to the relative gap in competitiveness at home and abroad, continues to be a major challenge for the Japanese economy.

In sum, many factors have been resolved or are being resolved, but some remain. The question is whether the remaining ones will prevent us from realizing a brighter future.

In  the  following,  I  would  like  to  briefly  review  the  impact  the  shrinking  population  and economic globalization have had on the corporate and household sectors. My conclusion is that the two sectors have addressed these factors by transforming themselves over the years, and excessive pessimism is not warranted.

## Corporate Sector under Population Decline and Globalization

The  investment  behavior  of  the  Japanese  corporate  sector  is  often  explained  as  follows: Investment in Japan, where the population continues to decline, is not profitable, whereas investment in overseas markets can be profitable. Firms' investment in Japan is therefore limited  to  the  renewal  of  existing  plant  and  equipment  and  confined  to  the  amount  of depreciation  expense.  They  instead  focus  on  expanding  their  overseas  operations.  If  this narrative reflects the reality, the stagnation of the domestic economy will not cease as long as the combination of population decline and globalization continues.

It is true that Japanese companies have actively expanded their overseas operations (Chart 4). The number of overseas subsidiaries has been growing consistently. Companies that have established overseas subsidiaries have half of their employees and sales proceeds outside Japan. While other jurisdictions have slowed the pace of globalization in the wake of the global financial crisis, Japanese companies have continued to expand abroad. (Chart 5) 1 .

However, this does not necessarily mean that companies were less profitable in the domestic market than in the overseas market (Chart 6). The profit margins of large domestic companies have been higher than those of their overseas subsidiaries most of the time. Since the global financial crisis, while the profit margins of overseas subsidiaries have remained flat, the profit margins of large domestic companies have continued to improve, and the gap between the two has been widening.

In addition, if the main motivation during this period was to invest overseas because of the low profitability of the domestic market, the movements of domestic and overseas capital investment should have been inversely correlated. But if we compare the movement of net domestic investment, or domestic capital expenditure less depreciation, and the movement of outbound direct investment, they seem to have moved rather in tandem. Of course, individual companies must have decided their investment destinations based on various motives, but broadly speaking, when Japanese companies were suffering from excess capacity after the bubble burst, there was weaker activity in both domestic and overseas investment, but as companies overcame this and regained their vigor, both domestic and overseas investment became active.

These developments suggest that the pessimism based on the combination of the shrinking population and globalization might not well reflect reality. The past 25 years can be divided into two periods: in the first half, Japanese firms struggled to overcome the aftereffects of the burst of the bubble, while in the second half they have, on the whole, become more and more active, both at home and abroad.

1 Chart 1 of Hogen,Y., Ito, Y ., Kanai, K., Kishi, N., ""Changes in the Global Economic Landscape and Issues for Japan's Economy, "" Bank of Japan Working Paper Series, 24-E-3 , 2024.

## Household Sector under Population Decline and Globalization

Now let's turn to the household sector. It is a common perception that the key issues for the household sector are the declining number of workers and sluggish real wage growth.

However, the shape of the population pyramid, the way we work, and the pattern of labor force participation are all changing, and the average value statistics might not tell the whole story.

For example, suppose that Worker A, who used to work 8 hours a day, retired from her fulltime job and started a part-time work, and that Worker B, who had been on leave of absence, returned to the workplace and resumed a part-time work. A and B work together and complete the job A did before by working 5 hours a day each and 10 hours in total, to cover the time needed for coordination between the two. Finally, suppose the sum of the wages A and B receive is the same as the wages A received before.

In this case, wages and labor productivity per worker are halved, and hourly wages and labor productivity  are  reduced  by  20%.  Though  this  change  in  the  average  values  gives  us  a negative impression, GDP and total real wages are maintained, and the total amount of wages after tax probably increases. Perhaps this case could be seen as a successful reversal of the effects of a decline in the working-age population.

To assess the changes, particularly from a longer perspective, we therefore need to look at households as a whole, not just the average values per person or per hour.

After the burst of the bubble, especially after the banking crisis in 1998, firms' efforts to slash excessive debt, capacity, and employment had significant impact on households. However, since  2004,  when  the  firms'  adjustment  process  has  largely  been  completed  (Chart  7), although the working-age population has recorded a steep decline, the decline in total working hours has been moderate.

Furthermore, real GDP, which is the total amount of added value created through work, and total real wages, which is the portion of GDP distributed to employees, have been growing steadily, except for the temporary declines due to the global financial crisis and the COVID19 pandemic.

It is true that total real wages declined, causing hardship on households, in 2022 and 2023, while real GDP recovered. According to the analysis by the Bank's staff 2 , this gap was mainly due to the deterioration in the terms of trade caused by the rise in energy and other commodity prices. The decline in the labor share contributed to the gap as well. Subsequently, the terms of trade has improved, and the total amount of real wages earned by all employees has picked up in 2024.

In sum, contrary to the conventional image that the corporate and household sectors have faced an inescapable impasse arising from the shrinking population and globalization, it may be argued that, after resolving the issues of excess debt, capacity and employment, they have so far succeeded in overcoming the structural challenges reasonably well.

## II. Monetary Policy

## Developments in Prices and Monetary Policy Outlook

I mentioned earlier that real interest rates rose after deflation began in the late 1990s. Then QQE was introduced in 2013, and since then Japan has no longer been in deflation in the sense of prices continuing to fall. Real interest rates turned negative (Chart 8).

The era of the negative nominal interest rate, when you were worse off depositing your money with the Bank of Japan than by keeping it under your mattress, ended in March last year. Real interest rates, however, remain negative. The real value of money lent or deposited continues to decrease as the interest cannot keep up with inflation.

2 Chart 17 of Fukunaga, I., Hogen, Y., Ito, Y ., Kanai, K., Tsuchida, S., "" Potential Growth in Japan: Issues on Its Relationship with Prices and Wages, "" Bank of Japan Working Paper Series, 24-E-16 , 2024.

A negative real interest rate means that it pays to borrow and invest in a project whose real economic value gradually erodes.

There is no consensus among economists on whether real interest rates could remain negative indefinitely. Ben Bernanke, former chairman of the Fed and Nobel laureate, argues that they could not. 3 On the other hand, Lawrence Summers, who served as secretary of the Treasury and president of Harvard University, points out that negative real interest rates are not so uncommon. 4

I have no intention to try present a solution to the dispute, but I would say that in a situation where the economy is being affected by negative shocks or when deflationary factors remain strong,  it  is  necessary  and  would  not  be  abnormal  for  real  interest  rates  to  be  negative. However, I do not think it normal for negative real interest rates to persist once the shocks and deflationary factors are resolved.

With regard to Japan, I have argued today that many of the shocks and deflationary factors have been resolved, and that, although the two major structural factors, shrinking population and globalization, persist, they may not be unsurmountable.

They may not be unsurmountable, but can we actually surmount them? The road will surely be  bumpy.  However,  more  workers  today  are  switching  to  companies  that  enhance productivity and raise wages. Both firms and the government are pursuing strategies to adapt to  the  emerging  structure  of  the  international  economy.  If  we  continue  to  overcome  the various  challenges  associated  with  a  declining  population  and  globalization  in  a  creative manner,  a  future  can  be  envisioned  in  which  real  interest  rates  will  no  longer  be  deeply negative.

In  conducting  monetary  policy,  it  is  also  necessary  to  pay  close  attention  to  short-term developments in economic activity, prices, and financial conditions. Let us look at the recent

3 Ben Bernanke, ""Why are interest rates so low, part 2: Secular stagnation"" Brookings commentary, March 2015.

4 Lawrence Summers, ""On secular stagnation: Larry Summers responds to Ben Bernanke"" Brookings commentary, April 2015.

developments in prices. The change in the consumer price index (less fresh foods) reached 4 percent in December 2022 and January 2023, due to the sharp rise in import prices and other factors,  but  has  gradually  decelerated  since  then.  The  main  scenario  the  Bank  of  Japan envisages is that the inflation rate for the next two fiscal years (April to March) will be around 2 percent (Chart 9).

On the other hand, inflation expectation has risen from below one percent to around one and half. The Bank of Japan aims to achieve the price stability target of 2 percent in a sustainable and stable manner. This target cannot be achieved unless the actual inflation rate declines as envisioned. At the same time, if inflation expectation does not rise toward 2 percent, the actual inflation rate will eventually fall below 2 percent, and it thus would not be possible to achieve the target in a sustainable and stable manner.

The path we have drawn is a difficult one, in which the actual inflation rate will decline and inflation expectations will rise, and both will land at around 2 percent. So far, however, the developments in prices and inflation expectation, including the economic mechanisms behind them, seem to have been largely on the path.

If  this  outlook  will  continue  to  be  realized,  the  Bank  will  raise  the  policy  interest  rate accordingly and adjust the degree of monetary easing, as it did in March and July last year. What I have described so far are the central scenario for the prices and the broad outlook for the monetary policy. But there are various risk factors at home and abroad, both upside and downside, and the policy should be conducted with due attention to them.

On the domestic front, one of the issues we should pay close attention to is the outlook for wage increases in fiscal 2025. Each firm faces unique challenges, and raising wages would by no means be a simple matter. But I hope to see strong wage hikes in fiscal 2025 as we did in fiscal 2024, given the high ratio of firms reporting favorable business conditions, strong corporate profits, low labor share ratio, accelerating labor shortages, employees searching and changing jobs increasingly actively, and the minimum wage raised last October.

On the  occasions  of  New  Year  ceremonies,  leaders  of  various  sectors  gave  encouraging messages on wage increases in fiscal 2025. At our branch managers' meeting held last week, we heard many positive reports, and multiple branch managers talked about companies which incorporated plans on continued wage increases in their medium-term business plans. The ratio of companies which respond that they will raise wages in fiscal 2025 and the rate of planned wage increases are broadly at or above the levels seen one year ago, according to many of the relevant surveys.

Regarding the overseas economy, one of the issues to look at is the policies of the new U.S. administration  and  their  impact  on  the  U.S.,  global  and  Japanese  economy.  Continuous monitoring will be warranted, but the inaugural address next week will give us an idea on the broad direction of policies the new administration will pursue. Experts will continue their debates on medium- to long-term effects of new policies, but, based on what has been known by today, many expect the U.S. economy to continue performing strong over the coming period, which seems to be in contrast with the outlook entertained around August last year when downside risks were the focus.

In any case, including these issues, the Bank is currently updating the outlook for Japan's economic activity and prices for this year onward by scrutinizing the latest data available and other information. The outlook will be presented in the Bank's report, Outlook for Economic Activity and Prices, to be released next week.

In conducting monetary policy, it is difficult but essential to judge the right timing. At the monetary policy meeting to be held next week, the board will have discussion to decide whether to raise the policy rate or not, based on the outlook to be compiled in the Report.

## Communication on Monetary Policy

We often hear requests that the Bank of Japan should strive for more effective communication on the conduct of monetary policy. Let me make three points on this matter.

First,  in  February  1999,  facing  the  zero  lower  bound  on  the  interest  rate,  and  aiming  for additional monetary easing, the Bank of Japan began to provide guidance on the future path

of monetary policy, adopting the proposal by Kazuo Ueda, the current governor, who then was a member of the policy board. This strategy, initially dubbed the ""policy duration effect"", came to be known as forward guidance. As other advanced economies also faced the zero lower bound, this strategy was adopted by central banks around the world, and it became commonplace for central banks to provide certain guidance in advance on the outcome of future monetary policy meetings.

However, while forward guidance has been effective, there has been a growing awareness that it may become a constraint when a policy change is necessary, and that in some cases, it may even have the adverse effect of delaying a necessary policy change. For this reason, many central banks withdrew forward guidance in 2022, when they were freed from the zero lower bound.

At  present,  the  base  line  of  many  central  banks'  communication  is  to  say  that  they  look carefully at the totality of the data available up to the time of each policy meeting and make decisions on a meeting-by-meeting basis. In Japan, the period with forward guidance lasted much longer than in other jurisdictions, and post-forward guidance communication is newer than in other jurisdictions, as the Bank of Japan dropped language binding the future course of  policy  from  its  publications  only  in  March  last  year.  It  has  therefore  not  been  well acknowledged, and is worth emphasizing, that the transition did happen in Japan as well.

Second, it is not desirable for the conduct of monetary policy to intentionally cause surprises, except in times of crisis where perceptions need to be drastically changed. In addition, if market participants' expectations diverge from the central bank's thinking, a market tantrum can  occur  in  the  process  of  resolving  the  expectation  gap.  It  is  therefore  desirable  to communicate in a way that prevents the excess growth of expectation gaps. Furthermore, the effectiveness of monetary policy depends significantly on how widely and accurately the central bank's intentions are understood. Therefore, it is essential to communicate the policy reaction function and views on the current economic condition so as to help people understand and form expectations about the future conduct of monetary policy.

However, this does not mean that the outcome of each monetary policy meeting should be telegraphed in advance so that it can be fully priced in by the market. It is not possible to do so, as the outcome of a policy meeting fully depends on the discussion at the meeting. In addition, if market participants start to assume that each policy meeting will be preceded by communication intended to let them price in the decision in advance, then they will focus more on the language the Bank uses than on the economic developments and outlook. Such would not be desirable.

Thirdly, we would like to learn from our experience and improve our communication. The content is of course important,  but  there  can  be  improvements  in  the  manner  of communication as well. For example, there were cases in the past where there were four speeches by board members in two weeks, and then none for a whole month. We would like to even out the timing of the speeches. Also, if the Bank announces the schedule of a speech at the last minute, it may be misunderstood as though the Bank was about to give some urgent message. We intend to announce the schedule of speeches as soon as practicable. We will continue to explore better approaches, benefitting from suggestions from stakeholders and perhaps learning by trial and error.

## Conclusion

## Hokusai ' s Great Wave

In July last year, the Bank of Japan issued a series of new banknotes. Your cooperation has made it possible to achieve smooth distribution. I would like to express the Bank's gratitude.

The new 1,000-yen bill features Katsushika Hokusai's masterpiece Kanagawa Oki Namiura (Chart  10).  There  is  no  consensus  yet,  but  many  argue  that  it  depicts  the  scenery  seen somewhere  off  Yokohama  Port.  This  means  that,  if  we  transpose  the  scenery  to  a contemporary setting, we may be able to see this meeting venue beyond the waves. This woodprint work, which is said to have been an inspiration to Van Gogh and to Debussy, is known overseas as The Great Wave .

Central bankers often call the period since the mid-1980s the Great Moderation. They argue that  business  cycle  fluctuations  have  become  much  milder  during  this  period  and  that  though it may somewhat sound like a self-praise -- the rise of independent central banks and their  proper  conduct  of  monetary  policy  have  been  the  key  factors  contributing  to  the moderation.

Recently, however, external shocks have struck one after another, and the governor of Banque de France, François Villeroy de Galhau, commented that we may have entered an era of Great Volatility. 5 It might also be named the era of the Great Wave.

Hokusai's work depicts small human beings facing the great force of nature, our ancestors enduring rough seas together on a small boat being toyed with by the waves. Far beyond the waves, we also see the immovable figure of Mt. Fuji, which symbolizes a constant, stable, balanced and awakened self to be found amid life's impermanence and chaos. I do not know what kind of era awaits us, but even if it is the era of the Great Wave, I hope we can stand firm together, with the figure of Mt. Fuji in our mind, as depicted in this picture.

Thank you for your kind attention. Now I would like to open the floor. I look forward to hearing your comments and opinions.

5 François Villeroy de Galhau, ""Monetary policy in perspective ( Ⅱ ): Three landmarks for a future of 'Great Volatility'"" Speech at the London School of Economics, October 2024.

## Japan's Economy and Monetary Policy

Speech at a Meeting with Local Leaders in Kanagawa

January 14, 2025

## HIMINO Ryozo

Deputy Governor of the Bank of Japan

## Introduction

Kanagawa and the Modernization of Japan

## I. Economic Activity and Prices

Review of Monetary Policy from a Broad Perspective Corporate Sector under Population Decline and Globalization Household Sector under Population Decline and Globalization

## II. Monetary Policy

Developments in Prices and Monetary Policy Outlook

Communication on Monetary Policy

## Conclusion

Hokusai's Great Wave

Introduction

## Kanagawa and the Modernization of Japan

## Commodore Perry's Fleet

Source: Edo-Tokyo Museum, ""Samurais Getting Ready to Fight on the Arrival of American Ships.""



## 'Civilization and Enlightenment'

Source: Yokohama Museum of Art, ""Steam Train on the Yokohama Coastal Railway"" (painted by Utagawa Hiroshige III, and donated by Ms. Saito Ryu).



Introduction

## Economic Growth of Japan and Peers

## GDP of Japan and the U.S.

## GDP per capita in Asia



Figures for 2024 are IMF projections in the October 2024

World Economic Outlook



## Air Raid on Yokohama

Source: U.S. National Archives and Records Administration.



## Industrial Zone in Kanagawa

Source: Kawasaki City.



1

Chart 2

.

I. Economic Activity and Prices

## Factors behind Prolonged Deflation

- Burst of the bubble economy
- Excessive debt, capacity, and employment
- Banking crises
- Credit crunch and credit withdrawal
- Global Financial Crisis
- The Great East Japan Earthquake
- COVID-19 pandemic
- Yen appreciation resulting from monetary easing in Europe and the United States
- Zero lower bound, rise in real interest rates, and decline in the natural rate of interest
- Behavior based on the belief that wages and prices do not move
- Declining birthrate, and aging and shrinking population
- Globalization of economic activities

I. Economic Activity and Prices

3

Chart 4

## Overseas Expansion of Japanese Firms

## Number of Overseas Subsidiaries

Size of Overseas Subsidiaries Relative to Domestic Headquarters



FY



## Japan's Pace of Globalization Compared to Peers

## KOF Globalization Index

## Stock of Outbound Direct Investment





Note: In the left-hand chart, the index is calculated based on several statistical indices, such as trade volume. The shaded area indicates the 10th-90th percentile range of 158 countries.

The right-hand chart shows the stock of outbound direct investments from Japan, the United States, and China.

Figures are calculated based on Hogen et al. (2024) using the latest data.

Sources: UNCTAD; KOF Swiss Economic Institute; BEA.

I. Economic Activity and Prices

## Profits and Investment at Home and Abroad

Profit Margin Ratio

## Domestic Fixed Investment and Outbound Direct Investment





Note: In the left-hand chart, large domestic companies are non-financial firms with a capitalization of 1 billion yen or more, including those that do not have foreign subsidiaries. In the right-hand chart, domestic fixed investment and domestic depreciation show the aggregate figures for domestic non-financial firms. Sources: Ministry of Economy, Trade and Industry; Ministry of Finance.

5

Chart 6

## Shrinking Population, Work Hours, GDP, and Wages



Note: Total real wages are real compensation of employees in SNA.  Figures for real GDP and total real wages for 2024 are up to Q3. Total working hours is the working hours of the total workforce.

Sources: Ministry of Internal Affairs and Communications; Cabinet Office.

Ⅱ . Monetary Policy

## Developments in Real Interest Rate

Real Interest Rate (1-Year)

Real Interest Rate (10-Year)





Note: Figures for real interest rates are calculated as government bond yields minus the composite index of inflation expectations (Bank of Japan staff estimates). Sources: Bank of Japan; QUICK, ""QUICK Monthly Market Survey &lt;Bonds&gt;""; Consensus Economics Inc., ""Consensus Forecasts""; Bloomberg.

7

Chart 8



## Developments in Consumer Prices and Inflation Expectations



FY

9 Note: The figure for actual for 2024/Q4 is the October-November average. Sources: Ministry of Internal Affairs and Communications; Bank of Japan; QUICK, ""QUICK Monthly Market Survey &lt;Bonds&gt;""; Consensus Economics Inc., ""Consensus Forecasts""; Bloomberg.

Conclusion

Chart 10

## Hokusai's Great Wave Depicted on New 1,000 Yen Note

",Ryozo Himino
https://www.bis.org/review/r250113c.htm,"Michelle W Bowman: Reflections on 2024 - monetary policy, economic performance and lessons for banking regulation","Speech by Ms Michelle W Bowman, Member of the Board of Governors of the Federal Reserve System, at the California Bankers Association 2025 Bank Presidents Seminar, Laguna Beach, California, 9 January 2025.",2025-01-09 00:00:00,"## Michelle W Bowman: Reflections on 2024 - monetary policy, economic performance and lessons for banking regulation

Speech by Ms Michelle W Bowman, Member of the Board of Governors of the Federal Reserve System, at the California Bankers Association 2025 Bank Presidents Seminar, Laguna Beach, California, 9 January 2025.

* * *

Let me begin by recognizing the devastation caused by the fires in the Los Angeles area. My thoughts and prayers are with those who have been impacted and the first responders who are fighting to bring the fires under control.

I would like to thank the California Bankers Association for the invitation to speak to you today. 1   I appreciate the opportunity to reflect on the past year, on both the path of monetary policy and the economy and on how this past experience can inform the bank regulatory agenda as we look ahead to a new year.

In light of the policy decisions at the last few Federal Open Market Committee (FOMC) meetings, I will begin by providing some perspective on my votes and then discuss my current views on the economy and monetary policy.

## Update on the Most Recent FOMC Meetings

At the September meeting last year, the FOMC voted to lower the target range for the federal funds rate, for the first time since we began tightening monetary policy to combat inflation, by 1/2 percentage point to 4-3/4 to 5 percent. Although I was unable to support such a large cut at that time, I did agree with the Committee's assessment that it was appropriate to begin the process of recalibrating policy to reflect the progress in both lowering inflation and cooling the labor market since the middle of 2023.

My dissent favored a smaller initial cut to begin the recalibration process and was the first FOMC dissent by a Board member in nearly 20 years. I explained my reasoning in a statement published after the meeting that noted that moving the policy rate down too quickly would carry the risk of unnecessarily stoking demand and potentially reigniting inflationary pressures. In addition, since inflation continues to hover well above our 2 percent goal, there was a real risk that the Committee's large policy action could be interpreted as a premature declaration of victory on our price-stability mandate.

At both our November and December meetings, the Committee lowered the target range for the federal funds rate by 1/4 percentage point, bringing it to 4-1/4 to 4-1/2 percent. I supported the December policy action because, in my view, it represented the Committee's final step in the policy recalibration phase. The target range now reflects 100 basis points of cuts since September, and the policy rate is now closer to my estimate of its neutral level, which is higher than before the pandemic. But given the lack of continued progress on lowering inflation and the ongoing strength in economic activity and in the labor market, I could have supported taking no action at the

December meeting. Still, I am pleased that the post-meeting statement continued to reference a flexible and data-dependent approach for considering future policy adjustments. It is important that we remain focused on returning inflation to 2 percent.

I expect that the coming months should bring clarity on the incoming administration's policies and the carry over of inflationary pressures from 2024, reflecting private spending decisions and an apparent faster spend-out of existing federal government appropriations in recent months. It will be very important to understand how these factors will affect economic activity and inflation going forward.

## The Economy Towards the End of 2024 and Risks to the Outlook

The U.S. economy remained strong through the end of last year, with solid growth in economic activity and a labor market near full employment. However, core inflation remains elevated, and I continue to see upside risks to inflation.

The rate of inflation declined significantly in 2023, but this progress appears to have stalled last year with core inflation still uncomfortably above the Committee's 2 percent goal. The 12-month measure of core personal consumption expenditures inflation-which excludes food and energy prices-moved back up to 2.8 percent in October and November, only slightly below its 3.0 percent reading at the end of 2023. Progress has stalled since the spring of last year mostly due to a slowing in core goods price declines. Persistently elevated core inflation continues to reflect pressures on housing services prices, possibly due to an increase in demand for affordable housing amid an inelastic supply. It also appears to be originating from a few other major components in recent months, such as in goods and in services with imputed prices.

Gross domestic product increased at a solid pace in the third quarter, maintaining the momentum from the previous four quarters. Growth continued to be driven by private domestic final purchases, as personal consumption, and retail sales in particular, strongly increased in the third quarter, more than offsetting further weakness in housing activity due to high mortgage rates. The latest data suggest continued strength in consumer spending in the fourth quarter as retail sales and sales of light vehicles continued to rise appreciably.

Post-election consumer sentiment appears to be improving, but it remains well below pre-pandemic levels likely because of higher prices. And since housing, food, and energy price increases have far outpaced overall inflation since the pandemic, lowerincome households have experienced the negative impacts of inflation hardest, especially as these households have limited options to trade down for lower-cost goods and services.

The most recent labor market report shows that payroll employment gains rebounded in November, following a temporary drag in October from hurricanes Helene and Milton and the Boeing strike. On balance, job gains averaged about 130,000 over those two months, a pace only slightly below the average gains in the second and third quarters. The unemployment rate rose to a still low 4.2 percent in November, but it has moved sideways since July. While unemployment is notably higher than in 2023, it is still at a historically low level and below my and the Congressional Budget Office's estimates of full employment, and we will receive the December employment report tomorrow.

The labor market has loosened from the extremely tight conditions of the past few years. The ratio of job vacancies to unemployed workers has remained close to the historically elevated pre-pandemic level in recent months. But there are still more available jobs than available workers, a condition that before 2018 had only occurred twice for a prolonged period since World War II, further signaling ongoing labor market strength. Wage growth remains indicative of a tight labor market and above the pace consistent with our inflation goal.

The rise in the unemployment rate last year largely reflected weaker hiring, as job seekers entering or re-entering the labor force took longer to find work, while layoffs remained low. Although there has been some cooling in labor demand and the labor force participation rate declined a bit further in November, the household survey may have failed to capture the usual seasonal hiring ahead of the holidays due to the unusually early survey week and the late Thanksgiving holiday.

More concerningly, the labor market data have become increasingly difficult to interpret, as surveys and other measurements struggle to incorporate large numbers of new workers and to accurately account for other influences. As the dynamics of immigration and business creation and closures continue to change, it has become increasingly difficult to interpret the monthly data from the payroll and household surveys. It is crucial that U.S. official data accurately capture structural changes in labor markets in real time, such as those in recent years, so we can more confidently rely on these data for monetary and economic policymaking. In the meantime, given conflicting economic signals, measurement challenges, and significant data revisions, I remain cautious about taking signal from only a limited set of real-time data releases.

Turning to the risks to achieving our dual mandate, I continue to see greater risks to price stability, especially while the labor market remains near full employment, but it is possible that we could see a deterioration in labor market conditions. Global supply chains continue to be susceptible to shocks, including labor strikes and increased geopolitical tensions, namely in the Middle East, Eastern Europe, and Asia, which could result in inflationary effects on food, energy, and other commodity markets.

The potential release of pent-up demand following the election, especially with improving consumer and business sentiment, could also present inflationary risks, as could an increased demand for housing given the long-standing limited supply, especially of affordable housing. While it is not my baseline outlook, I cannot rule out the risk that progress on inflation could continue to stall.

## The Path Forward

Looking ahead, we should be cautious in considering changes to the policy rate as we move toward a more neutral setting. Future actions should be based on a careful assessment of ongoing and sustained progress in achieving our goals, and we must be clear in our communication about how further changes are intended to affect economic conditions. We should also refrain from prejudging the incoming administration's future policies. Instead, we should wait for more clarity and then seek to understand the effects on economic activity, the labor market, and inflation.

I also continue to be concerned that the current stance of policy may not be as restrictive as others may see it. Given the ongoing strength in the economy, it seems unlikely that the overall level of interest rates and borrowing costs are providing meaningful restraint. With equity prices more than 20 percent higher than a year ago, easier financial conditions may be contributing to the lack of further progress on slowing inflation. In fact, concerns about inflation risks seem to partly explain the recent notable increase in the 10-year Treasury yield back to values last seen in the spring of 2024. In light of these considerations, I continue to prefer a cautious and gradual approach to adjusting policy.

Looking forward, it is important to note that monetary policy is not on a preset course. At each FOMC meeting, my colleagues and I will make our decisions based on the incoming data and the implications for and risks to the outlook and guided by the Fed's dual-mandate goals of maximum employment and stable prices. By the time of our next meeting later this month, we will have seen new reports on consumer and producer price inflation. In addition to closely watching the incoming data and broader financial conditions, I will continue to meet with a broad range of contacts as I assess the appropriateness of our monetary policy stance.

It is also important to clearly explain how we consider progress in meeting our inflation and employment goals in our policy deliberations. Restoring price stability is essential for fostering a strong labor market and an economy that works for everyone in the longer term.

## Approach to Bank Regulatory Policy

Turning to banking, I will start by sharing my thoughts on bank supervision and regulation. This year will see a transition in leadership at the banking agencies, and I expect that this will translate into a shift in priorities and approach. I am optimistic that by working collaboratively to focus on our statutory mandates, the banking agencies can improve how we fulfill our responsibilities in a fair, efficient, and accountable way. Adopting a more pragmatic approach to policymaking, one that imposes discipline in the exercise of the extensive powers and important responsibilities granted by Congress, would be most effective. 2

Public debates about the bank regulatory framework routinely focus on whether regulators are being ""hard enough"" on banks, or whether the framework is too ""lenient."" Framing the debate this way suggests a binary approach that ignores the known tradeoffs in any regulatory action-like raising capital requirements or downgrading a bank's management rating for minor issues to show ""toughness."" This approach interprets a rational prioritization of regulatory matters as being too bank friendly. While policy views may differ, policy debates should not misinterpret the dynamic of how banks and regulators should operate. In short, bank regulation and supervision need not be an adversarial system, with banks and regulators acting in opposition. Rather, banks and regulators often have the shared goal of a banking system that is safe, sound, and effective, with each serving an important role in furthering these objectives.

As we move away from this type of binary thinking, that leaves the question of how regulators can best accomplish their statutory objectives. As a starting point, we must identify the objectives we are trying to achieve. In conducting bank regulation and

supervision, the Federal Reserve has the important responsibility of promoting the safe and sound operation of individual banks and the stability of the broader financial system. In many cases, these goals are complementary. When individual banks operate in a safe and sound manner, the banking system generally promotes the stability of the U.S. financial system.

Of course, these objectives require a degree of balance if we want the banking system to serve the U.S. economy and facilitate economic growth. When we promote safety and soundness-for example by raising capital requirements-that has an effect on the aggregate lending capacity of the banking system and the availability of credit, particularly for less qualified borrowers. We must approach the task of bank regulation with an understanding and appreciation of these tradeoffs, coupled with an affirmative acknowledgment that the banking system is an important driver of business formation, economic expansion, and opportunity. We have the same responsibility to understand and appreciate the tradeoffs when we exercise our supervisory authority.

I am optimistic about the future of banking in the United States and believe that the banking regulators can support the banking system by adopting a more pragmatic approach. While this is a non-exclusive list, I continue to believe the areas that we should focus on should include (1) prioritizing safety and soundness, (2) renewing our commitment to regulatory tailoring, and (3) increasing transparency. 3

## Prioritization of Safety and Soundness

In 2024, bank regulators were still operating under the shadow of the 2023 bank failures, particularly the failure of Silicon Valley Bank (SVB). The risks facing SVBinterest rate and funding risks, rapid growth, and the idiosyncratic business model and concentrated customer base of the bank-have long been important issues that have been prioritized during examinations. At its root, SVB's failure exposed significant flaws not only in the bank's management but also in the approach to oversight and supervision.

As we approach regulatory and supervisory reform from the perspective of pragmatism, we need to take a close look at what went wrong and what could be fixed. Regulatory tools to improve management are imperfect and may be limited in their effectiveness before a bank has failed, but we have great latitude to modify our approach to supervision. One pragmatic change would be to prioritize safety and soundness and deprioritize matters that are not essential to-or that are tangential to-our statutory obligations. After SVB's failure, we saw a wide range of regulatory proposals. These have included substantial increases in bank capital requirements and pushing down global systemically important bank (G-SIB) and large bank requirements to much smaller firms. They have also included finding supervisory deficiencies in the management of well-capitalized and financially sound firms and considering widespread changes to the funding and liquidity requirements and expectations that apply to all banks.

Many of these proposals have targeted concerns well beyond remediating issues identified during the 2023 banking stress but have been justified in a generic way-at least in part-as a ""response"" to the failure of SVB. In many cases, the nexus between a

proposed reform and how that reform would remediate any of the underlying issues that caused the failure of SVB or caused stress in the broader banking system is not clearly articulated.

When the agencies pursue reforms, it is critical that the problem is clearly identified and that an explanation is given for how each proposal would address the problem. We should not characterize all reforms as ""crisis response"" actions, as doing so does not relieve us of the responsibility to analyze and justify the tradeoffs and alternatives of any particular measure.

There is substantial room for agreement and consensus. We all want a banking system that can effectively provide credit, including to underserved consumers and businesses. We all want a banking system that is resilient in the face of changing economic conditions. We all want a banking system in which banks are free to experiment and innovate to better serve their customers. And we all want a banking system in which banks are held to high but economically reasonable standards in terms of capital, risk management and compliance.

The process of any reform or change to the bank regulatory framework should begin with an identification of the problem, followed by an analysis of whether proposed solutions are within the agency's statutory authorities, and an evaluation of whether targeted changes could result in improvements, remediation of gaps, or elimination of redundant and unnecessary requirements. The resulting framework will better promote safety and soundness in a more durable and consistent way over time, while also continuing to support economic growth.

## Renewed Commitment to Tailoring

Like you, I firmly believe in the virtues of tailoring not only as a statutory responsibility but as a key to forming sensible and effective bank regulatory policy. 4   Tailoring can help ensure regulators focus on the most critical risks over time and avoid the overallocation of resources or imposition of unnecessary costs on the banking system. Tailoring also allows us to allocate limited supervisory resources to most effectively support safety and soundness of the banking system and U.S. financial stability. The Federal Reserve has not only statutory responsibilities established by Congress, but a responsibility to use our resources efficiently and effectively in the execution of our duties.

Over the past two years, we have seen proposals that would materially reduce the tailoring of regulatory requirements, particularly as it relates to capital (the so-called Basel III ""endgame"" reforms) and new long-term debt requirements that would apply to all banks with over $100 billion in assets. Both proposals raise significant policy questions as to whether the costs are justified by the benefits-questions not sufficiently addressed in the proposals-and pose significant risks of unintended consequences.

Essentially, this type of approach to capital ""flattens"" requirements across large banks. And coupled with other potential reforms to liquidity and funding requirements, this approach could lead to substantial industry consolidation as medium-sized banks weigh the benefits and costs to comply with an aggregate set of requirements more suitable

for the largest banks. We should be cautious of these types of piecemeal regulatory proposals and instead think more holistically about the aggregate impacts as part of our process.

Tailoring also plays an important role in supervision, an area that historically has differentiated expectations for firms based on size, business model, risk profile, and complexity. These criteria provide a reasonable basis to take a different approach based on the unique characteristics of each bank, and as banks shift in size and evolve in business model and risk, it is appropriate to recalibrate expectations. However, I see a growing risk that under the veil of supervision, there has been an erosion of a riskbased approach, and effectively a ""push-down"" of regulatory requirements designed and calibrated for larger firms to apply to smaller firms.

I continue to believe that tailoring should be a central tenet of our regulatory and supervisory approach and framework and believe that we must renew our commitment to this philosophy going forward. I am confident that going forward, regulators will return to regulatory tailoring, particularly for community banks with straightforward business models.

## Increasing Transparency

Regulators should operate in a transparent way and carefully and meticulously follow administrative procedures when making revisions to the regulatory framework. We should take a similar approach to shifts in supervisory focus. Doing so promotes trust and accountability to the public and should be integral to the important work we do promoting the safe and sound operation of the banking system and financial stability. Transparency also promotes innovation in the financial system by enabling banks to understand how to engage in new activities. This is especially important as digital assets and artificial intelligence are becoming increasingly more prevalent in the financial system.

A deliberate, transparent, and fact-based approach to pursuing statutory objectives helps us ""show our work,"" that we are focused on pursuing our policy goals, and are avoiding straying into political concerns outside of statutory purposes or functions. Promoting safety, soundness, and financial stability should not devolve into an exercise of regulatory allocation of credit-picking winners and losers-or promoting an ideological position through more open-ended processes like bank supervision and examination.

Transparency promotes fairness, as regulated entities and the public can better understand why and how our actions further our goals. When we identify areas that suffer from a lack of transparency, we should act promptly to address those concerns. Take, for example, the Federal Reserve's supervisory stress testing process. On December 23, the Fed announced that it would soon seek public comment on ""significant changes"" to the stress testing process designed to improve transparency of the tests and reduce volatility of the resulting stress capital buffers that apply to large financial institutions. 5   Given my longstanding support for revisiting the stress testing framework to promote transparency and reduce volatility, I am pleased with this development. 6

Transparency can lead to better public engagement and outcomes and should be a central part of the regulatory and supervisory approach, even when not legally

mandated, such as in supervision. Supervision involves examiners probing bank operations and assessing a bank's approach to risk and risk management. Much of this information is confidential and commercially sensitive and, therefore, not available to the public or released without risking some degree of harm to the institution.

But the confidential nature and approach to supervision tends to result in a wide range of information being categorized as confidential supervisory information (CSI) and subject to restrictions on sharing. This information ends up being shielded from public scrutiny and becomes a barrier to banks engaging in discussion with peers and other regulators to better understand supervisory expectations. Supervisory expectations should not surprise regulated firms, and yet changes in supervisory expectations often arise in the course of an ongoing examination. As a result, the ability of a financial institution to be proactive-to work to meet any new expectations-is impossible until they have received supervisory feedback, often in the form of a supervisory finding or matter requiring attention or, in extreme cases, in a formal or informal supervisory action.

I am not suggesting that there are always simple solutions to improve transparency, and certainly it is appropriate that much of the information developed in the supervisory process remains shielded as confidential supervisory information. But regulators must also acknowledge the new world in which we operate, one in which administrative law increasingly demands greater transparency and accountability to act as a check on regulatory overreach.

## Closing Thoughts

Thank you for the opportunity to share my thoughts on the economy and bank regulatory matters with you today. In the coming months, I look forward to seeing the impacts of the new administration's policies on the economy and assessing how monetary policy should respond going forward. Today, the U.S. economy begins the new year on a strong footing, with still elevated inflation and a solid labor market.

The new year brings an opportunity to reflect on the experience and lessons learned in the past few years and to take a critical look at improving the bank regulatory framework, including both supervision and regulation. And while I have laid out a few broad areas that I think deserve special attention-focusing on safety and soundness, renewing our commitment to tailoring, and improving transparency-my hope is that the steps we take to improve the regulatory framework in the future focus on pragmatism as a guiding principle.

1  The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.

2  Michelle W. Bowman, "" Approaching Policymaking Pragmatically (PDF)"" (speech at the Forum Club of the Palm Beaches, West Palm Beach, Florida, November 20, 2024).

3  See Michelle W. Bowman, ""New Year's Resolutions for Bank Regulatory Policymakers (PDF)"" (speech at the South Carolina Bankers Association 2024 Community Bankers Conference, Columbia, South Carolina, January 8, 2024).

- 4  See Economic Growth, Regulatory Relief, and Consumer Protection Act, Pub. L. No. 115-174, 132 Stat. 1296 (2018); Michelle W. Bowman, ""Tailoring, Fidelity to the Rule of Law, and Unintended Consequences (PDF)"" (speech at the Harvard Law School Faculty Club, Cambridge, Massachusetts, March 5, 2024).
- 5  Board of Governors of the Federal Reserve System, ""Due to Evolving Legal Landscape &amp; Changes in the Framework of Administrative Law, Federal Reserve Board Will Soon Seek Public Comment on Significant Changes to Improve Transparency of Bank Stress Tests &amp; Reduce Volatility of Resulting Capital Requirements,"" press release, December 23, 2024.
- 6  Michelle W. Bowman, ""The Future of Stress Testing and the Stress Capital Buffer Framework (PDF)"" (speech at the Executive Council of the Banking Law Section of the Federal Bar Association, Washington, D.C., September 10, 2024).",Michelle W Bowman
https://www.bis.org/review/r250113b.htm,Christopher J Waller: Challenges facing central bankers,"Speech by Mr Christopher J Waller, Member of the Board of Governors of the Federal Reserve System, at the Organisation for Economic Cooperation and Development (OECD) seminar series ""The Lectures of the Governor"", Paris, 8 January 2025.",2025-01-08 00:00:00,"For release on delivery 8:00 a.m. EST (2:00 p.m. local time) January 8, 2025

Challenges Facing Central Bankers

Remarks by

Christopher J. Waller Member

Board of Governors of the Federal Reserve System

at

Lectures of the Governor Organization for Economic Cooperation and Development

Paris, France

January 8, 202 5

Thank you, Alvaro, and thank you for the honor of initiating this new series of lectures from central bankers. 1 I will begin with a few words on the U.S. economic outlook and the implications for monetary policy.  But on this occasion, I thought it appropriate to then widen my perspective, to address what I see as the leading challenges that OECD economies face that are of particular importance to central bankers in how we approach monetary policy and our other responsibilities.

I continue to believe that the U.S. economy is on a solid footing.  Real gross domestic product (GDP) growth has been above 2 percent for eight of the last nine quarters and is expected to grow above 2 percent in the fourth quarter of 2024.  Despite this robust economic growth, the labor market softened over 2024, and employment is now near what I judge to be the Federal Open Market Committee's (FOMC) maximumemployment objective.  I have seen nothing in the data or forecasts that suggests the labor market will dramatically weaken over coming months.

With regard to inflation, after a period of rapid disinflation in 2022 and 2023, progress appears to have stalled in the final months of 2024.  Our latest reading of core personal consumption expenditures (PCE) inflation is 2.8 percent for the 12 months ending in November.  This is down just a bit from where it was a year earlier, at 3.2 percent.  This minimal further progress has led to calls to slow or stop reducing the policy rate.  However, I believe that inflation will continue to make progress toward our 2 percent goal over the medium term and that further reductions will be appropriate.

Let me explain why I expect inflation to continue toward our goal.  First, as we saw a year ago when inflation briefly increased, progress has been uneven, but

1 The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.

disinflation is more apparent if one smooths through the recent upticks.  To tease out the underlying trend in inflation, I often look at the six-month percent change in core PCE prices, which is 2.4 percent at an annual rate for November and has mostly been moving down toward 2 percent over the course of the year.  Second, the monthly reading for November came in much lower than expected at 0.11 percent after rising 0.26 percent in October.  Third, inflation in 2024 has largely been driven by increases in imputed prices, such as housing services and nonmarket services, which are estimated rather than directly observed and I consider a less reliable guide to the balance of supply and demand across all goods and services in the economy.  These two categories represent about one-third of the core PCE basket.  If you look at the prices associated with the other two-thirds of core PCE, they on average increased less than 2 percent over the past 12 months through November.  I don't support ignoring our best measures of prices for housing and nonmarket services, but I find it notable that imputed prices, rather than observed prices, were driving inflation in 2024 and thus expectations of the policy rate path.  Finally, the higher inflation readings from early in 2024 will begin to drop out of inflation numbers in January.  This should result in a significant step-down in the 12-month inflation numbers through March.

Looking further forward, geopolitical conflict could boost prices, as it has at times in recent years.  In addition, tariff proposals raise the possibility that a new source of upward pressure on inflation could emerge in the coming year.  Projections of the economic impact of these possible policy changes vary widely.  If, as I expect, tariffs do not have a significant or persistent effect on inflation, they are unlikely to affect my view

of appropriate monetary policy.  Of course, we need to see what policies are enacted before we can seriously consider their effects.

So what is my view?  If the outlook evolves as I have described here, I will support continuing to cut our policy rate in 2025.  The pace of those cuts will depend on how much progress we make on inflation, while keeping the labor market from weakening.  Based on the most recent Summary of Economic Projections, the median of policymakers' expected appropriate policy rate this year implies two 25 basis point cuts. 2 But the range of views is quite large, from no cuts to as many as five cuts for different FOMC participants.  As always, the extent of further easing will depend on what the data tell us about progress toward 2 percent inflation, but my bottom-line message is that I believe more cuts will be appropriate.

Let me now turn to what I consider some of the leading challenges that will frame monetary policy actions for OECD members in 2025 and beyond.  Each of the issues I raise are sizable challenges for all OECD countries, but some are bigger challenges in some places than others.  I have not tried to rank these challenges in importance, so please don't take any signal from the order in which they are raised.

I will start with the ongoing challenge all central banks face in reaching our targets for inflation.  While 12-month measures of headline inflation are close to target in most jurisdictions, most central banks target inflation in the medium term, and indicators of the trajectory of future price changes, such as core inflation, are still running persistently above target.  Like the Federal Reserve, most central banks in OECD economies are gradually easing monetary policy as inflation falls.  I believe policy is still

2 The most recent Summary of Economic Projections is available on the Board's website at https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm.

restrictive in most cases, which should support the goals of policymakers to have inflation at their targets going forward.

This common challenge, in the months ahead, has its roots, as we all know, in the common experience of the COVID-19 pandemic.  Economic conditions before and during the pandemic varied widely across OECD economies, as did the focus, timing, and forcefulness of policy responses.  The surge in inflation during the pandemic was the result of both supply and demand factors, and while the timing of the inflation surge varied across countries, the COVID inflation was largely a global phenomenon, as shown by research conducted by Federal Reserve staff. 3

A common factor that drove inflation across our economies was the disruption of goods production and delivery. 4 Shortages of key components and waves of COVID variants repeatedly disrupted supply chains, causing inflation to persist.  Fortunately, these disruptions have receded, and delivery times have returned to pre-pandemic levels. That said, there are many geopolitical factors that are still keeping deliveries of supplies volatile, which potentially could affect economic activity and inflation.

Another common experience has been the fiscal response to the pandemic.  The extent to which the fiscal policies rolled out in support of households and businesses

3 For example, Cascaldi-Garcia and others (2024) document that both the core and noncore components of headline inflation measures co-moved strongly across countries during the pandemic and inflation episode; see Danilo Cascaldi-Garcia, Luca Guerrieri, Matteo Iacoviello, and Michele Modugno (2024), 'Lessons from the Co-movement of Inflation around the World,' FEDS Notes (Washington:  Board of Governors of the Federal Reserve System, June 28), https://doi.org/10.17016/2380-7172.3543.

4 For an early account of the role of supply chain disruptions in fueling the global rise in producer and consumer prices, see Ozge Akinci, Gianluca Benigno, Ruth Cesar Heymann, Julian di Giovanni, Jan J.J. Groen, Lawrence Lin, and Adam I. Noble (2022), 'The Global Supply Side of Inflationary Pressures,' Federal Reserve Bank of New York, Liberty Street Economics (blog), January 28,

https://libertystreeteconomics.newyorkfed.org/2022/1/the-global-supply-side-of-inflationary-pressures.  On the transmission of supply disruptions to global value chains, see François de Soyres, Alexandre Gaillard, Ana Maria Santacreu, and Dylan Moore (2024), 'Supply Disruptions and Fiscal Stimulus:  Transmission through Global Value Chains,' AEA Papers and Proceedings, vol. 114 (May), pp. 112-17.

during the pandemic contributed to inflation is the subject of ongoing debate. 5 Regardless of their effects on inflation, fiscal policy actions across OECD countries led to a doubling and tripling of budget deficits as a percentage of GDP with even larger percentages in some places.  Those deficits have steadily fallen since then but are still higher in many countries than before the pandemic, and debt levels have grown for many OECD members.

Another recent challenge for OECD economies is the widespread weakness in manufacturing.  Manufacturing boomed in many places with the onset of the pandemic, when consumers switched their spending from in-person services to goods.  But as businesses and economies reopened with the easing of pandemic-related restrictions, the swing to service spending by consumers began what has been a sustained slide in manufacturing in OECD economies.  This slide has been compounded by three other factors.  First, because manufacturing is capital intensive, interest rate increases over the past couple of years raised capital costs in this sector.  As monetary policy eases across countries, this effect may unwind.  Also, higher energy costs after Russia's attack on Ukraine have hurt manufacturing more than other sectors.  And lastly, China's push to reduce its reliance on imports and expand its global market share in sectors such as autos has had a big impact across OECD economies.  While the manufacturing sector is a

5 See, for example, Robert J. Barro and Francesco Bianchi (2023), 'Fiscal Influences on Inflation in OECD Countries, 2020-2023,' NBER Working Paper Series 31838 (Cambridge, Mass.:  National Bureau of Economic Research, November; revised January 2025), https://www.nber.org/papers/w31838; Domenico Giannone and Giorgio Primiceri (2024), 'The Drivers of Post-Pandemic Inflation,' NBER Working Paper Series 32859 (Cambridge, Mass.:  National Bureau of Economic Research, August), https://www.nber.org/papers/w32859; and Karen Dynan and Doug Elmendorf (2024), 'Fiscal Policy and the Pandemic-Era Surge in US Inflation:  Lessons for the Future,' PIIE Working Papers 24-22 (Washington:  Peterson Institute for International Economics, December),

https://www.piie.com/publications/working-papers/2024/fiscal-policy-and-pandemic-era-surge-us- inflation-lessons-future.

smaller share of economic activity in the United States than in some other OECD countries, we shall see whether the weakness in global manufacturing is affected by the prospect of changes in trade policy in the U.S. and elsewhere.  The extent and timing of tariffs are highly uncertain, as are the effects.  Overall, the evolution of manufacturing adds uncertainty to the forecasts of central bankers' outlooks.

A short-to-medium-term challenge that is and will remain widespread among OECD countries is geopolitical risk.  Indexes of geopolitical risk suggest that risks are elevated, but not nearly as high as they were when Russia invaded Ukraine in February 2022.  Today however, you certainly can't see much evidence for geopolitical risk affecting financial markets.  But geopolitical risk will nevertheless remain a challenge that central bankers will need to keep in mind.  The outbreak of war in Europe and, more recently, in the Middle East were shocking developments that continue to reverberate, as we have seen recently in Syria.  It is unclear how these events will ultimately affect security, trade, and migration flows around the world.  The fact that these conflicts have not affected the global economy to a greater extent than they have so far doesn't mean they can't and won't.  Research shows that higher levels of geopolitical risk, and economic uncertainty more broadly, tend to foreshadow lower investment and employment. 6 I expect that central bankers in OECD economies will continue to consider geopolitical risk in the medium term.

The next challenge for central bankers that I would like to address also has both shorter and long-term dimensions to it, and that is something that I will refer to as a

6 See Dario Caldara and Matteo Iacoviello (2022), 'Measuring Geopolitical Risk,' American Economic Review, vol. 112 (April), pp. 1194-225; and Juan M. Londono, Sai Ma, and Beth Anne Wilson (forthcoming), 'The Global Transmission of Real Economic Uncertainty,' Journal of Money, Credit and Banking.

'rethink of globalization.'  For close to a decade now, many countries have been reexamining the costs and benefits from steadily freer global movement in capital, labor, and goods that was the norm over previous decades.  Although global trade has not decreased in the last decade, we have clearly seen changes in trade patterns, with more countries and firms putting greater emphasis on rerouting trade flows and shortening supply chains to avoid geopolitical risk and tariffs.  This isn't simply the result of some failed ministerial meeting or bilateral conflict.  Rather, it has been a persistent and widespread trend that has been under way for some time.  The presumption that the increasingly tighter global integration of our economies and financial markets would inevitably continue is no longer as safe as it long was.

At the same time, I have refrained from calling this development, as some have, the 'end of globalization,' because I don't believe that this will be the outcome.  As I think about the 38 governments represented by the OECD and consider how this organization has grown in size and in the depth of its engagement on different issues, I would say that globalization is not going away.  What I do expect, however, is there will be more thought and consideration among our leaders for how globalization affects the people we serve, with a more careful weighing of both the potential costs of closer integration and the potential benefits.  As these decisions by governments are made, central bankers will need to be prepared to respond appropriately in setting monetary policy and promoting financial stability.

Another longer-term challenge involves demographic trends.  What I mean here is the aging of populations in OECD countries, and, to some extent, everywhere else.

While this is mainly a problem for fiscal authorities, it does have some ramifications for central bankers in terms of long-run growth rates, productivity, and asset prices.

In the United States, those between the ages of 16 and 54 were 72 percent of the population in 2003, 62.7 percent in 2023, and are projected to be 61 percent in 2033. Aging is happening even more quickly in some other OECD countries.  This is a slowmoving development but, as populations age and move from working to retirement, employment and economic output fall.  This by itself lowers per capita GDP, which can affect consumption, investment and inflation.  As aging populations sell accumulated assets to support consumption, asset prices and interest rates will adjust as well, with the latter potentially affecting the central bank's estimate of the neutral policy rate.  There are mitigants to soften the effect of aging populations, such as an increase in retirement age, immigration and higher productivity growth for younger workers.  Again, these demographic factors are more important for fiscal policy, but there are spillovers to monetary policy.

Productivity growth is another issue facing central bankers and I know has been the subject of conversations at OECD gatherings this past year.  According to one set of estimates, labor productivity growth is responsible for more than half of the cumulative GDP growth in the United States since the end of 2019, compared to much smaller shares in other countries.  Productivity growth is notoriously volatile and, even years later, it is hard to say exactly what technological and other factors caused it. 7 Having some understanding of the trajectory of productivity growth is helpful for policymakers

7 For a discussion of factors affecting productivity growth in the U.S. and whether they can contribute to sustained growth, see Christopher J. Waller (2024), 'There's Still No Rush,' speech delivered at the Economic Club of New York, New York, March 27,

https://www.federalreserve.gov/newsevents/speech/waller20240327a.htm.

thinking about how fast their economies can grow without inducing inflation.  Central bankers must keep their eyes on productivity in judging whether wages can grow quickly without igniting inflation or whether potential growth has increased.  Productivity growth also plays a role in assessing the real neutral policy rate, otherwise known as r*.  Higher productivity growth is often associated with a higher value of r* for some policymakers and thus has implications for the interpretation of the degree of monetary accommodation or restrictiveness for policy. 8

One way to try to understand some of the factors affecting productivity is to compare the United States to other OECD countries.  While it is not particularly new for productivity to grow faster in the U.S. than in other advanced economies, some differences in our economies may have been particularly salient during and after the pandemic. 9 First, there was more disruption in employment in the United States during COVID than in many other OECD countries and after the pandemic subsided this may have led to better matching of workers with new jobs at which they could be more productive.   Second, during the acute U.S. labor shortages in 2022 and 2023, I heard numerous anecdotes that firms had to invest more in worker training to raise skill levels to what was necessary for positions.  This raises labor productivity with a delay, and it may have been an important factor recently.  Third, business creation is, by all evidence,

8 For a discussion of the relationship between these series, see Thomas Laubach and John C. Williams (2003), 'Measuring the Natural Rate of Interest,' Review of Economics and Statistics, vol. 85 (November), pp. 1063-70; and Kathryn Holston, Thomas Laubach, and John C. Williams (2023), 'Measuring the Natural Rate of Interest after COVID-19,' Staff Reports 1063 (New York:  Federal Reserve Bank of New York, June),

https://www.newyorkfed.org/medialibrary/media/research/staff\_reports/sr1063.pdf?sc\_lang=en. 9 For a discussion of factors explaining faster real GDP growth in the U.S. than Europe post COVID, which includes many factors affecting productivity, see Francois de Soyres, Joaquin Garcia-Cabo Herrero, Nils Goernemann, Sharon Jeon, Grace Lofstrom, and Dylan Moore (2024), 'Why Is the U.S. GDP Recovering Faster than Other Advanced Economies?' FEDS Notes (Washington:  Board of Governors of the Federal Reserve System, May 17), https://doi.org/10.17016/2380-7172.3495.

easier in the United States, and new firms often are more productive than existing firms. There was a surge in U.S. business creation after COVID, which could reasonably have led to a more productive re-allocation of labor.

There may have been other factors.  I don't think that artificial intelligence (AI) was one of them.  AI investment will take place over many years and most likely has not done much yet to add to productive capacity.  While it is possible AI could increase longer-run productivity growth, that remains to be seen.  But the other possible reasonsthe flexibility of labor rules, ease of business entry, barriers to innovation, lower regulatory hurdles-would sound familiar to people attending OECD discussions a decade ago.  The barriers to innovative risk-taking are probably lower-and the rewards higher-in the United States.

So while I am skeptical that AI is already making significant contributions to productivity growth, I have little doubt that it will do so.  AI and allied innovations in computing have the potential to bring productivity advances to high-skill labor-intensive services, akin to the way robotics transformed high-skill manufacturing.  If such advances do occur, one challenge for governments will be fostering an economy in which those dislocated by such a shift can obtain new skills and find productive and meaningful employment.  As ever, prudent regulation should be balanced with support for innovation that has the potential to deliver widespread improvements in living standards.  But regulatory policy should not strangle innovation in its infancy.

So, at the end of this list of challenges, how should central banks meet them? There will always be new challenges, but the right approach to monetary policy hasn't changed, nor should it.  In every case, the answer begins with sticking to our mandates

and resisting the temptation to go beyond them.  We must closely monitor economic and financial conditions and look in every direction, and down the road, for emerging risks. In keeping to our mandates, we concede that seeing all these risks clearly is hard, so we need to remain focused.

We also need to be nimble in responding to unfamiliar risks and be prepared to use our monetary policy tools in new ways to prepare for unprecedented challenges that may present themselves.  When conditions are uncertain, as they often are, we must move deliberately but also be ready to act quickly and decisively when the situation demands it, as we did in subduing inflation.  Effective monetary policy depends on clearly communicating our intentions so that the public will act on those intentions.  That also requires credibility, and this is most effectively maintained when monetary policy decisions are made according to our mandates and in the longer-term interest of a healthy economy and stable financial system.  Guided by these basic principles, I believe that central bankers are up to the considerable challenges of today, and those we will face in the years ahead.",Christopher J Waller
https://www.bis.org/review/r250113a.htm,Sarah Breeden: Reading between the lines,"Speech by Ms Sarah Breeden, Deputy Governor for Financial Stability of the Bank of England, at the University of Edinburgh Business School, Edingburgh, 9 January 2025.",2025-01-09 00:00:00,"## Reading between the lines speech by Sarah Breeden

Given at University of Edinburgh Business School

Published on 09 January 2025

In this speech Sarah Breeden sets out her views on the outlook for the UK economy and for monetary policy. She discusses the challenges around identifying the nature of shocks hitting the economy and how different shocks have different implications for medium-term inflation.

## Speech

It has been a little over a year since I joined the Monetary Policy Committee (MPC). Lots has happened over that period. I'm going to use this speech to review what we have learned and where that leaves my view of the outlook for the economy and for monetary policy. In doing that, I will aim to explain how important it is for us to keep asking ourselves which shocks could be hitting the economy and what implications those different shocks would have for medium-term inflation. We are always reading between the lines.

Before I get into the meat of the speech, I wanted to thank you for inviting me to come to speak to you today. I can think of few better places to come to talk about the economy than one of the homes of Adam Smith, the father of the discipline - I just can't promise to be as insightful and groundbreaking as he was in his day![1]

## Why do shocks matter?

Inflation has fallen materially over the past year. That is welcome news, especially given the painful high inflation period we found ourselves in during the prior couple of years.

But as monetary policymakers we must stay focused on where the economy might be heading, not where it has been. That means taking a view on which shocks are hitting the economy and how they might play out over time. This is easier said than done. It is notoriously hard to know which shocks are hitting the economy in real time. Reasonable people could take different views on the shocks that explain the same set of data. For example, is a reduction in economic activity a sign of lower domestic demand, lower demand from abroad or a reduction in the supply capacity of the economy? Is a fall in import price inflation a sign of past shocks easing off or a new shock hitting? Does it reflect a weaker global economy or more productive global suppliers?

This isn't just an intellectual exercise. Attributing data news to the 'wrong' shocks can have material implications for our understanding of the evolution of the economy in the future, and therefore what we should do with monetary policy. As policymakers we are constantly discussing and revising our views on which shocks best explain what we are seeing in the economy.[2] At the

Bank we do this by drawing on a wide range of hard and soft data, reports from people closer to the ground - such as the intelligence gathered via our Agency network, including from here in Scotland - and a large set of modelling and analytical techniques.

## Learning from recent experience

In the past few years the economy has been hit by a series of very large shocks.[3] We had no examples of shocks of the same type and scale under our current monetary policy regime, and so little in the way of past experience to guide us on how the economy would react to them. Perhaps naturally then, our understanding of those shocks has evolved with the passing of time, as more data has come in and as we have conducted more analysis.

I am going to walk you through a few important and very practical examples where we have changed our view in a way that makes a difference for our understanding of inflationary dynamics, and therefore for monetary policy. And then I'll turn to some of the current puzzles we are facing.

## Example 1: Demand environment

The first example relates to the demand environment - by which I mean the level of demand relative to supply, as captured in the output gap.[4] There was very material uncertainty considerably more than usual - about the balance of demand and supply during the pandemic, as well as uncertainty about how that balance might respond to the shocks that hit the economy after the pandemic was over.[5] As I'll explain, uncertainty about this balance between demand and supply matters, given its key role in inflationary dynamics.

We reassess the balance of demand and supply, as reflected in the estimated level of the output gap, every quarter using a set of statistical models, which draw on a range of data including nominal and real indicators. We use the steer from those models - along with a judgement overlay and evidence from other indicators of spare capacity, for example in the labour market and within businesses - to judge whether data news reflects demand or supply factors. That process means we sometimes end up revising our view of the past as well as the current level of the output gap, given that the data and so the steer we take from it can change materially over time.[6]

Chart 1 shows the range of our output gap estimates since the pandemic. During the pandemic itself in 2020 the MPC took the view that low inflation was explained by a very large output gap. But given the scale and nature of the changes in the structure of the economy at that time, they highlighted the material uncertainty around those estimates. We have since concluded that the output gap was much less negative than we thought at that time. Our latest estimates - for the recent past and into the future - have been revised up materially and are right at the top of the range.[7] Many of the upwards revisions came in periods when GDP data was coming in stronger than we expected (I'll return to this in my second example).[8]



Source: Bank of England

(a) Chart shows output gap estimates and projections from MPR forecasts since the Covid pandemic - conditioned on market interest rates - as a percent of potential output. Note that the range of forecasts would narrow mechanically over time because our forecasts only cover the next three years, so fewer forecasts extend to 2026 and beyond.

Taking the changes together, we now judge the output gap to have been 2-3 percentage points stronger in 2022 and 2023 than we previously thought, which changes the picture from an economy that was broadly in balance to one with material excess demand. That upwards revision is sizeable and persistent. The scale of these revisions in a relatively short space of time underlines quite how uncertain output gap estimation can be.

One driver of stronger demand could be our evolving view on how monetary policy affects the economy. Our latest assessment points to a faster and lower peak impact of Bank Rate on the output gap than we thought before this cycle. The reasons for faster transmission to a lower peak are complex relating both to the evolution of interest rates during the tightening cycle and to the conditions prevailing in the economy at the time.

Why might these changes in the output gap matter? The output gap is a key determinant of

medium-term inflation, via the Philips curve.[9] A rough rule-of-thumb might map a 1 percentage point increase in the output gap into around a 0.3 to 0.4 percentage point increase in inflation a year or so later. There is of course huge uncertainty around that rough relationship and a large literature on the shape of the Phillips curve, which can change over time. But the main point is that the revisions I am pointing to here are not small. Taken at face value, on their own these revisions might imply higher inflation next year and into 2026 by up to 1 percentage point.

It is important to note that an increase in the output gap does not necessarily imply a positive demand shock. It could just as well be driven by a fall in supply with a less than one-for-one fall in demand, which would open up an output gap alongside weaker activity. Given the absolute weakness of economic activity in the UK data in recent years, it seems plausible that some of the strength in the output gap might have been driven by weaker supply rather than stronger demand.

## Example 2: Energy shock

The second example relates to the effects of the energy shock. It has been well-documented that the UK economy faced a very large imported energy shock in 2021 and 2022.[10] At the peak of the shock, household energy prices were directly adding almost 4 percentage points to CPI inflation in the UK.

Energy price shocks push up on inflation and down on activity, presenting a source of potential trade-off for monetary policymakers.[11] Beyond the initial direct impact on inflation, we expected the shock to have an indirect effect on inflation via the output gap.[12] People find it difficult to substitute away from consuming energy, so materially higher energy prices effectively translate into a big reduction in real incomes. This reduction in real incomes would lead to cuts in nonenergy consumption, which would reduce demand and open up some slack in the economy, pushing down on inflation in the future via the output gap and the Phillips curve.

However, whilst economic theory pointed clearly to these channels being relevant in some form, the unprecedented nature of the shock meant it was difficult to know in advance exactly how people would respond, and so how big the effects would be.

Chart 2 sets out what we have learned from the experience of the past few years. Our latest assessment is that the output gap impact of the increase in energy prices in 2021 and 2022 was probably less negative than we thought when the shock first emerged. That is in part because energy consumers revealed a greater willingness and ability to substitute away from energy consumption than we had previously assumed, which reduced the effective hit to their real incomes in the face of the shock. A cross check - drawn from a recently re-estimated version of the Bank's COMPASS model,[13] which contains a more specific role for the energy sector points to a significantly smaller impact on the output gap from energy prices, which serves to highlight the material uncertainty around these estimates in general.

Source: Bank of England



(a) Chart shows the estimated impact of energy prices on the output gap in the November 2024 MPR forecast using different model relationships. All three lines use the same energy price profile, taken from the November 2024 MPR forecast. The line labelled 'previous' refers to the 2021 model relationships. The line labelled 'cross check model' refers to a re-estimated version of the COMPASS DSGE model. See Box B in the November 2022 MPR for further discussion of the treatment of energy price shocks.

Once again, these changes matter for medium-term inflation. Indeed the lower effect on demand via the energy price channel helps to explain part of the upwards revision in the output gap that I just talked about. As I mentioned earlier, a 1 percentage point upwards revision in the output gap, which is roughly what we have here, might push up on inflation by 0.3 to 0.4 percentage points.

## Example 3: Other drivers of energy prices

My final example relates to the role of climate mitigation policy in energy prices where there is now evidence that policies aimed at the climate transition were probably more important contributors to the recent rise and fall in inflation than we previously thought.

As Chart 3 shows, carbon prices rose materially in 2021 and 2022, peaking at around £100 per tonne of carbon dioxide (CO2) equivalent in the summer of 2022, a roughly 100% increase in price on the previous year.[14] From 2021 onwards, the UK's emissions trading scheme[15] saw a reduction in the supply of carbon permits, a decreasing share of permits being given out for free, and an expansion of sectoral coverage (over the 2021 to 2030 period). This was around the same time as the increase in wholesale gas prices, which could also have contributed to this rise in carbon prices.

These carbon costs are non-trivial in the sectors most exposed to the scheme, like the power sector. In 2022, during the peak of energy price shock, the wholesale price of gas was the dominant driver of high electricity prices. In 2024, however, carbon costs which amounted to roughly 50% of the fuel costs for gas-fired electricity producers in the UK were a major driver of prices.[16] Overall we might expect close to 100% of carbon costs naturally to be passed on in wholesale market prices.[17]



Source: Bank of England

(a) Chart shows the daily UK-relevant carbon price, i.e.: the EU ETS carbon price from 2005-2020, and the UK ETS carbon price from 2021-2024. The EU ETS price has been converted from EUR to GBP.

Given the potential significance of these developments, Bank staff have analysed both how much recent energy price increases have reflected carbon pricing and if the specific source of energy price shocks might matter for medium-term inflation.[18] Chart 4 summarises the results of this work. The results suggest that the source of an energy price shock might affect its impact on inflation. Specifically, if energy prices rise due to a carbon permit supply shock, the impact on nonenergy price inflation could be about 1.5x as large at its peak - and last several months longer than if the rise were driven by a gas supply shock. That seems plausible if shocks of this kind are expected to be longer lasting given the stringency and scope of the carbon permits scheme might be expected to increase over time.

This analysis underlines the case for us to stay focused on these issues in the future. It is an example of how models of the economy based on historical outcomes and relationships will naturally miss important changes in the structure of the economy that could be relevant to future monetary policy. That is why cross checks and judgement overlays must continue to be an essential part of our policymaking process.

Source: Bank of England



- (a) Chart shows the response of UK non-energy CPI inflation to restrictive carbon permit and gas supply shocks, as estimated by the BVAR model. Responses are scaled to increase UK energy CPI inflation by 1% at peak. The sample is June 2008 to April 2024. Shaded areas are 80% confidence intervals.

## Putting this thinking into practice systematically

In a recent speech my colleague Clare Lombardelli set out the contours of the Bank's response to the Bernanke review. It's early days still and I don't want to front run any of the important thinking that needs to be done to inform that response. But I did want briefly to offer some thoughts around how we might embed some of the material I've touched on in this speech into our regular policymaking processes.

First, building out our forecast evaluation capabilities - much as I have sought to do through these examples - will mean we can more systematically ask ourselves whether we have learned anything about the shocks that explain past data - and therefore how to think about the mediumterm outlook for inflation.

Second, as I hope I have shown, we can learn lessons from a range of models to help us identify shocks.[19] And we can use these models to build the potential for shock uncertainty into our scenario analysis.

Third, we should routinely be explaining publicly how monetary policy would need to change should we be wrong about the nature of the shocks that are hitting the economy.

Fourth, we should build more sophisticated analysis of climate policy into our bread-and-butter monetary policy work. There is mounting evidence that it matters for price stability. I plan to return to this in a speech later in the year.[20]

And finally, we need to make sure we explain how we are interpreting the data - in terms of its underlying shocks - and therefore what it is telling us about the medium-term outlook for inflation. That will help reduce the sensitivity of market rates to short-term data volatility and that will ultimately ensure that rates are appropriate for the state of the economy.

## Updating my view of the economic outlook

The economy has been undergoing waves of adjustment as the effects of the unprecedented shocks of recent years ease off. In informing my view of the outlook from here I find it helpful to look through the volatility in the data and group the shocks that are driving the economy into two buckets.

First, there is the lagged effect of the large shocks that hit the economy in the past.

The energy price shocks that I talked about earlier imparted downwards pressure on inflation through very mechanical so-called base effects - where headline inflation falls as increases in

prices a year earlier are not repeated - and through a cooling effect on demand. But they are unlikely to have much further impact on activity or inflation as we look ahead. You can see that in part in Chart 2 , where the impact of energy prices on the output gap is estimated to be very flat from this point onwards.

Monetary policy is still restrictive as it stands - meaning it is imparting downward pressure on demand, with some households and businesses having to refinance loans at higher rates than before. But the tightening in Bank Rate since 2021 won't do much more to activity in growth or levels terms as we look ahead. So following a period where the outlook has been dominated by the unwind of past shocks, if we could press pause on new shocks hitting the economy, we would be entering a period of relative calm (a big if).

One important exception to this general rule is second round effects in the labour market. There is uncertainty about how quickly these second-round effects will dissipate.[21] I would expect a continued unwind of past shocks, as lower headline inflation translates gradually into lower wage growth and this eases the pressure on price setters to pass on higher labour costs into prices.[22]

Second, there are new shocks hitting the economy. It is always difficult to work out what these are, but some are easier to identify than others.

For example, we now expect the Budget to lead to a near-term boost in demand relative to previous expectations, to be followed by a planned consolidation. We were also reminded just before Christmas that private sector wage growth remains high, and employment costs will be increased further by the changes to National Insurance Contributions (NICs) that will be implemented in April and the large increase in the National Living Wage at the same time.

Businesses have many potential margins of adjustment to increased NICs. At one extreme, they might respond by passing the entire cost through into lower wages - indeed, this would be my assumption for where it ends up in the long run. At the other extreme, they might seek to protect wages and increase prices, especially in the short term. They might also respond by reducing employment or by eating into their profit margins. The reality will sit somewhere between these extremes and will depend on the specific circumstances that each business finds themselves in. Whether employers can pass on higher costs to consumer prices will depend on the overall demand environment in the economy.

There is therefore uncertainty around what these shocks will mean for medium-term inflation. But they are likely to be considerably smaller than the large shocks of the recent past.

## What explains the slowing in activity?

Zooming out from the specific drivers, it is increasingly clear that the data is pointing to a slowing in economic activity in the UK.

Chart 5 offers one window into that. It shows the news in the monthly growth in GDP and market sector output according to the national accounts - expressed relative to our one-month ahead forecasts - cumulated since November 2023, when I joined the MPC. Having experienced upside surprises in economic activity for around half a year, we have now seen a string of downside surprises for about the same length of time. And we also know that the absolute level of both GDP and market sector output fell in real terms in September and October. It is of course early days to draw strong conclusions either way, but to come back to the need to read between the lines, it underlines the importance of understanding what kind of underlying shock might be driving that slowing.

Source: Bank of England



(a) Chart shows the difference between monthly growth outturns and one-month ahead forecasts, cumulated since November 2023.

One obvious step, which can give at least a partial view, is to look at the behaviour of nominal

variables - if inflation looks to be increasing at the same time as real activity is slowing, that tentatively points to a supply shock rather than downside news in demand. Chart 6 plots the cumulative news in headline and core inflation in recent months. The picture is messy, but it looks tentatively like demand might have been weakening over the past six months or so, up to the last couple of data points.

Source: Bank of England



(a) Chart shows the difference between monthly inflation outturns and one-month ahead forecasts, cumulated since November 2023.

A more sophisticated cross check using a model built by Bank staff confirms that demand shocks may have turned negative in Q3 of this year, having been more positive at the start of the year ( Chart 7 ). Supply and demand shocks are not mutually exclusive, so there could now be a weakening in both going on at the same time. But trends in supply are particularly uncertain at the moment and so it is difficult to identify where exactly a supply shock could be coming from.[23] This

uncertainty complicates the appropriate policy response.

Source: Bank of England



(a) Chart shows the estimated distribution of the demand shocks that have hit the UK economy in 2024 Q3 (aqua line), 2024 Q2 (orange line) and 2024 Q1 (purple line). These shocks are derived from a SVAR model for the UK economy, estimated using Bayesian techniques on data from 1992 Q1 to 2024 Q3. The shocks are identified through zero and sign restrictions. Among various shocks, the SVAR identifies both global and domestic demand shocks, which are pooled together in this figure. See here for further details on the model.

## What does this mean for policy?

That all begs the question: what should monetary policy do?

A year ago - in my first speech as an MPC member - I outlined two scenarios I was using to guide my policy strategy. I said I was most concerned about an upside scenario where inflation persistence became entrenched, perhaps facilitated by stronger demand in the economy.

It is clear to me that the risk of that upside scenario has now subsided sufficiently to no longer be a

core consideration in setting policy. Over the past year headline inflation has come in below our expectations - indeed below both of the scenarios I considered - as global shocks abated more quickly than we expected ( Chart 8 ).

Source: Bank of England



(a) Chart shows high and low inflation scenarios around the November 2023 forecast for CPI inflation, conditioned on market expectations for Bank Rate at that time. The high inflation scenario could be thought of as one in which, for instance, the labour market remains tight and second-round effects are very significant. The low inflation scenario could be thought of as one in which the economy is hit by negative demand shocks that reduce demand materially relative to the forecast. The scenarios have been adjusted for a base effects judgement applied in February 2023. The white line shows the latest data available up to the November 2024 MPR.

In December I judged that the evidence supported maintaining Bank Rate at 4.75% and that recent developments supported the case for a gradual approach to the withdrawal of policy restrictiveness in the coming months.

Two important questions follow from that judgement.

The first is how restrictive we are and should be - how far away we are from r*, the neutral level of

interest rates that leaves the economy in balance.

I've spoken already about how hard it is accurately to diagnose the nature of the shocks that are hitting our economy. In my view understanding the impact of these shocks and how they might affect medium-term inflation is the best way to feel our way to the right level of restrictiveness over time, led by the evidence as we see it.

The second question is how quickly we should remove that restrictiveness. That is difficult to know and will depend on how the factors above evolve over time. To be clear, I expect Bank Rate to come down over time as the effects of the large shocks of the past continue to abate.

As we move forward, I will be focused in particular on further diagnosing how much of the slowdown in activity in the economy can be attributed to supply and how much to demand given their differing impacts on the medium-term outlook for inflation. And I will continue to analyse the evidence around how employers are responding to the still-elevated level of growth in employment costs and what that means for inflation persistence.

## Conclusion

I'll finish by summing up what I've tried to get across today.

First, as monetary policymakers we must always be analysing which shocks we think are hitting the economy and what their implications might be for the medium-term inflation outlook. We have to remain flexible and constantly challenge ourselves about how wrong we could be and what that would mean. We must always be reading between the lines.

Second, I have updated my views on the shocks that have been driving the economy recently. The demand environment has been more resilient in recent years than we initially thought - partly because the response to the energy price shock was less negative than we thought, and probably also reflecting weaker supply. There is now some tentative evidence that activity is starting to weaken, though we expect it to pick up again.

Third, the recent evidence further supports the case to withdraw policy restrictiveness and I expect to continue to remove restrictiveness gradually over time. The important questions as I look ahead are what combination of shocks explains the recent slowdown in activity and how will employers respond to higher employment costs. The answers to those questions will affect the outlook for medium-term inflation and so the speed at which restrictiveness needs to be removed.

Thank you for listening.

I would like to thank Danny Walker for his assistance in drafting these remarks. I would also like to thank Lennart Brandt, Natalie Burr, Hannah Copeland and Boromeus Wanengkirtyo for their work on the effects of energy price shocks, and Davide Brignone and Michele Piffer for their work on the SVAR model. I would also like to thank Andrew Bailey, Fabrizio Cadamagnani, Alan Castle,

Iain de Weymarn Rich Harrison, Danae Kyriakopoulou, David Latto, Arjun Mahalingam, Josh Martin, Ed Millar, Huw Pill, Dave Ramsden, Fergal Shortall, Dooho Shin, James Talbot and James Tasker for their helpful input and comments. The views expressed here are not necessarily those of the Monetary Policy Committee (MPC) or the Financial Policy Committee (FPC).

1.  I'm aware that whilst Adam Smith didn't study at the University of Edinburgh he did live in the city and gave an influential series of lectures at the university following his graduation from Glasgow and Oxford.
2.  For a recent example see this speech by Philip Lane of the ECB.
3.  As Dr Bernanke emphasised in his review into our forecasting, many of these shocks were global in nature and not unique to the UK.
4.  The output gap captures the difference between the level of actual output relative to potential.
5.  I discussed these shocks in my speech a year ago.
6. Discussion of the challenges of output gap estimation .
7.  Part of the revisions to our output gap projections reflects changes to the conditioning assumptions we use in the forecast. An important change relates to energy prices, where more recent forecasts tend to have lower historical paths for energy prices, which would tend to push up on the output gap projections. Our August and November 2022 forecasts were particular outliers in this regard.
8.  In addition, the ONS recently revised up its estimates of the level of GDP in 2022, driven in large part by higher consumption. If we had allocated more of that GDP news to demand, and not matched it in supply, we would have an even higher estimated output gap in 2022.
9. Paper by my former colleague on the MPC for further discussion of the Phillips curve.
10. Detailed discussion of the energy shock .
11. Speech by my former colleague Silvana Tenreyro for further discussion of the optimal monetary policy responses to supply shocks. She notes that under some circumstances the optimal response to a temporary supply shock is to look through it.
12.  The direct impact of the energy shock on inflation also led to second-round effects in the labour market, where higher inflation led to higher wage growth and this fed back into higher inflation. Whilst I am not focusing on second-round effects in this section of the speech, they have of course been an important policy consideration in recent years.
13. Further details on COMPASS .
14.  Although the carbon price is volatile and has since fallen from this historic high, the UK Government's net zeroconsistent carbon price trajectory would see the price back up near £100 per tonne of CO2 equivalent.
15. More on the scheme , which is a form of carbon pricing that works on a 'cap and trade' principle where a cap is set on the total amount of certain greenhouse gases than can be emitted.
16. This is based on calculations by Bank staff . The estimated carbon cost faced by UK gas-fired power producers in 2024 is around £40 per tCO2e (UK ETS price) + £18 per tCO2e (UK CPS)] x 0.4 tCO2e per MWh (assumed emission intensity of gas-fired power) = £23.2 per MWh. In the context of natural gas fuel, the average UK fuel cost in 2024 is around £50 per MWh.

18.  The analysis uses a BVAR model with energy shocks identified using high-frequency data around policy announcements and news, to estimate how different energy price shocks affect non-energy inflation. Detail on the carbon shock identification , and for the gas shock identification . The sample is 2008 to 2024.
19. Recent speech by my colleague Huw Pill on this topic.
20.  My colleague James Talbot led some work on this last year, see the overview .
21.  This uncertainty is captured in the three 'cases' set out in recent MPRs. Persistence in inflation dissipates quickly in the first case as pay and price-setting dynamics continue to normalise following the unwinding of global shocks. In the second case, a period of economic slack is required to normalise these dynamics fully. In the third case, some inflationary persistence reflects structural shifts in wage and price-setting behaviour.
22.  My colleague Dave Ramsden has spoken about this process in recent speeches, for example .
23.  For example, there has been extensive discussion of the problems with the UK Labour Force Survey, which complicates our analysis of trends in labour supply in particular.

## Sarah Breeden

Deputy Governor, Financial Stability

©2025 Bank of England",Sarah Breeden
https://www.bis.org/review/r250114e.htm,Elson Gaskin: The Frank Collymore Literary Endowment - literature enriches the tapestry of our nation,"Remarks by Mr Elson Gaskin, Deputy Governor of the Central Bank of Barbados, at the 27th Frank Collymore Literary Endowment Awards Ceremony, Bridgetown, 11 January 2025. ",2025-01-11 00:00:00,"## Elson Gaskin: The Frank Collymore Literary Endowment - literature enriches the tapestry of our nation

Remarks by Mr Elson Gaskin, Deputy Governor of the Central Bank of Barbados, at the 27th Frank Collymore Literary Endowment Awards Ceremony, Bridgetown, 11 January 2025.

* * *

Good evening, ladies and gentlemen.

On behalf of the Central Bank of Barbados, I am delighted to welcome you to the 27th Frank Collymore Literary Endowment Awards Ceremony. This evening, we gather not only to honour excellence in literature and spoken word, but also to celebrate the enduring legacy of this competition and its pivotal role in shaping Barbados' cultural landscape.

As we mark this 27th edition, it's important to reflect on the journey so far. From its inception, the Bank's vision for the Frank Collymore Literary Endowment has been to nurture our literary heritage, ensuring that Barbadian voices resonate far and wide. The competition has grown into an institution, earning respect as a hallmark of quality and creativity, and it continues to inspire both emerging and established writers.

Literature plays a profound role in shaping and preserving our national identity. When we tell our stories - stories infused with the culture, language, and history of Barbados - we are not only entertaining but also educating. We are building a repository of our experiences, documenting who we are for future generations.

Each poem, short story, novel, or play by a Barbadian writer, each piece of spoken word performed, enriches the tapestry of our nation. It reminds us of our shared struggles and triumphs, our rich cultural heritage, and our unyielding spirit. By supporting our writers, we strengthen our identity as Barbadians and assert our place in the global literary community.

Beyond its cultural significance, literature is also a cornerstone of the orange economythe creative economy. Literature, alongside music, film, and other artforms, holds immense potential for economic diversification and growth. The works birthed from the FCLE have the power to attract international attention, spark collaborations, and create opportunities for our writers both at home and abroad.

Indeed, we can find examples of the FCLE's past winners who have made their presence felt in the global literary sphere, among them the late Kamau Brathwaite, Barbados' first poet laureate, Esther Philips, and our current committee chair, Yvonne Weekes, who I must, on behalf of the Bank, publicly congratulate on having her work, , translated into Spanish. I will also point out that was her winning entry Volcano Volcano back in 2004, which goes to show that entering and winning the FCLE has legs.

Moreover, as we continue to innovate and digitise, the orange economy presents opportunities for leveraging technology. E-books, audiobooks, and online platforms can

amplify our voices even more, reaching audiences far beyond our shores and turning creativity into a sustainable livelihood for our artists.

Tonight, I extend my heartfelt congratulations to all of this year's finalists and winners. To those who may not walk away with an award, let me encourage you: the act of putting your work out into the world is itself an achievement. Perseverance, discipline, and a commitment to your craft will bear fruit.

To all writers here tonight, I say this: you are custodians of our stories, ambassadors of our culture, and architects of our identity. Keep writing, dreaming, and daring. The FCLE exists because of you and for you.

To our dedicated committee, which as I mentioned earlier, is led, and ably so, by Dr. Yvonne Weekes, your vision and hard work continues to instrumental in the competition's success. Your efforts ensure that the FCLE continues to uphold its high standards and remains an inspiration to Barbadian writers.

And to you, the audience, thank you for showing up for these artists and their work. Your encouragement helps fuel their creativity and strengthens our literary culture. May we all remember that by supporting the arts, we are investing in a richer, more vibrant future for Barbados - one where our stories are not just told, but celebrated.

So, as we honour the finalists and winners of this prestigious award, let us also commit to championing our writers and the creative sector as a whole. Let us recognise that investing in the arts is not a luxury but a necessity for national development.

As we look to the future, I am confident that the Frank Collymore Literary Endowment will continue to thrive, offering a platform for exceptional talent and fostering a deeper appreciation for the written word.

Here's to another year of literary brilliance and to the enduring power of storytelling. Congratulations once again to our winners and participants.

Thank you, and enjoy the rest of the evening.",Elson Gaskin
https://www.bis.org/review/r250121f.htm, Andrew Bailey: A central banker's view of global challenges and expectations for the Bretton Woods Institutions' response,"Remarks by Mr Andrew Bailey, Governor of the Bank of England, at King's College, Cambridge, 17 January 2025.",2025-01-17 00:00:00,"## Andrew Bailey: A central banker's view of global challenges and expectations for the Bretton Woods Institutions' response

Remarks by Mr Andrew Bailey, Governor of the Bank of England, at King's College, Cambridge, 17 January 2025.

* * *

I am going to interpret my theme quite broadly this evening. That said, let me start appropriately as we are at King's - with a quote from Keynes at Bretton Woods - on the importance of monetary stability as a prerequisite for reconstructing the world economy (with thanks to Martin Daunton for using it in his recent book on World Economic Government):

""Without currency agreements you have no firm ground on which to discuss tariffs. In the same way plans for diminishing the fluctuation of international prices have no domestic meaning to the countries concerned until we have some firm ground in the value of money... It is very difficult while you have monetary chaos to have order of any kind in other directions.""

The focus on monetary frameworks and currency arrangements reflected the tension at the time between on the one hand national sovereignty and discretion and on the other hand multilateral frameworks. However, while monetary stability remains the bedrock today, the agenda has of necessity broadened out substantially in terms of economic policy. These days, global co-operation focuses more on ensuring a well-regulated financial system. That reflects the perennial tension between the national scope of governments and the more global scope of markets. Solving that tension requires multilateral frameworks and institutions.

Another theme concerns the Bretton Woods institutions themselves. We can't be misty eyed about Bretton Woods. On monetary stability, it was a halfway house solution to dealing with the implications of free international convertibility to gold for domestic economic management. It couldn't be implemented in full for some time, and didn't survive for long when it was. To borrow Dani Rodrik's phrase, Bretton Woods was shallow multilateralism with a small role for the Fund and the World Bank, and it didn't pass the test. Subsequently, global financial integration and its scale has become much more extensive and created its own instability. In doing so, this has required a reassessment of multilateralism and the Bretton Woods legacy, and brought the Fund and Bank to centre stage. They have been evolving, in response - but perhaps, so far, not fast or far enough. Understanding the drivers of global financial stability, and acting to preserve them is the new frontier.

But, we now live in a world where public institutions are under much more strenuous challenge to their legitimacy. The challenge now is to reinforce the institutions and their governance in terms of accountability and thus legitimacy. Otherwise, a democratic deficit exists which damages effectiveness. Can the institutions support the necessary multilateralism - to go back to the tension with national sovereignty? Can they embody the multilateral authority to speak truth to national power? There is nothing new about this challenge. But it has taken on greater force in a world of so-called populism which

embodies at least three pertinent features: first a greater emphasis on domestic production and the distribution of wealth relative to stability and the benefits of openness; second, a tendency to attribute unfavourable conditions to outside forces in a context of low trust societies; and third, with this decline in trust institutions are viewed as distant, unresponsive and acting for the benefit of powerful and uncontrollable interests.

It is a mistake to dismiss these features as not a reflection of the real world as we see it. Other people do see it that way. The challenge for international organisations is to be seen as part of the solution, not the problem.

I'm going to use the rest of my time to try to put these issues into the current context and draw out some priorities to go forward.

The theme of balancing national interests with international co-operation runs through the last 80 years. How do we preserve and develop the view that international cooperation is the best way to protect national interests? The argument was won at Bretton Woods because of the terrible context of global war.

The issue is again with us today. Moreover, the whole issue of the benefits of international co-operation has become more pressing as markets - in goods and finance - become larger and more global, with a sense of diminished national control and greater exposure and susceptibility to shocks.

The question then becomes, how can multilateral institutions build influence in this context, to put themselves in a position to influence the balance of national interests and international co-operation? What is their comparative advantage? I think the answer lies in putting more emphasis on the surveillance role, and the effectiveness of the messaging of that work. In a more shock prone world, with the international monetary and financial system potentially being profoundly altered by a series of major transformative trends, the returns on effective surveillance will be much greater. Forewarned is forearmed. Prevention is more effective than cure. The Fund's voice remains a powerful one, but unless its surveillance activities keep pace with a changing world, risks and vulnerabilities could be missed. None of us will be forgiven for missing the next crisis.

In particular, to return to where I started, financial surveillance needs to be a particularly high priority for us all, including the IMF. There remain, and will do so, financial vulnerabilities to be fixed. We are seeing major changes in the form of financial intermediation as the role of non-banks grows. But - and just as Hyman Minsky predicted - there is a growing resistance to regulation and rule-making as memories of the Global Financial Crisis recede. We have to continue to win our arguments, and it is becoming more challenging. Bilateral and multilateral surveillance are an important tool here. We will have to lay out the risks and vulnerabilities with more prominence and thereby directly challenge the naysayers.

Now, let me be clear, the Fund's surveillance analysis is very high quality - the WEOs and GFSRs are excellent, and they are just the tip of the iceberg. But I think the work can and should evolve in a number of areas in response to a more shock-prone uncertain and complex global economic and financial system, with a focus on resilience

building, spillovers, more systemic and macro-prudential assessment, and greater financial market surveillance.

Let me return to the main theme of balancing national interests and international cooperation. I want to draw out an element of the issue of national interests. It is the saddest and most dangerous. We are seeing the return of destructive nationalism, most obviously in Russia. I was an economic historian, not a central banker, when I was next door at Queens'.

Of course, history doesn't end, and we are being reminded of that. Bretton Woods was an important part of the response to the most destructive and tragic nationalism of modern times. At Queens' I was taught history by Richard Overy, who has written extensively on modern warfare. Recently, Richard has written a book called ""Why War?"" which seeks to understand the human propensity for conflict, no small task. He quotes the father of new realist political science, Kenneth Waltz, who wrote: ""Theorists explain what historians know: war is normal"". Richard sets out four broad motives for war: resources, belief, power and security. I mention this because as well as powerful and more detailed surveillance, for multilateralism to have impact it has to speak to the big issues. A criticism of the early history of the Fund and Bank is that they were often invisible. To be fair, Bretton Woods was not designed with the Cold War in mind, so the world moved on very quickly. But, since resources, belief, power and security cannot be separated from economics, with the rising threat of destructive nationalism we have to go back and determine what role the multilateral institutions should play to re-establish - and explain the value of - economic co-operation.

Another dimension to the issue of balancing national interests and international cooperation is the question of how many poles are there in the system? Bretton Woods is often portrayed as the transfer of authority from one single pole (Britain) to another (the US), the creation of a new era. It also gets portrayed likewise as the wrestle between Keynes and Harry White.

At the time, the importance of enabling this transfer of poles was cast in terms of avoiding going forwards the dangerous nationalism of the 1930s. Very quickly, the issue became the different one of whether collective international co-operation could embrace capitalist and communist systems, it couldn't.

Over time, the issue moved on to the tension between advanced countries and those in the developing and emerging ones, and it is this tension that has been a persistent feature of the Fund and the Bank in their more mature and influential era since the 1970s. Even if issues around voting shares remain to be resolved, the Fund has been able to evolve its toolkit in order to lend more money to vulnerable countries. Today, the issue of whether / how much the world is multipolar is complicated by the question of whether it is possible to frame effective international co-operation in a world where the two largest economies, the US and China, have such different philosophical underpinnings. This strikes me as more fundamental than the traditional Bretton Woods issue of how to design a system which creates appropriate discipline for creditor and debtor nations, though I don't want to deny the importance of that issue. The conclusion I draw here in terms of making multilateralism work is that we have to do all we can to make it work, and that this should be an acknowledged objective. Not least because many of the challenges we face cannot be fixed within national borders. We may end

up with shallow multilateralism, and that may or may not be a helpful outcome. What we can't do is give up in the face of a more difficult environment.

This brings me, finally, back to the point about speaking truth to national power. Clearly the context matters a lot. Global co-operation has a greater chance of success when economic benefits are widely shared, as are the risks perceived to be - i.e. we are all in this together, and know that we are so - and we exist in conditions of broad economic stability. We can hope, but hope is not a winning strategy. A world where there is greater actual and perceived risk of unequal outcomes and instability is one where collective action is harder and less likely to succeed.

At least up to a point, because I think the lesson of Bretton Woods as it played out is that the influence of collective action is non-linear. In other words, when the situation gets really bad, take the financial crisis, the call for international collective action and the willingness to submit to it, grows almost exponentially. It takes a good crisis as they say. But this is not a basis on which to run good policy. And this is the risk we face today - the vulnerabilities are growing, and the necessary solutions are global, but they are not sufficiently great to tip into crisis multilateralism. And we don't want that to happen.

As so we come back to the issue of how to influence by speaking truth to national power successfully, in a world of hostility to institutions. I will end with one thought on this, which I recognise may come across as too pious by half. We have to speak with humility and humanity. We don't know all the answers, and that is not a failing. The world is highly uncertain - and shock prone - and that is reality. By building its surveillance offer and working with members on how to build ex ante resilience, the Fund can be seen as a trusted problem solver which can be turned to in moments of crisis, rather than an institution which calls out where things went wrong and mops up after the crisis occurs. We serve the people as a whole at all times. I say this because when we look back at the last 80 years, it has not always been viewed this way by society as a whole.

I would like to thank Stuart Berry, Mark Joy, Karen Jude, Harsh Mehta, James Talbot and Matt Trott for their help in the preparation of these remarks.",Andrew Bailey
https://www.bis.org/review/r250121e.htm,"Darryl Chan: Europe, Asia and the changing global economy","Welcoming remarks by Mr Darryl Chan, Deputy Chief Executive of the Hong Kong Monetary Authority, at the Joint Conference of the Hong Kong Institute for Monetary and Financial Research (HKIMR), the European Central Bank (ECB) and the Bank of Finland Institute for Emerging Economies (BOFIT) on ""Europe, Asia and the Changing Global Economy"", Hong Kong, 20 January 2025.",2025-01-20 00:00:00,"## Darryl Chan: Europe, Asia and the changing global economy

Welcoming remarks by Mr Darryl Chan, Deputy Chief Executive of the Hong Kong Monetary Authority, at the Joint Conference of the  Hong Kong Institute for Monetary and Financial Research (HKIMR), the European Central Bank (ECB) and the Bank of Finland Institute for Emerging Economies (BOFIT) on ""Europe, Asia and the Changing Global Economy"", Hong Kong, 20 January 2025.

* * *

Governor Rehn, Dr Lane, Distinguished Guests, Ladies and Gentlemen, Good Morning!

A very warm welcome to all of you for joining today's conference. As we begin the new year, let me wish everyone a prosperous year ahead.

The Hong Kong Institute for Monetary and Financial Research (HKIMR) is deeply honoured to host this conference in collaboration with the European Central Bank (ECB) and the Bank of Finland Institute for Emerging Economies (BOFIT). The title of today's conference, ""Europe, Asia and the Changing Global Economy"", has been aptly chosen. Barring any surprise, this year will be marked by major changes - changes that echo political and economic events taking place in different parts of the world.

Indeed, the world economy is at a critical juncture. We are facing increasingly challenging near-term macroeconomic environment, heightened geopolitical tensions and geoeconomic fragmentation, rising trade disruptions and protectionism. Across both advanced and emerging economies, public debts as a share of economic output have surged steadily for years, further constraining the fiscal policy headroom going forward.  Meanwhile, medium-term growth rates are expected to decline on the back of lacklustre productivity growth and ageing populations.

Against this complex backdrop, policymakers need to look to structural reforms as the most effective way to stabilise debt dynamics and boost domestic productivity and longer-term growth. One notable example is the European Commission's ""Draghi Report"", which highlights the main elements necessary to enhance Europe's competitiveness.

Many policymakers in Asia share a similar sense of urgency to boost or reinvigorate economic growth. If history is any guide, a key lesson from the Asian Financial Crisis before the turn of the century is the need to address structural weaknesses through broad-based reforms and greater regional cooperation to enhance financial resilience.

History has also consistently demonstrated that an open and rules-based multilateral trading system generates value for the global community. In our view, it is crucial therefore that efforts to raise the competitiveness of domestic sectors should not be at the expense of the integrity of the global trading system.

Asia is and remains a major trade partner of the European Union (EU). China and the Association of Southeast Asian Nations (ASEAN) bloc represent respectively the EU's

second and third largest trading partners.  At unsettling times like this, Europe and Asia should endeavour to explore as much common ground as possible, so as to better harness mutual and sustained economic benefits through trade and investment.

We need to look beyond traditional merchandise trade, or trade in the traditional way. For example, there can be closer cooperation in the digital economy and on green technologies and green services.  Digital trade transformation offers substantial productivity gains.  It also offers better prospects of distributing the gains generated from trade more widely and equitably among the various stakeholders.

Cooperation in green innovations, including through mutually beneficial technology transfers, can support faster transitions by improving material productivity, reducing pollution, and mitigating climate change.

In this process, central banks and regulators also have a role to play - by upholding the resilience of our financial systems to support the real sector; by future-proofing our financial infrastructures so that they are fit for purpose with the advancements in technology; by better coordinating monetary and fiscal policy to provide a conducive macro environment.

In this regard, forums like today's conference provide a platform for policymakers, academics, and market participants to share their insights and expertise. I would like to thank colleagues from our joint-organisers, the ECB and the Bank of Finland for putting together such an interesting programme.

I look forward to many productive and insightful discussions in the next one and a half days. Thank you.",Darryl Chan
https://www.bis.org/review/r250121d.htm,Rajeshwar Rao: Challenges in liability management - maintaining the balance,"Keynote address by Mr Rajeshwar Rao, Deputy Governor of the Reserve Bank of India, at the Mint Annual BFSI (Banking, financial services and insurance) Summit & Awards, Mumbai, 17 January 2025.",2025-01-17 00:00:00,"## Challenges in Liability Management: Maintaining the Balance 1

At the outset, I would like to thank the organisers for inviting me to this 17th edition of the Mint BFSI Summit &amp; Awards. I am delighted to get this opportunity to engage with you during this event. As a regulator for banks and non-banking financial companies (NBFCs), I thought this could be an occasion to reflect on a less debated area for the regulated entities - their  liabilities  management  and  the  challenges.  In flagging  the mismatch between deposit and credit growth, Governor Das had previously drawn our attention to the rising challenge in this area. So, I thought of wading in with a few thoughts for your consideration.

## Introduction

2. The core function of banking involves accepting deposits, which are usually shortterm, and funding loans, which generally have longer maturities. Maturity transformation is thus an inherent feature of financial intermediation and banks are strongly exposed to the associated risks. As a result, strategic management of assets and liabilities is crucial to optimise profitability, improve liquidity and protect the bank against various risks. Historically, regulatory frameworks, including the Basel I and II, placed a greater emphasis on the asset side of the balance sheet, focusing on credit risk management and capital adequacy. This focus arises from the belief that credit defaults and asset deterioration pose the main threats to a bank's solvency. Liquidity and funding risks, primarily stemming from liabilities, were largely viewed as an issue that banks could manage themselves without requiring any regulatory oversight and intervention.
3. The Global Financial Crisis (GFC) of 2008, during which banks faced vulnerabilities on both sides of the balance sheet, challenged this approach resulting in profound changes to the banking sector's regulatory framework. During the crisis, many banks experienced  liquidity  crisis  leading  to  insolvencies  despite  adherence  to  capital requirements,  highlighting  the  fragility  of  funding  structures  reliant  on  short-term liabilities. This underscored the systemic importance of liquidity management and the need for regulatory oversight beyond asset-side vulnerabilities. The policy response was a paradigm shift that led to prescribing comprehensive global liquidity standards viz.  Liquidity  Coverage  Ratio  (LCR)  and  Net  Stable  Funding  Ratio  (NSFR)  which targeted short-term and medium-term liquidity resilience.

1 Keynote address delivered by Shri M. Rajeshwar Rao, Deputy Governor at Mint Annual BFSI Summit &amp; Awards 2025 on January 17, 2025 at Mumbai. Inputs provided by Akhilesh Gokhale, Tony Mammen and Shashank Srivastava are gratefully acknowledged.

4. It is now well understood that liability management is crucial not only for the stability and solvency of a regulated entity (RE) but is also as a key factor influencing its return on capital and growth trajectory. From the earnings perspective, the spread on interest earned  on  loans  and  the  cost  of  funds  determines  the  bank's  net  income  and profitability 2 .  The cost of liabilities thus has a direct impact on Net Interest Margins (NIMs) and earnings ratios. For instance, the share of current and savings account (CASA) deposits in total deposits, the mix of retail versus wholesale funding and the duration of liabilities play a key role in determining the funding cost and, therefore, profitability of banks. Further, the stability of funding is the key to resilience during any crisis. In this context, let me dwell briefly on the evolution of liability management in India, changing trends in liability structure, entity-specific challenges, and regulatory expectations.

## Evolution of ALM in India

5. As you all are aware, Indian banking underwent a strategic transformation with the broader economic reforms of the 1990s. The deregulation of interest rates and greater global integration made the risks encountered by financial institutions more complex and significant, requiring strategic management. Accordingly, the guidelines on AssetLiability Management (ALM) for financial institutions were first issued in February 1999 with further additions in late 2000s, covering the interest rate and liquidity risks along with prudential limits and disclosure framework.
6. The Indian Prudential Framework incorporated the Basel Committee on Banking Supervision (BCBS) Principles for Sound Liquidity Risk Management in 2012, followed by the adoption of two minimum standards for funding liquidity viz. LCR and NSFR. Recognizing that the LCR calibrations overlooked intraday liquidity and the increasing interdependencies  within  the  financial  system  could  lead  to  liquidity  disruptions affecting  payment  and  settlement  processes,  guidelines  for  monitoring  intraday liquidity  were  introduced. To  mitigate  the  concentration  risk  and  to  curtail  systemic implications of uncontrolled liability of larger banks, the Reserve Bank had very early on put in place limits on Inter-Bank Liabilities (IBL) for commercial banks (2007) and interbank  deposit  limits  for  urban  cooperative  banks  (UCBs)  (2009).  Scheduled Commercial  Banks  (SCBs)  (excluding  small  finance  banks,  payments  banks  and regional rural banks) have been permitted to set Board approved limits for borrowing in Call and Notice Money Markets, within the prudential limits for IBL. Such liability-

2 The other main driver of profits is the provision requirement which is dependent on the asset quality.

based concentration limits are unique to India and reflect the Reserve Bank's early cognizance of these risks.

## Liability Structure and Growth

7. Deposits continue to be the primary source of funds for SCBs, amounting to ₹217 lakh crore, which represented 77 per cent of total liabilities at the end of FY 2024. In contrast,  capital  funds  (i.e.,  capital,  reserves  &amp;  surplus)  and  borrowings,  each constituted around 9 per cent of liabilities 3 . The comparison of data between FY 2016 to FY 2024 indicates that the deposits have grown at an annual rate 4  of around 10 per cent,  aligning  with  the  overall  balance  sheet  growth,  and  their  contribution  to  total liabilities has remained stable at around 77 per cent (Charts 1 and 2 5 ) . Meanwhile, borrowings have grown at a slower rate 3  of 7 per cent as a result of which its share in total liabilities has decline from 11 per cent to 9 percent. On the other hand, Capital Funds have grown at close to 13 per cent and its share has increased progressively from 7.6 per cent to 9.3 per cent, indicating the deleveraging of banks' balance sheets, boosted by higher profitability and capital raising efforts.

Chart 1: Composition of Liabilities of

SCBs - end March 2024

4%

9%

9%

78%

Capital Funds

Deposits

Borrowings



Others

8.  Maturity  wise,  during  the  same  period,  the  contribution  of  term  deposits  has declined from 65.8 per cent of total deposits to 60.9 per while the shares of savings and current account deposits have increased from 25.3 per cent and 8.9 per cent to 29.2 per cent and 9.9 per cent, respectively. Consequently, CASA ratio has improved from  34.2  per  cent  to  39.1  per  cent.  This  trend  may  have  contributed  to  the

3 Borrowings include inter alia borrowings from RBI, other banks, institutions and agencies, capital instruments (Perpetual Debt Instruments and Tier 2 debt), and other bonds and debentures. The remaining liabilities (4.2 per cent) are composed of other liabilities and provisions.

4  Cumulative Annual Growth Rate (CAGR).

5 Source: RBI Reports on Trend and Progress of Banking in India, 2016 to 2024.

improvement in Net Interest Margins (NIMs) of SCBs, which has increased from 2.6 per cent in FY 2015-16 to 3.3 per cent in FY 2023-24 (Chart 3 6 ) .



9. Apart from deposits, banks raise liabilities in the form of debt capital instruments such  as Additional  Tier  1  (AT1)  bonds  and  Tier  2  bonds.  Furthermore,  banks  are permitted to issue domestic Long-Term Bonds to finance infrastructure and affordable housing loans and can also raise funds in overseas markets under the ECB route.
10.  For  Non-Banking  Financial  Companies  (NBFCs),  borrowings  are  a  significant source of funding, amounting to ₹34.46 lakh crore or 68 per cent of total liabilities as at end-March 2024. Within borrowings, debentures and borrowings from banks are the main contributors (Charts 4 and 5 7 ) . This makes NBFC's liabilities more market-driven and sensitive to interest rate changes compared to banks.



## Changing Trends and Challenges

11.  Banks are at the forefront of providing credit to productive sectors of the economy by channelizing household savings, which currently comprise approximately two-thirds of  India's  gross  savings.  Recent  trends  indicate  a  shift  in  household  preference  to financial assets for saving purposes leading to movement of these savings beyond traditional bank deposits towards capital market assets (Charts 6 and 7 8 ) . This shift is driven by several factors, including targeted efforts to deepen the financial sector, the growth of digital public infrastructure that offers convenient and frictionless access to  capital  markets,  changing  investment  preferences  due  to  demographic  shifts, increased financial awareness, and the recent period of sustained high returns yielded by equity markets. Additionally, the rise of alternative asset classes, search for higher yields  and  portfolio  diversification  have  further  fuelled  this  trend.  Over  the  past decade 9 ,  the  number  of  subscribers  and  the  assets  under  management  (AUM)  of mutual funds, pension and provident funds, and insurers have risen significantly, a trend likely to accentuate further. While this trend may not alter the aggregate funding available for banks, it may change the character of deposits having implications on cost of funds and margins for banks.

12.  Although  CASA  deposits  have  improved  over  the  longer  term  as  previously mentioned, there has been a recent shift, with share of CASA deposits declining and





8 Source: RBI Quarterly Data Release on Household Financial Savings, RBI Staff Calculations. Note: (i) Charts 6 and 7 include select components of household financial assets; (ii) Chart 6 provides the CAGR of Flow of Household Financial Assets.

9 For example, the mutual fund industry's AUM has grown from ₹10 trillion in 2014 to ₹66.93 trillion as on December 31, 2024, more than 6-fold increase in 10 years. The total number of accounts/folios as on December 31, 2024 stood at 22.50 crore. [Source: Association of Mutual Funds of India (AMFI) website]

that of term deposits, especially in higher interest rate buckets, increasing 10 . This has implications for bank NIMs and profitability. Lately, banks have also increased their reliance on short term funding through Certificates of Deposits (CDs) and the average CD outstanding had reached levels last seen in 2012 11 . Banks must, however, take cognizance of the fact that the higher reliance on short term liabilities can have its own repercussions if market conditions deteriorate.

13.    Banks  adopt  distinct  liability  sourcing  strategies  based  on  their  competitive strengths, market positioning, and business priorities. Large banks with an extensive branch network may have access to low-cost, stable retail deposits. While the banks with  a  more  pronounced  urban  presence  may  target  affluent  customer  segments, offering high-value deposit products tailored to high-net-worth individuals (HNIs) and corporate clients. Additionally, some banks with advanced technology stacks leverage digital  platforms  to  enhance  customer  acquisition  and  streamline  liability  sourcing, providing a competitive edge in attracting both retail and corporate deposits. On the other  hand,  differentiated  banks  are  seen  to  have  a  higher  reliance  on  inter-bank deposits  and  wholesale  funding.  This  diversity  in  funding  profiles  presents  unique challenges  in ALM,  as  each  business  strategy  introduces  its  own  complexities  in managing liquidity, cost of funds, and risk alignment.
14. 'Institutionalisation' of deposits, which I referred to earlier, will bring along specific challenges for the ALM for banks. A reduced reliance on retail deposits, coupled with a  greater  share  of  funding  from  institutional  sources  will  likely  result  in  increased funding costs, which in turn negatively affects profitability. The quest to maintain the margins can lead to eventual transmission of increased funding cost to interest rate on loans. This would either constrain growth of loan book or may force the lenders to dilute the underwriting standards and lend to riskier borrowers to maintain earnings ratios.  Banks  must  stay  alert  to  the  risks  of  certain  practices  that  may  seem  less evident during strong economic growth but could lead to serious consequences during economic downturns. Banks heavily reliant on wholesale funding are more vulnerable to rollover risks and outflows in times of economic stress. Therefore, effective liability management is crucial for mitigating these risks.
15.  Another issue pertains to deposit growth of certain banks not keeping pace with their loan growth, which has raised regulatory concerns about the risks associated

10 Term deposits formed 82 per cent of incremental deposits mobilised in H1:2024- 25. Source: RBI Financial Stability Report

with  higher  dependency  on  wholesale  funding  for  credit  disbursement.  Such imbalances  are  viewed  as  indicators  of  potential  structural  liquidity  vulnerabilities. While regulators monitor these trends as a macroeconomic gauge to assess systemic risks in the banking sector, it is crucial to recognise that for individual banks these indicators alone are insufficient to fully capture liquidity risk. From a short-term liquidity perspective, tools like the LCR offer a more nuanced view by considering factors such as  deposit  stability,  depositor  behaviour,  and  the  dynamics  between  retail  and wholesale funding. The relationship between these indicators is multifaceted and often contradictory, making it essential to avoid relying on any single measure in isolation and necessitating a holistic assessment of the ALM profile of banks.

16.    Contrary  to  banks,  the  liability  profile  of  NBFCs 12 is  shaped  by  their  primary activities, regulatory requirements, and the types of assets they finance. Historically, crises have demonstrated that NBFCs' over-reliance on short-term funding to support long-duration assets, such as infrastructure and housing loans, can result in significant liquidity constraints, deterioration in investor confidence, and credit rating downgrades, thereby constricting their ability to access capital markets. Consequently, NBFCs became heavily dependent upon bank funding, both direct lending and banks' subscriptions  to  debentures  &amp;  Commercial  Papers  (CPs),  leading  to  funding concentration. Recognizing the increasing dependency of NBFCs on bank borrowings, the RBI increased the risk weights of bank exposures to NBFCs by 25 percentage points in November 2023 which has helped in moderating the YoY growth in bank borrowings by NBFCs. To offset this, NBFCs have increased funding through CPs 13 and non-convertible debentures (NCDs) 14 .
17.  While  accessing  international  markets  can  reduce  NBFCs'  reliance  on  the domestic  banking  system  and  provide  a  broader  range  of  funding  options,  it  also exposes them to additional risks, particularly unhedged currency exposures, which can lead to volatility in funding costs and potential liquidity strains due to exchange rate fluctuations. NBFCs should integrate forex hedging into their ALM framework and closely  monitor  currency  exposure  to  mitigate  funding  cost  volatility.  The  liquidity

12 NBFCs regulated  by  the  Reserve  Bank  are  a  group  of  heterogeneous  financial  entities  operating  with  diverse  business strategies viz. investment credit, infrastructure finance, micro-finance, factoring, core investment, housing finance, non-operative financial holding, account aggregator, peer-to-peer lending, and primary dealing activities.

13  Outstanding CPs for NBFCs have increased by 26.2 per cent in FY 2023-24 (Source: RBI Report on Trend and Progress of Banking in India 2023-24)

14  Outstanding unsecured debentures for NBFCs have increased by 16.2 per cent in FY 2023-24 (Source: RBI Report on Trend and Progress of Banking in India 2023-24)

transformation of assets through securitization to free up resources for on-lending can also serve as an important tool to improve the ALM structure.

## Regulatory Expectations

18. Now, let me flag a few key issues that are being extensively debated globally on the ALM practices employed by banks and NBFCs and the regulatory expectations on these issues.

19. First, the rise of innovative products and technologies in banking has enhanced consumer  flexibility in accessing funds &amp; managing  cash  flows, significantly transforming  customer  behaviour.  Further,  the  evolving  dynamics  of  information dissemination through traditional and social media can profoundly influence customer behaviour,  potentially  escalating  and  amplifying  a  crisis.  These  factors  present heightened  challenges  and  banks  needs  to  be  watchful  and  carefully  review  their modelling  assumptions  on  stability  of  deposits  and  customer  behaviour  to  better predict  deposit  retention,  withdrawal  patterns,  pre-payments,  and  interest  rate sensitivities.
20. Second, the Liability-Driven Investment (LDI) crisis in the UK demonstrated the inherent vulnerabilities in highly interconnected financial structure, where the failure of one segment can precipitate cascading liquidity challenges across multiple sectors. Traditional  liability  management  models,  often  based  on  historical  data,  may  not adequately capture the risks posed by unprecedented market conditions. Consequently,  regulated  entities  must  develop  more  sophisticated  stress-testing methodologies  that  evaluate  their  ability  to  withstand  extreme  scenarios,  including those  that  involve  the  amplification  of  shocks  across  interconnected  financial networks.
21. The final point is the importance of contingency funding plans (CFPs). In general, REs must have formal CFPs commensurate with their complexity, risk profile, scope of  operations  and  their  role  in  the  financial  system. Among  others,  it  must  clearly articulate the available potential contingency funding sources and the amount of funds that can be derived from these sources. It is important to note that the lender of last resort (LOLR) function of central banks is regarded as (implicit) insurance for banks against  liquidity  shocks  that  money  market  participants  are  unwilling  or  unable  to absorb. The value of this insurance increases with banks' exposure to liquidity risk, which increases moral hazard. Banks need to recognize that, to address this moral hazard, the central banks retain discretion to decide whether to extend emergency

liquidity assistance to specific institutions. This assistance is intended as a safety net for  the  entire  financial  system  through  judicious  use  of  public  funds  and  is  often accompanied by supervisory intervention and conditionalities. Therefore, the LOLR function should not be regarded as a routine component of contingency funding.

22. As far as NBFCs are concerned, while they play a key role in enhancing access to credit  and  supporting  economic  growth,  their  activities  also  involve  a  significant amount of maturity, liquidity, and credit transformation. Most NBFCs, unlike banks, do not have access to public deposits, as the regulatory approach over the years has been to disincentivise the deposit taking activities of the NBFCs. Compared to the more stable retail sources of funding available to banks given their access to official backstops and their deposit franchises, NBFCs will continue to be dependent on banks and  capital  markets  for  their  funding.  It  is  imperative  for  NBFCs  to  diversify  their funding sources while optimizing borrowing costs and mitigating associated risks for a sustainable growth path.

## Conclusion

23. Today, we collectively aspire for a 'Viksit Bharat' by 2047, the centenary of our independence. This ambition demands consistent and sustainable economic growth combined with a systemic capacity for resilience. In order to achieve the ambitious economic growth target under this vision, the financial assets and bank assets would need to achieve a consistent and high paced growth over the next two decades, which would require a corresponding increase in liabilities and capital for the financial sector. This brings forth the need to address some of the emerging challenges as customer behaviour and preferences are undergoing profound changes while global ecosystems and external factors such as third-party dependencies and technology shifts are growing increasingly complex, reshaping the business landscape. Collectively,  these  dynamics  are  creating  a  challenging  environment  for  REs  who would need to recalibrate their approach and business strategies. This is not just about managing risks but also seizing opportunities to optimize funding structures, enhance stability,  and  support  economic  growth.  The  road  to  a  'Viksit  Bharat'  by  2047  will depend  significantly  on  how  well  the  financial  system  adapts  to  these  trends  and manages the complexities of resource raising and liability management.

Thank you.



-----****-----",Rajeshwar Rao
https://www.bis.org/review/r250121c.htm,Toni Gravelle: The end of quantitative tightening and what comes next,"Remarks by Mr Toni Gravelle, Deputy Governor of the Bank of Canada, at VersaFi (formerly Women in Capital Markets), Toronto, Ontario, 16 January 2025.",2025-01-16 00:00:00,"

Remarks by Toni Gravelle Deputy Governor of the Bank of Canada VersaFi (formerly Women in Capital Markets) January 16, 2025 Toronto, Ontario

## The end of quantitative tightening and what comes next

## Introduction

Good afternoon. Thank you, Tanya, for the kind introduction. And thank you to VersaFi for hosting this event.

The Bank of Canada's balance sheet has been larger than normal for a few years now. That's because of the role it played during the COVID-19 crisis, in making sure financial markets could work properly and in setting the economy on a path to recovery.

As we began to emerge from the worst of the pandemic, we ended quantitative easing (QE) in October 2021. Six months later, in April 2022, we started shrinking the balance sheet through quantitative tightening (QT), a process that continues today. Under QT, we have been letting our bond holdings roll off the balance sheet as they mature, without replacing them.

Last year, I said we thought that QT, also known as balance sheet normalization, would end sometime in 2025. Well, it's 2025. And since I had also promised to deliver any news about QT ahead of time, that is why I am here today.

When QT ends, we will be back to business as usual for how we manage the balance sheet. This will look a lot like how we managed it before the pandemic, which I outlined in a speech last March. 1  Essentially, we'll be purchasing assets mainly to offset the growth of currency in circulation-the cash in your wallets.

But some things have changed in the five years since the start of the pandemic. In particular, the payment system has evolved, and so has our monetary policy implementation framework. As a result, some evolution in how we manage our balance sheet is needed. So, today I'll give you an update on:

1

See T. Gravelle, 'Going back to normal: The Bank of Canada's balance sheet after quantitative tightening,' (speech to CFA Society Toronto, Toronto, Ontario, March 21, 2024).

- when, roughly, we expect QT to end
- how we will manage the balance sheet after QT ends and we resume our business-as-usual asset purchases
- what the likely drivers are of recent pressures in overnight funding markets

## Our estimate of demand for settlement balances

Let me start with a bit of background about a crucial element of our balance sheet, one that is key to guiding our QT process. I'm talking about settlement balances-what most other jurisdictions call central bank reserves.

These represent a liability on our balance sheet. 2  They are interest-bearing deposits held at the Bank of Canada that belong to members of Lynx, Canada's high-value wholesale payment system, who use them to settle large payments with each other. Lynx members include the biggest banks, which process the bulk of payments in Canada and, as a result, hold most of the settlement balances.

The interest rate that we pay on settlement balances is called the deposit rate. Due to arbitrage in overnight funding markets, the rate for overnight repurchase-or repo-agreements in these markets tends to be at or close to our deposit rate. And since the deposit rate moves one-for-one with our target policy rate, this helps ensure that the one-day or 'overnight' market rate used by financial institutions is also at, or close to, our target rate.

When we change our policy rate, this implies an equivalent change in the deposit rate, leading to changes in the overnight rate and, in turn, influencing longer-term interest rates, such as on mortgages or business loans. This is how we implement our monetary policy and ensure that it is reflected in borrowing and lending rates throughout the economy.

Now, as I discussed in my speech last March, because we now operate in a floor system, our aim in steady state is to supply just enough settlement balances to satisfy the demand for them from banks and other Lynx participants. 3  Currently, though, the amount of settlement balances on our books is higher than our best estimate of that demand because of the balance sheet measures that we took during the pandemic. So, as we shrink our balance sheet through QT, we are lowering the supply of settlement balances toward our best estimate of demand. This lower level is really a range, because we use a few different approaches to estimate the demand for settlement balances.

In estimating the overall demand for settlement balances in the financial system, we look at two types of demand. The first is payments-driven demand, which is the amount needed for Canada's high-value payments system to operate

2 For more detail about how our balance sheet works and its role in the Canadian financial system and economy, see the dedicated page on the Bank's website.

3 For a detailed discussion of why we switched to a floor system for implementation of our monetary policy, see my speech from March 2024.

smoothly. In other words, the amount of settlement balances that Lynx members want to keep on hand so that they can settle daily payments with each other.

The second type is precautionary demand. This is where risk-free and liquid assets, such as Government of Canada (GoC) bonds or settlement balances, are held as a buffer against unexpected funding or liquidity shocks.

But measuring either payments- or precaution-driven demand for settlement balances is difficult. So, to come up with the best estimate that we can, we regularly survey and speak with banks and other Lynx participants to help us understand how much demand there is. And in the latter part of 2024, we determined from these discussions and our own subsequent analysis that precautionary demand had grown beyond the level we had previously estimated.

Earlier last year, we thought QT would end when our settlement balances declined to a $20 billion to $60 billion range. This was based on our estimate of Lynx participant demand at the time.

Due to our updated assessment of precautionary demand, we have revised the range upward to between $50 billion and $70 billion. Of this, we continue to see about $20 billion to $30 billion being needed to support the payments system. The rest of the range is what we now expect precautionary demand to be.

Currently, we have about $130 billion in settlement balances, down from a peak of around $395 billion during the pandemic.

As you can see from the chart ( Chart 1 ), we expect settlement balances to reach our new estimated range around mid-year.

Chart 1: Historical and projected settlement balances



- —— Actual level of settlement balances
- see Forecast level of settlement balances until fiscal year-end 2024-25
- --Forecast level of settlement balances with constant RG (government cash balance) level

Note: The settlement balance forecast is highly uncertain and depends on many factors including, for example, the level of Receiver General (RG) cash balances deposited at the Bank of Canada. The forecast assumes a constant level of RG cash balances after fiscal year-end 2024-25. This could overstate settlement balances by the amount of funding that the government may need ahead of a large maturity. The forecast also does not include the value of any potential routine overnight repurchase agreement (repo) operations (or overnight reverse repo operations) conducted to reinforce the Bank's policy target, which would increase (or decrease) the projected level of settlement balances. Source: Bank of Canada calculations and projections

So that brings me to when we will end QT and start buying assets again as part of our business-as-usual balance sheet management process.

Based on the maturity profile of our assets, settlement balances are expected to fall well below the $50 billion to $70 billion range in the third quarter, due to a very large GoC bond maturity coming due on September 1, 2025 ( Chart 2 ).

Chart 2: The Bank of Canada's asset maturity profile until 2030



Source: Bank of Canada calculations and projections Last observation: January 15, 2025

To achieve a smoother glide path for settlement balances as they fall ahead of that large maturity, we will need a transition process where asset purchases help to offset the sharp and sudden drop. That means we will need to restart our normal-course asset purchases gradually, and well before September.

As a result, we expect to announce the end of QT and the associated restart of our business-as-usual asset purchases in the first half of this year. When we make that announcement, we will also publish a market notice with more details about the asset acquisition process, including the timing of our initial purchases and expected amounts. Given this timeline, I expect we will be the first major central bank, or among the first, to finish unwinding its pandemic-related QE asset purchases. That reflects three considerations. First, going into the pandemic, our balance sheet was smaller as a proportion of gross domestic product relative to other central banks because we hadn't used QE before. Second, we ended QE earlier than others. And third, the maturity profile of our asset holdings coming out of our COVID actions was shorter, so QT has gone faster in Canada than in most other jurisdictions.

As you can see from this chart, in terms of assets as a share of the economy, our balance sheet is already smaller than those in other major jurisdictions ( Chart 3 ).

## Chart 3: Central bank assets



Sources: Haver Analytics and Bank of Canada calculations

## The estimated range for settlement balances will evolve over time

Once we resume purchasing assets to offset the growth of currency in circulation, we will aim to manage our balance sheet in a way that keeps settlement balances in the range of $50 billion to $70 billion. But there may be brief periods when the amount falls below or rises above this range. 4

I also want to stress that, over the long term, demand for settlement balances will continue to evolve as the financial system evolves. So the amount that the major banks and other Lynx participants want to hold will likely vary as well. This means we will probably adjust our estimated range from time to time, possibly both up and down, to reflect changes in settlement balance demand. This way, we can make sure that our framework for implementing monetary policy remains effective at keeping the overnight rate in markets close to our target for the policy rate.

4 In steady state, settlement balances will fluctuate in the new range due to autonomous variations in our other major liabilities. For example, fluctuations in the amount of funds the Government of Canada puts in its deposit account with us will cause offsetting fluctuations in the level of settlement balances, all other things being equal. Fluctuations can also occur due to differences in the timing and size of our asset purchases versus the relatively lumpy maturities of our legacy asset holdings. We will aim to minimize fluctuations in order to keep settlement balances in the range but, on rare occasions, we may not always be able to for a day or so.

While our core objective is to supply enough settlement balances in the financial system for us to be able to implement our monetary policy effectively, that's not our only consideration. Another important factor is market discipline, given that we are also responsible for promoting a stable and efficient financial system.

What do I mean by this? Well, we don't want to see major banks and other core financial institutions under-investing in their capacity to robustly manage their liquidity because they have developed an unhealthy over-reliance on settlement balances. In managing their liquidity needs, financial market participants should be able to respond to fluctuations in those needs in other ways-for example, through access to markets.

Going forward, our assessment of the optimal range of settlement balances will account for the evolving nature of both payments and the financial system, as well as the need to maintain market discipline.

## The return to business-as-usual balance sheet management

Okay, so what will business-as-usual look like after QT ends?

Under our normal course of balance sheet management, we buy assets on a passive basis to reflect the autonomous rise in our liabilities. Traditionally, the biggest liability has been currency in circulation. Demand for cash usually grows at roughly the same speed as the nominal growth of the economy.

I want to be clear, though, that while QT is almost finished, the composition of our asset holdings won't be back to normal for quite some time. As I explained in my speech last March, we want to restore a more balanced mix of assets with a broader range of maturities-including more short-term assets-than we hold now. Currently, our asset portfolio is made up almost entirely of GoC bonds. And as a result, our asset holdings have a maturity profile that skews longer than it did before the pandemic. Going forward, we will hold not only GoC bonds but also GoC treasury bills (t-bills) and term repos, just as we did before the pandemic.

In steady state, we will aim to have the amount of our floating-rate assets, mostly term repos and t-bills, match the amount of our floating-rate liabilities, which include settlement balances. And we will aim to have the size of our bond holdings roughly match currency in circulation, given that currency is assumed to be a permanent liability. Although our asset purchase plan will be designed to ramp up to this steady-state composition, our asset growth is limited by how quickly currency in circulation grows. So we may not reach that composition until around 2030.

I want to emphasize that we will not be buying assets on an active basis to stimulate the economy like we did during the pandemic when we were doing QE. Our normal asset purchases before the pandemic were not QE. And our normal asset purchases after QT ends will not be QE either.

Now let's get into some of the specifics of our purchasing plans.

When we start growing our assets again for business-as-usual balance sheet management, we will start with term repo operations. These will be 1- and 3month terms, and we will gradually ramp up the amounts through bi-weekly

## operations.

T-bill purchases will take place in the primary market. We expect them to resume in the fourth quarter of this year, initially with relatively small amounts through each bi-weekly GoC debt auction.

GoC bond purchases will likely not start until toward the end of 2026-at the earliest. But, as we get closer to purchasing bonds, we will announce the timing well in advance.

When we start buying GoC bonds again in the normal course of business, we will do so in the secondary market, via reverse auctions. Secondary market purchases align with benchmark practices at other major central banks that buy their home jurisdiction's government bonds as part of the ir normal-course balance sheet management. And there are advantages to doing it this way compared with buying bonds in the primary market-that is, at GoC auctionswhich was our practice before the pandemic.

One advantage is that secondary market purchases will give us the flexibility to buy any GoC bonds outstanding across the full spectrum of maturities, rather than being limited to what's on offer at individual GoC bond auctions. This will allow us to replace maturing bonds with bonds from the maturity buckets that we want, which will help us rebalance the maturity structure of our balance sheet more quickly.

Buying in the secondary market also helps enhance the GoC bond market's functioning and liquidity. It gives participants more regular opportunities to trade and see pricing points for off-the-run securities that are less liquid than on-therun bonds.

When we do become a regular buyer in these markets again, a couple of key principles will guide us to help ensure that our presence leans toward enhancing market functioning. First and foremost, we want to limit the market impact of our purchase operations. Our bond purchase operations, for example, will be pricesensitive, and we won't necessarily buy everything that dealers offer to us. And second, we will always aim to be as transparent and predictable as possible. For example, we will publish calls for tender ahead of our operations, as well as quarterly purchase schedules.

So now you know what comes next once we've finished QT.

## Where do recent repo market pressures fit?

Before I conclude, let me also take this opportunity to say a few words about the recent pressures in repo markets and how they fit into all this.

I want to be clear that we will not be ending QT out of any concern about the functioning of repo markets. Our assessment is that, for the most part, other factors are causing these pressures. I also want to be very clear that the pressures in repo markets are not a reflection or indication of broader financial system stress.

Last year, our analysis determined that upward pressure in repo markets was being caused primarily by positioning in bond and futures markets, largely by

hedge funds. 5  Through our more recent monitoring and discussions, we can see that hedge fund activity and positioning continue to contribute to higher funding requirements sourced in the repo market. These have led to upward pressure on repo market rates-along with other factors, such as the transition to a one-day settlement period for trades, also known as T+1 settlement. 6

We've also seen greater upward pressure on rates in overnight repo markets around regulatory reporting dates, such as at year-end or quarter-end for banks. This happens in many other major jurisdictions as well. 7  Repo trading increases the size of a bank's balance sheet and, in turn, its regulatory capital requirements. So as reporting dates approach, banks try to reduce their balance sheet to satisfy regulatory requirements. This tends to make them less willing to conduct repo transactions with clients and cash desks, due to the impact that repo deals have on their books. And that reluctance reduces the supply of repo funding to the market and can cause or amplify upward pressures on repo rates.

Our analysis also finds that the Bank's routine overnight repo operations, where we inject funds into the market to ease upward pressure on overnight repo rates, can at times be less effective in these periods. This is because sourcing liquidity around reporting dates in the inter-dealer broker (IDB) market can be a better deal for banks and other intermediaries than getting it through our repo operations. Repo trading via IDBs offers netting benefits provided by central clearing, which lowers the amount of equity capital required for trades done in the IDB segment of the repo market. That is especially useful for intermediaries around reporting periods.

As always, we will continue to monitor all of these repo market dynamics.

## Conclusion

It's time to wrap up.

It's been a long road-almost three years since we began QT-but we are just about finished the QT process and the unwinding of our QE-related asset holdings. We will announce the end of QT in the first half of this year, and we will re-start business-as-usual asset purchases after it ends.

When QT is done, we'll go back to managing the balance sheet in a way that looks a lot like how we managed it before the pandemic. Crucially, when we start buying assets, these will be normal, passive purchases, reflecting the growth in

5  See B. Plong and N. Maru, 'What has been putting upward pressure on CORRA?' Bank of Canada Staff Analytical Note No. 2024-4 (March 2024). CORRA (the Canadian Overnight Repo Rate Average) measures the cost of overnight general collateral funding in Canadian dollars using GoC treasury bills and bonds as collateral for repurchase transactions. Making sure overnight rates are at or close to the target for the overnight rate that we set for monetary policy is how we ensure that borrowing and lending conditions in the economy reflect our policy stance.

6  See B. Plong and N. Maru, 'CORRA: Explaining the rise in volumes and resulting upward pressure,' Bank of Canada Staff Analytical Note No. 2024-21 (August 2024).

7  See, for example, R. Perli, 'Facing Quarter-End Pressures: Understanding the Repo Market and Federal Reserve Tools' (speech to New York University's Stern School of Business, New York, November 12, 2024).

## currency-not QE.

However, because payments and the broader financial system have evolved, our approach to balance sheet management has also evolved. This is reflected in our shift to a floor system for implementing our monetary policy, which means we need to supply an amount of settlement balances that roughly matches the demand for them. And that demand is now estimated to be higher than where we thought it would be when I spoke about our QT process last year.

Over the longer term, since the financial system will continue to evolve, demand for settlement balances can be expected to evolve too.

Market participants can count on us to communicate our next steps clearly and ahead of time. And all Canadians can count on us to manage our balance sheet in a way that both lets us achieve our monetary policy mandate and promotes a stable and efficient financial system. Thank you.",Toni Gravelle
https://www.bis.org/review/r250121h.htm,Eli M Remolona: Message for the Annual Reception for the Banking Community,"Keynote message by Mr Eli M Remolona, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 2024 Annual Reception for the Banking Community, Manila, 10 January 2025. ",2025-01-10 00:00:00,"## Eli M Remolona: Message for the Annual Reception for the Banking Community

Keynote message by Mr Eli M Remolona, Jr, Governor of Bangko Sentral ng Pilipinas (BSP,  the central bank of the Philippines), at the 2024 Annual Reception for the Banking Community, Manila, 10 January 2025.

* * *

Good evening, everyone.

Former central bank governors, members of the Monetary Board, partners from the banking and diplomatic community, government officials, friends from the media, ladies and gentlemen, happy new year!

First of all, congratulations to all of you and thank you for a milestone-filled 2024.

It has been a remarkable year and I am truly grateful for the hard work that each one of us has put in. Indeed, we have much to celebrate.

We received from S&amp;P (Global) an upgrade in our credit rating outlook. With your help, we launched the peso IRS (interest rate swap) market, and we took significant steps to expand the government repo (repurchase) market. We also rolled out the Financial Services Cyber Resilience Plan and helped pass the Anti Financial Account Scamming Act.

In the midst of all these, we also began circulating the new smarter, cleaner, and stronger polymer banknotes.

The year 2024 also happens to be the 75th anniversary of central banking in the Philippines. Please join me in applauding the services of BSP employees, the current ones, as well as those who served before them, some of them are here with us today.

We also have some new faces among us, including two members of the Monetary Board, Walter Wassmer and Jose Querubin. Their perspectives have already proven to be very helpful.

As we look ahead to 2025 and beyond, I am thrilled to continue working with you to build on our shared successes. Let us continue working together on digitalization and financial inclusion. Let us also intensify our efforts on Open Finance to ensure that people can choose financial services that best suit their needs.

Having worked with many of you over the years, I know that we share the same goal, and we share the same drive to make the banking industry a stronger engine for jobs and growth for the Filipino people.

Let me now call on my fellow members of the Monetary Board to join me on stage for the ceremonial toast.",Eli M Remolona
https://www.bis.org/review/r250121b.htm,Fabio Panetta: Peace and prosperity in a fragmented world,"Speech by Mr Fabio Panetta, Governor of the Bank of Italy, at the meeting ""Economy and peace: a possible alliance"", organised by the Centesimus Annus Pro Pontifice Foundation, Bologna, 16 January 2025.",2025-01-16 00:00:00,"

## Peace and prosperity in a fragmented world

Speech by Fabio Panetta* Governor of Banca d'Italia

Economy and Peace: a possible alliance Fondazione Centesimus Annus Pro Pontifice Bologna, Centro San Domenico, 16 January 2025

Today, our world is facing an alarming rise in geopolitical tensions and conflicts. The number of wars, which had decreased after the fall of the Berlin Wall, has turned upward again in the last fifteen years; in  2023  it  reached  its  highest  level  since  World  War  II (Figure 1).

In many regions, war - often fratricidal - is a daily reality. 1 Day after day, the news brings us dramatic images, reawakening fears linked to the traumatic experiences of the two world wars. In Western Europe, the debate about significantly increasing defence spending has resurfaced after a long time.

But conflicts are not the only cause for concern. The denial of basic needs, which still affects large parts of the world's population, is also a form of violence.

After  decades  of  ever  stronger  international  cooperation  and  economic  integration, history now seems to be taking a step backwards.

It is a very different world from the days when I started working as a central banker. In many ways, it is a world of greater uncertainty and less hope for the future, although even back then there was no shortage of stark clashes and dramatic tensions. 2

* I would like to thank Andrea Brandolini, Patrizio Pagano, Roberto Piazza, Pietro Rizza and Girolamo Rossi for their help in writing this speech, and Valentina Memoli and Roberto Pisano for their editorial support.

1 Most of the ongoing armed conflicts are civil wars. Those in Myanmar, Sudan and Ethiopia are among the bloodiest (Source: ACLED). The war in Sudan is causing a devastating humanitarian crisis: some 25 million Sudanese are suffering from food shortages; 10 million have fled their homes and 2 million have sought refuge abroad.

2 In the 1980s, despite signs of progress and hope - such as the possible rapprochement between the superpowers - there were still geopolitical, social and economic tensions. The Cold War shaped world politics, fuelling fears of an imminent nuclear conflict. In the Middle East, the Iran-Iraq war and the conflict in Afghanistan, with the Soviet invasion, strained international relations. Apartheid in South Africa was a further sign of the persistence of racial segregation dividing societies around the world. In Poland, the Solidarity movement and political tensions under the Communist regime exposed the internal struggles within Eastern Europe.

## Number of conflicts in the world involving at least one state (number of ongoing conflicts)



Sources: Uppsala Conflict Data Program (UCDP) and Peace Research Institute Oslo (PRIO), 2024. (1) Intrastate conflict: a conflict between a government and a non-governmental armed group within the territory of a given state, resulting in at least 25 battle-related deaths in one calendar year. If a foreign state is involved, the conflict is defined as 'internationalized' . If this is not the case, it is defined as 'non-internationalized' . (2) Extra-systemic conflict: a conflict between a state and a non-state group outside the state's own territory, resulting in at least 25 battle-related deaths in one calendar year. - (3) Interstate conflict: a conflict between states, resulting in at least 25 battle-related deaths in one calendar year.

It was therefore with great pleasure that I accepted the invitation from the Centro San Domenico and the Centesimus Annus Foundation to reflect, as an economist and with due humility, on such a fundamental issue as the link between peace and prosperity.

I  welcome  this  important  opportunity  to  acknowledge  the  Centro  San  Domenico's patronage of Catholic cultural activities for over fifty years. These efforts, like those of the Fondazione Centesimus Annus and above all of the Italian Episcopal Conference, are part of the Catholic Church's long-standing commitment to addressing social and economic issues, with a particular focus on inequalities and conflicts. 3

3 T he first encyclical on economic and social matters - the Rerum novarum , promulgated at the end of the 19 th century - was not the origin but the outcome of Catholic engagement on these issues. As far back as the middle of the century, at the height of the industrial revolution, many prominent Catholics were actively analysing the risks of industrial capitalism and of colonialism. At that time,  when class conflicts  broke  out  and  the Communist Party Manifesto by Engels and Marx was published, important Catholics such as Cardinals De Bonald in Lyon, Manning in Manchester and Gibbons in Baltimore spoke out on the distortions of the capitalist industrial system, while people such as Von Ketteler, a German bishop, engaged with the most important representatives of socialism. Catholic economists and sociologists - from the Italian scholar Giuseppe Toniolo to  the  Germanic  intellectual  Carl  von  Vogelsang  -  analysed  the  problems  of  capitalism  and proposed new models of work organization (see O. Köhler, La formazione dei cattolicesimi nella società moderna , in Storia della Chiesa, Vol. IX: La chiesa negli Stati moderni e i movimenti sociali 1878-1914 ,  Milan,  Jaca  Book,  1982,  pp.  234-239,  and  O.  de  Dinechin,  SJ, Rerum  novarum, in 'Aggiornamenti sociali', 3, 2019, pp. 258-262).

## 1. War cannot generate prosperity

Humanity cannot thrive without peace, and neither can the economy.

In  the  countries  involved  in  a  conflict,  war  seriously  damages  the  drivers  of  growth. 4 Hostilities destroy productive capital: infrastructure, machinery and raw materials. They claim victims, especially among the young generations, bending learning opportunities and the formation of a skilled workforce to the requirements of war. This reduces the availability and quality of 'human capital'. Furthermore, wars often erode social capital, 5 thereby weakening social cohesion and trust in institutions.

The war effort supports aggregate demand and can stimulate innovation, but seriously distorts its purposes. The economic benefits are short-lived and do not remove the need to reconvert the economy once a conflict is over, even in countries that were involved in the conflict but suffered no direct damage to their territory. The high inflation and the steep fall of economic activity that often mark wartime periods are signs of the damage that wars inflict on the economic fabric (Figure 2).

The manufacturing of war equipment does not help increase a country's growth potential. 6 Development comes from productive investment, not from arms. That is why, in the 1930s, John Maynard Keynes proposed a massive rise in public investment spending as a solution to economic depression in the United States, suggesting that President Roosevelt's focus should be on 'the rehabilitation of the physical condition of the railroads'. 7

Moreover, it is misleading to attribute technological progress to military expenditure. It is scientific research that sparks innovation. Military investment can generate innovation if it is allocated to research. 8  However, we do not need to resort to war for this: technologies developed for military purposes only translate into progress when they later find civilian applications.

War is therefore a form of 'development in reverse' 9 and cannot bring prosperity.

4 M. Schularick, speech at the ECB Forum on Central Banking, Sintra, 2 July 2024.

5 Research  on  the  importance  of  social  capital  for  economic  development  has  been  influenced  by Robert Putnam's work on Italy (see R.D. Putnam, Making democracy work: civic traditions in modern Italy , Princeton, Princeton University Press, 1993).

6 The fact that military spending is not, in and of itself, an instrument of economic development does not mean that it does not play a necessary role in national defence.

7 J.M. Keynes, 'From Keynes to Roosevelt: our recovery plan assayed', The New York Times , 31 December 1933. See also G.B. Eggertsson, 'Great expectations and the end of the depression', American Economic Review , 98, 4, 2008, pp. 1476-1516.

8 For example, the Manhattan Project, developed in the US during World War II, led to the exploitation of nuclear energy. Similarly, the Defense Advanced Research Projects Agency (DARPA) programme, set up in the 1950s, produced the internet. NASA's moon landing in the 1960s resulted in aviation and satellite technology advancements, such as GPS. But only military spending dedicated to research can generate long-term economic benefits (see J. Antolin-Diaz and P. Surico, 'The long-run effects of government spending', American Economic Review , forthcoming).

9 P. Collier et al., Breaking the conflict trap. Civil war and development policy. A World Bank policy research report , Washington DC, World Bank and Oxford University Press, 2003.

## Real income and inflation before and after World War II (indices: 1935=100)



Source: Ò. Jordà, M. Schularick and A.M. Taylor, 'Macrofinancial history and the new business cycle facts' , in M. Eichenbaum and J.A. Parker (eds.), NBER Macroeconomics Annual 2016 , Volume 31, 2017 , pp. 213-263.

## 2. Growth and integration as instruments of peace

Economic growth, prosperity and peace are instead closely linked. 10

To  understand  this  connection,  we  must  recognize  that  development  in  modern economies  is  based  on  integration  and  international  trade. 11   The  free  movement  of goods, capital, people and ideas facilitates the transfer of knowledge and technology, thereby helping to bring peoples together.

The idea that open trade and deep integration of production can secure lasting peace inspired the global economic framework that emerged after World War II.

The relationship between economic integration and peace is explicitly cited in the Havana Charter, which in 1948 sought to create an international organization for world trade to promote stability and prosperity. The Charter never did enter into force, but the talks led to the General Agreement on Tariffs and Trade (GATT), which was succeeded by the World Trade Organization (WTO) in 1995.

10 For Kant and Montesquieu , economics was the foundation of peace. In Perpetual peace , Kant argued that 'the commercial spirit cannot co-exist with war' and that international economic relations must be underpinned by international law 'based upon a federation of free states' (I. Kant, Perpetual peace, London, 1795, pp. 157 and 68). Montesquieu, in turn, wrote: 'L'effet naturel du commerce est de porter à la paix' (Montesquieu, De l'esprit des lois , 1748, book XX, chapter II, p. 349).

11 The correlation between open trade and growth after World War II has been studied by J. Feyrer, 'Trade and Income-Exploiting Time Series in Geography', American Economic Journal: Applied  Economics , 11, 4, 2019, pp. 1-35; see also J.A. Frankel and D.H. Romer, 'Does Trade Cause Growth?', American Economic Review ,  89,  3,  1999,  pp.  379-399;  D.  Rodrik, One Economics, Many Recipes: Globalization, Institutions, and Economic Growth , Princeton and Oxford, Princeton University Press, 2007; M.J. Melitz and S.J. Redding, 'Trade and Innovation,' NBER Working Paper Series, 28945, 2021.

In 1944, the Bretton Woods Conference established a multilateral system to promote cooperation and trade on a global scale. Other institutions followed over time, such as the World Bank (1944), the International Monetary Fund (1945), the OECD (1961), the G20 (1999) and the Financial Stability Board (2009).

The European project itself was conceived as a way of preventing new conflicts between neighbouring countries, following the devastations of World Wars I and II. In the words of Robert Schuman, the economic unification of Europe aimed to make war 'not merely unthinkable, but materially impossible'. 12

These initiatives fuelled the globalization that has taken off since the middle of the last century. The ratio of international trade to GDP rose from 20 per cent in 1950 to 34 per cent in 1975 (Figure 3) and then increased further in the following decades, mainly because of the end of the Cold War and the integration of new countries into the global economy, notably China. In 2019, this ratio reached 60 per cent.

Figure 3

## International trade developments between 1874 and 2021

## (exports plus imports as a percentage of GDP)



Source: Based on M. Klasing and P . Milionis, 'Quantifying the evolution of world trade' , 1870-1949, Journal of International Economics , 92, 1, 2014, pp. 185-197 .

Meanwhile,  the  global  production  structure  has  become  increasingly  complex  and interconnected  due  to  the  creation  of  global  supply  chains  and  an  increase  in  trade agreements, from 50 in 1990 to 300 in 2021. 13

This open, multilateral trade system has fostered development. The freedom to trade goods and services, to invest across borders, and to share knowledge and ideas has improved economic well-being for much of the world's population, creating new job opportunities - especially for women - and reducing inequalities between advanced and developing countries (Figure 4).

12 For more information, see the EU website: Schuman declaration May 1950 and F. Panetta, 'Europe's shared  destiny,  economics  and  the  law', Lectio  Magistralis on  the  occasion  of  the  conferral  of  an honorary degree in Law by the University of Cassino and Southern Lazio, 6 April 2022.

13 For further information, see the WTO's website: Regional trade agreements .

## Inequality between countries: 1950-2020 (1) (index)



Source: B. Milanovic, ' Global income inequality by the numbers: in history and now. An Overview ' , World Bank, Policy Research Working Paper, 6259, 2012. (1) Inequality between countries is calculated by assuming that all citizens of a given country have the same income.

Access to international markets has allowed many emerging economies to grow, 14 lifting hundreds  of  millions  of  people  out  of  extreme  poverty.  It  is  estimated  that  without the progress made over the last 35 years, 2.4 billion more people would be living in destitution today. 15

As the role of international cooperation grew stronger, conflict between states subsided.

All this progress led Steven Pinker to consider globalization as one of the reasons for the 'long peace' following the end of World War II. 16

## 3. Globalization, its discontents, and geopolitical shifts

Globalization has brought indisputable benefits, but there have been unwanted effects too, which have not always been fully understood or properly addressed by governments and international institutions.

Although  openness  to  foreign  trade  has  improved  living  conditions  in  emerging economies  and  reduced  income  inequalities  between  countries,  it  has  also  often exacerbated inequalities within States.

14 Openness to trade has benefited developing countries both directly and indirectly. Direct benefits include  access  to  new  production  technologies  and  new  markets.  Indirect  effects  include  greater competition  between  businesses  and,  consequently, higher domestic  production  efficiency.  This openness has also prompted governments to improve the quality of their fiscal and monetary policies (see  A.  Chari  and  P.B.  Henry,  'Learning  from  the  doers:  developing  country  lessons  for  advanced economy growth', American Economic Review , 104, 5, 2014, pp. 260-265).

15 In 1990, the world population was 5.3 billion, 38 per cent of which lived in extreme poverty (defined by the World Bank as living on less than $2.15 per day, at current prices). Had the share of people in poverty not decreased, today - with a world population of 8.2 billion - there would be 3.1 billion people living in absolute poverty; instead, there are 700 million (see United Nations, World Population Prospects: Summary of Results , New York, July 2024).

16 S. Pinker, The better angels of our nature: why violence has declined , New York, Viking, 2011.

In advanced economies - in the absence of reforms in areas such as education, health and social protection - globalization and the relocation of production have contributed to a slowdown in the income dynamics of workers in low-skill and low-paid jobs, but also of many in the middle class.

Many low-income countries - in Sub-Saharan Africa especially - have remained trapped in extreme poverty and high debt, in spite of the economic progress afforded by their involvement in the global economy and in spite of aid from multilateral development banks 17 and advanced countries.

Over 700 million people are suffering from food and water shortages globally, and even more lack access to adequate healthcare. 18 Almost 700 million people have no electricity, while 2.3 billion have to rely on using polluting fuels for cooking, posing serious health risks. 19  Around 250 million children aged between 6 and 18 are excluded from education, 20 with marked gender inequalities. 21

Moreover,  the  increasing  economic  clout  of  emerging  economies  has  not  been accompanied by corresponding advances in political freedoms. This is partly why leading countries  have  been  reluctant  to  review  the  governance  of  international  institutions in  order to grant these new economic powers more representation, which has led to dissatisfaction on their part.

These factors have caused many to view globalization as an elitist project, whether rightly or wrongly, 22 fuelling  resentment among large sections of the population. The 2007-08 financial crisis further undermined trust in the ruling classes, eroding confidence in the global

17 Multilateral development banks include the World Bank and regional development banks, foremost among  which  are  the  Inter-American  Development  Bank,  the  Asian  Development  Bank  and  the African  Development Bank. In  Europe,  the  European  Investment  Bank  and  the  European  Bank  for Reconstruction and Development financed investments in Central and Eastern European countries after the fall of the Berlin Wall.

18 FAO, IFAD, UNICEF, WFP and WHO, The state of food security and Nutrition in the world . Financing to end hunger, food insecurity and malnutrition in all its forms , Rome, 2024. Estimating the number of people without adequate healthcare is a complex issue: according to the World Bank and the World Health Organisation, over half of the world's population (4.5 billion people) have no access to essential medical services; for more details, see the page on the World Bank's website: Universal Health Coverage .

19 For more details, see the page on the World Bank's website: Energy.

20 UNESCO, 251M children and youth still out of school, despite decades of progress (UNESCO report) , press release, 31 October 2024.

21 Girls are often unable to attend school because of conflicts and social fragility, and girls are twice as likely as boys to be excluded from school in war-torn countries. See UNICEF, 27 million children out of school in conflict zones , press release, 18 September 2017.

22 Much of the negative effects on the labour market in advanced economies have in fact been driven by  technological  development  and  falling  transport  costs,  which  have  facilitated  the offshoring of production to emerging countries. However, in the public debate and according to general perception, these effects are often attributed to globalization. See F. Panetta, 'The future of Europe's economy amid geopolitical risks and global fragmentation', Lectio Magistralis delivered on the occasion of the conferral of  an  honorary  degree  in  Juridical  Sciences  in  Banking  and  Finance  by  the  University  of  Roma  Tre, Rome, 23 April 2024. Moreover, not all countries have complied with WTO rules: for example, industrial development in China has benefited from public subsidies that have outpriced companies and workers in other countries (see European Commission, EU imposes duties on unfairly subsidised electric vehicles from China while discussions on price undertakings continue , press release, 29 October 2024).

governance model based on free trade, economic integration, the role of international financial institutions and that of supranational bodies in the resolution of disputes.

The world is now evolving in the direction of a multipolar and fragmented system, with rising nationalist and protectionist sentiments and growing competition among opposing blocs of countries. Geopolitical tensions are escalating as a result.

On the economic front, these strains have led to trade disputes between the United States and China, to Brexit and to a growing number of vetoes by governments on foreign investments  in  domestic  companies.  Global  trade  is  fragmenting  and  is  increasingly being used for strategic purposes, especially in the race for technological dominance. In the next few years, a rise in protectionism can be expected, driven by US policies.

Meanwhile, military conflicts are spreading dramatically, and have now come to Europe too.

In this context, a growing tendency to reject shared international principles has emerged, even to the point of questioning the efficiency of democratic rules in global competition. 23 This raises very serious concerns for the future of international relations.

## 4. What economic policies are needed for peace?

The priority must be to preserve a global economy that remains open to international trade. Severing economic and trade links would lead to a significant loss of well-being for the world's population, further weakening the multilateral framework that has underpinned global economic development since the end of World War II, with repercussions that would extend beyond the boundaries of economics and finance. I will not dwell on these aspects, as I have discussed them elsewhere. 24

That said, it is necessary to correct the imbalances that have emerged over time in order to prevent deprivation and frustration from fuelling tensions and conflicts.

To achieve these goals, it is essential to act on several fronts, both domestically and internationally. I will only mention a few key points here, without claiming to be exhaustive.

The first step is to combat inequalities, in both poor and advanced countries. 25  Reducing gaps in income and opportunities is not only key to building a fairer and more equal society, but is also essential to guarantee social stability. Moreover, it is a prerequisite

23 In the words of the President of the Italian Republic Sergio Mattarella: 'Our public opinions are instilled with  the  doubt  that  democratic  power  is  weak,  inefficient,  slow,  and  unfit  to  govern  quick-paced evolutions. Or even that it is a penalizing factor in competing with non-democratic systems.' (speech by the President of the Italian Republic Sergio Mattarella at the Ceremony for the exchange of end-ofyear greetings with representatives of institutions, political forces and civil society, Rome, 17 December 2024).

24 F. Panetta, 'The future of Europe's economy amid geopolitical risks and global fragmentation', 2024, op. cit. and F. Panetta 'Economic developments and monetary policy in the euro area', speech at the 30 th ASSIOM FOREX Congress, Genoa, 10 February 2024.

25 The  Magisterium  of  the  Roman  Catholic  Church  constantly  addresses economic  inequalities.  See, among others, Benedict XVI, Encyclical letter Caritas in veritate, 29 June 2009, no. 42; Francis, Encyclical letter Fratelli tutti , 3 October 2020, no. 116.

for  development:  if  a  significant  part  of  the  population  is  excluded  from  economic opportunities, the entire economy suffers.

Another  step  is  improving  education  and  training  systems.  Fair  access  to  education is  necessary  to  break  the  poverty  cycle  and  build  a  skilled  and  productive  workforce capable of adapting to market changes and starting new economic activities. Investing in the education of young people, regardless of their initial conditions, means leaving no one behind and making full use of the human capital available.

It  is  also  vital  to  step  up  social protection and ensure access to efficient health services. This would enable workers to weather difficult times without falling into poverty, encouraging their  active  participation  in  the  labour  market  while  promoting  social  cohesion  and economic stability.

Another  priority  at  international  level  is  managing  the  external  debt  of  the  poorest countries, 26 which has reached $1.1 trillion. 27

Today, as was the case forty years ago, we must think about how to relieve the burden of this debt, which is hindering productive investment and holding back development in many countries. 28

However, the success of current initiatives is challenged by the involvement of new major creditors, such as China, and by current geopolitical tensions. 29 Accelerating these efforts would be one concrete step towards finding solutions to improve the living conditions of the populations affected.

But that is not all. It is essential to adopt policies that support development, countering the  pressure  that  extreme  poverty  exerts  on  migratory  flows,  making  them  difficult to  control.  Investing  in  the  management  of  these  flows  is  critical  to  supporting  the economies of the migrants' countries of origin and to responding to the consequences of demographic decline in the destination countries. Additionally, pursuing sustainable

26 The issue of debt of poor countries was raised by Pope John Paul II as early as 1986 in his speech to the United Nations (see CEI, 'Etica e finanza', supplement to no. 19, Quaderni della Segreteria CEI , August 2000, pp. 40-42). It was recently revisited by Pope Francis for the 2025 Jubilee (see Francis, Bull of Indiction for the Ordinary Jubilee, Spes non confundit , no. 16, 9 May 2024).

27 The figure refers to the debt held at the end of 2023 by the poorest countries, i.e. those that have access to concessional loans from the World Bank. The long-term external public debt of these countries has reached $780 billion. According to debt sustainability analyses conducted by the IMF and the World Bank, more than half of poor countries are considered as being in 'debt distress' or 'at high risk of debt distress'; the share was less than one quarter ten years ago.

28 We must not repeat  the  experience  of  the  1980s,  the  'lost  decade'  in  the  development  of  many countries,  caused  by  the  delay  in  recognizing  the  need  to  reduce  their  external  debt  and  by  the ensuing insolvency crises.

29 The  Common  Framework  for  Debt  Treatment,  signed  by  the  G20  countries  in  2020,  is  the  most significant attempt to regulate the debt restructuring processes of low-income countries, expanding the participation in the governance of these processes to non-Paris Club countries, such as China. The Global Sovereign Debt Roundtable, created in 2023 and comprising official bilateral creditors, private creditors and debtor countries, is a useful complement to the Common Framework, focusing on fostering debate on the most important challenges facing restructuring.

development models is necessary to ease tensions over access to scarce resources, like water and energy, which often fuel conflicts.

## Conclusions

Globalization  has  undoubtedly  increased  integration  between  countries  and  created opportunities for economic and social progress in many regions of the world.

However, it has also exposed very clear limitations. Current trade and geopolitical tensions are  symptoms of a system that has not fully met the expectations and needs of the world's population. Every day, thousands of people continue to suffer from deprivation and violence, often from seemingly endless fratricidal conflicts.

The economy  appears  to  have  become  globalized without fostering a 'global consciousness'.

Economic integration and international cooperation need to be revived, and their flaws corrected with policies that promote sustainable and inclusive development - policies that combine growth with social justice, environmental protection and the eradication of poverty.

Peace and prosperity are closely intertwined.

Peace is not merely the absence of conflict; it is also about creating the conditions for every  individual  to  live  in  dignity,  free  from  fear  and  poverty.  At  the  same  time,  any prosperity that does not contribute to widespread well-being will prove fleeting, and risks generating conflicts and instability.

As  Pope  Paul  VI  stated  in  his  encyclical Populorum  progressio ,  'development  means peace'. 30 Today, these words remind us of the urgent need to work for a future of fairer and more peaceful prosperity.

30 Paul VI, Encyclical letter Populorum progressio , 26 March 1967, no. 87.",Fabio Panetta
https://www.bis.org/review/r250120b.htm,"Sabine Mauderer: Climate change and supervision - prioritise action, foster collaboration","Speech by Dr Sabine Mauderer, Vice-President of the Deutsche Bundesbank, at the Basel Committee on Banking Supervision (BCBS) and Financial Stability Institute (FSI) high level meeting, Kapstadt, 16 January 2025. ",2025-01-16 00:00:00,"## Sabine Mauderer: Climate change and supervision - prioritise action, foster collaboration

Speech by Dr Sabine Mauderer, Vice-President of the Deutsche Bundesbank, at  the Basel Committee on Banking Supervision (BCBS) and Financial Stability Institute (FSI) high level meeting, Kapstadt, 16 January 2025.

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Ladies and Gentlemen,

I would like to begin my speech with a quote by the Nobel Laureate Desmond Tutu, who said:  Twenty-five years ago people could be excused for not knowing much, or doing much, about climate change. Today we have no excuse.

Who could disagree with the wisdom and moral clarity of Archbishop Tutu's words?

## 1 Advancements

Twenty-five years ago, the risks associated with climate change were not a major concern for central bankers and supervisors.

There were no climate hubs, no climate reporting and no climate stress tests.

A lot has changed since then.

In 2017, a handful of central banks-including the Bundesbank-founded the Network for Greening the Financial System. Surely, many of you are familiar with our network. The tremendous growth of the NGFS membership underlines our steadfast dedication to addressing climate-related risks.

Today we count over 140 central banks and supervisory authorities as members, alongside more than 20 observers globally. Recognizing that climate change is a major threat to our economies, we analyse its effects on key economic indicators, such as output, productivity and inflation.

Today, several central banks already incorporate climate-related risks into their analyses and decision-making processes. What is more, supervisory authorities are taking concrete steps to address the impacts of these risks on the financial institutions they oversee.

## 2 Capacity Building

In order to reap the full benefits of our work, we must ensure that all stakeholders are on board.

Building capacity is crucial in this process.

The NGFS actively promotes capacity building across its membership and we are eager to extend our partnerships. This is really a priority for me!

As some of you may know, we successfully concluded our regional Outreach Meeting with African plenary members and observers here in Cape Town yesterday. We exchanged views on the best strategies to scale up financial flows for climate adaption and mitigation measures in the region. We also discussed how to apply NGFS climate scenarios in the African context, among many other topics.

In my eyes, events like these are a great opportunity for mutual learning-to understand specific regional needs.

At the Bundesbank, we also have a long tradition of offering training courses to our international colleagues. In fact, we will offer several seminars around the topic of climate risks also this year. They are open to all our central bank colleagues . 1

In late February, we will start a preparatory course on climate risks, targeting those who are still finding their way into the topic. There will be advanced courses too, for examples on climate change and monetary policy and on supervising sustainability risks later in 2025. In addition, we offer tailored bilateral seminars.

So please do not hesitate to get in touch with me or my colleagues from the Bundesbank.

The integration of climate-related risk into financial supervision is an on-going effort which requires collaboration and knowledge sharing.

## 3 The Role of Supervision

Now, let us delve deeper into the role of supervision.

It is a given that supervisory authorities are responsible for ensuring that financial institutions manage all material financial risks they encounter.

Climate change clearly constitutes such a risk. The risk can come though transition or physical impacts-or even both. Additionally, nature degradation-such as deforestation and the erosion of soil ›- is increasingly becoming a focal point.

It is crucial for the financial sector to capture, monitor and manage climate and naturerelated risks. To give a practical example: As you know, land often serves as collateral for loans to small and medium-sized African businesses. The collateral-to-loan ratios can be quite high 2 . Investment in land resilience, such as climate-adapted irrigation techniques, can increase its quality and, consequently, its asset value.

A bank that does not manage climate risk would fail to capture these effects. It would therefore be unable to adequately price the value of the collateral.

I consider it essential that the financial sector takes these aspects seriously and prepares accordingly.

In 2020, the central banks in the euro area published a guide outlining their expectations for prudent climate risk management. And several central banks, including the ECB and the , have conducted climate stress tests to assess climate Bundesbank risks in the financial sector.

## 4 Climate Scenarios

To conduct climate stress testing, climate scenarios are a fundamental tool. They explore a range of plausible futures, without assigning concrete probabilities, serving as the basis for stress assumptions.

In November of last year, the NGFS released an updated version of its long-term climate scenarios. The outcome of these scenarios is quite striking:

Potential losses in global GDP could reach almost 15% by 2050 compared to a scenario without climate change. And even this may still be an underestimation, as we need to understand the causalities and tipping points even better.

The NGFSplans to launch a set of new short-term scenarios this quarter, covering a period of up to five years. They will help improve our understanding of the near-term financial and economic effects of transitioning to a net zero economy, also including the consequences of severe natural disasters.

## 5 Conclusion

In conclusion, the results of our numerous analyses strongly support Archbishop Tutu's perspective: We simply cannot ignore the profound and multifaceted implications of climate change to our economies and societies.

It is hence crucial that we collaborate, share best practices and address these challenges jointly.

Let us start now and continuously refine our approach as we learn from experience. Today's session on climate risk offers an excellent springboard for our efforts. Thank you very much.

1 International Central Banking Courses |  Deutsche Bundesbank

2  EIB,  2022  Finance in Africa: Navigating the financial landscape in turbulent times",Sabine Mauderer
https://www.bis.org/review/r250120a.htm,Sabine Mauderer: The year ahead for the Network for Greening the Financial System,"Speech by Dr Sabine Mauderer, Vice-President of the Deutsche Bundesbank, at the Network for Greening the Financial System (NGFS) Outreach Meeting with Plenary Members and Observers from Africa, Kapstadt, 15 January 2025. ",2025-01-15 00:00:00,"## Sabine Mauderer: The year ahead for the Network for Greening the Financial System

Speech by Dr Sabine Mauderer, Vice-President of the Deutsche Bundesbank, at the Network for Greening the Financial System (NGFS) Outreach Meeting with Plenary Members and Observers from Africa, Kapstadt, 15 January 2025.

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Good afternoon,

Esteemed colleagues and friends,

Before we move on to the final panel of the day, I would like to take this opportunity to thank you for the productive and insightful discussions we have already had throughout the day. Sharing our experiences today has underscored the critical role that central banks and supervisors play in addressing the multifaceted challenges posed by climate change-especially in this part of the world.

And it has highlighted the important role that the NGFS can play. It was great to hear about the progress our global network has made in advancing our understanding of climate-related financial risks and integrating these considerations into our frameworks.

Last year alone, we put out 10 publications across all workstreams. For instance, as you heard from James Talbot, we issued several reports that assessed the macroeconomic impact of climate change and the green transition 1   as well as a  Climate . macroeconomic modelling handbook 2   Integrating climate considerations into central bank macroeconomic modelling frameworks is crucial for informed policy-making. The handbook is useful for central banks at any stage of their climate modelling journey. As climate change-related events are becoming more frequent and more severe, understanding their impact will be even more crucial for central banks.

We also released the fifth vintage of the long-term climate scenarios. They show an updated and unfortunately much greater impact of climate change on GDP than previously estimated. If we continue with current policies, we risk losing up to 15% of GDP by 2050. These publications have generated huge attention. For instance, 3 several international media outlets, such as the Guardian, reported on the updated scenarios. Our analyses also generated great interest at the UN Climate Conference, COP29,  in Baku.

This is fantastic! It shows how our network has become an analytical powerhouse and an important voice and partner in international discussions on climate change. None of this would have been possible without your strong commitment and dedication! And I hope that you will continue to contribute to the NGFS's ambitious work. I can only encourage you to keep bringing your views and perspectives into our network and enriching its work.

In turn, Fundi Tshazibana, Vice-Chair of the NGFS,  the Secretariat and I will continue to make sure all members' voices are heard and that our work caters to different needs. Because as we heard throughout the day, the needs of African central banks and supervisors can differ from those of their Asian or European counterparts. For instance, when we talked about the NGFS climate scenarios earlier, it became clear that applying them in the African context comes with specific challenges that need to be addressed, such as data gaps.

This is why these regional outreach events are a great opportunity

- to facilitate more tailored and focused exchanges among members and observers from the same region.
- to strengthen cooperation and intensify knowledge sharing between members that have a lot in common.
- to understand regional needs.
- to make sure issues that matter to our members are well reflected in our work agenda.

I think today's event made good on these promises and was very successful. We aim to ensure that all our members can benefit from the ample expertise within our global and diverse network. Building capacity is crucial in this process. It is essential to equip and empower all members with the necessary skills and knowledge to address climate and nature-related risks.

The NGFS actively promotes capacity building across its members and beyond. Expanding these efforts is a top priority for me. We need to ensure that all our members can fully participate in and benefit from NGFS activities. The NGFS will work to develop targeted training programmes, and promote collaboration among members to effectively address climate and nature-related risks. I encourage all of you to make use of the existing training platforms and resources. I would be happy to hear your ideas on how we can improve our training resources and tailor them to your needs.

Looking ahead, we really need all hands on deck! Because we have a lot planned for this year. The NGFS aims to explore new frontiers. For instance, early in 2025 we plan to release the first vintage of the short-term scenarios, which will complement the existing long-term scenarios. Our work on adaptation is also progressing very well-thanks also to our colleagues from the National Bank of Rwanda who co-lead the NGFS Task Force on Adaptation. We published a first note at COP29 and are planning to release a more comprehensive analysis for  COP30. 4

Strengthening climate adaptation is essential for building resilient economies and safeguarding the well-being of our communities. Implementing measures to reduce vulnerability to climate impacts is particularly critical in Africa. That's why it is so important to discuss how to scale up adaptation finance in Africa. I found it very interesting to hear about challenges, possible solutions and how central banks and supervisors-and the NGFS-can support the mobilisation of adaptation finance.

In a moment, we will look more broadly at the role of central banks and supervisors in addressing climate-related challenges. Against a backdrop of increasing political fragmentation and polarisation, cooperation and collaboration are more important than ever. Because our planet is heating up fast. Last year was the warmest on record. 5

The implications of climate change for central banks, monetary policy and financial supervision are profound and multifaceted. Central banks and supervisory authorities around the globe must adapt to and tackle these challenges. As independent institutions, we can best do so by communicating the facts clearly and transparently! Our work can help to ensure that climate risks remain a top priority-in Africa and globally-despite the many headwinds.

Our upcoming, final panel discussion will round off a very productive day. Today's outreach meeting helped us to identify and discuss issues that are particularly relevant to economies in Africa. The NGFS is about sharing knowledge, experiences and best practices. About learning from one another. Personally, I learned a lot today, and I hope you did too.

Before we move on to the panel, I would like to thank Yann Marin and the team at the NGFS secretariat as well as everyone from the SARB for organising the meeting today. Thank you for being great partners in steering our global network. And most importantly, thank you, everyone, for your contributions. I look forward to continuing our exchange and I am sure there will be plenty of opportunities throughout the year.

In fact, tomorrow will already be our next opportunity. I am sure I will see some of you at the meeting of the Basel Committee on Banking Supervision and the Financial Stability Institute where we will also discuss the role of supervisors in addressing climate change.

And beyond that, I will be back soon in the context of the South African G20 presidency. Moreover, I recommend that each and every one of you attend the NGFS Plenary Meeting in Delhi in March, where we will need your perspectives as well. So, let's keep in touch and, together, let's all continue the success story of the NGFS!  Thank you.

1 Network for Greening the Financial System (2024):  Climate change, the macroeconomy and monetary policy, 29 October 2024.

- 2  Network for Greening the Financial System (2024):  Climate macroeconomic modelling handbook, 24 October 2024.
- 3  Network for Greening the Financial System (2024):  NGFS Climate Scenarios for central banks and supervisors - Phase V, 5 November 2024.
- 4  Network for Greening the Financial System (2024):  NGFS Conceptual Note on Adaptation, 13 November 2024.

5  World Meteorological Organization (2025):  WMO confirms 2024 as warmest year on record at about 1.55°C above pre-industrial level, 10 January 2025.",Sabine Mauderer
https://www.bis.org/review/r250121a.htm,Luis de Guindos: The economic outlook and monetary policy in the euro area,"Speech by Mr Luis de Guindos, Vice-President of the European Central Bank, at the 15th edition of Spain Investors Day, Madrid, 15 January 2025. ",2025-01-15 00:00:00,"## Luis de Guindos: The economic outlook and monetary policy in the euro area

Speech by Mr Luis de Guindos, Vice-President of the European Central Bank, at the 15th edition of Spain Investors Day, Madrid, 15 January 2025.

* * *

It is a pleasure to speak here again this year. 1   In my remarks last year, I expanded on monetary policy in the face of high inflation risks. The outlook was then still being shaped by the easing of pandemic-related supply constraints and by the energy price shock. Inflation had fallen rapidly from its peak in autumn 2022, but we needed to keep monetary policy sufficiently restrictive to ensure a timely and sustainable return of inflation to our 2% target.

Today, the euro area is in a very different place. Having cut interest rates four times since last June, by a total of 100 basis points, we have made substantial progress in bringing inflation back to target. At the same time, the balance of macroeconomic risks has shifted from concerns about high inflation to concerns about low growth. The outlook is clouded by even higher uncertainty, driven by potential global trade frictions, macroeconomic fragmentation, geopolitical tensions and fiscal policy concerns in the euro area. As the new year starts, it is imperative to work towards resolving the various conflicts happening in the world.

Today I will outline how the Governing Council is taking this uncertainty into account in its assessment of the inflation and growth outlook, and how a sound financial system is vital in supporting monetary policy. I will then explain the rationale behind the monetary policy decisions that we took in December and how we will approach policy decisions over the coming months.

## Inflation

The good news is that the disinflation process is well on track. Headline inflation came down quickly in 2023 from the double-digit figures we saw at the end of 2022, as the impact of energy and supply-side shocks faded. The decline in 2024 was more gradual but clearly in the right direction, with inflation averaging 2.4% over the year. The slight increase in inflation in December owing to energy-related base effects had been expected. Core inflation also declined over the past two years, falling from 5% in 2023 to 2.8% in 2024.

Most measures of underlying inflation continue to suggest that inflation will settle near our 2% medium-term target on a sustained basis. One of these measures, our Persistent and Common Component of Inflation, for example, which has the best predictive power for headline inflation over the one to two-year ahead horizon, has been around 2% for more than a year. Domestic inflation, which closely tracks services inflation, has edged down, but it remains high (at more than 4%) mostly because wages and prices in certain sectors are still adjusting to the past inflation with a delay. Wage growth has also been moderating.

The December Eurosystem staff projections expect inflation to average 2.1% in 2025 and to return sustainably to our target rather early in the projection horizon.

## Economic activity

The outlook for the euro area economy, however, remains weak and subject to significant uncertainty. Output grew above expectations in the third quarter of 2024. This was mainly driven by an increase in consumption, which partly reflect one-off factors that boosted tourism over the summer, and by firms building up inventories. The latest information suggests that the economy is losing momentum. Surveys indicate that manufacturing is still contracting and growth in services is slowing, as still-high energy prices, regulatory costs and the lagged effects of previous monetary policy tightening continue to bite. Firms are holding back on investments, and exports remain weak, with some European industries struggling to remain competitive. The labour market remains resilient, with employment growing in the third quarter of 2024, again by more than expected, and the unemployment rate remaining at its historical low of 6.3% in October. Overall, the December projections see growth in 2024 at 0.7%.

Looking ahead, the conditions are in place for growth to strengthen over the projection horizon, although less than was forecast in previous rounds. As the catching up of wages continues and as inflation falls, rising real wages should lead to stronger household spending. More affordable credit should boost consumption and investment. Provided trade tensions do not escalate, exports should also support the recovery as global demand rises. Growth is projected to be just above 1% in 2025 and to move slightly up to modest levels in 2026 and 2027.

Nevertheless, the risks to economic growth remain tilted to the downside. The risk of greater friction in global trade could weigh on euro area growth by dampening exports and weakening the global economy. In particular, the outlook is characterised by high uncertainty around future trade policies in the United States, political and fiscal policy uncertainty in some large euro area countries as well as global geopolitical risks. In fact, over the past year the European Commission's uncertainty index has reached its highest level to date. Furthermore, with formal budget submissions from several euro area countries still pending, projecting the future fiscal policy stance is challenging.

This environment of very high uncertainty could dent confidence and dampen the recovery in consumption and investment. Such pessimism is visible, for instance, in consumer expectations. While real household income increased both in 2023 and 2024 according to national accounts, only little more than a third of respondents to our latest Consumer Expectations Survey see their real income as having increased or at least stayed the same. Whereas only about 10% of households indicate an increase in perceived real income, in reality more than half of the households surveyed experienced an increase in their real income, when inflation is netted out from their selfreported nominal income. 2

## Financial stability

In this volatile economic environment, we see elevated financial stability vulnerabilities.

High valuations and concentrated risks leave financial markets vulnerable to adverse dynamics, which could be exacerbated by non-banks. Non-bank financial intermediaries have remained resilient to recent bouts of market volatility, supporting market-based finance in the euro area. However, broader market shocks could trigger sudden investment fund outflows or margin calls on derivative exposures. Given relatively low liquid asset holdings and significant liquidity mismatches in some open-ended investment funds, cash shortages could result in forced asset sales amplifying the fall in asset prices. While generally limited, pockets of elevated financial and synthetic leverage in some entities, like hedge funds, may add to spillover risks.

Simultaneously, sovereign vulnerabilities are increasing. Despite recent reductions in debt-to-GDP ratios in some euro area countries, fiscal challenges persist in several others. They are exacerbated by heightened policy and geopolitical uncertainty and structural issues such as sluggish potential growth. We therefore need to keep monitoring risks to financial stability carefully, including those stemming from recent increases in sovereign yields in the United States, the United Kingdom and, though more moderate, in the euro area.

On a more positive note, euro area banks are strong. Their resilience has been underpinned by solid capital ratios, robust liquidity buffers and high bank profitability. The latter may have reached its peak, however, as net interest margins are already declining while credit losses are gradually rising.

In this uncertain macro-financial environment, preserving bank resilience remains crucial. Existing releasable macroprudential capital buffer requirements and adequate borrower-based measures should be maintained to ensure that banks can absorb any future shocks. At the same time, the policy framework for non-banks should be improved from a macroprudential perspective to strengthen the sector's resilience. Finally, to mitigate the current risks to sovereign debt sustainability, it is important to implement the EU's revised economic governance framework fully, transparently and without delay. Given the structural challenges related to low potential growth, the consolidation of public finances will need to be designed in a growth-friendly way. 3

## Conclusion

Let me conclude. In December we decided to further moderate the degree of monetary policy restriction, lowering the key ECB interest rates by 25 basis points. This decision was based on our updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission. We are also continuing the process of balance sheet normalisation. In December the last repayment of the targeted longer-term refinancing operations was completed and reinvestments were discontinued.

We are determined to ensure that inflation stabilises sustainably at our 2% mediumterm target. Given the high level of uncertainty, we will continue to follow a datadependent and meeting-by-meeting approach to determining the appropriate monetary policy stance. The high level of uncertainty calls for prudence. In particular, severe global trade frictions could increase the fragmentation of the world economy, uncertainty about fiscal policy and its present challenges could weigh on borrowing

costs, and renewed geopolitical tensions could affect energy prices. We are therefore not pre-committing to a particular rate path. If the incoming data confirm our baseline, the policy trajectory is clear, and we expect to continue to further reduce the restrictiveness of monetary policy.

- 1  I am grateful to Adriana Grasso, Max Lampe and Thomas McGregor for their contributions to this speech.
- 2  Baumann, A., L. Caprari, G. Kocharkov and O. Kouvavas, (2025), ""Are real incomes increasing or not? Pessimism and its impact on consumption"", forthcoming in Economic , Issue 1, ECB. Bulletin
- 3  See Draghi, M. (2024), , September, and The future of European competitiveness Letta, E. (2024), "" "", April. Much More Than a Market",Luis de Guindos
https://www.bis.org/review/r250123c.htm,Ida Wolden Bache: Policy rate will likely be reduced in March,"Introductory statement by Ms Ida Wolden Bache, Governor of Norges Bank (Central Bank of Norway), at the press conference following Norway's announcement of the policy rate, Oslo, 23 January 2025.",2025-01-23 00:00:00,"## Ida Wolden Bache: Policy rate will likely be reduced in March

Introductory statement by Ms Ida Wolden Bache, Governor of Norges Bank (Central Bank of Norway), at the press conference following Norway's announcement of the policy rate, Oslo, 23 January 2025.

* * *

Presentation accompanying the speech

Chart 1: Policy rate kept unchanged at 4.5 percent

Norges Bank's Monetary Policy and Financial Stability Committee has decided to keep the policy rate unchanged at 4.5 percent.

Norges Bank is tasked with keeping inflation low and stable. The operational target is inflation of close to 2 percent over time. We are also mandated to help keep employment as high as possible and to promote economic stability.

We have raised the policy rate significantly to tackle high inflation. Since December 2023, the policy rate has been held at 4.5 percent. The interest rate has contributed to cooling down the economy and to dampening inflation. The current outlook suggests that inflation will return to target without a large increase in unemployment.

Inflation fell further towards the end of last year and has moved closer to target. At the same time, the rapid rise in business costs is likely to contribute to stoking inflation ahead. The Committee is concerned with the risk that if the policy rate is lowered too quickly, inflation could remain above target for too long. On the other hand, the Committee does not want to restrain the economy more than needed to stabilise inflation around 2 percent.

The Committee judges that a restrictive monetary policy is still needed, but that the time to begin easing monetary policy is soon approaching. If developments turn out as we now envisage, the Committee will reduce the policy rate in March.

We have not made new forecasts for this monetary policy meeting but have assessed new information about economic developments against the forecasts presented in December.

Chart 2: Unemployment is little changed

Growth in the Norwegian economy picked up slightly in 2024. Activity has been lifted by high public demand and large investments in the petroleum industry. At the same time, housing construction has shown a sharp decline. Unemployment has risen somewhat from a low level in recent years. In recent months, unemployment has changed little in line with our December projections.

Chart 3: Inflation has moved closer to target

Inflation has fallen markedly over the past year, and in December inflation stood at 2.2 percent and was lower than expected. However, excluding energy prices, which fluctuate widely, inflation was higher and broadly as projected.

International inflation has also declined markedly and moved closer to inflation targets. Many central banks have cut their policy rates. The market expects further rate cuts ahead, but fewer rate cuts than previously. Since the previous monetary policy meeting, the krone has been slightly weaker than assumed.

We set the policy rate based on conditions in the Norwegian economy, but as a small open economy, we are affected by international developments. The new US administration has announced trade policy changes, but it remains uncertain which measures will be enacted. Should tariffs be raised, global growth will likely slow, but the implications for price prospects in Norway are uncertain.

The Committee will have received more information about economic developments ahead of its next monetary policy meeting in March when new policy rate forecasts will also be presented.",Ida Wolden Bache
https://www.bis.org/review/r250123a.htm,Fritzi Köhler-Geib: Emission data - a mission for statistics,"Speech by Dr Fritzi Köhler-Geib, Member of the Executive Board of the Deutsche Bundesbank, at the 2025 conference of the European Statistical Forum, Brussels, 16 January 2025.",2025-01-16 00:00:00,"## Emission data — a mission for statistics

2025 conference of the European Statistical Forum

16.01.2025 | Brussels | Fritzi Kohler-Geib

Check against delivery.

## Ladies and Gentlemen,

It is both a pleasure and an honour for me to be here. This conference is very timely. On one hand, extreme weather events, such as the wildfires around Los Angeles currently in the news or the floods in Spain, underline the urgency of the topic of the conference. On the other hand, it seems that the relevance attributed to combatting climate change is about to be lessened among relevant international players, with a larger focus potentially being placed on economic competitiveness. | have just returned from a discussion among policymakers and researchers in Washington D.C., where many of the exchanges touched on the economic outlook in a potentially more fragmented world economy. Therefore, anything that can help resolve the potential trade-off between fighting climate change and improving economic competitiveness will be helpful, and official statistics in Europe can play an essential role in that.

| would like to address this topic by discussing three main questions with you in the next few minutes: Why do central banks care about climate change and how do official statistics play into this? What are the challenges and opportunities with regards to official statistics on sustainability going forward? In this opening address | will highlight the issue, and then | will give you our Bundesbank perspective on the third question: How can the challenges be addressed? What do we as statistical agencies and central banks have to do in this area going forward?

Let me start with the first question on central banks and climate change—why do we care about it? The simple answer is, we have to do our job. Our mandate is price stability. Climate change imposes stability risks mainly through two channels: physical risks related to extreme weather events that can destroy assets and infrastructure, and transition risks arising from increased investment needs to decarbonise production processes. Beyond this, there is biodiversity loss. In other words, climate change and nature degradation affect a central bank's core tasks. For banking supervision, financial stability analysis, and monetary policy, we need reliable and timely climate data, financial and non-financial data at both aggregated and micro level.

Turning to statistics, what has been done in official statistics? In macro statistics, a lot has been done and with great success. | will focus on two examples. First, at the macro level, fundamental concepts are provided by the Environmental Economic Accounting System, which maps the interaction between the economy and the environment. A second example is the G20 (Group of 20) work on improving sustainability-related data, where seven of the 14 new recommendations of the third Data Gaps Initiative (DGI (Data Gaps Initiative)) relate to climate-relevant aspects.

Official macro statistics are important but not enough to fulfil central bank tasks. Data about financial aspects are also important but difficult to find in public, structured data sources. To address this issue, the Network on Greening the Financial System (NGFS (Network for Greening the Financial System)) has developed a data catalogue for seven stakeholder categories and eight main use cases, providing an overview of a variety of data sources. [1] The final directory references, for example, 748 links to data sources based on the needs of financial sector-stakeholder use cases.

In the European System of Central Banks (ESCB (European System of Central Banks)), aggregated indicators based on microdata are constructed for the carbon footprint financed by financial institutions and the physical risk to which the collateral of financial institutions is exposed. [2] This work is challenging not only due to existing data gaps but also due to the linking of information from different sources.

In addition, new technologies offer opportunities to verify or generate information. For example, the BIS (Bank for International Settlements) Innovation Hub, a collaboration among central banks on innovative technology, is working on extracting sustainability-related information from company reports using Al (artificial intelligence) algorithms, particularly large language models, to automatically extract relevant climate-related indicators. [3]

The Bundesbank supports these projects and works together with academic institutions on using new technology to improve the climate data situation. One research collaboration is examining the extent to which satellite images and street-view images can be used for data quality control.

To summarise, central banks care about climate change as part of their price stability mandate and therefore need high-quality data.

Let me turn to the second question: What are the challenges and opportunities with regard to sustainability data going forward? All in all, much has been achieved and is ongoing in official statistics. However, the challenge for central bank analysis is not only the limited availability of data but also their quality, which often does not meet the standards of established statistics as defined by the European Statistical System (ESS (European Statistical System)) code of practice[4] or the ESCB (European System of Central Banks) public commitment. [5] Microdata are currently almost exclusively supplied by private sector data providers.

Let's look at an example. The figure on the slide #9 shows the emissions of companies—each data point representing the emissions of one corporation—provided by two private data providers, provider 1 on the y-axis and provider 2 on the x-axis. The orange points are reported emissions, and the blue points are estimated emissions by the data provider. If the information were identical, the observations would lie on the angle bisector, which one could expect given that the figures are not estimated but come from company reports. The visibly broad scatterplot illustrates that the data from the two providers differ significantly. Please note the log scale. In some cases, the difference is by a factor of 1,000.

The whole picture is shown on slide #10. The discrepancies visible there are even larger. Not all of these deviations can be explained by errors in the reported dimension of the data. Clearly, there is a need for action to improve quality.

So, what can we do to overcome the problem? From my point of view, the quality of economic microdata will be best if the data are directly taken from or at least derived from financial accounts or corporate reports. In this regard, the Corporate Sustainability Reporting Directive (CSRD (Corporate Sustainability Reporting Directive)) offers a window of opportunity, not only for statistics, creating a burden for companies at the same time. The new standards are already mandatory for many European listed entities and will apply to many more in the coming years—more precisely, to around 50,000 European companies, implemented in phases, with optional and simplified standards for small and medium-sized enterprises (SMEs (small and medium-sized enterprises).

emis-

So, CSRD (Corporate Sustainability Reporting Directive) is fantastic from a statistics viewpoint! And yet there are two perspectives (at least): one from the statistical side and the other from the reporting agents. From the statisticians' perspective, the CSRD (Corporate Sustainability Reporting Directive) will lead to a rich and high-quality source of microdata for climate-related and sion statistics. Statisticians need to work step by step. We have established the JECED task force, embodying a pan-European perspective. Let me explain this acronym in an iterative process. You know the

CMEB (Committee on Monetary, Financial and Balance of Payments Statistics), the Committee on Monetary, Financial and Balance of Payments statistics.[6] You may also know the ECCBSO (European Committee of Central Balance Sheet Data Offices), [7] the European Committee of Central Balance Sheet Data Offices. This latter body specialises in collecting and analysing financial statements of nonfinancial enterprises as well as publishing aggregated results — freely available for everyone. JECED stands for a joint venture of these two: Joint ECCBSO (European Committee of Central Balance Sheet Data Offices)-

CMEFB (Committee on Monetary, Financial and Balance of Payments Statistics) Task Force on Environmental Data.

Anticipating the stream of incoming data, the JECED proactively tackles issues such as identifying the data points to be expected in the CSRD (Corporate Sustainability Reporting Directive) reports, ensuring report accessibility, and dealing with simple but crucial issues such as ""who reports what and when?"" The goals of JECED are manifold: to statistically benefit from high-level disclosed corporate data, to develop ideas on integrating forthcoming environmental data with existing statistical datasets, and to avoid any redundant data collection in statistics. | have the impression that we all will benefit from this initiative. | would like to take this opportunity to specially thank my colleague Robert Kirchner, who was chair of the CMFB (Committee on Monetary, Financial and Balance of Payments Statistics) up to the end of 2024 and is still chair of the ECCBSO (European Committee of Central Balance Sheet Data Offices), for using his doublechairmanship to initiate this joint journey of discovery of the European System of Central Banks and the European Statistical System. | am also very thankful to all colleagues who actively support this task force.

From the corporates' perspective, the CSRD (Corporate Sustainability Reporting Directive) is designed as an information tool to make firms (and their stakeholders) aware of the environmental consequences of their decisions. At the same time, the data requirements are extremely costly for the corporates. Look at slide #13: According to a recently published research paper based on a survey among company executives in Germany, different dimensions of bureaucracy of all kinds sum up to 22 % of the working time of white-collar employees. Eighty percent of businesses see the need to hire external service providers, and total costs are estimated at around 6 % of turnover. Managers consider the reporting burdens originating from the EU (European Union) and the (German) Federal Government as especially onerous. This is why discussions on reducing bureaucracy routinely lead to calls for eliminating statistical reporting requirements.

To summarise, firm-level data challenges persist regarding availability and quality, and the CSRD (Corporate Sustainability Reporting Directive) offers an opportunity to address them. Yet, the burden for companies to fulfil the reporting requirements needs to be kept low from a competitiveness perspective.

Let me turn to the third question: What are the challenges and opportunities with regard to sustainability data going forward? Do we have an obligation to help lower the burden of enterprises to fulfil CSRD (Corporate Sustainability Reporting Directive) reporting requirements? One could interpret the UN (United Nations)'s 10 fundamental principles of official statistics in this way. See slide #14: the first principle highlights the role of official statistics for a democratic society, mentions the economy as an addressee, and refers to the environment as a relevant topic. The question is: How can we be of help?

A big challenge for firms is the reporting of indirect emissions. Let's take the perspective of an interconnected producer of goods and look at slide #15. The producer has to disclose not only their own emissions but also those embodied within intermediate inputs. This is to ensure that the producer takes into account that their decisions on the concrete structure of the supply chain influence the carbon emissions embodied in products. However, input providers may not always be able or willing to disclose their products' carbon content. This makes the calculation of embodied emissions extremely difficult for enterprises. A pragmatic approach could be to use suitable averages from statistics as a second-best alternative if no direct information is available. This could help enterprises estimate indirect emissions and make comprehensive carbon accounting functional.

Statistics can learn from disclosed direct emissions, and corporates can learn from statistical averages if no better data for intermediate inputs are provided. As this is the opening session, | dare to share with you a general idea, knowing that many details are missing, and | am confident that you will discuss this further during the conference. As currently foreseen, corporates would send their sustainability reports in a standardised and machine-readable format to national data hubs, which will be interconnected through the European Single Access Point (ESAP (European single access point)) provided by the European Securities and Markets Authority (ESMA (European Securities and Markets Authority)). The ECCBSO (European Committee of Central Balance Sheet Data Offices), which also consists of the ECB (European Central Bank) and national central banks, can quality check the data and assist ESMA (European Securities and Markets Authority) in this regard, and national central banks can use the data for their credit assessment. The same data can also be used to further improve ESS (European Statistical System) and ESCB (European System of Central Banks) statistics. Enterprises can use relevant statistical averages to estimate indirect emissions to be disclosed in their if no better data for intermediate are sustainability reports inputs provided.

A recent Bundesbank study by Ulf von Kalckreuth shows that accounting results will converge to the true values over time, even if the initial estimates are far from perfect. [8] See slide #17: on the y-axis, the graph shows the root mean squared error ( RMSE (root mean squared error)) of carbon content for different groups of products in a system of encompassing carbon accounting. This can be seen as a measure of the incorrect amount of carbon emissions of products due to incorrect information on the necessary indirect carbon emissions of their respective intermediate input products. What you see is a simulation based on microdata and aggregate figures for the US (United States) economy. The simulation starts out with industry averages instead of precise figures, meaning that there is only rough information on carbon emissions embodied in intermediate inputs. However, if companies report their direct emissions correctly and if they compute carbon contents based on the correct input mix, the indicators quickly converge to their true values, even if the starting values are wrong. Input providers report their results to the next level in the value chain, replacing the rough estimates with exact information on direct emissions and company-specific input composition. With each iteration, this exact and truthful information is pushed further up in the value chain and replaces initial estimates. The influence of the initial deviation from true values diminishes quickly. Each iteration on the x-axis is thus an updated approximation of the carbon emissions of intermediate products. The graph shows that only a few ""rounds of updates"" are necessary to converge to true overall (direct and indirect) emissions.

To achieve these results, several preconditions must be met. Firms need the relevant statistical averages. This is a task for statistics: to deliver easier access to existing data. What is exactly needed should be determined by enterprises, standard setters, and IT (information technology) program providers, who could make these second-best options available in their software solutions for enterprises. More and more input providers need to communicate the carbon content of their products to the users of inputs. For this to happen, incentives are needed. These can also be created with the help of statistics. What is the incentive problem and how can statistics alleviate it?

The incentive problem has at least two sides: the incentive to disclose and deliver emissions data, and the incentive to use directly delivered information from input providers even if they are less clean than the statistical averages. Just offering statistical data as a secondbest solution may create an outright disincentive, as companies may be tempted to use official statistical averages whenever their realworld inputs are less clean than this. However, with dispersion measures, standard setters can fix a proper mark-up for using aggregate data instead of direct information, such as two standard deviations or the 95 % quantile of the distribution. Then, corporations would have an incentive to disclose and provide their emissions if their emissions are lower than this threshold. Dispersion matters! This is what the graph on slide #18 shows. It is a plot of direct emissions on the x-axis and indirect emissions on the y-axis for US (United States) companies in the chemical industry. Each point represents a company. The indirect emissions are partly simulated. The profile of companies is quite different and depends on their narrow field of activity, depicted by the different colours. So even for similar products, the direct and indirect carbon emissions can be quite differently distributed. Statistics can offer relevant data, but determining the mark-up is the task of political decision-makers.

As we have seen, effective solutions require collaboration between standard setters, statisticians, companies, and international organisations. This has started with the so-called Hamburg workshop, which was jointly organised by the IMF (International Monetary Fund), the BIS (Bank for International Settlements)/IFC (Irving Fisher Committee on Central Bank Statistics),

Eurostat (European statistical office), the Central Bank of Chile, the University of Oxford Blavatnik School of Government, and the Bundesbank almost one year ago. [9] Please look at slide #19. And the conversation continues! Businesses have shown strong and marked interest in statistical averages as a second-best solution if no input provider information is available—both at the Hamburg workshop on carbon content and at the Hamburger Forum flr Nachhaltigkeitsberichterstattung with about 140 participants, most of them from the private sector. [10]

To summarise, statistical agencies, central banks, policymakers, and corporations need to get into an iterative learning process that can substantially lower the corporations' CSRD (Corporate Sustainability Reporting Directive) reporting burden on emissions and increase the competitiveness of Europe as a business location. A process has to be initiated and set in motion. We here in this room—the ESS (European Statistical System), the ESCB (European System of Central Banks), the ESF (Economic Stabilisation Fund), the CMEB (Committee on Monetary, Financial and Balance of Payments Statistics), the

ECCBSO (European Committee of Central Balance Sheet Data Offices), and the international organisations — have a joint mission! Let's do it together and put it into practice!

Thank you for your attention!

## Footnotes:

1. The Data Directory can be found here: The NGFS (Network for Greening the Financial System) Directory (masdkp.io) [https.//ngfs.dev.masdkp.io/]. Further information regarding the directory is published in the NGFS (Network for Greening the Financial System) Final Report on Bridging Data Gaps: final\_report\_on\_bridging\_data\_gaps.pdf (ngfs.net) /https://www. ngfs.net/sites/default/files/medias/documents/final\_report\_on\_bridging\_data\_gaps.pdf]
2. For the indicators and detailed further information, see Climate change-related indicators (europa.eu) [https:/www.ecb.europa.eu/stats/all-key-statistics/horizontal-indicators/sustainability-indicators/html/index.en. html]
3. On the BIS (Bank for International Settlements) Innovation Hub and Project Gaia see Project Gaia: enabling climate risk analysis (bis.org) [https:/www. bis. org/about/bisih/topics/suptech\_regtech/gaia.htm]
4. See European Statistics Code of Practice—Eurostat [https://ec.europa. eu/eurostat/web/quality/european-quality-standards/european-statistics-code-ofpractice#:~:text=It%20defines %20 16% 20key %20principles %20for %20the%20institutional,and%20standards %20for%20each %200f%Z
5. See Public commitment on European Statistics by the ESCB (European System of Central Banks) [https./www.ecb.europa.eu/stats/ecb\_statistics/governance\_and\_quality\_framework/html/escb\_public\_commitment\_on\_european\_statist
6. See Committee on Monetary, Financial and Balance of Payments statistics /https./Avww.cmfb.org/]
7. See ECCBSO (European Committee of Central Balance Sheet Data Offices) /https:/www.eccbso.org/]
8. On this argument, see von Kalckreuth, U (2022): ""Pulling ourselves up by our bootstraps: the greenhouse gas value of products, enterprises and industries"", Deutsche Bundesbank Discussion Paper No 23/2022, July, resubmitted at the Latin American Journal of Central Bank Research. The paper also contains a formal model and a simulation for Germany.
9. See International workshop organised by the IMF (International Monetary Fund) [https:/www.bundesbank.de/en/service/dates/carbon-content-measurement-for-products-organisations-and-aggregates-creating-asound-basis-for-decision-making-9 13014]
10. , BIS (Bank for International Settlements)/IFC (Irving Fisher Committee on Central Bank Statistics), Eurostat (European statistical office), Deutsche Bundesbank, Central Bank of Chile and the University of Oxford Blavatnik School of Government, Hamburg, 21-23 February 2024.
10. The conference was organised jointly by the DRSC (Deutsche Rechnungslegungs Standards Committee e.V.), the Wissenschaftsplattform Sustainable Finance, and the University of Hamburg in November 2024.

## Presentation



## &amp; Emission data -a mission for statistics!

Fritzi KOhler-Geib, Deutsche Bundesbank, Member of the Executive Board

16.01.2025 | 2 MB, PDF

[/resource/blob/941776/37f1df8b9 1899a0a742a2b4456083516/472B63FO73FO7 1307366337C94F8C870/2025-01-16-koehlerpraesentation-data.pdf]",Dr Fritzi Köhler-Geib
https://www.bis.org/review/r250121i.htm,Abdul Rasheed Ghaffour: Keynote address - launch of Tun Ismail Ali Centre of Excellence in Monetary and Financial Economics,"Keynote address by Mr Abdul Rasheed Ghaffour, Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the Preliminary Launch of the Tun Ismail Ali Centre of Excellence (TIA CoE) in Monetary and Financial Economics, hosted by the Asia School of Business, Kuala Lumpur, 20 January 2025. ",2025-01-20 00:00:00,"## Abdul Rasheed Ghaffour: Keynote address - launch of Tun Ismail Ali Centre of Excellence in Monetary and Financial Economics

Keynote address by Mr Abdul Rasheed Ghaffour, Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the Preliminary Launch of the Tun Ismail Ali Centre of Excellence (TIA CoE) in Monetary and Financial Economics, hosted by the Asia School of Business, Kuala Lumpur, 20 January 2025.

* * *

Assalamualaikum warahmatullahi wabarakatuh and a very good afternoon to our distinguished guests, Tan Sri Dato' Sri Dr. Zeti Akhtar Aziz, former Governor of Bank Negara Malaysia, Professor Helene Ray, Professor of Economics at the London Business School and other honoured guests, welcome.

It is with great pleasure and a deep sense of gratitude that I stand before you today at the launch of Tun Ismail Ali Centre of Excellence in Monetary and Financial Economics, here at the Asia School of Business (ASB).

Previously known as Tun Ismail Ali Chair (TIAC), the initiative has thrived under the auspice of Universiti Malaya over the last 20 years. Since its establishment in 2000, the success of the Tun Ismail Ali Chair in fostering innovative research and academic contributions are a testament of Tun Ismail Ali's legacy. For this, we are deeply grateful to Universiti Malaya for their unwavering support and invaluable partnership, which has laid a strong foundation for Tun Ismail Ali Chair.

Allow me to begin by expressing my deepest gratitude to Tan Sri Dato' Sri Dr. Zeti Akhtar Aziz. The initiative we are celebrating today is a reflection of her commitment to fostering excellence within our local academics communities, whose dedication has paved the way for this endeavour. The Tun Ismail Ali Chair owes its success to her strong aspiration to shape outstanding scholars in the field of monetary and financial economics. We also owe a great debt of gratitude for her instrumental role in the establishment of the Asia School of Business. Tan Sri Zeti's efforts and commitment have been pivotal in establishing ASB as a leading institution for higher learning and research in the ASEAN region. We are truly honoured to continue her legacy here at ASB.

I am also honoured to welcome our distinguished keynote speaker, Professor Helene Rey, who is the Professor of Economics at the London Business School. We are privileged to have a prestigious scholar of her caliber with us today despite her demanding schedule.

## The Late Tun Ismail Ali's Legacy

Ladies and gentlemen,

As we gather here today, let us reflect on the legacy of the late Tun Ismail Ali, and his significant contributions to Malaysia's financial and economic landscape. He was a pioneer in the field of central banking in Malaysia, and his visionary leadership laid the

groundwork for many of the institutions that we have today. Tun was known to be a man of principles - in particular, trustworthiness and integrity. His relentless pursuit of excellence and formidable intellect were matched by a deep sense of purpose to serve the country.

Among his lasting imprint as the first Malaysian Governor of Bank Negara Malaysia was the introduction of the Malaysian ringgit in 1967 to replace the Malayan dollar, which was a defining move that led to the establishment of the monetary policy framework. Under his leadership, he forged the path to a thriving financial system, overseeing the growth of domestic banks as champions for the underserved segment. To quote his own words, ""the role of Bank Negara is to ensure that the less privileged, the farmers, the small traders, small enterprises, small businesses and individuals, have ready . This quote exemplifies his unwavering access to bank credit on reasonable terms""  1 dedication to serve the nation by establishing policies that benefit the whole society. This, along with the establishment of the Malaysian Stock Exchange market paved the way to Malaysia's financial market resilience.

Today, we mark the beginning of a new chapter with the establishment of this Centre of Excellence together with the ASB. The Centre extends the legacy of Tun Ismail Ali. While the mission to advance expertise in the field of monetary and financial economics remains intact as it was first established two decades ago, the Centre will broaden its scope to address today's challenges. This includes widening its outreach through engagements with local institutions, students, and the public which would elevate the capacity of our education institutions. It will also function as a research hub on central banking matters, with a deep focus on emerging markets. Moving forward, the organisation of conferences, seminars, workshops and public lectures would allow the Centre to further facilitate the knowledge creation and exchange between academicians and institutions.

## The Challenges of Monetary Policy at Present and in the Future

Ladies and gentlemen,

As we gather here today, let us reflect on the legacy of the late Tun Ismail Ali, and his significant contributions to Malaysia's financial and economic landscape. He was a pioneer in the field of central banking in Malaysia, and his visionary leadership laid the groundwork for many of the institutions that we have today. Tun was known to be a man of principles - in particular, trustworthiness and integrity. His relentless pursuit of excellence and formidable intellect were matched by a deep sense of purpose to serve the country.

## Risk assessment under Knightian uncertainty

We as policymakers find ourselves navigating an era marked by unprecedented global uncertainties. While monetary policy has always involved some level of uncertainty, recent macroeconomic trends including the ongoing technological breakthroughs coming from machine learning and artificial intelligence, and the shifting geopolitical dynamics have amplified this uncertainty. This compels us to reassess our approach to monetary policy and increase the focus on risk assessments, for this to be prioritised at the forefront to support informed and effective decision-making. In this context, I would

like to revisit the concept of Knightian uncertainty 2 . The concept indicates that there is a critical distinction between risk and uncertainty. Risk presents uncertainties with known and measurable probabilities. Uncertainty on the other hand, is characterised by unknown and unquantifiable probabilities of occurring. Accounting for both risk and uncertainty in policymaking is critical to ensure we are able to address macroeconomic challenges effectively.

In facing these uncertainties, Malaysia is no different from the rest of the world. The structural trends that I outlined earlier have resulted in an environment where conventional economic models struggle to offer us insights. These unknown and unquantifiable uncertainties pose a formidable challenge to policymaking. To better navigate these challenges and uncertainties, we continue to explore frontier methods and go beyond conventional approach.

We have to diversify our surveillance methods. For instance, we have our regional offices to conduct on-the-ground surveillance and actively engage with relevant industries. We also use high-frequency data to assess the state of the economy and spend a great deal of time filtering the noises from such data. BNM's approach to monetary policy remains data-driven and forward-looking. To this end, we continue to closely monitor the balance of risks surrounding our domestic inflation and growth outlook, and will ensure that our monetary policy stance remains conducive to sustainable growth amid price stability.

## Monetary policy in a post-globalisation environment

The early 1990s saw the world enter an era of ""hyperglobalisation"" where trade grew markedly quicker than global GDP. The integration of global supply chains drove costs down and enabled low inflation despite relatively loose monetary policy. Indeed, central bank policymaking during those times were relatively more straightforward. Now, the recent trend of deglobalisation, reshoring, and supply chain fragmentation - particularly following the pandemic and ongoing geopolitical tensions - have disrupted these established assumptions. This combined with the rapid increase in digitalisation including the emergence of Central Bank Digital Currency (CBDC), could have implications on monetary policy either through the effects of tightness in financial conditions or other monetary policy transmission channels.

Conventional thinking about monetary policy in this new economic environment characterised by increased risks and fragmentation will no longer be sufficient. Amid this new economic reality, policymakers are confronted with the question of whether inflation dynamics are shifting structurally, which could result in a change in the traditional Phillips curve relationships, thereby complicating the trade-offs between inflation control and growth support. Moreover, another potential factor that could contribute to the more complex environment is the quality and timeliness of economic data which may have been challenged amid ongoing heightened global uncertainties.

As a result, our conventional thinking about monetary policy may require a closer look. While established macroeconomic assumptions continue to underpin baseline scenarios, their relevance in the current environment is increasingly uncertain. This

evolving context presents challenges in forecasting and subsequently formulation of monetary policy decisions, underscoring the need for greater adaptability and innovation in central banking.

## The vast unexplored area pertaining to macro-financial trade-offs and linkages

Last but not least, one of the most intricate challenges that policymakers have had to navigate is the interplay between monetary and financial stability. There remains a vast, unexplored area involving the potential trade-offs and linkages between monetary and financial stability.

Here, we are highly privileged to have Professor Helene Rey with us. Professor Rey's research on global financial cycles and its spillovers to emerging markets offers valuable insights in this domain. Her seminal research in the field of monetary and financial economics, especially looking into the global financial cycle has underpinned our understanding, particularly on capital flows and external shocks. 3   I have taken a keen interest in her study on risk-taking among financial intermediaries, which have uncovered unexpected trade-offs. Conventional economic models often indicate that financial agents such as banks and investors operate identically in terms of risk behaviour. However, Professor Rey's research demonstrates that there are indeed differences in risk appetites among financial intermediaries that can markedly influence the aggregate outcome of policy decisions. 4

As emphasised in her study, in scenarios of elevated interest rates, monetary policy easing can stimulate investment and stabilise the economy. However, at very low rates, further rate reductions would lead to concentrated risk among the most leveraged institutions, thereby creating financial fragility. This ""risk-taking channel of monetary policy"" underscores the delicate balance that policymakers must strive to maintain.

Another area that is vital to consider is the growing importance of coordination between monetary and fiscal policies. Establishing robust institutional frameworks that align these policies play a significant role in facilitating coordination between the two, while preserving independence. This would ensure the potential trade-offs mentioned earlier can be managed effectively.

## Positioning TIA CoE To Address these Challenges

Ladies and gentlemen,

With this in mind, we turn back to Tun Ismail Ali, his enduring legacy, and the unique position this Centre is now in. The Centre is able to facilitate policymakers to effectively address the upcoming global macroeconomic challenges, with proper arrangements planned ahead for the Centre to embark on. These include the Visiting Fellowship program, which would involve scholars and practitioners from around the world to contribute to our mission and provide guidance on the direction of the Centre based on their extensive academic experience.

The Centre is also committed to providing training and development opportunities. Plans have been made for visiting scholars, seminar series, and the establishment of thematic focus areas to align with the Centre's long-term objectives for capacity building. By enhancing the skills and knowledge of our local talent, the Centre aims to elevate the overall capacity of our institutions. Therefore, I strongly encourage academicians from local universities to participate and seize this opportunity to enhance skills and knowledge, with the aim of creating a robust economics and financial academic ecosystem in Malaysia.

## Conclusion

Ladies and gentlemen,

Let me conclude my remarks. I would like to reiterate the Centre's overarching mandate, which is to advance research in monetary and financial economics, and elevate the capacity of local higher education institutions. Through the collaboration with ASB and other local institutions as well as leveraging on the planned programs, the aim is to produce and disseminate impactful research. As Tun Ismail Ali once stated: "" The banking community in particular, as custodians of public funds, should strive to build up in time a legacy in the form of a body of traditions based on these time-tested virtues so that future generations may inherit a truly sound banking system and extol "" We may not always be able to predict every banking as a truly great profession. 5 uncertainty. But what we can do is to equip ourselves with as much knowledge and information as possible to better navigate and prepare against the unknown. This is what the Centre aims to achieve in honour of Tun Ismail Ali's memory.

Let us honour his memory by dedicating ourselves to the betterment of this country and effectively address the challenges of today's economy. In closing, I thank you all for being here today. Together, we will ensure that this Centre of Excellence becomes a beacon of knowledge and innovation in the field of monetary and financial economics that will underpin Malaysia's continuous development to a successful nation. May the establishment of this Centre serve as a reminder of how we have come, and how far more we must go.

Thank you.

- 1 Perdana (1998) Tun Ismail Ali Obituary: The Passing of A Banking Legend
- 2  Knight, F.H., 1921. ""Risk, Uncertainty, and Profit"". Houghton Mifflin Company, Boston.
- 3  Rey, H., 2015. ""Dilemma not Trilemma: The Global Financial Cycle and Monetary Policy Independence"". NBER Working Paper.
- 4  Coimbra, N. and Rey, H., 2024. ""Financial cycles with heterogeneous intermediaries"". Review of Economic Studies, 91(2), pp.817-857.

5  Tun Ismail bin Mohamed Ali (1975) 'Management of The Banking System', Central Banking in An Era of Change: Landmark Speeches 1959-1988, Bank Negara Malaysia, pp. 69-86.",Abdul Rasheed Ghaffour
https://www.bis.org/review/r250121g.htm,Jessica Chew Cheng Lian: Speech - launch of the Financial Markets Ombudsman Service,"Speech by Ms Jessica Chew Cheng Lian, Deputy Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the Launch of the Financial Markets Ombudsman Service, Kuala Lumpur, 17 January 2025. ",2025-01-17 00:00:00,"## Jessica Chew Cheng Lian: Speech - launch of the Financial Markets Ombudsman Service

Speech by Ms Jessica Chew Cheng Lian, Deputy Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the Launch of the Financial Markets Ombudsman Service, Kuala Lumpur, 17 January 2025.

* * *

It is my great pleasure to be here with you today to mark an important milestone in the evolution of our financial system. The journey to form the Financial Markets Ombudsman Service (FMOS) may have started out as a practical undertaking, but with the benefit of extensive consultations and valuable input from various stakeholders, including many in this room today, FMOS captures a larger, shared vision of a stronger future system of dispute resolution for financial consumers in Malaysia.

For this, Bank Negara Malaysia would like to thank the Securities Commission Malaysia for working closely with us to guide and support this effort. We would also like to applaud the significant effort, cooperation and commitment of the Board of Directors of Ombudsman for Financial Services (OFS) and Securities Industry Dispute Resolution Center (SIDREC), especially members of the Merger Steering Committee, as well as the staff of OFS and SIDREC, for enabling the seamless execution of this important initiative. Also not forgetting the financial industry representatives who weighed in on many issues along the way to ensure FMOS gets off to a credible start as a trusted, efficient and effective integrated service to financial consumers.

FMOS plays a pivotal role in our financial ecosystem. Disputes between businesses and consumers are commonplace. But few industries can lay claim to the same extent of power imbalance that exists between a financial institution and individual or small business customers. Financial matters are complex, and most individuals will not have the sophistication or resources at their disposal to guard against unfair dealings. FMOS helps to redress this imbalance by providing an avenue that is independent, fair and transparent for aggrieved financial consumers to resolve their disputes with financial service providers.

The establishment of FMOS complements Bank Negara Malaysia's ongoing commitment to promote financial inclusion and ensure the fair treatment of financial consumers. In recent years, about a quarter of regulatory standards that we issue are focused on conduct matters. This reflects our efforts to continuously raise the bar on how we expect financial institutions to ensure that they deal fairly with their customers. A notable example in the more recent period has been the revised Policy Document on Fair Treatment of Financial Consumers issued in 2024 where we introduced a new principle and specific requirements for financial service providers to consider and respond to the interests and needs of vulnerable consumers in conducting its business and operations. Another is the Policy Document on Product Transparency and Disclosure which was revised to introduce new and enhanced disclosure requirements incorporating behavioural nudges, to improve the clarity and accessibility of product information provided through digital channels. We are also in the process of revising the Complaints Handling Guidelines to reflect improvements we believe are needed to

ensure that complaints handling mechanisms of financial service providers remain effective and responsive in dealing with issues faced by consumers.

We have long maintained that the first step in resolving disputes must begin with financial service providers. Our work suggests that a customer's experience in how their complaints are handled can have a powerful effect on engendering trust even when a financial product fails to perform as expected. Given that cases of systemic, intentional malpractice within individual financial institutions are rare, a fair and sensitive approach to dealing with complaints can not only help financial institutions build enduring customer loyalty and trust, but also offer valuable insights to improve their product and practices. In cases of fraud and serious misconduct, we will not hesitate to take strong actions in collaboration with other law enforcement agencies to hold perpetrators to account, including barring individuals from working in the financial sector.

Over the past five years, the financial industry received around 2.3 million complaints, 98% of which were from the banking sector whilst the remaining were from the insurance and takaful sector. The number of complaints in recent years was 65% higher on average as compared to the complaints in 2020 which reflects not only the increasing complexity of financial services but also the higher level of consumer awareness and expectations. Conversely, complaints lodged with BNMLINK saw a 37% reduction over the same period. This suggests that ongoing improvements to complaint channels provided by financial service providers themselves are having a positive impact in ensuring that consumers are getting the help that they need, resulting in fewer complaints being escalated to BNMLINK. We expect this number to come down further in line with higher standards on fair treatment being set for financial service providers, including on the management of customer complaints. Evidence supporting this can also be observed from marked improvements recorded in customer loyalty and overall customer satisfaction as presented in the latest nation-wide Customer Satisfaction Survey (CSS) commissioned by the banking and insurance industry.

Looking ahead, FMOS will be uniquely positioned to build on and leverage on these improvements. With the formation of FMOS, the monetary award limit for eligible disputes that can be handled by FMOS was increased and streamlined to a maximum of RM250,000, from RM10,000 for disputes concerning motor third-party property damage, and RM25,000 for disputes concerning unauthorised transactions. The streamlined monetary limit of RM250,000 for all disputes is also consistent with the existing monetary award limit for disputes in the capital market, thereby enabling more financial consumers to use the alternative dispute resolution service offered by FMOS.

As financial products and services evolve and become increasingly complex, it will be vital for FMOS to ensure that its team is equipped with the necessary skills, knowledge and expertise to perform its expected role with a high level of professional competence and integrity. Sometimes, cases will call for creative solutions to deliver fair outcomes to disputing parties. To this end, we require and expect financial service providers to cooperate fully with FMOS towards achieving swift and fair resolutions. This includes promptly providing all necessary information and documentation to FMOS to facilitate its thorough review of cases and actively engaging with FMOS to explore solutions that deliver fair outcomes for consumers.

In rising to meet the expanded scope and higher expectations of it, FMOS will have to contend with a fast-changing environment, and be able to navigate the terrain between legal and fairness considerations in specific cases. In addition, one of its most important roles will be the ability to provide crucial and timely feedback to the regulators on systemic issues and poor practices to prompt early regulatory responses that can prevent future harm to consumers. The Bank also remains committed to work closely with FMOS to continuously improve on monitoring and regulatory feedback systems to inform our interventions. This includes using insights from cases handled by FMOS to identify areas where consumer education needs to be intensified to empower consumers to protect themselves against financial and misconduct risks.

Building trust in financial institutions has become more challenging with time, and yet never more important to build resilient communities. While trust in an individual financial institution can be fragile when consumers have a bad experience with an institution, FMOS plays a critical role to ensure the public can still continue to have confidence in a financial system that will fairly protect individual and small business consumers.

We have every confidence that FMOS is well-positioned to live up to these expectations. On that note, let me end my remarks by congratulating the board and staff of FMOS on its launch today.",Jessica Chew Cheng Lian
https://www.bis.org/review/r250128b.htm,François Villeroy de Galhau: For a high speed and safe journey into the financial future,"Speech by Mr François Villeroy de Galhau, Governor of the Bank of France, at the Bank of France high-level conference on speed and innovation in financial markets and market infrastructures, Paris, 28 January 2025. ",2025-01-28 00:00:00,"## François Villeroy de Galhau: For a high speed and safe journey into the financial future

Speech by Mr François Villeroy de Galhau, Governor of the Bank of France, at the Bank of France high-level conference on speed and innovation in financial markets and market infrastructures,  Paris, 28 January 2025.

* * *

## Ladies and gentlemen,

It is a great pleasure to welcome you to this high-level conference organised by the Banque de France on speed and innovation, and how they could be disruptive for financial markets and market infrastructures. Let me thank Emmanuelle Assouan and her teams for setting up this event. I would also like to extend my warm thanks to all participants from industry, public authorities and central banks who will give their views during three roundtables today, including my colleagues and friends Andrea Maechler, Piero Cipollone and Naoto Shimoda.

It is a for a Banque de France conference to be held here at the premiŁre CinØmathŁque française, which is definitely an excellent venue for our theme of today: we are here in the place where speed is made art. As you know, cinema was invented in France by the LumiŁre brothers in the late 19th century. During the projection in 1896 of one of their very first movies, , the audience The arrival of a train at La Ciotat station was so overwhelmed by the moving image of a train coming directly at them that people ran away. But we do not fear speed anymore, on the contrary: it has become a key success factor in financial markets and market infrastructures, yielding high benefits. Transactions and their settlement have already become dramatically swifter over the last decades - notably in France, which was at the forefront in dematerialising securities - and will continue gathering speed. I will first elaborate on the reasons why, in a fast-moving environment, resilience must be preserved in order to ensure financial stability (I). Our public-private partnership has to evolve, with a view to enhancing crossborder payments and the holistic project of creating a shared ledger (II).

## I. A fast-moving financial system whose resilience must be preserved in order to ensure financial stability

Markets are undergoing structural changes, all driven by increased speed aimed at achieving higher efficiency. Automation and high-frequency trading are driving a rise in daily trading volumes; new participants have emerged, and incumbents have evolved. Nowadays, robots and algorithms are unlocking new possibilities, while artificial intelligence offers the promise of value added in trading, customer relationships and investment decisions. From photography to digital movies, from local theatres to global web platforms, cinematography has gone through technological revolutions over the years. However, whether it's in cinema or finance, speed is not a goal per se. The social utility of certain accelerations such as high-frequency trading remains to be seen, and they carry risks. We must reflect on new guardrails to protect against possible increased market volatility - and even potential flash crashes caused by poorly coordinated algorithms that can amplify massive sell-offs.

Post-market processes are keeping pace with this acceleration in trading: settlement is getting ever faster. A few years ago, implementing T+2 (i.e. ensuring settlement within two days of transaction execution) was a major step forward for all players, as enshrined in the European CSDR regulation.  Nowadays we are once again aiming for i more ambitious targets, with an objective of T+1 in Europe in 2027 - as has already been the case in the United States, Canada and Mexico since end-May last year. Interestingly, across the Atlantic, this evolution was driven by market players, who saw in the shortening of the settlement cycle an opportunity to further reduce liquidity, counterparty and operational risks. The American experience also shows that T+1 yields direct financial benefits, in particular a significant lowering of CCP margins. T+1 therefore received overall support in ESMA's and the Commission's public consultations. I trust that we are all well aware of the operational requirements and challenges to be met:   preparatory work must start now, with the adaptation of IT ii systems and further automation of processes. It is also important to coordinate with the United Kingdom and Switzerland, and to pay due attention to the consequences in terms of shorter cut-offs - notably for FX transactions.

The tokenisation of assets is obviously another groundswell movement, which could further enhance the straight-through processing of trade and post-trade activities, and paves the way for yet another acceleration with a widespread implementation of T+0. It has the potential to generate even greater savings both for the financial industry and end-users. To date, the nascent DLT iii   finance has used new forms of commercial bank money as settlement assets, such as tokenised deposits or so-called stablecoins. As experience has shown in the last few years, they are far from immune, and Europe has made the right step by adopting the MiCA regulation. Failing to regulate crypto-assets and non-banks today would merely sow the seeds for tomorrow's financial crisis.

Beyond these regulatory issues, it has become more and more apparent that we currently lack the anchor provided by central bank money, which drastically reduces counterparty and liquidity risks, and crucially ensures the finality of payments. A wholesale central bank digital currency would ensure convertibility between tokenised assets, exactly as central banks currently ensure convertibility between commercial bank monies, allowing for delivery-versus-payment and payment-versus-payment. In short, tokenised central bank money would provide a ""safety pivot"", and serve as a reliable basis of trust on which these new technologies could realise their full potential.

## II. A step further with the interlinking of fast-payment systems and a European shared ledger to meet the challenges of transition and growth

Central banks must therefore keep up with these developments, in order to explore iv the potential of DLT and foster innovation while preserving the anchoring role of central bank money. Building among others on the Banque de France's pioneering experiments between 2020 and 2023,   the Eurosystem conducted a series of new v experiments on wholesale CBDC between April and November 2024, with the active vi involvement of the Banque de France, Banca d'Italia and Bundesbank as solution providers. We witnessed active industry participation in the Eurosystem experiments,

and I would like to take the opportunity to pay tribute to your strong commitment which, I believe, also reflects the growing awareness of the need for a safe settlement asset.

Together, we successfully tested numerous and very diverse use cases, ranging from primary issues to cross-currency payments, repos, margin calls and asset management, to give a few examples. Actual settlement was even tested for the lifecycle management of securities and secondary market transactions. With this ambitious programme, we have further delivered on our learning-by-doing approach, which is of the essence. As announced, the Eurosystem will draw lessons from the exploratory work, including on how to facilitate the provision of central bank money settlement for wholesale asset transactions on DLT platforms. Clearly, it is in the interest of both European commercial banks and the public sector to work together towards a tokenised European framework: money is and will remain a public-private partnership, which has to evolve.

As regards cross-border payments, the Eurosystem has launched initiatives to help improve them, including exploratory work on linking TIPS with other fast-payment systems such as UPI in India. We thereby support the G20 roadmap for creating a faster, cheaper, more transparent and accessible global payments ecosystem, while ensuring secure and reliable instant payments. The G20 roadmap also foresees, in the longer term, the use of tokenisation to further enhance cross-border payments.

We now need to bring all these advances together to create a global motion picture, in a holistic manner. Here, the idea of a ""unified ledger"" put forward by the BIS vii   looks like more than a promising technology: a rallying concept, or even a utopia. This nextgeneration market infrastructure would take one day in the future the shape of a shared, seamless and programmable platform that integrates central bank money, commercial bank money and tokenised financial assets - which would call for redefined and improved public-private partnerships. Accordingly, in April 2024 the BIS launched Project AgorÆ, to explore the tokenisation of cross-border payments to improve the viii existing correspondent banking model. This major project brings together seven central banks worldwide, including the Banque de France which represents the Eurosystem, and a large group of private financial firms. But a first and necessary step towards such a global infrastructure should be to build regional shared ledgers - one of which would be European.

A European shared ledger could prove an efficient means to overcome European market fragmentation and current inefficiencies, by facilitating the provision of seamlessly connected services across Europe. It would therefore act as a catalyst for a Savings and Investments Union, and provide tools such as green bonds and securities to finance the green transition, at a time where we have to mobilise Europe's private savings surplus of more than EUR 300 billion a year. In short, it would be an important lever for achieving our climate but also digital transformations, which are among our main challenges; it would also help Europe to gain in both size - by unifying its single market - and speed. Achieving this ambitious vision requires moving forward step by step, in a phased approach. Rather than replacing existing infrastructures which have already helped to reduce fragmentation in Europe - like the harmonised settlement system T2S -, this new shared infrastructure would tackle markets which still rely on manual processes and lack standardisation, such as OTC markets and unlisted stocks.

A crucial first step will be to make central bank money available on this infrastructure: this makes it all the more important to offer a wholesale CBDC solution in the short term to prepare this long term target.

Let me conclude with Billy Wilder, the director of . He once gave this Some like it hot sound piece of advice: ""If you have a problem with the third act, the real problem is in the first act."" This leads me to a twofold conclusion: first, that it is the right time to engage in the design and experimentation of market infrastructures of the future; second, that fast-paced transformations should not be at the expense of past achievements in financial stability, and increase risks. Central bank money must remain the settlement asset at the core of the financial system, whether tokenised or not. Under this condition, our common technological breakthroughs could contribute to meeting our major challenges. Thank you for your attention.

i  Regulation (EU) No 909/2014 on improving securities settlement in the European Union and on central securities depositories

- ii   ESMA (European Securities and Markets Authority) proposes to move to T+1 by October 2027, 18 November 2024.
- iii   DLT stands for ""distributed ledger technology"", which underpins the tokenisation of assets.
- Villeroy de Galhau (F.), , speech at iv Innovation by central banks: the sooner the better the BIS Innovation Summit, 6 May 2024.
- v   Villeroy de Galhau (F.), Wholesale CBDC: as decisive as Retail CBDC, and actively , speech, 3 October 2023. experimenting
- vi  ECB,  Exploratory work on new technologies for wholesale central bank money settlement, 4 December 2024.
- Carstens (A.) and Nilekani (N.), , BIS vii Finternet: the financial system for the future working paper, 15 April 2024.
- viii   BIS (Bank for International Settlements), Project Agora: central banks and banking , sector embark on major project to explore tokenisation of cross-border payments updated on 16 September 2024",François Villeroy de Galhau
https://www.bis.org/review/r250123b.htm,Gabriel Makhlouf: Remarks at the EU Heads of Mission Meeting,"Remarks by Mr Gabriel Makhlouf, Governor of the Central Bank of Ireland, at the EU Heads of Mission Meeting (HOMS), Embassy of the Republic of Bulgaria in Ireland, Dublin, 22 January 2025.",2025-01-22 00:00:00,"## Gabriel Makhlouf: Remarks at the EU Heads of Mission Meeting

Remarks by Mr Gabriel Makhlouf, Governor of the Central Bank of Ireland, at the EU Heads of Mission Meeting (HOMS), Embassy of the Republic of Bulgaria in Ireland, Dublin, 22 January 2025.

* * *

Good afternoon everyone. It's a pleasure to have the opportunity to address you today. Thank you in particular to Ambassador Andreeva-Malakova for the invitation.

Allow me to start by acknowledging your important work in navigating an increasingly complex international environment. Open dialogue and mutual respect have laid the groundwork for the meaningful cooperation at the core of our shared European project. It is also fundamental to the functioning of the broader international rules-based order that we have become familiar with over the last 80 years. And let me say, for the avoidance of doubt, that I remain a believer in the potential of international connectedness to strengthen communities rather than weakening them.

Ireland's track record is a testament to that. The first 50 years of independence are in stark contrast to the second 50: from isolated protectionism to being part of the largest single market in the world.

Our economic success has not been linear but it has run in tandem with that of the rest of the EU. We know what happened following the financial crisis just over a decade ago. But our strong mutually beneficial relationship has ensured that Ireland remains a vital part of the European project, contributing to and benefitting from the stability and opportunities it affords. The relationship underscores the importance of continued collaboration and shared progress.

But it is also obvious that we are in another period of transition across the globe. Political leaderships are changing across Europe and across the Atlantic. We have a new European Commission and European Parliament, where half of the MEPs are newly elected.

This period of political change comes at a pivotal moment. The global geopolitical landscape faces significant strain and complexity, driven by competing interests, shifting alliances and increasingly independent economic blocs. The Russian war on Ukraine and its people threatens the principles of sovereignty and territorial integrity that has underpinned the international order that was established 80 years ago. The conflicts in the Middle East and in Sudan are human tragedies that we have become uncomfortably familiar with.

Simultaneously, the rise of economic nationalism and trade disputes have created friction between major powers. Relationships appear to oscillate between competition and cooperation with resultant impacts on our individual and collective ability to tackle climate change, leverage the digital transformation and manage the march of demography.

These shifts present significant challenges for the EU. We have been a fervent advocate for free markets and global economic integration. But we now find ourselves needing to balance an open and dynamic economy with our own strategic independence.

That is further complicated by our competitive decline vis-à-vis our large global competitors. Mario Draghi has highlighted that China is leading the way in the development of clean technologies and the US on digitalisation. Since the start of the millennium, real disposable income has grown almost twice as much on a per capita basis in the US as it has in the EU. Enrico Letta argues that the Single Market's current framework is ill-equipped to navigate today's global challenges, particularly those posed by digitalisation and climate change.

Draghi and Letta both provide detailed recommendations on how to arrest Europe's malaise. Their recommendations deserve careful consideration and a response that is underpinned by a determination to strengthen Europe's unity, its competitiveness and its resilience.

A resilient financial system supports the efficient allocation of resources, facilitates investment and underpins trust in the broader economy. It is critical for maintaining economic stability, fostering growth and safeguarding public confidence. That means the Savings and Investments Union must deliver if Europe is to regain its competitive edge, and if we are to find ways to unlock the €11.5 trillion held by Europeans in deposits and cash and channel it to drive European innovation, while maintaining our resilience in the face of future potential shocks. As a strong advocate for a risk-based supervisory approach, the Central Bank of Ireland wants to ensure that the financial system remains resilient while serving the broader economy effectively.

Together with our Eurosystem colleagues, our focus continues to remain on price stability and ensuring inflation stabilises sustainably at our 2 per cent medium term target. We will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance for the Euro area.  In my view, the high levels of uncertainty in the global macrofinancial environment calls for prudence in our decision-making.

Our single currency is of course at the heart of one of Europe's success stories. Last year, we celebrated its 25 th   anniversary. The Euro has proven its resilience through a series of political, economic and health crises. It continues to be a symbol of strength for the European project and one of its biggest success stories. And as we enter a new era of technological innovation, the development of a Digital Euro represents a logical and critical next step.

By ensuring public money is available in digital form, we can future-proof our monetary system while maintaining trust and inclusivity for all European citizens. The Digital Euro will reduce costs by making financial transactions cheaper. It will facilitate innovation and competition and it will increase the resilience of the European payments system.

## Conclusion

Last year, the Central Bank of Ireland established a dedicated office in Brussels to strengthen our capacity to engage effectively with EU Institutions, providing timely input into the policy-making process, sharing our supervisory experiences and navigating the EU's legislative framework. We want to be a proactive and effective voice within the EU, playing our part in growing Europe's prosperity. While there are indeed challenges ahead, there are also opportunities. By working together, as ambassadors, as policy makers, as regulators, as central banks, and by developing what someone 1   once called a ""dangerous unselfishness"", we can shape a resilient and prosperous future for our Europe.

Thank you once again for the opportunity to speak with you today.

1 Martin Luther King, 3 April 1968",Gabriel Makhlouf
https://www.bis.org/review/r250128a.htm,Christine Lagarde: Central bank independence in an era of volatility,"Lamfalussy lecture (pre-recorded) by Ms Christine Lagarde, President of the European Central Bank, at the Lamfalussy Lectures Conference, organised by the Magyar Nemzeti Bank (the central bank of Hungary), Budapest, 27 January 2025.",2025-01-27 00:00:00,"SPEECH

## Central bank independence in an era of volatility

Lamfalussy Lecture by Christine Lagarde, President of the ECB, at the Lamfalussy Lectures Conference organised by the Magyar Nemzeti Bank, pre-recorded in Frankfurt am Main on 15 January 2025

Budapest, 27 January 2025

In his later years, Alexandre Lamfalussy was once asked what his fundamental motivation in life was. He recalled the experience of his turbulent youth, surrounded by the destruction caused by the Second World War. ""In the aftermath of the war,"" Lamfalussy said, ""I decided to serve the community in the rebuilding of Europe.""!

He went on to do just that. A member of the Delors Committee and the first President of the European Monetary Institute, Lamfalussy helped pave the way for Europe's monetary union and the establishment of the ECB.

His generation had also been scarred by the difficulties of the ""Great Inflation"" in the 1970s.) And so Lamfalussy — alongside other architects of the euro"" — ensured that the ECB would have sufficient powers to prevent a scenario where inflationary expectations once again became embedded in the economy.

We can see proof of this today, as advanced economies emerge from the largest inflation shock in a generation.

As in the 1970s, a series of shocks contributed to high and persistent inflation. But unlike the 1970s, inflation has since fallen relatively fast across advanced economies — and expectations have remained firmly anchored throughout.

This hard-won progress has been in large part due to the independence of central banks, which has given them the ability to take difficult but necessary monetary policy decisions in pursuit of stable prices.

## The rise of central bank independence

In the late twentieth century, central bank independence spread rapidly around the world.

A strong social consensus about its benefits — emerging from the negative experience of the 1970s sparked what Lamfalussy would later call a ""sea change"" in monetary policymaking.

—

By one account, over 80% of the world's central banks became operationally independent by the turn of the millennium. And price stability had been adopted as the primary objective of monetary policy low

frameworks across almost all advanced economies and many emerging market economies. Moreover, independent central banks both contributed to — and benefited from — a period of macroeconomic volatility.

In their famous paper, Alesina and Summers found a positive relationship between the degree of independence of central banks and lower and less volatile inflation outcomes.) At the same time, substantial structural changes were afoot in the global economy, which also helped to reduce macroeconomic volatility — an era that soon came to be known as the Great Moderation.

Globalisation led to an enormous increase in both global labour supply and production capacity, which meant that prices and wages were often little affected even in the face of strong demand. And the oil crises of the 1970s had sparked a wave of change in global energy markets, resulting in a more elastic energy supply.

The upshot of the Great Moderation was a virtuous circle.

An environment of low macroeconomic volatility made it easier for independent central banks to deliver on their price stability mandates. That, in turn, solidified the social consensus in support of central bank independence and helped ensure its growing adoption around the world — further contributing to lowering levels of volatility.

## The era of volatility

The end of the Great Moderation came suddenly and unexpectedly in 2008 with the arrival of the global financial crisis. And over the last years in particular, our world has changed dramatically.

Indeed, the two forces that fostered the spread of central bank independence — a strong social consensus and growing pools of global supply — are now coming under increasing pressure.

While recent research suggests that de jure central bank independence has never been more prevalent than it is today), there is no doubt that the de facto independence of central banks is being called into in several of the world.

question parts

One study examining 118 central banks in the 2010s shows that around 10% of them faced political pressure in an average year — even those central banks with a high degree of de jure independence.

1]

Another paper

finds that

between

2018

and

2020

alone, de

facto central

bank independence

deteriorated for almost half of those central banks in jurisdictions accounting for 75% of global epp.42]

There is evidence to suggest that political influence on central bank decisions can also contribute substantially to macroeconomic volatility. For instance, persistent political pressure on a central bank has been found to affect the level and the volatility of exchange rates, bond yields and the risk premium. 45]

At the same time, geopolitical tensions threaten to amplify volatility by increasing the frequency of shocks hitting the global economy.

We have already seen the impact of geopolitical tensions play out in Europe. Following Russia's invasion of Ukraine in early 2022, average output growth volatility in the euro area surged by 60%

compared with before the global financial crisis, while average inflation volatility shot up by 280%. 41 An environment of heightened volatility could make the task of maintaining price stability more difficult to achieve.) This could raise concerns that independent central banks are failing to deliver on their mandates, which could undermine the social consensus and further amplify volatility in the economy. So, the question that comes to the fore is: will the current era of volatility turn the virtuous circle that facilitated the rise of central bank independence into a vicious circle that leads to it being undermined?

## The benefits of central bank independence in today's world

All things considered, | would argue that this is unlikely to happen.

A volatile macroeconomic environment actually makes the benefits of central bank independence all the greater. We saw this during the recent inflation shock.

In OECD countries, average annual inflation surged to 9.6% in 2022 as they faced a variety of shocks that compounded each other. In response, independent central banks sharply increased policy rates.

These actions led to a rapid decline and convergence in the respective inflation paths of major economies — despite all these economies facing different shocks. Moreover, inflation expectations have remained firmly anchored, suggesting that the public continues to have faith in independent central banks' commitment to price stability over the long run.

In today's world, central bank independence offers two key advantages.

First, it acts as a headwind to volatility in these unpredictable times.

As we emerge from a period of very high inflation, the issue of time inconsistency is more relevant than ever.18] Compared with the pre-pandemic era of low inflation, central banks may need to contend with lower levels of rational inattention.""

In this environment, credible policy regimes become even more important for maintaining trust in central banks. Research finds that higher trust in the ECB lowers inflation expectations on average and significantly reduces uncertainty about future inflation.22

Second, central bank independence also contributes to regional strength in a world increasingly defined by geopolitical rivalries.

Price stability provides the foundation upon which other strategic goals can be achieved. Regions with stable prices tend to have more efficient resource allocation and higher levels of competitiveness, and they attract greater levels of investment. At heart, strong economic institutions are the fundamental cause of long-run economic growth and development differences between regions.24)

## Conclusion

Lamfalussy once described the task of launching the euro as ""navigating in uncharted waters"".22] jn an era of volatility, independent central banks now also find themselves in unfamiliar waters.

While inflation has fallen sharply, central banks are still likely to face a more volatile macroeconomic environment compared with the Great Moderation.

It therefore remains imperative that central banks have the independence to fully deliver on their price stability mandates.

Thank you.

1.

These remarks were pre-recorded in Frankfurt am Main on 15 January 2025.

2.

Lamfalussy, C., Maes, I. and Péters, S. (2013), Alexandre Lamfalussy: The wise man of the euro. A conversation with Christophe Lamfalussy, lvo Maes and Sabine Péters, LannooCampus, p. 185.

3.

Bordo, M.D. and Orphanides, A. (eds.) (2013), The Great Inflation: The Rebirth of Modern Central Banking, University of Chicago Press.

4.

Maes, I. (2016), ""Alexandre Lamfalussy: A Cassandra about Financial Stability', in Dyson, K. and Maes, I. (eds.), Architects of the Euro, Oxford University Press, pp. 241-249.

5.

Lamfalussy, A. (1997), ""The European Central Bank: Independent and Accountable"", in Maes, I. (ed.) (2017), Alexandre Lamfalussy: Selected Essays, Magyar Nemzeti Bank, p. 331.

6.

Haldane, A. (2020), ""What Has Central Bank Independence Ever Done for Us?"", speech at UCL Economists' Society Economics Conference, 28 November, citing Garriga, A. (2016), ""Central Bank Independence in the World: A New Dataset"", International Interactions, Vol. 42, No 5, pp. 849-868.

7.

Dall'Orto Mas, R. et al. (2020), ""The case for central bank independence — a review of the key issues in the international debate"", Occasional Paper Series, No 248, ECB, October.

8.

Alesina, A. and Summers, L.H. (1993), ""Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence"", Journal of Money, Credit and Banking, Vol. 25, No 2, May.

9.

Bernanke, B. (2004), ""The Great Moderation"", remarks at the meetings of the Eastern Economic Association, Washington, DC, 20 February.

10.

Romelli, D. (2024), ""Recent trends in central bank independence"", VoxEU CEPR, 26 February.

11.

Specifically, between the years 2010 and 2018. See Binder, C. (2021), ""Political Pressure on Central Banks"", Journal of Money, Credit and Banking, Vol. 53, No 4, June, pp. 715-744.

12.

Dall'Orto Mas, R. et al. (2020), ""The case for central bank independence — a review of the key issues in the international debate"", Occasional Paper Series, No 248, ECB, October.

13.

Cakmakli, C. et al. (2024), ""Do Financial Markets Respond to Populist Rhetoric?"", Oxford Bulletin of Economics and Statistics, Vol. 86, No 3, June, pp. 541-567. See also Demiralp, S. (2024), ""Silence is golden: How public criticism of central banks can backfire for leaders"", VoxEU CEPR, 18 April.

14.

Average output growth volatility relates to year-on-year euro area real GDP growth. The figure for average inflation volatility is derived from year-on-year HICP inflation for the euro area. The two reference periods are the 28 months following Russia's invasion of Ukraine and the 28 months leading up to the collapse of Lehman Brothers in 2008.

15.

In parallel, see also Afrouzi, H. et al. (2024), ""Changing Central Bank Pressures and Inflation',

Brookings Papers on Economic Activity, BPEA Conference Draft, 28-29 March, who argue that several economic and political economy factors may lead to a structurally higher inflation environment.

16.

Including Turkiye. See OECD, ""Inflation (CPI)"".

17.

This speaks to Lamfalussy's own prescient observation in the lead-up to the creation of the ECB. He argued that the new central bank ""will have no track record of its own ... This implies that financial markets and the general public will assess the performance of the ECB on the basis of the effectiveness of the monetary policy framework adopted and the ability to act in accordance with its primary objective."" See Lamfalussy, A. (1997), ""The European Central Bank: Independent and Accountable"", in Maes, |. (ed.) (2017), Alexandre Lamfalussy: Selected Essays, Magyar Nemzeti Bank, p. 334.

18.

Kydland, F. and Prescott, E. (1977), ""Rules Rather than Discretion: The Inconsistency of Optimal Plans"", Journal of Political Economy, Vol. 85, No 3, pp. 473-491; Barro, R. and Gordon, D. (1983),

National Bureau of Economic Research, February.

19.

Survey evidence for the euro area suggests that in early 2023, over 60% of citizens were paying more attention to inflation relative to a year earlier. See D'Acunto, F. et al. (2024), ""Household Inflation

32488, National Bureau of Economic Research, May.

20.

Christelis, D. et al. (2020), ""Trust in the Central Bank and Inflation Expectations"", International Journal of Central Banking, Vol. 16, No 6, December.

21.

Acemoglu, D. et al. (2005), ""Chapter 6: Institutions as a Fundamental Cause of Long-Run Growth', Handbook of Economic Growth, Vol. 1, Part A, pp. 385-472.

22.

Lamfalussy, C., Maes, |. and Péters, S. (2013), Alexandre Lamfalussy: The wise man of the euro. A conversation with Christophe Lamfalussy, vo Maes and Sabine Péters, LannooCampus, p. 11.

CONTACT",Christine Lagarde
https://www.bis.org/review/r250206e.htm,Philip N Jefferson: Do non-inflationary economic expansions promote shared prosperity? Evidence from the US labor market,"Speech by Mr Philip N Jefferson, Vice Chair of the Board of Governors of the Federal Reserve System, at Swarthmore College, Swarthmore, Pennsylvania, 5 February 2025.",2025-02-05 00:00:00,"For release on delivery 7:30 p.m. EST February 5, 2025

Do Non-inflationary Economic Expansions Promote Shared Prosperity? Evidence from the U.S. Labor Market

Remarks by

Philip N. Jefferson

Vice Chair

Board of Governors of the Federal Reserve System at

Swarthmore College

Swarthmore, Pennsylvania

February 5, 2025

Thank you, Professor O'Connell, for that kind introduction and for the opportunity to talk to this group. 1 I am delighted to be back at Swarthmore College. This special community brings back fond memories of fantastic students, great colleagues, and pedagogical excellence.

Yesterday, I discussed my outlook for the current U.S. economy.  I highlighted how the economy is growing and appears to be roughly in balance, with low unemployment and declining inflation.  Today, I will review some of the historical evidence pertaining to periods when the Federal Reserve has achieved both components of its dual mandate, maximum employment and stable prices, on a sustained basis-that is, periods of long non-inflationary economic expansions.  My title question is whether economic evidence indicates that such expansions also result in greater shared prosperity.

My focus will be on the labor market.  A reason for this focus is that for many individuals, their employment attachment is a key determinant of their household's overall well-being.  My approach will be to compare the current labor market with the labor market at the end of 2019-that is, at the end of the most recent long, noninflationary expansion.  Such a comparison provides a lens through which to view the prospects for broadly shared prosperity fostered by the current U.S. labor market.

The remainder of my talk is organized as follows.  First, I describe the labor market at the end of 2019.  After that, I discuss the state of the labor market in the immediate aftermath of the COVID-19 pandemic.  Then, I describe the current labor market situation.  Next, I discuss possible reasons why strong labor markets facilitate

1 The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.

broad-based prosperity.  Before concluding, I consider whether the benefits of long expansions are persistent.

## The Labor Market on the Eve of the COVID-19 Pandemic

Let's begin the exploration of my title question with a careful look at the situation during the historically strong labor market on the eve of the COVID-19 pandemic. Following the 2007-09 Global Financial Crisis, the U.S. economy expanded for 128 consecutive months, making it the longest economic expansion in U.S. history. During this period, as shown in figure 1, the aggregate unemployment rate fell steadily from a peak of 10 percent in October 2009 to 3.5 percent in September 2019, the lowest recorded in nearly 50 years.  Job opportunities were plentiful in this strong labor market, with the ratio of vacancies to job seekers hovering around 1.2 throughout 2019, implying that businesses were seeking to fill more open positions than there were workers actively searching for employment.  Moreover, while some long economic expansions have led to an unwelcome rise in prices, inflation remained low and stable.  Indeed, the Federal Reserve was grappling with inflation somewhat below, rather than above, its longer-run 2 percent target.

In addition, and perhaps related to the length of the expansion, the pre-pandemic labor market was remarkable in terms of the broad-based gains seen across demographic groups, which contributed to a historic narrowing of employment disparities.  For instance, as shown in figure 2, the unemployment rate among African Americans, the solid red line, has usually been about twice as high as that for white individuals, the solid blue line, and is more sensitive to the state of the business cycle.  The unemployment rate among Hispanics, the dotted green line, falls between these two groups.  In late 2019,

however, both African American and Hispanic unemployment rates had fallen to the lowest levels on record up to that point, significantly narrowing the persistent unemployment gaps between these groups.  Before this, the greatest improvement in the unemployment rate among African Americans was at the end of the 1991-2001 economic expansion, which itself was the second longest expansion in U.S. history.  But in 2019, the unemployment rate for African Americans was about 2 percentage points lower than it was in early 2001.

The influence of the long expansion on employment gaps also was evident for other groups of workers.  Like minorities, individuals with less education, and especially those who have not completed high school, also experience higher cyclical volatility in their employment. 2 In 2019, as shown in figure 3, the unemployment rate gaps between workers with less than a high school education, the solid red line, and those who have attained at least a bachelor's degree, the solid purple line, also were near multidecade lows.  Further, the strong labor market created new opportunities for teens and younger workers, groups whose employment prospects, and even long-term career trajectories, are especially sensitive to the cyclical state of the economy. 3

Beyond narrowing gaps between workers actively searching for a job, the strong pre-pandemic labor market also helped draw many new participants into the labor force. Among prime-age workers, those aged 25 to 54, the labor force participation rate began rising again around 2015, as shown in figure 4, reversing a declining trend.  This was true among both men, the solid black line, whose participation had been steadily declining since the 1950s, and women, the dashed red line, whose participation had previously

2 See Jefferson (2005, 2008).

3  See Oreopoulos, Von Wachter, and Heisz (2012).

peaked in early 2000.  Labor force participation among women was rising especially briskly in the months just before the pandemic, essentially reversing its entire decline over the previous 20 years.  While this partially reflects broader demographic trends such as increasing educational attainment, participation was rising for both women with and without a college degree after 2015, suggesting that the strong labor market played a part in this reversal.

Turning now from employment and participation to earnings, nominal wages were growing solidly before the pandemic.  As with gains in employment, the strong labor market was especially beneficial for some groups.  Most noticeably, as shown in figure 5, wage growth for the bottom quartile of earners, the solid red line, started to pick up about five years into the expansion, in late 2014, and by 2019 was significantly stronger than for workers in higher earnings quartiles, the solid purple line. 4 These differences in wage growth are important, as they imply convergence in levels and, therefore, declining wage inequality as the bottom of the distribution catches up to higher earners.  Similarly, wages were growing faster for non-white workers relative to white workers in 2019, though differences by educational attainment were less pronounced at the time.

Looking back now, the U.S. economy in 2019 was in a good place.  The labor market was tight but not overheating, bringing widespread gains to workers.  Further, had it not been for the sudden and dramatic interruption of the COVID-19 pandemic, this

4  Nominal wages in the figure are measured by the Atlanta Fed's Wage Growth Tracker.  Series show 12month moving averages of the median percent change in the nominal hourly wage of individuals observed 12 months apart.  Workers are assigned to wage quartiles based on the average of their wage reports in both the Current Population Survey and outgoing rotation group interviews; workers in the lowest 25 percent of the average wage distribution are assigned to the 1st quartile, and those in the top 25 percent are assigned to the 4th quartile.

strong labor market was expected to persist.  In December 2019, the median Federal Open Market Committee (FOMC) participant expected the aggregate unemployment rate to remain below 4 percent through the end of 2022 while inflation was expected to move back up to the Committee's 2 percent objective. 5 Had this long, non-inflationary expansion continued as the Committee forecast, gaps in employment and earnings across groups may have continued to narrow as well.

## The Labor Market Following the COVID-19 Pandemic

The expansion, however, was cut short by the COVID-19 pandemic.  In April 2020, the unemployment rate, as shown in figure 6, briefly surged to 14.8 percent, its highest rate since the Great Depression while the share of Americans seeking jobs (not shown) plummeted.  Moreover, those same groups that had benefited from the strong prepandemic labor market-African American and Hispanic workers, women, and individuals without a college degree-generally fared worse at the onset of the pandemic. Although some of these groups typically experience greater losses in economic downturns, factors unique to the pandemic, including greater exposure to the industries most affected by lockdowns, also contributed to disparities in job losses.  For instance, unlike a typical recession, the pandemic disproportionately affected service industries, which employ a larger share of women than industries like construction and manufacturing, which are generally more cyclically sensitive.

5  The December 2019 median forecast of FOMC participants is taken from the Summary of Economic Projections (SEP), which is available on the Board's website at

https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm.  FOMC participants submit projections of future economic activity and their individual views of the appropriate path of monetary policy conditional thereupon four times a year.  These projections are published as the SEP.  The SEP is neither a consensus forecast nor is it a commitment to a policy path.  Rather, it shows the median, central tendency, and range of the participants' projections estimated using the 19 individual projections.

Just as the pandemic itself led to unprecedented losses in the labor market, the subsequent recovery was unprecedented in many ways.  As the health risk abated and the economy reopened, labor demand surged as businesses attempted to re-hire workers, but many workers remained on the sidelines.  By late 2021, the labor force participation rate was still well below its pre-pandemic level.  Vacancies rose to record levels, while, at the same time, quits, as shown in figure 7, surged as workers sought out new job opportunities, leading some to refer to the post-pandemic recovery as the 'Great Resignation.'  Consequently, as shown in figure 8, the gap between available jobs, the solid black line, and available workers, the dashed red line, which had been just over 1 million positions in late 2019, widened to over 6 million, the equivalent of two job openings for every unemployed worker.  This was an exceptionally tight labor market, far exceeding any in recent history, including the labor market before the pandemic.

The strong post-pandemic aggregate economy reversed the disparities between groups that initially widened in 2020.  The aggregate unemployment rate fell to 3.4 percent in April 2023, its lowest since 1969.  That same month, the unemployment rate for African Americans fell to 4.8 percent, the lowest level on record and 1/2 percentage point below the previous record set in 2019, as shown in figure 9 by the red solid line, which is the difference between the unemployment rate for African Americans and its own average in the year 2019.

Although labor force participation was initially slower to recover, the labor force participation rate among prime-age women climbed to its highest level ever in 2023, well above even pre-pandemic levels, as shown in figure 10 by the red dashed line, which is

the difference between the labor force participation rate for women and its own average in the year 2019.

The tight labor market also led to a surge in nominal wage growth, especially for workers lower in the earnings distribution.  In fact, as shown in figure 11, wage growth for low-wage workers, the solid red line, was strong enough, with a peak wage growth close to 7.5 percent in 2022, to drive a meaningful compression in the aggregate wage distribution (not shown).  Economic research suggests that the pandemic recovery reversed around one-third of the increase in the aggregate ratio of the 90th percentile to the 10th percentile wage inequality since the 1980s. 6 These gains at the bottom of the income distribution also were reflected in the experience of different demographic groups, as shown in figure 12, with stronger wage growth for nonwhite workers, the dashed red line, relative to white workers, the solid black line, and, unlike even the prepandemic expansion, for workers with a high school education or less relative to those with a bachelor's degree or more.

Unlike the noninflationary pre-pandemic expansion, however, these nominal wage gains coincided with rising prices, reducing many workers' actual purchasing power.  Real wage growth deflated by the personal consumption expenditures price index, which adjusts for the effect of inflation on workers' purchasing power, was negative for many workers in 2022, despite strong aggregate employment growth. Further, the costs of inflation also vary across groups, and there is evidence that rising prices may hurt lower-income populations more. 7 This underscores the connection between the two components of the Federal Reserve's dual mandate to promote both

6 See Autor, Dube, and McGrew et al. (2023).

7 See Orchard (2022).

maximum employment and stable prices, since the benefits of strong labor markets are eroded when accompanied by an unwelcome rise in inflation.

## The Current Labor Market Situation

Let me turn now to the labor market situation more recently.  As the economy has recovered from the pandemic, the labor market has come into better balance.  By mid2024, the gap between available jobs and available workers-I'll show that figure again here-had essentially returned to where it was in 2019, reflecting both a decline in vacancies and improvements in labor supply.  Various indicators pointed to a labor market that was still tight, but no longer overheating.

Currently, the labor market remains solid, on balance, and inflation continues a bumpy descent toward the FOMC's 2 percent objective.  Layoff activity and initial claims for unemployment insurance, shown in figure 13, remain low by historical standards even as job openings have moved down to more normal levels.  The unemployment rate appears to have leveled off close to what the median FOMC participant currently sees as its long-run sustainable level of 4.2 percent. 8 While employment gaps between certain demographic groups have widened a touch since 2022, they remain historically narrow.  Further, a welcome development as inflation has moderated is that real wage growth has picked up even as nominal wage growth has slowed.  Though wages are now growing similarly across demographic groups, the narrowing of the wage gap across demographic groups realized in 2021 and 2022 persists.

8 See the December 2024 median forecast of FOMC participants in the SEP, which is available on the Board's website at https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm.

## How Do Strong Labor Markets Facilitate Broad-Based Prosperity?

Looking back at long, noninflationary episodes like the pre-pandemic expansion raises the question of why strong labor markets have been especially beneficial for certain demographic groups.  Although the literature has not reached a definite conclusion to this question, researchers have pointed to several economic mechanisms that may help explain these patterns.

In 1973, the economist Arthur Okun argued that 'high-pressure' labor marketssuch as those in 2019 and during the pandemic recovery-allowed workers to move up the job ladder, creating new opportunities for individuals on the margins of the labor market. 9,10 Further, he argued that when job openings are difficult to fill, employers relax hiring standards, creating new opportunities for individuals who otherwise might struggle to find employment.  Consistent with this argument, economic research shows that as the labor market strengthened from 2010 to 2014, employers reduced education and experience requirements in online job postings. 11 Economic research also highlights the role of more productive job-worker matches as tight labor markets facilitate a reallocation of labor to better and more productive jobs. 12 On the participation side, the labor force participation rate tends to respond to business cycles with a significantly longer lag than the unemployment rate, for instance, due to the stickiness of decisions related to caregiving or educational responsibilities.  This suggests that long expansions are especially important for drawing non-participants back into the labor market. 13

9  See Okun (1973).

10 While there is no official definition of a 'high-pressure' labor market, the term usually refers to a period when the unemployment rate is below its natural rate-that is, below its long-run sustainable level.

11 See Modestino and others (2016).

12 See Akerlof, Rose, and Yellen (1988).

13 See Cajner, Coglianese, and Montes (2021).

Of course, each business cycle is different, making it difficult to draw general conclusions from past episodes.  The pandemic recovery, for example, led to a rise in retirements, far more than what would have been expected given population aging. 14 On the downside, this contributed to the significant shortage of workers as the economy was reopening. On the upside, it may have created more opportunities for younger workers to move up the job ladder than is typical during a normal expansion, making Okun's argument especially relevant.  The COVID-19 pandemic also was a remarkable reallocation shock, and elevated quits and job switching may have improved the quality of matches between businesses and workers more than usual, potentially contributing to strong productivity growth and wage gains.

Perhaps paradoxically, excessively tight labor markets may not be beneficial to lower-wage workers in the long run.  Some economists argue that hiring difficulties may lead firms to adopt technologies that substitute, rather than complement, workers, ultimately reducing labor demand. 15 Similarly, an overheating labor market may lead some workers to prioritize short-term gains over longer-term career stability.  Empirical evidence, for example, suggests that during economic expansions some young people choose to take an unstable job that is likely to disappear in the next recession, rather than invest in training opportunities. 16

14  See Montes, Smith, and Dajon (2022).

15 See Krueger (2002).

16 Specifically, empirical evidence indicates that educational enrollment rates go down during expansions. For four-year college enrollment rates, see Dellas and Sakellaris (2003); for community college enrollment rates, see Betts and McFarland (1995); for high school enrollment rates, see Dellas and Koubi (2003).

## Are the Benefits of Long Expansions Lasting?

Another key question for policymakers is whether the benefits of long expansions can be sustained, given that the same groups who benefit disproportionately from strong labor markets also fare worse in recessions.  Again, the literature, while not conclusive, offers some reasons for cautious optimism.  There is some empirical evidence that suggests that the benefits of tight labor markets are somewhat persistent, at least for African Americans and women. 17 The fact that labor market disparities that worsened during the pandemic returned to their pre-pandemic levels so quickly following the pandemic may be another reason to be hopeful.

## Conclusion

Let me conclude by offering an answer to my title question.  The weight of the historical evidence I discussed today suggests that broadly shared economic prosperity is more likely when the economy grows over time with low unemployment and stable prices.  While the early part of the current expansion was inflationary, the intent of monetary policy actions over the past few years has been to return us to a prolonged period where prices are stable and the labor market remains solid.  The historical experience of the U.S. labor market suggests that long, noninflationary expansions are associated with narrower gaps in employment and earnings, with minority groups and less-educated workers benefiting disproportionately from sustained periods of strong economic growth.  Such benefits can help make up for the disproportionate losses experienced by the same groups during economic downturns and, in some cases, may even lead to lasting gains.

17 See Aaronson and others (2019).

Finally, let me return to where I started, the Federal Reserve's dual mandate: maximum employment and stable prices.  The historical evidence that I have reviewed tonight suggests that shared prosperity is a byproduct of sustained accomplishment of our mission.

Thank you.

## References

Aaronson, Stephanie R., Mary C. Daly, William L. Wascher, and David W. Wilcox (2019).  'Okun Revisited:  Who Benefits Most from a Strong Economy?' Brookings Papers on Economic Activity, Spring, pp. 333-75, https://www.brookings.edu/wp-content/uploads/2019/03/aaronson\_web.pdf.

Akerlof, George A., Andrew K. Rose, and Janet L. Yellen (1988).  'Job Switching and Job Satisfaction in the U.S. Labor Market,' Brookings Papers on Economic Activity, no. 2, pp. 495-582, https://www.brookings.edu/wpcontent/uploads/1988/06/1988b\_bpea\_akerlof\_rose\_yellen\_ball\_hall.pdf.

Autor, David, Arindrajit Dube, and Annie McGrew (2023).  'The Unexpected Compression:  Competition at Work in the Low Wage Labor Market,' NBER Working Paper Series 31010.  Cambridge, Mass.:  National Bureau of Economic Research, March (revised May 2024), https://www.nber.org/papers/w31010.

Betts, Julian R., and Laurel L. McFarland (1995).  'Safe Port in a Storm:  The Impact of Labor Market Conditions on Community College Enrollments,' Journal of Human Resources, vol. 30 (Autumn), pp. 741-65.

Cajner, Tomaz, John Coglianese, and Joshua Montes (2021).  'The Long-Lived Cyclicality of the Labor Force Participation Rate,' Finance and Economics Discussion Series 2021-047.  Washington:  Board of Governors of the Federal Reserve System, July, https://doi.org/10.17016/FEDS.2021.047.

Dellas, Harris, and Plutarchos Sakellaris (2003).  'On the Cyclicality of Schooling: Theory and Evidence,' Oxford Economic Papers, vol. 55 (January), pp. 148-72.

Dellas, Harris, and Vally Koubi (2003).  'Business Cycles and Schooling,' European Journal of Political Economy, vol. 19(4), pp. 843-59.

Jefferson, Philip N. (2005).  'Does Monetary Policy Affect Relative Educational Unemployment Rates?' American Economic Review, vol. 95 (May), pp.76-82.

--- (2008).  'Educational Attainment and the Cyclical Sensitivity of Employment,' Journal of Business and Economic Statistics, vol. 26 (October), pp. 526-35.

Krueger, Alan B. (2002).  'Economic Scene:  As Recovery Builds, the Less Educated Go to the End of the Employment Line,' New York Times, March 7.

Modestino, Alicia Sasser, Daniel Shoag, and Joshua Ballance (2016).  'Downskilling: Changes in Employer Skill Requirements over the Business Cycle,' Labour Economics, vol. 41 (August), pp. 333-47.

Montes, Joshua, Christopher Smith, and Juliana Dajon (2022).  ' 'The Great Retirement Boom':  The Pandemic-Era Surge in Retirements and Implications for Future Labor Force Participation,' Finance and Economics Discussion Series 2022-081. Washington:  Board of Governors of the Federal Reserve System, November, https://doi.org/10.17016/FEDS.2022.081.

Okun, Arthur M. (1973).  'Upward Mobility in a High-Pressure Economy,' Brookings Papers on Economic Activity, no. 1, pp. 207-52, https://www.brookings.edu/wpcontent/uploads/1973/01/1973a\_bpea\_okun\_fellner\_greenspan.pdf.

Orchard, Jacob (2021), 'Cyclical Demand Shifts and Cost of Living Inequality,' working paper, February (revised September 2022).

Oreopoulos, Philip, Till von Wachter, and Andrew Heisz (2012).  'The Short- and LongTerm Career Effects of Graduating in a Recession,' American Economic Journal: Applied Economics, vol. 4 (January), pp. 1-29.

## Do Noninflationary Economic Expansions Promote Shared Prosperity? Evidence from the U.S. Labor Market

## Philip N. Jefferson Vice Chair, Federal Reserve Board



Swarthmore College, February 5, 2025

Disclaimer: The views I will express today are my own and not necessarily those of the Federal Open Market Committee (FOMC) or the Federal Reserve System.



## Roadmap of Talk

- The labor market at the end of 2019
- The labor market following the pandemic
- The current labor market
- Strong labor markets and shared prosperity
- Persistent benefits of long expansions
- Conclusion



Figure 2: Unemployment Rate by Race and Ethnicity











Source:

Bureau of

Labor

Statistics via

Haver

Analytics.



2018





eee eee



Analytics.





2018







## Conclusion

- Historical evidence suggests that broadly shared economic prosperity is more likely when the economy grows over time with low unemployment and stable prices
- Long, noninflationary expansions are associated with narrower gaps in employment and earnings across demographic groups
- Shared prosperity is a byproduct of sustained accomplishment of our mission

## Do Noninflationary Economic Expansions Promote Shared Prosperity? Evidence from the U.S. Labor Market

## Philip N. Jefferson Vice Chair, Federal Reserve Board



Swarthmore College, February 5, 2025

Disclaimer: The views I will express today are my own and not necessarily those of the Federal Open Market Committee (FOMC) or the Federal Reserve System.",Philip N Jefferson
https://www.bis.org/review/r250206d.htm,Michelle W Bowman: Bank regulation in 2025 and beyond,"Speech by Ms Michelle W Bowman, Member of the Board of Governors of the Federal Reserve System, at the Kansas Bankers Association Government Relations Conference, Topeka, Kansas, 5 February 2025. ",2025-02-05 00:00:00,"For release on delivery 3:00 p.m. EST (2:00 p.m. local time) February 5, 2025

Bank Regulation in 2025 and Beyond

Remarks by

Michelle W. Bowman

Member

Board of Governors of the Federal Reserve System at

Kansas Bankers Association Government Relations Conference

Topeka, Kansas

February 5, 2025

Thank you for the invitation to speak to you today.' It is a pleasure to be with you. I always enjoy the opportunity to meet bankers from across the country to learn about the issues that are important to you. Recently, I have observed a shift in tone when I talk to bankers about the bank regulatory environment. Bankers are cautiously optimistic that we will see meaningful reform that right-sizes regulation and supervisory approach, reforms that—if executed appropriately—should help the banking system promote economic growth in a safe and sound manner. Today, I will share my views on a number of issues related to banking regulation and supervision, including the importance of tailoring, having a problem-focused approach to bank regulation and supervision, and the imperative of innovation in the banking system.

One of the unique characteristics of the U.S. banking system is the broad scope of institutions it includes and the wide range of customers and communities it serves. Given this wide variety of institutions, regulators must strive to foster a financial system that enables each and every bank, no matter its size, to thrive, supporting a vibrant economy and financial system. We must also be sensitive to emerging issues and trends that require attention, whether that be unintended consequences from capital requirements, the incentives created by our approach to regulatory applications, and to ensure legal compliance.

## Tailoring

The approach to regulation and supervision should promote a healthy and vibrant banking system. One key element of a regulatory approach that does so, and one that I often highlight, is the use of ""tailoring"" in the regulatory framework. For those familiar with my philosophy on

' The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.

bank regulation and supervision, my interest and focus on tailoring will come as no surprise."" In its most basic form, it is difficult to disagree with the virtue of regulatory and supervisory tailoring—calibrating the requirements and expectations imposed on a firm based on its size, business model, risk profile, and complexity—as a reasonable, appropriate, and responsible approach for bank regulation and supervision. In fact, tailoring is embedded in the statutory fabric of the Federal Reserve's bank regulatory responsibilities.*

The bank regulatory framework inherently includes significant costs—both the cost of operating the banking agencies and the cost to the banking industry of complying with regulations, the examination process, and supplying information to regulators both through formal information collections and through one-off requests. In the aggregate, these costs can ultimately affect the price and availability of credit, geographic access to banking services, and the broader economy. The cost of this framework—both to regulators and to the industry— reflects layers of policy decisions over many years. But this framework could be more effective in balancing the mandate to promote safety and soundness with the need to have a banking system that promotes economic growth.

Let's consider costs. As regulatory and supervisory demands grow, there is often parallel growth in the staff and budgets of the banking agencies. We should not only be cognizant of these costs, but we should act in a way that requires efficiency while ensuring safety and soundness. Some degree of elasticity in regulator capacity is necessary to respond to evolving economic and banking conditions, as well as emerging risks, but there must be reasonable

2 See, e.g., Michelle W. Bowman, ""Tailoring, Fidelity to the Rule of Law, and Unintended Consequences"" (speech at the Harvard Law School Faculty Club, Cambridge, MA, March 5, 2024), https://www.federalreserve.gov/newsevents/speech/files/bowman20240305a.pdf.

3 See, Economic Growth, Regulatory Relief, and Consumer Protection Act, Pub. L. No. 115-174, § 401(a)(1) (amending 12 U.S.C. § 5365), 132 Stat. 1296 (2018).

constraints on banking agency growth. Expansion of the regulatory framework is not a cost-free endeavor. These costs are shouldered by taxpayers, banks, and, ultimately, bank customers.

The bank regulatory framework has great potential to provide significant benefits, including supporting an innovative banking system that enhances trust and confidence in our institutions and promotes safety and soundness. When we consider the benefits and the costs, we can institute greater efficiencies in both banking regulation and in the banking industry itself. The framework is complex, and the various elements of this framework are intended to work in a complementary way. As banks evolve—by growing larger or by engaging in new activities— tailoring can help us to quickly recalibrate requirements in light of the new risks posed by the firm.

But the regulatory framework, especially how supervisors prioritize its application to the banking industry, can pose a serious threat to a bank's viability. For example, imposing the same regulatory requirements on banks with assets of $2 billion to $2 trillion under the new rules implementing the Community Reinvestment Act demonstrated a missed opportunity to promote greater effectiveness and efficiency.' I question the wisdom of applying the same evaluation standards to banks within such a broad range.

Likewise, supervisory guidance can provide fertile ground to differentiate supervisory expectations under a more tailored approach. While supervisory guidance is not binding on banks as a legal matter, it can signal how regulators think about particular risks and activities, and often drives community banks to reallocate resources in a way that may not be necessary or appropriate. The Fed's guidance on third-party risk management is an example of this.

4+ See dissenting statement, ""Statement on the Community Reinvestment Act Final Rule by Governor Michelle W. Bowman,"" news release, October 24, 2023, https://www.federalreserve.gov/newsevents/pressreleases/bowmanstatement-20231024.htm.

Originally, this guidance was published in a way that applied to all banks, including community banks. Yet it was acknowledged even at the time of publication that it had known shortcomings, particularly in terms of its administration and lack of clarity for community banks.°*

Tailoring is important for all banks, but it is particularly important for community banks. There are real costs not only to banks, but to communities, when the framework is insufficiently tailored, as community banks faced with excessive regulatory burdens may be forced to raise prices or seek to merge or be acquired. These banks often reach unbanked or underbanked corners of the U.S. economy, not only in terms of the customers they serve but also in terms of their geographic footprint. We are all familiar with banking deserts and the challenges many legitimate and law-abiding businesses and consumers have in accessing basic banking services and credit. It is difficult to imagine that a system with far fewer banks would as effectively serve U.S. banking and credit needs and sufficiently support economic growth.

It is imperative that we keep the benefits of tailoring in focus as the bank regulatory framework evolves. A tailored regulatory and supervisory approach can help inform our policies on a wide range of industry issues that are likely to emerge in the coming years.

## Problem-Based Solutions

One of the most difficult challenges on the regulatory front is prioritization, both for banks managing their businesses and for regulators deciding how to fulfill their responsibilities. At a basic level, the role of regulators is dictated by statute. Congress granted the Federal Reserve and other banking agencies broad statutory powers but has constrained how those powers may be directed through the use of statutory mandates, including to promote a safe and

5 See ""Statement on Third Party Risk Management Guidance by Governor Michelle W. Bowman,"" news release, June 6, 2023, https://www.federalreserve.gov/newsevents/pressreleases/bowman-statement-20230606.htm,

sound banking system, and broader U.S. financial stability. In the execution of these responsibilities, the Federal Reserve must also balance the need to act in a way that enables the banking system to serve the U.S. economy and promote economic growth. While these objectives are not incompatible, they do require us to consider tradeoffs when establishing policy.

How can regulators best meet these responsibilities? As many of you may already know, I strongly believe in a pragmatic approach to policymaking.® This requires us to identify the problem we are trying to solve, determine whether we are the appropriate regulator to address the problem based on our statutory mandates and authorities, and explore options for addressing the identified issue.

This approach of pragmatic problem-solving also applies to supervision, where process improvements could improve functioning. The Federal Reserve exercises its supervisory responsibilities by supervisory portfolio, with each portfolio relying on a combination of Board and Reserve Bank staff."" It is important that responsibility for supervisory decisions be paired with accountability for such decisions, which can be complicated depending on the different roles played by Board and Reserve Bank staffs, and as institutions change supervisory portfolios. The misalignment of responsibility and accountability detracts from effective supervision.

® Michelle W. Bowman, ""Approaching Policymaking Pragmatically"" (remarks to the Forum Club of the Palm Beaches, West Palm Beach, FL, November 20, 2024), https://www.federalreserve.gov/newsevents/speech/files/bowman20241 120a.pdf.

7 Board of Governors of the Federal Reserve System, ""Understanding Federal Reserve Supervision"" (""What is the difference between what examiners do at Reserve Banks and staff do at the Board? Supervision is a function of the Board, with Reserve Banks conducting supervision under the Board's delegated authority. The Board and Reserve Bank staff both play a critical role in carrying out the function of supervision, but the role varies by the supervisory group in which a bank is designated. LISCC supervision is run by the Board, with examiners employed by the Board and the Reserve Banks. For all other programs, examinations are conducted by Reserve Bank staff, with involvement of Board staff on horizontal exercises and key decisions. For banks in supervisory groups other than LISCC, Board staff set expectations for how Reserve Bank staff conduct examinations and, in turn, conduct oversight of Reserve Bank supervision to determine how well supervision is executed.""), https://www.federalreserve.gov/supervisionreg/approaches-to-bank-supervision.htm.

Our supervisory program should require strong examiner training, rely on examiner expertise in the conduct of examinations, and work in partnership with state bank supervisors. Doing so will allow us to leverage the practical experience and judgment of examination staff— characteristics that are necessary for effective supervision—while preserving the role of the Board to delegate and provide Reserve Bank oversight. Examinations cannot be just a boxchecking exercise. We must rely on well-trained and experienced examiners empowered to exercise independent judgment and ask questions, which leads to stronger and more effective supervision.

As we look at the banking system, including the regulatory framework, we must focus on those issues that are most important to advancing statutory priorities. There is always the risk of misidentification and mis-prioritization, and that we fail to take appropriately robust action on key issues or focus on issues that are less material to a bank's safety and soundness. Our goal should be to develop a better filter to promote appropriate and effective prioritization.

## Treasury market functioning

Where regulation may create or exacerbate financial stability risks, we need to take a close look at whether those risks are justified by the safety and soundness benefits of the regulation. The erosion of liquidity in U.S. Treasury markets provides a good example of unintended consequences and the need to evaluate tradeoffs in regulation. This issue is a byproduct of several important dynamics: (1) the role of large banks in the intermediation of U.S. Treasury markets, (2) the growth of ""safe"" assets in the banking system, and (3) the increase in leverage-based capital requirements becoming the binding capital constraint on some large banks. While regulators may not have tools to address all of these dynamics, clearly the adverse

impact of leverage-based capital requirements falls within the banking regulators' scope of responsibility.

Issues with Treasury market functioning have been known for quite some time. We have seen a persistent trend of low liquidity in U.S. Treasury markets for several years, which has been noted in the Board's semiannual Financial Stability Report.' Low liquidity can create more volatility in prices, exacerbate the effects of market shocks, and can threaten market functioning. Treasury market functioning and liquidity will likely be affected by the Securities and Exchange Commission's central clearing requirement for U.S. Treasuries, which may improve market functioning. In addition, the Federal Reserve's Standing Repo Facility may also help to promote smooth functioning in the Treasury market. But there is uncertainty regarding how the volume of Treasury securities issued and outstanding, and changes to the Fed's balance sheet over time, may affect this.

We have seen Treasury markets experience stress events as recently as the September 2019 repo market stress, and the so-called ""dash for cash"" in March of 2020. Both of these events raised concerns about the resiliency of U.S. Treasury markets. Therefore, we should continue to actively monitor indicators of market function, particularly whether Treasury market functioning improves over time, thereby enabling it to withstand future shocks.

The banking regulators are uniquely positioned to not only analyze but also remediate components of the bank regulatory framework that may exacerbate Treasury market illiquidity. Large bank-affiliated primary dealers play an important role in the intermediation of U.S. Treasury markets. These dealers are not immune or insulated from the effect of banking

8 See Board of Governors of the Federal Reserve System, Financial Stability Report (Washington, DC, November 2024), 10-11, https://www.federalreserve.gov/publications/files/financial-stability-report-20241122.pdf.

regulation. While many factors can affect market liquidity, including interest rate volatility and Treasury market saturation, we must consider whether some of the pressure is a byproduct of bank regulation.

The Federal Reserve has previously intervened to address market stress and support Treasury market functioning, for example, by temporarily excluding Fed reserves and Treasuries from the denominator of the supplemental leverage ratio (SLR).° Treasury markets play a critical role in the U.S. and global financial systems, and we should take action to address the unintended consequences of bank regulation, while ensuring the framework continues to promote safety, soundness, and financial stability.'°

Leverage ratios do not differentiate between the risk of certain asset classes or exposures, and therefore appropriately operate as a backstop to risk-based capital requirements. However, in periods of banks' balance sheet expansion—as during COVID-19 when we saw significant deposit inflows—leverage ratios can become the binding constraint on banks and their affiliates, increasing the amount of required capital based on increased balance sheet size regardless of risk. When constrained in this way, bank-affiliated primary dealers may pull back on market intermediation activities.

Where we can take proactive regulatory measures to ensure that primary dealers have adequate balance sheet capacity to intermediate Treasury markets, we should do so. This could

° See, e.g., Temporary Exclusion of U.S. Treasury Securities and Deposits at Federal Reserve Banks from the Supplementary Leverage Ratio, 85 Fed. Reg. 20,578, 20,579 (April 14, 2020),

https://www.govinfo.gov/content/pkg/FR-2020-04-14/pdf/2020-07345.pdf.

'0 See Financial Stability Report, 10-11. Board of Governors of the Federal Reserve System, ""Federal Reserve Board Announces that the Temporary Change to Its Supplementary Leverage Ratio (SLR) for Bank Holding Will as Scheduled on March 31,"" news release, March 19, 2021,

seek

Companies Expire https://www.federalreserve.gov/newsevents/pressreleases/bcreg20210319a.htm (noting that the Board would comment on changes to the SLR).

include amending the leverage ratio and G-SIB surcharge regulations for the largest U.S. banks. Adopting regulatory changes to mitigate these concerns may not be sufficient to ensure market liquidity, but it would be an important step toward building resiliency in advance of future stress events. In my view, it would be better to fix the roof now, while the sun is shining, by addressing over-calibrated leverage ratio requirements, and considering the unintended consequences of any future capital reforms.

## Stress testing

I will now turn to another area that the Board has already identified as a priority for review—stress testing. Stress testing can be an important supervisory tool, but its implementation, outcomes and process have raised significant questions and concerns about whether it is useful in identifying systemic weaknesses. In its current structure, it is an opaque test hidden from public scrutiny that is used to establish variable binding capital requirements on large banks. Our review should consider whether it is transparent and fair, and whether there are technical improvements that could enhance the reliability and credibility of the test and its results. !!

In its current form, stress testing is likely deficient on each of these fronts. Transparency promotes fairness, as regulated entities and the public can better understand why and how our actions further our goals. When we identify areas that suffer from a lack of transparency, we should act promptly to address those concerns. On December 23 of last year, the Fed announced that it would soon seek public comment on ""significant changes"" to the stress testing process designed to improve transparency of the tests and reduce volatility of the resulting stress capital

'| Michelle W. Bowman, ""The Future of Stress Testing and the Stress Capital Buffer Framework"" (speech at the Executive Council of the Banking Law Section of the Federal Bar Association, Washington, DC, September 10, 2024), https://www.federalreserve.gov/newsevents/speech/files/bowman202409 10a.pdf.

buffers that apply to large financial institutions.'? Given my longstanding support for revisiting the stress testing framework to promote transparency and reduce volatility, I am pleased with this development.'*

## Fraud

Finally, I would like to address the problem of fraud, particularly check fraud, which has grown in frequency and impact over the past several years. Fraud continues to harm banks, damaging the perceived safety of the banking system, and importantly hurting consumers who are the victims of fraudulent activity. Sometimes fraudsters target vulnerable populations, like the elderly, who are particularly susceptible to certain forms of fraud.

As I have noted in the past, efforts by regulators have been frustratingly slow to advance, and seem to have done little to address the underlying root causes of this increase in fraud. Why has this important issue failed to garner greater attention from all of the appropriate regulatory and law enforcement bodies? Different governmental agencies may share an important role in addressing this problem, but the need for a joint and coordinated solution does not excuse collective inaction.

Fraud is perhaps the most consistent issue raised when I speak with bankers. Often the concerns note frustrations with the tools available to fight fraud and frictions dealing with counterparties in investigating and addressing fraud. The costs of prevention, detection, and remediation can also be substantial, but so can the costs of navigating these issues dealing with

'2 Board of Governors of the Federal Reserve System, ""Due to Evolving Legal Landscape &amp; Changes in the Framework of Administrative Law, Federal Reserve Board Will Soon Seek Public Comment on Significant Changes to Improve Transparency of Bank Stress Tests &amp; Reduce Volatility of Resulting Capital Requirements,"" news release, December 23, 2024, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20241223a.htm.

'3 Bowman, ""The Future of Stress Testing.""

affected bank customers. We are overdue for more assertive action to protect bank customers and the financial system.

## The Innovation Imperative

Innovation has always been a priority for banks of all sizes and business models. Banks in the U.S. have a long history of developing and implementing new technologies, and innovation has the potential to make the banking and payment systems faster and more efficient, to bring new products and services to customers, and even to enhance safety and soundness.

Regulators must be open to innovation in the banking system. Our goal should be to build and support a clear and sensible regulatory framework that anticipates ongoing and evolving innovation—one that allows the private sector to innovate while also maintaining appropriate safeguards. We must promote innovation through transparency and open communication, including demonstrating a willingness to engage during the development process. Financial institutions should know what activities are permitted, and the supervisory and regulatory expectations that will accompany their activities. By providing clarity and consistency, we can encourage long-term business investment, while also continuing to support today's products and services. A clear regulatory framework would also empower supervisors to focus on safety and soundness, ensuring a safe and efficient banking and payment system.

Absent clearer rules of the road, we run the risk of reducing the availability of banking services. Bank regulatory policy should address the needs of the unbanked and expand the availability of banking services. It should not be used to limit or exclude access to banking services for legitimate customers and businesses in a way that is meant to further unrelated policy goals, sometimes referred to as ""de-banking"" or bank ""de-risking."" Credit decisions

should not be dictated by banking regulations or supervisory messages. Ultimately, bankers are and should be responsible for their own credit allocation decisions.

Regulators must change approaches that have resulted in credit allocation decisions, research how banks are making decisions related to which customers they serve, and promote an environment that allows legitimate bank customers to obtain banking services.

New technologies and services often require novel regulatory and supervisory approaches, and we recognize that past approaches will likely not be effective. Often regulators take a ""more is better"" approach to regulation and guidance. Over the past several years, the banking industry has faced an onslaught of proposed and final regulations and guidance, materials that require a significant time commitment to review, to comment on, and to implement. Many times, these require changes to policies and procedures or risk-management practices.

Fundamentally though, this ""more is better"" approach fails to address the core criticisms, including both an overall lack of transparency, and the perception (and perhaps reality?) that regulators have been overly hostile to innovation, including banks' involvement in any capacity with digital assets, the use of artificial intelligence, and the availability of new technologies and providers to access the payment system.

As a banker, state bank commissioner, and as a Board member, I have made the case for a more open-minded approach to innovation, including by co-hosting an informational event for bankers together with three other bank commissioners on distributed ledger technology and banking innovation just prior to joining the Board.'* We must prioritize understanding the risks

4 See, e.g., Michelle W. Bowman, ""Innovation and the Evolving Financial Landscape"" (remarks at the Digital Chamber DC Blockchain Summit 2024, Washington, DC, May 15, 2024),

https://www.federalreserve.gov/newsevents/speech/files/bowman202405 1 Sa.pdf.

and benefits of new technologies before developing a supervisory posture, especially when applying rules and using the ""soft"" power of supervision to discourage its use. Instead, we must create a supervisory and regulatory environment that facilitates reasonable and supportive approaches. The natural posture of a regulator may be to emphasize safety and soundness above all other objectives, but doing so will ultimately stifle innovation and threaten the long-term health and utility of the banking system.

## Closing Thoughts

Thank you for the opportunity to speak with you today. The financial system is constantly evolving, and our regulatory approach must anticipate this evolution. We must return to a regulatory approach that emphasizes appropriate tailoring of regulatory requirements and supervisory expectations and take a pragmatic approach in identifying and remediating the most pressing issues. And we must encourage ongoing innovation in the banking and financial systems.",Michelle W Bowman
https://www.bis.org/review/r250206c.htm,Anita Angelovska Bezhoska: Technical and legal aspects of joining SEPA payment schemes,"Speech by Ms Anita Angelovska Bezhoska, Governor of the National Bank of the Republic of North Macedonia, at the Workshop on Technical and Legal Aspects of Joining SEPA Payment Schemes, Skopje, 29 January 2025.",2025-01-29 00:00:00,"## Anita Angelovska Bezhoska: Technical and legal aspects of joining SEPA payment schemes

Speech by Ms Anita Angelovska Bezhoska, Governor of the National Bank of the Republic of North Macedonia, at the Workshop on Technical and Legal Aspects of Joining SEPA Payment Schemes, Skopje, 29 January 2025.

* * *

Mr. Paolucci, World Bank team, speakers at the workshop, representatives of financial institutions, distinguished guests,

It is a true honor and privilege to kick off this important event on payment systems, a topic that touches nearly every aspect of our daily lives and drives economies forward . In today's rapidly evolving landscape, payment systems are at the core of how businesses, governments, and consumers interact, and in making sure that transactions are seamless, secure and efficient.

In this vein, enhancing cross-border payments has been a priority both for advanced and emerging economies. For instance, in late 2020, the G20 leaders endorsed the roadmap for enhancing cross-border payments, thus bringing benefits through lower costs, faster speed, higher transparency and improved access in the payments area.  To monitor the progress, BIS launched a monitoring survey among central banks in 2023, covering three main areas: 1) payment system interoperability and extension, 2) data exchange and message standards, and 3) legal, regulatory and supervisory frameworks. The findings of the survey 1 reveal that enhancements of , as 71% of RTGS systems and the cross-border payments have been underway 91% of fast payment systems (FPS) have completed or are planning to complete at least two of the priority actions 2 .  Yet, vast room for improvements remains, including in the area of harmonizing or bringing closer legal, regulatory and supervisory frameworks that are indispensable for smooth and efficient cross-border payments.

Enhancing cross-border payments is of vital importance for the Western Balkans economies, as well. This region comprises of relatively small and open economies, with their international trade to GDP averaging close to 100%.  Most of them are already highly exposed to EU in terms of trade and financial linkages (close to 60% of their overall export goes to the EU), while intraregional trade needs further deepening. In fact, the latter - enhancement of regional economic integration is the second pillar of the Growth Plan for the Western Balkans.

Stronger regional economic integration is considered one of the driving forces for faster real convergence, as ""small and fragmented markets are unable to exploit economies of scale, and suffer from limited attractiveness to investors3 "" . Hence, there are no doubts that intraregional economic cooperation can serve as a catalyst for lifting the growth potential of the region. According to some estimates, it can potentially add up to 10% to the WB6 economies . The common regional market is also 4 a critical stepping-stone to the EU's Single Market.

Stronger trade and financial integration must be underpinned by efficient payments system . Lowering the time and costs of payment transactions can lift trade volumes, enhance financial flows and support foreign direct inflows that are inevitable for addressing the structural bottlenecks in the region. Although it is acknowledged that the WB region has made immense progress in the payments system area, yet gaps remain and need to be closed. To address these gaps, the World Bank, in collaboration with the Regional Cooperation Council and Central European Free Trade Agreement Secretariat, embarked on Western Balkans Payments Modernization Project, sponsored by the European Commission. Two main pillars of the project are SEPA accession and integration of the region with the ECB's TARGET Instant Payment Settlement (TIPS) system.

Let me now elaborate more on the expected benefits from joining SEPA.  The accession to the single payment area holds immense significance for all stakeholders in our economy . , joining SEPA before For financial institutions becoming EU member, means indirect access to European payment systems, eliminating the need for complex and costly correspondent banking arrangements. This simplification will lead to more efficient, cost-effective, and faster cross-border payments. SEPA provides a gateway to improved access to the EU For businesses, market. With standardized and streamlined payment processes, companies can engage in cross-border trade with greater ease, fostering economic growth and regional integration. The World Bank analysis for the costs of euro cross-border payments for micro, small, and medium-sized enterprises in the Western Balkans reveals that it costs approximately 12 times more to transfer €5,000 and 15 times more to transfer €20,000 from the EU to the WB6 than among the EU countries. , SEPA For citizens membership translates to a more affordable, convenient, and secure method for conducting euro transactions. Individuals will benefit from reduced fees on cross-border payments, including for remittances. ""It has the potential to reduce the cost of remittances to the Western Balkan economies, which currently amount to 6.71 percent of the total transaction, significantly exceeding the global Sustainable Development Goal target of 3 percent. By meeting this target, the economies could save approximately half a billion euros according to World Bank calculations."" 5 Furthermore, SEPA membership will accelerate the digital transformation of our financial By reducing reliance on cash transactions and promoting digital payment sector. methods, it will support the development of a more modern, secure, resilient and financial ecosystem. inclusive

Recognizing the benefits of joining SEPA, countries in the region have invested tremendous amount of time and resources, while being extensively supported by all stakeholders within the  Western Balkans Payments Modernization Project, especially the World Bank. These efforts brought us all either already into SEPA, or very close to a positive decision on joining it.

Related to this, let me elaborate more on our position. We submitted our application for SEPA membership on 10 th   of July last year. This historic step was the culmination of years of dedicated work, legislative overhaul, inter-institutional collaboration, and support from international and European organizations. Completion of the formal assessment of our application and our readiness to join SEPA by the European Payments Council is expected soon. This will confirm our compliance with

the European legal and regulatory requirements in critical areas, including payment services, anti-money laundering measures, free movement of capital, and data protection. These foundational elements ensure that our country is well prepared to meet SEPA's technical and legal requirements. Having said that, an effective accession will be possible only if domestic payment service providers prepare their systems to meet SEPA's technical and operational requirements.

Therefore, while the benefits of SEPA accession are clear, we must also acknowledge the challenges that lie ahead. Compliance with SEPA's regulatory and operational requirements demands investment in infrastructure, staff training, and system upgrades. The banking sector is expected to work diligently to ensure full readiness for integration with SEPA payment systems by October 2025, determined as SEPA first possible entrance date for payment service providers from the Western Balkan countries being SEPA members.

Of course, the successful implementation of SEPA adherence will require close cooperation between regulators, financial institutions, and all other relevant stakeholders . The National Bank is committed to facilitating this transition. We will continue to provide guidance, technical support, and regulatory oversight to ensure a smooth and efficient integration process. Additionally, we will work closely with the international partners that are genuinely committed to address any challenges. The strong commitment and support has recently led to the formation of a Steering group composed of representatives from relevant EU institutions, who play a key role in the integration process and implementation of SEPA, alongside Governors from the central banks of the region and the World Bank.

At the end, let me use this opportunity to thank our international and European partners for their continuous support, as well as to all the domestic stakeholders, as I have no doubts that we all fully understand the benefits of this project for spurring growth and supporting the overall wellbeing in the economy.

I encourage each of you to take full advantage of the sessions, networking opportunities, and discussions ahead. It is through collaboration and exchange of diverse perspectives that we truly grow and make lasting impact.

Thank you.

1  ""Steady as we go: results of the 2023 CPMI cross-border payments monitoring survey"", CPMI Brief No5, BIS, June 2024.

- 2  Refers to the following priorities: Extension of operating hours, allowed access to supervised non-bank providers, implementing at least one cross border link, and processing or planning to introduce ISO 20022 messages.
- 3  Common Regional Market Action Plan, 2025-2028.

- 4  ""Communication from the Commission to the European Parliament, the Council, the  European Economic and Social Committee and the Committee of the regions New growth plan for the Western Balkans"", European Commission, November 2023.
- 5  ""Driving economic integration through payments modernization in the Western Balkans"", World Bank  Driving-Economic-Integration-Through-Payments-Modernizationin-the-Western-Balkans.pdf",Anita Angelovska Bezhoska
https://www.bis.org/review/r250206b.htm,Derville Rowland: Innovation and technology in financial crime ,"Remarks by Ms Derville Rowland, Deputy Governor of the Central Bank of Ireland, at the Afore Annual FinTech and Regulation Conference, Dublin, 4 February 2025.",2025-02-04 00:00:00,"## Derville Rowland: Innovation and technology in financial crime

Remarks by Ms Derville Rowland, Deputy Governor of the Central Bank of Ireland, at the Afore Annual FinTech and Regulation Conference, Dublin, 4 February 2025.

* * *

Good afternoon, ladies and gentlemen. It is a pleasure to be with you today and to address a topic so crucial to the future of financial services: the utilisation of innovation and technology to conduct - and most importantly, combat - financial crime.

In the mid to late '90s, when email truly took off as a global tool for commerce, I was a barrister working for the UK's Crown Prosecution Service amongst others, dealing with various criminal cases including serious frauds.

Justified enthusiasm about the ability to connect the world more effectively and efficiently was subsequently dampened somewhat by use of the technology for all manner of deceptions, frauds and financial crimes.

Several decades later, we see the same pattern playing out in real-time with artificial intelligence, with criminals using AI tools to bypass customer due diligence controls and carry out fraud via social engineering.

These sophisticated methods, including the use of AI tools via text, images, and voice, present significant challenges for regulators and supervisors.

There's a popular saying that the pessimist complains about the wind, the optimist expects it to change, but the realist adjusts the sails.

As a regulator with hard-won experience of developing frameworks, building the teams to implement them, and deploying technology to combat financial crime and address misconduct, I'm very much a realist - albeit one who remains stubbornly optimistic. I don't believe it's an either/or scenario.

Put simply, I believe in the potential benefits of innovation and technology for consumers, investors, businesses and society - and want to see them realised. But this also means the risks must be effectively managed - we must, as it were, adjust the sails.

## The importance of collective responses

The risks, of course, need no explanation to this audience. The anonymity of virtual assets can be used to transfer illicit funds quickly and across borders, with criminals increasingly leveraging new technologies to commit fraud, launder the proceeds of crime, and carry out financing of terrorism. The speed at which funds can be moved across borders makes it easier for criminals to exploit the financial system. And so on.

Last month, the Central Bank of Ireland published statistics showing the value of fraud in payments in Ireland increased by a quarter in 2023 compared to 2022 - from €100m

to circa €126m. 1  Fraud was highest in credit transfers and card payments, with the biggest growth seen in money remittance.

This echoes trends across Europe, with a joint EBA/ECB report in August 2024 revealing that fraud losses are highest in credit transfer and card payments across the European Economic Area (EEA). 2

Financial crime, of course, recognises no borders. And so, given the scale of the challenge which regulators and law enforcement agencies face, collective action - a harmonised response - is imperative.

Which is why the EU's AML package is so important - it provides the framework and the agency (AMLA) through which we will collectively meet the challenge head on.

The AML package is by design technology neutral.  It applies to traditional banking /financial models equally as it applies to crypto-asset service providers (CASPs), crowdfunding platforms and intermediaries. It obliges all types of firms that come within its ambit to comply with a set of AML/CFT rules that have now been harmonised across Europe.

How these firms comply with the rules is up to them, via traditional AML/CFT compliance programmes or by using regtech tools. What's essential is that the means used are effective, and that such effectiveness can be demonstrated to supervisors.

This will be the case both for the 40 obliged entities that will be directly supervised by AMLA and the firms supervised by national AML authorities. 3

Not waiting for the wind to change, the EU has addressed a number of emerging risks in the package.

To give some examples, the use of AI is acknowledged under the package, with an obligation on firms to ensure that human oversight is applied to decisions proposed by AI tools that may impact customers in certain areas.

Additionally, details of Virtual IBANs which are linked to other payment accounts will have to be recorded in member states' Bank Account Registers. This will allow law enforcement to trace any funds being moved by such Virtual IBANs.

Finally, the package introduces the concept of Information Sharing Partnerships. Through these, credit and financial institutions will be enabled to share information relating to high risk customers, subject to important guardrails including data protection assessments.

The lack of an ability to share such information has long been pointed to as a real weak link in the system, which could allow someone who had an account closed by one bank on ML/TF grounds to seek to open an account in another.

It is hoped that these partnerships will be a real game-changer in the fight to keep bad actors from accessing the financial system in order to launder ill-gotten gains. Tech solutions, including tools which can allow information to be shared between financial institutions in a manner that complies with GDPR, will be essential here.

The package is also forward-looking in respect of sanctions.

Russia's illegal war against Ukraine exposed some fault lines in the EU's Financial Sanctions Framework. The package seeks to remedy this by imposing obligations on obliged entities to put in place frameworks to prevent and detect attempted breaches of EU financial sanctions.

It also requires obliged entities to ensure that prospective customers, and any person who owns or controls such prospective customers, are screened against the financial sanctions list prior to onboarding. Here again, we see the importance of effective technological solutions - the use of screening tools will be imperative for firms seeking to protect themselves from the possibility of breaching sanctions.

## Developing a wider approach to preventing financial crime

Money laundering pre-supposes a predicate crime which has generated assets for a criminal. Looking more widely across the landscape, more work is required to put in place a comprehensive financial crime preventative framework that includes fraud.

The EU and member states have started thinking about fraud and money laundering more holistically, rather than two silos to be tackled independently. This is very welcome.

For our part, the Central Bank of Ireland is approaching AML, fraud, and sanctions through the lens of financial integrity of the system. We are building out a more integrated supervisory framework to look at risk in a more holistic way. We want to take a whole-of-sector, rather than piecemeal, approach, and so very much support emerging EU thinking in this area.

As a single market and economic and political union, the EU can point to work already under way and leverage further opportunities to confront the challenges involved.

Already, there are a number of other important EU developments aimed at protecting the financial integrity of the system and the citizens who depend on it.

PSD3 and the Payment Services Regulation will strengthen customer authentication rules and extending refund rights of consumers who have fallen victim to fraud, among other measures.

The EU's Markets in Crypto Assets Regulation (MiCAR) includes rules relating to the information to be made available to prospective investors in crypto assets, partly in response to the proliferation of scams involving crypto asset issuance.

The amended Fund Transfer Regulation ensures that transfers of crypto assets by CASPs must now be accompanied by information on the sender and recipient, in the same way that credit transfers between banks must be.

The Instant Payments Regulation (IPR) obliges providers of standard and instant credit transfers to verify the payee at no additional charge to the payer. It also obliges PSPs offering instant credit transfers to screen their customer base against targeted financial sanctions lists at least daily.

The various regulatory and policy developments to tackle financial crime cannot succeed in isolation. For this reason, supervisors have been on a steady march away from reliance on traditional supervisory tools and are increasingly exploring ways to transform technology from an enabler of financial crime to a tool in the detection, disruption and successful prosecution of financial crime.

In that context, I'd like to mention a significant milestone in the Central Bank of Ireland's innovation journey - the launch of our Innovation Sandbox Programme last December on the specific theme of Combatting Financial Crime.

## About the sandbox

This initiative offers a structured environment for firms to develop innovative solutions in a collaborative environment, ensuring that new technologies are introduced safely and effectively into the financial sector.

The seven participants in the programme are employing new technologies and innovative methods to develop solutions that tackle financial crime, for the benefit of both the financial system and consumers.

Participants are representative of a diverse spectrum of innovators from Ireland, across Europe and the UK and feature start-ups, scaling firms, partnerships and established financial services firms.

Although it is still at an early stage in the programme, several key areas of focus have been identified such as:

- The use of AI, machine learning, and pattern recognition to detect and prevent fraud; and
- The use of technology to enable data sharing without compromising sensitive information, allowing real-time verification of identities and other credentials while ensuring full compliance with data protection regulations and the development of digital identity verification tools.

The Central Bank is organising workshops for participating firms on specific topics relevant to theme of combating financial crime, facilitating bespoke engagement with dedicated relationship managers, and providing access to a data platform offering data sets and tools relevant to the theme. This will allow participants to test and develop their innovation.

We are hugely excited about the programme and look forward to sharing the results of it in due course.

## Conclusion

In conclusion, I was greatly struck by something Elizabeth McCaul of the ECB Supervisory Board previously said: ""Technology is fundamentally a human activitytechnology is neither good nor bad, but humans make it so."" 4

The reality is that no piece of legislation can contemplate every financial crime risk or typology or close every loophole. We can't wipe out financial crime - any more than we can wipe out car theft, shoplifting or burglary. But what we can do is to become as effective as possible at reducing its impact.

Hence, as technology evolves, it behoves regulators and supervisors to evolve too continually adapting to keep pace with these changes and ensure that, collectively and individually, we are the forefront of protecting the integrity of the financial system and those who use it.

Thank you.

1  Behind the Data - Insights from Irish Payment Fraud Statistics

- 2  EBA and ECB 2024 Report on Payment Fraud
- 3  The 40 obliged entities will comprise the highest risk entities operating across the EU and at least one entity from each Member State.
- 4  ECB Supervisory board - Technology is neither good nor bad, but humans make it so",Derville Rowland
https://www.bis.org/review/r250204a.htm,Steven Maijoor: Cyber resilience in an age of geopolitical tensions,"Speech by Mr Steven Maijoor, Executive Director of Supervision of De Nederlandsche Bank, at the Annual FinTech and Regulation Conference, Brussels, 4 February 2025.",2025-02-04 00:00:00,"## Steven Maijoor: Cyber resilience in an age of geopolitical tensions

Speech by Mr Steven Maijoor, Executive Director of Supervision of De Nederlandsche Bank, at the Annual FinTech and Regulation Conference, Brussels, 4 February 2025.

* * *

On December 12th 2023, Kyivstar, Ukraine's largest telecom provider, suffered a cyberattack that disrupted services for millions of users. The attack, attributed to the Russian state-sponsored group Sandworm, was one of the biggest cyber incidents in Ukraine since the onset of the Russian invasion. The hackers had infiltrated Kyivstar's infrastructure months earlier. They deployed malware that erased thousands of virtual servers and personal computers, crippling the company's network for managing communication services.

The attack had several immediate effects. First of all, approximately half of Kyivstar's network was disabled, leaving millions without mobile and internet connection. But the damage wasn't limited to the telecom sector. The attack also disrupted banking operations, payment processing, and online banking services. Some ATMs and point-ofsale terminals didn't work. Financial transactions were in disarray across the country.

Amazingly, the Ukrainians were quickly able to restore services. Over the past three years they have become quite proficient in dealing with large-scale disruption. Many critical processes in Ukraine are equipped with redundancy measures. Many people even have two sim cards in their phones. That enabled the other Ukrainian telecom providers to circumvent the outage. Services at Kyivstar were gradually reinstated, with almost full restoration achieved eight days after the attack.

This episode raises some inconvenient questions. What if this would happen to us? What if a large scale Russian or Chinese cyberattack is launched on the telecoms sector of an EU member state? Would it be possible? How much damage could such an attack cause? Would it affect financial services? And would we be able to recover as quickly as the Ukrainians did?

A few years ago, most people would have found these questions to be rather hypothetical, but today, unfortunately, they have become quite urgent. Geopolitical tensions have been rising for more than a decade, but over the past few years they have accelerated. Countries are re-arming, they are protecting their strategic economic infrastructures, they are imposing trade restrictions and sanctions on each other, and they are weaponising access to international financial infrastructures and services. Needless to say this is bad news for the world economy and the financial sector. But perhaps in no area is the geopolitical threat so real and acute as in the digital domain.

Apart from the Kyivstar case, there are many other examples to back this up. In late 2023, a Russian hacker breached Microsoft's corporate network by exploiting a legacy account. As a result, the security and confidentiality of the email accounts of many organisations around the world were potentially compromised. Last year, the FBI discovered a dormant network of Chinese hackers in the United States that had compromised hundreds of routers and that was on standby to launch an attack if called on. And recently, Russian and Chinese vessels were suspected of damaging subsea

data cables. Since state-sponsored cyberattacks are often very well concealed, we do not have reliable numbers on how often they occur. But anecdotal information from intelligence agencies, like the Dutch General Intelligence and Security Service, suggest their number is increasing.

Traditionally, the financial sector has been an attractive target for cyber criminals with financial motives. But with the changing geopolitical climate, nation-state cyberattacks have become a very real possibility. Their main aim is to cause disruption and to steal sensitive information. Nation-state actors possess more resources, sophistication, and endurance than other hackers. And many sectors of the economy have become more vulnerable to large-scale disruption due to increased complexity and digitalisation. This is certainly true of financial services, with their long outsourcing chains and interconnectedness. And many financial firms depend on the same third-party service providers, so if one of these suppliers is attacked, large chunks of the financial sector may experience the knock-on effects. As we showed in our latest Financial Stability overview, a quarter of all reported global cyberattacks can potentially affect the financial sector through a vital process run by a third party on which the financial system depends.

So, to answer the questions I posed at the start: yes, I think a major state-sponsored cyberattack on the financial sector or one of its supporting sectors could happen. And frankly, I hope we would be able to recover as quickly as the Ukrainians did.

That is not because financial institutions haven't prepared. Many financial institutions have taken big steps in recent years to boost their cyber resilience. I think it is fair to say the financial industry is one of the better digitally defended sectors in the economy. As it should be. But given the size and urgency of the threat, we need to do even more to keep financial services safe. This is why cyber resilience will absolutely be a key focus area in our supervision of the financial industry in the coming years. This goes both for De Nederlandsche Bank, and for the European Central Bank.

Our aim is to make financial services safer against cyber threats. Not only by increasing the resilience of the financial sector itself, but also by stepping up the robustness of the entire chain of ICT service providers. DORA, the European Digital Operational Resilience Act, that came into effect at the beginning of this year, gives us additional tools to accomplish this aim.

To start with, under DORA, threat-led penetration tests are mandatory for the largest financial institutions in Europe. In the Netherlands we have been conducting these kinds of tests voluntarily for over eight years with good results, and we are very pleased that it is now becoming the norm at the European level.

But DORA also imposes stricter requirements for managing cyber risks in outsourcing chains. For example, financial firms face stricter rules for conducting due diligence on potential ICT providers. As a result, Fintechs may also experience more stringent due diligence from financial sector customers. And very importantly, under DORA, European supervisors can conduct inspections of critical third-party ICT service providers in tandem with national supervisory authorities. We expect bigtechs like Google and Microsoft to be placed under EU-wide supervision. And, just as with the banks, we are going to test their readiness to detect and withstand cyberattacks.

Despite all efforts, there is no such thing as perfect cyber security. It is therefore vital that financial institutions take measures to recover quickly after cyber incidents. This is crucial to ensure that services can continue and people don't lose trust in financial firms or the financial sector as a whole.

The results of the ECB's 2024 cyber stress test show that there is room for improvement on the recovery front. So it's a very good thing that DORA also imposes new requirements on institutions' continuity plans and backup policies. They need to develop a culture where cyber incidents are quickly detected and reported, they need to have their playbooks in place and they need to have clearly defined management roles and responsibilities. These are key ingredients for an effective response after a cyberattack.

An important principle of our supervision has always been that financial institutions are responsible for putting their own house in order. And that is also the case with cybersecurity. But if we only focus on individual institutions, we miss something. As I mentioned, on a digital level the financial sector is so interconnected, and connected to other vital sectors of the economy as well, that some degree of overall coordination and cooperation is necessary to arrive at an optimal level of resilience. Notably, recent assessments, derived from nationwide contingency exercises in the Netherlands, reveal various weaknesses. These weaknesses relate to the exchange of information between critical infrastructure providers, the distribution of roles and responsibilities, and the mobilisation of scarce cyber security knowledge and expertise in the event of major cyber incidents.

So the message here is: we need to work together. Governments should take the lead to improve cross-sectoral cooperation and coordination. They must continue to conduct large-scale cyber-drills and practice activating crisis plans. The insights gained should be used to enhance resilience.

But there is also a role for financial supervisors like DNB. Under the new legislation, we do not only need to check whether financial firms are compliant, but we also have an obligation ourselves to look over the fence and cooperate closely with other sectors. DNB is putting this into practice by working with vital sectors that are most critical to the financial sector, such as energy and telecommunications. Within our mandate, we support these sectors with information, cooperation and ethical hacking experience.

To sum up, the threat of major disruptions to our financial system from nation-state cyberattacks has become more urgent. Financial firms, and the entire outsourcing chain on which they depend, therefore need to do whatever they can to further boost their cyber resilience. Both in terms of detection and recovery. Cyber resilience is a top priority for European financial supervisors and there are new European laws in place. And we are going to use these laws to make sure that financial institutions under our supervision are as secure and well defended as possible. Enhancing resilience also means we need to work together. Governments, financial firms, supervisors, telecom, energy and other vital players in the outsourcing chain. Because in cyberspace, we are all linked together. And after all, a chain is only as strong as its weakest link.

Thank you.",Steven Maijoor
https://www.bis.org/review/r250206a.htm,Philip N Jefferson: US economic outlook and monetary policy,"Speech by Mr Philip N Jefferson, Vice Chair of the Board of Governors of the Federal Reserve System, at the Economics Department Special Lecture, Lafayette College, Easton, Pennsylvania, 5 February 2025.",2025-02-05 00:00:00,"For release on delivery 7:30 p.m. EST February 4, 2025

U.S. Economic Outlook and Monetary Policy

Remarks by

Philip N. Jefferson

Vice Chair

Board of Governors of the Federal Reserve System at the

Economics Department Special Lecture, Lafayette College

Easton, Pennsylvania

February 4, 2025

Thank you, Professor Smith.  It is an honor to be speaking to you today here at Lafayette College. 1 I am glad to have the opportunity to return to such a historically important place as Easton, Pennsylvania, and the Lehigh Valley.  This area was part of this country's colonial beginnings, it was instrumental in the rising of the industrial age, and, as the home to Crayola, it very literally played a role in coloring how we see the world.  Today, this region is leading the way forward with its many outstanding institutions of higher education, very prominently including, of course, Lafayette College.

Today, I would like to take this opportunity to share with you my outlook for the U.S. economy and my views of appropriate monetary policy.  This is a useful time to do that, as my colleagues and I on the Federal Open Market Committee (FOMC), the Federal Reserve's primary monetary policymaking body, held our first meeting of 2025 just last week.

Overall, the U.S. economy is starting the year in a good position.  I expect inflation's slow descent to continue, and I anticipate that economic growth and labor market conditions will remain solid.  I have learned, however, that it is wise to be humble about my projections.  There is always a great deal of uncertainty around any economic forecast, and currently we face additional uncertainties about the exact shape of government policies, as well as their economic implications.

Last week, my FOMC colleagues and I discussed the latest economic developments and reviewed data that arrived since our previous policy meeting in December.  At the conclusion of that meeting, I voted in support of the Committee's decision to maintain the target range for the federal funds rate at 4-1/4 to 4-1/2 percent.

1 The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.

This decision was made in support of our goals to achieve maximum employment and inflation at the rate of 2 percent over the longer run.  I remain focused on setting policy to achieve the dual-mandate goals given to us by Congress:  maximum employment and stable prices.  Sound monetary policy and positive supply-side developments have contributed to the achievement of sustained economic growth in recent years, the return of low unemployment, and inflation moving sustainably toward our 2 percent objective. I remain committed to returning inflation to our target while sustaining the solid labor market.  Now is an appropriate time to assess the path forward for the economy.  I am happy to be here today to share my views with you.

## Economic Activity

The U.S. economy appears to be maintaining its momentum after growing at a solid pace last year.  Last year's growth was notable because many private forecasters in 2023 projected a significant downturn sometime in 2024. 2 However, data over the past year painted a very different picture.  GDP grew 2.3 percent in the fourth quarter of 2024, according to last week's data release. 3 As you can see in figure 1, that extends a stretch of solid quarterly growth over the past couple of years.  Shortly, when I discuss the labor market, I will say more related to the large swing in GDP growth in 2020 that stands out in this chart.  For all of 2024, the economy grew 2.5 percent, which is a modest slowing from the 3.2 percent growth in 2023.  The economy has been benefiting from positive

2  See Harriet Torry and Anthony DeBarros (2023), 'A Recession Is No Longer the Consensus,' Wall Street Journal, October 15.

3  See Bureau of Economic Analysis (2025), 'Gross Domestic Product, 4th Quarter and Year 2024 (Advance Estimate),' news release, January 30, https://www.bea.gov/sites/default/files/2025-01/gdp4q24adv.pdf.

supply developments, including more workers joining the labor force and higher labor productivity.

The resilience of American consumers is the driving force behind the solid economic growth seen in recent quarters.  Household spending, adjusted for inflation, grew 3.2 percent in 2024, slightly stronger than in 2023.  The consumer spending data we have received recently have surprised me to the upside.  As you can see in figure 2, personal consumption increased at a faster pace each quarter last year.  Nominal retail sales rose briskly in the second half of last year.  Private-sector data are consistent with GDP figures.  According to private surveys of businesses, activity in the services sector, which accounts for about two-thirds of all consumer spending, has been on a general upward trajectory since mid-2020. 4

Elsewhere in the economy, growth has been less robust.  Residential investment has been fairly flat over the past three quarters, and growth of business fixed investment cooled last year from its strong 2023 pace.  Much of the equipment investment that did take place came from imports.  Indeed, domestic manufacturing industrial production was flat last year.  Overall, I see the economy as continuing to grow at a healthy pace this year, though I anticipate growth to be slightly lower than what we observed in 2024. Households and firms face an uncertain environment, and that tends to lower consumer spending and business investment.  If consumer spending continues to grow at the same pace as it has in the past two years, however, that could cause me to revise up my outlook for overall economic growth.

4  See the December 2024 Services ISM Report on Business, which is available on the Institute for Supply Management's website at https://www.ismworld.org/supply-management-news-and-reports/reports/ismreport-on-business/services/december.

## Labor Market

Turning to employment, I see the labor market as being in a solid position, with conditions broadly returning to balance after a period of being overheated.  It's helpful to step back and look at the labor market's path over the past five years.  Looking at figure 3, you can see that the unemployment rate surged in early 2020, peaking at 14.8 percent in April 2020, when the COVID-19 pandemic first took hold and a wide swath of the global economy was shutdown.  The unemployment rate subsequently fell swiftly as the economy recovered.  By April 2023, it touched 3.4 percent, a half-century low.  At that point, many employers reported that they were struggling to fill openings.  Then, over the latter part of 2023 and early 2024, the unemployment rate rose nearly a percentage point, an unusual pattern outside of a recession.  As a policymaker, I took note of this rise when considering our dual-mandate objectives.  Now, I have also taken note that the unemployment rate has effectively held steady since the middle of last year.  I view that as a sign that downside risks in the labor market have abated.

The latest jobs report showed that the unemployment rate was 4.1 percent in December, the same reading as in June 2024. 5 That is low by historical standards and close to estimates of the longer-run rate that is consistent with our employment mandate. In the three months ending in December, payrolls rose by an average of 170,000 jobs a month.  While employment growth has eased somewhat from the early part of last year, the steady unemployment rate suggests that payroll gains have been sufficient to absorb new entrants to the labor market.  The general moderation in hiring is consistent with

5  See Bureau of Labor Statistics (2025), 'The Employment Situation-December 2024,' news release, January 10, bls.gov/news.release/pdf/empsit.pdf.

other measures showing that the demand for labor has come into better balance with the supply of workers.

Looking at figure 4, you can see that as of November, there were 1.2 job openings for every unemployed person seeking work.  That ratio is down from 2.0 in 2022, when the labor market was overheated.  Also notice that the current vacancy-to-unemployment ratio is just a little below its value before the pandemic took hold.  And while hiring has eased from the pace in 2023, layoffs have not increased.  As you can see in figure 5, the number of Americans seeking first-time unemployment benefits has trended at historically low levels for the past three years.  Consistent with a moderation in hiring and a steady unemployment rate, workers' wage gains have slowed from when the labor market was overheated.  Still, the pace of increase in average hourly earnings has been healthy, increasing 3.9 percent during the 12 months ending in December, and shows that, on average, worker pay has grown at a faster rate than the rate of inflation.

Looking broadly across the past several months, I see a labor market that is in solid condition and not a source of significant inflationary pressure.  While the downside risks of a rapidly weakening labor market appear to have lessened, I expect some further softening that could cause the unemployment rate to edge just slightly higher this year but stay in a range consistent with recent readings.

## Inflation

Thinking about the other component of our dual mandate, inflation has come down a great deal over the past two and a half years but remains somewhat elevated relative to our 2 percent objective.  Inflation, as measured by the 12-month change in the personal consumption expenditures (PCE) price index, peaked at 7.2 percent in June

2022.  Looking at the blue line in figure 6, you can see that it has since come down to 2.6 percent as of this past December.  Economists also pay close attention to core inflation, which excludes often volatile food and energy costs.  That core PCE inflation figure, shown by the red dashed line, peaked at 5.6 percent in 2022.  By December 2024, it had eased to 2.8 percent.  Annualized inflation over the past three months has been closer to our 2 percent objective.  As you can see, the path of disinflation has been bumpy.  I expect that to continue to be the case.

I find it helpful to look at the components of inflation to better understand underlying trends.  Looking at figure 7, core goods inflation, the blue line, is running close to pre-pandemic levels, reflecting a better alignment between supply and demand after pandemic-related distortions.  Nonhousing services inflation, the red dashed line, has cooled largely in line with slower wage growth.  Housing services inflation, the purple dotted line, remains somewhat elevated, but I expect more progress in that category as the earlier slowing in growth of rents for new tenants feeds through into growth of average rents. 6

With supply and demand conditions having moved into better balance, wage growth slowing to a more sustainable pace, and longer-term inflation expectations remaining well anchored, I see a path for inflation to continue its progress toward our longer-run goal.  While the easing of overall inflation in recent years has been encouraging, the fact is that it remains above our 2 percent objective.  Monthly inflation readings tend to be volatile, consistent with the bumpy path I described, but the 12-month

6  See Philip N. Jefferson (2024), 'U.S. Economic Outlook and Housing Price Dynamics,' speech delivered at the Mortgage Bankers Association's Secondary and Capital Markets Conference and Expo 2024, New

York, May 20, https://www.federalreserve.gov/newsevents/speech/jefferson20240520a.htm.

readings have held in a fairly consistent range somewhat above our target over the second half of last year.

## Monetary Policy

In the current environment, I attach a high degree of uncertainty to my projections.  As I have already mentioned, there have been notable recent instances where forecasters have been surprised.  That said, I see the risks to achieving our employment and inflation goals as being roughly in balance, and I am attentive to the risks to both sides of our mandate.  That better balanced position is partly a result of the monetary policy actions over the past few years, which I will review briefly.

As you can see in figure 8, the FOMC responded to elevated inflation by raising the policy rate 5-1/4 percentage points over about 15 months, starting in March 2022, and then holding the rate at that restrictive level for more than a year.  This contributed to inflation easing from a 40-year high to near current levels while maintaining a solid labor market.  That outcome was historically unusual but greatly welcomed.  By September of last year, I had growing confidence that with an appropriate recalibration of our policy stance, strength in the labor market could be maintained in a context of moderate economic growth and inflation moving sustainably down to 2 percent.  The FOMC reduced the federal funds rate by a full percentage point over the course of our final three meetings last year.  As a result of those actions, our policy stance is now significantly less restrictive than it was when we began lowering the federal funds rate.  Given current economic conditions-specifically, inflation that remains modestly above our target and a labor market that is solid-and my projections of future economic conditions, I voted last week to maintain our current policy stance.  As long as the economy and labor

market remain strong, I see it as appropriate for the Committee to be cautious in making further adjustments.

Over the medium term, I continue to see a gradual reduction in the level of monetary policy restraint placed on the economy as we move toward a more neutral stance as the most likely outcome.  That said, I do not think we need to be in a hurry to change our stance.  In considering additional adjustments to the federal funds rate, I will carefully assess incoming data, the evolving outlook, and the balance of risks.  As is always the case, monetary policy is not on a preset course.  To that end, I could envision a range of scenarios for future policy.  For example, if the economy remains strong and inflation does not continue to move sustainably toward 2 percent, we can maintain policy restraint for longer.

Alternatively, if the labor market were to weaken unexpectedly or inflation were to fall more quickly than anticipated, it may be appropriate to reduce the policy rate more quickly.  Our current stance of policy is well positioned to deal with the risks and uncertainties that we face in pursuing both sides of our dual mandate.

As I conclude, I want to assure you that I am mindful that monetary policy decisions affect communities, families, and businesses across the country.  I highly value opportunities to visit places like Lafayette College and Easton to share my views, hear from you, and see how the economy is experienced firsthand in your community.  I remain fully committed to supporting maximum employment and bringing inflation sustainably to our 2 percent goal. Our success in delivering on these goals matters to all Americans.

Thank you.



## U.S. Economic Outlook and Monetary Policy

## Philip N. Jefferson Vice Chair, Federal Reserve Board

Lafayette College, February 4, 2025

Disclaimer: The views I will express today are my own and not necessarily those of the Federal Open Market Committee (FOMC) or the Federal Reserve System.



Source: U.S. Bureau of Economic Analysis, Real Gross Domestic Product, retrieved from FRED, Federal Reserve Bank of St. Louis.

Figure 2: Real Personal Consumption Expenditures



Note:

Percent change

from preceding

period, seasonally

adjusted annual

rate.

Source: U.S. Bureau of Economic Analysis, Real Personal Consumption Expenditures retrieved from FRED, Federal Reserve Bank of St. Louis.

Figure 3: Unemployment Rate



Source: U.S. Bureau of Labor Statistics, Unemployment Rate, retrieved from FRED, Federal Reserve Bank of St. Louis.



Figure 5: 4-Week Moving Average of Initial Claims



Source: U.S. Employment and Training Administration, 4-Week Moving Average of Initial Claims, retrieved from FRED, Federal Reserve Bank of St. Louis.

Figure 6: 12-Month PCE and Core PCE Inflation



Note: PCE Inflation is the change in the personal consumption expenditures price index and core PCE Inflation is the change in PCE price index excluding food and energy. PCE and core PCE are 12-Month inflation percentages calculated using seasonally adjusted annual rates.

Source: U.S. Bureau of Economic Analysis, Personal Consumption Expenditures: Chain-type Price Index and Personal Consumption Expenditures Excluding Food and Energy (Chain-Type Price Index), retrieved from FRED, Federal Reserve Bank of St. Louis.

Figure 7: Components of Core PCE Inflation



Figure 8: Federal Funds Rate





## U.S. Economic Outlook and Monetary Policy

## Philip N. Jefferson Vice Chair, Federal Reserve Board

Lafayette College, February 4, 2025

Disclaimer: The views I will express today are my own and not necessarily those of the Federal Open Market Committee (FOMC) or the Federal Reserve System.",Philip N Jefferson
https://www.bis.org/review/r250203f.htm,Tiff Macklem: Release of the Monetary Policy Report,"Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada and Ms Carolyn Rogers, Senior Deputy Governor of the Bank of Canada, at the press conference following the monetary policy decision, Ottawa, Ontario, 29 January 2025.",2025-01-29 00:00:00,"## Tiff Macklem: Release of the Monetary Policy Report

Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada and Ms Carolyn Rogers, Senior Deputy Governor of the Bank of Canada, at the press conference following the monetary policy decision, Ottawa, Ontario, 29 January 2025.

* * *

Good morning. I'm pleased to be here with Senior Deputy Governor Carolyn Rogers to discuss our policy decision and the (MPR). Monetary Policy Report

Today, we lowered the policy interest rate by 25 basis points. This is our sixth consecutive decrease and brings our policy rate to 3%.

We also announced our plan to complete the normalization of our balance sheet, ending quantitative tightening. The Bank will restart asset purchases in early March, beginning gradually so that its balance sheet stabilizes this year and then begins to grow modestly in line with economic growth.

We have three main messages this morning.

First, inflation has been close to the 2% target since last summer. Monetary policy has worked to restore price stability.

Second, lower interest rates are boosting household spending, and economic activity is picking up.

Third, the potential for a trade conflict triggered by new US tariffs on Canadian exports is a major uncertainty. This could be very disruptive to the Canadian economy and is clouding the economic outlook.

Since the scope and duration of a possible trade conflict are impossible to predict, the MPR projection we published today provides a baseline forecast in the absence of tariffs. We also provide some discussion of the potential consequences of a major trade conflict.

Let me expand on the first two messages before turning to the threat of tariffs.

First, inflation. A year ago, inflation was 3%, short-term expectations were still elevated and inflationary pressures were broader than normal. In recent months, inflation has remained close to 2%, business and consumer expectations have largely normalized and there is no longer evidence of broad-based inflationary pressures. Shelter price inflation remains elevated, but it is gradually coming down.

While we expect some volatility in CPI inflation due to temporary tax measures, our forecast is that inflation will remain close to the 2% target over the next two years.

Second, growth. There are signs economic activity is gaining momentum as past interest rate cuts work their way through the economy. Lower borrowing costs are boosting activity in the housing market as well as consumer spending on big-ticket

items like automobiles. The pickup in household spending is starting to broaden to other consumer items and is projected to strengthen further. Business investment has been weak, but is forecast to increase gradually. And the outlook for exports is being supported by new export capacity for oil and gas.

Employment has strengthened in recent months. But with job creation having lagged labour force growth for more than a year, the labour market remains soft. The unemployment rate was 6.7% in December, and wage pressures, which have proven sticky, are showing some signs of easing.

The Bank forecasts GDP growth will strengthen from 1.3% in 2024 to 1.8% in 2025 and 2026. Growth in GDP per person is projected to pick up as lower interest rates and rising incomes support spending. The projected increase in overall GDP growth is more modest than it was in October, largely due to lower population growth that reflects new federal immigration policies.

There are risks around our outlook, and Governing Council is equally concerned with inflation rising above the 2% target or falling below it. Absent the threat of tariffs, the risks to the inflation outlook are roughly balanced.

Let me turn now to the question of tariffs. US trade policy is a major source of uncertainty. There are many possible scenarios. We don't know what new tariffs will be imposed, when or how long they will last. We don't know the scope of retaliatory measures or what fiscal supports will be provided. And even when we know more about what is going to happen, it will still be difficult to be precise about the economic impacts because we have little experience with tariffs of the magnitude being proposed. Nevertheless, some things are clear.

A long-lasting and broad-based trade conflict would badly hurt economic activity in Canada. At the same time, the higher cost of imported goods will put direct upward pressure on inflation. The magnitude and timing of the impacts on output and inflation will depend importantly on how businesses and households in the United States and Canada adjust to higher import prices.

Unfortunately, tariffs mean economies simply work less efficiently-we produce and earn less than without tariffs. Monetary policy cannot offset this. What we can do is help the economy adjust. With inflation back around the 2% target, we are better positioned to be a source of economic stability. However, with a single instrument-our policy interest rate-we can't lean against weaker output and higher inflation at the same time. As we consider our monetary policy response, we will need to carefully assess the downward pressure on inflation from weakness in the economy, and weigh that against the upward pressure on inflation from higher input prices and supply chain disruptions.

So let me tell you what we're doing in preparation.

In recent years, we have invested in better information on supply chains, trade links and the connections between sectors. And this is helping us analyze the effects of supply disruptions including tariffs. We have begun assessing the possible consequences of different tariff scenarios, and present an example in this MPR.

We are stepping up our outreach activities across the country to hear directly from those affected by trade uncertainty. This includes augmenting our surveys of businesses and consumers to better understand how trade uncertainty is affecting their decisions and how they would cope in the event of a trade conflict.

We will update you on our analysis and assessments as developments unfold.

Having restored low inflation and reduced interest rates substantially, monetary policy is better positioned to help the economy adjust to new developments. As always, the Bank will be guided by our monetary policy framework and our commitment to maintain price stability over time.

With that, the Senior Deputy Governor and I would be pleased to take your questions.",Tiff Macklem
https://www.bis.org/review/r250203g.htm,Felicia Dlamini-Kunene: Greening of the Central Bank of Eswatini Project ,"Opening remarks by Ms Felicia Dlamini-Kunene, Deputy Governor of the Central Bank of Eswatini, at the Greening CBE Project Capacity Building Workshop, Ezulwini, 21 January 2025.",2025-01-21 00:00:00,"## Felicia Dlamini-Kunene: Greening of the Central Bank of Eswatini Project

Opening remarks by Ms Felicia Dlamini-Kunene, Deputy Governor of the Central Bank of Eswatini, at the Greening CBE Project Capacity Building Workshop, Ezulwini, 21 January 2025.

* * *

- Programme Director,
- Distinguished Guests
- UNDP Representative
- External Consultants (Pegasys and Carbon Trust)
- Dear Colleagues
- Ladies and Gentlemen
- Good Morning!

I wish to warmly welcome all of you to today's Workshop which is conducted under the Greening of the Central Bank of Eswatini Project. The workshop will be facilitated by our consultants from Pegasys and Carbon Trust.

Let me first acknowledge and appreciate the progress made so far on the Greening of the Central Bank of Eswatini Project with special appreciation to our implementing Partners - UNDP Eswatini, Pegasys and Carbon Trust, and other Stakeholders who have been very instrumental and cooperative in the delivery of the key elements of the Project so far.

The Greening of the Central Bank of Eswatini Project was initiated last year and significant progress has been made. The key milestones achieved in the project include the diagnostic study report and draft Eswatini Green Finance Taxonomy, which are the two pieces of deliverables that will provide a solid foundation for moving forward to the implementation stage. We are looking forward to wrapping up the Project in the next month or so. However, more work still lies ahead.

Programme Director, I wish to emphasize three important things this morning, which are: a) Coordination b) Capacity building, and c) Migration from the preparatory stage to implementation phase.

## a. Coordination

Someone once said the following words and I paraphrase here ""The urgency of climate action risks has become a clichØ, but it is a dangerous clichØ because immediate, effective, and transformative steps are urgently required to prioritize environmental protection"".

- Coordination on matters of climate change adaptation and mitigation is very critical, both at national level and within all stakeholder institutions. Government, CBE, UNDP, and the financial sector can only do so much as institutions, but if we work together in a coordinated way, more ground can be covered to protect and safeguard our economy from the devasting effects of climate change.

- I therefore wish to emphasize the importance of coordination for the purposes of progressing the journey of greening the financial system in Eswatini. Coordination and collaboration also relate to international and regional levels. The Bank has found it necessary to affiliate with regional and international bodies like the African Community of Central Banks, the Network for Greening Financial Systems, the Southern African Development Community, and the Alliance for Financial Inclusion, to name just a few. This affiliation is for numerous purposes including regulating climate change risks in our financial system.

## b. Capacity Building

- We are here today because we desire to empower participants with the conceptual understanding of climate change risks, both physical and transitional, appreciating the benefits and use of a green taxonomy for purposes of mitigating climate change risks and promoting green investments. We also need to focus on sustainable finance principles, blended finance and the adoption of Environmental Social and Governance principles.
- More training interventions will be designed to address gaps identified through the diagnostic study report issued. Today's training is targeted at imparting technical skills to participants by our experts (Consultants). Specialized topics of this nature need to be covered in depth to generate sufficient technical knowledge on climate change and its effects and how best to mitigate them.
- CBE in its endeavour to capacitate and empower staff on climate change matters and regulation, has joined the Network for Greening Financial Systems which is the network of Central Banks and Financial Regulators and a platform for members to exchange notes and experiences on financial system greening agendas. The Network for Greening Financial Systems affiliation will also assist the Bank with peer-to-peer learning from other members. On capacity building, the Network for Greening Financial Systems offers online courses on its Climate Training Alliance portal and has partnered with otheragencies like the Bank for International Settlements, the International Association of Insurance Supervisors, and the Sustainable Finance Forum to design and deliver specialized training on climate matters on a continuous basis.
- I, therefore, encourage all stakeholders to take the capacity building and knowledge generation on climate matters very serious and with the urgency it deserves.

## c. Progressing from the Preparatory to implementation phase - what does that mean?

- The Greening of the Central Bank of Eswatini Project progress made so far is quite significant, but more work lies ahead. The finalization of the diagnostic study report and the first version of the Eswatini Green
- For the Central Bank of Eswatini, the implementation stage means incorporating climate change - related risks both physical and transitional into our regulatory framework for supervising and regulating the financial sector. It means working with banks and other players within the ecosystem to enhance the identification, measuring, and control of risks associated with the devasting effects of climate change.

- We need to embrace the Environmental Social and Governance principles and advance our efforts for achieving Sustainable Development Goals (SDGs), in particular SDG 13 (climate action), in the context of the training sessions we are embarking on today.
- The Central Bank and financial institutions need to accelerate knowledge assimilation and building capacity on climate change - related issues with particular focus on research, scenario analysis, and stress testing capability to inform the country's / individual firm's vulnerabilities to climate change effects.

## Ladies and gentlemen,

I encourage everyone of you to engage actively throughout this workshop. Please ensure that you take advantage of learning from our experts and implement what you will learn.

With these few words, I now declare this workshop officially open. I thank you all, and I wish you all a productive and inspiring experience!",Felicia Dlamini-Kunene
https://www.bis.org/review/r250203e.htm,François Villeroy de Galhau: Short-term and long-term yields - a diverging perspective?,"Speech by Mr François Villeroy de Galhau, Governor of the Bank of France, at the Official Monetary and Financial Institutions Forum (OMFIF), London, 31 January 2025. ",2025-01-31 00:00:00,"

OMFIF, London - 31 January 2025 'Short-term and long-term yields: a diverging perspective?' Speech by François Villeroy de Galhau, Governor of the Banque de France

Press contact: Delphine Cuny (delphine.cuny@banque-france.fr)

Ladies and Gentlemen,

It is a great pleasure to be in London today for this OMFIF meeting and I am grateful  for  your  kind  invitation.  By  the  way,  today  is  history  for  our  single currency, the euro: we announced this morning a decisive step toward future banknotes. We will have to decide between two possible themes by next year: culture, with six prominent Europeans, and rivers and birds. These banknotes will much better represent Europe, and embody the historically high support of 81% of European citizens for their single currency. That said, I would like to share with you some insights about two recent monetary developments. I will first comment on short-term rates and yesterday's monetary policy decision (I) and then highlight some challenges against a backdrop of rising long-term rates (II).

## I. On ECB short-term rates: a clear direction, and a pragmatic pace

Yesterday, our Governing Council, led by President Lagarde, decided unanimously a fifth cut, and a fourth in a row. Compared to other major central banks, ECB has been the earliest to cut, the lowest to go, and probably has the clearest path in its monetary course. To put it in a nutshell: as the ECB president said, we are precisely on track in our victorious fight against inflation. We know there is  a  discussion  whether  this  success  is  the  result  of  luck  -  reversal  of commodity prices - or of central banks work. Both, to be honest: but monetary policy  played  its  significant  part.  There  are  different  models  used  by  various European NCBs and the ECB itself: but all of them converge to a conservative estimate of monetary policy having reduced inflation by about 2% in 2023 as well as in 2024.

Looking ahead, we should be sustainably around our 2% inflation target by this summer. The French flash inflation in January published this morning, stable at 1.8% and slightly  lower  than  expected,  is  good  news  on  this  road:  services inflation in particular seems  to  be receding. We  see  significant  wage deceleration  and  are  hence  confident  on  core  inflation  decrease,  including

services. And on activity, we avoided recession last year with 0.7% growth, and will again avoid it this year.  But the somewhat disappointing GDP stagnation in Q4 published yesterday confirms that risks on growth are clearly tilted to the downside.

With such a 'disinflationary slowdown', the direction of the travel is clear: our monetary policy will go from restrictive towards neutral, and should support a gradual recovery while ensuring inflation is at our target. How fast and how far should we go in this travel? This is where what I call 'agile pragmatism' and our data driven approach will guide us. I don't want to bother you today with a sophisticated discussion about the precise level of R*… Furthermore, long term yields have increased, limiting the easing of overall financial conditions.

## II. A more challenging view on long-term yields

## A) Unusual divergence between short and long-term rates

The ECB, since last June, and the US Federal Reserve, since last September, began a rate cutting cycle and both have reduced their policy rates by 100 bp last  year.  But  over  the  same  period  longer  term  yields  have  increased, particularly in the US which is very unusual compared to previous easing cycles. The US 10-year yield is now up by more than 80 basis points since the Fed started  cutting  rates  and  the  so-called  'Trump  trade'  began  while  previous easing phases were initially associated with a fall in long yields.



In the euro area, long-term rates have also increased but to a lesser extent and the US 10-year spread relative to EA OIS has risen by 80 bps over the same period.



## B) What can explain this rise in long yields?

The sovereign debt trajectories and the elevated global policy uncertainties are likely  the  two  main  factors.  Fiscal  deficits  remain  high  in  many  advanced economies (US, UK, FR); even in Germany, fiscal policy might become more expansionary  after  the  elections.  Uncertainty  about  the  trajectory  of  public finances is putting upward pressure on sovereign yields.

Macroeconomic factors are also at play, even though quite differently on both sides of the Atlantic. In the US, the risk of future trade restrictions and possibly immigration  policies  keep  uncertainty  about  the  outlook  and  inflation  high, directly  affecting  risk  premia.   In  the  short  run,  these  measures  are  akin  to negative supply shocks and likely to be inflationary, before possible reversal in the  longer  run  as  aggregate  demand  could  weaken.  For  now,  the  growth perspectives  remain  strong  in  the  US,  as  confirmed  by  recent  robust  labour market  data,  and  option-implied  distributions  of  inflation  expectations  show upside risks to inflation. In that context, markets expect the Fed to cut interest rates less this year than previously anticipated. The expectations component is estimated to account for about two-thirds of the increase in the 10-year Treasury yield since mid-September.

yield

10y

US



The  macroeconomic  picture  is  different  in  the  euro  area.  The  disinflation trajectory is more clear-cut and the macro outlook is weaker. The contagion to European yields from higher  US  interest  rates  has  thus  been  limited  so  far: monetary policy perspectives could and should rightly decouple. But spillovers on the bond markets operate also through the global risk channel. In a more uncertain global environment, investors require higher compensation for lending long  term,  which  results  in  higher  term  premia.  The  contribution  of  the  term premium to the change in OIS 10-year rates since mid-September is almost 15 bp. The impact of this rise in the term premium on financial conditions in the euro area is however mitigated by the depreciation of the euro/dollar exchange rate which has occurred during the same period.

## C) The role of unwinding QE shouldn't be overstated

Some commentators argue that the end of QE has contributed to the rise in long-term  yields.  This  interpretation  goes  back  to  the  initial  objective  of  QE. Asset purchase programmes were launched in times of crisis and when rates were at the effective lower bound (ELB) for two reasons:  1) to preserve an effective  monetary  policy transmission when specific  market  segments  were under strain - which is not relevant today, and 2) to provide additional policy space  when  required  (i.e.  monetary stance purpose).  In  that  latter  case, purchases of  long-term  bonds  aimed  at  compressing  the  term  premium  and therefore the long term yields, to stimulate aggregate demand.

In  principle,  'quantitative  tightening',  i.e.  the  full  unwinding  of  all  large  scale asset purchases would drive the market back to the status quo ante. But there

are two reasons to discount this; and the wording itself of 'QT' is somewhat misleading.  First, passive and bounded 'QT' is not the symmetric of active and open-ended QE: QE ramped up quickly but unwinds much more slowly. Recent research i finds  that  asset  purchases  had  powerful  effects  during  periods  of market stress. We should not expect to go back to crisis yields. As a matter of fact the term premium has been contained since the end of the reinvestments under the APP (July 2023) and the PEPP (December 2024). Second, QT is completely predictable and none of the parameters have changed since last summer. For both programmes the Governing Council announced months in advance the date at which reinvestments would be discontinued and market reactions at that time were very muted.

- D) To conclude, let me draw a few lessons regarding the use of balance-sheet tools in the future.
- 1) First, when the primary goal of QE is transmission or financial stability , there is no reason to hold the assets to maturity or to take excessive duration risk. There is no obligation to re-sell at short notice but there should be an option open at any time. More generally, QE is not necessarily the first-line instrument to restore appropriate transmission. TLTROs or large scale liquidity provision are  other  effective  tools  to  address  transmission  impairments  in  the  banking system.
- 2) Second, when the goal is to ease further the monetary stance while interest rates have reached their lower bound, then we should distinguish whether we aim to provide liquidity (i.e. volumes) or to reduce long-term rates (i.e. prices). If  the  primary  objective  is  to  inject liquidity ,  it  should  not  be  done  through purchases of long-term bonds, but by lending short term or at floating rates for LTROs. By the way, these were a powerful and successful innovation of the ECB, not used in the US. But the initial pricing of TLTRO III at quasi-fixed rates was not fully appropriate and had to be later recalibrated.

' Core QE' - i.e. purchasing and holding long-term bonds - should be used for the purpose of reducing the term premium and therefore the long-term yields. If  this  purpose  is  clear  and  warranted,  we  should  admit  that  it  entails  taking

interest rate risk onto our balance sheet, and hence possible losses as we have seen recently. We should then be ready to accept such risks, while looking more closely at the average maturity of the purchased portfolio.

3) In our portfolio holdings, we should prioritize government and supranational bonds to limit our direct balance sheet exposure to the non-financial corporate sector.  That  being  said,  such  programmes  are  not  and  should  never  be designed to fund governments nor to help fiscal stimulus.

4) Fourth and finally, we should not condition one instrument on another. Doing so creates communication issues if one programme has to be stopped. For instance, using asset purchases to make forward guidance more credible can turn out to be unwise, as we saw early 2022 when we had to gradually discontinue asset purchases before being able to raise rates.

*

*    *

I  will  end with a few lines from a French poet, Joachim du Bellay ii  in the 16 th century: ' Happy is the one, who like Ulysses, has completed a beautiful journey (…) And has then returned, full of wisdom and reason '. The last ten years have been anything but a beautiful journey for us central bankers; however, victory over  inflation  is  now  in  sight.  Like  Ulysses,  we  have  been  through  an unprecedented sequence of monetary policy challenges: this valuable experience gave us humility but also some confidence to face the next steps ahead. These include adjusting while keeping our toolkit, which will be a focus of our interim Strategy Review. Thank you for your attention.

i Du (W.), Forbes (K.) and Luzzetti (M.), 'Quantitative Tightening Around the Globe: What Have We Learned?', NBER Working Paper n°32321, April 2024  ; Acharya (V.), Chauhan (R.), Rajan (R.) and Steffen (S.), 'Liquidity Dependence and the Waxing and Waning of Central Bank Balance Sheets', December 2024

ii Du Bellay (J.), The Regrets , 1558",François Villeroy de Galhau
https://www.bis.org/review/r250203a.htm,Christine Lagarde: ECB press conference - introductory statement,"Introductory statement by Ms Christine Lagarde, President of the European Central Bank, and Mr Luis de Guindos, Vice-President of the European Central Bank, Frankfurt am Main, 30 January 2025.",2025-01-30 00:00:00,"## Christine Lagarde: ECB press conference - introductory statement

Introductory statement by Ms Christine Lagarde, President of the European Central Bank, and Mr Luis de Guindos, Vice-President of the European Central Bank, Frankfurt am Main, 30 January 2025.

* * *

Good afternoon, the Vice-President and I welcome you to our press conference.

The Governing Council today decided to lower the three key ECB interest rates by 25 basis points. In particular, the decision to lower the deposit facility rate - the rate through which we steer the monetary policy stance - is based on our updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission.

The disinflation process is well on track. Inflation has continued to develop broadly in line with the staff projections and is set to return to our two per cent medium-term target in the course of this year. Most measures of underlying inflation suggest that inflation will settle at around our target on a sustained basis. Domestic inflation remains high, mostly because wages and prices in certain sectors are still adjusting to the past inflation surge with a substantial delay. But wage growth is moderating as expected, and profits are partially buffering the impact on inflation.

Our recent interest rate cuts are gradually making new borrowing less expensive for firms and households. At the same time, financing conditions continue to be tight, also because our monetary policy remains restrictive and past interest rate hikes are still transmitting to the stock of credit, with some maturing loans being rolled over at higher rates. The economy is still facing headwinds but rising real incomes and the gradually fading effects of restrictive monetary policy should support a pick-up in demand over time.

We are determined to ensure that inflation stabilises sustainably at our two per cent medium-term target. We will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance. In particular, our interest rate decisions will be based on our assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission. We are not pre-committing to a particular rate path.

The decisions taken today are set out in a press release available on our website.

I will now outline in more detail how we see the economy and inflation developing and will then explain our assessment of financial and monetary conditions.

## Economic activity

The economy stagnated in the fourth quarter, according to Eurostat's preliminary flash estimate. It is set to remain weak in the near term. Surveys indicate that manufacturing

continues to contract while services activity is expanding. Consumer confidence is fragile, and households have not yet drawn sufficient encouragement from rising real incomes to significantly increase their spending.

Nevertheless, the conditions for a recovery remain in place. While the labour market has softened over recent months it continues to be robust, with the unemployment rate staying low, at 6.3 per cent in December. A solid job market and higher incomes should strengthen consumer confidence and allow spending to rise. More affordable credit should also boost consumption and investment over time. Provided trade tensions do not escalate, exports should support the recovery as global demand rises.

Fiscal and structural policies should make the economy more productive, competitive and resilient. We welcome the European Commission's Competitiveness Compass, which provides a concrete roadmap for action. It is crucial to follow up, with further concrete and ambitious structural policies, on Mario Draghi's proposals for enhancing European competitiveness and on Enrico Letta's proposals for empowering the Single Market. Governments should implement their commitments under the EU's economic governance framework fully and without delay. This will help bring down budget deficits and debt ratios on a sustained basis, while prioritising growth-enhancing reforms and investment.

## Inflation

Annual inflation increased to 2.4 per cent in December, up from 2.2 per cent in November. As in the previous two months, the increase was expected and primarily reflected past sharp drops in energy prices falling out of the calculation. Along with a month-on-month increase in December, this led energy prices slightly higher on an annual basis, after four consecutive declines. Food price inflation edged down to 2.6 per cent and goods inflation to 0.5 per cent. Services inflation edged up to 4.0 per cent.

Most underlying inflation indicators have been developing in line with a sustained return of inflation to our medium-term target. Domestic inflation, which closely tracks services inflation, has remained high, as wages and some services prices are still adjusting to the past inflation surge with a substantial delay. At the same time, recent signals point to continued moderation in wage pressures and to the buffering role of profits.

We expect inflation to fluctuate around its current level in the near term. It should then settle sustainably at around the two per cent medium-term target. Easing labour cost pressures and the continuing impact of our past monetary policy tightening on consumer prices should help this process. While market-based indicators of inflation compensation have largely reversed the declines observed in the autumn, most measures of longer-term inflation expectations continue to stand at around 2 per cent.

## Risk assessment

The risks to economic growth remain tilted to the downside. Greater friction in global trade could weigh on euro area growth by dampening exports and weakening the global economy. Lower confidence could prevent consumption and investment from recovering as fast as expected. This could be amplified by geopolitical risks, such as Russia's unjustified war against Ukraine and the tragic conflict in the Middle East, which

could disrupt energy supplies and further weigh on global trade. Growth could also be lower if the lagged effects of monetary policy tightening last longer than expected. It could be higher if easier financing conditions and falling inflation allow domestic consumption and investment to rebound faster.

Inflation could turn out higher if wages or profits increase by more than expected. Upside risks to inflation also stem from the heightened geopolitical tensions, which could push energy prices and freight costs higher in the near term and disrupt global trade. Moreover, extreme weather events, and the unfolding climate crisis more broadly, could drive up food prices by more than expected. By contrast, inflation may surprise on the downside if low confidence and concerns about geopolitical events prevent consumption and investment from recovering as fast as expected, if monetary policy dampens demand by more than expected, or if the economic environment in the rest of the world worsens unexpectedly. Greater friction in global trade would make the euro area inflation outlook more uncertain.

## Financial and monetary conditions

Market interest rates in the euro area have risen since our December meeting, partly mirroring higher rates in global financial markets. While financing conditions remain tight, our interest rate cuts are gradually making it less expensive for firms and households to borrow.

The average interest rate on new loans to firms declined to 4.5 per cent in November, while the cost of issuing market-based debt remained at 3.6 per cent. The average rate on new mortgages edged down to 3.5 per cent.

Growth in bank lending to firms rose to 1.5 per cent in December, up from 1.0 per cent in November, amid a strong monthly flow. Growth in debt securities issued by firms moderated to 3.2 per cent in annual terms. Mortgage lending continued to rise gradually but remained muted overall, with an annual growth rate of 1.1 per cent.

Credit standards for business loans tightened again in the fourth quarter of 2024, having broadly stabilised over the previous four quarters, as reported in our latest bank lending survey. The renewed tightening mainly reflected banks becoming more concerned about the risks faced by their customers and less willing to take on risks themselves. Demand for loans by firms increased slightly in the fourth quarter but remained weak overall. Credit standards for mortgages were broadly unchanged, after three quarters of easing, while the demand for mortgages again increased strongly, mainly because of more attractive interest rates.

## Conclusion

The Governing Council today decided to lower the three key ECB interest rates by 25 basis points. In particular, the decision to lower the deposit facility rate - the rate through which we steer the monetary policy stance - is based on our updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission. We are determined to ensure that inflation stabilises sustainably at our two per cent medium-term target. We will follow a datadependent and meeting-by-meeting approach to determining the appropriate monetary

policy stance. In particular, our interest rate decisions will be based on our assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission. We are not pre-committing to a particular rate path.

In any case, we stand ready to adjust all of our instruments within our mandate to ensure that inflation stabilises sustainably at our medium-term target and to preserve the smooth functioning of monetary policy transmission.

We are now ready to take your questions.",Christine Lagarde
https://www.bis.org/review/r250203b.htm,Klaas Knot: From Frankfurt with love - 14 years on the European Central Bank's Governing Council,"Text of the first Klaas Knot Lecture, by Mr Klaas Knot, President of De Nederlandsche Bank, initiated by the University of Groningen, Groningen, 31 January 2025.",2025-01-31 00:00:00,"## SPEECH

## From Frankfurt with love: 14 years on the ECB's Governing Council

## Read aloud

In the first Klaas Knot Lecture on international economic policy, initiated by the University of Groningen, Klaas Knot said 'we should aim to design our policy choices in such a way that they are robust across different outcomes, rather than focusing on only one scenario'. He spoke about his experiences during his 14 years as member of the ECB's Governing Council, and about monetary policy under fundamental uncertainty.

DNB



Qe



Bw







Thank you Harry, for your kind introduction. | feel both honoured and humbled to give the inaugural lecture in this series that bears my name. To be frank, it also feels a bit awkward. Usually, you have to be retired or dead, or both, for such an honour. But | can assure you that neither option appeals to me at present. | rather see this as an excellent opportunity to share with you some reflections on almost 14 years of monetary policy making as a member of the ECB's Governing Council.

What is the job of a central banker? In essence, the job of a central banker is to maintain price stability by responding to different kinds of shocks. And looking back on 14 years as a member of the Governing Council, we have experienced quite a few shocks. Over time, these have affected both the demand side and the supply side of the euro area economy. Some shocks were abrupt and transitory, while others were almost permanent.

Of course, when making policy decisions, we do not have the benefit of hindsight. Like so many policy makers, central banks need to act in real-time, often with imperfect information. One of the challenges facing central banks is therefore: how should we deal with uncertainty? By assigning probabilities to certain economic outcomes, our models can -to some extent -deal with risk. But sometimes the probability that a certain event will occur is simply unknown. And some events are even completely unforeseen. In these situations we speak of fundamental — or Knightian — uncertainty (see Knight, F.H. (1921) ""Risk, Uncertainty, and Profit""). When | took office, | could not imagine that we would be confronted with a major pandemic and war on the European continent. Nor do we know whether we'll face another pandemic, and what it might look like. It is fundamentally uncertain, and impossible to model.

Over the years, I've learned that, for a central banker, this implies at least two things. First of all, we should aim to design our policy choices in such a way that they are robust across different outcomes, rather than focusing on only one scenario. This means we need to consider various possible scenarios, and also think about what the outcome would be in the worst case scenario. Secondly, when our economic environment changes in a direction that was not foreseen, we need to be ready to change course swiftly. Like many professions, being a central banker requires one to ""learn on the job"".

When | look back on the past 14 years, the importance of these lessons is best illustrated by two different cases, both of which required the ECB to navigate uncharted and often choppy waters. The first is the flaws in the initial design of the Economic and Monetary Union, and the challenges this meant for our common currency. The second is the fight against inflation away from target. We have witnessed both ends of the spectrum: inflation persistently below target, followed by a sudden spike to record levels. | will share my experiences in a more or less chronological fashion.

## Institutional design of the EMU

Let me start with the design of our monetary union, the euro area. When the euro was introduced in 1999, the idea was relatively simple. We first froze exchange rates among euro area countries, then made this irrevocable by introducing a single currency. There would bea single central bank, the ECB, to safeguard its value. For maximum credibility, the ECB was modelled on the tradition of the Bundesbank, with a strong and independent mandate focusing solely on price stability. The existence of convergence criteria, which countries needed to meet in order to join, would ensure that differences in terms of for example inflation and fiscal positions were not too large.

Member states would maintain autonomy over fiscal policy, limited only by the 3% and 60% thresholds for deficit and debt levels, as laid down in the Stability and Growth Pact. These thresholds would ensure fiscal sustainability and prevent undue inflation pressures stemming from expansionary fiscal policy. Further coordination of fiscal policies was deemed unnecessary.

An independent central bank, together with a limit on debt and deficit levels, were thought to be enough to maintain both price stability and financial stability. If somehow a country would run into fiscal trouble, the no bail-out clause and the prohibition of monetary financing would ensure that the problem would remain a local one. Certainly, providing mutual support was not the intended solution.

In its first decade, the EMU appeared to perform well. Growth was solid, with poorer member states growing even faster than the rich ones. This contributed to a seeming convergence among member states. Interest rates also rapidly converged. All euro area countries were considered safe borrowers, and sovereign spreads virtually disappeared. And everybody lived happily ever after, or so it seemed.

But things changed drastically with the outbreak of the global financial crisis. It soon became clear that Greek public finances had become unsustainable. But the problem was not a local one. While public finances in other euro area countries had looked more or less fine before the crisis, private debts had increased rapidly, and there was an unhealthy embrace between the financial sector and governments. As the crisis progressed, private debts often turned into public ones. And yields started spiking in many countries simultaneously, with contagion across members states starting to play a role too.

In this situation, the EMU's original architecture did not prove to be of much help. It soon turned out that maintaining financial stability during a severe crisis was not possible without some degree of mutual support. This ultimately resulted in the establishment of the European Stability Mechanism. On my first day in office, three euro area countries were in a financial support programme with two more to follow. These programmes kept the euro area running. But they could not turn the tide, given that their size was inherently limited. In fact, the future of the euro itself was put up for discussion by some. When all member states are financially constrained, financial solidarity between member states was not enough.

Sovereign bond yields

10 year, percent



A pivotal moment was the declaration by Mario Draghi that the ECB ""is ready to do whatever it takes to preserve the euro"". This was followed by the announcement of the Outright Monetary Transactions, or OMT, program. OMT allows the ECB to directly intervene in sovereign bond markets, subject to strict conditions. As you can see in the chart, Draghi's words and the OMT announcement had an immediate calming effect on markets.

John Maynard Keynes already recognised in his General Theory — and | paraphrase — that ""most of our decisions are taken as a result of animal spirits, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities"". This is especially true for financial markets, where these ""animal spirits"" can lay low for a long time, before suddenly erupting. Another case of Knightian uncertainty. The experience with OMT underlines the importance of instilling confidence, ""taming the beast"", which the ECB can do by acting asa 'buyer of last resort'.

When the Governing Council decided on OMT, | was fully in favour of this measure. It was a quantum leap, as the ECB promised to — if needed -engage in potentially unlimited asset purchases. In a different situation, that would not have been the policy of my preference. But it was clear that a gamechanger was needed, and Mario Draghi offered it. | must admit that also | did not expect that Draghi's words would be so powerful. The confidence effect of OMT was in fact so strong that the instrument itself has never been put to use. The fact that it became part of our toolbox was enough to avoid a self-fulfilling prophecy. In hindsight, you can say that the OMT proved a turning point. After that, the sovereign debt crisis was not yet over, but the survival of the euro itself was no longer in question.

Clearly, post-OMT, we didn't suddenly fix all of the EMU's flaws. We've learned that a monetary union of heterogeneous member states is a complex undertaking. Crafting a flawless blueprint, robust to all possible shocks, is highly unlikely, especially taking into account the complex political realities of European integration.

But more importantly: as the crisis unfolded, policy makers showed a willingness to act. The ESM and the OMT, together with the banking union, have become important building blocks of a more financially robust monetary union.

## The fight against inflation away from target

Let me now turn to the second reality that has characterised my past 14 years as a member of the Governing Council, which is the fight against inflation away from target, both above and below. As you know, inflation remained persistently below target for much of the past 14 years, before more recently surging to high levels. I'll share some of the lessons | take from these periods, starting with the low inflation environment.

Perhaps counterintuitively, overly low inflation hurts households, businesses and governments in the euro area, just as too high inflation can be dangerous. It makes debt harder to manage, complicates price and wage changes, and reduces chances for new businesses to grow. Moreover, a persistent undershooting of the inflation target poses a risk for central bank credibility if it results in a de-anchoring of inflation expectations. If people do not believe the central bank can achieve its target, this may actually undermine the central bank's ability to do So.

As the sovereign debt crisis gradually subsided, but the economy remained weak and inflation continued to fall, the ECB was confronted with the so-called effective lower bound. This is the inconvenient reality that policy interest rates cannot be lowered much below zero. Therefore, the ECB needed other, unconventional tools to reach its target. These included forward guidance, negative interest rates, longer-term lending operations to banks, and of course most notably, asset purchases, or quantitative easing.

In 2015 the Governing Council launched its asset purchase programme, or APP. The aim was to make our monetary policy more accommodative, beyond what could be achieved by the conventional response of lowering short-term policy interest rates. The idea is that asset purchases suppress term premia and, hence, longer-term interest rates, thereby reducing financing costs for households and firms and boosting economic activity.

## ECB asset purchases and HICP inflation

## Net monthly purchases (billions of Euro, Ihs) and inflation rate (%, rhs)



However, in the subsequent years, after an initial pick-up, we saw that inflation stubbornly remained below target, despite prolonged asset purchases and an economy that was recovering slowly but steadily. This becomes especially clear when you look at core inflation, which excludes volatile components like food and energy prices. | believe that Quantitative Easing, or QE, can play an important role in staving off deflation risk when the anchoring of inflation expectations can no longer be taken for granted (for an evaluation of the effectiveness of unconventional monetary policy instruments, including QE, see Altavilla et al. (2021) (4). In an environment with very low inflation, it can help push down long-term rates, when the policy rate cannot be lowered further. The use case for QE however fades when inflation gets closer to target. QE has not been very effective in fine-tuning inflation. At the same time, asset purchases come with potential side effects, such as inflated asset prices, misallocation of resources, and risks to the central bank balance sheet.

The fact that we cannot fully get around the effective lower bound implies that central banks are better equipped to fight high inflation than to push up inflation when it is too low. Once borrowing costs no longer form an impediment to spending decisions, further reductions in borrowing costs will not have much of an additional impact.

The question then is: what can we do to better deal with low inflation? To be honest, | don't have a fully satisfactory answer, but one possible direction is the role of fiscal policy. A large strand of research shows that when monetary policy cannot be eased any further, fiscal policy can be especially effective at boosting growth and inflation.

Why is this? In normal times, fiscal stimulus leads to higher inflation, and in turn, higher interest rates. As a result, private spending is crowded out. But at the effective lower bound, this mechanism does not apply, at least not until inflation increases sufficiently for the central bank to raise its policy rate again. In fact, stimulus may lead to ""crowding in"" if expectations of moderately higher inflation lead to lower real interest rates (also see Knot, K.H.W. (2021)).

And when we talk about the interaction of monetary and fiscal policy, the institutional design of EMU again comes into play. Fiscal stimulus at the euro area level would require coordination between these 20 member states. But our monetary union was not designed for this.

During and after the euro crisis, member states mostly pursued fiscal consolidation, also to comply with the requirements of the EU fiscal rules. In fact, these rules had just been made more stringent. This was part of the ""package deal"" that enabled agreement on financial solidarity. Financial solidarity comes with the risk of moral hazard attached, and stricter rules help alleviate this risk.

As a result, the focus of individual member states was to get their Own House In Order, conveniently abbreviated as OHIO. And at the level of the individual member state this is understandable, in some situations even necessary. However, the result of these individual fiscal policy choices was a substantial fiscal tightening at the aggregated euro area level, during a time when monetary policy was trying to provide a boost to our feeble economies. This was not an ideal policy mix. So, as important as OHIO is, we should have paid a little bit more attention to UTAH, which is to say that Underspending Together Always Hurts.

OK, so let's pause here for a moment. So far, we have seen that instilling confidence in times of crisis can be really powerful, if backed up by a credible policy commitment. A big bazooka if you will. The EMU did not have a big bazooka initially, but that was fixed during the euro debt crisis. We have also seen that in times of very low inflation, fiscal policy can be a more effective instrument than monetary policy to push inflation up. However, for that to work we need to make sure that countries have enough fiscal space to be able to stabilise the economy, without raising concerns about debt sustainability. Moreover, we need some degree of coordination between monetary and fiscal policy. That is always difficult, but in the EMU, with 20 sovereign governments, it is nearly impossible.

Let's pick up the story-line. In the later post-crisis years, the euro area economy gradually picked-up steam, and while inflation remained below target, we were in a relatively good place.

This of course all changed when the COVID pandemic hit. We were faced with an unprecedented crisis. Not only in terms of economic impact, but also in terms of uncertainty. The virus was spreading rapidly, and economies shut down due to strict containment measures. Financial markets were stressed, and increases in sovereign spreads made it difficult for governments to provide support measures. Decisive action from governments and central banks was needed within weeks, if not days. At the time, there was no telling how long the pandemic would last and how deep it would hit our economies. In other words: fundamental, or Knightian, uncertainty. One of those moments where our models and forecasts were not very useful, at least initially.

From the ECB's side, the three main tasks were to stabilise financial markets, protect the supply of credit to the real economy, and counter the negative impact on inflation (also see Lane, P.R. (2020) (4). We, as the Governing Council, very quickly announced what we thought was a comprehensive policy package, including an expansion of our asset purchases by 120 billion. In the world of our models, our reaction was quick and quite substantial. However, amid an emerging pandemic, it was not received as such, and doubts whether it would be enough quickly appeared.

We therefore decided to reconvene, online, within a week. Doing more would require us to let go of certain safeguards in our purchase programme that were dear to me. | went back and forth, discussing with my staff and discussing with my colleagues in Frankfurt. Could, and should, we go even further? In that virtual meeting, we decided that, given the circumstances, indeed we should go in big, and we announced a steep increase in asset purchases with our Pandemic Emergency Purchase Programme, or PEPP.

As you can see, over the years we have enriched the English language with a lot of new acronyms. The programme managed to address the risks to the transmission of monetary policy. For example, the PEPP countered a rise in sovereign bond yields and thereby averted a tightening of financing conditions for households, corporates and banks during the pandemic. Just like Draghi's words in 2012, it had an immediate calming effect on markets. But it also, and this was its second purpose, eased our monetary policy stance during a phase when inflation risks were tilted to the downside.

And where fiscal and monetary policy were not aligned in the years prior, at the start of the pandemic they were pulling in the same direction. First of all, the general escape clause of the Stability and Growth Pact was activated. This enabled governments to take the necessary support measures at the national level. Second, governments decided on the NextGenerationEU programme at the European level. NextGenerationEU provided a much needed confidence booster, as well as an incentive for investments and structural reforms.

The European policy response during the initial phase of the pandemic highlights the importance of building sufficient fiscal space — achieved through consolidation during economic good times — to ensure the economy can be stabilised in times of crisis. The good news is that the new European fiscal framework provides more room for automatic stabilisation. Its success will depend on the actual compliance with and enforcement of the rules: will governments really reduce their debt during upturns? In this regard, the new EU fiscal framework will immediately be tested.

Moreover, the European policy mix during the first phase of the pandemic shows that when different authorities work together, the EMU can successfully absorb a large and uneven downward shock. The ECB continued its asset purchases until March of 2022. As you can see in the chart, purchases still continued when inflation had already started to climb.

## ECB asset purchases and HICP inflation Net monthly purchases (billions of Euro, Ihs) and inflation rate (%, rhs)



In retrospect, it's fair to say that the end of net purchases came quite late. While we observed inflation increasing to above target in the course of 2021, at the time we underestimated the strength of the recovery. Perhaps we, as well as governments, remained in ""crisis mode"" for a bit too long. But it should also be acknowledged that in this phase, many countries still had lockdown-type measures in place. Although the roll-out of vaccinations provided light at the end of the tunnel, we were not sure how soon we would definitively be leaving the pandemic behind us. This is another good example of decision-making under Knightian uncertainty.

Things clearly don't always go as planned, and with the benefit of hindsight we should've put more weight on inflationary scenarios.

This brings me to the final episode, of inflation running above target. Well, in fact it did more than just run above target, it hit record high levels. Inflation initially increased as a result of strong demand in combination with supply chain constraints. But subsequently, Russia's barbaric war on Ukraine, which caused an energy price shock, added fuel to the fire. Inflation ran far too high, in the double digits. Central banks had to step firmly on the brakes (for an overview of the causes of the inflation surge and the role of monetary policy, see DNB analysis (2024) \).

While markets understood that we had to be firm to fight inflation, the prospect of substantial interest rate hikes also led to concerns about the sustainability of high-debt countries.

You can see this in the chart. The two-year overnight indexed swap rate or OIS, which is a risk-free rate, is a reflection of market expectations of our policy rate in the short to medium term. Once these rate expectations started to climb in the beginning of 2022, spreads went up in tandem. This accelerated in June after the Governing Council signalled that the first rate hike would come at the next meeting. While it is natural for spreads of more risky assets to increase when interest rates go up, this response can also be stronger than warranted by underlying fundamentals. And in a monetary union without a single safe asset, this can pose a risk to an even transmission of monetary policy.

Two-year OIS rate and spreads on 10-year government bonds



In response, we could have done two things. Take the reaction of spreads into account and slow our rate hikes, which would have resulted in inflation staying above target for even longer, or address the transmission risks to allow for the required tightening response to inflation. We obviously decided for the latter, and announced yet another instrument, the Transmission Protection Instrument, or TPI, in July 2022. The TPI allows the Eurosystem to purchase sovereign bonds of countries that experience disorderly market dynamics not warranted by fundamentals. The ability to intervene was aimed at ensuring a smooth transmission of the monetary policy tightening cycle, consisting of both interest rate hikes and the reduction of our QE portfolio.

Two-year OIS rate and spreads on 10-year government bonds



This approach was successful. When we hiked rates at a historic pace during the Autumn of 2022, these were transmitted to member states evenly, without any further turbulence. As you can see in the chart, even when expectations of rate hikes continued to rise, spreads no longer increased.

This was another way the ECB showed strong commitment to pursuing its mandate by delivering tailored actions. In fact, the commitment to act was so clear that TPI, just like OMT, has never been used. The simple fact that it's there is enough to prevent these disorderly market dynamics, allowing us to focus on fighting inflation. At the same time, financial market responses to political events in several individual member states since then have shown that market discipline and incentives for sound fiscal policies have been preserved.

But TPI is also an example of learning as you go. While the OMT allowed us to intervene in cases where a member state was in an adjustment programme with the ESM, reflecting serious fiscal and structural challenges, we did not have a tool to act in cases where market dynamics were not warranted by fundamentals. With TPI, we filled this gap.

If | were to zoom out, this point about the importance of commitment and credibility in achieving the inflation target is also illustrated by the fact that the current disinflation process is proceeding relatively painlessly— without a major economic downturn or any meaningful rise in unemployment. This is in stark contrast to the Great Inflation of the 1970s, when price rises reached similarly high levels. Back then, central banks needed to take a much more forceful approach to ultimately bring inflation back down, forcing a hard landing for the economy. | think the difference here is the result of decades of building central bank credibility and anchoring expectations. An accomplishment that should not be underestimated.

The credibility that has been built up and the anchoring of inflation expectations have also allowed the Governing Council to take a more gradual approach to bringing inflation down. In a sense, it allowed to postpone reaching the target from the often prescribed medium-term of around two years to around four years now. This flexibility allowed for a 'soft landing', or a return to target without completely choking the euro area economy.

Now, what do these important episodes tell us about the appropriate monetary policy strategy for the ECB in the future? What does this mean for the application of unconventional monetary policy tools, for instance?

First of all, | don't think we can afford to do away with any of our tools, even if all of them have their own drawbacks. This is simply because we cannot exclude the possibility of circumstances in which we may need to employ them again. But when we do employ them, we should learn from previous experiences.

Let me give you an example. Regarding forward guidance, we saw that the commitment to maintain low interest rates for an extended period of time was initially very effective in suppressing mediumto longer-term interest rates, with limited costs. However, such commitments about future policy do come with risks if they are formulated too specifically and unconditionally. The more recent surge in inflation has taught us that when monetary policy needs to turn the ship quickly, such commitments about future policy can work against you. Does this mean that we should never employ forward guidance again? In my view it does not. There can still be many circumstances in which there is added value in clarifying the intentions of the central bank based on current information. However, going forward, in explaining our reaction function, we should emphasize that a changing environment can lead to a change in policy response.

And what about asset purchases? Again, asset purchases should also remain in the toolkit. They can play a key role in safeguarding monetary policy transmission by countering market instability and in reducing the risk of de-anchoring inflation expectations (see Knot (2024) for a discussion on the separation of tools for stance and transmission purposes). However, as with all our policies, we need to continue to weigh the balance of costs and benefits carefully and assess its proportionality. Especially when asset purchases are implemented on a large scale and for a prolonged period of time. My personal preference in such cases would be to employ QE forcefully when needed to avoid deflationary risks, but to avoid using it overly persistently, as | believe the balance of benefits and costs to shift over time.

## Conclusion

And what has all this taught me about the job of a central banker? As | said, the last fourteen years have involved a lot of “learning on the job” for me. | have learned that dealing with uncertainty, and with an environment that can suddenly shift requires flexibility and humility, but above all perseverance and a transparent commitment to the goal. And | have learned that economic models have their limits. The economists among you have no doubt all been schooled in the New-Keynesian DSGE-models that have been in fashion for some time now. And that is a good thing, because models bring structure and discipline to your economic thinking. But you should never take their outcomes literally, especially in times of large unprecedented shocks. This not only applies to monetary policy, but also to other economic models. And it is also true beyond economics — take climate models, for example. That is why we need robust policies, policies that are robust to different outcomes, rather than optimal policies that only work in one specific scenario.

And on that note, | would like to stop here and give the floor to Sandra. And after that, | will be happy to answer your questions.

## Discover related articles",Klaas Knot
https://www.bis.org/review/r250203d.htm,"Fritzi Köhler-Geib: Efficiency, resilience and digital horizons - perspectives and challenges for the public sector","Keynote statement by Dr Fritzi Köhler-Geib, Member of the Executive Board of the Deutsche Bundesbank, at the Digital Excellence Forum, Berchtesgaden, 31 January 2025.",2025-01-31 00:00:00,"## Fritzi Köhler-Geib: Efficiency, resilience and digital horizons perspectives and challenges for the public sector

Keynote statement by Dr Fritzi Köhler-Geib, Member of the Executive Board of the Deutsche Bundesbank, at  the Digital Excellence Forum,  Berchtesgaden, 31 January 2025.

* * *

Check against delivery

## 1 Introduction

Against the backdrop of a changing geopolitical environment, the relevance of digital advances and innovations has further increased.

I have just returned from a discussion among policy makers and researchers in Washington D.C., and many of the exchanges touched on the economic outlook in a potentially more fragmented world economy.

For both reasons, I am delighted to be part of this conference about digital excellence here in Berchtesgaden.

Representing the Bundesbank on this panel, I would like to contribute three considerations from a public sector perspective.

While there is a lot of discussion about digitalisation in Germany and the need to catch up in particular in the public sector, there are encouraging examples. The Bundesbank is at the forefront of public sector digitalisation: it is using artificial intelligence in multiple ways and is among the first public institutions to move seriously into the public cloud.

International financial architecture, markets and instruments are changing due to ongoing economic fragmentation and technological advances. Working on the digital euro is a way for the European Central Bank System to prepare for those changes and to take an active role.

Given the geopolitical environment and growing cyber risks, the Bundesbank is investing in its cyber resilience, including the setting up of a new governance model for IT security.

Allow me to expand on that.

## 2 Innovation

The Bundesbank is breaking new ground by proactively using the public cloud. This is a significant step forward for a public sector institution. As a first step, our innovative, highperformance and secure eBusiness portal for our currently over 180,000 customers-NExt-went ""live"" in the cloud. Customers are banks, insurances, corporates or other public sector institutions.

At the same time, we built up a Bundesbank-owned private cloud in our computer centres for particularly sensitive data. Through our hybrid cloud strategy and investments in technological trends like artificial intelligence, we are ensuring our readiness for the challenges of today and tomorrow.

Artificial intelligence will help us to expand our economic analyses and improve our understanding of the effects of various policy measures on inflation, employment and economic growth.

It also plays a pivotal role in our risk analysis efforts.

Take, for example, the risk controlling function and its analysis related to the many counterparties with whom the Bundesbank conducts financial transactions or purchases securities. By combining diverse sets of data and information, artificial intelligence helps us identify potential financial difficulties of a counterparty at an early stage. Given the sheer volume and complexity of the data involved, collecting and evaluating this information manually would be nearly impossible.

Through the strategic application of artificial intelligence, we can detect risks more quickly and with greater precision, allowing us to take timely and informed action.

We are also using an artificial intelligence platform that allows access to the latest language models in a secure environment. It is a chatbot that works in a very similar way to ChatGPT-only ours has different requirements, for example in terms of data governance. The requests are neither stored in the cloud nor used for training purposes.

## 3 Future of Finance

The international financial architecture, markets and instruments are currently changing due to ongoing economic fragmentation and technological advances.

Against this backdrop, there are several reasons in favour of the digital euro.

The first reason is related to autonomy and sovereignty. So far, there is no sovereign pan-European solution for payment in the digital space. As a result, there is a risk that Europe will become overly dependent on US providers for critical infrastructure. A digital version of the euro will facilitate a European-based ecosystem around payments.

Another reason is related to efficiency. We are seeing very strong fragmentation in the European payment market and increasing concentration through international card systems that are all US-based. The digital euro establishes standards that simplify competition.

Lastly, we also have to consider resilience. With the digital euro, we are safeguarding ourselves against competing currencies and stablecoins. The digital euro would be the next step in the development of the euro and would bring central bank money into the digital age.

The Bundesbank is a key player in the development of a digital euro thanks, amongst other things, to its IT expertise in payment systems and in the area of tech trends.

## 4 Cybersecurity

Cybersecurity is a decisive factor for the stability of the global economy and the functioning of our modern society. Operators of critical infrastructure, such as the Bundesbank, are under growing pressure from targeted cyber attacks.

Of course, the Bundesbank, too, is subject to the most common types of attacks like phishing or denial of service attacks. To give you an example: on average, we receive a phishing attack every 5 minutes.

That's why the principle ""Secure by Design"" is of crucial importance from the very beginning when developing and operating IT solutions and services.

The Bundesbank has just rolled out a new governance model for IT security in order to create the basis for effectively counteracting growing threats.

Concretely, we are appointing a designated ""security architect"" in each Bundesbank department who serves as the go-to person for all architecture-related security concerns. The security architect will support product owners and agile teams in implementing security processes and regularly evaluating the impact of securityrelevant information.

This role is complemented by ""security champions"" within each product team. These champions will help maintain the required level of information security throughout the entire product lifecycle, including regular checks for new vulnerabilities.

The governance model includes not only dedicated roles and responsibilities but also professional development and training measures for all staff in order to sensitise them to the fact that IT security is a critical discipline for everyone.

## 5 Conclusion

To conclude: By keeping up with technological developments, playing an active role in providing future forms of payment and of course safeguarding our security, the Bundesbank contributes to the competiveness of the German and European economy.

This is more relevant than ever in the current geopolitical context.

That's why I'm thrilled to participate in this excellent conference and exchange.",Dr Fritzi Köhler-Geib
https://www.bis.org/review/r250203c.htm,"Michelle W Bowman: Brief remarks on the economy, and perspective on mutual and community banks","Speech by Ms Michelle W Bowman, Member of the Board of Governors of the Federal Reserve System, at the New England CEO Summit, Portsmouth, New Hampshire, 31 January 2025.",2025-01-31 00:00:00,"## Michelle W Bowman: Brief remarks on the economy, and perspective on mutual and community banks

Speech by Ms Michelle W Bowman, Member of the Board of Governors of the Federal Reserve System, at the New England CEO Summit, Portsmouth, New Hampshire, 31 January 2025.

* * *

Let me begin by saying my thoughts and prayers are with the families of the passengers and crew who perished in the tragic flight accident in Washington, D.C. Wednesday evening.

Thank you for the invitation to speak to you today. 1   It is a pleasure to be with you virtually for your CEO Summit. I always enjoy the opportunity to meet bankers from across the country, especially New England, to learn about the issues that are important to you. The Federal Open Market Committee (FOMC) concluded its January meeting earlier this week, so I will begin by offering some brief remarks on the economy, and then share my views on a number of mutual and community bank issues, before addressing some questions that were submitted by your members in advance of today's meeting.

## Update on the Most Recent FOMC Meeting

At our FOMC meeting this week, my colleagues and I voted to hold the federal funds rate target range at 4-1/4 to 4-1/2 percent and to continue to reduce the Federal Reserve's securities holdings. I supported this action because, after recalibrating the level of the policy rate towards the end of last year to reflect the progress made since 2023 on lowering inflation and cooling the labor market, I think that policy is now in a good place to position the Committee to pay closer attention to the inflation data as it evolves.

Looking ahead to 2025, in my view, the current policy stance also provides the opportunity to review further indicators of economic activity and get clarity on the administration's policies and their effects on the economy. It will be very important to have a better sense of the actual policies and how they will be implemented, in addition to greater confidence about how the economy will respond.

## Brief Remarks on the Economy

The U.S. economy remained strong through the end of last year, with solid growth in economic activity and a labor market near full employment. Core inflation remains elevated, but my expectation is that it will moderate further this year. Even with this outlook, I continue to see upside risks to inflation.

The rate of inflation declined significantly in 2023, but it slowed by noticeably less last year. Without having seen the December data released this morning, I estimate that the 12-month measure of core personal consumption expenditures inflation-which excludes food and energy prices-likely remained unchanged at 2.8 percent in December, only

slightly below its 3.0 percent reading at the end of 2023. Progress has been slow and uneven since the spring of last year mostly due to a slowing in core goods price declines.

After increasing at a solid pace, on average, over the initial three quarters of last year, gross domestic product appears to have risen a bit more slowly in the fourth quarter, reflecting a large drop in inventory investment, which is a volatile category. In contrast, private domestic final purchases, which provide a better signal about underlying growth in economic activity, maintained its strong momentum from earlier in the year, as personal consumption rose robustly again in the fourth quarter.

Some measures of consumer sentiment appear to have improved recently but are still well below pre-pandemic levels, likely because of higher prices. And since housing, food, and energy price increases have far outpaced overall inflation since the pandemic, lower-income households have experienced the negative impacts of inflation hardest, especially as these households have limited options to trade down for lowercost goods and services.

Payroll employment gains rebounded strongly in December and averaged about 170,000 per month in the fourth quarter, a pace that is somewhat above average gains in the prior two quarters. The unemployment rate edged back down to 4.1 percent in December and has moved sideways since last June, remaining slightly below my estimate of full employment.

The labor market appears to have stabilized in the second half of last year, after having loosened from extremely tight conditions. The rise in the unemployment rate since mid2023 largely reflected weaker hiring, as job seekers entering or re-entering the labor force are taking longer to find work, while layoffs have remained low. The ratio of job vacancies to unemployed workers has remained close to the pre-pandemic level in recent months, and there are still more available jobs than available workers. The labor market no longer appears to be especially tight, but wage growth remains somewhat above the pace consistent with our inflation goal.

I hope the revision of the Bureau of Labor Statistics labor data, which will be released next week, will more accurately capture the changing dynamics of immigration and net business creation and bring more clarity on the underlying pace of job growth. It is crucial that U.S. official data accurately capture structural changes in labor markets in real time, such as those in recent years, so we can more confidently rely on these data for monetary and economic policymaking. In the meantime, given conflicting economic signals, measurement challenges, and significant data revisions, I remain cautious about taking signal from only a limited set of real-time data releases.

Assuming the economy evolves as I expect, I think that inflation will slow further this year. Its progress may be bumpy and uneven, and the upcoming inflation data for the first quarter will be an important indication of how quickly this will happen. That said, I continue to see greater risks to price stability, especially while the labor market remains near full employment.

Despite the prospect for some reduction in geopolitical tensions in the Middle East, Eastern Europe, and Asia, global supply chains continue to be susceptible to

disruptions, which could result in inflationary effects on food, energy, and other commodity markets. In addition, the release of pent-up demand following the election, especially with improving consumer and business sentiment, could lead to stronger economic activity, which could increase inflationary pressures.

## The Path Forward

As we enter a new phase in the process of moving the federal funds rate toward a more neutral policy stance, I would prefer that future adjustments to the policy rate be gradual. We should take time to carefully assess the progress in achieving our inflation and employment goals and consider changes to the policy rate based on how the data evolves.

Given the current stance of policy, I continue to be concerned that easier financial conditions over the past year may have contributed to the lack of further progress on slowing inflation. In light of the ongoing strength in the economy and with equity prices substantially higher than a year ago, it seems unlikely that the overall level of interest rates and borrowing costs are exerting meaningful restraint.

I am also closely watching the increase in longer-term Treasury yields since we started the recalibration of our policy stance at the September meeting. Some have interpreted it as a reflection of investors' concerns about the possibility of tighter-than-expected policy that may be required to address inflationary pressures. In light of these considerations, I continue to prefer a cautious and gradual approach to adjusting policy.

There is still more work to be done to bring inflation closer to our 2 percent goal. I would like to see progress in lowering inflation resume before we make further adjustments to the target range. We need to keep inflation in focus while the labor market appears to be in balance and the unemployment rate continues to be at historically low levels. By the time of our March meeting, we will have received two inflation and two employment reports. I look forward to reviewing the first quarter inflation data, which, as I noted earlier, will be key to understanding the path of inflation going forward. I do expect that inflation will begin to decline again and that by year-end it will be lower than where it now stands.

Looking forward, it is important to note that monetary policy is not on a preset course. At each FOMC meeting, my colleagues and I will make our decisions based on the incoming data and the implications for and risks to the outlook and guided by the Fed's dual-mandate goals of maximum employment and stable prices. I will also continue to meet with a broad range of contacts as I assess the appropriateness of our monetary policy stance.

Bringing inflation in line with our price stability goal is essential for sustaining a healthy labor market and fostering an economy that works for everyone in the longer run.

## Perspective on Mutual and Community Banks

Turning to banking, I will start with a brief discussion of the important role of mutual banks in the banking system before addressing other bank regulatory issues. One of the unique characteristics of the U.S. banking system is the broad scope of institutions

it includes and the wide range of customers and communities it serves. Given this institutional diversity, regulators must strive to foster a financial system that enables each and every bank, no matter its size, to thrive, supporting a vibrant economy and financial system.

## Mutual Bank Issues

In the Northeast, everyone is familiar with mutual banks given their significant presence in this region. Since the early 1800s, these banks have been dedicated to serving their local communities. 2   Their ownership structure differs from traditional banks in that mutuals are owned by their depositors, rather than by shareholders. Like other community banks, they focus on local issues that are important to their communities and to their depositors.

Many of the challenges mutual banks face are similar to those faced by other financial institutions, including competition from other banks, credit unions, and non-banks. But mutual banks also face unique issues that can add cost and expense to their operations. Two issues I would like to discuss are the challenges mutual institutions face raising capital, and unique procedural hurdles mutuals face in managing the dividend process. While these issues are unique to mutuals, both highlight the challenges of a lack of transparency, and insufficient focus on efficiency. 3

Just as with other community banks, a challenge for many mutuals is the difficulty of raising additional capital. This difficulty is exacerbated by their ownership structure, which typically requires mutuals to rely heavily on retained earnings. Although mutual institutions have historically been more highly capitalized relative to their stock-owned peers, if a mutual capital raise is needed, it would be helpful to provide some regulatory flexibility in the process. Recently, some mutuals have issued subordinated debt as a form of capital, but another form of regulatory capital may be preferable: mutual capital certificates.

To date, it has been unclear whether mutual capital certificates qualify as regulatory capital. These instruments could provide mutual banks an additional way to raise capital without disrupting their mutual structure. In my view, the banking agencies should be receptive to these kinds of instruments to ensure that mutual banks can both raise capital and maintain their depositor-owned structure. Mutuals need clarity and transparency about the regulatory treatment of these instruments and whether they qualify as regulatory capital.

Another concern for mutuals is the annual requirement to receive regulatory approval for a mutual holding company's waiver of a dividend issued by its subsidiary bank.  The 4 Board practice is to require a mutual holding company to submit an application each year to implement a waiver. This prior approval requirement is complex and imposes significant costs on these small institutions, reducing the investment they can make in their communities. Because of the time and expense of these waiver requirements, it is possible that the inefficiencies of the required application process erode the value of a mutual holding company structure, which would further constrain a mutual bank's ability to raise capital.

Since the Board has nearly 20 years of experience considering these waiver requests, it seems appropriate to consider whether the applications process for these waivers is

efficient. What lessons have we learned? Is the prior approval requirement effective in its review of holding companies waiving receipt of their dividends, or can this be resolved in a more efficient and cost effective manner? In my view, the Board should consider whether this process is effective and efficient in addressing concerns related to dividend waivers.

Mutual banks, like all community banks, are vital to the economic success of their communities. It is critical that our applications process not act as a limit on a particular type of institution simply due to regulatory inaction or lack of clarity and transparency. Regulators must find efficient and effective ways to support a vibrant and diverse banking system that enables these and other small institutions to thrive while supporting and investing in their local economy.

## Tailoring

Transparency and efficiency are just two of the necessary components of a regulatory approach that promotes a healthy and vibrant banking system. Another component that I speak about frequently is the use of ""tailoring"" in the regulatory framework. For those familiar with my philosophy on bank regulation and supervision, my interest and focus on tailoring will come as no surprise. In its most basic form, it is difficult to disagree 5 with the virtue of regulatory and supervisory tailoring-calibrating the requirements and expectations imposed on a firm based on its size, business model, risk profile, and complexity-as a reasonable, appropriate and responsible approach for bank regulation and supervision. In fact, tailoring is embedded in the statutory fabric of the Federal Reserve's bank regulatory responsibilities. 6

The bank regulatory framework inherently includes significant costs-both the cost of operating the banking agencies, and the cost to the banking industry of complying with regulations, the examination process, and supplying information to regulators both through formal information collections and through one-off requests. In the aggregate, these costs can ultimately affect the price and availability of credit, geographic access to banking services, and the broader economy. The cost of this framework-both to regulators and to the industry-reflects layers of policy decisions over many years. But this framework could be more effective in balancing the mandate to promote safety and soundness with the need to have a banking system that promotes economic growth.

For example, let's consider costs. As regulatory and supervisory demands grow, there is often parallel growth in the staff and budgets of the banking agencies. We should not only be cognizant of these costs, but we should act in a way that requires efficiency while ensuring safety and soundness. Some degree of elasticity in regulator capacity is necessary to respond to evolving economic and banking conditions, as well as emerging risks, but there must be reasonable constraints on growth. Expansion of the regulatory framework is not a cost-free endeavor, and the costs are shouldered by taxpayers, banks, and, ultimately, bank customers.

The bank regulatory framework has great potential to provide significant benefits, including supporting an innovative banking system that enhances trust and confidence in our institutions, and promotes safety and soundness. When we consider the benefits and the costs, we can institute greater efficiencies in both banking regulation and in the banking industry itself. The bank regulatory framework is complex, and the various elements of this framework are intended to work in a complementary way. As banks

evolve-by growing larger, or by engaging in new activities-tailoring can help us to quickly recalibrate requirements in light of the new risks posed by the firm.

But the regulatory framework, especially how supervisors prioritize its application to the banking industry, can pose a serious threat to a bank's viability. For example, imposing the same regulatory requirements on banks with assets of $2 billion to $2 trillion under the new rules implementing the Community Reinvestment Act demonstrated a missed opportunity to promote greater effectiveness and efficiency. 7   I question the wisdom of applying the same evaluation standards to banks within such a broad range.

Likewise, supervisory guidance can provide fertile ground to differentiate supervisory expectations under a more tailored approach. While supervisory guidance is not binding on banks as a legal matter, it can signal how regulators think about particular risks and activities, and often drives community banks to reallocate resources in a way that may not be necessary or appropriate. The Fed's guidance on third-party risk management is an example of this. Originally, this guidance was published in a way that applied to all banks, including community banks. Yet, it was acknowledged even at the time of publication that it had known shortcomings, particularly in terms of its administration and lack of clarity for community banks. 8

Tailoring is important for all banks, but it is particularly important for community banks. There are real costs not only to banks, but to communities, when the framework is insufficiently tailored, as community banks faced with excessive regulatory burdens may be forced to raise prices or shut their doors completely. These banks often reach unbanked or underbanked corners of the U.S. economy, not only in terms of the customers they serve but also in terms of their geographic footprint. We are all familiar with banking deserts and the challenges many legitimate and law-abiding businesses and consumers have in accessing basic banking services and credit. It is difficult to imagine that a system with far fewer banks would as effectively serve U.S. banking and credit needs and sufficiently to support economic growth.

It is imperative that we keep the benefits of tailoring in focus as the bank regulatory framework evolves. A tailored regulatory and supervisory approach can help inform our policies on a wide range of industry issues that are likely to emerge in the coming years.

## Problem-Based Solutions

One of the most difficult challenges on the regulatory front is prioritization, both for banks managing their businesses and for regulators deciding how to fulfill their responsibilities. At a basic level, the role of regulators is dictated by statute. Congress granted the Federal Reserve and other banking agencies broad statutory powers but has constrained how those powers may be directed through the use of statutory mandates, including to promote a safe and sound banking system, and broader U.S. financial stability. In the execution of these responsibilities, the Federal Reserve must also balance the need to act in a way that enables the banking system to serve the U.S. economy and promote economic growth. While these objectives are not incompatible, they do require us to consider tradeoffs when establishing policy.

How can regulators best meet these responsibilities? As many of you may already know, I strongly believe in a pragmatic approach to policymaking. 9  This requires us to identify the problem we are trying to solve, determine whether we are the appropriate

regulator to address the problem based on our statutory mandates and authorities, and explore options for addressing the identified issue.

As a first step, we must be attuned to the banking system and how regulatory actions affect that system. We oversee a wide range of banks of varying sizes, activities, affiliates, and complexity. These banks interact with a range of service providers, financial market utilities, payments providers, and non-bank partners, regularly competing with non-bank financial intermediaries. The banking system can be a key driver of business formation, economic expansion, and opportunity.

As we look at the banking system, including the regulatory framework, we must focus on those issues that are most important to advancing statutory priorities. There is always the risk of misidentification and mis-prioritization, and that we fail to take appropriately robust action on key issues or focus on issues that are less material to a bank's safety and soundness. Our goal should be to develop a better filter to promote appropriate and effective prioritization.

## Fraud

We have seen several instances where this filter did not produce appropriate results, as we have recently seen with fraud. The incidence of fraud, particularly check fraud, has been rising substantially over the past few years, causing harm to banks, damaging the perceived safety of the banking system, and importantly hurting consumers who are the victims of fraudulent activity. Sometimes these efforts target vulnerable populations, like the elderly, who are particularly susceptible to certain forms of fraud.

Despite this known problem, efforts by regulators have been frustratingly slow to advance, and seem to have done little to address the underlying root causes of this increase in fraud. Why has this important issue failed to garner greater attention from all of the appropriate regulatory and law enforcement bodies? Different governmental agencies may share an important role in addressing this problem, but the need for a joint and coordinated solution does not excuse collective inaction.

## Climate-Related Financial Risk

Of course, not every issue falls within the scope of the Federal Reserve's responsibilities. Even when policymakers identify an issue or priority that they would like to pursue, it is imperative to ask whether that priority falls within the scope of our mandate and authorities. Statutes and regulations, paired with the ""soft"" power of examination, can be deployed in ways that may not be primarily directed towards the priorities mandated for banking regulators. I've noted previously that the banking agencies' climate-related financial risk guidance arguably pushes the boundaries of appropriate regulatory responsibilities. Banks have long been required to manage all material risks, including weather- and climate-related risks. And while this additional guidance seemed to do little to advance the goals of promoting the safe and sound operation of banks it, in effect, posed significant risks of influencing credit allocation decisions. Ultimately, banking regulators should not dictate credit allocation decisions, either by rule or through supervision. Bank regulatory policy should be used to address the needs of the unbanked and expand the availability of banking services. It should not be used to limit or exclude access to banking services for legitimate customers and businesses in a way that is meant to further unrelated policy goals, sometimes referred to as ""de-banking.""

Once we have identified problems and determined that they are within the Fed's responsibility, we must consider alternative approaches to address them, focusing on identifying efficient solutions. New technologies and services often require novel regulatory and supervisory approaches, and we recognize that past approaches may not be effective. Often regulators take a ""more is better"" approach to regulation and guidance. Over the past several years, the banking industry has faced an onslaught of proposed and final regulations and guidance, materials that require a significant time commitment to review, to comment on, and to implement. Many times, these require changes to policies and procedures or risk management practices.

It is critical that in our urgency to address issues in the banking system-particularly for community banks-that we consider not just the direct and indirect effects of regulatory action but also this cumulative burden. Community banks are resilient and dedicated to serving their communities, but at some point, the cumulative burden of the bank regulatory framework can adversely affect the availability and pricing of banking services and threaten the ongoing viability of the community bank model. The community banks in this country are important economically and to their communities, and we should strive to support these institutions and their ongoing viability.

## Other Notable Issues and Concerns

In preparation for today's event, conference attendees were asked to submit questions in advance. So before concluding my remarks I'd like to address a few of these, since we won't be able to do a live Q&amp;A session in this virtual format. Thank you for submitting your questions in advance.

As community bankers, we are deeply invested in supporting the growth and resilience of our local economies. With ongoing regulatory pressures, what specific actions can the Federal Reserve take to ensure smaller institutions like ours remain competitive and capable of delivering the personalized service that our communities depend on?

One of the things I think is critical in identifying how to support community banks is listening to the industry-which issues are top-of-mind for you? Being an effective regulator requires a degree of humility, and receptiveness to hearing about issues that affect the business of banking, particularly when there are alternative ways that regulators can better promote safety and soundness, or where regulatory actions have resulted in unintended consequences. At the same time, during my conversations with banks, a few themes have emerged that deserve attention. This will be a non-exclusive list, but hopefully will give you a sense of the types of issues and concerns that I hear about most frequently when talking to community banks.

First, I think there is room to improve the transparency of regulatory communication. Banks should not be left to guess what regulators think about the permissibility of particular activities, or what parameters and rules should apply to those activities. Uncertainty discourages investments in innovation and the expansion of banking activities, products, and services, and can call into question whether internal processes and procedures are consistent with supervisory expectations. Banks already must

confront the challenges of dealing with evolving economic and credit conditions, regulators should not compound these challenges through opaque expectations and standards.

Second, I think we need to address shortcomings in the processing of banking applications, employing a more nimble and predictable approach specifically in the de novo formation and mergers and acquisitions (M&amp;A) contexts. Today, the process to obtain regulatory approval can be influenced by many factors under a bank's control-for example, the completeness of the application filed and responsiveness to addressing questions and providing necessary additional information. However, the timeline for application decisions is often uncertain and beyond the bank's control. This can be due to questions about the minimum amount of capital needed and early-stage supervisory expectations (for a de novo bank), or uncertainty about the competitive effects of a transaction, or the filing of a public comment raising concerns about an application in the M&amp;A context.

Finally, I think regulatory and supervisory ""trickle-down"" is real and it has significantly harmed community banks. I am referring to regulators conveying expectations to community banks (for example, during the examination process) that lack a foundation in applicable rules or guidance, or that were designed for larger institutions, or based on a horizontal review of unique banks.

It is very difficult to insulate community banks from the harmful consequences of ""trickledown,"" and broader structural changes may be needed to shield them from inapplicable and unreasonable expectations. At the same time, we must preserve strong supervisory standards as banks cross asset thresholds, so banks that grow larger and riskier are subject to appropriately tailored and calibrated requirements and expectations. I would also note that some degree of ""trickle down"" has occurred over time because the regulatory asset ""line"" defining community banks has remained constant at $10 billion in assets for over a decade. During that time, the economy has grown significantly, and inflation has rendered this asset definition obsolete. Many ""community banks""-as defined by business model and activities rather than asset size-now exceed the threshold and must comply with broader regulatory requirements that may be excessive.

## What support or guidance can community banks expect from the Federal Reserve as we navigate technological innovation and increased cybersecurity threats?

Both innovation and cybersecurity are issues that are top of mind for me. Innovation has always been a priority for banks of all sizes and business models. Banks in the U.S. have a long history of developing and implementing new technologies, and innovation has the potential to make the banking and payments systems faster and more efficient, to bring new products and services to customers, and even to enhance safety and soundness.

Regulators must be open to innovation in the banking system. Our goal should be to build and support a clear and sensible regulatory framework that anticipates ongoing and evolving innovation-one that allows the private sector to innovate while also maintaining appropriate safeguards. We must promote innovation through transparency and open communication, including demonstrating a willingness to engage during the development process. By providing clarity and consistency, we can encourage long-

term business investment, while also continuing to support today's products and services. A clear regulatory framework would also empower supervisors to focus on safety and soundness, while ensuring a safe and efficient banking and payment system.

On cybersecurity, banks often note cybersecurity and third-party risk management as areas that raise significant concerns. Cyber-related events, including ransomware attacks and business email compromises, are costly in terms of expense and reputation, and are time-consuming events that pose unique challenges for community banks.

The maintenance of cyber assets and technology resources required to support a successful cybersecurity program are often difficult for smaller banks. Regulators can promote cybersecurity, and stronger cyber-incident ""resilience"" and response capabilities by identifying resources and opportunities, such as exercises, for banks to develop ""muscle memory"" in cyber incident response.

The Federal Reserve plays an important role in supervising banks and supporting risk management practices. For example, the Federal Reserve hosts the Midwest Cyber Workshop, with the Federal Reserve Banks of Chicago, Kansas City, and St. Louis. 10 Over the past couple of years, this workshop has provided a forum to discuss cyber risk among community bankers, regulators, law enforcement, and other industry stakeholders. Community banks can also turn to the Federal Financial Institutions Examination Council (FFIEC) website, which includes the FFIEC Cybersecurity Resource Guide and links to other external cybersecurity resources.

We know well that cyber threats pose real risks to the banking system, and we recognize that community banks may have unique needs in preventing, remediating, and responding to cyber threats. Regulators should, therefore, ensure that a range of resources are available to support banks and seek further opportunities to help build bank resilience against these threats.

Community banks are integral to rural and underserved communities. How can the Federal Reserve support us in maintaining our presence in these areas, particularly amid ongoing consolidation trends?

As I noted earlier, it is essential that the U.S. banking system is broad and diverse, including institutions of all sizes serving all the different markets across the country. Community banks play a particularly valuable role in rural and underserved communities, and we need to ensure that the community banking model remains viable into the future.

To do that, we need to have a regulatory system in which both de novo bank formations and M&amp;A transactions are possible. Viable formation and merger options for banks of all sizes are necessary to avoid creating a ""barbell"" of the very largest and very smallest banks in the banking system, with the number of community banks continuing to erode over time.

M&amp;A ensures that banks have a meaningful path to transitioning bank ownership. In the absence of a viable M&amp;A framework, there is potential for additional risks, including limited opportunities for succession planning, especially in smaller or rural communities. Uncertainty related to the M&amp;A process also may act as a deterrent to de novo bank

formation, as potential bank founders may stay on the sidelines knowing that future exit strategies-like the strategic acquisition of a de novo bank by a larger peer-may face long odds of success.

Another challenge particularly in rural markets are the competitive ""screens"" that are used to evaluate the competitive effects of a proposed merger. Using these screens often results in a finding that M&amp;A transactions in rural markets can have an adverse effect on competition and should therefore be disallowed. 11  Even when these transactions are eventually approved, the mechanical approach to analyzing competitive effects often requires additional review or analysis and can lead to extensive delays in the regulatory approval process. Reducing the efficiency of the bank M&amp;A process can be a deterrent to healthy bank transactions-it can reduce the effectiveness of M&amp;A and de novo activity that preserves the presence of community banks in underserved areas, prevent institutions from pursuing prudent growth strategies, and actually undermine competition by preventing firms from growing to a larger scale.

1  The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.

- 2  The first mutual banks in the United States were chartered in 1816. The Provident Institution for Savings and the Philadelphia Savings Fund Society were both chartered that year. See ; https://www.jstor.org/stable/2123609   https://www.mass.gov/info-details . /history-of-the-division-of-banks
- 3  Michelle W. Bowman, ""Reflections on 2024: Monetary Policy, Economic Performance, and Lessons for Banking Regulation"" (speech at the California Bankers Association 2025 Bank Presidents Seminar, Laguna Beach, California, January 9, 2025).
- 4  12 CFR § 239.8(d).
- 5  See, e.g., Michelle W. Bowman, ""Tailoring, Fidelity to the Rule of Law, and Unintended Consequences (PDF)"" (speech at the Harvard Law School Faculty Club, Cambridge, Massachusetts, March 5, 2024).
- 6  See, Economic Growth, Regulatory Relief, and Consumer Protection Act, Pub. L. No. 115-174, § 401(a)(1) (amending 12 U.S.C. § 5365), 132 Stat. 1296 (2018).
- 7  See dissenting statement, ""Statement on the Community Reinvestment Act Final Rule by Governor Michelle W. Bowman,"" news release, October 24, 2023.
- 8  See ""Statement on Third Party Risk Management Guidance by Governor Michelle W. Bowman,"" news release, June 6, 2023.
- 9  Michelle W. Bowman, "" Approaching Policymaking Pragmatically (PDF)"" (remarks to the Forum Club of the Palm Beaches, West Palm Beach, Florida, November 20, 2024).

- 10  See Federal Reserve Bank of Chicago, Federal Reserve Bank of St. Louis, and Federal Reserve Bank of Kansas City, "" Midwest Cyber Workshop 2024,"" June 25-26, 2024.
- 11  Michelle W. Bowman, ""The Role of Research, Data, and Analysis in Banking Reforms (PDF)"" (speech at the 2023 Community Banking Research Conference, St. Louis, MO, October 4, 2023); Michelle W. Bowman, ""The New Landscape for Banking Competition (PDF),"" (speech at the 2022 Community Banking Research Conference, St. Louis, MO, September 28, 2022).",Michelle W Bowman
https://www.bis.org/review/r250212c.htm,Gabriel Makhlouf: The importance of foresight,"Opening remarks by Mr Gabriel Makhlouf, Governor of the Central Bank of Ireland, at the Strategic Foresight Symposium, Dublin, 11 February 2025.",2025-02-11 00:00:00,"## Gabriel Makhlouf: The importance of foresight

Opening remarks by Mr Gabriel Makhlouf, Governor of the Central Bank of Ireland, at the Strategic Foresight Symposium, Dublin, 11 February 2025.

* * *

Good morning, and welcome to today's Strategic Foresight Symposium. This morning's program seeks to cultivate debate, foster exploration, and encourage reflection on how strategic foresight and anticipatory governance can shape our strategies, plans, and policy decisions for the future.

To maintain trust and credibility as public institutions, we must demonstrate to our stakeholders a capacity to anticipate and plan for the future. Over the past decades, we have witnessed transformative shifts, not least the rise of the Internet, other rapid technological advancements, the internationalisation of supply chains, and the global financial crisis. More recently, the past five years have brought a global pandemic, significant military conflicts, the resurgence of extreme political movements, and the accelerating impact of climate change. In my view the interconnected trends and signals of change highlight the need to build strategic foresight capacity to help navigate an increasingly complex and uncertain world. Being future-focused is one of the four themes of our strategy, emphasising the importance of preparing for the challenges and opportunities ahead.

Let me mention some of them.

As we look to the future, it is clear that we are navigating a new era of great power competition, marked by the rapid shift to a multipolar world and the erosion of the international order that has underpinned global cooperation since World War II. Policyinduced geoeconomic fragmentation has moved from being a risk to becoming a reality, disrupting trade and foreign direct investment flows. As a small, open economy, Ireland finds itself at the crossroads of these geopolitical headwinds, deeply exposed to its challenges and complexities.

Ireland's ageing demographics pose significant challenges to our future labour supply and productivity, and to the sustainability of our long-term growth. As the more productive segments of our population shrink, the resulting pressure on government finances will intensify. This trend is not unique to Ireland. Across the EU, populations are nearing their peak and are projected to decline, with implications for the Union's economic growth and geopolitical influence. The IMF predicts that total hours worked in Europe will decline over the next five years. These shifts carry far-reaching policy implications, impacting working age and pension sustainability, healthcare resourcing, infrastructure, and our broader fiscal resilience. Addressing these challenges requires forward-thinking strategies.

The pandemic catalysed a significant acceleration in digitalisation, enabled by the expanded adoption of cloud computing. Alongside this we are witnessing a rapid evolution in artificial intelligence, reshaping not only the financial services industry but also the broader economy and the future of work. However, these transformative technologies come with complex challenges. AI's integration will spark critical debates

around privacy and ethical use. And while continued digitalisation in financial services offers opportunities to streamline transactions, it also heightens the need to address operational resilience, including ensuring robust defences against information and cyber security risks.

An increasingly insidious challenge is the growing risk of misinformation or alternative truths or straightforward lies, amplified by the rise of social media and the retreat from content moderation and fact-checking. This trend poses serious threats to the values that we have become used to and to democracy itself. Misinformation can undermine the stability of public institutions by corroding trust. This presents new challenges for all of us, as individuals, as institutions and as a community of citizens.

Strategic foresight is the ability of an organisation to continuously perceive, interpret, and respond to emerging ideas about the future. Rather than attempting to predict what lies ahead, foresight broadens our perspective, fostering dialogue that incorporates peripheral viewpoints and explores how multiple potential futures might unfold. To achieve this, we must augment our toolkit with methods such as horizon scanning and scenario analysis, empowering us to embrace anticipatory governance and navigate uncertainty through future-focused insights and dialogue.

I hope this morning's event inspires you to explore how strategic foresight can help future-proof our strategies and policies. Let me leave you with three takeaways:

- The status quo is unlikely to prevail: in the uncertain world we are now navigating, there is a requirement to augment our approach to governance, to be more futurefocused, and the use of strategic foresight can help;
- Make time for foresight: amid daily challenges, it's essential to set aside governance time, and to develop the capability and tooling to support effective horizon scanning;
- Be open and engaged: the challenges we face are deeply interconnected, affecting multiple policy areas. To future-proof effectively, we must break down silos, share insights, challenge perspectives, and adopt a collaborative, horizontal approach.

Thank you for coming and I hope you have a good morning.",Gabriel Makhlouf
https://www.bis.org/review/r250212b.htm,John C Williams: From where we are now,"Remarks by Mr John C Williams, President and Chief Executive Officer of the Federal Reserve Bank of New York, at Pace University, New York City, 11 February 2025.",2025-02-11 00:00:00,"## John C Williams: From where we are now

Remarks by Mr John C Williams, President and Chief Executive Officer of the Federal Reserve Bank of New York, at Pace University, New York City, 11 February 2025.

* * *

As prepared for delivery

## Introduction

It's great to be back at Pace University-particularly here at 15 Beekman. I've watched this building rise from the ground, and it's been wonderful to see it develop as a new focal point for the school.

The New York Fed has a number of connections to Pace. We're close neighbors and anchor institutions here in Lower Manhattan. More than 100 of our employees are proud Pace alumni. And through the years, Pace students have represented the Second District well in the College Fed Challenge competitions.

I'm sure the members of the Economics Society who are here today have come armed with thought-provoking questions about the economy and monetary policy. And I look forward to answering them. But first, I'm going to take this opportunity to talk about where the economy's been, where it is today, and where it's going. I'll discuss how the Fed is working to achieve its dual mandate of maximum employment and price stability. And I'll give my economic outlook.

Before I go further, I must give the standard Fed disclaimer that the views I express today are mine alone and do not necessarily reflect those of the Federal Open Market Committee (FOMC) or others in the Federal Reserve System.

## Where We've Been

Now that most economic data for 2024 have come in, it's a good time to talk about the key developments of the past year and what they mean going forward. In a nutshell, what the data tell us is that 2024 is the year the economy returned to balance, or ""equipoise"" as I like to say.

The FOMC defines price stability as 2 percent inflation over the longer run. And the 12month percent change in the personal consumption expenditures price index-the measure the FOMC uses to gauge inflation against its goal-ended 2024 at just above 21/2 percent.

While inflation remains somewhat elevated, and the path to 2 percent has been bumpy at times, we have made significant strides since June of 2022, when inflation reached a 40-year high of 7-1/4 percent. And the disinflation process has been broad-based, across all the major categories of goods and services.

We've also made great progress on the employment side of our mandate. The labor market-red hot in 2021 and 2022-has cooled considerably and is back to more normal levels. And over the past six months, several labor market indicators are showing signs of stabilizing. For example, at 4 percent, the unemployment rate is little changed from the middle of last year.

Despite the cooling of the labor market, the economy has continued to grow at a solid rate. Real GDP increased 2-1/2 percent in 2024, on the heels of more than 3 percent growth in 2023. This strong growth has been powered by robust gains in the labor force and productivity.

Since the Federal Reserve's mandate is to achieve maximum employment and price stability, we want to see demand in line with supply and keep the risks to achieving our goals in balance. Now that balance has been achieved, our job is to ensure the risks in balance. remain

Against this backdrop, the FOMC began moving its monetary policy stance from one that tightly constrains demand to one that is less restrictive. Over the course of three meetings in the latter part of 2024, the Committee lowered the target range for the federal funds rate by a total of 100 basis points.

We are not alone in this. Other central banks around the world have made similar policy moves. In many countries, inflation rose in 2021 and 2022 and has since come down. Central banks have responded to the global disinflationary process by shifting monetary policy to a less restrictive posture.

## Where We Are Now

As we enter 2025, the economy is in a good place. Growth has remained solid, supported by robust consumer spending.

And from where we are now, a number of signs indicate that inflation will continue to move toward our 2 percent longer-run goal-although it will take time before we can achieve that target on a sustained basis.

First, with the labor market now in balance, we have seen wage growth slow to levels broadly consistent with productivity trends and 2 percent inflation. Based on the latest reading of the New York Fed's Heise-Pearce-Weber Tightness Index, the labor market is now about as tight as it was in in the first half of 2017, a period when wage growth and price inflation were low. 1   In short, the labor market is not a source of inflationary pressure today.

Second, measures of underlying persistent inflation have moved in the right direction. For example, the New York Fed's Multivariate Core Trend inflation estimate has fallen to about 2-1/4 percent. 2   Although the decline has been choppy at times and has slowed over the past year and a half, this measure is well below the high of 5-1/2 percent that it reached in the summer of 2022.

And third, inflation expectations remain well anchored. Well-anchored expectations are a bedrock of modern central banking and are important to ensuring low and stable inflation. Survey- and market-based measures currently show that longer-term expectations remain at levels consistent with our 2 percent target. In particular, the New York Fed's Survey of Consumer Expectations shows inflation expectations are within their pre-pandemic ranges across all horizons. 3

That's where things stand in terms of our price stability mandate. On the employment side of our mandate, as I said earlier, the labor market is in a good balance. Importantly, the cooling from unsustainably tight conditions a few years back appears to have mostly run its course. Overall, the labor market looks solid, although some indicators, such as the rates of hires and quits, are a touch below where they were in the final years before the pandemic.

With the labor market in balance and inflation moving toward our price stability goal, the FOMC decided at its most recent meeting in January to leave the target range for the federal funds rate unchanged at 4-1/4 to 4-1/2 percent. 4   In terms of the Fed's balance sheet, the process of gradually reducing our securities holdings is proceeding smoothly.

## Where We're Going

So, where do I expect the economy will go in 2025 and beyond?

Based on the data we have today, I anticipate the growth rates of supply and demand will continue to slow while staying in balance. I expect real GDP growth to move to around 2 percent in 2025 and 2026, which is near my estimate of its long-run potential rate.

With growth in supply and demand well balanced, I anticipate the unemployment rate to remain essentially flat at around 4 to 4-1/4 percent.

And I expect overall inflation to remain around 2-1/2 percent this year, and then decline to our 2 percent goal in the coming years.

Monetary policy is well positioned to achieve maximum employment and price stability. The modestly restrictive stance of policy should support the return to 2 percent inflation while sustaining solid economic growth and labor market conditions. But it's important to note that the economic outlook remains highly uncertain, particularly around potential fiscal, trade, immigration, and regulatory policies.

## Conclusion

From where the economy has been to where it's going, one commonality is that it's faced tremendous uncertainties. From where we are now, the economy is in a very good place. The labor market is in balance. And inflation is on a path to reach our 2 percent longer-run goal over the next few years.

The Committee's decisions on future monetary policy actions will continue to be based on the totality of the data, the evolution of the economic outlook, and the risks to achieving our goals.

I remain strongly committed to bringing inflation back to our 2 percent target on a sustained basis, while being watchful to risks to both sides of our dual mandate.

With that, I look forward to taking your questions.

1 Sebastian Heise, Jeremy Pearce, and Jacob P. Weber, ""A New Indicator of Labor Market Tightness for Predicting Wage Inflation,"" Federal Reserve Bank of New York , October 9, 2024; and Sebastian Heise, Jeremy Pearce, and Liberty Street Economics Jacob P. Weber, "" Wage Growth and Labor Market Tightness,"" Federal Reserve Bank of New York Staff Report Number 1128, October 2024.

- 2 Federal Reserve Bank of New York, Multivariate Core Trend Inflation  (December 2024 Update).
- 3 Federal Reserve Bank of New York, Survey of Consumer Expectations  (January 2025).
- 4 Board of Governors of the Federal Reserve System,  Federal Reserve issues FOMC statement, January 29, 2025.",John C Williams
https://www.bis.org/review/r250212a.htm, Andrew Bailey: Are we underestimating changes in financial markets?,"Speech by Mr Andrew Bailey, Governor of the Bank of England, at the University of Chicago Booth School of Business, London, 11 February 2025. ",2025-02-11 00:00:00,"## Andrew Bailey: Are we underestimating changes in financial markets?

Speech by Mr Andrew Bailey, Governor of the Bank of England, at t he University of Chicago Booth School of Business, London, 11 February 2025.

* * *

I am going to spend most of the time today setting out the scale and significance of changes in financial market activity in recent years, and what this means for financial stability. My main message is that the significance of these changes has not been fully taken on board in many assessments of the challenges facing financial stability and the tools we need to assess the risks the changes have created. I will also put these issues into some broader context, around the role of central banks and of regulation.

An important theme here is that of moving to a financial system in which the presence and impact of non-banks and market-based finance is much larger. In this context, I will set out the importance of two recent Bank of England innovations which are I think pioneering in the central banking world: these are our  System Wide Exploratory Scenario, a new form of stress test tool, and the introduction of our  new contingent liquidity facility  for some non-banks. There is another important area of focus involving non-bank finance, namely the growth of private credit. That is not my focus today.

Let me start with the broader context. Four points stand out.

First, we have learned from long experience that central banks have two core purposes, monetary and financial stability, and that while policies in respect of each need to be focused and thus separate, they are dependent on one another to a very high degree. Specifically, for much of the existence of central banks, financial stability has not had the prominence or institutional development that has occurred with monetary policy. Even today, it can at times feel as if it is living in the shadow. Some central banks, like the

Bank of England, have gone further and operate with an institutional structure that ensures equal ranking across the two core purposes, but that is by no means universal.

Second, central banking is inherently a counter-cyclical activity. It took time for this to become monetary orthodoxy in the nineteenth century, and even more time for it to become explicitly part of the macroprudential approach to financial stability after the experience of the Global Financial Crisis (GFC) over 15 years ago.

Third, central banking policy making has to incorporate a substantial global context. Ultimately, the policies are national ones, but they have to reflect and incorporate global risks and events. This has been the case since at least the 1870s, which saw probably the first globally synchronised financial crisis. Global standards are an anchor for national standards. Set right, they facilitate openness and economic growth.

Fourth, one of the orthodoxies of central banking is that we act as the ultimate providers of liquidity to our banking system. In doing so, we seek to achieve our critical outcomes, namely: implementing the chosen official interest rate as the means to anchor monetary policy and achieve low inflation and price stability; achieving financial stability via the provision of high quality liquidity in the form of so-called central bank money; and third,

achieving and preserving the singleness of money, so that all forms of money have an assured equal nominal value (the pound in my bank is worth the same as the pound in your bank, and will remain so).

It has over time become central bank canon law that we transact with banks. In other words, the banking system has a special place, as the conduit for the transmission of central bank policies. This is the central bank equivalent of the old Heineken advert, ""Refreshes the Parts Other Beers Cannot Reach"". The key point here is the assumption that in all states of the world - non-stressed and stressed - central bank liquidity supplied through the banks would reach those parts of the financial system and economy in need.

Moreover, you don't have to go far back in time, certainly not to the start of my career forty years ago, to find that the Bank of England's interface was with a small number of banks - though admittedly they represented a large share of the system (and in saying that I am deliberately overlooking the role of discount houses - a rather unique British feature). During the operation of these arrangements, there were times when strains in terms of the efficiency of the liquidity flow were evident, but for a long time this system held together.

However, over time the issue of whether financial stability policies which are aimed at the banking system can be relied upon to ensure stability across the whole financial system has come increasingly to the forefront. In this sense, the issue is not new. This year marks forty years since I joined the Bank of England. One of the first things I worked on after joining in 1985 was to have a very small role in a BIS study called Recent Innovations in International Banking, chaired by Sam Cross of the New York Fed. In thinking about my remarks today, I went back to that report - after a long break - and particularly the conclusions it drew on so-called macro-prudential policy, and the role of the non-bank financial system. It's worth drawing out again five points made in the report:

- With the highest quality borrowers increasingly turning to direct credit markets, the average quality of banks' loan assets may gradually decline by comparison;
- In view of its narrower base, the international banking system might become less responsive to sudden liquidity needs or other shocks in the corporate or other borrowing sectors;
- A greater share of credit is likely to flow through capital market channels, which may be characterised by less supervision, but less complete information on which to base credit decisions, and by more distant business relationships between debtor and creditor, perhaps complicating the task of arranging rescheduling or financing packages for those with debt servicing problems;
- Both banks and non-bank financial institutions (NBFIs) are relying more on income from off-balance sheet business; and
- The distinction between banks and other financial institutions is becoming progressively blurred.

Sounds familiar? Bear in mind, this was written 20 years before the GFC. As a spoiler for what's to come, I asked myself the question, what did the report miss that we now

know? Two things stand out I think: the growth of leverage in the non-bank sector; and the growth of markets in sovereign tradeable debt - the report was focused much more on corporate debt.

So, what happened after that report was published? The regulatory world focused more on regulating financial stability through regulating the banking system. This was the emerging world of the Basel Agreements. The GFC rocked that world.

Out of that experience came several things: more Basel, in terms of microprudential regulation; mandatory clearing and placing clearing houses at the centre of the system to enhance resilience; a much enhanced focus on global macro financial stability, with the Financial Stability Board to the forefront; and a recognition that there needs to be a more explicit role for macroprudential policy.

What also came out of the GFC and post-GFC policies was a further shift in the balance of financial intermediation from the banking to the non-banking system, with the nonbank sector now making up nearly 50% of global financial assets compared to 40% for the banking sector. And so for the last fifteen years we have increasingly seen the emergence of risks to financial stability originating in the non-bank system.

This is the backdrop to the next section of my remarks today, which seeks to draw out just how much the system has changed in the last few years.

The key theme here is how much activity and risk in core financial markets now largely resides outside the banking system. This is not a new theme, given the post GFC changes, and it was the correct response to the dangers realised in the GFC of inappropriate risk inside the banking system. Our assessment is that the pace and scale of change in this direction continues to gather momentum. The footprint of hedge funds and non-bank market makers has grown substantially in recent years. Alongside this, what I will - without in any sense wishing to be disparaging - call the more traditional asset management industry has refocused towards passive investment strategies. Meanwhile, the role of banks has shifted towards providing risk warehousing and financing to markets and NBFIs. These are fundamental changes in the dynamics of markets.

Three non-bank business models stand out as dominant players in this rapidly evolving landscape.

First, we've seen the rise of multi-manager hedge funds in which individual portfolio managers - or ""pods"" - trade independently from one another under the banner of a single fund. These funds are large, sophisticated and manage risk centrally to ensure sufficient diversification. Their diversification means that they can benefit from a high degree of leverage from banks. They've also benefitted from an influx of talent from banks. There are benefits of this type of fund structure. It is a world where more and more portfolio managers operate under sophisticated umbrella risk management which can lean against large fund-level concentrations. However, there could be circumstances in which the means by which multi-manager funds protect themselves in this respect can create risks to the system. Specifically, where risk management results in pods de-risking aggressively in a shock, this could result in these funds amplifying market moves.

Second, systematic strategies which trade based on complex statistical models and rules and market signals rather than fundamentals are becoming more popular. These strategies were at one time the preserve of the FX and equity markets but are now becoming more prevalent in the fixed income world enabled by technological innovation. Their presence has increased the speed at which markets react as well as the number of instances of technical-driven corrections that are difficult to explain based on the fundamental outlook. They too obtain a high degree of leverage from banks.

Third, non-bank market makers, notably high frequency and principal trading firms, have grown substantially in scale and scope globally. They previously undertook intraday market activity but are now moving into carrying risk for longer periods of time. Market liquidity in normal times appears to have improved because of their presence. To illustrate this, throughout the substantial movements in bond yields during recent months we have not seen stress in terms of market functioning. The evidence of whether these entities help or hinder market liquidity in stress is more mixed.

Whilst the growing scale of these non-bank exposures has been absorbed by banks acting as prime brokers so far, such trends, if they continue, could have a profound effect on banks ' balance sheet capacity in the future.  As fund leverage increases and risk asset prices rise inexorably over time, there comes a point at which an inevitable strain is placed upon the system.  An excess of demand for financing resources over their supply could lead to repricing, tempting existing players to overreach and take on more risk than they should. Conversely, new entrants which are ill equipped to scale up quickly could be exposed to risks that could be highly damaging.

In sum, the market looks very different to what it was only five years ago. It involves large shifts in leverage, pricing power, speed of trading and liquidity provision. To be clear, these changes are not inherently bad, but they could create a new set of financial stability vulnerabilities which we need to understand and monitor and adapt new tools and approaches where appropriate.

Among these potential vulnerabilities, I would highlight a number:

- An increased likelihood and severity of procyclical jumps to illiquidity and large market moves that are unexplained by fundamentals. Multi-manager funds can make individual ""pods"" deleverage rapidly in stress conditions, which can exaggerate market moves. Smaller funds are more exposed to banks withdrawing financing. Systematic funds can deleverage automatically in response to a change in price signals. And,
- non-bank market makers, while active in normal times may withdraw liquidity in a stress;
- Second, there is a tendency towards increased concentration and interconnectedness given that these large hedge funds and market makers operate across all significant financial markets and represent the bulk of banks' prime brokerage balance sheets;
- Third, there is greater evidence of correlated activity. The funds are generally well capitalised and have longer gating periods than in the past, but both their trading and risk management strategies tend to be quite similar, increasing the prospect

- of common responses. While multi-managers are well placed to avoid correlations within each fund, correlation can still emerge across different funds as different multi-managers are often attracted to similar types of strategies; and
- Fourth, opacity and limited visibility in certain markets tends to lead to crowded trades, impairs risk management, and is more likely to prompt a rush to the exit in times of stress. We have seen evidence of this in a number of market events in recent years. An example is the Archegos incident where the limited visibility of the overall position made it hard for any single participant to manage and scale their exposure and in my assessment made the eventual problem when it materialised more of a threat to market stability.

I am going to use the rest of my time to answer the question, what do we do about the risks and vulnerabilities that can arise from this change of market structure? To be clear, the answer is not to seek to stand in the way of change. That's not sensible. There are good reasons why these changes are happening. Many of the trends being seen can support smoother and more efficient market dynamics and pricing in normal times, as well as increased and improved liquidity. They also provide an opportunity to diversify finance and lending to the real economy and if undertaken in a sustainable way then these developments can play a role in supporting growth.

There are good reasons why moving activity out of the banking system has happened. There are areas of risk taking that are not suited to being directly backed by deposits, and thus putting those deposits at risk. That was a lesson of the financial crisis. They are better being directly backed by what I would describe as investment capital. But a key point here is that it needs to be very clear to the providers that the investment capital is at risk, and that this is what goes with the returns. Mostly this understanding is in place, but sometimes it turns out not to be.

But if that takes care of the direct risk, we are still left with a substantial financial stability vulnerability arising from the more indirect risks, those that are less well understood, and can often put the system more broadly into difficulty. This is classic modern financial stability risk. The banking system may not be directly exposed to these risks, but in my experience there is a limited understanding of indirect risks which can arise at times of stress. And we seem to be more reliant on market-making and market liquidity provision from firms which are not so directly wired into the more assured forms of backstop liquidity, including from central banks. Likewise, the transparency of margining practices to increase predictability and thus liquidity management for NBFIs has become a focus of international work.

To be clear, this is not a pitch for the necessity and inevitabilities of more regulation. We are now in a world where attitudes towards regulation have changed, not I should say for the first time in my career. Hyman Minsky wisely pointed out that as memories of crises past recede, so attitudes towards regulation change. To paraphrase the historian Tony Judt, it is wise to avoid the idea that regulation is the best solution to any problem, but let's not fall into the opposite notion that it is by definition and always the worst available option. 1

It is important in today's setting that we have a fully informed debate about the role of regulation. That said, I want to emphasise three points. First, there is not a fundamental

trade off between growth and financial stability. We must always assess the best choices to make in terms of the tools that we use, but the financial crisis demonstrated that there is no sustainable growth without financial stability. The issue of low potential growth and thus low actual growth that is with us today is not a creation of recent times; rather it goes back to the financial crisis, the serious recession that followed and the long-term loss of output. Second, we must not abandon or compromise our commitment to the surveillance of risks to financial stability - to pointing out the vulnerabilities and their potential consequences - the more so in view of the fundamental changes to the system I have just described. And, third, we must retain the ability to act on these risks, and always ensure that we have the ex-ante tools to deal with potential problems.

Surveillance enables us to be targeted in our regulatory approach, and focus on the most important financial stability risks and have the right tools to deal with the problems we identify.

On surveillance, we have undertaken a path-breaking new exercise at the Bank of England, our System-Wide Exploratory Scenario Exercise, or SWES (because we like acronyms). We conducted it with help from the Financial Conduct Authority and the UK Pensions Regulator. It is more of a flow type stress test than a traditional bank stress test. In other words, we explored injecting stress into the financial system and the consequences of its flowing through the system.

The SWES tested the resilience of markets that are core to the UK's economy by enhancing the understanding of the behaviours under stressed conditions of banks and NBFIs active in those markets. The primary objectives were to:

- enhance understanding of the risks to and from NBFIs, and the behaviour of NBFIs and banks in stress, including what drives those behaviours; and
- investigate how these behaviours and market dynamics can amplify shocks in markets and potentially pose risks to UK financial stability.

This exercise was a first of its kind. It involved more than 50 market participants and covered a wide range of business models. It provided insights into the behaviour of different parts of the financial system under stress, and into the market dynamics and financial stability risks driven by their interactions. The SWES was not a test of the resilience of individual participants, but instead focused on system-wide resilience, with a focus on core UK financial markets.

The findings from the SWES provided insights into how, although rational individually, the behaviours of market participants could combine in ways that pose systemic risks. The exercise highlighted mismatches in firms' expectations of how others would act in a stress scenario. It also improved the understanding of risk management within the financial system and informed work to address vulnerabilities in market-based finance.

The SWES scenario comprised a rapid and significant shock to rates and credit spreads triggering significant losses and margin calls, with margin flowing from NBFIs to banks and central clearing parties (CCPs). The large and rapid market shock generated a significant liquidity need for many NBFIs in the form of margin calls and redemption requests. This liquidity impact combined with leverage and risk constraints, as well as investment strategies and other commercial drivers of behaviour, led to some

NBFIs having to recapitalise and/or deleverage rapidly. Banks had limited appetite to take on additional risk in some core UK markets. Through derisking and deleveraging, the financial system acted to distribute and amplify the impact of the shock and some core UK markets came under pressure.

The SWES has provided us with important insights. In particular, I would highlight:

- Understanding financial institutions' behaviours and interactions: The exercise highlighted how the behaviours of different financial institutions can interact to amplify market shocks, for example how calls for additional capital from leveraged entities can result in automatic and correlated sales of securities. This understanding is crucial for developing policies that mitigate systemic risks.
- Mismatches in expectations of counterparties' actions under stress, and risk management improvements: The SWES identified mismatches in firms' expectations of each other's actions during stress. For instance, users of cleared derivatives struggled accurately to estimate increases in initial margin due to the lack of transparency in CCP models, and users of repo markets overestimated their access to new repo funding under stress. This insight supports better risk management practices and helps firms prepare for potential market disruptions.
- Enhanced surveillance and systemic risk assessment capabilities: The SWES provides a more comprehensive view of the financial system's dynamics under stress, which enhances our surveillance capabilities. This allows for more proactive identification and mitigation of systemic risks and the SWES report makes recommendations for UK markets.
- Insights into potential cross border spillovers: For example, we also saw that hedge funds are particularly sensitive to conditions in the US Treasury repo market. A sudden increase in haircuts or contraction in repo availability would have a significant impact on a number of hedge funds. Their response to a shift in repo financing conditions would not necessarily be contained to US Treasuries and could impact upon other markets.
- Policy development: The findings from the SWES are informing policy work to address vulnerabilities in market-based finance. This includes enhancing the resilience of core UK financial markets and improving the overall stability of the financial system. In many cases the exercise provides further evidence to support existing policy work and new areas.

The SWES has demonstrated that such a system-wide approach is a valuable way to understand systemic risk in core markets.

We intend to invest in system-wide capabilities building on the SWES lessons learned. There are two main components to this. First, the SWES has allowed us to start to build modelling capability that could support lighter touch versions of SWES-type exercises for core UK markets in the future, supplemented with targeted engagement with financial firms to ensure behavioural assumptions remain appropriate. Second, we will consider whether to use SWES style exercises to explore risks in other markets over time. These exercises are particularly well suited to markets where interconnections and feedback are key, and where key firms are at the edge of the regulatory perimeter, where behavioural assumptions are critical, or where there are significant data gaps.

Moreover, for such an exercise to be most effective and targeted, prudential supervisors need to have a clear view of where risks are building within the system. Supervisors need to employ methods that are designed to identify and assess areas of potential vulnerability, using tools such as thematic reviews of emerging or growing risks, co-ordinated multi-jurisdictional examinations of key global business lines (with home and host

supervisors working together), and other techniques that enable effective peer comparison across banks.

I want to end back on the subject of liquidity provision in times of stress. I set out the canon law of central banking that liquidity goes through the banking system on the basis that the Heineken ad principle will apply in terms of the reach of these central bank lending facilities.

However, what we saw in the so-called Dash for Cash in early 2020 with the onset of Covid, and then the 2022 LDI episode were conditions in markets that demonstrated how vulnerabilities in NBFIs can propagate liquidity stress in core UK financial markets, notably the gilt market, and create a prospect of forced selling of gilts that could jeopardise financial stability.

NBFIs should manage the risks they face, and in some parts of the system it is appropriate that regulations are in place to provide more assurance of this management taking place. This is a key objective of the global Financial Stability Board. That said, it is not feasible or economic for NBFIs to maintain resilience to ensure self-insurance against the most extreme system-wide stresses, where the consequences may be forced selling and wider market disruption and a risk to financial stability. And, if the Heineken ad principle can't always be relied on in view of the changes in markets that I have described, in such circumstances central bank facilities should support financial stability by providing backstop liquidity to NBFIs and thus reduce the need to sell assets on a forced basis.

With this in mind, we have developed the Contingent NBFI Repo Facility, or CNRF, to tackle severe disruption in the gilt market that threatens financial stability due to shocks that increase the demand of NBFIs for liquidity.

The CNRF is a contingent facility to be activated at our discretion in view of the scale of the systemic stress in core markets and the ability of our traditional lending facilities for banks to mitigate that stress. It is not a standing facility. It will lend cash against gilt collateral to participating insurance companies, pension funds and liability-driven investment funds for a short term. The pricing will reflect the principle that it should be at a penalty rate.

This does widen the direct reach of our liquidity provision to eligible NBFIs that demonstrate an appropriate level of financial health. We think this is appropriate in view of changes to the financial system and the risks to financial stability from outside the banking system. But, it does not change a key central banking principle, namely that the standing provision of liquidity to support the so-called singleness of money goes only to the banks.

Both standing facilities and contingent facilities are available to banks because they create money and we need to ensure its singleness both in normal times and in times of severe market dysfunction and financial instability.  There is no rationale for standing facilities for non-banks as they do not create money.  There is only a rationale for a contingent facility because the evidence suggests that we need to adapt the Heineken principle only when there is a market dysfunction and on a temporary basis.   In other words, it modifies and extends the Heineken ad approach, but does not change the principle that the scope and definition of money is limited to the central bank and commercial banks.

In conclusion, my title today posed the question: ""Are we underestimating changes in financial markets?"" You may have decided by now that my answer to this question is yes. Moreover, the pace of change shows no signs of dropping off. As authorities responsible for ensuring financial stability, both domestically and globally, we have to keep our assessment and understanding up to speed. On this point, I want to thank all those, in the UK and overseas, who work with our teams at the Bank of England to inform our assessment and understanding. We couldn't do this without the time that you give to us.

Our assessment tools need to change, as do our tools of intervention. I have focused on two big changes that we have made.

The first is to introduce more dynamic - flow-style - market stress exercises alongside the more established and more static institutional stress tests. This allows us to stress test markets more efficiently, and, critically, as part of that test the assumptions that market participants make about the reactions and behaviour of each other, and thus of markets as a whole. This process of holding a mirror up is crucial. The second change is the introduction of a contingent liquidity facility for certain non-banks, designed to act as protection against stress in core markets.

Finally, there is a reaction taking place against regulation, and the responses to the GFC. We must not forget the lasting damage done by the GFC. There is no trade off between economic growth and financial stability. That said, there are usually choices about how we deal with evidence of vulnerabilities. It is critical that we have and develop tools of assessment and intervention. But these interventions may not always need to be more regulation. They can be liquidity facilities, and they can be to improve areas of the financial infrastructure, such as introducing clearing for gilt repo, a conclusion of our SWES. We should approach the response to vulnerabilities with an open mind.

## Thank you.

I would like to thank Martin Arrowsmith, Rasna Bajaj, Yuliya Baranova, Nat Benjamin, Sarah Breeden, Lee Foulger, Bonnie Howard, Bradley Hudd, Rebecca Jackson, Joshua Jones, Karen Jude, Clare Macallan, Harsh Mehta, Arif Merali, Pelagia Neocleous, Joshua Parikh, Rhys Phillips, Andrea Rosen, Vicky Saporta, Simon Stockwell, James Talbot and Sam Woods for their help in the preparation of these remarks.

- 1  Tony Judt applied this to the role of the state, contrasting the post-War liberal approach with the later neo-liberal approach. His conclusions can be read across to the role of regulators [Tony Judt, ""Ill Fares the Land: A Treatise on our Present Discontents"" Penguin 2010, P202].",Andrew Bailey
https://www.bis.org/review/r250211a.htm,Christine Lagarde: European Parliament plenary debate on the European Central Bank Annual Report,"Speech by Ms Christine Lagarde, President of the European Central Bank, at the plenary session of the European Parliament, Strasbourg, 10 February 2025.",2025-02-10 00:00:00,"## Christine Lagarde: European Parliament plenary debate on the European Central Bank Annual Report

Speech by Ms Christine Lagarde, President of the European Central Bank, at the plenary session of the European Parliament, Strasbourg, 10 February 2025.

* * *

It is a great pleasure to take part in this plenary session and discuss your draft resolution on the ECB's Annual Report.

At the ECB, we are deeply committed to transparency and accountability, particularly in how we communicate with the public and their elected representatives in the European Parliament. In fact, in the last parliamentary term we interacted with this Parliament even more frequently than in previous terms. 1

At the same time, we greatly value the opportunity to hear the Parliament's views. Your resolution and debate are an important pillar of the ECB's accountability framework and a key channel for you to share your views with us - and we listen. For instance, next week will mark ten years since the ECB started publishing the accounts of the Governing Council's monetary policy meetings , a major step in enhancing our 2 monetary policy communication and one that this Parliament had called for.

This year's draft resolution covers key issues that are central to the ECB's mandate and the future of the euro area, including our response to inflation, the digital euro and the ECB's role in supporting the EU's broader economic policies. It also reflects the dynamic challenges we face in Europe today, and I look forward to hearing your thoughts on all of these issues and having a constructive dialogue with you.

But let me first start by outlining our view on the current economic situation in the euro area and our monetary policy stance. I will then address the broader economic challenges we are facing and their implications for monetary policy.

## The euro area economy and the ECB's monetary policy

The euro area economy grew modestly in 2024. While output stagnated in the fourth quarter, it was still 0.9% higher than at the end of 2023. Surveys indicate that manufacturing continues to contract while services activity is expanding. Consumer confidence is fragile and, despite rising real incomes, households are hesitant to spend more.

Nevertheless, the conditions for a recovery remain in place. A solid job market and higher incomes should strengthen consumer confidence and allow spending to rise. More affordable credit should boost consumption and investment over time. Exports should also support the recovery as global demand rises, although this is conditional on developments in international trade policies.

Inflation stood at 2.5% in January and has recently developed broadly in line with staff projections. Core inflation has remained at 2.7% in recent months, reflecting a sideways

movement in both services and goods inflation. Wage growth is moderating as expected, although it remains elevated, while profits are partially buffering the impact of wage increases on inflation.

Inflation is set to return to our 2% medium-term target in the course of this year, with risks on both the upside and the downside. Greater friction in global trade would make the euro area inflation outlook more uncertain.

In total, the ECB has lowered interest rates by 125 basis points since last June, and the deposit facility rate - the rate through which we steer the monetary policy stance - now stands at 2.75%. At our last meeting in January, we decided to lower our key interest rates by 25 basis points, based on an updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission. In particular, the disinflation process in the euro area is well on track. Most measures of underlying inflation suggest that inflation will settle at around our target on a sustained basis. And while financing conditions continue to be tight, our recent interest rate cuts are gradually making borrowing less expensive.

We are determined to ensure that inflation stabilises sustainably at our 2% mediumterm target. We will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance. We are not pre-committing to a particular rate path.

## A challenging economic environment for monetary policy

Let me now turn to the broader economic environment and its implications for monetary policy.

Europe has faced a series of unprecedented challenges in recent years, each with its own far-reaching impact. From the COVID-19 pandemic to surging energy prices and the geopolitical upheaval caused by Russia's invasion of Ukraine, we have navigated our way through a storm of supply shocks. As we look ahead, the frequency of these shocks is likely to remain high.

While we have weathered these crises, the past few years have also revealed missed opportunities and underinvestment in areas such as the digital transformation and the green transition - and the uncertainty surrounding trade and economic policy continues to weigh on consumption and investment. 3   As a result, and as highlighted in reports by Enrico Letta and Mario Draghi, Europe finds itself lagging behind international competitors in productivity and growth.

In a world driven by shifting global dynamics and rapid technological change, Europe must strike a delicate balance between achieving strategic autonomy and preserving its openness to the global economy. As President Ursula von der Leyen and I highlighted in a recent article, Europe's response to these challenges must be bold and strategic. While the outlook may seem daunting, the prospects are more promising than they might appear. 4

One of Europe's first priorities should be to deepen the Internal Market. By removing remaining barriers within the Single Market - barriers that effectively function like tariffs

- we can unlock economies of scale, encourage innovation and reduce costs for consumers and producers alike. We are already home to a wealth of ideas and innovators. Our challenge is to transform these ideas into technologies that fuel economic growth. To do so, we need to reduce administrative burdens and foster an innovation-friendly environment.

Another critical area is enhancing Europe's autonomy in payments, which form the backbone of our economy and our single currency. At present, a few foreign providers dominate Europe's payments landscape, leaving us vulnerable to external pressures. As we face an increasingly digital future, we must prepare the ground for a digital euro. This will ensure the resilience and public good nature of our payment systems. It will also provide a platform for private innovation in digital payments.

With substantial savings at its disposal, Europe must channel more resources into private investment and scale up financing to support its innovators. A genuine capital markets union designed for citizens and businesses alike will be instrumental here.

More broadly, investment must be the cornerstone of Europe's economic transformation. The focus must be on investing in physical and digital infrastructure, research and development, and green technologies. These are not optional but essential investments required to drive productivity and guarantee Europe's competitiveness on the global stage. Moreover, they will address our energy dependence and help us meet our climate goals - both pressing imperatives.

In this regard, we welcome the European Commission's Competitiveness Compass as a concrete roadmap for action, which will also support the ECB in maintaining price stability by reducing Europe's susceptibility to supply shocks.

That said, the ECB is not standing idle. We are committed to learning from the experiences of recent years. As part of the ongoing assessment of our monetary policy strategy, we are preparing for the risk of an increasingly volatile future. We are taking stock of a changed inflation environment and economic context. We are also focusing on the implications for monetary policy, our experiences with our evolving policy toolkit, our reaction function and how to better deal with risk and uncertainty in policy setting and communications. While the ECB continuously evaluates and adapts its economic models - a topic raised in your resolution - assessing new analytical needs will be one component of this assessment.

## Conclusion

Let me conclude.

The challenges facing Europe are immense, but solutions are within our reach. Our opportunity lies in more Europe.

As Konrad Adenauer said 70 years ago, ""European unity was the dream of a few. It became the hope for many. Today it is a necessity for all of us."" This sentiment rings true today more than ever.

To jointly tackle Europe's challenges, I am counting on the Parliament's commitment. Within its mandate, the ECB will play its part. Ever since the introduction of the euro, the ECB has continuously adapted to changing economic environments to fulfil its mandate. We remain fully committed to delivering on this mandate. We are equally committed to maintaining our active and meaningful dialogue with the Parliament.

Thank you for your attention.

1  See Dreher, F., Hernborg, N., Mochhoury, S., Mulder, T. and Schölermann, H. (2024), ""The ECB's accountability to the European Parliament 2019-2024: commitment in times "", , Issue 7, ECB. of change Economic Bulletin

- 2  For the considerations behind publishing more detailed explanations of how the Governing Council reaches its decisions, see Draghi, M. (2014), ""Monetary policy communication in turbulent times"", speech at a conference organised by De Nederlandsche Bank, Amsterdam, 24 April. For the latest account (typically published four weeks after a monetary policy meeting), see ECB (2025), ""Account of the monetary policy meeting of the Governing Council of the European Central Bank held in Frankfurt am Main on Wednesday and Thursday, 11-12 December 2024"", 16 January.
- 3  Andersson, M., Bobasu, A. and De Santis, R.A. (2024), ""What are the economic "", , Issue 8, ECB. signals from uncertainty measures? Economic Bulletin
- 4  Lagarde, C. and von der Leyen, U. (2025), "" Europe has strengths it can build on"", The , ECB, 1 February. ECB Blog",Christine Lagarde
https://www.bis.org/review/r250210g.htm,Denis Beau: The foundations of trustworthy AI in the financial sector,"Speech by Mr Denis Beau, First Deputy Governor of the Bank of France, at the Cercle IA et finance, Paris, 4 February 2025. ",2025-02-04 00:00:00,"## Denis Beau: The foundations of trustworthy AI in the financial sector

Speech by Mr Denis Beau, First Deputy Governor of the Bank of France, at the Cercle IA et finance, Paris, 4 February 2025.

* * *

Ladies and gentlemen,

First of all, I'd like to thank the organizers for their invitation to launch this event focusing on the Paris financial centre's AI strategy: just days before the international AI Action Summit , this gives me the opportunity to reiterate our determination at the Banque de France and the ACPR to take action on this major issue for the industry and to do so in concert with all financial sector players. The summit will also be an opportunity for the Banque de France to reaffirm its commitment by organising a side event on 11 February, featuring a round table discussion on ethical and inclusive AI.

AI - as you are already well aware, is being increasingly used in the financial sector, whether to assess credit risk, set insurance rates or estimate asset volatility. For a supervisor, its impact is potentially double-edged: while AI is a source of opportunities for the sector - including for its supervisor - it is also a new vector of risk. This ambivalent impact partly explains the regulatory framework that has just been introduced in Europe.

The European Union has proven itself a pioneer in this area by adopting the AI Act in the summer of 2024. However, this legislation raises legitimate questions, especially for the financial sector: is there not a risk of hampering innovation in the name of controlling risk? I would like to reiterate, before you today, a strongly held conviction that may seem iconoclastic in the current environment: in the long run, regulating AI-related risks is good for competitiveness in both Europe and France. Without regulation, there can be no trust - and therefore no sustainable innovation.

Because my opening remarks this morning are from a supervisor's perspective, I will discuss the opportunities and risks (I), then the conditions necessary for effective regulation of AI in the financial sector (II).

I/ To get a bit of perspective on things, I would like to revisit an initial observation: AI, combined with an abundance of available data, is a powerful vector of transformation for the financial sector.

1/ Our observations show that AI is increasingly being used by financial institutions along all segments of the value chain: i) to improve the ""user experience"", ii) to automate and streamline internal processes, and iii) to control risks, particularly in the battle against fraud and against money laundering and the financing of terrorism.

The emergence of generative AI two years ago has triggered a revolution in the accessibility of AI technology, thanks to the possibility of interacting with algorithms using natural language - via Large Language Models (LLMs) which makes adoption

considerably easier. Generative AI is also boosting innovation within companies as computer code can now be written by a much broader group of people.

If harnessed properly, AI can therefore boost the efficiency of financial institutions, increase their revenues and provide them with risk management solutions.

- 2/ However, there is a downside, and the power of the solutions developed is accompanied by significant risks , both for each of the players in the financial system and for the stability of the system as a whole. I would like to mention three of these risks.

The first is that these technologies may be put to improper use. The complexity and newness of certain modelling techniques can result in more errors, either in systems design or use. This poses a risk not only for customers, but also for institutions' financial health, as a poorly calibrated model could generate systematic losses. These risks are compounded by two factors. First, the adjustment of the parameters of certain models in real-time , which is one of their strengths, can also result in rapid drift . Second, certain AI systems are particularly opaque , generating a "" black box "" phenomenon.

The second risk I would like to highlight is cyber risk , which has become the number one operational risk in the financial sector over the past few years. AI amplifies this risk - both in terms of the danger posed by attackers and because it represents a new area of vulnerability. Conversely, we should be aware that AI can also enhance IT security, for example, by helping to detect suspicious behaviour.

Lastly, I'd like to highlight a third risk, which could become increasingly significant in the future, namely environmental risk . In the absence of reliable data provided by businesses or a commonly accepted basis of calculation, quantification of this risk is still subject to considerable variability. Nevertheless, it is clear that training the most recent generative AI models is a very energy-intensive process ... and that if current trends continue, their regular use by billions of customers will be even more so . These factors naturally suggest that AI should be used rather frugally . In other words, AI systems should only be used when necessary.

II/ I would now like to turn to aspects of regulation, legislation and control , and primarily to the European AI Act. This will mainly concern the financial sector for two use cases: creditworthiness assessment for granting loans to individuals, and risk assessment and pricing in health and life insurance. The main impacts of this legislation will be felt from August 2026, and as market surveillance authority , the ACPR should be responsible for ensuring that it is properly applied.

With this in mind, I would like to share two simple messages with you this morning: i) the risks linked to AI can essentially be handled within the existing risk management frameworks; ii) however, we should not underestimate certain new AI-related technical challenges.

1/ The AI Act will not lead to any major upheaval in the way risks are managed in the financial sector.

Financial institutions have a sound risk management culture, as well as robust governance and internal control systems. The Digital Operational Resilience Act ( DORA ), which has just come into force, rounds out the traditional regulatory framework with specific rules on operational resilience and IT risk management. The financial sector is therefore well equipped to meet the challenge of complying with the new regulations.

Admittedly, the objectives of the AI Act - first and foremost the protection of fundamental rights - and those of sectoral regulation - financial stability and the ability to meet commitments to customerdiffer . But operationally, when the AI Act requires ""high-risk systems"" to have data governance, traceability and auditability, or guarantees of robustness, accuracy and cyber-security throughout the lifecycle, clearly, we are not in uncharted waters.

Rather, I would like to reiterate that the usual principles of sound risk management and governance continue to apply under the AI Act. Naturally these will guide the ACPR in assessing systems compliance when it is called upon to exercise its role of market surveillance authority. More specifically, our vision for deploying this new mission will be underpinned by three simple principles: (i) implementing "" market surveillance "" in accordance with the AI Act, i.e. primarily aimed at identifying systems likely to pose compliance problems; (ii) defining supervision priorities using a risk-based approach to ensure that the resources deployed are proportionate to the expected outcomes; and (iii) unlocking all possible synergies with prudential supervision. I believe that this was the intention of the European legislator when it entrusted national financial supervisors with the role of ""market surveillance authority"". It is also the best way of ensuring that we don't make the regulations any more complex at a time when our common objective should be to simplify them.

Naturally, the principles of good governance and internal control also apply to algorithms not considered high-risk by the AI Act, if they pose risks to the organisations concerned - think of the use of AI systems in market activities, for example. Here, lessons learned from implementing the AI Act and the resulting best practices will be invaluable for both supervisors and supervised entities.

## 2/ Nevertheless, the challenges posed by the use of AI should not be underestimated

Some of the issues raised by this technology are definitely new . Let me give you two examples. Firstly, explainability : with each advance in this field, artificial intelligence algorithms have become increasingly opaque and in a regulated sector like the financial sector, this is a problem. More specifically, day-to-day users of AI tools need to have a sufficient understanding of how they work and of their limitations if they are to make appropriate use of them and avoid the twin pitfalls of either blindly trusting the machine or systematically mistrusting it.

The second example is fairness. AI can accentuate biases present in data. Indeed, one of the aims of the AI Act is to detect and prevent such biases before they cause harm to citizens. This is a technically complex issue, as banning the use of certain protected variables is not enough to guarantee safe algorithms. This is particularly true for

activities such as granting loans or pricing insurance, where customer segmentation is part of normal business and risk management practices in a competitive environment.

To address these new challenges and comply with the various regulatory requirements, financial institutions will need to acquire new human and technical resources and upskill . As market surveillance authority and prudential regulator, the ACPR will ensure that risks are effectively managed . Compliance with the AI Act will have to be more than just an internal administrative labelling exercise, and financial institutions will have to ensure that the algorithms are managed and monitored by competent people who understand their inner workings.

This means that the financial supervisor itself has to upskill and adapt its tools and methods. The ACPR has already published certain proposals in the past concerning the issue of explainability. It will eventually have to establish a doctrine on this topic as well as on algorithm fairness. We will also need to develop a specific methodology for auditing AI systems.

We cannot and must not take this methodological step forward alone. In addition to unlocking synergies with other AI supervisors in France and Europe, we need to cooperate with the financial sector . Supervisors and supervised entities share many challenges and they will overcome them more effectively if they are able to move forward together.

Events like today provide an opportunity to channel our collective efforts into a widely shared project. It is by working together that we will be able to lay the foundations for trustworthy AI in the financial sector.

I wish you fruitful discussions throughout this morning.",Denis Beau
https://www.bis.org/review/r250210f.htm,"Tiff Macklem: Structural change, supply shocks and hard choices","Remarks (virtually) by Mr Tiff Macklem, Governor of the Bank of Canada, at the Chapultepec Conference, Mexico City, 6 February 2025.",2025-02-06 00:00:00,"## Tiff Macklem: Structural change, supply shocks and hard choices

Remarks (virtually) by Mr Tiff Macklem, Governor of the Bank of Canada, at the Chapultepec Conference, Mexico City, 6 February 2025.

* * *

Good afternoon. I'm pleased to be able to join you virtually to talk about the challenges that lie ahead for central banks. There's a lot to discuss.

But my first order of business is to congratulate and thank Agustín Carstens for his leadership as General Manager of the Bank for International Settlements (BIS). Your term, Agustín, has been marked by significant global upheaval-from pandemic shutdowns to war in Europe and double-digit inflation. These past few years have not been easy.

Through it all, you have been a source of unwavering wisdom. Your clear thinking in the face of the unknown, your long view and your deep understanding of our global interdependence-all combined with the experience and pragmatism of a former minister of finance and then central bank governor-have made you an invaluable leader.

More than that, through the BIS, you've brought us together with your friendship and your ability to get directly to the heart of the issue. You've helped us learn from each other. And you've made us better together.

I know there will be an opportunity to celebrate you in Basel as your retirement in June approaches. But I wanted to recognize your exceptional leadership in your home country. For those of us in the Americas, your special interest in our region has been deeply appreciated. Whatever you do next, I know Mexico and the Americas will be an important part. Thank you, my friend.

Now, let me turn to the challenges ahead. We are facing a global economic landscape that has shifted in recent years, and this shift has important implications for central banks.

As Agustín has highlighted in a series of insightful speeches, the structural tailwinds of peace, globalization and demographics are turning into headwinds-and the world looks increasingly shock-prone.

Higher long-term interest rates, elevated sovereign debt, slower economic growth and lagging productivity make all of our economies more vulnerable. Compounding these vulnerabilities are war, rising trade protectionism and economic fragmentation. In addition, new technologies-including artificial intelligence-are set to disrupt existing industries and create new ones. And we are seeing more frequent catastrophic weather events as the impacts of climate change become more pervasive.

As 2025 begins, we are facing new uncertainty with a shift in policy direction in the United States. President Donald Trump's threats of new tariffs are already affecting business and household confidence, particularly in Canada and Mexico. The longer this uncertainty persists, the more it will weigh on economic activity in our countries.

If significant broad-based tariffs are indeed imposed, they will test the resilience of our economies in the short run and reduce long-run prosperity. Tariffs mean economies work less efficiently. There will be less investment and lower productivity. That means our countries will produce less and earn less. Monetary policy can't change that.

What monetary policy can do is help with the short-run adjustment. But even here, monetary policy has to strike a balance. Significant, broad-based tariffs will sharply reduce demand for our exports. At the same time, a weaker exchange rate, retaliatory tariffs and supply chain disruptions will raise import prices, putting upward pressure on inflation.

With a single instrument-our policy interest rate-central banks can't lean against weaker output and higher inflation at the same time. So we will need to carefully assess the downward pressure on inflation from weaker economic activity, and weigh that against the upward pressures from higher input prices and supply chain disruptions.

Other structural headwinds pose similar challenges for monetary policy. They'll impact both demand and supply, slowing growth while adding cost. Monetary policy cannot address these headwinds directly or offset their economic consequences.

In a world with more structural change and more negative supply shocks, central banks will be faced with harder choices. And harder choices bring risks of public disappointment and frustration. We will face criticism about our decisions-and about how well monetary policy is seen to have worked when confronted with forces that are mostly out of our hands. We will be called ineffective or criticized for not doing enough. And some will challenge our independence.

So, what can all of us do?

First, we can be humble about what we don't know, but also confident in the effectiveness of our frameworks. We didn't get everything right through the pandemic. And elevated inflation and higher interest rates have been difficult for our citizens. But in Canada, as in many other countries, inflation has come down. And we restored low inflation without causing a recession or major job losses.

Guided by our frameworks, we can maintain confidence in price stability.

Second, we can be just as clear about what monetary policy cannot do. There will always be forces beyond our influence, and while we need to understand those forces, we should also be clear that understanding is not the same as controlling. And we need to avoid the temptation to overload monetary policy by expecting more of it than it can deliver.

Third, we can recognize that the world has changed. Structural headwinds and supply shocks require different types of information and analysis. This means investing in richer information about the supply side of the economy and building models that can analyze sectoral shocks and their transmission. It means reaching out and listening to

households and businesses. It means looking at our economies through different lenses, regularly challenging our assumptions, and using scenarios to help manage uncertainty.

Fourth, let's acknowledge that working together has never been easy and it's getting harder. But let's also remember that it's important. We are more effective if we confront our shared challenges together. The shared resolve of central banks to fight the postpandemic surge in inflation helped all of us bring inflation down. This was a positive international spillover and, together, we can generate other positive international spillovers.

Finally, we need to remain evidence-based, technocratic and professional, and free of political influence. We need to be open, accountable and transparent. And we need to be learning institutions-when faced with valid criticism, we should critically evaluate our policy actions and be willing to improve. Being independent and accountable and continuously learning is how we build trust.

The world is a tougher place today than it was a few short years ago. And facing the headwinds before us will not be easy. But that's why we have independent central banks-we are designed for tough times.

I look forward to hearing from my esteemed colleagues on this panel.",Tiff Macklem
https://www.bis.org/review/r250210d.htm,Adriana D Kugler: Entrepreneurship and aggregate productivity,"Speech by Ms Adriana D Kugler, Member of the Board of Governors of the Federal Reserve System, at the 2025 Miami Economic Forum, Economic Club of Miami, Miami, Florida, 7 February 2025.",2025-02-07 00:00:00,"For release on delivery Noon EST February 7, 2025

Entrepreneurship and Aggregate Productivity

Remarks by

Adriana D. Kugler

Member

Board of Governors of the Federal Reserve System at the

2025 Miami Economic Forum Economic Club of Miami

Miami, Florida

February 7, 2025

Thank you, Jon, and thank you for the opportunity to speak to you today. 1   It is such a pleasure to be back in Miami, a city I have seen grow and become ever more dynamic over the decades, as I have come many times to visit my large extended family here ever since the 1980s.

As I discussed in my final speech of 2024, two positive supply shocks have significantly benefited the U.S. economy over the past two years and have also affected the conduct of monetary policy. 2

The first of these has been the surge in population over the past few years that has helped bring labor supply into balance with labor demand and, thus, also helped move inflation toward the Federal Open Market Committee's (FOMC) 2 percent goal.  The other positive supply shock, which I outlined in my remarks in December, has been a step-up in aggregate productivity growth since 2020, which is an increase in the amount of economic output, across the economy, per hour worked or some other unit of labor. Although productivity growth, measured quarterly, can be quite volatile, over the past five years this acceleration is quite evident.  While productivity grew by about 1.5 percent a year from 2005 to 2019, starting in 2020 it has grown about 2 percent a year. This difference may not look dramatic, but because of compounding year-over-year, the consequences of an additional 1/2 percentage point in growth over the past five years are significant for workers and the U.S. economy.  When workers are more productive, it effectively means that businesses can produce more without needing to add workers, and

1 The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.

2 See Adriana D. Kugler (2024), 'A Year in Review:  A Tale of Two Supply Shocks,' speech delivered at the Detroit Economic Club, Detroit, Michigan, December 3,

that they can pay workers more without needing to raise prices.  When they are more productive, it can also serve as an incentive for businesses to expand.  Across the economy, higher productivity growth means that real wages and living standards for workers can rise faster without putting upward pressure on inflation.

And that is exactly what has been happening recently, a period when inflation has been falling while the economy is expanding.  While fast growth in wages was one of the factors driving inflation in 2021 and 2022, most likely some of that increase was due to productivity growth and, hence, was not inflationary.  If productivity continues to grow at an accelerated pace, it would support the FOMC's efforts to keep unemployment low and return inflation to a sustained level of 2 percent.  For that reason, I would like to spend the balance of my remarks exploring some of the possible reasons why productivity has accelerated, and the prospects that this fortunate development will continue.

Numerous factors affect aggregate productivity, and several may have driven the increase in productivity growth in the U.S. since the pandemic, in contrast to the subdued productivity growth experienced by other advanced economies around the world.

One such factor may have been a result of the enormous movement of workers caused by the pandemic.  It began with the dramatic loss of 22 million jobs in the spring of 2020, the reemployment of many of those workers and the continued mobility as people quit jobs, switched occupations and careers, and relocated in response to the enormous changes in work and home life brought about by the pandemic.  In finding new jobs, in what became a very tight labor market, workers had the opportunity to find better matches for their skills and, to some extent, work that they were motivated to carry out and which made them more productive.  One indication that this was probably a

significant factor in the U.S. is that other advanced economies where there was less worker movement have experienced lower rates of productivity growth. 3   Economic data and research suggest that periods of strong job re-allocation are accompanied or followed by higher productivity growth. 4

The tightness of the labor market since 2021 has also likely led firms to invest to a greater extent in labor-saving as well as labor-enhancing technologies, which, of course, is traditionally one of the major sources of productivity gains.  For example, many retail businesses seemed to have installed more self-checkout machines after the onset of the pandemic, allowing employers to substitute capital for workers when workers could not come to work in person and when there were severe shortages.  More generally, digital technology allowed employees to continue working from home during the period of the pandemic and beyond, saving commuting time and making employees potentially more productive. 5

To the extent that these factors are boosting productivity growth, they are by their nature one-off developments that eventually will fade.  A notable exception may turn out to be productivity improvements from investments in artificial intelligence (AI).  AI investment by businesses has stepped up in the past two years, and it appears to be accelerating. 6   The advent of the internet and related innovations boosted productivity

3 See Joaquin GarcíaCabo, Anna Lipińska,  and  Gaston  Navarro (2023), 'Sectoral Shocks, Reallocation, and Labor Market Policies,' European Economic Review, vol. 156 (July), 104494.

4 See, for example, Lucia Foster, John Haltiwanger, and C.J. Krizan (2001), 'Aggregate Productivity Growth:  Lessons from Microeconomic Evidence,' in Charles R. Hulten, Edwin R. Dean, and Michael J. Harper, eds., New Developments in Productivity Analysis (Chicago:  University of Chicago Press), pp. 30363; and John Haltiwanger, Henry Hyatt, Erika McEntarfer, and Matthew Staiger (2025), 'Cyclical Worker Flows:  Cleansing vs. Sullying,' Review of Economic Dynamics, vol. 55 (January), 101252.

5 See Myrto Oikonomou, Nicola Pierri, and Yannick Timmer (2023), 'IT Shields:  Technology Adoption and Economic Resilience during the COVID-19 Pandemic,' Labour Economics, vol. 81 (April), 102330. 6 Estimates of current AI usage by firms vary widely, but uptake appears to be significant and rising.  See Leland Crane, Michael Green, and Paul Soto (2025), 'Measuring AI Uptake in the Workplace,' FEDS

growth for about 10 years starting in the mid-1990s, and the benefits of AI could potentially be that revolutionary and persistent.

In addition to being temporary, the factors that I have outlined that could be boosting productivity, job re-allocation, and technological investments are themselves hard to measure across the economy.  And so are their effects on productivity as well. But there is another important factor that is likely to be driving productivity higher whose effects may well persist, and that is the surge in new business formation experienced since 2019.  As I will explain, new businesses are associated with higher rates of overall productivity growth, and that may be particularly true for some of the sectors in which these businesses were created.

Applications for new business tax identification numbers jumped shortly after the pandemic began and have remained elevated since then. 7   In 2024, the pace of applications that are likely to result in employer business formation was about 30 percent above its 2019 pace.  This surge is largely unique to the U.S.  In the euro zone, for example, business registrations have been relatively flat.  This may help explain why labor productivity growth in Europe has been well below that of the U.S. in recent years. 8

Notes (Washington:  Board of Governors of the Federal Reserve System, February 5), https://www.federalreserve.gov/econres/notes/feds-notes/measuring-ai-uptake-in-the-workplace20240205.html.

7 These data, which track applications to the Internal Revenue Service for new Employer Identification Numbers, are available from the Census Bureau's Business Formation Statistics.  I focus specifically on 'high-propensity applications,' which are those applications deemed by the Census Bureau to be particularly likely to result in the creation of new firms with formal employees.

8 See Francois de Soyres, Joaquin Garcia-Cabo Herrero, Nils Goernemann, Sharon Jeon, Grace Lofstrom, and Dylan Moore (2024), 'Why Is the U.S. GDP Recovering Faster Than Other Advanced Economies?' FEDS Notes (Washington:  Board of Governors of the Federal Reserve System, May 17), https://www.federalreserve.gov/econres/notes/feds-notes/why-is-the-u-s-gdp-recovering-faster-than-otheradvanced-economies-20240517.html.

The surge in applications in early 2020 was an early signal of an acceleration in the creation of job-creating new firms. 9   The latest data available indicate that new firms created 1.9 million jobs in 2023, 14 percent higher than the total for 2019. 10

A couple of aspects of this surge in business entry in the U.S. are noteworthy. First, the surge was particularly noticeable in high-tech industries that, historically, are important for overall innovation and productivity growth. 11   Second, while the pace of business applications has cooled somewhat over the past year, it still remains elevated and well above pre-pandemic norms.  It is, in fact, proving somewhat more persistent than some expected.

For these reasons, the surge in new business formation is highly relevant to our discussion about productivity.  There is a large body of research that finds that new firms are key contributors to innovation and growth in aggregate productivity. 12   This might seem surprising and counterintuitive, since it is well known that many new firms fail in their first year or two.  But in the commotion of competition that these many new

9 For extensive documentation and analysis of the pandemic business entry patterns, see Ryan A. Decker and John Haltiwanger (2024), 'Surging Business Formation in the Pandemic:  Causes and Consequences?' Brookings Papers on Economic Activity, Fall, pp. 249-302; and Ryan Decker and John Haltiwanger (2024), 'Surging Business Formation in the Pandemic:  A Brief Update,' working paper.

10 Data on employment among firms with age zero from the Bureau of Labor Statistics Business Employment Dynamics.  These are annual data with a March reference period.

11 For documentation of the pandemic high-tech entry surge, see Ryan Decker and John Haltiwanger (2024), 'High Tech Business Entry in the Pandemic Era,' FEDS Notes (Washington:  Board of Governors of the Federal Reserve System, April 19), https://www.federalreserve.gov/econres/notes/feds-notes/hightech-business-entry-in-the-pandemic-era-20240419.html.  For the role of high-tech industries in aggregate productivity growth, see John G. Fernald (2015), 'Productivity and Potential Output before, during, and after the Great Recession,' NBER Macroeconomics Annual, vol. 29, pp. 1-51.

12 The relevant literature is vast.  For example, see Marcela Eslava, John Haltiwanger, Adriana Kugler, and Maurice Kugler (2004), 'The Effects of Structural Reforms on Productivity and Profitability Enhancing Reallocation:  Evidence from Colombia,' Journal of Development Economics, vol. 75 (December), pp. 333-71; Titan Alon, David Berger, Robert Dent, and Benjamin Pugsley (2018), 'Older and Slower:  The Startup Deficit's Lasting Effects on Productivity Growth,' Journal of Monetary Economics, vol. 93 (January), pp. 68-85; and Ryan Decker, John Haltiwanger, Ron Jarmin, and Javier Miranda (2014), 'The Role of Entrepreneurship in US Job Creation and Economic Dynamism,' Journal of Economic Perspectives, vol. 28 (Summer), pp. 3-24.

businesses face, there are always businesses that persist and keep their lights on, and those often do so because they are innovative and more productive.  New businesses are the essence of the competition that drives market-based economies, and it is not surprising that they would be an important source of new products or processes for doing business-and a source of growth. 13

Of course, not every new firm has to innovate and grow to make important economic contributions.  Every entrepreneur contributes even if they just create a job for themselves and their family members.  But those new firms that do innovate and grow are critical for improvements in overall productivity over time.

As I noted before, since the surge in entrepreneurship after the onset of the pandemic featured an increase in high-tech businesses as well, the productivity implications could be significant.  Indeed, the last period of strong productivity growth in the U.S., which ran from the late 1990s into the early 2000s, was preceded by a surge of new business creation in high-tech industries, including those industries that more recently have been associated with AI-related developments. 14   So this is one source of my optimism about continued robust productivity growth in the U.S.

But it is not only the innovations produced directly by new businesses that are important, since by any measure these new firms are a small share of total businesses. New businesses also help drive innovation by existing firms.  As they scramble for

13 See Daron Acemoglu, Ufuk Akcigit, Harun Alp, Nicholas Bloom, and William Kerr (2018), 'Innovation, Reallocation, and Growth,' American Economic Review, vol.  108 (November), pp. 3450-91; and Vincent Sterk, Petr Sedlacek, and Benjamin Pugsley (2021), 'The Nature of Firm Growth,' American Economic Review, vol. 111 (February), pp. 547-79.

14 See Lucia Foster, Cheryl Grim, John C. Haltiwanger, and Zoltan Wolf (2021), 'Innovation, Productivity Dispersion, and Productivity Growth,' in Carol Corrado, Jonathan Haskel, Javier Miranda, and Daniel Sichel, eds., Measuring and Accounting for Innovation in the Twenty-First Century (Chicago:  University of Chicago Press).

funding, customers, and human capital, new businesses will increase competition with existing ones, forcing them to innovate as well so they can succeed.  This is surely also driving the recent acceleration in productivity growth.

Many predicted that the surge in new business creation would disappear as effects of the pandemic have faded, but this has not really happened.  It is possible that the surge in entry will recede and that its productivity effects will likewise be temporary.  On the other hand, the productivity gains from a surge in entry could last for some time, since these highly productive young firms have been found to grow rapidly for several years, contributing to aggregate productivity growth along the way.  Time will tell, but for now, it seems likely that this is a factor supporting productivity growth at a higher-thanhistorical rate.

I will confess to you all that it is not a coincidence that I have come to Miami to highlight the role of entrepreneurship in innovation and productivity growth.  Miami and the Miami metropolitan area is an extraordinarily entrepreneurial area, a place with high rates of new business creation, and it is likely an important source of the recent productivity surge.

Out of more than 900 U.S. cities for which we have data, Miami's post-pandemic new firm entry rate ranked 8th in the nation. 15   And Miami is not alone in Florida; 5 of the top 20 cities for pandemic-era business formation are here in your state. 16   Miami specifically, and Florida generally, has been a key part of the U.S. entrepreneurship story

15 Entry rates are measured as new firms as a share of all firms for 2021-22 (average) from the Census Bureau Business Dynamics Statistics; the Census Bureau data report entry rates for core-based statistical areas.

16 The 5 Florida cities in the top 20 are Orlando-Kissimmee-Sanford, Miami-Fort Lauderdale-West Palm Beach, Cape Coral-Fort Myers, Tampa-St. Petersburg-Clearwater, and Crestview-Fort Walton BeachDestin.

for some time.  During the decade before the pandemic, Miami ranked 5th out of more than 900 U.S. cities for firm entry rates, and Florida featured 8 of the top 20 U.S. cities. 17

Miami is special in this regard.  I wonder what is in the water here to produce such a dynamic, entrepreneurial culture.  Perhaps it is the extent of sunshine, which has long been associated with optimism.  Perhaps it is the friendly economic climate-in my own academic research, I have found that policies that facilitate business entry and support worker or job re-allocation are indeed helpful for dynamism and productivity. 18 But an interesting question for me as the first Hispanic at the Board of Governors since its creation is whether the large Hispanic population in Florida is also a factor behind the impressive pace of business dynamism that I have just described.

More than 25 percent of Florida's population is Hispanic, compared with around 20 percent for the United States as a whole. 19   Nationwide, recent data indicate that Latinos account for a dominant-and rapidly growing-share of new entrepreneurship in the U.S., with a particular increase since the pandemic. 20   Of course, many of these Latino entrepreneurs are also immigrants, another group with a well-known proclivity for entrepreneurship. 21  There are immigrants in Miami from the Caribbean and all over the

17 I  measure the pre-pandemic decade using average firm entry rates for 2010-19.  The 8 Florida cities in the top 20 are Orlando-Kissimmee-Sanford, Miami-Fort Lauderdale-West Palm Beach, Cape Coral-Fort Myers, Wildwood-The Villages, Tampa-St. Petersburg-Clearwater, Naples-Marco Island, North PortBradenton-Sarasota, and Jacksonville.

18 See, for example, David Autor, William Kerr, and Adriana Kugler (2007), 'Do Employment Protections Reduce Productivity?  Evidence from U.S. States,' Economic Journal, vol.  117 (June), pp. F189-F217; and Marcela Eslava, John Haltiwanger, Adriana Kugler, and Maurice Kugler (2004), 'The Effects of Structural Reforms on Productivity and Profitability Enhancing Reallocation:  Evidence from Colombia,' Journal of Development Economics, vol. 75 (December), pp. 333-71.

19  Data from the 2023 American Community Survey.

20 Analysis by Robert Fairlie using Bureau of Labor Statistics Current Population Survey data reported in Ruth Simon (2024), 'Latinos Are Starting U.S. Businesses at a Torrid Pace,' Wall Street Journal, March 26.

21 See Sari Pekkala Kerr and William Kerr (2020), 'Immigrant Entrepreneurship in America:  Evidence from the Survey of Business Owners 2007 &amp; 2012,' Research Policy, vol. 49 (April), 103918.

world who contribute to the entrepreneurial culture of this city, and it is surely this culture, as much as the efforts of any nationality or group, that is the real engine of the dynamism here.  I applaud you all for fostering that culture here in Florida, which is such an important contributor to the economic growth of our nation.  More entrepreneurs means more productivity, which is crucial to U.S. prosperity.

Let me conclude with an outline of my views on the outlook for the U.S. economy and the FOMC's efforts to return inflation to our 2 percent goal while maintaining a strong labor market.

The U.S. economy remains on a firm footing.

Real gross domestic product (GDP) continues to grow at a solid pace.  The Bureau for Economic Analysis estimates that real GDP grew 2.3 percent in the fourth quarter of 2024, and private domestic final purchases, which is the best indicator for GDP one quarter ahead, grew a solid 3.2 percent. Therefore, I anticipate solid GDP growth also in the first quarter of this year.  In addition, earlier today the Labor Department reported that U.S. employers created 143,000 jobs in January and the unemployment rate edged down to 4 percent, consistent with a healthy labor market that is neither weakening nor showing signs of overheating.

Inflation has fallen significantly since its peak in the middle of 2022, and in September the FOMC judged that it was time to begin reducing our policy interest rate from levels intended to strongly restrict aggregate demand and put downward pressure on inflation.  We reduced our policy rate 100 basis points through December, but the recent progress on inflation has been slow and uneven, and inflation remains elevated.  There is also considerable uncertainty about the economic effects of proposals of new policies.

Going forward, in considering the appropriate federal funds rate, we will watch these developments closely and continue to carefully assess incoming data, the evolving outlook, and the balance of risks.

Thank you again for the opportunity to speak to you today.",Adriana D Kugler
https://www.bis.org/review/r250210c.htm,Fatih Karahan: Recent economic and financial developments in Turkey,"Speech by Ms Fatih Karahan, Governor of the Central Bank of the Republic of Turkey, at the briefing on the Inflation Report 2025-I, Ankara, 7 February 2025.",2025-02-07 00:00:00,"## Fatih Karahan: Recent economic and financial developments in Turkey

Speech by Ms Fatih Karahan, Governor of the Central Bank of the Republic of Turkey, at the briefing on the Inflation Report 2025-I, Ankara , 7 February 2025.

* * *

Distinguished Members of the Press, Esteemed Guests,

First, I would like to welcome you all. We mark the second anniversary of the earthquakes of February 6. We still feel the pain of our losses in our hearts. Before I begin my speech, I commemorate with mercy, our citizens who lost their lives in the earthquake disaster and the recent fire in Bolu Kartalkaya. With my heartfelt condolences, I wish strength to mourning families.

Today, we are here to share the main messages of the Inflation Report.

The disinflation process continues. Macroeconomic indicators are also in line with this process.

We think that domestic demand has reached levels supportive of disinflation and the underlying inflation is on a downward path.

We will maintain our tight monetary policy stance in a way to make sure that disinflation continues.

In the following parts of my speech, I will give you detailed information about these topics.

I will start my presentation by sharing our assessments regarding the macroeconomic outlook and our monetary policy stance. Later on, I will present you our medium-term projections. Finally, our Deputy Governors and I will be answering your questions.

As usual, our Inflation Report includes boxes on prominent issues on the agenda as well as thematic analyses.

In this Report, we discuss topics such as price setting behavior, the relationship between producer and consumer prices in services, valuation effect on household assets and the foreign trade effects of changes in euro-dollar exchange rate.

Distinguished Guests,

I would like to start my speech with the recent key global economic developments.

We maintain our projection for a gradual recovery in global growth in line with the previous reporting period.

The divergence between the manufacturing industry and the services sector, observed in the previous reporting period, continues.

Leading indicators point to increased downside risks for the manufacturing industry.

The uncertainty regarding global trade policies has significantly increased in the recent period.

Increased protectionism in trade, uncertainties regarding global economic policies, and geopolitical risks amplify downside risks to global growth and upside risks to inflation.

The global demand outlook, geopolitical risks and supply-side factors remain determinant on commodity prices.

Global developments have recently increased the volatility in Brent oil prices.

Non-energy commodity prices, on the other hand, posted limited increases.

Central banks of advanced economies continue to cut interest rates in line with the inflation outlook.

Inflation remains persistent all over the globe, albeit at a subdued level.

Due to increased uncertainties regarding the inflation outlook as well as fiscal and trade policies, central banks are placing more emphasis on upside risks to inflation.

Against this background, market pricing also indicates slower rate cuts in 2025 in both advanced and emerging economies.

## Macroeconomic Outlook

Esteemed Guests,

Now I would like to share with you our observations on domestic macroeconomic developments.

Data for the third quarter of 2024 indicate that the contribution of domestic demand to annual growth was slightly negative at -0.1 points, while the positive contribution of net exports to growth increased to 2.2 points.

Thus, the composition of growth remained balanced.

Production indicators for the fourth quarter suggest a modest recovery in economic activity.

Having declined in the second and third quarters of 2024, industrial production started to rise again in the last quarter according to November data.

The services production index, on the other hand, registered a lower quarterly increase compared to industrial production.

As you know, this index is also directly related to demand in the services sector. The index signaled a flat course in demand for services throughout 2024.

Indicators for demand for goods also show that domestic demand remains moderate.

In this period, the retail volume index increased in quarterly terms.

However, the increase excluding gold was more limited.

Recent data point to a loss of pace in real spending by card.

Additionally, field observations from our interviews with firms also confirm the moderation in domestic demand.

Accordingly, data on demand for goods and services as a whole suggest that demand conditions are at disinflationary levels.

Indicators based on alternative methods and shown in light colors in the chart reveal that the output gap has remained in negative territory since the third quarter of 2024.

Here, I would like to emphasize that domestic demand will remain balanced in response to our tight monetary policy.

The output gap will hover at negative levels over the remainder of the year, and thus will remain an important component of the disinflation process.

The current account recorded a significant improvement in line with the rebalancing in domestic demand.

The ratio of the current account deficit to GDP dropped to 0.7 percent in the third quarter of 2024. We estimate the cumulative current account deficit to have remained at a similar level in the fourth quarter.

As noted in previous presentations, the current account balance improves during monetary tightening periods.

In the upcoming period, we expect the current account deficit to widen. However, it will be limited on the back of our tight monetary stance. We project that the current account deficit relative to GDP will remain below its historical average in 2025.

## Distinguished Participants,

Now, I would like to share our assessments on the inflation outlook, shaped in the context of these macroeconomic developments.

The disinflation process that started in June is right on track.

Consumer inflation decreased to 42.1 percent in January, a significant decline from its peak level in May.

Since the previous reporting period, inflation developments have been in line with our projections.

The decline in the underlying inflation continued in the last quarter.

Underlying inflation indicators may differ occasionally from each other. This underscores the importance of monitoring underlying inflation using a variety of indicators.

All the indicators we monitor point to a gradual slowdown in the underlying inflation.

In this period, distribution-based indicators recorded lower values than exclusion-based indicators such as B and C.

In January, the underlying inflation rose in line with our projections.

This was mainly driven by services items with time-dependent price setting and backward indexation. In January, wages, energy prices, administered prices, and tax adjustments affected consumer inflation.

In January, the annualized underlying inflation rose to 34 percent from around 30 percent in December, and remained below annual inflation.

We project that the underlying inflation will decelerate again in the second quarter, following the first quarter's increase.

To better understand the January dynamics, we have categorized the CPI items into two groups: those with state- and time-dependent price setting.

""The time-dependent group"" for which the price is set at specific periods of the year, such as in education services; differs from ""the state-dependent group"" for which the timing of the price setting is based on economic conditions.

In January, the time-dependent price setting group recorded higher price increases.

Furthermore, a closer look at this group reveals that the highest price increases are recorded in January due also to administered items. Price increases are weaker in the following periods.

For items with state-dependent price setting, the price increase rate is lower compared to the previous year. I suggest you to take a look at our Box on this subject.

In the last quarter of 2024, services inflation eased, and core goods inflation remained weak.

In January, core goods prices edged up by 0.7 percent. Annual core goods inflation has fallen to around 24 percent on the back of stable exchange rates, as well as commodity prices and demand conditions. Notably, durable goods prices maintain a positive outlook.

In January, services prices rose sharply by 10.3 percent, led by public and private healthcare services.

The official medical examination co-payment amount increased for the first time since 2017. The impact of this sharp increase on consumer inflation in January was 0.6 points. Moreover, this amendment will have carry-over effects on February inflation.

Despite the monthly surge, the services inflation maintains its downtrend on an annual basis. Meanwhile, items with a high backward-indexation tendency, such as education and rents, push services inflation up.

Given this, it is important to take a moment to discuss rent inflation.

After all, rent inflation differs from other services items in terms of both level and inertia due to factors including earthquakes, urban transformation, demographics, and limits on rent increases.

Despite its high level, we see that rent inflation is on a downward trend.

The Retail Payment System microdata also confirms this observation. Accordingly, the growth rates in new and renewed contracts are declining. Moreover, we see that these growth rates remain below the current annual rent inflation in CPI.

The periodical increase in monthly rent inflation in January, is due to the rise in the contract renewal rates. However, as can be seen in the chart on the right, the rate of increase in these contracts decreased also in January.

Producer prices-led pressure on consumer inflation, particularly on core goods, was moderate.

In this context, monthly producer inflation stood at 1.4 percent on average over the last three months, supporting disinflation in core goods.

As we have already underlined, the course of inflation expectations and price setting behavior is crucial for the pace of disinflation.

Inflation expectations continue to recede, albeit remaining above our disinflation path. Expectations across all sectors are steadily declining amid the fall in headline inflation.

We have recently observed a significant decline in the inflation expectations of consumers and firms. In fact, since March, inflation expectations of households and firms have dropped by more than 20 points and 10 points, respectively. Our decisive monetary policy stance will further improve expectations.

## Monetary Policy

Distinguished Participants,

In this part of my speech, I would like to talk about our monetary policy stance.

As you know, we kept the policy rate unchanged at 50 percent in the April-November period.

In December, we observed that the underlying trend of inflation declined further, and expectations and pricing behavior kept improving. Moreover, we concluded that domestic demand remained supportive of disinflation. In line with these assessments, we gradually lowered the policy rate from 50 percent to 45 percent while maintaining the necessary tightness.

We also narrowed the corridor between overnight borrowing and lending rates.

In addition, we support the effectiveness of monetary transmission via macroprudential measures and liquidity management, against the divergence in expectations of economic units and possible volatilities.

We can summarize the tools we use to support our tight monetary stance under three main categories:

With the regulations on deposits, we aim to increase the share of Turkish lira deposits and to gradually reduce FX-protected deposits (KKM).

With the regulations on loan growth, we prevent fluctuations in loan demand.

Third, we manage excess Turkish lira liquidity in the system by taking steps on liquidity.

We sterilize excess liquidity in the market through reserve requirements and our existing toolset.

In this regard, we also utilize Turkish Lira Deposit Buying Auctions and sell-side FX and gold swap auctions against the Turkish lira.

In addition, we started to open deposit buying auctions with 4-week maturity since January 24, aiming to extend the maturity of sterilization operations.

We closely monitor the liquidity conditions. We will continue to utilize our toolset effectively.

As for financial conditions, compound interest rates for deposits and commercial loans are priced at around 54 percent, and consumer loans at around 64 percent.

The five-point cut in the policy rate was reflected in deposit and loan pricing in line with our expectations.

Our monetary policy stance and macroprudential framework ensure that deposit rates remain at a level that supports the transition to the Turkish lira and boosts savings.

As for credit developments, following the mild course in October and November, consumer loan growth accelerated somewhat in December due to seasonal factors. This upturn was driven by credit cards and unsecured consumer loans.

The retail loan growth returned to its mild course in January.

It is critical that consumer loans follow a pace that will restore the rebalancing in domestic demand.

For this reason, we will ensure that consumer loan growth remains on a moderate path.

Regarding commercial loans, Turkish lira loan growth is in line with monthly growth limits and loan demand.

On the other hand, we lowered the monthly growth limit on foreign currency loans to 1 percent in January, due to ongoing strong demand for these loans.

We expect that the growth path of foreign currency loans will align with targets.

Our tight monetary stance and the measures to reduce the FX-protected deposits balance have preserved interest and confidence in Turkish lira assets.

The share of Turkish lira deposits neared 60 percent, converging to its historical average, while that of FX-protected deposits receded to 5 percent.

In August 2023, the total value of FX-protected deposits accounts surpassed USD 140 billion. The current balance decreased to USD 29 billion.

The decline in the FX-protected deposits balance strengthens the monetary transmission mechanism and reduces the risks on the central bank balance sheet by increasing the share of Turkish lira deposits.

Despite this significant decline, the transition rate from maturing FX-protected deposits to FX in the last 12 months stood at 12 percent.

Given the current level of FX-protected deposits, we plan to end this practice this year, giving priority to legal persons.

Recently, capital inflows have slowed down due to the decreasing risk appetite in global markets, yet, capital flows to Türkiye have been favorable.

In the upcoming period, capital inflows may display volatility depending on global developments.

Residents' and non-residents' increased confidence in the Turkish lira continues to be reflected positively on our reserves.

In August, we started to conduct sell-side swap transactions for sterilization purposes. Between March 22, 2024 and January 31, 2025 gross reserves increased by USD 42 billion, while our net FX position excluding swaps improved by USD 130 billion.

As of January 31, our gross reserves rose to USD 166 billion, while our net reserves excluding swaps rose to USD 65 billion, including our domestic Turkish lira currency swaps.

Our tight monetary policy stance continued to affect the risk perception towards Türkiye positively.

Although the risk premium followed a volatile outlook due to geopolitical developments, it maintained its moderate course.

## Medium Term Projections

Distinguished Participants,

Against the backdrop of the economic outlook I have presented so far, I will now share our medium-term projections.

You can find the revisions to our main assumptions in the Report.

Our medium-term forecasts are based on an outlook in which the tight monetary policy stance will be maintained, until the decline in inflation is sustained and the price stability is achieved.  We have also reflected in our forecasts that the coordination among economic policies will continue to increase.

Accordingly, we forecast inflation for end-2025 at 24 percent. We maintained our inflation forecast for end-2026 at 12 percent.

We target inflation to decrease to 8 percent in 2027 and stabilize at 5 percent in the medium term.

The lower and upper ends of the forecast range correspond to 19 percent and 29 percent for 2025, and 6 percent and 18 percent for 2026.

The forecast revision for 2025 was driven by factors that are relatively beyond the control of monetary policy.

As for the details of the revision, one of the leading factors was the increase in the weight of the services group in the CPI basket. This update pushed mechanically our previous forecast up by 0.8 points.

The 0.5 points of the 2.2-point forecast revision stem from the update in food inflation due to the unprocessed food.

A significant portion of the 1.7-point revision resulting from administered prices was driven by the increase in co-payment by patients' shares in medical examinations.

This revision is due to the factors that are relatively beyond the control of monetary policy. Thus, it does not signal any easing of the monetary policy stance.

Hence, we kept our 2026 forecast unchanged within a context where the probable secondary effects of the revision in our 2025 forecast through expectations will be offset by the tight monetary stance.

Our decisive monetary policy stance will continue to strengthen the disinflation process through moderation in domestic demand, the real appreciation of the Turkish lira and the improvement in inflation expectations.

By maintaining our cautious stance, we expect inflation to decline steadily in the upcoming period. In this process, tightness in financial conditions coupled with demand conditions will continue to support disinflation.

The decline in the underlying inflation will continue in 2025 as the stickiness in services inflation weakens and the improvement in inflation expectations become more pronounced. The coordination between monetary and fiscal policies will contribute to the disinflation process as well.

We will decisively maintain our tight monetary policy stance until decline in inflation is sustained and price stability is achieved.

We set the policy rate in a way to ensure the tightness required by the projected disinflation path. In this process, we take into account inflation realizations, underlying inflation and inflation expectations.

We make our policy decisions prudently on a meeting-by-meeting basis with a focus on the inflation outlook. Monetary policy tools will be used effectively in case a significant and persistent deterioration in inflation is foreseen.

## Distinguished participants,

I would like to emphasize once again that price stability is a prerequisite for sustainable growth and increased social welfare.

In the disinflation process, we will continue to do whatever it takes to bring inflation down in line with our intermediate targets.

## Distinguished Participants,

As I conclude my remarks, I would like to thank all of my colleagues who have contributed to the writing of the Report, primarily the members of the Monetary Policy Committee, the Chief Advisors and the staff of the Research and Monetary Policy Department and everyone that have contributed to the press conference.

We can now move onto the Question and Answer session. Our Deputy Governors will also be happy to answer your questions.",Fatih Karahan
https://www.bis.org/review/r250210e.htm,Gent Sejko: How to improve the quantitative and qualitative access of the agricultural sector to finance,"Address by Mr Gent Sejko, Governor of the Bank of Albania, at the meeting with Banks and the Agribusiness, Tirana, 6 February 2025.",2025-02-06 00:00:00,"## Gent Sejko: How to improve the quantitative and qualitative access of the agricultural sector to finance

Address by Mr Gent Sejko, Governor of the Bank of Albania, at the meeting with Banks and the Agribusiness, Tirana, 6 February 2025.

* * *

Your Excellency Prime Minister,

Honourable Minister Denaj, Honourable Minister Malaj,

Dear representatives of the banking sector and interest groups,

First, allow me to welcome you to this roundtable discussion, which focuses on a crucial issue for the economic development of Albania: identifying the pathways and instruments to improve both the quantitative and qualitative access of the agricultural sector to finance.

The economic and social importance of this sector is evident in various statistics, but I will mention just a few. Agricultural sector employs about one-third of the country's labour force and generates around 20% of the national product. Yet, even after three decades of transition, it is characterized by a low productivity and income level.  For example, the average income per capita in rural areas is approximately 50% of the average income per capital in urban areas.

The problems regarding development of agricultural sector are complex and - in most cases - are related to structural weaknesses in the production system and the supply chain that brings products to the market. However, it cannot be denied that one of the chronic problems this sector has faced and continues to encounter is its limited access to financing.

Hence, I am confident that this roundtable discussion is the right initiative at the right time.

Before addressing more specifically the issues surrounding lending to agricultural sector, allow me to consider it in a broader context.

## Dear participants,

Despite the many challenges we have faced, the Albanian economy has performed positively over the course of past decade. In the past ten years, the volume of economic activity in real terms grew by 39%, while average income per capita increased by 58%. The Albanian economy, in nominal terms, has grown from an economy of around EUR 10 billion in 2014 to an economy of almost EUR 25 billion in 2024.   This economic growth has yielded an increase in employment, wages and the well-being of the Albanian society. In addition, the main economic and financial soundness indicators of Albania: inflation, public debt, foreign debt, non-performing loans and banking sector's balance sheets, have been improving.

In this landscape of developments, the dynamism, flexibility and increasing sophistication of private sector have played a primary role. Also, the prudential monetary, fiscal and financial policies, as well as ongoing structural reforms have enabled a stimulating environment for bolstering consumption and investments. At the same time, the banking sector has developed into a reliable partner for Albanian households and businesses. Over the last decade, this sector has transformed to a buffer of shocks and a promoter of development from a generator and amplifier of shocks in the second decade of transition.

In particular, the structural reforms we have undertaken in close cooperation with the Albanian Government - where I find it appropriate to highlight the national plan for reducing non-performing loans, consolidating the banking sector, improving the supervisory and regulatory framework, as well as developing financial markets and payment instruments - have proven effective.  These reforms have enabled the preservation of financial stability, the expansion in the range of banking services, the reduction of their costs, and have led to a growth in lending to the Albanian economy. Focusing on the latter, I would like to emphasize that credit to the private sector reached a 16% growth rate in 2024. This rate implies an increase of around ALL 110 billion in the credit portfolio, representing the main flow of financial support for the economy.

However, these positive development trends are not uniform everywhere. In more concrete terms, the agricultural sector displays the weakest performance among the major sectors of the Albanian economy, caused by structural problems, such as land fragmentation; poor technological infrastructure; low horizontal and vertical integration between farmers, markets, and other sectors of the economy. In the same vain, credit to agriculture sector accounts for less than 2% of bank credit to businesses.

Dear representatives of the banking sector,

This progress, still falling short of the desires and needs that the agricultural sector has for credit, reflects both the reality of the risk associated with lending to this sector, due to the nature of the activity, its structural problems, the lack of collateral, and the high costs of lending. However, increasing your attention to its financing is a matter of strategic importance for the development of Albania. Studies conducted in this area have evidenced that lending to the agricultural sector has twice the impact on poverty reduction compared to lending to other sectors of the country.

In this context, I believe that the recent initiative of the Bank of Albania to approve and implement a Financing Program for micro, small, and medium-sized businesses offers an opportunity to open a new chapter in lending to agricultural sector.

This program responds to the concerns and demands of businesses, as well as our analyses, which show an uneven lending performance among businesses analysed by size. Although micro, small, and medium-sized businesses are the backbone of the Albanian economy, generating more than 80% of added value and employing nearly 80% of the workforce in the country, this sector is four times less creditworthy than large businesses and corporations. This phenomenon results from many factors, some of which we have tried to address through this program.

In these circumstances, the financing program for micro, small, and medium-sized businesses offers the opportunity for a qualitative boost in the development of these businesses in the short run. In addition it provides for addressing the structural issues that curb their access to credit in the medium term, and fosters partnership and mutual trust between them and the banking industry in the long term.

Taking advantage of this opportunity, allow me to emphasize that the Bank of Albania has made available a fund of All 25 billion to support the financing of micro, small, and medium-sized businesses. This program, which will be implemented through commercial banks, offers the possibility of significantly reducing the cost of credit for these businesses, which could reach up to 2%, but in any case, will not exceed the level of 3.5%, in turn enabling them to invest in physical assets, capital equipment, or technological platforms that serve to increase productivity. Also, I would like to clarify that our fund will be made available to commercial banks, which - through their selection process and at their own risk - will channel it into loans for businesses.

This exceptional measure by the Bank of Albania represents an important opportunity to boost lending to small and medium-sized businesses in general, and to those operating in the agricultural sector in particular. This initiative can be further supported by risksharing programs from the government, which I believe will be discussed further in this roundtable.

## Dear participants,

Concluding, I kindly invite you to be as concrete and forward-thinking as possible in your discussions, so we can jointly build an agenda of measures that will provide, within a reasonable time, a concrete and long-term solution to this problem.

I would also like to call on the banking industry to pay greater attention to the development of financial products tailored for agriculture - products that take into account the agricultural production cycle and the seasonality of farmers' incomes, as well as to explore all the opportunities offered by our international financial partners, in terms of generating funds and building instruments in providing the support this sector deserves.

Thank You!",Gent Sejko
https://www.bis.org/review/r250210a.htm,"Naoki Tamura: Economic activity, prices and monetary policy in Japan","Speech by Mr Naoki Tamura, Member of the Policy Board of the Bank of Japan, at a meeting with local leaders, Nagano, 6 February 2025.",2025-02-06 00:00:00,"

Bank  of  Japan February  6,  2025

## Economic Activity, Prices, and Monetary Policy in Japan

Speech at a Meeting with Local Leaders in Nagano

## TAMURA Naoki

Member of the Policy Board

(English translation based on the Japanese original)

## I. Economic Activity and Prices

## A. Economic Activity

I  will  begin  my  speech  by  talking  about  economic  activity  in  Japan. The  Bank  of  Japan assesses that the economy has recovered moderately on the whole, although some weakness has been seen in part. In terms of the median of the Policy Board members' forecasts -- as presented in the January 2025 Outlook for Economic Activity and Prices (Outlook Report) -Japan's real GDP growth rate is expected to be at 0.5 percent for fiscal 2024, 1.1 percent for fiscal 2025, and 1.0 percent for fiscal 2026 (Chart 1). While the projected growth rate for fiscal 2024 is low, this reflects the impact of negative growth in the January-March quarter of  2024,  which  was  due  to  temporary  factors  such  as  a  suspension  of  production  and shipments at some automakers. Looking at the growth rates for fiscal 2024 on a quarter-onquarter basis suggests that Japan's economy is likely to grow firmly. Thereafter, the economy is  projected  to  keep  growing  at  a  pace  above  its  potential  growth  rate,  with  overseas economies continuing to grow moderately and as a virtuous cycle from income to spending gradually intensifies.

Chart 1: The Bank's Forecasts for Real GDP



Note: Forecasts are medians of the Policy Board members' forecasts in the January 2025 Outlook Report. Real GDP values for fiscal 2024 onward are calculated by multiplying the actual figure for fiscal 2023 by all successive projected growth rates for each year.

Sources: Cabinet Office; Bank of Japan.

Let  me  now  explain  wage  developments,  which  I  believe  warrant  particular  attention  in envisioning  the  economic  situation.  The  upcoming  results  of  the  annual  spring  labormanagement wage negotiations currently in process will be an important factor in assessing whether  the  virtuous  cycle  from  income  to  spending  will  continue  to  operate  (Chart  2). Although the negotiations are still in progress, various large firms have already reported that they will implement high wage hikes on par with those last year. There continue to be reports by some small and medium-sized firms that wage hikes will be difficult, but many other firms have voiced that they have no choice but to raise wages in response to labor shortages. In this context, a paradigm shift seems to be taking place in firms' wage-setting behavior. Previously, it was common for firms to generate profits and then return them to employees in the form of wage hikes. Currently, however, firms face a situation of having to set a wage level that is sufficient to secure their workforce (Chart 3). Just as firms have needed to reconsider their business strategies in the face of a rise in raw material prices while taking this situation as a given, they need to do the same thing while taking the current wage situation as a given. Specifically, firms should take steps such as passing on cost increases to prices, enhancing business efficiency, and transforming their business models through, for example, business realignment and corporate restructuring. I hear that corporate executives have formulated their medium-term management plans while factoring in annual wage hikes. This suggests a

Chart 2: Results of the Annual Spring Labor-Management Wage Negotiations



Notes: 1. Figures for ""CPI inflation"" are for all items less fresh food, excluding the effects of the consumption tax hikes.

2. Figures for ""actual base pay increase"" and ""actual regular wage increase"" from 1991 to 2014 are those published by the Central Labour Relations Commission, while those from 2015 to 2024 are figures released by the Japanese Trade Union Confederation (Rengo). Figures are based on the wage negotiation results of labor unions for which the base pay increase is clear.

Sources: Central Labour Relations Commission; Ministry of Internal Affairs and Communications; Rengo.

Chart 3: Factors regarding Wage Hikes by Firms



Notes: 1. In the left panel, figures are based on the LOBO survey by the Japan Chamber of Commerce and Industry, and show trends in raising scheduled cash earnings. Figures up through fiscal 2023 are as of December of each fiscal year, while those for fiscal 2024 are as of September.

2. In the right panel, figures are based on a follow-up survey on the Price Negotiation Promotion Month organized by the Small and Medium Enterprise Agency. The pass-through rate in the panel refers to the proportion of labor cost increases incurred during six months prior to each survey, and passed on to prices.

Sources: Japan Chamber of Commerce and Industry; Small and Medium Enterprise Agency.

fundamental shift in the long-standing assumption that wages will not increase. In light of these points, I believe solid wage growth that is consistent with the price stability target of 2 percent can be expected at this year's annual spring labor-management wage negotiations.

## B. Price Developments

Turning to Japan's price developments, the year-on-year rate of increase in the consumer price index (CPI) for all items excluding fresh food has been at around 3 percent recently (Chart 4). That for all items excluding fresh food and energy, for which prices fluctuate significantly, has been at around 2.5 percent. The seasonally adjusted month-on-month rate of increase in this CPI has clearly accelerated since June 2024, roughly maintaining an increase of around 3 percent on an annualized basis (Chart 5). This reflects several developments: (1) the price

Chart 4: Consumer Prices



Source: Ministry of Internal Affairs and Communications.

Chart 5: Consumer Prices (Annualized Month-on-Month Rate of Change)



Note: Figures are the CPI for all items less fresh food and energy. Source: Ministry of Internal Affairs and Communications.

pass-through of recent cost increases, including higher raw material prices, shipping costs, and utility costs; (2) the ongoing pass-through carried out with a time lag by industries and firms that have been unable to pass on past cost increases sufficiently; (3) a growing number of firms passing on higher personnel expenses to prices; and, in this situation, (4) a rise in rice prices that is further pushing up overall inflation.

The inflation rate has remained at or above 2 percent for nearly three years, and the price of rice, which is a staple for Japanese people, has risen significantly. I am concerned that these factors may have a greater negative impact on consumer sentiment than what the figures alone imply and may adversely affect private consumption.

I think one reason why inflation has continued in Japan is that prices have been under upward pressure due to the positive output gap -- that is, the situation in which demand has outstripped potential supply capacity. According to the Bank's estimate, the output gap has been at around 0 percent recently, although this rate needs to be viewed with latitude, as estimates may differ depending on the estimation methods and are subject to estimation errors (Chart 6). So, does this mean that there has been neither upward nor downward pressure on prices? Looking at the breakdown of the output gap, the labor input gap has been positive (i.e., labor shortage),

## Chart 6: Output Gap



Notes: 1. Figures for the output gap are Bank staff estimates.

2. The Tankan factor utilization index is calculated as the weighted average of the production capacity DI and the employment conditions DI for all industries and enterprises. Capital and labor shares are used as weights. There is a discontinuity in the data for December 2003 due to a change in the survey framework.

Source: Bank of Japan.

whereas the capital input gap has been negative (i.e., excessive production capacity) because production facilities have not been operating at full capacity. That said, such operation below full capacity is not necessarily due to a lack of demand but rather due largely to the shortage of  labor  needed  to  operate  facilities  sufficiently. 1 In  the Tankan (Short-Term  Economic Survey of Enterprises in Japan), recent developments in the diffusion indices (DIs) showing firms' perceptions of production capacity and employment conditions reveal that, while the share of firms responding  that their labor capacity has been  insufficient increased substantially, hardly any firms were experiencing excessive production capacity. This may explain  the  significant  divergence  between  developments  in  the  weighted  average  of  the relevant DIs -- i.e., the Tankan factor utilization index -- and developments in the output gap estimated by the Bank. 2 Therefore, my view is that, although the tightness of supply and demand conditions differs between industries, the output gap is already in positive territory in reality and the lack of supply capacity is exerting upward pressure on prices.

1   Anecdotal information includes the following. The accommodations industry noted that Japanesestyle inns and western-style hotels inevitably had to limit occupancy rates due to labor shortages. The taxi industry noted that a shortage of drivers made it impossible to operate all vehicles even if they were  available.  The  manufacturing  industry  noted  that  firms  were  unable  to  operate  production facilities at full capacity due to labor shortages.

2 The Tankan factor utilization index is a composite indicator calculated using the weighted average of the production capacity DI and the employment conditions DI in the Tankan . It indicates whether firms sense an excess or a shortage in their production and labor capacity.

I  would  also  like  to  touch  on  medium-  to  long-term  inflation  expectations  of  firms  and households,  which  are  an  important  factor  in  assessing  the  underlying  trend  of  inflation. Firms' inflation outlook for general prices in the Tankan has increased moderately and that for five years ahead has continued to be above 2 percent (Chart 7). The results of the Bank's Opinion Survey on the General Public's Views and Behavior show that households' inflation outlook for five years ahead has been significantly above 2 percent, although bias in expected price levels should be taken into account. 3 Considering these factors, I believe that inflation expectations of firms and households have risen steadily and have generally reached the 2 percent level.

Chart 7: Inflation Expectations



Notes: 1. Figures for firms in the left panel are averages of all industries and enterprises.

2. Regarding figures for households in the middle panel, figures for the quantitative question are medians of numerical values for expected inflation rates provided by respondents. Figures for the qualitative question are estimated using the modified Carlson-Parkin method, quantifying the results of the 5-choice question shown in the right panel, asking respondents their expectations for whether and to what degree prices will go up or down.

Source: Bank of Japan.

3   This survey included a qualitative question asking respondents to indicate their outlook for prices by choosing options such as prices ""will go up slightly"" or ""will go up significantly."" When inflation expectations  are  estimated  using  the  responses  to  this  question  to  adjust  for  bias  in  household expectations, the estimates suggest that inflation expectations have risen moderately but are still at a level  of  around  1.5  percent.  It  should  be  noted,  however,  that  even  if  people  with  high  inflation expectations,  like  respondents  saying  that  prices  ""will  go  up  significantly,""  have  increased  their expectations further, they are only able to choose the same response. Given the bias arising from such constraints, the possibility cannot be ruled out that inflation expectations may be underestimated in these cases.

Returning to consumer prices, let us take a look at the outlook. In terms of the median of the Policy Board members' forecasts, the CPI (all items less fresh food) is projected to see a yearon-year rate of increase of 2.7 percent for fiscal 2024, 2.4 percent for fiscal 2025, and 2.0 percent for fiscal 2026 (Chart 8). As price developments have been on track to achieve the price  stability  target,  the  Bank  assesses  that  the  likelihood  of  realizing  this  target  has continued to rise. Moreover, considering the recent progress in firms' pass-through of cost increases to prices, higher personnel expenses reflecting labor shortages, and firms' moves to pass on such expenses to prices, I believe that risks to prices are becoming more skewed to the upside.

Chart 8: The Bank's Forecasts for the CPI



Notes: 1. Figures are the CPI for all items less fresh food, excluding the effects of the consumption tax hikes.

2. The locations of , △ , and ▼ in the chart indicate the figures for each Policy Board member's forecasts. The risk balance assessed by each Policy Board member is shown by the following shapes: indicates that a member assesses ""upside and downside risks as being generally balanced,"" △ indicates that a member assesses ""risks are skewed to the upside,"" and ▼ indicates that a member assesses ""risks are skewed to the downside."" The dotted red lines show the medians of the Policy Board members' forecasts presented in the January 2025 Outlook Report.

Sources: Ministry of Internal Affairs and Communications; Bank of Japan.

## II. Conduct of Monetary Policy

Now, I would like to turn to the Bank's conduct of monetary policy. The Bank conducts monetary  policy  with  the  aim  of  achieving  the  price  stability  target  of  2  percent  in  a sustainable and stable manner. Since the changes in the monetary policy framework made in March 2024, it has regarded guiding the short-term  interest  rate as  a primary policy  tool (Chart  9).  While  the  Bank  intends  to  adjust  the  degree  of  monetary  accommodation  in response to an increase in the likelihood of achieving the price stability target, it decided at the January 2025 Monetary Policy Meeting (MPM) to raise the target level of its short-term policy interest rate by 0.25 percentage points, to around 0.5 percent (Chart 10).

Chart 9: Guideline for Market Operations

|            | Short-term interest rate                                                                                | Other operating targets                                            |
|------------|---------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------|
| Oct. 2010- | Around 0 to 0.1% (uncollateralized overnight call rate)                                                 | -                                                                  |
| Apr. 2013- | -                                                                                                       | Monetary base: annual pace of increase of about 60-70 trillion yen |
| Oct. 2014- | -                                                                                                       | Monetary base: annual pace of increase of about 80 trillion yen    |
|            | Yield curve control                                                                                     | Yield curve control                                                |
| Sep. 2016- | -0.1% (rate on the Policy-Rate Balances in current accounts held by financial institutions at the Bank) | 10-year JGB yields: around 0%                                      |
| Mar. 2024- | Around 0 to 0.1% (uncollateralized overnight call rate)                                                 | -                                                                  |
| Jul. 2024- | Around 0.25% (uncollateralized overnight call rate)                                                     | -                                                                  |
| Jan. 2025- | Around 0.5% (uncollateralized overnight call rate)                                                      | -                                                                  |

Chart 10: Decision at the January 2025 MPM

Japan's economic activity and prices have been developing generally in line with the Bank's outlook , and the likelihood of realizing the outlook has been rising .

|                                            | Fiscal 2024   | Fiscal 2025   | Fiscal 2026   |
|--------------------------------------------|---------------|---------------|---------------|
| Real GDP                                   | 0.5 (-0.1)    | 1.1 (-)       | 1.0 (-)       |
| CPI (all items less fresh food)            | 2.7 (+0.2)    | 2.4 (+0.5)    | 2.0 (+0.1)    |
| CPI (all items less fresh food and energy) | 2.2 (+0.2)    | 2.1 (+0.2)    | 2.1 (-)       |



Adjusting the degree of monetary accommodation from the perspective of sustainable and stable achievement of the price stability target of 2 percent

## Short-term interest rate raised to ""around 0.5%"" :

(uncollateralized overnight call rate)

(previously ""around 0.25%"")

-  Real interest rates are expected to remain significantly negative, and accommodative financial conditions will continue to firmly support economic activity .
-  If the outlook presented in the January Outlook Report will be realized, the Bank will accordingly continue to raise the policy interest rate and adjust the degree of monetary accommodation.

The Bank expects that underlying CPI inflation will increase gradually and that, in the second half of the projection period presented in the January Outlook Report -- which covers the period through fiscal 2026 -- it will be at a level that is generally consistent with the price stability target. Moreover, although there are various uncertainties regarding the outlook, I believe that, by the second half of fiscal 2025 -- when wage hikes resulting from annual wage negotiations,  including  among small and medium-sized firms, will likely be confirmed -Japan's economy will reach a point where it can be judged that the price stability target has been achieved, considering several positive factors: changes in firms' wage- and price-setting behavior; the lack of supply capacity, reflecting labor shortages; and firms' and households' inflation expectations, which have generally reached 2 percent. If the economy does reach this point, it will be necessary for the Bank to raise the short-term policy interest rate to a level that is neutral to economic activity and prices -- i.e., the nominal neutral interest rate -within  a  similar  timeframe.  The  reason  is  that,  with  upside  risks  to  prices  growing  as  I mentioned earlier, if the short-term interest rate stays below the level of the neutral interest rate, this will further push up inflation. My sense is that the neutral interest rate would be at least around 1 percent. Therefore, I think it is necessary for the Bank to raise the short-term

interest rate to at least that level by the second half of fiscal 2025 to contain the upside risks to prices and achieve the price stability target in a sustainable and stable manner.

However,  how  economic  agents  in  Japan,  which  has  long  experienced  a  state  without meaningful  interest  rates,  react  to  higher  interest  rates  is  an  issue  that  warrants  careful attention without any preconceptions. Thus, bearing in mind that the short-term interest rate should be at the 1 percent level by the second half of fiscal 2025, I think the Bank needs to raise this rate in a timely and gradual manner, in response to the increase in the likelihood of achieving the price stability target. While doing so, it also needs to determine the appropriate level  of  the  short-term  interest  rate  by  carefully  assessing  how  the  economy  and  prices respond to the rate hikes. Based on these considerations, I will assess the appropriate timing of the next policy rate hike, to 0.75 percent. I believe that, even if the policy rate were raised to 0.75 percent, real interest rates would remain significantly negative and there would still be a long way to go before reaching a level that would put downward pressure on economic activity. Put differently, now is the time for the Bank to ease off slightly from pressing hard on  the  accelerator  of  monetary  easing,  so  that  it  can  slow  down  when  necessary  while avoiding harsh braking.

## III. Review of Monetary Policy from a Broad Perspective

At the December 2024 MPM, the Bank completed the review of monetary policy from a broad perspective (the Review), which it had been conducting since April 2023, and then released a report. In the Review, the Bank examined the positive effects and side effects of unconventional  monetary  policy  and  laid  out  the  implications  for  the  future  conduct  of monetary policy, considering the developments in Japan's economic activity and prices as well as financial conditions over the past 25 years. Today, I would like to share what I consider to be the key points of the Review and my thoughts about some of these points.

## A. Positive Effects and Side Effects of Large-Scale Monetary Easing since 2013

I will start with the positive effects and side effects of the various unconventional monetary policy  measures  the  Bank  implemented  from  2013  (Chart  11).  The  Review  draws  two conclusions: (1) while not as much as originally expected, large-scale monetary easing pushed up economic activity and prices; and (2) although there have been certain side effects, the overall effect of such easing on Japan's economy so far has been positive. I would like to make a few comments on these points, drawing on my past experience as a banker in the private sector.

## Chart 11: Positive Effects and Side Effects of Large-Scale Monetary Easing since 2013

## Impact on Economic Activity and Prices

- Large-scale monetary easing pushed up economic activity and prices .
- However, mainly due to the difficulties of influencing expectations, the effect was not as large as expected at the time when it was introduced .

## Side Effects of Large-Scale Monetary Easing etc.

| Functioning of financial markets        | Negative impact on the functioning of the JGB market                                                                                                         |
|-----------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Functioning of financial intermediation | Downward pressure on financial institutions' interest margins on loans and other assets but no evidence of financial intermediation activities being impeded |
| Supply side of the economy              | No clear conclusion reached, either positive or negative                                                                                                     |

## Assessment of the Effects and Side Effects of Large-Scale Monetary Easing

- Although there have been certain side effects on financial markets and financial institutions' profits, the overall effect on the Japanese economy so far appears to have been positive .
- However, attention should be paid to the possibility that the negative effects may become larger in the future , such as the possibility that the functioning of the JGB market does not fully recover or possible side effects of large-scale monetary easing materialize at a later date.

The first is about the side effects of large-scale monetary easing on the supply side of the economy. Based on analyses of currently available data, no clear conclusions, either positive or negative, were reached in the Review regarding the impact on the supply side. However, I think it highly likely that such easing exerted significant side effects. Specifically, due in part to  prolonged  large-scale  monetary  easing,  corporate  dynamism  stagnated,  resulting  in sluggish productivity. Thus, in my view, it is a stretch to say that the overall effect of largescale monetary easing has been positive.

The second point concerns the Review's call for attention to the possibility that the overall negative effects of large-scale monetary easing may become larger in the future, as further side effects may materialize at a later date. It is of course necessary to continue to carefully examine the side effects on the functioning of financial markets, financial intermediation, and the supply side of the economy. Another topic of relevance is whether prolonged monetary easing will give rise to problems, including how the yen's excessive depreciation and the surge  in  housing  prices  in  metropolitan  areas  will  affect  economic  activity  and  people's livelihoods. Close monitoring is warranted here.

## B. Implications for the Future Conduct of Monetary Policy

The Review notes the following (Chart 12). Unconventional monetary policy measures were effective in pushing up Japan's economic activity and prices. However, the quantitative degree of their effects is uncertain compared with guiding the short-term interest rate. Moreover, when unconventional measures are implemented at a large scale for a long period of time, they can bring about side effects. Going forward, if it becomes necessary to implement such measures, it will be important to weigh the benefits and costs, while taking account of the developments in economic activity and prices as well as financial conditions at the time.

## Chart 12: Implications for the Future Conduct of Monetary Policy (1)

## The Bank's Thinking on Unconventional Monetary Policy

- Unconventional monetary policy measures were effective in pushing up Japan's economic activity and prices . However, the quantitative degree of their effects is uncertain compared with conventional monetary policy measures (guiding short-term interest rates) . When unconventional monetary policy measures are implemented at a large scale for a long period of time, they can bring about side effects .
- Going forward, if it becomes necessary to implement unconventional monetary policy measures , it will be important to weigh the benefits and costs, while taking account of the developments in economic activity and prices as well as financial conditions at that point in time .
- The Bank should not exclude at this point any specific measures when considering the future conduct of monetary policy. Looking ahead, in considering the implementation of each measure, it will be necessary for the Bank to design policy measures that can exert positive effects while minimizing side effects as much as possible, taking account of the findings of the Review.

In this regard, it should be noted that the Review did not sufficiently analyze the effects of individual policies, owing to the limitations of quantitative analysis. In my opinion, largescale monetary easing had a positive effect on economic activity and prices for two years or

so from 2013, by way of the repricing of assets, including in terms of foreign exchange rates, stock prices, and real estate. However, I feel that the marginal effects of subsequent additional measures, such as further increases in Japanese government bond (JGB) purchases and the introduction of the negative interest rate policy, were considerably limited. If the Bank faces the  need  to  consider  unconventional  monetary  policy  measures  in  the  future,  I  believe  it should deliberate carefully, taking these factors into account.

## C. Price Stability Target of 2 Percent

Regarding the price stability target of 2 percent, the Review concludes that it is appropriate for the Bank to continue to conduct monetary policy from the perspective of sustainable and stable achievement of the target (Chart 13). It cites as reasons for this the need for some leeway to lower real interest rates in the case of an economic downturn, the upward bias in the CPI, and the fact that many central banks in major advanced economies have also set their inflation targets at 2 percent.

## Chart 13: Implications for the Future Conduct of Monetary Policy (2)

## Price Stability Target of 2 Percent

- It is appropriate for the Bank to continue to conduct monetary policy from the perspective of sustainable and stable achievement of the price stability target of 2 percent .
-  Unconventional monetary policy measures cannot fully substitute for short-term interest rate control, and it is desirable to conduct monetary policy so that the zero lower bound would not be reached. It is important to maintain a moderate positive inflation rate in a stable manner so that real interest rates can be lowered in the case of an economic downturn .
-  Bias in the CPI serves as supporting evidence.
-  Many central banks in major advanced economies have set their inflation targets at 2 percent .
-  When Japan was under the prolonged deflation, or in a low-inflation environment, prices of individual items became more rigid and the regular pay tended to be unchanged, and this may have distorted resource allocation or have constrained proactive investment by firms .
- In conducting monetary policy, it is important not to focus on the inflation rate at each point in time, but rather to capture the underlying trend of inflation by analyzing a variety of factors affecting the price changes .

In addition, the results of surveys for firms and households indicate that many preferred a situation in which both prices and wages (income) rise moderately to a situation in which they both remain almost unchanged (Chart 14). When Japan was under prolonged deflation, or in a low-inflation environment, prices of many items became more rigid and the regular pay  tended  to  be  unchanged.  I  believe  that  such  a  situation  may  have  distorted  resource allocation or constrained proactive investment by firms. Based on these experiences, it is necessary to achieve a moderate rise in prices accompanied by wage increases.

Chart 14: Preferences regarding Prices, Income, and Wages Households Firms



Note: Figures for households are based on the Opinion Survey on the General Public's Views and Behavior (September 2024 Survey). Those for firms are based on the Survey regarding Corporate Behavior since the Mid-1990s . Source: Bank of Japan.

On this basis, I think the Review underscores a vital point when it notes that, in conducting monetary policy, it is important not to focus on the inflation rate at each point in time, but rather to capture the underlying trend of inflation by analyzing a variety of factors affecting the price changes. Rather than being particular about the numerical value of 2.0 percent, I believe that, as long as prices are increasing moderately, the Bank should examine whether the mechanism behind the increase is consistent with the price stability target.

## D. Fiscal and Monetary Policy

As the Bank has continuously and consistently explained about the relationship between fiscal and monetary policy, the aim of monetary policy is to achieve price stability and should not be to support monetary financing of government debt. Nevertheless, in the exchange of views

conducted as part of the Review, it was pointed out that the Bank's large-scale JGB purchases resulted in a loosening of fiscal discipline, even though monetary finance was not the purpose of  the  purchases.  The  government  and  the  Diet  are  responsible  for  conducting  fiscal management appropriately. This is reflected in the joint statement released by the government and the Bank in 2013, which stated that the government would steadily promote measures aimed at establishing a sustainable fiscal structure. I believe it important to steadily ensure market credibility of achieving medium- to long-term fiscal soundness. That said, one side effect of the Bank's large-scale monetary easing was deterioration in the functioning of the JGB market, as it has become difficult to gauge how the market sees factors such as the future state of economic activity and prices as well as the government's fiscal condition by looking at the level of long-term yields on JGBs and how the level changes. I think this point warrants attention.

Up to now, I have highlighted and discussed monetary policy, which was the focus of the Review.  A  final  point  I  would  like  to  emphasize  is  that,  while  monetary  policy  has  a significant  impact  on  economic  activity  and  prices,  not  everything  can  be  accomplished through monetary policy. The chief actors in an economy are economic agents such as firms and households. I would thus like to reiterate that, even if monetary policy has supported the recent increases in prices and wages, I do not believe that these increases could have been achieved by monetary policy alone.

Thank you.",Naoki Tamura
https://www.bis.org/review/r250210b.htm,Philip R Lane: A middle path for European Central Bank monetary policy,"Speech by Mr Philip R Lane, Member of the Executive Board of the European Central Bank, at the Peterson Institute for International Economics (PIIE), Washington DC, 5 February 2025. ",2025-02-05 00:00:00,"## Philip R Lane: A middle path for European Central Bank monetary policy

Speech by Mr Philip R Lane, Member of the Executive Board of the European Central Bank, at the Peterson Institute for International Economics (PIIE), Washington DC, 5 February 2025.

* * *

## Accompanying slides to the speech

It is a pleasure to be here at the Peterson Institute for International Economics (PIIE): your impressive research on a wide range of topics is extremely valuable for policymakers. 1

At last week's monetary policy meeting, the ECB's Governing Council decided to lower the deposit facility rate - the rate through which we steer the monetary policy stance by 25 basis points from 3.0 per cent to 2.75 per cent. In cumulative terms, the deposit facility rate has declined by 125 basis points since last June. The decision reflected our updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission.

In what follows, I will explain in more detail the basis for this decision. I will review inflation developments, economic developments, our risk assessment, and financial and monetary conditions. Finally, I explain why pursuing a middle path for monetary policy is best suited to the current environment.

## Inflation developments

The disinflation process remains well on track. Inflation has continued to develop broadly in line with the staff projections and is set to return to our two per cent mediumterm target in the course of this year. Most measures of underlying inflation suggest that inflation will settle at around our target on a sustained basis. The Persistent and Common Component of Inflation (PCCI), which has the best predictive power among underlying inflation indicators for future headline inflation, continued to hover around two per cent in the December data, indicating that headline inflation is set to stabilise around our target.

Domestic inflation, at 4.2 per cent, stayed well above all the other indicators in December mostly because wages and prices in certain sectors are still adjusting to the past inflation surge with a substantial delay. However, the PCCI for services, which should act as an underlying attractor for services inflation and domestic inflation, fell to 2.3 per cent.

The anticipation of a downward shift in services inflation in the coming months also relates to the expected deceleration in wage growth in the course of 2025. Wages have been adjusting to the past inflation surges with a substantial delay, but the ECB wage tracker and the latest surveys point to a significant moderation in wage pressures this year. According to the latest results of the Survey on the Access to Finance of

Enterprises (SAFE), firms expect wages to grow by 3.3 per cent on average over the next twelve months, down from 4.5 per cent this time last year. Similarly, the latest Corporate Telephone Survey indicates that wage growth should decelerate from 4.3 per cent in 2024 to 3.6 per cent in 2025 and 2.7 per cent in 2026. This assessment is shared broadly among forecasters. Consensus Economics, for example, foresees a decline in wage growth by about one percentage point between 2024 and 2025.

Most measures of longer-term inflation expectations continue to stand at around two per cent, despite an uptick at shorter horizons that may reflect the recent rise in energy prices. While the inflation expectations of firms have stabilised at three per cent across horizons, according to the SAFE, larger firms that are aware of the ECB's inflation target show convergence towards two per cent. Consumer inflation expectations have edged up recently, especially for the near term, which can at least be partly explained by their higher sensitivity to the recent uptick in realised inflation. Inflation expectations of professionals - as captured by the latest vintages of the Survey of Professional Forecasters and Survey of Monetary Analysts - as well as market-based measures of inflation compensation have ticked up for the near term but, over longer horizons, remain stable at levels consistent with our medium-term target of two per cent.

## Economic developments

On a fourth-quarter-to-fourth-quarter basis, the 2024 growth rate came in at 0.9 per cent, constituting a material improvement in momentum relative to the 2023 growth rate of 0.1 per cent. While 2024 saw a modest recovery in consumption, investment remained weak and exporters continued to suffer competitiveness challenges. In terms of the quarterly profile, growth stagnated in the final quarter following a comparatively robust third quarter.

The incoming survey indicators suggest that the euro area economy is set to remain subdued in the near term. While unemployment remained low at 6.3 per cent in December, there has been some softening in labour demand, as reflected in lower vacancies and lower employment growth.

At the same time, our baseline assessment is that the conditions for a recovery remain in place. Higher incomes, lower interest rates and stronger household balance sheets should allow a faster pick-up in consumption. More affordable credit should also boost housing and business investment over time. Exports should also support the recovery as global demand rises, although this is highly conditional on developments in international trade policies.

## Financial and monetary conditions

Global and euro area bond yields have increased significantly since our last meeting. Amongst other factors, the spillover impact of the rise in US and global longer-term rates has contributed to the steepening of the euro area yield curve.

Our past interest rate cuts are gradually making it less expensive for firms and households to borrow. The cost of borrowing for firms has declined by 92 basis points and mortgage rates have declined by 62 basis points since their peaks in autumn 2023. However, the interest rates on existing corporate and household loan books remain

high, especially in real terms, with pre-2022 debt still re-pricing at higher rates as fixation periods expire.

In overall terms, financing conditions remain tight. While credit is expanding, lending to firms and households remains subdued relative to historical norms. Growth in bank lending to firms rose to 1.5 per cent in December. In part, the pick-up in December reflects firms substituting market-based long-term financing for bank-based borrowing amidst tightening market conditions and increasing upcoming redemptions of long-term corporate bonds. Overall external debt financing of firms increased by 1.9 per cent in December, but remained well below the historical average of 4.9 per cent. Loans to 2 households continued to rise gradually, driven by mortgages, but remained muted overall, with an annual growth rate of 1.1 per cent in December, notably below the longterm average of 4.2 per cent.

According to the latest bank lending survey, the demand for loans by firms increased slightly in the fourth quarter. At the same time, credit standards for loans to firms have tightened again, after having broadly stabilised over the previous four quarters. The renewed tightening of credit standards for firms was driven by the fact that banks see higher risks to the economic outlook and have lower tolerance for taking on credit risk. This finding is consistent with the results from the SAFE, in which firms reported a small decline in the availability of bank loans and more demanding non-rate lending conditions. In terms of households, the demand for mortgages increased strongly, mostly on the back of more attractive interest rates and better prospects for the property market. Credit standards for housing loans remained unchanged overall.

## Risk assessment

Risks to economic growth remain tilted to the downside. In addition to trade policy uncertainty, lower confidence could prevent consumption and investment from recovering as fast as expected. This could be amplified by geopolitical risks, such as Russia's unjustified war against Ukraine and the tragic conflict in the Middle East, which could disrupt energy supplies and further weigh on global trade. Growth could also be lower if the lagged effects of monetary policy tightening last longer than expected. In the other direction, growth could be higher if easier financing conditions and falling inflation allow domestic consumption and investment to rebound faster.

We take a two-sided approach to assessing inflation risk. Inflation could turn out higher if wages or profits increase by more than expected. Upside risks to inflation also stem from the heightened geopolitical tensions, which could push energy prices and freight costs higher in the near term and disrupt global trade. Moreover, extreme weather events, and the unfolding climate crisis more broadly, could drive up food prices by more than expected. By contrast, inflation may surprise on the downside if low confidence and concerns about geopolitical events prevent consumption and investment from recovering as fast as expected, if monetary policy dampens demand by more than expected, or if the economic environment in the rest of the world worsens unexpectedly. Greater friction in global trade would make the euro area inflation outlook more uncertain.

## A middle path for monetary policy

Taken together, the incoming data since our previous meeting meant that it was clear that we should take a further step in monetary easing by lowering the deposit facility rate to 2.75 per cent. By excessively dampening demand, the alternative of holding the deposit facility rate at the level of 3.0 per cent would not have been consistent with the set of rate paths that would best ensure that inflation stabilises sustainably at our two per cent medium-term target. At the same time, the new level for the deposit facility rate at 2.75 per cent preserves considerable optionality in responding to shocks. In particular, the rate path can adjust as appropriate in the event of material upside or downside shocks to the inflation outlook and/or to economic momentum.

While our baseline is that inflation should decline from 2.5 per cent in January to around our target in the coming months, it is still important to take into account that this deceleration might take longer than expected and that new upside risks to inflation could emerge, including due to external developments. These considerations explain why we have taken a step-by-step approach to rate cutting since last June.

At the same time, an excessive abundance of caution in monetary easing could threaten the recovery in domestic demand that is needed to support the pricing environment compatible with our medium-term two per cent target. Under this toocautious path, a below-target inflation dynamic could take hold, which would then require a more sizeable policy response to ensure inflation returns to our symmetric two per cent medium-term target.

Balancing these considerations suggest a middle path is appropriate, which neither over-weighs upside risk nor over-weighs downside risk. That is, a robust monetary policy approach should balance the risks of moving too slowly against the risks of moving too quickly. Accordingly, it is prudent to maintain agility in adjusting the stance as appropriate on a data-dependent and meeting-by-meeting basis and to not precommit to any particular rate path.

In closing, let me comment on two much-discussed concepts: restrictiveness and neutrality.

When inflation is materially above target and requires a monetary response to ensure that it returns to target in a timely manner and that inflation expectations remain anchored, the monetary stance must be clearly restrictive. As inflation returns close to target, policymakers need to shift their focus to adjusting monetary policy in line with the incoming economic and financial data and the evolving risk assessment to deliver the two per cent target over the medium term. In other words, policymakers should deliver the monetary stance that is appropriate to the situation.

In exiting a restrictive phase, much energy could be diverted towards creating a summary ""restrictiveness"" index. Any such index would have to incorporate at least nine factors: (i) the still-important rolling off of super-cheap debt that was taken out in the ""low for long"" era that is now being re-financed at higher rates; (ii) in the other direction, the transmission of the easing since the peak of the hiking cycle; (iii) the impact of the anticipation of future rate cuts on current financing conditions; (iv) the evolving contribution of quasi-exogenous influences on financing conditions (such as global upward pressure on term premia); (v) the dynamics of bond and equity risk premia; (vi) the evolution of credit standards in bank lending; (vii) the different timelines

for market-based and bank-based transmission; (viii) the responsiveness of consumption and investment to shifting monetary conditions; and (ix) the responsiveness of price setting to shifting monetary conditions.

All of these factors enter our calibration of monetary policy (our assessment of the strength of monetary policy transmission has been highlighted as central to our reaction function) and cannot be summarised by a single indicator such as comparing the prevailing policy rate to a highly-uncertain estimate of the so-called neutral rate. 3

In terms of policy making, uncertainty about the level of the neutral rate and, more generally, about the strength of monetary transmission inescapably sits alongside uncertainty about the inflation outlook and uncertainty about the economic outlook.

This is why our 2021 monetary policy strategy statement highlights that our decisions are based on an integrated assessment of all relevant factors. Over the last two years, we have emphasised in particular the importance of underlying inflation and the strength of monetary transmission as particularly relevant in complementing our analysis of the inflation outlook. More generally, it is essential that all relevant risks are incorporated in monetary policy decisions.

- 1  A slide deck  to accompany these remarks is available on the ECB website.
- 2  The starting date for the historical/long-term averages is January 1999.
- 3  The neutral rate is an important concept in understanding the likely long-run average interest rate but it is not a good guide to near-term policy decisions. A team of ECB economists will release an updated assessment of the neutral rate for the euro area on Friday.",Philip R Lane
https://www.bis.org/review/r250213e.htm,Burkhard Balz: Envisioning tomorrow - the role of CBDCs in Europe's digital financial ecosystem,"Speech by Mr Burkhard Balz, Member of the Executive Board of the Deutsche Bundesbank, at the Frankfurt Digital Finance Conference, Frankfurt am Main, 13 February 2025.",2025-02-13 00:00:00,"## Burkhard Balz: Envisioning tomorrow - the role of CBDCs in Europe's digital financial ecosystem

Speech by Mr Burkhard Balz, Member of the Executive Board of the Deutsche Bundesbank, at the Frankfurt Digital Finance Conference, Frankfurt am Main, 13 February 2025.

* * *

Check against delivery

## 1 Introduction

Good morning ladies and gentlemen and thank you very much for your warm welcome.

I am honoured to have been invited back to this year's Frankfurt Digital Finance Conference in this wonderful building here in Frankfurt's Palmengarten and to have been asked to hold a keynote to kick off today's event.

Allow me to begin my keynote this morning with a quote attributed to Oscar Wilde:  The future belongs to those who recognise opportunities before they become obvious. These words, ladies and gentlemen, could not be any better suited to our financial ecosystem.

And it is precisely opportunities that I wish to address in my keynote today - the opportunities provided by central bank digital currencies, or CBDCs for short. A subject that is as timely as it is significant.

## 2 The future is digital

We are at the cusp of a new era. One in which the digitalisation of the financial sector is not just an option but a necessity. New technologies are venturing into the realm of payments and new forms of money, such as digital central bank currencies and stablecoins, are also emerging as alternatives to physical cash.

These developments all pose new challenges for central banks. Ultimately, central banks must continue to ensure secure and efficient payments in line with their mandate and redefine their role in an increasingly digitalised world in order to maintain the public's trust in our monetary system.

The question that we therefore now face is: how do we respond to these technological challenges?

And that is precisely why we in the Eurosystem - by that I mean the European Central Bank and the national central banks of the euro-area member states, including the Bundesbank - are taking a proactive approach to actively help shape the future of Europe's digital financial ecosystem.

## 3 What are we aiming to achieve with the introduction of a digital euro?

One could argue that the Eurosystem already offers enough sufficiently well-functioning products, be it physical banknotes and coins or cashless payment instruments. After all, these have proven their worth for decades. Yet at the same time, we cannot simply ignore the evolving world around us. In an increasingly digitalised society, we must adapt to the changing needs and demands of consumers and rethink our payment services.

Let me outline the three key motivations behind the possible introduction of a retail CBDC in Europe - a digital euro, which we sometimes like to summarise as resilience, autonomy and efficiency.

Let me first start with resilience. The foundation of an independent and efficient monetary policy is the adoption and use of the euro. By providing our common currency-the euro-in its form as legal tender and as a modern ""all-in-one"" digital payment solution, we are paving the way for our currency to enter the digital age, making it ""future-proof"" and fit for purpose in an increasingly digital society.

The digital euro would thereby help to preserve the euro's fulfilment of the core monetary functions and shield the euro area from competing foreign currencies as well as foreign-and potentially unregulated-stablecoins by safeguarding the anchor function of central bank money.

Second, the digital euro is necessary to improve the autonomy of the European payment system. In its current form, the European payments landscape is highly dependent on non-European providers. Almost 25 years after the introduction of the euro, we still do not have a digital payment solution that can be used across the entire euro area and that runs on a European infrastructure, which, in my view, is not compatible with the concept of a single European market. Although a small number of successful payment innovations have emerged across the euro area over the past years, such as iDEAL in the Netherlands or BIZUM in Spain, the reach of these payment solutions usually ends at national borders.

As a result, payments in Europe are largely dependent on international schemes, primarily those in the United States. At present, just under two thirds of all card payments in the euro area are processed by non-European providers. And I believe that Europe's dependencies in the digital age are likely to increase if we do not fundamentally take matters into our own hands.

Third, is the issue of efficiency. By creating a pan-European payment rail in a technically modern form, we would foster competition and innovation in payments across Europe, which we believe is the best path towards efficiency in payments. The payment initiatives we have today, such as BIZUM or WERO, would be able to integrate the digital euro into their payment applications, thereby enabling them to gain instant European reach.

## 4 What would a digital euro be for the common citizen?

Although the issues I have just touched upon are very important, they are not necessarily of primarily relevance for the daily life of a majority of citizens in Europe. Hence, what would the digital euro be from the perspective of the customer?

I believe that the digital euro would not just be a commitment to Europe's autonomy, increase the resilience of our payment system and foster competition and innovation, it would also improve payments and make life easier for the 350 million residents of the euro area.

The digital euro would serve as an additional means of payment alongside cash. As a digital upgrade of banknotes and coins, it would be an ""all-in-one payments solution"", as we like to call it, which means it can be used in almost all everyday payment situations, including at retail checkouts, transactions among family and friends, online purchases, and payments to or from public authorities. Furthermore, it would be the first digital currency which could be used both online and offline. That is to say, also in the event of a loss of internet reception.

Moreover, the design of the digital euro would ensure that it would offer the highest possible level of user privacy, comparable only to cash. No other digital means of payment in Europe currently offers all these features.

Despite the many benefits the digital euro would bring for Europe as a whole, we must, nevertheless, proceed with caution. The introduction of a digital euro raises important questions about privacy, security, and the impact on financial stability and monetary policy. We must ensure that the digital euro upholds the highest standards of data protection, that it is resilient against cyber threats, and that it does not have a negative impact on financial stability.

## 5 Wholesale CBDC

Digitalisation raises questions not only in terms of how we intend to continue providing access to central bank money for our European citizens in future, but also in terms of how we intend to supply money to our wholesale customers. It is and will remain essential that we are able to settle digital transactions using new and innovative technologies, such as distributed ledger technology  (DLT) in central bank money. An entire ecosystem is currently evolving around the tokenisation of securities, which involves all parts of the financial system.

Like other financial players, the Bundesbank, and also the Eurosystem as a whole, see the significant benefits that the use of these new technologies can bring. The advantages of  DLT, such as automated settlement by means of smart contracts and reduced reconciliation needs, are clear.

But to fully harness this potential, we also need an innovative settlement mechanism for the cash leg-one which settles transactions in central bank money. We are therefore working on developing wholesale solutions that enable banks to settle  DLT-based financial market transactions in central bank money.

The Eurosystem recently completed an exploration phase together with the market, which ran from May to November 2024, during which we tested various new technologies for wholesale central bank money settlement using real transactions. The Bundesbank also participated in this exploration phase with its ""Trigger solution"", which builds a bridge between  DLT platforms and the conventional  TARGET payment system. The feedback we have received from the market so far has been very positive. I think we can already say that the exploration phase was a complete success.

The anticipated benefits of  DLT are seen as having the potential to address and overcome the ecosystem's current shortcomings, such as fragmentation, complexity, over-intermediation, and technological inefficiencies, which hinder the growth of a digital capital markets union.

By developing a new ecosystem from the ground up, it could be made more integrated and harmonised, featuring a ""common set of rails""-a shared ledger or a network of fully interoperable ledgers-that would guarantee reachability, open access, and compatibility across the services of all participants.

Our primary focus is now on implementing a short-term wholesale solution to meet the immediate and growing demands of the market. This will buy us some much-needed time to continue working on a vision for a long-term solution for wholesale  CBDC. A solution which must ultimately go hand in hand with the evolving financial market ecosystem.

## 6 Business-to-business (B2B)  payments

Alongside its work into the possible introduction of a digital euro and the exploration of wholesale  CBDC, the  ECB, together with the Eurosystem, has also been turning its focus to another area of payments-one which is increasingly gaining traction: businessto-business payments, or  B2B payments for short.

To fully leverage the potential of the evolving payments landscape in the area of CBDCs, last October the  ECB organised a special focus workshop on innovations in B2B payments and the role central bank money could play.

This workshop provided a one-of-a-kind platform to learn more about the potential use cases out there in the market. Given the high level of interest shown in the first focus workshop, I'm sure this will not be the last one of its kind.

## 7 Outlook

Ladies and gentlemen,

The introduction of the digital euro and the exploration of wholesale CBDC and B2B use cases are not just a technical exercise, but a clear commitment to the innovative strength and competitiveness of Europe.

The Bundesbank and the Eurosystem are determined to play an active role in shaping this digital transformation.

It is, however, crucial that we continue working together and pool our resources and expertise in order to fully exploit the opportunities offered by digitalisation to create a strong, stable and future-proof digital financial ecosystem for Europe.

Thank you for your attention.",Burkhard Balz
https://www.bis.org/review/r250213d.htm,Per Jansson: Credibility and flexibility going forward,"Speech by Mr Per Jansson, Deputy Governor of the Sveriges Riksbank, at Handelsbanken, Stockholm, 13 February 2025.",2025-02-13 00:00:00,"SPEECH

DATE:

13 February 2025 Deputy Governor Per Jansson Handelsbanken, Stockholm

SPEAKER:

LOCATION:

## Credibility and flexibility going forward *

My time as a member of the Executive Board of the Riksbank has been quite special, with two extreme periods in terms of how inflation has developed. The first period had already started before I joined the Executive Board in 2012. During this time, inflation had been below target more or less consistently for more than half a decade, sometimes very much below. The problem, which we shared with many other central banks, was how to get inflation to rise towards the target. After a few years of better target attainment in 2017-2019, the global pandemic hit and was followed by a period in which inflation rose sharply and was far above the target, for the first time since its introduction some thirty years ago (see Figure 1). In other words, the problems we have had to deal with during this time have been of very different kinds.

What these periods have had in common, however, is that monetary policy has reacted clearly and decisively to bring inflation back to the target. This has required quite specific, and in some cases unique, measures. First, negative policy rates and large-scale securities purchases, something that had not been tried before. After that, the fastest and largest rate hikes during the inflation targeting period.

I believe there may be some merit in the fact that inflation targeting has now been tested both during a period of too low inflation and during a period of too high inflation - and of course that it has proved to pass the test. The investment in credibility that we have thus made could pay off in the form of making it slightly easier to conduct monetary policy in the future. More specifically, it could mean that we can allow ourselves to act a little less forcefully than we have done so far

*  I would like to thank Mikael Apel and Mika Lindgren for help with the speech, Hanna Armelius, Charlotta Edler, Jens Iversen, Tanja Lind and Maria Sjödin for valuable comments, and Elizabeth Nilsson for the translation into English.

Telephone: +46-(0)8-787 00 00, Website: riksbank.se



with the interest rate. But a prerequisite for this is that economic actors really see the target as credible and worth upholding, and act accordingly. This is what I intend to talk about here today.

Diagram 1. CPIF and the CPIF excluding energy

Annual percentage change



Sources: Statistics Sweden and the Riksbank.

## Monetary policy a trade-off but under constraint

The former head of the US Federal Reserve, Ben Bernanke, has said that 'monetary policy is 98 per cent talk and only two per cent action'. 1 There is a lot of truth in this and I agree that the importance of monetary policy communication is often underestimated. But that doesn't tell the whole story. It is essentially the actions that make the communication credible, and especially during these periods, with lasting and large deviations from the target, the actions themselves have been particularly important. It would hardly have been enough if the Riksbank had communicated that we have an inflation target of 2 per cent that we intend to meet - and then not acted at all in accordance with it. Perhaps a more apt quote in this context is therefore that of the Swiss psychiatrist Carl Gustav Jung: 'You are what you do, not what you say you will do.' 2

Monetary policy affects inflation through a number of channels, which also affect different parts of the economy. Not all of these effects are perceived as positive by households and businesses. If, for example, the Riksbank raises the policy rate

1  Bernanke (2015).

2 Although the quote is attributed to Jung, it is difficult to find an exact reference. What is clear, however, is that Jung expressed many similar ideas about the importance of action and that it is people's actions that reflect their inner reality, rather than their words.

to curb high inflation, it is seen as positive when inflation eventually falls back. But the temporary increase in interest rates also raises the cost of borrowing and dampens demand in the economy, which is usually seen as a negative. It could also cause the krona to strengthen, which is a good thing for tourists abroad but not for exporters of Swedish products. A low policy rate to bring inflation up to target is often welcomed, as it reduces loan costs and boosts demand. But it can also contribute to higher-than-usual increases in the prices of housing and other assets, which is not always seen as positive, at least by those outside the housing market or not active in the asset markets concerned. Thus, monetary policy always has both desired and undesired effects, seen from a more general perspective.

When conducting its monetary policy, the Riksbank tries to balance desired against undesired effects. But this must be done under the restriction that confidence in the inflation target can be maintained, as this is a prerequisite for the target to function as a benchmark for price setting and wage formation in the economy - that it can fulfil its role as what is called a nominal anchor. The inflation target does not exist by chance, but because there is a conviction among economic policy-makers, and hopefully also among the general public, that an economy develops better over time if it has such a nominal anchor. This is why the formulation of monetary policy in the Sveriges Riksbank Act is that 'the overriding objective of the Riksbank is to maintain sustainably low and stable inflation'. 3

Under the constraint of maintaining confidence in the inflation target, we thus try to strike a reasonable balance and ensure that the undesired effects are as small as possible. It is, of course, difficult to quantify all the effects of monetary policy, but our overall assessment is that the desired effects have outweighed the undesired ones. That we thought so when we took the measures is of course obvious, but I also believe that, in retrospect, it can be said that the policy we have conducted has on the whole been successful.

The most important desired effect is, of course, that the credibility of the Swedish inflation target has been high and remains so. This is illustrated, for example, by the fact that long-term inflation expectations have been fairly consistently close to the inflation target (see Figure 2). This has been particularly striking recently, with inflation well above target.

3  Chapter 2, Section 1 of the Sveriges Riksbank Act.

Diagram 2. Inflation expectations

Per cent



Note. Expectations refer to the CPI. Money market agents.

Source: Origo Group.

## Cooperation with wage formation and fiscal policy

Although I believe that it has been very important that the Riksbank has acted as resolutely as it has, both when inflation was previously too low and when it has more recently been too high, factors other than monetary policy have of course also played a role in inflation and in the fact that confidence in the target has been, and still is, high.

One advantage for Sweden in this context, which I have emphasised on many occasions, is how our wage formation has worked. Despite the high inflation, wage settlements have remained moderate and responsible and in line with the inflation target. We have now had well-functioning wage formation for almost thirty years and, compared with how wage formation functioned previously, this has been rewarded with a very favourable development of real wages (see Figure 3).

However, it should be emphasised that this order has not been bestowed on us by higher powers, meaning that it would never change whatever happens. If, for example, inflation were to be above the target for an extended period, it is of course highly likely that demands would increase for wages to be based on the higher inflation rather than on the inflation target. The fact that wage formation has been so firmly anchored to the inflation target cannot be taken as an excuse for monetary policy not needing to react when inflation rises, or for that matter when it falls. Causality does not always work so that wages affect prices, it can also be the other way around, that prices affect wages.

## Diagram 3. Real and nominal wage development

Index, 1 January 1960 = 100 (left), and annual percentage change (right)



Note. Real wages are based on the CPI. The solid line indicates the date on which the inflation target takes effect. The dotted line indicates the date of application of the Industrial Agreement.

Sources: Statistics Sweden, the National Mediation Office and the Riksbank.

Another aspect is that it is quite some time ago, more than thirty years, since we experienced serious problems with wage-price spirals and persistently high inflation. This is of course positive in itself, but it also means that fewer people have personal experience of these problems. Although wage formation has just now once again proved its worth during a very challenging period, I think it is worth bearing in mind that there may be a risk that the 'institutional memory' of past problems could slowly fade over time. It is important that we all work together to ensure that it does not.

A further aspect is that it is quite common for voices on the employers' side to question whether the inflation target should have any particular significance for wage formation. 4 It is therefore also rather unclear what role these voices envisage that the inflation target should be playing at all.

The way in which fiscal policy is conducted is also central to the possibilities of maintaining confidence in the inflation target. During the recent upturn in inflation, the interaction between fiscal policy and monetary policy worked well, in the sense that fiscal policy did not reinforce inflationary impulses through broad stimulus. In that case, the Riksbank would have had to raise interest rates more than it did.

4  See, for example, Hallsten and Grath (2024).

The interaction between fiscal policy and monetary policy more generally is an interesting and internationally debated issue, which I have also raised earlier. 5 My view here is that fiscal policy should provide a little more support to monetary policy than it has done in recent decades, especially in situations where the policy rate is already low and the scope for further interest rate cuts is limited. In the recent upswing in inflation, it is clear that fiscal policy has recognised the importance of helping to bring inflation back to target. I believe that inflation should continue to play a role for fiscal policy, even in more normal situations, and that we could thus achieve a better policy mix more generally. 6

Figure 4. General government net lending and public debt in Sweden and abroad Per cent of GDP



Sources: Eurostat and the European Commission.

While it is clear that our strong public finances have served us well, there is now undoubtedly scope in Sweden to conduct fiscal policy somewhat more flexibly than in recent decades. From an international perspective, our public savings are high and our debt low (see Figure 4).

A simple coordination mechanism is that fiscal policy moves in the same direction as monetary policy, with the direction of changes in the policy rate being the starting point. There are some promising initiatives that can hopefully contribute to a better policy mix looking ahead. The Ministry of Finance and the Riksbank

5  See Jansson (2021).

6  In this context, it is of course important to analyse and continuously improve knowledge regarding the effects of fiscal policy on inflation. This applies especially in small open economies such as Sweden, where effects via the exchange rate may matter.

now have a more continuous dialogue and the Fiscal Policy Council has begun to discuss fiscal policy and monetary policy in a common context.

## Question marks over the role of price setting

It is not only wage formation and fiscal policy that matter for inflation, but also how firms set their prices. One reason why inflation rose so quickly and to such high levels was that rapid cost increases and the strong post-pandemic recovery created the conditions for a change in the price-setting behaviour in the economy, from that which had dominated for a long time. In the past, many firms found it very difficult to raise prices, as competition was perceived as fierce and customers risked shifting their purchases to other firms.

But the rapid recovery from the pandemic, the energy crisis in Europe and the global price increases associated with Russia's invasion of Ukraine changed the context. Cost increases could now be passed on to consumers more quickly and to a greater extent, even though it was fairly obvious that they were not permanent. Consumers also seem to have accepted this to a greater extent than before. In two studies, the National Institute of Economic Research (2022, 2023) has shown that the recent very rapid rise in inflation can be reproduced very well if one assumes that firms during this period had a pricing behaviour that was based on a complete pass-through of cost increases (see Figure 5). 7

7  This changed pricing behaviour is also evident in the Riksbank's Business Survey, where the difference between the March 2021 and March 2022 surveys is striking. Moreover, reports from the National Institute of Economic Research (2023) and the Swedish Competition Authority (2024) conclude that consumer food prices have increased more than can be explained by the increased costs. The Swedish Competition Authority (2024) writes that 'grocery retailers have, to varying degrees and due to market power, been able to increase their profit margins in SEK by applying oligopolistic pricing strategies towards consumers. In practice, this means that for some goods, the increase in the mark-up applied by retailers is greater than can be justified by the increase in purchasing costs' (p. 8, translated from Swedish). Representatives of food producers in particular have reacted to the Riksbank's statements on this (see Hellman and Eckerdal, 2024), despite the fact that the conclusions concern pricing at the consumer level - which is the Riksbank's natural focus - and not the food industry as a whole.

## Figure 5. Model-based and actual inflation developments

Percentage change for the period Q2 2019 to Q2 2023



Note. The figures show the National Institute of Economic Research's model-based calculations of consumer price developments under the assumption of full pass-through of the increase in production costs to prices compared with actual consumer price developments over the same period. The profit share is kept constant in the calculations.

Sources: Statistics Sweden and the National Institute of Economic Research.

It is usually said that the inflation target is intended to act as an anchor for price setting and wage formation. The role of the inflation target in wage formation, and vice versa - the role of wage formation in the ability to maintain the inflation target - is a subject of frequent and lively debate. This is not the case for business pricing. In a way, this is natural. Wage formation is a collective process and, of course, price setting is not. But central banks' inflation targets are formulated in terms of consumer prices, not wages, so how pricing works is of course also very important.

Nor is it just the case that firms' pricing decisions affect inflation. The monetary policy that has to be conducted when inflation rises has negative repercussions for businesses too. When interest rates have to be raised due to higher inflation, firms' financing costs rise and demand in the economy falls. 8 Thus, firms also benefit if sharp interest rate hikes can be avoided, and gain in the long run from the economy developing well, with a stable nominal anchor as a basis.

I therefore believe that there is a need for more discussion of the macroeconomic consequences of pricing as well - especially in situations where prices in large parts of the economy suddenly start to be set in a different way than normal. I think it would be valuable for businesses to participate in such a discussion,

8  See, for example, Daunfeldt (2024), who notes that the interest rate increases were also felt by firms.

particularly of course if it is done through organisations at a central level. I would like to emphasise that I am not, of course, advocating that pricing should in future take place in some kind of collective process, like wage formation, and I do recognise the importance of the price mechanism and the role of relative prices in the allocation of resources in the economy. But I also see no reason why the discussion about the inflation target and its role as an anchor in the economy should only be about wage formation and not at all about price setting.

Thus, while the inflation target works well as an anchor for wage formation, there are some questions about its role in price setting. Now pricing seems to have returned to more normal, but after this episode the question is how stable it is. One concern is that it could change again relatively quickly as the economy strengthens, or new cost shocks occur.

All in all however, I think it can still be said that the conditions for managing an upturn in inflation are favourable in Sweden, compared with many other countries. A monetary policy with a very clear focus on maintaining confidence in the inflation target, well-functioning wage formation based on the inflation target and a fiscal policy that has not been heavily stimulative during the period of high inflation have contributed to long-term inflation expectations being better anchored than in many other countries.

## Figure 6. Consumer prices excluding energy and policy rates abroad

Annual percentage change (left) and per cent (right).





Note. Consumer prices are measured in terms of the CPIF for Sweden, the HICP for the euro area and the CPI for the United States, the United Kingdom, Norway and Canada.

Sources: Eurostat, Statistics Sweden, Statistics Canada, Statistics Norway, U.K. Office for National Statistics, US Bureau of Labor Statistics and national central banks.

In addition, the interest rate sensitivity of the Swedish economy is relatively high in an international perspective. This is due to high levels of private sector debt, particularly among households, and a significant share of variable rate debt, which means that changes in the policy rate are transmitted rather quickly. Together, this has meant that the Riksbank has been able to content itself with raising the policy rate to a fairly modest level by international standards, despite the relatively large upturn in inflation, and we were also one of the first central banks to initiate rate cuts (see Figure 6).

## Confidence in the target requires active monetary policy

One can also reflect on the fact that the common perception before the global rise in inflation was that inflation was more or less dead. Now it turned out that this was not the case. Would it not be fair, then, to say that the monetary policy conducted in the past to bring inflation up to target was unnecessary? After all, things self-corrected, so to speak.

According to this view, inflation sometimes goes up and sometimes goes down and you don't have to worry about it getting stuck too low - or too high, for that matter. There are two problems with this reasoning. First, after a long period of very low inflation, it is of course risky to rely on the assumption that a pick-up in inflation will indeed materialise quite soon on its own. After all, virtually all observers were surprised when inflation rose so sharply around the world a few years ago. There were several interacting factors that could hardly have been predicted, not least the unexpectedly rapid recovery from the pandemic and Russia's invasion of Ukraine. If these events had not occurred, it might just as well have been another five to ten years when inflation would have remained very low.

Second, and partly related, it ignores the fact that persistent deviations from the inflation target sooner or later affect expectations about what level of inflation is normal in the economy. Expectations, in turn, affect actual pricing and make it harder to get back on target. In addition, of course, if the Riksbank had not pursued such an expansionary policy as it did, but had kept the policy rate higher, inflation would have been even lower, and the deviation from the inflation target even greater than it was. There would then have been an obvious risk that economic agents would have begun to regard inflation significantly below 2 per cent as normal. 9 In that case, the inflation target would no longer be the anchor.

9  It could be argued that this was also to some extent what happened, even with the Riksbank's more expansionary policy. Average nominal wage increases of only just over 2 per cent could be regarded as an indication that there was a lack of confidence in the inflation target. The National Institute of Economic

If inflation were then to rise, it is not clear that this would help much either. Doubts would have already arisen as to whether the central bank is really able to, or even has the ambition to, keep inflation at 2 per cent. Of course, such doubts apply both ways. If inflation could stay below the target for a long time, why couldn't it also stay above it for a long time? We would then reach a situation where the inflation target is no longer the benchmark for price setting and wage formation that it is intended to be, and inflation and inflation expectations will vary more. We have then also moved away from the fundamental purpose that the inflation target is intended to fulfil, namely to ensure that the economy develops better in the long term by providing such a benchmark.

## Key aspects often missing from the debate

Before I continue, let me make a digression here that concerns the inflation target as a benchmark and important aspects that have often been missing from the Swedish debate.

It is of course positive that monetary policy is discussed and scrutinised, not only in the Committee on Finance's public assessments but also in the general debate in the media. But for the debate to be meaningful, the arguments put forward should be based on an understanding of the conditions under which monetary policy operates, what the Riksbank's de facto task is and why it has that task. I believe that all too often this is not the case. This is a problem that I believe has not been sufficiently recognised, and which I raised in a speech a little over a year ago. 10

For example, it is a fundamental and necessary condition that the inflation target is recognised in the discussion. After all, the main task given to the Riksbank by the Swedish parliament, the Riksdag, is to ensure that inflation does not deviate from the target for too long, so that confidence in it can be maintained and the inflation target can actually function as a nominal anchor in the economy. It would therefore be very odd to completely ignore how inflation and inflation expectations can be expected to develop with the alternative monetary policy that one thinks should instead be pursued, or should have been pursued. Unfortunately, this is very common in the debate. And even if inflation and inflation expectations are mentioned, these variables, which are absolutely crucial

Research (2024) makes the assessment that a long-term nominal rate of wage increase of 3.5 per cent is compatible with the inflation target.

10  See Jansson (2023). See also Apel and Jansson (2023), which had the same message, and the debate in the journal Ekonomisk Debatt that followed this article.

to monetary policy, are downplayed in a way that makes it hard to take the alternative policy proposals seriously.

A fairly common criticism has been that it is the Riksbank's monetary policy that is the main reason why house prices and household debt are currently high. Here it is argued that the Riksbank should have kept the policy rate much higher in an attempt to slow the rise in house prices and household debt. However, it is rare that anything is said about how much higher the interest rate would have needed to be to actually achieve this, or what the effects of such a policy would have been on inflation, inflation expectations, unemployment, and the economy in general. 11 This is a good example of what I was just talking about, that the variables that are decisive for monetary policy are not included at all, or at least not sufficiently, in the reasoning.

Moreover, house prices are affected by much more than monetary policy. Firstly, it is about how well the housing market functions, that is, basically how well the supply and demand for housing can be made to match each other. Decisions on housing policy and tax policy are central to this. There are countries that have had roughly the same interest rate development in recent decades as Sweden, such as Finland, where house prices have not risen at all in the same way (see Figure 7). Monetary policy in Finland is conducted by the European Central Bank, whose policy rate has tended to be lower than that of the Riksbank, and whose securities purchases have been more extensive. From this fact alone, one should be able to conclude that the development of house prices and debt is about much more than monetary policy.

11  An exception is Coglianese et al. (2023) which turns the question on its head. They analyse the effects of the 2010-2011 rate hike, which they argue was driven entirely by the Riksbank's concerns about debt and house price developments. My view is that this interpretation is not entirely correct and that the increases were also justified on the basis of forecasts for the economy and inflation made at the time by the Riksbank and other analysts, including the National Institute of Economic Research, see Jansson (2014). Still, it is clear that a monetary policy that tries to counteract a rise in debt and house prices can cost a lot in terms of output and employment.

## Figure 7. House prices and policy rates in Sweden and Finland

Index (left) and per cent (right)



Note. House prices are measured in terms of the HOX house price index for Sweden and prices for dwellings in housing companies for Finland, January 2005 = 100.

Sources: ECB, Statistics Finland, Valueguard and the Riksbank.

It is also about the general interest rate level in the economy and what is considered a normal policy rate, that is, an interest rate that neither stimulates the economy nor has a contractionary effect. A concept often used here is the neutral interest rate. This interest rate is not determined by monetary policy, but mainly by savings and investment patterns at the global level, which in turn are strongly influenced by demographic factors. 12 Of course, if the level of the neutral interest rate changes, this could affect house prices. But the effect then does not go via monetary policy. 13

In my speech a little over a year ago, I noted that discussions of the neutral interest rate and how it has developed have often been absent from the media debate on the Riksbank and monetary policy. This ignores, among other things, the fact that the neutral interest rate has fallen globally over some thirty years to very low levels. The problems associated with this have long been discussed in academia and among central banks. 14 This downward trend in general interest rates has without doubt played a greater role than limited periods of

12  For a review of the determinants of the neutral interest rate, see for example Lundvall (2023). Seim (2024) presents the Riksbank's assessment of the long-term neutral interest rate.

13  In the evaluation of monetary policy commissioned by the Committee on Finance, Hassler et al. (2023) recognise this mechanism as central. They also argue that the negative interest rate was an appropriate policy.

14  This is also an important theme in the Long-Term Survey 2023 (Ministry of Finance, 2023), which argues that fiscal policy should take greater responsibility for stabilisation policy, as the historically low interest rates and the proximity to the lower bound of the policy rate are hampering monetary policy.

expansionary monetary policy in the rise in housing prices and indebtedness in Sweden, which has also run parallel to this development more or less continuously since the mid-1990s.

I find it difficult to see a very different alternative to the policy pursued by the Riksbank, given that the neutral interest rate was historically low and inflation was starting to move towards zero. If interest rates had been kept at a higher level, inflation would of course have been even lower and would have remained low for an even longer period of time, as I have just noted. It would then actually have been quite surprising if confidence in the inflation target had not been affected.

The problems with this are well known and I have talked about them many times. Let me therefore just briefly note that the main issue is that if inflation is persistently very low, say close to zero per cent, then there is very little scope to cut the policy rate to counteract recessions. The policy rate hits its lower bound quickly and needs to stay there for longer periods. So if one doesn't like zero or negative interest rates, then one should be particularly eager to maintain confidence in the inflation target. This is a line of thought that is surprisingly often overlooked.

Fortunately, over the past year, the concept of a neutral interest rate has begun to attract more attention in the Swedish media debate as well. 15 Hopefully, this will contribute to a more nuanced and constructive discussion of monetary policy - and to the debate in the future being conducted a little bit more on the same playing field, as I put it in my speech a good year ago.

## Confidence in the target a precondition for flexibility

So, to return to my main track and to summarise so far, the inflation target and the Riksbank's ability and determination to meet it have been tested on the downside and, relatively recently, on the upside, too. And in both cases, monetary policy has succeeded in maintaining confidence in the target. Can we benefit from this? Yes, maybe we can.

Confidence is not a so-called binary variable - a variable with only two possible outcomes - where you either have complete confidence or none at all. But the

15  See, for example, Carlström (2024) and Munkhammar (2024). The film 'Skuldfeber' (Debt Fever), which was broadcast on SVT at the end of last year, is however a quite remarkable example of a piece that completely disregards the arguments I have presented here. Without investigating any other possible causes, it puts forward the argument that it is monetary policy that is the main explanation for the high level of housing prices and household debt today. It thereby ignores, for example, the evaluations of the Riksbank and monetary policy carried out over the years by academic experts on behalf of the Riksdag Committee on Finance, which have not at all raised any such criticism (see, for example, Flug and Honohan, 2022, and Hassler et al., 2023).

conditions are still different if confidence is high compared to if it is low. In virtually all areas, if confidence is low, you have to work a little harder to show that you are really living up to your commitments. In monetary policy, 'work harder' is equivalent to changing the policy rate more.

If, on the other hand, confidence is high, then participants trust that the Riksbank has both the ambition and the ability to bring inflation back to target after a deviation. They therefore know that the deviation is temporary and that they do not have to worry about inflation remaining, for example, above target for a long time to come. As a result, they do not need to compensate themselves much for higher inflation by raising prices and wage demands. This in turn means that the Riksbank does not need to change the policy rate as much as would otherwise have been necessary. If confidence in the inflation target is high, it is thus also possible to allow slightly larger and slightly longer deviations from the target without monetary policy having to react fast and forcefully. It's the other side of the coin.

In the media debate, criticism has sometimes been levelled that the Riksbank has changed the interest rate too much and too sharply over the years and that the interest rate fluctuations themselves have created problems. Instead, these critics would like to see a more even development of the policy rate, preferably at a relatively high level. In practice, this means that the development of the means , that is, the policy rate, to influence the target variable , that is, inflation, is considered to be a goal in itself.

However, one cannot assume that monetary policy has this room for manoeuvre right from the start when it comes to setting the interest rate and allowing inflation to deviate from the target. That would be like 'putting the cart before the horse'. If interest rates are set in such a way that inflation can be more or less anything, we will sooner or later end up in a situation where there is no longer a nominal anchor. It is only when agents trust that the Riksbank can and will bring inflation back to the target after a deviation that monetary policy can allow itself to be more flexible. Confidence in the target is thus a precondition for flexibility.

## Greater room for monetary policy manoeuvre going forward?

At the same time, there is of course nothing inherently positive about large and frequent fluctuations in the policy rate. Although their purpose is to stabilise inflation, they can give rise to various types of uncertainty in the economy. Firms may find it more difficult to make informed investment decisions if their financing is closely linked to the behaviour of a widely fluctuating policy rate, and consumers may find it harder to make decisions about their housing or to plan

purchases, particularly of capital goods. Large and, in particular, unexpected changes in interest rates can also lead to volatility in financial markets, affecting stock prices, bond yields and exchange rates. Of course, large changes in the policy rate can also have major effects on the real economy that one would prefer to avoid. If confidence in the inflation target can be maintained with relatively limited variations in the policy rate, this is therefore preferable to larger and more forceful interest rate changes. 16

In this context, the Swedish krona is a special chapter. The development of the exchange rate has proven to be genuinely difficult to understand. 17 It can exhibit trends over fairly long periods that run counter to what are known as fundamentals, that is, basic factors that should matter for the exchange rate, such as how well a country's economy is performing relative to the rest of the world. There is therefore no guarantee that smaller fluctuations in interest rates would reduce movements in the exchange rate, especially the more trend-like ones. But if a more even development of the policy rate would nevertheless contribute to the krona fluctuating a little less, that would of course be positive.

It is possible that - after inflation targeting has now been tested on both the upside and the downside, and passed the test - we may now have moved another notch up the credibility scale. If that is the case, which I believe and hope it is, it may create some opportunities. We may have reached a point where we could at least start to test the waters and see if the room for monetary policy manoeuvre going forward is now a bit greater than it has been in the past. More concretely, it would mean that, at least at the margin, we could allow slightly larger deviations from the inflation target and slightly smaller changes in the policy rate on average. One could say that there might be an opportunity to make flexible inflation targeting even more flexible.

But I would like to emphasise that it is not only, and perhaps not even primarily, up to the Riksbank whether monetary policy can take a step in this direction. This presupposes that wage formation continues to be based on the inflation target, that the target also plays an important role in price setting and that it is taken into account more regularly in fiscal policy. It would of course also help if the debate on monetary policy were based to a greater extent than hitherto on the

16  This is partly related to Milton Friedman's (1968) argument that the central bank should avoid large swings in monetary policy. One difference, however, is that Friedman thought that such fluctuations were very rarely needed and that monetary policy itself was often the source of excessive fluctuations in the economy. Instead, it was assumed that price stability could be achieved with a constant rate of increase in the money supply. Monetary targeting was tested in various countries, with limited success, in the 1970s and 1980s and started to be abandoned in favour of inflation targeting in the 1990s (see, for example, Mishkin, 2006).

17  See, for example, Flam and Persson (2024).

Riksbank's main task being to maintain the inflation target. The more people who help to emphasise the importance of having an inflation anchor in the economy in the debate and in actual economic decisions, the more relaxed the attitude of monetary policy towards short-term deviations from the inflation target can be. For my part, I am prepared to try such an approach. But it will need to be empirical, with the effects on credibility very closely monitored. Let's see if we are ready to take such a step.

## References

Apel, Mikael and Per Jansson (2023), 'Penningpolitik i forskningen och den allmänna debatten' (Monetary policy in research and public debate), Ekonomisk Debatt, vol. 51, no. 7, pp. 65-69.

Bernanke, Ben S. (2015), 'Inaugurating a new blog', Commentary, Brookings, https://www.brookings.edu/articles/inaugurating-a-new-blog/.

Carlström, Johan (2024), 'Kan mystisk stjärna visa vägen mot billiga bolån?' (Can a mysterious star show the way to cheap mortgages?), Svenska Dagbladet, 22 June.

Coglianese, John, Maria Olsson and Christina Patterson (2023), 'Monetary Policy and the Labour Market: A Quasi-Experiment in Sweden', University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2023-123.

Daunfeldt, Sven-Olov (2024), 'Bluff och båg att företag täljt guld under inflationskrisen' (Bluff and hoax that firms made a fortune during the inflation crisis), DN Debatt, 21 October.

Ministry of Finance (2023), 'Long-Term Survey 2023 - Fiscal policy stabilisation"", SOU 2023:85.

Flam, Harry and Mats Persson (2024), 'Krona på rätt kurs? En ESO-rapport om den svenska valutans utveckling 1993-2024' (Is the Swedish krona on the right path? An ESO report on the development of the Swedish currency 1993-2024), Report to the Expert Group for Studies in Public Economics 2024:4 (in Swedish with English summary).

Flug, Karnit and Patrick Honohan (2022), 'Evaluation of the Riksbank's monetary policy 2015-2020', Reports from the Riksdag 2021/22:RFR4.

Friedman, Milton (1968), 'The Role of Monetary Policy', American Economic Review , vol. 58, No. 1, pp. 1-17.

Hallsten, Kerstin and Brenden Grath (2024), 'Tål att upprepas: Konkurrenskraften avgörande för lönebildningen' (Bears repeating: Competitiveness is crucial for wage formation), A newsletter from the Swedish Association of Industrial Employers' economists, Industriarbetsgivarna.

Hassler, John, Per Krusell and Anna Seim (2023), 'Evaluation of monetary policy 2022', Center for Monetary Policy and Financial Stability (CeMoF) at Stockholm University, Report from the Riksdag 2022/23:RFR5.

Hellman, Björn and Carl Eckerdal (2024), 'Absurda utsagor från Riksbanken' (Absurd statements from the Riksbank), debate article in Svenska Dagbladet, 22 November.

Jansson, Per (2014), 'Swedish monetary policy after the financial crisis - myths and facts', speech at SvD Bank Summit, 3 December.

Jansson, Per (2021), 'Is it time to review the division of roles in macroeconomic policy?', speech at Sveriges Riksbank, 8 December.

Jansson, Per (2023), 'The gap in the monetary policy debate', speech at Danske Bank, 12 December.

Lundvall, Henrik (2023), 'Drivkrafter bakom globala trender i den neutrala räntan' (Driving forces behind global trends in the neutral interest rate), Annex 2 to LongTerm Survey 2023, SOU 2023:87 (in Swedish with English summary).

Mishkin, Frederic S. (2006), 'Monetary Policy Strategy: How Did We Get Here?', NBER Working Paper 12515.

Munkhammar, Viktor (2024), 'Räntan som gäckar alla' (The interest rate that baffles everyone), Dagens industri, 16 July.

National Institute of Economic Research (2022), 'Prissättning hos svenska företag under 2022' (Price setting by Swedish companies in 2022), Special study, December 2022.

National Institute of Economic Research (2023), 'Prissättning hos svenska företag 2023' (Price setting by Swedish companies 2023), Special study, December 2023.

National Institute of Economic Research (2024), Lönebildningsrapporten 2024 (Wage formation report 2024).

Seim, Anna (2024), 'The neutral interest rate - significance, limitations and assessment', speech at Sveriges Riksbank, 26 November.

## SPEECH

Swedish Competition Authority (2024), 'Stigande matpriser - vart tar pengarna vägen?' (Rising food prices - where does the money go?), Rapport 2024:3.",Per Jansson
https://www.bis.org/review/r250213c.htm,Frank Elderson: From concept to delivery - accounting for climate and nature in maintaining price stability and keeping banks safe and sound,"Introductory remarks by Mr Frank Elderson, Member of the Executive Board of the European Central Bank and Vice-Chair of the Supervisory Board of the European Central Bank, at the MNI webcast on climate change ""Impact on Monetary Policy and Bank Supervision"", Frankfurt am Main, 12 February 2025. ",2025-02-12 00:00:00,"## Frank Elderson: From concept to delivery - accounting for climate and nature in maintaining price stability and keeping banks safe and sound

Introductory remarks by Mr Frank Elderson, Member of the Executive Board of the European Central Bank and Vice-Chair of the Supervisory Board of the European Central Bank, at the MNI webcast on climate change ""Impact on Monetary Policy and Bank Supervision"", Frankfurt am Main, 12 February 2025.

* * *

Central banks and supervisors are not climate and nature policymakers.

Central banks and supervisors are climate and nature policy takers.

And we face an ever-increasing volume of climate and nature-related factors that we must take into account in order to successfully deliver on our mandate.

This is the fundamental principle that underpins all our climate and nature-related activities at the European Central Bank.

It is a principle grounded in irrefutable facts established by the scientific community and transposed to make their implications clear for the economy and financial system. At the ECB, we have translated this principle into our monetary policy and supervisory work as a strategic commitment to account for the ongoing climate and nature crises, irrespective of shifts in the macroeconomic tides and no matter what direction the political winds may blow.

This is why, both in our monetary policy and in our banking supervision, we have meticulously formulated strategies that are robust and resilient in all weathers. In the face of changing climates, be they macroeconomic, political or indeed at the level of our planetary ecosystem, we will continue to deliver on our mandate to keep prices stable and ensure Europe's banks are safe and sound.

## Climate and nature in monetary policy

Let me start with what we our doing when it comes to accounting for climate and nature in our monetary policy.

When the ECB concluded its strategy review in the summer of 2021, our new strategy explicitly acknowledged the profound implications of climate change for the economy and therefore its relevance for monetary policy. In our strategy, we also formulated a concrete action plan, and we are delivering on that plan.

First, we have made significant progress in improving our ability to take climate considerations into account in the macroeconomic analyses that inform our policy discussions.

Second, with respect to our monetary policy instruments, we started tilting our purchases of corporate bonds towards issuers with a better climate performance to avoid undue exposures to climate-related risks. While the last remaining purchases were suspended at the start of this year, if any corporate bond purchases were to be needed for monetary policy purposes in the future, the established direction of the tilt would set the minimum benchmark. With respect to the collateral we require for our lending operations, further technical work on incorporating climate change collateral considerations is still ongoing.

Our current actions aim to support a high degree of confidence in the alignment of our activities, within our mandate, with the goals set by the Paris Agreement. We have committed to regularly reviewing all our measures to assess their impact. If necessary, we will adapt them to ensure they continue to fulfil their monetary policy objectives and support the decarbonisation path to reach the goals set by the Paris Agreement and the EU's climate neutrality objectives. Within our mandate, we will also look into addressing additional nature-related challenges.

## Climate and nature in banking supervision

Let me move to the steps we have taken in banking supervision.

Our supervisory strategy was formulated after we learnt in 2019 that less than a quarter of the banks under our supervision had demonstrably reflected on how the climate and nature crises were affecting their risk management. This observation was obviously concerning, so in 2020 we published a guide setting out our supervisory expectations. These expectations outline the ECB's understanding of the safe and prudent management of climate and nature-related risks under the prevailing prudential framework. Since then, we have consistently taken these risks into account in our supervisory work.

Considering the requirements clearly set out in the Capital Requirements Directive as implemented in national law, and the need for banks to implement a regular process for identifying all material risks, banks must ensure that practices are in place for the sound management of climate and nature-related risks. They had to achieve this by the end of last year and, in the run-up to that deadline, we also set interim deadlines for banks to remediate certain shortcomings related to the management of these risks. These deadlines were informed by what the banks themselves considered reasonable when we first started discussing climate and nature-related risk management with them.

We are still following up on the two earlier interim deadlines while we begin assessing banks' practices in light of their final end-2024 deadline.

After the first interim deadline back in March 2023, we saw that many banks still had not implemented an adequate materiality assessment of the impact of climate and naturerelated risks across their portfolios. The ECB imposed binding supervisory decisions on 28 banks, with 22 of them being told that if they did not remedy their shortcomings by a certain date, they would incur a periodic penalty payment for each day they remained in breach of our requirements. Encouragingly, almost all banks submitted an adequate materiality assessment in time, which shows that our supervisory efforts have been

effective in almost all cases. For a few banks, the process to determine whether penalties have been incurred is ongoing.

For the second interim deadline of the end of 2023, we asked banks to clearly include climate and nature-related risks in their governance, strategy and risk management. As with the first interim deadline, we found weaknesses in banks' practices that we communicated to them in the form of further feedback letters. In a small group of outliers, foundational elements for the adequate management of climate and naturerelated risks are still missing. These banks received binding supervisory decisions in autumn 2024, again outlining the potential imposition of periodic penalty payments if they fail to meet the requirements in a timely manner.

To avoid any doubt, we will proceed in exactly the same way with respect to the third and final deadline that fell due at the turn of the year. We want to see evidence that banks' risk management practices ensure the sound management of climate and nature-related risks across all areas of our supervisory expectations. For instance, this means that banks need to consider these risks in their stress-testing frameworks, including in plausible baseline and adverse scenarios that are in line with scientific evidence. Thereafter, banks will have to keep updating their practices in accordance with advances in data availability, methodologies and legislative and regulatory requirements. Banks need to ensure that their risk management practices remain commensurate with the magnitude of the climate and nature-related risks that they face. As supervisors, it is our job to make sure they do. To deliver on this, we will use obviously always in a proportionate way - all supervisory instruments that we have at our disposal.

## Conclusion

Let me conclude.

While the fundamental principle - that climate and nature are relevant for both monetary policy and banking supervision and, therefore, must be taken into account in the exercise of our tasks - is independent of the actions of climate and nature policymakers, the intensity and configuration of the risks that will ultimately materialise is not. The choices that climate and nature policymakers make will determine what combination of transition and physical risks materialises in the years to come. Regrettably, the prevailing consensus among climate scientists is that the goal of limiting global heating to 2 degrees Celsius, as set out in the Paris Agreement, is not currently being met. Last October the UN Emissions Gap Report concluded that the world is on track for an average increase of 3.1 degrees. 1   And even that dramatic number will only be achieved if all governments stick with their current policies. The physical risks of climate and nature hazards are currently materialising at an everincreasing scale and frequency. 2   These physical risks will continue increasing or transition policies will have to be implemented more abruptly to secure a timely transition which will cause an increase in transition risks.

To identify climate and nature-related risks, central banks, supervisors and the banks we supervise are reliant on good data. Reporting requirements in the EU's sustainable finance framework will improve the availability of reliable and comparable data that are needed to identify and manage financial risks. This is essential to ensure that the

broader sustainable finance framework can serve its purpose of unlocking finance for the green transition and thereby contributing to Europe's competitiveness agenda.

It is inevitable that climate and nature-related risks will increase. Concealing them will not make them disappear. And ignoring them will not make them less threatening for monetary policy and banking supervision. This is why we are delivering on our strategic commitment to take them into account in our work.

Robust to any shifting tides or changing winds.

Faithful to our mandate.

Thank you for your attention.

1  United Nations Environment Programme (2024), , 24 Emissions Gap Report 2024 October.

2  Munich Re has found that the average damage from natural disasters over the past 30 years (corrected for inflation) is rising. It averaged USD 131 billion per year worldwide over the past 30 years, but USD 236 billion over the past ten years and USD 268 billion over the past five, reaching USD 320 billion in 2024. See Munich RE (2025), "" Climate change is showing its claws: The world is getting hotter, resulting in severe hurricanes, thunderstorms and floods"", 9 January.",Frank Elderson
https://www.bis.org/review/r250213b.htm,Christopher J Waller: Reflections on a maturing stablecoin market,"Speech by Mr Christopher J Waller, Member of the Board of Governors of the Federal Reserve System, at A Very Stable Conference, San Francisco, California, 12 February 2025.",2025-02-12 00:00:00,"For release on delivery 5:05 p.m. EST (2:05 p.m. local time) February 12, 2025

Reflections on a Maturing Stablecoin Market

Remarks by

Christopher J. Waller

Member

Board of Governors of the Federal Reserve System at

A Very Stable Conference

San Francisco, California

Thank you for inviting me to speak today about stablecoins, an important innovation for the crypto ecosystem with the potential to improve retail and cross-border payments. 1   A little over three years ago, I outlined my views on the benefits and risks of stablecoins. 2   I can think of no better place than this conference to discuss the maturing stablecoin market and examine potential challenges that could impede stablecoins from reaching their full potential.

For the purposes of this speech, I define stablecoins as a type of digital asset designed to maintain a stable value relative to a national currency and backed at least one-to-one with safe and liquid assets.  Specifically, a pool of assets is held in reserve so that stablecoins can be redeemed for traditional currency in a timely fashion.

Stablecoins-as with any means of payment-must demonstrate 1) a clear use case and 2) a clear commercial case to be economically viable.  These terms are often conflated, but they are different, and both are necessary.  Having a use case is how you attract consumers and businesses, while a business model is necessary for issuers of stablecoins to continue operating.  As private sector innovators look to expand on the use cases of stablecoins and seek to achieve scale, what might emerge as challenges or roadblocks?  This is a question I will explore today, including from a public sector perspective.  Of course, as a policymaker, I am not here to endorse any of these use cases or business models, and what follows is not advice or recommendations.  Rather, I am discussing them to underscore the varied ecosystem that policymakers must understand.

1 Thank you to Marc Rodriguez, Alex Sproveri, Sonja Danburg, and David Mills of the Federal Reserve Board for their assistance in preparing this text. The views expressed here are my own and not necessarily those of my colleagues on the Federal Reserve Board.

2 See Christopher J. Waller, 'Reflections on Stablecoins and Payments Innovations' (speech at ""Planning for Surprises, Learning from Crises"" 2021 Financial Stability Conference, Cleveland, OH, November 17, 2021), https://www.federalreserve.gov/newsevents/speech/waller20211117a.htm.

I will begin by explaining some of the use cases of stablecoins, including those that are well established and those that are still emerging.  The primary use of stablecoins is as a safe crypto store of value.  In the early days of crypto trading, buying and selling crypto meant trading one crypto-asset for another crypto-asset.  As we have seen, crypto prices can fluctuate substantially, which means crypto-assets that are not anchored as stablecoins suffer from price risk.  All financial markets crave the existence of a safe, low-risk asset which allows traders to move out of risky positions into safe ones where the safe asset price is known and stable.  The beauty of financial innovation is that if a market demands such an asset, someone will figure out how to supply it.  Thus, stablecoins were born.

A stablecoin's value is tied to a national fiat currency, with the U.S. dollar being the fiat currency of choice for most stablecoins.  In this sense, stablecoins are synthetic dollars.  In our everyday life, the dollar serves as a medium of exchange and a unit of account.  By their tie to the dollar, stablecoins are the medium of exchange and unit of account in the crypto ecosystem.

But how does one trade a 'real' dollar for a 'synthetic' dollar, like a stablecoin? Exchanges already allowed agents to move in and out of the crypto ecosystem but doing so took time and money.  Stablecoins provided a marketplace solution to this problem-a means to represent dollars on exchanges so that transactions could be carried out more quickly and efficiently.  Currently, stablecoins are involved in over 80 percent of trading volume on major centralized crypto exchanges. 3

3 See 'Share of Trade Volume by Pair Denomination,' The Block , la st modified February 10, 2025, https://www.theblock.co/data/crypto-markets/spot/share-of-trade-volume-by-pair-denomination.

A second stablecoin use case is providing a means to access and hold U.S. dollars. Today, around 99 percent of stablecoin market capitalization is denominated in U.S. dollars, and the vast majority of digital asset trades are priced in U.S. dollars. 4   This is no surprise given the primacy of the U.S. dollar in global finance and trade, and I believe that stablecoins have the potential to maintain and extend the role of the dollar internationally. 5   U.S. dollar stablecoins could be particularly appealing to those in high inflation countries or to those without easy or affordable access to dollar cash or banking services.

A third use case is cross-border payments.  For example, we are hearing increased industry focus on the 'stablecoin sandwich' model of cross-border payments, in which fiat currency in one country is converted first into a U.S. dollar stablecoin, then that stablecoin is transferred to another individual, and then finally the stablecoin is converted back into the local fiat currency at its destination.  This has the potential to reduce the complexity of a series of correspondent banking networks, improving transparency, cost, and timeliness.  As this use case develops, it is critical that market participants implement all anti-money laundering and relevant consumer safeguards.

The last use case I will describe is in retail payments.  At present, stablecoin use for retail payments is very limited.  However, I am seeing a lot of new, private sector entrants looking to find ways to support the use of stablecoins for retail payments.  For example, firms that provide point-of-sale technology are acquiring innovative fintechs or developing their own capabilities to accept stablecoins for retail purchases.  This provides

4 See 'DefiLlama-Defi Dashboard,' https://defillama.com/.

5 See Christopher J. Waller, 'The Dollar's International Role' (speech at ""Climate, Currency, and Central Banking,"" Nassau, BS, February 15, 2024),

https://www.federalreserve.gov/newsevents/speech/waller20240215a.htm.

consumers with yet another option.  Firms are also looking to incorporate stablecoinsand crypto more broadly-into peer-to-peer payment apps.

It remains to be seen whether stablecoins will scale for retail payment use cases. Such an evolution would require both a substantial number of consumers to shift their preferences toward using stablecoins and a significant number of businesses to make necessary investments to receive payments via stablecoins.  We know that consumer retail payments behavior is sticky, and when behavior does change, it generally happens over a long period.  If retail payments use cases do increase, it would probably take years to have a significant impact.  That said, if stablecoins reduce transaction fees or allow merchants to attract customers, then merchants could have an incentive to accept them. Ultimately, the market will sort out whether consumers and businesses have the incentives to use stablecoins in this way.

In addition to stablecoins having clear cut use cases, issuers must have a viable business model.  To cite one famous example, Red Lobster's endless shrimp deal was popular with customers, but it did not turn out to be a sustainable model for the restaurant chain.  Let me describe what I think are the incentives for stablecoin issuers, but I am here today to learn more.

To date, most stablecoin issuers appear to generate revenue primarily by earning higher returns on their reserve assets than they incur in expenses.  They issue a zerointerest liability and use the proceeds to acquire interest earning assets, thereby profiting from the spread.  As with bank deposits, the interest rate environment will have a significant effect on the profitability of firms issuing stablecoins.  Higher interest rates generally mean higher rates of return on reserve assets, which generates revenue for the

issuer.  However, higher interest rates also have the potential to make non-interest bearing assets less attractive for consumers to hold.  That said, users who hold stablecoins as an accessible, safe store of U.S. dollar denominated value may not be particularly sensitive to the interest rate environment, a phenomenon we already see today with some holders of physical U.S. dollars.

An additional way stablecoin issuers can generate revenue is through fees.  This could include charging minting and burning fees, which occur when a customer acquires a new stablecoin for a real dollar or wants to redeem it for real dollars.  This is very much like the foreign exchange market in fiat currencies that most of us are familiar with. Alternatively, as occurs with most payments firms, the issuer could earn money from transaction fees.

Finally, stablecoin issuers may use stablecoins as part of a broader strategy to attract customers to whom they may sell other products and services.  In that case, stablecoins could be seen as a 'loss leader' to entice customers to use other products or services offered by the stablecoin issuer that are much more profitable.

With the exception of the last example, the viability of the other business models will depend on the ability of stablecoins to scale as a means of payment and on how consumers and businesses respond.  For example, if the stablecoin issuer decides to pass through interest earnings on its assets, that will make the stablecoin more attractive, but it will reduce the profits from issuing a stablecoin.  The smaller the interest rate spread, the more important scale becomes.  For the fee-based models, free entry into this space will drive down fees as it does in any other market, which will reduce the revenue from issuing a stablecoin.

Within this market, scale is important for achieving certain use cases as well as satisfying certain business models.  For example, stablecoins are unlikely to become a viable option for retail payments if consumers question whether stablecoins will be widely accepted as a means of payment, while stablecoin issuers cannot generate significant revenue from interest on backing assets or fees without scale.  I call this the 'Field of Dreams' problem-if you build it, will they come?

With all of that in mind, let's now dive into some of the potential challenges or roadblocks that will need to be overcome for stablecoins to achieve their full potential.

The first theme I will explore is one that I have discussed in the past-the safety and soundness of stablecoins and the need for a clear regulatory regime for stablecoins in the United States. 6   Stablecoins are forms of private money and, like any form of private money, are subject to run risk, and we have seen 'depegs' of some stablecoins in recent years.  Additionally, all payment systems face risk of failure, and stablecoins are subject to clearing, settlement, and other payment system risks as well.  At the same time, it is important to note that the risks faced by stablecoin issuers are not the same risks faced by banks.  The stablecoin market would benefit from a U.S. regulatory and supervisory framework that addresses stablecoin risks directly, fully, and narrowly.  This framework should allow both non-banks and banks to issue regulated stablecoins and should consider the effects of regulation on the payments landscape, including competing payment instruments.

I want to reiterate that I think it is important that U.S. legislation makes provision for the supervision and regulation of stablecoin issuers that is proportionate to the risks

6 See Chrisopher J. Waller, 'Reflections on Stablecoins and Payments Innovations.'

they pose, without stifling their innovative potential while the marketplace is still developing.  I believe in the power of the private sector to develop solutions that benefit businesses and consumers, with the job of the public sector to create a fair set of rules for market participants to operate within, including guardrails that ensure safety for consumers and the financial system as a whole.  Having a level of certainty is important for businesses looking to invest in new products and services as well as for consumer confidence and assurance.

Fragmentation is the next theme I'll explore, first from a technical perspective. Currently, several popular blockchain networks are designed as distinct from one another. Firms looking to scale across blockchains are seeking technical solutions to achieve cross-chain interoperability.  Will this ultimately prove efficient, especially in a world with multiple stablecoin providers operating within potentially different combinations of blockchain networks?  Or will there be multiple, competing ecosystems, for example where one stablecoin dominates on certain blockchains, and another stablecoin dominates on others?  Alternatively, a stablecoin market featuring a high degree of interoperability could support a variety of stablecoin issuers and blockchain networks, providing consumers a choice in stablecoins and technologies.  It is not yet clear how these dynamics will ultimately impact business models and use cases for stablecoins, but it is an issue that bears watching as firms work to scale and mature their businesses.

Fragmentation around the use and acceptance of stablecoins will also act as an impediment to scaling and will impact how stablecoin use cases develop.  As I noted, stablecoins will prove useful as a means of payment insofar as holders of a specific stablecoin expect that others will accept them.  The more people will accept a stablecoin,

the more convenient a stablecoin will be.  For the retail payment use case, how easy will it be for me as a consumer to pay with stablecoins at the point of sale, either in-person or online?  From the merchant perspective, what incentives will firms have to accept stablecoins?  Similarly, for cross-border payments, how widely will different firms (and their banking partners) transact in stablecoins?  And, more broadly, could stablecoins have the potential to recreate and potentially exacerbate the current challenges associated with correspondent banking, further fragmenting the marketplace?  Or could stablecoins mature in such a way to change the market structure of cross-border payments?

Fragmentation in regulation also has the potential to hold stablecoins back from reaching their full potential.  As I already discussed, the stablecoin market does not have a clear regulatory framework in the United States.  While there have been efforts to develop some international standards, the emergence of different global stablecoin regulatory regimes creates the potential for conflicting regulation domestically and internationally. 7   This regulatory fragmentation could make it difficult for U.S. dollar stablecoin issuers to operate at a global scale.  And as I have noted, scale is vital for any means of payment to achieve its full potential.

For example, under Europe's Markets in Crypto-Assets Regulation, stablecoin issuers can earn interest on their reserve assets as a business model, whereas other regulatory models being discussed would require reserves for stablecoins deemed systemically important to be held as non-interest-bearing central bank deposits, limiting

7 See Committee on Payments and Market Infrastructures and Board of the International Organization of Securities Commissions, Application of the Principles for Financial Market Infrastructures to stablecoin arrangements (Basel: Bank for International Settlements, July 2022),

https://www.bis.org/cpmi/publ/d206.pdf.

stablecoin issuers into a specific business model.  Domestically, state regulators have been key players in the development of the stablecoin market, and several states are in the process of developing state laws or finalizing new regulations related to stablecoin issuance.  There is a risk that state regulations may conflict, which could prevent the use of the same stablecoin across all states and reduce stablecoin scalability.  As with the United States' dual banking system, a complementary framework with state and federal regulators working together can allow innovation to flourish while achieving some of the benefits of scale that come with a harmonized set of market rules.

Different regulatory regimes are also creating separate reserve asset and redemption requirements for stablecoin issuers-a further potential regulatory regime fragmentation.  In Europe, non-systemic stablecoin issuers are required to hold a minimum of 30 percent of their backing assets in bank deposits, and regulators have further proposed concentration limits per bank. 8   This differs from the requirements of some U.S. state-regulated issuers. 9   To operate at a global scale, stablecoin issuers would therefore have to issue the same stablecoin under multiple regimes with separate reserve

8 See Regulation (EU) 2023/1114 of the European Parliament and of the Council of 31 May 2023 on markets in crypto-assets, and amending Regulations (EU) No 1093/2010 and (EU) No 1095/2010 and Directives 2013/36/EU and (EU) 2019/1937. See European Banking Authority,  Draft Regulatory Technical Standards to specify the highly liquid financial instruments with minimal market risk, credit risk and concentration risk under Article 38(5) of Regulation (EU) 2023/1114 (Paris: European Banking Authority, June 2024),  https://www.eba.europa.eu/sites/default/files/2024-06/d92b94f8-8260-43b6-abaed21e022414ed/Final%20report\_draft%20RTS%20to%20specify%20the%20HLFI%20in%20the%20reserv e%20of%20assets%20Article%2038%205.pdf and European Banking Authority, Draft Regulatory Technical Standards to further specify the liquidity requirements of the reserve of assets under Article 36(4) of Regulation (EU) 2023/1114 (Paris: European Banking Authority, June 2024), https://www.eba.europa.eu/sites/default/files/2024-06/580db2f3-8370-4927-baa3-

0f995722b417/Final%20report\_draft%20RTS%20further%20specifying%20the%20liquidity%20requireme nts%20Article%2036%204.pdf.

9 For example, see 'Virtual Currency Guidance,' New York State Department of Financial Services, last modified June 8, 2022, https://www.dfs.ny.gov/industry\_guidance/industry\_letters/il20220608\_issuance\_stablecoins.

asset and redemption requirements.  Will this be efficient and ultimately prove workable if the number of regulatory regimes domestically and internationally continue to grow? Will we expect a stablecoin issuer to rebalance its reserves when a stablecoin is transferred between users in different countries or U.S. states?  Creating consistency at the federal level could allow federal authorities to negotiate with foreign counterparts to ensure global regulations serve the interests of U.S. consumers and businesses and allow the U.S. to be a regulation setter for an asset class primarily denominated in our national unit of account.

In conclusion, my hope is that the stablecoin market will grow or diminish on the merits of their benefits to consumers and the broader economy.  For the private sector, that means continuing to develop innovative solutions that fit a market need while building sustainable business models.  And for the public sector, it means setting clear and targeted legal and regulatory frameworks and coordinating those frameworks across states and national boundaries to enable private sector innovation at a global scale.

Thank you.",Christopher J Waller
https://www.bis.org/review/r250213a.htm,Joachim Nagel: r* in the monetary policy universe - navigational star or dark matter?,"Lecture by Dr Joachim Nagel, President of the Deutsche Bundesbank, at the London School of Economics and Political Science, London, 12 February 2025.",2025-02-12 00:00:00,"## r* in the monetary policy universe: navigational star or dark matter?

Lecture at the London School of Economics and Political Science

12.02.2025 | London | Joachim Nagel

Check against delivery.

- 1 Introduction
- 2 Definition of r-star and use for monetary policy
- 3 Estimates for r-star over time
- 4 Uncertainties around r-star estimates
- 5 Conclusions for monetary policy

## 1 Introduction

Ladies and gentlemen, It's a pleasure and an honour for me to speak here before such a distinguished audience.

""Remember to look up at the stars and not down at your feet."" This was advice from Stephen Hawking, the famous English physicist and author of numerous books on the cosmos. And who would want to contradict the genius?

So today | invite you to join me on a stargazing tour. If you don't have a telescope with you, no worries. However, | should add a disclaimer here: When a couple look up at the stars, things could get romantic. When astronomers observe the stars, impressive images can come into view. When economists talk about stars, it usually gets complicated. Now you know what you're getting into!

I'm sure you've already guessed what topic | have in mind: the natural rate of interest—also known as r-star. It is a concept that economists have been grappling with for more than 125 years.""! And it has perhaps never received more attention than in the current era of monetary policy.

From a central banker's perspective, | would like to discuss what role r-star can and should play in the monetary policy universe. | will structure my lecture around four key questions: What is r-star and why is it of interest for monetary policy? How have estimates for r-star evolved over the past decades? What drives uncertainty about current estimates and the future evolution of r-star? What conclusions should monetary policy draw from this?

## 2 Definition of r-star and use for monetary policy

Let's start with the definition. The natural rate is the real interest rate that would prevail if the economy were operating at its potential and prices were stable. R-star is commonly thought to be driven by real forces that structurally affect the balance between saving and investment. Think of technological progress and demographics, for example. This also means that r-star should, by definition, be independent of monetary policy. The latter follows from the widely held belief that monetary policy can affect real variables only temporarily, but is neutral in the long term.

At first glance, the natural rate could be a guiding star for the conduct of monetary policy. If a central bank sets its policy rates so that the real interest rate is above rstar, monetary policy is restrictive or ""tight"". Consequently, economic activity slows and the inflation rate should decrease. If the real rate is below r-star, monetary policy is expansionary or ""loose"". It provides incentives for consumers to purchase more and for enterprises to step up investment and output. Hence, this should result in more economic activity and a higher inflation rate.

However, the idea of the natural rate serving as a guiding star for monetary policy comes with profound challenges. Perhaps the name r-star evokes associations with astronomy and navigation. But these would be misleading. If r-star were like a star in the sky, it would be relatively easy to locate. Stars emit light and are therefore observable.

The natural rate is a theoretical concept. It is based on a hypothetical state of the world. That means the natural rate is, by nature, unobservable. It can only be estimated. For example, models use assumptions about the relationship between measurable variables and r-star. In this respect, the natural rate is not so much like a star shining brightly in the sky. It is more a case of dark matter. As it is invisible, astronomers infer dark matter indirectly by observing its gravitational effects.

If something is hard to find, it only spurs researchers to look even harder—whether they are astronomers or economists. Therefore, we can draw on a variety of estimation methods for the evolution of the natural rate.

## 3 Estimates for r-star over time

Since around the 1980s various estimates of different types have been pointing to a downward trend for r-star over several decades and across many advanced economies.""! In the wake of the global financial crisis, the estimates slumped to exceptionally low levels.©! This development was roughly in line with the observed trajectory of actual real interest rates of shortand long-term government bonds during this period. And no wonder: In the long run, both should be driven by the same fundamental forces affecting the balance between saving and investment.

So the question is this: what has lifted saving and depressed investment? A simple answer would be: in the long term, the most important driver is potential growth. But this finding is not very enlightening. Potential growth is also not observable. It is determined by underlying forces such as demographics and technological progress. This is where we need to look for the causes.

Indeed, according to a number of recent studies, waning productivity growth and population ageing were the key factors in pushing saving up and investment down. 4] Lower productivity reduces the return on investment, so people are less willing to invest. As they expect to live longer, they are more willing to save.

In addition, inequality, risk aversion and fiscal policy could be other factors. For example, growing inequality raises saving, as richer households save a larger share of their income. Similarly, higher risk aversion leads to higher saving, especially in safe assets, while lowering investment.""

Many of the estimates for r-star reached their lowest point in the pandemic years 2020 and 2021. After that, there were signs of a partial reversal. A recent analysis by Eurosystem economists across a suite of models and data up to the end of 2024 suggests that estimates of r-star range from — 72 % to ¥2 % in real terms. In nominal terms, they find that it ranges between 134% and 2% %,9

It is clear that these ranges depend on the estimating approaches considered. Taking into account an even wider array of measures, Bundesbank staff calculations using data up to the end of 2024 reveal a range of 1.8% to 2.5%."" And the ECB (European Central Bank) found for the third quarter of 2024: When three estimates derived from versions of the Holston-Laubach-Williams model are factored in, the range of real r-star is —/2 % to 1% and the nominal range is 134% to 3%.

All in all, the results suggest that the range of r-star estimates most likely increased by about one percentage point from their lows. The latest estimates by economists from the Bank for International Settlements come to similar findings.®!

The reasons for the increase after the pandemic are not yet fully clear. For example, high fiscal spending with rising public debt levels could play a role. Or higher needs for capital, as companies make their value chains more resilient by duplicating structures and increasing stock levels.

## 4 Uncertainties around r-star estimates

Stargazing tours in economics are a journey into the uncertain. This is also and especially true for r-star. Estimates of the natural rate of interest are subject to major uncertainties, shaped by three M's: megatrends, methodology and monetary policy.

First, we are facing a number of megatrends. Think of climate change, ageing societies, digitalisation, and the risks of de-globalisation and increasing geopolitical divisions. The effects of these megatrends on natural rates are difficult to gauge and may change over time.

On the one hand, they could contribute to a higher natural rate. Here are some examples: The widespread uptake of artificial intelligence could boost productivity growth. The green transition could lead to higher investment. Fiscal deficits could persist at an elevated level due to higher defence spending given geopolitical tensions. The entry of the baby boomer generation into retirement could reduce savings.

On the other hand, life expectancy is predicted to keep rising; the high hopes for the productivity-enhancing effect of Al (artificial intelligence) could turn out to be too optimistic; and given high public debt levels, fiscal space for additional spending is limited in many countries. Overall, it is virtually impossible to predict which developments will prevail in affecting r-star.

The second factor of uncertainty is methodology. The methods used to define and estimate r-star differ in important ways, especially in terms of time and risk.

Ricardo Reis demonstrates this impressively in a recent paper."" He presents four different ""r-stars"". They are based on four different conceptual approaches. And they developed quite differently between 1995 and 2019.

One major difference is the risk dimension. Knut Wicksell's original definition of the natural rate was the rate of return on physical capital in equilibrium."" The rate of return on physical capital is the return on investment in the real economy. And this rate is very much associated with risks.

However, this perspective has been lost in virtually all of the model approaches. Generally, they use rather secure government bond yields as a starting point. Again, with regard to the real economy, a risky return on capital would be a more appropriate yardstick. When we look at measures for the return on private capital, we see a strong contrast with risk-free rates. Returns on private capital have remained broadly stable over the last decades in the US (United States),!""""! Germany!' and the euro area as a whole.!""?)

From these observations, Ricardo Reis draws the following conclusion: ""focusing exclusively on the return on government bonds as the measure of r-star, while neglecting the return on private capital, leads to the wrong policy advice.""!""4!

Another case in point is the time horizon that is considered. Commonly cited estimates seek to assess the real rate that prevails in the longer run, when all shocks have dissipated. Most of these estimates are highly imprecise. Many methods simply project the current or the historical level of real rates into the future. This may confound permanent trends with cyclical factors, which may not be representative for the future. As a result, such methods could miss important turning points in real rate trends.

Other approaches characterise a short-run real rate in a hypothetical world without frictions. While interesting, this concept is of limited value for actual policymaking in the real world. Methods based on a short-term equilibrium tend to produce more volatile estimates of r-star.

There is a third reason for caution: monetary policy itself may play a role in shaping the natural rate or its estimates. A number of studies challenge the view that money is neutral in the long run.!""&gt;!

There are different channels through which monetary policy could have lasting effects on real interest rates. Prolonged tight monetary policy, for example, may lower investment, innovation and productivity growth.!""® By contrast, persistent monetary easing could fuel financial imbalances and contribute to zombification.""""7!

Moreover, recent research suggests that central bank announcements provide guidance about the trend in real rates. For instance, a narrow window around Fed (Federal Reserve System) meetings captures most of the trend decline in US (United States) real long-term yields since 1980.''®! This could mean: when central banks look for r-star in financial market prices, they might actually be looking in a mirror.!'?! Feedback loops between monetary policy and markets could unduly reinforce their perceptions about r-star. And shifts in perceived r-star could affect actual r-star as it influences saving and investment decisions.

## 5 Conclusions for monetary policy

Against the backdrop of these major uncertainties, the final key question of my speech is this: what role can and should r-star play for monetary policy in practice?

Let's approach the answer with a thought experiment: Put yourself in the shoes of a monetary policymaker who only looks at r-star. The relevant interest rate with which you steer the monetary policy stance is currently 2.75 %. After a previous series of interest rate cuts, you consider whether a further cut would be appropriate.

Your staff inform you that various point estimates of r-star range from around 1.8% to 2.5% in nominal terms. If r-star were at the upper end of the estimates, the policy rate would become neutral with the next rate cut. Things would be different if r-star were at the lower end of the estimates: Monetary policy would continue to be restrictive, even after several further rate cuts.

So how would you proceed, given a certain stance you want to achieve? Beware: If you rely on a wrong estimate, your decision may have a different effect on inflation than you intended. Simply choosing the middle of the range might not be a happy medium. Around the point estimates, there are often uncertainty bands of different sizes and with asymmetries.

As you have probably guessed: It is no coincidence that | have described this particular decision-making situation. It looks similar in the euro area ahead of the next monetary policy meeting of the ECB (European Central Bank) Governing Council at the beginning of March. After several rate cuts, the neutral rate could already be near-—or there may still be some way to go.

The President of the New York Fed (Federal Reserve System), John Williams, put the problem in a nutshell when he said: ""as we have gotten closer to the range of estimates of neutral, what appeared to be a bright point of light is really a fuzzy blur.""

The bottom line here is this: The closer we get to the neutral rate, the more appropriate it becomes to take a gradual approach. For this purpose, r-star is a helpful concept: it indicates when we need to be more cautious with policy rate moves so that we don't take a wrong step.

At the same time, the limits of the concept are also clear: it would be risky to base decisions mainly on r-star estimates. Much more is needed to assess the current monetary policy stance and the optimal policy path for the near future.

That is why the Eurosystem uses a variety of financial, real economic and other indicators along the monetary policy transmission mechanism. We want the fullest picture possible. And, of course, r-star also has a place in this picture. For instance, rstar is included in model-based optimal policy projections that we use in the decision-making process.

In my opinion, proceeding in a data-driven and gradual manner has served the ECB (European Central Bank) Governing Council well. There is no reason to act hastily in the present uncertain environment. The data will tell us where we need to go.

Away from day-to-day monetary policymaking, the concept of the natural rate of interest provides a useful framework. This is also exemplified in the policy scenarios that Ricardo Reis presented last week in Brussels.!21J

He works with the assumption that government bond rates remain around current levels. | would add the assumption that inflation stays on target—actually, that is what | am in office for and committed to. Assuming output is at capacity, policy rates would be persistently higher than in the past. But the recommendations on actual monetary policy depend on the driving forces: is the new setting caused by less demand for safe and liquid assets or by an increase in productivity? And he has two more scenarios in his paper!

That provides a good example of why we should take a close look at the factors behind r-star estimates. Here it is important to even better understand the forces that are shifting real interest rate trends. We need to find out how these forces and trends affect our work to ensure price stability.

Reviewing our monetary policy strategy from time to time is therefore vital. That is precisely what we are doing right now in the Eurosystem. And, of course, in this process, we look at all the questions | mentioned about r-star.

Our stargazing tour is drawing to a close. It turns out we were dealing more with dark matter than with a shining star. Just as dark matter is an exciting field for astronomers, r-star is a rewarding topic for economists.

Using r-star alone to navigate the monetary policy universe could be like flying almost blind. But having it as one of many instruments in your cockpit is highly useful.

| would like to end by quoting Stephen Hawking again: ""Mankind's greatest achievements have come about by talking, and its greatest failures by not talking.""

## Footnotes:

1. Wicksell, K. (1898), Geldzins und GUterpreise: eine Studie Uber die den Tauschwert des Geldes bestimmenden Ursachen, Jena, G. Fischer (English version as ibid. (1936), Interest and prices: a study of the causes regulating the value of money, London, Macmillan).
2. Obstfeld, M., Natural and Neutral Real Interest Rates: Past and Future, NBER (National Bureau of Economic Research) Working Paper, No 31949, December 2023.
3. Brand, C., M. Bielecki and A. Penalver (2018), The natural rate of interest: estimates, drivers, and challenges to monetary policy, ECB (European Central Bank) Occasional Paper, No 217.
4. Cesa-Bianchi, A., R. Harrison and R. Sajedi (2023), Global R*, CEPR (Center for Economic and Policy Research) Discussion Paper No 18518; Davis, J., C. Fuenzalida, L. Huetsch, B. Mills and A. M. Taylor (2024), Global natural rates in the long run: Postwar macro trends and the market-implied r* in 10 advanced economies, Journal of International Economics, Vol. 149; International Monetary Fund (2023), The natural rate of interest: drivers and implications for policy, World Economic Outlook, April, Chapter 2.
5. On the development of risk appetite in financial markets, see Deutsche Bundesbank, Risk appetite in financial markets and monetary policy, Monthly Report, January 2025.
6. Brand, C., N. Lisack and F. Mazelis (2025), Natural rate estimates for the euro area: insights, uncertainties and shortcomings, ECB (European Central Bank) Economic Bulletin, 1/2025.
7. Additional models would also provide values outside this range, but are currently not deemed sufficiently robust.
8. Benigno, G., B. Hofmann, G. Nufio and D. Sandri (2024), Quo vadis, r*? The natural rate of interest after the pandemic, BIS (Bank for International Settlements) Quarterly Review, March.
9. . Reis, R. (2025), The Four R-stars: From Interest Rates to Inflation and Back, draft working paper.
10. Wicksell, K. (1898), op. cit.
11. Caballero, R., E. Farhi and P.-O. Gourinchas (2017), Rents, Technical Change, and Risk Premia Accounting for Secular Trends in Interest Rates, Returns on Capital, Earning Yields, and Factor Shares, American Economic Review: Papers &amp; Proceedings 107(5), pp. 614-620.
12. Deutsche Bundesbank, The natural rate of interest, Monthly Report, October 2017.
13. Brand, C., M. Bielecki and A. Penalver (2018), The natural rate of interest: estimates, drivers, and challenges to monetary policy, ECB (European Central Bank) Occasional Paper, No 217.
14. Reis, R., Which r-star, public bonds or private investment? Measurement and policy implications, Unpublished manuscript, September 2022.
15. Jorda, O., S. Singh and A. Taylor, The long-run effects of monetary policy, NBER (National Bureau of Economic Research) Working Papers, No 26666, January 2020, revised September 2024; Benigno, G., B. Hofmann, G. Nufo and D. Sandri (2024), Quo vadis, r*? The natural rate of interest after the pandemic, BIS (Bank for International Settlements) Quarterly Review, March.
16. Baqaee, D., E. Farhi and K. Sangani, The supply-side effects of monetary policy, NBER (National Bureau of Economic Research) Working Paper, No 28345, January 2021, revised March 2023; Ma, Y. and K. Zimmermann, Monetary Policy and Innovation, NBER (National Bureau of Economic Research) Working Paper, No 31698, September 2023.
17. Borio, C., P. Disyatat, M. Juselius and P. Rungcharoenkitkul (2022), Why so low for so long? A long-term view of real interest rates, International Journal of Central Banking, Vol. 18, No 3.
18. Hillenbrand, S. (2025), The Fed (Federal Reserve System) and the Secular Decline in Interest Rates, The Review of Financial Studies, forthcoming.
19. Williams, J. C. (2017), Comment on ""Safety, Liquidity, and the Natural Rate of Interest"", by M. Del Negro, M. P. Giannoni, D. Giannone, and A. Tambalotti, Brookings Papers on Economic Activity, Vol. 1, pp. 235-316; Rungcharoenkitkul, P. and F. Winkler, The natural rate of interest through a hall of mirrors, BIS (Bank for International Settlements) Working Paper No 974, November 2021.
20. Williams, J. C., Remarks at the 42nd Annual Central Banking Seminar, Federal Reserve Bank of New York, New York City, 1 October 2018.
21. Reis, R. (2025), op. cit.",Joachim Nagel
https://www.bis.org/review/r250212d.htm,Jerome H Powell: Semiannual Monetary Policy Report to the Congress,"Testimony by Mr Jerome H Powell, Chair of the Board of Governors of the Federal Reserve System, before the Committee on Banking, Housing and Urban Affairs, US Senate, Washington DC, 11 February 2025.",2025-02-11 00:00:00,"## Jerome H Powell: Semiannual Monetary Policy Report to the Congress

Testimony by Mr Jerome H Powell, Chair of the Board of Governors of the Federal Reserve System, before the Committee on Banking, Housing and Urban Affairs, US Senate, Washington DC, 11 February 2025.

* * *

Chairman Scott, Ranking Member Warren, and other members of the Committee, I appreciate the opportunity to present the Federal Reserve's semiannual Monetary Policy Report.

The Federal Reserve remains squarely focused on achieving its dual-mandate goals of maximum employment and stable prices for the benefit of the American people. The economy is strong overall and has made significant progress toward our goals over the past two years. Labor market conditions have cooled from their formerly overheated state and remain solid. Inflation has moved much closer to our 2percent longer-run goal, though it remains somewhat elevated. We are attentive to the risks on both sides of our mandate.

I will review the current economic situation before turning to monetary policy.

## Current Economic Situation and Outlook

Recent indicators suggest that economic activity has continued to expand at a solid pace. Gross domestic product rose 2.5 percent in 2024, bolstered by resilient consumer spending. Investment in equipment and intangibles appears to have declined in the fourth quarter but was solid for the year overall. Following weakness in the middle of last year, activity in the housing sector seems to have stabilized.

In the labor market, conditions remain solid and appear to have stabilized. Payroll job gains averaged 189,000 per month over the past four months. Following earlier increases, the unemployment rate has been steady since the middle of last year and, at 4 percent in January, remains low. Nominal wage growth has eased over the past year, and the jobs-to-workers gap has narrowed. Overall, a wide set of indicators suggests that conditions in the labor market are broadly in balance. The labor market is not a source of significant inflationary pressures. The strong labor market conditions in recent years have helped narrow long-standing disparities in employment and earnings across demographic groups. 1

Inflation has eased significantly over the past two years but remains somewhat elevated relative to our 2 percent longer-run goal. Total personal consumption expenditures (PCE) prices rose 2.6 percent over the 12 months ending in December, and, excluding the volatile food and energy categories, core PCE prices rose 2.8 percent. Longer-term inflation expectations appear to remain well anchored, as reflected in a broad range of surveys of households, businesses, and forecasters, as well as measures from financial markets.

## Monetary Policy

Our monetary policy actions are guided by our dual mandate to promote maximum employment and stable prices for the American people. Since last September, the Federal Open Market Committee (FOMC) lowered the policy rate by a full percentage point from its peak after having maintained the target range for the federal funds rate at 5-1/4 to 5-1/2 percent for 14 months. That recalibration of our policy stance was appropriate in light of the progress on inflation and the cooling in the labor market. Meanwhile, we have continued to reduce our securities holdings.

With our policy stance now significantly less restrictive than it had been and the economy remaining strong, we do not need to be in a hurry to adjust our policy stance. We know that reducing policy restraint too fast or too much could hinder progress on inflation. At the same time, reducing policy restraint too slowly or too little could unduly weaken economic activity and employment. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the FOMC will assess incoming data, the evolving outlook, and the balance of risks.

As the economy evolves, we will adjust our policy stance in a manner that best promotes our maximum-employment and price-stability goals. If the economy remains strong and inflation does not continue to move sustainably toward 2 percent, we can maintain policy restraint for longer. If the labor market were to weaken unexpectedly or inflation were to fall more quickly than anticipated, we can ease policy accordingly. We are attentive to the risks to both sides of our dual mandate, and policy is well positioned to deal with the risks and uncertainties that we face.

This year, we are conducting the second periodic review of our monetary policy strategy, tools, and communications-the framework used to pursue our congressionally assigned goals of maximum employment and stable prices. The focus of this review is on the FOMC's Statement on Longer-Run Goals and Monetary Policy Strategy, which articulates the Committee's approach to monetary policy, and on the Committee's policy communications tools. The Committee's 2 percent longer-run inflation goal will be retained and will not be a focus of the review.

Our review will include outreach and public events involving a wide range of parties, including events around the country and a research conference in May. We Fed Listens will take on board lessons of the past five years and adapt our approach where appropriate to best serve the American people, to whom we are accountable. We intend to wrap up the review by late summer.

Let me conclude by emphasizing that at the Fed, we will do everything we can to achieve the two goals Congress set for monetary policy-maximum employment and stable prices. We remain committed to supporting maximum employment, bringing inflation sustainably to our 2 percent goal, and keeping longer-term inflation expectations well anchored. Our success in delivering on these goals matters to all Americans. We understand that our actions affect communities, families, and businesses across the country. Everything we do is in service to our public mission.

Thank you. I look forward to your questions.

- 1  The February includes as a special topic an update on Monetary Policy Report employment and earnings across demographic groups.",Jerome H Powell
https://www.bis.org/review/r250218d.htm,"Lesetja Kganyago: Institutions, leadership and the populist challenge","Keynote address by Mr Lesetja Kganyago, Governor of the South African Reserve Bank, at the Arbitration Foundation of Southern Africa, Johannesburg, 13 February 2025.",2025-02-13 00:00:00,"

## Keynote address by Lesetja Kganyago, Governor of the South African Reserve Bank, at the Arbitration Foundation of Southern Africa, Johannesburg, 13 February 2025

## Institutions, leadership and the populist challenge

Good day and thank you for inviting me to give this keynote address.

Let me join you all in congratulating Andile Nikani on his appointment as the Chief Executive Officer (CEO) of the Arbitration Foundation of Southern Africa.

Arbitrators  work  to  achieve  fair  outcomes.  Fairness  is  an  objective  that  is  valued universally, even by children from an early age. But arbitrators like you also achieve something else.

As the field of law and economics has shown us, when you apply economic reasoning to  law,  you  often  find  that  traditional  legal  approaches  overlook  the  importance  of efficiency. In a dispute, especially a professional dispute, parties fear long delays and excessive  costs.  If  you  get  stuck  in  a  process  like  that,  even  winning  offers  little consolation.

So let me commend you, not only for ensuring fairness, but also for doing it efficiently enough that parties freely choose you to resolve their conflicts and voluntarily accept your decisions.

For this keynote, I have chosen a subject that I hope will interest both economists and lawyers. I want to talk about the populist challenge to institutions and what it means for leaders.

The fact is that populism is widespread in the world.

It was once seen as a developing-country phenomenon - something rooted in places like Argentina - and not much of an issue in mature democracies. But no one believes that  now,  especially  not  since  2016,  with  the  surprise  outcomes  of  the  Brexit referendum and the United States election. Last year - the year of elections - made that point even clearer. Whether we are talking about rich countries or poorer ones, there is no denying that we are in an age of populism. We need to reflect on why populist ideas have this appeal, and how we can respond.

Populism has several facets. A few years ago, I gave a speech on the economics of populism, which unpacked the constraints that lead populists to economic disaster. 1 But my focus today is on institutions.

Populists have long been defined, in part, by their hostility towards institutions. 2  The standard attack is that existing institutions are controlled by elites, who treat ordinary people with contempt and ignore their interests. Institutions claim to have expertise, but populists are suspicious of experts. They do not like the idea that policy choices require specialist knowledge and therefore cannot be left to ordinary people. And they unfairly target experts who they claim abuse their status to exclude regular people, for instance by using big, technical terms instead of speaking plainly. Populist leaders also typically  promise  to  wage  war  on  institutions,  to  clean  out  what  they  claim  as  the corrupt intermediaries so that they can take charge themselves.

Unfortunately, when populists come into power, they usually fare badly. It is hard to run a modern country without a lot of help and technical expertise. It is hard to stay honest without the necessary checks and balances. This is precisely why institutions are  established  in  the  first  place.  Dismantling  them  typically  results  in  chaos, incompetence and corruption. 3  These adverse outcomes make it easy to condemn populism.

1  E L Kganyago, 'Lessons from the economics of populism'. Address by Lesetja Kganyago, Governor of the South African Reserve Bank, at the ABSIP National Conference, Johannesburg, 19 October 2018. https://www.resbank.co.za/content/dam/sarb/publications/speeches/speeches-bygovernors/2018/537/An-address-by-SARB-Governor-Lesetja-Kganyago-on-lessons-from-theeconomics-of-populism.pdf

2  See C Mudde, 'The Populist Zeitgeist', Government and Opposition 35(4), 2004.

3  See for instance M Funke, C Trebesch and M Schularick, 'Populism's broken economic promises',

Foreign Affairs,

26 September 2024. https://www.foreignaffairs.com/world/populisms-broken- economic-promises '... we found that most populists weaken a state's economy, especially in the long

run. They do so in large part by undermining the rule of law and by eroding political checks and balances. Our study makes clear that although populists may sell themselves as the solution to a

But just  because populism has a record of failure  does not mean that established institutions are doing well.

The duty we have as leaders of institutions is not only to push back against populist attacks but also to ensure our institutions are above these criticisms. This is not an easy task.

Probably one of the most difficult for us was in 2017, when the South African Reserve Bank (SARB) came under attack from the Public Protector (PP) - an independent institution established by the Constitution to uphold constitutional democracy and to investigate claims of abuse of power.  The PP had investigated a case for which we believed she did not have jurisdiction. Despite this, we still assisted and cooperated fully  with  the  investigation.  We  were  shocked  when  we  found  that  one  of  her recommendations was that the mandate of the SARB be changed. In essence, a key recommendation would have taken away the SARB's mandate of price stability without assigning it to another entity. We felt duty-bound to defend the independence of the SARB as a key institution of our democracy and challenged the report in court. The court ruled emphatically in our favour.

The fact is, institutions do not always perform well. How to address this is a major problem, and arguably an under-studied one. 4  And it is especially challenging in the public sector.

In the private sector, as the scholar Albert Hirschman famously argued, if businesses do not perform, they lose customers. This prompts business leaders to make changes. If they fail to do so, they may go bankrupt, and other firms will take their market share.

Economists love this mechanism. Not only does it punish bad performers and reward reformers, but it also drives innovation as firms come up with better products than their rivals and lure away their customers. For example, I am guessing there are plenty of

country's ills, they tend to make life worse. Populists, in other words, hurt the 'real people' they claim to be saving.'

4  See for instance F Ferrara, The Development of Political Institutions , 2022, especially Chapter 3. '… while the literature seeking to account for the entrenchment and stability of institutions is so voluminous as to render the task of contributing original insights appear rather daunting, historical institutionalism has neglected the study of institutional decay to the point of requiring anyone interested in theorizing the phenomenon to formulate an explanation almost from scratch.'

smart phones in this room, but no BlackBerrys. The giants of one era are humbled in another.

An Intel CEO, Andy Grove, wrote a famous book about this process, titled Only the Paranoid  Survive .  His  key  insight  was  that  when  you  are  on  top,  there  is  an overpowering temptation to focus on the thing that got you there. But then you fail to innovate,  and  someone  else  comes  along  with  something  better  and  takes  your market.

The  challenge  for  big  firms  is  to  innovate  before  their  competitors  do.  But  this  is incredibly hard to do. 5  Fortunately for society, however, the combination of innovation and exit ensures the market stays dynamic. Some firms fall while others rise. The economy moves forward.

A  key  theme  of  the  current  populist  surge,  particularly  from  its  backers  in  the technology industry, is that the public sector is much less dynamic. It is painted as being sheltered, inefficient and guilty of strangling the rest of the economy through excessive regulation. 6  It turns out that many people agree with this view. 7

How should public sector institutions respond to these criticisms?

One defence is to say that a 'move fast and break things' philosophy, which may work well in some parts of the private sector, is not appropriate for the public sector, which needs to deliver stability and predictability. Indeed, you could even say that creative destruction works better in a stable institutional setting, supported by safety nets. 8

This argument is sometimes persuasive, but not always. After all, not all public sector institutions  perform  well.  There  is  a  valid  question  about  how  to  get  public  sector

5  For a discussion, see Chapter 22 in C Miller, Chip War, 2022

.

6  For a recent survey of this theme, see 'Many governments talk about cutting regulation but few manage to', The Economist , 30 January 2025. https://www.economist.com/briefing/2025/01/30/manygovernments-talk-about-cutting-regulation-but-few-manage-to

7  For example, see G Tett. 2025, January 31. 'Musk is right - US government badly needs a digital makeover', Financial Times, 31 January 2025. https://www.ft.com/content/f9754b26-25fc-4403-8d423b12e82cd20f '... America is bedevilled by a paradox. On the one hand, its private sector is extraordinarily dynamic, and driving much of the 21st-century tech revolution, with its laser-like focus on consumers. But on the other, its government bureaucracy is sclerotic and inefficient, with an antediluvian approach to technology.'

8  For example, see D Rodrik, 'Why do more open economies have bigger governments?', NBER Working Paper Series No.5537 , April 1996.

institutions to pursue their missions with urgency and to behave like they are truly servants of the public, not their masters.

I  mentioned  Albert  Hirschman  earlier,  and  of  course he  argues  that  market mechanisms are not the only option for addressing institutional failings. In his most famous  book  Exit,  Voice,  and  Loyalty  he  makes  a  case  that  staying  loyal  to institutions  and  demanding  reform,  rather  than  leaving  them,  could  drive  better results. 9

The case for  having  a  voice  is  inspiring,  and  there  is  little  doubt  in  my  mind  that community involvement and activism play an important role in holding institutions to account. But we also need to recognise that decay is usually quite advanced by the time civil society mobilises. It is rarely a pre-emptive solution.

We also need to recognise that 'voice', when it is a howl of outrage, can easily take the form of a populist rebellion, with its own dangerous consequences.

My conclusion is that leaders have a vital role in proactively addressing institutional decay. And this is where we need to take inspiration from the book I cited earlier: 'Only the paranoid survive'.

Leaders need to feel the urgency about doing better, and they need to feel it well before the populists show up. In this age of populism, institutions are not going to get the benefit of the doubt. They have to perform, and they have to be transparent and communicate effectively.

Let me now turn to how this applies to the SARB.

The fact is, we have no competition: there is only one central bank in the country. We also  have  the  power  to  create  money.  This  privileged  position  means  we  have  a greater responsibility to be disciplined to resist complacency. There is a famous saying in economics that 'the best of all monopoly profits is a quiet life'. 10  But I can tell you, even if we tried to live that quiet life, we would be inviting populist attacks.

9  Hirschman further argues that exit sometimes exacerbates institutional decline, because it is typically the best-resourced and most-informed people who leave first. Those left behind have a harder time demanding accountability and reform. A O Hirschman, Exit, Voice, and Loyalty: Responses to Declines in Firms, Organizations, and States . Harvard University Press, 1970. 10  J R Hicks, 'Annual survey of economic theory: the theory of monopoly, Econometrica, January 1935, p. 8

To  deal  with  this,  we  try  to  foster  a  culture  of  innovation,  accountability  and transparency. This means we take satisfaction in getting things done, and we make a point of communicating clearly and extensively.

Let me give some concrete examples of this philosophy in action.

My first example is about transparency. We recently volunteered for an independent review of our transparency practices, undertaken by the International Monetary Fund (IMF). 11  We did this because we believe central bank independence is only tenable if there is also accountability, which demands easy access to information. The review provided some positive comments as well as suggestions and criticisms on areas for improvement.  Compliments  are  always  nice,  and  the  review  affirmed  that  our transparency practices could serve as a model for other central banks. But criticisms are equally important and certainly welcomed, especially when offered in good faith. They are mainly suggestions for innovation, some of which may work for us. 12

My second example is our inflation target. Since 2000, the SARB has had a target range  of  3-6%.  It  was  meant  to  be  lowered  to  3-5%,  but  that  adjustment  was postponed when the rand depreciated in 2001, and it was never reinstated. The result is that we have used a higher and wider target than most other countries ever since. During  this  time,  the  SARB  has  developed  a  reasonably  good  inflation-fighting reputation. We could get away with leaving the target unchanged. But the research has been done, and we are convinced that South Africans would be better off with lower inflation, and thus a lower target. We champion this idea because we believe deeply in excellence in price stability, not just in doing the least we can get away with.

My  third  example  is  about  payments.  Payment  infrastructure  is  often  viewed  as important  but  unexciting,  like  plumbing.  However,  payments  are  currently  a  major strategic priority for the SARB, and one of the most interesting things we are working on. As you may have seen, we have recently acquired a 50% stake in BankservAfrica,

11  IMF, 'South Africa: Central Bank Transparency Code Review', 2 December 2024. https://www.imf.org/en/Publications/CR/Issues/2024/12/02/South-Africa-Central-Bank-TransparencyCode-Review-557776

12  For example, the report made various recommendation about transparency for the Gold and Foreign Exchange Contingency Reserve Account (GFECRA), such as creating a dedicated page on the SARB website for this content, publishing the settlement agreement, and disclosing GFECRA balances more regularly. All these have now been implemented. For the dedicated page, see

https://www.resbank.co.za/en/home/what-we-do/financial-markets/The-Gold-and-Foreign-Exchange-

Contingency-Reserve-Account

and we will be using this investment to drive a major modernisation of South Africa's payment ecosystem. Together with government and the industry, we plan to provide cheap, safe and fast digital payments, delivered at a retail level to our whole society to complement banknotes and coin. This is an innovation that will create significant benefits for ordinary people, and we are proud to be leading it.

Ladies and gentlemen, to conclude, the populist charge is dangerous and pervasive. Complacent  institutions  that  do  not  engage  the  public  effectively  are  going  to  be vulnerable. Our best defences are honesty with the public and excellence in pursuing our mandates. It is up to leaders of institutions to make this happen.

Thank you.",Lesetja Kganyago
https://www.bis.org/review/r250218c.htm,Klaas Knot: Dealing with geo-economic fragmentation,"Speech by Mr Klaas Knot, President of De Nederlandsche Bank, at the opening of the High Level IMF Constituency Meeting, Amsterdam, 14 February 2025.",2025-02-14 00:00:00,"## Klaas Knot: Dealing with geo-economic fragmentation

Speech by Mr Klaas Knot, President of De Nederlandsche Bank, at the  opening of the High Level IMF Constituency Meeting, Amsterdam, 14 February 2025.

* * *

Good morning, welcome back. And for those of you who were not present at dinner last night, welcome to our newly renovated building. We are glad to be back in our headquarters after nearly five years of renovation work. We are immensely proud of it.

Today's topic is 'Dealing with geo-economic fragmentation'. Not really a topic for a Valentine's day. Rather than being in love, it sometimes seems the world is in the middle of a nasty multilateral divorce. We see accusations, threats, and fighting over the children.

And as in a real divorce, geopolitical tensions have real consequences for real people. The impact on our constituency differs widely per country. For more than three years already, Ukraine has been literally fighting for its life. Incredibly, and despite all hardship, it has more than successfully concluded the 6th review of its IMF programme. Other countries in our constituency are facing a threatening security situation. They are rearming, protecting their strategic economic infrastructures. And we all suffer when free trade declines and international economic and financial cooperation stalls.

Strengthening national security and curbing strategic economic risks are logical policies in a world that has become a more dangerous place. But, if not properly managed, the economic costs of these policies could be very high.

Economic costs can be felt directly as a result of trade restrictions, for example through higher import prices, market segmentation and reduced access to technology and knowledge.

Fragmentation impacts not only the real economy and inflation. It also has implications for financial stability. Weaker growth and higher inflation make it more likely that banks and other financial institutions will incur credit and market losses. Restrictions on the flow of capital and investments limit the ability of financial institutions to diversify their portfolios. And state-sponsored cyber-attacks pose a threat to our financial systems.

But perhaps the most important way in which fragmentation impacts financial stability is when we can no longer find each other when faced with crucial cross-border challenges. And there are many such challenges. During the Global Financial Crisis, policymakers around the world were able to respond swiftly and effectively. This was possible thanks to good relations among public-sector financial decision makers and solid institutional structures that had been forged over the years. After the crisis, countries around the world, assembled in the G20, took the lead in hammering out a firm package of financial reforms. In a fragmented world, such a swift response is becoming more complicated. This could prove costly. That's because the most important challenges to financial stability that we currently face are precisely the crossborder issues that we can only solve if we work together.

For us central banks, and for institutions like the IMF and the World Bank, geoeconomic fragmentation is to a large extent a given. We have to deal with it, and of course the central question is: how? I am glad that we have been able bring four distinguished speakers to the table to share their expert knowledge and fuel our discussion.

To give you my two cents, I think our task as central bankers is to try to limit the economic cost of the current global political climate. By continuing to speak up for the international financial rules-based order that has brought us stability and prosperity over the decades. By pointing to the economic and social costs of protectionist policies. And by staying committed to constructive international working relationships as much as possible, so that the international financial policy framework can continue to function.

And we need to speak up for further European integration. In the economic and financial domain, that means deepening the internal market, completing the banking union, and working towards a capital markets union. But beyond that, it has become clear that we have to work closer together in many other fields as well: in defence, energy, healthcare, etcetera. And, as I said yesterday, we have to work to bring the nonEU countries that share our values closer to the European Union. To this end, the IMF constituency can be a useful instrument. We really need to work together.",Klaas Knot
https://www.bis.org/review/r250218b.htm,Christopher J Waller: Disinflation progress uneven but still on track rates cuts on track as well,"Speech by Mr Christopher J Waller, Member of the Board of Governors of the Federal Reserve System, at the University of New South Wales Macroeconomic Workshop, Sydney, New South Wales, Australia, 17 February 2025.",2025-02-17 00:00:00,"## Christopher J Waller: Disinflation progress uneven but still on track rates cuts on track as well

Speech by Mr Christopher J Waller, Member of the Board of Governors of the Federal Reserve System, at the  University of New South Wales Macroeconomic Workshop, Sydney, New South Wales, Australia, 17 February 2025.

* * *

Thank you, Bruce, and thank you for the opportunity to speak to you today. It's great being back in Sydney and seeing old friends-like the Opera House!

As I look at the U.S. economy today, I see that the real side is doing just fine but progress on lowering inflation has come in fits and starts. 1  After two good months of inflation data for November and December, January once again disappointed and showed that progress on inflation remains uneven. I continue to believe that the current setting of monetary policy is restricting economic activity somewhat and putting downward pressure on inflation. If this winter-time lull in progress is temporary, as it was last year, then further policy easing will be appropriate. But until that is clear, I favor holding the policy rate steady.

Spending by households and businesses has proved to be resilient, we have solid growth in real gross domestic product (GDP) and the latest data on employment, including revisions to most of 2024, support the view that labor market is in a sweet spot. Meanwhile, last week's January inflation data have a similar feel to that of January 2024, albeit to a smaller degree; they surprised on the high side and raised concerns that the progress we made in pushing inflation toward our 2 percent goal would stall out. But once we got past the first quarter of last year, we did see continued progress in reducing inflation in the latter part of the year. The question now is if we will see progress again later this year, as we did in 2024.

Progress on inflation is an important consideration in policymakers' judgment about whether monetary policy needs adjustment in the near term. The continued solid labor market is one reason why I supported the Federal Open Market Committee's (FOMC) decision at the end of January to hold our policy rate steady. After two good inflation reports for November and December there was concern about a January bounce back in inflation. So based on good labor market data and concerns about a seasonal shock to inflation not fully adjusted in the data, I felt it was prudent to stand pat at our January meeting. Given last week's inflation report, that concern was warranted.

Let me pause here for a moment to address some commentary after the FOMC meeting that cited uncertainty about the new Administration's policies as a leading reason for that decision. We must keep in mind that there is always a degree of uncertainty about economic policy, and we need to act based on incoming data even when facing great uncertainty about the economic landscape. We have done this in the past and will continue to do so in the future.

Let me provide two recent examples where the FOMC acted in the face of great uncertainty. In March 2022, inflation was roaring, and rate hikes were on the table.

Then Russia invaded Ukraine, which created tremendous economic uncertainty around the globe. Not only did the FOMC raise the policy rate in March 2022 for the first time since 2019, but in subsequent meetings we also implemented large rate hikes for several meetings. We could not wait for uncertainty about the war to be resolved.

The second episode was in March of 2023 when stresses emerged in the U.S. banking system, stemming in part from the failures of Silicon Valley Bank and Credit Suisse, with the latter occurring the weekend before our March FOMC meeting. There was great uncertainty as to whether these events would lead to financial instability and a significant contraction of credit that could trigger a recession. Many forecasters projected a recession would hit in the second half of 2023 as a result. Consequently, there were calls to stop hiking the policy rate due to a tremendous amount of financial and banking uncertainty. But the Federal Reserve worked in concert with other government agencies and used its financial stabilization tools to deal with the banking issues and continued raising the policy rate to deal with inflation. 2  So the moral of this story is that monetary policy cannot be put on hold waiting for these types of uncertainty to resolve.

Putting uncertainty aside, let me turn to my view of the economic data. As I noted, real GDP continued to grow solidly in the fourth quarter, at a pace of 2.3 percent, and would have been nearly 1 percentage point stronger without a reduction in inventories, which tend to be volatile. Personal consumption expenditures (PCE), which are typically twothirds of GDP, grew a robust 4.2 percent in the fourth quarter. As was noted in the Fed's latest to Congress, households have a solid level of liquid Monetary Policy Report assets to sustain their spending. Based on the limited data we have for the first quarter of 2025 this solid growth seems to be continuing. The employment report for January, which I will focus on in a moment, indicated a continued strong labor market, which should support consumption. Retail sales are reported to have fallen back in January after a strong rise in December, but given how volatile these data can be, and given that the cold weather in January probably held down sales, I'm not putting much weight on that reading for the time being. Business sentiment, as reflected in surveys of purchasing managers in both manufacturing and non-manufacturing, was among the most consistently positive in a while. The index for manufacturing businesses was 50.9, the first time since October 2022 that these results topped 50, as sentiment indicators about orders, production, and employment were all expanding. The corresponding index for the large majority of businesses outside manufacturing also indicated expansion, as it has for some time. The Blue Chip consensus of private forecasters and the Atlanta Fed's GDP Now forecast based on the data in hand predict growth this quarter similar to that of the end of last year. To circle back to my message earlier, many people predicted that tariffs proposed by the Administration on February 1 would have a significant effect on trade and consumption in the first quarter, not to mention prices, but after the postponement of some of those tariffs, it is unclear to me if and when that might show up in the data. I will, of course, be watching closely, but I haven't altered my outlook based on what has been implemented to date.

As I noted earlier, data on the labor market indicate that it is in a good spot, with employers having an easier time filling jobs than earlier in the expansion but with still ample demand for new workers and new jobs being created. The unemployment rate ticked down to 4 percent, which is just about where it has been for the past year. Employers added a net 143,000 jobs in January, down some from a 204,000 average

for the final three months of 2024 but right around the 133,000 average for the quarter before that. Two factors that may have held down this number a bit were cold weather and the fires in Los Angeles, which prevented thousands of people from getting to or performing their jobs. Beyond payrolls, the ratio of job vacancies to the number of unemployed people stands at 1.1, close to the level before the pandemic.

Wage growth continues to be strong, and it has considerably outpaced price increases, but is down from two years ago, and for a few reasons, I don't judge recent data as indicating that wages are a factor preventing inflation from making continued progress toward 2 percent. Though the January reading of average hourly earnings was a bit elevated, this series is pretty volatile and the reading may have been held up by weather-related issues. Smoothing through the monthly fluctuations, we see wage growth fairly steady at 4 percent a month over the past year. Broader measures of worker compensation show a more distinct moderation in growth. The Labor Department's employment cost index has fallen gradually but consistently from 4.2 percent at the end of 2023 to 3.8 percent at its last reading.

As for whether 4 percent wage growth is consistent with 2 percent inflation, I will note, as I have before, that productivity has grown at roughly a 2 percent annual rate since the advent of the pandemic-and slightly faster than that in 2023 and 2024. Unless that productivity trend changes a lot, wage growth is consistent with bringing inflation down to 2 percent.

Turning to inflation, last week's data taken as a whole were mildly disappointing but not nearly so disappointing as a focus on the consumer price index (CPI) alone would have indicated. Total CPI inflation for January came in hot at 0.5 percent, and core was 0.4 percent, which brings the 12-month changes to 3.0 percent and 3.3 percent, respectively. These 12-month readings are lower than we had in January 2024, so we have made some progress over the past year, but they are still too high.

However, we also received producer price data last week, and, combining that information with the CPI data, forecasts for January PCE inflation aren't as alarming as the CPI inflation data. Estimates for total PCE inflation, the FOMC's preferred measure, are about 0.3 percent and that for core PCE inflation was around 0.25 percent. These numbers will mean a bump-up in the monthly pace of core inflation of about one-tenth of 1 percentage point from readings of under 0.2 percent in November and December. And this would leave the 12-month and 6-month average core PCE inflation around 2.6 percent and 2.4 percent, respectively. These rates are lower than where they stood in January 2024, which is good, but progress has been slower than I expected on reducing inflation to our 2 percent target.

As a policymaker, I rely on these data to help me judge how close we are to meeting our inflation target. And I'm thinking hard about how to interpret these recent numbers because there seems to be some pattern over the past few years of higher inflation readings at the start of the year. This pattern brings into question whether the inflation data have ""residual seasonality,"" which means that statisticians have not fully corrected for some apparent seasonal fluctuations in some prices. Many firms reset their prices at the beginning of each year, and the Commerce Department tries to factor this in, but even after this adjustment, there is a consensus among economists that some seasonality remains. Incidentally, this probably isn't just a problem in January. Some

recently updated research by the Fed staff shows that inflation in the first months of the year has been higher than in the second half for 16 of the last 22 years. 3   I'm alert to this issue and will watch the data over the next few months to evaluate if we are having what looks like a repeat of high first quarter inflation data that could be followed by lower readings later in the year.

Before I get to my outlook for monetary policy, I want to address a topic of some debate recently, which is the divergence between long-term interest rates and the FOMC's policy rate since we started cutting rates in September. While the FOMC has reduced the policy rate 100 basis points since then, yields on the benchmark 10-year Treasury security have increased by a noticeable amount. In theory, longer-term rates should follow the expected path of the overnight policy rate set by the FOMC. But this relationship is based on the classic economic assumption of ceteris paribus, or ""all other factors remaining constant."" The 10-year Treasury security trades in a deep, liquid global market, and its yield is affected by a variety of factors other than the path of the policy rate. This means that all other factors are not constant and that the 10-year Treasury yield may not follow the federal funds rate.

Perhaps the most famous example of the divergence of market interest rates and policy rates began in the mid 2000's. The FOMC was tightening monetary policy from 2004 to 2006 and raised the policy rate 425 basis points. Over that time, Treasury yields barely moved. This was so surprising that Fed Chairman Alan Greenspan referred to it as a ""conundrum."" At about the same time, future Chair Ben Bernanke identified what he called a ""global savings glut"" that was pushing up foreign demand for Treasury securities and putting downward pressure on yields. Over time, this has come to be seen as a significant factor for the conundrum then and as a factor for low Treasury yields subsequently. This example is just to illustrate that the 10-year Treasury yield may not respond to the policy rate as expected because of a variety of factors that are beyond the control of the FOMC.

So, what does my economic outlook mean for monetary policy? The labor market is balanced and remarkably resilient. If you want an example of a stable labor market with employment at its maximum level, it looks a lot like where we are right now. On the other side of the FOMC's mandate, inflation is still meaningfully above our target, and progress has been excruciatingly slow over the last year. This tells me that we should currently have a restrictive setting of policy, as we do-to continue to move inflation down to our goal-but that setting should be getting closer to neutral as inflation moves closer to 2 percent and should allow the labor market to remain in a good place.

So for now, I believe a pause in rate cuts is appropriate. Assuming the labor market continues to be in rough balance, I can wait and see if the higher inflation readings in January moderate, as they have in the past couple of years. If so, I'll have to decide if this reflects residual seasonality that will go away later in the year and if the underlying trend in inflation is toward 2 percent, or if there is a different issue holding up inflation and how that may play out. Whichever case it may be, the data are not supporting a reduction in the policy rate at this time. But if 2025 plays out like 2024, rate cuts would be appropriate at some point this year.

And while we are waiting on data to understand how the economy is moving relative to our objectives, we will learn more about Administration policies. My baseline view is that

any imposition of tariffs will only modestly increase prices and in a non-persistent manner. So I favor looking through these effects when setting monetary policy to the best of our ability. Of course, I concede that the effects of tariffs could be larger than I anticipate, depending on how large they are and how they are implemented. But we also need to remember that it is possible that other policies under discussion could have positive supply effects and put downward pressure on inflation. At the end of the day, the data should be guiding our policy action-not speculation about what could happen. And if the incoming data supports further rate cuts or staying on pause, then we should do so regardless of how much clarity we have on what policies the Administration adopts. Waiting for economic uncertainty to dissipate is a recipe for policy paralysis.

- 1  The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.
- 2  See my March 2022 speech for a discussion of how the Federal Reserve oversees financial stability and macroeconomic stability using different tools.  Speech by Governor Waller on the economic outlook - Federal Reserve Board.
- 3  For a fuller discussion of residual seasonality in inflation data, see Ekaterina Peneva and Nadia SadØe (2019), "" Residual Seasonality in Core Consumer Price Inflation: An Update,"" FEDS Notes (Washington: Board of Governors of the Federal Reserve System, February 12).",Christopher J Waller
https://www.bis.org/review/r250218a.htm,"Michelle W Bowman: Brief remarks on the economy and accountability in supervision, applications, and regulation","Speech by Ms Michelle W Bowman, Member of the Board of Governors of the Federal Reserve System, at the American Bankers Association 2025 Conference for Community Bankers, Phoenix, Arizona, 17 February 2025.",2025-02-17 00:00:00,"For release on delivery 10:20 a.m. EST (8:20 a.m. local time) February 17, 2025

Brief Remarks on the Economy and Accountability in Supervision, Applications, and Regulation

Remarks by

Michelle W. Bowman

Member

Board of Governors of the Federal Reserve System at

The American Bankers Association 2025 Conference for Community Bankers

Phoenix, Arizona

February 17, 2025

Thank you for the invitation to join you here in Phoenix at the ABA's Conference for Community Bankers. 1   For the past seven years, this conference provided an excellent forum for me and bankers to meet and interact with a range of state and federal regulators, policymakers, service providers, and other stakeholders.  Today I would like to share a brief update on my views on monetary policy and the economy, before I turn to bank regulatory issues, and describe how I think that regulators should approach the important work of 'maintenance' of the regulatory framework.

## Economic Outlook and Monetary Policy

Toward the end of last year, the Federal Open Market Committee (FOMC) began the process of moving the target range for the federal funds rate to a more neutral setting to reflect the progress made since 2023 on lowering inflation and cooling the labor market.  At our September meeting, the FOMC voted to lower the target range, for the first time since we began tightening monetary policy to combat inflation, by 50 basis points to 4-3/4 to 5 percent.

You may remember that I dissented from that decision, the first time a Fed Governor dissented from an FOMC rate decision in nearly 20 years.  I preferred a smaller initial cut to begin the policy recalibration phase.  I explained my reasoning in a statement published after the meeting noting that the strong economy and a healthy labor market did not warrant a larger cut. In addition, moving the policy rate down too quickly could unnecessarily risk stoking demand, potentially reigniting inflationary pressures, and could be interpreted as a premature 'declaration of victory' on our price-stability mandate.

1 The views expressed in these remarks are my own and do not necessarily reflect those of my colleagues on the Board of Governors of the Federal Reserve System or the Federal Open Market Committee.

At the most recent FOMC meeting last month, my colleagues and I voted to hold the federal funds rate target range at 4-1/4 to 4-1/2 percent and to continue to reduce the Federal Reserve's securities holdings.  I supported this action because, after recalibrating the policy rate by 100 basis points through the December meeting, I think that policy is now in a good place, allowing the Committee to be patient and pay closer attention to the inflation data as it evolves.

In my view, the current policy stance also provides the opportunity to review further indicators of economic activity and get further clarity on the administration's policies and their effects on the economy.  It will be very important to have a better sense of these policies, how they will be implemented, and establish greater confidence about how the economy will respond in the coming weeks and months.

For now, the U.S. economy remains strong, with solid growth in economic activity and a labor market near full employment.  Core inflation is still somewhat elevated, but has appeared to resume its downward path, and my baseline expectation has been that it will moderate further this year.  Even with this outlook, there are upside risks to my baseline expectation for the inflation path.

In 2023, the rate of inflation declined significantly, but it has taken longer to see further meaningful declines since that time.  The latest consumer and producer price index reports suggest that the 12-month measure of core personal consumption expenditures inflation-which excludes food and energy prices-likely moved down to around 2.6 percent in January, which would represent a noticeable stepdown from its 2.8 percent reading in December and 3.0 percent at the end of 2023.  Progress had been especially slow and uneven since the spring of last year mostly due to rising core goods price inflation.

After increasing at a solid pace, on average, over the first nine months of last year, gross domestic product appears to have risen a bit more moderately in the fourth quarter, reflecting a large drop in the volatile category of inventory investment.  In contrast, private domestic final purchases, which provide a better signal about underlying growth in economic activity, maintained its strong momentum from earlier in the year, as personal consumption rose robustly again in the fourth quarter.  Following strong readings in December, retail sales and sales of motor vehicles softened in January.  However, these data can be noisy around this time of the year and sales were likely affected by the cold and wintery weather last month.

Payroll employment gains have picked up since the summer of last year and averaged a strong pace of about 240,000 per month over the past three months, with last month's gains likely held back by the Los Angeles wildfires and the harsh winter weather.  The unemployment rate edged down further to 4.0 percent in January and has moved sideways since the middle of last year, remaining below my estimate of full employment.

The labor market appears to have stabilized in the second half of last year, after it loosened from extremely tight conditions.  The rise in the unemployment rate since mid-2023 largely reflects weaker hiring, as job seekers entering or re-entering the labor force are taking longer to find work, while layoffs have remained low.  The ratio of job vacancies to unemployed workers has remained close to the pre-pandemic level in recent months, and there are still more available jobs than available workers.  The labor market no longer appears to be especially tight, but wage growth remains somewhat above the pace consistent with our inflation goal.

The recent revision of the Bureau of Labor Statistics labor data further vindicates my view that the labor market was not weakening in a concerning way during the summer of last year.  Although payroll employment gains were revised down considerably in the 12 months

through March 2024, job gains were little revised, on net, over the remainder of last year.  It is crucial that U.S. official data more accurately capture structural changes in labor markets in real time, so we can confidently rely on these data for monetary and economic policymaking.  But in the meantime, given conflicting economic signals, measurement challenges, and significant data revisions in recent years, I remain cautious about taking signal from only a limited set of realtime data releases.

Assuming the economy evolves as I expect, I think that inflation will slow further this year.  As the inflation data since the spring of last year show, its progress may be bumpy and uneven, and progress on disinflation may take longer than we would hope.  I continue to see greater risks to price stability, especially while the labor market remains strong.

With encouraging signs that geopolitical tensions may be abating in the Middle East, Eastern Europe, and in Asia, I will be monitoring global supply chains which could continue to be susceptible to disruptions, and lead to inflationary effects on food, energy, and other commodity markets.  In addition, the release of pent-up demand following the election could lead to stronger economic activity, which could also influence inflationary pressures.

Having entered a new phase in the process of moving the federal funds rate toward a more neutral policy stance, there are a few considerations that lead me to prefer a cautious and gradual approach to adjusting policy, as it provides us time to assess progress in achieving our inflation and employment goals.

Given the current policy stance, I think that easier financial conditions from higher equity prices over the past year may have slowed progress on disinflation.  And I am watching the increase in longer-term Treasury yields that has occurred since the start of policy recalibration at the September meeting.  Some have interpreted it as a reflection of investors' concerns about

inflation risks and the possibility of tighter-than-expected policy that may be required to address inflationary pressures.

There is still more work to be done to bring inflation closer to our 2 percent goal. I would like to gain greater confidence that progress in lowering inflation will continue as we consider making further adjustments to the target range.  We need to keep inflation in focus while the labor market appears to be in balance and the unemployment rate remains at historically low levels.  Before our March meeting, we will have received one additional month of inflation and employment data.

Looking forward, it is important to note that monetary policy is not on a preset course. At each FOMC meeting, my colleagues and I will make our decisions based on the incoming data and the implications for and risks to the outlook and guided by the Fed's dual-mandate goals of maximum employment and stable prices.  I will also continue to meet with a broad range of contacts to help me interpret the signals provided by real-time data and as I assess the appropriateness of our monetary policy stance.

Bringing inflation in line with our price stability goal is essential for sustaining a healthy labor market and fostering an economy that works for everyone in the longer run.

## Maintenance of the Regulatory Framework

I will now turn to bank supervision, the bank applications process, and regulation. Community banks experience the burden of the regulatory framework most acutely when it is not appropriately tailored to their size, risk, complexity, and business model.  While promoting safety and soundness in the banking system-particularly among community banks-is an important and necessary regulatory objective, we must also be cautious to ensure that the

framework does not become an impediment to their operations, preventing them from providing competitive products and services, innovating, and engaging in appropriate risk-taking.

During my tenure at the Board, I have laid out a wide range of issues and concerns that I see as critical components that are necessary to build and maintain an effective regulatory framework. 2   While I will only address a subset of these issues today, I'd like to begin by clarifying what I mean by this.

Our work to maintain an effective framework is never really complete.  Just as complacency can be fatal to the business of a bank, complacency can also prevent regulators from meeting their statutory obligation to promote a safe and sound banking system that enables banks to serve their customers effectively and efficiently.

2   See, e.g.,  Michelle W. Bowman, 'Bank Regulation in 2025 and Beyond' (speech at the Kansas Bankers Association Government Relations Conference, Topeka, Kansas, February 5, 2025),

https://www.federalreserve.gov/newsevents/speech/files/bowman20250205a.pdf; Michelle W. Bowman,

'Approaching Policymaking Pragmatically' (speech at the Forum Club of the Palm Beaches, West Palm Beach,

Florida, November 20, 2024), https://www.federalreserve.gov/newsevents/speech/files/bowman20241120a.pdf;

Michelle W. Bowman, 'Building a Community Banking Framework for the Future' (speech at the 2024 Community

Banking Research Conference, St. Louis, Missouri, October 2, 2024), https://www.federalreserve.gov/newsevents/speech/files/bowman20241002a.pdf; Michelle W. Bowman, 'The

Future of Stress Testing and the Stress Capital Buffer Framework' (speech at the Executive Council of the Banking

Law Section of the Federal Bar Association, Washington, D.C., September 10, 2024), https://www.federalreserve.gov/newsevents/speech/files/bowman20240910a.pdf; Michelle W. Bowman, 'Liquidity,

Supervision, and Regulatory Reform' (speech at 'Exploring Conventional Bank Funding Regimes in an

Unconventional World,' Dallas, Texas, July 18, 2024), https://www.federalreserve.gov/newsevents/speech/files/bowman20240718a.pdf; Michelle W. Bowman, 'The

Consequences of Bank Capital Reform' (speech to the ISDA Board of Directors, London, England, June 26, 2024), https://www.federalreserve.gov/newsevents/speech/files/bowman20240626a.pdf; Michelle W. Bowman,

'Innovation in the Financial System' (speech at the Salzburg Global Seminar on Financial Technology Innovation,

Social Impact, and Regulation: Do We Need New Paradigms?, Salzburg, Austria, June 17, 2024), https://www.federalreserve.gov/newsevents/speech/files/bowman20240617a.pdf; Michelle W. Bowman, 'Bank

Mergers and Acquisitions, and De Novo Bank Formation: Implications for the Future of the Banking System'

(remarks at A Workshop on the Future of Banking, Kansas City, Missouri, April 2, 2024),

https://www.federalreserve.gov/newsevents/speech/files/bowman20240402a.pdf; Michelle W. Bowman, 'Tailoring, Fidelity to the Rule of Law, and Unintended Consequences' (speech at the Harvard Law School Faculty Club, Cambridge, Massachusetts, March 5, 2024),

https://www.federalreserve.gov/newsevents/speech/files/bowman20240305a.pdf; Michelle W. Bowman, 'The Role of Research, Data, and Analysis in Banking Reforms' (speech at the 2023 Community Banking Research Conference, St. Louis, Missouri, October 4, 2023),

https://www.federalreserve.gov/newsevents/speech/files/bowman20231004a.pdf.

System maintenance is not something that we should shy away from.  In our everyday lives, we invest significant time in maintenance.  We schedule regular oil changes for our cars, and we invest in the infrastructure that allows our economy to function.  Devoting resources to maintenance often prevents more costly issues down the road-it's easier to get oil changes than it is to rebuild an engine.

So, what does maintenance look like in practice?  To address this question, I think it's helpful to look at three core areas in the bank regulatory framework:  Supervision, Bank applications, and Regulation.

## Approach to Supervision

Let's start with supervision.  Supervision operates almost entirely outside of the public view.  Much of the work involves the review of proprietary business information from banks, and the preparation of examination reports shielded from public scrutiny under the auspices of protecting confidential supervisory information.  But confidentiality should not be used to prevent scrutiny and accountability in the assignment of ratings.

So, today, I am going to dig a bit deeper into the realm of supervision to discuss supervisory ratings, accountability, and the troubling trend of inaction and opacity within the supervisory toolkit.

## Rational Standards &amp; Ratings

While there is some public disclosure of supervisory information, it is often difficult to get a true understanding of supervision based on data that may be released.  In fact, this data often sends confusing and conflicting signals.  For example, the Board's Supervision and Regulation Report presented information stating that only one-third of large financial institutions

maintained satisfactory ratings across all relevant ratings components in the first half of 2024. 3 At the same time, this report noted that most large financial institutions met supervisory expectations with respect to capital and liquidity. 4

The odd mismatch between financial condition and overall supervisory condition as assessed by the prudential regulators raises a more significant issue, whether subjective examiner judgment-those evaluations based on subjective, examiner-driven, non-financial concerns-is driving the firm's overall rating.  Are ratings trends based on the materiality of the identified issues, or do they imply that the regulators see widespread fragility in the banking system?

While this example highlights a large bank ratings framework issue, it is symptomatic of a broader issue that warrants scrutiny-whether the approach to supervision has led to a world in which core financial risks have been de-prioritized, and non-core and non-financial risks-things like IT, operational risk, management, risk management, internal controls, and governancehave been over-emphasized.  These issues are important, and certainly worthwhile topics for examiners to consider, but their review should not come at the expense of more material financial risk considerations-and they should not drive the overall assessment of a firm's condition.  There is evidence that supervision has undergone such a shift, not only among large banks, but among regional and community banks as well. 5   For all institutions, financial metrics are not among the primary findings determined from the examination process, and arguably they have been de-emphasized when assigning supervisory ratings.

3   See Board of Governors of the Federal Reserve System, Supervision and Regulation Report at 16-17 (Washington: Board of Governors, November 2024), https://www.federalreserve.gov/publications/files/202411supervision-and-regulation-report.pdf (describing data for the first half of 2024, the most recent period for which data is available).

4   Board of Governors of the Federal Reserve System, Supervision and Regulation Report .

5   Board of Governors of the Federal Reserve System, Supervision and Regulation Report at 17, 20.

Prioritization is valuable in the supervisory process, both to inform how examiners allocate their time, but also in helping banks allocate resources to remediate issues identified during the supervisory process.  The frequency of supervisory findings related to non-financial metrics may be a byproduct of how long it takes to remediate these issues, like longstanding issues with IT systems that have not been enhanced over many years of growth.  However, we should also be vigilant and deliberate about any shift in supervisory focus from financial risk toward non-financial risks and internal processes, as this shift is not focused on fundamental safety and soundness issues and it is not cost-free.

We should also not expect every firm to coalesce around a single set of products, internal processes, and risk-management practices.  Variety in banking models is a strength and a necessity of the U.S. banking system, relying on management and boards of directors to determine bank strategy, rather than a bank's business model effectively being set by supervisory directives.

Supervisory practices like horizontal reviews can create examiner incentives to expect uniformity and 'grade on a curve,' but this approach perversely punishes variation among bank practices, stifling competition and innovation.  Supervisory findings also inform bank ratings, which can have follow-on effects like limiting options for mergers and acquisitions (M&amp;A); raising the cost of liquidity; or diverting resources away from other, more important bank management priorities.

## Diagnostic Accountability

To maintain strong and appropriate supervisory standards and practices, we need to take a step back and diagnose the bank regulatory system in its entirety:  what is working, what is broken, and what needs to be updated.  When things go wrong, having an impartial check on

subjective judgments can lead to a better diagnosis.  Of course, a better diagnosis can produce more efficient and targeted improvements, and better promote accountability.  Accountability is critical to maintaining an effective regulatory system, and yet it can be difficult to establish a regulatory culture that includes mechanisms to promote accountability for supervisors and regulators. 6

At every organizational level, from examiners to agency leadership, judgments are made that contribute to the overall effectiveness of the supervisory process.  Reserve Bank examiners play a critical role in examining Fed-regulated institutions, both banks and holding companies. The Federal Reserve exercises its supervisory responsibilities by supervisory portfolio, with each portfolio relying on a combination of Board and Reserve Bank staff. 7   But this split allocation of responsibility should not diminish the accountability for supervisory decision making. Responsibility for supervisory decisions must be coupled with accountability for these decisions. The misalignment of responsibility and accountability limits our ability to conduct effective supervision.

This division of responsibility can pose a challenge to accountability.  In the aftermath of the bank failures in 2023 and the broader stress to the banking system, the Board and other agencies proposed a variety of regulatory reform measures to remediate and address identified issues, based on internal reviews of the failures and banking stress.  While I applaud efforts to hold ourselves accountable, we must ensure that self-reviews are credible, both in the causes they identify and in the reform agenda that they are used to support.  An internal review process poses

6   See Michelle W. Bowman, 'Accountability for Banks, Accountability for Regulators' (Essay published in Starling Insights , February 13, 2024), https://www.federalreserve.gov/bowman-starling-insights-20240213.pdf.

7   'Understanding Federal Reserve Supervision,' Board of Governors of the Federal Reserve System, last modified April 27, 2023,  https://www.federalreserve.gov/supervisionreg/approaches-to-bank-supervision.htm.

the temptation to avoid responsibility by assigning blame elsewhere, even when the review may be motivated by good intentions and with the outward appearance of impartiality.

Many of the core problems in the lead-up to the bank failures involved well-known, core banking risks-interest rate risk, liquidity risk, and poor risk management.  But if we look at the subsequent reform agenda, we see that the policy emphasis has been on broader regulatory changes rather than addressing supervisory program deficiencies.  In my mind, this highlights the need to have a process that challenges the subjective judgments of those that were involved in oversight, not only in performing the diagnostics, but evaluating how identified issues can best be remediated.

## Purging Inaction and Opacity from the Supervisory Toolkit

Supervision differs significantly from the regulatory process.  Implementing new regulations, or amending existing ones, requires a public notice and comment process established by the Administrative Procedure Act.  When done appropriately, regulations require regulators to 'show their work' by providing extensive analytical and factual support for proposals and final rules and soliciting comment from the public and addressing those comments before finalizing a regulation.  In contrast, the execution of bank examinations and the issuance of supervisory guidance lack these procedural safeguards, instead relying heavily on discretion and judgment with far lower standards for justifying actions taken with factual and analytical support under the veil of confidential supervisory information.  The greater flexibility afforded in the supervisory process can lead to poor outcomes, often caused by the temptation to use inaction and opacity as supervisory tools.  In my view, these tools, inaction and opacity, are not appropriate and must be subject to appropriate scrutiny or purged from the toolkit altogether.

First let's consider inaction.  The exam process requires open communication between examiners and banks.  Often interpretive questions arise during the exam process; how do existing rules and statutes apply in a particular circumstance?  These questions arise when existing rules and guidance are unclear, which is a frequent occurrence.  For example, how can a bank operate in a safe and sound manner while offering a new product or service, or when serving customers in particular business lines with unique needs?  Banks go to great effort to meet all applicable requirements and regulatory expectations, and regulators should welcome banks seeking supervisory input and relying on a compliance-focused mindset.

Open communication with regulated banks is a hallmark of good supervision, but regulators must live up to their end of the bargain by not leaving banks in 'limbo' for extended periods of time.  When a bank requests feedback and engages in good faith to provide information and respond to reasonable questions, regulators have an obligation to provide a clear response.  Banks should not be left to wonder whether an interpretation of existing laws, regulations, and guidance is consistent with the understanding of regulators.

Next, let's consider opacity.  Questions raised in the supervisory channel often result from supervisory expectations that lack sufficient clarity or the application of rules and regulations to new and emerging products and services.  While regulators should not form an opinion without understanding the relevant facts and circumstances, they must also strive to provide clarity-not just to the bank being examined, but to all banks.  Supervisory expectations should not surprise regulated firms, and yet transparency around expectations is often challenging to achieve. 8

8   See Michelle W. Bowman, 'Approaching Policymaking Pragmatically' (speech at the Forum Club of the Palm Beaches, West Palm Beach, Florida, November 20, 2024),

https://www.federalreserve.gov/newsevents/speech/files/bowman20241120a.pdf.

The problem of opacity in supervisory expectations is exacerbated by the umbrella of confidential supervisory information, or CSI, which is the label given to most materials developed in the examination process.  The rules designed to protect CSI limit the public's visibility into shifting priorities and expectations in the supervisory process. 9   Changes in supervisory expectations frequently come without the benefit of guidance, advance notice, or published rulemaking.  In the worst-case scenario these shifts, cloaked by the veil of supervisory opacity, can have significant financial and reputational impacts or can disrupt the management and operations of affected banks.

Opacity in supervisory expectations, or in the interpretation of applicable laws and regulations, should not be discovered only at the conclusion of an examination with the issuance of deficiencies, matters requiring attention, matters requiring immediate attention, or other shortcomings.

## Approach to Applications

Sunshine is the best disinfectant when it comes to an approach that fosters transparency and accountability. So, I would like to spend a few minutes discussing how we can better shine a light into the dark corners of the bank applications process.

## De Novo Formation

De novo formation has essentially stagnated over the past several years.  While many factors have contributed to the decline in the aggregate number of banks in the United States, one key factor has been the lack of new bank formation to replace banks that have been acquired or closed their doors.  This lack of de novo bank approvals does not necessarily indicate a lack of

9   See Michelle W. Bowman, 'Reflections on the Economy and Bank Regulation' (speech at the New Jersey Bankers Association Annual Economic Leadership Forum, Somerset, New Jersey, March 7, 2024), https://www.federalreserve.gov/newsevents/speech/files/bowman20240307a.pdf.

demand for new charters though, particularly in light of ongoing demand for bank 'charter strip' acquisitions where banks have been acquired just for their charters, the growing demand for banking-as-a-service partnerships, and the shift of activities outside of the banking sector into the non-bank financial system. 10   We should consider whether the applications process itself has become an unnecessary impediment to de novo formation.

How can we improve the process of de novo formation?  As fewer applications come in, institutional muscle memory for how to deal with new bank charters erodes, and it becomes difficult to navigate and ultimately to overcome institutional inertia.  A few steps like developing specialized expertise, streamlining the application process, and improving transparency can yield significant improvements.

First, de novo formations are very different from other bank applications where there are existing institutions with established supervisory ratings and examination records.  A de novo formation has no supervisory record of performance on which to base a decision or inform judgments about whether an application is consistent with approval.  Instead, regulators must evaluate the proposal based on applicable statutory requirements:  Is the business plan sound?  Is appropriate bank leadership in place?  Does the bank have a viable business plan and strategy? Is the bank's proposal supported by sufficient capital?  Should there be an expectation that all of these questions are answered exhaustively often well over a year before the bank would be formed, if it is approved?

In recent years de novo formations have been rare, and therefore staff tasked with evaluating these proposals do not have a recent perspective or deep well of experience from

10   See Michelle W. Bowman, 'The Consequences of Fewer Banks in the U.S. Banking System' (speech at the Wharton Financial Regulation Conference, Philadelphia, Pennsylvania, April 14, 2023), https://www.federalreserve.gov/newsevents/speech/files/bowman20230414a.pdf.

which to draw.  Under our current approach, regional Reserve Banks are the primary point of contact for de novo applicants.  We should consider creating a specialized resource that can be utilized by any reserve bank to assist them during the pre-filing conversations with de novo applicants.  Our goal should be to facilitate new bank creation-identifying and finding achievable pathways to yes, instead of expecting and insisting on increasing requirements to unachievable levels or those that are intended to deter applicants from filing or moving forward.

We should also consider whether there are ways to streamline the application process, including, if needed, by recommending statutory changes.  While the agencies use some common forms, de novo formations currently involve a range of regulatory approvals.  A de novo applicant must apply for a bank charter from the Office of the Comptroller of the Currency or a state banking authority, deposit insurance from the Federal Deposit Insurance Corporation, and potentially membership or a parallel holding company formation application with the Federal Reserve.

Each regulator may be focused on different aspects of the application, and each has the right to ask for additional information as part of the application review and analysis potentially significantly extending the review timeframe.  We should have clear standards of review and approval-and coordinated actions-among the state and federal regulators involved in any application.  This should include clear timelines for the point at which a regulator forfeits their opportunity to object due to inaction, delay, or stalling tactics.

But standards for de novo approval are not always clear to applicants, which can lead to lengthy back-and-forth discussions with banking agency staff even after an applicant has prepared the information required by the appropriate application forms.  The need for extensive additional information from de novo applicants can be caused by a failure to provide information

requested in the application form, but I suspect the submission of incomplete information is often a product of forms that do not include all necessary information.

We should not need to constantly supplement application forms with ad hoc information requests.  If additional information is needed, we should modify the required application forms. One area where the lack of transparent and clear standards is most evident is with the amount of capital required to establish a de novo bank.  Discussions around required capital often hinge on subjective assessments based on planned business model and growth, but they rarely involve regulators providing a minimum required capital amount.  Standards for approval should not be shrouded in mystery.

Reform of the de novo applications process should not be thought of as a deregulatory exercise.  Clear and transparent standards do not imply 'low' or inadequate standards.  At the same time, if we want to encourage a pipeline of de novo bank formations, we should also be comfortable with the uncertainty that accompanies any new business, including the risk that some de novo banks will not succeed.

The cost of eliminating the failure of de novo banks-or really of any banks at any time-is simply too great.  Banking is fundamentally about appropriately managed risks, and regulators play a key role in promoting a system that is safe and sound while also serving to support the banking needs of customers and broader economic growth.  Our goal should not be to create a banking system that is safe, sound, and ultimately irrelevant.

## Mergers and Acquisitions

The issues with the banking applications process extend beyond de novo formations, but involve some of the same concerns, whether there are clear standards, and we are able to act in a timely manner.  As a threshold matter, if regulators are clear about the information they need to

process an application-for example, by updating applications forms to include the full set of information needed to analyze each statutory approval requirement-then we should also hold ourselves to fixed approval timelines.  In my view, the purgatory of a long application process is another form of regulatory 'inaction' that must be eliminated.

We should also address aspects of the applications process that contribute to delay, including both the approach to competition and the public comment process.

The banking agencies have long relied on competitive 'screens' to evaluate the pro forma effect of a merger.  This process looks at the standalone institutions, imagines a merger in which their operations are combined, and then looks at how measures of competition will change in the areas served by the merged institutions.  Where there is overlap in markets served, there is the potential for tripping competitive screens and triggering additional scrutiny.  At the Federal Reserve, when a competitive screen is triggered the application process takes more time, as staff reviews the conflict, and the matter is removed from the Reserve Bank-delegated processing track.

Perversely, many banks that trigger additional scrutiny operate in rural markets and have less aggregate banking business over which institutions can compete.  In these concentrated markets, the analytical approach may involve a counterfactual in which only two future states of the world exist-the banks continue to operate on a standalone basis, or the banks merge and operate as a consolidated whole.  However, this framing ignores a possible third option, that one or both of the institutions will cease being viable and shut its doors, or be acquired by a credit union, similarly leading to an erosion of market competition and potentially greater disruption to the communities served.  This analytical approach to evaluating competition no longer remains appropriate, and it needs to be reformed to better reflect actual market realities. This must

include competition from credit unions, the farm credit system, internet banks, financial technology firms and other non-banks.

Finally, many M&amp;A applications come to the Board due to the receipt of an adverse comment from the public about the past supervisory record of one or both of the institutions involved in a merger.  The receipt of an adverse comment causes substantial delays in the processing of an application, as this too removes an application from the 'delegated' processing by the local Federal Reserve Bank, escalating the matter to the Board of Governors in D.C. While it is important that regulators take into account public feedback-and indeed, is required by applicable law-we should also be concerned about comments that may lack factual support or may solely rely on matters always considered in the review of a proposal, like the existing supervisory records of the acquirer and the target institution, and may be negated by the regulator's own examination report.

## Approach to Regulation - Cleanup and the Statutory Regulatory Review

Since the passage of the Dodd-Frank Act nearly 15 years ago, the body of regulations that all banks are subject to has increased dramatically.  Many of the reforms made after the 2008 financial crisis were important and essential to ensuring a stronger and more resilient banking system.  Yet, a number of the changes are backward looking-responding only to that mortgage crisis-not fully considering the potential future unintended consequences or future states of the world.

With well over a decade of change in the banking system now behind us postimplementation, it is time to evaluate whether all these changes continue to be relevant.  Some of the regulations put in place immediately after that financial crisis resulted in pushing foundational banking activities out of the banking system into less regulated corners of the

financial system.  We need to ask whether this is appropriate.  These tradeoffs are complicated, and we must consider not only the changes that were made but also the evolution of and differences in the banking system today.

Driving all risk out of the banking system is at odds with the fundamental nature of the business of banking.  Banks, after all, are businesses.  And they must be able to earn a profit and grow while also managing their risks.  Adding requirements that impose more costs must be balanced with whether the new requirements make the correct tradeoffs between safety and soundness and enabling banks to serve their customers and run their businesses.  The task of policymakers and regulators is not to eliminate risk from the banking system, but rather to ensure that risk is appropriately and effectively managed.

In a well-functioning and appropriately regulated banking system, banks serve an indispensable role in credit provision and economic stability.  The goal is to create and maintain a system that supports safe and sound banking practices, and results in the implementation of appropriate risk management.  No efficient banking system can eliminate all bank failures.  But well-designed and well-maintained systems can limit bank failures and mitigate the harm caused by any that occur.

Maintenance of the regulatory framework is necessary to ensure that our regulations continue to strike the right balance between encouraging growth and innovation, and safety and soundness.  One easily identifiable way to achieve this is using the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) review process, which the agencies initiated in February last year.

Although to-date it has not done so, the EGRPRA review requires the federal banking agencies to identify any outdated, unnecessary, or overly burdensome regulations and eliminate

unnecessary regulations and take other steps to address the regulatory burdens associated with outdated or overly burdensome regulations.  As I noted, prior iterations of the EGRPRA process have been underwhelming in their ability to result in meaningful change, but it is my expectation that this review, and eventually the accompanying report to Congress, will provide a meaningful process for stakeholders and the public to engage with the banking agencies in identifying regulations that are no longer necessary or are overly burdensome.  It is also my expectation that regulators will be responsive to concerns raised by the public.

Another area that is ripe for review are several of the Board's rules that address core banking issues-from loans to insiders, to transactions with affiliates, to state member bank activities, and holding company requirements.  Many of the Board's regulations have not been comprehensively reviewed or updated in more than 20 years.  Given the dynamic nature of the banking system and how the economy and banking and financial services industries have evolved over that period, it is imperative that we update and simplify many of the Board's regulations, including thresholds for applicability and benchmarks.

Finally, I want to address the unintended consequences of anti-money laundering requirements in the provision of banking services.  I think we can agree that fighting money laundering, terrorist financing, and other illicit activities is not only a statutory responsibility of the banking system but it also serves important public policy goals.  But while the regulatory framework prescribing how banks fulfill this role is not within the Federal Reserve's responsibilities, it is important to consider how these requirements affect the ability of banks to serve customers.  For example, the threshold for currency transaction reports (CTR) was established more than 50 years ago and has not been updated or indexed to inflation during that

time.  Just as an example, at the time it was implemented, a fully loaded Cadillac cost less than the CTR threshold.  We've come a long way since 1972.

It has also created a regime of more extensive and invasive reporting of customers' transactions that may pose little actual risks related to tracking illicit activities.  This reporting regime is also not cost-free, as banks may opt to avoid banking customers that trigger high volumes of CTR reporting, or that otherwise trigger the filing of suspicious activity reports.  The calibration of reporting requirements, their effect on bank customers, and the growing problem of customer 'de-banking,' warrant greater public attention.

The Federal Reserve should review the supervisory messages given to banks and their holding companies about how supervisors will evaluate and consider the bank's risks associated with customers that are caught in the Bank Secrecy Act or Anti-Money Laundering reporting web.  I am concerned that this framework is being used to downgrade a bank's condition based on a disproportionate weighting of its compliance with these requirements in comparison to its overall condition.  There are separate examinations conducted for this purpose, and they should be viewed separately, not as a cudgel for downgrading a bank's condition through the governance and controls mechanism or management assessment.

## Closing Thoughts

The banking system can be an engine of economic growth and opportunity, particularly when it is supported by a bank regulatory framework that is rational and well-maintained.  The work of rationalizing and maintaining this system is an ongoing cycle.  While my remarks today have touched on a wide range of issues that require rationalization and 'maintenance,' this is by no means an exhaustive list.

Maintaining an effective framework is not only about ensuring the existing plumbing continues to work (and making it more efficient where possible) but it also must include promoting a system that is responsive to emerging threats and the needs of the banking system. As an example, the significant increase in fraud over the past few years has not generated the strong regulatory and governmental response necessary, even though fraud can become a source of material financial risk, particularly to smaller institutions.

Thank you again for the opportunity to share my thoughts with you today.  As always, it is a pleasure to be with you!",Michelle W Bowman
https://www.bis.org/review/r250217h.htm,Eddie Yue: Navigating new growth corridors in Asia-Pacific,"Keynote speech by Mr Eddie Yue, Chief Executive of the Hong Kong Monetary Authority, at the Asia Securities Industry & Financial Markets Association (ASIFMA) Annual Conference, Hong Kong, Hong Kong, 17 February 2025.",2025-02-17 00:00:00,"## Eddie Yue: Navigating new growth corridors in Asia-Pacific

Keynote speech by Mr Eddie Yue, Chief Executive of the Hong Kong Monetary Authority, at the  Asia Securities Industry &amp; Financial Markets Association (ASIFMA) Annual Conference, Hong Kong, Hong Kong, 17 February 2025.

* * *

Ladies and Gentlemen, good morning.

Let me first thank ASIFMA for inviting me here today, and also for hosting this flagship conference in Hong Kong again.

The theme of this year's conference, ""Navigating New Growth Corridors in Asia-Pacific"", is very timely. The region is undergoing profound transformation, driven by a host of factors including the realignment of global supply chains, shifting economic landscapes, changing investment and consumption patterns, etc.  These factors have resulted in more frequent economic interaction among some of its key economies, particularly between China and ASEAN.  Over the last couple of years, we have often heard the catchy term ""corridor business"" or ""network business"", which describes the commercial opportunities that could arise from such interaction.  What I hope to do today is to share with you what I see are the fundamental forces underpinning these corridors or networks, how Hong Kong has been positioning itself for the resulting opportunities, and what more needs to be done.

## The New Growth Corridors

Let me start with the forces that are reshaping cross-border commerce and business in the region.

First is the changing pattern of trades. Part of that and also the headline-grabbing part is driven by changes in geopolitical dynamics and trade policies in the west.  But there are longer term economic considerations too.  Asia is no longer just the world's factory or a source of low-cost labour.  It has emerged as a powerhouse of innovation and consumption, with China leading the way.  Policies also play a part.  Trade agreements such as the Regional Comprehensive Economic Partnership (RCEP) are facilitating the flow of goods and services in the region.

The result of these is a stronger trade relationship between China and ASEAN. By 2024, ASEAN has become China's largest export destination and import source, accounting for 16.4% of China's exports and 15.3% of imports in 2024.

Arguably more important is that we are seeing deeper integration of supply chains in the region. In 2023, close to 10% of ASEAN exports were value added sourced from China, almost doubling the share in 2017.  This reflects how China and ASEAN are more tightly wedded together to form an integral part of the global supply chain.

The second factor is the growth of cross-border investment. This is the most notable in foreign direct investment.  In 2023, China's FDI to ASEAN reached USD 25 billion, an

increase by over one-third in just one year.  As of July 2024, the cumulative bilateral investment between China and ASEAN surpassed USD 400 billion.  Chinese investments cover not only manufacturing sectors, but also increasingly in emerging fields such as the digital economy and the green economy.  On financial investments, China's investment in ASEAN securities has also seen rapid growth in recent years, hitting USD 18.5 billion as of June 2024, with a yearly growth of over 20%.

## Hong Kong's Unique Role

Now, what is Hong Kong's role as we see the rapid growth of the China-ASEAN corridor?

As a leading international financial centre in Asia, Hong Kong has always been a key provider of efficient cross-border payments and financing services to support the region's trade and investment. Of the roughly USD 50 billion outstanding trade finance loans offered by banks in Hong Kong, around 40% were used to finance merchandise trade not touching Hong Kong, reflecting Hong Kong's role in financing trades in the broader region.

In fact, our role in trade finance is becoming more significant as RMB gains recognition as an international currency. Data from SWIFT shows that RMB's share in the global trade finance reached 6.4% in November 2024, ranking second just after the US dollar.  As the world's largest offshore RMB hub, Hong Kong handles approximately 75% of all offshore RMB transactions, particularly those related to cross-border trade payment and settlement.  This strong position in RMB business, together with our extensive offshore RMB liquidity pool, allow us to provide the most cost-effective RMB trade finance solutions, so that ASEAN exporters and importers can settle their transactions with China conveniently in offshore RMB.

Let's turn to our role in cross border investment. Hong Kong has always been the key intermediary for investment going into and out of the Mainland, handling about two-third of such flows in the past few decades.

And we do much more than just passing money from one hand to another. Hong Kong's capital market has been a key venue for raising capital by firms across the region.  Our equity market has continued to be one of the world's most liquid and resilient, even with the challenging macro environment.  With improved investor sentiment, our market is rebounding and our IPO market returned to the fourth place globally in 2024.  Less visible but no less important is our bond market.  According to our internal analysis, over USD 130 billion of Asian international bonds were arranged in Hong Kong in 2024, with a yearly growth of more than 50%, making Hong Kong the largest bond arranging hub in the region.  As in the case of trade financing, RMB's share of investment and fundraising activities in the region has also been on the rise.  In the first three quarters of last year, dim sum bond issuance in Hong Kong totalled over RMB 770 billion, increasing by 35% over 2023.

## Enhancing the Trade and Financial Corridors

All this is good. But what do we need to do next to strengthen our role in enhancing this important growth corridor?  Naturally, as the region's trade, economic and investment

landscapes continue to shift, Hong Kong would have to broaden and adapt our offerings to maintain our leading position.

Part of this involves building on our traditional strengths. For example, the HKEX introduced a new listing route in 2023 to facilitate the listing of specialist technology companies, which aims at further supporting companies in accessing capital to fund their innovative ideas and drive growth.  For the bond market too, the HKMA and the SFC have jointly established a task force with market participants to explore ways to further promote Hong Kong's status as a premier fixed income and currency hub.

With RMB taking up an increasingly larger share of cross-border trade and investment, we have also been beefing up our RMB offerings. On liquidity for example, just last week, we launched the offshore RMB repo business using Northbound Bond Connect bonds as collateral; and HKEX will also soon allow the use of these bonds as margin collateral at OTC Clearing Hong Kong.  To further support trade financing, the HKMA will introduce the RMB Trade Financing Liquidity Facility next week.  The facility will provide banks in Hong Kong with up to RMB 100 billion in liquidity for up to six months, and that will help reinforce Hong Kong's position as the global leader in offshore RMB business.

We are also making systematic efforts to look at what more needs to be done to ensure that Hong Kong continues to stay at the forefront. As announced by the Chief Executive in last year's Policy Address, the HKMA has established a working group to study future supply chain shifts and develop policy recommendations to enhance Hong Kong's capacity for the related financial services.  The Hong Kong Association of Banks is also setting up a new committee on corridor business.

While this is probably not the right occasion to discuss in details the findings of such groups, I would just like to outline three themes emerging from the study as key to capturing the opportunities from the new business corridors in the region.

First is the importance of digitalisation and innovation, in order to reduce cost, enhance efficiency, and enhance security and reliability. Trade finance is an area ripe for ""digital disruption"".  Over the years there have been attempts within the industry to go ""electronic"" in trade documentation and in obtaining trade financing.  But there is still a lot more that we collectively can help improve.  For instance, we are experimenting with tokenisation use cases in the area of trade and supply chain finance through our Project Ensemble Sandbox.

The second key theme is sustainability. If you just look at the news headlines, it is hard to shake the impression that sustainability is on the retreat.  To us at the HKMA though, our commitment to an orderly and inclusive transition is as firm as ever.  Last October, we launched the Sustainable Finance Action Agenda, setting out our vision to further consolidate Hong Kong's position as the sustainable finance hub in the region and support the sustainable development of Asia and beyond.  This commitment is underpinned by two beliefs.  First, our moral obligations, particularly given that the region is the world's biggest emitter and many of the region's emerging markets would be badly affected by climate change.  Hong Kong, as the region's financial centre, has the duty and capability to help.

But our commitment is also underpinned by our belief that sustainability is a good business. Hong Kong is Asia's largest location for issuing international green and sustainable bonds, with over USD 40 billion of these bonds issued here in 2024, capturing 45% of the regional market.  If we include green and sustainability loans as well, total green and sustainable credits issued in Hong Kong exceeded USD 80 billion.  Despite the news headlines, sustainability initiatives across the world, from disclosure standards and climate risk management practices, are coming into force.  They would bring new opportunities to those that are prepared, and we want to make sure that Hong Kong is at the centre of it.

The third key theme is engagement. Hong Kong has always been the ""China gateway"".  But to continue to effectively perform this role at a time when many Mainland corporations and investors are looking abroad, and when businesses in many Asian markets are looking to do business with China, Hong Kong must also get to know these markets, and to tell them our strength.  To really get to know each of these markets, engagement is critical.  Over the past two years, the HKMA has visited various countries in the region to pursue collaborative initiatives with central banks and have welcomed delegations to Hong Kong.  Some of such interaction are being converted into tangible work.  For example, last October, the HKMA and the Bank of Thailand announced the collaboration on Project Ensemble and Project San. Together, we will explore Payment versus Payment (PvP) and Delivery versus Payment (DvP) tokenisation use cases, including trade payments and carbon credits.  The objective of such central bank collaboration is to lay a foundation for the private sector to build on and turn into concrete businesses.  That should be the focus going forward.

## Conclusion

To conclude, I would just say that the China-ASEAN corridor is definitely expanding at a rapid pace, and Hong Kong is right in the middle. In performing our role as an international financial centre, apart from leveraging on our traditional strengths in banking services and capital markets, we need to focus more on three things: digitalisation, sustainability, and engagement.  I hope this introduction will help set the scene for your discussions through the day, and I wish you all a very successful conference.",Eddie Yue
https://www.bis.org/review/r250217f.htm,Ida Wolden Bache: Economic perspectives,"Annual address by Ms Ida Wolden Bache, Governor of Norges Bank (Central Bank of Norway), to the Supervisory Council of Norges Bank and invited guests, Oslo, 13 February 2025.",2025-02-13 00:00:00,"

## Economic perspectives

Annual address by Governor Ida Wolden Bache to the Supervisory Council of Norges Bank

Thursday 13 February 2025



## Economic

## perspectives 2025

'Some of the richest countries in the world are small. They are also outward looking.'

So starts the first chapter of Victor Norman's textbook on a small open economy. 1  This is also an apt description of our country. Openness and trade have been essential to our prosperity.

Victor Norman passed away last year, and with that Norway lost a leading researcher and an outstanding communicator. The first edition of Victor Norman's book was published in 1983. The quotation I just cited is taken from the expanded edition released ten years later. That was more than 30 years ago, but the book bears its age well. The insights it provides are no less relevant today.

The framework conditions for international cooperation and trade are in play. There is war in Europe, and the governments of many countries see a need for rearmament. In today's world, emphasis must be placed on national security and preparedness considerations.

But the gains from trade with other countries are still there in full, especially for a small economy like ours. Norman points out that small countries often have a narrow resource base as they tend to cover a small part of the earth's crust. Norway, for example, is abundant in energy resources, but poor in arable land and the crop season is short. Norman posits in his textbook that if we shut ourselves out, such a resource base would have left us sitting hungry in overly heated homes. Trade with other countries allows us to decouple consumption from production. Small countries also have small markets, which means that the cost of producing some things domestically is higher than importing them. International trade expands markets. We can sell aluminium and buy aircraft.

- 1 Norman, V. D. (1983) 'En liten, åpen økonomi' [A small open economy] Universitetsforlaget. Expanded edition: Norman, V. D. (1993) 'Næringsstruktur og utenrikshandel i en liten, åpen økonomi' [Industry structure in a small open economy].  Universitetsforlaget.

But as Norman writes: 'Open economies are not without their problems. Small countries must (almost by definition) take the world as it is - with minimal possibility of influencing international developments.' This is something we have experienced, most recently during the pandemic and the subsequent global surge in inflation.

## Five turbulent years

We have five turbulent years behind us (Chart 1). Monetary policy has had to navigate in uncharted territory. When the pandemic broke out and Norway went into lockdown, unemployment rose from 2 to 10 percent within a couple of weeks. The uncertainty was unusually great. To dampen the downturn, we set the policy rate at zero.

When economic conditions became more normal in autumn 2021, we began to raise the policy rate gradually. But as global activity rebounded, inflation also accelerated. Freight and commodity prices rose rapidly, and Russia's invasion of Ukraine amplified the price rise. After a few months, inflation also shot up in Norway. We understood that the interest rate level was too low, and we had to tighten faster. Inflation repeatedly proved higher than forecast. Interest rates among our trading partners rose rapidly, and the krone depreciated. We didn't want to restrain the economy more than needed. Employment considerations weighed heavily. At the same time, we had to prevent a continued rapid rise in prices with the risk of inflation becoming embedded in the economy.

The trade-offs were demanding. How high did we have to set the policy rate to counteract a stronger krone depreciation and stop adding fuel to the inflation fire? Would this require a higher interest rate than highly indebted Norwegian households could bear?

In December 2021, our forecast indicated that the policy rate would increase gradually to a peak of just below 2 percent. The outcome three years later was a policy rate of 4.5 percent.

## Chart 1 Monetary policy had to be adjusted along the way

Consumer price index. Twelve-month change. Registered unemployed as share of labour force. Percent

Policy rate. Percent

Sources: Norwegian Labour and Welfare Administration (NAV), Statistics Norway and Norges Bank





International experiences from the 1970s and 1980s gave reason to fear that the path to low inflation was via high unemployment. This fortunately seems not to be the case this time around. Inflation has slowed and approached our target of 2 percent without a large increase in unemployment. The employment rate is higher now than in the years before the pandemic, as it also is among many of our main trading partners.

Since I stood here a year ago, inflation has declined further internationally. Inflation has also slowed in Norway, with total consumer price inflation at 2.3 percent in January. But the fact that inflation is approaching target does not mean that our job is done, even if inflation in certain months were to drop below 2 percent. Our task is to keep inflation close to 2 percent over time. Wage growth is high, and new figures show that it accelerated further last year, which will contribute to stoking inflation ahead.

Policy rates have been lowered in many countries. Policy rate expectations fluctuated widely last year. International rate expectations rose through autumn, and fewer rate cuts are now expected than was the case last summer.

International long-term interest rates are higher than in the period prior to the pandemic (Chart 2). Our policy rate is set based on conditions in the Norwegian economy. But as recent years have reminded us, the interest rate level in Norway cannot over time differ significantly from the level among our trading partners.

We are approaching the time when we can ease monetary policy a little, but a restrictive stance is still needed. And we must be prepared for a higher interest rate level than we had been accustomed to over the past decade.

## Chart 2 Long-term interest rates are higher than before the pandemic

Ten-year US government bond yields. Percent



Source: LSEG Datastream fakeLegend1

## Lessons

The job of bringing inflation down is not finished. However, I would like to take this opportunity to pause for a moment and ask what we can learn from the experiences of the past five years.

A question both we and other central banks have raised is whether we should have foreseen the post-pandemic surge in inflation.

In retrospect, both our models and assessments were probably influenced by the many years of low inflation we had behind us. We underestimated the intensity of inflation impulses that would arise from the interplay between the pandemic-related supply-side shocks and the very expansionary economic policies in both Norway and a range of other countries (Chart 3). 2

At the same time, it is important, also in retrospect, to recall the great uncertainty that prevailed. History has shown that severe economic downturns can leave permanent scars on the labour market, 3  and we gave weight to the risk of unemployment becoming entrenched at a high level. When we began to tighten monetary policy gradually in autumn 2021, the pandemic had still not been defeated, and naturally our forecasts did not take into account Russia's invasion of Ukraine.

So, what have we learned? We have learned that we need data and models that better capture abrupt shifts in the economy, and that our analyses must take greater account of international impulses - also from the supply side. Monetary policy must also be able to turn around quickly when the outlook changes. This means we must continue being careful about to tying ourselves to the mast by making promises about the policy rate ahead or by implementing other measures that are difficult to reverse. Extreme situations may require forceful measures, but a sound

## Chart 3 We underestimated inflation

Consumer price index. Four-quarter change. Percent



Sources: Statistics Norway and Norges Bank

- 2 Powell, J.M. (2024) Review and Outlook , Jackson Hole Economic Symposium, 23 August 2024.
- 3 See N. Ellingsen and Galaasen, S., (2021) 'Long term consequences for the labour market '. Staff Memo 1/2021. Norges Bank (In Norwegian only).

## Chart 4 The speed of disinflation was faster than expected

Consumer price index. Four-quarter change. Percent



Sources: Statistics Norway and Norges Bank plan for measures must also include an exit plan. 4  This is also a lesson for other areas of economic policy.

Inflation increased faster in the wake of the pandemic than we had expected, but it has also decreased faster than envisaged (Chart 4). At the same time, unemployment has risen less than expected.

The costs of bringing down inflation appear to be smaller than in earlier periods of high inflation. Why is that so? Part of the explanation lies in the special shocks that hit us this time. When the pandemic was brought under control, people could return to work. As services production resumed, the pressure on goods production eased. A globally synchronised tightening of monetary policy 5  also factored in. The bottlenecks in the economy gradually eased, which paved the way for inflation to decline without a pronounced impact on activity.

We are unlikely to experience the exact same shocks again. But one important takeaway is the value of effective economic policy interaction. We have a system of coordinated wage determination where the social partners place emphasis on employment. Norges Bank has a clear responsibility for ensuring price stability. And the political authorities can take into account known reaction patterns of the central bank when determining fiscal policy. Thanks to those economic policy interactions, we have not experienced the same self-reinforcing wage price spirals as in the 1970s and 1980s. Another takeaway is the importance of anchored inflation expectations. Confidence that inflation would return to target in and of itself helped prevent inflation from spiralling out of control. But we still couldn't take that confidence for granted. When it emerged that inflation would prove to be higher, we had to translate words into action and respond by tightening monetary policy.

- 4 Bank for International Settlements (2024). ' Monetary policy in the 21st century: lessons learned and challenges ahead'. Annual Economic Report, June 2024.
- 5 This has been the most globally synchronised tightening of monetary policy in at least fifty years. See Forbes, K., J. Ha and M. A. Kose (2024) ' Rate cycles' Policy Research Working Paper 10876. World Bank

We took account of the lessons from the past years when we updated our monetary policy strategy last year. The aim has been to make the strategy more robust. When the work began, we had to acknowledge that the strategy from 2021 was marked by the preceding period of low global inflation and interest rates. The updated strategy also describes how monetary policy will respond to international cost shocks, a krone depreciation and high inflation.

The strategy sets out how monetary policy will be oriented to achieve the monetary policy objectives as defined by the political authorities. Since 2001, we have operated an inflation targeting regime. After a thorough review, the mandate was further specified in 2018 and the inflation target adjusted from 2.5 to 2 percent. In our view, we currently have a sound mandate for monetary policy. The fact that the Storting and government stood by the mandate through the past period has been important. To successfully return inflation all the way back to target, there should be no doubt about our mission.

By that I don't mean that the mandate should never be subject to evaluation. A number of other countries regularly review their mandates. In Canada, the central bank and the government review the framework every five years. 6  Perhaps it would be sensible to conduct more regular reviews of our mandate, as proposed by the commission headed by former Governor Svein Gjedrem in 2017. 7  Regular reviews would provide an opportunity to take on board new insights and strengthen the democratic anchor for the monetary policy mandate. Reviews that are scheduled in advance enhance predictability and avoid doubt as to the central bank's independence to set interest rates.

## Many people saw their spending power decline

Even though unemployment remained low, many households experienced a budget squeeze when both prices and interest rates rose rapidly. Wages also rose sharply, but until last year wage growth was not sufficient to keep pace with inflation.

Cost inflation was particularly high in 2023. When looking at household data across different income groups, 8  we see that purchasing power declined for many households that year, but not for all of them (Chart 5). The data show that purchasing power increased for most households at the lower end of income distribution, partly thanks to the rise in employment, but also due to other factors such as the increase in minimum pensions. Those who were worse off in 2023 had, across the board, a high interest burden. This group includes households with high income and large loans, but also young people with starting salaries and newly purchased homes.

- 6 See Bank of Canada (2021). Monetary Policy Framework Renewa l, December 2021.
- 7 Official Norwegian Reports (NOU) 2017:13. New central bank act. Organisation of Norges Bank and the Government Pension Fund Global .
- 8 Available figures to date from the Norwegian Tax Administration.

## Chart 5 Many households saw their spending power decline

Change in disposable real income from 2022 to 2023. Interest burden in 2023. Percent

Sources: The Norwegian Tax Administration, Statistics Norway and Norges Bank



Last year, the trend turned. Wages increased appreciably faster than prices, which brought real wages back to the 2021 level. Wages are also expected to rise more than prices in the coming years, and most households will be better off.

## Rising protectionism

It wasn't higher wages that triggered the initial surge in inflation. But we still had to respond by raising the policy rate. Had we not done so, prices could have continued to rise rapidly, in part because the krone could have depreciated substantially. Such situations could arise again.

A full-out trade war where all countries raise tariffs in unison could act as a global cost shock and lead to lower economic activity and higher inflation. 910

But it is still uncertain what the new global trade regime will look like. The US has raised tariffs on Chinese goods and announced higher tariffs against other countries (Chart 6). Some countries have announced retaliatory tariffs. Higher trade barriers could dampen global economic activity. At the same time, for the countries that impose higher tariff rates, the result may be higher prices that can spread to other countries through global supply chains. On the other hand, lower economic activity could dampen inflation. It is also possible for goods that are subject to a tariff in one market to be sold at lower prices in another.

Increased trade barriers will affect the Norwegian economy both directly and indirectly. Norway's exports to the US are relatively limited. But companies in some industries export large volumes of goods to the US, such as aircraft components, construction machinery and furniture. Norwegian companies that produce intermediate goods for other countries' exports to the US may also be affected. For Norway, the

- 9 Barattieri, A., M. Cacciatore and F. Ghironi (2021) 'Protectionism and the business cycle'. Journal of International Economics, Volume 129, March. 27.
- 10 Bergin, P. and G. Corsetti (2023) 'The macroeconomic stabilization of tariff shocks: What is the optimal monetary response?' Journal of International Economics, Volume 143, July.

## Chart 6 Tariff rates on the rise

Effective tariff on imports to the US. Percent

Sources: US international Trade Commission, US Census Bureau and Norges Bank



indirect effects via other trading partners may nevertheless be greater. Close to 70 percent of our goods exports go to the EU. The effects on EU countries and their response could have a significant impact on Norwegian exports.

The global economy could be hit hard by a large-scale trade conflict. For the time being, the potential effects of an altered trade regime on the inflation outlook, and hence the interest rate outlook, in Norway are uncertain.

With flexible inflation targeting, where we place considerable emphasis on employment, we are well equipped to deal with what may come.

## We do not have a target for the krone exchange rate

The krone exchange rate could also be affected by changes to the trade regime. The krone depreciation in recent years has received much attention. Many people have experienced that the strong purchasing power we Norwegians had abroad for a long time is no longer as strong. One might sometimes wonder whether our nation's self-esteem fluctuates with the krone exchange rate. Victor Norman also touches on this in his book. He points to 1982 when the Norwegian krone became worth more than the Swedish krona, and Norwegian media described it as finally getting revenge for all the football losses at Råsunda. 11

The krone exchange rate is the price of other countries' currencies measured in our currency. It is influenced by a myriad of decisions, made by economic agents all over the world. Some of them make FX transactions to settle trades in goods or services, others to invest and make money. Movements in the krone exchange rate can be difficult to explain and do not always reflect macroeconomic conditions. At the

- 11 Råsunda was a football stadium in the Stockholm suburb of Solna where the 1958 World Cup final match between Sweden and Brazil took place. In the period between 1938 and 2005, the Norwegian men's national team participated in 16 national team matches against Sweden in Råsunda, of which 10 were losses. For the period up to 1982, there were 14 matches and 9 losses. The Norwegian women's national team won the World Cup final against Germany in Råsunda in 1995. Råsunda was demolished 2013.

## Chart 7 How weak is the real krone exchange rate? - Different measures give different answers

Real krone exchange rate. Index. 1995 = 100



Sources: Statistics Norway, LSEG Datastream and Norges Bank same time, the exchange rate is perhaps the most important relative price for a small open economy.

Market exchange rates do not provide the full picture of the strength or weakness of the krone exchange rate. To obtain an expression for the cost of goods and services across countries, the exchange rate must be seen relative to the price levels across comparison countries. If we look at domestic and foreign consumer prices in a common currency, the krone is now weaker against our main trading partners than it has been over the past 30 years (Chart 7). If, on the other hand, we use a broader measure, such as the price of total output in Norway relative to abroad, the real krone exchange rate is slightly stronger now than it was 30 years ago. 12  The difference reflects a much larger rise in domestic producer prices than in domestic consumer prices relative to abroad in this period.

Developments that affect the Norwegian economy and foreign economies differently may entail the need for an adjustment of relative prices. In his book, Norman offers the example that Norway receives a currency gift from abroad in the form of oil revenues. The gift allows us to use labour that we would otherwise have had to use to melt aluminium, to care for the elderly and ill. The adjustment occurs by a decrease in the prices of tradable products relative to the prices of non-tradable products. The appreciation of the krone through much of the 2000s entailed such an adjustment, together with higher wage growth in Norway than abroad.

On the other hand, if the prices for the raw materials we export were to fall, or our manufacturing productivity lags behind, our capacity to finance imports will diminish. If this is to be counteracted, the cost level in Norwegian companies must decline relative to abroad, which can occur by means of a weaker krone. If the exchange rate shows little reaction, more of the adjustment to a lower cost level will have to take place

- 12 Over time, the real krone exchange rate by this measure, based on relative GDP deflators, has evolved fairly closely in line with the real krone exchange rate measured by relative labour costs.

through lower wage growth in Norway than abroad, and perhaps higher unemployment. The change that causes the krone to depreciate may be undesirable, but once it has occurred, a depreciation can be an advantage because it supports the adjustment to a new economic reality. The economic realities are inescapable, regardless the exchange rate regime.

## A small country with substantial financial assets

Even though our economy is small, our financial assets are substantial. In December last year, the value of the Government Pension Fund Global (GPFG) surpassed 20 trillion Norwegian kroner for the first time (Chart 8). Over the past five years, the GPFG has doubled in value. It is easy to think of the fund as a cork that always floats back up no matter what hits us. But that is not something to be taken for granted.

The value increase in recent years has been extraordinary. First, the doubling only occurs in Norwegian krone terms. It is the value in foreign currency terms that is important for the GPFG's purchasing power. Second, transfers to the GPFG have been particularly high owing to a sharp rise in natural gas prices - largely the result of Russia's war against Ukraine. This source of value gains is something we will hopefully be spared in the future.

Last year, the equity portfolio returned 18 percent, partly owing to strong returns on technology stocks. With the rise of new technologies and artificial intelligence, the world's ten largest listed companies now account for almost 20 percent of the GPFG's equities benchmark index (Chart 9). Our equity holdings in some of the largest US technology companies are worth more than all our equity investments in France or Germany, and a steep fall in value of only one of these companies could entail big losses.

Even though many have said so before, it bears repeating: We must be prepared for the possibility that a substantial decline in the value of the GPFG could occur, and that a rapid decline is not always followed by a

## Chart 8 The value of the GPFG has increased substantially

Government Pension Fund Global. In billions of NOK



Sources: Ministry of Finance and Norges Bank

## Chart 9 Certain companies account for a large share of the equity portfolio

Share of the GPFG's equity portfolio. Percent



Source: Norges Bank sharp rebound. As the GPFG currently finances more than one fifth of the central government budget, a sharp decline in the value of our financial assets will have considerable consequences for the government's fiscal policy space.

A world of growing conflicts may blur the boundary between the economic and political spheres. 13  That was a theme in my speech last year and is unfortunately no less relevant today. We cannot take for granted that the outside world will make a sharp distinction between Norwegian foreign policy and the GPFG as a financial investor. Norges Bank's answer as the manager of the GPFG is to adhere to the mandate as defined by the political authorities. The management of the GPFG has one objective, which is to achieve the highest possible return at an acceptable risk level. Solid returns over time depend on sustainable development. Climate risk management and grasping the opportunities of climate transition are and will be an integral part of fund management.

Since 2004, the GPFG has been subject to guidelines to prevent it from being invested in companies that violate fundamental ethical norms. Prior to issuing advice on exclusion, the Council on Ethics performs a thorough assessment of the company that has been complicit in violating norms. The value of such thoroughness is no less important in a more turbulent world. Thoroughness is also absolutely necessary if the ethical guidelines are to be changed. Confidence in the framework could weaken if the guidelines are frequently changed. At the same time, we must be open to the possibility that what is considered to be ethically acceptable may change as the world again becomes marked by military rearmament and growing tensions between countries.

## More turbulence ahead

Let me conclude. We have five turbulent years behind us and more turbulence is in the offing. The big headlines are centred on war, trade conflicts and political tensions within and between countries. In many

- 13 Official Norwegian Reports (NOU) 2022:12. The Fund in a changing world - The Government Pension Fund Global and new economic and political developments .

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countries, the gains from trade have not been shared by all. In the background, there are other changes taking place, but more slowly - global warming, ageing populations and rising government debt, against the backdrop of low productivity growth in many countries. The question is how a small open economy like ours can best prepare for what comes.

I'm fairly certain of what is not the answer. The answer is not to shut ourselves out. Norway has much to gain from an open, rules-based trading system. We must cooperate with other countries and show our support for international institutions and agreements.

We have a solid starting point for meeting the challenges to come. We have a clear division of roles in economic policy. The workforce is highly educated, and we have a tradition of cooperation between the social partners and across political divides. Our nation's sizeable financial wealth makes it easier - not more difficult - to meet the challenges.

The confidence in the framework and institutions we have built up over time must be preserved. This also applies to the central bank's monetary policy independence. Since autumn 2021, my colleagues and I have met the with the leaders of the Ministry of Finance 14 times to inform them of our decision to raise the policy rate. Each time, they politely received our message and took due note of our decision. That is not necessarily a given in other countries.

Thank you for your attention.",Ida Wolden Bache
https://www.bis.org/review/r250217c.htm,"Christodoulos Patsalides: Cyprus and the euro area - navigating growth, stability, and opportunities","Keynote address by Mr Christodoulos Patsalides, Governor of the Central Bank of Cyprus, at the Cyprus Shipping Chamber (CSC) Monthly Members Meeting, Nicosia, 6 February 2025.",2025-02-06 00:00:00,"## Christodoulos Patsalides: Cyprus and the euro area - navigating growth, stability, and opportunities

Keynote address by Mr Christodoulos Patsalides, Governor of the Central Bank of Cyprus, at the Cyprus Shipping Chamber (CSC) Monthly Members Meeting, Nicosia, 6 February 2025.

* * *

I would like to thank the Cyprus Shipping Chamber for giving me the opportunity to address this meeting today and discuss key economic developments. My remarks will begin with an overview of Cyprus' economic performance. I will then discuss the notable progress achieved in the banking sector and underscore the critical role of the shipping industry in driving export revenues. Following this, I will turn to the broader economic outlook for the Euro Area, concluding with insights into the European Central Bank's latest monetary policy decision on achieving price stability.

## Domestic economic outlook

The Cypriot economy continues to exhibit robust growth, despite facing persistent external challenges in a turbulent and uncertain global environment. Geopolitical risks, such as the ongoing war in Ukraine, conflicts in the Middle East, and rising international tensions, have elevated economic uncertainty.

Amidst these conditions, the Cypriot economy has consistently demonstrated remarkable resilience and flexibility. This is clearly reflected in its recent upgrades by credit rating agencies to the ""A"" category, further cementing its reputation in international financial markets. These upgrades underscore the growing confidence in Cyprus's fiscal policies and the solid outlook for its economic and banking systems.

Improved fiscal performance has been a cornerstone of these positive developments. Public debt has been reduced significantly, declining from 114% of GDP in 2020 to 74% in 2023, highlighting disciplined financial management. Projections from the Ministry of Finance indicate that this downward trajectory will continue, with public debt expected to fall below 50% of GDP by 2028. This progress strengthens fiscal sustainability and enhances the country's ability to respond to future challenges, reflecting a strong commitment to long-term economic stability.

According to the December 2024 projections of the Central Bank of Cyprus (CBC), economic growth for 2024 is expected to reach 3.7%, significantly higher than the projected Eurozone average of 0.7%. The expansion of productive sectors such as technology, trade, tourism, financial and professional services, shipping, and construction-particularly large private sector infrastructure projects-has been a key driver of growth.

For the period 2025-2027, GDP is expected to grow by approximately 3% annually, driven primarily by a projected increase in domestic demand and, to a lesser extent, external demand. Domestic demand is expected to be supported by a rise in private consumption due to the increase in real disposable household income and the

continued resilience of the labour market. Additionally, domestic demand will benefit from ongoing large-scale private non-residential investments, infrastructure projects aimed at supporting digital and green development, and other reform projects under the Recovery and Resilience Plan.

Regarding the shipping sector in particular, our small island has a maritime history spanning hundreds of years, and it is rightly is considered as one of the main pillars of the Cypriot economy. The country's maritime industry considerably contributes directly and indirectly to the country's GDP. Based on 2023 data, the shipping sector ranks third with a share of 17.2% to the total value of exports of services, after the Information and Communication Technology sector, the financial services and the tourism sectors, with shares of 30.2%, 20.3% and 11,5% respectively. In view of the aforementioned figures, it is evident that the sector managed to stay focused and strong despite the unprecedented challenges faced in the last few years, namely the covid pandemic, the wars in Ukraine and Gaza as well as the tensions in the Red Sea.

The strength of the labour market further reinforces this positive narrative. Unemployment has declined to 5% in the first nine months of 2024, compared to 5.8% in 2023. It is projected to remain at 5% for the full year and to fall further to 4.6% by 2027, approaching levels indicative of full employment. These figures compare favourably to the euro area, where unemployment is forecast to stabilize at 6.1% by 2027.

On the prices front, inflationary pressures have eased significantly, with inflation dropping to 2.2% in the first eleven months of 2024, compared to 4.1% in the same period of 2023. According to the CBC's December 2024 projections, inflation is expected to stabilize near the 2% medium-term target, reaching 1.9% in 2025, 2.1% in 2026, and 2.0% in 2027.

## The Cyprus banking sector

The Cyprus banking sector has demonstrated tangible progress and resilience, with key financial metrics reflecting a strong and sound performance. A primary indicator of this strength is the solid improvement in terms of solvency, with the Common Equity Tier 1 (CET1) ratio increasing from 21.5% in December 2023 to 23.5% in September 2024. This increase marks the highest CET1 ratio in the Union, surpassing the EU average of 16.0%.

Despite the challenges posed by consecutive crises, no tangible signs of credit quality deterioration are observed up to this point. In fact, the Non-Performing Loans (NPL) ratio has continued its positive downward trend. As of September 2024, the NPL ratio stands at 6.5%, a marked improvement from 7.9% in December 2023. This reduction reflects the sector's ongoing commitment to addressing legacy issues, bolstering the financial health of the asset side of its balance sheet, and reinforcing its capacity to support economic recovery. Yet, there is still some way to go, particularly considering that the average NPL ratio of the EU sector stands as of September 2024 at 1.9%. Furthermore, the improvement within the Cyprus banking sector has not been homogeneous across all institutions, with certain banks lagging behind. These institutions must therefore accelerate their efforts to align with the sector-wide advancements.

Profitability metrics have been robust, with the Return on Equity (RoE) reaching 23.2% in September 2024 as opposed of 11,1% of the EU average. Operational efficiency has improved as the cost-to-income ratio declined to 35.5%, a notable reduction from previous years and lower than the EU average of 53%.

Cyprus banks also exhibit some of the highest liquidity standings in the EU, reinforcing their ability to meet potential liquidity demands. The Liquidity Coverage Ratio (LCR), a measure of a bank's ability to withstand large liquidity outflows under a stressed period, stands as of September 2024 at 336%, compared to the EU average of 161% and minimum requirement of 100%. Furthermore, the Net Stable Funding Ratio (NSFR), which assesses the stability of a bank's funding base, stands also high at 187%, surpassing both the EU average of 127% and the minimum regulatory requirement of 100%. The Cypriot banking sector is thus well-positioned to face potential market disruptions and continue driving economic stability.

Through the first 11 months of 2024, Cypriot banks granted €3.3 billion in new loans to households and non-financial corporations (NFCs), surpassing the already high €2.9 billion provided during the same period in 2023. A negative side effect of a strongly liquid banking sector in a small country is the slow adjustment of interest rates in response to ECB monetary policy actions. Banks must exhibit responsible pricing policies in the face of reputation risk and the need to support the competitiveness of the economy.

Looking to the future, the banking sector faces challenges such as adapting to AI, mitigating cyber risks, addressing geopolitical uncertainties, and transitioning to a greener economy. Tackling these priorities is essential for sustaining the sector's positive trajectory and remains central to our supervisory agenda.

## Economic Developments in the Euro Area

The risks to economic growth continue to lean towards the downside. Increased disruptions in global trade may hinder euro area growth by suppressing exports and slowing the global economy. Additionally, reduced confidence could delay the recovery of consumption and investment beyond current expectations. The ECB's December projections estimate economic growth of 0.7% in 2024, 1.1% in 2025, 1.4% in 2026, and 1.3% in 2027. This recovery is expected to be driven primarily by rising real incomes, which should enable households to boost consumption, alongside increased investment by firms.

On the price front, euro area inflation rose to 2.4%, in December 2024, up from 2.2% in November, primarily driven by increased energy costs but this was expected due to energy-related upward base effects.

Despite the upticks in recent months, the disinflation process is well on track. ECB Staff see headline inflation averaging 2.4 per cent in 2024, 2.1 per cent in 2025, 1.9 per cent in 2026 and 2.1 per cent in 2027 when the expanded EU Emissions Trading System becomes operational. Services inflation continues to be sticky at around 4%, largely

stemming from the delayed catch-up adjustment of certain services prices to past inflation surges and ongoing wage pressures. At the same time, recent signals point to continued moderation in wage pressures and to the buffering role of profits.

Inflation is expected to fluctuate around its current level in the near term. It should then settle sustainably at around the two per cent medium-term target. Easing labour cost pressures and the continuing impact of past monetary policy tightening on consumer prices should help this process. Most measures of longer-term inflation expectations continue to stand at around 2 per cent.

## ECB Monetary Policy

Based on our updated assessment of the inflation outlook, underlying inflation dynamics, and the effectiveness of monetary policy transmission, we decided at our January Governing Council meeting to further reduce the three key ECB interest rates by 25 basis points. This adjustment brought the deposit facility rate-the primary tool for steering our monetary policy stance-to 2.75%

Overall, the euro area's economic environment remains intricate, with the risks to economic growth tilted to the downside and with both upside and downside risks to inflation present. The ECB continues to navigate these challenges through measured, careful adjustments in its monetary policy stance. Growth is a factor influencing inflation dynamics. It is crucial to ensure that the economy does not grow too slowly, as this could lead to inflation stabilizing below the target. As we move forward, in the current environment of elevated uncertainty stemming from potential global trade frictions and geopolitical tensions, the ECB's prudent data-dependent meeting by meeting approach shall continue to be important in addressing the evolving economic conditions within the euro area to ensure the timely return to the inflation target in a sustainable manner. The ECB is not pre-committing to a particular rate path.

## Conclusion

Let me now conclude: the Cypriot economy has shown resilience and adaptability, supported by strong performance, prudent fiscal policies, and a stable financial system, with key contributions from banking and shipping. As one of the pillars of our economy, the shipping sector continues to demonstrate global competitiveness and innovation, further strengthening Cyprus's position as a leading maritime hub. Looking ahead, challenges like climate change and geopolitical risks demand strategic foresight, but Cyprus is well-prepared to sustain growth.

At the Euro Area level, the economic outlook balances risks and opportunities, with the ECB ensuring price stability and sustainable growth through proactive, data-driven policies. By remaining data-driven and proactive, we can ensure that the monetary framework across the region remains resilient and responsive to evolving global dynamics.

Thank you.",Christodoulos Patsalides
https://www.bis.org/review/r250217d.htm,Christodoulos Patsalides: The Central Bank of Cyprus agenda - strategic vision and priorities,"Speech by Mr Christodoulos Patsalides, Governor of the Central Bank of Cyprus, at the 12th Banking Forum and Fintech Expo, Nicosia, 16 January 2025.",2025-01-16 00:00:00,"## Christodoulos Patsalides: The Central Bank of Cyprus agenda strategic vision and priorities

Speech by Mr Christodoulos Patsalides, Governor of the Central Bank of Cyprus, at the 12th Banking Forum and Fintech Expo, Nicosia, 16 January 2025.

* * *

## Introduction - Strategic Vision Statement and Elaboration

Distinguished guests, esteemed colleagues,

I would like to extend my sincere thanks to the organizers of the 12th Banking Forum and Fintech Expo for bringing us together for this important exchange of ideas and insights.

It is my privilege to have today the opportunity to present the strategic vision and priorities of the Central Bank of Cyprus. In an ever-evolving global and digital economy, we are committed to leading the way in fostering a resilient, innovative, and sustainable financial sector for Cyprus. Our agenda focuses on embracing digital transformation, ensuring robust governance, addressing societal and environmental challenges, and safeguarding financial stability.

Today, I will outline our key priorities, including advancements in the digital economy, the evolving role of digital payments, the potential introduction of a digital euro, and the regulatory frameworks that ensure responsible governance and societal considerations in our financial systems. Through these efforts, we aim to strengthen Cyprus' position as a dynamic player within the European financial landscape.

## Cyprus Economy

To ground our strategic vision, we must first examine the economic landscape in which the Cyprus economy operates. With its key sectors-ICT (Information Communication Technology), tourism, trade, shipping, and construction-, the economy has demonstrated resilience and adaptability despite the consecutive significant geopolitical challenges, including the ongoing conflicts in Ukraine and the Middle East. In recent years, Cyprus has achieved robust growth rate well above the EU average and maintained a strong fiscal position, consistently posting surpluses that have bolstered public finances. As a result, international rating agencies have upgraded their ratings well within the investment grade, highlighting our sound economic management, fiscal discipline, and reforms in the banking sector.

## Banking Sector in Cyprus

Building on the strength of our economy is the Cypriot banking sector, which has built up remarkable resilience and robustness despite a series of unprecedented and successive crises in recent years. The sector's solvency, as indicated by the Common Equity Tier 1 (CET1) ratio, rose to 23,5% in the third quarter of 2024, achieving its highest level on record and significantly surpassing the European average of 16,0%.

Additionally, the Liquidity Coverage Ratio (LCR)-a key indicator of credit institutions' capacity to withstand severe liquidity stress-reached 336% in September 2024. This level exceeds the regulatory minimum of 100% by more than threefold and stands well above the European average of 161,4%. The non-performing loan (NPL) ratio fell to 6,5% in the third quarter of 2024, marking its lowest level since 2014, when the NPL definition was standardized across the European Union.

However, there is no room for complacency as macroeconomic uncertainty, geopolitical risks, and emerging threats like cyber and climate risks grow. Banks must adapt quickly to identify and address these evolving challenges effectively. Moreover, technological advancements bring about a new landscape in which banks are called upon to compete. The pursuit of an appropriate business model is key.

## Digital Economy and Global Digital Trends

As we look toward the future, the digital economy emerges as a defining feature of global trends. Technology has the ability to sustain and improve our standards of living and the long-term productivity of our economy. Examples of innovative technologies used in financial services (usually referred to as FinTech) include artificial intelligence, cloud computing, digital wallets, big data analytics and biometrics. These technologies have been applied to improve customer service, automate payments, reengineer business processes, detect suspicious activity, and assist with customer profiling and digital onboarding. However, we are yet to see the realization of potential in other promising new technologies such as distributed ledger technology (DLT), smart contracts and tokenization.

As technology becomes more widespread in our evolving digital economy, cyber risk and data security continue to be by far the most prominent driver of operational risk for banks. Technological advances with increased sophistication, growing reliance on digital solutions, but also growing capabilities of cyber offenders, have all resulted in enhanced risk exposure for banks, including vulnerability to sophisticated cyber-attacks. Cyber risk is often driven by geopolitical risk, thus raising overall risk to a much higher level. Supervising these risks remains one of our priorities.

To take full advantage of the potential of innovative technologies responsibly while managing risks, common supervisory and regulatory approaches are essential. The EU has introduced key legislation such as DORA, PSD3, FiDA, MiCAR, and the AI Act, which aim to strengthen financial sector resilience and boost consumer and investor confidence by guiding responsible innovation. Recognizing the evolving market dynamics, the Central Bank of Cyprus has established an Innovation Hub to foster dialogue with fintech stakeholders and support domestic financial innovation.

## Digital Payments in Cyprus

A key element of the digital economy is the rapid rise of digital payments. We find ourselves in an era where digital transformation is reshaping economies, and Cyprus is no exception. One of the most prominent trends is the proliferation of digital payments, which now capture around 96% of cashless payments. At the same time, preference for cash payments is shrinking, as evidenced by a remarkable decline of 11% since 2022 that placed Cyprus at the top of euro area countries. Cypriots use cards 1,3 times more

frequently than their European peers, while our contactless card payments capture more than half of all card payments consistently since 2022. This reflects the readiness of local businesses to accept cards and to opt for terminals that embed Near-FieldTechnology.

In the same vein, e-commerce exhibits gradual expansion, manifested by online purchases via cards almost doubling over a six-year period to 28% of the total of card payments. It is indeed remarkable that the use of mobile phones for online purchases has almost reached one quarter of the total, outperforming the EU average which stands at 16%.

As of the 9th of January of this year, instant payments have become a reality for all banking participants. This signifies that account-to-account payments can be effected at the speed that people demand in the digital and social media age: transmission within 10 seconds, with immediate access to funds on a 24/7/365 basis, as opposed to the current 1-2 days waiting time. Consumers and businesses will reap the benefits in the months to come.

## Electronic Money Institutions &amp; Payments Institutions

E-money payments are gaining traction, driven by opportunities in fintech, e-commerce, and digital payments. Having licensed 4 electronic money institutions this year, the Central Bank of Cyprus now supervises 27 electronic money institutions and 11 payment institutions.

As part of our broader strategic agenda, we are committed to drawing on international experience in supporting the Central Bank of Cyprus in refining its approach for regulating, licencing and supervising Electronic Money Institutions (EMIs) and Payment Institutions (PIs) in Cyprus.

In December, the CBC, announced the establishment of a comprehensive licensing and supervisory strategy for the sector of these institutions.

For the development of this strategy, the CBC appointed an international consultancy firm whose experts, in collaboration with CBC staff, conducted an analysis of the sector and its inherent risks.

The objective of the new strategy is to pursue the prudent and sustainable growth of the sector. Among other measures, the strategy includes:

- The enhancing and enriching of the licensing processes for institutions applying to participate in the sector.
- The Strengthening of the supervision of institutions by implementing a risk-based supervisory approach for each institution and enriching supervisory tools.
- And the adoption of best practices for the operation of the sector.

To achieve these objectives, a Division for the Supervision of Electronic Money and Payment Institutions is being established, which will henceforth undertake the prudential supervision of the sector.

## Digital Euro

Moving on to the digital euro, I will give a brief status update from last year's forum. As legislative negotiations continue in Brussels, the Eurosystem is progressing through the first part of the preparation phase for the digital euro, focusing on calibrating the holding limits without compromising financial stability or bank intermediation as the banks will retain their role vis-à-vis their customers. The ECB continues to rapport with the market, with specific holding entitlements to be defined later. The rulebook formulation, developed with stakeholder input, will set standards for future digital euro distributors, leveraging existing frameworks for cost efficiency and allowing flexibility for innovation. Consumers and businesses prioritize functionalities like conditional payments and effortless bill-splitting, guiding expectations for future services.

Moving on to the platform and infrastructure preparations, the ECB is now selecting candidates from its recent application process and plans to enhance engagement with distributors to ensure readiness for the potential issuance and successful distribution of the digital euro, if and when the decision to issue is made.

Allow me to take a moment to refer to our efforts at raising awareness within our market through various communication channels, targeting the general public, the business community, and financial institutions. Aside from articles that we regularly publish in the press and on professional social networking platforms, we invite various stakeholder groups to the CBC premises. Last July we gave a press conference with Mr Piero Cipollone, member of the Executive Board of the European Central Bank, as keynote speaker. In November we held a focus session with business associations and their members, and in December we presented a thorough status update of the project to the members of our National Payments Committee. Last but not least, the Central Bank of Cyprus participates in panel discussions and presents the digital euro project at various local and international conferences.

## ESG Regulatory Landscape: Governance, Society, and Climate Change

## A. Governance

As we embrace these innovations, we remain steadfast in our commitment to strong governance. Governance, a core pillar of ESG, is crucial in enhancing transparency, accountability, and ethical standards in financial institutions. Strong governance enables sound lending decisions, reduces conflicts of interest, and ensures compliance with regulations including the updated Directive on Corporate Sustainability and ESG provisions in the recently enacted CRD 6, protecting institutional reputation and minimizing financial risks.

## B. Encompassing Society Considerations in Business Activity: Financial Conduct

Social factors, including diversity, labour practices, community engagement, and adherence to human rights standards, are also vital for modern credit institutions. Embedding diversity in governance and fair pricing in operations fosters trust among stakeholders, promotes financial inclusion, and enhances institutional resilience, strengthening reputation and market standing.

## C. Climate Change - CBC Initiatives

The Central Bank of Cyprus actively engages in thematic reviews, stress tests, and indepth analyses led by the European Central Bank to assess institutions' preparedness on climate risk and its integration into their strategy, governance, risk management and disclosures. This supervision helps ensure credit institutions speed up their preparations to manage ESG risks while meeting necessary sustainability and resilience standards. Additionally, the smaller institutions, directly supervised by us, were requested to develop implementation plans, with specific milestones, in order to advance the management of climate related risks, in line with the ECB's 13 supervisory expectations which stipulate how banks should integrate climate and environment risks into their business models and strategies, governance and risk appetite.

Beyond what is expected from the supervised institutions, the Central Bank of Cyprus has set up internally a Sustainability Team, aiming to support the CBC in addressing climate change in line with its mandate to maintain price stability, safeguard financial stability, supervise banks and support the general economic policy of the State, while also contributing to the target of net zero carbon emissions, and the continuation of strong governance. The recent visit of Mr Frank Elderson, member of the ECB's Executive Board and Co-Chair of the Task Force on Climate-related Financial Risks of the Basel Committee on Banking Supervision touched upon these issues as well.

## Concluding remarks

Let me now conclude: the strategic vision of the Central Bank of Cyprus is built on the pursuit of price stability and financial stability in its capacity as the macroprudential authority of the country. By embracing the digital economy, ensuring robust governance, and addressing climate change, we are positioning Cyprus as a forwardlooking financial hub in Europe. Together, we will navigate the challenges and opportunities of the future, ensuring stability and prosperity for all.",Christodoulos Patsalides
https://www.bis.org/review/r250217b.htm,Fabio Panetta: The global economy - navigating uncertainty and change,"Speech by Mr Fabio Panetta, Governor of the Bank of Italy, at the 31st Congress of ASSIOM FOREX (the Italian financial markets association), Turin, 15 February 2025.",2025-02-15 00:00:00,"## 31 st  ASSIOM FOREX Congress

## The Global Economy:

## Navigating Uncertainty and Change

Speech by the Governor of Banca d'Italia

Fabio Panetta

## 1. The international economy

In  the  advanced  economies,  inflation  is  declining  and  nearing  central banks' targets, leading them to gradually ease monetary tightening. The exception is Japan, where rising inflation has led the central bank to raise official interest rates to 0.5 per cent, the highest level in 17 years.

Compared with the past, disinflation has been faster and less harmful to economic activity. This is thanks to the rapid unwinding of the shocks that had pushed up consumer prices - such as high energy costs - and to monetary policy, which has kept inflation expectations anchored.

In  the  United  States,  where  inflation  is  falling  unevenly  amid  robust growth,  the  Federal  Reserve  is  easing  monetary  conditions  more  gradually than expected. Its decisions are also being influenced by the recent change in administration, whose new fiscal and trade policies could significantly impact the economy and inflation, with implications for monetary policy. In the midst of this, longer-term yields have risen since the beginning of December, despite the  drop  in  short-term  interest  rates,  spurring  an  appreciation  of  the  dollar (Figure A.1).

In the emerging economies, the inflation scenario varies from country to country.

In China, consumer price inflation is practically nil, while producer price inflation has been negative for two years, exposing the economy to the risk of deflation. Repeated monetary and fiscal interventions have supported financial markets, but their effectiveness in restoring price stability is uncertain.

By  contrast,  inflation  remains  high  in  Brazil,  Türkiye  and  Argentina, forcing central banks to maintain tight monetary conditions.

As regards economic activity, the global economy continues to expand at a moderate pace, with differences across regions and sectors.

In addition to the ongoing stagnation in the manufacturing sector, which has lasted for over a year, there is now also a slowdown in the service sector.

In the United States, growth remains strong, driven by rising household consumption, in turn fuelled by growing employment and wages, as well as stock market gains.

In other advanced economies, instead, growth remains weak.

In  China,  domestic  demand  is  being  held  back  by  declining  consumer confidence and by the ongoing real estate crisis. Exports are accelerating, though this may partly reflect a temporary effect of a frontloading of foreign sales to avoid any future US tariffs. 1

Looking ahead, the International Monetary Fund expects global growth to remain steady at just over 3 per cent in 2025 and 2026. The medium-term forecast of 3.1 per cent remains contained from a historical standpoint. 2

The  risks  to  growth  remain  tilted  to  the  downside,  mainly  owing  to geopolitical  tensions  and  persistent  challenges  in  the  Chinese  economy. Moreover, high global indebtedness could have a negative impact on economic activity  if  it  were  to  cause  volatility  or  financial  instability.  Finally,  the  US administration's policies could negatively affect global economic growth and financial conditions.

## 2. World trade

Global trade is undergoing  significant changes, driven by  economic, geopolitical and technological factors. 3

Many countries  are  focusing  their  trade  relations  on  trusted  partners  with whom they have long-standing relationships or common political and economic affinities.  This  trend  is  reshaping  the  geography  of  commerce, reducing  trade between  countries  from  opposing  geopolitical  blocs  and  increasing  it  between politically aligned economies (Figure 1). 4

1 T.R. Cook, M. Dzholos and J. Matschke, 'Did importers try to front-run recent tariffs on China?', Federal Reserve Bank of Kansas City, Economic Bulletin , 17 January 2025.

2 IMF, World Economic Outlook Update , January 2025. The IMF and Eurosystem staff macroeconomic projections (December 2024) do not account for the potential impact of a US tariff hike.

3 F. Panetta, 'The future of Europe's economy amid geopolitical risks and global fragmentation', Lectio Magistralis marking the conferral of an honorary degree in Juridical Sciences in Banking and Finance by the University of Roma Tre, 23 April 2024.

4 S. Aiyar, D. Malacrino and A.F. Presbitero, 'Investing in friends: the role of geopolitical alignment in FDI flows', European Journal of Political Economy , 83, 2024.

## Changes in the shares of imports from the different blocs of countries between 2021 and 2023 (1)

(percentage points)



Sources: F.P . Conteduca, S. Giglioli, C. Giordano, M. Mancini and L. Panon, 'Trade fragmentation unveiled: five facts on the reconfiguration of global, US and EU trade' , Banca d'Italia, Questioni di Economia e Finanza (Occasional Papers), 881, 2024, and M.G. Attinasi et al., 'Navigating a fragmenting global trading system: insights for central banks' , European Central Bank, Occasional Paper Series, 365, 2024.

(1) The bloc of countries 'aligned with the United States' includes, alongside the United States, mainly EU members, Australia, Canada, Japan, South Korea, the United Kingdom and Taiwan; the bloc of countries 'aligned with China' includes, alongside China, countries such as Iran and Russia; the remaining group of 'neutral countries' includes, among others, Argentina,  Brazil,  India,  Indonesia,  Mexico,  Saudi Arabia,  South Africa, Türkiye  and Vietnam.  Geopolitical  alignments among countries  are  based  on  the  indicator  proposed  by T.  den  Besten,  P .  Di  Casola  and  M.M.  Habib, 'Geopolitical fragmentation risks and international currencies' , in ECB, The international role of the euro , 2023, pp. 41-47 , supplemented with data from Capital Economics' Global Fracturing Dashboard.

This pattern affects both advanced and developing countries, and has led to a sharp decline in the share of Chinese products in imports of technology goods to the US and, more recently, to the European Union.

In  many  cases,  the  geographical  diversification  of  supply  sources  is merely  apparent.  Exporters  have  restructured  their  supply  chains,  creating triangulations through third countries to bypass trade barriers. For example, some  Chinese  products  are  exported  to  the  United  States  through  Mexico, Vietnam or Taiwan (Figure A.2). 5  Additionally, Chinese firms are setting up production facilities in countries not subject to restrictions, or directly in those that have imposed them. 6

5 F.P. Conteduca, S. Giglioli, C. Giordano, M. Mancini and L. Panon, 'Trade fragmentation unveiled: five facts on the reconfiguration of global, US and EU trade', Banca d'Italia, Questioni di Economia e Finanza (Occasional Papers), 881, 2024.

6 Chinese carmakers are building factories  in  Türkiye,  which  could  also  serve  the  European  market through the EU-Türkiye Customs Union. Chinese companies have also announced the establishment of new plants in Hungary.

Fragmentation reduces the efficiency of global trade, increasing the cost of goods and making supply chains more complex and vulnerable. In many countries, this could limit the availability of certain products, especially technological goods and those crucial for the climate transition. 7

## Trade tensions and their impact

The  reconfiguration  of  trade  I  have  just  described,  in  which  geopolitical factors play a key role, is undermining the multilateral system of global economic governance  built  on  productive  integration  and  free  trade.  International  trade is increasingly wielded  as strategic leverage, particularly in technological competition. 8

In  this  context,  the  new  US  administration  is  rolling  out  a  strategy  that includes  imposing  new  and  higher  import  tariffs. 9 Partners  with  substantial trade surpluses with the United States are particularly targeted. China's surplus with the US economy amounted to about $300 billion in 2024, accounting for around one third of China's total trade surplus and one quarter of the US deficit (Figure 2).

According to our estimates, if the tariffs announced before the US election were to be implemented and followed by retaliatory measures, global GDP growth would fall by 1.5 percentage points. The impact on the US economy would be more than 2 percentage points. For the euro-area, the impact would be more limited - around half a percentage point - but Germany and Italy would be more affected due  to  their  strong  trade  ties  with  the  United  States. 10 Initially,  these  negative

7 M.G. Attinasi, L. Boeckelmann and B. Meunier, 'The economic costs of supply chain decoupling', European  Central  Bank,  Working  Paper  Series,  2839,  2023;  G.  Felbermayr,  H.  Mahlkow  and A. Sandkamp, 'Cutting through the value chain: the long-run effects of decoupling the East from the West', Empirica , 50, 2023, pp. 75-108; B. Javorcik, L. Kitzmüller, H. Schweiger and M.A. Yıldırım, 'Economic costs of friendshoring', The World Economy , 47, 7, 2024, pp. 2871-2908.

8 C. Clayton, M. Maggiori and J. Schreger, 'A theory of economic coercion and fragmentation', BIS Working Papers, 1224, 2024; A. Mattoo, M. Ruta and R.W. Staiger, 'Geopolitics and the world trading system', NBER Working Paper, 33293, 2024.

9 According to pre-election announcements, tariffs are expected to rise from the current 2 per cent to between 10 and 20 per cent. Those on Chinese products could reach 60 per cent, up from the current 15 per cent. After taking office, the new US administration implemented a 25 per cent additional tariff on Canada and Mexico and a 10 per cent additional tariff on China. The tariff on Canada and Mexico was then put on hold, but that on Chinese imports remains in force. China responded with new tariffs on US imports and restrictions on its exports of raw materials.

10 These estimates are based on the assumption that US tariffs will rise to 60 per cent for China and to 20 per cent for other countries. If tariffs against Canada, Mexico, and China stayed at the levels initially set,  their  impact  would  be  much smaller, shaving about half a percentage point off global growth, should trading partners hit back. The contraction in the United States would be 1-2 percentage points, while the impact on the euro area would be practically nil.

## Trade balances in China and the US

(billions of dollars)



Sources: Based on Chinese customs and Trade Data Monitor data.

effects could be exacerbated by the rising uncertainty over trade policies that has already emerged in recent weeks (Figure 3).

The  most  striking  example  of  this  is  China.  Given  its  excess  production capacity in the industrial sector, Chinese firms have been lowering export prices for some years (Figure 4), boosting foreign sales and gaining higher market shares in emerging economies (Figure A.3). 11

The imposition of high tariffs by the US could lead Chinese exporters to seek new markets to offset the drop in sales to the US market. In this scenario, Italian and European businesses would face growing competitive pressure from Chinese firms,  whose  sectoral  specialization  is  increasingly  similar  to  that  of  European industry. 12

11 The reduction in Chinese export prices has been uneven across markets: the World Trade Monitor of the CPB Netherlands Bureau for Economic Policy Analysis estimates that the global average unit value of goods exported by China fell by 18 per cent between January 2023 and October 2024. According to Eurostat, the prices of Chinese goods for euro-area markets fell by 11 per cent over the same period.

12 The estimates used in this speech also account for the indirect effects of other countries redirecting goods affected by US tariffs. However, these are difficult to quantify and could turn out to be greater than expected.

## Trade policy uncertainty index

(index)



## Average unit export values: from China and the world

(index: 1 Jan. 2023=100)



Source:  Trade  Policy  Uncertainty  Index,  monthly  data; the latest figure refers to January 2025. For a description of  the  index  see  D.  Caldara,  M.  Iacoviello,  P.  Molligo, A. Prestipino and A. Raffo, 'The economic effects of trade policy uncertainty', Journal of Monetary Economics ,  109, 2020, pp. 38-59.

Sources: Based on Eurostat and CPB World Trade Monitor data.

History shows that trade wars harm growth, including for the countries that start  them. 13 Tariffs  do  not  guarantee a reduction in the current account deficit. If they did, they would also lead to a lower net inflow of capital into the country imposing them, 14  prompting adjustments through higher savings by residents or lower investment.

The  US  administration  may  therefore  be  using  tariff  announcements  as  a bargaining chip to redefine economic and political relations around the world.

13 The  trade  war  triggered  by  the  protectionist  measures  of  the  Smoot-Hawley  Act  of  1930 aggravated the Great Depression; see R.S. Grossman and C.M. Meissner, 'International aspects of  the  Great  Depression  and  the  crisis  of  2007:  similarities,  differences,  and  lessons', Oxford Review  of  Economic  Policy ,  26,  3,  2010,  pp.  318-338;  F.  Perri  and  V.  Quadrini,  'The  Great Depression in Italy: trade restrictions and real wage rigidities', Review of Economic Dynamics , 5, 1, 2002, pp. 128-151.

14 In the balance of payments, an economy's current account deficit coincides with its net external borrowing,  net  of  statistical  discrepancies.  The  current  account  balance  can  be  interpreted  as reflecting the saving and investment decisions of a country's resident sectors. Any improvement - a reduction in the deficit - must be offset by an increase in savings or a decrease in investment; see M. Obstfeld and K. Rogoff, 'The six major puzzles in international macroeconomics: is there a common cause?', in B.S. Bernanke and K. Rogoff (eds.), NBER Macroeconomics Annual 2000 , Cambridge, MA, The MIT Press, 2001, pp. 339-412.

Figure 3

However, in a world already fraught with geopolitical, trade, and military tensions,  this  strategy  could  spin  out  of  control,  producing  unintended  consequences, exacerbating existing disputes and creating new divisions. 15

Negotiated  solutions  based  on  cooperation  are  not  only  a  preferable alternative; they are essential to prevent a spiral of conflicts that could jeopardize global stability.

## 3. The European economy

The euro-area economy is struggling to regain momentum.

Following  the  stagnation  that  set  in  at  the  end  of  2022,  GDP  grew  at  a moderate pace in the first quarters of 2024, and then came to a halt again at the end of the year.

Domestic demand lacks strength. The saving rate has reached high levels, boosted by the increase in real yields and by the desire of households to rebuild the wealth that was eroded by the inflation shock. 16  Moreover, the succession of crises - from the pandemic to the war in Ukraine - has probably made consumers more cautious.

Expectations  of  a  recovery  driven  by  consumption  and  supported  by employment  have  been  repeatedly  disappointed.  The  Eurosystem's  growth forecasts have been revised downwards since the end of 2023 (Figure 5.a), as have the expectations of private operators (in contrast with those for the US economy; Figure 5.b).

Based on recent data, the recovery could be further delayed.

Consumer confidence has fallen again (Figure A.4) amid growing pessimism about the economic outlook and a weakening labour market, to which I will return shortly.  In  the  face  of  such  uncertainty,  consumers  are  unlikely  to  reduce  their savings.

15 In some worst-case fragmentation scenarios, the impact of tariffs could slash global GDP by as much as 6 per cent; see M.G. Attinasi et al., 'Navigating a fragmenting global trading system: insights for central banks', European Central Bank, Occasional Paper Series, 365, 2024.

16 A. Bobasu, J. Gareis and G. Stoevsky, 'What explains the high household saving rate in the euro area?', ECB, Economic Bulletin , 8/2024, pp. 59-63.

## Forecasts for euro-area GDP growth (per cent)



Sources: ECB (Eurosystem staff macroeconomic projections), and Consensus Economics (Consensus Forecasts). (1) Changes to Consensus Economics forecasts over time. - (2) The monthly survey includes a broad sample of analysts polled by Consensus Economics. - (3) The daily survey includes a smaller sample of analysts who update their forecasts more frequently.

Investments 17  are also slowing down, due to worsening growth prospects and the still restrictive tone of financial conditions.

With  no  solid  recovery  in  domestic  demand,  the  euro-area  economy  has found some support in foreign demand. The contribution of net exports (about half a percentage point in 2024) 18 can largely be put down to the stagnation of imports, against barely positive export growth (Figure A.5).

The manufacturing sector is suffering the most, as it continues to lose market share to Chinese manufacturers. This trend, which has been ongoing for years, is particularly pronounced in the automotive sector, one of the pillars of European

17 Capital investment is calculated as the difference between gross fixed capital formation and investment in  housing;  it  is  net  of  the  temporary  fluctuations  induced  by  the  movements  across  countries  of intellectual property products of multinational enterprises based in Ireland.

18 The  estimate  refers  to  recent  Eurosystem  projections;  ECB, Eurosystem  staff  macroeconomic projections , December 2024.

industry. Looking ahead, the difficulties faced by the automotive industry could have serious consequences for other sectors too. 19

These developments highlight the risks of over-reliance on external demand. At a time of tense trade relations, Europe's broad openness to international trade 20 and close integration into global supply chains (Figure 6) make its economy highly exposed to fluctuations in the global market and vulnerable to renewed protectionist pressures.

Figure 6

## Participation and use of foreign inputs in global value chains



## (1) (per cent of exports)

Source: Based on Asian Development Bank (MRIO) data.

(1) Overall participation (panel a) is defined as the share of exports connected with global value chains as a percentage of total exports. It consists of both the share of inputs purchased from abroad and used in the production of exported goods and services (backward participation, panel b), and the share of inputs that the economy supplies to foreign countries to produce their exports (forward participation).

Europe must adopt a new growth model that strengthens the single market and reduces reliance on external factors. Investment needs to be revitalized, as

19 The automotive industry accounts for 9 per cent of value added in euro-area manufacturing and 16 per cent for Germany. Across the estimated overall supply chain, for each automotive industry employee there are 1.8 employees in Italy and Spain and 1.6 in France and Germany; see A. Orame, G. Cariola and  G.  Viggiano,  'Il  settore  automobilistico  italiano  nella  transizione  verde:  evidenze  empiriche  e valutazioni  degli  addetti  ai  lavori',  Banca  d'Italia,  Questioni  di  Economia  e  Finanza  (Occasional papers), forthcoming.

20 In 2023, the share of euro-area exports in global markets (outside the euro area) was 15.0 per cent for goods - more than 6 percentage points higher than the United States.

it has been lower than in the United States for years; its shortfall is particularly evident when compared with Europe's high savings capacity. 21

Increasing  investment  alone  is  not  enough,  however.  It  is  essential  to invest  better,  prioritizing  projects  and  reforms  that  can  raise  productivity, whose  sluggish  growth  is  the  main  weakness  of  the  European  economy (Figure 7.a).

Figure 7



Sources: Based on Bureau of Economic Analysis, Bureau of Labor Statistics and Eurostat (National accounts) data.

- (1) Self-employed workers are excluded for the United States. - (2) Information and communication technology (ICT). -
- (3) The total refers to the non-farm private sector.

Innovative  sectors  are  at  the  top  of  the  list,  as  they  are  the  drivers  of productivity (Figure 7.b); this is especially true of those connected with the twin environmental and digital transition, which also plays a crucial role for European strategic autonomy (as in the case of energy).

The resources needed are sizeable, and require both public and private sector contributions. Interventions should be carried out through joint actions at European level in order to foster economies of scale and prevent the duplications that would result from fragmented national initiatives.

21 F.  Panetta,  'A  European  productivity  compact',  speech  at  the  20 th   Spain-Italy  Dialogue  Forum (AREL-CEOE-SBEES), Barcelona, 3 December 2024.

Europe needs what I recently referred to as a 'European productivity compact'. This does not mean creating a fiscal union, introducing an EU finance minister or  establishing  mechanisms  for  systematic  transfers  between  countries.  Rather, it involves setting up a common spending programme - targeted in its objectives and limited in time and cost - to finance investments that are indispensable for all European citizens. 22

Alongside strengthening the growth potential of Member States, this would generate  a  stable  supply  of  common  European  safe  assets,  an  essential  building block for creating a single capital market capable of financing innovative projects, including riskier ones.

The priorities and strategies to make the European economy more competitive are clear and have been carefully reviewed. 23 The real challenge now is to put them into practice.

## 4. Inflation and monetary policy

Inflation  in  the  euro  area  is  almost  back  to  its  2  per  cent  medium-term target.

The increase in recent months, up to 2.5 per cent in January (Figure A.6.a), was  anticipated  and  is  partly  due  to  base  effects  relating  to  past  energy  price developments. 24

Core inflation 25   has  remained at 2.7 per cent but indicators of momentum, which better capture recent trends, have shown an almost continuous downward trajectory  since  the  beginning  of  last  year,  standing  at  2  per  cent  in  January (Figure A.6.b).

Services  prices  have  continued  to  grow  at  a  relatively  strong  pace  of  3.9 per  cent.  This  pattern  partly  reflects  the  slow  and  gradual  adjustment  of  many

22 F. Panetta, 'A European productivity compact', December 2024, op. cit.

23 F. Panetta, 'The future of Europe's economy amid geopolitical risks and global fragmentation', April 2024, op. cit.; M. Draghi, ' The future of European competitiveness', September 2024; E. Letta, 'Much more than a market: speed, security, solidarity. Empowering the Single Market to deliver a sustainable future and prosperity for all EU Citizens', April 2024.

24 The base effect is the temporary change in the inflation rate that stems from price changes from one period to the next.

25 Core inflation excludes food and energy products, which are highly volatile.

services prices to past inflation and is therefore set to ease as a result of the decline in headline inflation. 26

Overall, there are reasons to assume that inflation will settle at 2 per cent over the medium term, in line with the latest Eurosystem staff projections.

The improvement in inflation has allowed the ECB Governing Council to end the policy rate hiking cycle that began more than two years ago and to reverse the path since last June. Since then, the ECB has cut its key interest rates five times, bringing the deposit facility rate to 2.75 per cent.

However, monetary policy has not yet fully normalized.

The reference rate is still higher than the estimated neutral rate, namely the  level  consistent  with  the  absence  of  inflationary  pressures  and  with potential economic growth. 27  As a result, monetary policy continues to exert a downward pressure on economic activity and on inflation, an effect that is less and less necessary with near-target inflation and persistently weak domestic demand.

As a matter of fact, the neutral rate concept will become less important going forward. Its estimates are highly imprecise. They only provide a rough indication of the monetary policy stance, becoming increasingly less useful as policy rates approach the estimated neutral level. More importantly, the concept of a neutral rate of interest is not enough to accurately calibrate the pace of monetary normalization.

Monetary policy decisions must always be based on an overall assessment of the outlook for the real economy and inflation, in which projection exercises play a key role. This is especially true for the euro area today, thanks to the recent improvement in the quality of inflation forecasts. 28

According to the projections published by the Eurosystem in December, inflation would hit the target if the key interest rates were lowered to around 2 per cent in mid-2025, in line with the market expectations prevailing at the

26 F.  Panetta,  'Monetary  policy  after  a  perfect  storm:  festina  lente',  speech  at  the  3 rd International Monetary Policy Conference organized by the Bank of Finland, 'Monetary policy in low and high inflation  environments',  Helsinki,  26  June  2024;  F.  Corsello  and  S.  Neri,  ''Catch  me  if  you  can': fast-movers and late-comers in euro area inflation', SUERF Policy Brief, 1070, January 2025.

27 These estimates generally stand at around 2 per cent in nominal terms; see C. Brand, N. Lisack and F. Mazelis, 'Natural rate estimates for the euro area: insights, uncertainties and shortcomings', ECB, Economic Bulletin , 1/2025, pp. 73-78.

28 F. Panetta, 'Back to the future: forward-looking considerations on monetary policy normalization', speech at Bocconi University, Milan, 19 November 2024.

time. Under this scenario, a less decisive easing of monetary policy could lead to excessively low inflation in the medium term.

## The risks to inflation

The economic outlook is evolving rapidly, as are the risks surrounding the forecasts, which need to be carefully assessed.

At present, the main downside risk to inflation is weak economic activity, a concern I have already addressed.

This is compounded by risks stemming from rising long-term yields, mainly as a result of the increase in long-term US dollar interest rates that spilled over to European financial markets, causing the euro area to 'import' from the United States a  monetary  tightening  that  would  not  be  justified  by  its  own  economic  outlook. Moreover, the increase in yen interest rates is prompting Japanese investors to scale back their exposure to foreign securities, including European bonds, in favour of domestic securities. 29 This shift is exerting upward pressure on long-term euro rates.

Fears that wage growth may be inconsistent with price stability are subsiding, as  indicated  by  the  latest  available  data  on  labour  costs  (Figure  8.a),  recent collective bargaining agreement renewals, 30  and signs of weakening labour demand (Figures 8.b and 8.c).

Presumably,  an  increase  in  US  tariffs  on  exports  from  Europe  would  not  significantly impact inflation. The tariffs could produce upward pressures linked to a depreciation of the euro against the US dollar and to possible retaliatory measures from the EU. However, these effects could be offset by a slowdown in the global economy and by China diverting its tariffed goods to European markets. According to our estimates, the net effect of the tariffs on inflation would be limited, if not slightly negative.

The greatest risks to inflation arise from the energy markets, which are experiencing high volatility and rising prices, especially for natural gas. In the near term, this could also increase inflation volatility. Future developments will need to be monitored closely, although  a  slowdown  in  global  demand  may  help  to  contain  price  pressures  in  the medium term. 31

29 M. Novik, I. Smith and D. Keohane, 'Japanese investors dump Eurozone bonds at fastest pace in a decade', Financial Times , 26 January 2025.

30 The recent negotiations in the German manufacturing industry resulted in moderate increases in the metalworking sector and a wage cut for the Volkswagen automotive group.

31 According to many analysts, China's demand for oil has peaked and is likely to fall in the coming years, owing to the rapid expansion of renewable energy capacity.

## Labour market in the euro area (1)



Sources: Based on data from Banca d'Italia, ECB, European Commission and Eurostat.

(1) The dotted lines indicate forecasts. - (2) The projected values are taken from the December 2024 Eurosystem staff projections. - (3) The wage tracker represents the average of wage increases under already signed collective bargaining agreements and measures wage growth on the basis of current collective bargaining agreements only, excluding one-offs and expired agreements. - (4) Percentage balance between firms expecting an increase and those expecting a decrease in employment levels in the three months following the survey. The total is calculated as a weighted average of manufacturing, services, construction and retail trade. - (5) Non-farm private sector. The data are seasonally adjusted and include all firms with at least one worker. The job vacancy rate is the ratio of the number of vacancies to the sum of vacancies and filled positions.

Overall, the available indicators seem to suggest that the predominant risk remains inflation falling below 2 per cent over the medium term. This conclusion is consistent with  both  inflation  expectations  derived  from  financial  contracts  and  with  analysts' assessments.

Monetary policy normalization must continue, with decisions supported by communication focused on the medium-term outlook for the real economy and inflation. At this juncture, overemphasizing specific data releases could heighten uncertainty and market volatility, ultimately making monetary policy less effective.

## 5. The Italian economy

Economic growth in Italy has waned in the last few quarters (Figure A.7), owing  in  part  to  the  challenging  international  environment  and  the  effects  of monetary tightening.

This weakening has taken a toll on investment and exports, the two components that largely drove the strong post-pandemic recovery.

Investment in capital goods has been hit particularly hard by the difficulties facing the manufacturing sector, which are common to the entire euro area. 32

Sales abroad are suffering because of the weakness of Europe's economy, and of Germany's in particular, which absorbs 12 per cent of Italian exports. Nearly half of the manufacturing firms that sell to Germany have seen their exports to this  market  decrease  (Figure  9),  which  has  had  a  negative  fallout  on  industrial production, in decline since 2022. The German economy's difficulties are spilling over to Italy via trade. 33

The main driver of growth has been household consumption, supported by the strong labour market and by the gradual, albeit still partial, recovery in real wages (Figure A.8).

For 2024 as a whole, GDP grew by 0.5 per cent - and by about another 0.2 percentage points without adjusting for calendar effects - but growth stalled in the second half of the year. According to our forecasts, GDP is expected to resume its expansion in the coming months. Lower interest rates, high employment levels and a recovery in foreign demand should support consumption and exports, while encouraging firms to invest. 34

32 The construction sector also contributed negatively, largely driven by the reduction in the very generous incentives for building renovations, which proved unsustainable for the public finances.

33 Despite recent problems, exports are about 10 per cent higher than in 2019, while the current account balance  is  again  largely  positive.  Over  time,  geographical  and  sectoral  diversification  and  cost competitiveness gains have enabled Italian firms to absorb the shocks that have hit some sectors, such as energy-intensive ones, and specific markets, such as the United Kingdom and Russia.

34 Despite the uncertainties surrounding international trade policies, Banca d'Italia's most recent business surveys found that most firms still expect to increase investment in the first half of 2025.



Source: Business Outlook Survey of Industrial and Service Firms, Banca d'Italia. (1) Percentage of Italian manufacturing firms reporting an increase or a decrease in exports to Germany in the first nine months of 2024 relative to the total number of firms exporting to Germany. Firms reporting a decrease (increase) include those that reported moderately or significantly lower (higher) exports to Germany in the first nine months of 2024 compared with the year-earlier period. For the remaining firms, exports remained unchanged.

As  in  the  rest  of  Europe,  Italy's  economic  recovery  is  threatened  by  a weakened and uncertain world economy. It is thus even more essential that we tackle the problems holding back the Italian economy head-on: weak productivity, high public debt, and inefficiencies in public administration. 35

A  redoubling  of  efforts  is  needed  to  complete  the  investments  under  the National Recovery and Resilience Plan (NRRP) and related reforms, acting swiftly to address any delays. Continuity for the NRRP must be provided, maintaining the reform momentum and rebalancing the public finances to support investment in human and physical capital and in innovation.

In  addition  to  supporting  economic  activity  in  the  coming  months,  the implementation  of  the  NRRP  will  improve  productivity  and  growth  potential, contributing to a full recovery in real income and boosting domestic demand. It would therefore strengthen confidence in measures taken at European level, paving the way for joint investments to increase productivity.

Of equal importance is the implementation of the medium-term fiscal structural plan drawn up by the Government and approved in January by the Council of the

35 F. Panetta, 'The Governor's Concluding Remarks', 31 May 2024 and F. Panetta, 'If we are not after the essence, then what are we after?', speech at the 45 th  Foundation Meeting for Friendship among Peoples, Rimini, 21 August 2024.

EU. The prudent management of the public accounts is already bearing fruit, narrowing the  yield  spread  between  Italian  and  German  government  bonds. Staying  the  course  could  lead  to  improved  sovereign  debt  ratings,  which remain at the low levels of 15 years ago, when Italian bonds were downgraded following the financial and euro-area debt crises.

Since then, the Italian economy has made considerable progress in terms of financial stability: its net international investment position has risen above 12 per cent of GDP, an improvement of over 35 percentage points compared with  2013  (Figure  A.9);  the  banking  sector  has  significantly  improved  its profitability  and  its  capital  position;  the  government  securities  market  has become more liquid and efficient, attracting a broad and diversified investor base.

These  factors,  alongside  a  rebalancing  of  the  public  finances,  could contribute to further reductions in government bond yields, improving funding conditions for households and firms and making Italy more competitive.

## 6. Banks and credit

Credit  growth  remains  negative  in  Italy,  although  there  are  some  signs  of recovery (Figure A.10).

Several  indicators  suggest  that  this  trend,  though  influenced  by  cautious lending policies, mainly reflects weak loan demand.

Firms' financing needs remain low owing to sound profitability and sluggish investment. Moreover, the share of firms reporting difficulties in accessing credit is falling across all sectors and size classes (Figure A.11).

For their part, banks have a strong capital base that can absorb any increases in the demand for funding.

However, the contraction of credit warrants attention. Small firms continue to record a greater and persistent reduction in loans (Figure 10); moreover, for these firms there are some signs of a potential shortage of credit. As economic activity recovers, these firms may need more external funding; it will then be essential for banks to ensure that viable firms have access to credit.

## Loans to non-financial corporations by firm size

## (12-month percentage changes)



Source: Based on Banca d'Italia data.

(1) Limited partnerships and general partnerships with fewer than 20 workers. Informal partnerships, de facto companies and sole proprietorships with more than 5 and fewer than 20 workers.

## Credit quality

The  flow  of  non-performing  loans  remains  moderate;  its  increase  in  the corporate sector is attributable to the effects of the interest rate hikes over the past years, in line with the forecasts made at this meeting one year ago. 36

Government guarantees  on  loans,  which  were  strengthened  to  address  the pandemic  emergency,  helped  to  contain  insolvencies.  The  stock  of  guaranteed loans is now declining, though very gradually (Figure A.12.a), as redemptions are largely offset by sizeable new loans (Figure A.12.b).

In a situation that is back to normal, government intervention should be scaled down and the terms and conditions for providing guarantees should be reviewed. The Budget Law for 2025 has already taken steps in this direction. 37

36 F. Panetta, 'Economic developments and monetary policy in the euro area', speech at the 30 th  ASSIOM FOREX Congress, Genoa, 10 February 2024.

37 More specifically, the ceiling for guarantees that can be issued by the Fund for improving access to credit for SMEs has been lowered to €160 billion (from €225 billion in 2023 and €200 billion in 2024). The stock of guarantees issued  by  the  Fund  over  the  five  years  2015-19  amounted  to  €60  billion. Moreover, while the current regime has been extended to 2025 and is still more favourable than the pre-pandemic one, some corrective measures have been introduced to discourage excessive recourse to government guarantees. See F. Panetta, '1924-2024: one hundred years of fostering a savings culture', speech at World Savings Day, Rome, 31 October 2024.

Further measures should be put in place to preserve this instrument for future emergencies and limit risks to the State budget. Resources must be channelled to support firms - often small ones - that face difficulties in accessing credit even though they have a positive business outlook.

In any event, banks must comply with supervisory standards when granting and managing loans, including guaranteed ones. Any negligence could undermine the effectiveness of government guarantees or provide public support to unworthy projects, exposing financial intermediaries to credit, legal and reputational risks.

## Deposits

Internet and mobile banking now allow depositors to transfer their savings quickly, even outside working hours and without going to a branch. This benefits customers, but also increases liquidity risk for banks, which may face large and sudden outflows of funds in times of stress. 38

In the current environment, where the ECB is withdrawing excess liquidity, banks need to weigh carefully the benefit of the low funding costs of sight deposits against the risk of sudden outflows.

Greater recourse to term funding helps stabilize funding sources, making liquidity  management safer and more predictable. In recent years, there has been a shift from sight deposits to time deposits, driven by the larger yield increases offered by the latter. However, the gap with other European banks remains wide.

Moving further along this path would strengthen the stability of the Italian banking system, especially in a global arena that exposes financial intermediaries and markets to sudden shocks.

However,  stepping  up  term  funding  requires  caution  when  it  comes  to complex financial instruments. In recent years, there has been strong growth in 'certificates', 39 partly due to tax advantages. 40

38 Under  normal  circumstances,  sight  deposits  are  a  relatively  stable  form  of  funding.  However,  in moments of high stress, they can become a source of vulnerability.

39 Last June, certificates issued by banks amounted to €84 billion, of which €56 billion were held by households.

40 Certificates  income  is  taxed  as  capital  gains  (sundry  income)  rather  than  as  dividend  or  interest (investment income). It can therefore be offset against losses on other securities, unlike investment income. Investors who have made losses on other investments therefore have an incentive to turn to certificates, as they can avoid paying taxes on the corresponding income by offsetting it against capital losses.

These  products,  which  are  linked  to  one  or  more  underlying  assets, 41 can improve  the  risk-return  profile  of  diversified  portfolios,  but  are  only  suitable for  investors  with  adequate  financial  skills.  Banks  must  ensure  they  are  placed responsibly and not offered to customers who are unable to assess their costs and risks.

Together with Consob, we are closely monitoring developments in this market and have repeatedly highlighted the high risks. 42

## Mergers and acquisitions

The Italian  financial  system  is  seeing  a  wave  of  mergers  and  acquisitions involving  banks  of  different  sizes,  insurance  companies,  asset  managers  and foreign intermediaries.

These transactions are primarily driven by the abundance of excess capital in  the  banking  sector.  Moreover,  the  prospect  of  shrinking  lending  margins due to declining interest rates is driving banks to seek economies of scale or synergies.

The announced transactions would narrow the size gap between the largest Italian banks and European competitors. On average, the total assets of the top five Italian banks are four times lower than those of their French counterparts and one and a half times lower than those of Spanish and German banks (Figure 11). While scale in banking generally brings both advantages and some well-known challenges, 43 these transactions can be seen within the broader perspective of the European market's integration and consolidation.

41 The underlying assets are interest rates, stock market indices or commodities.

42 Banca  d'Italia,  'The  Bank  of  Italy's  intervention  power  concerning  financial  instruments:  regular assessment of risks to financial stability', press releases, 26 April 2022, 21 April 2023 and 24 April 2024; and Banca d'Italia, Financial Stability Report, 2, 2024.

43 Setting aside the potentially negative repercussions for competition, large banks can become systemically important to the point of posing a risk to the economy in the event of failure. As a result, they could benefit from an implicit guarantee of government intervention should they find themselves in distress (the 'too-big-to-fail' issue). Bank resolution aims to remedy this issue, but it is not easily implemented. Large banks also bear the brunt of a high level of complexity and the costs that come with it, which could limit their efficiency and further complicate resolution; see D. Amel, C. Barnes, F. Panetta and C. Salleo, 'Consolidation and efficiency in the financial sector: a review of the international evidence', Journal of Banking and Finance , 28, 2004, pp. 2493-2519.

## Average total assets of major banks in the main European countries

## (billions of euros)



Source: Based on harmonized supervisory reports.

Banca d'Italia is involved in the M&amp;A approval process both independently and in cooperation with various national and European authorities. 44  The process starts after the transaction has been notified by the relevant entities, which are not required to give prior notice to the authorities.

The  supervisory  authority  verifies  compliance  with  Italian  and  European regulations,  assessing  whether  each  transaction  will  result  in  a  viable,  efficient intermediary capable of operating in accordance with the principles of sound and prudent management, serving the real economy without compromising financial stability.

Subject  to  these  criteria,  the  outcome  of  M&amp;A  transactions  is  ultimately determined by market dynamics and shareholder decisions.

## 7. Digital finance

Technology is changing the relationship between banks and savers, which is founded on trust.

44 In addition to Banca d'Italia, mergers and acquisitions can involve: the Single Supervisory Mechanism (SSM), where Banca d'Italia sits on the Supervisory Board, if the transaction concerns significant institutions or if it requires authorization to purchase qualifying holdings; IVASS, if it concerns insurance companies, including indirectly; Consob, when the transaction is carried out through a public takeover bid or exchange offer; foreign supervisory authorities, if non-Italian intermediaries are involved; and the Italian Competition Authority. Moreover, if the transaction involves Italian companies with strategically important assets and accounts, the Government can exercise special powers to protect national interest (capital screening).

While this relationship was once based on banks' ability to make payments and manage savings prudently, it now extends to ensuring accessibility and continuity of service. The protection of confidentiality, which has always been important for banking, now plays a crucial role.

Digitalization enables financial intermediaries to improve efficiency and risk management, while providing customers with timelier and cheaper services.

However, the growing interconnections between supervised and non-supervised entities and the complexity of processes are increasing the risks to business continuity and customer protection.

## Operational and cyber risks

Globally, there has been continuous growth in operational incidents and cyber attacks in the banking sector, a trend that is also under way in Italy (Figure 12).



Source: Based on supervisory reports.

(1)  Banking  groups,  stand-alone  banks,  payment institutions  and  e-money  institutions  are  subject  to  reporting.  Cyber incidents include cyber attacks and incidents that have the effect, even unintended, of sharing and/or altering the confidential data of a bank and/or its clients. Operational incidents arise due to inadequate or malfunctioning processes, human or system error, or force majeure. These events also include natural events, software and hardware errors, accidents, process malfunctions, sabotage (physical attacks). - (2) The number of reports indicates the incidents reported by individual banks; each incident may give rise to more than one report.

There are many causes. On the one hand, cyber threats have become more sophisticated,  as  a  result  of  heightened  geopolitical  tensions  and  advances in  artificial  intelligence.  On  the  other  hand,  the  complexity  of  information systems, the increase in outsourcing and the involvement of a growing number of players in business models have multiplied vulnerabilities.

IT  risks  are  exacerbated  by  the  concentration  of  certain  services  in  the hands  of  a  few  global  players.  An  incident  affecting  one  of  these  entities could have significant international repercussions, 45  leading to both direct and indirect losses. The former have been relatively small so far. The latter are more difficult  to  quantify  but  potentially  significant  in  terms  of  long-term  growth and sustainability. 46  The greater speed of financial transactions increases these risks. 47

These  developments  make  it  more  difficult  to  intervene  in  the  event of  incidents,  cyber  attacks  or  fraud.  It  is  therefore  essential  that  operators strengthen  their  information  systems  and  prevention  measures.  At  the  same time, consumers must make prudent and informed choices.

To respond to technological risks, the EU introduced the European Digital Operational Resilience Act (DORA), which strengthens oversight on providers of  technology  services,  on  business  risk  management,  and  on  the  testing  of resilience against attacks.

Banca d'Italia  has  stepped  up  its  action  on  this  front.  Last  December,  we asked banks to assess their IT risk management systems, especially in terms of their effectiveness in preventing breaches of data confidentiality, whether caused

45 Recent examples include last summer's CrowdStrike outage that had global (though relatively limited) repercussions, as well as the incident involving Worldline, the French digital payments company, when gas roadworks accidentally damaged its network connection to data centres in Italy, causing slowdowns and disruptions in retail payments.

46 According to the IMF, malicious activity has inflicted direct losses of $12 billion on the financial sector since 2004, more than one fifth of which were recorded in the four years 2020-23 (IMF, Global Financial Stability Report , April 2024). This figure is likely underestimated because the victims of cyber attacks could downplay the real extent of the damages incurred to protect their reputation.

47 For example, settlement times for securities transactions have gone from two days to one in major economies such as China, India, and more recently, the United States, Canada and Mexico. Elsewhere, faster  settlement  times  are  either  being  studied,  such  as  in  the  EU,  or  in  the  process  of  being implemented (UK and Switzerland). Another example of the greater speed of financial transactions is instant payments, which permit real-time settlement of retail payments.

by external attacks or unauthorized internal access. We also drew attention to the implementation aspects of the DORA regulation. 48

At  international  level, 49 we  are  working  to  make  the  payment  and  market infrastructures more reliable, including by harmonizing incident reporting schemes and third-party risk management. During the Italian G7 Presidency, we promoted an in-depth analysis of the risks that come with new technologies such as artificial intelligence and quantum computing.

## Crypto-assets and digital instruments

The  spread  of  crypto-assets  requires  the  attention  of  the  authorities,  also because of their extensive use for illicit purposes.

So far, irregularities and failures involving crypto-asset operators and markets have had a limited impact on the financial system, as the two sectors are separate.

However, the situation is evolving in different ways across countries, raising complex questions.

In Europe, the revision of the Capital Requirements Regulation introduced a  transitional  regime  for  banks'  crypto-asset  holdings,  which  reflects  the  spirit of the standard defined by the Basel Committee. 50  In addition, with the Markets in  Crypto-Assets  Regulation  (MiCAR),  European  lawmakers  discouraged  the development of speculative crypto-assets, prioritizing investor protection. 51

48 For  example,  where  to  place  the  ICT  risk  control  function  in  the  organization  chart;  procedures for  reporting  ICT-related  incidents  and  significant  threats;  and  cybersecurity  testing  within  the TIBER-EU framework (see Banca d'Italia, 'Regulation (EU) 2022/2554 of the European Parliament and of the Council of 14 December 2022 on digital operational resilience for the financial sector (DORA)', Communication of 30 December 2024). Together with the  Ministry  of  Economy  and Finance,  the  National  Cybersecurity  Agency  and  the  other  relevant  national  agencies  (Consob, Covip and IVASS), Banca d'Italia is working to ensure the coordinated implementation of DORA and other EU legislation.

49 Principally, the Bank for International Settlements (BIS), the International Organization of Securities Commissions (IOSCO), the Eurosystem, the G7 and G20.

50 The Basel Committee approved a standard relating to the prudential treatment of crypto-assets held by banks. It provides for capital requirements similar to those for the underlying assets for tokens that are digital representations of traditional assets and for those whose value is permanently pegged to an underlying asset. The requirements are far more stringent for other crypto-assets.

51 Banca d'Italia has indicated that among the instruments envisaged by MiCAR, only electronic money tokens (EMTs), whose value is linked to a single fiat currency, can fully perform the means of payment function; see F. Panetta, 'Banks and the economy: credit, regulation and growth', speech at the Annual Meeting of the Italian Banking Association (ABI), Rome, 9 July 2024; see Banca d'Italia, 'Regulation (EU) 2023/1114 on Markets in Crypto-assets (MiCAR)', Communication of 22 July 2024.

Together  with  Consob,  we  have  begun  to  talk  to  operators  interested  in providing  crypto-asset  services. 52 Banca  d'Italia's  task  is  to  ensure  that  these entities  have  adequate  safeguards in place to manage strategic, operational and financial risks, as well as risks linked to money laundering and the circumvention of international sanctions. 53

In the United States, in the absence of specific legislation, 54 market supervisors have intervened in recent years to limit the riskiest developments, while leaving the door open for the possibility of integrating crypto-assets into the financial system. 55 However, the new administration is instead inclined to support their expansion. 56

These regulatory divergences between the United States and Europe will need to be carefully assessed, once the US authorities' position becomes clearer, in order to  understand  their  international  implications.  Regulatory  arbitrage  in  this  field may be particularly insidious and difficult to counter: some operators might exploit regulatory differences to adopt less-than-transparent or highly risky practices, with possible consequences for savers and the integrity of the financial system.

Yet, crypto-asset risks do not only stem from regulatory divergences. It cannot be ruled out that one or more crypto-assets, including electronic money tokens, could be issued by tech giants and spread across Europe. 57

If  these  private  means  of  payment,  which  can  easily  be  integrated  into commercial platforms with billions of users, were to gain widespread adoption, the consequences could be significant. 58

52 Crypto-asset service providers (CASPs) are a new category of operators introduced by MiCaR, offering crypto custody, trading and exchange services.

53 On these issues, CASPs can refer to recent Banca d'Italia consultations (see Banca d'Italia, Consultation on the extension of the measures on customer due diligence and organizational, procedural and internal control measures to counter money laundering and terrorist financing for crypto-asset service providers, 15 January 2025).

54 The Financial Innovation and Technology for the 21 st  Century Act, introduced in 2023, was approved last year by the House of Representatives but was never written into law. To date, the crypto-asset market has been regulated based on the extent to which individual government agencies were willing to liken crypto-assets to traditional financial assets and therefore to bring them within the reach of existing legislation.

55 In  the  United  States,  for  example,  the  Securities  and  Exchange  Commission  (SEC)  approved  spot Bitcoin ETFs on 10 January 2024.

56 'Strengthening  American  Leadership  in  Digital  Financial  Technology',  Executive  Order  issued  on 23 January 2025.

57 Similar instruments are already available in the US, although they have not been widely adopted so far. For example, in 2023, PayPal launched PayPal USD, a crypto-asset pegged to the US dollar that can be used for transferring money via the PayPal app.

58 F.  Panetta,  'The  cost  of  not  issuing  a  digital  euro',  speech  at  the  CEPR-ECB  Conference  on  'The macroeconomic implications of central bank digital currencies', Frankfurt, 23 November 2023.

Commercial banks would risk losing an important part of their operations. In the public debate, it is sometimes argued that the introduction of a digital euro would entail this risk, overlooking the fact that the real threat comes from crypto-assets, for which - unlike the digital euro - there are no holding limits for savers. 59

Moreover, central banks, which are responsible for the smooth functioning of the payment system, would be operating in an environment where a handful of private, possibly foreign entities would play such an important role that any incident could jeopardize the stability of the system.

The  risks  to  payment  systems  and  financial  markets  could,  therefore,  be considerable.

## Conclusions

The exit from high inflation is unfolding at a relatively low economic cost. The global economy continues to expand, albeit at a moderate pace by historical standards. Financial markets and intermediaries also seem to have absorbed the severe shocks of recent years.

Yet the risks for the world economy have not gone away.

The greatest concerns still stem from geopolitical tensions, not only because they are fragmenting supply chains and undermining the efficiency of the global economic  system,  but  also  because  they  jeopardize  the  multilateral  order  and international integration in ways that are hard to predict.

The uncertainty stemming from US trade policies is affecting international trade, investment and growth. It needs to be tackled by asserting Europe's positions via  dialogue  and  negotiation,  preventing  any  confrontations  that  could  deepen existing fractures and trigger new disputes.

Europe finds itself in the midst of these upheavals, and it is lagging behind in forging a strong common response.

The  sluggishness  of  its  economy  is  in  contrast  to  the  vibrancy  of  the  US economy. This divergence is not merely cyclical: it reflects a deeper and structural challenge in Europe, with the digital lag perhaps its most obvious symptom. The

59 To ensure that the introduction of a digital euro does not lead to excessive outflows from bank deposits, the ECB has proposed a cap on the amount of digital euros that individuals can hold; see F. Panetta, 'A digital euro: widely available and easy to use', Introductory statement before the Committee on Economic and Monetary Affairs of the European Parliament, Brussels, 21 April 2023.

persistent weakness of investment, despite the high saving rates, is a clear sign of this malaise.

But  this  does  not  imply  an  inescapable  destiny.  To  overcome  it,  we  must recognize that only a common European response will allow us to successfully face up to the current difficulties.

The  Competitiveness  Compass  -  the  European  Commission's  roadmap for  this  legislative  term  -  correctly  identifies  three  key  objectives:  innovation, decarbonization and strategic autonomy.

Achieving these goals will require considerable resources, exceeding those available in the EU budget. These can be mobilized through a European productivity compact, financed in part by the regular issuance of EU bonds.

Italy  has  shown  that  it  can  react  to  crises,  and  it  cannot  settle  for  modest growth.  The  National  Recovery  and  Resilience  Plan  is  a  powerful  lever  for investment and reform. It must be implemented with determination and efficiency. Fiscal  consolidation,  productivity  and  innovation  are  the  priorities  for  ensuring stability and sustainable development.

Europe and Italy can boast a world-class production system, despite the current challenges. They can draw on a vast and widespread human capital, extraordinary talent, and abundant financial resources that are ready to support new investments and fuel growth. They can shape their future with bold choices, vision and unity of purpose.

The task ahead, though by no means an easy one, is to act with clarity and ambition,  paving  the  way  for  a  stronger,  more  competitive  and  more  inclusive economy.

APPENDIX

## US dollar effective exchange rate and US interest rates

(index: 1 Nov. 2024=100 and per cent)



Sources: Based on S&amp;P and LSEG data.

(1) An increase corresponds to an appreciation of the US dollar. - (2) Right-hand scale.

Figure A.2

## US imports and share of Chinese value added in total imports

(per cent)



Sources: F.P . Conteduca, S. Giglioli, C. Giordano, M. Mancini and L. Panon, op.cit.; and M.G. Attinasi et al., 2024, op. cit.

## Share of Chinese goods in the imports of the main world economies

## (1) (per cent)



Source: Based on Trade Data Monitor data.

(1) Provisional figure for 2024 (latest available figure: October 2024). Data for the euro area are net of intra-area imports.

Figure A.4

## Euro-area consumer confidence and contributions of its components (percentage deviations from the mean)



Source: Based on European Commission data.

## Euro-area exports and imports (1)

(year-on-year percentage changes)



Sources: ECB and Eurostat.

(1) The data for 2024 refer to the December 2024 Eurosystem staff projections.

## Euro-area inflation

(percentage changes)



Sources: Based on ECB and Eurostat data.

(1) Annualized 3-month changes based on seasonally adjusted data.

Figure A.6

## GDP growth in Italy and contributions of its components (1)

(percentage changes on previous quarter)



Source: Based on Istat data.

(1) The latest data for the contributions of GDP components refer to Q3 2024.

## Hourly contractual wages in real terms in Italy (1)

(index: January 2021=100)



Source: Based on Istat data.

(1) Istat's hourly contractual wage index is calculated on the basis of the wage floors laid down in the most representative national collective bargaining agreements for each sector. The figure shows the index performance in real terms, i.e. net of consumer inflation as measured by the harmonized index of consumer prices (HICP). The data refer to the non-farm private sector.

Figure A.8

## Net international investment position for the main euro-area countries in 2013 and in Q2 2024

(per cent of GDP)



Source: ECB.

(1) Right-hand scale.

Figure A.10



Source: Based on Banca d'Italia data.

## Firms' access to credit (1)

(per cent)



Sources: Banca d'Italia (Survey on inflation and growth expectations) and Istat (Business confidence surveys). (1) Net percentage of firms reporting difficulties in accessing credit. - (2) Refers only to manufacturing firms.

Figure A.12

## Stocks and flows of loans backed by public guarantees

(billions of euros)



Source: Based on AnaCredit data.

Printed on EU-Ecolabel certified paper (registration number FI/011/001)

The life-cycle environmental footprint of the paper used was offset by purchasing carbon credits and planting trees in Italy.",Fabio Panetta
https://www.bis.org/review/r250217a.htm,Joachim Nagel: Financing the transition to greenhouse gas neutrality - how much and with which instruments?,"Remarks by Dr Joachim Nagel, President of the Deutsche Bundesbank, at the University of Glasgow Adam Smith Business School, Glasgow, 13 February 2025.",2025-02-13 00:00:00,"## Joachim Nagel: Financing the transition to greenhouse gas neutrality - how much and with which instruments?

Remarks by Dr Joachim Nagel, President of the Deutsche Bundesbank, at the University of Glasgow Adam Smith Business School, Glasgow, 13 February 2025.

* * *

Check against delivery

## 1 Introduction

Ladies and gentlemen,

I am delighted to be here with you today. What better place than Glasgow to discuss the economic impacts of climate change and the green transition! And not just because it played host to the 2021 United Nations Climate Change Conference.

Glasgow is also where Adam Smith, the father of modern economics, studied and taught as a professor. Have you ever wondered what he would have thought of climate change? As a famed free-market economist, he might not be the first person you would think of. But even Adam Smith acknowledged that the invisible hand can sometimes lead to suboptimal outcomes.

Climate change is a prime example of this: market prices do not reflect the negative side effects of greenhouse gas emissions. Fortunately, it is now widely acknowledged that governments need to intervene and encourage individuals and companies to reduce their emissions.

Switching to a net-zero emissions economy is a major task. It requires changes in behaviour, innovation and significant investment to rebuild our capital stock. And this transition requires significant financing.

In my speech, I will explore what financing the transition to a greenhouse gas-neutral economy could look like. More specifically, I will focus on two key issues. First, how much investment is needed to achieve greenhouse gas neutrality, and how much of this investment is ""additional""? Second, what could the financing mix to fund this investment look like?

I know that answering these questions seems like a tough challenge-a taughy fleece tae scoor. But I will do my best to illustrate my points with clear, practical examples. Along the way, I will discuss electric cars and heating systems to help us understand the issues.

My remarks will focus on the European Union (EU),  borrowing some detailed insights from Germany. Unfortunately, these data do not cover the United Kingdom (UK).  But I will do my best to infer some insights for the UK as well.

## 2 How much needs to be invested?

Let me start with the question of how much the EU needs to invest to achieve greenhouse gas neutrality. The EU's Fit for 55 package aims to reduce greenhouse gas emissions by at least 55 per cent by 2030. These reductions are benchmarked against 1990 emission levels. This is an intermediate step towards full greenhouse gas neutrality, for which the EU still needs to pass legislation.

From 2021 to 2030, the European Commission estimates that EU countries need to invest over €1.2 trillion annually. 1   This amounts to nearly 8 per cent of theEU's GDP. The private sector must take on the bulk of these investments. The investment needs are significantly more than the actual annual investment of €760 billion in the previous decade.

The European Commission defines the difference between the investment required and the actual investment as the ""additional"" investment need. This additional investment need amounts to €480 billion, or around 3 per cent of   GDP.

This definition of ""additional"" investment is very useful from an accounting perspective. It gives a clear picture of how much more the EU needs to invest to meet its climate goals. However, from a financing perspective, it helps to define additional investment differently.

There are two types of investment needed to achieve greenhouse gas neutrality. The first type is investment that would not happen without the goal of reducing greenhouse gas emissions. A prime example of this type of investment is technology to capture and store carbon dioxide. This technology will play a crucial role in sectors that are difficult to decarbonise. These investments need economic resources and financing beyond what an economy spends just to maintain its capital stock.

The second type is investment where a greenhouse gas-neutral alternative replaces a fossil fuel-based technology. To illustrate this point, imagine two households buying a new car. The Jones family spend €45,000 on a new combustion engine car. From a technical perspective, the Jones family are making a replacement investment. No additional financing is needed. Meanwhile, the Smith family decide to switch from a combustion engine car to an electric vehicle. Let us say a comparable electric car costs €50,000. Of this amount, €45,000 is a replacement investment. Only the remaining €5,000 requires additional financing.

Contrast this with how the European Commission defines additional investment: They subtract the annual average value of electric cars bought in the past from the value of electric vehicles needed to meet the EU's intermediate greenhouse gas reduction goals. Past registrations of electric vehicles fell significantly short of what is needed. Accordingly, the additional investments, as defined by the European Commission's accounting perspective, are presumably much higher than the additional financing needs.

How great could the additional financing needs be? While we do not yet have specific figures for the EU,  there are some numbers for Germany. A recent study estimates that

Germany needs to invest around €390 billion annually from 2021 to 2030 to reduce emissions by 65 per cent compared to 1990. 2   They measure this absolute sum in 2020 prices. Relative to GDP,  the investment amounts to 11 per cent.

This is fairly close to the 8 per cent investment needs calculated by the European Commission for the However, only around 30 per cent of this investment requires EU. 3 additional financing. In absolute terms, this amounts to about €120 billion.

Let me pause for a moment to summarise the two key takeaways from my remarks so far. First, the transition to greenhouse gas neutrality calls for significant investment. However, in many cases, we are replacing fossil-based technologies with greenhouse gas-neutral alternatives. Accordingly, the additional financing needs are much smaller and seem manageable.

Second, we can minimise the additional financing needs by replacing already largely depreciated capital stock. By contrast, replacing relatively new capital stock that has barely depreciated would increase the economic and financial costs. Let me illustrate this point with a brief anecdote.

On 1 January 2024, the German government introduced a new law governing heating systems. In German, it is known by the beautiful name "" Gebäudeenergiegesetz"". This law mandates that heating systems use around two-thirds renewable energy. In anticipation of this new law, many households replaced their old gas heating systems with new ones. These heating systems can run for around 25 years, so they depreciate over a long period.

Bad luck if you just installed a new gas heating system and live in the German city of Mannheim. Here, the local gas provider has said it intends to stop its services in 2035. This means that a long-term investment will become unviable when little more than half of it has depreciated: A waste of both financial and economic resources.

This anecdote highlights one key point: to avoid wasting money, we need a clear and reliable path to greenhouse gas neutrality. With a clear path mapped out, people can confidently invest in the transition.

## 3 What could the financing mix look like?

Now, let us explore what the potential financing mix could look like. To achieve a greenhouse gas-neutral economy, households, firms and the public sector all need to invest. They can fund these investments using both internal and external sources.

As the name would suggest, internal financing comes from within. Like the Smith family putting aside some of their income to pay for their new car. Or think of a firm that sells its products and saves some of the profits. That is internal financing, too. External financing, on the other hand, comes from outside sources such as banks or investors.

Regarding their financing mix, households, non-financial firms and the public sector differ considerably. Households tend to save significantly and mainly use bank loans as a source of external finance. The public sector, on the other hand, raises most of its funds from external sources by issuing debt securities. Only firms have a more

diversified financing mix. Equity and bank loans play prominent roles here. Note that these observations hold for the EU,  the UK and Germany alike.

So, what might the financing mix for the transition to a greenhouse gas-neutral economy look like? To estimate these figures, we need two key components: First, the respective shares of households, firms and the public sector in total investment. According to rough estimates by Bundesbank staff for Germany, households might have to cover about one-third of the investment, the public sector around 20 per cent, and firms just under half. 4

Second, estimates for the future financing structure of the sectors. We assume that future financing structures will remain unchanged from today. 5   This implies that past financing structures are suitable for future climate investment. If this were not the case, perhaps due to the need for innovative financing instruments, the financing structure may differ.

What result do we get when we combine the two components? For Germany, we estimate that about 20 per cent of the financing mix could come from internal financing, primarily household savings. In terms of external financing, bank loans might play the largest role. They account for over one-quarter of the estimated financing mix. Households in particular obtain almost all their external financing from banks.

The second-largest external financing source could be debt securities, accounting for around 20 per cent. The public sector  plays a prominent role here, with funding coming almost exclusively from bonds.  Finally, the third-largest external financing source could be equity financing, comprising around one-sixth. Firms are the only users of this financing source, as households and the public sector do not issue equity. Different instruments, like loans from non-bank financial intermediaries, might cover the final sixth of the overall investment needs.

So, what does this mean for the EU and the Can the findings for Germany be UK? generalised? Fortunately, the financing structures of households, firms and governments are largely comparable across these regions. 6  Therefore, one of the two components in the calculations is roughly equal.

The second component-the sectoral investment needs-is less certain. I am not aware of any studies for the EU or the UK that divide the investment needs across households, firms and the public sector. 7   Without a better alternative, the findings for Germany may provide a reasonable initial estimate for both the EU and the UK.

## 4 Concluding remarks

Let me summarise and conclude. I have three main takeaways to share.

First, ""additional"" investment needs to become greenhouse gas-neutral can also be defined from a financing perspective. In many cases, we are replacing fossil fuel-based technologies with greenhouse gas-neutral alternatives. And this requires additional financing only if greenhouse gas-neutral technologies are more expensive or if the capital stock being replaced is not yet fully depreciated. The additional financing needs

are significantly smaller than the total investment required. Accordingly, I am confident that our financial system can mobilise the necessary financing.

Second, banks may play a larger role in financing the climate transition than is commonly anticipated. The main reason for this conclusion is that a substantial portion of climate investments falls on households. They need to make their homes more energy-efficient and replace fossil-fuelled heating systems with greenhouse gas-neutral alternatives. And households simply do not have many viable alternatives to bank loans.

Accordingly, a robust banking system is essential for achieving greenhouse gas neutrality. That is why we at the Bundesbank are committed to completing the European banking union. However, we also need to improve access to alternative financing sources. Non-financial firms, in particular, would greatly benefit from better capital market financing. That is why we at the Bundesbank are dedicated to creating a European capital markets union.

Third, legislators can minimise the additional financing needs by ensuring that the path to greenhouse gas neutrality is planned stringently and for the long term. Why? Because it provides incentives to avoid investments in fossil fuel technologies that may not be fully depreciated before they become non-viable.

- 1 See European Commission (2023), Investment needs assessment and funding availabilities to strengthen EU's Net-Zero technology manufacturing capacity, SWD (2023) 68 final.
- 2  Kemmler et al. (2024), Klimaschutzinvestitionen für die Transformation des Energiesystems, Prognos. This study is only available in German.
- 3  One reason why Germany's investment needs relative to GDP are higher than the EU's is that Germany intends to achieve greenhouse gas neutrality sooner (in 2045 rather than 2050).
- 4  The estimates are based on the public sector shares provided in Brand and Römer (2022),  Öffentliche Investitionsbedarfe zur Erreichung der Klimaneutralität in KfW and various plausibility Deutschland, Research-Fokus Volkswirtschaft, Nr. 395 assumptions. The analysis assumes that the public sector's involvement in industry and the residential investment sector is minimal or non-existent. This is because the analysis looks at financing flows before any government support, such as subsidies.
- 5  More precisely, the financing structure is derived from the average internal and external financing flows over the period 2018 to 2022. This averaging smooths out shortterm fluctuations and centres on the reference year of 2020 used in the Kemmler et al (2024) study. Internal financing enters the calculation on a net basis, assuming that the depreciation inflows finance the replacement investments.
- 6  In the EU and households rely slightly less on bank loans than in Germany, but UK, the share is still high. In the public sector, Germany has a significantly higher share of debt security financing, particularly compared to the In the non-financial firms EU. UK,

have a significantly lower share of equity financing and a higher share of (bank) loans compared to Germany. In contrast, in the EU,  non-financial firms have a slightly higher share of equity financing and a smaller share of (bank) loans compared to Germany. All figures are based on average financial flows from 2018 to 2022.

- 7  European Commission, op. cit., estimates that, in the EU,  the public sector could account for 17 to 20 per cent of total investment. However, it does not clarify how this investment will be split between households and firms. For the UK,  HM Government (2023), Mobilising Green Investment-2023 Green Finance Strategy, mentions that most investment must come from the private sector. However, it likewise does not provide any details on how this investment will be split between households and firms.",Joachim Nagel
https://www.bis.org/review/r250212e.htm,Sabine Mauderer: The European financial industry of the future,"Speech by Dr Sabine Mauderer, First Deputy Governor of the Deutsche Bundesbank, at the 6th Frankfurt Digital Finance Conference and European Fintech Day, Frankfurt am Main, 12 February 2025.",2025-02-12 00:00:00,"## Sabine Mauderer: The European financial industry of the future

Speech by Dr Sabine Mauderer, First Deputy Governor of the Deutsche Bundesbank, at the 6th Frankfurt Digital Finance Conference and European Fintech Day, Frankfurt am Main, 12 February 2025.

* * *

## Check against delivery

Ladies and gentlemen,

I'm glad to join you today at the "" Gesellschaftshaus Palmengarten"". Its history goes back to the 19 century. It was the "" "" or ""founders' period""-an era of strong th Gründerzeit economic expansion in Germany-when this building was constructed. And when Germany was developed as an industrial location. Developed by people, men and women, lead by curiosity, innovation, and a desire to achieve.

We have to cast our minds back a few years to see times of growth, real innovation and increasing productivity in Europe.

## 1 The role of the financial industry

In the 2010s Germany had a period of solid growth that some called ""the golden decade"".

Today, however, we see a need for growth and increasing productivity. Hence, our competitiveness is at stake. Not only in Germany, but also in other parts of Europe. And this comes at a time, when we are facing numerous major challenges:

Consider the significant geopolitical uncertainties of our time-which make a rethink necessary in many respects. Also consider the digitalisation of large parts of our economy, incl. disruptive AI.  And think about the climate-related need for an ecological transformation.

Financing all of this requires a substantial amount of capital.

This is where the financial industry comes in: The financial industry can act as an enabler of growth in the real economy. Growth that is so much needed right now.

Looking forward, the financial industry could translate growth potential into real growth in many fields-digitalisation, AI,  clean tech, pharma, biotech any many more.

In sum, there are huge business opportunities for Germany and the EU.  And we need the Financial industry to take advantage of the business opportunities.

But let us not forget that innovation happens in many places-at start-ups but also at well established companies. We need to make sure that a variety of funding sources are available to support our real economies.

We need a specific financial ecosystem that enables young, innovative companies to flourish. Be it VC, PE, etc. We need established capital markets. Above all, we need a strong and healthy banking sector that supplies our economy with sufficient credit.

That means: We need both traditional loans and venture capital. In any case, all the pockets of the financial industry provide the basis for a growing economy. It's also the basis for the digital and ecological transformation.

The German Council of Experts on Climate Change published [a week ago] new figures on the investment needs estimated for the transition towards net-zero economic activity. Those investment needs range between 135 and 255 billion euro-each year for Germany alone. 1   That's a lot.

Let's now have a closer look at the digitalization including  AI.

## 2 Artificial intelligence: innovation and competitiveness

The term artificial intelligence (AI)  was coined in the middle of the 20th century. But it was the release of ChatGPT in November 2022 that marked a breakthrough. For the first time it became possible to use an AI system without detailed technical knowledge.

Nowadays almost anyone can use AI.  The importance of responsible AI practices on the increase-as highlighted in the latest Declaration by the  G20. 2

There are important questions-to which, to be honest, there are no simple answers:

Are the opportunities and risks of AI balanced?

Does AI lead to a global fragmentation, to a new barrier between those who use AI and those who don't?

Does AI,  as a general-purpose technology, help us better manage economic challenges? 3

One example of the latter point: Many societies are lacking skilled labour due to demographic change. Here, the use of AI could provide a solution by increasing efficiency or substituting human services. AI can also help drive innovation.

AI enables both incremental and disruptive innovation across all parts of society:

- by facilitating faster decision-making
- optimizing existing processes,
- or by collecting, processing and using huge amounts of data.

It fosters creativity, supports scientific breakthroughs, and unlocks opportunities for entirely new industries and business models-a potential, albeit disruptive, growth engine.

Nevertheless, human creativity is still a key driver of innovation. In 2023, individuals or SMEs filed almost one in four patent applications in Europe. 4

Today, we are at a crucial stage: With international competition on the one side and technical and intellectual skills on the other. AI models from the United States are wellknown and often considered state of the art. China in particular has recently come up with new and apparently very efficient language models. However, the discussion about the background is not yet complete.

In Europe, we have to do our utmost to keep up with the pace. An important initiative recently came from France: In Paris the ""EU AI Champions Initiative"", a high-level summit, was held at the beginning of this week.

President Macron mentioned a funding volume of roundabout € 109 billion forAI in France. This approach is very encouraging for other EU member states. By comparison: President Trump has mentioned USD 500 billion for his ""Stargate"" plan in the USUS.

Despite these substantial investments, there is no guarantee of success. On the other hand, we must not allow ourselves to be deterred by possible failures. One example is the French AI chatbot LUCIE, which has been taken offline after giving some weird answers. I am sure France will take this as a chance to try even harder.

The narrative with all kind of innovation is: Accept failure to grow. The pioneers of the "" Gründerzeit""-which I mentioned earlier-knew this only too well.

We need this kind of courage to embrace a ""culture of trial and error"". It provides an important impetus to do things better. On the other hand, we have to ensure that new technology does not cause severe damage. Especially because AI is a relatively new technology with unknown potential and consequences for the entire society.

Risks can arise for the financial system, but much further afield as well. Imagine, risk management or investment advice would be provided mainly by AI.  Would this mean that investment recommendations are becoming more and more similar? Would we have concentration of risks? And what consequences would this have for financial stability? 5

Even more far-reaching questions concern our society.

The core question is: What does AI mean for our democracies, for our constitutions, for our fundamental rights? Specifically, we need to ask ourselves: Where is AI beneficial and where do we need clear rules.

In other words: What are the basic rules for using this technology?

It is therefore necessary to find a compromise between having the courage to innovate-and clear rules.

## 3 Strengthening the financial industry

Regardless of how we deal with AI,  we have to return to the issue of financing its development. As indicated earlier, the financial industry, as an enabler, has an important role to play.

Given the challenges of our time I mentioned earlier, it is vital to strengthen the European financial industry.

Let me highlight only two measures:

First, we need to get started on improving start-up funding. In 2024, more than 2,700 innovative start-ups were founded in Germany, the second-highest count after the record year of 2021. There is no shortage of innovative concepts and entrepreneurship per se, but implementation is lacking.

Further completing the European capital markets union (CMU)  is essential in this respect-promoting the development of the VC and private equity market as well as exit options for start-ups. The European Commission's ""Competitiveness Compass"", published recently, 29 January 2025, is a good start.

Second, we need to leverage digital technologies to create efficient, integrated and resilient European financial markets. The digital CMU could be a game changer in this respect.

Let me make it perfectly clear: Europe is a leader in this field.

We at the Bundesbank are engaged in several initiatives. And we have a prominent role to play in the development of a central bank digital currency (wholesale  CBDC).

## 4 Conclusion

Ladies and gentlemen, let me sum up: And I can be very brief, but still to the point.

The European Financial industry has to become an enabler of growth. Our Financial industry is key to ensure that the European economy stays competitive.

Thank you very much.

1 Zweijahresgutachten 2024   pp. 144, 151. See FAZ: 6, February 2025, p. 15.

2  G20 Engagement Groups Issue Joint Declaration on Artificial Intelligence - Data Privacy Brasil Research

- 3  ARTIFICIAL INTELLIGENCE AND ECONOMIC AND FINANCIAL POLICY MAKING A High-Level Panel of Experts' Report to the G7

4  Innovation in digital and clean-energy technologies boosts demand for patents in Europe in 2023 | epo.org

5 ARTIFICIAL INTELLIGENCE AND ECONOMIC AND FINANCIAL POLICY MAKING A High-Level Panel of Experts' Report to the G7, pp. 52 ff.",Sabine Mauderer
https://www.bis.org/review/r250219b.htm,Piero Cipollone: Striking the right balance - the European Central Bank's balance sheet and its implications for monetary policy,"Speech by Mr Piero Cipollone, Member of the Executive Board of the European Central Bank, at an MNI Connect webcast, Frankfurt am Main, 18 February 2025. ",2025-02-18 00:00:00,"SPEECH

## Striking the right balance: the ECB's balance sheet and its implications for monetary policy

## Speech by Piero Cipollone, Member of the Executive Board of the ECB, at an MNI Connect webcast

Frankfurt am Main, 18 February 2025

Today | would like to discuss the ECB's balance sheet and its implications for our monetary policy.

In recent years, the monetary policy debate has mainly focused on our interest rate decisions. This is for good reason. In response to the biggest inflation shock in a generation, we embarked on the fastest tightening of monetary policy in the ECB's history through rate hikes.

During this tightening phase, we used policy rates as the primary tool for setting our monetary policy stance, while normalising our balance sheet in a measured and predictable way. We initiated the gradual unwinding of our asset purchase programmes and recalibrated our targeted longer-term refinancing operations (TLTROs)."" As a result, the size of our balance sheet has fallen by more than a quarter from its peak.

Policy rates remain our primary instrument and will therefore continue to attract the most attention. But we should not underestimate the important role that our balance sheet policies have played over time as a component of our overall monetary policy stance and in ensuring the smooth transmission of our monetary policy to the real economy. This still holds true today as we make our monetary policy less restrictive.

Inflation has now fallen substantially to levels close to 2%. Our latest projections foresee it converging towards our target over the medium term, and the risks to the inflation outlook — once sharply skewed to the upside — have now become more balanced.

At the same time, the euro area's economic recovery remains weak — especially in the near term. The risks to the growth outlook are tilted to the downside and, if they materialise, may derail the recovery, with implications for the inflation outlook.

Against this background, the Governing Council has gradually been reducing the degree of monetary policy restriction by cutting policy rates towards neutral territory. While our direction is clear, we are very attentive to incoming information in view of the prevailing uncertainty about the economic environment. We continue to make decisions on a meeting-by-meeting and data-dependent basis. This gives us the option to adapt our interest rate path if necessary to ensure that inflation stabilises at our 2% medium-term sustainably target.

However, given the importance of financial conditions in determining the inflation outlook, we also need to consider the role played by the reduction of our balance sheet. In the tightening phase our rate decisions and balance sheet policies complemented each other, but they are now going in opposing directions.

This divergence has important implications across at least two dimensions.

First, it contributes to a steepening of the yield curve. Our rate cuts exert downward pressure primarily at the short end of the yield curve. At the same time, the gradual runoff of our asset purchase portfolios exerts upward pressure on long-term and, to a lesser extent, intermediate yields. This has been compounded by recent spillovers from the us 21

Second, it may affect credit supply. Declining levels of central bank liquidity could constrain banks' ability to extend credit, resulting in tighter credit conditions and potentially slowing down the investment and consumption that are critical for economic recovery.

In setting the policy stance, we therefore need to consider the impact of the overall set of financial conditions resulting from our interest rate and balance sheet policies. In other words, we need to strike the right balance if we are to achieve our inflation aim without an undue negative impact on incomes and employment. A rate cut has a more contained easing effect when the balance sheet is simultaneously reduced. This has implications when discussing the appropriate policy rate path.

We also need to consider the potential risks to the transmission of our monetary policy. In the past, abundant levels of liquidity have acted as a safeguard against spikes in liquidity needs that emerged regardless of where our rates stood. With this in mind, we need to carefully monitor the transition from abundant to less ample excess liquidity, mindful of the potential implications for financial stability.

Today, | would like to take stock of the ECB's experience with balance sheet policies, explaining why they remain a vital part of our monetary policy toolbox. | will then discuss the implications of the ECB's balance sheet for our monetary policy in the current environment.

## The ECB's experience with balance sheet policies

At the ECB, balance sheet policies have served a dual purpose over time, allowing us to deliver on our price stability mandate amid exceptionally difficult circumstances.

First, during periods when interest rates approached their effective lower bound and inflation remained below target, the ECB used asset purchases to support an accommodative monetary policy stance.

For instance, the ECB launched its asset purchase programme (APP) in 2015 to stimulate the economy and inflation at a time when deflationary threats loomed large. Asset purchases and the associated provision of central bank liquidity worked in several ways — including through the portfolio rebalancing, exchange rate and credit channels — to generate a significant upward effect on both economic activity and inflation.

Second, balance sheet policies have been pivotal to ensuring the smooth transmission of our monetary policy to the real economy, in both tightening and easing phases.

At times when we were lowering our policy rates, our TLTROs, launched in 2014, provided banks with long-term funding on favourable terms to incentivise them to lend to firms and households. This led to a persistent compression in lending rates and an increase in loan volumes over time.4

But balance sheet policies were also instrumental in ensuring the smooth transmission of monetary policy at times when we were increasing our policy rates. The announcement of our Transmission

Protection Instrument (TPI) in 2022 allowed us to embark on the fastest rate hiking cycle in our history without sparking financial fragmentation in the euro area.

Of course, the stance and transmission functions of our balance sheet policies do not operate in isolation. There can be beneficial interactions between the two.

As rates increased, for example, euro area banks had sufficient liquidity to manage any maturity mismatches that arose. This — alongside strengthened regulation and supervision — helped them to emerge unscathed from the market turbulence in March 2023 that saw the collapse of three regional banks in the United States.

## The proportionate use of balance sheet policies in an evolving economic landscape

The substantial expansion of the ECB's balance sheet required careful monitoring of potential side effects. That is why the principle of proportionality lies at the core of how we use our balance sheet instruments.

In its 2021 strategy review, the Governing Council assessed that its use of balance sheet measures — alongside negative interest rates and forward guidance — had indeed been proportionate, taking into account any side effects, for instance on inequality and the financial sector,

Some concerns, however, require a more nuanced perspective.

For example, there is little evidence to suggest that excessive risk appetite may be attributable to larger central bank balance sheets. If this were the case, we should have seen less risk-taking in markets as central banks began to withdraw their market footprint.

But the opposite has been the case. Today equity markets are near all-time highs. This may be due to

""animal spirits"", which have also been observed outside periods of central bank balance sheet growth. We saw them at play, for instance, during the dot-com bubble — a period when the cyclically adjusted price-to-earnings ratio hit its historic peak and central bank balance sheets were distinctly lean.

Moreover, as the Eurosystem gradually reduces its footprint in sovereign bond markets by reducing its holdings of euro area government bonds, concerns about the size of the balance sheet are becoming less and less justified (Chart 1).

Chart 1 Size of euro area bond market and the market

## government Eurosystem's footprint



Sources: Eurosystem and Centralised Securities Database.

Notes: The chart shows the evolution of the size of the euro area government bond market and splits it into outright holdings (yellow) and mobilised collateral (green), as well as what is not held or mobilised as collateral with the Eurosystem (blue). The Eurosystem market footprint is a relative measure, computed as the share of the Eurosystem's euro area government bond (EGB) holdings compared with the nominal amount outstanding. Outright holdings are EGBs held by the Eurosystem via purchase programmes, adjusted by EGBs lent back via the securities lending against cash collateral facilities. Mobilised collateral includes EGBs mobilised as collateral for open market operations. The latest observations are for 31 January 2025.

Going forward, an evolving economic landscape suggests that balance sheet policies could be increasingly useful as monetary policy instruments. Let me highlight two developments that are particularly relevant here.

First, the non-bank financial sector has grown considerably over time and is becoming increasingly relevant in the funding of the real economy.

In the euro area, the financial assets of non-banks have more than doubled since the global financial crisis. Compared with banks, non-banks are more responsive to monetary policy measures that purchases. 19]

influence longer-term interest rates, such as asset Given that non-banks adjust their portfolios more actively in response to changes in interest rates, this also increases the need for sufficient liquidity in the system to facilitate these adjustments.

Second, geopolitical fragmentation means that the global economy is becoming more shock prone and subject to higher levels of uncertainty (Chart 2).

Chart 2 Global Economic Policy Uncertainty index



Source: Bloomberg.

Note: The latest observation is for December 2024.

In this environment, we need to remember that the euro area is subject to fragmentation risk. A key lesson from the sovereign debt crisis is that balance sheet policies have been instrumental in making the euro area a more ""normal"" jurisdiction from the perspective of monetary policy.

As we navigate an increasingly complex economic landscape, the transition from abundant to less ample excess liquidity represents an inflection point that also requires close monitoring.

In this environment, banks' liquidity needs are met via a broad mix of instruments under our new operational framework. These include our short-term main refinancing operations (MROs) and threemonth longer-term refinancing operations (LTROs) and will also include — at a later stage — structural longer-term credit operations and a structural portfolio of securities.""

However, the decline in excess liquidity warrants careful monitoring, as it could exert additional tightening pressures on financial and financing conditions, potentially exceeding the intended policy stance.

## The implications of the ECB's balance sheet for monetary policy in the current environment

It is in this context that | would like to talk about the implications of our balance sheet for monetary policy in the current environment.

The ECB's balance sheet has been reduced at a faster pace than those of central banks in other major economies during their tightening cycles (Chart 3). So far, much of this decline can be attributed to banks' repayments of TLTRO loans. 12]

## Chart 3

## Central bank total assets



Sources: Bloomberg and ECB calculations.

Notes: The x-axis starts on 21 July 2022, 16 March 2022 and 15 December 2021 for the Eurosystem, Federal Reserve System, and Bank of England respectively. For the Bank of England, reserve balances are used as a proxy for the total balance sheet. The latest observations are for 12 February 2025.

Looking ahead, however, any further reduction in the size of our balance sheet will stem from the gradual unwinding of our asset purchase portfolios, as the Eurosystem no longer reinvests the principal payments from maturing securities.

As in the past, the normalisation of our balance sheet has implications for our monetary policy stance and the possible risks to monetary policy transmission.

## The monetary policy stance

Let me start with the implications for our monetary policy stance.

Our reaction function for rate decisions is built around three well-known criteria: (i) the inflation outlook, (ii) the dynamics of underlying inflation and (iii) the strength of monetary policy transmission.

Inflation has fallen by around three-quarters from its peak in late 2022 (Chart 4). The disinflation process is well on track, and our staff projections see inflation averaging 2.1% this year, 1.9% next year and 2.1% in 2027.

## Chart 4

## Headline inflation



Source: Eurostat.

Note: The latest observation is for January 2025 (flash estimate).

Most measures of underlying inflation suggest that inflation will settle at around our 2% medium-term target on a sustained basis. In particular, the ECB's measure of the persistent and common component of inflation (PCCI)""5] — a more forward-looking indicator of underlying inflationary pressures that tends to better predict future inflation — stood at 2.1% in December, and 2.0% when excluding energy.

Domestic inflation remains high, as wages and prices in certain sectors are still adjusting to the past inflation surge with a substantial delay. But our wage tracker is signalling a significant moderation in wage growth, and profits are partially buffering the impact on inflation.

It is the third leg of our reaction function — the strength of monetary policy transmission — that | would like to discuss in more detail, however.

As we cut interest rates, new borrowing for firms and households is becoming less expensive. But financing conditions continue to be tight — in part because our monetary policy remains restrictive and past rate hikes are still working their way through the economy.4I

While credit continues to expand, lending to firms and households remains subdued by historical standards. In December, the annual growth rate of lending to firms was roughly two-thirds below its historical average.45] Growth in housing loans increased gradually but also remained muted overall, at around one-fifth of its long-term average (Chart 5).{19]

## Chart 5

## Loans to firms and households



Sources: ECB (BSI) and ECB staff calculations.

Note: The latest observations are for December 2024.

At the same time, the recent gradual recovery in lending has not kept pace with the nominal growth of the economy, as reflected in the continued decline of the loan-to-GDP ratio (Chart 6).

## Chart 6

## Ratio of bank loans to GDP



Sources: ECB (BSI), Eurostat and ECB staff calculations.

Note: The latest observation is for the third quarter of 2024.

While policy rates remain our primary instrument for adjusting our monetary policy stance, the normalisation of our balance sheet may also affect the stance through two key channels.

First, while our rate cuts exert downward pressure primarily at the short end of the yield curve, our quantitative tightening exerts upward pressure on long-term maturities and, to a lesser extent, intermediate ones. This serves to tighten financial conditions.""

Indeed, the runoff of the asset portfolios of central banks has arguably been one of several factors contributing to a steepening of sovereign yield curves in recent months — akin to a reversal of the duration risk channel previously associated with central banks through quantitative easing (Chart 7).

## Chart 7

## New duration risk absorbed by private investors



Sources: Bloomberg and ECB.

Notes: The chart shows the month-on-month change in the duration of government bonds held by private investors (i.e. investors other than the domestic central bank). Rates are approximated by weighted average maturity.

At its peak in early 2022, the impact of current and expected Eurosystem bond holdings in our asset portfolios lowered ten-year sovereign bond yields by around 175 basis points./8) Due to quantitative tightening, however, the easing impact has now fallen to around 75 basis points and is expected to further reduce over time (Chart 8).

Chart 8 of APP and PEPP bond on risk

Impact sovereign holdings ten-year sovereign premia



Source: ECB calculations.

Notes: The impacts are derived from an affine arbitrage-free model of the term structure with a quantity factor (see Eser et al., op. cit.) and an alternative version of the model recalibrated so that the model-implied yield reactions to the March PEPP announcement match the two-day yield changes observed after 18 March 2020. The model results are derived using GDP-weighted averages of the zero-coupon yields of the big-four sovereign issuers (DE, FR, IT and ES). The continuous line represents estimates based on real-time survey expectations. The dashed line is based on projections of the Eurosystem's holdings of big-four sovereign bonds in the APP and PEPP as informed by the ECB's December 2024 Survey of Monetary Analysts. The model abstracts from any potential holdings in a structural portfolio of securities. The latest observations are for January 2025 (monthly data).

According to ECB research, an expected €1 trillion reduction in bond holdings may raise long-term risk-free interest rates by about 35 basis points (Chart g),09]

Chart 9 Expected term premium impact from running down the asset portfolio by €1 trillion



Sources: ECB December 2024 Survey of Monetary Analysts (SMA) and Akkaya, Y. et al., op.cit.

Notes: The chart depicts the expected effect on the term premium of various assets with a ten-year maturity resulting from an expected €1 trillion decrease in the ECB's bond holdings. Results are based on individual SMA responses from December 2022 until December 2023.

Second, an environment marked by declining levels of central bank liquidity may constrain banks' ability to extend credit.

Research documents the strong relationship between loan supply and structural sources of liquidity, such as reserves obtained through credit easing programmes or those injected through quantitative easing interventions.

More specifically, a €1 change in non-borrowed reserves or credit easing reserves is associated with a corresponding change in credit of approximately 15 cents or 10 cents respectively.29] In other words, a €500 billion drop in non-borrowed reserves — similar to the one expected in 2025 as a result of the decline in our APP and PEPP holdings — is associated with a €75 billion decline in credit supply, equivalent to about 0.6 percentage points of downward pressure on loans to the non-financial private sector,21]

Accordingly, as central bank liquidity declines, we may see tighter credit conditions in the economy. This could slow down investment and consumption, with firms cutting back on capital expenditure and consumers reducing purchases of big-ticket items that require financing.!221

Incoming data suggest that euro area GDP growth will remain subdued in the short term. Industrial production decreased notably in December and surveys indicate that manufacturing is continuing to contract, whereas services activity is expanding at a moderate pace (Chart 10).

## Chart 10

## Purchasing Managers' Index



Source: S&amp;P Global.

Notes: ""Output"" and ""New orders"" correspond to the manufacturing and composite indices, and ""Business activity"" and ""New business"" to the services index. The latest observations are for January 2025.

Given the uncertain economic environment, we are yet to see a sustained rebound in investment (Chart 11).23] And while we continue to expect consumption to be the main driver of the recovery, rising real incomes have not yet encouraged households to increase their spending in a commensurate manner (Chart 12),241 In the face of subdued domestic demand, our latest staff projections forecast a slower economic recovery than had been forecast in the September projections. [25]

## Chart 11

## Detailed decomposition of euro area real GDP

(quarter-on-quarter percentage changes and percentage point contributions)

- @ Real GDP
- © Private consumption
- @ Government consumption
- @ Gross fixed capital formation
- @ Net exports
- @ Changes in inventories



Sources: Eurostat and ECB staff calculations.

Note: The latest observations are for the fourth quarter of 2024 for real GDP, and for the third quarter of 2024 for the other components.

## Chart 12

## Real household disposable income and consumption



Sources: Eurostat and ECB staff calculations.

Note: The latest observations are for the third quarter of 2024.

Moreover, geopolitical risks may create further headwinds for the recovery, which we will need to monitor carefully. Forthcoming findings from the ECB's Consumer Expectations Survey (CES) suggest that consumers' concerns about geopolitical risks are negatively affecting economic sentiment — leading to more pessimistic expectations, more elevated income uncertainty and, ultimately, a lower propensity to consume.

We are determined to ensure that inflation stabilises sustainably at our 2% medium-term target. As we gradually cut rates towards neutral territory, we need to be mindful of the fact that we now have two monetary policy tools working in opposing directions, given our ongoing quantitative tightening. This is a first in our history at the ECB.

We therefore need to ensure that we factor in the tightening of our balance sheet when calibrating our rate cuts to achieve our inflation aim. This is because the stance effects stemming from our rate cuts will be somewhat dampened by the tightening induced by the normalisation of our balance sheet.

This is an important consideration when discussing the appropriate policy rate path.

## Risks to the transmission of our monetary policy

Similarly, we need to be mindful of the possible risks to the transmission of our monetary policy to the real economy in view of the prevailing uncertainty and potential risks to financial stability.

This cautious approach is crucial, especially given historical precedents where central banks faced unexpected challenges.

In late 2019, for instance, the Federal Reserve System was unexpectedly forced to temporarily reverse its balance sheet retrenchment due to liquidity challenges in financial markets.2] In 2022 the Bank of England halted quantitative tightening and launched emergency gilt purchases to safeguard financial stability after pension funds' liability-driven investment strategies exposed systemic risks.24 Recent bouts of market volatility also underscore that we should remain alert to the emergence of financial stability risks that may endanger transmission. Last August several factors converged to spark substantial market volatility.[28] The VIX, a market index that measures the implied volatility of the S&amp;P 500 index, recorded its largest ever one-day spike (Chart 13).22]

Chart 13 VIX index



Source: ECB staff calculations.

Notes: Long run average calculated since January 2000. The latest observations are for 7 February 2025.

Faced with such episodes of volatility, the further decline in our balance sheet must remain on a gradual and predictable path to avoid financial amplification effects. This is especially important in an environment where euro area banks are already tightening their credit standards, especially for firms and consumer credit, due to higher perceived risks related to the economic outlook (Chart 14).

[31]

## Chart 14

## Credit standards, demand for loans to firms and contributing factors



Source: ECB (bank lending survey).

Notes: ""Actual"" values are changes that have occurred, while ""expected"" values are changes anticipated by banks. Net percentages for the questions on credit standards for loans are defined as the difference between the sum of the percentages of banks responding ""tightened considerably"" and ""tightened somewhat"" and the sum of the percentages of banks responding ""eased somewhat"" and ""eased considerably"". Net percentages for the questions on demand for loans are defined as the difference between the sum of the percentages of banks responding ""increased considerably"" and ""increased somewhat"" and the sum of the percentages of banks responding ""decreased somewhat"" and ""decreased considerably"". ""Other financing needs"" as unweighted average of ""M&amp;A and corporate restructuring"" and ""debt refinancing/restructuring and renegotiation""; ""Use of alternative finance"" as unweighted average of ""internal financing"", ""loans from other banks"", ""loans from nonbanks', ""issuance/redemption of debt securities"" and ""issuance/redemption of equity"". The net percentages for ""Other factors"" refer to an average of the further factors which were mentioned by banks as having contributed to changes in credit standards or changes in loan demand, respectively. The latest observations are for the fourth quarter of 2024 (January 2025 bank lending survey).

Our balance sheet policy instruments continue to be a crucial item in our toolbox. The expectation that we will use them if necessary protects the smooth transmission of our monetary policy and reduces the likelihood that we will need to use these tools in the first place.

Moreover, in an environment of heightened uncertainty, even in the context of excess liquidity, we need to remain prudent and be ready to step in should another shock emerge. We should maintain the flexibility to swiftly expand liquidity facilities if stressful conditions arise.

## Conclusion

Let me conclude.

The ECB's experience with balance sheet policies to date demonstrates their importance both for the monetary policy stance and for the transmission of our monetary policy to the real economy. They are a vital part of our toolkit.

While policy rates remain our primary instrument for adjusting the monetary policy stance, we should also consider the role played by quantitative tightening in influencing overall financial and financing conditions — be it through the yield curve or through the bank lending channel.

To strike the right balance, we should ensure that our rate decisions adequately compensate for the tightening induced by the reduction of our balance sheet.

Thank you.

## Annexes

18 February 2025

## Slides

1.

In December 2021 the Governing Council decided to discontinue net asset purchases under the pandemic emergency purchase programme (PEPP) at the end of March 2022 and adjusted the path of net asset purchases under the asset purchase programme (APP). In addition, in October 2022 the Governing Council decided to recalibrate the third series of targeted longer-term refinancing operations (TLTRO III) as part of the monetary policy measures adopted to restore price stability over the medium term.

2.

The tightening of policy expectations and long-term rates in the US over the fourth quarter of 2024 and the first weeks of 2025 has exerted upward pressure on euro area long-term yields.

3.

See, for instance, Rostagno, M. et al. (2021), Monetary policy in times of crisis: A Tale of Two Decades of the European Central Bank, Oxford University Press; Arce, O. et al. (2020), ""A Large Central Bank Balance Sheet? Floor vs. Corridor Systems in a New Keynesian Environment"", Journal of Monetary Economics, Vol. 114, October, pp. 350-67; Andrade, P. et al. (2016), ""The ECB's asset purchase programme: an early assessment"", Working Paper Series, No 1956, ECB, Frankfurt am Main,

September; Rostagno, M. et al. (2021), ""Combining negative rates, forward guidance and asset purchases: identification and impacts of the ECB's unconventional policies"", Working Paper Series, No 2564, ECB, Frankfurt am Main, June; and Sims, E. and Wu, J.C. (2021), ""Evaluating Central Banks' tool kit: Past, present, and future"", Journal of Monetary Economics, Vol. 118, March, pp. 135-160.

Benetton, M. and Fantino, D. (2021), ""Targeted monetary policy and bank lending behavior', Journal of Financial Economics, Vol. 142, No 1, October, pp. 404-429; Altavilla, C. et al. (2020), ""Mending the broken link: Heterogeneous bank lending rates and monetary policy pass-through"", Journal of Monetary Economics, Vol. 110, April, pp. 81-98; Barbiero, F. et al. (2024), ""Targeted monetary policy, dual rates, and bank risk-taking"", European Economic Review, Vol. 170, November.

5.

Proportionality is a fundamental principle of EU law that requires that any action taken by the ECB is suitable, necessary and proportionate to the objectives pursued. See Chiti, M.P. et al. (2020), ""The Principle of Proportionality and the European Central Bank"", European Public Law, Vol. 26, No 3. 6.

""Assessing the efficacy, efficiency and potential side effects of the ECB's monetary policy instruments since 2014"", Occasional Paper Series, No 278, ECB, Frankfurt am Main, September.

7.

""Animal spirits"" is a Keynesian expression referring to human psychological factors influencing investment decisions. See also Akerlof, G. and Schiller, R. (2009), Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism, Princeton University Press. 8.

Historically, the main concerns surrounding a large market footprint have been that: (i) it exerts downward pressure on term and credit risk premia, thereby flattening the yield curve; (ii) it may increase collateral scarcity and thus lead to strains in repo markets; (iii) it may reduce the space to undertake monetary policy easing in the future in times of stress or when rates are at the effective lower bound; and (iv) it should not become larger than needed to steer rates.

9.

Financial Stability Committee (FSC) high level task force on NBFI (2024), ""Eurosystem response to EU Commission's consultation on macroprudential policies for non-bank financial intermediation (NBEI)"", November.

10.

Work stream on non-bank financial intermediation (2021), ""Non-bank financial intermediation in the Series, No 270, ECB, Frankfurt am Main, September.

11. monetary policy"", March.

ECB (2024), ""Changes to the operational framework for implementing 13 12.

All TLTRO III loans were paid back in full by the end of 2024.

13.

Banbura, M. and Bobeica, E. (2020), ""BCCI — a data-rich measure of underlying inflation in the euro area"", Statistics Paper Series, ECB, No 38, October.

## 14.

In addition, the aggregate lending rate can be influenced by composition effects. First, a loan's price is only observed if the borrower is not discouraged and the lender does not reject the application. Second, a significant shift from riskier to safer borrowers can exert downward pressure on lending rates — without this rebalancing, rates would be higher. Evidence from both hard and soft data supports the presence of such downward pressure.

15.

In December, the annual growth rate of lending to firms edged up to 1.5% — still well below the historical average of 4.3%.

16.

In December, housing loans grew at an annual rate of 1.1% — significantly below the long-term average of 5.1%.

17.

Recent evidence indicates that interest rates remain sensitive to quantitative tightening surprises even during periods of market calm and positive economic growth (see D'Amico, S. and Seida, T. (2024), ""Unexpected Supply Effects of Quantitative Easing and Tightening"", The Economic Journal, Vol. 134, No 658, February, pp. 579-613; and Lloyd, S. and Ostry, D. (2024), ""The asymmetric effects of quantitative tightening and easing on financial markets"", Economics Letters, Vol. 238, May).

18.

The sovereign bond yield here relates to an average of the ""big four"" economies, i.e. Germany, France, Italy and Spain.

19.

long-term interest rates?"", The ECB Blog, 14 November. Similar results are obtained in Costain, J., Barrau, G.N. and Thomas, C. (2024), ""Ihe term structure of interest rates in a heterogenous monetary union"", BIS Working Papers, No 1165, Bank for International Settlements, 1 February. Importantly, these results underscore that the estimated impact of quantitative tightening on long-term interest rates is broadly comparable in magnitude to the inverse effects of quantitative easing documented in previous studies (see, for example, Eser, F. et al. (2023), ""Tracing the Impact of the ECB's Asset Purchase Program on the Yield Curve"", /nternational Journal of Central Banking, Vol. 19, No 3,

August; and Altavilla, C. et al. (2021), ""Asset Purchase Programs and Financial Markets: Lessons from the Euro Area"", International Journal of Central Banking, Vol. 17, No 4, October). 20.

Altavilla, C., Rostagno, M. and Schumacher, J. (2024), ""When banks hold back: credit and liquidity provision"", Working Paper Series, No 3009, ECB, Frankfurt am Main.

21.

A similar quantification is obtained in Altavilla, C. et al., ""Central Bank Liquidity Reallocation and Bank Lending: Evidence from the Tiering System"", Journal of Financial Economics (forthcoming). The findings of this paper highlight that a reduction in central bank reserves affecting banks with lower liquidity holdings can have significant contractionary effects on loan supply.

22.

For theoretical and empirical evidence on how quantitative tightening affects the real economy, see Kumhof, M. and Salgado-Moreno, M. (2024), ""Quantitative easing\_and quantitative tightening: the money channel"", Staff Working Papers, No 1090, Bank of England, August; and Altavilla, C. et al. (2024), op. cit.

23.

In the third quarter of 2024, investment growth was entirely explained by an exceptional rise in Irish non-construction investment. Excluding Ireland, investment contracted by 0.6% in the third quarter. See Cipollone, P. (2025), ""Interview with Reuters"", 6 February.

24.

Baumann, A. et al. (2025), ""Are real incomes increasing\_or not? Household perceptions and their role for consumption"", Economic Bulletin, |ssue 1, ECB.

25.

ECB (2024), ""Eurosystem staff macroeconomic projections for the euro area, December 2024"", December.

26.

of Governors of the Federal Reserve System, 27 February.

27.

Pinter, G. (2023), ""An anatomy of the 2022 gilt market crisis"", Staff Working Papers, No 1019, Bank of England, March.

28.

These included a weaker-than-expected US jobs report, diminished market liquidity during the summer break and a rapid unwinding of yen-funded carry trades.

29.

Todorov, K. and Vilkov, G. (2024), ""Anatomy of the VIX spike in August 2024"", BIS Bulletin, No 95, Bank for International Settlements, 29 October.

30.

On the interaction between liquidity and the external finance premium, see Altavilla, C. et al. (2024), ""Macro and micro of external finance premium and monetary policy transmission"", Journal of Monetary Economics, Vol. 147, Supplement, October.

31.

See ECB (2025), ""The euro area bank lending survey — Fourth quarter of 2024"", January.

Copyright 2025, European Central Bank",Piero Cipollone
https://www.bis.org/review/r250219a.htm,Michael S Barr: Artificial intelligence - hypothetical scenarios for the future,"Speech by Mr Michael S Barr, Vice Chair for Supervision of the Board of Governors of the Federal Reserve System, at the Council on Foreign Relations, New York City, 18 February 2025.",2025-02-18 00:00:00,"For release on delivery 1:00 p.m. EDT February 18, 2025

Artificial Intelligence:  Hypothetical Scenarios for the Future

Remarks by

Michael S. Barr

Vice Chair for Supervision

Board of Governors of the Federal Reserve System at

Council on Foreign Relations

New York, New York

February 18, 2025

Advances in artificial intelligence (AI) have accelerated rapidly over the past few years. 1 It is now commonplace to see autonomous vehicles navigating city streets, and generative AI tools are available on phones and other devices wherever we go.  AI innovations make headlines and play a big role in financial markets, and generative AI has the potential to change how we think about productivity, labor markets and the macroeconomy. 2 Today, I will address that question by outlining two hypothetical scenarios for AI's impact and the implications for businesses, regulators, and society.  I will focus my comments on Generative AI, or GenAI, a subset of AI that has seen significant growth and integration into economic activity in just a few short years.

## GenAI and Its Adoption

Compared to earlier iterations of AI, GenAI is able to generate content, which allows it to significantly enhance productivity across a range of knowledge-based activities and be used by people without coding skills.  GenAI will likely become a 'general purpose technology,' with widespread adoption, continuous improvement, and productivity enhancements to a wide range of sectors across the economy.  We are already seeing GenAI improve the productivity of its own R&amp;D. 3   There is widespread enthusiasm for GenAI, and survey evidence shows much faster rates of consumer adoption of GenAI already than were seen for the personal computer or the

1 The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board.

2 See, for instance, Lisa D. Cook, 'Artificial Intelligence, Big Data, and the Path Ahead for Productivity,' (speech at Technology-Enabled Disruption: Implications of AI, Big Data, and Remote Work Conference, Atlanta, Georgia, October 1, 2024), https://www.federalreserve.gov/newsevents/speech/cook20241001a.htm.

3  See Gaurav Sett, 'How AI Can Automate AI Research and Development,' RAND Commentary , October 24, 2024, https://www.rand.org/pubs/commentary/2024/10/how-ai-can-automate-ai-research-and-development.html.

internet. 4 While actual deployment of GenAI is limited to some business functions, and there have been pitfalls along the way, businesses in almost every sector are experimenting with or considering how to make use of the technology. 5

Firms are also exploring Agentic AI-Gen AI systems that not only produce new content, but are also able to proactively pursue goals by generating innovative solutions and acting upon them at speed and scale. 6 Imagining Agentic AI's ultimate application, some speculate that we could experience a 'country of geniuses in a data center'-a collective intelligence that surpasses human capabilities in problem-solving and collaboration. 7 Some believe Agentic AI has the potential to connect ideas in disparate domains, potentially transforming research and development and society more broadly. 8

4  See Cory Breaux and Emin Dinlersoz, 'How Many U.S. Businesses Use Artificial Intelligence?' (Washington: U.S. Census Bureau, November 28, 2023), https://www.census.gov/library/stories/2023/11/businesses-use-ai.html; Alexander Bick, Adam Blandin, and David J. Deming, 'The Rapid Adoption of Generative AI,' NBER Working Paper No. 32966 (Cambridge, MA: National Bureau of Economic Research, September 2024, revised February 2025), https://www.nber.org/papers/w32966; and Leland Crane, Michael Green, and Paul Soto, 'Measuring AI Uptake in the Workplace,' FEDS Notes (Washington: Board of Governors of the Federal Reserve System, February 5, 2025), https://doi.org/10.17016/2380-7172.3724.

5  There's evidence of firms experimenting with these tools and then abandoning them-due to a multitude of reasons. See Kathryn Bonney, Cory Breaux, Cathy Buffington, Emin Dinlersoz, Lucia S. Foster, Nathan Goldschlag, John C. Haltiwanger, Zachary Kroff, and Keith Savage, 'Tracking Firm Use of AI in Real Time: A Snapshot from the Business Trends and Outlook Survey,' NBER Working Paper No. 32319 (Cambridge, MA: National Bureau of Economic Research, April 2024), https://www.nber.org/papers/w32319.

6  For more on Agentic AI's uses, advantages, and risks, see Mark Purdy, 'What Is Agentic AI, and How Will It Change Work?' Harvard Business Review (December 12, 2024), https://hbr.org/2024/12/what-is-agentic-ai-andhow-will-it-change-work.

7  See Dario Amodei, 'Machines of Loving Grace,' October 2024, https://darioamodei.com/machines-of-lovinggrace.

8  For biology and drug discovery, see Jean-Philippe Vert, 'Unlocking the Mysteries of Complex Biological Systems with Agentic AI,' MIT Technology Review (November 13, 2024), https://www.technologyreview.com/2024/11/13/1106750/unlocking-the-mysteries-of-complex-biological-systemswith-agentic-ai; and 'Owkin Announces First Patient Dosed in Phase I AI-Optimized Clinical Trial of OKN4395, a First-in-Class EP2/EP4/DP1 Triple Inhibitor for Patients with Solid Tumors,' Business Wire, January 30, 2025, https://www.businesswire.com/news/home/20250130436779/en/Owkin-Announces-First-Patient-Dosed-in-Phase-IAI-optimized-Clinical-Trial-of-OKN4395-a-First-in-Class-EP2EP4DP1-Triple-Inhibitor-for-Patients-with-SolidTumors.

## Hypothetical Scenarios Considering How GenAI Could Evolve

Today, I will outline two hypothetical scenarios for considering how GenAI could evolve. 9 In one, we see only incremental adoption that primarily augments what humans do today, but still leads to widespread productivity gains.  In the other, we see transformative change where we extend human capabilities with far-reaching consequences.  For each scenario, I consider the potential implications for the economy and financial sector.

Thinking through hypothetical scenarios can help widen our lens to a range of possible outcomes and provide a framework for assessing the balance between benefits and risks. Scenarios are not predictions of the future, but provide a framework for analyzing the factors that could lead to different outcomes.  Reality is complex.  GenAI adoption rates will vary across industries, leading to diverse impacts on market structures.  Elements of both scenarios will likely come to pass, and play out at different rates, which will influence the effects on the economy and society.  In the short term, GenAI may be overhyped, while in the long run, it may be underappreciated.  And, of course, things might turn out differently from these hypotheticals.

## Hypothetical 1: Incremental Progress with Widespread Productivity Gains

First, let me begin with the incremental scenario, where GenAI primarily augments work in existing processes and leads to steady and widespread productivity gains, but does not fundamentally unlock new capabilities or transform the economy.

9  Others have used other types of scenarios. See Anton Korinek, 'The Economics of Transformative AI,' The Reporter (Cambridge, MA: National Bureau of Economic Research, December 31, 2024),

https://www.nber.org/reporter/2024number4/economics-transformative-ai; Iñaki Aldasoro, Leonardo Gambacorta,

Anton Korinek, Vatsala Shreeti, and Merlin Stein, 'Intelligent Financial System: How AI Is Transforming Finance,'

BIS Working Papers

No. 1194 (Basel, Switzerland: Bank for International Settlements, June 2024), https://www.bis.org/publ/work1194.pdf; and Ethan Mollick,

Co-Intelligence: Living and Working with AI

(New

In this state of the world, GenAI tools enhance efficiency and enable more personalized solutions across industries, in ways that have incremental-but still meaningful-effects on people's lives.  For instance, in customer service, professional writing-but not this speech-and software engineering, GenAI-powered tools are already supporting workers, improving accuracy and speed, and these effects could spread to other sectors. 10 In this world, health care sees significant improvements as GenAI reduces administrative burdens, assists with diagnostics, and personalizes treatment plans based on real-time patient data.  Medicines and other treatments are developed at a faster pace. 11 Education is similarly affected, as GenAI alleviates administrative

10  For worker productivity gains in customer service, see Erik Brynjolfsson, Danielle Li, and Lindsey R. Raymond, 'Generative AI at Work,' NBER Working Paper No. 31161 (Cambridge, MA: National Bureau of Economic Research, April 2023, revised November 2023), https://www.nber.org/papers/w31161. For GenAI assisted writing gains, see Shakked Noy and Whitney Zhang, 'Experimental Evidence on the Productivity Effects of Generative Artificial Intelligence,' Science , vol. 381, no. 6654 (July 2023): 187-92, https://doi.org/10.1126/science.adh2586; Jordan Usdan, Allison Connell Pensky, and Harley Chang, 'Generative AI's Impact on Graduate Student Writing Productivity and Quality,' SSRN (August 29, 2024), https://dx.doi.org/10.2139/ssrn.4941022. For software engineering, see Sida Peng, Eirini Kalliamvakou, Peter Cihon, and Mert Demirer, 'The Impact of AI on Developer Productivity: Evidence from GitHub Copilot,' arXiv:2302.06590, February 13, 2023, https://doi.org/10.48550/arXiv.2302.06590; Leonardo Gambacorta, Han Qiu, Shuo Shan, and Daniel M. Rees, 'Generative AI and Labour Productivity: A Field Experiment on Coding,' BIS Working Papers No. 1208 (Basel, Switzerland: Bank for International Settlements, September 2024), https://www.bis.org/publ/work1208.pdf; Zheyuan (Kevin) Cui, Mert Demirer, Sonia Jaffe, Leon Musolff, Sida Peng, and Tobias Salz, 'The Effects of Generative AI on High-Skilled Work: Evidence from Three Field Experiments with Software Developers,' SSRN (September 5, 2024, revised February 10, 2025), https://dx.doi.org/10.2139/ssrn.4945566. For worker gains in the consulting industry, see Fabrizio Dell'Acqua, Edward McFowland III, Ethan Mollick, Hila Lifshitz-Assaf, Katherine C. Kellogg, Saran Rajendran, Lisa Krayer, François Candelon, and Karim R. Lakhani, 'Navigating the Jagged Technological Frontier: Field Experimental Evidence of the Effects of AI on Knowledge Worker Productivity and Quality,' Harvard Business School Working Paper No. 24-013 (September 2023), https://www.hbs.edu/ris/Publication%20Files/24-013\_d9b45b68-9e74-42d6-a1c6-c72fb70c7282.pdf. 11  See Ethan Goh, Robert Gallo, Jason Hom, et al., 'Large Language Model Influence on Diagnostic Reasoning: A Randomized Clinical Trial,' JAMA Network Open (October 28, 2024), https://jamanetwork.com/journals/jamanetworkopen/fullarticle/2825395; Nikhil Agarwal, Alex Moehring, Pranav Rajpurkar, and Tobias Salz, 'Combining Human Expertise with Artificial Intelligence: Experimental Evidence from Radiology,' NBER Working Paper No. 31422 (Cambridge, MA: National Bureau of Economic Research, July 2023, revised March 2024), https://www.nber.org/papers/w31422; Ashley Capoot, 'Reid Hoffman Enters 'Wondrous and Terrifying' World of Health Care with Latest AI Startup,' CNBC, February 2, 2025, https://www.cnbc.com/2025/02/02/reid-hoffman-launches-manas-ai-a-new-drug-discovery-startup.html; Kang Zhang, Xin Yang, Yifei Wang, Yunfang Yu, Niu Huang, Gen Li, Xiaokun Li, Joseph C. Wu, and Shengyong Yang, 'Artificial Intelligence in Drug Development,' Nature Medicine , vol. 31 (January 2025): 45-59, https://doi.org/10.1038/s41591-024-03434-4; Qian Liao, Yu Zhang, Ying Chu, Yi Ding, Zhen Liu, Xianyi Zhao, Yizheng Wang, Jie Wan, Yijie Ding, Prayag Tiwari, Quan Zou, and Ke Han, 'Application of Artificial Intelligence in Drug-Target Interactions Prediction: A Review,' NPJ Biomedical Innovations , vol. 2, no. 1 (January 2025), https://doi.org/10.1038/s44385-024-00003-9.

tasks for teachers, allows lessons to be tailored to individual students, and permits students to learn by doing. 12 In manufacturing, GenAI-optimized supply chains anticipate and adjust more quickly to disruptions, and current manufacturing processes are refined through virtual iteration. 13 In materials science, GenAI-driven experimentation accelerates the discovery of new materials, leading to advances in everything from construction to electronics. 14 Turning to the financial sector, we could see similar productivity gains.  Community banks leverage GenAIpowered chatbots to provide customized financial advice rooted in local knowledge, while institutions of all sizes continue to advance use of GenAI for compliance monitoring, fraud detection, risk management, and document analysis. 15

12  For more on education, see Justin Wolfers, 'An Econ Educators Guide to our AI-Powered Future,' Macmillan Learning, EconEd (presentation), September 26, 2024,

https://www.macmillanlearning.com/college/us/events/econed#:~:text=Justin%20Wolfers%20Speaks%20at%20Eco nEd%202024&amp;text=He%20discusses%20AI%20tools%20like,focus%20on%20core%20economic%20principles; and Anne J. Manning, 'Professor Tailored AI Tutor to Physics Course. Engagement Doubled,' Harvard Gazette , September 5, 2024, https://news.harvard.edu/gazette/story/2024/09/professor-tailored-ai-tutor-to-physics-courseengagement-doubled.

13  See Maxime C. Cohen and Christopher S. Tang, 'The Role of AI in Developing Resilient Supply Chains,' Georgetown Journal of International Affairs (February 5, 2024), https://gjia.georgetown.edu/2024/02/05/the-role-ofai-in-developing-resilient-supply-chains; and Remko Van Hoek and Mary Lacity, 'How Global Companies Use AI to Prevent Supply Chain Disruptions,' Harvard Business Review , November 21, 2023, https://hbr.org/2023/11/howglobal-companies-use-ai-to-prevent-supply-chain-disruptions.

14  See Sheldon Fernandez, 'How Generative AI Can Be Used in Electronics,' Forbes , April 26, 2023, https://www.forbes.com/councils/forbestechcouncil/2023/04/26/how-generative-ai-can-be-used-in-electronicsmanufacturing.

15  For U.S. financial institutions, see Elizabeth Judd, 'How to Balance Human and Machine While Using Chatbots,' Independent Banker , January 1, 2025, https://www.independentbanker.org/article/2025/01/01/chatbots-finding-abalance-between-human-and-machine; and U.S. Department of the Treasury, 'Artificial Intelligence in Financial Services' (Washington: U.S. Department of the Treasury, December 2024),

https://home.treasury.gov/system/files/136/Artificial-Intelligence-in-Financial-Services.pdf. For foreign financial institutions, see Bank of England and Financial Conduct Authority, 'Artificial Intelligence in UK Financial Services-2024' (London: Bank of England and Financial Conduct Authority, November 21, 2024), https://www.bankofengland.co.uk/report/2024/artificial-intelligence-in-uk-financial-services-2024; and Bank of Japan, 'Use and Risk Management of Generative AI by Japanese Financial Institutions,' Financial System Report Annex (Tokyo: Bank of Japan, October 29, 2024), https://www.boj.or.jp/en/research/brp/fsr/fsrb241029.htm. For global financial institutions, see OECD, 'FSB Roundtable on Artificial Intelligence (AI) in Finance,' Financial Stability Board, September 30, 2024, https://www.oecd.org/content/dam/oecd/en/topics/policy-sub-issues/digitalfinance/OECD%20%E2%80%93%20FSB%20Roundtable%20on%20Artificial%20Intelligence%20(AI)%20in%20 Finance.pdf.

The impact to society would be incrementally positive in this state of the world.  Humans would use GenAI as a tool to deliver goods and services that we currently produce in a more efficient way.  Productivity would go up.  The economy would grow at a faster pace. 16

What does this mean for the labor force?  The impact will depend on the industry and the nature of the job.  GenAI experiments suggest the technology holds the promise of levelling up skills and bringing productivity of lower-performing workers into line with higher performing workers. 17 In other cases, it could augment the highest performers, leaving them more time for creativity or strategic aspects of their roles.  Increasing automation for certain tasks may displace some workers, where certain skills can be replicated by GenAI.  Historically, as technology has replaced some jobs, it has augmented existing roles or created new ones. 18 However, this is not to downplay the individual cost for workers who need to retrain, find other employment, or change careers in response to major changes in labor demand.  Society will need to account for these possible effects of AI.

What does this mean for the economy?  As I noted before, the economy should grow, if the incremental productivity gains are widespread.  However, in this scenario, it is possible that the expected value creation from GenAI was overhyped, anticipating transformative breakthroughs rather than incremental productivity gains.  This could trigger market corrections for the firms that have heavily invested in this technology if reality doesn't measure up to

16  Lida R. Weinstock and Paul Tierno, 'The Macroeconomic Effects of Artificial Intelligence,' Congressional Research Service, January 28, 2025, https://crsreports.congress.gov/product/pdf/IF/IF12762.

17  See Shakked Noy and Whitney Zhang, 'Experimental Evidence on the Productivity Effects of Generative Artificial Intelligence,' Science, vol. 381, no. 6654 (July 13, 2023): 187-92,

https://doi.org/10.1126/science.adh2586; Brynjolfsson et al., 'Generative AI at Work' (see footnote 9); and 'for software engineering' from footnote 9; Korinek (2024) from footnote 7.

18  See David H. Autor, 'Why Are There Still So Many Jobs? The History and Future of Workplace Automation,' Journal of Economic Perspectives , vol. 29, no. 3 (Summer 2015): 3-30,

https://www.aeaweb.org/articles?id=10.1257/jep.29.3.3.See Simona Abis and Laura Veldkamp.

expectations.  While the U.S. economy experienced a surge of productivity growth during the dot.com boom in the late 1990s, it was followed by a wave of bankruptcies, capital overhang, and a cautious business investment climate. 19 The effects of the ensuing recession were widespread.

What does this mean for financial stability and other financial risks?  In this incremental scenario, GenAI may magnify both the vulnerabilities and sources of resilience that already exist in the system.  Attractive trades become more crowded, but risk managers gain new insights. 20 Malicious actors gain new tools, but cyber defenders become better armed.  So long as financial regulators, enterprise risk managers, and others charged with managing downside risks prioritize efforts to keep pace with the evolving financial ecosystem, there's nothing to suggest a wholesale transformation of the balance of risks.  Of course, keeping pace will pose challenges, and it's important that we all focus on the need to meet these risks.

## Hypothetical Scenario 2: Transformative Change

Now, let's consider a more dramatic hypothetical scenario, in which GenAI adoption extends beyond improving on what we currently do, and provides new expertise and capabilities that have transformative effects on the economy and society.  In this scenario, humans deploy their imagination and creativity-combined with robust investment in research and development-to deploy intelligent GenAI systems to make rapid breakthroughs in, for example, biotechnology, robotics, and energy, fundamentally reshaping existing industries and creating

19  See Ben S. Bernanke, 'Will Business Investment Bounce Back?' (speech at the Forecasters Club, New York, NY, April 24, 2003), https://www.federalreserve.gov/boarddocs/speeches/2003/200304242/default.htm. 20 See Financial Stability Board, The Financial Stability Implications of Artificial Intelligence (Basel, Switzerland: Financial Stability Board, November 14, 2024), https://www.fsb.org/2024/11/the-financial-stability-implications-ofartificial-intelligence; and Jon Danielsson and Andreas Uthemann, 'How AI Can Undermine Financial Stability,' VoxEU: CEPR, January 22, 2024, https://cepr.org/voxeu/columns/how-ai-can-undermine-financial-stability.

new ones.  In this instance, to focus the mind, we can think of GenAI as no longer only a tool for scientists to analyze data-in a sense, it becomes the scientist, directing the research. 21

For instance, let's say that GenAI applications in health care do not simply improve how we currently deliver care, but also enable therapies that target genetic mutations and cure diseases previously considered incurable. 22 Similarly, manufacturing evolves to create GenAIdriven robotic factories, with goods produced with new materials and atomic precision. 23 Materials science is transformed through the discovery of programmable materials and selfhealing substances, all of which reshape construction, technology, and consumer goods. 24 Meanwhile, GenAI optimizes fusion energy research, expediting the shift to sustainable energy

21  For some very early examples, see Davide Castelvecchi, 'Researchers Built an 'AI Scientist'-What Can It Do?' Nature , August 30, 2024, https://www.nature.com/articles/d41586-024-02842-3; Daniil A. Boiko, Robert MacKnight, Ben Kline, and Gabe Gomes, 'Autonomous Chemical Research with Large Language Models,' Nature , December 20, 2023, https://www.nature.com/articles/s41586-023-06792-0; and Helena Kudiabor, 'Virtual Lab Powered by 'AI Scientists' Super-Charges Biomedical Research,' Nature , December 4, 2024, https://www.nature.com/articles/d41586-024-01684-3.

22  For more on drug discovery and gene therapy, see Betty Zou, 'Team Uses AI and Quantum Computing to Target 'Undruggable' Cancer Protein,' Phys Org, January 27, 2025, https://phys.org/news/2025-01-team-ai-quantumundruggable-cancer.html; and Mohammad Ghazi Vakili et al., 'Quantum-Computing-Enhanced Algorithm Unveils Potential KRAS Inhibitors,' Nature Biotechnology , January 22, 2025, https://www.nature.com/articles/s41587-02402526-3.

23  See NASA Technology Transfer Program, 'Robonaut 2: Hazardous Environments (MSC-TOPS-44),' https://technology.nasa.gov/patent/MSC-TOPS-44.

24  For more on material sciences innovation, see Andy Extance, 'First GPT-4-Powered AI Lab Assistant Independently Directs Key Organic Reactions,' Chemistry World , January 8, 2024,

https://www.chemistryworld.com/news/first-gpt-4-powered-ai-lab-assistant-independently-directs-key-organic- reactions/4018723.article; Chenyang Liu, Xi Zhang, Jiahui Chang, You Lyu, Jianan Zhao, and Song Qiu,

'Programmable Mechanical Metamaterials: Basic Concepts, Types, Construction Strategies-A Review,'

vol. 11 (March 19, 2024), https://doi.org/10.3389/fmats.2024.1361408; Aidan Toner-Rodgers, 'Artificial

Intelligence, Scientific Discovery, and Product Innovation,' MIT, November 27, 2024, https://aidantr.github.io/files/AI\_innovation.pdf; and Thomas Hayes et al., 'Simulating 500 Million Years of

Evolution with a Language Model,'

, January 16, 2025, https://doi.org/10.1126/science.ads0018.

Science

Frontiers

,

sources. 25 And GenAI helps to create the next generation of quantum computing. 26 In that way, GenAI improves its own energy sources and computing capabilities, enabling it to become a more powerful creative tool. 27

Finance also looks radically different than it does today.  Individuals with access to hyper-personalized financial planning and businesses with innovative products and services seamlessly connect with one another through near-frictionless or novel forms of financial intermediation. 28 Trading strategies and risk-management practices are boosted by greater

25  See Tan Sui, 'AI Could Help Overcome the Hurdles to Making Nuclear Fusion a Practical Energy Source,' The Conversation , January 29, 2025, https://theconversation.com/ai-could-help-overcome-the-hurdles-to-makingnuclear-fusion-a-practical-energy-source-247608; Jaemin Seo, SangKyeun Kim, Azarakhsh Jalalvand, Rory Conlin, Andrew Rothstein, Joseph Abbate, Keith Erickson, Josiah Wai, Ricardo Shousha, and Egemen Kolemen, 'Avoiding Fusion Plasma Tearing Instability with Deep Reinforcement Learning,' Nature , vol. 626, February 21, 2024, https://doi.org/10.1038/s41586-024-07024-9; and Massimiliano Lupo Pasini, German Samolyuk, Markus Eisenbach, Jong Youl Choi, Junqi Yin, and Ying Yang, 'First-Principles Data for Solid Solution Niobium-Tantalum-Vanadium Alloys with Body-Centered-Cubic Structures,' Nature: Scientific Data , vol. 11, no. 907 (August 22, 2024), https://doi.org/10.1038/s41597-024-03720-3.

26  Nakia Melecio, 'Exploring the Synergy: Quantum Computing and Generative AI at the Intersection of Innovation,' ScaleUp Lab Program, Enterprise Innovation Institute, Georgia Tech, https://scaleuplab.gatech.edu/exploring-the-synergy-quantum-computing-and-generative-ai-at-the-intersection-ofinnovation/#:~:text=Solving%20Complex%20Challenges%3A%20Generative%20AI,leading%20to%20improved% 20model%20performance.

27  For an example on GenAI and quantum computers, see Rahul Rao, 'Quantum Computers Can Now Run Powerful

AI That Works like the Brain,' Scientific American , April 22, 2024, https://www.scientificamerican.com/article/quantum-computers-can-run-powerful-ai-that-works-like-the-brain. For an example about AI and clean energy, see Office of Policy, 'How AI Can Help Clean Energy Meet Growing Electricity Demand' (Washington: U.S. Department of Energy, August 16, 2024), https://www.energy.gov/policy/articles/how-ai-can-help-clean-energy-meet-growing-electricitydemand#:~:text=AI%20can%20also%20be%20a,capable%20of%20meeting%20load%20growth. For examples of how GenAI is augmenting creativity, see Tojin T. Eapen, Daniel J. Finkenstadt, Josh Folk, and Lokesh Venkataswamy, 'How Generative AI Can Augment Human Creativity,' Harvard Business Review (July-August 2023), https://hbr.org/2023/07/how-generative-ai-can-augment-human-creativity; and Anil R. Doshi and Oliver P. Hauser, 'Generative AI Enhances Individual Creativity but Reduces the Collective Diversity of Novel Content,' Science Advances , vol. 10, no. 28 (July 12, 2024), https://www.science.org/doi/10.1126/sciadv.adn5290.

28  See Iñaki Aldasoro, Leonardo Gambacorta, Anton Korinek, Vatsala Shreeti, and Merlin Stein, 'Intelligent Financial System: How AI Is Transforming Finance,' BIS Working Papers No. 1194 (Basel, Switzerland: Bank for International Settlements, June 2024), https://www.bis.org/publ/work1194.pdf; and Sarah Hammer, 'From Turing to Trading: How AI Is Revolutionizing Finance,' Finance Centers at the Wharton School, July 10, 2024, https://finance-pillar.wharton.upenn.edu/ai-in-finance/how-ai-revolutionizing-finance.

GenAI-based analytic tools that have dynamic real-time access to an enormous knowledge base in both the public and private domains. 29

Although this transformative scenario is more speculative and is accompanied by a far greater degree of uncertainty than the first, it is important to consider given the extraordinary opportunities for human advancement and welfare that could arise, even if just one of its transformative components were to come to fruition.  We would need to fundamentally reimagine how the economy is structured.

What are the impacts on the labor force, in a world where GenAI's capabilities extend beyond what humans can accomplish today?  Humans may have a role to manage multi-agent GenAI frameworks, or fill gaps where GenAI solutions remain expensive or inefficient for some applications.  But this is a world where some workers may see their current jobs disappearing.  It is also a world in which they may see their own work transformed and have many more choices about the work they do.  The nature of labor would radically change, and this will require us to have broader conversations about how to organize the economy.  These conversations should wrestle with how to navigate major economic shifts in a way that recognizes the impact on the human condition, and the extent to which people derive their communities, friendships, personal sense of meaning and dignity from their work.

What about the competitive landscape?  There is probably a greater likelihood that rewards for businesses would be distributed more unevenly at first, as significant breakthroughs with far-reaching ramifications may benefit a subset of firms and industries and concentrate

29 Large language models may even allow for the creation of synthetic data that allows for enhancing macroeconomic nowcasting and forecasting through economic AI agents that can also help with analyzing macroeconomic trends and contribute to more informed financial decisionmaking.  See Anne Lundgaard Hansen, John J. Horton, Sophia Kazinnik, Daniela Puzzello, and Ali Zarifhonarvar, 'Simulating the Survey of Professional Forecasters,' SSRN (December 1, 2024), https://dx.doi.org/10.2139/ssrn.5066286.

economic power in firms that control GenAI breakthroughs.  If only a handful of firms have the ability to accomplish the incredible things I've mentioned above, they may dominate markets and crowd out competitors.  To the extent that GenAI becomes broadly effective, widely available, and cheap, these market advantages could lessen over time if the right regulatory environment supports competitive market dynamics. 30 But history suggests caution in this regard; a handful of players may dominate. 31

And finally, for finance, we should anticipate fundamental changes in this scenario. When it's working well, the financial system helps move money and risk through time and space. 32 To the extent there are fundamental changes to how the economy is organized, we could need a new set of institutions, markets, and products to facilitate transactions among households, businesses, and GenAI agents.

## What Should We Do?

Among the many ways in which we can help to harness the potential benefits of GenAI and minimize its risks, I will highlight only a couple today.

Financial institutions, and the Federal Reserve System, should consider investing sufficient resources in understanding GenAI technology, incorporating it into their workflows

30  Kelly Ng, Brandon Drenon, Tom Gerken, and Marc Cieslak, 'DeepSeek: The Chinese AI App That Has the World Talking,' BBC News , February 4, 2025, https://www.bbc.com/news/articles/c5yv5976z9po.

31  For example, see IBM Newsroom, 'Data Suggests Growth in Enterprise Adoption of AI Is Due to Widespread Deployment by Early Adopters, But Barriers Keep 40% in the Exploration and Experimentation Phases,' IBM , January 10, 2024, https://newsroom.ibm.com/2024-01-10-Data-Suggests-Growth-in-Enterprise-Adoption-of-AI-isDue-to-Widespread-Deployment-by-Early-Adopters; and Jefferies Editorial Team, 'Can Startups Outsmart Big Tech in the AI Race?' Jefferies , September 17, 2024, https://www.jefferies.com/insights/boardroom-intelligence/canstartups-outsmart-big-tech-in-the-ai-race.

32 If AI agents proliferate in financial transactions, we will also need to be careful about the potential for unintended consequences such as collusion among AI agents.  See Winston Wei Dou, Itay Goldstein, and Yan Ji, 'AI-Powered Trading, Algorithmic Collusion, and Price Efficiency,' Jacobs Levy Equity Management Center for Quantitative Financial Research Paper, The Wharton School Research Paper, May 30, 2024,

where appropriate, and training staff on how to use the technology responsibly and effectively. 33 Meanwhile, the financial regulatory community should approach the changing landscape with agility and flexibility.  And beyond the financial sector, collaboration between governments, private industry, and research institutions will be critical to ensure that GenAI systems are not weaponized in catastrophic ways.  We should continue to focus on responsible AI research and development and implement safeguards against misuse, including monitoring systems, standards for secure AI system development, and agreement on red lines for acceptable use cases. 34 We should be attuned to the impact of GenAI on our economic and political institutions.  There's a risk that it concentrates economic and political power in the hands of the very few and could lead to the gains being realized only by a small group, while the rest are left behind.

Another thing I want to emphasize is AI governance.  I think most would agree that the goal of the technology is to improve the human condition, and to do that, we need to be intentional in advancing that goal.  We should make sure that we think about GenAI as enhancing, not replacing, humans, and set up best practices and cultural norms to that end. Every financial institution should recognize the limitations of the technology, explore where and when GenAI belongs in any process, and identify how humans can be best positioned to be in the loop.  We should also focus on data quality, and make sure that uses of GenAI do not perpetuate or amplify biases inherent in the data used to train the system or make incorrect inferences to the extent the data is incomplete or nonrepresentative. 35 In the realm of regulation, frameworks for

33 See Request for Information on the Development of an Artificial Intelligence (AI) Action Plan, 90 Fed. Reg. 9,088 (February 6, 2025), https://www.govinfo.gov/content/pkg/FR-2025-02-06/pdf/2025-02305.pdf.

34  See Heather Domin, 'AI Governance Trends: How Regulation, Collaboration, and Skills Demand Are Shaping the Industry,' World Economic Forum, September 5, 2024, https://www.weforum.org/stories/2024/09/ai-governancetrends-to-watch.

35  For more on bias introduced in models, see Moshe Glickman and Tali Sharot, 'How Human-AI Feedback Loops Alter Human Perceptual, Emotional, and Social Judgements,' Nature Human Behavior , December 18, 2024,

understanding model risk may need to be updated to address the complexity and challenges of explaining AI methods and the difficulty of assessing data quality.

We need to be attuned to the risk in finance.  The very attributes that make GenAI attractive-the speed, automaticity, and ability to optimize financial strategies-also present risk. 36 When the technology becomes ubiquitous, use of GenAI could lead to herding behavior and the concentration of risk, potentially amplifying market volatility.  As GenAI agents will be directed to maximize profit, they may converge on strategies to maximize returns through coordinated market manipulation, potentially fueling asset bubbles and crashes.  Speed, automaticity, and ubiquity could generate new risks at wide scale. 37

We also should monitor how introduction of this technology changes the banking landscape.  Nonbanks may be more nimble and risk-forward in incorporating GenAI into their operations, which may push intermediation to less-regulated, less transparent corners of the financial sector.  In addition, this competitive pressure may push all institutions, including regulated institutions, to take a more aggressive approach to GenAI adoption, heightening the governance, alignment, and financial risks I mentioned before.

https://www.nature.com/articles/s41562-024-02077-2; Saul Asiel Flores, ''Bias in, Bias out': Tackling Bias in Medical Artificial Intelligence,' Yale School of Medicine, November 18, 2024, https://medicine.yale.edu/newsarticle/bias-in-bias-out-yale-researchers-pose-solutions-for-biased-medical-ai; and Adam Zewe, 'Researchers Reduce Bias in AI Models While Preserving or Improving Accuracy,' MIT News, December 11, 2024, https://news.mit.edu/2024/researchers-reduce-bias-ai-models-while-preserving-improving-accuracy-1211. For governance in central banks, see Claudia Alvarez Toca and Alexandre Tombini, Governance of AI Adoption in Central Banks (Basel, Switzerland: Bank for International Settlements, January 2025), https://www.bis.org/publ/othp90.pdf.

36 See, e.g., Michael P. Wellman, 'Artificial Intelligence in Financial Services' (written testimony before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, September 20, 2023), https://www.banking.senate.gov/imo/media/doc/wellman\_testimony\_9-20-23.pdf.

37  See Jon Danielsson and Andreas Uthemann, 'AI Financial Crises,' VoxEU: CEPR, July 26, 2024, https://cepr.org/voxeu/columns/ai-financial-crises. For more on algorithm collusion, see Wei Dou et al., 'AIPowered Trading, Algorithmic Collusion, and Price Efficiency' (see footnote 33).

In conclusion, while AI's impact will vary across industries and the reality is evolving, the scenarios I have outlined today provide a framework to begin thinking about how we should respond to developments in GenAI.  However, as I mentioned above, elements of both scenarios will likely be present in the future, and play out at different rates, which will influence the effects on the economy and society.  Rapid advances in this technology, such as Agentic AI and advancements in open-source models, underscore just how new this technology is and the importance of understanding what it means for individuals, businesses, and markets.  Thank you.",Michael S Barr
https://www.bis.org/review/r250220b.htm,"Hajime Takata: Economic activity, prices and monetary policy in Japan","Speech by Mr Hajime Takata, Member of the Policy Board of the Bank of Japan, at a meeting with local leaders, Miyagi, 19 February 2025.",2025-02-19 00:00:00,"

Bank  of  Japan

February 19, 2025

## Economic Activity, Prices, and Monetary Policy in Japan

Speech at a Meeting with Local Leaders in Miyagi

## TAKATA Hajime

Member of the Policy Board

(English translation based on the Japanese original)

## I. Economic Activity and Prices

I  will  begin  by  talking  about  developments  in  economic  activity  and  prices.  Overseas economies have grown moderately on the whole (Chart 1). Having faced concerns of an economic slowdown around summer 2024, the U.S. economy has since grown firmly, mainly led by private consumption. The projected growth in the U.S. economy for 2025 was revised upward to 2.7 percent in the January 2025 World Economic Outlook (WEO) Update released by the International Monetary Fund (IMF). Recent economic indicators suggest a solid U.S. economy, especially the possibility that the labor market, which triggered the concerns of an economic slowdown, has bottomed out. The Federal  Reserve  kept  its policy  interest  rate unchanged at the January 2025 Federal Open Market Committee (FOMC) meeting, following three consecutive rate cuts at the previous meetings in the latter half of 2024 (Chart 2). The Summary of Economic Projections of the December 2024 FOMC meeting indicates future rate  cuts.  Some  market  participants,  however,  anticipate a  pause  in  the  reductions,  partly because of firmness of the U.S. economy and speculation over the new administration. Based on the resilience of the economy, I believe it is more likely that the economy will accelerate again in the near future, making a ""touch-and-go landing,"" so to speak, rather than a soft landing, although attention continues to be warranted on uncertainties surrounding policy conduct under the new administration. What is more, the U.S. economy has continued to grow for four years at a pace close to 3 percent, a pace above its potential growth rate of around 2 percent, and a relatively high growth rate is also projected for 2025. In this situation, it is necessary to  bear  in  mind the  possibility  that  growth  in  employment  and  inflation  in the country will  accelerate  further and  to  consider  how such  developments  will  affect  global financial markets.

Japan's economy has recovered moderately, although some weakness has been seen in part (Chart 3). With regard to the outlook, the economy is likely to keep growing at a pace above its potential growth rate, with overseas economies continuing to grow moderately and as a virtuous  cycle  from  income  to  spending  gradually  intensifies  against  the  background  of factors such as accommodative financial conditions. Furthermore, I think that momentum for economic recovery could strengthen if overseas economies, particularly the U.S. economy, turn out better than expected.

With regard to the corporate sector, although firms may suffer a delay in fixed investment due to labor supply constraints, they have maintained an active investment stance, as seen by the relatively  high  levels  of  investment  plans  in  the  December  2024 Tankan (Short-Term Economic Survey of Enterprises in Japan) (Chart 4). Private consumption has been  on a moderate increasing trend despite the impact of price rises and other factors. While prices have risen ahead of wages, the year-on-year rate of change in real wages is recently heading toward an upturn because nominal wages have increased clearly, reflecting the 2024 annual spring labor-management wage negotiations (Chart 5). However, wage hikes have not yet caught up with the pre-pandemic levels of price rises. Private consumption is also projected to continue increasing moderately, with the gap between prices and wages closing. This is because of a rise in wage growth, in addition to downward pressure on inflation exerted by, for example, the continuation of the government's measures to reduce the household burden of higher gasoline and other prices, despite these measures being scaled back.

As for prices, in terms of the median of the Bank of Japan Policy Board members' forecasts in the January 2025 Outlook for Economic Activity and Prices (Outlook Report), the year-onyear rate of increase in the consumer price index (CPI) for all items excluding fresh food is projected to be in the range of 2.5-3.0 percent for fiscal 2024 and at around 2.5 percent for fiscal 2025, and then be at around 2 percent for fiscal 2026 (Chart 3). Thus, in the second half of the projection period, the rate of increase in the CPI is likely to be at a level that is generally consistent  with  the  price  stability  target.  Looking  at  mediumto  long-term  inflation expectations of various economic entities to assess underlying inflation, they have been rising steadily (Chart 6). In addition, firms' price- and wage-setting behavior has been active. With firms facing supply-side constraints due to labor shortages -- in other words, a shift to a ""labor shortage economy,"" I am also paying attention to the fact that firms' price pass-through of sustained higher costs, such as increased personnel expenses and distribution costs, has been more widespread (Chart 7). As services prices recently have more frequently revised upward than before in every month including April and October, when prices are often changed in Japan, it can be assessed that price hikes have taken root. Against this background, the growth in the GDP deflator, which indicates domestic inflationary pressure, was mainly led by unit profits in 2023, as firms increasingly passed on cost increases. In 2024, on the other hand, the contribution of unit labor costs intensified, reflecting wage increases. Anecdotal information

reported at the meeting of the general managers of the Bank's branches, as well as media reports, suggests that a growing number of firms are indicating a positive stance toward wage hikes. Taking account of this and other information, I expect that base pay increases to be agreed in the 2025 annual spring labor-management wage negotiations will remain solid, as in 2024. As for the outlook, with solid levels of base pay increases in 2025, the growth rates of unit profits and unit labor costs are likely to become balanced due to a form of inflationary pressure  stemming  from  domestic  factors,  as  a  virtuous  cycle  between  wages  and  prices intensifies. This will likely bring inflation closer to the price stability target, which it has not been possible to achieve in a stable manner for many years.

In terms of overseas factors, import prices have recently become subdued, and thus their rise is not strong enough to bring about a price pass-through as significant as that which occurred from 2022 onward. That said, it has now become easier for firms to pass on cost increases to prices, partly because the norm that wages and prices do not rise has been shifting, with the relatively high inflation rate continuing for three years.

Given the possibility, as I mentioned earlier, that the U.S. economy will turn out better than expected, this could lead to a rise in U.S. interest rates and a further depreciation of the yen, thereby causing market volatility. These factors, combined with significant increases in base pay expected to be achieved in 2025, could pose an upside risk to prices, and this requires attention. In particular, as it is still early days since the launch of the new U.S. administration, I would also like to closely monitor the risk that markets will become highly volatile due to expectations regarding the economic measures to be taken by the administration.

Having said that, developments in wages and prices can be explained by the following three phases (Chart 8). In the first phase, looking back on the recent changes in firms' price- and wage-setting behavior, the starting point was the rise in imported raw material prices in 2022, or the first big push. In the second phase, relatively high wage increases have been achieved in the annual spring labor-management wage negotiations since 2023, this being the second big push. In the third phase, it is expected that there will be progress, especially from fiscal 2025 onward, toward achieving the price stability target, as inflationary pressure stemming

from domestic factors is exerted on the back of solid base pay increases and as inflation expectations rise.

## II. Recent Conduct of Monetary Policy

Let me now present my views on the Bank's conduct of monetary policy.

Monetary policy in Japan reached a major turning point in 2024. The Bank changed its largescale  monetary easing framework in March 2024, discontinuing the negative interest rate policy and yield curve control. Then, in July, the Bank decided on a plan for the reduction of its purchase amount of Japanese government bonds (JGBs) and raised the target level of the short-term interest rate to around 0.25 percent.

Given that Japan's economic activity and prices have been developing generally in line with the Bank's outlook and that the likelihood of realizing the outlook has been rising, the Bank, in January 2025, judged it appropriate to adjust the degree of monetary accommodation from the perspective of sustainable and stable achievement of the price stability target of 2 percent. The Bank therefore decided to raise the target level of the short-term interest rate to around 0.5  percent  (Chart  9).  However,  real  interest  rates  are  expected  to  remain  significantly negative after the change in the policy interest rate, and accommodative financial conditions will be maintained (Chart 10).

As I have explained thus far, I consider it necessary for the Bank to shift gears as appropriate, that is, proceed with further adjustment of the degree of monetary accommodation if it is confirmed  that  prices  are  developing  generally  in  line  with  the  Bank's  outlook  and  that positive corporate behavior -- such as solid business fixed investment, sustained wage hikes, and a continued price pass-through of cost increases -- is being maintained. In this regard, it can be said that, since 2024, firms have been taking an active stance toward fixed investment and have increasingly been passing on cost increases to prices and raising wages. On the other hand, I have also put emphasis on the risk that differences in monetary policy stance could bring about high volatility in financial markets, particularly foreign exchange markets. On this point, monetary policy stances differ due to the difference between economic cycles in Japan and those abroad, although the monetary policy stances of advanced economies and

their  corresponding  economic  cycles  were  once  largely  in  sync,  following  the  shift  to  a floating exchange rate system in the 1970s. In fact, looking back on its previous five cycles of policy interest rate hikes since the 1970s, excluding the most recent cycle, the Bank turned to rate cuts after the Federal Reserve cut its rate. Although there is a difference in monetary policy stance between Japan and the United States in the most recent cycle, it can be said that the difference has actually grown smaller, given that there is no pressure on balance sheet adjustments in the financial, corporate, and household sectors in either country and that the firmness of the U.S. economy was reconfirmed through January 2025. In my opinion, these circumstances signal a decline in the risk of high market volatility -- in other words, I believe that the flexibility of the Bank's monetary policy has increased.

With regard to the outlook, if the sustainability of positive corporate behavior continues to be confirmed and the Bank's outlook is realized amid accommodative financial conditions, I think  that it  will  then  be  appropriate  timing  for  the  Bank  to  make  a  further  gear  shift  in monetary policy. In doing so, it will be important to monitor whether wage hikes and the price pass-through of cost increases spread to small and medium-sized firms and to regional firms. Meanwhile, prices could deviate upward from the Bank's baseline scenario due to (1) the virtuous cycle  between wages and prices intensifying; (2) inflationary pressure stemming from domestic factors exerted especially toward fiscal 2025; and (3) possible market volatility, mainly in foreign exchange markets, caused by an increased likelihood of the U.S. economy returning to a recovery path. Furthermore, it can also be said that investors' expectations have increased, following a rise in asset prices, including real estate. From this perspective, while I  recognize  that  inflation  is  approaching  the  2  percent  price  stability  target,  with  positive corporate behavior already being observed, I believe it will be important for the Bank to consider continuing to implement gear shifts gradually, even after the additional rate hike decided in January 2025, in order to avoid creating excessively high expectations of continued monetary easing, which would lead to a materialization of the upside risks to prices and the risk of overheating of financial activity.

However, as uncertainties still remain surrounding the U.S. economy and it is difficult to identify the neutral interest rate, I think that the Bank is expected to take a vigilant approach, such as by examining at each Monetary Policy Meeting (MPM) how policy interest rate hikes

may affect developments in economic activity, prices, and financial conditions. It is especially difficult to estimate Japan's neutral interest rate, because Japan's policy interest rates remained at low levels from the 1990s and did not change in the way they did in the United States and Europe. Furthermore, given these limitations in identifying the neutral interest rate, I think it would be problematic in terms of policy flexibility for a central bank to announce a certain level for the neutral interest rate, as the market could interpret this as forward guidance.

## III. Looking Back on the Post-Bubble Period based on the Review of Monetary Policy from a Broad Perspective

Developments in Japan's economy that have not been seen for more than three decades were a topic of discussion in 2024; specifically, stock prices reaching a record high for the first time in about 35 years, and wage growth exceeding 5 percent for the first time in 33 years. I believe that these developments indicate a historic shift in Japan's post-bubble economy, and that the Bank's recent move away from large-scale monetary easing is an extension of this shift.

It took longer than expected for Japan to see this historic shift. In December 2024, the Bank compiled  and  released  the  findings  of  the Review  of  Monetary  Policy  from  a  Broad Perspective (hereafter ""the Review""), which it had been conducting over a period of around a year and a half. Among the main reasons for the prolonged moderate deflation in Japan, the Review points to chronic demand shortages with a decline in the natural rate of interest and the entrenchment of behavior and a mindset based on the assumption that wages and prices will not increase easily (Chart 11). In what follows, I would like to look back on the changes in  Japan's  economy  after  the  collapse  of  the  bubble.  I  will  also  present  my  view  on  the significance  of  the  Review,  in  terms  of  two  topics  in  global  financial  history,  and  on  the remaining issues.

## First Significance: Unprecedented Situation Even on a Global Scale

The first significance of the Review is in highlighting the fact that Japan's economy, among post-war advanced economies, can be said to have faced an unprecedented situation in terms of, for example, its macroeconomic environment. That is, the Review's analysis focuses on an extremely rare situation, namely, a prolonged environment, including asset deflation and

the yen's appreciation, in which it was difficult to depend on external demand. On this point, I will now look back, from a historical perspective, on why Japan's economy fell into such a situation.

Japan's economy continued to experience low growth from the 1990s, with the collapse of the bubble. Although a variety of factors contributed to the slowdown in growth, including demographic changes, I believe that the major cause was the change in corporate behavior in response  to  post-bubble  changes  in  the  economic  environment.  Specifically,  as  Chart  12 shows, in the context of significant asset deflation, an increasing number of firms sought to pursue management with minimum assets by paring down assets on their balance sheets and reining in investment, while also engaging in business restructuring to cope with mounting international competition by reducing costs in their income statements. These moves were rational  for  individual  firms  as  a  response  to  the  changing  business  conditions.  From  a macroeconomic perspective, however, this approach caused Japan to fall into a shrinking equilibrium due to the ""fallacy of composition"" -- assuming that what is true of one member of a group is true for the group as a whole. Firms' pursuit of both management with minimum assets  and  business  restructuring  not  only  reined  in  business  fixed  investment  but  also suppressed  investment  in  human  capital.  These  factors  together  are  considered  to  have brought down Japan's potential growth rate (Chart 13). Combined with prolonged stagnation in corporate demand for funds and developments including globalization and demographic changes, this contributed to pushing down the natural rate of interest.

What was unprecedented is the asset deflation. At its peak in the 1980s, Japan accounted for nearly half of global market capitalization. However, from the 1990s, stock prices in Japan fell  sharply  and  real  estate  prices  stagnated  (Chart 14). Turning  to  national  wealth,  when comparing the peak recorded during the bubble period with the lowest point recorded after the bubble's collapse, the difference was about 900 trillion yen, nearly double the GDP of Japan. The extent of the impact of the bubble's collapse bears comparison even with the loss of national wealth during World War II. 1 Also during the post-bubble period, a significant

1 According  to  a  report  on  damage  and  casualties  of  World  War  II  compiled  by  the  Economic Stabilization Board of Japan, the damage to national wealth reached 64.3 billion yen. This amounts to 86 percent of Japan's GNP for fiscal 1944.

decline in capital bases in real terms drove firms to curtail investment and reduce interestbearing debt. In addition, firms' concerns over funding stemming from post-bubble financial system instability led to hoarding cash and deposits. Furthermore, from the second half of the 1990s, following the bubble's collapse, there were some cases where firms' liquidity concerns grew because they perceived that financial institutions' lending attitudes became more severe, which likely resulted in scarring effects for corporate management. The multiplied impact on the real economy of such changes in financial factors is referred to as the financial accelerator effect,  and  it  has  been  argued  that  accelerator  effects  had a  serious negative  influence on Japan's post-bubble economy. 2

What can also be considered unprecedented is the situation in which Japan's economy could not  depend  on  external  demand --or,  the  competitive  environment  vis-à-vis  overseas economies that led to business restructuring among Japanese firms. In the aftermath of World War  II,  Japan  benefited  from  the  tailwind  of  global  trade,  for  many  years  serving  as  the manufacturing hub for the Western bloc. However, the geopolitical environment shifted after the fall of the Berlin Wall in 1989, and Japan was seen to pose a growing economic threat, which  led  to  mounting  trade  friction  with  the  United  States,  followed  by  the  rapid appreciation of the yen from the 1990s (Chart 15). Under these circumstances, Japanese firms were forced to curtail their share of production in the semiconductor sector. In addition, firms across a wide range of sectors, including those in the automobile industry, were called on to shift  their  production  sites  overseas,  leading  to  a  hollowing  out  of  domestic  industries. Moreover, despite the yen's appreciation, firms left their export prices unchanged to maintain price competitiveness. The upshot is that it became the established practice for firms in Japan to pursue management aimed at business restructuring and to hold down margins while not raising employee wages. Firms grew accustomed to the norm of absorbing increases in the cost of raw materials by cutting costs rather than by passing the higher costs on to selling prices.

2 For the feedback mechanisms of the financial accelerator, see the Bank's research paper on monetary policy under credit-market imperfections (available only in Japanese): Fukunaga, I., Bank of Japan Review , no. 2006-J-13 (July 2006).

Historical examples of asset deflation include Europe and the United States during the Great Depression in the 1930s, and some Scandinavian countries in the early 1990s. It has been pointed out that it was the expansion in external demand arising from currency depreciation that contributed to recovery in these economies. For example, expansion in external demand at the time of the Great Depression was brought about by currency depreciation partly due to the departure from the gold standard. In some Scandinavian countries in the early 1990s, the boost to demand arising from German reunification, in addition to currency depreciation, contributed to higher external demand. In light of these precedents, my view is that, in the case of Japan, the yen's appreciation and the difficulty of relying on external demand posed major  constraints  on  economic  recovery  following  the  1990s.  These  unprecedented conditions likely led to the entrenchment of the norm in which firms took for granted the practice of leaving wages and prices unchanged.

## Second Significance: Introduction of World's First Monetary Policy Tools

The  second  significance  of  the  Review  is  that  its  analysis  focuses on  the  world's  first unconventional monetary policy measures, implemented by the Bank of Japan (Chart 16). Let us look back on the transition of the Bank's monetary policy: I believe the Bank adopted the world's first zero interest rate policy, quantitative easing policy, and yield curve control to address the unprecedented conditions mentioned earlier (Chart 17).

Among these unconventional monetary policy measures, regarding the positive effects and side effects of large-scale monetary easing, the Review assesses that, ""although there have been certain side effects on financial markets and financial institutions' profits, the overall effect on the Japanese economy so far appears to have been positive."" It also assesses that, ""if it  becomes  necessary  to  implement  unconventional  monetary  policy  measures,  it  will  be important to weigh the benefits and costs of unconventional measures, while taking account of the developments in economic activity and prices as well as financial conditions at that point in time."" In addition, the Bank assumed that one of the primary channels through which large-scale  monetary  easing  would  affect  prices  would  be  higher  inflation  expectations brought about by the Bank influencing people's expectations. The Review then summarizes as follows. First, ""[although] the large-scale monetary easing appears to have had an impact to some degree on inflation expectations . . . adaptive expectations formation has had a larger

impact on the formation of inflation expectations in Japan, and such expectations also have been strongly influenced by past experience."" Second, ""it was not easy to change the behavior and mindset based on the assumption that wages and prices will not increase easily, and influencing expectations alone was not sufficiently effective to anchor inflation at 2 percent.""

The results of the Review's analyses likely have implications for economies other than Japan as well. For instance, China has commonality with post-bubble Japan in terms of the drop in real estate prices in recent years. I therefore hope the series of releases related to the Review will also be useful in the context of many other economies.

## Improvement in the Macroeconomic Environment

The unprecedented asset deflation and excessive appreciation of the yen reached a turning point around 2012 (Chart 14). On the other hand, it has taken a long time to shift the persistent norm that wages and prices do not rise. I said in my previous speeches that this shift could take longer than expected. To show the persistence of this norm, which took hold after the collapse of the bubble economy, I would like to present again, in this speech, one estimate as an example of Japan's negative experience, or the economic scarring effects.

Chart 18 shows the cumulative returns on investment by age of investors, assuming that they made a fixed monthly investment in the Nikkei 225 Stock Average starting from age 22, when many people are likely to begin working. With the ongoing rise in stock prices over the past decade or so, although people in their 20s and 30s have experienced hardly any negative returns, those in their 40s and 50s have had negative returns for nearly half of their working life, due to the prolonged post-bubble sluggishness in stock prices. While this is merely an estimate using stock prices as an example, it shows that those in their 40s and 50s in particular, the generation that currently makes up the core of firms and other economic entities, have suffered a long-term negative and traumatic experience. This is likely one of the factors that led  to  the  deeply-entrenched  cautiousness  in  corporate  behavior  after  the  collapse  of  the bubble economy. In addition, it also suggests that a shift in the corporate behavior mired in such a norm could take longer than expected, perhaps the decade it takes to form the next generation.  In  terms  of  the  adaptive  formation  mechanism  of  inflation  expectations,  one interpretation is that, since the norm that wages and prices do not rise was entrenched for such

- a  long  period,  the  shift  from  cautious  inflation  expectations  and  the  subsequent  rise  in expectations took far longer than initially anticipated.

On this point, the Review also shows that, in addition to the lower funding costs transmission channel, the financial and capital markets channel (stock prices and foreign exchange rates) was  also  significantly  effective  in  translating  the  benefits  of  lower  interest  rates  into  an improvement in the output gap (Chart 19). These findings suggest that the Bank's monetary easing contributed to the shift away from the asset deflation and the so-called six headwinds -- including the headwind of the yen's appreciation -- both of which prompted the changes in corporate behavior in the post-bubble economy. Considering, as I mentioned, that it may take as long as a decade for the norm to change, I believe that the Bank's patient continuation of monetary easing, and the resulting support for rises in asset prices and for the reversal in the excessive appreciation of the yen, laid the groundwork for reaching the inflection point of the norm shift, marking a historic change since the collapse of the bubble economy. With this groundwork, it can be assumed that, as shown in Chart 8, the big push observed since 2022 that originated abroad and stemmed from higher import prices finally led to the symbolic change in the norm in 2024 -- the historic shift observed for the first time in more than three decades -- and this shift has progressed to date.

Looking at Chart 12, the asset deflation that led firms to pursue management with minimum assets on their balance sheets has improved significantly as asset prices have risen, mainly in the  stock  and  real  estate  markets.  Firms  have  also  managed  to  shift  away  from  business restructuring since the 2010s, with the dissipation of the continued excessive appreciation of the  yen,  which  had  driven  severe  international  competition  in  terms  of  firms'  income statements.  Moreover,  with  Japan  finding  itself  in  a  very  different  geopolitical  position compared with the period around 1990, there were historic moves to bring production sites back home out of concern over economic security, as seen in, for example, the shoring up of domestic  production  of  semiconductors  in  Kumamoto  and  Hokkaido prefectures.  From  a macroeconomic perspective,  these  developments  suggest  a  significant  historic  shift  away from the unprecedented post-bubble economic environment.

## Remaining Microeconomic Issues

In light of this shift in economic conditions, I would like to consider some remaining issues. As I just mentioned, the key to a further gear shift in monetary policy is the sustainability of positive corporate behavior. Given that corporate behavior in Japan after the bubble's collapse was  typified  by  firms'  pursuit  of  management  with  minimum  assets  and  of  business restructuring, I think it is also necessary to examine the issues from these standpoints.

From the standpoint of management with minimum assets, an important criterion is whether solid business fixed investment will be maintained. On this point, firms have continued to take an active stance toward such investment. From the standpoint of business restructuring, the key criteria include increases in wages and selling prices as well as steps to secure margins. In this regard, corporate managers are aware of mounting social expectations for wage hikes and investment in human capital, and there has also been a change in their mindset that took for  granted  the  core  practice  of  keeping  wages  and  selling  prices  unchanged. Around  70 percent of firms have reported that they thought it preferable in terms of business activities for prices and wages to rise moderately (Chart 20). Forces are beginning to work to stimulate a certain degree of innovation, including among small and medium-sized firms and regional firms,  as  seen  in  the  recent  ongoing  increase  in  business  succession  and  merger  and acquisition (M&amp;A) activities, which may suggest that these firms have started to raise selling prices. Similarly, in the household sector, many households have reported that a state in which both prices and income rise moderately is preferable to a state in which prices and income both remain almost the same. As Chart 18 shows, Japan's economy is seeing the rise of a new generation  that  never  experienced  the  negative  economic  environment  and  shrinking equilibrium of the post-bubble period. I believe that this new generation has the potential to drive a rethinking of the core practice and the norm that have to date been widespread in Japan.

Notwithstanding  such  positive changes,  the  shrinking  equilibrium  that  continued  over  a number  of  years  has  left  many  firms  and  households  with  a  cautious  mindset.  From  a microeconomic  perspective,  some  firms  have  remained  cautious  toward  business  fixed investment, and improvements in corporate profits have not easily been trickling down to small and medium-sized firms and regional firms -- the downstream firms in the economy --

through price pass-throughs and wage hikes. I think this situation could be said to reflect challenges resulting from the norm.

In this context, I have been paying attention to the annual spring labor-management wage negotiations every year and firms' passing on of costs to prices, believing that progress in addressing microeconomic challenges is critical to creating a virtuous cycle between wages and prices and thereby achieving the price stability target. With regard to price pass-through in particular, the government has historically taken the initiative in implementing measures in the form of incomes policy to contain wage hikes and thereby curb inflation. However, the opposite aim is currently being pursued. The Japan Fair Trade Commission (JFTC) and the Small and Medium Enterprise Agency (SMEA) are taking the lead in promoting price passthrough, and representatives from the government, labor, and management have held joint meetings on wage increases -- a kind of reverse incomes policy. I will therefore be paying attention to these developments and their impact. In this regard, it can be assumed that these initiatives have been partly driven by restrained wage growth and a downtrend in the labor share despite extremely high growth in corporate profits (Chart 21).

Please take a look at Chart 22, which is a conceptual diagram of how expansion in corporate profits  is  spreading  across  the  economy.  From  a  macroeconomic  perspective,  corporate profits have expanded significantly due to factors such as the efforts of firms and more robust competition in international markets. However, from a microeconomic perspective, the use of corporate profits as a source for wage hikes and price pass-through to subcontractors has been limited due to the norm that wages and prices do not rise. Firms have channeled most of their profits into dividends and foreign investment, and have also limited their domestic fixed investment. This situation is gradually improving owing to various initiatives, and it is expected that this improvement will benefit households, small and medium-sized firms, and regional firms equally, thereby achieving a virtuous cycle.

These efforts toward the correction of microeconomic challenges, including wage hikes and price pass-throughs, are important to achieving the price stability target, and I think therefore that the Bank should conduct monetary policy while examining their developments. I am paying attention to changes in wages and in firms' price-setting behavior because, as I said

earlier, the macroeconomic environment in Japan faced an unprecedented severe situation for a long time, and consequently it became the norm for wages and firms' price-setting behavior not to change. I think that the need to focus on these changes could be considered one of the distinctive features of the Bank's current monetary policy, compared with other central banks.

## Changes in Financial Intermediation and Summary

Lastly, I would like to highlight that significant structural changes have been unfolding in the field of financial intermediation in Japan over the quarter century covered by the Review, especially as a secondary effect of the quantitative and qualitative monetary easing (QQE) that had been in place since the 2010s.

One of the Expert's Commentaries in the Review states that, while there was weakness in the transmission channel through which growth in lending is assumed by conventional monetary policy to have a positive impact on economic activity and prices, the capital markets channel -- that is, the stock and foreign exchange markets -- had a great impact. Indeed, real estate and housing loans were the drivers of the limited growth in bank lending over the past 25 years (Chart 23). 3 On the other hand, invested assets of asset management firms (investment advisors and investment trusts) have increased substantially over the past decade, due in part to  the  role  of  large-scale  monetary  easing  in  helping  to  improve  the  financial  and  capital markets. In 2024, the so-called first year of asset management in Japan, domestic and overseas investment assets outstanding approached 1,000 trillion yen, a scale that is above the domestic bank lending market. As the role of the transmission channel through financial and capital markets grows in importance, questions arise such as how central banks ought to carry out monitoring and respond appropriately to the structural changes. At the same time, I believe these changes also raise issues regarding the way in which the Bank communicates with the markets.  The  Review's  initiative  should  prove  invaluable  in  highlighting  issues  to  be addressed.

Similarly, looking at changes over the past 25 years from the standpoint of firms, there has been a major change in the environment surrounding corporate finance. As Chart 21 shows,

3 The rise in housing loans is partly attributable to the Government Housing Loan Corporation, which had a substantial lending share, scaling down its loan business in the 2000s.

corporate profits expanded more than eightfold in fiscal 2023 over the second half of the 1990s, reaching the highest level on record of around 80 trillion yen, and a further expansion is expected for fiscal 2024. The current situation of corporate profits remaining at high levels differs from the economic recovery phase in the 2000s, and this has also led to an increase in the overall level of corporate value. Turning to the returns of corporate profits to suppliers of funds, while interest paid to banks and other financial institutions has remained at around 10 trillion yen, dividends paid out to shareholders have expanded to a level just below 40 trillion yen, around eight times that of the second half of the 1990s. Since the bubble's collapse, firms have improved their financial positions by reducing excessive interest-bearing debt -- their interest burden falling to the extent that interest income exceeds interest expenses (Chart 24). On the other hand, amid asset deflation, firms' capital bases in real terms have been impaired and they have raised dividends to increasingly scarce suppliers of funds. It also appears that more corporate managers are conscious of capital costs. In terms of the savings-investment balance, the post-war structure of financial intermediation in Japan centered on commercial banks, which provided funds mainly in the form of loans to firms, which faced a shortage of funds (net borrowers). Since the bubble's collapse, however, as firms came to have excessive funds (net savers), the focus has shifted to suppliers of risk capital, including domestic and overseas investment funds. Therefore, equity governance has been strengthening, as opposed to debt governance.

Reflecting  once  again  on  the  post-bubble  period,  the  Bank  had  been  implementing unconventional monetary measures ahead of other central banks to address a downturn in the real economy  under  the  historically unprecedented  situation of asset deflation  and international competition. However, with the recent improvement in corporate profits and the solid rise in asset prices such as real estate and stocks, it could be said that now is the time for the direction of the financial accelerator to be changed, from its prolonged negative effect on the economy. In this case, it seems possible for the Bank to shift gears away from the substantial  degree  of monetary accommodation that has continued for many years. While microeconomic  challenges  remain,  including  wage  hikes and  price  pass-throughs,  the economy has moved out of the previous unprecedented situation. Given these developments, I believe that the Bank will need to conduct monetary policy based on the recognition that it

has  finally  reached  the  point  of  returning  from  the  implementation  of  unconventional monetary measures to policy conduct that is in line with what is seen in normal times.

Thank you.



## Economic Activity, Prices, and Monetary Policy in Japan

Speech at a Meeting with Local Leaders in Miyagi

February 19, 2025

TAKATA Hajime Member of the Policy Board Bank of Japan

## Developments in Overseas Economies (IMF's January 2025 WEO Update )

Chart 1



y/y % chg., % points

Major Economies' Growth Rates

Global Growth Rate

|                                          |   CY 2023 |   CY 2024 | CY 2025 [Forecast]   | CY 2026 [Forecast]   |
|------------------------------------------|-----------|-----------|----------------------|----------------------|
| World                                    |       3.3 |       3.2 | 3.3 (0.1)            | 3.3 (0.0)            |
| Advanced economies                       |       1.7 |       1.7 | 1.9 (0.1)            | 1.8 (0.0)            |
| United States                            |       2.9 |       2.8 | 2.7 (0.5)            | 2.1 (0.1)            |
| Euro area                                |       0.4 |       0.8 | 1.0 (-0.2)           | 1.4 (-0.1)           |
| Emerging market and developing economies |       4.4 |       4.2 | 4.2 (0.0)            | 4.3 (0.1)            |
| China                                    |       5.2 |       4.8 | 4.6 (0.1)            | 4.5 (0.4)            |



Changes in Growth Projections for 2025

Note: In the table, figures in brackets are the differences from the forecasts in the October 2024 World Economic Outlook (WEO). Source: IMF.

## The U.S. Economy



Policy Interest Rate

Employment and Prices

Note: In the right panel, figures are the medians of the target ranges for the federal funds rate. Figures for participants' projections are the medians of all participants' projections at the FOMC meetings.

Sources: Bloomberg; BLS; FRB.

Chart 3

## GDP and Outlook for Economic Activity and Prices

GDP

Outlook for Economic Activity and Prices (January 2025 Outlook Report)

s.a., ann., tril. yen

y/y % chg.

|                    |   Real GDP |   CPI (less fresh food) |   CPI (less fresh food and energy) |
|--------------------|------------|-------------------------|------------------------------------|
| Fiscal 2024        |        0.5 |                     2.7 |                                2.2 |
| As of October 2024 |        0.6 |                     2.5 |                                2   |
| Fiscal 2025        |        1.1 |                     2.4 |                                2.1 |
| As of October 2024 |        1.1 |                     1.9 |                                1.9 |
| Fiscal 2026        |        1   |                     2   |                                2.1 |
| As of October 2024 |        1   |                     1.9 |                                2.1 |



Note: In the right table, figures indicate the medians of the Policy Board members' forecasts (point estimates). Sources: Cabinet Office; Bank of Japan.

## Corporate Sector and Private Consumption

Real Private Consumption

## Planned and Actual Business Fixed Investment

y/y % chg.

CY 2019 = 100

Notes: 1. In the left panel, the Tankan figures are for all industries including financial institutions. The figures include software and R&amp;D investments and exclude land purchasing expenses. R&amp;D investment is not included before the March 2017 survey. The figure for private nonresidential investment for fiscal 2024 is the 2024/Q2-Q3 average.





2. In the right panel, figures for real private consumption are the real Consumption Activity Index (travel balance adjusted) based on Bank staff calculations, which exclude inbound tourism consumption and include outbound tourism consumption. Figures in angle brackets show the weights in the index.

Chart 5

## Nominal Wages and Prices

Sources: Cabinet Office; Bank of Japan.

Yearly Change

## Estimated Level

y/y % chg.



CY 2019 = 100

CY 2019 = 100



Notes: 1. Q1 = March-May, Q2 = June-August, Q3 = September-November, Q4 = December-February. Figures for 2024/Q4 are those for December.

Sources: Ministry of Health, Labour and Welfare; Ministry of Internal Affairs and Communications.

2. In the right panel, figures for nominal wages are seasonally adjusted.

## Inflation Expectations and Wage Growth Rate

Wage Growth Rate





y/y % chg.

## Composite Index of Inflation Expectations

Notes: 1. In the left panel, the composite index is calculated by extracting the common components, based on the first principal component, of the inflation expectations of firms, households, and economists and market participants. For details of the calculation method, see Box 4 in the April 2024 Outlook Report.

Sources: Bloomberg; Central Labour Relations Commission; Consensus Economics Inc., Consensus Forecasts ; Japanese Trade Union Confederation (Rengo); QUICK, QUICK Monthly Market Survey &lt;Bonds&gt; ; Bank of Japan.

2. In the right panel, figures from 1980 to 2014 are those published by the Central Labour Relations Commission, while those from 2015 to 2024 are figures released by Rengo.

Chart 7

## Higher Labor Costs and Prices

CPI by Labor Cost Ratio

GDP Deflator





Notes: 1. In the left panel, figures are based on Bank staff calculations using the CPI excluding fresh food, energy, imputed rent, and the effects of temporary factors. For details of the calculation method, see Box 5 in the January 2025 Outlook Report. 2. In the right panel, unit labor costs = nominal compensation of employees / real GDP.

Sources: Cabinet Office; Ministry of Internal Affairs and Communications.

## Wage and Price Developments from Fiscal 2022 (From the Perspective of Three Phases)



Chart 9

## Decision at the January 2025 MPM

Japan's economic activity and prices have been developing generally in line with the Bank's outlook , and the likelihood of realizing the outlook has been rising .

Medians of the Policy Board Members' Forecasts (y/y % chg.)

## Wages

|                                 |                                            | Fiscal 2024   | Fiscal 2025   | Fiscal 2026   |
|---------------------------------|--------------------------------------------|---------------|---------------|---------------|
| Real GDP                        | Real GDP                                   | 0.5 (-0.1)    | 1.1 (-)       | 1.0 (-)       |
| CPI (all items less fresh food) | CPI (all items less fresh food)            | 2.7 (+0.2)    | 2.4 (+0.5)    | 2.0 (+0.1)    |
|                                 | CPI (all items less fresh food and energy) | 2.2 (+0.2)    | 2.1 (+0.2)    | 2.1 (-)       |

-  Firms have expressed the view that they will continue to raise wages steadily , following the solid wage increases last year.

Prices

-  CPI inflation is likely to be at around 2.5 percent for fiscal 2025, due to the higher import prices stemming from the yen's depreciation etc.
-  With wages continuing to rise, underlying CPI inflation has been increasing gradually toward 2 percent .

## Overseas economies

Note: Figures in parentheses indicate changes from the October 2024 Outlook Report.

-  Global financial and capital markets have been stable on the whole , while attention has been drawn to various uncertainties.

Adjusting the degree of monetary accommodation from the perspective of sustainable and stable achievement of the price stability target of 2 percent

(uncollateralized overnight call rate)

## Short-term interest rate raised to ""around 0.5%"" :

(previously ""around 0.25%"")

-  Real interest rates are expected to remain significantly negative, and accommodative financial conditions will continue to firmly support economic activity .
-  If the outlook presented in the January Outlook Report will be realized, the Bank will accordingly continue to raise the policy interest rate and adjust the degree of monetary accommodation.

## Real Interest Rate

Real Short-Term Interest Rate (1-Year)

Real Long-Term Interest Rate (10-Year)

%



1.5

1.0

0.5

0.0

-0.5

-1.0

-1.5

-2.0

%

Nominal long-term interest rate

Real long-term interest rate (10-year)

Inflation expectations

-2.5

10

12

14

16

18

20

22

24

CY

Note: Figures for real interest rates are calculated by deducting inflation expectations from JGB yields for each maturity. Figures for inflation expectations are based on Bank staff calculations using the expectations of various economic entities (firms, households, and experts) at different horizons. Specifically, the data used in the calculations are as follows: for firms, the Tankan ; for households, the Opinion Survey on the General Public's Views and Behavior ; for experts, the QUICK Survey , the Consensus Forecasts , and inflation swap rates.

Sources: Bloomberg; Consensus Economics Inc., Consensus Forecasts ; QUICK, QUICK Monthly Market Survey &lt;Bonds&gt; ; Bank of Japan.

Chart 11

## Review of Monetary Policy from a Broad Perspective : Developments in Economic Activity, Prices, and Financial Conditions

Since the latter half of 1990s: prolonged moderate deflation

-  Conventional monetary policy measures were unable to sufficiently stimulate the economy due to the effective lower bound on nominal interest rates.
- Chronic demand shortages with a decline in the natural rate of interest
-  The decline in the natural rate of interest was attributable to factors such as asset prices falling and growth expectations taking a downward turn after the burst of the bubble economy; firms becoming more cautious in their risk-taking, particularly due to the Global Financial Crisis; and demographic changes.
- Entrenchment of behavior and a mindset based on the assumption that wages and prices will not increase easily
- Downward pressure on prices due to globalization and IT innovations

## Since 2013: moved out of the state of deflation

- Inflation expectations rose somewhat, and the rate of change in prices turned positive but remained below 2 percent
- The chronic shortage of demand abated, mainly due to large-scale monetary easing and fiscal stimulus packages, as well as changes in the external environment
-  There remained room for increases in the labor supply, such as from women and seniors.

## In the 2020s: changes since the COVID-19 pandemic

-  It took time for the behavior and mindset based on the assumption that wages and prices will not increase easily to change.
- Firms' behavior has shifted more toward raising wages and prices
-  Import prices rose significantly and government measures were taken to support firms to pass on higher input prices to their selling prices and raise wages.
-  Labor shortages became more pronounced (shrinkage of the room for additional labor supply and increased number of employed persons due to monetary easing and other factors).

## My View on Corporate Behavior in the Post-Bubble Period

Balance Sheet



Income Statement

Chart 13

## Potential Growth Rate and Natural Rate of Interest

Potential Growth Rate

Natural Rate of Interest





%

Notes: 1. In the left panel, figures are Bank staff estimates.

Sources: Bloomberg; Cabinet Office; Consensus Economics Inc., Consensus Forecasts ; Ministry of Finance; Ministry of Health, Labour and Welfare; Ministry of Internal Affairs and Communications; Bank of Japan.

2. In the right panel, the estimates are based on Bank staff calculations using the models proposed in the respective papers.

## Asset Prices and National Wealth

Stocks



National Wealth

Land

Note: Figures are based on the SNA. Dotted lines are based on the 1993SNA (benchmark year: 2000). Source: Cabinet Office.

Chart 15

U.S. Dollar/Yen

end of month, yen



## Transition of the Bank of Japan's Monetary Policy



Source: Bank of Japan.

Chart 17

## Introduction of Unconventional Monetary Policies

|                                                          | BOJ            | FRB           | ECB       |
|----------------------------------------------------------|----------------|---------------|-----------|
| Zero interest rate policy                                | February 1999  | December 2008 | July 2012 |
| Quantitative easing policy                               | March 2001     | November 2008 | May 2009  |
| Negative interest rate policy                            | January 2016   | -             | June 2014 |
| Yield curve control (target level of 10-year JGB yields) | September 2016 | -             | -         |

- Notes: 1. The underlined dates indicate that the Bank of Japan was the first to introduce the policies.
2. The date of the introduction of the ECB's zero interest rate policy is when the deposit facility rate was set at 0 percent. The dates for the FRB's and the ECB's quantitative easing policies are when they announced their decisions to purchase mortgage-backed securities (MBS) and covered bonds, respectively.

## Cumulative Returns from Investment in Japanese Stocks by Age of Investors

Period with negative

Note: Cumulative returns are estimated as of the end of 2024 by age of investors, based on the assumption that a fixed amount of the Nikkei 225 Stock Average is purchased every month from the beginning of the year. Red shows positive returns and blue shows negative returns. Darker shadows show larger positive or negative returns. Percentages for the period with negative cumulative returns are calculated by dividing ""years with negative cumulative returns as of the year end"" by ""total years of investment.""



Source: Bloomberg.

Chart 19

## Transmission Channels of Lower Interest Rates

Improvement in the Output Gap



- Notes: 1. Figures are based on a VAR model with coefficient restrictions using eight variables: output gap, interest rates (3-month), interest rate spreads (2-year minus 3-month, 5-year minus 2-year, 10-year minus 5-year), aggregate funding costs, nominal effective exchange rates of the yen, and stock prices.
3. In the right pie graph, figures show the 5-year cumulative effects.
2. Aggregate funding costs are the weighted average of bank lending rates and issuance yields for CP and corporate bonds.

## Preferable State of Prices, Income, and Wages

Households (Opinion Survey)

Firms (Large-Scale Corporate Survey)





Note: For details of the left and right panels, see the

Opinion Survey on the General Public's Views and Behavior

Source: Bank of Japan.

and the

Survey regarding Corporate Behavior since the Mid-1990s

## Corporate Profits

## Corporate Profits and Returns to Investors

## Labor Share

tril. yen





Notes: 1. Figures are based on the Financial Statements Statistics of Corporations by Industry, Annually , and exclude the finance and insurance industries.

2. Labor share = personnel expenses / value-added. Value-added = operating profits + personnel expenses + depreciation expenses.

, respectively.

(September 2024 Survey)

Chart 21

## My View on Mechanism of Expanding Corporate Profits and Ensuing Challenges Robust competition in

Chart 23



## Changes in Financial Intermediation

Loans

Invested Assets of



Asset Management Firms

Notes: 1. In the left and center panels, figures cover domestically licensed banks (banking accounts of domestic branches). Figures for ""nonmanufacturing"" exclude real estate and finance and insurance, and figures for ""finance &amp; insurance and individuals"" exclude housing loans.

2. In the right panel, figures for ""overseas clients,"" ""domestic clients excl. pension funds,"" and ""domestic pension funds"" are assets for discretionary businesses. Figures for fiscal 2024 are those for the end of September 2024. Figures for ""investment trusts"" are from fiscal 2022 onward due to data constraints.

## Improvement in Corporate Finance

Interest Balance

Capital Adequacy Ratio tril. yen





%

Note: Interest balance for small and medium-sized enterprises (SMEs) in the left panel includes dividend income. Sources: Cabinet Office; Ministry of Finance.",Hajime Takata
https://www.bis.org/review/r250220a.htm,Philip N Jefferson: How healthy are US households' balance sheets?,"Speech by Mr Philip N Jefferson, Vice Chair of the Board of Governors of the Federal Reserve System, at the Martin H Crego Lecture in Economics, Vassar College, Poughkeepsie, New York, 19 February 2025.",2025-02-19 00:00:00,"For release on delivery 5:00 p.m. EST February 19, 2025

How Healthy are U.S. Households' Balance Sheets?

Remarks by

Philip N. Jefferson

Vice Chair

Board of Governors of the Federal Reserve System at the

Martin H. Crego Lecture in Economics, Vassar College

Poughkeepsie, New York

February 19, 2025

Thank you, Professor Ho for that kind introduction and for the opportunity to talk Washington, D.C., I had the very good fortune that a high school counselor pushed me to to the Vassar community. 1 I am happy to be back on campus.  As a teenager in apply to Vassar College.  I was accepted, and I earned my bachelor's degree here. Attending Vassar opened a wider variety of opportunities to me than I would have otherwise had available.  But I encountered one problem:  Vassar did not offer any banking or business courses, which is what I wanted to study.  So, I enrolled in an economics class, figuring it was the next best thing.  I was hooked, and I have been studying economics ever since.

My time here as a student was transformative, and I was honored to have served on Vassar's board from 2002 to 2022.  Vassar is a vibrant intellectual community.

To motivate the topic of today's speech, let me begin by sharing with you briefly my assessment of the current state of the U.S. economy.  The performance of the U.S. economy has been quite strong overall. 2 Last year, gross domestic product grew at a solid pace of 2.5 percent.  I see the labor market as being in a solid position, with job creation steady and the unemployment rate at 4 percent in January.  Inflation has come down a great deal over the past two and a half years but remains somewhat elevated relative to our 2 percent target.  Based on recently released data, it is estimated that the

1  The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.

2 For a detailed discussion on my recent views on inflation, see Philip N. Jefferson (2025), 'U.S. Economic Outlook and Monetary Policy,' speech delivered at the Economics Department Special Lecture, Lafayette College, Easton, Pennsylvania, February 4,

https://www.federalreserve.gov/newsevents/speech/jefferson20250204a.htm; and for my recent views on the labor market, see Philip N. Jefferson (2025), 'Do Non-inflationary Economic Expansions Promote Shared Prosperity?  Evidence from the U.S. Labor Market,' speech delivered at Swarthmore College, Swarthmore, Pennsylvania, February 5,

12-month change in the personal consumption expenditures price index was 2.4 percent in January.  Progress toward our 2 percent objective has been slow in the past year.  I expect the path of inflation to continue to be bumpy.  While a cumulative cut in the policy rate by 100 basis points last year has brought the stance of monetary policy closer to a neutral setting, monetary policy continues to be restrictive.  I believe that, with a strong economy and a solid labor market, we can take our time to assess the incoming data to make any further adjustments to our policy rate.

Household consumption grew by 3.2 percent over last year.  Understanding the causes of the continued robustness in consumer spending is important because it accounts for two-thirds of overall economic activity.  Therefore, any accurate forecast of future economic activity would need to get the growth in consumer spending right.

Today, I will discuss one important factor behind the recent strength in consumer spending:  households' balance sheets-that is, their assets, such as stocks, bank accounts, and houses, and their liabilities, such as mortgages, car loans, and other forms of borrowing.  At first glance, households appear to be in a strong financial position. Overall, American households currently possess a very high level of wealth that is driven by elevated house values, relatively low overall debt levels, and a strong stock market.

Asset performance and the amount of debt, however, explain only part of the picture.  The health of household finances also depends on the cost of new and existing debt and the availability of credit.  Household balance sheets are an important factor behind the recent strength in consumer spending.  That said, some households may have a difficult time weathering unexpected costs or economic shocks.  Looking at a variety of indicators across the income distribution shows that, while, in aggregate, household

balance sheets are indeed strong, low- and middle-income households, and those with lower credit scores, may be stretched.

The remainder of my talk is organized as follows.  I will begin by discussing household wealth, both in aggregate and across the distribution of income.  Then, I connect elevated wealth to recent spending patterns.  After that, I discuss the assets side of household balance sheets.  Then, I turn to liabilities, including the cost of servicing debt.  Next, I discuss households' ability to get new credit and the cost of such credit. Before concluding, I discuss the role of households' balance sheets in the transmission of monetary policy.

## Overall Household Wealth and Its Implications for Spending

Let me now turn to the overall picture of household wealth.  Figure 1 shows a stylized household balance sheet, with assets on the left and liabilities on the right.  Net worth, also called wealth, is the difference between the two sides of the balance sheetassets less liabilities-and it is a key indicator of households' financial health.  Relative to income, households' net worth is near its highest level in the past 30 years.  Total net worth in the U.S. was over $50 trillion higher in the third quarter of last year than it was at the end of 2019.  After one accounts for inflation, this accumulation represents an increase in overall wealth of about 20 percent for U.S. households, as shown by the solid black line in figure 2.

These recent gains in household net worth have been broad based across the income distribution.  The net worth of low- and middle-income households-defined as the bottom 40 percent of the income distribution and shown by the dashed red line-has

increased in line with aggregate net worth. 3 Although these households account for 25 percent of total consumption, which is less than their population share, they are still key to the performance of the economy overall.

Let me now turn to the implications of household net worth for our understanding of the recent strength in spending.  Figure 3 shows the saving rate, which measures the share of disposable income-that is, income after taxes and government transfers-that households save rather than spend.  The saving rate has fluctuated widely over the past few years.  It rose during the pandemic, as many households received supplementary income support from the government and some cut back on spending.  Then, households spent some of the savings that they had accumulated during the pandemic, leading the saving rate to fall to a relatively low level in 2022.  The saving rate has recovered somewhat since then.  Now, it hovers around 1 to 1.5 percentage points below its level before the pandemic, indicating that households are still spending more of their income than usual.  It seems likely that elevated household wealth helps explain this higher-thanusual spending.

Overall spending has been elevated, but how has high consumption been spread across the income distribution?  Recent research shows that the spending of low- and middle-income households has lagged that of higher-income households over the past few years. 4 As shown in figure 4, although real retail spending growth moved similarly for all households before the pandemic, it has diverged since the middle of 2021.  Since then, spending for low-income households moved roughly sideways until the middle of

3  See Board of Governors of the Federal Reserve System (2024), 'DFA:  Distributional Financial Accounts,' webpage, https://www.federalreserve.gov/releases/z1/dataviz/dfa.  These data provide quarterly estimates of the distribution of a comprehensive measure of U.S. household wealth.

4 For more details, see Hacıoğlu Hoke, Feler, and Chylak (2024).

last year, when it began to grow again.  High-income households' consumption, by contrast, has grown more consistently over this period.

## Assets

Having discussed net worth and its implications for spending, now I drill down into the two components of net worth-household assets and liabilities.   With regard to the asset side, elevated net worth largely reflects gains in two important asset categories: stock market holdings and real estate.  Each category accounts for roughly one-fourth of households' assets.  The stock market valuation has increased at a very rapid pace over the past five years, leading to a $20 trillion rise in the value of households' stock portfolios.  As house prices rose, the value of households' real estate has also increased by about the same amount.

Real estate is a particularly important source of wealth for low- and middleincome households, comprising 40 percent of their net worth.  Therefore, the growth in real estate wealth over the past five years accounts for a very significant share-over half-of the increase in these households' overall wealth.  That said, many low-income households do not own their home, and so they did not benefit from the growth in house prices.  Equities comprise a smaller share of these households' wealth, and so they account for only around 10 percent of the increase in their wealth.

Wealth allows households to weather unexpected shocks, such as the loss of a job or a surprise bill; however, not all forms of wealth are quickly and easily accessible in case of such emergencies.  It can be expensive for households to access the equity that they have in their homes.  Also, much of households' stock holdings are in retirement accounts that are difficult to liquidate.  So, to understand how resilient households'

financial situations are, I also pay close attention to the most liquid components of their net worth, which include bank deposits and money market mutual funds.  As the solid black line in figure 5 shows, in aggregate, households hold about 20 percent more of these liquid assets than they did before the pandemic.  As the dashed red line shows, in contrast to the aggregate, low- and middle-income households have a slightly smaller liquid asset buffer than they did before the pandemic.  This smaller buffer suggests that some of these households may not be as equipped to handle economic shocks as they were five years ago.  That said, low- and middle-income households still hold more of these assets than they did 10 years ago, when many of them were still recovering from the Great Recession.

On the whole, the asset side of households' balance sheets paints a very healthy picture of their financial positions.  Rising house and equity prices have increased net worth for households across the income distribution, and elevated asset valuations seem to help explain strong consumption growth last year.

## Liabilities

Let me now turn to household liabilities-what households owe to their lenders. Figure 6 plots three major categories of household debt relative to disposable personal income. 5 You see home mortgages, the largest share, at the bottom in blue; consumer credit, which includes credit cards, auto loans, student loans in orange; and other consumer loans in beige. 6

5 Data are taken from Board of Governors of the Federal Reserve System (2024), Statistical Release Z.1,

'Financial Accounts of the United States,' https://www.federalreserve.gov/releases/z1/default.htm.

6 See Board of Governors of the Federal Reserve System (2024), Statistical Release Z.1, 'Financial Accounts of the United States,' https://www.federalreserve.gov/releases/z1/default.htm.

Total household debt rose through the 2000s and peaked around the time of the Global Financial Crisis of 2007 to 2009.  It then began a slow decline as households 'deleveraged.'  The evolution of total debt is driven by mortgage debt, which currently accounts for about 60 percent of total household debt.  Mortgage debt levels remain relatively subdued after rising somewhat during the COVID-19 pandemic, partly due to increasing home prices leading borrowers to take out larger loans.

Figure 7 zooms in on revolving credit-largely, credit card balances-which is part of the previous 'consumer credit' category. 7 Balances were at about 7 percent of disposable income until the COVID-19 pandemic.  Households reduced their spendingdecreasing the need for credit card debt-and in part used income support programs to pay down existing credit card debt.  The result was a nearly 3 percentage point drop in revolving credit relative to disposable personal income.  As consumer spending rose and households began to take on more credit card debt, this ratio began to rebound in 2021 but remains about 1 percentage point below its pre-pandemic levels.

Although levels of debt may be low, how costly is it for households to remain current on that debt?  Figure 8 plots the debt service ratio, which is the amount of required debt payments relative to disposable personal income. 8 Along with the fall in debt to which I just referred, this ratio plummeted during the initial stages of the COVID19 pandemic.  It has since risen, but it remains about 1 percentage point below its prepandemic level.  That said, interest payments on revolving debt, which excludes

7  Data are taken from Board of Governors of the Federal Reserve System (2025), Statistical Release G.19, 'Consumer Credit,' https://www.federalreserve.gov/releases/g19/current.

8 For the series and information on how it is computed, see Board of Governors of the Federal Reserve System (2024), 'Household Debt Service Ratios,' https://www.federalreserve.gov/releases/dsr.

mortgages, have risen over the past few years.  The share of disposable personal income going to pay this interest rate is now slightly higher than it was just before the pandemic.

## Credit Availability and Costs

So far, I have discussed households' current debt liabilities and how households are able to manage their current debt payments.  Even households with elevated levels of assets may wish to obtain new credit.  Policymakers and economists often ask, how easy is it for households, in general, to increase their borrowing, and at what cost?

Lenders consider a range of factors in determining whether to supply credit and how much credit to extend.  One key factor is the borrower's 'credit risk score.'  These scores, which are calculated by private companies, use information on individuals' past payment behavior and a variety of other factors to create a number that is predictive of their ability to repay debt.

Figure 9 plots the fraction of individuals with credit risk scores in the subprime, near-prime, and prime categories since 2014.  There has been a gradual increase in the fraction of borrowers with prime scores, in part reflecting the deleveraging that I referred to earlier, which is mirrored by the decline in the fraction with subprime scores.  As you can see, the fraction of subprime scores took a sharp turn downward at the start of the COVID-19 pandemic.  At that time, many people were able to use the pandemic-era income support programs to become current on their debt and otherwise boost their scores into near-prime and prime categories.  This 'credit score migration' helped many individuals obtain credit. 9

9  For more discussion, see Goodman and others (2021) and Driscoll and others (2024).

Before obtaining new credit, people may first turn to lines of credit that they already have-for example, credit cards.  Figure 10 plots 'utilization rates'-the ratio of credit card balances to credit limits-for subprime, near-prime, and prime consumers. Utilization rates fell for all three groups at the beginning of the pandemic but have risen since then and are now somewhat above their pre-pandemic levels for both subprime and near-prime borrowers.  These groups may be reluctant to draw down their credit lines further.

It can be challenging to determine the availability of new credit.  While the total amount of credit that people have and their new borrowing can be observed, these quantities are determined both by lenders' willingness to supply credit and borrowers' demand for credit.  Borrowers taking out fewer new loans may be due to a reduced supply of credit, lower demand for credit, or a combination of the two.  Sometimes, however, one of these factors can be identified.  For example, during the COVID-19 pandemic, reductions in household spending and increases in income support programs likely reduced the demand for credit, contributing to the decline in debt levels during that period.

A more systematic method that we have used at the Federal Reserve to help disentangle credit supply from demand has involved questions in our Senior Loan Officer Opinion Survey, or SLOOS. 10 This quarterly survey asks officials who oversee bank lending practices for their institutions about how they have changed loan underwriting standards over the past quarter for a variety of loan categories.  'Loan underwriting standards,' also known more simply as lending standards, refers to the requirements that

10  See Board of Governors of the Federal Reserve System (2025), 'Senior Loan Officer Opinion Survey on Bank Lending Practices,' https://www.federalreserve.gov/data/sloos.htm.

banks impose before extending a loan.  For example, banks may establish minimum credit risk scores for potential borrowers to qualify for certain kinds of consumer borrowing.  Banks that raise minimum credit scores are said to have 'tightened' standards and those that lower them to have 'eased' standards.  Tightening standards likely reduces the supply of credit. 11

Because the SLOOS surveys commercial banks, its results are most informative for those loan categories for which banks do a substantial amount of lending.  Hence, figure 11 shows survey results for consumer loans (credit card and auto loans), averaged together, weighting by balance sheet size. 12 Banks make almost all credit card loans, and about one-third of auto loans.  The figure plots the fraction of banks that have reported tightening less the fraction that have reported easing each quarter, weighted by the bank's loan portfolio-so that plus-100 percent would indicate that all banks tightened, and minus-100 percent would indicate that all banks eased standards.  For both credit cards and auto loans, banks eased standards in the early days of the pandemic but began to tighten them in 2022.  More recent responses suggest that banks continued to tighten standards over 2024, making it more difficult for borrowers to obtain new loans. Although this tightening could limit growth in spending by those households that would need more credit cards to do so, recall that higher-credit-score borrowers are not close to exhausting their credit lines.  In the most recent survey, banks have eased standards, which could support spending.

11  For an example of use of the SLOOS to help disentangle loan supply and demand, see Bassett and others (2014).

12  The SLOOS results reported here are based on banks' responses weighted by each bank's outstanding loans in the respective loan category and might therefore differ from the results reported in the published SLOOS, which are based on banks' unweighted responses.

## Monetary Policy Transmission

Now, before I conclude, let me say a few things about how the Federal Reserve's monetary policy has been affecting the cost of borrowing for households.  The primary tool that the Federal Reserve uses to influence the economy is the federal funds rate.  The Federal Open Market Committee (FOMC) meets eight times a year to discuss the appropriate setting of the committee's target range for the federal funds rate.  The FOMC's objective when setting this range is to achieve its congressionally mandated goals of maximum employment and price stability.  Changes in the FOMC's target for the federal funds rate affect overall financial conditions through various channels, including its effect on interest rates that matter for consumers' decisions to purchase houses and cars or borrow on their credit cards.  For example, when the FOMC eases monetary policy-that is, reduces its target for the federal funds rate-the resulting lower interest rates on consumer loans elicit greater spending on goods and services.  Higher spending can, in turn, lead prices to rise.  Lower mortgage rates make buying a house more affordable and encourage existing homeowners to refinance their mortgages.  Of course, the rates charged on longer-term loans, such as mortgages, are also affected by expectations of how monetary policy and the broader economy will evolve over the duration of the loans, not just by the current level of the federal funds rate.

With respect to lending costs, the reductions in the target range for the federal funds rate last year have begun to pass through to rates on consumer borrowing.  In the credit card market, interest rates are floating and are set as a fixed markup over the prime rate.  By convention, the prime rate is equal to the upper end of the target range the

FOMC sets for the federal funds rate, plus 3 percentage points. 13 As seen in figure 12, auto loan and credit card rates have fallen in recent months, with the decline in the prime rate.  Rates on auto loans are also influenced by the interest rates on shorter-maturity Treasury securities and risk spreads lenders assess to account for delinquencies and defaults.  Auto loan rates have declined, thus far largely because of falls in risk spreads.

In the U.S., mortgages are generally fixed rate and have a longer duration than most other forms of consumer borrowing.  Consequently, rates on new and existing loans can differ substantially.  As shown by the solid blue line in figure 13, the majority of households still have mortgages with rates below 4 percent that were set some time ago. But rates on new mortgages are elevated compared with the ranges observed since the 2007-09 financial crisis, with the current average 30-year fixed rate around 7 percent.  As I noted earlier, mortgages' long duration means their rates are driven more by longerterm interest rates, which are in turn determined by many factors beyond just monetary policy.  Households who recently became homeowners or moved must bear the cost of paying elevated mortgage rates.  As a result, many are not moving. 14

Overall, interest rates for many forms of consumer credit-with the notable exception of mortgages-have declined in recent months, starting to show the effects of the recent fall in shorter-term interest rates.  Nonetheless, available data suggest that while new credit is available for households with higher credit scores and income levels, those households with lower credit scores and income levels are finding it relatively more difficult to obtain credit.

13 Before the establishment in 2008 of a range for the federal fund rate, the convention was to use the target for the federal funds rate plus 3 percentage points.  See English (2021) for more discussion.

14  See Aladangady, Krimmel, and Scharlemann (2024).

## Conclusion

Let's return to the title question:  How strong are households' balance sheets? Generally, households appear to be in a good position:  Asset holdings are high across the income distribution, driven by high house and equity prices, and debt levels are subdued. Interest rates on some forms of debt have begun to come down, and required debt service is low as a share of income.  That said, some households appear to be stretched.  Lowercredit-score households' utilization rates are elevated, and banks have tightened loan underwriting standards on some forms of credit.  And even though, as a group, low- and middle-income households possess elevated levels of overall wealth, they have less of a buffer of liquid assets than they did before the pandemic.  These indicators suggest that certain groups of households may have a hard time weathering unexpected costs or economic shocks.

In closing, let me reiterate that it is important to monitor closely the strength of household balance sheets, which inform forecasts of overall economic activity.  Strong balance sheets help support consumption spending, which in turn can help deliver the economic growth that puts the Federal Reserve in the best position to achieve its policy goals of maximum employment and price stability.

## References

Aladangady, Aditya, Jacob Krimmel, and Tess Scharlemann (2024).  'Locked In:  Rate Hikes, Housing Markets, and Mobility,' Finance and Economics Discussion Series 2024088.  Washington:  Board of Governors of the Federal Reserve System, November, https://doi.org/10.17016/FEDS.2024.088.

Bassett, William F., Mary Beth Chosak, John C. Driscoll, and Egon Zakrajšek (2014). 'Changes in Bank Lending Standards and the Macroeconomy,' Journal of Monetary Economics, vol. 62 (March), pp. 23-40.

Driscoll, John C., Jessica N. Flagg, Bradley Katcher, and Kamila Sommer (2024).  'The Effects of Credit Score Migration on Subprime Auto Loan and Credit Card Delinquencies,' FEDS Notes.  Washington:  Board of Governors of the Federal Reserve System, January 12, https://doi.org/10.17016/2380-7172.3419.

English, William B. (2021).  ' The 'Marketization' of Bank Business Loans in the United States.'  Working Paper, Yale School of Management, October.

Goodman, Sarena, Geng Li, Alvaro Mezza, and Lucas Nathe (2021).  'Developments in the Credit Score Distribution over 2020,' FEDS Notes.  Washington:  Board of Governors of the Federal Reserve System, April 30, https://doi.org/10.17016/23807172.2902.

Hacıoğlu Hoke, Sinem, Leo Feler, and Jack Chylak (2024).  'A Better Way of Understanding the US Consumer:  Decomposing Retail Spending by Household Income,' FEDS Notes.  Washington:  Board of Governors of the Federal Reserve System, October 11, https://doi.org/10.17016/2380-7172.3611.



## How Healthy are U.S. Households' Balance Sheets?

Philip N. Jefferson Vice Chair, Federal Reserve Board

Vassar College, February 19, 2025

Disclaimer: The views I will express today are my own and not necessarily those of the Federal Open Market Committee or the Federal Reserve System.



## Roadmap of Talk

- Overall Household Wealth and Its Implications for Spending
- Assets
- Liabilities
- Credit Availability and Costs
- Monetary Policy Transmission

## Figure 1: Household Balance Sheet

| Assets                                                | Liabilities                                              |
|-------------------------------------------------------|----------------------------------------------------------|
| Real estate Stock holdings Bank deposits Other assets | Mortgages Auto loans Credit card loans Other liabilities |

## Net worth = Assets - Liabilities

Figure 2: Real Net Worth



Figure 3: Personal Saving Rate



Note: Monthly. Ratio of saving to disposable personal income.

Source: Bureau of Economic Analysis.

Figure 4: Average Household Spending, by Income Group



Figure 5: Real Liquid Assets



Figure 6: Household Liabilities



Note: Quarterly. Home mortgages also include loans made under home equity lines of credit and home equity loans secured by junior liens. Consumer credit includes credit cards, auto loans, student loans, and other consumer loans. Other liabilities include other bank loans and the liabilities of nonprofit organizations.

Source: Federal Reserve Board, Statistical Release Z.1, ""Financial Account of the United States.""

Figure 7: Revolving Credit Balances



Figure 8: Debt Service Ratio



Figure 9: Credit Risk Score Distribution



Note: Quarterly. Share of individuals in Federal Reserve Bank of New York (FRBNY) Consumer Credit Panel (CCP)/Equifax panel with indicated risk scores. Near prime is between 620 and 719; prime is greater than 719.

Source: FRBNY CCP/Equifax.

Figure 10: Credit Card Utilization Rates



Figure 11: Changes in Standards on Consumer Loans



Note: Quarterly. Responses weighted by bank loan portfolio size. Net percent of banks reporting tightening standards on consumer loans, which include credit cards, auto loans, and other consumer loans.

Source: Federal Reserve Board, Senior Loan Officer Opinion Survey on Bank Lending Practices.

Figure 12: Auto Loan and Credit Card Interest Rates



Figure 13: Distribution of Interest Rates on Outstanding Mortgages



Note: Monthly. Sample only includes outstanding mortgages current on their payments.

Source: Intercontinental Exchange Mortgage Technology, McDash.",Philip N Jefferson
https://www.bis.org/review/r250218e.htm,Burkhard Balz: Unlocking the potential of cross-border payments - challenges and opportunities,"Keynote speech by Mr Burkhard Balz, Member of the Executive Board of the Deutsche Bundesbank, at the Central Bank Payments Conference, Paris, 18 February 2025.",2025-02-18 00:00:00,"## Burkhard Balz: Unlocking the potential of cross-border payments challenges and opportunities

Keynote speech by Mr Burkhard Balz, Member of the Executive Board of the Deutsche Bundesbank, at the Central Bank Payments Conference, Paris, 18 February 2025.

* * *

Check against delivery

## 1 Introduction

Ladies and Gentlemen,

Thank you very much for the opportunity to speak to you today in a city that has a long history of being a hub for cross-border payments. Not far from here, in the arrondissement that still bears the name of their religious order, the Knights Templar had their headquarters. Founded as a knightly order, they increasingly focussed on their banking business in later years. This included offering services for cross-border payments: pilgrims could deposit their funds at the Templar commandery, receive a letter of credit, and could exchange that letter for cash at their destination. You could say that the Templars were the first European money transfer operator. 1

However, conducting banking business in the Middle Ages could be risky and could-amongst other factors-lead to an inglorious end. A short distance from here, the last Templars were burned at the stake on what is now the ˛le de la CitØ .

## 2 Current challenges in cross-border payments

While money transfer operators today do not have to fear vengeful monarchs, they face their own challenges when they offer cross-border payments. Although unbelievably fast and cheap compared to medieval standards, today's cross-border payments lag behind domestic payments when it comes to speed, cost, access and transparency. And when we look at the root causes, images of medieval transport routes come to mind.

The reasons for the discrepancy between domestic and cross-border payments are manifold: first of all, high barriers for market entry result in a lack of competition and long transaction chains. These market entry barriers include high liquidity costs, high regulatory standards as well as the need to build a sufficiently large network to achieve economies of scale. As a result, the long transaction chains with multiple parties involved negatively affect costs, speed and transparency. While the situation has been improving in the last few years, thanks to initiatives like SWIFT gpi, substantial obstacles still remain.

Second, the lack of harmonisation of regulatory standards hinders smooth payment flows across borders. As different countries have different regimes for sanction screening and fighting money laundering and financial crime, payments need to be checked multiple times along the payment chain. Often the chain is interrupted because

the relevant information to fulfil regulatory compliance is missing. Sometimes even manual intervention is necessary, which in turn hinders automated end-to-end processing of payments. Of course, this problem is multiplying with longer transaction chains.

Third, there are technical impediments. Insufficiently harmonised standards for message formats, varying opening hours of payment systems and differing technical system specifications can further exacerbate the frictions in cross-border payments.

Last but not least, I would like to address one aspect which is a very specific concern for me. Increased geopolitical tensions could have the potential to hamper efforts to improve cross-border payments by eroding the basis for international coordination: mutual trust. Moving forward, we have to find ways to rebuild that trust again in order to negotiate on fair and equal terms.

## 3 Towards a multilateral world in payments?

So, bearing in mind that the current infrastructure for global payments is not the optimum: what would be the ideal solution? A truly global system for cross-border payments? This is, in my view, rather unrealistic because it would not only require fully eliminating all current barriers, but also solving emerging issues, such as finding an appropriate governance framework. In order to take a step forward, we might need to grab the opportunities right ahead of us. Regional initiatives and interlinked systems could be the first steps towards a more interconnected global payments ecosystem.

In the Eurosystem, we have already taken a step in this direction. The platforms T2, for wholesale, and TIPS,  for real-time retail payments in Europe, enable not only payments in euro, but also in Swedish krona and will also soon support payments in Danish krona. Other examples of successful regional multi-currency solutions are Buna in the Arab region, and the Pan-African Payment and Settlement system (PAPPS).

Thus, while a global payment system may seem like an ideal solution, different regional systems have their advantages as well. They can cater for the specific needs of their region, and it is always easier to coordinate a smaller number of players than a global project.

However, in a payments landscape with a stronger regional focus, the risk of global fragmentation remains. This means there are two paths we have to embark on: on the one hand, we have to make sure that such a multilateral structure ensures the safety, resilience and integrity of the global payment system. On the other hand, different regional parts need to become interoperable with each other. Otherwise, there is the risk that fragmentation will exacerbate the current problems in cross-border payments, as previous harmonisation and standardisation efforts could become obsolete-not only in technical terms, but also with regard to market practices, regulations and strategies.

## 4 How can central banks address the challenges?

Now, the question that we have to ask ourselves as central bankers is: what can we do? And what better place to ask this question than at the Central Bank Payments Conference?

In 2020, the G20 developed a concrete roadmap to enhance cross-border payments. As part of this process, 19 building blocks with specific action points were developed and quantitative targets were set.

After almost five years, we can already see some improvements in the global payments landscape: together with the market, we have harmonised the ISO 20022 standard further, reducing frictions in the transmission of messages.

Furthermore, central banks around the world have expanded their operating hours, thus reducing delays when sending and settling payments across time zones. Whether that is the first step towards 24/7 operations for real-time gross settlement (RTGS)  systems remains to be seen, as this would come with a number of additional challenges. However, I believe it is not a question of ""if"", but more ""how"" because the world of payments has already moved towards 24/7 operations with regard to the new instant payment rails. This will also have an impact on liquidity management in central bank money, which is usually conducted via RTGS systems.

Additionally, there are ongoing initiatives to open up access to central bank payment systems, which could increase competition and thus enhance the efficiency of crossborder payments. Within the Eurosystem, we have already taken a key decision 2   in this regard and are currently exploring the detailed specifications under which such access can be granted.

Looking ahead, there are a couple of options for central banks to further enhance the efficiency of cross-border payments. For the last couple of years, instant payment systems have been built across the globe. When we interlink these systems, we could enable payment institutions worldwide to quickly expand their payment network. Assuming that we would also find more efficient ways for the currency conversion still needed in this context, we could also lower liquidity costs: this would address two of the main market entry barriers, thus increasing competition.

First trials in that direction have already been completed and interlinking with foreign payment infrastructures is one of the key components of the Eurosystem's strategy for the coming years. 3   If we interlink regional payment infrastructures, we can quickly tackle a number of the frictions we face in cross-border payments today.

In the future, central bank digital currencies (CBDCs)  could offer another opportunity, but we have to make sure that they combat fragmentation, rather than increase it. To guarantee this, we have to ensure that they are interoperable with each other and with traditional payment systems. Regarding the digital euro, the ECB and the national central banks of the Eurosystem are in close contact with market players and other central banks outside the euro area. However, while CBDCs might also be a very promising candidate in the cross-border space, in particular given that they are expected to penetrate the relevant markets strongly, it will take time for them to become established. This is because we are still at a nascent phase globally and, very often, priority needs to be given to ensuring a market roll-out in domestic markets, as is our aim for the digital euro.

Instant payment systems may not be ""traditional"" in terms of age, but they are still an evolution of the ""classic"" payment rails. Nevertheless, and given the rather diverging global situation, they could be a prime candidate for interlinking with emerging retail CBDCs in other areas: first, both systems are able to operate around the clock in realtime. Second, instant payment systems give instant feedback on whether the payment was successful or not. Third, messages could be tokenised and used to settle smart contracts in more technically innovative infrastructures.

This idea is not only applicable in the retail space. It could also benefit the wholesale area, where innovative solutions could help to address foreign exchange liquidity management, thereby complementing the linkage of RTGS systems, for instance. We at the Bundesbank have trialled those interconnections in the wholesale payments world with our trigger solution, which was one of three interoperability solutions tested as part of the Eurosystem's exploratory work. The trigger solution links distributed ledger technology (DLT)  platforms operated by the market with the ""traditional"" Eurosystem payment system (TARGET),  thus enabling the direct settlement of  DLTbased wholesale transactions on participants' existing RTGS accounts in central bank money.

When we look at past and current efforts, we see that much has been done to harmonise technical standards and to supply innovative solutions. However, in order to truly be successful in enhancing cross-border payments, we should not only look at what the market could do: we must also address the fragmented regulatory landscape as well. Harmonising regulatory standards across borders would remove one of the largest frictions in cross-border payments.

## 5 Outlook

When we take a look at what we have achieved already and what we still have to achieve by 2027, we could say that reaching the G20 targets will be a very ambitious climb. However, we should not downplay what we have achieved so far. We have made significant progress when it comes to global harmonisation of technical standards and updating payment infrastructures.

Momentum for the interlinking of payment systems has never been as great as it is today and new technologies like and maybe even can help to further reduce DLT, AI, the frictions affecting cross-border payments at present.

Despite the current geopolitical situation, central banks can help alleviate the challenges we face today by supplying policymakers and regulators with a range of options.

As you can see, improving cross-border payments is not as mysterious as a Dan Brown novel, and solving the problems that we face is not as hard as cracking the Da Vinci Code that Tom Hanks tries to crack in the films with the same name. And there are no longer Knights Templar defending the holy grail of efficient cross-border payments.

So, let us continue improving the global payments landscape.

Ladies and gentlemen, thank you for your attention.

- 1  See also: https://www.bbc.com/news/business-38499883
- 2  www.ecb.europa.eu/pub/pdf/legal/ecb.leg\_dec\_2025\_2.en.pdf
- 3  https://www.ecb.europa.eu/home/doc/ecb. doc241021\_TIPS\_to\_connect\_to\_other\_fast\_payment\_systems.en.pdf",Burkhard Balz
https://www.bis.org/review/r250224f.htm,"Rajeshwar Rao: Inaugural address - Second Annual Conference on Macroeconomics, Banking and Finance","Inaugural address by Mr Rajeshwar Rao, Deputy Governor of the Reserve Bank of India, at the Indian Institute of Management Kozhikode (IIMK) - National Stock Exchange (NSE) joint Second Annual Conference on Macroeconomics, Banking and Finance, Mumbai, 21 February 2025. ",2025-02-21 00:00:00,"Inaugural  address  at  the  Indian  Institute  of  Management  Kozhikode  (IIMK)National Stock Exchange (NSE) joint Second Annual Conference on Macroeconomics, Banking and Finance at Mumbai on February 21, 2025 1

## Introduction

Good Morning All!

I thank IIM, Kozhikode and the National Stock Exchange for inviting me to deliver the inaugural address at this Conference. The theme for the conference- ' Finance for Growth Amid Creative Disruptions '-captures the essence of the transformation we are witnessing in the financial sector - not just in India but globally. Disruptions in finance are not new, but what sets this era apart is the unprecedented pace and scale of change, fuelled by digitalization, artificial intelligence, and the resulting confluence of  these  changes  leading  to  emergence  of  new  business  models.  These  changes make it essential for us to understand how to harness them for sustainable economic growth.

2. For India, this transformation is particularly significant as we strive towards Viksit Bharat 2047 - a vision of a developed and self-reliant economy. Our goal of becoming an advanced economy by 2047 will require us to effectively integrate technology with finance to deepen markets, expand financial inclusion, and drive economic productivity.

## Creative Disruption vis-à-vis Creative Destruction

3. Innovation in finance has always been a double-edged sword-on one side, it drives efficiency and inclusion, but on the other, it can destabilize traditional structures if not managed well. This is where the distinction between creative disruption and creative destruction  becomes  crucial.  While  both  terms  may  seem  similar,  they  carry  very different  implications. Creative  destruction ,  as  popularized  by  economist  Joseph Schumpeter, refers to the complete dismantling of old systems to make room for new ones. In contrast, creative disruption is a more nuanced process-it's about evolving existing  systems,  refining  them,  and  making  them  better  through  technological

1 Inaugural address delivered by Shri M. Rajeshwar Rao, Deputy Governor at IIMK-NSE 2nd Annual Conference on Macroeconomics, Banking &amp; Finance on February 21, 2025 at Mumbai. Inputs provided by Pramanshu Rajput are gratefully acknowledged.

innovations. We are not simply looking to replace what exists but to transform it for the better.

4.  This  sets  the  context  for  my  talk  today.  I  will  share  my  views  on  how  digital transformation  is  reshaping  finance,  the  role  of  AI,  the  way  forward  for  more meaningful  financialization and financial inclusion and how the regulatory landscape must evolve to foster responsible growth.

## Digital Transformation in Finance

5.  The financial sector has undergone a profound transformation in the digital era, reshaping how individuals and businesses access and utilize financial services. The shift  from  cash-driven,  paper-based  transactions  to  a  seamless,  technology-driven ecosystem has been one of the most defining changes in modern finance. India has exemplified creative disruption in finance through innovations like Unified Payment Interface  (UPI),  Account  Aggregator  (AA)  framework,  and  the  recently  launched Unified Lending Interface (ULI). This has complemented the other components of what is  collectively  known  as  the  ' India  Stack '.  In  the  context  of  the  creative  disruption referred to earlier, these initiatives have not just supplemented the traditional banking system but have strengthened it by making transactions more seamless, expanding financial reach, and improving efficiency. Similarly, the rise of digital lending has not rendered conventional credit channels obsolete but has complemented them, bringing underserved segments into the formal financial fold.

Figure 1: Evolution of India Stack



| 2009                                                                | 2013                                                                            | 2015                                                         |
|---------------------------------------------------------------------|---------------------------------------------------------------------------------|--------------------------------------------------------------|
| Aadhar: 12- digit unique identifier containing individual's details | eKYC: digitised version of the ‘know your customer’ using Aadhar authentication | Digi Locker: access to digital versions of various documents |
| GSTN: unique 15-digit identifier assigned to                        |                                                                                 |                                                              |
| businesses under GST                                                |                                                                                 |                                                              |
| Presence-less Layer                                                 | Paper-less Layer                                                                | Paper-less Layer                                             |
| Cash-less Layer                                                     | | Consent Layer                                                                 | | Consent Layer                                              |

6. In my opinion, what truly sets India apart from global peers is the open approach. Unlike  many  other  countries,  where  these  advancements  have  come  as  "" walled gardens "",  India's  financial  infrastructure  is  built  on  the  principles  of  openness  and accessibility.  Our  platforms  are  designed  as  plug-and-play  systems,  enabling  any entity to build on top of them, fostering competition, innovation, and inclusion. Whether it is the UPI, the Account Aggregator framework, or the ULI, our guiding philosophy remains the same- creating an open ecosystem. UPI stands as a prime example of open digital infrastructure that fosters both innovation and inclusivity. It provides an interoperable framework for instant payments, enabling several private players to build seamless  financial  solutions  on  top  of  it.  As  on  date 2 ,  there  are  39  Third  Party Application Providers (TPAP) in the UPI ecosystem enabling UPI payments besides apps  of banks. With over 16 billion transactions  processed  monthly 3 ,  UPI demonstrates how public digital infrastructure can empower private sector innovation for promoting financial inclusion, without the risks of exclusivity. A research article 4 by World Economic Forum (WEF) had estimated that UPI has saved the Indian economy approximately $67 billion since its inception in April 2016.

2  As on February 20, 2025

3  RBI Payment Systems Report, 2024

4  India's digital leap: the Unified Payment Interface's unprecedented impact on the financial landscape dated June 26, 2023 available at https://www.weforum.org/stories/2023/06/india-unified-payment-interface-impact/

## AI/ ML in Finance

7.  While  the India  Stack has  successfully  built  the  digital  pipelines  that  power  a seamless  and  inclusive  financial  system,  as  we  move  forward,  I  believe  Artificial Intelligence (AI) and Machine Learning (ML) will become the engines that drive the next phase of financial transformation. These stand among the most transformative advancements of our times. This growing significance is reflected in how both financial institutions  and  regulators  are  increasingly  engaging  with  AI-related  topics.  An analysis (Chart 1) of the annual reports of Scheduled Commercial Banks has revealed a sharp rise in references to AI and its applications in recent years 5 .
8.  Further,  this  trend  is  not  limited  to  regulated  entities-central  banks  are  also devoting  more  attention  to  AI  in  their  public  interactions.  A  review  (Chart  2)  of speeches 6  by central bank officials globally shows a similar pattern, where discussions on AI related topics have increased significantly especially post-2022 generative AI wave. This underscores the increasing awareness and strategic focus on AI within the financial ecosystem.

Chart 1: Al Word Count for Public and Private Sector Banks



5  How Indian Banks are Adopting Artificial Intelligence? RBI Bulletin October 2024

6  Based on text mining analysis of central bank officials speeches available at Bank for International Settlements (2024). Central bank speeches, 2015-2024, https://www.bis.org/cbspeeches/download.htm.

Chart 2: AI word count for central banker speeches



9. While AI adoption in financial services is increasing, it can make a significant impact in three areas  viz.  risk  assessment  and  credit  scoring,  enhancing  customer experience, and fraud detection.

10. Traditional credit evaluation relies heavily on structured financial data, such as credit history and income statements. However, AI-driven models enable analysis of vast amounts of alternative data-including transaction patterns, utility bill payments, e-commerce behaviour etc. to assess a borrower's creditworthiness more holistically. This is not only useful in initial underwriting, but in pro-active monitoring of existing borrowers to detect stress at early stage and take remedial measures. It also enables offerings  of  hyper-personalized  financial  products  leading  to  enhanced  customer experience. Another use-case gaining prominence is fraud detection. Unlike traditional rule-based fraud detection systems, which rely on predefined parameters, AI based techniques  continuously  learn  and  evolve,  adapting  to  new  fraud  techniques  and identifying subtle anomalies in transaction and payment behaviour. This is especially critical in the era of real-time payments and digital transactions, where cyber threats, frauds and use of mule accounts are becoming more sophisticated.

## Challenges and Ethical Considerations

11. On an earlier occasion 7  , I spoke about the risks associated with AI/ML models and the guiding principles for their responsible use in finance. Today, however, I want to highlight a fundamental point: while AI raises critical issues such as algorithmic bias,

7  Innovations in Banking - The emerging role for Technology and AI, December 22, 2023 - at the 106th Annual Conference of Indian Economic Association in Delhi available at

fairness, data privacy, and security, the root of these challenges and many other lies in lack of explainability .

## Critical Need for Explainability and Human Oversight

12. Many advanced AI models, particularly deep learning-based systems, function as ""black boxes,"" producing outputs that even their developers struggle to interpret. In a sector where trust, accountability, and regulatory compliance are paramount, a lack of explainability  undermines  confidence  in  AI-driven  decisions.  In  the  absence  of explainability, human intervention can end up becoming mere rubber-stamping, rather than responsible oversight, increasing the likelihood of systemic errors.

## Second-Order Effects: Hidden Risks of Unexplainable AI

13.  AI  models  continuously  learn  and  evolve  based  on  new  data.  While  ' dynamic adaptation '  can  be  beneficial,  it  also  makes  models  susceptible  to  data  drift 8  and concept drift 9 . These changes can cause models to misalign with real-world trends, risking  incorrect  financial  decisions  and  instability.  Regular  human  oversight  and explainability are critical to prevent such risks.

## Danger of Over-Reliance on AI

14. A less appreciated risk of AI-based decision models is ""automation complacency,"" where  people  rely  too  much  on  technology,  even  when  situations  need  careful judgment. As the aphorism goes, ' All models are wrong, but some are useful 10 '. While algorithms can provide valuable insights and efficiency, they should be viewed as tools to support, not replace, human judgment.

## Skill Gap: A Compounding Factor in the Explainability Challenge

15. A significant yet often overlooked barrier to responsible AI adoption in finance is the shortage of professionals who can interpret and oversee AI models. If financial institutions lack personnel with the necessary skills in AI, data science, and regulatory

8  Data drift, or covariate shift, refers to the phenomenon where the distribution of data inputs that an ML model was trained on differs from the distribution of the data inputs that the model is applied to. This can result in the model becoming less accurate or less effective at making predictions or decisions (changes in the data due to seasonality, changes in consumer preferences, the addition of new products)

9  Concept  drift or drift is  an  evolution  of  data  that  invalidates  the data  model.  It  happens  when  the  statistical properties of the target variable, which the model is trying to predict, change over time in unforeseen ways. This causes problems because the predictions become less accurate as time passes.

10  Generally attributed to British statistician George Box

oversight, the explainability problem is further exacerbated and decisions made by AI models may remain opaque.

## Bridging the Gaps: Road Ahead for Financial Inclusion

16. Before I delve into the way forward on financial inclusion, another critical distinction is in order. Financialization and financial inclusion are often used interchangeably, but they represent distinct aspects of economic development. Financialization refers to the increasing role of financial markets, institutions, and instruments in an economy. On  the  other  hand,  financial  inclusion  focuses  on  ensuring  that  every  individual, especially  those  from  underserved  and  marginalized  communities,  has  access  to basic financial services like savings accounts, credit, insurance, and digital payments. The two are inherently complementary-without inclusion, financialization risks being concentrated  among  a  privileged  few,  limiting  broader  economic  participation. Conversely,  without  financialization,  inclusion  remains  superficial,  as  access  to banking alone does not empower individuals unless they can also save, invest, and grow their wealth.

## Present Status of Financial Inclusion

17. Reserve Bank of India's Financial Inclusion Index (FI-Index), a multidimensional composite index that  captures  the  extent  of  financial  inclusion  across  the  country, stood at 64.2 in March 2024, up from 60.1 in March 2023 and 43.4 in 2017. The index is  based  on  three  sub-indices  -  Access,  Quality  and  Usage.  India  has  made remarkable strides in expanding financial access, with the success of schemes like PM Jan Dhan Yojana, etc. ensuring that 80% of adults now have a bank account 11 . Till date, 54.84 crore bank accounts have been opened under PM Jan Dhan Yojana with  a  total  balance  of  ₹2.45  lakh  crore  in  the  accounts 12 .However,  true  financial inclusion goes beyond merely opening accounts-it requires meaningful engagement with financial services. As the FI-Index (Chart 3) shows, Usage is the one which is lagging the other two 13 .

11  World Bank, Global Findex Report, 2021

12 As on February 20, 2025, retrieved from https://pmjdy.gov.in/

13  RBI Annual Report 2023-24, page 99

Chart 3: Fl-Index and Sub-Indices (end-March)



18. A bank account should serve as the entry point for individuals to access a broader suite  of  financial  products,  including  credit,  insurance,  pensions,  and  investment opportunities. Without this deeper engagement, financial inclusion remains superficial, and the true benefits of a formal financial system do not reach every individual or business. It was encouraging to note that the improvement in the FI-Index in 2023-24 was  largely  contributed  by  the  usage  dimension,  reflecting  deepening  of  financial inclusion 14 . While this shows that we are moving in the right direction, there is still a long way to go wherein the most vulnerable populations and low-income groups have access to secure and affordable finance.

19. One of the significant gaps lies in access to credit, particularly for the informal sector of the economy, which is a major contributor to Indian economy, employing millions. Traditional credit models, which rely heavily on collateral-based lending, fail to  accommodate  first-time  borrowers  and  small  businesses  with  limited  credit histories. As a result, such entities and individuals either remain underfunded or turn to informal sources of credit, often at exorbitant interest rates. Another critical gap is in insurance penetration, which stands at just 3.7% in FY24, significantly lower than the global average of 7%. Similarly, pension assets in India account for only 21.5% of GDP (17% under EPFO and 4.5% under NPS), which pales in comparison to the 80% of GDP in OECD countries 15 .

14  RBI Report on Trend and Progress in Banking, 2023-24

15  Economic Survey 2024-25

## Leveraging Digital Transformation for Greater Financial Inclusion

20. To bridge these gaps, we must harness the power of digital transformation to make financial services more  accessible, efficient, and  inclusive. Technology-driven solutions can democratize finance by breaking traditional barriers and bringing a wider range of financial products to underserved segments of the population.

21. As I highlighted earlier, having a bank account is not very useful if it does not lead to further financialization i.e. ensuring Quality and Usage. In case of payments, UPI meets all three dimensions of Access, Quality and Usage. Given the omnipresence nature of UPI for retail payments and its ease of usage, it has become essential for many  informal  sector  businesses.  This  has  created  financial  footprints  for  a  large informal economy which was earlier mostly dealing in cash. Access to these financial footprints  has  been  enabled  for  the  financial  service  providers  through  the  AA framework  and  it  can  be  employed  by  lenders  to  underwrite  them  using  new-age models  and  combining  with  other  alternative  data  to  offer  hyper-personalized products.  This  approach  is  particularly  useful  in  extending  credit  to  new-to-credit individuals, gig workers, and small businesses who may lack formal credit histories but demonstrate strong financial discipline through alternative indicators. Thus, the AA framework  acts  as  a  bridge,  allowing  banks,  NBFCs,  and  other  financial  service providers  to  access  a  more  holistic  and  accurate  picture  of  a  customer's  financial profile.

22. Further, increasing formalization of MSMEs through GST, e-commerce sales data, etc. can help lenders assess creditworthiness more accurately. To augment further data-driven financial inclusion, RBI has also facilitated the setting up of ULI as a digital public  infrastructure  in  the  lending  space,  which  will  unlock  critical  financial,  nonfinancial  and  alternate  data  for  lenders  to  enable  informed  credit  decisions.  As  on December 6, 2024, over 6 lakh loans amounting to ₹27,000 crore, including 1.6 lakh loans  amounting  to  ₹14,500  crore  to  MSMEs  have  been  disbursed  using  the  ULI platform.  36  lenders,  including  various  banks  and  NBFCs  have  been  onboarded. These lenders are using more than 50 data services including, inter alia , authentication and  verification  services,  land  records  data  from  six  states,  satellite  service  data, transliteration, property search services, dairy/milk pouring data and  identity/ document verification.

## Financial Inclusion not Financial Excesses

23. While technology and digital innovations are driving financial inclusion and access, they also bring with them the risk of excessive exposure and over-leveraging, which can  create  significant  vulnerabilities  for  both  individuals  and  the  broader  financial system.  However,  as  it  is  said  that  presence  of  too  much  light  can  also  lead  to blindness, we must be aware of the risk of reckless financialization. Of late we have seen  some  concerns  of  excessive  borrowing  in  unsecured  segment  and  from derivative  euphoria  in  the  capital  markets.  The  temptation  of  short-term  gains  can easily  overshadow  the  long-term  financial  security  of  individuals.  Financial  entities have  a  duty  to  ensure  that  customers  fully  understand  the  risks  associated  with leveraged products and speculative investing.

24. While RBI along with other financial sector regulators is taking progressive steps to educate the customers, financial sector entities also need to shoulder part of the responsibility. Absence of financial literacy leads people to fall prey to unscrupulous players which erodes the trust of the people in the system. Increased financial literacy will help increase trust in the sector and its participants, whose benefits will accrue to the entities themselves.

## Financial Regulation in the era of fast-paced innovation

25.  While  educating  consumers  helps  protect  them  from  fraudulent  practices, regulation plays a critical role in maintaining stability and preventing systemic failure. Financial  services  are  regulated  because  their  stability  is  crucial  for  the  broader economy-failures in the financial sector have severe real-world consequences, often requiring costly taxpayer-funded bailouts. The 2008 global financial crisis is a reminder of  how  lax  regulation  and  excessive  risk-taking  can  lead  to  widespread  economic distress, job losses, and prolonged recessions. The cost of restoring financial stability in such scenarios is often much higher than the cost of preventive regulation. While strong regulation is essential to prevent such crises, determining the optimal level of regulations remains a delicate balance-too little regulation may increase systemic risk, while excessive regulation can stifle innovation, limit credit availability, and raise costs. Thus, regulating finance in an era of fast-paced technological innovation is a delicate balancing act.

26. At the same time, regulated entities must develop the necessary capabilities to implement and comply with evolving regulations. As financial institutions integrate AI, cloud  computing,  and  API-driven  finance  into  their  operations,  they  must  invest  in robust governance frameworks and risk management protocols to ensure compliance and customer appropriateness. Financial firms cannot afford to view regulation as a barrier to innovation-rather, compliance itself must become a core component of their digital  strategy.  A  strong  internal  culture  of  risk  awareness,  ethical  AI  usage,  and customer-centric  innovation  will  be  critical  in  navigating  the  evolving  financial landscape effectively.

## Conclusion

27.  ' Change  is  the  only  constant ,'  wrote  an  ancient  Greek  philosopher 16 and  yet change can appear daunting, destabilizing, even threatening. So, will the technological changes  lead  to  'creative  destruction'  and  really  replace  the  traditional  financial institutions like banks? The specter of banks being 'dead' has been raised in the past also. A quarter century back, the issue was examined in the light of disruptive financial innovation of those times such as securitisation which was touted as evidence enough for erasing the need of banks as financial intermediaries 17 . As the passage of time has shown, these predictions proved false, and the banking sector emerged even more resilient  from  these  disruptions.  Although,  history  does  not  repeat  itself,  and  the potential of the current wave of disruption is arguably bigger, it may be prudent to be cautious while making predictions about future of banking.
28. For banks and NBFCs, however the message is clear: adapt or risk being made obsolete. To remain competitive, financial institutions must invest in digital infrastructure,  and  pivot  to  a  customer-centric,  data-driven  approach  in  this  new landscape. At the same time, institutions must navigate the risks of excessive reliance on third-party technology providers, ensuring that regulatory  compliance  and cybersecurity  while  ensuring  customer  protection  remain  their  top  priorities.  The challenge is ensuring a balanced and resilient financial ecosystem for the future. The key is to harness the benefits while managing the risks.

Thank You!

16  Heraclitus of Ephesus

17  Boyd  and  Gertler's  Are  banks  dead?  Or  are  the  reports  greatly  exaggerated?  Federal  Reserve  Bank  of Minneapolis Quarterly Review Vol 18 No. 3",Rajeshwar Rao
https://www.bis.org/review/r250225b.htm,Zeljko Jović: Overview of recent monetary and macroeconomic trends in Serbia,"Introductory speech by Dr Zeljko Jović, Vice-Governor of the National Bank of Serbia, at the presentation of the February Inflation Report, Belgrade, 19 February 2025.",2025-02-19 00:00:00,"

## Introductory speech at the presentation of the Inflation Report -February 2025

Dr Željko Jović, Vice Governor

## Ladies and gentlemen, esteemed members of the press, dear colleagues,

Welcome to the presentation of the February Inflation Report .

Allow me, first, to briefly summarise the year behind us. Just as the previous postpandemic years, last year was marked by global uncertainty, heightened geopolitical tensions and rising protectionism. And yet it was the year in which global inflation, which remains elevated, was reined in. On top of this, inflation was contained without triggering  global  recession,  though  growth  remains  below-average  in  a  number  of countries, including in the euro area - a region particularly important for us. Even in such highly complex conditions, our country continued to demonstrate a high degree of resilience, and we successfully achieved all our objectives.

- Most importantly, when it comes to monetary policy, in May 2024, we brought inflation back  to the target tolerance band  of 3±1.5%,  consistent with expectations, while ensuring that it stays there in the remainder of the year.
- This helped us support economic growth more directly by cautious monetary easing, more favourable borrowing conditions and accelerated lending.
- A  favourable  growth  outlook  for  our  economy  was  an  important  feature  of macroeconomic trends in 2024 - the growth measured 3.9% and was one of the  highest  in  Europe.  As  we  diversified  growth  sources  and  responded  to challenges  in  an  adequate  and  timely  manner,  GDP  exceeded  the  prepandemic level by over 18%.
- I particularly wish to emphasise the new record-high FDI inflows worth EUR 5.2 bn in 2024, as well as record-high government capital expenditure worth around EUR 6 bn, which are important pillars of investment financing.
- Though government capital expenditure was fully executed in accordance with plan, the fiscal deficit of 2% of GDP was lower than projected, allowing for a further decline in public debt. FX reserves are at a record high, exceeding all adequacy criteria and guaranteeing the sustainability of our external position.
- An increase in the degree of dinarisation of loans and deposits, record-high dinar household savings above RSD 190 bn, and a reduction in the NPL ratio to a new low of 2.5% at end-2024 attest to the preserved and further reinforced financial stability.

- Owing to all the above results, the NBS and the Government achieved one of our key strategic objectives - in October 2024, Standard &amp; Poor's awarded us an investment-grade rating, and in late January Fitch affirmed Serbia's positive outlook,  leaving  room  for  an  investment-grade  rating  at  the  time  of  its  next review.

***

Further  on,  we  shall  present  current  economic  trends,  our  new  macroeconomic projections  and  monetary  policy  decisions  made  in  the  period  since  the  previous Report .

As I highlighted at the beginning, after retreating within the target tolerance band in May 2024, y-o-y inflation remained within its bounds, measuring 4.3% in December, i.e. it stabilised around that level in the second half of the year. In the course of Q4, the contribution  of  energy  prices  increased  somewhat,  mainly  due  to  the  low  base  for petroleum product prices. The drop-out from calculation of electricity price hikes from November 2023 worked in the opposite direction. Food prices, mainly on account of reduced  vegetable  supply  following  the  summer  drought,  also  provided  a  stronger impulse than in September, whilst the contribution of services prices declined. Similarly to other countries in the region, including the euro area, core inflation remained above the headline figure due to services prices and measured 5.3% y-o-y in December.



We would like to draw your attention to two text boxes in the February Inflation Report , where we provided a more detailed analysis of prices.

In one of the text boxes, we analysed how the distribution of y-o-y consumer price growth in 2024 changed compared to the previous year. The results of the analysis show that  the  distribution  improved  noticeably  over  the  course  of  the  year,  with  a considerable  reduction  in  the  share  of  products  and  services  within  the  consumer basket that recorded double-digit y-o-y growth. Additionally, the percentage of products and services that did not experience any price increase in 2024 rose to about 25%, with as many as 100 products and services having lower prices than in the year before.



Sources: SORS and NBS.

Sources: SORS and NBS.

In  the  second  text  box,  we  analysed  a  phenomenon  that  is  increasingly  being discussed  worldwide  and  has  come  to  be  known  as  cheapflation.  Cheapflation occurs when during inflationary pressures there is a faster price increase for cheaper brands compared to more expensive brands of the same products. Our analysis confirmed that within the food and beverage category, between 2022 and 2024, the cumulative price increase of cheaper brands was 5 pp higher compared to more expensive brands. The second characteristic of cheapflation was also confirmed: the largest price difference between cheaper and more expensive brands occurs during the most pronounced inflationary pressures. Several factors could be the cause of this  phenomenon. First,  the  demand  elasticity  for  food  is  generally  low,  and  it  is lowest for the cheapest brands. Additionally, price growth can lead to the substitution of  more  expensive  products  with  cheaper  alternatives  of  the  same  item,  thereby increasing  the  demand  for  the  cheapest  brands  and  creating  additional  price pressures. Furthermore, the imperfect market structure makes it easier for producers and retailers to pass increased costs on to retail prices, often more than fully. This is an issue the National Bank of Serbia has repeatedly warned about and one to

which  we  have  consistently  dedicated  significant  attention,  urging  retailers  to  be mindful of the important role they play in the supply chain.



* CPI  consisting of the cheapest brands.
- ** CPI  consisting of the most expensive brands.
* CPI  consisting of the cheapest brands.
- ** CPI  consisting of the most expensive brands.

Under our new central projection, inflation will continue to move within the target band over the next two years - the time horizon of our projection. More specifically, y-o-y inflation should move around the upper bound of the target band in early 2025, though we do not exclude the possibility that in some months it could temporarily overshoot the band by a thin margin. Inflation should  slow gradually thereafter, approach the target midpoint late in the year and stay around this level until the end of the projection horizon.  Such  inflation  movements  will  be  underpinned  by  the  still  tight  monetary conditions, subdued imported inflation and the anticipated lower global energy prices according to relevant international institutions' projections and market futures. If the new agricultural season which begins in May is average, fruit and vegetable prices should go down and food production costs decline. The projected movement of real wages in line with productivity growth should help core inflation slow and approach headline inflation.



I wish to emphasise that, by adopting a cautious approach and pursuing a responsible monetary  policy,  we  have  ensured  inflation's  return  within  the  target  band,  while maintaining  favourable  economic  growth  prospects.  Positive  economic  dynamics extended into Q4 2024 when, according to the SORS estimate, GDP rose by 3.3% yo-y, while in 2024 overall it rose 3.9%, slightly exceeding the November projection. Though the negative effects of the drought on agricultural production were stronger in 2024 than we estimated in November, they were more than offset by better outturns in manufacturing and service sectors. Construction also gave a positive impulse thanks primarily to the implementation of infrastructure projects planned under the 'Leap into the Future - Serbia Expo 2027' programme. According to our estimate, quarterly s-a GDP growth was around 1% in Q4 2024 and the carry-over effect for this year was roughly the same.



Sources: SORS and NBS calculation.

* NBS estimate.
* NBS estimate.



Under our new projection, we expect GDP growth to pick up to 4.5% this year and range between 4% and 5% in 2026 and 2027, but probably closer to the upper bound of the range in 2027 due to the hosting of 'Expo 2027'. From the aspect of use, GDP growth will be guided by domestic demand, with private consumption growth propped up  by  higher  disposable  income  and  positive  trends  in  the  labour  market.  Fixed investment growth will be supported by increased corporate profitability in recent years, high  FDI  inflows,  planned  government  capital  expenditure  for  projects  in  transport, energy and utility infrastructure, and improved financing conditions amid the initiated monetary easing and receding global inflationary pressures. Exports are also expected to  provide  a  positive  contribution  reflecting  the  start  of  serial  production  in  the automobile industry and new capacities in the energy sector, despite the still weak external demand, particularly from the euro area. Imports of goods and services will rise  faster  than  exports  in  2025  and  2026,  however,  as  the  investment  cycle accelerates and private consumption goes up, resulting in a negative contribution of net exports. The contribution of net exports is expected to turn positive in the year of hosting 'Expo 2027'.

I would like to draw your attention to a text box in this Report where we estimated that Serbia's potential output rate will measure around 4% in the medium term, propped up mainly by fixed investment which is set to exceed 25% of GDP in the next two years. We also expect an increase in the contribution of total factor productivity, driven by the application of new technologies in the production process, and by digitalisation and continuation of structural reforms, particularly in the energy sector. At the same time, the contribution of labour will remain positive, though lower than in recent years. All this  should  ensure  the  continuation  of  Serbia's  convergence  towards  advanced economies, making its growth sustainable over the long term.

Chart 11 Contributions of labour, capital and total factor productivity to GDP

Chart 12 Contributions of labour, capital and total factor productivity to potential output (in pp)





The current account deficit measured 6.3% of GDP in 2024, close to the estimated average equilibrium rate, as imports of goods and services rose faster than exports and  FDI  income  payments  went  up.  Within  goods  exports,  despite  the  still  weak external demand and challenges in the European automobile industry, manufacturing exports continued up, at a rate of around 3%, as a result of past investment. Import growth was guided by the imports of intermediate goods and equipment for capacity modernisation and investment cycle purposes, as well as by the imports of consumer goods  and  tourism  services,  reflecting  higher  disposable  income  of  households. Despite its increase, the current account deficit was fully covered by FDI inflows which measured EUR 5.2 bn in 2024. This was the fourth year in a row that appreciation pressures prevailed and the NBS was the net buyer in the FX market. Specifically, the NBS  bought  EUR  2,725  mn  net  in  the  FX  market  in  2024  to  prevent  excessive strengthening of the dinar. The country's FX reserves therefore climbed to EUR 29.3 bn at end-2024, further strengthening the economy's resilience to external risks.

We project that the share of the current account deficit in GDP this year and the next will be similar as in 2024 and that it will subside to around 4% in 2027 as service exports go up in the year of hosting 'Expo 2027' and foreign trade improves. A favourable external position will be maintained by the high FDI inflow diversified by project and geography and estimated to be around its last year's record-high level.



Fiscal trends in 2024 outperformed the expectations. This is primarily indicated by the consolidated fiscal deficit which measured 2.0% of GDP instead of 2.7% planned under the supplementary budget. Capital expenditure envisaged under the 2024 supplementary  budget  (7.3%  of  GDP)  was  fully  executed,  while  outlays  for  the purchase of goods and services turned out lower than projected. At the same time, higher tax revenue mainly reflected improved collection of excise duties and profit tax. Although the medium-term fiscal framework envisaged a more generous fiscal policy for the purpose of funding investments under the 'Leap into the Future - Serbia Expo 2027' programme, we do not expect this to undermine the declining trajectory of the public debt share in GDP, which at end-2024 stood at 47.6%, significantly below the Maastricht criterion of 60%.



2017 2018 2019 2020 2021 2022 2023 2024 2025*2026*2027*



- Source: Ministry of Finance.
* Projection from the Fiscal Strategy for 2025 w ith Projections for 2026 and 2027.
- Source: Ministry of Finance.
* Projection from the Fiscal Strategy for 2025 w ith Projections for 2026 and 2027.

We have not changed the key policy rate of 5.75% since the last Inflation Report . In making such decision,  we  were  fully  aware  that  a  cautious  monetary  policy  is  still warranted despite  inflation's  movement  within  the  bounds  of  the  target.  Caution  is primarily mandated by heightened geopolitical tensions and global market fragmentation,  coupled  with  the  risk  of  a  further  rise  in  protectionism,  which  could trigger an increase in the prices of energy, primary agricultural commodities and other raw  materials  in  production,  as  well  as  halts  in  global  supply  chains.  Skyrocketing prices  of  some  food  raw  materials,  such  as  cocoa  and  coffee,  in  global  stock exchanges also  cause  concerns  regarding  global  food  prices,  as  does  the  dented supply  of  agricultural  produce  in  the  domestic  market  due  to  the  summer  months' drought.

Given that past monetary policy easing has fully passed through to interest rates in money and credit markets, accelerating lending, we deem that a cautious approach is warranted and that the effects of past key policy rate cuts on inflation and economic activity in the coming period need to be fully considered.



Source: NBS.

Reflecting a more favourable price of borrowing аnd credit standards easing, lending to the non-monetary sector sped up y-o-y, to 8.2% at year end, with corporate loans rising by 4.8% аnd household by 10.2%. In 2024, lending was driven more by dinar loans, pushing dinarisation of receivables up to 37.4%. Lending growth, along with a lower  amount  of  non-performing  receivables  as  a  result  of  carefully  combined  and synchronised monetary and macroprudential policy measures, contributed to bringing the NPL share in total loans down to a new all-time low of 2.5% at end-2024.

Let  me  draw  your  attention  to  the  Decision  on  Temporary  Interest  Rate  Cap  we adopted late last year with a view to protecting financial stability and living standards of  citizens,  primarily  housing  loan  consumers,  and  making  the  monetary  policy transmission mechanism even more efficient by linking the effective interest rates to the key policy rate for some categories of loans to natural persons.

Our future monetary policy decisions will also be made cautiously, on a meeting-tomeeting basis, depending on the pace of inflation's slowdown and its key underlying factors in the domestic and international environment, and taking care of the effects on financial stability and economic growth.

## Ladies and gentlemen, dear colleagues,

The macroeconomic projections we have just presented are based on the assumptions that there will be no major tightening of geopolitical relations in the coming period and that global protectionism will not gain considerable traction. Nevertheless, there is a realistic risk of materialisation of such unfavourable scenarios - for economic growth globally and, by extension, for a small and open economy such as Serbia. We believe it is important, in such complex circumstances, that we should continue to strengthen the domestic fundamentals and our resilience to external risks, that we should keep running a responsible economic policy and preserve stability in every sense. Only in this way will we be able to remain on the path of sustainable growth and development, preserve investment and consumer confidence and direct our efforts toward further strengthening of productivity and competitiveness of our economy and a rise in the living standards of our citizens. We have come a long way toward a medium-income country and a country deserving of investment-grade rating. This is confirmed by the Fitch report saying that in the period from 2018 to 2024 our GDP per capita rose by over 80%, as well as by the great demand for dinar government securities at the first auction held this year after we obtained investment-grade rating. Now that we have the momentum, it is important to maintain it.

In the remaining part of the conference my colleagues from the Economic Research and Statistics Department will present our projections in more detail after which we remain open for all your questions.",Zeljko Jović
https://www.bis.org/review/r250225c.htm,"Denis Beau: New payments landscape, but old challenges for central banks?","Welcome address by Mr Denis Beau, First Deputy Governor of the Bank of France, at the Central Bank Payments Conference, Paris, 18 February 2025.",2025-02-18 00:00:00,"## Denis Beau: New payments landscape, but old challenges for central banks?

Welcome address by Mr Denis Beau, First Deputy Governor of the Bank of France, at the  Central Bank Payments Conference, Paris, 18 February 2025.

* * *

Let me start with stating the obvious: globally, the payments ecosystem has experienced significant transformations in the last couple of decades. New technologies have transformed products and services offered on the retail payment market; the ecosystem has expanded with new entrants notably BigTechs and Fintechs, which have now become key links in the payments value chain; and we have seen the emergence of new DLT-based private settlement assets, in tandem with the emergence of the so-called ""tokenisation of finance"".

Speaking from the perspective of a central bank which has in its mandate to ensure the proper functioning of the payment system, these transformations have raised traditional policy challenges to help mitigate risks and harness benefits of those transformations, given their potentially two sided impacts on efficiency and safety of payments. At the Banque de France, they have been addressed with 2 convictions: first a regulatory framework is needed that is sufficiently demanding but innovation friendly, to ensure confidence in our payment system; second, central bank money must remain at the heart of settlement between intermediaries, which is most sensitive from a systemic risk perspective. But those transformations have also brought to payments a new strategic dimension, owing notably to their wide-ranging implications on market concentration, data protection and sovereignty. And the first weeks of the new US Presidency are blowing in favor of deregulation, new and private crypto-based settlement assets, against multilateralism and multilateral institutions, which may be adding new challenges going forward.

Should this evolving payment landscape and policy environment lead us to alter in important ways the policies and tools we, central banks, have been using so far or considering using, like issuing Central Bank Digital Currencies (CBDCs)?

It is likely that all central banks may not have the same answer to that question, but what I would like to do now is simply share with you my own view on that topic. In a nutshell my conviction is that the Banque de France policy stance and toolkit may require more of an adjustment than a thorough overhaul going forward. I would like to take 3 key features of our payment systems policy so far to illustrate my view: our central bank money services, the role we give to cooperation with other stakeholders, and our involvement in the innovation ecosystem.

## 1 Central bank money services

In the wholesale space, the security and efficiency of financial transactions between financial intermediaries importantly hinge on the nature of the settlement asset chosen.

Lessons learned from past financial crises have underlined the critical importance of

using secure settlement assets. In response, the Banque de France and many other central banks have committed to promoting the use of central bank money in the wholesale payments space. This commitment is reflected in Principle 9 of the CPMIIOSCO's Principles for financial market infrastructures (PFMIs). And we have been successful in the implementation of this policy, as central bank money is actually the very dominant settlement asset in the wholesale space, across many currency zones, starting with the euro area.

However, as tokenisation of assets gains momentum, private settlement assets, particularly so-called ""stablecoins"", are likely to become the settlement assets for those transactions, absent the availability of central bank money on Distributed Ledger Technology (DLT). In addition, the proliferation of uncoordinated settlement solutions resulting from the lack of public sector response to the tokenisation of finance could lead to increased liquidity fragmentation.

This is why we have considered that we need to adapt the provision for the euro area of central bank money to the demands of an increasingly digital financial system, to prevent regression in the safety and efficiency of wholesale transactions. The urgency of such adaptation has certainly increased given the evolution of the geopolitical context I referred to earlier in my remarks.

Since 2020, the Banque de France has been one of the first central banks to launch an ambitious experimental program focused on the use of wholesale central bank digital currency (CBDC) in various settlement processes for varied assets.

Building on these experiments and promising outcome, the Eurosystem conducted a series of new experiments on the settlement of wholesale transactions in central bank money in 2024 with the active involvement of the Banque de France, Banca d'Italia and Bundesbank as solution providers. Actual settlement has been tested for the lifecycle management of securities and secondary market transactions. The Eurosystem will soon draw lessons from this work and I trust will roll out operational solutions rapidly, including on how to facilitate the provision of central bank money for wholesale transactions on DLT platforms.

At the international level, the BDF remains actively involved in several initiatives on wholesale CBDCs for cross-border payments. Three key initiatives working as bricks and coordinated by the BIS Innovation Hubs epitomize those investigations. First, Project Rialto, which focuses on improving cross-border settlement efficiency. Then, Project Mandala, which addresses regulatory frictions in cross-border payments. Finally, Project AgorÆ, which examines how a programmable platform and the tokenisation of cross-border payments can enhance the existing correspondent banking model, thus prefiguring the concept of shared ledger.

On the retail side, in the uncomfortable context of a lasting dependence on US payment solutions and networks, we have been since its inception supporting and involved in the digital euro project. We see it as an important one because it can provide a public alternative that preserves freedom of choice, sovereignty and competition in our euro area retail payment system. This new form of central bank money would be comparable to a ""digital banknote"", preserving the characteristics of cash in the digital space notably its privacy, resilience and inclusiveness. As you know, the Eurosystem is

currently conducting a preparation phase - aimed at finalising the design, selecting potential suppliers and conducting experiments. At the same time, a democratic debate is underway in the Parliament and the Council. The decision to issue a digital euro has not yet been made and will only be taken once the legislative process comes to a conclusion.

## 2 Cooperative approaches

The second key feature of our payments policy is the reliance on cooperation across authorities and with private sector stakeholders. An important driver for this is related to the fact that payments are increasingly challenged by the fragmentation of the payment value chain and the rise of sophisticated fraud patterns. This context calls for regulators and supervisors to share knowledge and best practices to foster . payments security To that end, I believe that central banks have a key role to play in facilitating cooperation across authorities in charge of data protection, cybersecurity, regulation of telecommunication and digital platforms, together with the private sector.

We have promoted and experienced successfully such cooperation in France for more than 20 years now, through the Observatory for the security of payment means. We therefore intend to maintain and extend it going forward at national level. We have just extended the participation to the OSPM to telcos and we plan to develop work with social media going forward. I believe that a dedicated forum on payment security at EU level could be usefully created on similar grounds.

Another important driver is that digitalization and the increasing role of BigTechs in payments raise novel challenges in terms of . This should encourage level-playing field central banks to explore new avenues of cooperation with competition authorities. This is a path we have started to take, to prevent and address non-compliance practices in payments markets, for example in the card market with access issues to NFC antenna on iPhones, or in the choice and selection of payment brands under the Interchange Fee Regulation.

The last driver I would like to mention is the increased dependence on non-European players in the euro-area payments market. In the uncertain geopolitical context we live in, has become a key issue for public authorities, including payment sovereignty central banks, for both retail and wholesale payments. This is why we and the other central banks of the Eurosystem have made the development of a pan-European payment solution an important goal of our retail payment strategy and that we support the roll-out of the European Payment Initiative (EPI) and its digital wallet, wero. The development of a digital euro as a platform for innovation could also contribute to this objective, allowing private payment solutions like wero to re-use its open standards to extend their reach and scale up. Furthermore, the provision of central bank money settlement for wholesale asset transactions on DLT platforms by the Eurosystem in the future months, and the development of a European Shared Ledger in the future years could directly contribute to this objective.

## 3 Involvement in the innovation ecosystem

A third and last key feature of our current payments policy I would like to mention is our active involvement in, and use of, technological innovations. I have already mentioned

illustrations of that feature though the wide ranging CBDC experiments, based on DLTs we have been performing over the last years. But there are other fields we are involved in like AI, cybersecurity, post-quantum cryptography.

Those experiments are run first to allow us to better understand those new technologies, building on dedicated resources and innovative tools we have put in place in-house, like our Lab, the Banque de France innovation center, and the Fintech Innovation center at the ACPR, or tools provided by others like the BIS, with its innovation hub, to which we actively contribute.

The knowledge base developed though this active participation to the innovation ecosystem can then be usefully leveraged for the conduct of our traditional activities to ensure a safe and efficient payment system, as an overseer, catalyst or service provider. Indeed, it allows us to acquire a good command of technologies which may be driving important change in the payment landscape going forward.

This operational model has served us well so far and we intend to keep it as a core feature of our payments policy.

To conclude, let me share with you three convictions regarding the conditions under which the transformations underway of the payments landscape can bring sustainable benefits (from an efficiency and safety perspective), and how we can best contribute as central banks.

First, we need a regulatory framework that does not stifle innovation but that is sufficiently demanding to ensure that stakeholders are reasonably protected, stability of our payment system is guaranteed and prevention of new system wide financial crisis is ensured.

Second, within the remit of our mandate vis-a-vis payment systems, we need to persevere with the policy goals we have been pursuing so far, where new issues such as sovereignty have gained a critical importance, while adapting the tools we use to evolving and more challenging geopolitical circumstances. An important area for this will be the adaptation of central bank money services to the digital age of payments we are now facing, including in the form of CBDC. This is all the more warranted for us at the Banque de France that it could provide a stepping stone towards the provision of a new, decentralised and European infrastructure in the form of a European Shared Ledger that we have started considering with attention.

Third, like in the past, collaboration will remain essential: between central banks, with authorities in other sectors and with market participants.",Denis Beau
https://www.bis.org/review/r250224h.htm,Ryozo Himino: An economy with positive interest rates,"Speech by Mr Ryozo Himino, Deputy Governor of the Bank of Japan, at the Hitotsubashi University Policy Forum, Tokyo, 30 January 2025.",2025-01-30 00:00:00,"

January  30,  2025

Bank  of  Japan

## An Economy with Positive Interest Rates

Speech at Hitotsubashi University Policy Forum

## HIMINO Ryozo

Deputy Governor of the Bank of Japan

(English translation based on the Japanese original)

## Introduction

After  a  quarter  century  with  near  zero  or  negative  policy  interest  rates,  the  Japanese economy is transitioning to a state with positive rates. People have mixed feelings about a state that has been unknown for decades. Let me pose three questions regarding an economy with positive interest rates.

## I. What Kind of Economy to Anticipate?

The first is the question of what kind of economy with positive interest rates to anticipate and what kind of path to pursue toward it. The difference between an economy with and without  positive  rates  is  not  merely  the  presence  or  absence  of  positive  rates.  There  are many  possible  forms  of  an  economy  with  positive  rates,  and  the  path  toward  such  an economy, including the causes and the speed of transition, can also be diverse.

To explore what can lie behind positive policy rates, I would like to begin with a conceptual framework for policy rate setting (Chart 1). First, let us assume that economic activity is affected by the level of the real policy rate, which is the nominal policy rate minus inflation expectations. A central bank will set its nominal policy rate to attain the desired level of the real policy rate.

The appropriate level of the real policy rate could be derived by adding to or subtracting from the natural rate of interest, the rate that is neutral to the economy, according to the policy  stance  toward  how  restrictive  or  accommodative  the central  bank  desires  its monetary  policy  to  be.  In  the  case  of  a  central  bank  with  a  price  stability  mandate,  the policy stance is set so as to bring the inflation rate in line with the price stability target.

There can be various approaches in determining the policy stance. One example could be (1)  to  look  at  the  extent  to  which  the  current  inflation  rate  and  medium -to  long -term inflation expectations deviate from the target, and (2) to assess how the deviation is likely to develop  going  forward  by  examining  slack  or  bottlenecks  in  the  economy  and  the persistence of the impact of external shocks, as well as structural factors.

Where  inflation  expectations  are  well  anchored  at  2  percent,  the  central  bank  will  pay particular  attention  to  the  risk  of  de -anchoring.  Where  inflation  expectations  are  not anchored at 2 percent, the central bank will consider how they could be anchored.

In short, policy stance is set based on a judgment regarding underlying inflation.

What I have explained is one example among many possible formulations. In this example, none of the factors mentioned can be directly observed except for the current inflation rate, the nominal policy rate, and the price stability target. Inflation expectations, their degree of anchoring, the natural rate of interest, economic slack and bottlenecks, the persistence of the effects  of  external  shocks,  and  structural  factors  can  only  be  estimated  or  evaluated  by making  various  assumptions  and  processing  multiple  sources  of  data  using  complex methodologies.

Therefore, it is not easy to verify with real data whether the framework has helped attain desired  outcomes,  or  whether  the  actual  conduct  of  policy  has  been  in  line  with  the framework. Moreover, since many factors that stand between the actual inflation rate and policy decisions are not directly observable, the framework can be confusing when used as a means of communication.

However, even simpler policy rules, such as the Taylor rule, still have at their core factors that are not directly observable, such as the natural rate of interest and the output gap. Also, many central banks do not mechanically apply simple rules. Rather, their policy discourse is often  based  on  some  kind  of  conceptual  framework  not  dissimilar  to  the  one  I  have described.

I  would  argue  that  the  framework  can  help  us  interpret,  for  example,  the  rapid  policy tightening in the United States in 2022 (Chart 2). In the United States, inflation expectations had been anchored at 2 percent, but soaring commodity prices  as well as narrower slack resulting  from  the  economy's  recovery  from  the  pandemic  and  fiscal  stimulus  caused  a sharp rise in inflation, which posed the risk that inflation expectations could be de -anchored to the upside. These developments, in particular the de -anchoring risk, led to a restrictive

policy  stance.  I  would  say  that  the  policy  response  successfully  contained  the  risk  of de -anchoring.

On the other hand, what has happened in Japan is, despite some resemblance, quite distinct from  what  happened  in  the  United  States.  In  Japan,  inflation  expectations  were  clearly below 2 percent and then gradually shifted toward 2 percent. The economy had significant slack but the slack has gradually narrowed. In view of these factors, the policy stance has been gradually adjusted to reduce the degree of monetary accommodation.

A  desirable  development  in  the  latter  type  of  direction  would  be  something  like  the following: a virtuous cycle of growth and distribution moves forward, in which firms invest and  conduct  R&amp;D, workers  accumulate  skills,  the  economy  grows,  and  the  fruits  of  this growth result in greater wages and corporate profits, leading to stronger consumption and investment,  and,  supported  by  this  cycle,  moderate  inflation  takes  hold  and  brings  the economy gradually towards a state with positive interest rates.

In this case, the economy with positive interest rates is not simply accompanied by positive rates,  but  also  by  growth,  wage  increases,  flexible  pricing,  vigorous  investment,  and productivity improvements. It may be hoped that the rigidity entrenched in the behavior of the corporate and other sectors may gradually become more flexible, leading possibly to a slight increase in the natural rate of interest.

Keidanren  (the  Japan  Business  Federation)  conducted  a  survey  of  its  member  firms regarding an economy with positive interest rates and published the results in December last year (Chart 3). According to the survey, approximately 70 percent of firms had a positive impression of such an economy, while 30 percent had a negative impression. Many firms that  responded  positively  explained  their  view,  saying  ""because  it  is  the  economic environment as  it  should  be""  or  ""because  it  signifies  the  good  state  of  the  economy.""  In addition, when asked what kind of strategy is required of firms in an economy with positive rates,  by  far  the  most  common  answer  was  ""providing  high  value -added  products  and services,"" according to the survey. The image of the economy with positive interest rates these respondents held seems to be close to the desirable developments I described earlier.

These are indeed the kind of developments that the Bank of Japan wishes to see, and so far the Japanese economy seems to be gradually moving toward that goal.

At its Monetary Policy Meeting in January, the Bank decided to raise the policy rate from 0.25 percent to 0.5 percent (Chart 4). Even after the rate hike, real interest rates will remain significantly negative, and accommodative financial conditions will be maintained, which will continue to provide solid support for economic activity. Looking ahead, the Bank will adjust the degree of monetary accommodation by raising the policy rate, if the outlook we have  for  the  economy  and  prices  continues  to  be  realized.  We  will  strive  to  conduct monetary policy so as to maximize the likelihood that we follow a favorable path.

How should we proceed in the future in order to reach a better form of an economy with positive  interest  rates?  What  should  be  expected  of  monetary  policy?  What  should  be expected of firms, households, and the government? These are aspects of the first point on which I would like to seek your views.

## II. Is an Economy with Positive Real Interest Rates Forthcoming?

The second question is whether an economy with positive real interest rates is coming. 1 We are entering an era with positive nominal interest rates, but are some way off from having positive real interest rates (Chart 5).

The economy with negative nominal interest rates, where one was worse off by depositing cash with the Bank of Japan than by keeping it under the mattress, ended last March, but we are still in an economy with negative real interest rates, where the real value of money lent or deposited decreases as the interest cannot keep up with inflation.

A negative real interest rate means that it pays to borrow and invest in a project whose real economic value gradually erodes.

1 See also Ryozo Himino, ""Japan's Economy and Monetary Policy,"" speech at a meeting with local leaders in Kanagawa,"" January 14, 2025.

Can negative real rates persist indefinitely? According to Ben Bernanke, Paul Samuelson taught him in graduate school at MIT that it is questionable. 2 Samuelson argued that, if real interest rates are expected to be negative indefinitely, almost any investment is profitable. To demonstrate his point, Samuelson cited a counterexample: at a negative interest rate, it would pay to level the Rocky Mountains to save even the small amount of fuel expended by trains and cars that currently must climb steep grades.

Indeed, even small cash flows, if they were to continue indefinitely, would have an infinite present value under a negative real interest rate.

I  think  this  story  gives  us  food  for  thought.  Samuelson's  argument  has  a  whiff  of  an  era when the prosperity of the U.S. economy was believed to last forever. If Samuelson were to come  to  Japan  today  and  say  the  same  thing,  however,  I  am  sure  students  would immediately  retort:  ""Professor,  if  the  amount  of  traffic  crossing  the  Rocky  Mountains continues to decline in the future, your counterexample does not hold. In an economy like Japan's, where the working -age population continues to decline and the size of the economy is expected to shrink eventually, is it not possible for the real interest rate to stay negative?""

I would like to respond to such students as follows: ""A decreasing working -age population does  not  necessarily  mean  a  shrinking  economy.  In  Japan, firms largely  completed  the process  of  adjusting  the  excess  employment  resulting  from  the  collapse  of  the  bubble economy  by  around  2004  and,  since  then,  although  the  working -age  population  has recorded  a  steep  decline,  the  total  number  of  working  hours  was largely  maintained  by means of greater labor participation, and real GDP continued to grow (Chart 6). Japan has had  and  will  continue  to  have  positive  growth  in  real  terms.  Although  some  individual activities may decrease, economic activity as a whole will continue to grow. Samuelson's argument may hold true for Japan as well.""

The merits of this reply depend on the prospect of continued positive growth. I think it is attainable.

2 Ben Bernanke, ""Why are interest rates so low, part 2: Secular stagnation,"" Brookings commentary , March 2015.

Allow me to make a brief detour to recall an experience I had. From 1985 to 1987, I was a student at a business school in the United States. A professor showed the class a video of a machine tool factory in Japan after showing a video of a U.S. factory. I still remember my classmates being shocked to see robots building robots and even repairing robots. Japan in the late 1980s looked like a super -advanced technology giant.

Indeed, two -thirds of the world's industrial robots were in operation in Japan at that time, but  by  2020  that  share  had  dropped  to  12  percent. 3 Today,  Japan  is not  on  the  world's frontier  in  the  use  of  artificial  intelligence,  self -driving  vehicles,  or  drones.  This  should mean  that  many  things  can  be  done  to  overcome  the  declining  population  and  labor shortages and continue economic growth.

In  my  view,  a  negative  real  interest  rate  can  be  necessary,  and  needs  not  be  considered abnormal,  if  negative  external  shocks  are  impacting  the  economy  or  strong  structural deflationary  factors  are  constraining  it.  For  Japan,  this  was  the  case  during  the  global financial  crisis  and  the  COVID -19  pandemic.  It  was  the  same  for  the  period  when  the corporate sector was saddled with excess debt, capacity, and employment in the wake of the collapse of the bubble economy and for the ensuing period when a risk -averse culture was entrenched in  the  sector.  Perhaps  it  may  also  become  the  case  if  in  the  future  we  fail  to overcome the effects of population decline. On the other hand, I do not think it normal for distinctively  negative  real  rates  to  persist  on  and  on,  once  the  shocks  and  deflationary factors are resolved.

The level of the real interest rate that is neutral to the economy, or the natural rate of interest, is affected by various factors, not just by demographics. There is a great deal of uncertainty surrounding  estimates  of  this level,  depending  on  the  data  and  methods  used.  Indeed, estimates  by  the  Bank's  staff  vary  considerably  depending  on  the  approach.  Some  may argue that the estimates around minus 1 percent are too much influenced by data from past periods of strong monetary easing. Others may question the estimates around zero, asking

3 Center  for  Research  and  Development  Strategy  of  the  Japan  Science  and  Technology  Agency, ""Panoramic  View  Report:  Systems  and  Information  Science and  Technology  Field,"" September 2024.

why  the  output  gap  has  not  improved  noticeably  while  real  interest  rates  are  clearly negative.

How should we think  about  the  natural  rate  of  interest  for  Japan?  Can  the  arrival  of  an economy with positive real interest rates be considered a possibility in the future? This is the second point on which I would like to hear your views.

## III. What Is the Impact of Changes in Balance Sheets?

The third question is: Since the previous period when Japan had positive nominal interest rates, which was decades ago, the balance sheets of firms and households have undergone dramatic changes. How do the changes affect what will occur this time?

I  would  first  like  to  look  at  the  example  of  the  United  States, which raised interest rates ahead of Japan. The IMF in July last year published an interesting analysis in its Article IV staff report. 4 The Federal Reserve raised interest rates significantly in 2022, but before that, during the pandemic, U.S. businesses and households refinanced themselves, paying down higher -cost floating -rate debt and locking in low rates at long maturities. By end -2021, 95 percent  of  mortgages  carried  low,  fixed  rates.  The  average  duration  of  corporate  bonds became longer.

At  the  same time,  both firms and  households  increased  their  holdings  of  short -duration financial  assets.  Households increased  their holdings of bank deposits and money market funds (MMFs) by nearly 3 percent of GDP, while firms held additional bank deposits and MMFs equivalent to 2.3 percent of GDP.

As a result, while corporate interest payments increased on a net basis during past interest rate hikes, they have decreased by 30 -40 percent during the latest interest rate hike phase (Chart 7). Also, households' net interest payments increased only slightly overall, despite an increase in interest payments on auto loans and revolving credit.

4 IMF, United States -- Staff Report for the 2024 Article IV Consultation, July 1, 2024.

Of course,  there  is  a  possibility  that  the  impact  of  interest  rate  hikes  will  be  felt  later  as maturing debts are refinanced. But, according to the IMF, the impact of interest rate hikes on household consumption and business fixed investment has been rather muted so far, as a result  of  balance  sheet  changes  in  which firms and  households  shifted  debt  to  long -term fixed interest rates and increased short -term financial assets.

In  Japan  as  well,  the  balance  sheets  of  both firms and  households  have  undergone significant changes (Chart 8).

In the corporate sector, the ratio of firms without debt (debt -free firms) or only with debt less than the amount of cash held (firms with a net cash position) has increased significantly. The ratio of such firms was 25 percent in 1999 and reached 46 percent in 2021. In addition, the ratio of floating -rate borrowing by firms is declining, and maturities are getting longer.

Financial assets held by households were 1,000 trillion yen in fiscal 1990, but have recently reached 2,200 trillion yen, an increase of 1,200 trillion yen over the period. On the other hand, financial liabilities increased only by 50 trillion yen, from 340 trillion yen in fiscal 1990  to  390  trillion  yen  at  present.  Unlike  in the United  States,  however,  the  ratio  of floating -rate mortgages has been increasing.

As a  result  of  these  changes,  there  may  be  differences  between  what  we  saw during the previous period with positive nominal interest rates and what we will see this time.

## Conclusion

I have raised three points today. First, what path should we follow to reach a better form of an economy with positive interest rates? Second, assuming that we are heading toward an economy with positive nominal rates, can we assume that we are also heading toward an economy with positive real rates? Third, what differences could arise between the economy with positive rates we saw decades ago and what we will see this time due to changes in the balance sheets of firms and households?

Today, I have only been able to raise questions. I hope that the leading experts who will speak in the following sessions will give me hints about how the questions can be answered.

Thank you for your kind attention.

## An Economy with Positive Interest Rates

Speech at Hitotsubashi University Policy Forum

January 30, 2025

## HIMINO Ryozo

Deputy Governor of the Bank of Japan

## Introduction

- I. What Kind of Economy to Anticipate?
- II. Is an Economy with Positive Real Interest Rates Forthcoming?
- III. What Is the Impact of Changes in Balance Sheets?

Conclusion

## Conceptual Framework for Policy Rate Setting: An Example



Note: Values of each box can be positive or negative. Elements shown in yellow are not directly observable.

1

I. What Kind of Economy to Anticipate?

Chart 2

## Developments in Consumer Prices and Inflation Expectations in the U.S. and Japan

## United States

Japan



Note: The figure for the actual PCE for 2024/Q4 is the October-November average. Figures for Japan exclude fresh food.

Bloomberg; BEA; Fed Cleveland; FRB.

Sources: Ministry of Internal Affairs and Communications; Bank of Japan; QUICK, ""QUICK Monthly Market Survey &lt;Bonds&gt;""; Consensus Economics Inc., ""Consensus Forecasts"";

## Keidanren Firms' Perceptions of an Economy with Positive Interest Rates

- Positive
- Rather negative
- Rather positive
- Negative
- No specific stance for now



Note: The chart shows the results of the survey of Keidanren member firms conducted between July 30 and September 17, 2024, to which 181 firms responded. Source: Keidanren (Japan Business Federation).

- I. What Kind of Economy to Anticipate?

Japan's economic activity and prices have been developing generally in line with the Bank's outlook , and the likelihood of realizing the outlook has been rising .

## Decision at the January 2025 MPM

## Medians of the Policy Board Members' Forecasts (y/y % chg.)

## Wages

|                                            | Fiscal 2024   | Fiscal 2025   | Fiscal 2026   |
|--------------------------------------------|---------------|---------------|---------------|
| Real GDP                                   | 0.5 (-0.1)    | 1.1 (-)       | 1.0 (-)       |
| CPI (all items less fresh food)            | 2.7 (+0.2)    | 2.4 (+0.5)    | 2.0 (+0.1)    |
| CPI (all items less fresh food and energy) | 2.2 (+0.2)    | 2.1 (+0.2)    | 2.1 (-)       |

-  Firms have expressed the view that they will continue to raise wages steadily , following the solid wage increases last year.

Prices

-  CPI inflation is likely to be at around 2.5 percent for fiscal 2025, due to the higher import prices stemming from the yen's depreciation etc.
-  With wages continuing to rise, underlying CPI inflation has been increasing gradually toward 2 percent .

## Overseas economies

Note: Figures in parentheses indicate changes from the October 2024 Outlook Report.

-  Global financial and capital markets have been stable on the whole , while attention has been drawn to various uncertainties.

Adjusting the degree of monetary accommodation from the perspective of sustainable and stable achievement of the price stability target of 2 percent

(uncollateralized overnight call rate)

## Short-term interest rate :

## raised to ""around 0.5%""

(previously ""around 0.25%"")

-  Real interest rates are expected to remain significantly negative, and accommodative financial conditions will continue to firmly support economic activity .
-  If the outlook presented in the January Outlook Report will be realized, the Bank will accordingly continue to raise the policy interest rate and adjust the degree of monetary accommodation.

3

Chart 4

## Developments in Real Interest Rates

Real Interest Rates (1-Year)

Real Interest Rates (10-Year)

%





%

Note: Figures for real interest rates are calculated as government bond yields minus the composite index of inflation expectations (Bank of Japan staff estimates). Sources: Bank of Japan; QUICK, ""QUICK Monthly Market Survey &lt;Bonds&gt;""; Consensus Economics Inc., ""Consensus Forecasts""; Bloomberg.

5

Ⅱ . Is an Economy with Positive Real Interest Rates Forthcoming?

Chart 6

## Shrinking Population, Working Hours, GDP, and Wages

CY2004=100



## Net Interest Payments by Nonfinancial Firms during Monetary Policy Tightening Cycle in the U.S.



Source: IMF.

Ⅲ . What Is the Impact of Changes in Balance Sheets?

Ratio of Debt-Free Firms by Firms

7

Chart 8

## Developments in Firms' and Households' Balance Sheets in Japan Maturity of Borrowing

Financial Assets and Liabilities



of Households",Ryozo Himino
https://www.bis.org/review/r250224i.htm,Yannis Stournaras: Euro area challenges in an uncertain geopolitical landscape,"Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, to the Ambassadors of the Member States of the European Union in Athens, organised by the Embassy of the Republic of Poland in Athens on the occasion of the Republic of Poland Presidency of the Council of the European Union, Athens, 13 February 2025.",2025-02-13 00:00:00,"## Yannis Stournaras: Euro area challenges in an uncertain geopolitical landscape

Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, to the Ambassadors of the Member States of the European Union in Athens, organised by the Embassy of the Republic of Poland in Athens on the occasion of the Republic of Poland Presidency of the Council of the European Union, Athens, 13 February 2025.

* * *

Your Excellencies, distinguished guests, ladies and gentlemen,

It is a pleasure and an honour to be here with you today at this esteemed gathering to discuss some of the most pressing challenges confronting the euro area. I would like to extend my deepest gratitude to His Excellency the Ambassador of Poland and to the Embassy of Poland in Athens for hosting this important event, and for your continued commitment to fostering dialogue on issues that affect all of us in Europe. As we navigate through the complexities of our interconnected economies, the euro area finds itself at a critical juncture. In many ways, we are at a crossroads, where the decisions we make today will significantly shape the economic future of Europe for generations to come.

Europe has emerged from the pandemic susceptible and weakened. Growth in the euro area has been disappointing in 2023 and 2024, at about 0.5% and 0.7% respectively, low on the basis of whatever criteria one would apply. A key factor underlying the tepid economic activity in the euro area in the last two years was weak business investment, which has been basically flat, if we exclude volatile business investment in Ireland. This starkly contrasts with the situation in the US, where business investment has grown almost three times faster than in the euro area in the post-pandemic period since the end of 2021.

And, if anything, our projections for growth in 2025, at around 1%, clearly do not point to a strong pick-up in activity. In fact, more recent data, like the stagnation of GDP in the last quarter of 2024, already raise questions about the growth dynamics this year. Surveys indicate that manufacturing is still contracting and growth in services is slowing. Firms are holding back on investments, and exports remain weak, with some European industries struggling to remain competitive.

This picture of subpar growth seems to reflect a series of long-standing structural impediments in the euro area, combined with unusually adverse global geopolitical factors as well as by political issues in some euro area countries, including the largest economies. War is waging on European soil, political gridlock hinders the ability to press ahead with reforms, while extremist political views are gaining ground across the continent.

Of course, our restrictive but necessary monetary policy stance in the recent past, aimed at counteracting inflationary pressures, has also contributed to the weak growth developments of the euro area. In this sense, the easing interest rate path on which we have embarked should support activity. The good news is that the disinflation process

remains well on track. Inflation has fallen rapidly from a peak of about 10.5% in October 2022 to 2.5% in January 2025 and is still trending downwards, despite some upward base effects in recent months, driven by oil and natural gas prices. What I find particularly encouraging is the fact that core inflation is at the moment a bit lower than we had expected in our latest projections. Core inflation is that part of inflation that excludes the most volatile components for which monetary policy has little, if any, impact. And this means that the past monetary policy tightening has done its job in taming inflation. It is also encouraging that, despite a very tight labour market and unemployment rates at historical lows, compensation per employee growth is easing. This is safeguarding a downward inflation path, also for services that are typically more labour-intensive compared to goods and, thus, their inflation is more persistent.

Our December 2024 Eurosystem staff projections expect inflation to average 2.1% in 2025 and to return sustainably to our target in late 2025. Unless unexpected contingencies materialise, the ECB's key interest rate through which we steer the monetary policy stance, the deposit facility rate, could fall to around 2% in the course of 2025 from its current level of 2.75%. Obviously, the sequence, pace and magnitude of interest rate cuts remain data-driven and will continue to be decided meeting by meeting.

Overall, the balance of macroeconomic risks in the euro area has shifted from concerns about high inflation to concerns about low growth. In my view, the euro area is in danger of losing its economic footing, if it has not already done so. We have failed to rival US tech giants, while our economies are stagnating, facing strained public finances. Our region has grown at an average quarterly pace of 0.3% in the last 12 quarters. To put it into context, the US economy has expanded by a far more over the same period. And, to add to our own problems, the new US President seems to implement his election campaign declarations regarding import tariffs.

Time is running out. We are facing, as ECB President Lagarde put it in Davos a few weeks ago, an existential crisis. There is an urgency for immediate action and collaborative efforts to effectively address Europe's challenges at home and abroad. In the remainder of my speech, I would like to emphasise several major areas of concern that need to be addressed in priority.

The first area is competitiveness. Productivity growth in the euro area has nearly stalled, constrained by unfavourable demographics, labour market rigidities in many countries, and weak capital growth. This also stems from Europe's lagging business and investment dynamism. Europe has yet to match its global peers in channelling sufficient resources into innovation and productive economic activity, while energy remains expensive. European manufacturers pay about twice as much for electricity as their counterparts in the US. Meanwhile, the needs for electricity of an expanding digital economy will be enormous. Supercomputing infrastructure for artificial intelligence is becoming a geopolitical battleground, and the EU sovereigns must build capacity to reduce strategic dependence on foreign big tech companies.

According to the 2024 European Investment Bank Investment Survey, capacity expansion has been a greater driver of investment in the US than in the euro area, where the primary focus in the latter remained on replacement. Euro area R&amp;D investment was focused on mature industries, such as cars and equipment, while it has

been increasingly concentrated in Information and Communication Technology (ICT)based activities in the US, such as data centres and AI-related facilities. Intangible investment is key for productivity and value added growth, likely contributing to the widening productivity gap between the two jurisdictions, and impacting also potential output growth differentials.

The road to a robust recovery for the European economy demands mobilising the substantial private investment necessary to reignite growth and foster resilience. To keep pace with global competitors, Europe needs to prioritise a substantial boost in investment in the next few years and structural reforms aimed at enhancing long-term potential growth. Notably, increased spending in green and digital transitions, innovation and energy are paramount for making Europe more productive, competitive and resilient.

## What is in my view needed?

First, a more harmonised, yet less burdensome, regulation in the EU - for example, regarding corporate law, insolvencies, taxation and labour law - would improve competitiveness without having to invest a single euro.

Second, the promotion of a single market for capital is essential. The creation of a European Savings and Investments Union is a move in the right direction, as it can ensure a smooth flow of investment throughout our Union. Establishing common supervision of EU capital markets, integrating the highly segmented infrastructure of European financial markets, and standardising products for retail investment can mobilise both EU's large savings and foreign capital. In addition, deepening the securitisation market and simplifying the relevant regulation can also contribute to attracting investors.

Third, the completion of Banking Union, with the establishment of EDIS (European Deposit Insurance Scheme) and a Crisis Management Mechanism - CMDI, since a segmented banking sector can never achieve the efficiency and economies of scale gains of US banks.

There is no doubt that enhanced financial integration can empower innovative firms at all stages of their development with the funding they need to scale up and thrive in a competitive global landscape, reducing their reliance on financing outside Europe. To this end, it is critical to provide investors with incentives for more risk capital, for example by overcoming the institutional and operational hurdles that make European venture capital firms underperform their US counterparts.

Finally, a permanent fiscal capacity in Europe can successfully step up investments and growth-enhancing projects directed towards areas that bolster economic potential and resilience across Europe. In fact, the accomplishments of the EU Recovery and Resilience Facility offer a valuable blueprint for what can be achieved through coordinated and targeted fiscal initiatives. A clear illustration of this is the finding in the Draghi report that, despite public spending in research and innovation being similar in the EU and the US, it yields much lower dividends in the EU because it is fragmented and uncoordinated across countries.

Related to that, we need to take a careful look at the factors that have inhibited private investment and, therefore, productivity. In this regard, two factors come to mind.

First, it appears that some countries are simply not competitive because of structural impediments, such as over-regulation in some markets. I find it interesting that our fastest growing economies at present are those that have had to implement structural reforms during the past decade - countries such as Spain, Portugal, Cyprus and my own.

Second, we should take a close look at the relationship between investment and our taxation policies. There may well be a need to better harmonise our tax policies in a way that provides an incentive to invest.

While these advances require addressing long-standing barriers and fragmentation across jurisdictions and sectors, they would also significantly improve the access of businesses to financing. By fostering business efficiency and resource reallocation to the most productive and competitive sectors, sustainable growth can be supported.

To this end, we welcome the Commission's roadmap on improving competitiveness that was released at the end of January 2025, the so-called Competitiveness Compass, which was based on recommendations by the Draghi report. An increase of productivity by closing the innovation gap is of paramount importance for the economic welfare of European citizens. So is investment in human capital through upskilling and reskilling, talent attraction and retainment, and effective integration of underutilised workers and immigrants into the labour force.

Under President Lagarde's leadership, the ECB's Governing Council stands ready to play its part in this quest for higher productivity and competitiveness. First, by maintaining a low and predictable inflation environment, the ECB promotes confidence among businesses and investors and contributes to fostering investment and long-term capital allocation required for sustainable economic growth. Second, by removing in a timely manner layers of monetary policy restriction no longer necessary. With inflation sustainably settling around our target, easier financing conditions will be key in stimulating investment by making capital more accessible and affordable.

The second area of concern for the euro area is the declared trade policy by the new President of the United States. Although the details of a potential imposition of US tariffs have yet to be disclosed, the prospect of an aggressive US trade policy, coupled with possible retaliatory measures, are likely to have far-reaching implications, adding to the euro area's headwinds. With trade volumes between the EU and the US at 1.5 trillion euros, it is clear that US tariffs on Europe will be negative for growth. Market estimates suggest that a 10% US tariff on all imports from the euro area, coupled with higher uncertainty about future US-EU trade relations, could depress euro area GDP growth by up to 0.5 percentage points within a year. The magnitude of these adverse growth effects will depend, among other things, on the range of products subject to higher tariffs, how long these tariffs will persist, which retaliatory and counter-retaliatory measures will be put in place, and the feedback effects from global economic and financial conditions. Incidentally, both theory and practice suggest that tariffs is usually a loose-loose instrument, hence not only the US trade partners are bound to loose, but the US too.

The impact of tariffs on euro area inflation is less straightforward, operating through various channels. On the one hand, a USD appreciation or a tariff retaliation on US goods from our side will make euro area imports from the US - as well as the bulk of total energy imports that is dollar-invoiced - more expensive, pushing up inflation. On the other hand, a possible re-direction of cheaper Chinese exports from the US to the EU market, due to a US-China trade war, would ceteris paribus accentuate the disinflation process in the euro area.

In any case, uncertainty about geopolitical, trade and financial developments could significantly weigh on economic sentiment and confidence, further hindering consumption and investment from recovering. At the same time, trade constraints are likely to impact activity in the manufacturing sector, the sick man in Europe, prolonging the ongoing economic stagnation in our region. Completing the Single Market will help meet these challenges.

Strengthening and extending Europe's trade alliances is also essential to balance trade risks. Expanding bilateral and regional preferential trade agreements would foster cooperation with other countries and contribute to a functional, rule-based multilateral trade system. These steps are essential to boosting investment and fostering sustainable growth, while enhancing the resilience of our economies against external shocks.

Turning to the pressing issue of climate adaptation and mitigation, it is clear that we are faced with ""peak pessimism"". The US withdrawal from the global climate change negotiations and initiatives has been complemented with major banks and asset funds in the US and Europe distancing themselves from climate policies. We can all see the risks. But we also need to see the opportunities. Momentum for the energy transition needs to remain strong in our continent, and across the rest of the world. We have an even stronger case to double down on our own initiatives to bolster decarbonisation, while avoiding Europe's deindustrialisation. Clean energy at competitive prices should be seen as a great opportunity to industrialise rather than the opposite. The European Commission's plans for a Clean Industrial Deal and its intentions to streamline the sustainability reporting rules, without discounting on transparency, are good examples of how to balance the goal of greening the economy with that of preserving the EU's industrial base and firms' competitiveness.

As supervisors, central banks can also make sure that the commercial banking sector is better positioned in managing climate risks. We can strengthen the credibility of our monetary policy in achieving our mandate, taking into consideration the implications of climate change for inflation and output. And last but not least, Europe ought to become again the key driver for green tech and finance, which takes me back to the imperative of the European Savings and Investment Union.

Let me conclude by saying that a key prerequisite for economic prosperity is a safer and more secure Europe. We cannot thrive in an environment where security is fragile or compromised. The Polish EU Presidency in the first half of 2025 has rightly spotlighted the security challenge as central to Europe's future. Reinforcing the EU's civilian and military preparedness must be a priority, as it ensures the Union is resilient to a variety of threats, both internal and external. From preparing for natural disasters to building robust defence capacity and shielding our economies from modern threats,

such as cyberattacks and critical infrastructure disruptions, are all vital to uphold economic stability and progress.

In a world fraught with uncertainty about geopolitical, trade and financial developments, full of unknown unknowns, I cannot emphasise enough the urgency for immediate and coordinated steps to navigate these challenges effectively. The challenges we face may be complex but are not insurmountable. With a shared commitment to economic stability, growth and innovation, we can continue to build a more inclusive and sustainable European economy and strengthen our continent's role in international diplomacy. I am confident that the ambitious programme of the Polish EU Presidency will yield positive outcomes and give Europeans a sense of security and optimism about the future of our economies.

Thank you very much for your attention.",Yannis Stournaras
https://www.bis.org/review/r250225a.htm,Anna Breman: How trade barriers affect the Swedish economy and inflation,"Speech by Ms Anna Breman, First Deputy Governor of the Sveriges Riksbank, at the Norrbotten Chamber of Commerce, Kiruna, 20 February 2025.",2025-02-20 00:00:00,"SPEECH

DATE:

20 February 2025 First Deputy Governor Anna Breman Norrbotten Chamber of Commerce, Kiruna

SPEAKER:

VENUE:

## How trade barriers affect the Swedish economy and inflation 1

Thank you for inviting me to speak here in Kiruna! We have had a turbulent start to the year 2025. It is likely that we will continue to receive conflicting statements from the United States on economic policy, not least with regard to their trade policy. This contributes to financial market volatility and general uncertainty about the outlook for economic activity and inflation.

Kiruna is closely linked to Swedish exports through the mining industry.   Like other Swedish industries, the mining industry may be adversely affected by the developments we are now seeing abroad. I would therefore like to focus my speech today on how the Swedish economy and inflation are affected by the risk of escalating trade barriers, and what we in Sweden can do to counteract the negative effects.

Trade barriers are particularly negative for an export-dependent country like Sweden. 2 However, their impact will depend on the scope of the tariffs, which countries are affected and how these countries respond with various countermeasures.

If the United States introduce extensive tariffs and other trade barriers in, and the EU responds with countermeasures, Swedish growth would be dampened, while the effect on inflation in Sweden is uncertain. Trade barriers tend to lead to higher inflation. But, on the other hand, poorer economic performance can lead

1  I would like to thank Maria Sjödin and Liza Tchibalina for excellent work on the speech and Björn Andersson, Hanna Armelius, Aino Bunge, Charlotta Edler, Mattias Erlandsson, Jens Iversen, Björn Lagerwall, Tanja Lind, Emelie Nordeman, Anna Seim and Ulf Söderström for valuable comments. I would also like to thank Elizabeth Nilsson for the skilful translation into English.

2  Trade barriers refer to tariffs and other measures affecting global trade, such as import quotas. They can cover both goods and services. The announcements made so far by the US administration have mainly focused on import tariffs on goods.

Telephone: +46-(0)8-787 00 00, Website: riksbank.se



to lower demand, which leads to lower inflation. I will discuss this later in this speech.

Sweden is well positioned to manage global uncertainty. Sweden has a diversified and competitive business sector that has shown a high capacity to adapt to new conditions. Moreover, we have strong public finances, and we at the Riksbank have both the tools and the preparedness to act to keep inflation at a low and stable level.

Today I would also like to emphasise that one additional way of counteracting the negative effects of trade barriers is to invest in reforms that strengthen productivity. An economy with high productivity growth can have faster growth, a strong labour market and rising real wages without high inflationary pressures. All else being equal, high productivity protects an economy against inflation. It is positive that competitiveness and productivity are the focus of the European Commission's new work programme, and that we have a Productivity Commission and an AI Commission in Sweden that contribute with concrete proposals for reforms. 3

Let me start by talking about the impact of increased trade barriers and what they could mean for the Swedish economy. I will then discuss why an increased focus on productivity and competitiveness is important in the uncertain world we live in. Finally, I will comment on how the risk of escalating trade barriers might affect monetary policy.

## Trade barriers can lead to both lower growth and higher inflation

Firms that trade internationally are on average larger, more knowledge-intensive and have higher productivity than other firms. To streamline production and strengthen competitiveness, many companies divide their production both inside and outside the country's boundaries. This can be done, for example, by producing components for a product in several different countries and then assembling them in yet another country. We usually talk about these as global value chains. Global value chains contribute to cheaper production, more

3  On 29 January 2025, the European Commission published an action plan to strengthen the EU's competitiveness. The action plan contains a list of some 50 actions and initiatives aimed at realising the three main recommendations of the Draghi report: boosting innovation, the green transition while maintaining competitiveness, and enhancing security.

specialised firms, increased competition and the diffusion of technologies and knowledge. 4

Increased trade barriers would be detrimental to global economic activity, as they hamper trade and limit competition, the pace of innovation and the ability to benefit from economies of scale. This ultimately leads to lower productivity and gross domestic product (GDP) than would otherwise have been the case. 5

Sweden is an export-dependent country and over time the value of Swedish exports has grown steadily. In 2023, exports accounted for around 55 per cent of GDP. Goods make up the largest share of exports, and most of the goods we export end up with our Nordic neighbours or in other European countries. But the United States is also an important export market.

In recent years, our exports have performed well, despite weak performance in some important markets such as Germany. Sweden's most important export products are road vehicles and machinery, pharmaceuticals, paper and pulp, petroleum products, iron, steel and iron ore. However, there is a strong trend for services exports to become increasingly important. Exports of services now account for around 30 per cent of total exports from Sweden.

Figure 1 shows that both exports of goods and services have developed favourably over the past five years. But it is clear that it is mainly exports of services that have contributed to growth, with growth rate of 50 per cent compared to 10 per cent for goods over the same period.

Trade barriers can affect both goods and services, but the measures introduced and announced by the United States have so far focused on goods. Sweden's strong services exports may provide some resilience to tariffs, but we would nevertheless probably be negatively affected if trade barriers are escalated. The export of services is complex and has many parts. 6 There are links between exports of goods and exports of services, as exports of services can be service contracts linked to a good being sold. We also know that some services exports are related to intellectual property rights and royalties that are related to goods exports.

When countries introduce import tariffs, they are often intended to protect domestic industries from foreign competition and to encourage the purchase of

4  See, for example, Alcalá and Ciccone (2004), Bernard and Jensen (1995), Criscuolo and Timmis (2017) and Melitz (2003).

5  Studies show unequivocally that raised domestic import tariffs have negative effects on the real economy in both the country that has raised its import tariffs and the countries that are impacted by them. The negative effects are amplified by the existence of global value chains with the greatest negative impacts on countries and sectors further down the production chain. See Dellmo (2025).

6  See the forthcoming S taff memo from the Riksbank on large Swedish companies and foreign trade in services.

domestically produced goods. There is also a hope that the higher import tariffs will improve the trade balance. Trade barriers, however, lead to higher costs for households and companies, especially in the country that has introduced or raised import tariffs. Studies of the tariffs imposed by the United States during Donald Trump's previous term show that they led to lower growth and higher inflation in the United States. 7 These tariffs were less extensive than those now being proposed.

For Sweden, the increase in tariffs in those years is estimated to have had a limited effect on GDP and inflation. 8 What the impact of tariffs would be today depends on their extent, which countries are affected and how these countries respond with various countermeasures. 9 It is not certain that tariffs in the United States would lead to higher inflation in Europe, as they could at the same time slow down growth in Europe - and low demand can dampen inflation. Moreover, other countries facing lower demand from the United States may choose to sell goods to Europe at lower cost. However, we are likely to see some impact on inflation in Europe if the United States imposes tariffs on us, and if we also respond with import tariffs on US goods and services.

In addition to these effects, we also need to take into account the effects through financial markets. The exchange rate of the country imposing import tariffs tends to appreciate, which can counteract the effects of the tariffs. 10 We have already seen large fluctuations on the financial markets following various statements on tariffs from the White House. For example, the Swedish krona weakened against the US dollar in the autumn, but has recently strengthened, despite continued signals of increasing trade tariffs in the United States.

Uncertainty and volatility on the financial markets make it difficult for households and firms to plan ahead, and this can reduce their willingness to consume and invest.

It is important to emphasise that we do not yet know how extensive the trade barriers will be. With the uncertainty surrounding the scope and design of the tariffs, we should be cautious about precise figures as to how the Swedish

7  See Dellmo (2025) for an overview of the research literature.

8  See Dellmo (2025).

9  The Riksbank published a couple of scenarios in the December Monetary Policy Report that illustrate, for instance, how the Swedish economy could be affected by a trade conflict between the United States and the rest of the world, and how this could affect monetary policy going forward.

10  The initial shift in demand from foreign to domestic production tends to result in a counteracting exchange rate appreciation. One reason is that higher inflation often leads to higher interest rates relative to other countries. The nominal exchange rate may appreciate if imports decline significantly and demand for foreign currency falls. An appreciation in the exchange rate hampers exports, but makes imports cheaper, which counteracts the effect of the tariffs.

economy and inflation would be affected. However, it is important to continuously monitor developments and to be prepared to act.

One way to counter the possible effects of US tariffs is for Europe to trade more with other countries. Diversification in terms of both trading partners and products makes a country less vulnerable. Otherwise, it is important to build a resilient and strong economy through reforms that increase productivity and competitiveness. This is the focus of the European Commission's new work programme. For Sweden, this means working on the measures we can take to strengthen Swedish competitiveness and productivity. But what exactly is productivity, and how do we achieve higher productivity growth?

## Trade boosts productivity and growth

Let me begin with an example from the mining industry. In the early 1950s, annual ore production in Sweden was around 23 million tonnes. 70 years later, the number of employees has decreased but production has increased to over 80 million tonnes. 11 Output per employee or per hour worked has thus increased, that is, productivity has increased. Higher productivity makes it possible to increase real wages, that is, wages adjusted for inflation.

But, it is not only miners who have gained higher real wages. Thanks to productivity increases in the Swedish economy, real wages in general have risen substantially, especially since the inflation target was introduced in 1995 (see Figure 3).

In this example, the increase in productivity is due to miners having better training and more advanced tools. Machines and robots have to some extent replaced people in the mines. Nevertheless, labour shortages are one of the mining industry's biggest problems. In Kiruna, unemployment is 2.2 per cent, one of the lowest in Sweden, and here a lack of labour with the right skills is an obstacle to expanding the mining industry in the region. 12

At a macroeconomic level, higher productivity has meant increased welfare and the creation of new jobs. Over longer periods, it is productivity that drives growth. The usual measure of how much we produce is GDP.

Since 1980, Swedish GDP has more than doubled (see Figure 2). About 25 per cent of that growth comes from the fact that we have had a growing population and increased employment, which means that the hours worked have increased. But

11  www.sgu.se/mineralnaring/mineralstatistik/

12  www.regionfakta.com/norrbottens-lan/

the other 75 per cent of growth comes from higher output per hour worked, that is, higher productivity.

Productivity varies over time. During periods of high productivity, it becomes relatively cheaper to produce goods and services, as the so-called unit labour costs are dampened. 13 In this way, developments in productivity and unit labour costs are often mirror images (see Figure 5). High productivity growth can thus dampen cost pressures in the economy. All else being equal, this means lower inflationary pressures.

## How to achieve higher productivity

In the short term, productivity can be very volatile. For policy makers, it is therefore often important to try to discern the more trend-like developments. But determining if or when there has been a shift in a trend can be difficult. 14 Productivity growth has been weak in Europe since the financial crisis and we have seen the same pattern in the United States, until the pandemic. After that, productivity growth picked up in the United States. No such sign of a positive trend reversal has been seen in Europe and Sweden (see Figure 6). 15

Sweden has historically had strong productivity growth in line with the United States, and it has been higher than in many European countries. While there are global trends in productivity growth, there are significant differences between countries. 16

Increased productivity can come from three main areas: increased capital intensity, labour force composition and higher multifactor productivity. 17

13  Unit labour costs are important for a firm's competitiveness. They describe how much labour has to be paid to produce one unit of a product or service.

14  See, for example, Cline, Kahn and Rich (2025).

15  The Draghi report highlights weak productivity as the biggest challenge for Europe. The new Commission Work Programme focuses on this. Productivity has also been weak in Canada, for example, as highlighted by Rogers (2024) at the Bank of Canada. Pilat (2023) summarises the analytical work and policy recommendations of ten national productivity commissions: Australia, Belgium, Denmark, Finland, France, Germany, Ireland, the Netherlands, New Zealand and Portugal between 2019 and 2022, and makes some comparisons with the UK Productivity Commission.

16  See, for example, the SNS Economic Policy Council Report 2024 and Growth Analysis (2021). Productivity varies between industries and also between firms. In Sweden, as in many other countries, the spread in productivity between firms appears to have increased over time, see Growth Analysis (2022).

17  See, for example, the Productivity Commission (2024) for an overview on productivity. The OECD (2024) emphasises that successful reforms to raise productivity need to increase the incentives and capabilities of firms and workers. Policies should take into account challenges both for companies at the forefront of technology, which are the main contributors to innovation, and companies that are lagging behind, which are mainly dependent on catching up. It also argues that policies need to promote a productive allocation of resources - capital and labour - in the economy, in particular by fostering a healthy level of business dynamism.

Capital intensity refers to investment in new technology, such as a machine or computer programme that allows employees to work more efficiently. Reforms that make it easier for firms to obtain financing for investment can contribute to higher capital intensity. Investments in infrastructure such as roads, railways and fast and efficient digital infrastructure can also boost productivity in both the private business sector and the public sector.

Labour force composition refers to the total human capital of the workforce, that is people's skills, knowledge, talents and education. Therefore, the quality, orientation and dimensioning of the education system are of great importance, but so is the possibility for continuous learning throughout life. Reforms that strengthen education, research and further education boost productivity.

Multifactor productivity measures how efficiently capital and labour are used. 18 It reflects technological progress, organisational improvements and so on. Reforms that reinforce this can include those that promote competition, economies of scale, 'management practices' and the ability of firms and institutions to adopt new technologies, such as Artificial Intelligence, AI.

The strong productivity in the United States in recent years has been highlighted in a couple of recent speeches by Federal Reserve Board members Adriana Kugler and Lisa Cook. Dr/Governor Kugler (2025) highlights three main potential explanations for the rising productivity growth in the United States: (1) better matching of unemployed and vacant jobs in the labour market following the pandemic, (2) good business dynamics with many new firms, and (3) technological advances, especially linked to AI. Dr/Governor Cook (2024) emphasises technology developments with a focus on AI, and its potential to boost productivity. 19 It is interesting to analyse how these factors have developed here in Sweden in recent years. Three interesting patterns can be found.

First: First, an analysis by the Riksbank shows that matching in the Swedish labour market has improved somewhat in recent years, but that it is still worse than it was before the financial crisis (see Figure 7). 20 We still have high structural unemployment, and many people leave school without the necessary grades. There is reason to believe that reforms that strengthen education and labour market matching would yield significant productivity gains for the Swedish economy.

Second: We do not see any trend towards increased entrepreneurship in Sweden. On the contrary, there has been a period with a trend decline in the number of

18 This is also called total factor productivity.

19  The period after 1995 when US productivity growth accelerated is also largely linked to information technology, see, for example, Bloom, Sadun and Reenen (2012).

20  See Häkkinen-Skans and Wasén (2025).

new business formations (see Figures 8 and 9). Sweden has a competitive business sector, but it is mainly characterised by large multinational companies that have been around for a long time. There is great potential here to stimulate the emergence of new firms, which can contribute to higher competition in different sectors and at the same time contribute to the use of new technologies, including AI.

Third: According to international comparisons, Sweden is not at the forefront of new technologies in AI. 21 Infrastructure and incentives during the 1990s are considered important factors for Sweden's good track record of adopting new technologies and making investments. Reforms that strengthen the adoption of AI technologies could help boost productivity.

It is positive that Sweden has both a Productivity Commission and an AI Commission. The Productivity Commission has published an interim report and will present its final report in October. 22 The AI Commission has published a long list of proposals with measures to promote the use of AI in Sweden. 23

I am optimistic that Sweden can once again become a country with high productivity growth. Sweden has long been good at adopting new technologies and also at enabling labour market transitions. Instead of protecting industries vulnerable to restructuring, we have chosen to be open to trade and competition, while facilitating re-skilling/re-training of the labour force. 24 But for that to happen now, we need to ensure that the AI Commission's and Productivity Commission's proposals lead to actual reforms and investments.

It is also important to recognise that technological changes are not always painless. Two of the 2024 Nobel Laureates in Economics (formally known as the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel), Daron Acemoglu and Simon Johnson, describe in their book ""Power and progress"" how new technology can create instability in society. The debate surrounding the regulation and implementation of AI is therefore important. 25 They also describe

21  In its report, the AI Commission points out that Sweden is lagging behind in AI development, which is reflected, among other things, in a deterioration in Sweden's ranking in the Global AI Index (from Tortoise Media). In the overall index, Sweden falls from 17th place (in 2023) to 25th place (in 2024) out of 83 countries that were compared. Among EU countries, we rank 10th, behind both Finland and Denmark. In terms of the components of the Global AI Index, Sweden's conditions are particularly weak in terms of political governance, where we are in 57th place.

22  In the interim report the commission proposed measures such as regulatory reform that could boost productivity in various sectors, including housing and construction.

23  The AI Commission's report 'Färdplan för Sverige' (Road map for Sweden - only available in Swedish) notes that measures are needed to improve productivity in Sweden and the EU. It calls for leadership with regard to AI and for the government to ensure that the basic conditions are in place. The report argues that ""comprehensive traffic regulations, fuel supply and AI targets"" are needed. The Commission emphasises that there is a substantial need for investment in digital infrastructure.

24  See SNS Economic Policy Council Report 2024 and the Productivity Commission's interim report.

25  See, for example, the AI Commission report 'Färdplan för Sverige' and Fjaestad and Vinge (2024).

how positive effects can take a long time to translate into increased growth and prosperity, and that institutions affect how wealth is distributed in an economy. Nor does higher productivity always lead to higher real wages. There are major differences between countries. In the United States, for example, real wages have stagnated in the 2000s, despite strong productivity growth (see Figure 4).

What is the Riksbank's role in promoting higher productivity? The Riksbank cannot create higher productivity, but we can contribute to it indirectly in several ways. By adjusting monetary policy to keep inflation low and stable, it becomes easier for firms to plan and invest. In Sweden, there is confidence that the central bank will bring inflation back to target if it deviates. This creates security and predictability regarding price developments over time. In this way, monetary policy contributes to investments that boost productivity.

I would also like to emphasise that the combination of an inflation target and the Industrial Agreement, where the social partners in the manufacturing sector set the 'benchmark' in wage negotiations, has contributed to low and stable inflation over time. It has also helped real wage growth to follow productivity growth closely. 26 This means that reforms that boost productivity have the potential to benefit everyone through higher real wages.

## Monetary policy in a world characterised by uncertainty about trade barriers

Let me return to the challenges we face in 2025 and what they mean for current monetary policy. Inflation is presently low and stable and the prospects for keeping inflation close to the target are favourable. Companies' pricing plans, inflation expectations and wage growth are all in line with inflation close-to-target even in the medium term. The Riksbank's focus is to maintain low and stable inflation while supporting the rebound in the Swedish economy.

Since May last year, the Riksbank has implemented six interest rate cuts totalling 1.75 percentage points. The cuts have already had an effect on the interest rates faced by households and firms, and they will have an increasingly clear impact during 2025. The lower interest rates give households increased purchasing power and companies lowers financing costs. We have seen positive signs that household consumption is beginning to pick up. The overall picture is therefore that Sweden is well placed for an economic recovery in 2025.

26  After the 1990s crisis, major changes were made to Swedish economic policy frameworks. In January 1993, the Riksbank announced that an inflation target of 2 per cent would enter into force with effect from 1 January 1995. For further information, see https://www.riksbank.se/en-gb/monetary-policy/the-inflationtarget/.

Since the most recent monetary policy meeting in January, inflation has come in slightly higher than expected. This was mainly due to the so-called CPI basket effect and goods prices. We will have more information about the economic outlook ahead of the next monetary policy meeting, including one further month of inflation outcome. In the Riksbank's current business survey, we are asking specific questions on increased trade barriers, which may provide an indication of how Swedish firms are adapting to the threat of tariffs. An overall assessment of the outlook for inflation and economic activity will determine the next steps for monetary policy.

My current assessment is that our forecast for the policy rate in December is holding up well. The forecast indicates an unchanged policy rate going forward, but at the same time we are prepared to both raise and lower the policy rate if the outlook changes. It is important to have patience to see the effects of the implemented rate cuts. In addition, monetary policy should not respond to shortterm volatility, be it financial market fluctuations or short-term month on month variations in inflation. But monetary policy must act if there is a risk of inflation lastingly overshooting or undershooting the target.

Having said that, it is likely that there will be significant uncertainty regarding trade policy for a long time. There is also considerable uncertainty about the United States' position on other key issues, such as geopolitics and energy and climate policy, and how Europe will respond to the potential effects of this. This uncertainty can lead to households and firms in Sweden postponing consumption and investments. The risk scenario therefore includes an unexpectedly protracted recovery in the Swedish economy and. There is also a risk, if trade barriers escalate, that this could lead to higher inflationary pressures in the medium term, also in Sweden.

Let me conclude by once again emphasising that Sweden is well positioned to manage global uncertainty. We have a competitive business sector, strong public finances and we at the Riksbank have both the tools and the preparedness to act to keep inflation at a low and stable level.

Higher productivity in Sweden would make us even more resilient in an uncertain world. Increased productivity is important for the Swedish economy, regardless of whether or not we see further trade barriers. Productivity generates growth while also dampening inflationary pressures. This is a fundamental prerequisite for increasing welfare, strengthening competitiveness and enabling real wage growth. At the same time, productivity has not taken off in Sweden in the same way as it has in the United States in recent years. The most important reforms for Sweden that would boost productivity are investing in education that strengthens matching in the Swedish labour market, investing in new technologies, including

AI, as well as promoting entrepreneurship and facilitating a dynamic business environment.

## References

Acemoglu, Daron and Simon Johnson (2024), 'Power and progress'.

AI Commission (2024), 'Färdplan för Sverige' (Road map for Sweden - only available in Swedish).

Alcalá, Francisco and Antonio Ciccone (2004), 'Trade and Productivity', The Quarterly Journal of Economics, 119(2).

Bernard, Andrew B. and J. Bradford Jensen (1995), 'Exporters, Jobs, and Wages in U.S. Manufacturing: 1976-1987', Brookings Papers on Economic Activity, Microeconomics, 1995.

Bloom, Nicolas, Rafaella Sadun and John van Reenan (2012), 'Americans Do IT Better: US Multinationals and the Productivity Miracle', American Economic Review 102, no. 1.

Cline, Alexander, James A. Khan and Robert W. Rich (2025), 'Is High Productivity Growth Returning?', Economic Commentary, Federal Reserve Bank of Cleveland.

Cook, Lisa D. (2024), 'Artificial Intelligence, Big data, and the Path Ahead for Productivity', Board of Governors of the Federal Reserve System.

Criscuolo, Chiara and Jonathan Timmis (2017), 'The Relationship Between Global Value Chains and Productivity', International Productivity Monitor, vol. 32.

Dellmo, Hans (2025), 'Macroeconomic effects of increased import tariffs', Staff memo, January 2025, Sveriges Riksbank.

European Commission (2025), 'A Competitiveness Compass for the EU'.

Fjaestad, Maja and Simon Vinge (red.) (2024), 'AI och makten över besluten' (AI and the power over decisions).

Häkkinen-Skans, Iida and Pernilla Wasén (2025), 'Labour market matching in Sweden', Economic Commentary no. 1, 2025, Sveriges Riksbank.

Kulger, Adriana D. (2025), 'Entrepreneurship and Aggregate Productivity', Board of Governors of the Federal Reserve System.

Melitz, Marc J. (2003). 'The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity', Econometrica, 71(6).

OECD (2024), 'Reviving productivity growth: A review of policies', OECD Economics Department Working Papers No. 1822.

Pilat, Dirk (2023), 'The Rise of Pro-Productivity Institutions: A Review of Analysis and Policy Recommendations', Productivity Insights Paper No.015, The Productivity Institute.

Productivity Commission (2024), 'Goda möjligheter till ökat välstånd' (Good opportunities for increased prosperity), SOU 2024:29.

Rogers, Carolyn (2024), 'Time to break the glass: Fixing Canada's productivity problem', Bank of Canada.

SNS (2024), Economic Policy Council Report 2024 'Productivity Growth in the Swedish Business Sector.'

Sveriges Riksbank (2024), 'Monetary Policy Report', December 2024.

Growth Analysis (2021), 'Productivity growth and its driving', Report 2021:019.

Growth Analysis (2022), 'Productivity divergence and the role of digitalisation', Report 2022:08.

## Figures

## Figure 1. Swedish exports

Index, 2019 Q4 = 100



Note. Quarterly data.

Source: Statistics Sweden.

Figure 2. GDP and total hours worked in Sweden

Index, 1980 = 100.



Note. Annual data. The difference between GDP and the total hours worked should correspond to the level of productivity.

Sources: Statistics Sweden and the Riksbank.

## Figure 3. Productivity and real wages in Sweden and the USA

Index, 2000 Q1 = 100.



Note. Quarterly data. Productivity is labour productivity measured in the number of worked hours. The real wage is deflated with CPIF for Sweden and CPI for USA.

Sources: The Riksbank and BLS.

## Figure 4. Inflation, productivity and unit labour costs

Annual percentage change



Note. Quarterly data. Six-quarterly moving average. Productivity is labour productivity measured in the number of worked hours. Unit labour costs describe how much labour has to be paid to produce one unit of a product or service.

Sources: Statistics Sweden and the Riksbank.

Figure 5. Productivity in different countries and regions

Index, 2000 = 100



Note. Quarterly data. Productivity is labour productivity measured in the number of worked hours.

Sources: U.S. The Bureau of Labor Statistics and Eurostat.

Figure 6. Beveridge curve 2011-2024



Note. The vacancy rate is defined as the number of vacancies in relation to the number of persons in the labour force. Statistics Sweden's short-term statistics on vacancies ended in the first quarter of 2024. Vacancies for the second and third quarter of 2024 has been projected with the aid of the Swedish Public Employment Service's newly registered job vacancies.

Sources: Statistics Sweden and the Riksbank.

Figure 7. Newly registered companies in Sweden

Per cent



Note. Monthly data. The dashed line is an average of the number of newly registered companies in Sweden during the period 2007-2024.

Source: Growth Analysis.

Figure 8. Business applications in the USA

Number



Note. Monthly data. High-propensity business applications are a subset of the total number of business applications. To be considered in the ""high propensity"" group, the company needs to recruit employees, advertise or plan the payment of the first salary or belong to a certain industry. Business applications belonging to the ""high propensity"" group also have their own subgroups, one of which is whether the business is a corporation.

Source: U.S. Census Bureau.",Anna Breman
https://www.bis.org/review/r250224e.htm,"Tiff Macklem: Tariffs, structural change and monetary policy","Remarks by Mr Tiff Macklem, Governor of the Bank of Canada, to the Mississauga Board of Trade-Oakville Chamber of Commerce, Mississauga, Ontario, 21 February 2025. ",2025-02-21 00:00:00,"

Remarks by Tiff Macklem Governor of the Bank of Canada Mississauga Board of Trade Oakville Chamber of Commerce February 21, 2025 Mississauga,  Ontario

## Tariffs, structural change and monetary policy

## Introduction

Good afternoon. It's a pleasure  to be here. I want to thank the Mississauga  Board of Trade and the Oakville Chamber of Commerce for inviting me.

When I accepted this invitation,  months ago, I intended  to use this opportunity to launch the renewal process for our monetary policy framework. The framework sets out the goal for monetary policy-to maintain price stability over time. In simple terms, we aim for a 2% inflation target, so inflation remains within a range of 1% to 3% most of the time. We renew the framework, in agreement with the Government of Canada, every five years. This is a strength of our system. It gives us the opportunity  to review performance and consider whether the framework remains the best one for the future.

That was my speech topic until President  Trump announced  significant and broad-based  tariffs on Canadian exports. While the new tariffs have not taken effect yet, the uncertainty around US trade policy is already affecting our economy. And if the United States starts a protracted trade conflict, the consequences  could be severe. I know this is foremost on everyone's mind. That's why I've adjusted  my remarks.

President  Trump wants to use tariffs as an instrument of US policy. What that means for the global economy and for the Canada-US trade relationship  is highly uncertain. We don't know what tariffs will be imposed, when they'll start, how long they'll last-or even really to what end. We also don't know how Canada and other countries will respond. And even when we know more, it will be hard to predict the economic impacts because we haven't experienced such broadbased tariffs since the 1930s.

What looks inescapable,  however, is that a structural change is upon us. Increased trade friction with the United States is a new reality. While there are

still  more questions  than answers, I will use my remarks to speak to some of the key questions:

What could this structural change look like?

How would a protracted trade conflict affect the Canadian economy in both the short run and the long run?

What can monetary policy do and not do?

What could Canada do-beyond the scope of monetary policy-to compensate for at least some of the consequences  of increased trade friction with the United States?

I'll then  turn back to my original plan and launch the latest review of our monetary policy framework. The future looks different than the past, and it's critical we get going on this review.

## The benefits of free trade between Canada and the United States

Before I explain how trade friction will hurt our economy, let me explain how open trade has helped both Canada and the United States.

After World War II, the allied nations created the Bretton Woods institutions  and progressively  reduced tariffs. They wanted to avoid the protectionism and instability  of the Great Depression.  And they believed that economic cooperation-including  open trade-was the best way to maintain peace and build prosperity.

In 1965, Canada and the United States signed the Canada-United  States Automotive Products Agreement ,  better  known as the Auto Pact. Open trade in the automotive sector allowed for economies of scale and specialization. Productivity went up and prices for motor vehicles went down in both countries. 1

The success of the Auto Pact prompted more appetite  for open trade. The Canada-US Free Trade Agreement ,  signed in 1988, broadened  the economic gains considerably.  Manufacturing productivity in Canada, for example, increased by about 14%. 2

In 1994, the trade relationship  expanded further to include Mexico with the North American Free Trade Agreement .  And in 2020, this agreement was updated  and renewed during the first Trump presidency. The durability  of this trade agreement speaks to the benefits to all three countries.

For roughly the past 60 years, our bilateral  trade with the United States has increased. Today, about three-quarters  of Canada's  goods exports flow to the United States. Canada is the number one export destination  for the United States-and  the largest export destination  partner for 32 of the 50 states. Canada's  biggest export to the United States is energy. Canadian oil, natural gas, gasoline,  and electricity literally fuel the US economy at a price no one else

1  K. Charbonneau, D. de Munnik and L. Murphy, 'Canada's Experience with Trade Policy,' Bank of Canada Staff Discussion Paper No. 2018-1 (January 2018).

2  A. Lileeva and D. Trefler, 'Improved Access to Foreign Markets Raises Plant-Level Productivity…For Some Plants,' Quarterly Journal of Economics 125, no. 3 (August 2010): 1051-1099.

in the world can provide. And if we exclude our energy exports, the United States actually has a trade surplus  with Canada ( Chart 1 ).

Open trade between Canada and the United States has benefitted both countries, increasing  efficiency, spurring investment, boosting  productivity and raising standards  of living. A significant increase in tariffs will kick all this into reverse.

Chart 1: Excluding energy, Canada has had a trade deficit with the United States since 2007

Canada-US

trade balance

in

Can$

billions, annual

data



Note: Canada-US trade balance excluding energy uses customs data for energy trade, while Canada-US trade balance uses balance of payments data.

Sources: Statistics Canada via Haver and Bank of Canada calculations

Analytics

Last observation: 2023

## What structural change looks like

The economic consequences  of a protracted trade conflict would be severe. But it would be a very different shock than the COVID-19 shock. In the pandemic, we had a steep recession followed by a rapid recovery as the economy reopened. This time, if tariffs are long-lasting  and broad-based,  there won't be a bounceback. We may eventually regain our current rate of growth, but the level of output would be permanently lower. It's more than a shock-it's a structural change.

To get an estimate of how much lower production and incomes would be, you need an economic model. As described in our January Monetary Policy Report (MPR), we have combined a multi-sector, multi-country trade model with our main macroeconomic models of the Canadian economy to examine the impacts of a protracted trade conflict. 3  I do want to emphasize  that models are imperfect at the best of times, and we need to be more cautious than usual because of the

3  See Bank of Canada, 'In focus: Evaluating the potential impacts of US tariffs,' Monetary Policy Report (January 2025).

lack of historical experience with big increases  in tariffs. So please  do not interpret these results as a forecast-but more as an illustration  of the economic impacts.

With that caveat, Chart 2 shows an estimate of the long-run effect of higher tariffs. The grey line shows the Bank's projection from our January MPR, which is our base-case projection without tariffs. 4  Economic output is climbing steadily. The blue line  shows the impact of the anticipated  tariffs based on the Executive Order signed by President Trump on February 1, plus retaliatory tariffs by Canada. That executive order calls for 25% tariffs on non-energy goods exports and 10% on energy exports to the United States. 5  Based on this scenario, economic output initially falls, then it steadies  and begins to grow again, but on a path that is about 2½% lower.

Chart 2: High tariffs permanently lower the path for output



Sources: Statistics Canada and Bank of Canada calculations, estimates and projections Last data plotted: 2030Q1

4  To be more precise, the grey line through 2026 is the MPR projection for gross domestic product. And this forecast has been extended assuming potential output growth of about 2% on average thereafter.

5  This scenario reflects recent developments and updates the more severe scenario presented in the January MPR. The Executive Order signed by President Trump on February 1 imposes new tariffs of 25% on all the goods, excluding energy, that it imports from Canada; 10% on all the energy products from Canada; 25% on all the goods it imports from Mexico; and an additional 10% on all the goods it imports from China. In addition, we add the retaliatory 25% tariffs on Can$155 billion worth of US imports proposed by the Canadian government. Mexico is assumed to retaliate by imposing a 25% tariff on all goods it imports from the United States. China is expected to retaliate by imposing tariffs in the range of 10% to 15% on less than one-tenth of its imports from the United States. Because our model scenario is quarterly, the new tariffs begin in the second quarter.

## How tariffs hurt economic activity and boost inflation in the short run

Models can also help us understand  the impact of tariffs in the short run. These effects are expressed  relative to the projection we published  in January.

The first thing we would see is a marked decline in exports. As Canadian goods become more expensive, US demand for those goods  would decline. A lower Canadian dollar would provide a partial offset. In our model with the scenario based on the February 1 Executive Order, exports  fall by 8½% in the year after the tariffs take effect ( Chart 3 ). Canadian  exporters respond  by cutting production and laying off workers.

Chart 3: Exports and business investment would fall sharply after tariffs are imposed

Percentage change compared with the January projection, quarterly data



Sources: Bank of Canada calculations, estimates and projections

Last data plotted: 203001

With exports to the United States accounting for roughly one-quarter  of our national  income, the shock would be felt across Canada.

Lower export revenues would reduce household  income. And retaliatory tariffs would raise the prices of many consumer goods. As a result,  consumer spending on everything from cars to entertainment and housing would slow. In this scenario, consumption declines by more than 2% by mid-2027 ( Chart 4 ). 6

6  In this scenario, governments are assumed to provide some additional support to households, transferring half the new tariff revenue to them.

## Chart 4: Consumption and output weaken until mid-2027

Percentage change compared with the January projection, quarterly data



Sources: Bank of Canada calculations, estimates and projections

Last data plotted: 203001

With export and consumer demand weakening, Canadian businesses  would also cut their  investment spending.  And higher costs and lower profit margins  would restrain investment further. With retaliatory tariffs on some goods and a lower Canadian dollar, businesses  will face higher import costs-Canadian  businesses buy roughly half of their machinery and equipment from the United States. In addition,  profit margins are squeezed  because the higher costs associated  with tariffs on imported consumer goods get passed  on to prices in Canada gradually. Lower sales, higher costs and reduced profit margins all combine to pull down business  investment substantially.  All told, investment declines by almost 12% by early 2026, one year after tariffs are imposed ( Chart 3 ).

What would this all mean for economic growth? In our January projection with no tariffs, we forecast growth of about 1.8% in both 2025 and 2026. But in the tariff scenario, the level of Canadian output falls almost 3% over two years. That implies tariffs would all but wipe out growth in the economy for those two years.

Finally, a trade conflict would push up prices, even as demand weakens. Retaliatory tariffs on US exports to Canada feed into the consumer price index (CPI). Roughly 13% of Canada's CPI basket is made up of goods imported from the United States. The depreciation  of the Canadian dollar also increases the cost of all imported goods and services. Finally, integrated  supply chains mean tariffs can add costs at multiple stages of production.

Chart 5: Total CPI inflation rises as upward pressure from tariffs outweighs the downward pressure from excess supply

Percentage point difference in the year-over-year inflation rate compared with the January projection, quarterly data



Sources: Bank of Canada calculations, estimates and projections

Last data plotted: 203001

In our tariff scenario, the factors pushing  prices up more than offset the downward price pressure  from weaker demand, so inflation rises ( Chart 5 ). In January, the Bank projected that inflation would remain close to the 2% target for the next two years. Tariffs would temporarily push inflation above 2%. 7

## What monetary policy can and cannot do

If the economy is on a lower path and there's  upward pressure  on inflation, what's the response  from monetary policy and the Bank of Canada?

What the Bank can do is help the economy adjust.  With inflation  now back around the 2% target, we are better positioned  to contribute to economic stability. However, with a single instrument-our  policy interest rate-we can't lean against  weaker output and higher inflation at the same time. As we consider our monetary policy response,  we will need to carefully assess  the downward pressure  on inflation from weakness in the economy and weigh that against the upward pressure  on inflation from higher import prices and supply chain disruptions.

Unlike the pandemic, if tariffs persist there will be no economic bounce-back. Long-lasting  tariffs mean lower potential  output because our economy works less

7  As shown in the January MPR, the path for inflation is quite sensitive to how quickly businesses pass through higher costs to consumer prices. Based on historical experience, this baseline calibration assumes full pass-through over three years, which is why year-over-year inflation is higher for three to four years. As shown in the sensitivity analysis in the MPR, faster pass-through means inflation would rise by more but also come back down more quickly. The overall price level increase is similar in both cases.

efficiently. Monetary policy cannot restore the lost supply. At most, it can smooth the decline in demand.

The sharp fall in exports and investment when tariffs are imposed, combined with weaker consumption, means that initially demand would fall more than potential output, creating excess supply in the economy. Provided the inflationary impact of tariffs is not too big, monetary policy can help smooth the adjustment  by supporting  demand so it doesn't  weaken too much more than supply. But how much support monetary policy can provide is constrained  by the need to control inflation.

The initial impact of tariffs is a one-time rise in the level of consumer prices. Monetary policy cannot change that. What monetary policy can-and must-do is ensure that higher prices do not become ongoing inflation. This means making sure that households  and businesses  continue to expect inflation to remain well anchored on the 2% target. Simply put, monetary policy needs to ensure the increase in inflation is temporary.

## Strengthening Canada's economic union

I hope-we all hope-Canada  can continue open trade with the United States. A trusted open trade relationship  benefits both countries. But if we are faced with a prolonged  trade conflict, the only way to offset this negative structural change is with a positive structural  change.

Structural policies  are appropriately  the responsibility  of elected governments and parliaments-not  the Bank of Canada. So I will tread lightly here.

The Bank has previously highlighted  Canada's  productivity challenge. 8  And it's good to see more focus by federal and provincial governments on structural reforms to increase productivity and investment by strengthening  our economic union. 9

Removing rules that restrict interprovincial trade and harmonizing  or mutually recognizing  provincial regulations  could provide some offset to increased trade friction with the United States. 10  Provinces could also make it easier for workers to move within Canada by mutually recognizing  different labour accreditations. There is also scope for all levels of government to reduce the timelines  and uncertainty related to regulatory approvals. And better east-west transportation links would make trade within Canada less expensive-and  help get Canadian products to overseas markets.

8  See C. Rogers, 'Time to break the glass: Fixing Canada's productivity problem' (speech delivered to the Halifax Partnership, Halifax, Nova Scotia, March 26, 2024); and T. Macklem in 'The Standing Senate Committee on Banking, Commerce and the Economy - Evidence,' minutes of proceedings, Ottawa, Ontario (October 30, 2024).

9  Intergovernmental Affairs Canada, 'Committee on Internal Trade discusses bold actions to enhance Canada's internal market,' news release (January 31, 2025).

10  Estimates from the International Monetary Fund suggest liberalization of internal trade in goods in Canada could significantly increase GDP per capita. For more detail, see J. A. Alvarez, I. Krznar and T. Tombe, 'Internal Trade in Canada: Case for Liberalization,' IMF Working Paper No. 19/158 (July 22, 2019); and L. Albrecht and T. Tombe, 'Internal Trade, Productivity and Interconnected Industries: A Quantitative Analysis,' Canadian Journal of Economics 49 (1): 237-263  (February 2016).

Again, it is not for the Bank of Canada to prescribe these policies or investments. But higher productivity means higher potential  output and more capacity for growth without inflation. As Canada confronts the reality of increased trade friction with the United States, a concerted focus on productivity has rarely been more important.

## Renewing our monetary policy framework

In some ways, the US tariff threat is part of a broader global economic shift. The structural tailwinds  of peace, globalization  and demographics  that helped keep inflation  low are turning  into headwinds-and  the world looks increasingly shock prone. Higher long-term interest rates, elevated sovereign  debt and slower economic growth have made the global economy more vulnerable. Compounding these vulnerabilities  are war, rising trade protectionism and economic fragmentation. Canada also has a structural supply challenge in its housing market. For years, the supply of housing  has not kept up with demand, and housing  affordability has deteriorated.

These shifts all have implications for inflation. They may put more upward pressure  on prices, and a more shock-prone world means more volatility in inflation.  And that brings me to my original topic: the Bank's flexible inflationtargeting  framework.

Since 1995, the 2% target has been jointly agreed with the Government of Canada. This gives it political legitimacy and gives the Bank the operational independence  to conduct monetary policy.

For 25 years leading  up to the pandemic, inflation was low and stable.  But the pandemic tested the framework like never before. We faced huge shocks to both demand and supply, a deep recession  and a rapid rebound. As the economy reopened,  inflation rose sharply, hitting 8%. Guided by the framework, the Bank raised the policy rate forcefully to bring inflation down. Since last summer, inflation  has been close to 2%, and we've cut our policy rate to keep it there. In short, the framework was tested-and  it proved resilient.

The measure of the framework's success is not only whether inflation is close to 2%. It's also how the framework performs in the face of shocks, especially big ones.

The next renewal of the framework is set for 2026, and the review begins  now. Our focus in this review will be how we can improve the framework and its implementation  to best address  structural changes.  We will consider several questions.

With more supply shocks, do we need a richer playbook for monetary policy? The usual response  to supply shocks is to look through their temporary impact on inflation.  But we saw in the pandemic that supply shocks can be persistent,  and they can accumulate. The best response  will depend  on the situation.

In a world with more volatility, how should we measure underlying inflation?  No single measure of core inflation works for all circumstances. What measures are most robust in a shock-prone world? Should we focus on two or three preferred measures, or is a broader approach better?

We also want to consider the interaction of monetary policy and housing. Housing affordability is a major concern for Canadians,  and rising housing costs feed inflation. But monetary policy cannot directly increase housing  supplythat's  an issue for elected governments at all levels.  Still, we must consider how monetary policy affects housing demand and supply and how the imbalance between them feeds into inflation in shelter  prices.

The question  of housing market imbalances also matters for the measurement of underlying inflation.  Does persistently  high inflation in shelter prices distort our measures of core inflation?

Finally, each time we've reviewed our framework we've asked about the inflation target itself. In our five reviews since 1995, we've considered  whether 2% is the right target  and we've weighed alternatives,  including price-level targeting and nominal GDP targeting, among others. Each time, we've concluded that 2% inflation  is the right target.  Canadians  have told us they don't want higher inflation.  They have also told us that the 2% target is well known and well understood.  That has helped anchor inflation expectations through thick and thin, including through the pandemic crisis. With trade conflict on our doorstep,  we need to focus our resources on the most pressing  and important issues  for our framework review. In my view, now is not the time to question  the anchor that has proven so effective in achieving price stability.

## Conclusion

We have covered a lot of ground, and it's time for me to conclude.

Canada's  economy is on a better footing.  Inflation has returned to target, interest rates have come down substantially,  and household  spending  has strengthened. But a new crisis is on the horizon.  If US tariffs play out as threatened,  the economic impact would be severe. A protracted trade conflict would sharply reduce exports and investment. It will cost jobs and boost inflation in the next few years and lower our standard of living in the long run. The uncertainty alone is already causing harm.

Central banks can do little to mitigate the damage  caused by a trade war. Our role will be to balance the upside  risks to inflation from higher costs with the downside  risks from weaker demand. Our focus will be to help smooth the painful adjustment  to a lower path for the economy while preventing price increases from becoming higher ongoing  inflation.

The inflation-targeting  framework has proven both flexible and durable.  Its review every five years is an opportunity to reflect on what's working well and what could be improved. The framework proved itself time and again, and the bar for change is high.

But the world economy is shifting. At the Bank of Canada, we are committed to ensuring  we are as prepared as possible  for the changes to come.

Thank you.",Tiff Macklem
https://www.bis.org/review/r250224d.htm,Philip N Jefferson: Reading between the lines? Textual analysis of central bank communications,"Speech by Mr Philip N Jefferson, Vice Chair of the Board of Governors of the Federal Reserve System, at the Macroeconomics and Monetary Policy Conference, Federal Reserve Bank of San Francisco, San Francisco, California, 21 February 2025.",2025-02-21 00:00:00,"For release on delivery 11:30 a.m. EST (8:30 a.m. local time) February 21, 2025

Reading between the Lines? Textual Analysis of Central Bank Communications

Remarks by

Philip N. Jefferson

Vice Chair

Board of Governors of the Federal Reserve System at the

Macroeconomics and Monetary Policy Conference Federal Reserve Bank of San Francisco

San Francisco, California

February 21, 2025

Thank you, President Daly, for organizing this conference and for the opportunity to talk to this group. 1 I have paid close attention to the papers presented at this annual conference in the past, and I look forward to today's presentations and discussion.

Today, I will talk about central bank communications and the use of textual analysis tools.  These tools help process qualitative information that may be hard to capture in numerical forecasts.  Also, they can improve our understanding of economic concepts that are otherwise difficult to measure.  This topic has been covered at this conference in the past.  Last year, for example, there was a paper on the program that highlighted the importance of considering the impact that speeches by the Chair of the Federal Reserve (Fed) have on asset prices when evaluating the transmission of monetary policy to the rest of the economy. 2 This paper also shows that speeches by the Vice Chair are less important than those by the Chair.  So this might be a good time to catch up on your text messages!  (Just kidding!)

My talk is organized as follows.  First, I will briefly discuss central bank communication and its effect on asset prices.  Next, I will discuss how recent advances in automated textual analysis may be having an impact on how the information in central bank communication is incorporated into asset prices.  Then I will review how researchers and market participants use textual analysis techniques, among other techniques, to gauge who is listening to central bank communication and to understand how monetary policy is transmitted to the economy.  Before concluding, I will broaden

1  The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.

2  See Swanson and Jayawickrema (2024).

my coverage and discuss how textual analysis tools can be used to estimate difficult-tomeasure concepts in economics such as uncertainty and supply chain disruptions.

These new textual analysis techniques are important to me as a policymaker because I want to understand how our communications are being heard, interpreted, understood, and acted upon.

## Central Bank Communication and its Effect on Financial Markets

Former Fed Chair Ben Bernanke often highlighted the importance of central bank communication, saying that 'monetary policy is 98 percent talk and 2 percent action.' 3 Obviously, the '98 percent' is hyperbole; it is not meant to be taken as an exact measure of how much of the transmission of monetary policy is due to central bank communication.  Even so, research and my own experience confirm that central bank communication is key for the transmission of monetary policy.  In remarks I delivered almost two years ago, I discussed how monetary policy is transmitted to the rest of the economy through financial market prices. 4 Changes in the federal funds target range are transmitted to overnight money market rates and other short-term interest rates through arbitrage relationships.  The configuration of short-term interest rates, central bank communication about the likely future path of short-term interest rates, and the associated economic outlook, in turn, affect long-term interest rates through investors' expectations. 5 Higher long-term interest rates increase the cost of borrowing for

3  See Bernanke (2015, 2022).

4 See Jefferson (2023a). Arbitrage is the economic force that keeps prices of financial instruments with similar payoffs, such as the federal funds rate and repo rates, close to each other.

5 More specifically, according to the expectations theory of the term structure of interest rates, intermediate- and long-term interest rates are importantly affected by the weighted average of expected future short-term interest rates.  In addition, monetary policy affects risk premiums (see, for example, Bernanke and Kuttner, 2005; Hanson and Stein, 2015; and Gertler and Karadi, 2015) and term premiums (if monetary policy tightens in response to inflationary shocks, term premiums also tend to rise as longermaturity bonds become riskier; see, for example, Piazzesi and Schneider, 2006).

households and businesses, thereby affecting households' and businesses' spending, savings, and investment decisions.

## Evolution of Fed Communications

Policymakers' approach to communication has evolved over time.  In the past, policymakers were not focused on clarity and transparency in their communications as they are today.  For example, former Fed Chair Alan Greenspan famously quipped in 1987, 'If I seem unduly clear to you, you must have misunderstood what I said.' 6 In the 1990s, however, he started to embrace transparency.  Figure 1 shows a timeline of the steps taken toward increasing transparency at the Fed since the 1990s.  In 1993, the Fed started to publish Federal Open Market Committee (FOMC) meeting minutes in their current form, and, soon after, it began releasing FOMC meeting transcripts with a fiveyear lag.  In February 1994, the FOMC started to issue post-FOMC meeting statements following meetings at which there was a change in the intended policy stance.  Later, it regularly incorporated the target federal funds rate into these statements.  In May 1999, the FOMC started to publish statements after every meeting, even on occasions when there was no change in policy.  In 2004, the FOMC accelerated the release of the minutes to three weeks after the meeting as opposed to after the subsequent FOMC meeting. During the tenure of former Fed Chair Ben Bernanke, the Fed's transparency increased significantly.  In November 2007, the FOMC began releasing the Summary of Economic Projections (SEP).  In 2011, Chair Bernanke started holding press conferences after every other FOMC meeting.  In 2012, under his leadership, the FOMC adopted an explicit inflation target of 2 percent in its new Statement on Longer-Run Goals and Monetary

6  See Appelbaum (2012).

Policy Strategy.  Also, it started publishing anonymized individual FOMC participants' views on the appropriate future path of the federal funds rate, now famously known as the 'dot plot.'  In 2019, Chair Powell continued this march toward transparency and started holding press conferences after every FOMC meeting.

Of course, Chair Powell and other policymakers testify regularly before Congress, as required by law.  Also, FOMC participants give public speeches and transparently discuss their views on monetary policy and associated issues, as evidenced by my speech here today.

Previously, I have spoken about two primary reasons for the increase in transparency. 7 First, transparency allows for greater accountability to the public. Second, there is a growing appreciation in the economics profession that clarity about policy actions helps the transmission of monetary policy to the rest of the economy by, for example, making asset prices more informationally efficient.  Relatedly, by conveying aspects of the Fed's reaction function, communications can help inform investors' views about the likely future path of monetary policy in a way that helps achieve the Fed's monetary policy objectives.

## Using Textual Analysis to Quantify Central Bank Communication

Central bank communication is clearly important in shaping the path of interest rates, so it is not surprising that investors and researchers use textual analysis techniques, including artificial intelligence, to quantify in an automated way information conveyed through FOMC statements and other communications, such as speeches by Governors

7 See Jefferson (2023b).

8

and Fed Bank presidents. Researchers have tested the hypothesis that clarity about policy actions would help the transmission of monetary policy to the rest of the economy. Using textual analysis, high-frequency asset price data, and high-frequency central bank communication data, this research shows that investors' reactions to specific sentences communicated by the central bank are quickly incorporated into asset prices. 9 In addition, economists have used textual analysis to understand how media reporting of central bank communication affects short-term interest rates. 10 For example, some have used a bag-of-words technique to estimate media sentiment during FOMC announcement days. 11 By design, a high media sentiment is meant to capture times when journalists report that the FOMC is more likely to tighten monetary policy in the near future.  Figure 2 shows that the correlation between media sentiment and six-month U.S. Treasury yield changes is positive and relatively high (40 percent), which suggests that media reporting of central bank communication plays an important role in the transmission of monetary policy.

Policymakers know that their communications are likely to affect the course of short-term interest rates, other asset prices, and the associated economic outlook, resulting in an easing or tightening of financial conditions.  Therefore, policymakers have

8  See, for example, Cieslak and McMahon (2023); Gardner, Scotti, and Vega (2022); Gómez-Cram and Grotteria (2022); and Sharpe, Sinha and Hollrah (2023).

9  See, for example, Gómez-Cram and Grotteria (2022), who use textual analysis, high-frequency asset price data, and high-frequency central bank communication data to understand investors' reactions to specific sentences communicated by the FOMC.

10  See Schmanski and others (2023).

11 A bag-of-words technique is a natural language processing technique that uses a collection (or 'bag') of words and a scoring system to quantify qualitative textual information.  Schmanski and others (2023) use this technique to pair a set of topic keywords with modifiers and determine whether the combination of topic-modifier communicates tightening, neutral, or easing news.  By construction, the sentiment is high when the media thinks the FOMC is more likely to tighten monetary policy in the near future.

always paid close attention to what they say, well before market participants started applying artificial intelligence tools to central bank communications.

In general, researchers argue that automated textual analysis and automated trading have increased the speed with which information is incorporated into asset prices. That suggests that asset prices have become more informationally efficient, sometimes in a matter of seconds or even milliseconds instead of minutes after information is released. 12 Thus, increased transparency and advances in technology have potentially made asset prices more informationally efficient, which, in turn, helps with the transmission of monetary policy.  Yet others argue that automated algorithms may be more prone to mistakes than humans, may provide an incentive for investors to value speed over accuracy, and may reduce the long-run informativeness of asset prices, which could hurt the transmission of monetary policy. 13

I look forward to the findings of future research as we develop a deeper understanding of this issue.  For now, I do not think artificial intelligence is changing the way policymakers communicate, but research shows that it has affected how quickly information about policy is incorporated into asset prices.

## Central Bank Communication:  Is Anyone Listening?

Next, I will discuss whether research using textual analysis is helping policymakers to understand better who is listening to central bank communication.  In 2018, former Fed Vice Chair Alan Blinder predicted that 'central banks will keep trying

12  See Chaboud and others (2014) for evidence that automated trading has increased the informational efficiency of foreign exchange markets by reducing the frequency of triangular arbitrage opportunities and the autocorrelation of high-frequency returns.  See von Beschwitz and others (2020) for evidence that automated textual analysis speeds up the stock price response to news.

13  See, for example, von Beschwitz, Keim, and Massa (2020); Dugast and Foucault (2017); and O'Hara (2015).

to communicate with the general public, as they should.  But for the most part, they will fail.' 14 He explained further that 'many economic models presume that central bank communication is aimed at wage-setters, price-setters, consumers, or investors-maybe all of them.  But are they listening?'  His answer was no , they are not listening to central bank communications, and he cited economic research using survey data to support his answer. 15

More recently, however, research shows that nonexperts and households are listening to central bank communications.  Some of this research uses textual analysis, and some uses randomized control trials.  Researchers have used textual analysis to process automatically and quantify more than 3.2 million posts on social media by experts and nonexperts.  This research shows that journalists and professional forecasters who comment often on central bank policies, as well as nonexperts who do not comment regularly on central bank policies do listen to central bank communications. 16

## Central Bank Communication and Monetary Policy Transmission

Further, research shows that direct central bank communication and the media's reporting of central bank communication are highly correlated.  Yet when they do not align, the media's reporting tends to have a larger effect on asset prices and professional forecasters' views about the future than the central bank's direct communication. 17 In addition, a randomized control trial with nearly 20,000 U.S. individuals shows that

14 See Blinder (2018, p. 569).

15  See Kumar and others (2015).

16  Ehrmann and Wabitsch (2022) document that the number of expert and nonexpert comments posted on the X platform (formerly known as Twitter) that discuss central bank communication increases after European Central Bank (ECB) press conferences and other ECB communications, such as speeches by the ECB president.  The authors also document that the content of the discussion tends to be objective (factual) rather than subjective, according to the authors' dictionary base subjectivity measure.

17  See Schmanski and others (2023).

central bank communication affects households' inflation expectations, which, in turn, affects their behavior as measured by scanner-collected data. 18 This research shows that while central bank communication tends to affect household expectations and spending behavior, the way households receive information matters.  In particular, households appear to react more to information conveyed by social media, friends, and family than to information conveyed by traditional media.  All told, this research suggests that central bank efforts to communicate with the general public are having some success, but there is still room for improvement.

## Measuring Economic Concepts Using Textual Analysis

Textual analysis is not only helping researchers understand who is listening to central bank communication.  Generally, it is helping them to measure qualitative information that is hard to capture with numerical forecasts and estimate difficult-tomeasure economic concepts such as uncertainty, supply chain disruptions, and financial conditions. 19 As I mentioned in a previous speech, uncertainty is not directly observable in the same way that inflation and economic output are. 20 Notwithstanding the difficulty in measuring uncertainty, researchers have developed tools to assess it.  In fact, in the past two decades, there has been tremendous growth in research devoted to the subject, especially on text-based measures of uncertainty.  For example, researchers created an economic policy uncertainty index, shown in figure 3, based on the number of leading newspaper articles that contain a combination of words related to economic policy

18  See Coibion, Gorodnichenko, and Weber (2022).

19  See, for example, Baker, Bloom, and Davis (2016) for textual analysis measures of economic policy, Soto (2023) and Young and others (2021) for textual analysis measures of supply chain disruptions, and Adams and others (2023) for a textual analysis measure of financial conditions.

20 See Jefferson (2023c).

uncertainty. 21 As shown in the figure, economic uncertainty in the U.S. reached an alltime high at the onset of the pandemic, came down slightly after the pandemic, and has recently increased as the potential economic implications of new government policies are discussed in newspaper articles.  Research also shows that newspaper text-based measures are highly correlated with stock price volatility, and that higher values of these measures are associated with lower investment and employment.  A corollary to that insight is that policymakers should communicate as clearly as possible to avoid increasing uncertainty.

Recent research has also discovered that narrative sentiment conveys information that may be hard to capture in numerical forecasts.  For example, it was shown that the tone of text accompanying a set of economic forecasts produced by the Fed's staff, predicts forecast errors of the Fed's staff as well as Blue Chip participants. 22 The predictive power of sentiment seems to be arising from signaling the downside risks to economic performance for output, employment, and stock returns.  These findings suggest that the tone of the narrative captures information that is not necessarily provided by corresponding forecasts.  Not surprisingly, given this information, the tonality has predictive power for stock prices as well as monetary policy surprises.

Another example of how textual analysis is helping researchers estimate difficultto-measure concepts is new measures of firms' demand and supply shocks.  Traditionally, academic researchers use sign restrictions in price and quantity measures to identify and differentiate demand shocks from supply shocks.  An increase in price and quantity is considered a demand shock; an increase in price accompanied by a decline in quantity is

21  See Baker, Bloom, and Davis (2016).

22  See Sharpe, Sinha, and Hollrah (2023).

considered a supply shock.  These so-called sign restrictions are useful tools; however, it is possible that an increase in price and quantity can be due to a surge in demand in the face of supply chain disruptions.  Other popular measures of supply chain disruptions are supplier delivery times and order backlogs provided by the Institute for Supply Management (ISM).  These measures, however, only estimate firm activity relative to the previous month and can lack important context for understanding short-term dynamics that can otherwise be captured in qualitative, text-based measures.  Thus, it can be useful to complement sign restriction methods, supplier delivery times, and order backlogs with textual analysis techniques that quantify firms' narratives in earnings calls and the Beige Book to identify better demand and supply shocks. 23 For example, figure 4 shows the Supply Chain Bottleneck Sentiment Index, the solid black line, estimated by a Board economist using textual analysis techniques to quantify the information conveyed in the Fed's Beige Book publications, along with the ISM Supplier Delivery Index, the dashed red line. 24 For illustration purposes, both indexes are normalized to have a zero mean and a standard deviation equal to one, with large positive numbers indicating that supply chains are stressed.  Both indexes surged in the 1970s after the oil price increase and ensuing energy crisis.  Supply chain disruptions reappeared in the 2000s with chip shortages, and, most recently, bottlenecks arose during the COVID-19 pandemic.  The figure illustrates how the text-based measure signals a more prolonged period of supply chain disruptions during the pandemic.  Comparing both measures, we see that the monthly changes in delivery times improved at a fast pace, as shown in the ISM index,

23  See Young and others (2021) and Soto (2023).

24 See Soto (2023).

but narratives of the post-pandemic recovery, as captured in the Beige Book, were signaling elevated levels of supply chain disruptions that eased more slowly.

## Conclusion

The idea of using qualitative information on media, government records, central bank, or management communication in economic research to understand better the transmission of monetary policy is not new. 25 What is novel is that, in the past two decades, there have been advances in textual analysis techniques and incredible growth of data that are easily available to researchers and investors, in terms of both volume and variety.  The advances in textual analysis techniques and the growth in alternative data have, in turn, helped researchers to better estimate difficult-to-measure economic concepts, to more easily identify who listens to central bank communications, and to investigate how quickly central bank communication is incorporated into asset prices, among other things.  Also, we have greater access to high-frequency data, such as millisecond timestamp financial transactions, and 'alternative data,' which includes textual information from social media posts.  As I mentioned earlier, these new textual analysis techniques are important to policymakers because we seek to understand how our communications are being heard, interpreted, understood, and acted upon.

While I am grateful that textual analysis techniques and data access have improved over the years, I will end on a cautionary note.  Automatic textual analysis should not be regarded as superseding other analysis of the historical record on monetary policy.  A wealth of data and techniques to analyze text does not necessarily translate into greater insight.  Therefore, it is important that policymakers, researchers, and investors

25  See, for example, Romer and Romer (1989, 2023, 2024) for a description of the 'narrative' approach.

continue to be diligent in using the right tools and the right data to make the best possible inferences. 26

Thank you!

26 For example, Dessaint, Foucault, and Fresard (2024) suggest that alternative data mainly help forecast short-term outcomes, and not so much long-term outcomes.

## References

Adams, Travis, Andrea Ajello, Diego Silva, and Francisco Vazquez-Grande (2023). 'More than Words:  Twitter Chatter and Financial Market Sentiment,' Finance and Economics Discussion Series 2023-034.  Washington:  Board of Governors of the Federal Reserve System, May, https://doi.org/10.17016/FEDS.2023.034.

Appelbaum, Binyamin (2012).  'A Fed Focused on the Value of Clarity,' New York Times, December 13.

Baker, Scott R., Nicholas Bloom, and Steven J. Davis (2016).  'Measuring Economic Policy Uncertainty,' Quarterly Journal of Economics, vol. 131 (November), pp. 1593-636.

Bernanke, Ben S. (2015).  'Inaugurating a New Blog,' Ben Bernanke's Blog, March 30, https://www.brookings.edu/articles/inaugurating-a-new-blog.

--- (2022).  'Ben Bernanke:  The Fed from the Great Inflation to COVID-19,' webinar, Brookings Institution, Washington, May 23, https://www.brookings.edu/wpcontent/uploads/2022/04/gs\_20220523\_bernanke\_transcript.pdf.

Bernanke, Ben S., and Kenneth N. Kuttner (2005).  'What Explains the Stock Market's Reaction to Federal Reserve Policy?' Journal of Finance, vol. 60 (June), pp. 1221-57.

Blinder, Alan S. (2018).  'Through a Crystal Ball Darkly:  The Future of Monetary Policy Communication,' AEA Papers and Proceedings, vol. 108 (May), pp. 56771.

Chaboud, Alain P., Benjamin Chiquoine, Erik Hjalmarsson, and Clara Vega (2014). 'Rise of the Machines:  Algorithmic Trading in the Foreign Exchange Market,' Journal of Finance, vol. 69 (October), pp. 2045-84.

Cieslak, Anna, and Michael McMahon (2023).  'Tough Talk:  The Fed and Risk Premium,' working paper, April (revised June 2024).

Coibion, Olivier, Yuriy Gorodnichenko, and Michael Weber (2022).  'Monetary Policy Communications and Their Effects on Household Inflation Expectations,' Journal of Political Economy, vol. 130 (June), pp. 1537-84.

Dessaint, Olivier, Thierry Foucault, and Laurent Fresard (2024).  'Does Alternative Data Improve Financial Forecasting?  The Horizon Effect,' Journal of Finance, vol. 79 (June), pp. 2237-87.

| Dugast, Jerome, and Thierry Foucault (2017). 'Data Abundance and Asset Price Informativeness,' Journal of Financial Economics, vol. 130 (November), pp. 367-91.                                                                                                                                                 |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Gertler, Mark, and Peter Karadi (2015). 'Monetary Policy Surprises, Credit Costs, and Economic Activity,' American Economic Journal: Macroeconomics, vol. 7 (January), pp. 44-76.                                                                                                                               |
| Ehrmann, Michael, and Alena Wabitsch (2022). 'Central Bank Communication with Non-experts - A Road to Nowhere?' Journal of Monetary Economics, vol. 127 (April), pp. 69-85.                                                                                                                                     |
| Verbal Communication: Method and Application to Fedspeak,' Journal of Financial Economics, vol. 143 (March), pp. 993-1025. Hanson, Samuel G., and Jeremy C. Stein (2015). 'Monetary Policy and Long-Term Real                                                                                                   |
| Gómez-Cram, Roberto, and Marco Grotteria (2022). 'Real-Time Price Discovery via                                                                                                                                                                                                                                 |
| Jefferson, Philip N. (2023a). 'Implementation and Transmission of Monetary Policy,' speech delivered at the H. Parker Willis Lecture, Washington and Lee Lexington, Va., March 27, https://www.federalreserve.gov/newsevents/speech/jefferson20230327a.htm.                                                     |
| University, ---(2023b). 'Communicating about Monetary Policy,' speech delivered at 'Central Bank Communications: Theory and Practice,' a conference hosted by the Reserve Bank of Cleveland, Cleveland, Ohio, May 13, https://www.federalreserve.gov/newsevents/speech/jefferson20240513a.htm.                  |
| Federal ---(2023c). 'Elevated Economic Uncertainty: Causes and Consequences,' speech                                                                                                                                                                                                                            |
| delivered at 'Global Risk, Uncertainty, and Volatility,' a research conference sponsored by the Federal Reserve Board of Governors, Swiss National Bank, and the Bank for International Settlements, Zurich, Switzerland, November 14, https://www.federalreserve.gov/newsevents/speech/jefferson20231114a.htm. |
| Kumar, Saten, Hassan Afrouzi, Olivier Coibion, and Yuriy Gorodnichenko (2015). 'Inflation Targeting Does Not Anchor Inflation Expectations: Evidence from Firms in New Zealand,' Brookings Papers on Economic Activity, Fall, pp. 208, https://www.brookings.edu/wp-                                            |
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| O'Hara, Maureen (2015). 'High Frequency Market Microstructure,' Journal of Financial Economics, vol. 116 (May), pp. 257-70.                                                                                                                                                                                                                                                              |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Piazzesi, Monika, and Martin Schneider (2006). 'Equilibrium Yield Curves,' NBER Working Paper Series 12609. Cambridge, Mass.: National Bureau of Economic Research, October (revised January 2007), https://www.nber.org/papers/w12609.                                                                                                                                                  |
| Romer, Christina D., and David H. Romer (1989). 'Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz,' NBER Macroeconomics Annual, vol. 4, pp.121-70. --- (2023). 'Presidential Address: Does Monetary Policy Matter? The Narrative Approach after 35 Years.' American Economic Review , vol. 113 (June), pp. 1395-423.                                       |
| --- (2024). 'Lessons from History for Successful Disinflation,' Journal of Monetary Economics , vol.148, Supplement (November), 103654.                                                                                                                                                                                                                                                  |
| Schmanski, Bennett, Chiara Scotti, Clara Vega, and Hedi Benamar (2023). 'Fed Communication, News, Twitter, and Echo Chambers,' Finance and Economics Discussion Series 2023-36. Washington: Board of Governors of the Federal Reserve System, May, https://doi.org/10.17016/FEDS.2023.036.                                                                                               |
| Sharpe, Steven A., Nitish R. Sinha, and Christopher A. Hollrah (2023). 'The Power of Narrative Sentiment in Economic Forecasts,' International Journal of Forecasting, vol. 39 (July-September), pp. 1097-121.                                                                                                                                                                           |
| Soto, Paul (2023). 'Measurement and Effects of Supply Chain Bottlenecks Using Natural Language Processing,' FEDS Notes. Washington: Board of Governors the Federal Reserve System, February 6 (revised January 16, 2025), https://www.federalreserve.gov/econres/notes/feds-notes/measurement-and- effects-of-supply-chain-bottlenecks-using-natural-language-processing- 20230206.html. |
| Swanson, Eric T., and Vishuddhi Jayawickrema (2024). 'Speeches by the Fed Chair Are More Important Than FOMC Announcements: An Improved High-Frequency Measure of U.S. Monetary Policy Shocks,' working paper, University of California, Irvine.                                                                                                                                         |
| the News: News Analytics and Algorithmic Trading,' Review of Asset Pricing Studies, vol. 10 (February), pp. 122-78. Young, Henry L., Anderson Monken, Flora Haberkorn, and Eva Van Leemput (2021). 'Effects of Supply Chain Bottlenecks on Prices using Textual Analysis,' FEDS Notes. Washington: Board of Governors of the Federal Reserve System,                                     |

December 3, https://www.federalreserve.gov/econres/notes/feds-notes/effects-ofsupply-chain-bottlenecks-on-prices-using-textual-analysis-20211203.html.



## Reading Between the Lines? Textual Analysis of Central Bank Communications

Philip N. Jefferson

Vice Chair, Federal Reserve Board

San Francisco Fed, February 21, 2025

Disclaimer: The views I will express today are my own and not necessarily those of the Federal Open Market Committee (FOMC) or the Federal Reserve System.



## Roadmap of Talk

- Central bank communication and its effect on financial markets
- Using textual analysis to quantify central bank communication
- Central bank communication and monetary policy transmission
- Measuring economic concepts using textual analysis



## Figure 1: Evolution of Fed Communications



Figure 2: Media Sentiment and 6—Month U.S. Treasury Yield Changes



Note: The figure shows a scatter plot of media sentiment and daily 6-month U.S. Treasury yield changes on FOMC announcement days. Media sentiment is estimated using a bag—of-words technique described in Schmanski and others (2023) that pairs a set of topic keywords with modifiers and determines whether the combination of topic-modifier communicates tightening, neutral, or easing news. By construction, the sentiment is high when the media reports the FOMC is more likely to tighten monetary policy in the near future. The scatter plot uses data from January 2000 to December 2023 and excludes effective lower bound periods (December 2008 to November 2015 and March 2020 to January 2022).

Source: Calculations of media sentiment are based on Dow Jones newswire articles (Factiva). Calculations of daily 6-month U.S. Treasury yield changes use Bloomberg data.





## Figure 4: Beige Book Supply Chain Bottleneck Sentiment and ISM Supplier Deliveries Index



Note: Month-Ends. The Supply Chain Bottleneck Sentiment Index is the total number of negative sentences minus the total number of positive sentences about supply chain bottlenecks, divided by the total number of sentences about supply chain bottlenecks from the Beige Book. Both series have been normalized to zero.The shaded bars indicate periods of business recession as defined by the National Bureau of Economic Research: December 1969-November 1970, November 1973-March 1975, January 1980-July 1980, July 1981-November 1982, July 1990-March 1991, March 2001-—November 2001, December 2007—June 2009, and February 2020-April 2020.

Source: Federal Reserve Board, Institute for Supply Management.",Philip N Jefferson
https://www.bis.org/review/r250224g.htm,Olli Rehn: Hearing of the Committee on Economic and Monetary Affairs of the European Parliament,"Speech by Mr Olli Rehn, Governor of the Bank of Finland, at the Hearing of the Committee on Economic and Monetary Affairs of the European Parliament, Brussels, 20 February 2025.",2025-02-20 00:00:00,"## Olli Rehn: Hearing of the Committee on Economic and Monetary Affairs of the European Parliament

Speech by Mr Olli Rehn, Governor of the Bank of Finland, at the Hearing of the Committee on Economic and Monetary Affairs of the European Parliament, Brussels, 20 February 2025.

* * *

Thank you for inviting me here today to discuss how I intend to conduct my duties as the First Vice-Chair of the European Systemic Risk Board (ESRB). Let me begin by saying that as a former Vice-President of this House and of the European Commission, I hold dialogue with Parliament in the highest regard.

I trust we are all aware of the hazardous complexities of our time. History seems to be experiencing a sudden jolt of acceleration - into reverse. The reaction from Europe to the ongoing geopolitical uncertainties should, I believe, be firm and forward-looking, creating a Europe that is stronger and more united - on the economy and finance, defence and security.

We at the ESRB are monitoring developments on the other side of the Atlantic with concern. The new US Administration is establishing new priorities, including significant deregulation of the financial system. This deregulation is also aimed at new sectors, such as private finance, non-bank financial intermediation and crypto-assets. We are vigilantly assessing its implications and the potential risks to the EU financial sector.

Having said that, we must not simply be on the defensive. I am convinced that the EU has the potential to deliver on the essential goals of competitiveness and productivity growth, as outlined in the Letta, Draghi and Niinistö reports 1 . I also remain convinced that building up a savings and investment union will be essential for enabling the EU to provide its citizens and businesses with the public good of a competitive and integrated financial system - one which can also foster their security. I should add that I firmly endorse all the efforts by the European Commission in this direction.

As First Vice-Chair of the ESRB, my priorities are shaped by the insights yielded by the High-Level Group on the ESRB Review. I had the privilege of chairing this Group and working with three esteemed colleagues: Advisory Scientific Committee Vice-Chair Professor Stephen Cecchetti, ECB Vice-President Luis de Guindos and Advisory Technical Committee Chair Pablo HernÆndez de Cos. Together, we examined the ESRB's performance over the last ten years, as well as the legal provisions underpinning ESRB functions.

Our goal was to contribute to the upcoming review of the ESRB Regulation by bringing our strategic advice on the ESRB's future. We recently published our report and shared it with your Committee. Importantly, some of our proposals might require legislative changes. I hope that your Committee will consider these in the upcoming review of the ESRB Regulation. 2

Let me continue here by taking a look at the big picture. I believe that the ESRB has been successful in fulfilling its mandate of macroprudential oversight. The comparative advantage of the ESRB lies in its unique position: being able to monitor and assess the prevention and mitigation of systemic risks and vulnerabilities across the entire EU financial system.

This is why the High-Level Group on the ESRB Review focused on how to enhance the ESRB's holistic assessment of systemic risk. Let me give you two examples of the advancements that we have in mind.

First, we envisage top-down system-wide stress tests covering the entire EU financial system. Such system-wide stress tests would allow us to examine where fragilities lie in the financial system - and to identify the weakest link in the chain.

Let me stress that what we have in mind is a top-down desktop exercise. This means that it would not create any additional requirements - such as reporting requirements for market participants. It would help us if you could provide a legal anchor for such a system-wide stress test in the ESRB Regulation.

Second, we propose enhanced access to data. The ESRB needs access to granular data on financial institutions, non-financial corporations, households and governments. We need this to analyse how entities are interlinked and how risks can spread throughout the financial system. This, of course, is also key to running the top-down system-wide stress tests I discussed a moment ago.

The ESRB already benefits from immediate and automatic access to many datasets. But some key datasets are only available in response to ad hoc requests. In other words, we have access to these datasets, but it is not continuous and automatic, as the ESRB - and the other authorities involved - need to follow a somewhat cumbersome procedure.

The European Parliament has recognised that this hampers our capability to monitor the financial system and has proposed a solution in a recent legislative procedure. Unfortunately, your proposal of data sharing by default between the European Supervisory Authorities (ESAs) and the ESRB has not become part of the final compromise on the legal text.

I hope that this Committee will continue its efforts to grant the ESRB immediate and automatic access to regular supervisory data collected by the ESAs. The upcoming ESRB Review provides an opportunity to enhance our framework in this regard.

Allow me to conclude by highlighting another, equally important element: communication. Since the ESRB does not have any binding powers, its warnings and recommendations will only be taken into account if it is able to convince others.

Communicating about financial stability is not always straightforward and can be challenging. Being keenly aware of this, we aim to focus ever more intensely on our communication efforts. It is perhaps something of a paradox that the longer macroprudential policy is successful - or, to put it another way, the more the memory of

the last financial crisis fades - the more probable it is that financial stability will be overlooked in public debate.

Nevertheless, macroprudential policies are and will remain essential. We must not forget that financial stability is a prerequisite for sustainable growth. A stable financial system not only fosters sustainable growth but also supports innovation. It ensures access to credit and creates confidence in the economy, thereby contributing to the wellbeing of all Europeans. It is therefore our hope that this Committee will help us further improve the holistic assessment of risks in the EU, including through enhancing the ESRB's access to data.

By ensuring that macroprudential policy decisions are grounded in relevant data and based on strong analytics, we will be in a better position to tackle current and future challenges together.

Thank you very much.

1  See Draghi, M. (2024), ""The future of European competitiveness - A competitiveness strategy for Europe"", European Commission, September; Letta, E. (2024), ""Much more than a market"", April; and Niinistö, S. (2024),  ""Safer together: A path towards a fully prepared Union"", October.

2  Regulation (EU) No 1092/2010 of the European Parliament and of the Council of 24 November 2010 on European Union macro-prudential oversight of the financial system and establishing a European Systemic Risk Board, (OJ L 331, 15.12.2010, p. 1).",Olli Rehn
https://www.bis.org/review/r250225d.htm,Chee Hong Tat: Remarks - Equities Market Review Group Media Conference ,"Remarks by Mr Chee Hong Tat, Minister for Transport and Second Minister for Finance, and Deputy Chairman of the Monetary Authority of Singapore, at the Equities Market Review Group Media Conference, Singapore, 21 February 2025. ",2025-02-21 00:00:00,"## Chee Hong Tat: Remarks - Equities Market Review Group Media Conference

Remarks by Mr Chee Hong Tat, Minister for Transport and Second Minister for Finance, and Deputy Chairman of the Monetary Authority of Singapore, at the Equities Market Review Group Media Conference, Singapore, 21 February 2025.

* * *

## Introduction

Good evening everyone. Thank you for joining us today. I want to first acknowledge the presence of our Review Group members and our Workstream members who have contributed to this set of measures that we are putting out, and also to thank the many industry stakeholders that we have consulted over the past several months.

Ladies and gentlemen, let me first set out what are our key challenges that the Review Group has identified and what are the objectives that we want to achieve.

- a. As we know, global capital and liquidity have concentrated in a handful of global stock exchanges, especially in the US. And if you look at the US listed stocks, they account for about two-thirds of global stock market capitalisation.
- b. Growth companies from around the world will want to seek out a US listing too, we see investors from around the world are also drawn to invest in US
3. because of the valuations and liquidity that they can obtain there. And increasingly markets, because these have outperformed global indices for a number of years. c. The challenges facing our local equities market here in Singapore in attracting new listings and also in growing our liquidity is not unique to Singapore. There are many exchanges in the world who are also facing similar challenges.

The Review Group therefore wanted to start by being clear what are our objectives, what we are trying to achieve.

- a. First, we heard feedback from many market participants that there are companies that have a strong presence here in Singapore or the region, but if they go to the US, these companies may not be large enough to sustain the investor interest post-listing. So, for this group of companies with a strong presence in
2. Singapore and the region - that is one group we could reach out to.
- b. We also know that companies with a higher brand recognition, which, if they list here, could also attract greater investor interest.
- c. So the Review Group therefore focused on strengthening the elements of our ecosystem, the attractiveness of our equities market here in Singapore to these companies from Singapore and from the region, so that they would see Singapore market as one that they can raise capital to fund their growth at a sustained pace, and also to be able to sustain the interest from their investor base for a longer period.
- d. Our approach was to look at the feedback and ideas that we have received and also to work on strengthening the foundations and elements of our equities market. So we are not looking for just one silver bullet because there isn't one.

- e. We want our approach to be a comprehensive, holistic one - addressing all aspects of the market that can have a positive impact on the overall attractiveness and competitiveness to be able to draw in listings, and to be able to draw in investor interest.

In formulating this set of measures, the Review Group and the two work streams, chaired by Der Jiun and Chuan Teck, consulted a wide range of stakeholders across the capital markets ecosystem.

- a. This included our fund managers, our market practitioners, the business leaders from our listed companies, pre-IPO companies that are thinking about listing in the
2. next few years, and also our various industry groupings and associations.
- b. There are also many members of the public, including those with capital market experience who also shared their feedback and their ideas with us, so I thank them.

The feedback from our stakeholders affirm that a well-functioning equities market is an important part of our enterprise ecosystem because it allows companies, including our startups, to be able to raise capital for their expansion.

- a. I think it especially important for the smaller companies who may not be able to tap global exchanges.
- b. The Singapore Exchange becomes an important source of capital for them, so this strong local equities market provides reliable exit option for private equity and venture capital investors to be able to realise their investments and to recycle the capital into new opportunities.
- c. So if we do it well, this also then becomes a virtuous cycle that can help to drive growth and innovation through a well-functioning market.

Recognising this, we want to look at a few areas. The measures that we have reviewed, and those that we are still studying - because this is the first tranche, there are still some more that we are studying - we aim to have these measures lay the foundations for a sustainable and well-functioning equities market.

- a. If we take the proposed measures together, they will hopefully make an impact.
- b. We will put in place conditions for the market to function better, develop the pipeline of listings, strengthen research and investment capabilities in Singapore equities, reduce regulatory friction and build investor confidence.
- c. Once the fundamental conditions are strengthened, I believe we will be in a stronger position to attract listings and also to raise investor interest and investor liquidity.

## Review Group's first set of measures

So let me now share with everyone the set of measures.

They span three mutually reinforcing pillars:

- a. First, measures to increase investor interest and trading liquidity.
- b. Second, measures to attract more quality listings.
- c. Third, to adopt a pro-enterprise regulatory stance and measures to able to strengthen investor confidence.

Let me start with increasing investor interest.

## Increase Investor Interest (Demand)

This is what we view as the demand side. The demand side measures seek to deepen trading liquidity, and strengthen capabilities in the local fund management and equity research ecosystem.

First, . We MAS will launch a S$5 billion Equity Market Development Programme will invest through fund managers in mandates with a strong focus on Singapore equities.

Second, PM has announced at Budget 2025, a tax exemption on the fund manager's qualifying income from funds with at least 30% allocation to Singapore . equities

Third, EDB will to support more capital adjust the Global Investor Programme (GIP) inflows into Singapore's equities market. New GIP applicants establishing a Single Family Office (SFO) will need to invest as least S$50 million in equities listed in Singapore or in approved exchanges.

Fourth, the Research Development Grant under MAS' Grant for Equity Market will be expanded to include coverage on pre-IPO Singapore (GEMS) Scheme 1 companies, sharpen focus on mid and small cap enterprises, and broaden research dissemination including via new media channels. MAS and SGX will release more details around the middle of the year.

## Improve Attractiveness Quality Listings (Supply)

We also want to encourage new listings that are attractive to investors - this is now looking at the supply side. PM has announced new tax incentives in his Budget speech. This builds on existing efforts, such as the Anchor Fund @ 65 and the GEMS Listing Grant, to attract companies and fund managers with operations in Singapore to tap our equities market to raise growth capital.

- a. First, companies that complete a primary listing or secondary listing with share issuance can enjoy a 20% or 10% listing corporate income tax rebate . So we give higher tax rebate if it is a primary listing, and a lower 10% respectively rebate for secondary listing. These are of course subject to applicable rebate caps based on market capitalisation.
- b. Second, the Government will provide an enhanced 5% concessionary tax . rate on qualifying income for new fund manager listings in Singapore

Through MTI and EnterpriseSG, we will continue to support the development of Singapore enterprises, which can provide a potential listing pipeline. As PM announced, we have committed about S$1.8 billion in investment funds to support enterprise growth in the last 5 years. We are launching a $1 billion Private Credit Growth Fund and we hope to do more over time if needed.

## Regulatory measures

Let me now move to the regulatory measures. On regulations, we heard three types of feedback.

- a. First, the involvement of both MAS and SGX RegCo in the listing review process introduces a layer of uncertainty and also lengthens time-to-market for prospective issuers.
- b. Over time, our regulatory regime has drifted away from disclosures-based to become more merit-based in some areas, while certain listing processes and requirements are also too prescriptive and onerous, which are not commensurate with the risk that they seek to address.
- c. At the same time, some of the past cases of corporate failures and market misconduct have dented investor confidence, and layers of rules were added to try and protect retail investors. Adding more rules increase compliance costs, but may not lead to better protection and could even give a false sense of security. So it is not how many rules you have, but how you design those rules and how you enforce, and how you then ensure that there is a good outcome.

We will want to adopt a regulatory approach that is both pro-enterprise and pro-investor confidence, because both are important.

- a. We will move decisively towards a more disclosure-based regime that is aligned with international standards, with accompanying measures to uphold high standards of corporate governance and strengthen investor confidence.
- i. A single regulator, SGX Regco will be responsible for all aspects to an IPO application.
- ii. SGX Regco will rely less on merit-based judgement when admitting IPOs and rely more on disclosures.
- iii. Prospectus requirements will be streamlined significantly.
- iv. Overall, firms seeking an IPO can expect an approval within 6-8 weeks. The streamlined listing process is an improvement compared to now, and compares favourably with leading financial hubs.
- v. Post-IPO, Regco will adopt a more targeted approach to disclosure queries, trading queries, trade with caution alerts and trading suspensions. This aims to reduce the potential for unintended impact on trading and liquidity, while maintaining the overall framework of safeguards.

MAS and SGX Regco will consult on the regulatory changes before finalising and implementing them.

## Review Group's second set of measures

So these are the three pillars of the first set of measures. We do have some ongoing review for the second set of measures which we are continuing to work on, but we want to share with everyone the first set of measures first, because after several months of review and consultation with the industry, we are ready to make this first move.

But this is still an ongoing review. In the next phase, we want to focus on the following key areas:

- a. First, introducing programmes to uplift listed companies' shareholder engagement capabilities and to sharpen their focus on shareholder value;
- b. Second, to attract retail liquidity through market structure changes such as reducing board lot size;
- c. Third, to strengthen investor protection through enhancing investor recourse avenues;
- d. Fourth, improving post-trade custody efficiency; and
- e. Finally, to develop cross-border partnerships.

The review is ongoing for this next set of measures. We will consult with industry stakeholders, and we aim to complete this second tranche of measures by end of this year.

## Conclusion

Ladies, gentlemen, let me wrap up my remarks. Doing this review, looking at how we can enhance our competitiveness for the Singapore local equities market is a challenging task with no easy solutions, but we know that if we don't try, our chances of success is zero. So we have to try. But it doesn't mean that all the measures that we put in place will definitely succeed, because a lot also depends on how other exchanges respond, how companies respond, and importantly, how we as an ecosystem - all the partners within this ecosystem - work together to implement these measures effectively to achieve good outcomes.

Through our approach to strengthen foundations and to enhance the elements of a wellfunctioning equities market, we want to give ourselves the best chance to attract listings and to be able to grow investor interest.

It requires a multi-pronged approach, a multi-year approach, where each set of measures must work together, and no single solution will be sufficient on its own. All stakeholders in our ecosystem must continue to work closely to collaborate to improve the market.

We also look forward to working with industry partners on this endeavour to co-create solutions and to be able to lay the foundations for a sustainable and well-functioning equities market.

Thank you.

- 1  The GEMS scheme was introduced in 2019 to support listings and expand the equity research ecosystem in Singapore's public equity market. The scheme comprises a

listing grant that defrays listing related expenses for companies that undertake a public listing in Singapore, and a research development grant that provides funding to support greater research coverage of Singapore-listed companies.",Chee Hong Tat
https://www.bis.org/review/r250224c.htm,Michele Bullock: Opening statement - House of Representatives Standing Committee on Economics,"Opening statement by Ms Michele Bullock, Governor of the Reserve Bank of Australia, to the House of Representatives Standing Committee on Economics, Canberra, 21 February 2025. ",2025-02-21 00:00:00,"## Michele Bullock: Opening statement - House of Representatives Standing Committee on Economics

Opening statement by Ms Michele Bullock, Governor of the Reserve Bank of Australia, to the House of Representatives Standing Committee on Economics, Canberra, 21 February 2025.

* * *

Check against delivery

Good morning, Chair and members of the Committee.

My colleagues and I are pleased to be here today to answer your questions.

As you know, on Tuesday the Reserve Bank Board decided to lower the cash rate target - our key monetary policy tool - by 25 basis points to 4.1 per cent. The cash rate had been at 4.35 per cent since November 2023. I will start with some background to this decision and explain the Board's strategy. I'll also talk about the outlook for the Australian economy and some of the risks and uncertainties. I will then make some remarks on the payments system, including the RBA's consultation on retail payments regulation and the status of work in the cash distribution space. Finally, this week's meeting was the last meeting of the Reserve Bank Board. From 1 March, the amended Reserve Bank Act 1959 will come into force, creating a new Monetary Policy Board and a separate Governance Board. So I will finish off with an update on our preparations for these new arrangements and implementation of the recommendations from the Review of the RBA more generally.

## Inflation

The Reserve Bank Board's mandate is to contribute to the welfare of the Australian people by delivering price stability and full employment.

What is meant by price stability is set out in the Statement on the Conduct of Monetary Policy agreed between the Australian Treasurer and the Reserve Bank Board in late 2023. To achieve low and stable inflation, the Board sets policy to return inflation to the midpoint of the 2-3 per cent target range. But there is flexibility around the timeframe in which we meet our inflation objective to balance this with meeting our full employment objective - achieving the maximum level of employment that is consistent with low and stable inflation. The Board's strategy over the past three years has been to try to bring inflation sustainably back to target within a reasonable timeframe while preserving as many of the jobs created over prior years as possible.

Looking over the past three years, I think we can be satisfied with the progress made so far - though our job is definitely not done.

Inflation has fallen substantially since the peak of 7.8 per cent in 2022 and there has been welcome progress since we last met in August. Inflation was 2.4 per cent at the end of 2024 and underlying (trimmed mean) inflation, which removes the more volatile

components of the index, was 3.2 per cent. Underlying inflation has eased over the past three quarters, and in the December quarter it was a bit lower than we had forecast. This has increased our confidence that inflation is heading in the right direction. At the same time, the unemployment rate has remained close to 50-year lows and the share of the population with a job has risen to a record high, which is good news. Growth in private demand has, however, been weak and wage pressures have eased. Collectively, this information suggests that higher interest rates have been working as anticipated, restricting economic activity and putting downward pressure on inflation.

## The Board's recent decision

When we previously met with this Committee in August, the cash rate target was at 4.35 per cent. It had been at that level since November 2023, when the Board increased the cash rate by 25 basis points. At that time, there were signs of upside risks to the inflation outlook, so the Board decided it was prudent to take out some insurance against those risks. The Board's decision on Tuesday to unwind the November 2023 increase reflects its assessment that this insurance is no longer required.

Looking ahead, the Board is committed to being guided by the incoming data and our evolving assessment of the risks. While the strong employment growth is good news for jobseekers, we are alert to the possibility that it is signalling a bit more strength in the economy, which could delay or derail the disinflation process. We have not precommitted to any particular course of action on interest rates. But in the forecasts published this week, the central projection suggests that if monetary policy is eased too quickly or by too much, disinflation could stall and inflation would settle above the midpoint of the target range. So the Board remains cautious about prospects for further policy easing.

## Economic outlook

Our forecasts for the economy, which are conditioned on the market implied cash rate path, have growth strengthening over the course of this year, the unemployment rate rising a little before stabilising at 4… per cent, and underlying inflation coming down further to a little above the midpoint of our 2-3 per cent target range from late 2025 onwards. Real earnings are also expected to begin to recover.

However, the economic outlook remains uncertain. This is especially so the further into the future we look. Recognising this, we highlighted a number of key risks in the February Statement on Monetary Policy.

While our central projection is for growth in household consumption to increase as income growth rises, there is a risk that any pick-up is slower than expected. If so, it would continue to weigh on output growth and could result in a sharper deterioration in the labour market than currently projected. Alternatively, labour market outcomes may continue to be stronger than expected, given the signal from a range of leading indicators. This could result in upward pressure on wages and inflation. A key uncertainty here is how much spare capacity there is in the labour market, since the answer to that will have a material bearing on the future path of inflation. We also hear

from liaison that weak demand has been putting pressure on business margins, helping to restrain inflation. As demand picks up, those constraints could ease and businesses might find it easier to raise their prices.

More broadly, there are uncertainties regarding the lags in the effect of monetary policy. Another question is how firms' pricing decisions and wages will respond to the slow growth in the economy and weak productivity outcomes while conditions in the labour market remain tight. In particular, growth in unit labour costs - which is what matters for business costs - remains high because of weak productivity, even while wages growth has eased.

There's also a lot of uncertainty around the global outlook at present. We're cautious about the possibility that global policy uncertainty may itself bear down on activity in many countries if households and firms delay expenditures pending greater clarity on the outlook. Our February Statement on Monetary Policy provides some scenarios to show different paths through which Australia could be adversely affected by changes to global policy settings. But, at present, it is too soon to tell how this will play out.

Before I move onto other areas of activity at the RBA, I want to assure members that the Board is conscious that households with mortgages have had to adjust following rate increases since the pandemic. And the impact of high inflation over the past couple of years has permanently increased the price level. That has hurt everyone but particularly those on lower incomes and the more vulnerable.

We have made good progress on inflation, however, the Board needs to be confident that it is returning to the target range sustainably.

## Payments system

Another critical area of work for the RBA is our regulation and oversight of the payments system. We are currently conducting a review of surcharging and merchant card payment costs, which I know has attracted considerable attention. We published an Issues Paper late last year and received over 90 submissions in response. A wide range of views was set out in these submissions and we have valued the strong engagement from stakeholders and the broader community in the consultation process. We are now actively exploring options to best support competition and efficiency in the payments system with the public interest firmly in mind, and will be discussing options and their trade-offs with the Payments System Board in early March. We aim to release a consultation paper in mid-2025 that will outline the Board's preferred policy options and seek feedback.

One other issue that I would like to bring to the Committee's attention is the work we are doing to identify the risks associated with the payments industry's intentions to decommission the Bulk Electronic Clearing System, or BECS. This system processes large volumes of critical payments, including pension and welfare payments and most of Australia's salary payments. While BECS is considered a legacy payment system, a transition away from BECS to more modern alternatives, if not carefully planned, raises risks for the reliability, efficiency and competitiveness of the payments system. We discussed some of our initial concerns publicly in December following a period of extensive consultation with stakeholders, and next month will publish a report outlining

our key findings and recommendations. Among these will be a recommendation that the industry and government work to establish a shared vision for the future of these payments and establish coordination and governance mechanisms to manage the transition. It is in all our interests that this issue is managed in an orderly fashion.

## Banknote distribution

Another issue I would like to update the Committee on is recent developments in the cash distribution system. While the use of cash for everyday payments has declined in recent decades, it remains an important means of payment for many Australians. Cash is used as a store of wealth, particularly during periods of economic uncertainty, and can be a useful backup for electronic methods of payment. The RBA is committed to supporting the Australian Government's policy objective to ensure cash remains a viable means of payment for as long as Australians want or need to use cash.

As you are aware, the cash distribution system has faced considerable challenges over the past year or so. The key issue is that as use of cash for transactions declines, it is becoming more expensive to store, process and distribute cash around the country. At present, we have a single firm, Linfox Armaguard, that provides these services and it has experienced financial difficulties because the revenue it is receiving for these services is not meeting its costs. In response, in June 2024, an industry support package of approximately $50 million over 12 months was agreed between Linfox Armaguard and its major banking and retail customers. This was designed to reduce the near-term risk of a major disruption to the supply of cash services and provide time for Linfox Armaguard and its major customers to improve efficiency and develop other measures to support Armaguard's financial position.

Although there has been progress, there is still considerable work to be done to establish a model for cash distribution that is sustainable. The RBA has a specific role in the cash distribution system: we issue wholesale quantities of banknotes to the banking sector so that they can meet their customers' needs, and we provide incentives to the system to support appropriate banknote holdings and quality around the country. We are currently reviewing these incentives to ensure they are fit for purpose in the evolving landscape of cash usage. On the other hand, the logistics of moving cash to bank branches, ATMs and retailers is undertaken by cash-in-transit companies. Work towards more sustainable cash distribution arrangements is ongoing; importantly, it requires cooperation across all industry participants with the needs of the community in mind.

## Implementation of the recommendations from the Review of the RBA

This appearance is our first since the Parliament passed amendments to the Reserve Bank Act late last year, which will take effect on 1 March. The amendments mean that the meeting of the Reserve Bank Board earlier this week was its last, drawing to a close 65 years of central banking history in Australia.

Preparations are well advanced for the start of the new era of governance for the RBA, which begins on 1 March. In many ways, the new Monetary Policy Board will look very familiar to transitioning members when it first meets in March. But it will look noticeably different for those who served on the Reserve Bank Board in earlier times. Since the

start of last year, the meetings of the Reserve Bank Board to deliberate on monetary policy have taken place over two days rather than one day. This has allowed the Board more time to carefully consider and debate the implications of the evolving information on the economy and financial markets, and how best to respond. The Board has been closely involved in preparing the media release announcing its policy decision and members are also more engaged with staff in the period between meetings. And the papers prepared for the meetings include a greater focus on strategy, the options available to the Board and the key judgements that underly the staff's advice. This material is also reflected in our communications, including the Statement on Monetary Policy and the monetary policy minutes.

The most significant change from 1 March will be the establishment of the Governance Board, which will support the efforts we are making to lift risk management practices, oversee our large project portfolio and assist us in meeting the challenges of a modern central bank. We recently held an induction briefing day with the members appointed to the Governance Board and it was clear from this that the RBA will be well supported by the new Board.

More generally, we have completed work on more than half of the recommendations of the Review of the RBA and are well advanced on preparing responses to most of the other recommendations. As a result, there have been noticeable changes to the culture of the RBA, driven by a commitment to be more open and dynamic, which we will build on in coming years. The Governance Board will report on our progress on implementing the reforms by the end of this year. These changes are all designed to strengthen our ability to do our work and enhance the welfare of the Australian people.

Thank you for listening. My colleagues and I look forward to answering your questions.",Michele Bullock
https://www.bis.org/review/r250224b.htm,Adriana D Kugler: Navigating inflation waves - a Phillips Curve perspective,"Text of the Whittington Lecture by Ms Adriana D Kugler, Member of the Board of Governors of the Federal Reserve System, at the McCourt School of Public Policy, Georgetown University, Washington DC, 20 February 2025.",2025-02-20 00:00:00,"For release on delivery 5:00 p.m. EST February 20, 2025

Navigating Inflation Waves:  A Phillips Curve Perspective

Remarks by

Adriana D. Kugler

Member

Board of Governors of the Federal Reserve System at the

Whittington Lecture McCourt School of Public Policy Georgetown University

Washington, D.C.

February 20, 2025

Thank you, Tom, and thank you for the invitation to give the Whittington Lecture. 1 It is humbling to be here giving this lecture to honor the memory and legacy of Leslie Whittington.  While I did not cross paths with Leslie here at Georgetown University, when I arrived, I heard so many stories about her contributions to the school, the university, and the students.  She worked on research about the effects of economic policies on children and families, so I know that if I had had the good fortune to overlap with her as a colleague, I would have benefited greatly from her work and presence.  It is also an honor to be giving this lecture, because so many dynamic leaders have previously stood before you, including some who have been inspirations to me in my career, such as Alice Rivlin and Cecilia Rouse.

Today I will be discussing a topic that has certainly captured the attention of central bankers, and the public at large, in recent years:  inflation and the relationship between inflation and unemployment.  But before I talk about a lens through which to think about the inflation experienced in the pandemic period, I want to update you with my views on the current outlook for the U.S. economy and the Federal Open Market Committee's (FOMC) efforts to sustainably return inflation to our 2 percent objective while maintaining a strong labor market.

## Economic Outlook

The overall picture is that the U.S. economy remains on a firm footing, with output growing at a solid pace.  Real gross domestic product grew 2.5 percent in 2024. Consumer spending continued to drive this solid pace last year.  While retail sales posted a decline last month, January data are often difficult to interpret.  Bad weather and

1  The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.

seasonal adjustment difficulties may have affected the release, and it should be noted the slowdown came after a strong pace of sales in the second half of last year.  That said, as usual, I pay attention to many indicators to gauge the state of the economy.  Employment readings show that the labor market is healthy and stable.  Payroll job gains have been solid recently, averaging 189,000 per month over the past four months, according to the Bureau of Labor Statistics (BLS).  After touching 4.2 percent as recently as November, the unemployment rate has flattened to 4 percent since then, consistent with a labor market that is neither weakening nor showing signs of overheating.

Inflation has fallen significantly since its peak in the middle of 2022, though the path continues to be bumpy and inflation remains somewhat elevated.  Readings last week from the BLS showed price pressures persisted in the economy in January.  Our preferred inflation gauge at the Fed, the personal consumption expenditures (PCE) price index, will be released next week.  Based on the consumer price index and producer price index data for January, it is estimated that the PCE index advanced about 2.4 percent on a 12-month basis in January.  Excluding food and energy costs, core prices are estimated to have risen 2.6 percent.  Those readings show there is still some way to go before achieving the FOMC's 2 percent objective.

Regarding monetary policy, the FOMC judged in September that it was time to begin reducing our policy interest rate from levels that were strongly restrictive on aggregate demand and putting downward pressure on inflation.  We reduced that rate 100 basis points through December, leaving our policy rate at moderately restrictive levels.  At our latest meeting in January, I supported the decision to hold the policy rate steady.  I see this as appropriate, given that the downward risks to employment have

diminished but upside risks to inflation remain.  The potential net effect of new economic policies also remains highly uncertain and will depend on the breadth, duration, reactions to, and, importantly, specifics of the measures adopted.

Going forward, in considering the appropriate federal funds rate, we will watch these developments closely and continue to carefully assess the incoming data and evolving outlook.

Now, turning back to the main topic of my speech, I will start with the core mission of the Federal Reserve:  to pursue the dual mandate, given to us by Congress, of promoting maximum employment and stable prices.  We saw firsthand during the pandemic period why the price-stability portion of the mandate is so important.  High inflation imposes significant hardship and erodes Americans' purchasing power, especially for those least able to meet the higher costs of essentials like food, housing, and transportation.  As a policymaker and economist, I think it is vitally important to have a good understanding of inflation dynamics and how those dynamics may have evolved over time.  This knowledge allows me to pursue the best policies to deliver stable prices while maintaining a solid labor market.

## Waves of Inflation

Five years after the pandemic took hold suddenly and with little warning, there is a tendency to remember the inflation buildup as a fast and uniform phenomenon.  But that was not the case.  Inflation stemming from the pandemic shock came in waves. Today I will first describe the different waves of inflation experienced in the pandemic period.  Then I invite you aboard the sailboat that we will use to navigate those waves: You could call it the SS Phillips Curve. The Phillips curve is a model that has been used

for a long time to try to explain inflation dynamics and the tradeoffs between inflation and unemployment.  Finally, I will discuss with you how this voyage may have changed the charts for policymakers.

Before the COVID-19 pandemic, the U.S., and much of the world's developed economies, experienced a prolonged period of low inflation.  Then, when the economy broadly shut down in March and April 2020, the U.S. experienced a brief period of deflation.  But by the middle of that year, we saw that the first of several waves of inflation began hitting the economy's shores.

The first notable wave of inflation came from food prices.  With many restaurants closed and people fearful of gathering, consumers pivoted their spending to grocery stores and online grocery delivery to meet their families' needs, with some stockpiling essential items because they feared future shortages.  This jump in demand was met with snarled supply chains for food processing and groceries.  Annual food inflation reached a first peak of 5 percent in June 2020.  There was a second food inflation wave with the onset of the Russian invasion of Ukraine in the middle of 2022.  Beyond the cost alone, grocery prices are an important determinant of inflation expectations for consumers since food is purchased so frequently. 2 Another wave of inflation came from goods other than food and energy-what economists call 'core goods.'  In the years immediately before the pandemic, goods prices were not a significant source of inflation.  During the expansion from 2009 until 2020, core goods inflation declined 0.5 percent annually on average.  However, once the pandemic took hold, consumer demand rotated from

2  D'Acunto, Malmendier, Ospina, and Weber (2021) show that consumers disproportionately rely on the price changes of goods in their grocery bundles when forming expectations about aggregate inflation; see Francesco D'Acunto, Ulrike Malmendier, Juan Ospina, and Michael Weber (2021), 'Exposure to Grocery Prices and Inflation Expectations,' Journal of Political Economy, vol. 129 (May), pp. 1615-39.

services to goods.  At the same time, additional supply chain issues arose, including closed factories and disrupted ports.  As consumption rapidly shifted toward goods, their prices rose sharply. 3 Core goods inflation picked up markedly in the spring of 2021 and reached a peak of 7.6 percent on a 12-month basis in February 2022.  This was a notable development because, during most of this century, goods price deflation offset price increases in other categories and thus kept a lid on overall inflation.

A third wave of inflation came from services costs, excluding housing.  Near the start of the pandemic, millions of Americans lost their jobs, and many left the labor market, with some retiring and others fearful of being exposed to the virus.  When the economy began to reopen from shutdowns, demand for workers rose faster than the supply.  As a result, the labor market quickly became very tight.  To attract workers, employers raised wages.  And to offset that expense, many raised prices.  Given that labor is the most important input into the production of services, core services inflation ensued, reaching a peak of 5.2 percent on a 12-month basis in December 2021.  Core services inflation stayed persistently high until it began to turn down in February 2023.

The final wave of inflation I will discuss came from PCE housing services inflation.  During the pandemic, many Americans reassessed housing choices, including those who preferred to move to detached homes in the suburbs from multifamily dwellings in cities.  The supply of housing has long been constrained, so when a further increase in demand met limited supply, prices rose.  Housing inflation rose to a peak of 8.27 percent on a 12-month basis in April 2023 and has moved lower since then.  The

3 Ferrante, Graves, and Iacoviello (2020) show that a sharp reallocation of demand from one sector to another can exacerbate supply chain disruption and cause aggregate inflation; see Francesco Ferrante, Sebastian Graves, and Matteo Iacoviello (2023), 'The Inflationary Effects of

Sectoral Reallocation,' Journal of Monetary Economics, supp., vol. 140 (November), pp. S64-81.

run-up in housing inflation came more slowly, but it is also the component most slowly to abate.  This is an area that experienced catch-up inflation, as housing inflation rises and falls slowly because rents are reset infrequently, usually only once a year for most renters.

For the remainder of this discussion, I will focus on core inflation, and specifically core goods and core services inflation.  My objective is to discuss several additions to an augmented Phillips curve model that allow us to capture the dynamics of those waves we encountered on our journey.

## The Traditional Phillips Curve

Since price stability and maximum employment are the two components of the Fed's dual-mandate goal, it is important for policymakers to be able to interpret the inflation process and relate it to macroeconomic conditions, including unemployment. One traditional way of understanding the usual tradeoff between inflation and unemployment is the use of the Phillips curve.  It was first employed by New Zealand economist A.W. Phillips in 1958 to describe a simple relationship between wage growth and unemployment.  Basically, it demonstrates that wage inflation is lower when unemployment is high, and higher when unemployment is low.  Since then, several variants and updates have been offered to the Phillips curve model, and I will offer updates, too.

One of the most notable updates came from Milton Friedman in 1967 in his presidential address to the American Economic Association. 4 In that speech, he argued

4  See Milton Friedman (1968), 'The Role of Monetary Policy,' American Economic Review, vol. 58 (March), pp. 1-17; and Edmund S. Phelps (1967), 'Phillips Curves, Expectations of Inflation and Optimal Unemployment over Time,' Economica, vol. 34 (135), pp. 254-81.

that there is only a temporary tradeoff between inflation and unemployment, because inflation depends on both the unemployment rate relative to a natural rate (the unemployment gap) and expectations of future inflation.

The unemployment gap measures how much unemployment is above or below some reference level such as the natural rate of unemployment, or NAIRU (nonaccelerating inflation rate of unemployment), which is thought to be the normal level of unemployment absent cyclical forces.  An unemployment rate that is above the reference level indicates that there is slack in the economy.  Conversely, if the unemployment rate is below the reference level, the economy is tight.  The unemployment gap has an inverse relation to wage and price inflation, because slack in the economy means that there are excess resources to meet demand while tightness in the labor market means there is little room to expand demand without putting upward pressure on prices.  Let's turn now to the other ingredient in Friedman's Phillips curve:  inflation expectations.  Inflation expectations represent the rate at which people expect prices to rise in the future.  A Phillips curve model that includes inflation expectations is called an 'expectationsaugmented Phillips curve.'

The idea behind adding inflation expectations to a Phillips curve is that workers care about their inflation-adjusted wage, rather than nominal wages, over the course of a period of employment when bargaining their pay.  Meanwhile, price-setting firms care about their relative price in pricing their products.  Both sets of agents must forecast as best as possible the future path of inflation to efficiently bargain their wages or set their prices.  In other words, both parties form expectations about the general price level, and

these expectations will feed back into the inflation process. 5 Friedman assumed that inflation expectations respond to lagged observed inflation-or what are called 'adaptive expectations'-and when that is so, it provides a mechanism for inflation to be persistent.

This view captured inflation dynamics in the 1970s and early 1980s fairly well; however, it was not broadly applicable to the period from the late 1980s through 2019, often called the 'Great Moderation.'  Rather, regarding inflation dynamics over an extended period, inflation appears to be more strongly related to long-run inflation expectations than to lagged inflation or short-run inflation expectations measures. Monetary policy can play an important role in setting long-run inflation expectations. Both wage seekers and price setters form their inflation expectations, in part, from their beliefs about the central bank's inflation goal.  When long-run inflation expectations stay close to the central bank's goal, we say that inflation expectations are anchored at that goal.  That goal is currently set at 2 percent, and long-run inflation expectations have indeed been in a tight range around that target. 6

The empirical literature on the Phillips curve has considered additional variables that may affect inflation and used those variables to create new versions of a Phillips curve.  For example, Phillips curves have long included measures of 'cost-push' pressures such as core import prices.  These cost pressures more fully capture shocks to

5 Friedman did not consider forward-looking price-setting firms, but more recent advances in macroeconomics do, such as New Keynesian models; see Jordi Galí (2015), Monetary Policy, Inflation, and the Business Cycle:  An Introduction to the New Keynesian Framework and Its Applications (Princeton, N.J.:  Princeton University Press).

6 In an earlier speech, I have sketched a model in which agents infer the central bank target by observing inflation, interest rates, and unemployment data; see Adriana D. Kugler (2024), 'Central Bank Independence and the Conduct of Monetary Policy,' speech delivered at the Albert Hirschman Lecture, 2024 Annual Meeting of the Latin American and Caribbean Economic Association and the Latin American and Caribbean Chapter of the Econometric Society, Montevideo, Uruguay, November 14,

firms' costs coming from global price pressures and not captured by other measures of slack.  Other Phillips curves also include lags of inflation to capture persistence in the inflation process. 7

To summarize, the empirical literature has come to the conclusion that inflation dynamics can best be captured by a Phillips curve that includes lags of inflation, long-run inflation expectations, and a measure of slack, as well as import and energy prices as cost-push shocks.  An instance of that formulation of a Phillips curve is included in former Chair Janet Yellen's speech from 2015. 8 Next, I would like to assess the accuracy of this baseline model during the recent run-up of inflation and consider how to augment the Phillips curve model with some new variables that may be able to capture some of the shocks experienced during the pandemic and post-pandemic period.  A large literature has emerged on how to interpret the recent run-up in inflation, and more research is needed to fully understand this complicated episode.  The Phillips curve model that I will use is another approach to consider.  This is a simple approach, but it is possible to consider more complex models, such as models that consider the joint dynamics of inflation and other variables or models that explicitly consider nonlinearities. 9 However, I still see value in starting from this simple framework, seeing what it can and cannot

7 For a review of Phillips curve formulations, see Robert J. Gordon (2018), 'Friedman and Phelps on the Phillips Curve Viewed from a Half Century's Perspective,' Review of Keynesian Economics, vol. 6 (4), pp. 425-36.

8 The model that I will use is similar to the one described by Janet Yellen in her famous speech at the University of Massachusetts in 2015; see Janet L. Yellen (2015), 'Inflation Dynamics and Monetary Policy,' speech delivered at the Philip Gamble Memorial Lecture, University of Massachusetts, Amherst, September 24, https://www.federalreserve.gov/newsevents/speech/yellen20150924a.htm.

9 See Pierpaolo Benigno and Gauti B. Eggertsson (2023), 'It's Baaack:  The Surge in Inflation in the 2020s and the Return of the Non-Linear Phillips Curve,' NBER Working Paper Series 31197 (Cambridge, Mass.: National Bureau of Economic Research, April), https://www.nber.org/papers/w31197.

explain about pandemic inflation, and then seeing whether the addition of certain variables can help the model more fully account for inflation during the pandemic.

## Estimation of the Phillips Curve Today

As I just explained, the Phillips curve model allows flexibility in the choice of variables, but economists employing the model must decide how to weight these variables.  And those weights must be chosen in some way.  Economists choose weights by examining available data and deciding which capture the inflation process in the best possible way.  This decision is called 'estimation.'  The modern way to undertake such an estimation is called 'training.'  Economists train a model on a specific set of data and consider different cuts of the data set to determine different ways to compute those weights.

I will consider quarterly data that have been consistently produced since 1964, allowing us to include the periods of the Great Inflation, the Great Moderation, and the most recent inflation run-up.  We could use this entire data set to train the model. However, subsample analysis also serves to prove some valuable points.

## First Result:  Examining the Great Moderation

Let's start by updating former Fed Chair Yellen's results.  She estimated the model using the data during the so-called Great Moderation; I will update her results by training the model through 2019, the last year before the COVID-19 pandemic took hold in the U.S.  As the term 'moderation' implies, this was a period in which both inflation and output became much less volatile.  We do not know exactly what brought about the Great Moderation.  Hypotheses include the effects of better inventory management or better monetary policy.  We do know, however, that inflation settled into a trend near to

or slightly below 2 percent during that period.  We estimate the model with data from this period, and we decompose how much of inflation is explained by the variables and how much is left unexplained, which economists call the 'residual.'  As it turns out, this model does a good job of capturing the inflation process over that period before the pandemic, and my results are similar to Yellen's.  The model explains 70 percent of the variation in inflation, meaning that only 30 percent of the variation in inflation is attributed to unexplained residuals.  An alternative way to understand the unexplained part is as the standard deviation of the residual or the unexplained portion of the model, which was 0.50 percentage point for the period from 2010 to 2019, compared with the standard deviation of inflation of about 0.8 percentage point.

This model, however, struggles to explain the run-up in inflation in the years immediately after the pandemic took hold.  The unexplained portion of inflation, the residual, rises dramatically in 2021 and 2022.  In 2021, the unexplained portion is almost 2 percentage points, and the following year, it is about 1.5 percentage points.  Perhaps we should not be surprised by the outcome.  These years saw inflation reach a four-decade peak, but the model has been trained on a Great Moderation sample that saw relatively quiet inflation. 10

## Second Result:  Using a Longer Sample

The results are more encouraging if, instead, we also include data from the previous period of significant inflation and train the model on data starting in 1964. Intuitively, it makes sense that including a period with persistent inflation, like the 1970s, might help us better understand another inflationary episode.  I stop at 2019 because I

10 The results that I obtain for the 1990-2019 period are similar to those that Yellen reports for the 19902014 period.

want to see if training on data from the previous 55-year period can explain the post-2020 inflation.

The model captures more of the most recent run-up in inflation when using the longer period of analysis.  The unexplained residual drops to about 1.5 percentage points in 2021 and to a bit above 0.5 percentage point in 2022.  Allowing for greater persistence in inflation allows an inflation equation to fit the pandemic period better, though it does not settle the question of whether the pandemic inflation was caused by large and persistent shocks or by large shocks and a persistent inflation process-for example, because of greater feedback between wages and prices.

To improve the model further, it would be useful to include additional explanatory variables that could better capture the overheating of the economy.  In what follows, I include variables that might account for factors experienced in the most recent bout of inflation, such as a very tight labor market and supply chain snarls.

## Third Result:  Alternative Measure of Slack

As I mentioned before, the very tight labor market was an important contributor to inflation in recent years, especially to services inflation, yet the weight on the unemployment gap in the Phillips curve for the more recent period is very small.  This measure of slack has become less and less important over time in explaining inflation, except during selected episodes such as in the aftermath of the Global Financial Crisis, which was characterized by a very sluggish recovery.  Outside of that episode, and very few others, the Phillips curve places little weight on that measure of slack in explaining inflation over the Great Moderation, including during the recent run-up.  This is also a reflection of training the model over the Great Moderation, in which inflation moved

fairly tightly around a very flat trend.  Notice that this would suggest a 'flat Phillips curve' or a big penalty in terms of unemployment needed to reduce inflation.  Instead, I focus on another very promising alternative measure that I have paid a lot of attention to since I was chief economist at the Department of Labor-and again since I joined the Board of Governors-and that I am very familiar with as a scholar of labor markets.  The measure is the ratio of vacancies to the level of unemployment. 11 In effect, this ratio measures how much competition there is for a given job, or the 'tightness' of the labor market.  Labor is an important input into most production processes, and, thus, tightness in the labor market is closely related to price pressures.  I use the standard version of this ratio that measures job openings from the Job Openings and Labor Turnover Survey as the numerator and the unemployment level from the Current Population Survey as the denominator.  This allows me to use data back to the 1960s. 12 The vacancy-tounemployment ratio as a measure of slack is more effective at explaining inflation than the unemployment gap.  This represents an interesting result because it offers a larger role to heated labor markets in explaining the run-up in inflation.  My results echo research that finds the vacancy-to-unemployment ratio is a helpful measure of slack to consider in out-of-sample forecasting exercises. 13

11 The ratio of job openings to unemployment has attracted the attention of many researchers.  See, for instance, Olivier J. Blanchard and Ben S. Bernanke (2023), 'What Caused the US Pandemic-Era Inflation?' NBER Working Paper Series 31417 (Cambridge, Mass.:  National Bureau of Economic Research, June), https://www.nber.org/papers/w31417.

12  Although job openings from the Job Openings and Labor Turnover Survey (JOLTS) go back only as far as the early 2000s, I use here the extended series from Barnichon that pieces together JOLTS data for the more recent period with a corrected version of the help-wanted index originally from the Conference Board for the period before 2001.  See Regis Barnichon (2010), 'Building a Composite Help-Wanted Index,' Economics Letters, vol. 109 (December), pp. 175-78.

13  See Regis Barnichon and Adam Shapiro (2022), 'What's the Best Measure of Economic Slack?' FRBSF Economic Letter 2022-04 (San Francisco:  Federal Reserve Bank of San Francisco, February),

https://www.frbsf.org/research-and-insights/publications/economic-letter/2022/02/what-is-best-measure-of- economic-slack; and Régis Barnichon and Adam Hale Shapiro (2024), 'Phillips Meets Beveridge,'

Journal of Monetary Economics,

supp., vol. 148 (November), 103660.

## Fourth Result:  Supply Chain Snarls

Although the vacancy-to-unemployment ratio offers a promising measure of slack and supply chain pressures due to labor shortages, that measure does not necessarily capture supply chain snarls whose roots lie outside of the labor market.  As I mentioned earlier, there were substantial supply chain disruptions during the past few years that came at the same time as strong demand.  That resulted in material and labor shortages. Attempts at quantifying supply-side disruptions have been around for some decades now. 14 I rely on a new monthly shortages index created by a team of Fed Board economists, which relies on textual analysis to scan news articles for sentences that include the word pairs 'labor shortages,' 'material shortages,' or 'food shortages.' 15 The Shortage Index allows us to better measure cost-push pressures from different sources and is constructed all the way back to the beginning of the previous century. Thus, it makes a difference to have access to advances in natural language processing. 16 When I add the Shortage Index to the baseline Phillips curve or to the vacancy-tounemployment-based Phillips curve, I obtain that the Shortage Index explains an even larger portion of the inflation run-up during and after the pandemic.  The residual for

14  The Institute for Supply Management's Supplier Deliveries Index has been around since the 1950s, the Federal Reserve Bank of New York's Global Supply Chain Pressure Index since 1998, and the Census Bureau's Quarterly Survey of Plant Capacity Utilization since 2008.

15  See Dario Caldara, Matteo Iacoviello, and David Yu (2024), 'Measuring Shortages since 1900,' working paper.  Their index is available at https://www.matteoiacoviello.com/shortages.html.

16

Other authors have used natural language processing in an attempt to produce a measure of shortages.

For instance, see Paul E. Soto (2023), 'Measurement and Effects of Supply Chain Bottlenecks Using

Natural Language Processing,' FEDS Notes (Washington:  Board of Governors of the Federal Reserve

System, February 6), https://www.federalreserve.gov/econres/notes/feds-notes/measurement-and-effects- of-supply-chain-bottlenecks-using-natural-language-processing-20230206.html.  Blanchard and Bernanke

use Google searches for the word 'shortage' as an indicator of sectoral supply constraints in a Phillips curve equation; see Blanchard and Bernanke, 'What Caused the US Pandemic-Era Inflation?' in note 11.

For an early-attempt, hand-coded shortage index, see Owen Lamont (1997), 'Do 'Shortages' Cause

Inflation?' in Christina D. Romer and David H. Romer, eds.,

Reducing Inflation:  Motivation and Strategy

(Chicago:  University of Chicago Press), pp. 281-306.

2020 is cut in half, the residual for 2021 is about 1 percentage point, and the residual is effectively eliminated in 2022.  I judge this a noteworthy result and a proof of concept that with additional augmentation, the Phillips curve model can better capture inflation dynamics during the recent period.  Through the lens of this model, supply shortages played an important role in 2022 in constraining output to grow at an anemic rate and in pushing up inflation.  Moreover, the model is also able to capture the decline in inflation in 2023 and 2024 despite the strong expansion in real activity.  I view the Shortage Index as a powerful indicator of the nonlinear effects stemming from a compounding of the contemporaneous interaction of demand and supply bottlenecks.

I have offered additional variables to account for a measure of slack as it relates to labor supply and material supply.  This exercise could be extended further to better account for some of the subcategories of inflation that caused the waves I discussed earlier.  For example, food inflation, which is characterized by two distinct waves, can mostly be explained by the Food Shortage Index, which captures a large portion of the residual in the baseline model.

## Lessons for the Policymaker

Today I have discussed the waves of inflation the country faced starting five years ago.  I also talked about how the vessel we use to navigate those choppy waters can be improved upon.  As I conclude, I want to discuss with you how central bankers might recalibrate their compasses, based on what we learned from considering these augmentations to Phillips curve models.  I think a clear lesson is that no single model alone can give a policymaker an understanding of every possible state of the economy. Policymakers must be open to various options, models, and frameworks-and not be

afraid to experiment in search of more accurate answers.  Policymakers must be very attentive to the most recent contributions from academia and empirical practitioners. Broadly, that is the approach I take, and why I apply the same rigor I did as an academic researcher to the monetary policy decisions that I confront.

The recent run-up in inflation in many ways was a rather unique period, spurred, at least initially, by the first onset of a global pandemic in more than a century.  Fully understanding the dynamics at play has provided a tough test for economists.  The models I described today have had some success in capturing salient features of the inflation process during the pandemic period.  I hope this illustrative analysis helps you see the difficulties of forecasting inflation in real time.

Another lesson to be learned from this experience is that the feared harsh tradeoff between unemployment and inflation, one that requires large costs in terms of job loss and reduction in incomes in order to reduce inflation, did not materialize in the years immediately after the 2022 inflation peak.  Inflation has been significantly reduced while the labor market has remained solid.  This is a historically unusual, but most welcome, outcome.  While this outcome is in part due to the actions of Fed policymakers, it is also possible to explain that remarkable result through the lens of the models that I have presented today.  A large fraction of the rise in inflation, most specifically core goods inflation, can be explained by supply chain snarls.  The untangling of supply chains contributed to a decline in inflation with little cost in terms of unemployment.  Likewise, labor markets were very tight in this period.  As workers returned to the labor force, labor markets became less tight, and the vacancy-to-unemployment ratio declined.  That

corresponded with a subsequent decline in inflation.  That is a consistent result because services inflation is closely connected to the cost of labor.

Thank you for your time today.  Once again, it is humbling to be asked to give the Whittington Lecture to honor the memory of fellow educator Leslie Whittington.  I look forward to your questions.",Adriana D Kugler
https://www.bis.org/review/r250220d.htm,Gabriel Makhlouf: Building economic resilience,"Speech by Mr Gabriel Makhlouf, Governor of the Central Bank of Ireland, at the Institute of International and European Affairs (IIEA), Dublin, 20 February 2025.",2025-02-20 00:00:00,"## Building Economic Resilience - Governor Gabriel Makhlouf at the IIEA

20 February 2025 Speech



Good afternoon. It's nice to be back at the IIEA.

The beginning of every year is a time to think about the future, reflect on the lessons learned - at least those that we can still remember - from the past, and plan and prioritise what we will do in the year ahead.

Today I want to talk about some of the areas the Central Bank will be working on in 2025, but also some of the issues that I believe are priorities for economic policy in general. The theme of my remarks will be the importance of building economic resilience in the face of the economic transitions that we are living through and that are ahead of us.

We find ourselves emerging from a period where, out of necessity, households, businesses and policymakers, have had to deal with the immediate - and in some instances unprecedented - short-run challenges created by a variety of global economic and geopolitical crises.

From pandemic to war and from supply chain disruption to inflation, we find ourselves today facing into a period of both challenge and opportunity for the Irish economy, against an uncertain international backdrop.

Indeed, as we look to the future, it is clear that we are navigating a new era of change to the international order that has underpinned global cooperation since World War II.

The global geopolitical landscape faces significant strain and complexity, driven by competing interests, shifting alliances with different values and increasingly independent economic blocs.

Policy-induced geoeconomic fragmentation has moved from being a risk to becoming a reality, affecting trade and foreign direct investment flows. As a small, open economy, Ireland finds itself at the crossroads of these geopolitical headwinds, deeply exposed to the challenges and complexities and at risk, to paraphrase Václav Havel, of being thrown 'repeatedly into the tumult of the world'. 1

The financial system is changing too, driven by economic trends and, in particular, advances in technology. Being part of the broader economy, it has also been buffeted by the same shocks and, with some notable exceptions, has demonstrated its resilience. We want that resilience to be maintained, and strengthened where necessary.

With this in mind, I want to offer my perspectives on the outlook, and the associated implications for Ireland's economic policy and what it means for the Central Bank.

Throughout my remarks today, I will underline the ongoing need to build economic resilience through the transitions that Ireland is undergoing. Our objective should be that we do not just weather the current storm but we emerge stronger, more resilient and better prepared to face the challenges and, indeed, take the opportunities that are in front of us.

## The economic outlook

Let me start by reflecting briefly on the current outlook which is, in summary, relatively favourable. Based on our most recent published forecasts from mid-December, we expect the domestic economy to grow in-line with its mediumterm potential out to 2027, having been operating above that level in 2023 and 2024. One notable indication of the recent relative health of the economy is that the unemployment rate has stayed below 5 per cent for 36 consecutive months (3 years) since February 2022. This is the longest sustained period of low unemployment in the available monthly data back to 1983.

Unemployment is projected to remain low and headline inflation is being contained, while real household disposable incomes continue to rise. Chart 1

Chart 1: Real household disposable incomes

Real household

disposable incomes

Source: CSO &amp; Central Bank QB24 Forecast



However, downside risks to this outlook have increased and there is a higher level of uncertainty, particularly as to how geoeconomic fragmentation will develop and the extent to which it will affect Ireland. In fact it feels as if we are in a period of fundamental or Knightian uncertainty, a period when some economists might be tempted to change career as they no longer see a future in economic forecasting. It feels a very very long time since our update in midDecember. Even before the concrete effects of more fragmented trade and economic relations materialise, heightened uncertainty will itself weigh on economic activity.

As an open economy with an export-led growth model, the Irish economy is more exposed than others to negative external shocks arising from changes to global trading patterns.  More pronounced fragmentation would undo some of the gains from the greater interconnectedness that has stimulated growth in the economy over the last 50 years.

If we consider the important role that international investment and multinational enterprises  play in the domestic economic model, we see how they drive a significant share of growth, tax revenue and employment in this country. It seems obvious that any reversal of this would be reflected in lower foreign direct investment, exports and productivity, all of which would serve to reduce overall economic growth with negative effects on the labour market and the public finances.  Fragmentation could also result in higher and more volatile inflation, particularly for a country like Ireland that is highly dependent on imports.

## Inflation

On inflation, at our last meeting three weeks ago, my colleagues and I (on the ECB's Governing Council) decided to lower our three policy rates by 25 basis points.  Last year we reduced rates by 100 basis points as inflationary pressures continued to ease and it became clearer that there would be a gradual convergence of inflation to our 2 per cent target during 2025.

Needless to say, the disinflation process remains subject to risks, and there is a very high degree of uncertainty surrounding the outlook. We stand ready to react to changes in the outlook, for both inflation and growth, which is why my colleagues and I continue to believe that we should not commit to any specific future path for interest rates.

Headline inflation in Ireland (measured by the Harmonised Index of Consumer Prices (HICP)) has moderated, and is currently below 2 per cent. Stronger than expected economic growth in recent years, over and above the economy's potential rate, has brought into sharp focus domestic supply and infrastructure constraints (which I will discuss shortly).

These, in turn present a situation where globally-determined inflation in Ireland is declining substantially, but more domestically-driven inflation remains significant. In particular, services inflation remains high at just below 4 per cent, and is expected to be the main positive contributor to headline and core inflation out to 2026. This reflects more significant domestic price pressures, driven in part by strong domestic demand and highlights the continued risk of overheating in the domestic economy.

## Challenges and opportunities

As we look forward to the second half of this decade, and beyond, Ireland faces some profound economic challenges, as well as significant opportunities. Policy choices should aim to balance short-term priorities with longerterm policy objectives that will determine our living standards throughout the 2030s and beyond.

I see two particular economic challenges that need to be addressed without delay: the infrastructure deficits which are affecting housing, transport, energy, water and waste water, and the risks to the Exchequer from the overreliance on a relatively narrow tax base, especially in the context of a changing global environment.

With the economy still operating somewhat above its potential currently, the infrastructure constraints that further limit sustainable growth in living standards have become apparent.  The ability to deliver infrastructure is particularly important not least to maintain incentives for inward investment. It is even more important at a time of geoeconomic fragmentation.

High costs and delays in the delivery of infrastructure manifest themselves in lower value for money for the initial investment, as well as in asset price and rent inflation. In turn, these price rises can eventually feed through to higher wage demands and a higher cost of living and doing business more generally, thus damaging competitiveness. Persistent infrastructure deficits in key areas can also lead to consumption and investment opportunities being foregone or delayed, as the economy cannot supply the volume of goods and services society demands.

As for the risks to the Exchequer, Corporation Tax now accounts for 25 per cent of tax revenue. Over 90 per cent of it is paid by foreign-owned firms, with only a third (c.€5bn) of the proportion deemed 'excess' from domestic economic activity being put aside for the future.  Corporation Tax is particularly vulnerable to geoeconomic fragmentation, whether as a result of trade tensions or changes in third-country policies. A substantial loss of the tax would push the budget into a deficit position, something that would have negative consequences for all of the required infrastructure development currently in the pipeline.

The challenges of infrastructure delivery and Exchequer receipts coincide with those that arise from a more structural and long-term perspective.

First, as outlined in recent research by the Central Bank, the potential growth rate of the Irish economy is set to halve to around 1.4 per cent by the middle of the century, as our working-age population declines. However, this analysis shows that an enhanced level of investment in physical and human capital to support productivity growth, and enabling people to stay longer in the workforce, can in part offset this decline.

This points to the opportunities available for economic policy to take action now, supporting continued sustainable growth in Irish living standards over the longer-run.

Ireland's ageing demographics pose significant challenges to our future labour supply and productivity, and to the sustainability of our long-term growth. As the conventional working age segments of our population shrink, the resulting pressure on government finances will intensify. The number of people of working age for each retiree in Ireland is set to halve from around four currently to two by 2050. This will create new demands for additional public expenditure relative to the present position.

This trend is not, of course, unique to Ireland.  Across the EU, populations are nearing their peak and are projected to decline, with implications for the Union's economic growth and geopolitical influence.  The IMF predicts that total hours worked in Europe will decline over the next five years. These shifts carry far-reaching policy implications, impacting working age and pension sustainability, healthcare resourcing, infrastructure, and our broader fiscal resilience. Addressing these challenges requires forward-thinking strategies.

A positive development in Ireland in recent years has been the increase in labour force participation rates for older workers, enabled in part by improvements in life expectancy. I expect to see such participation increase over time as we re-assess how we think about 'retirement' and human capital appreciation over the life cycle. 2

Estimates from the Department of Finance show that total age-related public spending is projected to rise by 6 percentage points of GNI* by 2050 (which would be the largest increase in age-related expenditure over this period across the EU). Moreover, in addition to meeting these new demands, the cost of maintaining existing levels of public services in future years will absorb substantial resources.

One of the more significant areas where concerted investment efforts are needed is the decarbonisation of the economy if Ireland is to meet the target of a 51 per cent reduction in greenhouse gas emissions relative to 2018 by 2030.

We still have an opportunity to make a considerable impact on reaching our targets, and the next five years will be critical for the transition towards climate neutrality, but there is considerable work to do.  It should not need pointing out but 2030 is not far away; in fact it's as far away as the start of the pandemic is behind us.

With current projections (from the Environmental Protection Agency) signalling a significant undershoot in meeting this target, estimates point to an additional annual investment need of around 1.7 per cent of GNI* to 2030, or €54.5bn in total by 2050 to achieve it, at least 20 per cent of which would likely comprise public investment. Over the period to 2030, this would constitute an increase of 8 per cent in public capital expenditure over and above what is currently envisaged in Budget 2025. And of course the costs of inaction are even bigger in the long term.

But our economy is in a good position to address these challenges. The near-term outlook speaks for itself and I welcome the Government's commitment to the two long-term Funds which have now been established. The Infrastructure, Climate and Nature Fund and the Future Ireland Fund are important developments and will help to allay the emerging cost of the ageing and climate transitions, as will the auto-enrolment retirement savings scheme which starts this September.

The Commission on Tax and Welfare's report provides a menu of options for broadening the tax base (and so futureproof the public finances). In the short-run this could help ease inflationary pressures while public capital spending is being increased, while at the same time helping to create a more sustainable tax revenue base and more resilient public finances with which future fiscal challenges can be addressed.

Importantly, the overall fiscal position should be designed to enable the significant investment needed to address the infrastructure deficits that are essential to removing the constraints to more sustainable growth in living standards, while guarding against the risks of overheating.

## Implications for economic policy

Given the domestic and international backdrop, Irish economic policy has the opportunity over the next five years to make a substantial contribution to maintaining sustainable growth in living standards across our community for the decades ahead, notwithstanding the major geopolitical and global challenges.

First, policy choices should strive to reconcile short-term priorities with long-term objectives. Although short-term problems have a tendency to dominate policy debate, in devising solutions to these it is important to maintain a focus on long-term priorities.

In order to do so, I believe the following areas of policy focus should be considered:

- Prioritising capital expenditure and tax base broadening to create the economic and fiscal space for the necessary increase in investment needed in the coming years;
- Enhancing and introducing structural reforms to reduce the costs of infrastructure delivery and boost productivity in the construction sector;
- Further enabling increased labour force participation and productivity by supporting life-long learning and adaptation to technological change;
- Continuing to support efforts to mitigate geoeconomic fragmentation while protecting supply chain security.  At EU level, this should include supporting actions to remove frictions in product and labour markets and harmonise rules and regulations across countries to improve the functioning of the Single Market, particularly for intra-EU trade in services. Related to this, it is important to ensure that competition policy frameworks are equipped to deal with the fast-changing environment in which we live in order to maintain the balance between innovation incentives and competition, particularly as AI changes the business and technological landscape.

Achieving decisive progress across these policy priorities would boost productivity which is at the heart of building resilience.

All aspects of policy - fiscal, structural, industrial, financial sector and monetary - have a role to play. With euro area monetary policy becoming less restrictive and the Irish economy expected to grow in-line with its medium-term potential, the role of domestic policy in maintaining macroeconomic stability comes to the fore. I have emphasised to the Minister for Finance the importance of the Government committing to rigorous expenditure control alongside an appropriate anchor or fiscal rule for budgetary policy to ensure the overall fiscal stance is appropriate, guards against pro-cyclicality and boom-bust dynamics and safeguards long-run fiscal sustainability.

This should support the creation of the necessary economic and fiscal space for the investment in infrastructure and the other structural reforms - in particular with regard to planning regulations - essential to Ireland's resilience and future prosperity.

## The financial sector

As for the financial sector itself, it is core to much of what I have spoken about, from the transition to net zero, to financing infrastructure, to supporting investment and innovation and assisting in managing the implications of our ageing population. Financial sector policy needs to deliver appropriate levels of resilience to ensure the system is able to support households and businesses in good times, and in bad.  We have seen the consequences of longterm and persistent costs of insufficient resilience for the broader economy. The financial sector has an important role to play in supporting the broader economy through the economic transitions we are living through.

I should add that this isn't just an issue for Ireland's financial sector. From a broader perspective, sustainably mobilising private savings across the EU for investment in Europe's productive capital stock would also enhance the resilience of households, businesses and the economy as a whole. In this respect both domestic and EU policy efforts should be enhanced to translate savings into investment and create a more vibrant funding environment for infrastructure and innovation. The Savings and Investments Union must deliver if Europe is to regain its competitive edge, and if we are to find ways to unlock the €11.5 trillion held by Europeans in deposits and cash and channel it to drive European innovation, while maintaining our resilience in the face of future potential shocks.

The Central Bank of Ireland will continue to focus on its mission of maintaining monetary and financial stability while ensuring that the financial system operates in the best interests of consumers and the wider economy. In particular this year, we will work with peers and other stakeholders on the simplification agenda and look to enable properlyfunctioning markets that support innovation and productivity without undermining core policy objectives such as financial stability and investor and consumer protection.

In any drive to simplify, we need to be clear that we do not compromise on delivering the stability, resilience and protections that consumers and the wider economy need and that the public expects.

## Conclusion

Let me conclude by going back to the beginning.  Economic resilience is the ability of an economy to manage change, whether it is to withstand (or recover from) shocks or the more gradual evolution to a different state. There is no one-off solution to the challenge of building resilience.

It is a continuous process involving individuals, households, businesses and policymakers adapting to - and shaping - the context in which they live and operate. At a minimum, we have to focus on the fundamentals such as stable and sustainable macroeconomic frameworks, sound monetary policy that delivers stable and predictable prices, wellregulated financial systems and well-functioning markets.

Needless to say, we also need to focus on the medium term while managing the short-term and in particular what is in our control. We can do that best by having a clear understanding of our starting point, learning from the past to help plan the future, extracting signal from noise, distinguishing action from assertion, avoiding disinformation bubbles and, as Keynes, might have put it, not 'losing ourselves in mere hypothesis but returning in some degree to first principles and, whenever we can, to such [facts] as there are'. 3

What is undoubtedly not a hypothesis is that Ireland and our partners in Europe are undergoing significant economic transitions in climate, in demography and in technology. On the face of it, we are also undergoing a significant economic transition in how international trading relationships are made and nurtured. The growing fragmentation of the global economy is a challenge to Ireland's openness, which has been one of the defining features of its economy and a key platform for the country's living standards. Building economic resilience - through investment in physical and human capital in particular - is the most effective way of helping to manage these transitions.

- [2] The tangle of ageing populations and productivity growth (November 2024)
- [3] Keynes JM, The Economic Consequences of the Peace",Gabriel Makhlouf
https://www.bis.org/review/r250224a.htm,Michael S Barr: Risks and challenges for bank regulation and supervision,"Speech by Mr Michael S Barr, Vice Chair for Supervision of the Board of Governors of the Federal Reserve System, at the Georgetown University Law Center, Washington DC, 20 February 2025.",2025-02-20 00:00:00,"For release on delivery 2:30 p.m. EDT February 20, 2025

Risks and Challenges for Bank Regulation and Supervision by

Michael S. Barr

Vice Chair for Supervision

Board of Governors of the Federal Reserve System at

Georgetown University Law Center

Washington, D.C.

Banks play an indispensable role in an economy that works for everyone. 1 They enable households to borrow to buy a home, save for the future, and deal with the ups and downs of managing finances.  Banks provide the credit for businesses to smooth out income and expenses, supply capital to seize new opportunities and create jobs, and facilitate the flow of payments that are the lifeblood of our economy.  And banks borrow from households and businesses as well, such as through federally insured deposits.  Because of these vital roles, we need to make sure that banks are resilient and serve as a source of strength to the economy in both good times and when the financial system comes under stress.  In our market economy, like any business, banks compete with each other and pursue profits by balancing risk-taking with safety and soundness. But because of the key role banks play in the economy, and the fact that banks do not fully internalize the costs of their own failure, regulation and supervision must ensure that banks do not take on excessive risks that can cause widespread harm to households and businesses.

Bank failures are as old as banking, and we've seen repeated waves of bank failures over the centuries.  America learned that hard lesson nearly 100 years ago, when bank failures played a central role in the Great Depression.  In response, the United States-and many other countries around the globe-set up a system of deposit insurance and enabled emergency lending in times of stress.  To balance the moral hazard of the federal safety net, Congress established a framework of regulation and supervision to make it more likely that banks internalize the costs to society of their risk-taking.

But finance is always evolving, and the buildup of new risks led to the banking crisis of the 1980s, and then to the Global Financial Crisis, with devastating consequences.  Weaknesses

1  The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.

that were revealed in regulation and supervision led to unprecedented and unpopular bailouts, and shuttered American businesses, devastated local communities with foreclosures, and millions of individuals lost their jobs and their livelihoods.  Government responded in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and in regulatory reforms by significantly strengthening bank oversight to curb excessive risk-taking.  The message from the American people was clear:  risk-taking must be balanced with the overarching need to maintain a resilient banking system that can continue to play its crucial role for households and businesses in good times and in bad.

Another, perennial lesson from the history of bank regulation and supervision is that the job is never done, and that the constant evolution of finance means risks will also evolve.  As Vice Chair for Supervision, I have recognized the need to approach this mission with humility, aware that I don't have all the answers or perfect foresight of where things can go wrong.  Both regulators and banks are limited in our ability to comprehensively identify and measure risks. Our financial system is complex, interconnected, and evolving.  We cannot fully appreciate how a specific vulnerability can interact with other vulnerabilities to amplify and propagate risk in the face of shocks, let alone accurately anticipate shocks in time to avoid them.

When I became Vice Chair for Supervision in July 2022, the Global Financial Crisis was almost 15 years past, and much had been done to strengthen the resilience of the system to reflect lessons learned.  But in March 2023, we experienced the second largest bank failure in history, Silicon Valley Bank (SVB), and the subsequent failures of Signature Bank and First Republic Bank.  SVB's failure triggered stress throughout the system and required the issuance of a

systemic risk exemption and the creation of an emergency bank lending program. 2 We have made some progress toward addressing the gaps that led to the failures.  But there will be headwinds that we must guard against in the coming years, as well as ongoing vulnerabilities and areas of risk that require continued vigilance.

Earlier this year, I announced I would step down as Vice Chair for Supervision but remain a member of the Board of Governors.  It has been an honor and a privilege to serve as vice chair for supervision, and to work with colleagues to help maintain the stability and strength of the U.S. financial system so that it can meet the needs of households and businesses.  I've determined that I would be more effective in serving the American people from my role as governor.  In this role, I'll continue to participate in monetary policy deliberations and vote on matters before the Board, including those related to supervision and regulation.

While it was a tough decision to make, I believe it was the right decision for the institution and, more importantly, for the public, whom we serve.  The risk of a dispute over my position would be a distraction from our important mission.  I feel strongly-as Chair Powell has said publicly many times-that the independence of the Federal Reserve is critical to our ability to meet our statutory mandates and serve the American public.  Put simply, our mission is too important to let such a dispute distract from doing our job for the American people.

Since my term for Vice Chair for Supervision will end later this month, I'd like to use one of my last opportunities as Vice Chair to discuss seven specific risks ahead: (1) maintaining and

2  Board of Governors of the Federal Reserve System, Department of the Treasury, and Federal Deposit Insurance Corporation, 'Joint Statement by Treasury, Federal Reserve, and FDIC,' press release, March 12, 2023, https://www.federalreserve.gov/newsevents/pressreleases/monetary20230312b.htm; and Board of Governors of the Federal Reserve System, 'Federal Reserve Board Announces It Will Make Available Additional Funding to Eligible Depository Institutions to Help Assure Banks Have the Ability to Meet the Needs of All Their Depositors,' press release, March 12, 2023, https://www.federalreserve.gov/newsevents/pressreleases/monetary20230312a.htm.

finishing post-financial crisis reforms; (2) maintaining the credibility of the stress test; (3) maintaining credible, consistent supervision; (4) encouraging responsible innovation; (5) addressing cyber and third-party risk; (6) risks in the nonbank sector; and (7) climate risk.  Each will continue to be a risk in either the near- or long-term.

## Maintaining and Finishing Post-Financial Crisis Reforms

There is always push back on financial regulation.  I felt that even in the wake of the Global Financial Crisis, as I helped to draft the legislative response to that crisis, the Dodd-Frank Act. 3 And I felt that over the last few years as we worked to finish the job of post-crisis financial reform and take up evolving threats revealed from the latest bank stress.  It is important to get the balance right, but it is also important to stand up for the American people.

I urge regulators to finish the job of implementing the final plank of the Global Financial Crisis reforms-and not to dismantle the hard-fought resilience that banks have built up in the process.  Of course, there are always ways to increase efficiency and reform prior methods without costs to resiliency, and I support those efforts.  But as I've spoken about many times, capital is critical to absorb losses and enable banks to continue operations through times of stress, and capital requirements should be aligned with the risks that banks take. 4 The Basel III endgame reforms include many improvements to how we measure credit, trading, operational,

3 See, e.g., U.S. Department of the Treasury, 'Remarks by Assistant Secretary Michael Barr' (speech at the Financial Times Global Finance Forum, New York, NY, December 2, 2010), https://home.treasury.gov/news/pressreleases/tg986.

4 See, e.g., speeches by Michael S. Barr: 'Why Bank Capital Matters' (speech at the American Enterprise Institute, Washington, D.C., December 1, 2022), https://www.federalreserve.gov/newsevents/speech/barr20221201a.htm; 'Holistic Capital Review' (speech at the Bipartisan Policy Center, Washington, D.C., July 10, 2023), https://www.federalreserve.gov/newsevents/speech/files/barr20230710a.pdf; 'The Next Steps on Capital' (speech at the Brookings Institution, Washington, D.C., September 10, 2024),

https://www.federalreserve.gov/newsevents/speech/barr20240910a.htm; and  'On Building a Resilient Regulatory Framework' (speech at Central Banking in the Post-Pandemic Financial System 28th Annual Financial Markets Conference, Fernandina Beach, FL, May 20, 2024),

and derivatives risks in light of our experience in the Global Financial Crisis.  All major jurisdictions except the United States have finalized rules that would implement these standards for their internationally active banks.

The Federal Reserve played a central role in developing these standards in the many years before my arrival as Vice Chair.  The Board sought comment on a proposal in July 2023 to implement the Basel III reforms, and we received a wide range of comments on the proposal. 5 On the basis of those comments, I took steps last fall to outline broad and material changes that would better balance the benefits and costs of capital in light of comments received and would result in a capital framework that appropriately reflects the risks of banks. 6 These reforms had broad consensus on the Board and the support of the heads of the Office of the Comptroller of the Currency and Federal Deposit Insurance Corporation.

When the U.S. provides leadership in international forums like Basel and then follows through, we set a powerful example and establish a standard that other jurisdictions also uphold. Implementing international standards enables U.S. firms to compete on a level playing field across the globe and makes the system safer.  When we don't follow through on our commitments, for whatever reason, concerns about a level playing field rise in other jurisdictions, in an international 'race to the bottom' on standards.  This harms us all and makes U.S. banks less competitive.  And unless the U.S. implements these standards, other jurisdictions will force U.S. banks operating abroad to meet their standards instead.

5  Board of Governors of the Federal Reserve System, 'Agencies Request Comment on Proposed Rules to Strengthen Capital Requirements for Large Banks,' press release, July 27, 2023,

https://www.federalreserve.gov/newsevents/pressreleases/bcreg20230727a.htm.

6 by Michael S. Barr: 'The Next Steps on Capital' (speech at the Brookings Institution, Washington, D.C., (September 10, 2024), https://www.federalreserve.gov/newsevents/speech/barr20240910a.htm.

Let me turn to unfinished business from the March 2023 banking stress.  In that event, we learned that bank runs and bank failures can happen fast, much faster than before.  Before SVB, the largest bank to fail did so over a period of several weeks.  The deposit losses experienced by SVB were much greater in both relative and absolute terms, and they occurred in less than 24 hours. 7

Over the past two years, the Federal Reserve has worked with banks to improve their ability to borrow from the discount window, and the financial system's collective readiness has improved significantly compared to pre-SVB, including with a substantial increase of $1 trillion in collateral pledged across the system. 8 The Federal Reserve has also worked to improve the functioning of the discount window, through a concerted effort to gather public input and identify areas for modernization.  These efforts have improved the ability of banks to weather stress, both individually and collectively, which enhances financial stability.

However, there is still more work to do.  For instance, banks, even the largest banks, are not currently required to establish a minimum level of readiness at the window, and, as a result, there are outlier firms that are not prepared for stress.  This needs to change.  Without a requirement there is also a significant risk of backtracking on the substantial progress in readiness we have made since March 2023.

Another important lesson from SVB is a classic one: balance sheet vulnerabilities among a group of institutions can be a source of contagion for the financial system and thus a key stability risk.  While we did much to improve the resilience of global systemically important

7  See 'Vice Chair for Supervision Michael S. Barr memo' in Board of Governors of the Federal Reserve System, Review of the Federal Reserve's Supervision and Regulation of Silicon Valley Bank (Washington, April 2023), https://www.federalreserve.gov/publications/files/svb-review-20230428.pdf.

8  See 'Discount Window Readiness,' https://www.federalreserve.gov/monetarypolicy/discount-windowreadiness.htm.

banks (G-SIBs) in the past decade, March 2023 showed that significant systemic risks can develop and spread from stress anywhere in the system, including in large and regional banks that are not G-SIBs. 9

The resilience of these firms has improved as they have recognized their vulnerabilities, and we have worked through supervisory channels to encourage risk-management practices that put them on a firmer footing.  But we also need to put in place more durable solutions to address risks.  For one, the level of capital held by large banks needs to align with the underlying risks on their balance sheets.  One important step would be to finalize the requirement that all large firms reflect unrealized losses on available for sale securities in their capital, which is a reform with broad agreement.  This will help them manage interest rate risk before it gets to extreme levels, a significant problem revealed in the banking stress of two years ago.

Another lesson from the spring of 2023 is that large and regional banks-as well as GSIBs-should ensure that they can actually monetize the securities on which they rely for their liquidity.  Why does this matter?  Banks need to be able to turn a portion of their assets into cash with a speed sufficient to meet outflows when uninsured depositors or other short-term creditors demand it.  Regulation needs to reflect realistic assumptions about monetization.

We should also consider updating some assumptions about deposit outflows in our liquidity requirements so that they better align with observed stress behavior.  During the stress in 2023, we saw uninsured deposits from high-net worth individuals and certain entities, such as venture capital firms, behave more like highly sophisticated financial counterparties than

9 For an earlier perspective, see Hearing on Prudential Oversight before the Senate Committee on Banking, Housing and Urban Affairs , July 23, 2015 (statement by Michael S. Barr), https://www.banking.senate.gov/imo/media/doc/BarrTestimony72315.pdf.

nonfinancial companies or ordinary retail depositors, which is how they are generally treated in regulations. 10 This mis-measured risk of deposit outflows means banks may not have sufficient liquidity to manage a stress period.

In a related vein, banks have stepped up their use of reciprocal deposit arrangementsarrangements where deposits are spread across many banks within a network-as a way to manage the risk of deposit amounts over $250,000. 11 While this arrangement spreads risk across the banking system, it is a strategy that has not been tested in a large-scale stress event.  It is only logical to wonder how the attenuation of relationships between customers and banks under reciprocal arrangements will affect the behavior of depositors worried about a bank run.  We also need to be attentive to operational risks in these arrangements, as well as the risk-management capacity of these companies to manage these relationships under stress.

A final lesson from the bank stress two years ago is that we need to do more to ensure that all banks that come under stress can be resolved in an orderly fashion.  One way to do this would be to require all large banks-including those that are not G-SIBS-to issue certain amounts of long-term debt.  This would have helped reassure depositors worried about the stability of bank funding and aided in the eventual resolution of at least some of the banks that came under stress in 2023.  The banking agencies have proposed a rule on long-term debt

Review of the Federal Reserve's

10   12 CFR 249. 32-33.  Board of Governors of the Federal Reserve System, Supervision and Regulation of Silicon Valley Bank (Washington, April 2023),

https://www.federalreserve.gov/publications/2023-April-SVB-Evolution-of-Silicon-Valley-Bank.htm; and Federal Deposit Insurance Corporation, FDIC's Supervision of First Republic Bank (Washington: September 2023), https://www.fdic.gov/news/press-releases/2023/pr23073a.pdf.

11  Board of Governors of the Federal Reserve System, Financial Stability Report (Washington: November 2024), https://www.federalreserve.gov/publications/files/financial-stability-report-20241122.pdf.

requirements, we have received many helpful comments that led us to adjust it in draft form, and I support moving forward to finalize it with those adjustments. 12

As I mentioned, revised Basel III standards, revised long-term debt requirements, and tobe-proposed liquidity standards would help to address gaps in our current framework, and I continue to believe that they should move forward.

Moreover, banks and supervisors should also stay vigilant to known risks in the current environment.  For instance, risks remain in the commercial real estate market, particularly within the office segment, as borrowers may find it difficult to refinance maturing loans.  And interest rate risk, especially for those with high levels of uninsured deposits, remains a key area of focus.

## Maintain the Credibility of the Stress Test

We face a challenging environment with the Federal Reserve's annual stress tests.  The stress tests helped the financial sector emerge from the Global Financial Crisis and rebuild its credibility.  The annual stress tests are still important to the financial sector's credibility today. The stress tests help banks, market participants, and supervisors understand the banks' vulnerabilities to shocks and to guard against those shocks by holding sufficient capital.

In December, the Board announced that, due to the evolving legal landscape, we would be undertaking significant changes to the stress tests to reduce capital volatility and improve transparency. 13 While I recognize that we need to increase transparency to reflect changes in the

12  Board of Governors of the Federal Reserve System, 'Agencies Request Comment on Proposed Rule to Require Large Banks to Maintain Long-Term Debt to Improve Financial Stability and Resolution,' press release, August 29, 2023, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20230829a.htm.

13  Board of Governors of the Federal Reserve System, 'Due to Evolving Legal Landscape and Changes in the Framework of Administrative Law, Federal Reserve Board Will Soon Seek Public Comment on Significant Changes to Improve Transparency of Bank Stress Tests and Reduce Volatility of Resulting Capital Requirements,' press release, December 23, 2024, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20241223a.htm.

legal environment in which we operate, there are good reasons why I and many of my colleagues and predecessors have been averse to such full disclosures since the inception of the stress test fifteen years ago.  There are several risks that we will need to guard against.

First, we need to guard against the risk that the process results in reduced capital requirements.  As they did during the Basel III process, banks are likely to argue against various aspects of the Fed's models that result in higher capital requirements, and not to highlight the areas in which the models underestimate risks.  We should take those comments on the Fed's models seriously and adjust the models as appropriate, but we should be careful not to overcorrect and lower bank capital requirements in ways that underestimate aggregate risk.  The Administrative Procedure Act should be a vehicle for transparency and public input into agency action, not used to weaken regulatory requirements that preserve the safety and stability of our financial system.

Second, we need to guard against the risk that banks lower their capital requirements because of increased transparency.  Increased disclosure of details about the Fed's stress models could enable banks to optimize stress test results by adjusting their balance sheet based on their knowledge of where the models underprice risk, in order to reduce their capital requirements without materially reducing risks.  Gaming the test in this way would be a bad outcome for risk management and our economy.

Third, banks are likely to change their behavior in other ways that increase risk.  We should be aware of the risk that full transparency into the models and scenarios used by regulators could discourage banks from investing in their own risk management if the test becomes too predictable.  Full transparency may also encourage concentration across the system in assets that receive comparably lighter treatment in the test.  And banks are likely to reduce

their management buffers over required levels, which will bring greater risks of breaching the minimums and regulatory buffers when a significant risk event eventually happens.

The fourth risk, and perhaps the greatest one, is that over time, given the difficulty of navigating the notice and comment rulemaking process on an ongoing basis to update the models we use, the dynamism and accuracy of the stress test will fade. 14 And as the events of two years ago show, it is hard to predict where risks will emerge in the financial system; an inherent challenge of preserving the relevancy of stress testing is coming up with a set of adverse scenarios that are novel enough, and dynamic enough, to reflect the risks that banks may face from unanticipated developments.  I believe that the Fed should commit to investing in a credible, effective process to maintain the dynamism of the binding stress test by regularly updating its models and scenario variables to reflect changes in the environment and changes to bank behavior.  This will require resources and a strong commitment up front and over time, but it will be necessary to maintain a credible stress test.

One effort we've already undertaken should help: to maintain the dynamism of the stress test, we launched exploratory stress scenarios to consider a wider range of possible conditions. 15 The Fed used this approach during the pandemic, and we've now made it a regular part of our annual stress test exercise. 16 The exploratory scenarios are not used to set binding capital requirements and are only reported on an aggregate level, but they help the Fed better understand

14 That model sclerosis contributed to the failure of the supervisory stress test used for Fannie Mae and Freddie Mac before the Global Financial Crisis, with devastating results. Scott Frame, Krisopher Gerardi, and Paul Willen, 'The Failure of Supervisory Stress Testing: Fannie Mae, Freddie Mac, and OFHEO,' Federal Reserve Bank of Boston Working Paper No. 15-4 (October 2015).

15  Board of Governors of the Federal Reserve System, Exploratory Analysis of Risks to the Banking System (Washington: June 2024), https://www.federalreserve.gov/publications/files/exploratory-analysis-results20240626.pdf.

16  Board of Governors of the Federal Reserve System, Assessment of Bank Capital during the Recent Coronavirus Event (Washington: June 2020), https://www.federalreserve.gov/publications/files/2020-sensitivity-analysis20200625.pdf.

risks posed to individual banks and to the banking system as a whole that are not captured in binding scenarios.  I hope and trust that the Fed will continue this important analytical work.

As an additional backstop to help ensure banks have sufficient capital to withstand losses, the Fed should preserve its discretion to set individually binding capital requirements on firms based on supervisory judgment under the International Lending Supervision Act.  Jurisdictions around the world undertake a similar process under a so-called Basel 'Pillar 2' approach, and the United States would benefit from using such a framework as well.  That is all the more important given the changes the Fed is undertaking for the binding stress tests.

## Maintaining Credible, Consistent Supervision

Another area warranting continued vigilance is supervision.  There will undoubtedly be calls to revamp supervision to reduce burden.  And I am all for making sure supervision is the most effective and efficient it can be.  Supervisors need to focus on the most urgent and important risks, and not burden firms with unnecessary or distracting matters.  But we need to be careful to preserve and enhance the ability of supervisors to act with speed, force, and agility as appropriate to the risk.

Supervisors have emphasized proactive supervisory engagement, which helps banks address issues before they grow so large as to threaten the bank or broader financial stability. Earlier intervention means that firms are likely to have more options to fix their problems, with little impact on bank profitability. 17

We should continue work to improve the effectiveness of our supervision and use datadriven analysis to improve our scoping and prioritization of supervisory issues.  I support this

17  Beverly Hirtle and Anna Kovner, 'Bank Supervision,' Annual Review of Financial Economics 14 (2022): 39-56.

work to the extent that it makes our supervision more effective and focused on the right issues. But the Board should resist initiatives that impede effective supervision by discouraging examiners to flag issues early, or initiatives that increase unnecessary process around issuing findings in a manner that impedes the speed and agility of supervision when it is needed.  More generally, supervision is another area in which 'efficiency and competitiveness' should not be used as an excuse for lax oversight that significantly impairs the safety and soundness of individual institutions and undermines broader financial stability.

We should take caution from our experience with SVB.  While some have claimed that the examiners at SVB did not focus on the right issues, it's important to highlight that the Office of Inspector General (OIG) concluded that the Fed allocated an insufficient number of examiner resources to SVB while in the RBO portfolio, and that the examiners assigned to SVB as it was growing did not have sufficient expertise in supervising large, complex institutions. 18 Once it was in the large bank portfolio, examiners highlighted the risk from interest rate risk and uninsured depositors, but did not act with sufficient force to get the bank to change course in a timely way.  We've made important changes since then, but we need to be sure we get the staff resources in place, and provide support to examiners on the front line, so that they can act with the speed, force, and agility warranted by the facts.

## Encouraging Responsible Innovation

Another set of risks involve those related to the role of innovative technology in the financial sector.  Innovation, when done responsibly, brings tremendous benefits to consumers, financial institutions, and the economy at large.  For instance, blockchain technology underlying

(Washington: September 25, 2023),

18 Office of Inspector General, Material Loss Review of Silicon Valley Bank https://oig.federalreserve.gov/reports/board-material-loss-review-silicon-valley-bank-sep2023.pdf.

crypto-assets has the potential to make financial services better, cheaper, and faster.  Responsible use of this technology could make banking more efficient and accessible to more consumers.

With any new technology, there are new risks.  To achieve the benefits in a durable manner over time, we must ensure that the associated risks are managed appropriately.  With crypto-assets, investors do not currently have the structural protections they have relied on for many decades in other financial markets.  It is important that those guardrails are put in place to avoid issues such as the misuse of client funds, misrepresentations, obfuscation about availability of deposit insurance, and fraud.  We should also recognize that some of the attractive attributes of crypto-assets-the pseudonymous actors that are parties to transactions, the ease and speed of transfer, and the general irrevocability of transactions-also make crypto-assets attractive for use in money laundering and terrorist financing.  It is encouraging to see innovators develop tools and processes to better manage these risks, while harnessing the benefits of the technology.  But regulation and supervision also have an essential role to play.

Responsible innovation is in everyone's interest.  In the past few years, we stood up the Novel Activities Supervision Program, which dedicates resources to understanding how technology is transforming banking and supports banks' ability to innovate while ensuring that banks clearly understand and manage the risks associated with innovative activities. 19 I hope and trust that approach will continue.

## Addressing Cyber and Third-Party Risk

Cyber risk from both foreign powers and non-state actors has become a major concern for banks, and regulators will need to ensure that these risks are being properly managed.  The

19 See https://www.federalreserve.gov/supervisionreg/novel-activities-supervision-program.htm.

operational disruption propagated through a third-party security company last summer was a wake-up call for banks and regulators about vulnerabilities in a system where security is outsourced.  Disruption of one of these critical systems may compromise a bank's ability to execute important functions and adversely affect individual firm safety and soundness as well as the broader financial system.  Given the significant concentration in the IT industry, we should expect operational failures at single IT entities to have potentially far-reaching effects, no matter their original cause.  And advances in artificial intelligence are likely to give bad actors new tools for fraud and infiltration, while also providing banks with new tools to combat these attacks. Both banks and the Federal Reserve need to continue to invest in cyber resiliency.

## Risks in the Nonbank Sector

Let me speak next to the perennial concerns of intermediation by financial firms outside the bank regulatory perimeter.  An increasingly varied and evolving collection of nonbank clients, including hedge funds, private credit, and insurance companies, is playing a significant role in the global economy and presenting new risks.

Beginning with hedge funds, bank exposures to hedge funds have risen over the past several years, and concurrently, hedge fund leverage remains near historic highs. 20 Archegos's failure revealed the risks presented by hedge funds and the degree of interconnectedness between banks and hedge funds.  And the exploratory analysis as part of last year's stress test showed that

20  Board of Governors of the Federal Reserve System, Financial Stability Report (Washington: November 2024), https://www.federalreserve.gov/publications/files/financial-stability-report-20241122.pdf.

banks have material exposures to hedge funds under certain market conditions, and that the hedge fund counterparty exposures can vary significant based on the specific set of shocks. 21

One area that has grown substantially is the Treasury cash-futures basis trade. 22 The basis trade helps provide liquidity and price discovery in normal times, as hedge funds trade with asset managers and other financial institutions to align returns to holding Treasury securities and related futures.  But the trade involves high levels of leverage, which can contribute to a rapid unwinding in positions and exacerbate market stress, as we saw in the spring of 2020.  In principle, margining practices and participants' risk-management activities should limit these risks, but individual firms do not account for the spillovers their actions can have on market functioning.  These externalities suggest a role for regulation, and the central clearing mandate for Treasury market trading is an important step in supporting the resilience of this market.  At the same time, we need to continue to consider how we can support the collection of minimum margin across trading venues and in bilateral trades to avoid loopholes and risks, and continue to monitor banks' credit risk management practices with these hedge fund counterparties.

Another area that has experienced rapid growth in recent years is private credit, which is now comparable in size to the high-yield bond market and leveraged loan market. 23 Traditional private credit arrangements rely on limited leverage and generally have long-term funding, making them less vulnerable to the deleveraging spiral associated with high leverage and shortterm funding.  Nonetheless, risks may be growing.  The connections between private credit and

21  Board of Governors of the Federal Reserve System, Exploratory Analysis of Risks to the Banking System (Washington: June 2024), https://www.federalreserve.gov/publications/files/exploratory-analysis-results20240626.pdf.

22  Board of Governors of the Federal Reserve System, Financial Stability Report (Washington: November 2024), https://www.federalreserve.gov/publications/files/financial-stability-report-20241122.pdf.

23  Board of Governors of the Federal Reserve System, Financial Stability Report (Washington: November 2024), https://www.federalreserve.gov/publications/files/financial-stability-report-20241122.pdf.

banks have been expanding, and private credit remains opaque, with limited information relative to asset classes of similar size. 24 Moreover, the rapid growth and opacity of the sector raise the risk that recent private credit arrangements may be assuming new risks.  Retail investors can now gain exposure to the asset class through mutual or exchange traded funds, which could present the age-old consumer and financial stability risks we see when opaque, illiquid assets are converted to liquid ones. 25

We also need to monitor risks in the insurance industry.  Households planning for retirement often rely on life insurance companies to provide them a steady stream of income.  In principle, life insurance companies are the ultimate patient investor and thus the natural vehicle to finance long-maturity and risky projects.  Indeed, while venture capital funding gets a lot of the attention, mobilized retirement savings through life insurance companies have supported long-term investments in capital-intensive projects.  However, life insurance companies, just like other financial institutions, can overpromise and be tempted to take on greater risk than their liability holders or regulators appreciate.  Given the complexity of some investment vehicles, the institutions themselves may not fully appreciate all of the risks.  The life insurance sector has been changing.  Even as the life insurance industry has been increasing its holdings of assets originated by private equity firms, private equity firms have been acquiring life insurers directly. Moreover, private-equity-affiliated insurers rely more heavily on nontraditional liabilities, which may prove flighty in a stress event.  This is something to watch carefully.  In the next business

24  John Levin and Antoine Malfroy-Camine, 'Bank Lending to Private Equity and Private Credit Funds: Insights from Regulatory Data,' Federal Reserve Bank of Boston Supervisory Research and Analysis Notes (February 2025), https://www.bostonfed.org/publications/supervisory-research-and-analysis-notes/2025/bank-lending-to-privateequity-and-private-credit-funds.aspx.

25 Chapter 2 The Rise and Risks of Private Credit in: Global Financial Stability Report, April 2024, https://www.elibrary.imf.org/display/book/9798400257704/CH002.xml.

cycle downturn, it's possible that unexpected losses at insurance companies could lead to a sharp pullback and deeper credit crunch.

## Climate Risk

Finally, regulators will need to continue to confront the financial risks from climate change.  The Federal Reserve has a responsibility to recognize emerging risks to the safety and soundness of banks, to the ability of households and businesses to access financial services, and to financial stability.  Costly natural disasters could present just such risks.

The recent wildfires in California should be a wake-up call that we need to focus on how insurance markets will need to adjust to more frequent and severe weather events.  The loss of life and hardship borne by many households is tragic, and the economic losses associated with the wildfires, while uncertain, are likely to be among the largest losses from a natural disaster on record.  The wildfires should remind us of the problems in property and casualty insurance markets-just as the severe flooding caused by Hurricane Helene reminded us of significant gaps in flood insurance coverage.

Often the structure and regulation of insurance markets prevents risk from being appropriately priced, limiting the ability of market signals to influence development and adaptation in high-risk areas and contributing to the buildup of risks.  And there is a broader question of the extent to which private capital will be sufficient to cover increasing natural disaster risk.

The Federal Reserve has an important but narrow role to play with respect to climate change, and that is to focus on risks from climate change to bank safety and soundness and financial stability.  The pilot climate scenario analysis conducted by the Federal Reserve was an

important step forward in assessing the capacity of the largest banks, as well as in building our own capacity, to perform the kind of analysis that is increasingly crucial as risks arising from more severe weather events become a driver of financial risk for specific firms and the broader economy. 26 Guidance for the largest banks also plays an important role in reminding banks of basic principles in prudent risk management as it applies to these types of climate-related risks.

## Conclusion

In conclusion, the United States has the benefit of a strong, vigorous economy, the deepest and most liquid markets in the world, and a critical place in the world economy through the role of the U.S. dollar.  The Federal Reserve has an essential role in maintaining the strength and resilience of the U.S. economy, including through its vigilance about the risks I discussed today.  A strong and resilient banking system benefits the American people. We need to be humble about our ability to predict shocks to the financial system, and how they will propagate through vulnerabilities in the system.  That is why it is so important to have strong regulation and supervision as shock absorbers to protect households and businesses from risks emanating from the financial system.

In closing, I want to speak directly to the staff of the Federal Reserve and express my deep gratitude.  Your rigorous analysis and deep expertise are fundamental to our ability to promote a strong and stable financial system that serves the American people.  Thank you for your outstanding service.

26  Board of Governors of the Federal Reserve, Pilot Climate Scenario Analysis Exercise: Summary of Participants' Risk-Management Practices and Estimates (Washington: May 2024),

https://www.federalreserve.gov/publications/files/csa-exercise-summary-20240509.pdf.",Michael S Barr
https://www.bis.org/review/r250220c.htm,Paolo Angelini: Data science in central banking,"Closing remarks by Mr Paolo Angelini, Deputy Governor of the Bank of Italy, at the 4th Irving Fisher Committee and Bank of Italy Workshop, Rome, 20 February 2025.",2025-02-20 00:00:00,"

## Data Science in Central Banking

Closing remarks by Paolo Angelini, Deputy Governor of the Bank of Italy

4 th  Irving Fisher Committee and Bank of Italy Workshop

Rome, 20 February 2025

Good afternoon ladies and gentlemen,

I am happy to be here with you today as we mark the conclusion of this workshop on data science in central banking. As highlighted in the Irving Fisher Committee Annual Report for 2024, launching this periodic workshop series jointly with the Bank of Italy, back in 2019, was a far-sighted strategic decision. 1

The focus of this fourth edition of the workshop, Generative Artificial intelligence (AI) and its applications in central banking, aptly underlines the ongoing transformation in the field. 2

There is broad consensus that Generative AI has the potential to significantly boost productivity worldwide. According to some estimates, it could yield annual productivity gains in the $2.6 - 4.4 trillion range globally. 3  Others predict an increase in output of the order of 15-20 percent, largely phased in over 15 years after adoption. 4  Survey evidence collected from global corporations suggests that for over 40 percent of respondents the return on investment in the most advanced Generative AI initiatives falls within the range of 11-30 percent, and meets expectations (Fig. 1).

1 The primary goal of these workshops is to showcase projects, share expertise among central banks, and reduce reliance on external service providers. The first workshop, in January 2019, focused on "" Computing Platforms for Big Data and Machine Learning "". The second focused on 'Data Science in Central Banking' and was organized in  two  parts,  dealing  respectively  with  ' Machine learning applications '  (October 2021), and with ' Applications and tools ' (February 2022). The third workshop was also on 'Data Science in Central Banking', with a focus on ' Data sharing and data access ' (October 2023).

2 An excellent primer on AI and central banks is in Bank for International Settlements, ' Annual report ', June 2024, pp. 91-127.

3 McKinsey, ' The economic potential of generative AI ', June 2023.

4 P. Aghion, S. Bunel, and X. Jaravel, 'What AI Means for Growth and Jobs', Project Syndicate, January 14, 2025. I. Aldasoro, L. Gambacorta, A. Korinek, V. Shreeti and M. Stein, 'Intelligent financial system: how AI is transforming finance', BIS Working Papers, no 1194, June 2024.

The  uncertainty  surrounding  any  estimate  remains  significant,  largely  due  to  the rapidly evolving nature of the phenomenon itself. Consider for instance the launch of the ChatGPT-like AI model 'R1' by DeepSeek, a Chinese startup, at the end of January. The  event  cast  doubt  on  the  widespread  belief  that  AI  requires  massive  amounts  of hardware  and  energy,  raising  questions  about  the  leadership  of  the  American  tech industry and causing strong stock markets fluctuations.

The adoption rate of AI by firms is also uncertain, but growing rapidly. In early 2024, 65 percent of respondents in a survey of international corporations reported that their organizations  regularly  use  Generative  AI,  nearly  double  the  percentage  observed  in 2023. 5 Adoption  rates  vary  across  industries  and  appear  to  be  higher  among  larger firms. Moreover, the speed of adoption within firms seems uneven: functions such as IT, operations, marketing, customer service, and cybersecurity appear to be at the forefront. 6 Additionally, perceptions of Generative AI differ markedly across corporate hierarchies, with top executives tending to have a more optimistic view of their organization's speed of adoption and implementation. 7

Uncertainty has led some commentators to avoid making precise predictions about AI's future  impact,  instead  considering  two  broad  scenarios.  In  one  scenario,  the  gradual adoption of Generative AI leads to incremental economic progress. In the other, more transformative scenario, AI fundamentally reshapes the world as we know it. 8  While the latter scenario may seem like science-fiction, some ongoing developments, such as the emergence of the so-called Agentic AI, suggest that it could in some form become a reality.

Regardless of the reliability of available estimates, there is no doubt that Generative AI is rapidly expanding across the business world and reaching consumers as well. Looking ahead, further growth seems inevitable, driven by increasing volume and diversity of data being generated and stored, the very fuel of AI, which Generative AI itself contributes to. The amount of data created worldwide each year is projected to continue its astonishing expansion, from 149 zettabytes (i.e., 10 21 bytes) in 2024 to more than 394 zettabytes by 2028 (fig. 2).

As this event draws to a close, I would like to reflect on some of the key topics that emerged from our discussion and extrapolate a little to broader considerations.

Over the past three days, we have explored several use cases of AI and data science that are gradually permeating data analysis, real-time economic monitoring, and decision-making in central banking. One of the key takeaways from our discussions is that AI can enhance the speed, accuracy, and depth of forecasting and nowcasting (e.g., for inflation and output, or  energy demand). We have also seen applications in regulatory compliance, financial

5 McKinsey, 'The state of AI in early 2024: Gen AI adoption spikes and starts to generate value'.

6 Deloitte, 'Now decides next: Generating a new future Deloitte's State of Generative AI in the Enterprise', Quarter four report, January 2025.

7 Deloitte, op. cit.

8 M. S. Barr, 'Artificial Intelligence: Hypothetical Scenarios for the Future', speech at the Council on Foreign Relations, New York, New York February 18, 2025.

supervision,  and  legal  analysis.  Large  Language  Models  (LLMs),  when  combined  with Retrieval-Augmented Generation (RAG) techniques 9  can extract insights from thousands of pages of regulatory filings, or legal documents, reducing the time devoted to document review and processing. Promising applications have also been showcased also in the field of financial stability monitoring. These findings confirm that AI applications are set to become ubiquitous in modern central banking, and beyond.

Several  presentations  also  highlighted  the  risks  associated  with  the  introduction  of AI. First, there is the issue of explainability in AI models. Many machine learning (ML) algorithms  function  as  black  boxes,  making  it  difficult  for  users  to  understand  the rationale  behind  specific  results  or  recommendations.  This  is  particularly  concerning for applications in regulation and supervision, where transparency and accountability are crucial. Second, biases embedded in historical financial data may be reinforced by AI models, raising ethical concerns. Third, Generative AI is prone to hallucinations and misinformation. We have seen how LLMs can fabricate imaginary regulatory clauses, or misinterpret complex financial concepts; more generally, AI can generate incorrect answers that may be difficult to detect. 10 Fourth, the widespread application of Generative AI to investment decisions raises financial stability concerns, partly due to its potential to amplify herding behavior. 11  Fifth, while AI has useful applications in cybersecurity, fraud detection and anti-money laundering, it can also serve be a powerful tool for criminals and fraudsters. I am sure that many other issues could be added to this list. 12

While these problems are significant, they have been clearly identified, and solutions are actively being developed. For instance, hallucination problems have been reduced in more recent releases of LLMs and can be further mitigated by grounding AI-generated responses in verified datasets through RAG models. Human oversight remains essential, but viable avenues for improvement are emerging.

But alongside these problems we also face other potential issues that are more difficult to identify and address. I am referring to the effects that the systematic use of these tools may have on the cognitive processes of individual users. For instance, as the technology becomes more reliable  with  each  new  release,  there  may  be  a  growing  tendency  to reduce human oversight and accept the answers generated by AI engines as 'the truth'. While this could lead to efficiency gains, it could also result in errors and the spread of incorrect or distorted information and beliefs, not only in financial markets, but across all  fields.  Furthermore,  as  responses  and  outcomes  that  closely  resemble  the  truth

9 RAG models enhance AI capabilities by adding information retrieval from specialized documents to the general purpose LLM text generation capabilities.

10 Among the respondents to the 2023 DigitalOcean survey on startups and SMEs trends ,  34 percent mentioned  security  concerns,  while  29  percent  pointed  to  ethical  and  legal  issues,  including  AI hallucinations and privacy risks.

11 Financial  Stability  Board,  'The  Financial  Stability  Implications  of  Artificial  Intelligence',  2024;  G7 Finance Ministers and Central Bank Governors under the 2024 Italian Presidency, 'A High-Level Panel of Experts' Report to the G7'.

12 For  instance,  F.  Natoli  and  A.  G.  Gazzani,  'The  Macroeconomic  Effects  of  AI-based  Innovation', confirm that AI gradually raises total factor productivity, but also tends to increase income and wealth inequality.

become instantly available at virtually no cost, users may have less incentive to memorize information. These shifts are occurring in a world where the role of machines, already significant, is expected to expand rapidly (fig. 3).

Generative AI is just the latest addition to a long list of innovations that may significantly impact how the human brain functions (consider for example the pervasive use of mobile devices, the internet, or social media). A parallel phenomenon that comes to mind is remote working, another major trend reshaping how we work and interact. Both AI and remote work bring clear and tangible benefits, but they may also have potential side effects that are harder to identify and assess, as they may only materialize in the longer term. We should all be mindful of these risks. 13

That  said,  I  am  not  suggesting  that  we  should  delay  AI  adoption  until  uncertainty  is reduced, or that its use should be resisted. However, low visibility calls for prudent driving. To ensure that AI is used in a robust, effective, fair, and accountable manner, adopters should focus on three key areas, which were echoed in various workshop presentations.

First, developing a sound AI governance framework should be a priority. At the macro level,  as  outlined  in  the  High-Level  Panel  of  Experts'  Report  to  the  G7,  this  requires 'policy preparedness', based on alternative AI development scenarios. 14 At the firm level, Generative AI significantly expands the range of users, moving from a relatively small group of specialists to virtually the entire workforce. Unlike previous technologies, it has the potential to radically transform operational models and introduce new risks. This calls for a high level of responsibility and strategic attention.

The governance argument is particularly strong in the specific field of data management. Data is the fuel of AI, and no engine can function properly if fed with contaminated or low-quality fuel. Until now, proper data management has enabled efficient and effective search, retrieval and usage. Looking ahead, it will be crucial for extracting value from AI applications. Proprietary data are likely to be fundamental for the successful adoption of  Small  Language  Models.  These  models  hold  great  promise,  as  they  can  be  easily tailored to a firms' specific needs while also mitigating the high costs and large energy consumption associated with LLMs. Examples relevant to central banks were provided during the workshop.

Second, the workforce should prepare for AI adoption. In the case of central banks, experts in economics and law have traditionally dominated the workforce. However, the digital revolution has gradually increased the pressure to reorient the talent mix

13 See e.g. I. Dergaa, 'From tools to threats: a reflection on the impact of artificial-intelligence chatbots on cognitive health ', Frontiers in Psychology, April 2024; S. Ahmad, 'Impact of artificial intelligence on  human  loss  in  decision  making,  laziness  and  safety  in  education ',  Nature  -  Humanities  and Social Sciences Communications, June 2023; T. Ray, 'The paradox of innovation and trust in Artificial Intelligence ',  Observer Reserve Foundation, February 2024. While these side effects, if indeed they exist,  are  quite  general,  we  should ask ourselves if there is anything specific to finance, or central banking, which might need attention.

14 G7 Finance Ministers and Central Bank Governors under the 2024 Italian Presidency, 'A High-Level Panel of Experts' Report to the G7'. This approach emphasizes readiness and flexibility, ensuring that policies can be adjusted and refined as new evidence emerges and technology matures.

toward experts in IT, engineering, and mathematics. AI, with its transformative impact on  work  processes,  will  further  intensify  this  pressure,  necessitating  adjustments  in hiring policies. But in such a fast-changing environment, simply hiring specialists cannot be the main solution. Training, reskilling and upskilling the workforce will be essential. Proper attention to these aspects will not only help organizations fully leverage new technology, but also address employees' resistance to change, often a major obstacle to successful adoption.

Third,  cross-institutional  cooperation  among  authorities  (not  just  central  banks  and bank supervisors) should be encouraged, given the the increasingly blurred regulatory boundaries in data-intensive technologies such as AI. 15  At the start of a new journey, it makes sense to learn from each other's mistakes and share best practices rather than rely on a trial-and-error approach in isolation. In today's challenging global environment, multilateralism is under strain, and international cooperation is facing strong headwinds. Given its long tradition of cooperation in international fora such as the BIS and the FSB, the central banking community is well-positioned to foster cooperation in this field. 16 Workshops like this one embody that spirit.

A  clear  area  for  targeted  cooperation  is  cross-border  data  sharing.  Many  of  you  are familiar with the difficulties of enabling data access, both nationally and internationally, due to the complex intersections between personal data protection, national security, intellectual property, and sectoral regulation. 17 In a sense, AI will raise the opportunity cost of maintaining exclusive control over information, calling for smart ways to reconcile public policy objectives with data-drive innovation. 18

Concluding on this final note, I encourage all of you to stay in touch, actively collaborate, and continue the conversations initiated during this workshop. These discussions can serve as the foundation for future partnerships and joint initiatives.

I  would  like  to  extend  my  sincere  gratitude  to  the  speakers  and  organizers  whose dedication and hard work have made this workshop possible. I wish you all continued success in your endeavors.

15 P. Hernández de Cos, 'Managing AI in banking: are we ready to cooperate?' Keynote speech at the Institute of International Finance Global Outlook Forum Washington DC, 17 April 2024.

16 O. Borgogno and A. Perrazzelli, 'From principles to practice: The case for coordinated international LLMs supervision ', Cambridge Forum on AI: Law and Governance. Vol. 1, e13, 2025.

17 O. Borgogno and M.S. Zangrandi, 'Data governance: a tale of three subjects' (2022) Journal of Law, Market &amp; Innovation, 1(2), 50-75.

18 The EU has been working on various data sharing measures that have the potential to enhance AI model training and development. European Commission, 'Working Document on Common European Data Spaces ', 24 January 2024 SWD(2024) 21 final, designs a plan to develop Common European Data Spaces, particularly in finance, energy, and health. Similarly, regulatory sandboxes enshrined in the EU AI Act could provide a valuable opportunity to facilitate the responsible use of personal data collected for other purposes. See Regulation (EU) 2024/1689 of 13 June 2024 laying down harmonized rules on artificial intelligence (Artificial Intelligence Act), Art. 59, Rec. 140.

## Distribution of the estimated return on investment (ROI) for the most advanced scaled Generative AI initiatives in a sample of international corporates (1) Fig. 1 - Distribution of the estimated return on investment (ROI) for the most advanced scaled Generative AI initiatives in a sample of international corporates (1)

Fig. 1 - Distribution of the estimated return on investment (ROI) for the most advanced scaled



Source: Deloitte, 'Now decides next: Generating a new future. Deloitte's State of Generative AI in the Enterprise', Quarter four report, January 2025. Source:  Deloitte,  'Now  decides  next:  Generating  a  new  future.  Deloitte's  State  of  Generative  AI  in  the Enterprise', Quarter four report, January 2025.

(1) The panels portray the frequency distribution of ROI across surveyed firms. For instance, in the left-hand side panel, from the bottom, 5 percent of firms report that they did not attempt to measure the return on their The panels portray the frequency distribution of ROI across surveyed firms. For instance, in the left-hand side panel, from the bottom, 5 percent of firms report that they did not attempt to measure the return on their investment, 9 percent estimate a ROI to be less than 5 percent, and so on.

investment, 9 percent estimate a ROI to be less than 5 percent, and so on.

Source: Deloitte, 'Now decides next: Generating a new future. Deloitte's State of Generative AI in the

Enterprise', Quarter four report, January 2025.

(1)

The panels portray the frequency distribution of ROI across surveyed firms. For instance, in the left-hand

Fig. 2 - Volume of data/information created, captured, copied, and consumed worldwide each year from 2010 to 2023, with forecasts from 2024 to 2028

side panel, from the bottom, 5 percent of firms report that they did not attempt to measure the return on their investment, 9 percent estimate a ROI to be less than 5 percent, and so on.

## Figure 2

## Volume of data/information created, captured, copied, and consumed worldwide each year from 2010 to 2023, with forecasts from 2024 to 2028 Fig. 2 - Volume of data/information created, captured, copied, and consumed worldwide each year from 2010 to 2023, with forecasts from 2024 to 2028



Source: IDC; Statista estimates. Source: IDC; Statista estimates.

© Statista 2024 © Statista 2024.

7

## Figure 3

## Share of total work tasks expected to be delivered predominantly by human workers, by technology (machines and algorithms), or by a combination of both Fig. 3 - Share of total work tasks expected to be delivered predominantly by human workers, by technology (machines and algorithms), or by a combination of both



Source: World Economic Forum, 'Future of Jobs Report', January 2025. Source: World Economic Forum, 'Future of Jobs Report', January 2025.

8",Paolo Angelini
https://www.bis.org/review/r250226d.htm,Sabine Mauderer: Presentation of the Deutsche Bundesbank's Annual Report 2024,"Statement by Dr Sabine Mauderer, Member of the Executive Board of the Deutsche Bundesbank, at the press conference presenting the Annual Report 2024, Frankfurt am Main, 25 February 2025.",2025-02-25 00:00:00,"## Annual accounts for 2024

Statement at the press conference presenting the Deutsche Bundesbank's Annual Report for 2024

25.02.2025 | Frankfurt am Main | Sabine Mauderer

Check against delivery.

1 Introduction

Ladies and gentlemen,

2 Balance sheet

3 Profit and loss account

4 Conclusion

## 1 Introduction

## Ladies and gentlemen,

A warm welcome to you from me as well.

Before we start looking at the 2024 annual accounts together in a few minutes, allow me to make a few introductory remarks.

The President has already said it: the monetary policy measures of the past few years are still having an effect. They are also reflected on central banks' balance sheets.

As you know, the Bundesbank started making provision for the increased financial risks early on, in the annual accounts for 2016. These risks materialised yet again in 2024.

On balance, the Bundesbank posted losses of around €19.8 billion in 2024, after a loss of €21.6 billion in the previous year. In 2023, however, we recorded a net distributable profit of zero because we used all of our provision for general risk and some of our reserves to offset losses. For 2024, remaining reserves totalling €0.7 billion were still available to offset some of the loss. The Bank is thus reporting an accumulated loss of €19.2 billion for 2024.

Let me share three important messages:

1. We have reached the peak of the losses.
2. Net equity has climbed to more than €250 billion.
3. There is a revaluation reserve of over €260 billion for the gold.

So the Bundesbank's balance sheet is sound.



The positive message is that the Bundesbank is fully able to perform its tasks even in the face of losses.

This slide shows that the Bundesbank's net equity increased significantly, rising by €50 billion or roughly 25%. We will look at the development of net equity in detail in just a moment.

Now let's take a closer look at developments in the annual accounts for 2024.

## 2 Balance sheet

First, let's look at the assets side of our balance sheet:



Total assets once again declined as a result of monetary and foreign exchange policy activities: they were down by around €149 billion, or 5.9%. Viewed over multiple years, though, total assets are still up on the end of 2019 - that is to say, their level before the pandemic and before the start of the highly accommodative monetary policy.

As in the previous year, the decline in total assets has three main drivers on the assets side:

1. First, securities holdings from the monetary policy purchase programmes decreased by €98 billion: this was largely concentrated on the APP portfolio, for which reinvestments of principal payments were discontinued as of July 2023. For the PEPP , meanwhile, reinvestments were gradually reduced to zero only as of the second half of 2024. We will see the effects of this more clearly in the 2025 annual accounts.
2. Second, lending related to monetary policy operations contracted by €67 billion, above all due to the phase-out of the TLTROs conducted at particularly favourable interest rates during the pandemic.
3. Third, liquidity outflows meant that the TARGET claim on the ECB fell by €47 billion in 2024.

On the liabilities side of the balance sheet, there was a corresponding significant decline in deposits: liabilities related to monetary policy operations fell on the year to €960 billion. In addition, other euro balances dropped on the year to €134 billion, mainly owing to smaller balances of non-euro area central banks.

Another key item on the liabilities side is banknotes in circulation: when the negative interest rate policy period ended in 2022, growth in the volume of banknotes in circulation within the Eurosystem had effectively come to a halt due to the higher opportunity cost of holding cash. Only in recent months has growth picked up again at individual national central banks. The Bundesbank's share of the Eurosystem's banknotes in circulation reported on the balance sheet under liabilities item 1 'Banknotes in circulation' rose to €389 billion. The volume of banknotes issued by the Bundesbank actually increased more than in the rest of the euro area. This can be seen in liabilities subitem 9.2 'Net liabilities related to the allocation of euro banknotes within the Eurosystem', which has risen to €567 billion.

The third aspect I would like to discuss is the revaluation accounts item: this item increased on the year, climbing by €70 billion to €267 billion.

You will see a breakdown of the revaluation accounts item on the next slide.



The revaluation reserve for gold contained within that item has risen by €69 billion to €263 billion based on the market value of gold as at the reporting date. The revaluation reserve for gold has grown strongly when viewed over the long term, in particular. This revaluation reserve is currently almost thirteen times as high as its level when monetary union was launched at the start of 1999.

The revaluation reserve for foreign currency has increased by €1 billion, driven by the weaker euro. This growth is mainly attributable to assets denominated in US dollars.

The revaluation reserves also have an impact on net equity, as shown on the next slide.



Net equity comprises:

1. capital and reserves;
2. the provision for general risk;
3. the revaluation accounts item; and
4. as of the 2024 annual accounts, the accumulated loss.

Looking at developments over multiple years, we can see that net equity developed positively in 2020 and 2021 over and above the increase in the provision for general risk (rising from €186 billion to €197 billion). In 2022, net equity went up to €207 billion, even though the Bank released some of the provision for general risk. In 2023, the provision for general risk in the amount of €19.2 billion was fully released to offset losses; however, the decline in net equity was much smaller, at €7 billion. This was mainly because of further growth in the revaluation reserve for gold owing to movements in the price of gold. Given that the revaluation reserves are now at their highest ever level of €267 billion, net equity rose overall to €251 billion in the reporting year, despite the accumulated loss of €19.2 billion, and is now at an all-time high.

Having net equity of €251 billion shows that the Bank can absorb the existing and prospective losses. It is fully able to fulfil its mandate. Our balance sheet is sound.

## 3 Profit and loss account

Let's now turn our attention to the profit and loss account.



Joachim Nagel has already pointed it out: the Bundesbank's earnings situation has improved only slightly on the year. The turnaround in interest rates and the associated key interest rate hikes in 2022 and 2023 have set many things in motion. Much like in 2023, the combination of long-term monetary policy securities - generating low levels of remuneration - on the assets side and short-term deposits remunerated at higher rates on the liabilities side was a source of considerable strain in 2024.

The burdens arising from interest rate risk are affecting us via two channels this year:

1. via our own securities holdings; and
2. via securities carried on the balance sheets of the other national central banks in cases where these securities are subject to income and risk sharing and are thus included in the pooling of monetary income among national central banks.

Now to the main items of our current profit and loss account:



The largest component of the profit and loss account isnet interest income. In bar 1, you can see that this has improved slightly, rising by €0.8 billion on the year. But at €13.1 billion, it is clearly in negative territory, as it was in the previous year.

Why is that so? As already touched upon, the monetary policy asset purchases have given rise to longer-term fixed interest positions (generating a low level of remuneration). The counterparts of these on the liabilities side of the balance sheet - after deducting banknotes in circulation - are short-term interest-bearing deposits of commercial banks. The mismatch in maturities has left an open euro interest rate position on the balance sheet. The significant increase in the deposit facility rate in 2022 and 2023 is continuing to cause interest rate risk from this open interest rate position to materialise - putting net interest income under strain.

Specifically, this means that while the remuneration of monetary policy securities increased only marginally (to 0.54% on average), credit institutions' monetary policy deposits resulted in a significant interest charge (of 3.81% on average for the year) owing to the higher deposit facility rate. This gives us a negative interest margin of -3.28% for 2024. On average for the year, this negative interest margin is actually up slightly on 2023 (-2.90%). However, maturing monetary policy securities, in particular, resulted in the open euro interest rate position being 22% lower on average for 2024, thus placing a lower burden on net interest income overall.

Realised gains arising from financial operations and write-downs related to foreign exchange and securities (bar 2) were, at €860 million, up by €467 million on the year on balance. Realised gains (mainly US dollars in the case of foreign exchange and US Treasury notes in the case of securities) - which were still coming under pressure from the stronger US dollar in the previous year - rose by €638 million to €1.2 billion in 2024.

At the same time, there were larger write-downs in the amount of €324 million. This is €171 million more than in the year before. While the need for write-downs on foreign exchange holdings was lower than in the previous year, there was a greater need for write-downs on securities holdings denominated in foreign currency, primarily as a result of higher capital market yields on US Treasury notes.

That brings me to monetary income. This comprises interest income from monetary policy assets, less interest paid on their counterpart liability items. In the Eurosystem, the resulting net interest income is shared according to the capital key.

At -€5.4 billion, the net result of pooling monetary income (bar 3) in 2024 was roughly the same as in the previous year. The lion's share is still attributable to redistribution effects relating to monetary policy supranational securities. These are securities issued by supranational institutions, such as the European Union. These securities were purchased by other national central banks as part of PSPP and PEPP purchases. The Bundesbank itself has no holdings. The Eurosystem's holdings came to an annual average of €398 billion. Income and risks are shared within the Eurosystem.

The supranational securities holdings generate only a low level of remuneration. Compared with the main refinancing rate, theinterest margin is thus negative at around -3.6% on an annual average for 2024. The lower income resulting from this for the affected national central banks is balanced out among the national central banks via the common pool of monetary income. Based on its capital share of 26.6%, the charge for the Bundesbank came to around €3.8 billion.

Staff costs (bar 4) in 2024 were down by €623 million to €1.5 billion. The decrease was caused by one-off effects in the previous year, in which additional transfers to staff provisions were necessary.

For 2024, this initially results in a loss for the year of €19.8 billion, which is €1.8 billion lower than the loss in 2023 before releasing the provision for general risk.

In the previous year, however, it was possible to offset the loss by fully releasing the provision for general risk of €19.2 billion (bar 6) and making withdrawals from reserves to the tune of around €2.4 billion (bar 7). By contrast, there are only reserves of just under €0.7 billion left available to offset the loss in the reporting year.

The profit and loss account for financial year 2024 thus closed with an accumulated loss of €19.2 billion, which will be carried forward to 2025.

## 4 Conclusion

I shall now conclude my remarks by summarising the main takeaways.

The financial burdens remained considerable in 2024. We expect the burdens to subside significantly as early as 2025. Nevertheless, they will remain considerable.

The open euro interest rate position will shrink further in size now that reinvestments under the PEPP have now also been phased out. Monetary policy securities holdings will become smaller as they mature. In addition, the negative interest margin will decrease because the lower deposit facility rate will reduce the interest expense for credit institutions' monetary policy deposits.

Overall, we expect to report losses and carry them forward for some time and that we will therefore be unable to distribute any profit for an extended period of time.

That brings me to the most important message of my speech today.



The Bundesbank has considerable assets. These are significantly in excess of its obligations. Our revaluation reserves, for instance, amount to €267 billion. Net equity comes to more than €250 billion.

In short, the Bundesbank can bear both the current and the foreseeable financial burdens. What this shows is that the Bundesbank remains able to fully discharge its tasks even with an accumulated loss.

The Bundesbank's balance sheet is sound.

Thank you.",Sabine Mauderer
https://www.bis.org/review/r250226c.htm,Joachim Nagel: Presentation of the Deutsche Bundesbank's Annual Report 2024,"Introductory statement by Dr Joachim Nagel, President of the Deutsche Bundesbank, at the press conference presenting the Annual Report 2024, Frankfurt am Main, 25 February 2025.",2025-02-25 00:00:00,"## Introductory statement

at the press conference presenting the Annual Report 2024

25.02.2025 | Frankfurt am Main | Joachim Nagel

Check against delivery.

- 1 Welcome
- 2 Need for economic policy action in Germany
- 3 Inflation in Germany
- 4 Inflation and monetary policy in the euro area
- 5 Annual accounts for 2024
- 6 Conclusion

## 1 Welcome

Ladies and gentlemen,

I would like to welcome you to our press conference, at which we will present our annual accounts.

First Deputy Governor Sabine Mauderer will explain our annual accounts to you in more detail in just a few moments.

To begin, however, I would like to take a look at current developments in economic activity and prices. I will then explain what conclusions I draw for our monetary policy stance. And, at the end of my statement, I will present the most important figures from our profit and loss account.

## 2 Need for economic policy action in Germany

Two days on from the snap Bundestag election, the election results are at the focus of attention among the media and the public as a whole.

There is a clear government mandate and a likely option for a coalition. In view of this, I hope that a new government will be formed swiftly.

I am sure that all of the parties involved are cognisant of their responsibility: Germany needs an effective government as soon as possible. A government that uses smart economic policy to enable the economy to get back on track. That puts the German economy on a path to higher growth. By ensuring greater certainty of planning and improving supply-side conditions.



At present, the German economy is in a state of stubborn stagnation. Real gross domestic product has seen practically no growth since 2018.

There was a rapid recovery from the sharp slump at the start of the coronavirus pandemic. Since then, however, the economy has been moving more or less sideways. Meanwhile, other countries such as the United States, but also many economies in the euro area, are on course for growth.

The sluggishness in the German economy cannot be explained by cyclical headwinds alone. Rather, structural problems play a key role.

In particular, export-oriented industry is under great pressure to adapt, which is due, amongst other factors, to the high prices for energy. In addition, it needs to be better prepared for the green transformation and absorb the impact of demographic change.

Furthermore, on global markets, German enterprises are facing growing competition from emerging market economies, which is intensified, in some cases, by subsidies. Many enterprises are also bemoaning the ever higher bureaucratic hurdles and the large fiscal burden required of them by the state. Not least, they are being hindered by the lack of political reliability.

While private consumption is bolstering economic activity, it is seeing only very subdued growth. One likely factor here is that the labour market is increasingly gloomy. However, the uncertain economic outlook is also contributing to households' reluctance to increase their consumer spending.

A slight economic recovery is expected over the course of the year. For the time being, however, no meaningful upswing is in sight. In addition, there are risks from international trade and geopolitics.

In any case, it is not possible to rule out a third consecutive calendar year with no growth. This makes it all the more important that the new Federal Government swiftly takes effective measures.

Germany continues to have strengths that should be leveraged and expanded upon: stable institutions; enterprises that remain financially sound and are adaptable and, in many cases, highly innovative; a highly skilled and dedicated workforce; and an abundance of clever and creative minds.

Smart, consistent and reliable economic policymaking can unleash a sense of change and increase the willingness for greater investment. I therefore hope that we will have a government that will rouse 'German Michel' from his slumber, to draw on an image from 'The Economist'.

We will soon be presenting the Bundesbank's proposals on how we can get the German economy on a path to growth. In this way, the Bundesbank is fulfilling its statutory mandate to support and advise the Federal Government on matters of economic policy.

## 3 Inflation in Germany

Our core mandate, however, is and remains to maintain price stability.



In Germany, the rate of inflation continued to fall last year: on an annual average, the rate of inflation according to the European Harmonised Index of Consumer Prices, or HICP (Harmonised Index of Consumer Prices), stood at 2.5 %.

Whilst it has fallen significantly compared with the preceding years, it is still noticeably above the medium-term target of 2 %. And it has risen again in recent months.

However, the uptick from 1.8 % in September to 2.8 % in January is not indicative of a new wave of inflation. Instead, it mainly reflects the sharp decline in energy prices at the end of 2023 and the associated base effect.

We therefore expect that the trend decline is intact and that inflation in Germany will continue to fall. We anticipate that Germany will see a sustainable return to a level of 2  % in 2026.

Despite the prospective price stability, people are still burdened by the issue of inflation.

Surveys show that the fear of rising costs of living remains one of the biggest concerns among people in Germany. And this is not surprising, either. [1]

After all, the shock of exceptionally high inflation has left a deep impression. And the decline in inflation rates does not, in fact, mean that prices will go back down again. Certain prices will fall, of course. But we need to get used to a higher level of prices overall.

Of course, another part of the bigger picture is that strong wage growth has now largely offset the inflation-related losses in real income.

Our Bundesbank Online Panel reveals that households are no longer feeling the financial burden of inflation as strongly this year as they did two years ago. However, a considerable proportion of people are still concerned or very concerned that the financial burdens on their household could become too high.

This figure stands at just under 40  %. And, among households with a monthly net income of less than €2,500, more than half are concerned. [2]

Personal experiences of high inflation have a long-lasting impact. For example, they influence inflation expectations for many years. And dissatisfaction about high prices and inflation can also be a political tinderbox. [3] [4]

## 4 Inflation and monetary policy in the euro area

This makes it all the more important for central banks to spare people the experience of high inflation as far as possible. And to decisively combat excessively high inflation.



This is precisely what we on the ECB (European Central Bank) Governing Council have done. Through a historically unprecedented monetary policy turnaround, we have helped to break the wave of inflation and keep inflation expectations anchored. The inflation rate in the euro area continued to fall last year, dropping to an average of 2.4  % for 2024.

Incoming data suggest that we are likely to reach our medium-term target of 2 % over the course of this year. This would allow us on the Governing Council to lower the key interest rates further.

At this point, we have lowered the deposit facility rate five times; it currently stands at 2.75 %. That is probably no longer all that far from the neutral rate of interest, though it is hard to pin down exactly what this rate is. In addition, we in the Eurosystem have progressed with our gradual shrinking of the balance sheet. [5]

Overall, then, the outlook for prices is fairly encouraging. However, the persistently elevated core inflation and the undiminished strength of services inflation warrant a degree of caution. This is especially true in light of the latest developments on the inflation front.



Headline inflation is now being driven primarily by services. Services inflation is, in any event, much more sluggish than that of components such as energy and food. For months now, it appears to be sticking to the 4 % mark.

Services make up nearly one-half of the statistical basket of goods. In order for headline inflation to fall to 2  %, services prices also need to rise less sharply. And that is precisely what we are expecting to happen, especially as wage pressures gradually recede in the euro area.

On the other hand, inflation could conceivably also come in higher than the current baseline scenario would suggest. If, for example, Europe feels compelled to respond to protectionist measures with retaliatory tariffs, this would be associated with rising import prices. As well as a further depreciation of the euro.

In view of the latest developments on the inflation front and given the high level of uncertainty, it is wise to take one step at a time in terms of monetary policy. And not to rush into further interest rate cuts.

With this in mind, the Governing Council would be well advised to remain true to its existing data-dependent, meeting-by-meeting approach, and not to pre-commit to a particular rate path. In the current uncertain environment, there is nothing to be gained from publicly speculating on where we might stand, in terms of our interest rate policy, in summer or at the end of the year.

## 5 Annual accounts for 2024

The monetary policy tightening, involving ten interest rate moves in a row and a rise of 450 basis points, has no precedent in the euro area. That is undeniable. But this restrictive monetary policy stance was appropriate and necessary in order to bring inflation under control.

In conjunction with the non-standard expansionary monetary policy measures taken previously, though, it also has significant implications for the Bundesbank's earnings situation. And that will remain the case for many years to come.

Which brings me to our annual accounts.

## Balance sheet as at 31 December 2024



| Assets                                                          | Liabilities                                                     | Liabilities                                                                   | Liabilities                                                                   | Liabilities         | Liabilities         | Liabilities   |
|-----------------------------------------------------------------|-----------------------------------------------------------------|-------------------------------------------------------------------------------|-------------------------------------------------------------------------------|---------------------|---------------------|---------------|
|                                                                 | Year-on-year change                                             | Year-on-year change                                                           |                                                                               | Year-on-year change | Year-on-year change |               |
| Foreign currency                                                |                                                                 | Monetary policy operations                                                    | Monetary policy operations                                                    |                     |                     |               |
| Monetary policy operations                                      |                                                                 | Euro balances of domestic and foreign depositors (liability items 3, 4 and 5) | Euro balances of domestic and foreign depositors (liability items 3, 4 and 5) |                     |                     |               |
| Euro-denominated securities                                     |                                                                 | Provisions                                                                    | Provisions                                                                    |                     |                     |               |
| TARGET                                                          |                                                                 | Other                                                                         | Other                                                                         |                     |                     |               |
| Other financial assets                                          |                                                                 |                                                                               | Revaluation                                                                   |                     |                     |               |
| Other                                                           |                                                                 | Net equity: (sum 250.6)                                                       | Capital and reserves                                                          |                     |                     |               |
|                                                                 |                                                                 |                                                                               | Accumulated loss                                                              | - 19.2              |                     |               |
|                                                                 | 2,372.6                                                         |                                                                               |                                                                               | 2,372.6             |                     |               |
| Amounts in € bn; discrepanciesin the totals are due to rounding | Amounts in € bn; discrepanciesin the totals are due to rounding | Amounts in € bn; discrepanciesin the totals are due to rounding               |                                                                               |                     |                     |               |

As a reminder: in the wake of the sovereign debt crisis, the inflation rate remained stubbornly and, at times, considerably below the target of 2 % for four years. The Eurosystem's monetary policy was therefore exceptionally loose for several years.

The key interest rates were lowered to zero and below. The Eurosystem offered refinancing operations at very attractive conditions, and banks made extensive use of these. Above all, it purchased securities on a large scale, government bonds in particular.

This resulted in a considerably expanded balance sheet: large holdings of low-interest, long-dated securities accumulated on the assets side. While short-term variable rate deposits rose on the liabilities side. This created substantial interest rate risk.



The Bundesbank was aware of this risk and built up a provision for general risk in the amount of just over €20 billion over a period of several years. The interest rate hikes in 2022 and 2023 caused this risk to materialise, and interest expenditure on the liabilities side rose rapidly. At the same time, interest income from the bond portfolios remained at a low level.

Thanks to the full release of the provision for general risk and the release of reserves, the Bundesbank managed to record a balanced result in financial year 2023. Distributable profit came to zero.



But that left just under €0.7 billion to cover further losses going forward. So it was on the cards that we would have to report an accumulated loss for 2024. I indicated as much at last year's annual accounts press conference. [6]

Another thing I hinted at last year was that the highest annual burdens would be behind us in 2024. And, indeed, at €19.8 billion, the loss figure for 2024 is lower than for 2023, when it totalled €21.6 billion. Subtracting the remaining reserves, this yields an accumulated loss of €19.2 billion for 2024, which will be carried forward to subsequent years and offset against future profits. [7]

Incidentally, the Bundesbank already recorded an accumulated loss back in the 1970s, most recently in 1979. So you see, dealing with such situations is nothing fundamentally new for us.

For 1974, for example, the Bundesbank recorded an accumulated loss of 8.9 billion Deutsche Mark. This was equivalent to just under 1 % of gross domestic product that year. By way of comparison, the accumulated loss for 2024 corresponds to just under 0.5  % of 2024 GDP (gross domestic product).

There are, of course, differences between then and now. The main factors shaping the situation back then are not the same as the ones that are at play nowadays.

The financial burdens are likely to be considerable again in the current year, but less so than in 2024. Because with key interest rates back on the decline and the balance sheet still shrinking, the earnings situation should improve considerably.

So peak annual burdens are likely to be behind us. However, losses are also to be expected for the next few years. The accumulated loss, an item in which the annual burdens from future periods will build up, will therefore increase for some years to come.

After that, profits can be expected once more. These will then be used to reduce the accumulated loss and subsequently to build up new risk provisioning.

Profit distributions to the Federal Government are therefore not a prospect for some time yet. Since we do not know how the key interest rates and the other framework parameters will evolve in the meantime, it would be unrealistic to give a specific date for when profit distributions will become possible again.



As unfortunate as it is that we cannot distribute profits, it must be stressed that the Bundesbank continues to have a sound balance sheet. It has high revaluation reserves. This is particularly true for gold.

The value of these reserves is many times greater than the current and prospective accumulated losses. And that value rose steeply last year.

Sabine Mauderer will present you with more precise figures in a moment.

The Bundesbank is fully unrestricted in its ability to act. We can and will continue to do all that is needed to ensure price stability.

## 6 Conclusion

Ladies and gentlemen,

European monetary policymakers are looking back on what has been an extraordinary decade: in view of the very low inflation, the monetary policy stance was initially very loose, with years of zero interest rate policy and extensive asset purchases. And then policymakers had to step heavily on the brakes in response to the inflation shock.

This has left its mark on the central bank balance sheet.

It will take some years before the impact on the Bundesbank's balance sheet has faded once and for all. Looking ahead to the long term, the Bundesbank will transfer profits to the Federal Government again in the future.

However, the most important thing is this: price stability is within reach.

I will now hand over to Sabine Mauderer. Thank you for your attention.

## Footnotes:

- See, for example, 1. Sicherheitsreport 2025 [https://www.sicherheitsreport.net/wpcontent/uploads/PM\_16.Sicherheitsreport\_2025.pdf]
- , survey conducted by the Institut für Demoskopie Allensbach, Stimmungslage in Deutschland - Sorgenbarometer
- , survey conducted by Ipsos, January 2025. [https://www.ipsos.com/de-de/meinungsumfragen/sorgenbarometer]
- Deutsche Bundesbank, Online Panel Households (BOP (Bundesbank Online-Panel)HH), results from January 2023 and January 2025. Question: 'How concerned are you that the financial burdens caused by inflation could become too high for your household in 2023/2025?' For households with a monthly net income of less than €2,500, 54 % are concerned. 2.
- Malmendier, U. and S. Nagel (2016), Learning from inflation experiences, The Quarterly Journal of Economics 131(1), pp. 53-87; D'Acunto, F., U. Malmendier and M. Weber (2022), What Do the Data Tell Us About Inflation Expectations?, 3.

NBER (National Bureau of Economic Research) Working Papers, No 29825, March 2022.

- Diermeier, M. and J. Niehues (2025), 4. (Überschätzte) Inflation: Potenziale für die politischen Ränder

[https://www.iwkoeln.de/fileadmin/user\_upload/Studien/Kurzberichte/PDF/2025/IW-Kurzbericht\_2025-Gefühlte-Inflation.pdf]

- , IW (German Economic Institute)-Kurzbericht 13/2025.
- Nagel, J. (2025), 5. r* in the monetary policy universe: Navigational star or dark matter?
- [https://www.bundesbank.de/en/press/speeches/r-in-the-monetary-policy-universenavigational-star-or-dark-matter--950660]
- , Lecture at the London School of Economics and Political Science, London, 12 February 2025.
- Nagel, J. (2024), 6. Introductory statement to the press conference presenting the Annual Report 2023
- , Frankfurt am Main, 23 February 2024. [https://www.bundesbank.de/en/press/speeches/introductory-statement-925324]
- Deutsche Bundesbank (2024), 7. Editierte Abschrift der Frage- und Antwortrunde anlässlich der Jahrespressekonferenz am 23.02.2024
- [https://www.bundesbank.de/de/aufgaben/themen/editierte-abschrift-der-frageund-antwortrunde-anlaesslich-der-jahrespressekonferenz-am-23-02-2024-925030]

.",Joachim Nagel
https://www.bis.org/review/r250226b.htm,Abdul Rasheed Ghaffour: Transforming banking and advancing sustainability,"Special luncheon address by Mr Abdul Rasheed Ghaffour, Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the 2025 ASEAN Banking and Finance Summit, Kuala Lumpur, 25 February 2025. ",2025-02-25 00:00:00,"## Abdul Rasheed Ghaffour: Transforming banking and advancing sustainability

Special luncheon address by Mr Abdul Rasheed Ghaffour, Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the 2025 ASEAN Banking and Finance Summit, Kuala Lumpur, 25 February 2025.

* * *

Since its inception 58 years ago, ASEAN has evolved to become a significant force in global trade, investment and diplomacy. ASEAN now stands as the world's fourthlargest economic bloc, with an estimated GDP of USD4.13 trillion.  Looking ahead to 1 2025, ASEAN is poised for another strong year. GDP is expected to grow by 4.7%, 2 significantly outperforming the global average. Much has been said about ASEAN's pivotal role in global supply chains, our geopolitical neutrality and our strategic location for global trade. However, ASEAN's driver for sustainable economic growth also comes from within: robust domestic consumption from a youthful demographic, strong growth of individual member states and increasing regional integration. In 2023, for example, intra-ASEAN trade accounted for 21.5% of the region's total trade in goods.

Let me touch briefly on Malaysia's growth outlook. After a strong performance last year, Malaysia is expected to record steady growth going into 2025 despite the challenging global environment. The diversified export structure will help cushion against external demand shocks. But, more importantly, key factors within the economy, particularly the robust expansion in investment activity and resilient household spending, will be important to drive growth this year. Exports are also expected to continue expanding with support from tech upcycle and forthcoming tourist arrivals. We acknowledge that the growth outlook is highly subject to risks from trade and investment restrictions. However, growth could potentially be higher from greater spillovers from the tech upcycle, more robust tourism activities and faster implementation of investment projects in the country.

The financial sector lies at the core of ASEAN's progress over the years. The sector acts as the central engine to our economy, facilitating financial flows within ASEAN. Indeed, over the last few decades, we have made progress in facilitating regional capital flows, connecting our payment infrastructure and introducing a framework to support the integration of our banking system through the ASEAN Banking Integration Framework (ABIF). However, the potential for intra-ASEAN investments remains untapped, and there is still much to be done to achieve regional regulatory coherence. My vision is for the financial sector to become the critical enabler for the next phase of economic integration under the ASEAN Economic Community (AEC) 2045. This would require the sector to strategically harness the three driving forces: funding, technology and talent.

## Mobilising funds to unlock new growth sectors, bridge financing gap and drive sustainable growth for ASEAN

Let's start with funding, which is a crucial driver of ASEAN economic growth. ASEAN is facing significant funding gaps that demand our urgent attention. Let me share a few

examples. The Asian Development Bank reports that ASEAN economies will need infrastructure investments of at least USD2.8 trillion from 2023 to 2030 to sustain economic growth, reduce poverty and respond to climate change. Key projects in the region that require large financing include the ASEAN Power Grid, which is pivotal to advancing the region's climate and energy security agenda, and various ASEAN highway and railway projects, such as the Asian Highway Network, which are cornerstones of regional economic development and integration. Our micro, small, and medium enterprises (MSMEs) also face a daunting financing gap, exceeding USD300 billion annually. 3

These figures underscore the urgent need for strategic investments and collaborative efforts to secure a resilient and sustainable future for ASEAN. This need is even more pressing in a region where over 90% of all social infrastructure development has traditionally relied on public resources, 4   and public funding faces increasing constraints. How, then, can the financial sector step in as a catalyst to crowd in diverse sources of funding and facilitate long-term investments to ensure sustainable economic expansion and build more resilient supply chains and communities?

This is where blended finance, the strategic use of public, private, and philanthropic finance sources and development finance, can be a critical tool to mobilise additional private capital flows toward sustainable development in ASEAN. The financial sector is pivotal in advancing blended finance to meet funding gaps in ASEAN, by enabling acceptable risk-taking levels based on various funding sources. This approach leverages the willingness of development finance and philanthropic funders, including sovereign funds within ASEAN to assume greater risk exposure, utilising tools like partial credit guarantees to attract additional investors. Multilateral development banks and development finance institutions play a critical role by offering concessional financing and technical assistance, which supports local companies in accessing capital markets and structuring deals, thereby encouraging participation by private financial institutions through co-funding arrangements.

I also believe that this is an opportunity for Islamic finance to demonstrate its unique role and impact. In recent years, Islamic finance has gained momentum within the ASEAN region. It offers alternative solutions to conventional financial structures through the use of risk sharing and social finance instruments that can be mobilised towards the development of productive economic sectors such as healthcare, transportation and green sectors. Notably, the deployment of blended capital using instruments such as waqf and zakat in Malaysia and a few neighbouring countries such as Indonesia and Brunei have significantly contributed to financial inclusion for the underserved and strengthened support for the MSMEs. An example of this is Malaysia's iTEKAD initiative, a social blended finance programme for low-income microentrepreneurs that provides social and commercial funding, which comes together with training and mentorship to empower them in generating sustainable income. In the capital market structure, Islamic finance has also been mobilised for infrastructure, climate and green projects. In Malaysia, for example, a total of USD56 billion of sukuk was issued in 2023 to fund real economic sectors with a high concentration in renewable energy and green real estate.

Embracing innovative financing structures will involve navigating various complexities that demand careful consideration, collaboration and adaptation. Hence, advancing

capacity building within the financial sector is very crucial. In Malaysia, the Joint Committee on Climate Change (JC3) continues to serve as a key focal point in supporting the financial preparedness for climate change. As part of Malaysia's ASEAN Chairmanship in 2025, Bank Negara Malaysia is committed to supporting the region's transition efforts. During the ASEAN Finance Ministers and Governors Meeting week from 7 to 10 April this year in Kuala Lumpur, we will host several side events to advance these discussions. These events include a closed-door investor roundtable focused on innovative financing solutions for sizeable ASEAN green and transition projects, as well as pitching sessions on sustainable ASEAN Projects. We invite the financial industry to contribute and participate in these events.

## Responsible deployment of technology in financial services is key to maximise its potential while minimising risk

Ladies and gentlemen,

There is an immense potential for ASEAN to also leverage technology. This is the second point. With a median age of about 30 and a substantial portion under 35, 5 ASEAN's population is digitally proficient. Indeed, the adoption of digital financial services can be a game-changer in addressing challenges within the region, which include to better serve the needs of large unbanked and underbanked populations in our region.

The outlook for digital financial services in ASEAN is very bright. Through innovations such as mobile wallets, digital payments and micro-lending, digital finance is expanding access to financial services for individuals who previously had limited options. These services are not just filling gaps - they are creating new pathways to financial inclusion, thereby allowing individuals to save, invest and access credit with unprecedented ease.

While digital financial services hold tremendous promise, it comes with its own set of risks. Today's technological advances are progressing at an unprecedented pace, making our response to these developments very crucial. For financial institutions, deployment of technology must be done thoughtfully and responsibly with holistic consideration of the impacts and value to the broader environment and community. This unwavering commitment to enhance financial services and preserve consumer confidence includes addressing cybersecurity risks, strengthening climate resilience, promoting financial literacy and ensuring that digital financial services are secure and accessible to all segments of society.

As regulators, our commitment is for our policies to strike a balance between embracing technological innovation and, at the same time, preserving financial stability. Our Regulatory Sandbox allows for experimentation and contributes to the recalibration of regulatory policies such as eKYC. We also adapt our regulations to welcome new players into the market, those that have strong value propositions on inclusion, as demonstrated by the issuance of our licensing and regulatory framework for digital banks and digital insurers and takaful operators.

Investing in talent strategies that not only creates a more agile and adaptive workforce, but also paves the way for regional talent mobility

Let me move on to the third point. At the heart of economic growth and development lies talent. ASEAN is blessed with a vibrant, young and dynamic workforce. To capitalise on this potential, the financial sector will need to create an environment that nurtures the next generation of leaders and innovators in finance who carry a unique ASEAN identity - one that is not only tech-savvy, but also adept at navigating the complexities of regional regulations and global economic shifts while championing social equity and environmental sustainability.

I would like to also take this opportunity to share Malaysia's efforts in developing talent in our financial sector. In July last year, the industry launched the Financial Sector Future Skills Framework, and this is to empower individuals to take charge of their professional development, while creating new talent pipelines and succession pools. I reiterate the call I made during the launch of the framework for the industry to work closely with training institutes, professional bodies and industry associations to ensure that training programmes meet the established quality assurance standards and set high standards in new skill areas.

Complementing this is a dynamic talent development hub, offering tailored learning programmes and certifications. For example, the Financial Sector Talent Enrichment Programme (FSTEP) targets fresh graduates interested in launching their career in financial services, while globally recognised financial certifications are available for seasoned professionals.

Malaysia is also home to regional research and learning hubs such as the SEACEN Centre and is recognised globally as a leader in Islamic finance. With a multitude of wellestablished talent development institutions and capacity-building providers in Islamic finance, we offer a fertile ground for nurturing specialised skills and thought leadership in this field.

To truly capitalise on the large working-age population in ASEAN, we need to go beyond domestic efforts. Financial institutions across the region should pursue collaborative initiatives that enhance talent mobility, such as through mutual recognition of qualifications and expertise sharing. ABIF can also be leveraged to intensify efforts to promote greater regulatory coherence through capacity-building initiatives. By doing so, we can improve connectivity across ASEAN markets, paving the way for a more integrated and resilient future for the region.

In closing, today's discourse reaffirms the financial sector's commitment to turning AEC 2045 into a reality. The challenge lies in ensuring that the ASEAN financial sector has the capacity to do so by mobilising funds, leveraging technology, and developing regional talent.

As I conclude my speech, I leave you with a thought from Peter Drucker: 'The best way to predict the future is to create it.' Together, let's create a future where the financial sector empowers ASEAN's growth and integration. On that note, I wish you all productive discussions during the rest of the Summit.

1  ASEAN in the Global Economy: A Half-Century Journey

## 2 ASEAN Outlook 2025

- 3 MSMEs In ASEAN: Addressing The Financing Gap - OpEd - Eurasia Review
- 4 Q&amp;A: Innovative Financing Can Help Bridge Southeast Asia's Infrastructure Financing Gap | Asian Development Bank
- 5  WEF ASEAN Youth Survey 2020 Report",Abdul Rasheed Ghaffour
https://www.bis.org/review/r250226a.htm,Michael S Barr: Managing financial crises,"Speech by Mr Michael S Barr, Vice Chair for Supervision of the Board of Governors of the Federal Reserve System, at the Yale School of Management, Program on Financial Stability, New Haven, Connecticut, 25 February 2025.",2025-02-25 00:00:00,"For release on delivery 11:45 a.m. EST February 25, 2025

Managing Financial Crises

Remarks by

Michael S. Barr

Vice Chair for Supervision

Board of Governors of the Federal Reserve System at

Yale School of Management Program on Financial Stability

New Haven, Connecticut

February 25, 2025

Thank you for the opportunity to speak to you today. 1 I note that the objectives of the Program on Financial Stability include 'supporting the world's financial authorities in refining proven crises management tools and strategies.' 2 Speaking as a representative of one of those authorities, I thought I would further the program's goals by focusing these remarks on the principles and practice of crisis management.  I am favored in that task with what one might call the luck of having been regularly confronted with crises in each of my three stints as a public servant, over a career divided between government and academia.  In noting how often my arrival in government was accompanied by crisis, it might be reasonable to wonder if this is correlation or causation.

Kidding aside, crisis management is central to all management because it demands the very best from managers when it is most needed.  Anyone who spends time in government can expect that some of the most memorable and challenging experiences will be managing through tough situations, when the answers to problems are unclear but the mission of the organization comes into acute focus.  The financial system is in a perpetual state balancing risk and reward. Sometimes the system falls out of balance, and vulnerabilities turn into stress or even crisis.  This moment is when it is crucial to mitigate spillovers from the financial system that can hurt businesses and households and wreak havoc on the economy at large.

Some of the most important features of modern economies were developed to prevent and mitigate financial crises.  The first central banks, and eventually the Federal Reserve, were created to provide stable currencies and banking systems in support of the long-term stability of the provision of credit necessary to foster growth and rising living standards.  Regulation of

1 The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.

2  See Yale School of Management, Program on Financial Stability (2025), 'About the Yale Program on Financial Stability,' webpage, paragraph 1, https://som.yale.edu/centers/program-on-financial-stability/about.

financial markets, regulation and supervision of banks, federal deposit insurance, and laws to protect investors, consumers, and businesses were developed over time to promote both financial stability and durable economic growth.  I have spoken previously about how monetary policy and financial stability are inextricably linked and how the tools we use to conduct monetary policy and support financial stability work together. 3

In the spring of 2023, the United States faced the prospect of a spiraling stress event, when poor management and excessive risk-taking by Silicon Valley Bank (SVB) led to a run that quickly spread to other banks and threatened the wider banking system.  Shortcomings in supervision and gaps in the regulatory framework also contributed to SVB's failure, and I've spoken about the steps the Federal Reserve has taken to improve supervision and other steps to close regulatory gaps. 4 Today, I'd like to talk about how effective management of the banking stress in the spring of 2023 helped prevent that event from spiraling into a financial crisis.

Given our student audience, I will begin with a little background on how I got into the crisis management business.  After Yale Law School and two court clerkships, I worked at the State Department and then went to work for Treasury Secretary Bob Rubin in 1995.  When I arrived, the Treasury Department had helped Mexico deal with a financial crisis that threatened to spread to the United States, and additional crises were to come in 1997 in Asia and in 1998 in

3 See, for example, Michael S. Barr (2023), 'Monetary Policy and Financial Stability,' speech delivered at the Forecasters Club of New York, New York, October 2,

https://www.federalreserve.gov/newsevents/speech/barr20231002a.htm; and Michael S. Barr (2024), 'The Intersection of Monetary Policy, Market Functioning, and Liquidity Risk Management,' speech delivered at the 40th Annual National Association for Business Economics (NABE) Economic Policy Conference, Washington, February 14, https://www.federalreserve.gov/newsevents/speech/barr20240214a.htm.

4 See Michael S. Barr (2023), 'Supervision and Regulation' testimony before the Financial Services Committee, U.S. House of Representatives, Washington, May 16,

https://www.federalreserve.gov/newsevents/testimony/barr20230516a.htm.  Also please see Michael S. Barr (2024), 'Supervision with Speed, Force, and Agility,' speech delivered at the Annual Columbia Law School Banking Conference, New York, February 16, https://www.federalreserve.gov/newsevents/speech/barr20240216a.htm.  For more on bank supervision, see 'Understanding Federal Reserve Supervision,' available on the Federal Reserve Board's website at https://www.federalreserve.gov/supervisionreg/understanding-federal-reserve-supervision.htm.

Russia.  Together, these events credibly threatened a worldwide financial crisis, which was averted by a response across the U.S. government and coordinated with governments and lending institutions around the world.  I left government for academia in 2001 and then returned to Treasury in 2009 under Secretary Tim Geithner, in the midst of the Global Financial Crisis (GFC).  I worked to develop what became known as the Dodd-Frank Act.  This law was a pivotal component of our response to the GFC by addressing gaps in financial market oversight, including through strengthened regulation and supervision of banks that increased the safeguards against the excessive risk-taking that caused the crisis.  I went back to academia again in 2011 and then returned to public service as the Federal Reserve Board's Vice Chair for Supervision in July 2022.  In this position, I oversaw the response to the bank failures in March 2023 and have helped develop ways to reduce these and other risks going forward.

## The March 2023 Banking Stress

Let me review some facts about what happened, so you can understand the context for how we put crisis management principles and practices to work.

SVB failed because of a textbook case of mismanagement of interest rate and liquidity risk. 5 This mismanagement made uninsured depositors lose confidence in the bank's solvency, so they ran.  While this was a textbook case, the speed and severity of the run were unprecedented.  The largest previous bank failure before SVB was of Washington Mutual in

5 See Board of Governors of the Federal Reserve System, Office of Inspector General (2023), Material Loss Review of Silicon Valley Bank (Washington:  September 25), https://oig.federalreserve.gov/reports/board-material-lossreview-silicon-valley-bank-sep2023.pdf.  Immediately following SVB's failure, Chair Powell and I agreed that I should oversee a review of the circumstances leading up to SVB's failure.  We published the results of this review on April 28, 2023; see Board of Governors of the Federal Reserve System, Review of the Federal Reserve's Supervision and Regulation of Silicon Valley Bank (Washington:  Board of Governors, April), https://www.federalreserve.gov/publications/files/svb-review-20230428.pdf.

2008. 6 The accumulation of stresses that resulted in Washington Mutual's failure occurred over several weeks.  By contrast, SVB's deposit outflows were much greater in both relative and absolute terms, and they occurred in less than 24 hours.  On top of that, the bank had major gaps in its liquidity risk management, including its preparedness to tap contingency liquidity. 7

Because this discussion is for future first responders, I will share with you some detail about what it's like to be on the front lines working to address a bank run.  On the morning of Thursday, March 9, 2023, SVB had only a little over $5 billion in collateral pledged to the discount window, as compared to over $150 billion in uninsured deposits. 8 Around midday, the firm contacted the Federal Reserve, indicating that it wanted to take out a discount window loan against this collateral, and the loan was granted. But in the next several hours, its account was drained as its deposit outflows spiraled.  In the late afternoon, the firm indicated that it would need additional liquidity to meet expected outflows.  The Federal Reserve worked with the firm to help it identify additional assets it could pledge to the discount window, but SVB was unsuccessful in identifying and moving sufficient collateral.  Fed staff worked with the firm through the night to establish ad hoc collateral arrangements, so that the firm could tap the discount window further to meet its liquidity needs in the morning.

While this process was happening overnight, however, the volume of online deposit withdrawal requests was growing, such that SVB management expected outflows of over

6 See National Commission on the Causes of the Financial and Economic Crisis in the United States (2011), The Financial Crisis Inquiry Report (Washington:  Financial Crisis Inquiry Commission, January),

https://www.govinfo.gov/content/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf; and Federal Deposit Insurance Corporation (2017), Crisis and Response:  An FDIC History, 2008-2013 (Washington:  FDIC), https://www.fdic.gov/publications/crisis-and-response-fdic-history-2008-2013.

7 For instance, the bank failed its own internal liquidity stress tests and did not have workable plans to access liquidity in times of stress.  The bank changed its own risk-management assumptions to reduce how these risks were measured rather than fully addressing the underlying risks.  See Review of the Federal Reserve's Supervision and Regulation of Silicon Valley Bank (note 5).

8 See Review of the Federal Reserve's Supervision and Regulation of Silicon Valley Bank (note 5).

$100 billion the next day, an unprecedented sum. 9 Even if the bank were able to pledge all collateral available that morning to the discount window, the firm would not have been able to meet its obligations.  It was not viable.  The state of California closed the bank and turned it over to the Federal Deposit Insurance Corporation (FDIC) for resolution.

SVB's failure contributed to the strains at FDIC-supervised Signature Bank, and that bank failed in short order.  As the situation intensified, the effects on businesses and households became increasingly apparent.  Critically, these failures caused a reassessment of the viability of uninsured deposits as a funding source across the banking system.  But strains at other banks materialized despite material differences between these firms.  The rapidity of equity market price declines for several banks triggered repeated trading halts for their shares.  Online deposits began to migrate out of smaller banks to larger banks, putting pressure on these smaller institutions. 10 Commercial customers that had remaining deposits at SVB after it failed realized that they would not have access to their deposits and thus wouldn't be able to make payroll or even stay in business. 11

The severity and rapidity of the spread of stress warranted a decisive response.  We developed a two-part strategy that weekend.

On March 12, the Treasury Secretary, the FDIC, and the Federal Reserve announced that the FDIC would protect uninsured deposits at SVB and Signature Bank under the systemic risk

9 See Review of the Federal Reserve's Supervision and Regulation of Silicon Valley Bank, p. 7 (note 5). 10  See Stephan Luck, Matthew Plosser, and Josh Younger (2023), 'Bank Funding during the Current Monetary Policy Tightening Cycle,' Federal Reserve Bank of New York, Liberty Street Economics (blog), May 11, https://libertystreeteconomics.newyorkfed.org/2023/05/bank-funding-during-the-current-monetary-policytightening-cycle.

11 See Berber Jin, Katherine Bindley, and Rolfe Winkler (2023), 'After Silicon Valley Bank Fails, Tech Startups Race to Meet Payroll,' Wall Street Journal , March 11,

https://www.wsj.com/articles/after-silicon-valley-bank-fails-tech-startups-race-to-meet-payroll-

4ebd9c5c?mod=article\_inline.

exception to least-cost resolution. 12 This action essentially implied that all depositors, insured and uninsured, would have access to their deposits Monday morning.  And the step helped calm uninsured depositors around the country.

Also on March 12, the Federal Reserve established the Bank Term Funding Program (BTFP) under its emergency lending authority with the approval of and a backstop from the Treasury. 13 The BTFP's terms and conditions addressed the fundamental source of bankingsector jitters:  questions about the ability of a range of banks to hold onto their high-quality securities that had lost value because of interest rate increases.  Unrealized losses on securities portfolios were a problem for many banks, particularly when the stability of their deposit bases came into question.  The BTFP provided stable funding for these high-quality assets, addressing these concerns.  Specifically, the BTFP provided one-year loans to banks in sound financial condition against Treasury securities and agency securities, valued at par.

By doing so, the BTFP addressed banks' immediate concerns about the stability of their funding and mitigated the risk that banks would be forced to liquidate assets in a fire sale, locking in losses.  BTFP advances provided confidence that banks would have sufficient funding to retain the securities on balance sheet.  The program supported confidence among depositors that their banks would have ready access to sufficient cash to meet their needs, thus helping reduce concern that a self-fulfilling panic could cause additional bank runs.

12 See Department of the Treasury, Board of Governors of the Federal Reserve System, and Federal Deposit Insurance Corporation (2023), 'Joint Statement by Treasury, Federal Reserve, and FDIC,' joint press release, March 12, https://www.federalreserve.gov/newsevents/pressreleases/monetary20230312b.htm.

13  See Board of Governors of the Federal Reserve System (2023), 'Federal Reserve Board Announces It Will Make Available Additional Funding to Eligible Depository Institutions to Help Assure Banks Have the Ability to Meet the Needs of All Their Depositors,' press release, March 12,

https://www.federalreserve.gov/newsevents/pressreleases/monetary20230312a.htm; and Board of Governors of the Federal Reserve System (2025), 'Bank Term Funding Program,' webpage,

https://www.federalreserve.gov/financial-stability/bank-term-funding-program.htm.

Usage of the BTFP was widespread across the banking sector, both in terms of actual usage and from a contingency standpoint.  For example, at its peak, BTFP borrowing exceeded $160 billion, and collateral posted to the BTFP reached nearly $540 billion, suggesting that banks saw value in being prepared and having capacity to tap the facility if necessary.  Over 1,800 institutions borrowed from the program, and the bulk of the borrowing was among institutions with less than $10 billion in assets.  These smaller institutions took out 50 percent of loans by value and nearly 95 percent of loans by volume.  Fed staff analysis showed the usage was more likely among institutions that had experienced deposit outflows, but usage was also widespread at firms that did not experience outflows.  The broad-based actual and contingency use was consistent with Federal Reserve communications that the program was part of prudent liquidity management and that we encouraged all depository institutions to use the program.  Now, about two weeks before all remaining outstanding BTFP loans are set to mature, the program is down to less than $200 million, and the program has experienced no losses. 14

Our response to the stress worked.  After the announcement of the systemic risk exception and the BTFP in early March, signs of broad-based contagion subsided, and the system stabilized.  While in the first two weeks of March midsize and regional banks experienced significant outflows of deposits, the acute phase of outflows had eased by the end of the month. Stability among banks that had earlier come under pressure didn't mean that every bank found its footing, but the process of dealing with balance sheet gaps was much smoother and spillovers remained contained.  By the fall of that year, deposit flows had fully stabilized and midsize and regional banks saw deposit inflows on net.

14 See Board of Governors of the Federal Reserve System (2025), Statistical Release H.4.1, 'Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks' (February 20), https://www.federalreserve.gov/releases/h41/20250220.

## Managing Additional Stress beyond Silicon Valley and Signature Banks

While the announcement of the systemic risk exception and the BTFP on March 12, 2023, helped stabilize banks in the United States, we were also continuing to manage stress in the global financial system in cooperation with relevant authorities.

Credit Suisse, a Swiss global systemically important banking organization, had been experiencing stress over several years before March 2023, with doubts about its future viability after the Archegos Capital Management and Greensill Capital scandals had tarnished its reputation and raised doubts about its business model.  Stress and outflows at Credit Suisse picked up in the fall of 2022, and we spent many months working with Swiss, European, and U.K. regulators on how to manage the growing issues, including war-gaming potential resolution scenarios.  Concerns about the firm's viability accelerated on March 9, 2023, when it was forced to announce that its internal controls over financial reporting were ineffective and had been for several years.  Though Credit Suisse continued to operate, it became apparent that the firm was in trouble in the week following the failures of SVB and Signature Bank.

Just one week after SVB failed, Swiss authorities arranged for Credit Suisse to be acquired by UBS in a weekend deal that involved triggering Credit Suisse's contingent convertible capital instruments, a severe dilution of shareholders, and the removal of senior bank management, as well as emergency liquidity support and extraordinary loss sharing from the Swiss government. 15 In a sense, Credit Suisse had failed very slowly over many months-even years-and then all at once.

15 See Michael S. Barr (2023), 'The Importance of Effective Liquidity Risk Management,' speech delivered at the ECB Forum on Banking Supervision, Frankfurt, Germany, December 1, https://www.federalreserve.gov/newsevents/speech/barr20231201a.htm.

The combination of these events involved coordination across U.S. and foreign jurisdictions, with careful monitoring and cooperation to identify risks to financial stability and to monitor spillovers to the U.S. and European banking systems.

Back in the United States, we worked with our domestic counterparts as a handful of additional banks remained under pressure in the months that followed.  Notably FDICsupervised First Republic Bank was closed on May 1, 2023.  First Republic had also experienced tremendous stress in March, as it suffered deposit outflows of nearly 20 percent in a single day. 16 First Republic withstood these outflows in part because of significant discount window lending, as well as the extraordinary coordination among several other banks that placed significant deposits at the bank-worth $30 billion.  But over time, it became clear that First Republic's rapid and large deposit outflows and unrealized losses on loans and securities would lead to its failure as well. 17

While these were the events that got the headlines, the Federal Reserve continuously monitored other banks with potential balance sheet vulnerabilities, including those with gaps in interest rate and liquidity risk management, as well as significant exposures to office commercial real estate.  We worked with these firms to ensure they addressed their vulnerabilities, while they bolstered their liquidity positions to manage potential stress.  For example, overall, from March 2023 to March 2024, banks of all sizes and condition, including many not under direct stress, pledged more than $1 trillion in additional collateral to the discount window.  Banks and supervisors took a wide variety of steps to shore up resilience throughout the system.

16 See Michael S. Barr (2024), 'On Building a Resilient Regulatory Framework,' speech delivered at Central Banking in the Post-Pandemic Financial System 28th Annual Financial Markets Conference, Federal Reserve Bank of Atlanta, Fernandina Beach, Florida, May 20,

https://www.federalreserve.gov/newsevents/speech/barr20240520a.htm.

17 See Federal Deposit Insurance Corporation (2023), FDIC's Supervision of First Republic Bank, (Washington: FDIC, September 8), https://www.fdic.gov/news/press-releases/2023/pr23073a.pdf.

## Principles and Practices for Managing Financial-Sector Stress

When a crisis hits, the stakes are high.  In the GFC, millions of Americans lost their homes, their jobs, and their dreams for their futures, when savings for education and retirement disappeared with the collapse of asset prices. 18 The contraction in credit hurt small businesses and families all across the country.  When banks can't carry out their role in supplying credit to those who need it, the effects are severe and widespread.

With those stakes in mind, here are five key principles that I learned in my experiences managing financial crises.

First, crisis response needs to be forceful.  The factor that transforms a series of unfortunate events into a self-sustaining crisis is the belief that there is no end in sight and no prospect of a sufficient response.  While we could debate whether every aspect of the GFC response was necessary, one clear lesson from this experience, and from other crises I have been involved in, is how important it is that the response be forceful enough to convince market participants and the broader public that there is a capability and the will to overcome the crisis.

A second principle is that the response should be proportionate.  While a forceful response is important to bolster confidence in the prospects for gaining control over the crisis, the response also must avoid shaking confidence by suggesting that conditions are worse than they seem.  In a crisis, information is spread unevenly.  A response that is out of proportion-for example, by touching aspects of the financial system not considered endangered-can be misinterpreted as providing vital information about the extent of vulnerabilities.

Another key component of crisis management is the need to engage in decisionmaking amid significant uncertainty.  I explained how the response needs to be both forceful and

18 See National Commission on the Causes of the Financial and Economic Crisis, The Financial Crisis Inquiry Report (note 6).

proportionate.  Finding this balance requires making tough judgments amid rapidly evolving conditions.  Crisis managers need to make consequential decisions quickly with the recognition that their understanding of the facts is incomplete.  Even the best of efforts to understand what is happening and what is needed will be unsatisfactory in the moment.  Decisionmaking under these conditions takes some courage.  It also takes humility:  the ability to listen to others around you, gather different perspectives, and weigh the imperfect information in real time.

A fourth principle is the need for clear communication-internally to the teams working on the response and externally to the public.  And these communications need to be consistent with each other and with the values of the institution, even if tailored to the particular audience. Clear internal communication provides direction to the crisis response teams and facilitates coordination across relevant public-sector actors.  Clear external communication, when grounded in a realistic assessment of the situation, can calm markets and reassure the public about the strategy.  And clear communication is a two-way street:  It involves listening to internal and external perspectives, as well as speaking in a way that can be heard.

And that brings me to the fifth principle I would cite, which is accountability.  Financial crises come about because of a lack of confidence in counterparties and among other participants in the financial system.  It is crucial for crisis responders to be credible and accountable not only for assessing the root causes of the crisis, but also for addressing these causes and the aftermath. That requires staying focused on the long-term goals for reform even as crisis management remains critically important and urgent. 19

19 I have discussed some thoughts on leadership attributes in previous speeches, including here:  Michael S. Barr (2024), 'Commencement Remarks,' delivered at the American University School of Public Affairs Graduation Ceremony, Washington, May 10, https://www.federalreserve.gov/newsevents/speech/barr20240510a.htm.

## Practices for Effective Management under Periods of Stress

These are important principles, and I will talk a little bit about some of the practices we used as we were guided by these principles.  One crucial component of successful management of a stress event is to gather the most relevant information as quickly as possible.  In a large and complex organization, it is necessary to overcome barriers to information flow across functions. In the case of the March 2023 banking stress, we drew from across the functions of the central bank to gather real-time information necessary to assess the severity of the conditions facing troubled institutions and also to identify potential levers of response.

Supervisors generally have real-time information from a bank as it undergoes stress, but this information needs to be put into context with foundational knowledge about the firm, such as the current structure of its balance sheet and typical payment flows.  While we managed an influx of reports about deposit flows at banks, it was important to be able to immediately put the size of the outflows in context and corroborate anecdotal reports against multiple sources, including from our own systems.  Our next step is to assess a firm's capacity to weather additional stress.  First responders can assess if the firm has maximized the liquidity potential of its assets, including through its relationships with liquidity providers.  And one needs to assess these firms' connections to the rest of the financial sector and identify interlinkages and spillovers.  Leaning on experts who engage in broader monitoring of financial markets and engage in outreach with well-established contacts can be important.  A team of staff who have the capacity to think broadly across the institution and draw on the partnerships they have built with a range of business lines is necessary to support the kind of information gathering and strategizing that are crucial for consequential decisions.  This is why an institutional culture that

supports curiosity and openness to ideas and inquiry from the most junior to the most senior staff is foundational.

Earlier I mentioned the principle of needing to be accountable to the public about the sources of the crisis and to address the underlying vulnerabilities that led to it.  On March 13, 2023, in consultation with Chair Powell, I requested a review of the failure of SVB.  Selfevaluation is the first step in any sound risk-management framework.  Experienced career staff from across the Federal Reserve System who were not involved in SVB's supervision reviewed the reasons for the bank's failure. 20 The review helped identify where the supervisory and regulatory functions of the Federal Reserve could be improved.  Additional reviews by external independent parties, which we welcomed, reached similar conclusions. 21 More broadly, carefully considering the underlying vulnerabilities that contributed to the stress helped the Fed develop proposals for how the supervisory and regulatory framework could be improved. 22

## Conclusion

No leader looks forward to managing through a crisis, but those who hope to be good leaders need to be good crisis managers.  These are skills that are most effectively developed through hard experience, but we can also learn from those who have gone through the experiences.  In my case, the lessons of dealing with financial crises as a government official have revealed to me some basic principles that I believe can be useful to crisis managers.  I have also learned that the best crisis management occurs beforehand, by strengthening rules and

20 See Board of Governors of the Federal Reserve System (2023), Vice Chair Barr for Supervision's 'Review of the Federal Reserve's Supervision and Regulation of Silicon Valley Bank - April 2023:  Key Takeaways,' webpage, https://www.federalreserve.gov/publications/2023-April-SVB-Key-Takeaways.htm.

21  See Government Accountability Office (2023), 'Bank Regulation:  Preliminary Review of Agency Actions Related to March 2023 Bank Failures' (Washington:  GAO, May 11),

https://www.gao.gov/products/gao-23-106834; and Board of Governors, Office of Inspector General, Material Loss Review (note 5).

22 See Barr, 'On Building a Resilient Regulatory Framework' (note 16).

norms and other structures meant to reduce the risk of a crisis in the first place and by fostering organizational values and culture that will help manage a crisis when it comes.

Thank you. i

i  Note: On February 25, 2025, the announcement date of the Bank Term Funding Program's creation was updated to March 12, 2023.",Michael S Barr
https://www.bis.org/review/r250305e.htm,Shinichi Uchida: Japan's economy and monetary policy,"Speech by Mr Shinichi Uchida, Deputy Governor of the Bank of Japan, at a meeting with local leaders, Shizuoka, 5 March 2025. ",2025-03-05 00:00:00,"

March  5,  2025

Bank  of  Japan

## Japan's Economy and Monetary Policy

Speech at a Meeting with Local Leaders in Shizuoka

## UCHIDA Shinichi

Deputy Governor of the Bank of Japan

(English translation based on the Japanese original)

## Introduction

It  is  my  pleasure  to  have  the  opportunity  today  to  exchange  views  with  leaders  in administrative, economic, and financial areas in Shizuoka Prefecture. I would like to take this chance to express my sincere gratitude for your cooperation with the activities of the Bank of Japan's Shizuoka Branch. Before hearing from you, I will explain Japan's economic activity and prices, as well as the Bank's conduct of monetary policy.

## I. Developments in Economic Activity and Prices Current Situation of Economic Activity and Prices

I will start by talking about developments in economic activity and prices. Please take a look at Chart 1. Japan's economy has recovered moderately, although some weakness has been seen in part. It is expected to keep growing at a pace above its potential growth rate.

Let  me  move  on  to  Chart  2.  Corporate  profits  have  been  on  an  improving  trend.  In  this situation,  business  fixed  investment  plans  in  the  December  2024 Tankan (Short-Term Economic Survey of Enterprises in Japan) indicate that the year-on-year rate of increase in planned investment for fiscal 2024 is over 10 percent. Although some projects had to be postponed due to labor shortages in construction, this means that the increase in business fixed investment is likely to continue for an extended period.

Turning to Chart 3, private consumption has been on a moderate increasing trend. This is attributable to an accelerated rate of increase in employee income on the back of base pay hikes  and  a  rise  in  bonuses.  Anecdotal  information,  various  surveys,  and  other  sources collected  so  far  suggest  that,  in  the  annual  spring  labor-management  wage  negotiations currently in process, wages are likely to continue rising steadily, following last year's solid wage increases. This is also expected to support private consumption.

Please take a look at Chart 4. The year-on-year rate of increase in the consumer price index (CPI) for all items excluding fresh food had decelerated, as the effects of a pass-through to consumer prices of cost increases led by the past rise in import prices waned. However, the rate has accelerated again recently, due to factors such as a rise in the price of rice. As for the outlook, the year-on-year rate of increase in the CPI (all items less fresh food) is expected to

slow down toward 2 percent. It is likely to be in the range of 2.5-3.0 percent for fiscal 2024, at around 2.5 percent for fiscal 2025, and at around 2 percent for fiscal 2026. This is based on the projection that the effects of cost-push factors will continue to wane, although there will  be  ongoing  moves  to  pass  on  higher  costs  to  prices,  including  increased  personnel expenses reflecting wage hikes.

## Relationship between Prices, Wages, and Private Consumption

Please take a look at Chart 5. In forecasting economic activity and prices, the most important aspect on the domestic demand side is the relationship between wages and prices, which are both rising, and their impact on private consumption. The year-on-year rate of increase in the CPI has remained above 2 percent for nearly three years, since exceeding 2 percent in April 2022. Simply adding up the increase over the three years on a fiscal year basis yields an increase in the CPI of 8.4 percent. In comparison, nominal wages for full-time employees, on a basis that includes bonuses, have increased by 8.3 percent. Wages have finally caught up with inflation, buoyed by the high wage hikes earlier this fiscal year. That said, wage growth should  essentially  exceed  the  rise  in  prices,  reflecting  productivity  growth.  My  hope, therefore, is for wages to rise further this spring.

Meanwhile, from a slightly more micro-level perspective, the situation in the corporate sector varies depending on individual circumstances, such as between large firms and smaller firms. The third and fourth rows of the table in Chart 5 show that the increase in hourly wages for part-time workers and in the minimum wage has exceeded the figure in the second row. Faced by such a situation in the labor market, smaller firms need to carry out relatively high wage hikes  to  attract  people  to  their  workforce.  Such  differences  have  been  seen  within  the household sector as well, such as the starting salaries of new graduates and the wages of younger workers rising at a high rate, while the wages of middle-aged and older workers have risen at a lower rate. Moreover, structurally, the older generation is less likely to benefit from wage increases since their income mainly consists of pensions.

Let  me  move  on  to  Chart  6.  While  it  is  difficult  to  generalize,  as  it  is  mainly  the  older generation that owns assets in Japan, credit card data suggest that the older individuals are, the more restrained their spending behavior tends to be. Firms that focus on this consumer

demographic  as  their  customer  base  are  of  the  view  that  it  is  difficult  to  pass  on  rising personnel expenses to selling prices, given the tough sales environment. While the term ""price pass-through"" tends to conjure up images of supply chains in manufacturing industries, many smaller  firms  operate  in  business-to-consumer  industries.  Although  many  firms  in  these industries  feel  the  need  to  pay  high  wages  to  attract  and  retain  employees,  their  sales environment appears to be less favorable.

The differences that exist within the household and corporate sectors are often described as ""polarization."" Under such circumstances, it is especially important to grasp local economic conditions, which cannot be fully captured using macro data. The microeconomic information that the Bank receives from all of you at its Head Office and branches is invaluable. We appreciate your continued cooperation.

## II. The Bank's Conduct of Monetary Policy

## Recent Conduct of Monetary Policy

Next, I will discuss the Bank's conduct of monetary policy. Please take a look at Chart 7. At the Monetary Policy Meeting (MPM) in January, the Bank raised its short-term policy interest rate by 0.25 percentage points, to around 0.5 percent.

As I mentioned earlier, the year-on-year rate of increase in the CPI has remained above 2 percent for nearly three years. Against this backdrop, a policy interest rate of around 0.25 percent  was  very  low,  and  real  interest  rates  --  which  take  inflation  into  account  --  were significantly  negative.  Even  after  raising  the  policy  interest  rate  to  around  0.5  percent, accommodative financial conditions have continued to firmly support the economy. Japan's economy has been recovering, albeit at a moderate pace, and underlying inflation has likely been  rising,  accompanied  by  wage  increases.  In  this  situation,  adjusting  the  degree  of monetary accommodation gradually, while maintaining accommodative financial conditions, will lead to stability in economic activity and prices in the long run. The developments in economic activity and prices that I outlined earlier are generally in line with what the Bank had anticipated, and this is why it made the policy adjustment.

While this was the main reason for the policy interest rate hike, the key criteria regarding the timing of the hike were developments in overseas economies, especially the U.S. economy. Shortly after the Bank raised the policy interest rate for the second time in July last year, U.S. employment statistics fell short of market expectations, raising concerns over a slowdown in the U.S. economy. Stock prices around the world declined sharply, and the U.S. dollar fell in the foreign exchange market. The yen-dollar exchange rate fluctuated substantially, partly reflecting the yen's prior depreciation. In addition, the fall in stock prices in Japan was greater than in other countries.

At a meeting with local leaders that same week, I said that the Bank would not raise its policy interest rate further when the financial and capital markets were unstable, and mentioned that the market reaction to U.S. economic indicators for a single month seemed too large and that the U.S. economy would most likely have a soft landing. Subsequently, most figures for U.S. employment statistics were relatively favorable. At present, the market consensus is that the employment data at that time were simply noise.

Please turn to Chart 8. Even at the time,  in the United States,  it was highlighted that the weakness in employment and the strength of the GDP data, particularly private consumption, seemed to be paradoxical. If one wanted to explain the data in a reasonable manner, one could argue that, even though employment and income were weak, people were dipping into their savings and spending, but that this dynamic would eventually run out of steam and GDP growth would slow down. The forecasts at that time are represented by the red dotted line in the left-hand graph. However, the GDP data were revised and, as shown in the graph in the middle, it turned out that the saving rate had not fallen, as was the case for the employment data I mentioned earlier. Meanwhile, as shown in the right-hand graph, inflation has come down to the 2-3 percent range, although the decline has paused somewhat since autumn. I think it is fair to say that the U.S. economy is in a well-balanced state.

With regard to the outlook, there are factors that can affect both economic activity and prices in the United States, such as the policies of the new administration. Geopolitical tensions also remain heightened. The future course of these factors and expectations regarding them will have an impact on business and household sentiment, not only in the United States but also

around the world, and on developments in global financial and capital markets. Uncertainties regarding the global economy remain high, and due attention continues to be warranted here.

## Questions about the Policy Interest Rate Hikes from Two Directions

The Bank terminated its large-scale monetary easing in March 2024 and subsequently raised the policy interest rate in July 2024 and January 2025. This policy conduct has been met with questions from two opposite directions. One question concerns why the Bank continues with a low policy interest rate of around 0.5 percent when prices have been rising by more than 2 percent for nearly three years. The answer is that (1) the current price rises still reflect the cost-push caused by global inflation, and this will eventually wane, and that (2) underlying inflation, where prices rise accompanied by wage increases, has not yet reached 2 percent. Please look at Chart 9. While CPI inflation, as shown in the left-most graph, has been above 2 percent, underlying inflation is still below 2 percent, as shown in the three graphs to the right. Tightening monetary policy in this situation would suppress economic activity, and wages would not rise. Inflation would also eventually fall below 2 percent.

A critical question from the opposite direction is why the Bank raises the policy interest rate when economic recovery is weak. The response here is, first of all, that a policy interest rate of  around  0.5  percent  is  sufficiently  accommodative  and  provides  strong  support  for  the economy. Moreover, the fact that there have been severe labor shortages at the current growth rate and that prices and wages have been rising (even though underlying inflation has not reached 2 percent) means that Japan's potential growth rate is lower than the current growth rate. According to estimates by the Bank's staff, Japan's potential growth rate is around 0.5 percent. If we want higher growth, measures to increase the growth potential of the economy are needed, such as raising productivity.

Please take a look at Chart 10. In this regard, it appears that personnel constraints are limiting the potential growth rate. Normally, when firms face labor shortages, they try to substitute labor with machinery or software. However, as can be seen in the two upper graphs, while labor shortages have recently become increasingly acute, firms' perception of their production capacity suggests neither severe shortages nor excess. This is a phenomenon that has not been seen much in the past, and it is particularly noticeable in nonmanufacturing industries. The

Bank therefore examined the extent to which labor and capital can be substituted for one another in each industry. The results are shown in the bottom graph. In some nonmanufacturing industries, such as accommodations as well as eating and drinking services on  the  far  right,  almost  no  substitution  has  occurred,  so  that  labor  shortages  are  directly limiting production (i.e., the provision of services). In fact, hotels and Japanese-style inns across the country have noted that they have to turn down reservations despite having rooms available  because  they  cannot  find  enough  staff.  In  addition  to  being  inherently  laborintensive, the industries on the right side of the graph consist mostly of small firms that are less likely to benefit from labor-saving investment. This means that even if they replaced jobs with machines, this would not be equivalent to compensating for one employee. I think that it is not enough to simply encourage labor-saving investment; instead, we need to address this issue  of  substitutability  through,  for  example,  the  joint  introduction  of  software  or  the consolidation of businesses to reach a larger scale. As you all know, raising productivity is a long and steady process. I believe we need to think concretely about measures to help microlevel efforts in the workplace.

## Outlook for Prices and the Path of Policy Interest Rate Hikes

Let me move on to Chart 11. Regarding the conduct of monetary policy going forward, if the outlook for economic activity and prices presented in the Outlook for Economic Activity and Prices (Outlook Report) is realized, the Bank will accordingly continue to raise the policy interest rate and adjust the degree of monetary accommodation. In this regard, the key point of the outlook is that the Bank expects the 2 percent price stability target to be achieved. In other words, the Bank expects that the year-on-year rate of increase in the CPI will decline toward 2 percent as the effects of the cost-push wane, while underlying inflation will rise toward  2  percent,  accompanied  by  wage  increases. As  a  result,  both  actual  inflation  and underlying inflation are expected to be at around 2 percent in the second half of the projection period of the January Outlook Report (sometime during the period from the second half of fiscal 2025 to fiscal 2026).

The policy interest rate at that time is considered to approach an interest rate level that is neutral to economic activity and prices. In theory, this level is 2 percent plus the natural rate of interest. However, while the natural rate of interest is conceptually an important criterion

for distinguishing between monetary easing and tightening, estimates of the natural rate of interest range from a minimum of around minus 1 percent to a maximum of around plus 0.5 percent, depending on the estimation method. Moreover, as these estimates are subject to estimation error, the range is too wide for the estimates to be used in actual policy conduct. In practice, the Bank will examine the response of economic activity and prices as it raises the policy interest rate, and at present the Bank does not know for certain what the interest rate level that is neutral to economic activity and prices will be. I think that it will be possible for the Bank to proceed while examining the response of economic activity if it raises the policy interest rate at a pace in line with expectations.

## Market Views and Interest Rate Formation

Please refer to Chart 12, which shows the policy interest rate path projected by financial markets. To reiterate, the Bank's rate hike process is conditional on its outlook for economic activity and prices presented in the Outlook Report being realized. Market participants may have projections for economic activity and prices that differ from the Bank's outlook, and could also have an array of views of the natural rate of interest. Based on their projections and views, market participants forecast the path of the policy interest rate and its level at the end of the rate hike process. Healthy functioning of the financial markets will require market participants to accurately understand the Bank's policy reaction function, which reflects the Bank's thinking on the conduct of monetary policy, and to form interest rates by plugging their own projections of economic activity and prices into the function. I thus think that the Bank communicating only ""the"" answer of the future policy interest rate could do away with the market's valuable information creation function.

The Bank has presented a consistent policy reaction function since the April 2024 Outlook Report. On this basis, if market participants' views of economic activity and prices change (i.e., if the figures plugged into the Bank's policy reaction function change), market interest rates  would  fluctuate  accordingly.  Normally,  however,  market  participants'  views  of economic activity and prices change continuously, so interest rates are expected to develop in a stable manner reflecting these views.

Moreover, long-term interest rates are formed by adding the term premium for each maturity to  the  projections  for  the  policy  interest  rate  path.  The  Bank's  purchases  of  Japanese government bonds (JGBs) have compressed the term premium, mainly through the impact based on the amount outstanding of its JGB holdings (the stock effect). In this regard, the Bank  has  been  gradually  reducing  its  purchase  amount  of  JGBs  in  accordance  with  the reduction plan decided in July 2024; however, the decrease in the amount outstanding of its JGB holdings has been limited, and therefore monetary easing effects are likely to continue at a large scale. In the reduction plan, the Bank explained its thinking that (1) in principle, long-term interest rates are to be formed freely in financial markets, and the Bank expected that the rates would fluctuate to some degree in response to factors such as market views of economic activity and prices and developments in interest rates overseas, and that (2) in an exceptional situation where long-term interest rates rose rapidly in a manner that differed from normal market developments, the Bank, from the perspective of encouraging the stable formation of interest rates, would make nimble  responses by, for example, increasing the amount of JGB purchases and conducting fixed-rate purchase operations of JGBs and the Funds-Supplying  Operations  against  Pooled  Collateral.  This  thinking,  of  course,  remains valid.

As described, the Bank has not changed its thinking on the policy conduct regarding the shortterm policy interest rate and on JGB purchases. In the process of the exit from large-scale monetary  easing,  the  Bank  will  continue  to  communicate  and  conduct  operations  as appropriate for the stable formation of interest rates.

## III. The Review of Monetary Policy from a Broad Perspective

Please  take  a  look  at  Chart  13.  Last  December,  the  Bank  published  a  report  entitled  the ""Review  of  Monetary  Policy  from  a  Broad  Perspective""  (hereafter,  the  Review),  which examined Japan's  economy  and  monetary  policy  over  the  25  years  since  the  start  of  the deflationary period. During the review process, which lasted a year and eight months, the Bank received cooperation and opinions from a large number of firms, including firms from Shizuoka  Prefecture,  as  well  as  financial  institutions,  market  participants,  and  academic experts. I would like to take this opportunity to express my gratitude once again. Due to time

constraints today, instead of introducing the content of the Review, I would like to look back on the past 25 years, sharing some of my personal experiences.

## Monetary Policy up to the Early 2010s

Please take a look at Chart 14. The monetary easing in the first 15 years up to the early 2010s did not produce the required easing effects because real interest rates could not be lowered sufficiently, due to the constraint that nominal interest rates could not be lowered substantially below zero percent. However, the biggest issue at the time was problems in the financial system,  and  I  think  that  the  effect  of  monetary  easing  in  preventing  the  collapse  of  the financial system by supplying liquidity was more important than is generally appreciated. In the early 2000s, I worked in the Bank Examination and Surveillance Department's bank group, where I was engaged in monitoring financial institutions and handling practical aspects of the lender  of  last  resort  (LLR)  loans.  At  the  time,  financial  institutions  were  in  the  midst  of disposing of nonperforming loans and were keenly aware of their capital constraints. I feel that, back then, an important part of the transmission mechanism of monetary policy was not fully functional, and easing effects were not fully transmitted. Moreover, from the perspective of one who observed financial institutions' daily funding on the ground, my honest impression was that it was a relief that this was during a period of quantitative easing. In fact, there was a significant sense of tension, with the Bank monitoring some financial institutions' funding in  great  detail,  calculating  their  cash  flow  down  to  the  maturity  of  individual  large  time deposits. I think that the extremely ample provision of liquidity to the market through the Quantitative  Easing  Policy  enabled  the  problems  in  the  financial  system  to  be  resolved without causing a sudden collapse due to funding issues.

Although monetary easing up to this stage was considered unconventional monetary policy, it  primarily  focused  on  forward  guidance  and  did  not  extend  to  negative  interest  rates  or lowering long-term interest rates through JGB purchases. In the early stages of quantitative easing, the Bank slightly increased its purchases of JGBs, but this was a measure to increase current account balances held by financial institutions at the Bank, which were the operating target,  and  was  not  aimed  at  lowering  interest  rates.  While  other  central  banks  were  also purchasing long-term government bonds at that time, the consensus then was not to use such purchases for intervening to guide interest rates, so as to avoid affecting the functioning of

markets or causing delicate issues with regard to fiscal policy, which I will discuss later. In central banking, there had long been a rule of expanding the balance sheet in line with the growing  volume  of  the  currency,  and  this  rule  served  as  a  self-imposed  restriction  on government  bond  purchases.  When  the  Bank  introduced  quantitative  easing,  it  partially modified  this,  creating  a  new  rule,  the  ""banknote  principle.""  There  was  a  sense  that  if purchases of long-term JGBs were to be increased, some kind of guiding principle was needed.

Next, please take a look at Chart 15. The consensus I just described changed dramatically in the wake of the Global Financial Crisis. With global financial and capital markets remaining unstable and growth and inflation rates falling, central banks around the world were forced to introduce powerful monetary easing measures. The adoption of unconventional monetary policies  in  many  countries  seems to  have  been inevitable,  as  the  impact  of  one  country's monetary policy naturally depends on its relative relationship with those of other countries, given the interconnectedness of global financial markets. When discussing the pros and cons of unconventional monetary policies, it is necessary to consider the global context at the time, and I think that, ultimately, the question comes down to the assessment of the central banking community as a whole.

## Large-Scale Monetary Easing since 2013

Against the background just described, the Bank from 2013 onward embarked on large-scale monetary  easing,  including  Quantitative  and  Qualitative  Monetary  Easing,  the  Negative Interest  Rate  Policy,  and  Yield  Curve  Control  (YCC).  This  series  of  policies  stimulated economic activity and prices through the core mechanism of monetary policy: lowering real interest rates. Looking again at Chart 14, real interest rates, represented by the blue lines, have been significantly negative for the period that is not shaded.

Please take a look at Chart 16. While some experts do not regard such lowering of interest rates as very effective, I think this is probably due to the fact that the easing effects were mainly transmitted through the market. It is true that when interest rates are already close to zero, lowering them further will not make firms want to invest, and only around 30 percent of  the  policy  effect  was  transmitted  through  the  lending  channel.  Over  50  percent  was transmitted via financial and capital markets, such as through stock prices and exchange rates.

On the other hand, those who think that large-scale monetary easing was effective highlight the  fact  that  Japan's  economy  was  previously  suffering  from  factors  such  as  excessive appreciation of the yen and stagnant stock prices, and that the introduction of large-scale monetary easing resolved these issues. However, some of the positive effects of the easing must be discounted, since these market developments also reflected external factors, such as recovery in the global economy. In any case, it is fair to say that the decline in real interest rates brought by large-scale monetary easing stimulated economic activity and prices, mainly through the financial and capital market channel.

Please see Chart 17. As a result, combined with various government measures, large-scale monetary easing created more than 5 million jobs and eliminated the slack in the labor market, which was the root cause of deflation. I think that the essence of a deflationary economy is a work-sharing  economy  burdened  with  surplus  personnel.  Looking  back,  from  the  1990s onward, the growth rate of Japan's economy declined and there was a chronic shortage of demand  due  to  the  collapse  of  the  bubble  economy  as  well  as  delayed  adaptation  to globalization and the declining birthrate and aging population. The typical solution to this would have been to accept a temporary increase in unemployment and bankruptcies in order to achieve a quick economic turnaround, which is what was the case in the U.S. economy during and after the COVID-19 pandemic, for example. By contrast, the social and economic choices made in Japan at that time pushed firms to maintain employment while receiving various support, which kept unemployment at low levels. The trade-off was a long period of excess employment and firm numbers, which prevented wages and product prices from rising. This  became  the  social  ""norm,""  and  actions  that  went  against  this  norm  were  sometimes criticized. 1

The Bank felt that the only way to resolve this entrenched situation was to provide strong stimulus  to  the  economy  and  bring  the  labor  market  into  a  state  of  labor  shortage.  On Christmas day in 2014, at an early stage of large-scale monetary easing, Mr. Kuroda, who was Governor at the time, gave a speech at Keidanren (Japan Business Federation) entitled

1   These points are analyzed in more detail in Uchida, S., ""Price Dynamics in Japan over the Past 25 Years,"" keynote speech at the 2024 BOJ-IMES Conference hosted by the Institute for Monetary and Economic Studies, Bank of Japan, May 27, 2024.

""Welcome to the 2 Percent Club."" For the Bank, this was an ""aggressive"" title for a speech. In his speech, the Governor argued that, after overcoming deflation, firms that did not believe in the achievement of 2 percent inflation would become more active, and the competition over securing the labor force, for example, would become intensified, and moreover that the favorable financial conditions of the transitional period would not be forever and this was a great chance, on a first-come, first-served basis. While the invitation was a bit too early, after 10  years  we  are  now  approaching  this  situation.  In  broad  terms,  the  aims  of  large-scale monetary easing are being realized, and I think the easing has worked in the direction of revitalizing Japan's economy.

## Effects and Side Effects of Large-Scale Monetary Easing

Nevertheless, there is no such thing as a free lunch, and there were side effects to large-scale monetary easing. Please refer to Chart 18. So far, the positive effects have outweighed the side effects. However, it should be noted that this assessment comes with a caveat, as there is a possibility of larger side effects emerging in the future.

Of the several side effects of large-scale monetary easing, distortions in financial markets and the impact on financial institutions' profits are inseparable from the positive effects. Thus, in pursuing monetary easing, the Bank has always been mindful to strike a balance between the positive and negative effects. In the meantime, there are two side effects that are somewhat different in nature from the ones I just mentioned: the first relates to the link between low interest rates and productivity, and the second relates to the link with fiscal policy.

Starting with the former, some argue that low interest rates have kept so-called zombie firms alive and held back long-term productivity growth. There are opinions both in favor of and against this argument in academia, and the Review does not reach a conclusion on this issue.

In my view, given the experience of the generation that faced the so-called employment ice age, the positive effects of the high-pressure economy caused by monetary easing, which improved the employment environment for subsequent generations, were greater than the side effects of low interest rates, and hence acted in the direction of increasing productivity. Since firms' moves to maintain employment during the deflationary period were aimed at workers already employed, these moves resulted in firms holding back their recruitment of people entering  the  labor  market.  Given  that  Japan's  labor  market  was  largely  characterized  by

lifetime employment, opportunities for younger workers to gain employment or receive onthe-job training (OJT) were hindered, and this was a significant factor leading to the decline in productivity for the economy as a whole. Moreover, even if the negative effect of lowproductivity firms surviving or a slowdown in business dynamics were greater (which I do not think is the case), this, in my view, is not something that was inseparable from low interest rates, but rather the result of social and economic choices, including the provision of subsidies. To reiterate, my view is that, given Japan's strong social aversion to unemployment, only labor shortages rather than interest rates could be the driving force of stimulating business dynamics.

Next, I would like to turn to the link with fiscal policy. On this point, the Review states that ""in the exchange of views conducted . . . it was pointed out that the large-scale monetary easing implemented by the Bank led to a loosening of fiscal discipline,"" and that ""it is crucial for the Bank to continue to clearly explain as it has been doing continuously and consistently, that  the  aim  of  monetary  policy  .  .  .  should  not  be  to  support  monetary  financing  of government debt."" The Bank has received criticism that this description is insufficient and unsatisfactory. While there are various ways to discuss this issue, and speaking briefly may cause misunderstanding, my own view, to put it bluntly, is as follows.

First of all, while the debates over monetary financing of government debt and fiscal moral hazard are related, these are separate issues. As experts often point out, whether a central bank engages in monetary financing of government debt is not something that is resolved by the  central  bank  simply  saying  that  it  has  no  intention  to  do  so.  Throughout  the  entire monetary easing process, it is necessary for the central bank to implement monetary policy that is appropriate for economic activity and prices. In other words, the result must be that the central  bank  does  not  deviate  from  necessary  policies  out  of  consideration  of  the  fiscal situation. So far, the Bank has implemented necessary policies, including policy interest rate hikes and reductions in its purchase amount of JGBs. By all means, the Bank will continue to conduct policy that is appropriate for economic activity. On this basis, however, to ultimately convince people that the aim of monetary policy is not to support monetary finance, we should wait for further progress in the exit process from large-scale monetary easing.

Next, the issue of fiscal moral hazard -- that is, whether fiscal discipline has loosened due to large-scale monetary easing -- depends on how we measure fiscal discipline. If we focus on whether it became easier for the government to spend, there is no doubt that the government sector, the borrowing entity, benefited from lower interest rates. On the other hand, if we focus on the impact on the fiscal situation, this is likely to be better compared to a scenario in which the economy followed a lower growth path in the absence of large-scale monetary easing. While various arguments can be made on this point, I want to discuss it from a slightly different angle. Let's say that large-scale monetary easing was necessary in terms of economic activity and prices (it is of course possible to question this condition, but that is an issue that should be discussed separately from the side effects). Based on this condition, if large-scale monetary easing has the side effect of loosening fiscal discipline, the government should respond to it. This will allow the government and the central bank taken together to implement policies that are appropriate for economic activity. It is certainly not optimal for the central bank to avoid implementing policies necessary for the economy simply to avert loosening fiscal discipline.

This point became a common challenge around the world during the COVID-19 pandemic and was frequently discussed at the international conferences I attended. The policy mix of fiscal expansion -- accompanied by increased issuance of government bonds -- and monetary easing -- including purchases of government bonds -- can be a delicate issue in terms of both monetary financing of government debt and fiscal discipline. A general consensus at the time was that large-scale coordination of fiscal and monetary policy requires strong discipline to ensure that each fulfills its respective mission. In Japan, this point was included in a joint statement issued by the government and the Bank in January 2013, well before the pandemic.

## The Exit from Large-Scale Monetary Easing

Finally,  although  it  does  not  represent  a  side  effect  itself,  one  thing  to  consider  when introducing unconventional policy measures is the exit from the measures. No architect would design a building without considering its demolition. When the Bank designed the large-scale monetary easing measures, it certainly was mindful of the exit process. One specific example is the feature for conducting the supply of funds at long-term fixed interest rates, which was incorporated into the Bank of Japan Financial Network System (BOJ-NET) when the system

was  upgraded  after  the  monetary  easing  was  introduced.  The  supply  of  such  funds  was implemented in the final phase of YCC. While there was discussion at the time as to whether this feature was really necessary, we asked the IT department to incorporate it into the system, saying that it would likely be necessary sometime during the period of moving toward the exit. As seen in this example, much of the Bank's ability to implement monetary policy is supported by the contributions made by the staff members that carry out operational functions at the Head Office and branches.

Although the exit process has only just begun, the Bank has passed two difficult hurdles that we thought would be major challenges: the first expansion of the range of 10-year JGB yield fluctuations  under  YCC  in  December  2022,  and  the  termination  of  large-scale  monetary easing in March 2024. Of course, it has not been all smooth sailing. In the case of the former, the Bank subsequently had to purchase 100 percent of certain government bond issues for several months, which significantly distorted market functioning.

In  the  case  of  the  latter,  please  have  a  look  at  Chart  19.  In  March  2024,  when  the  Bank terminated large-scale monetary easing, it explained that accommodative financial conditions would be maintained, which generated a sense of security in the markets. However, this came at the expense of an accumulation of so-called yen carry positions. The unwinding of these yen carry positions when the Bank raised its policy interest rate in July was one of the factors behind the large fluctuations in exchange rates and stock prices.

I  think that, going forward, the Bank needs to continue to exercise ingenuity and strike a balance in both its operations and communication. In this sense, the ultimate pros and cons of  large-scale  monetary  easing  are  yet  to  be  determined.  Put  differently,  proceeding successfully with the exit process will improve the overall assessment of the Bank's policies, so we are committed to conducting policy appropriately.

## IV. My Hope for the Economy of Shizuoka Prefecture

Please take a look at Chart 20. In closing, I would like to talk about the economy of Shizuoka Prefecture. In addition to a warm climate and abundant tourism, agricultural, forestry, and fishery resources, Shizuoka Prefecture's location offers convenient access to both Tokyo and

Nagoya, making it a popular destination for people to relocate to. Despite this well-endowed environment, the prefecture has not rested on its laurels, but rather has made distinct progress in addressing some of the issues I have discussed today.

In Japan's current labor market, there is much competition among firms and regions to find ways of attracting young people. In Shizuoka Prefecture, the public and private sectors have been working together to support startups and create attractive work opportunities for young people. Business matching events in Shizuoka City have yielded many connections between firms in the prefecture and startups elsewhere.

Moreover, it is important to devise ways to address labor shortages at the microeconomic level, as I mentioned. In this regard, the trial runs of self-driving trucks and buses on public roads in Shizuoka Prefecture is a leading example.

Lastly, while avoiding taking risks was an option during the deflationary period, the rule that holds in the ""2 Percent Club"" is that chances are seized on a first-come, first-served basis, as spelled out in the principle of capitalism. In Shizuoka Prefecture, the spirit of "" yaramaika "" -- which means to ""just set out to do something"" in the local dialect -- has been passed down, and this can be seen in efforts such as moves by manufacturing firms in the western part of the prefecture to expand business in India at an early stage. I would like to conclude my remarks by expressing the hope that, under this new rule book, the economy of Shizuoka Prefecture will continue to flourish. Thank you very much for your attention.

## Japan's Economy and Monetary Policy

Speech at a Meeting with Local Leaders in Shizuoka

March 5, 2025

## UCHIDAShinichi

Deputy Governor of the Bank of Japan

## Introduction

- I. Developments in Economic Activity and Prices
- II. The Bank's Conduct of Monetary Policy
- III. The Review of Monetary Policy from a Broad Perspective
- IV. My Hope for the Economy of Shizuoka Prefecture

## Real GDP

## Developments over Time

The BOJ's Forecasts (January 2025 Outlook Report)



I. Developments in Economic Activity and Prices

Chart 2

## Corporate Sector

## Corporate Profits

Business Fixed Investment





- Notes: 1. In the left-hand chart, figures are current profits based on the Financial Statements Statistics of Corporations by Industry, Quarterly and exclude ""finance and insurance."" Figures from 2009/Q2 onward exclude pure holding companies.
2. In the right-hand chart, figures are based on the Tankan , including software and R&amp;D investments and excluding land purchasing expenses. R&amp;D investment is not included before the March 2017 survey. Figures are for all industries including financial institutions.
- Sources: Bank of Japan; Ministry of Finance.

## Household Sector

## Private Consumption

## Employee Income





Notes: 1. In the left-hand chart, figures for total real private consumption are the real Consumption Activity Index (travel balance adjusted) based on staff calculations, which exclude inbound tourism consumption and include outbound tourism consumption.

2. In the right-hand chart, Q1 = March-May, Q2 = June-August, Q3 = September-November, Q4 = December-February. Nominal employee income = Total cash earnings ( Monthly Labour Survey ) × Number of employees ( Labour Force Survey ). Figures for real employee income are based on staff calculations using the CPI (less imputed rent). Figures from the Monthly Labour Survey are based on continuing observations following the sample revisions. Figures for 2024/Q4 are those for December.

Sources: Bank of Japan; Ministry of Internal Affairs and Communications; Ministry of Health, Labour and Welfare.

I. Developments in Economic Activity and Prices

## Consumer Prices



3

Chart 4

## Wages and Consumer Prices

| y/y chg.                                   | FY 2022   | FY 2023   | FY 2024   | Total   |
|--------------------------------------------|-----------|-----------|-----------|---------|
| CPI (less fresh food)                      | 3.0%      | 2.8%      | 2.6%      | 8.4%    |
| Nominal wages (full-time employees)        | 2.2%      | 2.2%      | 3.9%      | 8.3%    |
| Hourly nominal wages (part-time employees) | 1.2%      | 3.1%      | 4.4%      | 8.8%    |
| Minimumwage                                | 3.3%      | 4.5%      | 5.1%      | 12.9%   |

Note: The figure for the CPI for fiscal 2024 is the April 2024-January 2025 average. Figures for nominal wages and hourly nominal wages for fiscal 2024 are the April-December averages (based on continuing observations following the sample revisions).

Sources: Ministry of Internal Affairs and Communications; Ministry of Health, Labour and Welfare.

I. Developments in Economic Activity and Prices

## Real Private Consumption by Age



- Notes: 1. The baseline is the average for the corresponding months for fiscal 2016 through fiscal 2018.

2. Figures take changes in the number of consumers into account. Real values are obtained using the corresponding CPI for each item. (The CPIs are the same for all age groups). Sources: Nowcast Inc./ JCB, Co., Ltd., ""JCB Consumption NOW""; Ministry of Internal Affairs and Communications, etc.

5

Chart 6

II. The Bank's Conduct of Monetary Policy

## Decision at the January 2025 MPM

Japan's economic activity and prices have been developing generally in line with the Bank's outlook , and the likelihood of realizing the outlook has been rising .

Medians of the Policy Board Members' Forecasts (y/y % chg.)

## Wages

|                                            | Fiscal 2024   | Fiscal 2025   | Fiscal 2026   |
|--------------------------------------------|---------------|---------------|---------------|
| Real GDP                                   | 0.5 (-0.1)    | 1.1 (-)       | 1.0 (-)       |
| CPI (all items less fresh food)            | 2.7 (+0.2)    | 2.4 (+0.5)    | 2.0 (+0.1)    |
| CPI (all items less fresh food and energy) | 2.2 (+0.2)    | 2.1 (+0.2)    | 2.1 (-)       |

-  Firms have expressed the view that they will continue to raise wages steadily , following the solid wage increases last year.

Prices

-  With wages continuing to rise, underlying CPI inflation has been increasing gradually toward 2 percent .
-  CPI inflation is likely to be at around 2.5 percent for fiscal 2025, due to the higher import prices stemming from the yen's depreciation etc.

## Overseas economies

Note: Figures in parentheses indicate changes from the October 2024 Outlook Report.

-  Global financial and capital markets have been stable on the whole , while attention has been drawn to various uncertainties.

Adjusting the degree of monetary accommodation from the perspective of sustainable and stable achievement of the price stability target of 2 percent

## Short-term interest rate raised to ""around 0.5%"" :

## (uncollateralized overnight call rate)

## (previously ""around 0.25%"")

-  Real interest rates are expected to remain significantly negative, and accommodative financial conditions will continue to firmly support economic activity .
-  If the outlook presented in the January Outlook Report will be realized, the Bank will accordingly continue to raise the policy interest rate and adjust the degree of monetary accommodation.

7

II. The Bank's Conduct of Monetary Policy

Chart 8

## U.S. Economy



- Notes: 1. In the left-hand chart, the market forecast is based on a survey by Bloomberg.
2. In the middle chart, figures for the saving rate are calculated as follows:

Saving rate = (Nominal disposable personal income - Nominal personal outlays) / Nominal disposable personal income × 100. Sources: Bloomberg; Haver.

## CPI and Underlying Inflation



II. The Bank's Conduct of Monetary Policy

Chart 10

## Substitutability between Capital and Labor

Employment Conditions and Production Capacity



- Notes: 1. Figures in the upper charts are based on the Tankan . There is a discontinuity in the data for December 2003 due to a change in the survey framework.

Sources: Ministry of Finance; Cabinet Office; Bank of Japan.

2. In the lower chart, figures for the elasticity of substitution are calculated by estimating CES production functions by industry using the following variables from the Financial Statements Statistics of Corporations by Industry, Quarterly : value added, tangible fixed assets (excluding construction in progress), and the number of employees. For details of the estimations, see Box 2 of the January 2025 Outlook Report.

## Schematic Illustration of Future CPI Inflation and Underlying Inflation





*The estimates of various models range from around minus 1.0% to around plus 0.5%. Moreover, each estimate is subject to estimation error.

11

II. The Bank's Conduct of Monetary Policy

Chart 12

## Market Expectations for the BOJ's Policy Interest Rate



Note: The figure for the present is the 3-month yen overnight index swap (OIS) rate. Figures for 3, 6, and 9 months ahead are 3-month forward rates, those for 12 and 18 months ahead are 6-month forward rates, and the figure for 24 months ahead is the 12-month forward rate, all calculated from the yen OIS rates. Figures are as of March 3, 2025. Source: Bloomberg.

## Review of Monetary Policy from a Broad Perspective



13

Chart 14

III. The Review of Monetary Policy from a Broad Perspective

## Real Interest Rates



Note: Figures for real interest rates for each maturity are calculated as government bond yields minus the composite index of inflation expectations (staff estimates) for the corresponding maturity.

Sources: Bank of Japan; QUICK, ""QUICK Monthly Market Survey &lt;Bonds&gt;""; Consensus Economics Inc., ""Consensus Forecasts""; Bloomberg.

## Unconventional Monetary Policies by Central Banks



Sources: Respective central banks.

15

III. The Review of Monetary Policy from a Broad Perspective

Chart 16

## Transmission Channels of the Decline in Interest Rates Resulting from Large-Scale Monetary Easing



Note: The chart shows the contribution of each channel to the 5-year cumulative effect of the decline in interest rates on the output gap. The estimates are obtained using a VAR model with coefficient restrictions. For details of the estimation, see Chart 1-3-16 in the ""Review of Monetary Policy from a Broad Perspective."" Sources: Bank of Japan; Bloomberg, etc.

## Labor Market



Note: Figures for men and women are for employees aged between 15 and 64, while those for seniors are for employees aged 65 and over. Source: Ministry of Internal Affairs and Communications.

17

III. The Review of Monetary Policy from a Broad Perspective

Chart 18

## Impact of the Large-Scale Monetary Easing since 2013

Assessment of the Effects and Side Effects of Large-Scale Monetary Easing

- Although there have been certain side effects on financial markets and financial institutions' profits, the overall effect on the Japanese economy so far appears to have been positive.
- However, attention should be paid to the possibility that the negative effects may become larger in the future, such as the possibility that the functioning of the JGB market does not fully recover or possible side effects of large-scale monetary easing materialize at a later date.

Issues with Regard to Large-Scale Monetary Easing

Functioning of financial markets

Functioning of financial intermediation

Supply side of the economy (growth, productivity, etc.)

Relationship between Monetary and Fiscal Policy

## Financial Markets

## Yen Carry Positions (IMM Net Positions)



Note: IMM (International Money Market) net positions are the total of non-commercial and non-reportable positions against the U.S. dollar in currency futures transactions. Other currencies include pound sterling and the euro, Australian dollar, Canadian dollar, Swiss franc, Mexican peso, and New Zealand dollar. Source: Bloomberg.

19

IV. My Hope for the Economy of Shizuoka Prefecture

Chart 20

## Initiatives in Shizuoka Prefecture

Business Matching Events with Startups

Trial Runs of Self-Driving Buses



Source: TECH BEAT Shizuoka.



Source: Fuji City.",Shinichi Uchida
https://www.bis.org/review/r250305d.htm,Kazuo Ueda: Cross-border capital flows and the role of the IMF and central banks in the evolving international monetary system,"Remarks by Mr Kazuo Ueda, Governor of the Bank of Japan, at the International Monetary Fund (IMF) Event ""Asia and the IMF: Resilience through Cooperation"", Tokyo, 5 March 2025.",2025-03-05 00:00:00,"

March  5,  2025

Bank  of  Japan

## Cross-border Capital Flows and the Role of the IMF and Central Banks in the Evolving International Monetary System

Remarks at the IMF Event ""Asia and the IMF: Resilience through Cooperation"" in Tokyo

## UEDA Kazuo

Governor of the Bank of Japan

## Introduction

Thank you for inviting me here to celebrate this important milestone. As we discuss the future challenges and opportunities of the International Monetary Fund (IMF), it is worth noting that the 80 years since the creation of the Bretton Woods system has witnessed economic growth with the unprecedented expansion of trade in world history. Throughout this period, the IMF has consistently played a key role in promoting global cooperation and maintaining the  stability  of  the  international  monetary  system,  even  after  the  collapse  of  the  Bretton Woods system in 1971.

I will start my remarks by reviewing the response of central banks and the IMF to the Asian economic crisis in the late 1990s. Then, I will explore how we can reap the benefits and avoid the pitfalls of cross-border capital flows in an era of geopolitical uncertainty.

## I. Capital Flows and the Asian Economic Crisis

Cross-border capital  flows  have  benefits and  drawbacks. There  is  a  broad  consensus  that inflows of capital are beneficial to recipient countries, as they can make up for deficiencies in  long-term  risk  capital  for  financing  investment.  Indeed,  by  attracting  foreign  direct investment (FDI) from advanced countries, Asian emerging economies have been on a strong growth trend as a global hub for manufacturing supply chains. Capital flows can also be beneficial  to  the  sending  countries,  offering  investment  opportunities  for  the  savings generated by aging populations that have been typically seen in Japan.

Meanwhile, capital flows can also pose risks. They can be volatile and procyclical, amplifying economic and financial cycles in recipient countries. During ""risk-on"" periods, capital inflows into emerging markets tend to surge, adding further credit to an investment boom and fueling an asset-price bubble with increased leverage. This process can reverse dramatically during ""risk-off"" periods. If severe negative shocks are propagated through global financial markets, even countries with stable performance may get caught up in sudden stops and sharp reversals, falling  into  a  recession  accompanied  by  deleveraging.  Research  has  shown  that  ""global financial cycles,"" mainly driven by U.S. monetary policy, strongly affect risky assets in small open economies through international capital flows, which in turn limits their policy space to

maintain macro-financial stability. 1

Indeed, the Asian economic crisis in the late 1990s is a powerful reminder of the economic turmoil that can be triggered by disruptive capital outflows. It is important to note that, in this respect,  the  Asian  crisis  differed  crucially  from  classic  balance-of-payments  crises  or currency crises previously seen in emerging economies. In the run-up to the Asian crisis, ""gross"" rather than ""net"" capital inflows surged amid financial liberalization and globalization, and they acted as an amplifier of double mismatches -- currency and maturity mismatches -which had built up in the domestic banking system. In this situation, the dramatic reversal of gross capital flows triggered the banking crisis and currency crisis simultaneously with largescale deleveraging. Moreover, the crisis spread from one country to several other countries through successive capital outflows, raising fears of a worldwide economic meltdown due to financial contagion.

Drawing lessons from this traumatic experience, Asian central banks and the IMF have both taken a variety of actions to deal with capital flows and prevent a financial crisis. Asian central banks have strengthened prudential regulation and supervision to reduce foreign currencydenominated  liabilities,  the  so-called  original  sin,  which  was  one  of  the  underlying vulnerabilities in their financial systems. They have also introduced capital flow management measures (CFMs), some of which could work as macroprudential policy tools to prevent destabilizing capital flows. Moreover, they have shifted away from hard pegs and increased flexibility in their exchange rate regimes, so that exchange rate movements will be able to absorb external shocks. On the monetary policy front, many Asian central banks have adopted an inflation-targeting framework as a nominal anchor, thereby enhancing transparency and credibility.  They  have  also  accumulated  ample  FX  reserves  as  self-insurance  to  avoid resorting to the IMF's liquidity assistance. At the same time, the Asian authorities have set up a regional financial safety net, the Chiang Mai Initiative Multilateralisation (CMIM).

The IMF, the guardian of free capital flows, also recognizes that disorderly capital flows could pose a serious risk to financial stability. 2 Specifically, the IMF has enhanced its capacity to

1   Early examples include Rey (2013).

2 See Ariyoshi (2024) for the details of the IMF's initiatives following the Asian economic crisis.

analyze financial stability issues, and since 2003 has published the biannual Global Financial Stability  Report (GFSR)  as  a  companion  flagship  report  to  the World Economic Outlook (WEO). At  the  same  time,  it  has  strengthened  bilateral  and  multilateral  surveillance  on financial sector by conducting the Financial Sector Assessment Program (FSAP) in 5- or 10year cycles, in addition to the annual Article IV Consultations. As for capital controls, the IMF made an epoch-making shift in its ""Institutional View,"" published in 2012 and updated in  2022:  this  acknowledged  that  under  certain  circumstances,  capital  flow  management measures were useful as a macroprudential policy toolkit to prevent the buildup of financial vulnerabilities.  Moreover,  the  IMF  enhanced  its  role  of  providing  liquidity  support  for member  countries  in  times  of  crisis  by  increasing  the  size  of  its  lending  capacity  and introducing precautionary lending facilities, such as the Flexible Credit Line (FCL).

## II. Resilience So Far and the Way Forward

There is no doubt that these actions by Asian central banks and the IMF, as a whole, have contributed to the resilience of Asian economies to large and disruptive capital flows. In the face of the global pandemic and the subsequent aggressive monetary tightening in advanced economies, Asian countries have remained largely resilient to turbulence in capital flows. Indeed, researchers at the Bank for International Settlements (BIS) have recently shown that financial crises in emerging markets have become noticeably less frequent since 2000. 3 They point out that a set of structural factors has played a role in insulating domestic economies from global shocks. Among them, the improved monetary policy and prudential frameworks I have just outlined seem to be key.

It is true that several fortunate developments may also have contributed to the stability of Asian  economies  in  the  most  recent  episode.  Because  the  COVID-19  pandemic  was  a common,  global  shock  that  caused  synchronized  inflation  fluctuations  worldwide, Asian central  banks  had  no  need  to  steer  their  monetary  policies  in  a  different  direction  from advanced economies, thereby pre-empting large capital outflows. Moreover, we should note that the stronger U.S. economy relative to the previous monetary tightening episodes may have benefited emerging economies by increasing their external demand. 4

3   See Hardy, Igan, and Kharroubi (2024).

4   See Chen and Tillmann (2025).

In any case, we should not be complacent. Looking ahead, the resilience of Asian emerging market economies will be tested by rising  geopolitical tensions in  several  ways.  First,  as suggested by the IMF's GFSR, 5 an increase in geopolitical tensions among countries could cause a sudden reversal of cross-border capital flows. Furthermore, this effect could be larger for emerging countries than for advanced countries. Second, global economic fragmentation could  widen  the  divergence  in  monetary  policy  stance  by  reducing  business  cycle  comovements across countries. This could potentially increase the volatility of cross-border capital flows with destabilizing effects on exchange rate dynamics. Third, investors should take  into  account  geopolitical  factors  in  addition  to  conventional  risk-return  calculations, which could complicate capital flow dynamics. Now that non-bank financial intermediaries (NBFIs) are playing an increasingly important role in global financial markets, this could further lower the predictability of capital flows.

## III. Importance of Global Cooperation

Given the possible implications for macro-financial stability of rising geopolitical tensions, Asian central banks and the IMF should continue deepening their cooperation. In terms of crisis prevention, we can improve our ability to identify and quantify financial vulnerabilities by  exchanging  research  insights  from,  for  example,  stress  testing  exercises  or  scenario analyses of geopolitical risks, through the IMF's surveillance. Should a crisis arise, Asian central banks and the IMF could explore how to use regional financial safety nets and lending facilities to address liquidity shortages in an effective and coordinated manner.

As former IMF chief economist and former Governor of the Reserve Bank of India, Professor Raghuram Rajan stresses, 6 central banks tend to follow the ""own house in order doctrine"" because their domestic mandates do not legally allow them to take the full extent of adverse spillovers  abroad  into  account.  Consequently,  the  global  economy  may  be  led  into  a suboptimal  collective  path.  In  this  respect,  the  IMF  has  the  unique  role  of  promoting multilateralism  and  resolving  coordination  failures  to  improve  the  overall  welfare  of  the global economy.

5   See Chapter 3 of IMF (2023).

6 See Rajan (2023).

The international monetary system can be seen as a ""global public good."" 7 When it works well, everyone benefits; if it works poorly, everyone suffers. About 80 years ago, delegates from  more  than  40  countries  gathering  at  the  Bretton  Woods  Conference  created  a  new international  monetary  system  for  global  prosperity,  reflecting  on  the  mistakes  of  the competitive devaluations and restrictive trade policies that worsened the Great Depression. The Bretton Woods system itself ended in 1971, but its spirit is alive and well.

I believe it is time once again to renew our commitment to global economic cooperation in this era of heightened geopolitical uncertainty.

Thank you for your attention.

## References

Ariyoshi, Akira  (2024)  ""IMF  in  the  International  Monetary  System  --  Globalization  and Fragmentation --"" Public Policy Review Vol. 20, No. 2, February. Camdessus, Michel (1999) ""International Financial and Monetary Stability: A Global Public Good?"" Remarks at the IMF/Research Conference in Washington, D.C., May 28. Chen,  Hongyi  and  Peter  Tillmann  (2025)  ""Monetary  Policy  Spillovers:  Is  This  Time Different?"" Journal of International Money and Finance , Vol. 152, March. Hardy, Bryan, Deniz Igan, and Enisse Kharroubi (2024) ""Resilience in Emerging Markets: What Makes It, What Could Shake It?"" BIS Bulletin , No. 88, June. International Monetary Fund (2023) ""Geopolitics and Financial Fragmentation: Implications for Macro-Financial Stability,"" Chapter 3 of Global Financial Stability Report , April. Rajan, Raghuram (2023) Monetary Policy and Its Unintended Consequences , Karl Brunner Distinguished Lecture Series, November. Rey,  Hélène  (2013)  ""Dilemma  not Trilemma: The  Global  Financial  Cycle  and  Monetary

Policy Independence,"" Proceedings of the Jackson Hole Economic Policy Symposium .

7   See Camdessus (1999).",Kazuo Ueda
https://www.bis.org/review/r250305b.htm,Jorgovanka Tabaković: Serbia 2027 - striving towards a high-income economy,"Speech by Dr Jorgovanka Tabaković, Governor of the National Bank of Serbia, at the 32nd Kopaonik Business Forum, Kopaonik, 2 March 2025.",2025-03-02 00:00:00,"## Jorgovanka Tabakovi: Serbia 2027 - striving towards a high-income economy

Speech by Dr Jorgovanka Tabakovi, Governor of the National Bank of Serbia, at the 32nd Kopaonik Business Forum, Kopaonik, 2 March 2025.

* * *

## Slides accompanying the speech

Honourable members of the Government, esteemed representatives of the diplomatic corps, respected business leaders, dear fellow economists, ladies and gentlemen,

I would like to begin by saying, after the introductory remarks, that we should remember that the word ""artificial intelligence"" contains an essential falsehood in its name: artificial intelligence does not exist because creativity is inherently human. Artificial intelligence operates based on algorithms and the data input into the tools you have, such as your mobile phone. The trend of applying so-called artificial intelligence in all fields will ultimately have two consequences that are unacceptable for human civilisation - losing the truth and not knowing what is true versus what is a deep fake, and losing the human being, who is the only creative entity capable of making decisions and creating what is called ""intelligence"". While artificial intelligence can perform many technical processes faster, easier, and more efficiently, it cannot think.

Some say that one should not live in the past but always move forward. However, we have an obligation to respect the past to better understand where we are today and to have guidance for the future.

And the past teaches us that nothing should be taken for granted, as there are no final victories! Neither peace nor stability should be assumed, as they are not a given! That is why I will reiterate my conclusions from the previous two forums - what distinguishes theory from practice is our responsibility towards people, growth and development, and social stability. We depend on the conditions of the times we live in, but also on the decisions which we make and for whose consequences we bear responsibility.

Ladies and gentlemen,

(Slide 2) In October 2024, Serbia officially received an investment-grade credit rating! Congratulations to everyone!

I always emphasise, and I will do so again today, that on the economic front, no one can achieve much alone. No matter how brilliant they may be. This historic success is the result of teamwork by the President, the Government of the Republic of Serbia, and the National Bank of Serbia, and it belongs to all our citizens.

By joining the ranks of the one-third of the world's countries characterised by high business certainty, i.e. low investment risk, we have received yet another confirmation of the economic progress made over the past decade.

Most of those present today surely remember the period when Serbia had one major portfolio investor who invested in the Republic of Serbia's bonds. Just one. And that investor only invested in our country's securities because the interest rates were exceptionally high, which brought them excellent returns.

For many years now, the Republic of Serbia's bonds have been recognised as comparable to those of countries with investment-grade ratings, sought after by a large number of the world's largest global investors - those who have recognised our economic reform programme and all the results achieved over the past decade.

And I will reiterate today that the credit rating is the result of good political and economic decisions in the country, as one cannot be separated from the other. The continuity of political stability is a necessary precondition for the substantial and by no means easy structural reforms that develop the society we are part of.

We must preserve stability if we want a high-income economy - and I am sure that is the desire of everyone present at this forum today!

We must preserve stability in this competitive world full of challenges, where changes in the global order are happening faster than ever, and where the economic gap between key economies is widening!

This stability, along with sound policies, has enabled Serbia, even in the most complex conditions, to achieve numerous records last year!

- Last year, we returned inflation within the target tolerance band of 3-1.5%, with growth that was among the highest in Europe!
- We secured the country's record-high FX reserves of EUR 29.3 bn, which is 120% higher than in the pre-pandemic period. Gold reserves also reached a record-high level, currently standing at 48.7 tonnes.
- Dinar savings increased by nearly 40% last year.
- We also saw record-high FDI worth EUR 5.2 bn.
- Formal employment in the private sector is at a record high, with over 160,000 more people employed than in the pre-pandemic period.
- The unemployment rate is at its lowest level.

(Slide 3) The list of achievements is quite long, but the list of global risks is growing longer... That is why today, as we summarise the results and analyse the challenges, I will divide my presentation into four parts:

1. I will start with inflation factors.
2. I will continue with the measures of monetary and macroprudential policy.
3. I will specifically discuss the indicators of our economy's resilience to external risks.
4. I will conclude with the National Bank of Serbia's February projections, with a special focus on risks, various forms of risks, and their different effects on society and the economy.

I will proceed in order.

(Slide 4) Excellent news - in June last year, inflation was twice as low compared to end2023, based on all key components - energy and food prices, as well as prices within core inflation.

Amid unfavourable global and domestic weather conditions, inflation stabilised at around 4.3% in the second half of last year.

- (Slide 5) It was precisely the unfavourable weather conditions that caused the prices of certain food commodities, such as cocoa and coffee, to rise sharply on global exchanges, which affected global food prices.
- Additionally, the rise in prices of personal services remained elevated in many countries, which can be linked to the high growth in real wages, which constitute a significant part of the service sector's costs.

(Slide 6) When it comes to inflation factors, in the next few minutes, I will share the findings of our two studies.

The first analysis provides additional quantitative evidence in support of lower inflationary pressures by comparing the distribution of y-o-y price increases for goods and services in the consumer basket, as seen in the charts. The data confirm that in 2024, there was a significant reduction in the share of goods and services that recorded double-digit growth. Around 25% of goods and services did not become more expensive, and 100 products and services in the consumer basket became cheaper in 2024.

In the second analysis, we examined the phenomenon of faster price increases for cheaper brands compared to more expensive brands of the same products, creating an impression of higher inflation than the actual rate. This phenomenon has been colloquially termed cheapflation.

The analysis shows that in Serbia, during the period from 2022 to 2024, which was marked by increased global pressures, the cumulative price increase for cheaper brands within the food and beverages category was 5 pp higher than for more expensive brands of the same products.

- One of the reasons for this phenomenon is the low elasticity of demand for food, which is the lowest for the cheapest brands.
- Also, more pronounced price increases often lead to the substitution of more expensive products with cheaper alternatives, thereby increasing demand for the cheapest brands and generating additional price pressures.
- However, there is also the issue of an imperfect market structure, which makes it easier for increased costs of producers and merchants to be passed on to retail prices more than fully, a problem I have pointed out on several occasions.

To conclude the first topic.

Inflation has been curbed both domestically and globally. The good news is that in Serbia, we achieved this result in terms of inflation alongside high GDP growth!

However, there is no room for complacency. Uncertain and dynamic developments in international commodity and financial markets call for caution, as evidenced by the rise in inflation late last year in many countries.

(Slide 7) The second topic builds on the first - namely, the measures of monetary and macroprudential policy in 2024.

With inflation returning within the target band in May last year, and with projections indicating movement around the midpoint by the end of the monetary policy horizon, conditions were created for the start of monetary easing.

- Namely, we cut the key policy rate three times, by a total of 75 bp, to 5.75%.
- Our measures were transmitted to money and credit market interest rates, with lending activity increasing by 8.2% and the dinarisation of receivables also going up.
- Dinar savings recorded a record nominal increase of over RSD 53 bn, reaching over RSD 191 bn. This means that dinar savings are almost eleven times higher than in 2012! Let me remind you that the results of our latest analysis of the profitability of dinar and FX savings confirm that over the past twelve years, dinar savings have been more profitable than FX savings, both in the short and long term.
- To protect the interests of financial service consumers, we also decided to temporarily cap interest rates on loan agreements concluded with citizens, which will be specifically regulated by law.
- We also adopted regulations under our jurisdiction that will enable the implementation of the government programme for housing loans for young people.
- In addition, and thanks to all of this, the share of NPLs in total loans fell to its lowest level of 2.5% in December.

I conclude this topic by stating that our cautious approach is justified and that this is confirmed by the fact that we have achieved all three goals - low inflation in the medium term, high economic growth, and preserved financial stability of the country!

(Slide 8) The third topic I will discuss is the resilience of the Serbian economy, which was confirmed even during 2024, amid continuous external shocks.

- First, in 2024, we maintained relative stability of the dinar exchange rate against the euro, with the dinar gaining 0.1%.
- Last year, we bought over EUR 2.7 bn net in the FX market, or EUR 11.2 bn since 2017, which has been an important factor behind the growth in FX reserves.
- FX reserves stood at their record high of EUR 29.3 bn at end-2024, covering over seven months of imports of goods and services and 167% of money supply M1.
- Gold reserves, which traditionally serve as a safe haven, rose to a record level of 48.7 tonnes, with their value being over seven times higher than in July 2012. The adequacy of our decisions is also confirmed by the fact that the price of gold in the global market increased by around 30% last year, and the rise continues this year.
- GDP growth of 3.9% in 2024 was among the highest in Europe, driven by fixed investment and private consumption. The investment growth was supported by record-high profitability of the corporate sector, high FDI inflows, and government

- capital investment. At the same time, the growth in private consumption was driven by further increases in employment and real disposable income of the population.
- The value of exports of goods and services in 2024 reached EUR 43 bn, which is nearly 85% higher than in the pre-pandemic year of 2019. Within the goods sector, manufacturing exports grew by nearly 3%, despite still weak external demand. The reason for this resilience is the strategic focus on production and geographical diversification of markets and investors. Exports of services are also growing on solid foundations, driven by exports of information and telecommunications services.
- (Slide 9) FDI inflows were also record-high at over EUR 5.2 bn, despite all the uncertainties in the global market.
- An important element of resilience is the responsible conduct of fiscal policy, with a fiscal deficit of 2% of GDP, despite strong government capital investment. Particularly important is the fact that the growth in fiscal revenues is based on solid foundations - increased profitability and positive factors in the labour market, while the application of special fiscal rules for pension and public sector wage growth continues.

## Esteemed participants of the Forum,

All these results we are achieving, even in an environment characterised by low growth among our key trading partners, have secured us, for the first time in history, an investment-grade credit rating from Standard &amp; Poor's. Once again, congratulating all citizens on this success, I would like to say that we would certainly have received not only a positive outlook from Fitch but also the rating if political circumstances had not led to the agency's caution.

(Slide 9) The final topic concerns our expectations going forward and the challenges facing economic policymakers. However, before I move on to the projections, I would like to highlight the trends I have been discussing for years, often at this very place. However, it seems to me that it has never been more important to discuss this!

""Say goodbye to the world you knew - today we live in a new era!"" The conditions in which we operate economically are the most challenging, and technologically the most advanced! This is a time of enormous social divisions in all countries. In diplomatic terms, we define this as an unprecedented polarisation of society. ""People always know about misfortune and evil, but good remains hidden"", said Meša Selimovi.

A particular challenge today is conducting policies in the era of fake news, and in an environment where individuals believe that policies can be pursued through social networks. I have been highlighting this phenomenon for several years as a major risk to society and democracy. And it has long been said that people can be divided into two groups: those who move forward and achieve something, and those who follow them and criticise. I will reiterate: healthy scientific and social scepticism that questions everything is always welcome, and that is why we are here. However, scepticism that questions growth and development has no social or economic basis. And any influence that leads to a slowdown in potential growth has a direct negative effect on people's standard of living and prospects for progress!

I will now move on to the projections.

- Regarding inflation, we expect that in Q1, y-o-y inflation will move around the upper bound of the target tolerance band. For the rest of the year, we expect it to gradually slow down and approach the midpoint by the end of the year, which is the level around which it will move until the end of the projection horizon.
- Such inflation dynamics will be supported by continued restrictive monetary policy conditions, lower imported inflation, an expected slowdown in real wage growth, an expected decline in petroleum product prices, in line with futures, and an expected decline in fruit and vegetable prices, assuming an average agricultural season this year.
- In terms of economic activity, we expect a further acceleration in GDP growth to 4.5% this year. For the next two years, we project growth between 4% and 5%, i. e. closer to 5% in 2027, when the ""Expo"" will be held.Such GDP growth will be driven by domestic demand, with growth in private consumption supported by:
- positive trends in the labour market and further increases in disposable income, as well as
- more favourable monetary conditions. At the same time, we expect that wage growth in the medium term will be in line with productivity growth, contributing to medium-term price stability.
- Fixed investment growth will be supported by:
- increased profitability of the corporate sector in previous years,
- planned high government capital investment in transport, energy, and utility infrastructure, as well as
- more favourable financial conditions.
- We also expect continued FDI inflows, which will, through new technologies and more modern equipment, as well as new knowledge, contribute to the growth in total factor productivity.
- All of this together will contribute to further growth in both private and government investment, as well as its share in GDP of over 25% in the medium term.
- Due to the acceleration of the investment cycle and growth in private consumption, we expect that this year and the next, imports of goods and services will grow slightly faster than exports, resulting in a negative contribution of net exports to economic growth. On the other hand, in 2027, when the ""Expo"" will be held, we expect the contribution of net exports to be positive.

Of course, these, like all macroeconomic projections, are accompanied by numerous global risks, which I will present in a slightly different way than usual. I repeat, I will provide a global context.

- First, long-standing geopolitical tensions have been further exacerbated by the rise of global protectionism. Along with disruptions related to climate change, they continue to influence the volatility of global energy and other primary commodity prices and may have negative effects on both global economic growth and inflation.
- Furthermore, one of the growing structural problems, which the IMF particularly highlighted in October, is the widening income gap between Europe and the United States. The income gap reflects declining productivity growth in Europe,

- which extends to the level of individual enterprises. The response to such movements implies structural changes in the European economy, of which we are a part, with the aim of increasing productivity and competitiveness.
- This is also supported by the accelerated development of the so-called artificial intelligence, which brings enormous transformative changes, creating both opportunities and challenges! According to the findings of the World Economic Forum, in the period from 2025 to 2030, structural changes driven by artificial intelligence in the labour market will create around 14% of new jobs, while around 7% of existing jobs will be eliminated. Thus, the net effect of these changes will be positive in terms of creating new jobs, but the distribution of these changes across regions and countries remains to be seen. For our region to have such an outcome, we must work together to ensure that the transformation, which is inevitable, proceeds in a way that the closure of some jobs opens doors to others, of higher quality.
- This also requires a deeper analysis of demographic trends, namely the process of reducing the working-age population, which is a challenge for all countries. And that is why it is important to invest in people and activate that part of the population that is outside the active labour force.

When it comes to new sources of growth, I first want to state that the current growth model in Serbia has proven to be good. Ten years ago, in 2014, the share of investment in GDP was around 16%, and in 2024 - around 24%. The share of government investment was only 2.2%, and in recent years, it has been over 7%. The unemployment rate has been reduced from over 20% to around 8%, while youth unemployment has more than halved, and the number of formally employed people has increased by almost 400,000! The coverage of the average consumer basket by the average wage is at its highest level, around 95%, and is 30 pp higher than ten years ago! Thus, the current growth model has proven to be good!

When we talk about the coming period and new sources of growth, it is certainly best to have innovations and new technologies, where domestic companies should also play a significant role. Unfortunately, the key new technologies that will shape the world in the coming decades are in the hands of the United States and China, and the technological gap is widening. And it is precisely here, and for this reason, that there is room for greater cooperation and integration at the level of the entire European market.

I will also recall the October analysis by the IMF, which highlights that a deeper and larger single European market would stimulate the necessary growth in productivity. It notes that the two previous waves of enlargement - in 1995 and 2004 - brought benefits not only to the countries joining the EU but also to the founding member states of the EU, which experienced significant income growth. Therefore, a joint response in terms of developing new technologies could have a multiplier effect on the growth and development of all European economies!

Esteemed participants of the Business Forum,

I have spoken about global risks and potential responses, particularly from policymakers in Europe, of which we are a part. Among domestic risks, I highlight the potentially missed opportunities for high growth and the time needed to return to the trajectory we have secured, which places us at the top of Europe in terms of growth.

That is why today, as in previous forums, I will remind everyone that we have an obligation never to forget that stability is priceless, and there is no alternative to it. Without stability, any discussion about sustainable income growth and societal development loses its meaning!

On behalf of the NBS, I can promise:

- we will continue to work in the public interest,
- relative exchange rate stability has no alternative,
- there will be no negative interest rates in Serbia, as money must fulfil one of its fundamental roles - to earn through savings and the concept of interest. ""Negative interest rates are a sign of central banks' desperation, not a solution to economic problems.""

In every decision we make, we have been and will continue to be guided by the stability of the system! I believe that in these uncertain times, this is the key to duration. We cannot influence the policies and decisions of major powers, but we can and must support our development opportunities.

Finally, I congratulate the Serbian Association of Economists on their well-deserved selection as the host of the 21st World Congress of Economists, which will be held in June next year!

And finally, I ask you all, not expecting an answer: how many phone numbers do you know if you were to lose your phone and the contacts stored in it? Do you know how to calculate a discount on prices when you're out shopping? And how will your children, who rely on ChatGPT and mobile phones to do their homework, manage if, at some point, they can't charge their phone or if someone, just for fun, takes away their phone and all these devices that represent progress and development? Never forget that, above all, we are human beings who must think for ourselves, make our own decisions, and not forget the most basic things - to use our own brains and our own hearts!

Thank you all. I wish you a successful 32nd Kopaonik Business Forum.",Jorgovanka Tabaković
https://www.bis.org/review/r250305a.htm,Andrew Hauser: Monetary policy in a VUCA World,"Speech by Mr Andrew Hauser, Deputy Governor of the Reserve Bank of Australia, at the Australian Financial Review Business Summit, Sydney, 5 March 2025.",2025-03-05 00:00:00,"## Monetary Policy in a VUCA World



RESERVE BANK OF AUSTRALIA RESERVE BANK OF AUSTRALIA

## Andrew Hauser

Deputy Governor

The Australian Financial Review Business Summit

Sydney - 5 March 2025



## Introduction

In the late 1980s, as the Iron Curtain fell, the US Army War College threw away its old Cold War playbook. In its place, trainee strategists were taught to see the world as Volatile, Uncertain, Complex and Ambiguous: or 'VUCA' for short. 2 The implications were far-reaching. Out went the old certainties. And in came a new approach that stressed the importance of approaching problems from different angles, drawing on multiple perspectives and scenarios, learning from mistakes, making robust decisions, and communicating openly about the uncertainties.

Where the military began, the business world followed: VUCA begat a million Harvard Business Review articles. Inevitably perhaps, it lost some of its shine in the decades that followed. But today it's back - with a vengeance. The rules of global trade have been turned on their head. New geopolitical realities are dawning. Artificial intelligence, the energy transition, demographic change and the long shadow of COVID-19 are fundamentally changing our concepts of economic activity and work. And Australia, like elsewhere, is seeking new sources of productivity growth. 3  With the world in flux, companies, households and governments must change how they think, act and plan - just like those army cadets of the 1980s. 4

Monetary policy cannot affect these profound changes. But it does have one key job - and that is to ensure that, of all the things people do have to worry about, inflation is not one. High inflation hurts everyone. It hits living standards, particularly for those on low and fixed incomes. And it disrupts households and companies' plans. The past few years have been a vivid reminder of that. Around the world, core inflation reached multi-decade highs (Graph 1).

Graph 1 Trimmed Mean Inflation*

Year-ended



Sources: LSEG; RBA.

Uncertainty rose sharply too. Forecasting prices during the pandemic was harder than at any time in the past quarter of a century: for central banks (Graph 2) 5 - and for everyone else too.

Graph 2

Trimmed Mean Inflation Forecast Error*

One-year ahead



Sources: ABS; RBA.

That left inflation much higher up peoples' VUCA worry lists than it should be, harming livelihoods and crowding out focus on the economic choices that households and companies should be spending their time on. Our job is to put that into reverse - returning inflation to the background, where it belongs. 6

In my remarks today, I want to review progress towards that goal. I'll start with the good news - inflation is down and employment is up. We are moving on from the narrow path. But monetary policy must always look ahead and here I want to discuss two decidedly VUCA risks that shape that outlook: the prospects for world trade; and the degree of spare capacity in the Australian labour market. I will conclude with some implications for monetary policy.

## Moving on from the narrow path

While Australia saw much the same pickup in inflation as elsewhere, our monetary policy response was different. Interest rates rose significantly - but they never reached the levels seen in many other developed economies (Graph 3).

Graph 3 Policy Rates

Advanced economies*



* Light blue lines represent Canada, Euro area, New Zealand, United Kingdom and United States

Source: Bloomberg.

That was an explicit choice, grounded in our mission: to bring inflation down, but at a pace that helped preserve sustained full employment. An implication of this strategy, clear from the start, was that just as interest rates rose by less, so they would also fall less far - and less quickly.

There were always risks on both sides of this 'narrow path' - and people regularly called them out. Some said the RBA should have tightened more to bring inflation down faster and earlier - and clearly we could have. But that would have risked materially higher unemployment. Others said we should have eased more quickly to help kickstart economic activity. And we could have done that too. But it would have risked inflation being higher for even longer. In the Board's judgment, both alternatives would have left the Australian people worse off.

That is why the latest economic data are encouraging. Year-ended trimmed mean inflation, our preferred measure of underlying price pressures, fell to 3.2 per cent in the December quarter, 0.2 percentage points lower than expected in November. Among other things that reflected lower inflation in new dwelling costs, rents and market services - which had been stubbornly persistent. Measured on a shorter two-quarter annualised basis, trimmed mean inflation was in the 2-3 per cent target range (Graph 4).

Graph 4 Measures of Inflation



While inflation has moderated, employment has continued to grow extraordinarily strongly. That's true compared both with other developed economies (Graph 5), and with our own history: 64½ per cent of the population now have jobs, the highest on record.

Graph 5 Level of Total Employment*



December quarter 2019 = 100

By contrast, economic growth has been much more subdued, particularly in the private sector. But here too there is now cautiously better news, with partial indicators suggesting that household spending picked up in the December quarter. GDP growth is projected to rise back to trend over the forecast period.

So we look to be moving on from the narrow path. But central bankers are paid to worry, not celebrate. And monetary policy works with lags - so it must be set with an eye to the future, not the past. I will now discuss two key uncertainties that shape that outlook.

## Key uncertainty 1: Global trade policy - VUC, but especially A?

To the naked eye, the four words in 'VUCA' seem just different versions of 'chaos'. In fact, their meanings are distinct. Volatility and complexity are the simpler concepts. ' Volatility ' means rapid change, whether predictable or unpredictable - and ' complexity ' means a world of multiple overlapping causes and effects. Uncertainty and ambiguity are slipperier. ' Uncertainty ' , in the classical sense, means you know the model, but don't know the parameters. So you have to estimate an imperfect model-based forecast, which you can refine as you get more information. ' Ambiguity ' means you don't know the model, so any model-based forecasts will break down, and feeding more information into those same models won't help. In situations of ambiguity - or 'Knightian uncertainty' 7 as economists sometimes call it - judgement and instinct are as important as formal analysis.

These concepts can help us think through the implications for Australia of global trade policy uncertainty which is at a 50-year high (Graph 6).

Graph 6 Trade Policy Uncertainty*

Journal, and Washington Post.



Sources: Caldara et al (2019); RBA.

As economists, our inclination is to approach this as an analytical problem of classical uncertainty. We might note for example that, from a macroeconomic perspective, Australia's direct exposure to US tariffs levied on our exports is limited (Graph 7).

Graph 7 Direct Exposure to US Tariffs*



* Calculated as 10 per cent of the value of 2022 exports to the US divided by GDP; calculated in US dollars; does not account for trade redirection, tax incidence or price changes.

Sources: Deutsche Bank Research; RBA; UN Comtrade; World Bank.

Such an analysis might quickly turn, however, to the fact that Australia is heavily integrated into, and reliant on, the global economy more broadly - and particularly China (Graph 8). 8  Hence the bigger macroeconomic risk for us would be if the imposition of US tariffs on third countries triggered a global trade war that impaired our trade and financial linkages more broadly. As Australia's long history has shown, we thrive when trade, labour and assets flow freely in the global economy, but we suffer when countries turn inwards.

Graph 8 Exports at Risk*

By country



* Higher numbers indicate greater risk; the Ôneed for diversion indexÕ is the trade-weighted average of the geopolitical distance between each country and its trading partners; the Ôimpediment to diversion indexÕ is the trade-weighted average across sectors of a measure of sectoral concentration adjusted for geopolitical distance; line of best fit shown in grey.

Sources: Qiu, Xia and Yetman (2024); RBA.

In principle, it is possible to estimate the quantitative impact of policy alternatives on Australian activity and inflation using macroeconomic models, though the number of assumptions required is daunting. It includes: the scale, scope and persistence of US trade measures globally; the extent of any policy reactions in third countries (including both trade retaliation and domestic stimulus); the reaction in financial markets, including crucially how the exchange rate adjusts; and the responses of global trading firms, including both production and trade diversion.

Our February Statement on Monetary Policy included three stylised scenarios, involving different sets of these assumptions. 9 These scenarios suggest some downward impact on Australian activity; and an impact on inflation that could be either positive or negative, depending on whether supply or demand effects dominate. But many other alternatives are possible too. Given the large uncertainties at this early stage, only limited changes were made to our central projections for global activity.

Up until very recently, financial markets appeared to be placing little weight on any severe adverse scenario. Measures of implied volatility in equity, bond and most foreign exchange markets were subdued. Estimates of equity risk premia were close to their post-Global Financial Crisis lows (Graph 9).



And equity investors appeared to take out only modest extra downside insurance in response to the early flurry of news about tariffs (Graph 10).



There are several possible reasons for this apparently benign reaction. Investors may have believed tariff threats were being used primarily as a negotiating tool, with relatively limited longer term economic effects. They may have believed other promised US policy initiatives, including fiscal measures and deregulation initiatives, would more than outweigh the impact on global activity. They may have believed that demand in countries

outside the US, including Australia, would be insulated by adjustments in exchange rates 10 and extra stimulus in key overseas markets. Or they may simply have believed that US policymakers would again show limited tolerance for declines in equity prices, as happened in 2018/19.

That confidence has taken a bit of a knock in recent days. Some of that reflects recent US data, and some evolution in the direction of tariff policy. But it may also reflect a growing recognition that, if companies and households come to conclude that trade policy uncertainty has moved on from classical Uncertainty ('carry on till the fog lifts') to genuine Ambiguity ('almost anything could happen'), they may choose to batten down the hatches - postponing planned spending, particularly on longer term capital investment, until things become clearer. Such 'watchful waiting' could prove rational individually, but economically damaging in aggregate. As The Economist put it recently, 'tariff uncertainty can be as ruinous as tariffs themselves' . 11 The Federal Reserve estimated that heightened uncertainty over trade policy in 2018 reduced global GDP by nearly 1 per cent in 2019 12 - and Graph 6 suggests the pick-up in policy uncertainty is much larger this time around. The possibility of such an effect played a part in the Board's policy deliberations in February.

## Key uncertainty 2: Capacity in the domestic economy

A second key uncertainty lies closer to home, in the labour market. While the recent strength in employment growth is welcome, it's also unusual after a period of such subdued GDP growth. The question is what it means for the margin of spare capacity in the economy, and hence for the inflation outlook.

Assessing this issue is harder than it seems. Spare capacity cannot be directly observed. And its sustainable level has no set value, and likely changes over time as the structure of the economy evolves. Some argue this makes the concept meaningless - but that does require you to have an alternative narrative for inflation. At the RBA, we prefer to give it some weight while recognising the pervasive uncertainties, by building up a picture using a wide range of qualitative and quantitative data, and analytical techniques - as well as regularly challenging how we could be wrong.

An obvious place to start when assessing labour market capacity is to look at proxy measures. Two of the most important are unemployment (those looking for work) and underemployment (those in work, but looking to do more hours). As recently as November, we were projecting unemployment to rise to 4¼ per cent by end-2024 and 4½ per cent in late 2025, as past weak activity reduced hiring rates. In fact, unemployment has remained at or around 4 per cent, and underemployment has fallen back to late-2022 levels. A range of other capacity measures have also stabilised or reversed in recent months, including the ratio of vacancies to unemployment, and surveys of firms' reported labour constraints (Graph 11).

Graph 11 Labour Utilisation and Constraints



* Share of firms reporting labour constraints.

Sources: ABS; NAB; RBA.

With activity projected to pick up in 2025 as private demand recovers, these developments have caused us to revise down our central projection for unemployment.

But the implications for inflationary pressure depend on where this leaves spare capacity relative to sustainable levels. Two considerations suggest labour market conditions are relatively tight. First, all of the measures in Graph 11 lie some distance above their historical averages - and unemployment remains close to its lowest level at any time in the past 50 years. 13 But that can't be the end of the matter - because the levels of nominal and real wage inflation associated with a given level of unemployment have fallen substantially over that period. So the sustainable level must be lower too. 14  How much lower, no-one can say for sure. But it is possible to back out a range of time-varying estimates from past relationships between unemployment, wage and price inflation, using a suite of statistical methods of varying levels of sophistication. These estimates include the immediate pre-pandemic period, when wage inflation persistently undershot forecasts.

Those analytical approaches all suggest that, while sustainable unemployment levels are likely to have fallen materially in recent decades, current labour market conditions still appear relatively tight. Combined with the lower unemployment projection, that would suggest somewhat greater upward pressure on inflation from the labour market over the medium term. Exercises using the other measures in Graph 11 reach a similar conclusion.

But these are critical judgments - and serious commentators from academia, the financial markets and elsewhere have argued that we may be taking too pessimistic a view. We take those challenges seriously.

Some point out that business surveys of employment intentions have been at, or slightly below, long-run averages. And that is true, but such surveys typically focus on the market sector, where employment growth has been relatively subdued. They tell us less about pressures in the non-market sector, which has accounted for most of the recent strength in aggregate employment (Graph 12).

Graph 12 Employment Growth and Employment Intentions



* 12 months ahead; standard deviations from mean.
- ** Dot shows January 2025 value.

Sources: ABS; NAB; RBA.

That leads to a different challenge - that non-market employment has limited influence on aggregate wage and inflation pressure, because it draws on a different labour pool. But it is hard to find support for this in the data. For example, the health care sector - a big contributor to aggregate employment in recent years - has drawn quite materially on workers in other industries (Graph 13), helping to equalise cross-sectoral wage growth. 15 Discussion with liaison contacts suggest similar mechanisms are at work in other sectors too, including construction.

Graph 13 Employment and Cumulative Net Flows

By sector, September 2021 = 100



* Contributions to the change in employment in each sector since September 2021; the gap between the employment index and the sum of net hires from non-employment and other sectors captures multiple job-holders who have switched the industry of their main job.

Sources: ABS; RBA.

A third argument against the view that labour market conditions are relatively tight notes that nominal wage growth has been easing (Graph 14). But with measured productivity growth as weak as it has been recently, that still implies elevated growth in companies' unit labour costs. Some of that apparent strength could reflect under-measurement of productivity growth or a temporary burst of real wage catch-up to past inflation, rather than labour market tightness. But such effects would need to be unusually large to account for the whole of the gap. 16

Graph 14

## Wage Price Index Growth by Sector



Finally, it is possible that, over and above the impact of labour market conditions, recent disinflation also reflects compression in other aggregate price drivers, including margins and housing costs. In that context it is noteworthy that output-based measures of capacity pressures have continued to fall.

Drawing this all together, our central projection reflects a judgement that labour market conditions will remain relatively tight over the forecast period, and a little tighter than assumed in November. At the same time, we have recognised the risk that recent inflation data may suggest we have overestimated the extent of excess demand in the labour market by applying a little downwards judgement on the inflation profile. And the Statement on Monetary Policy sets out what one would need to believe to justify an even larger downward adjustment, as a risk scenario. 17

## Implications for the RBA's monetary policy decision

Graph 15 compares the central projection for trimmed mean inflation in February with that in November. Inflation is slightly lower in the near term, reflecting the downside news on inflation, wages and activity. But it is a little higher further out, stabilising slightly above the midpoint of the target range, reflecting the surprising strength in the labour market.

Graph 15 Trimmed Mean Inflation



Why then did the Board cut rates? Did we reject the staff forecasts, as some have claimed? Or did we suddenly and confusingly relax our previously stated intolerance for persistent inflation deviations from target? Nothing of the sort - for me at least, the rationale is relatively simple.

First, the encouraging news on price and wage inflation gave us somewhat greater confidence that underlying inflation is on track to return to the target range in the near term - if anything, a little more rapidly than previously expected. The Board noted that the combination of lower inflation data, and a lower near-term projection, put Australia in a very similar position to many other countries ahead of their first cuts (Graph 16).

Graph 16 Core Inflation Deviation at Date of First Cut

Deviation from target; data available at time of decision



* Central banks in the United Kingdom and New Zealand do not publish forecasts of core inflation.

Sources: Central banks; RBA.

Second, however, the Board also recognised that the uncertainties about the outlook for inflation become larger, the further out you go.

One uncertainty relates to future changes in the cash rate. All projections have to assume something about this path, and by convention we assume it follows market expectations. In February, that curve implied up to four 25 basis points cuts over the forecast horizon, at a somewhat more frontloaded pace than in November. In light of the data then available, including the strong labour market, it was not clear that a rate cutting cycle of this depth was likely to return underlying inflation sustainably to the midpoint of the target range. The February projections are consistent with that view.

Third, that did not, however, mean there was no case for a cut at all. To see that, the red swathe in Graph 17 shows an illustrative range of projections for underlying inflation at the time of the February forecast under the alternative assumption of an unchanged cash rate target of 4.35 per cent.

Graph 17 Illustrative Cash Rate Path Scenario



* Cash rate paths reflect a daily interpolation of quarterly profiles consistent with the board meeting cycles; black line refers to cash rate assumption underlying the February 2025 SMP forecast.
- ** The shaded area represents the range of outcomes spanned by two of the macroeconomic models in use at the Bank Ð MARTIN and the multi-sector DSGE model.

Sources: ABS; RBA.

The centre of the swathe lies slightly below the midpoint of the target range, consistent with a bias to cut. But there were good arguments for both a hold and a cut - and the Board discussed them in some detail, as the minutes released earlier this week show. 18 Foremost in that debate included the issues I have discussed today the outlook for global activity, and the degree of spare capacity in the labour market.

Some have flagged a concern that the Board's messaging on rates feels like fine-tuning. It is certainly true that the pervasive uncertainties we will face over the forecast period are orders of magnitude larger than the sorts of differences to the target midpoint I've discussed here. But the Statement on the Conduct of Monetary Policy agreed between the Treasurer and the Board is clear: we set monetary policy such that inflation is expected to return to the midpoint of the target range. And we do that because it maximises the chances of inflation remaining sustainably in that range. The rate cut in February reduces the risks of inflation undershooting that midpoint, but the Board does not currently share the market's confidence that a sequence of further cuts will be required.

That assessment will of course evolve as time proceeds and further data help distinguish between alternative narratives of the economy. Interest rates will go where they need to go to maximise the chances of keeping inflation sustainably in the target band while helping to sustain full employment. Progress towards that target

has been good - but it is too soon to declare victory. Many households and companies are continuing to struggle - and the Board will continue to take decisions, meeting by meeting, in the interests of all Australians. In so doing, our goal is to remove inflation from the list of things people have to worry about, leaving them free to focus on navigating an increasingly VUCA world.

## Endnotes

- I am particularly grateful to Sue Black, Chris Schwartz and Michelle Wright for their help in preparing this speech and to David Bold, Andrea Brischetto, Michele Bullock, Georgia Carney, Natasha Cassidy, Iris Chan, Sally Cray, Boston Dobie, Samuel Evangelinos, Matt Gibson, Jacob Harris, Sarah Hunter, Shan Jayawardhana, Bradley Jones, Christopher Kent, Kevin Lane, Jeremy Lawson, Marcus Miller, Mike Major, Penny Smith, Tim Taylor and Nick West for their comments and contributions. 1
- 'VUCA' was first coined by Warren Bennis and Burt Nanus in their 1985 book: Bennis W and B Nanus (1985), Leaders: The Strategies for Taking Charge , Harper &amp; Row, New York. 2
- For a recent perspective on the importance of productivity for monetary policy, see Plumb M (2025), 'Why Productivity Matters', Speech at the Australian Business Economists Annual Forecasting Conference, Sydney, 27 February. 3
- People didn't literally stumble across the merits of decision-making under uncertainty in the 1980s, of course. Indeed the RAND Corporation website still links to a 1959 paper by Thomas Schelling, the Nobel prize winning game theorist of the Cold War era: Schelling T (1959), 'Randomization of Threats and Promises', RAND Paper No P-1716, 5 June. It has more than a little relevance today. 4
- For a review of inflation forecasting over the pandemic period, see RBA (2022), 'Box C: What Explains Recent Inflation Forecast Errors?' , Statement on Monetary Policy , November. 5
- The goal of making monetary policy boring is sometimes compared with John Maynard Keynes' hope that 'economists could manage to get themselves thought of as humble, competent people on a level with dentists'. As a relatively recent arrival to Australia from the United Kingdom, I have discovered that dentistry is one of the many areas where my new adopted home has a substantial comparative advantage: Crocombe LA, GC Mejia, CR Koster and GD Slade (2009), 'Comparison of Adult Oral Health in Australia, the USA, Germany and the UK', Australian Dental Journal , 54(2) pp 147-153. Whether that reads across to relative monetary policy outcomes, I could not possibly say. 6
- The name comes from the Chicago economist of the 1920-1930s, Frank Knight. See, for instance, Knight FH (1933), Risk, Uncertainty and Profit , 1st reprint edition, Houghton Mifflin Co, Boston; or Kay J and M King (2020), Radical Uncertainty: Decision-Making Beyond the Numbers, WW Norton &amp; Co, New York. I also discussed these issues in Hauser A (2024), 'Beware False Prophets', Speech to the Economic Society of Australia, Brisbane, 12 August. 7
- Table 1 in my December 2024 speech sets out a range of measures of Australia's integration with the world economy, and also explains the background to Graph 8 (which is Graph 6 in the earlier speech): Hauser A (2024), 'The Ghost of Christmas Yet to Come', Speech at the Australian Business Economists' Annual Dinner, Sydney, 11 December. 8
- See Key risk #2 in RBA (2025), 'Chapter 3: Outlook', Statement on Monetary Policy , February. 9
- Despite the lively external commentary, the Australian dollar has so far adjusted only modestly to news about tariffs: the trade-weighted index fell only 2 per cent between the November 2024 and February 2025 Statements on Monetary Policy . 10
- The Economist (2025), 'Tariff Uncertainty Can be as Ruinous as Tariffs Themselves', The Economist , 6 February. 11
- Caldara D, M Iacoviello, P Molligo, A Prestipino and A Raffo (2019), 'Does Trade Policy Uncertainty Affect Global Economic Activity?' , FEDS Notes , 4 September. 12
- For an analysis of Australian unemployment since 1900, see Borland J and S Kennedy (1998), 'Dimensions, Structure and History of Australian Unemployment', Unemployment and the Australian Labour Market , Proceedings of the RBA Annual Conference, Reserve Bank of Australia, Sydney. 13
- See, for instance, Ellis L (2019), 'Watching the Invisibles' , Speech at the Freebairn Lecture in Public Policy, Melbourne, 12 June. 14
- See RBA (2025), 'Box C: Health Care Employment and its Impact on Broader Labour Market Conditions', Statement on Monetary Policy , February. 15
- The models of sustainable labour market capacity used to inform the forecast judgements aim to capture average real wage catch-up through the inclusion of lagged inflation and inflation expectations terms, and adjusting for large award wage increases linked explicitly to high inflation. 16
- See Key risk #1 in RBA (2025), 'Chapter 3: Outlook', Statement on Monetary Policy , February. 17
- RBA (2025), 'Minutes of the Monetary Policy Meeting of the Reserve Bank Board', 17-18 February. 18",Andrew Hauser
https://www.bis.org/review/r250304a.htm,Claudia Buch: Ten years of the banking union - laying the groundwork for the next decade,"Speech by Prof Claudia Buch, Chair of the Supervisory Board of the European Central Bank, at the ""Finanzplatztag 2025"" event, organised by Börsen-Zeitung, Frankfurt am Main, 3 March 2025.",2025-03-03 00:00:00,"SPEECH

## Ten years of the banking union: laying the groundwork for the next decade

Speech by Claudia Buch, Chair of the Supervisory Board of the ECB, 'Finanzplatztag 2025' event organised by Börsen-Zeitung

Frankfurt am Main, 3 March 2025

It has been more than 15 years since the global financial crisis, but its lessons are as relevant as ever. [ ] Europe reacted to the financial crisis and the European debt crisis by strengthening its institutions and regulations, with the banking union as a key element. Today's challenges are different, but we still need more European integration and a deeper internal market to face these challenges. 1

Let's look back at what has been achieved in the past ten years. The global financial crisis caused substantial damage to the real economy, with gross domestic product in Europe falling by 4.3% in 2009 alone. [ ]  Significant state intervention was necessary to stabilise the financial system and prevent even greater losses. Providing direct assistance to banks put a major fiscal strain on the euro area - even more so than the international financial assistance for individual countries during the euro area sovereign crisis. 2

[ ] 3

Banks in Europe today are more stable and better capitalised than they were ten years ago when the banking union was created, and non-performing exposures have fallen significantly. We now have European banking supervision which can apply common standards, assess risks consistently and take measures when banks show vulnerabilities. The Single Resolution Mechanism - the second pillar of the banking union - ensures that stress in the banking sector can be managed with funds provided by industry, without recourse to taxpayers' money.

All of this improves risk management - and the provision of banking services is not possible without taking risk. Banks transform short-term deposits into long-term loans and they diversify risk, which contributes to growth and prosperity. We as supervisors do not want to impede risk-taking. But it is our task to protect depositors and ensure that the financial system runs smoothly. And the larger the risks, the more capital banks need to absorb unexpected shocks so that when crises hit, deposits are secure and funding for the real economy is ensured.

The stability of the financial system we have seen in recent years has been the success of many: the political decisions on the banking union have given us better regulation and a better institutional framework. The ECB is responsible for directly supervising the largest banks in the euro area, in close cooperation and a spirit of mutual trust with national supervisory authorities. Many banks have improved their governance and risk management, and we are working at addressing the remaining deficiencies.

But it is also true that the shocks of recent years - the COVID-19 pandemic, the energy crisis - have been largely mitigated by policymakers. In view of the steep fall in GDP and the rise in prices, fiscal measures stabilised the financial situation of households and firms. Corporate insolvencies were contained, as were credit losses.

And a stable financial sector benefits the real economy. Banks with a better capital position can lend more and support their customers in difficult times. This is particularly visible in those countries that were most affected by the financial and sovereign debt crises. In those countries, high levels of non-performing loans and low capitalisation weakened banks and economic growth. Today, banks are better capitalised and are in a better position to promote growth. In Greece, for example, the level of non-performing exposures has fallen from almost 50% in 2016 to just over 3%, with economic growth at 2.4%, which is well above the EU average of around 1%. [ ]  Economic dynamics are similarly positive in Spain, Ireland, Portugal and Cyprus. [ ] 4 5

The next decade will bring new challenges throughout Europe. Geopolitical risks have increased. The energy transition, digitalisation and shifting patterns of global trade require structural adjustments in the real economy and will ultimately also be mirrored in banks' balance sheets. But there are new opportunities, too - for example, banks can take advantage of digitalisation, which could help them build scale within the internal market. At the same time, new financial service providers are entering the market, and these are often less well regulated. All of these factors may increase pressure on banks to take on additional risks.

So it is now up to policymakers, supervisors and banks to make the European banking sector future-proof. We need to look to the future - to the risks and challenges for banks, to the political choices necessary to strengthen the banking union and the internal market, and to a strong regulatory and supervisory framework that protects banks' resilience.

## Taking stock: resilience of the European banking sector

Strong, competitive banks are resilient - a term that has been much used since the pandemic and that covers many aspects. The economist Markus Brunnermeier defines resilience as the capacity to react to shocks without taking lasting damage - much like a reed, which bends in the storm but doesn't break. [ ] Banks' resilience has two dimensions. First there's the financial resilience. Do banks have enough capital and liquidity to absorb shocks on their own? The numbers are clear: the banks are much more resilient financially now than at the start of the banking union, and the quality of capital has improved. [ ]  Market confidence in European banks has increased. [ ]  Bank profitability has improved in recent years, no doubt driven to a large extent by higher interest rates. 6 7 8

In Germany, too, the banks have a better capital and liquidity position than they did ten years ago (see Figures 1 and 2). [ ]  As in the rest of the euro area, the leverage ratio has increased less than the riskweighted capital ratio. [ ] 9 10

## CET1 ratio and leverage ratio, 2015-24



Source: ECB supervisory banking statistics and ECB calculations.

## Liquidity coverage ratio and net stable funding ratio, 2015-24

Source: ECB supervisory banking statistics and ECB calculations.



But financial resilience is not everything. Banks may be very well capitalised and very liquid, but their existence may still be threatened when a serious cyberattack hits, when they breach financial sanctions or are suspected of money laundering.

So resilience also means sufficient operational resilience and good risk management. Here's an example: the number of cyberattacks on European banks almost doubled between 2022 and 2024 while the complexity and number of successful attacks grew. [ ] 11

This is why last year we conducted a cyber resilience stress test to check whether banks are well prepared to respond to successful cyberattacks. It turns out that banks are prepared and can react to cyberattacks. [ ]  But we did identify deficiencies across banks and so are now working with them on concrete solutions to remedy those vulnerabilities. 12

I would like to highlight one important point here: banks need IT systems that operate 24/7 so that their customers trust these systems. Good IT requires long-term investment. When banks invest too little in their IT systems, they may be able to boast good financial figures in the short run, but this can hurt their long-term competitiveness. This is why we as supervisors look at banks in their entirety - we identify deficiencies in IT and information systems, [ ]  risk provisioning and internal governance so that financial metrics reflect reality and that banks are sufficiently resilient. Banks' decisions on capital planning and payouts should, ultimately, be driven by the objective to maintain their long-term resilience. 13

## Challenges in the coming decade

Resilient banks will be able to cope with future challenges better than banks facing concerns about negative market developments owing to a weak capital base, tight liquidity or vulnerabilities in their IT systems.

## What are these challenges?

Structural change affecting the real economy due, among other things, to the energy transition and the new geopolitical realities may have an impact on banks' balance sheets. In their risk management, banks will need to take into account not only the direct impact, for example lower sales in the automotive industry, but also the effects on suppliers along the value chain.

At 2.3%, the level of non-performing loans is still low. [ ]  But we are already seeing slight deteriorations though, interestingly, not in the countries where banks have registered high loan defaults in the past. Nonperforming loans are rising notably in Germany and Austria, and to a lesser extent in France. Across sectors, commercial real estate and small and medium-sized enterprises are particularly affected. 14

On top of this come geopolitical risks - one of the priorities for European banking supervision. [ ] Geopolitical risks are not a new risk category, but they affect credit, market, liquidity and operational risks. Precisely because these risks - or rather, fundamental uncertainties - are not easy to capture in traditional risk models, they require particular attention from banks' management. Internal stress tests should consider relevant adverse scenarios, and vulnerabilities should be tackled in a timely manner. 15

We will not lose sight of increasing climate and environmental risks that need to be managed by banks. [ ] Let me be clear: we don't make climate policy. But we must ensure that banks adequately address climate and environmental risks and build up resilience. Since making this topic a supervisory priority in 2019, we have made significant progress. Almost all banks now consider climate-related and environmental risks to be material financial risks and have adapted their risk management practices. To this end, they are reliant on sound information from their customers and good climate reporting. But we have not reached our goal yet. More needs to be done to ensure that all banks manage climate and environmental risks well. 16

Last but not least, the digitalisation of finance affects the competitive landscape in the banking sector. By using artificial intelligence, for example, banks can make better use of information, reduce costs and work more efficiently so as to remain competitive. New providers of financial services are pushing into the market, often with innovative ideas. Big tech firms that are well capitalised and strong in terms of IT systems are offering financial services. But the digitalisation of finance also brings new risks, not least in the area of outsourcing. And other financial services providers often operate in a far less regulated environment - this can intensify the pressure on banks to likewise resort to risky business activities. Risks for financial stability may increase.

Our perspective as European banking supervisors is very clear. We are open to new digital business models, but we cannot decide which technologies are best suited. That is up to the market. But in the financial sector, market forces alone reach their limits. Supervision and regulation create a framework to ensure that competition does not lead to excessive risks, so that depositors are protected and that the financial sector can contribute sustainably to growth and prosperity.

## What needs to be done over the next decade

We can't achieve these goals alone. We need a strong regulatory framework that facilitates our work. We have this today - and we need a continued consensus in society that deregulation and weaker resilience would ultimately weaken stability and growth. We need banks that are well capitalised and have sound risk management systems - that's how banks can remain strong partners for the real economy. The debate on competitiveness should not be used as a pretext for watering down regulation. Because resilient banks are a key factor shaping competitive advantage.

Given the changed environment and greater risks, all stakeholders need to prepare for the coming decade.

As regards banks, their current good profitability offers them an opportunity to build more resilience, both financially and operationally. Moreover, a generational change is now occurring at many banks. Especially for German banks, which recorded a low number of loan defaults in recent years, it will be important to retain sufficient expertise in managing crises and dealing with loan defaults.

The response of the public sector to the changed environment has, in my view, three elements: supervision, reporting and regulation itself.

As supervisors, we adopted a comprehensive reform last year to make our processes leaner and more efficient. [ ]  At the same time, we will ensure that supervisory findings result in concrete improvements at banks more swiftly than they have done up to now. In addition, a pilot project is currently under way to accelerate supervisory approvals for standardised securitisations - without losing sight of the risks arising from securitisations. [ ] 17 18

Moreover, we can reduce the costs of regulatory reporting by making better use of supervisory technology (suptech) tools and by better integrating supervisory and statistical reporting systems. [ ]  Many banks could improve their internal information and reporting systems, an aim which is one of the current supervisory priorities. Besides improving the banks' internal risk management, this simultaneously reduces the costs of responding to supervisory requests. 19

Discussions are under way whether the complexity of the current regulatory framework could be reduced. For me, such discussions should be guided by two main principles. First, any modification of the regulatory framework should not come at the expense of resilience. Second, debates on the effects and side effects of regulations should be based on systematic evidence, including evidence from our supervisory work. This evidence paints a rather clear picture - greater financial sector resilience does not come at the expense of lending or growth. [ ] 20

Meanwhile, policymakers should do all they can to complete the banking union. Now is the right time to make the system robust and to close gaps in the resolution regime. The more credible the resolution regime, the lower the incentives for banks to take on excessive risks and the lower the costs if difficulties nonetheless arise.

It has now been almost two years since regional banks in the United States ran into problems and required policy support. We should not forget this experience: for medium-sized banks, too, it may make sense to use resolution procedures rather than insolvency if financial stability would otherwise be jeopardised.

We therefore see the European Commission's proposal to improve the crisis management framework as going in the right direction. [ ]  The Single Resolution Board (SRB) needs sufficient resources to extend the resolution regime to cover medium-sized banks. Moreover, contrary to international standards, Europe currently lacks an effective public sector backstop mechanism to provide temporary liquidity funding in resolution. [ ] 21 22

And we now need to make progress on the European deposit insurance scheme. Digital business models and risks are not bound by national borders. Depositors in Europe must have confidence that the banks to which they entrust their savings are not only subject to single supervision, but are also covered by a common deposit insurance scheme. Not least, European deposit insurance is essential to loosening the bank-sovereign nexus.

Finally, the capital markets union can help lower barriers to cross-border activities that are relevant for banks. European banking supervision applies common standards, such as when assessing mergers or granting licences. [ ]  However, there are marked differences across countries in many national rules affecting banks, for example in the area of insolvency or real estate law. That makes it more difficult to tap the full potential of the internal market. 23

## Conclusion

With the banking union, Europe has provided a strong common response to past crises. Legacy assets were reduced, banks' resilience has increased and European banking supervision ensures uniform standards across Europe.

More Europe and a stronger banking union should be the answer to the risks and uncertainties of the future. Neither banks nor supervisors can influence future shocks to banks and the economy. Sufficient capital and sound risk management increase the safety and soundness of banks. But even the best supervision cannot prevent future stress situations. Policymakers should therefore act now to close any remaining gaps in the European resolution regime. The better we can deal with future stress situations, the better depositors and taxpayers will be protected.

Calls for a relaxation of banking regulation to boost competitiveness and growth may sound tempting. But at the end of the day, reforms need to address the root causes of weak growth, stimulate innovation and allow companies to more fully reap the benefits of the Single Market - the reports by Mario Draghi and

Enrico Letta identify key policy areas. [ ] 24

We will of course have to make supervision, regulation and reporting as efficient as possible. However, the hope that looser supervision and regulation would pay off in the form of more growth is likely to remain illusory.

In fact, we need effective regulation and supervision to preserve financial stability as a basis for sustainable growth. The severe economic and social consequences of financial crises can easily be forgotten. We therefore need to be prepared now for the challenges of the future.

1.

I would like to thank Sharon Donnery, Thomas Jorgensen, Conny Lotze, Massimiliano Rimarchi, John Roche and Sascha Titze for their helpful comments and input on an earlier draft. All remaining errors are my own.

2.

Source: Eurostat.

3.

Ferdinandusse, M. and Lichtenauer, B. (2023), ' ', Economic Bulletin , Issue 6, ECB. The fiscal impact of financial sector support measures 15 years after the great financial crisis

The figures refer to the third quarter of 2024. Growth is calculated relative to the corresponding quarter of the previous year. See . Eurostat

5.

Most recent growth figures for these are: +3.3% (Spain), +2.5% (Ireland), +1.9% (Portugal) and +3.8% (Cyprus). See . Eurostat

6. Brunnermeier, M.K. (2021), The Resilient Society, Endeavor Literary Press, Colorado Springs 7.

Enria, A. (2023), , speech at the press conference on the 2023 SREP results and the supervisory priorities for 2024-26, Frankfurt am Main, 19 December. Introductory statement

8.

Avgeri, I., Dendramis, Y. and Louri, H. (2021), 'The Single Supervisory Mechanism and its implications for the profitability of European banks', Journal of International Financial Markets, Institutions and Money , Vol. 74, September.

9.

The CET1 ratio of significant banks in Germany increased from 13.21% in the third quarter of 2015 to 16.33% in the third quarter of 2024.

10.

The leverage ratio of significant banks in Germany increased from 4.85% in the third quarter of 2016 to 5.75% in the third quarter of 2024.

11.

Tuominen, A. (2025), ' ', The Supervision Blog , ECB, 17 January 2025. Between 2022 and 2024 the number of cyber incidents almost doubled from 77 to 153. One of the reasons behind this rise is dependence on third-party suppliers. If they fall victim to an attack, this has direct implications for the banks that use their services. Operational resilience in the digital age

- 12.

Buch, C. (2024), , speech at the press conference on the 2024 SREP results and the supervisory priorities for 2025-27, Frankfurt am Main, 17 December. Introductory statement

13.

Risk reporting deficiencies may mean that banks' management do not have an up-to-date and comprehensive picture of relevant risks. This is why the ECB is increasingly calling on banks to improve their information systems and address IT security and cyber risks. See ECB (2024), , May. Guide on effective risk data aggregation and risk reporting

14.

ECB, , Non-performing loans ratio (excluding cash balances at central banks and other demand deposits). Supervisory banking statistics

15. Buch, C. (2024), ' ', speech at the eighth European Systemic Risk Board annual conference on 'New Frontiers in Macroprudential Policy', Frankfurt am Main, 26 September; and ECB, . 16. Global rifts and financial shifts: supervising banks in an era of geopolitical instability Supervisory priorities for 2025-27

ECB (2020), , November; Elderson, F. (2024), ' ', The Supervision Blog , 8 May; Elderson, F. (2023), Guide on climate-related and environmental risks You have to know your risks to manage them - banks' materiality assessments as a crucial precondition for managing climate and environmental risks

'

Policymakers as policy takers - accounting for climate-related and environmental factors in banking supervision and monetary policy

', speech at the Peterson Institute for International Economics,

Washington D.C., 21 April ; Elderson, F. (2025), , 17 January; Elderson, F. (2024), ' ', speech at the Sustainable Finance Lab Symposium on Finance in Transition, Amsterdam, 4 October. Interview with Het Financieele Dagblad Sustainable finance: from ""eureka!"" to action

17.

Buch, C. (2024), ' ', The Supervision Blog , 28 May. Reforming the SREP: an important milestone towards more efficient and effective supervision in a new risk environment

18.

ECB (2025), ' ', Supervision Newsletter , 19 February. Securitisations: a push for safety and simplicity

19.

ECB (2023), ' ', Supervision Newsletter , 15 November; ECB, . Suptech: thriving in the digital age Integrated Reporting Framework (IReF)

20.

Buch, C. (2024), ' ', speech at the Eurofi Financial Forum 2024 in Budapest, 12 September. Building a resilient future: how Europe's financial stability fosters growth and competitiveness

21.

For details of the crisis management and deposit insurance framework (CMDI) see Enria, A. (2023), ' ', opening remarks at The CMDI package: a vital building block to improve our crisis management framework the SRB-ECB CMDI Seminar, 16 October.

22.

Financial Stability Board (2024), , Attribute 6 'Funding of firms in resolution', 25 April; ECB (2024), . Key Attributes of Effective Resolution Regimes for Financial Institutions Written overview for the exchange of views of the Chair of the Supervisory Board of the ECB with the Eurogroup on 4 November 2024

23.

ECB (2019), , 5 April; Elderson, F. (2025), , 17 January; ECB (2020), ; ECB (2018), , March. What is the ECB's role in bank mergers and acquisitions? Interview with Het Financieele Dagblad Guide on the supervisory approach to consolidation in the banking sector Guide to assessments of fintech credit institution licence applications

24.

Draghi, M. (2024), , The future of European competitiveness - A competitiveness strategy for Europe

9 September; Letta, E. (2024), , April. Much more than a market - Speed, Security, Solidarity

Reproduction is permitted provided that the source is acknowledged.

Media contacts",Claudia Buch
https://www.bis.org/review/r250305c.htm,Michelle Doyle-Lowe: Effective oversight is vital to the smooth operation of our payments system,"Remarks by Ms Michelle Doyle-Lowe, Deputy Governor of the Central Bank of Barbados, at the World Bank Payments Oversight Training Seminar, Bridgetown, 25 February 2025. ",2025-02-25 00:00:00,"## Michelle Doyle-Lowe: Effective oversight is vital to the smooth operation of our payments system

Remarks by Ms Michelle Doyle-Lowe, Deputy Governor of the Central Bank of Barbados, at the World Bank Payments Oversight Training Seminar, Bridgetown, 25 February 2025.

* * *

Good morning everyone and welcome to this important training initiative that is being facilitated by the World Bank, as part of Barbados' Payments System Modernisation Project. I am Michelle Doyle, Deputy Governor of the Central Bank of Barbados, and Executive Sponsor for this project.  Whether you are joining us in person or online, a warm Monday morning welcome to the World Bank team, the CEO of our sister regulator, the Financial Services Commission (FSC), Warrick Ward, and his team, as well as members of the Central Bank's Executive, management, and members of staff.

The modernisation of our payments system is not merely an infrastructural upgrade; it is a leap toward creating a more resilient, responsive, and innovative financial ecosystem that will further serve the evolving needs of Barbadians and our economy. This project represents the Central Bank's vision for a future where financial transactions are seamless, secure, interoperable, and accessible to all.

The role of the Central Bank to oversee the development of our payments market is well established in our legislative structures such as the National Payments System Act and the Central Bank Act. This mandate to monitor and regulate the payments system is underpinned by the fact that Payments are the backbone of the financial system and impact on financial system stability and integrity. Effective payments oversight is therefore vital for ensuring the smooth operation of financial transactions to mitigate risks and protect consumers. In addition, the Central Bank's collaboration with the FSC on payments oversight is vital for adequate governance and regulation of our evolving payments ecosystem.

Let me take this opportunity to introduce and thank key members of the World Bank team who have been supporting us over the last couple of months to advance the five workstreams that are required to make this modernisation project  a success. The Payments Oversight workstream is augmented by the legal and regulatory review workstream; the procurement and implementation of an Instant Payment System; the operationalisation of new payment functionality such as QR codes, etc.; and the digital financial literacy workstream to drive the adoption of digital payments in our market. We have Nicholas Smith, Senior Financial Sector Specialist - whom many of us have come to fondly refer to as Nick, given our frequent calls, touchpoint meetings, and WhatsApp messages on all matters related to this project.

We are also fortunate to have with us the World Bank experts who will be facilitating this three-day session:

- Corina Arteche - is a consultant with the World Bank for more than 10 years, specialising in payment system reform strategies and the implementation of the

oversight function. Previously, Corina was a manager at the Central Bank of Venezuela where she was responsible for off-site supervision of financial institutions and oversight of the payment and settlement systems. Corina holds a Master's degree in Information and Communication Technology Applied to Education from the Complutense University of Madrid and a Postgraduate Diploma in Economics from the University of Manchester. She has been integral to the development of our Payments Oversight workstream, and capacity building in this area.

- Holti Banka - is a Senior Financial Sector Specialist with the Payments Systems Development Group of the World Bank. Some of you may remember Holti as a panellist at last year's Annual Review Seminar. His work covers different aspects of retail payments including fast payments, national payment strategies, cost measurement of payment instruments, and payments infrastructure interoperability, among others. Holti has participated in numerous payments related conferences, published articles in several academic journals and is on the Editorial Board of the Journal of Payments Strategy and Systems. He received his PhD in International Development/Economic Policy from the University of Maryland.

Let me also take this opportunity to introduce other members of the World Bank Team joining us online- Ragheb al Buderi (Payment Systems and Procurement Consultant), Elize Jackson (Technical Consultant), Bernardo Barradas (Payment Systems Legal Consultant).

Throughout this three-day session, we will cover the key components of the payments oversight function, including:

1. Objectives of payments oversight
2. Components of the national payment system
3. Guidelines for off-site oversight
4. Assessment of systemically important payment systems using PFMI
5. Assessment methodologies for retail payment systems; and
6. Oversight of payment service providers

Corina, you have a diverse group of participants. Beyond our Bank Supervision team, there are representatives from various departments across the Central Bank, such as Operations, Foreign Exchange and Fund Management, Management Information Systems, and Research and Economic Analysis, to name a few. We are all in your capable hands. Rest assured, we have had our coffee or tea and look forward to your insights and guidance, as we roll-up our sleeves to cover the breadth of material that you have prepared for the next few days.  I encourage each of you to ask questions and to share your thoughts during the presentations and break-out sessions.

Whether you are joining us virtually or in person, thank you for your attention and commitment to this important initiative. Let us seize this opportunity to learn, collaborate, and innovate. I wish you a productive, engaging, and enlightening workshop.

I now turn over to the World Bank team to commence the session, and to Runako Brathwaite, Deputy Director in our Payments Oversight Unit, whom has worked assiduously to make this session a reality.

Thank you.",Michelle Doyle-Lowe
https://www.bis.org/review/r250303e.htm,Pål Longva: Report from Norges Bank Watch,"Remarks by Mr Pål Longva, Deputy Governor of Norges Bank (Central Bank of Norway), on the Centre for Monetary Economics' (CME) assessment of the Norges Bank's conduct of monetary policy, published in its Norges Bank Watch Report Series, Oslo, 27 February 2025.",2025-02-27 00:00:00,"Speech

## Report from Norges Bank Watch 2025

Remarks by Pål Longva, Deputy Governor of Norges Bank, 27 February 2025.

## Watch the speech (bi.no)

In February/March each year, the Centre for Monetary Economics (CME) presents a report commissioned by the Ministry of Finance on Norges Bank's monetary policy. A committee of independent economists assesses Norges Bank's conduct of monetary policy. The reports are published by the CME in its Norges Bank Watch Report Series.

First, I would like to thank the members of this year's committee. A regular assessment of our conduct of monetary policy by an external body is both useful and important. I would also like to thank the Centre for Monetary Economics for hosting this event and for the opportunity to comment on the report.

Let me begin by saying a few words about the conduct of monetary policy in 2024 before commenting on three topics raised by Norges Bank Watch (NBW): how we take international trends into account, our communication of uncertainty and, finally, the trade-offs we make in monetary policy.

## Monetary policy in 2024

The year 2024 was characterised by inflation slowing considerably from a high level and moving closer to the 2 percent target. Economic growth has been low in recent years, but registered unemployment has nevertheless remained below pre-pandemic levels. In our neighbouring countries, central banks started to lower policy rates. In Norway, the Monetary Policy and Financial Stability Committee decided to keep the policy rate unchanged throughout 2024. As commented by the NBW, our policy rate decisions were well in line with market expectations. As summarised in Chart 1: This was a year when the policy rate was stable and the policy rate forecast showed little change, a situation very different from 2023.

Chart 1: Stable policy rate and little change in the policy rate forecast in 2024. Policy rate. Projections five most recent reports. Percent. 2018 Q1-2027 Q4



## Source: Norges Bank

Through autumn, the policy rate was kept unchanged in Norway, while the policy rate was reduced in the US. The NBW points out that this happened at the same time as the krone depreciated against the US dollar. In our view, an increase in the policy rate differential in itself does not necessarily affect the krone exchange rate. What we have previously pointed out, is that there is a correlation between changes in the expected future policy rate differential and the exchange rate. In addition, the krone exchange rate is affected by many other factors.

Let me now turn to our inflation projections and the fact that they were persistently too high in 2024. In the turbulent years behind us, inflation rose to levels not seen in decades, driven by the pandemic, an expansionary economic policy and Russia's invasion of Ukraine. It has been challenging to project inflation, both when it moved up and when it was heading down again. It is difficult to find a single factor that can explain why our inflation projections were too high. When inflation was on the rise, it increased more rapidly than historical relationships would suggest, and the subsequent speed of disinflation was also faster. One possible hypothesis is that the pass-through from costs to prices has been faster than previously. This means that the cost increases faced by firms in the wake of the pandemic were more rapidly passed on through higher prices, and this may have resulted in faster disinflation once costs stopped rising.

## International developments

One of the topics in the report, which was also cited last year, is how we take into account international developments. The NBW's opinion is that our domestic inflation projections could have been more accurate if we had given more weight to global inflation developments. In this, we agree with the NBW. One of the lessons learned in recent years is that we must better incorporate international impulses, also from the supply side, into our analyses. The NBW encourages us to develop methods for deciding when transitioning into 'international mode' is appropriate, ie giving more weight to international developments. In Norges Bank's opinion, it may be demanding to take into account international developments in such an on-off manner. We must monitor international developments closely and, to the best of our ability, constantly assess how different shocks will affect the Norwegian economy.

Chart 2 shows contributions to inflation, both historically and in our projections. The blue bars show all the underlying driving forces included in our models and the red bars show unexplained contributions, which we have called residual terms. The underlying driving forces include, among other things, unit labour costs, the krone exchange rate and various international impulses. We have long had an indicator of price developments for imported consumer goods. In recent years, we have also constructed a new indicator that captures the contribution made by indirect price impulses via imported intermediate and capital goods used by firms in production. Even with the new indicator, we were unable to capture everything that drove inflation developments. We took this on board and several times made discretionary adjustments to the projections beyond what our models projected. The adjustments made to the projections in December 2024 are shown in the large shaded bars with residual terms in Chart 2. In this connection, I would like to mention that Norges Bank has an ongoing model project where one of the objectives is precisely to take into better account interna- tional developments in our macro model. In that respect, the analysis by the NBW is interesting and something that we will take into account in our work to further improve our projections.

Chart 2: Our models failed to capture inflation developments

Contribution to four-quarter change in CPI-ATE. Percentage points. 2018 Q1-2027 Q4

Sources: Statistics Norway and Norges Bank



## Communication of uncertainty

Another topic raised by the NBW is how Norges Bank communicates uncertainty. In the report, the NBW refers to the quantitative measures of uncertainty published in the monetary policy reports (Chart 3). These measures of uncertainty show that there was an upside risk for inflation also in 2024, although it did decline towards the end of the year.

## Chart 3: Upside risk for inflation in 2024

Spread between percentiles and median from quantile regressions. Eight quarters ahead. Four-quarter change in the CPI-ATE. Percentage points. 2021 Q1-2024 Q3



* Clear upside risk for inflation at the policy rate meeting in September (Monetary Policy Report 3/24)
* More symmetrical inflation uncertainty at the policy rate meeting in December (Monetary Policy Report 4/24)

Source: Norges Bank

The NBW encourages us to use and further develop quantitative measures of uncertainty to an even greater extent. We have plans to develop more measures of uncertainty. For example, we are considering a greater use of option prices. Option prices will reflect market pricing of risk ahead, for example related to energy prices, global interest rates and exchange rates. I have included an example in Chart 4, showing socalled implied volatility, or the standard deviation in percent, three months ahead for the krone exchange rate measured against the US dollar. If implied volatility is approximately 5 percent, as it has been in February, these option prices indicate that neither we in Norges Bank nor firms and households should be surprised if the krone exchange rate measured against the dollar is 5 percent stronger or weaker in three months' time. This may be useful information for firms and households when they make assessments and decisions.

Chart 4: Option prices can provide some indication of risk ahead USDNOK. 3-month implied volatility. Percent. 1 Jan 2019 - 25 Feb 2025



## Sources: Bloomberg and Norges Bank

Option prices may also provide us with information as to whether there is asymmetric risk related to our projections, ie a specific upside or downside risk. If we examine the entire estimated probability distribution of the krone exchange rate three months ahead (Chart 5) based on option prices from 25 February, we note that this is asymmetric[1]. According to this distribution, there is a 5 percent probability that the krone exchange rate depreciates by more than 9.3 percent, and a 5 percent probability that it appreciates by more than 7.8 percent. Another way of reading the chart is that the market prices in a higher likelihood of a considerable depreciation of the krone than a considerable appreciation. We can then use this to communicate how our other projections would be affected in the event of such alternative krone exchange rate developments.

Chart 5: Option prices can provide some indication about asymmetric uncertainty Option-based expectation for USDNOK three months ahead as of 25 Feb 2025

Sources: Bloomberg and Norges Bank



## Monetary policy trade-offs

The last topic I would like to comment on is the trade-offs we make in monetary policy . The NBW asks an important question: Could the trade-offs made in 2024 have been better if our inflation projections had been more accurate?

Analyses from the NBW suggest that, despite inaccurate inflation projections, the policy rate is at an appropriate level. One of the reasons for this may be that the Norwegian economy performed better than expected in 2024.

Chart 6: Lower inflation than expected, but higher activity

CPI-ATE. Four-quarter change. Percent. Output gap. Percent. 2018 Q1-2026 Q4

Sources: Statistics Norway and Norges Bank





In monetary policy, we have to constantly strike a balance between different considerations. In the long term, there is no conflict between low and stable inflation and high and stable employment. But in the short term, shocks could occur that give rise to a conflict between these two considerations, and then we must weigh these two considerations against each other. As the NBW notes, we updated our monetary policy strategy in 2024. The strategy describes how we in the Monetary Policy and Financial Stability Committee interpret our mandate. When we presented the updated strategy, we specified that we interpret our mandate to mean that we must give considerable weight to employment, also in situations when inflation deviates significantly from the target. This interpretation was also fundamental to the monetary policy stance before we updated the strategy.

One expression of the trade-offs made by the Committee is the inflation and output gap projections published in the Monetary Policy Reports. The January 2024 Monetary Policy Report included a box on these trade-offs, which the NBW also refers to and uses in its analyses. Among other things, the NBW finds that we gave considerable weight to output gap developments in 2024. Chart 7 shows the projections one to three years ahead for the output gap and the inflation gap (measured as deviations from the inflation target) published in various monetary policy reports going back to 2005. The chart illustrates how the attainment of monetary policy objectives changes from one monetary policy report to another. The chart also shows that in recent years we have moved southeast and closer to the centre of the chart, where both gaps are close to zero, suggesting prospects for a better attainment of monetary policy objectives.

Chart 7: Monetary policy trade-offs Inflation gap and output gap. Average 1-3 years ahead



## Source: Norges Bank

The points in the chart are in both the top-right quadrant and the bottom left quadrant, ie situations where our projections have given the same sign for both the inflation gap and the output gap. According to a simple theoretical model[2], this would not be optimal because a better attainment of monetary policy objectives can be achieved by setting the policy rate higher or lower, which would bring inflation closer to target and output closer to potential.

In reality, monetary policy trade-offs are more complex than the simple theoretical model indicates. In some situations, as a result of the economic realities, we would also give weight to other conditions, such as a risk of a build-up of financial imbalances or uncertainty related to the effect of the policy rate. The speed at which we seek to bring inflation back to target will also depend on the nature of the economic shock. The fact that the points in this chart have moved around considerably may just as much reflect substantial changes in the economic landscape as systematic changes in the weight given to the various considerations in our mandate over time.

Let me conclude by once again thanking the members of Norges Bank Watch. External evaluation is very useful, indicating where we should concentrate our efforts to improve our analyses and our communication.

Thank you for your attention.

[1] The calculation of the estimated probability distribution is based on the same method as the Atlanta Fed Market Probability Tracker

[2] See eg Røisland, Ø. and T. Sveen (2018) 'Monetary Policy under Inflation Targeting'. Occasional Papers 53/2018. Norges Bank.

Published  27 February 2025 10:00",Pål Longva
https://www.bis.org/review/r250303d.htm,"David Ramsden: Surveys, forecasts and scenarios - setting UK monetary policy under uncertainty","Speech by Sir David Ramsden, Deputy Governor for Markets and Banking of the Bank of England, at the Bureau for Economic Research, Stellenbosch University, Stellenbosch, 28 February 2025.",2025-02-28 00:00:00,"Opens

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## Surveys, forecasts and scenarios: setting UK monetary policy under uncertainty - speech by Dave Ramsden

Given at the Bureau for Economic Research, Stellenbosch University

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## Published on 28 February 2025

Dave Ramsden sets out how his views on monetary policy in the UK have evolved in recent months, in light of increased uncertainty, and the role surveys, forecasts and scenarios can play in supporting monetary policy setting when faced with that uncertainty.

## Speech

Thank you for the invitation to speak at Stellenbosch University today. I'm visiting South Africa in my capacity as a Deputy Governor of the Bank of England, attending the bi-monthly meetings of the Bank for International Settlements, starting later today in Cape Town. This morning I'm speaking as one of nine members of the Bank's Monetary Policy Committee (MPC), which has responsibility for setting monetary policy in the UK, with the primary objective of keeping UK inflation at 2% sustainably over the medium term.

In my speech today I want to set out how my views on monetary policy in the UK have evolved over recent months in response to my changing assessment of the outlook for the economy. That could sound like a relatively narrow focus but I hope my focus on the challenge of setting monetary policy against a back-drop of heightened uncertainties is of wider relevance.

Uncertainty is going to be a recurring theme of my speech. There are three dimensions that I'm going to bring out. The majority of my speech is going to be devoted to the prevailing uncertainty about the state of the UK economy; in particular the state of the UK labour market and the persistence of inflationary pressures. Most economies face some of the same uncertainties given the huge shocks that have hit the global economy but the UK is experiencing more than most.

The second aspect of uncertainty is about global developments, whether that be geopolitics or trade and financial fragmentation. The UK is a relatively small open economy so these matter and I will return to this aspect towards the end of my speech.

The third dimension is the impact domestic and global uncertainty has on the actions of businesses and consumers and what that means for the outlook for the economy.

The key conclusion I draw from the current elevated degree of uncertainty is that it increases the range of plausible states that the UK economy might end up in in the medium term. Hence the focus of my speech: on surveys, about the signals we can take from them about the

Opens current state of the economy; about forecasts of the most likely future state of the economy; and the importance of thinking through different possible scenarios and what they imply for the setting of monetary policy.

This approach, and particularly the role scenarios can have in informing monetary policy decisions, is entirely consistent with the recommendations of Dr Bernanke's review[1] of the Bank's approach to forecasting. I won't say anything more today about the Bank's wider Monetary Policy Transformation Programme, other than that I support strongly the Bank's direction of travel, which will better equip us to set and to communicate monetary policy in an increasingly uncertain world.[2] footnote footnote

## The current state of the UK economy…

Throughout 2024 the MPC's projections consistently pointed to a gradual normalisation in the UK economy, with domestic inflationary pressures easing as restrictive monetary policy increasingly took effect to restrain demand.

Table 1: February 2025 Monetary Policy Report Forecast summary(a)

|                                                | 2024 Q1   | 2025 Q1   | 2026 Q1   | 2027 Q1   | 2028 Q1   |
|------------------------------------------------|-----------|-----------|-----------|-----------|-----------|
| GDP                                            | 0.3 (0)   | 0.4 (0.5) | 1.5 (0.8) | 1.3 (1.5) | 1.8       |
| CPI inflation                                  | 3.5 (3.6) | 2.8 (2.8) | 3 (2.3)   | 2.3 (1.9) | 1.9       |
| Unemployment rate                              | 4.3 (4.4) | 4.5 (4.7) | 4.5 (4.9) | 4.8 (4.9) | 4.8       |
| Excess supply/Excess demand                    | 0 (-¼)    | -¼ (-½)   | -½ (-1)   | -¾ (-¾)   | -¼        |
| Private sector regular average weekly earnings | 6 (5¾)    | 6¼ (4¼)   | 3 ½ (3)   | 3 (2¾)    | 3         |
| Bank rate                                      | 5.3 (5.1) | 4.6 (3.9) | 4.2 (3.3) | 4.1 (3.2) | 4         |

(a) Figures in parentheses show the corresponding projections in the February 2024 Monetary Policy Report

As Table 1 shows, comparing the MPC's forecasts from a year ago for 2025 Q1, the current quarter, with the forecasts published earlier this month, that is largely what has happened, at least when looked at in annual growth rates space. GDP growth was quite volatile around the start of 2024 but has been sluggish since, slowing a little more than expected to just over 0.1% a quarter on average through the second half of 2024. Unemployment has risen slightly as a small amount of spare capacity (or excess supply relative to demand) has opened up.

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Inflation fell back to the 2% target in the middle of 2024 as past increases in energy prices partially unwound. But the MPC has consistently forecast that this wasn't a sustainable return to the target, as energy prices would stop being a drag on inflation once this unwind dropped out of the annual comparison, and the persistence of domestic inflationary pressures would be more evident, leading to a pick-up in headline inflation. That has happened, with headline CPI inflation rising to 3.0% in January 2025 from a low of 1.7% in September.

So far so seemingly on track, which doesn't seem consistent with the emphasis I've put on increased uncertainty. That's mainly because the challenges with understanding what is going on in the UK economy relate above all to the structural performance of the economy and in particular the labour market. This is most evident from the penultimate row which shows private sector average weekly earnings growth, which is now expected to be 6¼% in 2025 Q1, similar to the level a year ago and fully 2 percentage points higher than was forecast at that time. How to interpret this development is one of the key questions I will return to in the next section.

## …and the importance of surveys in informing the short-term outlook

The key issue for the MPC in formulating its forecasts has been to judge how much persistence to assume in domestic inflationary pressures. We've framed this judgement in terms of three cases to illustrate the range of possible outcomes on the degree of inflation persistence. In case 1, the unwinding of global shocks that drove up inflation in 2022, and the resulting fall in headline inflation, should feed through to weaker pay and price-setting dynamics meaning inflationary pressures dissipate more quickly. In case 2, on which the MPC's forecasts have been based, a period of economic slack is required in order for pay and price-setting dynamics to normalise fully. In case 3, structural shifts in wage and price-setting behaviours, following the major supply shocks experienced over recent years, mean inflationary pressures are even more persistent.

For my part, as set out in a speech I gave last autumn[3], the MPC's forecasts throughout 2024 presented a plausible outlook, consistent with case 2. But I also believed it was at least as likely that domestic disinflationary pressures would be stronger than envisaged in the MPC's published forecast, which would result in headline inflation staying closer to the 2% target throughout the first part of the forecast and falling below 2% more materially later on, consistent with case 1. footnote

The evidence on the labour market has been key to the MPC's and my assessment and in recent months there has been a significant amount of new information to absorb. This evidence takes two forms. First, some concerning developments in short term indicators, particularly on wages, as I have already highlighted. Second, how these fit into our understanding of the structure of the labour market and the economy, where staff analysis from their annual supply stock-take has fed into the latest forecasts.

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This new evidence leaves me with four interlinked questions, which all featured in the MPC's latest round of monetary policy deliberations.

- First, how resilient is employment and what is the trend in labour demand?
- Second, how has productivity growth evolved and what are the implications for the growth of potential supply or speed limit of the economy?
- Third, what is the starting level of spare capacity?
- Fourth, what are the implications for the short-term path for earnings?

The main analytical challenge in responding to the recent data is how to extract a signal from the volatility, or noise. And this is particularly the case in the UK at present where a lot of the official series are exhibiting unusual volatility. The shortcomings of the LFS data are well documented[4] but other official series such as the AWE and also GDP, as shown in Chart 1, appear to have become more volatile. footnote



Sources: British Chambers of Commerce (BCC), CBI, Lloyds Business Barometer, ONS, S&amp;P Global and Bank calculations. The latest GDP outturns data are to the three months to December 2024. The diamonds to Q3 show in-sample fitted values of the survey indicator model and diamonds for 2024 Q4 and 2025 Q1 show out of sample projections.

In approaching these questions I've therefore found it even more important than usual to look at a wider range of surveys and other data sources carried out in the UK by the Bank and other bodies, as well as the official data produced by the ONS. The first type asks the business or household what they have done over a period in the past. This is the basis for

Opens most official data. Some official data isn't produced from surveys at all but is compiled directly from administrative sources, such as the RTI data compiled direct from HMRC tax returns. The second type of survey focuses more on future intentions, what households and businesses plan to do over some future period. Examples include the Bank Agents' survey of future wage settlements. The third type focuses more on sentiment, how businesses and consumers are feeling, such as the GFK consumer confidence survey in the UK.

On the first key question, regarding the resilience of employment, the most recent data from the LFS shown in Chart 2 suggests employment grew by 0.3% in the three months to December 2024. But this series has been volatile and most alternative sources such as the HMRC RTI data suggest a weaker picture. Bank staff can pull together the signals from a range of sources into indicator-based models of the economy (using MIDAS techniques), as shown for GDP in Chart 1 and for employment in Chart 2. These models give a clearer sense of the underlying picture, as well as pointing to the immediate outlook a quarter or two ahead.



Sources: Bank of England Agents, HM Revenue and Customs, KPMG/REC/S&amp;P Global UK Report on Jobs, Lloyds Business Barometer, S&amp;P Global, ONS and Bank calculations. Bank staff's indicator-based models of near-term employment growth use mixed-data sampling (MIDAS) techniques ( Daniell and Moreira (2023) ). Latest data are three months to December for LFS employment and January for HMRC RTI employment. Quarterly estimates of underlying employment growth extend to 2025 Q1. Opens

As shown in Chart 2, the Staff's model suggests that underlying employment growth has softened in recent quarters to close to zero. It takes a signal from a range of indicators, including the composite PMI employment balance, which fell to 43.5 in February 2025, among

Opens the lowest levels since the series began in 1998. This and other more intentions-based surveys may also have been affected by the expected impact of, and reactions to, the October 2024 Budget measures, which will significantly increase the amount of NICs paid by employers from April 2025.

Turning to the second question on productivity and potential supply growth, the LFS data on the level of employment has recently been revised up significantly, to take account of the latest, higher estimates of UK population. Because there hasn't been a corresponding revision in GDP, estimates of actual and potential productivity have been revised down significantly. Output per worker is now estimated to have been flat in 2024 and potential productivity growth is estimated by Bank staff to be 1¾% lower than estimated a year ago, and to have fallen by ½ per cent in 2024 as shown in Chart 3.

This shows a significantly different picture for the recent path of productivity, which can't be explained by any of the usual drivers of productivity Bank Staff focus on. Stepping back, this adds to the existing puzzle of weak UK productivity growth since the global financial crisis, which has been the subject of a lot of analysis and commentary over the years[5]. The path of productivity growth is the key element in calculating potential supply growth, the rate at which the economy can grow without triggering inflation, effectively the economy's speed limit. footnote



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This matters for addressing my third question, on the starting level of spare capacity in the economy. A key MPC judgement underpinning our February 2025 forecasts was that the majority of the recent weakness in GDP reflects the weakness in productivity and therefore in supply. That means the sluggish growth in GDP is assumed to have led to only a small margin of spare capacity opening up to date, as shown in Table 1.

Another useful way of thinking about spare capacity is through the lens of labour market tightness. A key metric I have relied on to judge this has been the vacancies to unemployment ratio. We have seen vacancies decline markedly from their peak in mid-2022 and the ratio of vacancies to unemployment shown in Chart 4 is now back to levels seen in 2018. This is consistent with other indicators on labour market tightness and has led the MPC to assess the labour market to now be in broad balance. But with the pace of decline in the V/U ratio and the weakness evident in surveys of employments intentions, labour demand could continue to ease much more materially in the near future.



Sources: AA/WARC Expenditure Report, ONS and Bank calculations. The equilibrium V/U ratio is estimated using an errorcorrection model over the period 1982-2023. The real cost of vacancy posting and hourly labour productivity are included as long-run determinants for the level of vacancies. The model also includes controls for short-term movements in these variables. The final data points for both series in the chart are 2024 Q4.

What then are the implications of these developments for wages, my fourth question? Whilst earnings growth was still elevated in 2024, it had been steadily declining. However, in 2024 Q4 annual growth in private sector AWE rose to 6.2% from 4.9% in the three months to September. And as Table 1 showed it is forecast to stay at that level in 2025 Q1, a full two percentage points higher than the forecast a year ago.

Opens

This is a big forecast error in a key variable. And while Chart 5 shows the official data has again been volatile, the Bank Staff's indicator model has also stopped falling. I am not discounting the signal from these indicators but they are a relatively backward looking gauge, relating to the earlier tightness of the labour market.



Sources: Bank of England Agents, DMP Survey, HMRC, Indeed, KPMG/REC UK Report on Jobs, Lloyds Business Barometer, ONS and Bank calculations. Private sector regular pay growth in the aqua line shows the ONS measure of private sector regular average weekly earnings growth (three-month average on same three-month average a year ago). Bank staff's indicator-based model of near-term private sector regular pay growth is quarterly and uses mixed-data sampling (or MIDAS) techniques ( Daniell and Moreira (2023) ). A range of indicators inform the model, including series from the Bank of England Agents, the Lloyds Business Barometer, Indeed, ONS/HMRC PAYE payrolls and the KPMG/REC UK Report on Jobs. Indicators are weighted together according to their relative forecast performance in the recent past. Latest data points are for the three months to December 2024 for private sector regular pay and 2024 Q4 for the indicator-based model estimates. Diamonds indicate projections or expectations for pay growth. Definitions of wage growth vary between each of the measures. The Agents' pay survey diamond shows respondents' expected average pay settlements in 2025, weighted by employment and sector. The DMP diamond shows average expected pay growth one year ahead for respondents to the January 2025 DMP survey. Pay growth projections are for 2025 Q1 to 2025 Q4. Opens

In assessing where things are heading in the future I place more weight on the information we have from the Bank of England's Agents' Pay Survey[6]. This survey has a good track record as a predictor of how wages are likely to develop over the year ahead, as shown in Chart 6. footnote

Opens



Sources: Bank of England Agents, Incomes Data Research, Incomes Data services, Industrial Relations Services, Labour Research Department and Bank calculations. The Agents' pay survey diamonds shows respondents' expected average pay settlements for a given year (as reported on the survey the year prior). Estimates are weighted by employment and sector. Latest diamond in purple shows respondents' expected average pay settlements for 2025. The Bank of England private sector settlements database is informed by intelligence gathered from the Bank's Agents, Incomes Data Research, Incomes Data Services, Industrial Relations Services, and the Labour Research Department. Companies were asked to state their average UK pay settlement for each year and their expected average UK pay settlement for 2025. Private sector pay settlements are a 12-month average based on monthly data.

The latest Agents' Annual Pay Survey, carried out late last year, suggests average expected pay settlements in 2025 of 3.7%. That's quite a bit higher than the bottom half of the 2%-4% range, where I judged expected settlements were likely to settle. But it still marks a notable decrease from the average actual settlements figure of 5.3% in 2024. The MPC has taken a strong signal from this survey, as well as from the Bank's Decision Maker Panel survey, for the first year of the earnings forecast, which I will return to in the next section.

## The MPC's latest forecasts for the UK economy

Although there remains considerable uncertainty about the current state of the UK economy the emerging answers to my four key questions help establish a starting point for the MPC's forecasts for the next three years.

The MPC's latest forecasts, which I summarised in Table 1, set out the most likely path for the economy over the medium term and provide the framing for our policy decisions. They are conditioned on a set of assumptions, and are produced using a range of forecasting models and techniques which go much wider and deeper than the indicator based statistical models I presented in the last section.

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The majority of our forecasting models are estimated on past relationships between economic variables, and so rely on the past being a good guide to the future. Even at times of certainty and stability these models will perform less well the further into the future one goes. But at times when the economy is experiencing or dealing with the aftermath of significant shocks, when previously established relationships change, forecasting performance will deteriorate significantly. This is why the judgements made by the MPC, and all other forecasters, have become increasingly important in recent years.

As I've stressed, the key judgement for the MPC has been to decide the degree of domestic inflation persistence to assume; since last spring the MPC has judged there will be additional persistence during the first two years of the forecast over and above what previous experience would suggest. A reasonable question to ask is whether over the last year the evolution of inflation, and in particular the disinflationary process has been in line with this judgement.

To assess this I find it useful to focus on the relative pace of the increase and subsequent fallback of the different components or waves of CPI inflation. What is apparent from Chart 7 is the symmetry in the rise and fall of each component, with the exception of inflation in private sector rents.

Sources: ONS and Bank calculations. Data to January 2025.



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The major rise and fall of the waves for energy, food and core goods has ended, with the recent pickup in inflation in these components. But the easing in services inflation, the component which most relates to domestic inflationary pressures, continues. Services price inflation did rise to 5.0% in January 2025 up from 4.4% in December, though that largely reflected a rebound in volatile airfares prices.

Adding all this up and based on current short-term trends and known developments we expect headline inflation to rise further in the immediate future, and peak at around 3.7% later in the year. One key driver is the further increase in household energy bills from April 2025. Regulated prices are also increasing, and, alongside the impact of government policies announced in the Budget last Autumn, will also add to headline inflation by the middle of the year.

In determining its inflation forecasts beyond the short term, set out in Table 1, the MPC has judged that the latest pickup in headline inflation will not lead to additional second round effects on underlying domestic pressures. This is clearly an important new judgement, and it is borne out of the assessment of the evidence which I have set out, in particular the looser labour market compared with the time of the very large external costs shocks. The pickup in inflation is also expected to be much smaller than in 2021-22.

This suggests that some of the dynamics in the inflation generating process that were observed following the previous large shocks are unlikely to reoccur. Given this context, as already highlighted the MPC has taken a strong signal from the Agents' Pay survey and the DMP survey, such that earnings growth is forecast to continue to slow to around 3¾% by the end of 2025, as the labour market continues to ease and medium-term inflation expectations stay anchored. The challenges of forecasting earnings and, as a consequence, the extent of the signal taken from the surveys is illustrated in Chart 8. This shows that the 2024 Q4 official data on earnings, shown by the aqua line, was more than 2 percentage points above what could be explained by the Bank's three main forecasting models for earnings, shown by the swathe.

Opens



Sources: Bloomberg Finance L.P., Citigroup, ONS, YouGov and Bank calculations. The shaded swathe represents a range of projections from three statistical models of nominal private sector regular average weekly earnings growth, including a wage equation based on Yellen (2017), a wage equation based on Haldane (2018) and a simple error-correction model based on productivity, inflation expectations and slack in the labour market as embodied in the difference between the actual unemployment rate and the Committee's estimate of the medium-term equilibrium rate. The projections are dynamic, multistep ahead forecasts beginning at a point within the models' estimation periods and are sensitive to data revisions, which can lead to changes in the range over the past as well as over the forecast period. Latest data to December 2024.

Reflecting these judgements earnings growth is forecast to fall back to closer to inflation target consistent rates by the middle of 2026. Services are very labour intensive, so wages are the key determinant of services inflation.[7] This easing in domestic inflationary pressures along with a diminishing contribution from energy prices is what drives the forecast for headline inflation to fall back to close to the 2 per cent target from the end of 2026 as shown in Chart 9. footnote

Opens



Sources: Bloomberg Finance L.P., ONS and Bank calculations. Energy prices include fuels and lubricants, electricity, gas and other fuels.

In terms of the forecast for activity, shown in Table 1, the sluggish growth in GDP is judged to have led to only a small amount of spare capacity opening up as growth in productivity and the supply capacity of the economy is assessed to have weakened sharply over the past year. GDP growth is forecast to pick up steadily from the middle of 2025 with growth of 1.5% in the year to 2026Q1. Continued household real income growth, as real wages continue to increase in aggregate, plus a small reduction in household savings rates supports private consumption growth. Housing activity is picking up which should support housing investment over time and business investment growth remains positive. In addition, there is a contribution of about ½% of GDP to growth from the higher public spending included in the October 2024 Budget. As I've already stressed there are considerable uncertainties around the path for potential supply, but the MPC has assumed that the recent weakness in productivity is not sustained and potential supply growth picks up. As a result, excess supply capacity increases from ¼% in 2025Q1 to ¾% in 2027.

The forecast remains consistent with case 2 that the MPC has identified. The emerging margin of spare capacity in the economy acts against the continuing second round effects in domestic prices and wages to help bring inflation back to target in the medium term. Restrictive monetary policy is also continuing to do its job; it's noteworthy that the latest forecast is conditioned on market expectations for UK monetary policy which have tightened

Opens materially over the last year, with the implied path for the level of Bank rate in 2025 Q1 0.7 percentage points higher than was the case a year ago. The implied level of Bank rate at the end of the forecast period in 2028 Q1 is 4%.

Stepping back, I think the MPC's latest forecast represents a realistic assessment of the outlook for the UK economy. But given the evidence that has emerged in recent months and the increasing uncertainties about the state of the UK economy and global developments it is clearly not the only outcome. The MPC has been collectively thinking about various scenarios throughout the last few years, as well as the more specific three cases framework more recently.

As part of my thinking and approach to the MPC's latest forecasts and the February policy decision I've found it helpful to sketch out two very different qualitative scenarios for the UK economy, from the huge number of possible futures, which build on the MPC's existing cases framing for inflation persistence, and explore the interactions with judgements on the labour market and the demand and supply sides of the economy. In headline terms I think of them as a Weaker Demand and a Weaker Supply scenario.

Taking each in turn, weaker demand could emerge for example due to increased uncertainty about the outlook for the economy; the third dimension of uncertainty I highlighted at the start of my speech. Household saving might stay at the same high level for precautionary reasons and so not help support consumption growth. And business investment growth might not be sustained if businesses postpone investment in the face of growing uncertainty. If demand is weaker relative to supply then increased spare capacity would exert more downwards pressure on wages and prices. This process could either already be in train or it could quickly emerge if labour demand weakens more materially, more in line with the signal from some of the employment surveys. In addition, the impact in terms of reducing employment of the October 2024 Budget increase in NICs could be greater than assumed, relative to the other margins of adjustment assumed to be at work through wages, prices and profits.

I would be concerned under these circumstances that the interaction of weaker demand with a loosening labour market could be multiplicative, opening up an excessive degree of slack. This would result in wages slowing more sharply even than assumed under case 1, and inflation falling back to the 2% target more quickly and undershooting it in the second half of the forecast. Here the appropriate monetary policy response would be to reduce Bank rate more rapidly than otherwise. My concerns about the risks from this scenario playing out were what led me to vote in the minority for a 25bp cut in Bank rate at our December 2024 meeting.

Turning to the Weaker Supply scenario, it is entirely possible that current supply capacity is even weaker than we assessed it to be and may be more persistently weak through the forecast. This could result from the starting point for supply being lower, followed by a much weaker recovery in productivity than the MPC has assessed. A range of structural factors

Opens could explain this weakness. In those circumstances, the speed limit of the economy would be even lower, the labour market may remain tighter for longer, and wages could remain elevated leading to greater persistence in domestic inflationary pressures.

These are similar processes to those at work in the third case for the economy that the MPC has been considering. But if this was more clearly the context for the near-term increase in inflation the UK is experiencing then it would be more likely to lead to additional second round effects. In this scenario, policy would have to be more restrictive than otherwise to guard against the risk of medium-term inflation expectations becoming de-anchored, in response to a more prolonged period of above target inflation.

These scenarios stem from domestic uncertainties but increased uncertainties in the global economy also need to be factored in. Geopolitical uncertainties have been heightened for several years. In addition, there is significant uncertainty around the next steps the current US administration will take with regards to tariffs, and the potential actions of other countries in response. At present we do not have any specific enough information to build into our forecasting models. However, it is clear that uncertainty about global trade policy is already heightened. Chart 10 shows that, on one measure, trade policy uncertainty had already reached record highs in January 2025. And this may already be impacting on the global and UK economy via financial markets and via confidence channels.



Sources: Caldara et al (2019) and Bank calculations. The trade policy uncertainty index reflects automated text search results of the electronic archives of seven newspapers discussing trade policy uncertainty: Boston Globe, Chicago Tribune, Guardian, Los Angeles Times, New York Times, Wall Street Journal, and Washington Post. Data are monthly. The final data point is for January 2025. Opens

Opens

At this stage, as detailed in the February 2025 MPR, we have focused on the main potential channels for the impact.[8] On combining these channels our clearest conclusion is that greater trade fragmentation will likely lower UK economic activity, as barriers to trade inherently weigh on global demand, weakening demand for UK exports, and disrupting supply chains. But the impact of US tariffs could be inflationary or disinflationary for the UK depending on other countries' trade policies and the relative strength of different transmission channels. Depending on the specifics of the trade policy, and then how the UK and others respond to that policy, prices in the UK could go up or down.[9] footnote footnote

## Conclusions and implications for monetary policy

Before concluding, I think it is important to be reminded of where we are starting from. UK headline CPI inflation was 3% in January, above the 2% level it averaged from April to September last year, but only slightly above the rates in the US and Euro area, which have also risen recently. UK inflation is expected to rise in the short term to around 3.7% and is then forecast to fall back to close to the 2% target in the second half of the forecast period.

Sources: ONS for the UK, BEA for the US, Eurostat for the EA, LSEG Workspace and Bank calculations. Data to December 2024 for US, January 2025 for UK and EA.



To conclude, in assessing the state of the UK economy, compared with my position throughout last year I am now less certain than I was about the outlook for the UK labour market, and its implications for future inflation persistence and growth. Because of the evidence of recent months I no longer think that risks to hitting the 2% inflation target

Opens sustainably in the medium term are to the downside. Instead, I think they are two sided, reflecting the potential for more inflationary as well as disinflationary scenarios. I do, though, think the core disinflationary process remains intact.

Given the increased uncertainty and risks to inflation on both sides - from the near-term outlook to inflation, and from developments in the global economy - I am even more certain than I was that taking a gradual and careful approach to the withdrawal of monetary restraint is appropriate. This means judging the evidence afresh at each meeting to ensure the MPC sets monetary policy to meet the 2% inflation target sustainably in the medium term.

As a keen mountain climber, I was very pleased when the MPC's policy of maintaining Bank rate at a level of 5.25 percent from August 2023 to August 2024 became associated with South Africa's Table Mountain. The MPC is now on the descent path having cut Bank rate three times by a total of 0.75% since August 2024, most recently by 25bp at its February 2025 meeting. I know from my own experience that great care needs to be taken on the descent from a mountain; tiredness often sets in, concentration can lapse, obstacles have to be bypassed and at the end of a long day the weather can deteriorate. A gradual and careful approach is always needed on the way down a mountain to ensure a safe descent and a successful outcome. But that doesn't always mean the descent has to be slow. There may be circumstances when a slower than expected descent is justified but there will also be times when conditions require that the pace has to quicken.

With thanks to Ed Kent for his assistance in preparing these remarks, and to my fellow MPC members and colleagues, including Hassana Babangida, Alan Castle, Harvey Daniell, Giulia Gardin, Josh Lillis, Dan Steel, Michal Stelmach, Lukas von dem Berge and Jamie Walkington for their helpful contributions.

1. See Forecasting for monetary policy making and communication at the Bank of England: a review
2. The Bank's Deputy Governor for Monetary Policy and a fellow Monetary Policy Committee member, Clare Lombardelli, set out in greater detail in November last year how the Bank is responding to the findings of the Bernanke review.
3. See Back to the Future 2 Ð speech by Dave Ramsden
4. See Box D of the May 2024 Monetary Policy Report and the May 2024 letter from Huw Pill to the Office for National Statistics Opens
5. See, for instance, The UKÕs productivity growth challenge Ð speech by Dave Ramsden from February 2018 as well as more recent coverage like ' The Big Question: What is behind the UK productivity gap? ' Opens Opens
6. See Back to the Future 2 Ð speech by Dave Ramsden
7. See Outlier or laggard for a more detailed explanation of the inflation/inflation expectations/wages nexus and the role of wages and the labour market on domestic inflationary pressures.

Opens

## Dave Ramsden

Deputy Governor, Markets and Banking

8. See Box C of the February 2025 Monetary Policy Report

9. See also Not such an island after all Ð speech by Megan Greene and Between a shock and a hard place Ð speech by Swati Dhingra

©2025 Bank of England",David Ramsden
https://www.bis.org/review/r250303c.htm,Alberto Naudon: Opening remarks - 4th Workshop on Data Science in Central Banking,"Opening remarks by Mr Alberto Naudon, Board Member of the Central Bank of Chile and Chair of the Irving Fisher Committee on Central Bank Statistics (IFC), at the 4th Workshop on Data Science in Central Banking, organised by the IFC, hosted by the Bank of Italy, Rome, 18 February 2025.",2025-02-18 00:00:00,"## Alberto Naudon: Opening remarks - 4th Workshop on Data Science in Central Banking

Opening remarks by Mr Alberto Naudon, Board Member of the Central Bank of Chile and Chair of the Irving Fisher Committee on Central Bank Statistics (IFC), at the 4th Workshop on Data Science in Central Banking, organised by the IFC, hosted by the Bank of Italy, Rome, 18 February 2025.

* * *

Good morning, distinguished guests, colleagues, and friends,

It is my great pleasure to welcome you all to the 4th Workshop on Data Science in Central Banking organized by the BIS Irving Fisher Committee on Central Bank Statistics (IFC) and hosted by the Bank of Italy.

As we gather today, we are reminded of the rapid advancements in data science and its profound impact on central banking. Indeed, the sheer volume and complexity of financial data now available call for more sophisticated techniques for data management and analysis. This trend is reinforced by the new opportunities opened up by artificial intelligence and machine learning. This workshop is a testimony to our collective commitment to harnessing innovation to enhance central bank' operations, policy-making, and overall effectiveness.

As emphasized in the last 2024 IFC's Annual Report just endorsed by the BIS All Governors a few weeks ago, the current focus on data science and AI supports the broader objective of improving statistical methods and fostering innovation in central banks. This IFC report underscores that leveraging new technologies can be instrumental to enhance data quality, improve analytical capabilities, and support evidence-based policymaking. The Report also calls for reviewing the related ongoing initiatives pursued by central banks and for providing a platform for sharing knowledge and best practices.

Let me recall that the three previous IFC data science workshops have been dealing with, respectively, (1) machine learning applications; (2) applications and tools in data science; and (3) data access and sharing. This time we will over the next three days delve into the various aspects related to the use of generative AI in central bank activities. We will hear from esteemed experts and practitioners who will share their insights and experiences, providing us with valuable knowledge and practical tools to navigate the evolving landscape of data science.

I would like first to extend a special welcome to our keynote speaker, Julien Simon, Chief Evangelist at Arcee.ai, who will be discussing the tailoring of small language models for enterprise use cases. His expertise and vision will undoubtedly set the tone for our discussions.

Then the sessions of the workshop will cover various critical areas, such as natural language processing tools, AI for summarization and information extraction, supervisory technology, text analysis for market monitoring and monetary policy purposes, and data privacy and anonymization.

Let me share with you a few thoughts on these issues:

First, the new techniques we will discuss are not only very timely, but they are also essential to leverage data science to address the complex challenges we face in modern central banking. In particular, the integration of generative AI and advanced data analytics into central banks' operations can significantly enhance their ability to make informed decisions, assess economic trends, and work to promote monetary and financial stability. More generally, IT innovation provides brand new perspectives. For instance, open-source software offer numerous benefits supporting official statistics and data analysis, including cost savings, flexibility, and the ability to customize solutions to meet specific needs. Another example is that modern data management approaches such as data lakes and data meshes architectures allow for new ways to store, organize, and access data. This calls for careful planning and for not blindly following the crowd and fashionable buzz words.

The main goal is to concretely help central banks to more effectively leverage their information assets, improve the integration and quality of their data, and support more sophisticated analytical techniques.

Second, your presence here today, coming from various jurisdictions all over the world and representing central banks, other public authorities, international organizations, academia and the private sector, underlines the importance of the goal of this workshop, which is to showcase concrete projects, share experiences, develop inhouse knowledge and also reduce reliance on external service providers.

Third, central banks, as producers of official data, have a key role to play to promote the access and dissemination of credible information to various external stakeholders, including other domestic authorities, international institutions, academia, and the general public. But better data is also key for supporting real-time, evidence-based policymaking in central banks, which increasingly rely on trustworthy data and sophisticated analytical and forecasting capacities to support their decisions.

Fourth, the relevance of artificial intelligence for central banks cannot be overstated, as it offers immense opportunities to enhance productivity, improve decision-making, and foster innovation. In particular, Generative AI has the potential to revolutionize data analysis and interpretation, offering deeper insights and more accurate predictions. For instance, the use of large language models can significantly enhance our ability to process and understand vast amounts of unstructured data, ranging from economic reports to news articles, thereby enabling us to make more informed policy decisions especially in the areas of monetary policy, financial stability, and regulatory oversight.

However, and this is my fifth point, GenAI also presents significant challenges and risks. Central banks must navigate issues such as data privacy, security, and ethical considerations. The potential for systemic risks, such as homogenization of information and procyclicality, requires careful management. As central banks increasingly rely on

data-driven approaches, it is essential to ensure that sensitive information is protected, and that data is used ethically and responsibly.

And my last point is that addressing these challenges calls for developing robust governance frameworks. This is key so that we can harness the power of AI while mitigating its risks, ensuring that our financial systems remain stable and resilient. At the same time investing in advanced IT infrastructure and fostering collaboration and coordination as we do today can help to stay abreast of emerging threats and implement best practices.

To conclude, this workshop aims to gather a diverse audience of practitioners, specialists, and interested stakeholders from central banks, international organizations, national statistical offices, and beyond. Our primary objective is to highlight ongoing projects and exchange experiences that can help foster in-house expertise and lessen reliance on external service providers. For instance, a number of projects that will be presented in the next few days have replicable codes developed with open-source software and can be usefully shared among all interested stakeholders. Moreover, the presentations will enhance our understanding of the opportunities and risks associated with new Generative AI technologies. This is key for central banks willing to navigate the evolving financial landscape and ensure that they are well-positioned to meet future challenges.

I therefore encourage you all to actively participate in the sessions, engage with the speakers, and share your own experiences and perspectives. It is through this collaborative spirit that we can truly advance our understanding and application of data science in our field. Before closing, I would like to thank the organizers, speakers, and all participants for your dedication and contributions to this workshop. I am confident that our time together will be both enlightening and inspiring, and I look forward to the fruitful discussions and innovative ideas that will emerge.

Thank you, and welcome once again to the 4th Workshop on Data Science in Central Banking.",Alberto Naudón
https://www.bis.org/review/r250303b.htm,Michelle W Bowman: Community banking,"Speech by Ms Michelle W Bowman, Member of the Board of Governors of the Federal Reserve System, at the Robbins Banking Institute Lecture Series, Hays, Kansas, 27 February 2025.",2025-02-27 00:00:00,"## Michelle W Bowman: Community banking

Speech by Ms Michelle W Bowman, Member of the Board of Governors of the Federal Reserve System, at the  Robbins Banking Institute Lecture Series, Hays, Kansas, 27 February 2025.

* * *

It is a pleasure to join you today at Fort Hays State University for the Robbins Banking Institute Lecture. 1   I have been a supporter of this institute since it was first created here at Fort Hays State, including by giving a lecture to students during my tenure as the Kansas State Bank Commissioner. Today, my view is slightly different than at that time, and I thought it would be a good time to share my thoughts on the critical role community banks play, not only in the U.S. banking system but also as drivers of local and regional economic growth and as anchors of their local communities. I will also explore the responsibility of bank regulators to support community banks.

In a broad and diverse economy, banks of all sizes play an important role in the creation and funding of business and consumer opportunities and investments. Without this diverse banking ecosystem, 30 percent of American communities would not have access to a physical bank location. There is little doubt that community banks have an extensive presence across this landscape and that they are essential to the success of the American economy.

No other country in the world enjoys this direct access to and presence of financial services in remote and rural areas. These bankers are members of the community. They are neighbors and friends, and their kids attend local schools and play sports in the local recreational league. The term ""relationship"" banking has true meaning in this context.

The direct relationships provide an opportunity for bankers to understand the unique financing needs of local businesses and enables them to develop specialized services for specific segments of the local economy, including agriculture and small business lending. 2

Community banks are catalysts for local economic growth, and their bankers often also serve as civic leaders in the region. I served as one of those community leaders while I was a banker in Council Grove. That experience-whether serving as the President of the local Chamber of Commerce or the Rotary Club-provided a unique view into the local economy. And today, as I travel across the country to visit with bankers in just about every state, I learn about how they are driving investment, philanthropy, and financial support for the local economy. While this work is rewarding, it is also challenging. It is sometimes tedious-especially in today's regulatory environment-and it is a seven days a week job. Bankers are often ""working"" while engaged in social activities, attending church or their kids athletic events, and shopping at the grocery store, and I often hear about customers giving a loan payment to their banker in the grocery store or asking about financing terms for the new car they might have their eye on.

Once a policymaker grasps the perspective of community banking from this vantage point, it becomes clear that the regulatory approach is much more complex than necessary to address many small bank issues. A community bank that has no out-ofmarket customers applying for new accounts likely does not need the same know-yourcustomer processes as a large or regional bank that opens accounts online and may be more vulnerable to fraud. A community bank can operate safely and soundly, and in compliance with laws, without being subject to the same extensive guidance and regulatory requirements as larger, more complex banks that offer a broader range of products and may be exposed to wider range of risks. A number of onerous requirements imposed on community banks seem to reflect an assumption of an indirect and less personal banking relationship.

Public debates about the banking system often feature academics that tend to downplay the significant role of community banks in the financial system. Instead, they imagine a banking system with fewer banks as equally effective in meeting the banking needs of every community throughout the United States. The eight largest U.S. banks hold $15.4 trillion in assets, which is several times larger than the assets controlled by the more than 4,000 community banks in the United States. 3   But as we all know, aggregate asset size is not an accurate indication of these banks' importance.

Of course, metrics do not provide the full picture of how relationship-based lending practices drive local economic activity. They ignore that banking has a regional component, where local knowledge and expertise-and a commitment to the local community-can help enable the community to thrive. There is an important place for the largest banks and regional banks in the banking system, but it is a fallacy to assume that the presence of fewer community banks would not have devastating consequences for a number of consumers and businesses. Some community banks serve rural and underserved banking markets and may be the only option for consumers and businesses, especially those that have unique balance sheets or less pristine credit histories. If community banks were to disappear, many communities would be left with few or no alternative options for banking services.

While metrics do not tell the whole story, this is not meant to downplay the importance of data, research, and analysis, all of which assist us in our understanding of the banking system and how that understanding could be improved. Data can help us identify issues that must be addressed or remediated. Data can help us evaluate which elements of the current bank regulatory framework may be effective or ineffective. And data can help regulators update regulations and guidance with a clearer understanding of the intended and unintended consequences.

Over the past 20 years, we have seen the number of community banks continue to decline. Bank consolidation through mergers has contributed to this decline, and de novo bank formation has been largely nonexistent. Many factors have contributed to the bank consolidation trend, including competition from nonbank financial service providers and the ever-increasing regulatory burdens on the community banking model. Many of these same challenges have acted as a deterrent to bankers who have considered pursuing a de novo bank charter. And while many factors influence the health of the community bank model-including the interest rate environment, economic

conditions, and alternative sources of competition for credit-we should consider whether there are actions regulators can take to support and ensure the future of community banks.

## The Benefits of Experience

One of the biggest barriers to the community bank model is the competition for qualified bank management and staff. Attracting, developing, and retaining future and current bank leadership is a significant challenge. Yet, one of the most important priorities for bank management is to develop the next generation of leadership. Educational programs like this institute, bank and regulator internships, and regional graduate schools of banking can help develop this pipeline of talent to support the industry and supervisory responsibilities. These programs also help regulators recruit the next generation of bank examiners.

Working in my family's community bank reinforced the mission focus and relationship model of community banking for me. This holds true for many family-owned community banks across the country.

Since we are on the campus of Fort Hays State University today and we have a number of students in the audience, part of my message today is to encourage each of you to consider exploring a career in the financial services industry-including in community banking or with a state or federal banking regulator. Whether that experience becomes a lifelong career or a stepping stone along your path, having experience in banking provides valuable perspective on how local economies function and the importance of access to banking services and financial inclusion. This experience has helped to shape my perspective and approach as the state bank commissioner and as a member of the Board of Governors of the Federal Reserve System.

This experience is also not something that I take for granted-seeing different perspectives empowers me to be a better policymaker. For example, as a bank compliance officer you understand the challenges of ensuring the bank is in compliance with rules and guidance and is prepared for interactions with bank examiners. Further, having this perspective enables a policymaker to approach the process of drafting rules and guidance and relaying supervisory messages in a way that recognizes a need for clarity, efficiency, and simplicity. The outcomes of our work are enhanced by a better understanding of the costs and unintended consequences of getting it wrong.

## The Responsibility of Regulators

Overregulation and unnecessary rules and guidance imposed on smaller and community banks create disproportionate burdens on these banks, eventually eroding the viability of the community banking model.

Policymakers and regulators have a responsibility to ensure that the banking and financial systems encourage growth and innovation and foster a strong and growing economy. One of the great strengths of the U.S. banking system is the variety of institutions that meet the needs of consumers and businesses, not only through offering a range of products and services but also by reaching customers throughout the country, including in the most rural and remote locations. Our goal must be to facilitate

a banking and regulatory environment that enables banks of all types and sizes to thrive. For community banks, this includes building a better regulatory and supervisory framework to effectively support the unique characteristics of these institutions.

What should that framework look like?

First, it includes thresholds that better reflect risk and business model.

As currently defined, community banks are those with less than $10 billion in assets. The Federal Reserve divides banks into distinct supervisory portfolios that oversee ""community,"" ""regional,"" and four categories of larger banks. 4  The portfolio approach helps regulators differentiate standards and supervisory focus based on bank characteristics and risks. In theory, it allows examiners to better organize supervisory activities and to provide specialized training to help examiners focus on issues that are most relevant for the institutions being examined. If appropriately executed, this portfolio-based approach should lead to better and more risk-focused supervision, and in turn a safer and more sound banking system.

An organizational structure that better allocates and directs supervisory resources seems like a worthwhile goal, but over time, it becomes clear that there are downsides to this approach. One of these downsides is the static nature of the fixed thresholds defining the categories. Currently, our framework includes fixed thresholds that are not adjusted with economic growth, inflation, or the growth in deposits from unexpected sources and fiscal programs, like those from the COVID era. They also do not account for changed industry dynamics, especially those resulting from a particular bank's activities or risk profile. In this environment, some firms with stable growth, a static business model, and a straightforward risk profile cross the $10 billion threshold unintentionally, subjecting them to additional regulatory and supervisory requirements that were specifically designed and implemented for larger and more complex firms. Banks approaching the $10 billion threshold often choose to curtail their asset growth to stay below the threshold.

Another significant problem with the current approach-that specifically challenges community banks-is the failure to index and update how a community bank is defined. Given the low fixed-dollar asset thresholds, regulators must focus on ensuring that asset-based benchmarks remain reasonable and appropriate in their work to supervise banks, especially as they apply tailored, but static, supervisory standards. As is the case now, over time, economic growth and inflation have created an environment in which thresholds are inappropriately low.

We also need to implement a better, more timely, transparent, and viable path for all bank regulatory applications. The application process can be a significant obstacle to applications activity, in particular mergers and acquisitions. Applications often experience significant delays between the application filing date and before receiving final regulatory approval. In some cases, even for non-complex transactions, the regulatory approval process has taken more than a year. A healthy banking system is one in which banks can make decisions to merge with peers or acquire new assets or business lines, and one that allows new bank formation, in a reasonable amount of time in accordance with statutory timelines. As the bank applications process has become a barrier to bank merger activity, we have seen credit unions acquiring community banks

in record numbers. In the absence of a better functioning bank applications process, institutions will explore other options, including credit union acquisitions.

I think this trend should be a wake up call for regulators to reevaluate our approaches to many areas of our responsibility, but especially whether our applications processes are operating as effectively and efficiently as they should. It is important that the regulatory framework ensures that competition and broader availability of banking services remain a feature of the U.S. banking system.

A necessary approach to solving this is by making targeted improvements to the applications process. If you follow my work, you know that I often discuss how the applications process can be improved. 5   So I will note some of the important changes that I believe would be a catalyst to returning our bank applications review function to an appropriate processing timeline. These are simply threshold steps that should be easy to accomplish and would be a great start to fundamentally improving the process.

I believe that we should not be complacent when facing excessive and longstanding delays. For bank applications, we must focus our resources and expertise to review and promptly act on all bank applications, to streamline the required forms and procedures, and to provide clear standards for approval.

Bank regulators should be prepared to act promptly on applications, and yet the significant delays in applications processing we see suggests we can do better. The published statistics on applications processing also tell an incomplete story, as they do not reflect the time spent by applicants who withdraw applications before final regulatory action or that simply forgo business opportunities that require an application out of concern that the regulatory approval process is too uncertain and unpredictable. 6

Many banks experience these frictions in the applications process firsthand. And judging from the number of bankers that contact me as they experience unexplained and prolonged delays, there is clear need for improvement. Uncertainty regarding the status of the application and an expected timeline for resolution creates challenges in moving forward with related business processes often resulting in costly delays for systems conversions and unhealthy uncertainty among bank staff.

We can certainly learn from the inefficiencies in the current process and leverage these experiences by consulting with banks about these challenges and identifying a clear path to improve the process. One step could be to ensure that our applications teams have access to specialized knowledge required to more effectively approach applications for infrequent activities, like de novo formations. We should ensure that a Reserve Bank has the resources necessary to assist them in making the applications process smooth, and ensuring prompt action is taken on the application.

We also know that the applications process itself can be a significant barrier and has in recent years been used by regulators to delay decisions. While many activities that require regulatory approval rely on common application forms, some bank applications require regulatory approvals from multiple regulators. Even where only one primary federal regulator must act on an application, there may be requirements to solicit views from other regulators, or the need to request additional information from the applicant that was not included in the initial filing forms.

Each additional step in the process can lead to delays and prolonged uncertainty. Without question, there is a better process, and it should start with aligned requirements across the banking agencies, coordinated review processes, and clearer standards for approval.

The standards for approval should be clear to all applicants and consistently applied. This must include transparency not only in approval standards but also in timelines, which are equally critical to banks seeking regulatory approval. Banking applications are not filed without extensive work up front and specific plans in mind. For example, a merger application will include information about the pro forma institution's management team, geographies to be served in the merged institution's banking footprint, what products will be offered, and how the application will be consistent with the various statutory approval standards.

If we determine that we consistently need more information to process an application, we should amend the applications form instead of relying on time-consuming additional information requests that extend the decision timeline. And if there are standards we expect applicants to meet-for example, the minimum amount of capital required for a de novo bank formation or an expansionary proposal-we should be clear and transparent about those expectations in advance.

Uncertainty in the standards and timelines for action on bank applications can contribute to a regulatory environment that favors nonbanks. This more favorable treatment includes allowing them to engage in the same activities without the same regulatory burdens, like more favorable tax and regulatory treatment for credit unions and the exemption from Community Reinvestment Act requirements for nonbank financial institutions, again, including credit unions. Why would a new business choose to become a bank if they can avoid the complexities of the banking regulatory framework and still provide similar services?

## Tailoring

While these steps-developing a pipeline of future leadership for community banks and promoting a more efficient bank applications process-would help support the community banking system generally, perhaps the most critical feature of the framework that affects community banks is tailoring to address the ongoing burden of compliance.

Tailoring is the term we use in banking to describe an approach to regulation that strives to match regulation and supervision with the size, risk, complexity, and business model of an institution. Tailoring helps us calibrate regulation and supervision to the activities and risks at every tier within our framework, but it is particularly important when we think about its application for smaller and community banks.

Frankly, when you consider the fundamental differences between the largest banks and the smallest, tailoring seems like common sense rather than a distinct regulatory philosophy. But in the absence of industry experience among bank policymakers, the trend over time has been an erosion of tailoring in favor of one-size-fits-all approaches.

Pushing down requirements more appropriate for larger institutions to smaller bankseither formally through regulation or informally through supervisory messagingencourages homogenization of the industry. This trend becomes even more concerning when regulators ""grade on a curve"" by evaluating a bank to other institutions, relative instead of evaluating a bank . against a clear legal standard

It is also important for regulators evaluating regulations and supervisory approach to consider the aggregate benefits and costs of the framework, rather than looking at each part of the framework on a piecemeal basis. Often, the regulations and supervisory guidance issued by regulators has a ""cumulative"" or ""compounding"" effect on banks. A piecemeal approach ensures that banks cannot go to a single source or one regulation to understand supervisory expectations or requirements for a particular activity. While it may be possible to justify or explain any single regulation or piece of guidance on a standalone basis, when we consider the aggregate effects, it is clear that we need to rethink our approach and recommit to tailoring.

Regulatory ambivalence to tailoring comes at a significant cost. If current trends continue-where we push down requirements from large banks to small and attempt to ""smooth"" or standardize requirements and expectations across all banks-we will eventually find ourselves achieving the academically preferred end state of only a few large banks ineffectively serving the financial needs of the entire U.S. economy. In this state of the world, not only will community banks suffer but so will the communities they serve.

## Closing Thoughts

Thank you again for the invitation to join you today. It is wonderful to see the ongoing success and commitment of the Robbins Banking Institute in preparing the next generation of leaders to play an important role in the banking and financial system. While I have expressed concern about some recent trends, one of the many benefits of our system is that there are always opportunities to change course, and I am confident that with committed and experienced leadership we can.

I am also confident that the future of community banking is bright, as long as we focus on right sized and appropriate regulations and guidance and a recognition that investment in innovation and growth is a necessity, not a roadblock. Regulators have an important opportunity now to prioritize changes that will support the safe and sound operation of community banks while allowing these banks to support the U.S. economy, serve their communities, innovate, and grow. Community banks enable the economic success of our country and will continue to support financial opportunities for many future generations. I look forward to seeing how the students in attendance here today will be a part of and shape that bright future.

1  The views expressed in these remarks are my own and do not necessarily reflect those of my colleagues on the Board of Governors of the Federal Reserve System or the Federal Open Market Committee.

- 2  Allen N. Berger, Nathan H. Miller, Mitchell A. Petersen, Raghuram G. Rajan, and Jeremy C. Stein, ""Does Function Follow Organizational Form? Evidence from the Lending Practices of Large and Small Banks (PDF),"" National Bureau of Economic Research, Working Paper 8752 (Cambridge, MA: NBER, February 2002).
- 3  See, e.g., Board of Governors of the Federal Reserve System, Supervision and (PDF) (Washington: Board of Governors, November 2024), Table 2, Regulation Report Summary of organizations supervised by the Federal Reserve (as of 6/30/2024).
- 4  Larger banks are defined using tests that look primarily at asset size but may include other metrics like cross-jurisdictional activity, nonbank assets, short-term wholesale funding, or off-balance sheet exposures.
- 5  Michelle W. Bowman, ""Brief Remarks on the Economy and Accountability in Supervision, Applications, and Regulation (PDF)"" (remarks at the American Bankers Association 2025 Conference for Community Bankers, Phoenix, AZ, February 17, 2025).
- 6  See, e.g., Board of Governors of the Federal Reserve System, Banking Applications (PDF) (Washington, Board of Activity Semiannual Report, January 1-June 30, 2024 Governors, October 2024).",Michelle W Bowman
https://www.bis.org/review/r250303a.htm,Michael S Barr: Promoting responsible innovation through the Novel Activities Program,"Speech by Mr Michael S Barr, Vice Chair for Supervision of the Board of Governors of the Federal Reserve System, at the Alliance for Innovative Regulation, Washington DC, 27 February 2025.",2025-02-27 00:00:00,"## Michael S Barr: Promoting responsible innovation through the Novel Activities Program

Speech by Mr Michael S Barr, Vice Chair for Supervision of the Board of Governors of the Federal Reserve System, at the Alliance for Innovative Regulation, Washington DC, 27 February 2025.

* * *

Thanks to the Alliance for Innovative Regulation for organizing this event and for bringing together banks, fintechs, and regulators to collaborate and foster responsible innovation. 1

Innovation, when done responsibly, brings tremendous benefits to consumers, financial institutions, and the economy at large. Innovation can make financial products and services better, cheaper, and safer. It can make banking accessible to more consumers, advancing financial inclusion. It can modernize our financial infrastructures, creating efficiencies and providing new tools for banks to manage risk.

Innovation also comes with risks that need to be managed responsibly. Responsible innovation is in everyone's interest. Consumers want the benefits of innovation through products and services they can trust. Banks have an interest in managing the complexities of innovation responsibly, ensuring that they recognize new and evolving risks to safety and soundness, follow relevant laws, and protect and serve their customers. Fintechs often play a key role in offering products and services that allow banks to meet these needs. And regulators and supervisors should develop regulatory and supervisory frameworks that allow banks to clearly understand and manage the risks associated with innovative activities. To achieve that, regulators should provide ongoing transparency and clarity on our approach.

Today, I'd like to share how the Federal Reserve's Novel Activities Supervision Program, launched in the summer of 2023, plays an important role in supporting responsible innovation at our supervised institutions. 2  Prior to this program, the Federal Reserve established temporary working groups and task forces to better understand evolving technologies to inform supervision. Ultimately, though, we determined we needed a dedicated supervisory function for novel activities. There were a number of factors driving that decision that guided how we designed the Program.

First, we understood that the pace of innovation was rapid. And we knew there would, of course, be benefits and risks stemming from innovation in the financial system. So we tasked the Novel Program with monitoring and understanding how these innovations and associated novel activities are used in banking and what benefits and risks they would pose. We gave them the mandate to keep up with the expertise related to use of new technologies and to employ new tools and data analytics in supervision. We invested time and research in understanding new technologies and businesses because we understood the importance of allowing innovation in the sector and avoiding excessively rigid stances on risk that don't take into account the potential to make advancements in the sector and economy that benefit all of society.

Second, we recognized that many financial institutions across the country are exploring and using many of the same technologies and similar novel business models. We felt it was important to create a coordinated approach to supervising novel activities across the Federal Reserve System. We initially identified two dozen firms, including firms of all sizes, for supervision by the Novel Activities Program. Firms are added or removed from the Program based on their engagement in novel activities. The supervisory program is designed to build a broad-based perspective of novel activities, the benefits and risks, and how those risks are managed. In this way, the Novel Program helps to enable similar supervision of similar risks, in a manner that reflects our current understanding of those activities in a variety of contexts.

Third, while the technologies and products used by banks may be similar, their application and thus the benefits and risks may vary across business models. We understand the importance of tiering supervision to the type, extent, and level of risk posed by the novel activities and varied business models of supervised institutions and not imposing undue burden on firms. The Novel Activities Program employs a riskbased approach to supervision-meaning that the intensity of supervision is commensurate with the risk and scale of the activity. There is no one-size-fits-all model. Experts from the Novel team join the traditional supervisory teams that banks are used to working with on a regular basis, so there is no disruption or change in how we engage with banks. The Program is dynamic. As a bank changes its activities in this space, the rigor of the supervision similarly changes. 3

The Novel Activities Program serves as a central point of expertise on new and innovative activities, supporting coordinated and risk-based supervision, and facilitating collaboration and communication between supervisors and stakeholders, all of whom contribute to supporting responsible innovation.

Next, let me speak to two important principles in our Novel Program-clarity and collaboration.

## Clarity

Starting with clarity: for banks beginning to explore new technologies, supervisors should engage early in the process to understand the technology and the risks and provide a clear sense of their expectations along the way. Engagement allows for banks and their supervisors to share perspectives on effective risk management practices and the application of new technologies. Early and open dialogue creates opportunities for supervisors to provide feedback to banks on necessary risk management frameworks early on in their innovation process and to have an open dialogue that builds trust as products go to market.

As novel activities become more developed, we can issue guidance, resources, and other types of communications to further disseminate information, gather input, and provide clarity on effective risk management for novel activities. For example, in May 2024, the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation released a guide to assist community banks in developing and implementing third-party risk management practices, which could be a useful resource for banks seeking to engage in novel, technology-based partnerships. 4 A few months later, the agencies issued a joint statement on arrangements with third

parties to deliver bank deposit products and services, which discusses the risks these arrangements can present, offers examples of practices to manage those risks, and reminds banks of existing requirements and supervisory expectations. 5   There is no-onesize-fits-all approach in how we engage and communicate guidance to our firms, but it is essential that engagement happen to provide clarity to both sides.

I have said it before many times and want to reiterate it here: the Federal Reserve neither prohibits nor discourages banking organizations from providing banking services to customers of any specific class or type, as permitted by law or regulation. It is up to banks to choose their own customers, and not supervisors. That has been and will continue to be our practice. In fact, banks supervised by the Federal Reserve provide material and important services to the crypto-industry. For example, banks supervised by the Fed operate real-time, 24/7 payment platforms that serve as a primary mechanism for companies to exchange dollars to settle crypto-asset transactions. We monitor that activity from both a safety and soundness and financial stability lens, but we do not tell banks to serve or not serve those customers.

## Collaboration

Turning to collaboration, the private sector is at the forefront of innovation and that ongoing engagement and collaboration with industry gives supervisors insight into the evolving nature of novel innovations and developments. Insights gathered from supervision, analysis, and monitoring activities, and industry engagement, can identify real improvements to how financial services are delivered to households and businesses and how risks are managed by banks. Collaboration can also reveal areas where we can provide regulatory clarity for banks looking to engage in new activities.

I want to emphasize the importance of hearing from the public through tools like requests for information, or RFIs. The bank regulatory agencies published an interagency RFI on bank-fintech arrangements last July.  The purpose of the RFI was 6 to build on the agencies' understanding of these arrangements by soliciting updated input on the nature of bank-fintech arrangements. This included effective risk management practices regarding those arrangements, and the implications of such arrangements for bank risk management, safety and soundness, and compliance with applicable laws and regulations. We were also interested in understanding whether enhancements to existing supervisory guidance would be considered helpful in addressing the risks associated with these types of arrangements. We received over 100 comments. Respondents shared their insights on many topics, including the risks and benefits of these arrangements and how the agencies can bring additional clarity to our supervisory expectations. Some in the banking sector commented that the Novel Activities Program is an example of how cross-team collaboration might deepen an agency's understanding of technology and innovation. The Federal Reserve and the other agencies are carefully considering the feedback we received as we consider how we can continue to support responsible innovation.

We will continue to invest time and resources learning more about innovative technologies such as distributed ledger technology and bank-fintech partnerships to understand how they may benefit the institutions we supervise and their customers.

Moreover, interagency coordination and knowledge-sharing with federal and state regulators and the private sector continue to be critical sources of discussion, engagement, and knowledge-building.

## In Closing

In closing, thank you for this opportunity to outline the Fed's Novel Activities Program, which I believe has already improved the clarity and consistency of our supervision related to innovative technologies and fostered collaboration as banks and supervisors seek to better understand the risks associated with these activities. I believe this approach will support innovation that benefits consumers while supporting safety and soundness. Thank you.

- 1  The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.
- 2  See Board of Governors of the Federal Reserve System, ""Creation of Novel Activities Supervision Program,"" SR letter 23-7 (August 8, 2023).
- 3  As of today, there are 22 Federal Reserve supervised firms in the Novel Activities Supervision Program.
- 4  Board of Governors of the Federal Reserve System, ""Third-Party Risk Management: A Guide for Community Banks (PDF),"" SR letter 24-2 / CA letter 24-1 (May 7, 2024).
- 5  Board of Governors of the Federal Reserve System, ""Joint Statement on Banks' Arrangements with Third Parties to Deliver Bank Deposit Products and Services,"" SR letter 24-5 (July 25, 2024).
- 6  Request for Information on Bank-Fintech Arrangements Involving Banking Products and Services Distributed to Consumers and Businesses, 89 Fed. Reg. 61,577 (July 31, 2024).",Michael S Barr
https://www.bis.org/review/r250226e.htm,Howard Lee: Keynote address - Asia Pacific Loan Market Association Global Loan Market Summit,"Keynote address by Mr Howard Lee, Deputy Chief Executive of the Hong Kong Monetary Authority, at the Asia Pacific Loan Market Association (APLMA) Global Loan Market Summit, Hong Kong, 26 February 2025.",2025-02-26 00:00:00,"## Howard Lee: Keynote address - Asia Pacific Loan Market Association Global Loan Market Summit

Keynote address by Mr Howard Lee, Deputy Chief Executive of the Hong Kong Monetary Authority, at the Asia Pacific Loan Market Association (APLMA) Global Loan Market Summit, Hong Kong, 26 February 2025.

* * *

Tibor (Papp, Chair of APLMA), distinguished guests, ladies and gentlemen,

Let me first thank APLMA for inviting me here today. The loan markets were full of challenges in 2024. Geopolitical conflicts, high interest rate environment and uneven economic performances across regions have put pressure on loan demand in the Asia Pacific. Despite the uncertain environment, 2024 will probably be remembered as the starting point of mass adoption of Generative A.I. (GenA.I.) technologies. A few market statistics for putting this into perspective. Globally, fueled by the GenA.I. race, syndicated loans surged 35% to roughly USD 6 trillion, marking the highest volume on record. There was a 70% increase in syndicated loans in the high technology industry . 1

The spike in loan demand last year was mostly observed in the North American market. But we have also seen more GenA.I. innovations in other parts of the world, such as the sudden emergence of the cost-effective DeepSeek last month. To support GenA.I. development, large investments will be required for data centers and communication technology. We are probably still in the first inning of what is to come from GenA.I., and GenA.I. related syndicated loan transactions will likely be a running theme in the loan market for years to come.

## Harnessing Gen A.I.: A Smarter, Data-Driven Future

With GenA.I.'s unique capabilities in processing vast amounts of documents and unstructured data, as well as its ability to handle cross-media inputs and outputs, such as text, audio and graphics, the technology has the potential to revolutionise the operation of financial institutions, from customer-facing functions such as remote account onboarding and customer chatbots, to middle and back-office operations for risk management, fraud detection and automation of work processes.

At the HKMA, we are committed to promoting responsible GenA.I. adoption, and ensuring that innovation aligns with ethical standards and regulatory requirements. As a banking regulator, we are tasked not only with safeguarding the integrity and stability of financial systems but also with fostering an environment where innovation can flourish.

Regulatory innovation is more than just introducing new rules; it involves creating an adaptable framework that encourages experimentation while ensuring consumer protection and market integrity. By collaborating with the industry, we aim to better understand the application of emerging technologies in the financial sector. We have adopted an ""explorer"" mindset, embracing innovative thinking even at an early stage.

We have recently launched our GenA.I. Sandbox in collaboration with the Cyberport . 2 Within that, banks may partner with technology companies to test new ideas that leverage the latest GenA.I. technologies, refine innovative strategies and obtain early supervisory feedback.

A total of 15 use cases from 10 banks and 4 technology partners have been selected as the inaugural participants in the GenA.I. Sandbox. Notable use cases include augmenting credit assessment and fraud detection by automated processing of unstructured data, and enhancing customer service to handle more personalised and complex enquiries. This initiative ensures that we harness the benefits of A.I. while mitigating potential risks, facilitating innovation in a controlled environment.

## Sustainability: The New Frontier in Finance

Development of GenA.I. goes hand-in-hand with increase in power demand. In addition to investments in digital infrastructure, we will also see increase in investments for power generation and transmission. With rising temperatures and a rapidly changing global climate, it is imperative such increase in power demand is met in a sustainable manner.

Our Sustainable Finance Action Agenda outlines a vision for integrating sustainability at the core of our financial system. It calls on all banks to strive to achieve Net Zero in their operations by 2030 and in their financed emissions by 2050, reflecting Hong Kong's commitment to a greener economy.

Green and sustainable finance is closely tied to financial innovation. For instance, tokenisation technology could help solve long-standing challenges such as double counting in carbon credits, a key issue in carbon trading. This could unlock new business models and create opportunities for businesses and investors to engage in sustainable practices. We have also assisted the HKSAR Government in issuing two tokenised green bonds, creating demonstrative effect and promoting broader technology adoption in the capital market.

As announced by the Financial Secretary in his Budget Speech this morning, the Government will regularise the issuance of tokenised bond. So the HKMA is preparing for issuing the third tranche and will also continue to encourage private issuances through the Digital Bond Grant Scheme.

At the same time, the Financial Secretary also announced a bond issuance programme of $150 billion to $195 billion per year in the next five years. The Government debt-toGDP ratio will remain at manageable levels of 12 to 16.5%. The proceeds will be used to invest in infrastructure but not fund Government recurrent expenditure. So this would bring more opportunities to the debt capital market and provide good quality assets for investors.

On the investment front, the HKMA is prioritising ESG investments across all asset classes under the Exchange Fund, striving toward the Net Zero target by 2050 while contributing to a sustainable economy. Our investment approach integrates both quantitative indicators and the long-term sustainable value of investments.

## Infrastructure Financing for a Sustainable and Digital Future

Even with its vast scale, funding raised from the syndicated loan market may not be enough to support the global transition to a digital and sustainable future. More needs to be done to channel market capital into high-quality infrastructure development. In 2019, the Hong Kong Mortgage Corporation (HKMC) entered the infrastructure financing business, aiming to address the funding gap in the infrastructure market through securitisation.

So far, the HKMC has successfully issued two series of infrastructure loan-backed securities in the institutional market, with total value of over US$800 million. The securitisation issues received a strong response from investors, and promoted the development of local debt market.

In alignment with our vision for Hong Kong to play a central role in supporting green and sustainable financing needs in Asia and globally, both securitisation issues include sustainability tranches which are backed by sustainable, green and social assets, and issued in accordance with the HKMC's Social, Green and Sustainability Financing Framework.

## Conclusion

Looking ahead, we envision a future where new technologies will not only enhance connectivity among users, data, and services but also drives economic progress across sectors.

As we continue to evolve as regulators, it is imperative that we remain agile and responsive to the changing landscape. The journey of regulatory innovation and market transformation is one of immense opportunity and responsibility. By working together, we can create a financial ecosystem that is innovative, sustainable, and inclusive.

Thank you for your attention. I look forward to engaging with you in meaningful discussions that will shape our collective future. Once again, I thank APLMA for today's invitation.

1 (Nikkei Asia) AI drives global syndicated lending to record $6tn in 2024

2 HKMA announces inaugural cohort of GenA.I. Sandbox",Howard Lee
https://www.bis.org/review/r250226f.htm,Isabel Schnabel: No longer convenient? Safe asset abundance and r*,"Keynote speech by Ms Isabel Schnabel, Member of the Executive Board of the European Central Bank, at the Bank of England Agenda for Research (BEAR) conference, London, 25 February 2025. ",2025-02-25 00:00:00,"SPEECH

## No longer convenient? Safe asset abundance and r*

## Keynote speech by Isabel Schnabel, Member of the Executive Board of the ECB, at the Bank of England's 2025 BEAR Conference

London, 25 February 2025

Over the past few years, global bond investors have fundamentally reappraised the expected future course of monetary policy.

Even as inflation has receded and policy restriction has been dialled back, current market prices suggest that maintaining price stability will require higher real interest rates in the future than before the pandemic.

In my remarks today, I will argue that the shift in market expectations about the level of r* - the rate to which the economy is expected to converge in the long run once current shocks have run their course - is consistent with two sets of observations.

The first is that the era during which risks to inflation have persistently been to the downside is likely to have come to an end.

Growing geopolitical fragmentation, climate change and labour scarcity pose measurable upside risks to inflation over the medium to long term. This is especially true as the recent inflation surge may have permanently scarred consumers' inflation expectations and may have lowered the bar for firms to pass through adverse cost-push shocks to consumer prices.

The second observation is that we are transitioning from a global 'savings glut' towards a global 'bond glut'.

Persistently large fiscal deficits and central bank balance sheet normalisation are gradually reducing the safety and liquidity premia that investors have long been willing to pay to hold scarce government bonds. The fall in the 'convenience yield', in turn, reverses a key factor that had contributed to the decline in real long-term interest rates, and hence r*, during the 2010s.

The implications for monetary policy are threefold.

First, a higher r* calls for careful monitoring of when monetary policy ceases to be restrictive. Second, central bank balance sheet policies may themselves affect the level of r* through the convenience yield, making them potentially less effective than previously thought. Third, because central bank reserves also offer convenience services to banks, it is optimal to provide reserves elastically on demand as quantitative tightening reduces excess liquidity.

Upward shift in r* signals lasting change in the inflation regime

Starting in 2021, long-term government bond yields rose measurably across advanced economies. Today, the ten-year yield of a German government bond is about two and a half percentage points higher than in late 2021 (Slide 2, left-hand side).

What is remarkable about the rise in nominal bond yields in the euro area over this period is that it was not driven by a change in inflation compensation. Investors' views about future inflation prospects are broadly the same today as they were three years ago (Slide 2, right-hand side).

Rather, nominal interest rates rose because real interest rates increased. Euro area real long-term rates are now trading at a level that is substantially higher than the level prevailing during most of the post-2008 global financial crisis period (Slide 3, left-hand side).

Part of the rise in real long-term interest rates is a mechanical response to the tightening of monetary policy.

Long-term interest rates are an average of expected short-term interest rates over the lifetime of the bond, plus a term premium. So, when we raised our key policy rates in response to the surge in inflation, the average real rate expected to prevail over the next ten years increased. [ ] 1

What is more striking, however, is that investors also fundamentally revised the real short-term rate expected to prevail once inflation has sustainably returned to our target. This rate is typically taken as a proxy for the natural rate of interest, or r*.

The real one-year rate expected in four years (1y4y), for example, is now at the highest level since the sovereign debt crisis (Slide 3, right-hand side). Even at very distant horizons, such as in nine years, the expected real short-term rate (1y9y) has increased measurably in recent years.

To a significant extent, these developments reflect a genuine reappraisal of the real equilibrium interest rate that is consistent with our 2% inflation target. A rise in the term premium, which is the excess return investors demand for the uncertainty surrounding the future interest rate path, can explain less than half of the change in the real 1y4y rate. [ ] 2

These forward rates have also remained surprisingly stable since 2023, with a standard deviation of around just 15 basis points, despite the measurable decline in inflation, the protracted weakness in aggregate demand and the series of structural headwinds facing the euro area.

We are seeing a similar upward shift in model-based estimates of r*. According to estimates by ECB economists, the natural rate of interest in the euro area has increased appreciably over the past two years, and even more so than what market-based real forward rates would suggest (Slide 4). [ ] 3

This result is robust across many models and even holds when accounting for the significant uncertainty surrounding these estimates. In other words, for drawing conclusions about the directional change of r* from the rise in market and model-based measures, the actual rate level is largely irrelevant.

What matters is the direction of travel. And that is unambiguous: we are unlikely to return to the prepandemic macroeconomic environment in which central banks had to bring real rates into deeply negative territory to deliver on their price stability mandate. This suggests that the nature of the inflation process is likely to have changed lastingly.

## Real interest rates are only loosely tied to trend growth

Why do markets expect such a trend reversal for real interest rates in the euro area?

One answer is that some of the forces that weighed on inflation during the 2010s are now reversing.

Globalisation is a case in point. The integration of China and other emerging market economies into the global production network and the broad-based decline in tariff and non-tariff barriers were important factors reducing price pressures in advanced economies over several decades. [ ] 4

Today, protectionist policies, the weaponisation of critical raw materials and geopolitical fragmentation are increasingly dismantling the foundations on which trade improved the welfare of consumers worldwide.

These forces can be expected to have first-order effects on inflation.

European gas prices, for example, are up by 65% compared with a year ago despite the significant decline over recent days. Oil prices, too, have increased since September of last year, in part reflecting the marked depreciation of the euro.

While commodity prices are inherently volatile, and may reverse quickly, other deglobalisation factors, such as reshoring and the lengthening of supply chains, are likely to increase price pressures more lastingly.

And yet, the persistent rise in real forward rates poses a conundrum in the euro area.

The reason is that increases in long-term real interest rates are typically thought of as being associated with improvements on the supply side of the economy, such as productivity growth, the labour force and the capital stock.

At present, however, these factors do not point towards an increase in r* in the euro area.

Potential growth has generally been revised lower, not higher, as many of the factors currently holding back consumption and especially investment are likely to be structural in nature, such as a rapidly ageing population and deteriorating competitiveness.

The weak link between the structural factors driving potential growth and r* is, however, not exceptional from a historical perspective.

Indeed, over time there has been little evidence of a stable relationship between real interest rates and drivers of potential growth, such as demographics and productivity. [ ]  They have had the expected relationship in some subsamples but not in others. [ ] 5 6

Similarly, in the most popular framework for estimating r*, the seminal model by Laubach and Williams, potential growth has played an increasingly subordinated role in explaining why the natural rate of interest has remained at a depressed level in the United States following the global financial crisis (Slide 5, left- hand side). [ ] 7

Rather, the persistence in the decline in r* is explained to a large extent by a residual factor, which lacks economic interpretation.

Moreover, if growth was the main driver of r*, then one would expect all real rates in the economy to adjust in a similar way. But while real rates on safe assets have declined since the early 1990s, the return on private capital has remained relatively constant. [ ] 8

## Decline in the convenience yield is pushing r* up

A growing body of research attempts to reconcile these puzzles. Many studies attribute a significant role to the money-like convenience services that safe and liquid assets, such as government bonds, provide to market participants.

The yield that investors are willing to forgo in equilibrium for these services is what economists call the

'convenience yield'. [ ] 9

This yield, in turn, critically depends on the net supply of safe assets: When these are scarce, investors are willing to pay a premium to hold them, depressing the real equilibrium rate of interest. And when they are abundant, the premium falls, putting upward pressure on r*.

New research by economists at the Board of Governors of the Federal Reserve System shows how incorporating the convenience yield into the Laubach and Williams framework significantly improves the explanatory power of the model. [ ] 10

In fact, the convenience yield can explain most of the residual factor and is estimated to have caused a large part of the secular decline in the real natural rate in the United States (Slide 5, right-hand side).

Liquidity requirements that regulators imposed on banks in the wake of the global financial crisis, the Federal Reserve's balance sheet policies and the integration of many large emerging market economies into the global economy have led to an unprecedented increase in the demand for safe and liquid assets, driving up their convenience yield. [ ] 11

These findings are in line with earlier research showing that the convenience yield has played an equally important role in depressing the real equilibrium rate in many other advanced economies, including the euro area, during the 2010s. [ ] 12

This process is now reversing. According to the work by the Federal Reserve economists, r* has recently increased visibly, contrary to what the model without a convenience yield would suggest.

Asset swap spreads are a good indicator of the convenience yield. Both interest rate swaps and government bonds are essentially risk-free assets, so they should in principle yield the same return.

For a long time, this has been the case: before the start of quantitative easing (QE) in the euro area in 2015, the spread between a ten-year German Bund and a swap of equivalent maturity was close to zero on average (Slide 6, left-hand side).

Over time, however, with the start of QE and the parallel fiscal consolidation by governments reducing the net supply of government bonds in the market, the premium that investors were willing to pay to secure their convenience services rose measurably. At the peak, ten-year Bunds were trading nearly 80 basis points below swap rates.

But since about mid-2022 the asset swap spread has persistently narrowed. In October of last year it turned positive for the first time in ten years, and it now stands close to the pre-QE average again.

Other measures of the convenience yield paint a similar picture. The spread between ten-year bonds issued by the Kreditanstalt für Wiederaufbau (KfW) and German Bunds has narrowed from about -80 basis points in October 2022 to just -30 basis points today (Slide 6, right-hand side). [ ] 13

Furthermore, in the repo market, we have observed a steady and measurable rise in overnight rates and a convergence across collateral classes (Slide 7, left-hand side). [ ] 14

Over the past few years, transactions secured by German government collateral, in particular, were trading at a significant premium over others. This premium has declined considerably, reflecting a reduction in collateral scarcity.

Finally, in the United States, the spread between AAA corporate bonds and US Treasuries has declined from almost 100 basis points in 2022 to 40 basis points today (Slide 7, right-hand side). It currently stands close to its historical low.

## Global savings glut has turned into a global bond glut

All this suggests that, today, market participants value the liquidity and safety services of government bonds less than they did in the past, as the net supply of government bonds has increased and continues to increase at a notable pace.

In Germany and the United States, for example, the sovereign bond free float as a share of the outstanding volume has increased by more than ten percentage points over the past three years (Slide 8, left-hand side). It is projected to steadily increase further in the coming years.

So, the global savings glut appears to have turned into a global bond glut, which reduces the marginal benefit of holding government bonds.

There are several factors contributing to the rise in the bond free float. [ ] 15

First, and most importantly, net borrowing by governments remains substantial. The public deficit is estimated to have been around 5% of GDP across advanced economies last year, and it is expected to decline only marginally in the coming years (Slide 8, right-hand side).

Second, rising geopolitical fragmentation is likely to be contributing to a drop in demand for government bonds in some parts of the world.

In the United States, for example, there has been a marked decline in the share of foreign official holdings of US Treasury securities since the global financial crisis (Slide 9, left-hand side). It is now at its lowest level in more than 20 years. [ ]  The US Administration's attempt to reduce the current account deficit is bound to further depress foreign holdings of US Treasuries. 16

Third, central banks are in the process of normalising their balance sheets (Slide 9, right-hand side). Unlike when central banks announced large-scale asset purchases, the effects of quantitative tightening (QT) on yields are likely to materialise only over time, as many central banks take a gradual approach when reducing the size of their balance sheets.

## Higher r* calls for cautious approach to rate easing

These developments have three important implications for monetary policy.

One is that central banks are dialling back policy restriction in an environment in which structural factors are putting upward pressure on the real equilibrium rate. Recent analysis by the International Monetary Fund (IMF), for example, suggests that a fall in the convenience yield to pre-2000 average levels could raise natural rates by about 70 basis points. [ ] 17

While a significant part of these effects may have already materialised, other factors could push real rates up further over the medium term. The IMF projects that, in the coming years, overall global investment public and private - will reach the highest share of GDP since the 1980s, also reflecting borrowing needs associated with the digital and green transitions as well as defence spending.

Recent global initiatives aimed at boosting the development and use of artificial intelligence underscore these projections. Overall, these forces may well be larger than those that continue to weigh on the real equilibrium rate, such as an ageing population.

Central banks, therefore, need to proceed cautiously. We do not fully understand how the pervasive changes to our economies are affecting the steady state, or what the path to the new steady state will look like.

In this environment, the most appropriate way to conduct monetary policy is to look at the incoming data to assess how fast, and to what extent, changes to our key policy rates are being transmitted to the economy.

For the euro area, this assessment suggests that, over the past year, the degree of policy restraint has declined appreciably - to a point where we can no longer say with confidence that our policy is restrictive.

According to the most recent bank lending survey, for example, 90% of banks say that the general level of interest rates has no impact on the demand for corporate loans, with 8% saying that it contributes to boosting credit demand (Slide 10, left-hand side). This is a marked shift from a year ago when a third of all banks reported that interest rates were weighing on credit demand.

For mortgages, the evidence is even more striking. Today almost half of the banks report that the level of interest rates supports loan demand, while a year ago more than 40% said the opposite. As a result, a net 42% of banks report an increase in the demand for mortgages, close to the historical high.

Survey evidence is gradually showing up in actual lending data. Credit to firms expanded by 1.5% in December, the highest rate in a year and a half, and credit to households for house purchases grew by 1.1% (Slide 10, right-hand side).

Strong bank balance sheets are contributing to the recovery and, given the lags in policy transmission, further easing is still in the pipeline.

Lending conditions are also relatively favourable from the perspective of borrowers. The spread between the composite cost of borrowing for households and sovereign bond yields is well below the level seen over most of the 2010s and is now close to the historical average (Slide 11). [ ] 18

And while some maturing loans from the period of very low interest rates will still need to be refinanced at higher rates, over time this debt has declined in real terms and interest payments as a fraction of net income are buffered by rising nominal wages.

Overall, therefore, it is becoming increasingly unlikely that current financing conditions are materially holding back consumption and investment. The fact that growth remains subdued cannot and should not be taken as evidence that policy is restrictive.

As the ECB's most recent corporate telephone survey suggests, the continued weakness in manufacturing is increasingly viewed by firms as structural, reflecting a combination of high energy and labour costs, an overly inhibitive and uncertain regulatory environment and increased import competition, especially from China. [ ] 19

Such structural headwinds reduce the economy's sensitivity to changes in monetary policy.

## QE's impact on r* is reducing its effectiveness

The second implication from the impact of the convenience yield on r* is related to the use of balance sheet policies.

If QE raises the convenience yield by reducing the net supply of government bonds, it may ultimately lower the real equilibrium interest rate. Importantly, this channel - the convenience yield channel - is distinct from the term premium channel. [ ] 20

So, doing QE could be like chasing a moving target.

It reduces long-run rates by compressing the term premium. [ ]  But by making investors willing to pay a higher safety premium when the supply of safe assets shrinks, it may also reduce the interest rate level below which monetary policy stimulates growth and inflation. 21

This can also be seen by looking at how QE changes the balance of savings and investments. Fiscal deficits absorb private savings and thereby increase r*. By doing QE, central banks absorb fiscal deficits and thereby lower r*.

In other words, central bank balance sheet policies may be less effective than previously thought. [ ]  This could be an additional factor explaining why large-scale asset purchases did not succeed in bringing 22

inflation back to 2% before the pandemic.

Of course, the same logic holds true when central banks reduce their balance sheets.

If QE contributed to depressing r*, QT will raise it. Any rise in real rates may then be less consequential for growth and inflation. It would then be misguided to compensate for higher long-term interest rates resulting from QT with lower short-term rates.

This is indeed what recent research suggests: QT announcements tend to cause a significant decline in the convenience yield of safe assets. [ ] 23

There is one caveat, however.

QE and QT are implemented by issuing and absorbing central bank reserves, which themselves are safe assets - in fact, reserves are the economy's ultimate safe asset because they are free of liquidity and interest rate risk. [ ] 24

Banks therefore highly value the convenience services of central bank reserves. So, when evaluating the effects of central bank balance sheet policies on r*, it is necessary to consider both the asset and liability side.

Research by economists from the Bank of England does exactly that. [ ]  They show that the effects of QT on the real equilibrium rate depend on the relative strength of two factors. 25

One is the effect on the bond convenience yield, which causes r* to rise as the supply of government bonds increases.

The other is the effect on the convenience yield of reserves . That effect is highly non-linear: when reserves are scarce, banks are willing to pay a high mark-up on wholesale interest rates, as was evident in the United States in 2019 when repo rates surged strongly.

So, if QT leads to a scarcity of reserves, it may cause the overall convenience yield to rise, and hence equilibrium rates to fall.

## Convenience of reserves and the ECB's operational framework

At the ECB, we took this factor into account when we reviewed our operational framework last year. [ ] This is the third implication for monetary policy. 26

The new framework allows banks to demand as many reserves as they find optimal at a spread that is 15 basis points above the rate which the ECB pays to banks when they deposit their excess reserves with us. So, the opportunity cost of holding reserves is comparatively small, given the convenience services reserves provide to banks.

In addition, our framework allows banks themselves to generate an increase in safe assets - by pledging non-high quality liquid assets (non-HQLA) in our lending operations.In doing so, banks on average generate € 0.92 of net HQLA for every euro that they borrow from the Eurosystem. [ ] 27

Our framework therefore recognises that years of crises, more stringent regulatory requirements and the advance of new technologies - some of which increase the risk of 'digital' bank runs - imply that banks may wish to hold larger liquidity buffers than they historically have done.

Supplying central bank reserves elastically will ensure that reserves will not become scarce as balance sheet normalisation proceeds. And if banks access our standard refinancing operations when they are in need of liquidity, they will also not have to adjust their lending activities in response to the decline in reserves, as is sometimes feared. [ ] 28

For now, the recourse to our lending operations has been limited, as there is still ample excess liquidity. But as we transition over the coming years to a world in which reserves are less abundant, banks will increasingly start borrowing reserves via our operations.

Three ideas could be explored to make this transition as smooth as possible.

First, regular testing requirements in the counterparty framework could help ensure operational readiness while also allowing counterparties to become more comfortable with participating in our operations. A lack of operational readiness was one of the factors contributing to the March 2023 turmoil in the United States. [ ] 29

Second, and related, obtaining central bank funding requires thorough collateral management, especially if the collateral framework is as broad as the Eurosystem's. For non-HQLA collateral, in particular, the pricing and due diligence process can be operationally complex and time-consuming.

For this reason, central banks sometimes require counterparties to pre-position collateral to ensure that funding can be readily obtained. [ ]  In the euro area, some banks already pre-position collateral voluntarily, in particular non-marketable collateral which cannot be used in private repo markets (Slide 12, left-hand side). 30

Banks could be further encouraged to mobilise with the central bank the collateral that is eligible but currently stays idle on their balance sheets. This would increase operational readiness, mitigate financial stability risks and reduce precautionary reserve demand as banks would have higher certainty that they can access central bank liquidity at short notice.

In the Eurosystem, given its broad collateral framework, such an approach may be more effective in helping banks adapt their liquidity management to the characteristics of a demand-driven operational framework compared with a blanket requirement to pre-position collateral.

Finally, in some jurisdictions central bank operations are fully integrated into the platforms commonly used by banks to operate in private repo markets.

This offers banks a number of advantages, including seamless access to transactions with the market and with the central bank, and - depending on the design of clearing arrangements and accounting rules - it could potentially allow banks to net out their positions, thereby freeing up valuable balance sheet space.

Offering banks the possibility to access Eurosystem refinancing operations through a centrally cleared infrastructure could contribute to making our operations more economical in an environment in which dealer balance sheets are increasingly constrained (Slide 12, right-hand side). [ ] 31

The design of such arrangements should preserve equal treatment across our diverse range of counterparties, regardless of their size, jurisdiction and business model, maintain the possibility to mobilise a broad range of collateral and be compatible with our risk control framework.

Further reflection is needed on these considerations, including a comprehensive assessment of the benefits and costs.

## Conclusion

Let me conclude.

The shocks experienced since the pandemic led to an abrupt end of the secular downward trend in real interest rates. Whether this will be merely an interlude, or the beginning of a new era, is inherently difficult to predict.

But looking at the ongoing transformational shifts in the balance of global savings and investments, as well as at the fundamental challenges facing our societies today, higher real interest rates seem to be the most likely scenario for the future.

This has implications for our monetary policy. Central banks will need to adjust to the new environment, both to secure price stability over the medium term and to implement monetary policy efficiently.

Thank you.

## Annexes

25 February 2025

Slides

1.

At the very short end of the yield curve, real interest rates are closely tied to the actions of central banks.

As prices are rigid in the short run, monetary policy can directly affect real short-term interest rates by changing the nominal policy rate.

2.

Longer-term interest rates are arguably more relevant for the transmission of monetary policy than the short-term rate. So, if the changes in term premia reflect a structural shift in the compensation investors demand for holding long-term bonds - reflecting, for example, higher uncertainty about inflation and hence the future course of monetary policy - the natural rate of interest will be higher across the maturity spectrum.

See Brand, C., Lisack, N. and Mazelis, F. (2025), ' ', Economic Bulletin, Issue 1, ECB. Natural rate estimates for the euro area: insights, uncertainties and shortcomings

4.

Schnabel, I. (2022), ' ', speech at a conference organised by the Österreichische Vereinigung für Finanzanalyse und Asset Management, Vienna, 11 May; Ciccarelli, M. and Mojon, B. (2010), 'Global Inflation', The Review of Economics and Statistics, Vol. 92, No 3, August, pp. 524-535; Forbes, K. (2019), 'Has globalization changed the inflation process?', BIS Working Papers , No 791, Bank for International Settlements, June; and International Monetary Fund (2006), 'How Has Globalization Affected Inflation?', World Economic Outlook, Chapter III. The globalisation of inflation

- 5.

Schnabel, I. (2024), ' ', speech at The ECB and its Watchers XXIV Conference session on 'Geopolitics and Structural Change: Implications for Real Activity, Inflation and Monetary Policy',; and Borio, C., Disyatat, P., Juselius, M. and Rungcharoenkitkul, P. (2022), ""Why So Low for So Long? A LongTerm View of Real Interest Rates"", International Journal of Central Banking, Vol. 18, No 3, pp. 47-87, September. Frankfurt, 20 March. R(ising) star?

6.

The Industrial Revolution in the 18th century is a striking example. It coincided with a downward trend in real rates despite the persistent increase in total factor productivity growth during this period.

7.

Laubach, T. and Williams, J. (2003), 'Measuring the Natural Rate of Interest', The Review of Economics and Statistics, Vol. 85, No 4, pp. 1063-1070.

8. , Vol. 134, No. 3, pp. 1225-1298; and Reis, R. (2022), 'Which r-star, public bonds or private

Jordà, Ò. et al. (2019), 'The Rate of Return on Everything, 1870-2015', The Quarterly Journal of Economics investment? Measurement and policy implications', mimeo, London School of Economics.

9.

Krishnamurthy, A. and Vissing-Jorgensen, A. (2012), 'The Aggregate Demand for Treasury Debt', Journal of Political Economy , Vol. 120, No 2, pp. 233-267.

10.

Szoke, B., Xavier, I. and Vazquez-Grande, F. (2024), 'Convenience Yield as a Driver of r*', FEDS Notes , Board of Governors of the Federal Reserve System, 3 September. The authors also find that accounting for the convenience yield in the estimation of r* significantly improves inference, thereby reducing uncertainty bands.

11.

See also Caballero, R.J., Farhi, E. and Gourinchas, P.-O. (2008), 'An Equilibrium Model of 'Global Imbalances' and Low Interest Rates', American Economic Review , Vol. 98, No 1, pp. 358-393.

12.

See, for example, Ferreira, T. and Shousha, S. (2023), 'Determinants of global neutral interest rates', Journal of International Economics , Vol. 145; Del Negro, M. et al. (2017), 'The Great Escape? A Quantitative Evaluation of the Fed's Liquidity Facilities', American Economic Review, Vol. 107, No 3, pp. 824-857; and Del Negro, M., Giannone, D., Giannoni, M.P. and Tambalotti, A. (2019), 'Global trends in interest rates', Journal of International Economics , Vol. 118, pp. 248-262.

13.

Bonds issued by the KfW are guaranteed by the German Government, so any difference in the return is due to the liquidity services government bonds offer to investors.

14.

Schnabel, I. (2024), ' ', speech at the annual ECB Conference on Money Markets, Frankfurt, 7 November. The ECB's balance sheet reduction: an interim assessment

15.

Schnabel, I. (2024), ' ', keynote speech at the CEPR Paris Symposium 2024 hosted by the Banque de France, Paris, 16 December. Navigating towards neutral

16.

This has coincided with the price of gold - the world's other safe haven asset - having more than doubled over the past ten years.

17.

IMF (2023), 'The natural rate of interest: drivers and policy implications', World Economic Outlook , April. This estimate does not yet take into account a potential shift in the preferences of foreign investors.

18.

The 'equilibrium' mortgage rate will naturally be higher as markets reprice the real equilibrium rate for government bonds.

19.

Maruhn, F., Morris, R. and Slavik, M. (2025), ' ', Economic Bulletin, Issue 1, ECB. Main findings from the ECB's recent contacts with non -financial companies

20.

Krishnamurthy, A. and Vissing-Jorgensen, A. (2011), 'The Effects of Quantitative Easing on Interest Rates: Channels and Implications for Policy', NBER Working Paper , No 17555; and Krishnamurthy, A. and Vissing-Jorgensen, A. (2012, op.cit.). There is also evidence of a distinction between the bond premium and convenience yield channel through exchange rates. See Jiang, Z. et al. (2024), 'Convenience Yields and Exchange Rate Puzzles', NBER Working Paper, No 32092.

21.

Vayanos, D., and Vila, J.-L. (2021), 'A preferred-habitat model of the term structure of interest rates', E conometrica , Vol. 89, pp. 77-112; and Greenwood, R. and Vayanos, D. (2014), 'Bond Supply and Excess Bond Returns', The Review of Financial Studies , Vol. 27, No 3, pp. 663-713.

22.

Schnabel, I. (2024), 'The benefits and costs of asset purchases', speech at the 2024 BOJ-IMES Conference on 'Price Dynamics and Monetary Policy Challenges: Lessons Learned and Going Forward', Tokyo, 28 May. This channel may also question a fundamental tenet of macroeconomics: the long-run neutrality of money. There is a growing body of research showing evidence that monetary policy can have long-lasting real effects. See, for example, BIS (2024), 'Quo vadis, r*? The natural rate of interest after the pandemic', Quarterly Review, March and Hillenbrand, S. (2023), 'The Fed and the Secular Decline in Interest Rates', Working Paper, Harvard Business School, March.

23.

Du, W., Forbes, K. and Luzzetti, M. (2024), 'Quantitative Tightening Around the Globe: What Have We Learned?', NBER Working Paper , No 32321.

24.

See, for example, Vissing-Jorgensen, A. (2023), 'Balance Sheet Policy above the ELB', ECB Forum on Central Banking, Sintra, Portugal, 28 June.

25.

Kumhof, M. and Salgado-Moreno, M. (2024), 'Quantitative easing and quantitative tightening: the money channel', Staff Working Paper , No 1,090, Bank of England.

26.

Schnabel, I. (2024), ' ', speech at the Money Market Contact Group meeting, Frankfurt am Main, 14 March. The Eurosystem's operational framework

27.

Hartung, B. (2024), 'Liquidity transformation and Eurosystem credit operations', Working Paper Series , No 2933, ECB.

28.

Altavilla, C., Rostagno, M. and Schumacher, J. (2023), 'Anchoring QT: Liquidity, credit and monetary policy implementation', CEPR Discussion Papers , No 18581.

29.

See, for example, BCBS (2023), Report on the 2023 banking turmoil, October.

30.

Group of Thirty (2024), Bank failures and contagion - Lender of last resort, liquidity, and risk management, Washington, D.C

31.

Duffie, D. et al. (2023), 'Dealer Capacity and U.S. Treasury Market Functionality', Staff Report, No 1070, Federal Reserve Bank of New York. Similar suggestions are being proposed for the Federal Reserve. See Logan, L. (2023), 'Ample reserves and the Friedman rule', remarks before the European Central Bank Conference on Money Markets, 10 November.",Isabel Schnabel
https://www.bis.org/review/r250311m.htm,"Fritzi Köhler-Geib: Adapting to a changing world - monetary policy, structural reforms and digitalisation","Keynote statement by Dr Fritzi Köhler-Geib, Member of the Executive Board of the Deutsche Bundesbank, at the Frankfurt School & OMFIF seminar ""The European and international monetary and financial landscape"", Frankfurt am Main, 11 March 2025.",2025-03-11 00:00:00,"## Fritzi Köhler-Geib: Adapting to a changing world - monetary policy, structural reforms and digitalisation

Keynote statement by Dr Fritzi Köhler-Geib, Member of the Executive Board of the Deutsche Bundesbank, at the Frankfurt School &amp; OMFIF seminar ""The European and international monetary and financial landscape"", Frankfurt am Main, 11 March 2025.

* * *

Check against delivery

## 1 Introduction

Ladies and gentlemen, it is a great pleasure for me to be at the Frankfurt School. Thanks for the opportunity to provide an impulse for this timely exchange of ideas.

The topic of today's event reminds me of my recent visit to Washington D.C. in midJanuary, where we, an international group of researchers and central bankers, discussed the possible shape of the policies of a new administration and their potential impact.

At this point, we have already seen some changes, and it is becoming clear that the actions taken by Europe, and within it Germany, will be decisive.

Let me address this topic by means of three questions. I will start with monetary policy, move on to the geopolitical environment and round this off with structural reform in Europe, in particular in Germany.

The questions I would like to address are:

First, where do we stand with monetary policy in the euro area? And will the natural rate of interest help us answer this question?

Second, how is monetary policy affected by geopolitics and what is the economic impact of the ongoing geoeconomic fragmentation?

And third, what does Germany need to do to revive its meagre potential growth?

## 2 Monetary policy and the natural rate

Let us start with the first topic: monetary policy in the euro area and its quest for price stability.

In the euro area, inflation has fallen considerably over the past two and a half years. The headline rate currently stands at 2.4%-less than a quarter of what it was at its peak of 10.6% in October 2022.

In their latest macroeconomic projections, ECB staff last week predicted inflation to gradually decline and to reach the medium-term 2% target by 2026. In other words, the target is in sight.

But it is definitely too early to declare victory over inflation just yet. Core inflation and particularly services inflation are still elevated. The inflation rate without the volatile energy and food components stands at 2.6% in February. And the further development of inflation remains highly uncertain.

There is a risk that inflation will be higher than expected, as a result of US trade policy or higher unit labour costs, for example. Nevertheless, the decline in inflation and the prospect of reaching the target in the medium term have already allowed the ECB Governing Council to lower the key interest rates several times.

Monetary policy operates with a time lag. It would therefore be unwise to maintain a restrictive course until the target has actually been reached. The brakes can be released sooner.

Last week, policy rates were cut for the sixth time; the deposit rate, which is the relevant policy rate, now stands at 2.50%. So, is monetary policy still putting the brakes on economic policy and price developments?

One concept often used to address this question is the so-called natural rate of interest-or short: r-star. What is r-star?

Conceptually, r-star is the real interest rate that would prevail if the economy were operating at potential and inflation were stable. If a central bank sets its policy rates such that the real interest rate is above r-star, monetary policy is restrictive or ""tight"". If the real rate is below r-star, monetary policy is expansionary or ""loose"".

However, the natural rate is unobservable and can only be estimated. That makes r-star a fuzzy signpost for practical monetary policy.

A first problem is that estimates of r-star depend strongly on the methodology. A second problem is that the uncertainty that surrounds any r-star estimate is quite high. And a third problem is that real-time estimates of r-star are highly susceptible to revisions of the data.

All in all, estimates of r-star are notoriously uncertain. 1   Hence, it would be unwise to fine-tune monetary policy decisions mainly on r-star estimates. That is why the Eurosystem uses a variety of financial, real and other indicators along the monetary policy transmission mechanism.

Regarding the question of whether monetary policy is still restrictive, the answer is: we don't know exactly. But it is possible that we have already entered neutral territory.

Although the concept of the natural rate of interest provides only limited help in day-today monetary policymaking, it is a useful framework for the longer-term perspective. The downward trend of r-star over the past decades was mainly due to declining productivity growth and an ageing population. 2

However, before I address the question of how to improve growth potential, I would like to discuss how geopolitical tensions affect monetary policy and how the ongoing geoeconomic fragmentation is affecting the economy.

## 3 Geoeconomic fragmentation

Apart from uncertainty as to whether we have already entered neutral territory, current monetary policy is also being challenged by geopolitical and economic policy uncertainty.

If you look at the Global Economic Policy Uncertainty Index or the Trade Policy Uncertainty Index, you will see sharp rises over the past months. Macroeconomic uncertainty is even higher now than at the beginning of the pandemic. And trade policy is more uncertain than during the trade tensions in 2018 and 2019.

This rise in uncertainty is something that monetary policymakers have to take into account. Hence they cannot base their decisions solely on baseline scenarios but also have to consider risk scenarios.

The Bundesbank, for example, considered a scenario in which the US increases tariffs permanently by 20 percentage points across the board and trading partners retaliate moderately.

The simulation results highlight the risk that higher tariffs will impose wide-ranging adverse effects on economic activity and trade-in the US and elsewhere. While the effects on the euro area would be less than the effects on the US economy, they are not negligible.

The ECB Governing Council is therefore well advised to continue to decide from meeting to meeting based on new data and not to pre-commit to a certain interest rate path. This approach allows for the necessary flexibility and full optionality.

The recent rise in uncertainty-which is a challenge for Europe-falls into a period of already advanced geoeconomic fragmentation. If we look at the number of harmful trade interventions, this has perceptibly risen since 2020. 3

Between the financial crisis of 2009 and the beginning of the pandemic, the Global Trade Alert database recorded around three thousand new harmful trade interventions each year. However, in 2020, their number jumped to six thousand and has remained at a significantly elevated level since then.

Trade interventions include protectionist measures such as tariffs, quotas or subsidies. A closer look at the data shows that trade-distorting subsidies account for nearly twothirds of all harmful interventions implemented between 2020 und 2023.

While the number of interventionist and protectionist measures increased in all G20 countries, the United States and China show the most significant increases in harmful interventions. Many of them are of reciprocal nature. This stresses the risk of selfreinforcing loops following an initial protectionist measure.

However, the evidence regarding the impact of these restrictions on world trade dynamics is mixed.

On the one hand, the degree of global trade integration remains close to its level prior to the global financial crisis. In 2023, world trade represented 58% of global GDP,  only a slight decrease from the 61% recorded in 2008. To put this into perspective, these figures are significantly higher than in previous decades: in 1970, world trade accounted for just 26% of global GDP,  and by 1990, it had risen to 38%.

On the other hand, international trade is becoming increasingly regional. Gita Gopinath and her coauthors find that trade and investment between blocs is decreasing, compared to trade and investment within blocs. 4   We are also seeing an increase in regional trade agreements. Quite recently, for example, the EU and Mercosur came to an agreement-which is now to be ratified by its members.

Despite such comforting news, we have to concede a general shift away from the rulesbased global trade order. And most recently, as I already mentioned, one country has started to put into question virtually all of its trade relationships.

This is certainly a major risk for the global economy; and the country itself does not benefit from it either, as illustrated by the Bundesbank  simulation. But the current global economic policy uncertainty and the geoeconomic fragmentation is also weighing on European growth. And Germany, as a very open economy, is particularly suffering from this.

## 4 Structural reforms and the opportunities of digitalisation

## 4.1 Removing obstacles to economic growth

Which leads me to the last topic for today: economic policies in Germany.

Here, growth has been especially weak for several years. And the current weakness is not just cyclical. Competitiveness has been falling for several years, unveiling significant structural problems in the economy. And these problems can only be addressed by structural reforms.

Major obstacles to economic growth in Germany are high energy prices, labour shortages due to demographic change and little business dynamism and innovation. 5   In all three areas, structural reforms can improve the situation and increase the willingness to invest. And lack of private investment is one of the reasons for weak growth.

As regards energy policy, we have to achieve greater planning certainty and make the green transition as efficient as possible to save costs. To mobilise low-carbon investments at a broader scale, households and firms need more clarity about the path to carbon neutrality.

Investment in green technologies often entails high costs because of large amounts of upfront capital, but lifetime operation and maintenance costs are relatively low. Facing

high uncertainty about future policy, firms hesitate to invest-or invest abroad instead. To reduce uncertainty, we have to provide a consistent framework for future energy supply.

Overall, in my view, the most important policy instrument to lower greenhouse gas emissions is a uniform and broad price on carbon emissions across all sectors-not least, because it is most cost-effective.

In addition, governments need to take complementary measures to ensure an efficient transition to a low carbon economy. This is important to limit increases in fixed costs and thus enable the low operating costs of renewables to feed through to retail prices.

Such measures would include, e.g., abandoning brown subsidies, choosing low-cost options for the grid (i.e., overhead instead of underground transmission lines), exploiting digital progress for instance with respect to smart meters and bidirectional charging of electric vehicles, and advancing the integration of EU energy systems to avoid overcapacities and exploit country-specific advantages with respect to energy supply.

To address the issue of labour shortages, we should reduce incentives for early retirement. Moreover, a gradual raising of the statutory retirement age by linking it to life expectancy would be appropriate.

More and better childcare facilities would encourage young parents to increase their working hours. Relatedly, reducing disincentives to work in the tax and levy system would increase the contribution of secondary earners in the labour force.

Finally, it is advisable for Germany to attract skilled labour from abroad, for example, by streamlining the processes for obtaining work and residence permits.

Which leads me to the third area where action is needed: reducing red tape and fostering innovation to strengthen business dynamics.

A recent survey of the German Chamber of Commerce and Industry has shown that reducing bureaucracy is by far the most important thing that firms want the new Federal Government to achieve.

In Germany, some disclosure and reporting requirements are very-probably excessively-extensive. A case in point is the recently adopted Supply Chain Act. A streamlining of such regulations or at least avoiding making them more complex than at the EU level would perceptibly simplify doing business for many firms.

Another main issue is the speed of German bureaucratic processes. In particular, approval processes are notoriously slow.

In this respect, digitalisation of public administration is a great opportunity and may spill over to the private sector. You probably all remember the recent fuss surrounding the AI software DeepSeek. It seems to be able to provide AI solutions with only a fraction of the hardware others require.

I see the rapid evolution of AI technology and applications as a great opportunity. New approaches can open up possibilities for more efficient working. As a  Bundesbank board member, I have some practical insights to share about how digitalisation may look in the public sector. Being responsible for our Directorate General Information Technology, I would like to mention three examples of what we are doing.

## 4.2 Digitalisation in practice: the case of the Bundesbank

First, the Bundesbank  is breaking new ground by proactively using the public cloud. As an initial step, our innovative, high-performance and secure eBusiness portal-the New Extranet, or NExt-went ""live"" in the cloud. It is for our currently over 180,000 customers, including banks, insurers, corporates and other public sector institutions.

At the same time, we built up a Bundesbank-owned private cloud in our computer centres for particularly sensitive data. With this hybrid cloud strategy and investments in technological trends such as artificial intelligence, we are ensuring our readiness for future challenges.

Second, the Bundesbank  is also at the forefront of public sector digitalisation while using artificial intelligence in multiple ways. Take, for example, the risk control function and its analysis related to the many counterparties with whom the Bundesbank conducts financial transactions or purchases securities.

By combining diverse sets of data and information, artificial intelligence can help us flag potential financial difficulties of a counterparty at an early stage. Given the sheer volume and complexity of the data involved, collecting and evaluating this information manually would be nearly impossible.

AI will also help us to expand our economic analyses. And it will help us to improve our understanding of how various policy measures affect inflation, employment and economic growth.

Last but not least, I would like to mention the digital euro project.

The Bundesbank  is currently working within the Eurosystem to look into the issuance of a digital euro. The introduction of a digital euro would make a significant contribution to strengthening Europe's sovereignty, resilience and efficiency.

The Bundesbank  has played a key role in exploring a wholesale type of digital euro. It would enable the settlement of digital assets in central bank money. This will help improve the efficiency of capital markets and make the euro more attractive compared with other currencies.

Results from recent trials in this regard are very promising.

## 5 Concluding remarks

Ladies and gentlemen,

In my remarks, I talked about monetary policy, geoeconomic fragmentation, and structural reforms in Germany. With regard to digitalisation, I gave you some insights into what the Bundesbank  is doing.

What unites the three issues I have talked about today is that they are all driven by changes.

Changes that affect the macroeconomic setting we live in. Changes that require policy makers to be vigilant in order to adapt as well as possible.

I would like to invite all of us to consider these changes-these challenges-as an opportunity to move closer together in Europe. Or as Jean Monnet has put it:  Europe will be forged in crises, and will be the sum of the solutions adopted for those crises.

Thank you very much for your attention.

- 1  For more details, see Nagel, J. (2025), r* in the monetary policy universe: navigational star or dark matter?, Lecture at the London School of Economics and Political Science, 12 February 2025.
- 2  See Cesa-Bianchi, A., R. Harrison and R. Sajedi (2023), Global R*, CEPR Discussion Paper No 18518; Davis, J., C. Fuenzalida, L. Huetsch, B. Mills and A. M. Taylor (2024), Global natural rates in the long run: Postwar macro trends and the market-implied r* in 10 advanced economies, Journal of International Economics, Vol. 149; International Monetary Fund (2023), The natural rate of interest: drivers and implications for policy, World Economic Outlook, April, Chapter 2.
- 3  See Global dynamics (globaltradealert.org).
- 4  See Gopinath, G. et al. (2024), , IMF Changing Global Linkages: A New Cold War Working Paper No 76.
- 5  See also Nagel, J. (2025), Economic Policy Measures to Boost Growth in Germany, speech delivered at the Berlin School of Economics, 10 March 2025.",Dr Fritzi Köhler-Geib
https://www.bis.org/review/r250311j.htm,Richard Byles: Update and outlook for the Jamaican economy,"Monetary Policy Press Statement by Mr Richard Byles, Governor of the Bank of Jamaica, at the Quarterly Monetary Policy Report press conference, Kingston, 24 February 2025.",2025-02-24 00:00:00,"## Richard Byles: Update and outlook for the Jamaican economy

Monetary Policy Press Statement by Mr Richard Byles, Governor of the Bank of Jamaica, at the Quarterly Monetary Policy Report press conference, Kingston, 24 February 2025.

* * *

## Introduction

Good morning and welcome to our first Quarterly Monetary Policy Report press conference for 2025.

## Monetary Policy Decision

Last Thursday, the Bank's Monetary Policy Committee (MPC) deliberated on its policy stance in the context of a set of favourable macroeconomic data and forecast for Jamaica, albeit coloured by uncertainties relating to the economic policies of Jamaica's main trading partners and their potential impact on Jamaica and the rest of the World.

From those deliberations, the MPC determined that the current level of the policy rate continues to be appropriate to support inflation remaining within the Bank's target range of 4.0 to 6.0 per cent.

As such, the Committee unanimously agreed to:

- (i) maintain the policy rate at 6.0 per cent per annum; and
- (ii) preserve relative stability in the foreign exchange market.

I will now briefly highlight the factors which underpinned the MPC's decision, starting with the most recent and positive inflation data.

## Economic Conditions Underpinning Inflation

On the 17 th of February, the Statistical Institute of Jamaica (STATIN) reported that headline inflation at January 2025 was 4.7 per cent, representing a general declining trend from the 7.4 per cent at January 2024. Core inflation (which excludes the prices of agricultural food products and fuel from the CPI) was 4.0 per cent at January 2025, remaining consistently below 6.0 per cent since July 2023.

This outturn reflects the fact that the sources of inflation have been moderating.

First, the private sector's expectations of future inflation, a key driver of headline inflation, continues to fall. In the Bank's December 2024 survey of businesses' inflation expectations, which was conducted over the period 25 November to 21 December 2024, respondents lowered their expectations for inflation 12-months ahead by more than one percentage point. This represented a continuation of a downward trend observed since the middle of 2022.

The second factor supporting lower inflation is the recent positive developments in the prices of imported intermediate and final goods. Let me explain. The average price of grains (including wheat, corn and soybeans) for the December 2024 quarter was lower by approximately 15.1 per cent, when compared to the December 2023 quarter. In addition, average oil prices for the December 2024 quarter was lower relative to the previous year and are projected to increase only marginally over the next two years. Inflation in the United States (US), which directly affects the prices of consumer items imported by Jamaicans, decelerated to 2.9 per cent at December 2024 from 3.4 per cent a year earlier. On the other hand, shipping prices increased for the review quarter relative to the corresponding quarter of the previous year.

Thirdly, both the change in the exchange rate, and businesses' expectations about its pace of depreciation in the future, have remained relatively stable. At the 19th of February 2025, the exchange rate, notwithstanding some two-way movement, had depreciated by just 0.3 per cent when compared with the rate on the 19th of February 2024. This is a slower pace when compared to the 1.9 per cent depreciation for the same period a year earlier.

The foreign exchange market has been adequately supported by the Bank's use of its healthy reserves to augment flows in the market. BOJ sold US$1.1 billion via its BFXITT facility over the 12 months to end-January 2025, compared to the sale of US$897 million over the 12 months to end-January 2024. However, it is important to note that the Bank net purchased approximately US$1.1 billion over the 12 months period to January 2025.

Fourthly, the deceleration in headline inflation reflected the impact of no upward adjustments in regulated prices (such as transportation fares).

Finally, while employment levels remain high, anecdotal data suggest that wage pressures are moderating.

## Other Considerations

The MPC is also mindful of the trends in interest rates abroad as they, being a potential stimulant of foreign exchange demand, have been somewhat sticky in their downward movement. As expected, the US Federal Reserve (Fed) maintained its policy rate in January 2025 at the range of 4.25 per cent to 4.50 per cent. Further, average yields on longer-term Treasury Bills in the secondary market in the US rose from 3.7 per cent to 4.4 per cent between September and December 2024.

## Outlook for the Jamaican Economy

I will now briefly discuss the forecast.

Over the next two years, inflation is projected to remain well anchored within the Bank's target range of between 4.0 and 6.0 per cent. This inflation outlook is largely consistent with the previous forecast that was shared with you in November 2024.

However, the balance of risks to the inflation forecast now appear skewed to the upside (which means that inflation could rise above the forecast). The uncertainty that I

mentioned earlier related to potential economic policy changes among Jamaica's main trading partners, which could have adverse implications for remittance and tourism inflows into the economy, as well as repercussions for inflation expectations. Worsethan-anticipated weather conditions in Jamaica could also continue to put upward pressure on inflation. On the downside, lower inflation could result from weaker-thanprojected demand.

In relation to demand conditions, the economy is estimated by the Planning Institute of Jamaica to have contracted by 1.8 per cent for the December 2024 quarter, following the decline recorded for the previous quarter. This contraction was predominantly reflected in Agriculture, Forestry &amp; Fishing, Hotels &amp; Restaurants and related services, Construction, and Mining and Quarrying. The decline was principally due to the effects of bad weather and so masks the underlying normal level of the economy.

In this context, the PIOJ projects that the economy for the March 2025 quarter will grow in the range of zero to 1 per cent and BOJ projects that it will recover fully from the effects of the weather-related events over ensuing quarters. Real GDP for FY2025/26 is therefore projected to grow by between 1.0 and 3.0 per cent. Growth will be underpinned by expansions for Agriculture, Forestry &amp; Fishing, Electricity &amp; Water Supply and Hotels &amp; Restaurants.

## Concluding Statement

Ladies and gentlemen, Bank of Jamaica remains resolute in its commitment to continue achieving its primary mandate of price stability by maintaining inflation at 4.0 to 6.0 per cent.

In this context, the Bank remains committed to ensuring that the foreign exchange market remains stable. The gross international reserves of the Bank are healthy and are projected to improve even further over the next two years. This is in a context where the current account of the balance of payments has been in surplus for some time and is projected to remain so over the near-term. The gross reserves at end January 2025 amounted to US$5.6 billion, rising from US4.8 billion a year earlier. This level of reserves is more than adequate when compared to international benchmarks for adequacy.

Looking ahead, the Bank is prepared to adjust the stance of monetary policy if the risks highlighted materialise and impede our ability to attain the inflation target.

Thank you. I will now take questions.",Richard Byles
https://www.bis.org/review/r250311i.htm,Leonardo Villar-Gómez: Notes - 27th Asobancaria Treasury Congress,"Notes by Mr Leonardo Villar-Gómez, Governor of the Central Bank of Colombia, at the 27th Asobancaria Treasury Congress, Cartagena, 13 February 2025.",2025-02-13 00:00:00,"## Leonardo Villar-Gómez: Notes - 27th Asobancaria Treasury Congress

Notes by Mr Leonardo Villar-Gómez, Governor of the Central Bank of Colombia, at the 27th Asobancaria Treasury Congress, Cartagena, 13 February 2025.

* * *

Thanks to Asobancaria, and particularly to Jonathan Malagón and Alejandro Vera for the invitation to this event.

## I. Conceptual Considerations on Monetary Policy

As I have done in some recent presentations, I would like to begin this presentation with a general reflection. Specifically, I would like to reiterate something that may seem obvious to you but is nonetheless important. I am referring to the fact that the main objective assigned to and its Board of Directors by the Banco de la Repœblica Constitution is to preserve the purchasing power of the currency in coordination with the general economic policy. This has been implemented by the Board through what is known as the inflation target strategy, aimed at maintaining inflation around 3.0%, with exchange rate flexibility and the short-term interest rate as the main instrument.

The relationship between the objective of low and stable inflation and economic growth is complex. Typically, a contractionary monetary policy stance aimed at reducing inflation leads to an economic slowdown in the short term. However, the impact of that same policy and the achievement of low and stable inflation is clearly favorable for economic growth over a longer time horizon. This paradox is precisely what has led most of the world to grant central banks autonomy, ensuring that their decisions are not overly biased by short-term considerations, which are typically of greater importance to the governments in power.

A stable inflation of around 3.0% allows for higher sustainable economic growth for several reasons:

- Firstly, it creates stability and predictability conditions in general price levels, facilitating decision-making for companies, investors, and consumers.
- Secondly, but not less important, stable inflation at low levels is essential for maintaining sustainably low interest rates. No saver would be willing to purchase a long-term certificate of deposit (CDT in Spanish) at low interest rates if they believed inflation could erode the expected returns on those investments. Likewise, no bank will be willing to grant a fixed-rate mortgage loan for a 15- or 20year term if they expect inflation to rise in the future, leading to increased shortterm rates and funding costs.

On the other hand, maintaining low and stable inflation allows monetary policy to act countercyclically, tightening with higher interest rates in aggregate demand boom cycles that typically generate inflationary pressures and lowering those rates during periods when demand and economic activity decline, as happened during the COVID19 crisis in 2020.

Unfortunately, there are conditions where maintaining a contractionary monetary policy is necessary to lower inflation, even when economic activity has slowed down and there is no evidence of excess demand. This occurs, for example, when prices and wages are heavily indexed to past inflation. It also happens when country risk spread increases, such as those that have occurred recently, due to both global uncertainty and idiosyncratic factors, such as increases in public debt and higher-than-expected fiscal deficits.

Such conditions impose a greater burden on restrictive monetary policies, making them more difficult and costly in terms of the temporary sacrifice required in terms of the pace of economic activity and employment to bring inflation down to the desired level, ultimately restoring the possibility of stronger medium and long-term growth.

While these general considerations may seem excessively theoretical, they are essential for analyzing what has recently happened to Colombia's macroeconomic conditions. In fact, as we will see throughout this presentation, in recent years, we have had to implement a highly restrictive monetary policy, even more so than in neighboring countries, such as Chile or Perœ, where inflation faced fewer restrictions to decline. Nevertheless, I dare say that, fortunately, our policy has been successful in reducing inflation, and it has been adjusted in a way that, while it has had short-term costs in terms of economic activity and employment, these costs have been significantly lower than what many initially anticipated.

With these general considerations, I will now discuss in greater detail the Bank's view of the impact of the recent contractionary monetary policy on economic activity, employment, and financial activity and of course, inflation development and its expectations. In this context, I will later discuss the importance of the Bank's cautious approach in the process of reducing policy interest rates and the reasons why this caution has increased in the last two Board meetings.

At the end of my presentation, I will additionally make some remarks on the expected role of in managing saving resources that will be generated by Banco de la Repœblica the pension system in accordance with the reform approved by Congress last year, which requires urgent regulations by the Colombian Government.

## II. Adjustment in Demand, Economic Activity, Employment, and Credit

Banco de la Repœblica began implementing contractionary monetary policy through interest rates increases in September 2021, and it reached its higher intensity peak between April and December 2023, when the policy interest rate remained at 13.25%.

This policy undoubtedly had a significant impact on domestic demand, which, although painful, not only helped to initiate the inflation adjustment process but also reduced the excess demand that had resulted in a very high current account deficit in the country's balance of payments. This deficit reached 6.1% of GDP in 2022, an indicator that certainly implied significant external vulnerability for the Colombian economy at the time. The adjustment process on this front has been substantial. The current deficit of the balance of payments decreased to an average of 1.7% of GDP in the first three quarters of 2024, less than one-third of what it was two years earlier. The Bank's

technical staff estimates that this deficit could rise to 2.5% of GDP in 2025, a figure which, in any case, would remain significantly lower than what we observed in 2022.

Regarding economic activity, the adjustment process was significant in 2023, but the most recent period indicates a clear recovery:

- After two years of extremely high and unsustainable GDP growth in 2021 and 2022 (10.8% and 7.3%, respectively), economic activity slowed down to 0.6% in 2023.
- However, since the last quarter of 2023, when there was a 0.7% drop, GDP growth has been positive and increasing each quarter. With seasonality and calendar-adjusted figures, growth was 0.5% in the last quarter of that year and in the first three quarters of 2024, rising to 0.9%, 1.8%, and 2.0%, respectively. Additionally, according to the Monetary Policy Report released by the Bank's technical staff last week, the estimated growth for the last quarter of 2024 was 2.3%, thus maintaining the positive trend in economic dynamism recovery.
- For the full year of 2024, the Bank's technical staff forecasts a growth of 1.8%, although this figure reflects highly heterogeneous performance across different sectors, with positive results in agriculture and services but rather weak outcomes in manufacturing and construction. The expected growth for 2025 is 2.6%, and for 2026, 3.4%, figures broadly aligned with the estimated potential growth of the Colombian economy.
- In this context, it is also worth highlighting that, despite the significant monetary adjustment required to reduce inflation, labor market indicators have shown remarkable resilience. The unemployment rate reported by the National Administrative Department of Statistics (DANE) stood at 9.1%, significantly lower than the 10% recorded in December 2023. In turn, the employed population in December 2024 was 756,000 higher than a year earlier, showing a 3.3% growth. More generally, it can be said that over the last few years total employment has continued to grow and both informality and unemployment rates are lower than those observed before the pandemic. It would, indeed, be desirable for these rates to be even lower, but this would require structural policies beyond the scope of the monetary policy set by . Banco de la Repœblica
- Regarding the financial sector, the high interest rates we have seen during the recent macroeconomic adjustment process have led to a significant slowdown in credit growth, together with a deterioration in credit quality and substantial provisions. This has had a negative impact, with a considerable number of banks experiencing losses in both 2023 and 2024. However, solvency indicators remain favorable and are above regulatory minimums. In addition, the deterioration process in the loan portfolio quality is stabilizing, and recovery indicators of credit growth are beginning to emerge. Notably, in recent months, we have observed positive real growth in housing loan balances.

## III. Inflation Trends, Expectations, and Monetary Policy Caution

In terms of inflation, I must first highlight the strong downward trend of this indicator since March 2023, when it reached a maximum of 13.34%. Over the past 21 months, headline Consumer Price Index (CPI) inflation has fallen by more than eight percentage points to the 5.2% level reached last January.

Later, I will address the fact that headline CPI inflation has remained stable at 5.2% for three consecutive months, interrupting the downward trend of previous months. However, it should be positively noted that core inflation has continued to decline systematically, clearly responding to the contractionary monetary policy. The core inflation indicator most widely used indicator at the Bank (excluding food and items regulated by the government) fell from 10.5% in June 2023 to 5.15% in December 2024, and 5.02% in January 2025, according to the figures released last weekend by DANE.

The fact that headline inflation has not continued to decline in recent months, unlike core inflation, is entirely due to an upturn in food prices, which we expect to be temporary. Annual food inflation went from below 2.0% last October to 4.5% in January.

## IV. Reasons for Caution

The significant reduction in inflation achieved over the past two years cannot and should not lead us to complacency or a relaxation of the cautions with which the Bank has managed monetary policy in the recent period. In this regard, three key messages should be highlighted:

First, inflation remains significantly above the 3.0% target set by , Banco de la Repœblica a target that, as I mentioned at the beginning of my intervention, is an essential part of the inflation target strategy with which the Board of the Bank has interpreted its constitutional mandate. In 2024, we completed four years with inflation above the target, making it particularly critical for the credibility of the Bank and its strategy to meet the target in 2025.

The second message, which reinforces the previous one, is that inflation has proven to be more persistent in Colombia than in other countries in the region. In fact, Colombia currently has the highest inflation rate among all countries with an inflation target strategy in the Americas, including advanced countries, such as the United States and Canada, and countries with emerging economies similar to ours, such as Mexico, Brazil, Chile, Perœ, Uruguay, Paraguay, and Costa Rica. In these countries, inflation increased notably in 2021 and 2022, but all managed to bring it down to levels that are today lower than Colombia's and more in line with the targets set by the central banks. Three particularly noteworthy cases are Perœ, Costa Rica, and Paraguay, where inflation rates already reached or fallen below their respective targets, which has opened the possibility for them to significantly lower their policy interest rates far below the current rate in our country.

There are several reasons to explain the strong persistence of inflation despite a contractionary monetary policy. Among them, I would like to highlight how difficult it has been to reduce services inflation, which in the Colombian case remained at a level of 6.8% last January, well above headline and core inflation. To a high degree, services inflation is pressured upwards by phenomena such as the system we have of rental indexation to the previous year's inflation and the annual minimum wage adjustment mechanism, which in the last four years has become particularly complex due to increases much higher than the observed inflation.

The third message regarding the cautious approach we must maintain in monetary policy relates to inflation expectations. In a context where inflation remains above target and is more persistent than desired, inflation expectations play a crucial role in policy decisions.

As of December 2023, and at all eight sessions of the Board of Banco de la Repœblica in which monetary policy decisions were scheduled to be made during 2024, a process of reducing policy interest rates was systematically carried out, completing 375 basis points, taking it from 13.25% to 9.5% in December 2024. This process was conducted cautiously, with 50 bps reductions between March and October. In December, the pace was slowed to 25 bps and in January it was deemed appropriate to pause while waiting for more information on the determinants of future inflation, expectations, and the elements of judgment required to define the magnitude and speed at which monetary policy could be eased without jeopardizing the fulfillment of the target.

Among the factors that led to greater caution in December and January, I would like to highlight the performance of inflation expectations. An indicator we closely monitor is Break-Even Inflation, calculated as the difference between the return at which the fixedrate TES and inflation-linked TES (TES in UVR) are traded in the market at different terms. After making some technical adjustments for differences in liquidity and volatility premiums of the various securities, this indicator suggested last October that the expected inflation for the end of 2025 was remarkably close to 3.0%, fully aligned with the established target. In January 2025, the same indicator had risen to over 4.5%. Expectations reported by analysts in surveys conducted by and Banco de la Repœblica other institutions also increased between October and January, although to a lesser extent, and remain around 4.0%, still above the target.

Risks of higher inflation than expected a few months ago by the end of 2025 are partly linked to international phenomena, such as the potential for a global trade war driven by strong tariff increases by the U.S. This same outlook has made expectations of interest rate reductions by the Federal Reserve (FED) significantly more limited, and long-term global interest rates are currently higher than observed a year ago. In this context, during the last months of 2024, there was a significant depreciation of the currencies of emerging economies such as Colombia against the US dollar, with implications that could put upward pressure on inflation in our countries. Although this phenomenon has been partially reversed since the beginning of January, only time will give us greater clarity on its persistence over time.

Possibly related to the peso depreciation in the last months of 2024, the increase in tradable goods prices, as reflected in the Producer Price Index (PPI), has been significant. Last October, the annual growth rate of the PPI was only 1.6%, a figure that increased to 5.8% in December, although it slightly declined to 5.5% in January, perhaps reflecting the correction observed in the exchange rate.

Parallel to this, idiosyncratic factors have also impacted inflation expectations and the risk margins implicit in the interest rates of Colombian bonds abroad, making it necessary to reinforce a cautious approach. Among these factors, the most notable is that the fiscal accounts for 2024 showed a significantly larger deficit than anticipated, with a deficit of 6.8% of GDP, 1.2 pp higher than projected, which means that

Colombia's public debt levels are now at approximately 60% of GDP, considerably above the previous estimates of around 55% of GDP.

For 2025, the Financial Plan issued by the National Government last week projects a reduction in the deficit to 5.1% of GDP. Although this would imply a substantial improvement compared to 2024, concerns about fiscal sustainability persist not only because it is a higher deficit than expected when the Government Budget was presented, but because it is presented despite the fact that it represents a very strong growth in tax revenues, 17.4%, whose viability has generated concerns among several analysts. Moreover, even if these revenue projections were met, the government's net debt would remain above 60% of GDP at the end of 2025, a level similar to the all-time highs we reached during the COVID-19 crisis in 2020 and 2021 and clearly higher than the 55% of GDP that the Fiscal Rule Law considered sustainable and adopted as a reference anchor for that rule.

Besides the fiscal issue, among the factors that have recently affected inflation expectations, the magnitude of the minimum wage increase for 2025 stands out, which, if the adjustment in the transportation subsidy is included, implies an increase in costs for employers of 11%, more than 6 pp above the observed inflation and 8 pp above the inflation target. It is worth noting that this increase in the minimum wage also has a significant effect on the fiscal accounts, particularly due to its impact on pension payments of the average premium regime, which, in a high percentage, correspond to pensions of amounts equivalent to or close to the minimum wage.

Undoubtedly, recent developments create significant challenges for monetary policy and may make it more difficult and costly to achieve the inflation target. The decisions ahead will be complex. They are expected to be consistent with a path of interest rates that are falling, but probably at a slower pace than previously expected to maintain their consistency with the convergence of inflation towards its target. As we reiterate in all the Board's press releases, decisions will always be made with the available information, under the policy guidelines that I have tried to outline in this presentation.

## V. The role of in the Administration of the Banco de la Repœblica Contributory Pillar Savings Fund of the Pension System

I wish to end this presentation commenting on the role that will Banco de la Repœblica play in the administration of the Contributory Pillar Savings Fund of the pension system, based on what was approved last year by the National Congress.

Law 2381 of 2024 defines a new Comprehensive Social Protection System for Old Age based on four pillars: solidarity, semi-contributory, contributory, and voluntary savings. In the contributory pillar, the pension contributions made by workers are divided between an average premium component and an individual savings component. The average premium component will be administered by Colpensiones and will receive the contributions of all workers corresponding to incomes from 1 to 2.3 smlmv. Since the contributions of these workers go partially to the individual savings component, the change implies a significant increase in the resources that Colpensiones will receive from the moment the reform comes into force. In the future, this situation will be reversed, because the payment of pensions by Colpensiones will require more resources than those demanded by the current system.

In other words, the reform will generate a temporary surplus of resources for Colpensiones, which will surely be insufficient to cover future pension obligations. The bill itself estimates that by 2070 the Contributory Pillar Savings Fund (FAPC in Spanish) will have been fully exhausted, with which the National Government will need to provide more resources to cover the corresponding deficit. The challenge of making the pension system sustainable in the long term will surely require adjustments in the parameters of the system, particularly in retirement ages and in the contribution percentages of affiliates. The challenge of moving in this direction is still latent and is not altered at all by the role of manager of financial resources that is going to Banco de la Repœblica fulfill.

The creation of the Contributory Pillar Savings Fund (FAPC) administered by Banco de is proposed in such a way that the Fund is assigned calibrated revenues la Repœblica so that current expenditure on pensions by the National Government and the aggregate savings of the economy remain unaffected.

The resources received by through the FAPC will be channeled Banco de la Repœblica to the capital market through professional managers to generate a return that will help the National Government cover its pension obligations in the future. The law establishes a Directing Committee that will act as the highest authority of the FAPC and will have three members of the National Government and four independent expert members appointed by the Board of Directors of . Banco de la Repœblica

In line with its constitutional role as the Government's fiscal agent, the Bank will act as the manager of the Fund under a responsibility of means rather than result. For this purpose, the Bank shall provide the appropriate technical and operational infrastructure, ensuring a strict separation between the Fund's resources and the Bank's own resources, both in budgetary and accounting terms, guided by principles of prudence and diligence, common in trusteeship mandates. In addition, in the design of the Fund's management scheme, the Bank will ensure that its management is totally separated from the management of international reserves and from the monetary, exchange rate and credit policy functions, the guidelines of which are defined by the Board of Directors. This is how the Savings and Stabilization Fund (FAE in Spanish) currently operates, through which the Bank serves as the government's fiscal agent to manage resources originating from oil activities.

Regarding the resources to be administered in the Contributory Pillar Savings Fund, I would like to highlight that according to calculations by the Independent Fiscal Rule Committee (CARF in Spanish), the Fund's annual revenues would be close to 0.9% of GDP in the first years of operation and would reach 1.2% of GDP in 2051, the year from which they would progressively decline. Accordingly, at the peak assets under management would reach approximately 660 trillion pesos, equivalent to more than 35% of GDP. This is therefore an enormous responsibility, the proper functioning of which will have important implications for financial and capital markets. Preliminary estimates suggest that the Fund's monthly income as of 1 July would be in the order of 1.4 trillion pesos, which highlights the urgency of defining all the regulatory details as soon as possible so that the Bank can define the processes and the corresponding contracts for its proper operation.

In order to move forward in the structuring of the Fund, it is essential to have a regulatory framework that defines the composition of its Directing Committee, as well as the functions of that Committee and of the Bank as manager. The Bank has worked hand in hand with the Ministry of Finance and the Financial Regulation Unit (URF in Spanish) to outline a regulatory proposal that must be issued by the National Government. In this draft decree, a transition period has been proposed that will allow it to begin operating on 1 July, despite the lag that already exists in the regulations required to be able to form the FAPC's Directing Committee, advance in preparing contracts with the delegated administrators, define the criteria to choose them and establish their investment guidelines.

We hope that the draft decree that was worked on intensively last year with the URF and the Ministry of Finance and which, we understand is currently under review by the Ministry of Labor, can be published as soon as possible for public comment. With its issuance, the process of preparation for a change of such depth as the one we have ahead of us can begin, for which we have less than five months. Without the prompt issuance of this decree, it would be impossible to define the essential elements to begin administering the Fund in its transition period.

No less important is the additional regulation that must be built by the National Government, among others, on the operation to define the Fund's income, the definition of the generational sub-account scheme, their respective investment policies and the decumulation phase. The prompt issuance of the corresponding decrees is absolutely essential for the Bank to be able to comply with the functions assigned to it by law within the established time frames. The Bank has offered and will continue to offer its full cooperation so that the actors involved work with the required speed, and in a joint and coordinated manner, to achieve an adequate implementation of the new pension system in relation to the creation and entry into operation of the Contributory Pillar Savings Fund (FAPC).

Thank you.",Leonardo Villar-Gómez
https://www.bis.org/review/r250311f.htm,Sanjay Malhotra: Digital payments - background and benefits,"Address by Mr Sanjay Malhotra, Governor of the Reserve Bank of India, at the inauguration of Digital Payments Awareness Week 2025, held at the Reserve Bank of India, Mumbai, 10 March 2025.",2025-03-10 00:00:00,"## Sanjay Malhotra: Digital payments - background and benefits

Address by Mr Sanjay Malhotra, Governor of the Reserve Bank of India, at the inauguration of Digital Payments Awareness Week 2025, held at the Reserve Bank of India, Mumbai, 10 March 2025.

* * *

## Digital Payments - Background and benefits

Payments are the lifeblood of commerce, enabling the flow of goods and services in an economy. They connect people, empower individuals and businesses, and drive economic growth. Quick, secure and reliable payments at affordable prices are the bedrock for a vibrant economy. Payments through digital modes support economic growth. They also deepen financial inclusion by overcoming barriers like high transaction costs and geographical limitations . In effect, digital payments are not just 1 convenient but are also a powerful tool for economic empowerment and growth.

## Digital Payments - Convenience : Bouquet of products

Over the years, the Reserve Bank has supported various digital payment products. This has enhanced choice and convenience to the customers. We started with ECS (electronic clearing service). We then introduced NEFT, RTGS, IMPS, NACH (this is for e-mandates, it has replaced ECS), AePS, UPI, NETC, etc. We have introduced many new features on UPI and expanded its scope to cater to different needs of customers. These include UPI123Pay, UPI Lite, linking RuPay credit cards to UPI, processing payment mandates with single-block-and-multiple-debits, enabling Credit Lines for UPI, linking PPIs with UPI, etc. UPI with its multiple features, allows us to transfer money, pay bills, and make purchases with a simple click, tap or scan. We will continue to proactively support the development of the payment ecosystem.

## Digital Payments - Safety and Security

While promoting digital payment systems and innovations around them, we have been mindful of the needs of safety and security in payments. We have thus put in place various measures for this purpose:

- Multi-factor authentication; security controls for internet and mobile payments apps and card payments; card tokenisation (to prevent storage of card details in merchants systems), etc. are intended to make our payments ecosystem robust.
- We have enabled customers to have control over creating and terminating emandates for recurring transactions.

Enhancing safety and security of payments ecosystem is a work in progress. The recently released drafts on ""Framework on Alternative Authentication Mechanisms for Digital Payment Transactions"", and on ""Additional Factor of Authentication (AFA) for cross-border Card Not Present (CNP) transactions"" are steps in this direction.

## Payment Systems - Way Forward

Apart from the RBI, the government and other important stakeholders such as the Banks and Payment System Operators have also taken a number of initiatives to encourage the adoption of digital payments. While these efforts have produced results, as visible in the huge growth of digital payments, there is still a lot more to be done. Going forward, we will work on three broad areas.

## Payment Systems - Soft Touch Regulations to continue promoting innovation

First, we will continue to encourage innovation in payments, as also generally, while being mindful of risks and taking appropriate measures to mitigate them. We will promote innovation to facilitate payment systems that are fast, safe, secure, accessible and resilient. We have adopted a soft-touch approach to regulating the payments ecosystem and FinTechs. Through these regulations, the Reserve Bank attempts to balance these divergent set of expectations. Our approach has been to put in place regulatory guardrails within which all stakeholders are free to operate. We will continue to encourage innovation while promoting safety and security through soft-touch regulations.

## Promote awareness generation

Second, though much progress has been made in the development, spread and adoption of digital payments, there is a lot of scope to further deepen and expand digital payments in the country. In January 2025, more than 20 billion payments worth almost 250 trillion rupees were made in India through digital modes. Digital payments have become the preferred mode of payment for many of us. However, surveys have shown that nearly 40% of our adult population still do not use digital payments. One of the main reasons for this is the lack of awareness or familiarity with using digital payments.

To create awareness of Digital Payments, the Digital Payments Awareness Week is being observed in March every year. As part of this endeavour, the ""Har Payment Digital"" mission was launched in 2023. The mission seeks to promote digital payments by enhancing awareness of digital payments among all citizens and making available the necessary infrastructure and solutions for people to make payments digitally. The objectives of Mission Har Payment Digital can be achieved only with the active participation of all stakeholders. Geographies and population segments, lagging behind in usage and awareness of digital payments need to be identified and suitable steps taken to expand awareness and improve usage.

We are now in the 3rd year of this mission. The theme for this year is ""India Pays Digitally"". This year too, we will continue our awareness activities. By showcasing how digital payments have become a ubiquitous part of our lives, we will encourage those who haven't adopted digital payments yet, to do so.

The Reserve Bank, as in the previous years, will be running multimedia campaigns around this year's theme. To encourage active involvement of citizens, we will be conducting various competitions over social media with attractive prizes.

The Regional Offices of RBI too conduct Awareness Programs, called eBAAT, across the country covering various strata of society. We have been conducting these programs since 2012. In the last 8 years, more than 1800 such programs have been conducted. During this year, the content and method of delivery of eBAAT will be reviewed, and a pilot will be conducted (in a large State) with the objective to reach a very large number of people in the most efficient way.

I urge the Banks, Payment System Operators and other stake holders to contribute in their own innovative ways to take forward the mission of Har Payment Digital.

## More efficient Cross border payments

Third, while in domestic payments, the success of UPI has propelled India to a leadership position with a share of 48.5 per cent in global real-time payments by volume 2 , we will endeavour to make cross-border payments more efficient. This assumes priority as India is the largest receiver of personal remittances globally. As per a World Bank 3   report, it has been estimated that in 2024, India received remittances totalling approximately 130 billion USD. We need to address the challenges of high cost, slow speed, and insufficient access and transparency in cross border payments.. We will continue to expand the reach of UPI bilaterally by linking UPI with Fast Payment Systems of other countries. We will also explore the possibility of linking payment systems other than UPI for facilitating efficient cross-border payments. We will continue our engagement in a multilateral project called Project Nexus, to enable instant crossborder retail payments . 4

As we observe the 5th Digital Payments Awareness Week, I am happy to note that this year marks the 20th year of the establishment of the Department of Payment and Settlement Systems (DPSS). I congratulate the department on this key milestone. The work carried out by this department in association with all stakeholders has established India as a pioneer in digital payments. The revolution in India's payment systems is, however, far from over. We are just beginning to unlock the true potential of digital payments. I am confident that we will continue to work with renewed vigour to ensure that India remains at the forefront of digital payments globally.

Thank you.

- 1 World Bank, Digital Financial Services, April 2020.
- 2 ACI Worldwide, 2024
- 3 https://blogs.worldbank.org/en/peoplemove/in-2024--remittance-flows-to-low--andmiddle-income-countries-ar
- 4 Nexus, conceptualised by the Innovation Hub of the Bank for International Settlements (BIS), aims to connect the Fast Payment Systems of four ASEAN countries (Malaysia, Philippines, Singapore, and Thailand); and India, who would be the founding members and first mover countries of this platform.",Sanjay Malhotra
https://www.bis.org/review/r250311e.htm,Paolo Angelini: Innovation and innovation financing in Europe,"Welcome address by Mr Paolo Angelini, Deputy Governor of the Bank of Italy, at the conference on ""Financing growth and innovation in Europe: economic and policy challenges"", jointly organised by the Bank of Italy and the Florence School of Banking and Finance, Fiesole, 10 March 2025. ",2025-03-10 00:00:00,"

## Innovation and innovation financing in Europe

Paolo Angelini

Deputy Governor of the Bank of Italy

Welcome address at the conference on 'Financing Growth and Innovation in Europe: Economic and Policy Challenges', jointly organized by the Bank of Italy and the Florence School of Banking and Finance

Fiesole, 10-11 March 2025

## 1. Introduction

Good morning, and welcome to today's Conference on 'Financing Growth and Innovation in Europe: Economic and Policy Challenges' jointly organised by the Florence School of Banking and Finance (FBF) of the European University Institute and Banca d'Italia.

In my talk I will outline some key aspects of innovation and innovation financing in the European bank-dominated financial landscape. I will then briefly discuss a few selected initiatives within the EU's recently announced Competitiveness Compass, which aims to strengthen Europe's competitive position.

## 2. Some facts about innovation and the financial system in Europe

Europe is struggling to keep pace with the most dynamic countries, the United States above all, mainly because of low productivity growth. 1 Innovation is one of the key drivers of productivity. Recalling some facts can help frame the issue.

Fact #1: The  EU  is characterized by a relatively  weak  innovation  performance - a feature that I shall refer to as the 'EU innovation gap', borrowing terminology from the Commission Competitiveness Compass. 2  To be sure, this is a blunt summary of a nuanced  reality.  Historically,  Europe  has  had  a  good  track  record  at  generating  new ideas. For instance, it produces almost one-fifth of the top 10 percent most cited STEM publications, as much as the US. Likewise, about one third of patent applications to the

1 See F. Panetta, A European productivity compact , 20 th  Spain-Italy Dialogue Forum (AREL-CEOE-SBEES), Barcelona, 3 December 2024.

2 European  Commission,  2025, A  Competitiveness  Compass  for  the  EU ,  Communication  from  the Commission to the European Parliament, the European Council, the Council, the European Economic and Social Committee and the Committee of the Regions, 29 January 2025.

European Patent Office (EPO) comes from EU residents. 3   However, these shares have been declining over the last decade.  Ground was lost relative to China and, for patents, also relative to the US (Figure 1.a, b).

Moreover, the share of European patents in information and communication technologies, areas with high growth potential, is relatively small, whereas it is relatively large in mature fields,  such  as  transport  and  civil  engineering.  Further,  challenges  persist  in  creating an integrated EU market for ideas: two thirds of commercialized patents registered by European universities or research institutions include a partner from the same country, signalling a still strong home bias. Other indicators of innovation, such as R&amp;D spending, confirm this picture (Figure 2).

These considerations suggest that a search for the root causes of the EU innovation gap should not be limited to the financial aspects; there is something deeper than finance going on. But let me focus on finance, as this is the topic of the conference.

Fact #2: The low investment in innovation in Europe is certainly not due to insufficient domestic savings. European households' saving rate is structurally higher than that of their  US  counterparts, 4 and  every  year  about  €300  billion  of  savings  from  Europeans are invested in markets outside the EU (this is the mirror image of the current account surplus characterizing the EU).

Fact #3: The European financial system appears to be relatively less well-equipped to finance innovative, high-risk investment. 5 Innovative projects mainly rely on risk capital provided  via  self-financing  or  specialized  investors,  because  debt,  especially  bank lending, is less suitable for such projects, due to their high risk and to the misalignment of incentives between financiers and entrepreneurs. But in the main EU economies, the banking sector has historically had a predominant share in the financial system (Figure 3), at the expense of the share of institutional investors (such as insurance companies and pension funds). 6  The problem is compounded by the gradual growth of investments in intangibles (e.g. software, intellectual property, and patents) as a share of total corporate investment in many advanced economies (Figure 4): these assets are not an ideal collateral for bank loans.

3 The EPO data are affected by a home bias towards European applicants. However, looking at the OECD's Triadic Patent Families , a database that includes patents filed simultaneously at the EPO, the Japan Patent Office (JPO) and the United States Patent and Trademark Office (USPTO), the overall messages illustrated in Figure 1 remain broadly unaltered.

4 Over the last decade the average saving rate has been 13 percent in the EU versus 7 percent in the US.

5 See C. Lagarde, Follow the money: channelling savings into investment and innovation in Europe, 34 th   European  Banking  Congress:  'Out  of  the  Comfort  Zone:  Europe  and  the  New  World  Order', Frankfurt am Main, 22 November 2024.

6 The different institutional setup of social security and pension systems can help explain the difference in the structure of the EU and US financial systems. In the US, workers' social security contributions are transferred to pension funds investing in long term assets, whereas most European pension systems still rely on public pay-as-you-go social security systems, which do not need a well-developed financial system to function, as money from current contributions is used to pay for current retirees.

Risk-sharing mechanisms like securitization could help banks play an important role in financing innovation. In fact, banks could develop skills in screening innovative start-ups, originate the relationship and, via securitization, transfer the credit risk to other investors better equipped to handle it. But following the regulatory revision in the aftermath of the Global Financial Crisis, the European securitization market has remained subdued compared to the US and other countries (Figure 5). 7

Household preferences may play a role. According to financial account data, at end2023 cash and deposits accounted for 33 percent of total financial assets in the euro area, against a mere 12 per cent in the US (Figure 6). For equity the figures are reversed, with euro area at 24 per cent (only 4 percent listed), against 39 in the US (26 percent listed). These figures suggest a relatively low risk appetite among EU households, and indeed,  survey  evidence  confirms  this  hypothesis. 8 High  risk  aversion  can  negatively affect the flow of resources to firm financing, both directly - via reduced demand for equity and debt instruments - and indirectly - via prudent investment mandates given to institutional investors.

Fact #4: In the EU venture capital (VC) funds, the intermediaries more oriented to finance innovation, are relatively underdeveloped. 9  The EU lags behind the US and various other advanced economies (Figure 7). The lack of VC in the EU is felt especially in the later stages of firms' lifecycle, as successful start-ups generally need increasing amounts of capital to grow into large companies.

T his  gap  can  be  explained  by  several  factors.  In  part  it  reflects  some  of  the  abovementioned characteristics of the EU economy, including the relative underdevelopment of institutional investors and households' low risk appetite. Moreover, the propensity of institutional investors to invest in VC is significantly lower in the EU than in the US; low familiarity with the asset class, high costs of due diligence, regulatory restrictions are among the factors frequently identified to explain this gap. 10  Fragmentation of the EU

7 In Europe banks rely much more than in the US on the covered bonds market. While from the bank's funding perspective this  market's  role  is  not  that  different  from  the  securitization  one,  the  assets eligible for backing the covered bonds are typically low-risk (loans to public administrations and retail mortgages).

8 K. Bekhtiar, P. Fessler and P. Lindner, 2019, Risky assets in Europe and the US: risk vulnerability, risk aversion  and  economic  environment, ECB  Working  Paper  Series  No  2270,  find  that  more  than  70 percent of households in the euro area state that they are not willing to take any financial risks, versus below 40 percent for the United States.

9 Several studies show that VC investment fosters innovation and thus increases productivity growth. See T. Hellmann and M. Puri, 2000, The interaction between product market and financing strategy: the role of venture capital ,  Review of Financial Studies, 13, 959-984. S. Kortum and J. Lerner, 2000, Assessing the impact of venture capital on innovation , RAND Journal of Economics, 31, 674-692. Venture capital funds have often been involved in the financing of very successful start-ups. This has been the case, for example, for the 6 main listed companies by market capitalization in the USA (F. Panetta, Considerazioni finali sul 2023 , 31 May 2024). Venture debt may also play a role, in combination with equity financing, in periods between funding rounds.

10 N. Arnold, G. Claveres, and J. Frie, 2024, Stepping Up Venture Capital to Finance Innovation in Europe , IMF  Working  Paper  no.  146.  EIF,  2023, VC Survey  2023:  Market  sentiment,  scale-up  financing  and human capital , EIF Working Paper no. 93.

financial markets is another factor, as it makes it costly to invest in different EU countries, limiting VC funds' growth opportunities, exit options and scale.

The  role  of  VC  and  the  characteristics  of  the  industry  are  among  the  topics  of  the conference. The discussion could help us understand the relative importance of these and other factors, and to identify corrective measures.

Fact #5: While still small, the EU VC industry has grown significantly over the last decade, driven by initiatives taken by public sector operators. The experience of various countries show that public investment is crucial to venture capital expansion.

In the US, government support for venture capital began in the 1960s with the Small Business  Investment  Company  (SBIC)  initiative.  Growth  surged  in  the  1970s  and  80s, as  economic  expansion  and  pension  fund  deregulation  drove  higher  venture  capital allocations. 11 In Sweden, as part of a comprehensive reform of the financial system, the government's effort to stimulate venture capital was followed by a development of the sector in the 1980s. 12  A similar pattern can be observed in France and Germany during the early 2010s and, more recently, in Italy (Figure 8). 13

A common thread running through these examples is the role of the government for the  establishment  and  development  of  the  VC  ecosystem.  The  government  can  play an important role to get the industry started by acting as an anchor investor to signal confidence and bring in private investors. At the same time, public intervention is no guarantee of success; it needs to be carefully designed and fine-tuned as the industry progresses, going beyond simply supplying capital. 14

## 3. Recent EU initiatives to tackle the innovation gap

The above considerations suggest that, to make the EU financial system more conducive to innovation, a mix of private initiatives, regulatory reforms and public intervention is probably necessary, and that successful policies should address all the obstacles to the emergence of a thriving innovation ecosystem, not just the financial ones.

11 The 'prudent man' rule revision in 1979 allowed private pension funds to diversify into venture capital, previously  considered  too  risky.  The  later  influx  of  public  and  global  pension  funds  resulted  in  a substantial expansion of the US venture capital market. See J. Lerner and R. Nanda, 2020, Venture Capital's Role in Financing Innovation: What We Know and How Much We Still Need to Learn , Journal of Economic Perspectives, vol. 34 (3), 237-61.

12 J. Lerner and J. Tåg, 2013, Institutions and venture capital , Industrial and Corporate Change, vol. 22 (1), 153-182.

13 In France and Germany developments were spearheaded by the Banque publique d'investissement (BPI)  and  the  Kreditanstalt  für  Wiederaufbau (KfW), in the order. In Italy a similar role was played by CDP Venture Capital SGR, an asset manager controlled by the government that invests public as well as private funds. See R. Gallo, F. Signoretti, I. Supino, E. Sette, P. Cantatore, and M. Fabbri, 2025. The Italian Venture Capital market , Questioni di Economia e Finanza, forthcoming .

14 J.  Lerner, Boulevard  of  Broken  Dreams:  Why  Public  Efforts  to  Boost  Entrepreneurship  and  Venture Capital Have Failed - and What to Do About It . Princeton University Press, 2009.

Europe has been moving in this direction. Results, however, have been mixed. The Capital Markets Union (CMU) agenda, launched in 2015 to address the fragmentation of the EU capital markets, has faced headwinds, due to the inherent difficulty of the project (a seamless EU capital market would require substantial harmonization of corporate and insolvency  laws,  fiscal  regimes,  disclosure  practices  and  accounting  standards  across EU member states, which are a hurdle to cross-border operations and investment).

Building  on  the  Draghi  and  the  Letta  Reports, 15   the  Commission  recently  published the  Compass,  a  document  that  outlines  the  strategy  it  intends  to  pursue  to  boost competitiveness in  EU.  The  document  focuses  on  three  core  areas  -  one  of  which  is about closing the innovation gap complemented by five horizontal 'enablers'. Figure 9 attempts a synoptic look at the Compass, suggesting that the innovation issue is spread over all the three core areas as well the horizontal enablers.

The Compass includes the outline of a 'Savings and Investments Union (SIU)', an attempt to revamp the CMU, but more focused on mobilizing private finances, including those of institutional investors. It also features a plan to introduce a so-called '28 th  regime', a new EU-wide 'legal statute' for innovative companies that would include relevant aspects of corporate law, insolvency, labour, and tax law, and would simplify applicable rules, reduce the costs of failure, and facilitate foreign and cross-border investment. 16

The  Compass  also  announces  a  review  of  the  EU  budget  framework  to  concentrate resources on the strategic priorities. These proposals include the Tech EU investment programme to support disruptive innovation, and the European Competitiveness Fund to  foster  strategic  technologies  (from  artificial  intelligence  to  space,  from  clean  tech to  bio-tech  sectors,  etc.).  Moreover,  the  Commission  intends  to  expand  the  scope  of existing  financing  programmes,  such  as  those  of  the  European  Investment  Bank,  to crowd in private investments and increase cooperation and synergies with the activities of national promotional banks.

Following  suggestions  recently  advanced  by  various  commentators,  the  Commission reaffirms the intent to promote the EU's securitisation market 17 ; it also emphasizes the need to develop an EU VC market, but does not give details on possible specific initiatives.

All in all, then, the Compass covers a wide range of topics, and illustrates relatively high level principles and indications. A meaningful assessment of the initiatives announced will be possible only once they are fleshed out in greater detail. With this caveat, let me make a few considerations on few selected issues. 18

15 M.  Draghi,  The  future  of  European  competitiveness ,  September  2024;  E.  Letta, Much  More  Than a Market, April 2024.

16 A 28 th regime for innovative firms is proposed by the Draghi report; it is also discussed in the Letta report, with a focus on SMEs.

17 The Draghi and Noyer reports advocate the creation of an EU-wide platform for securitizations that would address the fragmentation problem and could offer a public guarantee backed by the EU.

18 For a brief critical overview of the Compass see J. Zettelmeyer, 'Draghi on a shoestring: the European Commission's Competitiveness Compass', Bruegel, 3 February 2025.

The idea of a 28 th   regime is not entirely new. The Commission has been promoting a harmonized set of corporate rules, alternative to national ones, since the 1970s. Since 2004  European  companies  with  a  minimum  subscribed  capital  of  120,000  euros  can adopt the statute of the 'societas europaea'. However, this initiative has not achieved the expected success, also because the EU legislation extensively referred to Member States' laws to regulate key aspects of corporate life. 19  De facto, what was pushed out the door came back through the window.

Differently from the initiatives taken so far, however, the 28 th   regime proposed in the Compass focuses only on innovative companies. Such narrow focus on companies with relatively homogeneous characteristics and investor needs could facilitate the creation of  an  appropriate  legal  framework.  The  initiative  should  be  accompanied  by  greater regulatory  harmonization  in  selected  industries,  to  grant  new  innovative  firms  the portability of certifications and the passporting of authorisations across Member States; 20 also, it could be supported by a greater specialisation of courts and a more centralised judicial system at the national level.

In light of the past experience, the success of the proposal will depend on the ability to reach a political agreement over a clear and comprehensive legal framework, capable of meeting the interests of entrepreneurs and investors in innovative companies. Referrals to national laws should be minimized to reduce the risk of divergences, which may also result from varying courts' interpretations.

The idea to concentrate resources on Europe's strategic objectives is also welcome. In particular, the initiatives aimed at enhancing the role of public EU funds could help address the fragmentation of EU private capital markets and provide incentives to increase crossborder investments in high-risk projects.

The Commission's emphasis on the need to restart the securitization market is welcome as well. The importance of this instrument goes beyond the innovation gap. Targeted amendments to the prudential framework (e.g. the revision of the so-called P factor) could  incentivise  supply  without  jeopardizing  the  soundness  and  resilience  of  the market. Policies should also focus on the demand side of the market, favouring a greater involvement of insurers and pension funds.

Two  final  overarching  points.  First,  the  Compass  identifies  the  simplification  of  the regulatory  and  administrative  framework  as  one  of  the  five  'horizontal  enablers'

19 The model of societas europaea has been mainly adopted by large firms in Germany. See European Commission, 2010, The application of Council Regulation 2157/2001 of 8 October 2001 on the Statute for  a  European  Company  (SE) .  In  2008  the  European  Commission  proposed  the  introduction  of  a 'European Private Company Statute', a project with objectives similar to those of societas europaea, targeted to small and medium-sized enterprises; after several discussions, in 2013 the proposal was withdrawn.

20 See Draghi Report, Part B, Section 2, Chapter 1.

necessary to boost EU competitiveness across all sectors. 21  This is a welcome (although belated) step, but the EU framework has been built over a number of years, and is very complex; the list of initiatives that the Commission intends to adopt is very long. The risk is that speed might come at the expense of quality, resulting - paradoxically - in yet more complexity of the framework. This would not be conducive to better investment decisions.

Second, the Compass maintains a conservative position on financial resources, notably omitting proposals to increase EU funds. The proposal to issue a European safe asset is not considered. While this proposal remains controversial, recent events make the case for it  more and more compelling, as the supranational dimension of the provision of fundamental public goods in Europe becomes evident. 22

According to the Compass, instead, finance for the projects has to come from national budgets, via tweaks to the state aid framework. This approach is likely to suffer from limitations  already  seen  at  work  in  previous  occasions:  in  particular,  difficulties  to coordinate  individual  spending  programs  into  coherent  EU-level  projects  and  lack  of level playing field for countries with different fiscal headroom.

Let me conclude by thanking all participants, speakers and panelists for their contribution, as well as the organising committee for their efforts for the success of this event.

21 The Commission sets ambitious quantitative targets for reducing reporting burden during its mandate (at least 25 per cent for all companies and at least 35 per cent for SMEs); in addition, the first-ever Commissioner for  Implementation  and  Simplification  has  been  appointed.  The  recently  published Omnibus I and II packages propose far-reaching simplifications in the fields of sustainability finance reporting  and  due  diligence,  EU  Taxonomy,  carbon  border  adjustment  mechanism,  and  European investment programmes.

22 See F. Panetta, A European productivity compact , cit.; Beyond money: the euro's role in Europe's strategic future , Conference Ten years with the euro, Riga, 26 January 2024.

## FIGURES

Figures

Figures

Source: panel (a): European Patents Office; panel (b): OECD.



Source: panel (a): European Patents Office; panel (b): OECD.

Figure 2 - Gross domestic spending in R&amp;D as a ratio to GDP



## Figure 2

Source: OECD for US and China and Eurostat for EU27. Source: OECD for US and China and Eurostat for EU27.

7

7

## Structure of the financial system in the FSB jurisdictions

(percentage of total domestic financial assets for advanced and emerging economies; percentage of GDP for totals) Fig. 3 -Structure of the financial system in the FSB jurisdictions (percentage of total domestic financial assets for advanced and emerging economies; percentage of

Fig. 3

-

Structure of the financial system in the FSB jurisdictions

Source: Financial Stability Board, Global Monitoring Report on Non-Bank Financial Intermediation, 2024.



Notes: (1) Data for Russia as of 2020. (2) Russia not included in aggregates. (3) All deposit-taking corporations. (4) Jurisdictions  with  OFI  assets  greater  (lower)  than  their  GDP  will  be  above  (below)  the  horizontal  dashed  line.  The percentage  of  Other  Financial  Intermediaries  (OFIs)  assets  to  GDP  for  the  Cayman  Islands  (296,237),  Luxembourg (19,248), Ireland (1,204) and the Netherlands (567) are not shown since they are particularly high compared to the rest of the jurisdictions. Source: Financial  Stability  Board,  Global  Monitoring  Report  on  Non-Bank  Financial  Intermediation,  2024. Notes:  (1)  Data  for  Russia  as  of  2020.  -  (2)  Russia  not  included  in  aggregates.  -  (3)  All  deposit-taking corporations. - (4) Jurisdictions with OFI assets greater (lower) than their GDP will be above (below) the horizontal dashed line. The percentage of Other Financial Intermediaries (OFIs) assets to GDP for the Cayman Islands (296,237), Luxembourg (19,248), Ireland (1,204) and the Netherlands (567) are not shown since they are particularly high compared to the rest of the jurisdictions. Source: Financial Stability Board, Global Monitoring Report on Non-Bank Financial Intermediation, 2024. Notes: (1) Data for Russia as of 2020. (2) Russia not included in aggregates. (3) All deposit-taking corporations. (4) Jurisdictions  with  OFI  assets  greater  (lower)  than  their  GDP  will  be  above  (below)  the  horizontal  dashed  line.  The percentage  of  Other  Financial  Intermediaries  (OFIs)  assets  to  GDP  for  the  Cayman  Islands  (296,237),  Luxembourg

(19,248), Ireland (1,204) and the Netherlands (567) are not shown since they are particularly high compared to the rest of the jurisdictions.

Figure 4 - Share of intangible investments over total investments

(percentage points)

## Figure 4



Source: Global INTAN-Invest 2024 release, World Intellectual Property Organization and Luiss Business School.

Source:  Global  INTAN-Invest  2024  release,  World  Intellectual  Property  Organization  and  Luiss  Business School.

8

## Annual issuance of publicly placed securitisations (1) (as a percentage of GDP) Figure 5 - Annual issuance of publicly placed securitisations (1)



Source: AFME.

Source: AFME.

Notes: (1) Excludes US agency and EU retained transactions. See

AFME,

Response to the FSB invitation for feedback on the effects of the G20 reforms on securitisation , 2023. Notes: (1) Excludes US agency and EU retained transactions. See AFME, Response to the FSB invitation for feedback on the effects of the G20 reforms on securitisation , 2023.

Source: AFME.

Figure 6

-

Composition of household financial assets in the US, the euro area and the UK

(1)

Notes: (1) Excludes US agency and EU retained transactions. See

AFME,

Response to the FSB invitation for feedback on the effects of the G20 reforms on securitisation

(percentage points; 2023)

## Figure 6

, 2023.

Figure 6

## Composition of household financial assets in the US, the euro area and the UK (1) (percentage points; 2023) Composition of household financial assets in the US, the euro area and the UK

-

(1)



Sources: Bank of England, ECB, US Federal Reserve. Sources: Bank of England, ECB, US Federal Reserve.

Notes: (1) EA stands for euro area. 'Other' includes commercial loans, employee stock options and other minor items; 'insurances' includes pension funds. Notes: (1) EA stands for euro area. 'Other' includes commercial loans, employee stock options and other minor items; 'insurances' includes pension funds.

## Figure 7

(1)



## Venture capital investment across jurisdictions, average 2021-23 (1) (in percentage of GDP) Figure 7 -Venture capital investment across jurisdictions, average 2021-23 (1) (in percentage of GDP) Figure 7 -Venture capital investment across jurisdictions, average 2021-23

Source: OECD.

Notes: (1) Average annual VC investment in percentage of GDP over 2021-23 in firms located in each jurisdiction. (2) Average for France, Germany, Italy, and Spain. Notes:  (1)  Average  annual  VC  investment  in  percentage  of  GDP  over  2021-23  in  firms  located  in  each jurisdiction. - (2) Average for France, Germany, Italy, and Spain. Notes: (1) Average annual VC investment in percentage of GDP over 2021-23 in firms located in each jurisdiction. (2) Average for France, Germany, Italy, and Spain.

Source: OECD. Source: OECD.

## Figure 8



Figure 8 - The size of the domestic VC market before and after the start of the public

Source: own calculation on Invest Europe data.

Notes: (1) The start of the public intervention in VC (T) is 2011 in Germany, 2012 in France, and 2019 in Italy. Notes: (1) The start of the public intervention in VC (T) is 2011 in Germany, 2012 in France, and 2019 in Italy. Notes: (1) The start of the public intervention in VC (T) is 2011 in Germany, 2012 in France, and 2019 in Italy.

Source: own calculation on Invest Europe data. Source: own calculation on Invest Europe data.

10

## Figure 9

## The Commission's Compass

|    | Three core areas                                                                                         | Three core areas                                                                                         | Three core areas                                                                                         |
|----|----------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
|    | closing the innovation gap                                                                               | defining a joint roadmap for decarbonisation and competitiveness                                         | increasing security and strategic autonomy                                                               |
| 1) | simplification of the regulatory and administrative burden                                               | simplification of the regulatory and administrative burden                                               | simplification of the regulatory and administrative burden                                               |
| 2) | reduction of intra-EU barriers that limit the well-functioning of the Single Market                      | reduction of intra-EU barriers that limit the well-functioning of the Single Market                      | reduction of intra-EU barriers that limit the well-functioning of the Single Market                      |
| 3) | adoption of a new strategy to mobilise resources to finance competitiveness Savings and Investment Union | adoption of a new strategy to mobilise resources to finance competitiveness Savings and Investment Union | adoption of a new strategy to mobilise resources to finance competitiveness Savings and Investment Union |
| 4) | promotion of skills and quality jobs                                                                     | promotion of skills and quality jobs                                                                     | promotion of skills and quality jobs                                                                     |
| 5) | better coordination of policies at EU and national level                                                 | better coordination of policies at EU and national level                                                 | better coordination of policies at EU and national level                                                 |

Source: adapted from EU Commission, Competitiveness Compass.",Paolo Angelini
https://www.bis.org/review/r250311d.htm,Jerome H Powell: Economic outlook,"Speech by Mr Jerome H Powell, Chair of the Board of Governors of the Federal Reserve System, at the University of Chicago Booth School of Business 2025 US Monetary Policy Forum, New York City, 7 March 2025.",2025-03-07 00:00:00,"## Jerome H Powell: Economic outlook

Speech by Mr Jerome H Powell, Chair of the Board of Governors of the Federal Reserve System, at the University of Chicago Booth School of Business 2025 US Monetary Policy Forum, New York City, 7 March 2025.

* * *

Thank you, Anil. I appreciate the opportunity to speak at this forum and look forward to our discussion. I will start with some brief remarks about the economy and the path of policy.

Despite elevated levels of uncertainty, the U.S. economy continues to be in a good place. The labor market is solid, and inflation has moved closer to our 2 percent longerrun goal. At the Federal Reserve, we are intently focused on the dual-mandate goals given to us by Congress: maximum employment and stable prices.

## Recent Economic Data

## Economic growth

The economy has been growing at a solid pace. GDP expanded at a 2.3 percent annual rate in the fourth quarter of last year, extending a period of consistent growth that has been supported by resilient consumer spending. Recent indicators point to a possible moderation in consumer spending relative to the rapid growth rate over the second half of 2024. Further, recent surveys of households and businesses point to heightened uncertainty about the economic outlook. It remains to be seen how these developments might affect future spending and investment. Sentiment readings have not been a good predictor of consumption growth in recent years. We continue to carefully monitor a variety of indicators of household and business spending.

## The labor market

Many indicators show that the labor market is solid and broadly in balance. The jobs report released this morning showed employers added 151,000 jobs to payrolls in February and the unemployment rate was 4.1 percent last month. Smoothing over the month-to-month volatility, since September, employers have added a solid 191,000 jobs a month on average. The unemployment rate remains low and has held in a narrow range between 3.9 and 4.2 percent for the past year. The jobs-to-workers gap has narrowed, and the quits rate has moved below pre-pandemic levels. Wages are growing faster than inflation, and at a more sustainable pace than earlier in the pandemic recovery. With wage growth moderating and labor supply and demand having moved into better balance, the labor market is not a significant source of inflationary pressure.

## Inflation

Inflation has come down a long way from its mid-2022 peak above 7 percent without a sharp increase in unemployment-a historically unusual and most welcome outcome.

While progress in reducing inflation has been broad based, recent readings remain somewhat above our 2 percent objective. The path to sustainably returning inflation to our target has been bumpy, and we expect that to continue. We see ongoing progress in categories that remain elevated, such as housing services and the market-based components of non-housing services. Inflation can be volatile month-to-month, and we do not overreact to one or two readings that are higher or lower than anticipated. Data released last week showed that total PCE prices rose 2.5 percent over the 12 months ending in January and that, excluding the volatile food and energy categories, core PCE prices rose 2.6 percent. We pay close attention to a broad range of measures of inflation expectations, and some near-term measures have recently moved up. We see this in both market- and survey-based measures, and survey respondents, both consumers and businesses, are mentioning tariffs as a driving factor. Beyond the next year or so, however, most measures of longer-term expectations remain stable and consistent with our 2 percent inflation goal.

## Monetary Policy

Looking ahead, the new Administration is in the process of implementing significant policy changes in four distinct areas: trade, immigration, fiscal policy, and regulation. It is the net effect of these policy changes that will matter for the economy and for the path of monetary policy. While there have been recent developments in some of these areas, especially trade policy, uncertainty around the changes and their likely effects remains high. As we parse the incoming information, we are focused on separating the signal from the noise as the outlook evolves. We do not need to be in a hurry, and are well positioned to wait for greater clarity.

Policy is not on a preset course. If the economy remains strong but inflation does not continue to move sustainably toward 2 percent, we can maintain policy restraint for longer. If the labor market were to weaken unexpectedly or inflation were to fall more quickly than anticipated, we can ease policy accordingly. Our current policy stance is well positioned to deal with the risks and uncertainties that we face in pursuing both sides of our dual mandate.

## Conclusion

Before I conclude, I will note that at our last FOMC meeting, we began our second fiveyear review of our monetary policy framework. We will consider changes to our consensus statement (Statement on Longer-Run Goals and Monetary Policy Strategy) and to our communications as part of this review. The consensus statement articulates our framework for the conduct of monetary policy in pursuit of the goals assigned to us by Congress. We will consider lessons of the past five years and adapt our approach, where appropriate, to best serve the American people, to whom we are accountable. The 2 percent longer-run inflation goal will be retained and is not a focus of the review.

This public review will be familiar to those who followed our process five years ago. We will hold outreach events around the country involving a wide range of parties, including events. We are open to new ideas and critical feedback. We will host a Fed Listens research conference in Washington in May. Our intent is to wrap up the review by late summer.

Thank you. I look forward to your questions.",Jerome H Powell
https://www.bis.org/review/r250311c.htm,Adriana D Kugler: The rebalancing of labor markets across the world,"Speech by Ms Adriana D Kugler, Member of the Board of Governors of the Federal Reserve System, at the Conference on ""Monetary policy transmission and the labor market"", organised by the Banco do Portugal, Lisbon, 7 March 2025.",2025-03-07 00:00:00,"For release on delivery 12:20 p.m. EST (5:20 p.m. local time) March 7, 2025

The Rebalancing of Labor Markets across the World

Remarks by

Adriana D. Kugler

Member

Board of Governors of the Federal Reserve System at the

Conference on Monetary Policy Transmission and the Labor Market Banco de Portugal

Lisbon, Portugal

March 7, 2025

Thank you, Tiago, and thank you for the opportunity to speak to you today.  I am delighted to be at the Bank of Portugal, among friends, including Governor Centeno, and to be speaking at a conference focusing on matters I deeply care about-monetary policy and labor markets. 1 Before I became a monetary policymaker, a large share of my work as an academic researcher addressed the effect on labor markets from policy choices such as payroll taxation, employment protections, occupational licensing, and unemployment insurance (UI).  I was able to apply some of these insights in my work as the chief economist at the Department of Labor, analyzing the labor market and supporting research on policies and their effectiveness.

And, of course, labor markets are central to carrying out the Federal Open Market Committee's (FOMC) dual mandate of maximum employment and stable prices. Recently, labor supply and demand in the United States have been roughly in balance, and the unemployment rate has been running close to the estimates of FOMC participants for its longer-run rate, which is consistent with the Committee's maximum-employment goal.

Today's employment report for February corroborates this view.  The net number of new jobs created was 151,000, not too far from the 177,000 average of the previous six months.  The unemployment rate was 4.1 percent, still in the narrow range between 4 percent and 4.2 percent that it has remained in since last summer.  Labor force participation was 62.4 percent-likewise within the range of values observed in the past year.  Consistent with this stability and evidence of balanced labor supply and demand, average hourly earnings are up 4 percent in the past 12 months, and with strong

1 The views expressed here are my own and are not necessarily those of my colleagues on the Federal Open Market Committee.

productivity growth in recent quarters, I do not believe wages are a significant source of inflation pressure.

On the price side of the FOMC's dual mandate, inflation has fallen significantly since its peak in mid-2022, and we have lowered our policy rate accordingly, with a reduction of 100 basis points since last September.  Still, inflation has moved sideways since the second half of last year, with uneven progress across its major categories. Inflation for market-based core services excluding housing has stepped down to an estimated 2.4 percent in January from a level of about 3.5 percent in the first quarter of 2024.  Housing inflation, which has stubbornly hovered above 5 percent for most of last year, has finally come down to an estimated 4.5 percent in January.  Adding to that, measures of new rents, such as those published by CoreLogic, suggest further progress in housing inflation going forward.

Unfortunately, one category of prices that has put upward pressure on inflation is 'non-market-based' core services, which are imputed rather than observed.  Although some of the components in that category may be affected by difficulties in measurement, others, such as prices for some financial services, are tied to the stock market and may have been signaling wealth effects that helped push up aggregate demand.  Core goods inflation has also been slowly rising.  In the first half of 2024, core goods inflation was negative 0.6 percent on average, close to its pre-COVID rate.  But, starting in May, core goods inflation has stepped up, and it was estimated to be about 0.3 percent in January. Consistent with an increase in goods prices, the releases of manufacturing and nonmanufacturing surveys this week, including those by the Institute for Supply Management, showed a jump in prices paid for purchases inputs.  This rise is not a

welcome development because, over the long term, goods price deflation has offset price increases in other categories and kept a lid on overall inflation.

Notwithstanding the well-balanced labor market, there are important upside risks to inflation.  Some measures of inflation expectations have risen significantly in the past couple of months, including those from the Michigan survey, the Conference Board, and the Atlanta Fed's survey of businesses.  For example, the measure of inflation expectations 1 year in the future from the University of Michigan Surveys of Consumers rose from 3.3 percent in December to 4.3 percent in January, while the expectations in the next 5 to 10 years rose over the same period-from 3.2 percent to 3.5 percent.  There is also considerable uncertainty about the inflationary effects of new policies and policy proposals.  With all these factors in mind, I strongly supported the FOMC's decision at our January meeting to maintain the target range for the federal funds rate at 4-1/4 to 41/2 percent.  Given the recent increase in inflation expectations and the key inflation categories that have not shown progress toward our 2 percent target, it could be appropriate to continue holding the policy rate at its current level for some time.  Going forward, I will continue to closely monitor the effects of policies on the economy, and I will carefully assess incoming data, the evolving outlook, and any changes in the balance of risks.

Let me now take a step back.  To understand the recent experience of a resilient and balanced U.S. labor market, it is helpful to look outward and consider how labor markets behaved around the world after the advent of the COVID-19 pandemic and its significant effects on employment.  In the remainder of my remarks, I will discuss similarities and differences in labor market recoveries in different countries, with a

special emphasis on the possible factors that helped the United States achieve a rebalancing of its labor market and rapid disinflation, and I will also address the potential for changes in these trends moving forward.

The worldwide pandemic disrupted the global economy and immediately caused high levels of unemployment and other forms of slackness in labor markets.  While the timing and extent of job losses and recovery from the pandemic varied widely across advanced and emerging economies, there were some commonalities.  By the spring of 2021, lower-skilled and younger workers had been hit harder than other groups, with larger increases in unemployment rates and larger declines in labor force participation. 2 Across different countries, there was also considerable variation in labor market policies enacted in response to the pandemic disruptions.  For example, while the United States pursued, among other initiatives, its usual approach of extended unemployment benefits to displaced workers, supplemented with unprecedented extra benefits to individuals, Australia and several European countries used short-term subsidies to employers to keep workers in their jobs.  After accounting for these policy variations, which were, in some cases, rooted in longstanding differences in how different governments try to stabilize employment, academic research has also found significant variation in the reasons why people were not working during the acute phase of the pandemic. 3 For instance, researchers found that, in the United States, a greater share of the unemployed had lost

2 See chapter 3, 'Recessions and Recoveries in Labor Markets:  Patterns, Policies, and Responses to the COVID-19 Shock,' in International Monetary Fund (2021), World Economic Outlook:  Managing Divergent Recoveries (Washington:  IMF, April),

https://www.imf.org/en/Publications/WEO/Issues/2021/03/23/world-economic-outlook-april-2021. 3  See Robert Breunig, Wei Cheng, Laura Montenovo, Kyoung Hoon Lee, Bruce A. Weinberg, and Yinjunjie Zhang (2024), 'Cross-Country Analysis of Labor Markets during the COVID-19 Pandemic,' NBER Working Paper Series 33029 (Cambridge, Mass.:  National Bureau of Economic Research, October), https://www.nber.org/papers/w33029.

their jobs recently, while in Europe and Australia, it was more common for people to be absent from work; in South Korea, a larger share of those not working had dropped out of the labor force.

The decrease in labor supply around the world also affected different types of workers in different countries.  Net immigration fell in North America and Europe.  In the United States and the United Kingdom, people retired at greater rates than had been experienced before the pandemic. 4 In the U.S., many workers caring for elderly or ill relatives or children out of school left their jobs and the labor force or curtailed the number of hours they worked. 5 In one study that looked at the United States, Canada, and four European countries, the declines in employment and hours worked were particularly large among women, with this gender gap being at least partially explained by childcare needs. 6 While this difference between men and women was significant in the United States for both employment and hours, in other countries, such as Germany, it only generated a gender gap in hours worked, probably because Germany's policies were aimed at keeping workers in their jobs and minimizing dislocation.  Across the world, the number of younger workers neither in school nor in the labor force also rose, with larger increases in North America relative to Western Europe-for example, the 3.5 percentage

4 For evidence on the U.S., see Joshua Montes, Christopher Smith, and Juliana Dajon (2022), ''The Great Retirement Boom':  The Pandemic-Era Surge in Retirements and Implications for Future Labor Force Participation,' Finance and Economics Discussion Series 2022-081 (Washington:  Board of Governors of the Federal Reserve System, November), https://doi.org/10.17016/FEDS.2022.081.  For evidence on the U.K., see Bee Boileau and Jonathan Cribb (2022), 'The Rise in Economic Inactivity among People in Their 50s and 60s,' IFS Briefing Note BN345 (London:  Institute for Fiscal Studies, June), https://doi.org/10.1920/BN.IFS.2022.BN0345.

5 See Joshua Montes, Christopher Smith, and Isabel Leigh (2021), 'Caregiving for Children and Parental Labor Force Participation during the Pandemic,' FEDS Notes (Washington:  Board of Governors of the Federal Reserve System, November 5), https://doi.org/10.17016/2380-7172.3013.

6  See Titan Alon, Sena Coskun, Matthias Doepke, David Koll, and Michèle Tertilt (2022), 'From Mancession to Shecession:  Women's Employment in Regular and Pandemic Recessions,' NBER Macroeconomics Annual, vol. 36 (1), pp. 83-151, https://doi.org/10.1086/718660.

point increase in the United States from 2019 to 2020 compared with the 1.1 percentage point rise in Portugal during the same period. 7 While there were larger declines in the number of people working in the U.S., there was a larger decrease in labor supply in the euro area relative to the United States because of the substantial decline in total hours worked in Europe, which was at least partially due to retention and work-sharing programs during the pandemic.

As restrictions to contain the spread of COVID-19 were eased and economies reopened, there were large imbalances between labor supply and demand.  With a surprisingly rapid recovery in economic activity in most countries, labor demand surged, but labor supply continued to be hampered by many lingering factors, including illness, voluntary social distancing, early retirements, and still-low levels of net immigration. 8 As economies reopened, the imbalance between supply and demand was amplified by consumers, who had been prevented from spending on many in-person services, abruptly switching their spending from goods to services. 9 This substitution induced a large increase in the demand for workers in the services sector, leading to acute labor shortages in some industries.  The labor shortage throughout the economy was reflected in low employment-to-population ratios and labor force participation rates (LFPRs) for many advanced economies.  Tighter labor markets lowered unemployment rates and boosted

7 See International Labour Organization (2024), Global Employment Trends for Youth 2024:  Decent Work, Brighter Futures (Geneva:  ILO, August), https://doi.org/10.54394/ZUUI5430.  The International Labour Organization typically uses the term 'youth' to encompass people aged 15 to 24, but in some of its analyses it also uses the range between 15 and 29.

8 See Danilo Cascaldi-Garcia, Musa Orak, and Zina Saijid (2023), 'Drivers of Post-Pandemic Inflation in Selected Advanced Economies and Implications for the Outlook,' FEDS Notes (Washington:  Board of Governors of the Federal Reserve System, January 13), https://doi.org/10.17016/2380-7172.3232. 9 See Francesco Ferrante, Sebastian Graves, and Matteo Iacoviello (2023), 'The Inflationary Effects of Sectoral Reallocation,' Journal of Monetary Economics, vol. 140, supplement (November), pp. S64-S81,

wage growth in many economies in the second half of 2020, and, by the end of 2021, vacancy and quits rates were high. 10 While this tightness in labor markets was in evidence on both sides of the Atlantic, it was more acute in the United States, where we saw the vacancies-to-unemployment (V/U) ratio reach a historical peak of 2 in early 2022, two-thirds higher than its 2019 level.  In the euro area, where the V/U ratio has traditionally been lower, Federal Reserve staff estimate that it also reached a historical high of 0.45 in the second quarter of 2022, more than 50 percent higher than its 2019 level.

To understand the cross-country differences in the rebalancing from tight to looser labor markets, I want to highlight three important factors that contributed to the cross-country performance of labor markets over the past few years:  first, the increases in LFPRs, especially for prime-age workers; second, increased labor productivity; and third, an increase in net immigration and also the absorption of these immigrants into labor markets.

Let's start with LFPRs.  In the United States, after participation by prime-age workers fell early in the pandemic, its recovery was quite strong until last year, and it reached levels not seen since the late 1990s.  A notable contributor to this recovery was the LFPR of prime-age women, which reached historical highs last year, likely due to additional help in childcare responsibilities from other family members and flexible work arrangements. 11 While prime-age worker participation recovered, the LFPR for all

10  See chapter 2, 'Wage Dynamics Post-COVID-19 and Wage-Price Spiral Risks,' in International Monetary Fund (2022), World Economic Outlook:  Countering the Cost-of-Living Crisis (Washington: IMF, October), https://www.imf.org/en/Publications/WEO/Issues/2022/10/11/world-economic-outlookoctober-2022.

11 See Camilo Garcia-Jimeno and Luojia Hu (2024), 'Female Labor Force Participation in the PostPandemic Era,' Chicago Fed Insights (Chicago:  Federal Reserve Bank of Chicago, July),

https://www.chicagofed.org/publications/chicago-fed-insights/2024/female-labor-force-participation.

workers has remained stubbornly below its pre-pandemic level in the U.S. and other advanced economies.  In the case of the United States, unusually high rates of retirement during the 2021-22 period played an important role, a phenomenon driven by, among other factors, increases in wealth fueled by gains in the stock market and rising home prices. 12 Of course, another factor driving the drag in U.S. participation has been the aging of the population and the expected ongoing retirement of baby boomers.

By contrast, the euro area saw the LFPRs surpass their pre-pandemic levels by early 2022, as policies in these countries promoted job retention.  Moreover, because far fewer Europeans continue working after the age of 65, the participation rate of older workers did not fall as much during the pandemic.

Differences in labor market policies likely contributed to the different recovery paths of the LFPR across advanced economies.  In the United States, estimates show that unemployed workers leave the labor force at a rate about 10 times higher than that of employed workers. 13 After leaving the labor force, a typical worker remains there for a significant period and may never again look for work.  Thus, one might expect that labor market policies that have different effects on the severity of spikes in unemployment would also affect labor force participation differently. 14 As many European countries that faced lower increases in unemployment also faced lower decreases in the LFPR, it

12  See the box 'Why Has the Labor Force Recovery Been So Slow?' in Board of Governors of the Federal Reserve System (2023), Monetary Policy Report (Washington:  Board of Governors, March), pp. 13-16, https://www.federalreserve.gov/monetarypolicy/files/20230303\_mprfullreport.pdf.

13 S ee Bart Hobijn and Ayşegül Şahin (2021), 'Maximum Employment and the Participation Cycle,' NBER Working Paper Series 29222 (Cambridge, Mass.:  National Bureau of Economic Research, September), https://www.nber.org/papers/w29222.

14 Cajner, Coglianese, and Montes document sluggish cyclical behavior of the LFPR relative to the unemployment rate for the U.S.; see Tomaz Cajner, John Coglianese, and Joshua Montes (2021), 'The Long-Lived Cyclicality of the Labor Force Participation Rate,' Finance and Economics Discussion Series 2021-047 (Washington:  Board of Governors of the Federal Reserve System, July),

seems that unemployment spells during the COVID-driven downturn might have contributed to exits from the labor force.  So, to the extent that the emphasis on job retention in Europe helped limit such exits, this policy choice may have helped explain the higher rates of labor force participation in the euro area relative to the United States.

The second factor I want to highlight that boosted labor supply during the economic recovery from the pandemic is productivity growth, which in a way acts like an increase in labor supply, as it increases the output that each worker can produce.  It seems likely that U.S. labor market policies spurred the higher rates of productivity growth in the United States relative to the euro area.

On the one hand, worker retention policies in Europe preserved the human capital of those specific firm-worker relationships.  These relationships are quite valuable when job-finding rates are low, and workers may spend longer times being unemployed. 15 Indeed, euro-area businesses have been reluctant to let go of workers, and indicators of labor hoarding are higher than their pre-pandemic levels. 16 One consequence of this hoarding is that hours per worker remain below pre-pandemic levels, pointing to a lower output per worker.

On the other hand, in economies such as the United States that have relatively higher job-finding rates, UI promotes the flow of workers to more-productive sectors of the economy and results in less labor hoarding.  Research by Federal Reserve staff shows

15 For a comparison on the duration of unemployment spells between the U.S. and Europe, see Olivier Blanchard and Pedro Portugal (2001), 'What Hides behind an Unemployment Rate:  Comparing Portuguese and U.S. Labor Markets,' American Economic Review, vol. 91 (March), pp. 187-207, https://doi.org/10.1257/aer.91.1.187.

16 For an analysis on labor hoarding in the euro area, see Vasco Botelho (2024), 'Higher Profit Margins Have Helped Firms Hoard Labour,' ECB Economic Bulletin, no. 4, pp. 54-58,

more sectoral reallocation of workers in the United States compared with the euro area. 17 As I argued in a speech in October at the European Central Bank, this pattern is very likely a major reason why productivity growth has been higher in the United States relative to other advanced economies. 18

U.S. labor market policies that rely more heavily on UI may have contributed to higher productivity growth in the United States, and to our recovery from the effects of the pandemic, by better matching the skills of individuals with jobs that make the best use of those skills.  Research finds that longer durations of UI allow workers to search for longer and find better job matches, even within the same industry.  That is the conclusion of research that I conducted with academic colleagues before I joined the Federal Reserve Board, and it can also be applied to the pandemic period because of the extended UI that individuals received during the period. 19 These larger benefits may have improved the efficiency of the U.S. labor market by also freeing up jobs that UI recipients would have taken but that would not have been as good a fit for them.  These openings may have allowed other UI nonrecipients to also match up with better employers given their qualifications and may have improved labor market efficiency.  Consistent with this idea, U.S. workers switched jobs at higher rates than in past recoveries, as reflected in higher

17 See Joaquín GarcíaCabo, Anna Lipińska, and Gastón Navarro (2023), 'Sectoral Shocks, Reallocation, and Labor Market Policies,' European Economic Review, vol. 156 (July), 104494, https://doi.org/10.1016/j.euroecorev.2023.104494.

18 See Adriana D. Kugler (2024), 'Global Fight Against Inflation,' speech delivered at the Conference on Monetary Policy 2024:  Bridging Science and Practice, European Central Bank, Frankfurt, Germany, October 8, https://www.federalreserve.gov/newsevents/speech/kugler20241008a.htm.

19  See Ammar Farooq, Adriana D. Kugler, and Umberto Muratori (2020), 'Do Unemployment Insurance Benefits Improve Match and Employer Quality?  Evidence from Recent U.S. Recessions,' NBER Working Paper Series 27574 (Cambridge, Mass.:  National Bureau of Economic Research, July; revised April 2022) https://www.nber.org/papers/w27574.  For a study using European data, see Arash Nekoei and Andrea Weber (2017), 'Does Extending Unemployment Benefits Improve Job Quality?' American Economic Review, vol. 107 (February), pp. 527-61, https://doi.org/10.1257/aer.20150528.

quits rates.  It seems very likely that the emphasis on UI in the United States, relative to its European peers, in the recent downturn contributed to higher productivity rates through better job matching.

The third important factor boosting labor supply since the pandemic was increased immigration in a number of countries.  While immigration flows into some European countries were comparable in proportion to those into the United States in 2022 and 2023, new immigrants often integrate more quickly into the labor force in the U.S., relative to European countries, possibly because of the higher flexibility of U.S. labor markets. 20 More broadly, because immigrants often have different backgrounds, cultures, and experiences, they bring a diverse set of skills to the labor market, which also leads to better matches between firms and workers, and, hence, a more efficient labor supply, a theory supported by recent research. 21 For these reasons, immigrants probably boosted the U.S. labor supply compared with other countries.

I have had a lot to say about labor supply across countries, but labor demand has also been a factor in the rebalancing of labor markets.  Central banks responded to the worldwide surge of inflation starting in 2021 with the most synchronized tightening of monetary policy since 1970. 22 Restrictive policy worked, and by 2022, labor demand began to soften, and vacancy rates decreased across advanced economies.  We also saw

20 See Courtney Brell, Christian Dustmann, and Ian Preston (2020), 'The Labor Market Integration of Refugee Migrants in High-Income Countries,' Journal of Economic Perspectives, vol. 34 (Winter), pp. 94121, https://doi.org/10.1257/jep.34.1.94.

21  See Gianluca Orefice and Giovanni Peri (2024), 'Immigration and Worker-Firm Matching,' Review of Economics and Statistics, pp. 1-45, https://doi.org/10.1162/rest\_a\_01476.

22 See Kristin Forbes, Jongrim Ha, and M. Ayhan Kose (2024), 'Rate Cycles,' paper presented at 'Monetary Policy in an Era of Transformation,' ECB Forum on Central Banking, Sintra, Portugal, July 3, https://www.ecb.europa.eu/pub/pdf/sintra/ecb.forumcentbankpub2024\_Forbes\_paper.en.pdf.  See also Dario Caldara, Francesco Ferrante, Matteo Iacoviello, Andrea Prestipino, and Albert Queralto (2024), 'The International Spillovers of Synchronous Monetary Tightening,' Journal of Monetary Economics, vol. 141 (January), pp. 127-52, https://doi.org/10.1016/j.jmoneco.2023.10.017.

hiring rates and quits rates trend down in the United States.  The better balance between labor demand and supply has been seen in lower V/U ratios across many advanced economies.  As I mentioned before, in the United States, this ratio went from the all-time high of 2 in early 2022 to 1.1 in January 2025, which is currently below the average observed in 2019, just before the pandemic.  The rebalancing of the labor market is also evident in the moderation in wage growth since 2021, a big factor in the significant progress toward the FOMC's 2 percent inflation target.  However, because different countries experienced different cumulative increases in their consumer prices in the recent episode of high inflation, wage growth has been 'catching up' with inflation at different rates across countries, as workers aim to recover real income losses.

I should mention some other differences in the structure of labor markets that could explain differences in wage growth.  A larger share of workers in Europe negotiates wages through labor unions.  The euro area experienced a larger energy shock after Russia's attack on Ukraine, which led to union-driven wage negotiations aiming to recoup real income losses and more persistent wage growth in the euro area.  Putting welfare and humanitarian aspects aside, which are quite important, the fact that many immigrants do not enter the labor force in the euro area when they first arrive because, among other reasons, they get support from government programs, also likely impedes the downward pressure from immigration on wage growth.  Moreover, those immigrants who do enter the euro-area labor force may enter the pool of unionized workers and not bargain unilaterally for their wages, thus not putting downward pressure on wage growth. Additionally, higher productivity will allow wage growth to settle at higher levels without adding inflationary pressures to our economies, and with productivity growth in

the U.S. running at a faster pace than in Europe, U.S. wage growth may end up settling at a higher level.  Thus, I see the recent pace of U.S. wage growth as being consistent with our 2 percent inflation target once we account for catch-up effects and productivity growth.

As in some other parts of the world, I see the U.S. labor market as having substantially rebalanced, and conditions have stabilized at a level that I believe is close to the FOMC's goal of maximum employment.  Still, I am closely monitoring any signs of changes in the labor market so that we can keep it in the good place that it is now while bringing down inflation to our target.

Thank you.",Adriana D Kugler
https://www.bis.org/review/r250311b.htm,"John C Williams: Discussion of ""Monetary policy transmission to real activity""","Remarks by Mr John C Williams, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the 2025 US Monetary Policy Forum, New York City, 7 March 2025.",2025-03-07 00:00:00,"## John C Williams: Discussion of ""Monetary policy transmission to real activity""

Remarks by Mr John C Williams, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the 2025 US Monetary Policy Forum, New York City, 7 March 2025.

* * *

## As prepared for delivery

## Presentation accompanying the speech

It's a pleasure to be here today and to have the opportunity to comment on the paper ""Monetary Policy Transmission to Real Activity."" This is my fourth time as a discussant at this conference, and I am sure that I speak on behalf of everyone here in thanking the authors for keeping their paper to only 23 pages. This is a welcome improvement over the lengthy tomes of yore that threatened to breach the 100-page mark-not to mention e-mail attachment size limits.

The paper provides a clear and succinct analysis of the timing and magnitude of effects of monetary policy shocks on spending and employment, both in the aggregate and across sectors. It adds to an extensive research literature that has focused on these issues, and the analysis and results are broadly consistent with those in past studies. In a nutshell, monetary policy shocks have their largest effects on housing, business investment, and spending on consumer goods-in that order. The peak effect on GDP occurs after a year and half, and on employment, it takes two years. Of course, there are differences across models and times, as well as uncertainty bands around these results, but this captures the main findings of the paper.

I'll admit that given the clarity of the paper and the uncontroversial results, I was somewhat at a loss in terms of what value I could add as a discussant. Fortunately, a passage in the paper provided a way out of this dilemma. In describing the recent episode, the authors note that ""while inflation expectations rose, they never became unmoored. Such stability of inflation expectations has a potentially important role in understanding why disinflation has not been accompanied by a slowdown in real activity."" I couldn't agree more, and this passage led me to look more closely at inflation expectations and how monetary policy shocks affected these expectations.

In my remarks, I will broaden the scope of their analysis to cover the behavior of inflation expectations, including the effects that monetary policy has on them. There is a large literature on the effects of monetary policy on realized inflation, analyzed in Havranek and Rusnak's meta-analysis, 1   but inflation expectations have received less attention. I will consider questions around two issues: First, did inflation expectations behave differently during the past five years relative to the pre-pandemic period? And second, what are the effects of monetary policy shocks on inflation expectations, and how do they compare to the effects on real activity described in the paper?

Before I utter even one more word, I need to give the standard disclaimer that the views I express today are mine alone and do not necessarily reflect those of the Federal Open Market Committee or others in the Federal Reserve System.

## A Decade of Expectations

To set the stage, I will briefly summarize the behavior of inflation and inflation expectations over the past decade. The dashed line in Figure 1 shows the 12-month percent change in the Consumer Price Index (CPI) from 2014 to January 2025. Prior to the pandemic, inflation was low and stable, fluctuating between 0 and 3 percent. But the post-pandemic experience over the past five years represented a sharp break. Inflation soared during 2021 and the first half of 2022, then quickly reversed most of that rise.

Short-run inflation expectations followed the pattern of the rise and fall of inflation, while movements in medium-term expectations were much more muted. The solid lines in Figure 1 show the medians of mean one-year-ahead and three-year-ahead inflation expectations taken from the New York Fed's Survey of Consumer Expectations (SCE). The SCE is a monthly, internet-based survey consisting of a 12-month, rotating representative panel of about 1,300 households. 2   The survey started in mid-2013, and questions regarding five-year-ahead inflation expectations were added in 2022. Due to that short sample length, I will mostly focus on the SCE's one- and three-year-ahead expectations.

A striking feature of these expectations is that they have fully returned to levels that prevailed between mid-2013 and mid-2016, before inflation expectations drifted downward during the extended low inflation experience prior to the pandemic. One-yearahead expectations peaked around the same time as CPI inflation in mid-2022 and subsequently returned to their pre-pandemic range at the end of 2023. Three-yearahead expectations peaked much earlier, in the fall of 2021, and returned to their prepandemic range in mid-2022.

## Expectations and Surprises

The first question I examine is whether the behavior of inflation expectations over the past five years has differed from that before the pandemic, something my colleagues and I first examined in a Liberty Street Economics post in 2022. 3   As in that article, I will look at this question in two ways.

The first is the sensitivity of inflation expectations to ""inflation surprises""-that is, the difference between what a survey respondent expected inflation to be and what it turned out to be. Athanasios Orphanides and I showed that this metric provides a useful summary statistic for the behavior of inflation expectations. 4

This approach takes advantage of the rotating panel structure of the SCE. The inflation surprise is calculated as the difference between CPI inflation recorded in the last month of an individual respondent's participation in the survey and their one-year-ahead inflation expectation at the beginning of their tenure. The change in inflation expectations is calculated as the difference between a respondent's forecast of inflation between the start and the end of their time on the panel. Table 1 reports the estimated

slope coefficients from a regression of individual revisions in inflation expectations on their inflation surprises by subsample. The table also reports the estimated coefficient for the subsample for which we have five-year-ahead expectations.

These results yield two insights into the behavior of inflation expectations. First, the estimated effects of inflation surprises to revisions in inflation expectations are considerably larger at the one-year-ahead horizon than at longer horizons. Second, the estimated effects during the past five years are quite similar to those for the prepandemic period.

A second measure of how inflation expectations respond to a shock is the comovement of revisions in expectations across different horizons. The upper panel of Table 2 reports the estimated coefficients of a regression of the six-month change in three-year-ahead expectations on the six-month change in one-year-ahead expectations based on the SCE for two subsamples. The middle panel shows the corresponding estimate for five-year-ahead expectations for the available data from 2022-2024. The lower panel shows corresponding results from the Michigan survey, which uses a subset of respondents each month who are re-interviewed six months later. The longer-run expectations question in the Michigan survey asks respondents about their expectations over the next five to 10 years.

## No Signs of Unmooring

These results show the same pattern of smaller estimated coefficients with longer forecast horizons. Interestingly, they indicate that the co-movement between one-yearahead and longer-term expectations over the past five years was somewhat lower than in the pre-pandemic period. This is consistent with the breakdown in the co-movements between the SCE's one- and three-year-ahead expectations shown in Figure 1. I should emphasize that based on these two metrics, there is no sign of inflation expectations becoming unmoored at any forecast horizon relative to the pre-pandemic period.

Taken together, these results suggest that respondents expect an inflation shock will gradually decay over the ensuing years. In particular, although inflation shocks are expected to have persistent effects on inflation, these effects are expected to largely dissipate after five years.

## Monetary Policy Shocks and Inflation Expectations

Finally, I will present impulse response functions (IRFs) of inflation expectations to monetary policy shocks as a complement to the paper's analysis of IRFs for real activity. Figure 2 shows estimated IRFs for monetary policy shocks, using the same measures as in the paper. 5   The IRFs are scaled to reflect a one-percentage-point increase in the one-year yield on impact. The projections use monthly data from 2000 to 2024. Because the SCE did not begin until 2013, the IRFs are computed using data from the Michigan survey and the Blue Chip Economic forecasts for long-run expectations.

## Three Findings

Three findings stand out from this analysis. First, in all cases, there is a lag of about eight months before the shock affects inflation expectations. This is surprising since inflation expectations are forward-looking and should move soon after a surprise. And it contrasts with evidence of an immediate partial response in real activity shown in the paper.

Second, the magnitude of the responses declines with the length of the forecast horizon. This is qualitatively in line with the evidence from the regressions that I reported earlier, suggesting that respondents expect the effects of shocks on future inflation to decline over time.

Third, long-run inflation expectations from the Blue Chip survey of forecasters are not sensitive to monetary policy shocks. This is consistent with other evidence indicating long-run inflation expectations have remained well anchored throughout this period. 6

I will close by again emphasizing the clarity and concision of the paper. For me, it was instrumental in stimulating further investigations into the effects of monetary policy on inflation expectations.

1 Tomas Havranek and Marek Rusnak, 2013. ""Transmission Lags of Monetary Policy: A ,"" , December, 39-75. Meta-Analysis International Journal of Central Banking

- 2 For more information on the SCE, see Olivier Armantier, Giorgio Topa, Wilbert van der Klaauw, and Basit Zafar, 2017. ""An Overview of the Survey of Consumer ,"" Federal Reserve Bank of New York , 23, no. 2, Expectations Economic Policy Review December, 51-72.
- 3 Olivier Armantier, Leo Goldman, Gizem Koar, Giorgio Topa, Wilbert van der Klaauw, and John C. Williams, ""What Are Consumers' Inflation Expectations Telling Us Today?,"" Federal Reserve Bank of New York , February 14, 2022. Liberty Street Economics
- 4 Athanasios Orphanides and John C. Williams, 2005. ""Inflation Scares and Forecast-,"" 8, April, 498-527. Based Monetary Policy Review of Economic Dynamics,
- 5 The responses are calculated using local projections, in the spirit of Jorda, by regressing the indicated measure of inflation expectations on the monetary policy shock, a constant, two lags of the independent variable, and two lags of the Goldman Sachs U.S. Financial Conditions Index (FCI). The inclusion of the FCI is thus intended to control for other potential confounding factors in the projections. See Silvia MirandaAgrippino and Giovanni Ricco, 2021. "" The Transmission of Monetary Policy Shocks,"" , July, 13, No. 3, 74-107, and Òscar American Economic Journal:  Macroeconomics Jordà, 2005. "" Estimation and Inference of Impulse Responses by Local Projections,"" , 95, No. 1, March, 161-182. American Economic Review
- 6 John C. Williams, A Steady Anchor in a Stormy Sea,  remarks at SNB-FRB-BIS HighLevel Conference on Global Risk, Uncertainty, and Volatility, Zurich, Switzerland, November 9, 2022.",John C Williams
https://www.bis.org/review/r250311a.htm,"Michelle W Bowman: Remarks on ""Monetary policy transmission to real activity"" and the recent experience","Remarks by Ms Michelle W Bowman, Member of the Board of Governors of the Federal Reserve System, at the 2025 US Monetary Policy Forum, New York City, 7 March 2025.",2025-03-07 00:00:00,"## Michelle W Bowman: Remarks on ""Monetary policy transmission to real activity"" and the recent experience

Remarks by Ms Michelle W Bowman, Member of the Board of Governors of the Federal Reserve System, at the  2025 US Monetary Policy Forum, New York City, 7 March 2025.

* * *

Thank you for the invitation to participate at this year's U.S. Monetary Policy Forum conference. It is a pleasure to be here to discuss the conference report and present my views on the transmission of monetary policy to real activity in recent years. 1   I would like to start by thanking the authors of the paper for their thoughtful and comprehensive analysis of the effects of monetary policy on economic activity. As you all may know, my background is in banking and bank regulation, so my experience with and interest in understanding the transmission and effects of monetary policy stems from my responsibilities as a Member of the Federal Open Market Committee (FOMC).

Turning to the discussion, I will begin with a few comments and suggestions on the paper and then focus on how monetary policy and other factors influenced U.S. economic performance during the tightening cycle that started in March 2022. I will then conclude with some thoughts on the relevance of the results in the paper for monetary policy going forward.

## Comments and Suggestions on ""Monetary Policy Transmission to Real Activity""

The paper's stated purpose is to estimate how monetary policy shocks affect gross domestic product (GDP) and employment through the use of a range of models. The evidence is generally similar to previous studies, supporting the broader principle that monetary policy exerts its effects with long lags and has a limited contribution to changes in real activity when the shock is small and not very persistent. We should keep in mind, however, that many other shocks hit the economy and that at times it may be hard to see the effects of monetary policy actions estimated in the paper as they work through the actual economy.

The paper notes that a 1 percentage point increase in the federal funds rate that retraces gradually, taking five to six quarters to reach half of its initial size, has persistent negative effects on GDP and employment. At maximum, this shock lowers GDP by 0.4 percent in about 18 months and employment by 0.3 percent in about two years, on average across the models considered in the paper. However, there is a wide range of estimated responses, as they depend on each model specification and the data used. The most sensitive components of GDP are residential investment, business fixed investment, and durable goods consumption, which is consistent with employment in the construction and durable goods manufacturing industries being highly interestrate sensitive.

The paper analyzes the transmission of monetary policy to real activity, but it would have been very interesting to go one step further and also see the effects of monetary policy on inflation. This is especially relevant because the FOMC has been focused on

bringing inflation down to its 2 percent target over the past few years. Of course, higher interest rates lower inflation by dampening aggregate demand and real activity, thereby removing pressure on resource utilization, wages, and prices.

The authors use several models to analyze the transmission of monetary policy. They use two well-known structural models created by Federal Reserve Board staff that have been used in Tealbook, the FRB/US and EDO models, in addition to two reduced-form VAR models, the New York Fed Bayesian VAR model and a simple four-variable proxy VAR model. It is reassuring that the estimated responses to a federal funds rate shock in the two models that I am most familiar with, the Board FRB/US and EDO models, seem consistent with previous findings. 2

One small issue is that neither of the VAR models directly includes the federal funds rate. The authors acknowledge this limitation in the analysis and address it by roughly estimating that a 100-basis points shock to the policy rate boosts the 1-year and 2-year Treasury yields by 45 and 40 basis points, respectively. This approach may have resulted in the implied monetary policy shock in the two VAR models looking more persistent than in the two structural models. I would suggest the authors take another look at this aspect of their exercise, so that the contours of the monetary policy shocks look more similar across the different models.

An alternative approach would have been to take the 1- and 2-year averages of the federal funds rate from the FRB/US and EDO impulse responses and possibly add a small term premium. This approach would have suggested larger effects of the federal funds rate shock on the 1- and 2-year Treasury yields than estimated by the authors. Another approach, especially in the proxy VAR setting, would have been to use a measure of the shadow federal funds rate, which provides a gauge of the overall monetary policy stance and is not constrained by the zero lower bound. 3

The paper focused on the effect of changes in the policy rate, but an important channel for the transmission of monetary policy is how it affects private interest rates that are relevant for households and businesses consumption and investment decisions. Private rates include interest rates charged on outstanding credit card balances, rates on auto and other durable goods loans, mortgage rates, and corporate bond yields. Although credit card rates move closely in line with the policy rate and include a time-varying spread that depends on the default risk profile of the borrower, longer-term private fixed rates on mortgages and corporate bonds depend on the expected path of the federal funds rate, the term premium embedded in longer-term Treasury yields, and risk spreads relative to Treasury securities of comparable maturity. Accordingly, monetary policy tools other than the policy rate, including forward guidance and the amount of securities holdings in the central bank's balance sheet, are also important for the transmission of monetary policy since they can more forcefully affect the expected path of the federal funds rate, term premiums, and risk spreads.

The authors analyze the contribution of major aggregate demand components to the overall effect of a monetary policy shock on GDP. One minor issue is that not all the models treat business investment equally. In particular, the EDO model includes inventory investment under business investment, while all other models do not appear

to do so. This difference may contribute to the much larger initial reaction of business investment in the EDO model compared to the other models, as inventory investment reacts quickly to a shock in the federal funds rate.

I would like to offer one last comment on the relatively small effect of monetary policy on real activity. Although I do not disagree with the authors' assessment, I think that the estimated effects can cumulate to be quite sizable even for the transient unexpected shock considered. The FOMC quickly raised interest rates to fight surging inflation between March 2022 and July 2023 by a cumulative 5-1/4 percentage points. According to the average impulse responses, a shock of this magnitude would lead to declines of about 2 percent on the level of real GDP and 1.5 percent on the level of employment, which would translate into a similarly large increase in the unemployment rate if those who lost their jobs mostly remained in the labor force. This seems to suggest the potential for fairly large effects on real activity, especially when the monetary policy shock has more persistent effects on the policy rate and results in larger increases in term premiums and risk spreads.

## The Recent Tightening Cycle

The FOMC started raising the federal funds rate in March 2022 to combat rising inflation. Although the initial rate hike was a mere 1/4 percentage point, the pace of tightening was faster over the remainder of the year, with an overall increase of more than 4 percentage points in the policy rate by the end of 2022. Rate hikes continued in smaller 1/4 percentage point steps the following year, adding to 1 additional percentage point increase by July 2023. As the authors note in the paper, the rapid pace of monetary policy tightening was somewhat surprising, especially as the FOMC was initially slow to react to signs that the rise in inflation during 2021 was not merely transitory and required more aggressive action.

As financial conditions tightened rapidly and the yield curve inverted in 2022, fears of an impending recession started to rise, with Federal Reserve Board staff mentioning downside risks to real activity and that a mild recession seemed equally likely to the baseline Tealbook projection for sluggish economic growth over the next year. 4   The staff eventually predicted a mild recession in the Tealbook forecast after the bank failures and banking system stress in the spring of 2023. 5   Such recession was widely predicted and, in hindsight, it never materialized. As you well know, the yield curve inversion has not been the only predictor of recessions that has failed in recent years.

On a Q4-over-Q4 basis, GDP growth slowed considerably in 2022 to a modest pace of only 1.3 percent. The components of GDP that exerted the most drag on growth that year were residential investment, goods consumption, and inventory investment, subtracting a total of 1-1/2 percentage points from real GDP growth in 2022.

Residential investment weakened rather quickly and fell more than 16 percent in 2022. The sharp decline in this category seems largely explained by higher mortgage rates, which surged more than 3 percentage points over the course of the year as the FOMC aggressively tightened monetary policy. In addition to higher interest rates, the 1-1/2 percent drop in goods consumption in 2022 likely reflected the imprint of higher inflation on real disposable income and the unwinding of previous fiscal stimulus.

Somewhat at odds with the empirical results in the paper, business fixed investment continued to rise appreciably as special factors led to a delayed response to the rise in interest rates. A broader measure of business investment that includes inventories did show a slowdown in growth, but even this broad measure continued to rise appreciably in 2022. Business fixed investment was likely supported by construction of new microchip and battery plants, the continued boost to software investment following the switch to remote work, and a rebound in nonresidential structures and transportation equipment investment after their protracted decline over the pandemic.

Payroll employment increased strongly in 2022 as labor force participation rose, the unemployment rate declined, and the labor market tightened considerably. Payroll employment moved back up to its pre-pandemic level and approached its trend as social distancing receded. The recovery dynamics in employment largely masked any effects from rising interest rates in 2022. The effect from higher interest rates on employment also tends to lag and be more persistent than the effect on GDP, so any effects likely showed up in 2023, an outcome that is consistent with the findings in the paper.

## Some Reasons Why the Economy Outperformed

The economy outperformed in 2023 as widespread predictions of an impending recession never materialized and instead growth picked up. From the point of view of the models in the paper, the stronger economy in 2023 also seems surprising, but this likely reflected other factors that influenced the economy and that are not accounted for in the model simulations.

Despite significant tightening in broad financial conditions in 2023, GDP growth strengthened notably as fiscal policy turned from a drag into a meaningful boost to growth and potential output accelerated further due to increased immigration and strong productivity growth. These favorable supply developments allowed for stronger economic activity along with easing of inflationary pressures. Although growth surprised to the upside in 2023, labor market tightness eased with the unemployment rate edging up over the year and payroll employment growth slowing markedly.

Faster GDP growth in 2023 was driven by a rebound in goods consumption, some recovery in residential investment, and stronger government spending. Goods consumption was boosted by strong gains in real compensation and personal income, including from declining inflation. Despite continued drag from higher mortgage rates, residential investment started recovering in 2023 as other factors supported demand. In particular, the labor market remained strong and household balance sheets were still healthy. The sharp rise in mortgage rates also created a lock-in effect that increased demand for new housing and construction activity.

The marked deceleration in employment in 2023 seems consistent with the longer lags in the response of employment to the rise in interest rates relative to that of GDP, especially as a significant portion of employment gains reflected increased labor supply from immigration, which allowed the labor market to come into better balance. Also consistent with the paper results, employment gains in the construction and durable goods manufacturing industries were more noticeably below their 2015-2019 trends than employment gains for the aggregate economy.

As the authors argue, another reason why real activity was more resilient in the face of higher interest rates may have been the healthy balance sheets of households and businesses at the start of the tightening cycle. Households had accumulated excess savings during the pandemic, reflecting both increased fiscal stimulus and reduced consumption due to social distancing and supply bottlenecks. 6   In fact, data from the Financial Accounts of the U.S. indicate that in the two years between the end of 2019 and the end of 2021, household bank deposits rose by nearly $4 trillion. 7

In addition, many households and nonfinancial businesses were able to refinance their mortgages and corporate bonds at very low rates during the pandemic. Although higher interest rates likely held back additional consumption expenditures and investment spending, they had less of an effect on households' and nonfinancial businesses' net cash flows as the average interest rates on household mortgages and business debt remained low. 8

With historically low borrowing costs during the pandemic era, mortgage originations and refinancing activity reached very high levels. As a result, the share of outstanding mortgages with an interest rate below 4 percent increased to nearly 70 percent by 2022 and it remains well above pre-pandemic levels today. Similarly, nonfinancial businesses issued record amounts of corporate bonds and extended the maturity of their debt to avoid new debt issuance earlier in the subsequent rate hiking cycle. Between 2020 and 2021, the fraction of triple-B corporate bonds maturing within three years fell to its lowest levels in nearly 20 years.

Fiscal policy also reentered expansionary territory in 2023, with above-trend stimulus partly driven by strong state and local government spending. Although the unwinding of COVID-19 fiscal support continued in 2023, the federal budget deficit turned back up and rose to near 6 percent of GDP, while the primary deficit inched up towards 4 percent of GDP. These deficit levels are unusual for an expansion, especially as fiscal policy seems to have contributed to the degree of tightness in the economy.

One way to describe the resiliency of real activity to higher interest rates during the recent tightening cycle is to say that some of the previously noted factors led to a rise in r-star. Higher population growth, from the influx of new immigrants, and higher productivity growth, arguably from the use of new technologies like artificial intelligence and the surge in new business formations, especially in high-tech industries, have likely boosted investment demand. In addition, the lack of significant fiscal consolidation has also increased demand for savings. An economy with stronger investment demand and very little household savings likely requires a higher equilibrium interest rate relative to pre-pandemic norms.

## Relevance of Results for Monetary Policy Going Forward

The U.S. economy has been experiencing major shocks and structural changes since the pandemic, which may have influenced or masked the transmission of monetary policy to real activity. It is, therefore, not straightforward to see how the impulse responses shown in this paper have translated in practice. And, as the paper acknowledges, a large portion of the fluctuations in real activity are driven by shocks other than those to monetary policy. Although the FOMC has been focused on lowering

inflation in the past few years, as we continue to make progress on approaching our 2 percent target, I expect that the labor market and economic activity will become a larger factor in the FOMC's policy discussions. Accordingly, the stylized results on real activity effects in the paper will prove especially useful going forward.

## Conclusion

I will conclude by saying that I enjoyed the paper, and that I appreciate the opportunity to be here to share my views on this topic. I look forward to the discussion and to hearing feedback from other participants and the perspective of my FOMC colleague and fellow discussant.

## References

Aladangady, Aditya, David Cho, Laura Feiveson, and Eugenio Pinto (2022). ""Excess Savings during the COVID-19 Pandemic,"" FEDS Notes. Washington: Board of Governors of the Federal Reserve System, October 21.

Brayton, Flint, Thomas Laubach, and David Reifschneider (2014). ""The FRB/US Model: A Tool for Macroeconomic Policy Analysis,"" FEDS Notes. Washington: Board of Governors of the Federal Reserve System, April 3.

Board of Governors of the Federal Reserve System (2022). ""Minutes of the Federal Open Market Committee, November 1-2, 2022,"" press release, November 23, 2022.

Board of Governors of the Federal Reserve System (2023). ""Minutes of the Federal Open Market Committee, March 21-22, 2023,"" press release, April 12, 2023.

Castro, Andrew, Michele Cavallo, and Rebecca Zarutskie (2022). ""Understanding Bank Deposit Growth during the COVID-19 Pandemic,"" FEDS Notes. Washington: Board of Governors of the Federal Reserve System, June 6.

Chung, Hess, Michael Kiley, and Jean-Philippe Laforte (2010). ""Documentation of the Estimated, Dynamic, Optimization-based (EDO) Model of the U.S. Economy: 2010 Version (PDF),"" Federal Reserve Board Finance and Economics Discussion Series 2010-29. Washington: Board of Governors of the Federal Reserve System, May.

Eichenbaum, Martin, Sergio Rebelo, and Arlene Wong (2022). ""State-Dependent ,"" , vol. Effects of Monetary Policy: The Refinancing Channel American Economic Review 112 (March), pp. 721-61.

Fabiani, Andrea, Falasconi, Luigi, and Heineken, Janko (2024). ""Monetary Policy and the Maturity Structure of Corporate Debt,"" unpublished paper, available at SSRN: http://dx.doi.org/10.2139/ssrn.3945615.

Jungherr, Joachim, Matthias Meier, Timo Reinelt, and Immo Schott (2024). ""Corporate Debt Maturity Matters for Monetary Policy,"" International Finance Discussion Papers 1402. Washington: Board of Governors of the Federal Reserve System, December 6.

Wu, J. Cynthia and F. Dora Xia (2016). ""Measuring the Macroeconomic Impact of Monetary Policy at the Zero Lower Bound,"" , vol. Journal of Money, Credit, and Banking 48 (March-April), pp. 253-91, https://doi.org/10.1111/jmcb.12300.

- 1  The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee. I would like to thank Eugenio Pinto and Michele Cavallo for their assistance in preparing these remarks.
- 2  See Brayton et al. (2014) and Chung et al. (2010).
- 3  The estimated measure of the shadow federal funds rate is based on the work by Wu and Xia (2016).
- 4  See Board of Governors of the Federal Reserve System FOMC Minutes (November 2022).
- 5  See Board of Governors of the Federal Reserve System FOMC Minutes (March 2023).
- 6  See Aladangady et al. (2022).
- 7  See Castro et al. (2022).
- 8  The effectiveness of monetary policy can be substantially reduced both during a long period of low interest rates and for a long period after interest rates renormalize. See Eichenbaum et al. (2022) for the mortgage refinancing channel and Fabiani et al. (2024) and Jungherr et al. (2024) for the corporate debt maturity channel.",Michelle W Bowman
https://www.bis.org/review/r250311l.htm,Phil Mnisi: Opening remarks - 2025 Post Budget Seminar,"Opening remarks by Mr Phil Mnisi, Governor of the Central Bank of Eswatini, at the 2025 Post Budget Seminar, Ezulwini, 7 March 2025.",2025-03-07 00:00:00,"## Phil Mnisi: Opening remarks - 2025 Post Budget Seminar

Opening remarks by Mr Phil Mnisi, Governor of the Central Bank of Eswatini, at the 2025 Post Budget Seminar, Ezulwini, 7 March 2025.

* * *

- Programme Director,
- Honourable Minister for Finance,
- Members of both Houses of Parliament,
- Senior Government Officials,
- Panellists,
- Captains of Industry,
- Distinguished Guests,
- Ladies and Gentlemen, Good Morning!

It is with great honour and pleasure that I welcome you all to the 2025 Post-Budget Seminar hosted by the Central Bank.

I would like to extend my sincere gratitude to both the Ministry of Finance and Central Bank of Eswatini for investing their time and limited resources in this important discussion.

Ladies and Gentlemen, the purpose of this Seminar is to bring together stakeholders from all sectors of society to deliberate and brainstorm on the 2025/26 National Budget.

Our goal is to assist the Ministry of Finance and the Government to effectively execute the budget to deliver key services to the people of Eswatini.

We wish to commend the Minister for Finance once again for availing himself and agreeing to deliver the keynote address focusing on the highlights of his 2025/26 Budget Speech. We sincerely appreciate you Honourable Minister for taking time from your busy schedule to be with us this morning.

To our Panellists and distinguished guests, we hope you have all had the opportunity to familiarise yourself with the Budget to facilitate an interactive session with the Honourable Minister.

Programme Director, the Central Bank and the Ministry of Finance recognize the importance of facilitating a Forum for professionals from both the public and private sectors to share their insight on the National Budget. This Seminar aims to create a platform for stakeholders to discuss key issues related to the Budget, ultimately helping to inform the Minister on how to effectively address these pertinent concerns moving forward.

Furthermore, the Seminar will provide stakeholders with an opportunity to share information in an open environment and your input is truly invaluable.

Honourable Minister, I would like to bring to your attention that a group of Panellists from the different spheres of society will share their insight on the budget. Their contributions are intended to reflect the sentiments of these sectors regarding the proposed budget. We appreciate them for honouring our invitation to be the lead discussants in this Forum.

The Panellists have been selected from various sectors, including the business community, civil society, international development partners, legislators and independent intellectuals.

Distinguished guests, you will recall that the Minister for Finance, delivered the National Budget for 2025/26 fiscal year to Parliament on 14th February 2025 themed ""Transformation for Growth"".

The budget was introduced as a Pro-growth National Budget that was developed through inclusive and comprehensive consultations with Emaswati (i.e. Chiefs, Members of Parliament, Tindvuna teTinkhundla, the community development council) across all four (4) regions of the country.

The budget aligns with His Majesty's Speech from the Throne delivered at the opening of the second session of the 12th Parliament, in which he declared 2025, as ""A year of Transformation to the Promise Land"".

In his speech, His Majesty urged the government to improve service delivery in several key areas, including, 'Health care', 'Education', 'Employment creation', 'Science and technology' as well as, 'taking care of the Elderly and the youth'. This call was a response to the ""NKWE"" commitment to address submissions made by the public during the Sibaya ""peoples parliament"".

Honourable Minister, it is unfortunate that post-tabling of the budget, we have seen a significant deterioration in external relations particularly the re-introduction of tariff barriers in trade by the US and withdrawal of external donor assistance. The latter in particular, will magnify public health challenges with closures of Non-Governmental Organizations (NGOs) in the health space and a squeeze in support funding for the Government in its health programs. Lamentably, these changes come with increased job losses adding to the pool of unemployment and straining the economy further on social challenges. Consequently, the government will need to address a substantial funding gap, created by these external factors, to ensure the continuity of essential services for the people of Eswatini.

Conversely, these challenges galvanize Eswatini, and Africa as a whole, to seize transformative opportunities. They compel us to strategically diversify our partnerships, aggressively bolster domestic capacity, and champion a more decisive role in regional leadership. This juncture underscores the critical necessity for agile strategic planning and fortified resilience in navigating the complexities of an ever-evolving global landscape.

Programme Director, it is opportune for us to congratulate the Minister for Finance for his continued commitment to fiscal prudence, which has been recognised by the

Moody's Credit Rating Agency with an upgrade of Eswatini's economy credit rating from B3 to B2. This improvement is a testament to the government's ongoing efforts to make Eswatini a risk-free investment destination.

I would also like to congratulate the Government, on the monumental launch of the first external sovereign bond which was registered on the Johannesburg Stock Exchange. This was truly a historic event for the country as it marked the issuance of its first international bond program.

Ladies and Gentlemen, I am requesting you to be honest and constructive in your deliberations as this will help ensure that the Ministry receives sound advice on how to effectively implement the presented Budget.

As part of the Bank's responsibility to offer advice to Government, I wish to assure you, Honourable Minister, that we stand ready to provide the necessary support and guidance to your Ministry.

## I THANK YOU ALL!",Phil Mnisi
https://www.bis.org/review/r250311k.htm,Felicia Dlamini-Kunene: The nexus between AML/CFT and financial inclusion ,"Speech by Ms Felicia Dlamini-Kunene, Deputy Governor of the Central Bank of Eswatini, at the Central Banking Spring Meetings, Cape Town, 26 February 2025.",2025-02-26 00:00:00,"## Felicia Dlamini-Kunene: The nexus between AML/CFT and financial inclusion

Speech by Ms Felicia Dlamini-Kunene, Deputy Governor of the Central Bank of Eswatini, at the Central Banking Spring Meetings, Cape Town, 26 February 2025.

* * *

- Programme Director,
- Distinguished Guests,
- Ladies and Gentlemen, Good Morning!

## Introduction

We gather here today to discuss a crucial and often delicate balancing act: ensuring financial inclusion while safeguarding our financial system against money laundering and the financing of terrorism. These two objectives, while seemingly at odds, are in fact deeply intertwined and essential for a stable and prosperous economy.

It is a truth universally acknowledged that promoting one can sometimes compromise the other. However, we must strive for a harmonious coexistence. Without this balance, our efforts to fight financial crime may inadvertently exclude legitimate businesses and consumers, driving them into the shadows and exacerbating the very problems we seek to solve.

Conversely, effective financial inclusion, when done right, should strengthen our AML /CFT efforts. By bringing more people into the formal financial system, we increase transparency and reduce the space for illicit activities. And similarly, robust AML/CFT controls, when implemented thoughtfully, can build trust and confidence, encouraging greater financial participation.

The central question, then, is: how do we make financial services accessible to all, while protecting our financial system from criminal abuse?

In Eswatini, we have made significant strides, achieving a financial inclusion rate of 87%. This success is rooted in our commitment to a risk-based approach to AML/CFT compliance, which supports our financial inclusion policies. Let me outline some of the key solutions we have implemented:

## A. Leveraging Technology

Financial institutions can enhance AML/CFT efforts while also promoting financial inclusion, ensuring that more people participate in the financial system safely and securely.

I will discuss the technological initiatives that support both AML/CFT compliance and financial inclusion pursued by the Central Bank of Eswatini collaborating with other relevant stakeholders:

- Mobile Money Enablement: We recognized the transformative potential of mobile money early on, licensing and regulating mobile money operators since 2011. This has been a cornerstone of our financial inclusion strategy, providing access to financial services for a large portion of our population. It has significantly advanced financial inclusion, driven by security measures like identification card verification and transaction limits that mitigate financial crime risks. Mobile money introduction has indeed spurred the financial inclusion rate of Eswatini and by 2018, 71% of the adult population and 62% of MSMEs were using mobile money.
- Digital Verification of Identification: We have streamlined customer onboarding by integrating financial institutions with the national database center, the Eswatini Royal Science Technology Park. This integration has enabled financial institutions to verify the identification information submitted by customers with the national civil registry information. While this has been a new development, there are improvements that are still to be made for the efficient use of this solution for both the financial institutions and the national database center.

## B. Simplifying  AML/CFT Requirements

AML/CFT supervisors have been given more leeway to ensure that everyone can access formal financial services through application of Risk Based Approach principles. This is enabled through the use of proportionality in the application of AML/CFT standards. Outlined below are some of the dispensations that Eswatini has introduced to date:

- Access to Banking Products: From lessons learnt from mobile money products, we have extended simplified due diligence requirements to the banking sector, allowing individuals with low turnover to open accounts using only their identification cards. This has broadened access to formal banking services for previously underserved populations.
- Foreign Currency Exchange: To combat the black market, we have simplified foreign currency exchange procedures for Emaswati, recognizing the importance of tourism and facilitating legitimate transactions. In 2016, we extended the simplified due diligence to forex bureaus who were allowed to change foreign currency amounting to E5,000 for Emaswati with the use of the identification document only. That helped in removing the barriers of requesting extensive supporting documentation to change currency that made the black market thrive.

## C. Financial Inclusion of Forcibly Displaced Persons

We have recently completed a comprehensive risk assessment focusing on the money laundering and terrorist financing risks associated with forcibly displaced persons (FDPs). For too long, a misguided notion has persisted that FDPs inherently pose a high risk to our financial system. This misconception has led to their exclusion from the formal financial sector, hindering their economic integration and overall well-being.

Our rigorous risk assessment, however, has revealed a different reality. It demonstrated that FDPs, in fact, present a medium risk to our financial system. This finding is pivotal. It allows us to move away from exclusionary practices and embrace a more inclusive approach. Based on this assessment, we have developed a robust roadmap for the financial inclusion of FDPs. This roadmap is not a solitary endeavor; it is a testament to

the power of collaboration. We have brought together diverse stakeholders to craft policy frameworks that guide the inclusion of this vital customer segment.

A significant milestone in this process has been the collaboration with the Commissioner for Refugees. We have worked closely to clarify the required Know Your Customer (KYC) documents for both asylum seekers and refugees. This has resulted in the creation of an informative pack, ensuring clarity and understanding regarding the identification documents used by FDPs.

Furthermore, our engagements with the Commissioner have yielded invaluable recommendations for strengthening the integrity of FDP identification documents. A key recommendation is the issuance of a permit or registration document to all refugees, facilitating their registration on the national civil registry database. This integration into our existing systems is crucial.

Upon implementation, FDPs will be granted a national personal identification number. This will unlock access to simplified due diligence products, and the verification of their information will be streamlined through our established digital verification system. By implementing these measures, we are not only fulfilling our humanitarian obligations, but we are also unlocking the economic potential of FDPs. Reducing barriers to financial products accelerates their economic integration, benefiting both the individuals and our nation as a whole.

This initiative demonstrates our commitment to building a more inclusive and equitable financial system. It underscores our belief that everyone, regardless of their circumstances, deserves access to the tools and resources necessary to build a secure and prosperous future.

## D. Embracing Innovation

- Biometrics and Digital Identity: We recognize the potential of biometrics and digital IDs to overcome the challenges of traditional identification, particularly for vulnerable populations. We are exploring how to implement this technology.
- Artificial Intelligence for Smarter Fraud Detection: We are also exploring the use of AI to detect suspicious transactions in real-time, enhancing the accuracy and efficiency of our AML/CFT measures.
- Central Bank Digital Currencies: While we have concluded that a CBDC will not be issued by the Bank in the short to medium term, we continue to monitor international developments and participate in initiatives like Project Sunbird - a regional initiative aimed at exploring the potential for cross-border CBDC within the Common Monetary Area.

## E. Strengthening Frameworks and Regional Cooperation

- We have developed a comprehensive Financial Inclusion Framework and a Gender Inclusive Finance Roadmap to guide the implementation of our financial inclusion agenda to ensure that no one is left behind.
- The Eswatini Payment Switch, with its Fast Payments module and planned Open Banking capabilities, will revolutionize our payment landscape and further enhance financial inclusion.

- We are also focused on the Greening of the Central Bank of Eswatini, recognizing that climate change disproportionately affects vulnerable groups.
- Finally, we understand the importance of regional cooperation. By sharing information and expertise with our neighbors, we can strengthen our collective defense against financial crime.

## Conclusion

In conclusion, effective AML/CFT and financial inclusion are not mutually exclusive. By embracing a risk-based approach, leveraging technology, and fostering collaboration, we can create a financial system that is both inclusive and secure. We must continue to review and align our regulations, invest in infrastructure, and build capacity to meet the evolving needs of our nation.

I Thank you for your time!",Felicia Dlamini-Kunene
https://www.bis.org/review/r250313c.htm,Christine Lagarde: A robust strategy for a new era,"Speech by Ms Christine Lagarde, President of the European Central Bank, at the 25th ""ECB and Its Watchers"" conference, organised by the Institute for Monetary and Financial Stability at Goethe University Frankfurt, Frankfurt am Main, 12 March 2025.",2025-03-12 00:00:00,"SPEECH

## A robust strategy for a new era

Speech by Christine Lagarde, President of the ECB, at the 25th ECB and Its Watchers conference organised by the Institute for Monetary and Financial Stability at Goethe University Frankfurt

Frankfurt am Main, 12 March 2025

Paul Valéry wrote that 'the trouble with our times is that the future is not what it used to be'.

Our expectations have indeed been swept aside in the last few years, and in the last few weeks in particular.

Established certainties about the international order have been upended. Some alliances have become strained while others have drawn closer. We have seen political decisions that would have been unthinkable only a few months ago.

The level of uncertainty we are facing is exceptionally high.

An index of trade policy uncertainty currently stands at close to 350, more than six times its average value since 2021. [ ]  And indicators of geopolitical risk stand at levels not seen since the Cold War, outside of wars and major terrorist attacks. [ ] 1 2

This new environment raises fundamental questions for monetary policy. How can we deliver price stability in a new geopolitical era?

Our strategy assessment is ongoing, as you know, and I will naturally not cover every issue in my speech today. I will focus on the factors I consider to be particularly relevant in this new era.

I will ask three questions: how is the environment in which we operate changing? What do these changes imply for our reaction function? And what do the changes imply for our policy communication?

My main message is that in an environment of uncertainty, a strong commitment to maintaining price stability over the medium term is more important than ever.

This commitment will require agility to respond to new shocks, albeit within a well-defined framework that limits short-sighted reactions and unbridled discretion.

As a result, we will need to continue steering the public's expectations. People will be looking to us - and other policymakers - to understand how we will navigate this more volatile era and help reduce, rather than amplify, uncertainty.

So, agility needs to be combined with clarity. Even when we cannot provide certainty about the rate path, we can provide clarity about our reaction function.

## The environment

When we last reviewed our strategy, the main challenge we faced was a prolonged environment of too-low inflation. Although the review provided lessons that are relevant under any circumstances, its main focus was on understanding the causes of too-low inflation and how to ensure that it did not become embedded.

The environment we are facing now is a different one. Three key changes stand out.

First, the direction of shocks is much harder to predict.

In the decade before our last strategy review, we faced a range of structural and cyclical forces that were almost uniformly disinflationary. Now, we are seeing notable shifts in the drivers of inflation.

We still face structural factors like ageing and digitalisation that will probably be disinflationary in the coming years. [ ]  But we are also now facing new, two-sided shocks - mainly linked to trade and defence, as well as climate change - which can amplify or counteract the existing forces. 3

Trade fragmentation [ ]  and higher defence spending in a capacity-constrained sector could in principle push up inflation. Yet US tariffs could also lower demand for EU exports and redirect excess capacity from China into Europe, which could push inflation down. 4

Second, the size of the shocks to inflation could potentially change.

In the period from the great financial crisis to our last strategy review, we faced some very large negative shocks to growth. The effect of these shocks on inflation, however, took time to materialise. We saw a slow-moving downward drift in inflation that eventually seeped into inflation expectations.

But looking ahead, shocks might feed into inflation more directly and increase volatility. And this risk may be particularly acute for the euro area, as we are highly exposed to some of the new types of shock.

For example, the euro area is very open to trade and part of integrated supply chains. Hence, trade fragmentation is likely to lead to larger, more disruptive relative price changes. [ ]  In a similar vein, the euro area is highly dependent on energy imports. [ ]  Geopolitical risks are likely to drive greater volatility in exchange rates and energy and commodity prices, as we have seen in recent weeks. 5 6

Third, if the shocks do become larger, the persistence of inflation could in some circumstances be greater.

One feature of the recent inflation shock was an increase in the frequency of price changes. [ ]  This can lead to a steepening of the Phillips curve and, more generally, to a proportionally stronger impact of large shocks on inflation. A model developed at the ECB suggests that inflation behaves in a visibly non-linear way: it reacts disproportionately more strongly to large shocks, whereas small shocks trigger no significant reactions. [ ] 7 8

If such state-dependent pricing becomes standard when the economy is hit by large shocks, but the frequency of wage-setting remains below that of price adjustment, we could see inflation becoming more persistent. [ ]  Large shocks would lead to a faster pass-through to inflation, and then wages would have to catch up with prices in a staggered way. 9

As an illustration, energy inflation peaked in October 2022, while services inflation only peaked in July 2023 and is still being pushed up by past shocks today, mainly through their delayed impact on wage adjustments.

In this environment of more uncertain, larger and possibly more persistent shocks, the way we have formulated our inflation target matters - that is, we aim for 2% inflation, our target is symmetric and we work to achieve it over the medium term.

This symmetric target has served us well during the recent inflation surge, helping to coordinate expectations and guide the inflation process back down towards 2%.

But the formulation does not mean that headline inflation will always be at 2%, which is impossible in the kind of environment we are facing now. It means that, regardless of the shocks we face, we must set our policy appropriately so that inflation is always converging back towards 2% over the medium term .

So, how can we do that? This brings me to the second area: the reaction function.

## The reaction function

Our reaction function has always been state-dependent. In other words, policy should react differently depending on the context and the origin, size and persistence of shocks.

Our medium-term orientation enables us to avoid reacting to small or passing shocks that will have faded by the time the effects of a policy change kick in. And it allows us to flexibly adjust the horizon within which we must return inflation to target.

Classically, monetary policy reacts more forcefully to demand shocks where output and inflation move together, and 'looks through' or reacts less to supply shocks that push output and inflation in opposite directions - if they are sufficiently small and transitory.

Empirical evidence based on the last two decades finds that the ECB has largely followed this prescription. Generally, it has reacted more strongly to demand shocks than to supply shocks. But it has responded to supply shocks more forcefully when these shocks were persistent and inflation was high. [ ] The new environment requires us to emphasise two factors. 10

The first is the anchoring of inflation expectations.

For the ECB, 'looking through' has always been conditional on inflation expectations remaining well anchored. The recent inflation surge has confirmed just how critical maintaining a strong anchoring is to successfully navigate a more volatile world.

Our analysis finds that, if inflation expectations had been as poorly anchored as they were in the 1970s, policy rates would have had to rise to 8% at the peak of the recent tightening cycle to tame inflation, with very high costs for the economy. With well-anchored expectations, recent disinflation has instead been achieved at a relatively low cost compared with similar episodes in the past. [ ] 11

This experience can, in some ways, give us confidence for the challenges ahead: the relative stability of high degree of credibility, which was reinforced by the decisive actions we took to keep inflation longer-term inflation expectations during a massive inflation surge suggests that our inflation target has a expectations anchored. [ ] 12

At the same time, our starting point for the recent inflation episode was a decade of too-low inflation and correspondingly subdued inflation expectations. This meant the public were initially inattentive to inflation and took time to update their views.

But there is some evidence that public awareness has been awakened by recent experience. Once consumers took notice of rising inflation, their inflation perceptions responded quickly but reduced more sluggishly when inflation started to fall. This sluggish response has contributed to the slow adjustment of consumer inflation expectations, especially one year ahead.

We will only know through careful observation how long these memories will last, and consequently how sensitive inflation expectations will be to new shocks. But in all scenarios, close monitoring of inflation expectations - across markets, analysts, forecasters, households and firms - will be central to our policy reaction function.

Once the anchoring of inflation expectations is assured, the second factor we need to assess is how the current environment affects the optimal policy reaction to different type of shocks.

If the Phillips curve becomes steeper at higher levels of inflation, meaning inflation responds faster to changes in activity, then it should also be easier for monetary policy to bring inflation down without imposing heavy costs on the economy. This would weaken one of the main rationales for 'looking through' large supply shocks. [ ] 13

At the same time, there may be risks in generalising from recent experience where disinflation was relatively painless.

Alongside well-anchored inflation expectations, the relatively low 'sacrifice ratio' during this disinflation episode may reflect a unique set of conditions that will not be applicable to future shocks. In particular, the fact that we faced a series of negative shocks to income reduced the extent to which demand needed to be dampened by monetary tightening. [ ] 14

Any future shocks we face - such as energy price shocks and supply chain disruptions or a large increase in spending on defence or infrastructure - will therefore have to be assessed through this framework.

All told, simple policy prescriptions will not be appropriate in the environment we now face. Within a wellarticulated strategy and an unwavering commitment to price stability, we will need to retain agility to respond to complex circumstances as they arise.

This has implications for our policy communication, which brings me to the third area.

## Policy communication

Maintaining agility affects how we can talk about the future. And this applies particularly to our ability to give detailed guidance on the future path of interest rates.

Forward guidance about the rate path is particularly useful under two circumstances.

First, when the economy is faced with one-sided, persistent shocks pushing it towards the effective lower bound. In this setting, it gives the public confidence that monetary policy will be sufficiently persistent to dislodge those shocks and deliver on its target, while also helping insulate monetary conditions from spillovers from abroad.

These benefits were all visible in the euro area from 2013 onwards when we first introduced rate forward guidance.

Second, forward guidance can be useful when shocks become two-sided following a long time at the lower bound. In this case, it can help to lay out the conditions for rate lift-off in a way that hedges against false positives and prevents a premature tightening, and thereby reduces uncertainty about the future path of rates.

However, one of the lessons of the recent period is that such guidance can become less helpful when uncertainty about the nature of the shocks is rising. In particular, some of the lift-off criteria we applied to our 2021 rate forward guidance were tied to the baseline inflation projections, but the projections were slow in catching on to the reality of a much more persistent inflation shock.

The combination of factors that created this shock - a worldwide pandemic producing bottlenecks in various sectors upon reopening and a major energy crisis - had not been seen since the end of the World War One. But with hindsight, it would have been beneficial in our forward guidance to explicitly account for the risks and uncertainty surrounding the baseline.

A general conclusion emerges: when the size and distribution of shocks becomes highly uncertain, we cannot provide certainty by committing to a particular rate path. Otherwise, forward guidance may constrain policy agility in the face of abrupt changes to the inflation environment.

But we can provide clarity about our reaction function. We can still help the public to understand how we will navigate the new environment.

First, we can clarify how we are likely to be affected by different states of the world.

Since the pandemic, the ECB has been making greater use of scenario analysis and sensitivity analysis precisely to make our policy more robust to changing circumstances. These exercises, together with our discussion of the balance of risks, are designed to ensure that policymaking can remain forward-looking and stay ahead of the shocks to come.

At present, we are considering various scenarios related to tariffs and fiscal policy changes, and what they will imply for growth and inflation. [ ] 15

Second, we can clarify what kind of data we will look at to make our decisions, which helps the public to distinguish signals from noise. This is why in March 2023 we set out three key inputs for policy decisions:

the inflation outlook - comprising both the baseline and risks around it - the dynamics of underlying inflation and the strength of monetary policy transmission.

In the early phase of our rate tightening, before these criteria were introduced, we saw large monetary policy shocks - linked both to rate decisions and indications on future rates - as markets were looking for orientation. But after March 2023, market moves were less pronounced despite similar levels of interest rate uncertainty, which suggests that the markets better understood our reaction function.

We also saw increased sensitivity to new data releases in the early tightening phase. But this diminished as markets understood which data we were focusing on and, especially, that data dependence should not be confused with 'data-point dependence'. [ ] 16



The lesson I draw is that laying out a clear reaction function is critical to tempering volatility in a world of exceptional uncertainty. The public must understand the distribution of possible outcomes ahead and how the central bank will react once it is sufficiently confident about which scenario it is facing.

In this way, clarity on the reaction function can be seen as providing framework guidance - i.e. a type of guidance that comes from the discipline implicit in a monetary policy framework - without pre-committing to any particular rate path, as the latter would excessively constrain agility.

The three inputs we are currently using are designed to deliver robust policy in the face of the particular constellation of shocks that have hit the euro in recent years, especially the staggered pass-through of a large inflation surge to wages. Whether we continue to use those same inputs in future will depend on the nature of the shocks that confront us.

Our strategy assessment should nonetheless commit to integrating risk and uncertainty about key factors into our reaction function. The data we draw on should capture not only our central projection for the economy, but also the uncertainty surrounding that projection and a rich, diverse set of risks.

## Conclusion

Let me conclude.

Thomas Jefferson said that 'eternal vigilance is the price of liberty'. The same can be said of stability.

Maintaining stability in a new era will be a formidable task. It will require an absolute commitment to our inflation target, the ability to parse which types of shocks will require a monetary reaction and the agility to react appropriately.

Our response to the recent inflation episode should give the public confidence that we will always do whatever is necessary to deliver price stability - and that our policy frameworks can adapt to new circumstances.

Central bankers will need to show agility to adjust their stance and their tools to changing circumstances, and they will need intellectual curiosity to challenge established principles and conventional wisdom.

Index based on Caldara, D., Iacoviello, M., Molligo, P., Prestipino, A. and Raffo, A. (2020), 'The economic effects of trade policy uncertainty', Journal of Monetary Economics , Vol. 109.

2.

Iacoviello, M., Wells, L., Yang, W. and Nate, S., 'Geopolitical Risk Index' (accessed on 10 March 2025).

3.

See Aldasoro, I., Doerr, S., Gambacorta, L. and Rees, D. (2024), 'The impact of artificial intelligence on output and inflation', BIS Working Papers , No 1179, Bank for International Settlements, April; and Lis, E., Nickel, C. and Papetti, A. (2020), 'Demographics and inflation in the euro area: a two-sector New Keynesian perspective', Working Paper Series , No 2382, ECB, March. For an alternative view on the effects of ageing on inflation, see Goodhart, C. and Pradhan, M. (2020), The Great Demographic Reversal , Palgrave Macmillan.

4.

Attinasi, M.G. et al. (2024), 'Navigating a fragmenting global trading system: insights for central banks',

Occasional Paper Series , No 365, ECB.

5.

ibid.

6.

Arce, O., Koester G. and Pierluigi, B. (2022), 'Challenges for global monetary policy in an environment of high inflation: the case of the euro area', ICE: Revista de Economía , No 929, pp. 115-130.

7.

Dedola, L., Henkel, L., Höynck, C., Osbat, C. and Santoro, S. (2024), 'What does new micro price evidence tell us about inflation dynamics and monetary policy transmission?', Economic Bulletin , Issue 3, ECB.

8.

Bobeica, E., Holton, S., Huber, A. and Martinez-Hernandez, C. (2025), 'Beware of large shocks! A nonparametric structural inflation model', forthcoming.

9.

For details on data allowing an analysis of the frequency of wage-setting in the euro area, see Górnicka, L. and Koester, G. (eds.) (2024), 'A forward-looking tracker of negotiated wages in the euro area', Occasional Paper Series , No 338, ECB.

See De Santis, R.A. and Tornese, T. (2023), 'Energy supply shocks' nonlinearities on output and prices', Working Paper Series , No 2834, ECB. This pattern holds more generally for central banks in advanced economies; see Hofmann, B., Manea, C. and Mojon, B. (2024), 'Targeted Taylor rules: monetary policy responses to demand- and supply-driven inflation', BIS Quarterly Review , Bank for International Settlements, December, pp. 19-36.

11.

Deutsche Bundesbank (2024), 'The global disinflation process and its costs', Monthly Report , July. See also Christoffel, K. and Farkas, M. (2025), 'Monetary policy and the risks of de-anchoring of inflation expectations', forthcoming.

Lagarde C. (2024), 'Monetary policy in an unusual cycle: the risks, the path and the costs', introductory speech at the opening reception of the ECB Forum on Central Banking in Sintra, Portugal, 1 July.

12. 13.

Karadi, P., Nakov, A., Nuño, G., Pasten, E. and Thaler, D. (2024), 'Strike while the Iron is Hot: Optimal Monetary Policy with a Nonlinear Phillips Curve', CEPR Discussion Paper , No 19339, CEPR Press, Paris &amp; London, 9 August.

14.

Lane, P.R. (2024), 'The effectiveness and transmission of monetary policy in the euro area', contribution to a panel at the Federal Reserve Bank of Kansas City Economic Symposium, Jackson Hole, 24 August. 15.

In addition, there needs to be clarity that the central bank will respond appropriately in the event of large market disruptions. The ECB has a strong track record in providing liquidity during financial stress episodes and has two backstop instruments in its toolkit (the Outright Monetary Transactions and the Transmission Protection Instrument). In turn, investor confidence in the liquidity policies and backstop instruments of the ECB acts as a self-stabilising force by limiting incentives to 'run for the exit' during stress periods.

16.

Lagarde, C. (2024), op. cit. and the Q&amp;As during the September 2024 and October 2024 press conferences are prominent examples.

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## Media contacts

Copyright 2025, European Central Bank",Christine Lagarde
https://www.bis.org/review/r250311h.htm,Victoria Rodríguez Ceja: Future challenges for monetary policy in the Americas,"Remarks by Ms Victoria Rodríguez Ceja, Governor of Bank of Mexico, at the BIS Chapultepec Conference, Mexico City, 5 February 2025.",2025-02-05 00:00:00,"## Victoria Rodríguez Ceja: Future challenges for monetary policy in the Americas

Remarks by Ms Victoria Rodríguez Ceja, Governor of Bank of Mexico, at the BIS Chapultepec Conference, Mexico City, 5 February 2025.

* * *

Good afternoon. First of all, I would like to thank the BIS and its Representative Office for the Americas for the invitation to participate in this panel.

Let me start by saying that Banco de MØxico's monetary policy conduct has focused at all times on the accomplishment of our priority mandate of price stability. When global shocks derived from the pandemic and the war in Ukraine, led to a clear and pronounced upward inflationary trend, a clearly restrictive monetary policy stance was attained as required by the severity of the episode.

The hiking cycle was concluded when the disinflation process started and made progress due to the fading of the effects of global shocks and the actions of monetary policy implemented. Later, as disinflation advanced, the inflationary outlook called to start reducing the monetary tightening, and we decided to initiate this process gradually.

Throughout last year, although headline inflation was affected by the non-core component volatility, it located at 4.21% in December. This reading was the lowest for a year end since 2020. Later, it declined to 3.69% in the first fortnight of January 2025. On the other hand, core inflation kept declining during 2024. Its evolution confirmed the noticeable improvement to resolve the inflationary episode originated by global shocks.

Core inflation has located around its pre pandemic historical average for the 2003-2019 period according to the most recent data. The permanent inflation target was defined at the start of that period. In the first fortnight of January 2025 core inflation stood at 3.72%. Regarding its components, merchandise inflation has reached particularly low levels, clearly below those previous to the pandemic. Moreover, services inflation, although it remains at relatively high levels, it has already shown gradual reductions. This suggests that disinflation would be, to a greater extent, generalizing further.

Going forward, headline inflation is expected to converge to the 3% target in the third quarter of 2026, and core inflation to reach that level in the second quarter of that year. These forecasts are subject to risks. The persistence of core inflation stands out, although this risk has moderated due to the lower levels of inflation observed. Moreover, we are monitoring the risk of the exchange rate depreciation to prices, but this effect could be lower than anticipated due to the economic activity weakness.

We are currently at a phase in which the challenge is to bring inflation down from its current level, similar to its historical average, as I previously mentioned, to the 3% target. We consider that this is consistent with a lower level of the reference rate relative to that demanded due to global shocks, although the monetary stance still should remain restrictive.

The Board estimates that looking forward it could continue calibrating the monetary policy stance and consider adjusting it in similar magnitudes. It anticipates that the inflationary environment will allow to continue the rate cutting cycle, albeit maintaining a restrictive stance.

Without losing sight of the fading of global shocks, the progress in disinflation and the levels already reached by headline and core inflation, we will remain vigilant to current challenges in upcoming meetings. In that regard, we are facing the uncertainty related to the potential effects of policies that the new American administration may adopt.

Given our high economic integration with the U.S., if policies affecting trade and financial flows between the two countries materialize, it would have consequences for the macroeconomic conditions of our country. The effect on Mexico's economic activity would be negative while those on inflation would have counteracting outcomes. Although greater economic weakness would tend to moderate price pressures, a greater exchange rate depreciation could generate upward pressures on inflation. In this sense, inflationary pressures could be observed both to the downside and to the upside.

The challenges that the Mexican economy will face in 2025 highlight the importance of having solid macroeconomic fundamentals, as they allow facing such events from a position of resilience. Mexico stands out among emerging economies for the strength of its macroeconomic framework./ In this regard, several macroeconomic pillars of the country stand out: i) external accounts are sustainable; ii) an adequate level of international reserves that may be complemented with resources from the Flexible Credit Line contracted with the IMF; iii) the banking system maintains a solid position in terms of liquidity and capitalization; iv) a significant fiscal consolidation was approved for 2025 with the aim of maintaining the soundness of public finances; v) the country has a flexible exchange rate regime which operates as a shock absorber. The latter has allowed us to focus fully and with a long-term perspective on achieving and preserving an environment of low and stable inflation.",Victoria Rodríguez Ceja
https://www.bis.org/review/r250313a.htm,Andriy Pyshnyy: National Bank of Ukraine press briefing - monetary policy decisions,"Speech by Mr Andriy Pyshnyy, Governor of the National Bank of Ukraine, at a press briefing on monetary policy decisions, Kyiv, 6 March 2025.",2025-03-06 00:00:00,"## Andriy Pyshnyy: National Bank of Ukraine press briefing - monetary policy decisions

Speech by Mr Andriy Pyshnyy, Governor of the National Bank of Ukraine, at a press briefing on monetary policy decisions, Kyiv, 6 March 2025.

* * *

Dear colleagues,

The Board of the National Bank of Ukraine has decided to raise the key policy rate to 15.5% per annum and to adjust the operational framework parameters of its interest rate policy. These decisions aim to support the attractiveness of hryvnia savings, maintain the sustainability of the FX market, and keep inflation expectations in check, which will allow bringing back the steady disinflation trajectory toward the 5% target. The NBU stands ready to take additional monetary measures if risks to the price dynamics and inflation expectations continue to rise.

As expected, inflation continued to increase at the start of the year, including due to the stronger impact of underlying factors

In January, inflation accelerated to 12.9%. In February, it continued to rise, according to the NBU's estimates. Temporary factors were the main drivers behind the increase in consumer inflation. Such trends had been expected and were generally in line with the NBU's forecast.

At the same time, the impact of underlying inflationary factors increased as businesses' expenses on energy and wages continued to pass through to prices and as consumer demand remained rather strong. As a result, core inflation grew rapidly and outpaced forecast estimates, especially in terms of the services component.

Economic agents' inflation and exchange rate expectations were mixed but generally remained relatively sustainable. This was supported by the NBU's previous measures to safeguard the sustainability of the FX market and protect hryvnia savings from inflation.

These measures resulted in lower volumes of net FX purchases by businesses and households in February, as well as in sustained demand for hryvnia savings instruments.  Households' inflation expectations improved at the start of the year.

At the same time, the statistics of search queries show that attention to inflation remains high. Given a potentially long-lasting period of high inflation readings, this could negatively affect inflation expectations and make price pressures more persistent.

The NBU's measures will help bring inflation down to its 5% target over the policy horizon

Inflation will rise in the coming months due to continued effects of last year's lower harvests and increases in businesses' production costs. At the same time, measures taken by the NBU to tighten its monetary policy will rein in underlying inflationary

pressures, and the arrival of new harvests in the summer will restrain the growth in food prices.

Thanks to the NBU's measures and the gradually waning effects of temporary drivers of price growth, inflation should return to the downward trajectory in H2 and decline to single digits at the end of the year. Inflation will decline to the 5% target over the policy horizon.

Expected volumes of international support will be sufficient to finance the budget deficit without resorting to monetary financing, and to maintain the sustainability of the FX market

Ukraine continues to receive international support. G7 countries disbursed the first tranches of assistance to Ukraine under the ERA Loans program. In late February, Ukraine also reached a staff level agreement with the IMF on the seventh review of the Extended Fund Facility.

Risks to the sufficiency of international financing remain balanced. The volumes of external support confirmed for this year should be enough for both non-monetary financing of the budget deficit and maintaining an adequate level of international reserves. This will enable the NBU to continue to ensure a sustainable situation in the FX market and keep inflation and exchange rate expectations under control.

The course of the war remains the key risk to inflation and economic development

The war is grinding on and continues to pose the risk of a further decline in economic potential, in particular due to the loss of people, territories, and production facilities. The speed of the economy's return to normal functioning conditions will depend on the nature and duration of hostilities.

At the same time, geopolitical uncertainty has increased. This is elevating war-caused risks, such as:

- the emergence of additional budget needs, mainly those to maintain defense capabilities
- further damage to infrastructure, especially energy infrastructure, which will restrain economic activity and put pressures arising from production costs on prices
- a deepening of adverse migration trends and a further increase of labor shortages on the domestic labor market.

In addition, the risks of less favorable foreign economic trends than currently expected have increased, in particular due to further geopolitical polarization of countries and the corresponding fragmentation of global trade.

On the other hand, positive scenarios could also materialize. They are primarily related to increased financial support from partners and the international community's efforts to ensure a just and lasting peace for Ukraine. A further acceleration of European integration processes and the rebuilding of infrastructure, including energy infrastructure, are also possible.

To maintain FX market sustainability, keep expectations under control, and to gradually bring inflation back to its 5% target over the policy horizon, the NBU Board decided to raise the key policy rate by 1 pp, to 15.5%

The NBU's previous measures to tighten its interest rate policy halted the downward trend in hryvnia deposit rates, while interest rates on hryvnia domestic government debt securities responded quite strongly to the key policy rate hike. This supported demand for hryvnia instruments. At the same time, a further tightening in monetary conditions is required to reverse the inflation trend.

Therefore, from 7 March 2025, the NBU will raise its key policy rate and other rates for its transactions with the banks by 1 pp, in line with its January forecast. With the FX market remaining sustainable, this step will help to further support demand for hryvnia savings instruments, keep inflation expectations under control, and thus limit pressures on prices.

In addition, to make hryvnia savings more attractive, the NBU is amending the parameters of the operational framework of its interest rate policy. More specifically, from 4 April 2025:

- the spread between the key policy rate and the interest rate on three-month certificates of deposit will be increased by 1 pp
- the key policy rate and the interest rates on refinancing loans will be also raised by 1 pp
- the NBU will provide greater opportunities for banks to place funds in three-month certificates of deposit, depending on how well they expanded their portfolios of hryvnia retail deposits with a maturity of more than three months.

The above measures will bolster the market incentives that encourage the banks to raise hryvnia retail term deposits. This will ensure continued growth in interest rates on term hryvnia instruments, thus more strongly protecting hryvnia household savings from being eroded away by inflation. As a result, the risks to price movements, the FX market, and international reserves are expected to decline.

The NBU stands ready to take additional measures if risks to the price dynamics and inflation expectations continue to rise

Stronger-than-expected pressure from underlying factors and higher pro-inflationary risks are increasing the risk that inflation expectations will worsen and that inflation will remain high for longer.

This raises the likelihood that the NBU will start a cycle of key policy rate cuts later than expected in the January macroeconomic forecast.

In addition, if inflationary risks continue to rise, the NBU will not hesitate to tighten its interest rate policy further.

Thank you for your attention!",Andriy Pyshnyy
https://www.bis.org/review/r250319m.htm,"Denny H Kalyalya: Think before you follow, safeguard your money  ","Speech by Dr Denny H Kalyalya, Governor of the Bank of Zambia, at the Launch of the 2025 Financial Literacy Week, Lusaka, 17 March 2025.",2025-03-17 00:00:00,"## Denny H Kalyalya: Think before you follow, safeguard your money

Speech by Dr Denny H Kalyalya, Governor of the Bank of Zambia, at the Launch of the 2025 Financial Literacy Week, Lusaka, 17 March 2025.

* * *

Permanent Secretary, Southern Province, Dr Namani Monze The District Commissioner, Mazabuka District, Mr Oliver C. Mulomba All Senior Governmental officials Chief Executive Officers of Financial Sector Regulators - PIA and SEC All Chief Executive Officers of Financial Services Providers All Cooperating partners Invited Guests Ladies and Gentlemen

## Good morning

I am delighted to extend a warm welcome to all of you joining us for the launch of this year's public awareness campaign for the Financial Literacy Week. This launch event was pre-ceded by the broadcasted message from the Minister of Finance and National Planning, on 16 March 2025. The FLW activities will take place from March 17 to 23, 2025, in all the 10 provinces of the Republic of Zambia. For the first time since we started to commemorate Financial Literacy Week, the event is being launched away from Lusaka, in Mazabuka, Southern Province. I commend the organizers for this change and I hope that future launch events will be held in different provinces every year.

The theme for this year, ""Think before you follow, safeguard your money,"" aligns with the official theme of the 2025 Global Money Week and has been adopted for the Financial Literacy Week in Zambia.

This year's theme underscores the importance of adopting an informed, responsible, security-conscious approach to managing personal finances. Therefore, individuals are encouraged to be mindful of potential risks in the financial sector and take steps to protect their hard-earned money. These risks include financial scams, fraud, theft, pyramid schemes, cyber-attacks, and other threats related to data privacy. In line with this year's theme, I urge consumers of financial services and products to actively safeguard their money by engaging only with licensed financial service providers. I also encourage you to be cautious about sharing financial information as well as diligently protect your personal data. Avoid sharing sensitive financial information, such as account numbers or passwords, with unknown individuals or over unsecured platforms. Additionally, be vigilant for phishing schemes, and be sceptical of unsolicited emails, messages, or phone calls requesting personal or financial information.

Finally, I encourage you to report any suspicious financial requests or digital invitations to the authorities, such as financial service providers (FSPs), ZICTA, or the Police.

Ladies and Gentlemen, financial literacy initiatives continue to focus on young people in primary, secondary, and tertiary institutions as well as adults, with the aim of equipping

future generations with the essential knowledge needed to make informed financial decisions for their financial well-being.

In this regard, financial education has been incorporated in the national school curriculum and financial literacy initiatives continue to be undertaken in collaboration with the Ministry of Education.

Esteemed Guests, we firmly believe that the development and execution of national strategies concerning financial education and inclusion have established a robust framework that facilitates effective engagement among various stakeholders, including the Government, financial sector regulators, financial service providers, and the general public. This collaborative effort has led to heightened awareness campaigns among the public regarding the availability and safe usage of financial products and services nationwide. Strengthening financial literacy among consumers would enable them to identify financial scams, fraudulent activities and avoid biased advice, thus helping them to make better financial decisions to safeguard their future well-being. In this regard with the conclusion of the National Strategy on Financial Education II (2019-2024), the Ministry of Finance and National Planning, along with the Bank and other financial sector regulators, have begun the process of conducting a comprehensive review of the strategy. The review will assess the progress, successes, and challenges of NSFE II, and guide the development of phase III of the N S F E.

Ladies and Gentlemen, in order to measure the strides that have been made in advancing financial education and financial inclusion in the country, I would like to inform you that a multisectoral project team has been established to conduct the 2025 FinScope Survey and disseminate topline findings by the end of this year.

FinScope surveys are invaluable tools for understanding the financial landscape of a country and developing targeted financial education and financial inclusion strategies. The survey provides information on access and usage of financial services (formal /informal), barriers encountered, financial literacy and overall financial inclusion. Enumerators will conduct interviews across all ten provinces, so we appeal to you, the public, to provide them with the necessary support.

Distinguished Guests, before I conclude, let me take this opportunity to remind you that the Bank of Zambia announced the introduction of a new family of Zambian Currency on Monday, 10 February 2025 (pursuant to section 17(1) of the Bank of Zambia Act, 2022).

The initiative reflects the Bank's commitment to providing currency that is secure, efficient, user friendly and well suited for everyday transactions. The new notes also offer advanced security features to protect against counterfeiting and other threats to the integrity of the currency. A nationwide awareness campaign is currently being conducted to sensitize the public about the new currency. Further, the Minister of Finance and National Planning will soon issue an SI to provide details for the process of exchanging the old currency for the new series, scheduled to commence on 31 March 2025.

As we carry out the 2025 Financial Literacy Week provincial activities, I encourage the campaign teams and financial service providers to continue to educate the public about

the new family of Zambian Currency to prevent people being defrauded by unscrupulous people who may take advantage of this change. The Bank of Zambia team will also be available to provide information and distribute awareness materials that highlight the key features of the new currency.

Dear Invited Guests, in conclusion, it is important to acknowledge that as part of the implementation of the National Strategy for Financial Education, Financial Literacy Awards are held annually in October. These awards aim to recognize the efforts of individuals and institutions in conducting financial literacy awareness initiatives. Therefore, I urge you to submit your financial literacy activities and initiatives to the Financial Literacy Working Group for consideration in this year's awards.

Once again, I extend my gratitude to the Working Group under the National Strategy on Financial Education Phase II for organizing the Financial Literacy Week activities. I particularly commend the Ministry of Finance and National Planning Financial Education Team, along with other financial sector regulators such as the Pensions and Insurance Authority and the Securities and Exchange Commission. I also wish to applaud the Bankers Association of Zambia, and our collaborating partners DSIK (the German Sparkassenstiftung) Zambia, as well as all other stakeholders who have consistently supported the Financial Literacy Week commemorations each year.

The Bank of Zambia remains steadfast in its commitment to supporting this national event, and we encourage all financial institutions and stakeholders to actively participate in the Financial Literacy Week activities nationwide.

THANK YOU FOR LISTENING MAY GOD BLESS US ALL.",Denny H Kalyalya
https://www.bis.org/review/r250319l.htm,Luke Forau: Launch of the new $1 coin,"Keynote address by Mr Luke Forau, Governor of the Central Bank of Solomon Islands, at the launching of the new $1 coin featuring King Charles III Effigy, Honiara, 13 March 2025.",2025-03-13 00:00:00,"## Luke Forau: Launch of the new $1 coin

Keynote address by Mr Luke Forau, Governor of the Central Bank of Solomon Islands, at the launching of the new $1 coin featuring King Charles III Effigy, Honiara, 13 March 2025.

* * *

Minister of Finance &amp; Treasury Hon Manase D Sogavare, Ministry of Finance and Treasury

CBSI Board of Directors Heads and Representatives of the Financial Institutions Members of the Press - both radio and print Our business partner from Royal Australia Mint (Not present here today) CBSI Executives, managers and staff CBSI Currency Taskforce Good people of Solomon Islands

Friends, Ladies &amp; Gentlemen

Gud Fala Morning Lo Iufala Evriwan who are here today, including those who are turning in today from SIBC.

It gives me great pleasure to welcome you all this morning, a special welcome to the Minister of Finance and Treasury, to witness yet another milestone in the Central Bank's history - the launch of the New SI $1 circulation coin with the new effigy of His Majesty, ""King Charles III"" which the Minister is going to declare it later on, and will be released into circulation as of today, 13 th   March 2025.

## Let me briefly take you back to our currency history that we journey before SI Independence in July 1978.

Before Solomon Islands gained Independence on 7 th   July 1978, the British Solomon Islands Protectorate has had its own currency notes and coins, which were first issued on 24 th   October 1977, using Her Majesty Queen Elizabeth's Effigy. I suppose this is one of the prerequisites for a nationhood. And FYI, the Central Bank was established in 1976, then it was called Solomon Islands Monetary Authority (SIMA).

In November 2011, for strategic reasons CBSI ceased all its currency coins agreement with the British Royal Mint and signed a new Agreement with the Royal Australia Mint Ltd (RAM) for the minting of all SI Circulation Coins &amp; Numismatic Programs

In June 2012, the Central Bank issued its first Circulation coins minted by the Royal Australian Mint Ltd, totalling SBD$25.7m.

Today, this currency development continues as we come to witness yet another new circulation bank coin that marks a new reign in the line of Thrown replacing the obverse of the coin which features the effigy of Her Majesty Queen Elizabeth II to a new Effigy of His Majesty King Charles III 2025.

## Let me turn to the new effigy of His Majesty King Charles III on the $1 SI circulation coin

As you may have already probably aware, the CBSI had recently pre-launched and unveiled the new King Charles effigy on the $1 coin to international media at the Royal Australia Mint Ltd in Canberra, in October 2024, via a Bank Industry News Media Release.

The coin, now set to be launched today (13 th   March 2025), represents a historic milestone in the journey of Solomon Islands' modern currency development and a continuation of our ongoing relationship between Great Britain and Solomon Islands and between CBSI and its supplier, the Royal Australian Mint Ltd

The new $1 coin will retain the same dimension (size and shape) with the beloved Nguzu Nguzu motif on its reverse, symbolizing good luck and protection, while the obverse will feature the new effigy of King Charles III designed by Daniel Thorne ( ). DT The inclusion of the effigy marks the first Solomon Islands coin to commemorate His Majesty's reign, combining traditional elements with this fresh design to celebrate the nation's heritage and monarchy.

The new coin is more than a currency; it is a symbol of the Solomon Islands' history, culture, and its ties to the Commonwealth. This design honors both our traditions and a shared value that the nations of the Commonwealth uphold in recognition of the monarchy.

The coin will be officially launched and will become available through the commercial banks and its branches as of this afternoon and the coming days. CBSI will also conduct special promotional events and educational campaign to familiarize the public with the new effigy. It is important to differentiate the significance of the New King's Effigy as compared to the Queen Effigy. The New King Charles' III Effigy when looking at the coin obverse, will be facing to the Left while the Queen's Effigy will be facing to your Right

This latest collaboration with the Royal Australian Mint continues our long-standing partnership between the Solomon Islands and Australia, showcasing the shared values and excellent business relationship of both nations.

## What to look for on the new bank coin:

## Front Design:

As alluded earlier, this new $1 coin will retain the same dimension (size, shape and aluminum bronze color) with the obverse featuring the new effigy of King Charles III designed by Daniel Thorne ( ). DT

## On the Back Design :

The new $1 coin also retain the same design with the famous Nguzu Nguzu motif on its reverse, that symbolizes good luck and protection, so there is no change to the reverse side of the coin at all.

As a market currency, this bank coin will be highly used in daily transactions because of its fitting face value for smaller payments for all retailers both in rural and urban areas.

The new and colourful bank coin will join more than $46.8 million worth of coins already in circulation as at end of December, 2024.

## Cost of Printing Banknotes

Allow me to now remind all our good people of Solomon Islands that the Central Bank spends a lot of money each time it prints or mints new currencies.  It costs the Central Bank around SBD3.4 million to get the new $1 coin with the new effigy from our supplier. The average life of the $1 coin is estimated at over 20 to 25 years before they become worn out to be used anymore.

So, I believe the current $1 coins circulating in your pockets and wallets right now is around 13 years old and are still in very good or good conditions.  Our current stock of the new $1 coins should last more than 3 years.

Statistics however show that the frequency of coins being issued to public through our commercial banks are excessively high due to coins being seen on a very high ONEWAY Traffic for reasons that are not quite clear to us at the Central Bank. But we believe individuals and business houses could be keeping those coins in their small piggy banks and were not allowed to circulate.

The more you hold to the coin and not circulating it through transactions, it reduces the multiplier effect that should have occurred. This causes shortage in coins, triggering CBSI to reorder coins more frequently from the supplier to ensure we have sufficient supply of quality coins to meet business and public demand. This further depletes our foreign reserves just to procure new currency notes or coins. We obviously do not want that to happen but it is happening.

Hence, I appeal to the people of Solomon Islands that you USE your new coins with extra care and pride but we would also advice you all to ensure that you do circulate the coins once it comes around your way to facilitate small changes in the trades of goods and services.

## Again, our advice is : Do not store them away in containers, piggy banks or hide them under mattresses.

Finally, I would like to thank the technical team from the Royal Australia Mint Ltd, for assisting CBSI in the design, formalities and production of our bank coins. Our partnership relationship with RAM, Australia had been now well around 13 years so this is indeed a unique occasion for both CBSI and RAM.

We would also like to thank the CBSI Board of directors, Minister of Finance and Solomon Island Government and other stakeholders in ensuring the legislative procedures and arrangements are fully in compliance and to the success of this project milestone. Thank you too to all the Heads of Financial Institutions witnessing the launch for this morning as the main channel of our currency distributions.

Final acknowledgement goes to my team the Currency Launch Taskforce, Currency &amp; Banking Services Department and the CBSI Management team for their coordinated job well done in  making this a success.

## Official Launch

Now, ladies and gentlemen, I now have the pleasure to invite the Hon Minister of Finance and Treasury (Hon Manasseh D Sogavare) to unveil the new $1 coin with the new effigy of His Majesty King Charles III 2025.",Luke Forau
https://www.bis.org/review/r250319k.htm,Caroline Abel: Women in environment and climate finance,"Opening remarks by Ms Caroline Abel, Governor of Central Bank of Seychelles, at the British High Commission Women's Forum ""Women in environment and climate finance"", Victoria, 13 February 2025.",2025-02-13 00:00:00,"## Caroline Abel: Women in environment and climate finance

Opening remarks by Ms Caroline Abel, Governor of Central Bank of Seychelles, at the British High Commission Women's Forum ""Women in environment and climate finance"", Victoria, 13 February 2025.

* * *

Minister Rose-Marie Hoareau, H.E High Commissioner Mr. Jeffrey Glekin, Distinguished Guests, Ladies and Gentlemen,

## Good morning,

It is an honour to be here with you today. Our gathering indicates that the pilot edition of the British High Commission's Women's Forum launched last year was a success. I take this opportunity to congratulate you, High Commissioner, and your dedicated team for ensuring that this second edition takes place. This forum serves as a platform for knowledge exchange, policy assessment and a valuable space for women in Seychelles to collaborate and drive impactful change. By incorporating discussions on climate finance and gender inclusivity, we reaffirm our commitment to fostering equitable and sustainable solutions for our nation.

As we all know, Seychellois women are not only represented in all aspects of life, but are successful in their own rights. When we look at the context of our society, according to official statistics, women in managerial positions make up 42 per cent of the workforce. Those in senior and middle management roles, make up an impressive 40 per cent of the workforce. In the National Assembly, 21 per cent of seats are held by women. This is testament to the strength, capability, and leadership qualities of our Seychellois women. We have to keep encouraging the younger generation to take every opportunity that arises, to break barriers and push towards greater heights. Seychelles might be small in size, but our ambitions are boundless.

Given Seychelles' unique characteristics, we are all in one way or another, connected to the environment. It fuels the very foundation of our economy. Tourism and fisheries our two main economic pillars, thrive because of our natural resources. As we move forward, we must be mindful of our most pressing reality: Climate Change. It is not just a future threat; it is a present challenge, and one that poses long-term sustainability risks to our environment, our economy, and our way of life. We all have a shared responsibility to act on it. We must understand that climate change is not just an environmental issue, but also a social and economic issue. It affects our communities, our industries, and our livelihoods. We see it in the frequency of natural disasters heavier monsoon rains, floods, landslides, and coastal erosion. These disasters highlight the urgent need for robust climate adaptation measures, sustainable financing, and enhancements in disaster risk management.

While climate change is indeed a threat, let us not view it only as that. Within the challenges lie opportunities. This is our moment to innovate for a more progressive economy in a way that is sustainable for our planet. This is our opportunity to explore

and invest in green and blue business ventures. We have seen a shift internationally, where global environmental policies are reshaping economies. The demand for fossil fuels will most probably decline as more nations commit to their national climate action plans on reducing greenhouse gas emissions, and adapting to the impacts of climate change. To echo the words of a colleague from the National Bank of Angola, as said in a monetary policy and climate change workshop held last month, ""In order to progress, we must adopt and adapt"".

As the country implements reform measures under the Resilience and Sustainability Facility, we are committed to integrating climate resilience into our financial system. This is a step towards not just economic stability but long-term sustainability. We will discuss further on this programme that is being implemented with the support of the IMF later during the day.

The journey ahead is not without obstacles, yet we remain optimistic. We are a nation that denotes the very definition of resilience, and I firmly believe that if we all play our part, no matter how small it may seem, together we can accomplish great things.

As we move forward in today's discussions, I encourage each of you to contribute, engage, and explore new avenues for climate finance that can create lasting change. Let this be a moment where ideas turn into action, policies into practice, and collaboration into concrete results.

I look forward to your insights on climate finance throughout the day.

Thank you.",Caroline Abel
https://www.bis.org/review/r250319j.htm,Sanjay Malhotra: Transforming grievance redress – the AI advantage,"Inaugural address by Mr Sanjay Malhotra, Governor of the Reserve Bank of India, at the Annual Conference of the RBI Ombudsmen, Mumbai, 17 March 2025.",2025-03-17 00:00:00,"## Sanjay Malhotra: Transforming grievance redress - the AI advantage

Inaugural address by Mr Sanjay Malhotra, Governor of the Reserve Bank of India, at the Annual Conference of the RBI Ombudsmen, Mumbai, 17 March 2025.

* * *

I am delighted to participate in this year's Annual Conference of the RBI Ombudsmen. The Reserve Bank has been organising this conference on or around the World Consumer Rights Day, that is, 15th March. World Consumer Rights Day is celebrated every year with the aim of raising global awareness about consumer rights and needs. We organise this conference to reflect on our achievements with regard to consumer services and to deliberate on how to improve services and reduce grievances. We need to improve consumer services, not only because it is our duty to do so, but because it is in our selfish interest to do so. In this age of competition, we would not survive long if we do not provide quality service to our consumers.

We have made tremendous strides in improving consumer services over the years. We have enabled internet banking and mobile banking. Most of the banking services, be it opening a deposit account, or taking a small loan have been digitised, adding to the convenience and speed. We are making record number of digital transactions through UPI and other means of digital payments. Many among the younger generation may have never visited a bank branch. We have even enabled opening of accounts using video KYC.

While we have enhanced customer experience over the years, the high number of customer grievances continues to be a matter of serious concern. I am told that last year (2023-24), the 95 Scheduled Commercial Banks alone received over 10 million complaints from their customers. If we take into account the complaints received at other RBI-regulated entities (REs), the number would be even higher. One may argue that this amounts to only four complaints per thousand accounts per year as there are about 2.5 billion bank accounts. But, for us, even one complaint is a cause of concern. We have 10 million complaints and with the rapidly growing customer base and expanding suite of products, this may grow, if we do not get our act together.

## Customer satisfaction - a cornerstone for banking and other financial services

Excellent customer service, in fact excellent customer experience is a in sine qua non any service industry. Our effort should be to enhance the total customer experience. The experience should be such that there is no cause for a grievance that requires a redress. Let me state a fundamental truth: every complaint is a test of trust. When a consumer files a grievance - whether for a disputed transaction, a lapse in service, inappropriate pricing or charges or an unfair practice - it is a signal that our system has fallen short. Left unresolved, such issues can erode consumer confidence and tarnish the entire ecosystem.

I am reminded of a real story about customer service. Some of you, especially the management graduates, may have heard it but it is so appropriate for today's theme

that it is worth being retold. In the winter of 1975, in a town in Alaska, a man walked into a store and complained to the salesman present that the snow tyres that he bought some time ago were not holding. The salesman was a little puzzled. He said that he could not replace them but will check what he could do and went to the back of the store. Those of you, who have visited departmental stores in the USA, would know that refunds are processed at the back of the store. The salesman came back after some time and handed over some cash as refund and the customer left satisfied. Can anyone guess why this was unique, as no questions asked policy for refunds is fairly common in the USA? It is because the company in question is Nordstrom which does not even sell tyres. It sells apparel and shoes. But, for Nordstrom, customer comes first. Trusting him and winning his trust is more important than anything else.

Some say that this is not a true story. How is this possible? How could a company offer refund for a product which it never sold? Nordstrom, however, insists that this incident did take place. Nordstrom had acquired three stores from another company that sold miscellaneous articles including tyres. The customer did not realise that the store had changed and walked in with his complaint. The key message is that Nordstrom saw itself being in the business of customer service, and not just selling goods. We too need to realise that we are in the business of providing unalloyed customer service and not just selling banking and other financial services.

## Top management to accord priority to customer service

I am sure you will all agree that we are indeed in the business of customer service. However, I suspect that we are not spending enough time on customer service and grievance redressal as a result of which not only are there a large number of complaints being received by banks and NBFCs but in the absence of satisfactory resolution, a large number of them are getting escalated to RBI Ombudsmen.

Let me give you some perspective. The number of complaints received under RBI's Integrated Ombudsman Scheme increased at a compounded average growth rate of almost 50 per cent per year over last two years to 9.34 lakh in 2023-24. The number of complaints processed at the Office of RBI Ombudsman increased by 25 per cent from about 2,35,000 in 2022-23 to almost 2,94,000 in 2023-24. Not only are large number of complaints getting escalated, a large proportion of them - nearly 57 per cent of the maintainable complaints last year - required mediation or formal intervention by the RBI Ombudsmen. You would all agree that this is a highly unsatisfactory situation and needs our urgent attention.

I would, therefore, strongly urge all the MD&amp;CEOs, Zonal and Regional Managers and the Branch Managers to spend some time every week, if not every day on grievance redressal. This is a must. All great CEOs find time to do it. We too must keep some time in our diary for improving customer service and grievance redressal.

## Improving customer service systems

Customer complaints aren't a nuisance - they are in fact opportunities to improve, innovate, and build trust. Handling them well can define your success. Each unresolved grievance is a missed opportunity for regulated entities to reaffirm customer trust and loyalty. It is also a warning signal as repeat complaints are often signs of systemic

flaws. Today, complaints often surface on social media even before reaching official channels, highlighting the need for proactive measures.

The effort thus should be to not only resolve the complaints but also to ensure that the same type of complaint does not arise again. Many of the complaints like digital transaction disputes, unauthorized charges, or miscommunication frequently recur. These are clearcut symptoms of underlying issues in the overall customer service framework of the regulated entities. A thorough root cause analysis should be performed for each complaint so as to enable remedial action and avoid repetition of same type of complaint.

In fact, I would go a step further. Best service is not one in which there is no occasion for grievance redressal but one in which there is no occasion for the customer service department to step in. Systems should work seamlessly and conveniently so that customers do not have to call the branch or the customer service centre or talk to anyone in the Bank or NBFC. Systems have to be so user-friendly that customers can rely on self-service rather than being dependent on anyone else.

## Improving internal grievance redressal systems

While improving systems to reduce grievances is important, setting up a robust grievance redressal system is equally important for all regulated entities. I would urge you all to review the same. While the regulations do not make any prescription for the organisational structure for grievance redressal, my experience suggests that there should be at least two levels for grievance redressal in large REs, with unresolved grievances getting escalated from the lower to the higher level. The highest level should be at a fairly high rank. This to ensure that requests do not get rejected without having been examined by a senior functionary who is empowered to take decisions in consumer interest. This will help reduce grievances getting escalated to the Ombudsman. It must also be ensured that there are sufficient number of grievance redress officers at all levels including in the Internal Ombudsman office.

I would also like to draw your attention to the misclassification of complaints as requests, queries, and disputes by the regulated entities. This results in the complainants' grievances remaining unaddressed. Moreover, this is also a gross regulatory violation.

## Major areas of service improvement

Let me now briefly allude to some of the major areas where we need to improve. These relate to KYC, digital frauds, mis-selling, and aggressive recovery practices.

As for KYC, we need to ensure that once a customer has submitted documents to a financial institution, we do not insist on obtaining the same documents again. Once the customer has updated his details, for example, his residential address, with one regulated entity of any financial sector regulator, it gets updated in CKYCR and other REs are notified of the updation. PML Rules made by the Department of Revenue in the Ministry of Finance and RBI's Master Directions on KYC mandate regulated entities to check the CKYCR system before seeking KYC documents for opening an account. However, most banks and NBFCs have not enabled the same in their branches

/business outlets, causing avoidable inconvenience to customers. This may be facilitated early. This will be in the interest of all.

Another important issue connected to customer protection is rising digital frauds. It is a matter of great concern that innocent customers continue to fall prey to scamsters. While this could be attributed to rise in digital transactions and innovative methods adopted by fraudsters, lack of customer awareness is also a major reason for the same. To mitigate this menace, REs not only need to put in place robust internal controls but also enhance digital financial literacy.

The issues of mis-selling and aggressive recovery practices have been highlighted earlier too. In this context too, I would request you to keep consumer interest supreme.

## Embracing technology - the AI way

Let me now come to the theme of this year's conference: AI's potential to revolutionize grievance redressal. We are entering an exciting era where technology, particularly artificial intelligence (AI), can drive remarkable improvements in speed, accuracy, and fairness of complaint resolution.

AI can help categorize incoming complaints by urgency, complexity, or subject area, ensuring minimal delay in reaching the right people or the right team. AI can also help in optimising complaint routing. Further, it can assist in decision-making and reducing processing time.

Secondly, AI can be used to pinpoint systemic gaps by analysing both structured and unstructured data such as emails, chat logs, and call transcripts. This will aid in identifying training needs and guiding necessary process reforms. Using data from millions of consumer branch visits, call centre logs, mobile apps, and social media, a unified, AI-driven view of all these interactions can help identify common pain points more efficiently. Leveraging data analytics, sentiment analysis, and predictive models, AI can be used to analyse large volumes of data to detect spikes in issues - such as ATM failures or erroneous charges - and alert REs pre-emptively.

Lastly, in a linguistically diverse country like India, AI-driven chatbots and voice recognition tools can eliminate language barriers by operating in local languages. Moreover, the implementation of conversational AI in chatbots, voicebots, and advanced IVR systems can handle routine queries round the clock, thereby freeing people to focus on cases that require empathy and complex problem-solving.

In short, integrating AI at every stage - from complaint lodging to closure - can result in a seamless, efficient, and data-driven grievance redressal system. Such a framework not only reduces processing times and addresses repetitive complaints but also fosters equitable outcomes by mitigating human biases. It is time that the banking industry explores and pioneers the integration of technology - including AI - to strengthen the grievance resolution mechanisms and make it best in class across the globe.

## Challenges and guardrails in AI driven grievance redressal system

While AI presents unparalleled opportunities, we need to be cognizant of the challenges and risks that its adoption poses. There are concerns on data privacy, algorithmic bias and complexity in AI-driven models. As we embrace AI in grievance redressal or any other process, we must also remain mindful of ethical considerations. Human oversight, bias mitigation and data privacy must be integrated into the AI Systems to ensure transparent and consistent outcomes.

## Investing in human resources

While technology in all its forms is a powerful enabler, I would like to emphasise that it is no substitute for integrity, empathy, and human judgment. In a world increasingly driven by data, algorithms, and automation, it is all too easy to lose sight of the human element. Every transaction represents not just a number in a ledger, but the hardearned savings of a family, the dreams of a small entrepreneur, or the lifelong savings of a senior citizen. It is, therefore, critical that REs continue to invest in human resources dedicated for customer service and grievance redressal. It is essential to invest in training of staff, especially in behavioural aspects of customer service. Moreover, the staff needs to be empowered to take decisions based on their judgement to redress consumer grievances, enhance customer satisfaction and win consumer trust.

## RBI as a facilitator

In the end, I would like to assure you that, while we exhort you to provide services efficiently to customers, we in the Reserve Bank shall also provide various services, approvals, clarifications, etc. to the regulated entities in a timely manner. We already have a citizen's charter. We are in the process of reviewing the charter. We will make the charter comprehensive to include all services that we offer either to the REs or directly to citizens. Moreover, we are reviewing the timelines for each service. It will be our endeavour to provide all approvals, etc. within the timelines. We are also making mandatory the use of PRAVAAH, which is RBI's secure and centralised web-based portal for any individual or entity to seek authorisation, license or regulatory approval on any reference made to the Reserve Bank in a timely manner. This will help us in expediting the disposal of applications received by the Reserve Bank.

## Conclusion

We stand at a pivotal juncture as India looks to realise its dream of a more resilient and inclusive . With the financial sector touching the lives of almost the entire Viksit Bharat population, we have a critical role. To succeed in this role, we must continue to enhance customer service and customer protection.

Thank you !",Sanjay Malhotra
https://www.bis.org/review/r250319h.htm,Sarah Hunter: Monetary policy - forward looking and data dependent in the face of uncertainty,"Speech by Ms Sarah Hunter, Assistant Governor (Economic) of the Reserve Bank of Australia, at the Australian Financial Review Banking Summit, Sydney, 18 March 2025.",2025-03-18 00:00:00,"## Monetary Policy: Forward Looking and Data Dependent in the Face of Uncertainty



RESERVE BANK OF AUSTRALIA

## Sarah Hunter *

Assistant Governor (Economic)

## The Australian Financial Review Banking Summit

Sydney - 18 March 2025

I would first like to pay respect to the traditional and original owners of this land, the Gadigal people of the Eora Nation, to pay respect to those who have passed before us and to acknowledge today's custodians of this land. I also extend that respect to any First Nations people joining us here today.

## Introduction

Three weeks ago, the Reserve Bank Board cut interest rates for the first time since 2020. Naturally there is a lot of interest in what lies behind the Board's decision-making process. Today I want to shine a light on three key inputs to the process, how they interact with one another and how they fit together to support the Board in its decision making.

The first is our view of how changes in the cash rate affect the economy. The impact of policy changes takes time to flow through the economy; looking at the response of banking credit flows to interest rate changes, which many here today know intimately, clearly highlights this. So policy decisions today shape inflation and employment outcomes in the future.

This necessitates a forward-looking approach to meeting our mandate. Policy decisions require both a view of the outlook for the economy and an understanding of how policy is likely to affect that outlook. That helps the Board set the cash rate to give the best chance of achieving the RBA's objectives over time.

The second is how we form our view of the outlook - our baseline forecast - and how it responds to incoming data. When we talk about being 'data dependent', we are referring to the way we update our view of where the economy is and the outlook. The implication of continuously updating our view on the outlook means we also continuously update our policy advice to the Board; the future pathway for the cash rate is not predefined.

Finally, I will say a bit about the Board's approach to setting policy under uncertainty. In practice we are uncertain about both the outlook for the economy, and the effect of monetary policy, and this complicates policy decisions. Under uncertainty, policy depends on more than just the central forecast - judgements about the risks and uncertainties matter too. That's why, as we have discussed on a number of occasions recently, it's important to consider alternative possible pathways for the economy and how policy would have to respond. 1

## Monetary policy is forward looking …

Central bankers and macroeconomists often say that monetary policy impacts the economy with a lag. 2

So, if inflation moves away from our target, or employment falls below full employment, monetary policy cannot immediately offset those moves. Instead, central banks have to look ahead. Ideally we would know when and by how much the economy is going to move away from our targets in the future. Knowing this, we would calibrate policy today to prevent this from happening, and the economy would stay at full employment and inflation at target.

In practice of course, this isn't what happens. We can't foresee shocks, and even in times of relative calm outcomes are rarely (if ever) exactly as we expect. The economy and our understanding of it is always evolving and our models, analysis and judgements aren't perfect; we don't have a crystal ball and even if we did it would be very cloudy.

Despite this, given the lags in monetary policy transmission, we always have to forecast how we think the economy will evolve, and set policy now so that we expect to achieve our mandate once any policy change has had time to have its effect. 3 In practice, as I will explain later, policy decisions also take account of uncertainties about the outlook. We put significant effort into identifying and understanding the risks around the baseline forecast, and the Board explicitly considers such risks in its decision-making. 4

## … because there are lags in transmission

It is important, then, to understand how policy changes affect the economy. In a speech in 2023 my colleague Christopher Kent set out the RBA's view of how monetary policy works, and how the sequence of increases in the cash rate up to that point had affected the Australian economy. 5 I plan to use the same framework to explore the lags in transmission, so let me briefly summarise it here.

Figure 1: How Changes in the Cash Rate Flow through the Economy



When the cash rate changes, the first step in transmission is that other short and longer term market interest rates and other asset prices (including the exchange rate) adjust, more or less straightaway. 6  Then these changes affect economic activity and ultimately inflation 7 through a number of 'channels':

- Cash flow : lower interest rates flow into households' disposable income; borrowers pay less to service their debt, and savers earn less on their deposits.
- Savings and investment : 8 a decrease in saving and borrowing rates typically encourages people and businesses to borrow, invest and consume more, and save less.
- Asset prices : A cut in interest rates typically encourages investment in assets, resulting in higher house, equity and other asset prices. Higher household wealth tends to increase household consumption.
- Credit : Lower interest rates can increase the flow of loans to households and the availability of external funding to businesses.

- Exchange rate : a decrease in interest rates can contribute to a depreciation of the exchange rate, making imports less competitive and exports more competitive, leading to stronger growth. Higher import prices also directly increase inflation.

Macroeconomists often talk about expectations, and whether or not an interest rate change is partially or fully anticipated by financial markets, households and businesses is an important determinant of the size of each transmission channel. If the change is fully anticipated by financial markets then we may see little if any change in asset prices and the exchange rate, which limits the size of the exchange rate and asset price channels after the decision. 9 Households and businesses may also start to adapt their spending and investment decisions ahead of a change in the cash rate, but they typically respond less than financial markets prior to the policy decision. 10

Overall, then, the size and timing of the impact of policy changes through these channels varies.

Take the cash flow channel as an example. Some variable loan and savings rates change quickly, as we saw following the Board's latest decision. Households in aggregate have more interest-sensitive loans than deposits, so lower interest rates increase household disposable income. That prompts higher spending by borrowers, though households typically adjust their spending by less than the changes in their incomes in the short run. 11 For those with fixed-rate mortgages, cash flows remain unchanged until loans roll over, though they might start adjusting their spending in anticipation (Graph 1).

Graph 1

## Housing Lending Rates



- ** For the new variable series, Perpetual data used to 2013; advertised package rates to July 2019; thereafter, data from the EFS collection.

Sources: APRA; Perpetual; RBA; Securitisation System.

Or consider the exchange rate channel. All else equal, an interest rate cut in Australia lowers the relative rate of return on Australian assets compared with overseas. 12 This typically leads to a depreciation of the dollar, making exports cheaper and imports more expensive. However, while the exchange rate adjusts immediately, the volume of traded goods responds more gradually. Domestic businesses will have existing contracts to purchase goods from overseas, while foreign buyers are similarly committed to purchasing Australian products at

previously agreed prices. If there is a trade deficit this price effect may exacerbate it. But as these contracts come up for renewal, and as firms and consumers adjust their purchasing behaviour, there will be a gradual increase in the volume of exports and a decline in imports, leading to an increase in net trade over time.

So far I've been discussing the direct channels through which cash rate changes impact the economy; these start working immediately, though they take time to fully play out. But there are also indirect spillovers, such as the impact of spending decisions by businesses, households, and importers on employment and income. 13  For example, a business might hire new workers for an investment project that is made viable by a rate cut, boosting household income and spending. This ripple effect can amplify the direct impact of policy and may occur quickly or over time. Recent research suggests these indirect effects could be a major part of the transmission mechanism. 14

While identifying these channels helps us think through how monetary policy operates, in practice they operate at the same time and there is no precise way to isolate or quantify the contribution of each one. Nevertheless, one simple way to build intuition about their relative roles is to look at how the components of GDP evolve after a change in monetary policy.

To do this we can use a model of the economy - here I will use MARTIN, the RBA's main macroeconomic model, to illustrate the transmission of a reduction in interest rates. 15

Graph 2 Deviation from baseline, with contributions GDP Response According to MARTIN*

* Response after the cash rate decreases by 100 basis points for one quarter and follows the path impliedby MARTINÕspolicy rule after that.
- ** ÔOtherÕ category includes ownership transfer costs, public demand, and changes in inventories.



Source: RBA.

There are a number of helpful insights from the decomposition shown in Graph 2:

1. The immediate GDP response to lower interest rates is relatively limited - it takes time for everyone to adjust
2. In MARTIN it takes 9-12 months for a loosening in monetary policy to have its peak effect on economic output.

3. The effect from total investment is an important channel over the first year, with dwelling investment in particular responding relatively quickly compared with business investment, whose response builds fairly gradually. 16 Intuitively this makes sense - businesses might immediately be encouraged to invest more by higher valuations and cheaper credit, but it takes time to get projects off the ground, and some businesses will wait to respond once they see an increase in the demand for their goods and services from consumers.
4. Changes in imports and exports also play an important role in driving the initial response of GDP , at least according to this particular model. This highlights that the exchange rate channel is important and operates relatively quickly compared with other channels; if overseas holidays become expensive, households tend to quickly switch to vacationing at home and vice versa. 17
5. The response of household consumption to lower interest rates is initially small but grows over time. This suggests the 'cash flow channel' - which should start working quickly 18 - plays a minor role in the overall transmission mechanism, as the boost from lower debt payments is offset by reduced interest income on deposits. The slow response likely reflects the indirect effects of transmission channels and households' tendency to smooth their spending changes.

While it takes about nine months for the cash rate to have its biggest impact on GDP , the peak effect on inflation is estimated to take nearly twice as long (Graph 3). This could be because it takes time for an increase in demand to affect the hiring decisions of firms and the job search decisions of households, which then ultimately feed into price setting. Or it may simply reflect some 'stickiness' in prices.

Graph 3 GDP and Inflation Response According to MARTIN*



Deviation from baseline

* Response after the cash rate decreases by 100 basis points for one quarter and follows the path impliedby MARTINÕspolicy rule after that.

Source: RBA.

This tells us that - according to MARTIN at least - the decisions we make today will have their largest effect on economic output at the end of 2025, and on inflation in mid-2026. 19

## Monetary policy is always data dependent …

So to set policy we need an estimate of how changes in the cash rate affect the economy and a view of the outlook for the economy - a forecast. 20

As forecasters, we essentially try to do two things. First, we try to understand the state of the economy now. Second, we use models based on economic theory and capturing historical patterns in the data combined with our judgement, to extrapolate from the current state of the economy into the future.

In both cases this comes down to our understanding of the data - both quantitative information such as official ABS data, surveys and financial market data, and qualitative information such as liaison. Extracting reliable signals from noisy data and forming a coherent economic picture is challenging. New or revised data can alter our view of the starting point or how the economy might evolve. As things constantly change, we continuously update our views with new information.

In recent years many central banks have described their policy setting as 'data dependent'. Rather than meaning that policy responds mechanically to particular pieces of data, we are data dependent in the sense that incoming data affects our view of where the economy is today and the outlook, and this in turn influences the path for policy. At times of heightened uncertainty about how the economy is responding to shocks - for example, during the pandemic and the immediate aftermath -central banks may put a higher weight on real time data relative to baseline forecasts and models. 21 But these weights change over time, as conditions evolve and we learn more about how the economy is responding; policymakers must always take a forward-looking view on the outlook. So, how does this work in practice?

## … because data informs our view of the outlook

To give a sense of how we draw this information together into a forecast, I am going to use the example of our household consumption forecasts.

In our most recent Statement on Monetary Policy (SMP), one of our key judgments was that household consumption growth had started to recover in line with the pick-up in real household incomes. This judgement was informed by analysis of a range of timely indicators - such as the ABS Household Spending Indicator, and credit and debit card spending indices - which suggested that consumption growth had picked up in the December quarter.

But was this just a temporary pick-up as financially squeezed households concentrated their spending around Black Friday and other sales? Digging further into the data suggested there was more to it than that (Graph 4). Not surprisingly, spending on the types of goods that tend to have significant sales, such as household goods and clothing, did grow strongly in the quarter. However, we had also seen a modest lift in household disposable income from the middle of 2024, and discretionary spending not impacted by sales (e.g. eating out) also showed signs of picking up, which suggested a genuine improvement in underlying momentum. Information from our liaison contacts also supported this assessment.

Graph 4 ABS Household Spending Indicator

Nominal, implied quarterly growth rate



* Includes clothing &amp; footwear, and furnishings &amp; household equipment. Sources: ABS; RBA.

Our read of the data is a crucial input to our forecasts. In fact, one way to think about the forecast is that it captures and projects forward what we think is signal from the latest data, while disregarding what we think is mostly noise.

The outlook for consumption is only one part of the forecast, and we spend considerable time thinking about how different assumptions impact different sectors, and how these interactions might magnify or offset one another. But underneath it all, the links between data, forecast and policy sits at the heart of us saying that policy is 'data-dependent'.

## Policy under uncertainty

As I set out earlier, the link between our forecast and the Board's policy decision is not mechanical. It is not as simple as constructing our central forecasts, then working out what the Board needs to do with the cash rate to meet its objectives.

The main reason for this is that there are always risks and uncertainties around the central forecast; the baseline pathway is just one of a vast number of possible outcomes. Board decisions are always made in an uncertain environment, which means thinking about the distribution of risks around the central forecast. One of the things we are focused on right now is US policy settings, the impact of these on the global economy and how this flows through to activity and inflation here in Australia; we have been using scenarios, analysis and judgement to assess the policy implications.

As the Governor and Deputy Governor have both indicated recently, the February decision reflected a judgement by the Board that it was the right time to take some restrictiveness away, but the Board were more cautious than the market about prospects for further easing.

In all of this, the RBA uses a range of timely indicators to form its economic forecasts. These data help to distinguish between temporary fluctuations and more sustained trends, informing policy decisions. The RBA's policy decisions are made in the context of various risks and uncertainties. The Board considers a wide range of

possible outcomes and uses scenarios, analysis and judgment to assess the implications of different policy paths, ensuring a balanced and forward-looking approach. This is why being forward looking is not in tension with being data dependent.

## Endnotes

- I would like to thank Tim Taylor, Gulnara Nolan, Jack Mulqueeney, Alexandra Michielsen, Iris Day and Eleanor Rogerson for substantive drafting support and Michele Bullock, Andrew Hauser, Chris Kent, Brad Jones, Michael Plumb, Penny Smith, David Jacobs, Alex Ballantyne, Jonathan Hambur, Anthony Brassil and Tom Williams for their comments on earlier drafts. *
- Hunter S (2024), `Shedding Light on Uncertainty: Using Scenarios in Forecasting and Policy', University of Adelaide South Australian Centre for Economics Studies (SACES) Lunch, Adelaide, 13 December. 1
- See Friedman M (1960), `A Program for Monetary Stability', Fordham University Press; Christiano LJ, M Eichenbaum and CL Evans (1999), `Monetary Policy Shocks: What Have We Learned and to What End?', Handbook of Macroeconomics , 1, pp 65-148; Arouba SB and T Drechsel (2024), `The Long and Variable Lags of Monetary Policy: Evidence from Disaggregated Price Indices', Journal of Monetary Economics , 148(S); Moura AS, G Buda, VM Carvalho, G Corsetti, JB Duarte, S Hansen, A Ortiz, T Rodrigo, JV Rodrigez Mora and G Alves da Silva (2025), `The Short Lags of Monetary Policy', Working Paper No w202501, Banco de Portugal. 2
- This approach to setting monetary policy has been described as 'forecast targeting': seeLEO Svensson (1997), `Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets', European Economic Review , 41(6), pp 1111-1146; Woodford M (2007), `The Case for Forecast Targeting as a Monetary Policy Strategy', Journal of Economic Perspectives , 21(4), pp 3-24. 3
- Hauser A (2025), `Monetary Policy in a VUCA World', Address to the Australian Financial Review Business Summit, Sydney, 5 March. 4
- Kent C (2023), `Channels of Transmission', Address to Bloomberg, Sydney, 11 October. 5
- Movements in asset prices reflect financial markets' view on both the short run, cyclical path for the cash rate (and other central bank policy rates) and its long run or neutral level. 6
- Monetary policy actions might also move households' expectations by influencing likely future inflation outcomes and showing households that the central bank is committed to returning inflation to the target. Through the recent high inflation period expectations have remained anchored, which has been a very welcome outcome; keeping expectations anchored is extremely important, because if expectations become unanchored it can become more costly and take longer to return inflation to the target. 7
- This is equivalent to the 'intertemporal substitution channel' referred to in Kent, n 5. 8
- As the change in policy rate has been anticipated, financial markets have already incorporated it into their prices and have adjusted - effectively these channels have started working before the actual change in the interest rate. Conversely, if the policy decision is a surprise, which can be no change in the cash rate as well as an unexpected change in the cash rate, movements in financial markets are typically more pronounced enhancing the post-decision transmission through these channels. 9
- There are a number of reasons why households and businesses are less responsive when they expect a change in the cash rate. For example, both groups may be credit or liquidity constrained or they may not have as much knowledge about the likelihood of monetary policy changes. 10
- For a recent update on the household cash-flow channel, see Jennison S and M Miller (2025), `An Update on the Household Cash-flow Channel of Monetary Policy', RBA Bulletin , January. La Cava, Hughson and Kaplan estimate the marginal propensity to consume (MPC) out of interest-sensitive cash flows to be around 0.2 for borrowers: La Cava G, H Hughson and G Kaplan (2016), `The Household Cash Flow Channel of Monetary Policy', RBA Research Discussion Paper No 2016-12. An individual household's MPC depends on several factors, including whether they face credit constraints: see, for example, Kaplan G and GL Violante (2022), `The Marginal Propensity to Consume in Heterogeneous Agent Models', NBER Working Paper No 30013. 11
- The size of the depreciation in the Australian dollar in response to a cash rate change depends on a number of factors. These include whether the decision has been anticipated or not, the short- and long-term economic outlook in Australia and overseas, broad policy settings in Australia and elsewhere, and concurrent and future monetary policy decisions by the RBA and other central banks. 12
- Economics often refer to these as general equilibrium or Keynesian multiplier effects. 13
- For example, Kaplan, Moll and Violante show that monetary policy affects output indirectly via a general equilibrium change in labour demand, which appears to dominate the direct effect via traditional channels of transmission such as intertemporal substitution: Kaplan G, B Moll and GL Violante (2018), `Monetary Policy According to HANK', American Economic Review , 108(3), pp 697-743. 14
- MARTIN is designed to capture the typical pattern of responses seen in the past to changes in interest rates, so it is effectively taking an average of the size of the different transmission channels (including whether the policy decision was anticipated or unexpected) over the inflation targeting period. That said, these estimates are uncertain and different models with different structural underpinnings or statistical properties can suggest a different picture. This is why we tend to look at a variety of models that make different assumptions about the economy, when forecasting and conducting scenario analysis. A forthcoming Bulletin article will explore the transmission mechanism in more detail and includes estimates from several models. 15

- Dwelling investment is a relatively small part of GDP so underlying its medium-sized contribution is a sizeable change in dwelling investment. 16
- MARTIN predicts that imports decrease after a decrease in the cash rate. This response is not common to all models; for example, the RBA's DSGE model predicts that the increase in household disposable income and households' forward-looking behaviour leads to a lift in import volumes. For a discussion of these different responses, see Ballantyne A, T Cusbert, R Evans, R Guttmann, J Hambur, A Hamilton, E Kendall, R McCririck, G Nodari and D Rees (2019), `MARTIN Has Its Place: A Macroeconometric Model of the Australian Economy', RBA Research Discussion Paper No 2019-07. Reflecting these modelling differences, a forthcoming Bulletin article explores the transmission of monetary policy from the perspective of several models. 17
- Unlike the other channels, the cash flow channel has an immediate effect on households' income. For households whose spending has been constrained, this could be expected to have a rapid effect on spending. The absence of a rapid response, and the fact that the cash flow effect on aggregate income is in any case limited, suggests this channel may not be the most prominent channel of monetary policy transmission. This is consistent with the findings in Ballantyne et al , n 17 and the estimates in La Cava et al , n 11. 18
- The timing of the peak effects depends on the model. For example, the Bank's DSGE model features a quicker pass-through from monetary policy to inflation (see Ballantyne et al , n 17 for a comparison). A forthcoming Bulletin article will explore the transmission mechanisms according to several macroeconomic models, including MARTIN. 19
- The RBA's forecasts are conditioned on the path of interest rates implied by market pricing. The focus of policy scenarios that inform the Board is therefore on how deviations from the market path affect the outlook. 20
- In the RBA's case, the shift to focusing more on actual outcomes relative to the baseline forecast was also accompanied by an increased focus on scenario analysis. See, for example, RBA (2020), May Statement of Monetary Policy . 21",Sarah Hunter
https://www.bis.org/review/r250319g.htm,Eli M Remolona: Getting out of the grey list - and staying out,"Speech by Mr Eli M Remolona, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Tuesday Club Meeting, Mandaluyong City, 11 March 2025.",2025-03-11 00:00:00,"## Eli M Remolona: Getting out of the grey list - and staying out

Speech by Mr Eli M Remolona, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Tuesday Club Meeting, Mandaluyong City, 11 March 2025.

* * *

Good morning, Tuesday Club!

Thank you once again for having me here. Special thanks to Marichu for adjusting the schedule--it was for an important reason, which I'll be sharing today.

Two weeks ago, I went to Paris to appear before the Financial Action Task Force (FATF) Plenary Meeting. I was joined by Executive Secretary Bersamin, Securities and Exchange Commission Chairperson Aquino, and Insurance Commissioner Reynaldo Regalado. It was the culmination of our country's efforts to be stricken off from the FATF greylist.

What exactly is FATF and what is the greylist? The FATF was established in 1989 by the G-7 group of countries. The mandate of FATF is to develop international standards to combat money laundering. But over time, that mandate has expanded to include countering terrorism financing and proliferation financing.

What the FATF does to carry out its mandate is to evaluate countries, [under] what is called a Mutual Evaluation, to see if they meet FATF standards. Countries that have deficiencies are placed on a List of Jurisdictions Under Increased Monitoring, that is the official name for the greylist. That means we have some deficiencies in terms of compliance with anti-money laundering rules and anti-terrorism financing rules. The thing about being on the greylist is that [it] places on your correspondent banks-or banks abroad that are dealing with us-a heavy burden in terms of compliance against money laundering. In fact, you may remember 2012, I think. One major global bank was caught violating its compliance measures and it was fined something like $1.9 billion. So, that is what comes with being on the greylist. Your banks have to be very careful [because of] the very strict compliance procedures- [and] heavy fines [for noncompliance].

In 2021, the Philippines was placed on the greylist. That means the FATF gives us recommendations on things that we should do so we ourselves would comply with antimoney laundering measures. It is easier for the banks if we do a lot of the compliance part ourselves. That is the advantage of FATF greylist, if you are not complying, they tell you how to comply. So, they give you a list of what are called action items. In 2018, they gave us 18 action items that will help us figure out how to comply with money laundering processes.

These action items included oversight of money service businesses, oversight of casino junkets, oversight of designated non-financial businesses or professions (DNFBPs)- in other words, list the lawyers and the bankers involved in these things-and also nonprofit organizations to make sure that even non-profit organizations comply with the items on the list. Law enforcement agencies were tasked to improve the confiscation of

proceeds of crimes, and the prosecution of money laundering and terrorism financing cases.

For context on what happened in 2021- Even 10 years before that, banks were already doing something called de-risking: they were already starting to cut off relationships with our banks. The correspondent banks abroad were cutting relationships with our banks here, which meant it was hard to send money here, it was hard to open accounts abroad, especially the smaller banks. The bigger banks somehow maintained the relationships with our banks because they could afford it. They could afford the compliance measures.

Then, in 2016 we had the Bangladesh heist. So, that brought us extra unwanted global attention. Actually, it was the 2016 Bangladesh heist that I think led to the greylist of 2021. So, we already suffered from measures that were being imposed on us even before the greylist. The greylist just made it official, and it allowed FATF to give us 18 items to get out of the greylist.

The good news from last month was not the end of a four-year ordeal; it was actually the end of a nine-year ordeal if you count from 2016.

So, we were told actually in 2021 [that] to get off the greylist by 2025 was too ambitious. We have consultants who were working with us. That was too ambitious, but we have to try. And so, under the leadership of President Marcos, the National Anti-Money Laundering and Counter Terrorism Financing Coordinating Committee (NACC) was reorganized in 2023, a scorecard system [was implemented] to hold the member agencies accountable for their deliverables. The Executive Secretary has been the chairman of NACC. I have been the vice chairman of NACC.

The directive of the President and the collaboration of national agencies in the NACC exemplifies the ""whole-of-government"" approach. This worked very well.

FATF also wanted to see high-level commitment. It was not just complying with 18 action items. They wanted to see evidence that there was commitment at the highest level. So, the banning of POGOs was a demonstration of that high-level commitment. That [banning POGOs] was not on the [FATF's] list [of action items for the Philippines]. Nonetheless, I think it was important in getting us off the greylist.

By October 2024, the FATF determined that the Philippines had satisfied the action plan. So, when it was not enough for the FATF to determine based on our reports on the action plan, they had to send a team to conduct an onsite assessment to validate what we have reported to them.

So, the team came here in January. That onsite team said, yes it is true, the Philippines has satisfied the action plan and then in February, there was a big meeting in Paris, which I attended. I gave one intervention and the executive secretary gave another intervention, and then after that, FATF decided that we are okay, we had met the expectations of FATF. There were no objections at all. So, it was a unanimous decision by FATF [for the Philippines to be removed from the greylist].

In fact, we are recognized for good behavior. [The Philippines is seen as] a regional leader in tackling money laundering and terrorism financing, so they [FATF] asked us to provide evaluators for the other countries in Asia that are still on greylist.

So, the official statement as you know came out on February 21, 5 pm Paris time, 12 midnight here. It was a weekend. But, if you looked at what happened to the peso before that weekend and after that weekend, I think it was anticipation of more investments coming into the Philippines.

Now, just because we are off the greylist does not mean that we are done. We have to make sure we do not get back into the greylist. In the past, we go in, we go out. This time, we are determined to stay out of the greylist. So, part of that means looking at our risks again. We call that national risk assessment.

So, we look at the whole economy to figure out what else can lead to risks of money laundering, what else can lead to terrorism financing and so on.

The next [FATF] evaluation [of the Philippines] will be in 2027. We want to make sure that we pass that evaluation.

In the meantime, we can reap the benefits of our delisting from the FATF greylist.

That delisting renews investor confidence. It paves the way for the restoration of correspondent bank relationships. So, it helps our OFWs, but it is more than that. It helps convince foreign investors to come in. Makes it easier for foreign banks to deal with our banks. So, I hope we can stay out of the greylist. We are determined to stay out of the greylist.

I think that is all I have for now. I am happy to take questions.",Eli M Remolona
https://www.bis.org/review/r250319f.htm,Gabriel Makhlouf: The value of trusted institutions,"Speech by Mr Gabriel Makhlouf, Governor of the Central Bank of Ireland, at the Čičin-Šain lecture, organised by the Croatian National Bank, Zagreb, 13 March 2025.",2025-03-13 00:00:00,"## The value of trusted institutions - Governor Gabriel Makhlouf at Čičin-Šain lecture

13 March 2025

Speech



Good morning everyone.

It's a pleasure to be in Zagreb. It is my first visit to a city that my family has connections to: my parents lived here and in fact my father died here back in 1992.  I have never had the opportunity to visit and am pleased to be here with you. [1]

Before I begin today's lecture, I would like to thank the Croatian National Bank (HNB) for organising this special event in honour of the late Dr Ante Čičin-Šain. This is the first lecture since 2018 due to a Covid-enforced hiatus, and as you all know, these lectures provide a focus for discussion and contact between Ireland and Croatia on matters of economic interest, as well as marking Dr Čičin-Šain's unique contribution to fostering trust and furthering relations between the two countries.

It's an honour to be here today to rekindle our special relationship and to deliver this lecture.

Although Ante Čičin-Šain needs no introduction here at the Croatian National Bank, I would like to pay tribute to his career and role he played in developing deep relations between Ireland and Croatia.

As Croatia's first Ambassador to Ireland, he was highly committed to developing Irish-Croatian relations and the two countries have enjoyed a very successful relationship since he took up his role. Prior to becoming Ambassador, Dr Čičin-Šain was of course the first Governor of the independent Croatian National Bank, during a particularly testing time for his country.  He brought about monetary independence for Croatia, and successfully introduced a new currency while Governor in the early 1990s.

In his role as Ambassador, he forged relationships and built trust between our two countries and further developed the path for Croatia which ultimately led to the country's accession to the EU in 2013.

Indeed the unique part he played in promoting Croatian-Irish relations was recognised by the Irish Government when, after he had retired as Ambassador, he was appointed Ireland's first Honorary Consul in Zagreb.

The Central Bank of Ireland and the Croatian National Bank have developed a successful relationship together over the past few decades. One significant milestone in our relationship that stands out was the coin that we issued jointly in 2007, commemorating Ivan Meštrovic.  He was one of five artists who, in 1927 and at the request of Irish poet and Nobel Prize winner William Butler Yeats, drew up the propositions for the design of the first coins of the Irish Free State.

Unfortunately, Meštrovic received the request too late but, as Yeats recorded, 'Meštrovic made one magnificent design and, on discovering that the date had passed, gave it to the Irish Free State with great generosity'. Meštrovic's design ('Girl with a Harp') is now used by us at the Central Bank of Ireland as our official seal. [2]

## Institutions and social capital

From coins and seals to institutions.  Some of you here today may have been in attendance in Dublin in 2006 when Dr Čičin-Šain delivered the first of these lectures.  He spoke about the importance of building relationships between Croatia and the European Union and the role that Ireland played in the development of the Croatian economy  He also spoke about the establishment of Croatian institutions, and in particular the HNB following a particularly turbulent period for your country.

In my remarks today I will focus on institutions.  Although my starting point is the broad definition of institutions as the frameworks that societies have designed to structure political, economic, and social interactions, I will concentrate on the institution that I lead.  I will discuss the important role that trust and credibility play to ensure that an independent central bank delivers its objectives.  And I will also discuss the importance of communicating effectively to maintain and improve trust. Finally, I want to address the challenge of sustaining trust in a world of alternative truths and disinformation bubbles.

Let me start by making some general remarks about the role of social capital in growing the economic capital that ultimately underpins a society's prosperity.  As I have argued before, the combination of financial and physical capital, natural capital, human capital and social capital represent the economic capital that supports and enhances a society's wellbeing. Social capital, in particular, is essential to the success of institutions such as independent central banks whose core functions take place in the public realm. [3]

I think of social capital as 'the social connections, attitudes and norms that contribute to societal wellbeing by promoting coordination and collaboration between people and groups in society.' [4]

Ultimately, social capital is how people connect with one another.

I do not intend to delve deep into the definitional and measurement issues around social capital (that's something for the future).  But social capital is essential to what we - central banks - do every day, and why we do it.  And, perhaps not surprisingly for a central banker, trust and credibility are the aspects of social capital that I will focus on today.

There is a mutually reinforcing connection between trust and credibility, and a central bank's goals.

If a central bank is credible, and households, firms and the financial sector have high levels of trust in its ability to deliver on its mandate, then arguably it will be easier for it to succeed.  Trust is a broader concept, one which captures the public's belief in the goodwill or integrity of a central bank.  The public's trust in an institution is linked to whether that institution is delivering public value, via the interconnected stewardship of the authorising environment. In broad terms, that environment consists of the institutions, structures, process and activities that transform the interests and views of individuals citizens into a 'collective public' that can articulate what is worth taxing, what is worth regulating and what is worth investing in or spending on. In that environment, leaders and staff at those institutions work to build the legitimacy, credibility and support required to sustain a public enterprise over time. [5]

Trust is fragile and relies on 'informal norms and social capital'. It is not a matter of blind faith.  It is earned through transparency, accountability and a demonstrated credible commitment to act in, and serve, the best interests of [6]

society.

Here, in Croatia, the creation of the HNB as a strong and independent central bank and regulator was an important step for a young, independent country in the early 1990s.

The HNB became a trusted institution through maintaining financial stability and implementing an independent monetary regime, which enabled stabilisation in a country that had previously been through a long period of economic instability, high inflation and frequent devaluations. Through its macroprudential measures, it protected the economy from the extremes of the global financial crisis and it successfully managed the move to the currency union in 2023.

On the other hand, if a central bank fails to deliver on its mandate, it can affect how credible and trustworthy it is perceived to be. In Ireland, we saw this during the financial crisis, when the lack of a sufficiently robust regulatory environment was identified as a key failure contributing to the collapse of the banking sector. [7]

It has been a long road back to rebuild trust for the Central Bank of Ireland.  There have been significant changes to the powers, structures and mind-sets within our organisation, along with a new macroprudential policy regime, reforms to our regulatory and supervisory approach, and a consumer protection framework that is responsive to emerging risks.

## Institutional independence matters

Whether old or new, institutions matter.

Economists from Adam Smith, to Ronald Coase, Mancur Olsen and, more recently, Daron Acemoglu and James Robinson, have explained how institutions are critical for the rule of law, property and civil rights, economic development, economic stability, and solving information and co-ordination problems across communities and societies. As Andy Haldane put it, the 'secret [of institutions] lies in solving societal problems of knowledge, coordination and incentives.  Institutional memory can help lengthen and strengthen otherwise short and subjective minds.' [8]

Today we find ourselves in a period of geopolitical uncertainty, with the economic landscape facing significant strain and complexity, driven by competing interests, shifting alliances with different values and increasingly independent economic blocs.   Although there continues to be global trend towards enhancing central bank independence signalling a broad recognition of the importance of independent monetary policy in maintaining economic stability - it is also true to say that established institutions, and their independence and effectiveness, are being challenged. As ECB President Christine Lagarde said earlier this year, 'although de jure central bank independence has never been more prevalent than it is today, there is no doubt that de facto independence is being called into question in several parts of the world'. [9] [10]

Ultimately, if we view social capital as a means for how we connect with each other, then it is clear that institutions matter for building social capital. This connection and the role institutions play in social capital is arguably more critical than ever, in a time when the changes brought on by social media have given birth to a period of social disconnection.  In particular, algorithms have driven the greater atomisation of society.  And they have also enabled the growth of self-reinforcing extremes where established institutional frameworks are being undermined.

Central banks, as important institutions of the State, play a critical role. In my view, and notwithstanding the de facto challenges I just mentioned, I believe that there is a general acceptance of the important role that central bank independence plays in helping to keep inflation in check. It is an enabler of society's expectation that authorities will act in a predictable manner in pursuing their objectives and that they will be successful in their mandate. But to continue to have the authorising environment within which to operate independently, we need to continue to have the trust of the public we serve.  And we cannot take that trust for granted. [11]

Trust for a central bank is at the core of enabling effective delivery of its mandate. In today's complex and fastchanging world, the independence of a central bank does not mean it acts in isolation.

It engages with individuals, businesses, the political system, the financial system and many other stakeholders on a daily basis.

And, to be clear, it is trust and not popularity that central banks should strive for.

Being a trusted, independent central bank contributes to the anchoring of inflation expectations and to reduced uncertainty about future inflation.  It helps contain short-term incentives and pressure on the central bank and facilitates the achievement of its goals. [12]

Numerous central banks' mission statements, or their codes of conduct, often emphasise the importance of being a trusted central bank.  In fact both the Central bank of Ireland and the HNB, as members of the Eurosystem, share a mission statement that attaches 'utmost importance to credibility, trust, transparency and accountability.'

Trust is important for many dimensions of central banking, and is core to what we do.

Financial stability relies on trusting that the financial system is stable and well-regulated. Trust underpins the very notion of money, and thereby the modern system of money itself. In effect, trust builds resilience in the financial system. And during a financial crisis, a central bank that has widespread public trust as a competent, is likely to find that its actions and communications are viewed as credible and reassuring, increasing their effectiveness.

Needless to say, trust also affects public and financial markets' inflation expectations, an important anchor and determinant of price stability.  Monetary policy requires trust - along various dimensions - to keep inflation expectations anchored.

In brief, a central bank that is trusted as having high integrity and whose policies are supported by the public is likely to be less prone to the influence of short-term electoral horizons. [13]

Building and maintaining trust helps to build social capital and helps us to grow our economic capital.

## How we can continue to build trust to improve public value?

But building and maintaining trust has become more challenging.  I mentioned de jure and de facto central bank independence earlier.  In fact surveys have shown that trust in public institutions has, in general, been on a downward trend. Some of this is a result of the social disconnection I also mentioned earlier, and some of it comes from the ongoing damage of the Global Financial Crisis. There are no doubt other reasons, but I will only mention one of them. [14]

The world of alternative truths and of disinformation bubbles has certainly had a corrosive effect on social capital.  In his recent book, Nicholas Carr warns of the dangers of 'our frenzied, farcical, information-saturated time'. Algorithms can act as a poisonous accelerant towards a 'post-truth' society.  It is a particular challenge for institutions such as central banks that rely on facts, and who sometimes must explain to the public inconvenient truths or the rationale for increasing interest rates, such as to deliver on their objectives. I don't have a solution to this challenge but I do think we need to address it proactively and not be passive in the face of its growing impact. [15]

I suggest central banks need to do a few things:

- First and foremost and self-evidently, we need to do our job well.  Nothing can earn trust better than delivering on your mandate to maintain price and financial stability, protect consumers and ensure the financial system works for the real economy;
- We need to be transparent and accountable.  And also humble.  We need to tell people what we're trying to do and why we're trying to do it.  And if we make mistakes, we should own them, fix them and learn from them;
- We should be open to diverse views and be prepared to change our view.  Your view may have been right, but when the facts change, you need to recalibrate. Change can strengthen institutions.  Or, to put it another way, if you only try to preserve an institution, you may in fact be weakening it;
- We need to be connected to the community as a whole, not least to the households and businesses that live in the real economy and are the ultimate owners of the 'authorising environment'.  We should make efforts to understand which, in my view, will also help us to be understood; and, perhaps, most of all,
- We should place our communication into a coherent narrative that helps understanding.  Narratives matter.  As Robert Schiller has pointed out, 'the spread and dynamics of popular narrative, particularly those of human interest and emotion and how these change over time' have an impact on the economy. And as I've said before, there's always a narrative and vacuums are always filled, not necessarily by facts that are accurate or benign. [16] [17]

What's critical to being trusted is of course the need to demonstrate trustworthiness. It is not simply a matter of asking the public to trust you. Trust is valuable when placed in trusted and credible institutions, but can be damaging or costly when (mis)placed in untrustworthy agents and activities. The public's view of a credible public institution is formed, in part, through the competent delivery of its mandate by the institution and its employees.  Doing our job well is fundamental to trust: it is what the public sees and feels. [18]

## Communicating effectively to improve trust

The importance of both understanding, and being understood, is a critical element of how an institution can strengthen its trust with the public.

At the Central Bank of Ireland, we have placed significant importance on the value of engaging and listening to our various stakeholders, as well as how we are communicating the delivery of our mandate.

How we engage with our communities and our commitment to being open and engaged, focused on transparency, and building genuine connections with the public we serve, matters to us. It allows us to foster a wider understanding of our mandate and role, it enhances the effectiveness of our policy-making and it contributes to maintaining trust and confidence in the financial system.

The changing dynamics of the world in which we inhabit, not least how information is accessed and shared, means that institutions need to evolve if we are going to inform and if we want to be understood.  We have to meet the public - in fact all our stakeholders - where they are, rather than hope that they will come back to the old ways of receiving and accessing information.  I guess that most of us in this room can remember those old days when we received almost all of our information through broadcast and newspapers.

Those days are gone.

Today, the proliferation of multiple platforms in the social media age has led to multiple ways of being informed whether accurately or not - and this presents a challenge to us all.

And the onus is on us to meet the challenge.  We need to meet people where they are, be it online, through different forms of media, or in person. We have to engage and communicate in ways that are accessible and understandable.

## Conclusion

Let me conclude.

We have entered a more uncertain geoeconomic and political environment where social capital will need to be nurtured carefully if it is to make its important contribution to growing our economic capital and enhancing the prosperity of our communities. The integrity and independence of trusted institutions matters more than ever.

Trust is needed for institutions to succeed, and central banks are no different. We need to consider carefully how we can build credibility and trust and sustain it in a world of alternative truths. It's a challenge that I am confident we can meet by doing our job well, by being transparent, humble and accountable, by being connected and open to different views, and by communicating clearly.  Perhaps, most of all, we can build and sustain social capital by seeking to understand so that we can also be understood.

- Thank you to Vasileios Madouros, Conor O'Shea, Cian O'Laoide and Steven Cull for their help in preparing these remarks. [1]

- 75 Years of Change: The Story of the Central Bank of Ireland [2]

- Makhlouf, Gabriel. . Speech at Victoria University Wellington (3 November 2016) [3] Growing our economic capital: investing in sustainable improvement in our wellbeing

- Makhlouf, Gabriel. ' '. Address to University of Auckland (27 March 2018) [4] Social Capital and the Living Standards Framework

- Understanding Public Value; [5] https://www.dpmc.govt.nz/sites/default/files/2022-12/understanding-public-value- mark-moore.pdf (PDF 836.56KB)

- Discussion Paper Series: [6] https://cepr.org/system/files/publication-files/DP19811.pdf

- Resolving Ireland's Banking Crisis by  Patrick Honohan [7]

- Haldane, Andrew; Address to the Centre for Research on Socio-Cultural Change (CRESC) Annual Conference, School of Oriental and Africa Studies, September 2003 [8] (PDF 243.94KB) (PDF 243.94KB)Why institutions matter (more than ever) (PDF 243.94KB) (PDF 243.94KB)

- Trust in Central Bank Independence, David Romelli [9]

- Lagarde, Christine. . Speech at the Lamfalussy Lectures Conference (27 January 2025). [10] Central bank independence in an era of volatility

- Carstens, Augustín. . Speech at the Bank of Madrid (17 January 2025). [11] Origins and foundations of central bank independence (PDF 420.16KB)

- ECB working paper [12] https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp3006~502710f3fa.en.pdf (PDF 2.22MB)

- Aikman, Monti and Zhang [13]  https://cepr.org/system/files/publication-files/DP19811.pdf

- OECD Survey on Drivers of Trust in Public found that across the 30 countries, the share of people with low or no trust in the national government (44%) outweighs the share of those with high or moderately high trust (39%). [14] https://www.oecd.org/en/publications/oecd-survey-on-drivers-of-trust-in-public-institutions-2024-results\_9a20554b- en/full-report.html

- Carr, Nicholas. Superbloom: How Technologies of Connection Tear Us Apart . (W.W.Norton &amp; Co, 2025) [15]

Schiller, Robert. Narrative Economics (Cowles Foundation, Yale University 2017) [16]

Makhlouf, Gabriel. . Lecture at the University of Canterbury (17 August 2017) [17] Chances, choices and challenges: New Zealand's response to globalisation

- Linking Trust to Trustworthiness [18]  https://www.tandfonline.com/doi/full/10.1080/09672559.2018.1454637?scroll=top&amp;needAccess=true",Gabriel Makhlouf
https://www.bis.org/review/r250319e.htm,François Villeroy de Galhau: Venturing into open waters to unlock Europe's innovative potential ,"Speech by Mr François Villeroy de Galhau, Governor of the Bank of France, at the Euronext Annual Conference 2025 ""Building the Savings and Investments Union for real"", Paris, 18 March 2025.",2025-03-18 00:00:00,"

## Speech



## Venturing into open waters to unlock Europe's innovative potential

Published on the 18th of March 2025

Euronext Paris - Building the Savings and Investments Union for real

Paris, 18 March 2025 Speech by François Villeroy de Galhau, Governor of the Banque de

France



Ladies and Gentlemen, dear Stéphane,

I am pleased to attend this birthday celebration: Euronext is 25 years old, only one year younger than the euro. And both are remarkable examples of European success and pride. Yet, to deliver fully, both need to be complemented with greater economic and financial integration. I cannot agree more with what Commissioner Albuquerque just said.

A decade ago, when the Capital Markets Union appeared, macroeconomic stabilisation was its foremost priority. Today, the overriding objective for our rebranded Savings and Investments Union (SIU) is to ensure an efficient capital allocation, to fund our investment needs. This story has been going on for so long that it often raises doubts: why would the project take off now? I suggest three reasons for hope. First, it has gained political ownership since last year, and in particular since the Letta report. Second, today, Europe may be coming into its own. D. Trump seemingly aspires to break it, but he may be achieving the opposite. And there can be no strategic and military autonomy without economic and financial sovereignty. Finally, we are beginning to focus on a limited number of strong actions rather than the long list of small items (36 !) in the 2020 action plan. As I am at Euronext's annual conference, I will focus on corporate equity for building a stronger economy. I will first elaborate on our  'Schumpeterian gap  ' and its twin deficits (I). I will then suggest three milestones to scale up European equity and innovation financing (II). i

## 1. The twin deficits of our 'Schumpeterian' gap: innovation and equity

1.1. Don't forget Draghi

Let me first remind the obvious. Europe lags behind on growth, productivity and innovation. Cumulative GDP growth per capita in the United States between 1999 and 2023 reached 39%, against 26% in the euro area. European companies invest, as a share of GDP, only half as much in research and development (R&amp;D) as their American counterparts. In the meantime, our investment needs have hardly ever been greater: if we add 'Rearm Europe' to the famous Draghi figures, EU would have to invest an additional EUR 900 billion yearly to remain competitive in key sectors, such as the environmental and digital transitions, defence and innovation.

ImageThématique Gouverneur Catégorie Discours



Investments needs under Draghi report's assumptions

This effort would account for more than 5% of our GDP. Yet, public resources are scarce and we cannot ramp up fiscal spending indefinitely.

Only four global Top 50 tech companies are European. . However, during the last decade in Europe, total tech industry workforce has increased sevenfold compared to the previous decade and total capital invested rose tenfold , showcasing a positive dynamic. ii iii

So much for a clear-headed diagnosis. Now, what is the therapy? Before coming to its financial aspects, I want to stress the importance of economic remedies and structural reforms I see with some concern the 'D' of Defence eclipsing and even crushing the 'D' of Draghi in our public debate today. The Letta and Draghi reports and the Commission's 'competitiveness compass' last February call for three imperatives three 'Is' - that cost nothing in fiscal terms: (i) 'Integrate more' the single market, particularly in services; (ii) 'Invest better', particularly in energy and technology; and (iii) 'Innovate faster', by cutting red tape. If we don't do this together, quickly and decisively, Europe's strategic autonomy would once again be lost in the sands of economic decline.

## 1.2. Equity, our new frontier

But there is a financial component to the treatment. I won't deal this evening with public funding, which is the only option for defence: the German shift is welcome. The Bundestag vote today is a game changer for Europe, a historical breakthrough. The French challenge is more difficult, because we have squandered too much of the 'peace dividends' in the past on spending on everyday comforts. Private funding is more promising: the European challenge is not a lack of it, but its misallocation.

The EU has considerable private savings, amounting to 5,5% of GDP yearly, against 3,4% in the US. . However, the structure of European households' financial portfolios reveals a predominance of low-risk assets. iv

Equity is more widespread in American than European portfolios



US households allocate more than 50% of their portfolios to riskier assets, whereas these account for only a third of the assets of European households. Moreover, European private savings surplus (around 300 billion in 2023) are channelled across the Atlantic to fund US corporates or public debt, rather than European companies.

Europe's economy does not lack credit financing; it lacks equity funding. We can pride ourselves on having a robust banking sector. Banking assets weight 300% of GDP in the EU, against only 85% of GDP in the US. Debt market-based financing is relatively less developed in the euro area than in the US, and used predominantly by larger companies. But the real gap lies in equity: equity financing of non-financial corporations amount to 215% of GDP in the US, compared to 88% in the euro zone.

## ImageThématique Governor Catégorie Speech



Equity financing of European non-financial corporations is limited

Equity capital financing allows for longer-term horizons, greater flexibility and higher risk tolerance, which are necessary in frontier technologies. This aspect is key, as the bulk of the productivity growth gap between France and the United States over the period 2000-2019 stems from ITintensive sectors. . v

We all know that total market capitalisation is about four times lower in Europe. European venture capital remains underdeveloped in comparison with the United States in all segments, from early to late stage funding. VC funds raised from 2013 to 2023 amounted to 0,36% of GDP in the US, while it represented a mere 0,07% of GDP in the EU, with some heterogeneity between European countries.

## ImageThématique Governor Catégorie Speech

(% of GDP over 2013-2023)



Note: total fundraising of French VC funds over 2013-2023 reached 0.11% of the French GDP over the same period. Sources: Invest Europe and NVCA, BDF calculation.

Us venture capital funds raise more than their European counterparts

Furthermore, we remain reliant on foreign VC to fund European innovation,  for more than 50% of late-stage investments in European tech.

## 2. Three milestones to scale up European equity and innovation financing

Let me now set out three milestones to scale up European equity and innovation financing. We should be taking the best from America, and leaving the rest. Let us become more simple, more innovative, more riskfriendly.

## 2.1 Harmonisation and simplification over deregulation to unlock growth

When it comes to regulation, we need less and more: less rules, more harmonisation. Contrary to a strong wind blowing from across the Atlantic, I have argued that 'simplification is not deregulation' . We stick to the objectives of financial stability and climate, but we reduce complexity. In this regard, the EU Commission's first proposed Omnibus directive is welcome as it alleviates the regulatory burden on European SMEs and intermediate-sized entities, but its balance will have to be fine-tuned. We could possibly streamline somewhat MIFID, and keep the Retail Investment Strategy simple. vii

Additionally, greater harmonisation brings clarity. Euronext's pioneering spirit in launching the single prospectus initiative - S1 - is commendable - a concrete step towards reducing market fragmentation. We welcome the emergence of ""coalitions of the willing"" among private actors, who are moving forward within the existing regulatory framework. But we should seek ingenious workarounds to accelerate the process, such as a 28th regime creating an optional, harmonised legal framework in key areas such as corporate law, labour, and taxation. We should always seek to reduce the European market fragmentation that limits our effective market size, hindering firms' ability to scale up. . And we need a greater harmonisation of supervision. ESMA's direct supervision of crypto-asset services providers   and cross border systemic market infrastructures such as CCPs and CSDs would be a significant step towards a unified capital market. viii ix x

2.2. More innovative: boosting European venture capital

A well-functioning equity financing ecosystem is a prerequisite for scaling companies; from venture capital allowing start-ups to develop breakthrough technologies, to private equity for growth and to listed markets for further expansion. Strengthening the pipeline from earlystage funding to market exit - whether through IPOs or strategic acquisitions - would help retain high-growth firms in Europe. The underdevelopment of European VC is rooted in the fragmentation of our financial markets and tax regimes, the risk aversion of institutional investors and the limited role of pension funds, which amount to only 30% of EU GDP (against 136% in the US).

The Tibi initiative launched in France in 2019, has enabled to channel long-term institutional capital into equity financing of innovative and growing tech companies. 'Tibi-labelled' funds have mobilised a total of EUR 13 billion for 2020-2026, effectively doubling insurers' participation in VC fundraising rounds . This success inspired Germany's 'WIN initiative', aiming to raise EUR 12 billion between 2025 and 2030. Complementing national initiatives, a new version of the European Tech Championship Initiative (ETCI), open to private investor could be boosted. We should complement this with much stronger public-private partnerships, with European public capital supplementing pari-passu cross-border private funds. To date, this initiative has gathered a funding of EUR 4,15 billion, a favourable yet insufficient amount to bridge the scale-up gap in Europe. Encouraging institutional investors to diversify their asset allocation through regulatory adjustments and incentive structures could unlock substantial capital, as proposed by the IMF . xi xii

2.3. Fostering a culture of well-informed risktaking

Eventually, we have to sail closer to the wind. To unlock our untapped growth and innovation potential, fostering a culture of well-informed risktaking is essential.

A competing explanation pointed out by entrepreneur Olivier Coste is that our innovation deficit stems not only from fragmented markets or insufficiently deep and liquid capital markets, but from the cost of failure deriving from overprotection of some stakeholders . Our system could evolve to a more Danish style 'flexisecurity', and improved insolvency law possibly through the 28th regime. Corporate restructuring costs may be up to ten times higher in countries with stronger employment protection legislation - in that case for highly qualified workforce -, such as France or Germany, undermining profitability and competitiveness. This factor especially affects the tech sector, where projects have a greater risk of failure. It discourages venture capital and private equity funds from investing in Europe. xiii xiv

With a more audacious mindset, investments are also concentrated on high-risk, high-impact projects . The US and China have built their technological and industrial leadership by channelling capital into bold, transformative ventures, particularly in sectors like AI, biotech, and green energy. By contrast, Europe often favours too incremental innovation, in fairly mature sectors, and excessive fragmentation in its public and private investments , - the so-called 'Middle-Technology trap', stressed among others by Jean Tirole. xv xvi

Financial education is another key pillar of the SIU. A better-informed public is more likely to engage in capital markets - with a reduced homebias -, ensuring that European households savings are efficiently allocated to productive investments rather than sitting in low-yield deposits.

Let me conclude: Europe has strengths to leverage: stable institutions, high-quality human capital, advanced infrastructures, as well as abundant savings. We need to mobilise all available assets towards a common ambitious and meaningful goal. Let's not downplay the obstacles we are facing, nor the international headwinds. But let's have more of an American virtue: self-confidence. The stoics teach us that we are not defined by external events, but by how we choose to respond to them. Or as Seneca states: 'We cannot direct the wind, but we can adjust the sails'.

i Villeroy de Galhau (F.), "" Europe's growth gap: reconciling Keynes and Schumpeter | Banque de France "", speech at College of Europe, 31 March 2021.

ii These four companies are: SAP, ASML, Schneider electric and Spotify.

Source: CompaniesMarketCap.

Largest tech companies by market cap

.

Accessed March 2025.

iii Atomico, "" The State of European Tech 2024 "", Executive Summary, December 2024.

iv OECD. National Accounts - Gross Saving, United States . OECD Data Explorer. (Accessed March 2025)

v See figure 3 in Bunel, S., Clymo, A., Garnier, O., &amp; Zago, R.,

Revisiting the European performance gap vis-à-vis the United States

, Bloc-notes Éco,

Banque de France, February 28, 2025.

vi Lagarde (C.), ' Follow the money: channelling savings into investment and innovation in Europe ' Speech at the 34th European Banking Congress, European Central Bank (ECB), November 22, 2024.

vii Villeroy de Galhau (F.), ' Towards a realistic simplification: untying some knots in European banking regulations', Banque de France, February 6, 2024.

viii Von der Leyen (U.), Lagarde (C.), "" Europe must act now to strengthen its competitiveness "", Financial Times, February 2025.

ix Bordon, A. R., Di Leno, L., Monteiro, J., &amp; Vanhala, J. et al. Europe's Productivity Weakness: Firm-Level Roots and Remedies . IMF Working Paper No. 25/40, International Monetary Fund.

x Barbat-Layani (M.-A.), Villeroy de Galhau (F.), "" European supervision: crypto first! | Banque de France "", Banque de France, 14 November 2024. xi France Invest (2023). Le capital-investissement Venture et Growth en France - Étude 2023. February 2023.

xii International Monetary Fund (IMF), "" Europe Can Better Support Venture Capital to Boost Growth and Productivity "", July 2024.

xiii Coste (O.), Europe, Tech and War, Amazon, November 2022.

xiv Coste, O. and Coatanlem, Y.

The Cost of Failure and the Quest for

Competitiveness: Disruptive Innovation as a Catalyst

. IEP Policy Brief No.

24, IEP @ Bocconi. 2024.

xv Tirole (J.), "" L'Europe prend le risque de devenir une figurante "", Le Point, 30 janvier 2025.

xvi EconPol Europe, "" EU Innovation Policy: How to Escape the Middle Technology Trap "", Policy Report, February 2024.",François Villeroy de Galhau
https://www.bis.org/review/r250319d.htm,Sethaput Suthiwartnarueput: The Thai economy - the current state and the way forward,"Speech by Dr Sethaput Suthiwartnarueput, Governor of the Bank of Thailand, at the Japanese Chamber of Commerce (JCC) dinner talk, Bangkok, 10 March 2025.",2025-03-10 00:00:00,"Distinguished JCC members and dear friends.

It's a great pleasure for me to be back here again. As noted, this is my fifth time coming to the JCC. Before I go on to the topic and talk about the current state and the way forward, I thought I'd do a little bit of looking back. I remember my first JCC talk back in March 2021 during COVID-19. It was a hybrid event, very cozy, with 12 people sitting and listening in, and about another 80 people online.

This year, it's a bit bittersweet. I always enjoy coming back here, but it will be my last JCC talk. It will be something that I will miss very much. So, thank you again very much for your kind welcome.

## Part 1: Then (JCC March 2024) &amp; Now (GDP Q4/2024 &amp; 2024)

When I was here a year ago, I  mentioned that I  thought consumption was likely  to continue to recover, expecting to see consumption growth of about 3%. As it turns out, consumption came in better than expected at 4.4%. We expected tourism to come back to about 34.5 million persons, but we closed last year with 35.5 million persons. Export value, which had a terrible year in 2023, was expected to rebound to about 2%, but it recovered nicely to 5.8%. The headline GDP number I gave you last year was expected to be in the range of 2.5 to 3%, and it came out at 2.5%. So, it was right at the very end, right at the very bottom of the range that we had expected.

And so why was that? We saw, again, consumption came in stronger than expected, exports did better than expected, tourism came back better than expected, but the headline GDP number came in quite weak. And if you look at the breakdown of the GDP number from last year, 2024, it turned out that the production side did not do well. There was a big inventory drawdown number that shaved off a big chunk of the headline GDP number. So, we ended up last year with a 2.5%. I mention this because it has implications for the outlook now and going forward.

## Part 2: Next (2025)

Growth: The fourth quarter of 2024 came in weaker than expected at 3.2%. We had been expecting a number in the high threes, about 3.8 or 3.9%. The reason for this weakness had a lot to do with more weakness in manufacturing than expected. This sets a low starting point for the figure this year. As a result, we expect this year, 2025, to be weaker than initially forecast. The latest number at our MPC meeting in December 2024, we put out publicly was 2.9%, but we now expect something closer to 2.5%, plus a bit. We still expect to see continued growth in consumption and tourism. We expect consumption to grow a little above 2.5% and tourism to come back to 39.5 million, close to pre-COVID levels. Exports are expected to grow, but at a slower rate than the 5.8% we saw last year.

One key challenge is the disconnection between consumption growth and manufacturing output (see graph 1). In the past, private consumption and manufacturing GDP were highly correlated, but now there's a disconnection. Between 2021 and 2024, consumption grew at an average of 2.1%, while manufacturing shrank by 0.6%. This gap is filled by imports, particularly from China. So, this has been

a major reason why we've seen a lackluster recovery in Thailand's headline GDP numbers. This also explains why the outlook for this year remains concerning. With all the uncertainty on the trade front, particularly around major economies ' tariff policies, there's a significant risk.

Inflation: On inflation, last year we saw inflation come in at 0.4%, below our target. This year, we expect inflation to be around 1.1%, within our target range of 1 to 3%. Does that worry us a lot? Short answer would be not too much. The reason is because the low inflation is driven by supply side factors like food and energy prices, not by a broad decline in demand.

We don't see a broad decline in prices that you would associate with general deflation. In fact, 75% of the goods and services in the consumption basket are not dropping in price. It's only a smaller segment of the CPI basket where prices are coming down, so it's not an overall broad-based decline. Inflation expectations remain anchored. Surveys of business and household inflation expectations are  in  the  2%  range.  So,  the  low  inflation  numbers  should  not  be  interpreted  as  broad-based deflation. We don't see the typical signs of a deflationary spiral. Normally, if people expect prices to keep dropping, they stop spending, thinking they can buy things cheaper later. This would lead to a decline in consumption. But in Thailand, consumption is still growing. We don't see a negative price and wage spiral, where low prices lead to low wage growth.

Financial stability: As everyone knows, we have very high levels of household debt. However, we are seeing  gradual  deleveraging  in  the  household  sector,  which  is  something  we  need  to  balance carefully. We don't want household debt to grow too rapidly through rapid credit growth, as that would not be good. Conversely, if credit growth contracts too sharply, the whole economy could suffer. This balancing act involves getting household debt, particularly the household debt to GDP ratio, on a path where it slowly decreases -not too fast, but not too slow either. We've seen signs that credit growth is slowing down and stabilizing. In the third quarter of 2024, credit aggregated growth was -2% year-on-year, but it leveled out to about -0.4% in the fourth quarter, indicating greater stability. However, credit growth is slowing down due to higher credit risk and lower risk appetite in lending.

In  the  household  side,  this  trend  is  expected  and  necessary  for  deleveraging.  However,  we  are concerned about SME lending, which has been a significant issue in Thailand. Pre-COVID, SME lending was declining, and although it increased sharply during COVID due to targeted credit measures, it is now shrinking again. This retreat from SME lending reflects decreased risk appetite among banks. To address this, we are tackling the problem at its source -credit risk. The risk of lending to SMEs is high, so we have established the National Credit Guarantee Agency (NaCGA) to help guarantee some of the credit and reduce credit risk, encouraging banks to lend more to SMEs.

Another area of interest is the auto side, where high purchase lending and auto loans have declined sharply  due  to  higher  credit  risk.  This  is  driven  by  falling  used  car  prices,  which  have  dropped significantly, not just here but in many countries, due to a glut of cars, particularly Chinese EVs at low price points. When used car prices fall, credit losses for banks increase, making them less willing to lend. However, we are starting to see signs of stabilization in the used car market and auction market. The flow of cars to auction is leveling off, slowing down by about 20% to 30% compared to its peak in the first quarter of last year, although still higher than pre-COVID levels. If the number of cars going to auction decreases, prices should stabilize, credit risks will go down, and banks' willingness to lend in this space should improve.

So, that's the current situation in the economy. Moving forward, at the Bank of Thailand, we focus on two main areas: monetary policy and financial sector policy.

Policy: Our policy over the past few years has focused on implementing a robust monetary policy within an integrated framework. This means we don't just rely on interest rates alone. Instead, we use a combination of tools like foreign exchange intervention (FXI) and financial sector measures, such as debt restructuring, to manage various economic challenges. Relying solely on interest rates places too much burden on a single instrument. Interest rates impact many areas, including exchange rates, credit, and household debt. Therefore, it's challenging to set the perfect rate to address all these issues. By using an integrated approach, we can balance the load across different tools, making our monetary policy more effective and comprehensive.

Fortunately, we have good buffers to handle FX volatility and high household debt. Instead of relying solely on interest rates, we use financial sector policies like debt restructuring. Our latest package, "" Khun Soo Rao Chuay"" helps address household and SME debt.

When  we  talk  about  monetary  policy,  we  don't  look  at  interest  rates  in  isolation.  We  use  an integrated approach, combining various tools to create a  robust policy. This means our policy is broadly right for a wide range of outcomes, especially in uncertain times. We focus on the outlook rather  than  just  data-dependent,  which  can  be  noisy  and  lagging.  This  helps  us  avoid  making backward-looking decisions. We aim to avoid adding noise to the market and prefer not to change rates frequently.

Recently, we lowered rates from 2.25% to 2% because we felt it was a more robust rate for the current circumstances. We consider growth, inflation, and financial stability when deciding rates. The growth outlook has softened, inflation is low, and financial stability risks are reduced due to slower credit growth. Overall, we believe 2% is a good, robust rate suitable for a wide range of outcomes, and we don't plan to move rates frequently.

## Part 3: Way forward

Digital: Our approach has been consistent over the years, focusing on building a future-ready and resilient digital financial landscape. We've made significant progress, especially in digital payments with systems like PromptPay, which now handles 71 million transactions daily.

We've  also  expanded  cross-border  QR  payment  linkages,  making  Thailand one  of  the  country's leaders in this area within ASEAN and Asia. We're moving from bilateral to multilateral payment linkages through projects like Nexus, connecting ASEAN fast payment systems with India.

Additionally, we're exploring the wholesale CBDC project called mBridge, which is a variety of central banks together to solve the payment and settlement issues that happen with the correspondent banking network. So instead of doing transfers via correspondent banking, taking whatever two, three days, things can now be done in literally seconds and minutes.

Under our ' three opens strategy '-more open infrastructure, more open competition, and more open data -we're reviewing virtual bank licenses and expect to announce winners by mid-year, with

operations starting in June 2026. Open data is crucial for facilitating data sharing and maximizing digital benefits.

Structural reforms: these are the kinds of things that we're doing and at the Bank of Thailand, the stuff that's under our purview and that we managed to do. But I think it's very fair to say that in terms of the way forward, there's a lot of structural stuff that should be done and needs to be done.

Structural reforms are crucial for Thailand's sustained growth. A lot of those are not necessarily with the Bank of Thailand. We share the sentiment that a 2.5% growth rate isn't satisfactory. We need long-term solutions, not just short-term economic boosts.

To achieve a higher long-term growth rate, we must improve productivity and competitiveness. This involves  regulatory  impact  assessments,  regulatory  guillotines,  easing  business  regulations,  and upgrading skills. These changes are essential for a sustained increase in growth and a better future for the Thai economy. And it's really, I think, the heart of what we would like and need to see for the Thai economy in terms of the way forward to get us to a better place over the longer term.

## Appendix

Graph 1: The disconnection between consumption growth and manufacturing output

Private Consumption and Manufacturing GDP



Source:

NESOC, calculated

by

BOT

Noted:

Private

Consumption covered

the spending

on goods

by

Thai households

and foreign

tourists.

Manufacturing GOP and Private consumption have become more clearly disconnected, correlation 2012-2020 = 79% vs 2021-2024 = 1184)",Sethaput Suthiwartnarueput
https://www.bis.org/review/r250319c.htm,Vasileios Madouros: Catching and keeping up - payments innovation in Ireland,"Remarks by Mr Vasileios Madouros, Deputy Governor of the Central Bank of Ireland, at the National Payments Conference, organised by the Banking & Payments Federation Ireland (BPFI) Dublin, 13 March 2025.",2025-03-13 00:00:00,"## Catching and keeping up - payments innovation in Ireland - Remarks by Vasileios Madouros, Deputy Governor, Monetary and Financial Stability at BPFI National Payments Conference

13 March 2025

Speech



Good morning everyone. Thank you to the BPFI for organising this year's National Payments Conference and for inviting me to take part. I'm delighted to be joining you again this year. 1

When we met this time last year, my main message was that many of the benefits of innovation in payments remained untapped from the perspective of the domestic economy.  Put differently, Ireland has been lagging behind some of our peers in terms of the payments offerings available to domestic households and businesses. The Government's National Payments Strategy (NPS), published last October, has set the foundations to address that.  And our collective near-term focus now needs to be on delivery, to realise the intended outcomes outlined in the NPS. 2 3

In my remarks today, though, I would also like to look further ahead. To consider not just how we catch up with the frontier of innovation of payments, but how we keep up over time. Because that frontier continues to shift rapidly, driven by technological and business model innovation.

## Technological shifts and the ongoing evolution in the payments landscape

To illustrate this point, let me start with a brief look back at the evolution that we have already seen in the payments landscape.

As everyone knows, a striking trend over recent years has been the rapid shift from cash to electronic payments for retail transactions . Over the past decade, cash withdrawals have decreased by close to a third, while the use of electronic payment methods has increased almost fourfold (Chart 1). Of course, cash is - and will remain - a core element of the payments ecosystem, and the Central Bank is committed to ensuring cash remains available as a means of payment. In aggregate, though, it is clear that electronic payments are increasingly popular amongst many in our society.

Chart 1: Electronic payments have risen rapidly, as cash withdrawals have fallen



The growth in electronic payments has, in turn, been driven primarily by continued innovation by card schemes . From the magnetic strip, to contactless payments, to the integration of cards into mobile wallets. Amid technological progress, evolving consumer preferences and a changing nature of commerce, card offerings have responded. Indeed, card payments have accounted for more than 60% of the growth in electronic payments in Ireland over the past decade (Chart 2).

Cumulative growth in number of transactions since 2014 (billions)

Chart 2: The growth in domestic electronic payments has been driven by cards



Internationally, paying by account has evolved into an increasingly effective payment method, enabled by greater use of application programming interfaces, 'open banking' and upgrades to the underlying infrastructure to support instant payments. Paying by account offers a convenient alternative to cards, strengthening competition, lowering costs for merchants and consumers and improving system-wide resilience. However, Ireland continues to lag behind other jurisdictions in the availability of pay-by-account offerings. Rightly, therefore, the NPS has prioritised the development of pay-by-account solutions as an additional payment method in Ireland.

In that context, it has been positive to see the progress made over the past year, whether in terms of the constructive engagement of the sector with the account-to-account workshops organised by the Central Bank or the implementation of the 'receiving' leg of instant payments. Indeed, progress on the latter means that we've seen a significant increase in reachability of Irish bank accounts with instant payments (Chart 3). But it is also clear that there is substantial further work ahead of us to make pay-by-account solutions broadly available in Ireland. This includes progress with the implementation of the 'sending' leg of instant payments as well as accompanying enablers, such as APIs and verification of payees. Ultimately, delivering a convenient and trusted pay-by-account solution for consumers and businesses in Ireland remains an important near-term priority.

Chart 3: Reachability with instant payments has risen, amid progress with implementing the 'receiving' leg of instant payments



## A further wave of transformation in payments (and finance)

So this is where we are now. But the transformative potential of technology in the world of payments - and finance more broadly - remain as strong as ever. In that context, progressing near-term priorities also needs to be accompanied with actively preparing for the future.

And a likely spark for further innovation is based on the potential of distributed ledger technology (DLT) . DLT allows for the creation of common shared ledgers, which can be updated simultaneously across all parties to a financial transaction. The technology has the potential to reduce frictions and inefficiencies, by removing the need for parties to a transaction to individually update and reconcile their own ledgers. DLT also allows for certain functions to be built into financial contracts, such as making conditional payments. And the possible use cases of DLT extend well beyond payments, introducing the potential for a diversity of digital assets to co-exist on shared ledgers.

The use of DLT is increasingly being explored for its potential to introduce greater efficiency and effectiveness in payments processes. For example, tokenised deposits are being investigated by banks across the world.  Put simply, these refer to the potential for using DLT technology to represent a standard deposit balance on a shared ledger. The majority of exploratory efforts at the moment have centred on the use of tokenised deposits for wholesale financial transactions, but attention is also being given to the tokenisation of retail deposits. 4 5

And, of course, DLT is also already in use by various so-called stablecoins .  These broadly comprise digital assets that aim, by one means or another, to maintain a stable value relative to some reference asset(s). At present, these tokens are mainly issued by non-bank entities, so they have been spurred not just by technological innovation, but also business model innovation. To date, their use has been largely confined to facilitating transactions within the crypto ecosystem, but there are certainly stated ambitions that they could be used for broader payment purposes across the economy, including for cross-border payments. 6

So where does this all leave us? It is clear that the journey of transformation in payments is ongoing. Indeed, we could be at the cusp of another wave of innovation disrupting the landscape.  While it is hard to predict the future, it certainly seems plausible that we will see increasing integration of DLT into financial services, including payments. Which then begs the question: how do we best respond to, and prepare for, the ongoing transformation in the payments landscape to achieve optimal public policy outcomes? 7

## Why central banks and regulators are responding

What is very clear - in this context - is that central banks and regulators cannot afford to stand still .

Why? Well, as you know, the modern monetary system is based on a public and a private tier: public money liabilities of the central bank; and private money - deposits of credit institutions. And payments systems - through which these different forms of money flow - rely on an inextricable partnership between the public and private sectors.

In that partnership, the role of central banks and regulators is to ensure trust . We do this in different ways: by issuing the safest and most liquid asset in the economy - public, or central bank, money; by operating core payments infrastructures; by regulating and supervising financial institutions; and by overseeing privately-operated payments systems. These foundations then enable the private sector to do what it does best: interface with customers, innovate, compete to win business and, ultimately, meet the evolving financial needs of households and business.

Given this inextricable partnership between the public and private sectors, to achieve optimal outcomes for households and businesses, central banks and regulators need to anticipate, and respond to, innovation. And, to illustrate why this is essential, it's useful to consider the counterfactual: what might be the costs of standing still, in light of the innovation that we're seeing in the private sector?

At the very least, there would be a risk that the full benefits of innovation in payments are not maximised from the perspective of the broader economy. Fragmentation harms efficiency in payments, resulting in higher costs for businesses and households. The core payments infrastructures operated by central banks guard against fragmentation, by offering a common platform and unified standards, upon which the private sector can build to provide services to businesses and households. If those infrastructures and standards did not keep up to speed with technological developments, we would risk a more fragmented payments ecosystem.

Similarly, if regulators were to stand still, the emergence of novel risks amid an evolving landscape could undermine confidence and integrity in payments. For example, it is not just payments providers that have innovated. Unfortunately, so have fraudsters.  Which means that our collective approach to preventing fraud needs to constantly evolve to protect consumers. And the increasing participation of new, innovative entities in the payments ecosystem requires that our regulatory and supervisory approach adapts, to remain fit for purpose and maintain confidence. 8

There are also more severe scenarios, from the perspective of the system as a whole, if central banks were to stand still amid broader innovation. Imagine, for example, a scenario where DLT becomes embedded across the financial system, but public money does not keep pace. If that were to happen, private money could replace central bank reserves as the key settlement asset for wholesale financial transactions. Such an outcome would be systemically risky. Central bank reserves are the ultimate risk-free and most liquid asset in the financial system. Their use as a settlement asset for large and time-critical wholesale transactions anchors confidence across the entire payments system, ultimately supporting all payments in the economy.

These scenarios illustrate the main point: for the benefits of the next wave of innovation to be harnessed, central banks and regulators need to keep up pace with developments.

## The Central Bank's response to innovation in payments

So let me now turn to how the Central Bank - as part the Eurosystem and the European System of Financial Supervision - is responding to the innovation we are seeing in payments. Ultimately, we ourselves are on a journey, as we are deepening our understanding of the opportunities and risks of different technologies and innovations.

Our ultimate aim is to ensure that the benefits of innovation for consumers of financial services are realised and the risks are managed effectively, thereby maintaining confidence in money and payments throughout this ongoing transition. This is a strategic priority for us, and the approach we are taking is multi-faceted, reflecting the range of activities we undertake to deliver trust in money and payments.

## New technologies for settlement in central bank money

One key initiative is the exploration of new technologies for settlement in central bank money.

Last year, the Eurosystem concluded a successful series of tests employing DLT for settlement in central bank money.  This work generated widespread interest amongst market participants, across multiple European jurisdictions. This pointed to the market's desire for the Eurosystem to play an active role in the ongoing digital transformation of the settlement landscape. 9

Last month, the Governing Council of the ECB decided to step up the Eurosystem's efforts in this area, following a two-track approach. First, in order to meet market demand, as soon as feasible, the Eurosystem will develop and implement a safe and efficient platform for settlements of transactions recorded on DLT in central bank money, through an interoperability link with TARGET Services. Second, the Eurosystem will look into a more integrated, longterm solution for settling DLT-based transactions in central bank money. 10

## Digital Euro

Another way in which the Eurosystem is responding to the innovation in payments is through the preparation for a Digital Euro.

The development of a retail central bank digital currency is especially relevant in the euro area, given the persistent fragmentation of the retail payments landscape in Europe. Despite multiple efforts, more than 30 years since the inception of the Single Market, 25 years since the launch of the single currency, and 10 years since the publication of the Single Euro Payments Area Regulation, most European retail payment solutions remain national in scope. This is preventing us from reaping the full benefits of the Single Market.

The public infrastructure that needs to be built to facilitate a Digital Euro would - amongst others - fill the gaps in our current fragmented retail payments landscape in Europe. More broadly, as a complement to cash, the Digital Euro could be used for all digital payments throughout the euro area, be free for basic use, be available both online and offline, and offer the highest level of privacy. No existing digital payment instrument offers all these features in the Euro Area.

A Digital Euro would offer an open platform for innovation, based upon which private payments providers could build value-added services and achieve pan-European reach, strengthening competition and competitiveness. It is yet another example of a public-private partnership.

## A responsive approach to regulation and supervision

Our approach to regulation and supervision has also responded, in different ways, as the payments ecosystem has continued to evolve.

One dimension of that has been the increased supervisory attention on the payments and e-money institutions (PIEMI) sector. In recent years, we've seen significant growth in the number and activity levels of PIEMI firms authorised in Ireland, providing services across Europe. Our supervisory efforts have sought to strengthen the regulatory maturity, governance and risk management capabilities of the sector, to better match those growing activity levels. 11

Another dimension has been our increased focus on operational resilience. This is critical in the context of growing digitalisation of financial services, including payments, set against ageing legacy IT platforms in some firms. Enhancing operational resilience, including cyber-related resilience, across the financial sector remains a priority for the Central Bank. In 2025, a key element of that will be the effective implementation of DORA obligations by regulated firms. 12

And the regulatory framework has also responded to the growth of digital assets, through the introduction of MiCAR. The Central Bank is the National Competent Authority for the authorisation and supervision of entities in Ireland subject to MiCAR. We have put in place a well-resourced and expert team to deal with the authorisation process in a responsive and timely way.

## Strengthened engagement with the domestic sector

Catalysing better public policy outcomes in payments requires effective engagement amongst participants of the payments ecosystem. The Central Bank actively supports that outcome, acting as a 'convening' force. We can bring together innovators and incumbents, payment service providers and payment service users, private market participants and public authorities.

An example of that has been the ongoing work through the Irish Retail Payments Forum on identifying and removing barriers to the development of account-to-account payment solutions in Ireland. Later this year, we also plan to engage with the sector on developments in, and implications of, new technologies in payments, including DLT.

From a regulatory perspective, our new Innovation Sandbox helps us deepen our understanding of the opportunities and risks associated with cutting edge innovations, while sharing our expectations for innovators seeking to enter the regulatory remit. 13

Our first iteration of the Innovation Sandbox has focused on combatting financial crime and fraud, which are particularly relevant to the payments trends we see. Future iterations of the sandbox could potentially explore DLT and its applications across the financial system, though of course that would require that there is sufficient engagement with the technology from the financial sector.

## Our commitment to cash

Finally, let me also cover cash. Because part of the preparation for the future is ensuring that digital developments in payments do not outpace society's needs and preferences.

Cash is - and will remain - a core element of the payments ecosystem - in Ireland and internationally. Indeed, the Eurosystem's cash strategy aims to ensure that cash remains widely available and accepted. While the use of cash in Ireland has been declining, it is very clear that there is a continued societal and economic demand by households and businesses to be able to use cash as a means of payment.

In that context, the Central Bank has been preparing for the delivery of our responsibilities under the legislative framework currently going through the Oireachtas on Access to Cash. This is an important public policy intervention, providing a mechanism for ensuring that future developments in the cash infrastructure provided by the private sector reflect society's needs. And, as a further signal of our commitment to cash, we have embarked on a project to build a new Cash Centre. We see this as a critical piece of national infrastructure, serving society for decades to come. 14

## Taking a strategic lens on payments innovation

So let me now turn to how we see the financial sector preparing for the potential transformation that lies ahead.

Overall, my observation is that the extent to which payments are seen as a strategic priority across the Irish financial system is uneven, and parts of the sector providing services to domestic households and businesses need to take a more forward-looking approach than we have seen to date. I recognise, of course, that the landscape is shifting constantly and rapidly. And that there are many competing priorities. But it is precisely because of this context, that a strategic lens is important.

Let me give you some practical examples of what I mean.

A strategic lens would recognise that expanding the breadth of data that accompanies a payment transaction is a necessary foundation for the future of payments. We are in the midst of an ongoing enhancement of the infrastructures underlying payment transactions, including by making increasing use of enriched messaging formats

- such as ISO20022.  Yet, we continue to see provisional, stop-gap measures, rather than long-term solutions. The use of intermediary ISO20022 converters is an example here, which needs to be phased out of the market.

A strategic lens would also seek to maximise the synergies between different tracks of the evolution of payments. For example, in the context of the Digital Euro, the Eurosystem wants to maximize the re-use of standards, payment instruments and infrastructures, allowing payment service providers to build on existing investments, including the ones made for instant payments. So, a strategic approach would seek to go beyond delivering the minimum requirements to meet the Instant Payments Regulation, and see the development of an effective pay-by-account functionality as a building block for scaling up capabilities and reaping the benefits of synergies in the future.

Active exploration of new technologies and innovations is also an important enabler for incumbent financial institutions to better understand their benefits and risks, consider the implications for their business models, and prepare for the future. While Irish financial institutions did not participate in the Eurosystem's exploratory work on new technologies for wholesale settlement last year, the Central Bank stands ready to support anyone who wishes to engage with the next steps of this work. Similarly, in terms of the Digital Euro, active engagement - with us, with the broader Eurosystem, and within industry fora - is key to building understanding and enhancing preparedness.

So I think a step change is needed in terms of taking a strategic lens to the future of payments, and grasping the opportunities available. Because failure to keep pace is a real risk, both from the perspective of central banks and regulators as well as the financial system itself.

## Conclusion

Let me conclude by taking a step back and considering the importance of innovation in payments from a broader lens.

Digitalisation is one of the most powerful 'mega-trends' shaping our society and economy. And payments are the lifeblood of the economy. So innovation in payments - done well and safely - can unlock broader economic benefits. It can improve efficiency, enhance competition, and reduce costs for businesses and households. And, at a European level, it can reduce fragmentation, helping to maximise the benefits of the Single Market for all Europeans. For those benefits to be realised, the Irish payments landscape needs to catch up with the frontier of innovation, and also keep up over time. That requires taking a strategic lens on the evolution of payments. And it also relies on an effective partnership between the public and private sectors. I look forward to continued engagement with many of you here today to realise those opportunities in the years ahead. Thank you for your attention this morning - and I hope you enjoy the rest of the conference.

- [1] I am very grateful to Austin Carberry, Robert Davies, John Geelon, Patrick Haran, Anne Marie McKiernan, Karen O'Leary, Gillian Phelan, Heloise Rosset, Jason Roche and Mikela Trigilio for their advice and help with preparing these remarks.
- [2] Madouros (2024) 'The evolving payments landscape in Ireland', available here.
- [3] Department of Finance (2024) 'National Payments Strategy', available . here
- [4] See, for example, European Banking Authority (2024) 'Report on Tokenised Deposits', available . here (PDF 869.85KB)
- [5] See, for example, UK Finance (2024) 'UK RLN Experimentation Phase: Summary Report', available . here
- [6] In practice, of course, there have been various incidents of deviations from the peg. See, for example, Kosse et al (2023) 'Will the real stablecoin please stand up?', available . here (PDF 606.96KB)

[7] See, for example, Carstens and Nilekani (2024) 'Finternet: the financial system of the future', available . here (PDF 846.75KB)

[8] For an analysis of payments fraud trends in Ireland, see Varadarajan (2025) 'Behind the Data - Insights from Irish Payment Fraud Statistics', available here.

- [9] See . https://www.ecb.europa.eu/press/intro/news/html/ecb.mipnews241204.en.html
- [10] See . https://www.ecb.europa.eu/press/pr/date/2025/html/ecb.pr250220\_1~ce3286f97b.en.html
- [11] See McMunn (2024) 'Perspectives and priorities - payments and e-money', available here.
- [12] See Central Bank of Ireland (2025) 'Regulatory and Supervisory Outlook, available here (PDF 2.15MB).
- [13] See Donnery (2024) 'Innovation and Trust- Regulating in the interests of us all', available
- [14] See https://www.centralbank.ie/news/article/statement-cash-centre-7-december-2022.",Vasileios Madouros
https://www.bis.org/review/r250319b.htm,Sanjay Malhotra: Climate change risks and finance,"Keynote address by Mr Sanjay Malhotra, Governor of the Reserve Bank of India, at the Policy Seminar on ""Climate change risks and finance"", organised by Reserve Bank of India, New Delhi, 13 March 2025.",2025-03-13 00:00:00,"## Sanjay Malhotra: Climate change risks and finance

Keynote address by Mr Sanjay Malhotra, Governor of the Reserve Bank of India, at the Policy Seminar on ""Climate change risks and finance"", organised by Reserve Bank of India, New Delhi, 13 March 2025.

* * *

I am delighted to be present here and be part of this important event on climate change which continues to draw attention in the national and international discourse. I would not dwell in detail about the perils of climate change since this audience is already well aware about its impact not only on the real economy, but also the financial system, as well as our day-to-day lives. Climate related changes are perceptible, clear, and visible. They are intensifying and threatening ecosystems, livelihoods, and economies. It is our individual and collective responsibility, to work together effectively and contribute to the global efforts to mitigate the risks associated with climate change and ensure that the Indian financial system remains resilient.

## Dimensions of Climate Change Risks

There are two dimensions to climate change related risks that we as regulators, policymakers and practitioners have to be aware of - the first is facilitative involving capacity building, development of the ecosystem and financing of green and sustainable transition; and the second is the prudential aspect, which is related to risk management.

While the role of the Central Banks in managing risks posed by climate change to the financial system is increasingly being recognised, their role in facilitating the financing of green and sustainable transition has been a matter of debate and has varying dimensions to it. Central Banks in Advanced Economies have traditionally followed an asset neutral approach. Central Banks in Emerging Markets and Developing Economies (EMDEs), on the other hand, have adopted directed lending policies to channelise credit to certain sectors of their economies given their individual country circumstances and developmental objectives. In the Indian context, as you are all aware, the priority sector lending guidelines facilitate credit to be channelled to specific sectors including renewable energy.

On the prudential aspect, there are several channels through which climate change risks impact the financial system. All the major types of financial risks - be it credit, market, or operational risk - are influenced by climate change. These risks include losses from credit portfolio due to extreme climate events or natural disasters (physical risks) and loss in value of collaterals due to stranded assets (transition risks); losses from investments; and operational losses. Although climate change impacts almost all economic sectors, the extent and nature of these risks vary by sector, industry, geography, and institution. The mitigation of climate change risks, therefore, rests firstly, on realistic and comprehensive assessment of the frequency and severity of climate risks and secondly, estimating their financial impact, which is no easy task.

As a Central Bank, the Reserve Bank is mindful of its role in addressing and mitigating risks to the financial system from climate change. In this context, our endeavour has been to play the role of a facilitator - including supporting capacity building and fostering a conducive regulatory framework for promoting green and sustainable finance. One important aspect of green financing/lending for sustainable finance is the higher credit risk due to borrowers' use of new and emerging green technologies, which have relatively limited track record in terms of reliability, efficiency, and effectiveness. Regulated Entities, therefore, need to develop suitable capacity and technical knowhow to better appraise risks in financing projects which use such green technologies.

## Evolution of climate change risks and mitigation for the Indian Financial System.

The Reserve Bank's approach with respect to climate related financial risks is oriented not just for the short-term but also the medium-term, taking into consideration the evolving national and global circumstances. Over the short-term, our goal is to be able to make a realistic estimation of the impact of climate related risks not just on individual institutions but also on the financial system as a whole. This would involve scenario analysis and stress testing exercises, using both bottom-up and top-down approaches.

The risk management framework in Regulated Entities for climate related financial risks is still evolving. There is a need for concerted efforts in developing the risk management framework; building technical expertise and competencies for comprehensive assessment and mitigation of climate related financial risks as also on the extent of losses due to such risks. I would now like to highlight some of the initiatives of the Reserve Bank has taken in this regard.

Climate related financial risk modelling is very important and data intensive. There is limited data available for measuring financial impact of climate change. Moreover, there is lack of benchmark sectoral transition pathways and country-specific carbon emission database. These constraints limit our ability to make a comprehensive assessment of climate change risks. These limitations also constrain comparison of financial impact, as each Regulated Entity may use its own assumptions and models to process climate related data. To address such constraints, we had in October last year announced the creation of a repository called the Reserve Bank - Climate Risk Information System (RB-CRIS). The repository is intended to bridge data gaps by providing standardised datasets. These datasets include hazard data, vulnerability data and exposure data related to physical risk assessment, sectoral transition pathways and carbon emission intensity database related to transition risk assessment. Work on this repository is underway and we expect to launch it later this year.

Several jurisdictions have started work on the assessment and disclosure of climate related risks. International organisations such as International Sustainability Standards Board (ISSB) of the International Financial Reporting Standards (IFRS) 1  Foundation has released standards on climate related disclosures. The Basel Committee on Banking Supervision (BCBS) has also released a consultative document on disclosure of climate-related financial risks with a view to integrate climate risk related disclosures 2 under the Pillar III disclosure requirements of the Basel framework. The Reserve Bank,

as you are aware, had already issued draft guidelines on Disclosure Framework on Climate related Financial risks in February 2024, for public comments. We have received valuable feedback and are in the process of finalising the guidelines. A guidance note on Climate Scenario Analysis and Stress Testing is also being developed for the Regulated Entities.

As we all are aware, technology and finance have a critical role in the transition towards a low-carbon economy. There is a need to build innovative solutions and capabilities in these areas. The Reserve Bank has been encouraging and facilitating innovations through its Regulatory Sandbox and Hackathon initiatives in the Fintech space. We propose to set up a dedicated ""on Tap"" cohort on climate change risks and sustainable finance under RBI's Regulatory Sandbox initiative. We are also planning to conduct a special ""Greenathon"" on climate change and related aspects.

We had in April 2023, issued the Framework on acceptance of Green Deposits  with 3 the objective of enabling banks to augment the flow of credit to green activities and projects. This again shows our willingness to facilitate financing green/sustainable projects. The idea behind the Green Deposits is similar to that of sovereign green bonds. We all need to raise awareness about such products.

I would like to highlight an important initiative to promote green finance. We have included finance to small renewable energy projects - solar, biomass based, windmills, micro-hydel plants and non-conventional energy based public utilities viz. street lighting systems, and remote village electrification projects as part of priority sector lending.

One of the oft-cited constraints to adequate flow of climate related finance has been the lack of bankable projects. Capacity and expertise constraints limit the ability to appraise and thus finance climate change mitigation. It also enhances the risk of funding such projects. Thus, creation of a common pool of such bankable projects will have multi-fold benefits for the entire ecosystem. Regulated Entities with experience of such projects can contribute to the pool for the benefit of others, while also benefiting from such information shared by other Regulated Entities. This will help share knowledge for benefit of all. There is a need for collaboration in this emerging and evolving area. I urge the Regulated Entities to seriously consider setting up such a pool through an appropriate institutional arrangement.

Before I conclude, let me say what is perhaps obvious. The impact of climate change risks is not limited to the financial system alone but extends to the real economy. Be it the corporates or the MSMEs or the agricultural sector, climate change risks are ubiquitous. This calls for a cohesive co-ordination and harmonisation in approach, among not only the financial sector regulators and the Regulated Entities but also various government agencies. There is a need to adopt a holistic approach towards mitigation of climate change risks considering the country specific requirements and circumstances. We will collaborate and coordinate with the government and other regulators to ensure that there is harmonisation and consistency in rules, regulations and our approach towards mitigating the impacts of climate change.

I am happy to note that while we are deliberating on this important topic, the Annual Steering Committee meeting of the Network for Greening the Financial System (NGFS) is also taking place today at this venue. NGFS is doing some pioneering work in the

area of managing climate related financial risks. Be it the NGFS scenarios, the recent work on adaptation, or the work on data directory, they have been a source of technical guidance and capacity building across the globe. We look forward to continued engagement and coordination with the NGFS.

## Conclusion

To conclude, let me reiterate that climate change risks are real and all stakeholders need to be prepared to address the risks and challenges from climate change. Even though we have made a decent start, there are still issues that need to be addressed. The Reserve Bank remains committed to continue adopting a constructive and consultative approach towards supporting the various initiatives being undertaken towards management and mitigation of financial risks related to climate change. We will continue to work steadfastly to realise our vision to build a financial system that can not only withstand future climate shocks, but also actively contribute to India's journey towards a sustainable and resilient future. I urge you all to contribute towards this cause. As Albert Einstein had said ""The world will not be destroyed by those who do evil, but by those who watch them without doing anything.""

Let me also take this opportunity to extend my best wishes to you and your families on the occasion of Holi - the festival of colours.

Thank you.

1  https://www.ifrs.org/issued-standards/ifrs-sustainability-standards-navigator/

- 2  https://www.bis.org/bcbs/publ/d560.pdf
- 3  https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12487&amp;Mode=0",Sanjay Malhotra
https://www.bis.org/review/r250319a.htm,José Luis Escrivá: Challenges and opportunities for the financial future of Europe,"Speech by Mr José Luis Escrivá, Governor of the Bank of Spain, at a meeting of the Spanish Banking Association, Madrid, 14 March 2025.  ",2025-03-14 00:00:00,"## JosØ Luis EscrivÆ: Challenges and opportunities for the financial future of Europe

Speech by Mr JosØ Luis EscrivÆ, Governor of the Bank of Spain, at a meeting of the Spanish Banking Association, Madrid, 14 March 2025.

* * *

Good morning everyone.

I would like to begin by offering my heartfelt thanks to the Spanish Banking Association and in particular to its Chair, Alejandra KindelÆn, for kindly inviting me to this event. I would also like to acknowledge the insightful speech by Commissioner Maria Luís Albuquerque, whose sentiments I share entirely.

We live in a time of profound change. The reshaping of the geopolitical landscape marked by growing tensions between the United States and China, the protracted impact of the war in Ukraine and global trade fragmentation - is generating a climate of uncertainty that demands a clear and resolute response from Europe.

Against this backdrop, Europe cannot afford the luxury of hesitation. This is not the time for fragmentation or paralysis. On the contrary, it is the time for unity across all domains, but very particularly in the economic and financial realm. In the face of external uncertainty, Europe must negotiate and act from a position of power and embrace its relative strengths, with robust institutions and a financial market equipped to foster growth and stability.

With this overall picture in mind, I would first like to emphasise that our currency, the euro, must become a key driver of economic sovereignty, especially when other regions make unpredictable decisions that could generate significant disruptions in areas such as banking supervision, payment systems and trade policy.

Against this deeply complex geopolitical backdrop, Europe needs concrete initiatives to strengthen its strategic position. One area where this is particularly evident is in payments, through the role played by the central digital bank currency in both the retail and wholesale realms.

We are clearly on an irreversible trend towards increasingly digital money, incorporating new technologies such as tokenisation. We must ensure that money's essential attributes are not lost along the way, such as the assurance and security provided by the central bank's backing, its issuance here in Europe and its distribution by institutions under our supervision.

On the retail side, we have made significant progress since the inception of the euro and the creation of the Single Euro Payments Area (SEPA), particularly in transfers and direct debits. However, in electronic payments at the point of sale, whether physical or digital, we continue to lag behind. We lack truly European solutions. 72% of card

payments in Europe rely on international networks, leaving us highly dependent on nonEuropean actors. This model comes at a growing cost: fees are estimated to have increased by around 35% in the last eight years.

This situation has been compounded by the emergence of new players, such as digital wallet providers, which have further narrowed margins. Apple Pay, for instance, charges 0.15% per transaction. And an even greater challenge is looming: the possible expansion of dollar-denominated stablecoins, a model actively backed by the current US Administration, which could deepen our dependence on foreign big tech firms. Although private initiatives such as EuroPA and Wero have sought to address these challenges, their reach remains insufficient.

It is in this context that the Eurosystem is developing the digital euro, which aspires to complement cash and provide a foundation for and impetus to private initiatives.

We are aware of the banking sector's concerns regarding balance limits and adaptation costs. However, in this challenging geopolitical context the digital euro should be regarded not as a problem but as a solution.

This is a historic opportunity to fully complete the Single European Payments Area, lessen our external reliance in a critical sector and retain income from commercial payments within Europe. It will also ensure that we are better equipped to address future risks, such as the rapid expansion of dollar-denominated stablecoins.

On the wholesale front, for some years the central bank digital currency has played a crucial role through TARGET infrastructure. Now the challenge is to adapt these systems to recent technological advancements. Asset tokenisation and the use of distributed ledger technology (DLT) offer potential benefits in terms of efficiency, transparency and security. We in the Eurosystem are already working on concrete solutions to ensure interoperability between DLT-based private platforms and TARGET services.

This same strategic approach should guide the review of our regulatory framework. In recent decades, regulators and supervisors have worked, in collaboration with the banking sector, to address the structural weaknesses brought to light by the 2007 financial crisis.

As a result of the initial Basel III reforms, which were implemented in Europe in 2013, today the European banking system is clearly more resilient. According to the Basel Committee on Banking Supervision, on the latest data available, since 2011 the average CET1 ratio has risen from 6.4% to 14.5%, while the leverage ratio has increased from 2.7% to 5%.  The liquidity indicators (LCR and NSFR) are also 1 comfortably above the required minimum of 100%.

Notwithstanding the monetary policy measures taken by central banks or the actions taken by governments, this greater resilience of European banks has been evidenced by their ability to smoothly overcome recent crises, including exogenous ones, such as the pandemic. Moreover, implementation of the 2017 Basel reforms continues to build up financial stability.

Europe's firm commitment to Basel III is all the more important in the current setting, and I hope it helps the jurisdictions still tackling the implementation process to take the steps necessary.

But we must not be complacent. Financial stability calls for a sound and solvent financial sector and for a regulatory and supervisory framework that is more simple, stable, predictable and efficient.

There is growing consensus about excessive regulatory complexity in Europe, which not only hampers financial institutions' operations, but also overloads the supervisory function and could fragment the market. This is why a holistic review and streamlining of our regulatory and supervisory framework is essential. I am not talking here about deregulation, as we are not seeking to lower requirements or remove the regulations that ensure the system's stability. Rather, the aim is to simplify the regulations overall, to make them more effective.

We must consider European regulations as a whole, including level 2 and 3 standards, to avoid overlaps and unnecessary complexity. We also need to analyse whether regulatory zeal in level 3 may, in some instances, have gone beyond the intentions of the legislator, and to take measures if necessary.

The current economic setting reinforces the need for these measures. Europe continues to grow, but it does so with a worrying structural weakness: a historical gap in private investment. In the euro area, productive private investment accounts for 12.3% of GDP, compared with 15% in the United States and 27% in China.

To bridge this gap, Europe must drive an ambitious structural agenda. One priority is to further European integration through policies that strengthen the Single Market, which will enable European firms to scale up and compete globally. Deepening the Single Market calls for simplifying the regulatory and fiscal frameworks, by reducing fragmentation and red tape. Another priority is strengthening coordination between national industrial policies and European public investment programmes. Public investment must act as a catalyst for private investment, within the bounds of a State aid governance framework that preserves the functioning of the Single Market.

The banking sector continues to be an essential cornerstone in this process. To finance these significant investment needs, firms will continue to resort largely to external source of financing. And the European economy is still heavily banked.

At present, bank loans account for 92% of European firms' total indebtedness, which means that mobilising bank lending will be essential to bridge the private investment gap.

In this regard, the pivotal role played by European Central Bank (ECB) monetary policy should be highlighted.

In response to the inflationary surge in 2021-2022, the ECB raised its interest rates by 450 basis points (bp) between July 2022 and September 2023. This tightening cycle was unprecedented in terms of both the pace and the scale of the policy interest rate hikes.

This decisive monetary policy action prevented the deanchoring of inflation expectations and mitigated potential second-round effects. Euro area inflation was thus swiftly brought down and is now close to the medium-term target of 2%.

This situation paved the way for a normalisation of monetary policy, with a cumulative cut of 150 bp in the deposit facility rate since June 2024. The policy interest rate cuts have gradually passed through to bank financing costs for firms.

Between October 2023 and January 2025 the average interest rate on new lending to euro area firms decreased by 1.1 percentage points (pp), to 4.1%.

This reduction in the cost of financing spurs business investment by boosting loan demand. Indeed, in January 2025 the stock of bank loans to euro area firms saw 2% growth in year- on-year terms, compared with a 0.2% decline in October 2023.

In the current geopolitical environment, I would like to mention Europe's commitment to strengthening its defence capabilities. This commitment poses major challenges from the standpoint of both public and private financing. On the public financing front, reaching the proposed military spending targets will require significant additional fiscal efforts. On the private side, bank lending to the defence sector is at very low levels. In Spain, for example, credit specifically earmarked for armament and ammunition manufacturing has not exceeded 0.1% of total bank lending at any point in the last two decades.

Like other long-term investments, this type of investment is characterised by high levels of uncertainty, strict regulatory requirements and long technological development cycles. Against this backdrop, it is important to assess whether the current regulatory and supervisory framework provides the proper incentives to mobilise bank financing towards this type of investment, and to analyse how the banking sector could play a more active role in this strategic area.

However, bank credit alone cannot meet all the financing needs. The specific characteristics of the banking business, which is subject to stringent prudential regulations that were strengthened after the 2008 financial crisis, make it difficult for financial institutions to provide financing for very long-term projects, particularly risky or highly uncertain ones. Since the global financial crisis, European firms have slightly increased their non-bank financing by issuing debt securities, whose share in the stock of corporate debt has risen from 4.4% in 2008 to 8.1% in 2024. However, this figure remains much lower than in the United States, where this type of financing accounts for 39.3% of the total.

This is precisely why Europe needs to foster deeper and more integrated capital markets. Capital risk is crucial for financing innovative projects and strategic sectors, such as technology or the energy transition. However, European early-stage investment markets are six times smaller than those of the United States and they are concentrated in a handful of countries, such as Germany, France and Sweden. In this connection, the Swedish experience is particularly illustrative. Sweden has managed to develop the EU's deepest capital market, with a stock market capitalisation volume equivalent to 170% of its GDP, well above the average 60% for the EU or 40% for Spain. A key factor for this success was the integration of its stock market into Nasdaq-Europe, a

regional platform operating markets in Sweden, Finland, Denmark and Iceland. By using a dual model which combines a main market with a more flexible growth segment (Nasdaq First North Growth Market), Sweden has helped startups and SMES gain access to government funding, recording the highest number of new admissions to trading in the entire continent in recent years. This experience shows that, in addition to EU reforms under the Capital Markets Union (CMU) framework, there is room for strengthening the capital markets at national level.

Venture capital should be a priority in Europe. Public capital plays a key role in the early stages of innovation. For it to work effectively, it is necessary to develop agile investment instruments that can accurately assess projects' financial and technological aspects, harnessing the potential of European funds for co-investment and attracting private capital. These instruments must be accompanied by measures to reduce regulatory barriers and facilitate private capital participation. Additionally, fostering an ecosystem in which venture capital funds have clear incentives to leverage the opportunities arising from public support is essential.

This is why the CMU is an essential cornerstone of Europe's financial future. We must avoid the errors of previous initiatives and adopt a pragmatic approach, with clear objectives and efficient measures. The Banco de Espaæa strongly supports the Savings and Investment Union (SIU), a European initiative combining the complementary objectives of the CMU and the banking union. We are fully aligned with Commissioner Albuquerque's view of the importance of this complementarity.

One of the most urgent aspects within the SIU is the revival of the securitisation market.

Securitisation allows banks to transfer credit risk off their balance sheets towards nonbank investors, releasing capital for new loans. However, it is underdeveloped in Europe. In 2022 the volume of securitisations issued in Europe was 0.3% of GDP, compared with 4% in the United States. Although there are particularities in both 2 markets - such as the role of government mortgage agencies in the United States or the importance of covered bonds in Europe - this difference is significant and calls for urgent action.

We believe that the reform of the European regulatory framework should focus on reducing its complexity, introducing greater proportionality in transparency requirements for originators and in due diligence obligations for investors.

We also support the creation of a European securitisation platform to facilitate the issuance of standardised securitised bonds.

1  See the Basel Committee on Banking Supervision's latest Basel III monitoring report for 2024, with data available to 2023.

2  See Mario Draghi's 2024 report on the future of European competitiveness, based on data from the Association for Financial Markets in Europe (AFME).",Jose Luis Escrivá
https://www.bis.org/review/r250311g.htm,Denis Beau: Regulation and innovation - mutual benefits,"Speech by Mr Denis Beau, First Deputy Governor of the Bank of France, at the Consulate of France in New York, New York City, 5 March 2025.",2025-03-05 00:00:00,"## Denis Beau: Regulation and innovation - mutual benefits

Speech by Mr Denis Beau, First Deputy Governor of the Bank of France, at the Consulate of France in New York, New York City, 5 March 2025.

* * *

Ladies and Gentlemen,

The financial sector is engaged in an unprecedented . New dynamic of innovation technologies offer vast opportunities in the field of financial services but bring also a variety of risks. This ambivalent impact of innovation raises obvious questions for central banks and supervisors in charge of : how can we ensure that financial stability financial stability is maintained in such a changing environment, and that customers and all stakeholders have in the financial system? In Europe, part of the answer confidence to this question is provided by adapting our regulation tools to help harness benefits brought by innovation while controlling risks. However this approach raises questions: is there not a risk of hampering innovation and therefore competitiveness of the financial sector in the name of controlling risks?

This morning I would like to share with you a strong conviction, which may seem iconoclastic in the current context, and perhaps even more so in this country: there is . Jean Monnet, one of the fathers of no point in opposing innovation and regulation European integration, famously said: 'Nothing is possible without men, but nothing lasts without institutions'. In the same vein, I would say: 'Nothing is possible without innovation, but nothing lasts without regulation'.

This is particularly true, I believe, for the financial system, and I would like to illustrate this in for the prospective safety and efficiency of the financial three critical areas sector - DLT-based finance, artificial intelligence (AI) and cyber risks.

## I/ Let me start with . DLT-based finance

1/ Today, crypto-assets are back in the spotlight, particularly here in the US. However, we need to bear in mind that 'first generation' crypto-assets, such as bitcoin, represent only a small proportion of global financial assets (1.4% of the world market capitalisation at the end of 2024), and are not widely used in critical financial services, including payments, on which the real economy depends.

In contrast, the sponsors of tokenization initiatives argue that DLT-based tokenization, while still in its infancy, offers wider opportunities and use cases notably in the . For example, in the field of investment, trading, clearing and settlement services short to medium term, the tokenisation of financial assets could lead to efficiency gains in , with blockchain technologies enabling greater automation, post-trade activities greater availability and transparency, and improved traceability. In the longer term, the tokenisation of non-financial assets - such as real estate - could increase the liquidity and of the underlying markets. accessibility

However, the development of tokenised finance is notably handicapped by the absence of a fully secure settlement asset. Central bank money - the most secure form of money, and the reference settlement asset in traditional finance is not . For this reason - in other words, by default currently available on blockchain market participants may be tempted to use crypto-assets known as . stablecoins However, stablecoins, especially when they are not regulated, are subject to many risks, particularly liquidity risks. Market participants are well aware of these risks, and the resulting goes a long way to explaining the relatively slow pace lack of confidence at which the tokenisation of assets is developing.

2/ Against this backdrop, our strategy in Europe has been to adapt our regulation to support a sustainable and safe development of tokenised tools in two main ways finance, and to also safeguards our monetary sovereignty on settlement solutions. First, we have developed for stablecoins issuers and digital assets an ad-hoc legislation service providers through the adoption of the MiCA Regulation and the so-called 'DLT Pilot Regime' Regulation. Second, central banks of the Eurosystem under the aegis of the ECB have been preparing an adaptation of the central bank money services they provide. To support the development of tokenized finance more specifically, the Governing Council of the ECB announced two weeks ago that the Eurosystem will develop and deploy solutions to settle in central bank money, including in , following digital form, namely in wholesale CBDC, transactions recorded on DLTs a two track approach. This initiative whose first track should become live by the end of next year should contribute to support the growth of an integrated and sound European market for digital assets.

II/ I'd now like to turn to a of innovation that is absolutely crucial for the second area financial sector: . artificial intelligence

1/ The recent International AI Safety Report led by Professor Yoshua Bengio identifies : risks associated with misuse, risks associated with malicious three types of AI risk use, and . This morning I would like to talk about the latter, and how systemic risks they apply to the financial sector.

First and foremost, the financial sector is vulnerable to risks originating in the real . AI could bring about incremental productivity gains but also more economy profound , with major sectoral restructuring, and major transfers of jobs from economic changes some economic sectors to others - with increased risks of bankruptcy in some sectors, speculative bubbles in others... These economic changes could in turn destabilise the financial sector.

The financial sector is also largely concerned with , which the environmental risks development of AI tends to amplify. The prospect of regular, or even intensive, use of AI by billions of customers around the world obviously raises environmental generative questions and leads to advocacy for a . reasoned use of AI

AI could also contribute to amplify financial sector vulnerabilities through a number of specific characteristics. For instance, , in concentration in the AI market terms of reliance on specialized hardware, cloud services and pre-trained models, may

result in compounding a risk of , if the financial dependence on third-party players sector were to massively favour the purchase of 'off-the-shelf' AI systems - for example in the field of generative AI, where the main players are today the same as those who dominate the cloud market. This echoes the sovereignty issues I mentioned earlier.

Other amplification impacts on financial system vulnerabilities could go through the use of the same types of trading tools and models, which could increase herding , resulting . behaviour in the financial markets in greater volatility and procyclicality The complexity and novelty of the new models could also increase the risk of error or misuse of AI by institutions. This could lead to significant financial losses, which, through financial interconnectedness, could quickly spread throughout the financial system.

2/ To deal with these risks, we must l , i.e. AI ay the foundations for 'trustworthy AI' that is under control, which implies appropriate regulation.

Europe has been a pioneer in this area : the , adopted in the summer of 2024, AI Act aims to protect citizens' rights while promoting the development of a European market of trustworthy AI. In addition, financial supervisors will have to adapt their supervisory activities to ensure that financial institutions remain in control of the . risks associated with their use of AI

To that end, I would like to share with you this morning. Firstly, two convictions the principles we usually promote as supervisors of sound risk management and governance can provide an effective framework for most of the risks associated , with a few adaptations. And the financial sector's risk management culture and with AI internal control systems provide solid safeguard.

However, and this is my second conviction, . Thus, some issues are resolutely new they require . This specific attention from supervisors and supervised entities alike is the case for the explainability and fairness of algorithms. To leave these questions unanswered would mean creating legal uncertainty for institutions, in other words slowing down operational decisions and ultimately innovation in the sector. So I believe that we need to provide the financial sector now with technological and regulatory , to ensure the development of trustworthy AI. In particular, this means that support need to upgrade their skills, adapt their tools and methods... supervisors in short, . Here again, they need to innovate innovation and regulation appear to be complementary rather than mutually exclusive imperatives.

III/ Finally, let me now turn to a of critical importance to the financial sector: third area . cyber risks

1/ The financial sector is one of the biggest users of data and IT resources in the world. This structural trend has been reinforced in recent years by the ever-increasing . This openness is of availability and openness of data great benefit to the financial , which can assess new risks or fine-tune pricing. At the same time, the sector and the multiplication of data sources strengthening of technical interconnections

are creating new vulnerabilities. These vulnerabilities are exacerbated by the , most notably AI, which greatly increases the development of new technologies threat posed by cyber attackers, although it can also help to identify attack patterns.

Another new technology could have an even more radical impact on cyber risks, with devastating consequences for the financial sector: . It has already quantum computing been proven that, thanks to their parallel computing capabilities, quantum computers will be able to , break the most widely used encryption methods by 'brute force' particularly those that currently protect our communication channels. The advanced dematerialisation of exchanges means that our economy and financial system are highly dependent on the robustness of encryption techniques. As a result, this threat should prompt us to begin without delay a gradual transition to quantum-resistant . These solutions already exist and have recently been cryptographic solutions referenced by the American NIST, even if they still require a great deal of research. This is one of the reasons why we, at the Banque de France, have been conducting a number of experiments in this area on an international scale, notably through our involvement in the BIS Innovation Hub.

2/ Furthermore, in order to reconcile open data and risk management, we need to . To that end, in Europe, organise the operational resilience of the financial sector the recently enacted complements the sectoral regulations with DORA Regulation specific rules on operational resilience and IT risk management. In particular, it introduces , such as threat-led penetration testing new risk prevention methods (TLPT) for systemic institutions. These enhanced security tests, involving 'red' teams that simulate the tactics of cyber attackers, allow institutions' critical systems to be tested in a real-world environment.

DORA also to share encourages financial institutions to cooperate with each other their knowledge of emerging threats. Supervisors will play a central role in facilitating and overseeing this exchange of information between stakeholders. In this way, regulation will act as a facilitator, to improve operational resilience and IT risk management.

To conclude, let me say a few last words on the challenges those innovations raise for us central banks and supervisors if we want to contribute positively to harness their benefits and mitigate their risks on the functioning and stability of the financial system.

1/ First, we need to master new technologies ourselves to remain effective and . This means equipping efficient in the conduct of our supervisory activities ourselves with , paying particular high-performance processing infrastructures attention to the at our disposal. When it comes to data, we need to sensitive data make the most of the , by taking advantage of technological new data sources innovations: the open ledgers that blockchains constitute, for example, are a new data manna for central banks and supervisors. To make the most of this potential, however, we need to acquire - which is not always easy in a highly competitive specialised skills world - and . In this area, closer cooperation with the develop our tools and methods academic world could enable us to move forward more quickly.

2/ This brings me to my second point: . we also need to cooperate more and better Each of the three subjects I mentioned earlier - DLT, AI, cyber and quantum - is by its . We therefore naturally need to develop synergies very nature a cross-border issue with , in order to build coherent regulation on a global scale. peer financial authorities We also need to go further and build cooperation with other sectoral authorities (competition, privacy, cyber-security, etc.), in order to take account of the many dimensions of these highly complex issues. Finally, it is also in our interest to : public authorities and financial cooperate more with the financial sector itself institutions share many challenges - think, for example, of quantum computing, which I mentioned earlier - and they will be able to tackle them all the more easily if they are able to move forward together.

To sum up, I would say that central bankers and financial supervisors must not only , in order to ensure the stability of the contribute to regulate, but also innovate financial system while supporting its transformation through innovations. This requires from us to avoid the pitfall common to both regulation and innovation, which can be excessive sophistication or complexity.

This is why in the debate which has started in Europe about how to foster the competitiveness of our financial sector, we advocate at the Banque de France for regulation as simple as possible, and for simplifying it and reducing the associated reporting burden when needed, without renouncing to set demanding requirements in terms of risk management.

In other words, we are in favor of simplifying, not deregulating, which means regulating more effectively and efficiently.

Thank you for your attention.",Denis Beau
https://www.bis.org/review/r250317a.htm,Chang Yong Rhee: Sustainability challenges in Korea,"Keynote speech by Mr Chang Yong Rhee, Governor of the Bank of Korea, at the Global Engagement & Empowerment Forum 2025 on Sustainable Development ""Time for Action: Bridging Divides for a Sustainable Future"", organised by the Yonsei University, Seoul, 14 March 2025.",2025-03-14 00:00:00,"## Chang Yong Rhee: Sustainability challenges in Korea

Keynote speech by Mr Chang Yong Rhee, Governor of the Bank of Korea, at the Global Engagement &amp; Empowerment Forum 2025 on Sustainable Development ""Time for Action: Bridging Divides for a Sustainable Future"", organised by the Yonsei University, Seoul, 14 March 2025.

* * *

## I. Introduction

Ladies and gentlemen, distinguished guests, I am Rhee Changyong, Governor of the Bank of Korea.

It is an honor to join the Global Engagement &amp; Empowerment Forum (GEEF) to discuss building a sustainable future. I sincerely thank Yonsei University President Yun Dongseob, former U.N. Secretary-General Ban Ki-moon, and everyone who made this event possible. I am also pleased to reconnect with former World Bank President Jim Yong Kim after my time in Washington, D.C.

Over the years, the GEEF has brought together global leaders, international organizations, businesses, and stakeholders to explore solutions for achieving the United Nations' Sustainable Development Goals (SDGs). I hope this forum continues driving practical solutions to today's sustainability challenges.

I am here to share Korea's perspective on these issues. Some people say, ""The Governor of the Bank of Korea is overstepping his bounds,"" because I speak on social issues beyond monetary policy. Discussing the SDGs today may reinforce that perception. While central bankers debate their role in such discussions, sustainability challenges directly impact our economy and daily lives. For this reason, I cannot remain indifferent-not just as a central bank governor, but also as a citizen.

Sustainability takes many forms, but today I will focus on two urgent challenges for Korea's economy. The first is climate change, a global crisis affecting everyone. The second is our declining birth rate and aging population, a challenge that is especially severe in Korea.

## II. Climate Change

There is global and domestic consensus that human activities drive global warming and reducing carbon emissions is essential. However, Korea faces significant resistance to accelerating carbon reduction due to its heavily export-oriented economy dominated by high-carbon manufacturing industries. Strengthening emission reduction policies and environmental regulations raises concerns about export companies losing competitiveness. Thus, balancing urgent carbon reduction with sustaining industrial competitiveness has become a central issue.

However, climate change should not be viewed solely from the perspective of export industries. It is a crisis directly affecting our daily lives and quality of life. We are already

experiencing more extreme heat waves, frequent flooding, and the gradual disappearance of familiar fruits and vegetables. Our summer rainfalls used to be predictable, but not anymore. If Los Angeles can experience massive wildfires, what is stopping Korea from experiencing similar disasters? Climate change is not distant-it is occurring now, and its impacts are unavoidable.

Air quality is a clear example. Last week, I visited Cape Town, South Africa, for a BIS meeting. While it was winter in Korea, it was summer there, with warm weather, a refreshing sea breeze, and remarkably clean air. Within days, I realized, ""This is truly clean air."" Upon returning to Incheon Airport, I immediately felt a headache-not just from the flood of emails about economic and political concerns, but also from the noticeably poorer air quality. Korea's air quality has improved recently, but after experiencing cleaner air in Washington, D.C., I can clearly sense the difference. As someone sensitive to lung health after experiencing long COVID, this difference is especially noticeable. Although conditions have improved, fine dust remains a serious issue.

Statistically, the cost of deteriorating air quality is undeniable. Over the past 15 years, diagnoses of atopic dermatitis and allergic rhinitis have doubled, and cases of heat exhaustion have quadrupled, now totaling 4,000. Climate change directly threatens our health, making the challenges of protecting public health increasingly severe as temperatures rise and pollution worsens.

Another example is the increased frequency of sudden downpours, repeatedly flooding Seoul's Gangnam Station area, one of Korea's wealthiest neighborhoods, submerging numerous luxury vehicles over the past several years. Beyond property damage, the human toll has been devastating. Just two years ago, 14 people tragically lost their lives when an underpass collapsed after 500mm of rain fell in thirteen days. Observing these intense summer storms reminds me of tropical squalls typically seen in Thailand or South America.

The Korea Meteorological Administration now classifies rainfall exceeding 50mm per hour or 90mm over three hours as ""extreme heavy rain,"" conditions responsible for 80% of flood damage. These extreme events have more than doubled since the 1970s. Given these dramatic changes, it is unclear whether our current flood prevention infrastructure-such as dams, embankments, and drainage systems-can handle the intensifying conditions. About 20% of national river embankments are already rated as ""inadequate"" or ""poor,"" and projections suggest half of Korea's dams may fail to prevent flooding by 2040. We must proactively strengthen infrastructure now to withstand growing climate challenges.

Third, climate change is disrupting our food supply. Last year, I faced criticism from agricultural stakeholders after suggesting apple imports due to soaring prices (Im et al., 2024). Initially, I anticipated resistance primarily from traditional apple-growing regions like Daegu and North Gyeongsang Province. However, apple production areas are gradually shifting northward. Apple cultivation in Daegu-Gyeongbuk has decreased by nearly half compared to 30 years ago. Once grown nationwide, except for the southern coast and Jeju Island, projections suggest high-quality apples will only be viable in

Gangwon Province's mountainous areas by the 2030s, due to rapid climate change (Rural Development Administration, 2022). Within a decade, importing apples will likely become a necessity rather than controversial.

The fishing industry faces similar disruptions. Pollack, once a staple in Korea, has nearly vanished from local waters, with catches below one ton since 2019. Traditional species like croaker and anchovies are declining, while warmer-water species like yellowtail and mackerel are increasing. Korea's fishing industry must rapidly adapt by modernizing vessels, gear, and aquaculture techniques to match the changing marine ecosystem.

While countless examples exist, the core message is clear. Climate change is not just a challenge for export industries-it already deeply impacts our daily lives and various domestic sectors. Thus, addressing climate change and reducing carbon emissions is not a matter of choice-it is an urgent necessity.

Although the government has initiated policy efforts, substantial progress remains necessary. First, Korea's Green Taxonomy (K-Taxonomy) must align with international standards to clearly define ""environmentally friendly"" activities, signaling strong support for carbon reduction. Second, carbon pricing must be more realistic. Last April, the global average carbon price was approximately $30 per ton, reaching $60 per ton in the EU, compared to only $6 per ton in Korea. At this price, companies find it more economical to buy emission credits than reduce emissions, undermining carbon reduction targets. Third, structural improvements to Korea's Emissions Trading System (K-ETS) are needed. Gradually reducing the 90% free allocation rate and tightening the emissions cap will create stronger market incentives for effective emissions trading.

The Bank of Korea is also increasing its efforts by conducting financial stress tests on climate-related risks. Financial institutions traditionally manage risks like loan defaults and real estate fluctuations, but climate-driven risks introduce unexpected tail risks not yet fully considered. Events like Los Angeles' wildfires or Australia's six-month wildfire crisis in 2019 are not distant threats. They serve as warnings for Korea. Severe localized climate damage could cause significant financial losses for households and businesses, destabilizing financial institutions and spreading shocks throughout the economy.

Thus, the Bank of Korea actively researches climate risks' impacts on our industries and financial system, conducting stress tests with financial institutions under various scenarios. Next Tuesday, we will present these climate stress test results at a joint conference with the Financial Supervisory Service.

Bank of Korea employees are also committed to reducing carbon emissions through research (Kim et al., 2024) and daily practices. Believing even small actions matter, we have adopted eco-friendly measures such as using recycled-paper business cards, reducing plastic use, turning off unused lights, and implementing license plate-based driving restrictions.

## III. Ultra Low Fertility and an Aging Population

Beyond climate change, one of the most pressing sustainability challenges is our demographic crisis-an aging population combined with extremely low fertility rates. Korea's total fertility rate slightly rose to 0.75 in 2024 from 0.72 in 2023. Although this small uptick is welcome, a fertility rate of 0.75 remains a national emergency. If this trend continues, Korea faces an irreversible population crisis that threatens economic stability and social cohesion.

Some people suggest that population decline might have benefits, such as reduced pollution, lower energy consumption, and higher GDP per capita, possibly enhancing quality of life. However, this view dangerously oversimplifies the issue. A fertility rate of 0.75 leads not to gradual decline but rapid demographic collapse, undermining economic and social stability. By contrast, the OECD average fertility rate of 1.4 results in a more manageable and sustainable population decline.

The difference between fertility rates of 0.75 and 1.4 significantly impacts economic growth prospects. At 0.75, Korea's population would shrink from 51.7 million to 30 million in 50 years, just 58% of today's figure, declining annually by 1.1%. In contrast, at a rate of 1.4, the population decline is less severe, reaching 43 million-83% of today's level-with an annual drop of 0.4%. From a purely demographic standpoint, the difference in GDP growth between these two scenarios would amount to 0.4 percentage points annually. But the true cost goes beyond this simple calculation. A declining youth population, crucial for innovation, entrepreneurship, and economic dynamism, would severely undermine Korea's long-term growth potential.  According to a recent Bank of Korea study, Korea's potential growth rate, currently around 2%, may approach near 0% by the late 2040s (Lee et al., 2024). If the fertility rate remains at 0.75, Korea will inevitably face prolonged negative economic growth after 2050. Conversely, at 1.4, Korea could maintain positive economic growth well into the future.

Beyond GDP, persistently low fertility will create substantial fiscal strain, increasing the burden on younger generations. As the elderly population surges, spending on pensions, healthcare, and elder care will rise significantly. According to the National Assembly Budget Office (2025), Korea's national debt-to-GDP ratio, currently 46.9%, is projected to reach 182% within 50 years if fertility remains at 0.75. If fertility improves to 1.4, the ratio would increase more slowly, reaching 163%. The burden on young Koreans will become particularly overwhelming. Currently, four working-age individuals support each elderly person. At a fertility rate of 0.75, this ratio will decline to one-to-one within 50 years. At 1.4, however, it remains more manageable, easing strain on future generations.

Moreover, economic instability from demographic shifts increases society's vulnerability to populism. Stagnant growth exacerbates income inequality, deepens generational and class divides, and fuels political polarization. Politicians and governments may resort to populist fiscal policies, such as direct cash handouts and temporary welfare measures, providing short-term relief without addressing underlying issues. Such policies risk creating a cycle of fiscal inefficiency and mounting national debt, exacerbating rather than resolving the core problems.

To preserve economic sustainability, decisive action must be taken urgently. If Korea's fertility rate remains critically low without significant expansion of the workforce through

foreign labor, the country risks chronic negative growth, soaring debt, and escalating social tensions. Avoiding this scenario requires raising the fertility rate to a more viable level. Completely reversing population decline may be unrealistic since many advanced economies face similar demographic challenges, but Korea cannot afford to remain passive. At a minimum, we must strive to reach the OECD average fertility rate of 1.4.

Why has Korea's fertility rate fallen so drastically? The answer lies in structural barriers discouraging young people from marriage and parenthood. Bank of Korea studies indicate young Koreans delay or forgo marriage and childbirth due to intense competition and anxieties over employment, housing, and childcare. Young people today face fierce competition for scarce, high-quality jobs, making career stability difficult. Simultaneously, soaring housing prices make homeownership seem unattainable. Under these pressures, raising children is more than challenging-it is an overwhelming financial and emotional burden.

A major driver of this crisis is the extreme concentration of population and economic activity in the Seoul metropolitan area. A recent Bank of Korea study analyzing fertility trends in 35 OECD countries identified Korea's urban concentration as among the highest globally, pinpointing it as a key factor behind the country's ultra-low fertility (Hwang et al., 2023). Over 50% of Korea's GDP, population, and jobs are concentrated in the Seoul metropolitan area-much higher than 5% in the U.S. and Germany, 10-20% in the U.K. and Italy, 20-30% in France, and 30% in Japan. While Korea's rapid economic development-the ""Miracle on the Han River""-transformed the country into an economic powerhouse, it also centralized infrastructure, talent, and opportunities in Seoul. Consequently, young people continue migrating to the capital for career prospects, draining vitality from regional economies and pushing many toward demographic extinction.

Korea's highly competitive university entrance system further reinforces the population concentration in the Seoul metropolitan area. Admission to prestigious universities is considered essential-not only for stable employment but also for social status and marriage prospects. This fuels intense competition for limited spots at elite universities, overwhelmingly located in Seoul. Private education has become critical, prompting families to relocate to Seoul's affluent areas like Gangnam-gu, known for high-quality private educational infrastructure. Many parents unable to afford homeownership instead rely on costly rental housing to secure educational advantages. This strategy appears justified, as students from Seoul account for 32% of admissions to Seoul National University (SNU), despite representing only 16% of school-age population. More strikingly, students from Gangnam-gu alone constitute 12% of SNU admissions, three times the district's 4% share of school-age residents (Chung et al., 2024). Relocating to Gangnam-gu is thus seen as essential for top university admission, intensifying Seoul's population density, raising housing prices, and worsening the fertility crisis.

Korea's university admission system is excessively competitive by any standard. Parents sacrifice their quality of life and retirement savings, investing considerable resources to secure their children's admission to elite universities. Paradoxically, this intense pursuit of academic success imposes a heavy cost on both parents and children. From as early as kindergarten, students experience relentless pressure and burnout, depriving them of childhood joys and a healthy adolescence.

Korea's critically low fertility rate (0.75), extreme population concentration in the Seoul metropolitan area, and overheated university competition seem like separate issues but are deeply interconnected. Left unresolved, these challenges-drastic population decline, persistent negative economic growth, escalating social tensions, and diminishing opportunities for youth-will push Korea toward an unsustainable tipping point. Addressing these structural issues simultaneously is challenging, yet the urgency demands bold action. Recognizing this, the Bank of Korea recently proposed two policy suggestions: foster a limited number of regional hub cities and implement a ""regional proportional admission system"" for universities.

First, to effectively reduce the extreme population concentration in the Seoul metropolitan area, we must strategically develop a small number of regional hub cities. Over the past two decades, regional development policies have been introduced to address this imbalance. However, due to political challenges and efforts to evenly distribute resources nationwide, these initiatives have been too fragmented to meaningfully curb Seoul's dominance.

According to Bank of Korea research, the optimal approach-given Korea's land area and population-is to concentrate substantial investments in two to six carefully selected regional hub cities. Targeted, large-scale investment in critical infrastructure, such as healthcare, education, and cultural amenities, is essential to providing a quality of life comparable to Seoul, thus effectively attracting and retaining residents (Chung et al., 2023, 2024). Pursuing this focused strategy will rebalance population distribution, revitalize regional economies-including surrounding smaller cities-and achieve sustainable national development.

In parallel, bold reforms to Korea's college admissions system are essential. The Bank of Korea has proposed a ""regional proportional admission system,"" where universities voluntarily allocate admissions based on each region's proportion of high school seniors (Chung et al., 2024). Despite multiple revisions to university entrance system, excessive competition in university admissions remains unresolved. BOK's new proposal seeks to enhance universities' autonomy in admissions while strongly requiring balanced regional representation-a crucial step to address extreme competition. Adopting this system offers several benefits. First, it reduces the disproportionate influence of socioeconomic factors such as parental wealth and private education, thus significantly enhancing social mobility. Second, dispersing admissions competition from Seoul would ease demographic pressures, stabilize housing prices, and improve fertility rates. Third, attracting students from diverse regions promotes mutual understanding, social cohesion, and reduces regional disparities.

This proposal does not require government intervention or legal amendments, relying instead on the willingness and initiative of leading universities. In Korea, there remains a strong belief that selecting students based solely on academic scores is the fairest, leading resistance to this proposal. Some universities argue they already implement regional proportional admissions for roughly 15% of their freshmen. However, such limited quotas can stigmatize these students and have insufficient impact on demographic or housing pressures in Seoul. To be effective, regional proportional admissions must be applied to most incoming students' admissions. In many advanced nations, regional diversity in admissions is widely accepted and encouraged. I believe Dr. Jim Yong Kim, joining us today and a former president of Dartmouth College,

understands this issue well. He could highlight how Korea's test score-based admissions approach is an exception globally, and how this reform could realistically occur through proactive leadership at major universities.

In my view, allowing universities greater flexibility in evaluating applicants-under regional proportional requirements-would better acknowledge and fairly recognize diverse talents. Human talent is far too diverse to be measured by academic tests alone. Yet, Korea's current admissions system prioritizes a narrow skillset: memorization, quick mathematical calculations, and rapid text summarization under time pressure. These skills, overly rewarded by standardized exams, limit the range of recognized talents. I happen to possess these particular skills and was a major beneficiary of Korea's college admission system. However, if asked to write a creative essay over a week, I might not have excelled. Today, elite university students often share certain defining characteristics such as a personality that diligently follows instructions without rebellion, a willingness to endure 15 years of repetitive study from kindergarten, an IQ high enough to handle the academic workload, but not so high as to question or challenge its purpose.

When Korea's primary goal was catching up with more advanced nations, the current educational system was beneficial in developing individuals who excelled at following orders and carrying out assigned tasks. However, with Korea now at the forefront of global technological competition, we need people unafraid to explore new frontiers, bringing diverse backgrounds and innovative thinking. Additionally, we must foster an environment that encourages collaboration, creativity, and meaningful interaction. It is time for universities to broaden their evaluation criteria and nurture diverse talents by implementing regional proportional admissions.

The challenges highlighted today-climate change and demographic crisis-pose critical threats and require urgent action. Korea has achieved remarkable economic progress, joining the ranks of advanced nations. Now we must focus on enhancing individual wellbeing, ensuring prosperity and happiness for all citizens. Through bold decisions, we can develop vibrant, youth-friendly, green regional hubs that combat climate change and support marriage and childbirth. The Bank of Korea remains fully committed to securing a sustainable, prosperous future for upcoming generations.

Thank you for your time and attention.

This speech was prepared with the assistance of Sanghun Park and Joonki Min from the Office of Sustainable Growth, and Inro Lee and Inkyung Yoo from the Economic Research Institute.

## References

Kim J. Y., Ryu G. B., Hwang J. H., Kim H. J., Kim H. N., Lee H. A., and Sim S. B. 2024. ""The Impact of Climate Change Risks on the Real Economy: Analysis by Climate Response Scenarios."" BOK Issue Note No. 2024-30, Bank of Korea.

Rural Development Administration. 2022. ""Prediction of Changes in Cultivation Areas for Six Major Fruits Considering Climate Change Scenarios."" Press Release. Lim W. J., Lee D. J., Lee Y. S., and Park C. H. 2024. ""Characteristics and Implications

of Korea's Price Levels: A Comparison with Major Countries."" BOK Issue Note No. 2024-14, Bank of Korea.

Chung M. S., Kim E. J., Lee H. S., Hong S. J., and Lee D. R. 2023. ""Interregional Population Migration and Regional Economy."" BOK Issue Note No. 2023-29, Bank of Korea.

Chung M. S., Lee Y. H., Yoo J. S., and Kim E. J. 2024. ""Analysis of Regional Economic Growth Factors and Balanced Development Focused on Hub Cities."" BOK Issue Note No. 2024-15, Bank of Korea.

Chung J. W., Lee D. W., and Kim H. J. 2024. ""Adressing Social Issues Steming from Excessive Competition in College Admissions."" BOK Issue Note No. 2024-26, Bank of Korea.

Hwang I. D., Nam Y. M., Sund W., Shim S. R., Yeom J., Lee B. J., Lee H. R., Chung J. W., Cho T. H., Choi Y. J., Hwang S. W., and Son M. K. 2023. ""Lowest-low Fertility and Super-aged Society: Causes and Impacts of the Extreme Population Structure, and Policy Options."" In-Depth Analysis, Korea Economy Outlook, Bank of Korea.

Lee E. K., Chun D. M., Kim J. W., and Lee D. J. 2024. ""Potential Growth Rate of the Korean Economy and Future Outlook."" BOK Issue Note No. 2024-33, Bank of Korea.

Lim W. J., Lee D. J., Lee Y. S., and Park C. H. 2024. ""Characteristics and Implications of Korea's Price Levels: A Comparison with Major Countries."" BOK Issue Note No. 2024-14, Bank of Korea.

National Assembly Budget Office. 2025. ""2025-2072 NABO Long-Term Fiscal Outlook.""",Chang Yong Rhee
https://www.bis.org/review/r250325b.htm, Andrew Bailey: Growth - what does it take in today's world?,"Lecture by Mr Andrew Bailey, Governor of the Bank of England, at the Chancellor's Distinguished Lecture Series, The University of Leicester, Leicester, 25 March 2025.",2025-03-25 00:00:00,"Opens

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## Growth: What does it take in today's world? - Lecture by Andrew Bailey

Given at the Chancellor's Distinguished Lecture Series, The University of Leicester

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## Published on 24 March 2025

Andrew's speech looks at economic growth and asks what it takes to increase the rate of growth in the economy. In answering that question, Andrew covers both the current situation in the UK and abroad, and economic history.

## Speech

Thank you for inviting me to speak today. It's always a pleasure to be back in my home town, and particularly here at Leicester University, not least because I went to school next door.

I am going to speak today about a topical subject - economic growth. The question I set myself is, what does it take to create a sustained increase in the growth rate of the economy in today's world? I'm going to range quite wide in answering the question, drawing in the current situation here in the UK and the world, and some economic history too.

Economic growth is, quite simply, the rate of expansion of the size of the economy. Let me start by explaining how it matters to the Monetary Policy Committee when we decide on the appropriate level of interest rates to achieve our objective of price stability, the 2% inflation target. There are two parts to why growth matters for monetary policy - the outcome and the inputs. On the first, quite simply, low and stable inflation is the best contribution monetary policy can make to growth in the economy. The same goes for financial stability, our other core responsibility as the central bank, which is also a key condition for growth.

On the inputs side, growth matters because monetary policy decisions require us to assess the inflationary consequences of the pressure on economic resources in this country. That pressure reflects the balance between demand and supply in goods and services and labour markets. To observe that level of pressure, we can't just look at actual national income or output and employment. If that's all we did, we would be left saying 'so what?' We have to compare the actual position with the productive potential of the economy (the supply capacity of the economy) and in doing so assess resource utilisation and thus the degree of pressure.

Except that, we can't observe or directly measure the supply capacity of the economy. It has to be estimated to derive an assessment of potential national income/output. Don't worry, I'm not going to use algebra today, but just a simple illustration: when we do those estimates, we label actual national income/output as Y, and potential income/output as Y*.[1] When Y=Y*, the value of goods and services produced in the economy is at the level where productive factors or resources - labour, capital and land - are being used at a sustainable rate, and thus we are at the level of national income/output consistent with inflation being at the target. footnote

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In fact, things are a bit more complicated, because productive potential (Y*) has both a longrun structural dimension - an influence here is the pattern of an ageing population and what that means for future labour supply - and a shorter run cyclical component - an influence here is the impact of a shock like Covid on labour supply, or the war in Ukraine on energy and food supply. On this last point, you will note that I have slipped in here that we don't live in a closed economy - potential supply and actual demand are affected by what goes on in the rest of the world too.

Two more points before I get off this section on definitions. First, in the MPC we spend time working out what we make of a concept called the output gap. Put simply, it's the difference between potential supply and actual production in the economy. It's the difference between Y and Y*, and provides one, but only one, read on inflationary pressures. And, we have to make this assessment looking forwards, as a forecast, because that's where the level of the interest rate now will have its effect. We can't observe the output gap;, so we have to use all the evidence at our disposal to form a view on it as a matter of judgement.

The second point relates to the growth rate of the economy - the growth of national income/ output. What are the components of productive potential (Y*)? I am going to keep this quite simple and stick to two - the supply of labour, and output per unit of labour. The latter is the simple definition of productivity - the effectiveness of the use of resources. You can reasonably say at this point, hang on there are three factors of production in an economy: labour, land (meaning all natural resources) and capital. Yes there are. However, it is useful to focus on labour supply and labour productivity, but recognise that the available land and capital supply are important determinants of labour productivity. Most standard models of economic growth will underline the role of investment in physical and human capital (including of course education).

Critically, there is a very direct link between productivity growth and living standards. Investment in capital and innovation which supports productivity growth will feed through to a growth in living standards.

So, what has been going on with the growth of potential supply in the economy in recent times? A spoiler here - it's not a very good story. I am going to give three figures for three time periods based on Bank staff estimates: the average annual rate of growth of potential supply in the UK economy and the contribution to that growth rate of productivity and labour supply. From 1990 to 2008, the average annual potential growth rate was 2.6%. Productivity contributed 2.2pp and labour supply 0.4pp. After the financial crisis, from 2009 to 2019, the potential growth rate fell to 1.3%pa, of which productivity contributed 0.3pp and labour supply 1.0pp. From 2020 to 2023 the potential growth rate fell further to 0.7%, with productivity contributing 0.5pp and labour supply 0.2pp. Covid was clearly a major factor in the most recent period. The comparable numbers for the growth of demand in the economy - actual growth - are: 1990-2008 2.3%; 2009-2019 1.4% and 2020-2023 1.1%.

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I think the point comes across clearly. The growth of potential supply has fallen, with the main contributor to that fall being weaker productivity growth. Covid was a major factor in causing a further fall. But it is the decade before Covid that provides a better read.

Productivity growth fell very sharply, and while the labour supply did increase, it did not offset the fall in productivity growth. And, actual growth rates have fallen too, so that actual and potential growth have remained broadly in line.

Moreover, in terms of living standards, an increase in labour supply does not offset a decline in productivity growth. We can see that by looking at the rate of growth of national income per person (GDP per capita). Between 1990 and 2008 the average annual growth rate was 1.8%. From 2009 to 2019, the annual growth rate was 0.7%. I have not replicated the comparison between 2020 and 2023 because 2020 was a bad year on which to start a comparison given the impact of Covid lock-downs.

The story of growth is, I am afraid, quite clear. It has slowed markedly in the last fifteen years or so, and this has affected the advance of living standards (both as a whole and among groups in society). Moreover, I will add one more important point. Like almost all advanced economies, we have a population that is on average increasing in age, and will continue to do so. Other things equal this will over time reduce the supply of labour to the workforce.

At this point, you can reasonably ask if I can say something to cheer things up? I will have a go, because my title today is: Growth, what does it take in today's world? To do this, I am going to turn to history for a while, and then come back to prospects now. I am going to make some longer-run observations on growth in the British economy, and then draw out some points which are salient to the situation today. They also help to tackle an important question we face today, namely is Artificial Intelligence the next big thing in terms of growth in the economy?

Britain is credited with being the first modern industrial nation. Typically, the definition of modern economic growth in this context is where technological progress is centre stage[2]. Recall that GDP growth per capita was 1.8% pa before the financial crisis, but only 0.7% pa afterwards. Looked at in the longer run context, a figure of around 2.2%-2.4% pa was the average from 1950 onwards. And, a figure of about ¾% was respectable for the nineteenth century, where the average was a bit under 1% for the period of the so-called Industrial Revolution. All things are relative and close to 1% was a considerable step up on the preIndustrial era[3]. footnote footnote

Still, we are left with the conclusion that a growth rate of per capita income which disappoints today would have looked respectable during the Industrial Revolution. What's changed? Two things stand out. First, it looks as if the overall growth rate has been enhanced over time as the development of institutions (public and private) and policies has provided an environment

Opens that supports growth. This is often known as endogenous growth - the environment supports and enhances the impact of technological progress and investment. Second, in an open economy such as the UK a key to growth has over time become the prompt and effective diffusion of foreign technology as well as domestic invention[4]. In other words, there is a bigger base of innovation to draw upon. footnote

Having made the point that things have changed in terms of growth rates since the Industrial Revolution, I want to go back to that period to identify four salient features which I believe are highly relevant to understanding today's environment. The four are: technological change; energy supply; population change; and the role of trade. These are all big subjects in their own right, so my treatment of them is going to be quite sparing. The main point I want to draw out is that each of these issues was important in the process of industrialisation, and each of them remains important in today's world.

Let me start by attempting to define what is meant by the term Industrial Revolution? A lot of ink has been used on this one. I am going to borrow a definition from the economic historian Tony Wrigley:

'The distinguishing feature of the industrial revolution which has transformed the lives of the inhabitants of industrialised societies has been a large and sustained rise in real income per head. Without such a change the bulk of all income would necessarily have continued to be spent on food and the bulk of the labour force would therefore have continued to be employed upon the land …..only when output growth exceeds population increase substantially and consistently, can there be grounds for supposing that an industrial revolution is in train[5]'. footnote

The essence of the definition is that technological change appeared to break the tight link between the economy's endowments of factors of production (land, capital and labour) and income, a break that was not expected to occur by classical economists such as Adam Smith who did not envisage sustained growth[6]. This technological change did not happen as quickly as the word 'revolution' would suggest. Moreover, it didn't happen evenly over time and certainly not evenly across the economy, and that too has led to a lot of ink being used to describe and debate the meaning of the term Industrial Revolution. footnote

What are the lessons of this for today? I think there are two lessons. First, if we think we are more or less using the factors of production fully today - if Y* is near to the production frontier made possible by the state of current technology, then we will need some quite large technological advance to break again the link that Adam Smith and the classical economists described - in other words, to push the frontier out. I am going to come back to whether AI is that technology. Second, even if the link is broken, it will take time to materialise and spread across the economy. This is a long term process. To be clear though, this does not mean that

Opens we can expect no growth without a major breakthrough on technology. Growth rates will go up and down for many reasons. But a substantial and sustained increase in growth most probably does need this breakthrough to happen, as has been case in the past.

Another way of capturing this issue is to ask what has caused the slowdown in productivity growth evident in all the major economies - not just the UK - over the last 15 to 20 years. There are two theories on this whodunnit. The first is that it is a consequence of the Global Financial Crisis.

The second is that since the start of the slowdown seems to pre-date the GFC it is due to a trend decline in technological innovation as the ICT revolution of the internet, faster semiconductors etc., started to slow (and what matters here is the rate of increase of innovation, not the level of it). The evidence seems to provide rather more support for the second explanation, but both could have been at work.[7] footnote

My second salient feature concerns the supply of energy. To return to Tony Wrigley's work for a moment, he made the point that the Industrial Revolution involved the discovery and application of a 'method of deriving mechanical energy from a mineral source on a substantial scale' and an escape from 'the problems associated with dependence on organic raw materials'[8]. Put simply it was a move from burning wood fires to coal burning steam engines. footnote

There are two lessons here for today that I want to draw out briefly. First, the steam engine is credited as the first example of what is called a General Purpose Technology (GPT). In other words, it enabled widespread innovation across many parts of the economy. The economic historian Nick Crafts identified two subsequent such GPTs, electricity from around the turn of the nineteenth to twentieth centuries, and Information and Communication Technology from around the 1970s-1980s. Crafts argued that the contribution from each of these GPTs has grown over time - each one has contributed more to income growth than its predecessors. This is grounds for optimism. According to his estimates, by 2006 the cumulative productivity gain from ICT had matched that of steam over the roughly century to 1910 suggesting that the progress of technology has become more rapid over time, and that we have become better at putting GPTs to work. Reasons for this improvement include educational advances, better financing and government policies to support R&amp;D.

The second lesson for today from the energy feature of the Industrial Revolution is that we are now seeing the move away from mineral based energy towards so-called renewable sources. This is at the heart of the climate debate. The economics would suggest that it is then a matter of pricing these sources to ensure that we capture the so-called externalities - the good and bad effects that come from each of them.

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My third important feature is population, and labour as a factor of production. Alongside a revolution in technology starting in the second half of the eighteenth century, the UK experienced an unprecedented increase in population which was not directly linked to the development of industrial technology. By the 1860s, the population was more than 3.5 times its level in the 1730s, mainly due to an increased birth rate. From 1780 to 1870 the annual growth rate of the population was around 1.2%. Bear in mind that from 1990 to 2008, the annual growth rate of the potential labour supply was 0.4%, while in the decade after the financial crisis it was 1%. To sustain a higher growth rate of population for a century in the earlier period was impressive.[9] footnote

When we compare the story of the Industrial Revolution on labour supply with recent times, we can be rather more granular on the modern period. There is a difference between the growth rate of the population and the growth rate of the potential labour supply, but we have the latter calculated only for the modern period, along with its components. Between 1998 and 2007 annual potential labour supply growth of 0.7% was made up of an equivalent growth in population, slightly higher participation in the labour force, slightly lower unemployment, and a fall in average hours worked. In the next decade we saw stronger growth in potential labour supply made up of a similar growth in the population, very little growth in the participation rate, a further fall in unemployment and a rise in average hours worked. The subsequent Covid period up to 2023 saw very little growth in potential labour supply, but a faster growth in population offset by a fall in participation, slightly higher unemployment and flat average hours. Population growth has been the largest recent driver of labour supply growth, with a well-known story on net migration as the major contributor, on which to be clear I offer no value judgement. Meanwhile, labour force participation has fallen, meaning that more people are not seeking to work, though we have some doubts about the data here.

Behind these recent trends is the larger story of the impact of a population which is on average ageing, as is the case in almost all the industrialised countries. Over recent history, the effects of ageing have been offset by increases in labour force participation within age groups, particularly as women remained in the labour force longer, including as the female state pension age rose to equal that of males. But this offsetting mechanism seems to be coming to a natural end.

The conclusion I draw from all of this is that whereas the Industrial Revolution was enabled by a parallel increase in the labour supply, we cannot count on this to the same degree today, even if we do see a return to the more prevailing level of participation pre-Covid. If so, that puts more emphasis on productivity and technological change as the driver of growth to come.

My fourth salient feature is trade and the openness of economies, another big one, and very much a subject of the moment. Let's go back to Adam Smith. One of Smith's important insights can be described by his observation that if a foreign country can supply us with a

Opens commodity more cheaply than we can make it, better buy it off them, with some part of the produce of our own industry employed in a way in which we have some advantage. That advantage which Smith pointed to would arise from one of his other insights, the benefits of specialisation and division of labour. In this way, Smith set out the view that greater openness through trade will increase competition, productivity and growth[10]. footnote

Nineteenth century economic growth had its origin in technological change, but as the century went on it was reinforced by trade expansion supported by falling transport costs. As the economist Robert Lucas put it, 'the evidence on trade and growth suggests that the rate of diffusion of technology depends on economic interactions on trade'. He added that 'economic growth is poorly described as the production of more and more of the same stuff', and that 'physical capital accumulation alone does not suffice to transform a static economy into a perpetually growing one.'[11] Indeed. footnote

On its own the technological change would not have supported the full Industrial Revolution without a major growth in trade which secured a supply of imported raw materials - e.g. cotton - and markets overseas in which to sell the finished goods. Britain's move to free trade after 1846, and the subsequent pattern of tariff reductions in Western Europe was a logical extension of comparative advantage for relatively land scarce but labour and capital abundant economies.

The result of all of this activity was a rapidly developed Atlantic Economy covering countries on both sides of the ocean which had a growing concentration on manufacturing goods. But it is overly simplistic to conclude that the story was a universal generalisation of industrialisation fostered by and fostering the rise of free trade. The story was not that simple. Protection and tariffs were a feature of the more labour scarce New World (notably the USA) in the late nineteenth century, and by the end of the century there were wider signs of a protectionist backlash[12]. From 1914 to around 1950 the world retreated into autarky. There was a backlash against globalisation before the 1st World War began in 1914. Nineteenth century industrialisation had created two distributional consequences: within some countries, for instance in the US where tariffs favoured industrial interests; and between the Atlantic economy and much of the rest of the world, with this second effect becoming known as the Great Divergence[13]. footnote footnote

After 1950, trade and openness revived, with a reduction in tariff barriers which was more a product of inter-governmental agreement on a multilateral basis. Over the modern period of time as more countries industrialised, trade flows have increasingly involved the exchange of manufactured goods, including the exchange of goods during the production process. Late nineteenth century trade created income inequalities between countries in the Atlantic Economy and the rest of the world and within countries. In contrast, recent trade developments have started to close those gaps, most notably between China and the traditional industrialised economies.

Opens

Income distribution matters when thinking about the relationships between trade and growth. Associated with this point is the degree to which the interaction of trade and growth upends peoples and communities. Recent quite high profile US work on trade policy has made the following point drawing on a comparison with nineteenth century Britain:-

'In the United Kingdom ….. the repeal of the protectionist Corn Laws prompted agricultural workers to flee the countryside for industrialising urban areas where factory jobs were waiting. By contrast, the American factory workers who were displaced beginning in the 1990s either had nowhere to go or ended-up working in low-skill, low paying service jobs.'[14] footnote

I can trace my own family in Norfolk back to the sixteenth century, but by 1886 they had moved to Dudley in the Black Country, via a one generation stopover in Suffolk. I have no idea whether 'flee to a waiting job' is the right description for their move as they have left no commentary behind.

That said, my family seem to fit the bill for nineteenth century Britain. I should say that it is therefore due to the Industrial Revolution that I was not always popular at school. The reason is that I am a West Bromwich Albion supporter because of the family connection to Dudley, and not a Leicester City supporter, though I try to make up for it as a Leicester Tigers and County Cricket supporter.

Robert Lighthizer, who was the US Trade Representative in the first Trump Administration, goes on to make a key point in this area, namely that his concern is a country, in this case China, running 'huge trade surpluses with the entire world year after year for decades'[15]. The key point is that in the contemporary world, unlike the nineteenth century, the political economy is not well suited to such persistent trade imbalances with their consequent effects. If that is too subtle, another way to put it is that such a system could be sustained in a world of empires and colonies, but no readily now. footnote

But, two things follow from this. First, Adam Smith and the classical economists were not wrong to make the link between trade and growth. Second, a cause of the contemporary imbalance is at least in part weak domestic demand in a number of countries, of which China is an important one - i.e. more of China's national income should be spent by its citizens on their own consumption. There are, therefore, also offsetting positions in other countries. We need effective multilateral processes that support getting us to more balanced outcomes.

This is the issue today at the heart of the pressure to return to higher levels of tariffs. To quote Robert Lucas again, until the Industrial Revolution two hundred years ago, the forces of economics:

'sufficed to maintain a rough equality of incomes across societies (not, of course, within societies) around the world. The industrial revolution overrode these forces for equality for an amazing two centuries. That is why we call it a 'revolution'. But they have reasserted

Opens themselves in the last half of the twentieth century, and I think the restoration of inter-society income equality will be one of the major economic events of the century to come. Of course, this does not entail the undoing of the industrial revolution. In 1800 all societies were equally poor and stagnant. If by 2100 we are equally rich and growing, this will not mean that we haven't got anywhere![16]' footnote

But we have to caveat that with some other wise words, namely that '(s)upporters of free trade in tangible goods have long recognised that its net benefits to countries typically are distributed unevenly, creating domestic winners and losers'[17]. footnote

Let me draw the history together and put it into the context of achieving sustained growth in the world we face today. The Industrial Revolution led to the so-called Great Divergence, which created an industrialised Atlantic Economy. This transformation was enabled by very open trade in goods, capital flows across the world and likewise unprecedented migration of people (mainly within the Atlantic Economy from Europe to North America). This system fell apart in the first half of the Twentieth Century, with two world wars and the Great Depression.

After the Second World War, up to the 1970s, the world economy was rebuilt under a system that featured strong capital and exchange rate controls, a gradual loosening of the trade controls that had increased between the wars, and greater freedom to pursue domestic policies to avoid the inter-war experience of mass unemployment. After the 1970s this system broke down and the world economy moved on to an era of free trade, capital flows that looked much more like the late nineteenth century, flexible exchange rates, and even more emphasis on independent national monetary and fiscal policies to tackle domestic situations.

It is in this setting that since the 1990s we have seen a further acceleration of the end of the Great Divergence, though not evenly. But, the evidence indicates that this system can lead to persistent large trade and current account imbalances. And here, it is persistence that matters. These imbalances are at the heart of what features so prominently in the news today - the issue, once again, of tariffs.

You will, I hope be pleased to hear that I am not going to give a further lecture today on this subject. But I will make three important points. First, I agree with work by the IMF which emphasises that persistent imbalances are largely driven by domestic macroeconomic forces - home grown persistent surpluses and deficits in spending and saving[18]. Second, I agree with Lighthizer that free trade is a force for prosperity if it rests on a level playing field, and that the trading system served the world economy well in the period of post-war adjustment up to at least the 1990s. But it has come under strain since then, and most recently we have been forcefully reminded that trade policy has to include a national security dimension. These two points - domestic macroeconomic forces and trade policy - are not incompatible. They sit together. My final point here is that to solve these issues we need authorities to come together and strengthen the rules of engagement in a multilateral setting. footnote

Opens

Let me finish on the subject of AI. I hope I have established the basic argument that links together technological progress, trade and economic growth. I have also argued that we face other headwinds which make achieving stronger growth through that set of linkages more challenging but also even more necessary.

Is AI the next General Purpose Technology (GPT)? A GPT has the potential to be used across a wide part of the economy, like electricity for instance. It is not just a short-lived boost to productivity growth but rather a significant change which keeps improving and lowering costs and makes innovation across the economy easier. It should have a significant and prolonged positive impact on productivity growth, and will itself create new ideas, new products and new ways of doing things. AI appears to me to have that potential, and so it could over time lift growth rates and per capita national income.

In doing so, it should increase the productivity of labour, by both complementing the skills of labour and substituting for labour in some situations. In doing so, it will lead to the re-design of the content of jobs. Again, we can look to the Industrial Revolution for clues here. And, there is a particular Leicester dimension to this piece of history. Probably the most famous resistance movement to such technological change was the Luddites of the early nineteenth century.

Named after the mythical character - or at least unidentified - of Ned Ludd, they were largely made up of framework knitters who resisted the move to mechanised knitting machinery. Leicestershire was one of the centres of Luddite activity. Indeed, very sadly, a number of Luddites were hanged outside Leicester Gaol, almost in sight of where we are today[19]. footnote

There was no doubt transitional pain and suffering at the time, and there were not the public institutions and policies of support that we have today. But the Industrial Revolution did not lead to mass unemployment, and I do not believe this will be the case with AI. Moreover, as I said earlier, a big difference from the early nineteenth century to today is that we now have a population that is on average ageing, and the need to complement human labour with technology to support the productive potential of the economy (Y*) is more pressing. So, I am therefore of the view that we must facilitate the growth of AI as the most likely General Purpose Technology which can move the needle on growth in the economy. In doing so, we must also invest in new skills in the labour force- in our human capital.

To conclude, we face a necessary challenge to raise the potential growth rate of the economy. There are strong headwinds. The combination of technology and trade remains an essential route to increasing productivity. Adam Smith's basic tenet is as true today as it was two hundred and more years ago. Growth also requires strong institutions and public policies to provide a supportive environment. Education and universities are part of that story - to

Opens create and encourage the development of human capital so, too is a strong multilateral international institutional framework for economy policy, including trade policy. And, central banks are important too, with our strong commitment to monetary and financial stability.

## Thank you.

I would like to thank Thomas Aedy, Jamie Bell, Craig Botham, Sarah Breeden, Maren Froemel, Karen Jude, Catherine Mann, Huw Pill, Martin Seneca, Krishan Shah and Fergal Shortall for their help in the preparation of these remarks.

1. It is reasonable to wonder, why Y as the letter to denote income/output? The earliest source I know of is a letter written by Keynes in 1937 to a fellow economist, Sir John Hicks: 'On one point of detail. I regret that you use the symbol I for income. One has to choose, of course, between using it for income or investment. But after trying both, I believe it is easier to use Y for income and I for investment'. So, there we are - it doesn't explain why Y, but the great man's view has stuck.
2. Simon Kuznets: Modern Economic Growth: Rate, Structure and Spread; Yale University Press, 1966
3. S N Broadberry, Campbell B, Klein A, Overton, M and van Leeuwen B: British Economic Growth, 1270-1870; Cambridge University Press, 2015.
4. N F R Crafts, Forging Ahead, Falling Behind and Fighting Back: British Economic Growth from the Industrial Revolution to the Financial Crisis; Cambridge University Press, 2018.
5. E. A Wrigley, Continuity, Chance and Change: The Character of the Industrial Revolution in England; (Cambridge University Press 1988) p9-11.
6. The classical economists believed in the stability of income levels not growth rates. They drew on the work of Thomas Malthus to conclude that economic growth following technological innovation would lead to an increase in population but not in income per person.
7. John Fernald, Robert Inklaar and Dimitroje Ruzic, 'The Productivity Slowdown in Advanced Economies: Common Shocks or Common Trends'. Review of Income and Wealth, 2024, Vol 71, Issue 1.
8. Wrigley, P78, 82.
9. Gregory Clark; 'What Made Britannia Great? How Much of the Rise of Britain to World Dominance by 1850 Does the Industrial Revolution Explain?' in Timothy J Hatton, Kevin H O'Rourke and Alan M Taylor: 'The New Comparative Economic History, Essays in Honour of Jeffrey G Williamson. (MIT Press 2018) P33-58. E A Wrigley and Schofield R5, 'The Population History of England, 1541-1871 (Cambridge University Press, 1981)
10. Adam Smith, 'An Inquiry into the Nature and Causes of the Wealth of Nations, (Pelican, 1970).
11. Robert E Lucas, 'Lectures on Economic Growth (Harvard University Press, 2002), P9, 10, 144.
12. Douglas A Irwin, 'Clashing over Commerce: A History of US Trade Policy (University of Chicago Press, 2017).
13. Kevin H. O'Rourke and Williamson J.G. 'Globalization and History: The Evolution of a Nineteenth Century Atlantic Economy. (MIT Press 1999). Ronald Finlay and O'Rourke, K.H. 'Power and Plenty: Trade, War and the World Economy in the Second Millennium' (Princeton University Press, 2007).
14. Robert Lighthizer: 'No Trade Is Free: Changing Course, Taking on China, and Helping America's workers', (Broadside Books 2023) p24.

Opens

15. Lighthizer, p26.
16. Lucas, P106.
17. Maurice Obstfeld and Taylor, Alan M, 'Global Capital Markets: Integration, Crisis and Growth' (Cambridge University Press, 2004) p4.
18. Pierre-Olivier Gourinchas, Ceyla Pazarbasioglu, Krishna Srinivasan and Rodrigo Valdés; Trade Balances in China and the US are Largely Driven by Domestic Macro Forces', IMF Blog, 12 September 2024.
19. Brian Bailey, 'The Luddite Rebellion' (Sutton Publishing, 1998).

## Andrew Bailey

Governor, Bank of England

©2025 Bank of England",Andrew Bailey
https://www.bis.org/review/r250325a.htm,Olli Rehn: Eurozone outlook and European Central Bank monetary policy,"Opening remarks by Mr Olli Rehn, Governor of the Bank of Finland, at the MNI Connect Video Conference, Helsinki, 18 March 2025.",2025-03-18 00:00:00,"## Olli Rehn: Eurozone outlook and European Central Bank monetary policy

Opening remarks by Mr Olli Rehn, Governor of the Bank of Finland, at the MNI Connect Video Conference, Helsinki, 18 March 2025.

* * *

## Presentation accompanying the speech

Let me first thank MNI for inviting me to speak at this conference. To kick off, I will briefly discussthe economic outlook in the eurozone and the current lines of thought in the ECB's monetary policy.

In presenting my remarks here, I will focus particularly on how the significant shifts in world politics of recent weeks will, in my view, affect the euro area economy and the European Central Bank's monetary policy.

Slide 2: Geopolitics dominates economic outlook

Geopolitics currently dominates and weighs on the outlook for the global economy, and does so with exceptional force.

Russia's illegal, brutal war of aggression in Ukraine has been going on for more than three years. It has shaken the European security order, and more recent events since the Munich Security Conference a month ago have marked a major disruption in the world order - in a way that is dangerous for Europe. This has forced the European Union to seek to strengthen its common defences.

It is clear that the United States is undergoing a fundamental change of direction both in its foreign and security policy and in its domestic political development. This is not necessarily just a temporary phenomenon, but may be a more permanent turn in US politics. And US foreign policy is now operating under a very different kind of rationality than it used to.

""America first"" trade policy in the US is profoundly protectionist but highly unpredictable. There will be no winners in a trade war. Tariffs and the related uncertainty will hit investment and slow down growth everywhere. The latest indicators on the US economy point to weaker than expected growth, which would also affect growth prospects in Europe.

As a result of the turmoil in world politics in recent weeks, Europe has woken up to the necessity of strengthening common defence. The situation is acute, and many EU countries, led by Germany, have announced significant decisions to increase defence spending. Europe is now taking action and responding to the challenge of forming and financing a common, strong defence.

These defence investments will have to be made in a situation where the public deficits of EU Member States are already large. However, the investments required for defence are of such a magnitude that they cannot be financed simply by increasing taxation or

cutting other public sector expenditure. It is therefore, in my view, justified, in the short term, to utilize the flexibility elements included in the EU's new fiscal rules, provided that longer-term debt sustainability is not compromised.

This is why we also need common European financing solutions, implemented in a way that strengthens our common security and accelerates joint procurement and production - I am thinking of air defence and drone production, for example.

Slide 3: Bank of Finland's scenario calculation: A trade war would weaken growth worldwide

Recent statements from the United States about imposing import tariffs have raised the threat of a trade war in the global economy. An analysis published a week ago by the Bank of Finland illustrates the significant risks that a trade war would pose to economic growth.

The study assumes that the United States would impose a 25% tariff increase on all imports from the euro area and a 20% increase on all imports from China. It also assumes that the euro area and China would impose equivalent tariffs on the United States. Moreover, the calculations take into account the potential economic effects of increased uncertainty affecting economic policy.

The scenario demonstrates that there are no winners in a trade war. As a result, world GDP would decline by more than 0.5% per year. The effects on the euro area and China would be even greater. A key aspect of a trade war is the rise in uncertainty, which we are already witnessing and which could lead to a reduced willingness to investment among businesses.

Efforts should, in any case, be made to prevent the threat of a trade war through a fair negotiated solution to mitigate the negative effects on growth. To support a negotiated solution, Europe should be prepared to respond to the imposition of tariffs with potential countermeasures.

It must also be said that when a brutal war is being fought on European soil, a trade war is the last thing we need right now - especially among allies.

Slide 4: Growth in the euro area economy picking up gradually

US tariffs and increased uncertainty are already having adverse effects on economic growth outlook in the euro area in the immediate and near term.

Europe's response to the deterioration of the security situation will have its own effects on European economies, which are very difficult to quantify at this stage.

The growth outlook for the euro area remains subdued. According to the ECB's March forecast, growth in the euro area is gradually picking up, but at a slower pace than expected, and growth risks are on the downside.

In addition to cyclical factors, the euro area economy is also experiencing structural problems. In the ECB's new forecast, productivity growth is slower than before. The

weakness appears to be more structural than previously. But it would be wrong to say that it is entirely structural.

One - if not the only - reason for Europe's slow productivity growth is precisely the weak development of investment in recent years. The background is a great deal of uncertainty fuelled by geopolitics, but there were also tight financial conditions for a long time.

Let me reveal that I don't belong to those who makes a crystal-clear distinction between structural and cyclical factors - it would be against my macroeconomic training. Rather, I see the distinction as a line drawn in water. Here, I feel like applying a giant of economics: ""In the long run, we will all retire. But in the meantime, we need more productive investment.""

In other words: although the euro area's longer-term challenges of growth and competitiveness cannot be solved by monetary policy, the fall in interest rates brings welcome room for manoeuvre for households and companies. Rate cuts have been supportive of the investments that are required to improve productivity. Of course, in the long term, the level and growth of investments is determined by their expected real returns.

Although there is little to be positive about in the security situation in Europe, the expected increases in defence spending and investment are at least likely to support GDP growth over the medium-term.

Slide 5: Euro area inflation stabilising at the 2% target

Inflation in the euro area is stabilising at the ECB's 2% target. The path of disinflation has been pretty much in line with forecasts. Wage inflation has largely decelerated, and forward-looking wage indicators point to a clear slowdown in wage growth. Most measures of core inflation  which excludes energy and food prices  also point to a sustained convergence of inflation around the 2% target over the medium term.

Risks to the inflation outlook are two-sided. Protectionism in world trade dampens growth and increases uncertainty about the inflation outlook. Geopolitical tensions pose a wide range of risks to the energy market, consumer confidence and corporate investment.

Slide 6: ECB's decision to ease monetary policy spurred by inflation stabilising and growth weakening

The ECB's latest decision to ease monetary policy leaned on the fact that inflation is stabilising and growth weakening. Thus, the Governing Council decided to cut the key policy rate by 25 basis points.

The rate cut was the sixth since we started easing monetary policy. Since last June, the deposit facility rate has been lowered by a total of 1.5 percentage points, from 4% to 2.5%. Monetary policy is thus becoming meaningfully less restrictive.

The decision was based, as usual, on three elements: the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission.

We are not pre-committed to any interest rate path. Policy rates are set at each meeting based on the latest information and our comprehensive assessment, next time on 17 April. The Governing Council retains full freedom of action in times of pervasive uncertainty.

Slide 7: Europe is under challenge from the world of geopolitics - investment is needed now in security and productivity

Let me now conclude. The world is now experiencing a transition of potentially similar magnitude as 30 years ago, when the Berlin Wall fell, the Cold War ended and Europe united. At that time, the evolution of humanity took a step forward and security rooted in cooperation was strengthened.

Today the world only is in reverse gear: power politics has returned in a brutal way with Russia's invasion, the United States is standing by Russia and playing sphere-ofinfluence politics, and China is challenging the entire international order.

But we must be able to navigate even in this geopolitically difficult terrain. With the Munich Security Conference, Europe has received yet another wake-up call.

At the same time, we must focus on our own economic problems. Europe needs investments in productivity growth - in human capital and in research and innovation. Protectionism highlights the need to complete the single market and expand the EU's network of free trade agreements.

The stabilisation of inflation and the weakening of the growth outlook have supported monetary policy easing since last summer. The ECB's monetary policy has been reasonably successful in bringing inflation down without inflicting unnecessary pain to the real economy.

The past few weeks have shown that Europe must urgently get its act together and stand united in the face of external security threats. In the coming weeks and months, Europe will have to demonstrate that it is taking action and meeting the challenge of strengthening its defence. There is no time to waste.

Thank you very much. I am happy to take any questions you have.",Olli Rehn
https://www.bis.org/review/r250324d.htm,Tiff Macklem: Navigating tariff uncertainty,"Remarks by Mr Tiff Macklem, Governor of the Bank of Canada, at the Calgary Economic Development, Calgary, Alberta, 20 March 2025.",2025-03-20 00:00:00,"

Remarks by Tiff Macklem Governor of the Bank of Canada Calgary Economic Development March 20, 2025 Calgary, Alberta

## Navigating tariff uncertainty

## Introduction

Good morning. It's a pleasure  to be here in Alberta. I want to thank Calgary Economic Development for the invitation.  The last time I spoke in Calgary was about 18 months ago-September 2023. The post-pandemic  crisis was easing, but uncertainty remained. Inflation was still above 3%, and the Bank of Canada's policy interest rate was 5%. Canadians  were being squeezed  by still-elevated inflation  and higher interest rates. Could we get inflation back to our 2% target without tipping the economy into recession?

As 2024 closed out, this question  was largely resolved. Inflation was on target, and economic growth had picked up. The Canadian economy was in good shape.

Inflation came down through the first half of last year and had been close to 2% since last summer. As the Bank's Governing Council became more confident that inflation  was on track to return to target, we began reducing our policy interest rate, starting  last spring. Substantial  rate cuts through the rest of the year boosted  household  spending,  and economic growth picked up to 2.2% in the third quarter and 2.6% in the fourth. Employment growth also strengthened  in November through January, and the unemployment rate came down.

The Canadian economy managed a soft landing.  Unfortunately, we're not going to stay on the tarmac for long.

We now face a new economic crisis. Since President Trump began threatening to impose a wide range of tariffs on Canadian exports, uncertainty has increased sharply. Depending on the extent and duration of tariffs, the economic impact could be severe. The uncertainty is already causing harm.

There's a lot we don't know. Some new tariffs are in place on steel and aluminium as well as on goods not in compliance with the Canada-US-Mexico

I would like to thank Chris D'Souza, Daniela Hauser, Ben Tomlin and Yang Zhang f or their help in preparing this speech.

Agreement. We don't know how long these will last. And we don't know if tariffs will broaden to other sectors. In the last two months, the US administration  has twice imposed and then retracted universal tariffs on all imports from Canada and Mexico. President Trump has also threatened  to extend tariffs to a wide range of industries,  including autos, semi-conductors and pharmaceuticals.  And he has repeatedly said new 'reciprocal' tariffs are coming on April 2 on many countries, although  what exactly this means is unclear.

Most disturbing  of all for Canadians, President  Trump has  threatened  our sovereignty, repeatedly referring to Canada as the 51 st  state. There can be no question  about our sovereignty or our border.

Last month, I gave a speech about the effects of broad-based  tariffs on the Canadian economy. Today I want to advance the discussion  in three ways.

First, I want to discuss  what tariffs could mean for specific sectors-and specific regions-of the country.

Second, I'll talk about the impacts of uncertainty caused by on-again,  off-again tariffs and threats of more to come. Canadian businesses  and households  are doing their best to navigate the unpredictability  of US policy, and that uncertainty is affecting our economy.

Finally, I'll talk about how the Bank is navigating  monetary policy in the face of unusual  uncertainty. Monetary policy cannot solve a trade war. And we can't make the uncertainty go away. But we can make sure we don't add to it by ensuring  inflation remains anchored on our 2% target. Canadians  are worried about trade uncertainty. We don't want them to have to worry about inflation as well.

We have a lot of ground to cover, so let's get started.

## Tariffs and uncertainty will hurt key sectors and regions

In my speech last month, I outlined  how the universal tariffs on Canada and Mexico that were threatened by President  Trump would impact the Canadian economy. I outlined the channels and broad impacts of a 25% tariff on nonenergy exports and 10% on energy exports, together with the retaliatory tariffs proposed  by the Canadian government. Our economic models predict exports and business  investment would decline sharply, the economy would work less efficiently, and we would earn and consume less. Higher tariffs would also increase prices, causing inflation to rise for a period  as the upward pressure  on prices from higher costs would outweigh the downward pressure from a weaker economy. 1

Since that speech in February, the level and timing of tariffs have changed several times. And there remain too many unknowns to predict what happens next.

1  See T. Macklem, 'Tariffs, structural change and monetary policy,' (speech delivered to the Mississauga Board of Trade-Oakville Chamber of Commerce, Mississauga, Ontario, February 21, 2025).

But we know that the tariffs and the uncertainty-if they are maintained-will particularly hurt a few key sectors. And that will have a big impact on Canada's regional  economies, including  here in Western Canada.

As those of you in the room know all too well, for Alberta the hit to the energy industry from a 10% tariff is a major concern. It's also a big issue  for Midwest US refineries that have invested heavily in equipment  to refine heavy Canadian oil. Roughly 94% of Canadian crude oil exports go to the United States, mostly through north-south  pipelines.

The launch of the Trans Mountain Expansion  pipeline  has increased the access of Canadian oil to overseas markets, and new export capacity for liquefied natural gas (LNG) is coming online. This helps to diversify the markets for Canadian energy exports, but these investments were designed  to augment our export capacity-not replace US demand.

Looking ahead, US tariffs could put downward pressure  on Canadian energy prices and reduce the profitability of Canadian  energy producers-at  least until access to other markets can be expanded. The hit to profits combined with the uncertainty means that investment will likely drop, and employment could follow. I know Albertans  have lived through boom-and-bust  commodity cycles for generations.  But a threat to the Canada-US energy relationship  is not something we've ever had to contemplate.

The other Prairie provinces are also being affected. The United States has temporarily exempted fertilizers,  including potash, from tariffs. And they've lowered the planned tariffs from 25% to 10% for non-compliant exports. But uncertainty remains. Spring seeding will soon begin, and farmers on both sides of the border are already feeling pressure from low grain prices. US farmers import potash from Saskatchewan to add potassium to their soil, while Canadian farmers often need US phosphate  to fertilize their crops. Other tariffs will have an impact, too. Canadian farmers buy machinery and equipment from the United States. And China has said it will impose a 100% tariff on Canadian canola oil and meal, effective today. China is the top market for Canadian canola-the export value is close to $5 billion. It's a very difficult situation  so close to planting season  and adds to the uncertainty Canadian farmers are already facing.

Other parts of the country, particularly Ontario and Quebec, will be disrupted  by the 25% tariffs on steel and aluminum. In 2024, the United States imported about one-quarter  of its steel and 40% of its aluminum from Canada, and Canada imported one-quarter of its steel and one-fifth of its aluminum from the United States. Those cross-border flows means that these sectors would be hit by both US tariffs and counter tariffs. It's going to hurt output and increase prices.

Monetary policy cannot target specific industries  or regions.  We have one monetary policy for the whole country. But to assess  the overall implications  of new tariffs, it's critical we understand  their impact industry by industry and how this  is affecting and spilling  over across regions.

The Bank's regional  offices across the country-in Halifax, Montréal, Toronto, Calgary and Vancouver-gather economic intelligence  across industries  and economic regions.  I am pleased  to be joined  by Farrukh Suvankulov, head of our

Calgary regional office, which covers the Prairies and Northwest Territories.  Our Calgary office is our second-largest  after our headquarters  in Ottawa.

## Pervasive uncertainty

Beyond the impacts of tariffs, the pervasive uncertainty created by the sudden and unpredictable  shifts in US trade policy is affecting both the Canadian and US economies.

Trade policy uncertainty measures-such  as the index in Chart 1 -have spiked in recent months. 2  After more than 50 years of high predictability in trade policy, there was a sharp increase in uncertainty during President Trump's first term in office. But that uncertainty doesn't  come close to what we see now.

Chart 1: Uncertainty about trade policy has spiked



Source: Caldara et al. (2020) Last observation: March 2025

There are at least two kinds of uncertainty related to US tariffs. There is uncertainty about the tariffs themselves-which tariffs will actually come to pass and how long will they last. There is also uncertainty about the economic impacts of tariffs. We've not had to grapple  with such large broad-based  tariff increases since the 1930s.

Let me elaborate.

2  The TPU index is derived from articles discussing trade policy uncertainty in major US newspapers. An article is considered to discuss TPU if it includes both terms related to uncertainty-such as risk , threat and uncertainty -and terms related to trade policy-such as tariff, import duty and import barrier. Although it is based on US newspapers, this index serves as a broad measure of TPU, not specifically tied to the United States itself.

## Uncertainty about US tariffs

Consumer confidence has fallen sharply in both Canada and the United States. After recovering through last year, the Conference Board of Canada's index of consumer confidence fell to its lowest level on record in March amid the chaos around US tariffs. And the University of Michigan's survey of US consumers also declined, with sentiment now at 2½-year lows.

Last week, the Bank of Canada published  new survey data on what we're hearing from households  and businesses. 3   Canadians  told us they have become more worried about their jobs and financial security, and they intend to pull back on their spending.  That's particularly true for workers in industries  that rely on trade-including  manufacturing, mining, and oil and gas.

Businesses  have lowered their sales outlooks, notably in manufacturing and in sectors that depend on consumer spending.  Some businesses  report credit has become harder to access. And with a weaker Canadian  dollar, the cost of imported machinery and equipment has risen. Businesses  are telling  us they are delaying or cancelling investments  and scaling back on hiring.

Uncertainty is also affecting businesses'  pricing decisions.  Businesses  have told us that they face new costs associated  with sourcing new suppliers,  finding new markets and managing inventories.  The majority of businesses  plan to pass on these costs, as well as the direct costs of any new tariffs, to the prices of the goods they sell.

Our surveys also find that near-term inflation expectations  have risen in Canada as businesses  and consumers brace for higher prices.  Short-term inflation expectations of US consumers have also risen materially for the first time since 2022.

Finally, uncertainty is also taking a toll on financial markets. Equity prices are down sharply in the last few weeks, particularly  in the United States. US stock market indices have fallen by about 10% from their recent peaks. And bond yields have come down. Markets are revising down their growth outlook  for North America.

The damage caused by tariff uncertainty has started on both sides  of the border.

## Uncertainty about the impacts

Even if and when we know what tariffs will be imposed, it's hard to know exactly how consumers and businesses  will react. It is clear that higher tariffs mean less demand, weaker growth and higher inflation. The mechanics of tariffs are straightforward.  Tariffs on Canadian  exports will be paid by the US company buying those goods. And the company will pass at least some of the cost onto the US consumer. The same goes for retaliatory tariffs on goods Canada imports from the United States.

3  For more information, see Bank of Canada, 'How Canadian businesses and households are reacting to the trade conflict' (March 2025).

What is less clear is how much tariffs will dent demand and how much they will be passed on to consumer prices. Will US buyers continue to buy imported Canadian goods when tariffs are added to the bill? If they are buying something they can't get anywhere else, maybe they'll accept a 25% price increase. But they will likely buy less of it. And if substitutes  are available,  Canadian exports may fall a lot.

The impact of tariffs on consumer prices will be affected by the strength  of demand. In our recent survey, about half of businesses  said they intended to raise prices as they cope with higher costs related to both tariffs and uncertainty, and three-quarters  of those said they would pass most of the cost increases onto their customers. But these intentions  may change as economic conditions evolve. We will be monitoring these business  intentions  closely.

The uncertainty about the pass-through  of higher costs to consumer prices is of particular importance to monetary policy. Our mandate is price stability-low inflation  is the best way we can support the economic and financial well-being  of Canadians  in good times and bad. So we're watching closely how the costs of tariffs and uncertainty pass-through  to consumer prices.

Chart 2 illustrates  the sensitivity  of inflation to different assumptions  about the speed at which higher tariffs pass through to prices. In all three cases, we assume 100% pass-through,  but we vary the speed from one to three years. 4  In practice, different items will experience very different speeds of pass-through. Tariffs on fruit and vegetables,  for example, will likely be passed  through almost immediately-these  are perishable  goods. Prices for more complicated goods with different components and longer-term contracts will tend to take longer to rise.  Our focus is on the overall response.

As you can see, a faster pass-through  (the blue line) means inflation would rise by more but also come down faster, provided monetary policy does its job. Slower pass-through  (the red line) means inflation doesn't  rise as high, but it remains elevated for longer. In all three cases, monetary policy responds  with the goal of ensuring inflation returns to the target over time. The more inflationary the impact, the less scope monetary policy has to support the economy. Instead,  it needs to put more focus on anchoring inflation expectations, which risk drifting up when inflation rises more and more quickly.

4  There is also uncertainty about the extent of pass-through. If, for example, pass-through were 50%, the lines in Chart 2 would be roughly scaled in half.

## Chart 2: Faster pass-through of tariff costs leads to a sharper increase in inflation

Percentage point difference in the year-over-year inflation rate compared with the January projection, quarterly data



Sources: Bank of Canada calculations, estimates and projections Last data plotted: 202704

## What uncertainty means for monetary policy

Let me now turn to how the Bank of Canada is navigating tariff uncertainty.

At the most fundamental level, we are anchored by our monetary policy framework-our 2% inflation target. We cannot resolve trade uncertainty, but there can be no doubt about our commitment to low inflation. Canadians  need to have confidence that we will maintain price stability  over time, even during periods of global upheaval.

We know that some prices will rise when the tariffs hit-that's  not something monetary policy can stop. What monetary policy can-and must-do is prevent those initial,  direct price increases from spreading.  We must ensure that higher prices from tariffs do not become ongoing generalized  inflation. Simply put, we need to make sure that a tariff problem doesn't become an inflation problem.

To do that, we're doing three things.

First, we're tracking cost increases through to consumer prices. Once prices have gone up to reflect the tariffs-a one-time increase-we want to see prices stabilize  at that higher level, at least until the tariffs are dropped.  We don't want to see price increases become more broad-based  or inflation expectations start to move significantly away from target.

Second, we're improving our analysis  to better inform our policy decisions.  We've built  better and richer multi-sector economic models as well as models that better

account for links between Canada and the world. The Bank is using these new models to analyze different tariff scenarios.

Finally, we're doing more outreach across Canada, both in-person  and digitally. We are being nimble with our surveys so we can reach companies and households  quickly.

We can't reduce uncertainty about US trade policy. But we are doing our best to reduce the uncertainty about the impacts of tariffs. All this work informs our monetary policy deliberations.

Still,  we need to confront the reality that, like everyone else, we are taking decisions  against a background of pervasive uncertainty. This affects how we take monetary policy decisions.

Let me explain.

In normal times, when Governing Council meets, we agree on an economic projection that is our view of the most likely outcome for the economy. That projection is based on economic data, surveys and the historical relationships captured in our models. That's our base case. And then we discuss the risks around that outlook. Our monetary policy discussions  are geared  toward deciding on the best monetary policy given the most likely outcome for the economy and the risks around that outcome.

But in a situation  of pervasive uncertainty, it's very hard for any of us on Governing Council to have high conviction about the most likely outcome. Several outcomes can all look plausible.  Different people will weigh the various factors differently. That's natural, and it's one of the benefits of having diverse perspectives around the table.

When we have this high degree of uncertainty around the base case, we give more consideration  to the risks. Our focus is less about the best monetary policy for a specific economic outlook and more about policy that works for different outcomes. To see why, consider the alternative.  If we were to guess where the economy is heading  and make policy to optimize that outcome, we'd risk getting it wrong. Our actions could be ineffective or even make the outcome worse. So we need to set policy that minimizes the risk. That means being less forwardlooking than normal until the situation  is clearer. And it may mean acting quickly when things crystallize. We need to be flexible and adaptable.

## Conclusion

It's time for me to wrap up.

I've spent much of my time today talking about uncertainty. Unfortunately, the uncertainty we face may last a while. That will make it difficult for Canadian businesses  to figure out their best strategy and hard for Canadian families to plan for the future.

But we do know a few things. The Canadian  economy started the year in good shape. Five years after the pandemic hit, we have come through an unprecedented  global crisis and restored economic growth and low inflation. Interest rates have come down substantially.  Because of that, we are in a better position  to confront the risks ahead.

Monetary policy cannot offset the effects of a trade war. What it can-and mustdo is ensure that higher prices from a trade conflict do not become ongoing inflation.  We are committed to maintaining price stability over time. There should be no uncertainty about that.

Thank you.",Tiff Macklem
https://www.bis.org/review/r250324k.htm,Dimitar Radev: Bulgaria currently fulfils unconditionally all nominal convergence criteria,"Speech by Mr Dimitar Radev, Governor of the Bulgarian National Bank, at the opening of the conference ""Money growth: banking, investment, technology"", organised by Capital newspaper, Sofia, 20 March 2025. ",2025-03-20 00:00:00,"## Dimitar Radev: Bulgaria currently fulfils unconditionally all nominal convergence criteria

Speech by Mr Dimitar Radev, Governor of the Bulgarian National Bank, at the opening of the conference ""Money growth: banking, investment, technology"", organised by Capital newspaper, Sofia, 20 March 2025.

* * *

Dear colleagues and guests,

Thank you for inviting me to open today's conference. It is taking place at a particularly dynamic and challenging moment for both the global and the Bulgarian economy. Such forums are extremely useful for the exchange of analyses, opinions and ideas at a time when the need to adapt economic processes to new realities is becoming increasingly clear.

Let's start with the geopolitical context. In my opinion, at least for the last 35 years, it has not been as important for the economic and financial, but also for the political development of Bulgaria, as it is now.

The key words for today's geopolitical context are uncertainty and unpredictability about what lies ahead or, as the President of the ECB very well put it these days, quoting Paul ValØry: ""The trouble with our times is that the future is not what it used to be.""

The obvious question is, what to do in such an environment? Politicians are facing it, but not only them. It is not my job to give advice on what should be done on the political front, at least not in my capacity. I shall therefore confine myself to one sentence: Active participation in strengthening and developing the European project in today's geopolitical context is the surest guarantee for Bulgaria's good prospects.

I will focus more on the economic and financial aspects.

Developments in Ukraine and the Middle East, the increasing trade conflicts between leading economies and the process of geopolitical fragmentation, as well as the boom in digital technology development are triggering significant structural transformations in global supply chains with uncertain duration, depth and consequences.

These developments are already having a tangible impact on international trade, leading to increased volatility in commodity prices and forcing a number of countries to adapt their economic and, in particular, industrial policies to rising protectionism worldwide. In pursuit of economic security, many economies are reviewing their dependence on external suppliers and taking measures to localise critical industries, restructuring their production chains.

These developments are likely to have an increasing impact on Europe, which remains one of the most vulnerable economies in the context of global geopolitical uncertainties, especially with regard to energy resources. For us, this vulnerability is an even more serious risk factor, given that our country remains one of the most energy-intensive

economies in Europe. Breaking long-standing energy dependencies, soaring gas and electricity prices and the need for accelerated energy transformation pose serious challenges to European economies. Energy costs continue to be significantly higher than in the US and some Asian economies, creating serious structural challenges for the competitiveness of European industry.

In this complex global environment, Bulgaria's starting macroeconomic position is actually not at all bad. In 2024, the country's real GDP grew by 2.8%, i.e. above expectations, and according to the latest BNB forecast, economic growth will remain stable on positive territory, standing at 2.5% this year and 3.0% in 2026. Growth will be supported primarily by domestic demand in a context of historically very low unemployment and the absence of macroeconomic imbalances.

The performance of our banking sector remains robust, with capital buffers, liquidity coverage and profitability above the EU average.

Despite the deterioration of fiscal indicators in recent years, our country still has manoeuvrability, both in terms of the fiscal space available and in terms of the opportunities to restore the fiscal buffers exhausted by the recent budgets.

Last but not least, our country currently fulfils unconditionally all nominal convergence criteria, including the price stability criterion, with which we have had problems in recent years.

For a small and open economy like ours, which is highly integrated into global supply chains, geopolitical developments also pose a number of risks, mostly related to:

- a continued decline in foreign demand for Bulgarian goods and services, especially in view of the deepening structural challenges faced by some of our main euro area trading partners; and
- increased fluctuations in the prices of key energy and non-energy raw materials, which affect business production costs and household disposable income.

In an environment of such risks, it is essential that the economy is well prepared for unexpected shocks affecting the aggregate supply of goods and services. Macroeconomic preparations mainly consist of maintaining sufficient buffers in the banking and fiscal sectors. On the one hand, the existence of such buffers would contribute to cushioning the effect of materialisation of risks and, on the other hand, to adapting to and potentially benefiting from changes in the global economy, such as the restructuring of global production chains. A good example in this regard in recent years is the relatively smooth transition of the Bulgarian economy through the COVID crisis. The high levels of fiscal reserve and bank capitalisation maintained at that time allowed our country to recover relatively quickly from the crisis and without the need for external financial support.

In such an environment, it is extremely important to break the momentum of quantitative and structural deterioration of our fiscal position and restore fiscal buffers. I will give the following example. By the end of 2024, the fiscal reserve reached its historical low, both as a percentage of GDP (4.7%) and as a percentage of total budgetary expenditure under the Consolidated Fiscal Programme (12.3%). For comparison, the average

values of these indicators for the last two decades amounted to 8.8% and 24.4%, respectively. The consolidation of the fiscal stance will remain a serious medium-term challenge against the objective need for higher public investment and military expenditure.

Let me also say a few words about the role of the BNB. In this uncertain environment, the BNB will continue to apply conservative supervisory and regulatory policies, introducing preventive measures to ensure the resilience of the banking system. The consistency and predictability of the policies we pursue are key to the confidence of the banking sector, businesses and investors.

Our approach will continue to include:

- maintaining high capital and liquidity buffers that ensure the resilience of the banking system;
- strict supervision of lending to avoid the accumulation of excessive risks on banks' balance sheets; and
- policy flexibility so that we can respond adequately to new challenges, including in terms of anticipatory economic growth objectives.

In other words, we not only want to ensure stability, but also to create a predictable environment in which economic actors can plan and invest with greater confidence.

Finally, of course, I will also touch on the subject of the country's accession to the euro area.

This topic unites more strongly than before the current issues we are discussing from geopolitics to economics and finance.

We have, indeed, one final step left. I am convinced that we are able to do it with dignity and self-confidence. It is not by chance that I emphasised that at the moment our country meets all the convergence criteria.

As a central bank, we are focused both on the successful implementation of this final step and on our full readiness to work in the context of the shared monetary sovereignty of the euro area. This includes two main groups of tasks.

The first relates to the operationalisation of the existing capacity to operate in the euro area, including the performance of functions that we cannot perform in a currency board environment. These functions relate both to the participation in defining the Eurosystem's monetary policy, which required the building of strong analytical capacity, and to the implementation of the common monetary policy at national level through its main instruments, including the conduct of open market operations, the preparation of conditions for participation and the technical provision of access for Bulgarian banks to the ECB's standing facilities. In addition to our participation in the process of creating and distributing the money supply, the BNB will also act as a lender of last resort, providing extraordinary liquidity support to Bulgarian banks in case of need.

The second task is related to logistics and technical preparation of the process of exchange and functioning of the banking system in the context of the euro area. What

has been done so far is truly unprecedented for the bank and the country in terms of scale and technical complexity. It includes construction and renting of areas; supply of machinery, equipment and materials; providing in practice a new fleet of armoured and security vehicles; creation of a qualitatively new payment and IT infrastructure; development and approval of transport schemes and security systems; full readiness to mint Bulgarian euro coins and deliver the necessary euro banknotes; obtaining the necessary licences and certificates; carrying out a large number of public procurements. I am making this incomplete enumeration to underline two things: first that we have been working hard on this topic and not since yesterday or today; and second, that the BNB and the banking sector are very ready to join and operate within a euro area context.

## Allow me to finish with a few conclusions:

- First, geopolitical uncertainty is one of the main risks to the country's economy and finances and requires the maintenance of buffers in the banking and fiscal spheres and readiness to implement adaptive policies;
- Second, the banking sector is well prepared to face the risks stemming from the external macroeconomic environment and can play an important role in the materialisation of potential development opportunities for key sectors of the economy by channelling credit resources to them;
- Third, unlike the banking sector, public finances need to restore fiscal buffers in the medium term while preserving the long-term sustainability of government debt; and
- Fourth, joining the euro area has enormous potential to become a catalyst for the country to navigate successfully in the face of global uncertainty. And this potential needs to be exploited.

Thank you for your attention and I wish you interesting and fruitful discussions!",Dimitar Radev
https://www.bis.org/review/r250324a.htm,José Luis Escrivá: Address at the presentation of the 20th King of Spain Prize in Economics,"Address by Mr José Luis Escrivá, Governor of the Bank of Spain, at the presentation of the 20th King of Spain Prize in Economics, Madrid, 17 March 2025.",2025-03-17 00:00:00,"## JosØ Luis EscrivÆ: Address at the presentation of the 20th King of Spain Prize in Economics

Address by Mr JosØ Luis EscrivÆ, Governor of the Bank of Spain, at the presentation of the 20th King of Spain Prize in Economics, Madrid, 17 March 2025.

* * *

Good afternoon.

Firstly, I would like to thank Your Majesty for being present at today's King of Spain Prize in Economics award ceremony and for gracing this institution with your attendance once again.

The King of Spain Prize in Economics was established in 1986 by the Fundación JosØ Celma Prieto. I would like to take this opportunity to thank the foundation's president, Javier Celma, for continuing the generous patronage his father began.

For this twentieth edition of the award, it has been my honour to preside the prize jury, made up by `lvaro Rodríguez Bereijo as vice-president, JosØ Ramón `lvarez Rendueles, JosØ Luis Feito Higueruela, Julio Segura, Carmen Reinhart and Carmen Herrero Blanco.

Following its deliberations on 29 October last year, the panel resolved to award the King of Spain Prize in Economics to Roberto Serrano for his brilliant academic and research trajectory, reflected in the quantity and quality of his publications. The prize winner is also an example of personal merit and dedication to the community as an economist.

Roberto Serrano was born in Madrid in 1964 and holds a degree in Economics from the Complutense University of Madrid, where he started his teaching career as an assistant lecturer. He was subsequently awarded a Fundación Ramón Areces Fellowship and a Fulbright Fellowship, which enabled him to pursue his M.A. and PhD studies at Harvard University. He completed his PhD there in 1992 under the direction of professors MasColell, Maskin (2007 Nobel Prize in Economics) and Green. Serrano became a professor of economics at Brown University in 1997, when he was only 33 years old, and is currently the Harrison S. Kravis Professor at Brown University.

Professor Serrano defines himself as an economic theorist. Economic theory works with abstract and mathematical models to shed light on the functioning and behaviour of the economy. And within economic theory, Serrano has specialised in microeconomics, which focuses on the behaviour of individuals and firms as economic agents. Microeconomics is often overshadowed by macroeconomics, which deals with large aggregates and dominates economic news. This is why microeconomists often receive less attention and recognition. This prize rightfully acknowledges the centrality (which I believe is growing) of microeconomics in economic science. As the availability of microdata and the computational capacity for processing them has grown, not only has

it become necessary to develop new empirical instruments to analyse them, but also new microeconomic conceptual models to understand the logic and fundamentals of the results obtained.

In the realm of microeconomics, professor Serrano is recognised globally as a leading authority in game theory, which studies strategic decisions made by individuals or ""players"" in situations where each participant's outcome depends on the decisions of others.

Among his numerous research contributions are his studies on the non-cooperative aspects of cooperative game theory and his work on designing mechanisms that steer players' behaviour towards achieving the best outcome for everyone involved, even without mutual cooperation. He also made a significant contribution to risk measurement by developing a risk index in 2008 in collaboration with Nobel laureate Robert Aumann.

Roberto Serrano has published over 80 papers on economics, game theory, operational research and applied mathematics in high-impact academic journals. Ten of these articles have appeared in some of the most prestigious economics journals.

Roberto's primary concern is improving our understanding of economic reality, thereby fostering societal development. His aim is to better comprehend market mechanisms and economic agents' incentives in order to help design policies that increase social well-being.

Teaching and sharing knowledge are also integral to his work. He has authored two textbooks, on intermediate microeconomics and welfare economics, which are widely used in universities around the world. As a professor, he has won high praise from his students and has received several awards for his excellence in teaching.

He was included in ""The Best 300 Professors"", a guidebook published by The Princeton Review for ""finding teachers with the power to change your life"". In it, the 300 highestrated professors are selected from 60 different academic fields based on interviews with millions of undergraduate students in the United States.

Roberto was elected a Fellow of the Econometric Society in 2013 and a Fellow of the Game Theory Society in 2017. Among his editorial work, his role as editor-in-chief of Economic Letters between 2011 and 2017 is noteworthy.

Roberto Serrano has achieved all this after overcoming great challenges, as he was diagnosed with retinitis pigmentosa when he was a teenager, which made him progressively lose his sight until he became completely blind. Thanks to his determination and the support of his father, Carlos, he was able to finish his university studies with excellent grades. Indeed, the tribute paid to Carlos Serrano by the Complutense University in 2005, with the attendance of his son, was entirely fitting. Fourteen years later, Roberto himself was awarded the title of doctor honoris causa by his alma mater, as a testament to his exceptional merit and personal dedication to the good of the community.

Your Majesty, thanking you once again for your presence at this ceremony, it only remains for me, with your permission, to ask the prize winner to step up to receive the 20th King of Spain Prize in Economics.",Jose Luis Escrivá
https://www.bis.org/review/r250319n.htm,"Frank Elderson: Resilience offers a competitive advantage, especially in uncertain times","Keynote speech by Mr Frank Elderson, Member of the Executive Board of the European Central Bank and Vice-Chair of the Supervisory Board of the European Central Bank, at the Morgan Stanley European Financials Conference, London, 19 March 2025.",2025-03-19 00:00:00,"SPEECH

## Resilience offers a competitive advantage, especially in uncertain times

Keynote speech by Frank Elderson, Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB, at the Morgan Stanley European Financials Conference

London, 19 March 2025

We are living in unprecedented, turbulent times. Not a single week goes by without significant shifts in the global economy. We are seeing a surge in tariffs, an unravelling of global trade and a growing transatlantic divide leading to new geopolitical realities, all while wars continue right on our doorstep.

Meanwhile, the debate on financial regulation is also intensifying. Some have raised the question as to whether regulation and supervision have become too conservative that they may be hindering competitiveness. Perhaps some of the investors and bankers here in this room are asking themselves the very same question.

In my remarks today, I will highlight that, particularly in an era of heightened economic uncertainty and geopolitical shifts, we need competitive banks that ensure the flow of finance into investment and innovation. I will argue, however, that a vital pre-condition for banks to play their fundamentally important role of financing the real economy is that they remain resilient. Because a banking system that cannot withstand shocks cannot reliably finance the economy, especially when it matters most. And while there are merits in removing undue complexity from the regulatory framework without compromising resilience, the debate on competitiveness should not be used as a pretext for watering down regulation. Rather than reducing complexity by lowering regulatory requirements, it would be more effective to achieve simplification through European harmonisation: don't cut rules, harmonise them.

## Resilience of the European banking sector

Let me start with resilience. Over the past decade European banks have become significantly stronger.

Thanks to robust regulatory guardrails and rigorous supervision, today's banking sector is far more resilient than it was ten years ago. This is reflected in higher capital and liquidity buffers, improved risk management and better governance.

Euro area significant banks are currently in a good financial position, with the aggregate Common Equity Tier 1 ratio standing at 15.7% in the third quarter of 2024. Similarly, the leverage ratio stands comfortably above regulatory requirements at 5.8%. I anticipate that the data for the fourth quarter of 2024, due for release tomorrow, will confirm this overall trend. [ 1]

## Chart 1

## Capital adequacy



Source: ECB supervisory banking statistics.

Liquidity ratios also remain well above regulatory requirements, with the liquidity coverage ratio standing at 158.5% and the net stable funding ratio at 126.9%.

## Chart 2

## Liquidity ratios



Source: ECB supervisory banking statistics and ECB internal computations for historical data.

This resilience is not a coincidence, but a testament to the joint efforts undertaken by regulators, supervisors and banks over the last decade.

It is worth remembering that the strong regulatory and pan-European supervisory framework was put in place as a response to the great financial crisis, which remains the biggest growth-destroying event in modern economic history. [ ]  The aim of legislators was clear: never again should we let excessive risktaking, insufficient regulation and 'light touch' supervision fuel another crisis like the one that affected millions of Europeans and resulted in average output losses of 8.5% of GDP in EU countries. 2

Encouragingly, Europe can look back on a decade of financial stability. Building on this renewed resilience, euro area banks are now in a much better position to support households and companies.

To ensure banks can continue to play this crucial role, their ability to earn sustainable profits is an indispensable component of resilience: without profits, banks cannot organically generate capital, make the necessary investment in future-proof IT systems, finance their clients' growth projects and remain attractive to investors. [ ]  Encouragingly, the profitability of euro area significant banks has notably improved, with the aggregate annualised return on equity (RoE) standing at 10.2% in the third quarter of 2024. Despite this improvement, the positive effect of higher net interest income seems to have already peaked. Moreover, although banks have seen their return on equity increase, it is still barely higher than 3

their own cost of equity estimates. [ ]  This shows that banks must keep a close eye on their operating efficiency. 4

Chart 3 Profitability: return on equity versus cost of equity



Source: ECB internal calculations.

Notes: This is the cost of equity as reported by the banks themselves. Owing to data availability constraints, the sample comprises a lower number of entities (104 significant institutions) than . Supervisory banking statistics

The European banking supervision cost of equity estimates (based on ) indicate a cost of equity which is normally higher than the self-reported cost of equity. established methodologies

One possible way of improving operating efficiency would be to reap economies of scale. Scaling up would enable banks to arrive at the investment budgets they need for digitalisation and cybersecurity.

In a highly fragmented European banking system, these economies of scale could also be achieved through market consolidation. We have repeatedly stressed that from a supervisory perspective, we see benefits in cross-border mergers and will not stand in the way of consolidation. What matters is that the acquisition results in safe and sound banks, regardless of who the proposed acquirer is or whether it concerns a domestic or cross-border acquisition. Our supervisory assessment is limited to the prudential grounds and criteria laid down in a limitative manner in the law. This means ensuring that new entities resulting from business combinations have sustainable business models, comply with regulatory and

supervisory requirements and have sound governance and risk management arrangements in place. [ ] Back in 2021, to be as transparent as possible about our approach for the benefit of market participants, we published a guide to consolidation in the banking sector clearly setting out our supervisory expectations. 5

## Risk outlook

Resilience must, however, not lead to complacency. The risk environment is changing in ways that demand our continued vigilance.

Although euro area GDP growth improved slightly to 0.7% in 2024, it remains subdued. In addition to the risks to the GDP outlook being tilted to the downside, structural trends are developing that may cause significant bottlenecks in global and European economies in the period ahead. [ ] 6

For example, geopolitical tensions are not expected to subside, we are seeing economic fragmentation along geopolitical fault lines and protectionist measures are growing. And while all of this is happening, the climate and nature crises - although lately it seems less fashionable in certain circles to point out this undeniable fact - are getting worse, and natural disasters are becoming ever more frequent, severe and costly. [ ] 7

The macro-financial context is having an impact on both the financial and non-financial risks that banks are facing.

Let me start by looking at the financial risks, focusing first of all on credit risk. Currently, the nonperforming loan (NPL) ratio stands close to historical lows at 2.3%. However, corporate insolvencies are on the rise, potentially leading to higher credit risk. Moreover, downside risks may materialise in sectors that are particularly sensitive to current macroeconomic trends.

## Chart 4

## Asset quality: NPL ratio



Source: ECB supervisory banking statistics

Note: 'cb' refers to 'cash balances at central banks and other demand deposits'.

In fact, we can see early signs of weakening asset quality, particularly in vulnerable sectors, such as commercial real estate, and in small and medium-sized enterprises (SMEs). Worryingly, banks' provisions do not appear to sufficiently reflect downside risks, confirming some persistent shortcomings in their International Financial Reporting Standard 9 (IFRS 9) provisioning frameworks.

Against this backdrop, European banking supervision made banks' credit risk management one of its key supervisory priorities for 2025-27, spurring on banks to pay close attention to the bread and butter task of sound credit risk management.

For example, this means that instead of kicking the can down the road, banks should recognise deteriorations in asset quality in a timely manner and ensure their provisioning develops in lockstep with decreasing asset quality.

Banks are also advised to identify borrowers that may experience structural repayment difficulties in sectors of the economy that are particularly sensitive to current macroeconomic trends. That is also why we are continuing our supervisory work on vulnerable sectors, by focusing for instance on banks' preparedness in dealing with potential economic deterioration across the full value chain of the automotive sector.

Moving on to non-financial risks, let me stress that - especially in the current risk environment - strong governance and sound risk culture are crucially important. [ ]  Banks' management bodies must ensure the effective and prudent management of their bank [ ] , and are therefore ultimately responsible for ensuring that banks are prepared for the challenges of today's risk landscape. 8 9

However, good governance, financial resilience and sound risk management are essential but not enough in themselves to ensure that banks always remain at the service of the economy. To do so, they must also be operationally resilient. Why is that?

Let's take the example of Amsterdam Trade Bank (ATB), which filed for bankruptcy even though it had ample capital and liquidity. What went wrong? Due to sanctions, ATB had lost access to its IT systems, which were run by third-party providers. There were no adequate contingency arrangements in place, so this well-capitalised, liquid, but operationally insufficiently resilient bank had to close.

Another example is last summer's CrowdStrike incident, which caused the operating system of a major provider to crash, displaying the so-called blue screen of death. This led to significant disruptions across sectors, including banks.

Lastly, we can also see that the number of significant cyber incidents reported to the ECB more than doubled between 2022 and 2024.

Chart 5

Number of significant cyber incidents reported to the ECB by significant banks



Source: ECB Banking Supervision.

Worryingly, we see a clear increase in attacks on third-party providers to which banks have outsourced certain services. Let me be clear: there are very good reasons for banks to outsource certain activities. For example, if they want to take advantage of cost efficiencies, or be more agile and optimise their own resources and expertise. [ ]  However, as the rising number of cyber incidents highlights, outsourcing also comes with risks that banks should assess thoroughly to ensure business continuity. Considering that European banks are highly dependent on third-party providers, particular vigilance is needed, especially in times of rapid geopolitical change. Banks may want to consider revisiting past risk management decisions when (re-)assessing their outsourcing arrangements. 10

## Chart 6

Overview of type and number of significant cyber incidents reported to the ECB by significant banks



Source: ECB Banking Supervision.

Note: '(D)DoS' stands for '(Distributed) denial of service'.

The examples that I just mentioned illustrate a fundamental point: in times of increasing digitalisation and geopolitical tensions which are fuelling cyberattacks, operational resilience is more important than ever.

However, unlike financial resilience, operational resilience can't be built up by accumulating Common Equity Tier 1 (CET1). Instead, boosting operational resilience requires investment. Given the current rise in banks' profitability, the time is right to continue investing in operational resilience. The more banks invest with strategic foresight, the better they will be operationally prepared if and when a cyberattack hits, for example.

Moreover, the Digital Operational Resilience Act (DORA), which became applicable in the EU earlier this year, will help to further boost operational resilience as it provides a robust framework that requires banks to foster a culture of continuous IT and cyber risk management. [ ] 11

What's more, neither cyber risks nor other risks stop at borders. Given the interconnectedness of the international financial system, international cooperation is vitally important. The good news is that we have well-established existing global institutions and fora such as the Basel Committee on Banking Supervision, the Financial Stability Board and the Central Banks and Supervisors Network for Greening the Financial System, which remain essential for financial stability, especially in the current risk context.

Hence, as we navigate through a complex risk environment with heightened uncertainties, vigilance, prudence and resilience are more important than ever. But resilience - whether financial or operational isn't just about protecting banks from shocks. It's also a foundation for long-term competitiveness. A bank that is robust in times of crisis is also a bank that is robust at all times so that it can invest and compete to the benefit households and firms.

## Competitiveness and financial sector resilience are closely interlinked

And this brings us to a broader question in the debate on competitiveness: how does one ensure a strong and competitive banking sector without compromising financial stability?

Let me be clear: framing financial stability and competitiveness as opposing forces is a fundamental misconception. Evidence shows that stronger, better capitalised banks are more competitive and - most importantly - better equipped to lend to the real economy. [ ]  Impact assessments of the post-crisis reforms in the banking sector show that the benefits clearly outweigh any potential unintended side effects. [ ]  Hence, competitiveness and financial sector resilience are closely interlinked. Neither can exist without the other. 12 13

Having said that, we generally support simplifying the regulatory framework where possible, as long as the current level of resilience of the banking sector is maintained and any changes are based on prior, sound impact assessments and cost-benefit analyses. After all, if we all agree that it only makes sense to legislate after solid ex ante impact assessments and sound analyses show that the benefits of certain rules outweigh their costs, then it must make just as much sense to rigorously perform these same assessments and analyses before scrapping those very same rules.

We must ensure that any short-term gains in simplification do not actually result in any long-term loss of resilience prudently built up over the last decade. We also need to ensure that simplification efforts do not leave pockets of risk unaddressed.

Let me illustrate this with an example. As prudential supervisors, our true north is that no material risk remains unaddressed. An important precondition for banks to be able to prudently manage their risks is that they have accurate risk data and information from their customers. The financial risks stemming from the ongoing climate and nature crises are no exception to that principle. It is therefore vitally important that any attempts to simplify sustainability reporting for companies do not result in critically important data points needed by banks to adequately manage their climate and nature-related risks no longer being disclosed in a harmonised manner. If this were to happen, banks would either no longer be able to conduct adequate risk management, or they would have to resort to requiring additional data from their clients on top of the current regulatory regime, which would be burdensome both for banks and their clients.

The economist Hyman Minsky wisely stated that, as memories of past crises fade, attitudes towards regulation change. Let me add that if such attitudes lead to confusing simplification and deregulation, memories of past crises could return with a vengeance.

The last thing we should do, especially as we go through times of high uncertainty, is to let our guard down as regards resilience and hamper banks' ability to manage their risks, thinking that 'this time will be different'', the phrase so poignantly coined in Rogoff's and Reinhard's 'Eight Centuries of Financial Folly'.

- [ ]  Let us, for once, avoid such folly and sidestep that all-too-attractive trap. 14

Instead, let me point to an often overlooked yet crucially important aspect that has significant simplification potential and does not come at the expense of resilience: a primary root cause of complexity in the European framework lies in the persistent fragmentation of rules at national level. For example, many facets of the current prudential framework do not actually consist of a single European regulation but of a patchwork of nationally transposed directives. To truly reduce complexity, we need more harmonisation at EU level through directly applicable regulations which would achieve a truly unified single rulebook. I would even go as far as to say that a more integrated and European approach is the most effective way forward to ensure that our regulatory framework is simpler and more effective. Financial markets would also greatly benefit from the harmonisation of corporate insolvency rules, accounting frameworks and securities laws, as well as from better disclosure of financial information by EU corporates. To make progress in these areas, alternatives methods could be envisaged, such as the introduction of a 28th regime, which would be a practical and very welcome intermediate step towards further harmonisation within the EU.

A completed banking union, including the establishment of a European deposit insurance scheme and a fully integrated capital markets union, would help eliminate barriers that still hinder market integration and would ensure that the financial system fosters both stability and growth. The path to greater competitiveness does not therefore lie in deregulation but in further European integration.

Moreover, as far as European banking supervision is concerned, we continuously apply a risk-based approach to simplify and reduce complexity and cost factors that unduly inhibit our task of keeping banks sound.

One example of our drive for 'simplification without compromising resilience' is the comprehensive reform of our annual health check of banks, the Supervisory Review and Evaluation Process, which we recently made leaner, more risk based and more efficient.

The recent, fast-track approval process for standardised securitisations is another excellent example of how, in close dialogue with the industry, processes can be simplified within the existing regulatory framework. By leveraging product standardisation for sufficiently simple significant risk transfer transactions, the fast-track process will lead to efficiency gains without - crucially - weakening our focus on relevant risks. I sincerely hope that together we can identify and pursue more initiatives of this kind.

We will also continue to reduce processing times by making better use of supervisory technology tools that use cutting-edge technologies, such as artificial intelligence. For example, since March 2023 we have been machine reading and pre-screening all our fit and proper applications, which speeds up supervisory assessments and, in turn, the responsiveness to banks. [ ] 15

## Conclusion

Let me conclude.

The progress made over the past decade has made European banks more resilient. Banks have evolved from shock propagators to shock absorbers.

As we navigate through the storms brewing over today's increasingly complex risk landscape, stable banks are more important than ever.

Rolling back on safety and soundness would not only undermine financial stability but also weaken banks' ability to finance the real economy.

Does that mean that there is no room for regulatory simplification? Does it mean that there is no room for any efficiency gains in the way we supervise? Of course not.

But let us stay on course while we explore how to simplify and harmonise the regulatory framework. Let us stay on course while we continue to enhance the efficiency and effectiveness of our supervision.

And let us stay on course in ensuring that the European banking system remains resilient.

Because resilient banks are nothing less than the bedrock of competitiveness and growth.

Thank you for your attention.

1.

The reference date for data contained in this speech is the third quarter of 2024. As of 20 March 2025, data for the fourth quarter of 2024 can be found on the web page. Supervisory data

2.

Previous systemic financial crises resulted in average output losses of 8.5% of GDP in EU countries. See Lo Duca, M. et al. (2017), ' ', Occasional Paper A new database for financial crises in European Countries

Series , No 194, July; and Woods, S. (2024), ' ', speech at the Annual City Banquet, Mansion House, 17 October. Competing for growth

3.

Strong profitability and a low cost-to-income ratio are important determinants of higher price-to-book ratios at individual bank level and hence banks' attractiveness to investors. See ' ', fireside chat between Kerstin af Jochnick, Member of the Supervisory Board of the ECB, and Chris Hallam, Managing Director at Goldman Sachs, at the Twenty-Eighth Annual European Financials Conference, hosted by Goldman Sachs in Madrid, 5 June 2024. What is the outlook for the European banking sector?

4.

Chart 3 shows that banks' own cost of equity estimates are at the lower end of our estimate range

5.

See Elderson, F. (2025), , ECB, 17 January; and ECB (2020), . Interview with Het Financieele Dagblad Guide on the supervisory approach to consolidation in the banking sector

6.

See Elderson, F. (2024), ' ', speech at the University of Cyprus, Nicosia, 21 November. Securing stability in an insecure environment: navigating a bottleneck environment

7.

Munich Re has found that the average damage from natural disasters over the past 30 years (corrected for inflation) is rising. It averaged USD 181 billion per year worldwide over the past 30 years, but USD 236 billion over the past ten years and USD 261 billion over the past five years, reaching USD 320 billion in 2024. See Munich Re (2025), ' ', 9 January. Climate change is showing its claws: The world is getting hotter, resulting in severe hurricanes, thunderstorms and floods

8.

See previous speeches and blog posts on governance, including ECB (2024), ' ', The Supervision Blog , 24 July; and Elderson, F. (2023), '' '', speech at the 10th Conference on the Banking Union organised by Freshfields Bruckhaus Deringer, the Institute for Law and Finance at Goethe University and the Center for Financial Studies, Frankfurt am Main, 19 September. Banks' governance and risk culture a decade on: progress and shortcomings Treading softly yet boldly: how culture drives risk in banks and what supervisors can do about it

9.

See Article 88(1) of the Capital Requirements Directive (CRD); and ECB (2024), , July. Draft guide on governance and risk culture

10.

For example, more than 70% of significant banks outsource critical payment services, and more than half outsource some of their lending and investment services. See ECB (2024), ' '', Supervision Newsletter , 21 February. Rise in outsourcing calls for attention

11.

See ECB (2025), ' ', The Supervision Blog , 17 January. Operational resilience in the digital age

12.

Budnik, K., Dimitrov, I., Gross, J., Lampe, M. and Volk, M. (2021), ' ', Macroprudential Bulletin , No 14, European Central Bank. See also Siciliani, P., Eccles, P., Netto, F., Vitello, E., Sivanathan, V. and van Hasselt, I. (2023), , Bank of England Prudential Regulation Authority, 11 September. On the usability of buffers for bank lending, see Couaillier, C. et al. (2021), ' ', Financial Stability Review, November; and Couaillier, C. et al. (2022), ' ', Working Paper Series, No 2644, ECB, February. Macroeconomic impact of Basel III finalisation on the euro area Paper 2: The links between prudential regulation, competitiveness and growth. Background working paper published by PRA staff in support of the conference on the role of financial regulation in international competitiveness and economic growth conference 2023 Bank capital buffers and lending in the euro area during the pandemic Caution: do not cross! Capital buffers and lending in Covid-19 times

13.

Financial Stability Board (2025), , 22 January. See also the of the evaluations performed to date. Evaluation of the Effects of the G20 Financial Regulatory Reforms overview

14.

Rogoff, K.S. and Reinhard, C.M. (2011), This Time Is Different: Eight Centuries of Financial Folly Princeton University Press.

,

15.

The ECB uses a dedicated tool called Heimdall, which is constantly updated and enhancements. For instance, we have further automatised the transfer of findings from fit and proper assessment to our core IT systems and in turn their timely communication to banks. Heimdall also supports a risk-based supervision approach as supervisors can now more easily focus on cases flagged as complex and at the same time speed up the assessment and conclusion of simpler cases. See ECB (2025), ' ', interview with Alessandra Perrazzelli, Deputy Governor of the Banca d'Italia and Member of the Supervisory Board of the ECB, Supervision Newsletter , 19 February. Bridging the gap between people and technology",Frank Elderson
https://www.bis.org/review/r250324j.htm,Christodoulos Patsalides: Current landscape and future challenges,"Welcoming speech by Mr Christodoulos Patsalides, Governor of the Central Bank of Cyprus, at the Joint Conference on Cyprus Economy by the Central Bank of Cyprus (CBC) and the European Stability Mechanism (ESM), Nicosia, 21 March 2025.",2025-03-21 00:00:00,"## Christodoulos Patsalides: Current landscape and future challenges

Welcoming speech by Mr Christodoulos Patsalides, Governor of the Central Bank of Cyprus, at the Joint Conference on Cyprus Economy by the Central Bank of Cyprus (CBC) and the European Stability Mechanism (ESM), Nicosia, 21 March 2025.

* * *

Ladies and gentlemen, esteemed guests, colleagues,

It is a great pleasure to welcome you today to this conference, jointly organized by the Central Bank of Cyprus and the European Stability Mechanism (ESM). I extend my sincere gratitude to our distinguished speakers and participants for joining us today to engage in an important discussion on the structural transformation of the Cypriot economy over the recent years.

Cyprus stands at a pivotal moment in its ongoing economic evolution. Over the past decade, we have witnessed significant shifts in our economic and banking models, from the recovery following the financial crisis of 2013 to a more diversified and resilient economy today. At the same time, global and regional developments-including geopolitical and trade tensions, technological advancements, and climate imperativesare shaping a new economic reality that requires strategic adaptation and agile forwardlooking policies, but they are also fueling uncertainty that warrants vigilance and agility.

The ESM has played a crucial role in safeguarding financial stability in the euro area and has been a key partner in Cyprus's economic recovery and resilience. Its role in ensuring a robust macroeconomic and financial performance is as relevant today as it was during the crisis years. However, stability and robustness alone are not enough-we must also ensure that our economy is built on a foundation of sustainability, innovation, and inclusiveness.

## The Banking Sector: a pillar of economic stability

A critical component of our economic transformation has been the strengthening of our banking sector. Over the past decade, Cyprus has made remarkable progress in enhancing financial stability, reducing non-performing loans, and improving regulatory oversight. The banking sector today is resilient and enjoys stronger capital and  liquidity buffers, among the highest in the euro area. These reforms have positioned our financial institutions to support economic growth more effectively.

Looking ahead, the continued modernization of our banking system will be crucial. Embracing digitalization, strengthening financial literacy, and ensuring access to financing for businesses and households are key priorities. Additionally, aligning with European banking standards and sustainability frameworks will further enhance the sector's role in fostering long-term economic stability. The resilience and adaptability of our financial institutions will be instrumental in supporting Cyprus's broader economic transformation.

## Structural Changes: the future of the Cypriot economy

Cyprus has made substantial progress in bolstering its financial system and expanding its economic diversification. However, structural challenges persist, and our discussions today will center on effective strategies to tackle them. I will now mention some of the key areas of transformation that have strengthened Cyprus's ability to withstand external shocks, whether from financial market fluctuations, geopolitical shifts, or supply chain disruptions:

We have reduced reliance on traditional sectors and expanded our footprint on industries such as technology, fintech, and renewable energy.

The adoption of digital financial services enhanced productivity, and promoted  innovation.

We have aligned our economy with European and global sustainability goals, thus ensuring that growth is both environmentally responsible and economically viable.

As regards labour market and skills development, we have adopted demographic changes by fostering lifelong learning, and ensuring that our workforce is equipped with the skills necessary for the jobs of the future.

## Structural reforms and the Stability and Growth Pact

Structural changes are not just a necessity for economic modernization, they are also closely linked to the European framework for fiscal and economic governance. The Stability and Growth Pact (SGP) sets the rules for sound public finances in the euro area, ensuring that fiscal policies support economic stability and sustainable growth. As Cyprus continues its path of economic transformation, it is imperative that our structural reforms are aligned with the principles of fiscal responsibility, debt sustainability, and macroeconomic resilience. The budget surplus for 2024, which reached 4,5% of GDP, illustrates our commitment to fiscal responsibility. Furthermore, the trajectory of public debt, which reached 61,9% in January 2025, reinforces the country's progress toward long-term financial stability.

The SGP framework emphasizes structural reforms that enhance productivity, competitiveness, and economic resilience. For Cyprus, this means:

- Strengthening public finances further while supporting growth-enhancing reforms in key sectors.
- Ensuring that investments in digital and green transformation are conducted in a fiscally sustainable manner.
- Enhancing the efficiency of public administration and regulatory frameworks, fostering an environment that supports private sector growth and innovation.

At the Central Bank of Cyprus, we recognize the importance of the balance between fiscal prudence and strategic investment in long-term growth. Our policies must safeguard that Cyprus continues to comply with the European fiscal framework while creating the conditions for sustainable economic progress.

## A shared responsibility for the future

While challenges remain, Cyprus has repeatedly exhibited through time endurance and its ability to adapt, reform, and progress. It is now the time to navigate the next steps in this journey, identifying policy priorities, investment opportunities, and regulatory frameworks that will further shape a healthy and prosperous future of our economy. A research and policy center has been recently established at the Central Bank of Cyprus, dedicated to conducting in-depth analysis and research to inform and guide our policy decisions.

I encourage an active engagement in today's discussions, exchange of ideas, and exploring solutions that will enable Cyprus to position itself as a dynamic, competitive, and resilient economy within the euro area and beyond.

Once again, I would like to extend my sincere appreciation to our ESM colleagues for their collaboration and I wish you all a productive and insightful participation.

Thank you.",Christodoulos Patsalides
https://www.bis.org/review/r250324l.htm,Philip R Lane: The digital euro - maintaining the autonomy of the monetary system,"Keynote speech by Mr Philip R Lane, Member of the Executive Board of the European Central Bank, at the University College Cork Economics Society Conference 2025, Cork, 20 March 2025. ",2025-03-20 00:00:00,"SPEECH

## The digital euro: maintaining the autonomy of the monetary system

Keynote speech by Philip R. Lane, Member of the Executive Board of the ECB, University College Cork Economics Society Conference 2025

Cork, 20 March 2025

It is a pleasure to participate in the annual conference of the UCC Economics Society. Today, I wish to discuss the digital euro, which is an important project at the ECB. [ ]  Draft legislation has been proposed by the European Commission and is currently under consideration by the Council of the European Union and the European Parliament. [ ] 1 2

A few years ago, archaeologists excavated two silver coins at Carrignacurra Castle, not too far from here.

[ ]  The first was a groat (a coin worth four pennies) from the 1200s depicting Henry III; the second was a coin from the 1400s featuring Edward IV. These two coins indicated a society that regarded precious metal as the embodiment of intrinsic value and closely associated money with sovereignty. 3

Over the centuries, the currency circulating in Ireland has changed multiple times. From 1927 until the launch of the euro, the Irish pound (the punt) was the national currency of Ireland. The punt was not backed by a precious metal, such as gold or silver. Rather, it was a fiat currency that derived its value from government regulation, the assets backing the currency and trust in the issuing authority, the Central Bank of Ireland and its forerunner the Currency Commission. Until 1979, the punt was pegged to the British pound sterling at a 1:1 exchange rate, reflecting the historical linkages with the United Kingdom and the significant bilateral trade volumes. It operated as legal tender until around a quarter century ago, when Ireland along with ten other EU Member States introduced the euro (twenty countries are now members of the euro area). By adopting the euro, Ireland reinforced its commitment to European integration, while also reducing its dependence on the UK monetary and financial system.

The developments in Ireland's currency over time demonstrate how monetary systems are shaped by broader societal and economic transformations. For instance, the history of Irish money includes two episodes of free-banking money, whereby private banks issued banknotes that were used by the public as means of payment. [ ]  In this aspect, the monetary history of Ireland resembles that of Scotland, England and the United States. This history can shed some light on the current debate about the new forms of private money that are emerging today, such as stablecoins in the context of a digitalising society - a trend that has become more pronounced in recent years. [ ] 4 5

In an increasingly digitalised society, in which the role of physical banknotes issued by the central bank is receding, the question arises whether the European Central Bank should issue a central bank digital currency (CBDC) for the euro area. [ ] 6

Today, I will explain why it is imperative for the ECB to introduce a digital euro. [ ]  I will first discuss the roles of central bank money and commercial bank money over time, before describing a range of scenarios that suggest a digital euro is necessary to preserve the monetary autonomy of Europe. Finally, before concluding, I will outline the benefits of the digital euro for Europe's Economic and Monetary Union. 7

## Our current monetary system The three main properties of money

Let me begin by recalling the three main characteristics of money: (i) it serves as a unit of account, (ii) it provides a medium of exchange, and (iii) it is a store of value.

The unit of account property solves a basic coordination problem in any economy: it is a lot easier to set prices and wages vis-a-vis a single benchmark (a loaf of bread is priced at, say, €2) rather than firms and households resorting to a diversity of benchmarks (a loaf of bread is priced at 10 apples). Through its interest rate and balance sheet policies, the central bank can provide overall price stability by ensuring that average prices do not rise by more than two per cent per year over the medium term.

The medium of exchange function reflects the superiority of monetary exchange to barter-type alternative systems. Suppose someone earns income by working as a university professor but wishes to consume a wide range of goods and services: it is a lot simpler to receive her salary in euro and pay for her desired goods and services in euro rather than searching for suppliers that might be willing to exchange a particular good or service for a customised university lecture. A huge volume of transactions occurs every day, with firms and household buying and selling products in exchange for monetary payments. The central bank anchors the payment systems that process these transactions. In particular, a request by a customer with an account in Bank A to make a €100 payment to a merchant with an account in Bank B is settled through an interbank transaction in which €100 is deducted from the reserve account of Bank A at the central bank and €100 is credited to the reserve account of Bank B at the central bank.

Money also acts a store of value. Alongside other financial and non-financial assets, households also hold bank deposits and banknotes in order to transfer purchasing power from one period to the next. Since overnight bank deposits (current accounts) pay nil or very little interest and banknotes do not pay interest, money is typically dominated by other assets in relation to long-term saving and investment plans. [ ]  At the same time, money provides a highly-liquid store of value and its roles as a unit of account and medium of exchange are closely connected to its role in preserving liquidity from one period to the next. 8

## Two sides of the same coin

In essence, our monetary system consists of two layers: ' central bank money ' and ' commercial bank money '. The use of the term 'money' here does not mean that we are speaking about two independent types of money. In practice, central bank money and commercial bank money are intertwined: indeed, it is essential that households and firms view these as equivalent. The label simply refers to the type of entity that issues the respective components of the aggregate money supply. More general terms for these two layers underline how money is created and distributed in the economy: since central bank money (banknotes and the central bank reserves held by commercial banks) is issued by the central bank, it originates outside the private sector and is referred to as 'outside' money . By contrast, commercial bank money (bank deposits) originates from, and circulates within, the private sector and is called ' inside' money (seen from the perspective of the private sector).

As central bank money is issued directly by the central bank, from an accounting perspective, it is backed by the assets of the central bank. That is, the Eurosystem can increase the supply of euro 'outside' money by crediting the reserve accounts held by commercial banks at the central bank in exchange for assets. This can be done by providing a loan to a bank (strictly, a temporary collateralised loan under its refinancing operations) or by acquiring bonds. [ ]  As noted above, the reserve accounts held by commercial banks at the central bank are an essential component of the overall monetary system, since most monetary transactions involve an interbank transfer from the customer's bank to the merchant's bank whereby funds are deducted from the reserve account of the customer's bank and credited to the reserve account of the merchant's bank. In turn, this implies that a commercial bank can only efficiently provide banking services to its customers (and maintain the trust of its counterparts) if it has sufficient central bank reserves to meet payment and withdrawal requests. Currently, commercial banks hold about €3 trillion in reserve accounts in the Eurosystem (corresponding to about 20 per cent of euro area GDP). As euro liabilities of the central bank, these reserves are the ultimate safe asset: there is zero credit risk. Moreover, reserves are the highest form of liquidity (one euro is always one euro), which is the foundation for reserves as the settlement asset for inter-bank transactions. 9

The supply of euro 'outside' money also includes about €1.6 trillion in banknotes (about 10 per cent of euro area GDP). Mechanically, banknotes are supplied via the banking system: an individual bank might request €10 million in banknotes to feed its ATMs or in response to the currency demands of its corporate customers and its reserve account with the Eurosystem is duly debited for this amount. If the bank does not have enough reserves for that operation, it must borrow them either from another bank or from the central bank itself. In the aggregate, this means the central bank also funds its acquisition of assets by issuing banknotes.

Unlike standard liabilities of other institutions, central bank money is not redeemable for commodities (such as gold) or alternative means of payment or stores of value. Instead, its intrinsic value comes from its acceptance as currency, which is deeply connected to the credibility of the monetary policy of the central bank in maintaining its value in terms of purchasing power (that is, maintaining price stability). This credibility is crucial because it shapes public trust in the currency and its stability.

In turn, the authority and credibility of the central bank are intrinsically linked to its sovereign foundations. In national currency systems, the central bank is established by the nation state as the monopoly provider of 'outside' money. [ ]  In the euro area, the ECB was established by the Treaty on European Union and 10

controls the issue of euro as a currency, with the mandate to maintain price stability. The Eurosystem (comprising the ECB and the national central banks of those EU Member States whose currency is the euro) decides and implements monetary policy decisions.

By contrast, commercial bank money is created through the lending and intermediation activities of commercial banks. Mechanically, when a bank makes a loan to a firm or household, it creates a deposit in the account of the borrower, thereby increasing the overall money supply (the sum of outside and inside money). The value of commercial bank money - mainly bank deposits - is pegged to central bank money: a €50 deposit has the same value as a €50 banknote. In turn, this means that retail transactions can be settled either by transferring funds from the bank account of the customer to the bank account of the merchant or by paying in banknotes. [ ]  The equivalence of bank deposits and banknotes is maintained through the promise of convertibility of bank deposits into banknotes (and vice versa): in particular, customers always have the outside option to withdraw their deposits in favour of banknotes that are backed by the central bank. 11

While banknotes (and coins) are still widely used to purchase goods and services, the central role played by commercial banks in an efficient payment system reflects the transactions services provided by banks to their depositors: inside money is particularly attractive as a means of payment, especially for large-scale transactions. [ ] [ ]  For all these reasons, commercial bank money today accounts for the bulk of the money in circulation. For instance, in the euro area, the size of our broad monetary aggregate M3 is ten times that of the banknotes in circulation. [ ] 12 13 14

Inside money is ultimately backed by the assets of the commercial bank, primarily loans and, to a lesser extent, bonds. Put differently, commercial bank money is not completely 'information insensitive' in the following sense: its value is conditional on the creditworthiness of borrowers and the financial health of banks. For this precise reason, commercial banks are heavily regulated and closely supervised. In addition, deposit insurance limits the risk that a liquidity shortage may hamper the capacity of the bank to convert deposits into cash in full and on demand, while central banks typically respond to systemic stress events by elastically providing liquidity to the banking system. While these safeguards are extensive, the traditional ability of customers to convert bank deposits into banknotes has played a foundational role in ensuring that the value of inside money is anchored by the value of outside money. In particular, outside money is entirely 'information insensitive' since it is the central bank that statutorily issues currency, which is the ultimate means for discharging liabilities in the economy. Furthermore, the direct access of the general public to outside money in the form of banknotes has underpinned the stability of the unit of account: in this way, everyone in society has had a personal (and, indeed, emotional) connection to central bank money.

## An evolutionary process towards a flexible but stable monetary system

This two-tier monetary system emerged gradually over the centuries.

The coins that were discovered in the nearby excavations in Cork are clear examples of state money complete with depictions of a sovereign that reinforced the authority of the state backing the coins. Of course, the emergence of state money goes further back. In ancient civilisations such as the Roman Empire or imperial China, state money provided a degree of standardisation in terms of weight, metal content and design that ensured trust in the value of the coins. [ ]  This way, state-issued coins were recognised and accepted across the vast territories of the empire; these were 'information insensitive' facilitating trade and taxation and, in general, monetary exchanges. The standardisation was a public good which generated widespread benefits that individual agents could have not easily produced on their own, thus improving social welfare. A broadly accepted means of payment facilitated the local exchange of goods and fostered trade over longer distances. As indicated earlier, this contrasts with the disadvantages of the direct exchange of goods (or barter), which requires the 'double coincidence of wants'. [ ] 15 16

The need for more efficient financial instruments to support the expanding trade networks and economic activities in those economically dynamic empires also gave rise to the origins of inside money. In the China of the Tang Dynasty (the High Middle Ages in western chronology), the 'feiqian' or 'flying cash' was developed to solve the challenges of long-distance trade. The 'feiqian' functioned as a promissory note, allowing the holder to redeem it for cash at a designated location. That experience paved the way for the issuance of 'jiaozi', the first exchange notes, which appeared before the end of the first millennium. These circulated freely in the market, becoming the first paper money, which helped China overcome challenges such as coin shortages in the context of a rapidly growing economy. [ ]  Moreover, it is worth noting that Song China's paper money was initially freely issued by private merchants and later taken over by the government to ensure stability and trust. The lessons from China's monetary history do not end there: over-issuance brought paper money to an end during the 15th century (Ming dynasty). [ ] 17 18

The complex societies of Rome and imperial China also generated early forms of banking. [ ]  However, the economic revival of late medieval and Renaissance Europe recreated banking in a way that expanded its activities to accepting deposits, making loans and engaging in trade remittance, with a proliferation of letters of exchange. All that came with a simple, but crucial, technological innovation affecting ledgers: 19

double-entry bookkeeping improved the accuracy, transparency and reliability of financial records. [ ] Nevertheless, Renaissance Europe experienced challenges related to the complexity and fragmentation of the system, with numerous kingdoms, principalities and city states each issuing their own currency. In certain cases, this gave rise to a sort of 'currency substitution', with a widespread acceptance and use of certain currencies well beyond their issuing region due to their perceived stability, the economic and political power of their issuers and the trust these commanded in international trade. [ ] 20 21

Still, the public deposit banks of that period, which were precursors of central banks as we know them today, contributed to the stability to the monetary system and reduced its complexity. These public deposit banks offered settlement of payments in their accounts and some of them were pioneers in creating certificates of deposits that could be used as proto-banknotes. [ ]  Indeed, it was that government backing 22

that helped the banknotes issued by the Swedish Riksbank (founded in 1668) and by the Bank of England (founded in 1694), the oldest central banks that still operate today, to achieve widespread acceptance in the course of the 18th century. [ ] 23

The popularity of banknotes reflected a tacit acknowledgement that a monetary system solely consisting of precious metals was not only inconvenient but could not keep pace with the rapidly growing needs of commerce. [ ]  Without a government monopoly in the issuance of banknotes, private institutions not linked to the government also started issuing banknotes, as had already occurred in China almost a millennium earlier. The apex of that development occurred during the free-banking experiences in the 19th century, a system characterised by competitive note issuance with low legal barriers to entry, and little or no central control of the assets backing these banknotes. [ ]  At that time, these assets mainly consisted of scarce commodities such as gold or of certain securities deemed to have low enough risk. 24 25

However, repeated panics and banking crises during the century led early central banks such as the Bank of England and the Riksbank to de facto assume the role of lender of last resort - one of the classical tasks of a modern central bank, as articulated in Walter Bagehot's Lombard Street: a description of the money market in 1873. [ ][ ]  By ensuring that banks had sufficient liquidity to meet requests to exchange bank deposits for cash, the frequency and severity of banking crises were reduced and the resulting system helped bridge the gap between outside and inside money. The gap was further closed by the growing moves towards the central bank's monopoly as sole issuer of banknotes and the legal establishment of state-backed paper money as legal tender. [ ] 26 27 28

However, at the time, central banks and governments had not yet developed the institutional frameworks and policy tools necessary to manage such fiat currencies effectively. [ ]  Rather, credibility relied on backing currency with metallic standards. The straitjacket of a metallic standard constrained their ability to flexibly respond to macroeconomic fluctuations and financial crises - as evident, for instance, during the gold standard period. [ ] 29 30

As the twentieth century progressed, the monetary system evolved beyond the constraints of metallic standards. The comprehensive regulation of banks, the establishment of deposit guarantee schemes and the abandonment of the gold standard, particularly after the Bretton Woods system collapsed in the early 1970s, permitted the transition to our layered fiat currency system. In that system, privately-issued means of payment in the form of scriptural inside money is valued to the extent that there is sufficient confidence monetary architecture: unbacked outside money issued, in the form of paper banknotes or electronic that it can always be converted in full and upon demand into what has become the foundation of the whole reserves held by commercial banks, by a sovereign or a central bank acting in the public interest. [ ][ ] Modern central banks now operate within institutional frameworks that prioritise transparency, independence, and accountability. By relying on these flexible and credible setups, and within the guardrails of their statutes that mandate them to the pursuit of clear objectives, central banks have 31 32

acquired and retained the tools for managing the currency in a way that fosters price stability and balanced growth.

The historical evolution of our monetary system highlights several key lessons. Central banks, by ensuring standardisation of outside money, trust in its value, and fungibility, provide an important public good: price stability as the prerequisite for macroeconomic stability. At the same time, inside money enhances the efficiency of the monetary system by addressing practical challenges, leveraging technological innovations, and meeting the liquidity and transaction needs of complex economies. The lesson of history is that inside money is best safeguarded through regulation and supervision of banks, the provision of deposit insurance and the willingness of the central bank to act as the lender of last resort in the event of a systemic liquidity crisis. In summary, an optimal combination of both inside money and outside money creates an efficient and resilient monetary system that can adapt to changing technological and economic conditions while maintaining stability and public trust in the currency.

## CBDC as a robust response to digitalisation

This evolution has brought us to the stable two-tier monetary system that I highlighted earlier. Central bank money serves as the monetary anchor: the central bank has full sovereignty over monetary policy; all forms of commercial bank money are convertible at par with central bank money; and payments can be made with both inside and outside money.

We are now witnessing a profound technological revolution that is reshaping economies worldwide. Naturally, as has always been the case, money will adapt to these shifts. I am referring to three trends in particular.

First, the increasing digitalisation of our economy is changing payment methods and behaviours. For instance, e-commerce now accounts for around one third of non-recurring payments in the euro area. Similarly, e-payment solutions (e-payment wallets and mobile apps) are gaining traction, growing at double-digit rates. [ ]  These developments highlight the diminishing role of physical banknotes as a means of payment in an increasingly digital world. [ ] 33 34

Second, entirely new forms of financial assets are emerging in in the wake of this digital transformation. Decentralised finance applications and crypto-assets such as bitcoin aim to bypass traditional financial intermediation. Of particular relevance as a medium of exchange are stablecoins. The proponents of stablecoins seek to combine the advantages of distributed ledger technologies with a stable conversion rate into traditional currencies. By contrast, crypto-assets such as bitcoin are not well suited to performing the medium of exchange function due to high price volatility and an incapacity to process high volumes of transactions at speed.

Third, digital ecosystems - platforms such as Alibaba and Alipay that integrate proprietary forms of money with other services - are creating closed environments that encourage consumers to remain within specific systems. [ ] 35

These technological advances offer opportunities, such as a more efficient and innovative financial system, but also pose challenges. These have the potential to disrupt the delicate balance of the two-tier monetary system and could threaten the sovereignty of central banks over monetary policy. Taking a forward-looking perspective is crucial because network effects heavily influence how money and payment systems evolve. The more widely a form of money or payment application is used, the more attractive it becomes to others - a dynamic that can entrench suboptimal developments if these take hold. For instance, once the adoption of a payment system or a communication app reaches a certain threshold, people tend to continue using it because others are also using it, which makes it more convenient but also 'locks in' users. At that point, reversing the adoption trend becomes exceedingly difficult.

It follows that we need to anticipate this type of development and be prepared if it materialises, because our responsibility is to ensure that the foundations of a monetary system that has proved its value are preserved for the future. I would like to explore the three trends that I have just identified in more detail and understand their implications. Those trends are likely to occur simultaneously and to various degrees, and are likely to interact with each other. Nevertheless, to simplify the analysis, let me analyse these trends one by one.

## A decreasing use of banknotes by the public

Within an ever-expanding digital economy, there is an increasing share of online transactions. The ECB remains committed to continue providing physical cash in the future and ensuring cash acceptance throughout the euro area. At the same time, the more transactions are made online, the lower the possibility for consumers to pay with physical banknotes, which are the legal tender and - together with their electronic counterparts, the central-bank-issued euro reserves held by banks - constitute the current form of central bank money. [ ]  This is obviously a natural technological progression, but it raises profound questions about the role of central bank money and the stability of the monetary system. 36

Will monetary policy remain effective and the monetary system cohesive if that trend continues? Traditionally, cash has played a critical role in maintaining trust in the convertibility of commercial bank money into central bank money and supporting effective monetary policy. Cash issued by the central bank acts as a 'glue' and vivid reminder that all forms of money - whether commercial bank deposits or other forms of inside money - owe their wide acceptance in commerce to their convertibility into central bank money at par. This possibility of convertibility fosters trust in the value of deposits and helps to contain the 'information sensitivity' of commercial bank money to a minimum, such that transactions of goods and services are fluid and unhampered by a constant need to verify the standing of the means of payment offered in exchange.

Conversely, the absence of such a monetary anchor could slow down and fragment the web of daily transactions that form the modern-day multi-trillion payment system. In addition to fostering trust, having public access to central bank money serves as a disciplining mechanism, providing a reliable fallback option to using commercial bank money. [ ]  In turn, the option of using central bank money for payments limits the scope for commercial payment systems to exploit monopoly power to charge excessive payment 37

fees. [ ]  As the share of online transactions increases, the extent to which the option to make payments in cash can act as a disciplinary tool against market power decreases. 38

The convertibility stipulation that lies at the foundation of our layered monetary system necessitates that commercial banks are granted access to central bank money in sufficient amounts to always be able to convert deposits into banknotes upon demand. As noted earlier, the central bank creates reserves - an electronic form of cash that can only be held by commercial banks - by making loans to the banks or by purchasing assets. Together with the interest rates charged on loans to banks, the interest rate paid on the reserves held by banks is the lever through which a modern central bank influences interest rates across the financial system, thereby affecting monetary conditions across the economy. [ ] 39

Without positive demand for central bank money, this link would weaken or disappear, undermining the ability of the central bank to guide monetary conditions. As inflation is determined over the medium term by monetary policy, dwindling demand for central bank money could threaten the control of the monetary authority over inflation and risk price indeterminacy. [ ] 40

Even if there was zero demand for banknotes and the general public did not directly hold money issued by the central bank, there would still be demand from commercial banks for the electronic cash (reserves) issued by the central bank in order to have sufficient liquidity to cope with high and volatile volumes of interbank payments and to be in a position to meet deposit withdrawal requests. [ ]  In principle, under normal conditions, the central bank could continue to deliver price stability by raising or lowering the interest rates paid on the reserve deposits held by commercial banks and the interest rates charged to supply extra reserves through making loans to commercial banks. 41

However, if the general public did not directly hold central bank money, an important and historic safeguard would no longer be available, namely the ability of firms and households to make direct payments in central bank money - banknotes. Moreover, the absence of a default central bank payments option that sits outside the commercial banking system could also endanger the capacity of the central bank to deliver price stability, especially under stressed conditions. In particular, if the payments system were to be totally dependent on the soundness of commercial banks, this would further raise the stakes in scenarios in which liquidity provision to commercial banks might run against the appropriate monetary policy stance. In summary, while the private incentives of individual commercial banks and the array of safeguards discussed above go a long way in underpinning monetary stability, the weakening of the effective capacity of the general public to transact in central bank money directionally increases risk in the monetary system.

## Stablecoins as a medium of exchange

What are the challenges facing our monetary system in an era of rapid technological change? Intuitively, distributed ledger technologies can provide the technological platform for a decentralised system in which private issuers could offer to settle transactions in secure and apparently 'information insensitive' forms of money outside traditional central bank systems. For example, bearer-based stablecoins - digital representations of private electronic banknotes that are designed to be backed by safe assets such as government bonds or bank deposits - could bypass settlement via central bank reserves altogether, thereby creating a monetary ecosystem that flies under the radar of central bank oversight. [ ] In particular, central bank money would play a much-diminished role in the payments system, if households and firms were to maintain their primary transaction accounts in stablecoins and only use commercial bank accounts to upload and download funds from these transaction accounts. [ ]  In a sense, a stablecoin provider would resemble a so-called narrow bank that only holds high quality liquid assets and promises to maintain a stable value of its liabilities (the funds held by customers in their stablecoin accounts). While the pros and cons of narrow banking have been much debated over the decades, a material decline in the volume of deposits held in commercial banks would disrupt the role of commercial banks in credit provision, which is especially prominent in the bank-based European financial system. Moreover, even if stablecoins were fully backed by deposits in the commercial banking system (that is the stablecoin provider would match stablecoin liabilities with deposit assets), these deposits would effectively constitute 'wholesale' deposits rather than 'retail' deposits, resulting in a lower liquidity coverage ratio (LCR). [ ] 42 43 44

Indeed, stablecoins, which are designed to maintain a stable value relative to a specified asset or pool of assets, have already gained a significant foothold in the crypto-asset universe. [ ][ ]  Their appeal lies in their ease of use and innovative features and in the possibility for fast, low-cost transactions. [ ]  While stablecoins play a central role in settling transactions in other crypto assets, it is clear that stablecoins are also attracting interest in the facilitating low-cost cross-border transactions in the 'traditional' economy and financial system. 45 46 47

In particular, despite significant technological progress, cross-border trade between countries remains to this day costly and inefficient, with large-value payments going through the correspondent banking network, which can take days to settle. There are unrealised positive network externalities, which are particularly evident to companies that maintain global supply chains. [ ]  Subject to being credibly backed by high-quality liquid assets, stablecoins can acquire a degree of global acceptability in wholesale transactions that can, in principle, address the inefficiencies that merchants face when making large crossborder payments through banks. 48

At the same time, as these digital assets continue to evolve and gather pace, one has to carefully assess their potential spillovers for domestic retail payments and consider the implications for the monetary system more broadly. In particular, as noted earlier, an equilibrium could emerge in which households and firms maintain transaction accounts with stablecoin providers, causing bank deposits and banknotes to lose relevance as a medium of exchange. Indeed, it is possible to imagine workers receiving salary payments in stablecoins (or immediately transferring salary payments from bank deposits to stablecoin accounts).

Let's consider two potential situations.

To start, imagine a situation in which euro-based stablecoins assert themselves as new dominant players. Imagine the pool of safe assets backing the stablecoins being directly or indirectly backed by the reserve accounts of commercial banks with the Eurosystem. These new instruments would essentially represent a novel form of inside money within our euro-based monetary system. Their strength would lie in their accessibility and transferability, potentially increasing the efficiency of the monetary system, especially in cross-border transactions or in facilitating so-called smart contracts. [ ]  Unlike traditional money market funds, such stablecoins could seamlessly serve as both savings and payment instruments. [ ] Critically, the ultimate nature of the two-layered system I was describing before would be preserved, with euro reserves issued by the Eurosystem providing the foundation of the new monetary order: the commercial banks that stablecoin providers deposit their funds with would need to hold larger reserve accounts to accommodate withdrawal requests from the stablecoin provider. 49 50

Still, a two-layer monetary architecture in which 'inside money' transactions are dominated by stablecoins rather than by commercial banks would pose new challenges. First, the new form of money would be less 'information insensitive' than the inside money created in the current institutional environment. The reason for this is essentially inadequate regulation and supervision. Recent experience has shown that, given the regulatory and supervisory vacuum in which these operate, some stablecoins can fail to maintain their intended stability, deviating (sometimes in dramatic fashion) from par value with their underlying reference asset. [ ]  While this risk would be minimal if the assets backing stablecoins were exclusively composed of deposits in the commercial banking system, stablecoin providers would naturally be tempted to hold higher-yielding but riskier securities in their asset portfolio. If the conversion rate between inside money the stablecoins - and the anchoring asset can change, it is up to the holder and the payee in a transaction to verify whether parity holds. This process is costly and prone to changes in sentiment. A change in sentiment about the capacity of the issuer to redeem the stablecoins at par could lead to systemic shocks and runs of the sort seen in the era of free banking, when private banks were given the authority to issue their own currency backed by Treasury bonds. [ ]  In summary, while the 'moneyness' of stablecoins relies on one-to-one convertibility into currency, this promise carries less credibility for stablecoin providers, which do not perform bank-like tasks such as credit provision to the economy and are not supervised or back-stopped by the central bank. 51 52

Second, as funds shift towards these new instruments, the stability of the financial system could be affected. At least part of the asset pool providing collateral for the stablecoins would be in the form of bank deposits. [ ]  However, as indicated above, this recycling of household and firm deposits back into the banking sector would only partially compensate the losses that banks would suffer in the first place as those cheap and more stable deposits migrate to the stablecoins domain. This shift would increase bank funding costs and negatively affect credit supply. Additionally, large stablecoin issuers would likely concentrate their holdings in safer, more liquid banks, further intensifying the effects for other banks in the economy. As stablecoin-managed assets grow, competition for liquid resources would increase their scarcity and price, resulting in still-higher costs for banks to maintain their buffers of liquid assets. 53

A second scenario imagines a new world with an increasing prevalence of stablecoins that are effectively backed by assets denominated in a foreign currency. [ ]  Given that the majority of existing stablecoins are linked to the US dollar, this is not a purely hypothetical scenario. [ ]  At some level, dollar stablecoins make it easier for European households to acquire low-risk dollar assets (typically, it is not easy to open a dollar bank account for European residents). The macro-financial implications of lower frictions in international capital mobility are well understood, both in 'normal' times and 'crisis' times. However, the open question is whether dollar stablecoins could also gain a foothold in domestic transactions in the euro area, whereby the domestic payments system becomes directly or indirectly anchored by the dollar rather than the euro. [ ][ ] 54 55 56 57

While the likelihood of this scenario is hard to quantify, a full risk assessment warrants inspection of even tail-type scenarios. A growing prevalence of digital dollarisation would undermine monetary sovereignty by compromising the ability to control the unit of account within its jurisdiction. This means the domestic currency would risk losing its status as the dominant currency for expressing prices and settling most trades. Although 'dominant' lacks a precise defining threshold, as the share of transactions settled in the domestic currency decreases, the capacity of the central bank to implement effective monetary policy and maintain price stability is significantly impaired. [ ]  For the euro area, the erosion of monetary sovereignty would also have a historic symbolic meaning. Such an erosion would affect the euro as a symbol of European identity and the perceived cohesion of the entire monetary system. [ ] 58 59

## Platform-based payment systems

The challenges and risks associated with a potential fading role of currencies anchored in a public function are amplified if one considers the closed and captive environments in which private digital alternatives are sometimes created. Many privately-issued forms of digital money are offered within ecosystems that are designed to generate such powerful network effects as to make it difficult for users to seek alternatives. [ ] By bundling payments with other services and restricting interoperability, platforms can establish so-called walled gardens, leveraging network effects to lock in users and making the loss of convenience or the cost of leaving the platform prohibitively high. [ ]  Transaction accounts would be reduced to a 'club good' offered in return for the payment of a fee or membership of a platform. In addition to the loss of monetary sovereignty, if combined with monetisation of payment data, such a scenario would entail the build-up of market power imbalances, inefficiencies and, ultimately, an unprecedented degradation of a competitionbased economy. [ ][ ] 60 61 62 63

## The digital euro as a robust policy response

The trends I have outlined highlight the potential for technological innovation to disrupt monetary transmission, monetary sovereignty, the singleness of money, and the welfare and fairness of society. Central banks have a mandate to safeguard monetary stability in all circumstances. This responsibility calls for a cautious yet forward-looking approach, ensuring we are ready to address challenges and forestall risks before they materialise.

A powerful and forward-looking response to these challenges lies in the issuance of a digital euro - a digital form of cash that would be available to the general public. Following a prudent risk management approach, introducing a digital euro would minimise the likelihood of adverse economic outcomes in the future and ensure the resilience of our monetary system in an increasingly digital world.

In a scenario in which the use of physical cash declines substantially, the digital euro can preserve public access to 'information insensitive' central bank money and protect the capacity of the central bank to deliver its macroeconomic mandate in a digital world.

The digital euro is also an effective tool to limit the dominance of foreign digital currencies, including the monetary sovereignty risks created by widely-adopted foreign-currency stablecoins. [ ]  Furthermore, in a world dominated by platform-based payment systems, where payments are bundled with other services in closed ecosystems, a digital euro would provide an open and interoperable alternative, preventing the fragmentation and limited interoperability of money. A digital euro could help to ensure a socially optimal level of data protection and would enable citizens to transact in the digital economy while enjoying the privacy benefits associated with cash. [ ]  With appropriate design features, the digital euro can deliver these benefits without destabilising financial institutions or disrupting monetary policy implementation or transmission. For example, appropriately calibrated limits on digital euro holdings can prevent excessive outflows from commercial banks while still providing individuals with access to secure digital money. [ ] In essence, issuing the digital euro is not just about adapting to technological change. It is about safeguarding the core principles that underpin our monetary system - stability, trust, and inclusivity - in an era of rapid transformation. 64 65 66

## Securing the future of the euro area: the strategic importance of the digital euro

## The special case of a monetary union

For the multi-country euro area, the benefits of a CBDC are more extensive compared to the calculus for an individual nation state with its own currency. It addresses challenges unique to our monetary union, while strengthening the position of the euro in an increasingly fragmented geopolitical world.

In particular, let me now turn my attention to the domestic payments system in the euro area. The payments system is multi-layered: a customer might pay her mortgage, rent and utilities bills by direct debit from her account but will typically use a card or e-wallet for electronic transactions in-store or online. In this multi-layered system, the customer pre-loads funds onto a card or into an e-wallet, or has a line of credit (as with a credit card). [ ]  These cards and e-wallets offer many advantages but also pose some risks, especially if the intermediaries offering cards and e-wallets are not European. 67

Against this backdrop, the digital euro presents a unique opportunity to overcome the persistent fragmentation in retail payment systems across the euro area. Unlike single-nation currency systems, the monetary union faces distinct challenges due to diverse legacy national standards and a non-unified retail payment system. [ ]  This fragmentation has led to a shortage of pan-European payment options, creating barriers for customers and businesses engaging in cross-border transactions within the euro area. [ ] While some of these frictions are so embedded to the point of near-invisibility from the point of view of many households, it is not cost free that customers must generally rely on non-European card or e-wallet providers to make payments across the euro area, with the partial exceptions of some domestic-only or regional card/e-wallet schemes in some countries or if a customer and a merchant happen to both have accounts with a particular fintech firm. 68 69

This has inadvertently strengthened the dominance of foreign companies in our payments landscape, especially for card payments, which currently account for the majority of retail payment transactions by value. [ ]  This fragmented landscape undermines competition, limits consumer choice, drives up costs and restricts the ability of the euro area to fully harness the advantages of digitalisation for its citizens and businesses. [ ][ ] 70 71 72

By mandating acceptance of the digital euro (by extending the legal tender status of banknotes to the digital world), we can create instant network effects that unify our fragmented market. Moreover, a standardised, pan-European platform would enable private payment providers to innovate, while benefiting from economies of scale, ultimately reducing costs for consumers and businesses alike. While, in principle, an integrated area-wide 'fast payment system' (FPS) could alternatively be developed by forceful regulatory initiatives and highly-coordinated investments across the universe of private payment providers, this is less feasible in the context of a multi-country monetary union with possibly non-aligned interests across different legacy payment systems. [ ] 73

For banks and payment service providers, the digital euro would serve as a catalyst for collaboration. It provides an economic incentive for these institutions to join forces to build a unified and innovative payment system that spans all retail use cases - whether peer-to-peer, point-of-sale transactions, or ecommerce. In particular, by linking customers and merchants across the euro area via the system of digital euro accounts, card and e-wallet providers could focus on providing additional payment services under which the underlying payments 'travel' via the digital euro system. This unified approach would strengthen the financial ecosystem of the euro area, enabling it to compete more effectively with large foreign technology firms by delivering innovative products at scale and at competitive prices. [ ]  As a not-for-profit venture, the digital euro would reduce costs for merchants and businesses, thereby increasing bargaining power vis-à-vis international card schemes, both for physical stores and in e-commerce. 74

Importantly, unlike private entities that often monetise payment data for commercial purposes, the digital euro prioritises user privacy, ensuring that citizens can transact securely in a digital economy without compromising their privacy. [ ] 75

## Geopolitical considerations

The digital euro would also play a crucial role in strengthening the strategic autonomy of Europe in an increasingly fragmented geopolitical landscape. We are witnessing a global shift towards a more multipolar monetary system, with payments systems and currencies increasingly wielded as instruments of geopolitical influence and competing jurisdictions seek to assert their independence from foreign monetary powers. [ ] 76

The rise of cryptocurrencies that enable direct, intermediary-free transactions, challenges the traditional financial system. In addition, China's development of the digital yuan, the exploration by the BRICS nations of a platform to link their central bank digital initiatives (the BRICS Bridge), and the mBridge project, involving China, Thailand, Hong Kong and the UAE exemplify how digital currencies can offer efficient cross-border payments. These are clear indicators of the ongoing global multipolar monetary

## trend. [ ] 77

In this context, Europe faces significant vulnerabilities. In the absence of attractive pan-European digital payment solutions, Europe's reliance on foreign payment providers has reached striking levels. International card schemes such as Visa and Mastercard now process sixty-five per cent of euro area card payments. In thirteen out of the twenty euro area countries, national card schemes have been entirely replaced by these international alternatives. [ ]  In addition, mobile app payments, dominated by nonEuropean tech firms (such as Apple Pay, Google Pay and PayPal), now account for nearly a tenth of retail transactions and are showing double-digit annual growth. 78

This dependence exposes Europe to risks of economic pressure and coercion and has implications for our strategic autonomy, limiting our ability to control critical aspects of our financial infrastructure. [ ]  When we rely on international cards, apps or stablecoins, we effectively outsource our payment infrastructure. This leaves European payments vulnerable to changing terms of use or to service withdrawal threats. [ ]  As discussed in the previous section, these risks could be further compounded by the growing dominance of foreign technology companies and a potential increase in the holdings of foreign-currency stablecoins. Currently, ninety-nine per cent of the stablecoin market is linked to the US dollar, and European interest in 79 80

these instruments is increasing rapidly. [ ][ ] 81 82

The digital euro is a promising solution to counter these risks and ensure the euro area retains control over its financial future. It would provide a secure, universally-accepted digital payment option under European governance, reducing reliance on foreign providers. From a strategic perspective, the digital euro would curtail the risk that domestic-currency stablecoins might gain a significant market share in the domestic payments system, which would be highly disruptive for the banking system and credit intermediation. Likewise, the availability of the digital euro would also limit the likelihood of foreigncurrency stablecoins gaining a foothold as a medium of exchange in the euro area. [ ]  However, especially taking into account the power of network externalities, these risks would increase if there were delays in launching a digital euro. 83

## Conclusion

Let me conclude.

The monetary system - and the currencies within that system - has seen a substantial transformation over the centuries. This transformation continues today. As societies become increasingly digital, central banks are exploring the benefits of introducing CBDCs to align with the needs of consumers and keep the monetary system fit for purpose in the digital age. The case for a CBDC is especially strong for a monetary union, especially in the context of a fragmented and externally-dependent payments system.

At a time of geopolitical uncertainty and shocks, the euro has maintained its reputation as a strong and stable currency. Well over three-quarters of citizens in the euro area now support the single currency - a record high. [ ]  And at eighty-nine per cent, Irish support for the euro is among the highest in the euro area. [ ]  However, as technology and the economy evolve, we need to ensure that we retain the monetary autonomy to preserve monetary stability under all circumstances. 84 85

The digital euro is not just about making sure our monetary system adapts to the digital age. It is about ensuring that Europe controls its monetary and financial destiny, against a backdrop of increasing geopolitical fragmentation.

1.

I thank Ramón Adalid, Lea Bitter, Roberta Fortes, Simon Mee and Cyril Max Neumann for their contributions to this speech. The views expressed in this speech are personal.

2.

My focus in this speech is on the monetary theory underpinning the digital euro discussion. For a complete guide to the digital euro project, see the . ECB's dedicated web page

3. Irish Examiner (2022), ' ', 27 September. 1,000-year-old coin among finds in Cork archaeological dig

4.

The periods 1797-1820 and 1824-1845 are considered to have been two free banking episodes in Ireland. See The experience of free banking, edited by Kevin Dowd (IEA publications, 2023).

5. ECB (2024), '

(SPACE)'. Study on the payment attitudes of consumers in the euro area

6.

Three countries have already launched a CBDC while a further 134 countries and currency unions are exploring whether to launch one. The countries that have launched a CBDC are the Bahamas, Jamaica and Nigeria. See Atlantic Council data for February 2025. See also Di Central bank digital currency tracker

Iorio, A., Kosse, A. and Mattei, I. (2024), ' ', BIS Working Paper , No 147. Embracing diversity, advancing together - results of the 2023 BIS survey on central bank digital currencies and crypto

7.

As my colleagues in the ECB Governing Council have also argued over the years. See Cipollone, P. (2024), ' ', speech at the Economics of (2024), ' ', The ECB Blog , 25 June; Panetta, F. (2023), Monetary sovereignty in the digital age: the case for a digital euro Maintaining the freedom to choose how we pay

Payments XIII Conference organised by the Oesterreichische Nationalbank, 27 September; Cipollone, P. ' ', speech at CEPR-ECB Conference 'The macroeconomic implications of central bank digital currencies', 23 November; Panetta, F. (2023), ' ', introductory statement at the Committee on Economic and Monetary Affairs of the European Parliament, 23 January. The cost of not issuing a digital euro The digital euro: our money wherever, whenever we need it

8.

Currency and deposits represent only one third of the total financial investment of euro area households, with insurance and pension schemes, shares (mostly unlisted), and investment fund shares accounting for practically all of the remaining two thirds.

- 9.
- I focus on the main assets acquired by the central bank; it can also purchase foreign-currency assets and

gold.

10.

Typically, the nation state is the shareholder in the central bank and the profits of the central bank are remitted to the national treasury. In any given year, the central bank may hold back some profits to build up buffers to offset possible future losses.

11.

In practice, as will be explained later in the speech, there can be several layers to the settlement of an electronic transaction but it ultimately results in a debit from the bank account of the customer and a credit to the bank account of the merchant.

12.

According to the Study on the payment attitudes of consumers in the euro area (SPACE), in 2024 cash was still the most frequently used payment method in physical locations: more than half (52%) of payments in those locations were carried out using cash. This share has declined from 59% in 2022, 72% in 2019 and 79% in 2016.

An RTGS (real-time gross settlement) system is a payment system that facilitates the continuous, realtime settlement of high-value or time-critical financial transactions on an individual basis. Typically operated by a central bank, RTGS systems entail settlement in central bank money (each participating institution has a reserves account at the central bank). The euro area RTGS is known as the T2 (previously Target2) system and is run by the ECB. For a comprehensive introduction to payments systems, see Bindseil, U. and G. Pantelopoulos, Introduction to Payments and Financial Market Infrastructures , Springer, 2023.

14.

Narrow definitions of money, such as euro area M1 include banknotes and overnight deposits, while broader definitions, such as M3, also include savings instruments, such as time deposits and debt securities up to two years, as well as money market fund shares.

15.

For a recent account of the historical development of money, see D. McWilliams (2024), Money: A Story of Humanity , Simon &amp; Schuster.

16.

Herger, N. (2019), Understanding central banks, Springer, 2019.

17.

Pʻeng, H., (1993), A Monetary History of China, Volumes One and Two (Zhongguo Huobi Shi) , East Asian Studies Press. See also Herger, N., op. cit. This paper money was first issued by private merchants but this task was subsequently abrogated by the government.

18.

Pickering, J. (1844), 'The history of paper money in China', Journal of the American Oriental Society, Vol. 1, No 2, pp. 136-142.

19.

See Usher, A.P. (1934), 'The origins of banking: the primitive bank of deposit, 1200-1600', The Economic History Review , Vol. 4, No 4, pp. 399-428 and Pʻeng, H., op. cit.

20.

Double-entry bookkeeping was first documented by medieval merchant Luca Paciolo in 1494 in Summa de arithmetica, geometria, proportioni et proportionalita , Paganini, Venice, but it is said to have been first used by Amatino Manucci at the end of the 13 th  century (see Lee, G.A. (1977), ""The Coming of Age of Double Entry: The Giovanni Farolfi Ledger of 1299-1300"", Accounting Historians Journal , Vol. 4, No 2, pp. 79-95.

21.

The Florentine florin and subsequently the Venetian ducat dominated trade across Europe and the Mediterranean over the 13 th  and 14 th  centuries. See Spufford, P. (1988), Money and its use in medieval Europe , Cambridge University Press and Lane, F. C. and Mueller, R.C. (2020), Money and Banking in Medieval and Renaissance Venice: Volume I: Coins and Moneys of Account , JHU Press.

22.

For instance, Taula de Canvi of Barcelona (1401) and the Casa di San Giorgio of Genoa (1047) practiced state-sponsored centralised giro banking in which their deposits were used for giro transfers and settlement of claims in a highly liquid and secure manner, while the Naples system of public banks issued 'fedi di credito', deposit certificates that could be passed on as a decentralised paper means of payment in central bank money. See Bindseil, U. (2019), Central banking before 1800: a rehabilitation, Oxford University Press.

23.

The Bank of England decided to issue 'running-cash notes' from its onset, it did not issue banknotes in fixed denominations until 1725. In Sweden, the Stockholms Banco, a precursor of today's Sveriges Riksbank, issued the first banknotes in Europe in 1661. Faced with an outflow of deposits when the fixed exchange rate between copper and silver was changed in 1661, Stockholms Banco replaced the cumbersome copper coins with credit notes, i.e. notes issued by the bank with printed and round denominations that could be transferred to third parties. These notes worked very well initially and became very popular due to their convenience. They were not linked to any deposit, and their acceptance was based on the general public's confidence that the bank would pay the value of the note in coins upon demand. However, demands to redeem the notes led the bank to fail in 1664 and the Council of the Realm banned the use of the banknotes. Paper money in Sweden was not issued again until 1701 in the form of Transport notes. See Ögren, A. (2024), ""Johan Palmstrüch, a Copper Money Doctor: Stockholm Banco and the Emergence of Banknotes in Seventeenth Century Sweden."" in Money Doctors Around the Globe: A Historical Perspective , pp. 33-53, Singapore: Springer Nature Singapore. See also Nicolaisen, J. (2017), ""What should the future form of our money be?."" and Sveriges Riksbank "" ."" . 1661 - First Banknotes in Europe

24.

The convenience gain of using banknotes can be illustrated by the bulkiness of some of the coins circulating at that time. For instance, during the 16 th  and 17 th  centuries, Swedish copper coins reached weights of up to 20 kilogrammes, which was the weight of the 10 daler coin, equivalent to about €1,500 in today's money.

25.

For a detailed account of the various free-banking experiences, see Dowd, K. (ed.) (2023) The experience of free banking IEA publications.

26.

Many other central banks in Europe were moving toward similar roles, but the timing and nature of these developments varied.

27.

The Hamburger Bank also seems to have been the central bank first acting as a full-scale lender of last resort - in 1763.

28.

The state theory of money or ""chartalism' emphasises the role of the state in declaring what constitutes legal tender and its capacity to levy taxes payable in that currency, which underpins the acceptance of money and its value in an economy. See for instance Knapp, G. F. (1924). The state theory of money. 29.

A fiat currency is not backed by a commodity such as gold but rather is backed by the trust of the general public that the central bank (and the sovereign) is committed to preserving its stability.

30.

Eichengreen, B. (1992), Golden fetters: the gold standard and the Great Depression, 1919-1933 , Oxford University Press. See also Keynes, J. M., (1925), The economic consequences of Mr. Churchill , L. and V. Woolf in which Keynes criticises the decision made by Winston Churchill, then Chancellor of the Exchequer, to return Britain to the gold standard in 1925. Keynes argued that this decision was economically unsound and discussed the potential negative consequences, which foreshadow the eventual crisis of 1931.

31.

The Great Depression was a pivotal event: Britain abandoned the gold standard in 1931 and the United States enacted the 1933 Glass-Steagall Act, establishing deposit insurance and an enhanced regulation and supervision of banks. These moves paved the way to the regime forged in the Bretton Woods agreements. By combining the anchor of the gold standard and the flexibility of the adjustable rate regime, that system provided monetary and macroeconomic stability. However, the lack of credible enforcement incentives also contributed to its relatively short-lived nature.

32.

""Scriptural money"" refers to money that exists in the form of account balances rather than physical cash. It is essentially digital or electronic money that is recorded in bank accounts and can be transferred through various electronic means, such as bank transfers, debit cards or online payment systems.

33.

A digital wallet (or electronic wallet) is a software-based system or an application that runs on any connected device. It stores your payment information and passwords of numerous payment methods and websites.

34.

See ECB (2024), (SPACE). Study on the payment attitudes of consumers in the euro area

35.

See also Brunnermeier, M. K., James, H. and Landau, J. P. (2019). 'The digitalization of money', National Bureau of Economic Research Working Paper , No 26300; Chiu, J. and Wong, T. N. (2022), 'Payments on digital platforms: Resiliency, interoperability and welfare', Journal of Economic Dynamics and Control , Vol. 142, No 104173.

36.

See also information on the and remarks by , and on the role of cash and public money more generally. Eurosystem cash strategy Stefan Ingves Jon Cunliffe Fabio Panetta

37.

See Lagos, R., and Zhang, S. (2022), 'The limits of ONETARY economics: On money as a constraint on market power', Econometrica, Vol. 90, No 3, pp.1177-1204.

38.

The scope for monopoly power in payment systems has also been addressed by regulation: since 2015, the European Union caps interchange fees at 0.2 % of the value of the transaction for consumer debit cards and at 0.3% for consumer credit cards.

39.

The ECB offers several options for banks that wish to borrow from it (on a collateralised basis). The main refinancing operations (MROs) offer loans on a seven-day basis; the longer-term refinancing operations (LTROs) offer loans on a 90-day basis; and the marginal lending facility (MLF) offers loans on an emergency basis at a penalty rate. These facilities are not much used at present: around €7.9 billion is currently outstanding in the MRO facility, €17 billion in the LTRO facility and just €20 million in the MLF. When warranted by the prevailing monetary conditions, the ECB has, in the past, also offered very long- term refinancing operations (VLTROs) and targeted long-term refinancing operations (TLTROs). The ECB does not pay interest on the minimum reserves that must be held by banks in the current account facility (currently about €188 billion) but does pay interest on the 'excess' (above minimum) reserves held by banks in the deposit facility (currently around €2.81 trillion). This deposit facility rate (DFR) is the rate through which the ECB steers the monetary policy stance.

40.

In a seminal paper, Woodford (1998) argued that, under specific conditions, monetary policy would remain effective in a cashless economy (understood as an economy without central bank money). However, the assumptions and conclusions of his analysis remain fundamentally debated. For instance, Rogers (2006) critically reviews Woodford's assumptions and points out conceptual and methodological errors. Moreover, Rogoff (2014) raises the point that it is not necessarily established that the economy converges to the same equilibrium with and without central bank money. Lastly, De Grauwe and Storti (2001) argue that the absence of central bank money would render monetary policy ineffective, thus threatening the capacity of the central bank to control inflation. However, the academic discussion remains purely theoretical, with models abstracting from important considerations relevant in practice. See Woodford, M. (1998), 'Doing without money: controlling inflation in a post-monetary world', Review of Economic Dynamics , Vol. 1, Issue 1, pp. 173-219; Rogers, C. (2006), 'Doing without money: a critical assessment of Woodford's analysis', Cambridge Journal of Economics , Vol. 30, No 2, pp. 293-306; Rogoff, K. (2015), 'Costs and benefits to phasing out paper currency', NBER Macroeconomics Annual , Vol. 29, Issue 1, pp. 445-456; and De Grauwe, P. and Storti, C. (2001), 'Monetary Policy in a Cashless Society', CEPR Discussion Paper Series , No 2696, CEPR Press, Paris and London.

41.

A regulatory source of demand for central bank money is imposed via minimum reserve requirements, i.e. the obligation on banks to hold a certain proportion of their liabilities in the form of electronic or physical cash. In the euro area, the minimum reserve requirement for banks corresponds to one per cent of deposits. However, as noted in the main text, banks like to hold substantial amounts of reserves in excess of the minimum requirement in order to have sufficient liquidity to cope with high and volatile volumes of interbank payments and to be in a position to meet deposit withdrawal requests.

42.

See Garratt, R. and Shin, H. S. (2023), 'Stablecoins versus tokenised deposits: implications for the singleness of money', BIS Bulletin , No 73, Bank for International Settlements; and Cipollone, P., (2024), ' ', keynote speech at the Bundesbank Symposium on the Future of Payments, 7 October. Towards a digital capital markets union

43.

In truth, there might be several layers in the payments system. A household might upload funds from its bank account to an e-wallet and in turn use the e-wallet account to buy stablecoins. In reverse, the proceeds of a sale in stablecoins could be initially lodged in the household's e-wallet and an additional step would be required to draw down these funds back to the household's bank account.

44.

See CE Coste (2024), 'Toss a stablecoin to your banker,' ECB Occasional Paper No. 353.

45.

See the Financial Stability Board's and more detailed explanations in Bullmann, D., Klemm, J. and Pinna, A. (2019), 'In search for stability in crypto-assets: are stablecoins the solution?' Occasional Paper Series , No 230, ECB, August. definition

46.

See, for example, Adachi, M. et al. (2022), 'Stablecoins' role in crypto and beyond: functions, risks and policy ', Marcoprudential Bulletin , No 18, 11 July.

47.

See also Waller, C.J. (2025), ' ', speech at A Very Stable Conference, San Francisco, 12 February. Reflections on a Maturing Stablecoin Market

48.

See BIS, IMF and The World Bank (2021), Central bank digital currencies for cross-border payments: Report to the G20 .

49.

A smart contract is a self-executing program that automates the actions in a blockchain transaction. Smart contracts automatically enforce and execute the terms of an agreement when predefined conditions are met, without the need for intermediaries or manual intervention.

50.

However, money market funds are not a commonly used savings instrument for households and are not backed by a deposit insurance scheme.

51.

See Duan, K. and Urquhart, A. (2023), 'The instability of stablecoins', Finance Research Letters , Vol. 52, and Anadu, K. et al. (2023), 'Runs and Flights to Safety: Are Stablecoins the New Money Market Funds?' Federal Reserve Bank of New York Staff Reports , No 1073, September.

52.

See Gorton and Zhang (2022), 'The Orkney Slew and Central Bank Digital Currency'. Harvard National Security Journal, Vol 14:1.

53.

Regulation (EU) 2023/1114 of the European Parliament and of the Council of 31 May 2023 on markets in crypto-assets, and amending Regulations (EU) No 1093/2010 and (EU) No 1095/2010 and Directives 2013/36/EU and (EU) 2019/1937 (MiCAR) establishes some constraints on the reserves of assets held by issuers of asset-referenced tokens (ARTs) and e-money tokens (EMTs). For instance, the draft regulatory technical standards establish that significant EMTs must always keep at least 60% of the funds received in deposits with credit institutions, although for significant ARTs that percentage refers to the amount referenced in each official currency (for ARTs that are not significant, that percentage is 30%, while EMTs that are not significant are not subject to reserve requirement unless established ad hoc by the supervisory authority).

54.

In 2019 the Libra consortium of private firms outlined a scheme in which a stablecoin would be pegged to a basket of currencies; in 2020 the consortium (rebranded as Diem) envisaged a collection of singlecurrency stablecoins. This project was abandoned in 2022.

55.

See, for example, Box 5 of Ferrari Minesso, M. and Habib, M.M. (2022), , June. 'The International role of the euro'

56.

It is possible to envisage scenarios in which a dollar stablecoin provider offers a synthetic euro stablecoin to European customers, calculating that it could afford to absorb the associated currency risk. Of course, the cost of hedging currency risk can move sharply under stressed conditions, such that these commitments might not be fully reliable.

57.

Brunnermeier, M. K., James, H. and Landau, J. P. (2019), 'The digitalization of money', National Bureau of Economic Research Working Paper Series , No 26300, September.

58.

Landau J.P. and S. Nicole (2024). 'Monetary Sovereignty in a digital world'. SciencesPo Policy Brief, June 2024.

59.

See Brooks, S. (2021), 'Revisiting the monetary sovereignty rationale for CBDCs'. Staff Discussion Paper , No 2021-17, Bank of Canada, December; and IMES Discussion Paper Series , No 2020-E-15, December. Ikeda, D. (2023). 'Digital money as a unit of account and monetary policy in open economies'.

60.

See also P. Cipollone (2024), ' ', speech at the Economics of Payments XIII Conference organised by the Oesterreichische Nationalbank, Vienna, 27 September. Monetary sovereignty in the digital age: the case for a digital euro

- 61.

Interoperability refers to the ability of different systems, devices or applications to exchange data and allow information-sharing.

62.

Lee, M., and Garratt, R. (2021), 'Monetizing Privacy with Central Bank Digital Currencies', Federal Reserve Bank of New York Staff Reports , No 958, January; Garratt, R. J., and Van Oordt, M. R. (2021), 'Privacy as a public good: a case for electronic cash', Journal of Political Economy , Vol. 129 No 7, pp. 2157-2180; Agur, I., Ari, A., and Dell'Ariccia, G. (2025), 'Bank competition and household privacy in a digital payment monopoly', Journal of Financial Economics , Vol. 166, April.

63.

Brunnermeier, M. K., James, H. and Landau, J. P. (2019), 'The digitalization of money', National Bureau of Economic Research Working Paper Series , No 26300, September. See also Panetta, F. (2020), 'From the payments revolution to the reinvention of money', speech at the Deutsche Bundesbank Conference on the 'Future of Payments in Europe', Frankfurt am Main, 27 November.

64.

Cong, L. and Mayer, S. (2022), 'The Coming Battle of Digital Currencies', The SC Johnson College of Business Applied Economics and Policy Working Paper Series , No 2022-04, December.

65.

The design of the digital euro ensures that transactions and accounts would remain anonymous to the Eurosystem. Just as banknotes are sourced via the ATM of a commercial bank, an individual would maintain a digital euro account with a commercial bank, which would be responsible for 'know your customer' procedures and related checks. See also Garratt, R. J. and Van Oordt, M.R. (2021), 'Privacy as a public good: a case for electronic cash', Journal of Political Economy , Vol. 129, No 7, pp. 2157-2180 and Ahnert, T., Hoffmann, P. and Monnet, C. (2025), ' Payments and privacy in the digital economy ', Journal of Financial Economics, forthcoming

66.

See, for example, ECB (2023) ' ', October, or the ECB's and progress reports on the preparation phase of a digital euro as well as the and the corresponding . A stocktake on the digital euro - summary report on the investigation phase and outlook on the next phase first second digital euro legislative proposal ECB opinion

67.

An important type of card is a debit card which draws funds from the customer's current account as needed.

68.

National communities have often preferred to preserve the legacy of investments made in the past. See Cipollone, P. (2024), 'Innovation, integration, and independence: taking the Single Euro Payments Area to the next level', speech at the ECB conference on 'An innovative and integrated European retail payments market', Frankfurt am Main, 24 April.

69.

While the implementation of the Single Euro Payments Area (SEPA) in the early 2000s successfully addressed cross-border payment challenges for credit transfers and direct debits within the euro area, a similar degree of harmonisation has not been achieved at the retail level. Retail payments remain narrowly focused on national markets, addressing only specific use cases and lacking the comprehensive reach needed across the euro area. See, e.g., Cipollone, P. (2024). 'Innovation, integration, and independence: taking the Single Euro Payments Area to the next level', speech at the ECB conference on 'An innovative and integrated European retail payments market', Frankfurt am Main, 24 April.

70.

A unified European card scheme was never developed, leaving existing national card schemes noninteroperable and unable to facilitate cross-border transactions in the euro area. As a result, international card schemes have become essential for card payments across European borders and increasingly within national EU markets. These international schemes have expanded beyond their traditional sectors - such as travel and entertainment - into areas typically served by national card schemes. See Plooij, M. (2020), 'A future-proof retail payments ecosystem for Europe - the Eurosystem's retail payments strategy and the role of instant payments therein' Financial Stability Review , Banco de España, Autumn.

71.

For instance, the average net merchant service charges in the EU increased from 0.27% in 2018 to 0.44% in 2022 (see European Commission (2024), Study on new developments in card-based payment markets,

,

including as regards relevant aspects of the application of the Interchange Fee Regulation - Final Report 5 February). This increase occurred despite regulatory efforts to contain it, as international card schemes exploited their strong negotiating position to raise the non-regulated components of the merchant service charge, such as scheme fees. See also Cipollone, P. (2024), 'Monetary sovereignty in the digital age: the case for a digital euro', keynote speech at the Economics of Payments XIII Conference organised by the Oesterreichische Nationalbank, Vienna, 27 September.

72.

Ahnert, T., Hoffmann, P. and Monnet, C. (2025), ' Payments and privacy in the digital economy ', Journal of Financial Economics, forthcoming.

73.

Examples of fast payment systems include the PIX system in Brazil and the UPI system in India.

74.

Assenmacher, K. and Smets, F. (2024), 'A digital euro: Monetary policy considerations', SUERF Policy Note , No 346, 12 April.

75.

Daman, M. (2024), 'Making the digital euro truly private', The ECB Blog , ECB, 13 June.

76.

States have utilised international currency relationships and arrangements as tools of coercive power to further their security interests. See, for example, Kirshner, J. (1994), Currency and Coercion: The Political Economy of International Monetary Power , Princeton University Press.

77.

See, for example, Rosa, B. and Larsen, C. (2024), Smart Money: How Digital Currencies Will Shape the New World Order , Bloomsbury Publishing.

78.

See Cipollone, P. (2025), 'The role of the digital euro in digital payments and finance', speech at Crypto Asset Lab conference organised by the University of Milano-Bicocca, 17 January.

79.

Lagarde, C. (2022) 'Digital euro - a common European project', video address to the 'High level conference: Towards a legislative framework enabling a digital euro for citizens and businesses', Brussels, 7 November.

80.

According to Stephan Miran, if the reserve asset is considered the lifeblood of global trade and financial systems, then whoever controls this reserve asset and currency can exert some degree of control over trade and financial transactions. Since the US dollar serves as the world's reserve currency, this enables the United States to impose its will in foreign and security policy using financial force rather than physical force. See Miran, S. (2024), A User's Guide to Restructuring the Global Trading System , Hudson Bay Capital, November.

81.

ECB calculations based on the Consumer Expectations Survey.

82. ECB (2024), 83.

Study on the payment attitudes of consumers in the euro area (SPACE) - 2024 , December.

Scholarly research suggests that countries are incentivised to digitise their fiat currencies, such as by launching CBDCs, due to the need to enhance currency adoption in a digital world and to address the growing competition from private digital money like stablecoins. The decision to digitise currencies is strategic and a pecking order appears: countries with strong but non-dominant currencies have the highest incentives and are likely to digitise their currencies first. Those with dominant currencies, like the United States, follow next in response to competition. By contrast, countries with very weak currencies have little to gain and may forgo digitisation. Although competition from private digital money can hinder digitisation, rivalry among fiat currencies actually speeds it up. For further details, see Cong, L. and Mayer, S. (2022), 'The Coming Battle of Digital Currencies', The SC Johnson College of Business Applied Economics and Policy Working Paper Series, No. 2022-04.

84.

Eurobarometer (2024), ' ', 29 November. Standard Eurobarometer 102 - Autumn 2024

85.

European Commission Representation in Ireland (2024), ' ', 29 November. New Eurobarometer survey shows record high trust in the EU: Irish people most optimistic about its future",Philip R Lane
https://www.bis.org/review/r250324i.htm,Eli M Remolona: Going digital - changing the digital finance narrative,"Speech by Mr Eli M Remolona, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 4th Digital Financial Inclusion Awards, Manila, 20 March 2025.",2025-03-20 00:00:00,"## Eli M Remolona: Going digital - changing the digital finance narrative

Speech by Mr Eli M Remolona, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 4th Digital Financial Inclusion Awards, Manila, 20 March 2025.

* * *

## Introduction

Good afternoon, everyone. Good afternoon, [Microfinance Council of the Philippines, Inc. Chairperson] Gilbert [Maramba]. Good afternoon, [Citi Philippines CEO] Paul [Favila]. Good afternoon, Teodoro [Lamang Jr.]. Thank you for your inspiring testimony.

Thank you all for joining us in this media launch for the Digital Financial Inclusion Awards. It is something that we do every year that recognized microentrepreneurs leading the way in digital finance.

## Shift in focus

Going digital is not always easy. Part of the challenge is what psychologists Amos Tversky and Daniel Kahneman described as the availability bias, which is our tendency to focus more on dramatic events rather than the common ones.

In digitalization, we hear a lot about online fraud and scams because they tend to be dramatic events. We do not talk about the boring benefits, faster transactions, better financial access, and new opportunities.

This makes small businessowners hesitant, ""Ang hirap pumasok sa digital"" or ""Baka maloko pa kami d'yan."" While these concerns are valid, they should not hold us back.

This is why we are here. To help shift the focus to the real success stories. The BSP and its partner agencies are working to make the digital landscape more secure, simpler, and more accessible.

First is safer digital space. The Anti-Financial Account Scamming Act or AFASA was actually enacted to fight fake accounts, fraud, and scams. The implementing rules and regulations are in the works.

Second is simpler digital banking. The QRPh and the new Standard Business Loan Application Form or SBLAF streamlined payments and credit application. Launched last December, the SBLAF is short, user-friendly, and fully digital.

Third, is broader digital access. The moratorium on digital banking license application was lifted, which means more digital banks helping small businesses in opening accounts, applying for loans, and transacting seamlessly.

With these measures, digital finance is becoming more secure, more efficient, and more inclusive. The entrepreneurs we are honoring here are proof of that.

Take Shanie Lou, who scaled her baking business through social media platforms and e-wallets. Or Ligaya, who used e-commerce to expand the market for her hand-woven bags.

## Closing

To our friends in the media, we ask you to share these stories and help shift the narrative. Let us show every Juan and Maria that digital finance is not something to fearit is something to embrace.

Maraming salamat po at mabuhay tayong lahat!",Eli M Remolona
https://www.bis.org/review/r250324h.htm,"Martin Schlegel, Antoine Martin, Petra Tschudin: Introductory remarks by the Governing Board, Swiss National Bank news conference","Introductory remarks by Mr Martin Schlegel, Chairman of the Governing Board of the SNB, Mr Antoine Martin, Vice Chairman of the Governing Board of the SNB, and Ms Petra Tschudin, Member of the Governing Board of the SNB, at the Media News Conference of the Swiss National Bank, Zurich, 20 March 2025.",2025-03-20 00:00:00,"## News conference

Embargo 20 March 2025, 10.00 am

## Introductory remarks by the Governing Board

## Martin Schlegel, Antoine Martin and Petra Tschudin

Chairman of the Governing Board / Vice Chairman of the Governing Board / Member of the Governing Board Swiss National Bank Zurich, 20 March 2025 © Swiss National Bank

## Ladies and gentlemen

On behalf of the Governing Board, it is my pleasure as Chairman to welcome you to the SNB's news conference. After our introductory remarks, we will take questions from journalists as usual.

## Monetary policy decision

I will begin with our monetary policy decision. We have decided to lower the SNB policy rate by 0.25 percentage points to 0.25%. The new policy rate applies from tomorrow, 21 March 2025. Banks' sight deposits held at the SNB will be remunerated at the SNB policy rate up to a certain threshold, and at 0% above this threshold. We also remain willing to be active in the foreign exchange market as necessary.

With our rate adjustment today, we are ensuring that monetary conditions remain appropriate, given the low inflationary pressure and the heightened downside risks to inflation. We will continue to monitor the situation closely and adjust our monetary policy if necessary, to ensure that inflation remains within the range consistent with price stability over the medium term.

## Inflation forecast

Allow me to address the development of inflation in more detail. Since the last monetary policy assessment, inflation has developed in line with expectations. It decreased from 0.7% in November to 0.3% in February. This decline is attributable in particular to the drop in electricity prices in January. Overall, inflation is still being driven mainly by domestic services.

Our new conditional inflation forecast has hardly changed since December. Without today's rate cut, the forecast would have been lower in the medium term. The forecast is within the range of price stability over the entire forecast horizon (cf. chart). It puts average annual inflation at 0.4% for 2025, 0.8% for 2026 and 0.8% for 2027 (cf. table). Our forecast is based on the assumption that the SNB policy rate is 0.25% over the entire forecast horizon.

I will now hand over to Antoine Martin, who will address the global economic outlook.

## Global economic outlook

Global economic growth was moderate in the fourth quarter of 2024. While growth was solid in the US and China, it was more subdued in the euro area. The services sector continued to contribute positively to economic activity worldwide. In large parts of manufacturing, by contrast, developments remained muted.

Inflation recently rose again somewhat in many countries, primarily driven by energy products. Underlying inflationary pressure is still elevated in many countries, albeit less markedly than a few quarters ago. Various central banks have therefore cut their policy rates further.

In our baseline scenario, we anticipate that growth in the global economy will remain moderate over the coming quarters. The high level of uncertainty surrounding trade policy is likely to weigh on investment and on global economic momentum. By contrast, monetary policy easing that has been implemented abroad will support growth. Underlying inflationary pressure should continue to ease gradually over the next quarters, particularly in Europe. Inflation in the US, however, is expected to remain elevated for some time.

Our scenario for the global economy is currently subject to high uncertainty. The situation could change rapidly and markedly, particularly from a trade and geopolitical perspective. For example, increasing trade barriers could lead to weaker global economic development. At the same time, a more expansionary fiscal policy in Europe could provide stimulus to the economy in the medium term.

This brings us to the situation in Switzerland, which Petra Tschudin will present.

## Swiss economic outlook

Economic growth in Switzerland was solid in the fourth quarter of 2024. The services sector and parts of manufacturing developed favourably. There was a further slight increase in unemployment, while the utilisation of overall production capacity was normal.

We expect GDP growth of between 1% and 1.5% for the current year. Domestic demand is likely to benefit from rising real wages and the easing of monetary policy. By contrast, moderate economic activity abroad looks set to have a dampening effect on foreign trade. In this environment, unemployment is likely to continue to rise slightly. We anticipate GDP growth of around 1.5% for 2026.

The economic outlook for Switzerland has become considerably more uncertain. Against the backdrop of increased trade and geopolitical uncertainties worldwide, developments abroad continue to represent the main risk.

I will now hand back to Martin Schlegel.

## Monetary policy outlook

Ladies and gentlemen, allow me to return to our monetary policy.

We have eased our monetary policy considerably over recent quarters. This easing has helped to stabilise the inflation outlook in the medium term.

Since our last monetary policy assessment in December, inflation has developed in line with expectations. Over the entire forecast horizon, our conditional inflation forecast is within the range consistent with price stability, which we equate with an inflation rate of between 0% and 2%.

Nevertheless, uncertainty about global economic and inflation developments has increased significantly. As a result, the outlook for inflation in Switzerland, too, is currently very uncertain. At present, the risks are predominantly to the downside.

With our interest rate cut, we are taking into account the low inflationary pressure and the downside risks. At the same time, we are supporting economic activity in Switzerland. In light of the heightened uncertainty, we will continue to monitor the situation closely and adjust our monetary policy if necessary, to ensure that monetary conditions remain appropriate.

Ladies and gentlemen, thank you for your attention.

## CONDITIONAL INFLATION FORECAST OF MARCH 2025

Year-on-year change in Swiss consumer price index in percent



Source(s): SFSO, SNB

## OBSERVED INFLATION IN MARCH 2025

|           | 2021   | 2021   | 2021   | 2022   | 2022   | 2022   | 2022   | 2023   | 2023   | 2023   | 2023   | 2023   | 2024   | 2024   | 2024   | 2024   | 2022|2023|2024   | 2022|2023|2024   | 2022|2023|2024   |
|-----------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|------------------|------------------|------------------|
|           | a1     | |o2    | |28    | |o4    | a1     | \e2    | |e     | |>4    | at     | \-2    | [28    | |      | lat    | |-2    | [es    | |o4    |                  |                  |                  |
| Inflation | -04    | 05     | 08     | 14     | 21     | 30     | 34     | 29     | 32     | 21     | 16     | 16     | 12     | 14     | 11     | 07     | 28               | 21               | 1.1              |

Source(s): SFSO

## CONDITIONAL INFLATION FORECAST OF MARCH 2025

|                                              | 2024   | 2024   | 2024   | 2025   | 2025   | 2025   | 2025   | 2026   | 2026   | 2026   | 2026   | 2027   | 2027   | 2027   |       |     |     |    |
|----------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|-------|-----|-----|----|
|                                              | a1     | |22    | |2s    | |o4    | a1     | \o2    | |es    | |>4    | a1     | \e2    | |23    | |o4 ai | |o2    |        | [es | |     |     |    |
| Forecast December 2024, SNB policy rate 0.5% |        |        |        | 07     | 03     | 02     | 03     | 05     | 08     | 08     | 08     | 07     | O07    | O07    | O07   | 0.3 | 0.8 |    |
| Forecast March 2025, SNB policy rate 0.25%   |        |        |        |        | 04     | 03     | 04     | 06     | 08     | 08     | 08     | 08     | 08     | 07     | 08 08 | 04  | 08  | 08 |

Source(s): SNB",Martin Schlegel; Antoine Martin; Petra Tschudin
https://www.bis.org/review/r250324g.htm,Christine Lagarde: Hearing of the Committee on Economic and Monetary Affairs of the European Parliament,"Speech by Ms Christine Lagarde, President of the European Central Bank, at the Hearing of the Committee on Economic and Monetary Affairs of the European Parliament, Brussels, 20 March 2025.",2025-03-20 00:00:00,"## Christine Lagarde: Hearing of the Committee on Economic and Monetary Affairs of the European Parliament

Speech by Ms Christine Lagarde, President of the European Central Bank, at the Hearing of the Committee on Economic and Monetary Affairs of the European Parliament, Brussels, 20 March 2025.

* * *

Charts accompanying the speech

It is a pleasure to be back in Brussels for our regular exchange.

Since we last met in December, the new US administration has taken office and embarked on a new course in domestic and foreign policy. This has far-reaching implications for the global economic and political landscape, and it forces Europe to address both long-standing and new challenges in trade, economic competitiveness and defence. It is clear that the world is not waiting for us.

In this context, your chosen topic of trade policies is pertinent and extremely timely. However, before we discuss that topic in more detail, let me start by updating you on the euro area economic outlook and the ECB's monetary policy stance.

## The outlook for the euro area

In 2024 the euro area economy recovered despite many headwinds. Euro area GDP grew by 0.9% on average, about twice as much as it did in 2023. Growth slowed in the fourth quarter of 2024, however, and the first months of this year have seen a continuation of many of last year's underlying patterns. Manufacturing is still contracting, although survey indicators are improving. High domestic and global policy uncertainty is holding back investment, and competitiveness challenges are weighing on exports. At the same time, services remain resilient. Moreover, rising household incomes and a robust labour market are supporting a gradual pick-up in consumption.

Heightened uncertainty is likely to dampen investment and exports more than previously anticipated. However, growth is expected to be supported by higher incomes and lower borrowing costs. Additionally, exports should benefit from rising global demand, though this remains contingent on developments in international trade policies. The latest ECB staff projections expect the economy to grow by 0.9% in 2025, 1.2% in 2026 and 1.3% in 2027. 1   These estimates are subject to considerable uncertainty, also owing to the trade policy environment, which I will discuss in the second part of my statement.

Turning to price developments, the disinflation process is well on track. Headline inflation decreased from 2.5% in January to 2.3% in February, mainly on account of a drop in energy inflation. Core inflation - excluding energy and food - also declined slightly from 2.7% in January to 2.6% in February, reflecting lower services inflation. Domestic inflation edged down in February but remains high, as wages and services prices in certain sectors are still adjusting to the past inflation surge.

Nominal wage growth moderated over the course of 2024. It is expected to continue decelerating in the coming months as real wages have caught up with levels seen before the surge in inflation, leading to fewer demands for inflation compensation.

The ECB staff projections see inflation moderating slightly in the coming months and then hovering around our 2% target as of the first quarter of 2026. Headline inflation is expected to average 2.3% in 2025, 1.9% in 2026 and 2.0% in 2027.

## The ECB's monetary policy stance

Let me now turn to our monetary policy stance.

Earlier this month we lowered our key interest rates by another 25 basis points. Inflation is developing broadly as expected, with most measures of underlying inflation suggesting that inflation will settle at around our 2% medium-term target on a sustained basis.

The deposit facility rate now stands at 2.50% - 150 basis points below the 2024 peak. Our monetary policy is becoming meaningfully less restrictive. New borrowing is becoming less expensive for firms and households, while loan growth is picking up. At the same time, past interest rate hikes are still being transmitted to the stock of loans, and lending remains subdued overall.

We are determined to ensure that inflation stabilises sustainably at our 2% mediumterm target. Especially in current conditions of rising uncertainty, we will follow a datadependent and meeting-by-meeting approach to determining the appropriate monetary policy stance. We are not pre-committing to a particular rate path.

## The impact of a shift in US trade policies

Let me now turn to the second topic of this hearing - the impact of the shift in US trade policies on the euro area.

The new US administration is changing direction in several policy areas, with trade being a focal point. As a result, uncertainty about the future path of trade policy has soared to exceptionally high levels.

In our interconnected world, increased trade frictions are detrimental to global growth and welfare. 2   They raise costs, disrupt production and often lead to an adjustment of supply chains. 3   This also encourages ""tit-for-tat"" retaliatory policies, further undermining the benefits of free trade.

The euro area, which is very open to trade and deeply integrated into global supply chains, especially with the United States, is particularly exposed to shifts in trade policies. 4

As regards the impact of specific trade measures, the situation is of course still evolving, and any estimates are subject to considerable uncertainty. That said, ECB analysis suggests that a US tariff of 25% on imports from Europe would lower euro area

growth by about 0.3 percentage points in the first year. A European response in the form of raising tariffs on US imports would further increase this to about half a percentage point. The brunt of the impact on economic growth would concentrate around the first year after the rise in tariffs; it would then diminish over time, however leaving a persistent negative effect on the level of output.

In such a scenario, the inflation outlook would become significantly more uncertain. In the near term, EU retaliatory measures and a weaker euro exchange rate - resulting from lower US demand for European products - could lift inflation by around half a percentage point. The effect would ease in the medium term due to lower economic activity dampening inflationary pressures.

Let me stress again that these estimates are subject to very high uncertainty given that the impact of tariff increases may be non-linear, for instance due to a significant reconfiguration of global supply chains. Of course, the high level of policy uncertainty requires us to remain vigilant and ready to act to protect price stability.

Crucially, the answer to the current shift in US trade policies should be more, not less, trade integration, both with trade partners around the globe and within the EU. Trade integration, including free trade agreements, has been a driver of economic prosperity and can protect against unilateral trade measures. In fact, ECB analysis indicates that closer integration with the rest of the world could more than offset losses incurred from unilateral tariffs, including retaliation. In such a scenario only countries engaging in isolationist policies stand to lose. It is therefore important that the EU remains open to trade, and swiftly finalising recent trade agreements with other international partners would be a powerful signal.

We must also use these developments as a catalyst for deepening trade between EU Member States. The Single Market is estimated to have added between 12% and 22% to long-run EU GDP in its first 30 years, 5   and the level of trade between Member States has doubled since its creation. 6

A deeper Single Market is crucial for reducing trade barriers within Europe and creating the scale necessary for firms to thrive. In addition, the more we exploit our own market, the more resilient Europe is to the impact of global fragmentation and external shocks more generally. With its Competitiveness Compass, the European Commission has put forward a concrete roadmap that should be urgently implemented. In this context, the plan for the savings and investment union presented yesterday is another crucial step.

By enhancing our strategic autonomy and increasing our economic clout, Europe negotiates with trade partners from a position of greater strength - strength that we can only gain collectively.

At the ECB, we will continue to carefully monitor global trade developments and take their impact into account in our monetary policy deliberations. In the current environment, it is important that we anticipate and assess implications of potential trade policy changes. 7   Careful analysis and communication are key, and we are exploring both aspects further as part of our ongoing strategy assessment.

## Conclusion

To conclude - in today's turbulent environment, only a united Europe is a stronger Europe.

Jean Monnet once said ""make men - work together; and might I also add women show them that, beyond their differences and geographical boundaries, there lies a common interest"".

This common interest is the prosperity of people in the EU. To achieve it, we must continue to uphold free trade, and we must strengthen our union.

The Single Market enables this, as it can contain the impact of global trade fragmentation. Let us continue to strengthen this precious tool and forge our own destiny in the interest of all Europeans.

Thank you for your attention. I now look forward to your questions.

- 1  Tariffs that were already in effect when the March 2025 ECB staff projections were finalised (on 19 February 2025) were included in the baseline projections - namely the first batch of bilateral tariffs between the United States and China. Other tariffs that were not yet in place at the cut-off date and those that had been postponed or had only recently been announced were not included in the baseline projections.
- 2  See Attinasi, M.G. et al. (2024), ""Navigating a fragmenting global trading system: "", , No 365, ECB; and Gunnella, V. insights for central banks Occasional Paper Series and Quaglietti, L. (2019), ""The economic implications of rising protectionism: a euro "", , Issue 3, ECB. area and global perspective Economic Bulletin
- 3  See Attinasi, M.G. et al. (2023), ""Global production and supply chain risks: insights "", , Issue 7, ECB. from a survey of leading companies Economic Bulletin
- 4  See ECB Working Group on Global Value Chains (2019), ""The impact of global value "", , No 221, ECB, April. chains on the euro area economy Occasional Paper Series
- 5  See Lehtimäki, J. and Sondermann, D. (2020), ""Baldwin vs. Cecchini revisited: the "", , No 2392, ECB, growth impact of the European Single Market Working Paper Series April.
- 6  See European Commission (2023) ""Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions: The Single Market at 30"",16 March.
- 7  For a discussion of monetary policy in an uncertain environment, see Lagarde, C. (2025), "" A robust strategy for a new era"", speech at the 25th ECB and Its Watchers conference organised by the Institute for Monetary and Financial Stability at Goethe University Frankfurt, 12 March.",Christine Lagarde
https://www.bis.org/review/r250324e.htm,François Villeroy de Galhau: Governing the Bank of France - two lessons from history for an uncertain world,"Speech by Mr François Villeroy de Galhau, Governor of the Bank of France, at the historical conference ""A mass of granite"", Paris, 20 March 2025.",2025-03-20 00:00:00,"

## Historical conference 'A mass of granite'

## 'Governing the Banque de France: two lessons from history for an uncertain world'

Speech by François Villeroy de Galhau, Governor of the Banque de France

Press contact:  Delphine Cuny (delphine.cuny@banque-france.fr)

Ladies and Gentlemen,

It  is  a  pleasure  to  speak  today  at  this  historical  conference  organised  in partnership  with  the Fondation  Napoléon .  This  year,  2025,  marks  the  225th anniversary of the Banque de France, founded by Napoleon Bonaparte as a 'mass of granite' to stabilise the scattered 'grains of sand' of the Nation and participate in its reconstruction after the Convention and the Directory. I think that we can all agree that the results have lived up to our ambitions: the Banque de France, its women and men, remain one of the cornerstones of the national - and now European - edifice and have enabled it to weather times of economic and  financial  turmoil.  These  successes  are  primarily  due  to  the  dynamic governance that has constantly renewed itself in order to serve an increasingly broad general interest (I). This year, which is particularly fraught with uncertainty at both the national and international levels, a few key episodes in our history also provide two lessons in resilience for France (II) and Europe (III).

## I) A dynamic governance

The current governance of the Banque de France is the result of more than two centuries  of  evolution,  which  has  led  our  institution  to  serve  an  increasingly broad  general  interest.  The  Banque  de  France,  born  of  the  Consulate,  was originally  a  listed  company.  The  First  Consul  was  also  the  first  of  its  private shareholders: a different era! The Bank provided genuine public services for the Paris financial centre: issuing banknotes and setting an attractive and stable discount  rate.  It  was  administered  by  a  Council  of  Regency  made  up  of representatives elected by its 200 main shareholders. From 1806, i the state's influence  over  the  Bank  grew  stronger:  a  Governor,  assisted  by  two  Deputy Governors,  all  appointed  by  the  head  of  state,  was  placed  at  its  helm.  As Napoleon Bonaparte famously said: 'I want the Bank to be sufficiently in the hands of the Government and not too much so.'

For several decades, the Banque de France remained de facto the 'Bank of Paris'  because  it  had  a  monopoly  on  issuing  banknotes  limited  to  a  local area. As of 1848, ii  this monopoly was extended to the whole of France, thus

lending  our  activities  a  national  dimension.  This  new  scope  of  action  was accompanied in 1936 by a democratisation of governance. iii   The Council of Regency was replaced by the General Council: 20 councillors, the bulk of whom were  appointed  by  the  public  authorities,  succeeded  the  15  regents.  All shareholders  -  and  no  longer  just  the  200  main  ones,  known  as  the  '200 families' - were henceforth represented at the General Meeting. This process was completed in December 1945 iv  with the nationalisation of the Bank, which became a public institution, wholly owned by the state, supporting policies for the reconstruction and modernisation of the French economy.

Our governance evolved once again with the Law of 4 August 1993 v  when the Banque de France gained its independence. A Monetary Policy Council, chaired by  the  Governor,  is  in  charge  of  setting  monetary  policy  'without  seeking  or accepting instructions from the government or any other body'. These first steps towards Economic and Monetary Union (EMU) were consolidated in 1999: the Banque de France became part of a federal system by joining the Eurosystem, which consists of the European Central Bank (ECB), of which it holds a 20% stake, and the 20 national central banks. Decisions concerning monetary policy are now taken collectively by the Governing Council of the ECB, chaired by Christine Lagarde, while our General Council continues to deliberate on internal management issues.

To  sum  up,  in  225  years,  we  have  changed  shareholders,  the  type  of relationship we have with the public authorities - from controlled autonomy to independence - and geographical scope - from Paris to Europe. But we have not changed our own 'governance' - we still have a Governor (I am the 31st) and two Deputy Governors, fewer than many other comparable central banks nor,  above  all,  our  missions:  monetary  and  price  stability,  and  the  smooth financing of the economy.

## II) A beacon of confidence in France

The Banque de France has therefore represented a beacon of confidence in times of economic and financial turmoil. The stabilisation of the French franc is

a prime example. After the First World War, the French economy gradually sank into  a  crisis  that  worsened  from  1924  onwards.  There  were  three  main symptoms: a deterioration in public finances, a sharp depreciation of the franc and government instability - there were eight ministers of finance between 1925 and 1926. Headed by its new governor Émile Moreau (1926-1930), the Banque de France endeavoured to defend the franc on the foreign exchange markets and it managed to stabilise it at a rate that was conducive to confidence and financial stability at the end of 1926. At the same time, Émile Moreau engaged in extensive discussions with Raymond Poincaré, President of the Council of Ministers, to convince him of the need to stabilise the franc, i.e. devaluation from its pre-war parity. Émile Moreau had no hesitation in threatening to resign in the national interest. vi  The President of the Council of Ministers ended up coming around to the position of the Banque de France: the monetary law of 25 June 1928 introduced the 'Poincaré' franc and brought lasting calm to the financial turmoil.

This is not an isolated example: several Banque de France personalities spurred on a national recovery in the face of danger. In 1958 for example, the De GaullePinay-Rueff financial stabilisation plan was largely inspired vii  by the economist Jacques  Rueff,  former  Deputy  Governor  of  the  Banque  de  France.  Wilfrid Baumgartner,  former  Governor  of  the  Banque  de  France  (1949-1960)  and Minister of Finance from 1960, ensured that it was successful. Two decades later in 1983, Jacques Delors - whose name this auditorium honours - averted the spectre of a financial crisis by implementing fiscal cuts and de-indexation measures to keep France in the European Monetary System viii  (EMS).

We are an old and a great country that has overcome a number of serious crises over the course of our history. This provides a lesson in resilience - and perhaps in hope - at a time when our country has to regain control of its public finances. And public opinion appreciates it when fiscal crises are overcome: each of the personalities I referred to forged a strong political and historical stature, showing that the French know how to recognise sound public management. The Banque

de  France  intends  to  remain  a  beacon  of  confidence  in  the  face  of  current uncertainties.  Thanks  to  the  almost  certain  victory  over  inflation,  the  Bank's credible action means that the euro enjoys a historically high level of support from 81% of European citizens - and 76% of the French population. ix  Drawing upon its independence, it also has a duty to provide the political authorities with its views and technical expertise on economic and fiscal issues, especially as these are subject to strong short-term pressures and a highly volatile and fraught public debate. We are currently at a historical turning point and - I say this in all seriousness - our response may be found wanting. However, our long history gives us an idea of what it takes to bounce back: to elevate public debate, we must first extend the timeframe beyond current obsessions. We now need to broaden the scope and learn to work together instead of engaging in Frenchstyle petty squabbling.

## III) An independent institution working for European monetary sovereignty

Indeed, the other contemporary lesson - alongside necessary French reform is  the  need  to  work  for  European  monetary  sovereignty  (III).  Two  significant episodes illustrate this.

First, the 'battle of the franc', also known as the 'EMS crisis', which occurred between  1992  and  1993  at  a  pivotal  moment  between  the  signing  of  the Maastricht  Treaty  and  its  effective  implementation.  In  September  1992,  just when the Treaty was due to be ratified in several Member States, speculative attacks targeted European currencies, forcing some of them to leave the EMS. Jacques de Larosière was Governor at the time and Jean-Claude Trichet, who was to succeed him at the end of 1993, was still Director of the French Treasury. The Banque de France intervened massively x  on the foreign exchange markets to support the franc. If the franc had left the EMS, it would have meant that the European Monetary Union project would have been abandoned for a long time. Fortunately, this did not happen - although it was a close-run thing - and the crisis was resolved within a European framework, as was the case later in July 1993, when the EMS fluctuation margins were finally widened, putting an end to

the pressure on exchange rates. Better still, this crisis revealed the fragile nature of  fixed  exchange  rates  between  national  currencies  and,  in  so  doing, strengthened the determination of Member States to complete the transition to Monetary Union as quickly as possible.

I will now move on to a second crisis, this time an existential one for the euro area. As of 2009, the global financial crisis began to mutate into a sovereign debt crisis in the euro area. Certain heavily indebted Member States faced the prospect of losing access to capital markets, and the euro area was in danger of breaking up. This was the first real test of the collective response capacity of the  Eurosystem.  It  responded  decisively  by  granting  long-term  loans  to commercial banks, buying sovereign bonds of Member States in difficulty on the secondary market where necessary, and managing the specific cases of the hardest-hit banks. Despite differences of opinion, the Member States managed to find common ground through trust-based dialogue: they established a safety net and created the European Stability Mechanism and the Banking Union

These two crises  taught  us  another  lesson  in  resilience:  by  acting  together, Europe has become more robust. In the words of Mario Draghi, Europe gained the ability 'to control its destiny' xi  thanks to this unique monetary sovereignty, recognised - and sometimes envied - throughout the world xii .

*

Given the current disheartening American u-turn, the euro's success serves as a  reminder  of  a  more  general  lesson:  should  it  so  wish,  Europe  has  the resources  to  achieve  economic,  financial  and,  in  the  longer  term,  military sovereignty. Today - and I say this with sadness for the great nation of America - it is better to be European than American. If we so wish, Europe's time has come. Rest assured that the Banque de France will build this strong Europe out of granite.

- i  Law of 22 April 1806
- ii  Decrees of 27 April and 2 May 1848
- iii Law of 24 July 1936 amending and supplementing the laws and statutes governing the Banque de France
- iv  Law of 2 December 1945 on the nationalisation of the Banque de France and the major banks and the organisation of credit
- v  Law of 4 August 1993 on the status of the Banque de France and on the activities and supervision of credit institutions.
- vi  Moreau (E.), Souvenirs d'un Gouverneur de la Banque de France , 1954
- vii  Chélini (M.-P.), « Le plan de stabilisation Pinay-Rueff, 1958 », Revue d'histoire moderne et contemporaine , octobre-décembre 2001
- viii   The European Monetary System (EMS), created in 1979, was intended to boost monetary policy cooperation between members of the European Economic Community (EEC). The exchange rate of a given European currency against  all  other  currencies  could  not  vary  beyond  fixed  'fluctuation  margins'  and  to  prevent  fluctuations  from exceeding this limit, central banks had to intervene on the foreign exchange markets.
- ix  European Commission, Eurobarometer, November 2024
- x  Eichengreen (B.), Naef (A.), 'Imported or Home Grown? The 1992-3 EMS Crisis', Journal of International Economics , Vol. 138 , September 2022
- xi  Draghi (M.), ' Sovereignty in a globalised world ', speech, 22 February 2019
- xii  Villeroy de Galhau (F.), « Monetary sovereignty in the 21st century », Speech, 14 November 2023",François Villeroy de Galhau
https://www.bis.org/review/r250324c.htm,John C Williams: Certain uncertainty,"Remarks by Mr John C Williams, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the Macroeconometric Caribbean Conference, Nassau, Bahamas, 21 March 2025.",2025-03-21 00:00:00,"## Certain Uncertainty

March 21, 2025

John C. Williams, President and Chief Executive Officer

## Remarks at the Macroeconometric Caribbean Conference, Nassau, Bahamas

As prepared for delivery

## Introduction

Good morning, everyone. I'm so pleased to be here with you today.

As it says on my CV, monetary policy under uncertainty has been my primary area of research. And after 30 years in central banking, I can unequivocally say: Uncertainty is the only certainty in monetary policy. 1

Today I will discuss the economy and monetary policy in the context of a changing and uncertain landscape. I'll talk about global inflationary trends, inflation expectations, and how the Federal Reserve is working to achieve its dual mandate of maximum employment and price stability.

Before I go further, I must give the standard Fed disclaimer that the views I express today are mine alone and do not necessarily reflect those of the Federal Open Market Committee (FOMC) or others in the Federal Reserve System.

## The Economy Today

I will start with a snapshot of the U.S. economy. The economy entered the new year on firm footing. GDP and job growth have been solid, propelled by robust gains in the labor force and productivity. After a period of cooling, a wide range of labor market indicators, including the unemployment rate, have stabilized, with supply and demand broadly in balance and the labor market no longer a source of inflationary pressure. 2

The disinflationary process has continued on a bumpy path toward the FOMC's inflation goal of 2 percent over the longer run. After reaching a 40-year high of over 7 percent in 2022, inflation-as measured by the 12-month percentage change in the personal consumption expenditures price index-has fallen to about 2-1/2 percent, still somewhat above our 2 percent target.

That's where things stand now, but the future is highly uncertain. Recent data-both hard and soft-are sending mixed signals. Measures of policy uncertainty have increased sharply in recent months. This is also seen in responses that explicitly ask about uncertainty in the New York Fed's Survey of Consumer Expectations (SCE).  And my business and financial market contacts highlight the role of greater uncertainty, especially around trade policy, in making it more difficult to plan investments and hiring. 3

Navigating uncertainty during periods of large changes will be a recurring theme in my remarks today. I will dig deeper into two topics that are important to understanding inflation in the current macroeconomic environment and that will no doubt shape the future course of our economies. And since this is the ' Macroeconometric Caribbean Conference,' I will of course bring evidence from macroeconometric models to bear on these topics.

## Global Inflation Trends

It goes without saying-especially to this audience of representatives of central banks from the Caribbean regionthat our economies are interconnected, and developments in one part of the world can have effects that ricochet across the globe. To be sure, a country's economy is influenced by domestic developments, but when it comes to inflation, global factors are a major driver, one that stretches across countries. This dynamic was particularly evident during the past five years, when countries around the world experienced a sharp rise and subsequent fall in inflation. 4

Economists at the New York Fed have developed a statistical model, called Global Multivariate Core Trend Inflation (Global MCT), to measure and better understand the behavior of the persistent components of global inflation.  This model uses inflation data from seven economies to estimate a common global inflation trend, as well as global 5

sectoral inflation trends in tradable sectors, such as core goods and food and energy. It exploits the co-movement of the persistent components of inflation across both countries and sectors.

This analysis uncovers very strong common components of inflation, with global factors explaining an overwhelming share of the persistent movements in inflation rates across the economies in the sample, except for Japan's. Importantly, these results are not driven by the pandemic and post-pandemic periods, as they are evident in prepandemic inflation data going back to 1990.

Analysis using this model finds that supply shocks were the primary driver of the rise and subsequent decline in global inflation trends over the past several years, both at the general and sectoral levels.  From the beginning of 2021 to late 2022, the estimated global inflation trend soared, then reversed most of that increase over the following two years. Although supply factors were primarily responsible for these swings, demand factors also played a role in boosting the global inflation trend from late 2021 to mid-2024. 6

When inflation is a global phenomenon, what can individual central banks do to control it? Here again, Global MCT provides a useful lens to analyze this question. Based on an estimated vector autoregressive model that includes Global MCT, U.S. monetary policy shocks have economically and statistically significant effects on both the global inflation trend and the core goods global inflation trend. And the peak effect occurred after about 12 months. Similar results are obtained using a version of the model with European Central Bank monetary policy shocks.

These empirical analyses illustrate how monetary policy spills over and spills back to domestic and international rates of inflation. In the United States, as in other countries, monetary policy decisions are based on domestic mandates. But as policymakers, we also understand that our decisions can affect global economic and financial conditions, and in turn can spill back onto our shores. This is one reason why it's so important that we meet in venues such as this one to share insights and analyses.

## Inflation Expectations

I will now turn to the critically important role of inflation expectations and how households and businesses think about future inflation. Well-anchored inflation expectations are paramount for ensuring price stability, especially during times of turbulence and uncertainty. The experience of the past five years is a testament to this: Wellanchored expectations were key to achieving disinflation while avoiding severe economic consequences.

It is useful to distinguish between short-run expectations that tend to respond to inflation shocks and medium- and longer-run expectations that should be less responsive when expectations are well anchored.

In the past two months, we have seen clear signs of a broad-based increase in short-term inflation expectations, but most indicators point to continued well-anchored medium- and longer-term expectations. For example, marketbased measures of inflation expectations have risen at shorter horizons but have been stable at longer horizons. And New York Fed business surveys from February show that businesses in the Federal Reserve's Second District expect higher cost increases, particularly among manufacturing firms and businesses with a high import share of their inputs. While year-ahead inflation expectations of firms also moved up, their longer-term expectations remained stable.  And the February SCE indicated that expectations are largely unchanged over the medium and longer run. 7 8

The sensitivity of short-run inflation expectations to inflation shocks-while medium- and longer-run expectations are well anchored-is also seen in formal econometric analysis using data from the SCE and the University of Michigan surveys. 9

In estimating the sensitivity of inflation expectations at different forecast horizons to 'inflation surprises'-that is, the difference between what a survey respondent expected inflation to be and what it turned out to be-the analysis yields two insights. First, the estimated effects of inflation surprises to revisions in inflation expectations are considerably larger at the one-year-ahead horizon than at longer horizons. Second, the estimated effects during the past five years are similar to those during the pre-pandemic period. Broadly similar results are obtained when analyzing the co-movement of revisions in expectations across different horizons.

This analysis indicates that households expect an inflation shock will gradually decay over the ensuing years. In particular, although inflation shocks are expected to have persistent effects on inflation, these effects are anticipated to largely dissipate after five years. Importantly, there are no signs of inflation expectations becoming unmoored relative to the pre-pandemic period.

## Monetary Policy Amid High Uncertainty

As I said at the start of my remarks, the economy entered this year in a good place, but there is a high degree of uncertainty about what the future holds. So, what does this all mean for monetary policy?

At its meeting on Wednesday, the FOMC decided to leave the target range for the federal funds rate unchanged at 41/4 to 4-1/2 percent. In the accompanying statement, the Committee noted that uncertainty around the economic outlook has increased, and it is attentive to risks to both sides of its mandate. The Committee reaffirmed its strong commitment to supporting maximum employment and returning inflation to its 2 percent objective, and its policy decisions will be based on a careful assessment of the incoming data, the evolving outlook, and the balance of risks. 10

In addition, the Committee decided to slow the pace of reduction in its holdings of securities. The ongoing process of balance sheet reduction follows the principles and plans laid out in 2022. Last June, the Committee took a first step in slowing the pace of balance sheet reduction. That process has progressed very well, resulting in a reduction of over $2 trillion in our securities holdings so far. This week's decision to slow it further is a natural next step to smooth the transition from abundant reserves to a level that is somewhat above ample. This action has no implications for our intended stance of monetary policy and should not affect the size of our balance sheet over the medium term. 11 12

## The Economic Outlook

Turning to the U.S. economic outlook, I expect GDP growth this year to step down from last year's pace in part because of a slowdown in labor force growth due to lower immigration rates. But it's hard to know with any precision how the economy will evolve. Uncertainty is high, and there are many scenarios that could play out, depending on fiscal and trade policies and geopolitical and other developments. In the Summary of Economic Projections that the FOMC released this week, the central tendency of projections for GDP growth this year was between about 1-1/2 and 2 percent, and for inflation, between about 2-1/2 and 3 percent. Any of these outcomes-or even some others outside these ranges-seem completely plausible to me. 13

In addition, it is hard currently to assign probabilities to these scenarios. This is something economists refer to as Knightian uncertainty. In these circumstances, it will be important to take a holistic view in monitoring and assessing all available information. It is also fitting to take a risk management perspective in assessing the economic outlook, in evaluating the appropriate stance of monetary policy, and in making policy decisions.

## Conclusion

There is certain uncertainty in monetary policy. The current modestly restrictive stance of monetary policy is entirely appropriate given the solid labor market and inflation still running somewhat above our 2 percent goal. It also positions us well to adjust to changing circumstances that affect the achievement of our dual mandate goals.

Whatever the economy has in store for us, I am committed to supporting maximum employment and returning inflation to our 2 percent objective.

Hat tip to Alan Greenspan, who famously said 'Uncertainty is not just an important feature of the monetary policy landscape; it is the defining characteristic of that landscape.' Alan Greenspan, 'Monetary Policy under Uncertainty,' at a symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, August 29, 2003. 1

Based on the latest reading of the New York Fed's Heise-Pearce-Weber Tightness Index, the labor market is now about as tight as it was in in the first half of 2017, a period when wage growth and price inflation were low. Sebastian Heise, Jeremy Pearce, and Jacob P. Weber, 'A New Indicator of Labor Market Tightness for Predicting Wage Inflation,' Federal Reserve Bank of New York Liberty Street Economics , October 9, 2024; and Sebastian Heise, Jeremy Pearce, and Jacob P. Weber, 'Wage Growth and Labor Market Tightness,' Federal Reserve Bank of New York Staff Report Number 1128, October 2024. 2

Federal Reserve Bank of New York, 'Medium- and Longer-Term Inflation Expectations Unchanged; Consumers' Pessimism About Their Future Financial Situations Increases,' March 10, 2025. 3

- Martín Almuzara, Babur Kocaoglu, and Argia Sbordone, 'Is the Recent Inflationary Spike a Global Phenomenon?,' Federal Reserve Bank of New York Liberty Street Economics , May 16, 2024. 4
- Ozge Akinci, Martin Almuzara, Silvia Miranda-Agrippino, Ramya Nallamotu, Argia Sbordone, Greg Simitian, and William Zeng, 'Global Trends in U.S. Inflation Dynamics,' Federal Reserve Bank of New York Liberty Street Economics , February 27, 2025. 5
- Ozge Akinci, Martin Almuzara, Silvia Miranda-Agrippino, Ramya Nallamotu, Argia Sbordone, Greg Simitian, and William Zeng, 'Supply and Demand Drivers of Global Inflation Trends,' Federal Reserve Bank of New York Liberty Street Economics , February 27, 2025. 6
- Jaison R. Abel, Richard Deitz, and Ben Hyman, 'Firms' Inflation Expectations Have Picked Up,' Federal Reserve Bank of New York Liberty Street Economics , March 5, 2025. 7
- Federal Reserve Bank of New York, Survey of Consumer Expectations (February 2025). 8
- John C. Williams, 'Discussion of 'Monetary Policy Transmission to Real Activity'"", remarks at the 2025 U.S. Monetary Policy Forum, New York City, March 7, 2025. 9
- Board of Governors of the Federal Reserve System, Federal Reserve issues FOMC statement, March 19, 2025. 10
- Board of Governors of the Federal Reserve System, Principles for Reducing the Size of the Federal Reserve's Balance Sheet, January 26, 2022; and Board of Governors of the Federal Reserve System, Plans for Reducing the Size of the Federal Reserve's Balance Sheet, May 4, 2022. 11
- Board of Governors of the Federal Reserve System, Federal Reserve issues FOMC statement, May 1, 2024. 12

Board of Governors of the Federal Reserve System, Summary of Economic Projections, March 19, 2025. 13",John C Williams
https://www.bis.org/review/r250326f.htm,Gabriel Makhlouf: Opening remarks - launch of the Consumer Protection Code,"Opening remarks by Mr Gabriel Makhlouf, Governor of the Central Bank of Ireland, at the launch of the Consumer Protection Code, Dublin, 24 March 2025.",2025-03-24 00:00:00,"## Gabriel Makhlouf: Opening remarks - launch of the Consumer Protection Code

Opening remarks by Mr Gabriel Makhlouf, Governor of the Central Bank of Ireland, at the launch of the Consumer Protection Code, Dublin, 24 March 2025.

* * *

Good morning everyone,

I would like to welcome you all to the Central Bank today.

Welcome in particular to Robert Troy TD, Minister of State, as well as Brian McHugh, Chair of the Competition and Consumer Protection Commission (CCPC), and Liam Sloyan the Financial Services and Pensions Ombudsman (FSPO).

We are also joined by stakeholders from across the financial system who, over the last three years, have supported and informed the development of the revised Consumer Protection Code which we are publishing today. Thank you all for coming and thank you for your commitment to dialogue and engagement to inform the new Code. You have made an important contribution to the new Code.

Before turning to the Code itself, let me say a few words about consumer protection more generally and our approach here in the Central Bank of Ireland.

Our mission is to serve the public interest by maintaining monetary and financial stability while ensuring that the financial system operates in the best interests of consumers and the wider economy.  We are guided by the objective set out in our founding legislation which stated that the Central Bank's ""constant and predominant aim shall be the welfare of the people as a whole"".  Everything that we do is aimed at serving the public interest and protecting consumers of financial services, whether it is through the consumer protection code, the mortgage measures, our monetary policy actions, our oversight of the payments system, or our supervision of individual firms.

Over the last decade, we have, along with the CCPC and FSPO in particular, played a significant role in strengthening the consumer protection framework in Ireland, to ensure that the system and protections are in line with global standards.  I was pleased with the endorsement we received from the OECD just before Christmas.  But while this strengthening of the framework has improved supports and outcomes for consumers, we also recognise the importance of ensuring that the framework - like all frameworks continues to adapt and evolve so that it remains fit for purpose and future-ready.

The challenges and risks facing us are clear. The global economy is fragmenting and countries across the globe are undergoing significant economic transitions - in demography, in technology, in climate - while also experiencing a period of unprecedented innovation.  The ways in which we as consumers buy, use and engage with financial services are changing significantly.  These changes reflect new

preferences, provide new opportunities and meet different needs on the part of individuals, households and businesses.  But they also create new challenges and new risks in the financial sector that we supervise and for the consumers we protect.

In the face of this changing ecosystem, we need to adapt, evolve and transform.  In fact all of us - firms, regulators, advocates, media - need to work together to secure customers' interests as they seek to navigate their financial affairs and to plan for their financial futures.

As set out in our Strategy, the Central Bank recognises that we must keep up with the changing world if we are to continue to deliver on our mandate.  As both a regulator and supervisor we are working to ensure that our frameworks are ready to respond to the changes that people are experiencing in their daily lives, and that we are connected to and understand - the needs of the individuals, households and businesses that make up the real economy which ultimately supports the welfare of the people as a whole.  For us it means being focused on innovation, building our data capability, modernising our regulations, evolving to adopt new mandates and transforming our supervisory framework.

Our new supervisory approach came into effect in January this year. It remains outcomes-focused and risk-based, building on our existing principles and practices.  The changes enable a more integrated approach to the different aspects of our mandate but remain focused on achieving four safeguarding outcomes: the protection of consumer and investor interests, the integrity of the financial system, the safety and soundness of firms, and the stability of the financial system.  Importantly, our new approach places consumer protection at the heart of day-to-day supervision. It positions us better as an organisation to meet our objectives to ensure consumers of financial services are protected in a changing financial landscape.

## Consumer Protection Code

Let me turn to the revised Consumer Protection Code itself.  It is built on the strong foundations of its predecessor which is the cornerstone of our - and the wider national - consumer protection framework for financial services. Throughout the course of the morning, you will hear further detail on the measures and protections that the updated Code will introduce. And you will also be able to read about them in the suite of materials that we are publishing today.

At its core, financial regulation is about supporting positive outcomes, protecting consumers and investors, and, ultimately, contributing to the economic well-being of the community as a whole. In reviewing the Code we have focused on modernising the regulatory framework to reflect the provision of financial services in a digital world. Consumers will benefit from a package of protections that better reflect how they are accessing financial services in the modern world.  Regulated firms will benefit from an integrated regulatory format, and a clearer articulation of their Code obligations, complementing the work they are already doing.

One of our key objectives in revising the Code has been to put customers at the heart of the culture, strategy and business models of financial services firms. This is addressed through a new Securing Customers' Interests Standard, supported by

detailed guidance which describes what firms need to consider, the actions they need to take, and the mind-set they should have towards their customers.  We want to see a maturing of firms' understanding and engagement with their consumer protection obligations where they take ownership for meeting these obligations, deliver positive outcomes and are proactive in addressing any issues that arise.

Another important aspect of our review has been on protecting consumers in vulnerable circumstances, as they are more likely to suffer detriment or harm.  The new Code sets out an updated definition of vulnerability along with enhanced requirements which reflect an improved understanding of its dynamic nature, recognising that people can move in and out of circumstances that make them vulnerable.  We want firms need to understand the broad nature of vulnerability, and ensure that their culture, policies and processes take account of the needs of consumers in vulnerable circumstances.

The revised Consumer Protection Code comes into effect 12 months from today.  We will continue to engage with industry and consumer representatives in relation to its implementation over the next year.  We want to see the new Code contributing to building trust in the financial system and for consumers to have the confidence that it will work to deliver positive outcomes for them.

In my view implementing the revised Code successfully will be more likely if it is seen as a collective effort on the part of all participants in the financial system:

- firms must continue to put the customer at the heart of their culture, strategy, business model and decision-making.  Customer interests should not be the afterthought to finalising a strategy. Consideration of the impacts on customers and customer outcomes needs to be a key aspect of the strategy development and decision-making process itself;
- consumer representative organisations play an important role in supporting and advising consumers in their interactions with financial services and I'm sure they will continue to do this as we work through implementation of the revised Code;
- media organisations of course play an important role in informing all the participants in the system;
- agencies such as the CCPC, FSPO and others will continue to play their
- important roles as key players in the national consumer protection framework; and
- the Central Bank we will remain focused on ensuring that the financial system operates in the best interests of consumers and the wider economy, as well as playing our part in communicating with consumers to raise their awareness of the revised Code.

Adopting a whole-of-system approach will support effective implementation of the revised Code and ensure the protection of consumer and investor interests in their interactions with a rapidly-changing financial system.

Thank you once again for joining us today.",Gabriel Makhlouf
https://www.bis.org/review/r250326e.htm,Sanjay Malhotra: Address - Private Sector Collaborative Forum of the Financial Action Task Force,"Address by Mr Sanjay Malhotra, Governor of the Reserve Bank of India, at the Private Sector Collaborative Forum of the Financial Action Task Force (FATF), Mumbai, 26 March 2025.",2025-03-26 00:00:00,"## Sanjay Malhotra: Address - Private Sector Collaborative Forum of the Financial Action Task Force

Address by Mr Sanjay Malhotra, Governor of the Reserve Bank of India, at the Private Sector Collaborative Forum of the Financial Action Task Force (FATF), Mumbai, 26 March 2025.

* * *

It is a pleasure to be here at the Private Sector Collaborative Forum (PSCF) 2025 of the Financial Action Task Force. I am happy to note that this is the first time that the forum is being held in India. I thank FATF for giving us this opportunity. In my previous role as the Secretary in the Department of Revenue, Ministry of Finance, Government of India, I had the opportunity of being closely associated with the FATF during our mutual evaluation last year.

## About FATF

Financial Action Task Force (FATF), the standard setting body for illicit financing has come a long way since its establishment in 1989. Over the years, it has evolved from an organisation with only 16 members to a global forum with 40 members. Through the FATF-styled regional bodies 1 , its reach is even wider. The standards developed by FATF are used by over 200 jurisdictions to combat money laundering (ML), terrorism financing (TF) and proliferation financing. The implementation of the standards has played an important role in strengthening the global financial system and making the world a safer place.

## India's Mutual Evaluation by FATF

India accords immense importance to Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT). Last year, India underwent the mutual evaluation by the FATF. India was placed in the 'regular follow-up' category, a distinction shared by only a few other G20 countries 2 . This is a recognition of our effective AML and CFT framework. It demonstrates our commitment to AML and CFT. This is a result of many years of building and continuously improving and strengthening the financial system of our country.

This was possible due to the collaborative efforts of all stakeholders, led by the Government of India including financial entities and designated non-financial businesses and professions in the private and public sector, regulators, and the state governments. The private sector plays a vital role in keeping the financial systems secure. Their role in implementing due diligence procedures, conducting robust risk assessments, monitoring transactions, and reporting suspicious activities is critical for preventing the abuse of the financial system. They identify suspicious activities and help government agencies in destroying illicit financial networks.

Strong public-private partnerships form the bedrock for safeguarding the integrity of the financial system. In India, we recognize the importance of close cooperation between public and private sector stakeholders in achieving these goals. Reserve Bank of India,

as the regulator and supervisor of a large segment of the financial system in India has diligently and consistently worked towards building and ensuring implementation of a strong AML and CFT framework in this segment of the financial system, in line with FATF recommendations. The Reserve Bank has taken several initiatives to enhance cooperation and coordination with various stakeholders. Similarly, the Financial Intelligence Unit (FIU)-India has also set up FPAC 3 , a public-private cooperation forum for facilitating closer interaction and collaboration. It has also supported the setting up of ARIFAC 4   - a cross sectoral forum for the private sector reporting entities to collaborate among themselves.

It is a result of these collaborative efforts that we have been able to build and demonstrate a robust and resilient AML and CFT framework. I compliment all the stakeholders, especially, the regulated entities in the financial sector as well as the designated non-financial businesses and professions for the successful mutual evaluation.

However, as all of you are aware, the threats from money laundering and terror financing to the national and global financial systems are continuously evolving and becoming more sophisticated. This is primarily due to technological advancements. In order to effectively counter these threats, we need to continue the close cooperation among various stakeholders - government agencies, financial entities in both the public and private sectors, civil society, and others.

The mutual evaluation process was rigorous and detailed. While providing us with valuable insights into our strengths, it has highlighted some areas of improvement in our AML-CFT framework. We are determined to further strengthen our financial system to deter and combat illicit financial activities taking into consideration the recommendations made during the evaluation. We will continue to strive for continuous improvement in this regard.

## Some thoughts on the Agenda for PSCF 2025

I am told that yesterday's sessions were very engaging and produced lively discussions. Looking at the agenda for today and tomorrow, I am confident that the deliberations on contemporary topics such as evolving AML-CFT landscape, financial inclusion &amp; humanitarian channels, risk-based approach to supervision, digitalization &amp; information sharing, beneficial ownership and countering of proliferation financing, will also be exciting. Let me outline some of my thoughts for the forum on these areas.

First, while we all continue to make our financial systems safe and secure against money laundering and terror financing, we as policy makers need to be mindful that our measures are not over-zealous and do not stifle legitimate activities and investments. You would appreciate that multiple laws and rules, each with their own level of granularity cast a high level of burden of compliance on the regulated financial service providers. This is relevant in the context of AML-CFT too. Therefore, we need to have laws and regulations which, with surgical precision, target only the illegitimate and illicit, rather than use them as blunt tools which unintentionally hurt even the honest.

Similarly, even while implementing the legal framework and regulations, we need to keep in mind the impact on persons and businesses. Risk-based approach is

recommended in this regard. But let us keep in mind that this is only a step forward in reducing compliance burden. Let us appreciate that it is not the ultimate solution, as any risk-based approach is not perfect; it would have false positives and false negatives. We need to continuously refine and improve our risk assessment models to make them robust.

To make these improvements, we need to improve the quality of our data and harness emerging technologies. This will help improve screening of transactions and detection of suspicious activities thereby reducing false positives and false negatives. Considering the evolving landscape in the area of money laundering resulting from changing customer behaviour and evolving products and services, we need to continuously augment AML risk assessment framework and make appropriate system enhancements on a regular basis after assessing the impact of ML and other risks. The focus has to also be on understanding the latest trends and developments in the financial world that can be exploited by criminals and accordingly develop tools and enabling frameworks that will allow us to detect suspicious transactions and activities early and take pre-emptive action. With the adoption of new technological tools and models, I am sure that AML-CFT risk assessments can be further fine-tuned. I would urge you all to discuss and share best practices in identification, mitigation and supervision of AML-CFT risks. This will not only help to reduce compliance burden on the Regulated Entities but also result in optimal allocation of supervisory resources.

While India has made remarkable progress in financial inclusion, we need to ensure that we continue to widen and deepen it. The discussions on FATF standards to promote financial inclusion need to find answers to the challenge of aligning financial inclusion and financial integrity, especially for the developing economies. It must be ensured that regulations do not create unintended barriers to financial inclusion. We need to be mindful of customer rights and convenience while fulfilling the due diligence requirements. I am happy to note that the amendments to Recommendation 1 and its interpretive note under the Mexican presidency intend to foster and promote financial inclusion without compromising on financial integrity. Similar approach is needed to extend access of financial channels for supporting humanitarian aid.

In recent years, digitalisation has been increasingly applied to customer onboarding and customer due diligence (CDD) processes. India has made huge strides in this regard too. The digital KYC and video KYC are shining examples of this. The Central KYC Records Registry (CKYCR) with more than one billion records is another example, which has the potential of ushering in a new era of customer onboarding by making it easier and seamless not only for customers but also for regulated entities to perform customer identification and due diligence. I am told there is a separate session to deliberate on the state of play of technical solutions in customer due diligence area. The discussions could be helpful in further enhancing the capability and utility of CKYCR manifold.

Further, during the process of CDD, reporting entities collect a large amount of data from the customers. Moreover, there are requirements of sharing of information with Financial Intelligence Units, law enforcement agencies and data registries leading to concerns regarding data protection and sharing of information without consent. India

has recently enacted a law for Digital Personal Data Protection. Exchange of experiences from different jurisdictions will help us in better implementing the law in our country.

Another important area which needs discussion is the travel rule. In today's world, fast payment systems are revolutionizing financial access and deepening financial inclusion. Developing countries like India have made huge progress in making digital payments accessible, affordable, and convenient. While card networks have helped developed economies in improving payment systems, fast payment systems have assisted Emerging Market and Developing Economies (EMDEs) leapfrog in this area. We have also enabled cross border payments using fast payment systems with a few countries. We will continue to work towards fulfilling our commitment to the effective implementation of the next phase of G20 roadmap towards inclusive cross-border payments by 2027. In this context, the ongoing discussions on FATF Recommendation 16 (R.16), known as the travel rule, assume importance. To meet the G20 objective of making cross-border payments faster, cheaper, more transparent and more inclusive, while maintaining their safety and security, it would be desirable to make the travel rule technology-neutral.

Lastly, discussions regarding combating proliferation financing and sanctions evasion need to answer questions related to identification of products and services which are most vulnerable to exploitation and the mitigation of the risks related to such products. This forum can discuss the best practices as well as challenges in this regard.

## Conclusion

To conclude, I would like to stress that through our collaborative efforts, we can safeguard the trust that underpins the global financial framework. Together, let us continue to collaborate and innovate in building a financial ecosystem that is not only safe and secure but also fast, convenient, accessible and affordable. Let us build financial systems that not only thwart the attempts of money laundering, terror financing and proliferation financing, but also support financial inclusion, encourage innovation, and facilitate economic growth. In the end, I wish the forum very fruitful and productive deliberations.

Thank you.

- 1 In addition to its own 40 members, FATF is also supported by nine FATF-styled regional bodies (FSRBs).
- 2 https://pib.gov.in/PressReleaseIframePage.aspx?PRID=2056773
- 3 FIU-India Initiative for Partnership in AML/CFT(FPAC), a public-private partnership (PPP) framework, was launched in January 2022, to facilitate collaboration between FIU-India and other stakeholders in the AML/CFT domain.
- 4 Alliance of Reporting Entities in India for AML/CFT (ARIFAC) is a private-private partnership initiative amongst reporting entities in India belonging to multiple sectors to

facilitate information sharing, development of knowledge products, training programmes and certifications.",Sanjay Malhotra
https://www.bis.org/review/r250326b.htm,John C Williams: Opening remarks - New York Fed Regional and Community Banking Conference,"Opening remarks by Mr John C Williams, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the 2025 New York Fed Regional and Community Banking Conference, organised by the Federal Reserve Bank of New York, New York City, 25 March 2025.",2025-03-25 00:00:00,"## John C Williams: Opening remarks - New York Fed Regional and Community Banking Conference

Opening remarks by Mr John C Williams, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the 2025 New York Fed Regional and Community Banking Conference, organised by the Federal Reserve Bank of New York, New York City, 25 March 2025.

* * *

## As prepared for delivery

Good morning, and welcome to the New York Fed.

We're so pleased to host you for today's event. Over the next few hours, we'll share perspectives on topics that are important to you as representatives of community and regional banks across the Federal Reserve's Second District.

If you've been here and heard similar remarks before, you may recall that this is the point where I offer a crucial piece of information. And that's the standard disclaimer that the views I express today are mine alone and do not necessarily reflect those of the Federal Open Market Committee or others in the Federal Reserve System.

The next crucial piece of information that I'll mention, on which I know you all agree, is that community and regional banks play a central role in this country's robust financial system and in the economic health of this region.

A critically important goal for the Federal Reserve is to maintain a safe and competitive banking system-and community and regional banks are a big part of that system.

To meet that objective, part of our core mission at the New York Fed is to supervise financial institutions of all sizes across the Second District. We evaluate the overall safety and soundness of banking organizations by assessing risk management, compliance with laws and regulation, operational resilience, and more. Our team here works closely with colleagues at the Board of Governors and other federal and state banking regulators to support this function.

While the building we are gathered in today is located in the heart of the financial district in Lower Manhattan, our jurisdiction stretches far beyond the five boroughs of New York City.

We supervise financial institutions from Buffalo to Plattsburgh . . . from Newark down to Asbury Park . . . from Stamford, Connecticut to the end of Long Island . . . from Puerto Rico to the U.S. Virgin Islands . . . and everywhere in between.

To help us carry out our responsibilities, my team and I regularly travel throughout the Second District to meet with leaders in government, business, education, community development, and the nonprofit sector. In fact, we've visited many of the locations I just mentioned.

On these trips, we see first-hand that big banks don't always have much presence in small cities. We hear directly from people about their banking opportunities and challenges. And we feel the vital role that community and regional banks play by enabling the flow of credit to individuals, households, and businesses that need it. Ultimately, these visits provide us with a clearer picture of economic conditions and the financial health of our region.

Understanding these conditions is critical. We recognize that what we do at the Federal Reserve-especially regarding monetary policy-affects banks and their customers in all sorts of ways.

Our connection to banks is not solely relegated to our supervisory responsibilities. We perform key functions to maintain the integrity of the U.S. payment and settlement system. This, of course, includes FedNow, the Fed's real-time payment network that went live in July 2023. FedNow allows for banks and credit unions of all sizes to offer instant payment services to their consumer and business customers, and more than 1,000 financial institutions are currently enrolled. 1

Our responsibilities are broad, and they are big. That's why we invest so heavily in our industry outreach efforts.

One way we do this is through convening various advisory groups, which operate on local and national levels. To take one example, the New York Fed's Community Depository Institutions Advisory Council is made up of representatives from commercial banks, thrift institutions, and credit unions in the Second District. 2

These forums provide us with insight into regional economic and financial conditions. In turn, we are able to share timely and relevant information and resources.

Today's meeting is another chance for us to connect and convene. Now, when households and businesses are experiencing heightened uncertainty about the economic outlook, our conversation is critically important. The agenda that we have put together will touch on many of these timely issues and topics. We've assembled a roster of excellent speakers and panelists to lead the discussions, many of whom are my esteemed colleagues. And we are keen to hear your views and perspectives in the Q&amp;A session a little later.

To that end, I'll now introduce the New York Fed's Director of Research, Kartik Athreya, who will share his views on the national economic outlook. Kartik has had a longstanding career at the Federal Reserve, and joined us in New York last year after serving for many years at the Richmond Fed. He's been a tremendous asset to our team, and I'm looking forward to his presentation.

Thank you.

1 FedNow Service, Seven lessons learned by FedNowfi Service participants , January 15, 2025.

2 Federal Reserve Bank of New York,  Community Depository Institutions Advisory Council, October 2024.",John C Williams
https://www.bis.org/review/r250326a.htm,"Adriana D Kugler: Latinos, entrepreneurs, and the US economy","Speech by Ms Adriana D Kugler, Member of the Board of Governors of the Federal Reserve System, at the 2025 US Hispanic Chamber of Commerce Legislative Summit, Washington DC, 25 March 2025.",2025-03-25 00:00:00,"## Adriana D Kugler: Latinos, entrepreneurs, and the US economy

Speech by Ms Adriana D Kugler, Member of the Board of Governors of the Federal Reserve System, at the 2025 US Hispanic Chamber of Commerce Legislative Summit, Washington DC, 25 March 2025.

* * *

Thank you, Ramiro, and thank you for the opportunity to speak with all of you today. 1 Welcome to Washington, D.C.! Bienvenidos a la capital! I hope you have a productive conference and an enjoyable visit. I am honored to speak with you today because I have long appreciated the efforts of the U.S. Hispanic Chamber of Commerce in supporting Hispanic-owned businesses, especially small businesses and entrepreneurs. It is also gratifying to speak to you today as the first Latin policymaker in the Federal Reserve's history.

The support and mentorship from my family and my communities, including many in the Hispanic community, have been foundational to my career. I am proud that I can bring my own perspective and background to how I view the economy and economic datajust as I value learning and hearing from others-because I know the decisions I make can affect the lives of all Americans. As a Fed Governor, I serve all Americans, and I strive to recognize the economic contributions that come from all corners of this country.

Today, I will talk about the entrepreneurial spirit that many Latinos embody and share with you the importance of Latinos to the whole of the U.S. economy. I will then provide my outlook for the U.S. economy.

## Entrepreneurial Spirit

Let me start by saying that I have a strong affinity for entrepreneurs and recognize that they are a driving force behind economic growth and job creation-which I know from the data, as I have spent most of my career as a labor economist and researcher. But I truly understand the crucial role they play in the economy because my grandparents and father were entrepreneurs. My maternal grandfather was a dairy farmer, and I still recall the effort and dedication I saw as a child while joining him as he went from store to store selling milk early in the morning-before starting his other job as mayor of the town. And my paternal grandparents owned an electronics shop, where they worked shoulder to shoulder. My grandpa ran the front end of the shop, and my grandma was in charge of the accounting and inventory. The lessons on the value of hard work and taking initiative have stayed with me throughout my career in academia and continue to now in my work as a policymaker. I have always brought an entrepreneurial spirit to everything I do, seeking to be proactive about identifying opportunities and pursuing new or better solutions to long-standing challenges.

And that is exactly what millions of Latino entrepreneurs do across the U.S. every day. There are roughly 5 million Latino-owned businesses that provide jobs to millions of other workers across the country. 2  And the number of entrepreneurs is growing fast. Between 2007 and 2022, there was a 57 percent increase in the number of Latin-owned businesses, and the number of employees on their collective payrolls grew 1.2 million.

As I have emphasized in my past speeches, the growth in new business formation has been critical in sustaining the productivity growth that we have experienced in recent years, which has allowed us to achieve an economic expansion while reducing inflation.

I see this growth as I travel around the country and meet with workers and business leaders. For example, I noted in a recent speech in Miami that South Florida is an area with a large and vibrant Latino community and is also one of the top regions for new business formation. 3

Other data are also consistent with an elevated level of entrepreneurship in our community. Latino adults who did not previously own a business created a new company at nearly twice the national rate in 2023. 4  And while the overall new entrepreneurship rate edged lower after a pandemic-era jump, the rate for Latino entrepreneurs continued to rise to a new record high in 2023. This growth matters to the U.S. economy. Entrepreneurs improve the way of doing business and generate new jobs and wealth. They often create new processes, products, markets, and services that solve problems and improve the quality of life for many. Entrepreneurs also bring fresh perspectives and contribute to economic progress. For example, a recent survey by the Stanford Latino Entrepreneurship Initiative shows that Latino-owned businesses outperform others in the adoption of artificial intelligence. 5

## Latinos in the Economy

Beyond starting businesses and creating jobs, Latinos are a large and growing part of the economy-as consumers, workers, and investors. Collectively, Latino households generate trillions of dollars in economic activity each year in the U.S. There are 34 million Latino workers in the U.S. labor force, and the median weekly earnings of Latinos working full time has doubled over the past 20 years, according to the Bureau of Labor Statistics. Those data points suggest that many Latino workers are moving into higher-wage, higher-productivity jobs. Overall, nearly one in every five Americans are of Latino heritage. In some states, such as Texas, that figure is closer to two in five. And given that the Latino population is growing, it is not surprising that Texas also led the country in job creation last year, adding 284,000 jobs to payrolls. 6   Across the U.S., the Latino labor force has grown 14 percent since the start of the COVID-19 pandemic, much faster than the about 4 percent growth for the total labor force.

Latinos tend to work or seek employment at high rates. The Latino labor force participation rate was 66.9 percent in February versus 62.4 percent for the population overall. In addition to filling jobs for employers and meeting consumer demand for goods and services, this labor force growth was a helpful counter to inflation at a time when the labor market was historically tight.

The growth in the Latino workforce contributed to the rebalancing of the U.S. labor market in recent years. The labor market has cooled from an overheated state to a stable position characterized by low unemployment and diminished wage pressures. Latino workers especially aided that rebalancing by taking positions that had been difficult for employers to fill. For example, early in the pandemic many Americans remodeled or expanded their homes, where they were suddenly spending much more time. And anyone in this room that undertook such a project in 2021 or 2022 likely

remembers how difficult it was to hire carpenters, plumbers, and other workers. Many skilled Latino workers filled that void. As of February, Latinos accounted for 35 percent of all construction workers, up from about 30 percent five years ago. Similarly, Latino workers have outsized representation in several other fields in which hiring has been challenging in recent years. Over one-third of warehouse and storage workers and onefourth of couriers-both important to the e-commerce industry-are Latino. Latinos also represent a large share of critical childcare, automotive repair, and building maintenance positions-the people that make it possible for everyone to get to work and do their jobs well.

Moving forward, the young Latino population will continue to contribute to the labor force, as 1 million Latinos every year will turn 18 over the next two decades. And the educational attainment growth of Latinos is three times faster than that of other groups. Already one-fourth of the nation's K-12 students are Latino-thus on track to soon contribute to the skilled labor force.

## Economic Outlook

Of course, I am always studying how the economy is playing out for Americans of all backgrounds. As such, I would like to share with you my economic outlook before I conclude.

The U.S. economy has been on solid footing in recent years. Consistent with that assessment, real gross domestic product grew 2.5 percent last year. The most recent data on economic activity in the early part of this year have shown some signs of softness: Retail sales plunged more than 1 percent in January. However, that slowing was not entirely unexpected after the strong showing in December, some bad weather earlier this year, and the difficulties in the seasonal adjustment of the data. Moreover, growth in retail sales moved back up into positive territory, increasing 0.2 percent in February.

The labor market appears to be stable through February. U.S. employers added 151,000 jobs in February and 125,000 in January. The pace of hiring during the first two months of the year is a slowdown compared with the strong gains in November and December, but, again, that could reflect weather disruptions and seasonal adjustment challenges. Over the past six months, employers added a solid average of 190,000 jobs a month. The unemployment rate-4.1 percent last month-is low and has remained near its current level since last summer.

Turning to inflation, I have been keenly aware that price increases have been painful for American families, and I have supported policies intended to bring inflation sustainably back to our 2 percent target. This effort has paid dividends. Inflation has come down a long way from its peak of more than 7 percent in June 2022. Based on the consumer price index and producer price index data for February, it is estimated that the 12-month change in the personal consumption expenditures (PCE) price index was 2.5 percent last month. That is welcome progress, but that progress has slowed since last summer. In certain subcategories there is evidence that inflation reaccelerated in recent months. Importantly, while goods inflation was negative in 2024-as was the norm before the pandemic-it has turned positive in recent months. This development is unhelpful because goods inflation has often kept a lid on total inflation and also affects inflation

expectations. In addition to the increase in prices already captured in official data, surveys show that consumers are expecting further increases in the near term. For instance, both short-run and long-run inflation expectations from the Michigan survey have climbed in recent months. According to comments from survey respondents, much of this uncertainty appears to be tied to trade policy. I am paying close attention to the acceleration of price increases and higher inflation expectations, especially given the recent bout of inflation in the past few years. Given the economy's overall solid position and the heightened level of uncertainty, I supported the Federal Open Market Committee's (FOMC) decision last week to maintain the policy rate at its current level. I see current policy as continuing to be restrictive and I judge that FOMC policy is well positioned. The committee can react to new developments by holding at the current rate for some time as we closely monitor incoming data and the cumulative effects of new policies. I remain committed to bringing inflation back down to our 2 percent goal while maintaining a solid labor market. As always, I will carefully assess the incoming data, the evolving outlook, and the balance of risks when considering the appropriate policy rate.

Thank you again for having me here.

- 1  The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.
- 2  See BÆrbara Gómez-Aguiæaga, George Foster, and Jerry I. Porras (2024), 2023 State a publication of the Stanford Latino Entrepreneurship , of Latino Entrepreneurship (PDF) Initiative (Palo Alto, Calif.: Stanford Graduate School of Business, in collaboration with the Latino Business Action Network, March).
- 3  See Adriana D. Kugler (2025), "" Entrepreneurship and Aggregate Productivity,"" speech delivered at the 2025 Miami Economic Forum, Economic Club of Miami, Miami, Florida, February 7.
- 4  See Robert W. Fairlie (2024), ""Indicators of Entrepreneurial Activity: 2023,"" working paper, January, http://dx.doi.org/10.2139/ssrn.4708111.
- 5  See Gómez-Aguiæaga, Foster, and Porras, in 2023 State of Latino Entrepreneurship, note 2.
- 6  See Bureau of Labor Statistics (2025), ""State Employment and Unemployment Summary,"" news release, March 17.",Adriana D Kugler
https://www.bis.org/review/r250325c.htm,Michael S Barr: Helping small businesses reach their potential,"Speech by Mr Michael S Barr, Vice Chair for Supervision of the Board of Governors of the Federal Reserve System, at the Aspen Institute, Washington DC, 24 March 2025.",2025-03-24 00:00:00,"For release on delivery 3:10 p.m. EDT March 24, 2025

Helping Small Businesses Reach Their Potential

Remarks by

Michael S. Barr

Member

Board of Governors of the Federal Reserve System at

The Aspen Institute

Washington, D.C.

March 24, 2025

Thank you for the opportunity to speak to you today. 1 The United States has an enviable entrepreneurial culture and a strong track record of building new companies.  Yet, new and small business owners often navigate significant challenges from establishment to growth.  These challenges typically include limitations in accessing capital, in developing robust business and professional networks for peer support and opportunities, and in building the comprehensive skills, resources, and social connections that contribute greatly to business resiliency and sustainability.  Women and minority entrepreneurs may face even greater obstacles.  While business formation is, of course, primarily a matter for the private sector, public policy can and should encourage increased rates of entrepreneurship and business formation-and the capital, networks, and skills essential for success for all business owners.

Today, I want to highlight the vital role that small businesses play in driving the U.S. economy, consider the challenges in accessing credit that some small business owners face, and offer some practical solutions to help small businesses thrive.

## Small Businesses and Their Role in the Economy

Small businesses are the heart of the U.S. economy.  They produce nearly half of the country's gross domestic product and employ just under half of all private sector workers. 2

Small businesses have created more than 60 percent of net new jobs since 1995, and business applications have remained consistently elevated at around 5 million annually since mid-2020. 3 In recent years, women-owned businesses and minority-owned businesses were two of the fastest-growing segments of businesses.  The number of small businesses owned by

1 The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.

2  U.S. Small Business Administration Office of Advocacy, 'Frequently Asked Questions About Small Business, 2024.' July 2024, https://advocacy.sba.gov/2024/07/23/frequently-asked-questions-about-small-business-2024. 3   Id.  See also Kennan Fikri and Daniel Newman, 'Business Applications Eked Out a New Record in 2023,' Economic Innovation Group, January 2024, https://eig.org/2023-business-formation.

minorities increased by almost 60 percent and the growth rate for women-owned businesses was not far behind at 50 percent during this time period. 4 We should all be encouraged by these statistics, as several studies suggest that improving business ownership and entrepreneurship across demographic groups would help grow our economy faster. 5

And from an individual perspective, entrepreneurship and small business ownership may offer meaningful economic advantages.  Research suggests that entrepreneurship often correlates with enhanced job satisfaction and improved economic mobility for business owners-though outcomes naturally vary based on multiple factors including market conditions, industry, and individual circumstances. 6

As we recognize the value of small businesses, it's also important to recognize that surviving as a small business is not easy.  About one in six new businesses fail during their first year and almost 50% fail by their fifth year. 7 When a small business struggles or fails, the repercussions often extend beyond the enterprise itself.  Entrepreneurs who have invested

4  See U.S. Census Bureau, 'Survey of Business Owners-Survey Results: 2012,' February 2016, https://www.census.gov/library/publications/2012/econ/2012-sbo.html; 'Annual Business Survey: 2022,' October 2023, https://www.census.gov/newsroom/press-releases/2023/annual-business-survey-employer-businesscharacteristics.html; 'Census Bureau Releases New Data on Minority-Owned, Veteran-Owned, and Women-Owned Businesses,' October 26, 2023, https://www.census.gov/newsroom/press-releases/2023/annual-business-surveyemployer-business-characteristics.html; and 'Nonemployer Statistics by Demographics: 2021,' https://www.census.gov/programs-surveys/abs/data/nesd.html.

5 McKinsey Institute for Economic Mobility, The Economic Impact of Closing the Racial Wealth Gap, August 13, 2019, https://www.mckinsey.com/industries/public-sector/our-insights/-the-economic-impact-of-closing-the-racialwealth-gap.  McKinsey Institute for Economic Mobility, The Economic State of Latinos in America: the American Dream Deferred , December 2021, https://www.mckinsey.com/featured-insights/sustainable-inclusive-growth/theeconomic-state-of-latinos-in-america-the-american-dream-deferred. Andre M. Perry and Carl Romer, 'To Expand the Economy, Invest in Black Businesses,' The Brookings Institution. December 31, 2020,

https://www.brookings.edu/articles/to-expand-the-economy-invest-in-black-businesses.

Wells Fargo, '2025 Impact of Women-Owned Businesses,'

https://www.wippeducationinstitute.org/\_files/ugd/2f8f8e\_4330c836da414d2ea7c6ea93b80bd6a4.pdf.

6 See, e.g., Levine, R., &amp; Rubinstein, Y. (2022). 'Smart and illicit: Who becomes an entrepreneur and do they earn more?' Quarterly Journal of Economics, 137(1), 191-241; JPMorganChase &amp; Co and Gallup. Entrepreneurial Insights: Owning and Employing as a Pathway to Wealth and Well Being. April 2024, https://news.gallup.com/poll/643268/employing-others-linked-wealth-wellbeing.aspx.

7 US Bureau of Labor Statistics. Survival of Private Sector Establishments by Opening Year, bls.gov/bdm/us\_age\_naics\_00\_table7.txt.

personal savings and assets in their ventures may face significant financial strain, creating ripple effects that impact their families' stability as well as the broader economic health of their communities.

In light of these dynamics, it is essential to understand the fundamental challenges that small businesses face and develop targeted tools and policies that can effectively support entrepreneurs as they start and scale their businesses.  Today, let me focus on credit access and the need for more transparency in lending terms.

## Access to Credit for Small Businesses

Many small businesses need credit to launch and grow their business.  Small businesses access financing from diverse sources, including banks of all sizes, credit unions, online lenders, and other nonbank financing companies.  Despite this range of sources, the Federal Reserve's Small Business Credit Survey (SBCS) identified credit availability as a challenge faced by over a quarter of small businesses. 8 In addition, many small businesses face problems with the credit they do obtain.

While access to credit poses challenges for many small businesses, these hurdles can be even more pronounced for women and minority business owners.  Research consistently shows that women-owned businesses typically start with smaller amounts of initial capital compared to other firms, even when accounting for factors like education, experience, credit scores, and business characteristics such as industry and growth potential. 9 Furthermore, women- and

8  '2024 Report on Employer Firms: Findings from the 2023 Small Business Credit Survey,' Small Business Credit Survey , Federal Reserve Banks, March 2024,

https://www.fedsmallbusiness.org//media/project/clevelandfedtenant/fsbsite/reports/2024/2024-report-on-employerfirms.pdf.  Other financial challenges include rising costs of goods, services, and/or wages; paying operating expenses; uneven cash flow; weak sales; and making payments on outstanding debt.

9  U.S. Department of Commerce, 'Women Owned Business in the 21st Century,' October 2010,

https://www.commerce.gov/sites/default/files/migrated/reports/women-owned-businesses.pdf. This report found that

minority-owned businesses often encounter distinct obstacles when seeking financing.  Minority business owners often have lower credit scores compared to non-minority business owners, which can lead to lower approval rates for loans. 10

Banks, nonbanks, and online lenders have the potential to fill these financing needs.  But to be effective, they need to understand consumer preferences and behavior to provide credit products that meet these needs in a safe and fair way.

## Addressing the Need for Financial Transparency

A significant challenge facing small businesses is the absence of policies providing essential tools and protection for small business borrowers.  Despite the fact that many small businesses function more like households than Fortune 500 companies, they generally fall outside regulatory disclosure requirements intended to ensure transparency in pricing, facilitate comparison shopping, and protect the financial interest of borrowers.

Consider the Truth in Lending Act (TILA), implemented in Regulation Z, which does not extend protection to small business borrowers. 11 This exclusion stems partly from the assumption that small business owners possess financial sophistication or can access professional assistance when needed.  This regulatory gap matters because business financing offers may

women start with less capital than men and are less likely to take on additional debt to expand their businesses. They

are more likely than men to indicate that they do not need any financing to start their businesses. Susan Coleman and Alicia Robb, 'A Comparison of New Firm Financing by Gender: Evidence from the Kauffman Firm Survey Data,' May 5, 2009, https://link.springer.com/article/10.1007/s11187-009-9205-7. This report found that, consistent with previous studies, women start their businesses with significantly lower levels of financial capital than men. Findings also reveal that women rely heavily on personal rather than external sources of debt and equity for both start-up capital and follow-on investments.

10  Fairlie, Robert, Alicia Robb, and David T. Robinson. 'Black and White: Access to Capital Among MinorityOwned Startups.' NBER Working Paper No. 28154. November 2020. https://www.nber.org/system/files/working\_papers/w28154/w28154.pdf.

11 While Regulation Z sets forth requirements for consumer credit advertising - and includes provisions to state charges as an Annual Percentage Rate (APR) and, among other things, full repayment terms when referencing payments, and certain other credit terms that may apply - Regulation Z does not apply to business credit. Because of this, lenders offering small business credit and lending products, often have more flexibility when it comes to disclosures of their products' costs and features than do lenders offering credit products for personal or household use.

present pricing structures that differ substantially from the standardized disclosures that small business owners are accustomed to seeing on consumer credit disclosures.

Research from focus groups conducted by the Federal Reserve Board and the Federal Reserve Bank of Cleveland revealed that many small business owners struggle with understanding the specialized terminology used by certain nonbank lenders. 12 For instance, instead of providing familiar metrics like an Annual Percentage Rate (APR) or an interest rate, some nonbank providers present a factor rate-a fundamentally different metric that cannot be directly compared to an APR or interest rate.  The research identified a lender's website that advertised a 'factor rate of 1.15' which translated to an undisclosed estimated APR of approximately 70 percent.  Further complicating matters, some lenders may disclose an interest rate without including an APR, meaning that various fees and additional costs may not be reflected in the stated rate that borrowers often use to evaluate their financing options.

While complexity sometimes serves a business purpose, in many cases, it obfuscates the costs and can lead to poor financial decisions by small business owners.  More broadly, product design by banks and nonbanks should help to counter, not lean into, biases that can lead to poor financial decision-making.  For instance, present bias describes our natural tendency to prioritize immediate benefits over long-term considerations.  This might lead business owners to focus more on quick access to funds or low initial payments rather than evaluating the complete longterm cost structure.  Similarly, status quo bias suggests that once a small business borrower establishes a lending relationship, they may be less inclined to explore alternatives, even when more favorable options become available.  The perceived complexity or uncertainty of

12  Barbara Lipman and Ann Marie Weirsch, 'Alternative Lending through the Eyes of 'Mom-and-Pop' SmallBusiness Owners' (2016), https://www.clevelandfed.org/people/profiles/w/wiersch-ann-marie/sr-20150825alternative-lending-through-the-eyes-of-mom-and-pop-small-business-owners.

refinancing or switching lenders can reinforce this tendency to maintain existing arrangements. Understanding psychological factors and cognitive biases can help small business borrowers make more informed financial decisions by recognizing how the presentation of lending terms might affect their evaluation process.

In light of these realities, banks, small business advocates, and industry stakeholders should support policies that help small businesses better understand risks, and to drive the market towards products that are designed to overcome, not exacerbate, these problems.  Potential policies would include enhancing transparency in loan terms, thus enabling business owners to make more informed financial decisions.  Additional borrower safeguards worth consideration include ensuring that loan products are sustainably repayable and don't lead businesses into costly reborrowing cycles, as well as ensuring fair treatment both during the loan origination process and throughout any restructuring efforts or collection proceedings.

Some states are moving forward with policies that protect small businesses.  California and New York, for example, now require many lenders to offer clear disclosure of the APR and estimated monthly payments. 13 This requirement gives borrowers the opportunity to understand the financing being offered in a clear, concise manner, enabling informed comparisons across different product options.  Several other states passed versions of disclosure laws for small business financing transactions, with some variability over the range of financing transactions covered and the types of disclosures required. 14

13 California Code of Regulations, Title 10, Chapter 3, Subchapter 3, https://dfpi.ca.gov/wpcontent/uploads/sites/337/2022/06/PRO-01-18-Commercial-Financing-Disclosure-Regulation-Final-Text.pdf; New York State Department of Financial Services, 23 NYCRR 600,

https://www.dfs.ny.gov/system/files/documents/2023/01/rf\_finservices\_23nycrr600\_text.pdf.

14 See, e.g., Virginia, Utah, and Florida.  For more details on the regulations across states, see https://onyxiq.com/commercial-financing-disclosure-laws/.

## The Role of Community-Based Programs

I want to recognize the important role that community-based programs can play in supporting entrepreneurs.  These programs provide accessible tools, technical assistance, and educational resources that help entrepreneurs reach their full potential.  Local organizations such as small business development centers, educational institutions, and community development financial institutions are connecting small business owners with personalized consulting, technical assistance and education, and entrepreneurial skills development.

The most successful of these types of programs deliver practical technical assistance and education while fostering collaboration within local entrepreneurial ecosystems.  These include university- or community college-based initiatives connecting business owners with volunteer consultants, resource hubs offering workshops, or rural development centers providing specialized support.  By emphasizing both skill-building and community connections, these programs help small businesses and entrepreneurs overcome barriers to success.

## Conclusion

In conclusion, small businesses are engines of innovation, job creation, and economic mobility in our society.  Great work has been done to understand what it takes to help small businesses thrive and grow, including access to sound and affordable credit, skills-building, and business networks.  I encourage us to build on this work by enhancing financial transparency, implementing supportive policies, and leveraging community-based programs to enhance business opportunities.  These collective efforts to support entrepreneurs and small business owners not only benefit individual enterprises but also contribute to a healthy and dynamic economy that works for all.",Michael S Barr
https://www.bis.org/review/r250324m.htm,"Richard Byles: Lessons from a small, open, developing, inflation targeter","Speech by Mr Richard Byles, Governor of the Bank of Jamaica, at the Macroeconometric Caribbean Conference ""Managing the post-COVID inflation shock"", Kingston, 20 March 2025.",2025-03-20 00:00:00,"## Richard Byles: Lessons from a small, open, developing, inflation targeter

Speech by Mr Richard Byles, Governor of the Bank of Jamaica, at the Macroeconometric Caribbean Conference ""Managing the post-COVID inflation shock"", Kingston, 20 March 2025.

* * *

## Presentation accompanying the speech

## Introduction

## SLIDE 1

Good [afternoon]. Thank you for inviting me to participate in this forum. I will speak on Jamaica's experience in managing the post-COVID-19/Russia-Ukraine inflation shocks. This experience may be a useful case study among Latin America and Caribbean (LAC) economies and could offer some insights for our ongoing enquiry into appropriate macroeconomic policy making.

## SLIDE 2

My basic conclusion is that, in response to the twin shocks, Jamaica performed well relative to other LAC countries. In the context of appropriate fiscal and monetary policy responses, Jamaica's GDP rebounded to its pre-pandemic level at a speed consistent with the recovery of its peers. Inflation spiked but returned to target in short order while inflation expectations, although rising temporarily, returned fairly quickly to normal levels. The exchange rate remained relatively stable and our foreign reserves increased.

## SLIDE 3

Against this background, my presentation will briefly describe the main impacts of the global shocks on the Jamaican economy and our policy responses. I will then outline the evolution of Jamaica's macroeconomic data after the shocks and in the context of our policy responses, before briefly outlining the key lessons learnt.

SLIDE 4

## Jamaica's Economic Context

Let me start by providing you with a brief tour of the Jamaican economy. While large relative to other Caribbean states, Jamaica is a geographically small country. We also have a very small population of 2.8 million with a per-capita GDP of approximately US$6,800.

## SLIDE 5

While Jamaica boasts a somewhat diversified economy comprising tourism, agriculture and light manufacturing, the Island is very open and is heavily reliant on tourism. The contribution of tourism to Jamaica's economic activity is somewhat less than that for other service-based states in the Caribbean, but the sector is a major source of income for the economy when compared with the LAC bloc as a whole.

## SLIDE 6

Remittances require a special note as these flows play an outsized role in the Jamaican economy. As a share of GDP, remittances to Jamaica is the 3rd highest in the LAC region and, by the same measure, is the 10th largest of 236 countries. You can therefore appreciate any shocks to the global economy that affects remittances is expected to have a large impact on consumption and welfare, Jamaica's balance of payments, growth, fiscal dynamics and inflation.

## SLIDE 7

A survey of the economy prior to the pandemic, highlights that macroeconomic conditions in Jamaica were strong. In 2019, the International Monetary Fund (IMF) assessed the country as having ""entrenched"" stability-"". The central government's debtto-GDP ratio at end FY2019/20 was close to 95 per cent, coming from a peak of 146 per cent in FY2012/13. To achieve this deleveraging, the fiscal authorities had maintained primary surpluses above 7.0 per cent for 7 consecutive years.

By 2019, inflation had also trended downward towards the lower end of the central bank's 4 to 6 per cent target range. Gross reserves were healthy and above the ARA metric. Jamaica's external accounts had also improved significantly, with an average current account-to-GDP deficit of -1.9 per cent between 2015 and 2019 relative to an average of -9.6 per cent between 2010 and 2014.

## SLIDE 8

## The Twin Shocks: The Pandemic/War

In March 2020, Jamaica confirmed its first case of COVID-19. Like many other countries, our initial reactions included closing our borders and enforcing work-fromhome orders, which effectively halted tourism and reshaped workplace practices for almost two years. These measures, however, proved to be effective in controlling outbreaks.

With the phased easing of containment measures, a global recovery gained momentum in late 2021. This led to a combination of resurging demand and constrained supply conditions, triggering inflation pressures.

As we all know, the Russia-Ukrainian conflict, which began in February 2022, further exacerbated supply chains disruptions, resulting in yet higher international commodity prices and further inflationary pressures.

## SLIDE 9

The curtailment in economic activity during the pandemic resulted in a contraction in GDP for Jamaica of 10.0 per cent for 2020. This was somewhat lower than our Caribbean counterparts, and broadly consistent with the average contraction recorded for the LAC. Not surprisingly, the significant fall in Jamaica's output was led by a considerable fallout in the Tourism sector and its related industries. A significant decline of 65.0 per cent tourism-related foreign exchange earnings also adversely affected the stability of Jamaica's foreign exchange market.

## SLIDE 10

It is in this context that depreciation in the exchange rate accelerated in 2020. Nevertheless, of the countries that have floating exchange rate regimes in the LAC, only Costa Rica and Peru fared better than Jamaica by this metric for that year. As we will recall, the Brazilian currency, an outlier benchmark, lost more than 30% of its value during the year. The relative performance of the Jamaican currency reflected the impact of our policy response, but I will return to this issue later.

## SLIDE 11

Turning to the CPI, for the first time in several years, inflation in 2021 reached doubledigit levels in the context of the twin shocks. The combination of sharper exchange rate depreciation, rising commodity prices and increases in inflation expectations, among other things, contributed to accelerated inflationary pressures. Inflation initially remained within BOJ's target range in 2020 but exceeded it between March 2021 and March 2024.

Although the acceleration in inflation was substantial, Jamaica fared better than our regional counterparts, regardless of whether or not they practised inflation-targeting.

## SLIDE 12

Despite the adverse impacts on key macro-economic variables, Jamaica's external accounts were, surprisingly, not severely impacted. For 2020, the current account recorded a deficit of - 1.1 per cent of GDP, an improvement from the -1.9 per cent deficit the previous year. This was due mainly to a fall in imports (given the decline in economic activity) and a stronger than expected rise in remittance inflows that offset the fall in tourism receipts. Remittance inflows defied expectations and increased by almost 30.0 per cent for the year. This phenomenon has not been fully explained but, to the extent that it was also evident in other countries such Mexico, Guatemala and El Salvador, it points to the impact the stimulus packages in the USA and other advanced economies, and less to factors such as changes in the behaviour of the remitters to Jamaica.

## SLIDE 13

Finally, although the financial sector faced challenges in 2020, the system remained sound and liquid. Admittedly, there was some deterioration in the sector's profitability and asset quality as a result of the pandemic. Credit to households also declined sharply. Despite this, the capital adequacy ratios of the system remained well above regulatory requirements throughout the period, reflecting the sector's resilience and the impact of solid macro-prudential oversight and intervention.

## SLIDE 14

Let me turn to discussing our policy interventions.

## Policy Response

SLIDE 15 Fiscal Policy

While demonstrating a strong commitment to fiscal discipline, Jamaica's fiscal response was measured, temporary and targeted towards supporting the most affected segments of the population. Stimulus packages were introduced by the Government throughout the pandemic years, which cumulatively amounted to 1.3 per cent of GDP. [These included one-off monetary transfers to households and firms, one-off salary compensation to workers, targeted household subsidies and reduction or deferral of selected taxes.]

Notably, Jamaica's stimulus package was more restrained than those of its Caribbean peers and below the regional average.

It also important to note that the country's public debt reduction path, which, before the crises, aimed to lower debt to 60.0 per cent of GDP or less by the end of FY2025/26, was temporarily disturbed by them. To navigate the challenges, the government sought a temporary suspension and amendment of Jamaica's fiscal rules.

## SLIDE 16

## Monetary Policy Response and Inflation Control

In relation to monetary policy, the Bank responded differently during the Covid-19 shock relative to the second shock brought on by the war.

During the first phase of the shock, that is between 2020 and early 2021, the policy rate was held at a historic low of 0.50 per cent to support economic recovery. In real terms, this was a very negative rate. The central bank also provided USD liquidity of over 7 per cent of GDP and JMD liquidity amounting to 4 per cent of GDP to the financial sector during the shock, while implementing other macro-prudential measures to ensure banking sector stability.

## SLIDE 17

At the start of the second phase of the shock, BOJ was granted the formal status of inflation targeter. However, the staff of the Bank had been practising inflation targeting for years before this formal designation and had developed several worst-case scenarios on the impact of the outbreak by this time. The staff was therefore able to quickly identify the tidal wave of food-price inflation coming through to us and advised the newly-formed MPC of the need to tighten monetary policy so as to anchor inflation expectations and stem any second-round effects that would have arisen from the shock.

The BOJ therefore employed a three-pronged approach by:

- Deploying open market operations more aggressively to maintain tight Jamaica liquidity conditions,
- Gradually increasing the policy interest rate by 650 basis points (bps) between October 2021 and November 2022; and
- Engendering greater stability in the foreign exchange market through foreign exchange intervention and adjustments to the Net Open Position limits.

This policy stance influenced the conduct of the Bank's open-market operations between 2022 and 2024. The Bank's 30-Day certificates of deposit and special longer dated instruments were used to tighten liquidity. During the 2022, a net absorption equivalent to 1.6 per cent of GDP (JMD$41.6 billion) via this medium was done, much higher than the 0.1 per cent of GDP (or JMD$2.1 billion) net absorbed in 2021. Continuing this stance in 2023, the Bank net absorbed the equivalent of 1.5 per cent (JMD$46.3 billion).

A major issue for Jamaica during the tightening cycle was the weakness in the credit channel of the monetary transmission mechanism. During this period, the Bank observed a low pass-through of its policy actions to DTIs lending and deposit rates. This weakness primarily resulted from a lack of competition in the banking sector, given the domination of the system by a few financial institutions. The three-pronged approach was therefore deemed critical to taming inflation.

## SLIDE 18

With, perhaps, the exception of Mexico, Brazil and New Zealand, to name a few, this change in monetary policy stance had not yet been contemplated by some of the major central banks. Brazil stands out as the most proactive in the region, tightening as early as four quarters before March 2020. The key issue for Bank of Jamaica at the time was to get ahead of inflation expectations and the second-round effects of the shock.

The start of Jamaica's tightening phase was therefore sooner than many inflationtargeting countries within the Latin American and Caribbean region.

## SLIDE 19

Strategic market interventions ensured that the exchange rate remained stable during both phases of the crises. By end-2023, the annual depreciation in the exchange rate was contained at 0.5 per cent, a large improvement compared to the spike in 2020. Jamaica therefore recorded a moderate nominal depreciation of its currency of just 17 per cent over the 5-year period from 2019 to 2024, substantially lower than the experience of Chile and Brazil. Also, compared to its LAC counterparts with floating exchange rate regimes, Jamaica exhibited one of the lowest levels of exchange rate volatility between 2020 and 2024. This stability was underpinned by the BOJ's approach to liquidity management and foreign exchange intervention, which ultimately reinforced the credibility of Jamaica's monetary policy framework to meet the inflation targeting objectives. It also highlights the effectiveness of the BOJ's strategic interventions in containing depreciation pressures, relative to other regional economies.

## SLIDE 20

I will now briefly summarise the impact on the economy of the monetary and fiscal responses.

## SLIDE 21

The reopening of the ports and the cessation of lock-down activities drove a recovery in GDP to pre-pandemic levels in just under two years. This pace of recovery was generally consistent with that of the LAC countries.

## SLIDE 22

Given the lower revenue flows caused by the contraction in GDP, along with increased expenditure for Covid-19 related activities, the central government's fiscal balance fell from a surplus of 1.4 per cent of GDP in 2019 to a deficit of 3.8 per cent of GDP in 2020. This was the first deficit since 2016 and the largest since 2012. The country's debt-to-GDP ratio increased to 108.7 per cent in 2020 from 94.7 per cent in 2019, largely the consequence of the fall in nominal GDP for the year. Although this change in debt-to-GDP was broadly in line with the LAC average, the fiscal deficit was significantly below the regional average and one of the lowest in the region.

The effects of the pandemic on the debt stock were, however, temporary. Jamaica reduced its debt-to-GDP ratio by 40 percentage points, from 108.7 per cent in 2020 to approximately 69 per cent by 2024. Prudent fiscal management, along with the rebound in nominal GDP, caused the debt ratio to revert sharply and with one exception, faster than our peers.

## SLIDE 23

Inflation also returned to BOJ's target range by early 2024, a faster pace than some in the LAC. This was driven in large part by the fall in commodity prices and the lagged impact of the Bank's relatively tight monetary policy stance (including its foreign exchange market interventions).

## SLIDE 24

Jamaica's current account also improved noticeably to a surplus of 3.1 per cent of GDP for FY2023/24, due in large part to a sharp rebound in tourism and continued high levels of remittances. This surplus, in addition to inflows from the IMF and Government's inflows contributed to the steady accumulation of reserves. Foreign exchange reserves consequently increased by 34 per cent between 2019 and 2023, outperforming some regional counterparts.

## SLIDE 25

## Lessons Learned and Policy Takeaways

I will now conclude by offering some key lessons and policy takeaways.

The overarching lessons from Jamaica's experience are that

1. Buffers are crucial in our ability to respond to shocks;
2. Institutions matter;
3. Strong and early monetary policy action are important, particularly for new inflation targeters;

4.

4. Credible and transparent FXI frameworks are necessary if the MTM is weak and there is a large shock and, finally
5. Remittances are clearly countercyclical.

Jamaica's ability to respond to shocks through fiscal expenditure and foreign exchange market intervention emphasised the importance of maintaining buffers.

On the point of strong policy institutions, Jamaica over a number of years have made steady progress in building them out. By granting the central bank policy autonomy, the government allowed it to take swift, decisive, potentially painful and thus politically unsavoury policy measures, just when the economy needed them. More recently, the GOJ has established a fiscal commission to act as a watch dog over fiscal policy determination and implementation. Institutions mattered for Jamaica during the crises and they will work towards continued stability in the future.

The strong and resolute policy interventions of the BOJ, as a new inflation targeting central bank, served to improve the credibility of Jamaica's the monetary regime and will help in the future to better anchor inflation expectations. Resolute upward adjustments in the policy rate along with aggressive liquidity tightening played a major complementary role in this strategy.

Looking in the rear-view mirror, BOJ's FX interventions strategy became the anchor for monetary policy in a context where the exchange rate channel of the monetary transmission mechanism is strong, but the credit channel is weak. The Bank, however, has committed significant resources and time to improving its tools and the credit channel of the MTM, with a view to arming itself for future inflation battles. What we are doing in this area may be the topic for an entirely different presentation.

A final lesson was seen in the resilience of remittances, underscoring their countercyclical nature.

## SLIDE 26

## Closing

Notwithstanding all the accomplishments of the central bank as well as the fiscal authorities, challenges still abound. We recognise the necessity to tackle the weaknesses in the monetary transmission mechanism. We also recognise that Jamaica's high level of openness will continue to expose us to external shocks and that, along with our exposure to climate change risk, imply the need for us to maintain our buffers and to build resilience.

The next challenge for the country therefore is to transition from the entrenched macroeconomic stability that it now enjoys to a path of sustainable higher economic growth.

Thank you.",Richard Byles
https://www.bis.org/review/r250324b.htm,Klaas Knot: Presentation of the 2024 annual report,"Introductory remarks by Mr Klaas Knot, President of De Nederlandsche Bank, at the presentation of the 2024 annual report, Amsterdam, 20 March 2025.",2025-03-20 00:00:00,"## Klaas Knot: Presentation of the 2024 annual report

Introductory remarks by Mr Klaas Knot, President of De Nederlandsche Bank, at the presentation of the 2024 annual report, Amsterdam, 20 March 2025.

* * *

Good morning and welcome to our fully renovated headquarters building.

Here you see the result of five years of hard work. I am very happy that the building turned out so well and that the renovation project stayed within budget and was completed on schedule. And all that despite the pandemic. King Willem-Alexander will conduct the official opening next week, and visitors are already finding their way to De . Everyone is welcome to come visit us. Nieuwe Schatkamer

This is the fourteenth time I have had the honour of presenting the DNB annual report. And this is also my last time. For on 1 July, my second term as President will come to an end, and with a heavy heart I will say goodbye.

As this is my last annual report, my introductory chapter also looks back over the past 14 years, including at the monetary policy we have conducted. A lot has happened in those 14 years, with one constant: events outside the Netherlands have always had a huge impact on the Netherlands itself.

Today this is perhaps more true than ever. A war has been raging in Europe for several years, and it is unclear whether it can be brought to a lasting and just end. At the same time, the post-war Atlantic security situation seems to have been thrown out of balance due to tensions between the United States and Europe, leading to a need in Europe to invest heavily in defence to ensure our security.

Against this geopolitical backdrop, far-reaching trade conflicts between the major economic trading blocs are looming. And we are also faced with various long-standing vulnerabilities relating to domestic economic tightness, inflation and sluggish European growth. These vulnerabilities are being exposed and exacerbated by the situation in the world today.

Following the pandemic and the energy crisis, we are now witnessing the world being turned upside down for the third time. So much so, that, to quote Pope Francis, this no longer feels like an era of change, but a change of era.

So there are big challenges ahead. Perhaps the two most urgent are the looming trade tariffs and the ambition to rapidly ramp up our defence spending. Trade tariffs disrupt global trade flows and the production chains built up over decades, hitting an open economy like the Netherlands extra hard.

In addition, it seems inevitable that Europe will be compelled to redouble its efforts in the area of defence. This will be a challenge for the still somewhat overheated Dutch economy, but certainly also for some European countries with high public debt.

How should we deal with these two challenges?

To begin with, through European strength and European unity. In today's uncertain world, the best thing we can do is to seek more cooperation within Europe - without isolating ourselves from the rest of the world.

It is essential for Europe to cooperate on defence, which is a public good of singular significance: if it is there, it is there for everyone. By working together in Europe, we can coordinate procurement, rather than each Member State buying arms and equipment separately. Fortunately, Europe seems to be accepting this challenge with great vigour.

The plans do come with a hefty price tag. In view of this, there is a strong case for giving countries a exemption from the budget rules for additional defence temporary spending. These expenditures need to be done quickly and, until recently, were unforeseen. This exemption should, however, be temporary and limited because increased spending is largely structural and public debt in the EU is still too high. A temporary relaxation of the rules will allow countries to integrate additional defence spending into their budgets in the longer term. Because sustainable public finances may not be compromised.

A stronger Europe is important not only for defence, but also more generally for an open economy like the Netherlands. The European Union has a population of around 450 million. Seventy percent of Dutch exports remain within Europe, meaning we have a vested interest in making Europe stronger.

European economic strength is also essential for dealing with tensions on the international trade front. Unfortunately, there are still barriers to working, doing business and investing across borders in the EU. This is why we need to strengthen the European single market. In particular, it is crucial to integrate European capital markets so that start-ups, scale-ups and European technology firms can raise capital more easily and cheaply and thus compete with US and Chinese firms.

The much-discussed Draghi and Letta reports and the European Commission's Competitiveness Compass make important proposals to improve the single market and European competitiveness.

What exactly does the geopolitical situation mean for policy in the Netherlands? We in the Netherlands have little influence on many of the developments currently taking place in the world. But we can do one thing. And that is to work to mitigate the economic consequences and perhaps seize new opportunities. Hence the theme of our annual report: 'Robust policies in an uncertain world'.

What do we mean by 'robust policies'?

- Policies that strengthen Europe.
- Policies that anticipate future challenges.
- Policies that better enable us to absorb shocks.

What does this mean in concrete terms?

Let me start with ourselves. The best contribution central banks and supervisory authorities can make in uncertain times is to do what they were put on earth to do:

ensure financial and price stability. We are working hard to make sure the financial sector, payment systems and the economy as a whole remain resilient to shocks.

Robust policies, moreover, are not only European policies, but also future-proof policies. For the Netherlands, this means addressing our scarcity problem. We are facing shortages of housing, human resources, physical space and so on. This puts limits on our growth, both now and in the future.

Robust policies also mean: ensuring buffers to absorb unexpected shocks. This is especially vital in unstable times, for both the government and the financial sector.

Public finances may be in good shape now, but in the medium term, healthcare spending, interest costs and now defence spending are set to rise sharply. It is essential that the government can continue to absorb shocks going forward, without financial markets becoming unsettled by mounting debt.

Sensible fiscal policy must also be pursued because of inflation, which has been too high in the Netherlands for too long. This can be particularly difficult for people who do not have much money to spend. Because Dutch inflation is higher than the euro area average, we cannot look to Frankfurt. Getting Dutch inflation under control is a joint responsibility both for the social partners and the government. In this case, robust policies mean that the government continues to pursue a trend-based budget policy, does not throw more fuel on the inflationary fire and thus anticipates long-term developments in the Dutch economy.

In view of all the challenges ahead, the Dutch economy is in a good starting position. Maintaining our prosperity requires robust policies. Policies that strengthen Europe, anticipate the future and create shockproof buffers. The latter, of course, is also vital for the financial sector. I would now like to give the floor to Steven.

## Steven Maijoor

In uncertain times, financial and economic stability are very important, as Klaas said. A healthy financial sector with sufficient buffers to absorb shocks is a key component of this stability.

Fortunately, we have seen that the financial sector has held up well during the shocks of recent years. Stronger regulations and the tightening of supervision after the financial crisis have clearly paid off. Banks are now in a much stronger position and are decidedly more robust.

However, we do see that the strengthening of regulations in recent years has created a confusing jungle of rules in a number of areas.

It would therefore be wise to simplify regulations and enhance harmonisation in Europe where possible. This might involve streamlining the vast quantities of technical standards and guidelines from European supervisory authorities.

And when it comes to minimising differences in the Banking Union and the Capital Markets Union, we favour regulations over directives.

Simplification should not be confused with deregulation, or the relaxation of rules, for example the Basel III capital requirements. We should not go down that path. Simplifying the rules does not mean lowering the bar. Especially in this uncertain world, it is important to stick to robust policies. For banks, this mainly means implementing the agreements made in Basel III.

## Gita Salden

In uncertain times, it is important that financial institutions are not only financially sound, but also ethically sound. A number of banks in recent years have faced enforcement action from us, or from the public prosecution service, for failing to combat money laundering adequately. On a positive note, we see clear improvement in AML efforts across the board.

But unintended side effects may also crop up. For example, if banks do not differentiate sufficiently between high-risk and low-risk files, which can result in an undue burden on law-abiding citizens and entrepreneurs. They may find it difficult or impossible to open a bank account, they may be required to answer intrusive questions, or they may be offboarded without clear cause. There are also customers who experience discrimination.

Countering financial crime can be done more efficiently and effectively through a more risk-based approach, smarter use of data-driven technological innovations and more focused cooperation throughout the chain.

Naturally I must also address the pension transition. DNB fully supports the new Pensions Act and the transition to the new system. Our task is clear: implement the law and ensure a diligent and balanced transition.

And that is exactly what we are doing: the transition is in full swing. The first four funds have received a positive decision on their conversion notification. Also, some 40 partial assessments have already been completed, and at least 40 funds are intending to convert within a year. Together, we are drawing important lessons from the initial experiences, enabling us to refine our assessment process and make it more predictable. This will help us achieve our mutual objective: a pension system that is ready for the future.

## Cindy van Oorschot

As global uncertainty increases, so does the frequency of cyberthreats. This is a matter of utmost urgency for everyone, but even more so for the financial sector. A quarter of all cyberattacks worldwide affect the financial sector. Traditionally, the sector has been an attractive target for cybercriminals with financial motives. But we now also face statesponsored cyberattacks.

As a supervisory authority, the introduction of DORA gives us a powerful tool to boost the resilience of the financial sector and strengthen the robustness of the entire chain of ICT service providers.

This includes the mandatory advanced resilience tests for large financial institutions. In the Netherlands, we have been carrying out such tests on a voluntary basis for more than eight years - under the name TIBER - with good results. In addition, we have now developed a more flexible version, called ART, which can also be used in other vital sectors.

We also put our own organisation through such tests, because we too are an attractive target for hackers.

Geopolitical uncertainties, including cyberthreats, affect all our tasks. In response, we have launched an overarching project focusing on geopolitical fragmentation to link existing activities in both the central bank and supervision domains to ensure that we are ready to act across the full breadth of our responsibilities.

## Olaf Sleijpen

Geopolitical uncertainty is also high on the agenda in the field of the payment system, which is often the target of the cyberattacks that Cindy just mentioned.

Another concern is that the infrastructure behind our digital payments at the checkout is largely non-European. Although the providers of this infrastructure are regulated under EU rules, the policies of foreign governments can still result in control over how and to whom we make payments. This is undesirable.

For this reason, we support European initiatives such as Wero, which provides a European digital payment solution. And DNB is actively contributing to the development of the digital euro. The business case for the digital euro is sometimes questioned for the Netherlands, which has an effective and efficient payment system. In view of global developments, we advocate the introduction of the digital euro. Specifically, the digital euro will provide us with a means of payment that is independent of non-European parties and that will also form a reliable backup in crisis situations. This will be an important addition to our payment infrastructure.

The last point I would like to mention is that we will also factor global tensions into our own investment policy.

Our mission is to contribute to sustainable prosperity in the Netherlands. For this reason, we are committed to integrating sustainability into our own-account investments. However, sustainable prosperity will benefit not only from an orderly energy transition, but also from a society that is resilient, secure and stable.

That is why this year we are exploring how our own - robust - investments can also contribute to a resilient society. In doing so, we are of course mindful of our role as a long-term investor, balancing different investment themes and asset classes.

In conclusion: Robust policies and European cooperation are the remedies we need in this uncertain world. There now seems to be momentum for both. This is positive and it should give us a glimmer of hope in these bleak times.",Olaf Sleijpen; Klaas Knot; Steven Maijoor
https://www.bis.org/review/r250401e.htm,Fabio Panetta: Overview of economic and financial developments in Italy,"Address by Mr Fabio Panetta, Governor of the Bank of Italy, at the ordinary general meeting of shareholders, Rome, 31 March 2025.",2025-03-31 00:00:00,"## Fabio Panetta: Overview of economic and financial developments in Italy

Address by Mr Fabio Panetta, Governor of the Bank of Italy,  at the ordinary general meeting of shareholders, Rome, 31 March 2025.

* * *

Ladies and Gentlemen,

Global uncertainty remains high, fuelled by persistent geopolitical and trade tensions. This environment hinders international trade and exacerbates the fragmentation of the global economy, contributing to a further slowdown in economic activity.

The European economy, already marked by a stagnating manufacturing sector, is particularly affected by these dynamics due to its high exposure to international trade.

Since last June, the ECB Governing Council has gradually lowered its key interest rates, reflecting the progress made in the fight against inflation. However, credit is being affected, with the usual lags, by the monetary tightening of the previous years and by a weak business cycle.

Looking ahead, we cannot yet say that the battle against inflation is over. It is crucial that we monitor any factors that could prevent inflation from returning to its 2 per cent target.

Monetary policy decisions will have to balance two aspects. On the one hand, the weakness of the European economy and geopolitical tensions are curbing consumption and investment, holding down inflation. On the other hand, the growing uncertainty due above all to the sometimes contradictory announcements on US trade policies requires a prudent approach to policy rate cuts.

As I will explain shortly, the negative impact of high policy rates over the past year is reflected in Banca d'Italia's 2024 Annual Accounts, which are submitted to you for approval today.

## Monetary policy and its impact on Banca d'Italia's Annual Accounts

The policy rates remained unchanged for the first five months of 2024. Since June, the ECB Governing Council has started to make gradual cuts: between then and the end of last year, it lowered the Eurosystem deposit facility rate by 100 basis points, to 3 per cent.

As of 18 September 2024, to limit the volatility of short-term market rates, the spread between the MRO rate and the deposit facility rate was reduced from 50 to 15 basis points.

Subsequently, over the course of 2025, the ECB Governing Council has cut the policy rates by a further 50 basis points.

Alongside this, it reduced reinvestments of maturing securities purchased under the pandemic emergency purchase programme (PEPP) by €7.5 billion per month over the second half of 2024, fully discontinuing them by the end of the year. Also taking into account maturing securities held under the asset purchase programme (APP), the overall amount of securities held by the Eurosystem for monetary policy purposes shrank by around €400 billion compared with 2023.

The amount of funding granted to euro-area banks through Eurosystem refinancing operations fell sharply, from €410 billion to €34 billion. This contraction was mainly due to the final repayments under the third series of targeted longer-term refinancing operations (TLTRO III).

At the end of 2024, the Eurosystem's overall exposure to monetary policy counterparties was entirely accounted for by weekly main refinancing operations and longer-term operations with 3-month maturities.

Overall, the developments in monetary policy operations led to a significant reduction in euro-area excess liquidity, namely banks' funds above the reserve requirements held with the Eurosystem. At the end of 2024, excess liquidity was €2,827 billion, down by €519 billion on the previous year.

## The balance sheet

In 2024, the Bank's balance sheet shrank for the third consecutive year, by €149 billion, in line with what was observed at Eurosystem level. Since 2021, the balance sheet has contracted by a total of 28 per cent, from €1,538 billion to €1,104 billion.

On the asset side, the decrease was mainly due to the reduction in refinancing operations, down from €150 billion to €23 billion, and in securities held for monetary policy purposes, which went from €657 billion to €591 billion, with Italian government bonds accounting for €544 billion.

On the liability side, there was a decline both in deposits held by banks, which fell by €66 billion, and in the Bank's negative TARGET balance, which dropped from €521 billion to €416 billion. The reduction in the latter was largely due to foreign investment in Italian, mostly public sector, securities. The disbursement of the fifth and sixth tranches of Recovery and Resilience Facility funds to the Italian State through the TARGET system also contributed to the decrease in the Bank's negative balance.

The negative TARGET balance has continued to decline in the first months of 2025, to around €400 billion on average in March.

## Main drivers of the 2024 net profit and outlook

In 2024, the Bank's financial result before tax and before the release of the general risk provision was negative by €7.3 billion, €0.2 billion lower than in the previous year.

In the Annual Accounts for 2022, we had already anticipated that Banca d'Italia would post a gross loss for the following two years, before the release of the general risk provision, largely due to the sharp contraction in net interest income. As pointed out last

year, the rate hike cycle that began in 2022 led to an increase in the cost of balance sheet liabilities - mainly bank deposits - with no corresponding increase in the yield on monetary policy assets. These assets are actually less sensitive to changes in interest rates, as they consist mainly of fixed-rate securities with medium to long-term maturities.

In 2024, despite the gradual reduction, key interest rates remained higher than in 2023 on average. As a result, the profit and loss account was again affected both by net interest income (-€4.2 billion) and by the net result of pooling monetary income (-€1.9 billion).

In the years prior to 2023, the Bank built up its financial buffers in anticipation of potential future losses, thanks to particularly high profits during that period.

In the 2024 accounts, the release of €5.8 billion from the general risk provision, along with the positive contribution of about €2.4 billion from the carryforward of the tax loss, enabled the Bank to close the year with a net profit of €0.8 billion.

This release from the general risk provision is consistent with the Bank's lower exposure to financial risk, stemming from its shrinking balance sheet. This risk will continue to decline in the coming years owing to the discontinuation of the reinvestment of the principal payments from the entire portfolio of securities held for monetary policy purposes.

Despite the total reduction of €11.4 billion in the general risk provision in the last two years, the degree of risk coverage remains adequate over the short and the medium term. Furthermore, given the current market expectations for the path of interest rates, we still expect 2025 to mark a return to gross profit.

I would like to emphasize that the primary goal of the Eurosystem is to maintain price stability, not to maximize profit. Monetary policy decisions are taken solely pursuant to this mandate, even when they temporarily lead to a reduction in the financial results reported by the central banks.

While central banks can fulfil this mandate effectively even when they report losses, financial independence remains vital for enabling them to properly perform their tasks. This is why we must welcome any tool or initiative that could help strengthen it. This philosophy has steered our provisioning policy in the past and will continue to do so in the future.

The digital euro project, designed to safeguard monetary sovereignty in the euro area and generate benefits for households and firms, can also contribute to the financial soundness of central banks, thereby protecting seigniorage. This would become even more important should the growth in banknotes in circulation slow as a result of increasing recourse to private means of digital payment.

## Organizational measures and digital transformation

One year ago, in this very setting, I stressed the Bank's commitment to the process of modernization in order to align its internal organizational structure with the changing environment and to make work processes more efficient, fully seizing the opportunities offered by digital transformation.

The evolution of the payment system has made the Bank's responsibilities and tasks more complex as we are called on to ensure that it functions properly and efficiently. In response to this growing complexity, last year we reorganized the Directorate General for Markets and Payment Systems, splitting it in two to form the Directorate General for Markets and Monetary Policy Operations and the Directorate General for Payments and Market Infrastructures. This decision was taken to increase the effectiveness and specialization of our organization in these areas.

We also established the Digital Euro Unit, reporting directly to the Governing Board, in order to concentrate the Bank's work on the Eurosystem's digital euro project in a single dedicated structure.

Alongside this, as part of the treasury services that Banca d'Italia performs on behalf of the government, the ReTes operating system, an extensive programme for reengineering treasury procedures, became operational at the beginning of this year. Thanks to an innovative IT architecture, ReTes makes it possible to significantly simplify processes, replace obsolete tools and impose a single standard for exchanges with all local and central government entities.

This infrastructure will cut operating costs and improve the quality of the service that the Bank provides to the State, leading to a more effective use of the Treasury's information assets and making it easier to monitor the public accounts.

Given the continuing importance of cash for the general public, Banca d'Italia is an active participant in the Eurosystem's work on designing the third series of euro banknotes. In addition to a new look, this series boasts more technologically advanced security features and will be environmentally sustainable.

In the meantime, the plan to restructure the branch network and expand its functions has entered the implementation phase. The goal is to strengthen the role of the branches in highly strategic business areas with greater growth potential, thereby increasing the contribution the Bank can make locally.

I have stressed many times how the branches are one of the strengths of our organization. Their roots in the local community, their ties with local institutions and their proximity to economic and financial operators are essential components of the Bank's operations. They are a valuable asset, which we will continue to put to good use.

At the same time, we must be mindful of the emerging needs of local communities and developments in the economic and financial system. The reorganization plan, whose impact on the staff is currently under discussion with the trade unions, aims to reinforce the link between the Bank and its local stakeholders, while at the same time

strengthening the coordination and integration between the branches and the head office. The goal is to ensure a more flexible organizational model, capable of effectively balancing operations and resources.

Moving on to innovation, a comprehensive programme of initiatives is being finalized to accelerate the Bank's digital transformation, with a view to improving the quality of the services offered, raising operational efficiency and making the Bank more agile and better equipped to face future challenges.

The programme is built around three main ideas: investing in cutting-edge technologies, expanding the range of digital services and fostering a strategic and balanced use of artificial intelligence; streamlining and innovating internal processes, thanks to the integration of information systems and the exploitation of new technologies; and completing the digitalization of document flows, further reducing recourse to paperbased processes.

Digital transformation and the progressive streamlining of administrative work, with the consequent reallocation of resources towards institutional functions and strategic priorities, will be two pillars of the new Strategic Plan, to be drawn up by the beginning of next year.

In keeping with our tradition, we will continue to invest in our people, knowing that the success of any initiative hinges on their active participation, on the continuous development of their skills and on leveraging their talent.

## Proposal for the allocation of the net profit

Dear Shareholders,

Pursuant to Article 38 of the Statute, acting on a proposal of the Governing Board and after hearing the opinion of the Board of Auditors, I present for your approval the Board of Directors' proposal for the allocation of the net profit for 2024.

Under the current dividend policy, the amount paid to the Shareholders is kept within a range of €340 million to €380 million, provided that the net profit is sufficient and without prejudice to the Bank's capital adequacy.

Shareholders' dividends may fall outside this range if there is a strongly negative profitability trend, as occurred last year.

Accordingly, from the net profit for 2024 of €844 million, I propose allocating €200 million as a dividend to the Shareholders, the same as in the previous year, and €644 million to the State, €29 million more than in 2023. To supplement the current dividend allocated to the Shareholders, the amount of €140 million is released from the special item for stabilizing dividends, which will therefore be brought to zero. The Shareholders will thus receive a total of €340 million.

The total amount effectively allocated to the Shareholders over the last five years is therefore €1,633 million, while the total allocated to the State over the same period in the form of profits amounts to €14,406 million, in addition to the current taxes for IRES and IRAP purposes of €3,361 million.",Fabio Panetta
https://www.bis.org/review/r250401d.htm,François Villeroy de Galhau: 10 years of the Observatory for Banking Inclusion - an example of collective efficiency,"Speech by Mr François Villeroy de Galhau, Governor of the Bank of France, at the tenth anniversary of the Observatoire de l'inclusion bancaire (OIB – Observatory for Banking Inclusion), Paris, 31 March 2025.",2025-03-31 00:00:00,"



## Speech



## « 10 years of the Observatory for Banking Inclusion: an example of collective efficiency »

Published on the 31st of March 2025

Paris - 31 March 2025

Speech by François Villeroy de Galhau, Governor of the Banque de France

The Chairman of the Cour des Comptes, dear Pierre, Ladies and gentlemen,

I am delighted to be here with you to celebrate the tenth anniversary of the Observatoire de l'inclusion bancaire (OIB - Observatory for Banking Inclusion). It is a great pleasure to welcome the Chairman of the Cour des comptes (Court of Auditors), Pierre Moscovici, who, as Minister of Finance, introduced the 2013 Banking Law that led to the creation of the Observatory.

Image



La naissance de l'observatoire de l'inclusion bancaire (OIB) ...

I have played my own modest part in this collective endeavour by chairing 21 of the 25 meetings of the OIB since September 2014. The Observatory was born out of a strong conviction - perhaps contrary to the commonly-held view - that finance and banks can act as a lever for social inclusion. Let me be clear: the Banque de France, which is often associated with sovereign missions (money and financial stability), is also proud to have social missions, which are essential for our Network and for me as Governor.

In 10 years, the Observatory has made significant progress. Unfortunately, in France and in Europe - unlike in the United States - we are quicker to lament our failures than to acknowledge our successes. So, this morning, it is a pleasure to celebrate a collective source of pride and, allow me to draw some broader lessons for public policy in our country at a time fraught with doubt. Effective public policy requires at least three ingredients: sustained action (I), quantified assessment (II), and a partnership and regional approach (III). However, we can't afford to rest on our laurels, so I will conclude with some forward-looking comments (IV).

## I. Sustained action and perseverance

The creation of the OIB in 2014 was part of the long history of banking and financial inclusion in France in two main areas: access to banking services and the protection of the most vulnerable consumers of financial services.

Image

...

S'INSERE DANS L'HISTOIRE DE L'INCLUSION BANCAIRE ET FINANCIERE

Accéder aux services bancaires

Protéger les consommateurs de services financiers en situation de fragilité

- &gt; Procédure de droit au compte a partir de 1984
- &gt; Un besoin réel, méme si la France bénéficie d'un des taux de bancarisation les plus élevés d'Europe (99,2%)
- &gt; Prévention et traitement des situations de surendettement depuis la loi Neiertz (1989), complétée par les lois Lagarde (2010) et Hamon (2014)
- &gt; Le dispositif le plus abouti d'Europe en termes de surendettement des ménages



... S'insère dans l'histoire de l'inclusion bancaire et financière

From the time that the 1984 Banking Law was introduced by Jacques Delors - almost 30 years before the equivalent European law - the right to a basic bank account procedure was created to guarantee access to banking services for all. The Banque de France implements this procedure, which allows anyone who has been refused an account by a bank to be designated an establishment that will provide basic banking services free of charge. Even though France has one of Europe's highest levels of access to banking services at 99.2%, the right to a basic bank account procedure continues to meet a real need: 29,300 designations were issued in 2024. I note that this number is steadily decreasing (down by 57% from the peak of 2015), which attests to a higher rate of access.

Banking inclusion also means protecting the most vulnerable consumers of financial services. In 1989, the Neiertz Act   introduced a collective procedure for handling cases of household overindebtedness from an overall perspective. This procedure was then regularly enhanced - with considerable cross-party consensus - by the Lagarde Act  in 2010 - on revolving credit in particular - followed by the Hamon Act in 2014 on the search for lasting solutions to limit recurring applications. France now has Europe's most advanced system for preventing and dealing with overindebtedness. i ii iii

## II. Quantified assessment: commitments and impact on bank charges

I have spoken about the long term. Let us now turn to the present and the significant progress that has been enabled by the OIB in three areas: figures, commitments and results.

First off, figures are essential: the financial vulnerability of households is detected by credit institutions using mechanisms implemented by the Observatory. Consequently, 4.3 million people were identified as financially vulnerable in December 2023 (up by 86% compared to 2015). This sharp increase does not point to a deterioration, but to a much more effective identification of vulnerable situations. Moreover, it is a preliminary step in the implementation of appropriate protective measures, particularly in terms of bank charges. These figures have elicited commitments from credit institutions and public authorities. Several recent examples bear this out. In 2018, banks committed to providing the vulnerable customer solution more widely and to cap payment incident fees. In 2020, these commitments were incorporated into the second version of the Banking inclusion and prevention of overindebtedness charter, which caps payment incident fees at EUR 20 per month and EUR 200 per year for beneficiaries of the vulnerable customer solution, and at EUR 25 per month for financially vulnerable customers. The Decree of 20 July 2020 also made it possible to modify the criteria for detecting situations of financial vulnerability by allowing earlier and broader identification of the customers concerned. iv

These commitments have produced concrete results. Financially vulnerable customers are being detected at an increasingly early stage and increasing numbers of financially vulnerable people are applying for the vulnerable customer solution. Beneficiaries of this offering, which protects vulnerable customers who apply for it, numbered over a million at the end of 2023, i.e. a 320% increase compared with 2015.

Image



Des résultats concrets en matière de détection et d'accompagnement de la clientèle financièrement fragile...

Bank charges for financially vulnerable customers have fallen significantly: down 32% between 2018 and 2023 on all account-related bank charges, from EUR 304 to EUR 207 per year; and down 25% between 2019 and 2023 on payment incident fees, from EUR 151 to EUR 113.

Image





The problem of bank charges was extremely sensitive and often made it into the media. It has not disappeared, but it has been significantly improved.

## III. A partnership and regional approach

The OIB also embodies the success of a partnership and regional approach to preventing financial exclusion. It is neither so common nor so easy to bring together three very different parties on a regular basis: the six main banking institutions; six welfare associations and organisations; and the public authorities. Allow me to highlight three of their collective achievements.



Une démarche partenariale et territoriale

The creation in 2022 of the departmental financial inclusion councils (CDIF), above all, enabled the actions of the OIB to be effectively deployed at the regional level and local difficulties and initiatives to be identified more effectively. The EDUCFI initiatives of the Banque de France, the steering body for France's financial literacy strategy since 2016, are also based on a partnership approach. These initiatives have helped to raise awareness of EDUCFI tools and services among a large number of financial inclusion stakeholders: 9,600 teachers, 30,000 social workers and 3,500 business support staff in 2024. During Financial Education Week, which this year took place from 17 to 23 March, the Banque de France and its partners organised more than 500 budgeting and financial education workshops throughout the country. This week whose theme was to encourage young people in particular to be careful with their finances - was widely publicised in the media and on social networks, testifying to French citizens' increased interest in developing their financial knowledge.  Lastly, I will touch on the 500 Budget Management Advice Offices (PCBs) set up throughout France since 2021: these organisations approved by the state and run largely by associations or CCASs  that are members of the OIB, enable all people to benefit from personalised, free and confidential guidance.

## IV. Building for the future

We now need to ensure that the substantial progress achieved through the OIB's actions is sustained, while remaining vigilant in the face of the current situation of overindebtedness and emerging risks.

Image



Pérenniser ces 10 ans d'action de l'OIB

I  will  start  with  some relatively encouraging news about the number of applications  to  the  household  debt  commissions.  Over  the  first  two months  of  2025,  the  slower  increase  in  the  number  of  applications observed at the end of 2024 was confirmed, 3% higher than during the same  period  at  the  start  of  2024.  We  are  expecting  a  similar  modest increase  for  2025  as  a  whole.  The  positive  effects  of  the  decline  in inflation - with the attendant gains in purchasing power - should offset the  less  favourable  labour  market  outlook.  These  developments  are nevertheless  part  of  a  long-term  downward  trend  in  the  number  of applications:  in  2024,  there  were  significantly  fewer  than  in  the  prepandemic period (-6%) and the number was well below the level of 10 years ago (-42% compared to 2024). vi

Image



L'évolution des dépôts de dossiers de surendettement

Beyond these cyclical factors, I would like to mention three points of vigilance. The increasing dissemination of new products, such as microloans and payment in instalments, poses increased risks to vulnerable populations, including the very young. The transposition of the recent directive on consumer credit should provide a better framework for these new forms of credit. And I would recommend systematic consultation of the National Database of Household Credit Repayment Incidents by all parties before granting loans. This would help to improve consumer protection and prevent financial difficulties and overindebtedness. Microcredit is also an effective tool for financial inclusion, with outstanding loans exceeding EUR 2 billion at the end of 2023. We are therefore carefully monitoring changes in the ecosystem and the recent warnings about funding assistance to microloan beneficiaries. This assistance is currently provided by associations and social welfare agencies that support the beneficiary throughout the process. Let me reiterate that it is the key feature and the key to the success of the French microcredit system. Lastly, with regard to the right to a bank account, the Banque de France is now ready to move to paperless designation letters - as recommended by the Cour des comptes in 2021 - to further speed up a procedure that has already been greatly simplified in recent years: banks must now do their part by adhering to this project by the end of 2025. I hope that voluntary action here will prevent us from having to use compulsory measures. vii

I will finish with these words by Victor Hugo: ""for as long as the possible is not done, our duty will never be fulfilled"". We are currently experiencing a historical turning point in the world, and our country's response may not live up to the occasion, nor to our duty, and I do not say this lightly. In its own modest way, the OIB's first ten years have nevertheless shown us how to raise the level of our debate and action: through persistence and staying power; quantified evaluation, from ex ante observations to results; a partnership and regional approach; and constant vigilance for the future. The OIB has been able to extend its timeframe beyond day-to-day concerns, bring together different parties and move beyond the usual French-style squabbling. More broadly, you can count on the Banque de France - and no doubt, dear Pierre, on the Cour des Comptes - to foster this spirit more than ever, thanks to its independence and its stability missions. viii

Law No. 89-1010 of 31 December 1989, on the prevention and resolution of difficulties relating to the overindebtedness of individuals Law No. 2010-737 of 1 July 2010, on the reform of consumer credit Law No. 2014-344 of 17 March 2014 on consumption by credit institutions to assess the financial vulnerability of their account i ii iii iv

Decree No. 2020-889 of 20 July 2020 amending the conditions used holder customers.

Social action community centre v vi

Banque de France, Enquête typologique sur le surendettement des ménages en 2024 , February 2025

Fichier national des incidents de remboursement des crédits aux particuliers vii

Cour des comptes, « Les politiques publiques en faveur de l'inclusion bancaire et de la prévention du surendettement : des outils adaptés, une mise en œuvre à conforter », 2021 Annual Public Report - Vol.II, April 2021 viii

Hugo (V.), « Détruire la misère » , speech, 9 July 1849 ix",François Villeroy de Galhau
https://www.bis.org/review/r250401c.htm,Isabel Schnabel: Financial literacy and monetary policy transmission,"Speech by Ms Isabel Schnabel, Member of the Executive Board of the European Central Bank, at the 2025 Mais Lecture at Bayes Business School, London, 27 March 2025.",2025-03-27 00:00:00,"SPEECH

## Financial literacy and monetary policy transmission

## Speech by Isabel Schnabel, Member of the Executive Board of the ECB, at the 2025 Mais Lecture at Bayes Business School

London, 27 March 2025

According to our latest public opinion survey, more than 90% of respondents are aware of the European Central Bank. [ ][ ]  But when asked about our tasks, only 43% said they know that the ECB is responsible for maintaining price stability, despite inflation continuing to be the most important issue for European citizens. [ ] 1 2 3

These findings are part of a broader societal phenomenon: the widespread lack of financial literacy. Financial literacy is the ability to understand and apply basic financial concepts. It empowers individuals to make informed financial choices, mitigate investment risks and make provisions for old age.

In my lecture today, I will argue that financial literacy also matters for the transmission of monetary policy. I will show that financially literate individuals react more strongly to interest rate changes, are more willing to take on risk and are more forward-looking when forming inflation expectations.

Together, these factors suggest that greater financial literacy tends to strengthen the transmission of central bank policies to the real economy. Therefore, it can make monetary policy more effective in achieving its objectives and lower the sacrifice ratio - that is, the cost of reducing inflation in terms of lost output or higher unemployment.

For this reason, central banks, including the ECB, have increased their efforts to foster financial literacy. Such initiatives strengthen trust in central banks and support broader policy goals, including progress on the European savings and investment union.

## Financial literacy varies widely across socio-economic groups

In 2021 G20 finance ministers and central bank governors recognised financial literacy as an essential skill for empowering people and supporting individual and societal well-being. [ ]  It is defined as the ability to understand and effectively use basic financial concepts to take personal financial decisions. 4

Such decisions are taken at various stages of life. People have to decide how much of their income they want to spend and to save, how to best invest their savings, how to finance big purchases like an apartment or a house, and how to make provisions for old age or emergencies. This requires an understanding of how interest rates and inflation affect the return on various financial products and the cost of borrowing.

The sharp economic fluctuations over the past few years have underscored how important financial literacy is for the well-being of households. The surge in inflation in the aftermath of the pandemic and the sharp rise in interest rates after a decade of low rates have highlighted the need for individuals to properly understand and react to a changing inflation and interest rate environment.

Economists Annamaria Lusardi and Olivia Mitchell developed the 'Big Three' financial literacy questions, which have become a widely used measure of financial literacy (Slides 2 to 4). [ ] 5

These questions assess basic knowledge in three areas that are of key importance for households' financial decision-making: the concept of compound interest, the importance of inflation for the purchasing power of savings, and the benefits of diversifying a portfolio across different assets. [ ]  People are usually considered to be financially literate if they can answer all these three questions correctly. 6

Numerous surveys collect information about the level of financial literacy across various countries and socio-economic groups, and the ECB has contributed to this effort by including questions on financial literacy in its consumer expectations survey.

These surveys show that many people struggle to answer all three questions correctly. In the euro area, less than half of respondents, around 48%, managed to get all three questions right (Slide 5).

Moreover, financial literacy varies widely across socio-economic groups.

First, financial literacy is lower for younger people. Those aged below 50 display below-average financial literacy, which could negatively affect their ability to build up long-term wealth or their decisions about major purchases. [ ] 7

Second, women have on average significantly lower financial literacy than men. This could lead to a higher risk of financial hardship and could explain why women are more often at risk of old-age poverty. [ ] Third, financial literacy increases with educational attainment and income, potentially reinforcing inequality as, on average, financially literate people take better financial decisions. [ ] 8 9

Finally, there is considerable variation across countries, also within the euro area. Financial literacy tends to be higher in northern European countries.

## Financial literacy matters for monetary policy transmission

These differences have important implications for individuals, but they may also have an impact on the effectiveness of macroeconomic policies.

Monetary policy is a case in point. The effectiveness of monetary policy relies on the smooth transmission of policy decisions - especially changes to key policy rates - to financing conditions and, from there, to economic activity and inflation.

Today I will focus on three key channels through which financial literacy can influence the transmission of our monetary policy: the interest rate channel, the risk-taking channel and the inflation expectations channel. [ ] 10

## Financially literate households react more strongly to interest rate changes

In standard macroeconomic models, monetary policy works mainly through the interest rate channel: an increase in interest rates shifts intertemporal trade-offs in the direction of higher savings and less consumption due to a substitution effect. Higher interest rates dissuade firms from investing and households from purchasing houses or durable goods.

Policymakers frequently use these models to derive policy prescriptions, thereby implicitly assuming that households react in an optimal way to changes in interest rates by adjusting their borrowing and saving. However, a lack of financial literacy in part of society could be one reason that not all people behave in the way that models with rational expectations assume. Consequently, policymakers may make mistakes in predicting household behaviour, affecting the way monetary policy is transmitted to the real economy. [ ] For example, survey evidence suggests that financially literate households are more responsive to changes in interest rates. 11

On the one hand, this reflects the fact that these households are more attentive to interest rate developments. Among financially literate households, 62% report paying 'some', 'much' or 'a great deal' of attention to the level of interest rates. For households with low financial literacy, this share is only 49% (Slide 6). [ ] 12

On the other hand, a financially literate person has a better understanding of how interest rate changes will affect their financial situation and how they should best respond.

The experience of recent years is a good example. When the ECB raised its policy rates in 2022 to fight inflation, financially literate individuals understood that this created more beneficial conditions for saving and less attractive conditions for borrowing, strengthening policy transmission. By contrast, less financially literate people reacted much less strongly to the dramatic change in the interest rate environment (Slide 7).

In other cases, the impact on transmission is less clear.

Households with high levels of financial literacy preferred fixed-rate loans when interest rates were low, but less so when interest rates were high (Slide 8). This behaviour tends to slow down policy transmission, as it insulates these households from changes in the interest rate environment. By contrast, less financially literate households did not significantly adjust their preferences when interest rates increased sharply. [ ] 13

The financial literacy of borrowers and depositors may also affect how swiftly and strongly banks pass through changes in policy rates to financing conditions. This is a key step in monetary policy transmission.

The more attentive households are to interest rates, the more likely they are to search for the best possible interest rate for both loans and deposits. Indeed, according to the consumer expectations survey, financially literate households are more likely to 'shop around' for the best terms of debt products (Slide 9, left-hand side).

The same is true for deposits. During the recent hiking cycle, banks had to increase deposit rates to prevent a deposit flight as depositors shifted from low-yielding deposits to higher-yielding investments. [ ] Such behaviour is likely linked to financial literacy. In fact, during the recent tightening cycle, cash accounts of corporates, which are managed by finance professionals, received higher interest rates for both overnight and term deposits than those of households (Slide 9, right-hand side). 14

Higher funding costs for banks then also translate into higher bank lending rates, strengthening the transmission of policy rates to financing conditions.

## Financial literacy increases risk-taking and stock market participation

A second important transmission channel of monetary policy operates through investors' risk appetite. This is the risk-taking channel .

Monetary policy influences people's willingness to take risks, with looser monetary policy being associated with greater risk-taking, as investors have an incentive to switch from safe assets to higher -yielding alternatives. [ ]  Increased risk-taking, particularly through greater stock market participation, amplifies the aggregate effects of monetary policy adjustments. [ ] 15 16



Research indicates that financial literacy plays a crucial role in determining the extent to which households engage in risk-taking by investing in the stock market or other risk assets. [ ]  Financially literate households are much more likely to invest in stocks or mutual funds, thereby strengthening monetary policy transmission (Slide 10, left-hand side). 17

Differences can also be found in the mortgage market.

A higher share of financially literate households take out mortgages and other loans than is the case for households with low financial literacy, although the difference is quantitatively much smaller than for stocks (Slide 10, right-hand side). Changes in aggregate consumption in response to interest rate adjustments are to a large extent driven by households with mortgages. [ ] 18

Higher risk-taking may also affect monetary policy indirectly by mobilising private capital for riskier and more productive investments. More risk capital should lead to higher productivity growth and hence a higher natural interest rate, r-star, giving central banks greater scope to stimulate the economy through lower interest rates due to a greater distance to the zero lower bound. [ ] 19

The effects of higher risk-taking can be self-reinforcing. If a larger share of the population rebalances their portfolios by switching from savings products or bonds to stocks in response to looser monetary policy, this may encourage firms to make additional investments. The increase in investment leads to higher aggregate income, in turn leading to more investment in the stock market. [ ]  Through this channel, stock market participation can magnify the investment response to monetary policy shocks. [ ] 20 21

Wealth effects provide another amplifying channel, as looser monetary policy tends to go hand-in-hand with a better performance of riskier assets, increasing household wealth and fostering consumption, with important distributional consequences. However, as shown over the recent tightening cycle, asset prices may behave differently. Over this period, the dampening effect of higher rates on stock prices was more than offset by stronger risk sentiment, leading to a surge in stock prices. Such wealth effects weakened monetary policy transmission in the most recent hiking cycle.

Lastly, financially literate households have been shown to be more likely to build up precautionary savings, making them better able to cope with financial shocks and smooth their consumption. [ ]  This may slow monetary transmission, as these households can initially draw on cash buffers when the cost of borrowing increases through policy tightening. Hence, the impact of financial literacy on risk-taking may also go in the opposite direction. 22

## Financially literate households are more forward-looking when forming inflation expectations

A third key transmission channel of monetary policy is the inflation expectations channel .

Since consumption and investment decisions as well as price and wage-setting processes reflect expectations about the future pace of price changes, household inflation expectations shape inflation dynamics. A growing body of research suggests that consumers' expectations matter greatly for the transmission of monetary policy, possibly more than those of financial market participants. [ ] 23

Research by the International Monetary Fund shows that, over the recent inflation episode, near-term inflation expectations became an increasingly important driver of inflation in advanced economies (Slide

## 11, left-hand side). [ ] 24

In turn, factors that can reduce the sensitivity of inflation expectations to actual inflation developments can contribute to bringing inflation down more quickly. And the lower the sensitivity, the lower the sacrifice ratio, allowing for swift disinflation without causing high unemployment or a deep recession.

It is therefore crucial that central banks understand how households form these expectations.

Research shows that policy tightening has a stronger dampening effect on near-term inflation expectations and inflation when a greater share of people in the economy are forward-looking (Slide 11, right-hand side). [ ] 25

Forward-looking households form their expectations on the basis of a broader set of information, including central bank policies and their expected impact on the economy, while backward-looking households base their expectations to a larger degree on past inflation experience.

Therefore, a higher share of backward-looking households means that the central bank must tighten monetary policy more to achieve the same drop in inflation.

The degree to which households are forward-looking likely depends on their level of financial literacy. Survey evidence indicates that households with higher financial literacy pay more attention to inflation. 52% of financially literate households pay 'much' or 'a great deal' of attention to inflation. This share stands at just 45% for the less financially literate (Slide 12, left-hand side). Higher attention also implies that these people are easier to reach through central bank communication. [ ] 26



However, these data also suggest that even for financially literate people, almost one half do not pay much attention to inflation. This may explain why inflation perceptions are often very persistent, adapting slowly to actual inflation dynamics. While headline inflation in the euro area dropped by almost 8 percentage points from its peak in October 2022 until the end of 2023, inflation perceptions fell by much less (Slide 12, right-hand side).

Again, there is some difference of inflation perceptions across different levels of financial literacy: while the inflation perceptions of both groups were similar when inflation had reached its peak, those of financially literate people are now 1.6 percentage points lower than those of less financially literate people.

Inflation expectations paint a similar picture. The one-year ahead inflation expectations of financially literate households have dropped much more quickly than those of the less financially literate (Slide 13, left-hand side).

These two findings are linked and reflect the fact that individuals' inflation perceptions have a substantial impact on their expectations of future inflation. [ ] 27



Overall, the share of consumers with inflation expectations broadly anchored around 2% - meaning that three-year inflation expectations are between 1.5% and 2.5% - has fluctuated around a level of only 17%, indicating a low degree of anchoring.

Again, there are notable differences in inflation expectations linked to financial literacy. The share of consumers with medium-term inflation expectations anchored around 2% is significantly higher for financially literate households. However, these households have also been more responsive to actual inflation developments, with the share of consumers with medium-term inflation expectations around 2% declining more sharply when inflation surged and rising more strongly when it came down (Slide 13, righthand side). [ ] 28

The observed differences in the formation of inflation expectations translate into lower deviations of individual one-year ahead forecasts from inflation perceptions at that time for more financially literate people, implying a lower subjective forecast error (Slide 14). In other words, households with higher levels of financial literacy tend to have more accurate inflation expectations. [ ] 29



Financial literacy also affects household perceptions of real, i.e. inflation-adjusted, incomes, with implications for monetary policy transmission. Over the past three years, real private consumption has increased more slowly than real disposable income. This can be partly explained by household misperceptions of their real income developments. [ ] 30

While over 50% of households in the euro area experienced positive real income growth in 2024, only 11% perceived that their real income had increased (Slide 15, left-hand side). The net percentage of pessimistic households is highest for the bottom half of the income distribution, and it is also higher for households with low financial literacy (Slide 15, right-hand side).

This implies that lower inflation due to restrictive monetary policy generally had a weaker impact on consumption due to such misperceptions, dampening the recovery.

## The need for enhanced financial education initiatives

The evidence presented explains why central banks have a keen interest in promoting financial literacy and improving financial knowledge.

In our 2021 monetary policy strategy review, we acknowledged that communication to broader audiences is key for monetary policy. That is why we have put more emphasis on explaining our monetary policy decisions to the general public in an accessible way. [ ] 31

Since President Lagarde took office, the Governing Council has made significant progress in making communication more accessible. For example, the introductory statement to the press conference after our monetary policy decisions has been replaced with the monetary policy statement, which offers a more concise and compelling narrative, while significantly reducing the textual complexity of monetary policy announcements, thereby increasing readability (Slide 16). To reach audiences beyond experts, the statement has been complemented by highly accessible, visualised statements, available in all EU languages. [ ] 32

When people understand how monetary policy works, they tend to trust central banks more. [ ]  And people's trust in the central bank and in its ability to maintain price stability has been shown to help anchor inflation expectations and increase the share of forward-looking people in the economy. [ ] 33 34

Knowledge about the ECB is linked to financial literacy. Financially literate households tend to be significantly more knowledgeable about the ECB and its inflation objective (Slide 17).

This has implications for the ECB's credibility. In the most recent inflationary episode, the share of households with high financial literacy that trusted the ECB to maintain price stability over the next three years rose notably after the ECB had embarked on its hiking cycle and inflation had come down significantly (Slide 18).

By contrast, households with low financial literacy lost confidence in the ECB's ability to maintain price stability as interest rates rose. Even when inflation had already come down significantly, the share of households that trusted the ECB's ability to maintain price stability remained low. This is in line with recent evidence from the United States, where 60% of survey respondents believe that high interest rates cause high inflation. [ ] 35

Therefore, to maintain and improve their credibility, central banks should help people understand their policy actions and their economic effects through communication and enhance their efforts to improve financial literacy. [ ] 36

At the ECB, we are taking active steps to do this. We have expanded our communication efforts towards the general public by offering explainers on YouTube (through our 'Espresso Economics' channel), by speaking more frequently on TV, by engaging on social media and by producing regular podcasts.

Earlier this month, on International Women's Day, the ECB took another step in promoting financial literacy by committing to five joint actions with national central banks, also aimed at closing the gender gap in financial literacy. [ ] 37

These include raising awareness, establishing a central bank financial literacy network, collaborating with national authorities for consumer protection, developing a harmonised financial literacy dataset across Europe, and focusing communication efforts on key moments in life, such as early education, taking out a major loan or building a pension.

Of course, such efforts can only complement, not replace, much broader efforts needed from governments and the education system. And it requires a long-term effort, with progress likely to be incremental. Financial literacy is also an important cornerstone of the savings and investment union, one of the

European Commission's flagship projects. [

] 38

Under its first pillar, it aims to encourage citizens to invest in capital markets, which can contribute to financing part of the massive investments needed for the green and digital transitions. [ ]  As I said before, financial literacy increases the willingness to make such investments. Therefore, an improvement in financial literacy is seen as essential to achieving the stated objectives. That is why the European Commission will adopt a financial literacy strategy, in line with the ECB's efforts. 39

## Conclusion

Let me conclude.

Financial literacy is an essential life skill that not only empowers individuals to make informed financial decisions but can also make monetary policy more effective.

Financially literate individuals respond more strongly to interest rate changes, are more willing to take on risk and are more forward-looking when forming inflation expectations. This tends to strengthen the transmission of central bank policies to the real economy.

However, significant differences in financial literacy across socio-economic groups highlight the need for continued educational initiatives.

Fostering financial literacy can support policy effectiveness, enhance public trust in central banks and help people make better financial decisions, ultimately contributing to a stronger economy and individual wellbeing.

As Benjamin Franklin, who spent more than 16 years here in London, once said, 'an investment in knowledge pays the best interest.'

Thank you.

## Annexes

27 March 2025

## Slides

1.

I would like to thank Dimitris Georgarakos for his contributions to this speech.

2.

ECB Knowledge and Attitude Survey, 10 th  edition, 2024, internal report.

3.

European Commission (2025), Eurobarometer, EP Winter 2025 survey, March.

4.

G20 (2021), Italian G20 Presidency Third Finance Ministers and Central Bank Governors Meeting Communiqué . This was preceded by the publication of comprehensive recommendations by the OECD on how to improve financial literacy globally. See OECD (2020), Recommendation of the Council on Financial Literacy .

5.

Lusardi, A. and Mitchell, O.S. (2014), 'The Economic Importance of Financial Literacy: Theory and Evidence', Journal of Economic Literature, Vol. 52, No 1, March.

6.

The 'Big Three' questions are the following: Interest rate question (numeracy): Suppose you had $100 in a savings account, and the interest rate is 2% per year. After five years, how much do you think you would have in the account if you left the money to grow? A) More than $102, B) Exactly $102, C) Less than $102, D) Don't know; Inflation question: Imagine that the interest rate on your savings account is 1% per year, and inflation is 2% per year. After one year, would you be able to buy: A) More than today, B) Exactly the same as today, C) Less than today, D) Don't know; Risk diversification question: Do you think the following statement is true or false? 'Buying a single company's stock usually provides a safer return than a stock mutual fund.' A) True, B) False, C) Don't know.

7.

Lusardi, A. and Mitchell, O.S. (2007), 'Financial Literacy and Retirement Preparedness: Evidence and Implications for Financial Education', Business Economics , Vol. 42(1), pp. 35-44, January.

8.

Lusardi, A. and Mitchell, O.S (2008), 'Planning and Financial Literacy: How Do Women Fare?' American Economic Review , Vol. 98, No 2, pp. 413-417, May. See also Hasler, A. and Lusardi, A. (2017), The Gender Gap in Financial Literacy: A Global Perspective , Global Financial Literacy Excellence Centre.

9.

Atkinson, A. and Messy, F.-A. (2012), 'Measuring Financial Literacy: Results of the OECD / International Network on Financial Education (INFE) Pilot Study', OECD Working Papers on Finance, Insurance and Private Pensions , No 15, OECD Publishing.

10.

Most of the results presented in this speech are descriptive without establishing causal relationships. Causal evidence is provided in some of the given references.

11.

Economists, including those at central banks, are increasingly using heterogenous agent (HANK) models, moving away from the representative agent assumption. Some findings discussed in the speech, such as the low responsiveness of some agents to interest rates, can be explained in such models.

12.

Baldassarri, L. Georgarakos, D., Kenny, G. and Meyer, J. (2024), 'Monetary policy transmission to households: The importance of consumers' attention to interest rates and financial literacy', VoxEU, 26 September.

13.

Byrne, D., Kelly, R. and O'Toole, C. (2022), 'How Does Monetary Policy Pass -Through Affect Mortgage Default? Evidence from the Irish Mortgage Market', Journal of Money, Credit and Banking, Vol. 54, Issue 7, pp. 2081-2101.

14.

Deuflhard, F., Georgarakos, D. and Inderst, R. (2018), ""Financial Literacy and Savings Account Returns"", Journal of the European Economic Association , Vol. 17(1), pp. 131-164.

15.

Bauer, M.D., Bernanke, B.S. and Milstein, E. (2023), 'Risk Appetite and the Risk-Taking Channel of Monetary Policy', Journal of Economic Perspectives, Vol. 37, No 1, Winter, pp. 77-100. See also Borio, C. and Zhu, H. (2012), 'Capital regulation, risk-taking and monetary policy: A missing link in the transmission mechanism?', Journal of Financial Stability , Vol. 8, Issue 4, pp. 236-251.

16.

Melcangi, D. and Sterk, V. (2024), 'Stock Market Participation, Inequality, and Monetary Policy', The Review of Economic Studies, June.

17.

Christelis, D., Georgarakos, D., Jappelli, T. and Kenny, G. (2024), 'Consumer risk-taking and stock market investment: Insights using the CES's consumer finance module', Research Bulletin , No 119, European Central Bank, May. See also van Rooij, M., Lusardi, A. and Alessie, R. (2011), 'Financial literacy and stock market participation', Journal of Financial Economics , Vol. 101, Issue 2, pp. 449-472.

18.

Cloyne, J., Ferreira, C. and Surico, P. (2020), 'Monetary Policy when Households have Debt: New Evidence on the Transmission Mechanism', The Review of Economic Studies , Vol. 87, Issue 1, pp. 102129.

19.

Filip, M.-D., Momferatou, D. and Parraga-Rodriguez, S. (2025), ' ', The ECB Blog , ECB, 11 February. Why a more competitive economy matters for monetary policy

20.

Melcangi, D. and Sterk, V. (2024), op. cit.

21.

On the downside, this channel can also encourage excessive risk-taking, thereby endangering financial stability. Even financially literate households may not be immune to irrational exuberance, fuelling financial bubbles.

22.

The build-up of precautionary savings may also be beneficial for financial stability. See Lusardi, A., Schneider, D. and Tufano, P. (2011), 'Financially Fragile Households: Evidence and Implications,' Brookings Papers on Economic Activity , Economic Studies Program, The Brookings Institution, Vol. 42(1), Spring, pp. 83-150.

McMahon, M. and Naylor, M. (2023), 'Getting through: communicating complex information', Bank of England Staff Working Paper No. 1047. See also Reis, R. (2023), 'Four mistakes in the use of measures of expected inflation', AEA Papers and Proceedings , Vol. 113, pp. 47-51.

23. 24.

See Chapter 2 of the IMF's October 2023 World Economic Outlook. Similar results for the relevance of inflation expectations for aggregate demand and inflation dynamics had been found for the low inflation period preceding the COVID-19 pandemic. An exogenous increase in the inflation expectations of households from below target levels leads to increased consumption and ultimately to higher inflation. Households expecting stable prices have a lower propensity to buy durable goods than those expecting positive inflation. See Coibion, O., Gorodnichenko, Y., Kumar, S. and Pedemonte, M. (2020), 'Inflation expectations as a policy tool?', Journal of International Economics , Vol. 124, May. See also Andrade, P., Gautier, E. and Mengus, E. (2023), 'What matters in households' inflation expectations?', Journal of Monetary Economics , Vol. 138, September, pp. 50-68.

25.

Albrizio, S. and Bluedorn, J. (2023), ' ', IMF Blog , IMF, 4 October. How Managing Inflation Expectations Can Help Economies Achieve a Softer Landing

26.

Ehrmann, M., Georgarakos, D. and Kenny, G. (2023), 'Credibility gains from communicating with the public: evidence from the ECB's new monetary policy strategy,"" Working Paper Series, No 2785, ECB. 27.

Weber, M., Gorodnichenko, Y. and Coibion, O. (2023), 'The Expected, Perceived, and Realized Inflation of US Households Before and During the COVID19 Pandemic,' IMF Economic Review , Vol. 71(1), March, pp. 326-368.

28.

For more details on consumers' inflation expectations, see D'Acunto, F., Charalambakis, E., Georgarakos,

D., Kenny, G., Meyer, J. and Weber, M. (2024), 'Household inflation expectations: an overview of recent insights for monetary policy', Discussion Paper Series , No 24, ECB.

29.

Rumler, F. and Valderrama, M.T. (2020), 'Inflation literacy and inflation expectations: Evidence from Austrian household survey data,' Economic Modelling , Vol. 87, pp. 8-23. See also Bruine de Bruin et al. (2010) who highlight how inflation expectations are higher among those with lower financial literacy:

Bruine de Bruin, W., van der Klaauw, W., Downs, J.S., Fischhoff, B., Topa, G. and Armantier, O. (2010), 'Expectations of Inflation: The Role of Demographic Variables, Expectation Formation, and Financial Literacy', The Journal of Consumer Affairs, Vol. 44, No 2, pp. 381-402. See also Burke, M.A. and Manz, M. (2014), 'Economic Literacy and Inflation Expectations: Evidence from a Laboratory Experiment', Journal of Money, Credit and Banking , Vol. 46, No 7, pp. 1421-1456, October. 30.

Baumann, A., Caprari, L., Kocharkov, G. and Kouvavas, O. (2025), 'Are real incomes increasing or not? Household perceptions and their role for consumption', Economic Bulletin, Issue 1, ECB.

31.

European Central Bank (2021), , July. Strategy review

32.

See the ECB's . Our monetary policy statement at a glance

33.

Ehrmann, M. (2024), 'Trust in central banks', Working Paper Series , No 3006, ECB.

34.

Niţoi, M. and Pochea, M.-M. (2024), 'Trust in the central bank, financial literacy, and personal beliefs', Journal of International Money and Finance , Vol. 143, May. See also De Fiore, F., Goel, T., Igan, D. and Moessner, R. (2022), 'Rising household inflation expectations: what are the communication challenges for central banks?', BIS Bulletin , No 55, 23 May. See also Christelis, D., Georgarakos, D., Tullio, J. and van Rooij, M., (2020), ""Trust in the Central Bank and Inflation Expectations,"" International Journal of Central Banking , Vol. 16(6), pp. 1-37, December.

35.

Binetti, A., Nuzzi, F. and Stantcheva, S. (2024), 'People's understanding of inflation', Journal of Monetary Economics , Vol. 148, Supplement, November.

36.

Angino, S. and Secola, S. (2022), 'Instinctive versus reflective trust in the European Central Bank,' Working Paper Series , No 2660, ECB.

37.

See the ECB's . Financial literacy in Europe hub

38.

Copyright 2025, European Central Bank

European Commission (2025), ' ', communication, 19 March. Savings and Investments Union: A Strategy to Foster Citizens' Wealth and Economic Competitiveness in the EU

39.

Lagarde, C. (2024), 'How to turn European savings into investment, innovation and growth', contribution to The Economist, 4 December.",Isabel Schnabel
https://www.bis.org/review/r250401b.htm,Claudia Buch: Hearing of the Committee on Economic and Monetary Affairs of the European Parliament,"Introductory statement by Prof Claudia Buch, Chair of the Supervisory Board of the European Central Bank, at the Hearing of the Committee on Economic and Monetary Affairs of the European Parliament, Brussels, 27 March 2025.",2025-03-27 00:00:00,"SPEECH

## Hearing of the Committee on Economic and Monetary Affairs of the European Parliament

Introductory statement by Claudia Buch, Chair of the Supervisory Board of the ECB, at the Hearing of the Committee on Economic and Monetary Affairs of the European Parliament

Brussels, 27 March 2025

It is my pleasure to report on the activities of ECB Banking Supervision and present our Annual Report for 2024, which is being published today. Last year marked the tenth anniversary of the Single Supervisory Mechanism, which was established in 2014 with a clear mandate to contribute to the safety and soundness of banks. More than 15 years after the global financial crisis and the European sovereign debt crisis, Europe can look back on a decade of financial stability. This is a crucial foundation for the real economy and contributes to the competitiveness of European firms.

Financial crises have occurred repeatedly throughout history, driven by excessive risk taking, insufficient regulation and weak supervision. They come at enormous economic, social, political and fiscal costs that can persist for many years. [ ] 1

To mitigate both the likelihood and the impact of financial crises, a comprehensive package of banking sector reforms has been implemented. Impact assessments show that these reforms have made the banking sector more resilient and that the benefits outweigh potential unintended side effects on lending or growth. [ ] 2

These benefits are clearly visible in Europe. The European banking sector now has solid capital and liquidity positions. [ ]  For significant institutions, the aggregate Common Equity Tier 1 (CET1) ratio stood at 15.7% in the third quarter of 2024. The aggregate leverage ratio remained broadly stable at 5.8%. Banks adjusted well to a more restrictive monetary policy environment, with an aggregate liquidity coverage ratio of 158% in the third quarter of 2024. In 2024 bank profitability continued to benefit from the increase in interest rates observed since mid-2022. 3

Banks' asset quality remains solid, although weaker economic growth and higher interest rates may increase risks. Overall, the ratio of non-performing loans to total loans remains at 2.3%, well below the level observed ten years ago. [ ] From a sectoral perspective, banks' exposures to small and medium-sized enterprises and to commercial real estate have become riskier, in part owing to the sensitivity of these exposures to higher interest rates. 4

Looking ahead, European banks face strong headwinds, requiring continued efforts to ensure financial and operational resilience. Geopolitical uncertainties, climate and nature-related risks and cyber risks can have severe negative impacts on banks. Addressing these risks remains a priority for ECB Banking Supervision.

Let me give you some examples.

Generally, we are monitoring how banks are addressing their exposure to geopolitical risk, which affects them through all traditional risk categories. [ ]  Operational risk is one focus area. Both the incidence and the severity of cyberattacks on banks have increased. We are working with the banks to strengthen their preparedness, drawing on the results of a cyber resilience stress test we conducted last year. [ ]  We have also adjusted our supervisory framework to prepare for the implementation of the Digital Operational Resilience Act (DORA), which has been in effect since January 2025. [ ]  DORA is strengthening the IT security of financial entities and reducing risks related to outsourcing. 5 6 7

Moreover, reliable information systems are essential for both banks and supervisors to monitor risks effectively. Yet, many banks still face shortcomings in their internal information systems. To address this, we published a guide to clarify supervisory expectations. [ ] 8

As regards climate and nature-related risks, banks have made notable strides. We continue to monitor banks' progress towards establishing reliable risk management and governance arrangements. These need to be informed by high-quality, client- and asset-specific data. Robust and efficient sustainabilityrelated reporting requirements for the corporate sector are thus key to identify and manage financial risks.

These are just a few examples of how the current framework has allowed European banking supervision to enhance bank resilience and to shift focus to new drivers of risks. This is a significant achievement.

At the same time, European banking supervision remains committed to reducing undue complexities in the current framework that hinder our ability to ensure that banks remain safe and sound. Clearly, simplification cannot come at the expense of resilience. The existing framework is effective in maintaining financial stability without impeding growth. But there is scope for improvement in three areas: supervision, reporting and regulation.

First, in order to deliver our supervision as efficiently and effectively as possible, we are reforming the Supervisory Review and Evaluation Process. These reforms were decided on in 2024 and will be fully phased in next year. They will allow us to focus more on relevant risks and to ensure that deficiencies are swiftly remediated by the banks. [ ]  In parallel, we are exploring ways to improve our administrative procedures. Currently, we are piloting fast-track approvals of risk transfer in securitisation, while maintaining a strong focus on relevant risks. 9

Second, there is scope to reduce reporting costs by harmonising reporting schemes, improving information systems and enhancing information sharing. Improvements in banks' information systems would pay off in two ways - they would enhance the banks' internal risk management and reduce the costs of responding to supervisory requests. [ ] 10

Generally, the ECB welcomes the political agreement that was reached by co-legislators on better data sharing in financial services. [ ]  In this spirit, we are working on several initiatives. The Integrated Reporting Framework (IReF) will integrate the Eurosystem's statistical and prudential reporting for banks. We are collaborating with the European Banking Authority through the Joint Bank Reporting Committee, which was established in 2024, to reduce reporting costs, in close cooperation with the industry. [ ] Notably, a Memorandum of Understanding between ECB Banking Supervision and the recently established EU Authority for Anti-Money Laundering and Countering the Financing of Terrorism (AMLA) will lay down the principles governing cooperation, including the exchange of information. Generally, we now have more than 40 supervisory Memoranda of Understanding with authorities around the globe, in addition to cooperation arrangements such as supervisory colleges. [ ] 11 12 13

Third, a potential simplification of regulation must not be mistaken for deregulation. Lowering standards would ultimately leave risks unaddressed and may incentivise high-risk practices with little benefit to the real economy or the resilience of banks. To ensure that simplification does not come at the expense of resilience, any discussion on changes in regulatory standards should be guided by sound evidence and cost-benefit analyses. While the ECB is not the regulatory authority, we stand ready to provide our supervisory expertise to these discussions. Assessing the impact of the current regulatory framework and exploring potential enhancements needs to be aimed at strengthening its effectiveness without compromising financial stability objectives.

Let me summarise. Europe needs to maintain a strong supervisory and regulatory framework to ensure financial stability, protect the real economy in times of stress and keep deposits safe - especially in light of the current economic uncertainty. Low risk premia, despite heightened geopolitical risks, increase the vulnerability of the financial sector to adverse shocks and global spillovers. [ ] 14

We need resilient banks - both financially and operationally - that can withstand shocks and continue delivering their services to the real economy. Weakening prudential and supervisory standards may harm the competitive position of European firms. Instead, removing national barriers to the Single Market and implementing structural policies can promote growth and innovation. [ ]  The capital markets union has the potential to harmonise national rules that impose costs on cross-border activities for banks, too. 15

Moreover, we need improvements to the crisis management and deposit insurance framework to better deal with bank failures and protect depositors more effectively. Completing the banking union, including with a European deposit insurance scheme, remains a key priority to strengthen financial stability.

1.

The average output loss resulting from financial crises (including banking crises and other types of financial crisis) has been approximately 8.5%, and the median output loss amounts to 6-7%. See Lo Duca,

M. et al. (2017/updated 2021), ' A new database for financial crises in European countries - ECB/ESRB

2.

See Bank for International Settlements (2022), ' ', December; the Financial Stability Board's ; and the Bank for International Settlement's ' '. Evaluation of the impact and efficacy of the Basel III reforms overview of evaluations of the effects of the G20 financial regulatory reforms Financial Regulation Assessment: Meta Exercise (FRAME)

3. ECB (2025),

, 27 March. ECB Annual Report on supervisory activities 2024

4.

Non-performing loan ratios including cash balances at central banks stood at 1.9% in the second quarter of 2024, compared with more than 7% in 2015.

5.

Buch, C. (2024), ' ', Global rifts and financial shifts: supervising banks in an era of geopolitical instability keynote speech at the eighth European Systemic Risk Board (ESRB) annual conference on 'New Frontiers in Macroprudential Policy', 26 September.

6.

See ECB (2024), ' ', 13 November; ECB (2024), ' ', Supervision Newsletter , 13 November; and ECB (2024), ' ', press release , 26 July. IT and cybersecurity risks - key observations in 2024 Evolving IT and cybersecurity risks ECB concludes cyber resilience stress test

7.

See, for instance, ECB (2025), ' ', Supervision Newsletter , 19 February; and ECB (2024), ' ', 3 June. Outsourcing trends in the banking sector Public consultation on the Guide on outsourcing cloud services to cloud service providers

8.

ECB (2024), , May. Guide on effective risk data aggregation and risk reporting

9.

See Buch, C. (2024), ' ', The Supervision Blog , ECB, 28 May. Reforming the SREP: an important milestone towards more efficient and effective supervision in a new risk environment

10.

See ECB (2025), ' ', Supervision Newsletter , 19 February. Sound risk data reporting: key to better decision-making and resilience

See the (CON/2024/21). Opinion of The European Central Bank of 21 June 2024 on the proposal for a regulation of the European Parliament and of the Council as regards certain reporting requirements in the fields of financial services and investment support

12. See in particular section 4.2.3, ECB (2025), , 27 March. ECB Annual Report on supervisory activities 2024

13.

See in particular section 4.1, ECB (2025), , 27 March. ECB Annual Report on supervisory activities 2024

14.

See ECB (2024), , November. Financial Stability Review

15.

See Draghi, M. (2024), ,

European Commission, September; and Letta, E. (2024),

, April. The future of European competitiveness - A competitiveness strategy for Europe Much more than a market",Claudia Buch
https://www.bis.org/review/r250401a.htm,Ida Wolden Bache: Policy rate kept unchanged,"Introductory statement by Ms Ida Wolden Bache, Governor of Norges Bank (Central Bank of Norway), at the press conference following Norway's announcement of the policy rate, Oslo, 27 March 2025.",2025-03-27 00:00:00,"## Ida Wolden Bache: Policy rate kept unchanged

Introductory statement by Ms Ida Wolden Bache, Governor of Norges Bank (Central Bank of Norway), at the press conference following Norway's announcement of the policy rate, Oslo, 27 March 2025.

* * *

Presentation accompanying the speech

Chart 1: Policy rate kept unchanged at 4.5%

The Monetary Policy and Financial Stability Committee has decided to keep the policy rate unchanged at 4.5%.

Norges Bank is tasked with keeping inflation low and stable. The operational target is inflation of close to 2 percent over time. We are also mandated to help keep employment as high as possible and to promote economic stability.

When inflation surged three years ago, we raised the policy rate sharply and rapidly. The policy rate has been held at 4.5% for more than a year. The tightening of monetary policy has contributed to cooling down the economy and to dampening inflation. Inflation has fallen significantly from the peak. Unemployment has increased a little in recent years from a low level.

When we last presented our projections in December, the Committee assessed that the time to begin easing monetary policy was soon approaching. We signalled that we would reduce the policy rate in March if the economy evolved as we envisaged at that time. We communicated the same intention at the monetary policy meeting in January.

The Committee now judges that it is appropriate to keep the policy rate unchanged given that the economy has not evolved as we envisaged.

The incoming data in recent months indicate that inflation could run markedly higher than we had previously projected. To bring inflation back to 2% within a reasonable time horizon, the Committee judges that there is a need to maintain the current stance for somewhat longer than envisaged in December.

Let me elaborate:

Chart 2: Wage growth has risen further

Wage growth has risen markedly in recent years and rose further in 2024. Overall wage growth was 5.6%, which was higher than expected. Higher wage growth will raise business costs and contribute to stoking inflation ahead.

## Chart 3: Unexpected rise in Inflation

Inflation has picked up in recent months and is markedly higher than projected in December. Consumer price inflation was 3.6% in February. In particular, food prices

increased, but prices for a range of other goods and services also rose at faster pace. Some of the inflationary factors are expected to be temporary, but not all of them.

The krone appreciation will on its own dampen inflation. The inflation projections for the coming year are nevertheless higher than the projections we presented in December.

If the policy rate is lowered prematurely, we risk seeing a continued rapid rise in prices.

## Chart 4: Regional Network contacts report increased activity

At the same time, we do not want to restrict the economy more than needed to bring inflation back to target. Unemployment has declined a little recently and been lower than expected. Employment has increased. Economic activity fell towards the end of last year, partly due to a continued decline in residential construction. But according to Norges Bank's Regional Network, activity has picked up over winter.

The uncertainty surrounding the outlook is greater than normal. The world economy is marked by the changed environment for international trade. Higher tariffs and trade policy uncertainty are expected to dampen growth among our trading partners, but the tariffs implemented to date will probably have a limited impact on economic activity in Norway. Regional Network contacts point to increased uncertainty due to trade conflicts, but only a small share expect that this will lead to lower activity in the near term. If more extensive trade restrictions were to lead to a global economic downturn, the outlook for the Norwegian economy could also weaken.

## Chart 5: Need to maintain the current stance for somewhat longer

If developments turn out as we now envisage, the Committee will most likely reduce the policy rate in the course of 2025. The forecast presented today is consistent with a decline in the policy rate to 4% by the end of 2025 and a gradual further decline over the next years. We must be prepared for a higher interest rate level than we had been accustomed to over the past decade.

## Chart 6. Inflation back to target without a large increase in unemployment

With the current policy rate path, wages are expected to rise more than prices ahead, and most people will see their budgets stretch further. Consumer price inflation is expected to rise slightly in the coming months and then to decline and approach the 2% target at the end of 2028. Unemployment is expected to rise a little to around the prepandemic level.

The future policy rate path will depend on how the economy evolves. If prospects suggest that wage and price inflation will remain elevated for longer than projected, a higher policy rate than currently envisaged may be required. If the pickup in inflation proves more temporary than currently assumed or unemployment rises more than projected, the policy rate may be reduced faster.

We cannot make any promises about the the policy rate. The promise we have made is that we will set the policy rate with the aim of returning inflation to target while helping to keep employment as high as possible. This is a promise we stand by.",Ida Wolden Bache
https://www.bis.org/review/r250401f.htm,Ahmet Ismaili: Navigating the digital transformation of the financial sector,"Speech by Mr Ahmet Ismaili, Governor of the Central Bank of the Republic of Kosovo, at the Conference ""Navigating the digital transformation of the financial sector"", organised by ProCredit Kosovo, Prishtina, 21 March 2025.",2025-03-21 00:00:00,"## Ahmet Ismaili: Navigating the digital transformation of the financial sector

Speech by Mr Ahmet Ismaili, Governor of the Central Bank of the Republic of Kosovo, at the Conference ""Navigating the digital transformation of the financial sector"", organised by ProCredit Kosovo, Prishtina, 21 March 2025.

* * *

Dear Mr. Paçarada

Dear Ms. Krenare Sogojeva Dºrmaku

Dear Mr. Zdravko Vuki,

Representatives of public institutions

Esteemed representatives of international organizations

Distinguished colleagues, ladies and gentlemen

It's my pleasure to great all of you on behalf of the Central Bank of Kosovo as we discuss a crucial topic-the digital transformation of our financial sector. This transformation is at our focus as the regulator, and we are dedicated towards a more modern, inclusive, as well as safe and secure financial system.

The advancement of digitalization is not just a global trend; it is a key objective of the CBK's Strategic Plan. Our aim is to foster digital finance in a way that benefits all sectors of society, promotes financial inclusion, and drives economic growth. However, we are fully aware that the future of financial services lies in digital transformation, where every individual and business in Kosovo can easily access and benefit from digital financial services, which will entail strengthening of data protection, cybersecurity and fraud prevention.

As part of this ongoing journey, I would like to share the key initiatives we are undertaking as regulator to move Kosovo's financial sector forward in the digital age while maintaining safety and stability of our financial system.

The Central Bank of the Republic of Kosovo over the years has put in place critical regulations that support digitalization, including regulations for licensing and supervising payment service providers, including fintech companies, and ensuring that new payment providers have access to the market. We have also enacted several key regulations that foster the development of digital financial services, improving the security and efficiency of digital transactions and protection of users of electronic payment instruments. In addition to the recently approved laws for the financial sector, these regulations are laying a robust framework for Kosovo's digital financial sector, helping to integrate digital finance with global best practices.

One of the most significant efforts in Kosovo's finance transformation is our efforts to align and become part of SEPA as well as adopt an instant payment system. SEPA's adoption will be a game-changer for Kosovo's payment system, ensuring that our financial infrastructure meets EU standards and enhances the efficiency of both domestic and cross-border transactions.

As part of this alignment, we are adopting best practices in digital banking, including strong consumer authentication, cybersecurity measures, and the implementation of electronic signatures. These steps are essential for creating a secure and efficient financial ecosystem that can seamlessly integrate into the broader EU market. Additionally, the alignment with SEPA will facilitate faster integration of people and systems within the EU.

The Central Bank of Kosovo is proud to be collaborating with the International Finance Corporation (IFC) to accelerate the development of digital financial services in Kosovo. With the support of the Swiss Secretariat for Economic Affairs (SECO), the CBK and IFC are working together in driving infrastructure improvements, promoting open banking initiatives, through establishing an Innovation Hub for enabling the launching of new services and products in a controlled environment while preserving the potential risks, as well as through capacity building and expertise in digital financial services. We have already made tangible progress in advancing digitalization at the CBK. Some of the initiatives we are implementing include: Preparing for SEPA by introducing provisions that regulate Open Banking (Open API), Adopting a New Regulation on Technical Standards for Strong Consumer Authentication, ensuring security and consumer confidence in digital transactions, Standardizing QR code procedures for payments, which simplifies and secures digital transactions for both consumers and businesses.

As part of our ongoing efforts to support digitalization in the financial sector, the Central Bank of Kosovo, in collaboration with the Agency for Information Society (ASHI), has made significant progress in improving public access to services.

We have integrated two services-the Register of Accounts (RLLB) and the Credit Registry of Kosovo (CRK)-into the national eKosova platform. This integration, allows citizens to easily verify their accounts with financial institutions and access their individual credit reports directly through the platform, without needing to make physical requests to the CBK.

In addition, we are working with the Agency for Information Society and Civil Register Agency with the support from the IFC, in enabling electronic verifications of IDs and addresses for bank clients directly through e-Kosova platform. All these efforts, should contribute in creating an environment that enables digital transformation and advances digital financial services.

We will closely cooperate with the Information and Privacy Agency, Ministry of Interior Affairs, Kosovo Banking Association and other institutions, to make sure that we jointly contribute to this process in efficient and secure implementation.

The road ahead is both exciting and challenging. The digital transformation of the financial sector is not just about technology - it is about creating a financial system that is more accessible, inclusive, and secure for all. This includes extensive collaboration and engagements in financial education in order to prepare the users of new digital financial services with the risks they pose, and against financial fraud that might potentially come with increased digitalization. Through our regulatory framework,

partnerships with international organizations, and ongoing capacity building, the Central Bank of Kosovo is committed to supporting a digital future and the protection of consumers along with safe usage of data, that benefits everyone in Kosovo.

In conclusion, the Central Bank of Kosovo is fully committed to supporting digital transformation, with digitalization at the core of its vision. We are not just adapting to the digital age, but actively shaping a future driven by innovation. By supporting the market in its digital journey, we are creating a dynamic financial ecosystem that will drive Kosovo's long-term economic growth. Together, we are building a foundation of progress, resilience, and opportunity for future generations.

Thank you.",Ahmet Ismaili
https://www.bis.org/review/r250407j.htm,Luis de Guindos: Financial stability in uncertain times,"Speech by Mr Luis de Guindos, Vice-President of the European Central Bank, at the International Federation of Accountants' Chief Executives Forum, Amsterdam, 3 April 2025. ",2025-04-03 00:00:00,"## Luis de Guindos: Financial stability in uncertain times

Speech by Mr Luis de Guindos, Vice-President of the European Central Bank, at the International Federation of Accountants' Chief Executives Forum, Amsterdam, 3 April 2025.

* * *

## Introduction

It is a pleasure to be taking part in the International Federation of Accountants' Chief Executives Forum today. In line with the topic of the event, I will reflect on the risks and 1 uncertainty that threaten financial stability and their implications for policymakers. I will be brief to allow enough time to take your questions.

Conceptually, risk is associated with situations where the exact outcome is unknown but the possible outcomes can be identified and their probabilities can be estimated reasonably well. For the ECB, financial stability is defined as a condition in which the 2 financial system is capable of withstanding shocks and the unravelling of financial imbalances. So, when assessing financial stability, we evaluate the likelihood of shocks materialising and their potential impact. Uncertainty, by contrast, refers to scenarios where it is impossible to define and measure outcomes and probabilities, often owing to a lack of information. While risk is quantifiable, uncertainty can be proxied at best.

## The current environment

Uncertainty in the macro-financial and credit environment is currently exceptionally high, in a world being reshaped by significant shifts in geopolitics, international cooperation, global trade policy, financial regulation and the role of crypto-assets. At the same time, the scale of the defence investment foreseen in the EU is unprecedented and adds another significant layer of uncertainty to the current environment.

According to a news-based index , economic policy uncertainty in the euro area is 3 currently more than three times the historical average. Similarly, an index of trade 4 policy uncertainty is more than eight times the historical average. 5   These levels are well above those seen during the pandemic.

Amid all of this uncertainty, the ECB's Governing Council decided to lower interest rates by another 25 basis points in March. The deposit facility rate is now at 2.5%, 150 basis points below its recent peak.

The disinflation process is well on track, with inflation developing broadly as expected. Headline inflation decreased further from 2.3% in February to 2.2% in March. According to recent data and in line with our projections, wage growth is moderating, which is helping services inflation to gradually decline. Most measures of underlying inflation suggest that inflation will settle at around our 2% inflation target, on a sustained basis.

But uncertainty surrounding the inflation outlook remains high, mainly on account of increasing friction in global trade. An escalation in trade tensions could see the euro depreciate and import costs rise, while much needed defence and infrastructure spending could raise inflation via aggregate demand. Geopolitical tensions could also lead to higher inflation owing to trade disruptions, rising commodity prices and energy costs. At the same time, lower demand for euro area exports and lower growth resulting from the impact of higher tariffs or geopolitical tensions could pose a threat to the economy, depress demand and push inflation down.

Weak economic growth remains a challenge for the euro area, even without any further shocks. ECB staff have again revised down their growth projections - to 0.9% for 2025, 1.2% for 2026 and 1.3% for 2027. The downward revisions reflect lower exports and ongoing weakness in investment. High uncertainty, both at home and abroad, is holding back investment, while competitiveness challenges are weighing on exports. Addressing these challenges in order to improve growth prospects is clearly more demanding in the current context of exceptionally high uncertainty about trade and economic policy.

## Challenges when analysing financial stability

Our macroeconomic projections are not the only area where we face great difficulties navigating this environment of heightened uncertainty. Analysing financial stability also requires us to adjust our frameworks and use state-of-the-art tools to assess the financial system's capacity to withstand shocks under these conditions.

Analysing multiple scenarios is a powerful way to deal with situations of high uncertainty. It allows us to test the resilience of the financial system against various possible manifestations of financial stress. Shocks cannot be predicted, but drawing on a diverse array of indicators and a range of sensitivity analyses is essential for us to understand the nuances of the current uncertainty. It is also crucial that our various approaches include ways to measure sources of risk amplification and non-linearities. By combining hard data indicators with survey results and analyses based on micro data, we can achieve a more granular, diverse and timely understanding of the economic landscape. Such a comprehensive approach can enhance our ability to anticipate and respond to emerging challenges.

## The main risks to financial stability in the euro area

In the current economic environment, we are observing marked vulnerabilities in financial stability. While banks remain in good shape, with sound solvency and liquidity indicators that are well above regulatory minimums, there are weaknesses in several other areas. First, elevated valuations and concentrated risks make financial markets susceptible to adverse corrections. Non-bank financial intermediaries have remained resilient to recent bouts of market volatility, but they are still quite heavily exposed to risky assets. Broader market shocks could cause sudden investment fund outflows or trigger margin calls on derivative exposures, unsettling markets and leading to abrupt price corrections. Second, sovereign indebtedness is a cause for concern at a time when defence spending is emerging as a priority in Europe, with different countries having very different amounts of fiscal space to respond. Despite the likely increase in

debt servicing costs, public finances need to be managed in a growth-friendly way and ultimately be sustainable. Third, the corporate sector has demonstrated resilience but faces competitiveness challenges and is subject to emerging credit risk concerns, especially in the case of firms that are more exposed to the export sector and geopolitical risks.

## Conclusion

In conclusion, an extraordinarily high level of uncertainty around economic and trade policy has been acting as a drag on markets and the economy alike. Financial intermediaries need to adapt their risk management tools in the face of new vulnerabilities and scenarios at a time when it is no longer possible to measure likely outcomes and probabilities. This environment calls for heightened vigilance, which is why we are exploring unconventional sources of risk and vulnerability and using a broader range of tools, such as sensitivity and scenario analyses, to assess the resilience of the financial system.

In terms of monetary policy, this uncertainty means we need to be extremely prudent when determining the appropriate stance. While most indicators point to inflation moving in the right direction, the environment of exceptional uncertainty requires us to stick even more closely to our data-dependent and meeting-by-meeting approach.

The European Union is at a crossroads. Defence policy requires a significant overhaul and challenges relating to trade and economic competitiveness need to be addressed. In addition to ramping up defence spending, we need to deepen and strengthen our Economic and Monetary Union with a true single market for goods and services that shores up our structural economic growth prospects, supported by a complete banking union and capital markets union.

- 1 I am grateful to Max Lampe for his contribution to this speech.
- 2  Knight, F.H. (1921), , Houghton Mifflin Company, Boston. Risk, Uncertainty, and Profit
- 3  Such indices are based on the frequency of specific words in news articles.
- 4  Baker, S.R., Bloom, N. and Davis, S.J. (2016), ""Measuring Economic Policy Uncertainty"", , Vol. 131, No 4, November, pp. 1593The Quarterly Journal of Economics 1636.
- 5  Caldara, D., Iacoviello, M., Molligo, P., Prestipino, A. and Raffo, A. (2020), ""The economic effects of trade policy uncertainty"", , Vol. 109, Journal of Monetary Economics January, pp. 38-59.",Luis de Guindos
https://www.bis.org/review/r250407i.htm,Sanjay Malhotra: Welcome address - 90th anniversary of the Reserve Bank of India,"Welcome address by Mr Sanjay Malhotra, Governor of the Reserve Bank of India, at the RBI@90 commemoration function, Mumbai, 1 April 2025.",2025-04-01 00:00:00,"## Sanjay Malhotra: Welcome address - 90th anniversary of the Reserve Bank of India

Welcome address by Mr Sanjay Malhotra, Governor of the Reserve Bank of India, at the RBI@90 commemoration function, Mumbai, 1 April 2025.

* * *

Her Excellency, the President of India, Hon'ble Governor of Maharashtra, Hon'ble Chief Minister of Maharashtra, Hon'ble Union Minister of Communications, Hon'ble Deputy Chief Ministers of Maharashtra, distinguished invitees, representatives of the media, and my colleagues from the Reserve Bank, past and present.

It is my privilege to welcome you all on this momentous occasion marking the 90th anniversary of the Reserve Bank of India. We are deeply honoured by the participation of the Hon'ble President of India. Her gracious presence has greatly enhanced the importance of this occasion and encouraged us immensely. I am thankful to her for taking out time from her busy schedule for us. I warmly welcome her to this function. I also welcome His Excellency, the Governor of Maharashtra, the Honourable Union Minister of Communications, the Chief Minister and the Deputy Chief Ministers of Maharashtra. I also warmly welcome all other dignitaries and guests who have taken out time to be present here with us.

Ninety years ago, the Reserve Bank of India was established to serve as the custodian of India's monetary and financial stability. Over these nine decades, we have evolved, adapting to the changing economic landscape while remaining committed to the economic progress of our nation and the welfare of its people.

As we entered the 90th year, exactly one year ago, we initiated the celebrations with the opening ceremony that was graced by the Hon'ble Prime Minister. Throughout the year, we organized several high-level events on themes such as emerging technologies and Digital Public Infrastructure. The Conference of Central Banks from the Global South reinforced India's thought leadership in the global community and deepened our understanding of the challenges and opportunities ahead.

To engage with the public, we hosted nationwide initiatives such as the RBI@90 Quiz, which received enthusiastic participation from students across the country. We organized an art competition that celebrated the creativity and heritage of India's artistic traditions. Sporting events, town hall meetings, tree plantation drives, and blood donation camps brought together our employees and communities.

All these events reinforced the spirit of collaboration and service that define the Reserve Bank. We celebrated our past and reaffirmed our responsibility for the future. We reflected on our achievements and rich legacy and recommitted ourselves to realising the vision of a Viksit Bharat built on a stronger, more stable, and inclusive financial system.

As we mark this milestone, we recognize that the Reserve Bank's role has expanded significantly beyond its initial mandate. Today, we stand at the confluence of tradition

and transformation, where the imperatives of price stability, financial stability, and economic growth intersect with rapid technological advancements, global uncertainties, challenges of climate change and increasing public expectations.

The next decade will be crucial in shaping the financial architecture of our economy. We remain committed to expanding and deepening financial inclusion. We shall strive to foster a culture of continuous improvement in customer services and strengthening customer protection. It will be our endeavour to optimize our regulatory frameworks by balancing the interests of financial stability and efficiency. We will continue to support technology and innovation. We shall remain vigilant, adaptive, and forward-looking. We will continue to collaborate effectively with all stakeholders - governments and financial sector regulators, among others. We will do everything that is required to improve the financial system by expanding its access, enhancing its efficiency, and strengthening its resilience in an evolving economic landscape.

Even as we embrace new technologies and modern regulatory approaches, our core values - integrity, transparency, and commitment to public service - will continue to guide us. The trust that the people of India repose in the Reserve Bank is our greatest asset. We are determined to preserve it and further strengthen it in the years ahead. This institution belongs to the nation. We shall continue to take each and every decision, driven by an unwavering resolve to serve the interests of the people, the financial system, and the economy.

As we conclude this year-long celebration and step into our centenary decade, we do so with confidence, determination, and a clear vision. The journey ahead will demand continuous adaptation and agility; fresh thinking and innovation; collaboration and coordination; and an unwavering commitment to excellence and perfection. We, at the Reserve Bank, remain fully prepared to meet all challenges and seize all opportunities, to contribute proactively and vigourously, to India's economic progress.

With these words, I again welcome Her Excellency, the President of India, and all other dignitaries and guests to this commemorative event.

Thank you. Jai Hind.",Sanjay Malhotra
https://www.bis.org/review/r250407h.htm,Jerome H Powell: Economic outlook,"Speech by Mr Jerome H Powell, Chair of the Board of Governors of the Federal Reserve System, at the Society for Advancing Business Editing and Writing Annual Conference, Arlington, Virginia, 4 April 2025.",2025-04-04 00:00:00,"## Jerome H Powell: Economic outlook

Speech by Mr Jerome H Powell, Chair of the Board of Governors of the Federal Reserve System, at the Society for Advancing Business Editing and Writing Annual Conference, Arlington, Virginia, 4 April 2025.

* * *

Thank you for having me here today. Monetary policy is more effective when the public understands what we are doing and why. Through your work, journalists like you help promote that greater understanding. I am sure this room full of reporters does not lack for questions to ask. Before addressing a few of those, I will briefly summarize the outlook for the economy and monetary policy.

At the Fed, we are squarely focused on achieving the dual-mandate goals Congress has given us of maximum employment and stable prices. While uncertainty is high and downside risks have risen, the economy is still in a good place. The incoming data show solid growth, a labor market in balance, and inflation running much closer to, but still above, our 2 percent objective.

## Recent Economic Data

After a couple of years of solid growth, many forecasters have anticipated somewhat slower growth this year. The initial reading for first-quarter GDP will be released later this month. The limited hard data are consistent with a slower but still solid growth outlook. At the same time, surveys of households and businesses report dimming expectations and higher uncertainty about the outlook. Survey respondents point to the effects of new federal policies, especially related to trade. We are closely watching this tension between the hard and soft data. As the new policies and their likely economic effects become clearer, we will have a better sense of their implications for the economy and for monetary policy.

Looking across many indicators, the labor market appears to be broadly in balance and is not a significant source of inflationary pressure. This morning's jobs report shows the unemployment rate at 4.2 percent in March, still in the low range where it has held since early last year. Over the first quarter, payrolls grew by an average of 150,000 jobs a month. The combination of low layoffs, moderating job growth, and slowing labor force growth has kept the unemployment rate broadly stable.

Turning to the other leg of our dual mandate, inflation has declined sharply from its pandemic highs of mid-2022. It has done so without the kind of painful rise in unemployment that has often accompanied periods of tight monetary policy that are needed to reduce inflation. More recently, progress toward our 2 percent inflation objective has slowed. Total PCE prices rose 2.5 percent over the 12 months ending in February. Core PCE prices, which exclude the volatile food and energy categories, rose 2.8 percent. Looking ahead, higher tariffs will be working their way through our economy and are likely to raise inflation in coming quarters. Reflecting this, both survey- and market-based measures of near-term inflation expectations have moved up. By most measures, longer-term inflation expectations-those beyond the next few

years-remain well anchored and consistent with our 2 percent inflation goal. We remain committed to returning inflation sustainably to our 2 percent objective.

## Monetary Policy

Turning to monetary policy, we face a highly uncertain outlook with elevated risks of both higher unemployment and higher inflation. The new Administration is in the process of implementing substantial policy changes in four distinct areas: trade, immigration, fiscal policy, and regulation. Our monetary policy stance is well positioned to deal with the risks and uncertainties we face as we gain a better understanding of the policy changes and their likely effects on the economy. It is not our role to comment on those policies. Rather, we make an assessment of their likely effects, observe the behavior of the economy, and set monetary policy in a way that best achieves our dualmandate goals.

We have stressed that it will be very difficult to assess the likely economic effects of higher tariffs until there is greater certainty about the details, such as what will be tariffed, at what level and for what duration, and the extent of retaliation from our trading partners. While uncertainty remains elevated, it is now becoming clear that the tariff increases will be significantly larger than expected. The same is likely to be true of the economic effects, which will include higher inflation and slower growth. The size and duration of these effects remain uncertain. While tariffs are highly likely to generate at least a temporary rise in inflation, it is also possible that the effects could be more persistent. Avoiding that outcome would depend on keeping longer-term inflation expectations well anchored, on the size of the effects, and on how long it takes for them to pass through fully to prices. Our obligation is to keep longer-term inflation expectations well anchored and to make certain that a one-time increase in the price level does not become an ongoing inflation problem.

We will continue to carefully monitor the incoming data, the evolving outlook, and the balance of risks. We are well positioned to wait for greater clarity before considering any adjustments to our policy stance. It is too soon to say what will be the appropriate path for monetary policy.

## Conclusion

We understand the benefits of a solid economy where workers can find jobs and inflation is low and predictable. We also understand that elevated levels of unemployment or inflation can be damaging and painful for communities, families, and businesses. That is why we at the Fed will continue to do everything we can to achieve our maximum-employment and price-stability goals.

Thank you. I look forward to your questions.",Jerome H Powell
https://www.bis.org/review/r250407f.htm,Christine Lagarde: The transformative power of AI,"Welcome address by Ms Christine Lagarde, President of the European Central Bank, at the European Central Bank conference on ""The transformative power of AI: economic implications and challenges"", Frankfurt am Main, 1 April 2025.",2025-04-01 00:00:00,"SPEECH

## The transformative power of AI

Welcome address by Christine Lagarde, President of the ECB, at the ECB conference on 'The transformative power of AI: economic implications and challenges' in Frankfurt, Germany.

Frankfurt, 1 April 2025

It is a pleasure to welcome you to our conference on the transformative power of AI.

In the early stages of a new technological breakthrough, it is often hard to discern fact from fiction. We struggle to imagine the ways in which the new technology will be used. And even if we predict the direction of technological change correctly, we rarely get the timeline or the size of the impacts right.

Today, we sometimes hear claims that AI is improving so fast that we are only a few years away from the nature of work being radically reformed. But we also hear arguments that the same barriers that slowed down the adoption of all past technologies will also delay AI adoption.

I cannot claim to know which vision will prove to be correct. But the early evidence is promising and, in my view, we must act on the basis that we are facing an economic revolution. This attitude will be particularly important here in Europe.

On this side of the Atlantic, we are still paying the price for having been too slow to capitalise on the last major digital revolution, the internet. The tech sector explains around two-thirds of the productivity gap between the EU and the United States since the turn of the century.

And now we are faced with a technology that can improve its own performance through self-learning mechanisms and feedback loops, enabling even more rapid advances and innovations. The risks of underestimating the potential of AI, and falling behind again, are simply too great to be ignored.

What's more, we are facing a new geopolitical environment in which we can no longer be sure that we will have frictionless access to new technologies developed overseas. This new reality strengthens the case for Europe to establish itself at the technological frontier.

There are two main areas where we should expect, and prepare for, major changes in the economy.

The first is productivity.

We can already see the productivity effects of AI in sectors like the US tech sector, where output is expanding while employment is falling. [ ]  But we are still in the early phase of the 'productivity J-curve', where new technologies diffuse to the wider economy and are reflected in GDP. 1

As such, estimates about the productivity gains of AI vary widely - but even at the lower end they would be a game changer for Europe.

One widely accepted methodology estimates that the euro area could see a boost to total factor productivity (TFP) of around 0.3 percentage points per year over the next ten years. [ ]  Compare that with the past decade, when annual TFP growth averaged just 0.5%. 2

Other estimates point to much larger gains, with productivity expected to grow 1.5 percentage points faster annually if AI is widely adopted over the next decade. [ ] 3

Whether Europe can achieve such productivity gains will depend on whether we can improve the environment for AI innovation and diffusion.

This comes down to funding, regulation and energy.

As I have been arguing for some time, Europe's relatively small venture capital ecosystem is a major hindrance to building foundational models in the EU. [ ]  Between 2018 and 2023, around €33 billion was invested in AI companies in the EU, compared with more than €120 billion in their US peers. [ ] Building and developing this technology also requires considerable investment in data centres, and the EU currently has around 4 times fewer dedicated sites than the US. [ ] 4 5 6

At the same time, ECB research finds that regulation and a lack of institutional quality are particularly detrimental to the expansion of high-tech sectors relative to more mature technologies. Investing in radical technologies is highly risky and needs a different set of framework conditions. [ ] 7

The adoption of AI, for example, depends on access to data pools to train models, which requires smart regulation to avoid data fragmentation while ensuring data protection. It also requires good institutions as, Our research shows that if the EU's average institutional delivery were raised to the level of best practice, for instance, effective legal systems are needed to defend a non-patentable asset like a set of AI prompts. AI-intensive sectors would see their share in investment rise by more than 10 percentage points. [ ] Finally, unless we see major breakthroughs in efficiency, Europe's energy supply constraints could pose a challenge to the diffusion of AI through the economy in the future. 8

The power consumption of data centres is expected to triple in Europe by the end of the decade. [ ]  AI training and inference is extremely energy-intensive. [ ]  And this surge in demand comes at a time when the green transition is also increasing the demand for electricity, for example for charging battery electric vehicles. 9 10

There is now a clear policy agenda in Europe to address these barriers. It is widely recognised that we need to build a savings and investment union to jump-start European venture capital, that we must simplify complex digital regulations and improve permitting speeds, and that we have to massively increase investment in data centres, fibre-optic networks and electricity grids.

But for Europe to make the most of the AI revolution, how the productivity gains from AI are harnessed also matters. Labour productivity can be increased either by reducing labour inputs relative to outputs, or by raising outputs relative to inputs. The employment implications of each route are vastly different.

This brings me to the second area of major change: the effect of AI on labour markets.

According to ECB research, between 23% and 29% of workers in Europe are highly exposed to AI. [ ]  This does not necessarily herald a 'job apocalypse'. It is reasonable to expect that AI will follow historical patterns by displacing some jobs while creating new one. [ ] 11 12

But there are two new questions that this technology poses.

First, will the pace of technological change be faster than in previous transitions? This question is critical for Europe, as our social model and traditionally high levels of job protection make it hard to see how a transition that leads to massive job reallocations could avoid a major backlash.

The key factor will be whether AI leans more towards job displacement via its 'automation potential', or towards changes in the nature of work via its 'augmentation potential'. In the augmentation scenario, workers will still need to adapt to changing roles and tasks, but the transition will likely be easier.

Recent research by the ILO finds that only a small share of jobs - around 5% in advanced economies meet the criteria for high automation. But a much larger share - over 13% - meet the criteria for high augmentation. [ ] 13

The second question is about the distribution of gains.

Early studies suggested that AI could increase the productivity of lower-skilled workers the most. [ ]  But newer studies looking at more complex tasks - like scientific research [ ] , running a business [ ] and investing [ ] - tell a different story. High performers benefit disproportionately and, in some cases, less productive workers see no improvements at all. 14 15 16 17

So even if AI augments more than it automates, we are likely to see an increase in labour market inequality. Demand for higher-skilled workers who can use AI most effectively will rise, while those less able to learn new skills could suffer.

All told, I do see a path for Europe to adopt AI without fracturing its social model. But it will require massive complementary investments in skills to prevent a rise in inequality.

Crucially, this will not require everyone to become coders, which would probably set the bar too high. According to the OECD, most workers who will be exposed to AI will not need specialised AI skills to get ahead in their careers.

In fact, the most sought-after skills in highly exposed jobs will be linked to management and business skills that many people have the capacity to learn. [ ] 18

The CEO of Anthropic, Dario Amodei, has described the potential capabilities of AI as being like 'a country of geniuses in a data centre'. [ ]  If this proves to be correct, it is both an awesome prospect for humanity and a daunting one for individual workers. 19

I believe we must act today, and especially in Europe, with the mindset that this future will likely come to pass. We must remove all the barriers that will prevent us from being at the forefront of this revolution.

But we must also prepare for the human and climate impacts of this transition, and we need to start now. I trust that this conference will generate the ideas we need to move forwards.

1. Allianz (2025), ' ', Allianz Research, 26 March. 2. Bergeaud, A. (2024), ' ', paper presented at the ECB Forum on Central Banking. 3. Briggs, J. and Kodnani, D. (2023), ' ', Goldman Sachs Economics Research, 26 March. 4. Lagarde, C. (2023), ' ', speech at the European Banking Congress, 17 November. 5. European Parliamentary Research Service (2024), ' ', March. 6. KPMG (2024), ' ', 23 September. 7. Bothner, J., Lopez-Garcia, P., Momferatou, D. and Setzer, R. (2025), 'Investment in AI intensive sectors the role of institutional factors in EU countries', Working Paper Series , ECB, forthcoming. 8. ibid. 9. McKinsey (2024), ' ', 24 October. 10. , Vol. 7, No 10, 18 Invest in your future: How to save your way out of employment vulnerability The Past, Present and Future of European Productivity The Potentially Large Effects of Artificial Intelligence on Economic Growth A Kantian shift for the capital markets union AI investment: EU and global indicators Data centres in Europe - a strategic approach The role of power in unlocking the European AI revolution de Vries, A. (2023), 'The growing energy footprint of artificial intelligence', Joule October.

11.

Albanesi, S., Dias da Silva, A., Jimeno, J., Lamo, A. and Wabitsch, A. (2025), 'New technologies and jobs in Europe', Economic Policy , Vol. 40, No 121, January, pp. 71-139. 12.

Autor, D., Chin, C., Salomons, A. and Seegmiller, B. (2022), ' ', MIT Working Papers , 14 August. New Frontiers: The Origin and Content of New Work, 1940-2018

13.

Gmyrek, P., Berg, J. and Bescond, D. (2023), ' ', ILO Working Papers , No 96, August. Generative AI and Jobs: A global analysis of potential effects on job quantity and quality

14.

Brynjolfsson, E., Li, D. and Raymond, L.R. (2023), ' ', NBER Working Papers , No 31161, National Bureau of Economic Research, April. 15. Generative AI at work

Toner-Rodgers, A. (2024), ' ', 27 November. Artificial Intelligence, Scientific Discovery, and Product Innovation

16.

Otis, N.G., Clarke, R., Delecourt, S., Holtz, D. and Koning, R. (2023), ' ', Working Papers , No 042, Harvard Business School. The Uneven Impact of Generative AI on Entrepreneurial Performance

17.

Kim, A.G., Muhn, M. and Nikolaev, V.V. (2023), 'From Transcripts to Insights: Uncovering Corporate Risks Using Generative AI', Chicago Booth Research Papers , No 23-19.

18.

OECD (2024), ' ', OECD Artificial Intelligence Papers , No 14, 10 April. Artificial intelligence and the changing demand for skills in the labour market

19.

Amodei, D. (2024), ' ', October. Machines of Loving Grace: : How AI Could Transform the World for the Better",Christine Lagarde
https://www.bis.org/review/r250407l.htm,"Christine Lagarde: A ""European moment"" in an inverted world","Speech by Ms Christine Lagarde, President of the European Central Bank, on the occasion of the conferral of the Sutherland Leadership Award, Dublin, 2 April 2025.",2025-04-02 00:00:00,"## Christine Lagarde: A ""European moment"" in an inverted world

Speech by Ms Christine Lagarde, President of the European Central Bank, on the occasion of the conferral of the Sutherland Leadership Award, Dublin, 2 April 2025.

* * *

It is an honour to receive the Sutherland Leadership Award.

There are moments in history when things that were once set in stone become fluid. Institutions, norms and alliances that seemed timeless can suddenly be remade.

These moments typically come only once in a generation. Peter Sutherland faced such a juncture when the Cold War ended. The collapse of the Soviet Union could have ushered in a period of global instability and turmoil.

But Peter demonstrated skilful leadership to leverage the defining geopolitical event of his time. As head of the General Agreement on Tariffs and Trade, he successfully led the world's largest trade negotiation, involving over 120 countries, which ushered in an era of unprecedented global cooperation and prosperity. 1

Compared with Peter's era, however, the geopolitical landscape we face today has been turned upside down. We can see this inverted world playing out in different ways.

After the Cold War, the global economy was generally one of openness, integration and certainty. Everyone benefited from a hegemon, the United States, that was committed to a multilateral, rules-based order. This allowed trade and investment to flourish.

But today we must contend with closure, fragmentation and uncertainty.

Geopolitical rivalries are spurring protectionism and upending global supply chains. The international institutions that Peter helped to build are facing increasing challenges. And one index of trade policy uncertainty now stands at more than eight times its average value since 2021. 2

This landscape poses a serious challenge for Europe on two fronts.

Economically, it risks compounding existing issues like sluggish productivity growth and weak competitiveness. Europe's reliance on external trade - its trade-to-GDP ratio is about twice that of the United States - makes it vulnerable to trade headwinds. On top of this, pronounced uncertainty may hold back the investment necessary for Europe's recovery.

Strategically, this new environment could also heighten our security vulnerabilities. We can no longer fully count on the security arrangements that have stood in place since the Second World War. If a security vacuum should arise, it may encourage opportunism by hostile actors on Europe's doorstep.

Yet despite this challenging landscape, I see a tremendous opportunity for Europe.

Just as in Peter's time, the structures that once seemed permanent are now becoming fluid again. And just as he did, we can harness the momentum created by geopolitical events to drive positive change.

So how can we - as Europeans - rise to the moment?

We can do so by embracing a simple idea that, at first glance, seems contradictory, but which in an inverted world makes perfect sense: we must cooperate to compete. And in doing so, we must also leverage our competitive advantage.

On the economic front, we need to work together to simplify and scale up our economy so that we can hold our own in a world dominated by economic giants. If we do so, we can attract talent and investment.

That means integrating our capital markets, allowing Europe's ample savings to fund our much-needed investments. And following the powerful example set by Peter during his time as European Commissioner in the 1980s, it means removing internal barriers that stand in the way of our Single Market, allowing our firms to scale more easily and compete more effectively. 3

There is clear momentum on this front. The reports by Enrico Letta and Mario Draghi have opened the way. And with its Competitiveness Compass, the European Commission has put forward a concrete roadmap with milestones that should be urgently implemented.

But we cannot stop halfway and we are pressed for time. As we scale up our economy, we need to scale up our decision-making to match it - and thereby stand tall and be heard.

At a time when major economies are adopting cohesive strategic agendas - using tariffs, for example, to extract concessions on other strategic goals - Europe cannot afford to be disunited. If we cannot take decisions in a European way, then others will use that against us.

To stand our ground, we need to be able to act as a single entity across several key areas. And that means we need to structurally change how we make decisions.

We know what stands in our way: a historical tradition whereby a single veto can scupper the collective interest of 26 other countries. But given the geopolitical shift at hand, I am convinced that national and European interests have never been so aligned. In this inverted world, more qualified majority voting would therefore be inherently more democratic.

I have no doubt that we can unleash a ""European moment"" leaders are willing to if seize it.

If it sounds like I am confident about Europe's future, it is because I am. But I am in good company here tonight. A recent survey finds that of all the Member States, the Irish are the most optimistic about the EU's future, and they are among the strongest supporters of the euro. 4

This sense of optimism is perhaps rooted in Ireland's extraordinary transformation in recent decades. And here I am reminded of the words of Oscar Wilde, who once wrote, ""Success is a science; if you have the conditions, you get the result."" 5

Ireland put those conditions in place during the most challenging of times, and has reaped the rewards. It is now incumbent on Europe to do the same.

## Thank you.

- 1 See Chapter 10 in Walsh, J. (2020), The Globalist: Peter Sutherland - His Life and , William Collins, London. Legacy
- 2  Index based on Caldara, D. et al. (2020), ""The economic effects of trade policy uncertainty"", , Vol. 109, pp. 38-59. See also ""Topic 2: Journal of Monetary Economics The impact of a shift in US trade policies"" in ECB (2025), ""Introductory statement in three charts"", 20 March.
- 3  See Chapter 8 in Walsh, J. (2020), The Globalist: Peter Sutherland - His Life and , William Collins, London. Legacy
- 4  More specifically, at 77%, Ireland shares the top level of optimism about the EU's future with Poland. See Eurobarometer (2025), ""New Eurobarometer survey shows record high trust in the EU: Irish people most optimistic about its future"".
- 5  Wilde, O. in Hart-Davis, R. (ed.) (1962), , Harcourt, Brace The Letters of Oscar Wilde &amp; World, New York, p. 143.",Christine Lagarde
https://www.bis.org/review/r250407e.htm,Abdul Rasheed Ghaffour: Unlocking opportunities to advance ASEAN climate initiatives,"Speech by Mr Abdul Rasheed Ghaffour, Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the ASEAN Investors Roundtable, Kuala Lumpur, 7 April 2025.",2025-04-07 00:00:00,"## Abdul Rasheed Ghaffour: Unlocking opportunities to advance ASEAN climate initiatives

Speech by Mr Abdul Rasheed Ghaffour, Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the ASEAN Investors Roundtable, Kuala Lumpur, 7 April 2025.

* * *

It is an honour for me to be here today at the ASEAN Investors Roundtable. It is through events like this, where key stakeholders come together, that we can continue to make meaningful progress toward addressing critical climate challenges faced by the region.

This roundtable is indeed very timely, as our region collectively face the devastating impacts of climate events on our economies and communities. As mentioned by Yang Berhormat Minister of Finance II, Datuk Seri Amir Hamzah, the urgency of climate action cannot be over-stated. We must act decisively today, not just to minimise the impact on our region but to capitalise on the opportunities of the future. Taking the necessary steps to build climate resilience not only ensures our economies can continue to grow in a sustained manner but the opportunities presented for climate investments are abundant - ranging from renewable energy projects to low-carbon infrastructure and sustainable agriculture.

ASEAN has made encouraging progress in laying the foundations to mobilise private capital to climate and sustainable finance. This includes initiatives such as the ASEAN Green Bond Standards and ASEAN Taxonomy for Sustainable Finance. However, given the scale of the region's investment needs, private sector investment in climate projects remain insufficient and must be scaled up. Redirecting just 5% of funding from Asian institutional investors towards climate-related activities could generate an additional annual flow of USD8 billion to USD10 billion. 1

But more is required to meet the region's monumental climate goals. With an estimated USD422 billion 2   needed by 2030 for climate mitigation and adaptation, there remains a huge gap between financing needs and current financing flows. No one party can or should shoulder this alone. To bridge this gap, a practical, collaborative approach involving the public, private and philanthropic sectors is crucial. I believe that publicprivate-philanthropic partnerships are not just desirable, they are essential to unlocking the full potential for ASEAN's decarbonisation.

## Key Regional Projects for Decarbonisation and their Funding Needs

Ladies and gentlemen,

Driving the region's decarbonisation agenda will be a number of key projects, with one such project being the ASEAN Power Grid. The APG, is a critical initiative to meet rising energy demand, while providing a strong foundation for a more sustainable ASEAN and strengthening regional energy security, in turn stimulating economic growth. The APG will facilitate the integration of renewable energy across the region, boosting energy

trade and supporting a cleaner, more sustainable future for ASEAN member states. But making the APG a reality is a enormous effort. This multi-year project calls for substantial investments to the tune of about USD764 billion for power generation and transmission systems through 2040, with USD17 billion for interconnectors alone. 3

Meanwhile, Carbon Capture and Storage (CCS) technology is a solution for decarbonising high-emission sectors, particularly those that are difficult to abate or where technologies have not caught up as yet. In Southeast Asia, we have many old oil and gas sites which are prime locations for carbon storage facilities. While CCS technology has been tried and tested dating back to the 1970s, the scale of CCS projects we require today is far greater due to the growing climate commitments and urgency to reach net-zero emissions.

## Innovative financing structures to address barriers

These projects are only two of many other current and future ones. While the opportunities are clear, no doubt, there are barriers to making these a reality. The high cost of capital, evolving technology, and the lack of effective risk mitigation mechanisms are primary barriers that often hinder climate projects from progressing beyond the planning stage. And so, we must continue to explore innovative ways to de-risk investments and ensure that appropriate financing is available at all stages of project development, particularly for large-scale and long-term initiatives like the APG and CCS projects.

We have seen blended finance increasingly being utilised to tackle these financing challenges, combining public, private and philanthropic funds to mitigate risks and attract more investment. That said, we must recognise that there is no one-size-fits-all solution. Financing structures can and should differ project to project, tailored to meet the specific needs of each project.

Islamic finance also offers diverse and viable financial instruments, including blended finance structures, which can be utilised to facilitate the region's transition towards a more sustainable and inclusive economy. Today, Islamic finance assets in Southeast Asia stands at USD859 billion. 4   The sukuk market in ASEAN has seen steady growth, with outstanding sukuk rising from USD364 billion in 2021 to USD414 billion in 2023, with Malaysia and Indonesia being the largest jurisdictions for sukuk issuances.

Over the years, sukuk has gained wider acceptance as an instrument for funding economic development in the region including for infrastructure, transportation and education sectors. For example, in 2018, Indonesia issued the world's first sovereign green sukuk. The proceeds were allocated for environmental and climate projects in renewable energy and sustainable transport. By tapping into Islamic finance instruments, ASEAN nations can access a broader investor base, including those seeking Shariah-compliant investment options. I invite the investment community to leverage the diversified and mature Islamic finance ecosystem in Malaysia.

## Conclusion and Call to Action

Ladies and gentlemen,

Advancing ASEAN's climate goals - and financing it - is a monumental effort. Strong partnerships will be key. It is our hope that the regional and global investment community - including both private and philanthropic investors - will join ASEAN member economies in this effort to channel meaningful investments towards the region's low-carbon transition agenda. This dialogue will also be key to sharing knowledge and exchanging ideas to unlock innovative financing structures.

Thank you. I look forward to the fruitful discussions today in our endeavour to build a sustainable and resilient future for ASEAN and beyond.

1 Climate Finance Access and Mobilization Strategy for the Member States of the Association of Southeast  Asian Nations (2024-2031)

- 2 Climate Finance Access and Mobilization Strategy for the Member States of the Association of Southeast  Asian Nations (2024-2031)
- 3 ASEAN Secretariat's Briefing on Energy Sector
- 4 As of end 2023 (Source: ICD-LSEG Islamic Finance Development (IFDI) Report 2024)",Abdul Rasheed Ghaffour
https://www.bis.org/review/r250407d.htm,Philip N Jefferson: US economic outlook and central bank communications,"Speech by Mr Philip N Jefferson, Vice Chair of the Board of Governors of the Federal Reserve System, at the conference ""Financial Intermediaries, Markets, and Monetary Policy"", sponsored by the Federal Reserve Bank of Atlanta and the University of Virginia Darden School of Business, Atlanta, Georgia, 3 April 2025.",2025-04-03 00:00:00,"For release on delivery 12:30 p.m. EDT April 3, 2025

U.S. Economic Outlook and Central Bank Communications

Remarks by

Philip N. Jefferson

Vice Chair

Board of Governors of the Federal Reserve System at

'Financial Intermediaries, Markets, and Monetary Policy,' a conference sponsored by the Federal Reserve Bank of Atlanta and the University of Virginia Darden School of Business

Atlanta, Georgia

April 3, 2025

Thank you, Dr. Tkac, for your kind words and for the opportunity to talk to this group. 1 It is always wonderful to be back in Georgia and here at the Federal Reserve Bank of Atlanta.  And it is an honor to speak at a conference co-organized by the University of Virginia, where I received my Ph.D.

You have heard already today about financial markets and the banking system. To add to that picture, I would like to share with you my outlook for the U.S. economy and my views of appropriate monetary policy.  But before that, I want to touch on the importance of central bank communications, and particularly the evolution of Fed communications.

## The Value of Communications

One of the reasons I so appreciate the opportunity to speak at events like this is because speeches are an important part of how the Federal Reserve delivers on its mission to the American people.  Like my colleagues on the Federal Open Market Committee (FOMC), I enjoy engaging regularly with people from around the country to hear about on-the-ground economic conditions and to learn specifics about industries and communities.  Such engagement is also a pathway to delivering better policy.  It is important that households, businesses, and financial markets understand policymakers' views and assessments of economic conditions.

Monetary policy is transmitted to the rest of the economy through financial market prices, such as long-term interest rates, which in turn affect the decisions of households and businesses.  Changes in the target range for the federal funds rate are transmitted to short-term interest rates through arbitrage relationships.  Short-term

1 The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.

interest rates and central bank communication, in turn, affect long-term interest rates through investors' expectations.  According to the expectations theory of the term structure of interest rates, intermediate- and long-term interest rates are the weighted average of expected future short-term interest rates.  In addition, monetary policy affects risk premiums.  Tighter monetary policy tends to reduce the willingness of investors to bear risk, making them less willing to invest in long-term assets, which means that their return should be higher for investors to buy these assets.

Former Fed Chair Ben Bernanke nicely summarized how important central bank communication is for the transmission of monetary policy by saying that 'monetary policy is 98 percent talk and only two percent action.' 2 While obviously hyperbole, the point is meaningful.  Clear communication is an important part of a Fed policymaker's job.

Today the Fed communicates in a variety of ways, including policymaker speeches, Chair Powell's press conferences, and even through the Fed's social media channels.  Clear and ample communication, however, has not always been the hallmark of the Fed.  In the 1990s, cable news outlets would attempt to spot former Fed Chair Alan Greenspan walking into the building on the day of FOMC meetings.  Commentators would pay careful attention to the size of his briefcase. 3 The thought was that if the Chair was advocating a rate change, the briefcase would be bulging with documents to convince fellow policymakers.  A light bag, on the contrary, would have signaled that a

2  See Ben S. Bernanke (2015), 'Inaugurating a New Blog,' Ben Bernanke's Blog, March 30, paragraph 1, https://www.brookings.edu/articles/inaugurating-a-new-blog.

3 See William T., Gavin and Rachel J. Mandal (2000), 'Inside the Briefcase:  The Art of Predicting the Federal Reserve,' Federal Reserve Bank of St. Louis, Regional Economist, July 1,

https://www.stlouisfed.org/publications/regional-economist/july-2000/inside-the-briefcase-the-art-ofpredicting-the-federal-reserve.

status quo policy decision was likely.  Former Chair Greenspan seemed to value the element of surprise.  In 1987, he famously quipped, 'If I seem unduly clear to you, you must have misunderstood what I said.' 4 That said, during his tenure in later years, he initiated substantial changes in how Fed policymakers communicate with the public.

Figure 1 shows a timeline of the steps taken toward increasing transparency at the Fed since the 1990s.  Beginning in 1993, the Fed started to publish FOMC meeting minutes in their current form at the next meeting.  Soon after that, the Committee began releasing full transcripts of what was said at the meetings with a five-year lag.  The next year, the FOMC started to issue statements following meetings at which there was a change in the policy stance.  Before such public statements, Fed watchers would need to observe movements in markets to determine if a policy change was being implemented. In subsequent years, the target federal funds rate was incorporated into these statements, and then, in 1999, the FOMC started to publish statements after every meeting, regardless of whether there was a policy change.  In 2004, the FOMC accelerated the release of the minutes to three weeks after the meeting.  The Fed's transparency increased further under former Chair Bernanke.  In November 2007, the FOMC began releasing the Summary of Economic Projections, commonly known as the SEP, which, as you may know, is a compilation of individual policymakers' forecasts for output, unemployment, and inflation.  Since 2012, the SEP has also included information about policymakers' projections of appropriate monetary policy, known as the dot plot.  Former Chair Bernanke started holding press conferences after every other FOMC meeting in 2011.  In 2012, the FOMC published the Statement on Longer-Run Goals and Monetary Policy

4  See Binyamin Appelbaum (2012), 'A Fed Focused on the Value of Clarity,' New York Times,

December 13.

Strategy, which is known as the consensus statement.  That statement articulates the FOMC's framework for the conduct of monetary policy in pursuit of the dual-mandate goals assigned by Congress:  maximum employment and price stability.  And since then, the FOMC has undertaken periodic public reviews of that statement.  Under Chair Powell's tenure, starting in 2019, the Chair's press conferences have been held after every FOMC meeting.

Of course, the Chair and other policymakers also regularly testify before Congress, as required by law.  And the Fed releases many reports and data, including the Monetary Policy Report, the Financial Stability Report, and the Supervision and Regulation Report. Policymakers' public appearances also help inform the public about the Fed's goals and its strategies to achieve those goals.

Communication is not just about talking; it is also about listening.  Policymakers listen to the steady beat of economic data, and the Board and the Reserve Banks conduct numerous surveys of financial market participants, businesses, and families.  Some of what we hear is summarized in the Beige Book, published eight times per year.  I also listen to experts and the public at events like this and Fed Listens events, several of which are planned for later this year.

Today, it is widely accepted that clear communication contributes greatly to effective transmission of monetary policy, especially because clear communication can affect the expected path of interest rates and financial conditions more generally.  Former Cleveland Fed President Loretta Mester studied this issue closely and discussed that when policymakers are clear about their policy goals, aspects of the economy that can and cannot be influenced by monetary policy, and the economic information that

influences their forecasts and policy decisions, the public will have a better understanding of monetary policy. 5 The public can then incorporate that information into their saving, borrowing, employment, and investment decisions.

## Economic Outlook

So, in that spirit of making sure the public is well informed, I will now share with you my outlook for the U.S. economy.  Over the past two years, significant progress has been made toward the Fed's dual-mandate goals of maximum employment and stable prices.  Labor market conditions are solid, and inflation has come down, though it remains somewhat elevated relative to our 2 percent goal.  While the economy is in a solid position, surveys of consumers and businesses show heightened uncertainty about the economic outlook.  It remains to be seen what these surveys imply about future spending and investment and the direction of the economy more broadly.

Economic Activity

The economy expanded at a solid pace at the end of last year with gross domestic product (GDP) rising at a 2.4 percent annual rate in the fourth quarter, extending a period of steady growth, as you can see in figure 2.  While Fed policymakers and many privatesector forecasters expect growth to continue, they broadly anticipate a slower pace of expansion this year.  In the SEP released after the March FOMC meeting, the median participant projected GDP to rise 1.7 percent this year and to move up a bit below 2 percent over the next two years.

5  See Loretta J. Mester (2018), 'The Federal Reserve and Monetary Policy Communications,' speech delivered at the Tangri Lecture at Rutgers University, New Brunswick, New Jersey, January 17, https://www.clevelandfed.org/collections/speeches/2018/sp-20180117-federal-reserve-monetary-policycommunications.

Resilient consumer spending has been the driving force of the current economic expansion.  More recently, a few signs have emerged that suggest that some of the factors supporting last year's strong spending growth may be weakening.  As you can see in figure 3, retail and food service sales rose 0.2 percent in February after falling a sharp 1.2 percent in January.  That slower pace of spending could reflect seasonality, poor weather, and expected cooling after the strong spending at the end of last year. Nonetheless, the readings at the start of this year suggest less support for growth from household spending in the first quarter.  The most recent Beige Book stated that contacts reported consumer spending was lower, on balance, with still solid demand for essential goods but increased price sensitivity for discretionary items, particularly among lowerincome shoppers. 6

Industrial production has increased for three straight months, including a 0.7 percent advance in February, which was led by a rise in manufacturing output, particularly motor vehicles.  Like consumer sentiment, however, readings on business sentiment have also slipped.  The Beige Book reported some increases in manufacturing activity, though it noted concerns raised by firms, including chemical products and office equipment makers, about the potential effect of changes to trade policy.  Some manufacturing contacts in this region, the Sixth District, said that they expected demand to improve over the next 12 months but also noted risks around policy changes and global uncertainty.

6 See Board of Governors of the Federal Reserve System (2025), The Beige Book: Summary of Commentary on Current Economic Conditions by Federal Reserve District, February,

If uncertainty persists or worsens, economic activity may be constrained.  An important lesson learned in recent years, however, is that American consumers have been resilient, and negative sentiment reported in surveys often does not translate into a slowdown in actual activity.

## Labor Market

With respect to the labor market, conditions remain solid.  The unemployment rate has remained low and was 4.1 percent in February.  As you can see in figure 4, it has remained in a narrow range for the past year, consistent with broader evidence that labor market conditions have stabilized.  That said, I anticipate that there could be some modest softening in the labor market this year.  In the SEP projections, the median FOMC participant expected the unemployment rate to be 4.4 percent at the end of this year and 4.3 percent over the next two years.

Payroll job gains have averaged nearly 200,000 per month over the past six months, through February.  We will, of course, get additional data tomorrow with the March jobs report.  The pace of job gains has cooled from its post-pandemic peak, but layoffs remain low.  Figure 5 shows that new applications for unemployment benefits are largely holding steady this year and running at rates consistent with pre-pandemic levels. Low layoffs are a reason why the unemployment rate has been steady even as hiring has moderated.  Recently, there has been an increase in former federal government employees seeking unemployment benefits and some uptick in claims filings in certain regions affected by those layoffs.  I will be monitoring incoming data closely and remain vigilant about potential spillover effects in sectors such as education, health care, and state governments.

Looking at figure 6, you see that the gap between job openings and unemployed people seeking work has held steady for several months.  That is another sign that the labor market is well-balanced.  The gap has significantly narrowed from a peak in 2022, when the labor market was overheated.  It is now consistent with 2019 readings, when the labor market was also solid and inflation low.  Wages are growing faster than inflation and at a more sustainable pace than earlier in the pandemic recovery.  The labor market is not a source of significant inflationary pressures.

## Inflation

Inflation has come down a great deal over the past two and a half years but remains somewhat elevated relative to our 2 percent objective.  Looking at inflation shown in figure 7, you see that the 12-month change in the personal consumption expenditures (PCE) price index peaked at 7.2 percent in June 2022.  Since then, it has come down on an uneven path.  In February, overall inflation was 2.5 percent on a 12month basis.  Core PCE inflation, which excludes volatile food and energy costs, shown by the dashed red line, peaked at 5.6 percent in 2022.  In February, it was 2.8 percent.

While inflation is well down from its recent peak, the latest data have largely shown it moving sideways.  The median FOMC participant forecasts overall PCE inflation at 2.7 percent this year and 2.2 percent next year.  In 2027, the median projection is at our 2 percent objective.  The prospect of tariffs has consum ers and businesses reporting that they expect higher inflation in the near term.  Beyond the next year or so, however, most measures of longer-term inflation expectations remain consistent with our 2 percent inflation goal.

To better understand what is driving inflation, I think it can be helpful to look at some major components of changes in prices, as you can see in figure 8.  Outside of food and energy, goods inflation was negative last year, helping to support overall disinflation. In more recent months, goods inflation has turned positive.  That may in part reflect trade policy or the anticipation of changes to trade policy, but capturing the exact cause is difficult.  Services inflation excluding housing, the dashed red line, has moderated from its peak but remains elevated.  Housing services inflation, the dotted purple line, continues to move lower.  If that trend continues, it could counter somewhat stronger inflation in other categories.

## Monetary Policy

In the current environment, I attach a higher degree of uncertainty to my projections than usual.  The most recent SEP indicated that other FOMC participants also were quite uncertain about the outlook:  A greater number of participants indicated that uncertainty around their projections of GDP growth, the unemployment rate, and inflation was higher than average over the past 20 years compared with responses from the previous SEP round in December 2024.  As I mentioned, consumer and business surveys show that much of the economic uncertainty they report is tied to recent developments in trade policy.  Significant changes in trade, immigration, fiscal, and regulatory policies currently are in process.  It will be crucial to evaluate the cumulative effect of these policy changes as we assess the economy and consider the path of monetary policy.  Of course, at the Fed, we look at the whole of the economy and many factors that shape it.

I supported the FOMC's decision to hold rates steady at our last policy meeting in March.  Growth has remained solid so far but has started to show some signs of slowing. Labor market conditions have remained stable through February, and progress on inflation has eased, but the outlook is uncertain.  These conditions led me to favor holding the policy rate constant at what I view as a moderately restrictive level.

The longer-term perspective provided by figure 9 shows that the FOMC responded to elevated inflation in the post-pandemic period by raising the policy rate 5¼ percentage points over about 15 months, starting in March 2022.  After the Committee held the rate at that restrictive level for more than a year, progress on inflation allowed it to lower its policy rate by 1 full percentage point last year to its current level. The outcome of inflation moderating toward the 2 percent target without a large increase in unemployment was historically unusual but greatly welcomed.

Thinking about the future path of policy, I will continue to assess incoming data, the evolving outlook, and the balance of risks.  As we emphasize, monetary policy is not on a preset course.  If the economy remains strong and inflation does not continue to move sustainably toward 2 percent, the current policy restraint could be retained for longer.  If the labor market were to weaken unexpectedly or inflation were to fall more quickly than anticipated, policy could be eased accordingly.  In my view, there is no need to be in a hurry to make further policy rate adjustments.  The current policy stance is well positioned to deal with the risks and uncertainties that we face in pursuing both sides of our dual mandate.

Having provided you with my current economic outlook, I would like to conclude by circling back to where I started, with the value of central bank communication.  The

remainder of today's conference will touch on FOMC communications and monetary transmission, among other topics.  In that sense, the remarks that I've just given may become tomorrow's data point!  I appreciate the pursuit of research like that presented today, which helps us gain further insight into a wide range of topics relevant to monetary policymaking.

Thank you for your time today.  I wish you a productive and informative remainder of the conference.

## U.S. Economic Outlook and Central Bank Communications

Philip N. Jefferson Vice Chair, Federal Reserve Board



FRB Atlanta-UVA conference, April 3, 2025

Disclaimer: The views I will express today are my own and not necessarily those of the Federal Open Market Committee (FOMC) or the Federal Reserve System.



## Figure 1: Evolution of Fed Communications





Figure

2:

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GDP

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Source: U.S. Bureau of Economic Analysis, Real Gross Domestic Product, retrieved from FRED, Federal Reserve Bank of St. Louis.











Figure 7: 12-Month PCE and Core PCE Inflation



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Reserve

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Personal

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Index and

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FRED,





## U.S. Economic Outlook and Central Bank Communications

Philip N. Jefferson Vice Chair, Federal Reserve Board



FRB Atlanta-UVA conference, April 3, 2025

Disclaimer: The views I will express today are my own and not necessarily those of the Federal Open Market Committee (FOMC) or the Federal Reserve System.",Philip N Jefferson
https://www.bis.org/review/r250407c.htm,Adriana D Kugler: Inflation expectations and monetary policymaking,"Speech by Ms Adriana D Kugler, Member of the Board of Governors of the Federal Reserve System, at the ""Public Talk: Reflections on Recent Economic Developments"", cosponsored by the Griswold Center for Economic Policy Studies and the Julis-Rabinowitz Center for Public Policy and Finance, Princeton University, Princeton, New Jersey, 2 April 2025.",2025-04-02 00:00:00,"For release on delivery 4:30 p.m. EDT April 2, 2025

Inflation Expectations and Monetary Policymaking

Remarks by

Adriana D. Kugler

Member

Board of Governors of the Federal Reserve System at

'Public Talk:  Reflections on Recent Economic Developments,' cosponsored by the Griswold Center for Economic Policy Studies and the Julis-Rabinowitz Center for Public Policy and Finance Princeton University

Princeton, New Jersey

April 2, 2025

Thank you, Alan, and thank you to the Griswold and Julis-Rabinowitz Centers for the opportunity to speak to you today. 1 As someone who has worked in both the public sector and academia, I applaud the common purpose of both centers in connecting researchers, policymakers, and the private sector to pursue policy ideas that serve the public good.

To that end, I can think of few individuals who have done more-as a teacher, researcher, government official, and public figure-than Alan Blinder.  That includes educating the public about economic policymaking.  In the spring of 2022, as many wondered whether Russia's war on Ukraine would add to the factors then driving up inflation, Professor Blinder wrote in the Wall Street Journal that a more important factor would probably be the public's expectations of future inflation. 2

As I will relate in these remarks, he was, of course, absolutely correct.  As in the past, inflation expectations have played a crucial role in the course of inflation since the spring of 2022, and I expect they will be important in the Federal Reserve's ongoing effort to achieve sustained inflation of 2 percent.  For that reason, I would like to focus on inflation expectations today, before discussing my outlook for the U.S. economy and the implications for appropriate monetary policy.  First, I will describe inflation expectations within the conceptual framework that many economists use to connect inflation to broader economic activity, known as the Phillips curve.  Second, I will discuss the central importance of the stability of these expectations, which we have come to call the 'anchoring' of inflation expectations.  Third, I will explain how firms and households

1 The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.

2 See Alan S. Blinder (2022), 'Wish the Fed Luck as It Seeks a Soft Landing on Inflation,' Wall Street Journal, April 6.

form their inflation expectations and how these expectations affect their economic decisionmaking.  Throughout, I will make some references to historical experiences with inflation but focus on the period since the pandemic.

Economists have long recognized the connection between inflation and overall macroeconomic conditions, but it was in trying to explain this empirical relationship and measure it with some precision that the importance of inflation expectations was revealed.

The foundation of this work was laid by New Zealand economist A.W. Phillips, a fascinating figure who was, among other things, a mechanical genius who built an early economic model operated by hydraulics rather than electronics.  In contemplating the mechanics of the economy, in 1958 Phillips set about to explain why nominal wage growth was slower when unemployment was high and faster when unemployment was low.  His and other subsequent research showed that a crucial factor was the utilization of resources, such as labor and capital. 3 Generally, when firms use labor and capital very intensively, production costs tend to rise, and firms have more scope to pass those cost increases along in the form of higher prices for their products and services, which, in turn, may push up inflation across the economy.  In contrast, when that level of utilization is low, costs tend to rise more slowly (or even fall), and firms have less scope for raising prices, thus pushing down inflation.  This tradeoff has been called the Phillips curve.

In this simple form, this tradeoff implies that governments can achieve and maintain very low unemployment only if they allow inflation to rise to a certain level.  In

3 For a literature review on the relationship between inflation and resource utilization, also called the slope of the Phillips curve, see Francesco Furlanetto and Antoine Lepetit (2024), 'The Slope of the Phillips Curve,' Finance and Economics Discussion Series 2024-043 (Washington:  Board of Governors of the Federal Reserve System, May), https://www.federalreserve.gov/econres/feds/files/2024043pap.pdf.

the latter 1960s, Milton Friedman and Edmund Phelps asserted that this orderly tradeoff was only temporary and would ultimately break down because of the role of expectations and, in particular, inflation expectations. 4 To use an example, while current production costs are important to a factory owner setting prices, that owner will also consider future production costs, future levels of demand, and expectations for inflation throughout the economy.  Likewise, workers will factor expectations of future economic conditions into their pay demands, and banks will consider future inflation in deciding loan rates. Consumers, whose purchases constitute some two-thirds of economic activity, make decisions about whether to purchase something today with an idea of what it will cost in the future.  All these decisions are influenced by expectations, and this is the way in which expectations may shape inflation now.  In turn, when we think about the Phillips curve and its tradeoff nowadays, we account for the important role of expectations of different individuals throughout the economy.

There are different measures of inflation expectations, some from surveys polling business owners, others asking consumers, and yet others estimating expectations among bond investors based on the differences in yields between nominal and inflation-indexed securities.  While most of my points apply broadly to all measures of expectations, my examples come mostly from surveys of consumers and businesses.  While there are questions, which I will address, about how well these surveys measure inflation expectations, I closely monitor them because they complement market-based indicators

4  See Milton Friedman (1968), 'The Role of Monetary Policy,' American Economic Review, vol. 58 (March), pp. 1-17; and Edmund S. Phelps (1967), 'Phillips Curves, Expectations of Inflation and Optimal Unemployment over Time,' Economica, vol. 34 (135), pp. 254-81.

of future inflation that are affected by dynamics intrinsic to financial markets, such as changes in risk premiums.

Let me note that, in addition to the way expectations of future inflation influence prices in the near term, there are economic mechanisms that link current inflation with past inflation, such as those that set wages and the terms of rental contracts.  In these cases, adjustments in these terms are often benchmarked on past inflation, as, for instance, when workers and landlords aim to recoup losses from increases in general prices.  To cite one example, as the economy reopened after the pandemic, workers sought higher wages to compensate for the early wave of inflation in food and core goods, thus further pushing up inflation, especially in the services sector, where labor accounts for the largest share of this sector's costs. 5 And, because rental agreements typically last for 12 months or more, landlords faced a lag in adjusting rents to reflect the escalation of inflation after the pandemic and sought to recoup those losses when renewing leases.

By looking at price changes this way, in a rearview mirror, some decisionmakers in the economy end up making inflation more persistent.  That is important to me as an economic policymaker who must pay attention to both expectations of future inflation and the persistence of current inflation.

When we speak of expectations of future inflation, it is crucial to define the time horizon, and different surveys conducted by the Federal Reserve and others ask about inflation from 1 year to as many as 10 years in the future.  Surveys with a shorter horizon,

5 For a discussion about the timing of the inflation waves of different categories, see Adriana D. Kugler (2025), 'Navigating Inflation Waves:  A Phillips Curve Perspective,' speech delivered at the Whittington Lecture, McCourt School of Public Policy, Georgetown University, Washington, February 20,

such as the University of Michigan Surveys of Consumers' question on inflation 1 year ahead, shown in figure 1, are heavily influenced by current inflation.  Near-term inflation expectations tend to be more volatile, moving up when, for example, energy prices increase, or down when energy or some other volatile set of prices decreases.  These expectations are important because many economic decisions, such as major consumer purchases and hiring and investment for firms, focus on horizons of only a few years ahead.

By contrast, inflation expectations over longer horizons, such as the Michigan survey's question on inflation during the next 5 to 10 years (the red line in figure 1), say less about current conditions than about the trend for inflation for some time in the future. You can think about these longer-term expectations as much less affected by the forces that push inflation up or down in the short term, what economists call 'shocks.'  Longerterm inflation expectations tend to be less volatile, affected less, for example, by what oil or food prices have done lately than by the stability of inflation over years or decades.

I mention these different time horizons because they matter in my job as a central banker.  Expectations a year from now reflect short-term shocks to the economy, as well as ongoing efforts from monetary policymakers to bring the economy back to its longerrun state.  Thus, while short-term expectations may indicate whether inflation is expected to move toward its target, they are not the best gauge of monetary policy credibility. Longer-term inflation expectations, however, should be much less influenced by shortterm shocks to the economy, and a change in those expectations has implications for the Federal Reserve's prospects for meeting its price-stability goal.

When these longer-term expectations are reasonably low and unresponsive to shorter-term developments, we say they are 'anchored.'  It is not clear who first defined the term, but Federal Reserve Chairman Ben Bernanke in 2007 gave a speech on inflation expectations in which he described 'anchored' expectations as 'relatively insensitive to incoming data.' 6

So how should we think about the process of anchoring and de-anchoring of inflation expectations?  The dynamics of short- and long-term inflation expectations shed light on this issue.  If the public experiences a spell of inflation higher than their shorterrun expectations, they will revise up these shorter-term expectations to ensure that their near-term plans account for the change in the economic environment.  That's what happened after the pandemic, when inflation based on personal consumption expenditures (PCE) rose to a peak of 7.2 percent and one-year expectations rose to more than 5 percent.  But longer-term inflation expectations remained anchored, with values within the range seen since 1995.  I would contrast this experience with the United States' previous bout of high inflation from the 1970s to the early 1980s.  Among other issues, such as high energy prices and accommodative monetary policy, rising inflation and inflation expectations fed a cycle of escalating inflationary pressures. 7 Inflation was high and very volatile over this period, and that is reflected in shorter and longer-term inflation expectations that were high and volatile, too.

6 See Ben S. Bernanke (2007), 'Inflation Expectations and Inflation Forecasting,' speech delivered at the Monetary Economics Workshop of the National Bureau of Economic Research Summer Institute, Cambridge, Mass., July 10, quoted text in paragraph 7,

https://www.federalreserve.gov/newsevents/speech/bernanke20070710a.htm.

7 For evidence on how longer-run inflation expectations may be driven by short-run inflation surprises, see Carlos Carvalho, Stefano Eusepi, Emanuel Moench, and Bruce Preston (2023), 'Anchored Inflation Expectations,' American Economic Journal:  Macroeconomics, vol. 15 (January), pp. 1-47.

Another important difference between these two episodes has to do with the performance of the Federal Reserve.  As opposed to the late 1960s and most of the 1970s, most recently the Fed acted aggressively to tighten monetary policy, raising the federal funds rate more rapidly than in previous tightenings and lowering inflation more quickly than ever before.  This came after 30 years of success in keeping inflation in check, and the credibility earned by the Fed's inflation discipline surely helped keep longer-term expectations stable.  This shows that an important role of the central bank is to convince the public, through actions and communications, about its intention to shape economic conditions and to use its policy tools to bring inflation to its target. 8 By committing to keep inflation low in the future, central banks seek to influence expectations of future inflation, which, in turn, influence conditions now and over time.  The Fed's credibility in keeping inflation low and stable, won over decades, kept longer-term inflation expectations stable, and that contributed significantly to the Fed's success in reducing inflation while keeping the labor market strong.

Those are some of the basics about inflation expectations and how they influence the economy and the conduct of monetary policy.  Next, I want to note some of the patterns we see in survey measures of inflation expectations, what influences expectations, and how inflation expectations are used by the public in their decisionmaking.  Fortunately, there is a rich body of economic research that has shed

8 For a survey on how central banks communicate with the general public and the effectiveness of such communications, see Alan S. Blinder, Michael Ehrmann, Jakob de Haan, and David-Jan Jansen (2024), 'Central Bank Communication with the General Public:  Promise or False Hope?' Journal of Economic Literature, vol. 62 (June), pp. 425-57.

light on these questions, and I will focus on the evidence for households and firms. 9 We can then take some lessons from these empirical patterns for monetary policymaking.

One important observation is that both short- and long-term inflation expectations are often notably higher than actual inflation, even after a period of very low inflation. There is evidence that survey respondents often believe the inflation they have experienced is higher than it is.  Another pattern is that there is a wide dispersion of views about both shorter and longer-term inflation expectations, reflecting, at least in part, the dispersion of inflation in the consumer baskets of goods and services purchased by different people.  Research also finds that some groups, such as women and lowerincome households, tend to have systematically higher inflation expectations.  In addition to this variation in expectations, there is high uncertainty in forecasts of future inflation. When people are asked to assign probabilities to different forecasts for inflation, surveys report wide distributions in the likelihood of one outcome or another.  Finally, short-term inflation expectations tend to be correlated with both recently realized inflation and perceptions about recent inflation. 10

These patterns tell policymakers that inflation expectations of households and firms are diffuse and likely harder to influence through monetary policy relative to financial market participants and professional forecasters who follow the news more closely.  Still, expectations from business owners and workers ultimately inform firms' pricing decisions and costs and, thus, may even be more relevant for inflation outcomes;

9 For a literature review on this topic, see Michael Weber, Francesco D'Acunto, Yuriy Gorodnichenko, and Olivier Coibion (2022), 'The Subjective Inflation Expectations of Households and Firms:  Measurement, Determinants, and Implications,' Journal of Economic Perspectives, vol. 36 (Summer), pp. 157-84. 10  See David Lebow and Ekaterina Peneva (2024), 'Inflation Perceptions during the Covid Pandemic and Recovery,' FEDS Notes (Washington:  Board of Governors of the Federal Reserve System, January 19), https://www.federalreserve.gov/econres/notes/feds-notes/inflation-perceptions-during-the-covid-pandemicand-recovery-20240119.html.

therefore, it is important for policymakers to communicate clearly with the public our intentions to bring inflation back to our target. 11

So, because inflation expectations are diffuse and heavily influenced by recent experience, let's consider the reasons for the dispersion in these expectations. Unsurprisingly, it starts with the considerable variation in the sources that the public uses to collect information about inflation.  Households report that their main source of information is their own shopping experiences, making regular purchases such as groceries and gasoline, and the price changes in those goods and services are what affect inflation expectations the most. 12 Also, it seems that inflation expectations of homeowners tend to respond to changes in mortgage rates because homeowners have more of an incentive to track changes in rates that might affect, for example, their prospects for loan refinancing. 13 Another important source of information is energy bills, with evidence also pointing to households' inflation expectations being more sensitive to energy prices when inflation is higher. 14 More generally, consumers and firms seem to pay more attention to news related to inflation when inflation is high, and this has been found for many countries. 15

11 See Ricardo Reis (2023), 'Four Mistakes in the Use of Measures of Expected Inflation,' AEA Papers and Proceedings, vol. 113 (May), pp. 47-51.

12  See Francesco D'Acunto, Ulrike Malmendier, Juan Ospina, and Michael Weber (2021), 'Exposure to Grocery Prices and Inflation Expectations,' Journal of Political Economy, vol. 129 (May), pp. 1615-39. 13  See Hie Joo Ahn, Shihan Xie, and Choongryul Yang (2024). 'Effects of Monetary Policy on Household Expectations:  The Role of Homeownership,' Journal of Monetary Economics, vol. 147 (October), 103599. 14  See Francesco D'Acunto and Michael Weber (2024), 'Why Survey-Based Subjective Expectations Are Meaningful and Important,' Annual Review of Economics, vol. 16 (August), pp. 329-57.  For evidence on the higher sensitivity of inflation expectations when inflation is higher, see Paula Patzelt and Ricardo Reis (2024), 'Estimating the Rise in Expected Inflation from Higher Energy Prices,' CEPR Discussion Paper 18907 (Paris:  Centre for Economic Policy Research, March), https://cepr.org/publications/dp18907. 15 See, for instance, Anat Bracha and Jenny Tang (2024), 'Inflation Levels and (In)Attention,' Review of Economic Studies ; and Michael Weber, Bernardo Candia, Hassan Afrouzi, Tiziano Ropele, Rodrigo Lluberas, Serafin Frache, Brent Meyer, Saten Kumar, Yuriy Gorodnichenko, Dimitris Georgarakos, Olivier Coibion, Geoff Kenny, and Jorge Ponce (2025), 'Tell Me Something I Don't Already Know:  Learning in Lowand High-Inflation Settings ,' Econometrica, vol. 93 (January), pp. 229-64.

While the unique experiences of survey respondents matter, this evidence points to inflation expectations being dependent on the state of the economy.  Thus, we policymakers should account for different economic conditions when assessing the risks of a de-anchoring of inflation expectations.  For instance, with fresh memories of the post-pandemic inflation and with recent surges in prices of some food items regularly purchased, inflation expectations of workers and firms may now be more sensitive to anticipated future price increases relative to the pre-pandemic period.

Let me now turn to how households and businesses employ their inflation expectations in their economic decisionmaking, with much of the evidence consistent with what one would expect based on long-standing economic theory.  Starting with households, in addition to any influence on wages from past inflation, expectations of future inflation help shape demands for pay raises.  Workers care about their inflationadjusted wages, rather than nominal wages, and (as shown in figure 2) we see a positive correlation between inflation expectations from consumers and wage growth, with a close co-movement during the recent inflationary bout.  A complementary decision for the worker is to look for a new job that pays more, especially if the person envisions a low probability of getting a raise in the current job or if the raise will likely not fully cover losses in real incomes from inflation.  Indeed, measures of general wage growth are more sluggish relative to those of job switchers.  Moreover, researchers also find evidence of higher job-to-job transitions for workers who have higher inflation expectations. 16 So

16  See Ina Hajdini, Edward S. Knotek II, John Leer, Mathieu Pedemonte, Robert W. Rich, and Raphael S. Schoenle (2022), 'Low Passthrough from Inflation Expectations to Income Growth Expectations:  Why People Dislike Inflation,' Working Paper Series 22-21 (Cleveland:  Federal Reserve Bank of Cleveland, June), https://www.clevelandfed.org/publications/working-paper/2022/wp-2221-low-passthrough-frominflation-expectations-to-income; and Laura Pilossoph and Jane M. Ryngaert (2024), 'Job Search, Wages, and Inflation,' NBER Working Paper Series 33042 (Cambridge, Mass.:  National Bureau of Economic Research, October), https://www.nber.org/papers/w33042.

inflation expectations of workers are an important influence on nominal wage growth and an important indicator of inflationary pressures for us policymakers.

Now let's consider how these expectations influence firms' decisions.  As I discussed in the context of the Phillips curve, firms with higher inflation expectations would be expected to increase prices more, and, indeed, researchers find causal evidence for this. 17 During the recent period of high inflation, the fact that business owners' shortterm expectations about costs or input prices rose only modestly and soon returned to levels close to 2 percent just suggests that firms' inflation expectations were not a strong source of inflationary pressures (as seen in figure 3).  Still, researchers at the Richmond Fed also found that during this period, business leaders incorporated more information about aggregate inflation measures in their own pricing decisions compared with times before the pandemic inflation surge. 18 While researchers also find that business leaders paid less attention to inflation as it came down, this evidence points to the inflation expectations of businesses being sensitive to underlying inflationary dynamics, and monetary policymakers should remain attentive to this.

Now let me turn to the recent developments in inflation expectations, the current U.S. economic outlook, and the implications for monetary policy.

In recent months, we have seen several measures of inflation expectations increase, with both consumers and businesses reporting new and proposed tariffs as an important reason.  Among surveys looking one year ahead, there have been notable

17 For the relationship between inflation expectations and pricing decisions, see Olivier Coibion, Yuriy Gorodnichenko, and Tiziano Ropele (2020), 'Inflation Expectations and Firm Decisions:  New Causal Evidence,' Quarterly Journal of Economics, vol. 135 (February), pp. 165-219.

18 For evidence on the recent inflationary episode, see Felipe F. Schwartzman and Sonya Ravindranath Waddell (2024), 'Inflation Expectations and Price Setting among Fifth District Firms,' Economic Brief 24-03 (Richmond:  Federal Reserve Bank of Richmond, January),

https://www.richmondfed.org/publications/research/economic\_brief/2024/eb\_24-03.

increases for surveys by the University of Michigan, the Conference Board survey of consumers, the Atlanta Fed's survey of businesses, the Philadelphia Fed's Survey of Professional Forecasters, and the New York Fed's consumer survey.  For instance, last Friday's release of longer-term inflation expectations from the Michigan survey was the highest since February 1993.  Additionally, the recent spike in short-term inflation expectations appears to be mostly 'anticipatory,' as one can infer from the divergence between falling inflation perceptions-what consumers think price increases have been in the past year-and climbing short-run inflation expectations, both data from the Michigan survey.  This anticipatory nature of the recent increase in short-run expectations may allow for price pressures through a second channel:  Businesses may feel a greater ability to pass along higher costs to consumers when they come from external factors out of the control of these businesses.  Indeed, firms are already reporting not only higher costs, but also expectations of higher costs, according to some surveys, such as the one conducted by the Atlanta Fed, along with other manufacturing surveys. For now, I take some comfort from the much smaller increases in longer-term expectations as measured by the Philadelphia Fed's Survey of Professional Forecasters, as well as the stability of longer-term measures of what we call inflation compensation, which is based on yields from nominal and inflation-indexed Treasury securities.

As in past episodes when inflation expectations increased, uncertainty about future inflation seems to have also gone up, as measured by the disagreement between the 75th and 25th percentiles of the distribution of individual respondents to the Michigan survey.  Simultaneously, in recent months, we have also seen measures of economic policy uncertainty increase (seen in figure 4), and there is evidence that policy

uncertainty and inflation uncertainty correlate over time. 19 One possibility is that policy uncertainty may be contributing to a rise in inflation expectations as well as to uncertainty about future inflation.  Still, it is hard to say at this point, and I will keep monitoring these developments.

Let me turn from developments on expected inflation to realized inflation.  After the substantial decline in inflation from its peak in 2022, recent disinflation has been slower, and the latest data indicate that progress toward the Federal Open Market Committee's (FOMC) 2 percent goal may have stalled.  Core PCE inflation was 2.8 percent in the 12 months ended in February, which puts us back at the same level seen in the last quarter of 2024.  The best news for February comes from housing services inflation, which has come down steadily for at least a year to a 12-month rate of 4.3 percent, even if it is still above the pre-pandemic level of 2.5 percent.  For the rest of the inflation categories, the news was less positive.  Core goods inflation, which had been negative for a large share of 2024, increased to 0.4 percent relative to a year before. February likely also marked an upward shift in market-based services inflation.  While I do not discount price pressures in nonmarket services, which remain elevated, the acceleration in market-based services in February from an estimated 3.1 percent to 3.5 percent is also not welcome, given that this category often provides a better signal of inflationary pressures across all services.

19 For evidence on how policy uncertainty and inflation uncertainty correlate over time, see Carola C. Binder (2017), 'Measuring Uncertainty Based on Rounding:  New Method and Application to Inflation Expectations,' Journal of Monetary Economics, vol. 90 (October), pp. 1-12.  The measure of economic policy uncertainty is from Scott R. Baker, Nicholas Bloom, and Steven J. Davis (2016), 'Measuring Economic Policy Uncertainty,' Quarterly Journal of Economics, vol. 131 (November), pp. 1593-1636. The measure of trade policy uncertainty is from Dario Caldara, Matteo Iacoviello, Patrick Molligo, Andrea Prestipino, and Andrea Raffo (2020), 'The Economic Effects of Trade Policy Uncertainty,' Journal of Monetary Economics, vol. 109 (January), pp. 38-59.

On the other side of the FOMC's dual mandate, employment continues to grow at a moderate pace, and the overall labor market has remained resilient through February. The net 151,000 jobs added last month was not too far from the 177,000 average of the previous six months.  The unemployment rate ticked up to 4.1 percent, and labor force participation moved down to 62.4 percent.  Other labor market indicators suggest continued moderation in the labor market but not significant weakening.

Given the recent lack of progress on inflation, recent increases in inflation expectations, and upside risks associated with announced and prospective policy changes, I strongly supported the FOMC's decision at our March meeting to maintain the target range for the federal funds rate at 4-1/4 to 4-1/2 percent.  I will support maintaining the current policy rate for as long as these upside risks to inflation continue, while economic activity and employment remain stable.  Going forward, I will carefully assess incoming data, the evolving outlook, and changes in the balance of risks.

Thank you.



## Inflation Expectations and Monetary Policymaking

Adriana D. Kugler Member

Board of Governors of the Federal Reserve System

At

The Griswold Center for Economic Policy Studies and The Julis-Rabinowitz Center for Public Policy and Finance Princeton University

April 2, 2025

## Figure 1

## Inflation and Inflation Expectations



Source: University of Michigan, Survey Research Center; Haver Analytics; FRB staff calculations.

## Figure 2

## Wage Growth and Consumers' Inflation Expectations



Note: Employment cost index (ECl) is for private industry workers; the ECI data start in 1981:Q1. Source: University of Michigan, Survey Research Center; Bureau of Labor Statistics; Haver Analytics; FRB staff calculations.

## Figure 3

## Inflation and Firms' Inflation Expectations



Note: PCE is personal consumption expenditures chain price index. Firms' inflation expectations come from the following question in the Atlanta Fed survey: ""Projecting ahead, to the best of your ability, please assign a percent likelihood to the following changes to unit costs over the next 12 months: less than -1%; between -1% and 1%; between 1.1% and 3%; between 3.1% and 5%; greater than 5%."" Source: Bureau of Economic Analysis; Federal Reserve Bank of Atlanta, Business Inflation Expectations; Haver Analytics; FRB staff calculations.

## Figure 4

## Measures of Economic Policy Uncertainty



Note: For economic policy uncertainity, 1985 = 100; for trade policy uncertainity, 1% share of articles = 100.

Source: Baker, Bloom, and Davis (2016); Caldara and others (2020); Haver Analytics.",Adriana D Kugler
https://www.bis.org/review/r250407b.htm,Christopher Kent: The Reserve Bank of Australia's monetary policy implementation system - some important updates,"Speech by Mr Christopher Kent, Assistant Governor (Financial Markets) of the Reserve Bank of Australia, at the KangaNews Debt Capital Markets Summit, Sydney, 2 April 2025.",2025-04-02 00:00:00,"## The RBA's Monetary Policy Implementation System - Some Important Updates



RESERVE

BANK OF AUSTRALIA

Christopher Kent *

Assistant Governor (Financial Markets)

KangaNews Debt Capital Markets Summit

Sydney - 2 April 2025

## Introduction

I would like to thank KangaNews for the opportunity to discuss some important updates to the system for monetary policy implementation in Australia. The Reserve Bank Board discussed this late last year, and we are now ready to announce operational changes to our Open Market Operations (OMOs) that will support the transition to ample reserves.

Monetary policy implementation is at the core of the financial system's plumbing. It is how we give effect to changes in the cash rate target, influence other money market rates and provide liquidity to the banking system. Importantly, it enables us to conduct monetary policy in a way that best contributes to both price stability and full employment.

The RBA achieves this by providing banks access to Exchange Settlement (ES) balances - otherwise known as reserves. Banks use these funds to settle payments with other banks and the RBA. Banks also hold reserves for precautionary and regulatory purposes. In response to various price signals, and to help manage their reserves and deal with their funding needs, banks borrow and lend reserves in money markets. These transactions underpin key interest rates in the Australian economy - such as the cash rate and short-term money market rates like bank bill swap rates.

An effective monetary policy implementation system is critical for all market participants. It aids in the smooth transmission of monetary policy, supports good functioning of money markets and hence other key financial markets, and encourages greater resilience in the financial system.

In March last year, the Reserve Bank Board endorsed the new system for implementing monetary policy. Banks' demand for reserves would be satisfied in full at our OMOs, at a price near the cash rate target, using full allotment repurchase agreement (repo) auctions. We call this system 'ample reserves with full allotment' because it supplies as many reserves as banks demand at our OMOs.

In April last year, I discussed why the Board endorsed this framework. 1 In brief, it is a simpler and more robust system for us to operate compared with the alternatives. It is also similar to systems used by other central banks, including the European Central Bank and the Bank of England. Banks will determine the amount of reserves they hold to suit their liquidity needs. The system is resilient to structural changes affecting banks' underlying demand for liquidity as well as policies that might affect the size of the RBA's balance sheet (such as unconventional policies if they were to become necessary again). At the same time, it implies a materially larger steady-state balance sheet for the central bank compared with pre-pandemic times.

Over the past year or so, we have been working on the detailed design of this system, and today I am announcing some important changes. I stress that these changes are operational in nature. They do not represent or signal a shift in the stance of monetary policy. Nor do they have a bearing on the Monetary Policy Board's current approach to allowing bond holdings acquired during the pandemic to mature.

Specifically, effective from 9 April 2025, we will:

- increase the price of all new OMO repos by 5 basis points to 10 basis points over the cash rate target; OMO will continue to be offered at a floating rate
- introduce a seven-day term, in addition to the existing 28-day term, at each weekly OMO.

Before outlining the Reserve Bank Board's deliberations and explaining why we have decided to make these changes, I want to review recent market developments.

## Recent developments in markets

Reserves have declined around $110 billion over the past year (Graph 1). Most of this reflected the final repayment of the Term Funding Facility (TFF) in June 2024. Subsequently, the level of reserves has fluctuated around $240 billion, and the cash rate has remained close to, but slightly below, the cash rate target.

Graph 1



Source: RBA.

Activity at our OMOs increased from around $3 billion a week in the June quarter of 2024 and has stabilised around $7 billion. This increase occurred shortly after the final repayment of the TFF, alongside a broader tightening in liquidity conditions in money markets globally. In response, banks accessed more reserves from OMO, and some of those funds appeared to have been recycled into other money markets. This was an early indication that the full allotment system was working as intended - reserves rose automatically in response to an increase in demand for liquidity while increases in money market rates were largely contained (Graph 2).

Graph 2 Monetary Policy Rates



Spread to cash rate target

Sources: ASX; RBA.

Current market conditions suggest that the transition to ample reserves - that is, a level of supply that is in balance with banks' underlying demand - is ongoing. The stock of reserves remains elevated, reflecting the bonds still on the RBA's books that we purchased during the pandemic. Our expectation is that reserves will continue to decline gradually for a time in response to the decline in the RBA's bond holdings. 2 Eventually though, the supply of reserves will approach banks' underlying demand, and thereafter banks' participation in OMO should pick up to offset the effect of further declines in the RBA's bond holdings.

Underlying demand for reserves is hard to estimate and it will only become evident as we approach ample reserves. We have done modelling work and banks have also provided us with estimates of their own demand for reserves. This suggests that underlying reserves could be anywhere between $100 and $200 billion. 3 An advantage of our full-allotment system in the face of such uncertainty is that the transition to ample reserves can occur without us needing to know the level of banks' underlying demand ahead of time. OMO use will rise automatically. Such a move, combined with an assessment of market conditions and liaison with the banks, will indicate when reserves have reached an 'ample' level. Private market activity may also increase as we approach this point - particularly in the short-term repo and cash markets. This is because banks wanting additional reserves on non-OMO days will seek to borrow them in private markets. Other banks can lend reserves if they have more than they need. The scale of this activity will depend in part on the extent to which banks choose to economise on their reserve holdings, given that obtaining reserves at OMO and leaving them in ES accounts comes at a cost to the banks. I will come back to this point in a moment.

## Principles for an ample reserves system

Over the past year, the RBA has consulted banks, estimated the underlying demand for reserves, and considered the ways in which the new ample reserves system might operate. We have published a summary of consultation responses on our website today; thank you to those who contributed. This work informed discussions at the Reserve Bank Board late last year at which three key principles for the ample reserves system were considered:

1. Sufficient monetary control . The Board agreed that the primary objective for monetary policy implementation was to achieve sufficient 'monetary control'. This involves the cash rate trading close enough to the target with other short-term interest rates tethered to the cash rate to be consistent with the desired stance of monetary policy.
2. Supporting private markets . The Board agreed that we could achieve the primary objective of monetary control while still allowing deviations of the cash rate from target. Allowing the cash rate to trade within a modest range will avoid the RBA having an overly large presence in markets and thereby encourage banks to use private markets. Well-functioning private markets will help banks to better manage their funding needs in normal times and times of stress. Banks can be encouraged to use private markets by setting the price for OMO in a way that avoids the RBA having an overly large presence in the repo market. 4 Using a mix of different operations to supply reserves could also be used to avoid an overly large presence in any one market.
3. Minimising risk to the RBA balance sheet . Providing reserves carries risks for the RBA - both financial and operational. The size and nature of the risks depend on the quantity of reserves as well as the characteristics of the operations used to supply them. Under an ample system, the RBA will provide more reserves compared with the earlier corridor system. OMOs do not carry interest rate risk because the floating rate of our OMOs is linked directly to the rate we pay on our liabilities. However, the use of other operations to supply reserves could entail financial risk.

A key question we considered was how to balance these principles given there is some tension between them. For example, we could have a high degree of monetary control by setting a low price for OMO close to the ES rate. But that would encourage banks to obtain a lot of reserves via OMO, crowding out private market activity and implying a large balance sheet for the RBA. Decisions on the configuration of OMO as well as the mix of other operations to supply reserves will need to balance these various trade-offs.

## Changes to the configuration of our OMOs

We have been running full-allotment OMOs since the onset of the pandemic. We switched these from daily to weekly auctions from October 2021. We then offered a term of 28 days and at a price 5 basis points above overnight indexed swaps from early 2022. We then switched this price to a floating rate that was 5 basis points above the cash rate target from February of last year. The system has worked well under an excess reserves system and has delivered an acceptable degree of monetary control. However, as reserves will decline further, and demand for OMO will pick up when reserves are no longer in excess of banks' underlying needs, we judged that some further changes were warranted.

A key issue is that at a price of 5 basis points above the cash rate target, meeting a large increase in the demand for funds at OMO might impair, at least at the margin, the health of other private money markets. Similarly, this low price for OMO will lead to a larger RBA balance sheet than otherwise and implies a tighter degree of monetary control that we judged to be necessary. At the same time, the current 28-day tenor is too long for those banks that may need additional reserves for only short periods, and it is much longer than the tenor of some key markets, particularly for overnight cash.

The changes I have announced will better allow us to balance the various trade-offs between meeting the three principles I have outlined. The two changes effective from 9 April 2025 are:

- We will increase the price of all new OMO repos from 5 basis points to 10 basis points over the cash rate target. 5
- We will offer a seven-day tenor in addition to the current 28-day tenor.

Auctions will continue to take place once a week (generally on a Wednesday morning).

An OMO rate of 10 basis points over the cash rate target remains consistent with the Board's desired degree of monetary control. Under this higher OMO price, we expect the cash rate will trade within a reasonable range of the cash rate target. Accordingly, the cash rate, and other money market rates, will be consistent with the desired stance of monetary policy.

Importantly, this higher price for OMO implies a lower overall demand for reserves than otherwise. The higher price will provide more of an incentive for participants to recycle reserves in private markets. Banks can still come to OMO to acquire reserves to meet their payment needs and obtain 'precautionary reserves' for unexpected liquidity needs or to lend to others. But the higher price will reduce banks' incentives to obtain more reserves at OMO than necessary. A bank can make good use of private markets as a source of reserves if they face an unexpected need for funds.

Offering a seven-day tenor has a couple of benefits. OMO will provide a closer substitute to overnight cash and funding from other short-term money markets. By itself, this will strengthen the degree of monetary control over those key markets. This decision is also consistent with feedback from market participants that a shorter tenor would help them to better manage their liquidity needs. However, respondents to the consultation also expressed an interest in the 28-day tenor. Retaining that longer tenor allows banks and the RBA to more efficiently manage their OMO activity by reducing operational burdens associated with more frequent rolling of positions.

During consultation some market participants wanted more frequent operations, but we believe the current weekly auction is enough to anchor the cash rate and other money market rates to the target. This setup also encourages banks to use private markets, especially on non-OMO days. In line with APRA's standards, banks must have strong frameworks for forecasting their liquidity demands and managing their liquidity risks. These processes are becoming more important as banks need to increasingly engage in private money markets to meet their liquidity needs.

As we transition to the ample reserves system, the RBA and market participants will gain valuable insights. We will actively monitor market conditions, engage with banks, and respond if needed, including by adjusting our OMO or other administered rates.

## Features of the ample reserves system

## Private markets

As we transition to ample reserves, some banks may need more liquidity than their current ES balances. One option is to borrow reserves from a bank with a surplus, benefiting banks on both sides of such transactions. This private activity may be associated with short-term volatility in money markets as prices adjust to supply and demand changes. Within reasonable bounds, this is a sign of healthy markets. Weekly full allotment OMOs will help banks meet their liquidity needs. But to limit volatility, banks should be ready to transact in various markets, including the cash market. Banks might use OMOs to acquire reserves for precautionary reasons or to lend into other markets when prices are high. Over time, banks will refine their reserve management approaches in the ample reserves system.

## The RBA's overnight standing facility

If banks face unexpected liquidity needs on a non-OMO day or after OMO has taken place, and cannot find liquidity on suitable terms in private markets, we would expect and encourage them to use the RBA's overnight standing facility (OSF). This facility provides reserves overnight at 25 basis points above the cash rate target, thereby limiting deviations in money market rates from the cash rate target set by the Monetary Policy Board. While the price is set to avoid displacing private market activity, it provides an incentive for banks to use the facility when other sources are more expensive.

Historically, market participants have been reluctant to use this facility. However, both the RBA and APRA expect that banks should use the OSF as part of their liquidity management if they fall short on their daily liquidity needs. We will encourage its use as part of the new normal.

In the rare case of broader stress across the banking system, the RBA could run an unscheduled OMO. But that would not be the standard approach in the case of a few banks requiring additional liquidity that could otherwise be provided in the market or via the OSF.

## Other operations

In addition to our open market repo operations, the RBA plans to use other operations to provide reserves across a range of markets, including foreign exchange swaps and purchases of short-dated government bonds. We would not use these to influence rates or liquidity in those markets. Rather, they will help the RBA to limit the extent of our footprint in any one market, particularly the repo market, and manage operational risks. The use of these operations is expected to be some time away since reserves supplied via OMO should gradually rise to meet demand as the supply of reserves from our existing bond holdings declines. We will outline our plans for these operations before actively using them to manage monetary policy implementation.

## The rate paid by the RBA on reserves

When the RBA moved to an excess reserves system in March 2020, banks had little need to borrow in the cash market, and the cash rate became closely anchored to the ES rate (Graph 3). The Reserve Bank Board narrowed the spread between the cash rate target and ES rate to 10 basis points and announced the ES rate in its monetary policy decisions. As we continue to transition to ample reserves, borrowing rates in private markets will rise as demand for liquidity from those sources increases, partly due to the higher rate at our weekly OMO. Consequently, the ES rate will be less significant as an anchor. Because of this, starting in May the Monetary Policy Board will announce the cash rate target in its decisions but not the ES rate.

Graph 3 Price Dispersion in the Cash Market



Spread to the ES remuneration rate

Moreover, from time to time the RBA may adjust the ES rate if that will help to better meet the objectives of the ample reserves system. For example, we may need to provide market participants with more of an incentive to recycle excess reserves by altering the ES rate, thereby changing the opportunity cost of holding reserves.

Any such adjustments would be purely operational in nature and would not represent a shift in the stance of monetary policy. Indeed, such changes in the ES rate could occur as needed. While we would convey these clearly to the market, such changes would not require the approval of, or announcement by, the Monetary Policy Board.

## Next steps

To reiterate, the changes to our operations will take effect on 9 April 2025.

It is important that banks focus on their liquidity management practices as we continue to transition to the ample reserves system. During the excess reserves period, many did not need to top up their reserves, but now all banks must be ready to use our facilities and transact in private markets.

The RBA and APRA will encourage banks to use the overnight standing facility as needed as part of their routine liquidity management. Today we have released a joint statement to emphasise this commitment and together we will engage with banks to ensure they understand the role of the OSF and are comfortable and ready to use it to manage liquidity as the system transitions to an ample level of reserves.

Meanwhile, we will continue to monitor conditions in key markets, including by talking regularly with market participants.

Finally, I stress that these changes have no implications for the stance of monetary policy. They do, however, represent important changes in the plumbing that supports the transmission of monetary policy and underpins critical activities across the financial system.

## Endnotes

- I thank Sean Dowling, Gian-piero Lovicu, Thomas van Florenstein Mulder and Aidan Penman for their excellent assistance in helping to prepare this speech. *
- See Kent C (2024), 'The Future System for Monetary Policy Implementation', Bloomberg Australia Briefing, Sydney, 2 April. 1
- In particular, the Australian Government will repay the RBA by issuing new bonds to the private sector (or receiving more in revenue than it spends), which will drain reserves from the system. Note that for the bonds issued by the governments of the states and territories this reduction in reserves happens on the days that semis mature. 2
- Bristow L (2024), 'Modelling Reserve Demand with Deposits and the Cost of Collateral', RBA Research Discussion Paper No 2024-08. 3
- Other operations could include foreign exchange and cross-currency swaps as well as purchases of near-maturity Australian Government Securities. RBA (2024), 'Minutes of the Monetary Policy Meeting of the Reserve Bank Board', Hybrid, 9 and 10 December. 4
- The price on existing OMO repos will remain 5 basis points over the cash rate target. 5",Christopher Kent
https://www.bis.org/review/r250407a.htm,Christian Hawkesby: Finance and Expenditure Committee - inquiry into banking competition,"Introductory remarks by Mr Christian Hawkesby, Acting Governor of the Reserve Bank of New Zealand, at the Finance and Expenditure Select Committee (FEC) Inquiry into banking competition,  Auckland, 31 March 2025.",2025-03-31 00:00:00,"## Christian Hawkesby: Finance and Expenditure Committee - inquiry into banking competition

Introductory remarks by Mr Christian Hawkesby, Acting Governor of the Reserve Bank of New Zealand, at the Finance and Expenditure Select Committee (FEC) Inquiry into banking competition,  Auckland, 31 March 2025.

* * *

Tn koutou katoa,

I'm Christian Hawkesby, Acting Governor. I'm here today with Reserve Bank Chair Neil Quigley, Director Prudential Policy Jess Rowe, and Financial Stability Adviser Charles Lilly.

I'd like to begin by acknowledging our Governor, Adrian Orr, who over 7 years would have attended FEC hearings more than 50 times and always been engaging.  We are looking forward to continuing that relationship.

We've been following the banking competition inquiry with great interest. We are a learning institution, and conscious that our policies need to reflect sound judgement, based on evidence and robust analysis.

The Reserve Bank has three core objectives: price stability, financial stability and central banking. Competition is important across all these objectives.

We care about competition because it promotes efficiency, productivity and, importantly, innovation in the financial services sector. However, it is not our role to promote individual institutions or entrants. Rather, as a central bank we provide the infrastructure (payment systems, settlement accounts) that the financial sector needs to operate. As a regulator, we ensure that our prudential settings are risk-based, not deterring efficient entrants or creating subsidies to low quality institutions.

We have never had more focus on competition across our functions, including addressing the recommendations of the Commerce Commission's market study.

Across our central banking functions, this includes broadening access to our interbank payments system though our ESAS Access Review; our Digital Cash proposal, to support innovation; and in our Cash Trials project to support access to rural banking services.

For our prudential settings, we have introduced a proportionality framework that includes graduated capital requirements, and we are reviewing risk weights for Standardised Banks, minimum capital for new entrants, and widening the use of the term 'bank' for deposit takers.  More broadly, our work on Mori access to capital and access to basic bank accounts are designed to prompt innovation, efficiency, and access.

Advancing competition and innovation in the financial sector, is a team effort across government agencies, regulators and the industry itself.

As outlined in our submissions to the Commerce Commission's market study and this inquiry, in our view some of the greatest gains to be made are through advancing open banking, customer data rights, digital identity, and the retail payments infrastructure to deliver an eco-system where competition can flourish.

## Speaker: Neil Quigley

The Reserve Bank set capital ratios following a review and consultation that ran from 2017-2019.

Capital is the buffer that allows a bank to absorb losses while still being able to pay its depositors and other creditors in full. We have heard the claims that our bank capital regime is unreasonably conservative, and that it is undermining competition and growth in the New Zealand economy. We think that at least some of those claims are incorrect, but ultimately all of the claims can be tested empirically.

At present our banking system is profitable and not capital constrained, so lending could be increased if there was demand. Of course, there may be some individual borrowers who would like a larger loan and/or at a lower rate, but that is an individual commercial bank assessment rather than being driven by system-wide capital constraints.

The Reserve Bank board has agreed to an evidence-based framework for a review of our capital regime utilising international experts and assessing it against the regimes in other countries.

This international view is important as a robust capital regime is critical to maintaining international confidence in our financial system. This was highlighted just two weeks ago with the visit of the IMF who said the primary objective of prudential regulation should be to safeguard financial stability, calibrated to New Zealand's unique risks.

## Speaker: Christian Hawkesby

We are happy to take questions.",Christian Hawkesby
https://www.bis.org/review/r250409g.htm,Jan Frait: Monetary policy analysis at the crossroads - insights from central banks' reviews,"Speech by Mr Jan Frait, Deputy Governor of the Czech National Bank, at the Czech National Bank Workshop ""Monetary policy: inflation targeting frameworks under review"", Prague, 1 April 2025.",2025-04-01 00:00:00,"## Jan Frait: Monetary policy analysis at the crossroads - insights from central banks' reviews

Speech by Mr Jan Frait, Deputy Governor of the Czech National Bank, at the Czech National Bank Workshop ""Monetary policy: inflation targeting frameworks under review"", Prague, 1 April 2025.

* * *

## Introductory remarks for the Panel Discussion

It is a great honour for me to chair the second panel today, in which we move further towards research and academic thinking. In particular, we will focus on the analytical and modelling frameworks used by central banks to support monetary policy decisionmaking.

Before we do so, I'd like to start by introducing myself as a monetary policymaker with some personal statistics. I have attended more than 200 monetary policy meetings in one capacity or another. As a board member, I have voted 93 times - 31 times for a cut and only twice for a hike. That looks pretty dovish, for sure. On the other hand, for 87% of the time I've been voting on interest rates, the relevant monetary policy rate has been higher than headline inflation. This appears more hawkish. Well, things are really statedependent.

No matter how long or how many times I've done this, I still consider myself a young apprentice, caught between Scylla and Charybdis - to borrow a lyric from one of my favourite bands, The Police. I approach decision-making with plenty of humility. In other words, even after all these years, much of what goes on in the economy remains to some extent a mystery to me. I don't feel I understand macroeconomic dynamics much better than I did 20 years ago.

When I was a student, macroeconomics and monetary theory textbooks described monetary policy as more of an art than a science. By the time I joined the Czech National Bank at the beginning of the century, it was a different story. Monetary policy had been operating under the then-new inflation-targeting regime for two years. Decision-making was increasingly based on a modelling framework derived from New Keynesian macroeconomics, which had gained the status of a fully-fledged science. Whether or not it actually deserved it was never discussed at the time.

One of the key aspects of this new paradigm was the belief that vague monetary policy objectives such as ""sound money"", ""monetary stability"", and ""macroeconomic stability"" should be replaced by the more concrete objective of price stability - ideally in the form of a specific numerical inflation target expressed as growth in the consumer price index.

After more than a quarter of a century of experience with this approach, I'm inclined to think that, as usual, we romantically overestimated its capacity. The primary monetary policy objective started to be viewed too narrowly. The focus on a specific number was

opportunistically misused to maintain extremely low interest rates and highly supportive monetary policy in times of positive supply shocks, even when there weren't always strong macroeconomic grounds for doing so.

In many countries, monetary policy became rather asymmetric. A regime designed to prevent time inconsistency in monetary policy often ended up fostering it. I constantly heard the argument, ""It doesn't matter that inflation is currently above the target. It'll soon return to it thanks to anchored expectations."" Yet as soon as inflation dropped below the target, the rhetoric changed to, ""There's a threat of deflation. We need to have extremely low rates or use other instruments to ease monetary and financial conditions.""

This was despite - or maybe even because of - the fact that monetary policy in developed countries had become a very powerful tool of economic policy. A tool on which hopes are pinned whenever sentiment worsens and economic activity slows. The models we use to assess and forecast macroeconomic developments undoubtedly encourage such hopes.

In the summer of 2002, the Czech National Bank introduced a small-scale, semistructural, gap-based model called the Quarterly Projection Model (QPM) for forecasting and analysis. QPM was a big step forward. It taught experts and board members to apply a model-consistent approach to macroeconomic policy. In a converging economy with a nominally appreciating currency and a rapidly developing financial sector, it was, of course, difficult for the model to explain everything that was happening. Frustration with the model outcomes began to mount when global macroeconomic volatility surged in 2007 amid large financial imbalances.

I was no longer at the monetary policy coalface at that time, as between 2007 and 2022, I worked in financial stability and macroprudential policy. My only monetary policyrelated legacy from this period can be seen on the webpage about ""the mandate of the Czech National Bank"", which states: ""Through the joint action of monetary policy and macroprudential policy, we contribute to maintaining confidence in the value of the Czech koruna and safeguarding the stability of the macroeconomic environment."" We keep doing so.

Frustration with predictions probably drove the decision to switch hastily to a New Keynesian DSGE model in the summer of 2008. Maybe there were other reasons, but the Czech National Bank's representatives did not expand on them at the time. Then the Global Financial Crisis erupted, and there was no longer any time for such discussions.

It's no secret that I never considered it beneficial to replace the semi-structural model with the DSGE model as the sole approach for macroeconomic forecasting. Not because I dislike one theory or model over another, but because theories and models are valuable to a central bank only to the extent that they facilitate an informed and sufficiently comprehensive debate - one that helps us understand the evolving economic story in the short, medium, and long run.

Basing monetary policy decision-making solely on the microeconomically consistent but economically limited New Keynesian DSGE model ultimately narrowed the debate. The

process became more automatic, and the decision-making appeared easier. The dilemmas that board members typically face became less visible. They were obscured by the standard linearization around the inflation target, which is typical of New Keynesian models. We tended to overestimate the impact of short-term interest rate changes while underestimating the effects of our powerful communication on long-term interest rates and asset markets. Paradoxically, this more ""scientific"" approach resulted in greater discretion in decision-making - and in sizeable unintended effects.

Today, in 2025, we are a little more enlightened. The recent wave of inflation was a kind of blessing in disguise. It reminded us that monetary policy is still an art as well as a science. It taught us that the primary purpose of macroeconomic analysis is to distinguish fundamental trends from temporary fluctuations, local peculiarities from global phenomena, and supply shocks from demand shifts. It helps monetary policymakers be principled yet flexible in challenging times, especially during geopolitical and economic turbulence.

In this context, it's only natural that many inflation-targeting central banks are considering changes to their monetary policy frameworks. More than a year ago, the CNB also decided to undertake an external review of its monetary policy analytical and modelling framework - the first such review in its history. We commissioned three independent reviews to gain a comprehensive perspective. And we got it. Two of the three reviewers accepted our invitation to join this panel.

Before I introduce the panellists, I'd like to make another musical analogy. I belong to a generation where many were briefly fascinated by jazz-rock - virtuoso musicians playing a lot of notes very fast. Amazing at first listen, still entertaining at the third, but for most of us, boring by the tenth - because the music lacked variation in mood, timbre, and rhythm. Then bands like The Police came along - jazz-trained musicians playing simple yet original songs in a technically brilliant yet energetic way, capturing the zeitgeist. With stops and double stops. Leaving plenty of space for the imagination.

I'd be glad if this approach became more widespread in the modelling we do to support monetary policy decision-making. We need analyses that are technically rigorous yet responsive to economic, social, and political dynamics - driven by emotion and belief, scepticism and conviction, avarice and altruism. To achieve this, we must diversify our thinking, remain open to adjusting our mindsets when major shifts occur, and invest in people who can develop alternative models and implement fresh ideas from academic research. We should be open to semi-structural, DSGE, agent-based, and other sorts of models, and use them in a way that improves our understanding of sometimes enigmatic developments in the economy.

Now I will truly hand over the mic to the power trio here today, who - except for one member - also happened to fly in from Britain. They all pay great attention to similar issues while differing in their methodological approaches.

John Muellbauer is a Senior Research Fellow at Nuffield College, Professor of Economics, and a Senior Fellow at the Institute for New Economic Thinking at the Oxford Martin School, University of Oxford.

He earned his undergraduate degree from Cambridge University and his doctorate from the University of California. John has collaborated with legendary macroeconomists and econometrists such as Charles Goodhart, David Hendry, Peter Sinclair, and Adrian Pagan. He has also served as a consultant for the Bank of England, HM Treasury, the South African Reserve Bank, and, more recently, the Czech National Bank. In 2024, he conducted a review of the Czech National Bank's analytical framework for policy analysis and forecasting, assessing its core and satellite models as part of an integrated approach to monetary policymaking.

Roman Šustek is a Reader in Economics at Queen Mary University of London and a Research Associate at the Centre for Macroeconomics at the London School of Economics. His research focuses on housing, mortgage finance, monetary policy, and the term structure of interest rates. He transitioned to academia after five years as an economist in the Monetary Assessment and Strategy Division of the Bank of England. He earned his PhD from the Tepper School of Business at Carnegie Mellon University, following an earlier role as an economist at the Czech National Bank in Prague. As part of the 2024 Czech National Bank monetary policy review, Roman contributed to the assessment of macroeconomic forecasting models and processes used in policy analysis. In his research and writings, Roman often focuses on the same topics as John, in particular on the links between household consumption, house prices, and mortgage regulation. These are ultimately the topics that were viewed as rather important by the BIS economists under our keynote speaker-Claudio Borio.

Jakub Matj is the Deputy Executive Director of the Monetary Department at the Czech National Bank and the Acting Director of the department's Macroeconomic Forecasting Division. He is also temporarily heading the Monetary Department. His research and policy work focuses on macroeconomic forecasting and monetary policy. Before his current role, he worked as an economist in the CNB's Monetary Department. He later joined the European Central Bank and served as a senior economist in the analytical team of Komerní banka. In 2019, he returned to the CNB as an adviser to the Bank Board and has been the Deputy Executive Director of the Monetary Department since 2023. Jakub has received several Czech Economic Society Young Economist awards and the CNB's Economic Research Award for his research. He earned his PhD in Economics from CERGE-EI, following his studies at the Institute of Economic Studies, Faculty of Social Sciences, Charles University.",Jan Frait
https://www.bis.org/review/r250407m.htm,Eva Zamrazilová: The role of macroeconomic models in the forecasting process - survey results,"Speech by Ms Eva Zamrazilová, Deputy Governor of the Czech National Bank, at the Czech National Bank Workshop ""Monetary policy: inflation targeting frameworks under review"", Prague, 1 April 2025.",2025-04-01 00:00:00,"## Eva ZamrazilovÆ: The role of macroeconomic models in the forecasting process - survey results

Speech by Ms Eva ZamrazilovÆ, Deputy Governor of the Czech National Bank, at the Czech National Bank Workshop on ""Monetary Policy: Inflation Targeting Frameworks Under Review"",  Prague, 1 April 2025.

* * *

## Presentation accompanying the speech

Good morning, ladies and gentlemen,

A very warm welcome from me as well.

It's not easy to take the floor after such a distinguished personality as Claudio Borio. However, I'll try to shift your attention to some quite interesting (practical) results covering 22 central banks concerning monetary policy frameworks.

Our panel will be organised as follows. First, I will briefly present selected issues from a questionnaire survey of 22 inflation-targeting central banks mostly from developed economies focused on the role of macroeconomic models in forecasting processes and decision-making. This short presentation will serve mainly as the kick-off for further discussion with our guests.

First, some background. In the summer of 2023, the Bank Board decided to reflect the past turbulent years, to check our monetary policy framework and, if necessary, to start a first-ever monetary policy review.

As a first step, we decided to learn some lessons about practices at other inflationtargeting central banks. A team from our Monetary Department led by Professor KomÆrek designed quite a comprehensive questionnaire, with more than 20 questions which more than 20 central banks responded to. The results, which can be found on our website, are, of course, in anonymised form. They offer a basic overview of the topics we were interested in.

The number and type of models, and their role and position.

We were especially interested in this question, because our practice to date has been to use one central fully-fledged model of the DSGE type.

This slide shows that the majority of central banks use two or more models. At the same time, most banks use a DSGE model, although not as their sole model - just two banks use DSGE this way.

DSGE is serving as main model in four CBs that use two or more models. Three banks have two equivalent core models, one of which is of DSGE type. Eight other banks use DSGE as a supportive model for cross-checking the results of the main model or for construction of alternative scenarios.

Therefore, the conclusion is clear - DSGE models certainly have a place in central banks' forecasting processes, but not an exclusive one. The responses reveal that we are a kind of an outlier, together with another two central banks, and that we should possibly try to develop a second model. This conclusion has since been confirmed by the two surveys conducted by our external reviewers.

Regarding the role of individual models in banks that use two or more models - minority of central banks (one third) have two equivalent models. One model is usually the core one and the other is ancillary. The motivation for having more than one model is to have an alternative concept or methodology, as well as to look for different levels of detail.

The final issue I would like to touch has been quite interesting for us as well. The responses to the question about the horizon for bringing inflation back to the target show that the most frequent monetary policy horizon is two years. Just four central banks prefer a shorter horizon, including ourselves, so we are in the minority again.

Those were my initial remarks and now let us turn to our panel discussion.",Eva Zamrazilová
https://www.bis.org/review/r250407k.htm,Mary-Elizabeth McMunn: Shocks and shifts - regulation and supervision in a changing world,"Remarks by Ms Mary-Elizabeth McMunn, Deputy Governor of the Central Bank of Ireland, at the IOB, Dublin, 3 April 2025.",2025-04-03 00:00:00,"## Mary-Elizabeth McMunn: Shocks and shifts - regulation and supervision in a changing world

Remarks by Ms Mary-Elizabeth McMunn, Deputy Governor of the Central Bank of Ireland, at the IOB, Dublin, 3 April 2025.

* * *

I am delighted to speak to you all this morning and many thanks to Mary for inviting me here today.

As my first speech in my new role as Deputy Governor, Financial Regulation, I wanted to:

- Share some perspectives on regulation and supervision, in particular in the context of the increasingly challenging environment which both regulators and industry are operating in.
- Set out what risk-based supervision means for me, and why and how we are moving to a new supervisory approach.
- Discuss our approach to the ""simplification"" agenda in the area of Financial Regulation, as Europe looks to improve its competitiveness and prosperity for the future.

But first I would like to touch on the challenging macro-economic backdrop and risk landscape facing the financial sector.

## Backdrop - volatility and uncertainty, shocks and shifts

Central banks, regulators, market participants and economists have all been speaking about heightened volatility, uncertainty and rapid change for a number of years now.

Looking back on the last decade two things strike me.

One: how true these pronouncements were. And two: that rather than abating, such uncertainty and change feels like it is accelerating, given the pace of change - political, economic, digital and environmental - underway.

When King and Kay popularised the term ""radical uncertainty"" in early 2020, even they were unlikely to have foreseen how radical it would quickly become.",Mary-Elizabeth McMunn
https://www.bis.org/review/r250409f.htm,Piero Cipollone: Empowering Europe - boosting strategic autonomy through the digital euro,"Introductory statement by Mr Piero Cipollone, Member of the Executive Board of the European Central Bank, at the Committee on Economic and Monetary Affairs of the European Parliament, Brussels, 8 April 2025.",2025-04-08 00:00:00,"SPEECH

## Empowering Europe: boosting strategic autonomy through the digital euro

Introductory statement by Piero Cipollone, Member of the Executive Board of the ECB, at the Committee on Economic and Monetary Affairs of the European Parliament

Brussels, 8 April 2025

It is a privilege to be here today to continue our discussion on the digital euro.

There are many compelling arguments in favour of introducing a digital euro, and in my view they all converge on one fundamental principle: strengthening Europe's strategic autonomy.

Today I would like to discuss what strategic autonomy in day-to-day payments means in practice, looking at both the key role of cash and the benefits of a digital euro.

Faced with a less predictable international environment, it is now time to take concrete action.

Retail payments are becoming increasingly digital. [ ]  Consumers are increasingly choosing to use digital 1

means of payment in shops, and they are also making ever more purchases online. Yet, a significant share of these transactions depend on non-European providers. Today, people in 13 euro area countries rely solely on international card schemes or mobile solutions for in-shop payments. [ ]  And even where national card schemes exist, they rely on co-badging with international card schemes to enable crossborder payments within the euro area. In the not so distant future, this could evolve into dependence on other private means of payment, for instance foreign stablecoins. 2

Excessively relying on foreign providers undermines our resilience and compromises our monetary sovereignty. [ ]  It also underscores the urgent need for a digital euro. Failing to act would not only expose us to significant risks, but also deprive us of a great opportunity. 3

## The vital role of cash in ensuring financial inclusion and resilience

Despite the rapid digitalisation of retail payments, cash remains a cornerstone of the European financial system and is currently our only sovereign means of payment.

The continued strong demand for cash [ ]  highlights the importance of ensuring that it remains a convenient, secure and universally accepted means of payment and store of value. 4

Cash ensures financial inclusion, but it also plays a crucial role in maintaining the resilience of our payment systems and economies. In times of crisis, for example during cyberattacks or power failures, cash provides a reliable fall-back option. We have also seen this during the natural disasters that have affected parts of the euro area over the past year.

Against this background, the Eurosystem is fully committed to ensuring that cash remains a widely available and accepted means of payment for everyone in Europe. We have implemented a comprehensive cash strategy [ ] , and we are redesigning euro banknotes to make them fit for the future. 5

Moreover, the ECB strongly welcomes the proposed regulation governing the legal tender status of euro banknotes and coins. As we explained in our opinion, the regulation should clearly prohibit ex ante unilateral exclusions of cash by retailers or service providers. It should also ensure that Member States will hold the banking sector responsible for providing essential cash services to both private and corporate customers, ensuring good access to facilities for withdrawing and depositing euro cash across the euro area. [ ] 6

## The need to enhance Europe's strategic autonomy in digital payments in a changing geopolitical environment

However, we must also ensure that Europeans have a secure and reliable digital means of payment that complements cash and extends its key benefits to the digital sphere. The growing preference for digital payments means that the acceptance and the availability of cash are no longer sufficient to cover a growing share of use cases. For example, online shopping accounts for more than one-third of our retail transactions, but cash cannot be used online and it is often not possible to pay using a European payment service [ ] , meaning we need to rely on non-European payment systems. This is a structural weakness that we need to address. 7

Europe cannot afford to rely excessively on foreign payment solutions. Doing so makes us dependent on the kindness of strangers in a context of heightened geopolitical tensions. The urgency of preserving our autonomy in defence and energy is already extremely clear. But ensuring autonomy for essential services like daily payments is just as urgent. Without it, we are vulnerable to geopolitical threats and risk losing our monetary sovereignty. Recent international developments underscore these risks.

Meanwhile, our reliance on foreign payment providers weakens our economic potential and our ability to compete. Owing to the fragmented payments market, European payment service providers often lack the scale to offer their services across the EU. This plays into the hands of non-European providers that can offer their services at the European level, and even internationally.

Our fragmented market structure also comes with a large price tag. But it does not have to be this way we have the power to decide how unified our payments market should be.

Data show that domestic card schemes are losing market share across Europe [ ] , while international schemes charge high fees to European banks and merchants. [ ] 8 9

And the growing popularity of digital wallets like PayPal or Apple Pay is exposing European banks to further outflows of fees and data.

Most recently, the measures taken by the new US Administration to promote crypto-assets and US dollarbacked stablecoins raise concerns for Europe's financial stability and strategic autonomy. They could potentially result not just in further losses of fees and data, but also in euro deposits being moved to the United States and in a further strengthening of the role of the dollar in cross-border payments. At the same time, private businesses are increasingly open to accepting stablecoins for customer payments, which could have far-reaching implications for monetary sovereignty. [ ] 10

Faced with these challenges, we need a public-private partnership to retain our sovereignty. The digital euro - as a sovereign European means of payment based on EU legislation - would be the cornerstone of this partnership.

It would ensure that the euro area retains control over its financial future. By offering a secure and universally accepted digital payment option which would be suitable for all use cases - and, crucially, under European governance - it would reduce our dependence on foreign providers. And it would limit the potential for foreign currency stablecoins to become a common medium of exchange within the euro area. [ ] 11

The digital euro would provide European consumers with a simple and safe digital payment option, free for basic use, that covers all their payment needs everywhere in the euro area while ensuring their privacy. [ ] It would also protect European merchants from excessive charges imposed by international card schemes and put them in a stronger position to negotiate fees with these schemes. [ ] 12 13

In addition, the digital euro could be used offline, making our daily payments more resilient as both consumers and merchants would still be able to use the digital euro without a network connection.

And, importantly, the digital euro would enable European payment service providers to operate autonomously once more. [ ]  The digital euro would not compete with private initiatives. Instead, it would exploit synergies and enable private initiatives to scale up more easily across the EU. This would help overcome the hurdles that have led to the current fragmentation. 14

One example of these synergies is offering an integrated solution that enables private initiatives to provide services across the euro area and effectively cover all use cases thanks to the common digital euro standards.

This would mean that people would not have to look for alternative foreign payment solutions. European banks would be able to retain their customers and be adequately compensated for their services.

The world of payments is changing fast, which is why it is crucial to move forwards with the digital euro legislation now.

The consequences of inaction are becoming increasingly apparent. Inaction could lead to a loss of control over our financial infrastructure, increased reliance on foreign systems and potential disruptions to our banking and credit systems. Delaying the digital euro would slow down our collective public-private response to these risks. European citizens are relying on us to secure Europe's chance to drive change rather than watch from the sidelines.

## Digital euro project on track

Let me now focus on the technical progress of our project.

The legal framework is crucial in shaping how the digital euro operates, including its status as legal tender and how privacy is protected. In parallel, the digital euro project is progressing according to schedule and we are nearing the end of the preparation phase. [ ] 15

Together with market participants we are working on the digital euro rulebook - a single set of rules, standards and procedures for digital euro payments. [ ]  You have previously asked about the benefits a digital euro would have for the private sector. This rulebook will enable European payment providers to expand their services across the euro area by capitalising on the open standards and legal tender status of the digital euro. As soon as the legislation is adopted by the co-legislators, these standards can be 16

finalised and market participants can use them, even before the potential issuance of a digital euro. [ ] This would frontload the benefits for both merchants and consumers. Later this week we will publish an update on the progress we have made on developing the rulebook. 17

It is vital that the digital euro ensures the stability of the financial system - we have heard your concerns on this topic, and it is one of our key priorities. As I mentioned the last time we met, we are currently developing the methodology that builds a solid analytical base to determine the digital euro holding limit.

[ ]  This methodology is based on the three pillars indicated in the draft legislation - usability, monetary policy and financial stability. We are building on the feedback we have received from all market stakeholders, and we aim to publish the results in the summer. Preliminary findings already indicate that using the digital euro for daily payments will not harm financial stability, banking supervision or monetary policy. 18

This public-private effort to regain our autonomy in the retail payment space will be more likely to succeed if it also fosters innovation, as some of you have mentioned previously. Therefore, last October we issued a call for expressions of interest in innovation partnerships for the digital euro. [ ]  The primary goal is to experiment with conditional payments and other innovative use cases. For example, we are exploring the possibility of allowing people to pay only if a given service is provided, thereby avoiding lengthy and uncertain reimbursement procedures. 19

We have seen a lot of interest from various market sectors, with around 100 applicants wanting to experiment further with new use cases and technological solutions. [ ]  These innovation partnerships will ultimately benefit all digital euro providers and users. Providers will be able to expand their customer and revenue bases, while users will benefit from innovative payment options. 20

In addition, technical work on privacy, offline functionality and operational resilience is progressing well. We are also in the middle of the procurement process to establish framework agreements with possible future providers of digital euro services. [ ] 21



Finally, we are conducting comprehensive user research to gather actionable insights into user preferences and ensure that the digital euro offers people clear benefits. [ ]  This is something you also raised in the European Parliament's recent resolution on the ECB's Annual Report. [ ] 22 23

## Conclusion

Let me conclude.

The time to act is now. Making progress on both the digital euro regulation and the regulation on the legal tender status of cash has become urgent if we are to increase our resilience to possible disruptions and reverse our ever-increasing dependence on foreign companies.

We have been highlighting the importance of Europe's strategic autonomy since the very beginning of the digital euro project. [ ]  The good news is that both the co-legislators and the ECB have been working hard on this issue in recent years. 24

This is a public-private common European project, and as co-legislators you are central to making it happen. Now is the moment to make Europe's strategic autonomy in the critical area of payments a reality.

For the digital euro to be successful, we need robust and forward-looking legislation. The ECB stands ready to support you with technical input as your deliberations progress, and we will of course continue to update you on the progress we are making.

In a fast-changing world, let's show all Europeans that we respond to challenges head-on, protect our currency and guarantee people's freedom to pay as they choose.

Thank you for your attention.

1.

ECB (2024), , December. Study on the payment attitudes of consumers in the euro area (SPACE)

2.

ECB (2025), , February. In addition, only a limited number of European countries offer a domestic payment option for online shopping. Report on card schemes and processors

3.

According to the most recent ECB payment statistics, in the first half of 2024 international card schemes accounted for 66% of all electronically initiated transactions conducted using cards issued in the euro area (up from 61% in 2022).

4.

The total value of euro banknotes in circulation is currently just below €1.6 trillion. And banknotes circulate rapidly: in 2024 the value of banknotes supplied by banks to their customers was at a similar level, just above €1.6 trillion.

5.

The aims to ensure that cash remains widely available and accepted as both a means of payment and a store of value. See also ECB (2025), ' ', press release , 31 January. Eurosystem cash strategy ECB selects motifs for future euro banknotes

6.

This approach ensures legal certainty for in-person payments and is aligned with the provisions laid down in the digital euro draft regulation. See , European Commission, COM(2023) 364 final, 28 June 2023 and . Proposal for a Regulation of the European Parliament and of the Council on the legal tender of euro banknotes and coins Opinion of the European Central Bank of 13 October 2023 on a proposal for a regulation on the legal tender of euro banknotes and coins (CON/2023/31)

7. ECB (2024), op. cit.
8. ECB (2025), Report on card schemes and processors

, February.

9.

EuroCommerce (2024), ' ', position paper , 8 July. EU businesses' competitiveness impacted by current cards payments landscape - a call for urgent action

10.

For example, PayPal has announced plans to offer its own stablecoin - PayPal USD (PYUSD) - as a payment option to more than 20 million small and medium-sized merchants by the end of 2025. This will allow merchants to easily pay their vendors in stablecoins through a new PYUSD-powered feature for paying bills. Instead of wiring payments through traditional banking networks, businesses will be able to send PYUSD instantly, with no intermediaries involved. PYUSD can be used anywhere PayPal is accepted, including millions of merchants worldwide. PYUSD can therefore already be used as a payment option on e-commerce platforms and at point-of-sale terminals, enabling merchants to accept payments from customers.

- 11.

See also Lane, P.R. (2025), ' ', speech at the University College Cork Economics Society Conference 2025, Cork, 20 March. The digital euro: maintaining the autonomy of the monetary system

12.

An offline functionality would allow people to use digital euro even when they have poor or no network reception. Before making a payment, the user would need to prefund their offline digital euro payment account and the funds would be stored locally on their device. The payment would take place without any third-party involvement. For more information on privacy, see Daman, M.G.A. (2024), ' ', The ECB Blog , ECB, 13 June. Making the digital euro truly private

13.

As is currently the case for other payment systems, payment service providers distributing the digital euro would be able to charge merchants for these services. Price-setting for merchants and payment service providers would be subject to a cap, as proposed by the European Commission in its digital euro legislative proposal. As with the production and issuance of banknotes, the Eurosystem would bear the costs of establishing the digital euro scheme and infrastructure.

14.

There are several examples of market initiatives that aim to provide pan-European solutions. For example,

14 banks from France, Germany, Belgium, the Netherlands and Luxembourg are seeking to position a new brand, Wero, as part of the European Payments Initiative (EPI). Wero currently offers payment solutions for person-to-person and online (where accepted) use cases. While this is a positive development, Wero still has a limited scope in the EU and does not intend to expand into point-of-sale payments with a contactless (NFC) solution. In parallel, EuroPA, the European Payments Alliance, has been created, under which Bancomat, Bizum and MB WAY have started rolling out their service to enable users in Italy, Portugal, Spain and Andorra to send and receive money instantly via mobile phone number. While interoperability among domestic schemes has the potential to connect separate payment systems, achieving a truly seamless and integrated payment experience requires significant technical, regulatory and user experience challenges to be overcome, particularly when considering various use cases like point-of-sale and e-commerce. These European private initiatives could capitalise on the open standards and legal tender status of the digital euro, thereby expanding into new countries and addressing new use cases more cost-effectively.

15. ECB (2024), , 2 December. 16. Progress on the preparation phase of a digital euro - Second Progress Report

The Eurosystem established a Rulebook Development Group for the digital euro scheme to obtain input from the financial industry, consumers and merchants. The Group consists of 22 public and private sector experts with experience in finance and payments. See ECB (2023), ' ', 15 February. For more information, see the letter from Piero Cipollone to Aurore Members of the Rulebook Development Group

Lalucq, Chair of the Committee on Economic and Monetary Affairs of the European Parliament, on the ' ', 5 September 2024. Update on work of digital euro Rulebook Development Group

17.

The digital euro rulebook would mandate common standards across the euro area. The digital euro acceptance standards would be made available for free for reuse by private parties, who will be able to develop their services on that basis. This will help private providers achieve a pan-European acceptance on a technical level, leading to cost efficiencies and a more integrated European payment market. The expansion of both their geographical reach and their portfolio of products will, in turn, make it easier for them to compete internationally. While technical acceptance would be guaranteed, commercial agreements would still be needed.

18.

The ECB has been working with experts from national central banks and national competent authorities to develop a comprehensive methodology for calibrating the digital euro holding limit. At the technical session on a digital euro held on 16 July 2024, Euro Retail Payments Board member associations shared their views on the factors influencing this calibration, which were incorporated into the development process. See ECB (2024), ' ', 10 December. Preliminary methodology for calibrating holding limits

19.

ECB (2024), ' ', MIP News , 31 October. Call for expressions of interest in innovation partnerships for the digital euro

20.

The applicants included 25 start-ups, 18 IT companies, ten other payment service providers, nine universities and five banks. Examples of new use cases include i) suburban transportation using a smartphone as the check-in/out device and allowing for conditional reimbursement if a service is delayed; ii) implementing consumer rights to withdraw from subscriptions, a process that is currently not always transparent.

21.

In 2024 we launched the process to select potential providers. We issued calls for applications to establish framework agreements for five digital euro components expected to be operated by providers outside the Eurosystem: (i) the alias lookup component; (ii) the secure exchange of payment information component; (iii) the fraud and risk management component; (iv) the offline component; and (v) a digital euro app and related software development kit. Other components, such as payment settlement, would be sourced from within the Eurosystem. For more information, see the letter from Piero Cipollone to Irene Tinagli, Chair of the Committee on Economic and Monetary Affairs of the European Parliament, on ' ', 3 January 2024. Update on work of digital euro Rulebook Development Group and start of selection procedure for potential digital euro providers

22.

The ECB has engaged a specialised provider to conduct comprehensive user research, which began in September 2024. The aim of this research is to gather actionable insights into user preferences to enhance the digital euro's value proposition. Key focus areas include: (i) a general segmentation analysis of the broader population to identify who would use a digital euro and what they would need; (ii) user preferences for holding limits that will inform the technical work on the methodology for calibrating the holding limit; and (iii) in-depth studies carried out with vulnerable groups and small merchants. The methodologies employed include surveys, focus groups, peer interviews and an online community for rapid consultation with users. The research findings are expected to be published in mid-2025.

23.

European Parliament (2025), , 22 January. REPORT on European Central Bank - annual report 2024

24.

ECB (2020), , October. Report on a digital euro",Piero Cipollone
https://www.bis.org/review/r250407o.htm,Olli Rehn: In science we trust? European enlightenment in the harsh world of geopolitics,"Remarks by Mr Olli Rehn, Governor of the Bank of Finland, at the ""Quo Vadis Europe? Democratic software power in a hard Geopolitical world"" conference, organised by the Joint Research Centre, Seville, 2 April 2025.",2025-04-02 00:00:00,"## Olli Rehn: In science we trust? European enlightenment in the harsh world of geopolitics

Remarks by Mr Olli Rehn, Governor of the Bank of Finland, at the ""Quo Vadis Europe? Democratic software power in a hard Geopolitical world"" conference, organised by the Joint Research Centre, Seville, 2 April 2025.

* * *

## Presentation accompanying the speech

Ladies and Gentlemen, Dear Friends,

Thank you for the invitation to speak at the EU's Joint Research Centre in Seville! It is an honour to be here and to have the opportunity to share my thoughts with you on the European project and the building of our Union - especially in the face of the ongoing shifts in geopolitics.

This reminds me of my first visit to Seville. When the world was last in a historic transition, more than 30 years ago, I happened to be in Madrid and Seville on an exploratory mission, just on those days when the Berlin Wall came down. Back then it was a time of remarkable optimism - now, unfortunately, history is rather going into reverse.

## Slide 2: Themes of today's talk

I'd like to structure my talk today under three themes. First, I will reflect on the genesis and progress of European integration, rooted in the Age of Enlightenment. Second, I will focus on Europe's security challenges amid current geopolitical developments. And third, I will discuss our common economic challenges. My core message is clear: Europe must remain united and steadfast - committed to acting as one, both in matters of security and in shaping a dynamic, resilient economy.

The European Union stands as a remarkable achievement of rational thought, cooperation and progress. Its very foundation is deeply intertwined with the legacy of the Enlightenment - a period that championed reason, science and the pursuit of knowledge.

But its roots go longer back in time. When we look at medieval European history - from Late Antiquity to the dawn of the Modern Era - we see a time of deep transformation. This period laid the foundations of modern Europe. States and nations began to take shape. A shared European culture emerged. It was built on the legacy of classical civilization and the Christian faith. Later came humanism, which shaped the Renaissance and helped pave the way for the Enlightenment. Ideas, books, and learning began to move again. Europe was waking up.

Key figures like Charlemagne, Thomas Aquinas, and Dante gave form to Europe's political, spiritual, and cultural identity. And from Spain, great minds and artists left their mark. One of them was Isidore of Seville, right here in this city. In the early Middle

Ages, he worked to preserve ancient knowledge for future generations. Centuries later, Miguel de Cervantes, through his literary genius and sharp humour, gave voice to the complexities of the human spirit. In Don Quixote, he playfully mocked the old heroic tales of knights and chivalry - and in doing so, helped define modern European literature. According to his own words, the idea for Don Quixote was born here in Seville, while he was in prison. Innovation stems sometimes from strangest of places!

I can confess I have a very personal connection to Cervantes. Every summer, I read a few chapters of Don Quixote in its beautiful Finnish new translation from 2013-always after siesta and before the daily sauna-and-lake, when the rhythm of the day best invites slow reflection. It has become a small tradition, and a way for me to return to that timeless world of witty but warm humour, melancholy, and imagination. It was building in this rich cultural and spiritual heritage that the idea of a united Europe - made up of many peoples - was born. La longue durØe, as French historians would say.

And the Enlightenment tradition is still valid today. A belief in rational decision-making remains at the heart of European governance. Science and research play a crucial role in shaping the policies and decisions that guide our Union in these times and into the future. As Benjamin Franklin wisely said, ""An investment in knowledge pays the best interest.""

My guiding principle as European Commissioner was always to rely on evidence-based policymaking, where reason prevails over impulse, and careful analysis over mere ideology. It is this commitment to knowledge and learning that keeps our institutions effective and our policies sound - and our democracies alive and kicking. The role of scientific research and expertise must remain central to our strategies and policies.

Well, we all know that these notions are not fashionable in many quarters in this age of populism and autocracy. But in my view, we must stick to these principles, for Europe to be Europe. Even if much of the world beyond our borders were to turn to autocracy, we should stick to our European model of democracy and the rule of law - for as long as Europeans desire this in their democratic way. And I trust they indeed do.

The enlargement of the European Union can be seen as an extension of the Enlightenment project. The enlargement into South-Western Europe in the 1980s was much more than an economic endeavour only - it was a way to anchor democracy in the region. The stabilisation of democracy in Spain and Portugal was firmly supported by this process, demonstrating how European integration fosters democratic values.

Similarly, the Eastern enlargement provided a framework through which the peoples of Central and Eastern Europe transitioned from state socialism to liberal democracy, reinforcing stability and bringing shared progress. One day in not-so-distant future, despite the current dire straits, this is also the prospect for Ukraine and the Western Balkans.

Indeed, an important manifestation of Europe as a peace project is the 2012 Nobel Peace Prize that was awarded to the European Union, which had, by then, ""for over six decades contributed to the advancement of peace and reconciliation, democracy and human rights in Europe"".

Slide 3: Geopolitics is dominating economic developments today with an exceptional force

Let me next turn to geopolitics. We are still at an early stage of the process of a global geopolitical change. Not only Xi and Putin but many in the US are aiming at an international system based on three superpowers - i.e. the US, China and Russia, which would basically divide the world into three spheres of interests. I doubt this return to the 1930s could actually take place - I doubt that this world of three poles would ever emerge or, especially, that it could be a world of peace and prosperity. Gradually with growing interdependence, a world of economic zones or even blocs has been emerging as an alternative. Asia is consisting of several economicpolitical zones, and the same is very much the case regarding Latin America and Africa.

Nevertheless, power politics is back, and it is bad news for Europe. It is likewise in the rise in the South China Sea. President Donald Trump has been threatening to taking Greenland or annexing Canada, which has paradoxically weakened the international status of the United States, as well as many American brands from Tesla to the defence industry.

The way we have long thought of our relationship with the United States has also been called into question by the US political leadership. This raises concerns about the future of democracy and the rule of law in the US - and even the question of how we should understand the concept of 'the West' in the non-geographic sense of the word, i.e. as a community of and commitment to democracy, the rule of law and civil liberties.

We Europeans have also been taken aback by the lack of commitment by the current US administration towards its allies in democratic Europe and towards the European security order, and by its almost unconditional and strange willingness to appease imperialist Russia.

In recent days, though, it seems that thinking in the White House on Russia has somewhat evolved. It has become clear that President Putin is quite apparently not interested in productive, good faith negotiations with Ukraine. This seems to have shifted attitudes in Washington to realise that Putin cannot be trusted, as was communicated by Finnish President Alexander Stubb who visited Trump over the weekend.

Since the Second World War, for good reason we have trusted that it is in the enlightened self-interest of the United States to stand as the security backstop for the Euro-Atlantic community. To my mind, as a long-time student of US foreign and security policy, this has been rational behaviour from the standpoint of the United States' own national security and of its global strategic interests and influence. But at the present time, the US is basing its actions on a very different kind of rationality.

I am aware that some are holding out hope that this is just temporary - that we'll be back to 'the old normal' in a few years. Two points on that. First, I would not bet on it there is no guarantee of a policy turn, as we may be witnessing a deeper political

current in the US. And second, even more fundamentally, over the longer term our security in Europe cannot be trusted to the whims of US voters in the seven swing states, and to the twists and turns of the unpredictable US political system. What does this mean for Europe? I would very much concur with ECB President Christine Lagarde who said recently that it is now a moment for us Europeans when we can decide together to take our destiny into our own hands - it is a march to independence for Europe.

Slide 4: Defence of Europe: a public good in the need of national and EU financing Supporting Ukraine and reinforcing European defence is an imperative for the security of the whole Europe. Common European defence is a crucial European public good.

A strong, independent Europe, capable of defending itself as the European pillar of Nato but even without relying on external support, is essential. As we have seen in past EU actions, such as the cohesion policy, the euro crisis management, and the economic recovery package in response to the pandemic, Europe works best when we act collectively, by pooling our resources and sharing responsibilities. Just like in these previous cases, where not all countries benefited equally but all contributed to the collective good, defence spending should follow the same logic. While some countries may face a more immediate threat from Russia, all of us do benefit from a stronger, more secure Europe. If Europe is not able to deter aggression on one front, its ability to do so on any others is called into question. Failure to contain Russia in Europe's Eastern borders would be felt from the Arctic to the Mediterranean. Free-riding is a recipe for weakness and submission.

To be effective in countering threats and building a robust defence, Europe must create joint capabilities, ensuring interoperability among national defence forces. This requires pooling resources and, if necessary, common debt to finance these efforts. The creation of a common defence system is not only logical but vital for Europe's future.

However, for Europe to be agile and effective in this endeavour, we must also be flexible in organizing our efforts. Speed and adaptability are key. This means close cooperation with the United Kingdom, which shares our values and has a strong military. Despite no longer part of the EU, the UK remains a key partner in Europe's security architecture. Moreover, we cannot afford to be held back by foot-dragging or even hostile member states, such as Hungary, which may hinder progress. This is why we must search for creative solutions, also often driven by coalitions of the willing, to ensure that we move forward with our shared goals.

At the same time, we must work for more effective European institutional arrangements that better serve the common good. This will require a significantly larger EU budget and more streamlined decision-making structures. The European Union must be ready to act decisively and with unity, ensuring that resources are allocated where most needed and that we can act with the necessary speed and efficiency.

This is also an opportunity to make Europe economically and financially stronger, as we need a liquid and large market of safe assets. Could European defence bonds provide such safe assets? The precondition for this is that these bonds would be used to finance genuine European public goods and be backed by larger common revenues in the future.

Solidarity and unity within the EU are reinforced by standing together, demonstrating our commitment to collective security and prosperity. Let us recall that the EU Treaty offers the legal basis for common defence in its article 42. Involvement from us all is vital in maintaining a united front and ensuring a peaceful and prosperous Europe for future generations.

Slide 5: Euro area inflation stabilising at the ECB's 2% target

Let me now turn to Europe's economic prospects. The outlook is dualistic: inflation is stabilising at our 2% target; meanwhile, growth is subdued.

In the European Central Bank's Governing Council meeting on 6 March, we decided to further lower interest rates, as disinflation is on track and the growth outlook has weakened. This was the sixth reduction since last summer. We are not pre-committing to a particular rate path but will take decisions on rates at each meeting, the next being on 16 April. As there is currently pervasive uncertainty, the Governing Council will maintain complete freedom of action in setting its monetary policy.

Slide 6: Bank of Finland's scenario calculation: A trade war would weaken growth worldwide

The elevated uncertainty brings me to the risks in our economic outlook. It is selfevident that trade protectionism is near the top of the list. When asked to name one proposition in the social sciences that is both true and non-trivial, the economics Nobel laureate Paul Samuelson, referring to international trade, replied: ""Ricardo's theory of comparative advantage"". The notion that free trade is beneficial for the prosperity of all nations is deeply rooted in the thinking of the Enlightenment - and supported by a wealth of empirical evidence.

An extensive trade war would weaken economic output worldwide, which is already starting to be priced in and felt as major turbulence in the global stock markets. Calculations by the Bank of Finland show that US tariffs targeting all imports from the EU countries and China could reduce global gross domestic product (GDP) by over 0.5% in 2025 and again in 2026. The impact on the euro area economy could be slightly greater than this. But, of course, the US companies would suffer as well. In my view, in the face of US protectionism, we cannot lie down in the fire, not even in friendly fire. It's important that the EU has been preparing proportionate countermeasures to reinforce its negotiating position, with the aim of negotiating a solution, which is better for everybody. In the context where there is Russia's illegal, brutal war going on in Ukraine and on European soil, the last thing we need is a trade war between allies.

Slide 7: EU free trade agreements: status report

In the face of US mercantilism, Europe should invest ever more in developing trade relations with the rest of the world, not least with the emerging and developing economies of the so-called Global South.

The starting point is solid: we have free trade agreements (FTAs) in place with over 70 countries worldwide, covering almost half of our external trade. These countries include major economies, like Japan, South Korea and Canada. These FTAs provide market access to businesses, reduce tariffs and promote trade relationships. Moreover, FTAs with Australia, India and Indonesia are being negotiated.

The next step should be to conclude the ratification of the Mercosur FTA. Latin American democracies are natural partners for Europe, and trade agreements that strengthen this partnership should be seen as a strategic priority - and likewise as a geopolitical necessity.

In the economy, the Achilles heel of Europe is slow productivity growth. The current geopolitical landscape is putting extra pressure on industrial competitiveness. That's why European industry must strengthen its technological capabilities. Cutting-edge research and innovation, and investment in areas like AI, will be crucial. We must also reinforce European academic institutions at the forefront of global research. Moreover, the price of energy is a big burden to European competitiveness. Unlike the US, Europe has no abundant fossil fuel supplies, so there is no other viable strategy for increasing our energy security than decarbonisation and the green transition. These should be seen as key elements in strengthening the EU's strategic autonomy.

One major area where we lack strategic autonomy is retail payments. This is why the Eurosystem is preparing a digital euro, a pan-European, cash-like payment method that would be accessible and accepted in all euro area countries. We already have a strong foundation in our wholesale payment systems and instant account-to-account payments.

Furthermore, global uncertainty and geopolitical challenges demand agile decisionmaking. We must streamline decision-making processes and cut the red tape, which will empower us to act more decisively. This would also help improve Europe's industrial competitiveness and productivity growth, as underlined in the Draghi report.

Slide 8: Europe is under challenge from the world of geopolitics - investment is needed now in security and productivity

To conclude, today's world is experiencing yet another major transition, as it was 30 years ago - but now, unfortunately, it is moving in a reverse gear. Europe's ability to sustain its soft power - its influence through diplomacy, trade, culture and values depends significantly on strengthening its hard power, particularly in terms of coordinated defence solutions. This is what it takes in today's world of unforgiving geopolitics, if we truly wish to cherish the legacy of the Enlightenment.

At the same time, Europe must strengthen its economic foundation by finding ways to increase productivity and hence fulfil its true potential.

In sum, Europe needs to show its capacity for renewal and remain united. Recent months have shown that a common response is more critical and urgent than before. There is no time to waste. At this critical time, Europe must stand together and act with purpose.

Thank you for your kind attention.",Olli Rehn
https://www.bis.org/review/r250409e.htm,Abdul Rasheed Ghaffour: Launch of the Cambodia-Malaysia cross-border QR phase 2,"Congratulatory remarks by Mr Abdul Rasheed Ghaffour, Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the Launch of the Cambodia-Malaysia Cross-border QR Phase 2, Kuala Lumpur, 8 April 2025.",2025-04-08 00:00:00,"## Abdul Rasheed Ghaffour: Launch of the Cambodia-Malaysia crossborder QR phase 2

Congratulatory remarks by Mr Abdul Rasheed Ghaffour, Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the Launch of the Cambodia-Malaysia Crossborder QR Phase 2, Kuala Lumpur, 8 April 2025.

* * *

It is with great pleasure that I welcome you as we celebrate the launch of the second phase of the cross-border QR payment linkage between Malaysia and Cambodia.

It was only about a year ago when Governor Chea and I signed the MOU on cooperation in payment systems and innovation. The MOU lays the groundwork for a more efficient cross-border payments that benefits both nations, in line with our shared vision for greater regional economic and financial integration. Since then, we have made great strides

After we celebrated the first phase that went live last September in Phnom Penh, we have witnessed encouraging take-up in the number of Cambodian visitors to Malaysia scanning DuitNow QR for purchases. The service has been well received, and I am confident that it will continue to grow further.

Building on this momentum, I am delighted that the second phase of the linkage is now live. Malaysians traveling to Cambodia can now easily transact with Cambodian merchants by scanning any of the 4.5 million KHQR touchpoints using the mobile payment apps of participating financial institutions.

Indeed, it is encouraging to see how much we have achieved in such a short span of one year. The achievement today is a testament to the collaborative efforts of various parties to operationalise this linkage.

Let me take this moment to congratulate those involved in this initiative. Special thanks go to (i) Governor Chea and her dedicated team at the National Bank of Cambodia, the operator of Bakong, (ii) to Dato' Izzaddin and PayNet, our instant payment system operator; (iii) to Datuk Khairussaleh and your team in Maybank, the sponsoring bank that has been instrumental in bridging these two systems; and (iv) my team at Bank Negara Malaysia.

On this note, let me also congratulate the National Bank of Cambodia on becoming a signatory to the MOU on Cooperation in Regional Payment Connectivity as announced by Governor Chea in her remarks earlier.  Cambodia's inclusion represents another positive step forward in ASEAN's collective journey towards greater regional economic and financial integration.

Our collective payment connectivity efforts are set to significantly boost our individual economies and ASEAN as a whole. By facilitating seamless payments, we provide a key catalyst for enhancing regional trade and investment and offer travellers a familiar and safe digital payment solution. Importantly, the linkages will foster greater financial

inclusion, empowering over 7 million merchants in Cambodia and Malaysia to access a broader customer base. With most of them being micro and small SMEs, we also elevate economic participation among those that are the very backbone of our economies.

In fact, we are already seeing the fruits of these efforts from the 21 existing payment linkages that are up and running within the region. In 2024, 5.2 million cross-border QR payment transactions were recorded a fourfold increase from the previous year. This underscores the value that these services bring to users and merchants alike.

As ASEAN Chair this year, Malaysia will continue to drive the payment connectivity agenda to broaden its impact throughout the region. Our priority in 2025 is to expand the number of payment linkages involving ASEAN member states and to promote greater usage of these services among users.

As we expand these linkages, equal focus will also be directed towards managing risks arising from payment connectivity to preserve confidence in a secure and thriving payment landscape for ASEAN. To ensure the linkages operate safely and securely, we will intensify efforts on cooperative oversight arrangements between countries. This will help to mitigate risks, including cybersecurity threats, fraud and scams, money laundering and terrorism financing.

ASEAN's success in pursuing payment connectivity hinges on strong cooperation and collaboration from everyone, not only among central banks but also between the public and private sectors. To this end, we look forward to continuing our partnership with the National Bank of Cambodia on payment connectivity initiatives, including on cooperative oversight, as well as on other cross-border payment areas such as CBDC.

On the industry side, we also see great potential in continuing support and collaboration with market players, especially in maximising the network effects of the linkages and promoting greater awareness of the services.

On this point, I encourage the industry to watch closely various cross-border payment initiatives being developed by the BIS Innovation Hub and offer to participate in the projects. A notable initiative is Project Nexus, which aims to develop a live multilateral payment connectivity infrastructure. The project has recently graduated, with an entity called Nexus Global Payments (NGP) formally incorporated just over a week ago, bringing the Nexus vision much closer to life. We invite all of you to consider being part of this exciting journey in shaping the future of global payment connectivity.

Efforts should not stop there. Beyond retail payments, we should also work towards futureproofing our payment connectivity on the wholesale side to unlock efficiency gains in back-end settlement processes. One area that I have in mind is the use of innovative solutions powered by blockchain technology for this purpose.

Together with the BIS and other partner central banks, BNM is heavily involved in ongoing projects including Project Mandala and Rialto that aim to automate compliance and FX processes using smart contracts. Separately, BNM is also exploring potential use cases for CBDCs under Project Mawar. We would certainly benefit from the industry's hands-on expertise in this journey. Together, we can unlock the full potential

of payment integration-improving efficiency, reducing costs, broadening access to payment services and ultimately enhancing user experience.

In closing, I believe that today's launch represents more than just the introduction of another new cross-border payment service-it is a testament to what we can collectively achieve when technology aligns with trust, vision is paired with execution, and countries join hands in the true spirit of partnership.

On that note, I thank you all again for your dedication and partnership in making this endeavour a reality and I look forward to seeing the impact this will bring to our citizens and our region.",Abdul Rasheed Ghaffour
https://www.bis.org/review/r250409d.htm,Ida Wolden Bache: Cooperation and independence - Norges Bank in a turbulent world ,"Speech by Ms Ida Wolden Bache, Deputy Governor of Norges Bank (Central Bank of Norway), at the Finance Norway conference, Oslo, 8 April 2025.",2025-04-08 00:00:00,"## Ida Wolden Bache: Cooperation and independence - Norges Bank in a turbulent world

Speech by Ms Ida Wolden Bache, Deputy Governor of Norges Bank (Central Bank of Norway), at the Finance Norway conference, Oslo, 8 April 2025.

* * *

Charts accompanying the speech

## Introduction

Good morning. I would like to thank Finance Norway for the opportunity to speak to you today.

In recent days, there have been large movements in financial markets. Equity prices have fallen sharply, and the fear index (VIX) has risen to levels not seen since the financial crisis and at the beginning of the pandemic. Oil prices have fallen, and the krone has depreciated.

As always, Norges Bank is prepared and is closely monitoring market developments.

Developments over the past few days can be viewed against the background of framework conditions for international trade and cooperation being in play. In addition, the security policy landscape has changed.

This affects all of Norges Bank's areas of responsibility.

Our assigned mandate is to maintain monetary stability and to promote the stability of the financial system and an efficient and secure payment system.

I have three key messages:

First, inflation remains too high. Norges Bank's aim is to return inflation to 2 percent.

Second, regulatory simplification and harmonisation across national boundaries must not be at the expense of the resilience of the financial system.

Third, contingency arrangements in the payment system must be strengthened, requiring action from Norges Bank, other authorities, the financial industry and each and every one of us.

## We will ensure low and stable inflation

Chart: Inflation back to target without a large increase in unemployment

Let me begin with monetary policy

When inflation surged three years ago, both we and other central banks raised policy rates sharply and rapidly. As inflation has come down, the central banks of Norway's main trading partners have cut their policy rates in several rounds.

In Norway, the policy rate has been held at 4.5 percent for more than a year. Inflation has fallen significantly from the peak but has picked up again in recent months. In February, consumer price inflation was 3.6 percent. Food prices in particular have risen sharply, partly reflecting higher international prices, but prices for a range of other goods and services have also picked up. At the same time, wage growth has risen markedly in recent years. Higher wage growth will raise business costs and contribute to stoking inflation ahead.

If the policy rate is lowered prematurely, we risk seeing a continued rapid rise in prices. At the same time, we do not want to restrict the economy more than needed to bring inflation back to target.

The economy has cooled in recent years. Unemployment has edged up from a low in 2022 but has recently declined while employment has increased. Economic activity fell towards the end of 2024, but Norges Bank's Regional Network contacts report increased activity over winter.

Our March forecasts indicate that the policy rate will most likely be reduced in the course of 2025. If developments turn out as we now envisage, we will return inflation to target without a large increase in unemployment.

The forecasts indicate that inflation will move down gradually and approach 2 percent at the end of 2028. Unemployment is likely to increase slightly to around the pre-pandemic level.

But uncertainty surrounding the economic outlook is greater than normal. The future policy rate path will depend on how the economy evolves.

The new US administration has announced higher tariffs, which, if implemented, will entail that the US returns to effective import protection that is higher than during the protectionist period in the 1930s. Imports from Norway would also be subject to higher tariffs. A number of countries have already imposed or announced retaliatory measures.

Chart: Norwegian exports also influenced indirectly via other countries

Norway's exports to the US are relatively limited. Direct goods exports to the US, excluding oil and gas, contribute about 1.3 percent to Norwegian mainland GDP. Nevertheless, for firms that export large volumes of goods to the US, higher tariffs may have serious consequences. Norwegian firms that sell intermediate goods for other countries' exports to the US may also be affected. The effects on the Norwegian economy via other trading partners may be more important. The EU accounts for close to 70 percent of Norway's goods exports. The effects on EU countries of the increased tariffs and their response could have a significant impact on Norwegian exports.

Trade policy is not the only factor that has an impact on the economic outlook. The European economy is also affected by increased defence and infrastructure investment. This may also have a bearing on the Norwegian economy.

There continues to be considerable uncertainty about the future trade regime. It is not a given that all the tariffs announced by the US will remain in effect and we do not know what retaliatory measures will be imposed by other countries. However, history and economic research show that higher trade barriers can dampen global economic activity. Uncertainty about future tariffs in itself may lead firms to postpone investment. Over time, less trade may result in less efficient supply chains, less technology diffusion and lower productivity. The impact on inflation is more uncertain. For the countries that impose higher tariff rates, the result may be higher prices that can spread to other countries through global supply chains. On the other hand, lower activity may dampen inflation. The effects on domestic inflation will also depend on movements in the krone exchange rate.

If prospects suggest that economic activity weakens amid a pickup in inflation, monetary policy trade-offs may be more difficult. We must then strike a balance between bringing inflation back to the 2 percent target and keeping employment as high as possible.

Our interpretation of Norges Bank's mandate is that considerable weight shall be given to employment - also at times when inflation deviates significantly from the target. Keeping employment as high as possible is also important when faced with a global trade conflict.

But we must respond by tightening monetary policy if there are prospects that inflation will become high. Low and stable inflation creates predictability for households and firms and is important for a well-functioning economy. When there is confidence in the inflation target, bringing down inflation becomes less costly, and we become better equipped to deal with shocks and turbulent periods.

## Sound regulation provides resilience

A well-functioning economy depends on the financial system performing functions such as providing loans, holding deposits and executing payment transactions - even in turbulent situations.

Norwegian banks are well-equipped to manage market turbulence and downturns. This is a result of profitable and efficient operations with sound risk management, but regulation, particularly through requirements for capital adequacy, liquidity and responsible credit standards, has also been necessary. Many of the current regulations were introduced in the wake of the global financial crisis in 2008 and are partly why the financial system has been resilient over the past few turbulent years.

Internationally, there are now indications that the pendulum is swinging back. Regulatory harmonisation and simplification are now higher up on the agenda, and a number of countries are facing increased pressure to ease regulatory requirements.

There are good reasons to explore opportunities to simplify complex and extensive regulations. Harmonising rules may level the playing field internationally, but simplification and harmonisation should not be carried out by relaxing requirements that are necessary to mitigate the build-up of risk and maintain resilience in the financial system. It is important to avoid inter-jurisdictional competition for the most accommodative regulations - a race to the bottom - as this would make everyone more vulnerable.

And in some areas, more regulation may be needed. There are signs of closer global linkages between cryptoasset markets and the traditional financial system, which may be a source of systemic risk. The increased prevalence of cryptoassets also makes it even more important that investing and paying using Norway's own currency is attractive and secure. This requires a future-oriented payment system.

## A future-orientated payment system

The core of the Norwegian payment system is Norges Bank's settlement system. Electronic payments in NOK, whether we use cards, mobile apps or online banking, are ultimately settled between banks in Norges Bank's settlement system. The daily average of such interbank transfers is NOK 350 billion.

The current settlement system functions well. It is efficient and stable, and contingency solutions are effective. However, the operation of an efficient and secure settlement system becomes increasingly resource-intensive with a more aggressive threat landscape and stricter security and contingency requirements. At the same time, there are few settlement service providers to choose from.

In recent years, Norges Bank has evaluated various designs of the next generation settlement system. Our assessment now is that collaboration with other central banks is the best long-term choice. This makes us better equipped to ensure stable operations, protect the settlement system against attacks and further develop new features and services.

Our Nordic neighbours have made similar assessments, and we have all turned our attention to Europe and the Eurosystem's shared platform, TARGET Services. Norges Bank has recently initiated formal discussions with the European Central Bank (ECB) to address Norway's participation in T2. This is the core system for settling payments in TARGET Services and has features that are equivalent to Norges Bank's current settlement system.

In 2024, we also signed an agreement with the ECB on participation in Target Instant Payment Settlement or TIPS. Participation in TIPS means that we will use the Eurosystem's platform to settle real-time payments such as peer-to-peer payments in Vipps.

Participation in the European settlement platform involves no change to our role as a central bank. We will remain responsible for settlement, which will continue to be in NOK. But we will be able to collaborate with other central banks in the operation and development of infrastructure for instant payments and thus ensure that our settlement system develops in pace with developments in the Nordic region and the rest of Europe.

A final decision on Norway's participation in T2 can be expected no earlier than the end of 2025. The transition to a new settlement system will take time and requires the efforts of both Norges Bank and you, the financial sector. However, this does not mean that other tasks related to payment system development will be put on hold.

## Contingency arrangements must be strengthened

The security and contingency arrangements of individual entities are the payment system's first line of defence. Each entity is responsible for implementing necessary measures based on an assessment of vulnerability and risk.

At the same time, crisis scenarios, which may involve the failure of critical components of the payment system or its underlying infrastructure, must be taken into account. In such scenarios, even well-protected systems or backup solutions may become unavailable. In order to deal with this, contingency arrangements must be further strengthened.

A working group appointed by the Ministry of Finance has recently published a report including 18 recommended measures to strengthen contingency arrangements in the Norwegian payment system. A number of the measures are also recommended by the Payment Commission appointed by the Norwegian government.

There are now a number of sound recommendations on the table, but contingency arrangements will not be strengthened until the measures have been implemented. Among other things, Norges Bank is in the process of establishing an independent backup solution for the settlement system. It is crucial that the financial sector also follows up. Enhancing contingency arrangements for point-of-sale payments by expanding the backup solution for BankAxept and establishing an independent backup solution for basic banking services are measures that could have a significant impact on overall contingency arrangements. This can be established quickly through effective collaboration.

The need to strengthen contingency arrangements also applies to us all. Everyone should have alternative means of payment available, including multiple payment cards, accounts with different banks and cash. This makes each of us and the payment system as a whole more resilient.

## Conclusion

Let me conclude.

Uncertainty about the economic outlook is greater than normal, and we must be prepared for financial market volatility in the period ahead.

According to the Norwegian Government, it is now important to maintain order in the Norwegian economy. We at Norges Bank will do our part.

Thank you for your attention.",Ida Wolden Bache
https://www.bis.org/review/r250407p.htm,Chiara Scotti: Financial and tax regulation for the digital era - charting the path forward,"Speech by Ms Chiara Scotti, Deputy Governor of the Bank of Italy, at the conference ""The interplay between tax and financial regulation in a new digital environment"", Rome, 7 April 2025.",2025-04-07 00:00:00,"

## Financial and Tax Regulation for the Digital Era: Charting the Path Forward

Speech by Chiara Scotti Deputy Governor of Banca d'Italia

Speech at the Conference

'The interplay between tax and financial regulation in a new digital environment'

Rome, 7 April 2025

Good morning, ladies and gentlemen. I would like to welcome you all to Banca d'Italia and thank the Global Tax Policy Center at the Institute for Austrian and International Tax Law of Vienna University for jointly organizing this conference to discuss the vital link between financial regulation and taxation in the new digital world. 1

I will focus on three key challenges faced by financial regulators and tax policymakers, highlighting potential synergies, open issues and possible solutions. 2  These are, first, the  definition  of  general  principles  that  financial  regulation  and  taxation  should follow to achieve their goals in dealing with the new digital environment. Second, the delineation of the scope of financial regulation and tax policies, with emphasis on their coherence and consistency in order to ensure they are clearly understood by market operators, investors and customers, and can be effectively enforced. Third, the need for  international  cooperation  and  cross-sectoral  coordination  to  leverage  potential synergies  and  to  avoid  regulatory  and  tax  arbitrage  as  well  as  other  unintended consequences and unnecessary complexity.

I will argue that we need an innovative and proactive approach that is able to intercept and  pivot  technological  and  market  developments  as  they  occur,  while  addressing

1 The link between regulation and taxation in addressing market inefficiencies is well known in public economic theory - see, among others, A.H. Barnett, B. Yandle, 'Regulation by Taxation', in J.G. Backhaus, R.E. Wagner (eds.), Handbook of Public Finance , Springer, Boston, MA, 2005. Regulation and taxation have always played a significant role in the smooth functioning and evolution of the financial and payment industries, and have often been used in parallel to address market inefficiencies or to create incentives aimed at pursuing relevant policy objectives, such as the growth of specific markets or sectors, particularly in their initial stage of development. On the possible role of taxation within the more general regulatory framework for digital assets, see R. Avi-Yonah, M. Salaimi, 'A New Framework for Taxing Cryptocurrencies', Tax Lawyer , 77, 1, 2003; Financial Stability Board (FSB), IMF-FSB Synthesis Paper:  Policies  for  Crypto-Assets ,  7  September  2023;  Banca  d'Italia,  'Decentralized  Technology  in Finance and Crypto-assets', Communication of June 2022.

2 With  thanks  to  Alessandra  Sanelli,  Mattia  Suardi,  Mariano  Siani  and  Giorgio  Merlonghi  for  their valuable contributions.

the unique challenges and risks of digital payments and financial services. 3  This will help regulators develop forward-looking supervisory measures that balance financial stability  with  innovation  and  efficiency,  while  enhancing  the  effective  management of money laundering risks and the proper fulfilment of tax obligations. In doing so, rulemaking should seek to be simple and plain.

Two main factors make this a daunting task. First, the technological complexity of the digital environment requires regulators and tax authorities to develop new expertise. Second,  the  real-time  nature  and  composability  of  the  new  digital  landscape  pose unprecedented legal and operational challenges. This is especially true for decentralized finance  (DeFi),  where  different  technological  layers  -  including  smart  contracts, protocols, interfaces and crypto-assets 4 -  are combined to create new products and services, potentially bypassing traditional financial intermediaries as well as new service providers.

## 1. Regulation	and	taxation:	common	principles	and	sector-specific	goals

The first challenge is to identify the common principles shared by regulation and taxation and  how  these  combine  with  their  sector-specific  goals. Consistency and coherence between taxation and regulation are necessary to achieve effectiveness and encourage innovation. A robust regulatory framework for digital assets can be ineffective if the tax framework is ambiguous, making rules on paper useless in practice. Similarly, fair and neutral taxation of digital assets will not be able to support the safe and sound growth of the industry if the regulatory approach is unclear, inconsistent or overly restrictive. 5 Complementarity and mutual reinforcement become particularly important as regulators and tax policymakers face the complexity of the new digital environment. 6

Other  common  principles  for  regulation  and  taxation  include certainty  and  clarity - knowing exactly what the rules are, what is expected of them, and what consequences might arise if  they  are  not  followed; time  consistency -  policies  should  remain  stable over time to allow businesses to make long-term decisions and investments, while being flexible enough to adapt to continued innovation; simplicity rules should be easy to understand and apply. Introducing new rules for digital assets could offer regulators a chance to rethink and simplify existing rules for traditional assets too. Finally, regulation and  taxation  should  respect technological  neutrality -  in  principle,  rules  should  not

3 C. Scotti, 'Journey to the future of the financial system ', speech at the 31 st  ASSIOM FOREX Congress, 2025.

4 Crypto-assets are digital representations of values or of rights that can be transferred and stored electronically  using  distributed  ledger  technology  (DLT)  or  similar  technology.  See  FSB, High-level Recommendations for the Regulation, Supervision and Oversight of Crypto-Asset Activities and Markets , 17 July 2023; Regulation (EU) 2023/1114 of the European Parliament and of the Council on markets in crypto-assets (MiCAR).

5 FSB, IMF-FSB Synthesis Paper: Policies for Crypto-Assets , 2023.

6 In some instances, taxation might play an active role, complementing regulation in orienting market developments and choices. For instance, tax rules could align with the different regulatory treatment of specific types of digital assets, depending on their risk profile and/or the environmental impact of the underlying technology. See K. Baer, R. De Mooij, S. Hebous, M. Keen, 'Taxing Cryptocurrencies ' , IMF Working Paper, June 2023.

necessarily favour one technology over another. 7  Since digital assets have unique features that make traditional approaches harder to apply, they create challenges for regulators and tax authorities. Technological neutrality should not be understood as an abstract concept: legal rules need to be adapted to innovation. 8

Sector-specific goals for financial regulation traditionally include consumer and investor protection, market integrity, financial stability, the smooth operation of payment systems, and the prevention of money laundering and terrorist financing. These goals also apply to  digital  services,  products  and  the  resulting  business  models.  However,  'traditional vulnerabilities' may be exacerbated in the digital context - operational risks, cyber and data security could become bigger challenges - and increased complexities might require new supervisory approaches - for example, SupTech 9 - as well as a continued dialogue with market participants and innovators to intercept changes in a timely manner and build effective and cutting-edge solutions. 10

Sector-specific objectives for taxation hinge on defining clear rules to ensure that income from digital assets is  taxed  fairly  and  that  potential  opportunities  for  tax  evasion  are curbed. Fairness in taxation implies that values deriving from digital assets should be included in tax bases following the 'ability-to-pay' principle. 11 Fighting tax evasion can be particularly challenging. The anonymity, a-territoriality and decentralized nature of some crypto-assets, which may allow individuals and businesses to hide transactions, create  opportunities  to  evade  taxation,  much  like  cash  payments  do. 12 Digital  assets and  services  can  also  make  tax  enforcement  difficult.  Traditional  tax  reporting  and enforcement models that rely on 'third parties' to track income do not work well in the digital world. Digital services are not always provided by traditional financial institutions: some actors are hard to identify, especially if they are located in other countries. And even if they can be identified, transaction data can be spread across different sources due to decentralization and peer-to-peer transactions.

7 The principle of technological neutrality should not be confused with the concept of neutrality that is typical of tax systems. The former means that regulation should be applied uniformly to different technologies, avoiding distortions that could stifle or indiscriminately promote innovation. The latter means that the tax system is neutral when it does not distort taxpayers' behaviour and decisions.

8 For  instance,  currently  in  most  countries  the  application  of  withholding  taxes  on  earnings  from traditional financial instruments relies on financial intermediaries acting as 'tax agents'. Conversely, in the case of tokenized financial instruments, the possibility to bypass financial intermediaries and hold the assets directly makes it necessary to identify new tailored ways to apply taxes.

9 Supervisory  technology  or  SupTech  is  the  use  of  innovative  technology  to  support  supervisory processes.

10 The need for a continued dialogue with innovators to build effective and efficient supervisory tools has been highlighted, among others, by C. Skingsley, 'Working together to ensure financial integrity', speech at the BIS Innovation Hub's 2025 Analytics Showcase, London, 27 March 2025.

11 The  'ability-to-pay'  principle  states  that  individuals  should  contribute  to  public  expenses  through taxes applied on bases that can be regarded as indicators of their well-being, economic power or capacity, such as income, wealth, expenses. It is strictly related to other principles, in particular those of solidarity and equality, of which the ability to pay is both an application and a development in the field of taxation.

12 This can be the case of unbacked crypto-assets, which represent by far the largest share of the market, are often held for speculative purposes and, in some instances, are more prone to be used for illicit activities.

To achieve their goals in the digital financial and payment landscape, regulators and tax policymakers across different jurisdictions have taken a variety of approaches.

The European Union has made significant strides in regulating digital finance, launching the Digital Finance Strategy in 2020. 13  Key initiatives encompass the regulation on markets in crypto-assets (MiCAR) and the DLT pilot regime for tokenized financial instruments. 14 The overarching aim is to enable the development of digital assets and services while ensuring a high level of consumer protection, transparency, market integrity and financial stability. To this end, MiCAR includes an ad hoc regime for so-called stablecoins 15 designed to tackle specific risks, for instance, those stemming from the underlying technology, as well as 'traditional' risks materializing in the new digital space. Regarding the latter, MiCAR establishes safeguards to ensure the safe and sound management of the reserves of  underlying assets, as well as prevent 'run risks' in case issuers are unable to meet redemption requests by token holders.

Despite progress, there are still unresolved issues. For instance, MiCAR's entity-based approach does not cover the entire DeFi ecosystem, where services are provided through decentralized applications running on permissionless networks and using smart contracts, with minimal or no intermediary involvement. 16 On a broader scale, complications also arise because, in a completely disintermediated environment, the relationships between private  parties  are  governed  by  algorithms,  potentially  eroding  the  role  of  laws  and contracts. 17  This could lead to the emergence of new governance and risk management issues.  Additionally,  the  lines  between  the  financial  and  payment  sector  and  other industries tend to be blurred in the digital space. EU regulatory institutions are currently analysing these issues. It will be necessary to promote dialogue between authorities and the market, even beyond the bounds of supervised operators, to intercept in advance

13 Communication  from  the  Commission  to  the  European  Parliament,  the  Council,  the  European Economic and Social Committee and the Committee of the Regions on a Digital Finance Strategy for the EU (COM(2020) 591). Alongside this, the Commission adopted the Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions on a the Retail Payments Strategy for the EU which aims to enhance Europe's payment market (COM(2020) 592); this includes the promotion of instant payments, which later led to the adoption in March 2024 of the Instant Payments Regulation (IPR).

14 Regulation (EU) 2022/858 of the European Parliament and of the Council on a pilot regime for market infrastructures based on DLT.

15 MiCAR regulates three categories of crypto-assets: ( i )  asset-referenced tokens (ARTs); ( ii )  e-money tokens (EMTs), both of which count as so-called stablecoins - crypto-assets that purport to maintain a stable value by referencing other assets, although they differ in terms of the referenced assets and the rights of the holders; and ( iii ) crypto-assets other than ARTs and EMTs, a residual category which encompasses crypto-assets that are different from ARTs and EMTs.

16 On the issues that are beyond the scope of MiCAR, see P. Cipollone, 'Conference on Digital Platforms and Global Law ', keynote speech, Rome, 29 April 2022.

17 P. Cipollone, 'Risposte (e proposte) della Banca d'Italia alle sfide dell'evoluzione tecnologica', Rivista del Diritto Bancario , 2022.

the development trends of the digital financial industry and try to guide them in safe and efficient directions. 18 I will also talk about this later.

On the other side of the Atlantic, the United States initially opted for enforcement actions for specific crypto-asset offerings and platforms 19 and, more recently, openly promoted US leadership in digital assets and financial technology, including the future adoption of a federal regulatory framework for the issuance and operation of digital assets. 20 The change in the US regulatory environment is evident as Congress is considering legislative initiatives for stablecoins, including their use for payment. 21

Regarding tax policy, several countries have adopted specific tax rules for crypto-assets or have provided comprehensive administrative guidelines that extend to them the tax rules  for  certain  traditional  assets.  Tax  reporting  obligations  have  been  imposed  on crypto-asset services providers, often leveraging regulatory frameworks, in order to avoid crypto-asset transactions being used as a way to evade taxation. There are still issues arising from the decentralized and anonymous nature of digital assets to be addressed. The taxation of tokenized financial instruments also needs further development alongside regulatory frameworks.

## 2. Identifying the scope of regulation and taxation: potential synergies

The  second  major  challenge  for  both  financial  regulation  and  taxation  in  the  new digital world is the need to identify the scope of the rules, to ensure certainty, clarity and consistency, thereby contributing to their effectiveness and making them simpler to understand.

To this end, as in the traditional payment and financial sectors, regulation plays a crucial role in defining the scope of applicability for the relevant products, services, individuals and  entities.  While  the  'same  activity,  same  risk,  same  regulation'  principle  should remain central, rules should address the specific features of emerging technologies. The  rule-making  process  should  break  down  the  various  functions  of  each  type  of digital asset, assess the associated risks, and understand the related income streams.

18 See  European  Banking  Authority  and  European  Securities  and  Markets  Authority, Joint  EBA-ESMA Report on the recent developments in crypto-assets (Article 142 of MiCAR) ,  16  January  2025, for an extensive  analysis  of  DeFi  and  other  activities  not  covered  by  MiCAR  such  as  crypto  lending  and borrowing. With regard the DLT pilot regime implementation, see ESMA, Letter to EU institutions on DLT Pilot Regime Implementation, 3 April 2024; European Commission, Letter on the DLT Pilot Regime Implementation, 3 May 2024.

19 This is particularly the case with the US Securities and Exchange Commission (SEC). See the list of the crypto-assets and cyber enforcement actions kept by the SEC.

20 Strengthening American Leadership in Digital Financial Technology', US Presidential Executive Order issued on 23 January 2025.

21 See the Guiding and Establishing National Innovation for U.S. Stablecoins Act of 2025 a.k.a. 'GENIUS Act of 2025' and the Stablecoin Transparency and Accountability for a Better Ledger Economy Act of 2025, a.k.a. the 'STABLE Act of 2025'.

In this context, regulation may provide a valuable anchor for the definition of tax rules for digital assets. Some considerations may assist us in this task.

First,  the  civil  law  framework  provides  a  baseline  reference  for  the  tax  treatment  of digital assets. Countries have adopted different approaches depending on their broader legal  systems.  For  instance,  crypto-assets  have  been  defined  in  different  ways  across jurisdictions  -  as  a  form  of  property,  intangible  assets,  financial  instruments,  foreign currencies, 'digital representations of value' or even commodities. 22

Second, identifying the functions, risks and income streams of digital assets and activities within  the  regulatory  framework  may  help  ensure,  on  the  one  hand,  that  digital  and traditional assets with similar functions are treated the same way from a tax perspective. 23 On the other hand, it can pinpoint the unique features of digital assets and activities that need to be taken into account when establishing suitable tax rules.

Third,  tax  policymakers  should  be  cautious  about  directly  transposing  regulatory concepts into tax provisions. Financial regulation is often based on principles and goals that do not immediately transfer to the tax system, which has its own logic and rules. 24

Last but not least, with regard to taxation, once its scope is defined, it will be necessary to assess whether the existing enforcement procedures are effective, or else to devise entirely  new  solutions.  Regulatory  efforts  to  identify  new  market  participants  and emerging business models may serve as a valuable reference for tax policymakers. Many jurisdictions have already included regulated and supervised crypto-asset service providers, such as exchange and trading platforms, within the scope of third-party 'tax agents'. Conversely, where digital transactions are fully decentralized, 25  it may prove very challenging to identify entities able to manage the tax obligations or act as 'tax reporting agents'; therefore, new enforcement systems need to be explored.

In  light  of  these  considerations,  addressing  the  challenges  of  the  digital  era  requires a proactive, future-proof approach, taking account of potential synergies between the different regulatory domains. Therefore, it is crucial to foster a constant dialogue with traditional and new market participants in order to intercept and pivot technological and market developments in financial and payment services within the digital landscape. This dialogue can be a valuable source of knowledge about the digital finance ecosystem to  enable  policymakers  to  chart  the  path  forward  towards  a  well-defined  regulatory

22 As highlighted, among others, in OECD, Taxing Virtual Currencies: An Overview of Tax Treatments and Emerging Tax Policy Issues , OECD Publishing, Paris, 2020.

23 For instance, e-money tokens denominated in foreign currencies, mostly used for payment purposes, should receive the same tax treatment as fiat foreign currencies, whereas unbacked crypto-assets, which can be held for other reasons, including investment and speculative intent, should be the object of specific tax rules.

24 For instance, according to the 'substance over form' principle, some investment tokens that are seen as financial instruments from a financial regulation standpoint might be characterized differently for tax purposes.

25 Compared with the traditional account-based financial system, digital asset transactions carried out on public DLTs adhere to a different paradigm, allowing visibility of transaction amounts and holdings on the ledger, but not of identifiable owners.

scope and tailored and flexible rules. Along the same line, regulators, central banks and supervisory authorities can serve as catalysts for innovation and actively contribute to the development of new ideas, enhancing the efficiency and security of financial and payment services. They are also innovation drivers themselves, notably when exploring the potential of central bank digital currencies (CBDCs). 26

Banca d'Italia is at the forefront of digital finance and payments, leveraging its roles as a central bank, supervisory authority and innovation enabler. Together with the ECB and other national central banks of the euro area, we, as Banca d'Italia, have been running analyses  in  view  of  the  possible  introduction  of  a  digital  euro  and  have  conducted exploratory  work  on  new  technologies  for  wholesale  central  bank  money  settlement. We participate in the Eurosystem PISA Framework, 27  which also covers digital payment tokens; we supervise crypto-asset issuers and service providers as the national competent authority under MiCAR, together with Consob (Commissione Nazionale per la Società e  la  Borsa),  the  Italian  Companies  and  Stock  Exchange  Commission;  we  also  offer  an integrated  set  of  innovation  facilitators  designed  to  encourage  dialogue  with  market participants and support the development of FinTech projects (among others, Canale Fintech and Milano Hub). 28

## 3. The need for international cooperation and cross-sectoral coordination

The  third  challenge  that  I  would  like  to  raise  today  is  related  to  the  need  for international cooperation and cross-sectoral coordination efforts aimed at establishing, implementing, and enforcing common minimum standards and rules. The borderless nature of digital assets, in fact, makes it difficult to link them to a given jurisdiction for regulatory, anti-money laundering (AML) and counter-financing of terrorism (CFT), and tax purposes, opening the door to regulatory and tax arbitrage as well as other unintended consequences.

In  this  regard,  one  issue  to  monitor  is  how  the  rapidly  changing  global  landscape  of digital  assets  could  impact  the  EU  market  and  regulatory  framework.  It  is  critical  for EU  central  banks  and  supervisors  to  thoroughly  assess  the  effectiveness  of  the  new digital asset regulation and to address potential risks, especially those arising from the increasing  interconnectedness  and  exposure  of  European  financial  intermediaries  to non-EU products and operators. It will also be essential for EU institutions to continue to

26 At  the  end  of  2023,  94  per  cent  of  central  banks  surveyed  by  the  BIS  were  either  exploring  or testing  the  issuance  of  a  CBDC.  See  A.  Di  Iorio,  A.  Kosse  and  I.  Mattei,  ' Embracing  diversity, advancing together - results of the 2023 BIS survey on central bank digital currencies and crypto ' , BIS Papers, 147, 2024.

27 Payment Instruments, Schemes and Arrangements. The PISA framework establishes a set of oversight principles, based on international standards, to assess the safety and efficiency of electronic payment instruments, schemes and arrangements (source: European Central Bank website).

28 C. Scotti, 'Journey to the future of the financial system', speech at the 31 st  ASSIOM FOREX Congress, 2025, p.  8.

advocate for the implementation of the standards for digital assets and new technologies promoted by international organizations. 29

In taxation, the OECD, under the auspices of the G20, has developed a new standard for  the  automatic  exchange  of  information  on  crypto-assets 30 to  prevent  them  from becoming a new 'tax haven'. Many countries have committed to adopting this standard. The EU has already implemented it with a forward-looking approach to the definition of crypto-assets, which ensures that the scope can be expanded to include future asset types. 31

While these efforts are a major step towards extending tax compliance to digital assets, some challenges still remain, particularly regarding their limited geographical coverage and their applicability to decentralized transactions, which may create loopholes. Another major challenge is the lack of international coordination in the tax treatment of digital assets.  Differences  in  countries'  approaches  may  affect  the  development  of  national markets and lead to jurisdictional arbitrage. Additionally, the lack of global coordination could result either in double taxation or in digital assets being untaxed altogether. 32

The uneven implementation of AML/CFT rules for digital assets also poses concerns. A  widespread  application  of  these  rules  is  essential  to  leverage  synergies  with  tax compliance  and  reduce  redundancies  between  the  two  frameworks. 33   Despite  the introduction of specific standards by the Financial Action Task Force (FATF), 34 significant variation in their implementation and enforcement still exists. This creates opportunities

29 As regards crypto-assets and DeFi see: Committee on Payments and Market Infrastructures (CPMI) and Board of the International Organization of Securities Commissions (IOSCO), Application of the Principles for Financial Market Infrastructures to stablecoin arrangements ,  July 2022; Basel Committee on Banking Supervision (BCBS), Prudential treatment of cryptoasset exposures , December 2022; FSB, Global Regulatory Framework for Crypto-asset Activities ,  17  July  2023;  IOSCO, Policy Recommendations for Crypto and Digital Asset Market , 16 November 2023; IOSCO, Policy Recommendations for Decentralized Finance (DeFi) , September 2023; Financial Action Task Force, Targeted Update on Implementation of the FATF Standards on Virtual Assets and Virtual Asset Service Providers , FATF, Paris, 2024.

30 OECD, International  Standards  for  Automatic  Exchange  of  Information  in  Tax  Matters.  Crypto-Asset Reporting Framework and 2023 update to the Common Reporting Standard ,  OECD Publishing, 2023. The Crypto-Asset Reporting Standard (CARF) mirrors the Common Reporting Standard for financial assets (CRS) and, like the latter, leverages AML KYC rules.

31 Directive (EU) 2023/2226 (DAC 8) on administrative cooperation in the field of taxation, adopted by the Council of the European Union on 17 October 2023.

32 The need for multilateral and supranational solutions to the tax problems arising from the increasing globalization and digitalization of the economy has long been at the forefront of the main international fora and institutions, such as the G20, the G7, the OECD, the EU and, more recently, the UN. It has been cited, among others, in E. Letta, Much More Than a Market , April 2024 (the 'Letta Report').

33 As also highlighted by the IMF in E. Mathias and A. Wardzynski, 'Leveraging Anti-money Laundering Measures to Improve Tax Compliance and Help Mobilize Domestic Revenues', IMF Working Paper, 21 April 2023. Tax crimes are one of the main predicate offences of money laundering in most countries. On the role of the financial intelligence units (FIUs) in tackling serious tax crime, see the Bulletin of the Egmont Group of FIUs, 'Money Laundering of Serious Tax Crimes - Enhancing Financial Intelligence Units' Detection Capacities and Fostering Information Exchange', July 2020.

34 FATF Recommendation 15 and related Interpretative Note, regulating, inter alia, the supervision and obligations of crypto-assets service providers (CASPs) - including Know Your Customer (KYC) rules and the reporting of suspicious transactions to the FIUs - and the transparency of crypto-asset transfers ('travel rule').

for  regulatory  arbitrage,  undermines  the  global  response  against  the  illicit  use  of digital  assets,  and  jeopardizes  cross-sectoral  domestic  coordination  and  international cooperation. The launch of a new round of mutual evaluation by the FATF and its global network will help exert further pressure on countries to strengthen their AML/CFT systems, including for crypto-assets. In the EU, MiCAR and the Transfer of Funds Regulation (TFR) 35 are  aligned  with  FATF  standards,  and  the  new  EU  Anti-Money  Laundering  Authority (AMLA) will improve supervision and cross-border cooperation. 36

Importantly,  AML/CFT  and  tax  authorities  face  similar  challenges  nationally  and internationally, particularly due to the decentralization and a-territoriality of many digital assets  and  payments.  While  these  issues  are  being  addressed  within  their  respective regulatory  domains,  effective  cross-sectoral  coordination  is  essential  to  maximize synergies and face emerging risks.

## Conclusions

Digital  assets  are  reshaping  the  payment  and  financial  industries,  offering  new opportunities but also posing new risks or exacerbating traditional vulnerabilities.

In  this  rapidly  evolving  landscape, the development of new approaches to regulation and taxation,  alongside  the  traditional  ones,  is  crucial  to  avoid  undue  constraints  on innovation while safeguarding financial stability and integrity, the proper functioning of markets and payment systems, the protection of individuals' rights, and the fulfilment of tax obligations. Rules should be simple, fair, clear, consistent, and future-proof; they should also exploit synergies across domains where possible.

Central banks and regulators play a key role in balancing innovation with secure, efficient financial and payment services that support the economy, while providing a solid anchor for tax systems. Banca d'Italia is committed to this mission, working within the EU's new frameworks for digital assets while encouraging innovation and ensuring the effectiveness of new rules. 37  Tax policymakers may contribute to designing a clear legal framework for digital assets through straightforward rules that also maintain fairness with traditional instruments.

This conference provides an opportunity to discuss these issues and emphasize the need for rules fit for the digital age. I look forward to a productive and engaging discussion.

35 Regulation (EU) 2023/1113 of the European Parliament and of the Council on information accompanying transfers of funds and certain crypto-assets.

36 AMLA will ensure coordinated and convergent supervisory actions on CASPs and will possibly directly supervise those posing the highest risks. AMLA will also contribute to improving cooperation between FIUs and support the development of joint analysis on suspicious cross-border cases, involving crypto-assets.

37 See  instance,  Banca  d'Italia,  'Regulation  (EU)  2023/1114  on  Markets  in  Crypto-assets  (MiCAR) ' , Communication of 22 July 2024.",Chiara Scotti
https://www.bis.org/review/r250409c.htm,Madelena Mohamed: Supply chain resilience - insights into greening value chains for ASEAN,"Keynote speech by Ms Madelena Mohamed, Assistant Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the High-Level Dialogue on ""Supply chain resilience: insights into greening value chains for ASEAN"", Kuala Lumpur, 8 April 2025.",2025-04-08 00:00:00,"## Madelena Mohamed: Supply chain resilience - insights into greening value chains for ASEAN

Keynote speech by Ms Madelena Mohamed, Assistant Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the High-Level Dialogue on ""Supply chain resilience: insights into greening value chains for ASEAN"", Kuala Lumpur, 8 April 2025.

* * *

It is a privilege to welcome you to this High-Level Dialogue on Supply Chain Resilience, where we can exchange ideas and insights into greening value chains for ASEAN. The drive towards net-zero targets across ASEAN countries underscores a critical reality decarbonising value chains, especially SMEs, is vital for both regional competitiveness, growth and resilience.

SMEs account for more than 99% of ASEAN business ecosystems. Yet many SMEs face structural limitation and implementation hurdles to climate action. These include financial constraints, skill gaps and insufficient access to technical support. Exportoriented SMEs in ASEAN are at risk of losing USD237.5 billion in potential revenue if they fail to transition to greener and sustainable practices. 1   Transitioning SMEs is more than just about cutting carbon emissions or using cleaner technologies - it is about future-proofing economies by improving resource efficiency, reducing costs, and building resilience against climate and other disruptions.

As we navigate the evolving global economic landscape, we must recognise the shifting dynamics that are reshaping international trade. In particular, the recent imposition of tariffs has surfaced the vulnerabilities arising from over-reliance on any particular markets or sectors. For ASEAN nations, this presents an opportunity to reassess our approach to trade and economic cooperation.

ASEAN is progressing well in its journey towards becoming the fourth-largest economic bloc by 2030. In 2025, ASEAN's GDP is projected to grow by 4.7%, surpassing global growth - this has yet to account for the tariff policy announced by the US administration last week. Early assessments based on what we know, is that the impact will be significant, given that we are mostly small open economies. But it is not something we cannot handle. Our region has faced difficult challenges before and endured extreme volatility in the past - yet, we have consistently emerged stronger. By deepening regional integration and intra-ASEAN trade ties, and diversifying our economies within the region, we will be better positioned to mitigate risks arising from global uncertainties. This includes, expanding and greening our supply chains, investing in new industries and markets, and leveraging on our collective strengths - be it in manufacturing, technology, or services - to foster a sustained, long-term growth.

In light of some of these changing dynamics, Malaysia, under the stewardship of the Joint Committee on Climate Change or JC3, set in motion a pilot blended mechanism known as Greening Value Chain programme or GVC in 2023. The GVC programme provides SMEs with support that extends beyond access to funding in their transition

journey. SMEs are accorded with access to technical training, and practical tools to begin their journey towards decarbonising their operations, in addition to funding at competitive rate.

A central element of this programme is the role of anchor companies - typically large corporates - to support SMEs within their respective value chains. More than 330 SMEs have undergone technical training since the start of the programme, and nearly half have started to measure and report their GHG emissions. 'Alone we can do so little; together we can do so much'. With this principle in mind, we blended three key components namely Collaboration, Innovation and Continuous Improvement to accelerate the decarbonisation journey of SMEs participating in the GVC.

First, we learned early on that a whole-of-ecosystem approach is necessary to achieve meaningful progress. Effective collaboration means having a common platform for individual parties to build on each other's expertise and experience. This allows comprehensive solutions that enhance feasibility of SME transition. Under the GVC, for example, we have seen large corporates acting as anchor sponsors, allowing SMEs to utilise their infrastructures and knowledge to transition.

Second, having a win-win partnership amplifies impact. With the right support, SMEs become more receptive to new solutions. We observed how incentives and financial aid from anchor corporates as well as participating financial institutions help the transition of their SME suppliers. Smart partnerships address resource constraints and foster a culture of innovation.

Third, sustaining the change is imperative. The system must be agile and flexible to adapt to evolving needs of SMEs. Adaptive frameworks, iterative policy enhancements, and continuous commitment from all stakeholders are essential for impact to be realised, and for the change to last.

## Conclusion and call to action

Each country is different. Yet, despite the idiosyncrasies, we share many common challenges. There is immense scope to learn from each other and adapt tested solutions to local context in this region. The GVC Playbook for ASEAN aims to contribute to this shared journey. Beyond capturing valuable lessons from Malaysia's experience, the playbook serves as a practical resource for policymakers, financial institutions, and businesses across ASEAN looking to integrate sustainability into their value chains.

To all participants here today - corporates, SMEs, financial institutions, and policymakers - I encourage you to optimise the GVC Playbook and explore ways to enhance your sustainability efforts. Together, we can achieve a more resilient, competitive and sustainable development across ASEAN.

Thank you and I wish you a productive session ahead.

1 Estimation based on 3 key exporting nation in ASEAN i.e. Malaysia (USD65.3 billion), Indonesia (USD25.6 billion) and Singapore (USD146.6 billion). Source:  Multinational Companies Planning to Cut Suppliers by 2025",Madelena Mohamed
https://www.bis.org/review/r250409b.htm,"Michael S Barr: AI, fintechs, and banks","Speech by Mr Michael S Barr, Vice Chair for Supervision of the Board of Governors of the Federal Reserve System, at the Federal Reserve Bank of San Francisco, San Francisco, California, 4 April 2025.",2025-04-04 00:00:00,"## Michael S Barr: AI, fintechs, and banks

Speech by Mr Michael S Barr, Vice Chair for Supervision of the Board of Governors of the Federal Reserve System, at the Federal Reserve Bank of San Francisco, San Francisco, California, 4 April 2025.

* * *

Good morning and thank you to the conference organizers for having me here today. 1 It's great to see such a diverse audience of fintech innovators, bankers, fellow regulators, and students. We all play a part in fostering responsible innovation. Responsible innovation requires a few things-having the optimism and curiosity to understand the potential benefits, the rigor and realism to identify the attendant risks, and the collective intent to find solutions to advance a safe and fair financial system.

Today, I'd like to speak about responsible innovation in the context of generative artificial intelligence (Gen AI) in banking and how bank-fintech partnerships may accelerate the integration of the technology and banking. Earlier this year, I laid out two scenarios for Gen AI adoption-an incremental scenario where the technology primarily augments what humans do today, and a transformative scenario where we extend human capabilities with far-reaching consequences. 2   Of course, these are hypotheticals, and elements of both scenarios will likely come to pass. But in either scenario, we should anticipate widespread productivity gains, particularly for banking. 3

Today, banks appear to be moving cautiously with their Gen AI use, which reflects the current state of the technology, as well as banks' internal organizational structure and the highly regulated environment in which they operate. At the same time, Gen-AI offers enormous potential to significantly alter the business of banking, provided that the risks are managed appropriately. Given rapid advances in Gen AI every quarter, in the nottoo-distant future, we may approach a point at which Gen AI becomes an imperative-a competitive necessity-in banking. To prepare for that point, it is useful for regulators and banks to think about the channels through which this competitive necessity may arise. Today, I want to focus on one of those channels, and that's the bank-fintech relationship. Fintechs are well positioned to integrate Gen AI into their products and services, and banks have valuable data on customer behavior on which the Gen AI models can be optimized. Given these synergies, competition and cooperation between banks and fintechs will likely spur innovation and accelerate the integration of Gen AI into banking.

Gen AI may have benefits for consumers and businesses through better, cheaper, and faster financial services; however, to harness the upsides of Gen AI, banks, fintechs, and regulators all have a role to play in helping to ensure that the risks are managed.

## Gen AI and Banking

Let me begin with why Gen AI has such potential for the banking industry. The business of banking is data-driven-data underpin the decisions to set yields on deposits, underwrite and price credit products, and manage the attendant risks. While traditional forms of artificial intelligence have become essential in areas like fraud detection, Gen

AI offers new possibilities for data analysis, taking into account a broader and more diverse set of data. Gen AI has benefits for document analysis, which could be applied to improve credit underwriting.

Beyond data processing and analytics, Gen AI-powered chatbots are already helping assist in customer service. While we still breathe a sigh of relief when we connect to a real customer service representative, this paradigm may change-Gen AI has the potential to enable such high-quality and efficient customer engagement and correct answers that customers may come to prefer Gen AI agents to people. Gen AI chatbots can break down complex tasks into component parts, split up tasks between several AI agents, and help customers make informed decisions. They can also replicate the human touch-adapting to the level of sophistication of their customers, anticipating the customer's needs, and being empathetic to the customer's experience-perhaps better than some humans. 4

And moving to trading and capital markets, Gen AI-based analytic tools can build on existing algorithmic trading capabilities by harnessing an enormous knowledge base in both the public and private domains. These enhancements have the potential to enable decisions that are faster and more informed-although with some attendant risks as I've discussed previously. 5

## Why Not Yet?

Given the potential for Gen AI to enhance banking, why do we not see widespread integration of Gen AI enhanced products and services in banking to date? There are several factors contributing to our current state. Let me highlight some key reasons.

Of course, one reason is that banks are being appropriately cautious in the highly regulated environment in which they operate. Beyond that, for some of these applications, the technology is not fully mature. For instance, Gen AI systems may still hallucinate, generating plausible sounding but inaccurate information. Relatedly, because Gen AI usually involves stochastic processes, answers can differ in response to the same query asked at different times or to similar queries. This is tough to square with the requirements of banking, where decisions must be well-controlled, numerically and legally precise, explainable, and replicable.

Information security is another key concern. To the extent that a Gen AI-powered agent is accessing sensitive customer data and authorizing transactions, it becomes an attractive target for malicious actors.  Further, as Gen AI models process vast amounts 6 of data, there's a risk that proprietary or customer information could be inadvertently included in the model's outputs or responses, leading to legal violations and privacy breaches.

Moreover, business processes at banks have not evolved to optimize Gen AI usage. Gen AI requires data and infrastructure to be effective. Many banks have existing tech debt, and their data storage is siloed and not optimized for firmwide analysis. Furthermore, there may be organizational practices that may make it hard to evolve existing processes to ones optimized by AI.

The technological and organizational limitations are real. Nevertheless, I think it may be only a matter of time before the technology advances so that these are engineering, product design, and risk management challenges-rather than insurmountable problems. And with regard to the business process issues, I think fintechs have a real role to play in helping to accelerate responsible innovation by banks in this space.

## Features of Fintechs and Banks

As Gen AI technology continues to develop, there's a good chance that fintechs will help drive widespread Gen AI adoption in financial services. There are a few reasons why this may be the case. First, fintechs are generally young companies with a clean tech stack and don't have to integrate new technology into old infrastructure. This allows them to make the most of their data and continuously integrate the latest AI capabilities. Second, these firms have financial and time constraints. Early funding rounds provide limited time and resources to demonstrate outcomes and drive fintechs to find effective, quick solutions, which often involve creative uses of cutting-edge technology. Third, because fintechs usually start as a simple business idea and focus on moving one product to production, they can optimize their tech stack for a single outcome instead of balancing the interests of competing business lines.

These attributes of fintechs can make them symbiotic with banks. Banks have deep customer data, and data are a key input to effective application of machine learning models, including large language models. Banks are also able to look across a range of business lines and use Gen AI to customize integrated sales strategies, and they have the scale to adopt global Gen AI solutions for compliance and risk management. And banks have existing customer relationships and mature control frameworks that form the basis of their credibility and trust.

Another way to consider the relationship of fintechs and banks is as a race between speed and scale. Fintechs have the ability to operate at speed but start with no scale. Banks, on the other hand, move more slowly but have scale in terms of investment, consumer reach, and risk management. This creates the dynamic where fintechs must attempt to scale their market share quickly enough to overcome the scale and incumbent advantage of the banks. 7

## Bank-Fintech Relationship as an Accelerant for AI Adoption

And this leads me to my next point-I believe that the bank-fintech relationship has the potential to accelerate adoption of Gen AI in financial services. This may come in the form of direct competition, with fintechs taking market share from banks for certain products, or banks crowding out fintechs by introducing better technology into their existing or new product lines. Such competition usually benefits consumers by providing more choice and better and cheaper products, provided that the risks are appropriately managed. It may also create competitive pressure and consumer demand that pushes banks to adopt Gen AI products and solutions more quickly.

Alternatively, fintechs and banks may enter into a symbiotic relationship, forming collaborative partnerships where fintechs and banks merge their strengths. Examples of

these partnerships may include banks purchasing or investing capital in fintechs with Gen AI products, or banks and fintechs entering into traditional vendor-client relationships.

## Responsibility for AI Risk Management

There's one common theme in these scenarios: technology advances outside of the bank perimeter and rapidly enters the regulated sector. To get prepared for this moment, bank risk managers and regulators should become familiar with Gen AI trends and monitor developments outside the bank perimeter so that they are not caught off guard as this technology quickly enters the banking system.

We have a shared role in creating the incentive structure to appropriately manage risks. To the extent banks are using Gen AI or offering Gen AI products and services, they have the responsibility to manage their risk, and should use their relationships to incentivize good risk management practices for fintechs. 8   This means choosing fintech partners that provide transparency and clarity regarding the development of AI tools and have demonstrated appropriate control in deployment. There's necessary tension here, as banks must understand the tools offered by their fintech partners for their own risk management, while fintechs may not want to share details they hold close-their secret sauce. With respect to Gen AI, it is important for fintechs and banks to tackle questions like who owns the customer data, and potential conflicts that may arise if a bank's customer data are fed back into a fintech's Gen AI model.

Fintechs also have an important role to play in laying the groundwork for good risk management of Gen AI. 9   As I've mentioned before, data quality and model training are critical to safe, sound, and fair use of these tools. 10   Fintech developers should, for example, prioritize identifying biases in training data sets and monitoring outputs in order to prevent those biases from amplifying inequalities or mispricing risks. Moreover, fintechs should be aware of how banks manage risk, so that the fintech can adapt Gen AI solutions to be compatible with sound risk management approaches.

And what should regulators do? As I've mentioned, regulators need to stay educated and informed on the technology, so that they understand the business case for deploying the technology and the attendant risks. They should review and update existing standards on model risk management, as appropriate, and engage in publicprivate forums where there are opportunities to work together. And they need to explore how and when to deploy the technology themselves, to remain in touch in the changing world and make reasoned judgments about how to supervise the use of Gen AI in the banking sector.

These changes will require broad-based curiosity from regulators, fintechs, and bankscombined with education and investment-to create a culture of awareness on the opportunity and risks of the technology. Equally as important is leadership, to establish appropriate governance over AI and provide appropriate direction on priorities.

## Conclusion

In closing, successful integration of Gen AI into banking will require both creativity in adoption as well as getting the guardrails right. That's not a zero-sum game. It's an opportunity for all stakeholders-banks, fintechs, regulators, and consumers-to help to set the foundation for the benefits of the technology to be achieved and the risks to be effectively managed. In this way, we can help to be part of the sound and resilient financial system for all. Thank you.

1  The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.

- 2  Michael S. Barr, "" Artificial Intelligence: Hypothetical Scenarios for the Future,"" speech at the Council on Foreign Relations, New York, February 18, 2025.
- 3  See the SAS web page, Cashing In: Study Shows Banks Investing Big in GenAI, and It's Paying Off, https://www.sas.com/en\_us/news/press-releases/2024/october /generativeai-banking.html.
- 4  J.W. Ayers, A. Poliak, M. Dredze, et al., ""Comparing Physician and Artificial Intelligence Chatbot Responses to Patient Questions Posted to a Public Social Media Forum,"" , April 28, 2023;183(6):589-96, https://jamanetwork. JAMA Internal Medicine com/journals/jamainternalmedicine/fullarticle/2804309.
- 5  Michael S. Barr, "" Artificial Intelligence: Hypothetical Scenarios for the Future,"" speech at the Council on Foreign Relations, New York, February 18, 2025.
- 6  For instance, see NIST blog, ""Technical Blog: Strengthening AI Agent Hijacking Evaluations,"" January 17, 2025.
- 7  And many fintechs have success, achieving significant scale in a relatively short period.
- 8  See Board of Governors of the Federal Reserve System, SR letter 23-4, ""Interagency Guidance on Third-Party Relationships: Risk Management"" (June 7, 2023).
- 9  See Board of Governors of the Federal Reserve System, SR letter 11-77, ""Guidance on Model Risk Management.""
- 10  Michael S. Barr, "" Artificial Intelligence: Hypothetical Scenarios for the Future,"" speech.",Michael S Barr
https://www.bis.org/review/r250407n.htm,Soledad Núñez: The Spanish banking system and the challenges it faces,"Speech by Ms Soledad Núñez, Deputy Governor of the Bank of Spain, at the Club Diálogos para la Democracia, Madrid, 1 April 2025.",2025-04-01 00:00:00,"

## 01.04.2025

## The Spanish banking system and the challenges it faces*

DiÆlogos para la Democracia Madrid Soledad Nœæez Deputy Governor

* English translation from the original in Spanish

To begin, I would first like to thank the organisers of 'DiÆlogos para la democracia' for their invitation today. On this occasion I will focus my address on an analysis of the situation of the Spanish banking sector and the challenges it faces in an increasingly complex global setting.

## Introduction

Spanish credit institutions play a very important part in our economy. They hold total assets of € 4.2 trillion  and  make  a  direct  contribution  in  terms  of  the  value  added  of  National Accounts of over 3%, more than in other large European economies. Spain's ten significant institutions, that is, those under the direct supervision of the Single Supervisory Mechanism (SSM) account for 14.1% of the total assets, more than would be expected given Spain's capital key. 1

A total of 184 deposit institutions are registered in Spain, 108 of which are Spanish banks plus 76 foreign branches. According to the structural financial indicators of the European Central  Bank  (ECB), 2   the  degree  of  concentration  in  the  Spanish  banking  sector  has increased significantly since 2007. Indeed, the five largest Spanish banks have gone from a market share of 40% in 2007 to around 70% in 2023. In consequence, at end-2023, Spain ranked  second  in  terms  of  banking  sector  concentration  among  the  main  European countries,  although  according  to  various  competition  authorities'  guidelines,  this  is  still below the levels associated with a moderately concentrated market. By comparison, over the  same period, concentration levels held relatively stable in France, Germany and the Netherlands and were significantly lower than those recorded by Spain in 2023.

We must also  recognise  how  well  the  banking  sector  has  performed  during  the  global economic shocks of recent years, from COVID-19 to the war in Ukraine and the subsequent energy crisis that caused an inflationary process that required a strong response from the ECB.  Faced  with  these  adverse  scenarios,  European  banks,  and  Spanish  banks  in particular, have maintained good solvency, profitability, liquidity and credit quality ratios. Thanks to the  extraordinary  deployment  of  exceptional  public  sector  measures  and  the soundness of the financial system, the economy outperformed the initial expectations.

Moving on now, and as I said earlier, I would like to begin by briefly reviewing the current situation of the banking sector.

## Bank lending volume

First  I  wish  to  highlight  that,  after  a  period  of  sluggishness  and  even  a  decline  in  credit volumes, the banking sector has grown in recent quarters. In 2024 credit to households and firms rose by 0.6% (by some € 7 billion), mainly owing to consumer credit and loans to large companies.

However,  these  figures  mask  a  certain  degree  of  heterogeneity,  since  while  credit  to households increased by 1.2%, mainly due to consumer credit (+6.7%), mortgage credit

1 The capital key reflects a country's relative share of EU gross domestic product and population and dictates its share of the capital of the European Central Bank.

2 ECB Structural Financial Indicators .

saw a more moderate 0.7% rise. Meanwhile, credit to firms held steady, as the growth among large corporates (+2.4%) offset the continued decline among small and mediumsized enterprises (SMEs) (-2%).

By type of institution, business among the so-called less significant institutions, i.e. those that are directly supervised by the Banco de Espaæa, has been more dynamic than among the  significant  ones.  Indeed,  the  volume  of  lending  to  firms  by  significant  institutions continued to fall in 2024, although this decline was offset by the growth in the rest of the sector.

It remains to be seen whether this feeble credit growth in 2024 will consolidate in the coming quarters. In this respect, the latest Banco de Espaæa Business Activity Survey 3  indicates that 18.5% of firms increased their investment in the first quarter of 2025, 2 percentage points more than in the previous quarter. It also shows that firms expect investment to grow in the next quarter. If that is the case, the increased appetite for investment could boost credit stock growth, especially in the corporate sector.

Meanwhile,  we  will  also  have  to  closely  monitor  mortgages,  which  account  for  a  very significant share in Spain (over 40% of the core credit stock). In 2024 we saw an increase of  18%  in  new  mortgage  loans,  together  with  a  fall  in  early  repayments.  This  must  be considered in context, as house prices rose sharply (by 11.3%) in 2024 4  and no significant changes in trend are expected in the short term. In this regard, however, nor have we seen a relaxation in lending standards, which remain prudent.

Accordingly, as we will see later, in terms of profitability it will be important that this growth in credit volumes consolidates. Spain's good economic situation, together with the new rate cutting  cycle,  is  likely  to  further  boost  credit  growth  in  2025.  But  macroeconomic  and particularly geopolitical uncertainties remain very high and could potentially impact exports, consumption or investment through the confidence channel. This means that, a priori, we do not expect to see significant growth in credit volumes this year.

## Credit quality

The second point I wish to highlight is credit quality. The high inflation rates experienced in recent years, as well as the sharp rise in interest rates that was needed to combat this high inflation, impacted the income available to firms and households to meet their debts. But this has not translated into increases in the non-performing loan (NPL) ratio, which remains at historically low levels (3.24%) 5  and on a downward trend. Strong employment, reasonable corporate margins, wage growth and the savings built up during the pandemic have all helped mitigate the adverse impact of the rise in interest rates.

3

https://www.bde.es/f/webbe/SES/Secciones/Publicaciones/InformesBoletinesRevistas/BoletinEconomico/25/T1/Files/ be2501-art06e.pdf

4 National Statistics Institute (INE) data. The annual rate of change in the Housing Price Index stood at 11.3% (12.3% in new housing and 11.1% in second-hand housing).

5 https://www.bde.es/webbe/en/estadisticas/compartido/datos/pdf/a0453e.pdf

A further factor that must also be considered is the relatively low level of indebtedness of the  Spanish  private  sector  (firms  and  households),  which  has  undergone  large-scale deleveraging since the great global financial crisis. Indeed, corporate debt levels fell from 119.6% of GDP in June 2010 to 64.8% in September 2024 (the latest available data) while, during the same period, household debt went from 85% to 44.1%.

This year we expect that as inflation stabilises around 2.5% 6  and interest rates decline, the financial  burden  on  households  and  firms  will  ease.  Yet  financial  costs  are  expected  to remain relatively high compared with the pre-pandemic period and this may have some impact on certain segments of households and firms with lower incomes or that are more financially vulnerable. In any event, we do not expect this impact to be significant, even though, as we all know, there is generally some lag between negative shocks and nonperformance.

For this reason, it is useful to track developments in stage 2 loans, i.e. segments that are still performing but that face financial difficulties that may lead to problems with payments being met in the future.

In this respect also the developments are positive, as the stage 2 ratio for the core portfolio overall 7  fell from 8.37% to 7.07% in 2024, with an especially favourable trajectory in the last quarter of the year. By segment, the most significant reduction was among firms - especially SMEs - and mortgages. By volume, SMEs and consumer credit are the portfolios with the most stage 2 credit (11.66% and 9.18%, respectively).

As  a  result  of  these  favourable  credit  quality  developments,  the  cost  of  risk  has  also remained low, at 70 basis points (bp), compared with 83 bp in 2023. The total coverage ratio, that is, provisions held by banks, has been relatively stable at around 2.20% but with increases in NPL coverage, which stands at 49%, as although the denominator (the volume of non-performing loans) is decreasing, the numerator (the volume of provisions) remains steady.

## Profitability

The  third  point  I  wish  to  analyse  is  profitability,  which  is  another  key  factor  for  banks' viability. In 2024 the Spanish banking sector achieved outstanding profitability, with return on equity (ROE) of 14.7%, up from 12.7% in 2023 which was also a very good year. This increase was due to higher net interest income, which added 330 bp to ROE, and to higher fees and commissions, which added a further 130 bp. However structural costs were also higher in 2024, up 2.2% (mainly owing to staff costs, which climbed by 8.7%), as were credit provisions (albeit below expectations) and other provisions (as a result of conduct-related complaints).

The growth in interest income was driven by higher interest rates on asset transactions, although this effect may have come to an end with the ECB's recent interest rate cuts. Consequently, we expect profitability to stabilise this year, albeit at relatively high levels.

6 See the Banco de Espaæa's latest projections.

7 'Core portfolios' refers to loans to households (mortgages and consumer credit) and firms.

If this pattern of growing credit volumes continues, it could partly offset the reduction in net interest margin caused by lower interest rates. It should be borne in mind that, especially in the case of firms, the fixed rate portfolio subject to review will have to be renegotiated at lower  prices,  while  lower  interest  rates  are  automatically  transferred  to  the  variable  rate portfolio. As for household mortgages, although 72% of all new mortgages are fixed rate, 60.5% of the overall mortgage stock is still variable rate.

Moreover, all other items, including fee and commission income, operating costs and bank levy costs, are expected to stabilise this year. Provisioning charges may fall in the new lower interest  rate  setting,  albeit  subject  in  all  cases  to  the  current  climate  of  heightened uncertainty. The geopolitical uncertainty, above all, especially impacts Spain's large banks that  have  an  international  presence,  particularly  in  the  United  States  and  Latin  America where macroeconomic variables could bear the brunt of new trade tariffs. At this stage it is extremely difficult to specify and analyse the impact this new scenario may have.

## Solvency

Solvency is the fourth and last of the main points I wish to highlight. In this respect, the Spanish  banking  sector  has  also  made  progress,  with  capital  ratios  of  12.9%  for  the significant institutions in 2024, an increase of 25 bp. Although these ratios are lower than the SSM average (15.8%), it must be borne in mind that Spanish banks have lower Pillar 2 capital requirements and lower buffer requirements as a consequence of their lower risk profile, reflected in their better results in the regular stress testing exercises. In addition, the leverage ratio has also improved and stands at 5.5%, slightly below the SSM average of 5.9%.

As we have indicated on previous occasions, the solvency ratio must be placed in context and  in  relation  to  other  variables  such  as  profitability.  Spanish  banks'  business  models generate  recurring  income,  which  constitutes  the  first  line  of  defence.  However,  these business  models  demand  more  Pillar  1  capital.  In  addition,  in  Spain  the  standardised approach is more commonly used, which is more burdensome in terms of Pillar 1 capital requirements than the advanced internal ratings-based (IRB) approach that is more common in other jurisdictions.

To conclude this overview, Spanish banks today enjoy a robust and solid financial situation. Following implementation of the regulatory reforms agreed in the wake of the great global financial  crisis,  and  with  banks'  strengthened  governance  frameworks,  prudent  risk management  and  more  effective  supervision,  the  Spanish  banking  map  is  now  quite different from that of a decade ago.

## Challenges

This good starting point has to be placed in the current geopolitical setting, in which the shifting balance of power worldwide has called into question agreements and situations that until very recently were considered settled. Consequently, the banking sector is now facing a range of challenges.

## Digitalisation

First and foremost, the banking sector must continue to enhance its digitalisation efforts, in tandem with the rest of the economy. In this new ecosystem, banks' own systems coexist with interactions and collaborations with other partners that provide services - often ones crucial for the banks. Banking is transforming its way of doing business to become more digital, offering more innovative products and services that are tailored to customer needs. In this sense, the path is clear. According to a recent study by Funcas, 80.8% of internet users in 2024 had used electronic banking in the last three months, up from 60.5% in 2019; 8 by 2030, this figure is expected to reach 95%. Indeed, if we break down the trends among digital banking users between 2019 and 2024, we can see that the greatest uptake is among lower-income households, the foreign population and the economically inactive. That said, this makes sense given that these groups had the most room for improvement. This digital transformation requires massive investments - more than € 5 billion in 2023 and with more expected to follow.

From a technology perspective, artificial intelligence (AI) is a real disruptor that can give rise to synergies with other existing technologies. For example, it can contribute to more efficient risk  management, earlier  cyber  threat  detection  and  cost-cutting.  However,  its  use  also poses challenges from an ethical standpoint.

Employing these technologies entails new risks and amplifies existing ones. The operational risks,  arising  from  the  increase  in  interconnections  and  the  surface  exposed  to  system failures, mean that banks must be ever more aware of the implications of such failures or attacks for their business. The new DORA regulation is envisaged as a regulatory umbrella to boost banks' resilience in this new environment. Outsourcing is also a concern, given the risks posed by over-reliance on a small number of service providers capable of handling essential activities, leading to a loss of control over these areas and a loss of the relevant expertise.

Banks should be encouraged and helped to take advantage of their strong starting position to develop and invest in new technologies, following a clear and well-defined strategy while maintaining their commitment to financial inclusion.

## Sustainability

Playing  our  part  in  the  European  economy's  transition  towards  sustainable  models  is another challenge. Despite the recent noise surrounding this issue, Europe's commitment to  this  transformation  remains  unwavering.  Energy  dependency  clearly  weakens  our economy. A green economy, free from reliance on fossil fuels that are polluting and scarce in  Europe,  is  a  stronger  economy.  It  makes  us  more  independent,  less  susceptible  to unpredictable external factors and, therefore, less vulnerable.

Europe remains committed to this transformation and the banking sector must support firms on this journey. But it is certainly no easy task. It involves not only making the necessary

8 https://www.funcas.es/documentos\_trabajo/estudio-sobre-el-sector-bancario-espanol-estructura-operativa-cambiotecnologico-y-transicion-verde/

investments and securing sufficient financing, but also establishing transition plans  with achievable, measurable and assessable goals and milestones.

As we have said on other occasions, the lack of reliable data is a challenge for the economy as a whole and particularly for the banking sector, but so is accompanying firms along this journey.  Banks  are  required  to  approve  their  transition  plans  in  line  with  the  guidelines recently published by the European Banking Authority. Naturally, these plans must be based on the plans of the firms they finance. The banking sector must engage with its counterparts throughout the entire process, as envisaged in the guidelines. This is no small ask in an economy as fragmented as ours.

## Adapting to the environment

Lastly, in this unpredictable environment, banks must be able to adapt their strategies and decision-making systems to the shifting and uncertain geopolitical environment. Geopolitical risk gives rise to traditional risks, such as increased credit risk, reduced liquidity or higher market risk owing to greater volatility. Therefore, banks must incorporate this new dimension into all their risk management processes.

Banks must be adequately prepared to manage this new factor. This risk has been included among  supervisory  priorities,  focusing  on  credit  risk  management  capacity  and,  in particular, the early detection of a downturn in credit quality, to then be reflected in the appropriate  levels  of  provisions  and  capital.  Compliance  with  regulations  relating  to operational cyber resilience will also be closely monitored, given that cyber attacks are more likely in the current environment. Lastly, how to integrate this geopolitical dimension into risk management frameworks, capital and liquidity planning and internal stress testing will be analysed.

## Concluding remarks

In short, Spanish banks are on a solid footing, but the challenges they face in the current setting  are  numerous  and  complex.  Integrating  AI  and  other  emerging  technologies, transitioning  to  sustainable  economic  models  and  adapting  to  an  uncertain  geopolitical environment demand a well-defined strategy, close collaboration with other stakeholders including all authorities - and a robust commitment to ethics and financial inclusion. Only through proactive and prudent risk management, backed up by strategic investments and meticulously crafted adaptation strategies, will banks successfully navigate this constantly shifting landscape and contribute to the strengthening of the European economy.",Soledad Núñez
https://www.bis.org/review/r250409a.htm,Lisa D Cook: The economic outlook and path of policy,"Speech by Ms Lisa D Cook, Member of the Board of Governors of the Federal Reserve System, at the 2025 McKay Lecture, University of Pittsburgh, Pittsburgh, Pennsylvania, 3 April 2025.",2025-04-03 00:00:00,"For release on delivery 2:30 p.m. EDT April 3, 2025

The Economic Outlook and Path of Policy

Remarks by

Lisa D. Cook

Member

Board of Governors of the Federal Reserve System at

2025 McKay Lecture, University of Pittsburgh

Pittsburgh, Pennsylvania

April 3, 2025

Thank you, Dr. Ripoll.  It is wonderful to be here at the University of Pittsburgh. I am honored to deliver the 2025 McKay Lecture in memory of Dr. Marion McKay, who led the economics department here for more than 30 years.  I am especially humbled to have this opportunity, given the many significant contributors to the field of economics who have spoken in this series, including David Autor, Claudia Goldin, Bob Lucas, and Joe Stiglitz. 1

I have been looking forward to this lecture for many months, because researching, discussing, and teaching economics have long been my favorite activities.  I have been a professor for much longer than I have been a member of the Federal Reserve's Board of Governors, which I joined three years ago.  Today, I would like to discuss my outlook for the economy and my views on the path of monetary policy.  For this speech, I will also offer recent historical context about how the economy arrived in its current position, take some time to review some concepts in economics, and, finally, discuss my approach to monetary policy at a time of increasing uncertainty.

Over the past few years, the U.S. economy has grown at a strong pace, supported by resilient consumer spending.  Currently, I see the economy as being in a solid position, though American households, businesses, and investors are reporting heightened levels of uncertainty about both the direction of government policy and the economy.  For instance, the Beige Book, a Fed report that compiles anecdotal information on economic conditions gathered from around the country, had 45 mentions of 'uncertainty.'  That is the largest number of mentions of the word in the history of the Beige Book, up from 12 mentions a year ago.  Consistent with elevated uncertainty, there are increasing signs that

1 The views expressed here are my own and not necessarily those of my colleagues on the Federal Open Market Committee.

consumer spending and business investment are slowing.  Inflation has come down considerably from its peak in 2022 but remains somewhat above the Federal Reserve's 2 percent target.  The labor market appears to have stabilized, and there is a rough balance between available workers and the demand for labor.  The unemployment rate remains low by historical standards.

The Federal Open Market Committee (FOMC), the Fed's primary body for making monetary policy, raised interest rates sharply in 2022 and 2023 in response to elevated inflation.  Then, amid progress on disinflation and a rebalancing labor market, last year my FOMC colleagues and I voted to make policy somewhat less restrictive.  At our past two policy meetings, we held rates steady at 4.25 to 4.5 percent.  Looking ahead, monetary policy will need to navigate the high degree of uncertainty about the economic outlook.

## Structure for Policymaking

I will discuss the elements of my economic outlook in more detail in a moment. But first let me tell you a bit about how I structure my thinking related to monetary policy and the economy.  The starting point for that exercise is always the mandate given to the Federal Reserve by Congress, which has two goals:  maximum employment and stable prices.  Achieving those goals will result in the best economic outcomes for all Americans.

So, when I say 'maximum employment,' what do I mean?  Maximum employment is the highest level of employment, or the lowest level of unemployment, the economy can sustain while maintaining a stable inflation rate.  Unemployment has very painful consequences for individual workers and their families, including lower

standards of living and greater incidence of poverty.  In contrast, maintaining maximum employment for a sustained period results in many benefits and opportunities to families and communities that often had been left behind, including those in rural and urban communities and those with lower levels of education.

More broadly, having ample job opportunities typically results in a larger and more prosperous economy.  It allows workers, a vital resource in the economy, to be deployed most productively.  Maximizing employment promotes business investment and the economy's long-run growth potential.  When people can enter the labor force and move to better and more productive positions, it fosters the development of more and better ideas and innovation.

How about 'stable prices?'  Like former Fed Chair Alan Greenspan, I consider prices to be stable when shoppers and businesses do not have to worry about costs significantly rising or falling when making plans, such as whether to take out a loan or make an investment. 2 Since 2012, the Fed has been explicit about the rate of inflation that constitutes price stability.  An inflation rate of 2 percent over the longer run is most consistent with the Fed's price-stability mandate.  Price stability means avoiding prolonged periods of high inflation.  We know that high inflation is particularly difficult on those who are least able to bear it.  Moreover, high inflation may require a forceful monetary policy response, which can lead to bouts of higher unemployment.  In contrast, price stability creates the conditions for a sustainable labor market.

2  Alan Greenspan (1994), 'Semiannual Monetary Policy Report to the Congress,' testimony before the Subcommittee on Economic Growth and Credit Formation of the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, February 22, https://fraser.stlouisfed.org/title/statementsspeeches-alan-greenspan-452/semiannual-monetary-policy-report-congress-8500.

## Economic Developments in the Pandemic Period

With the backdrop of the Fed's dual-mandate goals, I would like to discuss the extraordinary developments that have occurred over the past five years, since the onset of the COVID-19 pandemic.  Reviewing that recent history is important context for understanding the current state of monetary policy.  Before reviewing the data, it is important to recognize the tragic human suffering and loss of life the pandemic caused. That loss can never be fully described in numbers and charts.  For today's discussion, I will describe the economic implications, which were profound and will likely be studied for decades.

When the global pandemic took hold in the spring of 2020, economies around the world shut down or sharply limited activity.  This was especially true for in-person services, such as travel, dining out at restaurants, and trips to the barber shop or hair salon.  I would like to turn your attention to the screen, where I will display some charts to better illustrate economic developments.  In figure 1, you can see the sharp downturn in economic growth, followed by the subsequent recovery.  At this time, it also became apparent that the economic effects of shutdowns in one part of the world were exacerbated by constrained supplies from other parts of the world.  Global policymakers faced the common challenge of supporting incomes and limiting the negative effects of shutdowns, which, mercifully, were temporary.  The initial policy response was largely uniform across developed economies.  This generally included fiscal support from governments, particularly to help those most in need, although the magnitude differed across countries.  Central banks set monetary policy with the aim to prevent a sharp financial and economic deterioration.  Later, central banks extended accommodative

policy to support the economic recovery.  The Federal Reserve, specifically, cut its policy rate in the spring of 2020 to near zero and bought assets to support the flow of credit to households and businesses and to foster accommodative financial conditions. Establishing a low interest rate is intended to support spending and investment.

At the onset of the pandemic, a very deep but short contraction of economic activity occurred.  Millions of Americans lost their jobs, tens of thousands of school districts sent students and teachers home, factories closed because of outbreaks, and the supply of many goods was disrupted.  People also adjusted consumption patterns, rotating toward purchases of goods.  Americans who canceled vacation plans and gym memberships sought to buy televisions, exercise equipment, and other goods.  Demand for goods rose rapidly, but supply chains were unable to adjust at the same speed.  This contributed to a global surge in inflation.  That surge was followed by a further upswing in prices after February 2022, when Russia's invasion of Ukraine caused a shock to global supplies of commodities, including food and energy.

At the start of 2022, inflation topped 6 percent, and by the middle of that year it reached a peak above 7 percent. 3 With inflation unacceptably high, Fed policymakers turned toward tightening.  Take a look at figure 2.  You can see that from March 2022 to July 2023, the Fed raised its policy rate 5-1/4 percentage points. Those higher interest rates helped restrain aggregate demand, and the forceful response helped keep long-term inflation expectations well anchored.

The Fed's policy actions occurred alongside increases in aggregate supply. Global trade flows recovered from disruptions, and the availability of manufacturing

3 This is the Personal Consumption Expenditures price index.

inputs returned to pre-pandemic levels.  U.S. labor supply recovered significantly in 2022 and 2023, boosted by rebounds in labor force participation and immigration.  Figure 3 shows the rebound in labor force participation.  Notice that workers aged 25 to 54, the dark orange line, led that gain.  In response to rising rents, construction of multifamily housing picked up, helping counter shortages of available homes in some areas.  The combination of increased supply and policy restraint contributed to a significant slowing of inflation.  Notably, inflation came down without a painful increase in unemployment. This was a historically unusual, but most welcome, result.

## Productivity Gains

In addition to increased supply and policy restraint, another factor allowed the U.S. economy to grow in recent years as inflation abated-a resurgence in productivity growth.  Let's look at figure 4.  Data through the end of last year indicate that labor productivity has grown at a 2 percent annual rate since the end of 2019, surpassing its 1.5 percent growth rate over the previous 12 years.  As a result, the level of productivity, the blue line, has been higher than expected given the pre-pandemic trend, the dashed orange line.

Several forces likely supported productivity in recent years.  New business formation in the U.S. has risen since the start of the pandemic.  These newer firms are more likely to innovate and adopt new technologies and business processes, and this, in turn, can support productivity gains.  As the economy reopened after pandemic shutdowns, workers took new jobs and moved to new locations, and the pace of job switching remained elevated for some time.  That reallocation may have resulted in better and more productive matches between the skills of workers and their jobs, thus raising

labor productivity. 4 Labor shortages during the pandemic recovery also spurred businesses to invest in labor-saving technologies and to improve efficiency, which may have supplied at least a one-time boost to productivity.

Looking ahead, investment in new technologies may continue to support productivity growth.  Much of this investment has gone toward artificial intelligence (AI).  As I have discussed in previous speeches, I see AI, and generative AI in particular, as likely to become a general purpose technology, similar to the printing press and computer, that will spread throughout the economy and spark downstream innovation as well as continue to improve over time. 5 It holds the promise to increase the pace of idea generation, and each newly discovered idea could itself provide an incremental boost to productivity.  In the longer run, I am optimistic about the potential for gains in total factor productivity growth from the growing integration of AI into business processes throughout the economy.

## Economic Outlook

Now that I have reviewed the path of the economy over the past five years, I would like to present my near-term outlook for the economy in more detail.  In the past

4  See David Autor, Arindrajit Dube, and Annie McGrew (2023), 'The Unexpected Compression: Competition at Work in the Low Wage Labor Market,' NBER Working Paper Series 31010 (Cambridge, Mass.:  National Bureau of Economic Research, March; revised May 2024), https://www.nber.org/papers/w31010.

5 See Lisa D. Cook (2024), 'Artificial Intelligence, Big Data, and the Path Ahead for Productivity,' speech delivered at 'Technology-Enabled Disruption:  Implications of AI, Big Data, and Remote Work,' a conference organized by the Federal Reserve Banks of Atlanta, Boston, and Richmond, Atlanta, October 1, https://www.federalreserve.gov/newsevents/speech/cook20241001a.htm; Lisa D. Cook (2024), 'What Will Artificial Intelligence Mean for America's Workers?' speech delivered at The Ohio State University, Columbus, Ohio, September 26, https://www.federalreserve.gov/newsevents/speech/cook20240926a.htm.

year, overall economic activity and the labor market have been solid, while inflation has run somewhat above the Federal Reserve's 2 percent target.

## Inflation

I will start with inflation, which you can see in figure 5.  The most recent data show that inflation was 2.5 percent for the 12 months ending in February, as measured by the personal consumption expenditures (PCE) price index, shown in blue.  This is a marked shift down from the peak of 7.2 percent in June 2022.  The dark orange line shows that core PCE prices-which exclude the volatile food and energy categoriesincreased 2.8 percent in February, down from a peak of 5.6 percent in February 2022. Economists pay careful attention to core prices, as they are typically a better indicator of underlying inflation and the path of future inflation.

While the progress since 2022 has been notable, the decline in inflation over the past year has been slow and uneven.  Prices for energy, including gasoline, have moderated.  Food inflation has mostly stabilized over the past year, but it is still elevated for some grocery items.  Let's look at the components of core inflation in figure 6.  You can see that housing services inflation, the dashed green line, remains high but has moderated steadily over the past two years, consistent with the past slowing in market rents.

Since we are talking about housing and the cost of renting, let me say a word about the data we use at the Federal Reserve.  Most of the data I have presented thus far are carefully collected, analyzed, and released by federal government agencies, like the Bureau of Economic Analysis which collects data on GDP.  But we use a wide variety of sources, including series generated by the private sector.  Market rents-the cost many of

you pay for your apartment-is a good example.  Where do you think we get information on rents?  From some of the same websites you would use to find an apartment.  We use high-frequency data series from sources like those as inputs into a model of rents on new leases in real time.  This turns out to be helpful in the timely determination of where rents are, because they show up with a lag in official measures of inflation.

Going back to figure 6, outside of housing, core services inflation, the dark orange line, has eased only a bit over the past year, held up by persistent inflation in restaurant meals, airline fares, and financial fees.  Notably, goods prices outside of food and energy, the blue line, have increased recently after a period of decline associated with the resolution of pandemic-related supply disruptions.  The recent rise in core goods prices may partly reflect sellers' anticipation that tariff increases could raise the cost of supplies.

Tariff increases typically result in an increase in the level of prices for the affected goods, which temporarily pushes up the overall inflation rate.  But what matters for monetary policy would be a persistent boost to inflation.  I am carefully watching various channels through which tariff effects could have more widespread implications for prices. Tariffs on steel and aluminum have already raised prices for those manufacturing inputs. As those cost increases work their way through the manufacturing process, they could boost prices of a range of goods over time.  In the motor vehicle industry, those indirect effects, as well as direct tariffs on vehicles, could raise prices for new cars.  That in turn could feed through to prices for used cars.  And, as seen in recent years, higher prices for motor vehicles could, with a lag, raise costs for related services, such as rentals, insurance, and car repair.

Inflation expectations are another channel through which tariffs could affect inflation over time.  Figure 7 shows the University of Michigan Surveys of Consumers inflation expectation readings.  It shows a large increase in one-year inflation expectations, the blue line, which is consistent with the cost of tariffs being largely passed through to prices.  Indeed, many respondents mentioned tariffs as the reason for that rise.  Moreover, businesses, including contacts in the Beige Book, also report that they expect to pass on the costs of tariffs to their customers.  More worrisome is the uptick in longer-term inflation expectations, the dark orange line, which may be influenced by tariff concerns or the slow pace of disinflation.

However, I look at several measures of inflation expectations, including those derived from financial markets, shown in figure 8.  Those measures show a significant rise in inflation compensation for this year, the blue line.  However, reassuringly, there has been little increase in inflation compensation over the five years starting five years from now, the dark orange line.  It will be important to watch closely those indicators of longer-term inflation expectations.  If they were to rise substantially, it may become more difficult to keep actual inflation on a path back toward our 2 percent goal.

## Labor Market

Now let's examine something I am sure some soon-to-be graduates here are monitoring:  the labor market.  Currently, the labor market does not appear to be a significant source of inflation pressure, as wage growth has continued to moderate. Looking at figure 9, you can see the Labor Department's employment cost index report showed that wages and salaries for private-sector workers rose at a 3.6 percent annual rate in the fourth quarter.  After rising during the post-pandemic recovery, wage growth

has moved closer to a level consistent with moderate inflation.  Moreover, the wage premium for job switchers over those staying in their jobs, a substantial contributor to wage growth early in the pandemic recovery, has largely disappeared, according to data from the Federal Reserve Bank of Atlanta.  Notably, wage gains continue to outpace inflation, consistent with other measures showing that the labor market remains in a solid position.

After a long period of normalization that began in 2022, the labor market appears to have stabilized since last summer.  While hiring has slowed, layoffs continue to be low overall.  The unemployment rate, at 4.1 percent in February, remains historically low. Looking at figure 10, you can see that the rate has held in a narrow range between 3.9 and 4.2 percent for the past year.  Economists sometimes call the unemployment rate the U-3 series, as it is one of several measures of labor market slack.  Employers added 200,000 jobs per month in the three months through February, a solid pace of job creation, although it is down from its post-pandemic peaks.  Recent data show the labor market to be balanced.  Take a look at figure 11.  It shows the number of available jobs is about equal to the number of available workers.  You can see that is much different from 2022, when vacancies were high relative to people looking for work.  We will learn more details about the labor market tomorrow, when the March jobs report is released.

Looking beyond the headline labor market data, recent signals of softness have emerged and should be monitored.  Figure 12 shows the number of workers with parttime jobs who want full-time jobs.  Economists say these people are working 'part time for economic reasons.'  The February jobs data showed a pickup in the number of workers in this category.  This group is part of a broader measure of unemployment and

underemployment, called the U-6 series.  In addition, one measure of confidence in the labor market is the rate at which workers voluntarily quit their jobs.  Take a look at figure 13.  The quits rate was very high in 2022, when workers expected to be able to easily find a new job with higher wages.  Now you can see that the quits rate has fallen to a more normal level.  Consistent with that, surveys show that workers' perceptions of job availability have declined.  Both measures are now below their levels from 2018 and 2019, before the pandemic, when the labor market was very strong.

We are also beginning to see ripples from cuts to federal jobs and funding.  These cuts have affected federal workers across the entire country.  Also affected are government contractors and universities, who have announced layoffs or hiring freezes amid cuts and pauses in federal research grants.  Although the number of layoffs so far has been modest, the news and uncertainty have raised concerns about job security for households and consumer demand for businesses, as is evident in the Michigan survey and the Beige Book.  The Federal Reserve produces the Beige Book before every FOMC meeting, and it provides a timely, useful narrative about the economy from all 12 districts to accompany the multitude of data we receive prior to FOMC meetings.  This is recommended reading for all econ majors and anyone else interested in economic activity throughout the country.

## Economic Activity

Overall, the U.S. economy entered the year in a solid position.  Real GDP rose at a 2.4 percent annual rate in the fourth quarter of last year, extending a period of steady

growth.  Robust income growth and the wealth effect from several years of strong increases in asset prices boosted consumer outlays.

Data show that personal consumption spending slowed in the first two months of this year.  Although some of the reduction in spending may be due to unseasonably bad weather, consumers appear to have less of a financial cushion now than in recent years, and they are more pessimistic about their labor-market and income prospects.

Businesses say that heightened uncertainty due to trade and other policies has hurt their plans for hiring and investment.  Figure 14 shows a sizable increase in firms mentioning trade policy uncertainty on earnings calls in recent months.  Some businesses, especially in construction, agriculture, senior care, and food services, are also concerned that a slowdown in immigration will reduce labor supply.  In addition to survey data, businesses have expressed uncertainty in their forecasts, on earnings calls, and in other anecdotal reports.

Currently, my baseline forecast is that U.S. economic growth will slow moderately this year, with the unemployment rate picking up a bit, while inflation progress will stall in the near term, in part because of tariffs and other policy changes. Elevated and rising uncertainty, however, means that I am very attentive to scenarios that could be quite different from my baseline.  It is possible that new policies could prove to be minimally disruptive and consumer demand could remain resilient, and overall growth may be stronger than anticipated.  However, I currently place more weight on scenarios where risks are skewed to the upside for inflation and to the downside for growth.  Such scenarios, with higher initial inflation and slower growth, could pose challenges for monetary policy.

## Monetary Policy at a Time of Uncertainty

Now that I have explained my economic outlook, I would like to explore an important question at this moment:  How should monetary policy be conducted during a time of heightened uncertainty?  I believe one useful guide is the framework on optimal monetary policy decision making under uncertainty described by former Fed Chair Ben Bernanke in 2007. 6 He saw three areas of uncertainty relevant for policymakers:

1. The current state of the economy.
2. The structure of the economy.
3. The way in which private agents form expectations about future economic developments and policy actions.

Let us take those one by one.

So how do I seek clarity on the current state of the economy?  As I have said since I first joined the Federal Reserve Board nearly three years ago, I think it is important to look at a wide range of data in judging the economy.  Certainly, the key monthly and quarterly economic data releases are the gold standard, but I also find useful information in real-time data, surveys, and contacts with participants in the economy.

During the pandemic, the economic effects of widespread shutdowns were quickly seen in real-time data from unconventional sources, including Google mobility data, Open Table reservations, and social media metrics.  More recently, the sharp rise in uncertainty-and some of the implications-can be seen in timely information from affected businesses.  For instance, the Federal Reserve Bank of Philadelphia conducts a

6 See Ben S. Bernanke (2007), 'Monetary Policy under Uncertainty,' speech delivered at the 32nd Annual Economic Policy Conference, Federal Reserve Bank of St. Louis (via videoconference), October 19, https://www.federalreserve.gov/newsevents/speech/bernanke20071019a.htm.

survey of manufacturing firms in its District.  In figure 15, you can see that those firms report a significant rise so far this year in the prices they are paying for inputs and in the prices they expect to charge for their products.  Turning to figure 16, those firms report that current manufacturing activity was boosted in January-the spike in the orange line-in part as firms built up inventories ahead of expected trade policy changes. Activity then slowed, and their expectations of future activity have eased as well.

What about a second source of uncertainty-the structure of the economy?  One aspect of that is how demand in the economy responds to changes in the Fed's policy rate.  A way of judging those changes is by looking at financial conditions more broadly. Among the data series that matter for decisions of consumers and businesses are mortgage rates, other long-term interest rates, equity prices, and the foreign exchange value of the dollar.  Using those variables, Fed staff have constructed an index of overall financial conditions, called FCI-G.  You can see that in figure 17.  That index showed financial conditions easing notably (becoming a tailwind to GDP growth) in 2020 and into 2021 as the Fed eased policy in response to the economic fallout from the pandemic and then tightening sharply in 2022 along with higher Fed policy rates.  Over the past two years, overall financial conditions have eased modestly amid a strong stock market and moderation in long-term interest rates as inflation came down.  Currently, the FCI-G index shows financial conditions to be about neutral for GDP growth in the coming year.

What about uncertainty related to how private agents form expectations about future economic developments and policy actions as a source of uncertainty?  Currently, I believe this is the primary source of uncertainty.  Even before yesterday's larger than expected announcements on trade policy, businesses and consumers reported a high

degree of uncertainty about current and future trade policy actions, and-as I discussedsurveys generally show increased expectations of inflation, at least for the coming year.

What could be the effects of that uncertainty, and what should be the monetary policy response?  Tariff-related price increases and rising inflation expectations could argue for maintaining a restrictive stance for longer to reduce the risk of unanchored inflation expectations.  But these price increases also lower disposable personal income, which could lead to lower consumer spending.  And the uncertainty related to tariffs, by stalling hiring and investment, could generate a negative growth impulse to the economy and a weaker labor market.

Amid growing uncertainty and risks to both sides of our dual mandate, I believe it will be appropriate to maintain the policy rate at its current level while continuing to vigilantly monitor developments that could change the outlook.

Monetary policy is still moderately restrictive, though less so than before our rate cuts last year, which totaled 1 percentage point.  Over time, if uncertainty clears and we see further progress on inflation toward our 2 percent target, it will likely be appropriate to lower the policy rate to reduce the degree of monetary policy restriction.  I could imagine scenarios where rates could be held at current levels longer or eased faster based on the evolution of inflation and unemployment.  For now, we can afford to be patient but attentive.  I believe that policy is well situated to respond to developments, and I am continuously updating my outlook as matters evolve.

## Conclusion

As I conclude, I will reiterate the economy has been through an extraordinary period, since the onset of the pandemic, that has posed significant challenges for

monetary policymakers.  It is encouraging that inflation has moderated, albeit to a rate above our 2 percent target, while the labor market and broader economy remain solid.  It appears that the economy, for the moment, has entered a period of uncertainty.  I will repeat that I believe that current monetary policy is well positioned to respond to coming economic developments, and I will be watching those developments carefully.

Thank you again for hosting me here at Pitt.  It has been an honor to deliver the McKay lecture, and I look forward to continuing our conversation.



University of Pittsburgh Pittsburgh, Pennsylvania

April 3, 2025

## U.S. Economic Outlook and Monetary Policy

Lisa D. Cook

Governor, Federal Reserve Board

Disclaimer: The views I will express today are my own and not necessarily those of the Federal Open Market Committee (FOMC) or the Federal Reserve System



## Figure 1:  Real GDP



Note: Percent as a compounded annual rate of change. The grey shaded bar indicates a period of business recession as defined by the National Bureau of Economic Research: February 2020 to April 2020.



## Figure 2:  Federal funds rate



Note: Averages of daily figures. The grey shaded bar indicates a period of business recession as defined by the National Bureau of Economic Research: February 2020 to April 2020.



## Figure 3:  Labor force participation rate



Note: The labor force participation rate is defined as the number of people in the labor force as a percentage of the civilian noninstitutional population. It is the percentage of the population that is either working or actively looking for work. The gray shaded bar indicates a period of business recession as defined by the National Bureau of Economic Research: February 2020 to April 2020.



## Figure 4:  Business-sector productivity



Note: The data are output per hour in the business sector. The blue line plots output per hour, assuming a constant growth rate equal to its average from 2007:Q4 to 2019:Q4. The grey shaded bars indicate periods of business recession as defined by the National Bureau of Economic Research: December 2007 to June 2009 and February 2020 to April 2020.



## Figure 5:  12-month PCE and core PCE inflation



Note: Percent change is from 1 year earlier. Personal consumption expenditures (PCE) inflation is the change in the personal consumption expenditures price index and core PCE inflation is the change in PCE price index excluding food and energy. The gray shaded bar indicates a period of business recession as defined by the National Bureau of Economic Research: February 2020 to April 2020.



## Figure 6:  Components of core PCE inflation



Note: Percent change is from 1 year earlier. Core goods inflation is the change in the personal consumption expenditures (PCE) index excluding energy and food. Core services inflation is the change in the PCE price index excluding energy services. The gray shaded bar indicates a period of business recession as defined by the National Bureau of Economic Research: February 2020 to April 2020.



## Figure 7:  Inflation expectations



Note: The gray shaded bar indicates a period of business recession as defined by the National Bureau of Economic Research: February 2020 to April 2020.

Source: University of Michigan Surveys of Consumers



## Figure 8:  Inflation compensation



Note: Zero-coupon swap-based inflation compensation from Bloomberg (2021-present), Barclays (pre-2021). The gray shaded bar indicates a period of business recession as defined by the National Bureau of Economic Research: February 2020 to April 2020.



## Figure 9:  Wages and salaries for private industry workers



Note: Percent change is from 1 year earlier. Data from the employment cost index. The gray shaded bars indicate periods of business recession as defined by the National Bureau of Economic Research: December 2007 to June 2009 and February 2020 to April 2020.



## Figure 10:  Civilian unemployment rate



Note: The gray shaded bars indicate periods of business recession as defined by the National Bureau of Economic Research: December 2007 to June 2009 and February 2020 to April 2020.



## Figure 11:  Available jobs vs available workers



Note: Available jobs are employment plus job openings as of the end of the previous month. Available workers are the labor force. The gray shaded bars indicate periods of business recession as defined by the National Bureau of Economic Research: December 2007 to June 2009 and February 2020 to April 2020.



## Figure 12:  Part time for economic reasons



Note: Refers to those who worked 1 to 34 hours during the reference week for an economic reason such as slack work or unfavorable business conditions, inability to find full-time work, or seasonal declines in demand. The gray shaded bar indicates a period of business recession as defined by the National Bureau of Economic Research: February 2020 to April 2020.



## Figure 13:  JOLTS quits rate



Note: The data are seasonally adjusted quarterly averages. JOLTS is the Job Openings and Labor Turnover Survey. The gray shaded bar indicates a period of business recession as defined by the National Bureau of Economic Research: February 2020 to April 2020.



## Figure 14:  Trade policy uncertainty



Note: Like many news-based uncertainty indicators, this measure of trade policy uncertainty (TPU) may also capture news about future changes in tariffs, regardless of whether they happen or not. The gray shaded bar indicates a period of business recession as defined by the National Bureau of Economic Research: February 2020 to April 2020.



## Figure 15:  Price indices from manufacturing survey



Note: The gray shaded bar indicates a period of business recession as defined by the National Bureau of Economic Research: February 2020 to April 2020.

Source: Federal Reserve Bank of Philadelphia Manufacturing Business Outlook Survey



## Figure 16:  Activity indices from manufacturing survey



Note: The gray shaded bar indicates a period of business recession as defined by the National Bureau of Economic Research: February 2020 to April 2020.

Source: Federal Reserve Bank of Philadelphia Manufacturing Business Outlook Survey



## Figure 17:  Measure of financial conditions



Note: The FCI-G Index is pictured here and stands for Financial Conditions Impulse on Growth Index. The FCI-G Index aggregates changes in seven financial variablesthe federal funds rate, the 10-year Treasury yield, the 30-year fixed mortgage rate, the triple-B corporate bond yield, the Dow Jones total stock market index, the Zillow house price index, and the nominal broad dollar index-to gauge broad financial conditions and assess how these conditions are related to future economic growth. The gray shaded bar indicates a period of business recession as defined by the National Bureau of Economic Research: February 2020 to April 2020.



## U.S. Economic Outlook and Monetary Policy

For more information, please visit https://www.federalreserve.gov/",Lisa D Cook
https://www.bis.org/review/r250414j.htm,Ásgeir Jónsson: Speech – 64th Annual Meeting of the Central Bank of Iceland,"Speech by Mr Ásgeir Jónsson, Governor of the Central Bank of Iceland, at the 64th Annual Meeting of the Central Bank of Iceland, Reykjavík, 10 April 2025.",2025-04-10 00:00:00,"## `sgeir Jónsson: Speech - 64th Annual Meeting of the Central Bank of Iceland

Speech by Mr `sgeir Jónsson, Governor of the Central Bank of Iceland, at the 64th Annual Meeting of the Central Bank of Iceland, Reykjavík, 10 April 2025.

* * *

Madame Prime Minister, other Ministers, Chair of the Supervisory Board, honoured guests:

An hour before noon on Friday 15 April 1904, all stores in Reykjavík were closed, and children were given the day off school. At noon, city merchants gathered at the square in Lækjartorg and ""marched"" to the tune of band music to the cemetery on Suðurgata. The weather was delightful, and the Icelandic flag, which was then blue and white, and the Danish flag were held aloft as the parade moved along. When it reached the cemetery, a garland was placed on the grave of Jón Sigurdsson, speeches were given, those gathered sang ""Ó Guð vors lands [O God of our Land]"", and the group returned to midtown.

That parade marked the fifty-year anniversary of free trade and the end of the Danish trade monopoly, the last vestiges of which had been lifted on 15 April 1854. The celebrations continued through the evening with gatherings all over town. Freedom was eulogised with a nineteen verse ""ode to trade freedom"" written by editor and Alaska explorer Jón Ólafsson. The last verse translates loosely as follows:

Let freedom to trade be the beacon that guides us and helps us change boulders to bread.

Let freedom to trade be the bedrock beneath us, the bulwark of freedoms ahead.

Independence leader Jón Sigurdsson had certainly prioritised free trade. In 1843, he wrote an article for the magazine Ný fØlagsrit [New Association Writings] entitled ""On Trade in Iceland"", in which he explored Icelandic history through the lens of classical economics in the spirit of Adam Smith and David Ricardo. He attributed Iceland's poverty to the Danish trade monopoly, thereby staking out a new political policy: Free trade would be a cornerstone of Iceland's sovereignty. The 1904 event was therefore a victory celebration, as much had been gained over the preceding half-century. Iceland had home rule and a new bank registered in Copenhagen. Motorised boats and urbanisation were just over the horizon. Perhaps more importantly, the Icelandic nation had gained the confidence to stand on its own feet.

Honoured guests:

The period from 1860 until 1914 is often referred to as the First Globalisation - when trade in goods and capital was unrestricted and countries were interlinked by railroads, steamships, and the telegraph. The British were in the vanguard of global trade at that

time, harnessing their industrial power, their might as a colonial empire, and the strength of the gold-pegged pound sterling.

This openness came to an end with the outbreak of World War I in 1914. The US took the helm from Britain as the twentieth century's leading industrialised country but did not take the lead in world trade. This became obvious after the stock market crash of October 1929. In June 1930, the US responded by levying protective tariffs of 20% on the rest of the world. Other countries immediately responded in kind and world trade shrank by 60-70% over the ensuing two years, undeniably deepening the Great Depression.

Iceland's fight for independence was grounded not least in its having unrestricted access to foreign markets. It was in the shelter of this certainty that the nation chose to separate from Denmark and become a sovereign state on 19 October 1918. A mere 23 days later, on 11 November 1918, World War I ended with the signing of an armistice agreement on the Western Front, and soon afterwards, Europe stopped buying Icelandic herring. Iceland was close to insolvent by October 1920, and consumer goods had to be rationed in Reykjavík over the ensuing winter. The situation was only remedied after the króna had been devalued by 30% and a loan from Britain obtained on onerous terms.

Only two years after having gained sovereignty, Iceland had been battered by the fragility of international trade. Numerous shocks have shaken the country since then, and we have usually been poorly prepared for the headwinds. Perhaps it is not in Icelanders' nature to make hay while the sun shines, as we are advised in to do in the Book of Proverbs. I believe the COVID pandemic in 2020 was the first and only severe shock we have weathered without staring down the barrel of a balance of payments crisis, a currency implosion, the imposition of capital controls, or goods rationing. But our relative strength in 2020 did not materialise out of nowhere.

## Honoured guests:

Ever since the financial crisis struck in October 2008, we as a nation have given top priority to shoring up the economy's resilience to external shocks. Of course, this is not the work of any single individual but a joint effort involving many, many people. With the passage of the new Central Bank Act in 2019 and the merger between the Bank and the Financial Supervisory Authority in 2020, Iceland endeavoured to integrate monetary policy, macroprudential policy, and financial supervision into a comprehensive strategy. Five years after the merger, the boundaries between the two institutions have vanished, but the improvement is plain to see.

Anyone who doubts the efficacy of macroprudential tools should read the Bank's most recent Financial Stability report, issued this March. According to the analysis in that report, households' and businesses' balance sheets have seldom been healthier than they are right now, owing to moderate debt levels and ample equity. There are few signs of increased arrears as yet. Iceland's balance of payments is broadly satisfactory, and the króna has been relatively stable. In short, we are very well prepared to face headwinds.

The application of macroprudential tools has also supported monetary policy effectively by restricting both debt levels in the real estate market and derivatives contracts in the foreign exchange market. It has enabled us both to prevent bubble formation amidst rising house prices and to limit opportunities for speculation and carry trade in the wake of a significant tightening of the monetary stance. It is also clear that capital requirements on credit institutions strengthen the transmission of the monetary stance along the credit channel by limiting the multiplier effects on deposits and lending, or the money creation associated with increased leverage.

The Central Bank has now lowered its key interest rates four times since last autumn, and inflation has been on a more or less constant downward path for well over a year. Although inflation is still too high, it is moving steadily towards the 2‰% inflation target. Monetary policy works. As long as private sector balance sheets remain strong and resilience is sufficient, it is quite likely that the economy will achieve a soft landing after a period of very buoyant GDP growth. This is the scriptural lesson that truly matters.

## Honoured guests:

The voices insisting that we as a nation cannot afford the macroprudential buffers we have accumulated in recent years have grown ever louder. Icelandic banks, they say, are fenced in and their competitive position weakened by excessive capital requirements. Resolving this would involve either bank mergers or a relaxation of capital requirements. In this context, I want to ask everyone to pause for a minute and look back over the past five years, and to recognise that it is indeed possible to strengthen operations without increasing leverage and indebtedness in the system.

In 2019, the three systemically important banks' net interest income totalled 100 b.kr. or so. By 2024, it had grown to 150 b.kr. This is an increase of 16% in real terms. Over the same period, the banks' operating expenses rose by 7 b.kr., which is equivalent to a decrease of 19% in real terms. Their expense ratios in terms of regular income fell from 57% in 2019 to 43% as of 2024. Their interest rate spreads have held broadly unchanged. Simply put, this is a revolution in Icelandic banking operations! And no wonder that the three banks' returns were twice as strong over the past four years as over the four-year period immediately preceding. In 2017-2020, the banks' average returns were 5.7%, but in 2021-2024 they were 11.7%. Strong returns and strong macroprudential policy therefore go hand-in-hand!

I cannot resist quoting the closing line in Voltaire's Candide: ""We must cultivate our garden."" It seems crystal-clear to me that the three large banks have made astonishing progress in cultivating their gardens over the past five years - and that a host of opportunities still await them.

I want to emphasise here that the best foundation for sound long-term returns in the financial system is economic policy that ensures stability. This should be obvious - and it is a lesson we ought to have learned many times over. The heart of the matter is this: Strong macroprudential policy and robust financial supervision create more stable revenues for the financial system and reduce the likelihood of loan losses and collapse. Macroprudential tools lay the groundwork for preventing competition in the lending market from devolving into a game of leapfrog where participants vie with each other to

see who can make the most lenient requirements, as was the case during the years preceding the collapse of 2008. Being a systemically important bank in a small system brings with it both responsibilities and benefits, which must inevitably be reflected in higher capital requirements. But I want to mention that just this winter the Central Bank lowered capital buffers on Icelandic financial institutions not designated as systemically important. This is a reflection of the Bank's assessment that systemic risk has subsided with the application of macroprudential tools.

I also want to emphasise the importance of financial supervision for the credibility of the financial system, where transparency is a key to trust. It is vital to monitor risks within individual institutions because temptation within one entity can so easily become another's problem. In this context, it is important that we be able to investigate such cases and conclude them appropriately without giving rise to doubts about the financial system or the market as a whole. It is also important that we increase the efficacy of supervision to the extent possible, given the international commitments we have undertaken under the EEA Agreement. I would like to point out that the capital requirements imposed on Icelandic credit institutions due to specific credit risk have declined in recent years, partly because the banks' loan books are far better diversified and carry less concentration risk now that the share of real estate-backed loans has increased. The outlook is also for capital requirements due to mortgages with relatively low loan-to-value ratios to decline even further with the implementation of the third Capital Requirements Regulation (CRR III) in coming months.

Not only have real estate-backed loans generated secure interest income for the banks and reduced capital requirements, they have also created new, favourable possibilities for foreign funding. I am convinced that, once the dust settles after the period of rapid price rises and supply shortages in the housing market, we will see continued growth in the banks' mortgage lending, similar to that seen in neighbouring countries, and Icelandic households will then be able to borrow on the best possible terms. It is very important for the Government to support this loan form - one that is funded with deposits, on the one hand, and covered bonds, on the other - instead of launching a new system and/or sponsoring large-scale State-guaranteed lending. In this context, we should be chastened by the past, for the Housing Financing Fund's remaining assets are hopefully being settled virtually as I speak, and at a large loss to the Treasury.

## Honoured guests:

From the beginning of Iceland's sovereignty in 1918 until November 2008, the country's international reserves were too small to enable us to weather large external shocks. We changed course with loans taken in cooperation with the IMF in the wake of the financial crisis. But it was not until the Central Bank embarked on large-scale foreign currency purchases in the domestic interbank market in 2014-2017 that we acquired sizeable reserves financed in Icelandic krónur. These purchases created a glut of liquidity in the monetary system. Subsequently, the Central Bank's key interest rate became its deposit rate rather than the rate on collateralised loans. Instead of receiving interest income from its collateralised loans to the banks, as it had previously, the Central Bank paid interest on banks' deposits. If foreign interest income on the reserves were enough to cover these payments of deposit interest, the Central Bank's finances would be broadly in balance. As things stand, however, interest rates on deposits with the Central Bank have far exceeded returns on the reserves, owing to Iceland's interest

rate differential with abroad. Furthermore, because of their prudential role, the reserves are invested in high-quality liquid assets, which generally yield lower returns than higherrisk assets would. This, in turn, entails a negative interest rate differential for the Central Bank and has eroded its capital in recent years. In 2024, the Bank took measures to curb this trend, as I explained in my speech at the Bank's annual meeting a year ago.

The shift was of direct benefit to the commercial banks. The foreign currency purchases of previous years expanded the stock of deposits and liquid assets in the system. Thus the banks' gross interest income is higher than it would be otherwise, which should reduce their average expenses. Furthermore, financial institutions enjoy risk-free returns on their accounts with the Central Bank. The benefits of this stem from the difference between the deposit interest the banks pay to their customers and the deposit interest they receive from the Central Bank. Here it is worth noting that liquid assets such as the banks' deposits with the Central Bank are not subject to reserve requirements. In view of all this, it should be beyond doubt that the commercial banks derive a net benefit from the past few years' glut of liquidity in the Icelandic monetary system - not to mention the international reserves themselves.

The advantages of large reserves should also be patently obvious. The reserves confer benefits such as improved credit ratings, easier access to foreign credit markets, and better interest rate terms, and moreover, they are available to ensure liquidity in the foreign exchange market when needed. The commercial banks benefit in particular, as they are the only domestic entities apart from the Treasury and State-owned companies that have issued bonds in foreign credit markets. The direct advantage to the three banks can be seen, among other things, in last year's credit rating upgrades and in more favourable interest terms abroad, which ultimately deliver benefits to the banks' customers.

The international reserves currently total 865 b.kr., or 19% of GDP. They are held jointly by the Central Bank and the Treasury, although of course, the Icelandic nation is ultimately the owner. The 300 b.kr. worth of reserves owned by the Treasury are actually borrowed, as they are financed with foreign bond issues. The Central Bank's share in the reserves, which are financed primarily in krónur, comes to 565 b.kr. At present, the Bank and the Treasury bear the cost of the reserves jointly, together with deposit institutions via the 3% reserve requirement.

The Bank bases its assessment of the optimum size of the international reserves on the IMF's reserve adequacy metric, or RAM. The Bank's current assessment is that the reserves should not be below 120% of that metric. The reserves have shrunk in recent years, and their funding has changed markedly, owing in particular to the Bank's programme of foreign currency sales during the pandemic and the Treasury's foreign currency need. In 2024, the reserves were equivalent to 118% of the RAM. The outlook is for the reserves to shrink marginally in the coming term, all else being equal, owing to foreign payments made by the Bank on the Treasury's behalf. The Central Bank is therefore of the opinion that the reserves need to be strengthened. As a result, and as a step in that direction, the Bank will initiate a new programme of regular foreign currency purchases in the domestic interbank market on 15 April 2025, the 171st anniversary of free trade in Iceland. The Bank plans to buy a total of 6 million euros, the equivalent of 870 b.kr., each week. The programme will be explained in more detail in a press release posted on the Bank's website.

## Honoured guests:

The foundations for the post-war renaissance of free global trade were laid at a conference of 44 nations in the small US town of Bretton Woods, New Hampshire, in July 1944. Iceland was among them. At the Bretton Woods conference, the groundwork was laid for the establishment of the International Monetary Fund, the World Bank, and the so-called Bretton Woods fixed exchange rate system. Three years later, groundrules were created for the cancellation of tariffs and quotas in world trade with the signing in 1947 of the General Agreement on Tariffs and Trade, or GATT Treaty. In a total of eight rounds of negotiations, the world was opened up again, and GATT led to the establishment of the World Trade Organization in 1995, a year after the North American Free Trade Agreement (NAFTA) came into being.

The political capital for the endeavour came from the US, as did the political conviction that trade liberalisation was the only way to guarantee world peace and that big countries should not strong-arm smaller ones by levying tariffs on them. This perspective on the link between peace and free trade has been a leitmotif in US foreign policy for over 80 years - until 2025, that is.

It is unclear what short- and long-term impact the tariffs introduced by the current US administration this April will have on the global economy or on the future of liberalised world trade. It is obvious, though, that the side-effects will be felt not least by the American people, who have benefited enormously from free international trade.

I firmly believe in common sense: World trade will adjust to a new reality and will continue to grow. That does not change the fact that we Icelanders must always be prepared to respond to shocks and changed circumstances - to ensure the resilience of our economy. There is no question that strong macroprudential policy enabled us to weather the COVID storm without significant problems. And we have recouped our previous output capacity with 20% accumulated GDP growth since 2020. With this in mind, I want to encourage stakeholders and elected officials alike to avoid shortsightedness. Solid macroprudential policy is a good investment for the Icelandic nation.

It would be highly appropriate for us to gather at Lækjartorg next Tuesday, the 15th of April, walk together to Jón Sigurdsson's grave in the cemetery, and celebrate the abolition of the Danish trade monopoly. Jón's political policy - that free trade is a cornerstone of sovereignty and prosperity - is still valid.",Ásgeir Jónsson
https://www.bis.org/review/r250414i.htm,"Petra Tschudin, Thomas Moser: Fast and available round the clock - what instant payments mean for households, companies and financial institutions","Speech by Ms Petra Tschudin, Member of the Governing Board of the Swiss National Bank, and Mr Thomas Moser, Alternate Member of the Governing Board of the Swiss National Bank, at the Money Market Event, Zurich, 10 April 2025.",2025-04-10 00:00:00,"Speech

Embargo 10 April 2025, 6.00 pm

Fast and available round the clock: What instant payments mean for households, companies and financial institutions Money Market Event

## Petra Tschudin and Thomas Moser ∗

Member of the Governing Board / Alternate Member of the Governing Board Swiss National Bank Zurich, 10 April 2025 © Swiss National Bank

∗ The speakers would like to thank Jan Cuonz, Basil Guggenheim and Andreas Wehrli for their support in writing this speech. They also thank Loriana Crasnic, Laura Felber, Benjamin Gföhler, Matthias Jüttner, Kerstin Kehrle, Anna-Kathrin Keller, Raphael Reinke and Nicole Rütti for their valuable comments as well as the SNB Language Services.

## Ladies and gentlemen

Welcome to the Swiss National Bank's Money Market Event. My colleague Thomas Moser and I are delighted to be discussing the latest developments in Switzerland's cashless payments landscape this evening.

Since last year, bank customers in our country have been able to make transfers that are executed immediately. The amounts are credited within seconds, every day of the week and round the clock. In our speech, we will explore the significance of these instant payments for households, companies and financial institutions.

To illustrate the relevance of this topic, it is worth reflecting briefly on our everyday lives. Consumer behaviour has changed considerably in many areas. Thanks to online shopping and streaming services, we have grown accustomed to being able to consume quickly and at any time. You know the situation: We order a pizza online from the comfort of our living room in the evening, and it is delivered within half an hour. We have come to take this for granted. And yet, surprisingly, the physical delivery of the pizza is much faster than the electronic transfer of the money to the pizzeria. The payment that we trigger when we click 'Order' takes longer than you might think; indeed, it can take several days - or even weeks - for the money to arrive on the pizzeria's account.

## Types of cashless payment and the benefits of instant payments

Why is this? The lag in payment settlement is due to the fact that legacy settlement mechanisms cannot keep up with the pace of modern business. A look at the structure of the financial system helps to better contextualise and understand what changes instant payments bring.

The financial system has two tiers (cf. chart 1). The first tier, which is illustrated on the slide by the blue semicircle, is shaped by the central bank. In its role as the 'bank for banks', the SNB lays the foundation for the entire system, providing banks with secure central bank money and a central payment system for making transfers among themselves. In Switzerland, this real-time gross settlement (RTGS) system is operated by SIX Interbank Clearing Ltd on behalf of the SNB. We will come back to the RTGS system later.

The second tier, shown in green on the slide, is in the hands of regulated commercial banks. These institutions compete with each other and offer their services to companies and households.

Cashless payments are settled within this two-tier system. As our latest payment methods survey shows, we are increasingly paying with cards or apps in our day-to-day lives, especially in situations where immediate payment confirmation is required - for instance when shopping at a retail store. We pay at the checkout, the transaction is confirmed immediately and we can take our purchase with us right away.

When we pay with a card, a long settlement chain involving various financial intermediaries is set in motion. This is illustrated on the slide (cf. chart 2). A payment processor mediates between the payer's bank and the merchant bank and reconciles the authentication data according to a fixed set of rules known as a 'scheme'.

Intermediaries, such as TWINT, guarantee the payment to the retailer until it is actually received. The intermediaries thus take on the risk that the payment will not be made - in other words, they assume a credit risk. Limits are set in order to cap this risk. This means that large amounts cannot easily be transferred in this way. Furthermore, fees apply - especially for the payment recipient, in this case the retailer.

A classic bank transfer has different characteristics. The advantage of this payment method is that it can be used to transfer large amounts of money, for instance if you are buying a car. The slide shows the settlement process (cf. chart 3). The money is transferred from the payer's bank to the recipient's bank via the central Swiss payment system. The transaction is made using central bank money. This enables a final transfer of value, as in the case of cash payments, so that no intermediary has to take on a credit risk. The disadvantage here is the time lag between the payment order and its execution. It can take a day or more for the money to be credited to the recipient's account, and in the meantime the buyer has to wait to pick up their new car.

This is where instant payments come in. They offer households and companies the same advantages as existing types of cashless payment, but without the disadvantages (cf. chart 4). Instant payments are a versatile payment instrument and are attractive for both private individuals and companies. As with a classic bank transfer, the payment flows from the payer's bank via the central Swiss payment system to the recipient's bank. However with an instant payment, the payer's account is debited and the recipient's account credited almost immediately and simultaneously, irrespective of the time of day or day of the week. Furthermore, instant payments facilitate the transfer of large amounts. While there is currently a limit of CHF 20,000 per transaction, this is to be removed in the longer term. Immediate crediting enables payment recipients to manage their liquidity more efficiently and automate processes such as the dispatching of goods or the activation of services.

It also brings benefits from an overarching perspective. Instant payments run directly via the central Swiss payment system. They therefore benefit from network effects due to the broad participant base, as well as from high security standards and risk-free settlement in central bank money. Thanks to economies of scale, transaction costs at the system level are low and the exchange of sensitive authentication data over long settlement chains is also avoided.

Instant payments utilise the tried-and-tested two-tier financial system and combine the strengths of the various stakeholders: the SNB's security at the infrastructure level and the innovative power of competition between commercial banks. This interplay between security and innovation is not always present in alternative approaches to advancing payment methods. Private forms of digital money such as stablecoins do not benefit from the security provided by the central Swiss payment system. Furthermore, they could lead to a fragmentation of the

payments landscape. And, depending on its design, a central bank digital currency for companies and households might not harness the innovative power of the private sector.

## The introduction of instant payments and ongoing development options

Where do we stand in Switzerland today with respect to instant payments? As a first step, the SNB, together with SIX Interbank Clearing Ltd, which operates the central Swiss payment system, created the technical conditions for instant payments. In November 2023, the instant payments service within the payment system went into operation (cf. chart 5).

The second step was the market launch of instant payments in the summer of 2024. Since then, the largest financial institutions, which together account for more than 95% of retail payments in Switzerland, have been able to receive and process instant payments. Receiving instant payments will be mandatory for all banks and fintechs offering retail payment services from the end of 2026.

Customers of ten Swiss banks are currently able to send instant payments. These institutions process around half of all retail payments in Switzerland. The potential for broad coverage thus already exists today. Many more banks have announced that they will also provide the option of sending instant payments in the future.

Initial experiences since the launch have been positive. The average value per instant payment is over CHF 1,000, which is relatively high compared to other payment methods. This leads us to assume that the ability to pay large amounts instantly satisfies a real need on the part of private individuals and companies. Furthermore, instant payments are used mainly during the week. We interpret this as an indication that instant payments are especially attractive for companies.

Relative to established payment methods, however, the share of total payments being made via instant payments is still very low (in the per mille range).

How does this launch compare internationally? In general, it is evident that the speed with which instant payments become established can vary widely. In some countries, the initial uptake has often been slow. This is a typical phenomenon in complex systems with strong network effects. Think about how long cheque books survived in the US. However, depending on the prevailing circumstances, regulation and coordination between the various stakeholders, broad acceptance of instant payments can also be achieved quickly.

Adoption tends to be fast where instant payments make a big difference compared to existing payment methods - for instance, if they enable broad swathes of the population to access financial services affordably and easily. It also helps if authorities and banks cooperate in a coordinated fashion to make new instant payments-based services available. On the slide this is borne out by Thailand and Brazil, which experienced a rapid rise in the number of instant payments per capita (cf. slide 6).

Uptake is generally slower in countries with an already highly developed payments infrastructure. On the slide, we have taken Australia as an example, and Switzerland also falls into this second category. We have a well-functioning cashless payments system. Furthermore, the SNB does not oblige banks to offer their customers the option of sending instant payments and we do not intervene in fee setting. Rapid market acceptance is currently being hampered by the fact that the costs associated with instant payments are still high in some cases.

How do we see the future? The SNB expects instant payments to become a well-established feature of the payments landscape and we are working with industry on further developments.

One such development could be the use of instant payments at points of sale and for online transactions (cf. chart 7). This is not yet possible. At the moment, it is 'only' possible to make instant payments in the form of classic transfers from one bank account to another. SIX Interbank Clearing Ltd and the SNB have launched an initiative aimed at enabling payment solution providers to use the instant payments infrastructure. The goal is to create space for the development of new services for companies and households. The initiative would also galvanise competition and could lower payment fees. Consultation with market participants has shown that banks and other stakeholders in the payments field are open to this plan.

A second option for further development would involve linking the instant payments systems of different countries. This could add considerable value for companies and households, given that cross-border payments are generally expensive and slow today. And if instant payments could also be made across borders in the future, this would of course be particularly significant for a small open economy like Switzerland.

## Advantages and challenges of instant payments for financial institutions

So far, we have spoken about the advantages of instant payments for companies and households as well as the benefits from an overarching perspective. We would now like to talk about the advantages and challenges of instant payments for financial institutions (cf. chart 8).

Under the Swiss approach, instant payments are an enhancement of the classic account-based bank transfer. The banks are still the entities that clients interface with when making payments, and the banks remain responsible for authorising and processing payments. In many other countries, however, banks are losing this role, as payment providers there can authorise and process payments via their own interfaces. In other words, banks are losing one of their points of contact with their customers. The Swiss approach avoids this.

While the implementation approach for instant payments chosen in Switzerland offers opportunities for banks, there are also challenges.

The first major financial and organisational challenge is the adaptation of banks' IT infrastructure. This is necessary to ensure that transactions can be processed at the required speed. We are convinced that instant payments are a worthwhile investment in the future for banks.

A second challenge relates directly to the speed of instant payments. Since the sum of money is transferred immediately and irrevocably, and the payment recipient can withdraw that sum right away, it is more difficult to retrieve the money in the event of fraud. With the current system, banks normally have a few hours to review suspicious transactions, and, in serious cases, stop them. With an instant payments system, banks must act faster than in the past and must be able to identify - and if necessary, block - suspicious transactions at once.

Various solutions are being pursued globally. One involves automatically checking whether the account number specified in a payment is indeed assigned to the intended recipient. Another solution involves deploying machine learning and forecasting models for better fraud prevention.

## Adjusting arrangements for ensuring liquidity

A third challenge for financial institutions concerns the management of the liquidity required to settle instant payments. We would like to discuss this in more detail (cf. chart 9).

Putting the question somewhat pointedly: Where would the liquidity come from if we were all to make large instant-payment purchases from the comfort of our living rooms at the same time on a Sunday evening? How can banks make sure that they have sufficient liquidity to execute the transactions immediately?

On the slide you can see the operating hours for parts of the Swiss financial market infrastructure over the weekend. The instant payment service is available 24 hours a day, 7 days a week - so including the weekend. The RTGS service for payments between financial institutions, which we referred to at the outset of this speech, was previously unavailable during parts of the weekend. But that is changing, literally as we speak. Today, at 6.30 pm, the RTGS service will be adjusted so that it will also operate continuously at weekends and during public holidays.

However, the infrastructure needed for repo transactions, with which financial institutions can obtain additional liquidity at short notice on weekdays, will remain closed at weekends. To prevent liquidity shortages during weekends, public holidays and off-peak times, banks must therefore pre-fill their accounts in good time - much as they do their ATMs. They do so on the basis of empirical data on expected outflows. If banks miscalculate, this can affect money market interest rates and thus impair the implementation of monetary policy. In extreme cases, financial stability could even be put at risk.

In future, the SNB will therefore make it possible for SIC participants to obtain additional liquidity at any time. What exactly is planned here? To support financial institutions, the SNB will be offering the Payment System Support Facility (PSSF) from the end of 2027

(cf. chart 10). With the PSSF, financial institutions will be able to independently obtain liquidity on a secured basis at any time. On the slide, we have enlarged the first tier of the two-tier financial system shown at the outset. This is where financial institutions and the SNB operate, settling payments in central bank money. If a financial institution draws on the PSSF, the liquidity is technically transferred to its RTGS account. If necessary, the liquidity drawn can subsequently be transferred on to the instant payments account. Financial institutions can automate these processes in their core banking systems.

How does this new facility fit with the currently available SNB facilities? The PSSF will replace the intraday facility and the liquidity-shortage financing facility (cf. chart 11). Today, the SNB offers its counterparties interest-free intraday liquidity during the Swiss repo market's opening hours and overnight liquidity at a special rate - in each case secured by securities accepted by the SNB. Unlimited intraday liquidity is currently available, while overnight drawings are capped by a limit. This limit is set for each bank according to its payment requirements. These parameters will not change with the PSSF. The PSSF will also be directed towards the same institutions as today's standing facilities.

In contrast to the existing setup, banks drawing liquidity will have to pledge their collateral on an open-ended basis to the SNB in advance. Currently, the collateral is merely held in a custody account. Open-ended pledging is necessary because the operational implementation of the PSSF will take place directly within the payment system, instead of as a repo transaction. Liquidity drawn under the PSSF will therefore take the form of a secured loan. This will ensure the availability of the facility during weekends and off-peak times. The openended pledging will have no impact on regulatory metrics such as the minimum liquidity ratio.

Another advantage of the new technical implementation is that intraday liquidity that is not repaid within the same SIC clearing day will automatically qualify as overnight liquidity. In addition, overnight liquidity that is not repaid on time will be rolled over automatically. Moreover, the SNB will, during the working week, continue to make it possible for banks to draw intraday liquidity in excess of the value of the collateral pledged to the SNB via repo transactions.

All participants will be given a sufficiently long transition period to switch to the PSSF. We will communicate this in due course. The design of the new facility will also enable the SNB, where necessary, to react flexibly to developments in tokenised assets or relating to shorter settlement cycles. But that is a topic for a future Money Market Event speech.

## Conclusion

We are approaching the end our remarks now, so let me briefly sum up. Instant payments allow companies and households to make rapid transfers round the clock and facilitate their liquidity management. Banks remain the key point of contact for customers in payment matters. Since liquidity management can become more challenging for financial institutions in

light of instant payments, the SNB will be offering a liquidity facility that is available at all times in the form of the PSSF.

From an overarching perspective, instant payments facilitate innovation. The SNB expects instant payments to become the standard option for account-to-account payments and it anticipates that, in the longer term, it will also be possible to use this payment option at retail points of sale.

However, instant payments will not necessarily replace all existing payment types. In some use cases, delayed settlement may make sense - for example, when reserving a hotel room. Cash payments will also continue to play a role. We have therefore begun designing a new banknote series, to be issued in the 2030s. It will be crucial for the future viability of Switzerland's payments landscape that instant payments become standard where they offer advantages over other settlement types.

The SNB has the statutory task to facilitate and secure the operation of cashless payment systems. By introducing instant payments, we, together with SIX Interbank Clearing Ltd and financial institutions, are helping to future-proof Switzerland's payments landscape. Open dialogue is essential for successful cooperation, and in this spirit we are looking forward to your questions and to the panel discussion.

Fast and available round the clock: What instant payments mean for households, companies and financial institutions

Petra Tschudin, Member of the Governing Board Thomas Moser, Alternate Member of the Governing Board

Money Market Event, Zurich 10 April 2025



## Central bank and financial institutions in the two-tier financial system



## Card and mobile payments: fast but limited



## Bank transfers: large amounts but with a time lag



## Instant payments offer advantages and promote efficiency and security



## Banks have begun offering their customers instant payments



## Adoption rates of instant payments internationally



Impetus for the future: The SNB is committed to furthering the use of instant payments



Advantages for end customers

## Advantages and challenges for financial institutions



## Liquidity management now also at weekends and during off-peak times



Payment System Support Facility (PSSF): short-term liquidity support round the clock and at weekends

End customers

Financial institutions



PSSF will replace intraday facility (IF) and liquidity-shortage financing facility (LSFF)















CHF

Terms

Intraday and overnight

Price

Intraday: 0%; overnight: special rate

Collateral

Securities accepted by the SNB (SNB GC Basket)

Limit

Intraday: unlimited; overnight: limit

Access

Analogous to current IF and LSFF

Operational implementation

Open-ended pledging of collateral; liquidity drawn directly by participants via payment system (repo as backup); secured loan

Availability

24/7

new

## Conclusion

- -Instant payments are available in Switzerland, bringing advantages for end customers and the financial system.
- -Instant payments are a strategic investment for banks, but they also present new challenges.
- -The SNB will make its facility for short-term liquidity support available round the clock and at weekends.

## Thank you for your attention.

The speakers thank Jan Cuonz, Basil Guggenheim and Andreas Wehrli for their help in preparing this presentation.

- © Swiss National Bank

",Petra Tschudin; Thomas Moser
https://www.bis.org/review/r250414h.htm,"François Villeroy de Galhau: A European approach to simplification - avoiding three misconceptions, and suggesting concrete milestones","Speech by Mr François Villeroy de Galhau, Governor of the Bank of France, at the Eurofi High Level Seminar 2025, Warsaw, 11 April 2025.",2025-04-11 00:00:00,"

## Eurofi

## Warsaw, 11 April 2025 A European

approach to simplification:

avoiding three misconceptions, and suggesting concrete milestones

Speech by François Villeroy de Galhau, Governor of the Banque de France

Press contact: Delphine Cuny (delphine.cuny@banque-france.fr)

Ladies and Gentlemen,

I am pleased to attend this Eurofi Summit here in Warsaw - the birthplace of Marie Skłodowska-Curie, renowned French-Polish scientist and two-time Nobel laureate. A great European as well, currently among the shortlisted personalities to  appear  on  future  euro  banknotes.  Let  me  start  with  one  strong  belief  on Europe, which is our common safe haven. In this newly chaotic world, we have an absolute duty and a unique opportunity to enhance our economic power, which means accelerating on at least two positive solutions: (i) to build a digital euro to anchor our monetary sovereignty, in partnership with commercial banks, a  comprehensive  legislative  package  put  forward  by  the Commission  to  integrate  more  the  Single  market  and  the  Savings  and Investments  Union,  following  the  Draghi  and  Letta  Reports.  On  both  fronts, waiting in tetany or stupefaction would be lethal, and speed is of the essence:

- (ii) to  have  now let us act faster and further.

Coming back to science, financial stability and banking regulation must likewise be built on rigour - but also on clarity. In times of heightened uncertainty, we must  not  lose  sight  of  the  fundamental  ' why '  that  underpins  our  regulatory architecture.

I  will  first  elaborate  on  three  misconceptions  and  one  rightful  takeaway  for simplification (I), before suggesting a few concrete milestones to go down the road (II).

## 1. Three misconceptions and a rightful takeaway for simplification

## 1.1. First misconception: we need US-like deregulation

The first misconception would be to follow the path of deregulation. Today, a strong wind is blowing from across the Atlantic with a dangerous temptation to forget the lessons of the 2008 global banking crisis.

Deregulation would sow the seeds of future financial crises, still more at a time when crypto-assets and the growing role of non-bank financial intermediaries (NBFIs) are expanding the perimeter of systemic risk. Let me be clear, in case anyone here is still tempted to emulate the 'example' set by M. Trump's team:

it  would  be  a  huge  mistake.  The  Trump  administration  is  heading  down  the wrong path with its economic and financial agenda - and the severe financial instability triggered after April 2nd is a clear demonstration thereof. We shouldn't and we won't enter a race to the bottom.

## 1.2. Second misconception: nothing should change in Europe

The second misconception, conversely, would be that nothing should change that  even  modest  adjustments  would  inevitably  open  the  door  to  broader deregulation  and  bow  to  'banking  sector  lobbying'.  This  fear  is  unfounded: European regulators and supervisors are competent enough to know where to adjust, and where to stand firm. A decade after its inception, the Banking Union has  become  strong  enough  to  acknowledge  that  there  is  room  for  possible improvement.

Over the years, a growing number of requirements, guidelines and technical layers have been added to the framework.

BANKING PRUDENTIAL REQUIREMENTS ARE NUMEROUS IN EUROPE

COMPARING BANKING PRUDENTIAL REQUIREMENTS: THE CASE OF THE CAPITAL REQUIREMENTS FRAMEWORK



Source : EBA « stacking orders and capital buffers » rapport (2024).

- Notes : 1) Capital requirements related to going-concern solvency (excluding gone-concern MREL/TLAC requirements);
- The charts aim to reflect for banks. The size of each in the charts is illustrative and
- 2) requirements large requirement layer
- does not reflect actual rates (e.g., the CCyB exists in the US but is currently set at 0%).

This is not simply the result of bureaucratic blindness that is all too easily vilified: the different European  authorities are doing their job  competently  and conscientiously. But in Europe at least, there are structural causes. First, there is an accumulation of international, European and national standards, with the

constant temptation to add more. Each country also wants to keep its previous rules, making it difficult to lighten the burden. There are also numerous bodies in charge - the SSM with its microprudential role, the ECB and the European Systemic  Risk  Board  (ESRB)  with  their  macroprudential  role,  the  SRM  for resolution, European agencies including the European Banking Authority (EBA) for banks, and various national authorities.

## 1.3. Third misconception: we should still add requirements on European banks

The weakness of this European architecture is that no single authority is truly responsible for taking a holistic  view on  the appropriate level of capital. And there is possibly an assumption that more capital is always better, regardless of context or calibration. This dynamic is often driven by siloed optimisation: each authority,  acting  with  the  best  of  intentions,  introduces  additional  layers  of safeguards. Such 'local' optimisation can lead to a suboptimal race to the top.

But the reality is that European banks as a whole do not lack capital or liquidity. On the contrary, over the past decade, the average CET1 ratio of European banks has increased from 12.5% to 16.1%.

## EUROPEAN BANKS' BALANCE SHEETS ARE ROBUST

## CET1 RATIO FULLY LOADED

Source: EBA Risk Dashboard ; Banque de France.



Their resilience has been repeatedly tested and confirmed - recently through the 2023 stress testing exercises, which are credible, and well-recognised by markets, based on a very severe scenario, corresponding to a drop in the GDP approximately twice as strong as during the Great Recession. Moreover, the current 2025 exercise will anchor this credibility, as it is based on a narrative of worsening geopolitical tensions, with large, negative, and persistent trade and confidence shocks.

## 1.4. A rightful takeaway: we need a European approach to simplification

These three misconceptions lead us to a more grounded conclusion: the need for a European approach to simplification that is firm on objectives, but more nimble in design. The difference from deregulation is threefold:

First,  we stick to the fundamental objectives :  financial stability must remain paramount. The cost of banking crises is too high i  to be treated lightly. The same holds true for climate change, which is no longer a distant risk but an economic reality. ii  One word about the objective of competitiveness : it is important for the industry, and rightly so; but there is a hierarchy of objectives. Just as in monetary policy, price stability is the primary objective, preceding growth support, financial stability  must  remain  our  primary  objective.  Insofar  it  is  ensured,  we  should indeed support competitiveness.

Second, we stick to the international standards : Basel 3 for the banks, FSB guidelines for non-banks and cryptos. Most jurisdictions implement them: the new US unilateralism is the exception, and cannot become the rule.

Third,  simplification  is  about diminishing  complexity ,  and  not  necessarily diminishing requirements. We must examine how rules interact, how they are applied,  and  whether  their  combined  and  holistic  effect  truly  serves  their intended purpose. This applies to both regulation and supervision. Simplification is not a softening of our ambition but a way to make it more effective.

## 2. Going down the road of simplification: concrete milestones

Let me in this spirit lay down a few concrete milestones towards a European simplification.

## 2.1 Short term: supervision and reporting - including ESG

In the short term, there are opportunities to reduce the administrative burden for banks and competent authorities. On supervision, we welcome the SSM's 'SREP of tomorrow' initiative and the work on reporting simplification. They are important steps forward, and they must now be fully delivered and enhanced. In parallel, the EBA has launched concrete efforts to rationalise Level 2 and 3 texts, as well as reporting requirements, with practical actions to be taken by the end of 2025. I also welcome the Commission's decision to bring forward to 2026 the report on the state of the banking system in the single market, with a focus on competitiveness.

On ESG reporting , the Omnibus directive's direction of travel is encouraging. The reduction in reporting burden is welcome - but we can finetune the right balance, especially on CSRD. In particular, for mid-sized companies (from 250 to 1,000 employees) an appropriate reporting framework is still to be defined. Moreover,  the  upcoming  streamlining  of  the  first  set  of  ESRS  standards prepared by EFRAG should still contain the most necessary data to address climate-related financial risks, such as information regarding entities' transition plan. Indeed, we strongly support the development of credible transition plans for financial institutions. In this regard, achieving consistency between CSRD and CSDDD is a major step forward. The deferral of sectoral rules at this stage is, in my view, a sensible and proportionate choice.

## 2.2. Medium term: regulation

Quick wins matter - but we must also keep the broader perspective in view.

As  underlined  last  February  in  our  joint  letter  to  the  Commission  with  the Governors  of the Bundesbank,  Banca  d'Italia and  Banco  de  España iii , simplification must begin with a holistic assessment of the present framework.

This could lead afterwards to constructive discussion of Level 1 texts, and a critical review of gold-plating and Europe-specific layers of complexity.

While  we  should  not  pre-empt  the  outcome  of  this  review,  a  number  of wellknown candidates for simplification already stand out in my opinion. First, on resolution ,  the coexistence of TLAC and MREL requirements, which is a clear  case  of  gold-plating  and  complexity.  Then,  the multiplication  of  MDA triggers ,  which  generates  uncertainty  for  capital  planning.  In  particular,  the removal of the MREL and leverage ratio-based MDA triggers deserves serious consideration. Beyond these, ambition in simplifying should be maintained even on  more  complex  topics  such  as  the  structure  of  the  capital  stack,  and  in particular, the macroprudential architecture.

On Basel 3 , I am and remain a great supporter of its implementation, with one exception:  it  is  appropriate  to  postpone  by  one  more  year  to  2027  the implementation of the fundamental review of the trading book (FRTB) given the international uncertainty. This delay should be used to adjust some of the design of the FRTB. Lastly, current European discussions on the output floor's impact on  the  P2R  should  be  in  line  with  the  spirit  of  the  level  1  text  and  avoid goldplating.

*

To conclude, we can be proud of what has been achieved since the 2008 crisis: the European banking system is now more robust, better capitalised, subject to stronger and more coordinated supervision, giving us greater confidence as we face  today's  uncertainties.  We  can  now  turn  to  what  remains  to  be  done: reducing the complexity of our framework without weakening it. Simplifying does not mean lowering our guard - it means strengthening our foundations. Let us discuss it together, with a bit less passion and mutual suspicion, and a bit more pragmatic action. As Marie Curie said: 'Nothing in life is to be feared, it is only to be understood.' We must show less fears, and more mutual understanding. This is, contrary to the latest US drift, the European way I believe in.

i  'For instance, the median cost of over 150 systemic banking crises during the period 1970-2017 is 6.7% of GDP for advanced economies and 10% for emerging market economies (Laeven and Valencia, 2020)'. Source: BIS Working Paper n°1090. Monetary and Economic Department. Claudio Borio, Marc Farag and Fabrizio Zampolli. Tackling the fiscal policy-financial stability nexus. April 2023.  ii  The estimated cost of physical climate damages is projected to rise from 5% of global GDP today to 15% by 2050. Source: Network for Greening the Financial System (NGFS). NGFS long-term climate scenarios - Highlevel Overview. November 2024.  iii  Joint Letter from Banque de France, Bundesbank, Banca d'Italia and Banco de España, to the European Commissioner Albuquerque. 19th March 2025.",François Villeroy de Galhau
https://www.bis.org/review/r250414g.htm,"Claudia Buch: European banking integration - harnessing the benefits, containing the risks","Speech by Prof Claudia Buch, Chair of the Supervisory Board of the European Central Bank, at the Warsaw School of Economics, Warsaw, 10 April 2025.",2025-04-10 00:00:00,"SPEECH

## European banking integration: harnessing the benefits, containing the risks

## Speech by Claudia Buch, Chair of the Supervisory Board of the ECB, Warsaw School of Economics

Warsaw, 10 April 2025

Thank you very much for inviting me to speak here today. [ ] Poland's presidency of the Council of the European Union comes at time of exceptional uncertainty. The global economy is under strain from heightened geopolitical risks, trade tensions, and financial market volatility. Within Europe, this is adding to the pressure to revive growth and deepen the integration of the Single Market. Poland's economic history holds important lessons, having made the transition from a centrally planned economy four decades ago to being a fully-fledged member of the EU for two decades. 1

I would like to focus on banking integration, one of the banking union's main objectives and a key component of Poland's economic transformation. Although more than ten years have passed since the banking union was established, its objectives could not be more relevant today. The banking union has clearly delivered in terms of providing better, more harmonised supervision, a stronger regulatory framework and a resolution regime. European banks have proven to be resilient to recent shocks, including the COVID-19 pandemic, the energy crisis and the banking market turmoil of March 2023. Better regulation and supervision have made a significant contribution to this, as has policy support for the real economy.

Yet hopes that the banking union would lead to closer integration of banking markets across Europe have not fully materialised. Cross-border mergers have remained relatively rare, about 75% of banks' lending portfolios are invested in their home markets, and few banks have truly European business models. [ ] 2

Promotion of the Single Market for banking services by removing barriers to integration would offer many benefits. This would allow for better diversification of risks and better use of scale and scope. Banks could develop European strategies as a response to the digitalisation of financial services. Recent reports on the European economy stress the need to strengthen productivity by harnessing the Single Market's scale, improving access to equity finance, reforming the labour market and implementing structural reforms. [ ] Consumers would benefit from these measures, which would also help to promote growth. Although these reports focus mainly on the real economy, similar factors are at play in the banking sector. 3

In banking, however, greater integration and more intense competition can have implications for risk. Local shocks can spill over and lead to contagion, and increased competition may incentivise excessive risk- taking. The risks associated with cross-border integration need to be adequately addressed through banks' risk management, supervision and regulation.

The experience of central and eastern European countries (CEECs) offers valuable lessons. In the 1990s there was intense debate about how to open up to foreign competition and to regulate the sector. Since then, financial integration and regulatory harmonisation have made rapid progress.

Of course, history does not repeat itself. Moving from a centrally planned 'monobank' system, where central bank and commercial bank activities were not separate, to a modern banking system was clearly a unique institutional reform. At the beginning of the transition period, domestic banks in CEECs lagged far behind their international peers, and there was substantial potential for the transfer of technology. Uncertainty regarding the valuation of banks' assets was high, as each economy was undergoing a broad adjustment to a new set of relative prices. Non-performing loans (NPLs) increased significantly in the early transition period, and many banks failed. Today, more than 30 years later, foreign banks in the region have significant market shares, higher than in the rest of Europe, and capitalisation and technology have improved significantly.

However, the effects of integration become more visible under the magnifying glass of the transition period. There are lessons we can learn today from this exceptional period. First, the integration of banking markets brings many benefits. Yet despite the harmonisation of banking regulation and supervision, the full benefits of the Single Market still remain unexploited in Europe. Second, many barriers to integration are embedded in national rules that affect financial services. In this respect, the savings and investment union could be an important catalyst for greater integration. Third, adequate regulation and supervision is needed to ensure that the banking sector remains resilient during a period of heightened uncertainty and risk.

## Open markets: why consumers benefit and how banking is different

Consumers benefit from open markets and increased competition in many ways. Production based on comparative advantages allows for a better use of scarce resources, resulting in better quality products, lower prices and greater variety. Indeed, the benefits of integration through trade in goods and services are well documented. [ ]  In Poland, real GDP per capita grew significantly in the period following EU accession, rising from 51% of the EU average to 83% between 2004 and 2023 (Chart 1), while real income convergence was even faster than in other new EU Member States. 4

## Chart 1:Real GDP per capita, 2004-23



Notes: Based on real GDP per capita in terms of purchasing power standard, with the EU average as the baseline. EU is used in fixed composition, including all the countries currently being part of EU27. The yellow and purple lines are GDP-weighted averages. 'Other CEECs in the euro area' refers to Estonia, Croatia, Latvia, Lithuania, Slovenia and Slovakia.

Sources: European Commission and ECB calculations.

In Europe, the banking union has helped to strengthen the resilience and soundness of the euro area banking sector. Since its inception, the resilience of banks under European banking supervision has increased. [ ] 5



- Capital levels have increased - from 12.7% in 2015 to 15.9% in 2024 for the weighted Common Equity Tier 1 (CET1) ratio, and - less dynamically - from 5.3% to 5.9% for the unweighted leverage ratio. 
- Non-performing loans have declined to 1.9%. Ten years ago, NPLs reached an average of 7.5% and, in some countries, values of close to 50%. 
- Improved operational efficiency is reflected in lower cost-to-income ratios, which declined from 60% to 55% between 2015 and 2024. 
- Banks' return on equity has recovered from 5% to 10%, which also reflects the recent increase in interest rates, and European supervisors pay particular attention to the long-term sustainability of 

business models.

These achievements underscore the value of European banking supervision in promoting consistent, riskbased supervision across the euro area and ensuring a stable and competitive banking sector.

Generally speaking, the benefits of integration can come about through the cross-border provision of goods and services or through the direct investment of firms abroad. Foreign direct investment has the added advantage of providing the transfer of technology and know-how.

A similar rationale about the benefits of open markets applies to banking. More integrated and more competitive markets offer a wider choice of financial services and a better diversification of risks, while weakening banks' local market power. Financial contagion risks fall if financial markets are highly integrated. [ 6

]  From a theoretical point of view, the entrance of foreign banks tends to enhance efficiency, but the effects on competition depend on the mode of entry. [ ]  Foreign direct investment through the 7

acquisition of local banks may even lead to higher market power and increased profit margins. Crossborder lending may, in contrast, put greater pressure on profit margins and interest rates.

In banking, however, there is also a potential downside to greater integration and competition as risks may increase. Large shocks can spill over more easily in more integrated markets. More intense competition can trigger risk-taking. [ ]  The management of complex international organisations places particular demands on banks' governance and risk management. And exposure to geopolitical risks increases. Bank internationalisation is therefore often associated with higher risks. [ ] 8 9

The history of global banking provides ample evidence of these trade-offs. The global financial crisis in 2007-08 spread through the cross-border links between banks that had often taken insufficient account of the associated risks. The crisis resulted in a deleveraging of banks and a retrenchment from foreign markets that took years to return to normal. [ ]  This retrenchment was particularly strong in Europe: economic downturns increased loan defaults and weakened bank balance sheets, forcing banks to pull back from activities in affected markets. 10

As regards the benefits of foreign direct investment and cross-border bank mergers, the evidence is mixed. Deregulation of entry and the removal of indirect barriers that raise information costs can promote cross-border mergers. [ ]  In Europe, mergers and acquisitions in banking have a strong domestic or regional focus, presumably because information and execution costs are lower. Cross-border mergers tend to increase profitability by more than domestic mergers. [ ]  However, not all mergers improve efficiency and shareholder value, and some may even be motivated by adverse incentives of becoming 'too big to fail'. [ ] 11 12 13

Generally, the evidence points towards trade-offs that need to be managed. Better integration of markets clearly has benefits, but it also affects the incentive to take on risks. This link is not linear: risks can increase or decrease the more integrated the markets are. [ ]  That is why reaping the benefits of 14

integration and competition requires strong regulation and supervision to tilt the balance towards improvements in financial stability and consumer welfare.

## Opening up to foreign banks: example of the transition economies

Opening up to foreign banks in the transition economies of central and eastern Europe provides a case study for the effects of banking integration. In countries like Poland, that opted for a 'big bang' rather than a more gradual approach to transformation, price liberalisation and institutional reforms happened almost in parallel. Let me give you a quick overview of what happened on banking markets.

In Poland, commercial banks were separated from the central bank in 1989, paving the way for their subsequent privatisation. [ ]  This brought to an end a period of administered prices and credit allocation by the Government. A key policy question at the time focused on the sequence of opening up the market to foreign banks: should national markets be developed first and foreign banks allowed to enter the market only afterwards? Or should consolidation involve foreign banks? [ ]  In the end, the weakness of domestic banks meant that quick imports of foreign skills and technology were needed. Domestic banks also needed sufficient capital, which foreign owners were best placed to provide. 15 16

A key accelerator of institutional reform was accession to the European Union in May 2004. Today, credit institutions licensed in any Member State can operate branches in Poland without requiring local permission. [ ]  The capital account is fully liberalised. The Single Rulebook applies, and Poland is a member of relevant bodies such as the European Systemic Risk Board. ECB Banking Supervision cooperates closely with the Polish Financial Supervision Authority (Komisja Nadzoru Finansowego) through the European supervisory college framework [ ]  and we have memoranda of understanding with the Polish supervisory and resolution authorities. [ ] 17 18 19

Liberalisation and integration have deepened financial and banking markets. Banking sector assets increased from a little less than 50% of GDP in the mid-1990s to about 88% of GDP in 2023. [ ]  Crossborder gross financial flows accelerated, especially during the EU accession period. Poland has consistently managed to attract net inflows of foreign direct investment, which averaged about 2.5% of GDP between 2004 and 2023. The banking sector served as the main conduit for capital inflows. 20

The stock of credit to the private sector has increased, but it remains below the European average. In 1997 domestic credit was only 19% of GDP. Banking markets deepened, and this ratio increased to 35% in 2024 while remaining below the euro area average of 81% (Chart 2).

Chart 2: Domestic credit as a percentage of GDP in Poland and the euro area



Source: Bank for International Settlements (2025), ' Credit to the non-financial sector'.

Foreign banks initially entered the Polish market in tandem with their corporate clients. This 'follow your customer' strategy was the predominant mode of entry prior to the globalisation of financial markets that started in the 1990s. Foreign banks entered the Polish market by participating in the privatisation of domestic banks. In 1989 there were no foreign banks operating in Poland. As of 2023, 16 of Poland's 63 commercial banks were foreign-owned, accounting for 39% of total banking assets. [ ]  While this is a significant international presence, it is at the lower end of the spectrum compared with other CEECs. 21

The deep economic transformation of the 1990s left its mark on bank balance sheets. [ ]  The financial situation of banks deteriorated at the beginning of the decade, triggering the restructuring of banks and mergers. NPLs increased rapidly to a peak of 22% in 2004 (Chart 3). In 2023 NPLs stood at 2.3%, which comparable to the euro area average. [ ] 22 23

Chart 3: Non-performing loan ratio in Poland, participating countries and nonparticipating CEECs, 2014-24



Notes: Non-participating CEECs depicts the simple average of the gross NPL ratios for the Czech Republic, Croatia, Latvia, Hungary and Romania. Participating countries data is computed from supervisory banking statistics. For the Czech Republic, data before the fourth quarter of 2015 are not available.

Sources: ECB consolidated banking data and supervisory banking statistics.

Sufficient capital is the first line of defence against financial stability risks. The Polish banking sector has a higher CET1 ratio than the average across all countries participating in European banking supervision (over 19% compared with 16%), up from around 13% in 2014 (Chart 4). In fact, higher capital ratios are not uncommon in European countries outside of the euro area, potentially reflecting higher risks, including foreign currency risk, and the need for higher buffers.

Chart 4: Capitalisation of banks in Poland, participating countries and non-participating CEECs, 2015-23



Note: Non-participating CEECs depicts the simple average of CET1 ratios for the Czech Republic, Croatia, Latvia, Hungary and Romania. Participating countries data is computed from supervisory banking statistics.

Foreign-owned banks have played a significant role in shaping credit dynamics in the region. Prior to the great financial crisis, the increased presence of foreign-owned banks contributed to a substantial expansion in credit fuelled by cross-border capital flows. [ ]  While supporting economic growth, this also heightened vulnerabilities to shocks. During the crisis, foreign-owned banks in central and eastern Europe reduced their lending more sharply than domestic banks, as parent institutions sought to consolidate balance sheets and manage liquidity pressures at home. Evidence from other emerging markets suggests that foreign banks can also have a stabilising effect and lend in a countercyclical way. In Latin America, for example, foreign bank subsidiaries have been found to help smooth credit fluctuations thanks to their ability to access diversified funding sources and more stable parent company support. [ ] 24 25

Chart 5: Ratio of foreign banking group loans and advances to total loans and advances in Poland and the euro area, 2014-23



Note: The composition of the euro area has changed over the time period shown.

Source: ECB consolidated banking data.

In the CEECs, supervisory coordination proved crucial in mitigating the reduction of lending through foreign banks. The Vienna Initiative played an important role in encouraging parent banks to maintain exposures to the region. [ ]  This shows that close integration of international capital flows and banking markets can expose markets to the risks of contagion, requiring good supervision, regulation and coordination among authorities. [ ] 26 27

## Lessons for today: identifying and removing remaining barriers to integration

The experience of transition economies with cross-border banking integration in the 1990s is not only of interest to economic historians. It holds important lessons for the development of European banking markets today. In both cases, integration promises benefits - such as increased competition and efficiency - but also bring risks that need to be carefully managed.

The starting point for the countries in central and Eastern Europe in the 1990s was very different. When they began the integration process, they were emerging from decades of almost complete isolation from global markets. In contrast, today's EU banking integration builds on a foundation of decades building a common market and harmonising banking regulations.

Another key difference lies in the technological environment. In the 1990s, banks in CEECs faced a significant technology gap compared with their international counterparts. Today, banks across Europe operate with access to broadly similar technological capabilities.

Yet despite these more favourable starting points, barriers to integration remain. Variation in the response of net interest margins to rising interest rates across Member States show that markets remain segmented. Differences in market structures, varying degrees of local market power and limited crossborder competition prevail due to barriers that hinder the full integration of banking markets.

Better integration of market would thus have benefits. Stronger cross-border competition can reduce excessive market power at national level and generate positive spillovers for the real economy. [ ]  So how integrated are European banking markets, and what are the factors potentially impeding further integration? 28

At face value, direct barriers to the integration of banking markets in Europe are low. The Single Rulebook establishes a common regulatory framework for all banks in the European Union. And within the banking union, the European banking supervision ensures that banks in participating countries are supervised according to the same standards. The supervisory treatment of cross-border activities within the EU follows clear rules, so let me briefly summarise the state of play. [ ] 29

The ECB has exclusive competence for granting the authorisation to operate as a credit institution within the banking union. [ ]  Our assessment follows clear criteria related to capital levels, the business model and the suitability of managers and relevant shareholders. It may include expectations for an exit plan to prevent risks to financial stability. [ ]  And if a given credit institution no longer fulfils our requirements, the ECB may withdraw the authorisation. [ ] 30 31 32

As regards the cross-border allocation of capital and liquidity across banking groups in the EU, prudential requirements are principally applied at the individual entity level and the consolidated level. Waivers would make it more attractive for banks to establish subsidiaries across borders. EU banking legislation gives competent authorities the option to waive some requirements at the individual level, allowing banking groups to meet those requirements on a group-wide or sub-group basis. For capital, waivers can be granted only within the same Member State, not across borders [ ] , while liquidity requirements can be waived for non-domestic subsidiaries. However, banks have barely used this option. [ ] 33 34

As regards mergers and acquisitions, the approval process for qualifying holding applications follows clear rules that treat domestic and cross-border transactions in the same way. [ ]  The ECB is responsible for approving the acquisition and increase of qualifying holdings in credit institutions established within the banking union, based on the relevant national legal framework implementing the Capital Requirements Directive (CRD). [ ]  We assess transactions based on prudential requirements, prudent risk management, the sustainability of business models and governance structures, and the suitability of the shareholders. 35 36

The approval process also assesses the prudential implications of possible risks of money laundering or terrorist financing inherent to the transaction. [ ] 37

The adoption of CRD VI further promotes harmonisation and cooperation between competent authorities in the approval of mergers. Effective from January 2026, it introduces rules for merger approval at the European level. This is a welcome development that further lowers the barriers to integration, clarifying the rules and ensuring a level playing field in this crucial area. [ ]  While the CRD sets out the main assessment criteria, the European Banking Authority (EBA) is currently tasked with developing a common methodology for assessing mergers. 38

Capital requirements for domestic and cross-border activities within the banking union are now being treated more equally. This follows a change in the Basel Committee's methodology that recognises the risk-reducing effect of single supervision and resolution. Within the Basel frameworks for global and domestic systemically important institutions, banks with a higher volume of cross-border activities have a higher risk score and therefore a potentially higher capital surcharge. However, within the banking union, cross-border activities are more like domestic transactions because of shared rules and supervision. Accordingly, cross-border exposures within the banking union have lower risk scores than exposures outside the banking union. This has been applicable to global systemically important banks since 2022, and it will extend to the risk scoring of other systemically important institutions (O-SIIs) from next year

## onwards. [ ] 39

Yet despite harmonised banking rules, geographic and cultural distance remains an important factor in the integration of European banking markets. Time and again, empirical studies have shown that geographical distance is an important determinant of the strength of a lending relationship, both domestically and internationally. [ ]  The digitalisation of financial services may be a game-changer here, but it remains to be seen whether geographical distance will eventually become less important. 40

Legal differences across Member States are another 'distance' factor. Cross-border banking is not only affected by banking rules. It is the whole spectrum of national legislation that matters. There are still many differences in areas such as insolvency law, the mortgage market and corporate governance structures, all of which affect the valuation of assets and the ability to collect collateral.

Differences between national legislation are a major source of complexity in banking regulations. The regulatory framework for banks that the ECB applies includes not only harmonised EU rules but also national laws that implement EU directives. Moreover, European prudential legislation also contains Member State options and discretions - that is, provisions where national authorities can choose how to apply certain rules. This adds layers of complexity for cross-border banking groups. Any further harmonisation of relevant rules through the savings and investment union would thus be highly desirable.

## [ ] 41

The lack of a European deposit insurance scheme also contributes to market fragmentation. Only around 1.6% of household deposits were held in accounts with euro area banks outside their home countries in

August 2024. [ ]  Depositors might be reluctant to use the services of non-resident banks if there is uncertainty about the level of depositor protection, which means there is no level playing field when offering banking services across Europe. Moreover, a truly European deposit insurance scheme would enhance the banking system's resilience to adverse shocks, boosting depositor confidence and reducing market fragmentation. An additional barrier to further cross-border market integration is the limited transferability of contributions to deposit guarantee schemes. Currently, banks that join a new scheme cannot transfer in their past contributions, which may discourage cross-border mergers. 42

From a regulatory and supervisory perspective, little stands in the way of the further integration of European banking markets, particularly within the banking union. However, there are still many differences between national legal frameworks that impede banks' ability to develop truly European business models. As a result, national banking systems remain segmented, limiting the benefits of a truly unified banking market. Broader financial integration remains constrained, and the full potential of the Single Market is not being reached. This fragmentation not only restricts efficiency gains but also leaves financial systems more vulnerable to asymmetric shocks and instability.

## Addressing risks of banking sector integration

Banking sector integration brings benefits, but it can also entail risks. Mergers create larger banks with the aim of reaping the benefits from economies of scale and scope. However, large banks can also entail larger risks to financial stability due to their increased interconnectedness and complexity. Their failure could cause substantial harm to the financial system and the real economy.

From a microprudential perspective, the ECB can assess banks' European business models holistically. The yearly Supervisory Review and Evaluation Process (SREP) assesses banks' geographical expansion and group structure, while supervision of subsidiaries benefits from an assessment of the group's structure and viability. The same holistic perspective is taken during the approval process for consolidation transactions and licence applications.

In addition, large and systemically important financial institutions are subject to extra supervisory scrutiny. This affects the assessment of a bank's risks, governance arrangements and capital and liquidity positions. The ECB adapts the frequency and intensity of its supervisory engagement to a bank's potential impact on the financial system, its intrinsic riskiness and whether it is a parent entity, subsidiary or standalone institution.

From a macroprudential perspective, banks need to fulfil capital requirements that increase relative to their systemic importance. Within the European Union, two macroprudential instruments are applied to ensure that large, systemic banks are sufficiently capitalised. In accordance with their overall systemic importance, banks are subject to a CET1 surcharge when they are designated as 'other systemically important institutions' (O-SIIs) or 'global systemically important institutions'. The buffers depend on size, complexity, and importance of cross-border activities. National authorities are responsible for setting the buffers, and the ECB can increase ('top up') these buffers if necessary. In addition, since 2016 the ECB has applied a methodology to O-SIIs to ensure that systemic risks are addressed in a consistent manner, both within and across the countries participating in European banking supervision. [ ]  The ECB recently enhanced this methodology to take into account the systemic importance of all O-SIIs for the banking union as a whole. [ ] 43 44

Overall, these additional measures reduce the probability and costs of financial crises, and disincentivise banks from becoming systemically important. However, these measures would be incomplete without a proper resolution framework - which is the second pillar of the banking union. The resolution framework ensures that failing banks can be resolved without resorting to taxpayer-funded bailouts, while still preserving financial stability. The framework includes tools such as bail-in measures, which require shareholders and creditors to absorb losses first, and provides for the establishment of resolution plans and the use of the Single Resolution Fund to support orderly resolutions when necessary.

## Summing up

The cross-border integration of banking markets offers benefits. It enables banks to make the best use of state-of-the art technology, to benefit from economies of scale and to improve risk diversification.

At the moment, however, Europe is not fully reaping these benefits. Cross-border deposit holdings are small, cross-border mergers and acquisitions have been limited and banks' asset portfolios have a strong domestic focus. More needs to be done to remove barriers to integration, including those stemming from differences between national legislation.

But integration can also have downsides. Larger, more complex banks need to be management well, especially at times of heightened geopolitical risks. Banks need to have good governance and risk management mechanisms in place to address the potential downsides. They need to be well supervised and regulated.

Strong regulation and supervision ensures that banks' management act in the interests of all stakeholders, particularly the depositors and taxpayers who might be at risk if banks fail. European banking supervision provides the foundations for more integration and competition in a way that does not sacrifice resilience. But it needs the support of other policy areas to remove the remaining barriers to integration while maintaining a strong regulatory framework.

1.

I would like to thank Rustam Ablyaev, Alessandra Casoli, Francesco Chiacchio, Maciej Grodzicki, Korbinian Ibel, Salvatore Mastrullo, Samuel McPhilemy, Massimiliano Rimarchi, John Roche and Peter Welz for their very helpful input and comments on an earlier version of this speech. All remaining errors and inaccuracies are my own.

2.

Lenoci, F. and Molitor, P (2024), '

Intra-euro area cross-border bank lending: a boost to banking market

', Financial Integration and Structure in the Euro Area 2024 , ECB, June. See also Gotti, G., integration?

McCaffrey, C. and Veron, N. (2024), ' ', study requested by the European Parliament's Committee on Economic and Monetary Affairs, Economic Governance and EMU Scrutiny Unit, IPOL, October. Banking union and the long wait for cross-border integration

3.

International Monetary Fund (2024), ' ', Regional Economic Outlook, Washington, D.C., October; Draghi, M. (2024), ' ', European Commission, September; and Letta, E. (2024), ' ', April. The aforementioned work by the IMF shows that the productivity of listed firms in Europe is lower than that of US firms. A Recovery Short of Europe's Full Potential The future of European competitiveness Much more than a market

4.

International Monetary Fund (2025), ' ', IMF Country Report, No 2025/006, 21 January, p. 37. Republic of Poland: 2024 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Poland

5.

European Central Bank (2025), ' ', press release , 20 March. ECB publishes supervisory banking statistics on significant institutions for the fourth quarter of 2024

6.

Allen, F. and Gale, D. (2000), 'Financial contagion', Journal of Political Economy , Vol. 108, No 1, February, pp. 1-33.

7.

de Blas, B. and Niles Russ, K. (2013), 'All banks great, small and global: loan pricing and foreign competition', International Review of Economics &amp; Finance, Vol. 26, Issue C, pp. 4-24.

8.

For an overview of the literature on the link between risk and competition in banking, see Vives, X. (2016), 'Competition and Stability in Banking: The Role of Regulation and Competition Policy', 2 August, Princeton University Press.

9.

Berger, A.N., El Ghoul, S., Guedhami, O. and Roman, R.A. (2017), 'Internationalization and Bank Risk', Management Science , Vol. 63, No 7, July, pp. 2283-2301.

10.

Emter, L., Schmitz, M. and Tirpák, M. (2018), ' ', Working Paper Series , No 2130, ECB, February. Cross-border banking in the EU since the crisis: what is driving the great retrenchment?

- 11.

Buch, C.M. and DeLong, G.L. (2004), 'Cross-border bank mergers: what lures the rare animal?', Journal of Banking &amp; Finance , Vol. 28, No 9, pp. 2077-2102.

12.

Figueiras, I. et al. (2021), ' ', Financial Stability Review , ECB, November. Bank mergers and acquisitions in the euro area: drivers and implications for bank performance

13.

DeYoung, R., Evanoff, D. and Molyneux, P. (2009), 'Mergers and Acquisitions of Financial Institutions: A Review of the Post-2000 Literature', Journal of Financial Services Research , Vol. 36, No 2, December, pp.87-110. See also Berger, A.N., Buch, C.M., DeLong, G. and DeYoung, R. (2004), 'Exporting financial institutions management via foreign direct investment mergers and acquisitions', Journal of International Money and Finance , Vol. 23, Issue 3, April, pp. 333-366.

14.

Calomiris, C.W. and Haber, S. (2014), 'Fragile by design: The Political Origins of Banking Crises and Scarce Credit', Princeton University Press, 23 February. See also Beck, T., Demirgüç-Kunt, A. and Levine, R. (2006), 'Bank concentration, competition, and crises: First results', Journal of Banking &amp; Finance , Vol. 30, No 5, May, pp. 1581-1603; and Andreeva, D., Grodzicki, M., Móré, C. and Reghezza, A. (2019), ' ', Financial Stability Review , ECB, November. Euro area bank profitability: where can consolidation help?

15.

See Kozak, S. (2013), ' ', NBP Working Papers, No 166, Consolidation of the banking sector in Poland in 1989-2013 in comparison with the structural changes of the banking sector in the USA and the EU

Narodowy Bank Polski, for an overview of the development of the Polish banking sector and the role played by foreign banks.

16.

Narodowy Bank Polski (2001), ' ', December. See also Bonin, J.P. and Leven, B. (1996), 'Polish Bank Consolidation and Foreign Competition: Creating a MarketOriented Banking Sector', Journal of Comparative Economics , Vol. 23, No 1, August, pp. 52-72. The Polish Banking System in the Nineties

17.

European Banking Authority, ' '. Passporting and supervision of branches

18.

Supervisory colleges bring together home and host country authorities responsible for the oversight of cross-border banking groups. They facilitate the exchange of information, promote consistent supervisory practices and enhance the joint assessment of risks and crisis management coordination. A joint decision by the college is foreseen for key supervisory processes, such as the setting of capital and liquidity requirements in the Supervisory Review and Evaluation Process (SREP) or permissions for the use of internal models.

19.

See ' , in respect of cooperation and exchange of information for the performance of their tasks under Directive 2014/59/EU of the European Parliament and of the Council'; and '. Memorandum of Understanding between the Single Resolution Board, the European Central Bank, Bankowy Fundusz Gwarancyjny and Komisja Nadzoru Finansowego Memorandum of Understanding between the European Central Bank and the Competent Authorities of non-participating European Union Member States for the performance of their Supervisory Tasks

20.

Kozak, S. (2013), op. cit. See also ECB Data Portal 2023. Total assets for 2023 are based on the annual average of monthly end-of-period data reported by monetary financial institutions excluding the European System of Central Banks.

21.

Narodowy Bank Polski (2024), . Rozwój systemu finansowego w Polsce w 2023 r

22.

Kozak, S. (2013), op. cit.

23.

International Monetary Fund (2025), ' ', IMF Country Report, 2025/006, 21 January, p. 37. Republic of Poland: 2024 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Poland

24.

Dell'Ariccia, G., Igan, D., Laeven, L. and Tong, H. (2012), ' ', IMF staff discussion note , 7 June. Policies for Macrofinancial Stability: How to Deal with Credit Booms

25.

Cull, R. and Martínez Pería, M.S. (2013), 'Bank ownership and lending patterns during the 2008-2009 financial crisis: Evidence from Latin America and Eastern Europe', Journal of Banking &amp; Finance , Vol. 37, No 12, pp. 4861-4878.

26.

No

De Haas, R., Korniyenko, Y., Pivovarsky, A. and Tsankova, T. (2015), 'Taming the herd? Foreign banks, the Vienna Initiative and crisis transmission', Journal of Financial Intermediation , Vol. 24, No 3, pp. 325355. For a more general assessment of banks' retrenchment behaviour during financial crises, see De Haas, R. and Van Horen, N. (2013), 'Running for the Exit? International Bank Lending During a Financial Crisis', The Review of Financial Studies , Vol. 26, No 1, January, pp. 244-285. 27.

International Monetary Fund (2019), 'Republic of Poland: Financial Sector Assessment ProgramTechnical Note-Stress Testing and Systemic Risk Analysis', IMF Country Report, No 2019/120, 9 May, Washington, D.C.

28.

Cacciatore, M., Ghironi, F. and Stebunovs, V. (2015), 'The domestic and international effects of interstate U.S. banking', Journal of International Economics , Vol. 95, No 2, pp. 171-187

29.

Enria, A. (2021), ' ', speech at the Eurofi Financial Forum, Ljubljana, 9 September. How can we make the most of an incomplete banking union?

30.

This competence is exercised in an assessment conducted jointly with the national competent authorities.

31.

ECB (2018), , March. Guide to assessments of fintech credit institution licence applications

32.

Article 18 CRD, as implemented by national law.

33.

The same applies to large exposures and leverage requirements.

34.

Enria, A. and Fernandez-Bollo, E. (2020), ' ', The Supervision Blog , ECB, 9 October. Fostering the cross-border integration of banking groups in the banking union

35.

ECB (2020), . Guide on the supervisory approach to consolidation in the banking sector

36.

The relevant national competent authority serves as the point of entry for notifications and must submit a proposal to oppose or not oppose the acquisition or increase of a qualifying holding to the ECB, which is then competent for taking the final decision.

37.

The assessment also covers the reputation, knowledge, skills and experience of the members of the management body every time the proposed acquirer intends to use its power to identify new appointees. See Article 23 CRD, as implemented by national law, as well as Joint Committee of the , December and ECB (2023), , March. European Supervisory Authorities (2016), Joint guidelines on the prudential assessment of acquisitions and increases of qualifying holdings in the financial sector Guide on qualifying holding procedures

38.

See . Opinion of the European Central Bank of 27 April 2022 on the Proposal for a Directive of the European Parliament and of the Council amending Directive 2013/36/EU as regards supervisory powers, sanctions, third-country branches, environmental, social and governance risk (CON/2022/16) 2022/C 248/03

39.

See ECB (2022), ' ', 27 June and ECB (2024), ' ', 20 December. Governing Council statement on the treatment of the European banking union in the assessment methodology for global systemically important banks Governing Council statement on macroprudential policies - the ECB's framework for assessing capital buffers of other systemically important institutions

40.

Brei, M. and von Peter, G. (2017), ' ', BIS Working Papers , No 658, Bank for International Settlements, August. The Distance Effect in Banking and Trade

41.

Lebastard, L. (2022), ' ', Working Paper Series , No 2724, ECB, September. Financial exposure and bank mergers: micro and macro evidence from the EU

42.

Rumpf, M. (2024), ' ', The ECB Blog , 24 October. Cross-border deposits: growing trust in the euro area

43.

Behn, M. et al. (2017), 'ECB floor methodology for setting the capital buffer for an identified Other Systemically Important Institution (O-SII)', Macroprudential Bulletin , Issue 3, ECB, June.

44.

ECB (2024), op. cit.",Claudia Buch
https://www.bis.org/review/r250414f.htm,"Swaminathan J: Shared vision, shared responsibility – strenghtening NBFCs","Speech by Mr Swaminathan J, Deputy Governor of the Reserve Bank of India, at the conference of Non-Banking Financial Companies (NBFCs), Chennai, 28 March 2025.",2025-03-28 00:00:00,"## Swaminathan J: Shared vision, shared responsibility - strenghtening NBFCs

Speech by Mr Swaminathan J, Deputy Governor of the Reserve Bank of India, at the conference of Non-Banking Financial Companies (NBFCs), Chennai, 28 March 2025.

* * *

CA Shri Charanjot Singh Nanda, President, Institute of Chartered Accountants of India; Chairpersons of the Audit Committee of the Boards, MDs &amp; CEOs of NBFCs, and Statutory Auditors of NBFCs, Executive Directors from RBI and my colleagues from the Reserve Bank of India, Ladies and Gentlemen. A very good morning to all of you.

It is an honour to address this esteemed gathering representing the key pillars of the NBFC ecosystem -CEOs entrusted with driving business responsibly, Chairpersons of Audit Committees overseeing assurance, Statutory Auditors who ensure transparency and integrity, along with regulators and supervisors committed to maintaining financial stability and fostering a sound regulatory environment. The theme of our engagement today - ""Shared Vision, Shared Responsibility - Strengthening the NBFCs"" - could not be more timely or relevant.

The evolution of the NBFC sector is indeed a story of entrepreneurial energy, innovation and social impact. However, as the sector grows in scale and systemic importance, so too must our efforts to reinforce its foundations. A resilient, customercentric, and well-governed NBFC sector is a shared aspiration - and delivering on it our shared responsibility.

NBFCs have emerged as powerful engines of credit. By complementing the traditional banking system, they have significantly expanded access to credit, particularly for segments that have historically been underserved or excluded. Through innovative credit delivery models that harness technology and local insights, NBFCs have been able to design customised financial products tailored to diverse borrower needs. Their agility and close connect with customers have enabled them to play a role that is not only complementary to the role traditionally played by banks but, in many instances, catalytic in building a financial ecosystem characterised by deeper intermediation and wider opportunity.

The importance of NBFCs has only grown with time. In fact, over the past decade, their growth has consistently outpaced that of banks - a trend that has become even more pronounced in the last few years. This rapid growth is a testament to the sector's relevance and resilience - but it also raises the stakes. As NBFCs become more systemically important, the standards of governance, risk management, and customer treatment must rise accordingly.

## Understanding the Risks- Need for Responsible Innovation

The business model of NBFCs - while effective - comes with its own set of structural risks. Their funding is short-term as compared to the maturity of their lending or is directed towards higher-risk customer segments.

This maturity and credit transformation is at the heart of the NBFC model - but it also demands a heightened focus on risk management. If not carefully managed, it can create vulnerabilities, especially during periods of market stress or liquidity shocks.

Risk-taking must be intelligent and well planned, and never beyond the risk absorption capacity of the entity concerned. Liquidity and credit risks must be rigorously assessed and managed. Asset-liability mismatches, nature and tenor of the funding sources, and concentration risks all need board-level oversight which should be ably supported by robust internal controls.

## Growth with Fairness: Customer-Centricity is Non-Negotiable

Most importantly, even as we pursue scale, speed, and profits, we must not lose sight of fairness to the customer - that is the cornerstone of a sustainable business model. The NBFC sector must live up to its promise of inclusion by treating customers with dignity, transparency, and care. This entails ensuring transparent and easy-tounderstand pricing, free from hidden charges or usurious interest rates. In instances of default, recovery practices must be conducted in an empathetic and respectful manner.

Unfortunately, some NBFCs think they can pursue a business model where it is par for the course to resort to weak underwriting in pursuit of quick growth, coupled with excessive and unsustainable interest rates - at times masked as upfront charges or processing fees - which is followed by aggressive recovery practices upon default. Let me state unequivocally: this is not an acceptable model. Financial inclusion cannot be used as a pretext for financial exploitation. I urge each one of you to commit your institutions to upholding fairness in all your dealings.

This responsibility for fair conduct is shared commitment by the CEO, the Board, and assurance functions in any entity. A customer-centric culture must be driven from the top and embedded at all levels.

How do we ensure that our shared vision is realised, and our collective responsibilities are fulfilled? One of the most effective ways is by strengthening both internal and external assurance mechanisms.

## Strengthening Oversight: the Role of Audit Committee

Let me begin with the Audit Committee of the Board (ACB). Far from being a routine compliance requirement, the ACB is the lynchpin of institutional oversight and long-term financial health. It plays a critical role in reinforcing governance, guiding management on assurance, and ensuring the integrity of internal control systems. When functioning effectively, it becomes a proactive forum for identifying vulnerabilities and initiating timely corrective actions.

The role of the Audit Committee Chairperson is particularly significant in setting the tone for effective governance. It is essential that committee meetings are held regularly, conducted with clear purpose, and thoroughly documented to ensure accountability and follow-through.

The effectiveness of the Committee is in the substance of its deliberations. The ACB must actively monitor the adequacy and functioning of internal control systems - not merely to confirm their presence, but to ensure they are operating effectively in practice. Similarly, audit observations should not remain confined to meeting minutes; they must translate into timely and meaningful corrective actions. A strong ACB also tracks audit findings and ensures that corrective measures are implemented without delay.

Equally important is the establishment of an effective whistleblower mechanism overseen by the Board or the ACB which empowers employees and grants them anonymity, to report unethical or non-compliant behaviour, without fear of reprisal.

CEOs too have a crucial role in upholding the integrity of financial reporting. They must actively deter any attempts-whether deliberate or cleverly disguised-to misapply accounting standards or regulatory provisions. It is equally important to foster an environment where the Chief Financial Officer and Head of Internal Audit feel empowered to engage in open, honest, and transparent dialogue with the Audit Committee of the Board.

## The Crucial Role of Statutory Auditors

Now let me come to the role of Statutory Auditors, who are an indispensable part of the assurance ecosystem. In fact, the role of auditors has never been more critical - not merely in checking compliance, but in upholding trust. And trust, once lost, is hard to rebuild.

Auditors are expected to provide an independent, professional opinion on whether the financial statements present a true and fair view of the NBFC's financial position and comply with regulatory and accounting standards. However, in today's complex and dynamic environment, this is no longer enough.

Recent incidents - both in India and abroad - have shown that traditional financial audits must evolve. Auditors must bring technical expertise, forensic insight, and an ethical lens to their work. Red flags must not be ignored. Complex structures, derivatives, offbalance sheet items, related party transactions, and provisioning policies must be closely examined.

## Facilitative Role of Regulators and Supervisors

As regulators and supervisors, we shoulder a dual responsibility - to safeguard stability and discipline, while also fostering an environment that encourages innovation, inclusion, and sustainable growth. Contrary to perception in certain quarters, our approach actively seeks to strike the right balance. At the Reserve Bank of India, we are acutely aware that regulation is not merely about control; it is about enabling responsible financial intermediation within a well-defined and transparent framework. Several initiatives in recent years reflect this facilitative and proportionate approach to regulation. In my previous role as a commercial banker, I had the fortuitous opportunity to be closely associated with one such initiative -the Regulations Review Authority 2.0 which reinforced the RBI's strong commitment to easing the regulatory burden and streamlining compliance without compromising regulatory objectives.

The regulatory framework for NBFCs has evolved in the recent years with this understanding - gradually moving toward greater harmonisation with banks where warranted, while still preserving operational flexibility suited to the unique role NBFCs play in the financial system. The introduction of the scale-based regulatory framework explicitly recognises that the intensity of regulation and supervision must be proportionate to systemic importance. At the same time, the regulatory architecture encourages the development of responsible innovation and healthy competition in the sector.

Similarly, the role of the supervisor has also become more interactive and forwardlooking. It is not just about identifying compliance breaches after the fact, but about engaging with entities to strengthen internal systems, enhance governance, and build resilience against emerging risks. Through onsite inspections, offsite surveillance, thematic reviews, and structured engagements, the supervisory process aims to be a partner in the financial sector's long-term soundness - not an impediment to its progress.

## Conclusion

Our shared vision is clear: a dynamic, inclusive, and trusted NBFC sector that complements the banking system and serves the evolving needs of the Indian economy. And the way to achieve it is through shared responsibility - in governance, in customer protection, in financial prudence, and in ethical conduct.

We in the regulatory community stand committed to supporting this journey. Our intent is not to stifle innovation but to ensure that growth is sustainable, risks are wellmanaged, and customer trust is never compromised. On behalf of the RBI, I can assure you that as regulators and supervisors we will remain committed to playing our part, not just as watchdogs, but as enablers of a robust, inclusive, and future-ready financial ecosystem.

This conference gives us an opportunity to reflect on how we can contribute to this shared agenda. Whether making strategic decisions, chairing audit committees, or signing off on financials, drafting regulations or conducting supervision - we are shaping the sector's future.

Therefore, let us work together - with clarity of purpose and unity of action - to build a stronger, fairer, and more resilient NBFC ecosystem. Wealth creation should not just be for personal or institutional gain but to support the community, reflecting a sense of shared responsibility amongst all of us, in our pursuit to achieve an inclusive growth for all and realise the vision of Viksit Bharat 2047.

With this I wish you all fruitful and enriching deliberations over the course of this conference and look forward to the ideas and insights that will emerge in pursuit of our shared vision. Thank you for this opportunity and wish you all good luck, Jai Hind!",Shri Swaminathan J
https://www.bis.org/review/r250414d.htm,"Fabio Panetta: Opening of The Adventure of Money ""From Gold to the Digital Euro"" exhibition","Remarks by Mr Fabio Panetta, Governor of the Bank of Italy, at the opening of the exhibition ""The adventure of money - from gold to the digital euro"", organised by the Fondazione Caritro, Trento, 12 April 2025.",2025-04-12 00:00:00,"## Fabio Panetta: Opening of The Adventure of Money ""From Gold to the Digital Euro"" exhibition

Remarks by Mr Fabio Panetta, Governor of the Bank of Italy, at the opening of the exhibition ""The adventure of money - from gold to the digital euro"", organised by the Fondazione Caritro, Trento, 12 April 2025.

* * *

Mr President of the Autonomous Province of Trento, Mr Mayor, Rector, Distinguished Authorities,

Ladies and Gentlemen,

Let me begin by expressing my sincere gratitude to the organizers of the Festival of Economics - the Autonomous Province of Trento, Trentino Marketing, and the 24 Ore Group - as well as to the Fondazione Caritro, which graciously hosts us today, for their invitation to take part in this inaugural event.

The exhibition we are opening today offers a preview of the future Money Museum, whose permanent home will be in Rome, on Via Nazionale.

The Adventure of Money is a journey through five thousand years of history, a journey in which economics, society, politics and technology converge. It is a narrative that traces the evolution of the major monetary and financial phenomena, with the aim of making accessible a heritage often perceived as distant or obscure.

The past helps us understand the present better. Tools, technologies and objects now obsolete continue to speak to us: they reveal how societies have sought to meet needs that, in their essence, remain with us today.

The gold coins displayed here, for example, tell stories spanning centuries: bearing the likeness of emperors, recounting the economic might of cities such as Florence, or the maritime exploits of Venice.

Were we to melt them all down, we would be left with a single, modest ingot, and yet their value far exceeds the precious metal they contain. That added value stems from the trust that the issuing institutions were able to inspire - a trust that transformed simple metal discs into stable, recognized and widely accepted instruments of exchange.

From a certain point in history - illustrated with clarity throughout this exhibition - trust in money ceased to rest only on the material of which it was made or on the authority of the sovereign who issued it.

Over time, the foundation of trust in money shifted - from metal and monarch to the prudent governance of central banks, whose role is to preserve price stability, ensure the soundness of financial systems, and maintain public confidence. This remains the guiding purpose of the Bank of Italy and the entire European System of Central Banks.

The decision to devote an exhibition - and soon a museum - to the history of money and finance is part of a broader financial education initiative, aimed at providing citizens with the tools to navigate complex areas such as payments, credit and the management of personal savings.

Money and finance are often viewed as technical, remote, even dry subjects. Precisely for this reason, the exhibition - and the museum that will follow - employs narrative techniques and immersive technologies, to make even the most intricate concepts accessible and to spark curiosity, especially among younger generations.

In the long historical development of payment instruments over time, there have been relatively few major milestones, yet each has marked a profound transformation. From minted coinage - often in precious metals - we moved to the banknote, first convertible, then purely fiduciary, and finally to modern electronic payment systems. Each of these transitions accompanied pivotal moments in economic history, contributing to ever greater speed, safety and efficiency in transactions.

Yet innovation continues. Today's payment instruments, though highly advanced, still have limitations.

It is within this context that the ambitious European project of the digital euro takes shape: a digital form of central bank money, free of charge, accessible to all, privacyprotective, and anchored to the stable value of physical cash. This innovation will not replace current banknotes, but will complement them, thus expanding our options and strengthening our monetary system.

In this sense, The Adventure of Money is more than just the title of an exhibition. It is the thread that connects a millenary history - one that continues to evolve and, today in Trento, links itself to new generations and new horizons.

Thank you.",Fabio Panetta
https://www.bis.org/review/r250414c.htm,John C Williams: Uncertain times,"Remarks by Mr John C Williams, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the Puerto Rico Chamber of Commerce, San Juan, Puerto Rico, 11 April 2025.",2025-04-11 00:00:00,"## John C Williams: Uncertain times

Remarks by Mr John C Williams, President and Chief Executive Officer of the Federal Reserve Bank of New York, at  the Puerto Rico Chamber of Commerce, San Juan, Puerto Rico, 11 April 2025.

* * *

## As prepared for delivery

## Introduction

I would like to begin by thanking the Puerto Rico Chamber of Commerce for co-hosting today's event. Visiting Puerto Rico is always a highlight for me, and yesterday I had the pleasure of seeing Ponce for the first time.

I'm on the island as part of the ongoing engagement the New York Fed has with communities across the Federal Reserve's Second District. In our discussions, business and community leaders have shared their perspectives on Puerto Rico's economy. In turn, I've been able to place what's happening here in the context of the broader U.S. economy.

I'd like to continue that conversation this morning. But before we get to the Q&amp;A portion of the program, let me take some time to discuss the economy and monetary policy in the context of a changing and uncertain landscape. I'll talk about what the data are telling us and how the Federal Reserve is working to achieve its dual mandate of maximum employment and price stability. I'll also share some observations about Puerto Rico's economy.

Before I go further, I must give the standard Fed disclaimer that the views I express today are mine alone and do not necessarily reflect those of the Federal Open Market Committee (FOMC) or others in the Federal Reserve System.

## The Economy of Yesterday and Today

So, what can we expect for the economy? That question is top of mind for manyparticularly those trying to plan for the future at a time of heightened uncertainty.

The answer is multifaceted, but I will do my best to address it over the next 10 minutes or so.

To start, I'll say that the economy entered the year on firm footing. This was a result of strong growth fueled by robust gains in the labor force and productivity. After a period of cooling, a wide range of labor market indicators, including the unemployment rate, have stabilized at levels consistent with a solid labor market. 1

On the inflation front, the disinflationary process has been on a path toward the FOMC's longer-run inflation goal of 2 percent. Based on the 12-month change in the personal consumption expenditures price index, inflation was 2-1/2 percent in February,

reflecting a broad-based deceleration over the past few years. This is tremendous progress given that in mid-2022, inflation reached a 40-year high of over 7 percent. But we are still not at our 2 percent goal, and I remain committed to bringing inflation back to that goal on a sustained basis.

## Understanding Uncertainty

Despite this strong start, the future is highly uncertain. I am not alone in saying this. In fact, ""uncertainty"" was the overwhelming theme in the latest Federal Reserve Beige Book, a report about economic conditions across the 12 Federal Reserve Districts. Measures of policy uncertainty have increased sharply in recent months. For example, between October of last year and this March, the Economic Policy Uncertainty Index has nearly tripled, reaching the highest level recorded over the past 40 years, outside of 2020. 2   Unsurprisingly, the Trade Policy Uncertainty Index has skyrocketed to levels never before seen in data going back 65 years. 3

This pervasive sense of uncertainty is becoming increasingly evident, especially in socalled soft data such as surveys and information from business contacts. There's been a sharp decline in consumer sentiment, and business sentiment measures have weakened, too.

Shifts in sentiment can occur for a multitude of reasons, so understanding their source is key. While uncertainty about the economic outlook reflects many factors, the effects of tariffs and trade policy on the economy are certainly at the top of the list. For example, my business and financial market contacts highlighted that this has made it more difficult to plan for investments and hiring.

This gives us insight into the reality that businesses and consumers are faced with, many of whom speak of taking a wait-and-see approach. It's a concept economists call the ""option value of waiting."" At times of great uncertainty, consumers may put off making big decisions like buying a home or car, and businesses may delay investing until they have a better sense of what the future holds. And when households and businesses cut back on spending, economic growth slows.

## Inflation Expectations

In addition to the effects of uncertainty and trade policy on sentiment, we are seeing increasing signs of effects on near-term expectations of inflation. For example, marketbased measures of inflation expectations-which reflect what investors are willing to pay to be protected against inflation-have risen at shorter horizons but have remained stable at longer horizons. New York Fed surveys indicate that Second District businesses expect higher cost increases, particularly among manufacturing firms and businesses that rely heavily on imported goods and products. While year-ahead inflation expectations of firms also moved up, their longer-term expectations remained stable. 4

During times of turbulence and uncertainty such as these, well-anchored longer-run inflation expectations are critically important for ensuring sustained price stability.

## An Eye on Puerto Rico

The story here in Puerto Rico is consistent with what we're seeing elsewhere. The island's economy has been doing quite well. Employment numbers are impressive, with private sector employment at an all-time high. There's been strong growth across industries. And, after decades of decline, the island's population appears to have stabilized. Despite this strength, Puerto Rico is not immune to the effects of uncertainty, as I've heard from business leaders here.

## Monetary Policy Amid High Uncertainty

Considering the high degree of uncertainty about what the future holds, another question often asked is what this means for monetary policy.

The answer is that the current modestly restrictive stance of monetary policy is entirely appropriate given the solid labor market and inflation still above our 2 percent goal. Importantly, it gives us the opportunity to assess incoming data and developments, and ultimately positions us well to adjust to changing circumstances that affect the achievement of our dual mandate goals.

That's why, at its most recent meeting, the FOMC decided to leave the target range for the federal funds rate unchanged at 4-1/4 to 4-1/2 percent. In the accompanying statement, the Committee noted that uncertainty around the economic outlook has increased, and said it is attentive to risks to both sides of its dual mandate. 5   The Committee reaffirmed its strong commitment to supporting maximum employment and returning inflation to its 2 percent objective, and its policy decisions will be based on a careful assessment of the incoming data, the evolving outlook, and the balance of risks.

The Committee also decided to slow the pace of reduction in its holdings of securities, with a net effect of reducing the monthly pace of balance sheet runoff by about half. This is a natural next step to smooth the transition from abundant reserves to a level that is somewhat above ample. This action has no implications for our intended stance of monetary policy or for the ultimate size of our balance sheet.

## The Economic Outlook

It's hard to know with any precision how the economy will evolve. Given the uncertain effects of recently announced tariffs and other policy changes, there is an unusually wide range of outcomes that could transpire. That said, the broad contours of the outlook are becoming a bit clearer.

Given the combination of the slowdown in labor force growth due to reduced immigration and the combined effects of uncertainty and tariffs, I now expect real GDP growth will slow considerably from last year's pace, likely to somewhat below 1 percent. With this downshift in the pace of growth, I expect the unemployment rate to rise from its current level of 4.2 percent to between 4-1/2 and 5 percent over the next year. I expect increased tariffs to boost inflation this year to somewhere between 3-1/2 and 4 percent.

Although the economic outlook for this year is coming into better focus, what happens after that remains unclear. A key question is the extent to which this year's higher inflation spills over into subsequent years and how that may affect expectations. Another question is how the global economy will respond to the change in trade policies. As I stressed in a recent speech, the world's economies are highly interconnected, and what happens in our country affects other countries and vice versa. 6

## Conclusion

Elevated uncertainty poses many questions about the future of the economy and the path of monetary policy. It is simply too early to know the answers. But as we learn more about the effects of tariffs and other policies, we'll continue to carefully assess the incoming data, the evolving outlook, and the balance of risks to our goals.

Monetary policy is in the right place to manage those risks as best we can. Despite the recent rise in short-term inflation expectations, longer-term expectations have remained well anchored. It is critically important to keep inflation expectations well anchored as we pursue our goals of maximum employment and returning inflation to our 2 percent longer-run objective.

1 Sebastian Heise, Jeremy Pearce, and Jacob P. Weber, ""A New Indicator of Labor Market Tightness for Predicting Wage Inflation,"" Federal Reserve Bank of New York , October 9, 2024. Liberty Street Economics

- 2 Scott R. Baker, Nick Bloom, and Steven J. Davis, Economic Policy Uncertainty Index.
- 3 Trade Policy Uncertainty (TPU) Index  as described in Dario Caldara, Matteo Iacoviello, Patrick Molligo, Andrea Prestipino, and Andrea Raffo, 2020. ""The Economic ,"" , 109, January, 38Effects of Trade Policy Uncertainty Journal of Monetary Economics 59.
- 4 Jaison R. Abel, Richard Deitz, and Ben Hyman, ""Firms' Inflation Expectations Have ,"" Federal Reserve Bank of New York , March 5, Picked Up Liberty Street Economics 2025.
- 5 Board of Governors of the Federal Reserve System,  Federal Reserve issues FOMC statement, March 19, 2025.
- 6 John C. Williams, Certain Uncertainty, remarks at the Macroeconometric Caribbean Conference, Nassau, Bahamas, March 21, 2025.",John C Williams
https://www.bis.org/review/r250414b.htm,Michele Bullock: Women's economic empowerment in Australia,"Speech by Ms Michele Bullock, Governor of the Reserve Bank of Australia, at the Chief Executive Women Annual Dinner, Melbourne, 10 April 2025.",2025-04-10 00:00:00,"## Michele Bullock: Women's economic empowerment in Australia

Speech by Ms Michele Bullock, Governor of the Reserve Bank of Australia, at the Chief Executive Women Annual Dinner,  Melbourne,  10 April 2025.

* * *

I would like to start by acknowledging the Wurundjeri Woi-wurrung and Bunurong/Boon Wurrung peoples of the Eastern Kulin nation as the traditional owners and custodians of the land on which we are meeting this evening and pay my respects to Elders, past and present, as well as any First Nations people here with us or online.

It is great to be here to mark 40 years of Chief Executive Women (CEW).

I hadn't intended to talk about the RBA's policy responsibilities tonight, seeing as we are here to recognise the progress in women's economic empowerment. However, given developments over the past week, I will make a few short comments first.

Inevitably, there will be a period of uncertainty and adjustment as countries respond to the ongoing tariff announcements by the United States administration. It will take some time to see how all of this plays out and the added unpredictability means we need to be patient as we work through how all of this could affect demand and supply globally.

Financial market and economic volatility can be expected as this process unfolds. But there are two points I want to make on this. First, we're not currently seeing the same degree of impact as previous market events like in 2008 for example. And second, the Australian financial system is strong and well placed to absorb shocks from abroad.

We are closely monitoring financial market conditions here and overseas - as we always do. We continue to engage closely with our fellow financial regulators in Australia, and our central bank counterparts overseas, sharing information and working together. We are carefully considering several factors including the response of our trading partners, additional counter-responses from the US, the response of our exchange rate, and adjustments in other financial markets. A key focus for us is how all this uncertainty is affecting decisions made by households and businesses in Australia.

All of this - together with our usual detailed analytical work and scenarios - is helping us build a fuller picture of the possible impacts as we prepare for the next Monetary Policy Board meeting on 19-20 May. There are a lot of moving parts. We are bringing all this together to form an objective assessment of what it means for the outlook for domestic activity and inflation here at home.

We are mindful of not adding to the uncertainty, and to that end, it's too early for us to determine what the path will be for interest rates. Our focus remains on our dual mandate for price stability and full employment.

Now, back to our focus for being here tonight.

I'll reflect on the significant strides in women's empowerment in the Australian economy and the progress made by women at the RBA over the past 40 years. In doing so, I will

provide some reflections on my own leadership journey. I'll also highlight our efforts to help build the pipeline of future female economists and business leaders.

## Women's economic empowerment

Over the past 40 years, women's representation and participation in the Australian economy has undergone a remarkable transformation.

In the mid-1980s, women made up just under 40 per cent of the workforce, with 1 married women's participation in the labour market especially low. But through persistent efforts - including by organisations like CEW and many of the individuals in the room tonight - women's participation in paid work has increased considerably.

Law reform has helped, too, with the introduction of the Sex Discrimination Act in 1984 paving the way for further reforms to advance women's rights, particularly in our workplaces. This progress has been supported by a range of other factors, including greater access to education and child care. The increased availability of more flexible working arrangements - for women and men - has also helped.

Fast forward 40 years and women now account for almost half of the paid workforce. This has given women greater financial independence and social equity, a worthy goal in and of itself. But beyond that, it has expanded the pool of available workers, providing businesses with a larger and more diverse talent base.

There are some estimates for the United States that show that between 20-40 per cent of productivity growth in the 50 years to 2010 could be attributed to better talent allocation. 2

The idea here is simple. If there are more people working in positions that suit their skills, this maximises their ability to contribute to economic growth and better and more informed decision-making within organisations. It is good for women, good for businesses, good for productivity and the economy, and good for society.

## Opportunities to increase equity and representation

While women's labour force participation has increased, there's further progress to be made.

Research from the Workplace Gender Equality Agency (WGEA) shows that fewer than 20 per cent of CEOs are women, while women made up only one-third of board members. 3   The federal public service fares better, with women holding more than 50 per cent of Australian government board positions, and 45 per cent of chair and deputy chair positions. 4

The gender pay gap remains an issue. Since the mid-1990s, the gender pay gap 5   has narrowed by about 3 percentage points, mostly in the past decade. However, men still earn $28,000 more per year on average than women. 6

But there are positive signs, particularly for younger workers. Participation rates for those aged 25 and under are now equal for men and women, allowing young women to build skills and experience for future leadership roles.

Indeed, in addition to closing gender gaps being the right thing to do, analysis by the Organisation for Economic Co-operation and Development (OECD) indicates that it could boost GDP by an average of 9 per cent across OECD countries by 2060. Given 7 our ageing population in Australia, boosting the labour force participation of workingage women is not only desirable, but essential, for economic growth.

## My leadership journey at the RBA

At the RBA, we have a wide range of responsibilities and rely on diverse sets of skills and experience to get the job done. Women play an essential role in all aspects of our operations.

But this hasn't always been the case. In the 1960s and 70s, pioneers like Ann Catling and Margaret Campbell paved the way for gender equity at the RBA. Ann Catling, one of only 13 women on the men's pay scale at the RBA in 1966, made significant contributions to development economics and gender equity. Margaret Campbell, who began at the RBA in 1967, achieved equal compensation with men while studying fulltime at university. Other notable figures include Jillian Broadbent and Kerry Schott, who contributed to the RBA's first econometric model of the Australian economy.

When I first joined the RBA in the mid-1980s, there were barely any women at the level of section head. In 1996, I was the first female to reach deputy head level in a policy department.

Reflecting on my journey, there were three important milestones for me.

The first was earning a scholarship from the RBA to undertake a Masters degree in Economics at the London School of Economics. It wasn't just the postgraduate training. It was also an early recognition that my leaders saw promise in me.

The second was a career move when I came back from maternity leave. I was appointed as the deputy head of a new department - Payments Policy. It gave me a completely blank sheet of paper to build something new. I had very direct and regular exposure to the Governor and to the members of the Payments System Board. And I had great leaders - including men who were encouraging of me and other women as we progressed.

The third milestone was my appointment to Assistant Governor (Currency) in 2010 the first female assistant governor. This was a big change for me. It was a move from a policy to an operational area, in which I was not an expert. I also had to lift my gaze beyond my area of specialty to the enterprise level.

In the last decade, women's representation at the RBA improved significantly. In June last year, we achieved 40 per cent women in management roles. Women made up 44 per cent of employees, with four of seven Executive Committee positions held by

women. 56 per cent of promoted employees were women, and 63 per cent of those promoted to management were women. These promotions were all based on skills and ability.

This progress reflects the RBA's commitment to inclusion, and it is also a testament to the resilience and determination of women at the RBA.

There are four things I have learnt in my leadership journey. The first is not to undersell myself. Women have to be prepared to promote themselves even if we don't feel 100 per cent confident. Second is don't be afraid to do something different. I always took opportunities when they were offered. Most often it was a sideways move. Third, I found people who I trusted to guide me - some internal and, as I became more senior, people from outside the RBA. My contacts at CEW have been important here. Finally, the teams around me are my most valuable resources. They are professional, know what they are doing and always give their best. My job is to draw on that expertise, support them and guide them.

## Building the pipeline of future economists

Finally, I want to say a few words on the work the RBA is doing to build a diverse pipeline of future economists, policymakers and business leaders in Australia. There has been a sharp decline in the size and diversity of the economics student population since the early 1990s. 8   The trend raises concerns about economic literacy in society and the long-term health of the economics discipline.

This is an important reason for the RBA's education program, which engages with students and teachers and provides a range of resources that aim to inspire and support the next generation of economists. Some of our initiatives include school outreach programs and providing educational resources, research into the economics education landscape, and engagements with educational and curriculum bodies.

Today, males still outnumber females by two to one in high school and university economics. 9   Our research confirms that a confidence gap exists for females; that female students tend to underestimate their proficiency when it comes to economics. 10 It is not the case that women can't do economics - which I am sure will come as no surprise to anyone in this room.

Even among year 12 students who do study economics, a recent RBA study has found that there is a low interest in pursuing economics at the university level, particularly for females. Instead, these students are more likely to enrol in commerce, finance, or arts and social science courses. 11

One approach to increase the flow of high school students into university economics could be to develop some tailored advocacy to emphasise the connections between economics and other preferred fields of study. Increasing the representation of female role models amongst economists, female economics teachers and female advocates for economics in the public domain could also help. 12

## Conclusion

While we have made significant strides in improving gender equity and increasing female participation both at the RBA and within the broader Australian economy, there is still much work to be done.

I hope that my role as Governor of the RBA - the first woman to hold the role - gives encouragement to women coming up through the ranks of Australian businesses and the public service. You can do it.

Thank you to CEW for the opportunity to speak to you ahead of what I'm sure will be an engaging panel discussion.

Thank you to Angelina Bruno, Emma Chow, Iris Day, Samuel Evangelinos, Madison Terrell and Michelle Wright, for excellent assistance with this speech and to all the people that have provided me with opportunities and advice in my career over the years.

- 1  In March 1985, the female share of employment was 38.2 per cent. See Australian Bureau of Statistics (2025), 'Labour Force, Australia, Detailed', February, available at &lt;https://www.abs.gov.au/statistics/labour/employment-and-unemployment/labour-forceaustralia-detailed/latest-release&gt;.
- 2  Hsieh C-T, E Hurst, CI Jones and PJ Klenow (2019), 'The Allocation of Talent and U. S. Economic Growth', Econometrica, 87(5), pp 1439-1474.
- 3  Workplace Gender Equality Agency (undated), 'Women in Leadership', Australian Government.
- 4  Department of the Prime Minister and Cabinet (2025), 'Gender Balance on Australian Government Boards - 2023-24 Annual Report', Australian Government, News Release, 23 January.
- 5  As measured by the gap between male and female average weekly earnings.
- 6  Workplace Gender Equality Agency (2025), 'Employer Gender Pay Gaps Report 202324', Australian Government, March.
- 7  Organisation for Economic Co-operation and Development (2023), 'Joining Forces for Gender Equality: What Is Holding Us Back?', Report, May.
- 8  Dwyer J (2024), ' The State of Economics', Speech at The Economic Society of Australia, Sydney, 28 May.
- 9  Dwyer, n 8.
- 10  Tan J (2022), ' Exploring the Confidence Gap', RBA Bulletin, March.

- 11  Chow E (2025), ' Where Have All the Economics Students Gone?', RBA Bulletin, January.

12  Tan, n 10.",Michele Bullock
https://www.bis.org/review/r250414a.htm,Klaas Knot: Stating the obvious - a central bankers perspective on resilience in times of uncertainty,"Speech by Mr Klaas Knot, President of De Nederlandsche Bank, at the Eurofi High Level Seminar 2025, Warsaw, 11 April 2025.",2025-04-11 00:00:00,"## Klaas Knot: Stating the obvious - a central bankers perspective on resilience in times of uncertainty

Speech by Mr Klaas Knot, President of De Nederlandsche Bank, at the Eurofi High Level Seminar 2025, Warsaw, 11 April 2025.

* * *

Sometimes it is a central banker's job to say things that are already completely obvious to everyone. 'The economy is recovering.' 'Inflation is running slightly above target.' That type of statement.

In the same vein, I think it will not come as a total surprise to you when I say that we live in times of elevated uncertainty. In the almost 14 years since I became governor of the Dutch central bank, we have experienced unprecedented shocks. I am thinking in particular of the European sovereign debt crisis, the COVID pandemic, and the Russian invasion of Ukraine. In the background, the climate crisis continues to worsen. And over the past few months, the world has once again turned upside down for us Europeans.

People generally don't like uncertainty, but economists go even further. They hate it. They do like risk. Risk can be identified, and it can be quantified. Well, not always, but most of the time. They can model it, they can price it, they can hedge it. They love to model it.

For a long time, economists tended to solve the uncertainty problem by assuming it away. A lot of classical macroeconomic models assume that the probability distribution of future states of the world is known by agents.

But those strong assumptions about states of knowledge and cognition have not always been part of the economics profession. As early as 1921, Frank Knight published his book on optimal choice under fundamental uncertainty. And in the work of Keynes, Friedman and Hayek, imperfect information has a prominent place.

Over the last two decades, uncertainty and imperfect information have become more prominent in economic research. Thanks to this, today we know a lot about optimal decision making under uncertainty. One of the things we know is that in a world of risk and rational expectations, the optimal response to complexity is detailed and fine-tuned. But under uncertainty, that logic is reversed. Complex environments often call for simple decision rules. That is because such rules are more robust to unexpected changes.

That insight may be highly relevant in today's world. If we ever had the illusion that the world behaved like our economic models, now is the time to say goodbye to that illusion. Unforeseen events have always happened, but in the current global economic and political climate, it is as if the news headlines are screaming at us: expect the unexpected! It reminds me of that famous quote by Harold Macmillan. When asked, as Britain's new prime minister, what would determine his government's course, he replied with: ""Events, dear boy, events.""

What does that mean for central banks, regulators and financial institutions? For us, the current state of the world is more or less a given. Creating and solving global political problems is not part of our remit. But what we can and must do is make sure the financial system is resilient enough to withstand the shocks that may come. Uncertain times ask for robust policies.

For financial institutions, the primary answer to uncertainty has always been capital. For expected losses, banks hold provisions. For unexpected losses, they hold capital.

The financial crisis of 2008 made it clear that banks needed higher buffers to shield themselves against unexpected events. The strengthening of capital buffers after the great financial crisis served us well. Most notably, during the pandemic. Thanks to stronger buffers, banks were able to absorb losses and continue extending credit when the economy took a hit as a result of the lockdowns. In many countries, the presence of stronger buffers also allowed for capital to be released when needed most.

Stronger buffers and a more resilient banking sector continue to serve us well. Especially now in these times of fundamental uncertainty. A resilient financial sector can help the economy to withstand shocks from trade barriers and geopolitical events.

But our work to make the banking sector more resilient is not yet complete. For one thing, the final Basel III standards, that are meant to repair key weaknesses in banking regulation, still need to be implemented in many jurisdictions. In the meantime, the banking turmoil of two years ago was a reminder that bank failures are not a thing of the past. So there is still work to be done for banks, regulators and supervisors.

Against that background, in some countries there is a call for simplification of banking rules. I understand where this is coming from and I have some sympathy for it. As I said, simple rules may to some extent be an appropriate response to complexity and fundamental uncertainty in the financial system. And holding capital is in principle a simple way to deal with a complex and uncertain world. But the methods by which regulatory capital is calibrated nowadays have themselves become very complex.

I am in favour of simplification if warranted. But keep in mind here that simple rules are less risk-sensitive and thus more constraining. That's the trade-off. You want simpler rules? Sure, but those rules are then calibrated at a more prudent level. That is the logic behind the leverage ratio. That is also the logic behind the standardised approach.

Most importantly, we should be careful not to confuse simplification with deregulation. Deregulation means effectively lowering buffers by relaxing the rules. That would increase both vulnerability in the banking system and the likelihood of financial crises. That would be a big mistake.

Many in the banking sector view regulation as a constraint, something that limits profitability and imposes undue costs. But it's just the other way around. Prudential rules are not an obstacle to growth, they are an enabler of sustainable, long-term growth. Banks with strong capital positions and sound liquidity management are better positioned to extend and rollover credit, invest in new technologies and finance large-

scale projects. Strong banking rules are not a liability, they are an asset. Especially in uncertain times. And this is why we should fully implement Basel III in Europe. Even if other countries delay its implementation.

Next to bolstering bank buffers, we should further strengthen the European internal market. Especially in times of high uncertainty, a robust EU internal market serves as a first line of defence against external shocks. The IMF has recently estimated that by reducing the barriers to our internal market to levels comparable to those in the US, the EU could increase its productivity by almost 7 percentage points. By reducing our reliance on other regions we can cushion the impact of trade restrictions. And research shows time and time again that a deep internal market remains the EU's most effective tool for promoting a resilient and innovative economic and financial system.

An essential part of strengthening the internal market is further integrating Europe's fragmented financial markets. With the recent launch of the Savings and Investment Union, the European Commission is turning this objective into a concrete strategy. I think the Commission's proposals to integrate and enlarge our capital markets by supporting retail participation, including through pension savings, are a very good idea. That also goes for the proposals to centralise certain types of capital market supervision and address structural barriers against consolidation.

The SIU strategy gives Member States more responsibility for developing Europe's capital markets, in particular in the more complex areas of taxation, insolvency and pensions. Member States themselves had asked for a more bottom-up approach, and the Commission listened. Now it is up to Member States to live up to their commitments and come up with national initiatives, including the removal of existing national barriers.

Another step we can take to strengthen Europe is to introduce a digital euro. As you know, central banks and legislators are investigating the possibility of issuing a digital euro alongside cash to complement the existing commercial means of payment. This is important because the use of cash at points of sale is declining, meaning our reliance on commercial, electronic payment solutions is increasing. However, this does not contribute to our strategic autonomy, as commercial payments systems are still very much dependent on non-European parties. A digital euro will ensure that everyone in the euro area retains access to a simple, universally accepted, secure and reliable means of payment under all circumstances, in addition to existing payment options.

These uncertain times ask for more European cooperation. But that does not mean we should be turning our back on the rest of the world. On the contrary, we must continue to speak out for the benefits of multilateralism. We must continue to support the institutions that form its very pillars, like the IMF, the Basel Committee, and the FSB. And we must continue to cooperate with others who are willing to safeguard international standards, for example in financial regulation.

Multilateralism is enlightened self-interest. It's transactional, but in a smart way. It's not always the easiest way, but in the long term it is the best way. That is the lesson we learned in post-war Europe.

This is my last speech at Eurofi as central bank governor and as FSB chair. My term as president of the Dutch central banks ends on July 1 st . Those of you who had the

patience to listen to my contributions over the years, typically on the Friday morning slot, know that I am a believer in buffers, buffers, buffers, to deal with the twists and turns of financial fate.

After the global financial crisis that was considered a no-brainer. But as the memory of that crisis fades in the rearview mirror and international relations become more strained, we risk entering a regulatory race to the bottom. A race that would be quite dangerous for financial stability. Financial stability is easily taken for granted, but that would be a mistake. It reminds me a bit of that Joni Mitchell song Big Yellow Taxi: 'You don't know what you've got till it's gone.' It's a song about the environment, and the threat of ecological disaster, but it's equally applicable to financial stability. Let's remind ourselves what we've got, and let's protect it. That amounts to stating the obvious, but sometimes that is a central banker's job.",Steven Maijoor; Klaas Knot; Olaf Sleijpen
https://www.bis.org/review/r250417h.htm,"Junko Nakagawa: Economic activity, prices, and monetary policy in Japan","Speech by Ms Junko Nakagawa, Member of the Policy Board of the Bank of Japan, at a meeting with local leaders, Gunma, 17 April 2025.",2025-04-17 00:00:00,"

Bank  of  Japan

April  17,  2 0 2 5

## Economic Activity, Prices, and Monetary Policy in Japan

Speech at a Meeting with Local Leaders in Gunma

## NAKAGAWA Junko

Member of the Policy Board

## I. Current Situation of Economic Activity and Prices

## A. Current Economic Developments Abroad

I  would  like  to  begin  my  speech  by taking  a  look  at the  current  situation  of  overseas economies (Chart 1). Regarding global business sentiment, as of March 2025, the Purchasing Managers' Index (PMI) for the manufacturing industry has been at around 50 -- the breakeven point between improvement and deterioration -- and the PMI for the services industry has continued to improve. In the January 2025 World Economic Outlook (WEO) Update , the International Monetary Fund (IMF) projected that the growth rate of the global economy would be in the range of 3.0-3.5 percent for both 2025 and 2026, which is broadly in line with the average growth rate since 1980. The IMF will release the next quarterly update of the WEO this month, and attention is warranted on its assessment of the future path of trade policies in each jurisdiction and global developments in economic activity and prices affected by such policies.

## B. Current Economic Developments in Japan

I will now turn to the current situation of Japan's economy. The Bank of Japan judges that the economy has recovered moderately, although some weakness has been seen in part. It is necessary to pay attention to the fact that there are high uncertainties regarding trade policies in each jurisdiction and developments in overseas economic activity and prices affected by such policies. I will come back to this later.

In what follows, I would like to explain developments in Japan's economy from two aspects: the corporate sector and the household sector.

## 1. Corporate sector

Let me start with the corporate sector (Chart 2). Corporate profits have been on an improving trend on  the  whole.  The Financial  Statements  Statistics  of  Corporations  by  Industry, Quarterly shows that  current  profits for  all  industries  and  enterprises  for  the OctoberDecember quarter of 2024 reached their highest level since the April-June quarter of 1985, from when comparable data are available. This reflects progress in the pass-through of cost increases to prices and the increase in non-operating profits due to the yen's depreciation in the October-December quarter.  The  Bank's March  2025 Tankan (Short-Term  Economic

Survey of Enterprises in Japan) showed that business sentiment stayed at a favorable level. Specifically, the diffusion index (DI) for business conditions has remained at a favorable level for  both  manufacturing  and  nonmanufacturing:  although firms have  faced  a  rise  in  raw material  and  input  prices, labor  shortages, and a  rise  in  personnel  expenses, they  have benefited from favorable demand related to business fixed investment and from solid private consumption.

Now I will touch on business fixed investment (Chart 3). With corporate profits improving, business  fixed  investment  has  continued  on  a  moderate  increasing  trend,  mainly  led  by digital- and labor saving-related investments at home. The aggregate supply of capital goods -- a coincident indicator of machinery investment -- has increased with a continued recovery in demand for IT-related goods, although sluggish external demand has pushed down renewal investment. Regarding  construction  investment,  private  construction  completed has  been more or less flat, partly because investments have been delayed reflecting factors such as high construction material prices and labor shortages. That said, a leading indicator of construction investment has been at a relatively high level, mainly because the construction of logistics facilities,  urban  redevelopment  projects,  and the establishment  of  new  factories have all remained active. Business fixed investment plans in the March 2025 Tankan indicated that the year-on-year rate of increase in investment would be relatively high at 8.2 percent for fiscal 2024. They also showed a year-on-year rate of increase of 2.7 percent for fiscal 2025, suggesting a high increase compared with the average of past surveys for March, the month before the start of a new fiscal year.

Turning to industrial production, exports, and imports, the Bank judges that they have all been more or less flat (Chart 4). Looking at the latest developments, industrial production increased for  the October-December quarter  of  2024, reflecting (1) a dissipation  of  the  effects  of automakers suspending operations at factories in the previous quarter due to the typhoon, and (2) a concentration of projects to manufacture semiconductor production equipment; however, industrial production has since declined  somewhat, mainly  reflecting a dissipation of the effects of the concentration of such projects.

I will outline developments in real exports by region and by type of goods, based on data until February 2025 (Chart 5). By region, exports to the United States increased and have been at relatively  high  levels, as the effects of  the  dockworkers  strike on  the  East  Coast have dissipated. Some view that a front-loaded increase in demand prior to the U.S. tariff hike may have also affected some of these exports. On the other hand, exports to Europe have been relatively weak, mainly for capital goods. Exports to China have also been relatively weak against the background of a slowdown in the Chinese economy. Exports to the NIEs, the ASEAN  economies,  and  some  other  Asian  economies  have increased,  particularly  for semiconductor-related goods. By type of goods, exports of automobile-related goods have risen due to the dissipation of the effects of the dockworkers strike in the United States. As for  exports  of  capital  goods,  those of  semiconductor  production  equipment have been at relatively  high  levels. Although  exports  of  IT-related  goods  have been  firm, those of intermediate  goods --including  chemicals --have  been  at  relatively  low  levels,  mainly reflecting an oversupply of such goods, particularly in Asia.

## 2. Household sector

I now turn to the household sector, focusing on private consumption and the employment and income situation.

Private consumption has been on a moderate increasing trend to date despite the impact of price  rises (Chart  6). The Consumption Activity Index, which is calculated by combining various  sales  and  supply-side  statistics,  has  continued  on  a  decreasing  trend,  mainly  for nondurable goods. However, the Bank judges that private consumption thus far has been decent  in  reality.  This  is  evidenced  by  the  fact  that  services  consumption  has  increased moderately as a trend, and also suggested by, for example, anecdotal information from firms and high-frequency data such as on credit card spending.

The  employment  and  income  situation  has  improved  moderately. Chart  7 shows  that the number of employed persons has continued to rise. In the left panel of this chart, the calendar year 2019, the year before the outbreak of the pandemic in Japan, is used as the base year for the  number  of  regular  employees  and  non-regular  employees.  The  number  of  regular employees has been on a moderate uptrend, albeit with fluctuations, mainly in the information

and communications industry and the medical, healthcare, and welfare services industry, both of which have been facing severe labor shortages. The number of non-regular employees overall has been more or less flat: while the number of non-regular employees in industries such as face-to-face services has been on an increasing trend, the number of involuntary nonregular employees has been on a declining trend with labor market conditions tightening. Nominal wages per employee have shown a clear increase, partly reflecting the improving trend in corporate profits. In addition, the year-on-year rate of increase in scheduled cash earnings has remained at a relatively high level (Chart 8). In light of the employment and wage developments mentioned so far, employee income -- which is the total amount of wages earned by all employees -- has continued to see a clear year-on-year increase in nominal terms, and  in  real  terms, the  rate  of  change  in  employee  income  has  been  positive  recently. Furthermore, the 2025 annual spring labor-management wage negotiations provide positive signs: the third provisional aggregate results of wage negotiations compiled by the Japanese Trade Union Confederation (Rengo) show that the year-on-year rate of increase in wages agreed in the negotiations is an average of 5.42 percent, and that for unions with less than 300 members also stands at 5 percent, both following the high levels for 2024.

## C. Current Price Developments in Japan

Next, I would like to talk about current price developments in Japan (Chart 9).

Looking at recent data, the year-on-year rate of increase in the consumer price index (CPI) for all items excluding fresh food has been in the range of 3.0-3.5 percent, and the increase in the CPI for all items excluding fresh food and energy has been in the range of 2.5-3.0 percent. The increase in the producer price index (PPI) has been in the range of 4.0-4.5 percent. The increase in the services producer price index (SPPI) has remained relatively high recently at around 3.0-3.5 percent. Now let us take a look at the right panel of Chart 9, which shows the breakdown of the year-on-year rate of change in the CPI excluding fresh food, energy, and the effects of temporary factors. Figures for the rate of increase in general services prices seem to have moderated, partly because the impact of the price survey of charges for package tours to overseas being resumed last year has dissipated. On the other hand, the increase in goods prices has accelerated, due to a rise in rice prices and its spillover effects, and because moves to pass on higher costs -- such as increased personnel expenses and distribution costs

-- to prices have been widely observed. In addition, the rate of change in administered prices, which were less likely to move in the past, has been increasing.

Let me now focus on factors affecting price developments (Chart 10). The import price index on  a  contract  currency  basis  has  been  more  or  less  flat  since  2023,  after  it  decreased  in response to past developments in international commodity prices. On the other  hand, the index on a yen basis has been significantly higher than the index on a contract currency basis. Although commodity prices  have declined and the excessive depreciation of  the  yen  has subsided, firms' price revisions are still in progress; specifically, firms are in the midst of reflecting the impact of past developments in commodity prices and foreign exchange rates in the price  of  intermediate  and  final  products. This  is  because some firms  have  been conducting the revisions carefully while gauging developments in demand and their clients' and consumers' reactions.

Next, I would like to look at data that the Bank regularly releases as indicators used to capture the underlying trend in the CPI (Chart 11). The trimmed mean of the year-on-year rate of increase in the CPI has been in the range of 2.0-2.5 percent, and the mode and the weighted median have both been in the range of 1-2 percent, all showing a recent resumption of an uptrend. Chart 12 shows trends in the distribution of price changes for items that make up the CPI, specifically in the 25th-75th percentile band. It reveals that, since April 2022, around three-quarters of items have experienced year-on-year price increases. Although the median of the price change distribution is lower than the past peak, it has exceeded 2 percent, as more items have experienced high price rises recently. Therefore, the median and the year-on-year rate of increase in the price of items in the 25th-75th percentile band both seem to be on an uptrend again.

Given that the formation of inflation expectations in Japan is largely adaptive, the recent price environment has brought about a gradual rise in firms' and households' medium- to long-term inflation expectations.

## II. Outlook for and Risks to Economic Activity and Prices

## A. Outlook

Now I would like to explain the Bank's outlook for Japan's economic activity and prices based on the Outlook for Economic Activity and Prices (Outlook Report) decided at the January 2025 Monetary Policy Meeting (MPM) (Chart 13).

The real GDP growth rate is projected to be 0.5 percent for fiscal 2024, 1.1 percent for fiscal 2025, and 1.0 percent for fiscal 2026, in terms of the median of the Policy Board members' forecasts.

The  background  for  the  real  GDP  projections  is  that  Japan's  economy  is  likely  to  keep growing at a pace above its potential growth rate, with overseas economies continuing to grow moderately and as a virtuous cycle from income to spending gradually intensifies on the back of factors such as accommodative financial conditions.

The year-on-year rate of change in the CPI for all items excluding fresh food is projected to be 2.7 percent for fiscal 2024, 2.4 percent for fiscal 2025, and 2.0 percent for fiscal 2026, in terms of the median of the Policy Board members' forecasts. Likewise, the rate of change in the CPI for all items excluding fresh food and energy is projected to be 2.2 percent for fiscal 2024, and 2.1 percent for both fiscal 2025 and fiscal 2026.

The CPI projections are based on expected positive contributions throughout fiscal 2025 from high levels of rice prices and the dissipation of some effects of the government's measures that have been pushing down inflation. In the second half of the projection period -- in other words, toward the end of fiscal 2026 -- underlying inflation is likely to be around the 2 percent level,  which  is  generally  consistent  with  the  price  stability  target.  This  is  because  it  is projected that, with labor market conditions remaining tight, the output gap will continue to improve, wages and prices will continue to increase, and medium- to long-term inflation expectations will also rise.

## B. Risks

There are high uncertainties regarding this outlook for economic activity and prices. I will describe three risk factors to the outlook that I am paying attention to.

The first risk involves growing uncertainties regarding tariffs and other policies in the United States and developments in overseas economies and global financial and capital markets. One of  the  major  uncertainties  is  tariff  policies,  which  could  affect  Japan's  economy  through various channels. Specifically, they may have a direct impact on global trade activity and on Japanese firms' exports, production, sales, fixed investment, and profits. There could also be an impact on Japan's real economy and prices, as growing uncertainties regarding tariffs and other  policies could  affect  business  and  household  sentiment  at  home  and  abroad.  If commodity prices and global financial and capital markets undergo excessive fluctuations and adjustments, this may exert even stronger downward pressure on Japan's economy. Since the extent of the impact largely depends on the future course of tariff policies, it is necessary to monitor developments with high vigilance.

The second risk concerns firms' wage- and price-setting behavior. The sustained inflation seen thus far has brought about a rise in households' and firms' medium- to long-term inflation expectations, and firms' behavior has shifted more toward raising wages and prices. Apart from the potential impact of trade policy that I mentioned in the first risk, it is likely that firms' price revisions in response to past inflation are still in progress, as I explained earlier. In this context, upward pressure on wages could intensify further with labor market conditions remaining tight, and moves to reflect the past inflation and higher wages in selling prices could strengthen to a greater extent than expected.

The third risk is that a deterioration in consumer sentiment will disrupt the virtuous cycle from income to spending. As I mentioned earlier, the Bank judges that private consumption has been on a moderate increasing trend, thanks to improvement in the income situation and the  effects  of  the  government's  measures  implemented  thus  far  to  address  rising  prices. However, improvement in consumer sentiment has been seesawing, reflecting in part the climbing  rate  of  increase  in  the  price  of  food  and  other  everyday  goods.  Uncertainties concerning  tariff  policies,  the  employment  and  income  situation,  and  Japan's  economy,

together with a potential further increase in households' defensiveness toward spending due to price rises, may increasingly weigh on consumer sentiment and thereby push down the real economy.

## III. The Bank's Conduct of Monetary Policy

I would now like to look back at the Bank's decisions made at the MPMs held in January and March 2025.

With respect to the guideline for money market operations, at the January MPM, the Bank decided to raise the target for its policy interest rate, the uncollateralized overnight call rate, from  the  previous  level  of  ""around  0.25  percent"" to  ""around  0.5  percent""  (Chart  14). Accordingly, it also decided to change the interest rate applied to the complementary deposit facility and the basic loan rate applicable under the complementary lending facility, based on wage and price developments at the time of the January MPM. Regarding wages, many firms had plans to continue raising wages steadily in the 2025 annual spring labor-management wage negotiations, following the solid wage increases in 2024. On the price front, firms had been increasingly reflecting higher costs -- not only increased raw material costs but also higher personnel expenses and distribution costs -- in selling prices. Based on the assessment that the likelihood of realizing its outlook for economic activity and prices had been rising, the  Bank  judged  it  appropriate  to  raise  the  policy  interest  rate  and  adjust  the  degree  of monetary accommodation from the perspective of sustainable and stable achievement of the 2 percent price stability target.

At the March MPM, the Bank decided to maintain its guideline for money market operations. There  were  high  uncertainties  about  (1)  the  evolving  situation  regarding  trade  and  other policies in each jurisdiction and (2) economic activity and prices at home and abroad under such a situation. That said, the Bank judged that Japan's economic activity and prices had been  developing  generally  in  line  with  its  outlook,  given  factors  such  as  the  preliminary results of the 2025 annual spring labor-management wage negotiations available at the time of the March MPM. Nevertheless, the Bank deemed that it needed time to assess the impact of changes in the policy interest rate decided in January and earlier.

Considering the current levels of real interest rates, the future conduct of monetary policy will depend on developments in economic activity and prices as well as financial conditions. That said, if its outlook for economic activity and prices is realized, the Bank will accordingly continue to raise the policy interest rate and adjust the degree of monetary accommodation. At the MPM starting at the end of April, the Bank will release its projections for fiscal 2027 for the first time. With uncertainties such as the impact of tariff policies being significantly high,  it  will  make  monetary  policy  decisions  as  appropriate  while  carefully  monitoring, without  any  preconceptions,  economic  and  price  developments  at  home  and  abroad  and financial market developments.

Thank you.



## Economic Activity, Prices, and Monetary Policy in Japan

Speech at a Meeting with Local Leaders in Gunma

April 17, 2025

## NAKAGAWA Junko Member of the Policy Board Bank of Japan

## Overseas Economies

## Global PMI



Note: Figures for manufacturing are the J.P.Morgan Global Manufacturing PMI.

Figures for services  are the J.P.Morgan Global Services  PMI Business Activity Index. Source: Copyright  © 2025 by S&amp;P Global Market Intelligence,  a division  of S&amp;P Global Inc. All rights reserved.

## Outlook



Note: Figures are the weighted  averages of real GDP growth rates using countries'  share in Japan's exports as weights.  The real GDP growth rates are compiled  by the IMF, and the rates from 2025 onward are its projections  in the October 2024 WEO and the January 2025 WEO Update . Figures for advanced economies are those for the United States, the euro area, and the United Kingdom.  Figures for emerging  and commodity-exporting  economies are those for the rest of the world.

Sources: IMF; Ministry of Finance.

Chart 1

## Corporate Sector in Japan

## Corporate Profits

## Business Conditions



Chart 3

## Corporate Sector in Japan

## Coincident Indicators of Business Fixed Investment

## Business Fixed Investment Plans



Notes: 1. The figure for domestic  shipments  and imports of capital goods for 2025/Q1 is the JanuaryFebruary average. The figure for private construction  completed  for 2025/Q1 is that for January.

2. Figures for real private construction  completed  are based on Bank staff calculations  using the construction  cost deflators.

Notes: 1. Based on the

Tankan

. All industries  including financial institutions.

2. Figures include software and R&amp;D investments but exclude land purchasing expenses. R&amp;D investment  is not covered as a survey item before the March 2017 survey.
2. Sources: Cabinet Office; Ministry of Economy,  Trade and Industry; Ministry of Land, Infrastructure, Transport and Tourism.
3. There are discontinuities  in the data for December 2021 and December 2023 due to changes in the survey sample.

Source: Bank of Japan.

## Corporate Sector in Japan

## Industrial Production

## Real Exports and Imports



Source: Ministry of Economy,  Trade and Industry.

Chart 5



## Corporate Sector in Japan

## Real Exports by Region

## Real Exports by Type of Goods



Notes: 1. Based on Bank staff calculations. Figures in angle brackets show the share of each country or region in Japan's total exports  in 2024. Figures for 2025/Q1 are January-February averages.

2. Figures for the EU exclude those for the United Kingdom  for the entire period.

Note: Based on Bank staff calculations.  Figures in angle brackets show the share of each type of goods in Japan's total exports in 2024. Figures for 2025/Q1 are January-February averages. Sources: Ministry of Finance; Bank of Japan.

Sources: Ministry of Finance; Bank of Japan.

## Private Consumption in Japan



Chart 7

## Employment and Income Situation in Japan

## Number of Employed Persons

## Nominal Wages per Employee



Note: Figures for regular employees and non-regular employees prior to 2013 are based on the ""detailed tabulation"" in the Labour Force Survey . Figures for 2025/Q1 are January-February averages. Source: Ministry of Internal Affairs and Communications.

Notes: 1. Q1 = March-May, Q2 = June-August, Q3 = September-November,  Q4 = December-February. 2. Figures from 2016/Q1 onward are based on continuing  observations following the sample revisions. Source: Ministry of Health, Labour and Welfare.

## Employment and Income Situation in Japan

## Scheduled Cash Earnings

## Employee Income



Notes: 1. Q1 = March-May, Q2 = June-August, Q3 = September-November,  Q4 = December-February.

2. Figures from 2016/Q1 onward are based on continuing observations following the sample revisions.

Source: Ministry of Health, Labour and Welfare.



- Notes: 1. Q1 = March-May, Q2 = June-August, Q3 = September-November,  Q4 = December-February. 2. Employee  income = Total cash earnings ( Monthly Labour Survey ) × Number of employees ( Labour Force Survey )
3. Figures from 2016/Q1 onward are based on continuing  observations following  the sample revisions  of the Monthly Labour Survey .
4. Figures for real employee  income are based on Bank staff calculations using the CPI (less  imputed rent).
- Sources: Ministry of Health, Labour and Welfare; Ministry of Internal Affairs and Communications.

Chart 9

## Inflation Indicators

## Inflation Indicators

## CPI (Excluding Temporary Factors)

|                             |       |       | y/y% chg.   | y/y% chg.   |
|-----------------------------|-------|-------|-------------|-------------|
|                             | 24/Q2 | 24/Q3 | 24/Q4       | 25/Q1       |
| CPI                         |       |       |             |             |
| Less fresh food             | 2.4   | 2.6   | 2.6         | 3.1         |
| Excluding temporary factors | 2.4   | 2.8   | 2.8         | 3.2         |
| Less fresh food and energy  | 2.2   | 2.0   | 2.3         | 2.6         |
| Excluding temporary factors | 2.1   | 2.1   | 2.5         | 2.7         |
| PPI                         | 1.9   | 2.9   | 3.8         | 4.1         |
| SPPI                        | 2.8   | 3.0   | 3.2         | 3.2         |
| GDP Deflator                | 3.1   | 2.4   | 2.9         |             |
| Domestic demand deflator    | 2.6   | 2.2   | 2.4         |             |

- Notes: 1. Figures for the PPI are adjusted for the hike in electric power charges during the summer season. Figures for the SPPI exclude international  transportation.
2. The CPI figures excluding  temporary factors are Bank staff estimates  and exclude the effects  of free education policies,  travel subsidy programs,  and mobile phone charges.
3. Figures for 2025/Q1 are January-February averages, except for the PPI.
- Sources: Cabinet Office; Ministry of Internal Affairs and Communications;  Bank of Japan.



CY

- Notes: 1. ""Administered  prices (less energy)"" consists  of public services  and water charges. 2. The CPI figures are Bank staff estimates  and exclude the effects  of the consumption  tax hike, free education policies,  travel subsidy programs,  and mobile phone charges.
- Source: Ministry of Internal Affairs and Communications.

## Factors Affecting Consumer Prices

## International Commodity Prices

## Import Price Index

Chart 11



## Measures of Underlying Inflation

CPI: Trimmed Mean etc.

## DI of Price Changes



Note: Based on Bank staff calculations using the CPI excluding the effects  of the consumption  tax hikes, free education policies,  and travel subsidy programs. The CPI figures from April 2020 onward are Bank staff estimates  and exclude the effects  of measures such as free higher education.

Sources: Ministry of Internal Affairs and Communications;  Bank of Japan.



Note: The DI is defined  as the share of increasing  items minus the share of decreasing  items. The share of increasing/decreasing  items is the share of items for which price indices  increased/decreased  from a year earlier. Based on Bank staff calculations using the CPI (less fresh food) excluding  the effects  of the consumption  tax hikes, free education policies,  and travel subsidy programs.  The CPI figures from April 2020 onward are Bank staff estimates  and exclude the effects  of measures such as free higher education.

Sources: Ministry of Internal Affairs and Communications;  Bank of Japan.

## Inflation Expectations

## Distribution of Actual Price Changes

## Survey Results and BEI



Note: Figures are based on the year-on-year  price changes for each CPI item. Source: Ministry of Internal Affairs and Communications.



estimated  using the modified  Carlson-Parkin method for a 5-choice question.

2. Figures for firms show the inflation outlook of enterprises  for general prices (all industries  and enterprises,  average) in the Tankan .
3. The BEI (break-even inflation)  rate is the quarterly average of the yield spread between  fixed-rate coupon-bearing  Japanese government  bonds (JGBs) and inflation-indexed  JGBs. Figures from 2008/Q2 to 2013/Q4 are calculated using yield data for issue No. 16 of inflation-indexed  JGBs, which matured in June 2018.

Sources: Bloomberg;  Bank of Japan.

Chart 13

## Outlook for Economic Activity and Prices (as of January 2025)

y/y % chg.

|                                | Real GDP            | CPI (all items less fresh food)   | (Reference) CPI (all items less fresh food and energy)   |
|--------------------------------|---------------------|-----------------------------------|----------------------------------------------------------|
| Fiscal 2024                    | +0.4 to +0.6 [+0.5] | +2.6 to +2.8 [+2.7]               | +2.1 to +2.3 [+2.2]                                      |
| Forecasts made in October 2024 | +0.5 to +0.7 [+0.6] | +2.4 to +2.5 [+2.5]               | +1.9 to +2.1 [+2.0]                                      |
| Fiscal 2025                    | +0.9 to +1.1 [+1.1] | +2.2 to +2.6 [+2.4]               | +2.0 to +2.3 [+2.1]                                      |
| Forecasts made in October 2024 | +1.0 to +1.2 [+1.1] | +1.7 to +2.1 [+1.9]               | +1.8 to +2.0 [+1.9]                                      |
| Fiscal 2026                    | +0.8 to +1.0 [+1.0] | +1.8 to +2.1 [+2.0]               | +1.9 to +2.2 [+2.1]                                      |
| Forecasts made in October 2024 | +0.8 to +1.1 [+1.0] | +1.8 to +2.0 [+1.9]               | +1.9 to +2.2 [+2.1]                                      |

Note: Figures in brackets indicate the medians  of the Policy Board members' forecasts  (point estimates). Source: Bank of Japan.

,

## Decision at the January 2025 MPM

Japan's economic activity and prices have been developing generally in line with the Bank's outlook , and the likelihood of realizing the outlook has been rising .

Medians of the Policy Board Members' Forecasts (y/y % chg.)

## Wages

|                                 |                                            | Fiscal 2024   | Fiscal 2025   | Fiscal 2026   |
|---------------------------------|--------------------------------------------|---------------|---------------|---------------|
| Real GDP                        | Real GDP                                   | 0.5 (-0.1)    | 1.1 (-)       | 1.0 (-)       |
| CPI (all items less fresh food) | CPI (all items less fresh food)            | 2.7 (+0.2)    | 2.4 (+0.5)    | 2.0 (+0.1)    |
|                                 | CPI (all items less fresh food and energy) | 2.2 (+0.2)    | 2.1 (+0.2)    | 2.1 (-)       |

-  Firms have expressed the view that they will continue to raise wages steadily , following the solid wage increases last year.

Prices

-  With wages continuing to rise, underlying CPI inflation has been increasing gradually toward 2 percent .
-  CPI inflation is likely to be at around 2.5 percent for fiscal 2025, due to the higher import prices stemming from the yen's depreciation etc.

## Overseas economies

Note: Figures in parentheses indicate changes from the October 2024 Outlook Report.

-  Global financial and capital markets have been stable on the whole , while attention has been drawn to various uncertainties.

Adjusting the degree of monetary accommodation from the perspective of sustainable and stable achievement of the price stability target of 2 percent

## Short-term interest rate raised to ""around 0.5%"" :

(uncollateralized overnight call rate)

(previously ""around 0.25%"")

-  Real interest rates are expected to remain significantly negative, and accommodative financial conditions will continue to firmly support economic activity .
-  If the outlook presented in the January Outlook Report will be realized, the Bank will accordingly continue to raise the policy interest rate and adjust the degree of monetary accommodation.",Junko Nakagawa
https://www.bis.org/review/r240417g.htm,Kazuo Ueda: The Bank's Semiannual Report on Currency and Monetary Control,"Statement by Mr Kazuo Ueda, Governor of the Bank of Japan, before the Committee on Financial Affairs, House of Councillors, Tokyo, 17 April 2025.",2025-04-17 00:00:00,"## Kazuo Ueda: The Bank's Semiannual Report on Currency and Monetary Control

Statement by Mr Kazuo Ueda, Governor of the Bank of Japan, before the Committee on Financial Affairs, House of Councillors, Tokyo, 17 April 2025.

* * *

## Introduction

The Bank of Japan submits to the Diet its Semiannual Report on Currency and Monetary Control every June and December. I am pleased to have this opportunity today to talk about recent economic and financial developments and about the Bank's conduct of monetary policy.

## I. Economic and Financial Developments

I will first explain recent economic and financial developments.

Japan's economy has recovered moderately, although some weakness has been seen in part. Exports and industrial production have been more or less flat. With an improving trend in corporate profits, business fixed investment has been on a moderate increasing trend. The employment and income situation has improved moderately. Private consumption has been on a moderate increasing trend despite the impact of price rises and other factors.

The year-on-year rate of increase in the consumer price index (CPI) for all items excluding fresh food has been at around 3 percent recently, as services prices have continued to rise moderately, reflecting factors such as wage increases, and as the government's measures to reduce the household burden of higher energy prices have been scaled back, although the effects of a pass-through to consumer prices of cost increases led by the past rise in import prices have waned. Although underlying inflation, excluding the direct effects of the cost-push, is below 2 percent at this point, it has been increasing gradually, with wages continuing to rise.

Japan's economic activity and prices have so far been developing generally in line with the outlook presented in the Outlook for Economic Activity and Prices (Outlook Report). That said, it is necessary to pay due attention to risks to the outlook, particularly to the recent heightened uncertainties regarding the future course of trade and other policies in each jurisdiction. Meanwhile, Japan's financial system has maintained stability on the whole. The Bank judges that, even in the case of an adjustment in the real economy at home and abroad and in global financial markets, the financial system is likely to remain highly robust on the whole, mainly because Japanese financial institutions have sufficient capital bases.

## II. Conduct of Monetary Policy

Next, I will explain the Bank's conduct of monetary policy.

At the March Monetary Policy Meeting (MPM), the Bank decided to maintain the guideline for money market operations, in which it would encourage the uncollateralized overnight call rate to remain at around 0.5 percent. As for the future conduct of monetary policy, while it will depend on developments in economic activity and prices as well as financial conditions going forward, given that real interest rates are at significantly low levels, if the outlook for economic activity and prices presented in the January 2025 Outlook Report is realized, the Bank will accordingly continue to raise the policy interest rate and adjust the degree of monetary accommodation. In this regard, it will be necessary for the Bank to examine at each MPM whether the outlook will be realized, without any preconceptions. The Bank will carefully examine developments in economic activity and prices as well as in financial markets at home and abroad, including the impact of U.S. tariff policy, and will make policy decisions as appropriate, based on its assessment of the outlook for economic activity and prices, the risks surrounding them, and the likelihood of realizing the outlook.

With the price stability target of 2 percent, the Bank will conduct monetary policy as appropriate, in response to developments in economic activity and prices as well as financial conditions, from the perspective of sustainable and stable achievement of the target.

Thank you.",Kazuo Ueda
https://www.bis.org/review/r250417f.htm,Jerome H Powell: Economic outlook,"Speech by Mr Jerome H Powell, Chair of the Board of Governors of the Federal Reserve System, at the Economic Club of Chicago, Chicago, Illinois, 16 April 2025.",2025-04-16 00:00:00,"## Jerome H Powell: Economic outlook

Speech by Mr Jerome H Powell, Chair of the Board of Governors of the Federal Reserve System, at the Economic Club of Chicago, Chicago, Illinois, 16 April 2025.

* * *

Thank you for the introduction. I am looking forward to our conversation, Professor Rajan. First, I will briefly discuss the outlook for the economy and monetary policy.

At the Fed, we are always focused on the dual-mandate goals given to us by Congress: maximum employment and stable prices. Despite heightened uncertainty and downside risks, the U.S. economy is still in a solid position. The labor market is at or near maximum employment. Inflation has come down a great deal but is running a bit above our 2 percent objective.

## Recent Economic Data

Turning to the incoming data, we will get the initial reading on first-quarter GDP in a couple of weeks. The data in hand so far suggest that growth has slowed in the first quarter from last year's solid pace. Despite strong motor vehicle sales, overall consumer spending appears to have grown modestly. In addition, strong imports during the first quarter, reflecting attempts by businesses to get ahead of potential tariffs, are expected to weigh on GDP growth.

Surveys of households and businesses report a sharp decline in sentiment and elevated uncertainty about the outlook, largely reflecting trade policy concerns. Outside forecasts for the full year are coming down and, for the most part, point to continued slowing but still positive growth. We are closely tracking incoming data as households and businesses continue to digest these developments.

In the labor market, during the first three months of the year, nonfarm payrolls grew by an average of 150,000 jobs a month. While job growth has slowed relative to last year, the combination of low layoffs and lower labor force growth has kept the unemployment rate in a low and stable range. Meanwhile, the ratio of job openings to unemployed job seekers has remained just above 1, near its pre-pandemic level. Wage growth has continued to moderate while still outpacing inflation. Overall, the labor market appears to be in solid condition and broadly in balance and is not a significant source of inflationary pressure.

As for our price-stability mandate, inflation has significantly eased from its pandemic highs of mid-2022 without the kind of painful rise in unemployment that has frequently accompanied efforts to bring down high inflation. Progress on inflation continues at a gradual pace, and recent readings remain above our 2 percent objective. Estimates based on data released last week show that total PCE prices rose 2.3 percent over the 12 months ending in March and that, excluding the volatile food and energy categories, core PCE prices rose 2.6 percent.

Looking forward, the new Administration is in the process of implementing substantial policy changes in four distinct areas: trade, immigration, fiscal policy, and regulation. Those policies are still evolving, and their effects on the economy remain highly uncertain. As we learn more, we will continue to update our assessment. The level of the tariff increases announced so far is significantly larger than anticipated. The same is likely to be true of the economic effects, which will include higher inflation and slower growth. Both survey- and market-based measures of near-term inflation expectations have moved up significantly, with survey participants pointing to tariffs. Survey measures of longer-term inflation expectations, for the most part, appear to remain well anchored; market-based breakevens continue to run close to 2 percent.

## Monetary Policy

As we gain a better understanding of the policy changes, we will have a better sense of the implications for the economy, and hence for monetary policy. Tariffs are highly likely to generate at least a temporary rise in inflation. The inflationary effects could also be more persistent. Avoiding that outcome will depend on the size of the effects, on how long it takes for them to pass through fully to prices, and, ultimately, on keeping longerterm inflation expectations well anchored.

Our obligation is to keep longer-term inflation expectations well anchored and to make certain that a one-time increase in the price level does not become an ongoing inflation problem. As we act to meet that obligation, we will balance our maximum employment and price-stability mandates, keeping in mind that, without price stability, we cannot achieve the long periods of strong labor market conditions that benefit all Americans. We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension. If that were to occur, we would consider how far the economy is from each goal, and the potentially different time horizons over which those respective gaps would be anticipated to close.

## Conclusion

As that great Chicagoan Ferris Bueller once noted, ""Life moves pretty fast."" For the time being, we are well positioned to wait for greater clarity before considering any adjustments to our policy stance. We continue to analyze the incoming data, the evolving outlook, and the balance of risks. We understand that elevated levels of unemployment or inflation can be damaging and painful for communities, families, and businesses. We will continue to do everything we can to achieve our maximumemployment and price-stability goals.

Thank you. I look forward to your questions.",Jerome H Powell
https://www.bis.org/review/r250417e.htm,Tiff Macklem: Release of the Monetary Policy Report,"Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada and Ms Carolyn Rogers, Senior Deputy Governor of the Bank of Canada, at the press conference following the monetary policy decision, Ottawa, Ontario, 16 April 2025.",2025-04-16 00:00:00,"## Tiff Macklem: Release of the Monetary Policy Report

Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada and Ms Carolyn Rogers, Senior Deputy Governor of the Bank of Canada, at the press conference following the monetary policy decision, Ottawa, Ontario, 16 April 2025.

* * *

Good morning. I'm pleased to be here with Senior Deputy Governor Carolyn Rogers to discuss today's policy announcement and our April (MPR). Monetary Policy Report

Today, Governing Council maintained the policy interest rate at 2.75% after seven consecutive rate cuts.

The Canadian economy ended 2024 in good shape. Inflation had been close to the 2% target since last summer. The substantial interest rate reductions since last spring had boosted household spending, economic growth had picked up and many businesses told us the economy had renewed momentum.

Since then, the dramatic protectionist shift in US trade policy and the chaotic delivery have increased uncertainty, roiled financial markets, diminished global growth prospects and raised inflation expectations.

The path for US trade policy remains highly unpredictable. There is also considerable uncertainty about the impacts of a trade war on our economy.

At our monetary policy decisions in both January and March, Governing Council reduced the policy interest rate a further 25 basis points as threats of higher US tariffs intensified.

A lot has happened since our March decision five weeks ago. But the future is no clearer. We still do not know what tariffs will be imposed, whether they'll be reduced or escalated, or how long all of this will last.

At this meeting, we decided to hold our policy rate unchanged as we gain more information about both the path forward for US tariffs and their impacts.

Monetary policy cannot resolve trade uncertainty or offset the impacts of a trade war. What we can and must do is ensure that Canadians continue to have confidence in price stability.

Our focus will be on assessing the downward pressure on inflation from a weaker economy and the upward pressure from higher costs. We will support economic growth while ensuring inflation remains well controlled.

Faced with pervasive uncertainty, Governing Council will proceed carefully, with particular attention to the risks. That means being less forward-looking than usual until the situation is clearer. It also means we are prepared to act decisively if incoming information points clearly in one direction.

Let me now turn to what we're seeing in the Canadian economy.

Incoming data are increasingly pointing to a considerable slowing in business investment and household spending. After expanding 5.6% in the fourth quarter of 2024, final domestic demand is expected to be roughly flat in the first quarter of 2025. Supported by a pull-forward in exports to get ahead of tariffs, GDP growth in the first quarter is forecast to be about 1.8%. But with exports expected to decline, secondquarter growth will be much weaker.

In the labour market, job growth was picking up at the end of last year, but trade tensions are disrupting this recovery. Employment was flat in February, down in March, and many businesses report they are scaling back their hiring plans.

Inflation in Canada has risen from 1.8% at the time of the January Report to 2.3% in March, reflecting the end of the GST/HST holiday and some rebound in goods price inflation. Elevated shelter price inflation continues to ease but goods price inflation rose more than shelter price inflation came down. The prices for imported goods have been boosted by the past depreciation of the Canadian dollar. Some businesses have also said suppliers are proactively raising prices in anticipation of future tariffs. Near-term inflation expectations have also risen because households and businesses expect tariffs will raise prices.

The very near-term outlook for inflation is relatively clear. The elimination of the consumer carbon tax on April 1 will reduce CPI inflation by about 0.7 percentage points for one year. Lower global oil prices will also pull inflation down, so total CPI inflation is expected to be about 1‰% in April.

Looking beyond the very near term, what happens to the Canadian economy and inflation depends critically on US trade policy, which remains highly unpredictable. Given this uncertainty, point forecasts for economic growth and inflation are of little use as a guide to anything. So in this MPR, we instead present two illustrative scenarios that span a wide range of possible paths for US trade policy. In the report, we call these scenarios 1 and 2.

In Scenario 1, we assume most of the new tariffs get negotiated away, but the process is unpredictable, and businesses and households remain cautious. GDP growth in this scenario stalls in the second quarter, then expands only moderately. Inflation drops below the 2% target for the rest of 2025 and into 2026, both because of the end of the consumer carbon tax and a weak economy.

In Scenario 2, we assume a long-lasting global trade war. The economic consequences are severe. Canada's GDP contracts in the second quarter and the economy is in recession for a year. Growth gradually returns in 2026 but remains soft through 2027 as US tariffs permanently reduce Canada's potential output and lower our standard of living. Inflation rises above 3% in mid-2026 as tariffs, countermeasures and shifts in supply chains raise costs, pushing up many prices. Inflation then eases as weak demand limits ongoing inflationary pressures.

To be clear, these are only two of many possible scenarios, and even these do not span the possible outcomes.

Governing Council agreed that where US trade policy is relative to scenarios 1 and 2 is a moving target. The April 2 announcement put the situation closer to Scenario 2, but the partial rollback on April 9 and new exemptions in recent days have moved trade policy back towards the middle of the two scenarios. We don't know what's coming next, and US policy could well move back and forth before the situation is clearer.

As we considered monetary policy, we used these two scenarios to reflect the uncertainty about US trade policy. We also considered risks related to the impacts of tariffs-these could be smaller and slower, or bigger and faster than captured in the scenarios.

What happens with inflation will depend importantly on what happens with tariffs. And if we find ourselves in a protracted trade war, we will see opposing pressures on inflation. A weaker economy will put downward pressure on inflation and higher costs from tariffs will put upward pressure. Both the uncertainty about tariffs and their opposing forces on inflation make forecasting inflation especially difficult at this time.

Moving forward, we will pay close attention to the risks and uncertainties to the Canadian economy and inflation. These include: the extent to which higher tariffs reduce demand for Canadian exports; how much this spills over into business investment, employment and household spending; how much and how quickly cost increases are passed on to consumer prices; and how inflation expectations evolve.

Let me wrap up.

Since January, we've had a seismic shift in US trade policy and a sharp increase in uncertainty. New US tariffs are now in place on key Canadian industries and on every other US trading partner. Financial markets in Canada and around the world have violently repriced and remain volatile. Households and businesses in Canada and beyond are braced for weaker growth and higher prices.

Monetary policy will ensure inflation remains well controlled and support economic growth as Canada confronts this unwanted trade war. As always, we will be guided by our monetary policy framework and our commitment to maintain price stability over time.

With that, the Senior Deputy Governor and I would be pleased to take your questions.",Tiff Macklem
https://www.bis.org/review/r250417d.htm,Dimitar Radev: Bulgaria's forthcoming entry into the euro area is not just an important step in its European integration,"Speech by Mr Dimitar Radev, Governor of the Bulgarian National Bank, at the conference ""Financial policy and competitiveness of the Bulgarian economy"", organised by the American Chamber of Commerce in Bulgaria and the British Bulgarian Chamber of Commerce, Sofia, 15 April 2025.",2025-04-15 00:00:00,"## Dimitar Radev: Bulgaria's forthcoming entry into the euro area is not just an important step in its European integration

Speech by Mr Dimitar Radev, Governor of the Bulgarian National Bank, at the conference ""Financial policy and competitiveness of the Bulgarian economy"", organised by the American Chamber of Commerce in Bulgaria and the British Bulgarian Chamber of Commerce, Sofia, 15 April 2025.

* * *

Ladies and Gentlemen,

I would like to thank the American and British Bulgarian Chamber of Commerce for organising this event and for inviting me to participate. Such events are a good platform for discussions, especially in times of uncertainty.

The uncertainty we are facing today is a huge challenge for the global economic order and global trade, but also a good opportunity to consolidate the European and, in perspective, the Euro-Atlantic agenda. It takes two things to achieve this consolidation: composure and common sense.

For Bulgaria, the global context is complemented by the forthcoming fundamental change of our monetary regime with lasting economic, financial and social, but also political consequences.

The current developments have many aspects that will be the subject of today's discussion. In my opening remarks, I will address three of them: (1) the effects on the Bulgarian economy of what many commentators define as a trade war; (2) Bulgaria's readiness in this global context to introduce the euro as its national currency; and (3) the macroeconomic outlook for the country.

## Effects of the change in customs tariffs

The magnitude and dynamics of the changes in customs tariffs since the beginning of this month have sharply increased the uncertainty in global financial markets and have considerably aggravated the outlook for the global economy.

What we, as a central bank, are trying to do is to assess the direct and indirect effects of these developments on our country. Overall, the direct effects are limited.

This conclusion is mainly based on the assessment of the main channel for possible impact, namely foreign trade.

The U.S. share of our total goods exports in 2024 was about 2.5%, or $1.2 billion. If we look at the added value movement of all Bulgarian exports, we will see that around 4% of these exports is consumed in the US - so it can be concluded that Bulgarian exports worth around $1.8 billion are potentially exposed to the new customs regime.

It is important to clarify that the trade balance in goods between Bulgaria and the United States, for 2024, was positive and amounted to about $154 million. This year, however, our trade balance is likely to turn negative, after taking into account the value of imports that constitute military equipment. For example, the value of the eight fighter aircraft that have already begun to arrive this year is $ 1.2 billion, and eight more such aircraft worth $1.3 billion are expected to arrive in 2027.

Therefore, generally, our trade exposure to carry-over effects of new tariffs is relatively limited.

However, more tangible could be the indirect effects of a possible redirection of global trade flows and a possible restructuring of supply chains. For small and open economies, such as ours, such transformations can be challenging, and at this stage the relevant effects are difficult to quantify due to ongoing changes in foreign trade policies.

The good news for Bulgaria is that in this complex global environment, the country's macroeconomic position is stable. Economic activity in Bulgaria is expected to remain in positive territory. The banking sector has robust indicators in terms of capital adequacy, liquidity, and profitability, and these indicators remain above the EU average. Also, the country's fiscal position in terms of debt-to-GDP is still one of the strongest in the EU. At the same time, we need to regain control over annual budgets, including by building up explicit and implicit buffers.

Of course, as a central bank, we will continue to monitor inflation developments very closely. The net effect of recent developments on inflation in Bulgaria is difficult to predict, even in terms of direction, as it depends on a number of interlinked factors, including changes in global supply chains and shifts in trade flows, effects on the euro exchange rate and commodity prices, changes in the behaviour of economic agents, and the monetary and fiscal policy responses of the major economic regions.

Many of these factors are expected to have a short-term upward impact on inflation. But there are also factors that influence in the opposite direction. In the period since 2 April, for example, due to the sharp deterioration of the global economic outlook, the international oil price has fallen well below the assumptions in our current forecast, which, with all other things being equal, is an external factor for lower inflation in Bulgaria over the short term.

The best development we are hoping for, of course, is that the European Union and the United States will reach an agreement, and the sooner the better, which would ease customs barriers and, at best, introduce zero tariffs.

## Readiness to adopt the euro

The final phase of Bulgaria's process of joining the euro area is running relatively smoothly and has the potential to become a counterpoint to the negative implications of global developments.

In terms of logistics and technical preparations, the BNB and the banking sector are fully prepared both to carry out the changeover to the euro and to operate in the euro area.

With the latest amendments to the Law on the BNB, made in March, the process of legal convergence has been completed.

As regards the nominal criteria, we have consistently fulfilled the price stability criterion since the beginning of this year. The 2024 budget has been implemented within a 3% deficit. In terms of currency stability, debt-to-GDP, and long-term interest rates, we have traditionally met these criteria, and with a significant positive margin.

These developments put the country in a very solid starting position to join the euro area. Especially in a context of global uncertainty, the integration into strong alliances, such as the euro area, becomes all the more important. These are profound and multilayered positive effects - both on competitiveness and on the country's medium- and long-term economic prospects.

One of the effects that we expect to see over the short term is better accessibility and lower cost of financing for both the public and private sectors. There are two reasons for this: the expected upgrade of Bulgaria's credit rating and the lowered minimum reserve requirements of banks.

More strategically, euro area membership also means greater price and economic stability, as well as greater security - factors of key importance, especially in a complicated geopolitical environment. All these elements would improve the attractiveness of Bulgaria as an investment destination and would create prerequisites for accelerated investment activity and a higher growth of potential GDP.

Therefore, Bulgaria's forthcoming entry into the euro area is not just an important step in its European integration - it is a strategic opportunity to enhance the country's competitiveness and long-term economic potential. Of course, the short- and long-term positive effects can fully materialise if we pursue sound macroeconomic policies, if we restore budgetary discipline, and if we implement the long-delayed structural reforms aimed at improving human capital, innovation and the institutional environment.

## Macroeconomic forecast

Because of the factors described above, and, in practice, the impossibility of quantifying them precisely at this stage, our current macroeconomic forecast is subject to a greater than usual degree of uncertainty.

The baseline scenario forecasts that real GDP growth will again remain resilient this year and will be 2.8%. In 2026 we expect a temporary slowdown to 2.2%, and in 2027 a renewed acceleration to 3.1%. The main drivers behind this growth will be private consumption, government investments, and net exports, with different contributions from year to year.

Private consumption is expected to remain strong at nearly 4% per year, supported by rising employment and higher real household incomes.

Investments will grow relatively strongly this year, influenced by military supplies, but will fall temporarily in 2026, before increasing in 2027, and this dynamics will also be influenced by the completion of projects funded by EU funds, including under the National Recovery and Resilience Plan.

As regards the external sector, we expect export growth to remain subdued this year due to elevated global uncertainty and the expected historically low growth in global trade, but also due to planned maintenance works at large industrial plants. These developments will very likely lead to a temporary build-up of inventories in the economy in the current year. Over the next two years, however, we expect Bulgaria's export growth to rebound.

With regard to inflation, we forecast it to reach 3.5% at the end of this year and average annual inflation to reach 3.8%. The main drivers of consumer price growth will be the prices of foodstuffs and services, and the prices of services will continue to be influenced by rising labour costs and strong consumer demand. Next year, we expect inflation to slow down to around 2.5% and then remain at a similar level in 2027.

## Conclusion

We are observing a sharp increase in global financial market volatility and a significant deterioration in the outlook for the global economy. The good scenario for us to work on is to turn this difficult period into a catalyst not for demolition, but for consolidation of the European and, in perspective, the Euro-Atlantic project.

For Bulgaria, the final stage of euro area accession and the effective membership have the huge potential to counteract negative global scenarios. This rightly makes the euro area the main political, economic and financial priority of today.

Looking ahead, we expect that economic activity in Bulgaria during this year and over the next two years, despite the uncertainty and the divergent influence of individual factors, will remain in positive territory.",Dimitar Radev
https://www.bis.org/review/r250417b.htm,Jorgovanka Tabaković: Navigating industrial policy,"Opening speech by Dr Jorgovanka Tabaković, Governor of the National Bank of Serbia, at the presentation of the European Bank for Reconstruction and Development's Transition Report, Belgrade, 26 March 2025.",2025-03-26 00:00:00,"## Jorgovanka Tabakovi: Navigating industrial policy

Opening speech by Dr Jorgovanka Tabakovi, Governor of the National Bank of Serbia, at the presentation of the European Bank for Reconstruction and Development's Transition Report, Belgrade, 26 March 2025.

* * *

## Good day to you all!

Before we entered the conference room, we had a brief meeting, where we arrived at a general conclusion that we want to share with you: all the traditions that mark institutions and nations carry a special message. Our new friend Mr Cevat Aksoy, and my Jelena, who is in the audience and is from Kosovo and Metohija, particularly motivated us to talk about the customs from our regions. We connected this with the tradition of presenting the Transition Report at the National Bank of Serbia, which has continued since 2007, just as we continue all good traditions. Here, I see many dear faces that remind me that good people endure and that good customs should endure, and I am very happy that these good old customs are enriching people. Our cooperation with the European Bank for Reconstruction and Development continues as well.

You all know that the National Bank of Serbia is not the organiser of this event. It is the European Bank for Reconstruction and Development, which has been working on this Report for decades, and we are the hosts.

I would like to welcome the attending EBRD representatives - Mr Colangeli whom you all know very well and who will speak about the EBRD's activities in Serbia. I also welcome Mr Sanfey who is in charge of economic strategy and policies and will give us an overview of economic developments. With us here today is also Mr Aksoy, my dear Cevat, to whom I said that I decode people by their smile, and he has passed all qualifications and filters not only because of the exceptional biography he has managed to build in such a short time and at such a young age, but also because of the smile he has. A smile that speaks of knowledge and of a person, and I believe you will see this for yourselves too. He will present the findings of the Transition Report 2024-2025 themed: ""Navigating industrial policy"".

## Dear colleagues,

First, I will give you the conclusion:

- industrial policies can be a powerful tool for navigating economic growth and development,
- which is why they must be carefully designed and implemented.

Once present in large and developed economies, industrial policies are today increasingly present in emerging economies as well. They change to reflect global challenges, such as the green and technological transition, and also to align with risks

associated with mounting geopolitical tensions, rising protectionism in the world and global market fragmentation. These are challenges that require a strategic restructuring of economies.

It is a fact that since the coronavirus pandemic, governments have actively intervened in economic flows. Many instruments are used, such as subsidies, tax breaks and public investments, focused on strategically important sectors, including renewable energy sources, digital technology and artificial intelligence.

Today, I will not talk about the fact that the so-called great powers are using a number of other instruments in their quest for technological and economic dominance. Instead, I shall present several facts about where Serbia is against the backdrop of new industrial policy and structural reforms.

I shall begin by acknowledging that Serbia's new industrial policy aims to encourage structural changes in industry, with an emphasis on the production of goods and services with added value, modernisation, integration into global value chains and developing a knowledge-based economy.

The policies pursued and implemented are in the function of that objective.

Serbia pays special attention to digitalisation and automatization, as well as investment in technological development, factors that are indeed important for increasing the productivity and competitiveness of our economy.

These objectives are part of the investment programme ""Leap into the Future - Serbia Expo 2027"", therefore we always underline this, and I shall say it here again, that the entire programme goes much beyond the scope of the international exhibition. Infrastructure projects within the programme will have direct and indirect positive effects on economic growth in the long term as well.

As one of its priorities, the government has set the construction of technological parks and start-up centres in all big regional centres, as well as business incubators connecting the academic and business communities, as an example of developing a knowledge-based economy.

Next, growing demand for energy implies an increase in production capacity and energy sector reform. Adjustments are also required in the domain of energy transition to climate neutrality and decarbonisation, which Serbia has already begun by adopting an integrated national energy and climate plan.

One of the topics in the Transition Report is regional inequalities and the importance of mitigating them. For Serbia, the report underlines that free economic zones are concentrated in less developed areas precisely with the aim of mitigating regional inequalities. By building good infrastructure, such as roads, railways, powerlines and internet, we made it possible to more easily channel investments and open factories in underdeveloped regions of Serbia. Such policy has helped reduce regional inequalities in income, as confirmed by data. For instance, in the last ten years, the number of employed persons in the regions of South and Eastern Serbia increased by 50,000, and in Central and Western Serbia by around 66,000.

Support for the operations of micro-, small and medium-sized enterprises remains a priority. In Serbia, the Ministry of Economy has numerous programmes aimed at fostering entrepreneurship, promoting innovation, and supporting exports. Also, the digitalisation of public administration is a significant step towards saving time and enhancing operational efficiency for enterprises.

However, I would like to reiterate that for the sustained growth and development of any economy and society, including ours, stability and predictability of doing business are crucial. A favourable business climate, alongside political, macroeconomic and financial stability, is an essential prerequisite for further investment growth and, consequently, the creation of new jobs.

In Serbia, we have created such an environment, as evidenced by the fact that in October last year, we officially gained an investment-grade credit rating! Congratulations to all!

This historic achievement is the result of the collaborative efforts of the President, the Government of the Republic of Serbia and the National Bank of Serbia, and it belongs to all our citizens. I will take this opportunity to share with you the information that J.P. Morgan has announced a rebalancing of the portfolio of bonds that make up their indices, which will be implemented on 31 March. It has been announced that our new 10.5Y dinar bonds will be included in the J.P. Morgan index from that date on, making them the fifth dinar-denominated security to be included in the index. We are proud of this because it means we haven't stopped and continue to move forward.

I would like to highlight that our GDP growth of 3.9% in 2024 was among the highest in Europe, driven by fixed investments and private consumption. The investment growth was supported by record corporate profitability, robust FDI inflows and government capital investment. The rise in private consumption was fuelled by further increases in employment and real disposable income of the population.

In 2024, the unemployment rate dropped to a historic low of 8.6%, accompanied by real wage growth of around 9%.

Year after year, Serbia has attracted increasing levels of FDI, primarily in the manufacturing sector, with a record inflow of EUR 5.2 billion last year.

Despite the challenging environment, we have maintained the relative stability of the exchange rate of the dinar against the euro, which remains one of the key pillars of overall stability in the country.

We have also ensured a record-high level of FX reserves,  exceeding EUR 29 billion at the end of last year, which is 120% higher than pre-pandemic levels.

Our gold reserves have also reached record-high levels, with their value now more than seven times higher than in July 2012. This confirms the soundness of our decision to invest in gold, which traditionally serves as a safe-haven asset, particularly in times of uncertainty.

These are just some of the results we have achieved in an exceptionally challenging environment, demonstrating that Serbia has built strong buffers to defend against numerous external shocks, which are anything but few. While we cannot influence the policies and decisions of major global powers that affect us all, either directly or indirectly, we must collectively support and create opportunities for our development.

Ladies and gentlemen, esteemed colleagues,

Reducing inequality is not and cannot be merely a phrase that sounds good. Instead of the principle of we said, I advocate for and implement the principle of we did. Even when it is not our legal obligation, it is our moral duty. Personally, I believe that the best way to contribute to reducing all forms of inequality is by maintaining the stability of the country, which is not only a prerequisite for reducing inequality, but also for growth in general. Every potentially lost opportunity for growth means additional time to return to the growth trajectory we have established, with rates above 4%, and it also means moving further away from reducing regional inequalities, which is an important goal for policymakers.

Let us not forget that obtaining an investment-grade credit rating, which is an important element for further growth, is the result of sound political and economic decisions in the country, as the two are inseparable. The continuity of political stability is an essential prerequisite for the substantial and far-from-easy structural reforms that develop the society of which we are a part.

We must preserve stability in a competitive global environment rife with challenges, where changes in all areas of life and work are occurring faster than ever. Without stability, even the best industrial policy will not yield sustainable results!

Thank you for your attention and I apologise for speaking for so long. I rarely appear in public, but I never miss the Kopaonik Business Forum because of my friend Mr Vlahovi. I also rarely attend conferences, guided by relationships built over decades, just as I am here today thanks to the good relationships, though often challenging, with the European Bank for Reconstruction and Development. But in the end, we are always together and always victorious. Today, I shared the good news with Mr Colangeli that we gave a positive opinion yesterday for a joint project that will be implemented in Serbia.

Mr Colangeli, the floor is yours.",Jorgovanka Tabaković
https://www.bis.org/review/r250417c.htm,Jorgovanka Tabaković: Gender equality in financial institutions – the case of the National Bank of Serbia,"Video address by Dr Jorgovanka Tabaković, Governor of the National Bank of Serbia, at the Official Monetary and Financial Institutions Forum's (OMFIF) Live Gender Balance Index Launch 2025, Belgrade, 16 April 2025.",2025-04-16 00:00:00,"## Jorgovanka Tabakovi: Gender equality in financial institutions - the case of the National Bank of Serbia

Video address by Dr Jorgovanka Tabakovi, Governor of the National Bank of Serbia, at the Official Monetary and Financial Institutions Forum's (OMFIF) Live Gender Balance Index Launch 2025, Belgrade, 16 April 2025.

* * *

Dear colleagues,

A man can live without a woman, but without women, there is no future!

It was seven years ago that I gave my speech at the conference on the importance of women and gender equality organised by the OMFIF.

I was invited to London by my friend Mr David Marsh, Chairman and Co-founder of OMFIF.

I believe that the main conclusion of the 2025 Gender Balance Index is the same as it was back in 2018 - central banking is dominated by male governors.

But I also trust that we do see some positive changes, and that my National Bank of Serbia is certainly contributing to this.

## Dear colleagues,

Seven years ago in London, I talked about women and their role in society today. The conclusions that were valid then are still valid today! I asked all of us - why is the choice always EITHER/OR, black or white, career or motherhood, my way or no way? Career or motherhood? How did we sacrifice family to service activities? Instead of solidarity within the home, within family and across generations, we now have paid services - childcare and the care of the elderly. We have lonely individuals in a race for individuality and recognition who have lost all measure, including a clear goal they want to achieve. However- Not all relationships are those of purchase and sale and not everything is for sale. It is therefore necessary to preserve humanity, self-respect and the respect for others. Balance is the key to success.

That being said, I will now speak about my experience as the Governor of the National Bank of Serbia, currently serving my third term in office.

I will start with the opinion that I share freely, always and everywhere - I strongly disagree with any kinds of divides. I don't believe in quotas as I know that all of us women at the head of our central banks are on this function because of our achievements, not because of our gender. I believe in the power of diversity!

Also, just as I believe that it is wrong not to promote someone only because that person is a woman, I also believe that it is equally wrong to give someone a chance only because that person is a woman. Whether you're a woman or a man, the job is the same.

Now, I will turn my focus to the gender statistics in the National Bank of Serbia.

I will start with the conclusion that the NBS is an example of a women-dominated central bank. For me, this is victory, because it did not come as a consequence of gender quotas. It was a natural outcome of equal opportunities where women proved to be equally, if not more efficient than men.

Let's look at the numbers now.

- The number of women at the National Bank of Serbia has been on the rise since 2013. Today women make up over 57% of the total number of employees.
- Women hold the positions of the Governor and of the Vice-Governors, making up 60% of the Executive Board.
- Close to 59% of the total number of managers are women, which is up by eight percentage points compared to end-2013.
- In 2025, women were more active in professional development and training activities.
- There is also equality in terms of the average level of job coefficients for both genders - and this applies to both employees and the managing staff.
- In line with the Law on Gender Equality, we introduced the Risk Management Plan for Violations of the Gender Equality Principle.

Furthermore, we created a good working environment, and our colleagues are free to present their ideas, to be seen and heard knowing that their word matters and counts. My colleagues are experts with huge experience regardless of their gender, willing to do their best and grow together with the institution. We offer working from home and flexitime that proved as important support to women to better balance their work and family obligations. I dare say that we have built an institution with true equality in terms of equal rights, equal chances and respect for everyone.

## Dear colleagues,

In this last segment, and after spending 13 years at the helm of the National Bank of Serbia, allow me to put forth several conclusions regarding gender equality. And I have no doubt that we all share the same view!

1. First, regulations in many countries are gender supportive. There are plenty opportunities, but we have to recognise and use them. The system cannot do that on our behalf. Even better - we ourselves have to create opportunities.
2. Second, gender is only one of the many dimensions of diversity that we must all value.
3. Third, society should not make a simple choice between women and men, rather we should always try to support each other's best.
4. Fourth, the world should empower women more, but opportunities should be given to those who have the right knowledge and skills.
5. Fifth - society can reach its full potential only if we are open and if we use all talent and diversity. Institutions cannot be at their best if hard-working and talented people cannot imagine themselves in senior leadership positions.

Through generations, a lot has been done to raise social awareness about the fact that there are no special women's rights, but the obligation of society and each individual to consistently respect the BASIC human rights.

## To conclude.

Being a woman is amazing. Being a mother - even more so. I testify to that with my three grown-up children, two daughters and a son; good persons and educated individuals, whom I am very proud of and whom I respect. But being a successful woman, a satisfied woman and a mother, setting an example that the two can coexist in one person - that is the best way to motivate others.

Therefore, each of us can contribute by motivating and inspiring others with our own experience. For that, we do not need regulations. As for central banks, the best way to contribute is by delivering stability, as prescribed by the law.",Jorgovanka Tabaković
https://www.bis.org/review/r250417a.htm,Darryl Chan: Opening remarks - International Conference on Generative Artificial Intelligence,"Opening remarks by Mr Darryl Chan, Deputy Chief Executive of the Hong Kong Monetary Authority, at the International Conference on Generative Artificial Intelligence, co-organised by the Hong Kong Monetary Authority (HKMA), the Academy of Finance (AoF), the Hong Kong Institute for Monetary and Financial Research (HKIMR) and the Centre for Economic Policy Research (CEPR), Hong Kong, 10 April 2025.",2025-04-10 00:00:00,"## Darryl Chan: Opening remarks - International Conference on Generative Artificial Intelligence

Opening remarks by Mr Darryl Chan, Deputy Chief Executive of the Hong Kong Monetary Authority, at the International Conference on Generative Artificial Intelligence, co-organised by the Hong Kong Monetary Authority (HKMA), the Academy of Finance (AoF), the Hong Kong Institute for Monetary and Financial Research (HKIMR) and the Centre for Economic Policy Research (CEPR), Hong Kong, 10 April 2025.

* * *

President Weder di Mauro, distinguished guests, ladies and gentlemen,

Good morning, and a very warm welcome to you all for joining the International Conference on Generative Artificial Intelligence. On behalf of the Hong Kong Monetary Authority (HKMA), the Academy of Finance (AoF) and the Hong Kong Institute for Monetary and Financial Research (HKIMR), I would like to thank the Centre for Economic Policy Research for co-organising this conference.  It is also my great pleasure to address such a distinguished audience of policy makers, industry leaders, academics, and innovators here in Hong Kong.  Today's conference is a timely and important forum as we navigate the ongoing transformation that artificial intelligence (AI) brings to the financial sector and the broader economy.

Over the years, artificial intelligence has evolved from a concept of science fiction to a fundamental tool in our everyday lives. While traditional predictive AI has been instrumental in data processing and automating repetitive tasks, Generative Artificial Intelligence (GenA.I.) goes further.  It possesses the remarkable ability to generate novel, original content in the form of text, audio and graphics - an ability once thought to be an exclusive domain of human cognition, offering enormous opportunities for the financial sector and beyond.

GenA.I. could assist humans in doing their jobs, or provide services in a much more efficient way. It has the potential to streamline work processes - from writing codes, analysing vast datasets to automating the drafting of reports or even speeches (not this one though).  It can enhance customer support experiences by providing timely and personalised responses to complex enquiries.

Just yesterday (9 April 2025), the HKIMR released a report titled ""Financial Services in . The report notes that 75% the Era of Generative AI: Facilitating Responsible Adoption"" of the 55 surveyed financial institutions in Hong Kong have already implemented or are piloting and designing GenA.I. use cases.  The adoption rate is projected to rise to 87% in the coming few years, reflecting the strong momentum in adoption.

Despite the numerous benefits that are already very evident, we are probably just seeing the beginning of realising the potential of GenA.I. Across the globe, there is a race among AI service providers to develop increasingly sophisticated AI systems, such as Agentic AI or AI-powered agents, that can function autonomously with minimal to no human intervention.

In parallel, recent developments in open-source AI models have made the delivery of AI services more cost-effective and accessible, holding the promise of unlocking wider access to AI innovation for smaller institutions, start-ups, and individuals.

Yet, a balanced approach is required to promote GenA.I. developments. In Hong Kong, the Government issued last year a policy statement on the responsible application of AI in the financial market.  The statement clearly sets out our policy stance, which can be summarised as a dual-track approach: promoting AI adoption in the financial services sector while addressing potential challenges such as cyber security and data privacy.

At the HKMA, we view technology as an enabler of progress. Our role as a central bank and regulator is to ensure that the financial system remains resilient as we embrace innovation.  GenA.I. exemplifies why this balance is so crucial.  On the one hand, its potential for transformation is boundless; on the other, it brings challenges - challenges that are both novel and significant, forcing us to think deeply, act responsibly, and collaborate effectively.

When it comes to the responsible adoption of GenA.I., we ought to recognise that many different stakeholders are involved. In the following few minutes, I will try to address this from the perspectives of three distinct groups: individuals, financial institutions, and central banks.

Let me start with individual users. GenA.I. tools have become remarkably powerful and accessible to individual users.  An ever increasing number of platforms and software are offering user-friendly interfaces that cater to a wide variety of applications.  Which reminds us that we have to be mindful of over-reliance on GenA.I.

True, GenA.I. has substantially reduced the cost of generating new content, regardless of quality or authenticity. It is getting more challenging to distinguish fact from fiction, much like how ""bad money"" can drive out the good.  What is even more concerning is the growing trend of social media users resorting to GenA.I. tools as fact-checkers for online content, which could fuel further misinformation.

To harness the power of GenA.I. as a tool, we must treat it as such and avoid using a tool to replace our judgement. ""Human-in-the-loop"" is the necessary safeguard depending on the risks associated with a use case.  More importantly, we should retain the determination and ability to learn and grow while utilising GenA.I.  Which explains why the HKMA as a regulator has emphasised the need for banks to set a clear future direction for manpower development to support business priorities, and the need to draw up effective strategies that address talent needs, supported by the deployment of sufficient financial resources to staff reskilling and upskilling.

Let me turn to financial institutions, which have started to explore the use of GenA.I. Most of these institutions are still in the early stages of adoption, with a primary focus on improving operational efficiency through, for example, internal chatbots and coding.  The potential of GenA.I. to perform human-like tasks makes it an attractive candidate for wider adoption in customer-facing functions, such as customer chatbots, customised product development and delivery, targeted sales and marketing, and robo-

advisors in wealth management and insurance.  As financial institutions use more GenA. I. tools in customer-facing activities, the implications on consumer protection need to be properly addressed.

Trust must be the very foundation of the financial sector. The adoption of GenA.I. should not compromise the customer-centric culture that underpins this trust.  In support of the responsible adoption of GenA.I. in the banking sector, the HKMA has provided guidance to ensure appropriate safeguards for consumer protection.  The guidance aims to uphold governance and accountability, fairness, transparency and disclosure, as well as data privacy and protection.  Specifically, during the early stage of deploying GenA.I. applications, banks are expected to adopt the ""human-in-the-loop"" approach. Customers should be given the option to ""opt out"" and request human intervention on decisions generated by GenA.I.

These priorities echo the findings of the latest HKIMR report I just mentioned, which highlights the importance of transparency, data privacy, and governance in ensuring responsible GenA.I. adoption.

We at the HKMA are building a vibrant ecosystem for AI Innovation in Hong Kong's financial sector. Just as AI models need to be trained, so do the financial institutions.  For this purpose, the HKMA has introduced a GenA.I. Sandbox, designed to support the development, testing and pilot of innovative AI and GenA.I.-based solutions in the banking sector.  The sandbox is our joint effort with the Cyberport, providing banks with targeted supervisory feedback and computing power.  It enables banks to test and refine their GenA.I. applications in a risk-controlled environment, while allowing us as a regulator to provide guidance and share good practices on the adoption of GenA.I.

The HKMA has also adopted GenA.I. to improve our efficiency in performing the central banking and regulator functions. To gain first-hand experiences, we introduced our own GenA.I. tools last year, carefully designed to fully observe safety, confidentiality, and privacy. These tools help our teams summarise reports, draft documents, and analyse trends, all within a framework that prioritises data protection.  We complement these tools with regular trainings to equip our staff with the skills to critically assess outputs, mitigate risks, and apply AI ethically.  Our goal is not to replace the human touch but to augment it, using AI as a ""digital intern"" to enhance efficiency while ensuring that human judgment remains central to decision-making.

Ladies and gentlemen, as we reflect on the potential of GenA.I. and look to the future, we need to consider not just what it can do, but what it should do. Technology is not an end in itself - it is a means to an end. GenA.I. has the power to create a more inclusive, efficient, and resilient financial system, but only if it is designed with purpose and responsibility.  As we stand on the cusp of this new frontier, let us remember that the ultimate potential of AI lies not in its algorithms, but in how we choose to use it, and what outcome we intend it to deliver.

This profound responsibility to shape AI's trajectory makes collaboration not just a priority, but a necessity. The challenges posed by GenA.I. cannot be addressed in isolation; it requires collaboration, not just among central banks and financial institutions, but across industries, technology firms, and the academia.

Today's discussions will provide a great occasion for us to exchange ideas, share insights, and explore new partnerships. Collectively, we can ensure that GenA.I. is not just a technological breakthrough, but a force for good.

Thank you, and I wish you a productive and inspiring conference.",Darryl Chan
https://www.bis.org/review/r250416a.htm,Christopher J Waller: A tale of two outlooks,"Speech by Mr Christopher J Waller, Member of the Board of Governors of the Federal Reserve System, at the Certified Financial Analysts Society of St Louis, St Louis, Missouri, 14 April 2025.",2025-04-14 00:00:00,"## Christopher J Waller: A tale of two outlooks

Speech by Mr Christopher J Waller, Member of the Board of Governors of the Federal Reserve System, at the Certified Financial Analysts Society of St Louis, St Louis, Missouri, 14 April 2025.

* * *

Thank you, Jack and thank you to the CFA of St. Louis for the opportunity to speak to you today. It's a pleasure to be back home here in the city where I worked for nearly 12 years before becoming a Governor at the Federal Reserve Board.

I am here to discuss my favorite topic, which is the outlook for the U.S. economy and the implications for monetary policy. 1   I speak publicly on the outlook every few weeks or so, and usually the most exciting thing to happen in between these appearances is a monthly data release from the Bureau of Labor Statistics or the Commerce Department.

This time, of course, is different. The tariff increases announced April 2 were dramatically larger than I anticipated, adding on to other tariffs announced in March, along with retaliatory actions from some countries. Combining all of these actions to date, it is clear that tariffs this large and broadly applied could significantly affect the economy and the Federal Open Market Committee's (FOMC) pursuit of our economic objectives. Given that there is still so much uncertainty about how trade policy will play out and how businesses and households will respond, I have struggled, like many others I have talked with, to fit these varying possibilities into a single coherent view of the outlook.

It is an understatement to say that financial markets did not respond well to the April 2 tariff announcement. Then last Wednesday, a substantial proportion of the newest tariffs were suspended for 90 days pending negotiations to lower them, reportedly in exchange for lower barriers to U.S. exporters. This left in place a 10 percent tariff on all imports, the pre-existing tariffs on some products and countries, and a sharp increase in import and export tariffs on China trade. More sector-specific tariffs are promised, and much uncertainty remains about whether tariff negotiations will lead to deals or whether the April 2 tariffs will be implemented in 90 days.

Uncertainty about trade or fiscal policy decisions is precisely why you won't hear me talking about such actions very often. It is why I avoided speaking in detail about proposed tariffs earlier this year. I do not judge such policy actions. But I must base my policy decisions on the actions taken. Tariffs are the elephant in the room, so let's talk about them.

As I said a moment ago, I struggled after April 2 to come up with a single coherent view of how the tariff increases would affect my outlook and views on monetary policy. That difficulty did not end after the 90-day tariff suspensions announced on April 9, which, if anything, may have widened the range of possible outcomes and effects and made the timing even less certain. Friday's exemptions for some tariffs on some electronics imports from China only complicated the picture. Considering all this uncertainty, it is impossible to forecast how the economy will evolve very far into the future. In such

circumstances, I tend to think in terms of scenarios and managing the associated risks. So, for the balance of my remarks, I will try to lay out some possible tariff scenarios and how they will affect my thinking about the appropriate path for monetary policy in the coming months.

But before I get to this exercise, it is essential to understand how the economy was faring leading up to this big change in trade policy. As I will detail, in my view, the economy was on a fairly solid footing in the first quarter of 2025. While the evidence suggests real gross domestic product (GDP) growth slowed from a 2.4 percent annual pace in the fourth quarter, I believe the economy did grow modestly in the first quarter and that growth would have been stronger except for some special factors that are unlikely to continue.

A variety of ""soft"" data-reports from business contacts and a range of consumer and business surveys-hinted at a substantial slowdown. The ""hard"" data, which includes actual measurement and estimates of aggregate economic conditions, have tended to show that the economy grew modestly. While monthly readings through February show consumer spending slowed from the fourth quarter, that may have reflected unusual seasonal factors that weighed on spending in the first two months of this year, including harsh winter weather. We will get March retail sales later this week, and that should provide some helpful evidence of the pace of consumer spending. Another factor counted against measured GDP growth in the first quarter was a surge in imports, likely an anticipatory effect caused by the prospect of the new tariffs, which probably won't continue. In the labor market, employment grew 228,000 in March, exceeding expectations, and job openings through February indicated that the labor market remained roughly in balance. In light of the continuing strength of the labor market and factors that probably temporarily lowered GDP growth, I think the U.S. economy was in good shape in the first quarter.

Inflation has had a bumpy path down toward our 2 percent goal, and progress seemed to stall last year. But after some high inflation readings in January and February, we got some encouraging news last Thursday on consumer price index (CPI) inflation. Headline CPI prices fell 0.1 percent in March, bringing the 12-month measure of CPI inflation down to 2.4 percent. A drop in energy prices-which has continued so far this month-was a big reason for the step-down. Core CPI inflation, which excludes volatile energy and food prices and is a good guide to future inflation, rose just a tenth of a percent last month, which brought the 12-month change down to 2.8 percent, its lowest 12-month reading since March 2021.

When CPI data is supplemented with the producer price data that we received last week, we estimate that the price index for personal consumption expenditures (PCE), the FOMC's preferred inflation gauge, was roughly unchanged in March bringing the 12month change to 2.3 percent. Core PCE prices are estimated to have risen less than 0.1 percent for the month, leaving core PCE inflation at 2.7 percent over the previous 12 months. Both measures of total and core PCE inflation were above the FOMC's 2 percent goal.

Looking across the first-quarter data, I see the economy growing modestly with a labor market that was still solid and inflation that was still too high but was making slow progress toward our goal of 2 percent.

Let me now return to tariffs and my scenarios. To level set the discussion of tariffs, as of December 2024, the effective average trade-weighted tariff for all imports into the United States was under 3 percent. Earlier this year, targeted tariffs brought the average to 10 percent. The April 2 tariffs would have pushed that to 25 percent or more. Even with the pause on implementing those tariffs, retaining the new 10 percent tariff on most imports and a tariff on Chinese imports of well over 100 percent, estimates are that the average effective tariff today is still around 25 percent. This estimate is rough, and we have seen that policy can change quickly, but the point is that even after the 90day pause, the current tariff rate is a sharp increase to a level that the United States has not experienced for at least a century.

The primary challenge in analyzing the economic effects of the tariff increases is the considerable uncertainty that remains about their size and permanence. So I have decided to focus on two scenarios for tariff policy when thinking about the economic response. One possibility is that they will remain very high and be long-lasting, near the current average of 25 percent or more, as part of a committed effort by the Administration to engineer a fundamental shift in the U.S. economy toward producing more goods domestically and reducing trade deficits. The second scenario is that the suspensions are the beginning of a concerted effort to negotiate reductions in foreign barriers faced by U.S. exporters that will result in the removal of most of the announced import tariffs, which would reduce the average tariff rate to around 10 percent. This latter scenario had been my base case up until March 1. While there is a range of possibilities that could combine these objectives for tariff policy, these two approaches would yield significantly different outcomes for the economy and monetary policy, so I would like to discuss them today as two separate scenarios.

In doing so, I am not here to judge the objectives for the tariff increases. I am a central banker, and, as I said earlier, that means I take fiscal and other policy decisions made by others as a given when setting monetary policy.

Before I summarize my two scenarios, let me emphasize that neither of them are forecasts and that I am employing scenarios as a way to frame my thinking about managing the risks of decision making when the outlook is as uncertain as it is. The ""large tariff"" scenario assumes that average tariffs around 25 percent will remain in place for some time. Let's assume they remain at that level until at least the end of 2027, which is the horizon for economic projections made by FOMC participants. In my view, keeping the large tariffs in place this long would be necessary if the primary goal is remaking the U.S. economy, which is now mostly services, into one that produces a larger share of the goods it consumes. Such a shift, if it is possible, would be a dramatic change for the United States and would surely take longer than three years.

In the second scenario, it is assumed that the primary goal would be to use the tariffs as leverage to negotiate reductions in trade barriers faced by U.S. exporters. In this case, while I would expect that the announced minimum 10 percent tariff on all goods from all countries would remain in place, I would also expect that substantially all other tariffs would be eliminated over time. I will call this the ""smaller tariff"" scenario.

Let me begin with the large tariff scenario and the implications for inflation. As I have noted in past speeches, the textbook view of tariffs is that they are a one-time increase

in prices and would not be expected to be a persistent source of inflationary pressure. 2 While the tariffs after April 9 were very large, I still believe they would have only a temporary effect on inflation.

Private sector forecasts expect tariff increases of this magnitude to increase inflation by 1-1/2 to 2 percentage points over the next year or so, which I think is a reasonable estimate. If underlying core PCE inflation were to continue at its estimated 12-month pace of 2.7 percent in March, that would mean inflation could reach a peak close to 5 percent on an annualized basis in coming months if businesses quickly and completely passed through the cost of the tariff. Even if the tariffs were only partially passed on to consumers, inflation could move up to around 4 percent. These outcomes would obviously be a reversal of the progress we have made on bringing inflation down over the past few years.

It will be important to watch inflation expectations and make sure they remain anchored during this process. Surveys of consumers have shown big increases in inflation expectations for this year. However, I tend to discount survey-based measures of inflation and prefer those based on the spread between nominal and inflation-indexed securities, since investors have more skin in the game than survey respondents. These market-based measures have not increased significantly, which implies market participants view tariffs as a one-time change to the price level. So I don't think expectations have become unanchored.

There are other factors that may limit the increase in inflation. I continue to believe that monetary policy is meaningfully restricting economic activity and hope that underlying inflation may moderate over the course of the year, separate from the tariff effects. Also, competitive forces, including the desire to hold on to customers, may induce businesses to pass along only a fraction of higher costs from tariffs. Finally, if the economy slows substantially, then weaker demand will put downward pressure on inflation after tariffs take effect.

In terms of output growth, with large tariff increases, I would expect the U.S. economy to slow significantly later this year and this slower pace to continue into next year. Higher prices from tariffs would reduce spending, and uncertainty about the pace of spending would deter business investment. I have heard this repeatedly from business contacts around the country-tariff uncertainty is freezing capital spending. Productivity growth, an important source of GDP increases in recent years, would slow as investment is allocated according to trade policy and not towards its most productive and profitable uses. A fall in productivity would likely lower estimates of the neutral policy rate, making the current policy rate more restrictive than it is currently. Any trade retaliation from U.S. trading partners would reduce U.S. exports, which would be a drag on growth. There is a long list of factors that can lower growth in this scenario.

Along with slower economic growth would come higher unemployment. With large tariffs remaining in place, I expect the unemployment rate, which was 4.2 percent in March, would rise by several tenths of a percentage point this year and approach 5 percent next year. Even as the economy has moderated over the past year, the unemployment rate has stayed remarkably stable and close to estimates of its long-

term rate-in other words, close to the FOMC's goal. But a verifiable fact about the unemployment rate, based on history, is that when it starts to rise, as I expect it would under this scenario, it often rises significantly.

In summary, under the large tariff scenario, economic growth is likely to slow to a crawl and significantly raise the unemployment rate. I do expect inflation to rise significantly, but if inflation expectations remain well anchored, I also expect inflation to return to a more moderate level in 2026. Inflation could rise starting in a few months and then move back down toward our target possibly as early as by the end of this year.

Yes, I am saying that I expect that elevated inflation would be temporary, and ""temporary"" is another word for ""transitory."" Despite the fact that the last surge of inflation beginning in 2021 lasted longer than I and other policymakers initially expected, my best judgment is that higher inflation from tariffs will be temporary. If this inflation is temporary, I can look through it and determine policy based on the underlying trend. I can hear the howls already that this must be a mistake given what happened in 2021 and 2022. But just because it didn't work out once does not mean you should never think that way again. Let me use a football analogy to characterize my thoughts. You are the Philadelphia Eagles and it is fourth down and a few inches from the goal line. You call for the Tush Push but fail to convert by running the ball. Since it didn't work out the way you expected, does that mean that you shouldn't call for the Tush Push the next time you face a similar situation? I don't think so. With the history of 2021 and 2022 still in my mind, I believe my analysis of the effect of tariffs is the right call, and I am going to stick with my best judgment.

While I expect the inflationary effects of higher tariffs to be temporary, their effects on output and employment could be longer-lasting and an important factor in determining the appropriate stance of monetary policy. If the slowdown is significant and even threatens a recession, then I would expect to favor cutting the FOMC's policy rate sooner, and to a greater extent than I had previously thought. In my February speech, I referred to this as the world of ""bad news"" rate cuts. With a rapidly slowing economy, even if inflation is running well above 2 percent, I expect the risk of recession would outweigh the risk of escalating inflation, especially if the effects of tariffs in raising inflation are expected to be short lived. 3

Let me now turn to the second scenario, in which tariffs are lower. In this case, I would expect the 10 percent across-the-board tariff to be the baseline for the average trade weighted tariff. Under this scenario the effect on inflation would be significantly smaller than if larger tariffs remained. Here, the peak effect on inflation could be around 3 percent on an annualized basis. Since it may take some time for tariff-related price increases to work their way through production chains, the peak may be lower but still dissipate slowly. As trade negotiations proceed, I would expect that expectations of future inflation would remain anchored and short-term measures could even fall over time, helping keep overall inflation in check.

At the same time, the fact that there is still an increase in tariffs means the smaller tariff scenario would surely have a negative effect on output and employment growth, but smaller than the larger tariff scenario. The new tariffs are hitting an economy in good

standing, which leaves me encouraged that households and businesses would continue to spend and hire during trade negotiations that lead to substantially reduced import tariffs and possibly remove barriers to U.S. exporters over time.

As a result of these limited effects on inflation and economic activity from steadily diminishing tariffs, I would support a limited monetary policy response. Anchored or even lower inflation expectations as the economy slows, combined with the view that smaller tariff effects are temporary, gives the FOMC room to adjust policy as progress on the underlying trend in inflation is revealed in price data. With the threat of a sharp slowdown or recession diminished, pressure to reduce rates based on falling demand would diminish also. That is, the policy response in this scenario could allow for more patience. The preemptive policy cuts we did last fall can allow us some time to wait and see if the hard data catch up to the soft data or vice versa and how much of the tariff will be passed through to the consumer. In such a scenario, the outlook for monetary policy might not look much different than it did before March 1. With a fairly small tariff effect on inflation, I would expect inflation to continue on its path down towards our 2 percent target. In this case, ""good news"" rate cuts are very much on the table in the latter half of this year.

Let me conclude with two essential points. The first is that the new tariff policy is one of the biggest shocks to affect the U.S. economy in many decades. The second is that the future of that policy, as well as its possible effects, is still highly uncertain. This makes the outlook also highly uncertain and demands that policymakers remain flexible in considering the wide range of outcomes. In the end, the United States is a dynamic, resilient capitalist system that responds well to shocks and always has. I suspect that will continue to be the case now.

1  The views expressed here are my own and are not necessarily those of my colleagues on the Federal Open Market Committee.

- 2  See Christopher J. Waller (2025), ""Disinflation Progress Uneven but Still on Track Rate Cuts on Track as Well,"" speech delivered at the University of New South Wales Macroeconomic Workshop, Sydney, New South Wales, Australia, February 17.
- 3  Recent research from the Federal Reserve Bank of Minneapolis shows that this action is the optimal monetary policy response in a standard macroeconomic model. See Javier Bianchi and Louphou Coulibaly ""The Optimal Monetary Policy Response to Tariffs"" Working Paper 810, Federal Reserve Bank of Minneapolis, March 7, 2025.",Christopher J Waller
https://www.bis.org/review/r250416b.htm,Lisa D Cook: 2025 distinguished Alumna award acceptance remarks,"Remarks by Ms Lisa D Cook, Member of the Board of Governors of the Federal Reserve System, at the Cal Alumni Club of Washington DC Annual Reception, Washington DC, 15 April 2025.",2025-04-15 00:00:00,"## Lisa D Cook: 2025 distinguished Alumna award acceptance remarks

Remarks by Ms Lisa D Cook, Member of the Board of Governors of the Federal Reserve System, at the Cal Alumni Club of Washington DC Annual Reception, Washington DC, 15 April 2025.

* * *

Thank you, Dr. Rogers, and go Bears!

Thank you to the Cal Alumni Club of Washington, D.C. for this honor. 1   It is humbling to be in the company of so many other accomplished Cal alumni. And it is especially meaningful to receive this award from a university that has already given me so much. I am eternally grateful for my time at Berkeley and in my economics Ph.D. program, because it was a transformative experience that shaped me not only as an economist, but more importantly as a person. Again, I am deeply grateful for this honor.

I know there is a lot going on in the news at the moment, so let me just start by saying that I do not plan to discuss policy or the current economic situation this evening. Instead, I want to keep the attention on the energetic and dedicated Cal alums here tonight and the wonderful university we all call home. I will talk about the way in which Berkeley profoundly influenced my thinking, which has served me well throughout my career, and will share a few memories from my time on campus.

I would love to see who we have here tonight. First, where are the econ majors? Who lived in the International House? Now, where are the recent alums, say those who graduated in the past 5 years? (Congratulations, welcome to Washington.) Who here has graduated since 2010? Who here is in my generation and graduated in the 90s or early 2000s? And do we have some true Cal legends among us that are celebrating 40 or more years as a Golden Bear this spring? (Let's give them a round of applause.)

No matter when you attended Cal or how long you have been away, I think we can all agree that Berkeley is a special place that stays in your heart. I grew up in the South, and by the time I arrived at Berkeley, I had the good fortune to have spent time living in Africa and Europe. Even with this experience, what immediately stood out to me was the campus's openness to many different cultures and ideas. And a clear way this was expressed, as I am sure you will recall, was through the abundance of delicious food. Berkeley was truly like heaven for this former founder of a cooking school. Better coffee and cuisine than anywhere else in the country. Dim sum everywhere, vegan and vegetarian options galore, and that sourdough at Great Harvest Bread. (You cannot blame a hungry grad student for stopping in for samples.) When I was there, Berkeley was at the forefront of the farm-to-table and healthy eating movements. I remember being in awe of the produce at Berkeley Bowl. They had five or six types of yams and sweet potatoes. I am from Georgia, and I had never seen so many yams!

The wonderful food served as a perfect canvas upon which to share ideas. Sometimes that was having dinner at each other's apartments, and sometimes it was slipping over to the cafeteria between Bechtel and Evans to have lunch with my friends in engineering and computer science. Shockingly, the Cal engineers had nicer facilities

than the econ students in Evans Hall. By the way, Evans Hall is described on Cal's own websites as a ""dark, closed-in design. . . spoiling the main east-west axis of the campus."" Ouch, but I told you, open to ideas! 2

From these lunches and many other conversations at Berkeley, I learned the value of exchanging ideas and the free disposal of ideas. The next idea will come; be unafraid to try new things. Do not be wedded to bad ideas. I learned the value of working in teams and acknowledging and leveraging everyone's varied scholarly and lived expertise. I learned the value of sharing and collaboration. This fosters the spirit of innovation that drives the Bay area. You can see why many of the greatest advancements in the past century have come from that region of the country, many directly from Cal alumni.

It was awe-inspiring to be surrounded by so many outstanding students and stellar faculty members from many disciplines. The work of Cal researchers has changed the world. I often wondered what inspired these great minds. Then one day, while traversing the always congested campus, I saw it-the real incentive for great minds: Nobel laureates received reserved parking spaces. All of you who have fought Bay Area traffic and Berkeley campus parking restrictions know that tops any prize you can receive in Sweden!

But seriously, I was extremely lucky to have an amazing group of professors and supporters at Cal. Barry Eichengreen was my dissertation adviser, and George Akerlof was an informal adviser who was just curious about economies undergoing market transitions. Janet Yellen and Laura Tyson were inspirations. They epitomized the commitment to public service that flows through the Berkley campus. When I arrived, Dr. Tyson had recently left to become chair of President Clinton's Council of Economic Advisers (CEA). Of course, Dr. Yellen would soon serve as chair of CEA as well as those of Fed chair and Treasury Secretary, the only person in history to hold all three positions. I had the mentorship and support of a whole bunch of Romers: Christina, David, and Paul. Christina would also serve as CEA Chair as we climbed out of the Global Financial Crisis

I arrived on campus in 1991 the very week the Soviet Union started breaking up and the Russian Soviet Socialist Republic became just Russia. This series of events gave the world an unfiltered view of a Russian economy blinking into the sunlight after decades of central planning and stagnation. I asked, what would happen next, and what could we learn from this historic event? I was desperate to explore those questions and to explore them with Greg Grossman. No one in the world knew more about the Soviet and Russian economies than he did.

However, he had other thoughts-namely, retirement. When I asked him to advise me, he was hesitant. So, he presented me with a challenge. He said the only way to study the Russian banking system and economy was to become fluent in Russian. If I could learn the language, he would delay his retirement to advise me, along with Eichengreen. I could tell he thought his retirement plans were safe with that lofty goal. A year and a half later, I walked into his office and struck up a conversation in Russian. I could see his heart sink. I had won the challenge. (What he did not know then was that I had already learned four other languages and was blessed with the ability to pick up new ones quickly.) Once he agreed to stay on, I was off and running.

I plowed through Tsarist-era statistical tables stashed in the depths of Bancroft Library. Later, I would travel to Moscow and collect data from the Russian Statistical Agency and eventually survey and conduct interviews with Russian bankers and entrepreneurs. I credit my Berkeley professors, particularly Barry, Greg, George, and Paul, for supporting the curiosity that took me to Moscow and many other distant places to do research and push forward the field of economics with new questions, data, and analysis. I especially thank them for asking tough, thoughtful questions that prepared me to approach any situation of heightened uncertainty and in which standard models and the conventional wisdom in economics may not apply.

One aspect that stood out about the Berkeley experience was that we defended our dissertations at the proposal stage rather than upon completion. This arrangement was not common at the time but is now becoming a more frequent practice at other schools. It sets up the dynamic of these experienced, knowledgeable professors looking for constructive ways to allow experimentation to ultimately bring ideas to fruition. It is this sense of collaboration and openness that I have taken from Berkeley and brought with me everywhere I have gone-through universities, banks, the government, and now at the Federal Reserve.

There is a special way you learn to think at Berkeley. I hope you continue to carry that spirit in all you do here in Washington and beyond.

Thank you again for this tremendous honor. I will always be a proud Cal alumna.

1  The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.

2 Evans Hall, University of California, Berkeley.",Lisa D Cook
https://www.bis.org/review/r250417i.htm,Christine Lagarde: ECB press conference - introductory statement,"Introductory statement by Ms Christine Lagarde, President of the European Central Bank, and Mr Luis de Guindos, Vice-President of the European Central Bank, Frankfurt am Main, 17 April 2025.",2025-04-17 00:00:00,"## Christine Lagarde: ECB press conference - introductory statement

Introductory statement by Ms Christine Lagarde, President of the European Central Bank, and Mr Luis de Guindos, Vice-President of the European Central Bank, Frankfurt am Main, 17 April 2025.

* * *

Good afternoon, the Vice-President and I welcome you to our press conference.

The Governing Council today decided to lower the three key ECB interest rates by 25 basis points. In particular, the decision to lower the deposit facility rate - the rate through which we steer the monetary policy stance - is based on our updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission.

The disinflation process is well on track. Inflation has continued to develop as staff expected, with both headline and core inflation declining in March. Services inflation has also eased markedly over recent months. Most measures of underlying inflation suggest that inflation will settle at around our two per cent medium-term target on a sustained basis. Wage growth is moderating, and profits are partially buffering the impact of still elevated wage growth on inflation. The euro area economy has been building up some resilience against global shocks, but the outlook for growth has deteriorated owing to rising trade tensions. Increased uncertainty is likely to reduce confidence among households and firms, and the adverse and volatile market response to the trade tensions is likely to have a tightening impact on financing conditions. These factors may further weigh on the economic outlook for the euro area.

We are determined to ensure that inflation stabilises sustainably at our two per cent medium-term target. Especially in current conditions of exceptional uncertainty, we will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance. In particular, our interest rate decisions will be based on our assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission. We are not pre-committing to a particular rate path.

The decisions taken today are set out in a press release  available on our website.

I will now outline in more detail how we see the economy and inflation developing and will then explain our assessment of financial and monetary conditions.

## Economic activity

The economic outlook is clouded by exceptional uncertainty. Euro area exporters face new barriers to trade, although their scope remains unclear. Disruptions to international commerce, financial market tensions and geopolitical uncertainty are weighing on business investment. As consumers become more cautious about the future, they may hold back from spending as well.

At the same time, the euro area economy has been building up some resilience against the global shocks. The economy is likely to have grown in the first quarter of the year, and manufacturing has shown signs of stabilisation. Unemployment fell to 6.1 per cent in February, its lowest level since the launch of the euro. A strong labour market, higher real incomes and the impact of our monetary policy should underpin spending. The important policy initiatives that have been launched at the national and EU levels to increase defence spending and infrastructure investment can be expected to bolster manufacturing, which is also reflected in recent surveys.

In the present geopolitical environment, it is even more urgent for fiscal and structural policies to make the euro area economy more productive, competitive and resilient. The European Commission's Competitiveness Compass provides a concrete roadmap for action, and its proposals, including on simplification, should be swiftly adopted. This includes completing the savings and investment union, following a clear and ambitious timetable, which should help savers benefit from more opportunities to invest and improve firms' access to finance, especially risk capital. It is also important to rapidly establish the legislative framework to prepare the ground for the potential introduction of a digital euro. Governments should ensure sustainable public finances in line with the EU's economic governance framework and prioritise essential growth-enhancing structural reforms and strategic investment.

## Inflation

Annual inflation edged down to 2.2 per cent in March. Energy prices fell by 1.0 per cent, after a slight rise in February, while food price inflation rose to 2.9 per cent in March, from 2.7 per cent in February. Goods inflation was stable at 0.6 per cent. Services inflation fell again in March, to 3.5 per cent, and it now stands half a percentage point below the rate recorded at the end of last year.

Most indicators of underlying inflation are pointing to a sustained return of inflation to our two per cent medium-term target. Domestic inflation has declined since the end of 2024. Wages are gradually moderating. In the last quarter of 2024 annual growth in compensation per employee stood at 4.1 per cent, down from 4.5 per cent in the previous quarter. Rising productivity also meant that unit labour costs grew more slowly. The ECB's wage tracker and information from our contacts with companies point to a decline in wage growth in 2025, as also indicated in the March staff projections. Unit profits fell at an annual rate of 1.1 per cent at the end of last year, contributing to lower domestic inflation.

Most measures of longer-term inflation expectations continue to stand at around 2 per cent, which supports the sustainable return of inflation to our target.

## Risk assessment

Downside risks to economic growth have increased. The major escalation in global trade tensions and associated uncertainties will likely lower euro area growth by dampening exports, and it may drag down investment and consumption. Deteriorating financial market sentiment could lead to tighter financing conditions, increase risk aversion and make firms and households less willing to invest and consume. Geopolitical tensions, such as Russia's unjustified war against Ukraine and the tragic

conflict in the Middle East, also remain a major source of uncertainty. At the same time, an increase in defence and infrastructure spending would add to growth.

Increasing global trade disruptions are adding more uncertainty to the outlook for euro area inflation. Falling global energy prices and appreciation of the euro could put further downward pressure on inflation. This could be reinforced by lower demand for euro area exports owing to higher tariffs, and a re-routing of exports into the euro area from countries with overcapacity. Adverse financial market reactions to the trade tensions could weigh on domestic demand and thereby also lower inflation. By contrast, a fragmentation of global supply chains could raise inflation by pushing up import prices. A boost in defence and infrastructure spending could also raise inflation over the medium term. Extreme weather events, and the unfolding climate crisis more broadly, could drive up food prices by more than expected.

## Financial and monetary conditions

Risk-free interest rates have declined in response to the escalating trade tensions. Equity prices have fallen amid high volatility and corporate bond spreads have widened around the globe. The euro has strengthened over recent weeks as investor sentiment has proven more resilient towards the euro area than towards other economies.

The latest official statistics on corporate borrowing, which predated these market tensions, continued to indicate that our interest rate cuts had made it less expensive for firms to borrow. The average interest rate on new loans to firms declined to 4.1 per cent in February, from 4.3 per cent in January. Firms' cost of issuing market-based debt declined to 3.5 per cent in February, but there has been some upward pressure more recently. Moreover, growth in lending to firms picked up again in February, to 2.2 per cent, while debt securities issuance by firms grew at an unchanged rate of 3.2 per cent.

At the same time, credit standards for business loans tightened slightly again in the first quarter of 2025, as reported in our latest bank lending survey for the euro area. As in the previous quarter, this was mainly because banks are becoming more concerned about the economic risks faced by their customers. Demand for loans to firms decreased slightly in the first quarter, after a modest recovery in previous quarters.

The average rate on new mortgages, at 3.3 per cent in February, increased on the back of earlier rises in longer-term market rates. Mortgage lending continued to strengthen in February, albeit at a still subdued annual rate of 1.5 per cent, as banks eased their credit standards and demand for loans to households continued to increase strongly.

## Conclusion

The Governing Council today decided to lower the three key ECB interest rates by 25 basis points. In particular, the decision to lower the deposit facility rate - the rate through which we steer the monetary policy stance - is based on our updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission. We are determined to ensure that inflation stabilises sustainably at our two per cent medium-term target. Especially in current conditions of exceptional uncertainty, we will follow a data-dependent and meeting-bymeeting approach to determining the appropriate monetary policy stance. In particular,

our interest rate decisions will be based on our assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission. We are not pre-committing to a particular rate path.

In any case, we stand ready to adjust all of our instruments within our mandate to ensure that inflation stabilises sustainably at our medium-term target and to preserve the smooth functioning of monetary policy transmission.

We are now ready to take your questions.",Christine Lagarde
https://www.bis.org/review/r250428k.htm,François Villeroy de Galhau: Markets and minds - upholding the transatlantic partnership,"Speech by Mr François Villeroy de Galhau, Governor of the Bank of France, at the Atlantic Council, Washington DC, 23 April 2025.",2025-04-23 00:00:00,"

Atlantic Council, Washington DC - 23 April 2025 'Markets and minds: upholding the transatlantic partnership' Speech by François Villeroy de Galhau Governor of the Banque de France

Press contact:  Delphine Cuny ( delphine.cuny@banque-france.fr )

Ladies and Gentlemen,

I am honoured to take the floor here at the Atlantic Council, just a few blocks from  Franklin  Park  and  Lafayette  Square.  Washington's  geography  reminds every passerby of the enduring bond between our two nations - a bond forged in  shared  struggles,  and  anchored  in  common  values.  As  the  Marquis  de Lafayette,  'hero  of  the  two  worlds',  once  wrote  to  George  Washington: 'Humanity has won its battle. Liberty now has a country.' From the very start, the cause of liberty has been one we have carried together, across the Atlantic, and I strongly wish it still is.

Let  me  also  remind  you  with  gratitude  that  Dean  Acheson, i   a  transatlantic statesman who played a key role in the creation of the Atlantic Council, as well as the Marshall plan and the Bretton Woods institutions, was instrumental in the early steps of European integration. He viewed it as essential to a stable and prosperous Atlantic order, built on peace, democracy and market economy. He urged the French government to take the bold step leading to the Schuman Declaration of  9  May  1950,  and  hence  laid  one  of  the  cornerstones  of  what would become the European Union. For him, as for many Americans, the EU was not designed to 'screw the US', on the contrary. Robert Schuman, at that time  French  Foreign  Affairs  Minister,  remains  for  me  a  figure  of  profound admiration: he embodied the spirit of Franco-German reconciliation - a legacy I feel personally connected to, having grown up like him in that very region where our two nations meet.

Hence, I will highlight that the transatlantic partnership has been so far strong and balanced, as no other worldwide (I). But the US trade policy shift will harm the global economy - starting at home (II). Lastly, I will trace out a path for a European moment, if we seize this opportunity (III).

## 1.    Mutual  gains  across  the  Atlantic:  a  strong  and  balanced  economic partnership

- 1.1. A strong and balanced EU-US economic relationship

The  United  States  and  the  EU  are  the  world's  two  largest  economies, maintaining one of the largest bilateral economic relationships. While the EU runs a trade in goods surplus with the United States (USD 234 billion in 2023), the services deficit has widened substantially in the last years (USD 125 billion in 2023) ii . Net primary income flows in favor of US firms - mostly composed of investment income such as profits and asset returns - also offset the trade in goods surplus, ultimately leading to a balanced current account (USD 19 billion in 2023).



The effective applied tariffs between the EU and the United States were close before  recent  developments,  with  the  EU  imposing  a  3.95%  tariff  on  US products, while the United States applied a 3.5% tariff on EU products iii .

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European majority-owned affiliates directly employed an estimated 5.3 million US  workers  in  2023 iv .  European-based  investors  play  a  crucial  role  in  the strength of the US economy, representing close to 50% of all foreign holdings of US securities in 2023 v .

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For  centuries,  ideas  have  crossed  the  Atlantic  alongside  goods  and  capital. Today, this legacy lives on through an interconnected research ecosystem, with 120,000  European  researchers  currently  working  in  the  United  States,  and countless institutional partnerships between universities, labs, and firms.

## 2. The US policy shift on trade will harm the global economy - starting at home

I don't mean that the latest globalization wave was a fairy tale: it had its problems and its imbalances, both social and financial. But the current lose-lose game will obviously  increase  them,  and  in  no  way  solve  them.  The  new  measures announced as well as the increasing unpredictability, constitute a major negative shock to the global economy, but first and foremost to the US economy.

According  to  convergent  analyses  by  most  US  and  international  banks  and yesterday by the IMF, the United States could suffer in 2025 from an average estimated loss of around one percentage point in annual growth and a similarsized rise in underlying inflation. There could even be a US recession, which was unthinkable three months ago. But bad news for the US is bad news for all, including for Europe. According to preliminary assessments, there could be a direct negative impact of at least a quarter of a percentage point to euro area GDP growth in 2025. The impact on inflation remains more uncertain but could be as a whole on the downside. Our baseline scenario for France and the euro area remains that of an exit from inflation - returning to our 2% target this year - without a recession.

Financial markets reacted very negatively to these trade announcements with the very unusual combination of a sharp drop in US equity indexes, a rise in US long term bond yields, and a broad-based decline in the US dollar value. The economic  uncertainty  may  possibly  threaten  financial  stability.  Such  deeply disruptive  effects  would  also  result  from  attacks  on  the  independence  and credibility of central banks. Let me on this occasion express again my gratitude to Fed's Chair Powell, who admirably shows how a central banker must behave.

Independent from political impatience, our monetary policies are also autonomous from one another across the Atlantic. This in no way precludes - I can assure you - a continuous, trusted, and indispensable dialogue, which is more necessary than  ever  for  global  financial  stability.  But  this  autonomy  is precisely what allows each of us to fulfil our domestic price stability mandate. In Europe, this is made possible by one of the greatest institutional achievements of the 1990s: the creation of the euro. I was personally in Maastricht thirty-three years ago, and much more recently in Francfort last week, for our latest decision to cut interest rates. There is currently no inflationary risk in Europe, and we can now almost say: 'mission accomplished' when it comes to bringing inflation back to our 2% target: the significant deceleration of wages is another proof thereof. It is therefore both fair and appropriate that, compared to the Federal Reserve or the Bank of England, the European Central Bank has started cutting rates earlier , faster , and likely further this year. While this supports activity in the short term, the key to strengthening European growth remains structural - through a broader mobilisation of our internal resources.

3. Nurturing Europe's inner strengths to match America's best: a '3i's' strategy
2. 3.1 A path forward to preserve the mutually beneficial economic relationship Let us use the 90-day pause to seriously talk. The least economically harmful option would be indeed to negotiate - a bold European proposal, zero-for-zero tariffs for industrial goods, is already on the table - and then de-escalate the situation  rather  than  setting  off  a  transatlantic  spiral  of  tariff  hikes.  So  far, Europeans  have  reacted  in  a  remarkably  united  and  calm  manner.  The European Commission has prepared a series of retaliatory measures - in case they are unfortunately needed - but has deferred their application.

Furthermore, Europe and the United States must still commit to a 'pragmatic multilateralism',  focused  on  some  practical  themes  of  common  interest, including,  to  name  just  a  few,  financial  stability,  cross-border  payments  and crypto-assets, cybersecurity, the fight against financial crime and the prevention

of  extreme  climate  events.  Let  us  resolutely  preserve  and  support  the multilateral institutions such as the IMF and World Bank, born and hosted in this great country - and city.

3.2 Scaling up Europe: the 3i's agenda

If the current situation has a silver lining, it is to possibly usher the European moment: Europe, despite its limitations, as a haven of economic predictability and confidence, rule of law, social cohesion. But it will not happen without bold moves. We can already see clear signs of it with the impressive shift of the next German  government.  It  is  obvious  on  Defence,  but  let  me  focus  today  on Economy, as the other pillar. We need a 'general mobilisation' focusing on three imperatives,  3'i's,  taking  the  best  of  the  impressive  economic  success  of America, or if you prefer, size multiplied by muscle multiplied by speed. First, we need to integrate the single market more. This means making the most of its size - as large in GDP terms as the United States - by removing internal barriers in several areas such as services and energy. We also need to invest better,  giving  priority  to  the  most  promising  breakthrough  innovations,  and particularly those related to AI. To succeed, we need to build financial muscle through a genuine Savings and Investments Union (SIU) fostering more our abundant private savings towards equity and venture capital. Finally, we need to innovate faster . Europe  needs  simplification:  less  bureaucracy,  fewer procedures  and  shorter  deadlines.  But  simplification  is  not  deregulation,  the European approach vi  will remain firm on the objectives, but be more nimble in design.

And  to  successfully  implement  these  three  imperatives,  we  urgently  need  a binding, visible and not too distant calendar: such a calendar will mobilise all our political and economic forces, as did in the past the 1 January 1993 for the single market and the 1 January 1999 for the single currency.

*

Let me now conclude. The transatlantic partnership has always delivered more by  combining  open  markets  with  clear  rules  and  shared  trust.  As  the  great

French writer Victor Hugo envisioned: vii  ""A day will come when there will be no other battlefields but markets opening to trade and minds. […] A day will come when these two great  groups,  the  United  States  of  America  and  the  United States  of  Europe,  will  stand  face  to  face,  reaching  out  across  the  seas, exchanging their products, their commerce, their industries, their arts, and their genius.""  That  day,  alas,  has  grown  more  distant  in  recent  times,  and  the transatlantic sky has darkened considerably. But even in the storm, we must not lose sight of our long-term course. You, the American people, will decide what must be said and fought for on your side of the Atlantic, as loud and clear as necessary. As Europeans, our task is clear: to strengthen our own side of the ocean: let us, in the very name of the Atlantic spirit, seize the European moment.

- i Dean Acheson (1893-1971) served as US Secretary of State under President Truman from 1949 to 1953. A key architect of the postwar international order, he played a central role in the creation of the Marshall Plan, NATO, and the Bretton Woods institutions. He was also instrumental in supporting European integration and co-founded the Atlantic Council in the early 1960s to promote transatlantic cooperation.

ii Data from Eurostat and Banque de France calculations

- iii American Chamber of Commerce for the EU (2025), Annual Survey of Jobs, Trade and Investment between the United States and Europe Amcham TAE 25 V6.indd
- iv American Chamber of Commerce for the EU (2025), Annual Survey of Jobs, Trade and Investment between the United States and Europe Amcham TAE 25 V6.indd
- v US Treasury (2023), Foreign Portfolio Holdings of U.S. Securities, shla2023r.pdf
- vi   Villeroy  de  Galhau  (F.)  (2025), A  European  approach  to  simplification:  avoiding  three  misconceptions,  and suggesting concrete milestones , speech, 11 April
- vii Victor Hugo, speech at the Peace Congress, August 1849.",François Villeroy de Galhau
https://www.bis.org/review/r250429m.htm,Chang Yong Rhee: Navigating political uncertainty while maintaining independence,"FPA medal acceptance speech by Mr Chang Yong Rhee, Governor of the Bank of Korea, at the Foreign Policy Association Statesman Dinner 2025, Seoul, 21 April 2025.",2025-04-21 00:00:00,"## Chang Yong Rhee: Navigating political uncertainty while maintaining independence

FPA medal acceptance speech by Mr Chang Yong Rhee, Governor of the Bank of Korea, at the Foreign Policy Association Statesman Dinner 2025, Seoul, 21 April 2025.

* * *

Thank you, Mr. Fernandez, for that generous introduction. And good evening to the distinguished guests who joined the dinner tonight, including President Lateef and Mr. Euywhan Kim, Korean Consul General in New York. Your warm welcome means more than I can express.

For over a century, the Foreign Policy Association has been a leader in promoting international collaboration through public dialogue and education. Its role as a nonpartisan forum for intellectual discourse is more important than ever today, as the world experiences a rising political divide, geopolitical tensions, and global fragmentation.

I'm deeply humbled and honored to receive this award from the FPA, and especially feel undeserving when I consider past awardees like Chairman Volcker, President Trichet, Managing Director Georgieva, and many others. Also, sharing this award ceremony with the Secretary-General of the OECD, the Honorable Mathias Cormann, makes it even more special.

On a personal note, this medal holds a very special meaning within my family. When I got married, I made a joke to my wife, saying, ""As I'll devote my whole life to promoting world peace, you need to take care of everything else for our family."" I thank the FPA for vindicating my joke and justifying the many evenings I've spent away from my wife and children.

## Acknowledging Global and Korean Headwinds

Currently, we are facing heightened uncertainties. Globally, despite some easing of post-pandemic inflation, trade tensions are intensifying and geopolitical risks persist, reshaping supply chains and deepening global fragmentation, or reglobalization. They have triggered the global financial market turbulence and slowed down global growth. My understanding is that the IMF is going to consider lowering its world economic outlook significantly tomorrow.

Korea is not an exception. As an export-driven economy, it is particularly vulnerable to these external headwinds. Tariffs directly reduce our exports. And, given our deep integration with key supply chain partners, our semiconductor production in Vietnam, electronics and automobile manufacturing in Mexico, and battery production in Canada will all likely be significantly affected. At the same time, weak demand from China-which accounts for over 19% of Korea's exports-is expected to further weigh on our economy.

To make matters worse, current challenges have been especially difficult for Koreans. As you may know, political uncertainty intensified following the former president's

declaration of martial law late last year. After about five months of turbulence, we now hope that the Constitutional Court's recent upholding of the impeachment, along with the upcoming presidential election in June, will help settle this uncertainty behind us.

Nevertheless, ""Every cloud has a silver lining."" These political events also demonstrated the powerful resilience of Korean democracy.

There had been moments of unrest and deep confrontation among citizens with differing political views. However, the situation was resolved peacefully and constitutionally, and now we are advancing toward the presidential election.

Political Polarization and Central Bank Independence

One thing that I learned as a central banker during this period of political turmoil is the importance of central bank independence-but from a different angle.

We usually understand central bank independence to mean freedom from government interference or fiscal dominance. However, navigating through recent political challenges has made it clear to me that independence from politics is much more vital.

This is particularly true in deeply divided political environments such as Korea right now, where the presidency and parliamentary majority are decided by only a narrow margin of the popular vote.

Governments are appointed by an elected power. By this very nature, during times of heightened political tension, any policy decisions and announcements by governments are often filtered through a political lens and struggle to gain broad trust.

In contrast, a central bank, as Paul Tucker describes it, is an ""Unelected Power""-more free from political preference and generally perceived as politically neutral. This allowed us to communicate balanced and apolitical assessments of economic conditions, such as the economic impact of political instability, along with policy recommendations when they were most needed.

Independence with Flexibility

Of course, as Paul Tucker rightly points out in his book, central banks must not exploit the privileges that come with their independence. 1  He argues that central banks should strictly confine themselves to a narrow interpretation of their mandate, which includes price stability and political neutrality in general.

I agree with the spirit of that argument. But I also believe that some degree of flexibility is necessary-particularly in unexpected extreme situations, such as the political instability that Korea just experienced or crises like the pandemic.

Let me recall a conversation I had with a central bank governor from emerging Asia when I served as the IMF's Asia-Pacific Department Director. As many of you know, avoiding fiscal deficit monetization is generally considered one of the non-negotiable mandates of central banks.

However, in 2020, at the height of the COVID-19 crisis, that central bank took the unusual step of purchasing government bonds in the primary market under the spirit of shared burden with the government. As the governor explained to me, it was seen as inevitable to help those suffering from COVID-19, given the unusually large need for fiscal support, the limited financial market depth, and the importance of protecting sovereign credit rating.

Fortunately, the temporary deviation from text book central bank principles turned out to be a happy ending: the country navigated the COVID crisis without damaging its creditworthiness and returned to its pre-pandemic deficit target within two years as planned.

Fundamental concerns about deficit monetization remain valid. However, this case demonstrates how limited, temporary policy flexibility may be necessary depending on the specific nature of economic crisis and the maturity of capital markets.

Likewise, while leading the central bank through recent political turmoil, I often faced situations where my statements could be misinterpreted as political. For example, when both parties held opposing views on fiscal policy during the impeachment process and incoming election, discussing fiscal stimulus risked appearing partisan. Yet as central bank governor, I could not remain silent on its necessity, for two reasons.

First, after the martial law declaration, domestic demand was falling faster than expected. Some degree of fiscal stimulus was needed to alleviate a sharp decline in major market players' economic forecasts early in the year. Second, a bipartisan fiscal package seemed to be the best tool to send the message to global investors that Korea's economy operates independently of political divisions and to protect our credit rating.

While my public advocacy for fiscal stimulus created some controversy over political neutrality as expected, I believe that my decisions will stand the test of time. Yes, central bankers must be politically neutral, but as Keynes said of his mentor Marshall, economists need to be ""sometimes as near the earth as a politician.""

## U.S.-Korea Relationship &amp; Closing

Before I close, I would like to take a moment to highlight the enduring importance of the U.S.-Korea relationship, especially in the presence of many distinguished American leaders here tonight.

Since Korea's liberation in 1945, the U.S. and Korea have stood together as trusted allies, sharing common values, such as freedom, democracy, peace, and prosperity.

I mentioned the resilience of Korean democracy earlier in my remarks, and indeed, the U.S. has always remained alongside us throughout our democratic journey. At a critical crossroads in history, it helped guide Korea away from communism and toward democracy. Especially for the Bank of Korea, it also provided instrumental support in shaping our legal foundations-most notably, the Bank of Korea Act.

Despite the leadership transition and the complex geo-economic landscape in Korea, I remain confident that the U.S.-Korea relationship will be taken to the next level. I believe the ongoing support of those in this room will be truly invaluable.

Once again, I offer my deepest thanks to the FPA for this honor, and I wish the FPA continued flourishing in the years to come.

Thank you.

1  Tucker, P. (2018). Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State. Princeton University Press. https://doi.org/10.2307/j.ctvc7789h",Chang Yong Rhee
https://www.bis.org/review/r250428i.htm,Howard Lee: Opening remarks - Project Cargox expert panel kick-off meeting,"Opening remarks by Mr Howard Lee, Deputy Chief Executive of the Hong Kong Monetary Authority, at the Project Cargox Expert Panel Kick-off Meeting, Hong Kong, 28 April 2025.",2025-04-28 00:00:00,"## Howard Lee: Opening remarks - Project Cargox expert panel kick-off meeting

Opening remarks by Mr Howard Lee, Deputy Chief Executive of the Hong Kong Monetary Authority, at the Project Cargo x   Expert Panel Kick-off Meeting, Hong Kong, 28 April 2025.

* * *

Good morning, distinguished guests and Expert Panel Members.

On behalf of the Hong Kong Monetary Authority (HKMA), I would like to extend a very warm welcome to you all. We are excited to have you join us today to launch Project Cargo x   and share your valuable expertise.

Let me start by thanking you for dedicating your time, insights and energy to this important initiative. Cargo x   unites us with a bold vision: to build a more inclusive and efficient digital ecosystem for trade finance, powered by cargo data insights and our CDI data infrastructure.

This vision is critical in today's evolving global landscape, where trade conflicts and disrupted supply chains are reshaping established trade patterns. Many businesses, SME traders in particular, stand to benefit immensely from a more digitalised and streamlined trade finance ecosystem as they transform their business model and supply chains.

SMEs' access to trade finance has long been hindered by different processing pain points. For instance, the heavy reliance on paper-based documents has led to inefficiencies and difficulty in tracking and verifying the transactions. With light balance sheets, many SMEs also struggle to provide the collateral required by banks to secure loans. Furthermore, issues like duplicate financing have heightened the risk of default and fraud.

Through Cargo , we aim to address these challenges in a few ways. First, leverage x cargo data to streamline trade finance processes for banks; second, develop digital solutions to enhance SMEs' access to trade finance, in collaboration with key partners such as the Transport and Logistics Bureau and Airport Authority Hong Kong; and third, explore connections between CDI and international data partners to support innovative trade financing use cases.

Trade finance is inherently a complex process. For example, the export of collectible figures from Hong Kong already involves multiple parties, including the importer, freight forwarder, shipping line, port operator, insurance company, banks and customs authorities.

Given the intricate flow of goods, services, trade loans and payments, numerous documents, such as invoices, bills of lading, insurance certificates, letters of credit and customs declarations, are required to facilitate the trade.

To navigate this complexity, it is crucial to leverage industry expertise to gain a holistic understanding of the trade finance landscape, pinpoint areas for improvement, and identify processes for further digitalisation, particularly through cargo data. We are therefore very pleased to establish the Cargo Expert Panel, comprising representatives x from the trading and trade finance industry.

The Expert Panel will serve as a vital platform for public-private collaboration, fostering dialogue to develop a roadmap and recommendations for a more robust digital trade finance ecosystem. Your insights will be instrumental in driving this transformation.

We look forward to charting the future of digital trade finance together with the Expert Panel members through Cargo . Our concerted efforts will help overcome traditional x barriers and empower SMEs with faster, and more accessible financial services.

Thank you.",Howard Lee
https://www.bis.org/review/r250428h.htm,Fabio Panetta: Statement - meeting of the Development Committee,"Statement by Mr Fabio Panetta, Governor of the Bank of Italy and Governor of the Constituency of Albania, Greece, Italy, Malta, Portugal, San Marino and Timor-Leste, at the 111th Meeting of the Development Committee (Joint Ministerial Committee of the Boards of Governors of the Bank and the Fund on the Transfer of Real Resources to Developing Countries), Washington DC, 24 April 2025.",2025-04-24 00:00:00,"## Fabio Panetta: Statement - meeting of the Development Committee

Statement by Mr Fabio Panetta, Governor of the Bank of Italy and Governor of the Constituency of Albania, Greece, Italy, Malta, Portugal, San Marino and Timor-Leste, at the 111th Meeting of the Development Committee (Joint Ministerial Committee of the Boards of Governors of the Bank and the Fund on the Transfer of Real Resources to Developing Countries), Washington DC, 24 April 2025.

* * *

The world is facing an alarming rise in conflicts and acute geopolitical tensions. Persistently weak security conditions, sudden clashes in fragile, conflict-, and violenceaffected countries, and setbacks in international trade have far-reaching interrelated consequences, ultimately undermining our efforts to further reduce extreme poverty and placing decades of progress at risk.

In the current environment where the rules-based global economic governance faces new challenges, international financial institutions like the World Bank Group (WBG) and the International Monetary Fund (IMF) are all the more important. For 80 years, they have promoted economic and financial stability, poverty reduction, and development. Their role remains vital in global finance and offers the best value for donor aid. They deserve - and have - our support.

But complacency is unacceptable: all international financial institutions must enhance their efficiency and leverage their respective comparative advantages to ensure impact and strengthen their capacity to meet the priorities of developing countries. They must work as a system in a selective, coordinated, and collaborative manner.

In this spirit, we supported the WBG's Evolution, with a renewed focus on reducing poverty and boosting shared prosperity on a livable planet. Thanks to the implementation of the G20 Capital Adequacy Framework Review, promoted under the Italian Presidency, financial resources have increased. This can continue as we better incorporate other key features - such as preferred creditor treatment, concentration risk, and callable capital - into financial ratios.

We have achieved a successful 21st replenishment of the International Development Association (IDA) thanks to a concerted effort and look forward to its timely implementation. Defending and strengthening IDA is fundamental to reinforcing global stability and shared prosperity, supporting fragile countries, and ensuring that none are left behind. Along with other donors, clients, and WBG's management, our Constituency did its part. We must remain united and confirm the international community's commitment to cooperation and solidarity.

The focus on jobs and private sector development proposed in the Development Committee Paper is both timely and instrumental to generating sustainable growth.

The WBG's new approach to job creation should include a reinvigorated effort to invest in people's education and skills; we should also expand coverage and improve the efficiency of social protection systems. These efforts are essential to increasing resilience, broadening opportunities, and promoting economic transformation. As

artificial intelligence drives change, ensuring balanced benefits across sectors and society is vital.

It is equally important that the WBG work with client countries to identify and address obstacles to private sector development. This requires improving the quality of institutions and regulation, using development policy lending more effectively, and strengthening market infrastructure. One example of such an infrastructure is fast payment systems (FPS), which are crucial to the enhancement of cross-border trade and investment: the Banca d'Italia is providing an FPS in the Western Balkans that is up to international technical and regulatory standards and will favor integration with the euro area.

To thrive and create jobs, private companies need market demand. The WBG must refine its strategies on market creation, competition, trade, and foreign direct investment. Ongoing work in support of diversified and resilient value chains - both global and regional - can increase market access, boost productivity and technology transfer, and drive resilient industrialization. In the critical minerals sector, the Resilient and Inclusive Supply Chain Enhancement (RISE) Partnership is exemplary. RISE builds productive capacity and fosters sustainable economic growth in resource-rich developing countries, contributing to making the global clean energy transition more inclusive.

The WBG's plan to boost private capital mobilization is ambitious and necessary to expanding development finance. We strongly support changes to IFC's business model and the proposed financial innovations, particularly those aimed at offering more local currency solutions.

We also encourage the WBG to actively contribute to the design of innovative partnerships with financial intermediary funds (FIFs), such as climate and environmental vertical funds. Among other options, FIFs could provide hybrid capital and portfolio guarantees to the multilateral development banks, thus leveraging their resources by a factor of 10 and giving countries easier access to finance, while still preserving their institutional goals.

The WBG's engagement in the process leading to the Fourth Finance for Development conference in Seville has been commendable. While we should not forget the unprecedented amount of resources deployed by the WBG over the past years, we invite all relevant stakeholders to work together to strengthen existing initiatives and avoid overlaps and duplicated efforts.

Our Constituency strongly supports the WBG's engagement in Africa. Italy's Mattei Plan for Africa aims to promote development and reduce poverty through concrete investment projects, along with a renewed relationship with African countries based on cooperation, shared interests, and mutual benefits. The Plan seeks to attract investment, create jobs, and strengthen supply chains, focusing on education, agriculture, health, energy, and water. As part of this, Italy provides additional cofinancing to key infrastructural projects, like the Lobito corridor, and to the WBGAfrican Development Bank's Mission 300 initiative to bring affordable energy to 300

million Africans by 2030. The expansion of the WBG Rome office should contribute to enhancing knowledge sharing and projects aligned with the Plan's objectives. This should include moving to Rome dedicated IFC personnel for business development.

Strengthening collaboration between the WBG and the European Commission in Africa is crucial to maximizing impact and efficiency. This partnership can leverage the EU Global Gateway initiative to mobilize further resources, ensure better coordination and scale up essential investment projects.

We look forward to discussion of the new Fragility, Conflict and Violence strategy. As the WBG's contribution to the prevention agenda, we expect innovative and tailored approaches in targeted sectors to create jobs. Continued support to refugees and their host communities remains essential.

The WBG's leadership in responding to conflicts and tensions is also evident in its commitment to supporting Ukraine. The Fourth Rapid Damage and Needs Assessment (RDNA4) affirms that extensive destruction caused by the war will require a huge financial effort over the next decade. We applaud the WBG for this work, which is instrumental in guiding international support and ensuring a coordinated and effective response to the country's long-term recovery.

Finally, we would like to reiterate the importance of improving the monitoring and reporting on the impact of WBG operations. Incorporating better data, impact evaluation, and the lessons of experience should be part of this process. The search for higher-quality projects with sustainable outcomes must also inform the ongoing commendable work on the Procurement Framework.",Fabio Panetta
https://www.bis.org/review/r250428g.htm,Chia Der Jiun: Charting a steady course in a changing world,"Opening address by Mr Chia Der Jiun, Managing Director of the Monetary Authority of Singapore, at the Investement Management Association of Singapore (IMAS) Annual Investment Conference 2025, Singapore, 23 April 2025.",2025-04-23 00:00:00,"## Chia Der Jiun: Charting a steady course in a changing world

Opening address by Mr Chia Der Jiun, Managing Director of the Monetary Authority of Singapore, at the Investement Management Association of Singapore (IMAS) Annual Investment Conference 2025, Singapore, 23 April 2025.

* * *

## IMAS EXCO

Ms Carmen Wee, IMAS CEO Ladies and Gentlemen

Good morning. I am delighted to join you today at the 28th IMAS Annual Investment Conference.

This year's conference theme - ""Navigating an Evolving Landscape"" - is apt but may be understating the environment we are in today. Fundamental shifts in trade policy and the geo-strategic landscape have led us into a period of heightened uncertainty in the global economy and volatility in financial markets. In this new landscape of uncertainty and volatility, the asset management industry plays an important role in sustaining investor confidence and contributing to the resilience of markets.

## Role of Asset Management Industry to Manage Uncertainty

Let me focus on 3 areas that the asset management industry can help in:

- a. One, build more resilient markets;
- b. Two, provide products and portfolios that meet investors' diversification and retirement needs; and
- c. Three, support better informed investors.

## Resilient Markets

There are several components that contribute towards more resilient markets. Transparency, market integrity and settlement efficiency are fundamental. Regulators have a role in putting these right. Market infrastructure operators also have a role. Trading venues should be liquidity enhancing rather than liquidity fragmenting. Margin requirements should be set at levels that avoid amplifying funding stresses.

Market participants too play a role. Leverage needs to be deployed carefully to mitigate procyclical deleveraging. To be clear, market functionality has generally remained resilient through stress episodes, including through the sharp market repricing of risks and uncertainty in April. But we are also all aware of episodes where volatility spiked and market functionality deteriorated. In August last year, Japanese equities fell sharply and VIX spiked following the unwinding of leveraged carry trades. Earlier this month, 10year Treasuries rose 50bps over a short period of time, while the dollar weakened. A commonly heard attribution has been the unwind of leveraged trades. Crowded leveraged trades are vulnerable to changing policy, economic and market conditions. Market resilience is better assured through a diversity of market participants, employing

a myriad of strategies which provides depth and two-way flows. Let me give the example of Singapore's FX market, where MAS had sought to foster a diverse ecosystem of market participants to support depth and stability.

- a. In FX markets, we made efforts since 2018 via our Foreign Exchange E-Trading (""FXET"") initiative, to strengthen infrastructure capabilities. This has improved pricing and trade-fill efficiency while reducing latency. Over time, a diverse group of FX players have anchored their matching and pricing engines in Singapore to serve regional market participants. This enhancement of FX capabilities and infrastructure has supported FX price discovery and market functionality in this region during both Business-as-Usual and under stressed periods. Our eFX ecosystem continues to grow well with a diversity of market participants including platforms, banks, real money, hedge funds, and corporate treasuries. This has contributed to Singapore's continued growth as a leading FX hub in Asia, with the average daily traded volumes crossing US$ 1 trillion in 2024. 1

At this time of heightened uncertainty, MAS is closely watching that Singapore's foreign exchange and S$ money markets continue to function in an orderly manner. We also monitor the functionality of key funding markets in coordination with central banks globally.

## Products and Portfolios that Meet Diversification and Retirement Needs

Let me turn to my second point. Asset managers are key to providing fund products that serve the savings and retirement needs for our region. Their products should contribute to portfolio diversification and help investors manage market volatility while investing for the long term. In building and delivering such products,:

- a. Asset managers must have in place an effective liquidity and market risk management framework. There is a need to run regular stress testing on your portfolio risks under conditions when volatility spikes and correlations break down. Funds should also stress your ability to handle redemption spikes amidst adverse market movements. Global regulatory bodies such as the FSB and IOSCO have made calls for further enhancements to strengthen the industry's resilience in both normal and stressed market conditions, by reinforcing consistency between the funds' investment strategy and liquidity of fund assets, with redemption terms. In line with this, MAS will study the need to review the current framework for liquidity risk management by asset managers, and will engage the industry when ready. b. Product distributors and providers should also ensure that marketing and advertisements are fair and balanced. Marketing should not over-emphasise product features that are not sustainable across a robust range of scenarios. A sudden withdrawal of such product features could cause a loss of confidence and a redemption spike.
- c. Clear and timely disclosures should be provided to investors, to enable them to make well-informed investment decisions in fast-changing market conditions.

To provide retail investors with a wider set of investment choices, MAS is also currently consulting on a framework for private market investment funds for retail investors.

- a. Private market investments, such as private equity and infrastructure, generally have longer investment horizons and a differentiated set of risk factors that are different than public market investments. Retail investors may be interested in gaining exposure to this asset class as part of a well-diversified investment portfolio. b. We welcome feedback from all IMAS members as we work towards developing a balanced and risk-calibrated framework that can support the growth of a robust and sustainable market for such retail funds.

## Support Better Informed Investors

Third, asset managers support better informed investors, through continued partnership with MAS and the MoneySense community on investor education.

When MAS launched the national financial education programme MoneySense in 2003, one of its goals was to support consumers in becoming more self-reliant in financial affairs. This was important as consumers needed to exercise their judgement, evaluate the suitability of investments for their own needs, even as more complex and varied products entered the financial markets.

Over the years, industry associations, including IMAS, community organisations and consumer bodies have been valuable partners. Together, MoneySense's activities and programmes were launched to enhance consumers' understanding of financial affairs, whether it is in managing money, insurance protection, or investing and planning for retirement.

## IMAS' Contributions to Industry

Let me say a few words of appreciation for IMAS' role in galvanizing the industry.

I am happy to see IMAS' continued efforts to bring partners together to uplift the asset management sector. As I mentioned earlier, IMAS has played an important role in improving public education through your ongoing partnerships with MoneySense, SGX and FundSingapore. IMAS has also contributed efforts towards reskilling and upskilling for industry professionals by developing the iLEARN platform since 2019 as a one-stop platform for relevant training programmes in line with market shifts.

I am also encouraged to know that IMAS has taken the lead to support its members to deepen expertise in sustainable finance. I am happy today to be part of a significant milestone - the launch of the IMAS Climate Handbook in partnership with Amundi. This practical guide will enable asset managers to integrate climate considerations into risk assessments as well as investment frameworks.

In closing, as regulator and developer of the asset management industry, we share a common goal with market participants to keep our markets stable and vibrant and to ensure its sustainable growth in the face of global headwinds. MAS will continue to partner with IMAS and its members to build a more resilient, competitive, and innovative asset management ecosystem.

Thank you and wishing you all a fulfilling Conference ahead.

1  Source: Survey of Singapore FX Volume, Singapore Foreign Exchange Market. In October 2024, Singapore's FX average daily traded volumes (""ADTV"") reached a new high of US$1,136bn staying above the US$1 trillion mark (first reached in April 2024).",Chia Der Jiun
https://www.bis.org/review/r250428f.htm,Michael S Barr: Deepfakes and the AI arms race in bank cybersecurity,"Speech by Mr Michael S Barr, Vice Chair for Supervision of the Board of Governors of the Federal Reserve System, at the Federal Reserve Bank of New York, New York City, 17 April 2025.",2025-04-17 00:00:00,"For release on delivery 11:45 a.m. EDT April 17, 2025

Deepfakes and the AI Arms Race in Bank Cybersecurity

Remarks by

Michael S. Barr

Member

Board of Governors of the Federal Reserve System at

Federal Reserve Bank of New York

New York, New York

April 17, 2025

Thank you for the opportunity to speak to you today about artificial intelligence (AI) and cybersecurity. 1 In the past, a skilled forger could pass a bad check by replicating a person's signature.  Now, advances in AI can do much more damage by replicating a person's entire identity.  This technology-known as deepfakes-has the potential to supercharge identity fraud.  I've recently spoken about the importance of recognizing both the benefits and the risks of generative AI (Gen AI). 2 Today, I'd like to focus more on the darker side of the technology-specifically how Gen AI has the potential to enable deepfake technology, and what we should be doing now to defend against this risk in finance.

## Escalating Threat of Gen-AI Facilitated Cybercrime

Cybercrime is on the rise, and cybercriminals are increasingly turning to Gen AI to facilitate their crimes.  Criminal tactics are becoming more sophisticated and available to a broader range of criminals.  Estimates of direct and indirect costs of cyber incidents range from 1 to 10 percent of global GDP. 3 Deepfake attacks have seen a twentyfold increase over the last three years. 4

Cybercrime with deepfakes involves the same cat and mouse game common to sophisticated criminal activity.  Both cybercriminals and financial institutions are

1  The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.

2 Michael S. Barr, 'Artificial Intelligence: Hypothetical Scenarios for the Future' (speech at the Council on Foreign Relations, New York, NY, February 18, 2025),

https://www.federalreserve.gov/newsevents/speech/barr20250218a.htm; Michael S. Barr, 'AI, Fintechs, and Banks' (speech at the Federal Reserve Bank of San Francisco, San Francisco, CA, April 4, 2025), https://www.federalreserve.gov/newsevents/speech/barr20250404a.htm.

3  International Monetary Fund, Global Financial Stability Report , chapter 3 (October 2024),  See also, World Economic Forum, Why We Need Global Rules to Crack Down on Cybercrime (January 2023), https://www.weforum.org/stories/2023/01/global-rules-crack-down-cybercrime/.

4 'Fraud attempts with deepfakes have increased by 2137% over the last three years,' Signicat, February 20, 2025, https://www.signicat.com/press-releases/fraud-attempts-with-deepfakes-have-increased-by-2137over-the-last-three-

year#:~:text=Evolving20AI2Dbased20techniques20pose,AI2DDriven20Identity20Fraud20report.

constantly trying to outdo each other.  Criminals develop new attack methods, and companies respond with better defenses.  Here, the same technological innovations that enable the bad actors can also help those fighting cybercrime.  However, there is an asymmetry-the fraudsters can cast a wide net of approaches and target a wide number of victims, and they only need a small number to be successful.  Their marginal cost is generally low, and individual failures matter little.  Conversely, companies must undergo a rigorous review and testing process to mount effective cyber defenses and will thus be slower in developing their defenses.  A single failure is very costly.  As we consider this issue from a policy perspective, we need to take steps to make attacks less likely by raising the cost of the attack to the cybercriminals and lowering the costs of defense to financial institutions and law enforcement.

## Anatomy of a Deepfake

Deepfake attacks are those in which an attacker uses Gen AI to create a doppelganger with a person's voice or image and uses this doppelganger to interact with individuals or institutions to commit fraud.  Deepfake technology is a particularly pernicious vehicle for cybercrime. 5 The process begins with voice synthesis, where Gen AI models can synthesize the speech of their victim not only in words, but also in phrase patterns, tone, and inflection.  With just a short sample audio, for example, criminals assisted by Gen AI can impersonate a close relative in a crisis situation or a high-value bank client, seeking to complete a transaction at their bank. 6

5 Federal Bureau of Investigation, 'Criminals Use Generative Artificial Intelligence to Facilitate Financial Fraud,' public service announcement, December 3, 2024,

https://www.ic3.gov/PSA/2024/PSA241203#:~:text=AI2DGenerated20Audio2C20aka20Vocal20Cloning&amp; text=Criminals20generate20short20audio20clips,assistance20or20demanding20a20ransom.

6 See note 5.

Criminals can also use Gen AI-generated videos to create believable depictions of individuals.  For videos, Generative Adversarial Networks (GANs) are the core technology behind most deepfake systems. 7 GANs consist of two competing models, the generator and the discriminator, which compete with and improve each other.  This competition results in increasingly realistic, indistinguishable fake images and videos. 8

Deepfake technology can also be augmented by other AI tools; for instance, criminals can use AI to extract and organize extensive multimodal personal data to facilitate identity verification.  Attackers can also turn to 'dark web' tools, such as jailbroken versions of popular large language models, where the guardrails have been removed, to learn the deepfake trade and improve their attacks. 9

## Deepfakes in Action

I expect that many of you can recall examples of how deepfakes of politicians and prominent business executives have fooled the public and spread disinformation.

Deepfakes are also being used to commit payment fraud.  In one case in 2024, a sophisticated deepfake of the chief financial officer for British engineering and architectural firm Arup was reportedly deployed in a video meeting and convinced an Arup financial employee to transfer $25 million to thieves. 10

7  Tianxiang Shen, Ruixian Liu, Ju Bai, and Zheng Li, 'Deep Fakes' Using Generative Adversarial Networks (GAN) , https://noiselab.ucsd.edu/ECE228\_2018/Reports/Report16.pdf. McAfee, Beware the Artificial Impostor (May 2023), https://www.mcafee.com/content/dam/consumer/en-

us/resources/cybersecurity/artificial-intelligence/rp-beware-the-artificial-impostor-report.pdf.

8  'What is a GAN?' AWS, https://aws.amazon.com/what-

is/gan/#:~:text=A20generative20adversarial20network20(GAN,from20a20database20of20songs.

9  KELA, The State of Cybercrime 2025 Report (February 2025),

https://www.kelacyber.com/resources/research/state-of-cybercrime-2025/.

10  Kathleen Magramo, 'British Engineering Giant Arup Revealed as $25 Million Deepfake Scam Victim,' CNN Business , May 17, 2024, https://www.cnn.com/2024/05/16/tech/arup-deepfake-scam-loss-hong-kongintl-hnk/index.html.

In another case, an attacker attempted to undertake a highly convincing audio deepfake of the chief executive of Ferrari, down to mimicking his southern Italian accent. 11 The recipient of the attack-another Ferrari executive-tested the caller with a personal question only the chief executive would know, which thankfully exposed the fraud.

And these institutions and individuals are not alone-a 2024 survey finds that over 10 percent of companies reported experiencing deepfake fraud attempts, and few steps have been taken to mitigate the risks. 12

Particularly since COVID, we conduct much of our professional and personal lives over video.  When we see realistic and interactive video images of a loved one in trouble, we are disposed to trust them and do what we can to help.  Identity verification standards at banks often use voice detection, which may become vulnerable to Gen AI tools.  If this technology becomes cheaper and more broadly available to criminals-and fraud detection technology does not keep pace-we are all vulnerable to a deepfake attack.  These attacks can have significant financial costs to the victims of the crime and can also pose costs to society, eroding trust in communications and in institutions.

## Defending Against Deepfakes

So what should we do?  As I mentioned above, we should take steps to lessen the impact of attacks by making successful breaches less likely, while making each attack more resource-intensive for the attacker.

11  Sandra Galletti and Massimo Pani, 'How Ferrari Hit the Brakes on a Deepfake CEO,' MIT Sloan Management Review , January 27, 2025, https://sloanreview.mit.edu/article/how-ferrari-hit-the-brakes-on-adeepfake-ceo/.

12  Chad Brooks, '1 in 10 Executives Say Their Companies Have Already Faced Deepfake Threats,' business.com, June 28, 2024, https://www.business.com/articles/deepfake-threats-study/.

Let me start with ways to make successful breaches less likely.  A key step is to recognize the importance of strong, resilient financial institutions in preventing attacks. Banks are frontline defenders against deepfake-enabled fraud due to their direct involvement with financial transactions and customer data.  To verify payors, banks maintain identity verification processes, including multi-factor authentication and account monitoring practices.  To the extent deepfakes increase, bank identity verification processes should evolve in kind to include AI-powered advances such as facial recognition, voice analysis, and behavioral biometrics to detect potential deepfakes. Other techniques focus on assessing the probability that AI has been used in audio or video based on underlying metadata and then flagging the identity or transaction for further review using other verification.  These technical solutions can detect subtle inconsistencies in video and audio that human observers may miss.

Banks have two points of control over the transaction-confirming not only the sender's identity, but also the legitimacy of the recipient address.  They can scrutinize the recipients of large or unusual transactions, employing advanced analytics to flag suspicious patterns that could indicate fraudulent activities, and perform additional reviews before authorizing a payment to a recipient that raises flags.  Banks also invest in their human controls by maintaining up-to-date training for staff on the emerging risks and incorporating the necessary security measures to mitigate the damages from breaches when they occur.  And they are engaging with other financial institutions to help define the threat and identify appropriate controls and mitigants. 13

13 See, for instance, FS-ISAC's report on deepfake threats and risk management at https://www.fsisac.com/hubfs/Knowledge/AI/DeepfakesInTheFinancialSectorUnderstandingTheThreatsManagingTheRisks.pdf.

Customers should do their part, enabling multi-factor authentication on their accounts and verifying unusual requests through a separate channel, even if the person making the request seems genuine.  They should seek out education for themselves and their loved ones to help them detect and prevent fraud before it occurs. 14 And customers should value strong security practices at their financial institutions, including those which may add some friction to the user experience.  The customers that may be the highestvalue targets for criminals are often those with the largest digital presence, and thus most susceptible to deepfakes.  They are also the customers who may prefer the most frictionless user experience, making detecting deepfakes more difficult.  When it comes to protecting our money, we ought to expect and appreciate a little friction.

Regulators can help to reinforce the importance of cyber defenses in safe and sound banking through appropriate updates to guidance and regulation.  As with all rules, we should be mindful of the impacts on smaller institutions and help ensure that rules are right-sized for the risk.  In addition, we can work with core providers to understand the extent to which they are incorporating AI advancements in their products and services to help smaller banks defend against deepfakes and other emerging risks from the technology.  Last, we can also highlight research and development for cybersecurity startups and research into tools to combat deepfakes and Gen AI-based fraud.

Regulators should consider how we could leverage AI technologies ourselves, including to enhance our ability to monitor and detect patterns of fraudulent activity at

14 There are a variety of public and private resources that can help.  See, for example, the National Security Agency/Central Security Service at https://www.nsa.gov/Press-Room/Press-Releases-Statements/PressRelease-View/Article/3523329/nsa-us-federal-agencies-advise-on-deepfake-threats/; and the National Cybersecurity Alliance at https://www.staysafeonline.org/articles/why-your-family-and-coworkers-need-asafe-word-in-the-age-of-ai.

regulated institutions in real time.  This could help provide early warnings to affected institutions and broader industry participants, as well as to protect our own systems.

In addition to preventing attacks, we should also explore ways of making attacks more costly.  These may include coordination with domestic and global law enforcement, internationally consistent laws against cybercrime, and continued improvement on sharing threat intelligence and insights in real-time.  The official sector and banks should continue efforts to improve fraud data sharing within the financial sector and help institutions respond more quickly to emerging Gen AI-driven threats.  This will make it far harder for fraudsters to operate undetected, increasing the complexity and cost of their activities.  But the sharing is only as good as the data, and banks must do their part.  We should help ensure that banks and other regulated institutions meet their duties to report cyber incidents in a timely way, and regulators should too. 15

Another way to disrupt the economics of cybercrime is by increasing penalties for attempting to use Gen AI to commit fraud and increasing investment in cybercrime enforcement.  This includes targeting the upstream organizations that benefit from illegal action and strengthening anti-money-laundering laws to disrupt illicit fund flows and freeze assets related to cybercrime.  The fear of severe legal consequences could help to deter bad actors from pursuing AI-driven fraud schemes in the first place.

## Conclusion

Deepfakes are only one of many new techniques to facilitate cyberattacks, but they feel particularly salient because they are so personal. And they are on the rise.

15   'Computer-Security Incident Notification Requirements for Banking Organizations and Their Bank Service Providers,' 86 Fed. Reg. 66,424 (November 23, 2021),

https://www.federalregister.gov/documents/2021/11/23/2021-25510/computer-security-incidentnotification-requirements-for-banking-organizations-and-their-bank.

We will need financial institutions to adapt, collaborate, and innovate in the face of these emerging threats.

Thank you.",Michael S Barr
https://www.bis.org/review/r250428e.htm,"François Villeroy de Galhau: Preserving our transatlantic values, beyond present unpredictability","Speech by Mr François Villeroy de Galhau, Governor of the Bank of France, at the Foreign Policy Association, New York City, 22 April 2025. ",2025-04-22 00:00:00,"## François Villeroy de Galhau: Preserving our transatlantic values, beyond present unpredictability

Speech by Mr François Villeroy de Galhau, Governor of the Bank of France, at the Foreign Policy Association, New York City, 22 April 2025.

* * *

Ladies and Gentlemen,

It is my pleasure to be here in New York City; and I would like to express my sincere gratitude to Noel Lateef and the Board of Directors of the Foreign Policy Association (FPA) for organising this event and awarding me the FPA medal. It really strikes a chord with me, as I will explain, and even more today when our transatlantic ties are so unfortunately under stress.

## I. A very special gratitude to the FPA, and to your country

I am both honoured and humbled to be included among the distinguished recipients of the FPA medal. These include prominent central bankers, such as Paul Volcker of the Federal Reserve or Jean-Claude Trichet of the European Central Bank (ECB) and the Banque de France. This medal also has a personal resonance. I discovered in depth your beautiful country in March 1990, during a month-long trip of 15 so called ""Young European leaders"" invited by the German Marshall Fund. The United States welcomed us with open arms, taking us from New York City to Seattle, and from Detroit to Raleigh (NC). This was a time of hope, four months after the fall of the Berlin Wall; this was a time of mutual trust across the Atlantic built on the victory of freedom and democracy. This trip left me with a lasting friendship and admiration for the American people.

In a more collective dimension, I like to think that this medal is a testament to the common values and principles that this Association and the central banking community both strive to uphold. Your Association was founded at the end of the First World War by Americans committed [with President Woodrow Wilson] to creating closer ties between nations. It has since worked tirelessly to foster meaningful dialogue on the most pressing international issues, notably through its famous World Leadership Forum. This is especially important at a time when multilateralism is experiencing an unprecedented crisis.

Another common value, beside dialogue, is the importance of public engagement. For more than a century, the FPA and its Great Decisions programme have successfully promoted a more effective participation by American citizens in international affairs. Greater knowledge is indeed the key to informed opinion, and thus to a stronger democracy. At both the Banque de France and the ECB, fostering engagement with the wider public is also a priority. We regularly organise events directly involving the public such as the "" "" [Monetary Policy Forums] similar to Rencontres de la politique monØtaire the ""US Fed listens"". Greater clarity and transparency for our fellow citizens also helps to better anchor inflation expectations and thus to better ensure our price stability mandate.

## II. How to restore trust?

Hence, let me please speak here not only as the French Governor, but as a committed friend of your country and a dedicated European. It is more crucial than ever, across the Atlantic, (1) to tell the truth, (2) to fully assess the damage of a trade war, and (3) to open the way for a possible positive dialogue.

## 1) Telling the truth

We, Europeans, heard with surprise some weeks ago that ""the EU was created to screw the US"". With due respect, let me recall history. The European Union was constructed after WWII to lastingly establish peace, democracy and the market economy in Europe. These are three key American values, and this Union was legitimately founded with American support, as was the Franco-German reconciliation so difficult, yet so decisive.

Furthermore, it is important to set the record straight on economics. No, international trade is a zero-sum game, where one country's gain is necessarily another not country's loss. On the contrary, it is the most effective way to prosper together by exchanging goods and services, ideas, talent, and innovation. And yes, our transatlantic bond is deep, balanced and mutually beneficial. The United States and the EU are the world's two largest economies, maintaining one of the largest bilateral economic relationships, which amounted to around USD 900 billion in goods and USD 800 billion in services in 2023 . While the EU runs a trade in goods surplus with the United States i (USD 234 billion in 2023), the services deficit has widened substantially in the last years (USD 125 billion in 2023) . Net primary income flows in favor of US firms - mostly ii composed of investment income such as profits and asset returns - also offset the trade in goods surplus, ultimately leading to a balanced current account (USD 19 billion in 2023). The effective applied tariffs between the EU and the United States were close before recent developments, with the EU imposing a 3.95% tariff on US products, while the United States applied a 3.5% tariff on EU products iii . And let me remind here the obvious: value-added tax (VAT) is not a customs duty; it is levied on the final value of imported and domestically produced goods equally, like the sales tax in the US. EU and US firms have long established a robust investment presence in each other's markets. European majority-owned affiliates directly employed an estimated 5.3 million US workers in 2023 iv . European-based investors play a crucial role in the strength of the US economy, representing close to 50% of all foreign holdings of US securities in 2023 v

.

## 2) The possible damage of a trade war is huge

The new measures announced as well as the increasing unpredictability, constitute a major negative shock to the global economy, but first and foremost to the US economy.

According to convergent analyses by several US and international banks and today by the IMF, the United States could suffer in 2025 from an average estimated loss of around one percentage point in annual growth and a similar-sized rise in underlying inflation. But bad news for the US is bad news for all, and for Europe. According to preliminary assessments, there could be a direct negative impact of at least a quarter of

a percentage point to euro area GDP growth in 2025. Nevertheless, this depends on the outcome of the 90-day pause on reciprocal tariffs. The impact on inflation remains more uncertain but could be as a whole negative. Our baseline scenario for France and the euro area remains however that of an exit from inflation - returning to our 2% target this year - without a recession.

Financial markets reacted very negatively to these trade announcements with the unusual combination of a sharp drop in US equity indexes, a rise in US long term bond yields, and a broad-based decline in the US dollar value. The economic uncertainty may possibly threaten financial stability. Such deeply negative financial effects would also result from attacks on the independence and credibility of central banks, as we saw very recently.

I don't mean that the latest globalisation wave was a fairy tale: it had its problems and its imbalances, both social and financial. But the current lose-lose game will obviously increase them, and in no way solve them.

## 3) Is there a way for a possible positive dialogue?

I still hope there is, and let me share three more positive reflections to conclude with:

- a) Let us use the 90-day pause to seriously talk. The least economically harmful option would be indeed to negotiate - a bold European proposal, zero-for-zero tariffs for industrial goods, is already on the table - and then de-escalate the situation rather than setting off a transatlantic spiral of tariff hikes. So far, Europeans have reacted in a remarkably united and calm manner. The European Commission has prepared a series of retaliatory measures - in case it would be unfortunately needed - but deferred its application. It is also in Europe's interest to maintain open trade ties with a maximum amount of partners from the Americas to Asia: increasing the number of balanced free trade agreements - including Mercosur - is a strategic priority.
- b) Europe and France also need to become stronger. The only positive I see in this situation, as I said already last November with my German colleague Joachim Nagel , it is a wake-up call for Europe. This is of course the case in terms of defence. But also, in economic matters, where we have the duty and the means to better master our own destiny. We need a ""general mobilisation"" focusing on three imperatives, 3 'i's taking the best of the impressive economic success of America, or if you prefer, size multiplied by muscle multiplied by speed. First, we need to the single market more. This integrate means playing on its size - as large in GDP terms as the United States - by removing internal barriers in several areas such as services and energy. We also need to invest better, giving priority to the most promising breakthrough innovations, and particularly those related to AI. To succeed, we need to build financial muscle through a genuine Savings and Investments Union (SIU) fostering more our abundant private savings towards equity and venture capital. Finally, we need to faster. Europe needs innovate simplification: less bureaucracy, fewer procedures and shorter deadlines. But simplification is not deregulation, the European approach will remain firm on the vii objectives, but be more nimble in design. And to successfully implement these three imperatives, we urgently need a binding, visible and not too distant calendar: such a calendar will mobilise all our political and economic forces, as did in the past the 1 January 1993 for the single market and the 1 January 1999 for the single currency.

c) Europe and the United States can still commit to a ""pragmatic multilateralism"", more focused on some practical themes of common interest, to name just a few: financial stability, cross-border payments and crypto-assets, cybersecurity, the fight against financial crime and the prevention of extreme climate events. Let us preserve the multilateral institutions such as the IMF and World Bank, born and hosted in this great country, with more focused ambitions.

I will conclude by quoting Alexis de Tocqueville, a famous Frenchman - you may recall his influential work ""Democracy in America"" - who also had the privilege of discovering America during a memorable study trip two hundred years ago. ""There is nothing more fruitful in wonders than the art of being free"". viii  I mentioned shared transatlantic values: one cardinal value, freedom, is the driving force behind America's outstanding economic performance. Let us continue as much as possible to cultivate it together, through trade, innovation and robust dialogue! Thank you for your attention.

i  European Commission (2025), EU trade relations with United States  and Banque de France calculations

- ii  Data from Eurostat and Banque de France calculations
- iii  American Chamber of Commerce for the EU (2025), Annual Survey of Jobs, Trade and Investment between the United States and Europe Amcham TAE 25 V6.indd
- iv  American Chamber of Commerce for the EU (2025), Annual Survey of Jobs, Trade and Investment between the United States and Europe Amcham TAE 25 V6.indd
- v  US Treasury (2023), Foreign Portfolio Holdings of U.S. Securities,  shla2023r.pdf
- vi  Nagel (J.), Villeroy de Galhau (F.) (2024), A common call for a Franco-German revival , 22 November
- vi  Villeroy de Galhau (F.) (2025), A European approach to simplification: avoiding three , speech, 11 April misconceptions, and suggesting concrete milestones
- Tocqueville (de) (A.) (1835), [De la dØmocratie en AmØrique]. viii Democracy in America",François Villeroy de Galhau
https://www.bis.org/review/r250428d.htm,"Christopher J Waller: Welcoming remarks - ""Fed Listens""","Speech by Mr Christopher J Waller, Member of the Board of Governors of the Federal Reserve System, at a Fed Listens Event, hosted by the Federal Reserve Bank of St. Louis, St. Louis, Missouri, 23 April 2025.",2025-04-23 00:00:00,"## Christopher J Waller: Welcoming remarks - ""Fed Listens""

Speech by Mr Christopher J Waller, Member of the Board of Governors of the Federal Reserve System, at a Fed Listens Event, hosted by the Federal Reserve Bank of St. Louis, St. Louis, Missouri, 23 April 2025.

* * *

Thank you, Alberto, it is great to be back in St. Louis. And thank you to everyone here for this great turnout, which is itself a big part of what we are trying to accomplish today. 1

Fed Listens is about hearing from the public on the Federal Reserve's approach to monetary policy, and that begins with active and broad participation. Your interest and engagement in the work of the Fed is an essential first step in this process of consultation. In addition to the valuable information that Fed policymakers receive at these events, engagement with the public contributes to a broader understanding of the important role that monetary policy plays in the economy.

As we have heard from President Musalem, the Federal Reserve was, in important ways, actually designed to promote this kind of engagement and input from the public. Unusually among agencies of the federal government, the Fed is located in and part of every region of the United States. Reserve Banks such as the St. Louis Fed carry out a number of important functions, but among the most important is ensuring that the concerns and priorities of the communities each Reserve Bank serves are reflected in monetary policy decisions made in Washington.

This is something I know very well, having served here as executive vice president and research director for nearly a dozen years. I advised on monetary policy while engaging with people throughout the Eighth District, hearing their concerns about how they were faring in the economy, and how they were affected by inflation, interest rates, and the state of the job market. I learned a lot about the economies of Missouri, Illinois, Indiana, Kentucky, Tennessee, Mississippi, and Arkansas (see, I haven't forgotten!). But I learned just as much about how important it is to hear from people directly about their experiences as well as their perceptions, which are sometimes just as consequential for the economy. We call this part of the ""soft"" data that supplements the hard numbers of the government statistics that policymakers eagerly await. The ""hard"" data is indispensable for setting monetary policy, but we can't get a full and detailed picture of the economy without the soft data you can provide.

Fed Listens is directly connected to the Fed's review of our long-run goals and strategy for monetary policy, referred to as our framework, which was last updated five years ago. But in a larger sense, it is part of a broader process of consultation with the public that never stops. We know that individuals, families, businesses, and communities are significantly affected by decisions we make to promote a healthy economy. We want-in fact, we -to know how you have been impacted. We need to know how inflation need and interest rates are affecting consumers. We need to know how rates are affecting

the cost and access to credit by businesses small and large. We need to know how you expect the economy to evolve over the coming months and years, and how that is influencing your plans for the future.

In conclusion, I will say again how great it is to be back in St. Louis, and I look forward to hearing from all of you.

Thank you.

1  The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.",Christopher J Waller
https://www.bis.org/review/r250428c.htm,Christine Lagarde: IMFC statement,"Statement by Ms Christine Lagarde, President of the European Central Bank, at the fifty-first meeting of the International Monetary and Financial Committee, IMF Spring Meetings, Washington DC, 25 April 2025.",2025-04-25 00:00:00,"## Christine Lagarde: IMFC statement

Statement by Ms Christine Lagarde, President of the European Central Bank, at the fiftyfirst meeting of the International Monetary and Financial Committee, IMF Spring Meetings, Washington DC, 25 April 2025.

* * *

## Introduction

Since our meeting last October, the global economic order has changed. While the international community has benefited from an increase in trade and a reduction in barriers over many decades, the escalation of trade tensions and the imposition of tariffs have created strong headwinds for the global economy. The rise in trade policy uncertainty is unprecedented and is weighing on investment. Global growth is expected to continue at a moderate pace, but downside risks have intensified. Trade protectionism and fragmentation could hamper the smooth functioning of global value chains and negatively affect global trade dynamics, which have been a key engine of global growth and shared prosperity in recent decades.

Global inflation is projected to gradually decline amid easing labour markets in advanced economies and the impact of past monetary policy tightening. However, the ongoing escalation of trade tensions complicates the inflation outlook. Tariffs can trigger fluctuations in exchange rates, affect import prices and disrupt supply chains, and the impact on inflation is uncertain. Geopolitical tensions continue to present two-sided inflation risks as regards energy markets, confidence and investment.

In April, the Governing Council lowered the three key ECB interest rates by another 25 basis points. This decision was based on our updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission. The disinflation process in the euro area is well on track.

The Governing Council is determined to ensure that inflation stabilises sustainably at its 2% medium-term target. Especially in current conditions of exceptional uncertainty, we will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance. We are not pre-committing to a particular rate path. Especially when the size and distribution of shocks are highly uncertain, we cannot provide certainty by committing to a particular rate path. Instead, we can provide framework guidance, giving clarity about our reaction function, explaining how the euro area is likely to be affected by different states of the world and clarifying what kind of data we consider when making our monetary policy decisions.

## Economic activity

Euro area real GDP grew by 0.9% in 2024. Incoming data point to moderate growth in the first quarter of 2025, as foreseen in our March projections, but the outlook remains clouded by exceptional uncertainty. Euro area exporters face new barriers to trade.

These disruptions, coupled with tensions in financial markets and ongoing geopolitical uncertainty, are weighing on business investment and consumers are expected to become more cautious about the future, holding back spending.

At the same time, the euro area economy has been building up resilience against global shocks. In the medium-term, the strong labour market, higher real incomes and the impact of our monetary policy should underpin spending. Furthermore, important recent policy initiatives at national and EU levels aimed at increasing defence spending and infrastructure investment will likely have a positive impact on activity and further strengthen long-term growth.

The labour market remains resilient. Employment continued to expand in the fourth quarter of 2024, albeit at a more modest pace, and the unemployment rate declined to a historical low of 6.1% in February. Ongoing labour force growth continues to be supported by migration flows. Labour productivity is expected to improve as labour hoarding eases and profit margins moderate.

In the present geopolitical environment, it is even more urgent for fiscal and structural policies to make the euro area economy more productive, competitive and resilient. To address common challenges effectively, Europe needs to act as one. This requires us to work together towards greater economic integration and to attract talent and investment, especially in innovative and strategically important sectors. It also includes fostering green investment and the decarbonisation of the EU economy, which serve as a catalyst for growth and resilience. The European Commission's Competitiveness Compass provides a concrete roadmap for action, and its proposals, including on simplification, should be swiftly adopted. This includes completing the savings and investment union, following a clear and ambitious timetable, which should help savers benefit from more opportunities to invest and improve firms' access to finance, especially risk capital. It is also important to rapidly establish the legislative framework to prepare the ground for the potential introduction of a digital euro. Governments should ensure sustainable public finances in line with the EU's economic governance framework and prioritise essential growth-enhancing structural reforms and strategic investment.

Downside risks to economic growth have increased. The major escalation in global trade tensions and associated uncertainties will likely lower euro area growth by dampening exports and may also drag down investment and consumption. Deteriorating financial market sentiment could lead to tighter financing conditions and increase risk aversion, making firms and households less willing to invest and consume. Geopolitical tensions, such as Russia's unjustified war against Ukraine and the tragic conflict in the Middle East, also remain a major source of uncertainty. At the same time, an increase in defence and infrastructure spending will likely add to growth.

## Inflation

The disinflation process is well on track and inflation has continued to develop as staff expected. Annual inflation stood at 2.2% in March 2025. Headline inflation resumed its downward trend in February 2025 due to lower energy inflation and lower core inflation, while services inflation also eased markedly after hovering around 4% since November 2023.

Most measures of underlying inflation suggest that inflation will settle at around our medium-term target on a sustained basis. Domestic inflation has declined since the end of last year as the pressure from labour costs eased. Recent wage negotiations point to a continued moderation in labour cost pressures supporting the disinflation process.

Looking ahead, inflation is expected to hover around our two per cent target. Growing global trade disruptions are adding uncertainty to the outlook for euro area inflation. Falling global energy prices and a stronger euro could dampen inflation. This effect can be amplified by weaker demand for euro area exports owing to higher tariffs, and a rerouting of exports into the euro area from countries with overcapacity. Adverse financial market reactions to trade tensions could weigh on domestic demand and thereby also lower inflation. By contrast, a fragmentation of global supply chains could raise import prices and hence inflation. A boost in defence and infrastructure spending, along with extreme weather and the broader climate crisis, could also raise inflation over the medium term.

## Financial stability, euro area banking sector and non-bank financial intermediation

Despite very sharp movements in the global financial markets, the euro area financial sector has remained resilient. Headwinds from international trade and macro-financial challenges have become more acute and their impact on the economy at large, including on the financial sector, is still to be determined, especially in countries with more export-oriented economies. However, after regulatory reform and years of strong supervision, the euro area banking sector is facing this uncertain environment with robust capital and liquidity positions.

Although the euro area's non-bank financial intermediation (NBFI) sector has not shown significant signs of stress this year, liquidity vulnerabilities remain elevated. Coupled with pockets of high leverage, this could amplify potential market-wide stress, and the sector may face challenges from rising market volatility and geopolitical uncertainty.

To ensure the overall economy can continue functioning during periods of intense stress, a resilient financial sector capable of absorbing shocks is crucial. Therefore, in addition to continuing with strong banking supervision, macroprudential requirements must be maintained and the Basel framework implemented. Moreover, the resilience of the NBFI sector should be significantly strengthened in line with Financial Stability Board recommendations. This means enhancing the macroprudential policy framework for non-banks, ideally in an internationally coordinated way.

Despite the recent increase in crypto-asset market capitalisation, risks to euro area financial stability appear limited at this stage, although data gaps make it impossible to conduct a full assessment of every contagion channel, especially those related to nonbanks. However, if the current trends of crypto-asset growth and interconnectedness with the financial system continue, crypto-assets will eventually pose a risk to financial stability. At the same time, global implementation of regulatory frameworks for cryptoassets remains fragmented. To mitigate risks, the G20's crypto-asset roadmap must be

implemented globally. By implementing the Markets in Crypto-Assets Regulation (MiCA), the EU has taken an important step. However, continued vigilance will be crucial to adapt to market developments.

In addition, launching a digital euro would ensure that citizens and merchants could continue to benefit from the co-existence of private and public money in a digitalised world, thus enhancing our resilience and sovereignty in retail payments. By offering a secure and universally accepted digital payment option, the digital euro would reduce our dependence on foreign providers.

## International cooperation

In view of the current uncertain geopolitical and macroeconomic environment in a highly interconnected world, international cooperation remains essential. As platforms for cooperation, our multilateral institutions and fora are pivotal in helping us address our shared concerns as we strive to promote macroeconomic and financial stability. A wellfunctioning global financial safety net with a strong International Monetary Fund at its centre continues to be crucial for preventing and managing crises. It is our duty to ensure that our multilateral institutions remain effective in dealing with current and upcoming challenges.

In the field of payment systems, the Eurosystem is committed to advancing cooperation with its partners. The TARGET Instant Payment Settlement (TIPS) service can now settle instant payments in Danish kroner in addition to euro and Swedish kronor. The feasibility of establishing technical links with other fast payment systems for seamless, fast and transparent cross-border payments is being explored. The Eurosystem is also committed to the financial integration of the Western Balkans, where the Banca d'Italia, as a TIPS service provider, is working to develop an instant, multi-currency payment system based on TIPS software.",Christine Lagarde
https://www.bis.org/review/r250428b.htm,Sanjay Malhotra: Welcome address - 24th FIMMDA-PDAI Annual Conference,"Welcome address by Mr Sanjay Malhotra, Governor of the Reserve Bank of India, at the 24th Fixed Income Money Market and Derivatives Association of India - Primary Dealers Association of India (FIMMDA-PDAI) Annual Conference, Bali, 18 April 2025.",2025-04-18 00:00:00,"## Sanjay Malhotra: Welcome address - 24th FIMMDA-PDAI Annual Conference

Welcome address by Mr Sanjay Malhotra, Governor of the Reserve Bank of India, at the 24th Fixed Income Money Market and Derivatives Association of India - Primary Dealers Association of India (FIMMDA-PDAI) Annual Conference, Bali, 18 April 2025.

* * *

It  is  a  pleasure  to  be  here  at  the  24th  FIMMDA-PDAI Annual Conference in Bali, an island that shares a deep and rich heritage with India, marked by centuries of cultural and commercial ties.

The past year has been eventful for financial markets globally. The initial optimism that global central banks were poised for synchronised easing of interest rates, seemingly reaching the final stage in their battle against high inflation, gave way to unprecedented uncertainty in  recent  months.  In  this  backdrop,  this  conference  provides  an  excellent opportunity  for  a  fruitful  exchange  of  ideas  and  vibrant  discussions  among  financial market  participants.  I  thank  the  organisers  FIMMDA  and  PDAI  for  giving  me  this opportunity to participate in the conference and share my thoughts.

The  Indian  economy  and  the  financial  markets  have  demonstrated  remarkable resilience while they are not immune to the vagaries of an uncertain and volatile global environment.  As  I  mentioned  in  my  statement  post  the  recent  monetary  policy announcement, our domestic growth-inflation balance has improved significantly. There has  been  a  decisive  improvement  in  headline  inflation  which  is  projected  to  remain aligned  to  the  target  of  4  per  cent  in  FY26.  Global  uncertainties  and  weather disturbances,  however,  pose  risks  to  the  inflation  outlook.  Even  though  we  have projected a somewhat lower real GDP growth for FY26 at 6.5 per cent, India is still the fastest growing economy. Yet, it is much below what we aspire for. We have reduced repo rates twice and provided sufficient liquidity. In view of the rapidly evolving situation, especially  on  the  global  front,  we  are  continuously  monitoring  and  assessing  the economic outlook. We will be agile and proactive in our actions on the policy front, as always.

Coming  to  the  Indian  financial  markets,  all  market  segments  including  FX,  G-sec, Money Markets, have largely remained stable. While the Rupee came under a bit of pressure  a  few  months  ago,  it  has  fared  better  thereafter  and  regained  some  lost ground. Equity markets experienced significant correction, as capital outflows accelerated, a trend seen in most emerging markets. The government securities market has however, remained rock-steady throughout the year. The gross market borrowings of  the  central  and  state  governments,  totalling  24.7  lakh  crore  in  FY  2024-25,  sailed through smoothly. The cost of borrowing for the central government came down by 28 basis points to 6.96 per cent in FY25 from 7.24 per cent in FY24. The secondary market in  g-secs continued to be deep and active, partly aided by India's inclusion in global bond indices.

Meanwhile, we stand at the threshold of an exciting phase of transformation in India - a transformation that has faced many  challenges, but is imbued  with exciting

opportunities  -  our  demographic  dividend,  our  skilled  manpower  and  our  ability  to develop and harness technology to transform society. Against this backdrop, the theme of  this  year's  conference  -  ""India's  Financial  Markets:  Navigating  Through  Shifting Tides"" is timely and relevant.

## Financial markets - looking back and forging ahead

If  India  is  to  navigate  the  shifting  tides  and  fulfil  its  aspirations,  financial  markets  will have to play a crucial role. As the marketplace for raising capital and trading financial assets, financial markets are key enablers of economic growth. Financial markets have existed  for  centuries.  They  have  evolved  over  time.  The  complexities  of  financial markets have baffled humanity for centuries with one of history's greatest minds, Sir Isaac Newton, after losing his fortune in the South Sea Bubble, famously lamenting that ""I can calculate the motions of the heavenly bodies, but not the madness of people."" 1 Integrity of operations and the fostering of trust are fundamental to any financial market. Indeed, ensuring these elements is one of the primary objectives of financial market regulation. While, we realise as Benjamin Graham said that in the short run, market is a voting machine, but in the long run, we have to ensure that it is a weighing machine.

In  India,  financial  markets  have  evolved  within  a  regulated  framework,  adapting  to changing regulatory philosophies and approaches. Up until the last decade of the 20th century,  India's  financial  markets  were  shaped  by  a  conservative  macro-financial stance. From the 1990s, the foundation of robust and well-functioning financial markets started being built. Interest rates were deregulated. The exchange rate was freed. The Rupee  became  fully  convertible  on  the  current  account.  The  capital  account  was progressively  liberalised.  In  the  years  that  followed,  even  as  the  financial  markets  in India developed, the overarching approach was driven by the priorities of macroeconomic and financial stability. In recent years, however, our growing and more interconnected economy placed increasing demands on financial markets.

Against this backdrop, the Reserve Bank's efforts in recent years to develop financial markets have focused on supporting the needs of an aspirational economy. I won't go into the details, as the audience here is well-versed in the various regulatory changes that  have been brought about in recent years. Instead, I will focus on what we have accomplished and the work that still lies ahead.

## Financial markets: Recent trends

Over  the  past  few  years,  we  have  witnessed  significant  developments  that  have transformed our markets into a dynamic and resilient force. Let me give a few statistics to illustrate:

- 80 per cent increase in average daily volumes in the overnight money markets from about 3 lakh crore in 2020 to over 5.4 lakh crore in 2024;
- 40 per cent increase in average daily volumes in the g-secs markets to 66,000 crore over the same period;
- Almost doubling of average daily turnover in the forex market from 32 billion USD in 2020 to 60 billion USD in 2024;

- 622 per cent increase in notional outstanding interest rate derivatives from around 18 lakh crore in 2015 to over 130 lakh crore at the end of FY25;
- 2,233 per cent increase in average daily client volumes in MIBOR OIS (the most liquid derivative product) from approximately 600 crore in 2015 to nearly 14,000 crore in 2024;
- 73 per cent growth in average daily volumes in FX forwards and swaps from US$ 15 billion to over US$ 26 billion over the last decade; and
- Daily volumes of about US$ 7 billion in Non-deliverable forward (NDF) trades by domestic banks in recent months compared to negligible volumes on June 1, 2020, when it was first permitted.

The number of participants in the markets have also increased concomitantly:

- Several standalone primary dealers have been granted Authorised Dealer licences. The set of eligible market-makers has been expanded for the interest rate and credit derivative markets though interest here appears muted.
- In the last decade, the number of clients registered with the CCIL Trade Repository for interest rate derivatives has increased by about 3,233 per cent from about 300 to nearly 10,000 and for foreign exchange derivatives by 3,854 per cent from 2,200 to about 87,000. Of course, not all clients will be active participants.
- Non-resident participation has also increased in the g-sec market especially after the inclusion in global bond indices. Foreigners now hold 3.2 per cent of g-secs as compared to 1.7 per cent in August 2023, ahead of the first announcement of the inclusion. Non-resident participation in the derivative markets has also been growing.

There  have  been  significant  developments  in  financial  market  infrastructure  as  well. Repo  and  government  securities  markets  predominantly  function  on  electronic platforms, and are centrally cleared. Most forex spot and forward transactions as well as most MIBOR and Modified MIFOR based interest rate swaps also trade on electronic platforms  and  are  centrally  cleared.  All  OTC  derivatives  are  reported  to  a  trade repository.

There  is  also  growing  product  diversity.  While  plain-vanilla  products  dominate  the derivative  markets,  there  has  been  a  noticeable  rise  in  customized  products  in  both interest rate and forex derivatives, tailored to meet the diverse hedging needs of various stakeholders.  Recently,  forward  contracts  in  government  securities  have  also  been permitted.  The  approach  to  structured  products,  particularly  those  with  asymmetric payoffs,  has  remained  cautious  and  responsible.  We  plan  to  continue  the  same approach.

We  have  made  significant  strides  in  the  development  of  financial  markets  in  our country. Motivated to fulfil the nation's evolving needs and aspirations and guided by

learnings from successive crises, our markets have matured and advanced. Our market infrastructure is state-of-the-art. The levels of transparency are at par with the best in the  world.  Markets  for  government  securities,  foreign  exchange,  and  key  derivative products are highly liquid, relative to most peer economies and even to many advanced countries. With recent regulatory reforms, we have seen greater product and participant diversity, and the onshore and offshore markets have become tightly integrated.

These advancements are a testament to your dedication, innovation, and collaborative efforts. I congratulate all of you for your contributions in this joint endeavour. Today, we have  vibrant  financial  markets  which  not  only  continue  to  support  India's  economic growth but also inspire global confidence. But there is more to be done. Let me briefly outline my thoughts on some of these areas.

## Issues and concerns

## The Government securities market

The g-sec market is perceived as one of the most liquid markets globally as evidenced by low bid-ask spreads and low impact cost. However, the turnover ratio (measured as the annual turnover to outstanding stock of securities) of dated government securities has remained modest at just over one (1). If the less liquid state government securities (SGSs)  are  included,  the  ratio  falls  to  below  one  (1).  Liquidity  continues  to  remain concentrated  in  few  securities,  thinning  out  for  longer  maturities.  Secondary  market trading  is  dominated  by  banks  and  primary  dealers  with  many  large  institutional investors remaining ""buy and hold"" investors. Of the 3,000 plus institutional investors in g-secs, the top ten participants contributed a third of the overall turnover during 2024.

One continuing endeavour of the Reserve Bank has been to increase retail participation in  the  g-sec market. The launch of 'RBI Retail Direct' facility in November 2021, was one  initiative  in  this  direction.  Recently,  a  mobile  app  for  Retail  Direct  has  been introduced.  RBI  also  recently  permitted  retail  clients  of  SEBI-registered  non-bank stockbrokers to access NDS-OM. All of this makes it imperative to ensure that sufficient secondary market liquidity is available to such investors to be able to participate in the market at reasonable prices. Liquidity and pricing also need to improve for participants like cooperative banks, pension and provident funds with smaller deal sizes. Banks and primary dealers may need to play a much more active role to this end.

## The Money Markets

The  money  markets  in  the  country  remain  almost  entirely  overnight.  Despite  many efforts  over  the  years  to  develop  a  term  money  market,  for  example  by  removing statutory  pre-emptions  on  inter-bank  liabilities  and  by  conducting  term  repos/reverse repos of varying maturities, term markets remain missing especially in the 3 days to three months segment. Though alternatives such as overnight indexed swap rates and yields on treasury bills are being used, there remains a need for the development of a risk-free  term  structure  to  act  as  a  benchmark  for  pricing  of  interest  rate  products, including loans.

The dwindling liquidity in the call money market - whose rate is the operating target for monetary policy - also requires attention. This market is also critical for the robustness

of the MIBOR, the benchmark for the interest rate derivative market. Also of concern are the asymmetries which arise on occasions between different money market ratesthe rate at which RBI provides liquidity, the call money rate, the market repo rate and TREPS rate. This calls for more proactive functioning by banks - the entities with sole access  to  RBI's  liquidity  facilities,  the  call  money  market  and  the  repo  markets  -  to ensure  that  RBI's  liquidity  measures  are  promptly  and  seamlessly  transmitted  to  the broader market.

## The FX markets

The  foreign  exchange  markets  are  reasonably  liquid  with  narrow  bid-ask  spreads. There  is  growing  transparency  in  this  market.  All  FX  derivatives  are  reported  to  the Trade Repository and reporting of cash, tom and spot transactions has commenced . A 2 bulk  of  FX  spot  transactions  are  traded  on  electronic  trading  platforms  (ETPs). Authorised  trading  platforms  are  also  available  for  forward  transactions  but  there appears to be a preference for such trades to take place bilaterally. Trading on ETPs enhances transparency and market efficiency. We would like to see an increasing share of transactions done on ETPs.

In  January 2020, banks were permitted to deal in FX beyond onshore market hours. While volumes are not significant, we do see banks transacting both prior to and post onshore  market  hours.  Such  trading,  however,  is  largely  confined  to  the  period immediately before and after domestic FX market hours, suggesting that we are still some distance away from a true 24*5 market.

Fair treatment of customers and transparency in forex pricing for the smaller and less sophisticated  customers  continues  to  engage  our  attention.  Much  more  can  be  and needs to be done here. Divergence in pricing in FX markets for the small and large customers are far wider than what can be justified by operational considerations. FXRetail,  a  transparent  platform  for  undertaking  FX  transactions,  has  witnessed  a lukewarm response and our feedback is that this is largely  due  to  the  reluctance  of banks to offer the platform to their customers. There are regulations in place to ensure transparency in pricing for retail customers including a mandate for disclosing the midmarket  or  interbank  rate  to  customers.  As  an  industry,  there  is  a  need  for  marketmakers to  introspect  and  assess  in  what  ways  they  can  effectively  deliver  on  these regulatory and fiduciary mandates.

The  Reserve  Bank  has  recently  announced  that  access  to  FX  Retail  will  also  be provided  through  the  Bharat  Connect  platform.  In  the  first  phase,  a  pilot  to  facilitate purchase  of  US  dollars  by  individuals  is  planned.  Subsequently,  its  scope  will  be expanded based on the experience gained. I would appeal to all the financial market participants  including  Authorised  Dealers  to  extend  their  full  cooperation  in  ensuring that the pilot is implemented smoothly and successfully.

We also continue to see banking channels being used for activities on unauthorized FX trading platforms. This calls for greater vigilance and stronger efforts by banks to create awareness among their customers about the perils of using such platforms . 3

## The derivative markets

The size of the derivatives market, while growing, remains small in absolute terms and relative to our GDP. There are other issues apart from that of size. The liquidity in the interest rate derivative markets, for example, is limited to one or two products. Despite many efforts  over  the  years,  the  interest  rate  futures  market  or  the  credit  derivative market are yet to pick up. Market-making remains confined to banks, both in FX and interest  rate  derivatives.  While  this  is  not  surprising,  given  that  the  Indian  financial system is bank-dominated, the presence of a wider variety of players has the potential to enhance market depth, add to the diversity of views and foster greater competition and  efficiency.  Meanwhile,  developments  elsewhere,  including  the  need  for  more proactive  management  of  risks  by  different  stakeholders,  have  made  the  further development of these markets an imperative.

In  this  context,  you  are  aware  that  an  increasing  number  of  bank  loans  are  getting priced off external benchmarks, mostly the policy repo rate. The swap market based on an overnight rate may not be best suited to hedge such exposures especially as it is also used to express views on expected monetary policy movements. As was observed by the Committee on the MIBOR Benchmark, most developed countries have at least two major benchmarks - one used to take a view on the future movements of the policy rate and another used by the real sector to hedge risks. At least, a market for basis swap  instruments  needs  to  develop  to  manage  the  associated  basis  risks.  The Committee also recommended the development of a Secured Overnight Rupee Rate (SORR)  based  on  the  secured  overnight  market.  I  understand  that  the  Financial Benchmarks  India  Limited  (FBIL)  is  developing  the  benchmark.  Going  forward, derivatives based on the SORR will also need to be developed.

## Concluding remarks

Today,  financial  markets  stand  at  a  cusp  of  transformation  between  global  and domestic  headwinds,  unprecedented  opportunities  and  growing  public  expectations. When transformations such as these take place, there are many moving parts which need to come together like the pieces of a jigsaw and many stakeholders who have critical roles to play. FIMMDA and PDAI have been playing critical roles in fostering the development  of  Indian  financial  markets.  In  many  ways  though  not  formally  so, FIMMDA has functioned as a self-regulatory  organization  (SRO)  in  the  fixed  income and money markets of the country. I am aware that FIMMDA has applied for recognition as an SRO under the framework for the recognition of the SROs in financial markets issued by RBI. While we are examining the request, we expect to see FIMMDA and PDAI continue partnering with us in further developing financial markets in India.

As India forges ahead to take its rightful place in the emerging global order, financial markets have a crucial role to play. Financial markets will need to facilitate efficient and cost-effective  funding  for  realising  the  aspirations  of  the  country.  They  will  need  to enable the economic agents to manage their risks more efficiently amidst shifting global and domestic tides. They will also need to ensure fairness to every stakeholder as they chart ahead and make themselves robust, resilient, and future-ready.

As I conclude, I invite you to reflect on the intricate and dynamic wheels of finance that shape not only our markets but the very foundation of India's economy. These wheels, powered by transparency, trust, and innovation, require each cog - every participant in this room - to perform its role with purpose and integrity. Let us move forward with a

shared commitment to manage risks wisely, foster growth responsibly, and ensure the integrity of our financial markets.

Thank you.

- 1  Brunnermeier, M., and Reis, R. (2023). ""A Crash Course on Crises: Macroeconomic Concepts for Run-ups, Collapses, and Recoveries"".
- 2  In terms of notifications  RBI/2024-25/89/FMRD.MIOD.07/02.05.002/2024-25 dated November 8, 2024, on ""Reporting of Foreign Exchange Transactions to Trade Repository"", Authorised Dealers have started to report all inter-bank FX contracts undertaken by them to the Trade Repository of CCIL with effect from February 10, 2025.
- 3  The Reserve Bank, on its part, has been regularly updating the Alert List of unauthorized forex trading platforms and conducting awareness campaigns to educate users.",Sanjay Malhotra
https://www.bis.org/review/r250428a.htm,Klaas Knot: Agnostic or preaching the gospel - what the state of the world implies for ECB monetary policy and the role of the euro,"Speech by Mr Klaas Knot, President of De Nederlandsche Bank, at the Peterson Institute, Washington DC, 23 April 2025.",2025-04-23 00:00:00,"## SPEECH

## Agnostic or preaching the gospel: what the state of the world implies for ECB monetary policy and the role of the euro

'A more widespread use of the euro would be a good thing for Europeans.', said Klaas Knot in his speech at the Peterson Institute in Washington today. He spoke about what the current economic situation means for the ECB's monetary policy and for the international use of the euro.

Published: 23 April 2025

Speech Klaas Knot Peterson Institute Washington, 23 April, 2025



Thank you for the invitation to speak here in front of such a distinguished audience and at a time of great consequence for the US and European economies. We surely live in interesting times. After the Covid pandemic and the Russian invasion of Ukraine, history is taking a new turn. It is clear that the new US administration has pressed the reset button in its relations with many parts of the world, including Europe. Where these relations will go is still unclear, although I remain hopeful that 'reset' will not become 'eject'. It will probably take some time before we will see the full economic effects of the seismic changes that have taken place over the past few months. Or, as the American rock band The Eagles sang in the 1970s: 'we'll find out in the long run.'

But as a central banker, just as other policy makers, you cannot always wait for the long run. So what I would like to do today is to discuss with you some of the implications of the latest developments for the European economy and inflation, for monetary policy and for the role of the euro, based on what we now know.

In the euro area, after a couple of years of high price increases, we have finally left the inflation surge behind us. Looking at our projections, the ECB's inflation target of 2% is within reach. So one would expect monetary policy to return to stable waters. But then somebody threw a stone in the water.

Basically, we are talking about two stones here. First, the imposition of significant import tariffs and the pretty extreme uncertainty surrounding it, and second the prospect of higher defence spending in the euro area. Given that the situation has not yet stabilised, it is difficult to estimate precisely what the impact of both developments will be on growth and inflation.

With that disclaimer in mind, let me give it a shot.

Firstly, on the impact of the new tariffs. Economists see an increase in tariffs typically as a negative supply shock, because it makes traded goods more expensive. For European firms, US tariffs potentially also contribute to lower foreign demand.  But that's not the whole story. The heightened uncertainty surrounding these policies undermines economic confidence, dragging further down demand [chart 1]. Firms are more hesitant to invest when they cannot be confident about policies, households may be less likely to spend if they are worried about a recession. The recent pessimism on financial markets provides clear evidence of that.

Our own models at the Dutch central bank suggest that a US tariff of 25% on imports from Europe would lower euro area growth by about 0.3 percentage points. Tit-for-tat retaliation would further increase the drag on both the EU and the US. The brunt of the impact on growth would be around the second year after the tariff hike. Afterwards, it would moderate over time, but it would leave a persistent decrease in output. In a world with higher trade frictions, we are all worse off [chart 2].



Many such estimates have been produced recently, including by the Peterson Institute. So I think that in this crowd, I am preaching to the choir when I say that tariffs are bad for the world economy.

On inflation, views differ more, and the effects are harder to simulate with our models. According to our simulations, inflation would likely rise in the short term, and turn lower again after about a year as a result of the slump in demand. Nevertheless, initial reactions to the tariff news indicate that the effects may play out quite differently. Policy uncertainty is pulling forward the demand effect. And more generally, current movements in markets are going in different directions than our models predict, especially when it comes to the exchange rate. The strong euro, together with falling energy prices, suggests that the near-term impact might not be so inflationary after all. For the medium term, however, there still is the risk that disruptions in global supply chains will put upward pressure on prices. The inability to capture the situation in our models as it is unfolding, combined with the high level of uncertainty, makes this a very challenging environment to navigate.

Especially since, besides the US trade shock, we have to reckon with major fiscal policy changes. The shift in US foreign policy, together with the continued Russian threat, has finally got Europe's attention when it comes to taking care of its own defence. Many European governments are prepared to borrow substantially more for this aim. In Germany, the famous 'Schuldenbremse' - the debt brake - has been lifted. The prospect of higher European defence spending as well as Germany's historic fiscal boost will have an upward impact on growth in the medium term.

The upcoming boost in government spending is already reflected in business and investor confidence surveys, and in market pricing. Of course, it remains to be seen how fast these ambitions can be realised, and how exactly additional spending will affect growth and productivity. In any case, especially given the still-tight labour markets, it seems likely that the fiscal boost will contribute positively to inflation. An effect that will build up over time, as spending is being ramped up.

What does all this mean for the ECB's monetary policy?

Needless to say, the ECB Governing Council's focus is on maintaining price stability, in accordance with our mandate. Our interest rate decisions have been guided by three criteria: the inflation outlook, the underlying inflation and the strength of monetary policy transmission.

First, the inflation outlook. The latest figures and the ECB's most recent projections, dating back to March, show that inflation is well on track to return to target. In these projections, inflation has been revised upwards slightly in the short term, which means that the moment when we expect to reach 2% has been pushed back a bit, to early 2026. However, this was under the assumption of high energy prices, which have fallen since then. So in the near term inflation might well fall faster due to the euro appreciation, energy prices and the negative impact of uncertainty and tariffs on growth. In the medium term, the effect of tariffs is much more uncertain. Even if the demand effects persist, supply chain disruptions and retaliatory tariffs could push up prices. Similarly, all things equal, the fiscal impulse will contribute positively to inflation. So while near-term risks are downward, for the policy-relevant medium-term this is far less clear.

Second, we carefully monitor the dynamics of underlying inflation, the persistent component of inflation. Inflation in the services sector is still elevated, but falling as expected, as is wage growth. So at the moment this is looking good. We will, however, keep an eye on the extent to which the fiscal boost will put pressure on the already tight labour market.

And third, we consider the strength of monetary policy transmission to the economy. What we see in this chart is that the decreasing degree of monetary tightening is reflected in the loan and savings rates for households and firms, which are already much lower than last year's peak [chart 3]. We also see the loan volumes gradually increasing, a trend which picked up further in February [chart 4]. To assess whether this recovery will continue, we also closely watch how markets are digesting the news of the past weeks and how this is passing through to financing conditions.

On the basis of this assessment, the ECB cut its policy interest rates further by 25 basis points last week to a level of 2.25%. This means the ECB is lifting its foot off the brakes even further.



Looking forward, we will continue to take a data-dependent and meeting-by-meeting approach to determine the right monetary policy response. For me personally, our last meeting was a perfect illustration of the importance of this. Before the US tariff announcements, I was increasingly confident that inflation was developing in line with our intentions, and could have favoured a hold. Recent events have however increased near-term downside risks to inflation, and so I was on board with the rate cut. It insures against the near-term downside risks to both growth and inflation. But as I just argued, over the policy-relevant medium term, uncertainty around the outlook still is much more symmetric. For me, this suggests that a policy rate that is neither accommodative nor restrictive broadly remains the place to be. In any case, we will keep a medium-term focus, and aim to set policy in a manner that will result in inflation around the 2% target sustainably and with sufficient confidence not just in the baseline, but in a range of scenarios.

Ok, so I talked about the economy, inflation, and the ECB's monetary policy. But what does all this economic mayhem mean for the euro? And especially, what does it mean for the international role of the euro?

One thing you should know is that discussions about the international role of the euro are older than the common currency itself. Back in 1997, so two years before its introduction, I was at an IMF seminar about the implications of the euro for international monetary system. What I recall from the seminar was that there was wild speculation about whether the euro would become a major reserve currency. And few believed that the euro would ever dethrone the dollar as the world's leading currency.

And of course, that didn't happen. Upon the introduction of the euro, its international dimension initially developed well. The euro's external use rose above the combined share of its predecessor currencies, notably the Deutschmark (also



## see ECB (2024)

) [chart 5]. But then we got the global financial crisis, soon followed by the euro crisis, which laid bare serious design flaws in the Economic and Monetary Union. This did not exactly help to boost the euro's international appeal. However, commentary has been building that the euro might be heading for a comeback. At a minimum, the momentous shift in US economic policies provides a natural moment to revisit the issue.



Notes: Composite index based on use of eure in intennational bonds, loans and deposits by non-EA banks to/from mon-EA borrowers, global foreign exchange settlements reserves regimes. Source:

ECB (2024)

The international position of a currency is to some degree based on a self-reinforcing mechanism. People around the world use dollars to make transactions and set prices, and they also hold a lot of dollars. And because of that, other people do the same. Apparently, Kindleberger once compared the role of the dollar as an international currency to the role of English as an international language. I think that is still a good comparison.

Because of the strong pull of this effect, it usually takes a crisis to dethrone a world currency. The pound was replaced as dominant currency in the period between the world wars, while in more recent periods Brexit contributed to further dollarisation of non-EU trade in the UK. And the role of the euro in international financial markets substantially dropped during the euro area crisis years.

With the geopolitical tensions, the trade war, and the unusually high uncertainty about the future course of US economic policy, it is only natural for reserve managers to rethink the diversification of their foreign currency portfolio. A question that then comes up is to which extent the dollar can still be regarded as the safe haven. In the same vein, the current juncture offers an opportunity for the euro. For all its flaws, the European Union remains a pillar of the rules-based world order, which in an increasingly uncertain world may be the ultimate safe but increasingly scarce asset.

This gives rise to the question: should European policy makers pursue a larger international role for the euro?

The ECB has traditionally taken an agnostic view to this. And I have always shared that view. Promoting the international use of the euro has never been part of our mandate as a central bank, a mandate which is indeed solely focused on maintaining internal price stability. The external use of the euro is a reflection of the strength of the European economy and financial markets, and it has both positive and negative implications for the central bank's control of inflation.

Nevertheless, I think that my agnostic attitude recently seems to have shifted somewhat towards a state that perhaps could best be described as a cautious believer. The main reason for this gradual shift is the need for more European strategic autonomy in an increasingly hostile world.

The benefits are obvious in payments and financial markets. European payments systems and financial markets infrastructure are highly dependent on foreign service providers. This makes the operation of our vital economic functions vulnerable to sudden shifts in policies by foreign countries, to an extent that many Europeans would no longer find acceptable. It is also from this perspective that the digital euro could prove a valuable innovation.

But the benefits extend well beyond such considerations. Invoicing more imported goods in euros helps to shield Europeans from exchange rate shocks. And a greater demand for euro-denominated assets can draw in foreign investors, which reduces financing costs for governments and firms. This is the so-called 'exorbitant privilege', that over the years has become so attached to the dollar as the world's number one currency. This privilege may be even more pronounced in times of stress, due to safe haven flows taking place in such times.

And indeed the smooth absorption of government bonds that have become available on the back of quantitative tightening by the ECB, with a substantial share being snapped up by foreign investors, is an indication of the attractiveness of safe euro-denominated assets for foreign investors. I think we can safely say quantitative tightening has been facilitated by the attractiveness of the euro.

At the same time, a larger international role for the euro comes with responsibility. Foreign entities may look more to the ECB in times of market distress, in a way that the Federal Reserve has been central in the international monetary system. Fortunately, the ECB has evolved over the years, and has a wide range of tools at its disposal to safeguard price stability, and to stabilise financial markets if need be.

So in my view, a more widespread use of the euro would be a good thing for Europeans.

The next step is then of course: what steps could European policy makers take to strengthen the international role of the euro?

Well, as I said, external strength is a reflection of internal strength. The external attractiveness of a currency can therefore be supported by policies that improve the strength and efficiency of its economy and financial markets, backed by robust institutions.

For the ECB that means continuing to fulfil our mandate of maintaining price stability. This helps to underpin a healthy economic development and supports investor confidence in euro-denominated assets retaining their value. During the IMF conference I mentioned, almost 30 years ago, this was seen as a key condition.

I am pleased to see that, overall, we have done a good job of meeting this condition.

As for governments: in addition to remaining committed to being an open, dynamic economy and anchor for the rules-based world, important steps need to be taken to integrate the internal market, and in particular to integrate and deepen financial markets. Here, we still have quite some work to do in Europe.

Strengthening the European internal market would first and foremost be good for the European economy and for European companies and households. The IMF has recently estimated that by reducing the barriers in our internal market to levels comparable to those in the US, the EU could increase its productivity by almost 7 percentage points. As a welcome byproduct, this would probably also increase the attractiveness of the euro as a world currency.

Secondly, we currently do not have a single capital market, like you have here in the US. If you, as a US investor, wish to invest in firms across the EU, you potentially have to deal with up to 27 sets of rules and regulations, for example regarding corporate law and insolvency frameworks. This diminishes the attractiveness of our capital markets and means we forego billions of euros in riskbearing capital that could help boost new firms and technologies. If we would succeed in harmonising these rules, and remove the remaining barriers to cross-border capital movements, this would lower the cost for foreign investors to enter the European capital market. This would make it easier for European firms to issue debt, which in turn could lead to a further deepening of capital markets. Another example of a self-reinforcing mechanism. This would then boost private investment and make the European economy more resilient. So, the diagnosis is clear, as well as the treatment. But until now harmonising regulation has proven to be a formidable obstacle. Still, if we ever want to equal the dynamism and size of US capital markets, we really need to make progress in this area.

Another specific policy action that may contribute to a larger role for the euro is the further issuance of common safe assets - eurobonds. They were once quite controversial, but the experience with EU bonds that were issued during the pandemic was positive. The demand for these bonds among nonEuropean investors has been a welcome reflection of investors' faith in Europe's financial solidity.

The European Commission has proposed the issuance of additional common debt to finance higher defence spending. Further issuance of this euro-denominated safe asset would be a strong signal of further unity and integration in these divisive times. It would also signal that the issuance of common debt during the pandemic was not a one-off, and more structural issuance would increase the attractiveness for investors. It could be particularly helpful at a time when investors may be considering the distribution of their international asset holdings. Mechanically, adding supply to the market helps to make the eurobond market more liquid, potentially further drawing in foreign investors. This could also have helpful spillovers to other parts of the European debt market.

Of course, the strength of the euro is highly dependent on sustainable public finances. The average euro area government debt to GDP ratio is currently 88 percent, which is notably lower than the US federal debt ratio. But it is very high in a number of countries. Given the urgency of higher European defence spending, a temporary increase in debt may well be unavoidable. At the same time, we should avoid a continuous 'ratcheting up' of debt levels after crises. Financing common challenges with EU debt is not a way to circumvent the need for sustainable public finances. The servicing costs of EU debt are ultimately borne by the same taxpayers as those of national and local debt, even if common issuance can lower the average cost. In the medium term, higher EU debt should therefore go hand in hand with lower national debt levels. And an exception to the EU fiscal rules for national spending should be limited in time and scope, in other words for defence expenditure only.

I am wrapping up. For sure, the momentous events of the past months will have their bearing on the economy and inflation. For the ECB's monetary policy, this means that we will continue to take a data-dependent and step-by-step approach to determine the right monetary policy response.

Whether current events will have a positive impact on the international use of the euro is hard to say, but I would not be surprised if it did to some extent. This can prove valuable for the European economy. At the same, boosting the international role of the euro cannot be a standalone policy target. As I've tried to make clear, external strength is a reflection of internal strength. Our priority in Europe should be to further strengthen the European internal market. Especially in times of high uncertainty, a robust EU internal market serves as a first line of defence against external shocks. That should be the focus of European policymakers. Ultimately, a stronger euro area will imply a more attractive euro, which in turn could give a welcome push towards reaching our strategic economic goals. Whether you are an agnostic, a cautious believer, or preaching the gospel in the streets, that is simply how it works.

And all that aside, first best would of course be that we maintain a degree of international economic cooperation and stability. The United States and Europe have longstanding and deep historical and economic ties. And we have both long been solid pillars of a world economy that is based on rules. It is my conviction that this system has worked very well for both of us, and that all of us can continue to benefit from it. After all, to cite The Eagles once again, the modern world economy is a bit like Hotel California: you can check out any time you like, but you can never leave.",Klaas Knot
https://www.bis.org/review/r250429d.htm,Piero Cipollone: Navigating a fractured horizon - risks and policy options in a fragmenting world,"Speech by Mr Piero Cipollone, Member of the Executive Board of the European Central Bank, at the conference on ""Policy challenges in a fragmenting world: Global trade, exchange rates, and capital flow"", organised by the Bank for International Settlements, the Bank of England, the ECB and the International Monetary Fund, Frankfurt am Main, 29 April 2025.",2025-04-29 00:00:00,"SPEECH

## Navigating a fractured horizon: risks and policy options in a fragmenting world

Speech by Piero Cipollone, Member of the Executive Board of the ECB, at the conference on 'Policy challenges in a fragmenting world: Global trade, exchange rates, and capital flow' organised by the Bank for International Settlements, the Bank of England, the ECB and the International Monetary Fund

Frankfurt am Main, 29 April 2025

I'm honoured to welcome you to this conference, jointly organised by the Bank for International Settlements (BIS), the Bank of England, the European Central Bank (ECB) and the International Monetary Fund (IMF). [ ] 1

Today, we come together to discuss the urgent challenges posed by global fragmentation - a growing risk to our interconnected world. Earlier this month, the President of the United States announced tariff hikes, sending shockwaves through the global economy - a stark reminder that the fractures we face are no longer hypothetical, but real.

This announcement is but the latest chapter in a series of four major shocks that have been reshaping our world in recent years.

First, since 2018 the intensifying power struggle between the United States and China has led to tit-for-tat tariffs affecting nearly two-thirds of the trade between these two economic giants. Second, starting in 2020, the pandemic caused unprecedented disruptions to supply chains, which prompted a re-evaluation of the balance between global integration and resilience. Third, in 2022 Russia's unjustified invasion of Ukraine not only triggered an energy crisis but also deepened a geopolitical divide that continues to have worldwide repercussions. And fourth, we are now facing the rising risk of economic fragmentation within the western bloc itself, as new trade barriers threaten long-standing international partnerships.

The data paint a sobering picture. Geopolitical risk levels have surged to 50% above the post-global financial crisis average, and uncertainty surrounding trade policy has risen to more than eight times its average since 2021. [ ]  What we are experiencing is not merely a temporary disruption - it is a profound shift in how nations interact economically, financially and diplomatically. So, it does not come as a surprise that financial markets have experienced considerable volatility in recent weeks. It remains to be seen if, for markets to find a stable equilibrium, it will be enough to step back from the current international economic disorder towards a more stable, predictable and reliable trading system - a development that appears elusive in the short term. Against this backdrop, recent moves in exchange rates, bond yields and equities, 2

suggest that US markets have not been playing their usual role as a safe haven in this particular episode of stress. This potentially has far-reaching longer-term implications for capital flows and the international financial system.

Today I will focus on three key points. First, we are seeing increasing signs of fragmentation becoming visible across the economy and financial system. Second, the implications of this accelerating fragmentation could extend far beyond the immediate disruptions, with consequences for growth, stability and prosperity. Third, in this evolving economic landscape, central banks must adapt their approaches yet retain a steadfast focus on their core mandates, while striving to preserve international cooperation.

## The emerging reality of fragmentation

Let me begin by addressing a common belief - still held by many until recently - that, despite rising geopolitical tensions, globalisation appears largely resilient. Headline figures in trade and cross-border investment, for example, do indeed appear to support this belief. In 2024 world trade expanded to a record USD 33 trillion - up 3.7% from 2023. Similarly, the global stock of foreign direct investment reached an unprecedented USD 41 trillion. [ ]  However, these surface-level indicators may not reflect the underlying realities, creating a misleading sense of stability when important changes are already underway. In reality, fragmentation is already happening in both the global economy and the financial system. 3

## Fragmentation of the real economy

Fragmentation is most evident in rebalancing trade, driven by escalating geopolitical tensions. Take, for instance, the escalating US-China trade tensions that have been intensifying since 2018. Studies show the impact of geopolitical distance on trade has become notably negative. A doubling of geopolitical distance between countries - akin to moving from the position of Germany to that of India in relation to the United States - decreases bilateral trade flows by approximately 20%. [ ] 4

The series of shocks to the global economy in recent years have also contributed to this fragmentation. According to gravity model estimates, trade between geopolitically distant blocs has significantly declined. Trade between rivals is about 4% lower than it might have been without the heightened tensions post2017, while trade between friends is approximately 6% higher. [ ]  Global value chains are being reconfigured as companies respond to these new realities. In 2023 surveys already indicated that only about a quarter of leading firms operating in the euro area [ ]  that sourced critical inputs from countries considered subject to elevated risk had not developed strategies to reduce their exposure. [ ] However, these shifting trade patterns have not yet been reflected in overall global trade flows. Nonaligned countries have played a crucial role as intermediaries, or connectors, helping to sustain global trade levels even as direct trade between rival blocs declines. [ ]  But this stabilising influence is unlikely to endure as trade fragmentation deepens and geopolitical alliances continue to shift. 5 6 7 8

The tariffs announced by the US Administration are far-reaching and affect a substantial share of global trade flows. The effects on the real economy are likely to be material. In its World Economic Outlook, published last week, the International Monetary Fund revised down global growth projections for 2025-26 by a cumulative 0.8 percentage points and global trade by a cumulative 2.3 percentage points. [ ]  This notably reflects a negative hit from tariffs that ranges between 0.4% to 1% of world GDP by 2027. [ ] In particular, IMF growth projections for the United States have been revised down by a cumulative 1.3 percentage points in 2025-26. The cumulative impact on euro area growth is smaller, at 0.4 percentage points. 9 10

## Financial fragmentation

The fragmentation we are witnessing in global trade is mirrored in the financial sector, where geopolitical tensions are also reshaping the landscape.

In recent years, global foreign direct investment flows have increasingly aligned with geopolitical divides.

Foreign direct investment in new ventures has plunged by nearly two-thirds between countries from different geopolitical blocs. However, strong intra-bloc investments have helped sustain overall foreign direct investment levels globally, masking some of the fragmentation occurring beneath the surface. [ ] 11

But, as with trade flows, this dynamic is unlikely to persist as geopolitical tensions grow within established economic blocs. For instance, increased geopolitical distance is shown to curtail cross-border lending. A two standard deviation rise in geopolitical distance - akin to moving from the position of France to that of Pakistan in relation to Germany - leads to a reduction of 3 percentage points in cross-border bank

## lending. [ ] 12

The impact of fragmentation in global financial infrastructure is perhaps even more revealing. Since 2014 correspondent banking relationships - crucial for facilitating trade flows across countries - have declined by 20%. While other factors - such as a wave of concentration in the banking industry, technological disruptions and profitability considerations - have played a role [ ] , the contribution of the geopolitical dimension can hardly be overstated. The repercussions of this decline can be profound. Research shows that when correspondent banking relationships are severed in a specific corridor, a firm's likelihood of continuing to export between the two countries of that corridor falls by about 5 percentage points in the short term, and by about 20 percentage points after four years. [ ] 13 14

Contributing to this trend, countries such as China, Russia and Iran have launched multiple initiatives to develop alternatives to established networks such as SWIFT, raising the possibility of a fragmented global payment system. [ ]  Geopolitical alignment now exerts a stronger influence than trade relationships or technical standards in connecting payment systems between countries. [ ]  This poses risks of regional networks becoming more unstable, increased trade costs and settlement times, and reduced risk sharing across countries. 15 16

Additionally, we are witnessing a noticeable shift away from traditional reserve currencies, with growing interest in holding gold. Central banks purchased more than 1,000 tonnes of gold in 2024, almost double the level of the previous decade, with China being the largest purchaser, at over 225 tonnes. At market valuations, the share of gold in global official reserves has increased, reaching 20% in 2024, while that of the US dollar has decreased. Survey data suggest that two-thirds of central banks invested in gold to diversify, 40% to protect against geopolitical risk and 18% because of the uncertainty over the future of the international monetary system. [ ]  There are further signs that geopolitical considerations increasingly influence decisions to invest in gold. The negative correlation of gold prices with real yields has broken down since 2022, a phenomenon we have also observed in recent weeks. This suggests that gold prices have been influenced by more than simply the use of gold to hedge against inflation. Moreover, countries geopolitically close to China and Russia have seen more pronounced increases in the share of gold in official foreign reserves since the last quarter of 2021. 17

## The looming consequences of fragmentation

Accelerating fragmentation is resulting in the immediate disruptions we are now seeing, but this is likely to only be the beginning - potentially profound medium and long-term consequences for growth, stability and prosperity can be expected.

## Medium-term impacts

The initial consequences of fragmentation are already evident in the form of increased uncertainty. In particular, trade policy uncertainty has led to a broader rise in global economic policy instability, which is stifling investment and dampening consumption. Our research suggests that the recent increase in trade policy uncertainty could reduce euro area business investment by 1.1% in the first year and real GDP growth by around 0.2 percentage points in 2025-26 [ ] . Consumer sentiment is also under strain, with the ECB's Consumer Expectations Survey revealing that rising geopolitical risks are leading to more pessimistic expectations, higher income uncertainty and ultimately a lower willingness to spend. [ ] Moreover, ECB staff estimates suggest that the observed increase in financial market volatility might imply lower GDP growth of about 0.2 percentage points in 2025. 18 19

Over the medium term, tariffs are set to have an unambiguously recessionary effect, both for countries imposing restrictions and those receiving them. The costs are particularly high when exchange rates fail to absorb tariff shocks, and some evidence suggests exchange rates have become less effective in this role.

[ ] 20

The Eurosystem's analysis of potential fragmentation scenarios suggests that such trade disruptions could turn out to be significant. In the case of a mild decoupling between the western (United States-centric) and the eastern (China-centric) bloc, where trade between East and West reverts to the level observed in the mid-1990s, global output could drop by close to 2%. [ ]  In the more extreme case of a severe decoupling essentially a halt to trade flows - between the two blocs, global output could drop by up to 9%. Trade21

dependent nations would bear the brunt of these trade shocks, with China potentially suffering losses of between 5% and 20%, and the EU seeing declines ranging from 2.4% to 9.5% in the mild and severe decoupling scenarios respectively. The analysis also shows that the United States would be more significantly affected if it imposed additional trade restrictions against western and neutral economies with real GDP losses of almost 11% in the severe decoupling scenario - whereas EU losses would increase only slightly in such a case. [ ] 22

The inflationary effects of trade fragmentation are more uncertain. They depend mainly on the response of exchange rates, firms' markups and wages. Moreover, they are not distributed equally. While higher import costs and the ensuing price pressures are likely to drive up inflation in the countries raising tariffs, the impact is more ambiguous in other countries as a result of the tariffs' global recessionary effects, which push down demand and commodity prices, as well as of the possible dumping of exports from countries with overcapacity. The short to medium-term effects may even prove disinflationary for the euro area, where real rates have increased and the euro has appreciated following US tariff announcements.

In fact, a key feature of most model-based assessments is that higher US tariffs lead to a depreciation of currencies against the US dollar, moderating the inflationary effect for the United States and amplifying it for other countries. But so far we have seen the opposite: the risk-off sentiment in response to US tariff announcements and economic policy uncertainty have led to capital flows away from the United States, depreciating the dollar and putting upward pressure on US bond yields. Conversely, the euro area benefited from safe haven flows, with the euro appreciating and nominal bond yields decreasing.

## Long-term structural changes

The long-term consequences of economic fragmentation are inherently difficult to predict, but by drawing on historical examples and recognising emerging trends, it's clear that we are on the verge of significant structural changes. Two areas stand out.

The first one is structurally lower growth. On this point, international economic literature has reached an overwhelming consensus. [ ]  Quantitatively, point estimates might vary. For example, research of 151 countries spanning more than five decades of the 20th century reveals that higher tariffs have typically led to lower economic growth. This is largely due to key production factors - labour and capital - being redirected into less productive sectors. [ ] 23 24

However, data from the late 19th and early 20th centuries, a period which tariff supporters often look back to, seem to tell a different story. At that time, trade barriers across countries were high - the US effective tariff rate, for example, reached almost 60%, twice as high as after the 2 April tariffs. And sometimes countries imposing higher trade barriers enjoyed higher growth, which may provide motivation for current policymakers' trade tariff policies. But these episodes need to be read in historical context. Before 1913, tariffs mostly shielded manufacturing, a high-productivity sector at the time, attracting labour from other, less productive sectors, like agriculture. Therefore, their negative effects were mitigated by the expansion of industries at the frontier of technological innovation. Moreover, the interwar years offer further nuance - the Smoot-Hawley tariffs of the 1930s had relatively limited direct effects on US growth, mainly because trade accounted for just 5% of the economy.

But today's tariffs are unlikely to replicate the positive effects seen in the 19th century. Instead, they risk creating the same inefficiencies observed in the course of the 20th century, by diverting resources from high-productivity sectors to lower-productivity ones. This contractionary effect could lead to persistently lower global growth rates. In fact, the abolition of trade barriers within the EU and the international efforts towards lower trade barriers in the second half of the 20th century were a direct response to the economic and political impact of protectionism, [ ]  which had played a key role in worsening and prolonging the Great Depression [ ]  and had contributed to the formation of competing blocs in the run-up to the Second World War. [ ] 25 26 27

The second long-term shift driven by fragmentation might be the gradual transition from a US-dominated, global system to a more multipolar one, where multiple currencies compete for reserve status. For example, if the long-term implications of higher tariffs materialise, notably in the form of higher inflation, slower growth and higher US debt, this could undermine confidence in the US dollar's dominant role in international trade and finance. [ ]  Combined with a further disengagement from global geopolitical affairs and military alliances, this could, over time, undermine the 'exorbitant privilege' enjoyed by the United States, resulting in higher interest rates domestically. [ ] 28 29

Moreover, as alternative payment systems gain traction, regional currencies may start to emerge as reserves within their respective blocs. This could be accompanied by the rise of competing payment systems, further fragmenting global financial flows and international trade. Such shifts would increase transaction costs and erode the capacity of countries to share risks on a global scale, making the world economy more fragmented and less efficient.

## The central bank's role in a fragmented world

So, as these tectonic shifts reshape the global economic landscape, central banks must adapt their approaches while remaining steadfast in their core mandates. The challenges posed by fragmentation require a delicate balance between confronting new realities and working to preserve the benefits of an integrated global economy. In order to navigate the present age of fragmentation, it is necessary to take action in four key areas.

First, central banks must focus on understanding and monitoring fragmentation. Traditional macroeconomic models often assume seamless global integration and may not fully capture the dynamics of a fragmenting world. Enhanced analytical frameworks that incorporate geopolitical factors and how businesses adjust to these risks will be essential for accurate forecasting and effective policy formulation. The Eurosystem is reflecting on these issues.

Second, monetary policy must adapt to the new nature of supply shocks generated by fragmentation. The effects of the greater frequency, size and more persistent nature of fragmentation-induced shocks and their incidence on prices require a careful calibration of our monetary responses. In this respect, our communication needs to acknowledge the uncertainty and trade-offs we face while giving a clear sense of how we will react depending on the incoming data. This can be done by making use of scenario analysis and providing clarity about our reaction function, as emphasised recently by President Lagarde.

[

]

30

Third, instead of building walls, we must forge unity. Even as political winds shift, central banks should strengthen international cooperation where possible. Through forums such as those provided by the BIS and the Financial Stability Board, we can keep open channels of cooperation that transcend borders. Our work on cross-border payments stands as proof of this commitment in line with the G20 Roadmap [ ] . The ECB is pioneering a cross-currency settlement service through TARGET Instant Payment Settlement (TIPS) - initially linking the euro, the Swedish krona and the Danish krone. We are exploring connections between TIPS and other fast-payment systems globally, both bilaterally and on the basis of a multilateral network such as the BIS' Project Nexus. [ ] 31 32

And fourth, central banks must enhance their capacity to address financial stability risks arising from fragmentation. The potential for sudden stops in capital flows, payment disruptions and volatility in currency markets requires robust contingency planning and crisis management frameworks. Global financial interlinkages and spillovers highlight the importance of preserving and further reinforcing the global financial safety net so that we can swiftly and effectively address financial stress, which is more likely to emerge in a fragmenting world. [ ] 33

In fact, the lesson from the 1930s is that international coordination is key to avoiding protectionist snowball effects, where tit-for-tat trade barriers multiply as each country seeks to direct spending to merchandise produced at home rather than abroad. [ ]  In order to avoid this, the G20 countries committed to preserving open trade could call an international trade conference to avoid beggar-thy-neighbour policies [ ]  and instead agree on other measures, such as macroeconomic policies that can support the global economy in this period of uncertainty and contribute to reduce global imbalances. 34 35

Let me finally emphasise that the current situation also has important implications for the euro area. If the EU upholds its status as a reliable partner that defends trade openness, investor protection, the rule of law and central bank independence, the euro has the potential to play the role of a global public good. This requires a deep, trusted market for internationally accepted euro debt securities. That is why policy efforts to integrate and deepen European capital markets must go hand in hand with efforts to issue European safe assets. [ ] 36

## Conclusion

Let me conclude.

As we stand at this crossroads of global fragmentation, we must confront an uncomfortable truth: we are drifting toward a fractured economic and financial landscape where trust is eroded and alliances are strained.

Central banks now face a double challenge: to be an anchor of stability in turbulent economic waters while reimagining their role in a world where multiple economic blocs are forming. The question is not whether we adapt, but how we mitigate the costs of fragmentation without sacrificing the potential of global integration.

Our greatest risk lies not in the shocks we anticipate, but in the alliances we neglect, the innovations we overlook and the common ground we fail to find. The future of global prosperity hinges on our ability to use fragmentation as a catalyst to reinvent the common good.

- 1.

I would like to thank Michele Ca' Zorzi, Massimo Ferrari Minesso, Georgios Georgiadis, Cyril-Max Neuman and Jean-Francois Jamet for their help in preparing this speech, as well as Alina-Gabriela Bobasu, Laura Lebastard and Baptiste Meunier for their input.

2. ECB (2025), ' ', Introductory statement in three charts , 20 March. Topic 2: The impact of a shift in US trade policies
2. 3.

Leino, T. and Gavrilovic, M. (2025), ' ', IMF Blog , International Monetary Fund, 20 February. Foreign Direct Investment Increased to a Record $41 Trillion

4.

Gopinath, G., Gourinchas, P. O., Presbitero, A. F. and Topalova, P. (2025), ' ', Journal of International Economics , Vol. 153, January. See also Qiu, H., Xia, D. and Yetman, J. (2025), ' ', BIS Working Papers , No 1249, Bank for International Settlements, 14 March - the paper finds that year-on-year trade values between more geopolitically distant economies grew, on average, around 12 percentage points more slowly than between closer ones from 2017-23, mostly reflecting a fall in the quantity of goods traded among more geopolitically distant economies. Changing global linkages: A new Cold War? The role of geopolitics in international trade

- 5.

Bosone, C., Dautović, E., Fidora, M. and Stamato, G. (2024), ' ', Economic Bulletin , Issue 2, ECB. 'Rivals' and 'friends' refer to countries that fall into the fourth and first quartile of the distribution of geopolitical distance across country pairs respectively. Geopolitical distance is measured based on countries' observable behaviour on foreign policy issues, such as disagreements in their voting behaviour in the UN General Assembly, in line with Bailey, M.A., Strezhnev, A. and Voeten, E. How geopolitics is changing trade

(2017), 'Estimating Dynamic State Preferences from United Nations Voting Data', Journal of Conflict Resolution , Vol. 61, No 2, pp. 430-456.

6.

The firms surveyed are mostly multinationals with significant operations in the EU, and most also have a large share of activity outside the EU.

7.

Almost 40% said that they were pursuing a strategy to mostly source the same inputs from other countries outside the EU, 20% that they were pursuing a strategy to mostly source the same inputs from other countries inside the EU, while 15% said that they were pursuing other strategies, such as holding more inventory, diversifying their input sources, monitoring risk more closely, changing the composition of their product(s) or closing down some production capacity. See Attinasi, M. G., Ioannou, D., Lebastard, L. and Morris, R. (2023), ' ', Economic Bulletin , Issue 7, ECB. Global production and supply chain risks: insights from a survey of leading companies

8. Gopinath, G. et al., op. cit.

9.

See International Monetary Fund (2025), ' ', World Economic Outlook, April. Chapter 1: Global Prospects and Policies

10.

See International Monetary Fund (2025), 'The global effects of recent trade policy actions: insights from multiple models', ibid.

11.

Boeckelmann, L. et al. (2024), ' ', Economic Bulletin , Issue 7, ECB. Geopolitical fragmentation in global and euro area greenfield foreign direct investment

12.

Pradhan, S. K., Stebunovs, V., Takáts, E. and Temesvary, J. (2025), ' ', BIS Working Papers , No 1247, Bank for International Settlements. Geopolitics meets monetary policy: decoding their impact on cross-border bank lending

13.

Various factors might have been at play, such as fallouts from the financial crisis - which forced weaker banks to shut down or merge with stronger institutions to survive - or technological disruptions, with digital banking and fintech alternatives reducing the need for smaller, local banks as customers shifted to online platforms, bypassing physical branches, or the creation of new payment platform and digital asset exchanges. Lower profitability and revisions of banks' strategies also contributed to the decline in banking relations as the prolonged low interest rate environment compressed profit margins for banks, especially smaller ones reliant on traditional lending, pushing some to exit or merge.

14.

See Borchert, L., De Haas, R., Kirschenmann, K. and Schultz, A. (2024), ' ', CEPR Discussion Papers , No 19373, CEPR, 19 August. See also Boar, C., Rice, T. and von Peter, G. (2020), ' ', BIS Quarterly Review , Bank for International Settlements, March. Broken Relationships: DeRisking by Correspondent Banks and International Trade On the global retreat of correspondent banks

15. ECB (2024), , June. The international role of the euro

16.

Ferrari Minesso, M., Mehl, A., Triay Bagur, O. and Vansteenkiste I., (2025), ' ', CEPR Discussion Papers , No 20105, CEPR, 4 April. Geopolitics and global interlinking of fast payment systems

17.

OMFIF (2024), Global Public Investor 2024 .

18.

See ECB (2025), ' ', ECB staff macroeconomic projections for the euro area , March. The impact of tariffs on the March 2025 staff projections

19.

Coibion, O., Georgarakos, D., Gorodnichenko, Y., Kenny, G. and Meyer, J. (2025), ' ', The ECB Blog , 7 April. Worrying about war: geopolitical risks weigh on consumer sentiment

20.

Barattieri, A., Cacciatore, M., &amp; Ghironi, F. (2021). ' ', Journal of International Economics , 129, 103417; Eichengreen, B. (2019). ' ', IMF Economic Review , 67, 4-23; Furceri, D., Hannan, S. A., Ostry, J. D., &amp; Rose, A. K. (2018), ' ', National Bureau of Economic Research Working Paper , No. 25402. Protectionism and the business cycle Trade policy and the macroeconomy Macroeconomic consequences of tariffs

21.

Attinasi, M. G., Mancini, M., Boeckelmann, L., Giordano, C., Meunier, B., Panon, L., Almeida, A.M., Balteanu, I., Bańbura, M., Bobeica, E., Borgogno, O., Borin, A., Caka, P., Campos, R., Carluccio, J., De Castro Martins, B., Di Casola, P., Essers, D., Gaulier, G., Gerinovics, R., Giglioli, S., Ioannou, D.,

Kaaresvirta, J., Khalil, M., Kutten, A., Lebastard, L., Lechthaler, W., Martínez Hernández, C., Matavulj, N., Morris, R., Nuutilainen, R., Quintana, J., Savini Zangrandi, M., Schmidt, K., Serafini, R., Smagghue, G., Strobel, F., Stumpner, S., Timini, J. and Viani, F. (2024), ' ', Occasional Paper Series , No 365, ECB. Countries are allocated to geopolitical blocs (western, eastern and neutral) according to an index of economic and political alignment. See 'Annex 1: Allocation of countries to geopolitical blocs', ibid. Navigating a fragmenting global trading system: insights for central banks

22.

To the extent that the EU faces no trade restrictions with other western economies and neutral countries. 23.

Eichengreen, op. cit., Barbiero, O., Farhi, E., Gopinath, G. and Itskhoki, O. (2019), ' ', NBER Macroeconomics Annual , Vol. 33, Issue 1, pp. 395-457. The macroeconomics of border taxes

24.

Furceri, D., Hannan, S. A., Ostry, J. D. and Rose, A. K. (2020), ' ', Journal of Policy Modeling , Vol. 42, Issue 4, pp. 850-859. They show that a one standard deviation increase in tariff rates correlates with a 0.4% decline in GDP five years later. 25. Are tariffs bad for growth? Yes, say five decades of data from 150 countries

See also Panetta, F. (2023), ' ', speech at an event on 'Integration, multilateralism and sovereignty: building a Europe fit for new global dynamics' organised by Bruegel, Brussels, 24 April. United we stand: European integration as a response to global fragmentation

26.

Eichengreen, B. and Irwin, D. A. (2010), ' ', The Journal of Economic History , Vol. 70, Issue 4, pp. 871-897. The Slide to Protectionism in the Great Depression: Who Succumbed and Why?

27.

Jacks, D. S. and Novy, D. (2019), ' ', NBER Working Paper Series , No 25830. Trade Blocs and Trade Wars during the Interwar Period

28.

Mukhin, D. (2022), "" "", American Economic Review , Vol. 112, No 2, pp. 650-688; Barbiero, O. et al., op. cit. An equilibrium model of the international price system

29.

Eichengreen, B., Mehl, A. and Chiţu, L. (2019), ' ', Economic Policy , Vol. 34, Issue 98, pp. 315-363. Mars or Mercury? The geopolitics of international currency choice

30.

See Lagarde, C. (2025), ' ', speech at the 25th ""ECB and Its Watchers"" conference organised by the Institute for Monetary and Financial Stability at Goethe University, Frankfurt am Main, 12 March. A robust strategy for a new era

31. G20 (2020), , 21 November, paragraph 16; Financial Stability Board (2020), , 9 April; Committee on Payments and Market Infrastructures (2020), , Bank for International Settlements,13 July; and Financial Stability Board (2020), , 13 October. 32. G20 Riyadh Summit Leaders' Declaration Enhancing Cross-border Payments - Stage 1 report to the G20 Enhancing cross-border payments: building blocks of a global roadmap - Stage 2 report to the G20 Enhancing Cross-border Payments - Stage 3 roadmap

See Cipollone, P. (2025), ' ', speech at the Regional Governors' Meeting in Osijek, 1 April. Enhancing cross-border payments in Europe and beyond

33.

As noted in Aiyar, S. et al. (2023), ' ', IMF Staff Discussion Notes , 15 January, the global financial safety net plays an important role in safeguarding the stability of the global economy, but its coverage is uneven and global liquidity provision is limited. The global financial safety net consists of central banks' foreign exchange reserves, central banks' bilateral swap arrangements, regional financing arrangements and the IMF. See also IMF (2025), , April. Geoeconomic Fragmentation and the Future of Multilateralism Global Financial Stability Report

34.

Eichengreen, B. and Irwin, D. A., op. cit.

35.

See also Sapir, A. (2025), ' ', First Glance , Bruegel. The European Union should form an international open trade coalition in response to Trump's tariffs

36.

Cipollone, P. (2024), ' ', Financial Times , 12 June, and Panetta, F. (2023), ' ', Politico , 30 August. Why Europe must safeguard its global currency status Europe needs to think bigger to build its capital markets union",Piero Cipollone
https://www.bis.org/review/r250429c.htm,Luis de Guindos: Presentation of the European Central Bank Annual Report 2024 to the Committee on Economic and Monetary Affairs of the European Parliament,"Introductory remarks by Mr Luis de Guindos, Vice-President of the European Central Bank, to the Committee on Economic and Monetary Affairs of the European Parliament, Brussels, 28 April 2025.",2025-04-28 00:00:00,"## Luis de Guindos: Presentation of the European Central Bank Annual Report 2024 to the Committee on Economic and Monetary Affairs of the European Parliament

Introductory remarks by Mr Luis de Guindos, Vice-President of the European Central Bank, to the Committee on Economic and Monetary Affairs of the European Parliament, Brussels, 28 April 2025.

* * *

## Introduction

It is a pleasure to present the ECB's Annual Report for 2024 to this esteemed Committee. Concurrently, we are also publishing our response to the European Parliament's resolution on our previous Annual Report. These elements - our Annual Report, today's discussion and our response to your resolution - are central to the ECB's accountability to the European Parliament and highlight the open dialogue between our institutions.

In my remarks today, I will discuss the economic and financial stability landscape and consider the challenges that lie ahead. I will share the ECB's assessment and underline the need to invest in measures to enhance Europe's resilience amid a volatile external environment and an uncertain outlook.

## Economic developments and monetary policy

As highlighted in the Annual Report, economic activity in the euro area began to recover gradually in 2024. Incoming data suggest modest growth in the first quarter of 2025. However, risks have intensified amid exceptional uncertainty, largely related to trade. Euro area exporters are now facing new barriers, and tensions in financial markets and geopolitical uncertainty will likely weigh on business investment. In this environment, consumers may become cautious about the future and hold back spending.

In the medium term, a resilient labour market, higher real incomes and the impact of our monetary policy easing should support spending. Moreover, recent policy initiatives focused on defence spending and infrastructure investment at both national and EU levels are expected to positively affect activity and strengthen long-term growth.

Turning to inflation, headline figures fell further towards the ECB's 2% target in 2024, supported by our then restrictive monetary policy. Looking ahead, inflation is expected to hover around our target. However, global trade disruptions are adding uncertainty to the inflation outlook. Declining energy prices, further wage moderation and a stronger euro could dampen inflation, potentially amplified by weaker demand for euro area exports and a re-routing of other countries' exports into the euro area. Conversely, a fragmentation of global supply chains could raise import prices and hence inflation.

Following a period of holding interest rates steady in early 2024, the ECB started reducing its key interest rates in June. So far, we have lowered the rate on the deposit

facility by 175 basis points to 2.25%, in view of the disinflation process being well on track. We are determined to ensure that inflation stabilises sustainably at our 2% medium-term target. Especially given current uncertainty, we will continue to follow a data-dependent and meeting-by-meeting approach to setting the appropriate monetary policy stance, and we are not pre-committing to a particular rate path.

## Maintaining financial stability

Let me also say a few words on financial stability in the light of recent developments.

The recent trade policy upheaval has triggered the most significant financial market turmoil since the pandemic. While euro area banks' valuations have also been affected, their fundamentals remain robust and they are well positioned to withstand potential shocks thanks to their sizeable capital and liquidity buffers.

But despite the resilience of our financial sector, these developments warrant careful monitoring. Sharp adjustments in financial markets could become disorderly, particularly if they are amplified by the growing size and influence of non-bank financial institutions. In addition, trade conflicts could pose challenges for both households and corporates, translating into rising credit risk for banks and non-banks alike. Finally, a combination of weaker growth and heightened spending needs could increase pressures on government finances.

To ensure our banking system remains resilient in this environment, we need a regulatory framework that is fit for purpose. Decisive action is required to move us closer to completing the banking union. This includes an effective crisis management and deposit insurance framework that extends to small and medium-sized banks, and progress on a European deposit insurance scheme. The recent financial market turmoil also highlights that non-banks must be subject to robust rules, and that gaps in the regulatory framework need to be closed so they are not treated differently to regular banks.

The ECB supports efforts to simplify the regulatory framework. However, this should not be confused with deregulation. The resilience of our financial system can largely be attributed to the rules established since the global financial crisis. Financial stability is a global public good - it is in everybody's interest and must remain the long-term goal.

## Europe's future policy priorities

A strong and resilient financial sector will also play a crucial role - alongside the public sector - in financing Europe's key policy priorities as we confront a series of generational challenges.

The defence investments foreseen in the EU will have an impact on national public finances. By spending jointly through EU-level initiatives, we can achieve greater scale, reduce costs and strengthen our strategic autonomy - all while supporting long-term growth and fiscal sustainability.

In addition to the pressing security challenges, investing in the green transition and digital innovation remains vital to boosting Europe's competitiveness and closing the productivity gap with our global peers.

Finally, the evolving global landscape underscores the need to strengthen trade within the EU's Single Market, as emphasised by the European Commission. 1  A more integrated and deeper Single Market is essential if we are to achieve the scale required for European firms to thrive and expand, thereby enhancing our resilience against external shocks. We also need to ensure that innovative firms can access the financing they need in order to grow. In this context, completing the savings and investment union is both urgent and essential.

## Conclusion

Faced with a complex and uncertain landscape, the ECB remains firmly committed to its primary mandate of maintaining price stability. This is the most important contribution we can make towards fostering a strong and prosperous Europe.

I know that both our institutions are united by our commitment to serve the people of Europe, within our respective mandates. Our dialogue today is testament to this.

I now look forward to your questions.

1  For example, see European Commission (2024), The 2024 Annual Single Market and , 14 February. Competitiveness Report",Luis de Guindos
https://www.bis.org/review/r250429b.htm,Philip N Jefferson: Economic mobility and the dual mandate,"Speech by Mr Philip N Jefferson, Vice Chair of the Board of Governors of the Federal Reserve System, at the Economic Mobility Summit, hosted by the Federal Reserve Bank of Philadelphia, Philadelphia, Pennsylvania, 22 April 2025.",2025-04-22 00:00:00,"For release on delivery 9:00 a.m. EDT April 22, 2025

Economic Mobility and the Dual Mandate

Remarks by

Philip N. Jefferson

Vice Chair

Board of Governors of the Federal Reserve System at

Economic Mobility Summit, hosted by the Federal Reserve Bank of Philadelphia

Philadelphia, Pennsylvania

April 22, 2025

Thank you, Dr. Singleton, for the kind introduction and for the opportunity to speak here today. 1 It is great to be back in Philadelphia, and I look forward to today's discussions on economic mobility.

As monetary policymakers, my colleagues and I on the Federal Open Market Committee do not have direct control over economic mobility in the U.S.  Our key monetary policy tools are not designed to address this issue, nor is economic mobility part of our mandate.  However, our dual mandate of maximum employment and price stability has implications for a wide range of economic outcomes, including economic mobility.  This leads to many important questions about the relationship between the dual mandate and economic mobility.  In my remarks, I want to address two such questions. First, does meeting the dual mandate facilitate economic mobility?  And second, does economic mobility matter for the conduct of monetary policy?

In today's talk, I will discuss my views on these questions, but I will not be able to provide definitive answers.  Rather, I hope that posing these questions and relaying some of my own thoughts will lead to further discussions during this conference and beyond.  Before turning to these questions, let me start with a brief overview of intergenerational mobility in the U.S.

## Taking Stock of Economic Mobility

Economic mobility, the ability to move up the economic ladder, is at the heart of the American dream.  We tell our children that in the U.S., if you work hard and play by the rules, you can have a secure and successful financial future no matter where you start. We continue to believe strongly in this part of the American dream and remain optimistic

1 The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.

that hard work is a primary determinant of later-life success.  In a survey from 2019, when respondents were asked which factors are essential or very important to getting ahead in life, nearly 90 percent identified hard work, and only 30 percent indicated coming from a wealthy family. 2

Policymakers have long been aware of the importance of economic mobility.  To illustrate that, let me share a quote from former Federal Reserve Chair Ben Bernanke: 'Equality of economic opportunity appeals to our sense of fairness, certainly, but it also strengthens our economy.  If each person is free to develop and apply his or her talents to the greatest extent possible, then both the individual and the economy benefit.' 3

With these sentiments of what Americans and policymakers think and feel about mobility in mind, let me turn to some evidence on economic mobility in the U.S.  One common way to measure economic mobility is to relate an individual's income in adulthood to their family income during childhood.  The measure I am showing herefrom Harvard economist Raj Chetty and coauthors-is likely familiar to many of you. 4 It shows a relative intergenerational mobility measure, also known as the 'rank-rank' relationship.  This measure relates a child's ranking in the income distribution as an adult, shown on the vertical axis, to the child's family income rank during childhood, shown on the horizontal axis.

2 The data are Federal Reserve Board staff calculations for U.S. respondents in the International Social Survey Programme:  Social Inequality V.  See IISP Research Group (2022).

3 See Bernanke (2007), quoted text in paragraph 1.

4 In figure 1, parent and child linkages and incomes are based on population-level tax data.  The sample includes children born between 1980 and 1982.  Parent income for these children is the average of total pretax family income when the child is between the ages of 15 and 19.  Later-life income for these children is measured in 2014 when the child is between the ages of 32 and 34 and is defined as total individual pretax income.  See Chetty and others (2020).

The upward slope of the line implies that children born into lower-income families tend to be lower on the income distribution as adults.  For example, a child born to the richest parents is, on average, 30 percentage points higher in the income distribution as an adult compared with a child born to the poorest parents.  This difference in the relative standing in the income distribution as an adult translates into meaningful differences in earnings levels.  To put this in perspective, consider two children who grow up to be 30 percentile points apart on the earnings distribution as adults, with one at the 80th percentile and the other at the 50th percentile.  The child who grows up to be at the 80th percentile of the distribution as an adult will earn roughly twice as much compared with the child at the 50th percentile. 5

In addition to having lower earnings as adults, children born into lower-income families are more likely to experience outcomes that can negatively affect their success in the labor market later in life.  Girls born into the bottom decile of the family income distribution are about 10 times more likely to become teenage mothers compared with those born to top-decile families. 6 Boys born into bottom-decile families are roughly 20 times more likely to be incarcerated in their thirties compared with boys from families in the top decile. 7 Teen pregnancy and incarceration are extreme examples of barriers to labor market success that differentially affect children from lower-income families.  More generally, there are numerous reasons that any individual may struggle in the labor market, including skill mismatches and lack of proper training or education.

5 Earnings are, on average, just under $56,000 at the 80th percentile of the child earnings distribution, compared with just under $27,000 at the 50th percentile.  See Chetty and others (2020).

6 See Chetty and others (2014).

7 See Looney and Turner (2018).

## Does Meeting the Dual Mandate Facilitate Economic Mobility?

Now, let me turn to the Fed's dual mandate and discuss how working toward maximum employment and price stability helps set the stage for broad-based success generally, and how this may provide favorable conditions for upward mobility.

Consider my first question:  Does meeting the dual mandate facilitate economic mobility?  To help answer this question, I want to revisit remarks I delivered earlier this year about the implications of noninflationary expansions on shared prosperity. 8 Specifically, I am reflecting on the economic expansion that followed the 2007-09 Global Financial Crisis (GFC).  During that period, the economy expanded for 128 consecutive months, making it the longest economic expansion in U.S. history.

As shown in figure 2, the aggregate unemployment rate fell steadily from a peak of 10 percent in October 2009 to 3.5 percent in September 2019, the lowest level recorded in nearly 50 years.  The labor market in this period was remarkable in terms of broad-based gains seen across demographic groups, which contributed to a historic narrowing of employment differentials.  To illustrate this point, let's add in unemployment rates by levels of education, as shown in figure 3.  In 2019, the unemployment rate gaps between workers with less than a high school education, the solid green line near the top of the chart, and those who had attained at least a bachelor's degree, the solid orange line closer to the bottom, were near multidecade lows.  Further, the strong pre-pandemic labor market drew many new participants into the labor force, including teens and younger workers whose employment prospects, and even long-term career trajectories, are especially sensitive to the cyclical state of the economy. 9 These

8 See Jefferson (2025).

9  See Oreopoulos, von Wachter, and Heisz (2012).

are the types of labor market conditions that the economist Arthur Okun speculated would increase upward mobility. 10 In a tight labor market, when individuals move up the job ladder, they create openings for newer or less educated workers.

Moving on to earnings, figure 4 shows that nominal wage growth increased steadily following the GFC.  As with gains in employment, the strong labor market was especially beneficial for some groups.  To demonstrate that, let's turn to figure 5, which shows wage growth for different earnings levels.  Wage growth for the bottom half of earners, the dashed red line, started to pick up about five years into the expansion, and by 2017, it was notably stronger compared with that for workers in the top half of the earnings distribution, the solid blue line. 11 These differences in wage growth are important.  As the bottom of the distribution catches up to higher earners, wage inequality declines.  These are also dynamics that can facilitate upward economic mobility.

Let me now turn to the second component of the dual mandate, price stability. While some long economic expansions have led to an unwelcome rise in prices, inflation remained low and stable during the economic expansion following the GFC.  Indeed, Federal Reserve policymakers were grappling with inflation somewhat below, rather than above, the longer-run 2 percent target, as shown in figure 6.

Low and stable inflation is important for individuals and businesses for a variety of reasons.  It ensures that the nominal wage gains I just discussed are not eroded in real terms and that necessities remain affordable.  In addition, it helps individuals and families

10  See Okun (1973).

11  Nominal wages in the figure are measured by the Atlanta Fed's Wage Growth Tracker.  Series show 12month moving averages of the median percent change in the nominal hourly wage of individuals observed 12 months apart.  Workers are assigned to wage quantiles based on the average of their wage reports in both the Current Population Survey and outgoing rotation group interviews.  Workers in the lowest 50 percent of the average wage distribution are assigned to the bottom half, and those in the top 50 percent are assigned to the top half.

plan for major purchases, such as a car or home, and for major expenses, including retirement and college.

I want to highlight one of these major expenses-higher education-as attending college is an important pathway for upward mobility.  Looking at figure 7, higher education inflation is shown by the red line.  A variety of factors affect the cost of college generally, including student loan costs, state funding, and administrative overhead. Nonetheless, when inflation was low for an extended period during the economic expansion that followed the GFC, we also saw a moderation in the growth of higher education costs. 12

To illustrate the importance of college attendance for mobility, let me return to the rank-rank intergenerational mobility relationship I showed earlier.  As before, the darkest dots show the national child-income-rank-to-parent-income-rank relationship.  Now consider how this relationship looks across different types of higher education.  The red line shows elite four-year colleges, the green line shows the remaining four-year institutions, and the lighter-blue line shows two-year schools.  As you can see from the colored lines, the relationship between family income rank and later-life income rank is weaker-that is, the slope of the line is flatter-within each type of college than it is nationally.

The flatter slope indicates that outcomes for children from lower-income families are more similar to outcomes for children from higher-income families within each college type than they are overall.  In this way, higher education is an important source of

12 There are limitations to this measure of higher education costs, as it is volatile and may not reflect the underlying net price that students pay.  However, list tuition prices have been shown to be salient for many families when making college enrollment decisions.  For example, see Bleemer and Zafar (2018).

upward mobility for many youths and a pathway to a more secure financial future.  Of course, the relatively steeper national relationship holds because there are meaningful differences in college enrollment over the family income distribution.

Going back to my initial question, I asked whether meeting the dual mandate facilitates economic mobility.  I think that achieving the dual mandate sets the conditions for all individuals to succeed, including those moving up the economic ladder.  The evidence suggests that long noninflationary expansions are associated with narrower gaps in employment and earnings, and that lower-wage and less-educated workers benefit disproportionately from sustained periods of strong economic growth.  Further, achieving price stability allows individuals and households to plan for and make investments in human capital, such as attending college, that may allow individuals to move up the income distribution. 13

## Does Economic Mobility Matter for the Conduct of Monetary Policy?

Before I conclude, I want to return to my second question:  Does economic mobility matter for the conduct of monetary policy?  As I mentioned earlier, economic mobility is not part of the Federal Reserve's mandate, and our monetary policy tools are blunt instruments for affecting economic mobility.  For example, interest rates affect the entire economy, not targeted populations, and rate changes operate through financial markets rather than directly influencing labor market outcomes.

One way that economic mobility could matter for the conduct of monetary policy is if the goals of monetary policy are easier to achieve in a high-mobility society

13 Despite the rising cost of college, research consistently shows a positive return to higher education for most students.  See Wolla, Vandenbroucke, and Tucker (2023), Autor (2014), Zimmerman (2014), and Card (1999).

compared with one with low mobility.  I do not know if this is true, but let me offer some conjectures.  I think that a society with relatively higher mobility may allow for more efficient transmission of monetary policy.  In a dynamic economy with relatively more upward mobility, individuals may have greater incentives to be proactive in the job market.  They may seek new and better job opportunities, which could allow for a quicker path to maximum employment following economic downturns.  Further, individuals and households may hold additional savings for increased investments in human capital when mobility is relatively higher, allowing for more effective transmission of monetary policy.  Stepping back, I pose this question not to offer a definitive answer, but rather to serve as one potential starting point for your discussions here today.

## Conclusion

Let me conclude by pointing out that the patterns we observe in our economy, including those for economic mobility, are not predetermined.  Outcomes can and will change as we learn more about effective strategies to improve and maintain economic mobility in the U.S.  By joining in these conversations here today, and by continuing to research and describe the patterns of economic mobility, you are helping society understand the dynamics of our economy better and find new and innovative ways to help keep the American dream of economic mobility alive and well.  Thank you.

## References

Autor, David H. (2014).  'Skills, Education, and the Rise of Earnings Inequality among the 'Other 99 Percent,' ' Science, vol. 344 (May), pp. 843-51.

Bernanke, Ben S. (2007).  'The Level and Distribution of Economic Well-Being,' speech delivered at the Greater Omaha Chamber of Commerce, Omaha, Neb., February 6, https://www.federalreserve.gov/newsevents/speech/bernanke20070206a.htm.

Bleemer, Zachary, and Basit Zafar (2018).  'Intended College Attendance:  Evidence from an Experiment on College Returns and Costs,' Journal of Public Economics, vol. 157 (January), pp. 184-211.

Card, David (1999).  'Chapter 30 - The Causal Effect of Education on Earnings,' in Orley C. Ashenfelter and David Card, eds., Handbook of Labor Economics, vol. 3A.  Amsterdam:  Elsevier Science, pp. 1801-63.

Chetty, Raj, John N. Friedman, Emmanuel Saez, Nicholas Turner, and Danny Yagan (2020).  'Income Segregation and Intergenerational Mobility across Colleges in the United States,' Quarterly Journal of Economics, vol. 135 (August), pp. 15671633.

Chetty, Raj, Nathaniel Hendren, Patrick Kline, and Emmanuel Saez (2014).  'Where Is the Land of Opportunity?  The Geography of Intergenerational Mobility in the United States,' Quarterly Journal of Economics, vol. 129 (November), pp. 15531623.

ISSP Research Group (2022).  International Social Survey Programme:  Social Inequality V - ISSP 2019.  GESIS, Cologne. ZA7600 Data file Version 3.0.0, https://doi.org/10.4232/1.14009.

Jefferson, Philip N. (2025).  'Do Non-inflationary Economic Expansions Promote Shared Prosperity?  Evidence from the U.S. Labor Market,' speech delivered at Swarthmore College, Swarthmore, Pa., February 5. https://www.federalreserve.gov/newsevents/speech/jefferson20250205a.htm.

Looney, Adam, and Nicholas Turner (2018).  'Work and Opportunity before and after Incarceration,' Economic Studies at Brookings.  Washington:  Brookings Institution, March, https://www.brookings.edu/wpcontent/uploads/2018/03/es\_20180314\_looneyincarceration\_final.pdf.

Okun, Arthur M.  (1973).  'Upward Mobility in a High-Pressure Economy,' Brookings Papers on Economic Activity, no. 1, pp. 207-61, https://www.brookings.edu/wpcontent/uploads/1973/01/1973a\_bpea\_okun\_fellner\_greenspan.pdf.

Oreopoulos, Philip, Till von Wachter, and Andrew Heisz (2012).  'The Short- and LongTerm Career Effects of Graduating in a Recession,' American Economic Journal: Applied Economics, vol. 4 (January), pp. 1-29.

Wolla, Scott A., Guillaume Vandenbroucke, and Cameron Tucker (2023).  'Is College Still Worth the High Price?  Weighing Costs and Benefits of Investing in Human Capital,' Page One Economics.  St. Louis:  Federal Reserve Bank of St. Louis, September 1, https://www.stlouisfed.org/publications/page-oneeconomics/2023/09/01/is-college-still-worth-the-high-price-weighing-costs-andbenefits-of-investing-in-human-capital.

Zimmerman, Seth D. (2014).  'The Returns to College Admission for Academically Marginal Students,' Journal of Labor Economics, vol. 32 (October), pp. 711-54.



## Economic Mobility and the Dual Mandate

## Philip N. Jefferson

## Vice Chair, Federal Reserve Board

FRB Philadelphia-Economic Mobility Summit, April 22, 2025

Disclaimer: The views I will express today are my own and not necessarily those of the Federal Open Market Committee (FOMC) or the Federal Reserve System.



## Roadmap for Talk

- Taking stock of economic mobility
- Does meeting the dual mandate facilitate economic mobility?
- Full employment and economic opportunity
- Price stability and the relative price of human capital
- Does economic mobility matter for the conduct of monetary policy?
- Conclusion

Figure 1: Relative Intergenerational Mobility



Note: The figure shows the mean value of child income rank as an adult for each value of parent income rank and the fitted values from a regression. Source: 'Income Segregation and Intergenerational Mobility Across Colleges in the United States.'  Chetty, Friedman, Saez, Turner, Yagan. August 2020.

Figure 2: Unemployment Rate



Notes: The unemployment statistics only consider persons aged 25 and older. The grey shaded bars indicate periods of business cycle recession as defined by the National Bureau of Economic Research: March 2001-November 2001, December 2007-June 2009, February 2020-April 2020. Source: Bureau of Labor Statistics. Haver Analytics.

Figure 3: Unemployment Rate by Education



Notes: The unemployment statistics only consider persons aged 25 and older. The grey shaded bars indicate periods of business cycle recession as defined by the National Bureau of Economic Research: March 2001-November 2001, December 2007-June 2009, February 2020-April 2020. Source: Bureau of Labor Statistics. Haver Analytics.

Figure 4: Nominal Wage Growth



Note: Series show the 12-month moving averages of the median percent change in the nominal hourly wage of individuals observed 12 months apart.

The grey shaded bars indicate periods of business cycle recession as defined by the National Bureau of Economic Research: March 2001-November 2001,

December 2007-June 2009, February 2020-April 2020.

Source: Federal Reserve Bank of Atlanta, Wage Growth Tracker.

Figure 5: Nominal Wage Growth by Average Wage Level



Note: Series show the 12-month moving averages of the median percent change in the nominal hourly wage of individuals observed 12 months apart. Bottom 50% and top 50% are based on average wages. The grey shaded bars indicate periods of business cycle recession as defined by the National Bureau of Economic Research: March 2001-November 2001, December 2007-June 2009, February 2020-April 2020.

Source: Federal Reserve Bank of Atlanta, Wage Growth Tracker.

Figure 6: Personal Consumption Expenditures (PCE) Core Inflation



Note: Figure plots the 12-month percent change as of December.  The blue line shows core personal consumption expenditures (PCE) index that excludes food and energy prices. The grey shaded bars indicate periods of business cycle recession as defined by the National Bureau of Economic Research: March 2001November 2001, December 2007-June 2009, February 2020-April 2020.

Source: Bureau of Economic Analysis.

Figure 7: Personal Consumption Expenditures (PCE) Core &amp; Higher Education Inflation



Note: Figure plots the 12-month percent change as of December.  The blue line shows core personal consumption expenditures (PCE) index that excludes food and energy prices.  The red line shows the higher education component of the PCE index. The grey shaded bars indicate periods of business cycle recession as defined by the National Bureau of Economic Research: March 2001-November 2001, December 2007-June 2009, February 2020-April 2020. Source: Bureau of Economic Analysis.

Figure 8: Relative Intergenerational Mobility by College Type



Note: The national series shows the mean value of child income rank as an adult for each value of parent income rank and the fitted values from a regression. The series for each college type shows the mean child income rank by parent income ventile and the fitted values from a regression.  College types are defined as: elite colleges most competitive by Barrons Profiles of American Colleges, other four-year schools include all four-year institutions except those included in the elite category, two-year includes all two-year institutions.

Source: 'Income Segregation and Intergenerational Mobility Across Colleges in the United States.' Chetty, Friedman, Saez, Turner, Yagan. August 2020.

10",Philip N Jefferson
https://www.bis.org/review/r250429h.htm,Rajeshwar Rao: Building a robust ecosystem for green and sustainable finance in India,"Valedictory address by Mr Rajeshwar Rao, Deputy Governor of the Reserve Bank of India, at the Credit Summit 2025, organised by the Bharat Climate Forum, New Delhi, 17 April 2025.",2025-04-17 00:00:00,"## Rajeshwar Rao: Building a robust ecosystem for green and sustainable finance in India

Valedictory address by Mr Rajeshwar Rao, Deputy Governor of the Reserve Bank of India, at the Credit Summit 2025, organised by the Bharat Climate Forum, New Delhi, 17 April 2025.

* * *

Distinguished guests, participants, ladies and gentlemen, Good afternoon

At the outset, let me thank the organisers for inviting me and giving me an opportunity to deliver the valedictory address and share some of my thoughts on a subject which continues to engage national as well as global attention. I believe there would have been fruitful deliberations on the topics of green and sustainable finance and the role of financial institutions, opportunities and challenges, aligning of regulatory and policy worlds, facilitating global financing, and integration of climate change aspects in credit risks of the financial institutions. Each of these topics require detailed deliberations and collectively they form the building blocks for creation of a robust ecosystem for green and sustainable finance for the economy and financial system at large.

The critical enablers to attract green and sustainable investments that need to be put in place for financial ecosystem has been and continues to be a subject of deliberations at various fora be it G20 Sustainable Finance Working Group, the international standard setting bodies such as the Basel Committee on Banking Supervision, the International Sustainability Standards Board as well as the Financial Stability Board, and the Network for Greening the Financial System. These enablers range from adoption of a national green/ climate finance taxonomy, globally aligned disclosure standards for climate related financial risks, and robust assurance and verification process. Green and sustainable finance being a niche area, requires us to be mindful of greenwashing risks. Moreover, there are certain inherent risks and conditions that need to be met from the risk-reward perspective in green and sustainable lending/ investment decisions. Let me delve a bit into these aspects and try to build a narrative on how we can collectively build and develop a robust ecosystem for green and sustainable finance in India.

## The Green and Sustainable Finance Taxonomy

When we talk of green and sustainable finance, the primary consideration is understanding as to what defines it. A national level taxonomy is crucial as it serves as the first building block that aligns the entire ecosystem, be it the government, regulators, other policy makers, financial institutions and borrowers/investors. This is under development in India. You are aware that an announcement to this effect was made by the Hon'ble Finance Minister in the Budget Speech for 2024-25. Meanwhile, we at Reserve Bank of India have till this juncture used the Sovereign Green Bonds (SGrB) framework for mapping of the green and sustainable sectors. This was also used when we issued a Framework on acceptance of Green Deposits in April 2023, which aligns with the SGrB framework towards identification of the green sectors. Thus,

as a robust ecosystem enabler, the first building block would be a national level taxonomy for identification of the sectors and alignment of various regulatory dispensations along this taxonomy.

## Consistent and harmonised Regulatory approach

The second building block would be a consistent and harmonised regulatory approach towards assessment of climate change risks and fostering of related financing. The climate change risks, and the related issues are sector agnostic, with significant interdependencies. To ensure that the net zero target announced by the Hon'ble PM at COP26 in 2021 is achieved by 2070, it would require players in the economy and financial system to fine-tune their respective actions/ measures, so that as a country, we can achieve this target. It would also require a consistent and harmonised approach among the concerned regulators and authorities.

## Assurance and Verification Function

The next building block would be the development of robust assurance and verification functions. Assessment of climate related financial risks, green and sustainable finance are context specific, with need for a clear and objective demonstration of end use of funds. Transparency and related checks and balances that provide assurance on end use of the funds related to green and sustainable finance is extremely important. Given the technical expertise needed for assurance on climate related aspects, as well as adherence to benchmark assurance standards, there is a need to ensure credibility of this assurance and verification process. This would mean defining the requirement of consistent standards detailing expertise and skills that any assurer or verifier must possess to provide these services. A consistent approach across the financial system on the processes would provide confidence to the investors, which would then operate as a key enabler for increased flow of credit to the relevant sectors while addressing concerns around risks of greenwashing.

## Transparency and Disclosures

The fourth aspect is the need for transparency in climate related disclosures. This is essential for financial institutions to assess and manage climate related financial risks, ensure transparency, and support long-term financial stability. It also underscores the need for coherence among various sectors on disclosure aspects. To give an example, if a financial institution is to make any lending or investment decision or assess its portfolio risks, or is mandated to make climate related financial disclosures, then it must depend on the borrowers to provide the requisite information. This means not just putting in place an enabling mechanism for both the lender and the borrower but also having consistency across the financial system for seamless flow of data and information. The Reserve Bank of India had published a  draft ""Disclosure framework on Climate-related Financial Risks"", in February 2024  for public consultation. The draft guidelines require Regulated Entities to make qualitative and quantitative disclosures with respect to climate related financial risks based on four broad areas, viz., (i) governance (ii) strategy (iii) risk management and (iv) metrics and targets. We have received comprehensive feedback on the framework basis which the guidelines are being finalised.

## Complexities of climate change modelling and data considerations

Another area where consistency and harmonisation are required is compilation of data. For purpose of climate related financial risk, assessment and related facets of green and sustainable finance, be it transition or adaptation finance, data is very crucial. One of the limitations for climate risk assessment at this juncture is the need for technical expertise coupled with unique data requirements. Climate related data, understanding nuances of the climate patterns and the impact on account of climate change, is a highly technical and skilled job. Climate scientists across the world use super computers to study climate and weather patterns and its related aspects. It involves complex modelling and is resource intensive. If we depend on a financial sector expert, who uses financial modelling for assessing quantitative estimates and then arrive at the financial sector impact, this expertise alone may not suffice. The two skill sets needed for climate scenario analysis and climate finance risks are completely different in that as climate scientists are not experts in financial modelling and financial modellers have limited expertise in area of climate science. This makes the job of assessment of impact of climate change risks on financial sector more difficult and would therefore require collaboration amongst the two.

Given the impact of climate change risks, viz., physical and transition risks and the impact it has on the value of real assets and financial instruments, understanding these risks is crucial for lenders or investors from a risk-reward perspective. Thus, for uniform and consistent assessment of risks across the financial system, the aspect of disclosure and data becomes crucial. This will remove the misalignment of information between borrowers and lenders/ investors and not only allow a fair assessment of climate change risks but also foster green and sustainable finance.

As a part of this endeavour, Reserve Bank had in the monetary policy statement of October 2024, announced the formation of Reserve Bank - Climate Risk Information System (RB-CRIS). It is envisaged to bridge data gaps and provide standardised datasets to the Regulated Entities (REs) on three aspects - Physical Risk Data, Transition Risk Data, and Carbon Emission Factor Database. The physical risk data part would focus on providing pan-India hazard and vulnerability data. As regards the transition risk, the plan is to arrive at India specific transition scenarios and use them to provide sectoral benchmark transition pathways. Finally, recognising the need to standardise the emission calculation across the sectors, a consistent approach towards carbon emission methodology and the uniform database is also being proposed. Under RB-CRIS, the RBI intends to bring all the stakeholders together and bring coherence and bridge the existing data gaps.

## Climate change and credit risks

Climate change risks impact the financial institutions, financial system and real economy through the traditional risk categories and one risk factor that prominently stands out is credit risk. Climate change would lead to additional operational costs for the borrowers with an increased possibility of loss of their assets, leading to increased probability of default by the borrowers. The real economy is also impacted through various means such as direct property losses, crop losses, loss of employment and livelihood losses. Another facet of credit risk in climate change emanates from the need to promote green and sustainable financing. The fact that the net-zero technologies

driving the transition to decarbonisation, are at various developmental and evolving stages, itself signifies a significant increase in credit risks. Thus, there is a dichotomy wherein on one hand there is a need for incentivising green and sustainable finance and on the other there is an increase in inherent risks from encouraging such financing. So, the key issue is how to manage this dichotomy? While the prudential aspect, i.e., the risk management consideration, is the prime concern for any regulator, the flow of credit is generally market determined albeit mandated at times through specific directed lending policies. Therefore, a delicate balancing act needs to be performed by the regulators to avoid any imbalance from the broader financial stability perspective.

## Challenges to Green and Sustainable Finance and Global Financing

Challenges to green and sustainable finance are many. However, they can be broadly categorised in two specific buckets - one is the structural issues while the other relates to the quantum of financing available. From the structural perspective, the main challenges would be, high-upfront capex requirements given the specific nature of required project loans/ investments; perceived high inherent risks given the evolving nature of climate related technologies; asset liability mismatches which is ubiquitous to any lending/ investing activity, more so in case of project loans given the longer maturity, commencement and gestation timelines; and knowledge and information gaps, given the technical nature of assessment of climate change risks and appraisal of climate related technologies.

As to the quantum of financing available, there are various pull and push factors at work, in the context of global capital mobilisation. The global capital stock of lending/ investments flows also follows a risk-reward perspective. The pull factors are the specific domestic enablers which may drive investor appetite. This would be a function of robustness of the financial ecosystem, liquidity, and depth of the financial markets, transparency and disclosure standards, rigour of verification and assurance mechanism, development and dissemination of risk assessment models for climaterelated risks, data and capacity gaps, long-term strategy on transition plans, and availability of pool of bankable projects. The push factors would be the global commitment of funds for climate related funding. The recent geo-political developments could possibly lead to the weakening of these push factors. This is a developing story and there is a need to closely monitor the wider implications. Given the huge requirement for funding of the green transition, the availability of global funds remains critical.

The inherent risks in the green and sustainable finance, skews the risk-reward considerations leading to increased cost of credit. This leads to demand by private sector investors/ lenders for appropriate derisking mechanisms through grants/ guarantees/ philanthropic capital/ financial incentives, etc. Mobilising such capital on scale, would be a challenge. A related issue is the availability of bankable projects. Though, bankable projects invariably find credit, there are funding challenges with partially bankable and non-bankable projects. As you all may be aware, there are two aspects of climate change finance we need to consider, one is mitigation and other is adaptation. Mitigation is used for transition purpose and adaptation for resilience purpose. Financing in case of mitigation can be associated with cash flows, but it

becomes difficult for adaptation and resilience, as the associated cash-flows are difficult to assess leading to sub optimal capital flows towards sustainable investments in resilient infrastructure and adaptation.

## Augmenting green and sustainable finance

Given these limitations, there is a need for concerted efforts to overcome these challenges and augment green and sustainable finance. This would require a multipronged approach. Blended finance, which combines concessional public funding with private sector investment can be one of the main conduits of the credit flow by derisking climate related projects. India is a diverse country, with varying needs of climate mitigation and resilience, meaning, a coastal area would require a differentiated approach as compared to the regions near the Himalayas. We would need practical implementable solutions, curated to specific issues. Tools like guarantees, sustainabilitylinked loans, and climate-resilient bonds could be explored to further enhance private sector involvement.

The problem of climate change needs scalable solutions, and it cannot come by entirely relying on public funds. There is thus a need to develop a market wherein the riskreward perspective itself takes care of the scale of requirements. Even within adaptation space, there are pockets which can be associated with cash flows. Climate change risks and financing needs to be viewed also as an opportunity. Innovative solutions which not only mitigate financial risks associated with climate change but also incentivise private investors to participate in climate projects need to be explored.

Developmental Financial Institutions (DFIs) would have to play a major role in channelising the flow of credit for green and sustainable finance. There is a need for more collaboration between DFIs, Multilateral Development Banks (MDBs), National Development Banks (NDBs) and Vertical Climate and Environmental Funds (VCEFs). Given the current geo-political developments, with the world moving to a multi-polar world, there is a need for certain reforms within the MDBs as well greater representation from/ credit to the global south.

Technology and innovation would play a major role in mitigation of climate change risks while creating a robust ecosystem for green and sustainable finance in the country. This requires developing a platform that would bring together the REs and technology solution providers, to facilitate an orderly development of required technological solutions to mitigate climate related risks and overcome the current limitations and foster sustainability linked credit flow. The Reserve Bank has on April 09, 2025, included sustainable finance and climate risk mitigation as a topic under the Theme Neutral ""On Tap"" application facility under the Regulatory Sandbox which could help develop and test innovative solutions.

## The Way Forward

One term which often finds mention in global context has been ""inter-operability"". While as a concept, inter-operability seems ideal in a just and equal world, in these times in a world with stark inequalities, mandating inter-operability with similar level of commitments, may not be the ideal way and there is a need for a differentiated approach. The Emerging Markets and Developing Economies (EMDEs) have started

this journey to achieve seamless integration and inter-operability. However, there is yet some distance to be covered. Though, historical examples from high-income countries demonstrate the potential to decouple economic growth from emissions, for EMDEs this would require strong international co-operation, significant investments, and effective policies. Further, any transition from carbon intensive economy to a greener economy is not a smooth ride and there are going to be disruptions be it restructuring, reallocation of resources and financial flows as also displacement of workers and have a bearing on land use. Thus, as we traverse this journey there is a need for delicate balance to ensure that socio-economic implications are carefully considered and addressed.

Going forward, we would also need to arm our respective organizations with skilled manpower and technical expertise to spearhead the transformation in addressing the challenges of climate change. With this end in view, Reserve Bank has been conducting extensive capacity building programmes for the REs. The focus has been on bringing international experts to share their experience on green and sustainable financing, stress testing and scenario analysis, credit risk assessment, transition planning, physical risk assessment, and global best practices for governance, strategy and risk management.

## Conclusion

India occupies a unique position in the global climate context. As one of the world's fastest-growing economies, it faces the dual challenge of fostering and sustaining economic development while addressing climate change. On the one hand, it is highly vulnerable to climate risks while on the other hand, it has the potential to lead the global green transition. While we have made a fair start, there are several challenges that remain to be addressed. The risk management architecture in REs for climate related financial risks is still evolving and further concerted efforts are required. Further, a comprehensive assessment on the extent of losses that may be caused due to climate change risks in the future requires more granular approach. There is a need to build technical expertise and competencies for comprehensive assessment and mitigation of climate change risks. There is also a need for a more harmonised and coherent regulatory approaches across various sectors so that the sectoral dependencies may be addressed in an efficient manner. While the need for the world to transition to a greener tomorrow is given, there are several challenges on the way, and they need to be addressed in a holistic manner. We also need a collaborative and sensitive approach to address the various issues given the impact on the economies and the societies at large. I am confident seminars such as these give an opportunity to further the work to achieve these objectives.

Thank you.

Inputs provided by Sunil Nair and Saket Kumar are gratefully acknowledged.",Rajeshwar Rao
https://www.bis.org/review/r250429f.htm,Claudia Buch: Staying the course in troubled waters - safeguarding the stability of the global banking system,"Speech by Prof Claudia Buch, Chair of the Supervisory Board of the European Central Bank, at the Brookings Institution, Washington DC, 25 April 2025.",2025-04-25 00:00:00,"SPEECH

## Staying the course in troubled waters: safeguarding the stability of the global banking system

## Speech by Claudia Buch, Chair of the Supervisory Board of the ECB, The Brookings Institution

Washington D.C., 25 April 2025

Good morning and thank you for the opportunity to speak with you today. [ ] 1

An environment characterised by heightened geopolitical risks requires resilient banks. More than 70% of global banks' chief risk officers cite cyber resilience as an area in need of significant attention over the next five years, according to a recent survey conducted by the Institute of International Finance (IIF). [ ] Many highlight geopolitical risk and operational resilience as key areas of concern. Recent market reactions to the announcement of tariffs show how quickly the environment in which banks operate can change. 2

To stay the course in these troubled waters, safeguarding the stability of global banking systems has to be our main priority . The global financial system is highly interconnected. International banking is the lifeblood of the global economy. Today, banks' outstanding international claims amount to around 40% of global GDP. [ ]  This is in stark contrast to a long phase during the 20th century when global markets were practically shut down. In 1963, banks' international claims accounted for less than 2% of GDP. [ ] 3 4

A flourishing global economy is hardly conceivable without resilient banks. Banking plays a role similar to that of another industry that underpins global trade: shipping. Just as the shipping industry ensures the smooth flow of goods across the globe, banks provide essential services such as cross-border trade finance, global payments processing, correspondent banking, or foreign exchange services.

And global industries need global standards. Take the shipping industry as an example. The International Maritime Organization was founded in 1948, with the aim of ensuring 'the safety and security of shipping and the prevention of marine and atmospheric pollution by ships' through global conventions. [ ]  This international coordination has certainly not come at the expense of international trade, including seaborne trade: Global trade volumes are now 370 times higher than in the early 1950s. [ ] 5 6

Insufficient regulation and supervision of risks in global industries can have severe consequences . The global financial crisis made one thing clear: when banks take excessive risks and teeter on the brink of failure, they can put public finances at risk and drag down the real economy. Over the past half-century, there have been only two episodes of sharply declining global trade - the global financial crisis and the COVID-19 pandemic. And the wounds inflicted take a long time to heal.

After 17 years, the global financial crisis may seem like just a fading memory. Yet its lessons couldn't be more pertinent today. The global economy navigates through troubled waters, strained by heightened geopolitical risks, trade tensions, and financial market volatility.

And just as the global shipping industry needs regulation and supervision, so does global banking. Financial stability, consistent capital and risk management standards across jurisdictions, and fair competition benefit all market participants. Guidelines are needed to ensure that counterparts operate according to the same set of rules and that adverse shocks don't put the functioning of the entire system at risk. The Basel Committee on Banking Supervision was instrumental in establishing international capital standards several decades ago to prevent regulatory arbitrage and to promote stability. [ ] That very same objectives remain just as relevant today. 7

It is sometimes argued that banking rules are too complex. But banks themselves are highly complex institutions, especially those operating across multiple jurisdictions. For regulation to effectively address the industry's specific needs and vulnerabilities, it must be sufficiently detailed. The same is true in shipping, which is governed by dozens of international conventions that address specific risks and provide safeguards. [ ] To non-experts, these rules may seem complex, but each serves a specific and dedicated purpose. 8

Today, I would like to focus on three main themes.

First, open markets have clear advantages, but common guardrails are needed to ensure that these benefits can be reaped . Over the past decade, reforms to the common standards governing the global financial system have contributed to financial stability and thus provided a foundation for growth in the real economy.

Second, with the Single Supervisory Mechanism (SSM) in Europe, we are playing our part in ensuring that European banks are well supervised and remain trusted counterparts. The benefits of the banking union are clearly evident in a resilient banking sector, the establishment of common supervisory standards and a unified approach to bank resolution.

Third, we remain committed to global standards and supervisory coordination. In an environment of heightened geopolitical risks, high leverage in parts of the global financial system and high economic uncertainty, the achievements of the last decade are at risk of being undermined. We must work together to ensure that financial markets remain open and stable. Failing to do so risks a future of fragmentation, increased costs, and diminished opportunity for all.

## Regulation and supervision of banks in Europe: a quick recap

The banking union was established ten years ago as a strong European response to the global financial crisis and the euro area sovereign debt crisis. Before the banking union, supervisory and crisis management practices varied between countries. Yet the crises sent a clear message to policymakers: a more integrated approach to supervision and resolution was needed to restore trust in the banking sector. Policymakers listened. They created the banking union.

And markets listened as well - the banking union has been a crucial step in re-establishing trust in European banks. With the help of a consistent supervisory framework, we have enhanced the credibility and transparency of European banking supervision and contributed to strengthening the resilience of the sector.

The banking union rests on three pillars: the SSM, the Single Resolution Mechanism, and the European deposit insurance scheme - which is yet to be completed. Currently, deposit insurance is provided at national level through harmonised European rules. [ ] 9

The SSM has brought significant improvements to European banking supervision. The European Central Bank (ECB) directly supervises 114 significant institutions across the 20 participating countries . [ ] Less significant institutions are supervised directly by national authorities, with the ECB overseeing the process to ensure consistency. 10

At the heart of European banking supervision is the Supervisory Review and Evaluation Process (SREP). It provides a comprehensive assessment of each bank's risk profile, governance and business model viability. In the SSM, this process is carried out by Joint Supervisory Teams - composed of supervisors from both the ECB and national authorities - supported by horizontal functions that provide specific expertise.

Last year, the ECB's Supervisory Board decided on a comprehensive reform to make supervision more efficient and effective. This reform will allow us to better target the most relevant risks for each bank and to ensure that any deficiencies we find are remediated swiftly. [ ] This greater efficiency and stringency of the SREP process ultimately also benefits the banks. 11

The main outcome of the supervisory review are Pillar 2 capital requirements and guidance . [ ] While Pillar 1 establishes minimum capital requirements, the Pillar 2 requirement (P2R) is a binding requirement tailored to the specific risks of each bank. It covers risks not fully captured by the Pillar 1 legislation - such as concentration risk and interest rate risk in the banking book. The ECB benchmarks these requirements across institutions, which is a significant improvement on the previous, purely national supervision. 12

The guidance on Pillar 2 (P2G) offers a forward-looking perspective on bank capital, based on stress test results . It is not binding but provides banks with guidance on the capital they should maintain to withstand stress scenarios and address emerging risks. One such emerging risk is rising geopolitical tension, which is a key risk driver of the EBA's 2025 stress test scenario. [ ]  This scenario includes severe disruptions to global supply chains and international trade, leading to a marked slowdown in economic growth alongside sharp increases in energy and commodity prices. The stress test is currently underway, and results will be published in August 2025. 13

This approach to supervision ensures a level playing field for all banks operating in the euro area. It operates within a broader, harmonised regulatory framework that applies consistently across all 27

Member States of the EU. The Single Rulebook establishes common standards for all banks operating within the EU, providing a foundation for regulatory consistency beyond the banking union.

Effective as of January this year, the final elements of Basel III have been incorporated in EU banking rules, building on the previous reforms introduced in 2019. The updated Capital Requirements Regulation [ ]  (CRRIII) applies directly across all EU Member States, ensuring uniform standards without the need for dedicated national implementation. The new rules are being phased in gradually until the end of 2032. [ ] 14 15

A distinguishing feature of EU banking law is its broad application of the Basel standards. While the Basel Framework is primarily intended for internationally active banks, the EU applies these standards to all credit institutions. At the same time, the Single Rulebook takes into consideration specific characteristics of the European economy. Small and medium-sized enterprises (SMEs), for example, account for a large share of employment and are financed mainly through bank loans. [ ] The SME supporting factor reduces capital requirements for loans to such enterprises. This and other adjustments have raised questions from an international comparability standpoint, and the Basel Committee's 2014 assessment found the EU to be 'materially non-compliant' with its standards in certain areas. The materiality of these deviations thus needs to be carefully assessed going forward. 16

Generally, when assessing the impact of regulations, well-established evaluation frameworks can provide valuable insights. The ECB and the European Banking Authority (EBA) have conducted comprehensive impact assessments on the effects of the finalized Basel III framework in Europe. These studies indicate that the benefits in terms of enhanced financial stability significantly outweigh the initial adjustment costs.

[ ]  Moreover, impact assessments show that the impact of the Basel III reforms is mitigated be the fact that banks adjust their behaviour and that there is a long phase-in period. [ ] 17 18

Overall, the European approach to regulation and supervision has paid off. The combination of a broad implementation of the Basel standards and proportionate application of rules has contributed to a more resilient banking sector. European banks have weathered recent storms well, including the COVID-19 pandemic, the energy crisis, and the March 2023 turmoil in international banking markets. While policy interventions have certainly played a role in stabilising the real economy, this resilience of European banks can largely be attributed to their strong capital and liquidity buffers.

Having said that - what are the facts? How have European banks performed over the past decade? Here is a quick overview.

## Resilience of European banks

Today, the European banking sector is in a fundamentally stronger position than it was in the aftermath of the global financial crisis. [ ] European banks are well capitalised, with an aggregate Common Equity Tier 1 (CET1) ratio of 15.9% as of the end of 2024, higher than that of 2015, after the ECB took over banking supervision, with 12.7%. For comparison, in 2006, average Tier 1 ratios stood at around 8% in 2006 19

underscoring the step change in capital strength since the crisis. [ ]  The leverage ratio has also improved from 5.0 to 5.9% between 2015 and 2024. [ ]  The vast majority of banks maintain a comfortable buffer above the regulatory requirements. 20 21

Liquidity conditions remain favourable. Banks have smoothly transitioned to market-based funding as monetary policy has moved out of the phase of quantitative easing and low interest rates. The ability to access retail and wholesale funding remains intact, though some institutions will need to further prepare for a potentially tighter liquidity environment. [ ] 22

The quality of banks' assets remains strong, with the non-performing loan (NPL) ratio at 1.9% - well below the level ten years ago (7.5%). [ ]  This reduction in NPLs did not happen by chance. It reflects supervisory action by the ECB. Our Guidance to banks on non-performing loans, published in 2017, outlines supervisory expectations for how banks should identify, manage, measure, and write off NPLs. [ ]  In 2018, we followed this up by setting out our expectations for prudential provisioning levels for NPLs expectations the ECB began applying in 2021. [ ]  These steps were instrumental in accelerating the decline in NPL volumes. More recently, we intensified our efforts in the 2021 SREP, introducing a bankspecific capital add-on to Pillar 2 requirements for banks whose NPL coverage fell short of our expectations. [ ] 23 24 25 26

Bank profitability has increased, supported by interest rates moving out of the low-for-long environment. Banks' return on equity has increased from an average of 5.5% during the period of low interest rates to 9.8% on average in 2023-2024. Higher net interest margins have been a key driver. At the same time, efficiency gains have played a role, with the average cost-to-income ratio of European banks falling from 66% in 2020 to 55% in 2024.

Looking ahead, banks face considerable headwinds, which may affect their profitability. Net interest income has likely peaked, while a potential deterioration in asset quality, continued margin compression and subdued loan volumes may further weigh on earnings, particularly for those banks that benefited most from the hiking cycle. [ ] 27

However, domestic developments are only part of the picture. European banks are deeply embedded in the global financial system, with significant cross-border exposures and reliance on international funding sources. This interconnectedness underscores the importance of a stable international framework to ensure financial stability both within Europe and globally.

## Priorities for European banking supervision

European banks face a range of challenges, from geopolitical tensions and macro-financial uncertainty to technological disruptions and climate-related risks. With this in mind, we have identified three key priorities for the next three years: managing macro-financial and geopolitical risks, ensuring timely remediation of supervisory concerns and strengthening banks' digitalisation strategies.

Geopolitical risks and uncertainty have become a serious challenge for financial markets. Geopolitical risk is not a new risk category. But it drives the traditional risks of doing banking in ways that are difficult to predict and quantify. Protectionism, economic fragmentation, and geopolitical conflicts have been on the rise. [ ]  Banks must be able to assess how these phenomena could affect their business models, capital positions, and liquidity needs. 28

The ECB has recently introduced a framework describing how geopolitical risks affects banks' traditional risk categories. [ ]  Banks' governance and risk management frameworks need to ensure that banks adequately integrate geopolitical risks into their decision-making. Geopolitical risks should be reflected in banks' capital and liquidity planning, including stress testing, to capture potential disruptions. Provisioning practices must move beyond historical data to factor in geopolitical uncertainties. [ ]  Not least, geopolitical risks, including the impact of tariffs, feature prominently in this year's EU-wide stress test, alongside a dedicated exploratory scenario analysis assessing banks' ability to model counterparty credit risk under stress. [ ] 29 30 31

Another priority for our supervision is remediation. While progress has been made in identifying weaknesses in key areas such as governance, remediation has not always been sufficiently fast. This is why we are shifting our focus towards ensuring that material shortcomings are addressed within clear and reasonable timelines. Risk data aggregation and risk reporting is one area where banks can still improve. The ability to make timely, well-informed decisions depends on having accurate, comprehensive risk data. Remediating remaining deficiencies requires committing the necessary resources to invest into up-to-date information systems.

Not least, digitalisation presents both opportunities and challenges for banks. Emerging technologies, strategic partnerships and new business models offer ways to improve efficiency and customer services but they also introduce new risks, particularly in cybersecurity and operational resilience. Banks must strike the right balance between innovation and prudent risk management to address risks associated with digitalisation.

Cyber threats remain a particular area of focus. Cyber threats are rising, and we conducted our first cyber resilience stress test last year. [ ]  Banks depend on a small number of critical third-party providers, especially in cloud services, which can be a driver of systemic risk. We have thus strengthened our oversight of third-party providers. [ ] 32 33

## Priorities for global financial stability

The global financial system is a highly connected ecosystem, with banks at its core. Crises in one part of the system can swiftly cascade across economies, endangering financial stability worldwide. From the banking crises of the 19th century to the Great Depression, from the Latin American debt crisis of the 1980s to the global financial crisis, policymakers and investors have often believed that 'this time' was different - only to be proven wrong. [ ]  Overvaluation combined with high leverage have often been followed by a painful market corrections and financial contagion. 34

These episodes highlight the need for a stable framework that protects banks from sailing into troubled waters unprepared. Banks need to have the ballast to withstand sudden shifts in economic conditions, and they need to navigate with sufficient distance between them to avoid collisions. Without such safeguards, there is a risk that too many banks sail too close to the wind - taking on excessive risks in pursuit of shortterm gains - only to find themselves unable to stay afloat when conditions suddenly change.

Strong global standards can limit the risk of financial crises and contagion. In 1974, the Basel Committee on Banking Supervision was established and laid the foundations for the first Basel capital standards in 1988 with the introduction of the Basel I Framework. Over the years, the Basel standards have evolved in response to crises, addressing vulnerabilities exposed by the global financial crisis. The Basel standards are prime examples of the importance of multilateral cooperation in banking oversight. A predictable regulatory environment enables efficient cross-border operations, fosters trust among counterparties and reduces the probability of crises.

European banking supervision is responding to geopolitical risks, and we need reliable international frameworks. Financial stability is a global public good requiring strong global safeguards. We thus strongly support the work programmes of the Basel Committee and the Financial Stability Board. Only through continued collaboration can we promote a resilient global banking system that stands firm against future uncertainties.

Global financial stability benefits all. It benefits citizens who entrust their savings to banks. It benefits taxpayers who otherwise would have to bear the costs of a bank's failure. But even more so, rules that protect financial stability benefit the banking industry itself. A stable and predictable regulatory environment enables efficient cross-border operations, rather than dealing with different national rules. It ensures trust in counterparts. It reduces the probability of financial crises that ultimately entail large costs for investors in banks - holders of equity and bail-inable debt would be the first to lose if a crisis strikes. And these benefits are not confined to internationally active banks; they also affect more regionally oriented banks. Risks of global financial markets span across business models.

## Conclusions

Global markets require common global standards - not to constrain but to enable activity. This holds true for global trade and shipping, and even more so for the financial sector. International financial markets and contagion channels can be quite opaque. If trust suddenly vanishes, not only could financial markets stop functioning, but they can also bring the real economy down with them.

The global economy has enjoyed a decade of relative financial stability, based on adherence to common standards and supervisory cooperation. This is a significant achievement. But precisely at a time where financial stability could be challenged by heightened risks, memories of past crises are fading. There is increasing pressure to prioritise short-term profits and growth over long-term resilience.

We thus need continued cooperation to ensure that the global financial system remains resilient and at the service of the real economy. This requires reliable guardrails for international banking activities, but also adequate frameworks to contain spillovers from non-bank financial intermediaries and on IT and cyberrelated risks.

We remain committed to this cooperative approach. By focusing on resilience today, we strengthen banks' ability to support sustainable growth tomorrow. The best safeguard against accidents at sea is to have sufficient water under the keel and not sail too close to the wind.

1.

I would like to thank Korbinian Ibel, Michel Kohn, Massimiliano Rimarchi, Salvatore Rinaldi, and John Roche for their very helpful input and comments on an earlier version of this speech. All remaining errors and inaccuracies are my own.

2.

See EY and Institute of International Finance (2025), ' ', 14th annual EY/IIF global bank risk management survey. Agility in volatility: Rebalancing CRO priorities in a shifting risk matrix

3.

Bank for International Settlements (2025), ' ', statistical release , January. BIS international banking statistics and global liquidity indicators at end-September 2024

4.

McCauley, R.N., McGuire, P. and Wooldridge, P. (2021), ' ', BIS Quarterly Review , September. Seven decades of international banking

5.

See International Maritime Organization, ' '. Introduction to IMO

6.

See World Trade Organization, ' '. Evolution of trade under the WTO: handy statistics

7.

See Goodhart, C. (2011), The Basel Committee on Banking Supervision: A History of the Early Years, 1974-1997 , Cambridge University Press, Cambridge.

8.

See International Maritime Organization, ' '. List of IMO Conventions

9.

Directive 2014/49/EU of the European Parliament and of the Council of 16 April 2014 on deposit

(OJ L 173, 12.6.2014, p. 149). guarantee schemes

10.

Banks are generally classified as significant if they have total assets exceeding €30 billion, but other factors - such as their importance to the domestic economy or their cross-border activities - can also lead to this classification. See ECB, ' ' with reference date 1 March 2025, and ECB, ' '. List of supervised banks What makes a bank significant?

11.

For more detail, see Buch, C. (2024), ' ', The Supervision Blog , ECB, 28 May. Reforming the SREP: an important milestone towards more efficient and effective supervision in a new risk environment

12. Buch, C. (2025) ' ', The Supervision Blog , ECB, 11 March. 13. Reviewing the Pillar 2 requirement methodology

EBA (2025) ' ', press release, 20 January The EBA launches its 2025 EU-wide stress test

14.

(OJ L 176, 27.6.2013, p. 1). Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012

15.

See European Commission (2024) ' ', 24 July. Banking package: Moving forward with the implementation of the Basel standards, while preserving the international level playing field

16.

See Recital 44 of the CRR.

17.

See Budnik, K., Dimitrov, I., Gross, J., Lampe, M. and Volk, M. (2021), ' ', Macroprudential Bulletin , No 14, ECB, 26 July, and European Banking Authority (2024), ' ', 7 October. Bank for International Settlements, ' '. See the evaluation frameworks of the and the . Macroeconomic impact of Basel III finalisation on the euro area Basel III monitoring exercise results based on data as of 31 December 2023 Financial Regulation Assessment: Meta Exercise Financial Stability Board Basel Committee on Banking Supervision

18. ↑

19.

ECB (2024), '' ''. Aggregated results of the 2024 SREP

20.

, December 2006. Tier 1 ratios in 2006 are not directly comparable with today's CET1 ratios, as they were calculated under the pre-crisis Basel II framework and included a broader range of capital instruments. In addition, the sample of banks covered in 2006 differs from the current group of significant institutions supervised by the ECB. ECB Financial Stability Review

21.

ECB Supervisory Banking Statistics.

22.

Buch, C. and Schnabel, I. (2025), ' ', The ECB Blog , ECB, 18 March. Managing liquidity in a changing environment

23.

These ratios include cash balances at central banks and other demand deposits. The NPL ratio excluding cash balances at central banks and other demand deposits is 2.3% as at Q4 2024.

24.

ECB Banking Supervision (2017), ' ', March. Guidance to banks on non-performing loans

25.

ECB Banking Supervision (2018), ' ', March. Addendum to the ECB Guidance to banks on non-performing loans: supervisory expectations for prudential provisioning of non-performing exposures

26.

These have remained in use up to the 2024 SREP cycle, which resulted in non-performing exposure Pillar 2 requirement add-ons for 18 banks. See ECB Banking Supervision (2024), ' '. Aggregated results of the 2024 SREP

27.

ECB (2024), , November. Financial Stability Review

28.

IMF (2025), 'Geopolitical Risks: Implications for Asset Prices and Financial Stability', Global Financial Stability Report , Chapter 2, April.

29.

Buch, C. (2024), ' ', keynote speech at the eighth European Systemic Risk Board (ESRB) annual conference on 'New Frontiers in Macroprudential Policy', Frankfurt am Main, 26 September. Global rifts and financial shifts: supervising banks in an era of geopolitical instability

See ECB Banking Supervision (2024), ' 31. IFRS 9 overlays and model improvements for novel risks

', July.

ECB Banking Supervision (2025), ' ', press release , 20 January. ECB to stress test 96 euro area banks in 2025

32.

ECB Banking Supervision (2024), ' ', press release 33. ECB concludes cyber resilience stress test

, 26 July.

The (DORA) is an EU regulation that applies as of 17 January 2025. More information is available on the of the European Banking Authority. Digital Operational Resilience Act website

34.

See Reinhart, C.M. and Rogoff, K.S., This Time Is Different: Eight Centuries of Financial Folly , Princeton University Press, Princeton, 2011.",Claudia Buch
https://www.bis.org/review/r250429l.htm,David Ramsden: Renewed RTGS - digital public infrastructure as a platform for innovation,"Speech by Sir David Ramsden, Deputy Governor for Markets and Banking of the Bank of England, at the Innovate Finance Global Summit 2025, London, 29 April 2025.",2025-04-29 00:00:00,"## David Ramsden: Renewed RTGS - digital public infrastructure as a platform for innovation

Speech by Sir David Ramsden, Deputy Governor for Markets and Banking of the Bank of England, at the Innovate Finance Global Summit 2025, London, 29 April 2025.

* * *

Thank you for inviting me to speak at the Innovate Finance Global Summit 2025.

At the Bank of England, we have challenged ourselves to continue to be ambitious in how we are supporting innovation in the wholesale payments space, both as an infrastructure provider - with the renewed Real Time Gross Settlement (RTGS) core settlement engine - and in the context of wholesale payments more generally. We know that the opportunities are there in digitalising wholesale financial markets and realising these benefits will play an important role in supporting growth and competitiveness in the UK economy.

There are costly market frictions which could be substantially reduced through technological enhancements from both the public and private sector. There are also new possibilities such as fractionalisation of financial assets and ways to improve their abilities to be monetised which could cater for parts of the market which are currently underserved - through increasing the investor base, providing more liquidity or opening up more assets as potentially usable as collateral.

## Introducing our new RTGS platform

I am very pleased to say that we are now in Day 2 of the changeover to the renewed RTGS system. This has been a multiyear project for the Bank, building a completely new platform. On the first day of operation, the new system settled payments totalling £778 billion. I want to take this opportunity to thank our technology delivery partner, Accenture, all the participants, as well as all the Bank of England staff who have worked together over many years to get us to this point.

As digital public infrastructure, the renewed RTGS system provides a leading-edge technology platform which increases resilience and improves user functionality. These are crucial benefits since RTGS is the means by which we operationalise the Bank's balance sheet, using the reserves which are the core liquid asset of the financial system, to deliver our objectives of monetary and financial stability . But importantly for 1 today's Summit, the renewed RTGS system also expands the opportunities to innovate in the wholesale payments space, in particular enabling wider interoperability.

Our vision is for the renewed RTGS to act as an open platform to enable competition and drive innovation across the financial sector, by making central bank money accessible to new types of firms and entities. Working closely with industry as part of the Future Roadmap, we have identified a series of enhancements to RTGS to meet the evolving needs of the UK payments ecosystem. We will be consulting on whether to extend settlement hours for RTGS, perhaps in phases with the potential to enable access to settlement to near 24/7. We also want to expand further access to RTGS

accounts for settlement. Earlier this month we published a response 2  to our discussion paper on widening access to RTGS, including among non-bank payment service providers seeking access to UK payment systems, which could result in better services for end-users. 3

The next stage in our work is to explore the introduction of a synchronised settlement interface to allow the RTGS platform to interoperate with other ledgers, including tokenised asset ledgers, to achieve atomic settlement. In parallel, we are also 4 embarking on a programme of wholesale experiments to test the use cases, functionalities and prospective designs of a wholesale Central Bank Digital Currency (wCBDC), the outcomes of which can be compared with synchronisation.

## Greater use of digital assets

I will return to these next steps later but to set the scene it is important to view the platform for innovation that renewed RTGS will provide, in the context of the accelerating pace of change in wholesale financial markets. Many markets in the UK have been 'digitised' in some form since the mid-90s when the CREST system launched and many equities and securities were dematerialised. However, whilst most trading does take place electronically, the processes underpinning those trades continue to replicate an analogue way of doing business. For example, our technological architecture still operates on the basis of digital bond and share certificates being transferred digitally in sequence and then stored in electronic vaults, with separate ledgers needing to be separately updated and reconciled.

This approach has three key consequences for how settlement in markets operates:

Fragmentation - today market settlement operates through a complex patchwork of platforms, processes and procedures, each governed by distinct regulations and procedural frameworks. However, in practice different types of transactions are rarely completed in isolation (e.g. a securities purchase is often linked with a FX transaction and/or purchase of a derivative for hedging), adding complexity and risk. Sequential processing - certain transactions can only take place if previous links in the chain have already executed successfully, creating complexity and delays. Inefficiency - participants and central securities depositories still need to be able to support manual processes such as physical deliveries of certificates, even though the vast majority of trading and settlement occurs electronically. The myriad of reconciliation across many individual ledgers increases costs and risks too. These lead to a range of practical challenges and obstacles which capital markets participants have had to deal with, such as increased credit and settlement risk due to lags between trade execution and settlement, fragmentation of liquidity from the need to prefund positions, and operational risks arising from manual processing.

In effect, we have digitised the paper, but we have not digitalised the process of settlement in markets. While 'front office' functions such as electronic trading have captured much of the attention and investment, the less visible but equally critical posttrade environment has lagged behind. This is not a new insight - in 2020 the Bank's Future of Post-Trade Report 5  found that up to a quarter of revenue is spent on IT, but 75% of that spend is to 'keep the lights on' rather than change the processes.

Emerging technologies such as shared, programmable ledgers enable new functionality - such as real-time collateral management and asset fractionalisation - broadening market access, deepening liquidity, and enhancing the utility of financial assets. But with new innovation comes a need for new safeguards. As these technologies evolve, they must be accompanied by proportionate risk management and accompanied by safe innovation in the infrastructure which supports them.

## Proactive innovation - experiments and industry engagement

Alongside delivering renewed RTGS as a platform for innovation the Bank is increasingly moving towards greater use of practical experimentation to enable the future digitalisation of wholesale financial markets. In my remarks today I want to focus first on our role as regulator of the FMIs, where these digital assets would be issued and traded, and second on how we are challenging ourselves in our role as provider of the core settlement infrastructure.

As regulator we are actively taking steps to foster innovation and enable the business cases for digital assets to emerge in a safe way, in particular via the Digital Securities Sandbox (DSS).

The DSS, a joint initiative between the Bank and the Financial Conduct Authority (FCA), represents a key milestone for the UK in the adoption of new technologies to trading and settlement of financial securities, and in accelerating tokenisation. The Sandbox gives the Bank the power to 'turn off' certain rules, to allow industry to experiment with developing technologies, including tokenisation, to issue, trade and settle digital securities in a safe and secure environment for a range of regulated asset classes. Currently the only assets used widely in activities such as repo, lending and collateralisation are cash and assets held at central securities depositories. Tokenisation has the potential to widen this perimeter to other asset classes. And more efficient post-trade processes also mean lower transaction costs for end users, and that ultimately supports deeper markets, especially those in which infrastructure is lacking or prohibitively expensive to set up today.

Since launching last September, eight firms have already been approved to enter the DSS.

Late last year also saw the announcement by HMT of the launch of a pilot Digital Gilt, or DIGIT, which will see the issuance of a digital bond with similar features to a conventional gilt, using distributed ledger technology (DLT). This pilot has two aims: (1) to explore how new technology can be applied to the lifecycle of the UK's sovereign debt issuance process, and (2) to catalyse the development of UK based DLT infrastructure and the adoption of DLT in UK financial markets.

The DIGIT will leverage the benefits of the DSS structure, enabling the Bank and FCA to provide a regulated environment where innovation in the gilt market that can have long term benefits can flourish. We look forward to seeing HMT's proposed next steps for DIGIT soon . 6

As operator of RTGS, enabling innovative and safe cash settlement for these transactions is also essential. Through RTGS, we currently offer settlement in central

bank money (the ultimate risk-free asset) for a range of payment systems. We want to ensure central bank money settlement remains available as new markets and assets emerge. As new markets develop, we may in some circumstances be comfortable with these settling in commercial bank money in the first instance (when they do not present systemic risk), as we are allowing in the DSS.

We are taking steps to enable new types of markets and innovative business models to emerge. We have already introduced an omnibus account policy and we are the first central bank to have onboarded a private DLT-based payment system (Fnality).

I said earlier that exploring synchronisation will be a priority in the next phase of RTGS. Informed by co-creation work with industry, we are considering the addition of this functionality to achieve atomic settlement, which could enable RTGS to interface with tokenised asset ledgers. In this model a 'synchronisation operator' would be responsible for orchestrating the movement of funds in RTGS with assets on external ledgers. The synchronisation operator would be an entirely new type of business, enabled to develop and deliver new types of innovative services to financial institutions, businesses and individuals. This model could improve settlement speed and reduce settlement risk across a wide range of use cases, ranging from housing transactions to complex mergers and acquisitions.

Our work to date with the BIS Innovation Hub London on the Meridian series of synchronisation experiments demonstrated that synchronisation is a viable option with tangible benefits, for example, experiments show its potential to be applied to house purchases in the UK.

Most recently, Project Meridian FX, the results 7  of which we co-published last week, has shown how synchronisation could enable payment versus payment settlement in foreign exchange transactions. This work demonstrated the technical feasibility of interfacing RTGS with a range of external ledgers, including those based on DLT. Interest in this capability is growing - particularly among our central banking peers, who like us are exploring the potential role of synchronisation in facilitating safer, faster, and more transparent FX transactions.

We realise there is an open debate around the best ways for payment infrastructures to enable settlement of tokenised assets. One option could be recording tokenised assets and payments movements on a single 'unified ledger' (enabled by a wholesale central bank digital currency where that's needed given potential financial stability risks). A further approach could be through synchronisation, making use of the coexistence of multiple ledgers, connected by a third party or a technical mechanism. 8

We intend to launch a 'synchronisation lab': a platform that would simulate the synchronisation interface that the Bank is designing, and enable prospective synchronisation operators to develop and showcase viable propositions by facilitating hands-on experimentation across multiple use cases. We anticipate reporting findings in 2026, focusing on learnings for the design and build of a future live RTGS synchronisation capability.

We are also conscious of the need to test the use cases, functionalities and prospective designs of both wCBDC and synchronisation. The Bank has proposed to do this with a

programme of experiments in wholesale payments, the first of which will test synchronised settlement of a tokenised bond. We hope to report our first findings in the second half of 2026.

In the interim, we will continue to work closely with industry to gain insights to inform the scope of our experiments and the design of the synchronisation functionality in RTGS. We will also explore a further experiment later this year on how central bank money can be transacted and settled on an external programmable ledger which the Bank of England does not control.

## Conclusion

The digitalisation of wholesale markets could deliver a step change in efficiency and competitiveness of the UK financial sector, for example operational efficiencies of 40% could be achieved across a bond life cycle.  These innovative new ways to manage 9 interoperability and settlement risks will be beneficial too, and aided by the separate plan to move to T+1 settlement in 2027 for the UK and European financial markets. 10 The economic case for modernising capital markets is compelling. Efficient capital markets direct capital to its most productive use - lowering the cost of capital and supporting long-term economic growth.

Seizing the opportunities of new technology for the next generation of wholesale payments and settlement requires bold and clear action from authorities and industry. I hope that I have provided a clear sense of the wide range of steps, including delivered the renewed RTGS, new innovative features in RTGS, enabling innovation through the Digital Securities Sandbox, and our experimentation work, that the Bank is taking to make this a reality.

With thanks to Richard Lewis and Yi Wei Chai for their assistance in preparing these remarks, and to numerous Bank colleagues, including Andrew Bailey, Mary Bentley, Sarah Breeden, Emma Butterworth, Victoria Cleland, David Copple, Alex Gee, John Jackson and Nina Turnbull for their helpful contributions and comments.

- 1  See The future of money and payments - speech by Andrew Bailey | Bank of England
- 2  See Response to the discussion paper on reviewing access to RTGS accounts for settlement | Bank of England
- For further detail on this work, please see 3 Innovating wholesale payments: building a resilient and innovative future  speech by Victoria Cleland | Bank of England
- 4   Synchronisation enables the transfer of two assets on separate ledgers to be linked such that one asset moves if and only if another asset moves.
- 5  See The Future of Post-Trade | Bank of England
- 6  See HM Treasury and the UK Debt Management Office Policy Paper - Additional Information on the Digital Gilt Instrument (DIGIT)
- 7  See Project Meridian FX: exploring synchronised settlement in FX
- 8  Another example of this is the Deutsche Bundesbank's 'trigger solution' - Trigger Solution | Deutsche Bundesbank
- 9  See Tokenized financial assets: From pilot to scale | McKinsey

- 10  See Innovation in UK Financial Markets - shortening the settlement cycle - speech by Sasha Mills | Bank of England",David Ramsden
https://www.bis.org/review/r250429e.htm,Olli Rehn: The European economy in the new landscape of power politics and trade protectionism,"Speech by Mr Olli Rehn, Governor of the Bank of Finland, at the Washington Economic Festival, organised by the Reinventing Bretton Woods Committee, Washington DC, 24 April 2025.",2025-04-24 00:00:00,"## Olli Rehn: The European economy in the new landscape of power politics and trade protectionism

Speech by Mr Olli Rehn, Governor of the Bank of Finland, at the  Washington Economic Festival, organised by the Reinventing Bretton Woods Committee, Washington DC, 24 April 2025.

* * *

## Presentation accompanying the speech

Chair, Ladies and Gentlemen, dear Colleagues,

Thank you for the invitation to speak today.

In , Adam Smith wrote: The Wealth of Nations ""It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to This remains a timeless truth. International trade - grounded in a rules-based buy."" multilateral order - has long been a pillar of prosperity.

Today, that system is under pressure. Tariffs are back - and their economic effects are clearly negative across the board: short-term, medium-term, and long-term. There are few things economists agree on more than the benefits of free trade.

## The Shadow of Geopolitics

We are now living through a sharp geopolitical shift. As globalisation and multilateralism frays, Europe finds itself at a crossroads.

Europe's security environment is also being reshaped - not unlike in the early 1990s, but in reverse. The end of the Cold War brought integration and optimism. Today, power politics and fragmentation are making a troubling return. Uncertainty has become the defining feature of the economic and political outlook, globally and in Europe.

## Euro Area: Recovery Meets Trade Headwinds

Recent data showed signs of recovery in the euro area. Employment is solid, and unemployment is at a historic low of 6.1%. Private consumption has benefited from stronger real incomes. Investments in Europe's common defence and infrastructure will bolster manufacturing further. We've been building up resilience against global shocks.

Yet the renewed trade war is already weakening this momentum. Many of the downside risks highlighted in the ECB's March projections have materialised, and the growth outlook has suffered.

Recent market turbulence has also been due to central bank independence having been questioned. There is a vast body of empirical research that demonstrates the paramount importance of central bank independence for stable prices, well-anchored inflation expectations, sustainable growth and high employment. In Europe, central

bank independence is firmly anchored in the Treaty on European Union. It works in principle and in practice in the Eurosystem.

## Inflation and Interest Rates

Good news from Europe is that inflation in the euro area is stabilising at the ECB's 2% target. Disinflation is well on track.

Economists largely agree that large tariff increases will accelerate inflation in the US, but in the euro area the effects on inflation are two-way: the tariff hikes increase certain prices, but slower growth dampens inflation.

Most economists also assumed that the euro would weaken because of the US tariffs. However, this has not happened, quite the opposite.

Against this growth and inflation outlook, we decided last week at the ECB Governing Council to cut rates again by 25 basis points. Since last June, we've cut rates seven times - from 4% to 2.25%. These moves support consumption and investment in the face of global headwinds.

Our next monetary policy meeting will take place in June. If inflation is then projected to fall below our 2 percent target in the medium term, in my view the right reaction in monetary policy would be to cut rates further, in line with our strategy. But that depends on data and our assessment. Under pervasive uncertainty today, the Governing Council maintains full freedom of action in monetary policy. In any case, we will adjust our rates to bring inflation to 2% in the medium term - just as our strategy tells us to do.

An all-out trade war would weaken economic output worldwide, which is already felt in market turbulence. Various calculations show that US tariffs targeting imports from the EU, China and the rest of the world could reduce global GDP by some 0.5 to 1.0 percent in the next few years. 1

In the face of protectionism, Europe will not lie down in the fire. The European Commission has rightly suggested a zero-for-zero tariff agreement between the EU and the US. While Europe remains committed to constructive negotiations with the US, the Commission has been preparing proportionate countermeasures to reinforce our negotiating position, with the aim of reaching a solution that benefits everybody.

Amid Russia's brutal war in Ukraine, the last thing we need is a trade war between allies. Nobody benefits from it, apart from Putin and Xi.

Furthermore, Europe is deepening trade ties beyond the transatlantic relationship. We have over 44 FTAs covering 76 countries, nearly half of EU external trade, including with Japan, South Korea, and Canada.

Ratifying the Mercosur deal should be the next step. Moreover, new free trade agreements with India, Indonesia, and Australia are underway.

## Europe's Internal Challenge: Productivity

Externally, trade conflict is the challenge. Internally, our Achilles heel is weak productivity growth. Ageing populations, the green transition, and security demands all require large-scale investment and structural reform.

The Draghi Report on EU competitiveness offers a sobering but clear-eyed diagnosis. Its key prescriptions: deepen the Single Market and streamline regulation. These have now been boosted as key priorities of the EU.

In assessing Europe's economic prospects, we cannot ignore current security challenges. Whether we like it or not, power politics is back, and it is bad news for the global community.

What does this mean for Europe? I do fully concur with ECB President Christine Lagarde who said that it is now an opportune moment for us Europeans to take our destiny into our own hands. She is right: only by remaining united and steadfast both in matters of security and in shaping a dynamic, resilient economy, Europe can weather the geopolitical storm.

We are fully aware that the current geopolitical rock-bottom necessitates a strong, united Europe, capable of defending itself as a key pillar of Nato, but even without relying on external support. As in the past, Europe works best when we act together, pool our resources and share responsibilities.

At the same time, we will work for more effective European institutional arrangements that better serve the common good. This will require a more impactful and possibly larger EU budget, along with a more efficient use of funds and streamlined decisionmaking structures. The international role of the euro is strengthened by the stability of democracy, the rule of law and economy in Europe. We are also working for a digital euro for the sake of strategic autonomy. The prospect of a European safe asset and deeper capital markets would support investment in common defence and the green transition while enhancing financial stability.

## Resilience and the Financial System

Amid turbulence, Europe's banking and financial system has held up. EU banks remain resilient, bolstered by the reforms after the global financial crisis. Capital flows recently into the EU show investor confidence.

But resilience cannot be taken for granted. At the European Systemic Risk Board we are monitoring the non-bank spectrum and possible mainstreaming of crypto assets in the US with well-grounded concern.

At the same time, financial regulation must be smart and proportional. We must strike a careful balance between stability and innovation - simplifying where possible but avoiding deregulation.

## Monetary Policy Lessons and Strategy

Over the last five years, we have faced an exceptional combination of demand and supply shocks. We have indeed gained a lot of understanding about the appropriate

policy responses to such exceptional events. Much of this work will be summarised in the ongoing ECB strategy assessment.

In particular, we've learned that shocks are rarely ""pure"" supply or demand events. Covid, the energy crisis and war have blurred these lines - as has the trade war. Here, scenario analysis is vital, as stated in Ben Bernanke's review of the Bank of England. Our experience in the Eurosystem confirms that scenarios are most useful in analysing and communicating risks around the baseline during times of exceptional shocks.

Overall, uncertainty requires a comprehensive and pragmatic, even eclectic approach. Recall the 'Brainard principle' that high uncertainty calls for a more gradual response. In my view, the ECB's prudent stance before hiking rates in spring 2022, faced with the stagflationary outlook following Russia's invasion of Ukraine, well reflected this principle.

But it must be case-by-case. There are also strong arguments for decisive action in uncertain times, particularly when inflation expectations risk getting de-anchored. Monetary policy remains as much art as science.

## Conclusion: Europe at a Turning Point

We are again in a moment of historic transition - but not one of expanding cooperation, as 30 years ago, but of fragmentation and strategic rivalry.

In this context, Europe will show unity and renewal. That means speeding up common defence and defence investment. Likewise, it means investing in competitiveness, productivity, and innovation. It means reinforcing research and academic excellence. And it means delivering stability - economic and financial - in a more dangerous world.

At the ECB, we will do our part by ensuring price and financial stability, thus laying the foundation for Europe's long-term resilience and success.

Thank you for your attention. I look forward to our discussion.

1  See for example ""How will the trade war hit the economy?"", Bank of Finland Bulletin, 26 March 2025 and Mapping out trade war scenarios, Capital Economics, 10 th   April 2025.",Olli Rehn
https://www.bis.org/review/r250429k.htm,Martin Schlegel: Price stability benefits all,"Speech by Mr Martin Schlegel, Chairman of the Governing Board of the Swiss National Bank, at the 117th Ordinary General Meeting of Shareholders of the Swiss National Bank, Berne, 25 April 2025.",2025-04-25 00:00:00,"## Martin Schlegel: Price stability benefits all

Speech by Mr Martin Schlegel, Chairman of the Governing Board of the Swiss National Bank, at the 117th Ordinary General Meeting of Shareholders of the Swiss National Bank, Berne, 25 April 2025.

* * *

Madam President of the Bank Council Dear Shareholders Dear Guests

Welcome to the General Meeting of Shareholders of the Swiss National Bank. I am delighted to be able to speak to you here today. The challenging times we are currently experiencing make it all the more pleasant to come together for this occasion.

I have brought a 20-centime coin with me today, which I received as change not so long ago. It was minted in 1881, so it has been in use for over 140 years. It will certainly have experienced a lot over all those years and will have seen the inside of countless wallets throughout Switzerland - and perhaps even the world. It is somewhat worn as a result, but otherwise looks like the newest 20-centime coins.

Some of you may now be thinking that the purchasing power of this coin today is no longer the same as it was in 1881. And you are, of course, right. But the mere fact that it is still in circulation impresses me. For the time that has passed since it was struck spans not only many decades but also encompasses extraordinary political and worldhistorical events. Think, for example, of the two world wars or the fall of the Berlin Wall.

This coin thus epitomises the long-term stability of Switzerland - political stability, institutional stability and price stability. Price stability is the key contribution that the SNB can make to the stability of Switzerland. This also holds true in the current environment.

The trade policy situation at present is creating high uncertainty for all the countries affected - Switzerland included. The uncertainty relates to both the economic outlook and longer-term implications such as a possible fragmentation of the global economy. As a small open economy, Switzerland feels the effects of protectionism particularly hard.

This environment also presents a challenge for the SNB. However, the SNB must fulfil its mandate also in times of uncertainty and change. That is to say, it must ensure price stability while taking due account of economic developments. Price stability is an important prerequisite for our country to be able to prosper. Stable and favourable framework conditions are more important now than ever before. This brings me to the subject of my speech. I would like to answer some fundamental questions today: Why is price stability so important? How can the SNB ensure it? And finally, what monetary policy has enabled the SNB to safeguard price stability in recent years?

## Focus on the overall interests

Ladies and gentlemen, let me begin by setting out what the SNB's monetary policy aims to achieve. Article 99 of the Federal Constitution states that the SNB shall pursue a monetary policy that serves the overall interests of the country, i.e. focused on the interests of Switzerland as a whole. The SNB's monetary policy may therefore not give consideration to individual industries or sections of the population, and must instead be oriented towards the country in its entirety.

How can the SNB act in the overall interests of the country? Article 5 of the National Bank Act gives us the answer: The SNB shall ensure price stability. In so doing, it shall take due account of economic developments. Fulfilling this mandate is the best way that the SNB can serve the interests of the country as a whole, and thus of us all. It is simple to explain why this is the case.

First, price stability makes purchasing and investment decisions easier - this is, for instance, true for people buying their own home and for companies investing in new machinery. Price stability also helps the public sector, for example when it comes to budget planning. Stable prices provide planning security. Planning security promotes saving and investing, which in turn lays the foundations for growth and progress, thus generating new jobs and innovation. If the opposite is the case, namely if inflation is too high or too low, this creates uncertainty and thus curbs economic activity. Of course, price stability alone does not automatically result in investment. Uncertainty, such as we are currently experiencing with regard to trade policy, can lead to hesitancy in purchasing and investment decisions, even if price stability is maintained. Uncertainty is anathema to economic activity. Price stability cannot prevent trade policy uncertainty. However, stable prices are an important basis for the smooth functioning of the economy.

Price stability is also an important basis for politicians to be able to perform their tasks as well as possible. If inflation rises, it quickly becomes the most important concern on people's minds. We saw this during the recent wave of inflation, when household purchasing power fell noticeably in many countries owing to significantly higher prices.

This brings me to my second point. Price stability is also highly relevant for social cohesion in our country. It ensures that wages, pensions and savings retain their purchasing power - which is particularly important for low-income households. By contrast, high inflation erodes purchasing power, and the people hit hardest are those who are the most vulnerable financially.

Ladies and gentlemen, as you can see, the most important contribution the SNB can make to growth and prosperity in our country is to ensure price stability. Of course, price stability is only one of the necessary requirements for growth and prosperity, and not sufficient in and of itself.

## How do we stay on course?

So how do we ensure price stability? We are guided by our monetary policy strategy, which provides the framework for how we implement our monetary policy mandate. It defines what we understand by price stability, namely inflation between 0% and 2%. All values within that range are consistent with price stability. This definition gives us a certain flexibility, as we do not want to target a specific value for inflation. This flexibility

is essential especially for a small open economy such as ours, with Switzerland being particularly strongly exposed to global economic developments. In ensuring price stability, we always focus on the medium term. This means that we can allow inflation to temporarily move outside our range, i.e. below 0% or above 2%.

Allow me to illustrate how we make our monetary policy decisions with the help of a simple image. Imagine the SNB as a big ship. The ship has set course for price stability, but on the high seas there are currents, strong waves and storms that threaten to divert it from its destination. And there have been numerous global disruptions in recent years: the financial crisis, the euro debt crisis, Brexit, the coronavirus pandemic, the Russian attack on Ukraine and the current trade policy situation.

No matter how rough the waters are, the SNB must remain on course. To this end, we regularly carry out a comprehensive reassessment of the monetary policy situation. In doing so, we check whether our bearings are still correct. Specifically, we examine whether monetary conditions are still appropriate to ensure price stability. Monetary conditions result from the interest rate level and the Swiss franc exchange rate. If they are not compatible with price stability over the medium term, we have to adjust them accordingly. Or to return to the image of the ship: We turn the wheel.

Our main instrument here is the SNB policy rate. Changes to the policy rate affect the interest rate level and Swiss franc exchange rate - in other words, the monetary conditions that are decisive for our assessment. If necessary, we can also use other measures to ensure price stability, for example foreign exchange market interventions. It is always about adjusting monetary conditions. In other words, it is not about achieving a specific exchange rate target. In principle, Switzerland has flexible exchange rates. However, if exchange rate movements influence monetary conditions in such a way that price stability is threatened, then we react. To sum up, we can use both of these measures - i.e. the SNB policy rate and, if necessary, foreign exchange market interventions - to adjust monetary conditions in Switzerland. In doing so, we ensure price stability over the medium term.

Having discussed our aim, as well as our instruments and how we use them, I would now like to address uncertainty - an important aspect that constantly accompanies our work at the SNB, although generally not as markedly as in recent weeks. To maintain the maritime metaphor, the weather is hard to predict at times on the high seas.

How do we at the SNB deal with uncertainty? We tackle it with a risk management approach. This means that we think in terms of scenarios for the future development of inflation and the economy. We weigh up our respective courses of action and choose the option that delivers good results for a range of different scenarios.

Another important consideration with regard to monetary policy is timing, given that it takes time for our decisions to take full effect. Monetary policy therefore requires foresight. A ship also reacts only sluggishly to turns of the wheel. If we identify a need to act on our monetary policy stance, we have to do so resolutely. Putting off a necessary decision does not give you any additional room for manoeuvre - on the contrary: delaying monetary policy decisions entails the risk of second-round effects taking hold, i.e. of prices rising or falling because other prices have moved beforehand. In such circumstances, it becomes more difficult to bring inflation under control.

## Our monetary policy stance in the recent past

I would now like to turn to the SNB's monetary policy in recent years. As inflation increased after the pandemic, we raised the SNB policy rate at an early stage and sold foreign currency. This enabled us to combat inflation quickly. From summer 2023, we did not tighten our monetary policy further as inflationary pressure was decreasing. When inflation declined last year and the conditional inflation forecasts also showed a significant reduction in medium-term inflationary pressure, we reacted decisively and lowered the SNB policy rate in several steps. This easing helped to prevent inflation from weakening too sharply in the medium term.

We eased our monetary policy further at the assessment in March, lowering the SNB policy rate by 0.25 percentage points to 0.25%. We also confirmed our willingness to intervene in the foreign exchange market as necessary. With this rate cut, we are taking account of the still weak inflationary pressure and elevated downside risks for inflation. At the same time, we are supporting the development of the Swiss economy.

The uncertainty surrounding the trade policy situation is very high. At this stage, it is only possible to make a rough estimate of the impact on the Swiss economy and inflation in Switzerland. It remains very uncertain how inflation and the economy in Switzerland will develop. However, an economic slowdown cannot be ruled out. Growth is likely to be lower than was expected just a few weeks ago. The SNB is closely monitoring the situation and further developments, and will take them into account in its analyses and forecasts. We will adjust our monetary policy if necessary, to ensure price stability in the future as well.

It is not only the short-term implications for the Swiss economy that are uncertain. There is also uncertainty regarding the longer-term consequences, such as a possible reduction in global economic integration. Various events of late have already highlighted the possibility of an increasing fragmentation of the world economy, such as Russia's attack on Ukraine or the coronavirus pandemic, which weighed on global supply chains.

Central banks cannot shape the global trading system. They cannot prevent tariffs or protectionism in general. However, the SNB must always adapt to new situations and address their impact. This is the only way to ensure that it can fulfil its mandate, also in difficult circumstances.

Ladies and gentlemen, this brings me back to the 20-centime coin that I have brought with me to the General Meeting of Shareholders today. This coin should continue to retain its value - not because of the coin itself, but because price stability is in the interests of Switzerland as a whole and benefits us all.

Thank you for your attention.

The speaker would like to thank Christoph Hirter and Tanja Zehnder for their support in preparing this speech. He also thanks Claudia Aebersold, Alain Gabler, Carlos Lenz, Raphael Reinke and the SNB Language Services.",Martin Schlegel
https://www.bis.org/review/r250508a.htm,Pål Longva: Policy rate kept unchanged,"Introductory statement by Mr Pål Longva, Deputy Governor of Norges Bank (Central Bank of Norway), at the press conference following Norway's announcement of the policy rate, Oslo, 8 May 2025.",2025-05-08 00:00:00,"## Pål Longva: Policy rate kept unchanged

Introductory statement by Mr Pål Longva, Deputy Governor of Norges Bank (Central Bank of Norway), at the press conference following Norway's announcement of the policy rate, Oslo, 8 May 2025.

* * *

Presentation accompanying the speech

Chart 1: Policy rate kept unchanged at 4.5 percent

Norges Bank is tasked with keeping inflation low and stable. The operational target is inflation of close to 2 percent over time. We are also mandated to help keep employment as high as possible and to promote economic stability.

When inflation surged three years ago, we raised the policy rate sharply and rapidly. The policy rate has been held at 4.5 percent for more than a year. Inflation has fallen markedly from the peak but is still above target. Unemployment has edged up in recent years, albeit from a low level.

At yesterday's monetary policy meeting, the Monetary Policy and Financial Stability Committee decided to keep the policy rate unchanged at 4.5 percent.

There is uncertainty about future economic developments, but the Committee's current assessment of the outlook implies that the policy rate will most likely be reduced in the course of 2025.

We have not made new forecasts for this monetary policy meeting but have assessed new information about economic developments against the forecasts presented in March. I will now provide an account of these assessments, starting with international developments.

The global economy is marked by uncertainty about future trade policies. The US has raised tariffs on a range of goods, and some countries have responded with countermeasures. Trade barriers are now more extensive, and the global growth outlook appears to be weaker than assumed in the March . While higher Monetary Policy Report tariffs alone could push up inflation, lower global growth could dampen inflation.

Interest rate expectations have fallen internationally since March. Oil and gas prices and prices for a number of other commodities have fallen.

Global trade uncertainty has led to large movements in financial markets. Major equity indices fell sharply at the beginning of April but have since largely been reversed. Increased market stress and the fall in oil prices coincided with the krone weakening somewhat.

Tariffs have also risen for Norway. The US has imposed a tariff of 10 percent on many Norwegian goods and has announced an increase to 15 percent. The direct effect on growth in the Norwegian economy is likely limited, but global trade uncertainty could dampen activity.

## Chart 2: Registered unemployment is little changed

So far, activity in the Norwegian economy has been broadly as expected. Activity in the primary housing market appears to have picked up a little recently but is still at a low level. House prices have been lower than projected. The employment rate is high, and employment is somewhat higher than expected. In recent months, registered unemployment has shown little change.

## Chart 3: Inflation is still above target

Since the end of 2024, inflation in Norway has risen somewhat. In March, consumer price inflation fell to 2.6 percent. Inflation adjusted for tax changes and excluding energy products was stable at 3.4 percent. This was in line with our expectations. Overall inflation is primarily being driven by the rise in prices for food and services. The wage norm for manufacturing in 2025 is close to the Bank's projection of overall annual wage growth. High growth in business costs is likely to stoke inflation ahead. Since the March , the krone has been weaker than expected. A weaker krone means higher Report prices for imported goods.

In summary, our assessment is that a restrictive monetary policy is still needed to bring inflation down to target within a reasonable time horizon. If the policy rate is lowered prematurely, prices may continue to rise rapidly. On the other hand, an overly tight monetary policy could restrict the economy more than needed to bring inflation down to target.

Since March, developments in the Norwegian economy have been broadly as expected. Trade barriers have, however, become more extensive, and there is uncertainty about future trade policies. This may pull the interest rate outlook in different directions. On the one hand, the global growth outlook appears to be weaker, and oil prices have fallen. Norway's main trading partners are now expected to make more rate cuts than previously. On the other hand, the krone has weakened somewhat and been weaker than assumed.

The uncertainty surrounding the outlook is greater than normal, and the future path of the policy rate will depend on economic developments The Committee will have . received more information ahead of its next monetary policy meeting in June when new forecasts will also be presented.",Pål Longva
https://www.bis.org/review/r250507h.htm,Lesetja Kganyago: The role of ethical leadership amid threats to academic freedom,"Address by Mr Lesetja Kganyago, Governor of the South African Reserve Bank, at the Walter Sisulu University, Mthatha, 6 May 2025.",2025-05-06 00:00:00,"## Lesetja Kganyago: The role of ethical leadership amid threats to academic freedom

Address by Mr Lesetja Kganyago, Governor of the South African Reserve Bank,  at the Walter Sisulu University, Mthatha, 6 May 2025.

* * *

Good morning graduates and members of the university community.

It is my distinct honour to be recognised by Walter Sisulu University (WSU), an institution that bears the name of such an influential figure in South Africa's history.

Incidentally, just over four years ago, I was conferred an honorary doctorate by a university named after Walter Sisulu's lifelong friend, Nelson Mandela. I consider it a profound privilege for my name to be attached, albeit indirectly, to these two great men through the universities that stand as monuments to their legacies.

Today I would like to take the opportunity to reflect on the importance of safeguarding institutions such as WSU, tied as they are to our country's past and - more critically its future.

During apartheid, South Africa's universities became key sites of political activity. In an effort to curtail any political mobilisation, the government clamped down on progressive academics and student organisations.

In the 1980s, for example, five lecturers at the University of Transkei, the institution that would later become WSU, were deported. Hundreds of students were arrested and more were banned from campus. 1

But this campaign against academic freedom went beyond the hard power tactics displayed in the 1980s. The government also exacted its influence by meddling in appointments and creating obstacles to certain areas of research. 2

What happened at our universities during apartheid was not a one-off, and history has repeated itself in a number of different contexts since.

Most recently, universities in the United States (US) have also come under undue pressure. And US universities are not the only ones under strain, with research suggesting that academic freedom has declined in several other democracies in recent years.

In spite of our own recent history, today some South African universities face intense pressure to bend on their principles in relation to their academic boycotts of certain countries. 3

Having led the South African Reserve Bank for just over a decade now, I have come to understand that institutions often comes under attack when they shed light on some or other dereliction of duty elsewhere.

Whether it be a government's failure to uphold the rights of its citizens or its stated democratic ideals, or a financial institution's neglect to safeguard people's money, the attacker's response is often the same: a strike at the target's independence.

As we know, independence is sacred, especially for those institutions that hold a mirror up to power, as universities so often do.

To paraphrase Albert Einstein, academic freedom means having the right to seek the truth and to uncover that truth. Naturally this right comes with the duty not to withhold a part of what is believed to be true. 4

It is no secret that South Africa's universities have had their fair share of challenges over the years. Many of these have been the growing pains of a young democracy and, while our universities have been bruised, they have not been broken.

However, there are likely more perils in store for our maturing democracy, one of which reared its head during the country's last election. I am of course referring to the rise of anti-constitutionalism and populism, which have targeted parts of South Africa's accountability ecosystem.

In the wake of this looming threat, and the other crises that have torn at the fabric of society, ethical leadership and strong governance are crucial to ensuring our universities can continue to deliver quality higher education.

Every leader, lecturer and graduate of this university will forever have Walter Sisulu's name on their CVs. This comes with an immense responsibility.

Former President Nelson Mandela once described his comrade's life as one of ""absolute selflessness"". 5

Indeed, Sisulu was known for embodying servant leadership, prioritising collective good over personal gain. He also fostered collaboration among his peers, helping build an organisation that would withstand some of history's greatest tests.

As I stand before you today, now a member of this university community, I urge you all to model a type of leadership that will defend against threats to academic freedom and uphold accountability, thus safeguarding our country's future.

Thank you.

1  M Bot, 'Black student resistance to segregated universities', Indicator South Africa 3 (2), 1985, pp 12-16.

2  B Le Roux, 'Repressive Tolerance in a Political Context: Academic Freedom in Apartheid South Africa'. History of Education Quarterly 58(3), 2018, pp 461-466.

3  See https://www.news.uct.ac.za/article/-2024-10-19-update-on-matter-related-toresolutions-on-gaza-conflict

- 4  Translated by Harry Hemingway and Claudia Langenberg. See https://www. jameslindlibrary.org/einstein-a-1954/
- 5  See http://www.mandela.gov.za/mandela\_speeches/2002/020518\_sisulu.htm",Lesetja Kganyago
https://www.bis.org/review/r250507i.htm,"Eli M Remolona: Welcome remarks - Presidential and National Anti-Money Laundering, Counter-Terrorism Financing, Counter Proliferation Financing Coordinating Committee (NACC) Recognition Ceremony","Welcome remarks by Mr Eli M Remolona, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Presidential and National Anti-Money Laundering, Counter-Terrorism Financing, Counter Proliferation Financing Coordinating Committee (NACC) Recognition Ceremony, Manila, 5 May 2025.",2025-05-05 00:00:00,"## Eli M Remolona: Welcome remarks - Presidential and National AntiMoney Laundering, Counter-Terrorism Financing, Counter Proliferation Financing Coordinating Committee (NACC) Recognition Ceremony

Welcome remarks by Mr Eli M Remolona, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Presidential and National Anti-Money Laundering, Counter-Terrorism Financing, Counter Proliferation Financing Coordinating Committee (NACC) Recognition Ceremony, Manila, 5 May 2025.

* * *

## Introduction

Colleagues from the government, partners in the private sector, esteemed guests, good afternoon. Magandang hapon po.

I am pleased to welcome you to this recognition ceremony where we honor the champions behind our exit from the FATF grey list. Our sincere thanks to the Office of the President for hosting this occasion in the revered halls of Malacaæang.

## Over a decade of challenge

We were placed on the grey list in 2021. But the real story stretches back 10 years before that. Starting in 2010, global banks were already doing something called derisking-where they started cutting off their relationships with our banks.

This means, this exit ends not just three years on the grey list, but more than a decade of doing business with a handicap. We spent more than a decade wandering in the wilderness.

A study of grey-listed countries shows that grey listing results in deep declines in foreign direct investments, capital inflows, inward payments, and external loans. This reduced our access to global markets, which limited our growth potential.

Grey listing imposed enhanced monitoring while we address gaps on anti-money laundering, counterterrorism and proliferation financing frameworks.

That is real pressure because failure will mean something much worse. It could mean going to the blacklist. We had three years to work on it, but we came together, we made our way out of the wilderness.

Getting off the grey list was not easy. It was critical that the President (Ferdinand R.) Marcos (Jr.) made it a priority and Executive Secretary (Lucas) Bersamin steered our efforts.

Through concerted reforms, government agencies fortified our financial system and reaffirmed our commitment to combating financial crimes.

## Closing

Today, we honor our public and private sector champions who made this happen. Many of you work quietly behind the scenes but today, we give you the recognition and gratitude you deserve.

Maraming salamat sa inyong lahat. Mabuhay tayong lahat!",Eli M Remolona
https://www.bis.org/review/r250507l.htm,Roong Mallikamas: From open finance to an inclusive digital society,"Keynote presentation by Ms Roong Mallikamas, Deputy Governor of the Bank of Thailand, at the Money 20/20, Bangkok, 22 April 2025.",2025-04-22 00:00:00,"## Roong Mallikamas: From open finance to an inclusive digital society

Keynote presentation by Ms Roong Mallikamas, Deputy Governor of the Bank of Thailand, at the Money 20/20, Bangkok, 22 April 2025.

* * *

## Introduction: ASEAN's Fintech Potential

President of Money20/20 (Tracey Davies) Distinguished guests

I'm honored to be here today at Money20/20 to discuss a topic that's crucial to the future of finance in ASEAN: ""From Open Finance to an Inclusive Digital Society.""

Our region, a vibrant mosaic of economies, presents an unparalleled opportunity for fintech innovation. With a combined population exceeding 650 million and a rapidly growing digital consumer base, the potential is immense.

ASEAN's digital economy is projected to reach over $360 billion by 2025.  Yet, a 1 significant portion of our population remains unbanked or underbanked. For instance, studies indicate that over 60% of adults in some ASEAN nations lack access to formal financial services. 2   This substantial underbanked segment represents a critical opportunity for fintech to provide relevant and accessible solutions.

The reasons for this underbanking are multifaceted, often stemming from limited data availability for credit assessment, a lack of transparency in financial product offerings, and poor interoperability between existing systems. These factors collectively contribute to a high cost of customer acquisition for traditional banks, hindering their ability to effectively serve these populations. Fintech, with its agility and data-driven approaches, is uniquely positioned to overcome these barriers, fostering greater financial inclusion and driving economic growth by empowering our communities with seamless access to tailored financial tools and services.

## Thailand's Context and the BOT's 3 Opens

Ladies and Gentlemen.

Policy objectives for driving inclusive digital finance often involve balancing the trilemma of stability/safety, efficiency, and inclusion. And to clarify what we mean by inclusion, it goes beyond simply having a bank account. It's about ensuring that everyone individuals, small businesses, and marginalized communities - can access and utilize appropriate financial services like payments, savings, credit, and insurance in a convenient and affordable way. This is the vision we strive for in ASEAN, and each country prioritizes these elements of the trilemma with its own context and evolving needs.

Initially when developing PromptPay which is our national real-time payment system, Thailand focused on driving inclusion and maintaining stability,. Now, we emphasize

competition and efficiency, recognizing that smaller, agile players - fintechs and new entrants - are often better positioned to innovate and address the diverse, unmet needs of specific customer segments due to their nimbler structures and specialized focus. This competition, while maintaining system safety, can lead to more tailored and accessible financial solutions that larger, established institutions may find challenging to deliver efficiently across all demographics. Thailand's journey provides some lessons learned on how policy objectives have shifted and henceforth led us to pursue the '3 Opens' as our strategic priorities-Open Competition, Open Infrastructure, and Open Data.

- Open Infrastructure: Promotes interoperability and seamless connectivity, enabling efficient financial transactions.
- Open Data: Facilitates data sharing and collaboration, driving the development of personalized financial solutions.
- Open Competition: Encourages new players, fostering innovation and enhancing consumer choice.

Let's delve deeper into each of these ""3 Opens"".

## Analyzing the 3 Opens: Rationale and Way Forward

## [1 From PromptPay to Open Infrastructure]

In 2015, we aimed to promote inclusion through digital payments, leading to the development of PromptPay with the following regulatory constructs at that time with banks only: welfare and tax refunds, low fee, standardization, safety/stability.

Economically, a payment infrastructure is a natural monopoly, which is amplified by economies of scale, network effects, and data accumulation. Therefore, key infrastructure needs to be regulated, especially for fair access, pricing, etc. to ensure cost efficiency of the payment flows through the infrastructure. The initial restriction on non-banks participating in the infrastructure was a lesson learned. Although this strategy led to high adoption rates and a stable system, it inadvertently stifled innovation among existing players, who faced less competitive pressure to evolve their offerings. This is a key factor driving our current emphasis on opening up the infrastructure.

Currently, we aim to place more emphasis on efficiency, enabling Open Infrastructure by allowing non-banks to play a role in providing services that enhance access to digital finance for underserved groups. Therefore, the BOT will enhance the oversight of Systemically Important Retail Payment Systems (SIRPS), aligning with central bank practices abroad, such as the European Central Bank. Key regulatory criteria include membership and access rules, and fee structure. Thailand's broad payment strategy is that""payment should be broader than payment"". BOT hence focuses on Open payment infrastructure and Open payment data for better access to finance.

## [2 Leveraging data and technology with Open Data]

Having witnessed the transformative impact of PromptPay's widespread adoption in retail fast payments, We are now strategically focusing on the next critical layer of

digital infrastructure. Our priority is to put in place data sharing infrastructure, recognizing its pivotal role in driving further innovation and efficiency within the financial ecosystem.

Open Data is not just about technology. it's a catalyst for financial inclusion. Currently, customer data is scattered across various service providers and agencies. If there is a mechanism allowing customers to easily request their service providers and agencies to share their data to other service providers and agencies, it will enable customers to better utilize their data to receive improved financial services.

BOT pursues Project 'Your Data' to empower customers to have their own financial information and non-financial data portable to another service provider based on customer consent. Our priority use cases are access to credit and personal financial management as they still pose significant gaps in our financial system. Therefore, the data that serve such use cases include payment history, account balance, investment holdings, and government data such as tax filing information and utilities usage. By enabling secure and seamless data sharing, we're empowering individuals and SMEs, particularly those traditionally underserved, to access tailored financial services and participate fully in the digital economy.

## [3 Open Infrastructure and Open Data as foundation for Open Competition]

With the imminent launch of Project Your Data, we are establishing a robust supply of data within the financial ecosystem. Simultaneously, the Bank of Thailand is actively fostering demand by enabling financial service providers to innovate and compete on offering enhanced loan products and personal financial management solutions. The introduction of the new virtual banking license will empower digital-native players with tech-focused solutions to fully capitalize on this data sharing infrastructure. Furthermore, the soon-to-be-established National Credit Guarantee Agency will integrate this very data sharing mechanism to enhance its operations and support broader access to credit, especially for underserved SMEs.

With robust infrastructure and data sharing as the bedrock, all players - banks, fintechs, and virtual banks - can operate at their full capacity in an Open Competition, driving innovation and enhancing financial services for underserved communities. Fintechs, leveraging technology with greater agility and often a higher risk appetite than traditional institutions, can better cater to specific customer needs within these segments. For example, they can utilize alternative data for credit scoring individuals with limited traditional credit history, create tailored digital platforms for efficient invoice financing and supply chain management solutions, or offer integrated accounting and payment systems that streamline operations and improve cash flow for small businesses.

As we encourage new players to drive competition and expand financial inclusion, including these fintechs with their enhanced technological capabilities and willingness to navigate higher risk for underserved segments, we acknowledge the inherent risks associated with novel technologies. Beyond foundational technologies like digital assets and tokenization, fintechs are pioneering areas such as blockchain-based trade finance platforms that can reduce costs and increase transparency for SME cross-border transactions, and data analytics tools that provide SMEs with valuable insights for better

financial planning and access to tailored financial products. Our regulatory approach must therefore truly consider both the transformative potential and the evolving risks these innovations present, ensuring a balance between fostering access and maintaining stability.

## [4 Regulatory approach to embrace the new technology by collaboration]

Building on this foundation of open infrastructure and data, which empowers a diverse ecosystem of players, including agile fintechs uniquely positioned to serve underserved segments, our journey is one of continuous learning and adaptation. We recognize that the financial technology landscape is rapidly evolving, and no single entity holds all the answers. Therefore, our approach moving forward is deeply rooted in collaboration. We are committed to working hand-in-hand with the industry, including our fintech community, to refine our policies and navigate the complexities of this dynamic environment. Furthermore, we actively seek to learn from the experiences and best practices of both regulators and innovative fintech companies across the ASEAN region and beyond, fostering a collective understanding that will shape a resilient and inclusive financial future for all.

## [Collaborative Learning and Adaptive Guardrails]

Drawing upon our internal explorations with cutting-edge technologies like CBDC, we are now extending this spirit of learning and adaptation to the wider financial industry. Recognizing that innovation, especially from new players, can yield unpredictable outcomes, our approach centers on establishing clear 'guardrails' - collaboratively defining the boundaries to prevent systemic risks while allowing for experimentation. This ensures a resilient financial system that can safely accommodate novel solutions.

## [Enticing Innovation through an Evolving Regulatory Sandbox]

A key element of our collaborative strategy is our Enhanced Regulatory Sandbox. This controlled environment is specifically designed to attract fintechs and innovators to Thailand, offering a safe space to test ideas where risks are still being understood. Our initial focus includes Programmable Payments, demonstrated by the 'Tourist Wallet' application enabling USD stablecoin conversion to THB stablecoin for limited tourist spending, and 'Programmable Escrow Payments' designed to enhance trust and transparency in online commerce by automating fund release upon condition fulfillment. These real-world examples showcase the tangible opportunities within our sandbox.

## [A Streamlined Sandbox for Agile Collaboration]

We understand that a cumbersome sandbox can stifle innovation. Therefore, we are actively transforming our Enhanced Regulatory Sandbox to be more agile and accessible, with expanded scope, reduced compliance burdens, and significantly faster processing times - aiming for a 6-to-12-month timeframe for projects like Programmable Payments. By opening our sandbox to both regulated and unregulated entities, we aim to foster a vibrant collaborative space where knowledge sharing and rapid iteration can occur. The valuable lessons learned within this sandbox will directly inform our evolving regulations, ensuring they remain relevant and supportive of a dynamic digital finance ecosystem in Thailand.

## Conclusion: Building a Future-Ready and Inclusive ASEAN Fintech Ecosystem

In closing, the journey we've outlined today underscores the Bank of Thailand's unwavering commitment to fostering a dynamic and inclusive digital financial landscape within ASEAN. We firmly believe that by strategically embracing the '3 Opens' - Open Competition, Open Infrastructure, and Open Data - we can unlock the immense potential of digital finance to address the unique needs of our diverse populations, particularly the underserved.

Our experience, from the foundational success of PromptPay to the ongoing development of Project Your Data and our cautious exploration of new technologies within our enhanced Regulatory Sandbox, represents our attempt to learn and adapt. We understand that real progress requires not only innovation but also a continuous focus on resiliency, security, and responsible growth.

The path ahead necessitates continued collaboration - between regulators, financial institutions, fintech pioneers, and the very communities we aim to serve. By working together, sharing insights, and learning from each other's experiences, we can collectively build a future-ready ASEAN fintech ecosystem that is not only innovative and efficient but also truly inclusive, empowering individuals and businesses across our vibrant region to thrive in the digital age.

Thank you.

- 1  ERIA, 2023. ASEAN Digital Community 2045. ERIA Discussion Paper Series
- 2  64% of 25+ adults in East Asia &amp; Pacific (excluding high-income countries) have never borrowed from a formal financial institution (e.g. 79% in the Philippines, 66% in Thailand and Cambodia, 89% in Lao PDR) (World Bank Global Findex Database, 2021)",Roong Mallikamas
https://www.bis.org/review/r250507m.htm,Ariff Ali: Welcome remarks - Micro Parametric Insurance Products Payout event,"Welcome remarks by Mr Ariff Ali, Governor of the Reserve Bank of Fiji, at the Micro Parametric Insurance Products Payout event, Suva, 25 April 2025.",2025-04-25 00:00:00,"## Ariff Ali: Welcome remarks - Micro Parametric Insurance Products Payout event

Welcome remarks by Mr Ariff Ali, Governor of the Reserve Bank of Fiji, at the Micro Parametric Insurance Products Payout event, Suva, 25 April 2025.

* * *

Mr Padam Lala, Chair of SUN Insurance Board;

Mr Isoa Talemaibua, Permanent Secretary, Ministry of Rural and Maritime Areas and Disaster Management;

Mr Abduvakkos Abdurahmanov, Deputy UNDP Resident Representative;

Ms Anita Edgecombe, first Secretary climate change and disaster risk management, NZ High Commission in Fiji;

Development Partners, Distinguished Guests, Ladies and Gentlemen.

Bula vinaka and welcome to this Micro Parametric Insurance Payout Event. Today we witness and celebrate the outcome of collaboration of many partners who are committed to protecting the most vulnerable members of our communities from the impacts of natural disasters.

A special welcome to our aggregators and most importantly, the 15 policyholders (all from the Western Division) who represent the more than 1,100 policyholders who are recipients of the three trigger event payouts for this 2024/2025 policy period, covering an estimated 5000 beneficiaries.

Ladies and gentlemen, this event forms part of the broader InsuResilience Solutions Fund (ISF) Project, which is co-funded by the InsuResilience Solutions Fund of Germany through a Grant Agreement with our insurance partners, SUN Insurance and Tower Insurance.  We are grateful to the ISF for its support.

Most of us have witnessed first-hand that climatic events are increasing in frequency and impact. There are some estimates that such climatic events cause 10 times more economic damage to developing economies than developed countries and shaves off between 1-2 percent of GDP growth annually.  In addition, it puts strain on already stretched Government finances which otherwise can go for more productive capital or infrastructure investment.

Therefore, this payout event showcases the tangible impact of parametric insurance-a tool that provides timely, transparent, and predictable payouts to those affected by natural hazards.  SUN Insurance, one of two insurers currently working with the Reserve Bank of Fiji under this initiative, stands today as a strong example of private sector leadership in building resilience through innovation.  In my view, this microparametric insurance is more than a post-disaster payout. It offers a safety net to the most vulnerable and is a powerful and effective tool to unlock and enhance climate and resilience finance.

Please allow me to acknowledge SUN Insurance for its unwavering commitment to this initiative and Tower Insurance for its parallel efforts.  Your institutions have shown what is possible when the private sector steps forward with purpose, vision, and a willingness to innovate and meet the needs of our vulnerable communities.

We extend our sincere appreciation to the UN Development Programme (UNDP) and UN Capital Development Fund (UNCDF) for their support through the Pacific Insurance and Climate Adaptation Program, as well as the donors who support this program.  From the initial pilot in 2021 to supporting Fiji's successful proposal to the ISF, UNDP and UNCDF has played a catalytic role in introducing and establishing parametric insurance in Fiji.

Ladies and gentlemen, Fiji was the first country in the Pacific to pilot this form of insurance, and today we continue to lead the way as it expands into other markets across the Pacific.  This initiative is fully aligned with Fiji's National Financial Inclusion Strategy 2022-2030, particularly its Pillar on Inclusive Finance.

This pillar is committed to ensuring that all Fijians-especially those who are vulnerable and financially excluded, can access products and services that are not only affordable but are also tailored to their needs.  It also includes a strategic focus on developing financial solutions that build resilience against climate change and economic shocks.

The Micro Parametric Insurance project aims to onboard 5,000 policyholders, with a strong emphasis on inclusion-targeting 50 percent women and 60 percent from poor and vulnerable communities.  In addition, the project seeks to raise awareness and extend outreach on the benefits of parametric insurance to 20,000 Fijians across the country.  In partnership with key government ministries and aggregators, we have been able to reach close to 5,000 Fijians in person through awareness activities in the last five months.

Looking ahead, preparation for Year 2 of the ISF Project is already underway.  We will soon begin a review of the existing insurance products and explore the development of new parametric solutions tailored to the needs of more sectors and communities.  We acknowledge that delays occurred during the initial onboarding and payout process, and we undertake to ensure an effective process going forward.

In concluding, I wish to again sincerely thank SUN Insurance and Tower Insurance, UNDP and UNCDF for their commitment in sustaining this private sector-led initiative and ensuring the continued availability of parametric insurance in Fiji.

To the policyholders who will receive the payout certificates today, we hope you will continue to share with your fellow farmers and small business owners the benefits of having this insurance cover.  All key partners of the program will continue to safeguard the effective management of the project to ensure that our vulnerable communities are not left behind.

Thank you and my best wishes for an enjoyable event today.",Ariff Ali
https://www.bis.org/review/r250507p.htm,Ahmet Ismaili: Conclusion of the IMF mission for the review of the SBA arrangement and the RSF facility,"Speech by Mr Ahmet Ismaili, Governor of the Central Bank of the Republic of Kosovo, at the Conference ""Conclusion of the IMF Mission for the review of the SBA Arrangement and the RSF Facility"", organised by the Central Bank of the Republic of Kosovo, the Ministry of Finance, Labour and Transfers and the International Monetary Fund, Prishtina, 20 March 2025.",2025-03-20 00:00:00,"## Ahmet Ismaili: Conclusion of the IMF mission for the review of the SBA arrangement and the RSF facility

Speech by Mr Ahmet Ismaili, Governor of the Central Bank of the Republic of Kosovo, at the Conference ""Conclusion of the IMF Mission for the review of the SBA Arrangement and the RSF Facility"", organised by the Central Bank of the Republic of Kosovo, the Ministry of Finance, Labour and Transfers and the International Monetary Fund, Prishtina, 20 March 2025.

* * *

Dear Minister Murati, Dear Mr Amaglobeli, Representatives of the International Monetary Fund, Dear representatives of the media, Ladies and gentlemen,

It is a pleasure to be standing here today to mark the successful conclusion of the latest review of the Stand-By Arrangement (SBA) and the Resilience and Sustainability Facility (RSF) with the International Monetary Fund (IMF).

This achievement reflects our unwavering commitment to financial stability, economic sustainability, and institutional reform in the CBK and in the Republic of Kosovo.

We express our sincere gratitude to the IMF delegation, led by Mr David Amaglobeli, Mission Chief for Kosovo, for their continued support and cooperation. Their participation has been essential in guiding our efforts to advance the regulatory and supervisory framework and implement key reforms within our financial system.

The Central Bank of the Republic of Kosovo has worked diligently to strengthen institutional governance structures, enhance financial stability, and align the regulatory framework with international standards, particularly those of the European Union. The IMF's positive assessment highlights our proactive approach to these efforts, and we are proud of the significant progress that has been achieved.

One of the main points of the review of the arrangement and the facility is the adoption of key reforms, including the finalization of the New Law on Banks and the Law on Payment Services.

Our commitment to advancing the banking sector has continued through the development of the Supervisory Review Process (SREP) Roadmap, ensuring a strong risk assessment framework in line with European supervisory authorities, through the support of the IMF.

Other reforms implemented by the CBK, such as countercyclical capital buffer and additional capital requirements for systemic banks, supported by an increase in banks' contribution to the Deposit Insurance Fund, the continuation of the REPO line with the

European Central Bank, the establishment of a recovery and resolution structure, in addition to the review of the relevant and crisis response frameworks, strengthen the long-term sustainability of the banking and financial sector.

The IMF has also recognized our progress towards integration into the Single European Payments Area (SEPA). The submission of Kosovo's preliminary application to the European Commission - DG FISMA and the European Payments Council marks an important step on our path towards full financial integration with the European Economic Area. However, the process will depend on the constitutional review of the laws affecting this process which is known to be outside the scope of the CBK.

The Instant Payments project to be developed with the Central Bank of Italy, known as TIPS Clone, will enable the advancement of financial infrastructure to better serve businesses and individuals and with more reasonable costs and faster transactions.

The benefits from SEPA membership as well as from the modernization and digitalization of payment services will be multifaceted for the economy, in addition to direct savings from transaction costs, increased efficiency and security, resulting in the country's European integration. I would like to take this opportunity to thank the European Union Institutions for their commitment and the EU Office in Kosovo for their support and constructive approach in this process.

In terms of access to finance and financial inclusion, the removal of fees for payment accounts with basic services and measures to stimulate cashless payments have expanded financial inclusion, enabling wider access to banking products and services for our citizens.

Financial education and consumer protection have been areas of activity both in terms of internal organization and for the financial sector, where the CBK has been committed through new initiatives that increase transparency, competition and consumer protection.

Furthermore, in its commitment to addressing global challenges, including risks related to climate change and sustainable finance, the CBK has adopted the Strategic Roadmap as well as guidelines for banks to monitor and report on credit exposures related to the Carbon Border Adjustment Mechanism (CBAM), in line with European Union practices.

To enable support for large and economically impactful projects, including clean energy, we have adopted the Guide to Syndicated Loans, which expands banks' financing options, while reducing the risk of credit concentration.

The reforms undertaken as legal advances represent the basis for a modern and wellregulated financial system, which not only strengthens banking supervision, but also supports the integration of Kosovo's financial market into European financial markets. These are also recognized by the IMF assessment being presented today.

Our banking sector remains strong and resilient, highly liquid, well-capitalized, profitable and with low levels of non-performing loans. The sustainability of the financial sector is also reflected in the fact that all financial health indicators remain within the parameters and regulatory criteria set by the CBK.

Banks continue to play an important role in supporting the real economy. The loan-todeposit ratio reached 84.6%, with double-digit growth in lending and deposits.

With the conclusion of the fourth and final review of the IMF-supported programs, I am pleased to announce that all structural objectives and indicators applicable to the CBK have been successfully implemented, demonstrating our strong commitment to the policies and ownership of the program. The program results testify to a successful program for which we are all deserving.

The CBK remains committed to its mission to implement policies oriented towards promoting financial stability and an efficient payment system, and we remain open to possible new arrangements with the IMF to further strengthen and reform our financial system.

Once again, I would like to express my deepest gratitude to the IMF team for the constructive cooperation and important assistance to the CBK in the function of capacity building, in the areas of financial supervision, regulatory and supervisory framework, corporate governance, risk management, IT and cyber risk management, statistics, etc.

I also express my gratitude to the dedicated staff of the CBK, the Ministry of Finance and partner institutions that have contributed to these reforms.

While expressing my gratitude to Mr Ambaglobeli and Minister Murati for the constructive cooperation in the successful completion of this program, I remain open to questions.

Thank you.",Ahmet Ismaili
https://www.bis.org/review/r250507a.htm,Lisa D Cook: Four guides for the journey ahead,"Speech by Ms Lisa D Cook, Member of the Board of Governors of the Federal Reserve System, at the James Madison College 2025 Spring Commencement, Michigan State University, East Lansing, Michigan, 3 May 2025.",2025-05-03 00:00:00,"## Lisa D Cook: Four guides for the journey ahead

Speech by Ms Lisa D Cook, Member of the Board of Governors of the Federal Reserve System, at  the James Madison College 2025 Spring Commencement, Michigan State University, East Lansing, Michigan, 3 May 2025.

* * *

Huge congratulations to Michigan State University's James Madison College Class of 2025! 1   It is an honor to speak to this inspiring and talented graduating class. Before I address the graduates, I would like to thank those who helped you get here: the parents, grandparents, siblings, aunts and uncles, friends, teachers, and mentors. Congratulations and thank you to all who lifted up the Class of 2025.

As a professor's kid and as an MSU professor, I have come to treasure commencements as important milestones. It is wonderful to be with you today. The flowers are starting to bloom in Beal Garden, the lawns around Beaumont Tower are turning the perfect shade of Spartan green, and the ducklings are making their appearance on the Red Cedar. After another chilly winter, campus is reaching peak beauty-just in time for you to leave Michigan State.

I am full of optimism about everything that lies ahead of you. Despite any sense of angst you may feel about moving on from Madison, I hope that you are filled with optimism, too. Spring is a time of new beginnings. You are ready for the next step. Today marks both the completion of a tremendous accomplishment, and an exciting new beginning. Some of you may be feeling uncertain. That is natural. Others of you may have detailed plans that you are ready to execute. Remember, if you keep your head down and your eyes fixed only on the map, you may miss unexpected opportunities. Life-like Michigan weather-is going to surprise you. As you leave here, I want you to remain optimistic and have confidence, because you are ready.

When I was in your shoes, graduating from Spelman College, I remember feeling unsure of what the world would have in store for me. I did not imagine I would be a member of the Federal Reserve Board of Governors, or even an economist. (I started Spelman as a physics and philosophy major.) I only came to see economics as a potential route several years after my graduation, following a chance encounter. At the time, I was continuing my studies in philosophy in Senegal and was struggling to find the right prism through which to explore big questions that interested and motivated me. I decided to set out for an adventure of a lifetime: hike Mount Kilimanjaro in Tanzania. As luck would have it, during that journey I met a British economist. By the end of the trek, he convinced me that economics held the tools to address the questions I cared about deeply. Within months, I moved back home, enrolled in classes to prepare for a Ph.D. in economics, and began a path that ultimately led me to both Michigan State and the Federal Reserve.

Today, you are leaving the safe harbor of Case Hall and East Lansing, ready to depart on your next adventure. As you do, I would like to offer four guides for you to navigate your journey ahead: hope, curiosity, persistence, and a commitment to public service.

## Hope

My first guide for you is hope. Hope is a value instilled in me from a very young age. I saw my parents and family members face difficult challenges. They persevered because they held out hope that their actions would lead to a better future, not only for themselves, but for me and my sisters, our community, and ultimately all of society. I am proud to have followed in their footsteps.

As James Madison graduates, I know each of you has some corner of the world in which you have made a difference or wish to make a difference. It could have been through debate, JMC Senate, ASMSU, 4-H, ROTC, peer mentoring, Fed Challenge, a public service sorority or fraternity, or Model UN, among many other organizations. Whatever issue interests you, to make progress, you must undertake the difficult work of casting off old ways that no longer serve us, and adopting new ideas, new methods, and new technologies. This process requires faith put into action. Optimism expressed through effort. The daily choice to believe that you can make a difference. So, as you proceed, when you feel unsure, I urge you to guard your sense of hope. Let hope guide you to a better future.

## Curiosity

My next guide for you is curiosity. I encourage you to remain curious, for your attention and your time are among your most precious resources. From your first-year seminar, through your methods courses, to your senior seminars, your studies honed your capacity to seek new insights. I urge you to ask questions, hunt for the best available information, reason through it, and listen carefully to other points of view.

Remain curious about what others can teach you, and do not settle for easy answers. It is imperative that you continue to be filled with wonder about the world so that you can make it better. Curiosity is magical, but it takes vigilance, practice, and study to avoid stagnation, and to reach new insights. Curiosity will lead you to wonderful opportunities if you trust its guidance.

## Persistence

That leads me to my third suggestion for your journey ahead: be persistent. As Madison graduates, you know about preparation. To be persistent in your efforts, you need to continually prepare yourself for the next steps, even if you do not know the destination. It means grounding what you think and say in deep and informed knowledge, acquired through effort and reflection.

You are graduating at a unique time in the history of the world. We have access to unprecedented quantities of data. We have tools to gather and analyze these data to understand and improve the world. I encourage you to view learning as a lifelong pursuit. I ask you to familiarize yourself with new technologies and tools, such as artificial intelligence, and incorporate them into persistent preparation as a companion, not as a substitute, to live an informed, productive, and fulfilling life.

## Service

My final guide for you is a call to service. I know you understand this as James Madison students. Public service is woven into the culture here. Historically, Madison graduates have entered public service jobs immediately after graduation in large numbers, including with the Peace Corps, Teach for America, nonprofits, and local, state, and federal agencies.

Over the course of my life, many of my proudest and most enriching memories were opportunities to serve. (Were any of you in 4-H like I was? Do you remember the pledge? It is ""Head, Heart, Hands, and Health."") Whether it was my time as a page in the Georgia legislature, interning on Capitol Hill, serving on the Executive Committee of the American Economic Association (AEA), working at the U.S. Treasury and the White House, leading the AEA Summer Program at MSU, or now, as a member of the Federal Reserve Board, these opportunities to use my knowledge, skills, and time to try to improve the world have been invaluable to me.

As proud James Madison graduates, look for different opportunities to serve the greater good over the course of your lives. Public service is not always easy, but it is always meaningful and deeply rewarding. That could involve working in education or government, conducting research to expand our knowledge, inventing new technologies, volunteering for a nonprofit organization, or mentoring more junior colleagues. There are many ways-big and small-to serve. So, as you navigate your lives, ask yourself which paths will allow you to contribute to the greater good.

## Conclusion

Graduates-Spartans-you are entering the wider world, one filled with pressing needs, and countless opportunities. As you make your way, let hope be your constant companion. Heed your curiosity. Honor deep knowledge and thorough, persistent preparation. Embrace public service, however you define it.

Growing up, I was often inspired by a poem, popularized by the scholar and spiritual mentor to Martin Luther King, Jr., Howard Thurman: ""I'm tired of sailing my little boat far inside the harbor bar. I want to go out where the big ships float, out on the deep where the great ones are. Should my frail craft prove too slight for those waves that sweep the billows o'er, I'd rather go down in the stirring fight than drowse to death by the sheltered shore."" 2

Graduates, I urge you to plumb the depths of the deep oceans, where you will find the great questions that excite, challenge, and motivate you. You will face rough waters, the route will change, and your destination is not entirely known. As I said, life-like Michigan weather-is going to surprise you. But you are prepared. Your education and your experiences here have armed you with specific knowledge and skills, but also-more importantly-with a honed capacity to be curious, to persistently adapt, to serve, and to hope.

Congratulations, Class of 2025! I cannot wait to see what you will discover on your way.

- 1  The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.
- 2  Daisy Rinehart, ""The Call of the Open Sea,"" , October 1905, 36, Munsey's Magazine quoted in Howard Thurman, ""Finding God,"" in Religion on Campus: The Report of the , ed. National Student Conference, Milwaukee, December 28, 1926 to January 1, 1927 Francis P. Miller (Association Press, 1927), 48.",Lisa D Cook
https://www.bis.org/review/r250507k.htm,Fatih Karahan: Recent economic and financial developments in Turkey,"Speech by Ms Fatih Karahan, Governor of the Central Bank of the Republic of Turkey, at the 93rd Ordinary Meeting of the General Assembly, Ankara, 30 April 2025.",2025-04-30 00:00:00,"## Fatih Karahan: Recent economic and financial developments in Turkey

Speech by Ms Fatih Karahan, Governor of the Central Bank of the Republic of Turkey, at the 93rd Ordinary Meeting of the General Assembly, Ankara, 30 April 2025.

* * *

Esteemed Shareholders, Distinguished Guests,

Welcome to the Central Bank of the Republic of Türkiye' s (CBRT) 93rd Ordinary General Assembly Meeting.

The main contribution that central banks can make to social welfare is to achieve price stability. The year 2024 was marked by decisive steps taken by the CBRT to this end, which led to the start of the disinflation process.

Before moving on to the agenda items we will discuss at the General Assembly, I would like to share with you our assessments of macroeconomic developments since early 2024, and give a brief summary of our monetary policy implementations. Then I will talk about the measures we took to counter the recent volatility in markets. In the final part of my speech, I will briefly touch upon our corporate activities in 2024.

Distinguished Participants,

In 2024, the global growth outlook improved slightly, while the normalization trend in the supply and demand balance in labor markets continued. The recently heightened uncertainties regarding global economic and trade policies, and geopolitical developments have increased downside risks to global growth for 2025. Although global inflation has declined, the elevated uncertainty and brisk risks caused central banks to maintain their prudent stances.

Looking at Türkiye, economic activity was strong in the first quarter of 2024 on the back of wage adjustments and the demand brought forward, but slowed down in the second and third quarters in particular, due to the effects of monetary tightening. In the last quarter of the year, promotional sales led to acceleration in household demand and economic activity compared to the previous two quarters. Against this background, the contribution of domestic demand and net exports to growth remained balanced throughout 2024, pointing to a healthier outlook. In line with this rebalancing, economic activity slowed down on an annual basis in 2024 and the growth rate stood at 3.2%. On the production side, the services sector was the main driver of growth throughout the year, while the construction sector added to this growth. Demand indicators for the first quarter of 2025 suggest that domestic demand has lost momentum, yet remained above projections and its disinflationary effect has diminished. At this point, I would like to emphasize that we are closely monitoring demand indicators and will take necessary measures if developments in demand conditions adversely affect the disinflation process.

In 2024, exports increased annually, while imports declined. Due to the decline in the foreign trade deficit and the strong outlook for the services balance, the current account deficit narrowed significantly in 2024 to USD 10 billion. The strong outlook for the services balance was mirrored favorably in the current account balance, while improvements in gold, energy and core foreign trade balance supported the decline in the current account deficit. As of February 2025, the 12-month cumulative current account deficit was USD 12.8 billion due to wider gold and energy deficits despite the high level of services surplus.

After reaching 75.5% year-on-year as of May 2024, consumer inflation assumed a fast trend of decline owing to the disinflation process that started in June 2024, and stood at 44.4% at the end of the year. Domestic demand conditions, which tended to weaken throughout the year amid monetary tightening, came to the levels that supported the decline in inflation in the second half of the year. Credit utilization registered increases in the first half, but remained moderate in the remainder of the year thanks to macroprudential measures. Depreciation in the Turkish lira became more limited compared to last year, which alleviated inflationary pressures stemming from this channel.

In 2024, cost increases driven by wages and raw materials weakened. After edging up in the first quarter, commodity prices trended downwards for the rest of the year, with the energy group in the lead. Inflation expectations hovered above inflation forecasts, yet declined throughout the year. In addition to all these, periodic price hikes in the food group have become a risk factor for inflation.

## Distinguished Guests,

Against this macro-outlook I touched upon, we determine our monetary policy stance in a way to ensure the continuation of the disinflation process. Within the framework of the strong monetary tightening process that we initiated to establish disinflation as soon as possible, anchor inflation expectations and contain the deterioration in the pricing behavior, we raised the policy rate to 50% in March 2024. Maintaining our prudent stance against upside risks to inflation, we kept the policy rate constant at 50% in the April-November 2024 period.

In December, we reduced the policy rate to 47.5% on account of the inflation outlook and the improvement in inflation expectations. We also decided to set the overnight borrowing and lending rates 150 basis points below and above the one-week repo auction rate, respectively.

In addition to the policy rate, we continued to implement macroprudential policies in 2024 to enhance the effectiveness of monetary transmission against the divergence in economic agents' expectations and possible volatility. We made effective arrangements regarding deposits, loans and liquidity management.

Accordingly, we took steps to eliminate the excess Turkish lira liquidity that will support monetary tightening. As part of the simplification in the macroprudential framework, we abolished the securities maintenance regulation and terminated the additional reserve requirement maintenance practice based on the leverage ratio.

In order to phase out FX-protected deposit accounts (KKM) by switching to TL, we changed the target calculations for switching from KKM accounts to Turkish lira and for renewal of KKM accounts. In addition, we abolished the remuneration of required reserves for KKM accounts.

The disinflation process that started in June 2024 continued in the first quarter of 2025. As of March, annual consumer inflation receded to 38.1%. Commodity prices fell in the first quarter of the year, led by oil prices. Annual core goods inflation showed a slight uptick and declined below 20%. Services inflation, on the other hand, picked up somewhat in January due to wage, administered price, and lump-sum tax adjustments but slowed significantly in February and March. While fresh fruit and vegetable prices posted mild increases in the first two months of the year, unfavorable weather conditions in March led to an increase in fruit and vegetable prices.

Parallel to these developments in inflation, we reduced the policy rate to 45% in January and to 42.5% in March. We have kept implementing macroprudential measures in 2025 to maintain macro financial stability, support the tight monetary stance, and enhance the effectiveness of the monetary policy transmission mechanism.

To ensure that loan growth and composition remain consistent with the disinflation path, we reduced the monthly growth limit for foreign currency commercial loans to 1% and then to 0.5%. For Turkish lira commercial loans, we set the growth limit for SME loans at 2.5% and for other commercial loans at 1.5%. We raised the reserve requirement ratio for Turkish lira-denominated liabilities of banks with maturities up to one year. We terminated the opening and renewal of KKM accounts for legal entities as part of the strategy to phase out KKM accounts.

## Distinguished Participants,

In this part of my speech, I will talk about recent market developments and the measures we have taken to curb the risks that they may pose to the inflation outlook.

As you may know, developments in domestic and international financial markets in March and April led to depreciation in financial assets. To avoid these developments from disrupting the macroeconomic outlook, we swiftly took additional steps to support the monetary transmission mechanism.

The Monetary Policy Committee held an interim meeting on March 20 and introduced measures to support the tight monetary stance. Accordingly, we raised the Central Bank overnight lending rate from 44% to 46%. We also suspended the one-week repo auctions for a period of time, which restrained the rise in indicators displaying excess volatility on March 19.

On April 17, we raised the policy rate from 42.5% to 46%. We also raised the Central Bank overnight lending rate from 46% to 49% and the overnight borrowing rate from 41% to 44.5%. We closely monitor the potential effects of the rising protectionism in global trade on the disinflation process through global economic activity, commodity prices, and capital flows.

To contain volatility in the market, we took measures for Turkish lira and FX liquidity. Accordingly, we extended the maturities of Turkish lira deposit auctions. Moreover, we diversified our liquidity tools and began issuing liquidity bills with maturities up to 91 days. We made outright purchases of government domestic debt securities (GDDS) to support the effective functioning of the bond market.

As for foreign exchange liquidity, we started conducting Turkish lira-settled foreign exchange forward selling transactions. We will continue to closely monitor liquidity conditions and use liquidity management tools effectively.

## Distinguished Guests,

In order to maintain the sound functioning of financial markets, we will continue to decisively use all the policy tools at our disposal within market mechanism. We will adopt a proactive stance in determining the steps to be taken to contain the macroeconomic effects of the volatility in the market.

We will maintain our tight monetary stance until a sustained decline in inflation and price stability are achieved. Accordingly, we will determine the policy rate in a way to ensure the tightness required by the projected disinflation path taking into account the realized and expected inflation, and the underlying trend. Monetary policy stance will be tightened in case a significant and persistent deterioration in inflation is foreseen.

Distinguished Shareholders and Esteemed Guests,

In the last part of my speech, I would like to summarize some of our corporate activities in 2024.

We attach great importance to effective communication and coordination of our policies with other stakeholders. Therefore, in 2024, we continued to inform the public about our decisive steps towards achieving our primary objective of price stability through a simple, transparent and two-way communication policy. For the first time, we prepared and announced a ""Research Agenda"".

Last year, we took steps to use technology and financial infrastructure more intensively and effectively. I would like to briefly mention some of these.

Within the scope of FAST, in 2024, we continued our efforts to increase competition and innovation in the field of payments and to provide new and value-added services. We gradually increased FAST transaction amount limits.

We carried out tasks to ensure uninterrupted circulation of Turkish lira banknotes, modernize the hardware and software of the banknote processing system used in our branches, and increase our banknote processing capacity.

In 2024, we continued to carry out various activities in the framework of our duties and powers in order to increase cooperation with our national and international stakeholders and enhance existing relations.

While working to fulfill our core duties and responsibilities, we also continued to contribute to academic studies as part of our corporate social responsibility activities.

## Distinguished Shareholders and Esteemed Guests

I would like to emphasize once again that price stability is a prerequisite for sustainable growth and increased social welfare. At the CBRT, we will continue the disinflation process and work with determination and dedication to bring inflation down in line with the intermediate targets we have set.

Before concluding my remarks, I would like to thank my esteemed colleagues who support the Bank's activities with great dedication, and I would like to express my sincere gratitude to all of you for your participation.",Fatih Karahan
https://www.bis.org/review/r250507g.htm,Gabriel Makhlouf: Some reflections on geoeconomic fragmentation,"Speech by Mr Gabriel Makhlouf, Governor of the Central Bank of Ireland, at the Dublin Chamber, Dublin, 30 April 2025.",2025-04-30 00:00:00,"## Some reflections on geoeconomic fragmentation - Speech at the Dublin Chamber by Governor Makhlouf

30 April 2025

Speech



Good evening and many thanks to Dublin Chamber for the invitation to join you. 1 ,

This evening I am going to reflect on recent global developments, what it may mean for the economic outlook, and in turn how economic policy in Ireland and Europe more generally should evolve.

Much of what we are seeing now is a particularly swift realisation of one of a number of transitions the economy is facing, with various implications across the near, medium and longer-term.  Understanding the drivers of these transitions, and the nature of their implications, provides clear motivation for policy to maintain and build economic resilience, so that households, businesses and the community as a whole can weather the inevitable storms, and take the opportunities that such transitions can also provide.

I have reflected before on a number of these transitions, such as demographic change, climate change and digitalisation, but this evening I will concentrate on shifting geoeconomic relationships and possible fragmentation. This is an issue at the forefront of our minds given the scale of change being brought about by the US Administration, the high volume of announcements and policy changes, including imposing, removing and pausing of widespread tariff and non-tariff barriers, and the retaliatory responses across major economies. Effective average tariff rates have risen, most notably in the US, reaching levels not seen there in almost a century (Chart 1). 2

Non-tariff barriers have also risen in recent years (Chart 2).The ebbs and flows of cross-border trade and investment can always lead, and be led by, diverse political reactions and positions across countries. However, over the last few months we have witnessed a relatively rapid increase in policy uncertainty and a challenge from the US Administration to the multilateral institutional framework that has underpinned global economic relationships for much of the last 80 years.

The analysis and outlook published by the IMF last week were clear, with four key messages.  First, the imposition of tariffs and other trade barriers as announced will be a significant drag on the growth outlook globally, and especially so in the United States and China (Chart 2). Second, policy uncertainty is also weighing on the growth 3

outlook, damping consumer spending and business investment. Third, downside risks to growth have risen and the possibility of a more significant slowdown cannot be ignored, with the prospect of worsening trade tensions, tighter financial conditions amid higher public and private debt levels, and complex interconnections within the financial system which could amplify negative shocks. And, finally, prospects could rapidly improve if countries adopted a more cooperative approach to addressing the issues underpinning their trading relationships.

In trying to chart a course forward, it is useful to reflect on the possible motivations for those currently driving trade tensions higher.  What costs have economies and societies borne with the opening up of trade and investment flows across the globe?  What will countries be forsaking if there is a continuation to a more closed and protectionist approach? And, is there an opportunity to build on the benefits of openness while addressing any costs that may arise?

As economists, the benefits of trade are close to being hard-wired into us, drawing as they do on the writings of David Hume and the basic principle of comparative advantage first put forward by David Ricardo over two centuries ago. Obviously our understanding has evolved since then, alongside the realities and complexities of modern industrial production, global value chains and multi-national enterprises, the growth of services trade, and advances in technology and connectivity.  However, the basic principle that motivates economies and businesses across the world still holds: produce specific goods and services where it can be done more efficiently or with lower costs, and then trade to get access to other goods and services produced elsewhere on the same basis.  Ricardo's insight was that allowing such trade without impediments allows for both countries to consume more of every good, and as a result generate more income than in the case where trade does not take place or is impeded by things like tariff or non-tariff barriers. 4

This basic principle of the benefits of trade openness has, to varying degrees, underpinned much of the international economic policy agenda since the end of World War II.  While empirical studies can find different extents of the relationship depending on the starting point, time period considered and institutional factors , increasing trade openness has been found generally to be associated with higher growth in GDP per capita, a marginally lower level of income inequality between countries, and a reduction in absolute poverty especially in emerging and middleincome countries, most notably in Asia.  As we know from our own experience in Ireland, openness to international trade has been one pillar of our economic policy since the late 1950s and has contributed significantly to economic development here. We also understand what the impact of an economy closed to international trade can be. 5

So reverting to a world with more barriers to trade, added to by the inevitable tit-for-tat response in tariffs, poses significant challenges.  Trade wars more often than not lead to lose-lose situations, and often as the negative implications escalate the more intense the conflict.  That's clearly seen in the IMF analysis published last week, whereby the hit to growth prospects arising from the higher tariffs is more significant for the US and China. Higher tariffs are regularly shown to have negative consequences for productivity and long-run growth prospects for economies that implement them.  Higher tariffs are also regressive in nature up-front, with poorer households bearing a relatively higher burden of price increases (with the US experience of the 2018 increase in tariffs being among the most recent evidence of this.)  Retaliatory responses to unilateral actions are understandable.  However, we in Europe need to articulate a clear perspective on the benefits being foregone when trading partners adopt more protectionist stances.  We also need to work with trading partners to inform a clear approach to address the underlying drivers that motivate those protectionist stances. And, we need to invest more in working with new trading partners who also believe in the benefits of barrier-free trade. 6

## A macro perspective

From a macro perspective, the US Administration is, apparently, focusing on reducing or eliminating persistent US trade deficits, or more specifically US goods trade deficits.  However, the corollary of a trade deficit is an excess of domestic demand over domestic saving, which in the US case is also evident in the persistent budget deficit, which has grown to about 6.5 per cent of US GDP.  On the other side of the equation, large trade surpluses, such as those in China, are mirrored by an excess of domestic saving over domestic demand - and broadly speaking that excess saving has found its way into US Dollar assets, including US Treasuries issued to fund the US budget deficit.  Higher tariff and non-tariff barriers won't necessarily address these imbalances, and if they do it will be at a substantial cost to productivity growth and long term sustainable growth for the countries affected. A more sustainable approach would instead see a rebalancing of domestic saving and domestic demand in major economies, through sustainable fiscal consolidation in deficit countries and enabling more private domestic demand elsewhere.

These macro identities and patterns point to an area for further discussions between trading partners that could resolve some of the current pressures and result in better outcomes for all.  But it is also necessary to dig beneath a bit more to understand better some of the key drivers of protectionism.  From that more micro perspective, there are two issues that warrant consideration. First, the different income, wealth and opportunity experiences within countries that have coincided with greater openness to trade and investment. Second, the strategic objective of maintaining supply chain security for critical goods and services.

On the first, while greater trade and financial openness are generally associated with higher GDP per capita in a country, it does not, in and of itself, mean that those gains are felt within a country to the same extent.  In many economies, Ireland being among some notable exceptions, measures of post-tax income and wealth inequality have typically increased in recent decades alongside greater openness. In addition, evidence in a number of countries points to a related increasing perception of economic unfairness, low social mobility and increased economic insecurity. To paraphrase, a rising tide lifts all boats, but not all boats are equally able to withstand the swells of stormy weather. Or, in other words, economic transitions need to be managed to help navigate the storm and enter into calmer waters. 7

It is difficult to pinpoint the precise role of trade openness, financial openness, and technological advancement in these within-country trends, as the three are inter-related. Unlike Ricardo's simplified example two centuries ago, capital, labour and ideas are potentially mobile, and how they interact with the geography of trade will influence people's experience of the gains from trade openness.  It will likely also influence their subsequent responses to trade openness, or levels of trust in institutions, an important element of the social capital needed for economies to thrive.  However the evidence also points to the ability of policies and institutional frameworks that help to manage economic transitions and can promote broader gains to openness within countries, most notably through education and access to technology. Indeed, higher levels of educational attainment is likely one reason why Ireland is among those countries who have seen broader gains from openness. 8 9

On supply chain security, the disruption arising from the pandemic and Russia's war of aggression in Ukraine brought to the fore the need to build resilience in our economies to withstand shocks to the flow of critical goods and services. I have also reflected how the evolution of payment systems present another area where concerted effort is required to reap the benefits of technological advances while preserving strategic autonomy. Similar to seeing the economic gains from openness being more widespread, this points to the need for effective policies and institutional frameworks that can complement achieving wider societal goals.  Two examples that come immediately to mind are those frameworks which can facilitate more use of renewable energy domestically with less reliance on fossil fuels, and the adoption of the digital euro and a wholesale Central Bank Digital Currency as a European owned universal digital payment system. 10

With the exceptional uncertainty around where things might finally land, it is difficult to say what the impact of US tariffs, and any retaliation by the EU and others, is likely to have on inflation in the Euro area. It will be influenced by a number of factors, including trade diversion, especially China-EU trade flows, and the exchange rate. The dollar depreciation since early April suggests lower risk appetite for dollar assets, outweighing the lower import demand effects that would have led to an appreciation. The relative appreciation of the euro is deflationary, especially for imports of energy and other commodities which are priced in dollars. The growth outlook, both globally and for the euro area, has deteriorated (as we saw in the IMF forecasts). Increased uncertainty is weighing on consumer and business confidence. Business investment in particular is likely to be stalled until the tariff backdrop is settled, one way or another.

Furthermore, the market response to recent events has led to a tightening of financing conditions. All of these factors are a negative for the economic outlook for the euro area, and a downside risk for inflation in the near term. However, for the more policy-relevant medium term outlook, the risks are less clear. All of this uncertainty reinforces the value of following a meeting-by-meeting approach to determining the appropriate monetary policy stance for the euro area.

## What will the impact on Ireland be?

When we look at Ireland specifically, the economic vulnerability here to a more fragmented trade and investment dynamic between the EU and the US is considerable. Multinational enterprises (MNEs) in Ireland, many of which are US-owned, are integrated into global value chains in major sectors like pharmaceuticals, med-tech, and ICT manufacturing and services.  A number of our most prominent indigenous exporters in agri-food and small cap manufacturing also have significant exposure to the US market.  However, the vast majority of Irish exports, along with the associated profits, tax revenues, and employment generated from this sector, are intrinsically tied to both US investment and the inflow of US services.

In fact, Ireland experiences an overall trade deficit with the US, as the deficit in services trade surpasses the surplus in goods trade. Approximately 50 per cent of the value of Irish exports comes from foreign-sourced inputs, with the US being the primary provider of those inputs, especially in the largest economic sectors. For instance, nearly 15 per cent of the total value of Ireland's pharmaceutical exports ultimately stems from inputs imported from the US. At the same time, almost 20 per cent of the value of Irish exports ultimately go to the US, although the EU continues to be the largest single source of final demand for Irish exports.

Depending on the specifics, the application of tariffs and non-tariff barriers could significantly impact the operations of MNEs in Ireland over the longer-term, particularly if they affect their relative profitability. The most immediate reflection of this may be in the public finances, given the large share of corporation tax receipts arising from US MNEs, with corporation tax now accounting for over a quarter of all tax revenue.  This likelihood increases further if trade-related barriers coincide with broader changes in tax and industrial policy that could discourage investment and activity in Ireland. Such situations pose a major downside risk to the economic outlook. Even without specific details or the actual implementation of policies, the current rapidly changing policy environment is significantly elevating uncertainty, and this uncertainty is already weighing on business investment here.

What does this mean for Irish economic policy?  Earlier this year I wrote to the Minister for Finance (PDF 2.83MB) outlining what I think are the key priorities given the current backdrop, acknowledging the need to address issues with a long-term perspective.

These priorities still hold:

- Prioritise capital expenditure and tax base broadening to create the economic and fiscal space for the necessary increase in investment needed in housing and public infrastructure the coming years;
- Enhance and introduce structural reforms to reduce the costs of infrastructure delivery and boost productivity in the construction sector;
- Further enable the expansion of the labour force including through increased labour force participation and productivity, supporting life-long learning and adaptation to technological change;
- Continue to support efforts to mitigate geoeconomic fragmentation while protecting supply chain security.

Achieving decisive progress across these policy priorities would boost productivity here in Ireland.

## What opportunities might arise?

It is safe to assume that the world of international trade that we have been familiar with since the end of World War II will change over the short to medium term and we (both here in Ireland and in Europe) should begin to plan, and act, on that basis. In my view, policymakers should use this transition to look for opportunities and ensure that the economic impact of any tariff measures are lessened. I do believe that there is opportunity for both Ireland and the EU in this transition.

Across Europe, we need to examine where we can remove supply constraints, and consider where redirected demand can be used to stimulate domestic markets. For too long Europe has maintained high internal barriers, which have acted as an anchor to trade, and by extension growth. Both Mario Draghi's and Enrico Letta's report last year set out what could be done. Policies that seek to boost productivity and innovation should be pursued along with the completion of the EU Single Market, including the delivery of a single banking union, and the Savings and Investment Union.  We want capital to be allocated more efficiently throughout the European Union, harnessing the power of our Single Market while remaining open to global capital and aligned to global standards. To repeat, we need to focus on removing the remaining internal barriers to trade in goods and services.  A deeper and stronger Single Market will, in turn, boost the returns to investment. 11

From a broader perspective, sustainably mobilising private savings across the EU for investment in Europe's productive capital stock would create a more vibrant funding environment for infrastructure and innovation. The

Savings and Investment Union must deliver if Europe is to regain its competitive edge, and if we are to find ways to unlock the €11.5 trillion held by Europeans in deposits and cash and channel it to drive European innovation.

And, finally, the majority of the world continues to believe in a multilateral rules-based trading system. We need to be ready to work with new trading partners that think similarly to us.

## Conclusion

Let me conclude.  We are certainly living in interesting and challenging times.  But, with the right choices, we have the opportunity to build resilience in the economy and public finances to withstand a more fragmented geoeconomic environment.  We can do this by focussing on what we can control to make Ireland an attractive place to live and do business.  And, at the same time, we can continue to engage and influence our partners in Europe and beyond about the benefits of openness, multilateralism and institutional frameworks that promote win-win outcomes for all.

Chart 1: US tariffs are highest in a century

## US tariffs are highest in a century, global tariffs are also rising sharply

## Effective average tariff rate, United States



Sources: Haver Analytics; PIIE; Refinitiv Eikon; World Bank and |MF staff calculations. Note: Weighted average tariffs on US exports and world average use WITS data for 2022.Includes announced tariffs by the rest of the world on US exports up to April 12.



## NONTARIFF BARRIERS ON A RISING TREND

Number of net new domestic subsidy measures

Chart 3: Tariff effects vary across countries



## Tariffs effects vary across countries

Forecast change from January 2025, percentage points



Supply shock for tariffing country

Demand shock for tariffed country

Sources: IMF, World Economic Outlook; and IMF staff estimates.



- [1] Thank you to Vasileios Madouros, Conor O'Shea, Rob Kelly, Rea Lydon and Martin O'Brien for their help in preparing these remarks.

[2] See, for example, Building Economic Resilience (speech at IIEA February 2025), and The Tangle of Ageing Populations and Productivity Growth (speech at Society of Professional Economists, November 2024).

[3] See the flagship IMF reports published during the Spring Meetings - the , the and the . World Economic Outlook Global Financial Stability Report Fiscal Monitor

- [4] Ricardo, David. (1817) On the Principles of Political Economy, and Taxation.  In Ricardo's seminal example, he outlined a hypothetical two-country (England and Portugal), two-product (cloth and wine) world with immobile capital and labour.  In this simplistic setting he showed that if each country focussed on producing just the product which they were most efficient in (cloth for England and wine for Portugal) and traded with the other country for the other product, then both countries would be able to produce and consume more of both products. This holds even when one country has an absolute advantage of being more efficient in producing both products (as Portugal was assumed as having in Ricardo's example).
- [5] . Heimberger (2021)
- [6] and provide evidence of the macroeconomic and distributional effects of higher tariffs.  Looking back further, find a reduction in income inequality arising from the repeal of Britain's Corn Laws and the related reduction in tariffs on grain imports in 1846. Furceri et al (2018) (PDF 1MB) Carrol &amp; Hur (2022) (PDF 825.28KB) Irwin and Chepeliev (2021)
- [7] Some interesting references in this respect include , , , , , . Pavcnik (2011) (PDF 144.74KB) Nolan (2017) Rodrik (2018) (PDF 859.57KB) Heimberger (2020) Protzer (2021) (PDF 554.11KB) Quereshi (2023)
- [8] Rebuilding social capital: The role of Central Banks - Gabriel Makhlouf 2022
- [9] Ireland has among the highest levels of educational attainment across all age categories in the EU.  Tertiary educational attainment among the population aged 25-34 reached 63 per cent in 2023.
- [10] Governors Blog - Digital Dividends: Unlocking innovation in the payments ecosystem
- [11] . European Commission's new Competitiveness Compass examines a path to achieve this
* Vasileios Madouros speaking on behalf of Governor Gabriel Makhlouf",Gabriel Makhlouf
https://www.bis.org/review/r250507f.htm,Chia Der Jiun: Staying the course for Asia's transition to a climate-resilient future,"Opening address by Mr Chia Der Jiun, Managing Director of the Monetary Authority of Singapore, at the Financing Asia's Transition (FAST) Conference 2025, Singapore, 7 May 2025.",2025-05-07 00:00:00,"## Chia Der Jiun: Staying the course for Asia's transition to a climateresilient future

Opening address by Mr Chia Der Jiun, Managing Director of the Monetary Authority of Singapore, at the Financing Asia's Transition (FAST) Conference 2025, Singapore, 7 May 2025.

* * *

Ladies and Gentlemen,

A very good morning. It is my pleasure to welcome you today to the FAST Conference 2025.First, please let me acknowledge our partners for the FAST conference, Mr Cheng Wai Keung, Deputy Chairman of Temasek and Ms Susan Chan, Head of Asia Pacific of BlackRock.

We are facing a more uncertain path ahead for climate action than at any time in the last five years:

- There is greater uncertainty in global commitments to timely transition.
- Global private sector coalitions for climate action are also seeing a pullback. Many financial institutions have withdrawn from net zero alliances, and these alliances themselves have revised their objectives.
- Global corporate investment more generally may also turn more cautious amid heightened trade and economic uncertainty.

On the positive side:

- COP29 saw broad agreement to enhance cooperation in such areas as carbon markets and climate adaptation, as well as new goals to channel financing to developing countries;
- Many countries have submitted their 2035 NDCs, reaffirming a steady pathway towards their net zero goals; and
- Many major financial institutions have affirmed continued commitment to their net zero targets.

We are meeting at a critical time. It is now even more important to bring together leaders across policy, finance and the real economy, to advance concrete approaches and solutions that will maintain the course for climate action and the region's transition to a climate-resilient and nature-positive future.

## Enabling the Energy Transition in Asia

In Asia, enabling energy transition will be key to transitioning our economies.

- Asia's demand for electricity is projected to rise at an annual rate of 4% until 2035 1 , driven by end-use sectors such as transport, industry and buildings.

While energy demand is still growing, the good news is that in parts of Asia, renewable energy already makes up a significant share of the energy mix, supported by falling costs.

- Wind and solar generation capacity in China has already exceeded fossil fuelbased thermal power capacity for the first time in March this year.
- Countries such as the Philippines, Thailand and Cambodia are also seeing lower renewable energy costs than that of coal-generated energy. 2

There is an opportunity to drive the deployment of renewable energy and develop the infrastructure and solutions to support growth in Asian economies in a sustainable and resilient manner.

- The IEA expects renewable energy to supply more than half of Asia's increased electricity demand. 3
- The increase in demand for electricity will catalyse a corresponding demand for supporting infrastructure and solutions. Earlier this year, ASEAN foreign ministers reaffirmed the commitment to operationalise the ASEAN Power Grid (APG) by 2045.
- Almost S$1.1 trillion in financing is estimated to be needed over the next decade to ramp up renewable energy capacity, upgrade existing power grid infrastructure, and invest in battery storage systems. 4

Singapore hopes to do more to catalyse the scaling up of renewables power generation and their enabling infrastructure in Asia.

- Over the years, Singapore has supported partners across the entire infrastructure value chain, serving as the regional base to many international infrastructure development companies, project finance teams of global financial institutions, as well as multilateral development banks such as the World Bank and Asian Development Bank.

We have also put in place key initiatives to enable the financing of Asia's energy transition.

First, we have provided clear and credible definitions through the Singapore-Asia on what are green and transition activities, including activities within Taxonomy (SAT) the Energy Sector.

- Specifically, for electricity generation using renewables such as solar PV and wind, the SAT sets out thresholds and criteria for classifying such activities as ""green"" or ""transition"".
- There has been good adoption amongst financial institutions and corporates of the SAT since its launch.  Financial products have been developed based on the SAT's classifications, portfolios have been aligned with the SAT's criteria and corporate sustainability strategies have been formulated with reference to the SAT.

We are also bringing partners together through blended finance platforms to co-create solutions for the region, de-risk investments, and catalyse the flow of private capital, for energy transition projects.

- We launched the in end-2023 to Financing Asia's Transition Partnership (FAST-P) raise up to US$5 billion to support Asia's decarbonisation and climate resilience.
- Within the FAST-P platform, the Green Investment Partnership (GIP), managed by Pentagreen Capital, will be ready to commence deployment in the coming months. They will mobilise capital for marginally bankable clean energy infrastructure in Asia.
- I am also glad to share that a FAST-P office, with a dedicated management team, will soon be set up to facilitate the deployment of up to US$500 million of concessional capital from the Singapore Government into the three FAST-P partnerships, alongside capital from other partners. The office will continue to work closely with asset managers, banks, and commercial and concessional investors, to promote innovative blended finance solutions for sustainable infrastructure in the region.

These are important milestones, but we recognise that an ecosystem approach regulators, businesses, and financial institutions coming together - will continue to be needed to overcome these challenges. MAS will continue to work closely with the industry to develop solutions to support the region's energy transition.

## Developing High Integrity Carbon Markets

A second area of focus for Singapore is the development of high integrity carbon markets.There are situations where the economic case for climate projects may not be well-established, making it difficult to crowd in investors and capital. High-integrity and well-functioning carbon markets can play an important role, to strengthen the economic case for decarbonisation and channel much needed capital towards worthwhile projects.

There have been headwinds in the last few years, but recent developments such as the finalisation of Article 6 rules at COP29, and the growing industry acceptance of metastandards such as the ICVCM's  Core Carbon Principles, are helping to build 5 confidence in carbon markets.

Shaping a well-functioning global carbon market will require progress in the areas of (i) supply of high-integrity credits; (ii) strong demand for credits; and (iii) robust market infrastructure and capabilities. At the GenZero Climate Summit Insights earlier this week, 2nd Minister for Trade and Industry Dr Tan See Leng spoke about the work the Singapore Government is undertaking to address these gaps, including through developing common standards, crowding in financing, and building capabilities.

The convened by the MAS is also an important initiative that Transition Credits Coalition seeks to address some of these gaps in the carbon markets.

- In its interim report launched at COP29 last year, TRACTION outlined common key high-integrity attributes across various methodologies and frameworks for the early retirement of coal and its replacement with clean energy. It also identified

the transaction risks and possible risk mitigation solutions, and motivations of different buyer profiles.

Building on these findings, TRACTION has identified the market and technical . conditions where transition credits have the greatest potential to make an impact This will enable the industry to prioritise a pipeline of suitable transition credits projects.

TRACTION has also identified the key components of a Just Transition associated with the early retirement of coal plants , to guide project owners and financial institutions to address the socio-economic impacts of coal plant closures on workers and communities.

These findings help foster a common understanding of high-integrity and viable transition credit transactions, enhancing the scalability of transition credits as a mechanism to crowd in financing for energy transition.

I would also highlight the work of the Singapore Sustainable Finance Association (SSFA). The SSFA is collaborating with the Singapore Government to develop guidance for companies on the credible usage of carbon credits alongside a decarbonisation plan. They are also developing solutions to deepen carbon project financing and collaborating with ASEAN counterparts on the ASEAN Common Carbon Framework.

MAS, together with the SSFA, are now considering initiatives to further support financial institutions' participation in carbon markets.

## Strengthening Climate and Nature Resilience in the Financial Sector

Let me move on to a growing area of importance, that of adaptation and resilience. As the physical impact of climate change intensifies, there are mounting risks posed by both climate change and nature loss - risks that have cascading effects across sectors, markets, and value chains.

- The Financial Stability Board (FSB) intends to consider more closely how climaterelated physical risks can pose threats to financial stability.
- MAS took early steps in 2020 to embed resilience in the financial system, by issuing a set of These Guidelines on Environmental Risk Management (ENRM). set out expectations for robust governance, risk management, and disclosures related to environmental risks.
- Our financial institutions have also started to enhance the resilience of their portfolios to climate and nature risks. For example, by integrating physical climate risk into their internal credit risk models, asset valuation, and due diligence processes. Doing so will enable them to better anticipate and manage financial loss, minimise stranded assets, and uncover new financing and investment opportunities.

There is growing interest in how nature loss and ecosystem degradation can amplify the effects of climate change and put nature-dependent value chains at risk. It is timely that the SSFA, in partnership with Oliver Wyman, launched a white paper two weeks ago, titled ""Financing Our Natural Capital.""

- The whitepaper contextualises global frameworks to our region, identifies sectors of high priority from a nature materiality lens, and provides practical steps for financial institutions to incorporate nature into their business activity.

Beyond managing their own environmental risk, financial institutions play an essential role in mobilising capital towards solutions that enhance the adaptive capacity of economies and communities.

- The insurance industry in particular has a key role in developing risk financing solutions for renewable energy and decarbonisation technologies, to reduce the risk of such projects for commercial investors.
- Several international insurance brokers have built specialised capabilities in Singapore to support and develop such risk financing solutions, through risk analytics and advisory for physical climate risk, energy transition investments, and carbon and nature markets.

Ultimately, financial institutions can respond on two fronts: by managing exposure to growing climate and nature-related risks, and by innovating to finance and de-risk adaptation, resilience, and nature-positive solutions.

## Staying the Course and Building the Future

There are near-term uncertainties about the global momentum for climate action, but Asia can continue to chart a steady course in its transition. Policymakers, financial institutions, and corporates alike should take the long view, stay the course, and invest in the infrastructure, solutions, and capabilities that will enable industries and economies to transition. In doing so, we will unlock new opportunities for growth, create jobs, build resilient economies and make possible a more resilient future for all of us.

Thank you.

- 1  IEA. Southeast Asia Energy Outlook 2024 Executive Summary. https://www.iea.org /reports/southeast-asia-energy-outlook-2024/executive-summary
- 2  Wood Mackenzie. Solar inflation reverses as renewable costs in Asia reach all time low. https://www.woodmac.com/press-releases/asia-lcoe/
- 3  IEA. Southeast Asia Energy Outlook 2024. https://www.iea.org/reports/southeast-asiaenergy-outlook-2024/executive-summary
- 4  KPMG, Sustainable Finance Jobs Transformation Map, April 2024.
- 5  Integrity Council for Voluntary Carbon Markets",Chia Der Jiun
https://www.bis.org/review/r250507e.htm,Sarah Breeden: International payment rails - the value of a harmonised gauge,"Speech by Ms Sarah Breeden, Deputy Governor for Financial Stability of the Bank of England, at the panel ""Global state of digital asset regulations: regulatory harmonisation on digital assets"", at the Point Zero Forum 2025, Zurich, 6 May 2025.",2025-05-06 00:00:00,"## Sarah Breeden: International payment rails - the value of a harmonised gauge

Speech by Ms Sarah Breeden, Deputy Governor for Financial Stability of the Bank of England, at the panel ""Global state of digital asset regulations: regulatory harmonisation on digital assets"", at the Point Zero Forum 2025, Zurich, 6 May 2025.

* * *

## Introduction

Digital money and digital assets sit at the core of central banking. We regulate Financial Market Infrastructures (FMIs). We consider the broader implications for financial stability from new technology. And we have the unique position of providing the ultimate settlement asset of central bank money. So today I'm keen to talk about how digitalisation is impacting our objectives, why we're so focused on interoperability - or harmonised gauges, to return to the trains and rails analogy I used last year 1   - and what I see as the next steps for stablecoin regulation in the UK. This is a fast-moving space. It's important to recognise that we're all building our understanding and oftentimes learning as we go.

The developments in digital money and assets that we're talking about today are all inherently global in nature. That means we need to work closely with our international partners to ensure innovation happens safely across jurisdictions. Such harmonisation of standards internationally not only helps us regulators appropriately to manage risks to our economies emanating from overseas, but it also supports firms looking to operate and scale across borders to do so without unnecessary frictions. 2

## Digitalisation: the global opportunity

To take a step back, digitalisation is about turning assets and money into new, digital forms, which can be exchanged in new ways on new infrastructure. There are huge potential benefits from this, both increased efficiency and improved functionality. As central banks and regulators we need to engage to ensure the financial system can reap the benefits of this technology without introducing unwarranted risks. But importantly as, across the globe, we each look to upgrade our systems supporting retail and wholesale payments, we have a unique opportunity to reshape them in a way which better serves the global financial system - with greater harmonisation and crossborder payment and settlement a focus from the start. There is a huge prize here. Some estimates suggest that the total value of cross-border payments could reach nearly $290 trillion by 2030, up over 50% on last year. 3

Beyond managing risks, as a central bank, we have a unique place in this discussion. We provide both the ultimate, risk-free settlement asset in central bank money and the infrastructure on which it moves. We also supervise the financial market infrastructures which provide the plumbing through which money and assets move around the system before ultimately settling across our balance sheet. At the Bank of England, we are exploring how settlement in central bank money can support settlement of assets on

new types of ledger through synchronisation. And as my colleague Dave Ramsden recently outlined, we're working on a series of practical experiments - not just on synchronisation, but also to test use cases and prospective designs of a wholesale Central Bank Digital Currency. 4

We can also play a convening role, both domestically and internationally. For example, the G20, alongside the FSB, CPMI and other partner organisations have set out and are tracking progress against a roadmap for enhancing cross-border payments, focusing on making them faster, cheaper, more accessible and more transparent.

## Interoperability

One obvious place where that convening role can be put to good use is on interoperability. Whilst innovation can drive efficiencies and improved outcomes for users of the financial system, as central banks we like to take a system-wide view. In the payment and settlement space, there are natural monopolies as well as commercial interests to fragment the system by creating 'walled gardens'. Some of those gardens are very large, like globally available card schemes, whilst others sit within domestic payment systems (for example in the UK we have multiple interbank retail systems). One obvious risk of developments in digital money and assets is that new systems emerge in quite small walled gardens, with quite high walls, resulting in further fragmentation across the financial system. That is unlikely to lead to more efficient outcomes. And in bad states of the world such fragmentation could amplify shocks due to trapped liquidity or by undermining confidence in the financial system if customers are unable to move their money freely between 'new' and 'traditional' rails. Interoperability means that users can switch seamlessly between different forms of money and across asset classes. That will be important both in building trust in new technologies and for these technologies to deliver the benefits I outlined earlier.

Interoperability has both hard (technical) and soft aspects (regulatory standards such as AML). One way of delivering technical interoperability would be a single, unified ledger along the lines set out by the BIS in 2023, and built on in the Monetary Authority of Singapore's Global Layer 1 white paper. 5   In this vision, tokenised assets and money would coexist with central bank money on a single platform. Clearly such a piece of infrastructure would sit at the heart of any tokenised ecosystem and, likely within the central bank.

Equally we can drive towards interoperability through the development of harmonised technical standards, making it easier to re-route transactions between systems and reducing where possible the frictions from moving between different forms of money and assets.

However we choose to solve it, interoperability requires the kind of coordinated action that the public sector, with its convening power and ability to set standards and requirements, may be best placed to deliver. And when we start thinking about interoperability cross-border, that is where harmonisation and collaboration between regulators and authorities can be most effective.

As such, I think there's huge scope here for public authorities, along with industry, to work together to do more experimentation and collectively further our understanding on

how to integrate these new, digital forms of assets and money into the wider financial system.

## Digitalisation of Money: Stablecoins

Another way of thinking about interoperability is that it is crucial for achieving ""singleness of money"". 6   ""Singleness of money"" is a central bank concept which risks seeming quite complex. But put simply, what we mean is that if we are to safeguard financial stability, it is critical to be able to convert frictionlessly between different forms of money, so that all forms of money can be exchanged (and redeemed) at par value at all times. This leads to trust and confidence in the value of money - whether it's a bank note, a deposit at a commercial bank, or a stablecoin being used for payments - which in turn underpins confidence in the broader financial system. Ultimately, it is interoperability that delivers that the frictionless conversion, and therefore singleness of money, that we're so focused on as a central bank.

That idea sits at the heart of our thinking on how to regulate systemic, payments focused stablecoins. 7   We continue to think this principle remains a helpful way to guide our thinking about money. Should consumers not be readily able to exchange the types of money that they're using day-to-day, they may lose confidence in the broader financial system. Indeed, in an extreme scenario, where large amounts of economic activity take place in a form of money which isn't interchangeable, at par, with bank deposits or cash, and may not even be denominated in the national currency, we could see threats to monetary sovereignty as well as risks to financial stability. Clearly this would cut across the objectives of central banks.

In November 2023 the Bank of England was one of the very first central banks to set out a proposed framework for how to think about regulating stablecoins used widely in the real economy for payments purposes. By setting out our early thinking, and our focus on this singleness of money, we've been able to enter into a dialogue with industry which has been incredibly useful. We want to continue that dialogue as we refine our proposed regulatory framework. And, it goes without saying, we want to listen to and learn from our international colleagues as they design and implement their own regimes.

Let me set out three key themes of feedback we have heard on our proposals from our engagement with industry.

The first is that our proposed regime does not align with existing stablecoin business models whose revenues are based on interest income, and our focus on 'singleness of money' for stablecoins widely used for payments jars with the existing use cases for stablecoins.

It is clear that there are stablecoin use cases which are not centred on becoming widely used payment mechanisms in the real economy - supporting settlement in the crypto ecosystem, for example. However once a stablecoin has been issued, it has the potential to be used anywhere in the financial system - to settle real world as well as crypto activities, to settle wholesale as well as retail transactions, to be used offshore as

well as in its domestic regime. Accordingly, we want to reflect on how the broader UK regime should support each of these use cases and business models, whilst still mitigating the risks.

The second theme, clearly related to the first, is on transition into the Bank's proposed regime, and how this may be challenging the more it differs from the FCA's regime for non-systemic stablecoins.

And third, building on this point, industry also highlighted concerns with the UK having a regime which looks and feels different to regimes being implemented in other countries, and the challenges that might bring for firms wanting to operate cross-border businesses.

## Next steps for the UK stablecoin regime

So my key message on the UK stablecoin regime is, we've heard you, and we want to continue our dialogue with industry as we continue to refine our proposals. This is challenging because as I've outlined the world is changing at pace, and there are areas where we all need to learn as we go, for example on interoperability, and how stablecoins might scale within the regulatory regimes we set out. But perhaps I can start to sketch out where we go from here.

As I see it, it would be helpful to differentiate more clearly between ""payments coins"" being used in the real world, which are the focus of the Bank's regime, and other types of stablecoin, which have more investment use cases, or indeed play a settlement role in the crypto ecosystem (and which, in the UK, the Financial Policy Committee does not currently judge to be systemic).

Similarly, I think there is a clear difference between the very large, systemic payments coins we designed our regime for, and those which are smaller, but may have the potential to be systemic in the future. In other words, the regime we set out with 'singleness of money' at its core might not be the right regime for coins which aren't yet being used widely, at what central bankers would describe as a ""systemic level"", for payments.

I have an important caveat, however. Payment systems are networks - and a stablecoin focused on payments could take off very quickly and scale up due to natural network effects. We need therefore to be very mindful of the glidepath into a systemic regime for payments-focused stablecoins - including how we identify stablecoins which are on that trajectory - to ensure that any rapid growth in stablecoins which don't start off as systemic can be appropriately managed within the regulatory framework. And we need to be mindful of what that glidepath means for stablecoin business models.

The Bank is keen to ensure that its regime enables safe, systemic payments coins in the UK to have a viable business model. That's how we support safe innovation and it's how businesses and households in the UK are able to capture the benefits of this new technology. As a result, and reflecting feedback, we are reviewing how our proposals might permit firms to receive some return on their backing assets.

As we develop those proposals, you can be assured that we will maintain our focus on the singleness of money and financial stability. Without that confidence - in being able to redeem with legal certainty, in fiat at par, and without friction - we risk runs from one form of money to another, and a loss of trust in money that can undermine the basis on which economic activity takes place. 8   We need to, and we will, guard that very carefully.

In ensuring trust in money at a time of significant innovation, and where we need to learn and test as we go, at the Bank we've found sandboxes a useful way to further our thinking by working alongside the industry. For example, the Digital Securities Sandbox is a regulated live environment where digital securities can be issued, traded, and settled on distributed ledger technology, and where participants are allowed to scale their business as they demonstrate compliance with regulatory requirements at each stage. It is plausible that this type of approach could be beneficial in the footnote[9] payments context, allowing further open dialogue and experimentation between industry and authorities to understand how we can deliver important features like interoperability, whilst also learning more about the business models and use cases for stablecoins as they continue to develop. And, crucially, as we learn, we can share our reflections with authorities across the world, with an aim of supporting harmonisation and equivalence in outcomes.

## Conclusion

Let me conclude and return to the theme of today's panel: that as we move forward we should keep international harmonisation in mind. I don't think that requires precise, line by line matching requirements. Rather we want to be able to recognise where regimes in other countries deliver equivalent outcomes to the expectations we set. We'll continue to engage with and learn from our colleagues across the world such that we can make these judgements. And that will ensure we are best placed to realise those benefits of cheaper, faster, more efficient and more effective payments and settlements I mentioned at the start. I look forward to our continued engagement.

I would like to thank Francine Robb for her assistance in drafting these remarks. I would also like to thank Andrew Bailey, Paul Bedford, Emma Butterworth, Victoria Cleland, Nick McLaren, Sasha Mills, Ali Moussavi and Tom Mutton for their helpful input and comments.

1 Modernising the trains and rails of UK payments  speech by Sarah Breeden | Bank of England

2  For example, in 2023 the FSB published  Recommendations for the Regulation, Supervision and Oversight of Global Stablecoin ArrangementsOpens in a new window

3  Beyond borders: capturing growth in a dynamic cross-border payments marketOpens in a new window

4  Renewed RTGS: Digital public infrastructure as a platform for innovation  speech by Dave Ramsden | Bank of England

- 5  III. Blueprint for the future monetary system: improving the old, enabling the new ; Opens in a new window   Global Layer 1 (GL1) WhitepaperOpens in a new window
- 6  The future of money and payments - speech by Andrew Bailey | Bank of England
- 7  Consistent with the FPC's expectations for stablecoins set out in  Financial Stability Report December 2019 | Issue No. 46Opens in a new window
- 8  This is not just a theoretical risk. Similar examples have been seen in history with banknotes - eg the well-documented experience of 'free banks' in the US in the 1800s. It is also managed via the Scottish and Northern Irish Bank note regime which ensures that privately issued notes in the UK are fully backed and 'trade' at par.
- 9  Digital Securities Sandbox (DSS) | Bank of England",Sarah Breeden
https://www.bis.org/review/r250507c.htm,"Aleš Michl: Imagine a world where algorithms and technology assist us, but our values keep us firmly grounded","Speech by Mr Aleš Michl, Governor of the Czech National Bank, at the Czech National Bank (CNB) Discussion Forum 2025, organised by the University of West Bohemia, Plzeň, 29 April 2025. ",2025-04-29 00:00:00,"## Aleš Michl: Imagine a world where algorithms and technology assist us, but our values keep us firmly grounded

Speech by Mr Aleš Michl, Governor of the Czech National Bank, at the Czech National Bank (CNB) Discussion Forum 2025, organised by the University of West Bohemia, Plze, 29 April 2025.

* * *

The CNB's mandate is low inflation and financial stability.

Since the appointment of the new Bank Board, we have delivered the following results:

- (1) Inflation was brought down from 17.5% in July 2022 to exactly 2% - the CNB's inflation target, which was hit in February, March and June 2024. Headline inflation for 2024 stood at 2.4%, the lowest level since 2018, remaining within the CNB's tolerance band throughout the year (see Michl 2022, 2023a, 2023b, 2023c). Stable inflation means that Czech citizens can better plan for their future. If we lower interest rates further, we will do so very cautiously - the outlook still shows higher core inflation. We will definitely stay hawkish, guarding inflation and not allowing a long period of zero interest rates as in the past.
- (2) Clients of the failed Sberbank got their money back thanks to the CNB team's active role and oversight of the process in the creditors' committee. It was the largest and most successful bank insolvency in Czech history. Clients have so far recovered 95% of their deposits. The remainder will be paid once legal issues are resolved. The financial sector remains stable.

Other partial results of the work are:

- (3) The CNB is now halfway towards restoring its gold reserve. The Czech National Bank was established in 1993. At that time, it held 60.7 tonnes of gold in its vaults. By 2019, it had 8 tonnes, the lowest in its history. The gold had been sold off. By the end of 2024, we had increased our gold reserves to 51.2 tonnes. Gold is good for asset diversification. Our goal is to have 100 tonnes of gold in the reserves and to keep this treasure for future generations.
- (4) Ninety-nine per cent of banks on the Czech market use instant payments - a system the CNB developed, enabled and coordinates. Before, clients' transactions took up to two days to clear. Now they go through in a matter of seconds (for details, see KarhÆnek, MalovanÆ, Michl and Trubelík, 2025).
- (5) At the end of 2022, the CNB recorded a cumulative loss of CZK 487 billion (the highest in history), inherited from the previous Bank Board. The loss was the result of mismanagement of assets and liabilities on the CNB's balance sheet. The reason was that the expected return on assets, i.e. international reserves, was low compared to the cost of liabilities. We have changed that considerably. We have significantly increased the long-term expected return on assets, especially on international reserves. We hold more equities and gold. At the same time, we have reduced the cost of liabilities - we

increased banks' required minimum reserves and stopped remunerating them. We removed the root cause. The last two years have been profitable. But we cannot expect the CNB to be profitable every year. There will be periods when the CNB posts a loss. That may happen in 2025 or it could be another year. For example, if there's a sharp drop in equity or bond prices. Or if the koruna appreciates significantly against the euro or the dollar. This is because our assets are in foreign currencies, but our accounting is in koruna. Importantly, the CNB's assets are now structured in such a way that their long-term expected return exceeds the anticipated cost of liabilities (see Adam, Škoda, Michl, 2023).

These results are due to thousands of hours of hard work and difficult decisions made by our staff, as well as an improvement in our corporate or institutional culture. Culture is about how people work every day. The principles they apply when solving problems. And that determines whether or not an institution delivers results. Culture within an institution is crucial because it greatly affects how the organisation works, how its employees conduct themselves and how it is seen from outside.

At the start of our term, the Bank Board agreed that we needed to build a culture of openness and accountability, cut red tape, speed up decision-making, and make use of the ideas of our clever people.

We started with ourselves - the management. At that time, the country had the highest inflation in its history, and we knew we had to set an example for the public. In 2022 and 2023, we as the management had our salaries and bonuses frozen. The salaries of other employees increased only very slightly. I also said that bonuses for the management would only increase once results had been delivered. In 2023, we carried out the first comprehensive streamlining of the Bank's operations in ten years. We cut the number of positions by 5% compared to 2022. The number of managers reporting directly to the Bank Board was reduced from 17 to 14. During 2023 and 2024, we also completely reviewed all the areas and processes to reduce bureaucracy in the CNB's dealings both with the market and internally. Our aim was and is to stand out from other public sector organisations, which are often overstaffed and bound up in red tape (for details, see Michl, 2024, and Jeffery, 2024).

The values we follow at the bank have developed gradually. They continue to take shape through discussions and seminars held across the CNB (Holas, 2025). These values are not just words on paper, but a daily reality - a guide for decision-making and for tackling the complex situations the CNB faces.

Our values at the Czech National Bank, as they have emerged from more than a year of discussions within the bank, are:

1. Expertise
2. Credibility
3. Openness
4. Independence
5. Professionalism and hard work
6. Creativity and innovativeness
7. Morality and ethics
8. Responsibility

9.

9. Reliability and teamwork
10. Stability and continuity

We have also moved the bank towards technology. We have hired IT experts, while staff from branch operations have left, keeping the overall number of positions at the bank unchanged.

One great idea for using artificial intelligence was born during one of my breakfast meetings with bank employees. Since then, we've launched pilot AI projects at the bank. And I don't just mean the now-common ChatGPT from OpenAI. The bank will soon fully adopt Microsoft Copilot in the cloud. We're also testing Grok from xAI. But the key lies in programming with AI - we are testing, for example, Claude from Anthropic, and the use of the RAG artificial intelligence system. This is a system that first retrieves information from documents and then generates a response based on it. Unlike standard language models, it can process hundreds of pages of text at once and provide accurate answers.

You, the students, are the generation that will work with technologies that now seem distant. My goal is for the CNB to be a place where you come to bring your ideas to life. A place where you can change things for the better. And a place where every smart idea will have the support of management. I want us to build an institution together one that goes beyond its own boundaries. An institution where ""that's impossible"" doesn't exist and where problems are tackled by asking ""how do we do this as a team?""

Let me give you an example: every year I give employees a Christmas gift. At the end of 2022 - just after Covid - it was a box of vitamins. At the end of 2023, as we began shaping our values, it was the book . And at the end of 2024, each Winners Never Cheat employee received the card game . The game comes with The Mind: Let's Become One a deck of cards numbered from one to one hundred. A few cards are dealt, and the players have to place them in the centre of the table in ascending order. If you're holding a twenty, you need to play it before someone with a fifty, but nobody can see each other's cards. So the game requires mental alignment and an intuitive sense of when to play which card. This game is just a small symbol of our transformation - of our ability to become one, to think as a true team.

Soon, the Czech National Bank will be an institution that uses artificial intelligence and perhaps even blockchain - for better financial market supervision. It will use realtime data (Adam, MichÆlek, Michl, SlezÆkovÆ, 2021) and machine learning to predict crises (Adam, Michl, ŠvØda, 2025). The CNB will systematically apply AI in its supervisory process not only for analysis but also for automated decision-making in selected areas. The next generation of bankers will think completely differently working with real-time data, algorithms and systems that will be better decision-making partners than our previous models were.

The vision is a bank that helps people dream of a future without the fear of inflation. A bank that ensures financial stability through the use of data and technology. And an institution where employees uphold strong ethics. The internal culture of the institution matters deeply to me. It's not a soft topic - it's a hard tool for delivering results. The results I spoke to you about at the beginning. Just imagine a world where algorithms and technologies assist us, but our values keep us firmly grounded.

## References

Adam, T., MichÆlek, O., Michl, A., &amp; SlezÆkovÆ, E. (2021). The Rushin index: A weekly indicator of Czech economic activity. Czech National Bank Working Paper No. 4/2021.

Adam, T., Michl, A. &amp; Škoda, M. (2023). Balancing volatility and returns in the Czech National Bank's foreign exchange portfolio. CNB Research and Policy Note No. 1/2023. Czech National Bank.

Adam, T., Michl, A., &amp; ŠvØda, J. (2025). First use of AI in inflation forecasting. Czech National Bank. Available at:  https://www.cnb.cz/en/about\_cnb/cnblog/First-use-of-AI-ininflation-forecasting-at-the-CNB/

Bloomberg (2024, 19 June). Czech Central Bank chief Aleš Michl says no victory yet in inflation fight. Available at:  https://www.bloomberg.com/news/articles/2024-06-19/czechcentral-bank-chief-ales-michl-says-no-victory-yet-in-inflation-fight?embeddedcheckout=true

Holas, J. (2025). Inovace a organizaní zmny musí jít ruku v ruce s posilovÆním firemních hodnot [Innovation and organisational change must go hand in hand with strengthening corporate values]. Bankovnictví (4/2025).

Jeffery, C. (2024, 18. bezna). CNB's Aleš Michl on tackling inflation, Friedman's mistake and ditching DSGE. Central Banking. Available at:  https://www.centralbanking.com /central-banks/monetary-policy/7963511/cnbs-ales-michl-on-tacking-inflation-friedmansmistake-and-ditching-dsge

KarhÆnek, T., MalovanÆ, S., Michl, A. &amp; Trubelík, I. (2025). Instant payments in Czechia: Adoption and future trends. CNB Working Paper 4/2025. Czech National Bank.

Michl, A. (2022). Policy for a strong koruna [speech transcript]. CNB Discussion Forum. Faculty of Economics and Administration of Masaryk University, Brno. 23 November 2022.

Michl, A. (2023a). Inflation: The road to the target. University of Economics and Business, Prague. 15 May 2023.

Michl, A. (2023b). The road to the target II. CBA Assembly of Members. Czech Banking Association, Prague. 15 June 2023.

Michl, A. (2023c). The road to the target III. CNB Discussion Forum 2023. Tomas Bata University, Zlín. 17 September 2023.

Michl, A. (2024). Podmínky nízkØ inflace Engliše a Rašína [Engliš's and Rašín's conditions of low inflation]. CNB Discussion Forum 2024. Faculty of Economics, VSB Technical University of Ostrava, Ostrava. 4 December 2024.",Ales Michl
https://www.bis.org/review/r250507b.htm,Fabio Panetta: Address - opening session of the Board of Governors of the Asian Development Bank,"Address by Mr Fabio Panetta, Governor of the Bank of Italy, at the Asian Development Bank 58th Annual Meeting, Milan, 5 May 2025.",2025-05-05 00:00:00,"## Fabio Panetta: Address - opening session of the Board of Governors of the Asian Development Bank

Address by Mr Fabio Panetta, Governor of the Bank of Italy, at the Asian Development Bank 58th Annual Meeting, Milan, 5 May 2025.

* * *

Esteemed President Masato Kanda, Your Excellency Minister Giancarlo Giorgetti, Madame Secretary Asel Djusupbekova,

Honourable Governors, distinguished delegates, esteemed guests, ladies and gentlemen, it is a great honour and privilege to open the 58th Annual Meeting of the Asian Development Bank (ADB) here in Milan, Italy. We have come together today for a moment of celebration, before turning to the important work that lies ahead.

But before we proceed, let us take a moment to remember the victims of the devastating earthquake that struck Myanmar and Thailand at the end of March. We are proud that the ADB responded swiftly, approving a grant to support the emergency and humanitarian needs of the people affected.

The theme of this Annual Meeting is 'Sharing Experience, Building Tomorrow'. Asia, Europe and Italy all have important success stories to share.

In Asia and the Pacific, remarkable progress in poverty reduction has been achieved through greater participation in international trade and a gradual move up the valueadded ladder within global value chains. Reflecting this dynamism, the region contributed approximately 60 per cent to global growth in 2024.

Europe, for its part, has made great strides over the years in regional integration, the development of the welfare state, the establishment of common regulatory standards, and the construction of cross-border infrastructure - including in the field of payments, which is essential for trade, growth and financial inclusion.

These achievements are the result of a 'peace dividend' - decades of unprecedented progress in international cooperation and economic integration that fostered prosperity, stability and development across the globe. Yet today, this framework is under serious strain.

In a time of rising geopolitical tensions and conflicts, we must guard against dangerous steps backwards that could jeopardize the hard-won gains of recent decades. Peace remains the indispensable foundation for progress.

Modern economies are deeply interconnected, and openness to trade has benefited both advanced and developing nations, reducing inequality and lifting hundreds of millions of people out of extreme poverty. Protectionism threatens to undo these achievements and to weaken the very fabric of global prosperity.

Until the recent resurgence of trade tariffs, the Asia-Pacific region was on a path of steady growth, with inflation gradually easing. In Europe, economic activity was expanding at a moderate pace, while inflation hovered near the 2 per cent target.

Asia-Pacific remains the most dynamic region in the global economy. The robust growth in electronics exports last year reflects its ability to capitalize on accelerating demand driven by artificial intelligence, supported by its commanding 75 per cent share of global semiconductor production. This underscores both the advantages of an open and interconnected regional economy, and the risks posed by rising trade barriers and policy uncertainty.

These risks are acute for Asia Pacific, but they also affect Europe, where external demand plays a crucial role in sustaining growth. The prosperity of both regions is deeply intertwined with global trade flows and a predictable international environment.

Geopolitical tensions are, unsurprisingly, also a central concern for the Governing Council of the European Central Bank, on which I have the honour to serve as a voting member. Trade barriers and heightened uncertainty are key variables we must closely assess when formulating monetary policy in the euro area, as they affect both economic growth and the transmission of policy decisions.

In this context, preserving economic integration and reinforcing international cooperation are not optional - they are essential. Multilateral institutions play a pivotal role in safeguarding openness, stability, and the shared rules that underpin global prosperity.

The ADB stands as a pillar of the multilateral system. With its deep reservoir of development expertise, robust capital base, and broad-based membership, it brings together regional and non-regional partners, united by shared development goals and a commitment to inclusive growth.

Italy is fully committed to this mission. Its longstanding support for the ADB has been expressed through both financial contributions and the dedication of its human capital. Italian companies, renowned for their excellence in engineering, design, and industrial innovation, offer capabilities that can meaningfully contribute to the region's sustainable development. Their know-how aligns closely with the priorities of Asia and the Pacific.

In this endeavour, we may find inspiration in the journey of Marco Polo. Departing from Venice in 1271 as a young merchant, he travelled eastward to China, where he became an advisor to the Khan and a devoted admirer of Asian culture. His 17-year odyssey, later chronicled in Il Milione, helped to bridge continents, foster trade, and ultimately inspired future explorers - including Christopher Columbus.

Let us, today, be guided by the spirit of Marco Polo, who crossed not only the boundaries of geography, but also those of imagination. 'It was my will to discover', he wrote, 'and the will was stronger than the fear'.

May we too continue to choose cooperation over conflict, openness over barriers, and courage over hesitation - for the future we are building demands nothing less.

Grazie e buon lavoro.",Fabio Panetta
https://www.bis.org/review/r250507d.htm,Fabio Panetta: Invisible yet essential - the contribution of cross-border payments to a better world and a safer financial system,"Keynote speech by Mr Fabio Panetta, Governor of the Bank of Italy, at the Asian Development Bank 58th Annual Meeting, Milan, 6 May 2025.",2025-05-06 00:00:00,"

## Invisible yet essential: the contribution of cross-border payments to a better world and a safer financial system

Keynote speech by Fabio Panetta* Governor of Banca d'Italia

Banca d'Italia side event on 'Cross-border payment rails: from infrastructure roll-out to a smooth customer journey'

Asian Development Bank 58 th  Annual Meeting Milan, 6 May 2025

Payments are the backbone of the financial system. An efficient payment system is crucial for ensuring the secure and timely movement of funds between individuals, businesses, and institutions - both domestically and internationally.

The efficiency  and  reliability  of  payment  systems  are  often  taken  for  granted,  and largely go unnoticed - until something goes wrong. In recent years, however, there has been growing recognition that payments are not just a technical function but a vital  pillar  of  financial  inclusion,  financial  stability,  monetary  sovereignty  and  even geopolitics.

Technological  progress  has  greatly  improved  the  efficiency  of  domestic  payment infrastructures,  reducing  transaction  costs  and  speeding  up  execution.  However, these gains have scarcely materialized for cross-border payments, which remain slow, expensive and opaque. The reason is that technology alone is not enough: harmonized rules and procedures are essential on this front, and making progress on these aspects is more complex.

The stakes are high. In 2024, the global cross-border payments market was estimated at  over  $190 trillion 1 -  nearly  twice  the  size  of  global  GDP  -  and  it  is  projected  to surpass $300 trillion within the next 5 to 10 years.

* I  wish  to  thank  Alberto  Di  Iorio,  Antonio  Perrella,  Tara  Rice  and  Stefano  Siviero  for  their  valuable insights and contributions.

1 L. Ingham, A. Lawal and C. Allen, 'How big is the cross-border payments market? 2032's $65tn TAM', FXC Intelligence , 16 January 2025.

The  G20  and  international  organizations  have  recognized  the  urgency  of  enhancing payments across borders and have called for action, launching an ambitious Roadmap to address this issue. 2

Today, I will reflect on the key steps and motivations behind this initiative, discuss the remaining challenges, and sketch out possible strategies to overcome them.

## Why should we care about cross-border payments?

The G20 Roadmap sets out key objectives to improve all three segments of the crossborder  payments  market:  wholesale  payments  (which  are  essential  for  the  smooth functioning of the global financial system), retail payments, and remittances (which have a more direct impact on individuals' daily lives).

## The decline of correspondent banking: limited access and rising costs

Cross-border payments have always predominantly relied on a 'correspondent banking' model. Relying on a chain of intermediaries to complete a transaction inevitably makes payments slower, more expensive and less efficient. 3

To make things worse, the tighter prudential standards and stricter AML/CFT 4 regulations introduced  after  the  Financial  Crisis  led  to  a  decline  in  correspondent  banking relationships. 5   Between 2011 and 2022 the number of active correspondent banks fell by 30 per cent globally, with some regions experiencing reductions of nearly 50 per cent (Figure 1.a). 6 As  a  result,  the  network  has  become  increasingly  concentrated  and  less competitive (Figure 1.b), which contributes to persistently high costs and, in extreme cases, limits firms' access to international trade. 7

2 The G20 Roadmap aims to make cross-border payments faster, cheaper, more transparent and more inclusive.  Specifically,  it  seeks  to  achieve  quantitative  targets  for  each  of  the  four  objectives  just mentioned and for three different market segments: wholesale, retail, and remittances. In February 2023, the work was reprioritized around three main priority themes: i) payment system interoperability and extension, ii) legal, regulatory and supervisory frameworks, and iii) data exchange and message standards. See FSB, G20 Roadmap for Enhancing Cross-border Payments. Consolidated progress report for 2024 , 21 October 2024.

3 In a correspondent banking arrangement, the correspondent bank holds deposits owned by a foreign bank (the respondent bank) and provides this respondent bank with payment and other services. See CPMI, Correspondent banking , July 2016.

4 Anti-money laundering/countering the financing of terrorism.

5 FSB, Report to the G20 on actions taken to assess and address the decline in correspondent banking , 6 November 2015; T. Rice, G. von Peter and C. Boar, 'On the global retreat of correspondent banks', BIS Quarterly Review , March 2020.

6 CPMI quantitative review of correspondent banking data.

7 L. Borchert, R. De Haas, K. Kirschenmann and A. Schultz, 'The impact of de-risking by correspondent banks on international trade', VoxEU, 18 September 2024.

## Correspondent banking market



Source: CPMI quantitative review of correspondent banking data.

(1) Right hand scale.

## The emergence of alternative solutions

These inefficiencies have triggered the rise of new technologies - such as distributed ledgers -  and new products -  such as crypto-assets - in order to provide a better solution to people's payment needs. But it is a promise that needs to be taken with a large pinch of salt.

Unbacked crypto-assets pose significant risks, including the potential for substantial losses for end users (Figure 2.a). More importantly, they do not fulfil payment functions as they are highly volatile (Figure 2.b), lack intrinsic value and are often under-regulated or entirely unregulated.

If  properly  designed  and  regulated,  so-called  stablecoins  could  instead  perform  some payment functions. However, the proliferation of stablecoins running on non-interoperable blockchains risks fragmenting the payments landscape and undermining overall efficiency. In addition, regulatory frameworks vary significantly across jurisdictions, and the lack of coordination, particularly between Europe and the United States, makes future outcomes difficult to predict. 8

8 See for example, A. Di Iorio, A. Kosse and I. Mattei, 'Embracing diversity, advancing together - results of the 2023 BIS survey on central bank digital currencies and crypto', BIS Papers, 147, June 2024. In the US, two stablecoin bills have been introduced; one in the US House of Representatives (the 'STABLE Act') and one in the Senate ('GENIUS Act'). In addition, the US Administration issued an Executive Order (EO) 'Strengthening American Leadership in Digital Financial Technology' on 23 January. In particular, the EO instructs the new Presidential Working Group on Digital Asset Markets to propose a federal regulatory framework governing the issuance and operation of digital assets, including stablecoins, within 180 days of the order.

## Crypto-asset market



Sources: Based on CoinMarketCap and Nasdaq data as of 31 March 2025.

Finally, while stablecoins face the risk of a 'run' like banks, they typically lack some critical safeguards such as access to central bank facilities, deposit insurance, and resolution frameworks.

Prohibition is not the answer though. The only effective response to the emergence of riskier alternatives is to provide retail payment solutions that are equally efficient, but safer and more reliable.

## The social impact

Inefficiencies in  cross-border  payments  impose significant  social  costs  on  the  most vulnerable segments of the population.

Remittances often represent the main source of income for many low-income households, and while they may appear modest in the context of total cross-border payments, they are vital for certain economies, where they represent a large share of GDP (Figure 3.a).

Low-value remittances may incur disproportionately high fees relative to the amount sent (Figure 3.b). However, high costs are only part of the problem. Many unbanked individuals and people living in less developed economies lack access to payment services altogether, forcing them to rely on informal, unsecured channels for cross-border payments. 9

9 Unbanked individuals, particularly women from rural and impoverished areas, are disproportionally excluded from the formal economy, due in part to lack of financial education and absence of suitable alternatives.

## Remittances in Asia

(a) Top 10 Asian countries by share of remittance inflows (percentage of GDP)

(b) Average cost of sending $200 to Asian countries (per cent)





2.5

5.0

7.5

10.0

Source: World Bank.

In  principle,  high  remittance costs - which effectively resemble a tax on labour income earned abroad - could even discourage workers from relocating and hinder international labour mobility.

The  Asia-Pacific  region  is  particularly  significant  in  this  context,  as  it  is  the  largest recipient of international remittances worldwide. In 2023, it accounted for 38 per cent of global remittance inflows, amounting to $328 billion. In 2022, remittances to low- and middle-income countries in the region matched the volume of foreign direct investment, highlighting their role as a vital financial lifeline for developing economies. 10

Addressing  inefficiencies  in  cross-border  payments  is  an  increasingly  urgent  matter. In a world marked by growing interconnectedness, expanding e-commerce, and rising international  travel  and  migration,  the  social  costs  associated  with  them  are  likely  to increase over time.

## Challenges and the way forward

These  are  the  reasons  why  the  G20  launched  its  Roadmap  and  set  very  ambitious quantitative targets for improving cross-border payments.

Over the last five years, international organizations and standard setting bodies, such as the Committee on Payments and Market Infrastructures (CPMI), which I chair, have worked

10 UNDP Regional Bureau for Asia and the Pacific, Beyond Borders: How Remittances Are Reshaping AsiaPacific Economies , January 2025.

doggedly to advance the Roadmap. Most of the planned actions have been completed, and a wide range of infrastructure improvements have already been implemented.

Among other initiatives, let me highlight the work done to improve payment system interoperability. 11   The  CPMI  has  developed  frameworks  to  help  payment  system operators make informed decisions on extending operating hours, 12  expanding access to new participants, 13 and establishing sound governance and oversight arrangements. 14

I should also mention the CPMI's harmonized ISO 20022 message data requirements. 15 When widely and consistently implemented, this messaging standard can significantly accelerate payment processing, enhance automation - including in AML/CFT controls and reduce costs. These are real-world improvements that directly benefit users. 16

Even  in  'good  times',  it  would  take  time  for  these  efforts  to  translate  into  tangible improvements for end-users. The proposed guidance should be properly enforced and widely adopted. Moreover, several challenges continue to hinder progress towards the Roadmap's  objectives.  These  include  misaligned  AML/CFT  compliance  controls  and privacy rules, inefficient implementation of capital controls, limited transparency for endusers and insufficient competition in certain market segments.

A further complication is that the times are not so 'good'. Rising geopolitical tensions have turned control over global financial infrastructures into a tool of political leverage. 17 Several  economies  have  moved  to  strengthen  their  national  strategic  autonomy  by reinforcing  domestic  payment  infrastructures  or  developing  independent  messaging networks.  Financial  and  payment  infrastructures  have  become  central  to  geopolitical dynamics,  actively  shaping  global  influence  and  strategic  positioning. 18 As  a  result, payments are becoming even more fragmented.

11 Other initiatives completed under the Roadmap include: (i) recommendations to harmonize rules, laws and regulatory requirements for collecting, storing, and managing data ('data frameworks') for crossborder payments (see FSB, Recommendations to Promote Alignment and Interoperability Across Data Frameworks Related to Cross-border Payments: Final report ,  12 December 2024); and (ii) recommendations to level the playing field between banks and non-banks, addressing inconsistencies in their supervision and regulation (see FSB, Recommendations for Regulating and Supervising Bank and Non-bank Payment Service Providers Offering Cross-border Payment Services : Final report , 12 December 2024).

12 CPMI, Final report: Extending and aligning payment system operating hours for cross-border payments , May 2022.

13 CPMI, Improving access to payment systems for cross-border payments: best practices for self-assessments , May 2022.

14 CPMI, Final report to the G20. Linking fast payment systems across borders: governance and oversight , October 2024.

15 CPMI, Report to the G20. Harmonised ISO 20022 data requirements for enhancing cross-border payments , October 2023.

16 The CPMI is promoting their adoption by payment system operators throughout the transition period, and established a panel of global ISO 20022 market practice groups in early 2025 to support the regular maintenance of the data requirements.

17 H. Farrell  and  A.L.  Newman, 'Weaponized Interdependence: How Global Economic Networks Shape State Coercion', International security , 44, 1, 2019, pp. 42-79.

18 M. De Goede and C. Westermeier, 'Infrastructural Geopolitics', International Studies Quarterly ,  66,  3, 2022.

It is increasingly clear that the Roadmap targets are unlikely to be fully met by 2027. But this is not an excuse to scale back our efforts.

Improving cross-border payments was a key priority of the Italian G7 Presidency in 2024. 19 Our efforts focused on promoting one of the Roadmap's main objectives: the creation of bilateral interlinking arrangements between payment systems.

This is not the only path forward. An alternative approach could be to establish a single multilateral  arrangement  with  the  broadest  possible  geographic  scope.  However,  its appeal - reducing the number of connections - must be weighed against the significant challenges  of  defining  governance  structures  and  a  shared  regulatory  framework  as required for a multilateral platform.

A realistic and valuable scenario in the near future would be the coexistence of bilateral and multilateral interconnection agreements. A limited number of jurisdictions with strong strategic alignment and deep economic integration could form multilateral agreements, harnessing network effects and effectively creating regional hubs. These hubs could then connect to one another, or to individual jurisdictions, through simpler bilateral agreements.

## Conclusions

Let me conclude.

The Asian region stands out as a hub of innovation and experimentation - one that we observe with interest and from which we can draw inspiration. The implementation of several bilateral links across the region has effectively addressed cross-border payment inefficiencies in multiple corridors. At the same time, more ambitious longer-term projects are also emerging. This is why I believe today's event will be extremely relevant and fruitful.

'What is essential is invisible to the eye' said the fox to the Little Prince in Antoine de SaintExupéry's timeless tale. The same can be said of payment systems: when they function well,  they  go  unnoticed - yet when they fail, they are impossible to ignore. Payments don't just transfer money; they move people, businesses, and entire economies. And in a globalized world, when payments stop at borders, progress stops too.

Integrating payment systems is not just a matter of improving efficiency; it is a way to improve lives. And for many, especially the most vulnerable, the impact can be profound.

Integration can also be a source of stability. In fact, it is an insurance against political fragmentation: as global financial infrastructures become increasingly interconnected, the cost of geopolitical confrontations rises, and their likelihood is consequently reduced.

The  challenges  ahead  are  many,  but  they  can  be  overcome  through  dialogue  and cooperation.

19 A. Di Iorio et al., 'Acta, non verba: interlinking fast payment systems to enhance cross-border payments', CPMI Brief, 7, 2025.",Fabio Panetta
https://www.bis.org/review/r250430b.htm,Antoine Martin: The Extended Liquidity Facility (ELF) - the next step in the Swiss National Bank's liquidity support to banks,"Text of the public lecture by Mr Antoine Martin, Vice Chairman of the Governing Board of the Swiss National Bank, at the International Center for Monetary and Banking Studies (ICMB), Geneva, 29 April 2025.",2025-04-29 00:00:00,"Embargo 29 April 2025, 6:30 pm

## The Extended Liquidity Facility (ELF): the next step in the

SNB's liquidity support to banks ICMB Public Lecture

## Antoine Martin ∗

Vice Chairman of the Governing Board Swiss National Bank Geneva, 29 April 2025 © Swiss National Bank

∗ The speaker would like to thank Marc Blatter and Jacqueline Thomet for their support in preparing this speech. He also thanks Jakob Bosshard, Jan Cuonz, Benjamin Gföhler, Oliver Gloede, Jeannette Henggeler-Müller, Christoph Hirter, Sébastien Kraenzlin, Christian Myohl, Kathrin Scholl and Pascal Towbin, as well as the SNB Language Services.

## Good evening everyone

It is an honour to speak to you here tonight at the International Center for Monetary and Banking Studies. The ICMB has long been an important platform for discussing money, banking and finance - all areas central to the Swiss National Bank. Our institutions have built a strong partnership since 1974, and I am delighted to continue this long-standing dialogue.

As a central bank, the SNB plays a crucial role in managing banking system liquidity. We do this to implement monetary policy, ensure the smooth functioning of the payment system, and also to support financial stability. Tonight, I will focus on our role in providing liquidity to fulfil our statutory mandate of contributing to financial stability. As lender of last resort (LOLR for short), the SNB stands ready to step in during crisis situations - when banks' own liquidity buffers are no longer sufficient to cover their needs. A recent example was the liquidity assistance provided to Credit Suisse in March 2023. This event gave rise to renewed interest in how we design and implement liquidity support.

I would first like to examine the evolution of our role in this regard, and how we developed our framework for emergency liquidity assistance (ELA). Looking to the future, I will then describe our new framework for liquidity support, centred on the Extended Liquidity Facility (ELF). The ELF encompasses ELA and brings liquidity support closer to standard operations. I will end with some recommendations for strengthening banks' resilience to liquidity risk more broadly.

## 1. The evolution of the SNB's LOLR role

Let us start with a historical perspective to understand how past experience has shaped the framework we rely on today. The SNB's role as lender of last resort was acknowledged with the revision of the National Bank Act (NBA) in 2003 as part of its mandate to contribute to financial stability, but its roots go back much further.

## The origins of the LOLR role

In fact, central banks have always played a key part in preventing financial crises and banking panics. Traditionally, they have done so by providing loans to solvent but temporarily illiquid banks against collateral. The theoretical foundations for this role were established in the 19th century by economists such as Henry Thornton and Walter Bagehot. 1

Banks use short-term, demandable liabilities (such as sight deposits) to finance long-term, less liquid assets (such as loans). This transformation makes them inherently vulnerable to liquidity risks. If too many depositors withdraw funds at once, even a fundamentally sound bank may struggle to meet its obligations. Central banks are uniquely positioned to help because they can create liquidity in their own currency.

1 Thornton, H. (1802), An Enquiry into the Nature and Effects of the Paper Credit of Great Britain and Bagehot, W. (1873), Lombard Street: A Description of the Money Market.

While the SNB's role as LOLR was not explicitly defined when it was established in 1906, it acted in this capacity from an early stage. In 1912, it provided liquidity assistance to stop a run on Thurgauische Hypothekenbank, and it supported banks in Ticino and Uri in 1914. More examples have followed over the decades. 2 One pivotal episode was the real estate and banking crisis of the 1990s. Although no interventions were made in the end, the crisis highlighted the need for clearer liquidity support conditions and a more formalised approach. 3

Let me briefly reflect on the policy shift that emerged from this experience. Until the 1990s, the SNB - like many other central banks - used a policy of what was known as 'constructive ambiguity'. This meant that banks were kept uncertain about liquidity support to discourage excessive risk-taking. The core idea was to limit moral hazard, i.e. banks taking undue risks in expectation of central bank support in a crisis. The experience in the 1990s prompted a shift towards 'constructive clarity', a term coined by former SNB Vice Chairman Niklaus Blattner. 4 This meant that eligible banks knew the conditions for liquidity assistance in advance, and could adjust their liquidity and crisis management accordingly.

The policy shift aligned with, or perhaps anticipated, global trends. Central banks worldwide abandoned constructive ambiguity for a more structured approach. This new strategy, still in use today, emphasises clear terms for liquidity support alongside liquidity regulation to reduce moral hazard and, ultimately, the need for LOLR intervention. 5

## The ELA framework

The insights from the 1990s crisis were incorporated in the 2003 revision of the NBA, which formalised and strengthened the SNB's role as lender of last resort as part of its broader mandate to contribute to financial stability. 6 Based on the 2003 revision, the SNB introduced its ELA framework, with three main conditions for liquidity assistance: (i) only against sufficient collateral, (ii) only for solvent banks, and (iii) only for banks or groups of banks relevant for financial system stability. 7

The first two conditions - collateralisation and solvency - are historically established standards to protect public funds and avoid any overreach by the SNB into fiscal policy. The

2 SNB (1932), Die Schweizerische Nationalbank 1907-1932, (in German) pp. 415 et seq.

3 The SNB outlined an intervention strategy, in acknowledgment of its LOLR role. Lusser, M. (16 February 1993), Die Regionalbanken und die Schweizerische Nationalbank - Eine Standortbestimmung [Speech], SNB.

4 Blattner N. (25 May 2004), System stability and security of the systems [Speech], SNB.

5 Cf., for instance, Enoch, C., Stella, P. and Khamis, M. (1997), Transparency and Ambiguity in Central Bank Safety Net Operations, IMF Working Paper 97/138, or Shafik M. (26 February 2015), Goodbye ambiguity, hello clarity: the Bank of England's relationship with financial markets [Speech], Bank of England.

6 According to the Dispatch on the Revision of the NBA (in German, pp. 6184 and 6186-6187), while the term LOLR was deliberately not included in the NBA, the legislator regarded this role as part of the tasks to supply the money market with liquidity and to contribute to financial stability as outlined in art. 5, para. 2, lit. (a) and (e) NBA.

7 The framework was published as part of the 'Guidelines of the SNB on monetary policy instruments'. The current version is available online: https://www.snb.ch/en/the-snb/organisation/legal-framework#richtlinien.

SNB is required by law to ensure that liquidity support is secured by sufficient collateral. 8 The solvency requirement means that only viable banks receive support, preventing the SNB from artificially prolonging the life of unsound banks. 9 The third condition - limiting support to banks or groups of banks of systemic importance - was introduced with a pragmatic focus on making ELA operational for Switzerland's two largest banks at the time, UBS and Credit Suisse. In addition to these conditions, a formal approval by the SNB's Governing Board is required on a case-by-case basis.

The SNB made liquidity assistance operational for UBS and Credit Suisse in 2004. Mortgages were used as collateral, given that they are especially suitable for banks for this purpose: They make up a large part of Switzerland's domestic credit volume and are inherently illiquid.

Over time, the SNB extended the scope of liquidity assistance in three phases. 10 First, in 2015, the range of eligible collateral was widened to include securities such as bonds and equities in various currencies. Second, from 2015 to 2019, preparations were extended to include PostFinance, Raiffeisen Group and Zürcher Kantonalbank, following their designation as systemically important. Finally, starting in 2019, work began on broadening liquidity support to cover all banks in Switzerland. In 2023 and 2024, the SNB publicly announced that liquidity support against mortgages and securities as collateral would be available to all banks. As I'll describe in a moment, the SNB is currently working on making this fully operational.

Looking back, the SNB's preparations for liquidity assistance were essential in safeguarding financial stability in Switzerland. In March 2023, Credit Suisse received liquidity support totalling CHF 168 billion, including ELA and additional support under emergency law. 11 This represented the largest amount of liquidity support ever provided to a single bank anywhere in the world. It was delivered with same-day execution in three currencies - Swiss francs, US dollars and euros. This was only possible thanks to the preparations and regular testing of the SNB operations including ELA. Yet, the scope of this support was limited by Credit Suisse's insufficient collateral preparation. I will return to lessons learned from the Credit Suisse crisis later.

## 2. The Extended Liquidity Facility (ELF)

This takes us to the present. The SNB is currently working on introducing a new framework for liquidity support for financial stability purposes, centred on the Extended Liquidity

8 The law stipulates that the SNB must have 'sufficient collateral', leaving the SNB to decide what qualifies as sufficient, cf. art. 9, para. 1 (e) NBA, and the Dispatch on the Revision of the NBA (in German, pp. 6198 et seq.). In practice, the SNB applies risk-based discounts (haircuts) to the collateral received.

9 Banks must be solvent, or there must be a credible plan to restore solvency. In practice, the SNB requires a solvency confirmation by the bank and an assessment thereof by FINMA.

10 Cf. the report on the conduct of federal authorities in the context of the Credit Suisse crisis, a report by the Parliamentary Investigation Committee of 17 December 2024, table 11 (available in German, French and Italian).

11 Cf. SNB (2023), Financial Stability Report 2023, pp. 24-25, 38.

Facility (ELF). The ELF encompasses ELA and brings the support closer to standard operations. It builds on the announcements made in recent years to extend liquidity support to all banks in Switzerland and makes drawing conditions more flexible. Let me walk you through its key features and explain why we have designed it this way.

## Greater flexibility and reduced stigma

The primary purpose of the ELF is to provide liquidity support when banks deem their own liquidity buffers no longer sufficient. A key feature of the ELF is simplified access to limitedvolume liquidity support. Banks can draw liquidity up to a predefined limit without the need to confirm their solvency, and without additional preconditions such as having exhausted market funding. Removing the solvency confirmation for sound banks should not be viewed as a deviation from the solvency requirement outlined earlier. If there are concerns about solvency, the SNB can suspend this simplified access.

For liquidity needs exceeding the predefined limit, a more rigorous process applies, similar to the ELA framework. This includes confirmation of solvency from FINMA and a formal decision by the SNB's Governing Board. This case-by-case assessment remains crucial, as large-scale liquidity support often requires additional, coordinated efforts from both the bank and the authorities to address underlying issues and maintain stability.

A key goal of the more flexible drawing conditions is to reduce the stigma that can be associated with liquidity support. Banks may hesitate to use liquidity support for fear of signalling financial distress to the market. With the simplified access to limited volumes of liquidity, the ELF brings liquidity support closer to standard operations and reduces its 'emergency' nature. Thus, the ELF encourages banks to seek liquidity support at an early stage if they need it, without hesitation.

At the same time, the ELF is designed as a backstop facility. This means that the ELF's pricing will be set above market rates during normal times, ensuring it remains unattractive when markets are not stressed. The ELF should thus not serve as a primary source of funding for banks under normal conditions and should not interfere with or undermine banks' primary responsibility to manage their liquidity risk.

Our efforts are in line with global trends. Central banks around the world are rethinking the design of liquidity facilities for financial stability purposes, with a view to reducing stigma. 12 The challenge lies in balancing two competing considerations: too much accessibility could make banks overly dependent on central bank support, while being too restrictive could increase stigma and discourage banks from seeking support when needed. The ELF strikes a

12 Cf., for instance, Coelho, R. et al. (2024), Navigating liquidity stress: operational readiness for central bank support, FSI Insights, or Arseneau, D. et al. (2025), Central bank liquidity around the world, FEDS Notes. Efforts of the SNB to reduce stigma are not new. For example, during the Global Financial Crisis, the SNB reduced the special-rate surcharge on the liquidity-shortage financing facility to ease access. Further examples are the modification of disclosures of monetary policy data in 2008 as well as the extension of the SNB COVID-19 refinancing facility in March 2020 for systemically important banks to include mortgages and securities as collateral in addition to COVID loans.

balance by allowing easier access to smaller amounts while keeping a formal evaluation in place for larger interventions. The SNB will monitor and reassess the conditions of the ELF, ensuring that it evolves to maintain the right balance over time.

## A broad collateral framework

As mentioned, the ELF builds on the announcements made in 2023 and 2024 to extend liquidity support to all banks, using mortgages and securities as collateral. The range of collateral accepted includes mortgage claims on both residential and commercial properties, provided the underlying real estate is in Switzerland. Notably, this also covers most Swiss business loans. The eligible collateral also includes securities such as bonds issued by borrowers with lower credit ratings, as well as securitisations and shares in various currencies.

This broad collateral framework ensures the SNB can offer liquidity support under diverse market conditions and to banks with different business models. As in the past, the range of eligible collateral will continue to evolve, including through ongoing dialogue with the banks, to ensure its relevance and effectiveness.

An important prerequisite is that it must be possible to legally transfer or pledge the collateral to the SNB. Banks' preparations remain key in this regard: For the ELF to function effectively, banks must ensure they have sufficient collateral prepared ready for transfer to the SNB. This involves addressing legal aspects, such as amending transfer clauses in mortgage contracts.

## Looking ahead: implementing the ELF and beyond

The SNB is currently working with the banks and SIX, Switzerland's largest financial market infrastructure provider, to make the ELF operational on a large scale - a process that will take some time. The aim is to achieve a high level of standardisation and automation close to the handling of open market operations such as repos and SNB Bills. We will keep the public informed of our progress and share further details on pricing and borrowing limits with banks in due course.

While our focus here today is on the ELF, it is worth mentioning that the SNB is also making changes to its facilities that support the payment system. These facilities are designed for managing liquidity under normal market conditions. Specifically, the SNB has recently set out plans to consolidate its intraday facility and liquidity-shortage financing facility into a new 'Payment System Support Facility' (PSSF). 13 Together, the PSSF and the ELF will form a comprehensive liquidity framework, allowing the SNB to address a wide range of liquidity needs - from routine payment flows to unexpected liquidity shortages and, in extreme cases, financial stability crises.

13 Tschudin P. and Moser T. (10 April 2025), Fast and available round the clock: What instant payments mean for households, companies and financial institutions [Speech], SNB.

## 3. Strengthening banks' resilience to liquidity risks

So far, I have focused on the SNB's liquidity support to banks. When reflecting on this support, it is essential to view it within the broader context of banks' resilience to liquidity risk. This resilience relies on three lines of defence: first, banks' own liquidity provisions; second, the SNB's liquidity support; and third, a potential Public Liquidity Backstop (PLB). Let me give you some takeaways on the Federal Council's current efforts to strengthen liquidity regulation across these three lines of defence, which the SNB supports. 14

## Strengthening banks' liquidity provisions

First and foremost, it is the responsibility of banks to maintain sufficient liquidity to manage their risks. This is the first line of defence.

A key lesson from the crisis at Credit Suisse has been that banks' liquidity provisions should be strengthened further. An important regulatory requirement in this regard is the Liquidity Coverage Ratio (LCR), which measures a bank's ability to withstand liquidity shocks. 15 In the case of Credit Suisse, the outflows were significantly larger and occurred much more rapidly than assumed in the LCR framework, particularly for high-value retail deposits. Looking ahead, the SNB supports an internationally coordinated review of the LCR by the Basel Committee on Banking Supervision to reassess the underlying stress scenarios.

The goal of this review is not to require banks to self-insure against every potential liquidity risk. It would not be efficient for them to maintain liquidity reserves to cover all conceivable scenarios of liquidity stress. This is precisely why central bank liquidity support, secured by collateral, remains essential.

## Introducing a minimum collateral requirement

This brings me to the second line of defence: our liquidity support under the ELF. As mentioned, the effectiveness of this support depends on banks ensuring the transferability of assets to the SNB. Another key lesson from the Credit Suisse crisis has been that the bank's preparations in this regard were inadequate. A substantial proportion of Credit Suisse's eligible assets was not readily available to obtain liquidity assistance from the SNB.

To address this issue, the Federal Council has proposed the introduction of a requirement for banks to prepare a minimum amount of eligible collateral to ensure access to central bank liquidity when needed. The SNB fully supports this proposal. This not only encompasses liquidity support from the SNB, but also potentially from foreign central banks. Banks that

14 The Federal Council is currently working on a package of measures to strengthen banking regulation based on the gaps identified in its report on banking stability of 10 April 2024. A formal public consultation is scheduled to begin in the first half of 2025 for some of these measures.

15 Under the LCR, banks must hold enough high-quality liquid assets to cover potential outflows for 30 days. For systemically important banks, the Liquidity Ordinance additionally requires them to maintain sufficient liquidity to cover a 90-day liquidity crisis.

operate internationally can also face the risk of liquidity shortfalls in foreign currencies and in different jurisdictions.

## Anchoring the PLB in law

Despite these two first lines of defence, situations may arise where outflows exceed a bank's liquid assets and its collateral available for central bank liquidity support. In such cases, additional government-backed liquidity support under the PLB can serve as a third line of defence as part of a restructuring of the affected bank. In the UK, the US, the EU and elsewhere, a PLB or a similar instrument forms part of the financial stability toolkit. 16 The case of Credit Suisse, where a PLB was implemented under emergency law, has highlighted the need for such a mechanism in Switzerland as well.

The Federal Council and Swiss Parliament are working to embed a PLB for systemically important banks into ordinary law. The SNB supports this, as it reinforces the established division of responsibilities among authorities. The SNB can provide liquidity only against sufficient collateral; any further support must be decided by Parliament and the government.

Given the significant financial risks the PLB may pose for taxpayers, it is important to minimise the likelihood of this instrument needing to be used, as well as the potential scope when it is used. Strengthening banks' own liquidity buffers and ensuring they have a sufficient volume of prepared collateral for central bank liquidity support are key measures to reduce reliance on the PLB.

## Closing remarks

Let me conclude with two reflections on the SNB's evolving role in providing liquidity support to banks.

First, fulfilling this role will continue to be of the utmost importance to the SNB. The extensive liquidity support we provided to Credit Suisse two years ago was crucial for maintaining financial stability. Looking ahead, we must keep evolving our framework to stay prepared for future challenges. The ELF is an important step in this direction. It builds on earlier announcements to extend liquidity support to all banks in Switzerland, and makes drawing conditions more flexible with the goal of reducing stigma. This will allow us to respond to a variety of situations.

Second, safeguarding financial stability will continue to require close collaboration between the SNB, other authorities including FINMA and the Federal Department of Finance, and the banks. By strengthening banks' liquidity provisions, adding a new requirement for banks to prepare a certain amount of collateral, and anchoring the PLB for systemically important banks in the law, we can collectively enhance the resilience of the financial system.

16 For an international overview of PLB frameworks, cf. the Federal Council's dispatch on the introduction of a PLB of 6 September 2023, chapter 3.

Page 9/9

Thank you.",Antoine Martin
https://www.bis.org/review/r250430a.htm,Richard Doornbosch: Sustainable tourism development in Curaçao - a balanced approach,"Speech by Mr Richard Doornbosch, President of the Centrale Bank van Curaçao en Sint Maarten, at the Chata Membership Meeting April 2025, Willemstad, Curaçao, 4 April 2025.",2025-04-04 00:00:00,"## Richard Doornbosch: Sustainable tourism development in Curaçao a balanced approach

Speech by Mr Richard Doornbosch, President of the Centrale Bank van Curaçao en Sint Maarten, at the Chata Membership Meeting April 2025, Willemstad, Curaçao, 4 April 2025.

* * *

## Presentation accompanying the speech

## Introduction

## &lt;Sheet 1&gt;

Good morning, ladies and gentlemen. It is a pleasure to speak to you at today's CHATA Membership Meeting on a topic that is crucial to the future of our beautiful island: tourism development in Curaçao. This future encompasses not only the economic prospects of our country, but also our social well-being and environmental sustainability.

In recent years, particularly following the COVID-19 pandemic, Curaçao has witnessed remarkable growth in its tourism sector. The island has successfully strengthened its appeal in both stay-over and cruise tourism. Today, tourist arrivals are at record highs, and the sector has firmly established itself as the leading driver of economic growth in Curaçao. According to estimates by the CBCS, tourism now contributes more than 23% to Curaçao's GDP, representing approximately Cg. 1.4 billion. This figure includes also positive spillover effects to other sectors of the economy, such as transportation, real estate, and construction. This growth is particularly striking given that, until the mid2000s, tourism accounted for only around 8% of GDP.

Additionally, foreign exchange earnings from travel now represent approximately 50% of Curaçao's total foreign exchange earnings from the export of goods and services. This excludes foreign exchange revenues from tourism-related sectors such as the transportation and rental services. Moreover, the tourism sector provides a significant number of both direct and indirect jobs for the people of Curaçao.

## &lt;Sheet 2&gt;

With several ongoing and planned private investments, particularly in accommodation, the island's capacity to host more visitors is expected to increase substantially in the coming years. However, the key question is how we can manage this growth while minimizing potential social and environmental costs. Today, I would like to outline an approach to achieving sustainable tourism development. Without such an approach, we risk locking ourselves into a mass tourism model with high long-term costs - costs that could take decades to reverse.

## Growth seen from a different perspective

## &lt;Sheet 3&gt;

Before delving into this approach, allow me to provide a comparison of stay-over and cruise tourism development in Curaçao relative to Aruba and Sint Maarten. Since the 1980s, Aruba and Sint Maarten have experienced more rapid tourism growth than

Curaçao. As a result, Curaçao lags behind both destinations in terms of tourism maturity. Aruba, with its well-established brand, consistently attracts high volumes of American tourists. Meanwhile, Sint Maarten continues to demonstrate resilience and adaptability despite facing natural setbacks. However, over the past 15 years, Curaçao has been narrowing the performance gap with its regional peers. Since 2016, it has even surpassed Sint Maarten in terms of stay-over visitor numbers. Aruba, however, still receives higher volumes of stay-over tourists than Curaçao.

As for cruise tourism, up until the pandemic in 2020, Sint Maarten consistently outperformed both Curaçao and Aruba. In contrast, cruise tourism trends in the latter two countries have generally moved in tandem and on a comparable scale.

## &lt;Sheet 4&gt;

Now, let us assess tourism development in the three countries from a different perspective by focusing on the visitor-to-resident ratio. This ratio is defined as the number of visitors, both stay-over and cruise together, divided by the total population. It may serve as an indicator of the pressure exerted on the environmental and social resources of a destination and its population.

Although a cross-country comparison of the visitor-to-resident ratio should be interpreted with caution due to country-specific idiosyncrasies such as variations in tourism infrastructure and environmental considerations, this graph shows that the visitor-to-resident ratio in Sint Maarten has consistently remained higher than those of Aruba and Curaçao's. In 2023, for example, Sint Maarten welcomed approximately 41 visitors for every resident. This ratio was 19 for Aruba and 8 for Curaçao. This disparity is related to Sint Maarten's significantly larger cruise tourism sector. In fact, Curaçaos visitor-to-resident ratio consistently ranks the lowest among the three countries, indicating a younger stage of tourism maturity.

## &lt;Sheet 5&gt;

Given the rapid growth in tourism that Curaçao has experienced over the past years, let us perform a back-of-the envelope calculation to project the potential development of our visitor-to-resident ratio. Assuming the total number of visitors increases by 8% annually over the next five years, while our population grows by an average of 0.1% per year, which aligns with the average population growth observed over the past decade, all other factors remaining equal, the visitor-to-resident ratio would reach 16 by 2030. The assumed 8% annual increase in the total number of visitors is based on the forecast for 2025 and 2026 outlined in Curaçao's Strategic Tourism Destination Development Plan. As illustrated in the graph, the calculation suggests that the potential pressure on environmental and social resources could double compared to what we are experiencing at this moment.

## The Double-Edged Nature of Tourism Growth

## &lt;Sheet 6&gt;

While tourism expansion undoubtedly presents significant opportunities in terms of value added, employment, and foreign exchange earnings, it also carries hidden costs and risks, that, if ignored, could threaten Curaçao's long-term economic stability and quality of life.

Rapid and uncontrolled tourism growth can impose substantial social costs. Uncontrolled expansion often leads to overcrowding, especially in peak seasons. For instance, the inner-city areas of Punda and Otrobanda become particularly congested on days when the harbor is filled with cruise ships. Beaches also become overcrowded with visitors, which not only affects residents' quality of life but also diminishes visitors' experience.

In addition, a significant rise in tourist arrivals can lead to an increased cost of living. Currently, various construction projects of new hotels and residential buildings intended for Airbnb or tourist rentals are underway. As a result, housing prices have risen significantly over the last few years, making it difficult for locals to find affordable housing and thereby reducing their quality of life.

Moreover, intensified tourism activity can escalate environmental degradation through increased pollution and loss of biodiversity, potentially diminishing the overall visitor experience in the long run. Curaçao's unique ecosystems, coral reefs, and pristine beaches -its main attractions- are vulnerable assets that require vigilant stewardship to ensure they are not adversely affected by large scale tourism.

Strong tourism growth can also put severe pressure on Curaçao's public infrastructure. Already, increased road congestion is observable, particularly on the Caracasbaaiweg, a situation that will likely worsen with more stay-over arrivals. In addition, more visitors pose challenges for the provision of public goods such as sanitation and waste management, as well as utilities such as electricity production. Furthermore, capacity constraints at Curaçao International Airport could emerge as a bottleneck, limiting potential growth and reducing the overall attractiveness of Curaçao as a travel destination.

## People, profit and planet as principles for sustainable tourism development

Recognizing both the opportunities and potential costs of tourism development, Curaçao stands at a pivotal crossroads. Instead of focusing on a mass tourism model, we must embrace a balanced approach to ensure that tourism contributes sustainably to our economic prosperity, environmental stewardship, and social well-being.

Central to this strategy must be the clear identification of the type of tourists Curaçao seeks to attract. Sustainable tourism development should aim to welcome travelers who provide higher economic returns while imposing fewer social and environmental burdens. Attracting high-yield, low-impact visitors - those interested in immersive cultural experiences, culinary excellence, sustainable adventure tourism, or niche markets such as eco-tourism - will ensure more robust economic benefits for Curaçao. The focus should not be on volume but on value.

## &lt;Sheet 7&gt;

The following graph compares the Average Daily Rate (ADR) of Curaçao with those of other Caribbean countries in 2023. ADR is a key performance indicator that reflects the average revenue earned per occupied room over a specific period. The fact that

Curaçao ranks at the lower end of the selected Caribbean countries, with an ADR of USD224.67, implies that there is potential to increase the value that we derive from our tourism product.

## &lt;Sheet 8&gt;

A robust and holistic framework for sustainable tourism development should be encapsulated by the ""People, Profit, Planet"" principle, emphasizing the balanced and interconnected approach needed for sustainable development.

## &lt;Sheet 9&gt;

Let us first start with the first principle, 'People'. Tourism must benefit the local population of Curaçao, enhancing their quality of life and providing ample opportunities for participation and growth. Equitable benefit-sharing through employment opportunities, training programs, and empowerment initiatives, including entrepreneurial skills, ensures that the community remains central to tourism development. In addition, actively engaging residents in decision-making processes helps ensure that tourism development aligns with local values and cultural heritage.

The second principle is 'Profit', which focuses on economic sustainability. Curaçao's tourism industry must continuously strive for economic viability, ensuring profitability for businesses, employment opportunities for locals, and tax revenues for the government. Emphasizing quality tourism experiences over quantity will encourage higher spending, extended visitor stays, and repeated visits, thus increasing overall economic sustainability.

The final principle, 'Planet', emphasizes the critical importance of protecting Curaçao's natural environment. Sustainable tourism development must prioritize minimizing ecological footprints through responsible practices, such as reduced waste generation, energy and water conservation, and biodiversity protection. Sustainable management of our natural resources should safeguard the unique beauty and biodiversity of Curaçao for future generations and maintain the island's long-term attractiveness as a tourism destination.

By harmonizing these three principles - People, Profit, and Planet - Curaçao can ensure a resilient and sustainable tourism sector that benefits all stakeholders equitably while safeguarding the island's natural and cultural heritage.

## Understanding Tourism Carrying Capacity: Four Key Dimensions

## &lt;Sheet 10&gt;

Assessing and respecting the tourism carrying capacity should also be an integral component of the sustainable tourism development framework. The United Nations World Tourism Organization (UNWTO) defines tourism carrying capacity as ""the maximum number of people that may visit a tourist destination at the same time, without causing destruction of the physical, economic and sociocultural environment and an unacceptable decrease in the quality of visitors' satisfaction"". Carrying capacity is a multi-dimensional concept and must be understood across four dimensions.

The first dimension, economic carrying capacity, considers the ability of the economy to absorb and benefit from tourism without generating inflation, wage disparities, or

unsustainable price increases in housing and basic goods. It evaluates whether tourism revenues are widely distributed or concentrated among a few sectors, and whether the benefits outweigh the potential displacement of local industries.

The second dimension is the environmental carrying capacity. This dimension addresses the physical limits of Curaçao's ecosystems to accommodate tourism. It focuses on the impact of tourism on coral reefs, beaches, water resources, waste generation, and biodiversity. Monitoring visitor volumes in environmentally sensitive areas and applying zoning, restoration, and eco-certification measures are key to staying within safe environmental limits.

Meanwhile, the social carrying capacity reflects the ability of local communities to absorb tourism development without experiencing a decline in social cohesion, cultural integrity, or quality of life. It includes public attitudes toward tourism, perceived fairness in benefit-sharing, and tolerance for changes to local customs, space, and lifestyles.

And finally, the fourth dimension, governance, plays a critical role in managing tourism sustainably. It includes the capacity of public institutions to plan, regulate, and monitor tourism development effectively. It also involves legal frameworks, inter-agency coordination, stakeholder engagement, data collection systems, and transparency mechanisms that ensure tourism growth aligns with public policy goals.

By assessing and managing tourism within these four dimensions, Curaçao can avoid the risks of over-tourism and ensure that the island remains a vibrant, welcoming, and sustainable destination. In this regard, it is a positive development that Curaçao is proactively conducting a Destination Carrying Capacity Study to evaluate the economic, environmental and social impacts of strong tourism development.

The next step in this approach would be to identify a long-term vision focused on quality, authenticity and environmental responsibility. This vision should be commonly shared by all key tourism stakeholders. Next, growth scenarios should be defined that set clear targets for, among other things, tourist arrivals, employment and reductions in ecological footprints - aligned with the island's carrying capacity. In addition, the necessary investments in areas such as infrastructure, human capital and green innovation should be identified, along with relevant policy reforms, to strengthen the island's carrying capacity and achieve the outlined long-term vision. Ultimately, all initiatives must align with the principles of People, Profit, and Planet to ensure economic viability, social inclusivity, and ecological integrity.

## Social cost-benefit analysis to effectively manage sustainable tourism development

To effectively manage sustainable tourism development and prioritize tourism projects, the framework should include rigorous social cost-benefit analyses, particularly in the case of major tourism investment projects and public tourism-related infrastructure projects. These analyses extend beyond traditional economic evaluation and incorporate broader social and environmental dimensions that are critical for informed decision-making.

Social cost-benefit analyses for tourism projects not only assess the direct economic contribution in terms of employment and tax revenues, but also the social impact of such projects, including their effect on community well-being, housing affordability, public infrastructure pressures and local quality of life in general. Also, these analyses assess the environmental impact of tourism projects such as ecological footprints, resource depletion and pollution levels.

One benefit of conducting social cost-benefit analyses is that they enable policymakers and stakeholders to explicitly evaluate both the positive and negative impacts of tourism development projects with a focus on society as a whole rather than only short-term financial gains. In addition, these analyses allow for the prioritization of tourism projects that provide genuine, sustainable benefits while minimizing negative externalities.

Conducing social cost-benefit analyses is a complex, multi-dimensional exercise that demands technical expertise across several areas and extensive data. It is important that Curacao develops its own expertise in this area and focuses on having up to date economic, tourism, social and environmental data. This also requires cooperation and collaboration between public and private stakeholders.

## Conclusion

## &lt;Sheet 11&gt;

Ladies and gentlemen, Curaçao has been experiencing robust growth in its tourism industry, becoming the main pillar of our economy. While this growth brings immediate economic benefits, it is crucial that we also focus on long-term development strategies that encompass economic progress, social well-being and environmental sustainability. By acknowledging and addressing the potential costs associated with tourism development we can implement measures to mitigate these challenges effectively.

Today, I have outlined a balanced approach for sustainable tourism development centered around the principles of people, profit, and planet. In this regard, it is crucial that Curaçao continues advancing the initiatives outlined in its Strategic Tourism Development Destination Plan while also developing a comprehensive long-term strategy for sustainable tourism development that incorporates the concept of carrying capacity. Through a participatory process we must define acceptable levels of the economic, social and environmental impact of tourism on Curacao. Curacao is a unique tourist destination with potential to contribute even more significantly to Curacao's economy. However, it is crucial that we also prioritize sustainability by steering away from mass tourism and focusing more on value rather than on volume. Sustainable tourism development can serve as a catalyst for economic prosperity, and social wellbeing while ensuring environmental preservation. By embracing this balanced approach, we can secure a thriving future for Curaçao that honors our heritage while safeguarding our natural resources for the generations to come.

## &lt;Sheet 12&gt;

Thank you for your time and attention.",Richard Doornbosch
https://www.bis.org/review/r250429j.htm,Lesetja Kganyago: Challenges of the Group of Twenty,"Keynote address by Mr Lesetja Kganyago, Governor of the South African Reserve Bank, at the Brookings Institution, Washington DC, 22 April 2025.",2025-04-22 00:00:00,"## Lesetja Kganyago: Challenges of the Group of Twenty

Keynote address by Mr Lesetja Kganyago, Governor of the South African Reserve Bank, at the Brookings Institution, Washington DC, 22 April 2025.

* * *

Good morning.

Thank you for inviting me to Brookings. We have long benefited from your expertise, most recently when one of your fellows, Don Kohn, gave a star performance last month at our South African Reserve Bank Research Conference in Cape Town. It is great to be with you in DC today.

The focus of my talk is the Group of Twenty (G20), for which South Africa currently has the presidency. As you will all know, the G20 started in the 1990s as an informal arrangement for discussing macroeconomic developments and financial stability. It was designated the premier forum for international economic cooperation during the Global Financial Crisis (GFC) 1  and, at the time, it proved this status was well deserved. 2

It did this by demonstrating two great strengths.

First, unlike the Group of Seven, it brought together all the major economies, not just the richer ones. This balanced participation made it a genuinely global institution. Second, it was just small enough that it could act decisively.

In the years since the GFC, the G20 has worked on many important issues, with some real successes. The global regulatory reform agenda stands out as perhaps one of the most significant achievements of the G20. Today we can say the core of the global financial system is more resilient than it was during the GFC.

The G20 has demonstrated its value during crises, most notably at the onset of the COVID-19 pandemic, where it served as a central forum for coordinating responses and mobilising finance.

It has strengthened the global financial safety net, with a better-resourced International Monetary Fund at its centre, and has facilitated expanded resource commitments for the multilateral development banks.

In 2020, the Debt Service Suspension Initiative helped create fiscal space for poor countries at a moment of great peril. The Common Framework that grew out of this is still the most promising mechanism available for working out unsustainable sovereign debts.

It is a testament to the G20's value that even now, at a time of extraordinary global change, all its members agree about its importance, and all of them are committed to continuing its work.

At the same time, I think we are all in agreement that the G20 faces many challenges. I would like to discuss some of them today as a prelude to the discussion to come. I hope

you will forgive me for focusing today on how process subverts better policy formulation, but I believe this is a serious concern and detracts from what the G20 might achieve.

Let me start by drawing attention to the need for more focused agenda-setting, supported by better processes.

From a very operational perspective, G20 meetings are large. There is a rule of thumb, sometimes called Parkinson's law,  that the maximum size of an effective committee is 3 around 20 participants. Once you get past that threshold, it seems to become difficult to make decisions efficiently.

It would seem that an organisation called the G20 would be perfectly designed for satisfying Parkinson's law. But, in addition to the G20's 21 members, we also have a roster of invited countries and many international organisations. Counting in these invited participants, we had a total of 52 countries and institutions at our recent Finance Ministers and Central Bank Governors meeting in Cape Town.

In this context, it can be challenging to have spontaneous conversations and robust debates.

One high-level observation is that the G20 functions best in a global crisis. Minds are focused and participants move quickly to find each other in identifying root causes, analysing options and defining the path forward. I think of the meetings of Washington in 2008, London in 2009, and Toronto and Pittsburgh in 2010 as exemplars.

Once we are no longer in the throes of a crisis, it becomes harder to find purpose. When we say, for instance, that the G20's relevance is fading, I think we mean that the agenda, always rich in topics, is overloaded and too complex. While there are many agenda items suitable for reasoned, technocratic discussions, such as improving payment systems or helping heavily indebted poor countries, the G20 cannot effectively address itself to all of them.

Against this, the G20 has powerful mechanisms for adding issues to its agenda. Each year, we have a new presidency, and each presidency wants to make its mark by putting new issues on the table. This means we add more than we subtract. Because the G20 is powerful, prestigious and global, it is tempting to bring it all the problems of the world. It does not follow, however, that, just because something is important, it should be on the G20's agenda. There are many important issues for which the G20 is not the right forum.

So, we should be more intentional in how we choose which issues to discuss especially when the world is in between crises. Narrowing the G20's scope might also make for more focused discussions that say something more meaningful about the top two or three priorities chosen each year.

Keeping those priorities central to our discussions would also encourage a better kind of engagement - more intimate conversations that help participants find each other and craft common views.

In the end, with too much content and not enough conversation, our messaging and communication becomes loaded with vague 'priors' rather than more concrete solutions. We tend to sacrifice clarity and purpose in favour of finding relevance among only the most specialist audiences.

Refocusing on solutions would help to avoid falling into the trap of drafting long and formulaic communiquØs. Finally, we would do better by having shorter statements, written in plain language.

Of course, it is easier to communicate when you have clear decisions to share. The path here is to zero in on our inherently common challenges and then to work harder, partly with better agenda-setting, to develop common views.

In its early years, the G20 worked well for economic and financial stability issues. We need to preserve that focus and enhance it.

Another way of doing this could be to separate the various tracks, making them more distinct from one another, creating the space for the principals of the G20 Finance Track to focus, in part, on defining the agenda. Such a step might also mean rethinking the structure of the Finance Track itself and of its multiple working groups and their processes.

It has also been suggested that we should establish a permanent G20 secretariat. There are obstacles to this, including who hosts it, who gets which roles and who foots the bill. We would have to be very disciplined about keeping it small, meritocratic and well governed.

That said, establishing a secretariat for each track might address the problem that each year a new country assumes the presidency, puts in a huge effort and financial resources to learn the ropes, and then, just as it starts to really understand the system, its term is over and someone else starts all over again.

I cannot say I'm convinced a secretariat for each standalone track is a good idea, but maybe it is better than what we have now. It would be great to hear other suggestions.

To conclude, one of the best parts of the G20 is building relationships and social capital through meeting regularly. In doing so, we enhance our ability to cooperate in crises, gaining perspective and defining better, sustainable solutions.

Such a dynamic and engaged process is arguably even more critical now as the global community feels its way into a new era. It is in these times that we will find it harder to agree, and it therefore becomes more important to hear each other and seek to redefine our common interests. That there may be contestation over certain topics and how to approach them is a positive outcome of the G20, not a weakness. This is where value we add should, in fact, be found.

The G20 remains the premier forum for international economic cooperation, and should not have to be reinvented for every crisis. There is no doubt that global cooperation is difficult, even in less crisis-prone times. But the alternatives are worse. And the G20 could, with concerted effort, reach its previous levels of excellence.

## Thank you.

- 1  This formulation appeared in the 2009 Pittsburgh Summit Leaders' Statement, available here: https://www.g20.utoronto.ca/2009/2009communique0925.html
- 2  See, for instance, the expansion of resources for multilateral institutions described in the London Declaration, available here: https://www.imf.org/external/np/sec/pr/2009/pdf /g20\_040209.pdf
- 3  For a discussion, see R I Sutton and H Rao, The Friction Project, New York: St. Martin's Press, 2024, p 13.
- 4  The G20 comprises 19 countries plus the African Union and the European Union (EU) (with the European Central Bank, European Council and European Commission being counted with the EU, not separately). The 10 invited countries were Egypt, Ireland, Netherlands, Norway, Nigeria, Singapore, Spain, Sweden, Switzerland and the United Arab Emirates. The 21 international organisations included one regional organisation, the Southern African Development Community.",Lesetja Kganyago
https://www.bis.org/review/r250429o.htm,Christodoulos Patsalides: The economy of Cyprus - developments and outlook ,"Speech by Mr Christodoulos Patsalides, Governor of the Central Bank of Cyprus, at the 3rd Capital Link Cyprus Business Forum, New York City, 4 April 2025.",2025-04-04 00:00:00,"## Christodoulos Patsalides: The economy of Cyprus - developments and outlook

Speech by Mr Christodoulos Patsalides, Governor of the Central Bank of Cyprus, at the 3rd Capital Link Cyprus Business Forum, New York City, 4 April 2025.

* * *

## Intoduction

Your Excellency, the President of the Republic of Cyprus, distinguished guests, esteemed colleagues, and friends,

It is a great pleasure to address the 3rd Capital Link Cyprus Business Forum here in New York, a city that has long served as a global hub for business, finance, and innovation. I would like to extend my sincere gratitude to the organizers for bringing us together today to exchange insights on the economic trajectory of Cyprus. Events like this are crucial in fostering dialogue and reinforcing the strong economic ties between Cyprus and the international business community.

## Key metrics of the Cypriot Economy

The Cypriot economy and its banking sector have continued to demonstrate remarkable resilience, despite an increasingly volatile global environment marked by geopolitical uncertainty and rising trade tensions. In 2024, Cyprus achieved robust economic growth, significantly outpacing the euro area average and primarily driven by foreign investment, robust tourism, and rapid expansion in Information and Communication Technologies. At the same time, unemployment declined notably, falling well below the euro area average and approaching conditions of full employment, while inflation declined significantly and remains well on track. Fiscal performance also strengthened considerably, with public debt reduced to levels well below the euro area average, highlighting the country's improved fiscal discipline.

Meanwhile, key indicators of banking sector strength remained solid. Capital adequacy levels, as measured by the Common Equity Tier 1 (CET1) ratio, are significantly above the EU average, and profitability, as measured by Return on Equity, reached one of the highest levels across the Union. Cypriot banks also continue to maintain some of the strongest liquidity positions in the EU, further reinforcing the sector's soundness and resilience.

The remarkable economic performance of Cyprus was recently acknowledged by the International Monetary Fund. As mentioned in its Concluding Statement of its recent Article IV Mission:

""Cyprus has demonstrated impressive resilience to successive shocks. Growth has remained among the highest in the euro area, mainly supported by foreign investment, strong tourism, and a boom in the ICT sector.""

All major credit rating agencies have also recognized the notable progress of the economy, upgrading Cyprus's credit rating to the 'A' category. This progress not only reflects solid economic performance but also acts as a safeguard against global uncertainty and constitutes key factor for sustaining strong growth potential.

## Domestic Economy

## Growth Outlook

Having outlined the broader context of the Cyprus economy, I will now turn to the growth outlook in more detail. In 2024, GDP growth reached 3.4% compared to 0.9% in the euro area. Domestic demand, and most specifically, private consumption has been a key driver of growth, complemented by a positive contribution from net exports, particularly export of services. Investments also registered an increase in 2024, across both housing and other private investments, such as ongoing implementation of major infrastructure projects with foreign financing as well as projects under the Recovery and Resilience Facility. Despite geopolitical challenges, tourism arrivals and revenue reached record levels in 2024, exceeding four million tourists for the first time. On the production side, the services sectors of the economy were the key drivers for economic activity. Specifically, the sectors of trade, transportation (particularly shipping), hotels and restaurants gave the greatest support to GDP growth. The information and communication sector as well as financial and professional services were also important contributors to growth. Finally, healthcare and education, real estate management activities, construction and manufacturing sectors also fueled economic activity.

I would like to highlight at this point that the steps taken to diversify our economy-both across sectors, including services, tourism, and non-tourism-related industries, as well as across different markets-have played a key role in strengthening our resilience. These efforts have significantly enhanced our ability to withstand external shocks, particularly in times of geopolitical turmoil.

Looking ahead, based on March 2025 projections of the Central Bank of Cyprus, GDP is expected to continue to grow robustly at around 3% per year over 2025-2027. This continued expansion is anticipated to largely stem from domestic demand, with external demand playing, to a lesser extent, a supporting role. Investments are also expected to remain strong. Nevertheless, persistent geopolitical tensions may introduce downside risks to the speed of external recovery.

## Fiscal Developments and Public Debt Reduction

On the fiscal side, Cyprus has made significant strides in reinforcing fiscal stability, a cornerstone of sustainable economic progress. Notably, public debt declined substantially from 113.6% of GDP in 2020 to 65.4% in 2024. As of January 2025, the debt-to-GDP ratio had fallen further to 61.9%, reflecting disciplined fiscal policies and sound economic management. It should be noted that in the euro area, public debt stood at 88.2% at the end of the third quarter of 2024.

Looking forward, the Ministry of Finance projects that this downward trajectory will persist, with public debt expected to fall below 50% of GDP by 2028. This fiscal consolidation not only strengthens Cyprus' financial resilience but also enhances investor confidence, reinforcing the country's attractiveness for foreign direct investment and securing long-term economic stability.

## Inflation Trends

Turning to inflation, price stability remains a key focus. Inflationary pressures have eased significantly, with the headline inflation significantly declining to 2.3% in 2024 from 3.9% in 2023. This reduction has been largely driven by the correction of external supply-side shocks, particularly in energy markets, as well as the European Central Bank's monetary policy tightening.

Over the period 2025-2027, inflation is projected to sustainably stabilize around 2%. This is in line with the medium-term target we set at the Governing Council of the ECB. Although certain services sectors continue to experience relatively elevated price growth, overall inflationary pressures remain well-contained, ensuring a stable environment for households and businesses alike. However, we must remain vigilant, as exceptionally high uncertainty continues to pose upside risks to inflation, alongside climate-related factors.

## The Cyprus Banking Sector

The banking sector in Cyprus has demonstrated remarkable progress and resilience over the past years. Our financial institutions have not only navigated a challenging global environment but have also shown notable strides in strengthening their foundations. A primary indicator of this resilience is the enhancement of the solvency capacity, with the Common Equity Tier 1 (CET1) ratio increasing to 24.5% in December 2024. This increase places Cyprus at the top of the EU spectrum, well above the EU average of 16.1%.

Despite the ongoing challenges from successive crises, Cyprus has experienced no clear signs of a decline in credit quality. On the contrary, the Non-Performing Loans (NPL) ratio has continued to show improvement. As of December 2024, it has decreased to 6.2%. Even though this is a positive trend, we must acknowledge that more work is needed, especially considering the EU's average NPL ratio of 1.9% as of the same period.

Profitability has remained strong and persistent, with the Return on Equity (RoE) reaching 20.0% in December 2024, significantly higher than the EU average of 10.5% in the same period. Operational efficiency has also seen progress, as the cost-toincome ratio decreased to 37% in December 2024, a considerable improvement compared to previous years and lower than the EU's 54% average in the same period.

Cypriot banks maintain some of the highest liquidity levels within the EU. This strong liquidity position enhances their capacity to navigate potential market disruptions and to continue supporting economic stability. As of December 2024, the Liquidity Coverage Ratio (LCR), which reflects a bank's ability to withstand significant liquidity outflows

during stressful periods, stands at 333%, well above the EU average of 163% as of the same period and the minimum requirement of 100%. Similarly, the Net Stable Funding Ratio (NSFR), which measures the stability of a bank's funding sources, is at 188% in December 2024, exceeding both the EU average of 127% recorded in the same period and the required 100%.

Looking ahead, the banking industry must navigate several challenges, including integrating AI, managing cyber risks, responding to geopolitical instability, shifting towards a more sustainable economy, addressing the growing need for substantial investments in technology, and adapting to heightened competition from the nonbanking sector, particularly in the area of payment services. Addressing these key issues is crucial for maintaining the sector's positive growth and will continue to be a primary focus of our oversight efforts.

## Conclusion

Cyprus has demonstrated resilience and strong economic performance against a backdrop of global uncertainties. Despite elevated international risk and the increasing geopolitical fragmentation, it is my belief that Cyprus will continue to prosper thanks to its commitment on prudent, yet business-friendly policies.

Let me bring my speech to a close by quoting Warren Buffett's renowned advice: ""Risk comes from not knowing what you're doing."" This obviously highlights the necessity for informed decision-making. I therefore urge you to examine the country's track record and to assess the ingredients of its pursued policies. I am confident that Cyprus will stand out as a compelling and reliable destination for investment.

Thank you.",Christodoulos Patsalides
https://www.bis.org/review/r250428j.htm,Adriana D Kugler: Transmission of monetary policy,"Speech by Ms Adriana D Kugler, Member of the Board of Governors of the Federal Reserve System, at the Heller-Hurwicz Economics Institute, University of Minnesota, Minneapolis, Minnesota, 22 April 2025.",2025-04-22 00:00:00,"For release on delivery 6:00 p.m. EDT (5:00 p.m. CDT) April 22, 2025

Transmission of Monetary Policy

Remarks by

Adriana D. Kugler

Member

Board of Governors of the Federal Reserve System at

Heller-Hurwicz Economics Institute University of Minnesota

Minneapolis, Minnesota

April 22, 2025

Thank you, Juan Pablo.  I am delighted to be speaking at the University of Minnesota because, in many ways, this visit feels like a homecoming for me. 1 I was born right here in Minneapolis, before I moved to Colombia as a young child.  My parents told me so many wonderful stories about this area and the university.  My father studied for his Ph.D. here at the economics department.  He studied under accomplished economists, including Anne Krueger, Leo Hurwicz, John Buttrick, and Ed Foster, the latter of whom is still here as an emeritus professor.  The University of Minnesota has made many contributions to the field of economics and has historically had a close relationship with the Federal Reserve Bank of Minneapolis.  So you really are part of the Fed's extended family, and it is an honor to speak with you.

Today, I would like to speak with you about the transmission of the Fed's monetary policy.  I will discuss how monetary policy is transmitted through the economy, then touch on how I monitor its transmission, and, lastly, talk about two elements related to transmission that I evaluate when making monetary policy decisions.  Those elements are the long and variable lags of monetary policy and whether its transmission is asymmetric and has changed over time.  But before I delve into my primary topic, I would like to start by offering my views on the economic outlook.

## Economic Outlook

The U.S. economy has grown at a solid pace, with real gross domestic product (GDP) expanding 2.5 percent last year.  Activity indicators in the first few months of this year show healthy numbers.  Last week, the March retail sales release showed resilient consumption, with positive revisions for January and February numbers.  However,

1 The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.

measures of household sentiment, such as surveys from the University of Michigan, Conference Board, and Morning Consult, have shown signs of softness, albeit to varying degrees.  Many survey respondents report that their views reflect trade policy concerns, though, as we have seen, the exact contours of those policies are still taking shape.  Thus, GDP growth for the first quarter, which will be reported next week, may show some moderation relative to what we saw in 2024, although this moderation may be offset by increased purchases front-loading the implementation of tariffs.  Financial markets have experienced increased volatility in recent weeks.  If financial conditions were to tighten persistently, that could weigh on growth in the future.

The labor market remains solid, but the pace of hiring has eased during this year. In the first quarter, U.S. employers added 152,000 jobs per month, on average, compared with a monthly pace of 168,000, on average, last year.  The unemployment rate edged up last month to 4.2 percent, but it is still low and has remained near its current level since last summer.  Moreover, initial jobless claims have remained stable at low levels.  Those numbers are consistent with other measures indicating that the labor market is broadly in balance.

With respect to inflation, progress has slowed since last summer, and inflation remains above the 2 percent goal.  Based on the consumer price index (CPI) and producer price index (PPI) data, the 12-month change in the personal consumption expenditures (PCE) price index was estimated to have been 2.3 percent last month and 2.6 percent for the core categories, which exclude food and energy.

I pay careful attention to two subcategories of inflation:  first, core goods-which are goods outside of volatile food and energy products-and, second, nonhousing

market-based services, which are based on transactions and not imputed prices, such as car maintenance and haircuts.  Goods inflation was negative in most of 2024-as was the norm for several years before the pandemic-but it increased to 0.4 percent in January and February.  In March, the CPI and PPI releases pointed to goods inflation decreasing to a still-positive 0.1 percent, which is better news.  By contrast, nonhousing market services inflation stayed elevated through March, at an estimated 3.4 percent.  That category often provides a good signal of inflationary pressures across all services.  As we look ahead, while the long-run level of tariffs is still to be determined, tariffs have moved significantly higher this year.  That will likely put upward pressure on prices.  For instance, both survey- and market-based measures of near-term inflation expectations have moved up.  Longer-term inflation expectations-those beyond the next few yearslargely remain well anchored and consistent with our 2 percent inflation goal, and I hope they continue in that way.

I am closely monitoring incoming data and the cumulative effects on both sides of our mandate from policies in four distinct areas: trade, immigration, fiscal policy, and regulation.  I am also monitoring any risks to the outlook, especially upside risks on inflation or downside risks to employment.  Still, I think our monetary policy is well positioned for changes in the macroeconomic environment.  Thus, I will support maintaining the current policy rate for as long as these upside risks to inflation continue, while economic activity and employment remain stable.  I remain committed to achieving both of our dual-mandate goals of maximum employment and stable prices.

## Overview of Monetary Policy Transmission

Now turning to the primary topic of my speech, I will first discuss how monetary policy is transmitted through the economy.  In this section, I will give some examples from the recent past as a tool for explaining my arguments, but I am not intending to comment further on the latest developments in the economy.

Understanding the transmission of monetary policy starts with understanding how the Federal Reserve uses its policy tools.  The Federal Open Market Committee (FOMC) adjusts the target range for the federal funds rate, or the rate that banks pay for overnight borrowing.  Setting the federal funds rate is the primary means by which the Fed adjusts the stance of monetary policy, among its range of monetary policy tools.  In addition to the FOMC directly adjusting the federal funds rate, Fed policymakers' communications about the future path of monetary policy may also result in changes to longer-term interest rates because households' and businesses' expectations about future policy affect the level of interest rates.

Adjustments to the federal funds rate affect a multitude of financial conditions faced by consumers and businesses.  For example, changes to the federal funds rate filter through to the interest rates lenders charge for loans to businesses and households as well as to what financial institutions pay in interest on deposits.  The current and expected future path of the federal funds rate also affects asset prices, as it changes the relative attractiveness of different investments, such as stocks and real estate.  Fluctuations in both interest rates and asset prices affect a household's wealth and a corporation's

balance sheet, which can, in turn, affect the terms under which they can borrow. 2 I have discussed some of the most common ways in which policy is transmitted.  There are, of course, other important channels, such as exchange rates and international spillovers, that I will not discuss today.  Research suggests that the channels of transmission are extensive and ever evolving. 3

Consumers and businesses make decisions based on financial conditions. 4 For illustrative purposes, let's consider a period when FOMC policymakers view it as appropriate to ease the restrictiveness of monetary policy by reducing the target range for the federal funds rate over time.  The resulting lower interest rates on consumer loans elicit greater spending on goods and services, particularly on durable goods that are often financed.  Lower mortgage rates can encourage renters to buy a home by reducing the monthly payment borrowers face and can encourage existing homeowners to refinance their mortgages to free up cash for other purchases.  Lower interest rates can make holding equities more attractive, which raises stock prices and adds to wealth.  Higher wealth tends to spur more spending, as households tend to consume at least a portion of their increased wealth.  Investment projects that businesses previously believed would be marginally unprofitable become attractive because of reduced financing costs,

2 Such broader changes in credit conditions are called the 'credit channel' of monetary policy, discussed in Ben S. Bernanke and Mark Gertler (1995), 'Inside the Black Box:  The Credit Channel of Monetary Policy Transmission,' Journal of Economic Perspectives , vol. 9 (Autumn), pp. 27-48. 3 For evidence on how U.S. monetary policy affects exchange rates, see Martin Eichenbaum and Charles L. Evans (1995), 'Some Empirical Evidence on the Effects of Shocks to Monetary Policy on Exchange Rates,' Quarterly Journal of Economics , vol. 110 (November), pp. 975-1009.  Additionally, U.S. monetary policy also affects global financial conditions, as analyzed by Silvia Miranda-Agrippino and Hélène Rey (2020), 'U.S. Monetary Policy and the Global Financial Cycle,' Review of Economic Studies , vol. 87 (November), pp. 2754-76.

4 For evidence that financial conditions are a crucial part of the transmission of monetary policy, see Mark Gertler and Peter Karadi (2015), 'Monetary Policy Surprises, Credit Costs, and Economic Activity,' American Economic Journal:  Macroeconomics , vol. 7 (January), pp. 44-76.

particularly if businesses expect their sales to rise.  Expecting a better macroeconomic environment and lower delinquency rates down the road, banks may loosen their lending standards on approving loans for households and businesses.  All these decisions support aggregate demand and may put upward pressure on inflation.

Of course, there are periods when policymakers see it as appropriate to increase the level of restraint placed on the economy by raising the federal funds rate over time. That may occur when policymakers are seeking to lower inflation.  Then, the monetary policy effects I just described would be reversed, putting downward pressure on aggregate demand and inflation.

## Developments in Monetary Policy and Financial Conditions

Let me now discuss how I view the transmission and the stance of monetary policy during the past few quarters.  To be clear, I will not discuss the developments in financial markets over the past few weeks.

In the second half of last year, I gained greater confidence that inflation was on a sustainable path toward the FOMC's 2 percent objective.  I also wanted to preserve the strength I saw in the labor market.  As a result, I supported the FOMC's decision to decrease the target range for the federal funds rate by a total of 1 percentage point during the meetings from September through December.  However, even before the Committee began to ease policy, some financial conditions started to ease.  This easing can be seen in the Financial Conditions Impulse on Growth index. 5 That index, developed by Federal Reserve Board staff, showed easier financial conditions from March 2024.  And through

5 See Andrea Ajello, Michele Cavallo, Giovanni Favara, William B. Peterman, John Schindler, and Nitish R. Sinha (2023), 'A New Index to Measure U.S. Financial Conditions' FEDS Notes (Washington:  Board of Governors of the Federal Reserve System, June 30), https://doi.org/10.17016/2380-7172.3281.

January, the demand for loans by households and businesses picked up. 6 In the early months of the year, financial conditions, however, remained somewhat restrictive, as borrowing costs continued to be elevated and bank credit moderately tight.  Through March, interest rates on short-term small business loans had only edged down since their post-pandemic peak. 7 Banks stopped tightening lending standards after nine consecutive quarters, but they left standards unchanged in January. 8 These financial conditions helped to moderate aggregate demand and aid in moving inflation sustainably toward our 2 percent target.

## Details of Monetary Policy Transmission

Monitoring the financial conditions I just described is one important way I evaluate how well the Fed's monetary policy is being transmitted to the rest of the economy.  But it is not the only way.  I also consider two other elements that play important roles in the transmission of our monetary policy.

## Timing Matters

The first element to evaluate is the timing with which monetary policy affects the macroeconomy.  The contemporary economics literature uses a variety of statistical models to estimate the effects of what are called monetary policy 'shocks.'  Those are movements in the policy rate that are not explained by estimates of how monetary policy systematically responds to incoming economic and financial data and are not anticipated

6  See Board of Governors of the Federal Reserve System (2025), 'The January 2025 Senior Loan Officer Opinion Survey on Bank Lending Practices,' https://www.federalreserve.gov/data/sloos/sloos-202501.htm.

7 See survey data from the National Federation of Independent Business, available at William C. Dunkelberg and Holly Wade (2025), 'Small Business Economic Trends,' March, https://www.nfib.com/wp-content/uploads/2025/04/NFIB-SBET-Report-March-2025.pdf.

8  See Board of Governors, 'The January 2025 Senior Loan Officer Opinion Survey' (note 6).

by the public. 9 Focusing on the estimated effects of these shocks helps isolate the consequences solely coming from monetary policy actions and communications.  One lesson that emerges from this research is that, broadly speaking, it turns out that Milton Friedman's 'long and variable lags' concept still holds. 10 A selection of key studies on the topic estimates that it takes about one to two years for the maximum effects of policy to be observed in economic activity and inflation. 11 These long lags in monetary policy affecting the economy point to why it is important for policymakers to anticipate economic conditions as best as possible and try to be proactive about understanding the effects of different shocks to the economy, so they can act quickly when needed.

9 For a literature review on the different ways of identifying monetary policy shocks, see V.A. Ramey (2016), 'Macroeconomic Shocks and Their Propagation,' in John B. Taylor and Harald Uhlig, eds., Handbook of Macroeconomics , vol. 2 (Amsterdam:  North-Holland), pp. 71-162.

10  See Edward Nelson (2020), Milton Friedman and Economic Debate in the United States, 1932-1972, vol. 1 (Chicago:  University of Chicago Press), p. 141.

11 See the following papers:  Lawrence Christiano, Martin Eichenbaum, and Charles L. Evans (1999),

'Monetary Policy Shocks:  What Have We Learned and to What End?' in John B. Taylor and Michael Woodford, eds., Handbook of Macroeconomics , vol. 1 (Amsterdam:  North-Holland), pp. 65-148; Christina D. Romer and David H. Romer (2004), 'A New Measure of Monetary Shocks:  Derivation and Implications,' American Economic Review , vol. 94 (September), pp. 1055-84; Harald Uhlig (2005), 'What Are the Effects of Monetary Policy on Output?  Results from an Agnostic Identification Procedure,' Journal of Monetary Economics , vol. 52 (March), pp. 381-419; Jean Boivin, Michael T. Kiley, and Frederic S. Mishkin (2010), 'How Has the Monetary Transmission Mechanism Evolved over Time?' in Benjamin M. Friedman and Michael Woodford, eds., Handbook of Monetary Economics, vol. 3 (Amsterdam:  North-Holland), pp. 369-422; Olivier Coibion (2012), 'Are the Effects of Monetary Policy Shocks Big or Small?' American Economic Journal:  Macroeconomics , vol. 4 (April), pp. 1-32; Gertler and Karadi, 'Monetary Policy Surprises' (see note 4); Pooyan Amir Ahmadi and Harald Uhlig (2015), 'Sign Restrictions in Bayesian FAVARs with an Application to Monetary Policy Shocks,' NBER Working Papers Series 21738 (Cambridge, Mass.:  National Bureau of Economic Research, November), https://www.nber.org/system/files/working\_papers/w21738/w21738.pdf; Christiane Baumeister and James D. Hamilton (2018), 'Inference in Structural Vector Autoregressions When the Identifying Assumptions Are Not Fully Believed:  Re-evaluating the Role of Monetary Policy in Economic Fluctuations,' Journal of Monetary Economics , vol. 100 (December), pp. 48-65; Marek Jarociński and Peter Karadi (2020), 'Deconstructing Monetary Policy Surprises-The Role of Information Shocks,' American Economic Journal:  Macroeconomics , vol. 12 (April), pp. 1-43; Silvia Miranda-Agrippino and Giovanni Ricco (2021), 'The Transmission of Monetary Policy Shocks,' American Economic Journal:

Macroeconomics

, vol. 13

(July), pp. 74-107; and Michael D. Bauer and Eric T. Swanson (2023), 'A

Reassessment of Monetary Policy Surprises and High-Frequency Identification,' in Martin Eichenbaum,

Erik Hurst, and Jonathan A. Parker, eds.,

NBER Macroeconomics Annual 2022

, vol. 37

(May), pp. 87-155.

## Direction of Travel

The second element to consider when making decisions related to monetary policy is whether its transmission has been equally impactful during different points in time.  For example, credible evidence indicates that contractionary monetary shocks may generally decrease economic activity more strongly than expansionary shocks increase it. 12 To understand these asymmetric effects, consider the following illustrative metaphor used by Marriner Eccles, who led the Fed back in the 1930s.

Imagine a string with monetary policy at one end and the economy at the other. Employing tight monetary policy when inflation is rising is like pulling on the string to keep the economy in check-it works fairly well.  But attempting to stimulate the economy with loose policy during a downturn is like trying to push on the string to move the economy-a more difficult task.

There is evidence of this asymmetry in consumer spending on long-lasting durable goods, such as vehicles and appliances.  While an easier monetary policy may lower interest rates and thus stimulate spending on durable goods in the near term, the effects of that policy may be smaller over time, as households may have already purchased durable goods. 13 If a family replaces their living room furniture when rates are low, they are unlikely to need a new set of furniture a few years later and thus would not

12 See, for instance, Silvana Tenreyro and Gregory Thwaites (2016), 'Pushing on a String:  US Monetary Policy Is Less Powerful in Recessions,' American Economic Journal:  Macroeconomics , vol. 8 (October), pp. 43-74; Joshua D. Angrist, Òscar Jordà, and Guido M. Kuersteiner (2018), 'Semiparametric Estimates of Monetary Policy Effects:  String Theory Revisited,' Journal of Business &amp; Economic Statistics , vol. 36 (July), pp. 371-87; and Regis Barnichon, Christian Matthes, and Tim Sablik (2017), 'Are the Effects of Monetary Policy Asymmetric?' Federal Reserve Bank of Richmond, Economic Brief , vol. 3 (March), pp. 1-4, https://www.richmondfed.org/-

/media/richmondfedorg/publications/research/economic\_brief/2017/pdf/eb\_17-03.pdf.

13  See Alisdair McKay and Johannes F. Wieland (2021), 'Lumpy Durable Consumption Demand and the Limited Ammunition of Monetary Policy,' Econometrica , vol. 89 (November), pp. 2717-49.

consider how current rates would change their decisions.  Thus, during an easing cycle, it is reasonable to suspect that the potency of monetary policy may be somewhat diminished.

Another example of asymmetry can be seen in the transmission of monetary policy to private lending.  Board staff research documented strong growth in the period between the Global Financial Crisis and the pandemic, fueled by structural factors, such as the attractiveness of the market to borrowers and investors due to its higher customization. 14 One implication of this strong growth during this past policy tightening is that monetary policy transmission to private credit markets appeared more muted relative to financing through public credit markets or bank commercial and industrial lending.

By contrast, other factors specific to the recent period likely decreased the potency of monetary policy during the tightening cycle but may increase it during the easing cycle.  When the pandemic struck and social distancing was common, many households severely curtailed spending.  In addition, a historic level of government transfers boosted household income.  This combination led the personal savings rate to soar. 15 Recent work by Board staff suggests that these excess savings accumulated during the pandemic may have reduced the effects of tighter monetary policy over recent

14  See Ahmet Degerli and Phillip J. Monin (2024), 'Private Credit Growth and Monetary Policy Transmission,' FEDS Notes (Washington:  Board of Governors of the Federal Reserve System, August 2), https://doi.org/10.17016/2380-7172.3565.

15 See, for instance, Aditya Aladangady, David Cho, Laura Feiveson, and Eugenio Pinto (2022), 'Excess Savings during the COVID-19 Pandemic,' FEDS Notes (Washington:  Board of Governors of the Federal Reserve System, October 21), https://doi.org/10.17016/2380-7172.3223; and Francois de Soyres, Dylan Moore, and Julio L. Ortiz (2023), 'Accumulated Savings during the Pandemic:  An International Comparison with Historical Perspective,' FEDS Notes (Washington:  Board of Governors of the Federal Reserve System, June 23), https://doi.org/10.17016/2380-7172.3326.

years. 16 If households are flush with excess cash, they are less likely to respond to elevated interest rates by curtailing demand.  Instead, they may have funds to avoid financing or may feel they are able to afford higher monthly payments.

Now, some five years after the pandemic began, these excess savings are exhausted. 17 This creates an environment in which monetary policy could be having its average effects on the household sector, although we should consider that the financial health of borrowers with lower credit scores has deteriorated meaningfully in recent years and credit card and auto loan delinquencies are now above pre-pandemic levels.  For these households, easing monetary policy may have larger effects.

I am closely monitoring all these possible changes in monetary policy transmission across the economy.  Also, I am humbly aware that it is difficult for economists to judge the overall effect of monetary policy actions on the U.S. economy in real time.

## Conclusion

To summarize, I see inflation still running above the 2 percent target while the labor market has remained stable.  But the economy is facing heightened uncertainty, with upside risks to inflation and downside risks to employment.  This month, we learned that the tariff increases are significantly larger than previously expected.  As a result, the economic effects of tariffs and the associated uncertainty are also likely to be larger than anticipated.  It is important for monetary policymakers to broadly examine all available

16 See Thiago R.T. Ferreira, Nils Gornemann, and Julio L. Ortiz (forthcoming), 'Household Excess Savings and the Transmission of Monetary Policy,' International Journal of Central Banking .

17  See Hamza Abdelrahman and Luiz Edgard Oliveira (2024), 'Pandemic Savings Are Gone:  What's Next for U.S. Consumers?' SF Fed Blog, Federal Reserve Bank of San Francisco, May 3,

https://www.frbsf.org/research-and-insights/blog/sf-fed-blog/2024/05/03/pandemic-savings-are-gonewhats-next-for-us-consumers.

information, including market-based measures, surveys, and anecdotal reports, to understand what is happening in the economy as early as possible because, as I discussed, it takes time for policy to have an impact.  As the direction of the economy changes, it is critical to pay close attention to real-time data and to consider the lags and asymmetries of policy transmission to ensure we respond not only to the actual movements on both sides of the mandate, but also to the risks to the economic outlook.

As I observe the economy and consider the appropriate path of monetary policy, I am closely studying how the decisions the FOMC makes are transmitted through the economy.  We have learned much about how those transmission channels work and how they may have changed in recent years, and there is much more to learn.  I am confident some of that research will be done right here at the University of Minnesota.  Overall, of course, when setting policy, I am guided by how best to achieve the dual-mandate goals of maximum employment and stable prices given to us by Congress because that results in the best outcomes for all Americans.

Thank you again for such a warm welcome back to the Twin Cities.",Adriana D Kugler
https://www.bis.org/review/r250429p.htm,Primož Dolenc: Green finance and investment,"Opening address by Mr Primož Dolenc, Acting Governor of Bank of the Slovenia, at the conference ""Revitalizing investment for a sustainable future"", organised by the Bank of Slovenia and the European Investment Bank, Split, 3 April 2025.",2025-04-03 00:00:00,"## Primož Dolenc: Green finance and investment

Opening address by Mr Primož Dolenc, Acting Governor of Bank of the Slovenia, at the conference ""Revitalizing investment for a sustainable future"", organised by the Bank of Slovenia and the European Investment Bank, Split, 3 April 2025.

* * *

Ladies and gentlemen, distinguished guests,

I am delighted to welcome you to today's conference organized jointly by Banka Slovenije and the European Investment Bank.

The event builds on the discussions from our 2023 conference, once again placing at the center of our debate. green finance and investment

This underscores the recognition that risks linked to climate and environmental are among the most pressing global challenges of our time. change

Confronting these challenges calls for collective action and a shared responsibility towards future generations.

Achieving carbon neutrality by 2050 requires , significant investments across the EU alongside other measures.

According to Mr Draghi's report and other studies, the EU will have to allocate amounting to around two percent of GDP annually by additional green investments 2030.

Despite the funds available at the EU level and the reformed EU fiscal governance framework, we can expect for green investments in the years to a public funding gap come.

As public finances are increasingly strained due to security concerns and an ageing population, Europe needs a strong framework to also attract and efficiently deploy . private capital

The recently launched , which builds on the Savings and Investment Union strategy and projects, is an important element to support Capital Markets Union Banking Union the massive green investment needs.

A more integrated and deeper EU financial system - complemented by advances in financial literacy and, ideally, a positive shift in mindset - would enable a more efficient from businesses and citizens. allocation of savings

While Europe remains committed to ambitious climate goals, the strategies and processes guiding the green transition continue to evolve.

A perspective that has gained traction over the last year is how Europe can reconcile the complexities of global competition and environmental imperatives and balance . ambitious climate goals with economic vitality

In February this year, the European Commission unveiled its proposal for a Clean , outlining strategies to unlock investments in clean energy and Industrial Deal decarbonize and revitalize Europe's industry.

Another important initiative is the , introduced by the Omnibus Simplification Package Commission in February.

By and simplifying the business environment reducing administrative burdens Europe would enhance its global competitiveness and ultimately spur investments, including those supporting the green transition.

,

However, this drive for simplification is not without its and that easing critics concerns regulations could corporate accountability and stall progress towards our undermine climate objectives.

When introducing adjustments, policymakers must ensure that the underlying strategies are both and . ambitious pragmatic

At Banka Slovenije and within the Eurosystem, by: we are committed to play our part

- increasingly incorporating climate-related issues into our analyses;
- decarbonizing our monetary policy-related corporate bond holdings and implementing climate-related measures in our collateral framework;
- greening our non-monetary portfolio;
- and, as supervisors, encouraging and directing banks to identify, measure and manage climate-related risks in a timely and comprehensive manner, ensuring they remain well positioned to support the economy and the green transition.

Before we move on to the discussion, let me first give the floor to the Head of the European Investment Bank Group Office in Slovenia, Mr Simon Savšek.

Thank you.",Primož Dolenc
https://www.bis.org/review/r250429g.htm,Christopher Kent: Australia's external position and the evolution of the FX markets,"Address by Mr Christopher Kent, Assistant Governor (Financial Markets) of the Reserve Bank of Australia, to the Australian Financial Markets Association, hosted by Bloomberg, Sydney, 29 April 2025.",2025-04-29 00:00:00,"

## Speech

## Australia's External Position and the Evolution of the FX Markets

Christopher Kent

Assistant Governor (Financial Markets)

Address to Australian Financial Markets Association/Bloomberg

Sydney - 29 April 2025

*

ƃ

Ƅ

I would like to thank Bloomberg for hosting this event. Today I will discuss Australia's evolving external position and the development of foreign exchange (FX) markets. I will emphasise the growing footprint of superannuation funds in Australia's capital flows and the importance of these and other 'buyside' firms of adopting best practices in FX markets. [  1] [  2]

## Australia's capital account and FX markets since the float

The removal of capital account restrictions and the floating of the Australian dollar in 1983 reshaped our economy. Free capital movement facilitated large increases in foreign investment in Australia and allowed Australian households and firms to diversify their portfolios by investing overseas. Deep, wellfunctioning FX markets that developed following the float helped banks, businesses and fund managers to manage their foreign exposures.

Australia's integration into global capital markets saw two distinct trends in our net investment position with the rest of the world (Graph 1). First, in the decades after the float, Australia's high investment rate was associated with rising foreign debt. This saw net foreign liabilities rise substantially to around 50 per cent of GDP. Second, over more recent years, outbound investment has grown as a share of GDP as Australia's saving rate rose and domestic investment declined. This accumulation of foreign assets has contributed to an extraordinary decline in Australia's net foreign liabilities to levels last seen prior to 1983.

Graph 1 Net Foreign Liability Position

Per cent of GDP



## The rise in external debt and the internationalisation of FX markets in the 1980s

While foreign ownership of Australian assets was already common in some sectors, the full opening of the capital account allowed for much more foreign investment in Australia. The growth in debt held by overseas creditors was particularly noticeable in domestic banking and resource sectors. [  3]

The increase in cross-border investment was accompanied by a rise in FX transactions. Prior to the float, spot transactions by local commercial banks dominated FX transactions. While the Australian dollar spot market grew strongly, the 1980s also saw the establishment of FX swap markets. These instruments, which allowed market participants to better hedge their foreign currency exposures, quickly became the most traded in Australian dollar markets (Graph 2). The deepening of FX markets locally was also supported by the Australian Government's steps to broaden foreign banks' participation in Australia's markets. [  4] [  5]

Graph 2

## Foreign Exchange Turnover by Instrument



* Net-net basis. Global turnover as in BIS Triennial Survey; measured in Australian dollars.

Sources: BIS; RBA.

The growth of currency markets enabled non-financial corporations to make use of hedges in support of their trade flows and foreign-currency borrowing. This hedging was in part a response to post-float currency volatility and high-profile losses by unhedged borrowers. Over the 1980s, both the share of firms hedging and the average share of currency exposures hedged increased significantly. [  6] [  7]

By the mid-1990s, the internationalisation of the Australian dollar and its capital markets was well advanced. Trading in Australian dollar FX derivatives had risen to $75 billion per day, with about 60 per cent undertaken offshore. Also, foreign entities were issuing debt in Australian dollars in the 'Kangaroo bond market'. This issuance grew steadily over the 2000s, supported by cross-currency basis swaps, another FX derivative but with longer tenors that enabled better hedging of long-lived foreign currency borrowings. [  8] [  9] [  10]

Rising demand for Australian dollar assets from international investors enabled Australian businesses to issue debt in Australian dollars. At the same time, Australian banks and businesses issuing in large offshore markets could hedge their foreign currency-denominated debt back into Australian dollars at a [  11]

modest cost. Both developments greatly reduced the vulnerability of Australian debtors to Australian dollar depreciation.

The growth in Australian dollar FX markets since the float has been remarkable: it is the sixth most traded currency, even though Australia ranks 13th in economic size. This demonstrates the importance to Australia of FX markets in support of foreign trade and investment. But it also reflects the attractive correlations of the Australian economy (and hence the Australian dollar) with economic developments in Asia, coupled with strong institutional settings in Australia, including the free movement of capital. [  12]

## The increasing role of superannuation funds in Australia's FX markets

Another key facet of Australia's external position has been the substantial growth of the net foreign equity position. Australians have steadily accumulated more foreign equity holdings than foreigners have accumulated in Australian equity. Indeed, since 2013 we have had a positive net equity asset position (Graph 3).

Graph 3 Foreign Equity Position

Per cent of GDP



The rise in net equity assets of late has occurred while Australia has been running a current account deficit, creating an unusual situation. Inflows of new liabilities rose with the banks returning to offshore debt markets as the RBA's Term Funding Facility came to an end. However, a further rise in foreign equity holdings offset this, so net liabilities still declined. Much of the rise in net foreign equities reflects valuation effects from the Australian dollar's depreciation and rising overseas equity values (Graph 4). Even so, new equity accumulation continues, driven by investment from Australia's superannuation funds. [  13]

## Graph 4

## Net Foreign Equity Asset Position

Cumulative change



* Other adjustments include those due to the write-off of debt, reclassifications, and changes in financial assets and liabilities due to migration.

Sources: ABS; RBA.

The growth of superannuation funds since 1993 and their rising offshore investments have significantly shaped Australia's balance of payments. Super funds' offshore asset allocation has increased from nearly one-third in 2013 to about half in 2024 (Graph 5). As a result, super funds now account for a substantial share of Australia's capital outflows.

Graph 5

## Superannuation Funds' Offshore Assets



* Per cent of all assets.
- ** Per cent of all offshore assets.

Sources: APRA; RBA.

Purchases of foreign currency assets by superannuation funds expose them to exchange rate fluctuations. Many funds shield their members by partially hedging the foreign exchange rate risk associated with offshore assets via, for example, FX swaps. Given the large increase in super funds' offshore assets, the extent of foreign currency assets hedged has more than quadrupled since 2013. This has made the super funds natural counterparties to domestic banks, which are hedging their FX exposures arising from issuing debt offshore in foreign currency terms. [  14]

## The Foreign Exchange Global Code

This discussion highlights the increasing role of superannuation funds and their asset managers in FX markets. For FX markets to meet participants' needs, it is important that they all observe common standards promoting fair and transparent markets. The Foreign Exchange Global Code (Code) fulfills that function.

With the advent of the Code in 2017, buy-side participants like super funds can have greater confidence in market functioning and the behaviour of their sell-side counterparties. But this is a two-way street: both sell-side and buy-side firms should adhere to the Code's standards. Moreover, one way for fund managers to demonstrate that they are meeting their fiduciary duties is to adhere to the Code. Encouraging more buy-side participants to sign up is a focus of the Global Foreign Exchange Committee (GFXC).

To this end, the GFXC has worked hard to explain the process of signing up to the Code. We have emphasised that adoptees can concentrate on those aspects of the Code that are material to their activities, thereby greatly reducing the burden for buy-side firms.

I will end by acknowledging the sharp rise in volatility in FX markets in early April as markets incorporated announcements about the US administration's tariffs and the subsequent ebb and flow of related news. The Australian dollar fluctuated within a range of US4 cents, experiencing its largest daily decline of 4.5 per cent against the US dollar outside of the global financial crisis. Also, measures of volatility from FX options increased to levels observed during the pandemic and liquidity deteriorated noticeably. While markets have been more settled of late, such episodes serve as a reminder of the importance of the Code. It enhances trust between market participants and offers standardised and predictable ways of doing business. Hence, the role the Code plays in proper market functioning is even more crucial during periods of great uncertainty when markets are adjusting to significant economic news.

## Endnotes

- I thank George Tyler, Jason Griffin and Marcus Miller for their great assistance in helping me to prepare this speech. [*]
- This work builds on previous RBA work including Smith P (2023), 'The Extraordinary Decline in Australia's Net Foreign Liabilities', Speech at the CFA Societies 2023 Australian Investment Conference, Sydney, 18 October; Debelle G (2019), 'A Balance of Payments', Address to the Economic Society of Australia, Canberra, 27 August. [1]
- 'Buy-side' institutions purchase currency to invest in international assets; they include hedge funds, insurance firms, pension funds, and other asset managers. 'Sell-side' institutions - typically banks and currency brokers - trade currency with buy-side firms and provide liquidity in FX markets. [2]
- Tease W (1990), 'The Balance of Payments', in The Australian Macro-economy in the 1980s, RBA Annual Conference, 20-21 June; Black S, J Kirkwood, A Rai and T Williams (2012), 'A History of Australian Corporate Bonds', RBA Research [3]

Discussion Paper No 2012-09.

- Though a small market for non-deliverable forwards did exist prior to the float: Caballero RJ, K Cowan and J Kearns (2004), 'Fear of Sudden Stops: Lessons from Australia and Chile', RBA Research Discussion Paper No 2004-03. [4]
- Fraser B (1994), 'Foreign Banks in Australia', Talk to the Overseas Banks' Association of Australia, Melbourne, 17 August; Debelle G (2006), 'The Australian Foreign Exchange Market', Speech at Insto's Foreign Exchange Conference, Sydney, 17 November. [5]
- Debelle, n 5. [6]
- Becker C and D Fabbro (2006), 'Limiting Foreign Exchange Exposure through Hedging: The Australian Experience', RBA Research Discussion Paper No 2006-09; James E and C Vallence (2020), 'The Road to Australian Dollar Funding', RBA Bulletin, March. In this episode, numerous borrowers incurred significant losses on unhedged liabilities denominated in Swiss francs, which encouraged a more sophisticated approach to foreign financing thereafter. [7]
- This rose further over time and was around 85 per cent in 2013. See Bank for International Settlements (1998), 'Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity', May. [8]
- Debelle G (2008), 'Recent Developments in the Australian Bond Market', Address to the Westpac/KangaNews Speedmeeting Summit: Kangaroos &amp; Kauris, Sydney, 5 March. [9]
- Ryan C (2007), 'Some General Observations on the Kangaroo Bond Market', Address to the Kangaroos: Positioned for Growth Conference, Sydney, 29 March. [10]
- Black et al, n 3. [11]
- Bank for International Settlements (2022), 'Triennial Central Bank Survey: OTC Foreign Exchange Turnover in April 2022', 27 October. For GDP (current prices) data in 2022, see the International Monetary Fund World Economic Outlook Database. [12]
- This is in fact not a new phenomenon for equities: since 2013, valuation changes have been the driver of declines in the net foreign equity position, rather than new transactions. This reflects the comparatively greater returns generated by US equities, the long-run depreciation of the Australian dollar, and the offsetting effect of foreign direct investment in Australian equities. [13]
- Over recent years, the hedge ratio of offshore assets has declined sharply. While motivations and strategy vary by firm, there are likely to be several contributing factors to this decline, including economising on carry costs associated with hedging transactions and the use of a lower currency hedge ratio as a tail-risk hedge against declines in US equities. [14]

The materials on this webpage are subject to copyright and their use is subject to the terms and conditions set out in the Copyright and Disclaimer Notice.

- © Reserve Bank of Australia, 2001-2025. All rights reserved.

The Reserve Bank of Australia acknowledges the Aboriginal and Torres Strait Islander Peoples of Australia as the Traditional Custodians of this land, and recognises their continuing connection to country. We pay our respects to their Elders, past and present. Aboriginal and Torres Strait Islander peoples should be aware that this website may contain the names, images and voices of people who are now deceased.",Christopher Kent
https://www.bis.org/review/r250429q.htm,Leonardo Villar-Gómez: Speech - XVIII Asofondos Congress,"Speech by Mr Leonardo Villar-Gómez, Governor of the Central Bank of Colombia, before attendees of the XVIII Asofondos Congress, Cartagena, 4 April 2025.",2025-04-04 00:00:00,"## Leonardo Villar-Gómez: Speech - XVIII Asofondos Congress

Speech by Mr Leonardo Villar-Gómez, Governor of the Central Bank of Colombia, before attendees of the XVIII Congress, Cartagena, 4 April 2025. Asofondos

* * *

Good morning to all Congress attendees. I extend a special greeting to my Asofondos esteemed fellow panelists in this opening session: Mr. Juan David Correa, President of the Board of Directors of the Association; the Minister of Labor, Mr. Antonio Sanguino; and the Financial Superintendent, Mr. CØsar Ferrari.

I would also like to express my sincere appreciation to AndrØs Velasco and Daniel Wills, President and Technical Vice-President of , respectively, as well as to Asofondos all the members of the Association, for their kind invitation and the opportunity to participate in this vital forum.

On this occasion, I will first share 's perspective on Colombia's Banco de la Repœblica macroeconomic and monetary outlook. Additionally, I will conclude my remarks with reflections on the Bank's role in administering the Contributory Pillar Savings Fund, established by the Congress of the Republic as part of the pension reform approved last year.

It is important to clarify that the views I will present today do not necessarily reflect the position of the Bank's Board of Directors, nor do they represent the opinions of its individual members, who may hold differing interpretations on some issues I will address.

## On the Bank's autonomy and essential objectives

I would like to begin by addressing recent allegations directed at the Board of Directors, particularly some of its members, regarding alleged political motivations behind the decision made on Monday, March 31 to keep interest rates unchanged. My response to these claims is a strong reaffirmation of the institutional integrity of the Board, which operates strictly on technical grounds and within the clear constitutional mandate of safeguarding the purchasing power of the peso in tandem with general economic policy.

It is essential to emphasize that none of the Board Members, except for the Minister of Finance, represent any particular government or political opposition. The Constitution is unequivocal on this matter. Article 372 explicitly states: "" The members of the Board of ."" Directors shall exclusively represent the interests of the Nation

I have had the distinct honor of serving as member of the Board of Directors of Banco for the past twelve years and, more recently, for over four years as de la Repœblica Governor. I can state with absolute clarity and conviction that throughout these sixteen years, I have never witnessed any Board Member-or the Board as an institution-act with any motivation other than pursuing what is best for the country and its people. Our sole

objective has always been to fulfill the constitutional mandate of preserving the purchasing power of the peso while ensuring that this goal aligns with the highest possible level of sustainable economic growth and employment.

In this endeavor, the Board has been fortunate to rely on what I consider to be the most highly qualified team of economists in the country. Every decision the Board makes is preceded by a comprehensive recommendation document prepared by this technical staff. While these recommendations are not necessarily adopted in full, they serve as a crucial point of reference, providing the strongest available evidence to guide Board Members in making informed decisions. Ultimately, each vote is cast with the highest level of diligence, in adherence to the constitutional mandate, and with an unwavering commitment to the nation's best interests.

Over the past 25 years, throughout this century, the Board has implemented its mandate to preserve the currency's purchasing power through an inflation-targeting strategy. This approach seeks to maintain inflation at approximately 3%, with a flexible exchange rate and a very short-term interest rate as the primary policy instrument.

When inflation exceeds the target, it becomes necessary to uphold a contractionary monetary policy to bring it back under control. However, the short-term economic cost of such a policy-reflected in reduced productive activity-can be more pronounced and prolonged under certain conditions. This occurs, for instance, when prices and wages are heavily indexed to past inflation. Similarly, factors that elevate country risk premiums-such as global uncertainty or political idiosyncrasies, such as rising public debt or fiscal deficits exceeding expectations-can further complicate monetary policy efforts.

Under these circumstances, the burden on monetary policy intensifies as it seeks to steer inflation back to its target while restoring the conditions necessary for more substantial and sustainable economic growth in the medium and long term.

## Colombia's  recent adjustment process: a success story

The high policy interest rates maintained over the past three years reflect a deliberately restrictive monetary policy necessary in response to a significant inflationary shock-one that affected most economies worldwide between 2021 and 2023. Our policy response, characterized by elevated interest rates, entailed notable short-term costs regarding its impact on aggregate demand and productive activity. However, these costs were considerably lower than many had anticipated. Contrary to some forecasts, the economy did not enter a recession, and the observed slowdown in productive activity did not hinder the current unemployment rate from standing below pre-pandemic levels.

Concurrently, this restrictive monetary policy effectively contributed to a substantial reduction in inflation-more than eight percentage points-bringing it down from its peak of 13.4% to the current level of 5.3%. Additionally, the domestic demand imbalances that had manifested in a current account deficit exceeding 6% of GDP in 2022 were significantly corrected, reducing the deficit to just 1.8% of GDP by 2024. The technical staff now projects that this deficit will rise slightly to 2.4% of GDP in 2025, reflecting clear signs of recovery in domestic demand. Even so, the projected deficit remains well below its level three years ago, leaving the economy less reliant on external financing

and less vulnerable to abrupt changes in domestic and international conditions-an especially important factor given our current uncertainties.

I believe that this macroeconomic adjustment process has been successful. It is particularly noteworthy that, within this context, we are witnessing an evident recovery in economic activity. Growth is expected to reach 2.8% in 2025, a rate that compares favorably with forecasts for many regional economies and more advanced economies, including the United States and several European nations.

According to data from the National Administrative Department of Statistics (DANE), domestic demand grew by 4.4% in real terms in the last quarter of 2024. Similar growth rates are expected in 2025, providing the foundation for the projected recovery in GDP. This improvement is also reflected in labor market indicators, including the seasonally adjusted unemployment rate recorded last February, which was the lowest for any month since April 2017.

Undoubtedly, the reduction in policy interest rates implemented by this Board between December 2023 and December 2024 played a key role in supporting the recovery of domestic demand, productive activity, and employment.

## Why do interest rates remain relatively high?

At this point, it is essential to emphasize that our monetary policy interest rates remain at levels indicative of a contractionary monetary stance. Both nominal and real interest rates are currently higher than what the Bank's technical staff considers neutral and desirable in the medium and long term-conditions in which inflationary pressures are absent and the economy grows close to its potential rate.

In this context, I would like to reiterate a point I have made publicly on multiple occasions: I consider that interest rates lower than those currently in place would be desirable. Moreover, I am convinced that there is consensus among all members of the Bank's Board of Directors on this matter.

Why do we maintain interest rates that we deem contractionary and higher than what would be ideal in the medium and long term? The reason is that, despite our success in significantly reducing inflation from its peak in March 2023, the pace of disinflation in Colombia has been slower than in many other countries in the region and around the world, where inflation has already returned to the target ranges set by their central banks. This slower adjustment is primarily due to the high degree of price and wage indexation in Colombia  and other idiosyncratic and circumstantial factors that have complicated the disinflation process.

Furthermore, the process of lowering interest rates-which we all wish to continue-had to be temporarily halted during the last two Board meetings in January and March. This decision was driven by a slowdown in the pace of inflation's convergence toward the target, alongside factors that exerted upward pressure on inflation expectations and international interest rates relevant to Colombia's external financing. Notably, the rise in long-term interest rates in global markets coincided with an increase in Colombia's

country risk spreads. The latter occurred in a context where fiscal deficit figures significantly exceeded forecasts, and public debt as a percentage of GDP was rising at a rate well above what is consistent with macroeconomic stability.

When comparing Colombia with other Latin American countries that, like us, follow a target inflation strategy, we observe that nations such as  Perœ, Uruguay, Paraguay /span&gt;, and Costa Rica have made greater progress in reducing interest rates. This has been possible because inflation in these countries has already returned to the target ranges established by their respective central banks. In the case of Chile, inflation remains slightly above its target range due to specific factors related to public utility tariffs. However, inflation expectations suggest that by the end of 2025, Chile will be very close to its target of 3%-the same target set by Colombia.

The experiences of the region's two largest economies, and , are MØxico Brazil particularly relevant to our analysis. In MØxico , inflation currently stands at 3.7%, within the target range of 3% - 1 percentage point. This allowed the Mexican Central Bank to lower its monetary policy interest rate last week from 9.5% to 9%. It is worth noting, however, that even after this reduction, the real ex-post policy rate (the difference between the nominal rate and observed inflation) remains at 5.3% (9% - 3.7%), significantly higher than Colombia's  current level of 4.2% (9.5% - 5.3%).

The case of Brazil  is particularly striking and serves as an important reference for the risks faces. Inflation in is currently at 5.1%, slightly lower than in Colombia Brazil Colombia. The Brazilian Central Bank had been making steady progress in lowering its monetary policy interest rate, reducing it from 13.75% in August 2023 (slightly above Colombia's  at the time) to 10.5% by mid-2024. However, concerns over the country's fiscal situation in the latter half of 2024 led to a sharp depreciation of the real and rising inflation expectations. In response, the Central Bank was forced to rapidly reverse course, raising the policy rate from 10.5% to its current level of 14.25%. In real ex-post terms, this rate is nearly five percentage points higher than Colombia's. Additionally, the Brazilian Central Bank has signaled to markets that further rate hikes may be necessary in the coming months. Fortunately, Colombia  has not faced such a scenario recently, and clearly, avoiding such a situation remains a priority.

In Colombia, inflation remains above the 3% target set by the Central Bank. The technical staff's central forecast for year-end 2025 places inflation above the tolerance range of -1 percentage point around the target, as announced by the Board last November. If this projection materializes, 2025 would mark the fifth consecutive year in which the inflation target is not met. This would pose a challenge to the credibility of the inflation-targeting framework, which relies on the firm anchoring of inflation expectations as a key element of its effectiveness. Unfortunately, recent analysts' surveys suggest that inflation expectations among many economic agents have risen in recent months and remain above the target level.

The combination of deteriorating inflation expectations, fiscal risks in Colombia, and uncertainty surrounding the global economy-exacerbated by the trade tensions triggered by the United States-led the majority of the Board to decide last Monday to maintain the pause in the process of reducing the policy interest rate. As stated in the press release following that meeting: ""The decision to maintain the interest rate unchanged reflects a cautious approach to monetary policy, anticipating new

information in the coming months that will provide further evidence on the feasibility of additional rate cuts. This decision reaffirms the Board's commitment to achieving convergence with the inflation target in the context of recovering economic growth."" I believe this statement clearly conveys our expectations moving forward.

## The role of in administering the pension Banco de la Repœblica system's Contributory Pillar Savings Fund

Before concluding, I would like to address the role that will play Banco de la Repœblica in administering the pension systems' Contributory Pillar Savings Fund (FAPC), as established by the reform approved last year by Congress.

As you know, Law 2381 of 2024 stipulates that, within the contributory pillar, pension contributions from all workers will include an average premium component administered by Colpensiones, covering contributions on incomes between 1 and 2.3 times the legal monthly minimum wage. Since a portion of these contributions currently goes to the individual savings component, this change will significantly increase the resources received by Colpensiones once the reform takes effect. However, in the long term, this situation will reverse, as Colpensiones' pension obligations will eventually surpass the resources it collects.

To address this, the law mandates that the temporary surplus of funds received by Colpensiones-expected to last for two or three decades-be allocated to the Contributory Pillar Savings Fund (FAPC). Congress also determined that Banco de la Repœblica would be responsible for administering this Fund. The resources administered through the FAPC will be channeled into capital markets via professional asset managers, generating returns that will help the government meet future pension obligations.

Currently, even before the reform is enacted, Colpensiones operates with a significant deficit, requiring substantial transfers from the national government. These transfers are included in the annual national budget and contribute to the fiscal deficit. The creation of the FAPC, administered by , has been structured to ensure Banco de la Repœblica that its funding is adjusted in a way that neither affects the national government's current pension expenditures nor undermines aggregate savings in the economy.

It is essential to underscore that the temporary surplus of resources allocated to the FAPC will be insufficient to meet future pension obligations. According to the projections outlined in the bill, the Fund is expected to be fully depleted by 2070, at which point the government will need to allocate additional resources to cover the resulting deficit. Ensuring the long-term sustainability of the pension system will likely require adjustments to key parameters, particularly in retirement ages and contribution rates. The necessity of these reforms remains unchanged and is in no way diminished by role as a financial resource manager. Banco de la Repœblica's

A little over a month and a half ago, on February 13, I addressed this very auditorium during the Treasury Congress of the Banking Association, stressing the urgency of issuing the government decree regulating the FAPC's operation. I noted that without the prompt issuance of this decree, it would be impossible to establish the fundamental elements necessary to begin administering the Fund on time, as mandated by law for July 1.

Banco de la Repœblica's team worked intensively and constructively with officials from the Ministry of Finance and the Financial Regulation Unit (URF) throughout the last months of 2024, expecting that by year-end, the decree would be in place, allowing us to begin developing the institutional and financial framework required for the Fund's timely launch. Unfortunately, the process has been significantly delayed. In late February, a version of the decree was released for public consultation, which contained multiple provisions that had not been previously disclosed to the Bank, some of which were inconsistent with the law. Consequently, we submitted a detailed letter on March 7 highlighting our many concerns. Fortunately, several of these observations were taken into account by the Ministry of Finance and the URF, for which we are grateful. A revised draft was published for further comments last Friday, March 28. However, as of yesterday, we had to submit another letter reiterating key concerns that had not yet been addressed, raising the possibility that the decree's issuance could be further delayed or that it may not fully resolve our outstanding issues. I mention these dates to convey the pressing urgency we currently face in securing the regulatory framework needed to fulfill our legal mandate, which takes effect in less than three months.

Only once the regulatory decree is issued can we move forward with drafting and signing the FAPC administration contract between the government and the Bank. This will allow us to initiate the selection and hiring of the first administering entities responsible for overseeing the resources, which are expected to accumulate at a rate of approximately 1.4 trillion pesos per month starting July 1. Among many other matters, the contract must explicitly establish that will administer the Banco de la Repœblica FAPC's resources in its capacity as the government's fiscal agent, as it does with other funds. It will provide the necessary technical and operational infrastructure while ensuring a strict separation between the Fund's resources and the Bank's own, both in budgetary and accounting terms. Furthermore, the administration of these resources will adhere to principles of prudence and diligence, as is standard in fiduciary mandates, with responsibility over the means rather than specific financial outcomes.

The law establishes a Steering Committee as the highest authority of the FAPC, composed of three government representatives and four independent experts appointed by the Board of Directors of . However, the selection Banco de la Repœblica process for these four experts can only begin once the corresponding regulatory decree is in place. The draft decree published for public observations last Friday incorporated the Bank's proposal for a transition period, during which the Bank could operate under provisional rules, investing resources in moderate-risk portfolios similar to those currently administered by the AFPs. Nonetheless, the challenge of establishing these delegated portfolios within such a short timeframe remains considerable.

Several regulatory elements still require definition. In particular, I want to highlight three pressing issues.

1. First, a provision included in the latest draft of the decree must be revised, as it allows for the use of savings accumulated in the FAPC to make payments under the contributory and semi-contributory pension frameworks. This pertains to the decumulation of the Fund, which should be explicitly regulated in a separate decree concerning generational sub-accounts-an essential regulation that is still pending. The law stipulates that this decree must undergo review and include a

binding opinion from the Fund's Steering Committee, which has not yet been established. Consequently, incorporating mechanisms for decumulating the Fund's resources in the decree currently under discussion would not only be premature but also contrary to the law.

2. For , as administrator of the FAPC, it is essential to clarify Banco de la Repœblica which Government entity will be responsible for the Fund's accounting and which will oversee the corresponding auditing functions. After the bill was approved in the Senate and debated in the House of Representatives, the Bank highlighted the need for such clarity. While many House and government representatives showed willingness to make the necessary adjustments, procedural constraints in the legislative process prevented them. Given these circumstances, the government must define these key accounting and resource oversight aspects through a regulatory decree.
3. Regarding hiring delegated administrators during the transition period, it is imperative that government regulations establish clear limits on their remuneration in strict accordance with the law. Specifically, compensation should be structured as a fee based on the balance administered rather than as a percentage of the base income for contributions, as proposed in the version published last Friday. The latter approach is inapplicable for resources that do not correspond to individual contributions. Additionally, certain sections of the draft decree contain inconsistencies regarding the nature of the FAPC, treating it as if it were a savings fund for individual contributions-an interpretation that does not align with its legal framework.

Banco de la Repœblica remains fully committed to collaborating with all relevant stakeholders to ensure a coordinated and efficient implementation of the new pension system and the successful launch of the Contributory Pillar Savings Fund. However, I must reiterate the urgency of establishing adequate regulations, without which we simply will not be able to fulfill the mandate assigned to us by law.

Thank you very much.",Leonardo Villar-Gómez
https://www.bis.org/review/r250429a.htm,Denis Beau: Our payment system at a time of geopolitical risks,"Speech by Mr Denis Beau, First Deputy Governor of the Bank of France, at the Conseil Régional de Limoges, Limoges, 18 April 2025.",2025-04-18 00:00:00,"## Denis Beau: Our payment system at a time of geopolitical risks

Speech by Mr Denis Beau, First Deputy Governor of the Bank of France, at the Conseil RØgional de Limoges, Limoges, 18 April 2025.

* * *

Slides accompanying the speech

## [Slide 1 Cover slide]

The payments sector has undergone significant changes in recent decades, driven by digitalisation and the rise of new technologies. While the latter provide opportunities, they also bring risks, particularly in terms of financial stability and sovereignty. These risks have been amplified since the inauguration of the new US administration and the upheavals to the international order that its challenges to multilateralism and its deregulatory and protectionist policies could cause.

Against this backdrop of great uncertainty and the major shocks to the financial system since the start of the month, the financial authorities have an important role to play in fostering stability and trust among the players in the French and European economy and financial system. Accordingly, in addition to ensuring price stability, the objective of the Banque de France, in keeping with its monetary and financial stability mandates, is to help maintain stable access to financial services, particularly credit, and to encourage innovation and diversification. It also strives to ensure the smooth functioning of our economy and the infrastructures on which it relies, and especially our payment system.

In my presentation this morning, I would first like to review the main trends and challenges facing the European payments ecosystem, and then present the levers we are using at the Banque de France to ensure its efficient operation and the security of payment systems and payment means, and to help strengthen Europe's sovereignty over its payment system.

[Slide 2 - I. Trends and challenges for payments in France and Europe]

- I. The digitalisation of payments and its implications

## A. Progress in technology is leading to the rapid digitalisation of the payments ecosystem

[Slide 3: A rapid payment digitalisation process]

For a little over a decade now, we have been witnessing a strong move towards digitalisation and the increasing use of electronic payment solutions, with an attendant decrease in the use of cash. Payment cards are now the most commonly used means of payment at the points of sale, accounting for more than 48% of transactions in France in 2024. Conversely, cash payments are gradually decreasing, falling to 43% of point-of-sale transactions in France in 2024, whereas they stood at 50% in 2022, and as high as 68% in 2016 .

This trend accelerated even further with the rise of online shopping and the Covid pandemic. The share of e-commerce in the number of transactions thus doubled between 2019 and 2024 to reach a quarter of all transactions in France. At the same time, contactless payments and mobile payments have developed rapidly, with the aim of making payments increasingly seamless and almost invisible to consumers. This trend has been facilitated by the development of new technologies that have modernised payments, such as near-field communication (NFC) and QR codes, which have enabled the roll-out of contactless payments.

Against this backdrop, have emerged, whose value added new players in payments stems from technological innovation. These new players are now competing with traditional financial institutions such as banks. They include not only FinTechs but also ""non-financial"" players, namely telecom operators, technical service providers (specialising, for example, in the tokenisation of payment card data), and BigTechs, in particular the American GAFAMs - ApplePay, GooglePay - which dominate the mobile payments market. They also include Chinese and Korean platforms such as AliPay and WeChatPay.

The growth in the tokenisation of financial instruments, driven by the use of distributed ledger technologies (DLT) such as blockchain, represents a significant opportunity for our markets. Significant benefits are expected: faster exchanges, lower operating costs and greater transparency of transactions. However, this trend is now going hand in hand with a plethora of uncoordinated DLT initiatives, giving rise to the emergence of new private settlement assets, most notably stablecoins. These initiatives are largely controlled by non-European players and mechanisms, whose reference currency is the dollar.

## B. The challenges raised by changes in the payments landscape

[Slide 4: Issues and challenges posed by the digitalisation of the European payments system]

While the digitalisation of payment means has delivered many benefits, in particular by enabling simpler, faster, more convenient and more secure payments, it also poses . challenges

The decline in the use of cash raises questions about the sustainability of some of its characteristics, particularly confidentiality, universal acceptance and accessibility, which are not currently available in the digital sphere. Furthermore, the increase in the use of digital payments raises questions about the role of central bank money, as opposed to commercial money used for card payments, even though central bank money plays a key role in anchoring confidence in our monetary system.

Furthermore, expanding the use of digital solutions has steadily upped our reliance on non-European entities (particularly from the United States and China), which already leverage significant network effects, thanks notably to their ability to harness extensive datasets and customer bases. They also control a number of widely used proprietary standards (Visa, Mastercard). Beyond the question of operational resilience, this situation raises concerns over competition, strategic autonomy and data protection.

With the emergence of these international players, European payment solutions appear highly fragmented and their market share has been eroding. 1

The growing digitalisation of payments also represents a challenge to maintain a high level of payment security. Fraud schemes are becoming increasingly complex, involving the manipulation of payers and the circumvention of the strong authentication mechanisms put in place to ensure the security of digital payments in Europe. In particular, artificial intelligence (AI) is . a double-edged sword

AI amplifies cyber risk and, in payments, it can considerably facilitate payment scams, for example through deepfakes. But this technology can also become an invaluable , by enabling fraud schemes to be more rapidly and ally in the fight against fraud effectively identified. Against this backdrop, integrating AI into anti-fraud models could help to improve the security of the digital payment means available to the public.

It should also be noted that digitalisation could extend to financial assets, through tokenisation, although at present there are no suitable and really secure payment solutions available for these financial transactions. Therefore, without a central bank money-based payment solution for these ""wholesale"" transactions , private non-European solutions could become dominant, in particular stablecoins. However, almost all stablecoins are currently pegged to the dollar, and their issuance in the United States is not currently subject to any protective federal regulatory framework. If the tokenisation of financial assets were to gather pace, the lack of a central bank money payment solution in euro might therefore threaten the role of central bank money as the anchor of the euro area's monetary architecture, with concrete adverse consequences: an increase in counterparty and liquidity risks, increased fragmentation of settlement, and ultimately a loss of sovereignty and a weakening of financial stability.

In this context, the recent positions adopted by the , and in new US administration particular the adoption on 23 January of an Executive order, are likely to amplify these risks as this Executive Order (i) prohibits all work related to the development of a new form of central bank money compatible with technological changes, (ii) promotes the development of dollar-backed stablecoins, and (iii) encourages citizens and businesses to use public blockchains. This new political direction reinforces the need for Europe to preserve its monetary sovereignty, which means developing its payment sovereignty.

II. To meet these challenges, the Banque de France is using several additional levers for action

[Slide 5: Transition - Two additional responses: regulation/support and innovation.]

## A. Adapting regulatory frameworks and supporting innovation within a framework of trust

[Slide 6: Adapting regulatory frameworks at national and international level]

First and foremost, the Banque de France promotes clear, standardised and that allow innovation to flourish within a framework balanced regulatory frameworks

of trust conducive to their sustainable deployment. It therefore supports and contributes to the development of frameworks that aim to:

- Maintain a level playing field between players. For example, this has made it possible for operators other than Apple to have access to NFC antennae on iPhones at the European level to promote better competition.
- Adapt to technological progress to support the development of new players, while ensuring they are adequately regulated, based on the principle of ""same activity, same risk, same regulation"". This approach has guided the deployment of the Markets in Crypto-Assets (MiCA) regulation, which standardises the rules applicable to crypto-asset service providers, enabling them to develop their business while ensuring that risks to users and the financial system are properly managed.
- Protect consumers. This was, for example, the aim of the second European Payment Services Directive (PSD2), which introduced ""strong customer authentication"" (SCA) for more secure payments. The Instant Payment Regulation (IPR) follows the same logic, requiring payment service providers (PSPs) to deploy fraud protection measures (e.g. checking the name of the beneficiary against the IBAN) to ensure the orderly development of instant payments.

## [Slide 7: Strengthening the security of means of payment]

As part of its statutory mission, which includes ensuring the security of means of payment, the Banque de France supports innovation by ensuring that it does not jeopardise . The following tasks are performed the security of payment methods within the framework of the Observatory for the Security of Payment Means (OSMP).

- Communication campaigns targeting the general public, such as ""never give out your data"", carried by various audio-visual media and radio, and aiming to raise awareness of the personal nature of passwords in particular,
- Initiatives aimed at boosting cooperation with data protection, cybersecurity and telecommunications authorities to limit fraud as much as possible.

## [Slide 8: Promoting innovation by supporting private initiatives]

Support for innovation also seeks to ensure that private initiatives help to strengthen European sovereignty over the euro payment system:

- At the national level, this support aims to consolidate the position of highperformance French payment solutions, such as the Groupement carte bancaire (CB bank card group), which has been allocated specific support within the framework of the new national retail payments strategy for 2025-30, implemented by the National Payments Committee (CNMP) last October.
- At the European level, pan-European solutions, such as the European Payments Initiative (EPI), are strongly supported. EPI launched the 'Wero' digital payment wallet for consumers last autumn, providing instant payments across five European countries (Belgium, France, Germany, Luxembourg and the

Netherlands). This initiative with pan-European ambition aims to promote competition and strengthen Europe's strategic autonomy in retail payments.

## B. The provision of new central bank money services to preserve the key role of central bank money in a digitalised world

Alongside regulating and supporting private initiatives, the Banque de France is making a strong and decisive contribution to the Eurosystem's work on developing its services through the creation of a central bank digital currency for both retail and wholesale transactions. This work has become more strategically important in terms of ensuring European sovereignty over its payment system since the policy shift initiated by the new US administration that I referred to a few minutes ago.

## [Slide 9: Innovating with the digital euro: a European payment solution]

## 1. The digital euro

Given the strong dependence on American payment solutions and networks, the Banque de France thus supports and participates fully in the digital euro project spearheaded by the Eurosystem, which will constitute a public alternative, preserving the freedom to choose means of payment, sovereignty and competition in the euro area.

The digital euro aims to provide everyone with the possibility to use a 'digital banknote' in the digital payments sphere that incorporates the main features of a 'physical' banknote. Its off-line mechanism will provide a cash-like level of privacy and will be a guarantee of resilience. It will be free of charge for individuals. Its characteristics will foster digital financial inclusion, including for people without bank accounts or smartphones. It will also be a , which will new form of public money safeguard the anchoring role of central bank money and trust in our single currency.

The digital euro also aims to strengthen integration and strategic autonomy European in payments thanks to the legal tender status it would be given, making it usable anywhere and in any circumstances within the euro area. It will also be based on open , which private payment solutions such as Wero will be and harmonised standards able to use to expand their reach. In this way, the digital euro aims to foster the development of private solutions under European governance, which can be used across the euro area, whereas most solutions are currently restricted to certain countries or use cases.

The Eurosystem is currently in a that will last until the end of 2025. preparation phase At the same time, a democratic debate is taking place at the European level to define, by means of legislation, the conditions in which the digital euro may be used. A decision on issuance can be taken once this legislation has been approved by the European Parliament and the Council.

## [Slide 10: From Wholesale CBDC to a shared European ledger]

## 2. Wholesale central bank digital currency

With the development of tokenised assets, the Banque de France is also firmly committed to providing a payment solution in central bank money that includes making it available in tokenised form, in other words, a ""wholesale CBDC"".

The Banque de France has been resolutely committed to this solution since 2020, playing a pioneering role at the European level in an experimental programme conducted between 2020 and 2022, in partnership with various private and institutional sector players. This work, which allowed the Banque de France to develop and test its own blockchain (DL3S), was followed by that of the Eurosystem in 2024. This was used to test three solutions for settling tokenised assets in central bank currency through around 40 or so experiments.

Drawing on the lessons learned from these experiments and their confirmation of a demand for adapting central bank money services, in February 2025, the ECB Governing Council decided to quickly make available a settlement service in CB money adapted for tokenised assets, which will include money in token form, i.e. a ""wholesale"" CB digital currency.

This decision also paves the way for discussions on building a European shared ledger that could be used to adapt European payment infrastructures to the digital era to ensure sovereignty. By providing a credible alternative to non-European solutions, based on a standardised legal and regulatory framework, a European shared ledger could support financial integration within the EU and help strengthen the resilience and attractiveness of our financial market.

Conclusion : As a central bank tasked with safeguarding monetary and financial stability, and notably the security and efficiency of payment systems and means of payment for the euro, the Banque de France is fully committed to monitoring, understanding and supporting the major transformations currently taking place in the payments landscape. These transformations have recently assumed major strategic importance for the monetary sovereignty of euro area countries, necessitating the mobilisation of all the European players concerned to respond in an appropriate and adequate manner. This involves developing secure, efficient public and private panEuropean payment solutions that contribute to European sovereignty over its payment system. As both supervisor and provider of central bank money services, we are determined to play our part.

## [Slide 11: Thank you for your attention]

1  Report on card schemes and processors",Denis Beau
https://www.bis.org/review/r250429i.htm,Darryl Chan: Global outlook - unlocking market potential through financial connectivity,"Opening remarks by Mr Darryl Chan, Deputy Chief Executive of the Hong Kong Monetary Authority, at MO·MENTS 2025, organised by Ant International, Hong Kong, 29 April 2025.",2025-04-29 00:00:00,"## Darryl Chan: Global outlook - unlocking market potential through financial connectivity

Opening remarks by Mr Darryl Chan, Deputy Chief Executive of the Hong Kong Monetary Authority, at MO·MENTS 2025, organised by Ant International, Hong Kong, 29 April 2025.

* * *

Mr Peng Yang (CEO, Ant International), distinguished guests, ladies and gentlemen:

Good morning.  To those of you who have travelled from far and wide, a very warm welcome to Hong Kong!

It gives me great pleasure to join you today for MO MENTS 2025 organised by Ant · International.  This is a great gathering of forward-looking, innovative people who bring and share remarkable expertise, experience and ideas to shape the future of payments.  Indeed, payments is shaping the future of finance by unlocking the many possibilities and immense potential.

The theme of this event is global connectivity.  In my discussion today, I will share with you the exciting journey Hong Kong is going through to promote connectivity in the payments space, both locally and globally.  Our objective is to achieve cheaper, faster, more transparent, and more accessible payment services.  Before going global, we started with local.  There were two starting points: stored value facilities (or SVF in short) and faster payment system, or FPS.

In 2015, the Hong Kong Monetary Authority (HKMA) introduced a regime to regulate SVF operators who take the form of e-wallets or prepaid cards.  Today we have a robust SVF ecosystem of 15 operators.  These operators serve a wide range of institutional and retail customers from mass market to more niched segments.  In less than a decade, the number of SVF accounts have doubled, from around 40 million in end 2016 to 80 million in end 2024; and the total number of transactions has grown by almost 60%, from around 15 million per day in Q4 2016 to 24 million in Q4 2024.

The FPS is another success story.  Launched in 2018, it is a platform that supports full connectivity among banks and SVFs.  It provides real-time, 24x7 interbank transfers with just a few clicks on mobile devices.  Since its launch, FPS has experienced phenomenal growth.  It now has 16.4 million registrations in total, on the back of a local population of 7.5 million.

The SVF and FPS, working individually or in combination, provide a powerful tool that facilitates cheaper, faster payments and enhances user experience.  They promote not just financial inclusion but also the growth of e-commerce.

The use of SVF and FPS goes beyond Hong Kong.  For example, Hong Kong e-wallets can now be used at over 30 million merchants in Mainland China.  Between 2021 and 2024, the number of cross-border transactions in the Mainland has grown by almost 50 times.

In the case of FPS, in 2023 the HKMA joined hands with the Bank of Thailand to link up FPS and Thailand's PromptPay, enabling cross-border QR payments between the two jurisdictions.  Meanwhile, we are working closely with the People's Bank of China to connect FPS with the Mainland's Internet Banking Payment System.  Our plan is to formally roll out the link by the middle of this year.  Looking ahead, we are also exploring the possibility of further expanding the linkage of FPS with other fast payment systems in the region.

There is enough to keep us busy just by enhancing the interoperability and connectivity of the existing payment systems and networks.  Yet we are keenly aware of the need to keep taps on developments that bring new dimensions to the form and functioning of money.  Here I am referring to the emergence of central bank digital currency or CBDC, tokenised bank deposits, and stablecoins.

In terms of CBDC, our flagship project mBridge achieved the minimum viable product stage in 2024.  It is a seamless cross-border wholesale CBDC platform co-founded by the HKMA and several other central banks.  Supported by a comprehensive legal framework and a fit-for-purpose governance structure, the platform seeks to address the typical pain points in cross-border payments by enhancing efficiency and reducing costs through central bank digital money.  Going forward, the project will continue to expand the participation of public and private institutions with a view to achieving greater network effect.

We also leverage on our CBDC research to support the development of the tokenisation market.  Last year, the HKMA initiated Project Ensemble and established an Architecture Community to develop common industry standards that support interoperability between CBDC, tokenised money and tokenised assets.  In August, we launched the Ensemble Sandbox, working with our securities regulator and the private sector to explore and experiment with tokenisation of financial assets and real-world assets.  Currently, the use cases cover liquidity management, supply chain finance, green finance, and investment funds. We are pleased that Ant Group is an active participant of the Sandbox.  Project Ensemble also goes beyond Hong Kong.  We are partnering with other central banks including Thailand, Brazil and France to explore cross-border tokenisation use cases.

On stablecoin, we are in the final stage of passing the law that empowers the HKMA to license and supervise stablecoin issuers in Hong Kong.  Together with other regulatory efforts governing the exchange, trading and custody of crypto assets, the stablecoin licensing regime is an important element to nurture a responsible and sustainable crypto ecosystem in Hong Kong.

Running in parallel to the legislative process, a stablecoin sandbox was set up last year to provide a controlled environment for potential issuers to test the various features and controls of their proposed schemes, as well as their use cases that cover supply chain, capital market activities, cross-border payments, and Web3.0 applications.  The sandbox also enables the HKMA team to gain insights that inform the formulation of specific regulatory requirements and ensure they are fit-for-purpose.

Ladies and gentlemen, the payments industry has seen exponential growth in recent years and we should expect the momentum to sustain-if we do the right things.  On this,

I don't think people in this room need to be convinced.  Let me share some thoughts on how to capture those opportunities.

First is to make good use of technology.  Technology is the key driver in this growth story and it keeps pushing the possibility frontier.  Just imagine the potential of combining the ever growing computing power, artificial intelligence (A.I.), machine learning and big data.

What technology can deliver is amazing:

- in terms of making payment so much easier through one-click payment or voiceautomated payments;
- in terms of capturing new customer demands such as buy-now-pay later or subscription payments; and
- in terms of tailoring payment service to the needs of individual customers.

What we need is to stretch our imagination and be innovative.

In the process, one thing we always need to bear in mind is the fundamental value proposition of payment services-how payments can be made easier, faster, cheaper, and equally important, more accessible.  It is therefore heartening that we have a session today dedicated to inclusive growth.

Technology is a double-edged sword.  One increasingly troubling aspect related to banking and payments is the prevalence of fraud and scams.  In Hong Kong, more than 44,000 deception cases were reported last year, an increase of close to 12% year-onyear.  In a way we are victim of our own success by making payments much faster and more convenient.  This has now become one of the top challenges facing financial regulators across jurisdictions.  If unchecked, it will seriously undermine public confidence in the safety of the banking and payments sector, not to mention the issue of how to apportion the loss.

The HKMA and the banking and payments industries have therefore been in close collaboration with law enforcement agencies to raise public awareness, share intelligence and good practices, and use Scameter data to alert potentially at-risk customers.  This is a never ending battle, and technology can help address the risk.  We look forward to payments operators leveraging A.I. and machine learning in fraud detection and prevention of money laundering.  We at the HKMA stand ready to work with the industry in testing and deploying such technology.

My second point is about collaboration.  Deglobalisation, reglobalisation, fragmentationit may take on different names or different forms, but one thing is for sure, the global economy is entering uncharted waters, in search of the more stable state when the dust gets a little settled.

For an industry like payments that thrives on interoperability and connectivity, this is not good news.  But the reshaping of the global economic order and the realignment of global supply chain can also mean new business opportunities for the payments sector:

- think about the possible shifts, within a relatively short timeframe, in trade patterns and trade flows;
- think about new relationships to be established between buyers and suppliers; and
- think about the new payment corridors across countries and regions that may involve more local currencies.

These changes call for more timely, in-depth collaboration between different players in the payments space to better support customers.  And as long as payments remains a regulated space, we also need cross-border collaboration in the official sector, either through system linkage or policy coordination, to make this happen.

If I may quickly turn to my third point, which is the significance of operational resilience.  With increased connectivity and collaboration, system outage or cyber incidents will have much pronounced consequences.  It is crucial therefore, that operational resilience is a core objective and KPI.  And always have a contingency plan ready should anything untoward happen.

Ladies and gentlemen, as we look to the future, we need to be resilient, be agile, embrace technology, and, most importantly, remain customer-centric.  This should be the winning formula to unlock market potentials and promote a more efficient and inclusive financial ecosystem.

With that, I wish the event a great success.  Thank you very much.",Darryl Chan
https://www.bis.org/review/r250428l.htm,Sanjay Malhotra: India - a partner in progress and prosperity,"Keynote address by Mr Sanjay Malhotra, Governor of the Reserve Bank of India, at the US-India Economic Forum, organised by the Confederation of Indian Industry (CII) and US India Strategic Partnership Forum (USISPF), Washington DC, 25 April 2025.",2025-04-25 00:00:00,"## India: A partner in progress and prosperity Keynote Address by Shri Sanjay Malhotra, Governor

## Reserve Bank of India

## at the US-India Economic Forum organised by the Confederation of Indian Industry (CII) and US India Strategic Partnership Forum (USISPF), Washington DC, April 25, 2025

I am very happy to be here amongst you in this historic location. I thank CII and USISPF for giving me this opportunity to be present here and share my thoughts. Both CII  and  USISPF  have  played  important  roles  in  fostering  partnerships  in  trade, technology, investment and innovation between India and USA. I compliment them for their  efforts  in  strengthening  the  bond  between  two  important  economies.  In  my remarks today, I wish to present my perspective on how India is poised to be a dynamic powerhouse of opportunities, innovation, and sustainable growth in the years to come.

2. The Indian economy has demonstrated remarkable resilience and dynamism. Over the past four years (2021-22 to 2024-25), it has recorded an average annual growth  rate  of  8.2  per  cent.  It  was  and  continues  to  be  the  fastest-growing  major economy in the world. This is a significant step up from the average growth rate of 6.6 per cent in the preceding decade (2010 to 2019).
3. Even this year, our growth is expected to remain robust at 6.5 per cent. This is despite  the  tremendous  increase  in  uncertainty  and  volatility  in  global  financial markets.  While  this  rate  is  lower  than  in  recent  years  and  falls  short  of  India's aspirations, it remains broadly in line with past trends and the highest among major economies.
4. No wonder, over the last ten years, we have leapfrogged from the tenth largest economy to the fifth. In terms of purchasing power parity, we are already third. Even nominally, we are poised to become the third largest economy shortly. We aspire to become Viksit Bharat, i.e., a developed economy by 2047, when we complete 100 years of our independence. While there is indeed a scope for India's growth trajectory to rise over the medium to long-term, I am sanguine of our continued success. There are a lot of positive factors that give me this confidence. Let me outline a few of these.

## Policy continuity and stability

5. First and foremost, we are all aware of the research that shows that political and  policy stability with certainty are prerequisites for long-term planning of investments to fuel growth in any economy. Our vibrant democracy has been able to ensure the same, especially since the initiation of economic reforms, despite change of political parties in government. Economic liberalisation focusing on market oriented policies has been a consistent theme across successive governments. While the pace and specific focus of reforms may have varied from time to time, the commitment to a more  market-oriented  economic  structure  has  not  changed.  In  a  phased  manner, almost  all  sectors  have  been  opened  up  to  100%  foreign  direct  investment  (FDI). Almost 90% of the FDI is now under the automatic route. In the recent years, we have introduced  a  series  of  liberalisation  measures  to  further  open  up  the  economy, particularly  in  key  sectors  such  as  Defence,  Insurance,  Petroleum  &amp;  Natural  Gas, Telecom, and Space 1 .

## Financial stability

6. Second,  while policy continuity and  stability are prerequisites, they in themselves do not ensure financial stability, which is the bedrock on which a strong economy is built. Financial stability is essential for businesses and people to make expenditure  and  investment  decisions  with  confidence.  India's  financial  sector  is strong and vibrant, efficiently catering to funding requirements of various economic agents.
7. Financial sector: The banking sector, which continues to meet the large funding requirements  of  the  economy,  has  demonstrated  resilience  with  healthy  balance sheet. The soundness of scheduled commercial banks (SCBs) 2  has been bolstered by strong profitability, lower non-performing assets and adequate capital and liquidity buffers. The health of the non-banking financial companies (NBFCs) sector is also robust. Bank credit growth although moderating in recent months, continues to be in

1  FDI in the Defence sector has been increased to 74 per cent under the automatic route for companies seeking  new  industrial  licenses.  The  Telecom  sector  now  permits  100  per  cent  FDI  through  the automatic route. Similarly, the FDI cap in the Insurance sector was raised from 49 per cent to 74 per cent, and as announced in the Union Budget 2025, it will further rise to 100 per cent - with the condition that the entire premium is invested within India.

2  The gross non-performing assets (GNPA) of scheduled commercial banks (SCBs) declined to a 12year low of 2.42 per cent and their capital to risk weighted assets (CRAR) at 16.5 per cent at the end of December 2024.

double digits (about 12 per cent) compared to an average of about 10.5 per cent in the last 10 years. We are committed to further enhancing the capacity, responsiveness, and resilience of the banking and non-banking financial sectors with emphasis on balancing regulation with efficiency and stability. While offering excellent opportunities  for  investment,  as  private  debt  to  GDP  is  still  on  the  lower  side,  the banking sector is poised to meet the investment needs of the society and industry.

8. Capital  markets: The  Indian  capital  markets  -  equity  and  debt  -  have increasingly deepened, providing avenues for market-based funding to businesses. India's capital markets have witnessed record participation from retail and institutional investors, channelizing savings into productive investments. Today, there are almost 106  million  unique  demat  accounts  and  more  than  54  million  unique  mutual  fund accounts.  The stock market has delivered returns at a staggering 11 per cent CAGR over  the  last  twenty  years.  With  more  than  500  listed  companies  having  a  market capitalisation of more than 1 billion USD each, the capital market offers enormous opportunities  to  participate  in  India's  growth  story.  Indian  financial  markets  offer seamless entry and exit for foreign investors, reflecting the maturity of its economy.
9. External  sector: India's  forex  market  has  the  required  depth  and  liquidity  to weather pressures, such as seen in the last few months.  India's current account deficit (1.3  per  cent  of  GDP  during  April-December  2024)  remains  eminently  within manageable limits, supported by robust services exports 3  and private remittances. Even in the recent volatile period, the Indian rupee (INR) has moved in an orderly manner  and  performed  relatively  better  compared  to  its  peers,  reflecting  strong macroeconomic fundamentals, adequate foreign exchange buffers and depth of our foreign exchange market.
10. Gross foreign direct investment (FDI) inflows to India increased to 75.1 billion USD in April-February 2024-25 from 65.2 billion USD during the same period a year ago, reflecting foreign investors continued confidence in the Indian economy. Net FDI inflows, however, moderated during this period due to higher repatriations and outward investment, which is a sign of a mature market where foreign investors can enter and

3  India's services exports recorded a growth of 13.1 per cent during 2024-25 (April-February), despite global economic order shrouded with heightened uncertainty, on the back of software and business exports. Global Capability Centres (GCC) have emerged a key driver of services exports over the last few years, with notable contribution to India's exports of software and business services. With more than 1,800 GCCs, the sector is expected to expand from $64.6 billion in 2024 to $110 billion by 2030.

exit smoothly, reflecting positively on the Indian economy. India's foreign exchange buffer continues to be strong. As on April 18, 2025, India's foreign exchange reserves at 686.1 billion USD covers over 11 months of import and 96 per cent of external debt outstanding at end-Dec 2024.

11. Price Stability: The role of price stability in fostering sustainable growth and economic resilience is paramount. Monetary policy in India has played a stabilising role, containing inflationary pressures through coordinated action with fiscal authorities. India adopted a flexible inflation targeting framework in 2016, which has significantly strengthened policy predictability: inflation levels and volatility have come down markedly, inflation expectations are better anchored, and the transmission of monetary policy has improved. In view of the benign inflation outlook and moderate growth, monetary policy has turned accommodative. We have reduced policy interest rates cumulatively by 50 bps this year since February 2025.

## Fiscal prudence and efficiency

12. Fiscal policies of the government have a critical role in catalysing and sustaining economic development by ensuring that savings and public funds are used efficiently in productive sectors. India continues to demonstrate fiscal prudence to foster faster and inclusive growth. Its approach to the pandemic is a case in point. India adopted a calibrated approach to the pandemic. Rather than front-loading stimulus packages, as most  countries  did,  India  adopted  a  flexible  and  agile  approach  to  support  the vulnerable sections of society and small firms. This enabled a resilient recovery as it was  followed up with enhanced  capital expenditure and concerted push to manufacturing.  The  government  is  now  committed  to  fiscal  consolidation  after  the pandemic-induced stimulus, maintaining a focus on reducing the fiscal deficit without compromising  on  expenditure  quality i.e .,  growth  inducing  spending.  The  central government's fiscal deficit to GDP ratio has declined from 9.2 per cent in 2020-21 to 4.8 per cent in 2024-25 and it is budgeted to moderate further to 4.4 per cent in 202526. This is in stark contrast to rising debt levels in some of the advanced economies. India's public debt to GDP ratio at 81.3 % (in 2024) is reasonable 4 , with the world's top  10  economies  other  than  Germany  having  higher  public  debt  than  India.  The

4  It is projected to decline to 75.8 percent in 2030 (IMF World Economic Outlook, April 2025).

progressive fiscal consolidation in India has enhanced space for the private sector to raise resources for investment.

13. Moreover, government spending is better targeted. The quality of expenditure has improved. The share of central government's capital expenditure as a percentage of GDP has surged from 1.7 per cent in 2019-20 to 3.1 per cent in 2024-25.  Including the capital grants in aid to the states, it has increased to 4.3 per cent in 2025-26. 5  The Union government's borrowings this year are budgeted to be lower than the effective capital expenditure, signifying their use for productive purposes which have a higher multiplier  effect.  Various  measures  have  been  taken  to  improve  outcomes  of government expenditure. One such example is the Direct Benefit Transfer, which is estimated  to  have  brought  savings  of  about  40  billion  USD  (until  March  2023) 6 . Digitalisation of various government programmes like public distribution scheme with Aadhar as the backbone have also resulted in huge savings.  Just in time flow of funds to  State  government  has  helped  the  Union  government  improve  its  cash  flow management.

## Thrust on infrastructure

14. Infrastructure  is  important  for  economic  development.  Over  the  last  several years,  the  country  led  by  the  central  government  has  invested  heavily  in  physical infrastructure.  It  is  also  incentivising  capital  expenditure  by  state  governments, especially in urban development, power and tourism. From highways to renewable energy grids to sea ports, airports and railways 7 , India is building the backbone to support  sustainable  and  inclusive  growth  for  decades  to  come.  This  is  not  only improving connectivity but also creating multiplier effects, stimulating demand across

5  4.3 per cent in 2025-26 (Budget Estimates).

6  https://dbtbharat.gov.in/static-page-content/spagecont?id=18

7 Infrastructure sector has received priority attention with National Infrastructure Pipeline (NIP), National Monetisation Pipeline (NMP) and PM Gati Shakti as the flagship programmes. The National Highway network expanded by 60 per cent to 1,46,145 km in 2024.   PM Gati Shakti is streamlining over ₹6.38 lakh crore worth of road projects for seamless logistics. Railways have launched 136 Vande Bharat trains  and  identified  1,337  stations  for  upgradation  under  the Amrit  Bharat  Station  Scheme.  Metro networks have grown from 248 km to 1,011 km across 20+ cities, while operational airports increased from  74  to  159.  India's  aviation  sector  has  witnessed  significant  expansion  with  545  routes operationalised under the Ude Desh ka Aam Nagrik (UDAN), aimed at improving air connectivity. With 158  operational Airports  and  the  construction  of  84  airports  over  the  last  decade,  India's  aviation network is rapidly evolving.

various sectors. This is also bringing down logistics cost for businesses considerably and improving productivity and competitiveness.

## Renewed focus on manufacturing

15. Manufacturing  is  key  to  inclusive  development  and  employment.  We  are focused on a Atmanirbhar Bharat, that is, a self-reliant India. India's manufacturing sector is  gaining  momentum and emerging as a potent sector for investment, with support from policy measures such as the Production-Linked Incentive (PLI). The PLI targets  14  diverse  sectors 8 .  This  is  showing  results.  Mobile  phone  exports  have increased by almost 10x 9  from 2018-19 to 2023-24. Similarly, exports of solar cells and modules have jumped 20x 10   in the same period.
16. Proactive  government  policies  also  present  unparalleled  opportunities  for investment  in  sunrise  sectors  such  as  space,  semiconductors,  renewable  energy, electric vehicles (EVs), etc. India is positioning itself as a critical link in global supply chains, encouraging local sourcing and manufacturing. It is also becoming a global SaaS innovation hub, especially in generative AI.

## Demographic Dividend

17. With one of the youngest populations having a median age of 28 years 11 , India is  poised  to  harness  the  demographic  dividend.  To  fully  exploit  the  potential, Government has launched a number of programmes for skilling, entrepreneurship and apprenticeship. This will enhance productivity and growth. Labour market conditions in India are showing positive trends 12 , particularly with the increasing participation of women in the workforce. The Labour Force Participation Rate (LFPR) has increased to 60.1% in 2023-24 from 57.9% in the previous year and 49.8 in 2017-18.

8   Mobile, pharmaceuticals, medical devices, automobile and its components, solar PV, electric vehicles, and advanced chemistry cell (ACC) batteries

9   1.6 billion USD in 2018-19 to 15.6 billion USD in 2023-24 and 18.3 billion USD in 2024-25 (Apr 2024 - Jan 2025).

10     From 0.1 billion USD in 2018-19 to 2 billion USD in 2023-24 (1 billion USD for the period April-

January 2024-25).

11   Nearly 65 per cent of India's population is under the age of 35, with a median age of just 28 years, significantly lower than the other major emerging economies.

12  The unemployment rate has improved to 3.2 per cent during 2023-24 from 6% in 2017-18. LFPR for women increased to 41.7 per cent from 23.3 per cent over the same period. Formal employment has further strengthened as evidenced by the Employees' Provident Fund Organisation (EPFO) payrolls data - net payroll additions rose by 4.2 per cent in Q3:2024-25.

## Innovation

To take further advantage of the huge human resources, we need to move further up the value chain.  It is encouraging to note that India is fast becoming a nation of job creators rather than job seekers. When I left college, getting a job in a MNC was the preferred choice. None took up the challenge of starting a venture of his own. In recent years, however, a large number of engineering and management graduates are taking to entrepreneurship and start-ups. As a result of the entrepreneurship culture that this generation is embracing, we have about 150,000 recognised start-ups. We have a vibrant start-up ecosystem with government support coming in through programmes like Start Up India, Digital India and Atal Innovation Mission. We are home to the third largest  number  of  unicorns,  some  of  which  are  in  high  tech  areas  like  Artificial Intelligence, fintech, and renewable energy, to name a few. In the Global Innovation Index, India has risen from a rank of 81 in 2015 to 39 in 2024. It is first among lower middle income countries.

## Continued focus on Ease of Doing Business and reforms

18. The growth is steered by robust economic reforms which have strengthened the foundations for long-term economic prosperity. These reforms include the flexible inflation targeting framework (FIT), the insolvency and bankruptcy code, goods and services tax (GST), consolidation of public sector banks, rationalisation and reduction in corporate tax. The Indian government has repealed about 1,500 obsolete laws. 180 provisions have been decriminalised and more are planned. These reforms along with conducive policy environment have improved efficiency 13 , productivity, and competitiveness across different sectors.
19. The government is committed to further reduce regulatory burden, as is evident from the budget announcement earlier this year to set up a high level committee for regulatory reforms in all non-financial sectors. She highlighted the role of reforms as the fuel for growth. The Union Budget aims to initiate transformative reforms across six domains - taxation, power sector, urban development, mining, financial sector and regulatory  reforms.  Moreover,  an  Investment  Friendliness  Index  of  States  will  be launched to further the spirit of competitive cooperative federalism. A comprehensive

13  In the Global Competitiveness Index 2024, India ranks 39th among 67 economies, reflecting improved business efficiency.

review of the Income Tax Act, 1961 to make it concise, lucid and easy, and thereby reduce disputes and litigations, is also underway. The Reserve Bank too is committed to ensure that our regulations balance the objectives of stability and efficiency. For this purpose,  the  regulatory  review  authority  (RRA)  will  further  expand,  deepen  and expedite the process of reviewing and rationalising regulations.

## Digitalisation

20. India's  digital  transformation,  recognised  worldwide,  has  emerged  as  a significant enabler of ease of doing business and ease of living and an important driver of economic growth and innovation. Conducive government and regulatory policies, increasing digital penetration, and a young and aspiring demography have fostered this vibrant ecosystem. The government has invested in a number of digital building blocks like the JAM trinity, UPI, GSTN, ONDC, Digilocker. Digitalisation is improving efficiency, raising productivity, enhancing formalisation and promoting inclusiveness in the economy. Take any domain of the government and one will find that digitalisation and  e-governance  have  enhanced  turnaround  times,  reduced  costs  and  improved customer satisfaction levels.
21. I was here last year in one of the sessions to speak about how, among other measures,  digitalisation  in  the  department  of  revenue  not  only  enhanced  the  tax buoyancy  but  also  improved  customer  experience  and  processing  of  returns.  Tax buoyancy for personal income tax in the last four years 14  was 2.1.  On an average, it now takes less than 10 days to process income tax returns in India: down from 93 days  in  2014.  In  contrast,  in  some  countries,  it  still  takes  months  to  get  their  tax refunds.
22. The Reserve Bank is also promoting and nurturing digitalisation and innovation. The  Unified  Payments  Interface  (UPI)  is  one  such  example.  Processing  about  18 billion transactions in a month, it is setting global benchmarks in seamless, secure, real-time  systems.  UPI  has  demonstrated  how  public  digital  infrastructure  can empower private sector innovation for promoting financial inclusion. Our encouragement and support extend beyond the payment space to the broader fintech ecosystem through various initiatives including the regulatory sandbox. The Unified Lending Interface (ULI) which is currently in a pilot phase has the potential to transform

14  Personal Income Tax Buoyancy: 2021-22: 2.29; 2022-23:1.42; 2023-24: 2.61; 2024-25: 1.94.

the lending space. The ULI is expected to transform lending and access to finance just as UPI did to payments.

## Conclusion

23. To  conclude,  India  continues  to  be  an  economy  supported  by  stability  monetary, financial and political; policy consistency and certainty; congenial business environment;  and  strong  macroeconomic  fundamentals.  At  a  time  when  many advanced economies are facing economic headwinds and a deteriorating economic outlook, India continues to offer strong growth and stability making it a natural choice for  investors  seeking  long  term  value  and  opportunity.  Furthermore,  our  strong domestic demand 15  and relatively lower dependence on exports cushions the Indian economy from external spillovers.
24. India offers a policy ecosystem that is transparent, rule-based, and forwardlooking - an ideal setting for long-term and productive investments. As the world's fastest-growing major economy, India is not just a destination for investment - it is a partner in prosperity. Together, we have the chance to shape the future - not only for India but for a better world. I invite you to be a part of this journey, to collaborate, innovate, and invest in India.

Thank You.

15  Domestic demand contributes about 90% to GDP whereas merchandise exports contribute about 12 % of GDP which is much lower compared to some of our peers.",Sanjay Malhotra
https://www.bis.org/review/r250527s.htm,Kazuo Ueda: Opening remarks - BOJ-IMES conference 2025,"Opening remarks by Mr Kazuo Ueda, Governor of the Bank of Japan, at the 2025 BOJ-IMES Conference ""New Challenges for Monetary Policy"", hosted by the Institute for Monetary and Economic Studies, Tokyo, 27 May 2025.",2025-05-27 00:00:00,"

Bank  of  Japan May  2 7 ,   2 0 2 5

## Opening Remarks at the 2025 BOJ-IMES Conference

## Hosted by the Institute for Monetary and Economic Studies, Bank of Japan

UEDA Kazuo Governor of the Bank of Japan

## I. Introduction

We are pleased to welcome all of you, distinguished speakers and guests, to the 2025 BOJIMES Conference. Thank you very much for your participation.

The first BOJ-IMES Conference was held in 1983, and while it was held biennially in some cases,  this  year  marks  the  30th  edition.  Since  its  inception,  the  conference  has  brought together participants from central banks, international institutions, and academia, providing a valuable platform for candid and active discussions on central banking in the context of the evolving global landscape.

The theme of this anniversary conference is ""New Challenges for Monetary Policy."" I have just  returned  from  the  G7  meeting  in  Canada,  where  many  of  my  colleagues  expressed confidence  in  the  progress  made  toward  fulfilling  their  mandates,  though  they  also acknowledged  new  challenges  such  as  heightened  trade  policy  uncertainty  and  dealing effectively with more frequent supply shocks.

To be honest, I felt slightly left out, though not for the first time, because here in Japan we are still grappling with the longstanding challenge of achieving our 2 percent inflation target in a sustainable manner, while being mindful of the implications of the zero lower bound of policy interest rates.

That said, the nature of our challenge has evolved considerably in recent years. We are now closer to the target than at any time during the last three decades, though we are not quite there. Our recent path has been affected in a unique way by supply shocks.

With that in mind, I would like to take a few minutes to reflect on how our experience has evolved and how it compares with that of other countries. I hope that this perspective will provide some useful background for the discussions to come during the conference.

## II. Challenges for the bank's monetary policy

## Inflation rates

Let me begin with the current state of consumer price inflation. Chart 1 shows the headline

inflation  rates  in  Japan,  the  euro  area  (EA),  and  the  United  States  (US).  Inflation  surged sharply in the EA and the US during 2021-23. As has been widely documented, a significant part of this surge was driven by supply shocks, which, while temporary by nature, proved to have more persistent effects than initially thought. The subsequent decline in inflation in these economies reflects both the unwinding of those shocks and the effects of monetary tightening by the ECB and the Fed.

In  contrast,  Japan  experienced  a  delayed  inflationary  response,  likely  due  to  inflation expectations having remained anchored at low levels. However, unlike in the EA and the US, inflation in Japan has not moderated significantly since peaking around the start of 2023. As we will see shortly, this period has coincided with a gradual rise in inflation expectations.

More recently, inflation in Japan has picked up again, driven primarily by increases in food prices,  most  notably  rice  prices.  Over  the  past  12  months,  rice  prices  have  surged  by  98 percent, and the price of non-fresh food has risen by 7.0 percent. 1

In sum, Japan has been hit by two substantial adverse supply shocks. As a result, its current inflation rate exceeds that of both the EA and the US.

## Policy rates

Turning now to policy rates, as shown in Chart 2, Japan's policy rate remains the lowest among the three economies, at 0.5 percent, markedly lower than in the US, where the rate is above 4 percent.

Chart 3 presents real policy rates, calculated as the nominal rate minus the headline inflation rate. In both the EA and the US, real rates are above zero, reflecting inflation rates above target.  In  contrast,  Japan's  real  policy  rate  remains  deeply  negative,  despite  a  similarly positive inflation gap from the inflation target. These broad features of inflation and interest rates are well known.

1   Non-fresh food accounts for 22.3 percent of the consumption basket.

The difficult question is: Why has the Bank of Japan maintained such an accommodative stance, even after three years of inflation exceeding 2 percent? The Bank has argued that underlying  inflation  remains  below  2  percent. This  naturally  leads  to  the  question:  What constitutes underlying inflation?

In principle, it refers to inflation excluding temporary factors. But in practice, there is no perfect data series that capture this concept. Instead, it must be judged from the totality of data and information on the economy, making communication with the public challenging. We have often faced harsh criticism for a perceived lack of clarity.

## Inflation expectations

One  variable  we  closely  monitor  to  assess  underlying  inflation  is  inflation  expectations. Although less elusive than the concept of underlying inflation, using inflation expectations also raises questions such as: Whose expectations matter most, and over what horizon?

In  Chart  4,  I  have  selected  commonly  used  measures  of  medium-  to  long-term  inflation expectations for Germany and the US, along with a weighted average of medium- to longterm expectations of various agents in Japan. 2

For Germany and the US, inflation expectations have remained remarkably stable within a 23  percent  range,  anchored  near  the  inflation  targets,  even  during  the  nearly  10  percent inflation episodes of 2022-2023. 3 This stability likely reflects the public's confidence in their central banks' ability to maintain price stability.

In  contrast,  Japan's  medium-  to  long-term  inflation  expectations  were  stuck  around  0-1 percent from the late 1990s until 2013, when large-scale monetary easing was introduced. Inflation expectations rose above 1 percent in 2014, but fell back to the earlier range by 2016 and  stayed  there  until  2021.  Shorter-horizon  expectations  remained  even  closer  to  zero, reflecting the deeply entrenched nature of Japan's zero-inflation equilibrium.

2   Regarding how the composite index of inflation expectations is constructed, see Osada, M. and T. Nakazawa, 2024, ""Assessing Measures of Inflation Expectations: A Term Structure and Forecasting Power Perspective,"" Bank of Japan Review Series , 2024-E-4.

3 The implications for the  US  economy  of  the  recent  sharp  rise  in  household  long-term  inflation expectations are yet to be determined.

Inflation expectations began to rise again in 2022, responding to global inflation dynamics and Japan's continued monetary easing. They now stand between 1.5-2.0 percent--the highest in 30 years, though still below the 2 percent target. In other words, we have managed to deanchor expectations from zero, but have yet to re-anchor them at 2 percent. This is why we are still maintaining an accommodative policy stance. 4

## Central bank communications

Communicating  this  policy  stance  has  been  difficult,  not  only  because  of  the  inherent ambiguity in the notion of underlying inflation, but also due to the persistent gap between headline and underlying inflation, as shown in Chart 5. (For the time being, we treat inflation expectations as a proxy for underlying inflation.) The gap corresponds to the direct effects of the supply shocks and other temporary forces affecting headline inflation. While central banks respond primarily to underlying inflation, the public tends to react to headline inflation. This divergence has always existed to some extent, but its recent magnitude and persistence have been particularly problematic in Japan.

Central banks generally adopt a ""look-through"" approach to supply shocks, so long as supply shocks are not expected to affect underlying inflation. We also largely ""looked through"" the first round of supply shocks, i.e., the inflation of imported goods in 2022-2023. However, Japan's recent experience is unique: while headline inflation rose, underlying inflation rose as well. Increases in underlying inflation were driven not only by economic recovery from the  pandemic and the tight labor  market,  but  also by  the  supply  shocks,  as  they  fed  into domestic prices and wages.

Now we are facing another round of supply shocks in the form of food price increases. Our baseline view is that the effects of food price inflation are expected to wane. However, given that underlying inflation is closer to 2 percent than a few years ago, we need to be careful about how food price inflation will impact underlying inflation.

4   Other proxies of underlying inflation exhibit mixed messages as to what the inflation level is. The rate of increase in base wages is around 3 percent, which is already at a level consistent with 2 percent inflation. Service price inflation has been subdued at 1.3 percent for all services, and at 1.5 percent for general services, as of April 2025.

As supply  shocks  become  more  frequent  globally,  the  relationship  between  headline  and underlying inflation will likely remain a major focal point for many central banks.

## Way forward

In light of growing uncertainties, particularly those related to trade policy, we have recently revised down our economic and inflation outlook.

However, we continue to expect underlying inflation to gradually move toward 2 percent over the second half of our forecast horizon. As discussed in our quarterly Outlook Report , there are  both  upside  and  downside  risks  around  the  baseline  scenario,  and  risks  to  economic activity and prices are skewed to the downside for fiscal 2025 and 2026. To the extent that incoming  data  allows  us  to  gain  more  confidence  in  the  baseline  scenario,  as  economic activity and prices improve, we will adjust the degree of monetary easing as needed to ensure the achievement of the sustainable 2 percent inflation target. Considering the extremely high uncertainties, it is important for us to judge whether the outlook will be realized, without any preconceptions.

## III. Concluding Remarks

In  opening  this  conference,  I  have  shared  some  thoughts  on  the  challenges  for  monetary policy in Japan. While many of these challenges are specific to Japan's unique situation, there are also areas of common concern where we can learn together: the concept and measurement of underlying inflation and inflation expectations, how best to communicate policies anchored in such concepts, and managing monetary policy under frequent supply shocks.

I hope the discussions over the course of this conference will shed light on these critical issues and offer valuable insights for the global central banking community.

## Headline Inflation

Quarterly

## Monthly





Note: Figures for Japan are CPI (all items, excluding the effects of the consumption tax hikes). Figures for the United States and the euro area are CPI (all items) and HICP (all items), respectively. Figures for 2025/Q2 are those for April. Sources: Ministry of Internal Affairs and Communications; Haver.

Chart 2

## Policy Rates



1

## Real Policy Rates



Note: Real policy rates are calculated as nominal policy rates (shown in Chart 2) minus headline inflation (shown in Chart 1). Sources: Bank of Japan; ECB; FRED; Haver; Ministry of Internal Affairs and Communications.

## Medium- to Long-term Inflation Expectations



Note: Figures for Japan are the composite index of inflation expectations (staff estimates, 10-year ahead). Figures for the United States and Germany are the forecasts in the Consensus Forecasts (6 to 10 years ahead).

Sources: Bloomberg; Consensus Economics Inc., ""Consensus Forecasts""; QUICK, ""QUICK Monthly Market Survey &lt;Bonds&gt;""; Bank of Japan.

Chart 4

3

## Japan's Inflation and Inflation Expectations



Note: The blue line represents CPI (all items, excluding the effects of the consumption tax hikes). The red line represents the composite index of inflation expectations (staff estimates, 10-year ahead).

Sources: Bloomberg; Consensus Economics Inc., ""Consensus Forecasts""; QUICK, ""QUICK Monthly Market Survey &lt;Bonds&gt;""; Bank of Japan; Ministry of Internal Affairs and Communications.

5",Kazuo Ueda
https://www.bis.org/review/r250527n.htm,Fatih Karahan: Recent economic and financial developments in Turkey,"Speech by Dr Fatih Karahan, Governor of the Central Bank of the Republic of Türkiye, at the briefing on the Inflation Report 2025-II, Istanbul, 22 May 2025.",2025-05-22 00:00:00,"## Fatih Karahan: Recent economic and financial developments in Turkey

Speech by Dr Fatih Karahan, Governor of the Central Bank of the Republic of Türkiye, at the briefing on the Inflation Report 2025-II, Istanbul , 22 May 2025.

* * *

Distinguished Members of the Press, Esteemed Guests,

Welcome to the briefing we hold to convey the main messages from our Inflation Report.

Today also marks the Financial Literacy Day.

We are working to increase knowledge and awareness about the importance of price stability and central banking. We contribute to financial literacy through platforms such as the CBRT Blog and ""Economics for All"".

Dear Guests,

We continue to gradually reap the outcomes of our tight monetary policy.

Coupled with the moderation in demand, the disinflation process has continued smoothly since June 2024. Now, the underlying inflation has declined. The fall in services inflation has become more pronounced, and goods inflation remains low.

On the other hand, this process has been accompanied by intensified uncertainties in the recent period. In response to the financial market developments in March and April, the CBRT proactively took the necessary measures. Going forward, we will maintain our decisive monetary policy stance and act to ensure continuation of the disinflation process.

In the following parts of my speech, I will provide detailed evaluations of these topics.

In my presentation, I will first share our assessments of the global economy, the macroeconomic outlook, and the steps we have taken in the face of recent developments. Later on, I will present our medium-term projections. After the presentation, our Deputy Governors and I will be answering your questions.

As usual, our Inflation Report includes boxes on prominent issues on the agenda as well as our thematic analyses.

Distinguished Guests,

I would like to continue my speech with the recent key global economic developments.

As you also know, we are witnessing important changes globally. The USA announced a wide range of tariffs on April 2. These tariffs, which were expected to be sectoral or regional before the announcement, turned out to involve more than 180 countries.

On the other hand, the global trade tensions have somewhat eased following the bilateral talks and postponements of tariffs in recent weeks.

Shaded areas in the chart show the episodes in the 2017-2020 period and 2025, in which tariffs were introduced and uncertainties escalated.

Despite the recent moderation, uncertainties surrounding global trade and economic policies remain elevated.

While these uncertainties increase downside risks to global growth, potential inflationary effects vary across countries.

With tariff measures of April 2, the VIX index measuring expected volatility rose sharply.

Then, the index declined progressively on the back of the later developments, converging to its average of the first quarter of 2025.

During this period, the US Dollar Index and global stock exchanges registered sharp changes in both directions.

Likewise, we also observed fluctuations in long-term bond yields, depending on the news flow.

These fluctuations in financial asset prices increase macrofinancial risks through the balance sheets.

Affected by the protectionist measures, growth expectations for all major economies, the USA in particular, have declined.

This also affects the external demand projections for our country negatively. Changes in the euro area growth have particular significance in this respect. For instance, the 2025 growth forecast for Germany, one of the most important trade partners of Türkiye, was revised from 0.7 percent in October to 0 percent in May.

In this context, our external demand indicator points to weakening global growth in 2025.

Driven by the expected weakening in global growth, energy commodity prices - crude oil and natural gas in particular - registered marked declines at first.

Then we saw an increase again in May. However, prices still remain below the levels in the previous reporting period.

Non-energy commodity prices, on the other hand, decreased at first but then posted a rise led by gold and other precious metal prices.

Similar to financial asset prices, commodity prices may also fluctuate depending on the news flow regarding global trade policies.

The effects of recent developments on inflation expectations, on the other hand, vary across countries.

Compared to the previous reporting period, we see a moderate increase in inflation expectations in 2025, particularly for advanced economies.

Accordingly, the rise in protectionism has a potential to decelerate the fall in global inflation.

On the other hand, depending on the impact of tariffs, we think that the policy trade-off may increase in economies that face a simultaneous deterioration in the inflation and growth outlook.

As shown in the charts, global markets have been pricing more rate cuts after the tariff measures.

However, central banks continue to emphasize that they will maintain caution in rate cuts.

To sum up before moving on to domestic developments, we still navigate through high levels of global uncertainty compared to the period before April the 2nd.

## Macroeconomic Outlook

Esteemed Guests,

Now, I would like to share with you our observations on domestic macroeconomic developments.

Our tight monetary policy has led to a notable balancing of demand composition in 2024. While the impact of domestic demand on growth has declined considerably, the positive impact of net exports stands out.

Meanwhile, economic activity recovered in the last quarter of the year.

In this period, household demand for goods remained robust due to the sales campaigns and the demand brought forward. Thus, private consumption increased on a quarterly basis.

Similarly, industrial production, which declined in the second and third quarters of 2024, started to increase again in the last quarter of the year.

This increase in industrial production continued in the first quarter of 2025, albeit at a slower pace.

The services production index recovered moderately in the last quarter of 2024 and then continued to increase in the first quarter of 2025.

The first-quarter increase is lower when sectors with a relatively weak relation to household demand, such as ""professional, scientific, and technical activities"" and ""information and communication,"" are excluded.

Capacity utilization rates of the manufacturing industry hover below the historical average.

Business Tendency Statistics data are in line with the moderation in domestic demand as a result of the monetary tightening. In fact, registered domestic market orders from manufacturing firms hovered close to the average of the previous periods.

On the labor market front, the headline unemployment rate continues to decline, while broadly-defined indicators are still at high levels.

Data on applications per job openings also points to an increase. This outlook is similar to that of past tightening periods.

When we consider a broader set of data together with the indicators I discussed, we assess that the tightness in the labor market is less than the unemployment rate implies.

In the first quarter, domestic demand remained above projections, though it lost momentum.

In this period, the increase in the retail sales volume index decelerated slightly compared to the previous quarter. In March, the index declined on a monthly basis, for the first time since May of last year.

Excluding jewelry, which serves as a store of value rather than consumption goods, the quarterly uptrend is more muted.

The chart on the right shows retail sales volume and expenditures on goods in household final consumption, both trend-adjusted.

Following the tightening, consumption of goods has fallen below the trend. There is also a loss of momentum in retail sales. This outlook is more evident when gold is excluded.

Card spending points to a slight increase in household consumption both in the first quarter and in April.

The deviations from the trend suggest that household consumption expenditures continue to lose momentum.

When we consider the data on demand conditions as a whole, we see that the disinflationary impact of demand conditions declined in the first quarter.

The average of the indicators based on alternative methods implies a negative level in the second half of 2024 and a near-neutral level in the first quarter of this year.

On the other hand, we expect demand conditions to align more closely with the disinflationary path as of the second quarter of the year due to the tightening in financial conditions and global developments.

I would like to reiterate that we will implement the necessary measures should the demand conditions adversely affect the disinflation process.

Current account balance recorded a significant improvement in line with the moderation in domestic demand.

The ratio of the current account deficit to GDP dropped to 0.8 percent in the last quarter of 2024.

As for 2025, downside risks to the current account deficit driven by energy and commodity prices and upside risks driven by global demand stand out.

Despite the weak global demand and the recent uncertainty regarding the trade policies, exports remained strong with a mild increase.

Meanwhile, imports increased due to the demand brought forward in response to the uncertainty.

We forecast that the current account deficit-to-GDP ratio in 2025 will be slightly higher than in 2024, but will remain below long-term averages.

Distinguished Participants,

Following this brief summary of domestic economic activity, I will now share our assessment on the inflation outlook.

As I noted at the beginning of my speech, the disinflation process that started in June 2024 continues uninterruptedly.

Consumer inflation decreased to 37.9 percent in April, a significant decline from its peak in May 2024. Leading data suggest that this trend is continuing in May as well.

Since the previous reporting period, inflation has been below the midpoint of our forecast range. This was mainly driven by the lower-than-expected course of domestic energy prices and the revision to the Health Practices CommuniquØ.

As you may know, underlying inflation indicators provide a better picture of the inflation trajectory.

Following a rise in January, the underlying inflation slowed significantly in the FebruaryMarch period. Then, we witnessed a partial increase in April due to the developments in financial markets.

Meanwhile, as can be seen in the chart, there is no significant change in the underlying inflation when analyzed using the three-month moving averages.

Here, I could add that the leading data for May point to a lower course in the underlying inflation compared to April.

Annual CPI inflation stands at 37.9 percent.

However, the average of the underlying inflation indicators and the median inflation, which has a relatively good forecasting performance, imply that the annualized underlying inflation is slightly above 30 percent. This suggests that disinflation will continue.

An analysis of consumer price developments by subgroups reveals that goods inflation remained relatively low.

Core goods inflation receded to 20 percent on an annual basis, driven by the mild course in the first quarter. Meanwhile, durable goods inflation, which is highly sensitive to financial conditions, stood at 19 percent.

We also observe a slowdown in services inflation, albeit more gradual than in goods inflation. In fact, services inflation has dropped by more than 40 points over the last year.

A closer look at services inflation reveals that items with a strong tendency to backward indexation, such as education and rent, pushed this group up.

Rent inflation displays significant inertia compared to the rest of the services group due to factors specific to the housing sector, such as earthquakes and urban renewal.

On the other hand, we observe a milder course in services subgroups, which are relatively more sensitive to demand conditions.

Another significant issue is the reflection of the recent financial market developments on prices.

On a monthly basis, core goods inflation picked up in April, while the services inflation posted a relatively limited increase.

In fact, after rising in the first quarter driven by items subject to time-dependent pricesetting, services inflation resumed its downtrend.

Meanwhile, price increases gained strength in some core goods items, like durable consumption goods, which are highly sensitive to exchange rate developments. We see that automobile prices stood out in this period due in part to the developments in the euro-dollar parity.

In fact, an analysis of inflation by imported inputs intensity reveals that inflation remained on a downtrend in items with relatively low import content, while price increases grew stronger in items with high import content in line with exchange rate developments.

However, registered and leading data indicate that exchange rate pass-through has waned compared to last year, and the recent exchange rate developments have had a limited impact on inflation.

We expect that demand conditions will be milder in the remainder of the year and limit the exchange rate pass-through amid declining KKM balance, tighter financial conditions, and global developments.

In addition, we consider that, if it remains, the recent decline in commodity prices amid concerns over global trade and growth may offset some of the exchange rate-driven upward impact.

International crude oil prices, in particular, fell significantly below the path projected in the previous Inflation Report, mitigating the impact of TRY-denominated import prices on headline inflation.

However, last month's agricultural frost across the country increased the upside risks to unprocessed food prices, particularly fruit prices, for the upcoming period.

The share of the 16 most affected products in the consumer basket is around 1.5 percent.

While registered and leading data suggest that there has not yet been a negative reflection in food prices, we consider that this development may exacerbate pressures on food inflation in the upcoming period.

As we have always emphasized, inflation expectations and the course of firms' price setting behavior are also of great importance during the disinflation process.

The chart shows the 12-month-ahead inflation expectations. As you know, following the policy measures and the decline in headline inflation, inflation expectations had declined significantly, albeit varying across sectors.

Due to the recent developments in financial markets, the improvement in inflation expectations paused in April.

As for year-end expectations, we see that market participants' expectations rose to 30 percent.

Against this background, inflation expectations continue to hover above our disinflation path. This requires us to maintain our tight and decisive monetary policy stance.

## Monetary Policy

Distinguished Participants,

In this part of my speech, I would like to talk about recent market developments and our monetary policy stance.

As you know, in the second half of March, we observed volatility in financial markets driven by risk aversion behavior.

Subsequently, the higher-than-expected additional customs tariffs announced on April 2 increased volatility in global markets.

From day one, we have taken steps to strengthen the tight monetary stance by assessing the likely risks to the inflation outlook posed by developments in financial markets.

We can break down these steps into three categories: those to increase the funding cost of the Turkish lira, liquidity steps and steps to limit the demand for foreign exchange.

Starting with the funding cost, we first held an Interim Meeting on March 20. At this meeting, we evaluated that the volatility might be temporary, so, we raised the Central Bank overnight lending rate from 44 percent to 46 percent. We suspended the oneweek repo auctions for a period of time.

After April 2, anticipating that the heightened volatility in global financial markets might pose persistent risks to the inflation outlook, we raised the policy rate from 42.5 percent to 46 percent at our meeting on April 17.

Moreover, we raised the overnight lending rate to 49 percent and the overnight borrowing rate to 44.5 percent.

As part of the liquidity management, we extended the maturities of Turkish lira deposit auctions. We also diversified our liquidity toolset and began to issue short-term liquidity bills.

Last but not least, we took steps to limit foreign exchange demand. Accordingly, we initiated Turkish lira-settled foreign exchange forward selling transactions at the CBRT.

Additionally, in the respective period, we conducted outright government domestic debt security purchases to prevent dollarization risks and interest rate volatilities that may arise from outflows from money market funds.

The volatility in financial markets in the second half of March caused impairment in financial assets, leading to outflows from Turkish lira assets.

After the period of high volatility, investors' preference to Turkish lira deposits continued, while the outflow was driven by money market funds.

Investors' risk perception regarding the Turkish lira recovered on the back of reduced volatility in the market and the measures we took. Since April, there has been a slight increase in money market funds.

Due to the volatility experienced in March, household demand for FX deposits increased in the week of March 21.

Following the interim MPC meeting decision dated 20 March, the demand became limited, and with the MPC meeting decision dated 17 April, the decrease in FX deposits became evident again.

To sum up, we took swift action to prevent the macroeconomic outlook from deteriorating due to financial market developments.

And thanks to these measures, the volatility in markets faded away.

We will continue to use all monetary policy instruments proactively and decisively to maintain the effective functioning of markets.

At this point, I would like to share the latest developments regarding the financial conditions that are critical to the transmission of our monetary policy.

On a compounded basis, deposit and commercial loan rates are around 60 percent, while consumer loan rates are approximately 70 percent.

The rate hikes we delivered were transmitted to deposit and loan pricing as we had expected.

Thanks to our monetary policy stance and the macroprudential framework, the level of deposit rates supports the transition to Turkish lira savings.

In April, consumer loans accelerated slightly due in part to seasonal effects.

Meanwhile, data for the first half of May suggest that loan growth started to slow again on a weekly basis.

It is crucial that consumer loans follow a course that supports the rebalancing in domestic demand.

Accordingly, we will continue to use all available tools to ensure that consumer loans remain on a moderate and controlled path.

Turkish lira commercial loan growth is in line with monthly growth limits and loan demand.

Meanwhile, to strengthen the monetary transmission mechanism, we lowered the monthly growth limit for FX loans to 0.5 percent in March and narrowed the scope of exemptions.

Since this adjustment, FX loan growth has remained on a path consistent with the targets.

On the deposits side, the sum of KKM accounts exceeded 140 billion dollars in August 2023. Currently, this balance is lower at 17 billion dollars.

In February, we terminated new openings and renewals for KKM accounts for legal entities.

We ensured a decline in the KKM balance without posing a risk to financial stability and by prioritizing Turkish lira deposits.

The decline in the KKM balance increases the share of Turkish lira deposits. Thus the monetary transmission mechanism is strengthened and risks to the central bank's balance sheet are mitigated.

Although the recent volatility in financial markets led to a decrease in the share of the Turkish lira, this decline was limited thanks to the steps taken and the trend has flattened out again since mid-April.

In fact, the share of Turkish lira deposits is 58 percent, close to its historical average. This level remains about the same when mutual funds are included.

Capital inflows to Türkiye diverged positively due to the disinflation process that became more discernible as of January.

However, due to the recent developments in financial markets and lower risk appetite, capital outflows from emerging economies and Türkiye became more pronounced.

After the second half of March, outflows from Türkiye accelerated in response to the announcement of measures on tariffs.

On the other hand, it is noteworthy that in recent weeks, capital outflows from emerging economies and Türkiye have stopped and there has been a moderate capital inflow to these economies.

Gross reserves, which were 124 billion dollars in March last year, reached 171 billion dollars in mid-March this year. Meanwhile, net reserves excluding swaps rose from minus 65 billion dollars to 66 billion dollars.

Having declined to 139 billion dollars on May 2, gross reserves picked up again, reaching 146 billion dollars on May 16. In this period, net reserves excluding swaps first fell to 14 billion dollars, then rose to 21 billion dollars.

## Medium-Term Projections

Distinguished Participants,

Following the economic outlook that I have summarized so far, which provides the background for our forecasts, I will share with you our medium-term projections.

As I mentioned at the beginning of my speech, the recent rise in protectionist tendencies in global trade has increased downside risks to the global growth outlook. Therefore, we have significantly revised down our assumptions for external demand, which we base our forecasts on.

In line with this outlook, we revised down our assumptions for crude oil and import prices for 2025 and 2026.

Due to unprocessed food inflation, we revised our food prices assumption for 2025 upwards.

Our medium-term forecasts are based on an outlook in which the tight monetary policy stance will be maintained until a significant and sustainable decline in inflation is achieved. We have also reflected in our forecasts that the coordination among economic policies will continue to increase.

Accordingly, same as the previous reporting period, we forecast inflation for end-2025 at 24 percent. We maintained our inflation forecast for end-2026 at 12 percent.

We target inflation to decrease to 8 percent in 2027 and stabilize at 5 percent in the medium term.

Towards the end of the year, the forecast range for 2025 would be expected to get mechanically narrower. However, due to the recent rise in uncertainties, we maintained our forecast range between 19 percent and 29 percent. The forecast range for end2026 corresponds to 6 percent and 18 percent.

In forecast revisions for 2025, the upside and downside effects counterbalanced each other.

One of the prominent factors here was the increase in our food price assumption driven by unprocessed food. This change raised our previous forecast by 0.5 points.

Although the output gap has recently been above our forecasts, the net impact of this deviation was limited to 0.3 points thanks to the tightening we have implemented.

Despite the decrease in the assumption for oil and import prices, the revision in the assumption for Turkish lira-denominated import prices due to developments in the basket exchange rate increased the inflation forecast by 0.1 points.

Initial conditions and the underlying trend also pushed the inflation forecast up by 0.1 points.

Meanwhile, due to the reduction in health examination co-payments in February, there was a downward revision of 1.0 point stemming from administered prices.

I would like to emphasize once again that our recent policies have prevented a serious deterioration in the inflation outlook.

We will continue to monitor all developments and factors concerning the revisions. During this process, continued moderation of domestic demand on the back of our monetary policy measures is one of the most critical issues for us. Meanwhile, taking into account the high level of uncertainties compared to the previous period, we will decisively adhere to our prudent and tight monetary policy stance.

We envisage that inflation will decline steadily in the period ahead on the back of our continued cautious stance. Our decisive monetary policy stance will continue to strengthen the disinflation process through moderation in domestic demand, the real appreciation in the Turkish lira and the improvement in inflation expectations.

As expectations return to a downward trend and the fall in services inflation sustained, the decline in the underlying inflation will continue in the remainder of 2025. Increased coordination among monetary and fiscal policies will also contribute to this process.

To sum up, we will decisively maintain our tight monetary policy stance until permanent decline in inflation is sustained and price stability is achieved.

We set the policy rate in a way to ensure the tightness required by the projected disinflation path. In this process, we take into account inflation realizations, underlying inflation and inflation expectations.

We adjust the policy rate prudently on a meeting-by-meeting basis with a focus on the inflation outlook. We will be always ready to tighten our monetary policy stance in case we foresee a significant and persistent deterioration in inflation.

## Distinguished Guests,

I would like to emphasize once again in this meeting that price stability is a prerequisite for sustainable growth and increased social welfare.

In the disinflation process, we will continue to do whatever it takes to bring inflation down in line with our intermediate targets.

## Distinguished Participants,

As I conclude my remarks, I would like to thank all of my colleagues who have contributed to the writing of the Report, primarily the members of the Monetary Policy Committee, the Chief Advisors and the staff of the Research and Monetary Policy Department, and everyone that have contributed to the press conference.

We can now move onto the Question and Answer session. Our Deputy Governors will also be happy to answer your questions.",Fatih Karahan
https://www.bis.org/review/r250526o.htm,Adriana D Kugler: Economic outlook,"Speech by Ms Adriana D Kugler, Member of the Board of Governors of the Federal Reserve System, at the International Economic Symposium, co-hosted by the National Association for Business Economics and the Central Bank of Ireland, Dublin, 12 May 2025.",2025-05-12 00:00:00,"## Adriana D Kugler: Economic outlook

Speech by Ms Adriana D Kugler, Member of the Board of Governors of the Federal Reserve System, at the International Economic Symposium, co-hosted by the National Association for Business Economics and the Central Bank of Ireland, Dublin, 12 May 2025.

* * *

Thank you, Reamonn. It is an honor and a privilege to be asked to speak in the beautiful country of Ireland and here at the Central Bank of Ireland. The histories of the U.S. and Ireland are intertwined. Our friendship is enduring, and our economies are closely tied. The Irish economy and the Bank stand as examples of the benefits of being open to international connections and the sharing of the best ideas and practices. I am delighted to have the opportunity to meet with my counterparts here and continue this great friendship. It is also wonderful to see many members of the National Association for Business Economics (NABE). NABE and its members have made many important contributions to the field of economics; as such, I always enjoy speaking to this esteemed group. 1

I am particularly delighted to contribute to this conference on trade, technology, and policy. As an academic, part of my research has investigated the link between trade and productivity. And in my current role, I have highlighted these themes in several of my recent speeches, including the role of recent advancements in technology, such as artificial intelligence, as well as the role of business formation in terms of boosting U.S. productivity over the past few years. 2   Today, I would like to focus my attention on the current outlook for the U.S. economy and how I am thinking about the path of monetary policy. Of course, given current developments, I will focus on the role played by trade policy and how it may affect the economy and productivity going forward.

While the latest data show a resilient economy, I expect growth this year to be slower than last. Labor market conditions have been mostly stable. Inflation remains above the Federal Open Market Committee's (FOMC) 2 percent target, and further progress on disinflation has been slow. Looking ahead, I am monitoring the effects of changing trade policies, as I see them as likely having a significant effect on the U.S. and global economies in the near future.

Trade policies are evolving and are likely to continue shifting, even as recently as this morning. Still, they appear likely to generate significant economic effects even if tariffs stay close to the currently announced levels, and the uncertainty associated with these tariffs has already generated effects on the economy through front-loading, sentiment, and expectations. Let me start by describing how I see current economic conditions.

## Economic Activity

Regarding overall economic activity, it is currently hard to judge the underlying pace of growth of the U.S. economy, as the gross domestic product (GDP) release for the first quarter showed strong evidence of front-loading of imports ahead of tariffs. GDP contracted at a 0.3 percent annual rate in the first quarter after expanding 2.5 percent

during 2024. However, the latest GDP figure likely overstates the deceleration in activity, as a 41.3 percent surge in imports apparently did not get fully picked up in the inventory data or other components of spending. The size of the swings in imports may make the measurement of activity more difficult.

It is helpful to look at private domestic final purchases (PDFP), a measure of demand in the private sector: It rose at a rate of 3 percent in the first quarter-similar to the pace recorded last year. Still, the strength in PDFP also likely reflects some pull-forward of purchases by businesses and consumers to get ahead of tariffs.

The Federal Reserve's April Beige Book and conversations with contacts also point toward front-loading in auto sales or other high-end goods. However, the Beige Book and various indicators of consumer and business confidence also point to a downbeat tone about underlying economic activity down the road. For instance, the Beige Book notes that several Districts see a deterioration in demand for travel and other nonfinancial services and indicates that businesses may put investments on hold moving forward. Several other economic indicators that I track suggest some signs of declining economic activity in the future. For instance, the Institute for Supply Management's manufacturing purchasing managers index for April shows that new orders have been declining since February.

## Labor Market

On the employment side of our mandate, conditions seem to be mostly stable. The most recent employment report showed that employers created 177,000 new jobs in April, in line with the average of the previous six months. The unemployment rate was 4.2 percent-still within the narrow and historically low range of 4 to 4.2 percent-where it has remained since May of 2024. In addition, the pace of layoffs remains modest. New applications for unemployment benefits have remained relatively stable at historically low levels. However, I am carefully watching other sources of data for any signs that the labor market could be shifting, given the broader uncertainty. Some forward-looking measures of layoffs have increased, such as the number of mentions of the word ""layoff"" in the Beige Book.

In terms of the demand for workers, the U.S. Labor Department's Job Openings and Labor Turnover Survey (JOLTS) showed that the vacancy rate-the number of vacant jobs as a percentage of total employment and vacant jobs-declined to 4.3 percent in March, the lowest in six months. The government data showed that the ratio of vacancies to the number of unemployed Americans was 1.0 in March, below its 2019 average of 1.2-also indicating the continuing easing of U.S. labor markets. Overall, job growth remains positive, and unemployment is still low, but I am watching a broad range of incoming readings carefully.

## Inflation

On the other side of our dual mandate is inflation. After two years of notable progress following U.S. inflation reaching its pandemic-era peak, progress on disinflation has slowed since last summer. Inflation remains somewhat above the FOMC's 2 percent goal. At the Fed, the inflation reading we track most closely is the personal consumption expenditures (PCE) price index. The March report, released on April 30, showed that

the 12-month change in the PCE price index was 2.3 percent; the core PCE price indexwhich excludes food and energy prices-rose 2.6 percent over the same period.

To help me judge the path of future inflation, I pay careful attention to two subcategories of the index. One is core goods prices, which exclude volatile food and energy prices. The second is nonhousing market-based services, which are based on transactions such as car maintenance and haircuts, not imputed prices. Goods inflation was negative for most of 2024-as was the norm for several years before the pandemic-but it was positive early this year. In contrast, nonhousing market services inflation stayed elevated through March, coming in at 3.4 percent. That category often provides a good signal of inflationary pressures across all nonhousing services. Looking ahead, I find it critical to monitor not only the most up-to-date data but also the changing economic policies around the world.

## Economic Effects of Global Policy Changes

To pause briefly, I would like to take a moment to discuss the Fed's structure. The Fed operates independently from the elected government in Washington. We make our policies to best achieve the goals given to us by Congress of maximum employment and price stability. As such, it is not my role to comment on the policies offered by the U. S. government or any government around the world. Rather, I make assessments of the likely effects of these policies, observe the behavior of the U.S. and world economies, and develop views about the best U.S. monetary policy to achieve our dual-mandate goals.

The U.S. is implementing policy changes in trade, immigration, fiscal policy, and regulation, and other economies are also changing their policies in the areas of trade and fiscal spending, particularly in defense, which could stimulate aggregate demand. But given that the most important changes have occurred so far in the area of trade policy, today I would like to discuss some important economic channels through which changes in tariffs may affect the U.S. economy.

Although higher tariffs on U.S. imported goods may affect our macroeconomy through many channels, some of which I will describe next, I think they will primarily act as a negative supply shock, raising prices and decreasing economic activity. While uncertainty remains about the ultimate level of the average tariff rate, currently announced average tariffs in the U.S. are still much higher than they were in the past many decades. If tariffs remain significantly larger relative to earlier in the year, the same is likely to be true for the economic effects, which will include higher inflation and slower growth.

How do I expect this to play out? In the near term, higher import costs will raise prices for both consumer goods and inputs to production. On their own, imported goods represent about 11 percent of U.S. GDP. However, given that several intermediate goods, such as aluminum and steel have been tariffed, and they affect costs in many sectors of the economy, prices of many goods and services are also likely to be affected. In addition, in conversations with business contacts, I have heard that firms are paying attention to the price sensitivity of consumers across the entire catalog of items sold and may spread price increases to less price-sensitive items to avoid reducing their profit margins. A Federal Reserve Bank of Dallas survey of Texas

business executives found that 55 percent of respondents expect to pass through most or all of the costs from higher tariffs to customers. Of those expecting to pass on costs, 3 26 percent expect to pass through the higher tariff cost upon the announcement of tariffs, and 64 percent expect this pass-through to occur within the first three months after the tariffs take effect. That would suggest that price increases may be observed soon.

Given these expected price increases, real incomes will fall, and operating costs will rise, which will lead consumers to demand fewer final goods and services and firms to demand fewer inputs. Ultimately, I see the U.S. as likely to experience lower growth and higher inflation. Over time, there could also be significant effects on productivity. As firms adjust to the higher input costs and lower demand, they may cut back on capital investment and shift to a less-efficient combination of inputs. Additionally, less-efficient domestic firms may increase their market share. 4   All of this may result in a decrease in potential output growth, lowering the underlying pace of economic activity in the U.S.

In addition to any direct effect from actual global policy changes, consumers, businesses, and market participants have reported high levels of uncertainty about which policies may be ultimately chosen and how long they will remain in place. In fact, in recent months, several measures of economic uncertainty have risen sharply.

There are several types of measures that quantify economic uncertainty, with two types having gained prominence among economists closely monitoring the U.S. economic outlook. 5   Some are based on financial market transactions, such as the Chicago Board Options Exchange's Volatility Index, popularly called the VIX. Others are based on the occurrence of certain keywords associated with the concept of uncertainty in newspapers of wide circulation, such as the economic policy uncertainty and trade policy uncertainty readings. 6   These measures of uncertainty have reached historical highs in recent months. Similarly, I also saw the word ""uncertainty"" being highly cited in the Beige Book I reviewed before the FOMC's policy meeting last week. 7

In times of heightened uncertainty, businesses may delay investment decisions, and consumers may increase precautionary savings and postpone discretionary purchases. Moreover, the economic research literature has documented that these decisions from businesses and consumers reverberate through the economy, pushing down aggregate demand. Firms, anticipating lower demand for their services and products, may post fewer job openings and cut back on investments to expand capacity. While the labor market has remained broadly resilient, the JOLTS data for March showed that job openings fell. Workers, therefore, may have a more difficult time finding employment, decreasing economy-wide income and aggregate demand. 8   This lower aggregate demand may then exert downward pressure on inflation, though probably not by enough to offset the effect from the adverse supply shock that I previously mentioned. For example, recent data show that prices for accommodations and airfares have fallen, consistent with an increasing number of anecdotal reports of weaker consumer demand for discretionary travel services.

I am also monitoring the effect of policy changes on another important channel: inflation expectations. For instance, consumers and businesses have reported tariffs as an important reason for having increased their near-term inflation expectations. Several

surveys, including those from the Conference Board and the Federal Reserve Banks of Atlanta and New York, have found that consumers and businesses expect higher inflation one year from now. Another closely watched survey from the University of Michigan showed that one-year-ahead inflation expectations in April were higher than in the pandemic period. This increase in short-run expectations may give businesses more leeway to raise prices.

Most longer-run measures, including those from the Philadelphia Fed's Survey of Professional Forecasters and the New York Fed's Survey of Consumer Expectations, show either stability or much smaller increases in inflation expectations, which does provide some comfort to me. Additionally, inflation compensation, which is based on yields from Treasury Inflation-Protected Securities, has increased only for short-term maturities, such as one year ahead, and has shown stability in maturities over the five years starting five years from now. Still, I have taken note of the increase in longer-term inflation expectations from the Michigan survey, which reached the highest level since June 1991. Given these developments, I am keeping a close watch on inflation, because as I have indicated in the past, I believe it is critical to keep long-term inflation expectations very well anchored at 2 percent.

Looking globally, international developments do not seem to be adding inflationary pressures to the U.S. Economic growth in most developed economies remains moderate, and domestic inflation in those countries has declined from elevated levels. In Europe, activity data point to modest growth as the region deals with headwinds stemming from past energy shocks and competitive pressures from elsewhere in the world. The New York Fed's Global Supply Chain Pressure Index has been relatively stable since the beginning of the year. Oil prices have declined significantly since January.

## Monetary Policy

I have discussed a lot of data and developments with you today. To summarize, the U. S. economy has remained resilient up until now, with a still-stable labor market. Meanwhile, the disinflationary process has slowed. This comes against a backdrop of heightened uncertainty as households, businesses, and, indeed, monetary policymakers process the changes to economic policies that are happening around the world. Going forward, I will continue to closely monitor the direct effects of global economic policies on prices and employment, as well as the indirect economic effects from uncertainty, inflation expectations, and productivity.

U.S. monetary policymakers on the FOMC met last week in Washington. At that meeting, the Committee voted to maintain its policy rate at 4-1/4 to 4-1/2 percent. Given the upside risks to inflation and given that I still view our policy stance as somewhat restrictive, I supported the decision to keep rates at that level. With inflation and employment potentially moving in opposite directions down the road, I will closely monitor developments as I consider the future path of policy.

I view our current stance of monetary policy as well positioned for any changes in the macroeconomic environment. I remain committed to achieving both of our dualmandate goals of maximum employment and stable prices.

Thank you for your attention today-and thank you very much for inviting me to speak to you here in Dublin. It has been an honor and a privilege. I look forward to your questions.

- 1  The views expressed here are my own and not necessarily those of my colleagues on the Federal Open Market Committee.
- 2  See Adriana D. Kugler (2025), "" Entrepreneurship and Aggregate Productivity,"" speech delivered at the 2025 Miami Economic Forum, Economic Club of Miami, Miami, Florida, February 7. Also, see Adriana D. Kugler (2024), ""A Year in Review: A Tale of Two Supply Shocks,"" speech delivered at the Detroit Economic Club, Detroit, Michigan, December 3.
- 3  The special questions included in the survey of Texas business executives is available on the Federal Reserve Bank of Dallas' website at  https://www.dallasfed.org /research/surveys/tbos/2025/2504q#tab-all.
- 4  For the effects of tariffs on productivity, see Marcela Eslava, John Haltiwanger, Adriana Kugler, and Maurice Kugler (2013), ""Trade and Market Selection: Evidence from Manufacturing Plants in Colombia,"" vol. 16 Review of Economic Dynamics, (January), pp. 135-58; Marcela Eslava, John Haltiwanger, Adriana Kugler, and Maurice Kugler (2004), ""The Effects of Structural Reforms on Productivity and Profitability Enhancing Reallocation: Evidence from Colombia,"" Journal of Development Economics, vol. 75 (December), pp. 333-71; and Davide Furceri, Swarnali A. Hannan, Jonathan D. Ostry, and Andrew K. Rose (2022), ""The Macroeconomy after Tariffs,"" World Bank vol. 36 (May), pp. 361-81. Economic Review,
- 5  For a literature review on quantifying uncertainty, see Danilo Cascaldi-Garcia, Cisil Sarisoy, Juan M. Londono, Bo Sun, Deepa D. Datta, Thiago Ferreira, Olesya Grishchenko, Mohammad R. Jahan-Parvar, Francesca Loria, Sai Ma, Marius Rodriguez, Ilknur Zer, and John Rogers (2023), ""What Is Certain about Uncertainty?"" vol. 61 (June), pp. 624-54. Journal of Economic Literature,
- 6  For more details on the economic policy uncertainty index, see Scott R. Baker, Nicholas Bloom, and Steven J. Davis (2016), ""Measuring Economic Policy Uncertainty,"" vol. 131 (November), pp. 1593-1636. For more details Quarterly Journal of Economics, on the trade policy uncertainty index, see Dario Caldara, Matteo Iacoviello, Patrick Molligo, Andrea Prestipino, and Andrea Raffo (2020), ""The Economic Effects of Trade Policy Uncertainty,"" vol. 109 (January), pp. 38-59. Journal of Monetary Economics,
- 7  The April 2025 Beige Book is available on the Federal Reserve Board's website at https://www.federalreserve.gov/monetarypolicy/beigebook202504-summary.htm.
- 8  For studies documenting how uncertainty shocks may act as adverse aggregate demand shocks, see Sylvain Leduc and Zheng Liu (2016), ""Uncertainty Shocks Are Aggregate Demand Shocks,"" vol. 82 (September), pp. Journal of Monetary Economics, 20-35, as well as Susanto Basu and Brent Bundick (2017), ""Uncertainty Shocks in a Model of Effective Demand,"" vol. 85 (May), pp. 937-58. Econometrica,",Adriana D Kugler
https://www.bis.org/review/r250527l.htm,"Asahi Noguchi: Economic activity, prices, and monetary policy in Japan","Speech by Mr Asahi Noguchi, Member of the Policy Board of the Bank of Japan, at a meeting with local leaders, Miyazaki, 22 May 2025.",2025-05-22 00:00:00,"

Bank  of  Japan

May  2 2 ,   2 0 2 5

## Economic Activity, Prices, and Monetary Policy in Japan

Speech at a Meeting with Local Leaders in Miyazaki

## NOGUCHI Asahi

Member of the Policy Board

## I. Economic Activity and Prices

## A. Economic Developments at Home and Abroad

I will begin my speech by talking about recent economic developments at home and abroad.

From the collapse of the bubble economy in the early 1990s until around 2021, when recovery from the COVID-19 pandemic began, Japan's economy was in a state of low nominal growth, with prices and wages tending to decline but barely rising. However, having been engulfed by the wave of global inflation, which emerged following the pandemic, Japan's inflation rate has remained above 2 percent since fiscal 2022. This high inflation has placed a heavy burden on households, forcing them to continue curbing consumption; on the other hand, however, it has played a significant role in pushing up wages that had been suppressed until recently. As a consequence, Japan's economy is currently shifting to a new phase where sustainable inflation is realized accompanied by wage increases. The keys to making this shift happen are  a  lasting momentum for wage increases and an intensified underlying  inflation trend resulting from the pass-through of higher wages to prices.

Currently, Japan's  economy is growing steadily,  with  the  exception  of rather unexpected factors such as the rise in prices of rice and fresh food causing upswings in overall inflation. While there remains weakness in domestic demand due to high prices, the annualized quarteron-quarter real GDP growth rate has continued to recover moderately, owing in part to the expansion in external demand reflecting the yen's depreciation (Chart 1). On the other hand, downside risks stemming from overseas economies have rapidly heightened as new U.S. tariff policies have been put forward with unexpected intensity by the second Trump administration. Accordingly, forecasts for overseas economic growth have been revised markedly downward (Chart 2).

Until recently, overseas economies came close to making a so-called soft landing, in the sense that the high inflation caused by the post-pandemic reopening of the economies began to subside without  an  accompanying  significant  rise  in  the  unemployment  rate  (Chart  3). Particularly  in  the  United  States, as inflation  was  contained gradually due  to  monetary tightening, the economy maintained high growth, partly because immigrant inflows helped increase labor supply and labor productivity rose. Currently, however, the United States is

facing an acute increase in concerns over so-called stagflation, where inflation resurges while the economy contracts (Chart 4). This is because the roll out of a vast array of tariffs will not only induce a decline in households' real income and consumption through domestic price hikes,  but will also  adversely  affect employment and investment. Moreover, while some import-competing industries that are shielded by tariffs could earn profits, growth in such industries will rather reduce the productivity of the overall economy as these industries are essentially relatively  low-productivity sectors  in  which  a  country  has  a  comparative disadvantage.

What is more concerning is the intensification of global trade friction reflecting the retaliatory tariffs already being applied in part. If the friction intensifies further, a bloc economy similar to  that in the  1930s could  reappear. In that  case, as happened back  then, economic deterioration will spread worldwide through a contraction in global trade. Such a contraction could ultimately result in all countries being losers, so to speak. According to the trade theory advanced by David Ricardo, free trade benefits all participating countries. Thus, if there is an unwinding of free trade, its benefits could be lost and all the countries involved will in turn incur losses.

## B. Price Developments

Turning to domestic price developments, Japan faced typical cost-push inflation in the postpandemic period, due to higher imported goods prices brought about by the impact of global inflation. This was especially evident in the fact that prices of energy and food accounted for a sizable contribution to rises in consumer prices. However, the rate of increase in imported goods  prices  became  moderate,  in  line  with  subsiding  global  inflation,  and the  pace  of increase in the prices of energy and food started to regain stability. As a result, the year-onyear rate of increase in the consumer price index (CPI) declined to the range of 2.0-2.5 percent around the middle of 2024 (Chart 5).

The CPI inflation rate has increased again since then, primarily due to the rise in food prices. One of the causes of the higher inflation is the resumption of the yen's depreciation after having temporarily appreciated sharply in summer 2024. The yen's depreciation has directly led to rises in the price of imported food and other items because the pass-through of higher

import prices, after having been weak, has intensified due to the entrenched inflationary trend. Another factor contributing to the rise in CPI inflation is price hikes of rice and fresh food resulting from supply shortages (Chart 6). I will later elaborate on how to assess price rises essentially stemming from these exogenous factors in the context of monetary policy.

## II. Monetary Policy

## A. Policy Interest Rate Adjustments

Next, I will discuss the Bank of Japan's policy conduct. Judging that achievement of the price stability target of 2 percent in a sustainable and stable manner was in sight, the Bank, at the Monetary Policy Meeting (MPM) held in March 2024, decided to discontinue its large-scale monetary easing policy and shift back  to  a  conventional  policy  framework,  in  which  the degree  of  monetary  accommodation  is  adjusted  by  guiding  the  money  market  rate. Subsequently, the Bank raised the target level of its policy interest rate, the uncollateralized overnight call rate, from ""around 0 to 0.1 percent"" to ""around 0.25 percent"" in July, followed by a hike to ""around 0.5 percent"" in January 2025 (Chart 7).

The reason behind the Bank's adjustments to its policy interest rate is to reach a situation in which inflation of around 2 percent is achieved in a stable manner, as smoothly as possible. Indeed, prices are on the rise, but in terms of the underlying trend in inflation -- which I will come back to later -- inflation has yet to reach the target point at this stage. Nevertheless, various indicators suggest steady progress in approaching that point. If the Bank were to avoid even  a  single  adjustment  to  the  policy  interest  rate  until  prices  reach  the  target  point, unexpectedly rapid adjustments -- which could potentially trigger economic shocks -- would be necessary when the target is actually met.

The Bank will adjust its policy interest rate while carefully monitoring developments in the underlying trend to make sure that inflation begins to stabilize at around 2 percent. In doing so, I believe it is crucial that the Bank take a measured, step-by-step approach as follows: the Bank takes sufficient time to examine the economic impact of the rate hike each time it raises the policy interest rate; the Bank then decides on the next policy rate hike after adequately assessing both upside and downside risks at each point in time. This implies that the terminal policy rate,  which corresponds to the peak level of the policy interest rate, should not be

determined in advance based on factors such as the estimated neutral interest rate. Given that Japan's economy has experienced deflationary trends over a few decades, these estimates are only  useful  in  providing  a  rough  figure  for  the  terminal  policy  rate, which can  only  be measured based on the economic situation at the time, particularly price developments.

## B. Balance-Sheet Adjustments

At the July 2024 MPM, the Bank decided on a plan for the reduction of its purchase amount of Japanese government bonds (JGBs) for the period until March 2026 (Chart 8). The Bank's purpose here is not to adjust monetary accommodation but to restore the JGB markets, which contracted due to the large-scale monetary easing policy. Unlike the period of scarce reserve balances prior to the global financial crisis in 2008, when the Bank guided and maintained the money  market  rate  as  the  policy  interest  rate,  exclusively  through  money  market operations, the Bank now sets the interest rate it applies to current account balances held by financial institutions at the Bank as the policy interest rate. Thus, monetary policy conduct is independent of the Bank's balance sheet. Even if the extent of the reduction in the Bank's JGB purchases leads to monetary tightening or easing, either should be adjusted by guiding the money market rate.

The Bank's JGB reduction plan decided in July 2024 can be said to be automatic in nature, in that the planned amount of monthly purchases of JGBs will be reduced by about 400 billion yen each calendar quarter, in principle. This means that, since the formation of long-term interest rates is left to the market, there will be no policy-driven changes in the Bank's JGB purchases.  On  the  other  hand,  the  plan  ensures  a  certain  degree  of  flexibility  in  market operations, in that it allows for making flexible changes to the amount of JGB purchases in the  case  of  sudden  market  swings.  The  reason  is that,  even  though  recovery  in  market functioning is important, this would be meaningless if it ended up fostering or disregarding market turmoil. However, such an unusual measure will only be implemented during times of severe market disruption. Yields on 10-year JGBs surged to nearly 1.6 percent in March 2025, but I personally believe that this rise -- albeit rapid -- cannot be regarded as disruptive, as  it  seems  to  have mainly reflected  expectations  among  market  participants  of  a  higher terminal policy rate, given Japan's higher-than-expected economic growth and upswings in prices.

At the June 2025 MPM, the Bank will conduct an interim assessment of the plan for the reduction of its purchase amount of JGBs decided in July 2024, and announce a new guideline for its purchases from April 2026. In my view, it is unnecessary at this point to make any major changes to the current plan; that said, the Bank will need to examine the reduction plan for April 2026 onward from a longer-term perspective. In any case, under the current policy regime, which is premised on ample reserve balances, the Bank is able to take sufficient time in reducing the size of the balance sheet. This is also desirable in terms of maintaining market stability.

## III. Toward Sustainable Achievement of the 2 Percent Price Stability Target

## A. Importance of Sustainable Price Stability

The Bank has continued with monetary easing in terms of maintaining sufficiently low real interest rates, aiming to achieve the price stability target of 2 percent in a sustainable and stable  manner.  Since  spring  2022,  the  year-on-year  rate of  change  in  Japan's  CPI  has consistently exceeded the target of 2 percent (Chart 5). The Bank has however continued with monetary easing based on the assessment that the rise in inflation may not necessarily be sustainable as it has basically been driven by exogenous factors, led by higher import prices. Due to the prolonged depreciation of the yen, the impact of higher import prices remains deeply entrenched. That said, unless there is a continuous depreciation of the yen, the impact will eventually dissipate. In addition, since around the end of 2024, the rise in prices of rice and fresh food has pushed up inflation substantially, but because this is attributable primarily to supply shortages, prices of these items should at least no longer continue to rise linearly, unless such shortages increase further.

The  rise  in  inflation  caused  by  these  exogenous  factors  is  essentially  temporary  and unsustainable, even if it lasts for a prolonged period. In contrast, if inflation is accompanied by a sustained increase in nominal wages, which represent labor compensation, it should certainly be sustainable. Labor is an essential factor of production for all goods and services. Therefore, if nominal wages as a representation of labor remuneration continue to rise, prices in many cases will also continue to rise. In fact, in many countries and periods, there has generally been a strong correlation between inflation and nominal wage growth (Chart 9).

This means that, for prices to keep rising moderately at a rate of around 2 percent, nominal wages should also keep rising at a rate consistent with those price rises.

Another way in which inflation and nominal wage growth are linked is that the latter requires the former. That is, for firms to raise wages, many goods and services inevitably require a pass-through of wage increases to their prices. In other words, if goods and services industries cannot raise prices, they will also find it difficult to raise wages. In Japan, nominal wages tended to fall and rarely rose from the late 1990s, when deflation became severe, until the early 2020s, when the pandemic struck (Chart 9). This suggests that firms continued to avoid raising wages to the extent possible for fear of a decline in sales and profits if they raised their selling prices. As a result, even when corporate profits grew, real wages in Japan did not rise sufficiently, and the labor share continued to decline as a trend (Charts 10 and 11).

One of the reasons the Bank has been conducting monetary policy with the aim of achieving sustained inflation of around 2 percent is that, when many firms are able to raise their selling prices by that amount, they will likely be able to raise wages accordingly. I believe that, if such wage increases bring about a rise in people's real wages owing to productivity growth, it can be said that a ""virtuous cycle between wages and prices"" has finally been achieved.

## B. Steady Strengthening of Inflation Accompanied by Wage Increases

Price stability as pursued by monetary policy is not a state where prices remain unchanged. If  the  prices  of  goods  and  services  do  not  change  at  all,  this  rather  indicates  market malfunctioning. Instead, monetary policy should aim to achieve a state in which the prices of many  goods  and  services  continue  to rise  moderately  accompanied  by  nominal  wage increases. This implies that the focus of monetary policy is not on temporary price changes caused by import or supply-side factors, but on the underlying trend in inflation, which is closely linked to developments in nominal wages.

To distinguish the underlying factors that have sustained the rise in CPI inflation since spring 2022, the Bank has used the concepts of the ""first force"" and the ""second force,"" with the former representing a temporary rise in inflationary pressure caused by exogenous factors, and the latter representing a more sustainable rise in inflationary pressure stemming from

wage increases. 1 Since the recent increase in CPI inflation is driven mostly by higher energy and food prices, the first force still accounts for a substantial part of the rise in the CPI; in fact, due to the rise in prices of rice and fresh food, the first force rather seems to have become stronger most recently. In other words, the strength of the second force, which corresponds to the underlying trend in inflation, is not yet sufficient. At least, the second force alone cannot explain the achievement of 2 percent inflation.

That said, the second force is also certainly gaining momentum. The main reason is that the nominal wage growth rate has continued to rise, reflecting the tight labor market conditions following  the  pandemic  and  the  results  of  the  annual  spring  labor-management  wage negotiations to date (Chart 12). While it is difficult to accurately determine the extent to which wage increases are pushing up inflation, it is possible to get a rough idea from, for example, developments in services prices, as I will elaborate shortly.

What is important for monetary policy decisions is the underlying trend in inflation, which excludes temporary price fluctuations. However, this does not mean that the first force can be disregarded, since it may also indirectly affect underlying inflation. When temporary price fluctuations affect nominal wages and even the underlying trend in inflation through a change in  people's  inflation  expectations,  this  is  generally  called  the  secondary  effect. A  typical example of this is the wage-price spiral that occurred in many advanced economies in the 1970s, a phenomenon where wages and prices continued to rise in unison.

Although the secondary effect is normally regarded as undesirable since it undermines price stability, there are some cases when such an effect becomes necessary. For instance, Japan's economy had long been mired in the ""zero norm"" with regard to prices and wages -- that is, a vicious cycle in which prices do not rise because wages do not rise, and vice versa. However, the indications of a virtuous cycle in which inflation rises accompanied by wage increases are finally beginning to emerge, and it is clear that the trigger for this was higher import prices caused by global inflation following the pandemic. In that sense, it can be considered that the first force has also had a certain impact on the underlying trend in inflation.

1 See Ueda, K., ""Japan's Economy and Monetary Policy,"" speech at a meeting with business leaders in Osaka, September 25, 2023.

## C. Price Changes of Goods and Services Due to Gaps in Productivity Growth

As these two forces illustrate, the attributes of each item driving what is generally referred to as a rise in inflation are often far from uniform. To start with, there are items such as energy and fresh food whose prices fluctuate substantially in the short term due to changes in supply conditions. While prices of these items have a large impact on people's livelihoods, they are not strongly linked to the underlying trend in inflation. What matters for the underlying trend in inflation is how the prices of goods and services excluding energy and fresh food develop. However, even between goods and services, there are extremely large differences in the way their prices change.

CPI developments in the United States, the United Kingdom, and other countries show that, except during periods such as the pandemic, it is mostly services prices that continue to rise, while goods prices on average do not rise as much (Chart 13). Looking around us, many industrial  products  have  clearly  become  more  affordable,  particularly  when  taking  into account improvements in product quality due to advances in technology. This implies that goods prices tend to be inexpensive relative to services prices, as goods are more likely to generate higher productivity growth than services. However, this gap in productivity growth between the two merely explains changes in their relative prices, not changes in their absolute prices such as a decline in goods prices or an increase in services prices. To explain this, it is necessary to consider how wages evolve due to increased productivity in the goods sector.

When  a  firm  or  an  industry  experiences  increased  productivity,  its  profits  temporarily increase; however, in a competitive market, these will eventually be used as a source for either wage hikes or price cuts. Which of the two will be chosen probably depends on economic and labor market conditions. If the firm or the industry maintains its selling prices and uses all of its profits to raise wages in order to secure and expand employment, the labor market will tighten and nominal wages will in turn rise. In that case, other firms or industries whose productivity has not increased will have no choice but to raise wages to retain workers and pass on higher wage costs to their selling prices. In other words, productivity growth in one sector, instead of causing price cuts in that sector, brings about nominal wage growth and

consequent price hikes in another sector without productivity growth. 2 CPI developments in the  United  States,  the  United  Kingdom, and  other  countries  suggest  that  this  is  indeed happening in goods and services prices.

## D. Importance of Services Prices in Assessing Underlying Inflation

In assessing the underlying trend in inflation, it is important to consider how steadily the prices of services continue to rise along with nominal wage increases, as services are subject to slow productivity growth, and labor remuneration accounts for a large share of total costs. A unique characteristic of price developments in Japan before the pandemic was the absence of price increases led by services prices. This can be attributed to the deeply-entrenched norm of prices falling but not increasing, which kept many firms, including those in the services industry,  from  raising  prices,  no  matter what the  circumstances.  In  such  an  economic environment,  firms  naturally  avoid  wage  hikes  as  much  as  possible,  because  such  hikes directly reduce profits due to increased labor remuneration.

For inflation to remain at an appropriate level, demand-side factors are certainly important. Since  many  services  are  non-tradable  goods  that  are  both  produced  and  consumed domestically, it can be said that a rise in services prices is a more direct indication of the strengthening of demand-pull inflation caused by an expansion in domestic demand.

If services prices are driven by nominal wages, how do these wages evolve? It is well known that nominal wages are generally downwardly rigid -- that is, they do rise, but they do not fall easily. However, in Japan, from the end of the 1990s, when deflation became full-fledged, wages tended to fall but not to rise easily. Nominal wages in many countries other than Japan have  continued  to  rise steadily, but the pace has been  relatively  moderate.  These

2 Economist Yoshihiro Takasuka applied this logic to inflation in Japan during the postwar highgrowth period and called it ""productivity gap inflation."" For details, see Takasuka Yoshihiro, Gendai nihon no bukka mondai [Price issues in modern Japan] (Tokyo: Shinhyoron Publishing Inc., 1972), ch. 2. However, it should be noted that when different sectors experience productivity growth at different rates, the extent to which general prices rise depends on nominal wage growth rate overall, which is likely subject to economic conditions and other factors; therefore, inflation cannot be explained by productivity gaps alone.

developments suggest that there is a certain degree of rigidity or stickiness in nominal wages, both upward and downward.

This stickiness in nominal wages is perhaps related to the peculiarities of the labor market, in which matching jobseekers to jobs is particularly costly. Apart from part-time work and other non-regular forms of employment, considerable costs and time are required for jobseekers to find a job that meets their criteria and for firms to search for necessary human resources. Moreover,  such  costs  are  sunk  costs  that  cannot  be  recovered. 3 As  both  employers  and employees try to avoid repeatedly incurring these costs, employment relationships generally tend to be continuous; Japan's lifetime employment system is a prime example of such longterm employment practices. This implies that in the labor market, the mechanism whereby supply and demand are adjusted through changes in wages does not function well, or only sluggishly. The same can be said of housing rent, which is as sticky as wages.

A rise in underlying inflation can only be achieved when these sticky nominal wages continue to  rise  at  an  appropriate  rate  reflecting  improvements  in  economic  conditions,  and accordingly when services prices  in particular continue to rise  sufficiently. As mentioned earlier,  services price  inflation  usually  exceeds  goods  price  inflation  to  the  extent  that productivity growth in services falls short of that in goods. Therefore, in order for general prices to keep rising by about 2 percent, the rate of increase in services prices likely needs to consistently exceed 2 percent. Examining the extent to which this condition is currently being met in Japan, I find that the increase in the services producer price index (SPPI), for example, exceeded 2 percent in the second half of 2023, and began to remain stable at around 3 percent from the middle of 2024 (Chart 14). This trend of rising inflation is particularly pronounced in services with a high labor cost ratio, where labor remuneration accounts for a large share of total costs.

On the other hand, although CPI inflation for services has risen post-pandemic, it is still far from remaining firmly above 2 percent (Chart 15). Moreover, when separating CPI items by

3 American economist Arthur M. Okun has likened these costs inherent in the labor market to tolls. See Arthur M. Okun, Prices and Quantities: A Macroeconomic Analysis (The Brookings Institution, 1981), ch. 2.

labor cost ratio, what stands out is the high rate of inflation for items with a low labor cost ratio (Chart 16). This indicates that import price increases have a much greater impact on the overall CPI than wage increases. It also suggests that firms have made progress in passing on wage increases to producer prices, but the pass-through to consumer prices has yet to be fully realized.

## E. The Need to Achieve a Virtuous Cycle, and Necessary Policy Responses

Until recently, Japan's economy remained in a situation in which neither prices nor wages rose,  and  therefore  people's  real  wages  did  not  rise  either.  In  this  situation,  despite  the continuous launch of new and upgraded products, people did not become better off because nominal  wages  did  not  rise  in  a  way  that  reflected  improved  productivity.  In  a  normal, growing economy, when productivity improves in a certain sector, this causes nominal wages to rise at a rate exceeding the inflation rate, which in turn spreads throughout the economy and  benefits  those  working  in  other  sectors  where  productivity  is  less  likely  to  improve. However, nominal wages in Japan had barely risen, and people had therefore been unable to benefit from improved productivity.

What can be said is that, in order for people to enjoy the fruits of economic growth, nominal wages need to rise at a rate exceeding the inflation rate; in other words, real wages must rise. On this point, Japan's real wage growth is finally starting to turn positive (Chart 10). For real wages to increase, it is necessary that the CPI inflation rate decline with a sustained uptrend in nominal wages. I would like to note a few points that need to be kept in mind in this context.

First, in terms of nominal wages, what is needed at this stage is not for momentum for wage increases to strengthen further, but for such upward momentum to become entrenched by trickling  down  to  small  and  medium-sized  firms  and  regional  economies. Assuming  that Japan's labor productivity growth rate remains at around 1 percent, if nominal wage growth takes hold at a rate above 3 percent, it can be judged to have reached a level close to that consistent with the 2 percent price stability target. Second, in terms of prices, with overall CPI inflation declining due to weakening of the ""first force,"" the ""second force"" conversely needs to strengthen. More specifically, while the impact of higher import prices and supply shortages of rice and fresh food wanes, services prices need to rise at a rate above 2 percent,

and this, in my view, is an important condition for sustainable and stable achievement of 2 percent inflation.

Taking  these  points  into  account,  the  Bank's  basic  stance  on  its  future  monetary  policy conduct should be to make careful policy adjustments while closely monitoring developments in the economic situation, including upside and downside risks. This is because, unlike in the world of abstract economic models, there are various frictions and resulting stickiness in the real economy, which means that, even when causal economic forces are at work, it takes considerable time for their effects to materialize. Nevertheless, the path of Japan's economy following the pandemic shows that such forces are certainly at work. In that sense, I believe that the necessary approach to the future conduct of monetary policy is cautious optimism, keeping  a  firm  eye  on  growing  overseas  risks  while  calmly  assessing  how  the  situation unfolds.

Thank you.



## Economic Activity, Prices, and Monetary Policy in Japan

Speech at a Meeting with Local Leaders in Miyazaki

May 22, 2025

## NOGUCHI Asahi

Member of the Policy Board Bank of Japan

Real GDP

Annualized Quarterly Growth Rate



Source: Cabinet Office.

Quarter-on-Quarter Changes s.a., q/q % chg.

|                                | 2024      | 2024      | 2024      | 2024      | 2025      |
|--------------------------------|-----------|-----------|-----------|-----------|-----------|
|                                | Jan.-Mar. | Apr.-Jun. | Jul.-Sep. | Oct.-Dec. | Jan.-Mar. |
| GDP                            | -0.4      | 0.9       | 0.2       | 0.6       | -0.2      |
| Domestic demand                | -0.5      | 1.2       | 0.5       | -0.1      | 0.6       |
| Private demand                 | -0.6      | 1.0       | 0.7       | -0.2      | 0.9       |
| Private consumption            | -0.6      | 0.8       | 0.7       | 0.1       | 0.0       |
| Private residential investment | -3.2      | 1.2       | 0.7       | -0.2      | 1.2       |
| Private non-resi. investment   | -1.1      | 1.4       | 0.1       | 0.8       | 1.4       |
| Public demand                  | -0.2      | 1.8       | -0.1      | 0.0       | 0.0       |
| Exports of goods & services    | -3.6      | 1.5       | 1.2       | 1.7       | -0.6      |
| Imports of goods& services     | -3.7      | 2.7       | 2.2       | -1.4      | 2.9       |

Chart 1

## IMF Forecasts for Global Growth

## Global Growth Rate

Major Economies' Growth Rates



Note: Figures are as of April 2025.

Source: IMF.

y/y % chg.

Chart 3

|                                          |        | CY2025 [Forecast]   | CY2025 [Forecast]   | CY2026 [Forecast]   |
|------------------------------------------|--------|---------------------|---------------------|---------------------|
|                                          | CY2024 | As of Jan. 2025     | As of Apr. 2025     |                     |
| World                                    | 3.3    | 3.3                 | 2.8                 | 3.0                 |
| Advanced economies                       | 1.8    | 1.9                 | 1.4                 | 1.5                 |
| United States                            | 2.8    | 2.7                 | 1.8                 | 1.7                 |
| Euro area                                | 0.9    | 1.0                 | 0.8                 | 1.2                 |
| United Kingdom                           | 1.1    | 1.6                 | 1.1                 | 1.4                 |
| Japan                                    | 0.1    | 1.1                 | 0.6                 | 0.6                 |
| Emerging market and developing economies | 4.3    | 4.2                 | 3.7                 | 3.9                 |
| China                                    | 5.0    | 4.6                 | 4.0                 | 4.0                 |
| India                                    | 6.5    | 6.5                 | 6.2                 | 6.3                 |
| ASEAN-5                                  | 4.6    | 4.6                 | 4.0                 | 3.9                 |

## Overseas Economies

CPI

## Unemployment Rate



Note: Figures for the CPI are for all items.

Sources: BLS; Eurostat; NBS; ONS.



## U.S. Consumer Sentiment and Inflation Expectations



Source: University of Michigan.

Chart 5

## Consumer Prices



Source: Ministry of Internal Affairs and Communications.

## Indices of CPI Items



Source: Ministry of Internal Affairs and Communications.

## Decision at the January 2025 MPM

Japan's economic activity and prices have been developing generally in line with the Bank's outlook , and the likelihood of realizing the outlook has been rising .

Medians of the Policy Board Members' Forecasts (y/y % chg.)

|                                            | Fiscal 2024   | Fiscal 2025   | Fiscal 2026   |
|--------------------------------------------|---------------|---------------|---------------|
| Real GDP                                   | 0.5 (-0.1)    | 1.1 (-)       | 1.0 (-)       |
| CPI (all items less fresh food)            | 2.7 (+0.2)    | 2.4 (+0.5)    | 2.0 (+0.1)    |
| CPI (all items less fresh food and energy) | 2.2 (+0.2)    | 2.1 (+0.2)    | 2.1 (-)       |

Note: Figures in parentheses indicate changes from the October 2024 Outlook Report.



Adjusting the degree of monetary accommodation from the perspective of sustainable and stable achievement of the price stability target of 2 percent

## Short-term interest rate: raised to ""around 0.5%""

(uncollateralized overnight call rate)

(previously ""around 0.25%"")

-  Real interest rates are expected to remain significantly negative, and accommodative financial conditions will continue to firmly support economic activity .
-  If the outlook presented in the January Outlook Report will be realized, the Bank will accordingly continue to raise the policy interest rate and adjust the degree of monetary accommodation.

## Chart 7

## Decision at the July 2024 MPM: Plan for the Reduction of the Purchase Amount of JGBs

## The concept of the plan for the reduction until March 2026

1. Long-term interest rates: to be formed in financial markets in principle
2. JGB purchases: appropriate for the Bank to reduce its purchase amount of JGBs in a predictable manner, while allowing enough flexibility to support stability in the JGB markets

## Reduction in a Predictable Manner





## Allowing Enough Flexibility

1. The Bank will conduct an interim assessment of the plan at the June 2025 MPM .
2. In the case of a rapid rise in long-term interest rates, the Bank will make nimble responses by, for example, increasing the amount of JGB purchases.
3. The Bank is prepared to amend the plan at the MPMs, if deemed necessary.

Chart 9

## Nominal Wages and CPI



Note: Figures for the CPI are for all items.

Sources: BLS; Ministry of Health, Labour and Welfare; Ministry of Internal Affairs and Communications.

## Nominal and Real Wages



Note: Figures for the CPI are for all items excluding imputed rent.

Sources: Ministry of Health, Labour and Welfare; Ministry of Internal Affairs and Communications.

## Labor Share



Notes: Large firms are corporations with capital of 1 billion yen or more.

Small firms are corporations with capital of 10 million yen or more but less than 100 million yen.

Source: Ministry of Finance.

Chart 11

## Wage Growth

Notes: 1. Figures for scheduled cash earnings are for establishments with 5 or more full-time employees.



2. Figures for base pay and total wage increases from 1994 to 2013 are those published by the Central Labour Relations Commission, while those from 2014 to 2025 are figures released by Rengo.

Sources: Central Labour Relations Commission; Japanese Trade Union Confederation (Rengo); Ministry of Health, Labour and Welfare.

## Consumer Prices, Services Prices, and Goods Prices

## United States

United Kingdom

Canada

Sources: BLS; ONS; Statistics Canada.



Chart 13





## Services Producer Prices



Note: Figures exclude the effects of consumption tax hikes.

Source: Bank of Japan.

## CPI for General Services



Note: Figures are Bank staff estimates and exclude mobile phone charges and the effects of the consumption tax hike, free education policies, and travel subsidy programs.

Source: Ministry of Internal Affairs and Communications.

Chart 15

## CPI by Labor Cost Ratio

Notes: 1. Figures are based on Bank staff calculations using the CPI excluding fresh food, energy, imputed rent, and the effects of temporary factors.



2. CPI items are matched to the items in the 2015 Input-Output Tables for Japan and grouped in terms of the share of ""wages and salaries"" and other labor costs in the domestic output of those items. Figures for items with a high (low) labor cost ratio are the weighted averages of the items that fall into the top (bottom) 25 percent.

Source: Ministry of Internal Affairs and Communications.",Asahi Noguchi
https://www.bis.org/review/r250527k.htm,Gediminas Šimkus: Unlocking the power of motivation in Anti-Money Laundering,"Opening remarks by Mr Gediminas Šimkus, Chairman of the Board of the Bank of Lithuania, at the Annual Anti-Money Laundering Center Conference 2025, Vilnius, 20 May 2025.",2025-05-20 00:00:00,"## Gediminas Šimkus: Unlocking the power of motivation in Anti-Money Laundering

Opening remarks by Mr Gediminas Šimkus, Chairman of the Board of the Bank of Lithuania, at the Annual Anti-Money Laundering Center Conference 2025, Vilnius, 20 May 2025.

* * *

Dear Vice-Minister of Finance, distinguished guests, dear colleagues,

Before I begin, let me express my sincere gratitude to the Center of Excellence in AntiMoney Laundering for hosting us today. Thank you. In just a few short years, this gathering has become a vital space for reflection on where we stand today and where we are headed.

Time and again in our previous gatherings, we went beyond the surface of illicit finance. And discussed about the importance of cooperation to address money laundering risks.

This year we are going even further beyond the surface. Because true motivation stems from fully understanding the mission.

A - M - L. We all know what these letters stand for. Today, I would like to invite you to uncover additional layers of meaning. As three qualities that define an effective and principled response to financial crime.

A is adequacy. M is mobilisation. And, leadership.

Or AML, in short.

Let me now unlock these qualities.

First, on adequacy. I will repeat what I emphasized on our previous gatherings, standing exactly at this tribune: Lietuvos bankas is loving and therefore, strict supervisor. Adequacy and a risk-balanced approach was. And remains. The essence of our supervisory strategy to fight illicit financing.

Money laundering risk management does not mean de-risking. The focus on the consumer - in terms of accessibility, quality and safety of financial services - has to remain at the heart of business for each and every financial institution. True AML effectiveness lies not in narrowing access. But in strengthening vigilance of both rules and the common sense. In truly knowing your customer. Not rejecting them preemptively.

Of course, our job is to think about risks. And to be attentive to them.

The risk of fraud remains relevant. Financial institutions have to implement adequate controls to identify and prevent fraud cases.

Mobilisation. Of an international as well national effort. That is the second point I want to make.

Previous year. For the first time. EU level regulation harmonising anti-money laundering rules were adopted. You, as community of AML professionals, are well aware that criminal activities go beyond states' borders. So, it is very important to have clear framework aimed at eliminating regulatory arbitrage.

To coordinate the enforcement of EU level regulation, a new European Authority is set up. AMLA.

I believe AMLA could be a game-changer. Because it offers a unique opportunity to eliminate the fragmentation of AML oversight and enforcement across the EU and effectively address illicit cross border financial flows.

A push toward European approach doesn't mean local authorities are getting less important. To the contrary. AMLA opens up the path for nationally-grown skills and competences to be transmitted to the EU level.

I want to say that for AMLA to be impactful, cooperation is key. The agency must be rooted in strong, operational partnerships with those who understand the national context and risks best.

These people are YOU.

The 3rd national money laundering and terrorist financing risk assessment completed last year was an important milestone. It deepened the knowledge of nationally faced risks. The assessment was very important for financial sector to identify both their own risks and those of their partners/clients.

To understand and prevent the risks we need to work in common. Using this opportunity, I would like to thank the State Tax Inspectorate, Financial Crimes Investigation Service, vigilant markets participants, Lithuanian Police, my colleagues at Lietuvos bankas, Center of Excellence in Anti-Money Laundering. You are an essential part of unified effort to stand firm against illegal activities.

Dear colleagues,

Leadership is the third quality that defines an effective and principled response to financial crime.

Leadership is not defined by title. Rank. Or position. The leader is an analyst who carefully reviews suspicious transactions. The leader is a compliance officer who challenges inconsistencies.

Leadership lives in the choices we make when no one is watching. In the consistency, integrity, and devotion with which we perform our duties.

True leadership is not defined by what you do. But by how.

But how to make the leadership continuous? How to find motivation in everyday routine? When daily tasks are often repetitive. And even good results not always come with applause.

I invite you to unlock the power of motivation from the very essence of the work that you do. Because it is both distinct and special.

In most areas of finance, professionals are tasked with managing credit, liquidity or market risk. Measuring it. Pricing it. Deciding what level of exposure is acceptable.

The risk that YOU face is fundamentally different. It cannot be priced. It cannot be accepted. It must be fought - relentlessly.

Because it is not just a risk to financial integrity. Money laundering is a threat to justice and to security. Your job is not about constructing a financial portfolio which minimizes expected credit loss.

You are protectors of financial system. You are generators of trust. Ultimately, you are guardians of the values our society lives by.

This is not an easy task. So, let that responsibility be a key. That you use to unlock the gate leading to everyday motivation.

I will stop here wishing you insightful conference.",Gediminas Šimkus
https://www.bis.org/review/r250526p.htm,Clare Lombardelli: What if things are different?,"Speech by Ms Clare Lombardelli, Deputy Governor for Monetary Policy of the Bank of England, at the Bank of England Watchers Conference, London, 12 May 2025.",2025-05-12 00:00:00,"## What if things are different? - speech by Clare Lombardelli

Given at the Bank of England Watchers Conference, London

In this speech Clare sets out her current view on the outlook for inflation and what this means for monetary policy. She then turns to how scenarios can help monetary policymakers consider how the economy may differ from a baseline and explores some of the issues raised by scenario analysis.

## Speech

Good morning. Thank you for inviting me. It's a pleasure to speak again at the Bank of England Watchers Conference.

Today I'm going to talk about two things: the outlook for inflation and reforms to our monetary policy processes.

My messages are: first, if you consider all the economic news, noise and bumpiness, underlying inflation pressures for the UK economy have continued to fall. So, it is sensible for us to continue our gradual and careful approach to reducing policy restrictiveness, including through another cut in Bank Rate by 25bps last Thursday.

And second, in reforming our monetary policy processes, we are putting risks and uncertainty more explicitly at the centre of our policy framework. This means important roles for scenarios and wider risk considerations alongside the central outlook. We are developing a wider framework and suite of analytical inputs to build uncertainties and risks into our policy deliberations when appropriate. In that context, I will talk this morning about how we used scenarios in our most recent policy round.

## The outlook for inflation

When I spoke at the Watchers conference in November I talked about the disinflation process, the underlying drivers of inflationary pressure, the need to see further progress on that and the expectation that we would. That has broadly played out, allowing restriction to be reduced gradually. Monetary policy is still restrictive and the current stance reflects a balance between the need to continue to squeeze out underlying inflationary pressure and managing the risks of lower demand in the economy. It is preferable to conduct monetary policy in a steady and predictable way, contributing stability to the environment for other economic decision makers. And we have been able to do that over the last year or so.

When thinking about the process of disinflation, my focus is on wages, as they are the largest component of the prices set by domestic services firms, and so a key driver of moves in underlying inflation. Wage growth is still too high to be consistent with inflation at target. Annual growth in private sector regular AWE was 5.9% in February. This is likely to reflect persisting second-round effects from the period of high inflation and the presence of supply constraints generating inflationary pressures. Productivity growth has been very low over the past couple of years (Chart 1) but that hasn't been reflected in a substantial decline in wage growth. I will say a bit more on this later when I come to discuss alternative scenarios for the economy.

Chart 1: Labour productivity growth has been very weak



Sources: ONS and Bank calculations. Final data points are for 2024 Q4. Underlying output per worker is based on Bank staff's underlying measures of GDP and employment based on indicator-based models (see Charts 2.8 and 2.12 from May MPR ).

The AWE data are noisy; Bank staff monitor a broader set of indicators and their combined steer for the current rate of underlying wage growth is lower, at 5¼% (Chart 2). And forwardlooking indicators point to further progress on disinflation; the Agents' pay survey has pay settlements at 3.7% by end-2025 and expectations for wage growth from the DMP survey are around 4% by year-end. Importantly, the most recent pay settlements data are consistent with these forward-looking steers (Chart 3); the upcoming settlements will provide important information.

Chart 2: Wage growth higher than target-consistent but gradually easing



Sources: BoE Agents, DMP Survey, HMRC, Indeed, KPMG/REC UK Report on Jobs, Lloyds Business Barometer, ONS and Bank calculations. Measures of private sector wage growth. For more details see footnote to Chart 2.16 in May MPR .

Chart 3: Latest pay settlements consistent with steer from Agents' survey



Sources: BoE Agents, Brightmine, CIPD, Incomes Data Research, Incomes Data Services, Industrial Relations Services, Labour Research Department, ONS and Bank calculations. Final data points are the three months to February for private sector regular AWE growth, April for BoE settlements database, March for Brightmine settlements and 2025 Q1 for CIPD expected settlements.

If the forward-looking indicators are broadly accurate, that would represent substantial progress by the end of the year. Simple ready-reckoners suggest that wage growth around 3% and potentially a bit higher would be consistent with inflation at target (Table 1), if productivity growth returns to rates of around 0.5-1%. This calculation also assumes import price inflation in line with its historical average - while this would be unlikely in the longer term if global trade were to fragment, it may be a plausible assumption over the coming period given the exchange rate moves we have seen and the potential for trade diversion from reduced exports by the rest of the world to the US.

Table 1: Ready reckoners for target-consistent wage growth



| = < g ~ = S o g ny Q t 8 ES   | = < g ~ = S o g ny Q t 8 ES   | = < g ~ = S o g ny Q t 8 ES   |
|-------------------------------|-------------------------------|-------------------------------|

Illustrative estimates of wage growth consistent with 2% CPI inflation, based on reasonable assumptions for medium-term import price inflation and labour productivity growth. Calculations assume an import intensity of 25% for the CPI basket (due to both direct and indirect channels, consistent with average COICOP class import intensity) and constant markups, such that labour and capital costs grow at the same rate.

However, caution remains appropriate. I'll be more comfortable when I see material deceleration in the data over a longer period.

The picture for services inflation, which is a simple and observable proxy measure for the persistent component of inflation, is broadly similar to that of wages. The absolute rate of services inflation is still too high, with the annual measure at 4.7% in March, but it's come down from 6% one year ago. Abstracting from volatile items, underlying measures of services inflation have shown modest declines in recent months. But higher-frequency measures have been flatter. So the picture is not entirely reassuring, although we should expect this disinflation to be bumpy. More broadly, looking forward, the evolution of wages should drive services inflation, especially if firms face limited scope to expand margins in an environment of subdued demand.

Most recently, the economic news has been dominated by the US administration's announcements and their implications for the global trade outlook. Higher tariffs and more uncertain US policies will likely reduce growth and inflation over the policy-relevant horizon because of reduced demand and trade diversion from reduced exports by the rest of the world to the US. The exchange rate movements we have seen further support lower imported inflation to the UK, although exchange rates can shift in response to trade policy news and the evolution of global risk sentiment. In the longer term, if global trade were to fragment, this would reduce output and productivity and would raise inflationary pressures.

Coming into the May policy round I was balanced between holding and cutting rates. Taken together, the combination of further gradual progress on disinflation and the trade developments led me to conclude that a 25bps cut was the appropriate decision for May.

## Scenarios

A valuable tool to help us better understand risks and uncertainties and their consequences is scenarios. Scenarios help us to answer 'what if' questions - what if the economy doesn't behave broadly as our central expectation. They are being increasingly used by monetary policymakers and forecasters in response to uncertainties. For example in April the IMF published a forecast and alternative scenarios in its World Economic Outlook . And in its April Monetary Policy Report , the Bank of Canada dispensed with a central forecast altogether publishing two alternative scenarios based on different assumptions for trade tariffs, oil prices and the exchange rate.

Scenarios are one of the tools we are developing and experimenting with at the Bank of England in response to Dr Bernanke's review ( Bernanke, 2024 ). They are one part of the ambitious reform programme that I've previously talked about ( Lombardelli, 2024 ). That will encompass a much wider range of improvements across our infrastructure, modelling toolkit, use of data, culture and communication.

In our recent policy round we began to explore using scenarios to have a better discussion of the economy and policy. We considered two scenarios, more details of which are given in Box A in our May Monetary Policy Report .

The first scenario explores the risk that demand weakens more than expected. This could be because the chilling effect of trade policy uncertainty has a greater impact on UK investment and consumption. In our central forecast we expect a material fall in the savings rate from its current elevated level of 10½% to 8½% after three years. But if households become significantly more uncertain about the outlook for the economy and their incomes or job prospects, they may hold back spending, in particular on major purchases. Equally firms may reduce or delay investment if uncertainty about how the economy will evolve leads them to doubt whether investment will be profitable.

In this scenario, we also looked at what would happen if the faster build-up of excess supply triggered a quicker unwind of inflation. This was modelled as a steepening of the Phillips Curve, consistent with a looser labour market in which workers accept a lower rate of pay growth and firms reduce prices more rapidly.

In a second scenario, renewed second-round effects on inflation as well as supply constraints in the UK economy generate a more persistent inflationary environment. We explored a scenario where productivity growth doesn't recover after the recent period of weakness and wage growth continues to outpace productivity gains. Alongside this, households and firms' inflation expectations are more sensitive to the near-term rise in inflation than usual - perhaps because the increase is more concentrated in food and energy prices, which we know are the most salient items, or also because the experience of higher inflation over recent years has made expectations more sensitive to price rises.

The structural mechanism considered here is different to that discussed in the third 'case' in the November MPR, where real income resistance drives up wage demands in the context of reduced labour market contestability.

In the May round, the MPC used analysis of these scenarios, their economic mechanisms and policy implications as part of the regular discussions we have on the latest data, the economic outlook, policy and communications. Reflecting on those discussions, I'll make a few points.

First, these scenarios describe a limited number of specific economic mechanisms. They don't aim to provide a comprehensive view of risks around the outlook. This is intentional, as it allows us to consider in more detail some of the specific risks some members of the Committee are worried about. Enabling us to think through the macroeconomic implications and the potential consequences for policy. Getting into the economics allows us to think harder about not just how plausible these scenarios are, but also how worried about them we should be.

Second, these scenarios aren't just about describing the response of the economy and our reaction function to an economic shock or a different conditioning assumption path, as sensitivity analysis would. They do that, and it's a useful thing.[1] But we can also use scenarios to help us explore uncertainty around key parameters of the economy; for example, around the relationship between the output gap and inflation (the slope of the Phillips curve) in different states of the world. The first of the May scenarios goes some way towards doing that. We plan to do more of this type of analysis in future.

Third, these are not simple ""downside' and 'upside' scenarios. They both explore circumstances in which economic activity is lower than potential. We are not sending a signal about whether we view the growth forecast as optimistic. But by exploring different mechanisms by which activity may be weaker than we expect, we can explore the different consequences for policy. The first scenario describes a negative demand shock, while the second presents a trade-off for the MPC given the inflationary environment and a negative output gap.

The two scenarios are not mutually exclusive. It is possible, and indeed likely, that members may worry about both scenarios or aspects of them. It would be perfectly reasonable to be concerned that productivity growth does not return to pre-Covid levels and also that demand may be more suppressed by trade policy uncertainty. In this way they are not mutually exclusive states of the world that we can assign probabilities to. Nor does it make sense to place Committee members along a 'hawkometer' scale from the downside scenario, through the central forecast, to the upside scenario. And there are other dimensions that scenarios may be useful to tease out, like for example preferences for gradualism or activism when setting policy under uncertainty.

Fourth, the calibration of these scenarios inevitably reflects judgment. We could have produced more or less severe scenarios describing these economic mechanisms. For monetary policymaking, scenarios tend to be more useful when they are different from the central case, but still plausible. This differs from scenarios for the analysis of financial stability risks, for example, where it often makes sense to analyse mechanisms that are more in the tails of the distribution of possible outcomes. Both of the scenarios we considered in May are plausible for the UK economy and so helpful in thinking about the possibility that the economy may evolve differently to our central projection.

Fifth, and taking a step back, there is an ongoing debate among policymakers, market participants and academics on how best to use scenarios to inform monetary policy. This is an important area of research. I don't want to pre-empt how these discussions may evolve, including with my colleagues on the MPC. But in my view, they are a valuable tool to help us build the analysis of uncertainty more explicitly into our framework. In the recent meetings I found it particularly helpful to use scenarios as a vehicle to discuss the 'robustness' of different policy choices to alternative economic outcomes, and the extent to which policy might need to respond as we continue to learn about the outlook.

## Policy considerations

That fifth point brings me to the last thing I want to talk about today - how we are beginning to think about using scenarios as an input to our policy deliberations. One way in which scenarios can be used in that way is to assess how policy could respond to their macroeconomic implications. Doing this requires an assumption about how monetary policy is set. There are many ways to do this, each with a differing economic rationale and accompanying pros and cons. For example, two common approaches are empirically estimated simple policy rules (such as that of Taylor, 1993 ) and model-consistent 'optimal' policy. It is worth emphasising that none of these approaches provides an accurate guide to what policy should do in the real world given the simplifying assumptions used. Indeed, these approaches add further assumptions to our 'what if' thought experiments: 'what if monetary policy responded to this scenario in a mechanical, model-based, manner?'. Nevertheless, such experiments can provide useful inputs to policy deliberations, including by exposing the relevant policy considerations.

In the May round, we used a version of model-consistent optimal policy. This approach is based on some very strong assumptions. These include that the model is linear, that monetary policy is set to minimise a quadratic 'loss function', and that both the private sector and monetary policymaker have full information about each other's behaviour and the shocks hitting the economy.[2] Expanding the breadth of our toolkit for policy simulations is one of the key areas we will be pursuing in response to the Bernanke review. For now, this is just one of a number of possible ways of determining policy paths.

Variants of the central projection that assume model-consistent optimal policy have been among the analytical inputs discussed by the MPC for some time. An additional use of such variants is as the reference points for assessing and understanding the policy response in scenarios.[3]

As I explained earlier, the first scenario is characterised by a standard negative demand shock, with a negative output gap and inflation falling materially below target in the absence of a tailored monetary policy response. While the second scenario presents a trade-off for monetary policy, given inflation above target and a negative output gap.

Against this backdrop, Chart 4 shows how the model-based policy responses to the two scenarios would differ. Bank Rate would be almost 50bps lower after 3 years in the lower demand scenario than under the model-based baseline path. And it would be about 25bps higher in the inflation persistence scenario.[4] In these simulations, monetary policy responds more strongly to the lower demand scenario than to the higher inflation persistence scenario because the policymaker is assumed to place some weight on reducing output volatility in addition to its primary objective of returning inflation to the 2% target. Another way to put this is that a monetary policymaker will tend to respond more strongly to a demand shock than if they have to confront a trade-off between stabilising inflation and reducing output volatility.

Chart 4: Policy tends to respond more strongly to a demand shock than in the presence of a trade-off



Sources: Bank of England, ONS and Bank calculations. Model-based simulations of the endogenous response of monetary policy to the May forecast and scenarios produced by Bank staff. Chart shows the difference between the endogenous model-based Bank Rate path in the higher persistence and weaker demand scenarios, relative to the endogenous modelbased path for the central forecast. The model used to produce these simulations is specified in the Annex to Broadbent (2022) .

We also used the scenarios to consider the robustness of policy to alternative economic outcomes. We used the toolkit I described a minute ago to evaluate outcomes if the policymaker sets policy expecting a baseline outlook, but the economy evolves like in either of the scenarios. This allowed us to discuss the possible costs of policy missteps if the economy ends up evolving in a different way than the expected.

Applying the analysis to the policy decision, it's consistent with the view that the 25bps reduction to Bank Rate would not lead to large regrets if the economy evolves as in either of the two scenarios. More broadly, the evidence suggests that at 4.25% monetary policy is still restrictive, so if we were to find ourselves in a world with greater inflation persistence than expected, policy would still be providing pressure to squeeze inflation out of the system. And it would be doing that whilst having taken out some insurance against the risk of a larger fall in demand through the 25bps cut in May.

Of course, we will keep experimenting as we continue to work on our response to the Bernanke review. And we are learning from other central banks and economic policymakers. The work of developing and applying scenarios and wider analytical tools and capabilities to think about uncertainty in a shock-prone world is an essential part of our reform programme. I've shared some of our early lessons today, this will not be the last word, far from it.

Thank you.

I'd like to thank Fabrizio Cadamagnani, Rich Harrison, Jack Page, Michal Stelmach, Matt Tong and Matt Waldron for their help in preparing this speech. Thanks also to Andrew Bailey, Sarah Breeden, Ambrogio Cesa-Bianchi, Catherine Cormack, Iain de Weymarn, Megan Greene, Bob Hills, Lien Laureys, Catherine Mann, Adrian Paul, Andrea Rosen, Fergal Shortall, James Talbot, Danny Walker and Chris Young for their helpful comments.

1. The Bank has published scenarios of this nature in the past, e.g. see the discussion of an alternative path for energy prices in the August 2022 MPR .
2. See Bank of England Staff Working Paper No. 911 for a technical description of the toolkit used to implement optimal policy, or the Annex to Broadbent (2022) for a high-level description.
3. This is necessary for isolating the policy implications of the scenario, since a comparison between a scenario constructed under model-based policy and the market-conditioned baseline would include the effects of different assumptions about both economic shocks (and the mechanisms through which they transmit to the economy) and the behaviour of monetary policy.
4. These differences in policy paths should not be interpreted as implying an expectation that the market-implied path for Bank Rate would adjust by similar amounts if either scenario were to come to pass. First, applying the same assumptions about policy in the baseline forecast implies a different path for rates than the market path. Second and more importantly, as already noted, these policy responses are mechanical responses based on several strong assumptions. As a result, they do not capture all relevant considerations for real-world policymaking.

## Clare Lombardelli

Deputy Governor, Monetary Policy

©202

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https://www.bis.org/review/r250526q.htm,Olaf Seijpen: Tough love - the importance of the internal audit function for central banks,"Speech by Mr Olaf Seijpen, Executive Board Member of Monetary Affairs and Financial Stability of De Nederlandsche Bank, at an international conference of central bank internal auditors at De Nederlandsche Bank, Amsterdam, 23 May 2025.",2025-05-23 00:00:00,"## Klaas Knot: Tough love - the importance of the internal audit function for central banks

Speech by Mr Olaf Seijpen, Executive Board Member of Monetary Affairs and Financial Stability of De Nederlandsche Bank, at an international conference of central bank internal auditors at De Nederlandsche Bank, Amsterdam, 23 May 2025.

* * *

First of all I want to apologise for not being able to welcome you on the first day of the event. I hope you have had good discussions so far and have been able to see something of the city of Amsterdam.

For those of you who don't know me, I am Olaf Sleijpen, Executive Board member at De Nederlandsche Bank. In that capacity, I am also a member of the Committee on the Global Financial System (CGFS) and the Committee on Payments and Market Infrastructures (CPMI). So I know the BIS well.

As a board member, I rely on your work as internal auditors to govern the central bank. You and your colleagues in the internal audit department provide me with information on the functioning of risk management, internal control, and governance processes. You are the eyes and ears within the organisation. And you serve as a mirror for the board and management by evaluating the organisation in an unbiased and impartial manner.

Internal audit in central banks is vital. Our organisations perform a very special public task. Keeping the financial system safe and sound. People trust us. If we breach that trust, it not only damages our organisation, it affects the entire financial system. What's more, as a supervisory authority we impose all kinds of standards on the financial sector, including governance and internal controls. If we do not live up to the standards we impose on others, we lose all authority. This means that we have to set the bar very high on governance and internal controls in our own organisations.

So your role is difficult but essential. What is necessary to effectively perform that role? I want to mention five points here.

First of all, it goes without saying that the internal audit department follows the rules of the profession as laid down in the Global Internal Audit Standards, and those of their own internal organisation. That's the basis.

Second, internal auditors need to have thorough understanding of the organization and a good network within it. That sounds logical, but such a network does not arise all by itself and it must also be maintained. Because, let's face it: most people in the organisation don't see you as their best friend. You ask them all kinds of difficult questions, and as a reward for their efforts, you tell them that they are doing it all wrong. And you also tell their bosses. So your colleagues may see you as a necessary evil, at best. That means it requires skills to develop and maintain good contacts. Of course,

they have to cooperate. But if you can make your colleagues understand that your job is to help them improve their work, then they will probably be more open to feedback and more inclined to give you the information you need.

Building good relationships is all the more difficult given the added challenge of the hybrid working culture that has developed since the pandemic. Where full-time presence in the office used to be the norm, it is now sometimes difficult to get employees to come to the office at all. I don't know if and how this dilemma is playing out in your organisations, but here in the Netherlands, it is a topical theme. We now even organise Friday afternoon drinks every two weeks, with my fellow board members and me standing behind the bar, just to persuade people to come to office.

Third, it is important to have not only an internal network but also a good network outside the bank. So go and take a look at companies in the private sector as well as other government agencies. This will give you the opportunity to learn from best practices of other internal audit functions. Since central banks are somewhat special animals, it is also good to learn from each other. This meeting is, in my opinion, a good opportunity for that.

Fourth, strong communication skills are key. Present your observations concretely, clearly, and sharply where necessary. And avoid making the message too cautious, which could make it difficult to understand. That requires not only skill but also will. Speaking truth to power is not always easy, but if you don't, you deny your organisation an opportunity to learn and improve.

My fifth and final point is to provide insight into the interrelationships between risks, or in other words: connect the dots. By viewing findings from separate audits in conjunction and reporting on them in a quarterly report, for instance, you can bring new insights to directors. Board members may otherwise only receive relevant information in a fragmented way. Moreover, the information that reaches us is often filtered. But you have a unique perspective on the entire organisational landscape. So do not hesitate to mention insights into causes and behavioural and cultural aspects when formulating your findings. After all, if you want to ensure that an organisation successfully implements a strategy, behaviour and culture are key. In general, the causes of problems that occur in the organisation can often be traced back to these underlying aspects.

So these are my five points. Five key elements of good internal auditing, if you will. It is all easier said than done, of course. We ourselves at DNB are learning continuously. There are several change projects underway to improve our internal organisation. DNB is organised into four key domains (Monetary, Supervision, Resolution, and Internal Operations) comprising the various task areas. While each domain is well-organised in itself, cooperation between and across these domains needs improvement. To achieve the desired bank-wide changes such as in the areas of operational risk management and business continuity, all parts of the organisation need to work together. As board members, we assume that if we have explained our aims, they will work in practice. However, practice can be stubborn. It is precisely at this point that the IAD, in its independent role, steps in to test, assess and provide insight into what is happening within the organisation.

Let me conclude by saying a few words about why we are here. By sharing information and exchanging views, we learn from each other. This is one of the many reasons why international cooperation is important. However, multilateralism is under pressure on all fronts. This is dangerous because it impedes our ability to address common challenges effectively. Therefore, it is essential that we as central banks continue to set a good example and cooperate effectively, for example in the BIS. Multilateralism is a form of enlightened self-interest. It's not always the easiest way, but in the long term it is the best way.",Olaf Sleijpen
https://www.bis.org/review/r250526s.htm,"Michael S Barr: Opening remarks - ""2025 Northeast/Mid-Atlantic Small Business Credit Symposium""","Speech (via pre-recorded video) by Mr Michael S Barr, Member of the Board of Governors of the Federal Reserve System, at the 2025 Northeast/Mid-Atlantic Small Business Credit Symposium, co-hosted by the Federal Reserve Banks of New York, Cleveland, Philadelphia, Boston, and Richmond, held at the Federal Reserve Bank of New York, New York City, 15 May 2025.",2025-05-15 00:00:00,"## Michael S Barr: Opening remarks - ""2025 Northeast/Mid-Atlantic Small Business Credit Symposium""

Speech (via pre-recorded video) by Mr Michael S Barr, Member of the Board of Governors of the Federal Reserve System, at the 2025 Northeast/Mid-Atlantic Small Business Credit Symposium, co-hosted by the Federal Reserve Banks of New York, Cleveland, Philadelphia, Boston, and Richmond, held at the Federal Reserve Bank of New York, New York City, 15 May 2025.

* * *

Good afternoon, and thank you for the opportunity to be part of the Small Business Credit Symposium. 1   Small businesses are the backbone of our economy, and yet they face significant challenges. As a researcher and public official, I have spent considerable time working on these issues, and today, I would like to address three critical challenges that small businesses face: access to capital, skills development, and network building. Then, given my role as a member of the Federal Open Market Committee, I'll offer my perspective on the impact of economic conditions and the outlook on small businesses and provide some details on the vital role that small businesses play in our economy.

The first challenge facing small businesses that I'll highlight is access to capital and credit. Small businesses access credit from diverse sources, including banks of all sizes, credit unions, online lenders and other nonbank financing companies. Nevertheless, entrepreneurs and small business owners face a significant gap, relative to larger businesses, in accessing capital. According to the Federal Reserve's Small Business Credit Survey (SBCS), credit availability is a challenge faced by over a quarter of small businesses. 2   In addition, many small businesses worry about the cost of credit and confusing terms and conditions in some credit offers. And still others are discouraged from even applying for credit and so are unable to start or grow their businesses. Minority entrepreneurs and those located in low- and moderate-income areas often have an even harder time than other businesses in accessing credit in safe and affordable ways. 3

There are many ways to help address these gaps. For example, in Detroit, I was fortunate enough to work with colleagues to help set up a loan loss fund serving small businesses in Detroit, Michigan. The loan loss fund helps banks to reach deeper into the small business market by mitigating downside risks to lending. Community Development Financial Institutions (CDFIs) can also play important roles in expanding access to small business credit, especially in underserved areas. Fintech providers can use lower cost structures and technological innovations to serve small business owners as well. Federal and state governments have a role to play as well, such as through SBA programs, the CDFI Fund, and the State Small Business Credit Initiative.

In addition to the credit gap, many small businesses often face a knowledge and skills gap. Many entrepreneurs and small business owners start their firms without the range of financial and management skills needed to run a successful business. 4   And it's not always easy for entrepreneurs to identify or develop the specific skills and knowledge they need to grow and sustain their businesses. Bridging this knowledge gap may

require a variety of approaches. For instance, many organizations, both private and public, have developed information and training to help small business owners establish and grow their businesses. Online learning platforms, payment platforms, small business development centers (SBDCs), chambers of commerce, and community colleges, for example, develop and provide information tailored to the various needs of small business owners and entrepreneurs. 5   Focusing on practical skills, such as financial management and operations planning, can help build the capacity for greater knowledge and skill acquisition.

In my own experience with this challenge, I had the privilege of working with colleagues to launch the Detroit Neighborhood Entrepreneurs Project, which brings facultysupervised student teams to collaborate with local businesses on their legal, financial, design, marketing, business strategy, and technology challenges. The interdisciplinary program helps to bridge the skills and resource gaps that small businesses owners face, while students learn important new skills themselves from both faculty and the small businesses that they serve.

The third challenge facing small business owners and entrepreneurs is the need to cultivate strategic connections and build robust professional networks that support their growth and success. Business and professional networks often provide entrepreneurs and small business owners with access to critical resources and knowledge. While established entrepreneurs have actively cultivated these connections and all that they can offer, emerging entrepreneurs and new small business owners often don't know where to start. Accessing networks of experienced entrepreneurs can help early-stage entrepreneurs and small business owners gain perspectives that will be vital for growing their firms. Business associations and member organizations that connect owners and staff at companies of all sizes can facilitate knowledge sharing. Even more importantly, these business networks can help to expand market access. Many years ago, for example, I helped to establish BusinessLINC, which brought together established businesses and budding entrepreneurs.

Those are a few of the challenges I have observed over the years, and some thoughts on how to address them. With the time remaining, let me turn to my current vantage point and the question of why small businesses are so vital to a healthy and growing economy. In part, this is because small businesses, to a great extent, the U.S. are economy. Businesses with 500 or fewer employees account for almost half of all private sector employment, nearly 40 percent of the sales revenue of businesses, and nearly 40 percent of what is paid to private sector workers. 6   But this actually understates the impact of small businesses, because they are especially important for economic growth. We know that the overwhelming number of new businesses are small businesses, and we also know that new businesses are a particularly potent source of innovation and productivity growth. 7   One of the reasons that the U.S. economy has done so well the past few years is because of an acceleration in productivity growth, which, together with immigration increasing the labor force, allowed our economy to grow resiliently while inflation was falling. It is no coincidence that this productivity surge occurred while the creation of new businesses was also surging. 8   For instance, small businesses are responsible for 16 times as many patents per employee as larger businesses. Small businesses play an important role in innovation and economic growth. 9

In my view, the economy is on solid footing, with solid growth, low and stable unemployment, and inflation continuing to come down towards our 2 percent target. But the outlook has been clouded by trade policies that have led to an increase in uncertainty, contributing to declines in measures of consumer and business sentiment. Potential disruptions to supply chains and distribution networks are particularly acute for small businesses, which are less diversified, less able to access credit, and hence more vulnerable to adverse shocks. Small businesses play a vital role in production networks, often providing specialized inputs that can't easily be sourced elsewhere, and business failures could further disrupt supply chains. As we saw during the pandemic, such disruptions can have large and lasting effects on prices, as well as output. If these disruptions were to occur, we'd likely see lower growth and higher inflation ahead.

That's the macro view. At the level of individuals and households, small businesses are a vital basis for financial security and economic mobility. Outside of stockownership and retirement savings, home ownership is responsible for 45 percent of household nonfinancial wealth, with business equity right behind at 34 percent. 10   Those who are selfemployed, as most small business owners are, have an average of four times as much wealth as those who are employed by others, and twice as much as retirees. Successful entrepreneurship also correlates strongly with upward mobility, with studies showing business owners more likely to move into higher income brackets than their non-entrepreneurial counterparts. 11

These opportunities matter a great deal to individuals, families and communities, and they also matter in promoting a strong economy with stable prices and low unemployment, key to the Fed's mission. I look forward to hearing more about the insights from today's event and working with all of you to encourage entrepreneurship and small business ownership, which is so vital to our economy.

- 1 The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.
- 2 ""2025 Report on Employer Firms: Findings from the 2024 Small Business Credit ,"" , Federal Reserve Banks, March 2025. Other Survey Small Business Credit Survey financial challenges include rising costs of goods, services, and/or wages; paying operating expenses; uneven cash flow; weak sales; and making payments on outstanding debt.
- 3 Michael S. Barr, ""Minority and Women Entrepreneurs: Building Capital, Networks, and Skills (PDF),"" Brookings Institute, March 2015.
- 4 According to Intuit/QuickBooks, only half (54 percent) of small business owners say they had a good understanding of financial management before starting a business. ""20 Small Business Financial Literacy Statistics to Know in 2025,"" QuickBooks Blog, April 2, 2025, https://quickbooks.intuit.com/r/small-business-data/financial-literacy-statistics/.
- 5 SBDCs are cooperative efforts involving the Small Business Administration (SBA), a college or university, and often other private or public partners. There are more than 1,000 SBDCs operating in all 50 states, the District of Columbia, and many U.S. territories. The centers offer free counseling and training for small businesses on topics

such as business planning, financial management, marketing, and access to capital. "" America's SBDCs,"" America's SBDCs.

- 6 "" Frequently Asked Questions (PDF),"" Small Business Administration Office of Advocacy, July 2024.
- 7 See Titan Alon, David Berger, Robert Dent, and Benjamin Pugsley, ""Older and Slower: The Startup Deficit's Lasting Effects on Productivity Growth,"" Journal of vol. 93 (January 2018): 68-85; and Ryan Decker, John Monetary Economics, Haltiwanger, Ron Jarmin, and Javier Miranda, ""The Role of Entrepreneurship in US Job Creation and Economic Dynamism,"" vol. 28 Journal of Economic Perspectives, (Summer 2014), 3-24.
- 8 See the Census Bureau's Business Formation Statistics, based on Internal Revenue Service applications for new Employer Identification Numbers.
- 9 U.S. Senate Committee on Small Business &amp; Entrepreneurship, ""Innovation and Research,"" news release, September 22, 2021 to November 4, 2022.
- 10 "" Small Business Facts: The Importance of Business Ownership to Wealth (PDF),"" Small Business Administration Office of Advocacy, August 2021.
- 11 Ross Levine and Yona Rubinstein, ""Smart and Illicit: Who Becomes an Entrepreneur and Do They Earn More?"", , vol. 137(1) (2022): 191Quarterly Journal of Economics 241; JPMorgan Chase &amp; Co and Gallup, ""Employing Others is Linked to Wealth and Well Being,"" April 11, 2024, https://news.gallup.com/poll/643268/employing-otherslinked-wealth-wellbeing.aspx; and Signe-Mary McKernan and Hal Salzman, ""SelfEmployment and Economic Mobility (PDF),"" April 2008.",Michael S Barr
https://www.bis.org/review/r250526r.htm,Denis Beau: Fintechs and innovation as a key to controlling our economic destiny,"Speech by Mr Denis Beau, First Deputy Governor of the Bank of France, at the ""Fintech R:Evolution"" summit, organised by France Fintech, Paris, 21 May 2025.",2025-05-21 00:00:00,"## Denis Beau: Fintechs and innovation as a key to controlling our economic destiny

Speech by Mr Denis Beau, First Deputy Governor of the Bank of France, at the ""Fintech R:Evolution"" summit, organised by France Fintech, Paris, 21 May 2025.

* * *

Ladies and gentlemen,

I would like to begin by thanking France Fintech and its President, Alain Clot, for inviting me to speak here today. This year we celebrate the 10th anniversary of France , which also gives me an opportunity to congratulate the association for its Fintech considerable achievements over the years promoting the French fintech ecosystem and highlighting its successes.

Unfortunately, the is less auspicious, particularly with the geopolitical context caused by the new US administration's policy declarations exceptional uncertainty and unpredictability, which is weighing on our economic and financial position. But, as the Governor of the Banque de France recently said in his annual Letter to the President of the French Republic , we should not let this overwhelm us; on the contrary, it should inspire us to take action and finally regain control of our . France and Europe need , and one of the best ways economic destiny more growth of achieving this is through . faster innovation

The financial sector can and must be at the forefront of this innovation acceleration. Clearly, the fintechs have a to play - in their short history, crucial role they have already shown how skilled they are at leveraging new technologies to invent new business models or make existing ones more efficient.

Financial authorities must also help to meet the collective challenge - and the Banque de France and ACPR are already firmly committed to this. To prove my point, I would like to give you three examples of what is being done, both at the national and : first, on simplifying regulations (I); second on supporting the adoption European levels of artificial intelligence (II); and lastly on supporting the tokenisation of finance (III).

## I/ My first example concerns regulatory simplification.

1/ Let's start with a brief reminder of what we have done: over the past 15 years, European regulation has . The PSD1 substantially opened up the financial sector and PSD2 directives, the crowdfunding regulation, the MiCA regulation and the Pilot Regime have all allowed facilitated the creation new players to enter the market and of numerous fintechs - as many of today's  participants can no doubt attest. In parallel, the ACPR, as financial supervisor, has set up a system of for innovative support fintechs, which helps them obtain the licences they need Under the best possible conditions. As part of this, the ACPR created the Fintech Forum in 2016, and established its ""Fintech Charter"" in 2021.

After this opening-up phase, it is time to . The Draghi and Letta simplify the regulation reports singled out regulatory simplification as one of the keys to European competitiveness: more speed means more innovation and more growth. But simplifying does not mean deregulating - lest we forget the lessons of the Great Financial Crisis. Rather, it means regulating more effectively, having fewer regulations but implementing them better and thereby making them more efficient

.

Among the possible avenues for simplification, I would like to underline two that . First, . directly concern the fintech ecosystem fewer statuses and registrations This means , such as payment institution and merging some very similar statuses electronic money institution, which is one of the proposals in PSD3. It also means avoiding the systematic accumulation of statuses - for example between electronic money institution and EMT issuer - and reducing the number of entities that have to - for example by only requiring the network register as payment services agents head to be registered.

A second avenue is to lighten the reporting burden. ACPR teams are currently conducting interviews, notably with fintechs, to identify and specify concrete measures in this field, including a reduction in the complexity of nomenclatures and formats, and possible so-called proportionality measures, i.e. reduced reporting requirements for start-ups in the financial sector. Similar efforts are underway at the European level, where the Commission has committed to cutting reporting obligations by at least 25% over its mandate.

## II/ My second example concerns supporting the adoption of AI.

Europe has proved itself to be a pioneer in this field, with the adoption in the summer of 2024 of the , the first regulatory framework in the world protecting citizens' rights. AI Act Less often mentioned is the regulation's second core objective: to create a single . Despite claims to the contrary, there is no reason European ""trustworthy AI"" market to believe the AI battle has already been lost to the US and Chinese tech giants. Personally, I am convinced that the European way - consisting in reconciling innovation and trust to create innovation that stands the test of time - will prove its worth over the long term.

However, it is clear that the battle will not be won without the of productive adoption AI in different economic sectors. In the AI can deliver multiple financial sector, benefits. First, , via increased automation of significant productivity gains administrative tasks - think of what the ""machine"" reading of documents can do for the compilation of credit files, or automated photograph analysis for the processing of insurance claims. AI can also provide for customers, particularly thanks better services to increased personalisation. Lastly, it can , especially in payments, improve security where it can detect fraud patterns faster and more effectively - something we are working on at the moment with the Observatoire de la sØcuritØ des moyens de paiement (OSMP - Observatory for the Security of Payment Means). Fintechs and legacy players have already started to embrace these new technologies; it is vital to . continue and speed up the process

As market surveillance authority, the ACPR should be responsible for enforcing the AI Act in the financial sector. It shall do so with the intent of reconciling innovation , and with the and security, which is consistent with the spirit of the regulation usual principles of risk management and governance that we strive to enforce as supervisor. The ACPR shall also try to add as little as possible to institutions' , by applying a - where the means existing regulatory burden risk-based approach are proportionate to the expected results - and by exploiting all possible synergies with its usual controls. To this end, the ACPR has included market representatives in discussions on how to implement the regulation.

III/ This brings me to my third and final example, supporting the tokenisation of finance.

First, a reminder: in Europe, we have the benefit of the MiCA regulation and the socalled Pilot Regime, which provide a to support the harmonised European framework emergence of new blockchain activities and new players. It is a distinct advantage as it gives us a major tool for to users and the financial system. mitigating risks

In this context, the tokenisation of financial assets could deliver efficiency gains in postmarket activities, thanks to greater automation, availability and transparency, and better traceability. The tokenisation of non-financial assets - for example, real estate - could increase the liquidity and accessibility of underlying markets.

But the development of tokenised finance is currently being hampered by the lack of a . At the moment, dollar-backed - the dominant secure settlement asset stablecoins settlement solution for crypto-assets - are not governed by a protective federal framework in the United States, leaving users exposed to various dangers, including liquidity risk. The use of these assets also raises important questions regarding . Europe's sovereignty over its monetary system, especially its payment system

This is why the Eurosystem has committed to providing market participants with a . The initiative should help foster the wholesale central bank digital currency by 2026 development of a robust, integrated European digital asset market. But while financial authorities can establish the framework - and even provide essential services - what ultimately matters is how market participants choose to use it. In this respect, I am firmly convinced that the French ecosystem has a real card to play in developing . high value-added use cases

I would like to conclude by saying that, for crypto-assets as well as other assets, the new US administration's economic and financial policy course risks creating multiple setbacks. So, despite the probable turbulence, now is the time for Europeans to take . their destiny into their own hands

Obviously - and this will be my final point - this implies solving the difficulties financing faced by our firms, and I know how important this is for fintechs. These issues are notably linked to a in Europe; which is why the lack of sufficient venture capital Banque de France has long argued for , increasing our capabilities in this area

notably via the project promoted by the European Savings and Investments Union Commission. We still have a lot of work to do. But on this issue, as on others, I am convinced we can find solutions together, because where there is a will, there is a way.

Thank you for your attention.",Denis Beau
https://www.bis.org/review/r250526t.htm,Clare Lombardelli: Central bank communications and uncertainty,"Speech by Ms Clare Lombardelli, Deputy Governor for Monetary Policy of the Bank of England, at the Second Thomas Laubach Research Conference, organised by the Federal Reserve Board, Washington DC, 16 May 2025.",2025-05-16 00:00:00,"## Clare Lombardelli: Central bank communications and uncertainty

Speech by Ms Clare Lombardelli, Deputy Governor for Monetary Policy of the Bank of England, at the Second Thomas Laubach Research Conference, organised by the Federal Reserve Board, Washington DC, 16 May 2025.

* * *

Thank you for inviting me to speak today.

It seems the Bank of England has become something of a trendsetter by having Ben Bernanke evaluate our monetary policy arrangements. We're incredibly grateful to Ben for the time and thought he put into his advice to us. His insights are proving invaluable in enabling us to change our approach for the better.

The emphasis of Ben's review for the Bank of England was on the Monetary Policy Committee's processes for policy making, our tools and our communications during times of high uncertainty and structural change. So it was not a framework review, like the Federal Reserve is currently undertaking. There's an important reason for that difference - namely that the key elements of the UK institutional framework for monetary policy are set by Government, not by the Bank or its Monetary Policy Committee.

There are a lot of similarities in the themes from Ben's reviews of the Bank of England and the paper he has just presented on proposals to improve the Federal Reserve's communications. In particular, in both reports he notes the unhelpful emphasis on a single, central forecast and the way that current communication frameworks struggle to adequately convey sufficient information about policy strategy, especially under conditions of uncertainty.

For the Federal Reserve he goes into further detail and makes practical proposals on some key areas we are also reflecting on and may change in our practice. Particularly: what is an input to policy making and what is an output; the respective roles of staff and policymakers in forecasts, scenarios and other judgements; and what policy paths to use in published analytical material. These issues are important. Different central banks handle them differently reflecting differences in institutional set-up and the pros and cons of different approaches. There is no 'correct answer' on the specifics, but as Ben's two reviews show, there are some common themes that point towards good practice.

The Bank of England approaches Ben's conclusion that it is useful to use a baseline forecast and scenarios from a different place to the Federal Reserve. We heavily anchor our analytical processes and communications of the policy decision around our central forecast.

So it is quite a philosophical change as we move to explicitly focus less on a central forecast, and instead consider a wider range of scenarios for both policymaking and communications.

Our forecast-based approach to communication has risked the impression that monetary policymakers at the Bank of England put more weight on a single view of the

outlook, or that we have more certainty, than we actually do. In reality, our policy discussion is more comprehensive, more lively and exposes a wider range of views, as our published one-member, one-vote structure makes transparent.

Of course we have always discussed uncertainty and risks in our communication products. And we have long used fan charts to show uncertainty around inflation and output. Fan charts have their advocates and are a powerful visual representation of uncertainty. But they have limitations, including in enabling people to understand how and the economy may be different to a baseline forecast. why

Scenarios can play a valuable role in both policymaking and communication.

For monetary policymakers, scenarios can help to shed light on economic forces that might shape the macroeconomic outlook. They are quantitative exercises, if inevitably highly stylised. The quantification helps policymakers understand the extent to which certain economic shocks and mechanisms may or may not have material effects on the outlook. It also helps them explore possible trade-offs between stabilising inflation and mitigating output volatility and the possible policy responses.

The process of producing scenarios also helps staff to learn more about the reliability and robustness of those scenarios: for example, how reliant they are on assumptions about parameters or mechanisms that we have relatively little information or evidence on. This is also useful information for policymakers. Overall, while scenarios provide valuable quantitative results, the main lessons for monetary policymakers will often be directional and qualitative.

One of the most useful elements of the policy process at the Bank of England is the internal discussion among MPC members and with the staff, which explores what are the most important questions shaping our respective policy views and how we can learn from each other. That discussion shapes policymakers' views and our votes. In this context, forecasts and scenarios are most useful when they bring issues to life, facilitating that conversation and allowing each of us to learn from others' perspectives.

The discussions of policy strategy and tools yesterday demonstrated how scenarios can also help us think about policy 'robustness'. For example, Silvana Tenreyro talked about the value of considering different scenarios when considering guidance, including conditional guidance on balance sheet tools - they enable policymakers to think practically about how that guidance would stand up in different circumstances.

In his opening remarks at this conference Chair Powell talked of the need for clear communications and also the need to convey the uncertainty that surrounds our understanding of the economic outlook.

In this context, the potential benefits of scenarios are obvious. They provide clear narratives or stories that bring to life not only how the economy may evolve differently but also the economic forces that could be driving those differences. They can highlight the features policymakers are most focussed on and how they would react if the economy evolved in that way. They can also speak to a wider audience than fan charts and similar tools, which can be quite specialist and technical.

Ben's paper on Federal Reserve communications also draws out how scenarios can help overcome a frequent challenge for policy communications. By underscoring how the future path of policy is conditional. The publication of selected alternative scenarios makes explicit how policy will depend on the evolution of the economy. By giving a concrete example, it brings that point to life.

In communicating monetary policy to observers, we aim to give clear and simple messages. But the credibility of, and trust in, central banks will be enhanced if we acknowledge the genuine uncertainty that policymakers need to confront. It does not inspire confidence or support credibility to ignore it. Scenarios can help communicate that uncertainty and the factors that policymakers may need to react to if uncertainties crystalise. We need to do that in a way that does not overload people and guides observers to what policymakers judge is most important.

This direction of travel is consistent with the idea that inflation targeting is not intended to suggest that monetary policy can fine-tune the trajectories of activity and inflation. Instead, it is a broad framework to guide policy and what people should expect from policy, thereby anchoring inflation expectations as Carl Walsh emphasised yesterday.

If the Federal Reserve were to move towards an economic review-type product, as Ben suggests, it would need to answer the question of whose report it is, or who is the 'owner' of its components. In the UK, our historical approach has been to publish a forecast that represents the best collective judgement of the Monetary Policy Committee.

In part that is because, in our framework, the Committee is required to set out our view of the outlook. Rightly so given the importance of transparency and accountability. One practical difference with the FOMC is that we have a smaller committee of nine people, geographically located together. This makes it easier to support a very interactive process.

However, our historical approach to producing a best collective judgement forecast potentially created pressures to compress the Committee's views and judgements through a single funnel. So we are going to move away from that to a forecast based on an initial staff proposal, that a majority of the Committee agree is a reasonable basis for discussions. This approach shares some similarities with the Riksbank and Norges Bank, perhaps unsurprisingly given that our institutional structures share some similarities.

In moving away from a best collective judgement forecast, we are recognising there is no single view of the central outlook across the Committee and creating more space for individual policymakers to debate different views before finalising their policy judgements. This will allow us to better harness the deep expertise within the Committee, which has broad diversity of views and experience built in. At the same time it will liberate the Committee from the fine details of the forecast and enable more focus on policy strategy.

At the Bank of England, we are excited about the benefits that these changes can bring. But we realise that we are on a journey and so conscious that there is a huge amount to learn. That is why events like this, which offer the opportunity to learn from others

travelling similar journeys, are so valuable. With that in mind, let me thank the organisers of this conference for putting together such a thought-provoking event. From a Federal Reserve perspective, it may be targeted at your framework review, but I can assure you that it is enormously useful for the wider central banking community.",Clare Lombardelli
https://www.bis.org/review/r250526f.htm,John C Williams: Uncertainty and robust monetary policy,"Remarks by Mr John C Williams, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the Reykjavík Economic Conference, organised by the Center for International Macroeconomics at Northwestern University and the Central Bank of Iceland, Reykjavík, 9 May 2025.",2025-05-09 00:00:00,"## Uncertainty and Robust Monetary Policy

May 09, 2025

John C. Williams, President and Chief Executive Officer

## Remarks at the Reykjavík Economic Conference, Reykjavík, Iceland

As prepared for delivery

## Introduction

Good afternoon. I've been waiting for the right opportunity to visit Iceland, and this conference is a wonderful reason to be here. I would like to thank Governor Jónsson for the invitation.

We are experiencing a moment of great uncertainty and change. I'd like to take this time to step back and revisit the lessons of the past several decades of monetary policy under uncertainty, a topic I have devoted most of my career to as a researcher and policymaker. In particular, I'll discuss the key characteristics of monetary policy approaches that are robust to uncertainty.

Before diving deeper into this topic, I must give the standard Fed disclaimer that the views I express today are mine alone and do not necessarily reflect those of the Federal Open Market Committee (FOMC) or others in the Federal Reserve System.

## Uncertainty Is Pervasive and Multifaceted

After 30 years in central banking, I can unequivocally say: ' Uncertainty is the only certainty in monetary policy.'  Or, in the words of Alan Greenspan, former Chair of the Federal Reserve: 'Uncertainty is not just an important feature of the monetary policy landscape; it is the defining characteristic of that landscape.' 1 2

And there's no doubt that uncertainty will continue to be the defining characteristic of the monetary policy landscape for the foreseeable future. This is a direct result of structural changes in the global economic environment such as those posed by artificial intelligence, deglobalization, and innovations in the financial system-not to mention the perennial challenges of measuring the so-called star variables such as r-star.

## Rules vs. Discretion

So, what foundational principles, approaches, and debates have already been established with regard to monetary policy under uncertainty?

I'll begin with the 'rules vs. discretion' debate. In both theory and practice, the tradition in monetary economics circles has been to counterpose the value of predictable, rule-like behavior against the need for discretionary actions in the face of uncertainty and rapid change. For example, some say the world is too complicated and uncertain to design a useful policy rule, much less follow one, and discretion is essential. On the other side, discretion can contribute to poor outcomes.

Although the rules-vs.-discretion debate has helped clarify fundamental issues, the right answer, in practice, is a blend of the two. As renowned macroeconomist, monetary theorist, and public policy expert John Taylor pointed out, a simple equation does reasonably well in describing the Fed's interest rate setting during the early Greenspan years, even though Greenspan himself highlighted the risk management nature of policymaking.  And policy rules themselves cannot be immutable since they implicitly or explicitly incorporate structural factors that are subject to change over time. 3

## Robust Policy Under Uncertainty

This is where robust policy comes into play. The goal of robust monetary policy is to blend a high degree of predictability and consistency with the ability to perform effectively across a wide range of circumstances. In so doing, it increases the scope for rule-like behavior and reduces the need for discretionary actions. It inherently trades off fine-tuning to a particular view or model of the world with robustness in a world of unknowns. Early advocates of this approach included Bennett McCallum and John Taylor, and it has been studied extensively since then. 4

A useful analogy is decision-making by a policy committee.  Each member of the committee holds a particular view of the behavior of the economy (represented, say, by a particular macroeconomic model). A robust policy is one that yields decisions that may not be the first choice of any individual committee member but is acceptable to most members. 5

## Foundations for Robust Monetary Policy

With robust monetary policy being so important, how can we ensure that we get it right?

It all goes back to foundations. And the features of robust monetary policy are inextricably linked to the core foundations of successful monetary policy identified through decades of theory and evidence.

Today, I will highlight three principles: accountability and independence, transparency, and well-anchored inflation expectations.  It's important to note at the outset that these are mutually reinforcing. 6

I'll start with accountability and independence. History teaches us that central banks can be more successful at delivering price stability when they own the responsibility for that goal and have the independence of action and tools to achieve it. Too often in the past-most notably in the 1970s-some central banks behaved as if they were powerless to control inflation. Today, regardless of economic shocks, changes in government policies, or swings in globalization and deglobalization, central banks recognize that maintaining price stability is their job: they are the protectors of price stability.

The second principle is transparency, which provides predictability and clarity, and thereby enhances effectiveness. This includes clear communication of a central bank's strategy and policy decisions, and an explicit numerical longerrun inflation target. Transparency reinforces public accountability for price stability and focuses the internal policy debate on how to best achieve that goal. For households and businesses, transparency takes some of the uncertainty off the table so they can better plan. Central banks that adopted inflation targeting led the way on this. For the Federal Reserve, these concepts are described in the FOMC's Statement on Longer-Run Goals and Monetary Policy Strategy, which was introduced in January 2012. 7

The third key principle, which has become a bedrock of modern central banking, is well-anchored inflation expectations. In the 1960s and 1970s, both short- and longer-term inflation expectations in the U.S. became unmoored, rising as actual inflation rose. This made it more difficult to maintain stable prices amid the shocks of that period. By communicating an explicit inflation target-and then delivering inflation consistent with that targetcentral banks have earned credibility with the public. This feedback loop between effective policy actions and communications, well-anchored expectations, and price stability short-circuits so-called second-round effects in wage and price setting that exacerbate and prolong the effects of shocks, as was the case in the 1970s.

## Risk Management and Fault Tolerance

With these three foundational aspects of successful monetary policy squarely in mind, I will now turn to the design of robust policy. The basic premise is that policymaking under uncertainty is intrinsically an exercise in risk management: guard against risks that have high costs in terms of possible outcomes, and accept risks that don't.

In the remainder of this presentation, I will describe monetary policy in terms of a policy rule that stipulates the setting of interest rates as a function of different variables. The Taylor Rule is one prominent example, whereby the nominal interest rate depends on an estimate of the natural rate of interest, the inflation rate, and the deviation of a measure of economic activity from its natural rate (such as the output or unemployment gap). Although the characteristics of robust policy can be described in different ways, the policy rule formulation helps illustrate some basic concepts. 8

## Fault Tolerance

A useful way to describe the conditions for robust policy is through the lens of 'fault tolerance.' Fault tolerance is a concept originally used in engineering and is defined as ''the ability of a system or component to continue normal operation despite the presence of…faults''. Applying this to monetary policy, fault tolerance is related to the sensitivity of macroeconomic outcomes across various models to changes in the parameters of a monetary policy rule. 9 10

Figure 1 illustrates two representative cases of fault tolerance. In this example there are two competing models of the economy: A and B in the left panel, and B and C in the right panel. For the purposes of this figure, the monetary policy rule is assumed to be fully described by the parameter β. The two curves trace out the relationship in each model between the parameter β (on the x-axis) and a measure of the resulting macroeconomic outcome, where larger values are worse (for example, the outcome could be the variance of the inflation rate). The optimal choice of the policy parameter is indicated by β*(X) for model X.

The left panel of the figure illustrates the case of a high degree of fault tolerance in both models in that outcomes are not very sensitive to the choice of the policy parameter. The right panel illustrates the case of low fault tolerance in model C for values of the parameter β that diverge significantly from the optimal choice, while model B is the same as in the left panel.

Robust policies are designed to operate in high-fault-tolerance regions and avoid low-fault-tolerance regions. In the case illustrated in the left panel of the figure, a robust policy is characterized by a value of β somewhere between the optimal values in the two models. This policy is not exactly optimal in either model but performs well across the two models.

In the case shown in the right panel of the figure, the robust policy avoids the intolerant region for model C and is therefore biased toward the optimal value in model C. Such a policy provides insurance against the possibility that model C is the true description of the world. The exact choice of the robust policy depends on the precise specification of the central bank's objective function and beliefs about the uncertainty across models.

## Three Examples

Fault tolerance provides a conceptual framework for thinking about uncertainty and robust monetary policy. I will now consider three examples of uncertainty-regarding models, the formation of expectations, and the star variables like r-star-where robust policies differ from the optimal policy in a given model and effectively manage the risk of having the wrong model. Each of these cases fits into the examples of fault tolerance illustrated in Figure 1.

## Model Uncertainty

The broadest type of uncertainty for monetary policy is related to economic models. This can be due to uncertainty about model parameters within a model or uncertainty about how the economy works across models.

Research on model uncertainty has highlighted two key findings. First, policies that are designed to be optimal in one model can miss the mark in other models. This can be especially problematic when policies are optimized to idiosyncratic features of a particular model that are not common to other models. Second, even when policies optimized for a specific model are not robust to model uncertainty, it is generally possible to find robust policies that perform very well across models. That is, as illustrated by Figure 1, the costs of robustness are relatively small compared to the gains in terms of risk management. 11

## Uncertainty about Expectations Formation

A particularly relevant form of uncertainty for monetary policy concerns the formation of expectations. In many standard models with rational expectations, inflation expectations are a priori assumed to be well anchored. In practice, there is a great deal of uncertainty regarding how the public forms expectations.

In models where longer-run expectations can become unmoored, robust policies act more strongly to keep expectations near the target rate than would otherwise be the case. Specifically, the risk of unmooring of inflation expectations tends to increase with the persistence and magnitude of inflation deviations from the target-this is the region of fault intolerance-or low fault tolerance. Therefore, robust policies are biased to avoid such regions by responding more strongly to inflation relative to output or unemployment gaps. Furthermore, to the extent that transparency regarding the central bank's goals and strategy can help anchor longer-run expectations, the trade-offs between optimal and robust policies improve. 12

## Blurry Stars and Difference Rules

The final example is uncertainty over the so-called star variables, such as the natural rates of interest and unemployment. Monetary policy rules often rely on these, but they are measured imprecisely and change over time. Under some assumptions, uncertainty about the values of star variables in isolation should not affect optimal policy; that is, certainty equivalence holds.

However, given the wide range of uncertainties that prevail-including uncertainty about the processes that determine the star variables-the assumptions underlying this theoretical conclusion are unlikely to hold in practice. In this case, acting as if one knows the star variables when making policy can lead to persistent deviations of inflation from the target that risk unmooring inflation expectations. 13

Fortunately, research has shown that approaches that 'follow the data' and don't rely as much on estimates of starred variables perform very well when the uncertainty is very high. A simple and effective approach is represented by 'difference rules,' where the short-term nominal interest rate is raised or lowered in response to inflation and changes in economic activity. Combining uncertainty about the formation of expectations and the star variables exacerbates the risks of unmooring expectations and reinforces the robustness quality of difference rules. 14 15

## Conclusion

Many types of uncertainty are associated with relatively high fault tolerance and are therefore manageable by taking a robust policy approach that takes into account a variety of models. In other cases, such as uncertainty about the formation of expectations and the star variables, fault tolerance can be lower and non-robust policies can perform very poorly. In these cases, the risk management implication is to pay the insurance cost in terms of second-best performance to protect against bad outcomes. A critical lesson from this research is the importance of maintaining well-anchored inflation expectations, especially when uncertainty is very high.

The robust policy approach does not pretend to solve the rules-vs.-discretion debate, nor does it tell policymakers what they should do in every circumstance. Instead, it provides insights into the conditions under which different policy approaches are likely to be successful or not. As such, they can be useful guides to navigating a highly uncertain world.

## Figure

John C. Williams, 'Certain Uncertainty,' remarks at the Macroeconometric Caribbean Conference, Nassau, Bahamas, March 21, 2025. 1

Alan Greenspan, 'Monetary Policy under Uncertainty,' at a symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, August 29, 2003. 2

Taylor, John B., 1993. 'Discretion Versus Policy Rules in Practice,' Carnegie-Rochester Series on Public Policy . 39: 195-214. 3

McCallum, B. T., 1988. 'Robustness Properties of a Rule for Monetary Policy,' Carnegie Rochester Conference Series on Public Policy , 29: 173-204, and Taylor, John B., 1999. 'Introduction to Monetary Policy Rules ,' ed. John B. Taylor, University of Chicago Press, 1-14. 4

This analogy was suggested by Patrick Minford and referenced in: Levin, Andrew T. and John C. Williams, 2003. 'Robust Monetary Policy with Competing Reference Models,' Journal of Monetary Economics , July, 50: 945-75. 5

John C. Williams, 'Connecting Theory and Practice,' remarks at the Hoover Institution Policy Conference, Stanford, California, May 3, 2024. 6

Board of Governors of the Federal Reserve System, Federal Reserve issues FOMC statement of longer-run goals and policy strategy, January 25, 2012. 7

Alternative characterizations of robust policy include robust control and robust optimal policy; for early references, see Levin, Andrew T. and John C. Williams, 2003. 'Robust Monetary Policy with Competing Reference Models,' Journal of Monetary Economics , July, 50: 945-75. 8

Levin, Andrew T. and John C. Williams, 2003. 'Robust Monetary Policy with Competing Reference Models,' Journal of Monetary Economics , July, 50: 945-75. 9

IEEE Computer Society, 1991. IEEE Standard Computer Dictionary: A Compilation of IEEE Standard Computer Glossaries, in IEEE Std. 610 , 1-217. 10

See, for example (and references therein), Levin, Andrew T., Wieland, V., and Williams, J. C., 1999. 'Robustness of Simple Monetary Policy Rules under Model Uncertainty,' in Monetary Policy Rules , ed. John B. Taylor, University of Chicago Press, 1-14, 263-99; Levin, Andrew T., Wieland, V., and Williams, J. C., 2003. 'The Performance of Forecast-Based Monetary Policy Rules Under Model Uncertainty,' American Economic Review, June, 93(3): 622-45; Levin, Andrew T., Onatski, A., Williams, J. C., and Williams, N., 2006. 'Monetary Policy Under Uncertainty in Micro-Founded Macroeconomic Models,' NBER Macroeconomics Annual 2005 , ed., Mark Gertler and Kenneth Rogoff, University of Chicago Press, 229-87; Taylor, John B. and Williams, J. C., 2011. 'Simple and Robust Rules for Monetary Policy,' in Handbook of Monetary Economics, Volume 3B , eds. Benjamin Friedman and Michael Woodford, 829-60. 11

- Orphanides, Athanasios, and Williams, J. C., 2004. 'Imperfect Knowledge, Inflation Expectations, and Monetary Policy,' in The Inflation-Targeting Debate , eds. Ben S. Bernanke and Michael Woodford, University of Chicago Press, 201-34; Orphanides, Athanasios and Williams, J. C., 2005. 'Inflation Scares and Forecast-Based Monetary Policy,' Review of Economic Dynamics , April, 8(2): 498-527. 12
- 'Orphanides, Athanasios and Williams, J. C., 2005. 'The Decline of Activist Stabilization Policy: Natural Rate Misperceptions, Learning, and Expectations,' Journal of Economic Dynamics and Control , November, 29(11): 1927-50. 13
- With a lower degree of uncertainty, a hybrid approach that combines elements of the standard Taylor Rule and a difference rule performs well. See Orphanides, Athanasios and Williams, J. C., 2002. 'Robust Monetary Policy Rules with Unknown Natural Rates,' Brookings Papers on Economic Activity , 2: 63-145; Orphanides, Athanasios and Williams, J. C., 2006. 'Monetary Policy with Imperfect Knowledge,' Journal of the European Economic Association , 4(2/3): 366-75. 14

Orphanides, Athanasios and Williams, J. C., 2007. 'Robust Monetary Policy with Imperfect Knowledge,' Journal of Monetary Economics , July, 54(5): 1406-35; Orphanides, Athanasios and Williams, J. C., 2013. 'Monetary Policy Mistakes and the Evolution of Inflation Expectations,' in The Great Inflation: The Rebirth of Modern Central Banking , eds. Michael D. Bordo and Athanasios Orphanides, University of Chicago Press, 255-97. 15",John C Williams
https://www.bis.org/review/r250526u.htm,John C Williams: Why Are You (Y* R* U*),"Remarks by Mr John C Williams, President and Chief Executive Officer of the Federal Reserve Bank of New York, at Hofstra University's Graduate Commencement, Hofstra University, Hempstead, New York, 18 May 2025.",2025-05-18 00:00:00,"## John C Williams: Why Are You (Y* R* U*)

Remarks by Mr John C Williams, President and Chief Executive Officer of the Federal Reserve Bank of New York, at Hofstra University's Graduate Commencement, Hofstra University, Hempstead, New York, 18 May 2025.

* * *

## As prepared for delivery

President Poser, Chair Schaeffer and members of the Board of Trustees, deans, faculty and staff, family and friends, Kate and Willie Pride, and of course, the graduating class of 2025 . . . good evening and congratulations!

It's been over 30 years since I received my doctorate. I am deeply honored and humbled to be donning commencement regalia to receive a second one. Thank you to the entire Hofstra community.

When you first heard that John Williams was speaking here today, perhaps you were expecting the John Williams. You know, the one who wrote the music for Star other Wars and dozens of other movies.

I may not have written music for Star Wars, but I have written quite a bit about something called ""r-star.""

What is r-star?

R-star is the natural, or ""normal,"" rate of interest. It's the eventual destination for interest rates. The problem is that you can't look it up in a book or find it in a statistical table. Like many things in life, you must learn about it through experience and evidence (although I am sure if you ask ChatGPT, it will give you an answer). It's the kind of thing that we economists say is ""unobservable,"" but then spend our careers obsessing over how to observe it. Well, at least I do.

You've already studied for your hard-earned degrees and may not be ready to pursue another one in economics . . . . So, I'll explain just one quick detail about r-star and yet then get to the point.

R-star is part of a group of macroeconomic ""star"" estimates-a family, so to speak. Really, they're just a form of shorthand. R-star's often referenced cousins are y-star and u-star, which stand for real GDP and unemployment, respectively.

So, we've got ""y"", ""r"", and ""u.""

Coincidentally, ""why are you?"" is the beginning of a set of questions that I have asked myself at many points throughout my career. My passion for studying r-star has taken me on a three-decade journey as a researcher, policymaker, and leader of a centuryold institution in Lower Manhattan. And I think it's helpful framing for graduates like you as you take the next steps in your careers.

As you continue on beyond the walls and halls of this beautiful Hofstra campus and venture into offices, hospitals, schools, and businesses, ask yourself:

Why are you here?

Why are you going to be successful?

Why ? you

For many people, the first motivation to earn a graduate degree is to secure a job or to advance in your particular field. That is important, and you will find it valuable every day. But there's even more to it. When you think more broadly about the ""whys,"" your career, and the role that it plays in your life, can be far more expansive than you could have imagined.

So, the first lesson that I'll share can help answer the question, ""why are you here?"" And the answer is to remind yourself about what you've set out to achieve with your graduate studies. And that is, to be both a generalist and a subject matter expert.

Yes, I know I am sounding like a two-handed economist.

But think about it. On the one hand, the world needs people who have knowledge and skills that are narrow-and on the other, we need knowledge and skills to be broad. Each of you has a strong foundation and comprehensive education, but also deep subject matter expertise.

Graduate education may close some doors, but it opens up many new ones, too. You've earned an advanced degree at an esteemed institution, and you've invested a tremendous amount of time and money into learning everything that you could in your chosen area. And with this expertise you are well positioned to build and exercise strengths that you have yet to develop or that may not come naturally to you.

Combine all your experiences from life, from college, from work, and from the studies that landed you here today. Piece them together and use them as building blocks to find your footing. With the mindset of operating as a subject matter expert a both and generalist, you can discover opportunities and prospects you may not have previously considered.

On to the second question: ""Why are you going to be successful?""

To this I answer, ""by finding a mentor.""

A good mentor, the mentor, is not the one who will say, ""just follow in my footsteps right and do exactly what I did."" Instead, it's the one who will say ""knock on this door,"" or point out the doors that you don't even know exist. It's one who believes in you and is willing to tell you important things, even some you may not want to hear.

My mentor, Janet Yellen, did this for me. In fact, she was the one who helped me understand the first lesson I just spoke about. Back in the 2000s, I worked for her as a research economist. The work I was doing was exactly what I set out to do, and what I

loved. But at a certain point, Janet-who at that time was the President of the San Francisco Federal Reserve-advised me to broaden my perspective and experiences. She recommended that I learn about the activities and people in our organization outside my area of expertise. This meant spending time away from my main responsibilities, where I was very comfortable, and moving into areas where I knew nothing-and it showed!

I needed to be encouraged to think more broadly, outside of charts and graphs and footnotes. I did my best to follow her guidance, and I am glad I did. Let me emphasize this part: it's not enough to have a mentor or mentors-you have to be open to their guidance and take action.

The experience of learning new things, seeing situations from a new perspective, and making mistakes along the way is what truly made a difference not only to me, but also to the people around me and to the organizations I was in. And this led to many of the accomplishments I am most proud of in my career.

Without Janet Yellen's mentorship, I would not be who I am and where I am today.

And now to answer the final question: ""Why ?"" you

You have the skills. You have the experience. You have the drive.

But in the pursuit of career success, don't forget why you love what you do and why you stand out.

I often say that as an economist, I know just two words: supply and demand.

While it's true that economics plays a major role in my life, I have also made sure to stay close to other two-word phrases that are near and dear to me. Like video games. Classic rock. Star Trek. The names of my two sons, Kenneth and Nicholas. Pizza. Sorry, that's one word. Pizza. Eat

Continue to develop your hobbies, passions, and interests. They will keep you energized when sometimes work does not.

And they will keep you human. Keep you relatable. Keep you sane.

Whatever title you hold, wherever your office is, or whichever board seat you occupy, always remember ""you.""

You have earned the right to be a leader in your field, so embrace leadership in all its forms. We need leaders from all kinds of backgrounds and disciplines. We need strong communicators. And we need those who can inspire teams, take ownership, and drive progress. Especially at times of great uncertainty, people crave effective leadership.

That's why this is a good time in your career to play two roles.

You can a mentor and a mentor at the same time. Pay it back and pay it have be forward.

And while you're busy making incredible contributions to your organizations and to the world, don't forget yourself. Don't forget what makes you great. And don't forget to eat pizza.

Congratulations, and best of luck in everything you do. May the stars be with you.",John C Williams
https://www.bis.org/review/r250527f.htm,Adriana D Kugler: Commencement remarks,"Speech by Ms Adriana D Kugler, Member of the Board of Governors of the Federal Reserve System, at the Economics Commencement Ceremony, University of California, Berkeley, California, 20 May 2025.",2025-05-20 00:00:00,"## Adriana D Kugler: Commencement remarks

Speech by Ms Adriana D Kugler, Member of the Board of Governors of the Federal Reserve System, at the Economics Commencement Ceremony, University of California, Berkeley, California, 20 May 2025.

* * *

Thank you, Stefano, and before I say anything else, congratulations to the Class of 2025! 1   My family is here today, so let me acknowledge my husband Ignacio, my daughter Miri, my son Danny, and my parents who are watching from elsewhere. I start with family because I know it takes a village! So, I want to acknowledge the enormous accomplishment by the graduates and also by their families and friends who supported them through this journey. Let's give all of them a big round of applause! I also want to thank the leaders of Berkeley's economics program for giving me the privilege of returning here, as a graduate of this program, to be a part of what is, in fact, my very first economics commencement ceremony here at Berkeley.

On a similar spring afternoon in 1997, when my classmates were walking across this stage, I was across the country, hurrying to finish my dissertation at the Brookings Institution and preparing to start my first job as an economist. I would have loved to be here, as you are, and I praise you for taking the time to share with your classmates, friends, and family this moment of recognition for the huge achievement today represents. But somehow, at the time of my graduation, I felt the need to get on with earning a living and moving forward with my life, as I am sure many of you are eager to do also.

So, you can understand that this is a very special-and also a little strange- moment for me because it feels, in a way, like I am celebrating my own graduation 28 years later! I think it is also an unusual situation for all of you to listen to this speaker who was once where you are today. It is unusual because standing at this podium now is not just the person I have become in the decades since leaving Berkeley. Standing beside me, very close by today, is also the young woman I was in 1997, who was too busy to attend her own graduation. You will be hearing at times from both of us today, and we may even exchange a few words with each other.

This sounds a little like that Aubrey Plaza movie you may have seen last year, in which a young woman gets advice from her older self. Unfortunately, unlike Aubrey Plaza's character, I cannot help my younger version through the many challenges that she will face, and let me tell you, there were many challenges indeed, and yet here I am! Nevertheless, because of my proximity, today, to that younger self, I hope I can see the world a little more through your eyes, when I try to offer some words of wisdom. I know, I know, commencement speakers are expected to provide wisdom and advice. But really, today, I would like to mainly tell you that the wisdom and also the conviction of my younger self are what allowed me to navigate the challenges along the way. So, trust yourselves!

As I have indicated, the younger version of me was quite impatient to get her professional life started and try to make a mark in the world. The older me would say,

""Take your time, figure out who you are, who you will become! Life is long, and among other things, life teaches you to have patience to work for big goals."" There is merit to this advice, of course, but today I am thinking about how I felt when I was in your shoes, and I am thinking that one of the underappreciated gifts of younger people is, in fact, impatience. I will say more about this, but if you take a look around at all the many urgent challenges we face here in the U.S. and the world, many of which depend on the powerful tool of economics and its potential to make people's lives better, then I would certainly say that some impatience is, indeed, very much what we need.

I speak of economics as a tool because that is all that it is. It is not a philosophy, a value system, or a religion, although I acknowledge that some in our profession might treat it that way. Economics can't answer all the questions we face in our lives. Economics can't tell us how to treat each other, or what kind of world we should strive to create, but it is a means to those ends.

And even the answers that economics provide are always evolving, as our can understanding of economic behavior and phenomena evolves. What we understand in economics has evolved in the years since I left Berkeley, and it will continue to evolve. While this understanding does change over time, I think of it as changing like the California landscape changes. Some towns and cities grow, some decline, and there is the occasional earthquake to shake things up. But the landmarks that guide us in economics-the Golden Gate, the Sierra Nevada-they have been standing for a while now, and I believe they will continue to stand for a long time to come.

Using these landmarks, these foundational and time-tested insights, economics can indeed be a powerful tool. But it is a tool, only to the extent, like any other tool, that it is useful. A brilliant insight, if not applied, or tested, or employed for some useful purpose, is like the gadget you pick up at the hardware store and never use. It is just taking up space in the toolbox. When economics reveals how to use resources efficiently, how to raise production and income and lower costs, these insights are only useful if they are applied-if they win in the marketplace of ideas.

As you embark on your careers as economists, and the myriad ways in which you can employ the knowledge and skills you have acquired, one cause that I hope you all will embrace is actively participating in this marketplace of ideas. I hope you do, because, from the level of the individual household to the loftiest decisions of business leaders and government, employing the foundational insights of economics is the difference between prosperity and the utterly avoidable lack of prosperity.

It is tempting to think that time-tested and broadly accepted ideas are permanent. In fact, the debate has never ended on many foundational ideas of economics, some of which can seem counterintuitive to people. These are ideas that must be fought for, because, as I said, to lose that fight is to go backward and accept less prosperity.

Among the aspirations that each of you hold as you leave the Greek theater today, I hope that you will use what you have learned at Berkeley to be part of this fight. I would go further and argue that, along with the diplomas that you are receiving today, you will also carry with you a special responsibility to promote these principles and use them to promote greater prosperity for all. I am not shy in saying that economists have such a responsibility, nor in saying that the learning you have acquired qualifies you to be an

active participant in these debates. I believe expertise matters, because, in the your cacophony of opinions, and trolling, and disinformation that seems to crowd ever more into the marketplace of ideas each year, I cling to the idea that expertise still matters. In his book , Jonathan Rauch argues The Constitution of Knowledge: A Defense of Truth that, just as important as America's written Constitution is an unwritten one, based on a widespread agreement on what is true and what is not true. Knowledge, he writes, as it is added to and preserved over time, is a special glue, that Gorilla clear and precise super glue, that helps to hold society together and settle many conflicts. Expertise matters as the basis for that knowledge. When your expertise as economists is absent, when your voices are absent from the debate, knowledge suffers, and we are all poorer because of it.

Let me pause for a moment because I am hearing from my younger self just now that these commencement remarks are maybe getting a little heavy. I can understand how she feels. Think about how things looked in 1997. The Cold War was over! The tech boom was just taking off, which meant that Oakland was still affordable. Honestly, in hindsight life back then sounds a lot less complicated than it seems today. My first job was at Pompeu Fabra University in Spain, and my second was at a large public university, the University of Houston. I had some research ideas, mostly in the area of labor economics, and I found some great collaborators, and I was off to the races. Today, I realize that colleges and universities are facing challenges like never before, which means that the prospect of trying to make a career in academia is much less certain.

Public service is another traditional destination for economists, and I have been very fortunate to be able to move forward in my career as an academic, while taking time out on three occasions to work in Washington-as chief economist at the Department of Labor, as the U.S. executive director at the World Bank, and now as a governor at the Federal Reserve Board. By contrast, it is, of course, to put it mildly, a very challenging time to be thinking about starting a career in public service, at least at the federal level.

I can stand here today and lament the new challenges faced by you and by many others in the Class of 2025. I am a mom, and my kids are also facing new circumstances. But I also look back sometimes and wonder how I got here. And this is another case where I believe the 27-year-old me had more wisdom than I do. If she were crossing this stage today, with you, facing these undeniable challenges, I do not think she would be discouraged. She would stubbornly say: ""I love economic research; I will find a way to become an academic."" If you told her about the challenges facing colleges and universities, she would say that it is simply unthinkable that America would not support the greatest post-secondary educational system in the world. And if you told her that a pendulum swing in opinion might limit opportunities in public service, she might say: ""If the purpose of life is helping others, (and I think it is) then public service will be valued, and it is something I must do, and that I will do.""

I think if you had told the 27-year-old me that she could not achieve these things, which she dreamed of, she would stubbornly refuse to accept it. And of course, this is the way that humankind eventually solves most big problems. More than anything else, it is stubborn determination, which I hope is in good supply among you already, and which I encourage you to cultivate. You have already, of course, one of the greatest assets that anyone can have to make a career in economics, which is an education from one of the

greatest universities in the world-the University of California, Berkeley. When I attended here, I had the privilege of taking classes with four winners of the Nobel Prize, and many people tell me that, if anything, the faculty is even stronger today. In my recent work at the Fed, I have had occasion to cite research by six current faculty members in public speeches. You have learned from the best, and with your energy, expertise, impatience, and stubborn determination, I know that nothing will stop you! Whatever you choose to do, I hope you will make use of what you have learned at Berkeley to be an active part of that marketplace of ideas. Go forth from here and make the world a brighter and better place. Go seize the day as you head out Sather Gate! Congratulations, again, Class of 2025, and thank you.

1  The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.",Adriana D Kugler
https://www.bis.org/review/r250527e.htm,Ida Wolden Bache: Norges Bank's management of the Government Pension Fund Global,"Introductory statement by Ms Ida Wolden Bache, Governor of Norges Bank (Central Bank of Norway), at the hearing of the Standing Committee on Finance and Economic Affairs of the Storting (Norwegian parliament) on the management of the Government Pension Fund Global, Oslo, 13 May 2025.",2025-05-13 00:00:00,"## Ida Wolden Bache: Norges Bank's management of the Government Pension Fund Global

Introductory statement by Ms Ida Wolden Bache, Governor of Norges Bank (Central Bank of Norway), at the hearing of the Standing Committee on Finance and Economic Affairs of the Storting (Norwegian parliament) on the management of the Government Pension Fund Global, Oslo, 13 May 2025.

* * *

Thank you for the opportunity to talk about Norges Bank's management of the Government Pension Fund Global (GPFG).

The investment objective of the GPFG is to achieve the highest possible return at an acceptable level of risk. In 2024, returns were high but lower than the return on the benchmark index against which our performance is measured. The Executive Board emphasises the importance of assessing the performance of the GPFG over long periods and is satisfied that the return over time has been higher than the return on the benchmark index.

We are in a period of global transition. The framework for global trade and cooperation is in play, and the security policy landscape is changing. This has resulted in substantial volatility in the return on the GPFG's investments so far in 2025.

I have three key messages today:

First, the experience from previous periods of turbulence, as well as the strengthening of Norges Bank's work on geopolitical risk in recent years, makes the management of the GPFG better equipped to face the current uncertainty.

Second, the GPFG has a financial objective. Active ownership is about managing risk and creating economic value over time.

Third, the energy transition provides investment opportunities. We continue to build a portfolio of renewable energy infrastructure assets and have increased the number of such investments over the past year.

Let me begin with the ability to face new uncertainty.

The Ministry of Finance determines the investment strategy and the benchmark index, and significant strategic decisions are endorsed by the Storting (Norwegian parliament). The equity allocation is 70 percent, and risk is reduced by broad diversification, across regions, sectors and individual companies. The return of the GPFG tracks the benchmark index closely.

Equity investments have been important for the GPFG's performance. At the end of 2024, the cumulative return on the GPFG amounted to over NOK 11 000 billion since inception, of which equity investments accounted for almost NOK 10 000 billion. In order to achieve this return, we have had to withstand several periods of substantial falls in value.

The repricing of technology stocks after 2000, the financial crisis and the outbreak of the pandemic come to mind. Crises do not repeat themselves. Each crisis is unique and difficult to foresee. Nevertheless, being able to follow the GPFG's investment strategy through periods of turbulence is a strength.

The Executive Board is responsible for ensuring that Norges Bank Investment Management (NBIM) has the systems, resources and expertise needed to monitor, assess and manage the risk resulting from geopolitical conditions.

In recent years, NBIM's management of this risk has been strengthened. The scenario analysis and stress testing are part of this. NBIM has built up more expertise and improved internal coordination. The Bank also participates in meetings of the Contact Forum established by the Ministry of Finance for the exchange of information on international matters. All of this enhances contingency preparedness, but contingency planning entails continuous work.

Let me now turn to active ownership. As owner, we have expectations towards the boards of directors of the GPFG's investee companies. The expectations are described in expectation documents that cover different environmental, social and governance issues. The expectations are principles-based and are publicly available.

Active ownership is about risk management and creating long-term economic value. Climate risk is one example of this. In our opinion, companies that address risks associated with climate change will perform better over time. As a long-term owner of almost all listed companies, it is in the GPFG's own-interest to have an orderly energy transition.

The energy transition also creates investment opportunities. The mandate provides for investing some of the GPFG in unlisted renewable energy infrastructure. These are active investment decisions that are subject to the same requirements for risk and return as the GPFG's other investments.

In 2024 and so far in 2025, the Bank has made more investments in unlisted renewable energy infrastructure than previously. The new investments include solar and onshore wind projects in Portugal and Spain and offshore wind projects in the UK, Denmark and Germany. The Bank has also invested in a fund that includes early-stage renewable projects. This fund will invest in different types of technology and across various regions.

The Executive Board has established a framework for unlisted investments that emphasises that also this part of the GPFG's management must be cost-efficient and responsible.  High transparency and reporting standards are required.

Let me conclude. Norges Bank's management of the GPFG is based on a clear mandate and a framework that has proven robust over time. If we consider that adjustments to the mandate are needed, we are conscious of our responsibility as adviser to the Ministry of Finance.

We welcome the Ministry's appointment of an external expert group that will review the GPFG's investment strategy. Such reviews further develop the management of the GPFG, and we will of course make ourselves available to the group if they so wish.

With that, I will pass you to Nicolai Tangen.",Ida Wolden Bache
https://www.bis.org/review/r250527d.htm,Philip R Lane: The communication of monetary policy decisions - incorporating risks and uncertainty,"Remarks by Mr Philip R Lane, Member of the Executive Board of the European Central Bank, at the Second Thomas Laubach Research Conference, hosted by the Federal Reserve Board, Washington DC, 16 May 2025.",2025-05-16 00:00:00,"REMARKS

## The communication of monetary policy decisions: incorporating risks and uncertainty

## Remarks by Philip R. Lane, Member of the Executive Board of the ECB, at the Second Thomas Laubach Research Conference

Washington, D.C., 16 May 2025

In my remarks today I will focus on how the ECB communicates its monetary policy decisions, with a particular emphasis on the integration of risks and uncertainty into the monetary policy decision-making process. [ ][ ] 1 2

Monetary policy meetings take place over two days. On Wednesday afternoon, there are presentations by ECB Executive Board members: Isabel Schnabel reports on the latest financial market developments and I review the global environment and the latest economic, monetary and financial developments in the euro area. This is followed by a general discussion of these topics by Governing Council members. On Thursday morning, I present a proposal for the monetary policy decision, which is then discussed by the Governing Council. After the monetary policy decision is made (typically by consensus), the monetary policy statement is finalised by the Governing Council, concluding the Thursday morning session.

In the afternoon, a press release announcing the decision is published at 2:15 p.m. While this press release was quite succinct in the past, a summary explanation for the decision is now included, and - for the quarterly meetings - the main elements of the staff macroeconomic projections are reported.

At the opening of the press conference at 2:45 p.m., President Lagarde reads out the monetary policy statement. The opening section matches the press release, while further sections go into more detail on economic activity, inflation, the risk assessment and monetary and financial developments. This is followed by a question-and-answer session. After the press conference, the quarterly forecast meetings also see the publication of a staff article that explains the new set of macroeconomic projections. About two weeks later, the Economic Bulletin is published, containing summaries of the preparatory analysis that was made available to the Governing Council prior to the meeting. An account of the meeting is published about a month after the meeting.

The aim of the monetary policy statement is not only to explain the immediate decision but also to update the underlying narrative in terms of the overall orientation of the monetary stance, the main forces shaping the dynamics of the economy and the inflation process, the evolving risk assessment and monetary and financial developments. The discipline of limiting the length of the monetary policy statement (it was about 1,500 words in April) puts a premium on identifying the main issues that the Governing Council wishes to emphasise. At the same time, this length offers room for a sufficiently broad survey of these themes to underpin the monetary policy decision. Naturally, at the quarterly meetings, there is also considerable external interest in the details of the new staff macroeconomic projections: it makes sense to publish the staff article after the press conference. In that way, the initial focus in the monetary policy statement and the press conference is on the Governing Council's overall assessment of the situation, whereas the technical details of the staff work follow thereafter.

The publication of the meeting account summarises the presentations by Isabel and myself and the ensuing discussions among the members of the Governing Council. The account includes a section entitled 'Monetary policy considerations and policy options' that provides the main features of the monetary policy proposal that I presented at the meeting. This typically includes considerations of how risk factors were taken into account in the proposal. [ ]  Especially since the Governing Council's monetary policy decisions are typically consensual, the summary of the discussion provides valuable insights into the range of views expressed at the meeting. 3

Taken together, the press release, the MPS, the press conference, the staff macroeconomic projections article, the Economic Bulletin and the meeting accounts provide a phased sequence of public information releases that helps external audiences to understand how we make our monetary policy decisions. In addition, in pursuing a multi-layered approach to public communication, a visual monetary policy statement is also released, which explains the monetary policy decision in short and easy-to-understand language, accompanied by a set of infographics to illustrate the main messages. [ ] 4

These decision materials are complemented by speeches and interviews by Executive Board and Governing Council members. The publication of an array of analytical contributions by staff (through the Economic Bulletin, the ECB Blog, working papers and occasional papers) also helps improve understanding of monetary policy formation, including in relation to the staff projections, which form a key analytical input into monetary policy meetings.

In view of this rich information set, would it be a game changer if the Governing Council additionally published its conditional assessment of the most likely future rate path, as practised by some other central banks? Putting aside the logistical challenge of forming a consensus on the conditional future rate path among the twenty-six members of the Governing Council, it is my view that such an exercise would create unwarranted expectations about the future rate path. Moreover, it would distort the monetary policy decision-making process in view of the potential reputational costs associated with deviations of actual decisions from the previously-flagged path. [ ]  Procedurally, publishing a conditional rate path would also be awkward in the context of a staff-led projections exercise that is based on the market rate path. 5

More fundamentally, publishing a conditional baseline for the future rate path would not well capture the sensitivity of future rate decisions to the evolving macroeconomic environment and shifts in the risk assessment. As part of the meeting preparations, the staff analyse a family of plausible future rate paths and it would convey excessive confidence if any one candidate rate path were to be singled out. In particular, staff simulation exercises show the sensitivity of rate paths to both the point-in-time macroeconomic projections and various underlying assumptions that underpin model-based optimal rate paths as well as 'robust' rate paths that seek to minimise the risk of a policy error across a range of plausible scenarios. Importantly, all such rate path analyses are sensitive to the assumptions made about the preferences of policymakers. [ ]  Even if the rate path simulation exercises are highly valuable inputs into the internal development of the monetary policy proposal, it is preferable to take a meeting-by-meeting approach and focus the public communication on the immediate decision. [ ] 6 7

At the same time, to improve external understanding of how we make decisions, it is helpful set out the criteria guiding the reaction function to the main risk factors prevailing at any point in time. [ ]  This provides 'reaction function' guidance in terms of the key inputs driving monetary policy decisions. [ ]  For instance, during the disinflation process over the last two years, the Governing Council has highlighted that measures of underlying inflation and the incoming evidence on the strength of monetary policy transmission were especially important in guiding decisions, in addition to the 'standard' role of the inflation outlook (comprising both the baseline and the risks around it). The prominence of these specific risk proxies reflected the high uncertainty about the intrinsic persistence of the inflation surge (such that measures of underlying inflation provided important insights into the persistent component of inflation) and, similarly, the high uncertainty about the impact of the exceptionally fast pace of the cumulative rate hiking over 2022-2023 (such that monitoring the evidence on the strength of monetary transmission was crucial). Since both inflation persistence and the strength of monetary transmission are first order influences on the calibration of the rate path, the prominence given to these factors in our public communication have helped market participants to understand that the incoming information along these dimensions is central to our data-dependent monetary policy decisions. Looking to the future, the exact articulation of reaction function guidance should be periodically updated in line with the evolving risk environment: there is unlikely to be a fixed, timeless list of risk proxies. 8 9

The risk assessment section of the monetary policy statement provides additional signals regarding the factors that might shape future rate decisions. The meeting-by-meeting list of upside and downside risks to growth and inflation help to shape market pricing of future rate decisions: as the evolution of these risks become more or less prominent between meetings, market participants can revise their views. Naturally, this risk assessment is informed by considerable staff analysis that identifies and calibrates material threats to the growth and inflation projections.

Finally, alternative scenarios have been included in the staff macroeconomic projections exercise in the context of specific risk constellations. These include the onset of the pandemic in early 2020, the unjustified invasion of Ukraine by Russia in early 2022 and the elevation of geopolitical tensions in the Middle East in autumn 2023. In the near term, the ongoing uncertainty about US tariff policies means that alternative scenarios will also be included in the June macroeconomic projections exercise. These staff exercises are valuable in conveying the scale of revisions to the projected inflation and output paths that would be triggered under the realisation of the alternative scenarios. [ ] 10

In providing the risk assessment in the monetary policy statement and by staff publishing alternative macroeconomic projection scenarios in the context of specific risk constellations, there is extensive communication on how different risk factors might shape future decisions. Some might wish that the Governing Council lays out specific policy responses to these various risk profiles in order to 'fill out' the distribution of future rate paths. However, as outlined above, the rich information set that is attached to each monetary policy decision together with reaction function guidance provides a sufficient foundation for market participants to assess how the realisation of various risks could affect the future rate path.

An additional potential application of scenario analysis is to construct a limited set of specific 'curated' alternative scenarios by combining selected alternative calibrations of the primary economic and financial judgements underpinning the baseline projections. Publishing such alternative scenarios can be helpful in conveying the difficult choices embedded in making forecasts and in capturing possible differences in policy preferences across policymakers. From a communications perspective, this can be particularly helpful in systems where policymakers have a collective responsibility to endorse the published forecast but retain individual responsibility in casting votes.

Since the ECB relies on a staff-led projections exercise and has a strong preference for consensual decisions, the set of considerations in publishing such curated scenario analyses is different. In making sure monetary policy decisions are robust to non-baseline realisations, it is also not clear whether such a curated approach would be superior to a 'many scenario' internal staff analysis (possibly augmented by machine learning algorithms) that explores robustness across the many combinations of shocks and modelling choices that are considered at each meeting. In addition, if the aim is to capture the main risk concerns of policymakers, selecting a limited set of curated alternative scenarios (out of very many possible scenarios) for each meeting would be logistically taxing for a twenty-six member Governing Council. A basic concern is that the selected curated scenarios might turn out to have shined the spotlight on risk factors that proved to be immaterial and might give the impression that the risk analysis was too narrow in scope.

In any event, the specific methods used to convey how risks and uncertainty are incorporated into the that policy decisions not only take into account the baseline but also the surrounding risk environment.

monetary policy decision-making process are less important than the underlying commitment to articulate Moreover, there is an active research agenda in academia and policy organisations on how best to incorporate uncertainty into monetary policy decisions and monetary policy communications: as this research bears fruit over time, central banks should adapt their practices. [ ] 11

In these remarks, I have focused on how we currently communicate our monetary policy decisions and the associated decision-making framework. How best to integrate risk and uncertainty into our monetary policy decisions and our communication is a key topic for our ongoing assessment of our monetary policy strategy. [ ]  We will publish our updated strategy in the second half of the year. 12

## Annexes

16 May 2025

Slides

1.

The views expressed in this contribution are personal and should not be interpreted as representing the collective view of the ECB Governing Council.

2. A slide deck to accompany these remarks is available on the ECB website.

3.

For instance, the latest published account is for the March meeting and the proposal included the motivation: ' Moving the deposit facility rate from 2.75% to 2.50% would be a robust decision. In particular, holding at 2.75% could weaken the required recovery in consumption and investment and thereby risk undershooting the inflation target in the medium term. Furthermore, the new projections indicated that, if the baseline dynamics for inflation and economic growth continued to hold, further easing would be required to stabilise inflation at the medium-term target on a sustainable basis. Under this baseline, from a macroeconomic perspective, a variety of rate paths over the coming meetings could deliver the remaining degree of easing. This reinforced the value of a meeting-by-meeting approach, with no pre-commitment to any particular rate path. In the near term, it would allow the Governing Council to take into account all the incoming data between the current meeting and the meeting on 16-17 April, together with the latest waves of the ECB's surveys, including the bank lending survey, the Corporate Telephone Survey, the Survey of Professional Forecasters and the Consumer Expectations Survey .'

4. The are available on the ECB website. visual statements

5.

Nuanced communications in a twenty-member monetary union (with twenty different media sectors) is much more challenging than in any individual country with a single media sector.

6. In particular, the weight put on cyclical deviations in output in the 'loss function' is important for such

exercises.

7.

For a discussion of rate path simulations, see Lane, P.R. (2024), ' ', guest lecture at Stanford Graduate School of Business, 2 May, and Lane P.R. (2024), ' ', keynote speech at the Bank of England Watchers' Conference 2024, King's College London, 25 November. The analytics of the monetary policy tightening cycle Monetary policy under uncertainty

- 8.

Of course, the over-riding orientation of our monetary policy is to deliver our symmetric two per cent inflation target over the medium term and this commitment underpins all of our communications. In mapping that strategic commitment to monetary policy decisions, laying out the reaction function provides additional clarity.

9.

For an extensive articulation of the role of providing such guidance, see Lagarde, C. (2025) ' ', speech at 25th 'ECB and Its Watchers' conference organised by the Institute for Monetary and Financial Stability at Goethe University in Frankfurt am Main, Germany. A robust strategy for a new era

- 10.

In addition, staff also maintain 'inflation-at-risk' and 'GDP-at-risk' quantitative models that extract the distribution of macroeconomic risks from the joint evolution of a range of macroeconomic and financial data.

11.

See, for example, Adrian, T, Giannone, D., Luciani, M. and West, M. (2025), 'Scenario Synthesis and Macroeconomic Risk', CEPR Discussion Paper No. 20219; Ciccarelli, M., Darracq Pariès, M., Landau, B. and Sousa, J. (2025), 'Exploring an uncertain future with the help of scenarios', ECB Blog, 15 January, and Battistini, N., Chahad, M. and Fonseca, L. (2025), ""Narratives and Risks: An Integrated Framework for Policy"", mimeo.

12.

For a recent analysis of the importance of integrating risk and uncertainty into the monetary policy process, see Hernández de Cos, P. (2025) 'Lessons for the European Central Bank from the 2021-2023 inflationary episode', Working Paper 05/2025, Bruegel.",Philip R Lane
https://www.bis.org/review/r250527c.htm,Christopher J Waller: The role of economic research in central banking,"Speech by Mr Christopher J Waller, Member of the Board of Governors of the Federal Reserve System, at the Award Ceremony for the Winners of the Bank Al-Maghrib Prize for Economic and Financial Research, Bank of Al-Maghrib, Rabat, Morocco, 14 May 2025.",2025-05-14 00:00:00,"## Christopher J Waller: The role of economic research in central banking

Speech by Mr Christopher J Waller, Member of the Board of Governors of the Federal Reserve System, at the Award Ceremony for the Winners of the Bank Al-Maghrib Prize for Economic and Financial Research, Bank of Al-Maghrib, Rabat, Morocco, 14 May 2025.

* * *

Thank you for the opportunity to speak to you today. 1

I have spent most of my career conducting research and overseeing research by others, first as a professor and later as a research director in the Federal Reserve System. More recently, I have been more of a consumer than a producer of research as a member of the Federal Open Market Committee (FOMC). Eight times a year, the FOMC meets to set the appropriate stance of monetary policy to achieve the economic goals assigned to us by the U.S. Congress. We discuss where the economy stands in relation to those goals, how it is likely to evolve, and the implications for monetary policy. We examine hard statistical data, ""soft"" data in the form of surveys and input from business contacts, and other domestic and global factors.

Another vital input for central bankers is economic research. Nearly all central banks have a research group to help policymakers think through the effects of monetary policy on the economy. In the Federal Reserve, the 12 regional Reserve Banks and the Board of Governors have staffs that perform a variety of research activities. First and foremost, they use research to advise the Governors and Bank presidents on the appropriate path of monetary policy given current events. Second, they provide analysis of the global, U.S., and regional economies. Third, economists at the Reserve Banks meet with businesses in their Districts to discuss economic issues and to collect information about the local economy. Finally, there are research groups around the Federal Reserve System that focus on banking, payments, financial markets, financial stability, and community development.

The word ""research"" is used very loosely in everyday life. When I was a professor, my undergraduates would do ""research"" to write a term paper. When I go on vacation, I often do ""research"" on what to do or see at my destination. Analysts at financial institutions do ""research"" on individual firms or sectors of the economy. For today's talk, I narrow in on the types of research done at central banks, with a focus on the Federal Reserve.

## Research at the Federal Reserve

Research is a vital input for providing state-of-the-art advice to policymakers within the Federal Reserve System. Because the Fed is accountable to the public, policymakers must be able to explain why certain actions were taken and describe the intellectual foundations underlying those decisions. Decisions are analyzed, discussed, and criticized by many, in particular by highly skilled and knowledgeable academic researchers. Top academics are on the cutting edge of research, particularly on the

subject of monetary policy. Milton Friedman, Allan Meltzer, Robert Lucas, John Taylor, and Michael Woodford are just a few examples of academic scholars who challenged central bankers over the past 70 years on how monetary policy should be conducted. Central banks must be up to the challenge and be able to debate and compete with these academics in the world of theory and ideas.

To do that requires hiring central bank economists who are trained in the academic research tradition and continue working at the research frontier. And that means pursing academic research at central banks. Our decisions will be better if we hire motivated and well-trained economists and let them work on the big questions that economics seeks to answer. The Federal Reserve tries to create a strong academic research environment to attract strong researchers to work at the Federal Reserve to give us a better foundation for the decisions we make.

When I was research director at the Federal Reserve Bank of St. Louis, I told our board of directors that my goal was to build a department that was renowned for producing high-quality academic research. They often responded by saying, ""But the Federal Reserve is not a university. Rather than doing academic research, why isn't your staff doing research on issues that you direct them to work on that helps the president of the Bank?"" This is a great question and one that should be asked at every central bank. To answer that question, I would start by explaining the difference between academic research and directed research, which I will now do today. Once I have, it will be clear that directed research relies on its grounding in academic research and is a complement to directed research in supporting policymaking.

## Academic Research

Academic research considers a broad range of economic matters. It often focuses on issues that are currently off the radar screens of policymakers who are focused on the near-term economic outlook. But there is value in thinking broadly. Not too long ago, trade policy and tariffs were not a major concern of policymakers. A critical aspect of academic research is that it is often ""proactive""-it focuses on intellectually interesting issues often before they become relevant for monetary policy.

Academic research conducted by Federal Reserve economists is often done with the goal of publishing it in academic journals. Papers submitted to these journals go through a rigorous vetting process by economists outside the central bank. This serves as an important check on central bank ""group think."" The ideas and conclusions of the paper must be based on sound economic theory and empirical evidence. They cannot reflect dogma or outdated beliefs about how the economy operates.

Academic research can take the form of an evaluation of major economic events, sometimes called an ""economic autopsy."" This type of analysis can take years, and it's not particularly time sensitive. To this day, economists are still researching the causes of the 2008 financial crisis and how policies undertaken at that time helped or hindered the subsequent economic recovery.

## Directed Research

Then there is directed research. Directed research is just that-an issue or policy problem that staff economists are told to work on by their supervisors. It is not unrestricted thinking about an issue. Often, directed research addresses an emerging topic that demands attention from policymakers. As a result, directed research is usually reactive in nature. It often has the feel of firefighting-an issue flares up, and policymakers must respond. They need analysis of the problem to think about the issue and how to act. For example, the April 2 tariff announcement was larger and more extensive than nearly anyone expected. Immediately, questions were asked of staff around the Federal Reserve System such as, ""What will this do to the U.S. economy? What will happen to inflation and unemployment?"" The answers to these questions are obviously time sensitive.

Directed research often involves running shocks though existing economic models or quick data analysis and it relies on existing economic research. One could call the results ""quick and dirty"" answers. Because this work is time sensitive, central bank researchers do not have the luxury of getting their directed research vetted by the economics profession. They simply figure out how the current issue can be incorporated into the models or analyzed with econometrics, and whatever answer comes out is the best they can do in the time they have.

Because directed research is often reactive and time sensitive, researchers must rely on existing published research as a key input into their analysis. You cannot come up with original or innovative models on the spot to deal with an issue that suddenly appears. And, on the data front, you may not have the time to look deeply at the microdata. In these situations, existing academic research done by central bank economists and by academics outside the central bank provides the foundation for conducting the directed research. This is why I say that academic research is a complement to directed research. Good directed research requires academic research. Furthermore, postmortem analysis is not always done after directed research is completed. Once the issue goes off policymakers' radar screens, it might not be looked at again. If the issue resurfaces at a later date, then there may be some postmortem investigation into earlier analyses to see what went right and what went wrong.

Finally, directed research sometimes takes the form of analysis involving the gathering and organizing of facts and data to generate a simple narrative for less specialized audiences. The Beige Book-which is a survey of regional economic conditions done by the Reserve Banks-is a clear example. But it also takes other forms, such as talks by research economists to private-sector audiences, presentations to the Reserve Bank boards of directors, or writing about timely topics in short economic posts.

## History of Research at the Federal Reserve

Economic research has shaped monetary policy at the Federal Reserve from its very beginnings, but the form and use of that research has varied considerably over time. I do not have the time today to give this topic the justice it deserves. But I will touch on a few historical highlights. During the early decades of the Federal Reserve System, ""research"" at the Fed was largely limited to the collection of statistics, only some of which were published by the Fed and other government agencies. At the Reserve Banks, the focus was often on measuring and reporting on regional economies or

sectors. 2   Monetary policy decisions were made using policy frameworks that were often not tested in the rigorous and scientific ways associated with economic research today. For example, in the 1920s, the Federal Reserve adhered to the ""real bills"" doctrine that called for providing liquidity to businesses when it was demanded during expansions and contracting credit when demand for it fell during times of slowing growth. 3   This, of course, is often exactly the opposite of what monetary policy should do to either control inflation in an overheating economy or support economic activity in a slowdown.

Up until the 1950s, journal-oriented economic research in the Federal Reserve System was quite limited. But a big increase took place in the 1950s, when the Reserve Bank presidents became much more involved in monetary policy decisions. 4   Before that, Bank presidents focused mainly on local operations and discount window policy. But once they became more involved in national-level policymaking decisions, their new responsibilities required them to have more specialized research staff who were trained in modern economic theory and data methods. The creation and development of professional research departments led to a greater debate within the Federal Reserve and among outside academics as to how monetary policy should be conducted.

In the 1960s, Keynesian macroeconomic theory was the dominant paradigm in policymaking, and large-scale econometric models were being developed to provide quantitative analysis of monetary policy. The Board of Governors led the way by hiring Ph.D. economists from academia to develop and use these Keynesian models and econometric techniques to aid policymakers. This was an important first step in raising the skill level of research staff to match that of top academics.

But the beauty of the Federal Reserve's structure is that alternative macroeconomic frameworks and theories could be developed in the rest of the System. And the first example of an alternative view of monetary policy was developed by research economists at the Federal Reserve Bank of St. Louis and became a force to be reckoned with.

In the early 1970s, after inflation failed to fall as much as expected in a slow economy, Fed Chairman Arthur Burns came to believe that inflation was very little affected by economic slack and was instead a structural problem that could only be dealt with through wage and price controls. 5   Board models typically viewed the 1970s inflation as being driven by special factors that were outside the influence of monetary policy. In contrast, at the St. Louis Fed, monetarism was the dominant paradigm in thinking about monetary policy. The Bank's researchers believed the 1970s inflation was driven by excessive monetary growth. 6   This led to a vigorous debate throughout the 1970s between Board staff and St. Louis Fed economists over the sources of inflation and how to bring it back down. At the end of the 1970s, Paul Volcker became Chair of the Federal Reserve and essentially adopted the St. Louis monetarist position of halting monetary growth to bring inflation under control. He announced a fundamental change in the Fed's policy approach, vowing to bring inflation down by adopting strict monetary growth targeting. Volcker succeeded, but at the cost of causing a severe recession.

In the 1980s, the Federal Reserve Bank of Minneapolis became a dominant force in monetary policy research by proposing new economic theories and policy frameworks. In association with economists at the University of Minnesota and the University of

Chicago, researchers at the Minneapolis Fed explored how rational expectations would affect the transmission channel of monetary policy. Up until then, Fed forecasting models assumed that individuals had adaptive expectations, meaning they were purely backward looking. This meant that the Board's econometric models didn't account for policy actions that were announced in advance but hadn't taken effect yet. If households and firms did understand how current policy actions and announcements would affect future outcomes, they would react in ways that didn't match the predictions of the Board's forecasting models. This would lead to significant errors in the guidance that the staff provided to policymakers.

A critical finding of all this research was that private agents' inflation expectations were forward looking-they would adjust to promises, and failures, of central bankers to keep inflation low and stable. If people didn't believe a central bank's promise to keep inflation low, then the central bank lacked credibility. This would cause inflation expectations to increase, which would lead to demands for higher nominal wages, thereby feeding future inflation. It is now widely believed that this was a key problem that Volcker faced: His promises to bring inflation down were not fully credible, as they came after the Fed's uneven efforts at fighting inflation over the previous decade. Research on monetary policy, along with the experience of the Volcker years, led to the concepts of ""credibility"" and ""stable inflation expectations"" becoming central parts of how every central bank enacts policy.

A key innovation at the Minneapolis Fed that led to this explosion of fundamental macroeconomic research was creating strong research links between Fed researchers and academics at the University of Minnesota. Instead of being on opposite sides of the fence, the idea was to have Fed researchers and academics work together side by side. This frequent interaction led to the type of rigorous debate between academics and Fed researchers that I discussed earlier. As a result, more rigorous and sound monetary policy frameworks were developed over the next several decades. The success of this close interaction between academics and Fed researchers led most Federal Reserve Banks and the Board of Governors to adopt similar relationships that continue to this day.

Another example of the value of economic research came with the onset of the Global Financial Crisis in 2008, the worst since the Great Depression. As it happened, the Fed Chair at the time was one of the world's leading experts on that period, Ben Bernanke. He drew heavily on his and others' research on the 1930s, and related work on Japan's crisis and slow growth in the 1990s and 2000s, to help fashion new monetary policy tools to combat the downturn, including quantitative easing and extended forward guidance. 7

Does this suggest that central bank policymakers should all be Ph.D. economists and have a record of journal publications? Of course not-there are other skills and work experiences needed in the policy sphere, and the Fed has economists and noneconomists among its policymakers. Before the 1990s, very few policymakers were Ph. D. economists, and those who were usually did not have academic records in research; instead, policymakers typically had backgrounds in financial markets or the law. In 8 contrast, since the 1990s, key policymaking roles in central banks around the world have been filled by Ph.D. economists with an academic research background. Today, 10 of the 19 FOMC policymakers are Ph.D. economists. The experience of these

economists further embeds economic research into monetary policymaking and strengthens the decisions that are made.

In conclusion, I expect research to remain an important part of policymaking at the Fed and other central banks. I believe that the insights provided by this research can further our understanding of the economy and improve monetary policymaking.

- 1  The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.
- 2  The Federal Reserve Board and the Reserve Banks did have several Ph.D. economists on staff who engaged in pathbreaking research. For example, the Federal Reserve Bank of New York's John H. Williams and Randolph Burgess and the Board's E.A. Goldenweiser and Winfield Riefler produced numerous articles and treatises on financial markets, international monetary arrangements, and Federal Reserve policy.
- 3  See Ben S. Bernanke (2013), ""A Century of U.S. Central Banking: Goals, Frameworks and Accountability,"" vol. 27 (Fall), pp. 3-16. Journal of Economic Perspectives,
- 4  Much of the following material draws from Michael D. Bordo and Edward S. Prescott (2023), "" Federal Reserve Structure and the Production of Monetary Policy Ideas,"" Working Paper Series 23-29 (Cleveland: Federal Reserve Bank of Cleveland, November).
- 5  See Edward Nelson (2005), ""The Great Inflation of the Seventies: What Really Happened?"" vol. 5 (1); and Christina D. Romer and Advances in Macroeconomics, David H. Romer (2013), ""The Most Dangerous Idea in Federal Reserve History: Monetary Policy Doesn't Matter,"" American Economic Review: Papers &amp; Proceedings, vol. 103 (May), pp. 55-60.
- 6  For a discussion of the part played by the Federal Reserve Bank of St. Louis in the development of monetarism, see chapter 13 in Edward Nelson (2020), Milton Friedman , (Chicago: University and Economic Debate in the United States, 1932-1972 Volume 2 of Chicago Press).
- 7  See Bernanke's discussion of the comparison between the Great Depression of the 1930s and the Great Recession of 2007-09 in Ben S. Bernanke (2023), ""Nobel Lecture: Banking, Credit, and Economic Fluctuations,"" vol. 113 American Economic Review, (May), pp. 1143-69.
- 8  For example, Alan Greenspan, a successful Wall Street economist and chairman of President Ford's Council of Economic Advisers, had not published much in journals when he earned his Ph.D. in economics in 1977, at age 51, 10 years before he became Fed Chair.",Christopher J Waller
https://www.bis.org/review/r250527b.htm,Steven Maijoor: A race we cannot afford to lose - cybersecurity in an age of geopolitical tensions,"Speech by Mr Steven Maijoor, Executive Director of Supervision of De Nederlandsche Bank, at the International Swaps and Derivatives Association (ISDA) Annual General Meeting, Amsterdam, 14 May 2025.",2025-05-14 00:00:00,"## Steven Maijoor: A race we cannot afford to lose - cybersecurity in an age of geopolitical tensions

Speech by Mr Steven Maijoor, Executive Director of Supervision of De Nederlandsche Bank, at the International Swaps and Derivatives Association (ISDA) Annual General Meeting, Amsterdam, 14 May 2025.

* * *

On April 22 the Dutch Military Intelligence and Security Service reported that it had detected a Russian cyberattack targeted at a Dutch critical public service. It was the first time a state-sponsored cyberattack was reported in the Netherlands. Which is not the same as saying that it happened for the first time.

Geopolitical tensions have been rising for more than a decade, but over the past few years they have accelerated. Needless to say this is bad news for the world economy and the financial sector. But perhaps in no area is the geopolitical threat so real and acute as in the digital domain.

State-sponsored cyberattacks are often very well concealed, so we do not have reliable numbers on how often they occur. But anecdotal information from intelligence agencies suggest their number is increasing.

Traditionally, the financial sector has been targeted by cyber criminals with financial motives. But with the changing geopolitical climate, nation-state cyberattacks on financial institutions have become a realistic possibility. The aim of nation-state actors is usually not financial gain, but disruption. For them, the financial sector is an attractive target. The sector is crucial to the functioning of the economy. Also, many financial firms depend on the same third-party service providers. If one of these suppliers is attacked, large chunks of the financial sector may experience the knock-on effects. As we showed in our latest Financial Stability overview, a quarter of all reported global cyberattacks - so including energy and telecom - can potentially affect the financial sector through this channel.

Artificial Intelligence is likely to reinforce the cybersecurity threat. AI makes cyberattacks more sophisticated. At least some of them, like phishing. Also, the scale, access and speed of cyber-attacks will probably go up.

Recently, we have seen this very clearly in the context of cyber-crime. For example, by enabling very advanced deepfakes. We had the rather spectacular case of a finance worker in Hong Kong, who was tricked into paying out $ 25 million. The fraudsters used deepfakes to pose as the company's CFO in a videoconference call. Although nationstate actors use AI, we have not yet observed them using these techniques to create large scale disruptions. But what if nation-state actors fully exploit the potential of AI, and use it to disrupt vital processes on a larger scale?

When we talk about financial institutions in this context, most people will first of all think of banks. But for you, I think Central Counterparty Clearing Houses and other market infrastructures are perhaps just as important. Many of you depend on them for the

trading, clearing and settlement of transactions in foreign exchange, securities, options and derivatives.

Market infrastructures occupy a unique position in the cyberthreat landscape. They seem to be targeted less, but if, for example, CCPs are attacked successfully, the impact could be very high. This is partly because there are relatively few of them. If party A goes down, it can be difficult for party B to compensate. Their attack surface is also relatively smaller because they offer fewer types of services compared to banks. Also, they have fewer public-facing web applications, and fewer customers than banks. However, the systems they do operate are highly advanced and very important for the functioning of the financial system.

All of these features make them an attractive target for nation-state actors who want to cause maximum disruption. This does not mean that market infrastructure parties are currently being attacked. But given the geopolitical situation, tomorrow's reality could be different.

What makes CCPs potentially more vulnerable than banks is that most of them have outsourced part of their cybersecurity. That is understandable. If you are a large bank, having a few hundred cybersecurity experts is an affordable investment. CCPs do not have the resources for this. To them, outsourcing provides access to expertise and higher standards for cyber and information security. But the drawback of course is that it makes CCPs dependent on external parties, and it makes their cyber defence more complex.

All this means CCPs need to stay alert. Cyber resilience is at least as important for CCPs as it is for other financials.

Many financial institutions have taken big steps in recent years to boost their cyber resilience. But given the size, urgency and evolving nature of the threat, we need to do even more to keep financial services safe. It seems more and more that we are involved in a digital arms race. A race with a sophisticated and cunning opponent. A race in which we want to be roadrunner, and not the coyote.

This is why cyber resilience will absolutely be a key focus area in our supervision of the financial industry in the coming years. Our aim as a supervisor is to make financial services and the financial system safer against cyber threats. Not only by increasing the resilience of the financial sector itself, but also by stepping up the robustness of the entire chain of ICT service providers. DORA, the European Digital Operational Resilience Act, that came into effect at the beginning of this year, gives us additional tools to accomplish this aim.

To start with, under DORA, threat-led penetration tests are mandatory for the largest financial institutions in Europe. In the Netherlands we have been conducting these kinds of tests voluntarily for over eight years with good results, and we are very pleased that it is now becoming the norm at the European level. The largest CCPs within the EU will be part of the group of financial institutions for which the penetration tests will be mandatory.

But DORA also imposes stricter requirements for managing cyber risks in outsourcing chains. For example, financial firms face stricter rules for conducting due diligence on potential ICT providers. And very importantly, under DORA, European supervisors can conduct inspections of critical third-party ICT service providers in tandem with national supervisory authorities. We expect big techs like Google and Microsoft to be placed under EU-wide supervision. And, just as with the banks, we are going to test their readiness to detect and withstand cyberattacks.

Despite all efforts, there is no such thing as perfect cyber security. It is therefore vital that financial institutions take measures to recover quickly after cyber incidents. This is crucial to ensure that services can continue and people don't lose trust in financial firms or the financial sector as a whole.

The results of the ECB's 2024 cyber stress test of a group of banks show that there is room for improvement on the recovery front. So it's a very good thing that DORA also imposes new requirements on institutions' continuity plans and backup policies. They need to develop a culture where cyber incidents are quickly detected and reported. They need to have their playbooks in place. And they need to have clearly defined management roles and responsibilities. And this includes good crisis communication, which is absolutely essential. These are all key ingredients for an effective response after a cyberattack.

But even if we all have our own house in order, that is not enough. Because on a digital level the financial sector is so interconnected, and connected to other vital sectors of the economy as well, that some degree of overall coordination and cooperation is necessary.

Governments should take the lead to improve cross-sectoral cooperation and coordination. They must continue to conduct large-scale cyber-drills and practice activating crisis plans. The insights gained should be used to enhance resilience.

Under the new legislation supervisors also have an obligation to cooperate closely with other sectors. DNB is putting this into practice by working with sectors that are most critical to the financial sector, such as energy and telecommunications. Within our mandate, we support these sectors with information, cooperation and ethical hacking experience.

To keep financial institutions and the financial system safe, resilience against cyberattacks has become just as important as holding sufficient capital and liquidity. So we need to do whatever we can to further boost it. Both in terms of detection and recovery. And we need to work together. Governments, banks, market infrastructures, supervisors, telecom, energy and other vital players in the outsourcing chain. Because this is a race we cannot afford to lose.",Steven Maijoor
https://www.bis.org/review/r250527a.htm,Philip N Jefferson: Economic outlook,"Speech by Mr Philip N Jefferson, Vice Chair of the Board of Governors of the Federal Reserve System, at the Annual Conference of Second District Directors and Advisors, Federal Reserve Bank of New York, New York City, 14 May 2025.",2025-05-14 00:00:00,"For release on delivery 9:10a.m. EDT May 14, 2025

Economic Outlook

Remarks by

Philip N. Jefferson

Vice Chair

Board of Governors of the Federal Reserve System at the

Annual Conference of Second District Directors and Advisors, Federal Reserve Bank of New York

New York, New York

May 14, 2025

Thank you, President Williams.  It is wonderful to be back in New York, and it is an honor to speak to you, the directors and advisers to the Second District.  You all play an extremely important role for the Federal Reserve Bank of New York and, indeed, for the entirety of the Federal Reserve System.  You, and your peers around the country, inform President Williams and the other Bank presidents about how you see the economy unfolding in your communities and in your industries.  The presidents, in turn, share that vital information with all the members of the Federal Open Market Committee (FOMC) so that we can make the best monetary policy decisions to benefit all Americans.  Thank you for the important contributions. 1

In the spirit of sharing information, I thought it would be helpful to share with you my economic outlook.  First, I will discuss how I see recent economic activity.  Next, I will talk about developments pertaining to both sides of our dual mandate, maximum employment and price stability.  Finally, I will offer my current view of monetary policy. Economic Activity

While the economy entered a period of heightened uncertainty this year, the underlying data through the first quarter showed resilience.  As you can see in figure 1, gross domestic product (GDP) contracted slightly by 0.3 percent in the first quarter, on an annualized basis, after expanding at a 2.4 percent rate in the fourth quarter of 2024.  That change, however, overstates the deceleration in activity.  A surge in imports apparently ahead of anticipated changes to trade policy did not seem to be reflected fully in inventory or spending data.  That misalignment complicated the interpretation of measured GDP data.  Private domestic final purchases, which exclude government

1  The views expressed here are my own and not necessarily those of my colleagues on the Federal Open Market Committee.

spending, inventory investment, and net exports, usually gives a better read than GDP on the underlying momentum in the economy.  That came in at a 3 percent rate in the first quarter, consistent with readings from last year.

Looking at figure 2, you can see that inflation-adjusted consumer spending was strong much of last year.  Spending eased at the start of 2025, which could in part reflect poor weather and seasonal adjustment challenges.  Spending bounced back in March, perhaps reflecting some purchases ahead of expected trade policy changes.

Of course, those observations of first-quarter economic activity are now in the rearview mirror.  Tariff announcements and heightened uncertainty about government policies in general are the dominant economic developments of more recent weeks and have caused me to look carefully at my forecasts.  It is not my role to express views on policies coming from the Administration or Congress, but I do study the implications of those policies on economic activity and inflation.

Various surveys show a decline in business sentiment related to trade policy.  The Beige Book reported that some retailers are expecting to raise prices in response to tariffs, which could then limit spending, especially by the most price-sensitive consumers.  Manufacturers saw risks of supply chain disruptions related to trade policy changes.  Moreover, uncertainty is quite high.  As a result, I have adjusted down my expectations for economic growth this year, but I see the U.S. economy as continuing to expand.  Of course, trade policy is still evolving, so its ultimate economic implications are not known, and I will be following developments carefully.

## Labor Market

Turning to the labor market, conditions continue to be solid.  As you can see in figure 3, the unemployment rate was 4.2 percent in April.  It has fluctuated within a narrow and historically low range between 4 and 4.2 percent since the middle of last year. U.S. employers added 177,000 jobs to payrolls last month, effectively matching the average growth over the past six months.  Payrolls have been rising at a pace consistent with a stable unemployment rate and a flat labor force participation rate.  Hiring has slowed from the rapid pace recorded earlier in the current expansion, but layoffs remain historically low.  That can be seen in figure 4.  New applications for unemployment benefits this year remain in the same low range recorded over the previous three years.

Looking at figure 5, you can see the ratio of job vacancies to unemployed workers was at 1 in March, well down from a peak of 2 in 2022.  The measure is consistent with a labor market that looks to be in balance and is not a source of inflationary pressure. Looking ahead, I am watching for signs that the labor market could cool as tariff increases begin to weigh on economic activity.

## Inflation

Regarding inflation, recent data are consistent with further progress toward our 2 percent inflation target; however, that goal has not yet been reached.  Looking at figure 6, the blue line shows inflation as measured by the price index for personal consumption expenditures (PCE) has trended down from a peak above 7 percent in mid-2022.  In March, PCE prices advanced 2.3 percent from a year earlier.  Core PCE inflation, which excludes volatile consumer energy and food prices and is usually a better indicator of future inflation, the dashed red line, was at 2.6 percent.  Figure 7 shows the components

of core PCE inflation, which can provide insight into sources of inflationary pressures. Housing services inflation, the purple dotted line, has fallen notably since early 2023 and could continue to provide support to the disinflation process.  Core services inflation, the dashed red line, has largely moved sideways since the early part of last year, contributing little to further disinflation, and I largely expect that pattern to continue as well.  In contrast, goods inflation, outside of food and energy, the blue line, has picked up a bit this year.

There is much uncertainty, however, around the future path of inflation.  If the increases in tariffs announced so far are sustained, they are likely to interrupt progress on disinflation and generate at least a temporary rise in inflation.  Whether tariffs create persistent upward pressure on inflation will depend on how trade policy is implemented, the pass-through to consumer prices, the reaction of supply chains, and the performance of the economy.  Short-term inflation expectations have increased in both survey- and market-based measures, but I think it is notable that most measures of longer-run inflation expectations have been largely stable, suggesting that the American people understand the Federal Reserve's commitment to return inflation to our 2 percent target.

While trade policy has received the bulk of recent attention, I remain focused on the aggregate effect from the totality of different government policy changes, including trade, immigration, regulatory, and fiscal policies, as well as their net effects on the economy.  This net effect will likely remain uncertain for some time.

## Monetary Policy

Last week I supported the FOMC's decision to hold the federal funds rate at current levels as the best policy to achieve our dual mandate of maximum employment

and price stability.  As you can see in figure 8, the FOMC acted last year to reduce the policy rate by a full percentage point.  Over the past several meetings, the rate has been held at what I view as a moderately restrictive level.  I view the current stance of policy as well positioned to respond to developments that may arise.

With respect to the path of the policy rate going forward, I will carefully assess incoming data, the evolving outlook, and the balance of risks.  Various measures of consumer and business sentiment have declined sharply this year, and I will be watching very carefully for signs of weakening economic activity in hard data.  At the same time, higher tariffs could lead to higher inflation this year.  It is uncertain whether inflationary pressures would be temporary or persistent.  Our monetary policy actions are guided by our dual mandate to promote maximum employment and stable prices for the American people.  With the increased risks to both sides of our mandate, I believe that the current stance of monetary policy is well positioned to respond in a timely way to potential economic developments.

## Conclusion

The uncertain economic outlook presents a challenge for monetary policymakers. It is critical that we have the best available information from a broad cross section of sources, which is again why your efforts to keep President Williams and other monetary policymakers informed are so critical.  Effective policymaking starts with hearing from people in every corner of this country-including New York, New Jersey, Connecticut, Puerto Rico, and the U.S. Virgin Islands.  Directors and advisers like you make that possible.  Thank you again.



## Economic Outlook

Philip N. Jefferson

Vice Chair, Federal Reserve Board

Board of Governors of the Federal Reserve System

The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.

Annual Conference of Second District Directors and Advisors Federal Reserve Bank of New York

May 14, 2025



## Figure 1: Real Gross Domestic Product



Note: Percent change from preceding period, seasonally adjusted annual rate.

Source: U.S. Bureau of Economic Analysis, Real Gross Domestic Product, retrieved from FRED, Federal Reserve Bank of St. Louis.



## Figure 2: Real Personal Consumption Expenditures



Note: Seasonally adjusted.

Source: U.S. Bureau of Economic Analysis, Real Personal Consumption Expenditures, retrieved from FRED, Federal Reserve Bank of St. Louis.



## Figure 3: Unemployment Rate

Source: U.S. Bureau of Labor Statistics, Unemployment Rate, retrieved from FRED, Federal Reserve Bank of St. Louis.





## Figure 4: 4-Week Moving Average of Initial Claims



Note: Seasonally adjusted.

Source: U.S. Employment and Training Administration, 4-Week Moving Average of Initial Claims, retrieved from FRED, Federal Reserve Bank of St. Louis.



## Figure 5: Job Openings: Total Nonfarm/Unemployment Level



Note: Seasonally adjusted.

Source: U.S. Bureau of Labor Statistics, Job Openings: Total Nonfarm and Unemployment Level, retrieved from FRED, Federal Reserve Bank of St. Louis.



## Figure 6: 12-Month PCE and Core PCE Inflation



2022

2023

Note: PCE inflation is the change in the personal consumption expenditures price index, and core PCE inflation is the change in PCE price index excluding food and energy. PCE and core PCE are 12-month inflation percentages calculated using seasonally adjusted annual rates.

Source: U.S. Bureau of Economic Analysis, Personal Consumption Expenditures: Chain-type Price Index and Personal Consumption Expenditures Excluding Food and Energy (Chain-Type Price Index), retrieved from FRED, Federal Reserve Bank of St. Louis.



## Figure 7: Components of Core PCE Inflation



Note: Core goods inflation is the change in the personal consumption expenditures (PCE) price index excluding energy and food. Core services inflation is the change in the PCE price index excluding energy services.

Source: U.S. Bureau of Economic Analysis.



## Figure 8: Federal Funds Rate



Source: Federal Reserve Bank of New York.



## Economic Outlook

Philip N. Jefferson Vice Chair, Federal Reserve Board Board of Governors of the Federal Reserve System

Annual Conference of Second District Directors and Advisors Federal Reserve Bank of New York

May 14, 2025",Philip N Jefferson
https://www.bis.org/review/r250527g.htm,Philip N Jefferson: Liquidity facilities - purposes and functions,"Speech by Mr Philip N Jefferson, Vice Chair of the Board of Governors of the Federal Reserve System, at the 2025 Financial Markets Conference ""Financial intermediation in transition: how will policy adapt?"", sponsored by the Federal Reserve Bank of Atlanta, Fernandina Beach, Florida, 19 May 2025.",2025-05-19 00:00:00,"For release on delivery 8:45 a.m. EDT May 19, 2025

Liquidity Facilities:  Purposes and Functions

Remarks by

Philip N. Jefferson

Vice Chair

Board of Governors of the Federal Reserve System at

'Financial Intermediation in Transition:  How Will Policy Adapt?' 2025 Financial Markets Conference, sponsored by the Federal Reserve Bank of Atlanta

Fernandina Beach, Florida

May 19, 2025

Thank you, President Bostic, for that kind introduction and for the opportunity to talk to this group today. 1 I am delighted to be here, and I look forward to discussions at this important conference.

The theme of today's conference is developments in financial intermediation and potential implications for monetary policy.  As this conference embarks on a larger discussion of the role of banks and nonbanks in various market segments-including credit markets, Treasury and money markets, and payments-I believe it is worth taking a step back to explore an important background factor, which is how and why central banks provide liquidity.

The provision of liquidity by central banks is a foundational element of financial intermediation.  Central banks should be able to provide liquidity effectively for the financial system to function smoothly.  Today, I will take this opportunity to discuss some aspects of liquidity provision by the central banks.  Of course, the main forms of liquidity provided by central banks-namely, currency and bank reserves-are the foundation of safe liquidity in the economy.  It is vital for a central bank to make clear that it stands ready to provide liquidity should stress emerge.  But a central bank must also take steps to minimize moral hazard.  'Moral hazard' in this context refers to the concern that publicly provided liquidity might encourage private financial institutions to take on excessive risk.

What I would like to focus on in this speech are two types of liquidity provision that aim to reduce the frictions associated with the basic operations of banks.  The first type of liquidity is intraday credit, which is key in handling payment system frictions

1 The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.

during the day, and the second one is overnight credit, which deals with a range of frictions. 2 I will also highlight some design features of broadly similar liquidity facilities in three other advanced economies:  the U.K., Japan, and the euro area.  I believe it is valuable to look at other central banks' experiences with liquidity provision, which entails recognizing the important differences that exist across jurisdictions and mandates and considering what lessons can be learned.

At their core, liquidity facilities support the smooth operation and stability of the banking system, the effective implementation of monetary policy, and the furtherance of a safe and efficient payment system.  This activity in turn supports the flow of credit to businesses and households.  Last year, the Federal Reserve Board issued a public request for information (RFI) seeking to identify operational frictions in these facilities, and those comments are under review.  I hope that today's discussion about how facilities operate in the U.S. and around the globe can further that dialogue among participants at this conference.

## How It Works in the U.S.

Let me start by discussing how liquidity provisions work in the U.S., as summarized in slide 3.  Banks maintain deposit accounts at the Federal Reserve (Fed). The balances in these accounts, known as reserves, are the most liquid assets that banks have and are used to meet payment flows as households and business customers of banks carry out their regular business.  Banks often experience mismatches in the timing of payment inflows and outflows, which could occasionally cause the balance in a bank's

2 I refer to primary credit lending as overnight lending for simplicity even though banks are able to borrow for maturities of up to three months.  The vast majority of primary credit lending is overnight.  See Jefferson (2024a) and (2024b) for a summary of the evolution of the discount window.

account at the Fed to become negative.  To help institutions manage this mismatch and promote the smooth functioning of the payment system, the Fed extends intraday credit, also known as daylight overdrafts.

Intraday credit facilities provide temporary credit to depository institutions such as commercial banks and credit unions to foster the smooth functioning of the payment system.  If a bank temporarily lacks the funds to process payments, it can use intraday credit to avoid delaying payments until it has sufficient liquidity.  The Fed provides intraday credit on both a collateralized and an uncollateralized basis.  Collateralized intraday credit is provided free of charge, whereas uncollateralized credit incurs a fee. Since this type of credit is provided on an intraday basis, the Fed expects banks to have positive balances in their accounts by the end of the operational day.  If a bank has a negative balance at the end of day, it incurs an overnight overdraft and pays a penalty.

The Fed also provides overnight credit through the discount window to approved counterparties against a broad range of collateral.  This type of liquidity provision is designed to mitigate short-term misallocations of liquidity.  For example, a bank may need to settle a large payment at the end of the day, but it may temporarily have insufficient funds in its account to do so.  To meet the payment obligation, the bank could borrow in private interbank markets-in which financial institutions lend funds to each other on a short-term basis-or from the central bank.  The rate on overnight credit also helps central banks with monetary policy implementation.  In addition, overnight liquidity facilities often serve as a first line of defense against stresses, and they stand ready to provide liquidity when institutions face outflows.

All discount window loans are collateralized, and a wide range of bank assets, including a variety of loans and securities, are eligible to serve as collateral. 3 The Fed operates three separate facilities under the discount window: primary credit, secondary credit, and seasonal credit.

The first one, primary credit, is available to generally sound banks at a rate that is currently set at the top of the target range for the federal funds rate.  Providing liquidity at this rate supports the implementation of monetary policy because institutions can turn to the Fed if conditions tighten in money markets that might otherwise push overnight money market rates above levels that would be consistent with the Fed's target range.  As I noted earlier, primary credit also helps deal with idiosyncratic funding challenges that banks might be experiencing.  Most of the funding provided is on an overnight basis; however, funding is available for up to 90 days.

The next one, secondary credit, is available to banks that are not sufficiently healthy to have access to primary credit.  It is available at a higher rate, features higher haircuts on collateral, and is limited to overnight credit. 4

3 Examples of assets that may serve as collateral include, but are not limited to, U.S. Treasury securities, investment-grade corporate bonds, U.S. government agency-backed mortgage securities, commercial and industrial loans, commercial real estate loans, agricultural loans secured by farmland, one- to four-family mortgage loans, and auto loans.  For more detail on assets that may serve as collateral, please see Federal Reserve Banks (n.d.), 'Collateral Eligibility - Securities and Loans,' Discount Window Direct, https://www.frbdiscountwindow.org/pages/collateral/collateral\_eligibility.

4 The Fed lends less than the fair market value of the collateral provided to manage the credit risk associated with its lending operations.  For example, if a bank needs a loan of $100, a portfolio of securities valued at $200 may be required to be posted if the discount or haircut associated with that portfolio is 50 percent.  The difference between the amount that the Fed will lend on a particular asset and the fair market value of that asset reflects the haircut, or margin.  These haircuts differ, for instance, with the historical price volatility and credit risk associated with the asset.  Information on the haircuts for different assets may be found at Federal Reserve Banks (n.d.), 'Collateral Valuation,' Discount Window Direct, https://www.frbdiscountwindow.org/pages/collateral/collateral\_valuation.

The third facility, seasonal credit, provides short-term liquidity to smaller institutions that experience sizable seasonal fluctuations in their balance sheets. Typically, these are banks located in agricultural or tourist areas.

## Short-Term Credit Provision across Jurisdictions

Looking at central banks' experiences across jurisdictions provides useful insights about different approaches to providing liquidity. 5 Central banks choose a combination of interest rates, collateral requirements, collateral valuation practices, and other design features to encourage usage of facilities while minimizing undesired consequences-in particular, moral hazard.  For example, a central bank facility that provides liquidity at an attractive interest rate could be very effective in ensuring that shocks to the financial system do not disrupt the flow of credit but may potentially increase moral hazard.  If that facility only accepted a narrow set of high-quality collateral, however, then the moral hazard associated with it could be reduced.  Alternatively, the usage of a facility that charges an interest rate above the market rate (a so-called penalty rate) is likely limited, but if the facility accepted a broad range of collateral, usage can be encouraged. 6 In these two examples, the counterbalancing choices are with respect to the interest rate charged and the eligible collateral.  Different central banks might prefer one approach over the other depending on specific aspects of their frameworks and banking systems.

Of course, there are challenges in comparing liquidity facilities across jurisdictions given important differences with respect to central banks' legal authorities,

5 See Arseneau and others (2025).

6 A penalty rate in the Board's emergency lending regulation is defined as a rate that is higher than the market rate in normal circumstances, affords liquidity in unusual and exigent circumstances, and encourages repayment of the credit and discourages use of the program or facility as the unusual and exigent circumstances that motivated the program or facility recede and economic conditions normalize.

See Regulation A-Extensions of Credit by Federal Reserve Banks, 12 CFR pt. 201.4(d)(7) (2024).

monetary policy frameworks, the size of the economy and financial sector, and institutional structures.  This divergence is also true across the four advanced economies that I will consider today:  the U.S., the U.K., Japan, and the euro area.  There can be large differences in each jurisdiction's banking sector and central bank balance sheets relative to the size of their economies, highlighting the need to use caution when comparing aspects of their liquidity provision.

With that caveat in mind, let's look at the design features of some foreign central bank liquidity facilities that are fairly similar to the Fed's discount window.  As shown in figure 1, the Bank of England (BOE) operates two such short-term facilities: an operational standing facility and a discount window.  The operational standing facility features lower rates but restricts acceptable collateral to high-quality, highly liquid sovereign debt.  The discount window facility accepts a broader range of collateral but charges a higher rate.

Which facility an eligible borrower turns to in the U.K. depends on the sorts of collateral that are being pledged.  In the U.S., whether an institution has access to primary or secondary credit depends on the condition of the borrower.  The BOE monitors borrower conditions, and the Fed also sets haircuts on collateral based on asset riskiness. The differences in design considerations could influence how eligible borrowers integrate these facilities into their regular liquidity management practices.

The Bank of Japan (BOJ) has two facilities:  one that provides overnight loans and another that provides somewhat longer-term funding up to three months.  Because the BOJ has been operating a system with a very large supply of reserves for some time, its lending facilities tend not to be used extensively, other than in stress periods.

The European Central Bank (ECB) operates a marginal lending facility quite similar to the Fed's discount window.  It can meet the idiosyncratic funding needs of individual banks and serves as a ceiling on interbank rates and thus helps the ECB implement monetary policy.  This facility is an important element of the ECB framework even though the ECB's approach to monetary policy implementation involves providing the banking system with a sizable amount of reserves through weekly (repo) lending operations. 7

The international differences show that central banks can accomplish their objectives using facilities with quite different designs.  As I noted earlier, one of the vital purposes of a short-term liquidity facility is to be able to provide support to the banking systems during stress.  The Fed, the BOE, the BOJ, and the ECB have been able to do so. Figure 2 shows short-term credit provision over time for the four central banks: the BOJ, the green line; the Fed, the black line; the ECB, the blue line; and the BOE, the red line. 8 Each line is the monthly short-term credit outstanding as a share of central bank assets in 2019.  This figure illustrates a few important points.

First, at most times, use of the short-term central bank liquidity facilities is modest.  Second, central bank provision of short-term liquidity can increase very rapidly during times of stress. 9 For example, the Fed and the ECB provided substantial shortterm liquidity during the 2007-09 financial crisis.  Third, the figure also illustrates that stress is not always global in nature and peak usage does not necessarily coincide.  For

7  See Isabel Schnabel (2024), 'The Eurosystem's Operational Framework,' speech delivered at the Money Market Contact Group meeting, Frankfurt, Germany, March 14,

https://www.ecb.europa.eu/press/key/date/2024/html/ecb.sp240314~8b609de772.en.html.

8 Values in figure 2 represent the marginal lending facility for the euro area, the complementary lending facility for Japan, the operational standing lending facility for the U.K., and primary credit for the U.S.

9 See Jefferson (2024a) for a longer historical perspective on the Fed's liquidity provision over time.

instance, short-term liquidity provision rose in the euro area during the European sovereign debt crisis that began in late 2009 and peaked in 2012, but it did not increase much in the U.S.  Similarly, short-term liquidity provision increased in the U.S. during the March 2023 banking stress episode, but it did not increase in the euro area.  I also want to highlight that during stress events, central banks complement their regular shortterm standing liquidity facilities with other facilities.  Therefore, stress events may not necessarily result in an increase in liquidity provision through a short-term standing facility.

Now let's turn to more recent developments.  Over the past few years, as central banks have shrunk their balance sheets, liquidity has been gradually reduced, which has made the existing liquidity provision tools more relevant. The BOE and the ECB have indicated that they are moving toward operating frameworks in which short-term liquidity providing repo operations will play a key role. 10

The Fed has stated that it will continue to operate in an ample-reserves regime.  In this regime, the primary credit rate is positioned to be slightly above the rate expected to prevail in interbank markets so use of the discount window should typically remain modest.  Still, the facility remains available to be used.  Figure 3 shows the discount window credit as a share of Fed assets over the past decade.  As you can see from this figure, over the past few years, the discount window has been used more than was the case before the pandemic.  Increased usage may be due to the discount rate being set

10 See, for example, B (2024), 'Transitioning to a Repo-Led Operating Framework,' discussion paper (London:  BOE, December 9), https://www.bankofengland.co.uk/paper/2024/dp/transitioning-to-a-repoled-operating-framework.

See, for example, Schnabel, 'The Eurosystem's Operational Framework,' The Eurosystem's operational

closer to private market rates than was the case before the pandemic, the availability of longer maturity loans, and shifts in communication.

## Intraday Credit Provision across Jurisdictions

Just as there are differences with respect to the provision of overnight liquidity across central banks, there are also differences in the provision of intraday credit.  One difference is with respect to unresolved intraday overdrafts.  As I noted earlier, it is possible for banks to incur overnight overdrafts if they fail to take such action as requesting an overnight loan, although overnight overdrafts are not considered business as usual and carry a penalty rate in the U.S., currently set at the primary credit rate plus 400 basis points. 11 The BOJ does something quite similar.  By charging a high penalty on overnight overdrafts, both the Fed and the BOJ discourage overdrafts.

In contrast to the Fed and the BOJ, the ECB and the BOE can automatically convert most of the intraday overdrafts into an overnight loan from the business-as-usual facility seamlessly, without action on the part of the bank, against the same collateral at the end of the day. 12 That feature creates a greater similarity between intraday credit and overnight credit in those jurisdictions.  The relationship between intraday credit and overnight credit is going to be an important one for central banks amid developments in payment systems, including advances in technology and the expansion of payment system operating hours.

11 See Board of Governors of the Federal Reserve System (2023), Federal Reserve Policy on Payment System Risk, (Washington:  Board of Governors), p. 33,

https://www.federalreserve.gov/paymentsystems/files/psr\_policy.pdf.

12 The BOE is a special case because, for most institutions, intraday overdrafts are seamlessly converted into an overnight loan if the institution signed up to use the operational standing facility in advance. Institutions that have not signed up in advance and end the day with an overdrawn reserve account face an overdraft charge of 2 percent plus the Bank Rate or another rate set at discretion.

## Conclusion

Today, I provided an overview of the Fed's provision of liquidity through the discount window and intraday credit and highlighted some similarities and differences across jurisdictions.  In summary, the Fed's discount window and intraday credit facilities have many features that are similar to those found in other central bank facilities.  While differences in institutional, legal, and financial system structures across jurisdictions make central bank short-term lending context specific, looking at the experiences of central banks across other jurisdictions is informative, as central banks share similar goals and face similar challenges when it comes to liquidity provision.

The Fed is continually assessing and striving to improve the operational aspects of discount window and intraday credit.  The Federal Reserve System has made several important advancements to ensure that liquidity provision meets the needs of the 21st century economy.  For example, Reserve Banks have worked to streamline the use of electronic files when establishing access to the discount window and made technological advancements in the process for requesting a discount window loan.  The Federal Reserve System launched a convenient online portal called 'Discount Window Direct' for requesting and prepaying discount window loans that is generally accessible to banks 24-7.  To improve familiarity with the discount window, Reserve Banks have conducted outreach to banks and made efforts to guide them in using the program.

To complement these efforts, the Board issued an RFI last September seeking input on the operations of the discount window and intraday credit.  Any issues identified in the responses to the RFI can help the Fed understand further improvements that may promote efficiency and reduce the burden on banks.

I look forward to hearing insights you may have into central banks' liquidity facilities and how these issues intersect with the topics that will be discussed at this conference.  Thank you!

## References

Arseneau, David, Mark Carlson, Kathryn Chen, Matt Darst, Dylan Kirkeeng, Elizabeth Klee, Matt Malloy, Benjamin Malin, Emilie O'Malley, Friederike Niepmann, Mary-Frances Styczynski, Melissa Vanouse, and Alexandros P. Vardoulakis (2025).  'Central Bank Liquidity Facilities around the World,' FEDS Notes. Washington:  Board of Governors of the Federal Reserve System, February 26, https://doi.org/10.17016/2380-7172.3740.

Jefferson, Philip N. (2024a).  'A History of the Fed's Discount Window:  1913-2000,' speech delivered at Davidson College, Davidson, North Carolina, October 8, https://www.federalreserve.gov/newsevents/speech/jefferson20241008a.htm.

Jefferson, Philip N. (2024b).  'The Fed's Discount Window:  1990 to the Present,' speech delivered at the Charlotte Economics Club, Charlotte, North Carolina, October 9, https://www.federalreserve.gov/newsevents/speech/jefferson20241009a.htm.



Financial Markets Conference, Federal Reserve Bank of Atlanta Fernandina Beach, Florida

May 19, 2025

## Liquidity Facilities: Purposes and Functions

Philip N. Jefferson

Vice Chair, Federal Reserve Board

Board of Governors of the

Federal Reserve System

The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.



- Liquidity facilities and their purposes
- How it works in the U.S.
- Daylight overdrafts
- Discount window
- Short-term credit provision across jurisdictions
- Conclusion



## Federal Reserve Liquidity Provision

## Intraday Credit (Daylight Overdrafts)

- Smooths payment mismatches during the day
- Provided to banks and other depository institutions
- Provided free of charge (if collateralized)
- May be uncollateralized

## Short-Term Credit

## (Discount Window)

- Smooths funding fluctuations overnight or during short periods
- Provided to banks and other depository institutions
- Interest rate linked to monetary policy
- Always collateralized



## Figure 1. Liquidity Facilities and Their Functions



FUNCTION: Intraday | Business-as-Usual Overnight Liquidity |



## Figure 2. Short-Term Liquidity Provision across Central Banks

Percent of 2019 central bank assets



Note: Data extend through Dec. 2024. U.S. values are for primary credit only. Usage is end-of-month values, except BOE which is the monthly average of daily values. Central bank assets are as of Dec. 31, 2019.

Source: European Central Bank (ECB), Marginal Lending Facility; Bank of Japan (BOJ), Complementary Lending Facility; Bank of England (BOE), Operational Standing Lending Facility; Federal Reserve (Fed), Primary Credit; via FRED.



## Figure 3. Discount Window Usage as a Share of Federal Reserve Assets



Note: Stress periods during COVID-19 and the March 2023 banking turmoil are truncated at the top of the figure, peaking at 0.97 percent and 1.77 percent, respectively. Month-ends +/- 1 business day have been filtered out. Data extend through May 14, 2025.

Source: Federal Reserve Board, Statistical Release H.4.1, ""Factors Affecting Reserve Balances.""



Financial Markets Conference, Federal Reserve Bank of Atlanta Fernandina Beach, Florida

May 19, 2025

## Liquidity Facilities: Purposes and Functions

Philip N. Jefferson

Vice Chair, Federal Reserve Board

Board of Governors of the

Federal Reserve System",Philip N Jefferson
https://www.bis.org/review/r250526x.htm,Lisa D Cook: Opening remarks on productivity dynamics,"Speech by Ms Lisa D Cook, Member of the Board of Governors of the Federal Reserve System, at ""Finishing the Job and New Challenges"", a monetary policy conference, hosted by the Hoover Institution, Stanford University, Stanford, California, 9 May 2025.",2025-05-09 00:00:00,"## Lisa D Cook: Opening remarks on productivity dynamics

Speech by Ms Lisa D Cook, Member of the Board of Governors of the Federal Reserve System, at ""Finishing the Job and New Challenges"", a monetary policy conference, hosted by the Hoover Institution, Stanford University, Stanford, California, 9 May 2025.

* * *

Good afternoon. Thank you for moderating, Peter. It is an honor to be with you today, and it is always great to be back at Stanford and at the Hoover Institution. I spent several formative years of my career here, including as a National Fellow, and always enjoy returning. And it is a privilege to share the panel with Dr. Schnabel, and Presidents Musalem and Hammack. I look forward to our discussion. 1

Before that, I would like to briefly discuss a topic I see as critical to the future path of the economy: productivity growth. Productivity growth has been surprisingly strong in recent years, and this has influenced my view of the appropriate stance of monetary policy. I will also explore two ongoing developments that are likely to influence productivity growth moving forward: changes to trade policy and the wider adoption of artificial intelligence (AI). Productivity dynamics are something I have long studied closely and will continue to pay careful attention to as I consider the appropriate stance of monetary policy.

It is helpful to start by looking back about three years to the middle of 2022. At that point, the global economy had largely reopened after pandemic closures, a historic amount of federal support had been deployed, and unemployment was falling toward a half-century low. But supply disruptions persisted, and the 12-month inflation rate reached its peak at over 7 percent. The challenge for Federal Reserve policymakers was clear: Move inflation back toward its 2 percent target while maintaining the health of the labor market. The Federal Open Market Committee (FOMC), which I joined that year, began to raise the federal funds rate from near zero, ultimately reaching just above 5 percent by mid-2023. Many forecasters predicted that a recession in 2023 was more likely than not. And yet, one did not materialize. Instead, inflation came down considerably, while unemployment remained low. How did this unusual and welcome outcome happen?

Two notable factors were the unwinding of pandemic-era conditions that previously constrained the supply of both goods and labor in conjunction with restrictive monetary policy that contributed to a moderation in aggregate demand. Today, I would like to call attention to a third factor: a greater-than-usual increase in productivity during the pandemic recovery.

Prior to the pandemic, from 2007 to 2019, productivity growth in the business sector averaged 1.5 percent annually. In the past five years productivity growth accelerated to 2 percent. While some of the productivity gains may reflect situations unique to the reopening of the economy, it is notable that the level of productivity, as measured by output per hour, remained above trend throughout 2023 and 2024. 2   This increase in productivity was partially driven by pandemic labor shortages themselves. When it was difficult to find employees, as many Americans retired or stepped out of the labor force,

many businesses innovated. For example, restaurants adopted online ordering apps and retailers accelerated the implementation of self-checkout systems. 3   These changes improved efficiency and contributed to an expansion in potential gross domestic product (GDP). As a result, price pressures eased from their peak while demand remained strong.

Improved productivity is widely beneficial to the economy. It allows workers to receive pay raises without companies needing to further increase prices and helps ensure consumers have access to the products and services they demand. Furthermore, and particularly relevant to me as a monetary policymaker, a rise in potential output lessens the need to use monetary policy to slow demand. This effect is good for the obvious reason that it allows for increasing economic growth without higher inflation. But importantly, it also lowers the risk of a policy overshoot that could cause the unemployment rate to rise.

Now that I have reviewed the role that productivity growth played in the post-pandemic recovery, I would like to focus on two countervailing forces on productivity that I am currently studying. These are changes to trade policy and the growth of AI.

I expect to see a drag on productivity in the near term stemming from the recent changes to trade policy and the related uncertainty, for several reasons. First, uncertainty around trade policy is likely to reduce business investment going forward. At this time, firms do not know the ultimate level and incidence of tariffs or their duration. Firms contemplating large investments might observe conditions that could hold under the paradox of thrift, wondering whether they could get a better deal if they just wait. Higher costs of imported materials and components could also cause firms to delay or scale back their investment plans. This reduction in capital formation can lead to slower technological innovation and adoption and decreased overall efficiency in production processes. Second, protectionist trade policies, while intended to support domestic industries, may inadvertently lead to a less competitive environment, if they prop up less efficient firms. And third, any supply-chain disruptions resulting from the policy changes would make production slower and less efficient. These disruptions can lead to inventory mismatches, production delays, and increased costs as firms scramble to find alternative suppliers or redesign their products to accommodate new input constraints. This set of disruptions could pose a particular challenge for monetary policymakers. A reduction in potential GDP means less slack in the economy, which, in turn, means greater inflationary pressure. According to the Taylor Principle, for which no explanation is needed at this conference, taming higher inflation requires a higher policy rate. I believe that keeping inflation expectations credibly anchored is essential. Therefore, all else equal, lower productivity could cause me to support keeping rates at a higher level for longer.

The second ongoing economic development I see altering productivity is the rapidly expanding use of AI. I view this emerging technology as likely to have a significant positive effect on productivity growth. In fact, I see AI as poised to be at least as transformative as other general purpose technologies, such as the printing press, the steam engine, and the internet. With wider adoption of AI, we could have a surge in potential output.

As I have discussed in several recent speeches, AI has the potential to revolutionize numerous sectors of our economy. 4   We already see AI assistants boosting productivity in customer service, software development, and medical diagnosis. AI's ability to process and analyze vast amounts of data could lead to breakthroughs in scientific research and innovation, resulting in an increased arrival rate of new ideas, further amplifying its effect on productivity.

Of course, an AI productivity boom would come with its own set of challenges. If potential output expands too rapidly, it could leave slack in the economy and the labor market. Moreover, the productivity gains from AI may not be uniform across all sectors, job types, or tasks, leading to a transitional period as the labor market adjusts. Despite these challenges, I am optimistic about AI and its potential to drive significant productivity growth in the coming years.

To summarize, I see an important role for productivity growth to play in assisting FOMC policymakers to achieve our dual-mandate goals. This dynamic played out, alongside other factors, in recent years when inflation eased from historic highs while the labor market remained solid. Two currently unfolding economic events are likely to influence productivity growth in the coming years-specifically, changes to trade policy and the expansion of AI. Those two developments may prove to run counter to each other, but it is too soon to predict precisely. I will be closely monitoring developments in this space. I look forward to engaging with those studying this topic including, I am sure, many in this room.

Thank you. I look forward to the discussion.

- 1  The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.
- 2  For additional discussion, see the box ""Labor Productivity since the Start of the Pandemic"" in Board of Governors of the Federal Reserve System (2025), Monetary (PDF) (Washington: Board of Governors, February), pp. 18-20. Policy Report
- 3  See Austan Goolsbee, Chad Syverson, Rebecca Goldgof, and Joe Tatarka (2025), ""The Curious Surge of Productivity in U.S. Restaurants,""  NBER Working Paper Series 33555 (Cambridge, Mass.: National Bureau of Economic Research, March).
- 4  See Lisa D. Cook (2024),  ""Artificial Intelligence, Big Data, and the Path Ahead for Productivity,""  speech delivered at ""Technology-Enabled Disruption: Implications of AI, Big Data, and Remote Work,"" a conference organized by the Federal Reserve Banks of Atlanta, Boston, and Richmond, held in Atlanta, Georgia, October 1.",Lisa D Cook
https://www.bis.org/review/r250526w.htm,Lisa D Cook: A view on financial stability,"Speech by Ms Lisa D Cook, Member of the Board of Governors of the Federal Reserve System, at the Seventh Annual Women in Macro Conference, cosponsored by New York University's Graduate School of Arts & Science, New York University's Stern School of Business & University of Chicago's Becker Friedman Institute for Economics, New York City, 23 May 2025.",2025-05-23 00:00:00,"For release on delivery 12:00 p.m. EDT May 23, 2025

A View on Financial Stability

Remarks by

Lisa D. Cook

Member

Board of Governors of the Federal Reserve System at the

Seventh Annual Women in Macro Conference, cosponsored by New York University's Graduate School of Arts and Science, New York University's Stern School of Business, and the University of Chicago's Becker Friedman Institute for Economics

New York, New York

May 23, 2025

Thank you, Alessandra, for organizing us today, and thanks to you, Veronica Guerrieri, and Marina Azzimonti for initiating this effort seven years ago.  I am honored to be with so many friends in macroeconomics at the 2025 Women in Macro Conference. I still read, recommend, and cite your work and am grateful to New York University and the University of Chicago for supporting this conference and this research. 1

How has the arc of mainstream macroeconomic research become more closely integrated with issues related to financial stability?  This question is what I would like to discuss today.  I applaud the advances in incorporating financial stability into macroeconomic models, which have significantly enhanced our understanding of financial market functioning and its effect on the economy.  It is a topic that holds special importance to me as a macroeconomist who has worked at the intersection of macroeconomics and finance since my dissertation and as the chair of the Federal Reserve Board's Committee on Financial Stability.  I would like to then offer my assessment of the stability of the U.S. financial system.

Financial stability supports the objectives assigned to the Federal Reserve, including full employment and stable prices, a safe and sound banking system, and an efficient payments system.  A financial system is considered stable when banks, other lenders, and financial markets are able to provide households, communities, and businesses with the financing they need to invest, grow, and participate in a wellfunctioning economy-and can do so even when hit by adverse events, or 'shocks.' 2

1 The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.

2 See Board of Governors of the Federal Reserve System (2024), Financial Stability Report (Washington: Board of Governors, April), https://www.federalreserve.gov/publications/April-2024-financial-stabilityreport-purpose-and-framework.htm.

Financial instability, by contrast, arises when vulnerabilities-such as asset bubbles, excessive leverage, liquidity mismatches, or interconnected exposures-can build up to such an extent that they can amplify different shocks and threaten the core functions of the system and the functioning of the broader economy.

## Macroeconomic Research and Financial Stability

The idea that supply creates its own demand, or Say's law, was the prevailing economic orthodoxy of the 1800s.  As a result, the core content of macroeconomics as a separate discipline did not exist.  Prolonged periods of involuntary unemployment were considered to be impossible.  Money and credit were thought to act as a 'veil' with no real effects, so money was seen as neutral and banks and other financial intermediaries as essentially passive, despite what we now know.

The Great Depression fundamentally put an end to this comforting orthodoxy and prompted decades of work to better understand the causes of, and policy responses to, economic fluctuations.  For the first time, financial factors took center stage in economic theory.  Directly responding to the failures of economic theory exposed by the Depression, John Maynard Keynes introduced the concept of a 'liquidity trap,' in which fear pushes the demand for money so high that the usual corrective measures become ineffective. 3 Friedrich Hayek and the Austrian school of economics emphasized the role of unsustainable credit booms, noting that booms in 'malinvestment' would lead to fundamental mismatches that would need to be addressed. 4 Despite the early focus on panics, credit booms, and extreme dynamics, macroeconomic research evolved in a way

3  See John Maynard Keynes (1936), The General Theory of Employment, Interest, and Money (London:

Macmillan).

4 See Friedrich A. Hayek (1931), Prices and Production (London:  George Routledge &amp; Sons).

that de-emphasized the role of the financial system, likely reflecting technical limitations and, more broadly, the need to develop policy frameworks for the post-World War II economy where the Great Depression seemed less relevant.  Modeling financial crises requires addressing complex nonlinear dynamics, feedback loops, and discontinuities, like defaults and bank runs.  All of these were analytically intractable and computationally unmanageable with the tools available at the time.

As a result, the macroeconomic framework that originated from the ideas of Keynes generally assumed stable and frictionless financial markets.  The IS-LM, or Investment-Saving Liquidity Preference-Money Supply framework, which describes how the goods market and the money market interact to determine aggregate output and interest rates in the economy, emerged as the central analytical tool for understanding short-run output and interest rate dynamics. 5

However, the neoclassical synthesis was not without its critics.  Joan Robinson argued that capital accumulation and investment behavior were inherently volatile and criticized the prevailing framework for overlooking important sources of instability. 6 Milton Friedman's work challenged the Keynesian paradigm by highlighting the importance of monetary policy and the destabilizing effects of monetary mismanagement. 7   Even as the rational expectations revolution in macro ushered in explicit modeling of micro foundations and dynamic optimization, financial intermediaries, credit frictions, and the potential for systemic crises remained largely

5 See J. R. Hicks (1937), 'Mr. Keynes and the 'Classics'; A Suggested Interpretation,' Econometrica, vol. 5 (April), pp. 147-59; and Franco Modigliani (1944), 'Liquidity Preference and the Theory of Interest and Money,' Econometrica, vol. 12 (January), pp. 45-88.

6  See Joan Robinson (1956), The Accumulation of Capital (London:  Macmillan).

7  See Milton Friedman and Anna Jacobson Schwartz (1963), A Monetary History of the United States, 1867-1960 (Princeton, N.J.:  Princeton University Press).

absent.  Neoclassical growth models prioritized capital accumulation and technological progress as drivers of long-run growth, and real business cycle models emphasized productivity shocks as drivers of fluctuations in employment and growth. 8

Two papers familiar to many of you here and published in 1983 were instrumental in bringing financial stability considerations back into macroeconomic research.  Douglas Diamond and Philip Dybvig showed how banks' role in providing liquidity makes them vulnerable to runs, while Ben Bernanke demonstrated how bank failures deepened the Great Depression. 9 These contributions, which were recognized with a Nobel Prize in 2022, have helped pave the way for researchers wishing to explore both directions of the relationship between financial fragility and macroeconomic outcomes.  In parallel, Hyman Minsky's financial instability hypothesis advanced a dynamic view of systemic risk, emphasizing how periods of sustained economic and financial stability tend to encourage excessive leverage and risk-taking-culminating in what we now call a 'Minsky moment.'  This phenomenon is when a rapid unwinding of financial positions triggers broader economic distress. 10

Ultimately, it took the Global Financial Crisis to bring home just how deeply the financial system and macroeconomic dynamics are intertwined, as evidenced by the explosion of research on financial stability and financial frictions.  Models incorporating

8  See Robert M. Solow (1956), 'A Contribution to the Theory of Economic Growth,' Quarterly Journal of Economics, vol. 70 (February), pp. 65-94; and Finn E. Kydland and Edward C. Prescott (1982), 'Time to Build and Aggregate Fluctuations,' Econometrica, vol. 50 (November), pp. 1345-70.

9  See Douglas W. Diamond and Philip H. Dybvig (1983), 'Bank Runs, Deposit Insurance, and Liquidity,' Journal of Political Economy, vol. 91 (June), pp. 401-19; Ben S. Bernanke (1983), 'Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression,' American Economic Review, vol. 73 (June), pp. 257-76; and Ben S. Bernanke, Mark Gertler, and Simon Gilchrist (1983), 'The Financial Accelerator in a Quantitative Business Cycle Framework,' in John B. Taylor and Michael Woodford, eds., vol. 1: Handbook of Macroeconomics (Amsterdam:  Elsevier), pp. 1341-93.

10  See Hyman P. Minsky (1982), Can 'It' Happen Again?  Essays on Instability and Finance (Armonk, N.Y.:  M.E. Sharpe) .

financial intermediaries, leverage cycles, and endogenous risk became more central to macroeconomic analysis, while empirical work confirmed the critical role of credit booms in preceding financial crises. 11

Over the past few years, macroeconomic research, to which some of you have contributed, continued to incorporate important financial stability aspects, ranging from endogenous leverage and bank runs to models studying the effects of monetary policy in the presence of heterogenous banks. 12 Much of this research is also being done at the Fed, and it has informed our current work in the area.  I thought it would be helpful to describe some of that work to you.

## Monitoring Financial Stability

Central banks around the world routinely monitor the financial system for risks, because financial crises can lead to severe recessions.  A cornerstone of the Fed's work in this area is our framework for monitoring and assessing vulnerabilities.  The most recent version of our semiannual Financial Stability Report (FSR) was released last month. 13 Our framework distinguishes between two fundamental elements:  shocks and

11 See, for example, Mark Gertler and Nobuhiro Kiyotaki (2010), 'Financial Intermediation and Credit Policy in Business Cycle Analysis' in Benjamin M. Friedman and Michael Woodford, eds., vol. 3: Handbook of Monetary Economics (Amsterdam:  Elsevier), pp. 547-99; Markus K. Brunnermeier and Yuliy Sannikov (2014), 'A Macroeconomic Model with a Financial Sector,' American Economic Review, vol. 104 (February), pp. 379-421; Mark Gertler and Simon Gilchrist (2018), 'What Happened: Financial Factors in the Great Recession,' Journal of Economic Perspectives , vol. 32 (Summer), pp. 3-30; Òscar Jordà, Moritz Schularick, and Alan M. Taylor (2013), 'When Credit Bites Back,' Journal of Money, Credit and Banking, vol. 45 (December), pp. 3-28; Carmen M. Reinhart and Kenneth S. Rogoff (2009), This Time is Different: Eight Centuries of Financial Folly (Princeton, N.J.:  Princeton University Press). 12  See, for example, Mark Gertler, Nobuhiro Kiyotaki, and Andrea Prestipino (2020), 'A Macroeconomic Model with Financial Panics,' Review of Economic Studies, vol. 87 (January), pp. 240-88; and Marco Bellifemine, Rustam Jamilov, and Tommaso Monacelli (2022), 'Monetary Policy with Heterogeneous Banks,' CEPR Discussion Paper No. 17129 (Washington:  Center for Economic and Policy Research, March 22), https://cepr.org/publications/dp17129.

13 See Board of Governors of the Federal Reserve System (2025), Financial Stability Report (Washington: Board of Governors, April), https://www.federalreserve.gov/publications/files/financial-stability-report20250425.pdf.

vulnerabilities. 14 Shocks are adverse events that by their nature are difficult to predict and, unfortunately, are all too frequent.  Recent examples include the pandemic, Russia's invasion of Ukraine, the collapse of Silicon Valley Bank, and many geopolitical events that still warrant headlines.  Vulnerabilities, which are aspects of the financial system that would amplify stress, tend to build up over time and can be identified and assessed.  We monitor vulnerabilities in four key categories:  asset valuation pressures, household and business borrowing, financial-sector leverage, and liquidity and maturity transformation, or funding risks.  Policies to build resilience in the financial system are appropriately targeted at reducing vulnerabilities, because they do not require foreknowledge of any particular shocks.

The financial cycle is recognized as being lower in frequency than the business cycle, with vulnerabilities building over years and typically only to be crystallizing in a short-lived stress event-the classic dynamic of going up by the stairs but down by the elevator. 15 Further, as I mentioned earlier, vulnerabilities often build during prolonged expansions as, for example, investor optimism leads to greater tolerance of risk, excess borrowing, and increased leverage.  The realization of stress and associated contraction can put these forces into reverse, resulting in decreased vulnerabilities.  But the economic and human costs of such an adjustment can be significant.

14 Details of the approach are outlined in the framework developed by Tobias Adrian, Daniel Covitz, and Nellie Liang (2013), 'Financial Stability Monitoring,' staff report no. 601 (New York:  Federal Reserve Bank of New York, February; revised June 2014),

https://www.newyorkfed.org/medialibrary/media/research/staff\_reports/sr601.pdf.

15  See Claudio Borio (2014), 'The Financial Cycle and Macroeconomics:  What Have We Learnt?' Journal of Banking &amp; Finance, vol. 45 (August), pp. 182-98.

## Financial Stability Assessment

Our most recent FSR reflects data and information generally available as of April 11, a point when financial market volatility and risk-off sentiment were elevated, with, for example, the S&amp;P 500 having fallen more than 10 percent from its prior peak. Nonetheless, the report echoes many of the themes that we had been highlighting for the previous couple of years.  I will discuss our most recent report in the context of some of those themes and illustrate a few lessons from the April volatility.

Let me start with one theme that is quite encouraging.  Generally, businesses and household finances are in solid shape.  Most households are able to service their debt, and overall household debt relative to GDP has declined over the past five years.  While we are seeing some stress among low-to-moderate-income borrowers and those with subprime credit scores, the risks posed by overall household borrowing remain moderate. Stable balance sheets and solid income have supported the ability of most nonfinancial businesses to service their debt.  At the same time, smaller and riskier businesses-which tend to have lower debt service capacity, measured by the interest coverage ratio-are sensitive to income shocks.

Most households are able to service their debt, and overall household debt relative to GDP has declined over the past five years.  While vulnerabilities posed by overall household borrowing remain moderate, we are seeing some signs of stress among borrowers with subprime credit scores, which include many low- and moderate-income households.  For instance, auto and credit card delinquency rates for borrowers with subprime credit scores increased substantially in 2022 and 2023 and are at or near their highest levels since the financial crisis.  More generally, a sufficiently large income

shock could strain the debt-servicing capacity of a broader group of households and push up delinquency and default rates, resulting in more substantial losses for lenders.

Asset prices have fluctuated significantly over the past several years.  Although we do look at asset prices, we tend to focus more on 'valuations pressures,' which essentially measure how much prices differ from a variety of benchmarks.  For instance, we care whether prices, relative to measures of risk, appear to be out of step with historical experience.  In such circumstances, the potential price declines-should risk appetite revert to historical averages-would be larger than normal.  Additionally, when the compensation for risk is low, borrowing or leverage could also increase and put further upward pressure on valuations.  Coming into the April volatility, valuation pressures were elevated, consistent with the strong economy.

Allow me to discuss our view of valuation pressures in property markets and come back shortly to the imprint of the April volatility on stock and bond prices.  The significant rise in house prices during and after the pandemic has slowed substantially over the past couple of years, but price-to-rent ratios and model-based valuation measures are around the record levels last seen in 2005.  Two key differences are that lax underwriting standards do not appear to have driven the increase in house prices and owners' equity appears to be more solid, using both price- and model-based measures.

We also noted that commercial real estate (CRE) valuations had been elevated going into 2022 but declined significantly through the period of higher interest rates and deteriorating CRE fundamentals.  Prices and fundamentals appear to have moderated, and valuations are closer to historical norms.  Given the significant volume of CRE that is maturing and will need to be refinanced, I am continuing to watch this market closely.

Let me now turn to financial system leverage and funding risks.  Capital in the banking system continues to be at historically high levels.  However, as you no doubt remember, the intersection of interest rate and liquidity risks played a prominent role in the March 2023 banking-sector stress.  High reliance on funding from uninsured deposits was a key vulnerability among some of the most affected banks, including those that failed.  When higher interest rates resulted in substantial unrealized losses, we observed rapid outflows of uninsured deposits from a handful of banks.  In the April FSR, we describe how over the past couple of years, the share of uninsured deposits relative to total bank funding has decreased for most banks, especially for those that previously relied heavily on uninsured deposits.  This outcome is a welcome signal.  However, sizable exposure to fixed-rate assets remains, suggesting ongoing exposure to interest rate risk.

Since 2019, our FSRs have noted another development in markets-a decline in market liquidity.  'Market liquidity' refers to the cost of quickly buying or selling a desired quantity of a security and being able to do so without having a significant effect on the market price.  During periods of asset-price volatility, it is not surprising that liquidity often declines, so we consider whether market liquidity measures are low given the level of volatility.  As discussed in previous FSRs, some evidence indicates that a number of measures of liquidity have shifted down over time, particularly in Treasury markets, where volatility has also been relatively high. 16 We have done a lot of work, as

16 See, for example, Board of Governors of the Federal Reserve System (2023), Financial Stability Report (Washington:  Board of Governors, May), https://www.federalreserve.gov/publications/files/financialstability-report-20230508.pdf; and Board of Governors of the Federal Reserve System (2024), Financial Stability Report (Washington:  Board of Governors, November),

https://www.federalreserve.gov/publications/files/financial-stability-report-20241122.pdf.

have others, to analyze the causes and what lower liquidity in normal times may imply for market functioning during periods of severe stress.  One area we are exploring is broker-dealers' intermediation capacity, which has been affected by a number of factors, including elevated Treasury issuance and increased client demand for secured financing-which is typically collateralized by Treasury securities.

With that backdrop, let me now turn to last month's events.  The details of the tariff announcements in early April were unexpected.  Corporate earnings calls and our own broad-based market outreach suggest three areas of concern among businesses and market participants:  One, significantly heightened uncertainty, two, an increased risk of a slowdown in economic activity, and three, prospects for higher inflation.  With subsequent announcements some of this uncertainty has ebbed.  Nonetheless, the episode offers some insights relevant for financial stability.

Asset prices fell sharply, particularly in equities, but also in corporate bond and other securities markets.  By the second week of April, major stock indices had declined almost 20 percent from their mid-February peaks, with over half of the declines coming in a seven-day period in early April.  The Chicago Board Options Exchange's Volatility Index, the VIX, was extremely elevated through this period, closing at levels not seen since the onset of the pandemic.  Some of the decline in equity prices likely reflected a change in the economic outlook, but investor risk appetite likely fell as well, although this is harder to assess because data on changes in earnings expectations arrive with a lag. As we have flagged in previous FSRs, large asset-price declines, whatever the cause, can trigger margin spirals and other feedback loops that are self-reinforcing, if there is excessive leverage or liquidity mismatches in the system.

Highly leveraged investors, including some large hedge funds, have rapidly unwound positions during past bouts of market volatility.  While such dynamics likely contributed to some of the price declines in early April, the overall volumes appear limited.  As Roberto Perli, the manager of the Federal Open Market Committee's System Open Market Account, noted in a recent speech, while there is evidence of some unwinding of the swap spread trade, it was orderly.  He said there is no evidence of an unwinding of the cash-futures basis trade, a large and highly leveraged trade that exploits small differences in the prices of Treasury securities and Treasury futures contracts.  This stability likely owes in part to the resilience of funding markets through this episode. 17

Large asset-price declines also prompt outflows from open-end mutual funds. Some funds specialize in relatively illiquid assets, such as high-yield corporate bonds or leveraged loans.  This is another potential vulnerability we have tracked over time, because a large redemption wave can overwhelm these funds' cash reserves, leading to fire-sale dynamics in the underlying markets.  And redemptions from some funds were quite large in April, particularly given that, in contrast with previous episodes, the general level of interest rates did not fall.  Nonetheless, funds were able to handle these redemptions without contributing to stress in corporate debt markets.

Treasury markets also continued to function in an orderly fashion throughout the episode.  To be sure, market depth and other liquidity measures decreased from already low levels, but the decline was in line with what would be anticipated, given the elevated volatility in markets.  This outcome is in contrast to what we saw in March 2020, when

17  See Roberto Perli (2025), 'Recent Developments in Treasury Market Liquidity and Funding Conditions,' speech delivered at the 8th Short-Term Funding Markets Conference, sponsored by the Board of Governors of the Federal Reserve System, Washington, May 9,

https://www.newyorkfed.org/newsevents/speeches/2025/per250509.

trading became much more difficult than would have been expected, given the level of volatility because of the broad market dysfunction that characterized the onset of the pandemic.

The episode provided a real-life example of the large asset-price declines and sudden bursts of volatility that can result from shocks when asset valuations are stretched, as well as the importance of stable and resilient funding markets in absorbing shocks. The experience will surely help us hone our ongoing assessment of financial system vulnerabilities and areas of resilience.

## Conclusion

I would like to conclude my remarks with a few examples of research areas that I think would be interesting and helpful to me and, perhaps, to other policymakers.

First, I understand the difficulty of developing macroeconomic models in which financial risk is endogenously determined by leverage and liquidity mismatch rather than a reliance on exogenous risk shocks.  But I hope that the prospect of making highly impactful policy-relevant contributions will induce researchers to dig in on this topic.

Second, episodes of strain in U.S. Treasury markets over the past several years illustrate the importance of nonbank financial intermediaries, a term that encompasses hedge funds, mutual funds, life insurers, finance companies, and money market funds. This is particularly true in the U.S., where credit is provided by a combination of banks and nonbanks that are often connected through counterparty relationships or common exposure.  It would be helpful to have deeper insights into the potential macroeconomic consequences of the shifting interaction between banks and nonbanks.

Third, relatedly, efforts to incorporate private credit and private equity into macroeconomic models could spur important lines of research.  Layered leverage in intermediation chains involving private equity, private credit funds, banks, and businesses can transmit and amplify real-economy shocks to different parts of the financial sector.  In addition, private equity and private credit are macro-relevant sectors that can transmit shocks to the real economy.

I understand that it is easy to throw out a research wish list and walk away, leaving the substantial modeling and operational challenges to others.  But I do think it is worth developing new tools and approaches for better characterizing our evolving macrofinancial reality.  I hope some of you and your graduate students will take up the challenge.

Thank you again for the opportunity to join you today.",Lisa D Cook
https://www.bis.org/review/r250526y.htm,Luis de Guindos: Financial stability in the euro area,"Speech by Mr Luis de Guindos, Vice-President of the European Central Bank, at the International Swaps and Derivatives Association (ISDA) Annual General Meeting, Amsterdam, 15 May 2025.",2025-05-15 00:00:00,"## Luis de Guindos: Financial stability in the euro area

Speech by Mr Luis de Guindos, Vice-President of the European Central Bank, at the International Swaps and Derivatives Association (ISDA) Annual General Meeting, Amsterdam, 15 May 2025.

* * *

## Introduction

Recent months have been rather eventful on global financial markets, bringing to the fore discussions about risks to financial stability and the resilience of financial institutions. I would like to explore these topics in more detail today, with a particular focus on the euro area.

## A volatile and uncertain macro-financial outlook

Faced with the reality that globalisation as we know it has come to an end, the world is adjusting to a new environment. As our economic and financial systems adapt, greater geoeconomic fragmentation globally may increase the likelihood of more frequent and more impactful adverse tail events. The most immediate concern is that ongoing trade tensions could escalate into a trade war, with potentially significant negative consequences for global growth, inflation and asset prices.

As the euro area economy is very open and deeply integrated into global supply chains, there are a number of financial stability vulnerabilities that could be tested. But the elevated level of uncertainty has not been limited to trade. Several other policy areas, including monetary, fiscal and national security policies, have also been affected.

## Key financial stability vulnerabilities

We see three key vulnerabilities in the ECB Financial Stability Review to be published next week. The first concerns financial markets. A considerable increase in US trade policy uncertainty to more than 60 times the historical average has injected significant volatility into financial markets. Trade policy uncertainty can also lead to greater exchange rate volatility, affecting portfolio investment decisions and capital flows. Equity markets remain particularly vulnerable to sudden, sharp adjustments owing to persistently high valuations and risk concentration. We have warned of vulnerabilities posed by high valuations that are not backed by fundamentals, and recent financial market volatility has shone a light on this source of risk. Notably, the CBOE Volatility Index (VIX), jumped to three times its historical average following the announcement of US import tariffs on 2 April. As the considerable declines in the aftermath of that announcement have largely been recouped, equity valuations - especially in the United States - remain elevated.

We also continue to see strong geographical and sectoral market concentrations. While the United States accounts for around 4% of the world's population and around a quarter of global GDP, its equity market accounts for more than two-thirds of global equity market capitalisation according to the MSCI global index. Moreover, just a

handful of large US-based technology companies account for 30% of S&amp;P 500 market capitalisation. Like with equity market risk premia, credit spreads remain compressed and appear to be out of sync with the very high levels of geopolitical and policy uncertainty. As such, there is a risk that investors may be underestimating and underpricing the likelihood and impact of adverse scenarios. Negative surprises in a volatile and uncertain environment - including sharply deteriorating economic growth prospects, sudden changes in monetary policy expectations or an escalation of trade tensions - could lead to further abrupt shifts in investor sentiment, causing spillovers across different asset classes while fuelling investors' interest in alternatives such as gold and crypto-assets, as we have recently seen.

The second vulnerability relates to the euro area economy. Escalating trade tensions could affect euro area firms and households, with potential credit risks for both banks and non-banks. On aggregate, the balance sheet fundamentals of euro area firms and households have improved in recent years, with their levels of indebtedness falling below those seen before the pandemic. However, trade tensions, high funding costs and weak growth could be a sign of headwinds in the near future. And even if trade tensions subside, this period of high uncertainty is very likely to have led to precautionary actions by firms and households, which could act as a drag on growth. In addition to increased foreign competition, rising global trade tensions could exacerbate credit risk in the corporate sector, with a negative impact on the profitability of firms operating in highly export-oriented and tariff-sensitive sectors, such as the steel industry or the automotive sector. Households continue to benefit from stable labour markets, rising real wages and higher savings. But this situation could reverse if trade-related corporate vulnerabilities unravel and lay-offs in the corporate sector rise, which could have an adverse impact on employment and consumption.

The third vulnerability is related to sovereign risks. The public debt-to-GDP ratio in the euro area has fallen since the pandemic but the fiscal positions of some euro area countries remain weak. And looking ahead, although higher defence spending and substantial infrastructure investments are warranted in light of current geoeconomic challenges, they are likely to lead to a deterioration in fiscal balances.

These expectations have led markets to price in higher government financing needs which, together with the expectation that additional spending could have a positive impact on growth, contributed to the recent rise in ten-year euro area government bond yields. This rise has since partly reversed as a result of ""flight to safety"" inflows to euro area government bond markets following the announcements of US tariffs. Nevertheless, an increase in debt servicing costs could put a further strain on fiscal positions, especially in countries which have high short-term refinancing needs and are already burdened by high debt levels. Moreover, the risks to growth resulting from trade tensions combined with higher defence spending may limit the fiscal space available to shield the economy from adverse shocks, address structural challenges associated with climate change, digitalisation and low productivity, and manage the economic implications of ageing populations.

## Financial sector resilience

Given these vulnerabilities, we have to ask ourselves whether euro area financial institutions are sufficiently well prepared to cope with the associated risks.

Euro area banks are well capitalised, supported by solid profitability and robust asset quality. However, while non-performing loan ratios remain near historical lows, the credit risk outlook for corporate and household portfolios is expected to deteriorate given weak macro-financial conditions, the lagged impact of high interest rates on borrowers and escalating trade tensions. In particular, any broader and longer-lasting macro-financial effects of trade policy uncertainty could lead to a deterioration in banks' asset quality, especially for banks with higher exposures to sectors that rely on trade with countries outside the EU.

At the same time, lower net interest income poses downside risks to bank profitability, especially for banks with a higher share of floating rate loans and a higher cost of risk.

The extremely uncertain external environment reinforces the need to keep macroprudential capital buffer requirements at levels that ensure the banking sector remains resilient. The regulatory and supervisory framework has effectively safeguarded financial stability while also supporting economic growth. Nevertheless, there is scope to make the framework more efficient and effective by reducing unwarranted complexities without compromising banks' resilience.

On a positive note, the recent high volatility has not impeded the functioning of financial markets. Overall, non-banks appear to have weathered the adverse market disturbances relatively well thus far. They have also continued to absorb a high share of sovereign debt, underscoring their important role in euro area sovereign bond markets in the context of higher debt issuance.

However, sharp adjustments could still become disorderly, especially if non-banks' low levels of liquidity amplify price swings. In an environment of heightened geopolitical and trade policy uncertainty, non-banks may face higher valuation losses and more frequent margin calls as trade tensions increase market volatility and weigh on asset quality. Significant exposures to US dollar-denominated assets may also increase the risk of additional spillovers from potential US market shocks and exchange rate fluctuations. In particular, structural liquidity mismatches in open-ended funds, exacerbated by escalating global trade disputes that heighten the risk of sudden outflows, could leave liquid asset holdings insufficient to cover severe yet plausible redemption shocks, thereby amplifying adverse market dynamics. Insurance corporations and pension funds could also face liquidity pressures as a result of increasing margin calls, as these entities make extensive use of interest rate derivatives for hedging purposes. At the same time, increasing synthetic leverage in some entities, like hedge funds, may exacerbate risks of financial contagion and expose liquidity vulnerabilities through margin calls.

These persistent liquidity and leverage vulnerabilities in the non-bank financial intermediation (NBFI) sector require a comprehensive policy response. The rising market footprint and interconnectedness of non-banks increases the risk that NBFI vulnerabilities amplify adverse market developments across the entire financial system. This is why we need an effective macroprudential policy framework for non-banks that improves the sector's resilience. The policy response should focus on addressing key structural vulnerabilities in the NBFI sector, including monitoring and tackling risks from non-bank leverage, enhancing the liquidity preparedness of non-banks to meet margin and collateral calls, and mitigating liquidity mismatches in the investment fund sector. Moreover, strengthening NBFI policies would help ensure that non-banks remain

resilient under stress and thus bolster the capital markets union. It is vital that we establish comprehensive and resilient capital markets to reinforce the EU's Single Market, in addition to fostering economic and financial integration and ensuring that innovative companies have access to sufficient sources of financing. This cannot be achieved in isolation - it requires enhanced EU-wide supervisory coordination and improved global cooperation to level the playing field and minimise the potential for regulatory arbitrage.

## Conclusion

All in all, financial stability in the euro area has remained sound throughout the market turbulence and major uncertainty. But despite broad resilience in both the financial and non-financial sectors, there is no room for complacency. Uncertainties arising from trade tensions, deregulation and reduced international cooperation are fuelling concerns about global economic and regulatory fragmentation. Rising trade tensions pose particular risks to the open euro area economy that is deeply integrated into global supply chains. In this highly uncertain and volatile environment, the likelihood of tail events remains high. Risk sentiment could deteriorate abruptly as still high valuations and increasing risk concentration render equity and credit markets vulnerable to shocks. While increased defence spending has the potential to boost growth if it is well targeted and sourced from within the EU, it may exacerbate fiscal vulnerabilities in some countries. And trade policy uncertainty could have an adverse impact on tradereliant firms, with the associated broader economic repercussions translating into rising credit risk for banks and non-banks. Given this elevated and pervasive uncertainty, strong regulatory and supervisory frameworks remain key across all financial sectors to ensure that the resilience we have seen up to now also holds firm in the face of future risks.",Luis de Guindos
https://www.bis.org/review/r250526l.htm,Sarah Breeden: A system-wide approach to system-wide resilience - CCPs and their users ,"Speech by Ms Sarah Breeden, Deputy Governor for Financial Stability of the Bank of England, at the International Swaps and Derivatives Association (ISDA) Annual General Meeting, Amsterdam, 14 May 2025.",2025-05-14 00:00:00,"## Sarah Breeden: A system-wide approach to system-wide resilience CCPs and their users

Speech by Ms Sarah Breeden, Deputy Governor for Financial Stability of the Bank of England, at the International Swaps and Derivatives Association (ISDA) Annual General Meeting, Amsterdam, 14 May 2025.

* * *

## Introduction

I wanted to start by saying what a pleasure it is to be here with you today. ISDA has been instrumental in setting global standards and promoting best practices in the derivatives industry. Your tireless efforts in advocating for robust risk management frameworks and transparent market practices have significantly contributed to the stability and resilience of the financial system.

In many markets, central clearing, including of derivatives, plays a hugely important role in managing risks and maintaining resilience. Day in, day out, CCPs (central counterparties) clear trillions of pounds worth of contracts, bringing profound benefits to the stability and efficiency of the financial system. One of their key benefits, both from a safety and an efficiency perspective, is their ability to simplify the web of connections between market participants through multilateral netting. Through their margining practices, CCPs also help to set a common baseline of risk management for all market participants. And CCPs enhance the transparency of default management. If a member defaults, the CCP is entrusted to manage the default and minimise costs for all: a cost it may then share among the members if not covered by the initial margin (IM). If this is all done predictably - in line with their rulebooks - then the CCP removes uncertainty from markets in times of stress. Let's not forget - Lehman's cleared exposures were managed without loss after its default.

Given the critical role they play, ensuring the resilience of CCPs is central to our work at the central bank. 1   But ensuring the stability of individual CCPs, while necessary, is not sufficient for financial stability. As central nodes in the financial system, CCPs' actions can affect confidence and risk behaviour across the financial system, affecting the ability of others to provide vital services. It is important, therefore, that in our regulation of CCPs we take a macro-prudential approach, considering risks to financial stability in the UK and globally and this is what I want to focus on in my remarks today.

## The Margining Trilemma and the Role of Procyclicality

Margining practices are a key example where actions of one firm, although prudent from an individual, micro-prudential, firm perspective, have the potential to contribute to macro-prudential financial stability risks.

Margins play a vital role in managing counterparty credit risk. They are likely to vary as the market environment changes to better reflect counterparty credit risk. However, whilst calling higher margin in stressed markets will increase protection for the CCP and its members if a counterparty defaults, it may also increase liquidity demand at a time

when liquidity is likely to be scarce leading to a procyclical response. If market participants are not adequately prepared, this could lead to counterparty default or a liquidation of positions if firms cannot maintain their risk exposures. Such asset liquidations can then exacerbate price moves, potentially generating a self-reinforcing spiral.

These dynamics contributed to stress during the dash for cash episode in 2020. 2   They were also evident in the commodity crisis of early 2022 and were seen in bilateral markets in the gilt market dysfunction in autumn 2022 . 3

We should expect CCPs to raise margins in these events. But we also expect CCPs to hold enough margin when markets are calm that the increases are not unmanageable for participants. (Of course, we should also expect participants to be prepared - as I'll come on to later).

Indeed, we can think of margin practices as a trade-off, or trilemma, between different risks. The models CCPs use to calculate their initial margin can be scored along three different dimensions: (i) coverage: how well does the margin cover the poster's risk; (ii) cost: how expensive is the margin requirement over time; and (iii) reactivity: how jumpy is it in times of market volatility/stress. And if the model doesn't score well in any of these dimensions, there may be an emerging risk to financial stability. We might imagine there is a ""family"" of risk models (and therefore margin levels) inside a ""safe zone"" where all three dimensions score well: enough coverage, not too reactive, and not too expensive.

Whilst current regulatory requirements do set some constraints - e.g. risk coverage must always be met, and models shouldn't be too reactive - there is a reasonable amount of discretion available to CCPs. Indeed, what could be deemed as ""too jumpy"" for one market with smaller end users might be ""just fine"" for another market with large banks.

It is something we expect the CCPs to think very carefully about when calibrating their models. Indeed, it is part of their duty to be aware of the impact of their margin calls on their membership, and to take seriously the feedback from their members, for example who sit on their risk committees. This is something we explore in our supervisory reviews, as well as when looking at models. Given inevitable pressures to lower margins in the good times, it is essential for us all to maintain a focus on what might happen in bad times.

## Transparency and Margin Preparedness

Transparency and predictability in margin practices is also critical. In our System Wide Exploratory Scenario (SWES), we found there were material differences between clearing members' and CCP's projections for initial margin calls. While in the SWES we found an overestimation by clearing members, in other contexts we could see an underestimation - if, for example, stress follows an extended period of low volatility, as seen in the dash for cash and commodity stresses.

So, what is being done? Since 2022, the Bank has been an active contributor to the international work streams that build on the BCBS-CPMI-IOSCO review of margining

practices published in September 2022. 4   The key policy outcomes of these work streams have culminated in a set of proposals which aim to increase the resilience of the centrally and non-centrally cleared market ecosystem in times of stress. Among these you will find:

1. Proposals to improve centrally cleared market participants' understanding of potential future margin requirements, as a result of more transparent CCP margin models and governance arrangements that seek input from participants when designing or changing the frameworks used for assessing margin.
2. Recommendations to enhance the liquidity preparedness of non-bank market participants for margin and collateral calls, in centrally and non-centrally cleared derivatives and securities markets.

And importantly the recommendations highlighted the need for all market participants to conduct liquidity stress tests for margin and collateral calls - including to ensure reliable sources of liquidity.

This year, we will start to implement the recommendations domestically and continue working with international standard setting bodies to embed the proposals into the existing frameworks of international standards for Financial Market Infrastructures . 5

Part of the benefit of taking a macro-prudential approach is that we recognise that not all of the responsibility for addressing financial stability risks sits solely with CCPs. Indeed, the better prepared market participants are for bad times, the more resilient the system can be to shocks.

On that theme, I wanted to highlight the FSB work on NBFI leverage. We and the FSB are grateful for the feedback we have received on the consultation paper - including from ISDA - and we are taking this seriously as we look to finalise its recommendations. We remain committed to addressing financial stability risks arising from leverage in NBFIs through improved risk identification and monitoring, a combination of policy measures and enhanced cross-border collaboration.

In a similar vein, our experience in September 2022 and our SWES have underscored vulnerabilities in the gilt repo market and the potential for dysfunction to threaten financial stability and the real economy. In November 2024 the Financial Policy Committee (the UK's macroprudential authority) welcomed further work to consider how to improve resilience in gilt repo markets. 6   And so, we will start a conversation with industry via a Discussion Paper (DP) later this year on possible reforms to market structure to enhance gilt repo market resilience. The DP will be exploratory and will aim to gather views from market participants on potential options to help mitigate vulnerabilities, including greater central clearing of gilt repo and minimum haircuts on non-centrally cleared repos. We will share more information on our planned engagement in due course and look forward to market participants' input and views on these issues.

## Portfolio Margining

Another area where participant behaviour might be sensible from an individual firm perspective but potentially create risks at a system-wide level is portfolio margining. For example, participants (including CCPs) liquidate a defaulting counterparty's position as a portfolio, not contract by contract, and so portfolio margining allows them to account for reductions in risk that come from hedged or diversified portfolios. 7   Not accounting for this risk reduction would result in margin being set to cover more extreme market moves than margin is designed for.

Whilst this portfolio approach makes sense at a micro-prudential level for an individual firm, it may have the side effect of facilitating increased leverage in the system as a whole. Take for example the cash-futures basis trade, 8   where the amount of leverage a participant can take depends on both the repo haircut and the initial margin rate of the future. The repo leg is usually done at zero or near-zero haircuts, given competitive pressures and as dealers are able to net potential counterparty credit risk on repo with margins paid on the offsetting future.

How this works in practice for CCPs depends on the local market structure. The CCP that clears the repo is often different to the CCP that clears the future, so if the trader is clearing both legs of the basis trade, they could be paying two sets of initial margin. But in the case of cross-CCP margining, margin is based on the net risk position across multiple CCPs, on the assumption that the CCPs will cooperate to manage the position as a single portfolio in the event of default. Should that link between CCPs break down, for whatever reason, including for operational reasons, unexpected extra margin could be significant. Such arrangements put a premium on ensuring CCP resilience, including in stress.

Cross-margining arrangements like these which utilise off-setting positions rely in general on assumptions about correlation. Events from a few weeks ago demonstrated how correlations can break down in stress. We saw key breaks in US swap spreads and a de-correlation of US equity prices and interest rates. It is essential, therefore, that participants, including CCPs, apply conservative assumptions around correlation breaks and unexpected shocks to prepare for scenarios where relationships between correlated products become less predictable or unreliable - including where moves may be amplified by market concentration or illiquidity.

Of course, portfolio margining also occurs in non-centrally cleared markets, in which case it is the dealer offering portfolio margining rather than the CCP. According to a 2023 report from the Office of Financial Research, over 70% of bilateral US Treasury repo is conducted at zero haircut. 9   Even where official netting agreements do not exist, balance sheet allocations may be set up in a way that assumes certain correlations will hold. For example, prime brokers may be incentivised to lend very cheaply to clients they conduct equity business with. Sudden changes in correlations or sharp movements in market prices may result in sharp corrections in balance sheet allocation. In turn this may lead to contraction in funding and liquidity in core markets. And that may quickly have real economy impacts.

## The Importance of Operational Resilience

I wanted to finish by noting that robust margining practices, whilst providing numerous benefits as I set out up front, often rely on quite complex operational process. The ability for CCPs to fulfil their central role in the financial system hinges on them remaining operationally resilient. As we face a landscape characterised by rapid technological change and heightened geopolitical tensions, our expectations of their operational resilience, including to cyber risk, have to evolve. We know incidents happen, but identifying the greatest financial stability risks, transmission channels, and ensuring there are robust recovery capabilities is crucial to limiting wider disruption of financial markets. CCPs must navigate these dynamics to mitigate risks and avoid amplifying threats to the broader financial system. 10

## Conclusion

Let me conclude. A macro-prudential approach to the supervision of CCPs is essential given their central role in the financial system. Our supervisory approach needs to ensure their actions, whilst prudent from a micro-prudential perspective, do not amplify shocks in times of stress. In doing so, we should work with our international partners to ensure margining practices, in centrally and non-centrally cleared markets, are robust and do not lead to excessive pro-cyclicality or facilitate excessive leverage in the system. And we should minimise the chances of operational incidents leading to financial stability risks. But taking a macro-prudential approach also means considering how broader developments will impact the derivatives markets. Broader reforms to address the risks from NBFI leverage and improve resilience in core markets are a necessary part of ensuring financial stability too.

I would like to thank Max English, Gerardo Ferrara, Amy Middleton, Francine Robb, Nicola Shadbolt, Sadi-Mae Wilson and Michael Wood for their assistance in preparing this speech. I would also like to thank Andrew Bailey, Jon Hall, Barry King, Harsh Mehta, Sasha Mills, David Rule for their advice and comments.

1 The Bank of England is responsible for regulating and supervising CCPs in the UK. Our approach is underpinned by four principles: our supervision is judgement based; forward looking; focused on key risks; and proportionate.

- 2  Bank of England Financial Stability Paper No. 47Opens in a new window
- 3 Financial Stability Report - December 2022 | Bank of England  and  Financial Stability Report - July 2022 | Bank of England
- 4  CPMI-IOSCO Review of Margining Practices, September 2022Opens in a new window

.

- 5  CPMI-IOSCO's Further Guidance on the Principles for Financial Market Infrastructure (i.e. international guidance for financial market infrastructures) and other relevant CPMIIOSCO documents.
- 6  Financial Policy Committee Record - November 2024 | Bank of England

- 7  For example, if the member has offsetting positions in two highly correlated products then the cost of liquidating the positions together will be lower than the sum of the two individual exposures. Alternatively, if the member has a diversified portfolio then this could also carry lower risks, as the probability of all exposures within the portfolio simultaneously facing a very extreme shock is lower.
- 8  Government bonds often trade cheaper than their futures because your outlay is higher to buy a bond. This can make it profitable - at zero market risk - to buy a bond and sell the future. And you can leverage this trade with repo: if you lend the bond, and buy another with the cash you receive you can sell a second future and double your position. This serves an economic function by providing liquidity to futures markets, but creates a risk explained further down in the main body.
- 9  Key Finding on Non-centrally Cleared Repo | Office of Financial ResearchOpens in a new window
- 10  Our Operational Resilience Policy  sets out our expectations on actions FMIs should undertake to achieve a level of operational resilience which the Bank finds sufficient, to ensure minimisation of the likelihood of operational disruptions and mitigating and recovering from a disruption. In March 2024 the FPC also set out its approach to operational resilience from a macroprudential perspective -  Financial Stability in Focus: The FPC's macroprudential approach to operational resilience | Bank of England",Sarah Breeden
https://www.bis.org/review/r250526k.htm,"François Villeroy de Galhau: A mobilising deadline for seizing ""Europe's moment""","Hearing of Mr François Villeroy de Galhau, Governor of the Bank of France, before the National Assembly Foreign Affairs Committee, Paris, 14 May 2025.",2025-05-14 00:00:00,"

Hearing of François Villeroy de Galhau, Governor of the Banque de France before the National Assembly Foreign Affairs Committee

A mobilising deadline for seizing 'Europe's moment'

Paris, 14 May 2025

Press contact: Delphine Cuny (delphine.cuny@banque-france.fr)

Mr President, Honourable Members

Thank you for inviting me to appear before the Foreign Affairs Committee of our National  Assembly  today.  This  is  an  extraordinary  event,  and  even  a  first  although I do often speak before the Finance Committee. I would like to extend my sincere thanks to your President for this opportunity. It also reflects the new era we are entering, marked  by the shift in American policy, global unpredictability and, I believe, 'expectations of Europe'. These fractures are as significant  in  economic  terms  as  they  are  in  diplomatic  terms;  I  will  naturally focus on the former. However, I would like to dispel one common misconception right away: economic and financial reform is not merely technical in nature; it also has an essential political  sovereignty  dimension (I). I  would then like to address another concern: economic Europe is not condemned to remain stuck in its past inertia; it can and must seize this unique opportunity (II).

## I)  Economic  and  financial  Europe:  a  political  rather  than  a  technical undertaking.

- 1.1. The  European  challenge:  transforming our economic  and  financial strengths into sovereignty

France and Europe's challenge in terms of power in 2025 is clearly defence related,  but  it  is  just  as  much  about  the  economy. We  cannot  move  forward sustainably with the former without achieving the latter. Europe certainly has economic  strengths,  but  we  neither  have  enough  awareness  nor  enough confidence in these. Our single market is as big as that of the United States in terms  of  purchasing  power  parity  (EUR  17.9  trillion  for  the  European  Union compared with EUR 18.4 trillion for the United States in 2024 i ). The European Union has an abundant resource: private financial savings that are increasing every year, representing a flow of EUR 1,085 billion (6% of GDP) last year ii . We have a highly skilled workforce - our continent has produced more than 500 Nobel Prize winners - a firmly established rule of law and a shared social model. While the United States is unfortunately turning inwards and relinquishing its global  leadership  role,  the  European  Union  is  expected  to  act  as  a  possible stabilising force by our international partners.

But today we must transform these strengths into power. Our single market is much less attractive than the US market, particularly for innovative companies, as  it  remains  far  too  fragmented.  Our  financial  savings  surplus,  although considerable (over EUR 400 billion last year iii ), is partly intermediated by US finance and insufficiently channelled into European corporate equity financing iv . Transatlantic mobility remains highly imbalanced in the field of research: nearly 120,000 European researchers currently work in the United States. As a result, Europe is lagging behind in the area of technology: too much private investment is flowing into existing sectors and not enough into innovative sectors. This is the 'middle technology trap' described by Jean Tirole, among others. v  France has long been the leading and rightful advocate of this necessary European economic sovereignty, but it must now, unfortunately, restore its fiscal credibility if it wants to bring its partners fully on board. Ultimately, France must reduce its deficits and debt in order to regain influence in Europe.

- 1.2  Europe  has  nevertheless  managed  to  achieve  trade  and  monetary sovereignty

However, there are two areas where Europe, thanks to its unity, has managed to achieve sovereignty: trading power and monetary sovereignty.

The European Union is now the world's largest trading power, vi  and it speaks with one voice through the Commission. The US protectionist measures are a 'lose-lose' game, but one in which the initiator will pay the highest price: vii  growth in the United States this year will be lower than was forecast in January, with higher inflation. The 'agreements' announced in the last few days with the UK and then China, while less harsh than the brutal measures of 2 April, are not good  agreements:  there  are  still  too  many  penalising  tariffs  -  including  the unprecedented baseline tariff of 10%! - and, above all, there is still just as much vagueness  and  unpredictability,  which  is  fuelling  a  wait-and-see  attitude.

Europeans have so far managed to remain calm and united: it is right to have tabled retaliatory measures, but they should be phased in gradually to allow for negotiations  and  hopefully  de-escalation.  Furthermore,  Europe  has  every interest  in  forging  trade  alliances  with  a  maximum number  of  other partners,

from Latin America (including Mercosur) to Asia, provided such agreements are balanced.

More  than  25  years  ago,  we  succeeded  in  building  monetary  sovereignty through the creation of the euro. It took political will and a method that mobilised all stakeholders. Recognised worldwide, it now gives us the autonomy we need in the face of America's volatility. Remember how greatly our monetary policy decisions were influenced by US dollar policy in the 1980s and 1990s? Today, they are entirely our own.

Despite a highly uncertain international environment, the monetary situation in the euro area is now clearer. For the first time in several years, we have returned to what could be termed the ""2-2"" zone: inflation close to 2%, our target, and a key interest rate of 2.25%, well below the US viii  and UK ix  rates of 4.25%. This success consolidates the historically high level of support among French and European citizens for the single currency, which stands at 81% in Europe.

Given the uncertainty surrounding US financial assets and our partners' appetite for diversification, strengthening the international role of the euro may become a strategic imperative. Admittedly, this role was not stipulated in the objectives of  the  European  treaties,  and  when  the  euro  was  created,  the  Eurosystem adopted a neutral stance on the international ambitions of the euro. x However, on  the  20th  anniversary  of  the  euro,  the  ECB xi emphasised  the  shift  from  a ""neither/nor""  approach  (i.e.  neither  hindering  nor  supporting)  to  a  'happy coincidence'  between  the  Eurosystem's  internal  objectives  and  the  external dimension of the euro. Naturally, the role of the dollar will remain important; the strengthening of the euro must therefore be a gradual and balanced process, based on the choices made by private players. But it also goes hand in hand with an internal opportunity: consolidating our common architecture - whether it be  the  Savings  and  Investments  Union  or  offering  safe  euro-denominated assets.

## II. Overcoming stupefaction to seize ""Europe's moment'

I  will  now  come  on  to  a  second  misconception:  that  European  economic sovereignty is an impossible goal. Admittedly, this objective - which has existed alongside monetary union from the outset and has gained traction over the past 15  years  with  plans  for  a  Banking  Union  and  a  Capital  Markets  Union  -  is progressing too slowly. However, if there is one good thing about America's policy shift, it is at least a wake-up call for Europe. But we do have to admit, our collective response is still not up to the task. We have the ability to make this leap, provided we have the firm and lasting will to do so. The formation of the new German government coincides with this window of opportunity.

## Setting  a  mobilising  deadline  for  achieving  economic  and  financial sovereignty

The Draghi xii and Letta xiii reports in 2024, followed by the European Commission's 'Competitiveness Compass' and Savings and Investments Union of February and March 2025, respectively, are remarkably convergent in terms of the structural reforms needed, and these necessary actions do not involve any extra fiscal cost. As the Banque de France put it in its recent 'Letter to the President  of  the  French  Republic""  xiv ,  we  need  a  general  mobilisation  based around three imperatives - 3 'i's, or, if you prefer, size multiplied by muscle and by speed.

First we need to integrate the single market more. This means focusing on our size  by  removing  internal  barriers,  especially  in  numerous  sectors  such  as services and energy.  Second we need to invest better, giving greater priority to the most promising disruptive innovations, especially those linked to artificial intelligence  (AI).  To  do  this,  we  need  to  develop  Europe's  financial  muscle through a genuine Savings and Investments Union that channels more of our abundant private savings into European equity financing and venture capital. Finally, we  need to innovate faster. Europe needs simplification: less bureaucracy, fewer procedures and shorter deadlines. But simplification does not mean deregulation. The European approach will remain firmly focused on its objectives, but more agile in its conception.

However, this  economic  and  financial  sovereignty  can  only  be  achieved  if  it meets  one  key  condition: that  the  political  aims  and  expectations  of  the economic players are rapidly aligned .  To  this  end,  I  call  for  a mobilising deadline , as Jacques Delors did in the past with 1 January 1993 for the single market, and 1 January 1999 for the single currency. xv  It is up to the Commission to propose this deadline and the Council to approve it, but why not 1 January 2028? We need to give ourselves two to three years to emerge more powerful and sovereign from the policy turnaround initiated by the current  US administration.  Christine  Lagarde  has  called  for  a  'march  towards  European independence'  in  response  to  the  illusory  American  'Liberation  Day'. xvi   The Commission should therefore aim to present all of its legislative proposals this year. It's now or never: history will not wait.

Lastly, I would like to add an essential technological dimension to our monetary sovereignty.  The  digitalisation  of  the  European  economy xvii   for  day-to-day payments  is  increasing  our  reliance  on  non-European  players,  especially international networks xviii  and big tech. Furthermore, the boom in stablecoins most often backed by the dollar and strongly promoted by the US government -  poses  a  serious  risk  of  'privatisation'  and  'de-Europeanisation'  of  the currency. For all of these reasons, the Eurosystem is a fervent advocate of a digital euro - a banknote in the digital arena. The aim is not to replace banknotes and coins or existing banking solutions, but here too, an ostensibly technical project masks an essential political dimension.

*

Faced with America's policy shift, and as we commemorate the 80th anniversary of the end of the Second World War and the 75th anniversary of the Schuman Declaration, xix  Robert Schuman's words resonate even more sharply today: 'It is no longer a question of vain words, but of an act, of a bold act, of a constructive act.' xx  Yes, we urgently need to shake off a certain economic nonchalance and overcome our stupefaction faced with the new US administration. We need a general mobilisation: the French and European response must be a collective one, with a fair sharing of the burden and a decisive pace of action. This can be

France and Europe's moment if - and only if - we do this. Thank you for your attention.

- i  GDP PPP in current euro in 2024, source: AMECO/European Commission, October 2024.
- ii  Rolling annual flow in the fourth quarter of 2024. Banque de France calculations.
- iii  Villeroy de Galhau (F.) (2025), Letter to the President of the French Republic: From stupefaction to a general mobilisation. How to respond to America's policy shift, 9 April.
- iv Villeroy de Galhau (F.) (2025), Venturing into open waters to unlock Europe's innovative potential , speech, Euronext Paris, 18 March.
- v  Fuest (C.), Gros (D.), Mengel (P.-L.), Presidente (G.) and Tirole (J.) (2024), EU Innovation Policy - How to Escape the Middle Technology Trap , European Policy Analysis Group, April.
- vi The European Commission considers the EU to be the world's leading trading power based on the number of countries for which it is the main trading partner, its share of global trade in goods and services, and its direct investment flows. Source: European Commission (2025), The EU's position in world trade.
- vii  Villeroy de Galhau (F.) (2025), 'Markets and minds: upholding the transatlantic partnership' , Atlantic Council speech, Washington, 23 April.
- viii The federal funds rate was in a range of 4.25% to 4.5% on 14 May 2025.
- ix  UK base rate stood at 4.25% on 14 May 2025.
- x  Villeroy de Galhau (F.) (2023), The euro as a complementary asset in a more multilateral system, speech,
- Conference ' The internationalization of the euro and the creation of the Union of Capital Markets in the EU', Paris, 16 June
- xi European Central Bank (2019), The international role of the euro, June 2019 , June, pp. 38-39; European Central Bank (2020), 2019 Annual Report , May, p. 67.
- xii  Draghi (M.) (2024), The future of European competitiveness , September.
- xiii  Letta (E.) (2024), Much more than a market , April.
- xiv  Villeroy de Galhau (F.) (2025), Letter to the President of the French Republic: From stupefaction to a general mobilisation. How to respond to America's policy shift, 9 April.
- xv  Villeroy de Galhau (F.) (2025), 'Markets and minds: upholding the transatlantic partnership' , speech, Atlantic Council, Washington, 23 April.
- xvi  Lagarde (C.) (2025), Interview France Inter radio, 31 March.
- xvii  In France, cash was used in 43% of POS payments in 2024, compared with 68% in 2016. See Banque de
- France (2025), French people still value cash, despite using it less and increasingly turning to cards and mobile payments | Banque de France, Banque de France Bulletin, 25 February.
- xviii  They represented 66% of euro area card payments in Q1 2024.
- xix  Schuman (R.) (1950), Declaration, 9 May.
- xx  Schuman (R.) (1950), Declaration, 9 May.",François Villeroy de Galhau
https://www.bis.org/review/r250526v.htm,Christine Lagarde: Earning influence - lessons from the history of international currencies,"Speech by Ms Christine Lagarde, President of the European Central Bank, at an event on Europe's role in a fragmented world, organised by Jacques Delors Centre at Hertie School, Berlin, 26 May 2025.",2025-05-26 00:00:00,"SPEECH

## Earning influence: lessons from the history of international currencies

Speech by Christine Lagarde, President of the ECB, at an event on Europe's role in a fragmented world organised by Jacques Delors Centre at Hertie School in Berlin, Germany

Berlin, 26 May 2025

Over the past 80 years, the global economy thrived on a foundation of openness and multilateralism underpinned by US leadership. By championing a rules-based international system and anchoring the dollar as the world's reserve currency, the United States set the stage for trade to flourish and finance to expand.

This global order proved immensely beneficial to the European Union, whose founding liberal principles aligned seamlessly with it. But today it is fracturing.

Multilateral cooperation is being replaced by zero-sum thinking and bilateral power plays. Openness is giving way to protectionism. There is even uncertainty about the cornerstone of the system: the dominant role of the US dollar.

All else equal, this fracturing can pose risks for Europe. Our economy is deeply integrated into the global trading system, with exports accounting for close to one-fifth of our value added and supporting 30 million jobs.

Any change in the international order that leads to lower world trade or fragmentation into economic blocs will be detrimental to our economy.

But - with the right policy responses - there could also be opportunities. The changing landscape could open the door for the euro to play a greater international role.

Today, the euro is the second global currency, accounting for around 20% of foreign exchange reserves, compared with 58% in the case of the US dollar. Increasing the international role of the euro can have positive implications for the euro area.

It would allow EU governments and businesses to borrow at a lower cost, helping boost our internal demand at a time when external demand is becoming less certain.

It would insulate us from exchange rate fluctuations, as more trade would be denominated in euro, protecting Europe from more volatile capital flows.

It would protect Europe from sanctions or other coercive measures.

In short, it would allow Europe to better control its own destiny - giving us some of what Valéry Giscard d'Estaing called the 'exorbitant privilege' 60 years ago.

So, how likely is this change to happen? History suggests that it is far from guaranteed. The euro will not gain influence by default - it will have to earn it.

For the euro to increase its global status, history tells us that we need to build on three foundations - each of them critical for success.

First, Europe must ensure it has a solid and credible geopolitical foundation by maintaining a steadfast commitment to open trade and underpinning it with security capabilities.

Second, we must reinforce our economic foundation to make Europe a top destination for global capital, enabled by deeper and more liquid capital markets.

Third, we must bolster our legal foundation by defending the rule of law - and by uniting politically so that we can resist external pressures.

Before we explore each of these three foundational components, let us observe what recent history can teach us.

## Shifts in the global currency landscape

Shifts in the global currency landscape are not unprecedented in monetary history. There have been previous episodes where the world's leading reserve currency issuer has taken steps that have called that leadership into question, without ultimately jeopardising it.

For example, the US dollar took over from the pound sterling as the world's leading reserve currency in the mid-1920s, with its share in foreign exchange reserves rising to 64% by 1931. But this leading position did not stop the United States taking measures to unilaterally change the international monetary order.

For instance, in 1933 President Roosevelt suspended gold convertibility to fight the deflationary forces of the Great Depression. He dismissed European demands for fixed exchange rates with the argument that 'the sound internal economic system of a nation is a greater factor in its well-being than the price of its currency'. [ ] 1

Then again in the 1970s President Nixon ended the Bretton Woods system by unilaterally suspending dollar convertibility to gold and imposing a 10% import tariff.

Faced with growing imbalances between US current account deficits and the surpluses of western Europe and Japan, Treasury Secretary John Connally declared that 'no longer can considerations of friendship, or need, or capacity justify the United States carrying so heavy a share of the common burdens.' [ ] 2

On both occasions, there was a decline in the standing of the US dollar as a foreign reserve currency. In the 1930s, it fell from over 60% to around 20% of global foreign exchange reserves. In the 1970s, it fell from about 70% to 50% two decades later.

But on neither occasion was there a robust alternative currency that could take over at short notice. In the 1930s, the pound sterling was already declining, while in the 1970s the Deutsche Mark and the Yen were backed by markets that were too small.

So, instead, investors flocked to gold. The share of gold in foreign reserves increased by about 20 percentage points in the 1930s to 97% and almost doubled to 60% in the 1970s. [ ] 3

Today, there is a key difference compared with previous eras. With the euro as the world's second-largest currency, there is another international currency alongside the dollar. But this has not yet convinced investors.

Over recent years, the dollar's share in global foreign exchange reserves has fallen, with its current level of 58% being the lowest since 1994. In parallel, central banks have been accumulating gold at a record pace - almost matching the levels seen during the Bretton Woods era. [ ]  The share of gold in global foreign reserves [ ]  has reached around 20%, surpassing that of the euro. [ ] 4 5 6

As previously mentioned, we can identify three essential foundations for international currency usage, without which a currency cannot succeed on the global stage. And in each case, we can see that Europe has many of the key ingredients for success, but we need to bring them together to reinforce the foundations. Action is in order.

## The geopolitical foundation

The starting point is a credible geopolitical foundation - which rests on both a country's role in global trade and the strength of its military alliances.

A currency's exposure to trade is especially important, as it provides the initial pathway to wider international use. In the mid-1920s, for example, the dollar overtook the pound sterling as the leading form of trade credit before it became the leading reserve currency. [ ] 7

Once a currency captures a larger share of trade invoicing, its role in international banking and finance, and ultimately as a reserve asset, becomes self-reinforcing. Higher demand for the currency enhances its role as a store of value and further encourages investors to hold it. [ ] 8

As a major actor in global trade, Europe already has a key ingredient of a strong geopolitical foundation, creating the potential for a virtuous circle of euro internationalisation to unfold.

The EU has the largest network of trade agreements in the world. Europe is the number one trading partner for 72 countries, which together represent almost 40% of world GDP. [ ]  And this status is reflected in the share of the euro as an invoicing currency, which stands at around 40%, more than double its share as a reserve currency. 9

Europe can press home this advantage by continuing to forge new trade agreements. And we should make clear that we support a win-win approach to trade, ensuring that we are the most attractive partner to make deals with.

The ECB can also help make the euro more attractive for euro-denominated trade. We are working on a potential digital euro and pursuing initiatives to enhance cross-border payments in euro, which could potentially facilitate international cross-border transactions in the future.

And by extending swap and repo lines to key partners, we safeguard against euro liquidity shortages abroad disrupting the smooth transmission of our monetary policy - which in turn encourages those partners to transact more in euro.

But there is a limit to how much a currency can grow simply by virtue of being open to trade. In fact, the euro's share of global export invoicing is already as large as that of the US dollar, but we are not closing the gap in reserve currency status.

This is because investors - and especially official investors - also seek geopolitical assurance in another form: they invest in the assets of regions that are reliable security partners and can honour alliances with hard power. So a credible geopolitical foundation must also rest on robust military partnerships.

This dual strength is essentially what we can learn from the US dollar's dominance. It is not just a product of economic fundamentals but it is also powerfully reinforced by US security guarantees. These guarantees not only deepen trade ties [ ] , but have been shown to boost a currency's share in foreign reserves by up to 30 percentage points. [ ] 10 11

We are now seeing a major shift in Europe towards rebuilding our hard power, with important initiatives underway at the national and EU levels. And we should be clear that following through with this effort is a precondition for the euro to become more widely used.

## The economic foundation

Trade and military power are important for establishing demand for an international currency. But to satisfy this demand, investors need appropriate assets to invest in.

This is why a strong economic foundation - one that provides opportunities for growth and opportunities to invest in growth - is equally essential.

There is a virtuous circle between growth, capital markets and international currency usage. Growth generates robust rates of return, which make investors want to hold assets in a particular currency. And capital markets provide investment opportunities and channel funds back into growth.

At the same time, if capital markets provide a sufficient supply of 'safe assets', investors can hedge their exposures efficiently. When a shock hits and riskier investments lose value, safer assets rise in value. That provides a complete ecosystem for investments in the currency.

The US dollar's rise to dominance in the interwar period was certainly driven by this virtuous circle. The development of US capital markets boosted growth - with each 1 percentage point increase in market capitalisation yielding 0.5 percentage points more growth [ ]  - while simultaneously establishing the foundation for dollar dominance. The depth and liquidity of the US Treasury market in turn provided an efficient hedge for investors. 12

Europe has all the elements it needs to produce a similar cycle. But so far, we have not been able to put all the pieces together.

Despite our large single market, we have fallen behind the US in terms of growth performance and market returns. Since 2000, US labour productivity per hour has grown twice as much as in the euro area, mainly driven by the tech sector, and US markets have delivered returns that are around five times as high as those of European markets. [ ] 13

Despite our large savings, we have made little progress in integrating our capital markets to channel more of our funds into growth. 60% of household equity investment goes into home country markets even though there may be greater opportunities abroad.

And despite our strong aggregate fiscal position - our debt-to-GDP ratio is 89%, compared with 124% in the United States - we provide relatively few safe assets. Recent estimates suggest that outstanding sovereign bonds rated at least AA are just below 50% of GDP in the EU and above 100% in the US. [ ] 14

The conclusion for Europe is clear: if we truly want to see the global status of the euro grow, we must first reform our domestic economy.

That means moving forwards with the priorities identified in recent reports: completing the Single Market, enabling start-ups, reducing regulation and building the savings and investment union. And it means avoiding a piecemeal approach, where we make progress where it is easy and dither where it is hard, else we will never kick-start the positive cycle.

Moreover, in this new geopolitical landscape, the case for acting in a European way has never been stronger.

Each individual country of course needs to make sure that its national policies support growth. But we also need to be mindful of self-defeating fragmentation. For example, we all agree that Europe needs to build up its strategic industries to avoid excessive dependencies - as Mario Draghi and Enrico Letta emphasised in their recent reports. But we will not succeed if we have 27 different policies for these industries.

Nowadays there are also more policy goals that qualify as European public goods, notably strengthening European defence. But due to the free-rider problem, defence is a good that is likely to be undersupplied. Moreover, joining forces to procure equipment and develop new technologies - leading to economies of scale and more interoperability - will result in greater operational effectiveness than if all 27 Member States go it alone.

Economic logic tells us that public goods need to be jointly financed. And this joint financing could provide the basis for Europe to gradually increase its supply of safe assets.

## The legal foundation

Geopolitical strength and faster growth can go a long way towards strengthening the euro's international role. But maintaining demand for the currency will also depend on our ability to uphold a robust legal and institutional foundation.

Ultimately, currencies achieve and maintain their reserve status if the institutions and policies backing them consistently safeguard investor confidence in their long-term value. [ ] 15

For example, historically, the US dollar's pre-eminence has rested on the strength and stability of US fiscal and monetary institutions. The Federal Reserve System's credible commitment to controlling inflation, combined with the unparalleled liquidity of the US Treasury market, created a perception of minimal sovereign risk. This made the dollar a safe haven during global economic turbulence and recessions. [ ] Since 1970, there have been 34 instances of simultaneous sovereign debt and financial crises globally, 16

but the US has remained immune to such 'twin crises'. [ ] 17

However, when doubts emerge about the stability of the legal and institutional framework, the impact on currency use is undeniable.

These doubts have materialised in the form of highly unusual cross-asset correlations since 2 April this year, with the US dollar and US Treasuries experiencing sell-offs even as equities fell. The same doubts are also cited by investors who are turning to gold: two-fifths say they are doing so as a hedge against rising geopolitical risk. [ ] 18

Given this context, the EU has a legitimate reason to turn its commitment to predictable policymaking and the rule of law into a comparative advantage.

This commitment is baked into how the EU works. The positive side of our often slow and complicated decision-making processes is that checks and balances are always respected. We have also enshrined into law the independence of our key institutions, like the ECB, in ways that are hard for politicians to threaten.

But relying on the fact that our bureaucratic systems are hard to change is not enough. In the current geopolitical environment, we are facing increasing external pressures to take actions that jeopardise the rule of law. And we will only be able to resist these pressures if we are more politically united and able to speak with a single voice.

As we potentially enter a renewed era of great power rivalry, with countries being asked to take sides, we are likely to find ourselves under pressure to make decisions that are not necessarily in our own interest.

But if we take this opportunity to unite and, preferably, to reform our institutional structure by enabling more qualified majority voting in areas where a single veto has often held back the collective interests of the 26 other countries, that would enable us to act decisively as a united Europe. We would then be in a much stronger position to defend and uphold our values and, as a result, to defend and uphold global confidence in our currency.

## Conclusion

Let me conclude.

In the history of the international monetary system, there are moments when the foundations that once seemed unshakeable begin to shift.

The Belgian-American economist Robert Triffin described this with great clarity. He observed that nations' confidence in the international monetary system depends on the reliability of the reserve currency, which, in his words, is 'highly dependent on individual countries' decisions'.

But moments of change can also be moments of opportunity. The ongoing changes create the opening for a 'global euro moment'.

This is a prime opportunity for Europe to take greater control of its own destiny. But this is not a privilege that will simply be given to us. We have to earn it.

1.

Roosevelt, F.D. (1933), ' ', message transmitted to the London Economic Conference, 3 July. Wireless to the London Conference

2.

Eichengreen, B. (2011), Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System , Oxford University Press, New York.

3.

Share for known foreign reserves in 24 countries. See Eichengreen, B. and Flandreau, M. (2009), 'The rise and fall of the dollar (or when did the dollar replace sterling as the leading reserve currency?)',

European Review of Economic History , Vol. 13, No 3, pp. 377-411; and Eichengreen, B., Chiţu, L. and Mehl, A. (2016), 'Stability or Upheaval? The Currency Composition of International Reserves in the Long Run', IMF Economic Review , Vol. 64, No 2, pp. 354-380.

4.

Central banks purchased more than 1,000 tonnes of gold in 2024, which is double the average annual amount seen in the previous decade. Global holdings of gold by central banks now stand at 36,000 tonnes, close to the all-time high of 38,000 tonnes reached in 1965 during the Bretton Woods era.

5.

At market prices.

6.

ECB (2025), The international role of the euro , June, forthcoming.

7.

Mehl, A., Mlikota, M. and Van Robays, I. (2023), ' ', The international role of the euro , ECB, June. How is a leading international currency replaced by another? Old versus new evidence

8.

Gopinath, G. and Stein, J.C. (2018), ' ', NBER Working Paper Series , No 24485, National Bureau of Economic Research, April. Banking, Trade, and the Making of a Dominant Currency

9.

European Commission (2025), , Communication from the Commission to the European Parliament, the European Council, the Council, the European Economic and Social Committee and the Committee of the Regions, COM(2025) 30 final, Brussels, 29 January. A Competitiveness Compass for the EU

10.

Eichengreen, B., Mehl, A. and Chiţu, L. (2021), 'Mars or Mercury redux: The geopolitics of bilateral trade agreements', The World Economy , Vol. 44, No 1, pp. 21-44.

11.

Eichengreen, B., Mehl, A. and Chiţu, L. (2019), 'Mars or Mercury? The geopolitics of international currency choice', Economic Policy , Vol. 34, No 98, pp. 315-363.

12.

Czupryn, R. and Wójtowicz, L. (2021), 'The Influence of the Capital Market on Economic Growth in the USA', Central European Review of Economics &amp; Finance , Vol. 35, No 4, pp. 5-14.

13.

The S&amp;P 500 has grown by an impressive 568%, while the Euro Stoxx 50 has managed only a modest 115% over the same period.

14.

Bletzinger, T., Greif, W. and Schwaab, B. (2023), ' ', VoxEU , Centre for Economic Policy Research, 20 January. The safe asset potential of EU-issued bonds

15.

Iancu, A. et al. (2020), ' ', Departmental Papers , No 20/002, International Monetary Fund, 17 November. Reserve Currencies in an Evolving International Monetary System

16.

Goldberg, L., Krogstrup, S., Lipsky, J. and Rey, H. (2014), ' ', VoxEU , Centre for Economic Policy Research, 26 July. Why is financial stability essential for key currencies in the international monetary system?

17.

'Financial crises' refers to banking and/or currency crises. See Laeven, L. and Valencia, F. (2020),

'Systemic Banking Crises Database II', IMF Economic Review , Vol. 68, pp. 307-361.

Copyright 2025, European Central Bank

18.

ECB (2025), op. cit.",Christine Lagarde
https://www.bis.org/review/r250602e.htm,Olli Rehn: Walking a fine line - the European economy and ECB monetary policy in a shifting global landscape,"Remarks (online) by Mr Olli Rehn, Governor of the Bank of Finland, at the Lorenzo Codogno Macro Advisors Limited (LCMA) Forum, 28 April 2025.",2025-04-28 00:00:00,"## Olli Rehn: Walking a fine line - the European economy and ECB monetary policy in a shifting global landscape

Remarks by Mr Olli Rehn, Governor of the Bank of Finland, at the Lorenzo Codogno Macro Advisors (LCMA) Forum, XXX, 28 April 2025.

* * *

## Presentation accompanying the speech

Let me first thank the LCMA [Lorenzo Codogno Macro Advisors] for inviting me to speak at this conference. To kick off, I will briefly discuss the ongoing change in the global landscape and its implications for the economic outlook in the euro area and for the ECB's monetary policy.

Slide 2. Geopolitics overshadowing the economy

Today, we are on the cusp of profound changes in the global trading and economic relations. A rules-based multilateral system is being challenged by deals-based bilateral relationships.

From a European perspective, the uncertainty extends beyond economics. The security policy environment of Europe is currently transforming as rapidly as it did in the early 1990s, only this time in reverse.

These developments come on top of challenges we were already grappling with: from climate change and Europe's productivity slowdown to persistent conflict in the Middle East and China's challenge to liberal world order.

Slide 3. Shifting global landscape implies major uncertainty

With the backlash of globalisation and the European security order being damaged, it is no exaggeration to say that the economic outlook for Europe is marked by pervasive and persistent uncertainty.

And by any metric you wish to look at, uncertainty related to policy - particularly around US trade policy - has grown enormously. These developments are now reverberating also through financial markets, where we are witnessing heightened volatility across asset classes. Notably, the behaviour of US-related assets has been unusual, as investors reassess their view of the US economy.

Tariffs will have a negative effect on growth in the short, medium and long term. Apart from direct effects, it is the pervasive uncertainty - especially policy uncertainty - that is detrimental to investment and economic activity.

Taken together, the pervasive uncertainty and the tariffs themselves hold back the global growth momentum-which was already estimated to be weaker than that in the pre-pandemic era. As a result, downside risks dominate the outlook.

Slide 4. The economic outlook is surrounded by downside risks

What does this all mean for the European economy?

Based on recent data, the euro area economy was recovering pretty much in line with the ECB's forecasts. Private consumption growth has strengthened due to the increase in real income, and tentative signs of improvement have emerged in the manufacturing sector, which has been under pressure for some time. Employment in the euro area is solid, and unemployment is at a historic low of 6.1%. The fiscal impulse from increasing spending and investments in Europe's common defence and infrastructure will contribute to bolstering growth in the medium term.

However, the trade war and the enormous uncertainty it brings are now holding back growth also in the euro area. Some of the downside risks foreseen in the ECB's March projections have already materialised, and as a result, the growth outlook has further weakened.

Slide 5. Inflation is converging towards the ECB's 2% target

Turning to the inflation outlook, the ECB's March projections suggested that euro area inflation is stabilising at our 2% target over the medium term. Disinflation is well on track.

A particularly important development is the decline in services inflation, which had remained stubbornly high at around 4%, but has now clearly moderated. Wage inflation, including forward-looking indicators, supports the view that underlying inflationary pressures are easing.

Looking ahead, economists are largely unanimous that tariff increases will accelerate inflation in the US, but in the euro area the effects are two-way. The higher import costs increase some prices, but weaker growth dampens inflation.

Most economists also assumed the euro to depreciate in response to US tariff actions. In fact, the opposite has occurred-adding further complexity to the inflation outlook. At the same time, China may redirect exports to Europe, potentially increasing supply and dampening prices further.

Overall, financial markets seem to think that tariffs and the surrounding uncertainty will slow down euro area inflation, at least in the short term. This time I tend to agree with the markets. Taking into account these developments, I find it reasonable to assume that there are downside risks to the inflation outlook in the ECB's March projections.

Slide 6. The ECB retains full freedom of action due to uncertainty

Against this growth and inflation outlook, we decided before Easter at the ECB Governing Council to cut rates again by 25 basis points. Since last June, we've cut rates seven times - from 4% to 2.25%. These moves support consumption and investment in the face of global headwinds.

It is important that we remain vigilant about any deviations from our symmetric 2% inflation target, in line with our strategy. If inflation is projected to fall below our 2% inflation target over the medium term, then the right reaction is to cut rates further. I

think it is important that we do not let any thresholds, such as an estimated neutral rate, constrain us.  This is a time for agile and active monetary policy.

We will continue to decide on interest rates at each meeting in accordance with our three-element framework: the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission. Under the pervasive uncertainty, it is even more important than before that the Governing Council maintains full freedom of action in setting its monetary policy.

And finally, while markets have been able to weather the recent volatility and are functioning well, we of course monitor the events closely and stand ready to use all instruments that are necessary in order to preserve price stability and financial stability.

Let me conclude. In these uncertain times, we at the ECB will do our part in creating favourable conditions for Europe's success. First and foremost, this means safeguarding the euro area's price and financial stability. In the face of policy- or politicsdriven turbulence and elevated uncertainty, a strong commitment to maintaining price stability over the medium term is more important than ever.

Thank you for your attention. I will be glad to take any questions that you have.",Olli Rehn
https://www.bis.org/review/r250604e.htm,"Olli Rehn: Europe at the crossroads - common defence, re-emerging economy?","Speech by Mr Olli Rehn, Governor of the Bank of Finland, at the Bank of Finland and Bruegel Europe Day Conference, Helsinki, 9 May 2025.  ",2025-05-09 00:00:00,"## Olli Rehn: Europe at the crossroads - common defence, re-emerging economy?

Speech by Mr Olli Rehn, Governor of the Bank of Finland, at the Bank of Finland and Bruegel Europe Day Conference, Helsinki, 9 May 2025.

* * *

## Presentation accompanying the speech

Dear Friends of Bruegel and the Bank of Finland,

It is a great pleasure to celebrate with you all today both the 20 th   anniversary of Bruegel and the 30 th   anniversary of Finland's membership of the EU. It is indeed an honour to organise and hold this conference together with Bruegel and to celebrate Europe Day.

The founders of Bruegel were truly visionary 20 years ago. They recognized a gap - a growing need for stronger economics-based analysis and research on the shaping of the European Union. Anchoring the think tank firmly with EU Member States was also a wise decision.

I had the privilege and pleasure of being present - if not at Bruegel's creation, then certainly at its institutional foundation - as economic policy advisor to Finland's Prime Minister Matti Vanhanen. The Finnish Government, specifically the Ministry of Finance, decided to become a founding member institution. More recently, the Bank of Finland also joined the club, and we have made good use of Bruegel's valuable work.

Today, we all appreciate Bruegel for its diverse and independent research, which significantly enhances evidence-based and research-informed policymaking in Europe. Let me extend my warmest congratulations and wish you many more dynamic and productive years as Europe's leading policy think tank.

## Dear Friends,

Europe Day today marks the 75th anniversary of the Schuman Declaration, which laid out the foundation for European integration. In 1950 Europe was still recovering from the human and economic devastation of the Second World War.

From the Finnish standpoint, the immediate post-war years were not a brilliant time to be a small nation. As Private Rahikainen put it in Väinö Linna's The Unknown Soldier, in response to a minister's idealistic speech after the armistice in September 1944:

""To hell with their damned speeches. When your powder's all gone, it's better to keep your mouth shut than go spouting about the rights of small nations. A dog raises his hind leg on them.""

The Schuman Declaration nevertheless turned the tide and became the starting point for , the long period of relative peace with notably few conflicts between Pax Europaea European countries.

Indeed, an essential manifestation of Europe as a peace project is the EU's 2012 Nobel Peace Prize. The European Union had, by then, ""for over six decades contributed to the advancement of peace and reconciliation, democracy and human rights in Europe"".

## Slide 2: Outline of today's talk

I'd like to structure my remarks today under three themes. First, the seismic geopolitical shift which the world is currently witnessing. Second, the need for immediate investments in common defence to secure Europe's peace. And third, revitalising the EU economy through advancements in innovation, trade and productivity.

## Slide 3: Power politics is overshadowing the world economy

Let me start with the shifting geopolitical landscape, which presents the EU with significant new security challenges.

The rules-based international order, on which Europe built its post-war recovery, is under strain. Xi Jinping, Vladimir Putin and Donald Trump have each, in their own way, challenged this order  pushing for a world where great powers claim their spheres of influence and where might is only right. Such a tri-polar world would not be a world of peace and prosperity.

Since the Second World War, for good reason we have trusted that it is in the enlightened self-interest of the United States to stand as the security backstop for the Euro-Atlantic community. To my mind, as a long-time student of US foreign and security policy, this self-interest has clearly been rational from the standpoint of the United States' own national security and its global strategic interests and influence. However, the US is now making decisions based on a very different type of rationality that involves strained relations with the European Union.

I am aware that some are holding out hope that this is just temporary - that we'll be back to 'the old normal' in a few years. Two points on that. First, I would not bet on it there is no guarantee of a policy U-turn, as we may be witnessing a deeper political current in the US. And second, even more fundamentally, we must ask: can European security over the longer term be left at the mercy of the political winds in Pennsylvania's rust belt and seven swing states? Or should Europe finally take substantially greater responsibility for its own security?

In my view, the answer is clear, given the current and probable future defence environment: Europe must build its own credible common defence. Supporting Ukraine and reinforcing European defence is imperative for the security of the whole of Europe. Common defence is a crucial European public good. We need a strong, independent Europe, capable of defending itself as the European pillar of Nato.

The COVID-era recovery fund and earlier crisis responses have shown that the EU is capable of solidarity. A similar level of unity and quick decision-making is now needed for defence.

Many EU countries have already increased defence spending. Germany has committed to major investments. Not all EU states currently have the fiscal capacity to follow suit.

That's why Europe must build joint capabilities, interoperable forces  and, if necessary, common financing.

Europe would also benefit from a broad and liquid market for safe assets, such as the US enjoys. Bonds issued by EU institutions have consistently drawn strong investor demand. The currently unpredictable nature of US economic policy only increases the demand for stable investment options. Europe should capitalise on that by developing genuine safe assets - another field calling for Bruegel's continued active input.

Moreover, I have been reading with great interest about the proposal for a European Defence Mechanism (EDM), which was launched by Bruegel last month. Such an intergovernmental organisation would apparently be modelled on the existing and welltested template of the European Stability Mechanism. I see many merits in this proposal and would love to dive deeper into this - but I shall refrain from doing so, as I suppose that the panel will shortly be discussing the EDM more closely.

Let me nevertheless comment that Bruegel's proposal includes cooperation with the United Kingdom, which shares our values and has a strong military. Despite no longer being part of the EU, the UK remains a key partner in Europe's security architecture. I should also add that we cannot afford to be held back by foot-dragging or by hostile Member States, such as Hungary, which might wish to hinder progress.

This is why we must, as Bruegel has done, search for creative solutions, typically driven by coalitions of the capable and willing, to ensure that we move forward with our shared goals.

At the same time, we must work for more effective European institutional arrangements that better serve the common good. These should include a significantly larger EU budget and more streamlined decision-making structures.

This is also an opportunity to make Europe economically and financially stronger, as we need a liquid and large market of safe assets, as I alluded to earlier. Could European defence bonds provide such safe assets? A precondition for this would be that these bonds would be used to finance genuine European public goods and be backed by larger common revenues in the future.

Solidarity and unity within the EU are reinforced by standing together, demonstrating our commitment to collective security and prosperity. Let us recall that the Treaty on European Union offers the legal basis for common defence in its Article 42. Involvement from us all is vital in maintaining a united front and ensuring a peaceful and prosperous Europe for future generations.

## Slide 4:  Growth in the euro area has been picking up

My third and final theme is the re-emerging European economy. Yes, re-emerging, even though it provides a mixed picture today.

Recent data has shown signs of recovery in the euro area, but the outlook remains clouded by exceptional uncertainty due to President Trump's trade war. Employment is solid in the euro area, and unemployment is low at 6.2%. Private consumption has

benefited from stronger real incomes. Investments in Europe's common defence and infrastructure will bolster manufacturing further and strengthen long-term growth. Europe will continue to build up resilience against global shocks.

With disinflation on track and the growth outlook weakening, we decided at the European Central Bank's Governing Council meeting on 17 April to lower interest rates. This was the seventh reduction since last summer.

Given the pervasive uncertainty, the Governing Council is maintaining full freedom of action in monetary policy. We will adjust our rates to bring inflation to 2% in the medium term - just as our strategy tells us to do.

## Slide 5: Bank of Finland's scenario calculation: A trade war would weaken growth worldwide

The elevated uncertainty brings me to the significant risks in our economic outlook, especially trade protectionism.

An extensive trade war would weaken economic output worldwide, and we have already seen major turbulence in the global stock markets.

Calculations by the Bank of Finland show that if the US were to impose tariffs targeting all imports from EU countries and China - raising them by 25 percentage points - and the EU were to take equivalent counter measures, world GDP could decline by over 0.5% in both 2025 and 2026. The impact on the euro area economy could be slightly greater, with the estimated GDP effect ranging from 0.7% to 1.5% in the first year, depending on the increased uncertainty and the extent of counter measures taken. With all the usual caveats, these figures illustrate the seriousness of the threat posed by a full-scale trade war.

Bank of Finland's earlier calculations concerning the effects of the trade war on the Finnish economy are in line with these estimated effects on the euro area economy. While the model estimations come with uncertainty, they consistently speak to significantly negative outcomes for open economies such as Finland, as a result of trade war.

In my view, in the face of US protectionism, the European Commission's response has been justified and rational. The Commission has rightly suggested a zero-for-zero tariff agreement between the EU and the US. While Europe remains committed to constructive negotiations with the US, the Commission has been preparing proportionate countermeasures to reinforce our negotiating position, with the aim of reaching a solution that benefits everybody and avoids further damage to growth.

## Slide 6: Investment needed now in security and productivity

""This is Europe's moment"" has become a slogan of the era. But to what extent is there substance to it?

No doubt, President Trump's policies are compromising the United States' economic and institutional dominance, while Europe's position is benefiting from its stability and certain political developments.

Yet, the fact remains that the size of the US bypasses the European economy significantly in many dimensions, especially in factor productivity and therefore in growth. Will Europe adopt Mario Draghi's recommendations to boost productivity? European industry must strengthen its technological capabilities. Cuttingedge research and innovation, and investment in areas like AI, will be crucial.

Furthermore, Europe's Savings and Investment Union needs to be advanced. The US has a larger and more unified internal capital market which benefits from scaling, a strong venture capital ecosystem, and fewer regulatory hurdles. The US dollar may remain the world's leading reserve currency at the centre of the global financial system. But many investors are keen to diversify their portfolios to euro-denominated assets, which will also strengthen the international role of the euro.

The price of energy is a considerable burden to European competitiveness. Unlike the US, the EU has no abundant fossil fuel supplies, so there is no other viable strategy for increasing our energy security than decarbonisation and the green transition. The green transition in energy is not just climate action - it's a geopolitical investment. So is the digital euro and the broader effort to bolster the international role of the euro.

Human capital and academic freedom are among Europe's greatest assets. As these freedoms are eroded in the United States, Europe has a unique opportunity. In my view, the EU should rapidly create a special visa programme for top researchers seeking intellectual freedom without political pressure. We must highlight Europe's universities where critical thinking is encouraged and academic liberty protected. This is an investment in Europe's future prosperity and influence.

## Slide 7: Conclusions

To conclude, today's world is experiencing yet another major transition, as it was 30 years ago when the Cold War came to an end. But now, unfortunately, it is moving in reverse gear.

Europe's external security and its soft power depend now on strengthening its hard power, particularly in terms of coordinated defence solutions. Moreover, despite the current uncertain geopolitical environment, international cooperation remains essential in a highly interconnected world. We stand for it.

At the same time, Europe must strengthen its economic foundation by finding ways to increase productivity and hence fulfil its true potential. At the ECB, we will contribute to this by ensuring price stability and financial stability, thus laying the foundation for Europe's economic and social re-emergence and long-term resilience.

In sum, this truly is Europe's moment. We must defend our way of life - solving conflict and making progress through reason, dialogue and democracy.

As Reinhold Niebuhr, the theologian and international relations theorist from our western neighbour, once said:

""The sad duty of politics is to establish justice in a sinful world.""

That is precisely Europe's task now - more so than for decades.

Thank you!",Olli Rehn
https://www.bis.org/review/r250604h.htm,"Jorgovanka Tabaković: By joining SEPA, Serbia reaffirms its strategic direction","Speech by Dr Jorgovanka Tabaković, Governor of the National Bank of Serbia, at the ""Technical and legal aspects of connecting to SEPA schemes"" workshop, Belgrade, 28 May 2025.",2025-05-28 00:00:00,"## Jorgovanka Tabakovi: By joining SEPA, Serbia reaffirms its strategic direction

Speech by Dr Jorgovanka Tabakovi, Governor of the National Bank of Serbia, at the ""Technical and legal aspects of connecting to SEPA schemes"" workshop, Belgrade, 28 May 2025.

* * *

Ladies and gentlemen, esteemed guests, dear colleagues,

It is a particular pleasure for me that my neighbour, Mr Holti (Senior Financial Sector Specialist with the Payments Team in the Finance, Competitiveness &amp; Innovation Global Practice at the World Bank) from Albania, is with us. As a good host, at the beginning, I greeted him in the way my neighbours in my home town would do. That is indeed a sign of good hospitality, but there is also a bit of bitterness because we, as the best, are the 41st in the SEPA system. However, there is a good Serbian saying: Luck is never late. And whenever something happens, it happens on time.

I am speaking to you at a moment when a significant chapter has already been opened: the Republic of Serbia has become part of the Single Euro Payments Area (SEPA).

With this step, Serbia has entered a new phase of economic integration with the EU. We are now the first country in the region with an advanced instant payment system, ready to participate equally in a space where payments are executed without borders quickly, securely, and reliably.

"" Europe will not be made all at once, or according to a single plan. It will be built ,"" said Jean through concrete achievements which first create a de facto solidarity Monnet, one of the founding fathers of the EU. Our path to SEPA embodies these concrete achievements - the collective effort of experts, institutions and partners from the country and abroad.

SEPA is not merely a technical framework for connecting payment systems. It is a civilizational framework of trust - a common language for European markets and the foundation of the digital economy. If the Tower of Babel, like in Bruegel's painting, remained unfinished in its construction because the people of the world could not agree to speak one language, through the SEPA instrument we are trying to realise that eternal human dream - to speak the same language in order to understand each other best.

By joining SEPA, Serbia not only establishes the basis for more efficient cross-border payment transactions but also clearly reaffirms its strategic direction, which is European, modern and inclusive.

Our path to SEPA was a carefully guided process of reforms, involving thorough alignment with the highest EU standards. From adopting a modern legal framework for payment services and implementing the provisions of the PSD2 directive to enacting secondary legislation - every step was grounded in a clear vision and institutional

responsibility. During this process, we enhanced supervisory capacities, strengthened collaboration with the banking and fintech sectors, and created a regulatory environment that now enables a stable, transparent, and competitive system. Over this time, Serbia has taken a significant leap - not only in terms of aligning with the highest EU standards but also in terms of developing its own solutions that today serve as benchmarks both regionally and globally. When I say our own solutions, I mean solutions developed primarily relying on our own efforts, for our greatest strength is the people who created that software. Our instant payment system, the NBS IPS system, which operates in real time and processes over five million transactions a month, has become a symbol of innovation and reliability. We have achieved what until recently seemed a distant goal - that the size of a country depends not on its territory but on the knowledge it possesses and the trust it inspires. Today, Serbia does not merely follow European trends but actively shapes them - through vision, infrastructure, and the trust it has built among partners and users.

I extend special gratitude to the European Payments Council, the European Commission, the European Central Bank, and the World Bank for their continuous support. Your confidence in our institutional capacity has been the driving force behind our resolve.

As Governor, I am proud of the National Bank of Serbia's team, which has worked tirelessly toward this goal. We witness how expertise has translated into reform, how plans have become reality, and how vision has opened the door to the European financial system.

"" "", or He who has a why to live can He who has a why to live can bear almost any how bear almost any burden. And he who does not, does not embark on any project. These are not only the words of Friedrich Nietzsche, but a philosophy we affirm every day in our business decisions. These words - that if you know why you live, you can endure any burden - shape human resilience and the meaning of existence. Our why has always been clear: to ensure that citizens and the economy reap the benefits they deserve - lower costs, greater trust and simpler processes.

Today, we can proudly say that Serbia is part of the European payments area. Our application has been officially accepted. Serbia has become a full-fledged member of the SEPA geographical scope.

On behalf of the National Bank of Serbia, the institution entrusted with the stability and development of the domestic financial system, it is my honour to announce this news with a sense of deep pride and responsibility. With this achievement, Serbia takes its place in the Single European Payments Area with systems that speak the same language of standards, regulations that protect users, and a vision that integrates economies into a single payments market.

This is a space where interoperability is not just a technical term but a daily practice of trust. It is a network where every signal, every transfer of funds, every digital confirmation - testifies to a single European idea: that stability, transparency, and efficiency are not a matter of luxury but expectations. Today, Serbia does not translate the lexicon of payment standards - it is the one writing it. Now, all payment service providers in Serbia stand before a new chapter of responsibility but also of opportunity.

Joining SEPA does not mark the end of our work - our work now begins at a higher level. Now is the moment to once again demonstrate our leadership: through knowledge, efficiency and dedication, and to prove that the trust placed in us was not accidental but earned.

May this day be remembered as the moment Serbia did not take a step forward - but a natural step. For we did not wait to become part of SEPA; we have long been ready for it. Today, Europe has recognised what we already knew - that Serbia belongs to a community that values knowledge, reliability and vision, and that Serbia is part of the area where standards mean trust and collaboration yields results.

I thank everyone who has supported us on this journey, above all our colleagues, then the banking sector, which has always understood that we are working together on this task. I wish everyone a successful and inspiring continuation not only of today's workshop but also of our future cooperation.

Thank you.",Jorgovanka Tabaković
https://www.bis.org/review/r250604g.htm,"Lisa D Cook: Welcoming remarks - ""Fed Listens""","Welcoming remarks by Ms Lisa D Cook, Member of the Board of Governors of the Federal Reserve System, at a Fed Listens event, hosted by the Federal Reserve Bank of Atlanta, Atlanta, Georgia, 4 June 2025.",2025-06-04 00:00:00,"## Lisa D Cook: Welcoming remarks - ""Fed Listens""

Welcoming remarks by Ms Lisa D Cook, Member of the Board of Governors of the Federal Reserve System, at a Fed Listens event, hosted by the Federal Reserve Bank of Atlanta, Atlanta, Georgia, 4 June 2025.

* * *

Thank you, President Bostic. And thank you to all of you who came out to join the Federal Reserve today. It is so wonderful to be back in my home state of Georgia. I was born and raised 100 miles down the road in Milledgeville, I have been an Atlanta baseball fan since Hank Aaron was swatting the baseball out of Fulton County Stadium (any Atlanta fans here?), and I have spent a lot of time here in Atlanta, including when I attended Spelman and Georgia Tech. 1

The Federal Reserve has been given a dual mandate of maximum employment and stables prices. The purpose of today's event is to hear from all of you about Fed Listens how the Federal Reserve's approach to monetary policy affects your families, your businesses, and your communities. I appreciate your interest in our work. Events like these provide valuable information to Fed policymakers, like President Bostic and me. The Federal Reserve System is really designed to be part of the communities we serve. The Fed has a Reserve Bank in every region of the U.S., and those Banks have Branches that carry out many important functions, including making sure the priorities and concerns on a local level are reflected in monetary policy decisions made in Washington.

As an economist, I am always studying incoming data and information to make the best policy decisions. Much of that comes in the form of statistics from various agencies, universities, and businesses. But another extremely valuable input comes from people, like you, who can tell us how the economy is playing out in their daily lives as they make purchases, consider investments, and think about employment choices. That is why I especially value these opportunities.

This event is specifically tied to the review of our long-run goals and Fed Listens strategy for monetary policy, which we call our framework. 2   It was last updated five years ago. At that time, it was determined that it makes sense to regularly revisit the framework through a public review. Thank you for being part of this today. Again, the primary purpose of this event is to listen to you all, so I will stop here.

Thank you. I look forward to hearing your input.

1  The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.

2  For more information, see the Federal Reserve Board's website at  https://www. federalreserve.gov/monetarypolicy/review-of-monetary-policy-strategy-tools-and-. communications-2025.htm",Lisa D Cook
https://www.bis.org/review/r250603j.htm,Klaas Knot: Off the beaten path - what we learned during the renovation at Frederiksplein,"Speech by Mr Klaas Knot, President of De Nederlandsche Bank, at the occasion of receiving the certificates on sustainability and wellbeing for the newly renovated DNB headquarters, Amsterdam, 2 June 2025.",2025-06-02 00:00:00,"## Klaas Knot: Off the beaten path - what we learned during the renovation at Frederiksplein

Speech by Mr Klaas Knot, President of De Nederlandsche Bank, at  the occasion of receiving the certificates on sustainability and wellbeing for the newly renovated DNB headquarters, Amsterdam, 2 June 2025.

* * *

Thank you Giovanna, thank you Brigit. Thank you both for your kind words. Here stands a very proud central bank governor. BREEAM and WELL are widely recognised international standard setters. So receiving certificates with such a high ranking is a great honour and recognition. A recognition of the efforts of all those people who worked so hard to create a sustainable headquarters building for De Nederlandsche Bank that is open to the public and where it is a joy to work.

But the importance of the BREEAM and WELL certificates reaches further than just this building. It shows that sustainable construction in the Netherlands is feasible, affordable and formidable.

Since 2011, sustainability has been part of the mission of De Nederlandsche Bank. We take sustainability into account in all of our core tasks. So when we started thinking about creating a new office space, it soon became clear to us that, whatever its shape or form, it would be sustainable.

Putting your money where your mouth is.

Except: it is not our money. In the end, it is the public's money. Some people may think we were somehow able to do this because we are the central bank. It's easy to be green when you're rich. But it is just the other way around. Because we are a public institution, we had to be very cost conscious.

Sometimes green construction can save costs. Take for example the 80 percent in energy savings that we realized. And sometimes we had to make choices. But as an institution that thinks long-term, we didn't want to make decisions that would push costs forward to future generations. That would not have been sustainable. That's why, for example, we were very rigorous in removing asbestos. That took us longer than expected. But to us it was absolutely necessary.

So green construction doesn't have to cost a lot of money, but it does cost a lot of effort. That's because going for sustainable solutions unfortunately still means going off the beaten path. And everything that is non-standard takes more effort, almost by definition. Take for example the Satellite, the round building that was added in the early nineties and has been removed again as part of the renovation. We wanted it to be reused. Because it was a modular building, it could be dismantled, and reconstructed somewhere else. The plan was to use the modules to build a nursing home for elderly people, here in Amsterdam. That proved to be extremely complicated. Despite the fact that all parties involved were enthusiastic, in the end we had to let go of the original plan. Now the Satellite will get a second life as an entertainment venue on the

Scheveningen Pier. A central bank becoming a night club: not exactly what we had in mind, but our original aim to reuse the building has still been reached.

So building sustainably is not always easy. But to quote professor Albus Dumbledore (yes, the one from the Harry Potter series): 'there will be a time when we must choose between what is easy and what is right.' End of quote. And you all know the thing about going off the beaten path. The first time is really difficult. The second time is still difficult, but a little bit less. The third time it is already somewhat easier. And by the tenth time, a new path is being created. A sustainable path.

And now I want to say something about wellbeing. It was important to us to create a healthy and inspiring work environment for our staff. That goes much further than tangibles. It also involves air quality, food &amp; drink, movement and acoustics, to name just a few. The large, open stairs in the atrium are a favourite feature of mine. They are very attractive and very visible, so we now take the stairs much more often. Apart from the vitality aspect, the atrium also encourages a sense of community. Already on the first day, you could hear DNB colleagues say: 'Today I met more people than I did in the old building in a month.' And that brings me to an important point: the ultimate certificate of wellbeing is awarded by our colleagues. And from all of what I hear, I get the impression that the people at DNB are very happy and proud with their new building. In fact on Wednesdays and Fridays, you can see a lot of colleagues bringing their family, with buggies and all.

I am also glad that you recognised the building's openness to the public. Because that was a very important objective of the renovation. As DNB, we are at the heart of society, and it is therefore important that we are open and accessible. And if you say that you are open and accessible, your building needs to reflect that. Again: put your money where your mouth is. By relocating the gold and banknotes to the new Cash Center in Zeist, we were literally able to open our doors to the public. And so far everything is working as we intended. We receive a lot of visitors every day, ranging from school classes visiting De Nieuwe Schatkamer, to students studying here for their exams, or people just walking in to have a coffee and see the building and the art collection.

I could go on for hours, but nothing beats the real thing. So to our guests I say: take the opportunity to look around after this event, both inside the building and outside in our gardens. I hope it inspires you. To the people of BREEAM and WELL: again a heartfelt thank you. And to all the people inside and outside DNB, present and not present here today, who worked so hard to realise this magnificent building: thank you for all your efforts. To borrow some words from the poet Robert Frost: 'You took the road less travelled by, and that has made all the difference.'

Thank you.",Klaas Knot
https://www.bis.org/review/r250605a.htm,Tiff Macklem: Monetary Policy Decision,"Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada and Ms Carolyn Rogers, Senior Deputy Governor of the Bank of Canada, at the press conference following the monetary policy decision, Ottawa, Ontario, 4 June 2025.",2025-06-04 00:00:00,"## Tiff Macklem: Monetary Policy Decision

Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada and Ms Carolyn Rogers, Senior Deputy Governor of the Bank of Canada, at the press conference following the monetary policy decision, Ottawa, Ontario, 4 June 2025.

* * *

Good morning. I'm pleased to be here with Senior Deputy Governor Carolyn Rogers to discuss today's monetary policy announcement.

Today, Governing Council maintained the policy interest rate at 2.75%.

Uncertainty remains high. The Canadian economy is softer but not sharply weaker. And we've seen some firmness in recent inflation data. Against this backdrop, we decided to hold the policy rate unchanged as we continue to gain more information on US trade policy and its impacts.

The trade conflict initiated by the United States remains the biggest headwind facing the Canadian economy.

Since our April decision, the US administration has continued to increase and decrease various tariffs. China and the United States have stepped back from extremely high tariffs, and bilateral trade negotiations have begun with a number of countries. The extreme financial turmoil we saw in April has moderated and stock markets have recovered their losses. However, the outcomes of the trade negotiations are highly uncertain, tariffs are well above their levels at the beginning of 2025, and new trade actions are still being threatened. The recent further increases in US tariffs on steel and aluminum underline the unpredictability of US trade policy.

In addition to the uncertainty about US tariffs, there is also uncertainty about their impacts. At its April decision, Governing Council said it would pay close attention to the extent to which higher tariffs reduce demand for Canadian exports; how much this spills over into business investment, employment and household spending; how much and how quickly cost increases are passed on to consumer prices; and how inflation expectations evolve.

Since then, there is partial information on some of these risks and uncertainties. Let me provide an update.

So far, the US economy has proven resilient. Imports were strong as businesses tried to get ahead of tariffs, and that pulled down first-quarter US GDP. But domestic demand remained relatively strong. Early indicators for the second quarter suggest a rebound in growth as imports fall back and domestic demand continues to expand.

The flip side of the strength in US imports was a surge in Canadian exports. This boosted first-quarter GDP growth in Canada, which came in at 2.2%, slightly stronger than the Bank had forecast. The composition of growth was largely as expected. Exports and inventories were strong but final domestic demand was roughly flat. Strong spending on machinery and equipment held up growth in business investment by more

than expected. Consumer spending slowed from a very strong fourth-quarter pace, but continued to grow despite a sharp drop in consumer confidence. Housing activity contracted as resales fell significantly, and government spending also declined.

The labour market has weakened, with job losses concentrated in trade-intensive sectors. The unemployment rate rose to 6.9% in April. So far, employment has held up across sectors that are less exposed to trade. But businesses are generally telling us that they plan to scale back hiring.

The pull forward in exports and inventory accumulation in the first quarter borrows economic strength from the future, so the second quarter is expected to be much weaker. Spending by Canadian families and businesses has shown some resilience in the face of US tariffs and heightened uncertainty. But they are likely to remain cautious, suggesting domestic spending will remain subdued.

It is still too soon to see the direct effects of retaliatory tariffs in consumer price data. What we can see clearly is the impact of the elimination of the consumer carbon tax. This knocked 0.6 percentage points off inflation in April, largely due to lower gasoline prices, and pulled headline inflation down to 1.7%. This tax effect will remain in the yearover-year change in the CPI for the next 11 months before falling out next April.

Inflation excluding taxes was 2.3% in April, slightly stronger than the Bank had expected and up from 2.1% in March. The Bank's preferred measures of core inflation, as well as other measures of underlying inflation, moved up in April. There is some unusual volatility in inflation, but these measures suggest underlying inflation could be firmer than we thought. Higher core inflation can be partly attributed to higher goods prices, including food, and may reflect the effects of trade disruption. Many businesses report they are already facing higher costs related to finding alternative suppliers and developing new markets. The Bank will be watching measures of underlying inflation closely to gauge how inflationary pressures are evolving.

The Bank is also watching inflation expectations closely. In April, we reported consumers and businesses expected prices to rise as a result of tariffs, while longerterm inflation expectations remained well anchored. Recent surveys continue to show consumers are bracing for higher prices, and many businesses say they intend to pass on tariff costs.

Governing Council will continue to assess the timing and strength of both the downward pressure on inflation from a weaker economy and the upward pressure on inflation from higher costs.

At this decision there was a clear consensus to hold policy unchanged as we gain more information. We also discussed the path ahead for the policy interest rate. Here, there was more diversity of views. On balance, members thought there could be a need for a reduction in the policy rate if the economy weakens in the face of continued US tariffs and uncertainty, and cost pressures on inflation are contained.

Faced with unusual uncertainty, Governing Council is proceeding carefully, with particular attention to the risks. This means we are being less forward-looking than usual.

We are focused on ensuring that Canadians continue to have confidence in price stability through this period of global upheaval. We will continue to support economic growth while ensuring inflation remains well controlled.

With that, the Senior Deputy Governor and I would be pleased to take your questions.",Tiff Macklem
https://www.bis.org/review/r250604c.htm,"Christopher J Waller: The effects of tariffs on the three I's - inflation, inflation persistence, and inflation expectations","Speech by Mr Christopher J Waller, Member of the Board of Governors of the Federal Reserve System, at the 2025 Bank of Korea International Conference ""Structural shifts and monetary policy""  Bank of Korea, Seoul, 1 June 2025.",2025-06-01 00:00:00,"## Christopher J Waller: The effects of tariffs on the three I's - inflation, inflation persistence, and inflation expectations

Speech by Mr Christopher J Waller, Member of the Board of Governors of the Federal Reserve System, at the 2025 Bank of Korea International Conference ""Structural shifts and monetary policy""  Bank of Korea, Seoul, 1 June 2025.

* * *

Thank you to the conference organizers for inviting me to speak today. I have attended this conference several times and I'm honored to be on the program this year. Today, I will speak on the U.S. economic outlook and the implications for monetary policy. 1   I will focus my comments on two issues: first, the effects of tariffs on inflation persistence, and second, the divergence of household inflation expectations and financial market measures of inflation expectations.

The theme of this conference is structural shifts and monetary policy. The key structural shift that is affecting the economies of both the United States and South Korea is the recent change in U.S. trade policy, and a substantial share of my remarks will address how this shift is affecting the U.S. outlook.

The variability in tariff announcements this year, including the whipsawing of court rulings and doubling of metal tariffs last week, has created considerable uncertainty about where trade policy will settle. In mid-April, based on how things looked at the time, I proposed two scenarios to consider in framing an outlook and a preferred stance of monetary policy: a large tariff scenario and a smaller tariff scenario. 2   In both cases, I assumed that the tariff increases would lead to a one-time boost to prices that would temporarily raise inflation, after which inflation would return to its underlying rate. This temporary increase could play out with a prompt rise in inflation that could recede quickly, or it could occur more gradually with a more modest increase that would recede more slowly. As I will explain, crucial to this judgment is my assumption that longer-term inflation expectations remain anchored.

The large-tariff scenario I described assumed an average, trade-weighted tariff for goods imports of 25 percent, which is close to where things stood after the 90-day tariff suspensions announced April 9, and my scenario assumed that this would remain in place for some time. In that case, I argued that inflation based on the personal consumption expenditures (PCE) price index could reach a peak of 5 percent on an annualized basis this year if businesses passed through all of the tariff costs to consumers. If firms absorbed some of the tariff increase, then inflation might peak around 4 percent. I also argued that an economic slowdown from these higher costs could push the unemployment rate up from 4.2 percent to 5 percent next year.

The smaller-tariff scenario assumed a 10 percent average tariff on goods imports would remain in place but that higher country and sector specific tariffs would be negotiated down over time. In this case, inflation may rise to 3 percent on an annualized basis and then dissipate. Growth in output and employment would slow, with the unemployment rate rising but probably not as high as 5 percent.

Reported progress on trade negotiations since that speech leaves my base case somewhere in between these two scenarios. The temporary reduction in China tariffs has significantly decreased the trade-weighted average tariff, since China supplied about 13 percent of U.S. goods imports in 2024. But that reduction is only temporary and is due to increase if a trade agreement is not reached by August 12. Meanwhile, tariffs on other countries were temporarily lowered to 10 percent, but it is unclear where they will end up. Furthermore, the Administration continues to say that it plans additional tariffs on specific industries and sectors of the economy. Last week's court decisions declaring a large share of tariffs illegal introduce additional uncertainty, but there seem to be multiple options for maintaining tariffs, so I will stick with an estimated trade weighted tariff right now of 15 percent on U.S. goods imports, which falls in between my large- and smaller- tariff scenarios. I see the risks of my large tariff scenario having gone down, but there is still considerable uncertainty about the ultimate levels, and thus about the impact on the economic outlook.

The context for this uncertainty about tariffs is that hard data on the fundamentals of the economy lately has been mostly positive and supportive of the Federal Open Market Committee's (FOMC) economic objectives. There is very little evidence of the effect of trade policy in this data on inflation or economic activity through April, but that may change in the coming weeks. In comparison, there is evidence of tariff effects in the ""soft data"" based on surveys of consumers, businesses, and investors-indications of an expected slowdown in economic activity and an increase in prices. As of today, I see downside risks to economic activity and employment and upside risks to inflation in the second half of 2025, but how these risks evolve is strongly tied to how trade policy evolves.

A careful examination of the hard data on overall economic activity through April shows it has been, on balance, positive. I say this because, while real gross domestic product contracted slightly in the first quarter, private domestic final demand, a measure of spending by consumers and businesses, grew at a healthy annual rate of 2.5 percent in the quarter. Of course, economic policy uncertainty among businesses is very elevated, and this has affected measures of sentiment and confidence for consumers and businesses, which fell to historically low levels in April. One index of this policy uncertainty compiled from newspaper stories, government reports, and the dispersion of the forecasts of private-sector economists rose in April to nearly twice the level seen during the pandemic and the Global Financial Crisis. 3   However, consumer sentiment rebounded with the announcement that the China tariffs had been lowered temporarily. And households' spending should continue to be supported by income from the resilient labor market. In addition, my business contacts have told me that, because of tariff uncertainty, their investment plans are currently on hold but are not canceled. So we may see a slowdown in investment in the near term but a jump back up later this year.

Wherever things end up on a continuum between my ""large"" and ""smaller"" scenarios, I do expect tariffs will result in an increase in the unemployment rate that will, all else equal, probably linger. Higher tariffs will reduce spending, and businesses will respond, in part, by reducing production and payrolls.

We won't get the jobs report for May until this Friday, but the consensus expectation is that employers added 130,000 jobs and that the unemployment rate remained steady at 4.2 percent. We have seen a reduction in wage pressures over recent months, and the

ratio of job vacancies to the number of unemployed people has moderated from as high as 2 a couple of years ago to close to 1 today, which was about where it was before the pandemic. With a balanced labor market, if aggregate demand slows noticeably, businesses will likely look to cut workers. But I believe job cuts would be modest if the smaller-tariff scenario is realized. Most chief executives I have spoken to say that they can maintain their current operations with an effective tariff of 10 percent, looking for efficiencies here and there, and won't have to significantly reduce their workforces.

## Inflation

Now let me turn to the outlook for inflation. Before the recent shift in U.S. trade policy, inflation had been making consistent, but uneven, progress over the past two years toward our 2 percent goal. While that progress seemed to stall at the beginning of 2025, it has resumed the past two months. The same pattern of higher readings at the start of the year, followed by lower readings the next couple of months, also occurred in 2024 and I expect that research will eventually reveal some residual seasonal effect or other factor that has affected at least some prices early in the year.

Total PCE inflation for April rose 0.1 percent, and core PCE inflation without energy and food prices increased by the same amount. It was the second monthly reading at 0.1 percent or less, and it means that headline PCE inflation was up 2.1 percent over the 12 months through April and that core was up 2.5 percent. In the absence of the tariff increases, I was expecting inflation would continue to be coming down nicely to our 2 percent goal. But now I expect that the effect of higher tariffs will raise inflation in the coming months. The surge in imports to build up inventories ahead of the April 2 announcement makes the timing of price increases somewhat uncertain.

Thinking about the rest of 2025 and 2026, I expect the largest factor driving inflation will be tariffs. As I said earlier, whatever the size of the tariffs, I expect the effects on inflation to be temporary, and most apparent in the second half of 2025. This will be determined not only by the ultimate size of the increase, but also by how exporters and importers respond, something that is highly uncertain. Will foreign exporters discount prices to try and preserve market share? Will domestic importers absorb some of the tariff increases to shore up demand and sales volumes? Will firms simply pass the entire tariff along to consumers? Since about 10 percent of personal spending goes to imported goods, if the ultimate tariff levels are closer to my 10 percent smaller-tariff scenario and if that is fully passed through to consumers, then the tariff would push up prices 1 percent. But based on my conversations with business leaders, I suspect the tariff cost will not be fully passed through and, instead, the burden will be distributed something like 1/3, 1/3, and 1/3 among consumers, importers and exporters. In this case, it would raise inflation three tenths of 1 percent for a short period. However, if the tariffs are higher than 10 percent, more of the increase is likely to be passed on to consumers, as businesses face limits in how much they can absorb and still find a way to remain profitable.

I have also heard from business contacts that firms may choose to spread the tariff across non-imported goods. This would increase many goods prices a little instead of boosting import prices by a larger amount. But this approach would not affect the total impact of tariffs on the overall price level. Let me illustrate why using an example.

Imagine a firm selling 10 goods with equal sales revenue so that all have an equal weight of 1/10 when aggregating the firm's average price. Now assume one of the goods is imported. A 10 percent tariff on the imported good that is fully passed through raises the price of the imported good by 10 percent, while the prices of the other nine goods remain unchanged. This pricing strategy raises the average price of all goods by 1 percent. Now, instead, suppose the firm chooses a different strategy and decides to spread the tariff cost across all goods by raising all 10 goods prices by 1 percent. As a result, the price of the imported good increases much less, but the prices of the other nine goods now increase a bit even though they are not subject to tariffs. Under this strategy, the average price of the firm's goods still goes up 1 percent, and the tariff is fully passed through. So both pricing strategies have the same total effect on the aggregate price level across the firm and, if repeated, across the economy. The same logic applies to passing along the tariff via a sequence of smaller price increases instead of at a single point in time-in the end, the aggregate price level goes up by the same amount regardless of whether it is gradual or immediate.

I have heard the concern that some firms may raise prices opportunistically while blaming the tariff increase. There is always a risk that firms blame some purported cost spike for a price increase, but it doesn't happen often because of the risk of losing market share to competitors or squandering the allegiance of loyal customers. So while this may happen in isolated instances, I do not believe it will be a significant source of additional inflation above and beyond the tariff-induced increase.

## Inflation Persistence

Let me now turn to the first of two issues about inflation that I want to cover in more detail. This is inflation persistence. The economics behind a tariff increase implies it should have a transitory effect on prices-tariffs raise prices once, but those prices don't keep going up. I know that hearing ""transitory"" will certainly remind many people of the consensus on the FOMC in 2021 that the pandemic increases to inflation would be transitory. Inflation turned out to be much more persistent than we thought it would be. Am I playing with fire by taking this position again? It sure looks like it. So why do I believe a tariff-induced inflation spike will not be persistent this time?

Looking back to how inflation played out in 2021 and 2022, I believe there were three key factors that increased the persistence of the initial burst of inflation in 2021. First, there was a negative labor supply shock that was more persistent than expected. I believed that once the economy reopened, all of this labor would return. However, many workers left the labor market because of illness, or to care for children and family members, or took early retirement. They never returned. And with every wave of COVID-19, the United States experienced additional waves of early retirements that inhibited the labor supply from returning to its pre-pandemic level. Also, with the service sector shut down, demand surged for goods as spending on travel and other services halted and the negative labor supply shock led to a shortage of workers in goods production, delivery, and sales. Goods industries raised wages to attract workers and then once the economy began to reopen, service-sector firms had to pay higher wages to get workers back. This persistent shortage of labor from these several pandemicrelated effects continued through 2021 and 2022 as job vacancies skyrocketed and firms had no choice but to pass along escalating wage increases in the form of higher prices.

The second factor driving inflation after the pandemic was that the supply chain disruptions that many expected to be temporary turned out to be more persistent. There were multiple waves of COVID affecting different regions of the world at different times, so that resolving production and transportation problems was constantly disrupted by the ebbing and flowing of the disease. One notable detail is that China's lockdowns lasted much longer than expected and played an important role in global supply disruptions.

The last factor was the quite stimulative fiscal response in the United States. There were hundreds of billions of dollars in grants to businesses to pay idled workers and large transfer payments to households. Furthermore, additional fiscal spending bills in 2021 and 2022 further stimulated aggregate demand. I am willing to admit that, at the time, I underappreciated how the large and sustained fiscal response would combine with highly accommodative monetary policy to overstimulate aggregate demand in an economy that quickly recovered from the early effects of the pandemic.

Today I don't see factors like the three I have described here reinforcing the inflationary effects of higher tariffs. There is no longer a shortage of labor and, at least so far, no indication that tariffs are causing big disruptions in supply chains, as the recent surge in imports that I mentioned should attest. While Congress is putting together a tax bill, as it stands now, a large share of that legislation extends tax cuts that have been on the books for eight years and thus would not be stimulative. Finally, monetary policy is in a very different position-we have shrunk our balance sheet by over $2 trillion and our policy rate is north of 4 percent instead of being at the effective lower bound. So I do not believe one can use 2021 and 2022 as a basis for predicting what will happen to the persistence of inflation arising from tariffs.

## Inflation Expectations

Now let's discuss the second issue of diverging inflation expectations. I have argued that I believe the tariff-induced inflation will be transitory and we should look through it when setting policy as long as longer-term inflation expectations are anchored. 4 However, right now, we are seeing a dramatic disparity between household measures of inflation expectations and market-based measures, as well as the inflation expectations of professional forecasters. The University of Michigan's Surveys of Consumers show that both near- and longer-term inflation expectations have increased strikingly, on net, in the past few months and currently stand at 6.6 percent and 4.2 percent respectively. Meanwhile, inflation expectation measures based on prices of nominal versus inflation-adjusted securities have not increased very much, with 2-year Treasury Inflation-Protected Securities inflation compensation around 2.7 percent and 5year and 10-year around 2.4 percent. Also, the median from the Survey of Professional Forecasters for consumer price inflation 6 to 10 years ahead is at 2.2 percent.

This highly unusual discrepancy between inflation expectation measures creates problems for policymakers. Whose expectations should we be paying attention to? I prefer to look at market-based measures of inflation compensation and professional forecasters' expectations because they have money on the line. Those buying inflation protected-securities lose money if they are wrong. Professional forecasters have clients and firms making financial decisions based on those forecasts and will lose customers if

their predictions are wrong. As I used to teach my students, in a capitalist system, competition will drive firms out of business if they make bad decisions. Forecasting mistakes can be costly for consumers, but households aren't competing with each other and won't be driven out of business if they make bad decisions.

But, for the sake of argument, let's assume that the household measures of high inflation expectations are correct and financial market participants' expectations are too low. What are the implications of this mismatch? 5   If households actually believe inflation will be 7 percent for several years, workers would be expected to demand at least a 7 percent raise to keep their real wages from falling. 6   If firms grant those wage demands, then inflation would rise by roughly 7 percent as the wage increases are passed through. Also, job search and the quits rate should increase as workers look for higherpaying jobs.

Is this happening? Although that was the story a few years ago in a tight labor market, I am not now hearing about such an upturn in wage demands from my business contacts, and I don't see it in wage and compensation data. After several years of outsized pay increases and in a labor market that has loosened significantly from a year or two ago, I think workers don't have much leverage to ask for raises and are probably more worried about keeping their jobs right now. Furthermore, instead of increasing, the quits rate is below its pre-pandemic level. Given labor market conditions, it seems hard to believe that the high inflation expectations we are seeing in consumer surveys will lead to large nominal wage increases and a second-round burst of inflation.

A second point here is that if consumers believed we were about to face high inflation, they would be front-loading purchases, much as importers seem to be front-loading their inventories. But, on the contrary, with the exception of motor vehicles, we haven't seen a broad surge in the consumer spending, which overall is growing more slowly than it did in the second half of 2024.

For financial businesses, they set interest rates of their loans and financial products based on expected inflation. Their views should be embedded in market-based inflation expectations and those of professional forecasters. If they got the forecast wrong and the nominal interest rates on their loans were too low, then their real returns would be dramatically reduced and their profit margins squeezed. I have a hard time believing interest rates are mis-priced so badly. If they were, then households would think the real interest rate on loans is greatly suppressed. Consequently, loan demand for interest-sensitive products like houses, cars, and durable goods should surge. While loan demand appears to be healthy, there are no reports from banks or other financial firms that loan demand is surging.

So, based on wage demands, spending patterns, and loan demand, I see no evidence of economic activity that conforms to the inflation views reflected in the University of Michigan household measures, which, like other polling about the economy in recent years, may reflect attitudes about other factors. 7

In conclusion, given my belief that any tariff-induced inflation will not be persistent and that inflation expectations are anchored, I support looking through any tariff effects on near term-inflation when setting the policy rate. Fortunately, the strong labor market and progress on inflation through April gives me additional time to see how trade

negotiations play out and the economy evolves. Assuming that the effective tariff rate settles close to my lower tariff scenario, that underlying inflation continues to make progress to our 2 percent goal, and that the labor market remains solid, I would be supporting ""good news"" rate cuts later this year.

- 1  The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.
- 2  See Waller (2025) . A Tale of Two Outlooks
- 3  See Scott R. Baker, Nick Bloom, and Steven J. Davis (2025), ""Economic Policy Uncertainty,"" webpage, https://www.policyuncertainty.com/us\_monthly.html.
- 4  For an interesting history of monetary policymakers ""looking through"" inflation increases, see Nelson, Edward (2025). "" A Look Back at ""Look Through,"" Finance and Economics Discussion Series 2025-037. Washington: Board of Governors of the Federal Reserve System.
- 5  In what follows, I am focusing solely on the higher level of inflation expectations and not the higher level of inflation uncertainty. The level of inflation and uncertainty about inflation are highly correlated, so it is difficult to disentangle the effects separately. To see how these two effects can alter household behavior, see Dimitris Georgarakos, Yuriy Gorodnichenko, Olivier Coibion, and Geoff Kenny (2024), ""The Causal Effects of Inflation Uncertainty on Households' Beliefs and Actions (PDF),"" NBER Working Paper Series 33014 (Cambridge, Mass.: National Bureau of Economic Research, October).
- 6  As documented in Nelson (2025), second round wage effects were a general concern of policymakers in the 1970s and 1990s when discussing oil price shocks or how to respond to changes in value-added taxes and exchange rate shocks.
- 7  For a discussion of factors that were affecting inflation perceptions during the COVID pandemic, see David Lebow and Ekaterina Peneva (2024), ""Inflation Perceptions during the Covid Pandemic and Recovery,"" FEDS Notes (Washington: Board of Governors of the Federal Reserve System, January 19).",Christopher J Waller
https://www.bis.org/review/r250605b.htm,"Boris Vujčić: Growth and resilience of Central, Eastern and Southeastern European Countries in a more fragmented world","Introductory remarks by Mr Boris Vujčić, Governor of the Croatian National Bank, at the international conference ""Growth and resilience of Central, Eastern and Southeastern European Countries in a more fragmented world"", jointly organised by the Croatian National Bank and the International Monetary Fund, Dubrovnik, 30 May 2025.",2025-05-30 00:00:00,"## Boris Vuji: Growth and resilience of Central, Eastern and Southeastern European Countries in a more fragmented world

Introductory remarks by Mr Boris Vuji, Governor of the Croatian National Bank, at the international conference ""Growth and resilience of Central, Eastern and Southeastern European Countries in a more fragmented world"", jointly organised by the Croatian National Bank and the International Monetary Fund, Dubrovnik, 30 May 2025.

* * *

Dear Managing Director Kristalina Georgieva, dear ministers, governors, distinguished guests, ladies and gentlemen - good morning to all of you.

After a beautiful evening yesterday, which served as a perfect introduction to our gathering, it is my distinct pleasure to welcome you to the conference organized jointly by the International Monetary Fund and the Croatian National Bank. This is now our fourth time convening here in Dubrovnik, so we can confidently say - welcome to what has become our traditional Dubrovnik Conference.

I am especially honored to once again welcome my co-host, the IMF's Managing Director Kristalina Georgieva, who was with us two years ago as well. That means one of two things - either we made a very good impression, or the problems we discussed then have kindly stayed with us - and perhaps even brought some friends along this time.

I'm also delighted that Commissioner Valdis Dombrovskis could join us this time - after unfortunately not being able to attend our last conference. It's a real pleasure to have him here with us, and we are grateful for such an inspiring speech last night. And a warm welcome back to Tereza Czerwiska, Vice-President of the European Investment Bank, whose continued support we deeply appreciate.

We meet again at a time of heightened uncertainty - not only about the direction of global growth but about the very rules and norms that have governed international cooperation for decades. The key drivers of the global economy - openness and integration - now seem to be reversing. Trade and investment routes are shifting, and tariffs have become the new buzzword. We are, once again, navigating choppy waters.

The theme of this year's edition - ""Growth and Resilience in CESEE in a More Fragmented World"" - is not new to us. In fact, it echoes the discussions we've had across several years of this conference. Back in 2017, we discussed the challenge of economic convergence, and how investment, productivity, and demographic trends could help CESEE countries close the gap with the rest of Europe. Then in 2019, we tackled labor market pressures and demographic headwinds threatening to stall that convergence. And in 2023, we explored how the region could foster resilience in the face of energy insecurity, post-COVID supply chain shifts and frequent supply shocks.

All of these themes - energy, labor markets, productivity, trade patterns - converge again today in the face of a new and more complex reality: a fragmented world.

For the last three decades, the countries of Central, Eastern, and Southeastern Europe have advanced on a clear convergence path built on openness, foreign investment, trade, and rising productivity. As a result, millions of people saw significant improvements in their living standards.

But today, the world around us is changing fast. We are seeing growing economic fragmentation, rising protectionism, and intensified geopolitical competition. For countries of our region, whose growth models have relied heavily on integration into global and European production networks, this shift presents a real challenge.

To better understand how to adapt to these challenges, we should look not only outward - but also back. Back to this very city, Dubrovnik. Because long before modern supply chains and trade agreements, the small city-state of Dubrovnik navigated a fragmented, multipolar world - and it was very successful at it.

The Republic of Dubrovnik, or Ragusa, was nestled between two great powers: Venice to the west, the Ottomans to the east. It had neither great armies nor large territories. But it had strategy, diplomacy, and economic sophistication.

Dubrovnik flourished not by trying to dominate, but by connecting. It signed a series of treaties with both Christian and Muslim states, guaranteeing safe, tax-advantaged trade and ensuring its merchants had access to markets across the Mediterranean. The Republic's strategy was to create an environment that was stable and attractive to foreign traders, while carefully protecting its own merchants' interests.

The people of Dubrovnik understood that trade was not merely a matter of profit, but of ethics, reputation, predictability, and long-term planning. One of Dubrovnik's most remarkable thinkers from the 15th century - Benedikt Kotruljevi [Benedetto Cotrugli] in his book ""On Trade and the Perfect Merchant"" wrote:

""Even though trade is full of change and uncertainty, it still follows certain noble rules both general and specific - which every merchant must understand.""

This suggests that the merchant of that era was seen as a proponent of trust and stability, someone whose success depended on following principles that benefited not just themselves, but society as a whole. So even back then, Dubrovnik understood that trade is not a zero-sum game, but a win-win dynamic that raises prosperity for all sides through cooperation, not confrontation.

And while Dubrovnik's economic model was based on trade, its leaders wisely balanced openness with strategic autonomy. They understood the value of smart tariffs and customs policy - set low enough to stay competitive and keep trade flowing, but calibrated to protect the city's autonomy and to fund public needs. They also invested strategically in shipbuilding - offering targeted subsidies to support a sector vital to their maritime strength. This wasn't industrial policy for its own sake, but in service of a broader national strategy: ensuring competitiveness and autonomy in providing topnotch transport services for merchants and trade partners.

Not every intervention was a success. For example, Dubrovnik tried to support local textile production, but it never matched the scale or quality of foreign competitors. The

lesson was clear even then: successful industrial policy needs to align with long-term comparative advantages.

Equally instructive is Dubrovnik's approach to resilience. The city was much aware of the risks of war, siege and famine, so in the 16th century it invested in underground grain silos, which were carved into solid rock. These silos, called ""Rupe"" (or ""Holes"") could store enough supplies to feed the population for a full year. [They still exist today in the Dubrovnik Ethnographic Museum you can see the deep silos through openings in the floor.] These reserves weren't just practical; they were strategic. They reduced dependency on external supplies and gave Dubrovnik the confidence and autonomy to negotiate from a position of strength, even in crisis times.

The lessons from Dubrovnik - about balancing openness with protection, ambition with caution, and integration with strategic autonomy - remain deeply relevant today. Like Dubrovnik, our region must navigate between powerful blocs and shifting alliances. It must adapt its growth model to a more uncertain, fragmented world.

## What does this mean in practice?

It means recognizing that the reshaping of global value chains and re-industrialization in Europe will not happen evenly. The CESEE region must actively define its role - within the EU and beyond - to ensure it is not sidelined in these processes.

It means accelerating digital transformation, advancing institutional reforms, and investing in the skills and capabilities needed to compete in high-value sectors.

It also means strengthening the region's ability to withstand shocks: from diversifying energy sources and modernizing infrastructure to building strategic reserves and ensuring robust public institutions.

And while not all CESEE countries are EU members, all have a stake in the future of Europe's economic architecture. A more complete and functional Single Market would benefit the entire region - not only by deepening access for member states, but by creating more predictable, rules-based conditions for those outside the EU as well.

In short, the region's future will depend not only on national choices, but on regional cooperation and strategic alignment. The story of Dubrovnik reminds us that small actors can shape their destinies in big ways if they are ambitious, adaptable, and open to cooperation.

To follow Valdis's example, I'll close with a Latin proverb Historia est magistra vitae. Indeed, in many ways, Dubrovnik's success story mirrors the choices we face today. Dubrovnik showed centuries ago - and as our region has shown in recent decades that resilience is not the absence of risk, but the ability to navigate it wisely. So let us proceed today not with pessimism, but with strategic clarity. This conference is our opportunity to channel that spirit - to connect past lessons with future goals and to ensure that cooperation and resilience go hand in hand, even in a fractured world.

I wish you all a stimulating and constructive discussion ahead and I am happy to give the floor to the Managing Director of the IMF, Ms Kristalina Georgieva.",Boris Vujčić
https://www.bis.org/review/r250602d.htm,Kevin Greenidge: Strong regulation is the foundation for financial stability,"Remarks by Dr Kevin Greenidge, Governor of the Central Bank of Barbados, at the Bank Analysis and Examination Course, hosted by the Central Bank of Barbados, Bridgetown, 12 May 2025.",2025-05-12 00:00:00,"## Kevin Greenidge: Strong regulation is the foundation for financial stability

Remarks by Dr Kevin Greenidge, Governor of the Central Bank of Barbados, at the Bank Analysis and Examination Course, hosted by the Central Bank of Barbados, Bridgetown, 12 May 2025.

* * *

Distinguished representatives from the Association of Supervisors of Banks of the Americas (ASBA), esteemed participants from regional supervisory authorities, valued colleagues from the Central Bank of Barbados, good morning.

It is a pleasure for the Central Bank of Barbados to host this Bank Analysis and Examination Course in collaboration with ASBA.  And I am delighted to chat with such a highly experienced group of professionals, all committed to enhancing our collective expertise in bank supervision with a shared goal of preserving financial stability across our respective jurisdictions.

I thank ASBA for its invaluable support and dedication in organising this training. And I commend your continued commitment to strengthening financial supervision. This training ensures that the knowledge and skills of our member jurisdictions remain relevant, dynamic, and world-class. Your contributions align with our common objective as regulators to foster a stable and sustainable financial sector. I am confident that I echo the sentiments of many in expressing our deep appreciation for this enduring partnership and the opportunities it provides.

ASBA's work has helped us maintain international excellence in our regulatory standards. As an associate member for over 20 years, the Central Bank of Barbados has actively engaged in ASBA's initiatives such as training programmes, policy discussions, and knowledge sharing, all aimed at enhancing regulation and supervision across the Americas, the Caribbean, and Spain.

In 2002 and 2011, the Central Bank of Barbados proudly hosted Bank Analysis and Examination courses, as well as a course on Consolidated Supervision in 2014, amongst others. Over the years, our officers have also participated in a range of training courses. This continued engagement has enabled our supervisory teams to sharpen their skills and ensure that our risk-based supervision techniques remain aligned with the evolving financial landscape.

## Regulation in Barbados

Strong regulation is the foundation for financial stability. It provides the framework through which supervisory authorities can identify, assess, and contain the risks facing the financial sector. This stability is essential to ensuring that institutions continue to provide the financial services that underpin economic activity.

As the principal financial regulator in Barbados, the Central Bank plays a central role in upholding financial stability. The Bank Supervision Department was established in 1974

in accordance with the statutory mandate given by the Central Bank Act to supervise the operations of commercial banks and other financial institutions. The department seeks to ensure that licensed institutions function in a safe and sound manner, and in so doing to contribute to a sound economic and financial environment. We've built our regulatory approach on a solid foundation of legislation, supervisory frameworks, and guidelines, which are supported by a diverse and capable team that is further strengthened by developmental opportunities such as this course.

## Risk-Based Supervision

We've grounded our supervisory practices in the principles established by the Basel Committee on Banking Supervision. These core principles inform our Risk-Based Supervision (RBS) approach - a methodology that evaluates financial institutions based on the key inherent risks within their activities, and the quality of their risk management in response to those threats. Risk-based supervision enables us to prioritise our resources effectively by focusing on the areas that matter most.

## Purpose of the Course

Foundational training such as this is critical, especially since bank examination is a multifaceted and dynamic discipline that demands strong analytical grounding, sound judgement and the ability to adapt with the evolving risk landscape. This course aligns seamlessly with the core principles of bank supervision, which emphasises the need for forward-looking risk-based supervision, robust supervisory frameworks and continuous capacity building. These principles are refined from time to time to accommodate emerging risks and ultimately strengthening supervisory effectiveness.

We welcome the timely and essential integration of key financial assessment characteristics into this training, specifically through ASBA's CAMELS rating system - a proven benchmark for evaluating the health and stability of financial institutions.

It will equip participants with tools and techniques to conduct in-depth analyses of financial institutions, identify vulnerabilities, and assess their resilience leading to stronger and more informed supervisory decisions.

I note that the administration of the course will be two-fold consisting of a theoretical foundation followed by a practical simulation of a bank inspection to reinforce the concepts through real-world application.

## Concluding Remarks

Over the coming days, you will explore the methodology behind the CAMELS framework as applied by the U.S. Federal Reserve. The insights gained will serve to enhance your ability to conduct risk-based assessments, contributing to more prudent and forward-looking supervisory practices.

I encourage all participants to actively engage in the discussions, share experiences, and make full use of the expertise in the room. Your dedication to strengthening financial oversight is critical to the continued resilience of our financial systems.

Thank you once again to ASBA, our organisers, and to each of you for your commitment and participation. I wish you all a productive and rewarding training experience.",Dr Kevin Greenidge
https://www.bis.org/review/r250528h.htm,Abdul Rasheed Ghaffour: The changing landscape and talent development initiatives for Malaysia's financial sector,"Speech by Mr Abdul Rasheed Ghaffour, Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the Asian Institute of Chartered Bankers 8th Chartered Banker Conferment Ceremony, Kuala Lumpur, 24 May 2025.",2025-05-24 00:00:00,"## Abdul Rasheed Ghaffour: The changing landscape and talent development initiatives for Malaysia's financial sector

Speech by Mr Abdul Rasheed Ghaffour, Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the Asian Institute of Chartered Bankers 8th Chartered Banker Conferment Ceremony, Kuala Lumpur, 24 May 2025.

* * *

It is a privilege to stand before you at this conferment ceremony, where we celebrate the achievements of more than 600 individuals who demonstrated dedication and outstanding achievement in banking. We are also honouring the conferment of Honorary Fellowship to Governor Eli, and paying tribute to the lifetime achievement of Tan Sri Azman Hashim, Fellow Chartered Banker (FCB), both outstanding individuals who have made immense contributions and shown commitment to excellence, which we can all strive to emulate.

About a month ago, we welcomed our regional partners for the ASEAN meetings. We had the opportunity to engage deeply on the region's most pressing challenges, namely the uncertainty from the US tariff announcements, the acceleration of digital transformation and the urgency of promoting sustainability practices.

These challenges underscore the critical need for the financial sector to adapt and evolve in response to an ever-changing landscape. To navigate these complexities, continuous investments in talent are not merely an option but a necessity. By equipping our workforce with the necessary skills and knowledge, we empower them to transform challenges into opportunities and drive our economy forward. The knowledge, devotion and tenacity that have brought all conferees together today are the essential foundations that will propel Malaysia to greater heights.

## Global trade uncertainty, digitalisation and sustainability will shape the financial sector landscape in Malaysia

Ladies and gentlemen,

Our banking sector has been no stranger to formidable challenges. Yet, in recent years, we have been faced with transformative forces that could redefine the landscape of banking. Allow me to expand on three pivotal areas which I mentioned earlier: economic uncertainty, digital transformation and sustainability, and their implications on the banking sector workforce.

As I speak, global trade uncertainty continues to persist, arising from a growing push for greater protectionism and a shift away from globalised supply chains. As a small open economy, the escalation in trade tensions and global policy uncertainties will affect Malaysia. However, we are facing this from a position of strength. Our economy will continue to grow, anchored by continued household spending and steady expansion in investment activities. Externally, resilient underlying demand for E&amp;E goods and a

sustained momentum of tourism activity can cushion the impact of tariffs on our exports. Malaysia's diversified product and export markets further underscore our resilience against external shocks.

These shifts in economic outlook remind us that the global landscape is ever-changing, underscoring the need for resilience and adaptability in the face of these headwinds.

On this, the banking sector plays a critical role in allocating capital efficiently to support economic growth and transformation. We have demonstrated robust expertise in traditional areas such as retail segments (mortgages and personal finance), as well as other mature corporate industries. However, as the financial landscape evolves, new opportunities are emerging that remain underexplored, offering potential for growth and innovation. Financing of trading activities such as shipping, aviation or aerospace, investments in data centres, and other high-growth industries, represent untapped avenues that could contribute meaningfully to our economic development. By broadening their focus and addressing these gaps, the banking sector can better position businesses to compete effectively on a global stage.

In the wake of global trade uncertainties, the banking sector's role in supporting domestic businesses becomes more pronounced. Banks must collaborate with industry players to identify new opportunities, leveraging on both financial expertise and industry insights. A workforce adept at risk management, market analysis and client advisory enables banks to offer innovative financial solutions to help businesses stay ahead.

The next transformative force is the increasing pace of technological breakthroughs, a trend underpinned by the proliferation of artificial intelligence (AI), data and automation. The Malaysian banking sector has increasingly leveraged AI and automation for risk management, fraud detection and complex analysis to enhance operational efficiency and strengthen security. The use of AI-powered chatbots and virtual assistants has also allowed customers to benefit from enhanced and personalised customer experiences, often without the need to visit a bank branch.

While technology has clear benefits for the financial sector, it needs to be adopted responsibly, balancing efficiency with risk management. Senior leaders in the banking sector have themselves expressed increasing concerns about new vulnerabilities introduced from AI adoption, such as cybersecurity, legal uncertainty related to operations, difficulties in controlling outcome accuracy and prejudice from model bias. 1 The banking sector's shift to leverage technology, in particular AI, to remain competitive must be underpinned by strong governance frameworks, stringent data privacy protections and the highest ethical standards across the workforce. To ensure responsible adoption of AI, banks need to develop an understanding of both the opportunities and risks associated with AI, and invest in training programmes to enhance AI awareness, create an organisation-wide culture of responsible AI adoption and help employees recognise potential risks.

Let's now turn to the third critical area: sustainable finance and environmental, social and governance considerations. This year's ASEAN Chairmanship theme on sustainability underscores the region's commitment to equitable growth and environmental stewardship.

At our meeting in Milan earlier this month, the ASEAN+3 finance ministers and central bank governors reaffirmed our commitment to collaborate on transition finance, disaster risk financing, and climate resilience. The meeting also recognised the need to channel greater capital flows into green and sustainable projects, including large-scale regional initiatives such as the ASEAN Power Grid (APG) being pursued as part of our chairing of ASEAN this year. A report by AMRO highlighted that Southeast Asia will require over USD200 billion annually in climate-related investments to achieve its net-zero targets.

As we delve into this important area, it is evident that these are not just environmental imperatives, but instead, a strategic priority area across the region. Therefore, the banking sector must integrate ESG factors into their core operations and decisionmaking. Banks play a pivotal role in channelling financial solutions and capital towards projects that are not only economically viable, but also environmentally and socially responsible. For example, the increasing importance of blended finance as a key lever in scaling up climate-aligned and impact-driven investment will require bankers to build skills that go beyond standard credit risk assessment. This shift requires a banking sector workforce which is well-equipped with the right knowledge and expertise to be able to not only reduce credit risk for lenders, but also contribute meaningfully to advancing sustainability priorities and meeting ambitious climate goals.

## Significant efforts have been undertaken by talent affiliates, while more can be done by the industry to collectively upskill the workforce

Ladies and gentlemen,

Malaysia has invested significantly in developing talent in our financial sector. Over the years, we have developed a comprehensive ecosystem of talent affiliates providing training, certification and future-looking guidance on the skills needed by the financial sector. On this, I would like to take a moment to applaud the Asian Institute of Chartered Bankers (AICB), Islamic Banking and Finance Institute Malaysia (IBFIM) and Asian Institute of Insurance (AII) for their commitment in driving the development and encouraging the implementation of the Financial Sector Future Skills Framework (FSF) since its launch in July 2024. I also wish to highlight the important role played by financial institutions to further complement these efforts through their respective learning and development academies.

While the financial services industry benefits from a good talent development ecosystem, more collective actions are needed to future-proof the workforce. In an era of rapid transformation, the question remains: Is the industry investing enough in talent to meet evolving business needs and remain competitive?

With the FSF as a common dictionary on skills critical for the future, I call on the banking sector to accelerate efforts to foster knowledge acquisition in areas that are relevant to address both current industry challenges and needs, as well as emerging trends to prepare professionals for future opportunities. This includes building a deep understanding of the unique financial requirements of sectors that will catapult the growth of the Malaysian economy, and in tandem, enhancing technical skills in credit risk assessment for these sectors to ensure financing decisions are made sustainably. Additionally, training should also focus towards building capacity to address regional financing demands, particularly in infrastructure financing and blended financing, to

support the long-term economic growth of the region. By equipping banking professionals with advanced capabilities and specialised expertise, the financial sector can proactively respond to emerging opportunities, ensuring its readiness to meet evolving economic challenges and contribute to Malaysia's regional competitiveness.

Equally important is the need to continuously nurture ethical and principled bankers who uphold the highest standards of integrity. In a rapidly changing financial landscape, the foundation of trust and accountability is indispensable for ensuring the sector's longterm sustainability and resilience. AICB, alongside industry leaders, must emphasise the development of bankers who embody professionalism, ethical conduct, and a commitment to responsible practices.

In closing, I would like to once again congratulate all conferees today. Your individual commitment to self development and dedication towards embodying the values of integrity, professionalism and expertise will collectively elevate the banking sector. Your achievement today is setting a benchmark for the industry and will hopefully inspire many others to follow in your footsteps.

To Governor Eli, today's honorary conferment recognises your exemplary leadership, transformative contribution and excellence within our profession. Through his previous role in the Bank for International Settlements (BIS), Governor Eli advanced research and discussions on regional and international finance, and has been recognised as one of the top-performing central bank governors globally in his current role. As a former professor and director at the Asia School of Business (ASB), Governor Eli has also significantly contributed towards strengthening central banking education through the development of the Master's in Central Banking course.

To Tan Sri Azman Hashim, the Lifetime Achievement Award is a fitting honour to an industry heavyweight whose visionary contributions have profoundly shaped and advanced the Malaysian banking sector.

Malaysia's financial system is renowned for its resilience, innovation and sound governance. But the true strength behind this success is our people. I end with a simple quote from Jack Welch, the CEO of General Electric for more than twenty years, 'The most important job you have is growing your people'.

Thank you, and I wish all of you a fruitful journey ahead.

- 1 IBM's 2024 Global Outlook for Banking and Financial Markets",Abdul Rasheed Ghaffour
https://www.bis.org/review/r250604d.htm,Rosanna Costa: The power of data for a smart world,"Opening remarks by Ms Rosanna Costa, Governor of the Central Bank of Chile, at the Sixth Statistics Conference ""The power of data for a smart world"", Santiago de Chile, 3 June 2025.",2025-06-03 00:00:00,"## Sixth Statistics Conference: 'The Power of Data for a Smart World'

## Opening Remarks by Rosanna Costa, Governor of the Central Bank of Chile

June 3-4, 2025

InterContinental Hotel, Santiago, Chile

1. Good morning, ladies and gentlemen.
2. It is an honor and a privilege to welcome you to the Sixth Statistics Conference of the Central Bank of Chile, which we are hosting in a particularly meaningful year for our institution as we celebrate its centennial. Over the past 100 years, the evolution of the economy-and of statistics in particular-has been closely interlocked with dynamic and ever-changing environments and faced with a future that is advancing rapidly and full of promising and challenging changes.
3. This sixth edition of the Statistics Conference, whose title - 'The Power of Data for a Smart World'- resonates strongly in this moment of our history. If there is one lesson the past century has taught us, it is that knowledge, grounded in solid information and rigorous analysis, guides the path to progress and stability. We are also opening the window to new developments that offer us opportunities and challenges, because they provide tools, but at the same time demand more information, of better quality and greater timeliness.
4. In  recognition  of  these  one  hundred  years,  I  would  like  to  revisit  them  through  the  lens  of statistics-and from there, open the door to the next century.

## The Bank and Statistics

5. The  production  and  publication  of  statistics  have  gone  hand  in  hand  with  the  institutional development and the economic and financial evolution of our country 1 , as well as with global events.
6. At least three decades before its official establishment in 1925, there was widespread debate about the idea of having a central bank that would contribute to macroeconomic stability. By the late nineteenth century, economic instability, and a fragile monetary system-evidenced by frequent banking crises and the near-continuous depreciation of the Chilean peso-highlighted the need for an institution capable of providing stability. These significative economic and social tensions culminated in the enactment of a new Constitution in 1925. Within this context, the idea of an autonomous central bank, including its governance and its relationship with the Executive and Legislative branches, became an important topic of national debate.
7. From its inception, our Central Bank recognized the importance of information for decisionmaking. It established a specialized unit to collect statistical data that would enable analysis and study of the country's commercial and economic conditions, essential for the Board at the time.
8. In  January  1928,  the  Central  Bank  of  Chile  began  publishing  its  Monthly  Bulletin.  This publication, that compiles national statistics, continues to this day. Its first issue included figures on  nitrate  production,  exchange  rates,  railway  traffic,  total  amounts  of  checks  processed  in

1 Much of the historical account presented here is based on the book Banco Central de Chile 1925-1989: Una Historia Institucional, by Camilo Carrasco (2009).

- clearinghouses, components of money (currency and deposits), and loans. These data reflected the Chilean economy of the time, characterized by a strong dependence on nitrate as the main export product and the driving force of domestic activity.
9. During the Great Depression of the 1930s, Chile suffered a severe economic contraction due to the sharp decline in nitrate 2 and copper exports, which weakened international reserves, public finances, and economic growth. The fiscal surplus of the late 1920s turned into a deficit in 1931, GDP plummeted, and a deflationary period unfolded, culminating in the abandonment of the gold standard and the suspension of external debt service. In this context, banking statistics (that is, loans,  interest  rates,  currency  in  circulation 3 ,  and  bank  reserves);  foreign  exchange  statistics (official exchange rate and foreign currency operations); fiscal data (on government revenues and expenditures),  foreign  trade  data  (exports  and  imports  of  copper,  nitrate,  and  coal)  and international reserves gained importance.
10. During  World  War  II,  the  Chilean  economy  faced  external  restrictions,  rising  inflation,  and increased state intervention. The war disrupted international trade, negatively affecting exports, except for copper, which remained strong due to demand for arms production. One of the main statistical  innovations  at the  time  was the  systematic publication of the balance of payments. Although its compilation began in 1930 by the General Directorate of Statistics, it was in 1943 that the Central Bank of Chile took an active role in its preparation, analysis, and dissemination.
11. Toward the end of World War II, in 1944, the Bretton Woods Monetary and Financial Conference was held in the United States to design a new international financial system. This meeting led to the creation of institutions such as the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (now part of the World Bank Group). The IMF was tasked  with  promoting  international  monetary  cooperation,  supporting  trade  expansion  and economic growth, and discouraging policies that could harm global macroeconomic stability and nations' welfare.
12. The  Bretton  Woods  agreements  required  the  Central  Bank  to  submit  a  'Foreign  Exchange Budget' each November, which included estimates of the foreign currency the country could use the following year to cover imports, capital account liabilities, and other obligations or needs. This was first presented in 1946.
13. The need for a common methodology to measure countries' economic activity led the United Nations to publish the first international standard for the System of National Accounts (SNA) in 1953. Chile adopted this system in 1967 with the creation of the National Accounts Department under  the  National  Planning  Office  (ODEPLAN). 4 This  enabled  the  annual  publication  of statistics  on  Gross  National  Product  (GNP),  investment,  consumption,  and  productive  and institutional sectors. This new information marked a significant advancement in the availability of national macroeconomic data.
14. The decades following World War II were marked by Central Bank financing of the Treasury, which led to  recurrent  inflationary  problems,  and  balance  of  payments  crises.  The  economic authorities of the time designed diverse and consecutive macroeconomic stabilization programs through price controls, including wages, and applied different exchange rate schemes, without

2 At the same time, there was a rise in synthetic nitrate, which had been developed in Germany in 1913.

3 Currency in circulation and deposit data available since 1926.

4 ك National accounts were prepared by the Production Development Corporation (Corfo) prior to the creation of ODEPLAN.

correcting the source of the imbalance. In this context, it became necessary to have balance of payments and monetary statistics.

15. In  the  1970s,  the  Bretton  Woods  agreements  were  abandoned  globally,  which  brought  new challenges for the oversight of the international financial system. The collection of statistics now took place in a world of flexible exchange rates and increasing financial integration. Locally, in the early years of the decade, the Chilean economy was largely closed, facing significant macroand microeconomic imbalances, marked by substantial fiscal expansion that led to hyperinflation.
16. In  the  second  half  of  the  1970s,  Chile  began  a  process  of  trade  liberalization,  gradually eliminating tariff barriers, reducing subsidies to domestic production, and dismantling exchange and  price  controls.  In  this  new  context,  the  Central  Bank  strengthened  its  role  in  statistical compilation, expanding foreign trade coverage 5 through  the  publication  of  export  and  import statistics by product and country. This allowed for more precise analysis of trade flows and better monitoring of trade openness and the competitiveness of local industry. Monetary and financial statistics were also enhanced to reflect the incipient activities and operations emerging in the capital  market,  distinguishing  between  monetary  and  fixed-income  assets  and,  in  the  latter, identifying the various inflation-indexed instruments and their issuers.
17. The  1980s  marked  a  turning  point.  In  July  1981,  the  Central  Bank  officially  assumed responsibility for compiling and publishing the National Accounts, which had previously been the  responsibility  of  ODEPLAN.  The  Bank  thus  established  itself-alongside  the  National Statistics Institute 6 -as one of the main institutions responsible for producing and disseminating Chile's macroeconomic statistics.
18. The 1982-83 debt crisis had a profound impact on economic activity and employment, severely affecting the population's well-being. Its severity led to the suspension of external debt payments, the collapse of nearly the entire domestic financial system, the imposition of capital controls, and the adoption of an adjustment program with the IMF to support economic stabilization. This program included fiscal and structural adjustment measures, such as reducing the fiscal deficit, controlling inflation, imposing capital controls, and restructuring the financial system.
19. These developments demanded greater statistical transparency, particularly regarding external accounts. Thus, in 1983 the Central Bank began publishing external debt data disaggregated by maturity and counterparty. That same year, to enable more timely monitoring of the economy, the Bank also launched the Monthly Index of Economic Activity (IMACEC), a key tool for shortterm economic analysis that continues to this day.
20. In 1989, a milestone occurred that has shaped the history of our institution over the past 35 years: the  enactment  of  the  Constitutional  Organic  Law,  which  established  the  Central  Bank's autonomous status. In this context, the Bank's role was consolidated as the institution responsible for compiling and publishing the country's main macroeconomic statistics in a timely manner, including statistics of monetary and exchange rates, balance of payments, and national accounts.

5  According to the document Series de comercio exterior: 1970-1981 .

6 Law No. 17,374, enacted on October 15, 1970, established the National Institute of Statistics (INE), updating both the functions and the name of the former Directorate of Statistics and Censuses, which had been created in 1943.

21. In  line  with  international  best  practices, in  1992 the 1986 Input-Output Matrix (IOM86) was published 7 . It was considered one of the most comprehensive in Latin America by its breakdowns. It was updated in 1996 and 2003, and since 2008 has been calculated annually, along with the publication of Supply and Use Tables. Additionally, the Bank updates the benchmark years every five years since 1996. The next benchmark revision, for the year 2023, will be published in March 2027.
22. The globalization and increasing financial integration of Chile into the world economy during the 1990s prompted the development of new statistics. Measuring external debt alone was no longer enough.  It  became  necessary  to  also  include  the  international  investment  position,  capturing investments  made  abroad  by  various  domestic  economic  agents,  with  institutional  investors playing an increasingly prominent role.
23. Institutional strengthening and technological advances enabled improvements in the frequency, coverage, and disaggregation of data, as well as the dissemination of new statistical series since the  second  half  of  the  two  thousands.  In  fact,  to  consolidate  all  macroeconomic  statistics compilation and collection functions within the Central Bank, the Statistics Division was created in 2008.
24. Likewise, we have gradually integrated into the international community, actively participating in organizations such as the IMF and the BIS. Chile's admission to the Organization for Economic Co-operation  and  Development  (OECD)  in  2010  further  enhanced  the  quality  and  scope  of macroeconomic statistics. This has involved adopting the highest international standards in data collection and dissemination, ensuring both the comparability and reliability of our statistics. At the regional level, we are also affiliated with the Center for Latin American Monetary Studies (CEMLA).
25. Technological progress has paved the way for the statistics produced by the Central Bank of Chile to evolve continuously to meet the growing demand for information to support monetary and financial policy, as well as the needs of the Chilean society. In 2005, Quarterly National Accounts were  introduced,  followed  in  2011  by  the  Quarterly  Institutional  Sector  Accounts  (QISA), integrating real and financial dimensions of the economy with greater frequency.
26. The 2008 Global Financial Crisis highlighted the need to improve transparency and oversight of derivatives  markets.  In  Chile,  this  led  to  the  development  of  the  Integrated  Derivatives Transactions Information System (SIID-TR), a centralized data repository that enables financial authorities to monitor systemic risks, identify cross-institution exposures, and prevent liquidity crises or contagion.
27. In critical contexts such as the COVID-19 pandemic, the urgency of having more timely and detailed  data  became  evident,  enabling  a  deeper  understanding  of  economic  and  social phenomena,  as  well  as  the  heterogeneous  impacts  across  different  segments  of  society.  In response,  the  Bank,  using  microdata,  increased  both  the  frequency  and  timeliness  of  its publications, along with the territorial and thematic disaggregation of data. These improvements have  facilitated  more  agile  and  precise  decision-making,  especially  in  periods  of  heightened uncertainty. One example of this was the launch, in mid-2022, of the quarterly Regional GDP publication and the development of experimental statistics, which provide more timely insights into the evolution of economic activity.

7  It should be noted that there were already two previous Input-Output Matrices, from 1962 and 1977, prepared by ODEPLAN.

28. Currently, we continue working to enhance the use of statistics and data. We are committed to producing  statistics  on  household  disposable  income,  consumption,  and  savings  by  income quintile,  in  line  with  international  recommendations. Additionally,  we  are  developing  natural capital statistics, and within regional national accounts, we plan to include data on investment and foreign trade.
29. In our commitment to serving society and making the Bank's information more accessible, we have continuously innovated in how we publish and share our statistics in different formats and channels. In 2004, we launched the Statistical Database (BDE). Later, we introduced a mobile simplified  version  and  an API,  to  enable  bulk  data  downloads  and  seamless  integration  with analytical and visualization tools. We also launched a Regional App, improving access to this data. As part of this effort, in 2024 we also announced the first public call for research projects using microdata, promoting academic collaboration.

## Statistics of the Future

30. As we have seen, the Bank has played a key role in providing information to society, guided by the principles of transparency, trust, and integrity. Our statistical work has evolved through the use of data and technology, the implementation of new methodologies, and the exploration of new data sources.
31. As we cross the threshold of our centennial, it is time to envision the statistics of the future. As I mentioned earlier, economic and social events have historically driven the development of new statistics, as well as advances in computing led to more comprehensive, higher quality, and more timely statistics. A similar pattern can be expected going forward. However, the future also brings new  challenges,  given  the  availability  of  microdata,  advances  in  artificial  intelligence  and quantum computing, and improvements in regulatory frameworks. Certainly, economic statistics are poised for a radical transformation.
32. Asking ourselves: what statistics and data might look like 100 years from now? is more than an interesting experiment-it is a compelling exercise. Some current aspects will only improve. For example, the immediacy with which we access information today suggests that, in the future, every  economic  transaction  could  be  recorded  in  real  time,  allowing  us  to  instantly  gauge economic  activity.  This  would  bring  economists  closer  to  their  long-standing  aspiration  of detecting turning points in key variables as they happen. Likewise, data collection sources will multiply, and historical series could be continuously updated, eliminating the need to wait years for final versions.
33. The  use  of  unstructured  data-captured  from  our  digital  devices  such  as  smartphones  or smartwatches-could  offer  more  accurate,  timely,  and  cost-effective  insights  than  traditional surveys. This could, among other things, facilitate the measurement of informality.
34. Statistical portals, which currently allow users to collect information based on their needs, could evolve into platforms where users, by inputting their characteristics, would receive customized information powered by AI. Machines may communicate autonomously, potentially leading to previously unthinkable fields-such as the development of statistics for robots.
35. The  future  is  uncertain  but  promising.  However,  these  advances  must  be  accompanied  by regulations that ensure the appropriate use of data and protect privacy, placing the society's well-

being  at  the  center,  promoting  transparency,  and  ensuring  the  ethical  use  of  information  to strengthen public trust.

36. In  this  rapidly  evolving  world-one  that  may  reach  unimaginable  heights-our  2023-2027 Strategic Plan includes a key objective, that is, to continue deepening the use and analysis of data across all areas of the institution. We aim to be at the frontier when major changes occur, with a robust statistical system that respects individual and social rights. This will help the Central Bank to continue to fulfill its role as a guardian of macroeconomic stability in the decades to come.

## Conference 2025

37. Our commitment to staying informed about innovations in statistics and data has been enduring. This led us to organize our first Statistics Conference in 2015, bringing together the interests of both compilers and users, aligned with the international agenda and our strong commitment to promoting,  disseminating,  and  using  statistics. Today,  with  pride  -and  after  organizing  five conferences,  including  one  during  the  pandemic  in  2021,  with  participation  from  experts  at statistical offices and central banks at the forefront of knowledge-, I can say that the Statistics Conference has become a regional benchmark event.
38. This year's conference is an opportunity to reflect on the past, celebrate current achievements, and look to the future with determination. Over the next two days, we will explore successful experiences in the use of data and artificial intelligence for more informed and timely decisionmaking. We will see how data is being used to gain deeper insights into economic and social phenomena, anticipate trends, identify opportunities, and mitigate risks. I believe the discussion on how artificial intelligence is transforming decision-making will be of particular interest.
39. In a world where information flows at unprecedented speed, organizations must know how to listen to their audiences and adapt to their needs. Moreover, in a landscape filled with multiple sources and indicators competing with traditional statistics, ethics, privacy, and responsibilityboth in data management and information dissemination-are essential considerations. For this reason,  we  will  explore  how  various  institutions  work  to  maintain  credibility  and  strengthen public trust through effective communication.

## Final Reflections

40. Since their earliest uses, statistics have been-and will continue to be-essential for interpreting our  reality,  guiding  research,  and,  above  all,  enabling  informed  decision-making.  In  an increasingly interconnected and data-saturated world, their relevance not only endures but grows stronger.
41. The role of central banks and statistical offices in providing the information needed to understand the economy and design evidence-based policies is more vital than ever. On the occasion of its centennial, the Central Bank of Chile reaffirms its commitment to producing relevant economic information, leveraging the growing analytical capabilities offered by granular data and artificial intelligence tools.
42. A century of history has taught us that stability is built on solid foundations of knowledge and transparency. That crises and abrupt changes in the environment are best addressed with timely, high-quality data and rigorous analysis-not improvisation or political pressure. That autonomy

is not an end in itself, but a means to ensure technical decisions focused on the well-being of citizens.

43. We look to the future with the certainty that the power of data-managed with responsibility, ethics, and vision-will enable us to build a more prosperous and resilient world. Yet we face a number of complex and multifaceted challenges, such as designing strategies to manage and analyze large volumes of data while ensuring their reliability, accuracy, and confidentiality, and balancing data utility with privacy rights.
44. As producers of statistics, we must maintain a constant commitment to learning and a willingness to think outside the box-to  be  creative, explore new  methodologies,  and strengthen communication  and  collaboration  skills  in  an  increasingly  interdisciplinary  world,  all  while meeting the growing demand for more accurate, rigorous, timely, and granular information.
45. As for the limits we can reach, there are concepts today that remain only partially measurablesuch as well-being-which may become fully measurable in the future. This would represent a revolution in the way public policies are designed. Whether or not we reach that point, we must begin preparing now.
46. The Sixth Statistical Conference of the Central Bank of Chile represents a valuable opportunity to learn, share, and collaborate in addressing the new challenges we face as producers and users of statistics.
47. We sincerely thank all speakers and participants present for your valuable contributions to this event  and  for  allowing  us  to  share  and  learn  from  one  another.  We  are  confident  that  the discussions  and  presentations  over  the  coming  days  will  be  of  great  value  and  inspiration  in continuing to strengthen the fundamental role of statistics in our countries. I hope this conference proves productive and enriching for each one of you.
48. Finally, I would like to thank the organizing team of this Conference-Patricia Medrano, Helen Parker, Antonia Silva, Vania Vargas and Romina Villarroel from the Statistics and Data Division, and Dafne Guiloff and Maria José Reyes from the Institutional Affairs Division.
49. A very warm welcome to you all!",Rosanna Costa
https://www.bis.org/review/r250603d.htm,"Kevin Greenidge: Unbreakable, unmovable, unstoppable","Remarks by Dr Kevin Greenidge, Governor of the Central Bank of Barbados, at the 36th Annual Caribbean Sales Congress (CARAIFA), Bridgetown, 13 May 2025.",2025-05-13 00:00:00,"## Kevin Greenidge: Unbreakable, unmovable, unstoppable

Remarks by Dr Kevin Greenidge, Governor of the Central Bank of Barbados, at the 36th Annual Caribbean Sales Congress (CARAIFA), Bridgetown, 13 May 2025.

* * *

## Good evening.

As the stars in the life insurance business gather tonight, I am delighted to address you on the occasion of your 36th Annual Caribbean Sales Congress. It is both an honour and a privilege to engage with such a distinguished gathering of professionals who shape the financial security of our Caribbean nations.

From the start of this Congress yesterday evening, tonight, and over the coming days, we reflect on industry trends, celebrate regulatory progress, forge new connections, and honour your exceptional achievers. Your congress theme - ""Unbreakable, Unmovable, Unstoppable"" - resonates deeply with me. These powerful words capture the very essence of what it means to thrive in today's ever-evolving world, including within the life insurance and financial advisory sector. They speak to the resilience, steadfast determination, and unwavering commitment that define your work, day after day.

Over the next few minutes, I invite you to join me on a journey exploring the vital importance of your sector and discovering what you must collectively do to remain truly unbreakable, unmovable, and unstoppable in an ever-changing world.

## The Cornerstone of Caribbean Financial Stability

The life insurance sector stands as an indispensable pillar supporting our Caribbean economic landscape. The numbers tell a compelling story: ordinary life plans continue to dominate market share across Barbados, the Eastern Caribbean, and Trinidad and Tobago, while group health plans remain the cornerstone in Jamaica and beyond.

Yet despite these encouraging trends, our region's insurance penetration rate of 2.18 percent trails significantly behind the OECD average of 4.6 percent. This gap represents not just a statistical shortfall, but a pressing opportunity for expanded financial education and awareness throughout our communities.

But let us remember insurance transcends mere policies and premiums; it . In a embodies security, stability, and the safeguarding of our collective future Caribbean increasingly vulnerable to economic disruptions, brought on by the climate crisis, and shifting demographics with aging populations and declining birth rates, your profession serves as a bedrock of financial protection. Whether securing a family's stability after losing a breadwinner, or guaranteeing a child's education, or creating pathways to dignified retirement, you provide the foundation of financial resilience upon which our communities build their dreams.

## Transforming Regional Economies Through Strategic Investment

Our regional economies also stand at a critical crossroad, poised for strategic restructuring that will create sustainable growth platforms for generations to come. Take Barbados, for example - our economy has undergone remarkable transformation since 2018, evolving from a stagnating system burdened by debt into one characterised by sustained economic expansion and consistent debt reduction.

We've made tremendous strides in enhancing our competitiveness, while simultaneously addressing both external and internal macroeconomic imbalances. The revitalisation of our formerly dormant capital market, through new treasury bill offerings and our recent long-term 20-year debenture, marks a significant milestone. With increasingly positive reviews from regional and international credit rating agencies, as evidenced by four upgrades in the last eight months, these financial products have attracted substantial interest.

I encourage you, my regional colleagues, to reconsider your exposure to Barbadian government securities as you seek safe, secure investments from a nation firmly recommitted to fiscal prudence and sustainable, inclusive growth.

Yet our journey has only begun, and the investment decisions made by life insurance companies like yours will prove instrumental in driving Caribbean economic growth forward. No economy can fully address its citizens' long-term needs through fiscal measures alone. Instead, we must harness our people's collective savings through strategic investments that accelerate sustainable growth.

Consider this striking reality: approximately US$5.4 billion in excess cash currently sits idle in central banks across our region - low or non-earning investments that could instead fuel transformative growth. Imagine these resources channelled into developing tourism, renewable energy, and addressing the climate crisis - a fight that the Prime Minister of Barbados is leading - and innovative industries that sustainably leverage our vast marine resources and technological capabilities. How about harnessing some of this excess liquidity through a regional bond for economic development?

Life insurance products are uniquely designed to manage longevity risk, making your industry perfectly positioned to drive investment in crucial long-term infrastructure and both private and public securities that meet appropriate criteria. Tonight, I challenge us all to reimagine how these investments can reshape our Caribbean destiny.

## Celebrating Excellence: The Monica Robotham Story

Now, we are gathered here tonight to celebrate a woman whose career and life is a testament to perseverance, excellence, and a profound commitment to service Monica Robotham. Ladies and gentlemen, I am deeply honoured to join you in celebrating Monica's extraordinary journey - a path that truly embodies what it means to be unbreakable, unstoppable, and unmoveable in your industry. Her story resonates profoundly with me because it demonstrates how dedication and service can transform not just a career but an entire community.

From her humble beginnings at Life of Jamaica in 1987, Monica pursued excellence through prestigious designations and shattered barriers to join the industry's elite. Her transformative leadership as President of the Jamaica Association of Insurance and

Financial Advisors demonstrated unwavering commitment, breathing new life into the organisation when others might have faltered. Perhaps most inspiring was her remarkable service to vulnerable populations during the darkest days of COVID.

Monica's guiding principle ""You are remembered not by what you gathered, but by - offers us a profound model for success that transcends personal what you scattered"" achievement. Tonight, I invite each of you to follow Monica's example: become unbreakable through continuous professional growth, become unstoppable through selfless service to others, and become unmovable in your commitment to excellence. Her remarkable legacy highlights the truth that when we embrace these principles, we too can create lasting impact that ripples through both our profession and our communities.

## Personal and Professional Growth: Your Path to Becoming Unstoppable

Success in this field demands more than knowledge and expertise - it requires a mindset of resilience, adaptability, and above all, continuous learning. To truly embody being unbreakable, unmovable, and unstoppable like Monica, I invite you to embrace these transformative principles in your own development journey:

First, commit yourself to lifelong learning. The financial services landscape, like most industries today, is evolving at breath-taking speed. Regulatory shifts, technological revolutions, and emerging risks make staying informed and continuously honing your skills absolutely essential. Embrace professional development opportunities, earn new certifications, and position yourself as a trusted expert whose knowledge illuminates the path forward. The Central Bank I lead maintains an enduring tradition of training and development, and we encourage all financial services professionals to invest in their growth.

Second, build meaningful client relationships that transcend transactions. In this era of technological convenience, the human touch remains your most precious asset. Your ability to genuinely connect with clients, deeply understand their unique needs, and provide thoughtfully tailored financial solutions, sets you apart in a crowded marketplace. Remember - a truly effective financial advisor is far more than a salesperson; you are a strategic partner guiding your clients' financial journeys. Don't simply sell products - ensure they meet each client's unique circumstances and aspirations. We've witnessed too many instances of product mis-selling globally, and I recognise that we as Caribbean people sometimes approach long-term investing with understandable caution.

Third, strengthen the ethical foundations upon which everything else rests. Trust must remain the fundamental currency of your industry. The financial advisory profession stands or falls on transparency, integrity, and unwavering ethical responsibility. CARAIFA's mission to uphold rigorous industry standards testifies to the critical importance of maintaining credibility and trustworthiness in every client interaction.

Fourth, embrace technological innovation as your ally rather than your adversary. Digital transformation is reshaping financial services in ways we could scarcely imagine a decade ago. Whether leveraging data analytics to gain deeper client insights or

utilising digital platforms for enhanced service delivery, technology should be viewed as a powerful enabler rather than a disruptive force. The more effectively you harness its capabilities, the more efficient and impactful your practice becomes. Now is the perfect moment to explore artificial intelligence and understand how it can dramatically enhance efficiency, productivity, and results, throughout the insurance industry.

Fifth, adapt nimbly to our region's changing economic environment. The Caribbean's economic landscape continues to evolve rapidly. The average growth in Gross Written Premiums across various markets has been modest - 2 percent in Barbados, 3 percent in Belize, and 4 percent in the Eastern Caribbean - reflecting the persistent challenges we face in achieving robust economic expansion. As financial professionals, you must anticipate market shifts, develop sophisticated understanding of economic trends, and provide solutions that are not merely relevant but genuinely sustainable over time.

Finally, and perhaps most importantly, bring others along on your journey to success. To borrow Monica's profound personal motto, ""You are remembered not by what you Her wisdom embodies an essential truth. In the gathered, but by what you scattered."" realm of insurance and financial services, success is often measured by metrics policies written, revenue generated, profits earned. But the true measure of your legacy lies not in what you accumulate for yourself, but in the lasting impact you . And impacting others' lives positively is at the core of your create in others' lives business.

Like the parable of the mustard seed - the smallest of all seeds that grows into a mighty tree providing shelter for many - each small act of service contains within it the potential for tremendous growth and impact. Every day presents opportunities to scatter seeds of service, to scatter seeds of mentorship, and to scatter seeds of kindness seeds that, when nurtured, blossom into lasting relationships, thriving careers, and stronger communities.

Just as the mustard seed's greatness lies not in its size, but in its immense potential, your most significant contributions often begin as simple gestures of support. Whether providing mentorship to emerging professionals, engaging in community outreach, or leading by example, when you climb the ladder of success like Monica, you must extend a hand to pull others up alongside you. Remember always - from the smallest seeds come the most abundant harvests.

## Embracing Monica's Legacy of Impact

As I close and you reflect on the profound work you do, carry Monica's powerful words in your heart: ""You are remembered not by what you gathered, but by what you Like her, your career represents far more than a job - it embodies a lifescattered."" calling. Monica has shown us that true success lies in the lives you touch, in the colleagues you mentor, and in the communities you strengthen.

You, like Monica, possess the power to transform countless lives by ensuring families remain financially secure, businesses continue to thrive, and communities build upon foundations of economic strength.

You are unbreakable in your commitment to serving others, mirroring Monica's steadfast resilience through challenges, from her humble beginnings to her emergence as an industry leader.

You are unmovable in your dedication to financial empowerment, demonstrating the same resolve Monica showed when revitalising JAIFA's headquarters and supporting seniors during the pandemic's darkest hours.

You are unstoppable in your pursuit of excellence, following Monica's inspiring example of continuous growth from her early days at Life of Jamaica through earning prestigious designations and establishing new standards of achievement.

As you move forward into tomorrow, know that, like Monica, the seeds you scatter today will grow into the forests of tomorrow. Let her extraordinary journey inspire you to see beyond numbers, beyond commissions, to the true, transformative impact of your work. May this congress serve as a catalyst igniting renewed passion, deeper knowledge, and even greater commitment to your noble profession - a commitment to being remembered not by what you gather, but by what you scatter.

Together, embracing Monica's spirit of service and excellence, and guided by the wisdom of the mustard seed parable, let us continue building a Caribbean that stands financially resilient, well-insured, and confidently prepared for whatever the future may bring.

Thank you, and may this evening's stars light your path forward.

Enjoy your 36th congress.

I thank you!",Dr Kevin Greenidge
https://www.bis.org/review/r250603e.htm,Kevin Greenidge: Creativity and culture are not luxuries - they are necessities,"Remarks by Dr Kevin Greenidge, Governor of the Central Bank of Barbados, at the Annual Crop Over Visual Arts Festival, Bridgetown, 26 May 2025.",2025-05-26 00:00:00,"## Kevin Greenidge: Creativity and culture are not luxuries - they are necessities

Remarks by Dr Kevin Greenidge, Governor of the Central Bank of Barbados, at the Annual Crop Over Visual Arts Festival, Bridgetown, 26 May 2025.

* * *

## Good evening.

It is a pleasure to join you once again to open the Season of Emancipation Visual Arts Exhibition Series. This annual tradition remains one of the most meaningful ways we celebrate our cultural identity as a nation, offering a space to reflect on who we are, how far we've come, and where we aspire to go.

This year's exhibition is especially significant. It opens on African Liberation Day, unfolds during the Season of Emancipation, and sets the stage for Barbados' hosting of CARIFESTA 15. Each of these milestones is important in its own right. But together, they form a powerful moment for us to examine ourselves, not just as a nation, but as part of the wider Caribbean and African Diaspora family.

The theme, Inner Visions, is both introspective and provocative. It invites us to pause, look inward, and ask: What do we see when we examine ourselves through the lens of freedom? What shapes our desires and dreams? And how do our current realities align with the promises made at Independence and the aspirations of the 1937 generation?

The two exhibitions - Self-Reflections and Diasporic Connections - challenge us to confront difficult truths even as we celebrate the richness of our culture. They ask: What does it mean to be truly free - mentally, socially, creatively? How do we balance tradition and transformation? Are we fulfilling our potential?

These are not rhetorical questions. They are deeply personal, and also profoundly national. Because freedom is not just about breaking chains. It's about building the conditions for self-actualization.

At the Central Bank of Barbados, we are proud to once again sponsor this initiative, continuing a commitment we first made more than three decades ago. For the third consecutive year, we are investing $80,000 to support this exhibition and to help strengthen Barbados' visual arts sector. But our investment goes beyond funding. It is an affirmation that creativity and culture are not luxuries, they are necessities. They help us name our experiences, understand our histories, and imagine our futures.

The Bank itself reflects this philosophy. We've curated a remarkable art collection over the years, much of it acquired through this very exhibition. These works document Barbadian life in all its beauty, struggle, complexity, and joy. They now form part of our national heritage, reminding us that art is not just something to observe, it is something to live.

This year's inclusion of animation, digital sculpting, and interactive installations is a welcome evolution. It reflects the ingenuity of our artists and mirrors the Bank's own digital transformation journey. More importantly, it underscores our ability as a people to stay rooted while embracing change.

Art also creates tangible economic value. It fuels creative industries, supports livelihoods, attracts global attention, and offers opportunities for youth. As we prepare to host CARIFESTA once again, this exhibition stands as an early and powerful showcase of the creative excellence Barbados brings, not just to the region, but to the world.

But perhaps most powerfully, this exhibition reminds us that the deepest revolutions begin within. Before we change systems, we must first shift mindsets. Before we build the future, we must confront the truths of the past.

In the spirit of Bussa, Nanny Grigg, and the countless unnamed whose inner visions gave rise to bold action, we are called to do the same. To reflect. To be courageous. To reimagine.

To the National Cultural Foundation and the Queen's Park Gallery, thank you for your vision and your leadership.

To the artists, thank you for holding up a mirror to this nation. Thank you for showing us who we are, and who we might yet become. Your work is invaluable.

I encourage everyone here to fully engage with this exhibition, not just with your eyes, but with your heart. Because in every brushstroke, frame, and installation, there is a question being asked:

What do you see when you look within?

Thank you and enjoy the exhibition.",Dr Kevin Greenidge
https://www.bis.org/review/r250603b.htm,"Felicia Dlamini-Kunene: Speech - ""Symposium on enhancing financial inclusion"" ","Speech by Ms Felicia Dlamini-Kunene, Deputy Governor of the Central Bank of Eswatini, at the Symposium on ""Enhancing Financial Inclusion in Eswatini: Challenges and Opportunities"", Ezulwini, 19 May 2025.",2025-05-19 00:00:00,"## Felicia Dlamini-Kunene: Speech - ""Symposium on enhancing financial inclusion""

Speech by Ms Felicia Dlamini-Kunene, Deputy Governor of the Central Bank of Eswatini, at the Symposium on ""Enhancing Financial Inclusion in Eswatini: Challenges and Opportunities"", Ezulwini, 19 May 2025.

* * *

- Chief Executive Officer of the Alliance for Financial Inclusion,
- Representative of the Minister for Finance
- Governor of the Central Bank of Eswatini,
- Chief Executive Officer of the Financial Services Regulatory Authority,
- Acting Chief Executive Officer of the Centre for Financial Inclusion,
- Chairman of the Bankers Association of Eswatini,
- Captains of Industry, both banks and non-banks
- Distinguished delegates
- Colleagues, Ladies and Gentlemen

It is an honour and privilege to address you at this important Symposium where we reflect on our collective progress, deepen collaboration, and reaffirm our shared commitment to building a more inclusive and resilient financial ecosystem.

We are especially delighted to host the CEO of the Alliance for Financial Inclusion (AFI), whose keynote address we eagerly anticipate. Your presence here is both symbolic and practical: itreaffirms AFI's enduring support for Eswatini's financial inclusion journey and the strength of our mutual partnership.

We are especially grateful to the stakeholder community-government ministries, sibling regulators, financial institutions, development partners, consumer advocates, and all our collaborators, for making the time to be with us today. Your continued commitment, presence, and partnership speak volumes. Please know that your efforts are immensely appreciated in all respects-from strategy design to grassroots implementation, your dedication is the driving force behind our collective progress.

Let me also take this opportunity to reflect on a moment of pride for the Kingdom of Eswatini: the privilege of hosting the AFI Working Group Meetings in May last year. It was a true honour for us to welcome AFI member institutions and experts from across the globe to our shores. We thank you for the trust you placed in us and hope the experience was as enriching for the network as it was for us. The exchange of knowledge and ideas during those meetings continues to shape our financial inclusion journey today.

We were especially pleased to showcase Eswatini's financial inclusion journeywith the AFI network-highlighting the strides we have made, the partnerships we continue to foster, and the innovation we are embracing as we work to build an inclusive financial system that leaves no one behind.

Over the years, Eswatini's relationship with AFI has grown from strength to strength, grounded in shared values and a mutual commitment to building more inclusive, resilient, and sustainable financial systems. AFI's technical assistance, peer learning mechanisms, and policy leadership have been instrumental in helping us drive the financial inclusion agenda at both national and institutional levels.

As the stakeholder community, we are especially proud to report the successful launch of Eswatini's National Financial Inclusion Strategy 2023-2028in May 2024, an event graced by AFI executives and attended by a broad range of stakeholders. This strategy provides a bold and inclusive roadmap for enhancing access to financial services for underserved segments of our population. We are grateful for AFI's ongoing support and the engagement of its working groups in shaping and refining our national approach.

In this regard, we wish to extend our sincere appreciation to theMinistry of Finance, particularlytheCentre for Financial Inclusion (CFI)for its pivotal role in championing the development and driving the implementation of the National Financial Inclusion Strategy 2023-2028. The CFI's commitment, coordination, and technical leadership have been instrumental in mobilizing stakeholders, aligning efforts, and ensuring that the strategy reflects the priorities and aspirations of the people of Eswatini.

Furthermore, in an endeavour to internalize the National Financial Inclusion Strategy, the Central Bank has formally embedded financial inclusion into its core policy objectives. This includes an intentional focus on increasing economic and financial literacy and expanding access to quality financial services. To further support this mandate, the Bank established a dedicated Financial Inclusion Division, which is tasked with the coordination and implementation of financial inclusion activities both within the Bank and across the national financial ecosystem.

In pursuit of financial inclusion, Eswatini has made significant progress across multiple fronts. We launched ourGender Financial Inclusive Roadmap (GFIR) in August 2022, a strategic initiative aimed at reducing gender disparities in financial access and usage. With AFI'ssupport, work is underway to develop a national Fintech strategy, complemented by advancements in digital payments infrastructure through the National Switch project and adoption of open banking standards. Consumer protection has been strengthened, inclusive green finance has progressed through the finalization of the Eswatini Green Finance Taxonomy, while targeted efforts in SME development and gender-inclusive finance, including a case study on women MSMEs-are expanding access and opportunity. Financial literacy has also been prioritized, with national outreach campaigns and integration into school curriculums under consideration.

Anothersignificant achievement has also been the rollout of the sex-disaggregated data (SDD) project, conducted in partnership with FSRA and CFI, aimed at improving gendersensitive policy formulation through better data collection and analytics. We extend our sincere thanks to the banking industry for their cooperation and support as this project matures.

We are pleased to inform stakeholders that, in collaboration with the World Bank, we have launched a technical assistance project focused on gender and financial inclusion. One key output will be a Supply-side Gender Disaggregated Data Diagnostic, which will inform a national roadmap.

Despite these efforts, significant challenges remain. Today, there is still a 14% gender gap in bank account ownership, with 48% of women banked compared to 62% of men. Addressing this gap requires decisive action.

Eswatini can develop a clearer picture of financial inclusion through a gender lens, leading to more effective policies and programs thatempower women economically.

In conclusion, Eswatini's financial inclusion journey continues to be shaped by a spirit of collaboration, innovation, and commitment to ensuring that no one is left behind. The tangible progress made thus far-from strategy development and regulatory reform to digital innovation, financial literacy, and data-driven inclusion-reflects the collective effort of government, regulators, financial institutions, and our development partners. As we look ahead, we remain steadfast in our resolve to build a more inclusive, equitable, and resilient financial system, one that truly empowers all Emaswati.

Let us continue to work together with purpose and urgency, leveraging the power of partnerships like AFI, to turn inclusion into impact.

Now, allow me the honour of inviting a leader whose vision and guidance continue to steer Eswatini's financial sector towards greater resilience and inclusivity.

Ladies and gentlemen, please join me in welcoming the Governor of the Central Bank of Eswatini, Dr. Phil Mnisi,to deliver his address.

Governor, the floor is yours.",Felicia Dlamini-Kunene
https://www.bis.org/review/r250602a.htm,Richard Byles: Update and outlook for the Jamaican economy,"Monetary Policy Press Statement by Mr Richard Byles, Governor of the Bank of Jamaica, at the Quarterly Monetary Policy Report press conference, Kingston, 21 May 2025.",2025-05-21 00:00:00,"## Richard Byles: Update and outlook for the Jamaican economy

Monetary Policy Press Statement by Mr Richard Byles, Governor of the Bank of Jamaica, at the Quarterly Monetary Policy Report press conference, Kingston, 21 May 2025.

* * *

## Introduction

Good morning and welcome to our Quarterly Monetary Policy Report press conference.

My statement today is set against the backdrop of a rapidly changing policy landscape in the United States and the global economy, which has implications for Jamaica's economic prospects. Since our last press conference in February 2025, the US government has been resetting trade relationships with its trading partners and has announced several economic policy changes, particularly relating to tariffs, immigration, remittances and fiscal operations. These policy announcements, negotiations and subsequent policy amendments have fuelled uncertainty in the world economy and have:

1. resulted in tariff retaliations by the major trading partners of the US, particularly China,
2. generated higher volatility in equity and bond markets in the US and around the World,
3. precipitated a fall in commodity prices and
4. stimulated a fall in consumer confidence in the US.

Naturally, there has been much uncertainty about the impact of these policies on the US economy but more so on the global economy, including Jamaica. Bilateral negotiations between the US administration and other countries surrounding tariffs, trade and investment policies are ongoing, and the outcomes of these negotiations are unknown at present. It appears, however, that the march of globalisation has generally paused and, when this resetting of trading relations has concluded, higher tariffs are likely to be part of a new global trading arrangement. Importantly, it appears at this stage that the final package of bilateral tariffs to be imposed on trading partners by the US, will be materially lower than those announced on the second of April 2025.

## Monetary Policy Decision

Following careful consideration of the implications of these developments, recent economic trends and the outlook for the Jamaican economy, the MPC unanimously agreed to:

(i) reduce the policy rate (the rate offered to deposit-taking institutions (DTIs) on overnight placements with Bank of Jamaica) by 25 basis points from 6.00 per cent to 5.75 per cent per annum, effective 21 May 2025 and (ii) preserve relative stability in the foreign exchange market.

Let me explain the rationale for this decision in the context of the new global environment.

## Recent Economic Developments

First, the incoming economic data on Jamaica continue to point to a stable domestic economy with inflation remaining in the 4 per cent to 6 per cent target range. On the 15th of May, the Statistical Institute of Jamaica (STATIN) reported that headline inflation at April 2025 was 5.3 per cent, in-line with the outturn for April 2024. Headline inflation has therefore continued to remain within the Bank of Jamaica's target. Also, core or underlying inflation remains low. Core inflation (which excludes the prices of agricultural food products and fuel from the consumer price index (CPI)) was 4.4 per cent at April 2025, remaining below 6.0 per cent since July 2023. The stable and relatively low inflation outturn primarily reflected the end of the impact of previous price increases for regulated items (such as bus and taxi fares), and no new such increases, which offset higher food inflation. Moreover, the exchange rate, imported inflation and the private sector's expectations of future inflation (inflation expectations) have been fairly stable.

Expectations about exchange rate depreciation have also remained relatively stable. At the 14th of May 2025, the exchange rate had depreciated on a year-over-year basis by 1.9 per cent. There was a mild uptick in the pace of depreciation between end April and early May in the context of a slight increase in demand and a build-up of FX positions by Authorised Dealers. In response, the Bank augmented flows in the market. Cumulatively, BOJ has sold US$1.1 billion via its B-FXITT facility over the 12 months to end-April 2025, compared to US$983 million over the 12 months to end-April 2024. However, it is important to note that the Bank net purchased approximately US$1.1 billion over the 12 months period to April 2025. Therefore, as at 14 May, Jamaica's gross international reserves remains healthy, amounting to US$5.9 billion or 135% of the measure considered adequate.

There has also been a moderation in imported inflation in the March 2025 quarter relative to the December 2024 quarter. Specifically, oil prices declined during the quarter, relative to the previous year.

The Bank estimates that the domestic economy grew in the range of 0.0 to 1.0 per cent for the March 2025 quarter, which, translated into an estimated contraction of -1.0 to 0.5 per cent for FY2024/25. Finally, while employment levels remain high, anecdotal data suggest that wage pressures are moderating.

## Near-term Outlook

In assessing the near-term outlook, the MPC contemplated the implications for the Jamaican economy of the policies that have been implemented by the US administration to date and in so doing, looked at several scenarios. From this exercise,

the Bank's view is that the first-round impact of the increase in US tariffs on prices in Jamaica will not be significant.

For the US, the policies are likely to temporarily increase inflation. We expect that the US Federal Reserve (Fed) will respond appropriately, and we also anticipate a slowing of the pace of US economic growth. We note that the Fed maintained its interest rate target in the range of 4.25 to 4.50 per cent in May 2025 and is likely to continue to maintain rates for an extended period of time in 2025.

While some consumer prices in Jamaica may rise due to higher inflation in the US, the impact of imported inflation on overall domestic price level increases will be largely offset by falling world oil prices.

Given the available information, the Bank therefore projects a moderate impact of the US policy changes on prices in Jamaica. In this context, the outlook is for inflation to remain within the Bank's target range of 4 to 6 per cent over the next two years, notwithstanding some upside risk. This outlook assumes stable inflation expectations, a moderate decline in crude oil prices, continued stability in the exchange rate and moderate domestic demand.

The US policy changes may have some impact on Jamaica's GDP growth and the external accounts, to the extent that tourism and goods exports, as well as remittances are affected by these changes. Some of Jamaica's exports will be exempt from the baseline tariff imposed on Jamaica by the US and this may augur well for growth in those industries. The economy is, therefore, projected to grow moderately over the near term.

Against this background, and factoring domestic demand conditions, for FY2025/26 real GDP is projected to recover in the range of 1.0 to 3.0 per cent, largely reflecting normalisation in the mining, tourism and construction sectors. In this context, employment levels are projected to remain high, even as anecdotal data suggest that wage pressures are moderating.

The current account of Jamaica's balance of payments is projected to remain in surplus over the near-term and the international reserves are projected to remain healthy. The Bank projects that gross reserves will improve further over the medium-term, remaining above the Assessing Reserve Adequacy (ARA) 100 per cent benchmark.

## Risks

The risks to the inflation forecast are skewed to the upside, which means that inflation could be higher than projected. Higher inflation could stem from a sharper-thananticipated increase in the tariff faced by trading partners of the US. In addition, domestic inflation could be higher than projected if there is a further escalation in geopolitical tensions, which could negatively impact international supply chains. Lower inflation could, however, result from lower-than-projected international commodity prices as well as weaker demand conditions.

The MPC will therefore continue to carefully monitor domestic inflation expectations and any upward pressure on prices caused by the evolving tariff landscape. The Bank is

prepared to adjust the stance of monetary policy if its outlook does not materialise and there is an upward deviation of the inflation rate from the Bank'starget range. Importantly, the Bank is well positioned to support stability in the foreign exchange market, should the effects of the policy changes abroad affect foreign exchange flows by more than currently anticipated.

## Concluding Statement

Ladies and gentlemen, Bank of Jamaica remains committed to achieving its primary mandate of maintaining inflation at 4.0 to 6.0 per cent and will deploy the tools necessary to preserve price and foreign exchange market stability. The external environment carries much uncertainty but the domestic macroeconomic outlook remains stable in the Bank's view.

Thank you. I will now take questions.",Richard Byles
https://www.bis.org/review/r250604b.htm,Lisa D Cook: Economic outlook,"Speech by Ms Lisa D Cook, Member of the Board of Governors of the Federal Reserve System, at the Council on Foreign Relations, New York City, 3 June 2025.",2025-06-03 00:00:00,"## Lisa D Cook: Economic outlook

Speech by Ms Lisa D Cook, Member of the Board of Governors of the Federal Reserve System, at the Council on Foreign Relations, New York City, 3 June 2025.

* * *

Thank you, Michael. I am honored to be back at the Council on Foreign Relations.  1

I would like to congratulate you on becoming president of this august body. I have known Mike for some time. In fact, he helped me when I was a graduate student working on my dissertation on Eastern Europe at the University of California, Berkeley and visited the Treasury Department. I am grateful for your generosity during that time and over my career, Mike. I also want to thank the Council on Foreign Relations for awarding me a postdoctoral International Affairs Fellowship that allowed me to serve at the Treasury Department. This fellowship provided a transformational experience, and today, as a Federal Reserve Governor, I regularly draw on the significant lessons I learned during the 2000-01 period. I am glad to see this important program still going strong.

To set the foundation for our discussion today, I will offer my outlook on the economy and share my views on the path of monetary policy. I will then put my thoughts in a global context by briefly examining how we can apply cross-country lessons learned during the pandemic recovery to the current period.

## Economic Outlook

The U.S. economy is still on a firm footing, but uncertainty has notably increased since the beginning of the year. The latest data indicate that unemployment continues to be low, while inflation remains somewhat above the Federal Open Market Committee's (FOMC) 2 percent goal. However, there is evidence that changes to trade policy are starting to affect the economy. I do not express views on the Administration's policies. But I do study the economic implications, which appear to be increasing the likelihood of both higher inflation and labor-market cooling. In this environment, monetary policy will need to carefully balance our dual-mandate goals of price stability and maximum employment. Former Chair Ben Bernanke said that, in times of uncertainty, policymakers must consider a range of possible scenarios about the state of the economy. The resulting policy decisions, he said, ""may look quite different from those that would be optimal under certainty."" 2

Let me start by looking at one part of our mandate. Inflation has declined from its pandemic highs but remains somewhat above target. The most recent data show that inflation was 2.1 percent for the 12 months ending in April and 2.5 percent when excluding food and energy costs. 3  Price increases tied to changes in trade policy may make it difficult to achieve further progress in the near term. One-year inflation expectations have risen sharply this year. So far, most measures of longer-term inflation expectations have moved less significantly. I will continue to monitor these data carefully. The recent post-pandemic experience with high inflation could make firms more willing to raise prices and consumers more likely to expect high inflation to persist.

I will now turn to the other part of our mandate. The labor market has remained resilient, at least through early spring. The unemployment rate in April held steady at 4.2 percent, a historically low level. Payroll job gains averaged nearly 150,000 per month through four months this year, a moderation from last year. Trade policy changes could alter hiring plans in the near future. Changes to global trading patterns could also have a negative effect on U.S. productivity. Though, as I noted in recent remarks, productivity gains associated with the introduction of artificial intelligence technology into the workplace could potentially, at least in part, counter that effect. 4

In terms of overall economic activity, U.S. GDP moved lower in the first quarter after solid growth last year. However, private domestic final purchases, which exclude net exports, inventory investment, and government spending, grew last quarter at a rate consistent with recent readings. Looking ahead, I anticipate a slowdown in the expansion of economic activity from last year's pace. The ultimate level of tariffs remains unknown because policy changes are still developing. However, the effects are already noticeable. Manufacturing output declined in April. Orders for heavy trucks plunged. Firms reported a drop in capital expenditure plans for 2025. Measures of uncertainty have increased, on net, this year, and household and business sentiment has declined, despite some recent improvements in both.

## Monetary Policy

While the economy remains solid, the economic environment could become highly challenging for monetary policymakers. At our most recent policy meeting last month, I supported the FOMC's decision to leave our policy interest rate unchanged. The current stance of monetary policy is well positioned to respond to a range of potential developments.

Trade policy changes and the response of financial markets, firms, and consumers suggest risks to both sides of our dual mandate. As I consider the appropriate path of monetary policy, I will carefully consider how to balance our dual mandate, and I will take into account the fact that price stability is essential for achieving long periods of strong labor market conditions.

## International Comparison

In light of the fact that the current paths for the U.S. and global economy are uncertain, I think it is helpful to study a recent period when that was also the case: the pandemic downturn and the inflation that followed. To launch our discussion, I will highlight two lessons from cross-country experiences that might apply today.

One lesson is that the inflation environment can change abruptly, especially in a world with global shocks. The pandemic revealed how large global shocks can generate severe supply and demand imbalances that, in turn, can cause surprisingly persistent inflationary pressures across economies. However, these factors were underappreciated during the post-pandemic economic recovery. As a result, forecasts around the world under-predicted inflation. Forecasters may be able to do better in the

future by tracking new indicators regarding shortages, various sources of pressure on supply chains, and changes in the frequency of price adjustments, especially when price setters see an upside risk to inflation.

A second lesson is that credible inflation targeting is essential to keep longer-term inflation expectations anchored. Inflation targeting by central banks proved important during the post-pandemic economic recovery in achieving the monetary policy credibility that kept longer-term inflation expectations anchored. Recent research has provided support for this finding in both advanced and emerging economies. 5   And that is precisely why I am committed to supporting a monetary policy that keeps longer-term inflation expectations anchored.

## Conclusion

To summarize, I see the U.S. economy as still being in a solid position, but heightened uncertainty poses risks to both price stability and unemployment. I will continue to monitor developments closely as I consider monetary policy decisions. When making decisions, I think it has been valuable to remain a student of economic history. Our recent past has provided some useful lessons for decision-making during periods of high uncertainty and elevated risks to our dual-mandate goals.

Thank you. I look forward to our discussion.

- 1  The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.
- 2  See Ben S. Bernanke (2007), ""Monetary Policy under Uncertainty,""  speech delivered at the 32nd Annual Economic Policy Conference, Federal Reserve Bank of St. Louis (via videoconference), October 19, paragraph 19.
- 3  These numbers reflect inflation as measured by the personal consumption expenditures price index.
- 4  See Lisa D. Cook (2025), ""Opening Remarks on Productivity Dynamics,""  speech delivered at ""Finishing the Job and New Challenges,"" a monetary policy conference hosted by the Hoover Institution, Stanford University, Stanford, California, May 9.
- 5  For advanced economies, see Brent Bundick, A. Lee Smith, and Luca Van der Meer (2024),  ""Maintaining the Anchor: An Evaluation of Inflation Targeting in the Face of COVID-19,"" (PDF)  Research Working Paper 24-15 (Kansas City: Federal Reserve Bank of Kansas City, December). For Latin American emerging economies, see Patrice T. Robitaille, Tony Zhang, and Brent Weisberg (2024),  ""How Well-Anchored Are LongTerm Inflation Expectations in Latin America?""  FEDS Notes (Washington: Board of Governors of the Federal Reserve System, December 20).",Lisa D Cook
https://www.bis.org/review/r250603i.htm,Sarah Hunter: Joining the dots - exploring Australia's economic links with the world economy,"Speech by Ms Sarah Hunter, Assistant Governor (Economic) of the Reserve Bank of Australia, at the Economic Society of Australia (Queensland) Business Lunch, Brisbane, 3 June 2025.",2025-06-03 00:00:00,"

## Speech

## Joining the Dots: Exploring Australia's Economic Links With the World Economy

## Sarah Hunter

Assistant Governor (Economic)

Economic Society of Australia (Queensland) Business Lunch

Brisbane - 3 June 2025

## Introduction

I'd like to begin by acknowledging the Traditional Owners of the land on which we meet today, the Yuggera and Turrbal people of Meanjin and pay my respects to Elders past and present.

And thank you to the Economic Society of Australia [Queensland Branch] for giving me this opportunity to talk to all of you.

I'm sure many are familiar with the Lenin quote 'There are decades where nothing happens; and there are weeks where decades happen'. It certainly feels like the last few months fit into the latter category. The broad-based nature of the proposed US tariffs, retaliation from major partners and other policy shifts all have the potential to structurally alter the world economy. As recently discussed by our Deputy Governor Andrew Hauser, what happens overseas matters for the Australian economy and is therefore a key factor in monetary policy settings. 1 ƃ Ƅ

In the recently released Statement on Monetary Policy (SMP) we outlined our thinking on how recent developments will influence the Australian economy. To help us understand the implications for Australia, we have developed a framework that captures the key transmission channels and combined this with a set of alternative scenarios that flex key assumptions and judgements. Together they underpin our thinking about how this environment will flow through the global economy and how Australia is exposed. The key transmission channels we have identified are:

- Trade flows between countries are likely to realign, and over time multinational businesses could start moving production to different countries.
- Households and businesses in the countries that apply tariffs are likely to change what they consume, as some products become relatively more expensive, and as prices change more generally.
- Until it's clearer where policy will settle, businesses and households are likely to become (understandably) more cautious, and potentially delay major decisions such as capital investment.
- Fiscal and monetary policy can respond, potentially helping to offset adverse impacts.
- Financial markets will respond by repricing all assets including equities, bonds, commodity prices and exchange rates. These moves impact financial conditions, which further impact firms' and households' decisions.

I will now discuss these channels in more detail, including how they are embodied in the scenarios in the May SMP.

## Tariff policy and global trade flows

Economic theory and evidence suggest that higher global tariffs will put a drag on the global economy. This is true in both the short and long run, though here I'll focus on the short run as that is what is most relevant for monetary policy. [  2]

For the country imposing them, tariffs are a tax on imports. In the short term, this makes imported goods more expensive and pushes up domestic prices, to the extent the tariff is not offset by lower profit margins in overseas producers and exchange rate adjustments. Higher import prices will mean less imports and shifts in demand towards locally produced products. But it takes time for domestic businesses to invest and expand, and for some products (such as raw materials) it may not be possible for domestic production to fill the gap. This means prices are likely to remain higher in the near term, which will reduce households' purchasing power and therefore drag on business incentives to invest. [  3]

Collectively, domestic demand in the tariff-imposing country falls, all else equal. If households expect the tariffs to have a sustained effect on economic growth, and so their future incomes, they may also cut back further on spending today. For the countries that are subject to higher tariffs, they will weigh on export demand and in turn their broader economic conditions. Domestic stimulus may offset some of these effects; in the May SMP our baseline scenario assumes that China will support its economy through expansionary fiscal policy. But for both sets of countries, any net weakening in demand growth will spill over to their trading partners. [  4]

Overall weaker global growth would put near-term downward pressure on the prices of globally traded goods. For countries that are not imposing higher tariffs, such as Australia, this could flow into import prices, making products cheaper and lowering inflation. In the current episode, this 'trade diversion' channel could be amplified by the nature of the changes, in particular the US authorities' focus on China. As a lynchpin of the global manufacturing supply chain, Chinese goods represent a large share of imports for many countries (including Australia). With the US market harder to access, Chinese producers could lower their prices and try to redirect their products to other markets.

But working in the other direction, the broad-based nature of the increase in tariffs and increased use of non-tariff barriers such as export bans could create a new bout of supply chain disruptions. By increasing the cost of intermediate inputs that cross borders, such as commodities, machinery and equipment and components, tariffs could potentially lift the cost of production globally. This could push up consumer prices in all countries, particularly for more complex products, such as cars, whose components are sourced from a wide range of countries.

Our current baseline scenario assumes that, overall, the weaker global growth environment will moderately dampen prices for tradable goods, all other things equal. That is, we expect weaker demand to outweigh the inflationary impact of any supply chain disruptions. We will be monitoring global trade flows and inflation data closely in the coming months to assess whether this judgement is correct.

## Uncertainty's drag on economic activity

Aside from the effects of changes to global trade that I've talked about so far, the unpredictability of where tariffs will settle and changes to other policy settings has the potential to create significant uncertainty, both around the nature of the policies themselves as well as their impact. And there is ample research showing that higher uncertainty can lead to declines in investment, output and employment. [  5]

Typically, higher uncertainty leads firms to delay decisions that are costly to reverse, like investment and hiring. This makes sense intuitively, because there is value in waiting to see how things are playing out before making a decision that is (at least partially) non-reversable - something often referred to as 'real options' value. These ideas are borne out in the historical data. Research suggests that the negative impacts of higher policy uncertainty - including trade policy - are largest for businesses, as they typically pull back on investment. Some studies find higher uncertainty also has a measurable impact on household consumption, but this is typically more modest.

Uncertainty is a bit of a slippery concept and there are lots of different ways of trying to measure it, but the graph below shows two (Graph 1). One - the global economic policy uncertainty index - is based on the number of news articles that talk about policy uncertainty. The other - the VIX - is a measure capturing how uncertain markets are about near-term equity prices. Both show a sharp rise in uncertainty recently, though the VIX index has declined in recent weeks. [  6]

If we see businesses and households respond as they have in the past, then the current level of uncertainty will weigh materially on global activity. But the unpredictability and unprecedented nature of the current situation makes it hard to be precise on the size of the impact. In the SMP we have tackled this by using alternative scenarios that capture smaller and larger responses to uncertainty. The baseline scenario assumes a relatively modest drag, the trade peace scenario no significant drag, and the trade war scenario a substantial pull back in activity. Going forward we will be monitoring carefully which assumption is closest to how things unfold.

Graph 1



## Financial markets' response

This brings us neatly to financial markets. Movements in global asset prices after the United States announced its tariffs on April 2 capture how financial market participants initially evaluated their likely impact, and these movements broadly aligned with the channels I've already discussed. Equity prices declined sharply - particularly in the United States - at least in part reflecting expectations for the direct impact of the tariffs and the indirect impact via slower economic growth on company earnings. Expectations of lower future growth also meant that expectations for future central bank policy rates declined, which flowed through to bond yields (Graph 2).

Graph 2



At the same time, increased uncertainty and risk led investors to require larger risk premia to hold risky assets. This was reflected in increased spreads on corporate bonds, and some increases in equity risk premia that put further downward pressure on equity prices (Graph 3). In other words, investors wanted more compensation for holding riskier assets. [  7]

Some of these movements unwound in the following weeks after pauses in implementation of some tariffs. As of 30 May, financial market participants appear to be pricing in some downside risk to global growth, but they are no longer pricing in a material economic downturn. Consistent with this, expectations for central bank rate cuts have also been pared back.

Graph 3



Still, there remains a risk that further changes to tariffs or other policy settings, or actual economic outcomes prompt financial markets to downgrade the outlook, which leads risky asset prices to fall sharply. If this were to occur, it would lead to a more sustained tightening in financial conditions, which would make it more expensive for businesses in particular to borrow or raise funds for investment. This outcome is embodied in the trade war downside scenario we presented in the May SMP and is a significant amplifier of the initial shock generated by the sharp hike in tariffs.

## Exchange rates

One financial market that deserves some deeper discussion is the exchange rate. When the outlook for global growth weakens, the Australian dollar typically depreciates (falls in value) as investors expect our economy to be buffeted by the global headwinds and the RBA to respond with cuts to the cash rate.

This makes our exports cheaper in foreign currency terms, which offsets some of the effect of weaker global demand. [  8]

An additional driver of the Australian dollar in times of uncertainty is its status as a 'risk-sensitive' currency. When global investors are worried, they tend to focus on reducing risk exposure, moving their capital to low-risk assets in countries like the United States, Switzerland and Japan. This means the Australian dollar tends to lose value against these currencies, over and above the depreciation linked to weaker growth and expected cuts in the cash rate. This dynamic partly explains the movements during the global financial crisis (GFC) when the Australian dollar declined very sharply, even though the Australian economy was much less exposed to the global downturn (Graph 4).

Graph 4



While the initial response of the Australian dollar during the current episode was in line with historical experience, the recent recovery against the US dollar in particular has been more unusual (Graph 5).

The exchange rate has been volatile over recent months, but on a trade weighted basis is overall little changed in response to global events. It has appreciated against the US dollar (and therefore also the Chinese renminbi and other currencies pegged to the US dollar) but depreciated against most other major currencies.

This appears to reflect some offsetting factors. Concerns about the growth outlook and related 'riskoff' dynamics contributed to the Australian dollar's depreciation relative to several other currencies. But at the same time some investors have reduced their exposure to US assets, leading to broad US dollar weakness.

The weakness in the US dollar during a period of heightened risk is in contrast with many previous episodes, though it's too early to know whether this dynamic will continue. The return of the trade weighted index to its pre-shock value means that, on average, the price of our exports in foreign currency terms hasn't changed. But the relative move of capital towards Australian assets compared to the United States reflects an increase in capital inflows, which could support domestic investment activity. We'll be monitoring how these channels play out over time.

Graph 5



## The economy's exposure to the current episode

## Trade flows linkages

As previously outlined, when global conditions deteriorate and uncertainty increases Australia's exports typically benefit from the currency depreciating, as this improves competitiveness. Although this channel may be less pronounced than in other episodes, Australia's exporters are relatively well-placed to weather the storm.

The fundamentals underpinning our exports make it likely that in volume terms at least they'll be less impacted than other countries. Higher US tariffs on Australian exports are unlikely to have a material direct impact as Australian exports to the United States only account for around 1.5 per cent of Australian GDP, a low share compared with other countries (Graph 6). [  9]

## Graph 6



Furthermore, the structure and composition of Australia's exports will potentially provide an additional buffer to export volumes. Resources make up 75 per cent of Australian good exports, and despite the exposure of China and other resource intensive countries to the tariff shock, we might expect export volumes to remain resilient in the short run.

This is because Australia's resource export volumes are less sensitive to movements in global demand than other exports as we are a relatively low-cost producer of bulk commodities like iron ore. You can see this on this chart, where most Australian iron ore miners sit on the lower left end of the production cost curve (Graph 7). Short-run declines in commodity prices tend to lead to reduced volumes from other higher cost producers, while Australian producers feel the impact via lower prices and so earnings.

So far, the current episode has not seen a sharp correction in Australia's key commodity prices, underpinned by a relatively positive outlook for China. This view assumes that the Chinese authorities will support their economy through fiscal stimulus and is embodied in our baseline scenario, with the downside trade war scenario encapsulating a correction. If this were to occur the income flows from commodity exports would fall significantly.

Graph 7



By contrast, trade in services, which comprise around 20 per cent of Australian exports to the world, are more responsive to changes in global demand and the exchange rate. We can see this in the below chart, which shows historically how movements of services export volumes have correlated with changes in the real exchange rate, a measure of competitiveness (Graph 8). In the years following the GFC, the appreciation and depreciation in the exchange rate contributed to a decline and then strong rebound in services export volumes. [  10] [  11]

Trade in services tends to react more strongly because some exported services tend to be easier to substitute and more discretionary. Travel services, for example tourism, are a key Australian export that might be affected by recent developments. Weaker global growth is likely to dampen demand, but any exchange rate depreciation will make Australia a more attractive destination. Simultaneously, travel service imports (i.e. outward tourism) may decline if the Australian dollar depreciates; holidaying overseas will become more expensive than taking a trip locally.

Graph 8



Uncertainty dampener on households and businesses

While key parts of Australia's export volumes may be relatively resilient to global demand conditions and uncertainty, domestic demand is unlikely to be completely insulated. As discussed earlier, greater uncertainty about the future can lead households and businesses to save instead of spending and investing, and this is likely to be the case for Australian households and businesses too. And increased borrowing costs and risk premia in global financial markets are likely to spill into domestic markets, further weighing on activity.

Previous research by RBA economist Angus Moore found exactly this. Higher global uncertainty has a large negative effect on Australian business investment, while the negative effect on consumption is more modest (Graph 9). Though the magnitude of these effects is itself very uncertain, this does suggest that global uncertainty may weigh substantially on domestic activity if uncertainty remains elevated. As with all of the other channels, we explore different assumptions for the size of this channel in the scenarios in the May SMP. [  12]

Graph 9



## Putting it all together for policy

So how will the current unpredictable and uncertain global environment transmit through to the Australian economy? The short answer is we can't be completely sure. The framework I have outlined identifies what we think are the key transmission channels, and we have used scenarios to simulate different alternatives. Within this range, the baseline forecast is for recent global developments to contribute to slower economic growth in Australia and a slightly weaker labour market. We also anticipate that, overall, the price of tradable goods will be slightly dampened. Together, these two outcomes mean that inflation is forecast to be a little lower than at the February SMP, settling around the midpoint of the 2-3 per cent target range.

This forecast is based on several judgements, and assumptions about the potency of the transmission channels I have discussed today. These include how tariff policies evolve, how fiscal and monetary authorities around the world respond, whether trade diversion reduces the price of imports or global supply chains become heavily disrupted, and how much uncertainty weighs on economic activity.

By using the framework and scenarios together we have anchored our thinking and cut through some of the uncertainty about the outlook. These were provided to the Monetary Policy Board to help inform their decision-making; taking all the information into account and considering the risks to the outlook, they decided to cut the cash rate by 25 basis points.

What will happen from here? Going forward, the RBA will continue to monitor domestic and international outcomes and global policy developments. Benchmarking these against the scenarios in the May SMP will help us identify the scenario that best reflects current conditions and the outlook, enabling the Board to adjust policy settings accordingly.

## Endnotes

- See Hauser A (2024) 'The Ghost of Christmas Yet To Come', Speech to the Australian Business Economists' Annual Dinner, Sydney, 11 December. [1]
- See, for example, Auclert A, M Rognlie and L Straub (2025), 'The Macroeconomics of Tariff Shocks', NBER Working Paper No 33726, which presents a theoretical model and discusses the conditions under which tariffs will be contractionary in the short term; Furceri D, SA Hannan, JD Ostry and AK Rose (2019), 'Macroeconomic Consequences of Tariffs', IMF Working Paper No 2019/009, which analyses the effects of tariffs over the medium term from 1963-2014. [2]
- In early 2025, US imports surged as businesses looked to beat the imposition of tariffs. This response is likely to unwind once the new regime has been put in place. [3]
- In the longer term, once the supply side of the economy has had time to adjust (and assuming tariffs are expected to remain at higher levels), tariffs are still likely to weigh on economic growth. But over this horizon, this would appear as a shift from imports to less efficient domestic production. That said, there may be other reasons a country may want to promote domestic production. [4]
- Londono, Ma and Wilson summarise the different varieties of economic uncertainty - including policy uncertainty - and the literature on their economic effects: Londono JM, S Ma and BA Wilson (2025), 'Costs of Rising Uncertainty', FEDS Notes, 24 April. See also Baker SR, N Bloom and SJ Davis (2016), 'Measuring Economic Policy Uncertainty', The Quarterly Journal of Economics, 131(4), pp 1593-1636 and Caldara D, M Iacoviello, P Molligo, A Prestipino and A Raffo (2020), 'The Economic Effects of Trade Policy Uncertainty', Journal of Monetary Economics, 109, pp 38-59, which develop measures of economic and trade policy uncertainty respectively and study their impacts on economic activity. [5]
- Deputy Governor Andrew Hauser spoke about the varieties of uncertainty and the challenge of quantifying them in his speech earlier this year: Hauser A (2025), 'Monetary Policy in a VUCA World', Speech to the Australian Financial Review Business Summit, Sydney, 5 March. [6]
- It's worth keeping in mind that standard measures of equity risk premia are imperfect. They tend to rely on lagged measures of expected earnings. Moreover, standard approaches estimate them as the gap between the required return on equity and the return on government bonds, which are assumed to be riskless. But recent events have potentially seen risk premia on US bonds increase. This would lead to an understatement of the increase in the equity risk premia. [7]
- There is a large body of research undertaken by the RBA and elsewhere that has shown that the floating exchange rate typically absorbs a great deal of the effect of global shocks over the past 40 years, meaning smaller effects on activity. See as one recent example Hendy P and B Beckers (2024), 'How Do Global Shocks Affect Australia?', Research Discussion Paper No 2024-10. See also Stevens G (2013), 'The Australian Dollar: Thirty Years of Floating', Speech to the Australian Business Economists' Annual Dinner, Sydney, 21 November; Debelle G and Plumb M (2006), 'The Evolution of Exchange Rate Policy and Capital Controls in Australia', Asian Economic Papers, 5(2), pp 7-29. [8]
- There will also be limited effect on indirect demand for Australian exports from higher US tariffs on other countries, as accounting for this indirect demand only raises Australia's export exposure to the United States to a little over 2.25 per cent of Australian GDP. [9]
- This services export share can be as large as 25 per cent under different accounting frameworks, such as when the share includes the price of getting exports to destination. [10]
- Cole and Nightingale identified the relative responsiveness of services exports to exchange rate movements: Cole D and S Nightingale (2016), 'Sensitivity of Australian Trade to the Exchange Rate', RBA Bulletin, September. Through the years following the GFC, a number of other elements played into the strong rise in resource exports - namely strong demand from China, which drove both exports and the exchange rate. [11]

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The Reserve Bank of Australia acknowledges the Aboriginal and Torres Strait Islander Peoples of Australia as the Traditional Custodians of this land, and recognises their continuing connection to country. We pay our respects to their Elders, past and present. Aboriginal and Torres Strait Islander peoples should be aware that this website may contain the names, images and voices of people who are now deceased.",Sarah Hunter
https://www.bis.org/review/r250602b.htm,Adriana D Kugler: Opening remarks,"Opening remarks by Ms Adriana D Kugler, Member of the Board of Governors of the Federal Reserve System, at the 2025 Federal Reserve Board Macro-Finance Workshop, Washington DC, 29 May 2025.",2025-05-29 00:00:00,"## Adriana D Kugler: Opening remarks

Opening remarks by Ms Adriana D Kugler, Member of the Board of Governors of the Federal Reserve System, at the 2025 Federal Reserve Board Macro-Finance Workshop, Washington DC, 29 May 2025.

* * *

Thank you, Olesya, and thank you for the invitation to speak to you today. It is such a pleasure to contribute to this conference.

Our profession has increasingly recognized, especially after the Global Financial Crisis, that research in the interdisciplinary topics between macroeconomics and finance is indispensable both for monetary policy and for promoting financial stability. As a researcher myself, and having spent many years in academia, I place great value on the social contribution of research and its potential to improve policymaking.

I want to express my appreciation for your efforts in using macro-financial data and theoretical models to enlighten us on several critical issues. For instance, let me cite a few topics of the conference that shed light on important issues:

- The work on the transmission of monetary policy to both households and firms provides insights into how policy decisions ripple through the economy, a topic I recently addressed in a speech at the University of Minnesota. In this speech, I discussed my approach to monitoring monetary policy transmission and highlighted some of its key elements, such as the long and variable lags associated with policy effects.
- The exploration of the neutral rate of interest-that which neither slows nor stimulates economic activity-provides another angle to this important concept. This is a topic I have addressed in previous remarks, and I am especially interested in the potential factors that can affect the neutral rate.
- The work on how and why financial conditions faced by firms and households change with data releases and underlying macroeconomic conditions also enhances our grasp of the complex interplay between economic indicators and real-world financial experiences.
- The research on the functioning of the Treasury securities market and how it is affected by regulatory constraints sheds light on a crucial aspect of our financial system.

I commend you for pushing ahead with a research agenda that furthers our understanding of topics so relevant to our monetary policymaking.

In the spirit of stimulating your research appetite, I'd like to mention some topics that have captured my attention recently. These represent emerging challenges and opportunities in the field, and I believe they warrant further investigation.

First, recently, I have been paying attention to the possible interaction between the financial vulnerabilities of firms and their exposure to trade. As global economic tensions rise and supply chains evolve, understanding how a company's financial health intersects with its international trade exposure becomes increasingly crucial. This

research could provide valuable insights for both policymakers and business leaders navigating an uncertain global economic landscape.

Second, lately, I have been monitoring the financial stability implications of the potential lower desirability of U.S. financial assets in flight-to-safety events. Traditionally, U.S. assets have been seen as a safe haven during times of global economic uncertainty. One notable example of this was during the Global Financial Crisis. However, we recently saw instances in which the VIX went up, stock prices went down, long-term yields from U.S. Treasury securities went up, and the U.S. dollar depreciated against the currencies of advanced foreign economies (AFEs), with a notable role for the euro. Importantly, the historical relationships and the observed moves in the VIX and interest rates of AFEs would have been associated with a decrease in long-term yields from U. S. Treasury securities and an appreciation of the dollar. As the global economic landscape shifts, it is crucial to examine how possible changes in the role of U.S. financial assets as a safe haven might affect financial stability both domestically and internationally.

Lastly, I have been keenly interested, for some time now, in how stresses in the commercial real estate (CRE) sector could potentially spill over to the rest of the U.S. economy. The CRE sector continues to face challenges from low vacancy rates and valuation losses, especially in urban centers for the office sector. Another challenge is that some banks, insurers, and securitization vehicles continued to have concentrated exposures to CRE. As we have seen in past crises, such as the Global Financial Crisis, vulnerabilities in specific sectors can have far-reaching consequences for the financial system. Understanding potential vulnerabilities and potential domino effects are vital for maintaining overall economic stability and crafting preemptive policies.

These, I believe, represent some of the most pressing questions facing our field today. They offer rich opportunities for groundbreaking research that could significantly influence future policy decisions.

In conclusion, I want to reiterate my gratitude for the vital work you are all doing. Your research not only advances our understanding, but it also provides a solid foundation for informed policymaking. As we navigate the complex interplay of macroeconomics and finance in an ever-changing global landscape, the importance of your work cannot be overstated.

I encourage you to continue pushing the boundaries of our knowledge, to ask the difficult questions, and to pursue the answers with rigor and dedication. Your efforts today will shape the policies of tomorrow, influencing the economic well-being of millions.

Thank you for your attention, and I look forward to the insightful discussions and presentations that will unfold during this conference.",Adriana D Kugler
https://www.bis.org/review/r250528e.htm,Denis Beau: How to make European financial integration a strategic strength in which European citizens play a key role,"Keynote speech by Mr Denis Beau, First Deputy Governor of the Bank of France, at the 36th International Master Thesis Competition in Economics and Finance (CIMEF) Prize Ceremony, Paris, 7 May 2025.",2025-05-07 00:00:00,"## Denis Beau: How to make European financial integration a strategic strength in which European citizens play a key role

Keynote speech by Mr Denis Beau, First Deputy Governor of the Bank of France, at the 36th International Master Thesis Competition in Economics and Finance (CIMEF) Prize Ceremony, Paris, 7 May 2025.

* * *

Ladies and gentlemen,

It is a pleasure to welcome you to the Banque de France for this award ceremony for the 36 th   international economics and finance dissertation competition. Before going on to highlight the best dissertations and the most original work selected by the jury this year, I would like to specifically address all the students.

As you start or prepare to start your professional life, I want to share with you a perspective and two certainties, which I hope could help you in the early years of your career and, maybe, beyond. (I) The perspective is that of a threshold between two eras. This eventually represents an opportunity and a responsibility. To make the most of the situation, I am convinced we need to change our mindset (II), first, to finally make financial integration a strategic strength for Europe, and second (III), to make Europeans masters of their own destiny rather than passive bystanders to a technocratic project.

## I. Standing at the threshold of a new era: taking the challenges seriously and seizing the opportunities

I shall start with the analysis. It has become something of a clichØ - but that does not make it any less true: we are on the verge of a new era.

Over the past 15 years, since the outbreak of the Great Financial Crisis, we have rediscovered the vital importance - as well as the fragility - of our financial systems, our economies, our democracies, of peace in Europe, of the climate and our ecosystemsthe list goes on.

In a world that is changing before our very eyes, one thing is clear: Europe risks being left behind. Our economy is lagging in terms of growth, productivity and innovation. Between 1999 and 2024, GDP per capita grew by a cumulative 46% in the United States, compared with 30% in the euro area. As a share of GDP, European firms invest half as much in research and development (R&amp;D) as their US counterparts.

Reversing this loss of speed and returning to growth, innovation and productivity is the first of three interdependent challenges we need to meet in the very near term. We also finally need to build our European sovereignty and strategic autonomy, and move forward on the climate, environmental, digital and demographic transitions - which we must anticipate and support if we are to avoid merely suffering the consequences.

The amount of investment needed to face up to the challenges is massive: if we add ""ReArm Europe"" to Draghi's famous figures, the EU will have to invest an additional EUR 900 billion per year up to 2030. That's over 5% of our GDP.

## II. Changing our European mindset: placing the ends rather than the means at the heart of the European financial integration agenda

Meeting these challenges calls for huge efforts from each of us. From my perspective as a central banker, let me focus on the special role finance has to play in Europe's response: for the past 50 years, we have worked steadily to build a European single market, notably for financial services, helped by powerful catalysts such as the creation of the single currency and ESAs, the establishment of the Banking Union and the SSM, and the current Capital Markets Union project.

Each of these initiatives represents real progress. However, throughout these years, our mindset has remained primarily institutional, and basically bureaucratic.

For Europe to achieve full financial integration and reap all of its rewards - especially at a time the risk of a profound fracturing of the financial landscape has never been greater with the potential reconfiguration unleashed by the new US administration's policy change - it seems appropriate to adopt a more ""substantial"" approach, to make the European financial system not just something that needs to be regulated, but rather an asset for the European economy.

To achieve this, in his recent Letter to the , the President of the French Republic Governor of the Banque de France firmly underlined the need to take concrete steps, backed by sufficient EU consensus, in three main areas: reducing market fragmentation, investing better and innovating faster.

At the heart of these three priorities is the Savings and Investments Union: its aim is to create a single market for financing that will improve the allocation of savings by exploiting the complementarity between the Banking Union and Capital Markets Union - because it's clear that bank and market financing remain overly fragmented by national borders.

We also, I think, need to shift from an obligation of means to an obligation of results. The projects we need to carry out are nothing new, but the approach is very different. Up to now, the European agenda has primarily been conceived as a regulatory one, on the basis that this is sufficient to achieve a final result for which we are not accountable. But public action is more than simply drafting legislation. It must be based on a clearly stated intent, have an explicit ambition, and achieve concrete results for which it remains fully accountable.

Let me illustrate this with three examples:

The first concerns the regulatory framework for the financial system. It is vital that it be simplified. Over time, our institutional approach and the primacy given to regulation have led to an excess of red tape and inconsistencies. It is possible to revisit this regulatory framework to make it more efficient and agile, without undermining the

objectives pursued, which, on the whole, have been met - and so without being dragged into a regulatory race to the bottom by the new US administration.

A prime example of this is the proposed ESG regulations recently submitted by the Commission with the Omnibus Directive project, and which the Banque de France largely supports.

Another obvious candidate for simplification is the entire bank prudential framework its microprudential, macroprudential and resolution rules - where examples of overcomplexity, redundancy and overlapping international standards abound. The framework has become labyrinthine, and even the specialists get lost - to say nothing of the institutional challenges that make it impossible to take a holistic view of bank capital requirements and their appropriate level.

A second example is the equity financing of the European economy. We have all the instruments we need - from venture capital to equity markets - but none of them are on a sufficient scale. We particularly need to make better use of European long-term investors, who together are regarded as leading players in global financial markets, but struggle to make up sufficient mass. This can be achieved through the revision of the Solvency II Directive, and by using national and European public financial institutions more effectively to develop public-private partnerships.

My last example relates to market infrastructures. We need to adapt our European infrastructures to the wave of technological innovations currently being deployed, based on distributed ledger technology and asset tokenisation. Our first objective is to develop a wholesale central bank digital currency (wCBDC) for use by market participants, followed by a CBDC for everyday retail payments (digital euro). Then, in the medium term, we need to develop a European unified ledger to modernise securities transactions. The US authorities' recent announcements in support of crypto-assets and stablecoins make it even more vital we complete this project, to maintain our monetary and financial sovereignty in the new world we are entering. The goal now is to move as quickly as possible from experimentation to operationalisation. Rest assured that the Banque de France and other Eurosystem central banks are working very actively and resolutely to complete this project.

## III. We should not neglect the human side: savers and financiers as stakeholders

One of the keys to deepening our European financial integration is to make things simpler and more strategic - scaling down to half a dozen objectives with clear purposes and impacts rather than having an action plan with 36 highly technocratic projects.

But there is another challenge that is often overlooked: the human aspect of the project, since nothing can be achieved without mobilising our fellow citizens. In this case, it means mobilising savers and financial professionals.

In France, and probably other European jurisdictions, things in this area are far from optimal. The regulations are well-meaning, but at the very least overly complex, and in some respects treat savers like children, while also encouraging intermediaries to take

a by-the-book approach to customer interests rather than genuinely seeking to do what's best for them. More generally, they tend to treat the symptoms rather than looking for actual causes - one of the main ones being financial illiteracy, a phenomenon that has been well-documented and leads to sub-optimal outcomes in terms of household wealth management (reduced returns) and for the financing of the economy (a relatively risk-averse supply of financing).

To help resolve this situation, the Banque de France intends to fully play its role as the national steering body for financial education - a task entrusted to it by public authorities - and provide explanations, training and guidance. I would like to commend EDUCFI for its work providing accessible educational content for all audiences, to help them better understand money, savings, loans and the risk of scams. I encourage you to tell people about these resources and to use them as much as possible: they are an important lever for spreading economic knowledge.

But we must go further. Improving financial education means giving everyone the means to understand their choices, protect their savings and make a bigger contribution - indirectly but effectively - to the financing of the economy. This is a prerequisite for social justice, economic efficiency and citizenship.

To conclude, I would like to make a wish for you, as students about to embark on your careers. You will be the ones making tomorrow's European financial sector a vibrant and effective financial system. May you always remain committed to the interests of your clients and have a broad understanding of the challenges we collectively face. Behind your profession lies a mission that is essential to our society. The quality of your work will also make a difference to the future of Europe and Europeans.",Denis Beau
https://www.bis.org/review/r250603h.htm,Jerome H Powell: Opening remarks ,"Opening remarks by Mr Jerome H Powell, Chair of the Board of Governors of the Federal Reserve System, at the Division of International Finance 75th Anniversary Conference, Federal Reserve Board, Washington DC, 2 June 2025.",2025-06-02 00:00:00,"## Jerome H Powell: Opening remarks

Opening remarks by Mr Jerome H Powell, Chair of the Board of Governors of the Federal Reserve System, at the Division of International Finance 75th Anniversary Conference, Federal Reserve Board, Washington DC, 2 June 2025.

* * *

Thank you, Beth Anne.

I want to start by offering my condolences to the family and friends of former Vice Chair Stanley Fischer. Stan was a colleague of ours at the Fed, and a giant in the field of international economics. In addition to reaching the highest levels of the field in his own right, he was a trusted and generous mentor and teacher to a generation of the most important economic thinkers, including many heads of global central banks, advisers to presidents, and countless economists. We will miss him.

Congratulations to Division of International Finance (IF) on 75 years of outstanding work in service to the Federal Reserve Board and, by extension, to all Americans. Many current staff members are here to celebrate today, as well as a number of IF alumni, including past division directors Ted Truman, Karen Johnson, Nathan Sheets, and Steve Kamin. The division has produced many other notable alums, including Chair and Secretary Janet Yellen; professor, author, chess grandmaster, and our keynote speaker, Ken Rogoff; and humanitarian and economist Albert Hirschman, famous for the Herfindahl-Hirschman Index and more recently as a character in Netflix's to name just a few. Transatlantic,

In my time at the Fed, the IF division has provided invaluable insight into global economic activity, international trade and capital flows, and developments in foreign financial markets. Division staff have also played a key role during episodes of global financial stress. And your research and analysis are critical inputs into our monetary policy decisions. Thank you to all that have served in this division over the past 75 years. Today I will kick off this conference by briefly reviewing why the division was created and highlighting a few of its many accomplishments over the years, before turning you over to a robust set of presentations and panels.

## New Era for Global Economy

The IF division was created on July 1, 1950, but the idea began to germinate a few years earlier. The U.S. emerged from World War II as a global economic superpower. The Bretton Woods Agreement placed the U.S., and the Fed, in a central position in the global economy. Our mission then, as it is now, was to serve the American people. But it was clear at that moment that the Fed needed to have better knowledge of global developments to achieve our dual-mandate goals.

A 1948 memo proposing to create this division stated, ""Problems of international economics and finance have become increasingly large, complex, and significant in

recent years, and our foreign economic relations will undoubtedly continue to give rise to issues of the first magnitude."" That is the rare economic forecast that turned out to be spot on!

Seventy-five years later, it remains critical that the Fed understand the policies and practices of other governments and central banks, and their implications for the U.S. economy and financial markets. Exchange rate policy, of course, is now firmly in the hands of the U.S. Treasury. However, the end of the Bretton Woods era in the 1970s fundamentally changed the conduct of monetary policy, as policymakers had to understand the effects of potentially more volatile movements of the U.S. dollar on American families and businesses.

Understanding global trade and capital movements has only grown in importance since 1950, as we saw during the pandemic. The IF division helps produce the data on international capital flows, and has spent decades researching the effects of these flows and international trade on U.S. and foreign economies. Understanding this complex and interconnected web is essential for us to anticipate the path of employment and inflation.

Another important development in the 1970s was the increasing use of macroeconomic modeling, which greatly influenced the division's work. Under the direction of former Division Director Ralph Bryant, IF developed its first multicountry model. Always on the forefront, over the years, economists in the division-many of whom are in this room today-developed increasingly sophisticated models, with each new generation expanding the capability to tackle the international risks and issues of the day. These models have proven useful for understanding how international shocks transmit through the economy and financial markets, for assessing risks and uncertainties through alternative scenarios, and for better comprehending the implications of various shocks for the U.S. and global economy. The results have informed research papers, Board memos and briefings, as well as the risks and uncertainty assessment that Federal Open Market Committee members receive in advance of every meeting.

## Prepared for Crisis

The IF division has also played an important role in responding to global economic turbulence. A prime example is the Latin American debt crisis of the 1980s. That episode required analytical thinking about the macroeconomic repercussions of the crisis as it played out around the world. Work by division, and by the International Monetary Fund and other institutions, led to the establishment of emergency facilities to prevent more dire financial outcomes. As global capital flows increased, other episodes of financial distress surfaced across the world, including in Mexico, Asia, and Russia. International capital flows and spillovers became, and remain, a recurrent feature in the division's analytical and monitoring work.

The expertise generated through study and response to those global challenges proved invaluable when stress hit closer to home during the Global Financial Crisis and the pandemic. Both of those events required immediate, broad, and, in many cases, unprecedented responses to avoid disrupting the availability of credit to American households and businesses. The nation, and the world, looked to the Federal Reserve to lead in these moments. During the Global Financial Crisis, when global funding markets came under stress, the IF division worked to establish swap line arrangements

with several major central banks that helped restore stability in U.S. dollar funding markets. And during the pandemic, the IF division helped lead efforts to expand the provision of dollar liquidity by setting up the FIMA Repo Facility. 1

These periods of acute financial stress and uncertainty prompted the division to develop new tools and analytical products that could be used to understand and respond to the events unfolding on the ground. For instance, the division has devised new methods to measure and assess the effect of various types of uncertainty on economic activity, including new indexes that were built to track geopolitical risk, inflation, trade policy, and economic uncertainty. As we continue to navigate the current period of heightened uncertainty, this work is critical to understanding the quantitative implications of uncertainty shocks.

## Conclusion

I will conclude by saying that, for 75 years, nine Fed chairs and countless Board members have greatly benefited from the guidance and counsel of IF staff-and not just when responding to crisis. This team helps assure we are well prepared for our international engagements, by providing detailed materials ahead of time and often by traveling with us. IF staff are always welcome and productive companions. In these and other endeavors, we benefit from the robust relationships you establish and maintain with our global counterparts.

Thank you to Beth Anne and all the staff here that organized this wonderful event. And, finally, thank you again to all the current and former IF staff for what you have done and continue to do to help us be a globally knowledgeable and responsive central bank, so that we can deliver on our dual mandate for all Americans.

1  Foreign and International Monetary Authorities Repo Facility.",Jerome H Powell
https://www.bis.org/review/r250604a.htm,"Kazuo Ueda: Economic activity and prices, and monetary policy in Japan","Speech by Mr Kazuo Ueda, Governor of the Bank of Japan, at a meeting held by the Naigai Josei Chosa Kai (Research Institute of Japan), Tokyo, 3 June 2025.",2025-06-03 00:00:00,"

J u n e 3 , 2 0 2 5

Bank  of  Japan

## Economic Activity and Prices, and Monetary Policy in Japan

Speech at a Meeting Held by the Naigai Josei Chosa Kai (Research Institute of Japan)

## UEDA Kazuo

Governor of the Bank of Japan

(English translation based on the Japanese original)

## Introduction

Thank you for the opportunity to speak today at the Naigai Josei Chosa Kai. It was two years ago at this event that I gave my first speech after becoming Governor of the Bank of Japan. In that speech, I stated that I would endeavor to make logical decisions and provide explanations as clearly  as  possible  in  fulfilling  my  duties  as  Governor.  Moreover,  with  a view  to  carrying  out  the  Bank's  mandate  of  achieving  price  stability,  I  highlighted  the importance of carefully supporting ""nascent developments,"" which were finally in sight at that time, in maturing toward achieving the price stability target of 2 percent.

Fortunately, Japan's economic activity and prices have continued to improve since then, and the  ""nascent  developments""  toward  achieving  the  2  percent  target  have  steadily  gained momentum, accompanied by wage increases. In March 2024, the Bank judged it was within sight that the price stability target of 2 percent would be achieved in a sustainable and stable manner, and changed its large-scale monetary easing framework, which had lasted for over a  decade.  Thereafter,  it  adjusted  the  degree  of  monetary  accommodation  by  raising  the policy interest rate in July 2024 and again in January 2025.

However, the scale of the tariffs announced by the U.S. administration since early spring of this year was considerably larger than what many people had expected, and the environment surrounding  economic  activity  and  prices  at  home  and  abroad  is  changing  significantly. While the environment surrounding Japan's economic activity and prices also has become increasingly complex, today I would like to return to what I stated as my intention when I spoke here two years ago and explain, as clearly as  possible, the Bank's view on Japan's economic activity and prices and its thinking on the conduct of monetary policy.

## I. The Impact of Trade Policies and Economic Activity and Prices

## The Impact of Trade Policies on Japan's Economy

Let me start by talking about the impact of U.S. tariff policy on Japan's economy.

Since February of this year, the United States has introduced a series of tariffs, starting with country-specific tariffs on China and other countries, then item-specific tariffs on steel and aluminum, automobiles, and other items, followed by reciprocal tariffs on many economies.

In  particular,  the  reciprocal  tariffs  announced  on  April  2  were  large-scale,  applying  to  a wide range of items, which is unprecedented for an advanced economy after World War II. According  to  staff  calculations  by  the  International  Monetary  Fund  (IMF)  shown  in  the left-hand graph of Chart 1, if the tariffs announced as of April 9 were to be implemented in full, the U.S. effective tariff rate, which had been around 2 percent, would rise significantly to a level of over 20 percent. With some economies launching retaliatory measures, indexes gauging uncertainty regarding trade policies, as shown in the right-hand graph, have also risen rapidly. Despite recent developments such as the United States and China reaching an agreement to substantially scale back tariff rates, there remains high uncertainty regarding economic activity and prices at home and abroad.

These  developments  in  trade  policies  will  exert  downward  pressure  on  Japan's  economy through several different channels.

The first channel is the decline in the price competitiveness of exported goods from Japan in the U.S. market. This channel has drawn much attention, receiving wide media coverage as a  direct  impact  of  U.S.  tariff  policy.  Please  take  a  look  at  Chart  2,  which  shows export-related  data.  Looking  at  the  left-hand  graph,  the  actual  figures  for  Japan's  real exports  have  been  solid  so  far,  and  it  is  likely  that  this  partly  reflects  front-loading  of exports in view of future tariff hikes. Going forward, if Japanese firms pass on the impact of tariff increases to selling prices in the United States, these firms risk losing market share to U.S. products, which would act to suppress overall exports from Japan. Indeed, the index for  Japanese  firms'  views  on  export  orders  shown  in  the  right-hand  graph  is  below  50, which is the threshold between an increase and decrease in new export orders. On the other hand, there may also be some Japanese firms that decide to adopt business strategies that keep  selling  prices  in  the  United  States  unchanged  and  absorb  the  impact  of  tariff  hikes themselves, accepting a deterioration in export profitability. In this case, the impact of tariff hikes on local sales and export volumes may be limited. However, the profits of these firms would come under downward pressure, which could have a negative impact on wage hikes and business fixed investment going forward.

The second channel is the decline in demand due to heightened uncertainty. Even though it receives  less  attention  than  the  first  channel,  this  second  channel  could  exert  downward pressure on Japan's economy at an earlier point in time. When uncertainties regarding tariff policies  are  as  high  as  seen  now,  firms  that  are  likely  to  be  affected  will  naturally  be cautious  about  various  investment  projects.  The  household  sector  will  also  have  an incentive to hold back on large purchases for the time being, such as purchases of durable goods  like  automobiles  and  household  electrical  appliances  or  of  housing,  to  prepare  for risks  such  as  a  future  economic  downturn.  In  fact,  looking  at  data  on  business  and household  sentiment  in  Chart  3,  figures  for  Japan  have  deteriorated  recently,  and  it  is possible  that  the  heightened  uncertainty  will  affect  the  spending  behavior  of  firms  and households. As for the extent to which the heightened uncertainty affects spending behavior, the  Bank  will  carefully  examine  revisions  in  firms'  business  fixed  investment  plans  for fiscal 2025 and other data in the next Tankan (Short-Term Economic Survey of Enterprises in Japan) to be released in July.

The  third  channel  is  the  impact  of  a  contraction  in  global  trade  activity  reflecting  a widespread  slowdown  in  the  global  economy.  The  tendency  to  put  off  spending  due  to heightened uncertainty that I just mentioned can be seen not only in Japan, but worldwide. Moreover, not only economies facing tariffs, but also the United States and other economies imposing tariffs are likely to experience a decline in  domestic demand, due to the rise in import prices and other factors. In particular, the decline in global demand for goods such as durable  goods  and  capital  goods,  which  typically  require  many  stages  in  the  production process,  could  be  amplified  through  global  supply  chains,  pushing  down  exports  and production  in  a  range  of  economies,  including  Japan.  In  this  regard,  the  IMF's World Economic Outlook (WEO) released in April projects that the real GDP growth rate of the global economy is likely to be lower than previously expected, dragged down by lackluster trade, as can be seen in the right-hand graph of Chart 4. In addition to such impact through trade  activity,  attention  is  warranted  on  the  possibility  that  the  slowdown  in  the  global economy will push down profits of Japanese firms through a decline in dividends from their overseas subsidiaries.

The fourth channel is financial and foreign exchange markets. The announcement of U.S. tariffs triggered a relatively large decline in global stock prices and a depreciation of U.S. dollar  through mid-April. Since then, stock prices and the U.S. dollar have rebounded to some degree, and volatility in global stock prices and foreign exchange rates has declined. That  said,  the  Bank  will  continue  to  pay  due  attention  to  developments  in  financial  and foreign exchange markets and their impact on Japan's economy.

## Outlook for Japan's Economic Activity and Prices

I have so far described the impact of U.S. tariff policy in detail. On this basis, I would now like to turn to the outlook for Japan's economic activity and prices.

As  I  mentioned,  recent  tariff  policies  will  exert  downward  pressure  on  Japan's  economy through  several  different  channels.  That  said,  the  Bank  currently  expects  that  Japan's economy  will  be  able  to  withstand  such  downward  pressure  and  that  the  mechanism  in which  wages  and  prices  rise  moderately  in  interaction  with  each  other  will  not  be interrupted. The reason is that high levels of corporate profits will act as a buffer, and that the  income  situation  for  households  has  also  become  more  resilient  due  to  the  economic recovery so far.

Please take a look at Chart 5. In recent years, Japan's corporate profits have remained at historically high levels on the whole, and therefore even if there were to be some downward pressure,  corporate  activity  would  not  be  significantly  restricted  in  terms  of  funding. Moreover, although the impact of tariff policies mentioned earlier is expected to be felt first mainly  in  manufacturing  and  among  exporting  firms,  firmness  in  nonmanufacturing  -which  accounts  for  about  80  percent  of  employment  in  Japan  --  is  expected  to  support Japan's  economic activity.  In  this  respect,  during  the  period  in  2019  when  trade  frictions between the United States and China escalated, Japan's exports and production activity in manufacturing inevitably experienced some  weakness;  on  the other hand, business performance  in  nonmanufacturing  remained  firm  and  a  strong  sense  of  labor  shortage persisted.  The  sense  of  labor  shortage  in  nonmanufacturing  has  strengthened  further recently  amid  the  heightened  labor  supply  constraints  reflecting  demographic  changes. Given  these  developments,  it  is  likely  that  labor  market  conditions  in  Japan  will  remain

tight and firms will maintain their active wage-setting behavior on the whole, despite the impact of tariff policies.

Let me now turn to prices. Recently, the year-on-year rate of increase in the consumer price index (CPI) for all items excluding fresh food has been at around 3.5 percent. As shown in Chart 6, the significant rise in food prices such as rice prices since autumn last  year has contributed  to  the  overall  increase.  Since  the  rise  in  food  prices  likely  largely  reflects cost-push factors such as higher prices of imported fertilizer and raw materials, as well as weather  conditions,  at  least  the  year-on-year  rate  of  increase  is  expected  to  decelerate. Central banks' monetary policies aim at achieving price stability through affecting overall demand, and not at changing the prices of particular goods or services. Moreover, it takes time for these policies to have an effect on the economy. Therefore, in achieving the price stability target of 2 percent, it is important to examine developments in underlying inflation, excluding the direct effects of cost-push factors. Unfortunately, there is no single indicator that pins down developments in underlying inflation. It is therefore necessary to carefully examine various price indicators, in addition to a range of information regarding economic activity and prices, including factors that underlie price developments such as labor market conditions and wage growth. With this in mind, based on the frequently used indicators of underlying inflation shown in Chart 7, it can be said that Japan's underlying inflation has risen  moderately  so  far.  Moreover,  the  CPI  figures  for  April  also  show  that  firms  have continued their moves to reflect higher costs -- including increased personnel expenses and distribution costs --in selling prices for a variety of items, in the form of ""beginning-of-the-period  price  hikes""  for  the  fiscal  year.  Of  course,  if  Japan's  economic growth were to moderate due to the impact of tariff policies, this would exert downward pressure  on  prices.  Nonetheless,  even  in  this  situation,  the  mechanism  that  I  touched  on earlier, in which wages and prices rise moderately in interaction with each other, is likely to remain  in  place.  Furthermore,  if  there  is  progress  in  bilateral  trade  negotiations  and uncertainties regarding trade policies recede, overseas economies are expected to return to a moderate  growth  path,  and  Japan's  economic  growth  rate  is  likely  to  rise.  Given  these factors, the  Bank  projects  that,  although  underlying  CPI  inflation  will  be  sluggish temporarily due to the deceleration in the economy, it will then rise again toward the price stability target of 2 percent.

## II. Risks Surrounding Trade Policies

So  far,  I  have  discussed  the  baseline  scenario  of  the  outlook  for  economic  activity  and prices in Japan, taking into account the impact of U.S. tariff policy. There are always upside and  downside  risks  to  the  baseline  scenario  of  the  outlook;  and  especially  when  there  is extremely high uncertainty as is currently the case, it is more necessary than ever to keep this in mind.

The  Bank's  baseline  scenario  of  the  outlook  that  I  have  explained  today  is  based  on assumptions including the following: negotiations on trade and other policies will progress to  some  extent,  and  a  severely  adverse  scenario  in  which  global  supply  chains  are significantly  disrupted  will  be  avoided.  Conversely,  if  these  assumptions  do  not  hold, the outlook could change considerably in either direction. Moreover, in addition to the future course  of  trade  policies,  there  is  also  significant  uncertainty  regarding  how  economic entities at home and abroad will respond to these policies, warranting due attention.

Taking  these  points  into  account,  I  would  like  to  point  to  three  risks  that  will  require particular attention going forward.

## Supply Chain Complexity

First,  as  global  supply  chains  have  become  more  sophisticated  in  recent  years,  their complexity has also increased, adding to the uncertainties surrounding the impact of tariff policies. Given that production networks across Asia are intricately intertwined, especially in  IT-related  industries,  if  unexpected  bottlenecks  emerge  and  ripple  through  the  entire supply chain, this could have a significant impact on Japan's exports and imports and on Japanese  firms'  business  activity.  Against  this  background,  it  is  necessary  to  carefully monitor the future course of negotiations not only between Japan and the United States, but also between the United States and other economies.

## Firms' Wage- and Price-Setting Behavior

Second, there is a risk that Japanese firms' wage- and price-setting behavior could change significantly due to the impact of trade policies. As in the outlook I mentioned earlier, firms are  projected  to  maintain  their  active  wage-  and  price-setting  behavior  as  labor  market

conditions remain tight. That said, attention is warranted on the possibility that actual price changes could shift the expectations and behavior of firms and households, through which the impact on future prices could be amplified.

Unlike  in  the  United  States  and  Europe,  where  inflation  expectations  are  anchored  at  2 percent, in Japan, wage- and price-setting behavior based on the assumption of moderate inflation  has  not  yet  fully  taken  hold  among  firms  and  in  society.  In  this  situation, if  the profits of exporting and global firms come under pressure due to the effects of tariff policies, it is necessary to closely monitor whether this will lead to pressure at those firms to restrain wages or pressure through the supply chain to cut costs. Conversely, if there are disruptions in global logistics, putting upward pressure on import prices, attention needs to be paid to the possibility that cost-push pressures could affect prices and even wages.

## The Future of Globalization

The third risk, from a longer-term perspective, concerns how U.S. tariff policy and the new international relationships formed as a result could affect the broader trend of globalization, which has underpinned global economic growth. Please look at Chart 8. As shown in the left-hand graph, both trade and foreign direct investment increased rapidly on a global basis from the end of the Cold War in the 1990s until the Global Financial Crisis in the late 2000s. Since then, global trade has continued to increase generally at the same pace as the global economy. As shown in the right-hand graph, Japanese firms have actively pursued foreign direct  investment  --  more  so  than  firms  in  other  economies  --  with  the  aim  of  building supply chains that reduce production costs and of tapping into local demand.

While  this  response  to  globalization  has  contributed  to  strengthening  the  profitability  of Japanese firms, it has also exposed them to a variety of risks. For example, while splitting production  processes  across  multiple  economies  helps  firms  contain  costs,  it  also  makes production  and  inventory  management  more  difficult.  These  vulnerabilities  have  become more apparent with the repeated supply chain disruptions since the COVID-19 pandemic. In addition,  events  such  as  Russia's  invasion  of  Ukraine  have  increasingly  drawn  global attention to economic security, and there have been cases in which this has affected both trade and firms' production activity around the world. As these trends continue, recent tariff

policies  may  serve  as  a  catalyst  for  firms  to  further  consider  the  configuration  of  their supply  chains,  resulting  in  major  changes  in  firms'  behavior,  especially  in  terms  of  their strategies on where they locate their production bases.

Of  course,  decisions  about  where  to  locate  production  bases  should  be  made  by  firms themselves in light of costs, benefits, and various risk factors. While the major changes in the global economic environment present new challenges that firms must overcome, Japan's economy has overcome a host of challenges in the past and managed to raise its growth potential with the proactive efforts of firms serving as the driving force. To promote such proactive  efforts  by  firms,  it  is  important  to  maintain  an  open,  fair  and  rules-based international economic order so that firms do not have to be overly concerned about risks stemming from international developments and other factors. This point was reaffirmed at the  International  Monetary  and  Financial  Committee  (IMFC)  meeting  that  I  attended  in April.  While  it  is  true  that  rapid  globalization  over  the  past  three  decades  has  created  a number of difficult  issues  regarding  the  distribution  of  the  gains  from  globalization,  it  is also  true  that  there  are  no  winners  in  the  increasing  fragmentation  and  decoupling  of  the global  economy.  It  is  essential  for  economies  to  redouble  their  efforts  to  build  a  better international economic order going forward. In this process, ensuring the stability of global financial and capital markets and the global financial system is also important. The Bank will continue to exchange information with other central banks and relevant parties at home and abroad as it works to address these issues within the scope of its mandate.

## III. The Bank's Conduct of Monetary Policy

## Future Conduct of Monetary Policy

Next, let me turn to the Bank's conduct of monetary policy.

As mentioned, the Bank currently expects that Japan's economy will be able to withstand the  downward  pressure  stemming  from  tariff  policies,  and  that  the  mechanism  in  which wages  and  prices  rise  moderately  in  interaction  with  each  other  will  not  be  interrupted. Although underlying CPI inflation is likely to be sluggish temporarily, there has been no change  in  the  general  direction  of  the  Bank's  outlook  that  underlying  CPI  inflation  is expected  to  increase  gradually  toward  2  percent.  However,  as  for  risks  to  the  baseline

scenario  of  the  outlook,  uncertainties  regarding  the  future  course  of  trade  policy  in  each jurisdiction  are  extremely  high,  and  it  is  therefore  necessary  to  pay  due  attention  to  the impact of trade policy on financial and foreign exchange markets and on Japan's economic activity  and  prices.  Although  recent  progress  in  trade  negotiations  --  particularly  the agreement between the United States and China to substantially scale back tariff rates  on each  other  --  is  perceived  as  a  positive  development  by  markets,  there  remain  high uncertainties. The Bank needs to examine these developments carefully and make decisions as appropriate regarding its monetary policy conduct.

In  doing  so,  it  is  important  to  recognize  that  financial  conditions  in  Japan  have  been accommodative.  Please  look  at  Chart  9.  Real  interest  rates  currently  are  significantly negative  --  even  more  so  than  during  the  period  of  large-scale  monetary  easing  --  partly because the Bank has cautiously adjusted the degree of monetary accommodation even as inflation expectations have risen moderately. Moreover, financial institutions have continued to take an active lending stance, and issuance conditions for corporate bonds have remained favorable on the whole. Such accommodative financial conditions have provided firm support for economic activity in Japan, even amid the effects of trade policies.

Based on these points, if Japan's underlying CPI inflation increases toward 2 percent, in line with  the  baseline  scenario  of  the  outlook,  the  Bank,  in  accordance  with  improvement  in economic activity and prices, will continue to raise the policy interest rate and adjust the degree  of  monetary  accommodation.  In  this  regard,  given  that  there  are  extremely  high uncertainties regarding the future course of trade policy in each jurisdiction and the impact of trade policy, the Bank will carefully examine factors such as developments in economic activity and prices as well as in financial markets at home and abroad, and judge whether the outlook will be realized, without any preconceptions.

## Interim  Assessment  of  the  Plan  for  the  Reduction  of  Japanese  Government  Bond Purchases

Finally, I would like to talk about Japanese government bond (JGB) purchases. In June last year, the Bank decided that it would reduce the amount of JGB purchases as part of its exit process from large-scale monetary easing. In July, the Bank decided on a plan to reduce the

purchase amount of JGBs over the period until March 2026, as shown in Chart 10, and has since been reducing purchases in line with the plan. The plan stipulates that, in principle, long-term interest rates are to be formed in financial markets, and that the Bank will reduce its purchase amount of JGBs in a predictable manner while allowing enough flexibility to support stability in the JGB markets. In terms of predictability, the current plan makes it clear in advance that the purchase amount of JGBs will be cut down by about 400 billion yen each calendar quarter through January-March 2026. At the same time, in order to ensure flexibility, the plan stipulates that, in the case of a rapid rise in long-term interest rates, the Bank will make nimble responses by, for example, increasing the amount of JGB purchases. In  addition,  specifics  such  as  the  purchase  amount  of  JGBs  by  residual  maturity  will  be decided on an operational level, taking account of market conditions at each point in time. Moreover, at the  Monetary  Policy  Meeting  (MPM)  to  be  held  this  month,  the  Bank  will conduct  an  interim  assessment  of  the  current  plan  and  discuss  a  guideline  for  its  JGB purchases from April 2026 and announce the results.

In view of the interim assessment, the Bank is currently reviewing the developments in and functioning of the JGB markets. As part of this, it held meetings in mid-May to exchange views with bond market participants, for which the minutes were released yesterday. Taking into account the discussions at the meetings, there are three key points regarding the interim assessment at this point.

First, the reduction of the purchase amount of JGBs has been having its intended effects of improving the functioning of the JGB markets so far. Many market participants pointed out that, although market liquidity declined temporarily from early spring due to the effects of tariff policies, the functioning of the JGB markets has been on an improving trend on the whole.  Thus,  there  are  only  limited  calls  for  modification  of  the  current  reduction  plan, which covers the period until March 2026. On this basis, given that the amount outstanding of the Bank's JGB holdings remains high, many market participants shared the recognition that  it  was  important  for  the  Bank  to  continue  making  efforts  to  further  improve  market functioning.

Second, in considering the plan from April 2026, it continues to be important to strike a balance between predictability and flexibility. From the viewpoint of ensuring predictability, it is appropriate for the Bank to announce in advance a plan that covers a certain period of time. On the other hand, given that the functioning of the JGB markets is still on its way to recovery and that price fluctuations  have  been  seen  since early  spring,  many  participants expressed the need for a framework that continues to ensure flexibility.

Third,  many  market  participants  expressed  the  view  that  it  would  be  appropriate  for  the Bank to continue to reduce its purchase amount of JGBs from April 2026. That said, there were  various  opinions  regarding  the  specific  pace  of  reduction.  Drawing from  the experience  of  the  reductions  so  far  and  taking  into  account  the  opinions  from  market participants, the Bank will discuss, at the next MPM, a guideline for its purchase amount of JGBs from April 2026.

## Concluding Remarks

I  have talked about the outlook for economic activity and prices in Japan and the Bank's thinking  on  monetary  policy  conduct  in  light  of  this  outlook.  As  I  mentioned  today, although  developments  in  trade  policies  since  early  spring  have  had  a  larger  impact  on Japan's economy than we had expected, the ""nascent developments"" toward achieving the 2 percent price stability target have continued to gain momentum.

Given that the uncertainties regarding trade policies are likely to remain high, the Bank will carefully  examine  a  range  of  data  and  information,  and  assess  the  outlook  for  economic activity and prices, the risks surrounding them, and the likelihood of realizing the outlook, without  any  preconceptions.  On  this  basis,  the  Bank  will  continue  to  conduct  monetary policy as appropriate from the perspective of sustainable and stable achievement of the 2 percent price stability target.

Thank you very much for your attention.

## Economic Activity and Prices, and Monetary Policy in Japan

Speech at a Meeting Held by the Naigai Josei Chosa Kai (Research Institute of Japan)

June 3, 2025

## UEDA Kazuo

Governor of the Bank of Japan

## Introduction

- I. The Impact of Trade Policies and Economic Activity and Prices
- II. Risks Surrounding Trade Policies
- III. The Bank's Conduct of Monetary Policy

Concluding Remarks

## Trade Policy

## U.S. Effective Tariff Rate

## Trade Policy Uncertainty Index



I. The Impact of Trade Policies and Economic Activity and Prices

Chart 2

## Exports

## Real Exports



New Export Orders PMI (Manufacturing)



- Notes: 1. In the left-hand chart, the latest figure is for 2025/Q2 (April).
2. In the right-hand chart, figures for Japan are the au Jibun Bank Japan Manufacturing PMI (new export orders PMI). The latest figures are for 2025/Q2 (the figure for Japan is the
- April-May average and that for the global PMI is for April).

Sources: Ministry of Finance; Bank of Japan; Copyright © 2025 by S&amp;P Global Market Intelligence, a division of S&amp;P Global Inc. All rights reserved.

## Business and Household Sentiment

## Business Sentiment

## Consumer Confidence





- Notes: 1. In the left-hand chart, figures are for the composite PMI (year-ahead outlook for output) for each economy. Those for Japan are the au Jibun Bank Japan Composite PMI. The dotted lines show the original data, and the solid lines show 3-month backward moving averages. The latest figures are for May 2025.
2. In the right-hand chart, figures are from the OECD. The latest figures are for April 2025.
- Sources: Copyright © 2025 by S&amp;P Global Market Intelligence, a division of S&amp;P Global Inc. All rights reserved; OECD.

I. The Impact of Trade Policies and Economic Activity and Prices

## Global Economy and Trade

## IMF Projections for Global Real Growth Rate

Revisions to the IMF's Projections

## 1. Projection for 2025

## 2. Projection for 2026



Note: In the left-hand chart, ""April 2025 projection"" shows the IMF's ""reference forecast"" in the April 2025 WEO. ""April 2025 projection (risk scenario)"" shows the range of projected outcomes should the upside and downside risks presented in the April 2025 WEO materialize.

3

Chart 4

## Corporate Profits and Labor Market Conditions

## Corporate Profits

## Employment Conditions DI



I. The Impact of Trade Policies and Economic Activity and Prices

Chart 6

## Inflation



## Indicators Related to Underlying Inflation

1. Price Indicators Excluding Highly Volatile Items



7

II. Risks Surrounding Trade Policies

Chart 8

## Globalization

## Global Trade and Outward Foreign Direct Investment (FDI)



## Outward FDI Stock



## Financial Conditions

## Real Interest Rate (1-Year)

## Lending Attitudes of Financial Institutions as Perceived by Firms





- Notes: 1. In the left-hand chart, figures for the real interest rate are calculated as government bond yields (1-year) minus the composite index of inflation expectations (staff estimates).

9

2. In the right-hand chart, figures are based on the Tankan and are for all industries. There is a discontinuity in the data for December 2003 due to a change in the survey framework. Sources: Bank of Japan; QUICK, ""QUICK Monthly Market Survey &lt;Bonds&gt;""; Consensus Economics Inc., ""Consensus Forecasts""; Bloomberg.

## Ⅲ. The Bank's Conduct of Monetary Policy

Chart 10

Plan for the Reduction of the Purchase Amount of JGBs (Decision at the July 2024 MPM)

## The concept of the plan for the reduction until March 2026

1. Long-term interest rates: to be formed in financial markets in principle
2. JGB purchases: appropriate for the Bank to reduce its purchase amount of JGBs in a predictable manner, while allowing enough flexibility to support stability in the JGB markets

## Reduction in a Predictable Manner





## Allowing Enough Flexibility

1. The Bank will conduct an interim assessment of the plan at the June 2025 MPM .
2. In the case of a rapid rise in long-term interest rates, the Bank will make nimble responses by, for example, increasing the amount of JGB purchases.
3. The Bank is prepared to amend the plan at the MPMs, if deemed necessary.",Kazuo Ueda
https://www.bis.org/review/r250602c.htm, Andrew Bailey: State of trade,"Speech by Mr Andrew Bailey, Governor of the Bank of England, at the Irish Association of Investment Managers Annual Dinner 2025, Dublin, 29 May 2025.",2025-05-29 00:00:00,"## Andrew Bailey: State of trade

Speech by Mr Andrew Bailey, Governor of the Bank of England, at the Irish Association of Investment Managers Annual Dinner 2025, Dublin, 29 May 2025.

* * *

It is a great pleasure to be in Dublin, and I want to start by thanking the Irish Association of Investment Managers for inviting me again to speak. I say again because I also have to begin with an apology, for standing you up last year at short notice when the General Election was called in the UK. And so, my other thanks is to my fellow Governor Gabriel, for stepping in last year when I withdrew at short notice.

Not much has happened in the last year. To keep it topical, I am going to use my time to talk about trade, both in goods and in financial services. This is not only topical but highly relevant, because Ireland and the UK are both open economies, with longestablished trade connections, and likewise strong connections in financial services.

Trade matters. It matters at both the economy-wide or macro level, and at the level of individual firms, the micro level. And, almost needless to say, the two are closely linked.

I am going to start by laying out key elements of the big picture, before moving on to talk about financial services. My starting point is two key elements of the macro dimension of trade. In many past times in talking about trade it would have been easy to pass over them, as points that are not contested. I think they need repeating today.

The first point is that trade supports output in the economy - and it is good for economic welfare. As I will come on to, there are important qualifications to this point, but they don't invalidate it. From Adam Smith onwards, it has broadly been accepted that trade supports specialisation and efficiency of production and it enables knowledge transfer, and these features support productivity and economic growth.

The second point is that we should not expect trade between countries to be in balance all of the time. The whole world should be in balance - because it is a closed system as we have not found and started trading with extra-terrestrial life yet. But as individual countries, we are not closed, as Ireland and the UK demonstrate. Unfortunately, the world's exports and imports don't usually equal each other, but that's down to our counting not ET.

However, since trade balances between countries don't balance - and they should not be expected to do so, - what determines the balances and patterns of trade? At the whole economy, or macro, level the answer is that trade is determined by the balance between a country's saving and investment - macroeconomic fundamentals. And, these are shaped by factors such as business conditions and cycles, productivity growth, savings behaviour, interest rates, fiscal policy choices and exchange rates. In other words, trade is an outcome of the big driving forces of economies, and if we want to affect trade patterns on a lasting basis, that's where we should look.

Well, up to a point, yes. I am conscious that what I have just said is a rather a textbook espousal of the case for free trade. No apologies, I do believe in free trade. But, I'm

also aware that things are not that simple - the story doesn't end there. Trade patterns are also shaped by national policies, particularly industrial policies, and by the rulesbased world trading system that seeks to set the guardrails for such policies.

Now, the argument, as I interpret it, of the US Administration is that those rules have been stretched beyond breaking point, and actions have to be taken to put this right.

As I read it, there are two parts to this argument.

The first is that the rules of the world trade system - based around the World Trade Organisation - have broken down, and are in need of reform. IMF staff have pointed to more use of industrial policies around the world in recent years, and argued that these should only be used for very limited domestic objectives such as local market failures, but that has not been the case of late, and that this practice will and has exacerbated trade tensions. More concretely, between 2009 and 2022 China implemented around 5,400 so-called subsidy policies, which were concentrated in priority sectors, i.e., ones that matter. This was equal to about two-thirds of all the subsidy measures adopted by G20 advanced economies combined.

The macro story on trade is influenced by what goes on at the micro level, and we can't see these two as distinct. There has been an increase in the use of industrial policies one country has been active on this front, but it's not alone.

The second point is around how the rules of engagement of the world trade system have come under pressure from new developments which have affected all of us. Let me briefly set out two which are closely linked. First, before the outbreak of Covid world trade had grown rapidly, more rapidly than world output, and in doing so the supply chains for final products had become much more complicated, but also efficient in the sense that they had exploited the benefits of trade.

This meant that a lot more of world trade comprised so-called intermediate goods inputs to the final product, but not the product itself. This exploited one of the longest standing principles of free trade - so-called comparative advantage. In other words, produce stuff where it is most efficient relatively speaking to do so, accepting that the relative point means that no country should specialise in everything. Over time, the trade system has become more and more refined - we have heard the phrase ""just in time delivery"". This was highly efficient, until it wasn't.

Covid dealt a blow to the efficiency of the trade system. Even though initial pandemicrelated supply chain disruption was resolved quite rapidly, as we recovered from Covid these trading patterns and systems did not return to normal as quickly and fully as we expected.

Why was that? There were no doubt a number of reasons, but a large one is the growth of national security concerns as a threat to the efficiency of trade. In reality, sadly, Russia's illegal war in Ukraine provided real evidence of the disruption that can happen, and is one factor behind a growing threat from national security to our assumptions on frictionless trade. To be clear, national security concerns are not a good reason to

retreat indiscriminately from global trade. The best way to ensure resilience to geopolitical risk is not by reshoring production, but by diversifying supply chains among reliable partners who abide by international law.

Viewed from the perspective of a central bank responsible for monetary policy, the inevitable conclusion is that we cannot assume that the supply sides of our economies behave as efficiently as they did before Covid. And this was a substantial cause of the very difficult upsurge in inflation.

I am going to conclude on broader trade with a number of points, and then say something on financial services. Four points strike me as very important on trade.

First, while I am an unshaken believer in free trade, I do accept that the system has come under too much strain, we have to work hard now to rebuild it, and it is incorrect to dismiss those who argue for restrictions on trade as just wrong-headed. We need to understand what lies behind these arguments. That said, I want to get back to an open trading system.

Second, to solve the issues we face, we need to look at the macro level - the big economic drivers that I mentioned earlier, and call out where and why we think there are unsustainable trade imbalances. We need to strengthen the IMF's surveillance in order to improve the process for calling out unsustainable trade imbalances. But we must also look at the micro-level - the rules based world trade system - and work out what we need to do to solve this problem and make it more effective again.

Third, if it is believed that tariff action is needed to create the shock and awe to get these issues on to the table and dealt with, then something has gone wrong with the multilateral system, and we need to deal with that.

Fourth, creating a sustainable world trading system matters to all of us. It matters to countries like Ireland and the UK, which are highly open economies, and have been throughout their development. And it matters to central bankers and economic policymakers because our jobs are much harder if we face more inflexible and uncertain supply side conditions in our economies, as we appear to do today.

Almost all of the attention in recent months in the area of trade has been on goods trade - tangible stuff. Tariffs are a tool whose use is largely confined to the world of goods trade. But, there are two other important features of the trade world. First, alongside trade in goods sits trade in services-intangibles. For the UK, the latest numbers indicate that the total volume of trade was made up of 54% goods and 46% services. For Ireland the numbers are 28% goods and 72% services.

Financial services are an important part of trade in services and particularly so for Ireland and the UK.

The second important feature of the trade world is that alongside tariffs sit non-tariff barriers. These are all sorts of obstacles to trade, some put in place deliberately, some are features with their origin in other objectives than affecting the flow of trade, and others which are just there who knows why. Non-tariff barriers to trade are by no means limited to trade in services, but they are the dominant form of restriction in that world.

This brings me to Brexit. I have to start with an important disclaimer. As a public servant, I take no position on Brexit per se - it was a decision of the British people, and has been put into effect. That said, our evolving trading and regulatory relationship with the EU requires many judgements on the most effective way to do so - what delivers the most effective outcome.

I want to make two important points in this context. The first relates more to trade in goods, the second to financial services. Let me start with goods. I said earlier that trade enhances and supports economic activity.

It follows that if the level of trade is lowered by some action, it will have an effect to reduce productivity growth and thus overall growth. Just as tariffs, by increasing the cost, can reduce the scale of trade, the same goes for the type of non-tariff barrier that Brexit has created. Now to reiterate, this does not mean that Brexit is wrong, because there can be other reasons for it, but it does suggest, I think powerfully, that we should do all we can to minimise negative effects on trade.

The evidence on Brexit suggests that in the UK the changing trade relationship has weighed on the level of potential supply.

I conclude from this that, just as the Windsor Agreement on trade involving the UK and Ireland was a welcome step forward, so too are the initiatives of the current UK Government to rebuild trade between the UK and EU, and of course there is a very particular important aspect here for the UK and Ireland.

Let me turn to financial services. There is often an impression given that the flow of trade in financial services is predominantly from the UK to the EU. In other words, the UK is an exporter of financial services. This creates the notion of a one-way street, and that leads to the image of a dependency, and from there the notion of the dependency in some sense being unhealthy starts to come in.

My strong view is that - contrary to this one way idea - the relationship goes both ways, and that is a good thing. And, this is very well illustrated by the relationship between Ireland and the UK in the area of financial services.

Let me draw out the two-way street point some more, using the example of the 2022 shock to Liability Driven Investment funds connected to UK pension funds, so-called LDI funds. The LDI episode occurred when UK financial assets saw a significant repricing, with a particular impact on long-dated gilts. The Financial Policy Committee at the Bank of England judged that UK financial stability was at risk due to dysfunction in the gilt market and recommended that the Bank take action. This action took the form of intervening via temporary purchases of long-dated gilts.

Many of the funds involved were domiciled in other jurisdictions, including here in Ireland and Luxembourg. To be very clear, domicile was not a part of the problem. But, it had to help to enable the solution, and it did. A co-ordinated response between the UK, Ireland and Luxembourg was essential, and I am very grateful to the Central Bank of Ireland and the authorities in Luxembourg for helping us to respond effectively.

There have been important lessons from the LDI episode, which are increasingly relevant in the context of the increased market volatility we have seen in recent weeks following the US announcement on trade tariffs last month. Together, working with other UK regulators, the Central Bank of Ireland and the authorities in Luxembourg, we have taken action to build resilience in LDI funds. And I hope this close cooperation can continue as we seek to navigate another two way street by building more resilience into money market funds in the EU and the UK, as we strengthen our domestic rules.

The benefits of open financial markets as well as the dependencies also tend to go both ways.

The UK and EU are both seeking to strengthen our domestic capital markets. The EU's Savings and Investment Union agenda and the UK government's reforms to pensions are both seeking to direct savings towards productive investment. These are important measures, not least given the pressing need for financing some of the common structural challenges we face in the UK and EU - for example, defence and security, demographics, and the technological and climate transitions.

But strengthening domestic capital markets is only part of the story. The scale of investment needed requires access to global capital, supported by open financial markets. The alternative is fragmentation, which we have unfortunately seen in the global economy in recent years, which reduces the size of markets, and makes them inherently less stable. Fragmentation also increases the cost of capital, undermining growth and investment. Financial market openness, built on a foundation of robust global standards and trust, is a much better alternative.

To repeat, open financial markets are a good thing. As with goods trade, open financial markets support economic growth as well as increasing investment and reducing the cost of capital. So the benefits of open financial markets, as well as the dependencies, tend to go both ways, so a two-way street; and working together effectively is the best way.

As such, there is merit in seeking to increase the openness of our financial markets by reducing non-tariff barriers.

The Bank of England and the Central Bank of Ireland enjoy a very strong relationship, which is built on trust and respect, fostered by close cooperation and coordination and a steadfast commitment to shared values and working together in international bodies to promote global standards. And, my strong view is that this type of work benefits the industries that we oversee. The message that I get consistently, and rightly, is that firms want robust but fair and consistent regulatory standards which will support both stability and competition, and set the level playing field on which they operate.

## Thank you.

I would like to Sarah Breeden, Lee Foulger, Mike Hatchett, Himali Hettihewa, Karen Jude, Jake Levy, Zertasha Malik, Jeremy Martin, Harsh Mehta, James Talbot, Lanze Gardiner Vandvik, Sam Woods for their help in the preparation of these remarks.",Andrew Bailey
https://www.bis.org/review/r250603g.htm,Fabio Panetta: Overview of economic and financial developments in Italy,"Concluding remarks by Mr Fabio Panetta, Governor of the Bank of Italy, at a meeting for the presentation of the Annual Report 2024 - 131st Financial Year, Rome, 30 May 2025. ",2025-05-30 00:00:00,"





## The Governor's Concluding Remarks

Annual Report

2024 - 131 st Financial Year

Rome, 30 May 2025

## Ladies and Gentlemen,

Trade disputes and the ongoing conflicts are undermining confidence at the international level, casting a shadow over the global economic outlook. In recent weeks, the International Monetary Fund (IMF) downgraded its global growth projections for the next two years, to less than 3 per cent, well below the average recorded in past decades.

Concerns over a potential trade war intensified on 2 April, when the United States introduced sweeping tariff hikes, which were partly paused in the  weeks  that  followed.  The  announcement  sparked  significant  volatility in the financial markets, with firms most exposed to international trade hit hardest. Investors shifted towards assets that are considered safer, pushing the price of gold to new all-time highs.

Unlike in previous periods of uncertainty, the yields on long-term US Treasury bonds decreased and the dollar depreciated (Figure 1.a). This trend persisted  in  the  weeks  that  followed,  despite  a  partial  easing  of  financial tensions and a rebound in stock prices. This raises important questions about the future structure of the international monetary system and the dominant role of the US dollar as both a reserve and a trade invoicing currency. 1

We  are  witnessing  deep  fissures  in  the  very  equilibrium  that  has underpinned the global economy for decades. While the policies of the US administration are the primary trigger, they are part of an already rapidly changing landscape.

## A global economy amid uncertainty and change

The current trade disputes are partly driven by growing discontent with globalization and disenchantment with the unfulfilled promises of free trade.

Since the great financial crisis, a widespread perception has taken hold in many advanced economies that globalization has exacerbated inequality and reduced employment opportunities for lower-skilled workers. In reality, these developments are largely a consequence of technological progress, as well as of distortions caused by unfair trade practices, such as the substantial subsidies granted by some emerging economies to their manufacturing sectors.

Meanwhile, many low-income countries remain trapped in poverty and burdened by high levels of debt, despite the opportunities presented by an integrated global economy and the financial aid provided by the international community. Discontent has grown among emerging economies - which have benefited  greatly  from  trade  liberalization 2 -  over  the  lack  of  recognition, within  the  governance  of  international  institutions,  of  their  increasingly important role in the global economy.

As a result, consensus around a framework based on shared rules, open markets, and multilateral cooperation has gradually weakened.

Against  this  backdrop,  the  protectionist  policies  adopted  by  the  US reflect  its  declared  aim of reviving domestic manufacturing and correcting trade imbalances, particularly vis-à-vis China.

The announcement of high tariffs, it would appear, is being used as a bargaining  tool  to  redefine  international  economic  and  political  relations. However, the effects of this strategy are difficult to predict and manage.

Although the tariffs currently in force in the US are lower than those announced in early April, they are the highest since the Second World War and are causing a notable increase in average tariffs worldwide (Figure 1.b).

Figure 1



Sources: For panel (a), based on LSEG and Intercontinental Exchange data; for panel (b), see the sources for Figures 14.2 and 14.7 in Chapter 14 of the Annual Report for 2024 , 2025.

(1) The figure shows developments in the effective exchange rate of the US dollar in the 30 days following the outbreak of the Asian financial crisis, the collapse of Lehman Brothers and the tariff announcement on 2 April 2025. An increase in the index indicates an appreciation of the US dollar against a basket of currencies. - (2) Right-hand scale.

Their potential impact is now significantly greater than in the past, owing to the close integration of the global economy.

The higher trade barriers could shave nearly 1 percentage point off global growth over a two-year period.

The estimated impact on the US economy would be roughly double that. The tariffs could lead to lower labour demand and heightened inflationary pressures, at a time when inflation expectations are already rising. They are also weighing on household and business confidence, with potential repercussions on consumption and investment.

The  stream  of  announcements,  retractions  and  revisions  is  fuelling uncertainty and volatility in the markets. These conditions risk amplifying the effects of the tariffs and could persist for some time, given the complexity of trade negotiations, which typically take far longer than the 90-day suspension announced.

Higher trade barriers are unlikely to correct the large US trade deficit, which mainly reflects imbalances driven by strong domestic demand in an economy  close  to  full  employment.  A  correction  would  require  reducing consumption or investment, which would be accompanied by lower inflows of foreign capital. 3

The  medium-term  effects  of  the  tariffs  on  the  global  economy  will depend on the ability of countries and firms to redirect international trade and  forge  new  trade  relations.  Chinese  firms,  for  example,  are  expanding their presence abroad by leveraging technological advantages and adopting aggressive pricing policies to absorb excess capacity.

Protectionist  policies  are  steering  the  global  economy  onto  a  perilous course.  The  tariffs  currently  in  effect  could  reduce  international  trade  by around 5 per cent, prompting a reconfiguration of global supply chains. This would lead to less integrated and less efficient trading systems.

The effects risk spilling over beyond trade, altering the structure of the international  monetary  system,  currently  centred  on  the  US  dollar,  and restricting capital flows.

They could go further still, hampering the movement of people, ideas and knowledge. Weaker global cooperation, including in science and technology, would ultimately reduce incentives for innovation and hinder progress. Over time, the very foundations of shared prosperity would be compromised.

Yet  perhaps the most far-reaching risk lies elsewhere: that trade, once a driver of integration and dialogue, becomes a source of division, fuelling political instability and endangering peace.

## The globalization of services

Somewhat surprisingly, current trade disputes continue to revolve around goods trade, despite the growing role of services in the global economy. The United States has a large surplus in this sector, including with the European Union, especially in digital services (Figure 2.a).

Since  the  global  financial  crisis,  international  trade  in  services  has grown faster than trade in goods (Figure 2.b), reaching 15 per cent of world GDP, one quarter of total trade and one third of transactions within global supply chains. Even within trade in goods, the share attributable to services - such as marketing, design and after-sales support - accounts for a growing portion of value added.

Figure 2



Sources: Eurostat and IMF , World Economic Outlook , April 2025.

- (1) A negative value indicates an EU deficit and a US surplus. - (2) Sum of imports and exports. -
- (3) Right-hand scale.

The  main  driver  of  this  expansion  has  been  digitalization,  which  has made it easier to provide services remotely. 4 Over the last twenty years, trade in digital services has grown at an average annual rate of 8 per cent, twice as fast as traditional services such as tourism and transportation.

As was the case for goods in the past, trade in services may prove to be  a  powerful  engine  of  productivity  growth, 5 helping  to  narrow  gaps between countries  and  contain  inflation.  However,  for  this  transition  to be  sustainable,  it  must  be  combined  with  social  protection  systems  and

targeted investment in human capital, so as to safeguard the workers most exposed to technological change.

Insidious  risks  are  inherent  in  the  concentration  of  power  in  a  few large global corporations which steer technological innovation, control vast troves  of  data  and  threaten  competition.  The  combined  market  value  of the seven leading US tech companies today exceeds $15 trillion. Given this scenario, effective regulation that protects consumer rights, media plurality and competition - without stifling innovation - is essential.

## Global public debt

Over  the  last  fifteen  years,  the  global  debt-to-GDP  ratio  has  risen significantly, with a marked acceleration in the two largest world economies (Figure 3).



Source: IMF.

(1) The data from 2025 onwards are forecasts. - (2) Excludes the United States. - (3) Excludes China.

This  trend  partly  reflects  the  series  of  global  shocks  -  from  the  2008 financial  crisis  to  the  pandemic  and  the  energy  crisis  -  that  have  disrupted economic activity and necessitated extraordinary government intervention.

The high level of debt exposes economies to volatility in sovereign debt markets and limits the room for manoeuvre in the event of a crisis.

Low-income economies face severe tensions. 6 In just over 15 years, their debt-to-GDP ratio has doubled and debt servicing costs have soared, diverting crucial  resources  from  growth  and  development. 7 More than half of these countries are currently in a highly vulnerable position, 8 and a significant share of their debt is due to mature in the next two years .

A larger share of this debt is now held by foreign creditors. Alongside multilateral  institutions  and  the  governments  of  advanced  countries,  new actors, such as China and a growing number of private investors, have come to the fore. Such a diverse pool of creditors, compounded by the deterioration in international relations, makes it more difficult to find shared solutions and to manage potential crises in a coordinated way.

It is crucial to strengthen the G20's Common Framework for restructuring the debt of low-income countries, which has been little used so far because of  procedural  obstacles.  We  need  more  effective  cooperation  between stakeholders,  so  as  to  overcome  the  challenges  posed  by  disagreements between countries. Although the debt of low-income countries accounts for just a small share of the world economy, reducing it is essential, not only to limit global financial risks, but above all to create prospects for prosperity for more than one billion people.

Lowering the debt-to-GDP ratio is also key for the advanced economies in order to free up resources for development. This requires policies that can boost growth through reforms, innovation and education. At the same time, it is essential to embark on a path of fiscal consolidation that is both credible and gradual: credible,  to  bolster  confidence  in  the  sustainability  of  public finances; gradual, to prevent setbacks to growth and head off unacceptable social costs.

Equity is critical to the success of any reform strategy. Without social consensus, no fiscal policy is sustainable in the long term.

## The economic outlook and monetary policy in the euro area

## The real economy and inflation

After a long period of stagnation, the euro-area economy returned to growth in 2024, though at a rate below its potential. 9 Once again, Germany failed to provide its decisive contribution.

Domestic  demand  remained  below  expectations,  despite  some  signs of recovery. The fallout from the energy crisis, the still restrictive monetary

policy stance and the widespread uncertainty dampened consumption and investment, which was affected by the weakness of the manufacturing sector.

The support from foreign demand also faltered, reflecting the deterioration in the global economy.

In the first  quarter  of  this  year,  GDP  rose  by  0.3  per  cent.  Industrial production,  while  showing  signs  of  stabilization,  remains  well  below  the levels recorded prior to the energy crisis, especially in Germany and Italy.

In this context, the return of inflation to close to 2 per cent is a positive sign (Figure 4.a). This is partly due to wage pressures easing: the recovery in real wages is well on track and new contracts provide for significantly smaller increases than in the past two years.

Figure 4

## Economic activity and prices in the euro area

## (year-on-year percentage changes)



Sources: European Commission and Eurostat.

(1) For GDP growth forecasts, see European Commission, European Economic Forecast , November 2024 and May 2025.

## Outlook and risks

Protectionist policies loom over the fragile recovery outlook. The outcome of trade negotiations is uncertain, but the impact on the European economy is bound to be significant.

The  United  States  is  the  main  outlet  market  for  euro-area  products, absorbing almost one fifth of exports. Some of the sectors most exposed to tariffs - such as transport equipment, machinery and beverages - are already showing  signs  of  declining  confidence,  weakening  order  expectations  and deteriorating employment prospects.

Tariff barriers could also reduce demand  for European products indirectly by holding back the global economy. In addition, China and some South-East Asian countries, which all have excess production capacity and large trade surpluses with the US, are likely to seek new outlets to counter the effect of the tariffs, thus exacerbating competitive pressures on European markets.

Uncertainty  about  trade  policies  hinders  business  planning  and  raises firms'  borrowing  costs.  Following  the  April  announcements,  European equities fell sharply, amid rising volatility and widening credit and liquidity risk premiums.

Tensions have since subsided and have not affected financial stability, thanks  to  the  soundness  of  the  European  banking  system  and  to  the improvement  in  the  public  finances  of  vulnerable  countries.  However, investor confidence is still wavering.

In recent weeks, the IMF and the European Commission have cut their growth  forecasts  for  the  next  two  years  by  about  half  a  percentage  point (Figure 4.b).

On the inflation front, energy prices have fallen considerably and the euro has  strengthened. T ogether  with  weak  economic  growth  and  intense  global competition,  these  developments  could  dampen  consumer  price  inflation. Market expectations point to inflation returning to below 2 per cent as early as the second half of this year and decreasing to 1.7 per cent on average in 2026.

This is an unsettled economic outlook.

A further appreciation of the euro, growing uncertainty or tighter financial conditions could magnify the recessionary impact of the tariffs. Moreover, a larger-than-expected increase in Chinese exports to Europe could push down production and inflation. 10

Conversely,  swift  and  tangible  progress  in  trade  negotiations  would mitigate  downside  risks  to  economic  activity.  The  anticipated  increase  in public spending in Europe could support growth, with the effects appearing gradually over time. Disruptions to global supply chains would put upward pressure on inflation.

## Monetary policy

Past concerns about the disinflation process have proved unfounded.

The credibility  of  the  European  Central  Bank's  action  has  kept  expectations anchored to the 2 per cent target, preventing the recovery in real wages from triggering the feared wage-price spiral. Core inflation has declined at a pace

consistent with past experience, while persisting somewhat in services. Even the 'last mile' has not proved particularly challenging so far. 11

On the whole, disinflation has not taken too high a toll on the economy and  is  now  close  to  completion.  The  cuts  in  the  ECB's  key  interest  rate, amounting  to  1.75  percentage  points  over  the  past  year,  are  feeding  into financial  conditions  and  will  support  economic  activity  over  the  next  few months.

Charting the course of monetary policy in the coming months will be far from easy.

Decisions will have to be assessed on a case-by-case basis, weighing up available data and the outlook for inflation and growth.

The previous cuts clearly leave less room for reducing interest rates further. However, the macroeconomic outlook remains weak and trade tensions could cause it to deteriorate, though it is hard to say how and when that might play out.

It will be essential to maintain a pragmatic and flexible approach, 12 while closely monitoring liquidity conditions and signals from financial and credit markets.

The ECB Governing Council has already proved able to act decisively and swiftly to safeguard monetary and financial stability, and will continue to do so in the future.

## The European Union: rethinking the growth model

The European economy is showing clear structural weaknesses. Stagnating productivity  and  lagging  innovation  are  curbing  its  growth  potential.  Its dependence on foreign markets, both in acquiring  supplies  and  in  selling its products, makes it more vulnerable in an increasingly fragmented global environment.  We  need  to  rethink  the  growth  model  that  has  supported Europe for decades.

## Productivity and innovation

Over the past 30 years, labour productivity in the European Union has grown by 40 per cent, more than 25 percentage points below the figure for the United States. 13 The gap has widened since 2019: productivity in Europe has increased by just 2 per cent, against 10 per cent in the US, where gains have been driven mainly by high-tech sectors.

This gap reflects above all the difficulties in fostering innovation.

As a share of GDP , European firms only invest half of what US firms do in research and development. 14 In Europe, most of the investments are made by long-established firms in mid-tech sectors, such as the automotive industry.  Investments by young and innovative firms - many of which choose  to  relocate  abroad  -  account  for  a  smaller  share.  Conversely, the US business environment is constantly being renewed by new firms capable  of  succeeding  in  dynamic  markets; 15 investment  in  research  is concentrated in digital and knowledge-intensive services.

Public spending on research and development in Europe is comparable in size to that of the US, but is fragmented among Member States. 16 The lack of effective coordination limits the scope for carrying out projects on a European scale.

Despite China's rapid rise, Europe remains a top player in scientific research,  on  an  equal  footing  with  the  US  in  many  high-tech  sectors. However, this leading position does not translate into product innovation: the  number  of  patents  remains  low,  especially  in  the  digital  field.  In artificial  intelligence,  for  example,  the  number  of  European  patents  is less than one fifth of those filed in the US, despite a much smaller gap (around 30 per cent) in scientific output. 17

## Trade openness

The degree of trade openness of the European economy, which had already been on the rise since the beginning of the century, expanded further  after  the  global  financial  crisis,  when  policies  geared  towards external competitiveness and fiscal austerity squeezed domestic demand. 18 The trade surplus has quadrupled, reaching 3.2 per cent of GDP , while consumption and investment have declined as a share of GDP .

As a result, Europe has increased its trade openness compared with the United States and overtaken China (Figure 5.a). In some areas, however, its  openness  has  translated  into  a  dependence  on  foreign  markets  and countries.

Europe's  energy  needs  rely  heavily  on  foreign  sources:  about  two thirds  of  the  energy  consumed  comes  from  fossil  fuels,  almost  all  of which are imported. Dependence on China is also very high for many strategic  goods,  especially  those  relating  to  the  energy  transition  and high-tech products (Figure 5.b).

## The trade openness of the major economies and their dependence on imports from China



Sources: Eurostat, IMF ( World Economic Outlook , April  2025)  and  based  on  data  from Trade  Data Monitor.

(1) The EU data exclude intra-EU trade. - (2) Share of imports from China in total imports.

## Manufacturing, services and energy

Manufacturing  is  still  an  important  component  of  the  European economy, where it accounts for 15 per cent of GDP - 20 per cent in Germany compared with 10 per cent in the United States. However, competition from the emerging economies has been eroding Europe's competitive edge, including in medium- and high-tech sectors, putting the resilience of entire production chains at risk. China in particular has continued to increase its share  of  global  manufacturing  (Figure  6),  by  leveraging  technology,  low costs and tight control over value chains.

In services, Europe's external surplus - though substantial - stems mainly from traditional sectors such as tourism and transport, while in the United States it is driven by digital specialization.

## China, the EU and the US: shares of global manufacturing

## (share of global value added)



Source: United Nations Industrial Development Organization.

The issue of high energy costs remains unresolved. Following the invasion of Ukraine, energy costs for European industries have increased significantly, widening the gap with the other major economies. By mid-2024, the cost of electricity in Europe was twice as high as in the US and China and one fifth higher than in Japan.

This  disadvantage  curbs  investment  and  undermines  competitiveness, increasing the risk of firms relocating abroad. Resolute action is needed to reconcile  containing  energy  costs  with  the  decarbonization  process.  The European  Commission  has  recently  provided  guidance  to  that  effect. 19 However, as I have noted in the past, 20 an  effective  energy  transition  also requires taking account of its social and production issues, striking the right balance between ambition and feasibility.

## Triggering change

The  European  economy  requires  swift  and  structural  action.  What  is needed is  an  adequately  funded  reform  programme  with  a  clear  timeline, based on proposals already put forward at EU level. 21

It is necessary to remove the remaining internal barriers to the movement of  goods,  capital  and  people,  and  to  invest  in  technology,  common infrastructure and sectors with high growth potential.

In  an  increasingly  unstable  global  landscape,  strengthening  strategic autonomy must be a top priority.

The  European  Commission's  Competitiveness  Compass 22 points  in the right direction, but it does not address the crucial issue of how to raise the necessary funds. Several estimates suggest that supporting the green and digital transitions and reinforcing the EU's defence capabilities will require €800 billion per year until 2030. 23 This is a sizeable amount, yet it only covers part of the overall financial needs. Making Europe truly competitive will require even greater investments.

A commitment of this scale cannot rely solely on national budgets, nor can it  rely  on  the  private  sector  alone.  As  I  have  recently  argued,  what  is needed is a true European 'productivity compact'. 24

On the one hand, the public sector is essential for financing European public goods - from energy security to defence and including basic research and for supporting initiatives that have collective benefits, returns over a long horizon, and at the same time more uncertain outcomes.

On  the  other  hand,  mobilizing  private  capital  is  key  to  financing innovative business projects. To do so, we must urgently complete the creation of a fully integrated European capital market, capable of channelling savings towards long-term, risky investments - including through the development of venture capital and private equity funds on a European scale.

This will require regulatory changes, 25 to which I will come back shortly. However, eliminating the fragmentation of the capital market along national lines at its root means introducing a European safe asset with a dual purpose: financing the public component of investment and providing a sound and credible common benchmark for the entire financial system.

Our estimates suggest that an integrated capital market, centred on a European safe asset, would lower financing costs for businesses, resulting in additional investment of €150 billion per year and increasing GDP by 1.5 per cent in the long run. The effect on GDP could be up to three times larger if the new investments were directed towards innovative high-tech projects.

This effect would be greater if a single, well-structured and liquid capital market  -  providing  better  opportunities  for  diversification  -  were  able  to attract resources from abroad.

The experience of NextGenerationEU shows that it is possible to finance an ambitious  European  investment  plan  through  the  issuance  of  common  public debt without having to create a fiscal union or introduce an EU finance ministry.

## Security and defence spending

The new international context has made it clear that Europe needs to step up its defence capabilities. Achieving this goal will require a shared strategy among Member States, a sound common governance framework and sizeable investment. 26

The Commission's proposal 27 relies on national funding and loans, rather than on European spending and transfers financed using common funds. Such an approach risks widening the disparities between Member States and making spending  less  effective.  What  we  actually  need  is  a  common  programme, supported by European debt.

A commitment of this scale must have a clear foundation.

Common resources should  be  allocated  by  prioritizing  technology  and research in defence. At national level, ramping up defence spending should not come at the expense of growth-boosting investments and social expenditure.

Most importantly, promoting international cooperation and peace must remain at the heart of European action.

Investing together in security and defence does not mean entering an arms race, but rather taking a realistic stance in response to common threats that no individual country can tackle alone. Only in this way can security become a pillar of European solidarity: the kind of solidarity that not only protects but also generates prosperity, cohesion and trust.

## The Italian economy

I have commented on the Italian economy's long period of stagnation on past occasions.

Over the last five years, however, despite the pandemic and energy crises, the country has displayed signs of a renewed economic vigour.

Growth was greater than in the euro area. GDP grew by about 6 per cent,  driven  by  an  increase  of  almost  10  per  cent  in  the  private  sector. 28 Alongside construction, a significant contribution also came from services, which have been expanding in both the traditional and the advanced sectors. The number of people in employment has increased by around one million, and is now at a historical high of over 24 million, whereas the unemployment rate has fallen from 10 to 6 per cent. The South has grown at a slightly higher rate than the national average. 29

## Restructuring the production system

These  achievements  were  supported  by  expansionary  economic measures, but would not have been possible without the restructuring of the production system that followed the sovereign debt crisis. 30

Between 2013 and 2023, labour productivity  in  the  private  sector grew by 0.7 per cent a year on average, and total factor productivity rose by more than 1 per cent, marking a clear improvement compared to the period 2000-13. 31

The number of workers employed in medium-sized and large firms has grown significantly and the number of companies with at least 250 employees has risen by one third. 32 The adoption of advanced technologies, such as cloud computing, robotics and artificial intelligence, has spread (Figure 7.a). 33 Over time, profitability and capital positions have strongly improved (Figure 7.b).

This  response  by  the  production  system  to  global  changes  offers  a beacon of hope, but it is just a first step.

Figure 7

## New technologies, profitability and leverage of Italian firms (per cent)



Sources:  Calculations  based  on  data  from  Banca  d'Italia  (Survey  of  Industrial  and  Service  Firms; Financial Accounts) and Cerved.

(1) Share of firms with 20 or more employees that reported using each technology on an extensive, limited  or  only  experimental  basis.  -  (2)  For  cloud  computing,  the  latest  figure  refers  to  2024.  (3) Right-hand scale. - (4) Leverage is calculated as the ratio of financial debts to the sum of financial debts and own funds.

## Recent developments and manufacturing

GDP  grew  by  0.7  per  cent  in  2024,  accompanied  by  particularly favourable employment conditions. However, labour productivity declined, and so did goods exports.

There  was  modest  growth  in  domestic  demand,  with  households remaining cautious and limiting the expansion in consumption to 0.4 per cent, in spite of a 1.3 per cent increase in disposable income.

Value added in manufacturing fell by 0.7 per cent, partly as an effect of  growing international competition. The remainder of the private sector instead grew by 1 per cent.

In spite of the present challenges, Italian industry is not headed for decline. Dynamic and competitive firms operate in all economic sectors, invest in technology and research, and rank high in their field of production. Having such solid foundations provides a strategic advantage in global competition, but they need strengthening.

Firms need to continue along the path of innovation and investment supported  by  public  policies  that  enable  them  to  manage  the  current transformations successfully.

In Italy more than elsewhere in Europe, it is a priority to address energy costs, 34 persevering  with  the  course  of  action  already  undertaken:  making greater  use  of  clean  energy  sources,  incentivizing  the  use  of  long-term contracts  and  strengthening  infrastructure  and  transmission  networks. 35 Adequate investment and much simpler authorization procedures for new plants are needed.

Yet the central issue is always productivity - in manufacturing as in the rest of the economy. There has been encouraging productivity growth, though it is not enough to support development in Italy.

Low salary  levels  are  a  reflection  of  this  weakness.  Since  the  start  of  the century, mirroring the stagnation in productivity, real wages have grown far less than in the other major European countries: up to the pandemic, wages had grown by a mere 6 per cent. The subsequent inflationary shock drove real wages back to below the 2000 levels, despite the recovery that began last year.

Nevertheless, to ensure a lasting increase in wages, it is essential to boost productivity and growth through innovation, capital accumulation and forceful public action.

## Innovation as a strategic lever

Innovation must be at the heart of our economic strategy. This requires far more investment in research and development, in order to bridge the gap that divides Italy from Europe and the United States (Figure 8).



Source: Based on OECD data, 2021.

(1) Includes funding from abroad and expenditure on research by universities using own funds.

The  biggest  effort  here  must  come  from  the  private  sector,  whose spending on research and development remains low, a shortcoming that is only partly explained by the prevalence of traditional sectors.

Public action can support innovation by stimulating private research and investment in technology. Public incentives have yielded positive results in the last few years, albeit at a high cost. 36 They can become more effective and less costly if they are more targeted and if procedures are simplified.

The  quality  of  scientific  research  has  equalled  -  and  in  some  sectors overtaken - that of the major European countries, especially in medicine, engineering and IT. 37 However, the number of patents remains low, equal to one fifth of German patents and to half of those of France, and they are concentrated  in  mature  sectors.  Technology  transfer  capacity  is  also  still unsatisfactory. 38

These  failings  are  mainly  a  question  of  resources:  average  university spending stands at 1.3 per cent of GDP in Europe, but at only 1 per cent in Italy. Closing this gap would be a farsighted investment, achievable with relatively limited resources.

Increasing  funds  to  improve  centres  of  excellence  would  make  the university system more attractive to Italian and foreign researchers, who are currently choosing institutions abroad. Targeted policies for attracting talent could also catch scholars who are leaving other countries.

## The National Recovery and Resilience Plan

Public action can support capital accumulation by investing in infrastructure  and  creating  a  business-friendly  environment.  This  is  the guiding principle behind the National Recovery and Resilience Plan (NRRP).

Italy has received €122 billion under the Plan so far and has used over half of that. 39 The disbursement of the upcoming instalments will depend on reaching targets linked to the completion of public works. The information currently available suggests that there are delays. 40

The use of NRRP funds has supported the economy in recent years. The measures scheduled over the years 2025-26 could increase GDP by 0.5 per cent: at a time of cyclical weakness, it is essential to be resolute in moving forward with their implementation.

As regards reforms, measures to liberalize markets and simplify administrative  procedures  have  strengthened  the  economic  fabric  over  the last  fifteen  years. 41 The  institutional  landscape  has  improved.  The  length of  trials  on  contractual  issues  is  down  by  one  third,  in  part  thanks  to  the organizational  reforms  to  civil  justice.  Also,  the  NRRP  has  promoted  the digitalization  of  the  public  administration,  making  public  services  more accessible and procurement procedures for public works more efficient and transparent. 42

Reform  efforts  require  time  and  continuity,  and  must  continue beyond the end of the NRRP . The priorities remain those set out in the fiscal-structural  plan  for  the  next  five  years: 43 improving  the  business environment and reforming the public administration and the justice and tax systems.

## Demographics and the labour force

The ageing of the population and the low birth rate are bound to have a profound effect on the growth potential of Italy's economy. According to Istat, the number of working age people will drop by five million by 2040. 44 This could mean an 11 per cent contraction in GDP , an 8 per cent fall in per capita terms. 45

An increase in labour market participation rates would soften this effect. 46

Greater inclusion of women could help significantly; despite recent progress, their participation rate is among the lowest in Europe. 47 Investments in childcare services  encourage  female  employment,  which  is  still  hindered  by  a  lack  of adequate facilities and an unbalanced distribution of family responsibilities.

However, even under the most favourable scenario, higher participation rates will at best offset the fall in the working-age population.

In order to expand the labour force in a stable way, attractive employment opportunities need to be created for the many Italians who leave the country in search of better prospects. Some 700,000 Italians have emigrated in the last ten years, a fifth of whom are young graduates. 48

Legal immigration can make a significant contribution, especially in the construction and tourism sectors, which are experiencing a growing shortage of labour. 49

This  contribution  could  extend  to  higher  value-added  activities, provided that skilled workers can be attracted. 50 Italy lags behind on this front: among the leading countries, it has the lowest share of immigrant graduates (Figure 9). Narrowing this gap entails - among other things aligning  the  system  for  recognizing  academic  degrees  and  professional qualifications in line with European standards.



Sources: Based on Eurostat and OECD data, 2023.

## The public finances

Compared  with  15  years  ago,  when  the  assessments  of  the  main  rating agencies on Italy's public debt began to worsen, the fundamentals of our economy have greatly improved.

The  net  international  investment  position,  which  was  negative  by  20 percentage points of GDP , is positive by 15 points today. The banking system is significantly more robust, which has a significant impact on agencies' ratings.

The resolution of the pandemic and energy crises has made it possible to end the phase of extraordinary budget measures, thus improving the public accounts. The deficit fell to 3.4 per cent of GDP in 2024 and a primary surplus was recorded for the first time since 2019.

This progress was reflected in the positive assessments recently published by rating agencies.

However, the process of fiscal consolidation is only at the beginning. Debt remains high and expenditure will come under pressure in the next few years owing to an ageing population, the green and digital transitions, and the scaling up of our defence capacity.

The  new  European  rules  have  restored  a  medium-term  horizon  to  fiscal policy,  thereby  helping  to  anchor  investors'  expectations.  The  medium-term fiscal-structural plan, published last autumn, sets out a path for debt reduction in line with this new approach. The public finance document for 2025, approved in April, confirmed that we are heading in that direction.

It  is  crucial  to  ensure  continuity  along  this  path,  even  in  the  event  of  a weakening macroeconomic outlook. The progress achieved in recent years must prompt us to maintain a prudent fiscal policy and to intensify the reform efforts needed to support growth.

Economic  growth  and  the  sustainability of the public finances are interdependent.  Confidence  in  the  soundness  of  public  finances  encourages investment, and higher growth in turn makes fiscal consolidation less of a burden.

## Banks and financial markets

## The Italian banking system

Balance sheet data and market valuations confirm that the Italian banking system is on solid footing.

The cost-to-income ratio continues to improve. Net interest income is starting to be negatively affected by falling interest rates, but profitability is

being supported by fee income, especially on asset management activities. Return on equity remains high and the outlook is stable.

Small banks, which are more vulnerable to the squeeze on net interest income, nevertheless enjoy a relatively satisfactory return on equity of around 8 per cent. 51

Capitalization  is  robust  for  the  system  as  a  whole  and  exceeds  the European average. The price-to-book ratio for listed banks remains well above one (Figure 10).



Source: Based on LSEG data.

According to our estimates, the flow of non-performing loans to firms will  continue  to  grow  moderately  over  the  next  two  years. T rade  tensions could affect credit risk, but the impact should be limited overall. 52 In any case,  high  profitability  and  the  built-up  capital  buffers  have  prepared  the Italian banking system to absorb possible shocks.

Banca  d'Italia  continues  to  monitor  the  situation  closely  and  stands ready  to  take  action  where  needed.  Over  the  last  few  months,  the  Bank has  intervened  in  several  cases  in  which  small  banks  found  themselves  in difficulty, mainly owing to corporate governance and internal control system deficiencies.

## Trends in lending

Over the last year, lending to firms continued to decline, albeit at a slower pace. This development warrants attention: adequate availability of credit is

essential to support investment and revive production - especially for small firms, who find it more difficult to access alternative funding sources.

The available evidence suggests, however, that the contraction in lending to firms primarily reflects weak demand, rather than a tightening of credit supply conditions.

Business surveys show that the share of firms that report difficulties in accessing credit is declining across all sectors and all size classes.

This finding is consistent with firms' balance sheet data. In recent years, internal financing has grown more than investment (Figure 11.a), including for small firms, thereby progressively reducing - and eventually eliminating the need for external funding (Figure 11.b).



|                                                                                                                                  | Figure 11                                                                      |
|----------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------|
| Internal financing, investment and financing needs of Italian firms (a) Ratio of internal financing to investment (2) (per cent) | (1) (b) Investment, internal financing and financing needs (billions of euros) |
| 20 40 60 80 100 120 2003 2008 2013 2018 2023 0 100 200                                                                           | Financing needs Internal financing Investment 2003 2008 2013 2018 2023         |

Sources: Banca d'Italia, Istat and Cerved.

(1) Annual flows, nominal values. - (2) The data refer to a sample of about 800,000 limited companies.

At the same time, many firms have substantially increased their capital 53 and expanded their reserves of financial assets. As I have already mentioned, leverage has improved considerably since the sovereign debt crisis.

Banca d'Italia will continue to follow developments in lending, especially in the case of small firms.

## Consolidations

In recent months, several complex consolidation transactions have been announced, sometimes in competition with one another, that involve banks of different sizes and business models, insurance companies and asset managers.

For some of these transactions, the investigation phase has ended, while for others it is still under way.

Three years of robust profits have made significant resources available to banks, which are now being used to launch initiatives that would reduce the fragmentation of the Italian credit market, thereby bringing its degree of concentration closer to that of the other main European countries.

Acquisitions can be a delicate moment and mark a break in the life of intermediaries.  Their  goal  must  be  to  strengthen  them,  which  is  why  they must be well-designed and aimed solely at value creation.

Creating value means, first and foremost, offering firms and households adequate financing in terms of quantity and costs; effective and transparent savings  instruments  at  fair  conditions;  qualified  and  innovative  services, consistent with Italy's development needs.

As  part  of  its  mandate,  Banca  d'Italia  is  involved  in  the  transaction approval  processes  in  close  cooperation  with  the  ECB  and  IVASS.  Other national and foreign authorities operate in accordance with their statutory powers.

Banca d'Italia is responsible for verifying that each transaction complies with Italian  and  EU  prudential  legislation,  and  that  the  resulting  intermediaries are sound in terms of capital, liquidity and risk governance.

Provided  these  conditions  are  met,  the  judgment  on  each  offer  is ultimately determined by market dynamics and shareholder decisions.

## Simplifying the regulatory framework

The  newly-elected  US  administration  has  taken  a  favourable  stance towards the deregulation of the banking and financial sectors. This also raises questions for the European Union, which needs to consider whether and how to respond so as not to be placed at a competitive disadvantage.

There are good reasons why Europe should not go down the same path.

Weakening the regulatory framework in an environment of increasing risks  would  be  imprudent.  Maintaining  an  effective  regulatory  framework that staves off instability and preserves the soundness of the system is crucial.

The rules introduced in response to the global financial crisis have proved effective. They have helped European banks withstand major shocks - from the  pandemic  to  the  energy  crisis  -  while  remaining  strong.  Conversely, the failure of a few US regional banks in the spring of 2023 can be partly explained by the non-application of some international prudential standards.

Moreover, European banks have been showing highly positive capital and income results for years, proof that well-designed regulations can safeguard stability without sacrificing competitiveness and efficiency.

The aim must therefore not be to relax the rules but rather to improve them.

The  focus  should  be  on  simplification,  thereby  eliminating  regulatory overlaps and ambiguities and lightening the administrative burden. 54 A clearer and  more  consistent  regulatory  framework  would  reduce  uncertainty  for operators and make supervisory action more effective and timely.

In Europe, simplification must start by harmonizing the legislation across EU Member States, so that operators active in multiple markets do not have to comply with different rules. In the banking sector, the goal must be to have a coherent EU legislative framework based on a consolidated banking law for all the Member States.

Intervention  should  help  achieve  the  objectives  of  the  regulations, preserving the levels of capital and liquidity achieved so far. It should cover all regulatory levels 55 and the main scopes of application: from macroprudential oversight and the supervision of financial intermediaries, to crisis management and resolution.

Simplification is one of the European Commission's priorities for this legislative term and is part of its strategy to boost the EU's competitiveness. 56

The  initiatives  recently  announced  by  the  Commission 57 to  develop securitizations,  facilitate  the  cross-border  activity  of  investment  funds  and boost investment in venture capital go in the right direction and can foster the creation of a genuine European capital market.

Banca d'Italia is involved in the discussions on these issues within the Eurosystem and in cooperation with the Ministry of Economy and Finance and the European Commission.

## Crypto-assets

The link between the world of crypto-assets and the financial system are  growing  ever  stronger  at  international  level.  Agreements  between

crypto-asset players and financial intermediaries are on the rise, and so are initiatives launched by the latter. Some US listed companies have purchased large  amounts  of  Bitcoin,  thereby  exposing  their  shares  -  and  indirectly savers - to the volatility of this instrument. Furthermore, exchange traded funds (ETFs) that invest in Bitcoin have been operating for some time.

These developments have implications for risk.

First,  crypto-assets  such  as  Bitcoin,  which  are  not  backed  by  an underlying asset, are highly volatile and are mostly traded on unregulated, opaque  exchanges.  Their  growing  interconnectedness  with  the  financial system makes it more difficult to contain the related risks, as I have already discussed on previous occasions. 58

Second,  there  is  the  matter  of  stablecoins.  These  instruments  are designed to maintain a stable value against underlying currencies or assets, but still expose holders to risks relating to the soundness of the issuers and to volatility in the value of the underlying asset. In the absence of adequate regulation, their suitability as a means of payment is doubtful, to say the least.

However,  if  large  foreign-based  technology  platforms  decided  to promote the use of stablecoins for payments between their customers, this could lead to new systemically important payment schemes operating on a global scale. Traditional means of payment used domestically - such as banknotes and cards - could be crowded out, negatively affecting monetary sovereignty, personal data protection, and credit intermediation, which so far has always been integrated with and complementary to the provision of payment services.

One risk that cuts across all crypto-assets is that of illicit use. As these technologies allow anonymous transactions, they lend themselves to being used for activities such as money laundering, arms or drug trafficking and the circumvention of international sanctions. 59

Several countries have started regulating crypto-assets. China decided to ban their use. Conversely, the US administration has taken a favourable stance, though the regulatory framework is still a work in progress. 60

In Europe, the Markets in Crypto-assets Regulation  (MiCAR) introduced rules to protect customers and facilitate the orderly development of  the  market. 61 MiCAR  divides  stablecoins  into  two  categories:  only those  pegged  to  a  single  currency  -  known  as  electronic  money  tokens (EMTs) - offer consumers sufficient safeguards to qualify as a means of payment, including the right to redeem them at nominal value.

Since MiCAR came into force, only some EMT stablecoins have been issued  in  the  EU  and  their  circulation  is  limited  so  far.  Many  operators reported they had started providing crypto-asset services, or were intending to apply for authorization to do so.

In  Italy,  there  has  so  far  been  little  interest  in  the  issuance  of crypto-assets  by  supervised  intermediaries  and  other  operators,  while  a growing focus on custodial and trading services has been observed.

The risks that stem from this sector will have to be monitored carefully, especially the reputational risks linked to the provision of crypto-assets by banks. In fact, there is a concern that crypto-asset holders might not fully understand their nature and conflate them with traditional banking products,  with  potentially  negative  repercussions  for  confidence  in  the credit system should losses occur.

Overall,  MiCAR  offers  protection  to  European  savers.  However, heterogeneity  in  regulatory  approaches  at  international  level  remains a  source  of  risk.  EU  citizens  might  be  exposed  to  failures  of  platforms or issuers based in other jurisdictions that lack adequate controls or the necessary transparency and operational safeguards.

These risks can be contained through international cooperation - an objective for which Europe could take the lead.

But we would be remiss to think that the evolution of crypto-assets can be controlled only through rules and restrictions.

What is needed is a response that matches the ongoing technological transformation, one capable of meeting the demand for secure, efficient and accessible digital payment instruments, all while preserving the role of central bank money. The digital euro project stems precisely from this need.

At the same time, strengthening financial literacy is essential to help people navigate the new digital landscape and make informed decisions about  the  opportunities  and  risks  that  come  with  these  products  and services.

Banca d'Italia is engaged on both of these fronts.

## Conclusions

New countries have emerged on the global stage, propelled by market integration throughout the long period of economic stability following the end of the Cold War.

In 2000, G7 economies accounted for almost half of the world's GDP; today, they generate less than one third. Technology is no longer the exclusive domain of advanced countries.

The importance gained by the emerging economies was bound to shift the existing balance.

Globalization has driven world growth and lifted more than two billion people out of poverty, but not everyone has benefited fully. What has followed is a widespread sense of disenchantment, heightened by a dramatic sequence of crises over the last two decades.

Today's bitter trade disputes are not a passing malaise. They are symptoms of  a  fraying  of  international  political  and  economic  relations,  which  has accelerated the reorganization of global supply chains and of trade flows that was already under way.

Digital innovation is unfolding before our very eyes. It can and should become a driving force for productivity again, which otherwise risks stagnating in advanced countries. We must not fear it.

Yet, like any technological revolution, the one  we  are currently experiencing will reshape our economies. It will only be sustainable if we can benefit from it by making it inclusive, mitigating its risks and protecting the weak.

The  repercussions  of  these  developments  on  the  global  economy  are difficult  to  foresee.  Even  the  role  of  the  dollar,  long  the  linchpin  of  the international  monetary  system,  is  now  being  questioned.  Uncertainty  is widespread.

The multilateral system - unbalanced and imperfect as it was - sought to address global challenges through shared rules and common principles. That system is now in crisis. In its place, a multipolar order is taking shape, one in which power dynamics carry increasing weight.

Even the historically close relationship between the US and Europe is feeling the strain. Yet the cultural affinities and economic ties that unite us must ultimately prevail over the current frictions.

We must get ready to navigate these uncertain waters, without giving up our values, and without falling behind.

The European Union remains a bastion for the rule of law, democratic coexistence  and  openness  to  trade  and  international  cooperation,  but  it cannot afford to stand still. It must rise above national divisions and convert its  economic  strength  -  and  its  rich  heritage  of  culture  and  values  -  into political clout.

I  have  often  argued  that  a  common  European  response  is  key  to overcoming today's challenges. The agenda is well-known, and the path is already mapped out.

There is now an unavoidable need, but also a real possibility, to complete the common market; to simplify, but not dismantle, the rules that govern it; and to create a unified capital market centred on the regular issuance of European bonds. This would help generate the public and private resources needed to finance investment and foster growth.

It  is  just  as  important  to  preserve  and  strengthen  the  pillars  of  the European social model. Our social welfare systems, based on the principle of solidarity, are preconditions for development and cornerstones of European civil society.

Italy will also benefit from a decisive common European response.

The challenges of growth and innovation now facing Europe emerged earlier - and more markedly - in Italy. We bear the burden of longstanding structural weaknesses that we have not yet overcome: regional disparities, low  education  levels,  a  fragmented  production  system,  and  persistent barriers  to  innovation.  For  forty  years  now,  we  have  shouldered  a  heavy public debt that restricts our investment capacity and constrains economic policies.

Yet, in the aftermath of the global financial and sovereign debt crises, we are seeing signs of change: in manufacturing and services, in the financial sector, in the public administration and in research. These are signs of vitality that we must not fritter away.

These achievements are unfinished, but they mark real progress. They provide  a  concrete  foundation  on  which  to  build  -  through  reforms,  by dismantling entrenched privileges, and by giving young people a future they can believe in.

We have both the responsibility and the opportunity to do this.

## Endnotes

- 1 Globally, over 50 per cent of trade transactions (excluding those within the euro area) and some 60 per cent of foreign currency reserves are denominated in US dollars.
- 2 Without the progress made over the last 35 years, 2.4 billion more people would be living in poverty today; see F. Panetta, 'Peace and prosperity in a fragmented world', speech at the event 'Economy and Peace: a possible alliance', Bologna, 16 January 2025.
- 3 The US trade deficit is the main cause of the current account deficit, which, in accounting terms, corresponds to the net capital inflow. In general, holding GDP constant, a narrowing in the trade deficit  must  be  offset  accounting-wise  by  a  decrease  in  either  consumption  or  investment;  see M. Obstfeld and K. Rogoff, 'The six major puzzles in international macroeconomics: is there a common cause?', in B.S. Bernanke and K. Rogoff (eds.), NBER Macroeconomics Annual 2000 , 15, Cambridge, MA, The MIT Press, 2001, pp. 339-390.
- 4 In the last 20 years, international trade costs for services have fallen by between 30 and 60 per cent, largely as a result of technological progress; see L. Patrignani, 'Understanding digital trade', Banca d'Italia, Questioni di Economia e Finanza (Occasional Papers), 841, 2024.
- 5 Empirical analyses point to a positive relationship between international trade in services and productivity growth, both in importing and exporting countries; see M. Amiti and S.-J. Wei, 'Service offshoring and productivity: evidence from the US', The World Economy , 32, 2, 2009, pp. 203-220; J. Perla, C. Tonetti and M.E. Waugh, 'Equilibrium technology diffusion, trade, and growth', American Economic Review , 111, 1, 2021, pp. 73-128.
- 6 Low-income countries are those eligible for concessional financing from the World Bank.
- 7 For further details, see the box 'The debt situation in low-income countries', Chapter 1, Annual Report for 2024 , 2025.
- 8 According to the IMF and the World Bank, more than half of low-income countries are 'in debt distress' or 'at high risk of debt distress'.
- 9 Euro-area GDP expanded by 0.9 per cent in 2024, against an estimated potential growth rate of 1.2 per cent; see European Commission, European Economic Forecast. Spring 2025 , May 2025.
- 10 The existing tariffs are estimated to lead to an increase in Chinese exports to the euro area of around 2.5 per cent over the next two years, with a negative impact on inflation of 0.1 percentage points. These effects could be three times greater if the ongoing negotiations were to fail and the tariffs currently on hold were to be reinstated.
- 11 F. Panetta, 'Economic developments and monetary policy in the euro area', speech at the 30 th ASSIOM FOREX Congress, Genoa, 10 February 2024.
- 12 F. Panetta, 'The ECB must remain pragmatic in setting rates', Financial Times , 26 March 2025.
- 13 The gap is also significant in total factor productivity, which has grown by 37 per cent in the United States and by 25 per cent in Europe.
- 14 In 2023, US firms' spending on research and development amounted to 2.7 per cent of GDP, compared with 1.5 per cent for European firms.
- 15 F. Panetta, 'If we are not after the essence, then what are we after?', speech at the 45 th Foundation Meeting for Friendship among Peoples, Rimini, 21 August 2024. C. Fuest, D. Gros, P.-L. Mengel, G. Presidente and J. Tirole, 'EU innovation policy: How to Escape the Middle Technology Trap', EconPol Policy Report , 2024.
- 16 Horizon Europe, the European Union's framework programme for research and innovation for the period 2021-27, has just €13.4 billion a year available in funding, i.e. just over 10 per cent of the total expenditure of the Member States.
- 17 In 2023, China accounted for one third of global scientific research output, four times more than fifteen years prior. In the same year, the United States and Europe each produced one fifth of total quality research. Quality scientific research publications are defined as the top 10 per cent of papers by number of citations, according to Scopus Custom Data and SCImago Journal Rankings data; see OECD, OECD bibliometric indicators . Selected highlights , May 2025.
- 18 F. Panetta, 'Monetary autonomy in a globalised world', welcome address at the joint BIS, BoE, ECB and IMF conference on 'Spillovers in a 'post-pandemic, low-for-long' world', Frankfurt, 26 April 2021.
- 19 European Commission, 'Action Plan for Affordable Energy. Unlocking the true value of our Energy Union to secure affordable, efficient and clean energy for all Europeans', COM(2025) 79  final,  26  February  2025.  The  Action  Plan  proposes  action  on:  cost  components  affecting end-users; markets, instruments and contracts for the purchase of electricity; and the investments needed to upgrade the existing infrastructure.

- 20 F.  Panetta,  'The  heat  is  on:  challenges  and  opportunities  of  the  energy  transition',  opening remarks  at the G7-IEA  conference  on  'Ensuring  an  orderly  energy  transition',  Rome, 16 September 2024.
- 21 E. Letta, 'Much more than a market: speed, security, solidarity. Empowering the Single Market to  deliver  a  sustainable  future  and  prosperity  for  all  EU  Citizens',  April  2024;  M.  Draghi, 'The future of European competitiveness', September 2024.
- 22 European  Commission,  'A  Competitiveness  Compass  for  the  EU',  COM(2025)  30  final, 29 January 2025.
- 23 F. Panetta, 'Investing in Europe's future: The case for a rethink', speech delivered at the Istituto per  gli  Studi  di  Politica  Internazionale  (ISPI),  Milan,  11  November  2022;  O.  Bouabdallah, E. Dorrucci, L. Hoendervangers and C. Nerlich, 'Mind the gap: Europe's strategic investment needs and how to support them', The ECB Blog, 27 June 2024. M. Draghi, 2024, op. cit.
- 24 F. Panetta, 'A European productivity compact', speech at the 20 th Spain-Italy Dialogue Forum (AREL-CEOE-SBEES), Barcelona, 3 December 2024.
- 25 European Commission, 'Savings and Investments Union. A Strategy to Foster Citizens' Wealth and Economic Competitiveness in the EU', COM(2025) 124 final, 19 March 2025.
- 26 For further details, see the box 'Defence spending in EU countries', Chapter 2, Annual Report for 2024 , 2025.
- 27 The  European  Commission's  proposal  is  the  'ReArm  Europe/Readiness  for  2030'  plan;  see 'President von der Leyen will hold Strategic Dialogue on Steel on 4 March, and announces Steel and Metals Action Plan', press release  by  the  President  of  the  European  Commission,  Ursula von der Leyen, 25 February 2025; European Commission and the High Representative of the European Union for Foreign Affairs and Security Policy, 'Joint white paper for European defence readiness 2030', JOIN(2025) 120 final, 19 March 2025.
- 28 The figure indicates growth in value added in the non-farm, non-financial private sector, net of real estate services.
- 29 F. Panetta, 'Eppur si muove: l'economia del Mezzogiorno dopo la crisi', speech at the 'Il polso dell'economia: il Mezzogiorno' event, Catania, 19 September 2024 (only in Italian).
- 30 As well as raising GDP growth by 1 percentage point for the period 2019-23, the recent review of national accounts also gave higher figures for firms' productivity growth.
- 31 Between  2000  and  2013,  labour  productivity  stagnated  and  total  productivity  fell  by  half  a percentage point per year.
- 32 A.  Accetturo  et  al.,  'Le  recenti  dinamiche  della  produttività  e  le  trasformazioni  del  sistema produttivo', Banca d'Italia, Questioni di Economia e Finanza (Occasional Papers), forthcoming (only in Italian).
- 33 For further details, see the box 'The use of artificial intelligence by Italian firms', Chapter 6, Annual Report for 2024 , 2025.
- 34 The cost of electricity to firms in Italy in 2024 was 25 per cent higher than the European average. (Based on Eurostat data; Electricity prices components for non-household consumers - annual data).
- 35 Since 2022, Italy has seen a significant acceleration of new renewable energy installations, after eight years of modest growth. Firms are making increasing use of long-term electricity purchase agreements and the system operator has promoted new types of contracts. The development plan recently presented by Terna contains numerous measures to increase the capacity and resilience of the electricity transmission network. For further details, see M. Alpino et al., 'Going green: the recent development of renewable energy sources in Italy', Banca d'Italia, Questioni di Economia e Finanza (Occasional Papers), 908, 2025. Italy has taken measures that are in line with recent European Commission guidelines.
- 36 Ministry of Economy and Finance, Banca d'Italia and Ministry of Enterprise and Made in Italy, 'Gli  incentivi  in  investimenti  4.0:  una  valutazione  dell'impatto  della  misura',  2024  (only  in Italian).
- 37 For more details, see the box 'The innovation system in Italy: an international comparison', Chapter 6, Annual Report for 2024 , 2025.
- 38 Italy's  most  active  university  handles  barely  one  third  of  the  patents  of  the  leading  German university and one quarter of those of the French equivalent.
- 39 Our country ranks fifth in terms of both the share of payments received and of completed milestones and targets. The countries that have done better have much smaller plans. These include France and Germany, with an allocation of funds amounting to €40 and €30 billion respectively.

- 40 For  further  details,  see  Ministry  for  European  Affairs,  the  NRRP  and  Cohesion  Policies, Sesta Relazione al Parlamento sullo stato di attuazione del Piano nazionale di Ripresa e Resilienza , 27 March 2025, and the box 'The state of progress of the National Recovery and Resilience Plan (NRRP)', Chapter 4, Annual Report for 2024 , 2025.
- 41 E. Ciapanna, S. Mocetti and A. Notarpietro, 'The macroeconomic effects of structural reforms: an empirical and model-based approach', Economic Policy , 38, 114, 2023, pp. 243-285; A. Cintolesi, S. Mocetti and G. Roma, 'Productivity and entry regulation: evidence from the universe of firms', Banca d'Italia, Temi di Discussione (Working Papers), 1455, 2024.
- 42 For further details, see the box 'An indicator of the quality of the institutional environment', Chapter 11, Annual Report for 2024 , 2025 (only in Italian).
- 43 'Medium-term Fiscal-Structural Plan. Italy 2025-2029', approved by the Italian Parliament on 9 October 2024.
- 44 Istat, Population and household projections. Base 1/1/2023 , Statistics report, 24 July 2024. Median scenario.
- 45 The effect of the demographic decline on GDP is calculated assuming that productivity and the employment rate by gender and age group remain unchanged at 2024 levels.
- 46 'Parliamentary commission of inquiry into the economic and social effects stemming from the ongoing demographic transition', testimony by Andrea Brandolini, Deputy Director General of Economics, Statistics and Research at Banca d'Italia, Chamber of Deputies, Rome, 15 April 2025 (only in Italian).
- 47 In 2024, the female participation rate was 57.6 per cent in Italy.
- 48 'Parliamentary  commission  of  inquiry  into  the  economic  and  social  effects  stemming  from the ongoing demographic transition', testimony by Francesco Maria Chelli, President of Istat, Chamber of Deputies, Rome, 1 April 2025 (only in Italian).
- 49 According to estimates based on Istat data, the job vacancy rate in construction and in tourism in the last five years was about 3 per cent, or just under 70,000 jobs per year.
- 50 The  attractiveness  of  other  major  destination  countries  also  depends  on  simpler  procedures for validating the qualifications and skills acquired by migrants in their country of origin; see G. Basso, E. Gentili, S. Lattanzio and G. Roma, 'Migration flows and policies in Italy and in other European countries', Questioni di Economia e Finanza (Occasional Papers), 923, 2025.
- 51 'Small banks' here means those that are referred to as 'less significant institutions' in European supervisory parlance, and specifically those with a traditional business model.
- 52 For more details, see the box 'The exposure of the euro-area banking system to the sectors most vulnerable to US tariffs', Financial Stability Report , 1, 2025.
- 53 Between 2011 and 2024, the cumulative flow of capital increases by firms amounted to around €280 billion; over the same period, the overall value of own funds rose from 84 to 121 per cent of GDP.
- 54 Joint letter from the Governors of Banca d'Italia, Banco de España and Banque de France, and the President of Deutsche Bundesbank to the EU Commissioner for Financial Services and the Savings and Investments Union, 5 February 2025.
- 55 These include: primary legislation (Level 1), delegated acts (Level 2) and the guidelines developed by the European supervisory authorities (Level 3).
- 56 European  Commission,  'A  Competitiveness  Compass  for  the  EU',  2025,  op.  cit.,  and European Commission, 'A simpler and faster Europe: Communication on implementation and simplification', COM(2025) 47 final, 11 February 2025.
- 57 European Commission, 'Savings and Investments Union. A Strategy to Foster Citizens' Wealth and Economic Competitiveness in the EU', 2025, op. cit.
- 58 F. Panetta, 'Banks and the economy: credit, regulation and growth', speech delivered at the Annual Meeting of the Italian Banking Association (ABI), Rome, 9 July 2024.
- 59 Between 2020 and 2024, transactions in crypto-assets linked to criminal activity amounted to about $200 billion.
- 60 In the United States, a number of measures are being considered with a view to ensuring the stability of crypto-asset players and protecting customers' rights; see the box 'Developments in the crypto-assets market and the risks to financial stability', Financial Stability Report , 1, 2025.
- 61 Issuers of crypto-assets and entities offering services relating to these instruments are subject to a number of requirements relating to capital, governance, asset segregation, transparency and customer protection. MiCAR also introduced rules to combat the use of crypto-assets for illicit purposes.

Printed by the Printing and Publishing Division of Banca d'Italia Rome, 30 May 2025",Fabio Panetta
https://www.bis.org/review/r250528m.htm,Anita Angelovska Bezhoska: Building stronger partnerships for economic growth,"Keynote address by Ms Anita Angelovska Bezhoska, Governor of the National Bank of the Republic of North Macedonia, at the Balkan Alumni Summit, Skopje, 27 May 2025.",2025-05-27 00:00:00,"## Anita Angelovska Bezhoska: Building stronger partnerships for economic growth

Keynote address by Ms Anita Angelovska Bezhoska, Governor of the National Bank of the Republic of North Macedonia, at the Balkan Alumni Summit, Skopje, 27 May 2025.

* * *

Ladies and gentlemen,

It is a pleasure to join you today at this important event organized by the Macedonian American Alumni Association. On this occasion, allow me to share some insights on the topic of regional economic collaboration and its potential to unlock new opportunities for sustainable growth in the Western Balkans region.

Let me begin my address with a dose of realism . Despite 3 decades of transition, economic convergence in the Western Balkans remains low income is less than half of the EU income, and the progress has been particularly slow since the GFC. In our case, the income level stands at 41% of the EU average. This remains one of the most pressing challenges across the region. In addition, let me add a dose of . This slow progress cannot be attributed solely to recent external shocks. honesty Indeed, the crises of the past few years, such as the global pandemic, energy disruptions, and inflationary pressures, have all undoubtedly taken their toll. These shocks, however, did not create our vulnerabilities, they only exposed them and Data clearly show that amplified structural weaknesses that have already existed. the slowdown in convergence was already in motion well before the recent crises, reflecting cyclical downturns as well as deeper structural challenges. Over the past two decades, the region's potential growth has nearly halved, from about 5% Macedonian potential growth during 2000-2008 to just 2.5% between 2009 and 2024. fell even more sharply, from 3.1% to 2.3%. It is a fact that the potential growth of the EU economy has declined as well, but less than ours (2.9% to 1.8%), pointing that future convergence may be even more challenging.

## What explains the decline in potential and actual growth across the Western Balkans?

The analysis shows that it is broad-based, stemming from weaker contributions from all three key drivers of long-term growth: productivity, labor, and capital. First, productivity has stalled, with productivity levels remaining at approximately half This is due to the fact that innovation, technological diffusion, and the EU average. digital transformation have not kept pace with global shifts. For example, the Global Innovation Index (2024) ranks North Macedonia at the 58th position out of about 130 countries, with the lowest ranking in the R&amp;D segment, where we have invested 10 times less than advanced economies. One in Second, labor input is weakening too. five people born in the WB region is now living abroad, and one in three considers leaving the country (OECD Survey). And finally, the stock of capital remains low at only about 30% of the EU stock, reflecting insufficient investments both in terms of size and quality.

These are not just economic figures. They highlight the persistent gap between the economic achievements so far and the still untapped potential within our economies.

And this is precisely where the power of regional partnership can be harnessed, creating a clear path to accelerate growth. Indeed, empirical research shows that multilateral free trade agreements and regional cooperation can contribute to growth directly, through trade and FDI flows , and indirectly, through increased productivity . 1 2 some studies  find that CEFTA led to increased trade among members For example, 3 by at least 74%. In addition, evidence 4  shows that its implementation has not only deepened trade ties but also contributed to the economic growth of its members.

## So, where does the WB region stand today in terms of trade and financial integration?

Well, regarding trade, data shows that despite the progress, regional integration remains low. As of 2024, total intra-regional trade stood at about 11% of the total WB trade, and continued to follow the downward trend that began after the pandemic crisis. In the Macedonian case, trade with WB peers makes up only 14% of our total exports and 9% of imports. These are modest shares indicating significant room for by making trade easier, faster, and cheaper. expansion

When it comes to FDIs, intra-regional FDI flows also remain limited, with a significant portion of investment coming from outside the region, mainly from the EU. In the Macedonian case, investment originating from WB countries accounts for only around 3% of the total FDI inflows over the last decade, which is among the lowest shares in the region. In this context, boosting intra-regional FDI could help diversify investment sources, promote knowledge and technology transfer, and deepen And a more integrated regional market, through the economic linkages in the region. economy of scale, can be a more attractive destination for investments outside the region.

## Looking forward, what can be done to further strengthen regional integration and growth prospects?

It appears that there are to address a couple of priorities. First, intensify reforms common structural issues such as low productivity, capital investments, but also tight labor markets. Recent findings from the Balkan Barometer (2024) indicate that 70% of WB businesses call for public policies specifically designed to keep talent within the region. Then, continue aligning regional regulations and standards, and to address market fragmentation and increase eliminating administrative obstacles regional competition. As an example, trucks spend 28 million hours waiting at borders every year - a burden that costs 1% of the region's GDP. Of course, this has to be done in a way that means aligning with . As the European standards and practices 2024 OECD's competitiveness data show, since 2018 the policy environments across the WB countries have steadily converged toward EU standards, but the pace of convergence varies across different dimensions and countries. No country has so far reached EU standards in any of the 15 policy dimensions assessed.

One important area, which is within the remit of the central banks, is improving the which can act as engines of growth by efficiency of cross-border payments, facilitating trade, commerce, and tourism. In this regard, a significant milestone was reached earlier this year when our country officially joined the Single Euro Payments Area (SEPA).

No doubt, all these reform efforts are costly, but the EU's Growth Plan for the Western Balkans introduces a 6 billion EUR facility in grants and concessional loans, aimed at supporting them. In fact, a Common Regional Market initiative is one of the key pillars of the Growth Plan and is expected to be a catalyst for the deeper integration of 18 million people. Some estimates show that this initiative, through increased harmonization, could add 10% to the GDP of the economies in the region . 5

Still, to effectively use the provided funding and implement reforms, the quality of . According to the World Bank institutional quality institutions is of key importance indicators, our country ranks slightly above the average for the WB region, but if we compare the entire region with developed countries, a significant gap is evident. Empirical research has shown that in lower-income countries, strengthening institutions has a significant positive contribution to higher economic growth.

To conclude, the path to sustainable and inclusive growth in the Western Balkans does not lie in isolation, but in collaboration. As the well-known Japanese poet Satoro wisely said, ""Individually, we are one drop. Together, we are an ocean.""

Thank you.

- 1  Bond et al. (2005), Alvarez et al. (2013), Didier and Pinat (2017).
- 2  Seghezza and Baldwin (2008).
- 3  Petreski (2018).
- 4  World Bank (2018), WIIW (2023).
- 5  Gomez Ortiz Maria Del Mar; Zarate Vasquez,Roman David; Taglioni,Daria. The Economic Effects of Market Integration in the Western Balkans (English). Policy Research working paper; no. WPS 10491 Washington, D.C.: World Bank Group: The Economic Effects of Market Integration in the Western Balkans",Anita Angelovska Bezhoska
https://www.bis.org/review/r250528i.htm,Olli Rehn: Macroeconomic policy in times of global political upheaval,"Keynote speech by Mr Olli Rehn, Governor of the Bank of Finland, at the Bank of Finland and Centre for Economic Policy Research (CEPR) joint conference ""Frontiers of monetary economics in the 21st century: where and where to?"", Helsinki, 13 May 2025.",2025-05-13 00:00:00,"## Olli Rehn: Macroeconomic policy in times of global political upheaval

Keynote speech by Mr Olli Rehn, Governor of the Bank of Finland, at the Bank of Finland and Centre for Economic Policy Research (CEPR) joint conference ""Frontiers of monetary economics in the 21st century: where and where to?"", Helsinki, 13 May 2025.

* * *

Ladies and Gentlemen, Colleagues and Friends,

Welcome to the sunny, spring-time Helsinki. On behalf of the Bank of Finland and the Centre for Economic Policy Research, it is my great pleasure to open this year's research conference on monetary economics - which again has an excellent and a most fascinating programme!

Let me begin with a mission statement - and a confession. Our slogan at the Bank of Finland is: ""Securing stability - in science we trust."" That is, we lean on evidence- and theory-based economic analysis and policy-relevant research to support our stability mission.

However, I must make a confession. In this turbulent world, it is comforting to return to a familiar setting and reflect on policy challenges alongside leading economists. Although only eight months have passed since our last gathering, it feels like the global landscape has shifted dramatically.

And the confession is this, in front of you as researchers, scholars, scientists, leading economists; in these times of pervasive uncertainty, we need plenty of judgment and scenario analysis to supplement our economic and econometric research and regression equations, thus making monetary policy, by necessity, is as much an art as a science. Such is life in these strange times - but finally, at least, it dis make me understand why the Governor at Bank of Finland is, , also the chair of the arts ex officio committee of the Bank!

Talking about geopolitics and its effects, just look at the ECB's evolving language. Uncertainty went from ""increased"" to ""high,"" then ""pervasive,"" and now, per President Lagarde, ""exceptional."" This isn't linguistic inflation. It reflects how genuinely hard forecasting has become, with markets pricing in risk at levels not seen in years.

Risks abound: from trade wars to faltering global alliances. For central bankers and researchers alike, this is no time for complacency. Instead of dissecting every new risk, today I want to focus on three key areas:

- Lessons from the recent inflation surge;
- Open questions around fiscal policy, particularly defence spending;
- And finally, the role of productivity and innovation.

## Low inflation - past and future

Let's nevertheless recall there are some good news. The European economy is recovering. Unemployment is at 6.1%, the lowest since the euro's creation. Inflation has been hovering just above 2% since late 2023, allowing the ECB to cut rates seven times.

The energy shock that hit Europe in spring 2022 has played out very differently than in the 1970s, with the economic cost being much lower this time. Thanks to increased labour supply and lower working hours, wage-price spirals were avoided. Today's labour market is more flexible, less unionised, and better educated.

Importantly, inflation expectations were much better anchored before the recent inflation surge. This underlies the importance of central bank independence and a strong commitment to the inflation target. The ECB has focused firmly on maintaining these, and will continue to do so.

Before Covid, the main challenge was that inflation remained stubbornly below the target. Most risks to the inflation outlook were deflationary, including population ageing and the related increase in savings, and the low investment demand. And before the ECB's 2021 review and move to a symmetric 2% target over the medium term, which has worked well, the inflation target was perceived as a ceiling, creating a downward bias.

From around 2021, inflationary pressures reappeared. First this was due to the pandemic-broken supply chains and stimulus-fuelled demand, then due to the energy shocks arising from Russia's invasion of Ukraine.

We learned how demand and supply shocks can be deeply intertwined. But we still face many unknowns in that regard. Current geopolitical tensions may expose us to new surprises that we have little historical experience of. Preferably, the spectre of a prolonged trade war with the US will dissipate sooner rather than later, as an economic conflict between long-standing friends and allies is the last thing we need in a world challenged by dictatorial impulses and by a neocolonial mentality.

Furthermore, what if China shifts exports away from the US to Europe, slashing prices to compete? That could bring deflationary forces and industrial strain to the EU. Would it benefit consumers or hurt our economy overall? The policy response would not be straightforward.

Let's hope we don't have to answer these questions through crisis. Whatever the challenge, the ECB will remain focused on price stability and its symmetric 2% inflation target over the medium term.

## Defence spending - new pressures

Since the pandemic, fiscal spending pressures have risen. Now, security concerns are adding fuel. Russia's aggression and doubts about US defence commitments are prompting big spending shifts across Europe. Germany is paving the way and has eased its constitutional debt limits.

We can assume that with normal execution lags the most substantial fiscal impact will start to be felt from next year 2026 and 2027 onwards. This implies that the fiscal impact on the growth and inflation outlook will take effect in the medium term, as an ordinary citizen perceives is, although this timespan of fiscal impulse will mostly be beyond the projection horizon of medium term as understood in monetary policy. Our assessment indicate a moderately significant impact on growth and limited impact on inflation in the relevant timespan.

Waking up and substantially increasing defence spending is welcome. Security is the bedrock of economic stability. Peace and security within European borders are fundamental to the European project and its economy.  Defence should be seen as a European public good. Further support for Ukraine should also be seen in the same light.

But what does this mean for inflation? Historical comparisons to war-time money printing don't apply here. Independent central banks like the ECB remain focused on keeping inflation expectations anchored.

Still, we need to understand what type of shock defence spending represents. Is it demand or supply driven? Likely both, depending on how and where the money is spent.

We also face the question of to pay for it. EU-level spending would offer more how stability and efficiency. That might mean higher membership fees, new revenue sources, or even treaty changes. Defence bonds - as safe assets - are one option, but only if backed by solid future income.

Meanwhile, demands on public budgets are rising across the board: infrastructure, climate policy, aging populations.

What guidance do we have so far from economics research?

There is a large body of literature on fiscal multipliers, which incidentally often uses defence spending as a natural experiment or exogenous shock. These multipliers are frequently estimated to be below one, because public spending or investment usually crowds out private one.

However, evidence suggests that multipliers tend to be larger in times of recession and economic slack. Moreover, some of the best evidence on the magnitude of fiscal multipliers is based on US data, where the multiplier may be smaller. This is simply because the US defence industry is very large compared to its European counterpart and is thus more likely to face diminishing marginal returns.

All these issues mean that for European defence spending to be successful and sustainable, we must make every euro count. The additional defence spending should focus on investment in building up industrial network capacity and R&amp;D, rather than simply procurement of defence equipment, which may be largely imported.

Then there is also the aspect of defence efficiency. For this, we need sound planning and coordination at the European level, as well as a common market for defence, as

stressed in last year's Letta Report. Recent experience has shown that training in the use of unfamiliar weapons and problems with shortages of spare parts can become critical bottlenecks. Therefore, further harmonisation of technical standards and types of arms and equipment across European defence forces is key.

With a history of independent and diminished national defence industries, the EU has some considerable catching up to do. We need to increase both national and EU-level defence spending, e.g. as Bruegel has suggested, by establishing a European Defence Mechanism formed by a coalition of the capable and willing. Such a fund would bypass the limitations to raising EU-level income, be resilient to any intra-EU obstruction and could also accommodate countries from outside the European Union, like the United Kingdom and Norway.

In short: defence spending won't necessarily be inflationary. But to be effective, it must be efficient. We need smart investments - in industrial capacity, innovation, and R&amp;D not just procurement. And we must avoid fragmented efforts. A European Defence Mechanism, built by a coalition of the capable and willing, could also help to pursue these goals.

## Innovation - defence and civilian

Let's now turn to innovation. Defence spending often yields big returns beyond the battlefield. Its effectiveness should be assessed from a long-term perspective, not only via short-run multipliers. Historically, it has given rise to technological breakthroughs that have not only found direct civilian applications but created whole new non-defence industries.

Walkie-talkies were created during the Second World War at Motorola for infantry and artillery communication. Radar gave us microwave ovens. Military satellites gave us GPS and digital imaging. Jet engines, nuclear energy, the internet - all have military origins. Dual-use in action.

Yes, these are cherry-picked examples. But they highlight that basic research often needs public support. The private sector tends to shy away from ""unknown unknowns.""

Modern defence is about technology, not just steel and troops. And there's often more pressure to innovate efficiently. Look at Ukraine - it has rapidly developed drone tech, despite scarce resources.

We know that Europe needs a productivity boost. For years, we depended on cheap energy from Russia, cheap goods from China and the security shield from the U.S. abroad. That stability was a mirage, if not a hallucination.

To maintain our living standards and sovereignty, we must double down on innovation by investing on human capital and creating a conducive environment for research and researchers. Whether it's AI, clean tech, green transition or digitalisation, we can't afford to lag behind. Innovation is not optional; it's vital for Europe's future - a necessary condition for sustaining Europe's quality of life and democratic values.

Why not use the EU Horizon programme to create a scholarship and visa programme for returning and moving scientists to attract talent to Europe, where critical thinking and academic freedom in universities are encouraged and safeguarded?

## Dear friends,

Let me conclude. Europe finds itself in a puzzling paradox, which would be funny if it were not purely pathetic. As Polish PM Donald Tusk put it starkly recently by quipping as follows: ""500 million Europeans are asking 300 million Americans to protect them from 140 million Russians.""

We need to put an end to that paradox. Europe must take responsibility for its own external security, in today's harsh geopolitical world.

This isn't just about military strength. It's about cohesion, economic resilience and longterm growth. We need to spark Europe's industrial renewal, reinforce technological leadership, and enhance productivity.

As history shows, Europe tends to move forward in times of crisis. In every crisis there is an opportunity - this time round we must use it particularly wisely to make Europe more resilient and capable of thriving again.

Thank you.",Olli Rehn
https://www.bis.org/review/r250611h.htm,Erik Thedéen: Monetary policy communication in practice,"Speech by Mr Erik Thedéen, Governor of the Sveriges Riksbank, at the Swedish Economic Association, Stockholm, 2 June 2025.",2025-06-02 00:00:00,"SPEECH

DATE:

02 June 2025

SPEAKER:

Governor Erik Thedéen

VENUE:

Swedish Economic Association, Stockholm

## Monetary policy communication in practice 

I would like to begin by thanking you for the invitation and by drawing attention to the fact that this year is actually the thirtieth anniversary of the tradition of the Governor of the Riksbank giving a speech at the Swedish Economics Association. In 1995, the then Governor Urban Bäckström gave a keynote speech at an association meeting. Since then, the Governor has been invited to give a speech every year. On behalf of myself and my predecessors, I would like to take this opportunity to thank the Swedish Economic Association for these three decades. As Governor of the Riksbank, it is a privilege to come to this forum every year to discuss topics that are relevant to the Bank. I hope the tradition can be kept alive for many years to come.

It is no coincidence that the tradition started in 1995. That was the year that the Riksbank officially started to conduct monetary policy to achieve the new inflation target. 1 Inflation targeting has developed a lot over these 30 years, and the speeches given by the Governors of the Riksbank to the Association reflect that journey. Ever since the inflation target was introduced, transparency has been a watchword for the Riksbank, and central banks have become more transparent in general. At the same time, the focus has increasingly shifted to how we communicate monetary policy, which is natural. If you are more open, you also need to think more about what you say and how you say it.

 I would like to thank Björn Andersson, Mika Lindgren, Maria Sjödin and Hugo Sparrman for their help with this speech. I would also like to thank Caroline Jungner för language improvements on the Swedish version, Elizabeth Nilsson for the translation into English, and other employees at the bank for their valuable comments on the speech.

1  The inflation target was announced on 15 January 1993, when the General Council of the Riksbank announced that from 1995 monetary policy would be aimed at a target for inflation, measured as the annual change in the CPI, of 2 per cent.

Telephone: +46-(0)8-787 00 00, Website: riksbank.se



Monetary policy communication is a hot topic that has been the focus of strategy reviews by many of the major central banks recently. Today I would like to describe how attitudes towards transparency and communication have changed, and compare the Riksbank with other central banks, with a particular focus on the points where the Riksbank has chosen to be more open than many others. I will also discuss challenges that all central banks need to address in their communication. One conclusion is that there are clear benefits to central bank transparency, but that transparency does not automatically mean clarity. That's why openness and clarity are the watchwords of the Riksbank's communication policy -both are needed. 2 Communication also needs to be adapted to the circumstances, for example when uncertainty about the economic outlook is unusually high, as it has been recently. I will round off my speech by describing the changes the Riksbank has made in response to this.

## Shift in attitudes towards transparency and communication

Today, central banks spend a lot of time communicating what they do and why, and we endeavour to make the information understandable. This is a major shift compared to a few decades ago. At that time, central banks' stated strategy was to say as little as possible about monetary policy.

When I worked at the Riksbank in the early 1990s, interest rates in the economy were indirectly controlled via liquidity in the banking system. Depending on how much the commercial banks borrowed from the Riksbank, they paid a marginal interest rate that increased in steps. Every day the Riksbank made forecasts of how large the borrowing needs of the banking system were and conducted open market operations to place the banking system on a step with a particular marginal interest rate to achieve the desired effect on market interest rates and foreign exchange flows. There was little transparency and the Riksbank was not very open about what marginal rate it was aiming for. Indirect control and a lack of transparency contributed to signals from the Riksbank sometimes being perceived as unclear, and could lead to newspaper comments of this type: 'Market traders are increasingly asking whether the Riksbank has tightened monetary policy.' 3

2  The Communication policy is available on the Riksbank's website under About the Riksbank/How the Riksbank is governed/Internal regulatory framework/Policies.

3 Quotation from Svenska Dagbladet on 5 December 1989, see P. Sellin (2018), 'The Riksbank's operational frameworks for monetary policy 18852018', Economic Review 2, Sveriges Riksbank.

Similar examples can be found at other central banks. There was a perception that explicit statements on monetary policy could lead to unwanted reactions on the financial markets. Thus, monetary policy could become less effective if the central bank were too open and transparent.

From the 1990s onwards, this attitude was turned on its head. There are several explanations for this. For the Riksbank, greater transparency was in part a deliberate strategy to shore up damaged confidence following the economic crisis of the early 1990s and the failed defence of the fixed exchange rate. 4 Another reason, which the Riksbank shared with many other central banks, was greater independence. It became more and more common to give central banks a mandate to conduct monetary policy -often inflation targeting -at arm's length from other economic policies. Greater independence requires a greater focus on openness and transparency, as this is a precondition for democratic scrutiny and accountability. 5

At the same time, macroeconomic research evolved and models were developed that provided a theoretical foundation for inflation targeting. An important insight characterising these models is the importance of looking at the behaviour and decisions of individual economic agents -households, companies, market participants -to understand how the macroeconomy develops over time. These decisions are influenced by agents' expectations about monetary policy, among other things. This 'channel' through which monet ary policy can influence the economy today, in addition to the current level of interest rates, received greater focus.

## Communication can make monetary policy more effective

In a stylised theoretical world, where all agents are rational and have complete information about how the economy works, ongoing communication about monetary policy is in principle superfluous. The central bank then announces the monetary policy objective and a rule for achieving it in different circumstances. Based on that, everyone can work out for themselves how the central bank will act.

4  A discussion of the importance of communication for confidence, with the Riksbank as an example, can be found in P. Meyersson and P. Petrelius Karlberg (2012), ' A journey in communication: The case of Sveriges Riksbank '. SNS förlag.

5  N. Dincer, B. Eichengreen and J. Martinez (2024), ""Central Bank Independence: Views from History and Machine Learning"", Annual Review of Economics 16.

The reality is of course more complex. No one has complete information on how the economy works. In practice, it is difficult for a central bank to specify a rule to which it will always adhere. But there is still a point in central banks trying to act in a systematic manner. This makes it easier to understand and anticipate monetary policy. Communication then helps households, companies and market participants understand how the central bank acts. This in turn makes monetary policy more effective.

One example is when the central bank announces a target for inflation and then acts and communicates in a way that gives credibility to this target. Households and companies then set their expectations that inflation will eventually be close to the target, which in turn makes it easier to actually keep inflation around the target. Expectations ""do some of the job"" for the central bank.

Expectations that inflation will be close to the target in the long run are closely linked to expectations of how the central bank will change the policy rate, and hence how short-term market interest rates will develop. Expectations of shortterm market interest rates affect other financial prices, such as interest rates on longer-term loans, which play an important role in the decisions that households, companies and market participants make today. Communication that clarifies how the central bank acts can therefore increase the chances of the central bank influencing interest rate expectations and thus the economy today, making monetary policy more effective.

## Forward guidance as a monetary policy tool

What kind of information is interesting for the central bank to communicate? In general, all information relevant to the central bank's monetary policy decisions. The objective(s) of monetary policy is of course the most important. But the strategy for achieving the targets can also be useful information, as can the central bank's assessment of the economic situation and what it thinks about the outlook for the future, including how the interest rate will develop.

When the central bank communicates about future monetary policy, it is sometimes called 'forward guidance'. This is sometimes described as a monetary policy tool that can be used in particular when the policy rate is close to its lower bound and cannot be cut further. If the central bank can then adjust expectations that interest rates will remain low for a long time, it will stimulate the economy now, without cutting interest rates further. The difficulty is to make it credible that monetary policy will be conducted in a particular way in the future, especially if it would mean that the central bank then acts in a way that is not normal.

But monetary policy guidance need not necessarily be regarded as a tool whose main purpose is to influence the expectations of economic agents in a particular

direction. It may simply be part of the communication on monetary policy, which is aimed more at explaining the central bank's reaction function. It is then also natural to emphasise that this is a forecast that will change depending on what happens in the economy. As I will discuss later, it is this type of guidance that the Riksbank uses in its communication. But before I talk about the Riksbank, it might be interesting to see how things are at other central banks. 6

## How do central banks communicate in practice?

A comparison of 15 inflation-targeting central banks in OECD countries shows that the vast majority take eight monetary policy decisions per year. All of them communicate their decisions in a press release and a large majority publish a report with forecasts for four of the decisions. Most also hold a press conference in connection with each decision, while some choose to hold a press conference only in connection with decisions when publishing a report. About half of them report how individual members voted. With a few exceptions, central banks publish the minutes of the meetings at which monetary policy is decided, but usually without revealing the reasoning of individual members. In some cases, central banks transcribe what is said at the meetings and publish this, but with a delay of several years.

For the most part, the reports reflect the views of the committee that takes the monetary policy decisions. In line with the aim of stabilising inflation over the medium term, the forecasts in the reports usually extend 2 -3 years into the future. Some central banks choose to let the policy rate forecast be exogenous, using either market expectations of the policy rate or an assumption that the policy rate will remain unchanged throughout the forecast period. Most allow the development of the interest rate to be determined endogenously in the forecasting process, i.e. it is determined at the same time as other forecasts. However, also publishing the interest rate forecast in the reports is something of a watershed, and only a few do so. 7

6  The comparison is based on Table 1 in C. A. Claussen (2017), ""Central Bank of Chile's Monetary policy decisionmaking process, communication and transparency. Review and recommendations', Banco Central de Chile. An update has been made using information available on central bank websites.

7  Like the Riksbank, the central banks of New Zealand, Norway, the Czech Republic and Israel publish their own interest rate forecasts. The US Federal Reserve does not have a straightforward interest rate forecast, but publishes the various committee members' assessments of the appropriate level of the federal funds rate at the end of the next three years. The central bank of South Korea publishes a similar socalled 'dot plot'.

## The Riksbank is one of the most transparent central banks

What is the situation at the Riksbank? As many may know, the Riksbank is ranked as one of the most transparent central banks in the world, in fact the most transparent about monetary policy in a recent comparison. 8 This is the result of a determined effort that has gone hand in hand with the development of inflation targeting. This transparency is the result of several different factors. I have already mentioned a few: the poor state of trust after the 1990s crisis, greater independence and academic research showing the benefits of transparency. To this can be added a long Swedish tradition of openness in public administration, but also dialogue with various target groups and, not least, inspiration from other central banks. 9

There are many similarities between the Riksbank and other central banks in terms of how we communicate, but in some respects the Riksbank has chosen a more open approach to communicating monetary policy than several other central banks. These include the Riksbank's own forecast for the policy rate and the transparency of our decisions, which is reflected in the way we draft the minutes of the monetary policy meetings. 10

## The interest rate forecast has become a natural part of the Riksbank's communication on the economic outlook

From the start of inflation targeting in the 1990s until 2005, the Riksbank made forecasts under the assumption that the policy rate would remain unchanged during the forecast period. This was then changed to an assumption that the interest rate would follow market expectations as reflected in the pricing of financial instruments. In 2007, the Riksbank took the step of making its own forecast for the policy rate, which it also communicated externally. The inspiration for this was the Reserve Bank of New Zealand, which had already started publishing an interest rate forecast ten years earlier.

The Riksbank's decision to switch to its own interest rate forecast had developed over a long period, as it felt that the disadvantages of other interest rate assumptions had become too great -both in internal forecasting work and in

8 N. Dincer, B. Eichengreen and P. Geraats (2022), 'Trends in Monetary Policy Transparency: Further Updates', International Journal of Central Banking , vol. 18. The data in the article extends until 2019. 9 P. Meyersson and P. Petrelius Karlberg (2012), ' A journey in communication. The case of Sveriges Riksbank '. SNS Förlag.

10  It is worth noting that the Riksbank also seems to communicate more ex post analysis of monetary policy than other central banks, i.e. analysis that is relevant in monetary policy evaluations, see Table 1 in N. Dincer, B. Eichengreen and P. Geraats (2022), ""Trends in Monetary Policy Transparency: Further Updates', International Journal of Central Banking , vol. 18.

communication. 11 Reading the motivations from 2007, the impression is that the publication mostly followed on from the decision to make its own interest rate forecast -since it was made, it seemed natural to also communicate it. Admittedly, there were practical difficulties in producing an interest rate forecast and these needed to be addressed. For example, it was discussed whether the Executive Board could agree on a forecast. On the other hand, possible drawbacks of publishing the interest rate forecast were quickly dismissed, drawbacks such as that market participants would start to rely too much on the forecast, or that the Riksbank would feel obliged to stick to its interest rate forecast even though it should be changed.

The possibility of influencing expectations of the policy rate was emphasised as an advantage when the Riksbank began to publish its own interest rate forecast, often called the interest rate path. But the Riksbank was clear from the outset that the interest rate path depends on the economic situation and can be changed. 'The interest rate path is a forecast, not a promise' was repeated frequently in the press releases, at the press conferences and for a long time also in the introduction to the Monetary Policy Reports. For the Riksbank, the guidance on monetary policy has thus been more about providing information on the Riksbank's assessment and reaction function than actively trying to steer expectations of the interest rate going forward.

## The minutes of the monetary policy meetings make it clear who in the Executive Board has said what

In 2007, the Riksbank also made other changes to its communication to increase understanding of monetary policy and facilitate evaluations. One such change was the inclusion of members' names in the minutes of monetary policy meetings. The minutes, which are published shortly after the meetings, therefore show which member of the Executive Board makes which contribution. In this respect, the Riksbank differs from many other central banks. One reason is probably that the composition and working methods of the banks' monetary policy committees differ.

A prerequisite for the work of the Executive Board of the Riksbank is that the members take individual responsibility for monetary policy. This is reflected, among other things, in the fact that we are not expected to agree on our

11  For more details on the background and motivations, see M. Apel and A. Vredin (2007), ""Monetary-Policy Communication. The Experience of the Swedish Riksbank"", Czech Journal of Economics and Finance , 57 and E. Bylund, J. Iversen and A. Vredin (2023), ""Monetary policy in Sweden after the end of Bretton Woods"", Comparative Economic Studies , 66. An evaluation of the first ten years with an own interest rate forecast can be found in Sveriges Riksbank (2017), ""The Riksbank's experiences of publishing interest rate forecasts"", Riksbank Studies June.

decisions. 12 Decisions are taken by majority vote, with dissenting members entering reservations, which we communicate with the monetary policy decision. It is important that each member of the Executive Board can explain his or her own views on monetary policy and the basis for them. In the past, this was communicated in speeches, but now the minutes are the main source of such information.

The Riksbank's own research shows that, since we started reporting names in the minutes, members explain their positions in more detail and it is now also more common for them to refer back to their own reasoning. 13 It is, of course, positive in itself that we in the Executive Board think carefully about and prepare our contributions. But one drawback is that there are rarely spontaneous discussions at our monetary policy meetings. Such discussions take place earlier in the preparation process. While this may be perceived as a disadvantage from a transparency perspective, an advantage of this arrangement is that it should increase the conditions for a more consistent and predictable monetary policy.

Another advantage of including the names of the members in the minutes is that it facilitates the internal work of the Executive Board, which is a necessary condition for effective communication of monetary policy in general. When there is an opportunity to nuance positions, it becomes easier for the five of us on the Executive Board to agree on a level for the policy rate, a press release with a monetary policy message and a report with forecasts, including a forecast for the policy rate. As I mentioned, we do not necessarily aim to be unanimous. However, to reach a decision, it can be necessary to compromise on details. This is easier when we can use the minutes to 'ventilate'. 14 They show that there are nuances in the consensus and that we often arrive at a decision from different directions.

## Communication in practice -challenges

Regardless of how central banks communicate, they all face similar challenges in getting their messages across. Today I happen to be speaking to the Swedish Economics Association, an audience we can count as a statistical extremity when it comes to knowledge of and interest in economics and monetary policy. Of

12  The Executive Board of the Riksbank is usually described as an individualistic monetary policy committee, as opposed to a collegial committee in which consensus is sought and the members do not openly state dissenting opinions once the decision has been taken. See, for example, A. Blinder (2007), ""Monetary policy by committee: Why and how ?', European Journal of Political Economy , vol 23.

13  M. Apel, M. Blix Grimaldi, L. Ahrenberg, D. Holmer and A. Jönsson (2025), ""The effect of increased transparency on an individualistic monetary policy committee"", forthcoming in Sveriges Riksbank Working Paper Series.

14  See also M. Flodén (2024), ""Communicating future monetary policy -reflections after eleven years as a member of the Riksbank's Executive Board"", speech 17 April, Sveriges Riksbank.

course, financial market participants are also a group that closely follows monetary policy and is often targeted by central banks.

However, the vast majority of society is not an expert in economics and is unlikely to be interested in following monetary policy communication in detail. And maybe they have no reason to do so. If inflation is low and stable, it may be natural to care less about following monetary policy. 15

## Most people take part in central bank communication indirectly via the media

But while in some ways low interest in central bank communication could be interpreted as a top grade for monetary policy, it poses an even greater challenge in communicating monetary policy and getting the message across. Central banks' communication with the public has come under greater focus in the past decade. 16

An interesting question is through which channels the public receives information from central banks. Traditional sources such as TV and newspaper articles are still a more common source than social media. 17 Even for groups that may have a greater interest in following monetary policy, such editorial media appear to be an important interface for central banks. 18 But it cannot have escaped anyone's notice that the media landscape is nevertheless changing. This is why central banks also need to constantly consider how best to reach out. The Riksbank has long been present on social media, partly reaching groups that are not as easily reached via traditional media. There is also greater scope for customising communication to the recipients.

Obtaining information directly from the central bank's website is less common, but it does happen to some extent. To take the Riksbank as an example, our website has an average of just over 100,000 page views on the days we publish a new interest rate decision, compared with just over 20,000 page views per day on average over a year. If, in addition to information on the level of the policy rate, you would like more details on the interest rate announcement, you can find

15 See for example M. Weber et al. (2025), 'Tell Me Something I Don't Already Know: Learning in Low - and High Inflation Settings', Econometrica , 93, and C. Sims (2010), 'Rational inattention and mone tary economics', Chapter 4 in B. Friedman &amp; M. Woodford (eds) Handbook of Monetary Economics vol. 3, Elsevier.

16  For a review of the research, see A. Blinder, M. Ehrmann, J. De Haan and DJ. Jansen (2024), 'Central Bank Communication with the General Public: Promise or False Hope?', Journal of Economic Literature , 62. 17 See M. Gardt, S. Angino, S. Mee and G. Glöckler (2021), 'ECB communication with the wider public', ECB Economic Bulletin 8.

18  Surveys conducted by the Riksbank show that the editorial media are the main interface that the Riksbank has with financial actors, people in labour market organisations and officials at other authorities.

them in the press release and the report published at the same time. The press release page has an average of around 13,500 views and around 1,400 downloads on the days when an interest rate announcement is published. 19

But most people receive the Riksbank's message via the media. This stage in the communication between a central bank and the public matters for how the central bank's message reaches the public. 20 To begin with, the extent of media coverage is important, as the greater the coverage, the more likely it is that the message will reach its intended audience. Of course, the extent of media coverage depends on what the central bank actually does. But research shows that the narrative of central bank communication itself also influences the scope. 21 The way central banks express themselves also plays a role in how much of the central bank's wording is reflected in the reporting. This is especially true when the state of the economy is more uncertain. 22

Once the communication from the central bank reaches the public, the next question is how it is received. Put simply: Do people understand what central banks say? Research shows that this may not always be the case. 23 For one thing, the results show that there is limited knowledge about the tasks of central banks and how monetary policy works. Reasonably, however, the experience of recent years should have raised this knowledge somewhat, so it will be interesting to see what new studies will show. But it is also the case that central banks have historically tailored their communication and language more to experts. However, there have been changes here. The Riksbank launched a plain language project back in 2007 to ensure that our communication is understandable. Like other central banks, the Riksbank has also worked with what the Bank of England calls layered communication, where the same message is formulated and illustrated in different ways for different groups. 24 One example is our short videos summarising the key messages of each interest rate decision.

19  More downloads of the reports take place in the days following the rate announcement. These are not total figures.

20  See, for example, O. Coibion, Y. Gorodnichenko and M. Weber, ""Monetary Policy Communications and Their Effects on Household Inflation Expectations', Journal of Political Economy , 130.

21 See for example S. Ter Ellen, V. Larsen and L.A. Torsrud (2022), 'Narrative Monetary Policy Surprises and the Media', Journal of Money, Credit and Banking 54.

22 See T. Munday and J. Brookes (2021), 'Mark my words: the transmission of central bank communication to the general public via the print media', Staff Working Paper No. 944, Bank of England.

23  See A. Blinder, M. Ehrmann, J. De Haan and DJ. Jansen (2024), 'Central Bank Communication with the General Public: Promise or False Hope?', Journal of Economic Literature , 62.

24  See, for example, A. Haldane (2018), ""Climbing the Public Engagement Ladder"", speech on 6 March, Bank of England.

## Communicating uncertainty is a challenge

One of the major challenges for the communication of monetary policy, whether aimed at experts or not, concerns uncertainty and risk. I'm not just saying that because this has been particularly challenging lately. 25

Monetary policy operates largely with a time lag and central banks therefore need to base their decisions on forecasts of the economic outlook, forecasts that are inevitably uncertain. As a central bank, one wants to provide information about the forecasts on which the decisions are based and give some kind of guidance on how monetary policy will be conducted. At the same time, you would normally emphasise that these statements are highly uncertain, that unexpected events may occur and that the economic outlook can change in a way that requires monetary policy to take a different path. This part of the communication is difficult to get across.

One reason for this is that we all prefer clear messages to uncertain ones. ""What does the weather forecast say -will it rain tomorrow?"" Information on the likelihood of rain is often available, but to answer the question, many people are probably content to see whether or not the weather map has a cloud with raindrops. The focus is on averages and modes. The fact that there is a whole distribution of possible outcomes behind these measures is overlooked or completely ignored. But for communication to provide a better understanding of the central bank's assessments and decisions, it is important that the uncertainty in the assessments is highlighted and that households, businesses and market participants understand that it exists. Otherwise, the communication of the economic outlook and forward guidance could be interpreted as more confident statements than the central banks intended.

## Several examples of the difficulty of providing forward guidance conditional on what is happening in the economy

Even where central banks have more actively sought to guide interest rate expectations, forward guidance has in principle always contained elements of caveats, emphasising that monetary policy depends on the outlook, which is uncertain and subject to change. In general, guidance has thus been more conditional than unconditional. 26

There are several examples of the difficulty in getting such reservations across. The Bank of England's 2013 ""conditions-based"" forward guidance described how

25  E. Thedéen (2025), ""On risk, uncertainty and geoeconomic fragmentation"", speech on 16 May, Sveriges Riksbank.

26 See, for example, B. Broadbent (2022), 'Reliable partners', speech on 30 March, Bank of England.

monetary policy would be conducted until unemployment had fallen below a certain level. This guidance only applied under certain conditions. As David Miles, a member of the Bank of England's Monetary Policy Committee at the time, has noted, the guidance then inevitably became more complex than if they had simply promised to conduct monetary policy in a certain way. 27 But that was how the message was interpreted in many quarters, judging from comments in the media, for example. A similar example is the Reserve Bank of Australia's combination of a conditions and time-based forward guidance in 2020 -2021. The Bank noted in an evaluation that while the guidance was conditional, many people did not interpret it as such. 28

## It is natural that the Riksbank changes its interest rate forecast

As I have tried to describe, the Riksbank publishes interest rate forecasts more because we want to be transparent and provide information about how we think and normally act, rather than to make commitments about the interest rate. From this point of view, it is essential to emphasise that the Riksbank is communicating a forecast, not a promise, and that it is natural -in fact quite fundamental -that we change the interest rate forecast.

If the Riksbank makes the right assessment of the economic situation, if key assumptions about the economy hold and if future developments are not affected by new ""shocks"" -then the interest rate forecast reflects how we would probably conduct monetary policy in the future. But if -or rather when -any of this changes, we will need to change the interest rate forecast so that it once again reflects a well-balanced monetary policy where inflation is lastingly around our target of 2 per cent at the same time as monetary policy contributes to a balanced development of production and employment.

We think that this way of communicating works well in general and several of the fears that existed with publishing an interest rate forecast have not been realised, for example that the Riksbank would feel obliged to follow its interest rate forecast or that market participants would rely on the Riksbank's forecast.

But there are also challenges. One such is that the interest rate forecasts have not been particularly accurate. For example, they systematically overestimated the path of the policy rate over a long period of time, which resulted in some criticism. In some periods, there have also been relatively large differences between the Riksbank's interest rate forecast and how market participants

27  D. Miles (2014), ""What is the right amount of forward guidance? The experience of the Bank of England with forward guidance"", speech on 13 November, Bank of England.

28 Reserve Bank of Australia (2022), Review of the RBA's Approach to Forward Guidance.

expected the policy rate to develop, particularly in the longer term. Such differences have not been easy for the Riksbank to deal with. Are they due to different perceptions of the economic outlook, or to difficulties in separating risk premiums from expectations? Or do they indicate that market participants do not believe that the interest rate forecast reflects how the Riksbank normally acts?

The Riksbank has drummed home the message that the interest rate forecast should not be interpreted as a promise, and it seems to have got through. But it is still a challenge to get across that the interest rate forecast is part of the communication of a reaction function, i.e. how the Riksbank thinks about monetary policy and how we normally act. In the media reporting and the debate on monetary policy, the focus is still mostly on what we will do at the next monetary policy meeting and what the Riksbank's forecast for the interest rate is in the long term.

## Unusually high degree of uncertainty may mean we need to communicate differently

As I have mentioned, uncertainty is one of the major challenges for communication, and recently uncertainty has increased significantly. Since the large surge in inflation, there has been fundamental uncertainty about the pricing behaviour of firms and its implications for the inflation propensity of the economy. In addition, uncertainty about the economic outlook has grown in line with risks related to the war in Europe, the conflict in the Middle East, government crises in European countries and uncertainty about economic policy in the United States.

The arguments in favour of transparency are basically the same regardless of the level of uncertainty. It is natural that many people seek guidance from the central bank when uncertainty about developments is particularly high. At the same time, it is likely to make it even more difficult for central banks to reach out with caveats in the guidance. In times of unusually high uncertainty, it may therefore be necessary to adapt the way one communicates. An extreme example of a situation of great uncertainty is when the pandemic paralysed the global economy in spring 2020. 29 The Riksbank then changed the format of its Monetary Policy Report. Instead of one main scenario, two equivalent scenarios were published, based on different assumptions, including the spread of infection. The scenarios also only illustrated developments for a limited number of variables. An interest

29  Another example is the global financial crisis of 2008. How the Riksbank then adapted its communication is described in P. Meyersson and AL. Mikiver (2018), 'The Riksbank's communication before, during and after the financial crisis', Economic Review 4, Sveriges Riksbank.

rate path was published, but only for developments over the next year instead of the next three. 30

The recent unusually high level of uncertainty about the economic outlook has left its mark on central bank communications. For instance, several central banks, including the Riksbank, have emphasised more than before that monetary policy will be determined by new information on the economic and inflation outlook. Moreover, some central banks that provided monetary policy guidance during the pandemic and the period of high inflation have basically stopped doing so. For example, communication from the ECB, the Bank of England and the Federal Reserve is less concrete about future monetary policy now than it was before. This is probably explained by the fact that there is a less clear direction for future interest rate decisions when inflation has fallen back towards the inflation targets. In addition, the direction of monetary policy is thus unusually uncertain. This makes it less relevant to use guidance as a tool to manage expectations.

In a world that can change rapidly, it is of course important to constantly review and assess the effectiveness of monetary policy communication -and to be prepared to make changes if this is deemed necessary. The Riksbank has not reduced its guidance on monetary policy in that we have continued to publish interest rate forecasts. However, following discussions within the Executive Board and with Riksbank staff, we have made some changes to address the challenges faced in communication. Let me mention some of the changes we have made recently in terms of how the Riksbank communicates about risks and uncertainty. 31

## The Riksbank's changes in communication.

One major change we made in 2024 is that we now have eight regular monetary policy meetings a year instead of five. So we followed the most common approach for central banks. Although it is, and has always been, possible to hold extraordinary meetings, more regular meetings allow the Riksbank to adjust monetary policy more quickly. In times of rapid change, it also improves the conditions for effective communication by allowing us to communicate more often a comprehensive view of economic developments.

30  Monetary Policy Report, April 2020, Sveriges Riksbank. The format with a main scenario and full projections was back to normal in the subsequent report in July 2020, but then with alternative scenarios to illustrate the high uncertainty surrounding the main scenario.

31 More details can be found in the article 'Changes in the Riksbank's monetary policy communication' in the Account of Monetary Policy 2024.

At four of the eight monetary policy meetings, the Riksbank publishes a Monetary Policy Report. At the other meetings, we publish a Monetary Policy Update without any new forecasts. Hence, at every other meeting we do not publish a new inflation or interest rate forecast, but we still need to refer to the previous forecasts. We have therefore adapted to communicating guidance more verbally, for example when we judged in our last decision in May that inflation was slightly more likely to be lower than to be higher than in the March forecast. I think this has worked well, and the communication has been able to handle monetary policy adjustments even without forecasts. Nor have there been abnormally large market reactions on those occasions.

We have also changed the communication around the interest rate forecast to some extent. As I have mentioned, the challenge is to convey a message about monetary policy that also clearly communicates risks and uncertainty. Given the experience of recent years, we recognised that this part of the communication needed to be more nuanced and concrete. In general, uncertainty about interest rate developments is greater further ahead than in the near term. To illustrate this, the Riksbank previously published an uncertainty interval around the interest rate forecast, based on historical forecast errors. But it was difficult to convey via this interval, for example, how uncertainty was linked to the inflation outlook for a specific decision.

We have now made some changes to the Monetary Policy Report to clarify the difference in how the Executive Board views the forecast for the policy rate in the near term, where the information value is quite simply greater, and the longerterm forecast. The first section of the Report presents the considerations that are most important for the current monetary policy decision and focuses on the Executive Board's assessment of the policy rate over the next three quarters. The final chapter of the Report contains a more detailed monetary policy analysis, which also discusses developments over the entire three-year forecast period. It also makes it more clear that there is greater uncertainty about longer-term developments.

Another change the Riksbank has made concerns alternative scenarios. Analysing scenarios has long been a central part of the material for monetary policy decisions, for instance to identify important risks that the Executive Board needs to take into account in its decisions. They can also be an effective tool in external communication to make uncertainty about future monetary policy more concrete.

While this is not a new tool for the Riksbank, we now publish alternative scenarios in every Monetary Policy Report and highlight them more in our communication. 32

Alternative scenarios illustrate the uncertainty of developments and provide information on the risks that the central bank is focusing on at the time of the decision. But the fact that the future is uncertain is in some sense trivial. I believe that the communication of alternative scenarios is most effective when combined with a forecast for the policy rate, or equivalent guidance on what monetary policy would look like in the alternative scenarios. In this way, the scenarios can make the uncertainty more concrete and also help to provide more information about the central bank's reactions.

## Communicating the purpose of monetary policy remains important

To summarise my discussion today, I have described how the shift towards greater transparency has meant a greater focus on how central banks communicate their monetary policy. I have also discussed challenges that our communication faces in practice and the need to adapt it to the circumstances. Transparency is generally a good thing, but it does not work to merely open all the windows wide and think that is enough. Communication needs to be adapted so that the information and messages are clear and properly understood. Conditions differ from one central bank to the next and can influence the choices made. The Riksbank has chosen to be more transparent in some respects than many other central banks, for example with regard to its own interest rate forecast and the minutes of monetary policy meetings. This is partly due to a generally favourable attitude towards transparency and partly to changes that the Riksbank has made to facilitate its internal work.

Finally, let me end where I started, with the thirtieth anniversary and with Urban Bäckström's speech at the Swedish Economics Association in 1995 33 One of the purposes of Urban's speech was to explain the meaning and interpretation of the inflation target announced by the General Council of the Riksbank. It is interesting to note that the wording of the inflation target has since changed in a couple of respects, partly in response to communication challenges for the Riksbank. For example, the target was originally defined in terms of the CPI, but is now formulated as a target for the CPI with a fixed interest rate, the CPIF. Another

32  Since 2007, when the Riksbank began publishing forecasts for the policy rate, the Riksbank has, over time, to varying degrees used alternative scenarios to communicate monetary policy.

33  The speech was published in the Society's proceedings in Ekonomisk Debatt No. 3, 1995 and is available on the Society's website (in Swedish).

example is that there was originally a tolerance band around the target of ±1 percentage point, which was removed and then replaced by a variation band.

That said, the 1995 speech feels surprisingly relevant, not least the discussion of the costs of high inflation and the importance of price stability. Inflation targeting was admittedly in its infancy, and it was far from obvious that it would manage to anchor inflation expectations. But Urban said that there was ""could be reason for cautious optimism'. Three decades later, we can see that the optimism about inflation targeting was justified. But as the rise in inflation in 2021 -2022 shows, nothing can be taken for granted. There is every reason for central banks to constantly remind themselves of the purpose and objectives of monetary policy. Research also suggests that such communication from central banks may be the most important.

In that spirit, I will give the last word to Mr Bäckström:

'This is also why central bankers around the world so often say that the best contribution monetary policy can make to high and stable growth is to preserve price stability. It also means that price stability should not be seen as an end in itself but as a means of creating the conditions for stable and favourable longterm economic development.'",Erik Thedéen
https://www.bis.org/review/r250611g.htm,Yannis Stournaras: Central banks - opportunities and implications posed by artificial intelligence,"Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the ECONDAT Conference on ""Economics with nontraditional data and analytical tools"", London, 6 June 2025.",2025-06-06 00:00:00,"## Yannis Stournaras: Central banks - opportunities and implications posed by artificial intelligence

Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the ECONDAT Conference on ""Economics with nontraditional data and analytical tools"", London, 6 June 2025.

* * *

## Introduction

Many thanks to the conference organisers for inviting me to be here today. It's a privilege to be part of this dialogue that is helping to shape the digital era.

Central banks may seem far removed from your world-but we share an important feature: all of us are engaged in understanding complexity, managing uncertainty, and preparing for the future.

Today, I would like to discuss how central banks can harness the transformative potential of artificial intelligence (AI) in their mission to safeguard monetary and financial stability. My remarks will unfold along three dimensions, focusing on several important issues, but without being exhaustive.

- First, on the ways that AI intersects with our monetary policy strategy at the European Central Bank (ECB).
- Second, on the opportunities AI offers to central banks for efficiency gains in areas such as communication and economic analysis.
- Third, on the implications posed by AI for price stability, monetary policy transmission and financial stability.

## Intersections of monetary policy strategy with AI

So, let me briefly discuss the ways that AI intersects with our monetary policy strategy.

When the ECB Governing Council embarked on its strategy review last year, we made it clear that price stability remains our objective. We also decided to keep the symmetric, 2% inflation target unchanged.

The clarity which that objective provides, and our success in achieving that objective, have provided the ECB with credibility, which was essential in keeping inflation expectations anchored around the 2 per cent level during the recent inflation surge.

Although our updated strategy is only expected to be concluded and announced later this year, the following is important.

When the review was initiated, no one could have possibly foreseen the tectonic eruptions to the geopolitical landscape that ensued.

These developments have only reinforced the importance of the review and the need to ensure that our policies will remain fit for a rapidly evolving world -- a world that is now being shaped by geopolitical tensions, trade disruptions, ongoing climate change, and rapid advances in artificial intelligence.

In such a world, central banks need to be able to respond with agility, which is undoubtedly a guiding virtue for everyone in this room.

We have to deliver a strategy that is not only robust but also flexible: one that allows adjustments to the monetary policy stance and our toolkit in response to shocks and provides a foundation that can guide the Governing Council in navigating through challenges in the years to come.

In today's fast-moving environment-where inflation dynamics can shift rapidly, financial conditions are increasingly volatile and uncertainty is ever-present-we need to improve our ability to communicate, assess economic developments in real time and make more accurate projections of the outlook to guide our monetary policy making.

This is where AI begins to play a potentially transformative role. In the following, I will focus on the opportunities provided by AI in core central banking fields, namely communication and economic analysis.

## Opportunity to enhance communication

I start with communication.

Central banks have come a long way in their communication strategies. As you may know, it was not always the case that the words ""central bank"" and ""communication"" could even stand together in the same sentence.

In the 1960s and 1970s, the conventional wisdom among central bankers was: ""the less said, the better."" The aim was often to surprise markets with the announcement of their policy decisions. Significant policy decisions were sometimes made without immediate public disclosure, and the rationale behind them was not always transparently communicated. The language used would often make the oracles of Delphi seem crystal clear.

Alan Greenspan once captured this perfectly when he said, "" if I seem unduly clear to ."" you, you must have misunderstood what I said

Things began to change in the 1980s and 1990s. Two factors, in particular, helped bring about this change.

The first factor was credibility. As more and more central banks adopted inflation targeting frameworks, they realized that to achieve their targets, they needed to control inflation expectations. In other words, they needed to be credible.

The second factor was independence. As central banks achieved independence from politicians, they also had to communicate in a transparent way with the public to help build trust, and safeguard accountability.

An important corollary of the improved communication is that it has increased the effectiveness of monetary policy transmission.

The previous ECB strategy review in 2021 consolidated this finding, while also calling for central banks in the euro area to use simpler and engaging language to directly access a broader audience.

More recently, efforts are being made to exploit AI for the benefit of our communication processes, to enhance transparency, foster trust, and ensure that our monetary policy reaction function is clearly understood, thereby supporting the anchoring of inflation expectations.

An important application involves the sentiment analysis of official publications, such as monetary policy statements, speeches, and press releases. For example, using Large Language Models (LLMs) the impact of ECB statements on financial markets 1   can be explored. This kind of work helps understand how the language in communications shapes market expectations for inflation and interest rates.

AI models can be trained on financial and policy-specific issues to detect subtle shifts in tone - such as whether a message appears more hawkish (in favour of tighter monetary policy) or dovish (in favour of looser monetary policy) - before publication. This allows communications teams to adjust language in order to ensure it aligns with the intended policy signal, minimising the risk of misinterpretation by the markets that could trigger undue volatility.

AI can also play a growing role in the crafting and refining of speeches by policy makers. LLMs can support a consistent voice in communication, while also tailoring the tone and content to specific audiences - be it financial market analysts, other expert audiences, or the wider public.

Moreover, AI supports a wide range of multilingual and accessibility needs. Machine translation models - fine-tuned for economic and legal language - help ensure timely publication of central bank materials across multiple official languages, a feature very useful to the European System of Central Banks which speaks all 24 official languages of the EU.

Recourse to AI for communication purposes, however, necessitates caution. Overreliance on AI in crafting and interpreting central bank communications could create an ""echo chamber."" This would occur when AI tools respond to, and amplify, each other's outputs, leading to overly uniform narratives and repetitive signals, that may distort the policymakers' message. This is a clear case that illustrates the need for human oversight in overviewing processes to ensure that communication stays varied, accurate, and relevant.

## Opportunity to improve central bank economic analysis and decision making

Another area that AI is poised to enhance is economic analysis. Following the AI revolution, we have started to build expertise in incorporating AI and non-traditional data in our analytical tools. These tools are rapidly being applied in the economic analyses that inform our monetary policy decisions.

A question however arises: Is the use of AI in this context a hype? Or could it mark a methodological revolution that will help us better pursue our mandate? I believe that there are unique opportunities but also several challenges.

First, central banks rely heavily on economic data to make informed decisions on monetary policy. Traditional statistical methods may not be sufficient to apprehend the complexity of the current uncertain environment. The use of LLMs can deliver enhanced data processing and analysis of unstructured data sets of textual data (like news articles or social media). This enables us to access new and non-traditional data sources, that could provide useful insights into our policies.

Furthermore, machine learning (ML) models can quickly detect patterns, trends, and potential risks that might not be visible using traditional methods. Thus, we could identify structural breaks and patterns that would otherwise be difficult to detect.

These tools can also help identify non-linear relationships. This is particularly important in a complex environment, since capturing non-linearities in the data is essential to understanding how the economy will evolve under stress and how seemingly small disturbances could lead to large-scale economic disruptions.

In addition, by processing real-time data, AI can provide timely insights and rigorous analysis, allowing central banks more flexibility in decision making. This is valuable in a world prone to shocks and in times of pervasive uncertainty.

There is also a possibility that these tools will be useful in the prediction of turning points in the business cycle and of tail events, such as fiscal crises.

Finally, AI could improve forecasting and nowcasting inflation and economic activity. The Eurosystem already uses AI to improve its forecasting processes. For example, ML techniques are applied in inflation forecasting or in nowcasting global trade . 2 3 Moreover, short-term forecasts of economic activity are informed by sentiment indicators derived from the textual analysis of news, using LLMs . Research at the 4 5 Bank of Greece has produced forecasting models of inflation based on textual indicators of supply and demand disturbances in commodity markets. With the help of AI tools, these indicators can be updated on a daily basis and thus help predict inflation more accurately. This research has found that out-of-sample inflation forecast errors are reduced by up to 30 per cent.

Still, there are several challenges.

First, AI models are often complex and opaque, lacking transparency. Being like a ""black box"", they are - at least for the time being - difficult to reconcile with the principles of transparency and accountability of central banks.

Second, AI models (usually LLMs) could occasionally provide inaccurate or misleading information, raising practical, reputational and legal concerns. Therefore, human supervision is of the essence, especially in processes that require rational reasoning.

Third, the quality of non-traditional data is often poor and the process of reconciling these data with our existing data sources is demanding. In a similar vein, the use of AI should not create an over-reliance on machine-driven outcomes.

Overall, I believe that AI is a potent technology which has already brought about tectonic shifts in economic analysis. Its potential is still unfolding, and the benefits it offers are only beginning to be realised. The cutting-edge research promoted at this conference marks a point of methodological revolution. I believe that such research will fundamentally transform the way we understand economic dynamics and will ultimately enable us to make better-informed decisions.

While AI opens unique opportunities for central banks in the pursuit of their mandate, it also brings a number of emerging implications that we must carefully consider. I'd like to share what I see as some of the most significant.

## Implications on productivity, employment, inflation

Let me start with the effects on the macroeconomic outlook.

AI has strong potential to raise productivity, both through its direct impact on total factor productivity, but also through improvements of efficiency on individual firm level. However, the aggregate effects remain uncertain and vary widely across studies . 6

One reason is that a disproportionate share of the benefits generated by AI may be concentrated in a small number of highly advanced firms, particularly large technology companies with the resources and infrastructure to develop and deploy cutting-edge AI tools.

This concentration poses a risk: while AI can deliver substantial productivity benefits at the enterprise level, these gains may not necessarily translate into broad-based growth in aggregate productivity, unless mechanisms are in place to ensure that the diffusion of AI is wide across sectors, firms and countries.

In a similar vein, the potential impact of AI on employment is difficult to estimate. On the one hand, it can automate routine, lower-skilled tasks - potentially displacing workers. On the other hand, AI can create new opportunities by increasing labour demand for non-automated tasks, as well as giving rise to new types of jobs. To maximise the favourable effects of AI on employment and to mitigate risks such as labour market inequality, reskilling the workforce with AI-complementary skills will be essential.

Turning to prices, the impact of AI on inflation could go in both directions. Increased global demand for energy - driven by the computational intensity of AI technologies could raise energy prices. According to the IMF , electricity used by data centres alone, 7 is already as much as that of Germany or France, and by 2030 would be comparable to that of India which is the world's third largest electricity user. At the same time, AI can also contribute to more efficient energy use and improved grid management, potentially lowering costs.

Moreover, AI-induced productivity improvements might help offset labour shortages, especially in times of low unemployment and ageing population. This could lead to a decline in unit labour costs, exerting thus downward price pressures. However, the overall impact of AI on employment and wage growth is difficult to predict.

Expectations also play a central role in the price formation process. If consumers fully anticipate future benefits from AI (such as better products, lower costs, or higher wages), they may bring forward consumption in the short term, creating inflationary pressures. However, if expectations are only regressively formed, disinflationary forces may dominate in the near term due to delayed consumption and investment.

## Implications for monetary policy transmission

The transmission of monetary policy to the economy, and thus monetary policy making are significantly impacted by AI.

As I already noted, AI is expected to bring about distributional shifts in income and wealth. These shifts matter for monetary policy, since they influence households' marginal propensity to consume and their access to credit.

Should AI disproportionally raise the income share of lower-income households - with a higher marginal propensity to consume and greater credit constraints - the transmission of monetary policy could be strengthened. In contrast, if the gains accrue mainly to higher-income, more skilled households - who have lower marginal propensity to consume and are less responsive to interest rate changes -- then monetary policy transmission may weaken.

AI is also affecting how firms set prices. Companies that are more digitalised and employ algorithmic pricing tools can adjust prices more frequently and with greater precision in response to economic shocks. Higher price flexibility could induce - all else equal, a more efficient real economy.

At the same time, ML tools enable firms to personalise prices and introduce heterogeneity, which is likely to weaken the link between monetary policy measures and prices, although AI could provide tools that enhance price transparency and improve consumers' ability to compare prices. There is also the risk that algorithmic pricing could lead to tacit collusion among firms and greater market power, undermining the effectiveness of monetary policy in controlling inflation.

Finally, AI may influence wage-setting dynamics. If the presence of automation erodes workers' bargaining power, wage responsiveness to changes in unemployment could

be reduced. This would weaken the sensitivity of inflation to shifts in monetary policy and complicate central banks' ability to steer inflation effectively.

## Implications for financial stability

Turning now to financial stability, the implications of AI technologies are complex and multifaceted.

On the one hand, AI offers powerful tools to enhance financial institutions' capabilities in risk assessment, liquidity management and strategic decision making. On the other hand, AI can exacerbate existing vulnerabilities and create new ones.

For example, generative AI could be deliberately misused - such as through the creation of deepfakes or fabricated statements - potentially aimed at manipulating sentiment or triggering market stress.

There is also the risk of herding behavior. As more institutions adopt similar AI models, the likelihood of systemic stress increases. What may initially appear as isolated, microlevel risk could rapidly escalate via AI and pose serious threats to financial stability.

If financial institutions, market participants or the public at large base their key decisions on such inputs, without adequate human verification, we may witness situations of disorderly market volatility. Overreliance to a limited number of AI providers could further raise operational risks and adversely affect the resilience of the financial sector.

Therefore, it is critical that these tools are deployed with caution. Sound governance, robust regulatory oversight, and adequate safeguards will be essential to ensuring that AI acts as a tool for strength, rather than a source of systemic risk.

## Conclusion

To conclude, the core task of central banks remains safeguarding price and financial stability, and AI poses unprecedented opportunities but also considerable challenges.

From enhancing communication and improving economic analysis, to reshaping the channels through which monetary policy and the financial system operate, AI is already redefining the way we pursue our tasks.

As I have outlined today, AI can make central banks more agile, more transparent, and more effective. But its use also demands flexibility - not only in the tools we use, but in the way we think, plan and make decisions. In a world of growing complexity and rapid technological change, we must ensure that innovation goes hand in hand with responsibility, transparency, and trust.

This calls for thoughtful integration, not blind adoption. As we integrate AI into our policymaking, we must ensure that human judgment and critical thinking remain central to our decisions. AI should serve as a tool to enhance - not replace - our responsibility to make sound, efficient policy choices in the interest of our citizens.

The euro area faces a dual challenge: harnessing the opportunities that artificial intelligence presents while actively addressing its broader implications.

To rise to this challenge, it is vital that we craft a comprehensive European AI strategy. To improve the environment for AI innovation and diffusion of new technologies, our strategy has to rest on three pillars: funding, regulation and energy.

Developing and scaling AI requires substantial investment, particularly in digital infrastructure. There is broad consensus on the importance of building a savings and investment union to jump-start European projects on innovation, including AI.

Complementary efforts to equip people with the skills they need to thrive in an AI-driven economy and to mitigate the risk of widening inequality are also of high importance.

In addition, regulatory burdens and weak institutional quality can significantly hold back the expansion of high-tech sectors. That's why we need simple but efficient regulation, while ensuring protection of personal data and strong institutions to defend AIgenerated innovation.

Energy, too, is a critical piece of the puzzle. AI diffusion across the economy will place greater demands on Europe's energy infrastructure. Addressing supply constraints now is essential to ensuring that AI adoption is sustainable in the long run.

All these considerations need to be taken into account when assessing challenges and opportunities arising from this very innovative technology. The successful adoption of AI requires a flexible adjustment in a constantly evolving environment. Therefore, we need to commence our journey on that potentially wonderful vessel with urgency but also with careful consideration, towards a new shore.

I am confident that the insights shared at this conference, and the research being pursued by many of you in this room, will be instrumental in guiding us forward.

Thank you.

- 1 See, for example, Ashwin, J. et al., ""Nowcasting euro area GDP with news sentiment: "", , Vol. 39, No 5, August 2024, pp. a tale of two crises Journal of Applied Econometrics 887-905.
- 2 See, for instance, Lenza, M. et al. (2023), ""Forecasting euro area inflation with machine learning models"", Research Bulletin, No 112, ECB, 17 October.
- 3 See Menzie, C. et al. (2023), ""Nowcasting world trade with machine learning: a threestep approach"", Working Paper Series, No 2836, ECB.
- 4 See Ashwin, J. et al., ""Nowcasting euro area GDP with news sentiment: a tale of two crises"", Journal of Applied Econometrics, Vol. 39, No 5, August 2024, pp. 887-905

- 5 Dimitris Malliaropulos &amp; Evgenia Passari &amp; Filippos Petroulakis, 2024. ""Unpacking commodity price fluctuations: reading the news to understand inflation,"" Working Papers 334, Bank of Greece.
- 6 See Acemoglou, D. (2024), ""The simple macroeconomics of AI"" MIT, and Filippucci F. et al. (2024), The impact of Artificial Intelligence on productivity, distribution and growth: Key mechanisms, initial evidence and policy challenges"", OECD.
- 7 IMF Chart of the Week, ""AI Needs More Abundant Power Supplies to Keep Driving Economic Growth"", 13 May 2025.",Yannis Stournaras
https://www.bis.org/review/r250613a.htm,Christine Lagarde: ECB press conference - introductory statement,"Introductory statement by Ms Christine Lagarde, President of the European Central Bank, and Mr Luis de Guindos, Vice-President of the European Central Bank, Frankfurt am Main, 5 June 2025.",2025-06-05 00:00:00,"## Christine Lagarde: ECB press conference - introductory statement

Introductory statement by Ms Christine Lagarde, President of the European Central Bank, and Mr Luis de Guindos, Vice-President of the European Central Bank, Frankfurt am Main, 5 June 2025.

* * *

Good afternoon, the Vice-President and I welcome you to our press conference.

The Governing Council today decided to lower the three key ECB interest rates by 25 basis points. In particular, the decision to lower the deposit facility rate - the rate through which we steer the monetary policy stance - is based on our updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission.

Inflation is currently at around our two per cent medium-term target. In the baseline of the new Eurosystem staff projections, headline inflation is set to average 2.0 per cent in 2025, 1.6 per cent in 2026 and 2.0 per cent in 2027. The downward revisions compared with the March projections, by 0.3 percentage points for both 2025 and 2026, mainly reflect lower assumptions for energy prices and a stronger euro. Staff expect inflation excluding energy and food to average 2.4 per cent in 2025 and 1.9 per cent in 2026 and 2027, broadly unchanged since March.

Staff see real GDP growth averaging 0.9 per cent in 2025, 1.1 per cent in 2026 and 1.3 per cent in 2027. The unrevised growth projection for 2025 reflects a stronger than expected first quarter combined with weaker prospects for the remainder of the year. While the uncertainty surrounding trade policies is expected to weigh on business investment and exports, especially in the short term, rising government investment in defence and infrastructure will increasingly support growth over the medium term. Higher real incomes and a robust labour market will allow households to spend more. Together with more favourable financing conditions, this should make the economy more resilient to global shocks.

In the context of high uncertainty, staff also assessed some of the mechanisms by which different trade policies could affect growth and inflation under some alternative illustrative scenarios. These scenarios will be published with the staff projections on our website. Under this scenario analysis, a further escalation of trade tensions over the coming months would result in growth and inflation being below the baseline projections. By contrast, if trade tensions were resolved with a benign outcome, growth and, to a lesser extent, inflation would be higher than in the baseline projections.

Most measures of underlying inflation suggest that inflation will settle at around our two per cent medium-term target on a sustained basis. Wage growth is still elevated but continues to moderate visibly, and profits are partially buffering its impact on inflation. The concerns that increased uncertainty and a volatile market response to the trade tensions in April would have a tightening impact on financing conditions have eased.

We are determined to ensure that inflation stabilises sustainably at our two per cent medium-term target. Especially in current conditions of exceptional uncertainty, we will

follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance. Our interest rate decisions will be based on our assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission. We are not pre-committing to a particular rate path.

The decisions taken today are set out in a press release  available on our website.

I will now outline in more detail how we see the economy and inflation developing and will then explain our assessment of financial and monetary conditions.

## Economic activity

The economy grew by 0.3 per cent in the first quarter of 2025, according to Eurostat's flash estimate. Unemployment, at 6.2 per cent in April, is at its lowest level since the launch of the euro, and employment grew by 0.3 per cent in the first quarter of the year, according to the flash estimate.

In line with the staff projections, survey data point overall to some weaker prospects in the near term. While manufacturing has strengthened, partly because trade has been brought forward in anticipation of higher tariffs, the more domestically oriented services sector is slowing. Higher tariffs and a stronger euro are expected to make it harder for firms to export. High uncertainty is expected to weigh on investment.

At the same time, several factors are keeping the economy resilient and should support growth over the medium term. A strong labour market, rising real incomes, robust private sector balance sheets and easier financing conditions, in part because of our past interest rate cuts, should all help consumers and firms withstand the fallout from a volatile global environment. Recently announced measures to step up defence and infrastructure investment should also bolster growth.

In the present geopolitical environment, it is even more urgent for fiscal and structural policies to make the euro area economy more productive, competitive and resilient. The European Commission's Competitiveness Compass provides a concrete roadmap for action, and its proposals, including on simplification, should be swiftly adopted. This includes completing the savings and investment union, following a clear and ambitious timetable. It is also important to rapidly establish the legislative framework to prepare the ground for the potential introduction of a digital euro. Governments should ensure sustainable public finances in line with the EU's economic governance framework, while prioritising essential growth-enhancing structural reforms and strategic investment.

## Inflation

Annual inflation declined to 1.9 per cent in May, from 2.2 per cent in April, according to Eurostat's flash estimate. Energy price inflation remained at -3.6 per cent. Food price inflation rose to 3.3 per cent, from 3.0 per cent the month before. Goods inflation was unchanged at 0.6 per cent, while services inflation dropped to 3.2 per cent, from 4.0 per cent in April. Services inflation had jumped in April mainly because prices for travel services around the Easter holidays went up by more than expected.

Most indicators of underlying inflation suggest that inflation will stabilise sustainably at our two per cent medium-term target. Labour costs are gradually moderating, as indicated by incoming data on negotiated wages and available country data on compensation per employee. The ECB's wage tracker points to a further easing of negotiated wage growth in 2025, while the staff projections see wage growth falling to below 3 per cent in 2026 and 2027. While lower energy prices and a stronger euro are putting downward pressure on inflation in the near term, inflation is expected to return to target in 2027.

Short-term consumer inflation expectations edged up in April, likely reflecting news about trade tensions. But most measures of longer-term inflation expectations continue to stand at around 2 per cent, which supports the stabilisation of inflation around our target.

## Risk assessment

Risks to economic growth remain tilted to the downside. A further escalation in global trade tensions and associated uncertainties could lower euro area growth by dampening exports and dragging down investment and consumption. A deterioration in financial market sentiment could lead to tighter financing conditions and greater risk aversion, and make firms and households less willing to invest and consume. Geopolitical tensions, such as Russia's unjustified war against Ukraine and the tragic conflict in the Middle East, remain a major source of uncertainty. By contrast, if trade and geopolitical tensions were resolved swiftly, this could lift sentiment and spur activity. A further increase in defence and infrastructure spending, together with productivity-enhancing reforms, would also add to growth.

The outlook for euro area inflation is more uncertain than usual, as a result of the volatile global trade policy environment. Falling energy prices and a stronger euro could put further downward pressure on inflation. This could be reinforced if higher tariffs led to lower demand for euro area exports and to countries with overcapacity rerouting their exports to the euro area. Trade tensions could lead to greater volatility and risk aversion in financial markets, which would weigh on domestic demand and would thereby also lower inflation. By contrast, a fragmentation of global supply chains could raise inflation by pushing up import prices and adding to capacity constraints in the domestic economy. A boost in defence and infrastructure spending could also raise inflation over the medium term. Extreme weather events, and the unfolding climate crisis more broadly, could drive up food prices by more than expected.

## Financial and monetary conditions

Risk-free interest rates have remained broadly unchanged since our last meeting. Equity prices have risen, and corporate bond spreads have narrowed, in response to more positive news about global trade policies and the improvement in global risk sentiment.

Our past interest rate cuts continue to make corporate borrowing less expensive. The average interest rate on new loans to firms declined to 3.8 per cent in April, from 3.9 per cent in March. The cost of issuing market-based debt was unchanged at 3.7 per cent. Bank lending to firms continued to strengthen gradually, growing by an annual rate of

2.6 per cent in April after 2.4 per cent in March, while corporate bond issuance was subdued. The average interest rate on new mortgages stayed at 3.3 per cent in April, while growth in mortgage lending increased to 1.9 per cent.

In line with our monetary policy strategy, the Governing Council thoroughly assessed the links between monetary policy and financial stability. While euro area banks remain resilient, broader financial stability risks remain elevated, in particular owing to highly uncertain and volatile global trade policies. Macroprudential policy remains the first line of defence against the build-up of financial vulnerabilities, enhancing resilience and preserving macroprudential space.

## Conclusion

The Governing Council today decided to lower the three key ECB interest rates by 25 basis points. In particular, the decision to lower the deposit facility rate - the rate through which we steer the monetary policy stance - is based on our updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission. We are determined to ensure that inflation stabilises sustainably at our two per cent medium-term target. Especially in current conditions of exceptional uncertainty, we will follow a data-dependent and meeting-bymeeting approach to determining the appropriate monetary policy stance. Our interest rate decisions will be based on our assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission. We are not pre-committing to a particular rate path.

In any case, we stand ready to adjust all of our instruments within our mandate to ensure that inflation stabilises sustainably at our medium-term target and to preserve the smooth functioning of monetary policy transmission.

We are now ready to take your questions.",Christine Lagarde
https://www.bis.org/review/r250610c.htm,Michelle W Bowman: Taking a fresh look at supervision and regulation,"Speech by Ms Michelle W Bowman, Vice Chair for Supervision of the Board of Governors of the Federal Reserve System, at the Georgetown University McDonough School of Business Psaros Center for Financial Markets and Policy, Washington DC, 6 June 2025.",2025-06-06 00:00:00,"## Michelle W Bowman: Taking a fresh look at supervision and regulation

Speech by Ms Michelle W Bowman, Vice Chair for Supervision of the Board of Governors of the Federal Reserve System, at the Georgetown University McDonough School of Business Psaros Center for Financial Markets and Policy, Washington DC, 6 June 2025.

* * *

It is a pleasure to join you today for my first public remarks as the Federal Reserve Board's Vice Chair for Supervision. 1   Today, I will describe my approach to leading the Fed's Division of Supervision and Regulation in its vital work to promote the safe and sound operation of the U.S. banking system. I have spoken extensively in the past about my principles for supervision and regulation, which will continue to guide my approach to supervision and the bank regulatory framework. 2

At the core of these principles is pragmatism, which focuses on first identifying the problem to be solved and then developing efficient solutions. 3  Once we have identified a need for reform, or a problem to be solved, our next task is to conduct a careful analysis of the intended and unintended consequences of any proposed policy solution, and to consider alternative approaches that lead to lower cost or better outcomes.

The views I share with you today reflect my initial thoughts about how these principles should be incorporated into the important work that will be required to improve supervision and regulation in the future, addressing: (i) enhancing supervision to more effectively and efficiently meet the Fed's safety and soundness goals; (ii) reviewing and reforming the capital framework to ensure that it is appropriately designed and calibrated; (iii) reviewing regulations and information collections to ensure that this framework remains viable; and (iv) considering approaches to ensure the applications process is transparent, predictable, and fair.

## Enhancing Supervision

Supervision focused on material financial risks that threaten a bank's safety and soundness is inherently more effective and efficient. We should be cautious about the temptation to overemphasize or become distracted by relatively less important procedural and documentation shortcomings. Fundamentally, as I've noted in the past, our goal should be to prioritize the identification of material financial risks and encourage prompt action to mitigate risks that threaten safety and soundness. There are a number of changes we can adopt in the near term to better enable us to accomplish this goal:

Tailoring . Risks are not uniform, and each bank is unique based on its business model, complexity, and business profile. I am a long-time proponent of tailoring banking regulations. Going forward we will extend the application of tailoring to our supervisory approach to financial institutions, not only among bank categories, but also within a particular category.

In the past, the Board has ""pushed down"" requirements developed for the largest firms to smaller banks, often including regional and community banks. One approach that would preserve tailoring is to create an independent community bank supervisory and regulatory framework to clearly separate these banks from larger bank supervision and regulation. This would serve to insulate these smaller banks from standards designed for larger and more complex firms. While I have no objection to a deliberate, intentional policy to apply similar standards to firms with similar characteristics as conditions warrant, the gradual erosion of distinct regulatory and supervisory standards among firms with very different characteristics-essentially the subtle reversal of tailoring over time-is not a reasonable approach for implementing supervision and regulation.

Both regulators and legislators should consider whether the bank regulatory framework includes appropriate thresholds for defining distinct categories of institutions, and whether simple fixes-for example the indexing of thresholds to inflation or growth-could better ensure a sound, tailored approach that remains durable over time. It is clear that the current $10 billion threshold defining the upper bounds of a ""community bank"" leaves many institutions that pursue this business model-of community and relationshipbased banking-subject to heightened requirements more suitable for larger and more complex firms.

To further these objectives, later this year I will host a conference on small and community bank issues, to discuss improving the bank regulatory framework to adopt a more efficient, tailored approach for these firms. We must demonstrate wisdom and courage by carefully listening to those who are subject to regulatory oversight and considering ways to enhance our approaches to both supervision and regulation.

One issue that continues to present challenges to smaller banks is check fraud. The ongoing increase in bank losses to this type of fraud can negatively impact the perceived safety of the banking system and result in significant consumer harm. Past efforts by regulators have been frustratingly slow to advance and seem to have done little to address the underlying root causes of this increase in fraud. I will continue to work to identify specific actions that can be taken to reduce the incidence of fraud, including through expediting the remediation process from check fraud after it occurs. I expect that the Federal Reserve, in coordination with the OCC and FDIC, will soon take action on this front.

Ratings . Ratings must reflect risk, and yet we have seen gradual changes in supervisory approaches that have eroded the link between ratings and financial condition. 4   Federal Reserve supervisory statistics show that that two-thirds of the largest financial institutions in the U.S. were rated unsatisfactory in the first half of 2024. 5   At the same time, the majority of these same institutions met all supervisory expectations for capital and liquidity.

This odd mismatch between financial condition and supervisory ratings requires careful review and appropriate revisions to our current approach. Under the current large bank ratings framework, a single component rating can result in a firm being considered not ""well-managed,"" which has driven the disparity between well-managed status and financial condition.

The Federal Reserve will soon begin to address this mismatch, by proposing changes to the Large Financial Institution ratings framework. The proposed changes will be designed to result in a more sensible approach to determining whether a firm is wellmanaged, no longer disproportionately weighting a single framework component for a firm that has demonstrated resilience under a range of conditions and stresses.

This initial change should help address the gap between assessed ratings and material financial risk for those firms subject to this framework. We have an obligation to ensure that our supervisory ratings are current, credible, and reflect material financial risk. This promotes effective supervision and ensures that firms are accurately rated based on their underlying financial strength, which should increase the public's confidence in our assessment of the banking system.

We must also consider the appropriateness of the broader ratings framework which applies to smaller institutions, including the CAMELS framework. Are these frameworks appropriately tailored to capture material financial risks, particularly for elements that rely on subjective examiner judgment? While judgment is a legitimate and necessary tool in supervision, it must always be grounded in the materiality of the identified issues as they relate to the financial health of each institution and the banking system as a whole. This has been a notable shift in supervision not only for large banks, but also for regional and community banks.

Improving prioritization. Examiners review a broad range of activities in the supervisory process. A random sample of examination reports demonstrates that supervisory focus has shifted away from core financial risks (credit risk, interest rate risk, and liquidity risk, for example), to process-related concerns. While process is important for effective management, there is a risk that overemphasis on process and supervisory box-checking can be a distraction from the core purpose of supervision, which is to probe financial condition and financial risk. Checklists should not distract examiners from the central purpose of examinations.

Another tool that we will be reviewing with a critical lens is the use of horizontal reviews. In theory, horizontal reviews-where examiners conduct a narrow but deep review on a particular topic across multiple banks-can help improve an examiner's perspective. Horizontal reviews, when used effectively, can help supervisors better understand the range of industry practices.

But these reviews have quickly evolved into oversimplification of complex issues and often include ""grading on a curve,"" where firms are rank-ordered, with an expectation that implementing a simpler approach fails to meet expectations, under the assumption that the more complex approach is appropriate for all firms. However, this side-by-side comparison fails to address the only question that matters: whether a firm's approach meets appropriate legal and supervisory standards for the individual firm's characteristics. Differences in approaches are not indicative of shortcomings, particularly since these can often be explained by distinguishing the underlying activities, scope and scale of operations, and risk tolerance of the firm's board and management.

There is also a lack of transparency in the results of these exams, and a risk that horizontal reviews will create generally applicable rules without complying with the Administrative Procedure Act (APA). I will be looking closely at whether the continued use of horizontal exams going forward is appropriate, and if so, to ensure that these exams are sufficiently transparent, they reflect proper respect for the APA, and do not circumvent our responsibility to provide each regulated institution with a fair, firmspecific evaluation.

The role of guidance in supervision. Finally, I will discuss the important role of guidance in the supervisory process. Guidance can be an effective tool to promote transparency in supervisory expectations, to provide clarity to regulated institutions on the permissibility of new activities and their associated risks, and to provide firms some perspective on how they may comply with statutory and regulatory requirements. Structured with these goals in mind, guidance can further the objective of supervisory prioritization.

Where guidance does not further these objectives, it is worth revisiting. I think it is important that we review a wide range of existing guidance, including outstanding Supervision and Regulation Letters (SR Letters), topical guidance that addresses issues that may adversely affect innovation (like the extensive guidance that has some bearing on third-party risk management), and the many other guidance documents that have been issued in recent years.

Fundamentally, guidance should clarify expectations, and provide answers to industry questions, such as our earlier ""office hours"" guidance that provided a venue for banks and innovators to share information on new products and services like digital asset activities and artificial intelligence.

Changing expectations around the use of guidance, as a tool to promote clarity in supervisory expectations, can encourage innovation in the banking system. Uncertainty in supervisory expectations has long been an obstacle to banks seeking to innovate, including banks engaging in digital asset activities or incorporating new technologies like artificial intelligence to improve efficiency and delivery of products and services. Just as it is imperative that banks innovate to remain competitive in the future, it is critical that bank supervisors enable the adoption of new technologies in a manner consistent with safety and soundness.

Examiner training and workforce development . Examiners must engage in a challenging course of study and pass rigorous tests before qualifying to become a commissioned bank examiner. Those who have obtained this license have a strong foundation that they can rely on to conduct appropriate examinations. The commission demonstrates an elevated level of expertise, judgment, and fairness that these examiners bring to their work. As such, they should not shy away from transparency or public accountability.

Currently, the Federal Reserve does not require all staff involved in supervision and bank examination to have met or to be on a path to meet this credential. Regulated entities should be able to expect that all of our examination and supervisory teams have achieved or are working to achieve this level of professional expertise. Going forward,

the Fed will prioritize this training, particularly as we face an aging workforce across the Federal banking agencies that will require our new examination staff to ensure the safety and soundness of the banking system into the future. Failure to invest in and plan for examiner training today will result in much less effective supervision in years to come.

## Capital

Capital requirements are an important component of the prudential regulatory framework and are essential for the stability of interconnected banking and financial systems around the world. Yet too often, our efforts to address capital reform take a piecemeal approach to capital requirements. We tend to review individual elements of the capital framework in isolation, without considering whether proposed changes are sensible in the aggregate and contribute to a capital framework in which all components work together effectively.

While each component is important, the aggregate calibration of requirements is ultimately the most meaningful, and we must examine whether this approach in totality appropriately captures risk. Over-calibrated capital requirements effectively create market distortions, disfavoring some activities over others in a way that is divorced from prudential safety and soundness goals and economic conditions.

Leverage ratios are one example that illustrates this concern. The Federal Reserve has long acknowledged that leverage ratios are intended to act as a ""backstop"" to riskbased capital requirements. When leverage ratios become the binding capital constraint at an excessive level, they can create market distortions. This is especially true in the case of the enhanced supplementary leverage ratio (eSLR) which is applicable to the largest banks.

As a result of this leverage requirement, banks are less inclined to engage in low-risk activities like Treasury market intermediation and revise their business activities in a way that is neither justified nor responsive to their customer needs. These distortions can also create broader financial system impacts like increased stress on Treasury market functioning. To be clear, the increasing bindingness of the eSLR on the largest firms did not result from careful policy debate and discussion. Instead, it is an unintended consequence of market and other bank regulatory requirements implemented after it was originally put in place.

The original calibration of the eSLR was based on forecasts of the level of reserves and other so-called ""safe assets"" in the system that are now far out of line with current levels. I expect that in the near future, the agencies will publish a proposal to help address this concern and ensure that the eSLR resumes functioning as a backstop capital requirement.

While this fix to the eSLR is necessary, it may not be sufficient to address issues in the capital framework. In July, the Federal Reserve will host a conference that will broaden our perspective in the consideration of capital requirements for large banks. We will bring together bankers, academics, and other capital experts to examine whether capital requirements as currently structured and calibrated are operating as intended-in a complementary fashion.

I welcome the opportunity to consider a broader range of perspectives as we look to the future of capital framework reforms. In addition to considering potential changes to leverage ratio requirements and stress testing, the capital conference will also include a discussion of potential reforms to the GSIB surcharge and the Basel III capital requirements.

The Board has already proposed a significant change to reduce the volatility in capital requirements resulting from our current stress testing process. The proposal includes providing a longer implementation timeline to phase in the annual stress capital buffer requirement. And later this year, the Board will consider more extensive changes aimed at promoting transparency, fairness, and predictability in the stress testing program.

While stress testing is an important supervisory tool, its implementation, outcomes, and processes have raised significant questions and concerns about its effectiveness in identifying systemic weakness. The lack of transparency around the models used in stress testing prevents meaningful discussions about how the stress tests can be improved.

Capital has an impact on the business activities of all banks. Although the capital framework for the smallest institutions tends to be simpler and more straightforward, calibration and design elements play an important role in the functioning of smaller banks just as they do for larger banks. Therefore, it is important that we also take the opportunity to address issues for smaller banks, that provide critical support to their local communities and the economy. On this front, we will review and consider the community bank framework, including capital requirements like the calibration of the community bank leverage ratio, and whether reforms to the capital framework for mutual banks can be improved to promote capital formation.

I look forward to the results of public engagement on these issues, including through the upcoming conferences. As we consider bank capital requirements, the focus should be on achieving a capital framework that provides a strong foundation for the banking system, appropriately requires banks to hold capital corresponding to risk, and works together with bank supervision to support a safe and sound banking system.

## Review of Regulations and Information Collections

Since the passage of the Dodd-Frank Act nearly 15 years ago, the body of regulations that all banks are subject to has increased dramatically. Many of the reforms made after the 2008 financial crisis were important and essential to ensuring a stronger and more resilient banking system. Yet, a number of the changes were backward lookingresponding only to that mortgage crisis-not fully considering the potential future unintended consequences or future states of the world.

With well over a decade of change in the banking system now behind us postimplementation, it is time to evaluate whether all of these changes continue to be relevant. Some of the regulations put in place immediately after that financial crisis resulted in pushing foundational banking activities out of the regulated banking system into the less regulated corners of the financial system. We need to ask whether this was and continues to be appropriate. These tradeoffs are complicated, and we must

consider not only the changes that were made but also the evolution of and differences in the banking system today.

Driving all risk out of the banking system is at odds with the fundamental nature of the business of banking. Banks must be able to earn a profit and grow while also managing their risks. Adding requirements that impose more costs must be balanced with whether the new requirements make the correct tradeoffs between safety and soundness and enabling banks to serve their customers and run their businesses. The task of policymakers and regulators is to eliminate risk from the banking system, but rather not to ensure that risk is appropriately and effectively managed.

In a well-functioning, regulated banking system, banks serve an indispensable role in credit provision and economic stability. The goal is to create and maintain a system that supports safe and sound banking practices, and results in the implementation of proper risk management. Our goal should not be to prevent banks from failing or even eliminate the risk that they will. Our goal should be to make banks safe to fail, meaning that they can be allowed to fail without threatening to destabilize the rest of the banking system.

Maintenance of the regulatory framework is necessary to ensure that our regulations continue to strike the right balance between encouraging growth and innovation, and safety and soundness. One easily identifiable way to achieve this is using the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) review process, which the agencies initiated in February of last year.

The EGRPRA review process requires the federal banking agencies to identify any outdated, unnecessary, or overly burdensome regulations, eliminate unnecessary regulations, and take other steps to address the regulatory burdens associated with outdated or overly burdensome regulations. Prior iterations of the EGRPRA process have been underwhelming in their ability to result in meaningful change, but it is my expectation that this review, and eventually the accompanying report to Congress, will provide a meaningful process for stakeholders and the public to engage with the banking agencies in identifying regulations that are no longer necessary or are overly burdensome. It is also my expectation that regulators will be responsive to concerns raised by the public.

Another area that is ripe for review are several of the Board's rules that address core banking issues-from loans to insiders, to transactions with affiliates, to state member bank activities, and domestic and foreign activities of bank holding companies. Many of the Board's regulations have not been comprehensively reviewed or updated in more than 20 years. Given the dynamic nature of the banking system and how the economy and banking and financial services industries have evolved over that period, we should update and simplify many of the Board's regulations, including thresholds for applicability and benchmarks.

## Banking Applications

The process to file an application and receive regulatory approval, whether it involves banks seeking a charter, institutions seeking to merge, or any other application de novo for bank regulatory approval should reflect both (1) transparency as to the information

required in the application itself, and the standards of approval being applied, and (2) clear timelines for action.

Recent experience with banking applications suggests that revisions would be helpful in this space. Streamlining the applications for formation, and establishing clearer de novo standards for approval, may encourage more activity. de novo

Similar problems have affected bank mergers and acquisitions, where there have been lengthy processing delays. We need to rethink whether many of the additional requests for information can be addressed through better application forms or relying on information that is available from bank examinations. We should also consider factors that force applications to be moved from Reserve Bank-delegated processing to requiring consideration by the Board. One example is the perverse effect of ""competitive"" screens that disproportionately affect transactions in rural and underserved banking markets. Another is the treatment of adverse public comments that may lack factual support or rely on matters already considered in the review process, including existing supervisory records.

## Closing Thoughts

I am honored to have the opportunity to serve as the Vice Chair for Supervision. The work of supervision and regulation is critical to maintaining a safe and sound banking system and protecting U.S. financial stability. Conditions constantly evolve in the banking system, and so too must the regulatory and supervisory framework. We must be proactive and responsive in the face of emerging risks and ensure that the framework operates in an efficient and effective manner.

The steps I have identified today are intended to further these goals by creating an initial roadmap to refocus supervisory and regulatory efforts on the core financial risks most critical to maintaining a healthy and resilient banking system. I look forward to working with my Board colleagues and my counterparts at the other banking agencies as we pursue sensible and pragmatic reforms.

1  The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.

- 2  See, e.g., Michelle W. Bowman, "" Bank Regulation in 2025 and Beyond"" (speech at the Kansas Bankers Association Government Relations Conference, Topeka, KS, February 5, 2025); Michelle W. Bowman, "" Innovation in the Financial System"" (speech at the Salzburg Global Seminar on Financial Technology Innovation, Social Impact, and Regulation: Do We Need New Paradigms?, Salzburg, Austria, June 17, 2024); Michelle W. Bowman, ""Tailoring, Fidelity to the Rule of Law, and Unintended Consequences (PDF)"" (speech at the Harvard Law School Faculty Club, Cambridge, MA, March 5, 2024); Michelle W. Bowman, ""New Year's Resolutions for Bank Regulatory Policymakers"" (speech at the South Carolina Bankers Association 2024 Community Bankers Conference, Columbia, SC, January 8, 2024).

- 3  Michelle W. Bowman, "" Approaching Policymaking Pragmatically (PDF)"" (remarks to the Forum Club of the Palm Beaches, West Palm Beach, FL, November 20, 2024).
- 4  See Board of Governors of the Federal Reserve System, Supervision and Regulation (PDF)at 16-17 (Washington: Board of Governors, November 2024), (describing Report data for the first half of 2024, the most recent period for which data is available).
- 5  Board of Governors of the Federal Reserve System, Supervision and Regulation . Report",Michelle W Bowman
https://www.bis.org/review/r250611f.htm,Frank Elderson: The rule of law as a constitutional pillar of European central banking,"Keynote speech by Mr Frank Elderson, Member of the Executive Board of the European Central Bank and Vice-Chair of the Supervisory Board of the European Central Bank, at the Italian constitutional court, Rome, 9 June 2025.",2025-06-09 00:00:00,"SPEECH

## The rule of law as a constitutional pillar of European central banking

Keynote speech by Frank Elderson, Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB, at the Italian constitutional court

Rome, 9 June 2025

## Introduction

Thank you very much for inviting me.

The writings, judgments and speeches of many among this distinguished audience have shaped our understanding of the rule of law. I find it a privilege - and slightly daunting - to address you today on such a fundamental issue.

Today I am speaking to you as a central banker and banking supervisor. However, before I do so, allow me to take a moment to speak from a more personal perspective. Not as an official, but as the young law student I once was, reflecting on how I first came to understand and appreciate the rule of law.

As a law student at the University of Amsterdam in the early 1990s, I often cycled past a monument to Henk van Randwijk, a member of the anti-Nazi resistance during the Second World War. The monument is simple. A plain red brick wall, bearing the final lines of Van Randwijk's most famous poem in simple white lettering:

' een volk dat voor tirannen zwicht zal meer dan lijf en goed verliezen dan dooft het licht … '

' a people that bows to tyrants will lose more than body and belongings then, the light goes out … '

I would sometimes stop, park my bicycle against a tree, and contemplate these words, hearing the echo of the heinous crimes committed on the streets of Amsterdam, and far beyond, during those hellish years when the light had indeed gone out.

I would think of the US military cemetery in Margraten, in the South of the Netherlands, where my parents used to take me and my sisters as children to see the endless rows of meticulously kept graves, each honouring one of the 10,000 US soldiers buried there, who had given their lives so that the light might shine once again in all its splendour.

I would continue my way to law school, thinking of one of the most fundamental lessons our professors had taught us: if the horrors of the past are to be avoided, if minorities are to be protected, if the individual is to be free, democracy needs to be accompanied by the rule of law. We studied the small, but fundamental, book, 'Democracy and the Rule of Law', which I keep on a shelf facing my desk to this day. Our professors never tired of explaining how vital the word 'and' is in that title: the rule of law is both a precondition for democracy, and an essential limit to majority rule. For tyranny, which Van Randwijk's poem so poignantly warns against, can be exercised not only by a single ruler, but also by half the population plus one. Put succinctly, democracy protects the majority against the minority, while the rule of law protects the minority, even a minority of one, against the majority. And this, so we were taught, is why we need both.

Although the importance of the rule of law has been impressed on me since my earliest days, I am not speaking to you today as a historian, a legal scholar, or a young law student. Today I speak to you as a central banker and banking supervisor. Today, I intend to show that the rule of law is of the highest relevance for us as a central bank and supervisor to deliver on our mandate. In addition, I will present the case that we have a specific role to play in upholding the rule of law.

The rule of law is not merely the bedrock upon which lawyers, judges and legal scholars build their work. In recent years, its pivotal role in fostering economic prosperity has come to the forefront of public debate, underscoring its profound relevance far beyond the boundaries of the legal profession.

The rule of law is not a binary concept - it is not simply present or absent. Instead, it exists on a continuum, shaped by various factors such as constraints on government powers, independent courts, the absence of corruption, and respect for human rights. Its strength is also wide-ranging, varying significantly across jurisdictions, and it evolves over time. For many decades, the global rule of law experienced a steady and encouraging ascent. However, some recent indicators suggest that this progress may have reached its peak, while others point to signs of retreat. [ ] 1

Today I will discuss how the rule of law supports central banks in delivering on their price stability mandate, and banking supervisors in fostering financial stability.

It is worth emphasising that the connection between the rule of law and a thriving economy is wellestablished: a strong rule of law correlates consistently with robust and sustained economic growth. [ ] Last year, economists Daron Acemoglu, Simon Johnson and James Robinson were awarded the Nobel Prize in Economics for their groundbreaking research, which persuasively demonstrated not just such a correlation, but a causal relationship between weak institutions - closely linked with a poor rule of law and lower economic growth. [ ]  Their findings highlight an important insight: economies thrive when institutions are strong, as institutional strength enables investors, entrepreneurs and consumers to make long-term decisions with confidence, knowing that contracts will be enforced, corruption fought and 2 3

property rights upheld. Institutional reliability thus forms the backbone of innovation, creativity and sustained growth.

However, this relationship is not one-directional. Strong economic growth, in turn, reinforces institutional resilience, creating a virtuous cycle in which institutional strength and economic prosperity feed into one another. [ ] 4

Central banks are a crucial part of this mutual dependence. They are significantly more effective in delivering on their mandates when the rule of law is strong. At the same time, strong central banks and strong supervisors are essential institutions in supporting a strong economy. As such, within their mandates, central banks and prudential supervisors have a vital role to play in upholding, promoting and, when necessary, determinedly defending the rule of law.

## Why does the rule of law matter for the European Central Bank?

The Treaty on European Union proudly declares that the Union is founded on the values of respect for human dignity, freedom, democracy, equality, the rule of law and respect for human rights. The rule of law forms the backbone of some of the most tangible and far-reaching achievements of our European Union ranging from the single market and the protection of human rights to the mutual recognition of judgments. Few aspects of European integration reflect its unity more clearly than the shared commitment to upholding the rule of law.

For the ECB, the rule of law is a critical foundation of its mandate in multiple important ways. Today, I will focus on three closely connected areas: first, the role of the rule of law in laying the very foundations for, and safeguarding trust in, money; second, the importance of the rule of law for delivering on our mandates; and third, the role of the rule of law supporting price and financial and price stability by ensuring the independence of the central bank.

## Money

Let me start with trust in money. Aristotle declared long ago that money was introduced by convention as a kind of substitute for a need or demand, and its value is derived not from nature but from law. [ ]  While money has classically been thought of as serving the functions of medium of exchange, store of value, unit of account and means of payment, it is the law which determines whether a thing is money and what 5

nominal value is attributed to it. It is the law which determines which things are legal tender. [ ] 6

Modern money is 'fiat money' meaning that it has no intrinsic value. Following the end of the gold standard with the collapse of the Bretton Woods system in 1971, its value is also no longer tied to physical assets like gold. Instead, the value of our money rests entirely on trust - trust in public authorities, trust in the institutional frameworks that uphold it, and, fundamentally, trust in the central bank as the issuing authority.

Consider the euro banknotes in your pockets. The paper itself holds no intrinsic value. The worth we collectively assign to those €10, €20 or €50 banknotes is rooted in a strong legal foundation. Law gives central bank money legal tender status, meaning that it must be accepted for settling a debt. Trust in all other forms of 'money', such as commercial bank deposits, ultimately rests on convertibility at par with central bank money. The law thus helps preserve the value of today's banknotes as well as the savings in your bank account. [ ] 7

We are currently taking a pivotal step in adapting central bank money to the digital age, by progressing towards the possible issuance of a digital equivalent: a digital euro. As cash today, which will remain available, a digital euro builds on the treaty-based competence to issue legal forms of public money, leveraging advanced technology within a robust legal framework to ensure people trust the numbers on their screens. The rule of law underpins these frameworks, transforming algorithms into a reliable and trustworthy form of public money.

## Delivering on our mandates

Let me now turn to the function of the rule of law in enabling central banks to effectively deliver on their mandates.

For central banks to effectively fulfil their mandate of price stability, they must carefully assess the economic outlook. This assessment requires leveraging models and historical patterns to forecast economic developments. However, for us to be able to predict and forecast economic developments, the economy must operate within a framework of consistent and transparent rules. The rule of law plays a vital role in this regard. By fostering predictability and stability, it provides the essential foundation for robust economic analysis and informed monetary policy decision-making.

The effectiveness of the ECB's banking supervision mandate to promote the safety and soundness of banks also hinges on a strong legal system with enforceable supervisory decisions. The laws give the supervisor a broad toolkit to ensure that banks remain safe and sound. For instance, this toolkit includes the power to require banks to hold more capital as part of the bank-specific annual Supervisory Review and Evaluation Process, and the power to sanction banks if they do not adhere to prudential rules.

Beyond these broader principles, a sound legal system is indispensable for central banking operations in practical terms. For instance, the legal requirement for adequate collateral is a cornerstone of both monetary policy implementation and financial stability. Yet collateral can only be deemed adequate if the legal framework guarantees that central banks can enforce their rights over it when necessary.

Another example is the central bank's reliance on accurate statistics to carry out its mandate effectively. To ensure that reporting agents fulfil their obligations, central banks require enforceable sanctioning powers.

All these examples show that the rule of law is a precondition of central banking and prudential supervision.

## Central bank independence

The effectiveness of a central bank in achieving its price stability mandate rests on its independence. Like the judiciary and other independent agencies, independent central banks are part of a constitutional model that recognises the role of independent institutions as checks and balances on executive and legislative power. Most legal systems in advanced economies ensure that the power to create money should be entrusted to bodies operating outside the electoral cycle to mitigate a time-inconsistency problem: the tendency of policymakers to prioritise short-term gains over long-term stability. [ ]  Independence insulates the central bank from the short-term pressures of daily politics, enabling it to focus on its mandate. 8

Hence central bank independence, price stability and the rule of law are closely intertwined. Empirical evidence suggests that price stability depends on both the strength of the rule of law and the independence of the central bank. Social trust in the central bank depends on the overall level of trust in the legal system as a whole. If a perfectly independent central bank were to operate in a system with systematic deficiencies in the rule of law, it would not be able to deliver effectively on its mandate. [ ] In short, an independent central bank can only function if its decisions are seen as credible, and, crucially, credibility depends on the overall system based on the rule of law functioning well. 9

Moreover, the distinct character of the European System of Central Banks (ESCB) also illustrates the crucial importance of the rule of law for the ECB. As the Court of Justice of the European Union (CJEU) has ruled, the ESCB is based on a highly integrated system that brings together national central banks and the ECB. [ ]  National central banks are not merely national institutions - they are also integral components of the ESCB. Importantly, the governors of the national central banks of the euro area are also members of the ECB's Governing Council, which is responsible for taking monetary policy decisions. 10

A similar principle applies to the Single Supervisory Mechanism (SSM). For instance, the Joint Supervisory Teams that inspect banks are composed of staff from both the ECB and national competent authorities (NCAs). Likewise, the ECB Supervisory Board includes representatives from both the ECB and NCAs.

Because of the integrated nature of both the ESCB and the SSM, which both bring together national authorities and the ECB, rule of law deficiencies at the national level can affect the functioning of the ESCB, the SSM and the ECB. Respect for the rules governing the organisation and safeguarding the independence of these national components of the ESCB and the SSM are thus essential to achieving their mandates of price and financial stability.

## What central banks can do to support the rule of law

Now that we have explored how the rule of law is a precondition for central banks and supervisors being able to deliver on their mandates, let us turn to the other side of the coin: the role of the European Central Bank in upholding and protecting the rule of law.

Clearly, central banks cannot oversee the general conditions of the rule of law - that is not their mandate. But central banks do have specific responsibilities in this context.

First, central banks must themselves adhere to rule of law principles under the scrutiny of courts. And second, central banks have instruments at their disposal that can be used to reinforce the legal fabric that supports the rule of law.

Let me start with the former: central banks are fully embedded in the rule of law architecture. For instance, the Treaties explicitly place the ECB under the jurisdiction of the CJEU, and the ECB's actions - in all areas, including monetary policy, banking supervision and transparency - have been subject to judicial scrutiny. [ ]  Compared with other major central banks, the ECB is among those most frequently brought before court. [ ]  By contrast, most other central banks are practically exempt from the jurisdiction of the courts when conducting monetary policy. [ ]  The preliminary reference procedure has also brought ECB monetary policy measures before the CJEU. [ ]  In essence, even when discretion is granted to the ECB by the courts or the legislature, it is discretion within the bounds of the law - not beyond it - and both its scope and conditions remain subject to judicial review. 11 12 13 14

This duty of the ECB has both a negative and a positive dimension. Not only is the ECB responsible for remaining within the confines of the law, it also has to react when other institutions with which it cooperates threaten to violate the law. [ ] 15

Legal scrutiny by the courts is not the only form the legally required ECB's accountability takes, however. In fact, a key pillar of our transparency and accountability to citizens includes explaining our decisions to the public and reporting regularly to elected bodies. For example, the ECB publishes detailed accounts of the monetary policy meetings of the Governing Council, explains its policies in dedicated press conferences and answers questions from Members of the European Parliament. (MEPs). Moreover, the President of the ECB and the Chair of the Supervisory Board appear regularly in front of the European Parliament to exchange views with MEPs. This not only makes monetary policy and banking supervision more understandable, but also proactively submits our institution to public scrutiny. Public scrutiny is an indispensable element of the rule of law: the law must be seen to be upheld for its acceptance by the general public.

Let me now turn to the ECB's role in maintaining the rule of law. And I would like to be crystal clear again: in the EU, maintaining the rule of law is mainly a task for the courts and the political institutions. But the ECB also has responsibilities in this area, and I will outline five that I think are particularly important.

First, the Treaties give the ECB special powers to monitor respect for central bank independence, in particular personal independence. The Statute of the ESCB, which is a Protocol of the Treaty on the functioning of the EU (TFEU), exceptionally empowers the Governing Council of the ECB and national governors to bring to the European Court of Justice an action for annulment of a national measure that does not respect the independence of central bank governors. [ ]  This is the only case where the EU legal order provides for an annulment by the European Court of Justice of a national measure. I am sure that the jurists in today's audience will immediately recognizes how exceptional this is. By allowing a direct change of the legal reality within the national legal order by means of an EU remedy, the Statute of the ESCB ensures, very effectively, that the rule of law is upheld. 16

Second, the ECB Governing Council has the role of acting as guardian of the Treaties vis-à-vis the national central banks in the same way as the Commission is guardian of the Treaties vis-à-vis the

Member States. [ ]  While the ECB has never instituted infringement proceedings against a national central bank before the CJEU, the very existence of this power enables the ECB to ensure compliance by national central banks with the requirements of central bank independence and the prohibition of monetary financing of the public sector. Another as yet unused power of the ECB under the Statute of the ESCB/ECB is the power of the ECB Governing Council, by a two thirds majority vote, to prohibit national central banks from performing functions other than those specified in the Statute where these interfere with the objectives and tasks of the ESCB. [ ]  The existence of this power enables the ECB to ensure that the functions of national central banks do not interfere with ESCB's primary objective of price stability or the monetary policy and other tasks of the ESCB. 17 18

Third, the Treaties require national and EU authorities to consult the ECB on any draft legislation that falls within its fields of competence. [ ]  The ECB enjoys a privileged position in directly influencing national legislation at the stage of its adoption and raising issues of legality. The ECB has issued numerous opinions on draft national legislation concerning the institutional structure and governance of national central banks. A recurring theme in many of these opinions has been the compatibility of amendments to the statutes of national central banks with the Statute of the ESCB, particularly regarding Member States' obligation to ensure the independence of their national central banks and the prohibition of monetary financing. 19

Fourth, the Treaties require the ECB to issue convergence reports. [ ]  At least once every two years, or at the request of a Member State with a derogation from adopting the euro, the ECB reports to the Council on the progress made by the Member States with a derogation on the fulfilment of their obligations regarding the achievement of Economic and monetary union. Last week, the ECB published its report on Bulgaria. [ ]  These convergence reports receive more attention with regard to their economic dimensions, but they also include an important examination of the compatibility between national and EU law. [ ]  Whilst this ECB instrument only addresses the legislation of Member States that have not adopted the euro, it is a means of consolidating and developing EU standards, including where rule of law issues might be at stake. 20 21 22

And last but not least: the Statute of the ESCB provides the ECB with specific powers regarding international cooperation. [ ]  In practice this means that the ECB actively participates in international fora and institutions with a clear direction to uphold their role and the international rule of law. As you all know, public international law, from the World Trade Organization to the very fundamentals of international humanitarian law, is currently under a heavy strain, which makes our role regarding international cooperation all the more relevant. 23

## Conclusion

Let me conclude.

With these remarks, I hope to have shown that the rule of law is of the highest relevance for central banks and supervisors.

First, it is a necessary condition for us to adequately deliver on our price and financial stability mandates. Here we depend (and count!) on those institutions whose mandate is specifically focused on upholding the rule of law, among which the legislature and, especially, you, the judiciary.

Second, in specific areas the ECB itself has a role to play in safeguarding, nurturing and defending the rule of law. Within the limits of our competences, you can count on us to do so.

The European Union is both creature and guarantor of the rule of law. It is a beacon of legal certainty, strong institutions and the protection of fundamental rights. All of us continuing to play our role - and we will play ours as much as we know that the courts will play theirs - will lead not only to the protection but to the growth of the quality and the depth of the rule of law.

By thus further strengthening the rule of law, we will encourage investment, foster economic growth and enhance the international role of the euro. [ ]  And by doing so we will further solidify the foundations for freedom, peace and prosperity that will ensure that Van Randwijk's light will never fade but will shine more brightly than ever before. 24

1. ;

See, for instance, World Justice Project, ; Our World in Data, and Worldbank, . WJP Rule of Law index Rule of Law index Worldwide Governance Indicators

- 2.

History has shown that the application of the rule of law may be selective, excluding certain subjects while continuing to foster economic growth at large. However, ultimately the uncertainty of falling within its remit undermines the rule of law.

3.

Acemoglu, D., Johnson, S. and Robinson, J.A. (2001), 'The colonial origins of comparative development: An empirical investigation', American Economic Review , Vol. 91, No 5, pp. 1369-1401; Acemoglu, D. and Robinson, J.A. (2012), Why nations fail: The origins of power, prosperity and poverty , Profile Books, London, pp. 45-47.

4.

International Monetary Fund, for instance, notes that stronger economic performance can lead to institutional changes, with countries potentially needing - and being able to afford - to strengthen legal and regulatory frameworks. IMF (2003), 'Chapter 3: Growth and Institutions' World Economic Outlook, April, Washington, DC.

Aristotle, Nichomachean Ethics, Book 5, Chapter 5 (F.H. Peters trans., 156, 15th edition 1893).

6.

Mann, F.A., The Legal Aspect of Money 272 (5th edition, 1992).

- 7.

Besides the law, the intrinsic value of money also derives from its acceptance as currency, which depends on the central bank's credibility in maintaining its value. Modern central banks operate within frameworks that prioritise transparency, independence, and accountability. These structures, guided by statutory mandates and clear objectives, foster public trust in the stability of the currency. See, Lane, P.R. (2025), ' ', speech at the University College Cork Economics Society Conference 2025, 20 March. The digital euro: maintaining the autonomy of the monetary system

8.

The classic time-inconsistency problem arises if monetary policy conducted on a discretionary, day-by-day basis leads to worse long-run outcomes than could be achieved by committing to a policy rule. See, for instance, Kydland, F.E. and Prescott, E.C. (1977), 'Rules rather than discretion: The inconsistency of optimal plans', Journal of Political Economy , Vol. 85, No 3, pp. 473-491.

9.

Empirical evidence highlights that both central bank independence and a strong rule of law are essential for achieving price stability. However, when the rule of law is weak, the effectiveness of even a formally independent central bank in maintaining price stability is significantly undermined (see Nurbayev, D. (2018), 'The rule of law, central bank independence and price stability', Journal of Institutional Economics , Vol. 14, No 4, pp. 659-687).

10.

Ilmārs Rimšēvičs and European Central Bank v Republic of Latvia , Joined Cases C-202/18 and C-238/18, para. 69; European Commission v Republic of Slovenia , C-316/19, para. 83.

11. In addition, national central banks are also subject to the jurisdiction of their respective national courts.

12.

For supervision, see Smits, R. and Braga de Arruda, T. (2025), The Banking Union and Union Courts: overview of cases as of 30 April 2025, available on the . European Banking Institute's website

13.

For the Federal Reserve System, for example, see Ostrowski, S. (2021), 'Judging the Fed', The Yale Law Journal , Vol. 131, No 2, pp. 726-781; and Egidy, S. (2019), ' Judicial review of central bank actions: can

', Building bridges: central banking law in an interconnected world ECB Legal Conference 2019 , ECB, pp. 53-76). Europe learn from the United States?

14.

The preliminary reference procedure is a mechanism that allows national courts to seek guidance from the CJEU on the interpretation or validity of EU law, and has led to the review of ECB actions within the context of national proceedings, (see, for example, Peter Gauweiler and Others v Deutscher Bundestag , C-62/14; Proceedings brought by Heinrich Weiss and Others , C-493/17)..

15.

According to the CJEU, EU institutions may breach fundamental rights both by means of a positive act, and by passive behaviour, such as allowing a national authority to take a measure that violates fundamental rights in the context of financial assistance programmes. See Ledra Advertising Ltd v European Commission and European Central Bank (ECB) , T-289/13.

16.

Ilmārs Rimšēvičs and European Central Bank v Republic of Latvia , Joined Cases C-202/18 and C-238/18, paras. 64-77.

17.

Article 271(d) TFEU and Article 35.5 ESCB/ECB Statute.

18.

Article 14.4 ESCB/ECB Statute.

19.

Articles 127(4) and 282(5) TFEU.

20.

Convergence Reports are issued by the ECB and the European Commission on the basis of Article 140(1) TFEU.

21.

ECB (2025), . Convergence Report, June 2025

22.

More specifically, they examine the legislation of each Member State with a derogation (including the statutes of their national central bank) and Articles 130 and 131 TFEU and the Statute of the ESCB.

23.

Article 6.1 of the Statute of the ESCB.

Copyright 2025, European Central Bank

24.

Lagarde, C. (2025), ' ', speech at an event on Europe's role in a fragmented world organised by Jacques Delors Centre at Hertie School in Berlin, Germany, 26 May. Earning influence: lessons from the history of international currencies",Frank Elderson
https://www.bis.org/review/r250611d.htm,Martin Schlegel: Introductory remarks - TBTF news conference,"Introductory remarks by Mr Martin Schlegel, Chairman of the Governing Board of the Swiss National Bank, at the TBTF news conference, Berne, 6 June 2025.",2025-06-06 00:00:00,"## Martin Schlegel: Introductory remarks - TBTF news conference

Introductory remarks by Mr Martin Schlegel, Chairman of the Governing Board of the Swiss National Bank, at the TBTF news conference, Berne, 6 June 2025.

* * *

## Introduction

## Ladies and gentlemen

The Swiss National Bank supports the amendments at legislative and ordinance level planned by the Federal Council in the areas of capital and liquidity requirements, early intervention, and recovery and resolution planning. The crisis at Credit Suisse highlighted weaknesses in the regulatory framework. The regulatory adjustments now planned constitute a package of measures drawing the right lessons from this crisis. The planned regulatory adjustments are key to strengthening banks' resilience and their resolvability in a crisis. In my remarks, I would like to focus on two topics that are particularly relevant with regard to the stability of the financial system and the role of the SNB, namely liquidity and capital requirements.

## Liquidity

In crisis situations, the SNB performs its role as lender of last resort. A particularly relevant measure in this regard is the planned regulatory requirement for systemically important banks to prepare sufficient collateral for obtaining central bank liquidity. Fulfilling its role as lender of last resort is of the utmost importance to the SNB. The ample liquidity support that we provided to Credit Suisse was a key part of the measures to safeguard the stability of the financial system. The SNB is continuously developing its framework for liquidity support in order to remain prepared for future challenges. The recently announced Extended Liquidity Facility (ELF) is an important step in this direction. The effectiveness of liquidity support depends largely on banks being able to transfer their assets as collateral to the SNB. We therefore support the Federal Council's proposal that banks be required to prepare for access to liquidity support from the SNB and other central banks.

## Capital

The SNB supports the planned regulatory adjustments in the area of capital. For a bank's reported capital ratios to be meaningful, they must reflect the bank's actual lossabsorbing capacity.

In the case of Credit Suisse, this was true only to a certain degree. First, the value of its assets such as software and deferred tax assets fell sharply during the crisis. As a result, the bank's capital situation deteriorated significantly. This came at an exceptionally unfavourable time, when a robust capital situation would have been crucial. Second, the value of the bank's foreign participations fell by more than half in the space of one year. Under the current capital regime, these impairments impacted on the parent bank's capitalisation.

The proposed regulatory adjustments in the area of capital regulation address these weaknesses in a targeted way and thereby strengthen the stability of the financial system. The prudent valuation of certain balance sheet items and the full deduction of software and deferred tax assets from Common Equity Tier 1 (CET1) capital, the highest quality of regulatory capital, make the reported capital ratios more robust. The planned full backing of foreign participations with CET1 capital ensures that losses on foreign participations do not negatively impact the parent bank's capital situation. This also facilitates the implementation of stabilisation options in future crises.

Thank you for your attention.",Martin Schlegel
https://www.bis.org/review/r250611a.htm,Paolo Angelini: Sovereign debt markets - post-pandemic developments and challenges,"Welcome address by Mr Paolo Angelini, Deputy Governor of the Bank of Italy, at the 11th International Conference on Sovereign Bond Markets ""Sovereign bond markets: sailing in calm and stormy waters"", Venice, 10 June 2025.",2025-06-10 00:00:00,"

## Sovereign debt markets: post-pandemic developments and challenges

Paolo Angelini Deputy Governor of the Bank of Italy

Welcome address at the 11 th  International Conference on Sovereign Bond Markets on 'Sovereign bond markets: Sailing in calm and stormy waters'

Venice, 10-11 June 2025

## 1. Introduction

Good afternoon and welcome to the 11 th  International Conference on Sovereign Bond Markets, a joint endeavor among central banks (Bank of Italy, Deutsche Bundesbank, Bank of Canada and the European Central Bank) and U.S. and European academic institutions.

Venice is a historically important venue for sovereign debt: the Republic of Venice was the first state to develop a sovereign debt market ,  in  the late XIII century. 1 Historical records show that most of the features of modern sovereign debt were designed here. At that time, just across the eponymous bridge, the island of Rialto was the commercial and financial heart of the city, where merchants met to exchange information about world developments and to conclude contracts. Venice's revenue largely came from indirect taxes, such as salt and customs duties. As military expenses grew, particularly for  campaigns in the Italian mainland and naval conflicts to secure the Adriatic, the Republic resorted to a new financing source, namely compulsory financial investments by wealthy citizens.

To this end, the Venetians developed a financial instrument, 'prestiti' (i.e. loans), which gave the (forced) purchaser a claim on the state and a right to interest. Such loans were a mere entry in the ledgers of the state loan office ('Camera degli Imprestiti'), so Venice invented not just sovereign bonds, but also dematerialization.

These claims were marketable, with a vibrant secondary market. 2  They could even be lent and pledged as collateral for bank loans. Their coupons, called 'paghe', also became

1 See  for  example  R.C.  Mueller, The  Venetian  Money  Market:  Banks,  Panics,  and  the  Public  Debt, 1200-1500 ,  Baltimore, Johns Hopkins University Press, 2019; C.M. Cipolla, Money, Prices, and Civilization in the Mediterranean World: Fifth to Seventeenth Century , Princeton, Princeton University Press, 1956.

2 A time series of interest rates on 'prestiti' appeared in the first edition of S. Homer, A History of Interest Rates , New Brunswick, Rutgers, 1963.

separately marketable, a detail that parallels modern-day bond 'stripping'. According to some records, the yield on these credits was also used to set the interest rate on private loans. 3

Today, sovereign debt markets continue to be the backbone of complex and sophisticated financial markets. They are key for the transmission of monetary policy and central to financial stability, as they serve as a benchmark for pricing other bonds, as well as loans to firms and households. Sovereign bonds are widely used by financial institutions to meet regulatory requirements and are treated favorably in capital and liquidity frameworks. Critically, they are viewed as 'safe assets' - especially those of advanced economies - due to low credit risk and their tendency to hold or gain value during downturns. This makes them ideal as collateral.

The resilience  and  smooth  functioning  of  sovereign  debt  markets  is  critical  for  policymakers and authorities. Effective fiscal and monetary policies as well as financial stability hinge on them.

Following the extraordinary shocks to the global economy in recent years, sovereign bond markets are adjusting to new trends, which come with important challenges to policymakers, investors and debt managers. In the rest of my talk I will sketch four recent developments and frame some key challenges and questions for our consideration.

## 2. Sovereign debt markets: post-pandemic developments

The pandemic left an important debt legacy. Since then, four developments have been shaping sovereign debt markets.

First, public debt increased considerably during the pandemic and is still rising in most countries. According to the IMF, global gross public debt is now about 90 percent of GDP, up from 84 per cent in 2019, and it is projected to reach nearly 100 percent by 2030. 4 What stands out most is the expected sharp rise in public debt of the world's two largest economies - China and the United States (Figures 1 and 2). In the euro area, the  debt-to-GDP  ratio  is  projected  to  rise  only  modestly  through  2030.  This  reflects, in  part,  the  newly  reformed  EU  fiscal  rules,  designed  to  promote  medium-term  debt consolidation  while  preserving  space  for  public  investment  and  structural  reforms. Still, the fiscal outlook remains uncertain, due to geopolitical developments and rising demands for investments and defense-related spending.

3 Interestingly, Venetian loans attracted wealthy foreign investors. Yet, if these investors became enemies of the Republic, their assets could be frozen, seized, or used as leverage in negotiations-a tactic that echoes modern financial strategies in conflict.

4 For context, global debt stood at just 62 percent before the Global Financial Crisis. According to the latest IMF projections, in over one-third of countries, while remaining well above pre-pandemic levels, public debt is expected to rise even further this year. Together, these economies account for three-quarters of global GDP.

The  growth  of  the  United  States  public  debt  has  raised  serious  concerns  about  its long-term sustainability. 5  And given the central role of the United States in the global economy and for  global  finance,  tensions  in  its  sovereign  debt  market  could  have far-reaching consequences, including for emerging economies with significant public and private foreign currency exposures. 6

A second key fact is that around half of low-income countries are close to or facing debt distress, according to the IMF and the World Bank. 7 The external debt of these economies at the end of 2024 stood at almost 1 trillion of US dollars, up by a third since the onset of the pandemic. While these economies represent only a small share of global GDP, just 2 percent in 2024, their population accounts for around 20 percent of the world's total. A debt crisis in these regions might not shake the global financial system, but it could have serious human and geopolitical consequences, including the risk of heightened conflict and rising migration pressures.

A third key development is that in most countries interest rates have gone back up to 'normal' levels, and are not expected to return any time soon to the low levels of the last  decade. In advanced economies, nominal and real rates have declined somewhat following the high inflation period, but are still much higher than before the pandemic. The combination of higher debt and higher rates going forward (Figure 3) is expected to increase the cost of servicing the debt (Figure 4).

A fourth key trend is that, following the ultra-accommodative policies that defined the previous decade, since 2022 a growing number of central banks in advanced economies have  been  reducing  the  size  of  their  government  bonds  portfolios,  via  the  so-called quantitative tightening (QT). 8

Recent cross-country evidence shows that the increased net supply of government paper caused by QT has been absorbed mostly by nonbanks, both foreign and domestic, though with heterogeneity across countries. 9  The process has been smooth so far. In the euro area mainly investment funds and foreign private investors increased their shares, and to a lower extent households, banks, pension funds and insurance companies (Fig. 5.a). In this case as well, cross-country heterogeneity is high. For example, in Italy the households' share increased significantly, whereas banks' share declined.

5 See K. Dynan and D. Elmendorf, 'Putting US Fiscal Policy on a Sustainable Path', NBER Working Paper Series , 33751, 2025; G.J. Hall and T.J. Sargent, 'Fiscal Consequences of the US War on COVID', mimeo.

6 S. Arslanalp and B. Eichengreen, 'Living with High Public Debt', Jackson Hole Economic Policy Symposium , 2023.

7 See IMF, Debt Sustainability Analysis and World Bank, International Debt Report, 2024.

8 The Bank of England led the way, launching quantitative tightening in February 2022. It was soon followed by other major central banks, including the U.S. Federal Reserve and the European Central Bank. At the end of 2024, these central banks had reduced their balance sheet size to 30, 42 and 23 percent of GDP (from their respective peaks of 49, 67 and 35 percent).

9 See W. Du, K. Forbes and M.N. Luzzetti, 'Quantitative Tightening Around the Globe : What Have We Learned?', NBER Working Paper Series , 32321, 2024.

## 3. Sovereign debt markets: challenges

These  developments  -  rising  sovereign  debt,  higher  interest  rates,  and  a  changing investor landscape - raise challenges for researchers, investors and debt management officers (DMOs).

A key question is: at what interest rates will investors be willing to hold such increasing amounts  of  government  debt?  In  other  terms,  what  is  the  reactivity  of  demand  for sovereign debt to interest rates?

Our keynote speaker, Professor Greenwood, has conducted seminal work in this field. His research illustrates how different investor types, each with their own preferences for specific segments of the sovereign market, interact with bond arbitrageurs to shape the yield response when quantities change. 10

There are multiple dimensions to be taken into account to answer the above question. The reactivity of demand can differ over time, and across investor types, bond maturities, macro-financial  conditions,  and  jurisdictions.  There  seems  to  be  some  consensus that some investors have low elasticity of demand, as they tend to buy and hold the securities. Insurance companies and pension funds are often considered to be part of this category. 11  Other investors, instead, such as hedge funds, tend to have high elasticities, especially during stress periods. 12  Also, there is some evidence that in periods of stress banks tend to act as contrarian, buying sovereign paper as interest rates rise, whereas foreign investors reduce their exposures. 13

Fresh  evidence  and  insights  come  from  new  studies  such  as  those  that  will  be presented tomorrow, that examine this topic in the light of granular data and innovative methodologies. 14

Overall,  this  evidence  suggests  that  for  debt  managers  it  is  important  to  know  the composition  of  their  investor  base,  and  to  study  the  characteristics  of  demand.  For

10 R. Greenwood and D. Vayanos, 'Price Pressures in the Government Bond Market', American Economic Review , 100, 2, 2010, pp. 585-590; R. Greenwood, S. Hanson and D. Vayanos, 'Supply and Demand and the Term Structure of Interest Rates', Annual Review of Financial Economics , 16, 2024, pp. 115-151.

11 For evidence on how insurance companies and pension funds' government bond portfolios respond to their liabilities structure and regulation, see D., Domanski, H.S., Shin, and V. Sushko, 'The Hunt for Duration:  Not  Waving  but  Drowning?',  2017, IMF  Economic  Review, 65,  and  K.  Jansen,  'Long-Term Investors, Demand Shifts, and Yields', The Review of Financial Studies, Volume 38, Issue 1, January 2025.

12 O.  Panzarino,  'Investor  Behavior  Under  Market  Stress:  Evidence  from  the  Italian  Sovereign  Bond Market'. Bank  of  Italy,  Markets,  Infrastructures,  Payment  Systems , Research  Paper No.  33,  2023; F.M. Ferrara, et al., 'Hedge funds: good or bad for market functioning?' ECB Blog , September 2024. FSB, Report on 'Liquidity in Core Government Bond Markets', 2022.

13 P., Angelini, G. Grande, and F. Panetta, 'The negative feedback loop between banks and sovereigns', Bank  of  Italy,  Occasional  Papers no.  213,  2014,  show  that  in  the  aftermath  of  the  sovereign  debt crisis Italian banks bought domestic sovereign paper, and that returns turned out to be higher than those from bank loans, on a risk-adjusted basis. By contrast, foreign investors fled the market. Results supporting a similar interpretation are reported in Panzarino, op. cit.

14 See, in particular,  the  conference papers on the U.S. Treasury market by M. Chaudhary, Z. Fu and H. Zhou (2025) 'Anatomy of the Treasury Market: Who Moves Yields?' and by K. Jansen, W. Li and L. Schmid (2025), 'Granular Treasury Demand with Arbitrageurs'.

instance, in the euro area the share of sovereign paper held by price sensitive investors has been gradually increasing in recent years (Figure 5.b), and so has the share of hedge funds in trading activity. 15 This suggests that in a situation of market stress, other things equal, tensions on sovereign yields might be stronger than in the past.

This risk is exacerbated by the relative scarcity of safe assets in the euro area. A feature which is also relevant to the international role of the euro.

Several commentators have suggested that the current geopolitical conjuncture offers an opportunity for the euro. 16  To seize this opportunity, decisive steps are needed toward integrating the EU capital markets more deeply and creating a large, liquid, and unified market for euro-denominated debt securities (a goal worthy in itself, given its relevance for the growth potential of the European economy). The EU Commission has recently put this issue at the centre of its program with the so-called Competiveness Compass, but the absence of a European safe asset remains a critical obstacle. 17

The issuance of EU bonds is an important first step. These instruments already enjoy the highest credit rating, and have made real progress since their inception. First, EU bonds are now issued under a unified funding strategy - moving away from fragmented labels  like  NextGenerationEU,  SAFE,  and  SURE  -  to  present  a  clear,  coherent  identity to investors. Second, since October 2024, these bonds are supported by a repo facility run by the European Commission, which helps ensure a smoother functioning of the secondary markets. And third, liquidity has been further enhanced with the introduction of futures contracts, making these instruments more attractive for hedging purposes. 18 These improvements have contributed to narrowing the spreads relative to the Bund down to about 40 basis points on average in 2025, from about 70 in 2022 (Figure 6). 19

However,  if  Europe  wants  to  build  a  financial  system  that  matches  the  weight  of  its economy, and offer global investors a credible alternative to the US dollar, it needs to go beyond technical adjustments, and dramatically scale up the issuance of EU bonds, as their total volume remains too modest to support a thriving market and bring down the liquidity premium (Figures 7, 8, 9). Achieving this goal would demand a bold political step to start a process that transcends the current boundaries of existing programs and reflects a shared European vision for the future of our economic and financial union. 20

15 F.M. Ferrara et al., op. cit.

16 See e.g. H. Rey, Opinion: How Trump's policies could dethrone 'king dollar' and make the euro great again, Marketwatch, May 21, 2025.

17 See P. Angelini, Innovation and innovation financing in Europe , 10 March 2025.

18 A futures contract was launched by the Intercontinental Exchange in October 2024 ; another one will be launched in September 2025 on the Eurex . This will enhance the ecosystem across cash, repo, and derivatives markets in line with international fixed income standards.

19 K. Pallara, M. Pericoli and P. Tommasino, 'Issuing European safe assets: how to get the most out of Eurobonds?', Banca d'Italia, Questioni di Economia e Finanza, forthcoming.

20 See  O.  Blanchard  and  A.  Ubide,  ' Now  is  the  time  for  Eurobonds:  A  specific  proposal ',  Realtime economics blog, Peterson Institute for International Economics, May 30, 2025. The scheme closely resembles the proposal advanced by Cioffi et al., Outline of a redistribution-free debt redemption fund for the euro area, Bank of Italy, Occasional Papers no. 479, 2019.

The experience of NextGenerationEU and the other programs mentioned above, however, provides examples of how such a process could be set in motion, as it shows that it is possible to finance an ambitious European investment plan through the issuance of common public debt without having to create a fiscal union or introduce an EU finance ministry. 21

Let me thank all participants, speakers and panelists for their contribution, as well as the organizing committee for their efforts for the success of this event. I wish you all a productive and stimulating conference.

## FIGURES

## Figure 1



Source: IMF World economic outlook, April 2025 and October 2019. Note: Dashed (dotted) lines are April 2024 (October 2019) projections. Shaded areas for the 2025-2030

forecast period.

Figure 2

Main regions: public debt-to-GDP ratios

(% of GDP)



Source: IMF World economic outlook, April 2025 and October 2019.

Note: Dashed (dotted) lines are April 2024 (October 2019) projections. Shaded areas for the 2025-2030 forecast period.

## Expected 10-year government bond rates 5 years ahead

## (per cent)



Source: Consensus Forecasts.

Legend: 2025 = April 2025 expectations for 2031-35; 2015 = expectations for 2021-25.

## Figure 4



Source: IMF WEO Apr. 2025.

## Sectoral euro area government bond absorption since the end of QE

(change in bond holdings by sector between 2022:Q2 and 2025:Q1 as a fraction of bond outstanding as of 2022:Q2)



Source: Securities Holdings Statistics, European System of Central Banks.

## Holdings of euro area government bonds (EUR billions, quarterly data, 2014:1 - 2025:1)



Source: Securities Holdings Statistics, European System of Central Banks.

Notes:  Preferred  habitat  investors  include  insurance  companies  and  pension  funds  and  foreign  official investors and Eurosystem (which is reported separately). Price sensitive investors include the foreign private sector and all other euro area sectors (banks, investment funds, households, non-financial corporations and the public sector). The distinction between the two groups follows Vayanos and Vila (2009, 2021) and Eser et al. (2023). The patterns displayed in the figure do not change if households and firms are considered as preferred habitat investors.

## Figure 5b

Figure 7



## Outstanding global sovereign bonds for the main advanced economies (box size based on amounts outstanding on December 2024)



Source: Bloomberg for non-euro area countries. CSDB-Derived Securities Issues Statistics (CSEC) statistics for the euro area outstanding amounts; Centralised Securities Database (CSDB) for EU bonds. : Ratings follow the S&amp;P notation. Euro area sovereign ratings have been grouped in the four categories in the legend. Average of the sovereign rating by the three main agencies as of May 7, 2025. Sovereign

Note bonds of Euro area countries are in blue, by rating.

## Sovereign debt securities outstanding in some euro area countries and EU bonds (EUR billions; monthly data)



Source: CSEC statistics for individual countries, CSDB for EU-bonds. Last observation: April 2025.

## Figure 9



- (1) Liquidity is measured with the average bid-ask spread on 10-year government bonds in 2025.",Paolo Angelini
https://www.bis.org/review/r250611e.htm,Sabine Mauderer: Navigating global challenges - what's in it for Europe?,"Speech by Dr Sabine Mauderer, Member of the Executive Board of the Deutsche Bundesbank, at the International Capital Market Association (ICMA) Annual General Meeting & Conference, Frankfurt am Main, 5 June 2025.",2025-06-05 00:00:00,"## Sabine Mauderer: Navigating global challenges - what's in it for Europe?

Speech by Dr Sabine Mauderer, Member of the Executive Board of the Deutsche Bundesbank, at the International Capital Market Association (ICMA) Annual General Meeting &amp; Conference, Frankfurt am Main, 5 June 2025.

* * *

Check against delivery

## 1 Introduction

Ladies and gentlemen.

I don't know what your early morning routine looks like, but mine has changed significantly. Every morning when I get up, the first thing I do is to check the news for developments that I would not have expected even some months ago. Global uncertainty and tectonic shifts are everywhere.

Today, I would like to take a closer look at what this means for Europe. More specifically: how can Europe make the most of the current circumstances, where many international investors look for new investment opportunities?

## 2. Global threats: Weak growth and high debt

Let me recap some of the challenges our world is facing.

First, the global economy is experiencing a longer period of relatively weak growth. The reasons for this are manifold:

1. Growing trade barriers,
2. overcapacity in China and
3. concentration risks along the supply chain.

All these factors are becoming a more pressing issue. Trade barriers, such as tariffs and export restrictions, fragment international markets and reduce the efficiency of global trade. Overcapacity in China in key industries can lead to further price pressure, especially in Europe. Concentration in either critical industries like the chip industry or commodities, such as rare earths, can create economic dependencies.

Besides significant headwinds resulting from geopolitical tensions, we have countryspecific challenges. These include:

1. Demographic change, causing a shortage of skilled workers.
2. Small and medium-sized companies not using the full potential of digitalisation.
3. Slow administration and high degree of bureaucracy.

These factors matter, especially in Europe.

And in addition to all this, we are facing broader challenges that you all are aware of. A short list: climate change, degradation of nature and the effects of artificial intelligence (AI)  on our economies.

We also need to talk about rising global debt. Fiscal deficits and public debt-to-GDP ratios have grown significantly in emerging markets and developing economies (EMDE). In 2025, even in advanced economies the debt-to-GDP ratio has reached an average level of 110%. 1

High debt is a significant risk for financial stability. High debt also limits governments' room for manoeuvre.

## 3. Uncertainty causes high volatility in financial markets

At the same time we face significant uncertainty that is evident in the high volatility on financial markets. This year alone, volatility indicators in many market segments spiked at various occasions:

In early March, when the new German government presented its fiscal plans. In April, markets reacted strongly to the announcement of ""reciprocal"" tariffs by the US administration. Recently, we have seen rising yields in many countries, particularly at the long end of the yield curve.

In part this increase in rates can be seen as a normalisation, as central banks are slowly withdrawing from bond markets. But rising term premia may also reflect heightened awareness of fiscal sustainability with regard to a number of countries, including the US.

This shows that: Fiscal leeway is not infinite. This is what even leading government bond markets are telling us.

In such an environment, market participants have to deal with remarkable changes. Probably the most prominent one involves rising US Treasury yields, which normally go hand in hand with a rising US dollar. Recently, however, this correlation has been reversed.

Potential vulnerabilities also originate from non-bank financial institutions (NBFIs).  We saw high margin calls affecting hedge funds, to mention just one example. We have to keep a close eye on NBFIs,  not least since they control roughly 50% of global financial assets. 2

Bottom line: In recent months we have experienced significant volatility in financial markets. The good news: Financial markets remained quite resilient, despite this high volatility. But with all these uncertainties and rising debt levels also in advanced economies it is clear: We are not out of the woods.

## 4. Europe has benefited so far

Europe, in particular, has been holding up relatively well amid this uncertainty and volatility. The euro has appreciated against the US dollar and against the currencies of other major trading partners. European equity markets have been outperforming their peers in other regions. German government bonds have served as a stability anchor and a safe haven, especially amid the uncertainty around tariffs.

Looking at government bond spreads in Europe, there were no signs of fragmentation even in times of market stress. We are seeing more and more non-European entities issuing bonds in euro instead of US dollar. Finally, the German government's fiscal package was well received. The biggest part of the rise in Bund yields following news about the spending plans reflected an improved medium-term growth outlook.

So, that's the good news, but let's also be honest: Part of the market reaction towards Europe is due to positive expectations about future outcomes. It seems that to some extent we are being praised for reforms we have yet to implement.

Beyond that, the strength that Germany and Europe have shown is more relative  in nature, so far. In other words, we have also benefited from higher uncertainty in other parts of the world.

But it is also true that many investors are discovering Europe to be a safe haven. It is a place where democracy, the rule of law and the principle of checks and balances are part of the  DNA.

## 5. How can Europe benefit in the future?

Against this backdrop, how can Germany and Europe preserve and build on these positive developments? Or, put differently, how can we ensure that the current tailwind does not become a lukewarm breeze?

First, we have to make sure that democracy, rule of law and the principle of checks and balances remain the backbone of Europe.

Second, any fiscal space needs to be used in a smart way, fostering growth. This means that financial resources must be channelled into productive investments.

Third, growth requires not only smart support from the government. The biggest effort must come from the corporate sector itself.

European companies have to become more competitive to keep pace with global dynamics. This includes making advances in digitalisation and AI,  as well as driving innovation in disruptive technologies and areas.

Companies have to stay alert and agile. They have to adapt to the speed of key developments and remain open to change. For that, they need to recruit skilled people.

To get skilled people, Europe must ensure a well-functioning education system, including good universities. We must secure that everyone has access to educational institutions.

That leads me to my last point: We need a social system that ensures social cohesion. At the same time, a social system has to be balanced to provide incentives for work and to avoid overburdening fiscal capacities.

I could go on listing all the areas where Europe needs to improve. But let me come to an end.

## 6. Conclusion

Ladies and gentlemen.

The momentum is now on Europe's side, but it will not be endless. Europe needs to speed up. The public and private sector both need to accelerate and intensify their efforts to ensure their economies remain globally competitive. That's what investors expect.

A major cornerstone of Europe's promise as a safe haven lies in its democracy, its rule of law and its system of checks and balances. These are some of Europe's greatest treasures.

Being a passionate European, I will do my best to safeguard these treasures. In my case, by stressing the value of central bank independence.

1 International Monetary Fund (2025): World Economic Outlook, 14 April 2025.

2  Financial Stability Board (2024): Global Monitoring Report on Non-Bank Financial Intermediation, 16 December 2024.",Sabine Mauderer
https://www.bis.org/review/r250610b.htm,Sharon Kozicki: Talking to Canadians - how real-world insights shape monetary policy,"Remarks by Ms Sharon Kozicki, Deputy Governor of the Bank of Canada, at the C.D. Howe Institute, Toronto, Ontario, 5 June 2025.",2025-06-05 00:00:00,"

Remarks by Sharon Kozicki Deputy Governor C.D. Howe Institute June 5, 2025 Toronto, ON

## Talking to Canadians: How real-world insights shape monetary policy

## Introduction

Thank you for the kind introduction, Bill. And thank you for inviting me to speak before you today.

It's always a pleasure  to be in Toronto. This is where I did my undergraduate  and master's degrees, just north of here at the University of Toronto. I have fond memories of spending  days in the Buttery-and occasional trips to the Brunswick House and the Duke of York. But I digress.

I really appreciate  the opportunity to deliver the annual Laidler Lecture in honour of David Laidler and his many contributions  to economic thinking. He has left an indelible  mark on North American-and specifically, Canadian-monetary  policy. This legacy includes writing two award-winning  books with Bill Robson.

Speaking of which, I'm delighted  to be here at the C.D. Howe Institute. The Institute  has long been a resource for the Bank of Canada, thanks to its nationally  acclaimed writing about economic policy. I've also enjoyed partnering with your organization  on workshops to debate  and research important economic issues.

As you know, yesterday was one of the Bank's eight fixed interest rate announcement dates. So my talk here is timely.

In yesterday's decision, Governing Council maintained the policy interest rate at 2.75%.

Here's the context in which we took this decision.

The trade conflict initiated  by the United States remains the biggest headwind facing the economy. Uncertainty remains high.

The Canadian economy is softer, but not sharply weaker.

And we've seen some firmness in recent inflation data.

I would like to thank Sarah Miller, Joshua Slive and Lena Suchanek for their help in preparing this speech.

These themes are broadly in line with what the Institute's  Monetary Policy Council mentioned last week when it called on the Bank to cut its policy interest rate by 25 basis points.

In taking yesterday's decision, we of course looked at traditional  sources of data from Statistics Canada. The agency's reports on issues  like inflation, jobs and housing  are critical to understanding  recent economic conditions.  But while those data give a good view of the forest-they're not necessarily providing as clear a sightline  to the trees. We want to be able to see both.

So today I want to discuss how we are discovering new insights  relevant to our policy-making. This includes our use of non-traditional  data and surveys, as well as engaging  in important outreach activities with Canadians.

In the book To Kill a Mockingbird ,  Atticus Finch says, 'You never really understand  a person until you consider things from [their] point of view.' This is true. The conversations  my colleagues and I have with both individuals  and businesses  help us see beyond the data-and  consider their points of view.

## Expanding our information gathering

As I said earlier, traditional  macroeconomic data paint a high-level picture. They report on whole segments of the economy. Sometimes that means we don't see how economic conditions  are affecting different households  and businesses.

Not only that, but traditional  data tend to look backward-they measure what has already happened.  They work best at helping  us forecast and explain things we have previously experienced.

The Bank's surveys and consultations  with Canadians  give us a snapshot  of their spending  and investment intentions.  We learn more about their expectations for inflation  and economic activity. The results are crucial to our deliberations.

When we expand the kinds of information we consider in our decisions,  we gain a more complete view of how raising  or lowering the policy rate affects consumers and businesses  across the country.

Simply put, this broader range of information helps us make better decisions.

Just as importantly, connecting with Canadians  helps build trust and credibility with those we serve. When people  have trust in the Bank as an institution-and see that we have their best interests  top-of-mind-it creates an environment that supports  the effective transmission of monetary policy.

This is because when Canadians  expect that we will follow through on our commitments, it greases  the wheels for our actions to have their intended effect. And that, of course, is to achieve price stability,  which in the long term promotes the economic and financial welfare of our country and its citizens.

## Non-traditional sources of data

Now, I'd like to dive into some specific ways the Bank has broadened  its sources of information over the years. I'll start with why we use some non-traditional sources of data.

Our experiences during the COVID-19 pandemic provide a good example.

Before the pandemic, we certainly didn't have data or models to grapple with a worldwide health crisis that would cost lives and livelihoods.  Then, in March 2020, economies around the world came to a grinding  halt. Moreover, the situation  was evolving very quickly.

Let's consider what was happening  with travel and dining out. Demand for services like restaurants,  flights and hotels was the first to fall off.

Statistics Canada produces monthly data on sales at bars and restaurants  that are helpful in normal times. But at the start of the pandemic, the backwardlooking figures didn't reflect the rapidly deteriorating  situation.  So the Bank turned to more frequently published  data-such as restaurant reservations,  flight bookings and credit card transactions-to  assess  consumers' real-time spending patterns.

Another useful source of non-traditional  data in the spring of 2020 were job postings  from websites like Indeed.  These data showed us the demand for new workers by firms across the country, nicely complementing data from Statistics Canada's  Labour Force Survey. The Labour Force Survey told us what had happened  with employment in the previous month, while more real-time data gave us a glimpse of what businesses  expected for future hiring.

And today, in the face of a global trade conflict, we've continued to use-and even expand our reliance on-non-traditional  data. For instance, we are looking at different metrics to round out our analysis of tariff implications. These include the number of trucks crossing the border, and the volume of ships entering  and leaving ports in both Canada and the United States.

It will surprise  no one here to learn that the numbers aren't encouraging.  As one example, the number of trucks crossing the border both to and from the United States dropped sharply in April.

This type of information is invaluable  in times of great economic uncertainty-like we're in today.

## Surveying Canadians

Now on to another important tool: surveys.

Like other central banks, the Bank conducts a number of surveys with the financial sector. 1  The results provide us with information on important issues like lending  conditions as well as the demand for and supply of credit. We also gain important insights  on risks and resiliency in the financial system. And we talk to financial market professionals  to hear their views on where the economy and inflation  are headed.

But today, in talking about surveys, I want to focus more on how our regional offices inform our monetary policy deliberations  by reaching out to households and businesses.

1 For examples, see the Senior Loan Officer Survey, the Financial System Survey and the Market Participants Survey.

Since the late 1990s, the Bank has been expanding its reach into the diverse regions that make up this great country. This work has included opening  regional offices, and surveying businesses  and consumers about their economic views. Our regional  staff are well positioned  to strengthen  our ties with key local stakeholders  such as industry, government, educational  institutions  and community organizations.

Currently, the Bank's regional  offices conduct three key macroeconomic surveys: the Business  Outlook Survey, the Business  Leaders'  Pulse   and the Canadian Survey of Consumer Expectations. 2,  3, 4

I'll go over each one in greater detail in a moment. But overall, surveys like these accomplish three main goals.

First, they help inform our outlooks for the economy and inflation. We hear from individuals  and businesses  about how they're feeling-a measure of their current levels of confidence. We also ask what they expect to happen  to prices and their own spending  in the future.

This gives the Bank forward-looking views on economic activity, demand, capacity pressures  and inflation. That makes surveys particularly helpful in providing early indications  of how the economy is reacting during times of great uncertainty, like the current trade conflict.

Surveys also shine a light on trends that may be simmering beneath the surface. They help us understand  behavioural  changes that don't always show up in aggregated  data reports-at  least not immediately.

Finally, these surveys help us gather a wide range of views on how current economic conditions  are playing out in communities across Canada.

Our national  economy is made up of diverse regional economies. Economic conditions  may differ across regions,  and regions may respond differently to broad-based  upswings  and downturns. 5  Survey data give us a clearer view of the differences in how households  and businesses  are experiencing the economy.

Let me now turn to each of the surveys.

The Business  Outlook Survey-or BOS for short-is a quarterly survey of businesses  across the country. It has existed since 1997, which provides us a rich, long dataset for comparisons.

Staff in our regional offices meet with local business  leaders to discuss their views on the economy. We ask about their expectations for sales and demand, as well as their investment intentions.  We probe their views about labour

2 See the Bank's website for details about the Business Outlook Survey.

3 For more, see T. Chernis, C. D'Souza, K. MacLean, T. Reader, J. Slive and F. Suvankulov, 'The Business Leaders' Pulse-An Online Business Survey,' Bank of Canada Discussion Paper No. 2022-14 (June 2022).

4 See the Bank's website for details about the Canadian Survey of Consumer Expectations.

5 For more, see D. Amirault, M. Verstraete and S. Miller, 'Canada's regional economies,' The Economy, Plain and Simple (June 2023).

shortages,  as well as hiring and wages. And we ask for their outlooks on costs and pricing, as well as economy-wide inflation. This gives us a broad range of perspectives about how businesses  view the economy.

For example, the results of the BOS for the fourth quarter of 2021 helped us better understand  how the COVID-19 pandemic was affecting firms. 6  For the first time since the start of the pandemic, we saw that businesses  were planning  to pass along cost increases  stemming from supply chain pressures.  They had concluded that customers understood  these pressures  and were willing to accept price increases.

More recently, firms told us that uncertainty about tariffs has been affecting them in multiple ways. These impacts include weaker demand from their business customers that would be directly affected by tariffs.

Now on to the Business  Leaders' Pulse, or BLP for short. This is our newest survey, created in 2021. It's a short monthly online  questionnaire  to assess  firms' expectations for growth in sales and employment. It also asks about perceived risks to their business  outlook, and poses other topical questions.

The BLP provides a flexible and nimble pulse of evolving situations.  It complements the BOS with timely feedback from firms about the effects of rapid changes in the economy.

And the BLP has been very helpful in monitoring effects from the situation  south of the border. For example, businesses  were reporting an increase in both uncertainty and inflation expectations as early as November 2024. In December, we also began noting a decline in business  sentiment-even  before the new US administration  was sworn in.

This downward trend continued  through the first quarter ( Chart 1 ). Firms have reported that they are delaying or entirely cutting their plans to invest and hire. Sales expectations among exporters have also fallen considerably  in recent months ( Chart 2 ).

6  See Bank of Canada, Business Outlook Survey-Fourth Quarter of 2021 (January 2022).

## Chart 1: Business sentiment fell through the first quarter

Excluding normal seasonal patterns, how would you rate current business conditions for your firm? (double-weighted balance of opinion*)



* Percentage of firms reporting positive sentiment minus the percentage reporting negative sentiment. Responses of very good business conditions and very poor business conditions are given twice the weight of responses of good business conditions and poor business conditions. The range of potential outcomes of this double-weighted balance of opinion is -200% to 200%.

Note: This question was not asked in September 2022.

Source: Business Leaders’ Pulse

Last updated: May 31, 2025

## Chart 2: Sales expectations have softened, especially for exporters

Expected sales growth next 12 months, relative to historical average



Note: The historical is taken from 2022 2025

average January through May

Source: Business Leaders' Pulse

Last updated: May 31, 2025

The final survey I'd like to highlight  is the Canadian  Survey of Consumer Expectations, or CSCE. This is a quarterly survey that measures households' views about their job prospects and financial health, as well as their expectations for inflation.  We also ask about current issues  of interest to the Bank. The results are parsed out by characteristics like age, geography, income and education.

During and immediately after the pandemic, the CSCE was helpful in giving the Bank a clearer look at differences in spending  and saving patterns  across households.  When it came to individuals,  the pandemic-and subsequent increases in inflation and interest  rates-affected different segments of the population  very differently. I spoke about this at the University of Regina in the autumn of 2023, a speech I encourage you to read. 7

More recently, in the first quarter of 2025, results  from the CSCE highlighted  an emerging 'Buy Canadian' movement that could reduce Canadian imports from the United States.

The CSCE has allowed us to see how trade tensions  with the United States are having a more pronounced  impact on some Canadians.  People working in sectors that rely on exports to the United States are increasingly concerned about their job security. They say they're more likely to reduce spending  on durables-such  as furniture and appliances-and  on non-essentials  like restaurant  meals and vacations.

And tariff policies could impact the prices consumers face. Indeed, with all the talk about tariffs, consumers' inflation expectations over the next year or two have recently increased  ( Chart 3 ).

## Chart 3: Consumers' inflation expectations increased earlier this year

Inflation expectations for each horizon: What do you expect the rate of inflation (deflation) to be? (Interpolated median)



## Special regional consultations

I'll turn now to consultations  that fall outside of the Bank's normal survey schedule, and that are driven largely by pressing  issues  of the day.

For many years now, the Governor and other senior  Bank officials have met regularly with leaders in different sectors. Most recently, members of Governing Council spoke with representatives  from the auto sector, as well as other manufacturers and exporters. We wanted to hear first-hand how the trade conflict is affecting businesses  in these sectors today and their outlook for the future.

The Bank is also holding  special consultations  across the country to supplement traditional  datasets  and our standard  surveys.

As an example, I'll take you back to the interest  rate decision in March 2025.

We were operating  in an environment that was truly chaotic. Governing Council wanted to know more about how the economy was being affected by uncertainty around both US trade policy and Canadian  countermeasures.

We relied heavily on the results  of our three standard  surveys to inform our interest rate decision.  And we supplemented  these results  with additional information from businesses  and industry associations  that were particularly affected by trade tensions.  This would not have been possible  without the strong relationships  our regional  staff have developed and nurtured over the years.

We also considered  information coming in from such consultations  for our rate decision yesterday. I'll give you a glimpse of what we heard.

Overall, firms believed that their worst-case tariff scenarios were much less likely to materialize than they reported earlier this year. While uncertainty remains high, there was less talk of catastrophic outcomes. But firms have now started seeing concrete impacts on their performance, and they're finding it challenging  to formulate their outlooks.

Most businesses  expect activity to weaken in the near-term, which puts jobs at risk. In addition,  firms spoke about their costs increasing,  which likely means they will need to raise prices at some point.

Governing Council considered this information with other data and analysis in deciding yesterday to keep our policy interest rate at 2.75%.

## Governing Council outreach

For my final example, I'd like to talk now about an initiative that is near and dear to my heart.

Members of Governing Council have ramped up the number of regional visits we make to hear first-hand about local economic conditions  in communities across the country. We're asking a lot of questions  and listening  to people's  views and experiences.

Sometimes these regional  meetings take place when a member of Governing Council is in a community for a public speech. Other times we will make a trip solely to meet with community members and local firms.

Last year, my colleagues and I embarked on 16 community visits with a combined total of about 100 roundtables,  bilateral  meetings and consultations.  In addition  to businesses,  we met with a diverse range of individuals  and groups across the country, including Indigenous  Peoples, labour unions,  public officials, business  improvement associations  and organizations  that provide social services-to name just a few.

While I'm in Toronto, I'll be meeting with representatives  from academia, a labour union and a shipping  and transportation  company. I will also be speaking with the head of a mentorship program for tech start-ups  and a leader in biomedical engineering.

People I've met with across the country have left an indelible  mark on my perspective as a member of the Bank's Governing Council.

Hearing first-hand from people and businesses  gives me greater clarity of the depth and breadth of economic issues.  Speaking face-to-face with people turns facts and figures into a more complete narrative of how the economy is evolving.

I've also heard things in my travels that foreshadowed  what appeared later in hard datasets.  For instance, when I was in Moncton earlier this year, firms told me that shipments  to the United States were happening  sooner than originally planned.  They also reported an uptick in bringing  shipments to Canada. This pointed to exporters and importers pulling forward shipments  and building  up inventories  ahead of tariffs-which showed up later in official data.

These insights  also help the Bank grasp the real-world issues  that stretch beyond traditional  data.  When I met with representatives  from Ottawa's information technology sector, I heard that the high cost of housing  is making it difficult for

firms to attract new employees from out of town. Affordability also came up in my conversations  with people working in the social services sector. They spoke about seeing increases in the number of people using food banks and experiencing homelessness.

Another benefit of doing outreach is that it allows you to connect the dots. If I hear something  in the Fraser Valley and again here in Toronto, this may be a sign of an emerging national  trend that's worth keeping an eye on.

But I want to stress that it's not just Governing Council members like me who are out collecting these insights.  Our regional staff make important connections with individuals  and businesses  every day. They deserve huge kudos for their efforts in communities across the country.

What we hear really does help us understand  how developments like pervasive trade uncertainty affect the economy. So if the Bank asks your organization  to participate in a survey or an outreach activity, I encourage  you to do so. We're grateful to those who are willing to take time out of their busy schedules  to meet with us.

And lest I leave you with the impression  that the benefits are one-sided,  I certainly hope that those we meet with also come away from our conversations with a deeper understanding  of how the Bank of Canada is working for them.

We know the last few years have been difficult. Many households  and businesses  faced significant hardships  with inflation spiking higher than it had in decades. The elevated interest rates that were needed to bring inflation back to the Bank's 2% target also made borrowing more expensive.

In the end, the Bank's monetary policy actions restored price stability, and we have been able to lower our policy interest rate by 2.25 percentage points since last  spring.

But Canadians  once again face greater uncertainty about what the future will hold. It's important that people continue trusting us to be a steady hand in these turbulent  times. Our outreach is an important part of earning-and  maintainingthis  trust.

## Conclusion

It's time for me to wrap up.

Before I take your questions,  I want to note that this year marks the Bank's 90 th anniversary. For nine decades, we have promoted the economic and financial well-being  of Canada and Canadians.

We don't always get everything right, but we are constantly learning  and adapting.  This is vitally important in today's highly uncertain environment when the situation  sometimes feels like it's changing by the hour.

As we navigate this uncertainty, my colleagues and I will continue reaching out to those we serve. When Governing Council is better informed, we make better decisions-for you, and for all your fellow Canadians.

Thank you for taking the time today to hear more about our work at the Bank of Canada, and how your insights  shape our thinking.

I look forward to answering any questions  you may have.",Sharon Kozicki
https://www.bis.org/review/r250604f.htm,Chee Hong Tat: Opening remarks - Nomura Investment Forum Asia,"Opening remarks by Mr Chee Hong Tat, Minister for Transport and Second Minister for Finance, and Deputy Chairman of the Monetary Authority of Singapore, at the Nomura Investment Forum Asia, Singapore, 4 June 2025. ",2025-06-04 00:00:00,"## Chee Hong Tat: Opening remarks - Nomura Investment Forum Asia

Opening remarks by Mr Chee Hong Tat, Minister for Transport and Second Minister for Finance, and Deputy Chairman of the Monetary Authority of Singapore, at the Nomura Investment Forum Asia, Singapore, 4 June 2025.

* * *

Good afternoon. I am delighted to join you at the Nomura Investment Forum Asia. I thought this is an opportunity to be able to engage everyone over lunch; gives us an opportunity to share with all of you some of our thoughts on the current situation and how we want to move forward. I don't think I have to spend too much time to explain why we are now in a very different environment. I am sure you have heard this many times and you have experienced it day-to-day in your jobs.

Just before I came, I saw on the news flash, that the latest S&amp;P Global Singapore Purchasing Managers' Index has fallen in the month of May. In April, it was 52.8 and in May, it has fallen to 51.5. Of course, fortunately, it is still above 50 but this is actually one of the lowest in the last few months. It is a reflection of the concerns that businesses have with regard to the more uncertain environment that we are in. And of course, we know that the uncertainties continue. It is not over yet. We may experience a bit of reprieve when there is a pause, like the 90-day pause - there are a number of these pauses - but we don't know what will happen after the end of the 90-day period. We also don't know whether there will be new rules and changes later. So the long and short of it is, I think we can all agree, it is now a much more uncertain, turbulent and volatile world.

So what can we do? I think if we look at it more positively, there will be some areas where we can still do something to be able to improve the situation that we are in. We are not entirely without agency. There are things we can do.

- a. For example, the trade in the US, as a result of all the tariffs and uncertainty, will definitely be affected. But it doesn't mean that we can't look for opportunities to further increase trade, investments and cooperation amongst other countries, between regions as well. So for example, Europe and Asia, and with countries in the region, how do we further strengthen collaborations with Japan and ASEAN, China, India, and many others.

b. So it is not that because the US is now pursuing a very different environment, and it is a changed world, that there are therefore no opportunities in other areas.

But having said that, it doesn't mean that these opportunities will automatically be translated into outcomes. The potential is there. So we talk about say for example, between Japan and ASEAN, between India and ASEAN, between Europe and Asia, I think we can all see the possibilities and potential. But having the potential is just part one; we must be able to translate the potential into outcomes - down to the actual projects that we can do together, the investments that we can do together, the trade links that we can do. If I may share one frank observation - today, we see a lot of focus on how we can further strengthen collaboration, trade, and investments. I think it is a move in the right direction. But until these aspirations are translated into outcomes, into

actual projects, investments, and trade flows, businesses may still not feel the benefit in Asia, and the uncertainties will still continue.

So one of the first things I will put forth to everybody is that governments and also companies need to look for how we can use this as a reminder, use the crisis as an opportunity to spur ourselves into expediting the economic transformation that we need within our economies but also between countries. If we can do that, it will open up new opportunities, new trade flows, new investments, new projects that we can work together, and hopefully, that will give a cushioning impact on what we are now experiencing with the tariffs and trade wars.

## Opportunities Ahead

So if I look at financial services, Singapore is a leading financial centre in Asia and our key objectives are to connect global markets, to support Asia's development and how we can better serve our companies in Singapore.

So today, the financial services sector is a key economic driver - its contribution to Singapore's GDP has grown from 12.5% in 2018 to 13.8% in 2024, and it employs close to 200,000 professionals in Singapore.

So amidst the current fast-changing environment, more volatile environment, we will continue to look for ways to strengthen our position as a trusted financial centre, how to enhance our connectivity with key markets and how we can continually improve the rules and processes to sharpen our competitiveness. So I would like to, in my speech today, touch on each of these three areas in turn, and we can get into further discussion later during the fireside chat.

## Strengthen Position as Trusted Financial Centre

So first, how to strengthen our position as a trusted financial centre. Now in a more uncertain world, trust, reliability, I think will become more valuable. The trust premium is a competitive advantage that has enabled Singapore to build a vibrant financial services sector.

- a. Global financial institutions continue to set up and expand their regional businesses in Singapore due to this trust premium and it is something that we have built up over the years and we must continue to nurture this, safeguard this, our trusted reputation. Businesses choose Singapore because they know that they can count on a stable environment, on clear rules, consistent policies and a businessfriendly environment.
- b. Singapore also has deep capabilities to allow our companies to grow, especially in areas like, say for example, asset management, and this is both public and private markets. We are a trusted gateway for international investors to access investment opportunities in Asia, and also for Asian investors who want to invest globally. And this can cater to investors who are looking to rebalance their portfolios into Asia. Earlier when I was in the holding room having a chat with some of the Nomura executives and there is this shift - some of the assets moving out from certain places into other places in the world. I think this is something which if we

play our cards right can also bring new opportunities for our financial sector.

- c. Now Nomura's presence in Singapore bears testimony to some of the points that I made earlier. In recent years, it has steadily grown its Foreign Exchange (FX), Markets, and also its Wealth Management businesses in Singapore, to better serve its clients and also to look at how it can help its clients to be able to use Singapore as a base for their Asian operations.
- d. So I think that is the first point, how do we further strengthen our position as a trusted financial centre and competitiveness.

## Enhance Connectivity with the Region

The second one is how do we enhance our connectivity with the region. So deepening financial connectivity can support and catalyse trade linkages between like-minded economies and trade partners.

- a. At the 12th ASEAN Finance Ministers' and Central Bank Governors' Meeting held in April, the Ministers and Governors agreed to deepen economic integration and financial connectivity.
- b. So allow me to cite two areas where we have seen good breakthroughs. First, ASEAN has made significant progress in enhancing and expanding regional payment linkages:
- i. Singapore's first cross-border instant payment linkage happened when the Bank of Thailand and MAS launched the PromptPay-PayNow linkage in 2021.
- ii. We have since expanded our bilateral instant payment connectivity to Malaysia and also India.
- iii. Building on this momentum, the ASEAN-5 and India are working on a multilateral payments gateway called Nexus, which will allow us to connect with even more markets and payments corridors, both within and beyond ASEAN.
- iv. And this will benefit individuals and also our companies, especially our SMEs, which can use these linkages for faster and more secure cross-border payments and also support closer economic and trade linkages.
- c. Sustainable finance is another example where we have seen good progress on ASEAN connectivity. The MAS has worked in partnership with our counterparts in the region to develop the ASEAN taxonomy , which aims to facilitate sustainable 1 financing flows within ASEAN.
- i. The ASEAN taxonomy provides a common framework for classifying green and transition projects and economic activities in the region. This helps channel capital towards activities that promote the transition of the real economy onto a more sustainable pathway.
- ii. With this clear and consistent taxonomy, ASEAN will be better placed to

attract more sustainable financing for key projects. The final version of the ASEAN taxonomy will be completed in November this year, and we look forward to its adoption by investors and corporates in the region.

- d. Ladies and gentlemen, we can draw inspiration from the progress that we have made in these two areas, in payments and also in sustainability, and the push for greater connectivity in other key areas will include our capital markets and also cross-border data connectivity.
- e. So that's the second area - enhancing connectivity in the region.

## Continually Review Rules and Processes to Improve Singapore's Competitiveness

The last and final area I want to touch on is how can we continually review our rules and processes to improve our competitiveness. So this is an area where I think we need to continue to do more because things will develop very quickly. We have new services, new business models, new requirements, and it is incumbent on us to be able to keep up with these new changes. And in doing so, we can improve our efficiency, we can reduce business costs, and make ourselves more attractive to businesses and investors.

So MAS will continue to closely engage the industry to see how we can enhance the areas for improvements, where are the pain points, where are the new opportunities and to facilitate new growth opportunities. And if I may just again cite two recent examples:

- a. In Wealth Management, MAS has significantly shortened the timelines for family office tax incentive applications to less than 3 months, with the roll-out of a new system and streamlined application process at the start of this year. This was in response to industry feedback on the long processing time in the past and of course, the challenge that I set for my colleagues is, let's continue to see how we can do even better. We have made some improvements, but I think we can still look at how we can do better, what are some of the areas for further improvement and we welcome feedback and suggestions from our friends in the industry.
- b. On Capital Markets, MAS is seeking feedback on proposals to streamline our prospectus requirements and to broaden investor outreach channels for IPOs. The proposals fall into three main areas:
- i. For primary listings on the Singapore Exchange (SGX), MAS is proposing for issuers to focus on the disclosure of core information that are most relevant and material for investors. This will concentrate the issuers' efforts on disclosures that are most pertinent for decision-making by investors.
- ii. For secondary listings on SGX, MAS is proposing to align disclosure requirements with baseline international disclosure standards. These simplified requirements will allow issuers who already have primary listings elsewhere to use the same prospectus and with minimal adaptation for their secondary listing on SGX.

- iii. The third proposal is around changes to existing legislation, to allow issuers to gauge investor interest earlier in the IPO process. This will support bookbuilding efforts, as well as give investors more time to familiarise themselves with the issuers and their intended offers.

So ladies and gentlemen, I have given you just some examples but there are many more.

- a. For MAS, one of the ways it is working closely with the industry is to set up regulatory sandboxes, so that we can test out new ideas, new concepts in an environment which, even if it fails, will not have a wider systemic impact on the financial system. So it is safe to fail. Even if you try and fail, it is contained within the sandbox. But if it works well and succeeds, we can then look at how we can scale up some of these ideas, and extend them across the system.

## Conclusion

Let me conclude my speech, before we proceed to the next part of the session, which is the fireside chat.

I want to put to all of you that even though we are now living in a more turbulent and uncertain period, it is precisely in these times of uncertainty that dialogues like this, that partnerships like this, matter most.

- a. So I would like to welcome your feedback and views on how we can work together, how we can respond to some of these challenges, and how we can seek out new opportunities in these uncertain times,
- b. And I am confident that if we work together - and this is one of the strengths we have in Singapore - the ability to work closely between the tripartite partners between the Government, industry and the workers in the unions to be able to look at how we can transform ourselves, how we can look ahead, anticipate where are the new opportunities and then work together to prepare ourselves for these new opportunities.
- c. In some other places, it is not that they cannot see the opportunities or that they cannot think of the changes that are needed, but it is that they cannot translate these ideas into implementation because there will always be different groups that will be affected differently when they make some of these changes. So the trust that we have built up and the ability to work across the tripartite ecosystem Government, industry and the unions and workers - that is one of the key strengths we have in Singapore, and I hope that it will help us to better deal with the current crisis that we are facing and, in the process, seek out new opportunities for our businesses and our people.

I look forward to continuing the conversation with all of you over the fireside chat. Thank you very much.

- 1  The ASEAN Taxonomy was first launched in Nov 2021; the third version was launched in Dec 2024 and the final version (V4), is slated for publication in Nov 2025.",Chee Hong Tat
https://www.bis.org/review/r250611b.htm,Rajeshwar Rao: Moving the boundaries of financial inclusion - a regulatory perspective,"Address by Mr Rajeshwar Rao, Deputy Governor of the Reserve Bank of India, at the HSBC's event for Financial Inclusion, Mumbai, 9 June 2025.",2025-06-09 00:00:00,"## Rajeshwar Rao: Moving the boundaries of financial inclusion - a regulatory perspective

Address by Mr Rajeshwar Rao, Deputy Governor of the Reserve Bank of India, at the HSBC's event for Financial Inclusion, Mumbai, 9 June 2025.

* * *

Distinguished guests, participants, ladies and gentlemen, Good evening.

At the outset, let me thank the organisers for inviting me to share some of my thoughts on the theme of financial inclusion. Before that, let me take a moment to acknowledge that today i.e., June 05, 2025, is the World Environment Day, an UN-recognized day that brings together people across the globe in a shared mission to safeguard and restore our planet. This year's theme of ending plastic pollution is a call to all of us to make a behavioural shift in our daily life choices. In the spirit of preserving the purity of our environment and safeguarding our well-being, let us commit toward making more sustainable choices.

Coming back to our theme for the day, let me begin by stating the obvious that financial inclusion is not just a policy objective but a collective obligation and responsibility for all stakeholders in the financial ecosystem. The importance of the theme can be underscored by the fact that at least seven out of the seventeen United Nations Sustainable Development Goals of 2030 view financial inclusion as a key enabler for achieving sustainable development worldwide by improving the quality of lives of poor and marginalized sections of the society. It is seen as a way to bridge the gap between the privileged and the under-privileged and a way to bring people out of poverty. An inclusive financial system has the potential to reduce income inequality and poverty, promote social cohesion and enable shared economic development. It also can dissuade the disadvantaged and low-income segments of society from seeking out informal options that renders them vulnerable to financial distress, debt, and poverty.

## History of Financial Inclusion in India

Given the theme for today's discourse, it would be worthwhile to set the historical context regarding financial inclusion in India. While the financial inclusion initiatives in our country can in many ways be traced back to the 1950s, with significant developments ensuing in the subsequent decade, it was the National Credit Council meeting of July 1968 that paved the way for framing of Priority Sector Lending (PSL) guidelines, nationalisation of select private banks in July 1969 and launch of the Lead Bank Scheme in December 1969 that were the precursors of this journey. The branch expansion policy adopted by RBI during the 1970s, which required a specific number of branches to be opened in rural areas for every branch opened in urban areas, became the foundation for expanding the reach of banking services that we see today. Besides, the experiments with group-based lending towards the turn of the last century and proliferation of microfinance institutions have also helped link the unserved section of the population with the formal banking system.

Interestingly, the above initiatives were taken during a period when the term 'financial inclusion' was not prevalent in the country. The first reference to the term was made in RBI's Annual Policy Statement for the Year 2005-06 by Dr Y.V. Reddy , the then 1 Governor of the Reserve Bank of India, who highlighted 'financial exclusion' that resulted due to certain banking practices. Banks were then urged to review their existing practices to align them with the objective of financial inclusion, leading to the genesis of 'no frills' account, which are now known as Basic Savings Bank Deposit Accounts.

## Financial Inclusion in Indian Context

The first step in promoting financial inclusion is understanding its nuances, which are as dynamic and diverse as the Indian economy itself, and thereafter outline its ambit in the Indian context. Given its multi-faceted nature, various organisations and jurisdictions have defined financial inclusion in different ways. In India, the formal definition of financial inclusion 2   was given in January 2008 by the Committee on Financial Inclusion chaired by Dr C Rangarajan as ""the process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low-income groups at an affordable cost"". Reflecting the priorities of that time, the definition focused largely on the access to financial services. Currently we have a scenario, where more than 95% households have access to a bank account , 3 which reflects remarkable progress on one out of three parameters of Financial Inclusion Index developed by the Reserve Bank to measure the extent of financial inclusion in the country.

While there has been a significant progress in expanding the banking reach, it is also important to ensure that inherent barriers to a gamut of financial products and services are eliminated and usage of these services expands to various segments of yet underserved and un-served population in the country. Efforts towards making financial services accessible become futile if they are not used by the intended population or are used without appropriate awareness of its risks and benefits. Thus, the other two parameters of RBI's financial inclusion index, viz., usage and quality of the financial services cannot be overlooked while defining or measuring financial inclusion. Over the last few years this index has shown reasonable improvement, but there is a scope for improvement in some aspects.

## Current Scenario

To get a perspective on the current scenario, it would be worthwhile to dwell a bit on some of the recent developments in the journey of financial inclusion in the country. Several policy measures towards furthering financial inclusion have been undertaken from time to time, but it was the launch of Pradhan Mantri Jan Dhan Yojana (PMJDY) that became the watershed moment in this journey. The Jan Dhan Yojana - Aadhar Mobile i.e., JAM trinity provided a quantum leap in our endeavour to ensure access to banking services for all adults, making it the world's largest financial inclusion program. As of May 21, 2025 , 55.44 crore Jan Dhan accounts, 56% of which belong to women, 4 have over 2.5 lakh crore worth of deposits, which speaks volumes about the impact of the scheme. The provision of universal access to bank accounts has not only increased

the potential reach of other financial services but has also enabled frictionless delivery of welfare programs to the targeted segment through adoption of Direct Benefit Transfer (DBT).

## Digital Payments

Access to a bank account is a prerequisite for availing other financial services, and a robust payments and settlements system is an indispensable enabler for proliferation of formal financial services. Over the past decade, the fundamentals of banking have changed with the advent of digital modes of banking like net banking and mobile banking as well as digital payments systems like Unified Payment Interface (UPI). In FY 2024-25, digital payments surged 35% Y-o-Y by volume to 60.81 crore transactions per day, with UPI accounting for 83.73% of such transactions 5 . The extraordinary uptake of UPI stands as a testament to the power of collaborative and use-case-driven innovation in driving financial inclusion. A particularly compelling example of this transformation can be seen in the informal sector-where today a street vendor or pop-up store owner nonchalantly places a QR code at the fore and receives payment for services without any hassle for cash and quietly integrating himself into the formal financial system with dignity and ease.

For further expanding and deepening the digital payments ecosystem in the country, a Payments Infrastructure and Development Fund has been constituted to encourage deployment of payment acceptance infrastructure. Further, all State and Union Territory Level Bankers' Committees have been advised to identify districts and assign them to designated banks, with an endeavour to make these districts 100 per cent digitally enabled. The objective is to provide every eligible individual in the identified district at least one mode of digital payments viz., cards, net banking, UPI, AEPS , etc. It is 6 understood that as on March 31, 2025, 514 districts across 15 states and 6 UTs are 100 percent digitally enabled. This marks a significant milestone in our journey towards a digitally inclusive economy.

## RBI's financial inclusion index.

RBI's financial inclusion index, which captures the extent of financial inclusion across the country, with four iterations published till date, has increased from 60.1 in March 2023 to 64.2 in March 2024, showing a Y-o-Y increase of 6.82 per cent. While the progress is appreciable, credit gaps still exist in the system which may be attributed amongst others to a lack of documentation available with the individuals/ entities in the informal system and of awareness regarding the various government schemes. There is as such a need to make concerted efforts to fill them.

## Recent regulatory initiatives

The RBI has been sensitive to need to bring about improvement in the financial inclusion in the country. Some of the measures taken recently in this regard include raising the limit for collateral-free agriculture loans to 2 lakh per borrower, enhancing various loan limits under PSL, expansion of the list of eligible borrowers under the category of 'Weaker Sections' alongwith removal of existing cap on loans by UCBs to women beneficiaries. The scope of co-lending is proposed to be broadened by

expanding the list of permitted regulated entities (REs) that can enter a co-lending arrangement and extending the same beyond PSL loans. A comprehensive review of the Lead Bank Scheme is also underway with an objective to enhance the effectiveness and impact of the scheme.

With respect to digital payments, permissible transaction limit on UPI Lite has been revised in FY 2025 from 500 to 1000 and on UPI 123PAY from 5,000 to 10,000 to encourage their wider adoption. Further, with a view to promote digital payments among individuals without bank accounts, UPI Circle has been introduced which allows a secondary user to make UPI transactions up to a limit from the primary user's bank account in a secure manner. Besides, in an effort to enhance ease of access to digital infrastructure for persons with disabilities, payment system participants (PSPs) have been advised to review their payment systems and devices and carry out necessary modifications so that all such systems and devices can be easily accessed and used by persons with disabilities.

## Financial Literacy

Meaningful financial inclusion also requires access and awareness in right proportions for ensuring responsible and equitable service delivery of financial services. Therefore, financial literacy and financial inclusion need to be considered as two sides of the same coin - promoting financial inclusion without adequate financial literacy would lead to underutilization of financial services and increased chances of errors and frauds. Conversely, educating the consumers without facilitating their access to the formal financial system would result into unmet demand for financial services. The efforts towards augmenting financing literacy have been institutionalised by setting up of the National Centre of Financial Education (NCFE) jointly by the financial sector regulators. RBI as a regulator has been at the forefront of financial literacy with the launch of annual Financial Literacy Week campaigns targeted at specified sections of the population. Financial awareness empowers borrowers to assess and understand financial products, thereby supporting informed decision-making. To facilitate informed decision making by the customers and enhance transparency by the lenders, the RBI has mandated that all REs provide a standardised disclosure of key terms and conditions in the form of Key Fact Statement (KFS) to all retail and MSME borrowers.

## Challenges

Even as all the stakeholders in the financial system, including the regulator and the REs, play their part in advancing financial inclusion, certain issues that act as impediments to the efforts made in this regard have come to the fore and will need to be addressed. Let me briefly highlight a few such issues.

## Grievance Redressal

Having an effective grievance redressal mechanism is non-negotiable for financial sector enterprises as non-resolution of consumer's concerns not only leads to erosion of customer base but also results in loss of trust in the broader financial system and deters new consumers from entering the system. It is concerning that the complaints received at the Offices of RBI Ombudsmen as well as Centralized Receipt and

Processing Centres (CRPCs) marked a sharp 33% year-on-year increase 7   in FY202324. This raises questions on the products, practices, and handling of grievances at the level of the RE. REs, therefore, need to analyse the gaps and strengthen their processes to reverse the trend of increasing grievances.

## Mis-selling

While financial inclusion entails a bouquet of financial services, pushing the same indiscriminately to unaware consumers may be detrimental to their well-being and undermine its stated intent. There are reports of mis-selling of financial services such as insurance products. The concern is that such mis-selling without regard to suitability and appropriateness would beget distrust in schemes aimed at providing a safety net to the low-income households by creating artificial boundaries. We are examining whether it necessitates framing of guidelines to address mis-selling of financial products and services by REs.

## Cyber Safety and Digital Literacy

As digitalization becomes more pervasive, the need for increasing digital literacy becomes even more pronounced. Empowering individuals to use digital devices and platforms with confidence and security is essential to ensuring inclusive participation in the digital economy. Often, apprehensions related to uncertainty, the possibility of errors, or financial loss create psychological barriers that hinder the adoption of technological solutions such as ATMs, mobile banking, and other digital services. The rising incidents of frauds through novel techniques makes it imperative that REs collaborate with other stakeholders like SROs, NGOs, etc. to generate awareness and promote safe digital practices among customers.

At the same time, it is critical for REs to implement effective measures to combat digital frauds. One such area warranting attention is the use of One-Time Passwords (OTPs) as a means of Additional Factor Authentication (AFA). While this method has served well in the past, the evolving threat landscape in the arena of cybersecurity now calls for the development and adoption of more secure and resilient alternatives. Further, REs must diligently adopt the designated 160 number series 8   for all service and transactional voice calls as prescribed by the Government. This initiative is critical to maintaining the integrity of communication channels and protecting customers from phishing and other forms of cyber-attacks.

RBI has been running extensive multimedia awareness campaigns using audio-visual messages under the name 'RBI Kehta Hai' and text messages as 'RBI Says'. Further, RBI has introduced the bank.in and fin.in domains exclusively for banks and non-bank entities to curb cyber security threats and malicious activities. Also, to aid the customers in verifying Digital Lending Apps' (DLAs) association with RE, the RBI has created a public repository of DLAs deployed by the REs which will soon be available on RBI's website.

## Developments in Microfinance

Let me now focus on a few developments in Microfinance sector. Microfinance has placed itself as a promising avenue for providing formal financial services to the excluded sections of population. While microfinance has played an important role in financial inclusion, there are some issues which need attention. The sector continues to suffer from vicious cycle of over-indebtedness, high interest rates and harsh recovery practices. While some moderation in interest rates charged on microfinance loans has been observed in recent quarters, pockets of high interest rates and elevated margins continue to persist. Even lenders having access to low-cost funds have been found to be charging margins significantly higher than the rest of the industry and which in several instances appear to be excessive. The lenders should look beyond the conventional ""high-yielding business"" tag for the sector and approach it with an empathic and developmental perspective, recognising the socio-economic role that microfinance plays in empowering vulnerable communities.

The frequency of disruptions in the microfinance sector has increased of late. Incidents of high borrower indebtedness, coupled with coercive recovery practices, sometimes lead to tragic consequences. It is in the collective interest of all stakeholders that such disruptions are pre-emptively addressed and avoided. In this regard, REs must also enhance their credit appraisal frameworks to prevent over-leveraging of borrowers. Additionally, they must eschew any coercive or unethical recovery practices, ensuring that financial services are delivered in a manner that is both responsible and sustainable. While the business model may be sound, the organisational structure and the incentive schemes framed to deliver the services may be flawed resulting in perverse outcomes for customers. This calls for an introspection around the models.

## Way Forward

Even as we reflect on some of these challenges, we need to be clear about the path that we must take to ensure greater financial inclusion. As we look to the future, the way forward for financial inclusion lies in the strategic deployment of emerging technologies to build a more accessible, equitable, and efficient financial ecosystem. Innovations such as AI, blockchain, and digital public infrastructure are revolutionizing how financial services are delivered, especially to the underserved and remote communities. One such innovation in this space is the Account Aggregator (AA) framework. By empowering individuals to securely share their financial data with consent, the AA system enables more accurate credit assessments and potentially facilitates the delivery of customized financial products. Building on this foundation, the Unified Lending Interface (ULI) standardizes and streamlines the digital lending process by providing lenders with a host of alternate data including digitised state land records, milk pouring data and satellite data. It's RBI's belief that the JAM trinity will be followed by the new trinity of JAM-UPI-ULI in revolutionizing digital infrastructure and credit delivery and provide necessary fillip to financial inclusion efforts, pushing it to new highs.

The development and implementation of India Stack has revolutionised the banking landscape in India and has been instrumental in furthering financial inclusion by reducing infrastructural, geographical, and linguistic frictions and plugging leakages. REs have been encouraged to innovate in product design, offering solutions that reflect the unique needs of their customer base; for instance, offering flexibility in repayment schedules, variable savings contributions, and locally tailored financial products shaped

by seasonal income cycles, occupational patterns, or behavioural tendencies. Such customisation can go a long way in further improving access, usage, and quality of financial services. REs can bring some of these innovations under the theme neutral 'On Tap' Regulatory Sandbox framework, which provides a structured environment for testing state-of-the-art solutions in the interest of consumers and financial stability. As connectivity can pose challenges in remote and rural areas, REs can explore the development of lightweight mobile applications and web interfaces optimised for lowbandwidth environments. These measures will go a long way in extending the reach of digital financial services to the last mile, thereby ensuring inclusive and accessible banking for all.

A lot has been achieved in the journey for achieving financial inclusion thus far, yet a lot more needs to be done. It cannot be merely achieved by standalone policy initiatives but by implementation of such initiatives both in letter and spirit by all stakeholders in the financial ecosystem. Also, those who remain outside the ambit of formal finance today represent untapped potential that can meaningfully contribute to economic growth in the future. The dividends of such inclusion will not only accrue to the institutions involved but will also strengthen the foundation of a more resilient, equitable, and prosperous society. Financial inclusion should not be viewed as an act of philanthropy, but rather as a strategic investment in the nation's economic and social development. With the right mix of well thought of and carefully crafted regulation, technological advancement, and institutional empathy, our collective efforts can dismantle longstanding barriers and usher in a new era of inclusive and sustainable financial growth - one that leaves no citizen behind and resonates far beyond set boundaries.

Thank you.

Address delivered by Shri M Rajeshwar Rao, Deputy Governor, Reserve Bank of India on June 05, 2025, at HSBC's event for Financial Inclusion in Mumbai. Inputs provided by Jyoti Prakash Sharma, Jignasa Morthania and Yash Goel are gratefully acknowledged.

- 1 Annual Policy Statement for the Year 2005-06 by Dr. Y. Venugopal Reddy, Governor, Reserve Bank of India
- 2 Report of the Committee on Financial Inclusion
- 3 National Family Health Survey (NFHS - 5), 2019-21
- 4 https://pmjdy.gov.in/account
- 5 As per Reserve Bank of India's  Annual Report for 2024-25
- 6 Aadhaar Enabled Payment System
- 7 Table 1.1 of the  Annual Report of Ombudsman Scheme, 2023-24

8 To address the issue of unsolicited and spam calls from telemarketers, Department of Telecommunications (DoT) has allocated the 160-numbering series for solely making service and transactional calls to be used by banks, financial institutions, and other service providers, to keep away from the use of the 140-numbering series that was allocated to telemarketers.",Rajeshwar Rao
https://www.bis.org/review/r250613b.htm,Klaas Knot: How is the water? Continuing our work to preserve financial stability,"Speech by Mr Klaas Knot, Chair of the Financial Stability Board and President of De Nederlandsche Bank, at a Financial Stability conference at the Bank of Spain, Madrid, 12 June 2025.",2025-06-12 00:00:00,"## Klaas Knot: How is the water? Continuing our work to preserve financial stability

Speech by Mr Klaas Knot, Chair of the Financial Stability Board and President of De Nederlandsche Bank, at a Financial Stability conference at the Bank of Spain, Madrid, 12 June 2025.

* * *

Thank you. I want to start by telling you a little story. Some of you may know it.

There are these two young fish swimming along and they happen to meet an older fish swimming the other way. The older fish nods at them and says ""Morning, boys. How's the water?"" And the two young fish swim on for a bit, and then eventually one of them looks over at the other and says ""What the hell is water?""

This parable was famously used by the American writer David Foster Wallace in a commencement speech in 2005. Now, just like Wallace, I don't plan to present myself here as the wise, older fish explaining to you what water is. The point of the fish story is merely that, like he said: 'the most obvious, important realities are often the ones that are hardest to see and talk about.'

Now, Wallace was speaking to a class of graduates about the benefits of a liberal arts education in life. To have his idea being used by some central bank technocrat at a conference on financial stability would probably be his worst nightmare come true. But although it may seem a stretch, I think his idea applies to our world too. Because financial stability is an obvious and important reality. Its impact is universal. Financial stability affects households, businesses, governments-and ultimately, the trust that underpins our economies. It's the basis of everything in economic life.

Because of its universal impact, financial stability seems like a natural state. We take out our phone and we pay. And the bread that we buy costs the same as it did last week. And when we wake up in the morning our savings are still in our bank account. Financial stability is something that seems to be just there, unconditionally. But it really isn't. It is something we must continuously work for. It demands vigilance, coordination, and above all, the political will to act before the crisis hits. I know that you are aware of this. But many people tend to forget.

As this is my last address in my capacity as Chair of the FSB, let me take this opportunity to look back a bit, take stock. And ask: where do we stand? How is the water?

In truth, it has been anything but calm. Over the past years, we have experienced quite some waves in the financial system: the dash for cash during the onset of the Covid pandemic, the commodity market turmoil following the Russian invasion of Ukraine, the failure of Archegos Capital Management in March 2021, and the market volatility associated with the recent trade tariff announcements. Central banks had to intervene

in some of these episodes to support market functioning and the supply of credit to the economy. And in each case, parts of the non-bank financial sector played a central role in amplifying the stress.

Non-bank financial intermediation, or NBFI, has grown into a critical part of the financial system. Its rise has been driven by regulatory shifts, search for yield, technological innovation, and demographic trends leading to asset accumulation.

The NBFI sector brings real benefits. NBFIs offer a diversified source of funding and much needed competition for banks. But they also have vulnerabilities-liquidity mismatches and the inability of some market players to prepare for them, leverage, and growing interconnectedness with banks. Historically, regulation of this sector focused on investor protection, market integrity, and other mandates. But those don't fully capture the systemic risks. We needed a financial stability lens.

That's what the FSB brought to the table. Our work to date has included policy recommendations to enhance money market fund resilience, to address structural liquidity mismatch in open-ended funds, and to enhance liquidity preparedness for margin calls. Later this month, we will deliver policy recommendations to the G20 to address financial stability risks arising from leverage in NBFI.

Have we made a difference? The recent bout of tariff-related volatility in global markets could serve as a test. We saw a global sell-off in equity markets and historic trading volumes. Typical correlations between certain asset classes broke down. We saw some deleveraging and large margin and collateral calls. Yet - the system held. That is encouraging. But let's be honest: we can't credit our reforms just yet. Because the FSB's recommendations have not yet been implemented in full. And recommendations alone don't reduce systemic risk. Implementation does. That means authorities must not only put them into national laws and regulations, they must also have the capacity to operationalise them.

One of the biggest challenges we face in NBFI is data. We need better data. More data. And better use of that data. There is a reason why the non-bank sector was formerly called ""shadow banking"". It's opaque. There are gaps. And those gaps mean we often don't see the vulnerabilities-until it's too late. The quality and timeliness of non-bank data are essential for identifying and assessing vulnerabilities and for designing and calibrating effective policies. We must address these data challenges. We can't keep relying on crises to reveal what we should have seen coming.

That's why a high-level group within the FSB is now exploring how to close those data gaps-to support risk monitoring, policy design and implementation, and cross-border cooperation.

And let's be clear: we can't just copy-paste banking rules onto the NBFI sector. It's too diverse and different from banks. We need to look at both non-bank entities and activities. But our goal should be clear: a level playing field across the financial system. Not by weakening bank rules-but by strengthening the resilience of the non-bank sector.

Which brings me to the banking sector. During my tenure as FSB Chair, we witnessed something unprecedented: the failure of a global systemically important bank. The

demise of Credit Suisse, together with the failure of three US regional banks, was a stark reminder that bank failures are not relics of the past. It brought lessons for banks and financial authorities. In some areas, our work to make the banking sector more resilient is not yet complete. Take the final Basel III standards. These are designed to strengthen the resilience of banks to withstand losses. And yet-they still have not been implemented in many jurisdictions. The Credit Suisse case also highlighted that more than 15 years after the Global Financial Crisis, authorities still face challenges in dealing with failing banks.

So yes, we've made progress. But we're not done. And in the meantime, we must protect what we've already built.

Because let's not forget: during all the recent episodes of financial stress the banking system held up. In fact, during the pandemic, banks acted as shock absorbers. Not shock amplifiers. They absorbed losses. They kept credit flowing. They helped keep the economy afloat. That's no small feat.

And I believe that is largely thanks to the reforms we put in place after the global financial crisis. The years of hard work. The tough decisions. The commitment to resilience.

But now, more than 15 years later, we're hearing familiar calls again-for deregulation. But also calls for simplification. And let me be clear: those two are not the same.

I understand the desire to simplify. Banking regulation and supervision has become overly complex. Over the past 15 years, a great deal of regulation has been introduced from various angles -global, EU, national. Micro and macro. New risks added, old ones rarely removed. There's overlap. There's friction. And yes, sometimes, there's a lack of supervisory proportionality for smaller institutions. That's worth looking into.

But keep in mind that, beyond some point, simple rules are less risk-sensitive. And that means they have to be stricter. You want simpler rules? Sure, but those rules must then be calibrated at a more prudent level. That is the general thinking behind the standardised approach of Basel III. That is also the thinking behind the leverage ratio.

Most importantly, what we must avoid is confusing simplification with deregulation. Deregulation means effectively lowering buffers by relaxing the rules. That would both reduce resilience in the banking system and increase the likelihood of financial crises. We cannot afford to undo the progress we have made. Especially not now, in this time of unusually high uncertainty, both on the economic and political front. That would be a big mistake. As the late Rudiger Dornbusch used to say: 'The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.'

Which brings me to my next point. The developments in both the bank and non-bank sectors are unfolding against a backdrop of major structural shifts-shifts that could reshape financial stability as we know it. I am talking here about technology, about payments, and climate risk.

Technological innovation is transforming the financial sector. It's adding new layers of complexity. And it's doing so at speed.

The period leading up to the 2008 Global Financial Crisis was marked by balance sheet expansion and financial product innovation. But over the past 15 years, the focus has shifted toward technological innovation. The FSB has been watching this closely. It's our job to harness the benefits while mitigating the risks.

And yes, the benefits are real. Technology has made financial services faster, more accessible, more efficient. And in some areas, like AI, we have only started to see its full impact. But it also brings new risks. Why? Because of the speed and scale of adoption. For example in cyberattacks. Because of the growing interconnections with the traditional financial system. Because of the concentration of services in a few key providers.

Technology creates new interdependencies. And it can accelerate the pace at which a crisis unfolds. Technological innovation is perhaps most visible in the payments space, where new platforms and digital assets are rapidly reshaping how value moves across borders and between users.

These dynamics are most visible in crypto-assets. This fast-growing market has seen more than its fair share of bankruptcies, liquidity crises and outright fraud, even as its links with traditional finance continue to grow. At the FSB, we have long maintained that crypto does not yet pose a systemic risk, but recent developments suggest we may be approaching a tipping point. Barriers for retail users have dropped significantly, particularly with the introduction of crypto ETFs. The interlinkages with the traditional financial system continue to grow. Stablecoin issuers, for example, now hold substantial amounts of U.S. Treasuries. This is a segment we must monitor closely.

The crypto ecosystem will continue to evolve-and so must our regulatory frameworks. Jurisdictions are actively developing these, and the FSB's recommendations offer a common foundation. This is especially important given the inherently cross-border nature of crypto. Effective implementation must extend beyond the G20, supported by strong regulatory and supervisory cooperation.

Now, part of crypto's rise can be traced to the shortcomings of cross-border payments. This is a complex, technical issue. But solving it has real-world benefits-for people, for businesses, for economies. This is the goal of the G20 Roadmap for Enhancing CrossBorder Payments. The aim of the roadmap is to bring about cheaper, faster and more transparent and inclusive cross-border payment services for the benefit of citizens and businesses worldwide.

We've made progress. The FSB, the CPMI, and others have done a lot of work. However, our goals are ambitious. And while they have driven changes by both the private and public sectors, we continue to see significant challenges, particularly in certain regions and payment corridors. As we move toward crafting a strategy for the next phase of work, we are seeking to clarify the issues that continue to impede progress. We will continue to work with the private sector to get it done.

Next to technology and payments, we face another growing challenge-one that's no longer on the horizon, but right at our doorstep. I'm talking about climate change. Now, climate change may originate outside the financial sector-but its impact on financial stability is very real.

Extreme weather events are becoming more frequent. And as they occur, the risks to financial systems continue to rise. These events test the ability of financial institutions to manage risk and maintain services-especially in the most vulnerable regions. That's why we must keep strengthening risk management practices. And why we must build resilience-across the entire global financial system.

The FSB's Climate Roadmap, launched in 2021 and endorsed by the G20, gives us a coordinated path forward. It focuses on four key areas: firm-level disclosures, data, vulnerability analysis, and regulatory and supervisory tools.

These four pillars are not standalone. They're connected. They build on each other.

For example: consistent, reliable corporate disclosures are the foundation. They help close data gaps. They help firms-and authorities-understand climate-related risks. Better data leads to better analysis. And better analysis leads to better policy.

And we are making progress. More jurisdictions and companies are adopting climaterelated disclosures. New global standards on sustainability assurance are boosting trust in those disclosures. Tools like climate risk dashboards and scenario analyses help us understand vulnerabilities. International bodies are issuing guidance on how to integrate climate risks into existing regulatory and supervisory frameworks. And across the global financial community, we're seeing knowledge shared, capacity built, and good practices identified.

But let's be honest-challenges remain. Especially when it comes to implementation. The groundwork is there. But now, the focus must shift to action-by firms and by authorities. We still lack reliable, granular, and comparable data. That makes it hard to fully assess and manage climate-related risks.

And let's face it-traditional financial stability tools weren't built for this. They're not always fit for purpose when it comes to forward-looking, long-horizon risks like climate change. That's why developing robust, climate-specific analytical approaches must remain a top priority.

Because climate risk isn't just an environmental issue. It's a financial one. And it's one we can't afford to ignore.

Let me wrap up.

Financial stability is an international public good. Every single issue I have mentioned today - NBFI, banking, crypto, payments, climate - they all cross borders. And so must our response be.

If we want to meet today's challenges to financial stability, we have to continue to work together. And we need to stay committed to the international bodies we have built to

underpin that cooperation, such as the Basel Committee and the FSB. In a fragmented world, global cooperation is harder. But it is also more essential. During the global financial crisis, policymakers acted swiftly and in unison. We must preserve that capacity.

Because for society, financial stability is like what water is for fish. We barely notice ituntil it's gone. Preserving financial stability is continuous hard work. It is complicated, it is technical, it is not glamorous. Calibrating risk weights for banks doesn't make headlines. It doesn't fill the streets with protestors. Therefore, it doesn't always get the attention it deserves from policy makers, among all the other issues they have on their plate.

But make no mistake: a stable financial system is the foundation for almost all public policy. When financial stability is lost, everything else falls apart. Governments can't focus on education, or healthcare, or climate. They're too busy drawing up rescue plans for an economy in free fall.

So we have to continue our work. Which means maintaining our ambition as policy makers to take the agreed policies all the way through to implementation. Let's keep our eyes on the water. And let's keep it safe and stable.",Klaas Knot
https://www.bis.org/review/r250610d.htm,Klaas Knot: Remarks for the 93rd G30 Plenary,"Remarks by Mr Klaas Knot, Chair of the Financial Stability Board and President of De Nederlandsche Bank, for the 93rd G30 Plenary, Berlin, 7 June 2025.",2025-06-07 00:00:00,"## Klaas Knot: Remarks for the 93rd G30 Plenary

Remarks by Mr Klaas Knot, Chair of the Financial Stability Board and President of De Nederlandsche Bank, for the 93rd G30 Plenary, Berlin, 7 June 2025.

* * *

It is a pleasure to be here today to reflect on the critical intersection of financial innovation and stability. I would like to share some thoughts from my perspective as Chair of the Financial Stability Board.

A fundamental principle that guides the FSB's work is that we do not pick winners. Our focus is on ensuring that innovation develops safely and responsibly, within the boundaries of our public policy objectives.

When considering the relationship between innovation and stability, two aspects stand out. First, the speed at which new technologies can be adopted - and how quickly that can translate into systemic implications. Second, the cross-border nature of many of these innovations, which can amplify their impact and complicate regulatory responses.

A striking example that highlights both of these dimensions is the case of Libra. In 2019, Facebook announced plans to launch a blockchain-based stablecoin payment system. Although it never actually launched, the announcement alone triggered a strong response by the global regulatory community. The potential systemic and cross-border implications of a widely adopted global stablecoin were immediately apparent. This episode also fuelled a broader conversation on improving the end-user experience in cross-border payments.

The FSB has played a central role in shaping the global response to these questions.

## The global response: building foundations for stability

The global response had two pillars.

The first pillar was the development of high-level recommendations for stablecoins, published in 2020 and then revised in 2023. These recommendations set clear expectations for the design and operation of stablecoins to ensure they do not undermine financial stability.

The second pillar was, arguably, the G20 Cross-Border Payments Roadmap. This G20 initiative recognised the need to enhance the user experience for cross-border payments. This roadmap emerged at a time when traditional financial systems were derisking, creating gaps that new technologies and players sought to fill.

Stablecoins have the potential to address some of the challenges in cross-border payments, but they also introduce new risks. Importantly, they are not the only solution. Innovations in domestic payment system, such as  mobile payments, instant or fast payments, and the exploration of central bank digital currencies (CBDCs) and tokenised deposits - potentially through a single ""ledger"" or interoperable ledgers -  also have the potential to reshape the payments landscape.

## Looking ahead: balancing innovation and stability

As we look to the future, a key question stands out: will stablecoins replace traditional bank-based cross-border payments, or will they remain a niche solution in a fragmented global payments ecosystem? While the answer is unclear, the potential risks are not.

Let's start with a fundamental question: how different is a stablecoin from e-money or a bank deposit? At first glance, stablecoins appear to be a novel technological innovation, promising faster, cheaper, and more efficient payments. However, their core functionsstoring value and enabling payments-are not fundamentally different from traditional financial instruments.

A stablecoin backed by high-quality liquid assets mirrors the structure of e-money issuers. Similarly, a stablecoin issued by a private entity with claims on an  issuer resembles a bank deposit.  Yet, despite these similarities, stablecoins often operate outside the regulatory frameworks that govern  bank deposits and other products that are similar to bank deposits, like money market funds.

This highlights the importance of the principle ""same activity, same risk, same regulation."" If stablecoins perform the same economic functions as traditional instruments, they should adhere to equivalent regulatory and supervisory standards. This is not about stifling innovation but about safeguarding financial stability.

Consider a stablecoin issuer promising 1:1 backing with high-quality reserves. Without strict oversight, could these reserves fund riskier ventures, with stablecoins acting as conduits for leveraging the financial system? This scenario is not hypothetical. We have seen how loosely regulated financial instruments can amplify risks rather than mitigate them. The potential for runs on  large stablecoins could have financial stability implications given their large-scale investments in the short-term funding markets . The interconnectedness between stablecoins and traditional financial systems  has grown rapidly.

To address these risks, the FSB has set guardrails for the regulation, supervision, and oversight of stablecoins. These guardrails ensure robust standards for transparency, governance, and risk management. However, if we want to prevent regulatory arbitrage, consistent implementation across jurisdictions is critical. We should not allow stablecoins to exploit gaps in oversight to gain a competitive advantage or to introduce hidden risks into the financial system.

## Strengthening Cross-Border Payments

Beyond stablecoins, cross-border payments remain a focus area for the FSB. We work to bring the G20's goal of making cross-border payments faster, cheaper, more accessible and more transparent to fruition. Cross border payments mostly rely on domestic payments systems. But unlike domestic payment systems, there is no overarching global governance framework for cross-border payments. Despite innovation in cross-border payments, inefficiencies, high costs, and delays in processing payments persist.

To address this, the FSB, in collaboration with the Committee on Payments and Market Infrastructures (CPMI) and other stakeholders, has been working to align technical standards, as well as legal, regulatory, and supervisory frameworks. This work is essential no matter what technology is used.

## Conclusion

As we navigate this complex landscape, our task is to strike the right balance between fostering innovation and safeguarding financial stability. The likely route for the evolution of global payments remains uncertain. If that comes by the spread of new payment rails, such as stablecoin, or if it comes by the improved efficiency of longestablished payment mechanisms should be something we are agnostic on. But what is certain is that fostering innovation must not come at the expense of stability.

Continued global coordination and vigilance is therefore crucial. We must address the risks posed by stablecoins and other fintech innovations while ensuring that payments systems provide good value for consumers. Improving the user experience is not just a matter of convenience; it is essential to prevent the proliferation of unregulated or lessregulated alternatives.

Authorities must work together to build a financial system that embraces innovation while ensuring resilience, inclusivity, and trust. By applying the principle of ""same activity, same risk, same regulation"", we can foster a payments ecosystem that is both forward-looking and fundamentally sound.

Thank you.",Klaas Knot
https://www.bis.org/review/r250616c.htm,Aleš Michl: Remarks on euro adoption,"Remarks by Mr Aleš Michl, Governor of the Czech National Bank, for the panel discussion ""Should the Czech Republic adopt the euro?"" at the Bloomberg event ""The future of the euro in CEE"", Prague, 10 June 2025.",2025-06-10 00:00:00,"## Aleš Michl: Remarks on euro adoption

Remarks by Mr Aleš Michl, Governor of the Czech National Bank, for the panel discussion ""Should the Czech Republic adopt the euro?"" at the Bloomberg event ""The future of the euro in CEE"", Prague, 10 June 2025.

* * *

## Delivering on our mandate of price stability

The new Bank Board was appointed in mid-2022. At that time, inflation in the Czech Republic was 17.5 percent. Today, it is back under control, down to just 2.4 percent.

The base repo rate is currently at 3.5%, and I expect it will remain at this level for some time.

Our strategy is clear: to keep interest rates higher for longer compared to the period before COVID, to avoid any unconventional policies, and to follow the vision that in monetary policy, less is more (Michl, 2024b).

This year, our currency - the koruna - appreciated by 11% against the US dollar and by 2% against the euro. This helps us in the fight against inflation.

The Czech National Bank is the most trusted institution in the country (STEM, 2025) . 1 We take this trust seriously.

## The pros and cons of having an independent monetary policy

## Two main advantages:

First, exchange rate flexibility. A stronger koruna makes imports cheaper, which helps fight inflation. On the other hand, a weaker koruna supports exports during a recession. We can call it an adjustment mechanism for the economy - or, to be exact, an adjustment mechanism for the balance of payments.

## And the second one:

The current policy of the European Central Bank does not fit the Czech economy. Our key interest rate is 3.5%, while in the eurozone it is 2%. We still need high interest rates to keep inflation low. We also need positive real interest rates to maintain price stability.

In Croatia and Slovakia, inflation is around 4%, which means they currently have negative real interest rates. That makes it harder for them to fight inflation.

Our goal is price stability - not to support exporters. The key is to keep the growth of money in the economy under control.

## One key disadvantage:

Everyone can make mistakes. In the history of the Czech National Bank, there were two major ones: keeping real interest rates negative for more than 10 years before COVID, and increasing the money supply (banking liquidity) by 100% in 2017 in order to weaken the koruna. This is one of the reasons why core inflation after COVID was higher in the Czech Republic than in the eurozone. We must not repeat these mistakes.

That is why our strategy is to keep interest rates higher for longer, avoid any unconventional policies, and follow the vision that in monetary policy, less is more.

## The ""perfect"" timing of euro adoption

Just to remind you, the government makes the final decision about euro adoption, not the central bank.

My PhD thesis was about the perfect timing for euro adoption.  And the main conclusion was that one day, the exchange rate adjustment mechanism may stop working for the economy.

## Let me give two situations as examples:

First, a weaker koruna might help exporters - but at the same time, it brings very high inflation into the country (Michl, 2016).

Second, if there is already a large amount of loans in euros in the economy - like in Croatia (Croatia: 70%, vs 20% in the Czech Republic) - independent monetary policy effectively stops working. A weaker koruna in such a situation could lead to large-scale defaults.

For now, the exchange rate adjustment mechanism still works. There is no need to rush to adopt the euro. We should remain a country with a strong koruna, an independent monetary policy, and robust FX reserves - not follow the example of Croatia.

## Our experience with fighting high inflation

Inflation was 17.5% in July 2022 and still rising. The key interest rate was already at 7%. Then, a new Bank Board was appointed - and we changed the strategy.

The gamechanger was the strong koruna strategy, which we introduced in late 2022 (Michl, 2022). We announced that we would keep interest rates stable for an extended period. At the same time, we clearly communicated that a strong koruna is crucial for the Czech economy.

This strategy worked. In spring 2023, we saw the strongest koruna in our history. The strong koruna helped reduce inflation by making imported raw materials cheaper. It also created tougher conditions for exporters - a necessary trade-off.

The market understood and trusted our strategy because we communicated it openly and transparently. And that was enough. Sometimes, less is more in monetary policy. It is better to maintain a steady and credible restrictive stance than to keep interest rates at zero for a decade - and then hope to control inflation with a sudden, sharp rate hike.

## On FX volatility and risk premia

Yes, FX volatility brings hedging costs for companies. But the mission of monetary policy is price stability - not cheap financing.

Let me measure the risk premium using the asset swap spread: the difference between the 5-year government bond yield and the interest rate swap rate, measured in percentage points. Currently, this spread stands at 0.2 percentage points in Croatia, 0.3 percentage points in Slovakia, and 0.2 percentage points in the Czech Republic.

We aim to keep the risk premium low through credible and independent monetary policy - and by putting pressure on the government to balance public finances.

Within the eurozone, governments often feel less pressure to save money or balance their budgets. The bailout system reduces the risk premium - but it also weakens the incentive for fiscal responsibility. In a country without market pressure, politicians become less motivated to reduce deficits, and a real estate bubble can form more easily.

We also learned the wrong lesson from the eurozone fiscal rules - the idea that a deficit under 3% of GDP is always acceptable. It's not. What really matters is maintaining balanced public finances over time.

## Cheap euro loans and the koruna's higher borrowing costs

Yes, corporate loans in euros are cheaper, but interest rates on savings are higher in our country. In the Czech Republic, we need higher interest rates to fight inflation.

Those higher rates help slow down borrowing - for everyone: households, the government, and businesses (Michl, 2024a).

Monetary policy's mission is price stability - not cheap financing.

Keeping money too cheap for too long was one of the mistakes in the past that led to high inflation.

## References

Michl, A. (2016). NovÆ kritØria pro pijetí Eura [New Euro Convergence Criteria]. PolitickÆ ekonomie, 2016(6), 713-729.

Michl, A. (2022). Policy for a Strong Koruna. CNB Discussion Forum. Faculty of Economics and Administration at Masaryk University, Brno, 23 November 2022.

Michl, A. (2024). The Target. University of Pardubice, CNB Discussion Forum 2024, 23 April 2024.

Michl, A. (2024b).  CNB's Aleš Michl on Tackling Inflation, Friedman's Legacy and Ditching DSGE. Central Banking, 19 December 2024.

- 1 https://www.cnb.cz/en/cnb-news/press-releases/Czechs-Now-Trust-the-Central-Bankthe-Most/",Ales Michl
https://www.bis.org/review/r250611c.htm,Christine Lagarde: Stemming the tide - safeguarding our ocean and economy,"Speech by Ms Christine Lagarde, President of the European Central Bank, at the Blue Economy and Finance Forum, Monaco, 7 June 2025.",2025-06-07 00:00:00,"## Christine Lagarde: Stemming the tide - safeguarding our ocean and economy

Speech by Ms Christine Lagarde, President of the European Central Bank, at the Blue Economy and Finance Forum, Monaco, 7 June 2025.

* * *

It is a pleasure to speak at the Blue Economy and Finance Forum.

In his 1857 poem ""Man and the Sea"", Charles Baudelaire explored the deep kinship between the ocean and humanity. 1   For Baudelaire, they were two forces drawn together by awe, fascination, and even conflict.

Today, that dynamic has taken on a new and troubling dimension. We rely on the ocean for climate stability and economic prosperity, yet we are fuelling a climate crisis that threatens to undermine the very system we depend on. We cannot let that happen.

Baudelaire described the sea as a ""mirror"" to the human soul. We now need to take a hard look in that mirror and ask ourselves: what can we do to stem the tide of this crisis, to safeguard our ocean and economy?

This morning's two panel discussions will go a long way towards answering that question. But I would like to take this opportunity to open the plenary session with a few thoughts - about what is at stake, and what stakeholders can do about it.

## The ocean's importance for our climate and economy

The ocean is home to 95% of the planet's biosphere. 2   It spans environments as varied as sunlit coral reefs and pitch-black abyssal plains. And it supports an immense range of life, from countless microscopic organisms to the world's largest animal, the blue whale.

Given the ocean's richness, it is worth preserving in its own right. But its value does not end there - the ocean also benefits humanity in two vital ways.

First, it is one of the planet's most powerful allies in the fight against climate change.

The ocean helps to regulate global temperatures by absorbing vast amounts of heat and redistributing it through major currents like the Gulf Stream. It is also the world's largest carbon sink, reducing the amount of carbon dioxide in the atmosphere and helping to slow global warming.

The Intergovernmental Panel on Climate Change finds that the ocean has absorbed over 90% of the excess heat trapped in the earth's system, as well as a third of the carbon dioxide that humans have emitted since the Industrial Revolution. 3

Second, a sustainable ocean serves as an important pillar supporting the global economy, providing for food security and economic opportunities.

Marine ecosystems support over three billion people who rely on fish for at least 20% of their animal protein intake. Indeed, this dependency is more pronounced in some of the least-developed countries, where seafood provides most of the animal protein consumed. 4

These ecosystems also help sustain employment opportunities. More than 150 million jobs depend on the production, trade and consumption of ocean-based goods and services, according to the United Nations. 5   The ocean is also home to key natural resources, such as medicines and biofuels, which are vital for ongoing advances in healthcare and clean energy sectors.

So, there is a great deal at stake in preserving the ocean's health.

## The threat of climate change

But today we are placing the sustainability of our ocean under extraordinary stress, with serious implications for both our climate and economy.

Without the ocean's capacity to absorb heat and carbon, we would have had to contend with a faster, even more dangerous pace of global warming. Yet there are now signs that this capacity is becoming strained.

The last ten years were the ocean's warmest on record. Warmer oceans are driving more frequent marine heatwaves, which damage ecosystems, and have been a major contributor to rising sea levels due to the thermal expansion of seawater. The rate at which the global mean sea level is rising has more than doubled over the past three decades. 6

On top of this, the ocean's absorption of carbon dioxide is driving acidification.

Combined with ocean warming, acidification is contributing to the bleaching and death of coral reefs, which are vital for supporting fisheries and protecting coastlines from storms. Since 2023 over 80% of the world's coral reefs have been affected by bleaching. 7

We find ourselves in dangerous waters. Together, these changes could have profound consequences for the global economy.

Food security may be undermined, potentially leading to more volatile prices, which is a concern for central banks tasked with safeguarding price stability. And if coastal areas become unliveable due to rising sea levels or frequent flooding, people may be forced to move. More than 600 million people around the world live in coastal areas that are less than ten metres above sea level. 8

## Stemming the tide

So, what can we do to stem the tide of these troubling developments? We may not be able to fully reverse the damage done, but we can work towards slowing its momentum, potentially even stopping it, by acting on two important fronts.

First, we need to protect. That means cutting greenhouse gas emissions decisively and keeping the goals of the Paris Agreement within reach.

If we succeed in doing so, we could limit sea level rise to around half a metre by the end of the century. That might not sound reassuring. But every tenth of a degree we avoid is a piece of coastline preserved, a reef protected or a storm surge weakened.

We also need to protect the natural systems that shield us from floods. Nature-based solutions - for instance, restoring mangroves, marshes and coral reefs - offer powerful, cost-effective defences against extreme weather. Coral reefs alone can reduce wave energy by an average of 97% while supporting fisheries, tourism and coastal livelihoods. 9

The second front is just as important: we need to prepare.

Whether we like it or not, climate-related risks are materialising. We need to adapt our infrastructure and economies to a more volatile world. That includes building sea walls and surge barriers and budgeting for resilience rather than reacting after disaster strikes.

Make no mistake: adaptation will be costly. According to UN assessments, costs could run into the hundreds of billions of dollars globally each year by mid-century. 10   But the cost of inaction would be far higher. One study estimates that failing to keep global temperatures below two degrees above pre-industrial levels could lead to USD 14 trillion in global annual flood costs by 2100. 11

To meet this challenge, we need to catalyse finance for marine and coastal conservation - for instance, through innovative approaches that convert natural capital into financial capital. 12

This can be especially impactful for vulnerable countries with limited fiscal space. Above all, we must listen to the communities affected, treating their needs as a basis for our actions rather than an afterthought.

Let me conclude.

Baudelaire reminds us that the sea is a mirror of our own nature, which can either heal or harm.

So, let us choose to heal. That means nurturing the ocean's rich diversity and facilitating finance to support innovative adaptation measures that build more resilient communities and a stronger global economy.

Thank you.

- 1  Baudelaire, C. (1857), . Les Fleurs du mal
- 2  Grantham Research Institute on Climate Change and the Environment (2023), ""What role do the oceans play in regulating the climate and supporting life on earth?"", 28 February.
- 3  Intergovernmental Panel on Climate Change (2019), ""IPCC Special Report on the Ocean and Cryosphere in a Changing Climate"".
- 4  Food and Agriculture Organization of the United Nations, "" Coastal Fisheries Initiative"".
- 5  United Nations (2025), ""United Nations Ocean Conference, Nice, France 2025: Facts &amp; Figures"".
- 6  Specifically, from around 2.1millimetres per year in 1993 to around 4.5millimetres per year in 2023. See Hamlington, B.D. et al. (2024), ""The rate of global sea level rise "", , Vol. doubled during the past three decades Communications Earth and Environment 5, No 601, 17 October.
- 7  National Oceanic and Atmospheric Administration (2025), ""Coral Reef Watch: Current Global Bleaching: Status Update and Data Submission"", 21 May.
- 8  United Nations (2017), "" "", , New Factsheet: people and oceans The Ocean Conference York, 5-9 June.
- 9  Ferrario, F. et al. (2014), ""The effectiveness of coral reefs for coastal hazard risk "", , Vol. 5, No 3794, 13 May. reduction and adaptation Nature Communications
- 10  United Nations Environment Programme (2023), "" Adaptation Gap Report 2023"", 2 November.
- 11  Science Daily (2018), ""Rising sea levels could cost the world USD 14 trillion a year by 2100"", 3 July.
- 12  On this front, the Blue Institute, under co-founder Ralph Chami, has developed strategies to assign transparent, evidence-based financial value to marine natural capital.",Christine Lagarde
https://www.bis.org/review/r250611l.htm,Soledad Núñez: Embracing the future on solid grounds - reinforcing financial stability,"Speech by Ms Soledad Núñez, Deputy Governor of the Bank of Spain, at the EFDI (European Forum of Deposit Insurers) 2025 Annual International DGS (Deposit Guarantee Scheme) Conference, Madrid, 5 June 2025.",2025-06-05 00:00:00,"## Soledad Nœæez: Embracing the future on solid grounds - reinforcing financial stability

Speech by Ms Soledad Nœæez, Deputy Governor of the Bank of Spain, at the EFDI (European Forum of Deposit Insurers) 2025 Annual International DGS (Deposit Guarantee Scheme) Conference, Madrid, 5 June 2025.

* * *

We are living in an age of profound uncertainty.

In recent months, geopolitical actions have greatly affected the global economy. The United States imposed tariffs, leading to retaliatory measures from other countries, which disrupted global trade. In Europe, these issues are worsened by the ongoing conflict in Ukraine, which has had severe human and economic impacts since it began in 2022.

However, the challenges do not end there. Europe's economic performance lags behind other regions, particularly the United States and China. The Letta and Draghi reports have made this clear: Europe must act with urgency, implementing policies that drive productivity and innovation.

The gap is particularly wide in the field of technological innovation. The world's largest tech companies by market capitalization are either American or Asian. Not a single European startup has reached a valuation of 100 billion USD in the past fifty years. Closing this gap will require significant public and private investment.

Investment alone isn't enough. As Mario Draghi recently said, ""Integration is our last hope."" We need not just a single market for goods, but a unified financial system where European and national authorities work together for stability.

This principle of unity applies equally to our financial safety net. Cooperation between central banks, supervisory authorities, resolution bodies, and deposit insurers is essential.

It is in this context that this European Forum of Deposit Insurances (EFDI) International Conference provides a valuable platform to reflect on these challenges from the perspective of financial stability.

I would like to thank the Spanish Directorate-General for Insurance and Pension Funds and EFDI for bringing together such a distinguished line-up of speakers.

## 1 European Economic Situation

Recent episodes of protectionism, including the generalised tariffs announced by the United States and the retaliation of China, require continued attention, as they continue to have an impact on capital flows and thus on the stability of financial markets. In Europe, this difficult situation is compounded by the tensions of other conflicts in Ukraine or in the Middle East, with an unbearable and unacceptable cost in human lives.

Against this international background of unprecedented uncertainty, as Letta and Draghi's past diagnostic reports have already pointed out, Europe faces a structural competitiveness gap compared to the United States and China. This gap is aggravated by differences in Research and Development investment, industrial scalability and access to venture capital.

The current climate of uncertainty and such competitiveness gap mean that the only valid response at European level is unity and swift action.

In response, the European Commission recently launched the Competitiveness Compass, a road map to revamp the EU's economy. It transforms Draghi's recommendations into a concrete roadmap - backed by the political support needed to act rapidly and in a coordinated way.

The Compass aims to close the competitiveness gap while reducing strategic dependencies for the Union. The Compass proposes measures such as a call for deepening the single market, prioritising European Union policies, reducing bureaucracy and simplifying regulatory and fiscal frameworks.

Europe needs to act together to boost its economy. To face challenges like climate change, technological changes, and geopolitical issues, Europe must invest significantly. The Draghi report suggests an additional €750-800 billion per year is needed by 2030, especially for small and medium-sized businesses and start-ups, which can't rely just on bank financing.

## 2 Savings and Investment Union and the Single Capital Market

One initiative deserves particular attention - and I'm sure Commissioner Albuquerque will speak to it as well: the Savings and Investment Union.

The EU is equipped with a talented workforce, innovative companies and a large pool of household savings of around €10 trillion in bank deposits. Bank deposits are safe and easy to access, but they usually earn less money than investments in capital markets. The Savings and Investment Union will make it easier for citizens' savings to be mobilised for productive activities both through traditional bank financing and by putting their savings to work in capital markets. In this way companies - especially innovative start-ups and SMEs - will gain greater access to finance and venture capital.

This initiative will also help us move towards the long-standing goal of a genuine capital single market.

These changes will not, however, be immediate. European banks, including Spanish banks, must continue to play a key role in channelling savings into productive investments. Their better competitive position allowed them to cope with the turmoil that affected US regional banks a couple of years ago as well as more recent shocks.

It should not be forgotten that a strong regulatory framework together with robust governance and effective supervision are essential elements to contribute to a sound banking system.

The ECB has recently launched an initiative aimed at identifying redundancies and unnecessary complexities in regulation that affect the efficiency and competitiveness of European banks. The necessary reduction of the bureaucratic burden should not, however, affect the quality of compliance and reporting standards, which have made a decisive contribution, especially in the area of capital and solvency, to the solid position that European banks enjoy today.

Current historical low NPL ratios, high profitability and strengthened solvency ratios will allow European banks to best meet the challenges associated with the environment I have mentioned. One of these will be related to digitalisation and the use of artificial intelligence. Banks can take advantage of their good momentum to boost digitalisation and prepare for competition from new competitors.

## 3 Digitalization and Technological Innovation

The digital transformation of the banking sector is irreversible. AI, asset tokenisation, and quantum computing are already reshaping finance, and their impact will only grow. But they also introduce new risks. These risks relate to the possibility of cyber-attacks but also to the dependence of financial institutions on technology providers. The DORA Regulation establishes mandatory standards for technological risk management, focusing on cybersecurity and testing but also on the management of technological suppliers, which recognises their critical role.

I am sure that the panellists in the conference sessions will address the relevance of this new regulatory framework, the implementation of which will require strong support from institutions, providers and of course authorities. Lessons learned in the implementation of this new regulatory framework may be useful as a reference, with appropriate proportionality, for the management of technology risk by the deposit insurers sector, as their systems and processes are exposed to similar risks.

The transformative potential of AI for the economy in general and the financial sector in particular is obvious. The use of AI will make it possible to automate repetitive tasks, free up human resources for higher value-added activities and improve decision-making through advanced data analytics. Banking should in turn support the use of AI in its relationship with customers, personalising and improving the customer experience. However, AI management entails relevant risks that must be monitored, from the misuse or bias of models, their lack of explainability or the increase in cyber-attacks.

The European Union has taken a decisive step in regulating these risks. The new European AI Regulation grants specific competences to national authorities for the supervision of high-risk AI systems in the financial sector, which implies additional tasks for supervisors such as the Banco de Espaæa. Again, the successful implementation of this framework will be crucial for authorities, institutions and providers.

Let me also make a brief reference to the importance of a digital euro in the area of payments. The digital euro won't replace cash, but will reduce dependence on big tech and thereby boost competitiveness in the Union. Card payments in Europe are dependent on foreign networks, which is a strategic weakness for the continent.

This dependence may become even greater with the emergence of foreign providers of digital mobile wallets or the expansion of dollar-denominated stable coins. There are still important elements to be defined in the design of the digital euro, in particular how it operates with private systems. Despite some concerns for the financial sector about the cost of adaptation and balance limits - which will need to be addressed in the ongoing design phase - the digital euro will bring strategic advantages for the future of the Union.

Also in the area of payments, it is also likely that in 2025 the future PSD3 will see the light of day. The new Directive will replace the current PSD2. Its development responds to the need to adapt regulation to the growth of electronic payments, reinforcing consumer protection in accessing digital services and reducing payment fraud. PSD3 will also impose a single authorisation and operating regime for electronic money institutions and payment institutions, with a growing presence in the financial sector.

The new regulation will remove barriers to the entry of these competitors into payment systems. As with any innovation, its development must be accompanied by an appropriate balance of responsibilities and rights of the parties involved.

We have also seen the adoption of the immediate transfer regulation for the euro area from early 2025, which will be implemented gradually until 2027. Since the beginning of this year, payment operators in the euro area have already been offering their customers the same or better rates for immediate and ordinary bank transfers, with the addition of verification of the identity of the beneficiary.

I am sure that the Conference will also address the challenges and implications for deposit insurers of these innovations in the scope of their functions, in particular in the reimbursement of guaranteed balances to depositors in case of a payout event.

## 4 CMDI: The role of deposit insurers

Equally important for guarantee funds will be the framework resulting from the negotiations between the European co-legislators on the ongoing revision of the Resolution Directives (BRRD) and its Regulation (SRMR) as well as the Guarantee Funds Directive (DGSD), the Crisis Management and Deposit Insurance (CMDI) legislative package. The reform of the CMDI represents an important step towards a more integrated, resilient and, above all, better prepared Banking Union to cope with future crises, and promises important benefits in terms of financial stability and depositor protection.

The Commission's original proposal of April 2023 was followed by two more alternative proposals from the Council and the Parliament, in its old composition. The different proposals share the need to strengthen crisis management to protect depositors' access to their deposits by reinforcing the use of funding mechanisms such as the Resolution Fund, the SRF for the Eurozone, and national deposit guarantee funds. The reform seeks to expand the perimeter of resolution, applying the resolution mechanisms to a greater number of credit institutions, by enabling easier access to the resolution funds thanks to the contribution of deposit guarantee funds to resolution. The

contribution from private sources such as the one from deposit insurers, will complement adequately the internal bail-inable resources of the bank, without resorting to public money.

Equally important, the CDMI proposal will review the use of guarantee fund resources for other purposes than deposit payouts, as the measures to prevent the failure of a credit institution or the alternative measures to be used in insolvency proceedings, acknowledging the effectiveness and benefits of these tools for the management of banking crises. The wider the tool-kit, the better.

The framework will also deepen the coordination between resolution authorities and deposit guarantee schemes. Robust communication protocols, joint crisis preparedness exercises and early access to information are essential elements to ensure an effective crisis management mechanism.

In any case, the final text should provide a framework that facilitates its effective implementation, especially important when it comes to acting decisively in a short time frame, such as the ""weekend"" of resolution. It should also reinforce the role of guarantee funds in the management of banking crises.

In this regard, let me point out the importance of the role that the Spanish DGS played in crisis management of the Global Financial Crisis, which severely affected the Spanish financial sector and particularly the savings banks. The contribution of the Spanish DGS, and thus of Spanish banks, was decisive in the management of the crisis that affected these institutions from 2010. The contribution of FGD's resources for the absorption of losses and recapitalisation amounted to 23 billion euros, approximately a third of the total granted to the sector including public aid, and it served to reduce the cost to the taxpayer.

Since then, the FGD has been improving its financial capabilities besides its systems and processes. On the financial side, it has already reached a capitalisation level exceeding the minimum regulatory target, well complemented by a private commercial line. In the operational area, the EBA, in charge of assessing the implementation of its standards on stress testing for guarantee funds, recently published a benchmark report among 7 EU deposit insurers, including the Spanish DGS. In the report the EBA acknowledges the FGD has in place adequate arrangements to test its capacities under stressed scenarios, and therefore in good position to be prepared to face an intervention.

## 5 Conclusion

Let me conclude.

I believe a strong crisis management framework with a flexible toolkit is essential. Equally important is the coordination among authorities before, during, and after any disruption. This means authorities and deposit insurers must act quickly, decisively, and together.

This unity is crucial now more than ever. In a time of increasing fragmentation, both globally and regionally, Europe must respond with a single purpose and strategy, especially in maintaining financial stability.

Today, I've highlighted some of the missing pieces in Europe's financial integration and the need for national authorities to step up. The Spanish Deposit Guarantee Fund is committed to this goal. Through its active role in European forums, it will continue to contribute to the strengthening of our shared framework.

As Mario Draghi recently reminded us in his report presentation: ""In this world, it will be only through unity that we will be able to retain our strength and defend our values.""

I am confident that the distinguished speakers we will hear today and tomorrow will help illuminate the path ahead.",Soledad Núñez
https://www.bis.org/review/r250611m.htm,Soledad Núñez: Address - CREO 2025 Forum,"Address by Ms Soledad Núñez, Deputy Governor of the Bank of Spain, at the CREO 2025 Forum, organised by Cinco Días, Madrid, 28 May 2025.",2025-05-28 00:00:00,"## Soledad Nœæez: Address - CREO 2025 Forum

Address by Ms Soledad Nœæez, Deputy Governor of the Bank of Spain, at the CREO 2025 Forum, organised by Cinco Días, Madrid, 28 May 2025.

* * *

I would like to thank Cinco Días for their kind invitation to participate in this second edition of CREO, a forum for reflection and debate on Spain's economic future and the challenges facing the financial system. Today two fundamental areas for our country's development and growth have been addressed.

First, the technology and innovation industry, which is key for driving a state-of-the-art, efficient and competitive economy.

Second, the banking sector, which is essential in any economy for channelling the funds needed to make business investments and meet consumer needs.

Starting with the banking sector, the first point to highlight is the prominent role it plays in our economy:  the latest National Statistics Institute (INE) data show that the 1 financial sector has contributed more than 5% of gross value added to the Spanish economy, above the European average. Moreover, it generates slightly more than 1% of employment in Spain. The banking sector is the main pillar of the financial industry, which also includes the insurance sector and other financial intermediaries.

As you are all aware, the Spanish banking sector is in good health, having undergone a major transformation in recent years. Indeed, the current Spanish banking landscape looks little like that of 15 years ago. The great financial crisis triggered a series of legislative reforms, propelled by the Basel Capital Accord, which strengthened banking solvency and fuelled advances in other areas, such as governance. All this led to an improvement in risk management, which is key to ensuring the good health of the sector.

Thanks to this prudent risk management, Spanish banks now have historically low nonperforming loan ratios, profitability levels above the European average and significantly more robust solvency levels than in the past. These legislative and management changes have also been accompanied by a new supervisory framework: the Single Supervisory Mechanism for the leading banks, or so-called ""significant institutions"", which in Spain account for 94% of total banking sector assets.

As has already been noted during today's session, the banking sector faces a range of challenges, some unique to it and others shared by the economy as a whole.

Among the latter, the present uncertain global environment cannot go unmentioned. The new geopolitical setting, in which trade positions are still unclear, will undoubtedly affect the global economy. The projection models suggest that the direct impact on the Spanish economy will not be very significant. However, there could clearly be an indirect impact through other economies with which we have closer ties. In consequence, the banking sector will have to keep a close watch on credit risk

developments, especially in the sectors that are, a priori, most exposed to changes in the new international trade order. Other risks - such as liquidity or market risk - should also be monitored in view of the potential impact of possible financial market instability owing to unexpected events.

Another challenge faced by all economic sectors is adapting to the ongoing technological revolution, as the use of technology clearly affects the financial industry, albeit not exclusively. The emergence of new tools, new communication channels, new competitors, etc., poses a challenge for the banking sector, as banks will have to make major investments within a pre-defined strategic framework.

New technologies - today notably including artificial intelligence - represent a business opportunity, paving the way for new banking products more in line with customers' needs and delivered through new, faster channels. Although the use of artificial intelligence by banks is not yet widespread, it is a galvanising factor that will prompt efficiency gains, reducing costs and boosting profitability.

Banks' use of technology and artificial intelligence will have to be prudently managed, as they increase operational risk, owing to possible system failures or cyberattacks. Banks must be ready to quickly and diligently manage any such failures, as well as the risks associated with reliance on third-party providers for certain critical activities. Moreover, the use of artificial intelligence has ethical connotations that must also be considered, avoiding undue bias or inexplicable results.

As it advances in this unstoppable digitalisation process, the banking sector, as an essential service provider, cannot leave anyone behind. This is why it must continue its efforts to ensure access to banking services for population groups who face the most barriers, whether due to a digital divide, physical distance from a bank branch or their lack of the basic financial knowledge to make sound economic decisions.

The last challenge I wish to mention briefly here today is the sustainable transition of the banking sector. Although banking is not a highly polluting sector per se, it does play a leading role in enabling all productive sectors to transition towards a more sustainable economy. Sustainability and competitiveness are two essential and interlinked concepts; a sustainable economy tends to be more competitive because it uses fewer resources. The banking sector should play a leading role in providing appropriate funding for that transition, for which purpose it needs both data and metrics. In the current debate on regulatory simplification under way at various fora, one of the focal points is sustainability reporting. Certainly, we need to reflect on this and other requirements, but any attempt to simplify firms' sustainability reporting must not compromise the harmonised or sufficient disclosure of critical metrics and data points for climate and nature-related risk management.

We need to move towards a more sustainable and competitive economy, and the banking sector will play an essential role in that process.

Moreover, as I mentioned at the start, the technology and innovation industry is key, to boost our economy and make it more competitive and productive.

The role of the technology and communication sector is particularly crucial. Compared with the European Union (EU) average, it accounts for a smaller share of the Spanish economy in terms of gross value added (6% versus 8%) and employment (4% versus 4.5%). But our economy is very well positioned for technological change for various reasons. First, Spain has good digital skills; indeed, in 2023, 66% of the Spanish population aged between 16 and 74 had high digital skills, the fourth highest figure in the EU after the Netherlands, Finland and Ireland. It also has a good digital infrastructure, with a high penetration rate of high-speed networks. In 2023, 96% of households had access to high-capacity networks, the third highest figure in the EU.

Second, Spanish firms are very open to adopting and using digital technologies. According to a recent survey by the European Investment Bank, 2  innovation and digitalisation are the key to our firms' competitiveness and Spain leads the way in the use of advanced digital technologies (80% versus 74%).

Third, the industrial production index of high-tech manufacturing industries has risen more in recent years than among our main European peers. Indeed, since 2021 this sector has grown by more than 25% in Spain, compared with 12% in France and 2% in Germany.

In short, integrating new technologies and artificial intelligence in the banking and tech sector presents significant opportunities for achieving efficiency gains, reducing costs and boosting profitability. But this progress must be prudently managed, taking into account operational and ethical risks, as well as the need for digital inclusion.

Furthermore, the banking sector has an essential role to play in the transition towards a more sustainable economy, providing appropriate funding and correctly managing risks, drawing on data and metrics backed by clear sustainability reporting. Spain's technological environment is well positioned to continue leading in innovation and digitalisation, with a highly skilled population and state-of-the-art digital infrastructure. As we move forward, collaboration between these sectors will be vital to drive a more competitive, productive and sustainable economy.

1  https://www.ine.es/dyngs/INEbase/en/operacion.htm? c=Estadistica\_C&amp;cid=1254736177056&amp;menu=ultiDatos&amp;idp=1254735576581

2  https://www.eib.org/en/press/all/2025-056-eib-investment-survey-shows-that-spanishcompanies-have-better-economic-prospects-and-invest-more-than-the-europeanaverage-in-green-transition-and-advanced-digital-technologies#:~:text=Innovation% 20and%20digitalisation%20are%20a,74%25",Soledad Núñez
https://www.bis.org/review/r250611k.htm,"Kevin Greenidge: A legacy of excellence - resilience, reflection, renewal","Remarks by Dr Kevin Greenidge, Governor of the Central Bank of Barbados, at the Central Bank of Barbados 2025 Staff Awards Gala and Dinner, Bridgetown, 6 June 2025.",2025-06-06 00:00:00,"## Kevin Greenidge: A legacy of excellence - resilience, reflection, renewal

Remarks by Dr Kevin Greenidge, Governor of the Central Bank of Barbados, at the Central Bank of Barbados 2025 Staff Awards Gala and Dinner, Bridgetown, 6 June 2025.

* * *

Good evening, everyone.

What a joy it is to see all of you here this evening, gathered not just in your finest, but in full celebration mode as we honour a truly remarkable group of colleagues and reaffirm the legacy of excellence that defines the Central Bank of Barbados.

Tonight, we are recognising 27 members of our Bank family, each of whom is celebrating a significant milestone - five, 10, 15, 20, 25, 30, and even 40 years of dedicated service. That's not just a list of numbers. That is decades of experience; that is decades of contributions, that is decades of wisdom and above all, that's decades of . resilience

In addition to our long service awardees, I want to recognise the recipients of this year's Special Awards. These honours speak not to the length of service but the quality and impact of that service.  Each Special Award reflects a distinct and valuable dimension of what makes our team exceptional. Whether it's for innovation, exemplary work, team spirit, or going above and beyond the call of duty, you have each elevated our standards and inspired those around you. I commend you for not only your achievements but the example you set.

I'm sure you'll agree with me that this year's theme, ""Legacy of Excellence: Resilience, Reflection, Renewal,"" is perfectly suited to the moment. It speaks to who we are, what we've been through, and what lies ahead.

## Resilience

Let's begin with resilience. It's a word we've become quite familiar with in recent years. But for the Bank, and especially for those we are celebrating tonight, resilience is more than just bouncing back. It's about standing firm.

Many of you have navigated the changing tides of our economy, technological transformation, organisational changes, and yes, even a global pandemic. Yet through it all, you showed up. You leaned in. You remained committed to our mission - to maintaining the fixed exchange rate that has served as well for almost 50 years and to promoting financial stability, to educating Barbadians and earning the public's trust- to safeguarding our economy.

And let's be honest: some days weren't easy. But your ability to adapt, to innovate, to support your colleagues, and to continue moving the Bank forward is the very definition of resilience. You are part of the foundation that keeps this institution strong.

## Reflection

This evening also calls for reflection - not only on how far you've come individually, but on what we've built together.

From those early years when we were spread across multiple locations, to our current home at Tom Adams Financial Centre, to the strategic vision we now pursue as a modern, efficient, forward-thinking central bank, a centre of excellence, every achievement has been made possible because of people like you.

As we reflect on the past, we acknowledge the impact of your work across every department. Every function, every role, every contribution matters. The work you have done has enabled sound decision-making, safeguarded national assets, and enhanced the financial literacy of our people.

And you didn't just do the job. You passed on knowledge. You trained the next generation. You reminded us that institutional memory isn't stored in files - it lives in people.

## Renewal

But we cannot stop there. The final pillar of tonight's theme is renewal - and this speaks to the future.

We are in the midst of an exciting period of transformation. Digitisation is no longer an aspiration - it's a reality. We are modernising our systems, redefining how we work, and becoming more agile and data-driven. We are changing not for change's sake, but because a 21st-century central bank must meet 21st-century challenges.

And that process of renewal depends on all of us - whether you are just starting your journey at the Bank or you are one of the distinguished individuals marking multiple decades of services tonight. Renewal means embracing new ideas, upskilling, mentoring, and staying open to change. It means choosing excellence - every day.

It is why I continue to champion our vision of internalising excellence. Because when excellence becomes embedded in how we think and act - in how we show up to work, how we support one another, how we serve the public - then we do more than meet targets. We create impact.

## A Castle and a Legacy

Fittingly, we are gathered at a venue rich in legacy. Sam Lord's Castle - restored and reborn - stands as a symbol of how history and renewal can coexist. Much like the Bank, it reflects endurance, reinvention, and enduring relevance.

So as we celebrate tonight, let us take pride not only in what has been achieved, but in what is still possible. Let us honour our legacy by building on it - through resilience, through reflection, and with a constant spirit of renewal.

## Congratulations and Thanks

To each of our awardees - whether this is your first milestone or your eighth - thank you. Thank you for your service, your loyalty, your hard work, and your heart. You represent the best of us. May you feel the pride that you have more than earned.

To the organising committee: you've done a stellar job. This evening has been beautifully executed, and I thank you for giving our colleagues the celebration they deserve.

And to the rest of us: may the legacy we honour tonight inspire us - and may we each commit to carrying it forward.

Congratulations, and enjoy the evening.

Thank you.",Dr Kevin Greenidge
https://www.bis.org/review/r250613d.htm,Leong Sing Chiong: Opening remarks - CCI-ILSTC Trade and Financial Conference,"Opening remarks address by Mr Leong Sing Chiong, Deputy Managing Director (Markets & Development) of the Monetary Authority of Singapore, at the China-Singapore (Chongqing) Connectivity Initiative New International Land-Sea Trade Corridor (CCI-ILSTC) Trade and Financial Conference, Singapore, 11 June 2025.",2025-06-11 00:00:00,"## Leong Sing Chiong: Opening remarks - CCI-ILSTC Trade and Financial Conference

Opening remarks address by Mr Leong Sing Chiong, Deputy Managing Director (Markets &amp; Development) of the Monetary Authority of Singapore, at the ChinaSingapore (Chongqing) Connectivity Initiative New International Land-Sea Trade Corridor (CCI-ILSTC) Trade and Financial Conference, Singapore, 11 June 2025.

* * *

Senior Minister of State for Digital Development and Information and Health, Mr Tan Kiat How,

Chongqing Municipal People's Government Vice Mayor Xu Jian, His Excellency, Ambassador Cao Zhongming, Bank Indonesia Executive Director Pak Yoga Affandi, Ladies and gentlemen,

Good morning. It gives me great pleasure to welcome you to Singapore for the CCIILSTC Trade and Financial Conference. Today's Conference is especially meaningful for three reasons.

First, it marks the 10th anniversary of the China-Singapore (Chongqing) Connectivity Initiative or CCI. The value of the CCI as an important driver for cross-border connectivity cannot be understated. Since the CCI's inception, there has been sustained growth in trade volumes in both directions. And finance has been an important driver, with over US$21.69 billion in cross-border financing deals since the CCI's inception.

Second, the Conference reflects strong interest and active participation of financial institutions from both sides, working hard on new areas to explore partnerships, and work on cross-border financing deals together. All this is taking place against the backdrop of expanding financial collaboration at the China-Singapore Joint Council for Bilateral Cooperation which covers RMB cooperation, capital market connectivity, as well as digital and sustainable finance.

Third, this Conference brings together, for the first time, the CCI Financial Summit and the CCI-ILSTC International Cooperation Forum. This new format seeks to bring our financial services and trade ecosystems even closer together, more effectively catalysing the discovery of new linkages and business opportunities. This is timely as ASEAN is also Chongqing's largest trading partner accounting for more than 16% of Chongqing's total trade.

As CCI enters its next decade, we look to how Western China and ASEAN can deepen cooperation, harness key structural trends, and identify new opportunities in futureoriented areas such as green finance and digital connectivity. This will improve the quality and scope of cross-border financial services, enabling our financial sectors to better serve the real economy. In doing so, financial institutions can also help businesses with their green transition efforts and capitalise on digitalisation trends to enhance their business models.

Both China and ASEAN will require a vast amount of green financing and investments to transition our economies towards a sustainable, low carbon future.

Banks from China and Singapore, together with the Singapore Exchange, have been engaging Chongqing corporates on green financing opportunities. For instance, last year, the EU, China and Singapore announced the Multi-Jurisdiction Common Ground Taxonomy, or M-CGT which enhances the comparability of green taxonomies across the EU, China and Singapore. With the M-CGT, corporates from the three regions will benefit from a common framework which aligns their green activities with international standards, making it easier to access cross-border green financing.

Aside from capital markets, our financial institutions have also been active in supporting Chongqing's decarbonisation journey. Some examples include:

- DBS Bank's provision of a green loan to Singapore Power Group in 2025, to support the district cooling and heating system project at Raffles City Chongqing. This will reduce its carbon footprint by about 30 percent.
- OCBC Bank's arranging of a green syndicated loan for EBA Investments 1   in 2024, for their Chongqing IMIX+ Project in the Chaotianmen Business District. This loan, which references internationally recognised Green Loan Principles, helps promote carbon neutrality for the project.

Meanwhile, digital technology has great potential to break down barriers and make cross-border trade simpler, more efficient, and potentially enhance SME trade connectivity between China and ASEAN. As SMS Tan mentioned in his remarks earlier, Proxtera's network of digital marketplaces will enable small and medium-sized enterprises (SMEs) in Chongqing and the Western Region to access a greater network of buyers and suppliers. The integration of trade discoverability and financing functions on the Proxtera platform can also help these SMEs overcome some of the challenges and complexities of cross-border trade as they seek to access new markets.

In closing, there is much potential to further grow the trade and financial connectivity between Chongqing and ASEAN. Under the umbrella of the CCI, we hope to bring new ideas, innovations and initiatives that will ensure sustainable growth across our regions. This is in keeping with the JCBC objective of fostering an all-round, high-quality, futureoriented partnership.

Thanks, and I wish you all a fruitful Conference for the rest of the day.

- 1  EBA Investments is a primary market fund under China Everbright Limited.",Leong Sing Chiong
https://www.bis.org/review/r250613c.htm,Darryl Chan: Keynote speech - International conference on Roads and Railways 2025,"Keynote speech by Mr Darryl Chan, Deputy Chief Executive of the Hong Kong Monetary Authority, at the International Conference on Roads and Railways 2025, Hong Kong, 12 June 2025.",2025-06-12 00:00:00,"## Darryl Chan: Keynote speech - International conference on Roads and Railways 2025

Keynote speech by Mr Darryl Chan, Deputy Chief Executive of the Hong Kong Monetary Authority, at the International Conference on Roads and Railways 2025, Hong Kong, 12 June 2025.

* * *

Financial Secretary, Director Yau (Director of Highways), President Leung (President, Hong Kong Institution of Highways and Transportation), distinguished guests, ladies and gentlemen,

Good morning. It gives me great pleasure to join you at International Conference on Roads and Railways 2025 today.

When global investors and businesses choose Hong Kong to base their operations, our world-class infrastructure is often one of the deciding factors. True that geographically we are blessed to be located at the heart of Asia. But more importantly, it's the decades of hard work-to provide excellent accessibility within the city and seamless connectivity with the rest of the world-that defines Hong Kong as a global trade, logistics and financial hub.

The theme of this year's conference is smart and green transport infrastructure. In the coming two days there will be ample opportunities to share experiences and insights on how we can build, operate and maintain smart and green infrastructure. We at the Hong Kong Monetary Authority take keen interest in infrastructure financing. We do this in three different capacities: as a promoter of Hong Kong as an international financial centre, as the agent assisting the Government in the execution of its bond programmes, and as the manager of Hong Kong's official reserves that counts infrastructure as an investable asset class. So, let me try to approach this important subject from the perspective of financing.

Hong Kong's pursuit of excellence in infrastructure and financial services goes hand in hand. Our efficient and extensive transport networks enable Hong Kong to serve as the regional focal point of international finance. Our strengths as a financial hub, on the other hand, facilitate infrastructure investment.

This enabling role goes beyond Hong Kong. With mature capital markets, a deep liquidity pool and world-class financial services, Hong Kong is well-positioned to bridge the infrastructure investment gaps in Asia and beyond. A World Bank report estimates that the world needs to spend US$3.7 trillion a year on infrastructure to keep up with the economic and demographic developments till 2040. Roads alone require one-third of that investment, not to mention railways and other transport infrastructures that are vital to a well-functioning economy. In terms of geography, almost 60% of the spending needs are related to Asia.

As we press ahead with an ambitious infrastructure programme, the climate challenge looms large. With climate change intensifying, the world today needs transport

infrastructures that are less carbon-intensive and more climate-resilient. The associated long-term economic benefits are significant. According to OECD's estimate, every dollar invested in climate-resilient infrastructure can generate four dollars in economic growth. Yet, the sustainable features may well translate into higher upfront investment, making it more challenging to build financially viable infrastructures.

How can Hong Kong leverage our strengths as a financial hub to support the region to meet these challenges and to capture the benefits? Two ideas come to mind: one is Hong Kong as a platform for infrastructure debt, and the other is an enabler for greater direct participation by private capital in infrastructure investment.

Most if not all infrastructure projects are funded by public money. The source of funding may come from fiscal surplus cumulated over time. But with governments around the globe facing fiscal strains, and given the huge initial investments as well as the long returns horizon, this can hardly be a major funding model. Which leads to debt financing. Bonds and loans have been the leading instruments for infrastructure financing. According to the World Bank, in the decade starting 2013, close to 80% of the private investments in infrastructure projects were raised through debt financing.

Hong Kong, as the region's debt financing hub, has amassed rich experience in supporting infrastructure projects home and abroad. Our public sector has made active use of debt financing to support local infrastructure development.

One notable example is the Hong Kong Government's bond programmes: one on green and sustainability, and the other on infrastructure. So far the Government has issued US$47 billion equivalent of green bonds and infrastructure bonds to fund our capital works projects, some of which relate to climate-resilient infrastructure such as waste and drainage improvement, flood-prevention works, as well as green buildings and energy efficiency. Another public-sector issuer is the Airport Authority, who in January this year raised US$7 billion equivalent, multi-currency notes to fund the airport's threerunway project and expansion of facilities. The issuance is the largest-ever public bond offering by a Hong Kong issuer.

International and Mainland Chinese projects have also turned to Hong Kong's debtraising platform. For more than a decade Hong Kong has consistently taken the top spot in Asia by arranging around one-third of the region's international bonds. Public sector issuers include international organisations such as the Asian Infrastructure Investment Bank who issued Hong Kong dollar bond to fund sustainable infrastructure projects in Asia. Mainland local governments are repeat issuers of renminbi bonds in Hong Kong to fund local infrastructure projects ranging from railways to underground trains.

These infrastructure bonds and loans arranged in Hong Kong were well received by private investors. But for projects in frontier markets, which have the most acute needs for infrastructure, developers need to go the extra mile to make risk-adjusted returns acceptable to private capital. Asia, in particular, needs to better mobilise private capital, which currently only funds 10% of infrastructure development in the region. With our know-how and diverse investor base, Hong Kong can also play an enabling role in this space.

Public-private-partnership is well-practised in Hong Kong. Over the years, we have adopted various models with great success, such as build-operate-transfer and railwayplus-property. The cross-harbour tunnels and the subway system that we all use on a daily basis are compelling examples. More recently, we adopted the design-build-andoperate model in the development of the newly commissioned Kai Tak Sports Park, where the Government funded the construction cost and receives a share of the revenue from the operating contractor.

Through such partnerships, private investors can gain access to unique infrastructure investment opportunities with a tailored risk and reward profile. The public sector can more flexibly leverage limited resources to expedite the development of infrastructure to deliver long-term social and economic benefits.

We also make good use of securitisation to lower the entry barrier for investors by offering exposure to a diversified portfolio with credit enhancement. This model provides an avenue for investors who may otherwise be discouraged by the hefty size and complex screening process of infrastructure projects.

The Hong Kong Mortgage Corporation is a local pioneer in infrastructure financing securitisation. It acquires senior debt from greenfield and brownfield infrastructure projects, and securitises the loan assets as a standalone alternative asset class.  Since 2023, the company has successfully completed two issuances of infrastructure loanbacked securities that amounted to US$820 million in total. Repeated issuances have helped diversify its investor base to include insurers, pension funds and security firms, among other local and international financial institutions.

I should also mention that Hong Kong is home to impact investors who seek out opportunities to support the region's sustainable development. For example, one of the world's leading producers of sustainable aviation fuel was incubated by a family office in Hong Kong, paving the way to raising additional funding from some of the world's major private investment firms.

Ladies and gentlemen, I have outlined different models that can be used to mobilise private capital to help finance infrastructure projects. While private investors naturally look for good returns, they also pay close attention to the governance of these projects.

Take the example of the Government bond programmes, we have developed robust frameworks that set out clearly how the capital raised will be managed, what categories of projects will be eligible, and how the specific projects are selected. In the case of green projects, there is a further requirement to conduct independent pre- and postissuance review of their compliance with green standards. Detailed regular reporting and disclosure also form part of the commitments under these programmes. We are also prepared to respond to investor scrutiny through engagements with them.

The governance framework I just mentioned is important not just to enable investors to make informed decisions and to keep track of how their investments are deployed. It is also a powerful tool to help the issuer-the Government in this case-to exercise discipline and demonstrate accountability in project planning, evaluation, and execution. In short,

it helps us raise and deploy funding for infrastructure projects in a smart and responsible manner, so that these projects will bring tangible economic and social benefits to our community.

I trust the sharing by policy makers, industry leaders and experts at this conference will shed light on how we can strengthen our collaboration in support of inclusive and sustainable growth through smarter and greener infrastructure. I wish you all a most rewarding conference. Thank you!",Darryl Chan
https://www.bis.org/review/r250616b.htm,Gita Salden: Innovation we can trust - the role of De Nederlandsche Bank in regulating FinTechs,"Speech by Ms Gita Salden, Executive Director of Supervision of De Nederlandsche Bank, at the conference ""FinTech meets the regulators"", jointly organised by De Nederlandsche Bank (DNB) and the Netherlands Authority for the Financial Markets (AFM), Amsterdam, 16 June 2025.",2025-06-16 00:00:00,"## SPEECH

## Innovation we can trust: the role of DNB in regulating FinTechs

## Read aloud

'A license from a respected regulator helps your business build trust with customers, investors, and partners.', said Gita Salden at the conference 'FinTech meets the regulators' at DNB, Amsterdam, today. She spoke about the importance of innovation in the financial sector and the importance of regulation to underpin trust.

Published: 12 June 2025



## Do you know what this is?



This is the reverse side of one of the first banknotes issued by DNB, two centuries ago.

Do you see all the names and dates written on it?

These are payment details: when people were paid with a DNB banknote, they wrote down the name of the payer and the date of payment.

If the banknote turned out to be worthless, at least they knew who to turn to for the 'real' payment.

Why did people think that was necessary?

Because money is about trust.

And the Dutch had some bad experiences with banknotes during the period of French rule of the Netherlands, when French notes were not backed by gold.

So from our founding in 1814, DNB did everything they could to win people's trust:

the new banknotes contained a promise of payment in gold or silver coins and they were signed by no fewer than four people: DNB's president, two directors and the secretary.



These banknotes are part of our historical money collection.

You can see them next door, in our former gold vault.

Because when we renovated this building, we not only wanted it to be energy-efficient and sustainable, but also - quite unusual for a central bank - as open and transparent as possible.

Because trust is not only something you receive, but something you give.

Trust is not only about security, about guarantees, about stability, but also about openness, about letting the world in and looking towards the future.

So we opened our doors and our vault to visitors.

Don't worry, all the gold bars, coins and banknotes have been safely rehoused in a secure facility in Zeist: our trust is not limitless….

I am proud to welcome you in our new headquarters where old meets new.

The perfect place to talk about opportunities and challenges, value and trust, digitalisation and the future of the financial sector.

The perfect place for new money to meet old money, for FinTech to meet the regulators.

Welcome!

We have a lot to talk about…

We all know that the financial sector is in the midst of a technological revolution.

New players, new business models, new technologies:

FinTech is transforming the way we pay, borrow, invest, and manage risk.

And we, as supervisors - DNB and the AFM - want to see this innovation thrive.

At DNB, we believe that a strong and innovative financial sector is essential to serving customers, supporting the economy, and building a future-proof financial system.

That's why we're open to new ideas, new technologies, and new ways of doing business.

But let me be clear: this openness comes with a responsibility.

Not only for DNB and AFM, but for every organisation that wants to offer financial products and services.

Because like I said: money is about trust.

In 'The Ascent of Money: A Financial History of the World', Niall Ferguson puts it beautifully: 'Money is not metal. It is trust inscribed.' End of quote.

The moment that trust is broken, the entire system is at risk.

Let me give you an example.

You may have followed the case of Binance.

A major global crypto platform - operating without proper authorisation, facilitating billions in illicit transactions, and ultimately leaving Dutch customers unprotected. When DNB confronted Binance about its non-compliance with anti-money laundering regulations, they chose to exit the Dutch market rather than meet the standards we expect.

And then there is this case where we were notified by the Financial Intelligence Unit.

About a young man with a slick pitch about investments in tech stocks who managed to convince investors to hand over millions of euros.

He used the money to finance a lavish lifestyle: luxury hotels, designer clothing, and expensive cars.

The pattern - large sums coming in, nothing going into investments - was flagged because it resembled a classic pyramid scheme.

The case was referred to law enforcement, and the AFM was notified.

Why is a case like this important to follow up?

Indeed, there is no physical damage, nobody is left dead or bleeding.

But the damage to the financial market is devastating: trust has been betrayed.

That's exactly why we hold the line: not to stifle innovation, but to guard, maintain and strengthen consumer trust in financial markets.

And to be fair, we are quite lenient nowadays…

When, way back in 1836, a young lady was suspected of counterfeiting DNB banknotes, the public prosecutor demanded the death penalty….

But today we still adhere to the rule we applied then: trust, but verify.

Because trust is not simply a nice-to-have in finance.

It's the foundation.

Without it, nothing else works.

In his book, Ferguson describes money as a medium of exchange, a unit of account and a store of value, and states: 'To perform all these functions optimally, money has to be available, affordable, durable, fungible, portable and reliable.'

To make sure that money can perform all these functions, DNB and the AFM are the main regulators.

Who does what?

There's an important difference between DNB and the AFM when it comes to supervising FinTechs.

DNB focuses on prudential supervision: we check if companies are financially stable and able to meet their obligations.

The AFM focuses on conduct supervision: they make sure companies treat customers fairly, provide clear information, and keep markets honest.

The supervision of many FinTechs is shared between DNB and the AFM.

Who takes the lead depends on what the company mainly does.

If it's payments, savings, or lending, DNB is usually in charge.

If it's investment services or financial advice, the AFM is the main supervisor. This way, FinTechs get the right kind of supervision based on their risks.

The latest FinTech Census in 2023 shows that FinTech companies in the Netherlands often have mixed experiences with supervision from DNB and the AFM. While they appreciate the openness and information provided by both regulators, they also find the process to be strict, risk-averse, and sometimes rigid.

Many FinTechs feel there's little room for innovation and that licensing is slow and unpredictable.

They - you - would prefer a more solution-oriented approach, with clear feedback on obstacles to obtaining a license.

We have taken these comments to heart.

We understand that obtaining a license from DNB or the AFM is a rigorous process.

We understand that it can feel long, complex, and sometimes frustrating.

But we do not mean to be rigid, we mean to be fair.

We don't want the process to be seen as a barrier to innovation, but as a mark of quality.

Not to be seen as an obstacle, but as a gateway to trust.

Because a license from a respected regulator helps your business build trust with customers, investors, and partners.

Believe me, we are not here to make life harder for you than it needs to be.

We work hard to make sure that our supervision is proportionate and risk-based.

In other words: we do not ask for more than is necessary.

So, if your business model carries limited risks, we won't burden you with excessive conditions.

For instance: a small payment startup doesn't face the same demands as a systemic bank.

A niche lending platform isn't held to the same standards as a major insurer.

For early-stage innovators, we offer exemptions and sandbox-like approaches.

We're open to exploring new business models

That's why we have set up the Innovation Hub - a joint initiative of DNB, the AFM, and ACM, the Authority for Consumers and Markets.

It's a space for open conversation, where you can pitch your ideas, ask your questions, and explore how regulations apply to your innovations.

Whether you're building an AI-driven investment tool, experimenting with tokenised assets, or creating a cross-border lending app, we invite you to come and talk to us early.

The questions we receive in the Innovation Hub are very diverse.

They cover all topics that touch on innovation in the financial sector and the regulatory framework.

From a new AI tool at a large bank, to two technical university students who want to build an app to let people donate to street musicians, because no one carries cash anymore.

The Innovation Hub answers questions like:

- 'I want to issue financial instruments via blockchain, but the regulations don't account for this technology, so I can't fully comply. How can I make sure that I don't break the law in my specific case?' Or;
- 'I want to issue electronic money or provide payment services. Do I always need a license for this activity?' Or;
- 'I've come up with an app that makes it easier for groups of friends to pool money. If I want to launch this app, do I need a license?'

We do our very best to provide answers to these kinds of questions.

And let's be honest: not every idea is going to fit within the rules.

Sometimes, we'll have to say no.

But when we do, we'll explain why, and together we'll explore whether there's a better way.

Because at the end of the day, we share the same goal:

A financial system that is safe, reliable, and innovative.

So please, don't let today be the only time we connect.

Our door is open.

Literally.

We are here to listen, to help, and - when necessary - to push back.

Because as regulators, we have to balance two roles: enabling innovation and safeguarding trust.

The quote of Niall Ferguson I used before was not complete.

He wrote: 'Money is not metal. It is trust inscribed. And it does not seem to matter much where it is inscribed: on silver, on clay, on paper, on a liquid crystal display.'

In other words: Money is money and money is trust, in every shape and form.



So, let's use this meeting to build trust. To build a thriving FinTech sector, but also a financial system that serves society as a whole.

Let's get to work!",Gita Salden
https://www.bis.org/review/r250611i.htm,Christodoulos Patsalides: Navigating economic challenges - strategies for financial resilience and growth,"Speech by Mr Christodoulos Patsalides, Governor of the Central Bank of Cyprus, at 4th ICPAC (Institute of Certified Public Accountants of Cyprus)Mediterranean Finance Summit, Limassol, 22 May 2025.",2025-05-22 00:00:00,"## Christodoulos Patsalides: Navigating economic challenges strategies for financial resilience and growth

Speech by Mr Christodoulos Patsalides, Governor of the Central Bank of Cyprus, at 4th ICPAC (Institute of Certified Public Accountants of Cyprus)Mediterranean Finance Summit, Limassol, 22 May 2025.

* * *

Slides accompanying the speech

## Introduction - The Imperative of Resilience

Ladies and gentlemen,

It is a pleasure to join you today at the fourth ICPAC Mediterranean Finance Summit. I would like to thank the organizers for convening such a distinguished group of professionals and corporate leaders who are instrumental in shaping the financial future of our region.

We meet at a time when resilience is no longer an abstract goal but a daily necessity. The global environment remains deeply uncertain - shaped by geopolitical tensions, trade disputes, economic fragmentation, rapid technological change, and the accelerating impacts of climate change. Advances in digital technology, automation, artificial intelligence, and new financial innovations are transforming industries, challenging existing business models, and creating new vulnerabilities - from cyber risks to regulatory gaps. These powerful forces are testing the flexibility of our institutions, the responsiveness of our policies, and the strength of collaboration between central banks, regulatory authorities, financial supervisors and fiscal institutions, both at the national and European levels.

In this context, I would like to share how we, as policymakers and supervisors, are working to reinforce financial resilience - not just to manage current shocks, but to lay the groundwork for sustainable and inclusive growth.

To frame today's discussion, I will focus on three key dimensions:

- First, the evolving economic and monetary policy outlook in Europe - including recent decisions by the Governing Council of the European Central Bank and their implications for stability and growth.
- Second, the strategic reforms needed to complete Europe's financial architecture - from capital market integration to a more unified regulatory and supervisory framework.
- And third, the growing importance of regulation and operational resilience in building trust, protecting stability, and enabling innovation in an increasingly digital and interconnected financial system.

I will also briefly reflect on Cyprus's experience - both the progress we have made and the steps we are taking to future-proof our financial sector.

Through these reflections, I intend to provide a forward-looking perspective - not only on where we stand today, but also on the path we must take to navigate uncertainty with confidence and purpose.

Let me begin with a brief overview of the broader European economic landscape.

## Europe's Economic Landscape: Navigating Trade Tensions &amp; Monetary Policy

In April 2025, at the Governing Council of the European Central Bank, we decided to further lower the key ECB interest rates by 25 basis points, based on our most recent assessment of inflation dynamics, underlying inflation pressures, and the strength of monetary policy transmission. The disinflation process has continued to progress well, strengthening confidence that inflation will sustainably return to the 2% target in the medium-term horizon.

At the same time, it is important to underline that under the exceptionally uncertain economic conditions, monetary policy decisions are calibrated with extra caution without any pre-commitment to a predetermined path, adhering to a data-dependent meeting-by-meeting approach, which has served very well in ensuring full optionality and agility in our policy responses.

The broader euro area outlook remains fragile. Real GDP growth reached 0.9% in 2024, and while the labour market continues to show resilience - with unemployment remaining at a historic low of 6.2% in March 2025 - risks remain elevated. Trade disputes, geopolitical instability, and other factors that - ceteris paribus- contribute to tighter financial conditions continue to weigh on confidence and investment across the euro area.

Nonetheless, the inflation outlook provides grounds for cautious optimism. Inflation stood at 2.2% in April 2025, with underlying measures pointing towards sustained convergence with the ECB's target. Lower energy prices and a tempering of wage growth pressures have all contributed to this positive development. However, the April's reading upticks in services and core inflation, although likely due to stronger than expected Easter effects, warrant continuous close monitoring.

While price stability is in near sight, the road ahead is not without challenges. Risks associated with global supply chain disruptions, inflationary, stagnant and even stagflationary dynamics, are still present. For the corporate sector, this evolving economic landscape presents both opportunities and challenges. The gradual easing of interest rates is improving financing conditions, and stable prices boost confidence and support household consumption and firms' investment plans. But firms must remain vigilant to the broader risks emanating from global fragmentation and shifting investment patterns and stand ready to adapt and respond effectively.

## Challenges for Europe and the way forward: Completing Europe's Financial Architecture/Strategic Priorities

While monetary policy plays a vital role in maintaining macroeconomic stability, it cannot, on its own, resolve the deeper structural inefficiencies that continue to hold

back Europe's economic dynamism. To build a financial ecosystem that is not only resilient in the face of crisis but also conducive to long-term prosperity, we must complete the long-standing project of deepening Europe's financial architecture.

First, we must address the persistent fragmentation of the Single Market. Although it has been a cornerstone of European integration for over three decades, the Single Market still suffers from uneven implementation and regulatory inconsistencies, particularly in services, digital activity, and professional mobility. These barriers significantly impede growth, limit scale economies, and reduce cross-border competition. In response, the European Commission's upcoming Single Market Strategy 2025   is set to provide a refreshed policy framework to eliminate remaining 1 bottlenecks. It includes proposals for harmonized corporate rules, streamlined procedures for cross-border activity, and improved enforcement mechanisms - all aimed at making the internal market truly function as a single economic space.

Second, the underdevelopment of capital markets in the EU remains a key constraint on investment and innovation. Despite a substantial pool of private savings - estimated at around €33 trillion 2   - Europe continues to lag behind other major economies in converting those savings into productive investment. Fragmented regulatory regimes, insufficient market depth, and relatively low cross-border participation hinder access to finance, particularly for small and medium-sized enterprises. The Capital Markets Union (CMU)   aims to tackle these shortcomings by creating a truly integrated and efficient 3 market for capital. A fully realized CMU will allow investors and savers to diversify more broadly and enable businesses - especially startups and scale-ups - to access deeper pools of equity and debt financing across the Union at lower costs.

Third, to support innovation and technological advancement, it is essential to scale up Europe's venture capital ecosystem. While Europe has made progress in fostering startups, the continent continues to lag behind its global peers - particularly the United States - in terms of risk capital availability and the ability of startups to grow into globally competitive firms. Early-stage and growth-stage companies frequently face funding gaps that limit their ability to scale, commercialize new technologies, and create highquality jobs. A stronger, more integrated European venture capital market would help address these issues. The European Commission's venture capital policy   outlines a 4 range of initiatives to attract more private investment, reduce regulatory fragmentation, and enhance access to equity finance across borders. These include reforms to improve exit conditions through deeper capital markets, support for cross-border venture funds, and initiatives like InvestEU 5   , which crowd in private capital by sharing risk. Building such an ecosystem is vital not only for economic competitiveness but also for achieving Europe's strategic autonomy in key technologies.

Fourth, Europe must ensure effective and coherent financial supervision across its internal borders. Today, the supervision of capital markets and financial services remains largely national, resulting in regulatory fragmentation and inconsistent enforcement. To strengthen market integrity and investor confidence, it is essential to upgrade the powers of the European Securities and Markets Authority (ESMA) 6   . A more empowered ESMA - ideally with authority akin to the Single Supervisory

Mechanism (SSM) in the banking sector - would enable more consistent application of EU law, reduce compliance complexity for cross-border operators, and reinforce the EU's global standing as a safe and efficient capital market.

Fifth, the Banking Union 7   remains unfinished without the introduction of a fully mutualised Deposit Guarantee Scheme (DGS). The absence of a common DGS perpetuates the so-called ""bank-sovereign nexus,"" whereby concerns about a country's fiscal health can spill over into confidence in its banks. Completing this pillar would help ensure that depositors are protected uniformly across the euro area, reinforce financial stability, and prevent fragmentation in times of stress. It would also further level the playing field across member states, making the European banking sector more robust and competitive.

Finally, the creation of a safe European asset 8   , such as a Eurobond, is critical to strengthening the transmission of monetary policy and providing a benchmark instrument for EU-wide capital allocation. A safe asset would serve as a low-risk investment vehicle for institutional investors, enhance the stability of the European financial system, and support the international role of the euro. It would also contribute to breaking the negative feedback loop between national sovereign debt markets and financial institutions, fostering greater financial integration and resilience across the euro area.

Taken together, these priorities form the pillars of a more complete, competitive, and crisis-resilient European financial framework. Achieving them will not be easy - but the cost of inaction is higher. Without decisive progress, Europe risks falling behind in the global race for investment, innovation, and financial leadership.

## Regulation and Operational Resilience

Building on the structural reforms I just outlined, it is equally important to ensure that the European financial system is not only better integrated, but also well protected and prepared to withstand new types of shocks in a rapidly evolving corporate and risk environment. To this end, European authorities remain firmly committed to safeguarding and strengthening financial system resilience and this commitment is reflected in the ongoing completion of the Basel III framework 9   , which emerged in response to the 2008 global financial crisis. The finalisation of these reforms ensures that banks remain adequately capitalised, better manage liquidity risks, and are less vulnerable to future shocks.

In parallel, EU authorities are also prioritising the implementation of new regulatory frameworks that respond to emerging structural challenges. The Digital Operational Resilience Act (DORA) 10   introduces a harmonised EU framework to enhance the digital resilience of financial institutions against ICT-related disruptions and cyber threats. On the sustainability front, the Corporate Sustainability Reporting Directive (CSRD) and the Sustainable Finance Disclosure Regulation (SFDR) are being 11 12 rolled out to improve transparency, accountability, and the integration of Environmental, Social, and Governance (ESG) considerations into both corporate practices and investment decisions.

Together, these reforms reflect a forward-looking regulatory agenda aimed at futureproofing the financial system-ensuring stability, improving risk management, and aligning financial sector operations with broader societal and environmental goals.

## Cyprus: Strengthening Resilience in Practice

Let me now turn to Cyprus - a small but open economy that has shown notable strength and adaptability in recent years.

Despite a persistently volatile international backdrop, the Cypriot economy has continued to deliver solid results. In 2024, Cyprus recorded one of the highest growth rates in the euro area, supported by resilient private consumption, growing investment in housing and infrastructure, and an exceptionally strong tourism season. Services exports - including ICT, shipping, trade, and professional and financial services continued to diversify and reinforce the country's economic base. These developments reflect a deeper structural transformation, which has made the Cypriot economy more agile and better able to absorb external shocks.

The labour market remains strong, with unemployment declining near full employment levels, and inflation has moderated considerably - reflecting both the easing of supplyside shocks and the effectiveness of euro area monetary policy. This disinflation process is helping to restore purchasing power and support business and consumer confidence.

Fiscal indicators have also improved substantially. Cyprus has achieved a significant reduction in public debt in recent years, far outpacing the euro area average. The country's performance has been positively recognized by all major credit rating agencies, which now place Cyprus firmly in the 'A' category. The IMF, in its latest Article IV report, also acknowledged the economy's resilience and the effectiveness of national policies in managing both risk and opportunity.

Looking ahead, growth is projected to remain steady. At the same time, however, global uncertainties - particularly those linked to rising trade tensions and geopolitical fragmentation - present clear downside risks. While Cyprus has limited direct exposure to global goods trade disruptions, we remain highly interconnected through services and financial channels and must therefore stay alert to second-round effects.

Turning to the banking sector, the progress achieved over recent years is substantial. Banks today are better capitalized, more profitable, and more efficient. Core indicators including capital adequacy, liquidity, and return on equity - are well above the EU average. This provides a strong buffer against volatility and supports financial stability under a range of scenarios.

Importantly, credit quality has continued to improve, with non-performing loans steadily declining. While still elevated compared to EU norms, the trend is encouraging and reflects the sector's ongoing efforts to address legacy risks. It is vital that this progress continues, with particular attention paid to less significant institutions and to maintaining strong risk management practices across the board.

In parallel, the Central Bank of Cyprus has continued to strengthen its supervisory approach. Our focus is not merely reactive - it is forward-looking. This means anticipating and preparing for emerging risks - from cyber threats and climate-related exposures to the integration of artificial intelligence and the growing presence of nonbank financial players.

In this context, we have introduced targeted enhancements to our supervisory frameworks. A key area of focus has been the growing sector of electronic money institutions (EMIs) and payment service providers (PIs), which are playing an increasingly important role in the evolving financial system. In December 2024, we announced the establishment of a comprehensive licensing and supervisory strategy for EMIs and PIs. As part of our organizational restructuring, a dedicated Directorate was created to oversee these institutions, enabling more specialized and effective supervision. The regulatory perimeter must evolve in tandem with the market - ensuring stability without stifling innovation. As a result of these efforts, the sector has grown substantially, with 39 institutions now operating under our supervision - a reflection of both the market's dynamism and the credibility of our regulatory environment.

Other key supervisory enhancements include the adoption of more risk-sensitive supervisory methodologies and the integration of climate considerations into institutional strategy and governance. We have also raised the counter-cyclical capital buffer to reinforce resilience against rising systemic risks - a measure that reflects our commitment to proactive macroprudential policy. In parallel, we are streamlining regulatory requirements where appropriate. On 2 May 2025, the Central Bank of Cyprus published the Prevention of Money Laundering and Terrorist Financing Directive of 2025. The Directive aims to strengthen the framework for the prevention of money laundering and terrorist financing by aligning procedures with the Guidelines of the European Banking Authority and international best practices. It also facilitates the provision of financial services by introducing simpler procedures.

As part of our sustainability agenda, the Central Bank has established a Sustainability Committee at Board level, a dedicated Sustainability Team, and an independent Office of Climate Change. These structures support our broader effort to align supervisory expectations with evolving EU standards, and to ensure that supervised institutions take meaningful steps to manage climate-related financial risks.

Moreover, we continue to advocate for digital preparedness in the banking sector. Cybersecurity, digital transformation, and operational resilience are now at the core of prudential discussions - not merely auxiliary concerns. The safe adoption of technological innovation must go hand-in-hand with robust governance, risk management, and appropriate regulatory oversight.

In sum, Cyprus's resilience is not the result of chance. It is the product of deliberate reform, prudent policy, and close public-private cooperation. But as always, there is no room for complacency. The global environment is becoming more complex - and more interconnected. The challenge before us is to ensure that our financial sector remains not only sound and stable, but also innovative, responsive, and prepared for the future.

## Closing Reflections: Leadership Through Uncertainty

As we reflect on the path ahead, one message is clear: the global economic environment will remain uncertain and fast-changing for the foreseeable future. In this context, the role of financial leaders - especially CFOs and senior executives - is more critical than ever.

Leadership today requires more than financial acumen. It demands agility, foresight, and a commitment to ethical governance. It means preparing institutions not only to withstand volatility, but to adapt early and strategically to emerging risks - whether geopolitical, technological, or environmental.

In this broader effort, smaller economies can lead by example - demonstrating how agility and strategic foresight can turn challenges into opportunities for the entire Union.

Small countries, such as ours, often have the potential to act more nimbly than big ones. In this sense, they can be ""incubators"" of new ideas or new business models within the EU that challenge the rigidities of some of the bigger countries. It's an example of healthy system competition from which the whole EU can in principle benefit. But that won't happen in practice unless developments in small countries can scale up to the European level fast and without internal barriers. And that's where the Single Market comes in.

At the Central Bank of Cyprus, we remain committed to supporting the above effort with our contribution to a financial ecosystem that is resilient, forward-looking, and grounded in trust. Through sound monetary policy, effective supervision, and proactive regulatory engagement, we will continue working closely with all stakeholders - in Cyprus and across Europe - to promote financial stability, foster innovation and build the foundations for long-term prosperity.

Let me close by thanking ICPAC once again for the invitation, and for the important role it plays in advancing dialogue and collaboration within the financial community. It is only through shared understanding and collective effort that we can meet the challenges of today - and shape the opportunities of tomorrow.

Thank you.

1 European Commission's upcoming Single Market Strategy 2025

- 2 Enrico Letta - Much more than a market (April 2024)
- 3  Capital Markets Union (CMU)
- 4  European Commission's venture capital policy
- 5  InvestEU - European Commission
- 6  European Securities and Markets Authority (ESMA)

## 7  Banking Union

- 8  Developing European safe assets - article in Intereconomics | European Stability Mechanism
- 9  Basel III - European Commission
- 10 Digital Operational Resilience Act (DORA) - EIOPA
- 11 Corporate sustainability reporting - European Commission
- 12  Sustainability-related disclosure in the financial services sector - European Commission",Christodoulos Patsalides
https://www.bis.org/review/r250610a.htm,Adriana D Kugler: The economic outlook and appropriate monetary policy,"Speech by Ms Adriana D Kugler, Member of the Board of Governors of the Federal Reserve System, at the Economic Club of New York, New York City, 5 June 2025.",2025-06-05 00:00:00,"## Adriana D Kugler: The economic outlook and appropriate monetary policy

Speech by Ms Adriana D Kugler, Member of the Board of Governors of the Federal Reserve System, at the Economic Club of New York, New York City, 5 June 2025.

* * *

Thank you, Barbara, and thank you for the invitation to speak to you today. It is an honor to join other members of the Federal Open Market Committee (FOMC) who have addressed the Economic Club of New York over the years. 1

My subject is the current state of the U.S. economy, the economic outlook, and the implications for monetary policy. The short version is that the labor market appears resilient and stable and economic activity is continuing to grow, although at a more moderate pace than in the second half of last year.

While the labor market is currently at or near the FOMC's goal of maximum employment, there is the prospect that trade and other policy changes could raise the unemployment rate and push employment away from our objective. These policies, especially higher import tariffs, could also raise inflation over the rest of this year. In fact, while progress toward the FOMC's goal of 2 percent inflation has continued, we have seen an escalation in goods inflation and data from surveys, and non-traditional sources point to some inflationary pressures as well.

In addition to increases in U.S. import tariffs and retaliatory increases in the tariffs foreign countries apply to U.S. exports, other policy changes, either proposed or already underway relate to immigration, fiscal policy and regulation. Those policies could affect economic conditions, and since it is the FOMC's job to set monetary policy that is best able to achieve our mandated goals of maximum employment and stable prices, we must consider the effects of these policies. So far, we are beginning to see the impact only of higher tariffs on inflation. Still, thinking about the outlook requires consideration of how the economy could be affected by all these policy changes moving forward.

It remains difficult to judge the current strength of economic activity, based on data through the first four months of 2025, primarily because of the front-loading of imports ahead of the implementation of tariffs. While real gross domestic product (GDP) declined slightly in the first quarter, that was largely because of a surge in imports ahead of anticipated tariff increases, a surge that will likely reverse. Putting aside fluctuations in trade and in inventories and focusing on the April data, personal income and consumption point to a slight moderation in economic activity. While personal disposable income increased at a healthy pace so far this year, consumption grew more slowly in April, which may indicate consumers are becoming more cautious. That said, there is considerable uncertainty about imports in the second quarter and uncertainty about the impact that higher prices will have on spending, so I will be looking for more evidence about economic activity in May ahead of the FOMC's next meeting, June 17 and 18.

One encouraging sign about economic activity is the resilience of the labor market. We will get the May employment report tomorrow, but the data in hand indicate that employment has continued to grow and that labor supply and demand remain in relative balance. In April, employers added 177,000 jobs, slightly higher than the average for the previous six months. The unemployment rate was steady in April at 4.2 percent, in the historically low range of 4 percent to 4.2 percent that it has remained in since May 2024. Data on job openings and quits for April likewise point to a resilient but somewhat looser labor market with a balance of supply and demand. The vacancy rate, a measure of demand for workers, was 4.4 percent, down from a peak of 7.4 percent three years ago and roughly the same level as just before the pandemic. 2   The quits rate, an indicator of the confidence workers feel in finding a job, has been in the narrow range of 1.9 to 2.2 percent since December 2023, and just a bit below the average level in 2019. 3

Ahead of tomorrow's employment report, other data that we have for May are generally consistent with this picture of the labor market but may suggest some cooling. The average of private-sector forecasters' predictions for total job creation is 130,000. 4   Also, while the pace of job layoffs remained at historically low levels through the final week of May, based on the number of new claims for unemployment benefits, other measures suggest modest increases in layoffs. For instance, Worker Adjustment and Retraining Notifications (WARN notices) of layoffs have ticked up since the beginning of the year, as have the mentions of layoffs in the Fed's Beige Book survey and job cuts data reported by Challenger, Gray and Christmas.

The other side of the FOMC's dual mandate is price stability. Progress in lowering inflation toward the Committee's 2 percent target has slowed some since last summer, even if headline and core inflation have continued to decline. The FOMC's preferred inflation gauge, based on personal consumption expenditures (PCE), grew at a 2.1 percent annual rate in April. While that is quite close to the FOMC's target, it was dragged down by a decline in energy prices. Core inflation-which excludes volatile prices for food and energy and is a good guide to future inflation-came in at 2.5 percent, so I do believe that our monetary policy stance, which I view as modestly restrictive, is currently appropriate to achieve and sustain 2 percent inflation over the longer term.

Sticking with core inflation, to help me judge ongoing progress toward price stability, I like to look at the 12-month change in each of the three main categories of core inflation: housing services, services excluding housing, and goods. The PCE price index for housing services has declined markedly in the past year, from 5.7 percent in April 2024 to 4.2 percent in April this year, but it is still considerably above the level that persisted before the pandemic. Meanwhile, the PCE price index for core services excluding housing, which makes up more than half of core PCE inflation, has declined from 3.6 percent in April last year to 3 percent in April 2025, still somewhat above the level that prevailed before the pandemic. And the third category is core goods inflation, which rose at a 0.2 percent annual rate in the 12 months through April, compared with April 2024 when it had actually fallen 0.5 percent over the previous 12 months. In recent decades, core goods prices have typically fallen over time, helping to keep a lid on overall inflation, so this is a meaningful reversal of the disinflationary process. To sum up, while core services inflation has fallen, it is still running above the rate before the

pandemic, and the progress on core goods inflation has reversed. I have been paying attention to this reversal for some time and how this could be exacerbated by the announced and implemented tariffs.

Research published recently by Federal Reserve Board staff calculates the passthrough of tariffs enacted before April 2 to individual product categories tracked in personal consumption expenditures. 5   Using PCE data from February through April, the authors estimate that the 20 percentage point increase in tariffs on Chinese imports earlier in the year raised overall core PCE prices by two tenths of 1 percent. Since tariffs on China are currently higher than 20 percent, and tariffs have increased for other countries, these results tell me, first, that the pass-through of tariffs into prices is relatively quick, and, second, should elevated tariffs persist, even just in the short run, larger effects may be coming soon. The import surge I mentioned earlier, ahead of sharp tariff increases, has delayed the price effects associated with those tariffs, and the reversal in that surge that I expect in the next few months will likely signal larger price increases.

An important feature of most of the data I have mentioned so far is that it is released with significant lags. For example, the initial estimate of GDP is released about 30 days after the end of the quarter, and two later revisions mean that we may not get a clear idea of how output increased until nearly three months afterward. Monthly data on job openings are typically released with a one-month delay. The reasons for these lags are well known. For instance, statistical agencies can only survey households and businesses every so often, and it takes time to compile and publish high-quality statistics. Still, if policymakers solely rely on these traditional data to forecast what the economy will do in the future, they end up focusing on the past, which is a little like driving down the road by looking in a rearview mirror.

As I mentioned in my speech last year to the National Association for Business Economics, there has been an explosion of nontraditional or soft data produced by the private sector, giving us an opportunity to measure economic developments with greater timeliness (sometimes even in real time), at a higher frequency, and with more granularity. 6   These data are released closer to the time of collection, such as several surveys from the Federal Reserve Banks. Given today's fast-changing and uncertain environment, soft and non-traditional data becomes all the more important.

That said, nontraditional data often face their own challenges, including issues with representativeness, the lack of methodological consistency, and a short time-series history. And, to be clear, while some non-traditional data are indeed ""soft data"" in that they capture sentiment or expectations, other data in this category are decidedly ""hard,"" since they are based on actual decisions and actions by businesses and households. In evaluating both traditional and nontraditional data on the economy, I face a tradeoff between timeliness and precision, but both sources are essential for me in formulating an outlook.

So, in the context of hard data that has lately been providing a less-than-clear view of the economy, what are the nontraditional data telling me about meeting the FOMC's two economic objectives? On the price-stability side, survey data from businesses suggest that price increases are coming. These surveys report diffusion indexes, which are calculated as the percentage of total respondents reporting increases in prices

minus the percentage reporting declines. Surveys for May point to indexes for inputs and selling prices being elevated relative to the beginning of the year, probably reflecting effects from higher tariffs. Manufacturing and non-manufacturing surveys from the Institute for Supply Management (ISM), as well as several surveys from the Federal Reserve Banks report increases in material prices and prices charged to customers, with many respondents volunteering that this is related to tariff increases.

I believe expectations of future inflation are an important determinant of current inflation, and data for May continue to point to increases in measures of near-term inflation expectations. An average of private-sector economists published by the Survey of Professional Forecasters finds that expectations for core PCE inflation over the next year moved up from 2.4 percent in April to 2.9 percent in May. Among data on inflation expectations, the most dramatic increases have been seen in the University of Michigan Surveys of Consumers. While I take seriously the concern that recent methodological changes in the survey may have made this measure less reliable, this survey is a longstanding and important barometer of consumer sentiment, and I still monitor the signals it is giving us closely. According to the Michigan survey, consumers expect inflation in the next year to average 6.6 percent and over the next 5 to 10 years to average 4.2 percent. Tariffs continued to be an important issue in the Michigan survey, with nearly three-quarters of consumers mentioning them, up from almost 60 percent in April. Firms have also raised their inflation expectations, with a survey by the Cleveland Fed reporting an increase in one-year-ahead expectations from 3.2 percent in the first quarter to 3.9 percent in the second.

However, I still see stability in most measures of longer-run inflation expectations. Notably, expectations among professional forecasters for inflation 6 to 10 years ahead decreased from 2.1 percent in April to 2 percent in May. That provides me some comfort, as it points to confidence from the public in the Fed to bring inflation to our goal of 2 percent over the medium term.

Recent developments and the data I have been monitoring have led me to consider at least three channels through which tariffs could have a persistent influence on inflation. First, as I have mentioned in some previous speeches, while it is true that short-run inflation expectations are influenced by short-term economic shocks, I value them because they often represent the horizon of decisionmaking for businesses and consumers. 7   The increase in short-run inflation expectations that I previously mentioned may give businesses more leeway to raise prices, thus increasing the persistence of inflation. A second channel for tariffs influencing inflation could be opportunistic pricing by firms, if they take advantage to increase prices of items not directly affected by tariffs. This, along with tariffs on intermediate goods, could generate second-round effects on inflation. And a third channel is that lower productivity may lead to upward pressure on prices. As firms adjust to the higher input costs and lower demand, they may cut back on capital investment and shift to a less-efficient combination of inputs. While, so far, I have only seen anecdotal evidence for the opportunistic pricing among these three channels, I am closely monitoring any signs of increased persistence on inflation.

Nontraditional data indicators of real activity suggest that the economy might be starting to slow. Measures of household sentiment about economic conditions remain downbeat, such as those from the University of Michigan or the Conference Board. As

for businesses, manufacturing surveys, such as the ISM, report a slowing in new orders. Additionally, the May Beige Book reports that economic activity has declined slightly relative to April. On the services side, representing the majority of businesses, the ISM PMI has trended down in the past few months and reached a level in May consistent with stagnation. Focusing on the ISM services new order component, it declined significantly in May to one of its lowest levels in recent years.

In summary, the nontraditional data on economic activity are consistent with my overall assessment that we might be seeing some moderation in the growth of economic activity but not yet a significant slowdown. As policies on fiscal matters and immigration take shape, I find it important to also account for their implications for the U.S. economic outlook. On the fiscal side, the omnibus bill passed by the House would add stimulus to the economy. 8   On the immigration side, we have seen inflows substantially down since last year, which decreases the labor supply and could add meaningful upward pressure to inflation by the end of the year in sectors reliant on immigrant labor such as agriculture, construction, food processing, and leisure and hospitality. That said, I have not yet seen much of an imprint on wages from these developments.

Let me conclude with the implications of all this for monetary policy. As inflation has declined over the past two years, due in part to tighter monetary policy, the U.S. economy has remained resilient, with stable labor markets and employment near its maximum sustainable level. Disinflation has slowed, and we are already seeing the effects of higher tariffs, which I expect will continue to raise inflation over 2025. I see greater upside risks to inflation at this juncture and potential downside risks to employment and output growth down the road, and this leads me to continue to support maintaining the FOMC's policy rate at its current setting if upside risks to inflation remain. I view our current stance of monetary policy as well-positioned for any changes in the macroeconomic environment.

Thank you for the opportunity to speak to you today, and I look forward to what I expect will be interesting questions.

1  The views expressed here are my own and not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.

- 2  The vacancy rate is defined as the number of vacant jobs as a percentage of total employment.
- 3  The quits rate is defined as the percentage of employees who voluntarily quit their jobs relative to total employment.
- 4  I report here the median of economists' expectations for total nonfarm payrolls polled by Bloomberg.
- 5  See Robert Minton and Mariano Somale (2025),  ""Detecting Tariff Effects on Consumer Prices in Real Time,""  FEDS Notes (Washington: Board of Governors of the Federal Reserve System, May 9).

- 6  See Adriana D. Kugler (2024),  ""The Challenges Facing Economic Measurement and Creative Solutions,""  speech delivered at the 21st Annual Economic Measurement Seminar, National Association for Business Economics Foundation, Washington, June 16.
- 7  See Adriana D. Kugler (2025),  ""Inflation Expectations and Monetary Policymaking,"" speech delivered at the Griswold Center for Economic Policy Studies and the JulisRabinowitz Center for Public Policy and Finance, Princeton University, Princeton, N.J., April 2.
- 8  See Congressional Budget Office (2025), Preliminary Analysis of the Distributional (Washington: CBO, May). Effects of the One Big Beautiful Bill Act",Adriana D Kugler
https://www.bis.org/review/r250617w.htm,Gent Sejko: Launching of the EBRD Transition Report 2024-25,"Opening remarks by Mr Gent Sejko, Governor of the Bank of Albania, at the presentation of the Transition Report 2024-25 by the European Bank for Reconstruction and Development (EBRD), Tirana, 28 May 2025.",2025-05-28 00:00:00,"## Gent Sejko: Launching of the EBRD Transition Report 2024-25

Opening remarks by Mr Gent Sejko, Governor of the Bank of Albania, at the presentation of the Transition Report 2024-25 by the European Bank for Reconstruction and Development (EBRD), Tirana, 28 May 2025.

* * *

Dear guests, colleagues and friends,

It is a special pleasure for me to be with you hosting the presentation of the Transition Report 2024-25 by the European Bank for Reconstruction and Development (EBRD).

The Transition Report 2024-25 provides an in-depth analysis of a highly dynamic issue of nowadays: the reformulation of industrial policies in a global context shaped by new challenges and opportunities.  The EBRD, while placing it at the heart of this year's Report, highlights the increasing complexity and strategic rebound of industrial policies as a tool to address structural changes in both advanced and developing economies in the 21st century.

Nowadays, these policies in addition to being considered as a merely tool supporting the existing industries, should also be seen as a lever for establishing diversified and innovative economies. For more than two decades, in Albania and the region, we have prioritized structural reforms that build strong institutions, improve the business climate, and create an open and competitive economy. Over the past five years, these reforms have contributed to an average economic growth of 3.5-4%, a reduction in unemployment to 11.3% in 2024, and a 7% growth in private consumption. These reforms have been-and remain-essential, but today, they are no longer sufficient, as we face a completely different global reality.

- Geopolitical tensions have caused a 30% increase in the cost of global supply chains since 2020.
- According to WTO, trade fragmentation has reduced the global trade flow by 5.4% in 2023.
- Reindustrialization policies in advanced economies (e.g., the Inflation Reduction Act in the USA and the EU Green Deal) which now channel over 80% of global investments in clean technologies.

Many economies-including our economy-are currently facing a demographic decline, changes in the labour market, and sectoral imbalances. In this context, the debate on industrial policies has shifted from discussion to clear, data-driven strategies.

## What does this mean in practice?

First, we need to understand that today's industrial policies are not about protecting old industries, in contrary they promote sectors of the future-those that can grow, scale up, and create sustainable value. For many EBRD countries, including Albania, the path to growth through traditional industrial exports has become more difficult. In its place, a new opportunity is emerging: the export of digitalized and internationally tradable services.

These ""global innovation services""- such as information technology, design, logistics, and data analysis-are at the heart of productivity growth and added value. But to develop them, strong foundations are needed, such as: investments in education, a skilled workforce, modern digital infrastructure, and high institutional capacities. Some Central and Eastern European economies have already become leading exporters in the field of computer services. Albania also has the potential to follow this path.

Second, the policies we undertake must be aligned with the European integration process. As a small and open economy, with 70% of trade oriented towards the EU, Albania has much to gain by moving towards the European Union convergence. Moreover, membership in SEPA brings us closer to European markets and reduces international transaction costs by 30%.

Third, we should ensure inclusion and sustainability. Industrial policies, in addition to focusing on sectors where we have potential to win in global markets, should also focus on those that are vital for employment and social cohesion within Albania. Specifictailored local policies should underpin industrial policies, such as special economic zones-and be carefully designed, by emphasizing local and regional specific characteristics.

Fourth, state aid should be directed on firms with high potential. Data show that new and dynamic firms are the main drivers of employment and innovation. Policies aimed at stimulating them-such as loan guarantees, subsidized interest loans, or governmentbacked venture capital funds-can make a big difference.

## Dear guests,

In this debate on industrial policy and development directions, the role of the central bank, although not direct, is special and irreplaceable.

The central bank does not compile industrial policies, but it contributes to them as a guarantor of macroeconomic and financial stability-a fundamental condition for any sustainable development. Today, we can say that the Albanian economy continues to grow (GDP grew by 4% in 2024, inflation remained at 2%, private credit increased by 16.7%, and the non-performing loans ratio has dropped to a historic low of 4%). These facts reflect a sound, stable financial system able to support the real sector.

Price stability, functional financial systems, a banking sector, and a modern payment system that serves the real economy-are important prerequisites for long-term investment and sustainable development of the country. Beyond this, the Bank of Albania is also providing a significant contribution to improving financial inclusion through innovations in payment systems and membership in SEPA, the institutionalization of the basic account, effective supervision, financial education, and the promotion of financial innovation. These interventions open new markets and opportunities, so the Bank of Albania will continue to contribute to all these areas with dedication and professionalism.

Concluding, I invite you to be ambitious yet prudent; to design industrial policies that are smart, inclusive, and aligned with our long-term aspirations. Above all, let us invest not

only in sectors of economy, but also in people as the basic unit of the workforce, as well as in institutions and infrastructure that will define the Albania of tomorrow, in our path towards European integration, as a space of opportunities for continuous transformation.

Thank You!",Gent Sejko
https://www.bis.org/review/r250603a.htm,Phil Mnisi: Enhancing financial inclusion in Eswatini - challenges and opportunities,"Opening remarks by Mr Phil Mnisi, Governor of the Central Bank of Eswatini, at the Symposium on ""Enhancing financial inclusion in Eswatini: challenges and opportunities"", Ezulwini, 19 May 2025.",2025-05-19 00:00:00,"## Phil Mnisi: Enhancing financial inclusion in Eswatini - challenges and opportunities

Opening remarks by Mr Phil Mnisi, Governor of the Central Bank of Eswatini, at the Symposium on ""Enhancing financial inclusion in Eswatini: challenges and opportunities"", Ezulwini, 19 May 2025.

* * *

- Programme Director,
- Dr. Alfred Hannig, CEO of the Alliance for Financial Inclusion,
- Mr. Vusi Dlamini,PS Finance,
- Ms. Felicia Dlamini-Kunene, CBE Deputy Governor,
- Ms. Nomcebo Hadebe, Head of the AFI Africa Regional Office,
- Ms.Sizakele Dlamini,CEO Eswatini Centre for Financial Inclusion,
- Mr. Ncamiso Ntsalinthali, CEO FSRA,
- Ms. Paula Ricaurte,Senior Manager in the CEO' Office in Malaysia,
- Mr. Mvuselelo Fakudze, Chairman of the Eswatini Bankers Association,
- Director SME,
- CEO SEDCO,
- Representatives from the Central Bank, government, financial institutions, and development partners,
- Distinguished Guests,
- Ladies and gentlemen,Good afternoon to you all.

It is my pleasure to welcome you all to this important symposium. I assure you that the time you have taken to be present today will not be in vain. I am extremely pleased to also extend a very warm welcome to Dr. Alfred Hannig and the AFI delegation.

Your visit to Eswatini marks a significant milestone in our ongoing journey toward inclusive finance. It further demonstrates the importance of the deliberations that will be taking place today. We are honoured to host you, and we value the strong partnership between the Central Bank of Eswatiniand the AFI network. We thank you for your continued support.

As you might all agree, financial inclusion is an essential element of every nation's development agenda. However, it goes beyond being a developmental goal or policy enabler, it is a necessity. It is about economic empowerment, about resilience, and about ensuring that every citizen, particularly the most vulnerable, has access to tools that enable them to participate meaningfully in the economy. This is especially crucial in our current context, where the dual challenges of limited access and low usage offinancial services continue to persist.

Over the last decade, Eswatini has made commendable progress in expanding access to financial services. Through the cooperation from the government, financial institutions, and our development partners-financial inclusion within the formal sector increased tremendously from 53% in 2011 to an impressive 87% in 2023.

However, the recent findings of the 2023 Blended FinScope MSME(Micro, Small, and Medium Enterprise)survey remind us that access alone is not enough. The reality that only 5% of MSMEs access credit from banks, and just 4% have any form of insurance coverage, points to deeper systemic issues that we must address collectively.

Distinguished Guests, the National Financial Inclusion Strategy 2023-2028 provides us with a framework to address these challenges. It focuses on developing financial capabilities through financial education, together with creating a healthy MSME sector that can demand and attract financial services, foster growth and create employment opportunities. Additionally, the strategy supports enabling economic participation of the more vulnerable sociodemographic segments of our population.

The Strategy further prioritiseinterventions that enhance access to and usage of financial services in a way that meaningfully contributes to the intendedoutcomes of the Eswatini National Development Plan and the UN Sustainable Development Goals.

Today's symposium is not just a conversation-it is a call to action. It is a platform to reflect on how the financial sector can do more to reach the last mile. It is an opportunity to reimagine how data, collaboration, and innovation can help us close the inclusion gap.

Programme Director, let me highlight three key messages I hope will frame our discussions this afternoon:

i.First, the financial sector must continue to evolve. From banks and microfinance institutions to fintech innovators, every player has a role to play in developing products and services that are responsive, affordable, and relevant to the needs of our people-especially our MSMEs, women, youth, and those in rural areas.

ii.Second, data is a critical enabler. We need to invest in data collection, analytics, and reporting mechanisms that give us a deeper understanding of financial behaviours and barriers. Evidence-based policymaking must guide our interventions if we are to be impactful.

iii.Third, collaboration is the cornerstone of progress. No single institution can achieve financial inclusion in isolation. We must foster partnerships across the financial ecosystem-public and private sector, regulators and innovators, local and international partners. The National Financial Inclusion Strategy 2023-2028 provides us with a solid framework to guide these efforts.

In closing,Ladies and Gentlemen, I would like to reiterate the Central Bank's commitment to advancing financial inclusion in Eswatini. We remain fully engaged in the AFI network. We are determined to continue learning, sharing, and innovating-to create a more inclusive financial future for all Eswatini citizens.

Thank you to the organizers and stakeholders here today for your commitment to this important cause. I look forward to the fruitful discussions ahead and the collective impact we will make. Let us work together to build a more inclusive financial system that benefits all our people, ensuring no one is left behind. I wish you all a productive and inspiring symposium.

## I Thank You ALL!",Phil Mnisi
https://www.bis.org/review/r250617n.htm,"Gabriel Makhlouf: Opening statement - Joint Oireachtas Committee on Finance, Public Service Reform and Digitalisation, and Taoiseach","Opening statement by Mr Gabriel Makhlouf, Governor of the Central Bank of Ireland, before the Joint Oireachtas (National Parliament) Committee on Finance, Public Expenditure and Reform, and Taoiseach (Head of Parliament), Dublin, 11 June 2025.",2025-06-11 00:00:00,"## Gabriel Makhlouf: Opening statement - Joint Oireachtas Committee on Finance, Public Service Reform and Digitalisation, and Taoiseach

Opening statement by Mr  Gabriel Makhlouf, Governor of the Central Bank of Ireland, before the Joint Oireachtas (National Parliament) Committee on Finance, Public Expenditure and Reform, and Taoiseach (Head of Parliament), Dublin, 11 June 2025.

* * *

Chair and Committee members, thank you for the opportunity to address you today.  I am joined by Mary Elizabeth McMunn, Deputy Governor for Financial Regulation, and Gerry Cross, Director for Capital Markets and Funds.

You have invited me to discuss the issue of the Central Bank's role in the approval of prospectuses prepared by the State of Israel. Let me start by repeating what I said to this Committee last year, that I remain absolutely appalled by the horrific loss of life and destruction we are seeing in Gaza and the occupied Palestinian territories. Like all members of the Houses of the Oireachtas, I want to see an immediate end to hostilities by all parties.

Before I turn to the approval of prospectuses, let me make a general but important point about the role that central banks play in modern economies and societies. As a body established under statute, we are vested with certain powers and functions which we are required to perform. And we are required to perform and exercise these in the manner in which the legislated tasks are assigned to us, following the law and in line with how it frames our responsibilities. To state the obvious, this matters for we are established by law, we are empowered by law, and we must always act within and in line with the law.

One of the powers that has been assigned to us is to perform the functions of a competent authority under the European Prospectus Regulation . This means that we 1 must approve a prospectus once certain conditions are met.

## Overview and role of the Central Bank

The Prospectus Regulation was implemented as one of a number of essential steps towards the completion of Europe's Capital Markets Union. By harmonising the approach to the approval of prospectuses, the Regulation seeks to prevent divergent approaches and rules among Member States, ensure the proper functioning of the internal market, and provide for a high level of consumer and investor protection.

Under the Prospectus Regulation, a prospectus must be drawn up, approved and published when securities are to be offered to the public or admitted to trading on a regulated market in the EU.

As competent authority, the Central Bank is responsible for assessing whether a prospectus has been drawn up in compliance with the disclosure requirements of the

Prospectus Regulation. The specific disclosure requirements and the requirements for the prospectus approval process are specified in an EU Commission Delegated Regulation , which supplements the Prospectus Regulation. 2

We are required to approve a prospectus where it meets the standards of completeness, consistency and comprehensibility under the legislation. Our legal obligations are clear and we do not need guidance to follow them.

The law is also clear that, by approving a prospectus, the Central Bank does not endorse the issuer and does not endorse the securities. Rather, it means the Central Bank is satisfied that the issuer has disclosed the required information, in the required manner, to potential purchasers of the securities, so that investors can make their own informed investment decision.

For the avoidance of doubt the Central Bank does not issue, sell, trade or list these bonds.  And in the case of Israeli sovereign bonds, we do not authorise or supervise them and they are not listed on a stock exchange we regulate.

It is also important to be clear that under the Prospectus Regulation, it is up to the thirdcountry sovereign to choose one EU Member State to apply to for approval of its prospectus. The competent authority of the chosen Member State is then obliged to discharge the relevant duties within the Prospectus Regulation. In effect the Central Bank is carrying out a role mandated by EU law.

## Sanctions

While central banks have many powers and functions, their roles are still limited to their mandate.

Under the EU's legal framework, the European Commission is responsible for trade policy and trade relations with third countries.

The Central Bank has no mandate to impose sanctions on any State or person for breaches or alleged breaches of international law.

The EU implements sanctions adopted by the UN and adopts its own sanctions in certain circumstances. As Committee members know, unlike the EU sanctions against Russia after its invasion of Ukraine, the EU has not, at this time, adopted sanctions against the State of Israel.

The Central Bank would of course implement any sanctions adopted by the EU that are applicable to the Central Bank's functions, as we have with Russia.

## Impact of international law rulings and opinions

It has been stated that the Central Bank could refuse to approve the Israeli bond prospectus on the basis of certain international law rulings and opinions, namely on the basis of the International Court of Justice (ICJ) provisional rulings in the ongoing South

Africa - Israel case or on the basis of the ICJ opinion on the Occupied Palestinian Territory. This is incorrect. The Central Bank cannot decide to impose sanctions for breaches or alleged breaches of international law.

The South Africa case against Israel referred to the ICJ in December 2023 alleges breaches of the Genocide Convention , with regard to Israel's actions in Gaza. In that 3 case the ICJ has found that the rights claimed by South Africa were plausible. On that basis, the ICJ issued certain provisional measures to Israel between January and May 2024. This case, which Ireland has now filed a declaration of intervention, is ongoing and remains to be determined.

Separately, in an advisory opinion, from July 2024, the ICJ found that Israel's continued presence in the Occupied Palestinian Territory is unlawful.

It is for international bodies such as the UN or the EU to determine how to respond to breaches or alleged breaches of international law, including to determine whether sanctions are necessary. The Central Bank cannot impose sanctions on Israel - for example by refusing to approve the Israeli bond prospectus - in circumstances where the EU has not imposed any such sanctions itself.

## Further Prospectus Reviews

The currently approved prospectus will expire on 1 September 2025. Should the State of Israel seek a further approval of its bond prospectus, we will ensure that the review process is carried out in line with the requirements of the Prospectus Regulation.

## Conclusion

To conclude, we must carry out the statutory tasks and functions which have been assigned to us. We have to work within the law and the prospectus issued by the State of Israel meets the standards of completeness, consistency and comprehensibility required by the law. We will continue to carefully and comprehensively discharge our obligations under the EU Prospectus Regulation.

Finally, let me reiterate my own sense of sadness and horror at the continued, unconscionable, killing and injury of people, the blocking of humanitarian aid, and the shocking implications for all involved in this conflict. I speak for everyone at the Central Bank when I say that we want to see an immediate end to hostilities by all parties.

1  Regulation (EU) 2017/1129 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market.

- 2  Regulation (EU) 980/2019.

3  The Convention on the Prevention and Punishment of the Crime of Genocide (the Genocide Convention).",Gabriel Makhlouf
https://www.bis.org/review/r250617m.htm,Jorgovanka Tabaković: Serbia upgraded the prudential framework for banks,"Speech by Dr Jorgovanka Tabaković, Governor of the National Bank of Serbia, at the Annual Assembly of the Association of Serbian Banks, Belgrade, 9 June 2025.",2025-06-09 00:00:00,"## Jorgovanka Tabakovi: Serbia upgraded the prudential framework for banks

Speech by Dr Jorgovanka Tabakovi, Governor of the National Bank of Serbia, at the Annual Assembly of the Association of Serbian Banks, Belgrade, 9 June 2025.

* * *

Ladies and gentlemen, dear Marina, esteemed fellow bankers,

The answer to the question of whether it is an advantage that we have known each other for so long and that I recognise the faces of executive board chairpersons and you recognise me from this side lies in the figures that speak to the financial system stability. I will dare to say that it is an advantage, as this continuity shows that we are doing our job well.

It is my pleasure to greet you also on behalf of the National Bank of Serbia. You have the privilege of having nearly the entire Executive Board of the National Bank of Serbia here with you. This year, I would like to use the opportunity to speak primarily about the tasks ahead of us, which have been set out in the legislation adopted by the National Assembly.

I am pleased that the Association is celebrating its centenary. This is a testament to quality. The fact that you have withstood various historical and economic turbulences and your hundred-year existence speak volumes. Anything that withstands the test of time is valuable. I wish you at least another hundred years.

It is a special pleasure to be here today at the Kolarac Endowment, a home of Serbia's cultural and intellectual tradition, symbolising enduring investment in knowledge, stability, and trust. Few can claim the virtue embodied by Mr Ilija Kolarac. His single greatest passion was trade, his only love was his wife Sinelija, and his mission was the scientific and cultural advancement of his people. May your greatest passion be banking, trust, not merely profit. Yes, profit too, but above all - trust. As for that one love only, that is a personal choice, but let our shared mission be a secure and modern banking sector.

Where do we stand globally compared to a year ago?

Inflation declined significantly, as did the policy rates, and the focus has shifted back to productivity growth. However, caution remains imperative because of the fragmentation into trade blocs and certain non-market measures! In Serbia, we returned inflation within the target band, where it had been prior to the global escalation, and we expect it to be around the 3% target midpoint by year end.

Let me share the figure, which will be publicly released on 12 June: inflation is now at 3.8%, but even more importantly, core inflation fell from 5% to 4.6%, and we expect this downward trend to continue.

Let me point out that, for us, the relative stability of the dinar exchange rate against the euro has no alternative. I believe that this kind of predictability is extremely important both for the financial and the real sector - even in the short term, and still more so in the long term. Though relatively stable, currency alone is not enough for prosperity, while an unstable currency is enough to trigger a crisis.

Just between us, I must say - and this is not a complaint, quite the contrary, that rating agencies don't even ask us about the banking sector when we meet. Their assessment has remained unchanged for years. I quote Standard &amp; Poor's: ""We assess that risks to financial stability in Serbia will remain low, supported by a well-capitalised, profitable, and liquid banking system funded by domestic deposits. The NPL ratio remained at a historic low despite global economic challenges."" End of quote. Today, this important indicator of bank asset quality stands at 2.3%!

As easy as it sounds to utter this extended sentence, only you and we at the National Bank of Serbia know how difficult it is to achieve and maintain such a result. Generally and individually, banks in Serbia are well-capitalised, profitable, and hold high levels of liquid assets:

- the capital adequacy ratio at the system level is 21%,
- the liquidity coverage ratio is 190%,
- the net stable funding ratio is 178%,
- lending growth has been driven both by household and corporate lending and is largely funded by deposits.

Deposit levels and deposit growth are indicators of confidence in the system. This is also confirmed by dinar savings, which stand at nearly RSD 194 bn, up by over 1% this year and 11 times higher than in 2012. FX household savings increased by 2% this year, reaching EUR 15.7 bn, double the 2012 level.

These achievements are shared, as we couldn't have accomplished them without the commercial banks, and you couldn't have done it without your regulatory authority. In December, at the second banking summit, I wished our fellow bankers from the region to have the kind of cooperation between the banking sector and the regulatory /supervisory authorities that we have in Serbia. In other words, we have an open dialogue on everything, on development potential and the challenges we jointly address. This model of cooperation includes argument exchange, and it can exist and endure only as such. The principle of ""my way or no way"", whether from individuals, industries or lobbies, cannot be a basis for durability and I am proud that we don't foster it. The National Bank of Serbia is here to ensure a sound regulatory framework and to support a stable business environment, given that the financial and real sectors can both thrive only in good synergy.

This year we further improved the regulatory framework. By adopting the Law on Amendments and Supplements to the Law on Banks, as the umbrella law for bank operations, we enhanced the effectiveness and efficiency of the operational, supervisory and bank resolution frameworks. We designed legislative arrangements and novel solutions:

- drawing on the experience gained from the control of the implementation of the law, as well as the legal interpretation needs identified so far, and
- using information obtained from monitoring domestic financial sector trends, as well as international standards and trends.
- Thus, we further aligned our regulatory and supervisory framework for banks with EU regulations.

We improved the bank resolution framework, including by establishing the Bank Resolution Fund, which will be managed by the National Bank of Serbia. By doing so, we ensured further harmonisation with the relevant directive on bank recovery and resolution.

By legally recognising the key functions and their holders in banks, we underscored the significance of corporate governance in banks.

- There is greater focus on internal controls system.
- This also includes the introduction of an additional requirement for members of bank managing boards, whereby the ability of each member to dedicate sufficient time to performing those duties is taken into account during the appointment process.
- In addition, we have further specified the requirements for membership in the management bodies, as well as the scope of responsibilities of those bodies.

Based on the needs identified in practice and taking into account the solutions of the key EU regulations, we upgraded the prudential framework for banks. We have prescribed additional obligations for banks and expanded the supervisory powers and responsibilities of the National Bank of Serbia. We have also defined the supervisory review process, carried out by the National Bank, in principle, both substantively and procedurally, in line with existing practices and the fundamental principles of European guidelines and regulations.

We also made important changes regarding AML/CFT risk management, thereby increasing legal certainty in executing transactions. This further contributes to the positive assessment of the Serbian AML/CFT system in the sixth round of evaluation conducted by the Council of Europe's Committee - MONEYVAL.

Another key piece of legislation we adopted is the Law on the Protection of Financial Service Consumers. Based on experience and practice, the drafting began in April last year, and the entire legislative process was fully transparent and open to both banks and citizens. However, public attention largely focused on interest rate caps. Although the products that prompted the introduction of interest rate caps in the new EU Consumer Credit Directive were not widespread in Serbia, our goal is clear - to prevent a sharp increase in market interest rates and to promote fixed-rate loans, thereby protecting the system from systemic risks.

- In April, the weighted average interest rate on FX-indexed housing loans stood at 4.73%, 27 bp below the cap, while the weighted average rate on existing loans was 4.92%.

- Of all newly approved housing loans between the introduction of the cap in 2023 and end-December 2024, as much as 45.24% were contracted at a fixed rate, which is a huge improvement.
- These data show that we achieved our objectives.

However, this law should not be reduced solely to interest rate caps. It is much more than that.

The purpose of the Law is to ensure that the interest of financial service consumers is fully respected from the very start - not only during the contracting of services, including advertising and pre-contractual information, but also in the design of such products and throughout contract performance.

To that end, we introduced new obligations and instruments, among which I point out the following:

1. Responsible lending implies that a bank assesses the consumer's creditworthiness with a focus on the consumer and their ability to repay the loan without significant difficulty, rather than solely assessing the credit risk in terms of prudential regulations. In cases where, due to objective reasons, the consumer experiences difficulty, it is the bank's responsibility to attempt to restore regular payment by offering appropriate relief measures, which is also in the bank's longterm interest.
2. I also believe that practice will fully confirm the soundness of our decision regarding the obligation of banks to offer consumers the option to either sell the property themselves or to transfer ownership to the bank, following the termination of a housing loan agreement and prior to the sale of the property.
3. I would also highlight the introduction of the advisory services framework and the regulation on how such services are to be provided, which should help consumers select the service that best suits their needs and offers value for money. At the same time, we took care to prevent conflicts of interest between incentives to sell banking services and more or less ""independent advisory service"" that serves the consumer's best interest. This requires that bank branches employ staff with appropriate expertise and professional integrity to carry out these tasks.
4. Digitalisation is necessary, but personal contact and advice are irreplaceable, and I am sure that cost rationalisation in this area will not deliver the desired results. Based on experiences most of us had, I publicly state this opinion - not just as an opinion, but as a shared responsibility. Call centres, machines, and unresolved problems - I wish you could be on the other side and feel what that means.

Finally, we will now be able to oversee the application of all this much more effectively through covert supervision or mystery shopping, which I believe will help banks identify their deficiencies more clearly and address them more efficiently.

I am one of the few witnesses who knows how, despite your awareness of all the issues and operations of the banks you manage, there are still hidden, shadowed corners of business that you would surely resolve quickly and efficiently - if only you knew they existed. In many cases, as I have seen for myself, you are unaware of certain problems

until the regulatory authority -the National Bank of Serbia - quietly, discreetly, and with good intentions, brings them to your attention. We will continue that practice, but this example of covert supervision or mystery shopping will also be a novel approach.

I would like to share with you the pleasure of reaching a stage where colleagues from EU countries are asking us to provide them with some of our positions, as well as to share our experience in implementing transposed EU regulations.

I now turn to the most current topic. Let me remind you that 22 May this year is a significant date not only for the National Bank of Serbia and the financial institutions of our country, but also for all our citizens and economic entities. On that day, the Republic of Serbia became part of the Single Euro Payments Area (SEPA). Although we were officially admitted on that day, this event was preceded by numerous activities undertaken by the National Bank of Serbia, in cooperation with the Ministry of Finance and other institutions in our country, aimed at fully aligning the national legal framework and standards with those of the EU.

According to the European Payments Council calendar, payment service providers from Serbia will be able to submit documentation for joining the SEPA payment schemes starting from November this year, while May 2026 is set as the earliest operational readiness date, i.e. date from which payments within these schemes can begin to be executed.

Why is this important? Joining SEPA, as a formal legal prerequisite for further improving cross-border payments with the EU and the region, enables us to move to the second, much more significant phase of this process - the technical integration of the domestic payment infrastructure with the European one. Without this, joining SEPA would merely mean replacing one set of rules with another, without any substantial benefits.

The Republic of Serbia, as the first country in the region with a state-of-the-art instant payment system - the NBS IPS system - has a significant advantage over neighbouring countries, since we have a system that has been operating for nearly seven years using the same standards, i.e. the same message format, as the European TIPS system. Our goal is to ensure that same level of quality in payments with EU countries and the region, which is why we are working intensively with colleagues from the European Central Bank on developing a model for connecting the NBS IPS system to the TIPS. We are particularly focused on ensuring that the integration is carried out with minimal costs and only minor changes to the information systems of our payment service providers.

Although it goes without saying, I will reiterate that Serbia will do everything necessary to ensure that our citizens and businesses truly experience the real benefits of joining SEPA starting from May next year - namely, cheaper and faster international payments and easier access to the EU market.

Dear colleagues,

You list as priorities in your work for 2025 the continued positioning of the Association of Serbian Banks as an institution with a tradition worthy of respect - one that, by keeping pace with market trends, protects the interests of banks and the banking sector, but also of the broader community and all citizens.

I am not someone who divides people into winners and losers, and I believe that we can all be winners if we cooperate and always keep in mind why we work and exist and that is for our citizens. You have put this nicely by saying the broader social community and all citizens. This 'all' is something that should guide us because we have the ability to act in the interest of all. Our legacy must be an efficient and secure banking system that serves all clients.

Our system is measured not only by indicators of stability but also by the level of trust that citizens have in our institutions. For this reason, I will conclude my welcoming address with the words of one of the founders of modern central banking: "" The core ."" And if you allow me to take a few tenet of a sound monetary system is trust, not profit more minutes to share my perspective on the times we are living in - I made a brief note on 5 June that I would like to share with you.

## These days

We owe a debt to future days and souls unborn Even if it means a sacrifice that won't be recognised, acknowledged or cared for For it is only when good times pass heavy days come and people have none to blame that they will remember that someone once knew how to create much from little because he respected even those who tripped him up and those who envied him They will recall the one who dared to stand to guard his roots and take the future in his hands For he believed in humankind. The rage will pass, the children will grow The immature will learn what wise men know Some will always blame others for being somebody's pawns for not realising in time that they lost much and gained little and that time - once gone - can't be reclaimed.

From Marina's presentation, I will highlight the need to make up for what was lost in the first part of this year, and through work, as we have done so far, to recover both lost time and the funds that should have arrived as foreign direct investments, as well as growth - not only in the banking sector but also in other sectors where growth has not been satisfactory. However, I hope that together we will achieve it, because I will repeat

what I said at the GDP Council meeting - let no one say that there is a lack of liquidity, because yes, we do have a bank-centric system, but also enough liquidity and enough willingness to invest in every good project. For that, I sincerely thank you.",Jorgovanka Tabaković
https://www.bis.org/review/r250617c.htm,Leonardo Villar-Gómez: Notes for the banking convention remarks,"Speech by Mr Leonardo Villar-Gómez, Governor of the Central Bank of Colombia, at the opening session of the banking convention, organised by Asobancaria, Cartagena, 4 June 2025.",2025-06-04 00:00:00,"## Leonardo Villar-Gómez: Notes for the banking convention remarks

Speech by Mr Leonardo Villar-Gómez, Governor of the Central Bank of Colombia, at the opening session of the banking convention, organised by Asobancaria, Cartagena, 4 June 2025.

* * *

I would like to begin by expressing my gratitude for this opportunity to take part in this event, and extend a very special greeting to Mr. Jonathan Malagón, president of Asobancaria, Mr. Javier SuÆrez, chairman of its Board of Directors, all the members of the Association, the Financial Superintendent, Professor CØsar Ferrari, and all those present at this convention.

## Turbulent times

Exactly one year ago, I began my remarks at this same event by noting that, like most countries around the world, Colombia's monetary policy had experienced particularly turbulent periods in recent years.

At the time, that statement was entirely accurate. We had just emerged from the global recession triggered by the 2020 pandemic and experienced a remarkably rapid recovery, one that brought about apparent excess demand and mounting inflationary pressures. These pressures intensified further in 2022 with the sharp rise in grain and agricultural input prices following Russia's invasion of Ukraine.

These developments pushed global interest rates up dramatically from their historically low levels seen in 2020, coupled with negative policy rates in several of the leading advanced economies, to the highest levels observed in over four decades by 2023.

As if that were not enough, Colombia has also faced a substantial shift in public debt levels and the ratings assigned to this debt by the leading credit rating agencies. This has been accompanied by a pronounced deterioration in country risk indicators, both in absolute terms and relative to our regional peers. For example, the country risk premium on Colombian debt, as measured by Credit Default Swaps (CDS), relocated from among the lowest to among the highest in Latin America in just four years.

By the time of the June 2024 Banking Convention, signs suggested that the global economy was achieving a soft landing. Inflation in advanced economies and many emerging markets was converging toward central bank targets, and economic activity was stabilizing, particularly in the United States, where unemployment had fallen to historic lows below 4%.

However, the anticipation of a return to calmer times proved short-lived. Beginning in late 2024 and more markedly from April 2025 onward, we witnessed a dramatic and unexpected shift in U.S. trade policy. This included unprecedented tariff increases on global imports and a unilateral withdrawal from all existing free trade agreements, even those with long-standing allies.

If uncertainty had been a defining feature of the past five years, the levels we are experiencing today far exceed anything we could have anticipated.

## The role of central banks and monetary policy

What role do central banks play in this environment of heightened uncertainty, and how has Banco de la Repœblica responded in particular?

Central banks in countries like Colombia cannot eliminate uncertainty related to variables beyond their control, such as global economic conditions or domestic fiscal policy decisions, which fall under the authority of the National Government and Congress. However, what central banks can and must do is provide transparent and credible signals about the medium- and long-term inflation outlook. In doing so, they help mitigate the effects of volatility in conditions that lie outside the scope of monetary policy.

In Colombia, as in many other countries, I believe that the inflation targeting framework we adopted more than twenty-five years ago remains a highly effective and powerful strategy. It enables us to respond to changing conditions while providing an anchor for the economy and a relatively straightforward rule for conducting monetary policy.

Broadly, and perhaps in simplified terms, the inflation targeting strategy can be described as follows: when the inflation outlook exceeds the established target, monetary policy should be contractionary, characterized by relatively high policy interest rates. This situation typically arises when demand for goods and services outpaces the economy's productive capacity. As a result, contractionary policy generally acts countercyclically, helping to stabilize both demand and output around their potential levels.

Conversely, when inflation expectations fall below the target, monetary policy should be expansionary, aimed at stimulating demand for goods and services, as we saw during the 2020 pandemic. One of the strengths of the inflation-targeting strategy is its simplicity, which also extends to the primary monetary policy instrument: the benchmark rate. This is the short-term rate at which the central bank provides liquidity to the financial system when needed.

A key feature of this strategy is that the central bank - in our case Banco de la Repœblica - does not attempt to manage or control the exchange rate. Exchange rates can be influenced by factors entirely unrelated to domestic conditions. For instance, in the first half of this year, global dynamics led to the U.S. dollar depreciating by approximately 9% against the euro. This was reflected in the Colombian peso's appreciation relative to the US dollar, even though the peso simultaneously depreciated against the euro and other currencies. While exchange rate movements can certainly impact inflation expectations and other critical economic variables, and are therefore relevant to our monetary policy decisions, Banco de la Repœblica does not target specific exchange rate levels. These rates may even move in opposite directions depending on the foreign currency in question.

A similar dynamic applies to long-term interest rates, which often behave differently from the central bank's short-term policy rate. This divergence was evident over the

past year, when Banco de la Repœblica significantly lowered its policy rate, yet ten-year TES bond rates increased by over 1.5 percentage points. This rise was driven by changes in international financial conditions and a heightened perception of risk surrounding Colombia's public debt.

Under the inflation targeting framework, Banco de la Repœblica cannot eliminate the uncertainty caused by external and fiscal variables. However, it can contribute to economic stability by delivering a clear and credible message about the medium- and long-term inflation outlook. This, in turn, helps stabilize demand and output around their potential levels, an objective that aligns closely with the core mandate assigned to Banco de la Repœblica by the 1991 Constitution.

## Colombia: a relatively successful macroeconomic adjustment process

How has the inflation targeting strategy worked in Colombia in recent years? I would argue that, considering the high degree of volatility in the environment, this strategy has been relatively successful. Unfortunately, it has not been entirely successful due to several factors that have slowed and complicated the convergence of inflation toward the target, making this process more difficult in Colombia than in other countries that apply the same policy framework.

Let me begin by emphasizing that the persistence of observed and expected inflation above target has led us, in recent years, to maintain a restrictive monetary policy stance, with benchmark rates above what could be considered neutral or desirable in the medium- and long-term. This approach is consistent with the inflation-targeting strategy and has proven effective, given that inflation has declined by more than eight percentage points from a peak of 13.4% in the first quarter of 2023 to its current level of 5.16%.

Thanks to this policy, the pronounced excess in domestic demand that we faced three years ago has been significantly corrected. At the time, this excess demand was reflected in a current account deficit exceeding 6% of GDP by 2022. That figure fell to just 1.8% of GDP in 2024. Although the deficit is expected to increase in 2025 due to lower oil prices and a partial recovery in domestic demand, it will likely remain at less than half of what it was three years ago. This makes the Colombian economy less reliant on external financing and less vulnerable to abrupt shifts in domestic and international conditions, a significant achievement in the current global context.

Equally notable is the clear recovery in economic activity. Growth for 2025 is projected at 2.6%, well above the figures for the two previous years (0.7% and 1.7%, respectively), and compares favorably both with expectations for many Latin American countries and with the 2% average estimated by the IMF for the region. Colombia's GDP growth in the first quarter of this year, which reached 2.7%, along with other highfrequency indicators of recent economic activity, further reinforces this sense of optimism.

Of course, this recovery has been uneven. While sectors such as agriculture, retail, and entertainment are showing exceptional dynamism, others, particularly manufacturing, mining, and construction, continue to show low levels of activity and negative growth rates. Fixed capital investment also remained stagnant in the first quarter, holding at

already depressed levels. Several hypotheses have been proposed to explain these weak results, including issues related to sector-specific policies and significant uncertainty regarding the future of such policies and business incentives. Nevertheless, it is essential to note that domestic demand has demonstrated a consistently positive momentum. According to figures published by DANE, domestic demand grew by 4.4% in the last quarter of 2024 and by 4.7% in the first quarter of 2025, both in real terms.

This growth in demand and productive activity is also reflected in the labor market. Employment increased by over 3% in the past year, and the unemployment rate in April was 8.8%, the lowest for that month in many years. However, it is essential to note that this improvement is due mainly to an increase in self-employment, rather than in wage or salaried employment.

Undoubtedly, the gradual reduction in the policy interest rate initiated by the Board of Directors of Banco de la Repœblica since December 2023, made possible by a significantly lower inflation environment, has played an important role in supporting this recovery in domestic demand, economic activity, and employment.

## Why haven't interest rates fallen further?

I believe it is wise to reiterate that, although policy interest rates have fallen substantially, from 13.25% in December 2023 to 9.25% at present, they still remain at levels consistent with a contractionary monetary policy. Both nominal and real interest rates are above what the Bank's technical staff considers neutral or desirable in the medium and long term, when inflation has converged to its 3% target and the economy is growing at a rate close to its potential.

The primary reason for maintaining these relatively high rates is that inflation remains above the target. While we have made substantial progress in reducing it from its peak in March 2023, the decline has been slower than expected and also slower than in many other countries in the region and around the world, where inflation is already within the target ranges defined as acceptable by their respective central banks.

This resistance to a faster decline in inflation in Colombia is largely due to the high levels of price and wage indexation present in our economy, along with other idiosyncratic and cyclical factors that have made the adjustment process more difficult. For instance, the minimum wage and transportation subsidies paid by employers increased by 11% this year, eight percentage points above the inflation target, making it more challenging to meet that target in 2025.

In fact, since November 2024, the downward momentum in inflation has lost strength. Over the last six months, inflation has hovered in a narrow range between 5.1% and 5.3%, without a clear downward trend. Core inflation (excluding food and regulated items) continued to decrease during this period, falling from 5.4% in November to 4.8% in March. However, this trend reversed slightly in April, with inflation rising to 4.9%, driven by increases in non-regulated service sectors.

This slowdown in the disinflation process since last November has heightened concerns about the pace of convergence toward the inflation target. It is also reflected in a notable increase in inflation expectations for the end of 2025, as reported in analyst

surveys. These expectations now stand at around 4.8%, compared to approximately 3.7% in October of last year.

Furthermore, international interest rates relevant to Colombia's external financing have also increased. This is partly due to rising long-term rates in global financial markets, driven by heightened global uncertainty, and partly due to the increase in Colombia's country risk premiums, following news that the fiscal deficit has widened far more than expected. Moreover, public debt as a share of GDP is rising at a pace that exceeds what is consistent with macroeconomic stability.

These factors help explain a paradoxical and often misunderstood phenomenon: the yield on long-term TES securities, which determines the government's financing costs, has risen significantly over the past year by as much as 1.5 percentage points for 10year bonds. This has not resulted from an increase in Banco de la Repœblica's policy interest rate; on the contrary, as previously noted, that rate has fallen substantially. When we compare Colombia with other Latin American countries that follow an inflation targeting strategy, we see that countries such as Peru, Uruguay, Paraguay, and Costa Rica have been able to reduce their policy interest rates more aggressively, as inflation in those economies is already within the target ranges set by their central banks. In Chile, inflation remains slightly above target, mainly due to the behavior of public utility rates, but expectations point to inflation converging to the 3% target by the end of 2025.

The experiences of the region's two largest economies are especially relevant as benchmarks for us.

In Mexico, the central bank recently lowered its policy interest rate to 8.5%, considering the prospect of a sharp economic slowdown, or even a recession, due to the powerful impact of U.S. tariff policy on that country. It is worth noting, however, that this monetary policy move was facilitated by the fact that Mexico's inflation rate is significantly lower than Colombia's, at 4.2%. In fact, Mexico's ex post real interest rate (i. e., the difference between the nominal rate and observed inflation) remains slightly higher than Colombia's.

Brazil presents a particularly striking case. Inflation there currently stands at 5.5%, slightly above Colombia's rate. The Central Bank of Brazil had been making significant progress in lowering its policy interest rate, from 13.75% in August 2023 to 10.5% by mid-2024. However, in the second half of 2024, growing concern over the Brazilian government's fiscal situation led to a sharp depreciation of the real exchange rate, a rise in inflation expectations, and a subsequent reversal in monetary policy. The central bank was forced to raise the policy rate rapidly, from 10.5% to its current level of 14.75%. In ex post real terms, this rate is more than five percentage points higher than Colombia's. Fortunately, Colombia has not faced such a situation in recent times, and clearly we would not want to encounter it in the future either.

In Colombia, the technical staff's central scenario projection for the end of 2025 anticipates a continued decline in inflation. However, inflation is still expected to remain above the tolerance range of -1 percentage point around the 3% target set by the Board last November. At that time, we believed it was both feasible and likely that inflation would fall within that range by 2025. Yet, developments beyond the Bank's control, such as the increase in the minimum wage and the widening of the fiscal deficit,

which in turn has driven a considerable rise in Colombia's country risk premium, have made achieving that target significantly more difficult. These developments have compelled us to maintain a policy interest rate that, while it has continued to decrease, is clearly higher than what both the market and we had expected six months ago.

Looking ahead, uncertainty remains high, driven by both domestic and international factors. Future monetary policy decisions will depend on the evolution of many variables, each of which must be assessed as new information becomes available. What I can say with confidence is that, under our current inflation-targeting framework, policy decisions will continue to be made cautiously to ensure that inflation converges toward the target. I am personally convinced that this strategy remains the most appropriate path for fostering sustainable economic growth over the long term.

## Financial system results

Over the next few days, within the framework of this Banking Convention, numerous analyses of the current situation and outlook for financial institutions will be presented, starting with the one that Superintendent of Finance, Professor CØsar Ferrari, is likely to deliver shortly. I will not delve into sector-specific issues, but I would like to leave you with two general messages.

The first concerns the soundness and outlook of the financial system. Like many other sectors, the financial sector has borne a significant cost during the recent years' adjustment process. Restrictive monetary policy led to a sharp increase in funding costs and interest rates on loans to customers, particularly in 2023. Combined with the slowdown in economic growth, this resulted in a marked deterioration of portfolio-at-risk and non-performing loan indicators, driving up provisioning expenses and loan writeoffs. Consequently, a considerable number of financial intermediaries recorded substantial losses.

Nonetheless, it is very encouraging that the credit institutions system as a whole continued to generate positive returns. Even those institutions that posted losses consistently maintained solvency ratios well above the regulatory minimums. After what was undoubtedly an arduous and painful adjustment process, the financial system remains fundamentally sound and well-positioned to resume a path of healthy, sustainable growth, something that is already becoming evident in recent data.

Indeed, the number of institutions reporting losses has been falling significantly, in line with improving conditions. Non-performing loan indicators and provisioning expenses are trending downward, and the pace of loan portfolio growth is accelerating. All available signs suggest that the most difficult and painful phase of the adjustment process is now behind us.

## Bre-B

The second message I would like to convey relates to the rapid progress we are making toward the launch of our fully interoperable instant payment system, Bre-B.

As you know, in October 2023, less than two years ago, we published the regulation on the interoperability of instant transfers. Since then, we have worked closely with the

financial industry to define the technical and operational standards necessary to enable all system users to send and receive money between accounts at any institution securely, at any time, in real-time, and with a simple, unified user experience.

In line with our schedule, I am pleased to announce that the first component of the instant payment ecosystem will be available in mid-July. This is the Centralized Directory, a repository that stores the keys each user associates with their account, through which they will receive funds via Bre-B.

The preparation process for launching Bre-B's Centralized Directory led several entities to conduct pilot programs to fine-tune their procedures and familiarize customers with the key system. Based on this market evolution and in seeking to provide a smoother user experience, we recently updated the regulation to incorporate processes that capitalize on insights from these pilot efforts.

Staying on track with our timeline, which has been adhered to in an exemplary manner, payments and transfers through Bre-B will be enabled in the third week of September 2025. As discussed in various technical working groups, each institution is expected to inform its users about the steps required to access this new service.

The introduction of Bre-B represents a significant boost to ongoing efforts to digitize payments and financial services more broadly. It lays the groundwork for continued innovation in transaction infrastructure, while promoting financial inclusion, economic competitiveness, and user satisfaction.

I would like to take this opportunity to recognize and thank the team at Banco de la Repœblica leading this initiative, as well as the National Government and all private sector stakeholders involved. I also extend my appreciation to the various international organizations that have contributed greatly to this effort through their support. This ambitious project is a clear example of what can be achieved when the public and private sectors collaborate toward a shared goal, leveraging international best practices to benefit the general population. I invite everyone to continue this collaborative work to ensure the scalability of the ecosystem by adding new functionalities and use cases, such as recurring payments and collections, so that Bre-B can support the vast majority of everyday transactions and achieve broad-based adoption.

## Contributory Pillar Savings Fund

I cannot conclude this speech without at least briefly addressing the Contributory Pillar Savings Fund, which, under the pension reform enacted by Law 2381 of 2024, is to be administered by Banco de la Repœblica starting July 1.

Last Thursday, May 29, the national government issued Decree 0574, which regulates several key aspects we had been expecting for months, regulations essential to advancing preparations for the Fund's operation. I would like to thank the URF and the Ministry of Finance for their efforts and their openness to the Bank's comments on earlier drafts.

The challenge ahead is substantial. We must still finalize the signing of an interadministrative contract between the government and Banco de la Repœblica, which will

allow us to begin selecting and hiring the portfolio managers for the resources the Bank is expected to receive starting in July, less than a month from now.

I want to reaffirm the Bank's commitment, expressed since the Law's enactment over a year ago, to work swiftly, collaboratively, and in coordination with all relevant parties. That said, the Bank's ability to meet its legal responsibilities on time will also depend on the pace at which several preliminary steps are completed, many of which fall outside our direct control.

Thank you once again to Asobancaria for the opportunity to participate in this opening session. I wish you productive deliberations in the days ahead. As always, I trust they will yield valuable contributions to the financial sector, the economy, and the country as a whole.",Leonardo Villar-Gómez
https://www.bis.org/review/r250617l.htm,Rosanna Costa: Presentation of the Financial Stability Report First Half 2025,"Presentation by Ms Rosanna Costa, Governor of the Central Bank of Chile, of Central Bank of Chile's Financial Stability Report First Half 2025 before the Finance Commission of the Honorable Senate of the Republic, Santiago de Chile, 19 May 2025.",2025-05-19 00:00:00,"

## FINANCIAL STABILITY REPORT

## PRESENTATION BEFORE THE FINANCE COMMISSION OF THE

HONORABLE SENATE OF THE REPUBLIC ∗

Rosanna Costa Governor Central Bank of Chile 19 May 2025

## Introduction

Mr. President of the Finance Commission, senators members of this Commission,

As is usual in the months of May and November, we attend this Committee to present the view of the Board of the Central Bank of Chile on recent financial sector developments and their implications for financial stability, which are detailed in the Financial Stability Report (IEF) that we published this morning.

On Thursday and Friday last week we held our Financial Policy Meeting, where the Central Bank Board decided to maintain the Countercyclical Capital Buffer (CCyB) for the banking system at a level of 0.5% of risk-weighted assets. This requirement is a precautionary macroprudential measure whose main objective is to strengthen the resilience of the banking system.

As we are usually reminded at the beginning of these presentations, the IEF is part of the mandate given to us by the Law to ensure the normal functioning of internal and external payments. Its objective is to analyze the vulnerabilities, potential risks and mitigators of our financial system and its capacity to absorb severe shocks. It is, therefore, a Report which, unlike the Monetary Policy Report, does not present projection scenarios, but, on the contrary, focuses on risk scenarios which, though unlikely, are a possibility.

This quality of focusing on risks -characteristically with a negative bias and a cautious tonemay make it seem to an unfamiliar reader that a very complex outlook is being outlined. We wish to make it clear that this is not our purpose, but rather to give an account of how the Chilean economy can handle potential adverse scenarios.

In this IEF, the main change from our presentation to this Commission last November 2024 is the  considerable  increase  in  global  uncertainty  following  the  U.S.  government's  tariff announcements.

This  process  had  a  peak  of  financial  volatility  after  the  unexpected  magnitude  of  the announcements made in early April, to which its subsequent developments also contributed. More  recently,  there  are  some  signs  suggesting  that  there  is  a  willingness  to  favor  new agreements. In that scenario, we observed significant movements in the prices of financial assets in the world markets.

Despite the magnitude of the shock, interestingly the financial markets around the world Chile  being  no  exception-  have  been  able  to  accommodate  these  movements  and  have functioned without major disruptions.

With respect to our country, it is important to point out that the imbalances of previous years have  been  fixed  and  the  financial  situation  of  credit  borrowers  -that  is,  households  and firms- has been improving over the last few quarters. At the same time, banks have liquidity and capital levels that would allow them to deal with adverse events.

This puts us in a better position to face a significant deterioration in the global scenario. In any case, our country is not immune, nor can it isolate itself from what is happening in the world. We have  fundamental  pillars,  such  as  macroeconomic  soundness,  a  robust  regulatory  and financial supervision framework, and the tools to face complex situations. But this does not spare us from continuing to work to strengthen them.

Let me now turn to the contents of the Report and elaborate on several of the issues I mentioned in this introduction.

## Financial markets' evolution

As I said, the most salient economic and financial development of the last few months has been the considerable increase in global economic uncertainty.

Since  we  published  our  previous  IEF  in  November  2024,  there  have  been  a  number  of developments  in  the  global  political  and  trade  arena.  The  inauguration  of  the  new  US administration  in  January  led  to  an  increase  in  trade  tensions,  which  was  expected  given previous statements by the incoming authorities. In fact, between January and March there were  several  announcements  and  counter-announcements  of  tariff  measures  on  specific countries and products.

The  highest  point  of  these  tensions  occurred  at  the  beginning  of  April,  when  the  U.S. government  announced  tariffs  that  significantly  exceeded  expectations.  Some  economies retaliated with tariffs on American products, triggering an escalation of announcements that led to a peak in financial volatility in the first half of the month.

After that, the U.S. government announced a 90-day postponement of part of the measures, at which time it expressed its willingness to negotiate agreements. This was well received by the markets. Thus, in recent weeks we have heard of agreements between the United States and the United Kingdom, the temporary reduction of tariffs and announcements of talks between China and the United States, which have further reduced financial volatility. However, in an environment of frequent news in different directions, uncertainty about what will come out of this process remains high.

At the highest point of this period, the index measuring trade uncertainty almost doubled, reaching its highest on record. In turn, financial volatility rose to levels comparable to those at the outbreak of the pandemic. In subsequent weeks, financial volatility indicators have been reversing some of the previous increases (Figure 1).

As I mentioned, financial markets managed to absorb this significant increase in volatility without major disruptions. Nevertheless, important movements were observed, highlighting the unusual evolution of US financial assets for several weeks, in particular long-term interest rates and the US dollar.

Typically, in the face of global uncertainty, these assets tend to provide a safe haven. In these cases, investors protect themselves in U.S. Treasury bills, thus raising their price and reducing long-term  interest  rates. A  desirable  side  effect  is  that  lower  rates  mitigate  the  impact  on financial conditions. This time around, however, the dollar depreciated and long-term rates on sovereign instruments rose, creating a scenario where investors reduced their U.S. positions. In any case, these variables have continued to react largely to trade-related news.

Contrasting  with  the  US  experience,  in  emerging  economies,  including  Chile,  financial markets have evolved more favorably than in previous stressful episodes. Although sovereign spreads rose in April, these increases were of a lesser magnitude compared to past situations, while sovereign interest rates have been slightly reduced, currencies have appreciated against the dollar and stock markets have yielded positive results (Figure 2).

At home, the increase in the volatility of long-term interest rates and the Chilean stock market has been lower than the average for emerging economies. The peso/dollar parity, on the other hand, has been more volatile than in comparable economies, which is to be expected given its role as an adjustment variable during episodes of stress (Figure 3).

We are seeing the change in external conditions while other global vulnerabilities mentioned in previous Reports are still present. These include the high levels of public and private debt in  the  world,  doubts  about  the  performance  of  some  Chinese  economic  sectors,  and  the unfolding of diverse geopolitical conflicts.

In  this  context,  a  negative  perception  of  the  future  performance  of  the  global  economy, particularly  that  of  the  United  States,  has  been  taking  hold.  Post-April  2  forecasts  -for example, those of the IMF and Consensus Forecasts- already show adverse impacts of higher tariffs on economic activity (Figure 4).

Notwithstanding, we still do not have a material background as to how the changes in the global scenario are affecting our economy. Moreover, among other elements, doubts persist as to which tariff scenario will prevail and what effects the increased uncertainty will have on the world economy.

Thus, although it is still difficult to assess the magnitude of the effects and when they will materialize, it is clear that the impact on activity will be negative. The next few months will provide us with more clarity on this issue. The Central Bank, as always, will react with the forward-looking approach that is allowed us by the two-year inflation target.

## Credit lenders' and borrowers' situation

As  I  mentioned  at  the  beginning,  the  IEF  is  a  report  that  seeks  to  contribute  to  the understanding of the financial system and its potential risks. The report focuses on assessing its capacity to adapt adequately to adverse economic phenomena. To this end, by methodically subjecting the economy to severe risk scenarios, vulnerabilities are detected as well as the

mitigating factors available to credit users, that is, households, businesses, and the government, plus the banking system.

That said, it is important to note that, in recent quarters, the Chilean economy has fixed the macroeconomic imbalances of previous years, with a more favorable economic performance and an increase in household and corporate income, together with the corresponding recovery in domestic demand.

Thus, the activity gap has closed, the current account deficit has been significantly reduced and, although inflation remains high, the outlook for convergence to the 3% target by early 2026 is reaffirmed (Figure 5).

Regarding  the  financial  situation  of  households  and  firms,  the  deterioration  of  the  world economy finds them in a financial position that has been improving in recent quarters. This reduces the risks for the financial system.

This improvement in the financial position of households is taking place in a context where the increase in income and savings, together with the reduction in short and long-term rates, have improved the indicators of indebtedness  and financial burden. Thus, consumer credit defaults have been reduced, while mortgage defaults have stabilized (Figure 6).

About businesses, commercial default remains high from a historical perspective, even though there has been a wide-ranging decrease among the different economic sectors (Figure 7).

On aggregate, corporate indebtedness stood at 112% of GDP at the end of 2024. This figure is somewhat lower than that reported in the first half of last year. This result came from a higher level of GDP, which more than offset the increase in external debt in nominal terms, due to the issuance of instruments abroad and the depreciation of the exchange rate (Figure 8). In the larger companies -those reporting to the Financial Market Commission (CMF)- there was an increase in operating cash flow and liquidity close to its historical average.

In  any  case,  despite  the  favorable  evolution  of  financial  conditions  at  a  general  level, vulnerabilities  persist  in  specific  groups.  Larger  companies  show  a  greater  recovery  in financial  indicators  like  indebtedness,  margins,  and  financial  burdens  in  contrast  with  the persistent lag in the recovery of smaller companies and those that received Fogape loans during the pandemic, among other factors (Figure 9).

Another sector that has been a constant focus of analysis is residential real estate, which has remained persistently weak. The main factors that have affected this sector have remained the same. Mortgage rates, despite some decrease, are still higher than they were in previous years, negatively impacting the demand for mortgage loans. Also, there is still a high stock of unsold finished homes.

Housing prices show a slight increase, although as noted in previous Reports, a significant downward adjustment continues to be a risk factor. However, in the face of a stress scenario,

such as an abrupt adjustment in the value of collateral, banks have sufficient mitigators in terms of debt-to-collateral ratios and conservative collateral valuation criteria (Figure 10).

Generally speaking, at the margin, there have been incipient positive signs in the real estate sector: a good performance in the stock market valuation of companies in the sector; lower commercial loan rates;  and  default  rates  among  these  firms  have  stabilized,  although  they remain high (Figure 11).

The banking system is in a solid position and well prepared to face a more negative scenario. The banks have constituted sufficient provisions and guarantees to cover the level of default in their portfolios and show some headroom in their liquidity indicators.

In addition, banks have continued to strengthen their capital base, and their solvency indicators have increased in line with the process of convergence to Basel III standards, mainly through new  issues  of  perpetual  bonds  that  took  place  during  the  last  half  of  the  year. And  their profitability has remained above historical averages (Figure 12).

As for credit, its performance has not changed much in recent quarters. This, in general, is associated with a still weak demand and stable supply conditions. This assessment is in line with our first quarter's Bank Lending Survey and with the responses of the firms surveyed for our May Business Perceptions Report (IPN).

The first of these data shows a weaker demand in all credit segments: consumer, housing, big companies, SMEs, real estate, and construction. In the IPN, companies also report contained demand, although somewhat higher investment intentions emerge than in previous surveys, which would be financed with credit (Figure 13).

In any case, it is important to note that the cost of credit has been decreasing, in line with its benchmarks and, in the case of shorter-term rates, with the policy rate cuts. Thus, the firms assess that the level of interest rates has been losing relevance as an explanation among the factors that determine their perception of the conditions for accessing credit (Figure 14).

## Main risks

The main risk to local financial stability comes from abroad, in particular from a new upsurge in foreign geopolitical and commercial tensions.

In a context where the valuation of external financial assets remains high, the risk of new price adjustments is still present. Should there be a sudden adjustment in global risk appetite, this could trigger a correction in asset prices, deteriorating financial conditions facing emerging economies.

In such a scenario, a significant increase in sovereign spreads and abrupt capital outflows could be observed, with consequences on the liquidity, borrowing capacity, and solvency of agents. This is particularly relevant in emerging economies with weaker fiscal and external buffers, as

pointed out by the IMF in its latest Global Financial Stability Report. Locally, the reduced depth of the capital market compared to previous episodes could hamper its capacity to cushion the effects of abrupt changes in portfolios on financial variables.

Regarding the local impact of these events, tensions in the external scenario would negatively affect both local economic activity and the payment capacity of households and firms in the country. Although  certain  positive  developments  have  been  observed  in  recent  weeks,  the magnitude  of  the  impact  that  trade tensions -including  the  increase  in  tariffs  and uncertainty- will have on the Chilean economy is still unclear, just as we do not know the dimensions of the shock itself or its evolution over time.

All  in  all,  we  cannot  rule  out  scenarios  in  which  these  effects  would  be  more  relevant, negatively impacting activity, the labor market and wealth, affecting the repayment capacity of households and firms. These repercussions could be intensified along with commercial and geopolitical tensions.

## Stress tests

The  IEF  includes  stress  tests  that  allow  us  to  evaluate  the  economy's  ability  to  withstand adverse events. In these scenarios, the economy is subjected to a very significant shock on different macroeconomic and financial variables, including activity, inflation, employment, interest  rates,  and  the  exchange  rate.  These  stress  scenarios  include  decreased  GDP  and increased  unemployment  by  several  percentage  points,  with  interest  rate  hikes  of  several hundred basis points, in addition to exchange rate fluctuations and volatility.

For this test, performed with data up to the end of 2024, the results of the stress scenarios for credit users show a stable or better situation with respect to the previous Report. Considering the evolution of some of the variables in the first months of 2025, e.g., default and income growth, the situation would improve for both firms and households.

In the stress testing of firms, the debt-at-risk decreases, explained by both the evolution of sectors that make up a significant share of the banks' portfolios and commerce.

Regarding shocks, the one from interest rates has a somewhat milder impact due to the fall in the cost of short-term financing, which has reduced the financial burden. This is partially offset by a greater effect of the activity shock. Of a lesser magnitude, indexation risk is mitigated by the limited UF debt holdings and the convergence of inflation.

For households, under the stress scenario, debt-at-risk is mostly unchanged from the previous test. The shock has the greatest impact on quintiles first to fourth. The interest rate shock has the  greatest  impact  on  debt-at-risk,  followed  by  the  impact  of  higher  unemployment.  By portfolios, and compared to the previous test, the debt at risk rises in the mortgage portfolio and falls marginally in the consumer portfolio (Figure 15).

About the banking system, the stress tests show that the industry remains solvent in the face of a severe shock. In a risk scenario where activity contracts sharply, funding costs increase and financial conditions deteriorate, the level of capital in the banking system would allow it to absorb potential losses.

The availability of additional capital headroom, contributed to by capital increases, perpetual bond issues and the construction of regulatory buffers, has improved their shock absorption capacity in times of financial stress. In such scenarios, considering the most rigorous core capital metric (CET1), banks also remain solvent, with some banks of varying sizes making partial use of the regulatory buffer provided for these purposes (Figure 16).

With  this  in  mind,  at  last  week's  Financial  Policy  Meeting  we  decided  to  keep  the Countercyclical Capital Buffer activated at 0.5% of Risk Weighted Assets (RWAs). We believe that this level is consistent with the macro-financial and risk conditions facing the financial system. This risk environment highlights the importance of having a capital buffer previously constituted  by  the  banks,  which  enhances  their  capacity  to  withstand  a  shock  and  can  be released in the event of a financial stress event, which would help to mitigate its impact on the provision of credit to households and businesses.

In addition, as we communicated in November last year, the first Financial Policy Meeting in 2026 the start of the convergence towards the neutral level of 1% of RWAs will be evaluate. This will be done, as far as macro-financial conditions and the evolution of credit allow, and considering a minimum term of one year for its construction.

Having revisited the contents of our Financial Stability Report, I will close this presentation with some concluding thoughts.

## Concluding thoughts

Dear senators. We are facing a global scenario of high uncertainty, where episodes of high volatility are not going away anytime soon.

The  trade  tensions  we  are  currently  experiencing  are  unusual  events,  triggered  by  an unprecedented phenomenon, and are therefore more difficult to analyze. Moreover, it is not clear what level of tariffs will prevail globally, nor how they will affect production chains, which are today so closely interconnected. What is clear is that global trade and its institutional framework  are  undergoing  significant  changes  and  its  impact  on  the  world  economy  is negative, particularly for a small, open economy such as ours. We are talking about both the effects of an uncertain transition and the long-term costs as productivity is diminished due to a less efficient use of comparative advantages among economies.

These changes, and the risks associated with them, are part of a global picture that was already fraught with considerable uncertainty. Countries have used up slack in the face of the crises we have confronted in the recent past -the pandemic, for one- and these have not recovered

and, in fact, have left the world greatly indebted. Indeed, the prospects for adjusting the high public debt are not clear. On the one hand, spending is under pressure because the population is  aging,  and  we  face  an  increasing  number  of  natural  disasters.  On  the  other  hand,  the escalation of geopolitical conflicts puts pressure on defense spending.

In  these  circumstances, we need to start analyzing more extreme risk scenarios, where the origin of the shocks is associated with events that until recently were not very likely, but whose consequences on the global economy and financial stability are much more significant.

Regarding how Chile is facing this situation, I would like to reiterate that the economy is on a better footing, to the extent that we have resolved the major macroeconomic imbalances of previous years and the local financial system has capacities and mitigators provided by a robust regulatory framework and financial supervision. However, we are not immune to the effects of a global shock.

We cannot isolate ourselves from what happens in the world. Our task is to be prepared when a  shock  hits.  Although  we  have  enough  tools  and  we  have  been  complementing  and strengthening them, we are coming from a complex period in which we have been using up slack.  That  is  why  we  have  spoken  on  several  occasions  in  this  same  forum  about  the importance of all of us being actively concerned about restoring our economy's capabilities. Today, the relevance of this discussion increases.

On the fiscal front, the persistence of structural deficits for several years has been reducing slack and increasing public debt. Official projections indicate that, in the short term, the latter will be slightly below the cap of 45% of GDP defined as prudent by the authorities. However, as has been pointed out in previous reports, there are risks that could lead to debt overstepping the  mark  in  the  coming  years.  Sustaining  the  debt  below  the  defined  threshold  requires  a difficult set of measures and agreements. This is a major challenge in which all actors must compete. Maintaining prudent fiscal accounts through sustainable sovereign indebtedness is fundamental for the economy to be able to mitigate the impact of future shocks and improve financing conditions for households and firms.

The depth of the capital market is another factor to be on the lookout for. It was severely affected after the withdrawals of pension funds. It is important to remember once again that a deep capital market allows us to mitigate the effects of exposure to global markets, especially in the face of sudden reversals in financial prices. For this reason, it is necessary to maintain our efforts aimed at deepening the local financial market.

The pension reform will contribute to increase household savings, which will be reflected in a deeper capital market, although this will take a long time. Considering the volume of pension funds  (roughly  60%  of  GDP),  an  important  challenge  is  to  implement  the  new  regulatory framework while avoiding undesired effects on the valuation and volatility of financial assets. However, the approved legal framework provides for a gradual transition and allows for a prudent changeover management to give room for the necessary adaptations and mitigate risks.

About our banks, the implementation of Basel III will be completed by the end of the year, thereby increasing the soundness and resilience of the banking system. The industry has made an orderly transition to the capital buffers of this new standard, using different instruments to fulfil with the requirements imposed by the Law.

As part of Basel III, in May 2023, the Central Bank activated the Countercyclical Capital Buffer at 0.5% of risk weighted assets. On that occasion, bearing in mind the macro-financial conditions and the situation of the banking system, it was estimated that the requirement could be met within one year, without causing a significant impact on credit. Several analyses that we have shared since then confirm this initial assessment.

The  activation  of  the  CCyB  provides  us  today  with  an  additional  tool  that  contributes  to mitigate the procyclical effect of credit in times of crisis, particularly when, as a consequence of the crisis, capital becomes restrictive.

In late 2024, we published a revised framework for this instrument, in which we defined it as an essentially precautionary tool. At the time, a neutral value of 1% of risk-weighted assets was established, where it would remain for most of the time. In addition, a transition path was established in which convergence to the neutral level will only begin to be analyzed once the implementation  of  the  set  of  requirements  involved  in  Basel  III  has  been  completed,  and bearing in mind the macro-financial and credit market conditions at that point in time.

At the same time, as part of our financial policy agenda, we have been making progress in the generation of instruments to improve liquidity management in the domestic financial market. The objective of this agenda is to strengthen the mechanisms through which liquidity can flow between market agents themselves, thus reducing the Central Bank's dependence on liquidity tools.

One such instrument is the so-called repo transactions, which are contracts for the sale and repurchase of financial instruments. Their market is underdeveloped in our country, partly due to the lack of a framework contract offering legal certainty and establishing common standard conditions recognized at industry level for both local and cross-border operations.

In  order  to  solve  these  problems,  a  framework  agreement  will  be  put  for  consultation  to establish the general terms and conditions, including the treatment in the event of default. Of particular importance in these processes is the possibility of offsetting, collateral execution and close-out netting of the positions held by the parties among themselves as a result of the agreed repos. This regulation, to be issued by the Central Bank, will be put out for public consultation during the first half of this year.

Liquidity management will be complemented by enabling self-securitized bonds that can be used as collateral in transactions with the Central Bank, or between financial institutions. These are specifically retained securitization instruments issued by commercial banks, which have as  underlying  assets  from  their  own  portfolios  (mortgage  loans),  and  which  comply  with certain prudential conditions defined in the regulations issued by the Bank.

Complementing these initiatives, the CMF has published a proposal for a regulatory change to reduce,  under  certain  conditions,  the  risk  weights  applicable  to  both  repos  and  selfsecuritization transactions.

Another initiative that the Central Bank has been promoting is to encourage the use of the Chilean peso in cross-border transactions, which has been known as 'peso internationalization.' This initiative has its origin in a regulation issued by the Central Bank authorizing certain transactions with non-residents denominated in Chilean pesos (opening of correspondent accounts, credit operations, derivative transactions with physical settlement in pesos).  This  has  several  objectives,  including  to  make  the  local  financial  market  more competitive, to increase its liquidity levels and to deepen it.

Its implementation, however, has faced several challenges, largely due to regulatory frictions that have been gradually cleared up. Most recently, our IRS (SII) established the tax reporting conditions for these operations, necessary to enable correspondent accounts in pesos, and the CMF issued a new regulation that will facilitate the issuance of credit lines associated with these accounts.

With the fulfillment of these milestones, we believe that the last obstacles to progress towards the  internationalization  of  the  peso,  which  the  Bank  has  strongly  promoted,  have  been resolved.

Dear Senators, this Report talks about risks, not projections. It talks about the capabilities of our economy, particularly of the banking system, to face shocks of great magnitude, from the point of view of the risks and resilience of the financial system. The scenario in which this analysis takes place is one in which the system and the users of credit, namely households and businesses are, on average, somewhat less vulnerable. But we are certainly not immune, and we must also be always aware of the heterogeneities of the financial system.

The  IEF  also  tells  us  about  our  challenges.  Of  the  importance  of  rebuilding  slack  and improving  our  strengths.  This  not  only  includes  the  work  of  the  Central  Bank  and  the development of an agenda of legal and regulatory advances, but also the responsibility of all of us who make public policies to generate resilience and cushion the effects that external shocks have on our country. This task is essential for stability and growth, and we must face it as a full challenging and permanent task.

Thank you.



(1) TPU stands for Trade Policy Uncertainty; EPU stands for Economic Policy Uncertainty. (2) Dashed vertical line marks statistical close of previous IEF. VIX: implicit volatility in one-month options on S&amp;P500. MOVE: implicit volatility index in one-month options on 2-, 5-, 10-, and 30-year US Treasury bills. Sources: Bloomberg, Davis (2016); Caldara et al. (2020); Caldara and Iacovello (2022).

Figure 2 Ten-year interest rates and exchange rates (1)

(change from 2.Jan.24, basis points; change from 2.Jan.24, percent)



(1) Vertical lines mark 20 January and 2 April 2025. The change in the 10-year rate is constructed on a series that repeats the previous day's data when there are no transactions. (2) An increase (decrease) indicates currency appreciation (depreciation). (3) Means the median of the cumulative change in basis points for the 10-year rate and the percent variation of the exchange rate of a set of emerging economies (Brazil, Chile, Colombia, Hungary, India, Indonesia, Mexico, Peru, Poland, South Africa, Thailand and Turkey).

Sources: Central Bank of Chile and Bloomberg.



(*) The bars show the difference in volatility between the 25th and 75th percentiles of a set of emerging economies that includes: Brazil, China, Colombia, Hungary, India, Indonesia, Malaysia, Mexico, Peru, Poland, Russia and Turkey. Annualized standard deviation of daily change/return in each month. Sources: Central Bank of Chile and Bloomberg.

Figure 4 Growth forecasts for the world and the United States (1)(2)



(1) Solid lines are Consensus Forecasts data, calculated on a sample of countries representing an average of 86% of the world economy. For the rest of the world, the weighted average between the PPP-weighted growth of advanced economies and the respective aggregate of emerging economies is used. Forecast for 2026 is available as of January 2025. (2) Squares and crosses correspond to the latest WEO and IPoM forecasts respectively. Sources: Central Bank of Chile; Consensus Forecasts and International Monetary Fund.



(*) The series consider the 2023 benchmark CPI basket and the splicing of the Central Bank of Chile. Sources: Central Bank of Chile and National Statistics Institute (INE).

Figure 6



(1) Median, moving quarterly average. (2) Moving three-month average. Q1-Q4 up to C$1,365,000, Q5 up to C$5,200,000. Q5 truncated in tax cap, which could bias upward the quintile's indicators. Source: Central Bank of Chile based on information from CMF, AFC, and SUSESO.



(*) Locally financed firms. Non-performing portfolio refers to non-performing C or group portfolio. Other refers to other economic sectors such as: Agriculture, Mining, Financial services, Transport &amp; Telecommunications, Natural resources and unclassified. Provisional information for 2025.QI. For more information see Box II.1 in IEF for the first half 2024.

Source: Central Bank of Chile based on information from CMF and SII.



(*) Quarterly data based on firm-level information with the exception of non-bank factoring, leasing and others, securitized bonds and bills of exchange. Local bank debt. Does not include commercial college debt.

Source: Central Bank of Chile based on Achef and CMF data.

(1) Data through February 2025 for local bank-financed companies. Sales brackets defined as of December 2022: Small (2,400&gt;sales&lt;25,000 UF/ year); Medium (25,000&gt;sales&lt;100,000 UF per year); Large (sales&gt;100,000 UF/year). (2) Annual operating margin = (annual sales-purchase of intermediate good)/annual sales. (3) Indebtedness=debt/annual sales. Source: Central Bank of Chile based on information from CMF and SII.



(1) The bars represent stock in Santiago Metropolitan Region. (2) Nationwide data. Source: Central Bank of Chile based on CChC and SII data.





(*) Locally financed firms. Non-performing portfolio refers to non-performing C portfolio or group portfolio. Provisional information for 2025.QI. For more information see Box II.1 in IEF, first half 2024. Source: Central Bank of Chile based on Bloomberg, CMF and SII data.



(1) Expected requirements for December 2025. Blue bars show minimum capital requirement and other charges to be paid with CET1 as defined in the Law. (2) Return refers to 12-month rolling sum. Averages calculated from 2010 to date.

Source: Central Bank of Chile based on CMF data.

Figure 13 Bank Lending Survey: change in demand for credit



(1) Simple average of large companies, SMEs, real estate and construction firms. (2) Simple average of consumer and mortgage loans. (3) Each series represents the difference between the number of surveyed banks that perceive some degree of strengthening of loan applications and the number of those who perceive some degree of weakening of loan applications, both as a share of total responses.

Source: Central Bank of Chile.

## Figure 14

## Interest rates on installment loans (*)

## EPN: interest rate hike due to worsened financial conditions



(*) Rates in pesos for commercial and consumer loans; rates in UFs for housing loans, with coverage only for the Metropolitan Region. Dashed vertical line marks statistical close of previous IEF.

Source: Central Bank of Chile based on information from its Business Perceptions Survey (EPN) and CMF.

Figure 15 Debt at risk

(probability of default, percent of GDP)



(1) Amount owed by each firm weighted by their individual probability of default in one year. (2) Amount owed by each person weighted by their individual probability of default in a stressed scenario within a one-year horizon. (3) Comparison only for reference purposes, due to changes in National Accounts that reviewed GDP, together with the application of a shock of greater magnitude since 2H2023.

Source: Central Bank of Chile based on information from CMF, Servel and SUSESO.



(*) Capital requirements are calculated as the weighted average of the particular limits of each bank. Second half-year tests consider limits as of December of each year. A stress scenario assumes the release of the Countercyclical Capital Buffer (requirement) in effect at each moment. Source: Central Bank of Chile using its own and CMF information.",Rosanna Costa
https://www.bis.org/review/r250617k.htm,Frank Elderson: What good supervision looks like,"Keynote speech by Mr Frank Elderson, Member of the Executive Board of the European Central Bank and Vice-Chair of the Supervisory Board of the European Central Bank, at the 24th Annual International Conference on Policy Challenges for the Financial Sector, Washington DC, 12 June 2025.",2025-06-12 00:00:00,"SPEECH

## What good supervision looks like

Keynote speech by Frank Elderson, Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB, at the 24th Annual International Conference on Policy Challenges for the Financial Sector

Washington DC, 12 June 2025

It's a pleasure to be here with you today. The theme of this conference - harnessing regulatory standards to empower supervision - is not only timely, but also central to how we think about the future of prudential oversight. Across jurisdictions, supervisors are rethinking how best to align regulation and supervision: making them more targeted, more agile in addressing today's risk landscape and more efficient, all while remaining effective and credible.

At the same time, a broader debate is emerging - about whether supervisory authorities have taken on too much, whether the expectations placed on banks have grown too great, and whether more restraint might now be warranted. This debate touches on core questions about the scope, the approach and the limits of supervision.

In this context, it is worth taking a step back and revisiting some of the foundational principles that shape how we think about our role. The principles that are well established in the work of the Basel Committee on Banking Supervision, the Financial Stability Board (FSB) and the International Monetary Fund (IMF) are widely adopted by supervisors around the world.

It is with these principles that I would like to begin.

## Widely held views on the proper scope of supervision

Good supervision begins with clarity about our role.

There is broad consensus - and rightly so - that banking supervision must remain anchored in a clear and limited mandate. Supervisors are not political actors. It is not their task to advance broader social or environmental objectives or, for that matter, any political goals unrelated to financial stability.

They are not there to take control of banks or to substitute their judgement for that of banks' senior management.

They are not there to steer credit towards or away from any particular sectors or customers based on political or social preferences.

They are not there to police business models based on popularity or public sentiment.

Supervisors' responsibility is to ensure that the institutions they oversee remain safe and sound so they can support the real economy in both good and bad times.

This means that the supervisory function must remain focused. Its role is to assess whether banks have sufficient capital and liquidity, whether they are adequately identifying and managing material financial and non-financial risks, and whether they have the capacity to absorb losses and continue to remain resilient under a range of scenarios

And we must recognise the limits of supervision [ ] . A well-functioning financial system also crucially hinges on market discipline where Investors and creditors must bear the consequences of risk decisions, for instance through bail-in. If supervision were expected to prevent all failures, it could become overly intrusive, unduly conservative and ultimately ineffective. 1

These principles - a clear mandate, focus and institutional discipline - are widely accepted as the foundation of prudential oversight. They serve as guard rails against overreach and politicisation.

## What banking failures have taught us about risk boundaries

The principles I just outlined are generally accepted. They form the bedrock of modern prudential supervision. But what we are seeing today is the tendency of some to interpret those principles narrowly to argue that supervision must confine itself strictly to balance sheet metrics and refrain from probing deeper into the qualitative foundations of a bank's risk profile.

Such an approach would run counter to the direction supervisors have taken, with good reason, in the years since the global financial crisis. Such a constrained view of supervision risks making the banking system less safe, not more. It could elevate form over substance, delay intervention until consequences have materialized, and dismiss the early warning signs that rarely appear in quantitative metrics alone.

In truth, the supervisory community has spent the past 15 years broadening its field of vision, from a narrow lens focused on capital and liquidity to a wide-angle view that encompasses a broader concept of resilience. This broadening of vision was not a coincidence - it was developed based on the painful lessons of past crises. [ ]  We have learned - often the hard way - that safety and soundness cannot be assured by compliance with minimum capital requirements alone. We have seen that institutions can meet all formal thresholds while concealing deep-seated governance failures, weak risk cultures and flawed assumptions about their operating environment. Failures are often rooted in unresolved qualitative weaknesses, such as poor governance and flawed business models, that go unaddressed until too late, despite compliance with capital and liquidity requirements. [ ] 2 3

As a result, supervisory effectiveness has come to increasingly depend on the ability to identify and address these underlying drivers of risk. These insights have not led to a broadening of the supervisory mandate, but to a more focused understanding of how that mandate must be exercised in practice. Where risk arises - whether in capital and liquidity, governance or internal control functions - it falls squarely within the scope of prudential oversight.

## What safety and soundness actually require

To take safety and soundness seriously is to recognise that resilience depends on more than capital ratios or liquidity buffers. Over the past decades, after carefully looking at the root causes of various banking crises, supervisors have adopted a broader view on banks' resilience beyond financial metrics. Governance and risk culture, operational resilience and structural risk drivers such as climate-related risks now form an indispensable component of the Basel Core Principles for effective banking supervision - the gold standard of supervisory practice around the globe. [ ]  The Core Principles are a playbook that supervisors across the world follow when adopting and assessing their own supervisory rules. 4

## Governance and risk culture

Let me start with governance. Supervisory experience consistently shows that weaknesses in governance and risk management are not secondary concerns - they are among the most common root causes of prudential failures.

Although Northern Rock, Lehman Brothers, Silicon Valley Bank and Credit Suisse failed for different reasons, they shared a common underlying weakness: fundamental failures in internal governance, risk culture and risk management. [ ]  Time and again, it is governance failures that allow underlying risks to build up unchecked until they manifest in capital and liquidity. In that sense, weak governance is often the earliest and most reliable warning sign that an institution is heading for trouble. 5

The conclusion is clear: governance, risk culture and sound risk management are not peripheral issues. They are at the core of prudential oversight. They affect the quality of strategic decisions, the timeliness of remediation and, ultimately, the soundness of banks. [ ]  Weakening supervisory attention to governance would mean overlooking a key driver of both success and failure. As governance is often the root cause, it is neither effective nor efficient to focus only on the symptoms of risk while ignoring what lies beneath. 6

## Operational resilience

The same goes for operational resilience: in an environment marked by rising cyber threats and technology disruptions, financial strength alone is no longer sufficient to ensure that banks can continue serving their customers without interruption.

Recent episodes have made this clear. For example, Amsterdam Trade Bank (ATB) - a Dutch bank owned by a Russian parent - was not under stress due to capital or liquidity issues. But when international sanctions were imposed in response to Russia's invasion of Ukraine, ATB abruptly lost access to its IT systems, which were run by third-party providers. Lacking sufficient contingency arrangements, it could no longer operate. Despite being financially sound, the bank was forced to shut down - a stark illustration of how operational fragility can lead to failure.

Encouragingly, supervisory frameworks have responded accordingly. Operational resilience and cyber risks are now at the heart of the work of the Basel Committee, the FSB and many supervisors around the globe. [ ]  Operational resilience is also a priority area for European banking supervision. For instance, the 7

ECB is conducting targeted reviews of banks' cyber risk preparedness, outsourcing governance and operational continuity planning. The Digital Operational Resilience Act (DORA), which became applicable in the EU earlier this year, will help further boost operational resilience as it provides a robust framework that requires banks to foster a culture of continuous IT and cyber risk management. [ ] 8

## Structural risk drivers

Certain external risk drivers have a direct impact on the traditional risk categories in the prudential framework. Two such drivers - climate and nature-related risks and geopolitical risks - have therefore become increasingly relevant to banking supervision around the world. But they are not new categories of risk. Rather, they are risk drivers, operating through established channels - credit, market, operational, liquidity, legal and reputational - and influencing the scale, distribution and dynamics of risks on banks' balance sheets. [ ] 9

Thanks largely to the pioneering work of the Central Banks and Supervisors Network for Greening the Financial System (NGFS), climate-related risks now feature prominently in the work programmes of major international standard-setting bodies such as the Basel Committee, the Committee on Payments and Market Infrastructures and the FSB. The NGFS has now grown to 145 central banks and supervisors from around the world who all acknowledge that climate-related risks are a relevant driver of financial risk and therefore fall squarely within the mandate of supervisors. [ ] 10

Physical risks such as extreme weather events like floods, droughts and forest and city fires can damage companies' production facilities and people's homes. This can affect loan repayment capacity which, in turn, can lead to higher credit risk for the bank that provided the loan. Transition risks - driven by changes in regulation, technology or market preferences - can result in stranded assets and expose banks to litigation or reputational harm. [ ] 11

We can already see the effects of the twin climate and nature crises: think about the devastating fires in Los Angeles leading to damages estimated at hundreds of billions of dollars. Remember the floods in the Spanish region of Valencia resulting in around €17 billion worth of damage or the heavy rains in Slovenia that washed away 16% of the country's GDP.

So when I see devastating floods like those in Slovenia or Spain, or wildfires like those in Los Angeles as a supervisor I see risk increasing. As a supervisor I see collateral being washed away or going up in flames.

So, crucially, climate and nature-related risks are not a policy objective for supervision. They are a risk driver that influences the scale and shape of exposures across all major risk categories in the Basel framework. Ignoring them would mean failing to account for a material determinant of financial soundness. Ignoring them, therefore, would be a very political thing to do.

Another example of a structural driver of traditional risk categories are geopolitical events. Their probability distribution is not straightforward due to a lack of historical data, and they often interact with existing vulnerabilities in ways that defy linear stress assumptions. Consequently, European Banking Supervision has taken steps to make sure are resilient to these risks [ ] . 12

## Global guidance on effective supervision: the role of the IMF and the Basel Committee

Much of what we now consider to be established supervisory practice has been shaped by the consistent contributions of institutions like the IMF and the Basel Committee. Their work has helped clarify the foundations of effective supervision and provided the analytical tools to respond to evolving risk environments. The IMF and the World Bank have played a critical role in advancing supervisory thinking and practice in both developed and developing economies. Through their Financial Sector Assessment Program (FSAP), they have provided policymakers in these countries with structured, comparative evaluations of supervisory frameworks and, perhaps more importantly, concrete recommendations to improve the effectiveness of their regulatory and supervisory frameworks. These assessments offer a rare combination of technical depth, candour and cross-jurisdictional perspective. FSAPs challenge complacency, encourage alignment with international standards and good practices, and highlight structural gaps that may not be visible from within.

More specifically, in the context of the EU, the IMF played a pivotal role during the euro area crisis by identifying the most pressing institutional and governance shortcomings that needed to be fixed. Ultimately, the creation of the banking union, with a common resolution framework and a single supervisor, addressed many of the deficiencies that IMF reports had clearly identified. Crucially, the IMF's credibility, grounded in the rigour of its analysis, helped galvanise the political will needed to act - strengthening both Europe's financial architecture and the European project as a whole.

The second euro area FSAP is currently being concluded. We look forward to engaging with the IMF's assessment of banking supervision in the euro area and its recommendations for further improving our practices. The first euro area FSAP, which was completed in 2018, resulted in a number of important recommendations in areas such as the governance of European banking supervision, the harmonisation of national legislation and the supervision of liquidity risk. These recommendations helped raise the bar in terms of how we supervise European banks.

In recent years, the IMF's work on supervisory culture and effectiveness - including the paper 'Good Supervision: Lessons from the Field' [ ]  - has further improved our understanding of what makes supervision work in practice. It underscores the importance of a clear mandate, operational independence, timely intervention, and sound internal governance within supervisory authorities themselves. What makes this work particularly valuable is that it draws on the IMF's experience across a wide range of jurisdictions, bringing together practical lessons from different supervisory contexts. 13

Together, the IMF and the Basel Committee have provided both external discipline and internal structure. They have helped ensure that supervisory frameworks evolve in a way that is coherent, risk-sensitive and globally aligned. In doing so, they have contributed significantly to the stability and credibility of the postcrisis supervisory landscape.

## Five pillars of good supervision

It is now widely accepted that supervision must consider a wider range of risk factors - including governance, operational resilience and structural risk drivers. This has been the consensus for some time, and recent events have only reinforced it. But with this broader scope comes a responsibility to maintain operational discipline. Supervision must remain risk-focused, calibrated and effective.

In this context, a growing international consensus around five core supervisory pillars has emerged. These pillars provide a practical foundation for supervision that is both risk-sensitive and institutionally grounded.

## 1. Risk-based and forward-looking

Supervision must focus on the risks that matter most. That means identifying vulnerabilities before they materialise and assessing whether banks can remain resilient under adverse but plausible scenarios.

This includes risk areas that may be sensitive in some jurisdictions. Climate and nature-related financial risks, for instance, should be assessed not because of their policy implications, but because they are material drivers of credit, market, operational, legal and other types of risk. Concealing them will not make them disappear. And ignoring them will not make them less of a threat. Risk-based supervision therefore does not differentiate between risks on the basis of political tides. It addresses material risks to make sure that banks remain safe and sound.

## 2. Judgement-based and engaged

Effective supervision relies not just on facts, figures and fundamentals, but also on professional judgement applied with independence. Supervisors must be close enough to understand the bank's risk environment yet far enough to challenge management assumptions where needed.

This involves connecting data points across silos, probing for root causes rather than symptoms, and escalating issues promptly when risk management responses fall short. Supervision is not passive monitoring - it is active, structured and engaged oversight, compelling banks to improve where necessary.

## 3. Independent and accountable

Supervisors must be operationally independent in order to challenge the banks they oversee - including on sensitive or strategic issues. Independence must be matched by accountability. This means being transparent about the reasons for decisions, open to scrutiny and prepared to explain both action and inaction.

It also means learning from times when intervention was insufficient or too slow. The credibility of the supervisory function depends on public trust, and that trust rests on a clear sense of institutional responsibility: the willingness to own decisions, acknowledge missteps and continuously improve the way the supervisory mandate is fulfilled.

## 4. Calibrated and consistent

Supervision must be tailored to the size, complexity and risk profile of the bank - but with consistent expectations across the system. Smaller banks are subject to less frequent scrutiny, but not to lower prudential standards.

Consistency also means applying expectations in a comparable way over time and across supervisory teams and jurisdictions.

## 5. Action-oriented and enforceable

Supervision must lead to change where change is needed. Supervisors need not only the analytical capacity to detect risk, but also the powers, ability and willingness to act to make sure that findings are addressed in a timely manner. The turmoil of March 2023 underscored the cost of delay when known weaknesses remain unresolved.

A structured escalation framework is essential. Supervisors must define proportionate and time-bound remediation paths - and be prepared to move from moral suasion to enforcement with formal, legally binding requirements when necessary. For example, in our experience within European banking supervision, supervisors often identify issues that banks themselves recognise and address promptly. In such cases, moral suasion works well, and the matter is resolved quickly and constructively. But there are times when moral suasion alone is not enough - or only proves effective because banks are aware that supervisors also have more intrusive tools available.

Legal risk must be assessed, but must not be used as an excuse for inaction. Supervisory decisions must be defensible - and where challenged, they must be upheld or clarified through institutional processes and where annulled due to a different judicial interpretation of the law, lessons are drawn from that experience. A functioning enforcement culture is essential for timely remediation and systemic resilience. Supervisors should not shy away from using all the tools at their disposal - even the more severe tools - if necessary. [ ] 14

Taken together, these five pillars provide a coherent model for effective supervision in a complex and fastchanging financial environment. They enable supervisors to address the full range of material risks while maintaining predictability and institutional discipline.

This is not about expanding the supervisory mandate. It is about delivering on the mandate in a way that reflects the realities of modern banking and the expectations of those we serve.

## Supervision and simplification

The theme of this conference - harnessing regulatory standards to empower supervision - captures a central challenge for all supervisory authorities: how to ensure that regulation and supervision work in concert, not at cross purposes. Across the supervisory community, there is growing momentum to simplify regulatory and supervisory processes. This reflects both external expectations - including calls to reduce the administrative burden - and internal recognition that supervisory efficiency is essential to credibility.

At the ECB, we are actively working to make our own supervisory processes more targeted, streamlined and risk-focused. [ ]  Simplifying supervisory processes is not only compatible with effective supervision it is a precondition for sustained effectiveness in a more complex and resource-constrained environment. 15

At the same time, simplification needs to be understood in its proper context. A more efficient supervisory process does not imply a higher tolerance for unresolved risk. It does not mean overlooking persistent deficiencies, delaying action or avoiding the use of intrusive tools when they are warranted. Risk-based supervision requires prioritisation - but prioritisation must not become passivity.

To that end, the ECB is taking practical steps to make supervision more efficient and focused. We have streamlined our core processes so that supervisors can concentrate on the most important issues and give banks clearer, earlier guidance. [ ] 16

But simplification must not mean reduced vigilance. It requires a supervisory mindset that empowers individuals to exercise judgement, to make decisions and to feel confident in doing so. When risks are identified and remediation is slow or insufficient, supervisors must be prepared to act in a timely manner, using the full range of tools available.

Simplification and strong supervision are not contradictory. In a changing political and financial environment, maintaining the right balance between them will be critical. When properly aligned, they enable a supervisory model that is both efficient and effective - capable of adapting to new risks, while upholding public confidence in the stability of the system.

## Conclusion

Let me conclude.

Over the past two decades, supervision has adopted a more comprehensive view of banks' resilience. This progress has not been accidental. It has been driven by the experience - at times costly and painful that financial resilience alone does not reduce the likelihood of banks failing. Prudential oversight must therefore also cover the structural and behavioural factors that affect banks' resilience.

Today, that progress is being questioned. Some argue that supervision has adopted a too broad view. That the best course of action would be to narrow the scope, defer more to market incentives and lighten supervisory intervention. These arguments often invoke restraint - but in practice, they risk taking us back to a model that proved insufficient.

The task now is not to do more for the sake of doing more. Nor is it to step back in the name of simplicity. The task is to act decisively and proportionately on the risks that matter. To maintain a supervisory approach that is clear, consistent and enforceable. And to ensure that simplification leads to sharper focus - not diminished resolve.

Let us therefore ensure we do not allow the lessons of past crises to disappear in the rear-view mirror. Let us resist the temptation to lower the guardrails, thinking that 'this time will be different', the phrase so poignantly coined in Reinhart and Rogoff's 'Eight Centuries of Financial Folly'. [ ] 17

Let us, for once, avoid such folly and sidestep that all-too-attractive trap. Thank you for your attention.

1.

'The task of policymakers and regulators is not to eliminate risk from the banking system, but rather to ensure that risk is appropriately and effectively managed.' See Bowman, M.W. (2025), ' ', speech at the Georgetown University McDonough School of Business Psaros Center for Financial Markets and Policy, 6 June Taking a Fresh Look at Supervision and Regulation

2.

Elliott, J.A. et al. (2010), ' ', Staff Position Note , No 2010/008, International Monetary Fund, May; Board of Governors of the Federal Reserve System (2023), , April, p. 8; Basel Committee on Banking Supervision (2023), , October, p. 26; Basel Committee on Banking Supervision (2015), , July. The Making of Good Supervision: Learning to Say ""No"" Review of the Federal Reserve's Supervision and Regulation of Silicon Valley Bank Report on the 2023 banking turmoil Corporate governance principles for banks

3.

Balan, M. Restoy, F. and Zamil, R. (2025), ' ', FSI Insights on policy implementation , No 66, Bank for International Settlements, April. Act early or pay later: the role of qualitative measures in effective supervisory frameworks

4. Basel Committee on Banking Supervision (2024), . 5. , Core Principles for effective banking supervision

Senior Supervisors Group (2009), , October; Financial Services Authority (2008), March; Basel Committee on Banking Supervision (2023), ; Board of Governors of the Federal Reserve System (2023), . Risk Management Lessons from the Global Banking Crisis of 2008 The supervision of Northern Rock: a lessons learned review Report on the 2023 banking turmoil Review of the Federal Reserve's Supervision and Regulation of Silicon Valley Bank

6.

Effective governance is a key element underpinning several of the Basel Committee's principles. See Basel Committee on Banking Supervision (2015), , July; and Basel Committee on Banking Supervision (2024), , 25 April. Guidelines on corporate governance principles for banks Core Principles for effective banking supervision

See Basel Committee on Banking Supervision (2024), ; the Bank of England's ; the Federal Reserve System's ; International Monetary Fund (2024), ' ', Global Financial Stability Report , April; and the FSB's . Principles for operational resilience web page on operational resilience web page on operational resilience The Last Mile: Financial Vulnerabilities and Risks web page on cyber resilience

8.

See Tuominen, A. (2025), ' ', The Supervision Blog , ECB, 17 January. Operational resilience in the digital age

9.

Basel Committee on Banking Supervision (2021), , April. Climate-related risk drivers and their transmission channels

10.

NGFS (2018), , October. First Progress Report

11.

For litigation risks see: NGFS (2021), , November; NGFS (2023), , September; NGFS (2023), , September; NGFS (2025), ; NGFS (2024), , July. Climate-related litigation: Raising awareness about a growing source of risk Report on climate-related litigation Report on micro-prudential supervision of climate-related litigation risks Climate-related litigation: recent trends and developments Nature-related litigation: emerging trends and lessons learned from climate-related litigation

12.

Buch, C. (2024), ' ', speech at the eighth European Systemic Risk Board annual conference on 'New Frontiers in Macroprudential Policy', Frankfurt am Main, 26 September; and ECB, . 13. Global rifts and financial shifts: supervising banks in an era of geopolitical instability Supervisory priorities for 2025-27

Adrian, T. et al. (2023), ' ', IMF Working Papers , No 2023/181, International Monetary Fund, 6 September. Good Supervision: Lessons from the Field

14.

Elderson, F. (2023), ' ', speech at the House of the Euro, 7 December; Elderson, F. (2024), ' ', speech at the '10 years SSM and beyond' event organised by Allen &amp; Overy, 27 June. Powers, ability and willingness to act - the mainstay of effective banking supervision Preparing for the next decade of European banking supervision: risk-focused, impactful and legally sound

Buch, C. (2025), ' ', speech at the Goldman Sachs European Financials Conference, 11 June. 16. Simplification without deregulation: European supervision, regulation and reporting in a changing environment

Sheridan, R., Woulfe, S. and Catarineu Rabell, E. (2025), ' ', Supervision Newsletter , ECB, 14 May. SREP reform: towards more efficient and effective supervision

17.

Reinhart, C.M. and Rogoff, K.S. (2011), This Time Is Different: Eight Centuries of Financial Folly ,

Princeton University Press.

Copyright 2025, European Central Bank",Frank Elderson
https://www.bis.org/review/r250611j.htm,Richard Doornbosch: People over profit - the benefits of cooperatives - relevant as ever,"Opening speech by Mr Richard Doornbosch, President of the Centrale Bank van Curaçao en Sint Maarten, at the 25th International Annual International Leadership Conference, Willemstad, 6 June 2025.",2025-06-06 00:00:00,"## Richard Doornbosch: People over profit - the benefits of cooperatives - relevant as ever

Opening speech by Mr Richard Doornbosch, President of the Centrale Bank van Curaçao en Sint Maarten, at the 25th International Annual International Leadership Conference, Willemstad, 6 June 2025.

* * *

## Introduction

It is a true honor to be with you today at this impactful Annual Leadership conference here in Curaçao, an island where cooperation is not optional but a necessity. We are living in what you have aptly called the disruptive age. An era in which leaders must navigate technological, environmental, and social change.

I will argue that in this era, the key cooperative principle of people over profit has enduring relevance. However, this is not business as usual. During this conference you will delve into the strategies credit unions need to thrive in today's financial world. What I will do is ask three hard questions you need to be able to answer or at least consider when formulating your strategies.

On behalf of the Central Bank of Curaçao and Sint Maarten, I extend a warm welcome to each and every one of you.

I am pleased to see the energy, enthusiasm, and diversity represented here today. Leaders and professionals who share a commitment to strengthen the credit union sector, not just for today's members, but for generations to come.

## People Over Profit

At the core of the credit union sector lies a guiding value that sets you apart within the broader financial system: people over profit. This principle is not incidental- it is a deliberate and defining element of your institutional model. And it finds its most concrete and consistent expression in the seven internationally recognized cooperative principles.

These principles- (1) voluntary and open membership, (2) democratic member control, (3) member economic participation, (4) autonomy and independence, (5) education, training and information, (6) cooperation among credit unions, and (7) concern for community- are not mere formalities. They represent a coherent framework that ensures accountability, transparency, and equitable treatment of members.

In a world marked by rapid technological advancements, societal shifts, and economic uncertainties, these cooperative principles provide a stable foundation. By responding to the need for social relevance, sustainable economic models, and participatory governance, these principles are well-suited to address contemporary challenges and contribute to a stable and forward-looking organizational culture.

As a supervisory body, the CBCS views the framework of credit unions both as a strength and a safeguard because in a world where many feel left behind by traditional financial institutions, credit unions stand for inclusion, trust and service to communities. Because of their uniqueness, credit unions are in a strong position to help address financial inclusion. To fulfill that purpose the credit union sector must, however, evolve.

To do so, I will outline three key questions you need to be able to answer:

1. Why are we a cooperative organization?
2. What is or should be the added value for our members?
3. How should we embrace innovation and technology to ensure competitiveness and compliance?

## Where We Are Today

Allow me to first begin with some personal connection and to reflect on our local context. I come from a family rooted in cooperation. My parents are both from Groningen, a traditional agricultural region, up north in the Netherlands. My grandfather was one of the founding members of the AVEBE, a cooperative that organized farmers after the First World War in 1919 to ensure fair pricing of their products. AVEBE is now a multinational in the food industry but still owned and governed by its 1900 members that are all farmers. The operations have changed greatly but the foundation remains the same. To serve each other.

The same principle guided the origin of credit unions in the Caribbean in the first half of the 20th century. They were set up as a social instrument to give workers and small independent entrepreneurs access to savings and credit services. Since then, the credit union sector has been essential to Caribbean communities. However, the necessity for cooperatives remains present. Not everyone in the Caribbean can put his or her money in a bank account to save, not all entrepreneurs have access to finance.

In Curaçao, the credit union sector is an important pillar of financial inclusion and community empowerment. Almost 25% of the population of Curaçao is a member of a credit union. There is great strength in the business of credit unions: community trust, (financial) education, deep member relationships, and a core purpose that places people before profits. Credit unions play a vital role in promoting financial inclusion, offering access to savings, credit, and financial services to individuals and families across the island. They provide opportunities for small businesses to grow, for young people to finance their education, and for families to build secure futures.

But we must also recognize that the sector has its challenges around governance, innovation, and risk management that have the potential to undermine its benefits to the community. The foundation is strong because of the deep member relationship, the powerful sense of mission and purpose and an enduring commitment to community welfare, but it must be reinforced, and it must evolve.

That brings us back to our key questions. The why, what and how. Why are you serving your members, what should be your added value and how to use innovation and technology to thrive. If you are not able to answer these questions, there is probably some searching and homework to do.

## Three key tasks

## 1. Why? Reinforce your cooperative culture

Obviously, I cannot answer the ""why"" question for you. It should define your focus. It might be ensuring access to basic financial services to your membership, or enhancing financial literacy, or guaranteeing access to finance to ensure growth opportunities to small and medium sized businesses. It should be closely aligned with your membership needs.

The answer should define your organizational culture. Culture is the force that shapes decisions, drives behavior, and defines an organization's identity; what motivates employees to go the extra mile for members, inspires teams to innovate, adapt, grow and earn the trust and loyalty of communities. When ""financial health"" of your members is your mission, you probably will have different priorities as when ""access to finance"" is in your primary mission statement.

Credit unions traditionally boast a strong organizational culture because their members believe in the principles of cooperativism. It is this shared belief that forms the heart of their success. To ensure continued growth and relevance, it is essential to nurture and strengthen the reason to serve your members. By doing so, you continuously reaffirm the central role of the members.

## 2. What? What should be your added value and how should that guide your strategic goals

Alongside a strong culture, credit unions need a clear strategy driven by the added value you provide to your members. Strategic goals provide a roadmap for the future. A well-defined strategy focuses resources, guides decision-making, and ensures that all efforts are aligned with the organization's vision, the 'why'.

There are a few misconceptions about credit unions I would like to address in this context.

Misconception number 1. For credit union efficiency is less important. And I hope I preach to the converted here. Yes, credit unions main focus is not profit, but they do need to provide low-cost financial solutions to serve their members. You can only provide low-cost products and services if you organize yourself efficiently. And size does matter because there are economies of scale. There are fixed costs in operating a core banking system, in external control, in basic governance structures. And although the minimal size to operate a credit union depends on the regulatory framework and operational design of the institution, it seems that a credit union with less members will be harder to operate in a sustainable manner while adding value to its members.

Number 2. Compliance is less important because you know your members. It's indeed a great advantage for compliance if you know your customers. However, for effective oversight your compliance still needs to be 'auditable' and your risk management up to par. Without it you risk high fines and ultimately your license to operate.

A final misconception is that in credit unions members decide everything because they are democratic. Indeed, democratic member control is an important principle. But just like in a democracy, the people are being represented by parliamentarians and powers are being shared between the different branches of government. In a cooperation members decide on a council of supervision to oversee management that is responsible for day-to-day operations and decision making. The governance needs to be designed in a careful and deliberate manner in order to balance democratic member control with room for independent executive decision making and professional oversight in order to guarantee soundness and integrity of operations.

People over profit does not mean you should not be competitive and professional. Being competitive means that you would like to succeed. How you define success will be different for credit unions compared to financial institutions driven by shareholder value.

For credit unions, strategic goals will aim to service their members:

- Introducing digital service channels to enhance member convenience /nursing technology-driven accessibility: mobile banking, online applications, real-time services.
- Deepening community partnerships to extend impact and relevance.
- Offer member-centric products that meet life cycle needs: from microloans to housing finance and retirement savings.

## 3. How? By embracing innovation and technology to ensure competitiveness and compliance

The Central Bank of Curaçao and Sint Maarten envisions a credit union sector that is not only surviving but thriving. A sector that is dynamic, inclusive, and innovative.

For this we must imagine a future where credit unions embrace innovation and new technologies to service their members.

In an ageing society, membership of credit unions is also ageing. This provides opportunities and challenges. The opportunity to guide members into the digital age and assist with new online banking tools to ensure digital inclusion. And the challenge to ensure young generations are also inspired by their mission and vision and appreciate the financial products and services.

In several Caribbean countries banking and insurance is seen as cumbersome, slow and expansive. There are ample opportunities for credit unions to:

- Deliver tech-enabled services that attract new members,
- Work together across borders to share infrastructure and reduce costs,
- Operate with world-class governance and compliance,
- Lead the way in promoting financial literacy and empowerment.

The principle of people before profit is timeless, however for credit unions to succeed in a fast-changing world you have to embrace innovation without hesitation. Embracing innovation means investing in people and technology.

## CBCS as a regulator

CBCS supervises credit institutions to ensure the soundness and integrity of the financial institutions of Curaçao and Sint Maarten.

In this context, prudential supervision plays a key role by ensuring that financial institutions maintain adequate solvency and liquidity, while strong governance and compliance provide the foundation for sound operations, enabling timely identification and management of risks.

## A Shared Commitment

One of the features of the dialogue between credit unions in Curaçao and Sint Maarten and the Central Bank of Curaçao and Sint Maarten is the emphasis on open communication and proportionate regulation within the legal requirements. Proportional does not mean the bar is lower for credit unions. It means that where risks are lower the requirements can be lower. Or where complexity is lower the reporting requirements can be less onerous and complex while still meeting legal requirements.

A significant aspect of our dialogue is the annual meetings between the Central Bank of Curaçao and Sint Maarten and FEKOSKAN. These meetings serve as a platform for discussion to ensure that the sector remains resilient and aligned with regulatory standards. The Central Bank of Curaçao and Sint Maarten and FEKOSKAN are committed to addressing challenges collectively.

Furthermore, the Central Bank of Curaçao and Sint Maarten is involved in supporting education and professional development within the credit union sector. By offering learning opportunities, the Central Bank of Curaçao and Sint Maarten wants to help credit unions enhance their internal expertise and manage their operations more efficiently and sustainably. This proactive approach will contribute to strengthening the capabilities of staff, enabling them to better support their members and adapt to changes in the financial landscape.

The journey ahead is one of the enormous opportunities.

With a strong culture and clear strategic goals, credit unions in Curaçao and Sint Maarten and across the Caribbean can position themselves not only as competitive financial institutions but as leaders in shaping a more inclusive, resilient, and prosperous financial future.

At the Central Bank of Curaçao and Sint Maarten, we are committed to supporting this journey where appropriate.

## Closing

Credit unions were born out of necessity: a community-based solution to exclusion. The Central Bank of Curaçao and Sint Maarten thinks that that mission remains. But today, members need digital, responsive, and ethical financial partners. This can be achieved by focusing on the three key actions outlined today: reinforcing your cooperative

culture, setting clear and strategic goals to drive transformation and competitiveness, and embracing innovation and collaboration to build lasting resilience for the future. Throughout this journey, it is essential to remain grounded in the core value that defines credit unions: putting people over profit.

I wish you all a conference full of inspiration, collaboration, and new ideas. I hope it sparks new strategies, strengthens leadership bonds, and ignite a renewed sense of purpose for credit unions in the region to thrive.

Thank you.",Richard Doornbosch
https://www.bis.org/review/r250616e.htm,Chang Yong Rhee: Speech - 75th Anniversary of the Bank of Korea,"Speech by Mr Chang Yong Rhee, Governor of the Bank of Korea, to commemorate the 75th Anniversary of the Bank of Korea, Seoul, 12 June 2025.",2025-06-12 00:00:00,"## Chang Yong Rhee: Speech - 75th Anniversary of the Bank of Korea

Speech by Mr Chang Yong Rhee, Governor of the Bank of Korea, to commemorate the 75th Anniversary of the Bank of Korea, Seoul, 12 June 2025.

* * *

I would like to thank Choongwon Park, Taesup Kim, and Byeongrok Lee for their help in preparing this speech. * This is an unofficial translation of the original speech released on June 12, 2025.

My dear colleagues at the Bank of Korea,

Seventy-five years ago, the Bank of Korea took its first step with the mission of contributing to the sound development of the national economy through pursuing price stability. Since that day, we have faithfully fulfilled our responsibilities through every chapter of our nation's history, bringing us to where we stand today. I would like to express my deepest respect to our predecessors who devoted themselves to setting and implementing monetary policy over the decades. I also extend my sincere gratitude to the members of the Monetary Policy Board, who continue to serve as a guiding compass for the Bank, and to all the staff who have diligently carried out their duties in their respective roles. Above all, I would like to extend my heartfelt appreciation to the families of our staff, whose steadfast support has been a constant source of strength. This year marks both the 75th anniversary of the Bank of Korea's establishment and the 80th anniversary of national liberation. This is a special year, an opportunity to reflect on our history defined by overcoming numerous crises and achieving remarkable progress. More recently, over the past six months, a rapidly shifting global landscape and escalating political tensions have evoked a sense of crisis reminiscent of the turmoil that followed Korea's liberation.

Globally, geopolitical tensions have persisted due to the wars between Russia and Ukraine and between Israel and Hamas. At the same time, domestically, political instability that escalated following the declaration of martial law late last year has continued, deepening social conflict and division. It has been a period of confusion that can be summed up in one word: ""uncertainty"". Amid these global and domestic shocks, Korea's economic growth has slowed considerably, and self-employed and small business owners are facing significant difficulties in particular.

Despite these challenges, there remains a silver lining. Although political uncertainty has brought high economic and social costs, the process of overcoming it has reaffirmed the strength and resilience of our democracy. Now, with a new administration in place on a foundation of a mature democracy, we look forward to strengthening social cohesion through unity and restoring economic vitality by prioritizing pragmatism. The Bank of Korea must also do its part to help the nation overcome these hardships by conducting monetary policy based on principle and conviction, and by faithfully fulfilling its responsibilities, including pursuing price stability, that are essential to the future of the national economy and to the well-being of the people.

## My dear colleagues,

Economic conditions this year remain highly challenging. As noted in last month's economic outlook, the GDP growth forecast has been revised downward to 0.8% for the

year and to 1.6% for next year, representing a significant downgrade from the February projection. The projected growth rate for this year is the lowest in the past three decades, excluding the periods of the Asian Financial Crisis, the Global Financial Crisis, and the COVID-19 pandemic. It is also highly unusual for an annual growth projection to be lowered by as much as 0.7%p within the span of just three months.

A combination of several factors lies behind this sluggish growth. While the expected slowdown in exports due to tighter U.S. protectionist trade policies is a key contributor, a more critical factor is a delayed recovery in domestic demand amid six months of prolonged political uncertainty. As a result, GDP growth in the first half of this year is expected to come in at just 0.1% compared to the same period last year. In particular, construction investment is projected to contract for five consecutive quarters through the second quarter of this year, emerging as the single largest source of the downward pressure on growth. This is attributable to the correction currently underway in real estate-related debt, which had surged rapidly since the COVID-19 pandemic. Significant uncertainty also looms over the 1.6% growth outlook for next year. While domestic demand is expected to recover gradually going forward, the outlook for exports could differ greatly depending on how U.S. trade policies and global trade negotiations unfold.

The Bank of Korea views the current situation with grave concern and acknowledges the urgency of stimulus policies in that regard. Since October last year, we have cut the Base Rate four times in an effort to reinvigorate the economy, and we intend to maintain an accommodative monetary policy stance for the time being. At the same time, close coordination between monetary and fiscal policy should continue as long as it does not compromise central bank independence. However, in determining the appropriate degree of economic stimulus, it is essential to assess the current low growth not only from a cyclical perspective but also from a structural lens.

While this year's projected growth is similar to levels seen during the Global Financial Crisis, a simple comparison between the two periods would be misleading. In the mid to late 2000s, Korea's potential growth rate hovered at around 4%, but it has now fallen sharply to below 2% as low birth rates and an aging population have become increasingly pronounced. Although the potential growth rate has declined over time, the amplitude of the economic fluctuations has not narrowed, due to Korea's high external dependence and an export structure heavily concentrated in a few key industries. As a result, the likelihood of negative growth the in case of an external or internal shock has increased significantly compared to the past. The probability of negative quarterly growth, as seen in the first quarter of this year, was estimated at around 14% in 2024, which is roughly three times higher than a decade ago. 1

Under the current circumstances, it is clear that stimulus measures are urgently needed for economic recovery. Yet at the same time, in light of these structural shifts, we should also make efforts to prevent continued declines in the potential growth rate and establish a resilient economic structure against cyclical volatility. Excessive reliance on economic stimulus packages, driven by immediate pressures alone, could result in bigger negative side effects.

For instance, excessively lowering the Base Rate would more likely fuel housing price hikes in the Seoul metropolitan area, rather than support a recovery in the real

economy. We need to be mindful that since last March, apartment prices in Seoul have increased at an annualized rate of approximately 7%, and that household lending by the financial sector has also increased at a fast pace. We should break away from the past practice of tolerating excessive investment in real estate in an attempt to give an easy boost to the economy. In addition, although the won/dollar exchange rate has recently declined to the mid-1,300 won level, volatility in the foreign exchange market could reemerge as the interest rate differential between Korea and the U.S. might widen further depending on the pace of the Federal Reserve's rate cuts, and as uncertainty regarding trade negotiations among major economies remains high. Going forward, while the Bank will maintain an accommodative monetary stance, decisions concerning the timing and extent of any further rate cuts will be made with caution based on a thorough assessment of macroeconomic and financial developments.

Building on this awareness, the Bank of Korea has actively sought not only to conduct monetary policy, but also to identify the structural problems of our economy and to propose solutions. For instance, we have diagnosed that Korea's low birth rate and an aging population are rooted in the concentration in the Seoul metropolitan area and in the intense competition in the college entrance system. In response, we have put forward bold institutional reform proposals such as a ""balanced development focusing on regional hub cities"" and a ""regional proportional admissions system"" (Chung, M. et al., 2024; Chung, J. et al., 2024). To mitigate the economic and social impact of an aging population, we have explored policy measures like the sustainable employment of older workers, improvements in care services, and the utilization of home pensions after retirement (Oh, S. et al., 2025; Chae, M. et al., 2024; Hwang, I. et al., 2025). In addition, recognizing the vulnerabilities arising from Korea's heavy dependence on exports and its concentration in a few key industries, we have also conducted research into strategies that could help foster intellectual services as a new growth engine for exports (Choi, J. et al., 2025).

The call to pursue structural reform alongside economic stimulus is not unique to Korea. Across Europe, as growth stagnates, there is a growing recognition that the region's deepening reliance on China and Russia and the disruptions from the global supply chain fragmentation are not merely temporary phenomena, but structural vulnerabilities. Efforts are emerging to address these challenges. A prominent example is the report ""The Future of European Competitiveness,"" published in September last year by Mario Draghi, the so-called ""Draghi Report."" This report provided a comprehensive, long-term analysis of the causes behind Europe's weakening competitiveness and proposed a wide range of policy responses. Since the beginning of this year, there have been notable efforts to strengthen the euro's status as an international currency by integrating the region's capital markets, in response to the rise of U.S. protectionism.

The European case offers some important implications. It is increasingly acknowledged that the slow progress made on structural reform across Europe was not due to a lack of policy proposals, such as those outlined in the Draghi Report, but rather on the absence of political leadership to reconcile divergent national interests. In a self-critical reflection that Europe has carried out reform only in response to an external crisis, the current trade conflict with the U.S. paradoxically presents a valuable opportunity to strengthen its own political leadership.

Structural reform inevitably involves conflicts of interest, and in the process, there will unavoidably be both winners and losers. Without sufficient coordination and broadbased public consensus, even well-designed policies may falter in the face of resistance from interest groups. The various policies proposed by the Bank of Korea are no exception. We hope that the newly launched administration will clearly prioritize its structural reform agenda and demonstrate leadership in managing social conflict, to turn the current crisis into an opportunity. The Bank of Korea will provide full support during these efforts through rigorous analysis and thoughtful policy recommendations.

My dear colleagues at the Bank of Korea,

The structural reforms I have mentioned so far are efforts to solve problems accumulated from the past. Now, however, we must also prepare for future challenges from a forward-looking perspective. Above all, as digital technologies and artificial intelligence (AI) continue to penetrate every aspect of our economy and society, we are witnessing rapid and fundamental changes in the financial and economic landscape. In this environment, identifying and nurturing new engines of economic growth has become one of our most urgent priorities. Grounded in this awareness, we are committed to not only conducting research, but also to taking concrete action. We have proudly launched our own initiatives that proactively respond to digital innovation and to the growing influence of AI.

With ""Project Hangang,"" the Bank of Korea has recently begun conducting pilot test for a future digital currency infrastructure based on a wholesale central bank digital currency (CBDC) and on tokenized deposits, conducting trials in a real-world environment (Bank of Korea, 2025a). Of course, today's payment systems, including credit cards and mobile payment services, are already highly efficient, but we must not become complacent with current levels of convenience. The digital transformation of finance has moved beyond a race for speed. We are now entering a new phase that demands structural change and greater interconnectedness. The Bank for International Settlements (BIS) has introduced the concept of the ""finternet"" as a vision for the future of finance (Carstens et al., 2024). This envisions the integration of fragmented financial services across banking, securities, digital payments, and insurance into a unified interface, enabling real-time, user-centric financial management.

To realize this vision, a common digital currency foundation that interconnects all financial institutions is essential, with a CBDC and tokenized deposits at its core. These instruments function as a trusted common unit of settlement for all participants, serve as the technological standard, and can be designed as ""programmable money,"" making them the key enablers of the personalized and automated financial environment envisioned by the finternet. Project Hangang is scheduled to conduct a follow-up test later this year to assess the potential benefits of tokenized deposits and determine whether to move forward with commercialization. In parallel, as KRW-denominated stablecoins not only have the potential to drive innovation in Korea's fintech industry but could also function as substitutes for legal tender, we will work closely with relevant authorities to establish institutional safeguards that ensure their stability and usefulness, while preventing any circumvention of foreign exchange regulations. Additionally,

through our participation in ""Project AgorÆ,"" in collaboration with major central banks and global institutions, we are helping to build a cross-border digital financial infrastructure aimed at dramatically reducing the cost of international remittances.

Alongside digital finance, AI is rapidly becoming a part of everyday life, and its full potential is still difficult to predict. Korea is among the few countries that are developing ""sovereign AI"" based on its own language.  As AI deployment extends beyond 2 centralized large-scale servers to smaller devices, such as smartphones, it may also open new opportunities for Korea's semiconductor industry. In line with this transformation, the Bank of Korea is currently developing a BOK-specific AI model built on a sovereign AI platform developed by a domestic firm. We plan to implement this model in the second half of this year. We hope this project will serve as a good example of public-private cooperation in developing Korea's AI industry. I also encourage all of our staff to become comfortable using AI tools and to grow into the kind of creative talent that is demanded by this new digital era.

To properly utilize AI technology, cloud computing is essential. AI needs to process large-scale data and conduct high-performance computations, that exceed the limitations of ordinary computers or of internal servers. Until now, the government's ""network separation policy"" for cybersecurity has been unavoidable in some respects, but at the same time, it has restricted the use of new technologies. However, in light of 3 the rapid spread of AI, we can no longer adhere to traditional methods. Accordingly, the Bank of Korea, for the first time among public institutions, is launching its own AI initiative and, in collaboration with the government, is also carrying out a ""network improvement pilot project"" as part of this broader effort. We hope that the Bank of Korea's pilot project will contribute to accelerating AI adoption in the public sector. I would also like to take this opportunity to express my deep gratitude to the members of the Monetary Policy Board for their active support for these pioneering efforts, such as Project Hangang and our AI development project, despite many challenges.

## My dear colleagues,

Over the past three years, many changes have taken place within the Bank of Korea. We have made efforts toward new management innovations, such as reforming the evaluation system, restructuring the organization, delegating more authority to lower levels, and promoting a culture of information sharing and open discussion. As a result, the Bank of Korea's organizational capabilities have been significantly strengthened. Research reports we have published have sparked social responses, and our standing as a think tank for the national economy has been further strengthened. This is not just my personal view, but one that has also been affirmed by external evaluations, as well. According to a recent public perception survey concerning the Bank of Korea, the proportion of favorable responses rose by 9.6%p from last year, surpassing the 50% mark for the first time. The public's assessment of the Bank's credibility also increased by 18.2%p, reaching 66% (Bank of Korea, 2025b).  I would like to sincerely thank all of 4 you for your active participation in these efforts for change and innovation.

There have also been significant changes in our public communications. Christine Lagarde, the president of the European Central Bank, once emphasized ""humility"" as the key principle in central bank communication, stating that we need to narrow the gap with the public through simple and clear messages. The Bank of Korea has also been

striving to communicate through multiple channels that are tailored to various audiences. The ""Financial and Economic Snapshot"" provides visualized information to help people better understand economic trends. Our YouTube content has become more diverse, ranging from ""BOK Inside,"" which captures the daily lives of our staff, to ""BOK Overseas Briefings"" from our overseas representative offices. Starting this week, we are opening a gift shop at the Bank of Korea Money Museum to showcase souvenirs that represent the Bank of Korea, with the aim of raising the Bank's brand awareness.

We have also established a dedicated studio to improve the quality of our media content and are providing systematic media training for our staff. I am especially pleased and encouraged by the active media engagement of our younger employees, not only at headquarters but also at our regional offices. Thanks to these continued efforts, the number of subscribers to the Bank of Korea's YouTube channel has surpassed the Silver Creator Award threshold and is now nearing 110,000. We look forward to continued growth, with the aim of surpassing 150,000 subscribers in the near future.

Over the past three years, as I worked alongside all of you, I have witnessed the high level of competence demonstrated by our employees. The favorable assessments of our structural reform reports were only made possible by the in-depth analyses that supported them. I believe the quality of our work stands on par with that of any international institution, such as the IMF. Moving forward, I hope each of you will believe in your own potential and approach your work with greater initiative.

Of course, there are still several areas that require improvement, and some aspects have yet to meet expectations. More than anything, I encourage you to not limit yourselves to passively carrying out tasks directed from above, but to ask your own questions and to take the initiative in driving change within our organization. In my first commemorative speech marking the Bank's anniversary, delivered shortly after taking office, I emphasized the need to build an organizational culture where, ""everyone can express their own views regardless of seniority."" Some noticeable progress has been made toward such a ""vibrant Bank of Korea,"" but there are still not many employees who feel comfortable saying, ""Governor, I'm not sure I agree with you."" I hope to see more change in this regard going forward. My office door is always open.

Winston Churchill once said, ""To improve is to change; to be perfect is to change often."" The progress we have made so far is a valuable outcome made possible by the collective dedication of all our staff. I hope that this spirit of change will continue to flourish so that a self-sustaining, enduring culture of innovation can take firm root within the Bank.

As we stand at this meaningful milestone of our 75th anniversary, I would like to once again express my heartfelt gratitude to all of you who have made today's achievements possible. In covering so many topics in today's speech, I remain mindful that I was unable to extend specific words of appreciation to our colleagues who work quietly and tirelessly in essential areas such as currency management, security, customer service, business support, and facility maintenance. I am deeply aware that your dedication and hard work are truly the backbone of this organization. I believe that the time we build

together will lay a strong foundation not only for the future of the Bank of Korea, but also for a brighter future of our national economy. I sincerely wish you and your families continued health and happiness. Thank you.

- 1  Park, K. et al. 2025. ""The Recent Increase in Contraction Frequency, Structural Reform Alongside Cyclical Responses is Urgently Needed.""
- 2  sovereign AI"" is broadly defined as an AI system that is built and operated using a country's own data and infrastructure, with the ability to accurately reflect and understand a nation's or region's institutions, culture, history, and values, or the capacity to develop and manage such a system.
- 3  The Bank of Korea has been physically separating its internal and external computer networks since 2016 to protect its internal information systems from cyber threats.
- 4  A survey of 1,000 individuals from the general public by the external research agency Hankook Research, conducted on Feb. 10-13, 2025.",Chang Yong Rhee
https://www.bis.org/review/r250617b.htm,Yannis Stournaras: Welcome speech - Household Finance and Consumption Network meeting,"Welcome and introduction speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the Household Finance and Consumption Network (HFCN) Meeting, Athens, 12 June 2025.",2025-06-12 00:00:00,"## Yannis Stournaras: Welcome speech - Household Finance and Consumption Network meeting

Welcome and introduction speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the Household Finance and Consumption Network (HFCN) Meeting, Athens, 12 June 2025.

* * *

It is with great pleasure that I welcome you today to the Bank of Greece, for the June meeting of the Household Finance and Consumption Network (HFCN). We are proud to host this important event. The work that all of you, HFCN economists and statisticians, are doing is critical, as it provides useful insights into how our policymaking process ultimately affects the public.

The Household Finance and Consumption Survey (HFCS) has cemented itself as the pinnacle of harmonised pan-European household data-gathering. It started off as a much needed input to our monetary policy deliberations. Before the HFCS, only a handful of member states conducted their own household finance surveys, in an unharmonized fashion. We then often had to rely on aggregate statistics, or patterns of behavior identified from the Fed's Survey of Consumer Finances. This was not ideal, as there are significant differences between the US and the euro area. The HFCS serves to fill that gap, improving our understanding of key features of household economic behaviour in Europe.

The Global Financial Crisis laid bare the need to improve our understanding of how the economy works and how monetary policy functions. The workhorse model of our profession, the New Keynesian Representative Agent model, was useful, but had substantial shortcomings which became evident at that juncture, in particular the fact that it ignored most types of household heterogeneity. As luck would have it, the first wave of the HFCS started exactly as the sovereign debt crisis was unfolding.

But why is it important to measure the heterogeneity of households as regards their spending and wealth accumulation? From a monetary policy standpoint, two issues stand out:

The first has to do with how monetary policy transmission works on the household side. With a representative agent model, only interest rate changes matter, via the Euler equation. Recent research (Auclert, 2019), however, documents additional channels, related to heterogeneity across households in terms of i) their marginal propensity to consume (due to liquidity constraints), ii) the effect of monetary policy on earnings, and iii) the distribution of nominal debt liabilities. For instance, if monetary easing redistributes income towards low earners, who tend to consume more of it, then the effects of policy are amplified relative to standard channels. Such effects can only be captured through surveys like the HFCS. And indeed, the network has produced a rich set of findings along these lines.

The second issue involves the opposite concern, namely how transmission itself affects different sets of households. This was especially important during the asset purchase

programs, as it was often argued that asset purchases increased inequality by inflating the prices of assets held by the wealthy. However, this ignored the earnings channel of monetary policy, via which QE in fact reduces income inequality, while having little effect on wealth inequality (Lenza and Slacalek, 2024).

More recently, the HFCS was used to analyse another crucial issue, the distributional effects of inflation (Pallotti et al., 2024). The study found substantial heterogeneity across countries and age groups in terms of welfare losses, driven by heterogeneity in nominal net positions across households. Indeed, half of the 25-44 year olds gained (though a reduction in real debt) at the expense of retirees. Interestingly, losses were uniform across the consumption distribution, as rigid rents served as a hedge for the poor.

The HFCN has clearly been doing a great job in highlighting the quantitatively important dimensions of household heterogeneity in the euro area. I see two avenues for further work:

First, administrative data or data from the ECB's Consumer Expectations Survey could complement the information collected by the HFCS to further deepen our understanding of the above questions.

Second, a somewhat unexplored topic, and a natural next step, would be to move from documenting heterogeneity to understanding the of heterogeneity.  For causes instance, at the Bank of Greece we included a short module in the fifth wave of the HFCS, to examine whether people with a refugee background have different inclinations towards the accumulation of immovable assets. Going forward, it would be worthwhile to explore what other types of questions could be added to the survey, so as to further explore the drivers of household heterogeneity.

At the Eurosystem, we take pride in our ability to design surveys and independently conduct research, so as to inform policy. This is crucially important, especially in a world where public discourse, notably on issues of distribution and inequality, seems to be  under intense scrutiny in both policy debate and academic research. Surveys such as the HFCS and the ensuing research output become even more important, as we gradually come to realise that heterogeneity does matter for policy design. This makes it even more crucial that we continue such work.

Last but not least: May I take the opportunity to commemorate our distinguished and beloved colleague Sotiris Saperas, late member of the HFCN, not only for his scientific expertise, his valuable contribution to the HFCS project, but also for his kindness and exemplary character.

Thank you for your contribution to the HFCN and I wish you a very fruitful meeting.

## References

Auclert, Adrien (2019), ""Monetary Policy and the Redistribution Channel,"" American Economic Review,

109(6), 2333-2367.

Laudenbach, Christine and Ulrike Malmendier and Alexandra Niessen-Ruenzi (2025), ""The Long-lasting Effects of Living under Communism on Attitudes towards Financial Markets,"" Journal of Finance.

Lenza, Michele, and Jiri Slacalek (2024), ""How Does Monetary Policy Affect Income and Wealth Inequality? Evidence from Quantitative Easing in the Euro Area,"" Journal of Applied Econometrics.

Pallotti, Filippo and Gonzalo Paz-Pardo and Jiri Slacalek and Oreste Tristani and Giovanni Violante, (2024), ""Who bears the costs of inflation? Euro area households and the 2021-2023 shock,"" Journal of Monetary Economics, vol. 148(S).",Yannis Stournaras
https://www.bis.org/review/r250617a.htm,Gent Sejko: Central banking and economic history - reflections and prospects,"Welcome address by Mr Gent Sejko, Governor of the Bank of Albania, at the 5th Conference of the Museum of the Bank of Albania on ""Central banking and economic history: reflections and prospects"", Tirana, 11 June 2025.",2025-06-11 00:00:00,"## Gent Sejko: Central banking and economic history - reflections and prospects

Welcome address by Mr Gent Sejko, Governor of the Bank of Albania, at the 5th Conference of the Museum of the Bank of Albania on ""Central banking and economic history: reflections and prospects"", Tirana, 11 June 2025.

* * *

Dear colleagues, researchers and friends,

It is a special pleasure for me to welcome you to this significant event, which celebrates the 100th anniversary of the Bank of Albania's foundation. Today's conference represents a commemorative event as well as an opportunity to reflect on the journey of one of the fundamental institutions of our state, and more broadly, on the evolution of Albania's economy, identity, and institutional development, and that of the region.

Sami Frashºri, one of our most farsighted thinkers, was the first envisioning the idea of establishing a national Albanian bank. In his political manifesto in 1899, ""Albania-What it Was, What it Is, and What it Will Become?"" Frashºri wrote about a sovereign Albanian state, founded on strong institutions. Among them, he considered the central monetary authority crucial for national stability and progress. This idea, born during a time of turmoil in the Balkans, matured over a century characterised initially by instability, but also by reconstruction and reforms.

The history of the central bank in Albania reflects the evolution of the country itself, with three distinct phases shaped by different political and economic systems. Despite with no continuity, the first attempt to establish a national bank took place in 1913, immediately after the Declaration of Independence. Ismail Qemal Vlora, founding father of our independence, viewed the national bank as the second most important institution of the new state, after the Act of Independence. The foundation of the National Bank of Albania in 1925 brought to life his precious ambition. The bank, constructed according to architectural structures of European central banks and under Italian administration, issued the first national currency by operating based on the gold standard, and simultaneously performed both central banking and commercial banking functions.

After World War II, the foundation of the Bank of the Albanian State reflected the transition to a planned economy. Before pursuing a path of almost total isolation, during this period, Albania realigned through certain alliances, first with Yugoslavia, then with the Soviet Union, and finally with China. The central bank operated within a closed system for almost five decades, issuing currency, managing limited financial activities, and implementing policies in an economy disconnected from global markets.

In the early 1990s, the third chapter began, with the democratic transition and the establishment of the Bank of Albania, as a modern and independent institution. Our integration into international institutions such as the IMF and the World Bank marked a turning point, laying the foundation for market reforms, strengthening institutional capacities, and the path toward European integration. Nowadays, the Bank of Albania safeguards the price stability, financial stability, and macroeconomic stability.

Over time, the Bank has operated under practically all monetary regimes, from the gold standard to centralized planning, monetary targeting, and inflation targeting. The Bank, through each transition, has exhibited pragmatism and professionalism, always aiming to serve as a stabilizing force in times of uncertainty.

This evolution has taken place thanks also to the contributions of people - economists, civil servants, researchers, and even artists - whose expertise and dedication have shaped the Bank's identity. We are deeply appreciative of their extraordinary work in developing the institution. In addition we are grateful to researchers for documenting this journey: for example, the distinguished economist Haxhi Shkoza; the esteemed writer, academic, and former director of the Bank, Dhimitºr Pasko; Professor Aristotel Pano, who co-curated with us the 20th and 21st-century sections of the Bank's museum and authored the official history of the Bank of Albania for this centennial; Professor Iljaz Fishta and Kristo Frashºri, along with many others who have contributed and continue to contribute to the writing of Albanian banking history.

However, the full story has yet to come to light. Over the past three years, as part of this anniversary, our museum and research teams have uncovered internal institutional discussions, political decisions, and cultural dimensions that still remain hidden in archives or scattered across publications of the time. We are devoted to preserving and expanding this institutional memory as understanding the past boosts the decisions we make for the future.

Albania's path toward integration into the European Union has been a key pillar of the undertaken institutional and economic reforms. The Bank of Albania plays a crucial role in this process, aligning its policies and practices with the European standards, aimed at building up the stability, transparency and the resilience necessary for the European Union membership. Looking ahead, we have embraced a strong dedication: to bolster institutional readiness, enhance regional cooperation, and ensure that Albania's financial system is prepared to face the challenges and benefits from opportunities of an integrated European future.

These new challenges or opportunities, like: digital currency, climate risks, artificial intelligence and financial innovation are transforming the global financial landscape. Albania is no exception. The next decades will require agility, foresight, and close cooperation with European and international partners. In this regard, we must continue to strengthen our institutional capacity- to meet our core mandate, also to support the stability and well-being of the Albanian citizens.

For these reasons, conferences like this one are important. By bringing together historians, museologists, researchers, and economists, we exchange new perspectives on how monetary institutions evolve, how monetary decision-making shapes outcomes, and how confidentiality is achieved and maintained. This conference is not confined in only studying the past. It also aims to open up the necessary dialogue about what comes next.

Thank you for your participation and contribution to this ongoing discussion.

I look forward to reading your reflections and research, along with the next chapters we will write together.",Gent Sejko
https://www.bis.org/review/r250616d.htm,Sethaput Suthiwartnarueput: The future of money,"Speech by Dr Sethaput Suthiwartnarueput, Governor of the Bank of Thailand, at the Central Banking Summer Meetings, London, 11 June 2025.",2025-06-11 00:00:00,"## Sethaput Suthiwartnarueput: The future of money

Speech by Dr Sethaput Suthiwartnarueput, Governor of the Bank of Thailand, at the Central Banking Summer Meetings, London, 11 June 2025.

* * *

It is a pleasure and privilege to be asked to speak at the Central Banking Summer Meetings on the future of money. It is also a daunting and difficult task given the rapid developments and sheer number of initiatives going on in this area. Before looking forward to the future of money, it may therefore be helpful to first look back at the basics and the fundamental functions of money. What are some of the things that will not change? This will help us to anchor what any well-functioning future monetary system should look like. We can then also use these fundamentals to help serve as guidelines and guardrails for assessing monetary innovations so that they improve and strengthen the system without inadvertently undermining it. Along the way, we will see that while the future of money will have many innovations that we cannot foresee and many functions that are best left to the private sector, there are some critical functions that central banks must continue to provide, whatever the future holds.

## The fundamentals of money

The main purpose of money and the monetary system is to facilitate exchange. At its most essential, this system consists of 3 elements: (1) a unit of account (UOA), (2) a means of payment (MOP); and (3) mechanisms to transfer the means of payment and settle transactions.

While all three elements are essential, the UOA function is perhaps the most intrinsic and one upon which the other elements build. It is the metric by which the value of all goods, services and financial assets are measured. Being a purely abstract, immutable unit of measurement like the unit of distance, it acts like a language to translate and compare relative values of goods and services. This comparison of relative values - in other words an exchange rate among goods and services - underlies trade. And having a common numeraire greatly reduces the number of relative prices that need to be known. The UOA is primitive in the sense that it is the underlying basis upon which the rest of the monetary system builds on.

The second element, the means of payment (MOP), is a representation of the UOA and acts as a generally accepted instrument that settles obligations. It underpins the quidpro-quo process of exchange in a decentralised trading system. Being a representation of the UOA means that the MOP should at all times and across all forms have a fixed exchange rate of 1 relative to the unit of account. The ""singleness of money"" means that all monies trade at par relative to the UOA, and hence to each other. The alternative is needless complexity, cost and confusion. Ruling out fluctuating exchange rates between different forms of money allows money to circulate freely and play its role in helping to coordinate economic activity.

The third element, the mechanism for transferring the MOP, must be secure, efficient, and timely. This guarantees integrity in the transfer of value across counterparties, enabling settlement finality.

Many of you will have noticed that I have left out the traditional store of value function of money. This is not because it is unimportant. But it is simply not a distinguishing feature of money. Any asset, financial and real, is a store of value. Moreover, because a viable MOP must have a fixed exchange rate of 1 relative to the UOA, by construction it must also intrinsically be a store of value. There is therefore no need to refer to this function separately.

## Trust in money: the role of central banks

While the three elements described are the essential technical components of a monetary system, underlying it all and even more fundamental is trust. A precondition for the system to work at all is trust that the measure of value will stay relevant, that the object functioning as money will be generally accepted and that payments will be executed. As they say, money makes the world go round, but trust is what makes money go round. Ensuring trust is difficult and calls for a strong institutional setup. Central banks, along with banking and payment supervisory authorities, are key pillars of this edifice. 1

Safeguarding the integrity of the UOA is the chief responsibility of central banks through its conduct of monetary policy, ensuring that the UOA (the price of money in terms of goods and services) can be well-anchored. Like most essentials, the critical importance of the UOA is most apparent when it fails. Loss of integrity of the UOA means high inflation or persistent deflation. Both are highly disruptive to the process of exchange. In the extreme case when trust in the UOA disappears, the economy adopts other countries' UOA (dollarization) implying a loss of monetary sovereignty.

While the issuance of the MOP and the mechanism for transferring it can, in part, be outsourced to the private sector (e.g., bank deposits, e-money), maintaining trust requires strong regulatory and supervisory frameworks to ensure they function as they should at all times. The singleness of money, for example, is not something that obtains naturally, but must be actively maintained. The difficulty of creating and maintaining trust in money is evidenced by that fact that most private initiatives creating money essentially piggyback on the prevailing system by adopting existing national units of account and tying settlement ultimately to bank deposits. Sound monetary policy and regulatory frameworks will continue to be the bedrock of any future monetary system.

## So what else does the future of money hold?

My guess would be a continuation of the general direction of travel in recent years in two areas: (1) more flexible monetary policy frameworks; and (2) enhanced interoperability of the payment system. Let me discuss each in turn.

First, a more flexible monetary policy framework. Inflation targeting has proven to be a robust framework for safeguarding the UOA. But as the economic and financial landscape changes, it will need to evolve. One particular challenge is the greater role of

sector-specific factors as well as supply shocks more generally in driving price movements. As witnessed during the post-pandemic global inflation surge, persistent supply-side pressures can generate sharp and heightened bouts of inflation volatility as well as drive large sustained relative price changes. Global trade frictions, reconfigurations of supply chains, technological innovation, demographic changes and the climate transition will exert persistent pressures on trend inflation.

The greater prominence of idiosyncratic price shocks and relative price trends, means that inflation may deviate from targets more often and more persistently even as it is anchored over time. The ability of central banks to steer inflation, especially within narrow ranges, becomes more limited. In such a setting, there is a need for greater flexibility and tolerance both for the size of deviations from inflation targets, as well as the time horizon over which inflation is brought back to target. We need to recognize clearly the risks associated with overly active and excessive fine-tuning of policy. Inflation targeting should evolve towards increased flexibility, reducing the heavy emphasis on achieving precise numerical targets, and allowing monetary policy to keep a sharp focus on the medium term. At the Bank of Thailand, this approach allowed us to look through Covid-era inflation and enabled a smooth transition to a more neutral policy rate without overshooting and supported a rapid disinflation to pre-pandemic levels in just 6 months without disrupting the economic recovery.

Second, greater payments interoperability. The other two of our three elements, the MOP and mechanism for its transfer, which I will loosely refer to as the payment system, have seen extremely rapid innovation and progress. The dimension in which the payment system will continue to evolve is interoperability, broadly defined as the ability of the various forms of MOP to be seamlessly exchanged against one another and to be interlinked with other information systems. Greater interoperability will need to be underpinned by three pillars: a technical pillar that enables different systems to communicate and exchange data seamlessly; a legal pillar that ensures rights and obligations of transacting parties are upheld across potentially different regulatory schemes; and an economic pillar that creates incentives for service providers to facilitate interoperability.

An interoperable payment system is crucial for efficient and secure digital transactions allowing, for example, the transfer of money on one system to be linked to those in another (PvP), to the transfer of securities (DvP), or to other preset conditions prescribed in information systems that embed particular states of the world (programmability). The push for interoperability is not new. One can think of the ATM machine as an example of an innovation that allowed interoperability between cash and bank deposits.

The creation of PromptPay, our retail fast payment system enhanced interoperability of bank deposits across institutions. It has been a game changer, enabling the rapid takeup of digital payments. This was aided tremendously by the development of a single, standardized QR code for payments. Not only did this prevent fragmentation, but it also allowed merchants to accept electronic payments simply using a printed QR code rather than installing costly payment terminals - a major factor in driving adoption for an economy with a large informal sector.

We have also focused heavily on enhancing interoperability of money across borders, given the well-known inefficiencies and pain points that exist in cross-border payments. At the retail level, we continue to build on cross-border QR payments connecting PromptPay with payment systems in 8 Asian countries. This allows Thai merchants to receive payments from abroad as seamlessly as domestic transactions. Through the PromptPay-PayNow linkage with Singapore, the world's first linkage of fast payment systems, residents in both countries can send and receive money instantly, 24/7, at low cost using just the recipient's mobile phone number. On a multilateral basis, we are working through Project Nexus to establish a platform through which a single connection would allow fast payments system to reach all other countries on the network. At the wholesale level, we continue to explore in cooperation with three other central banks through Project mBridge the creation of a scalable platform for crossborder payments on a distributed ledger. The platform has demonstrated that payment costs could be reduced by half, settlements could be done in seconds, and settlement risk could be eliminated through payment-versus-payment (PvP) transactions.

With the more widespread adoption of DLTs, interoperability of the payment system going forward will center around two challenges: (i) interoperability of money across different DLT networks (e.g., through ""bridges"" or interledger protocols); and (ii) interoperability between DLT networks and external off-chain data sources, including the traditional financial system (e.g., through 'oracles'). The former is a precondition for preserving the singleness of money in tokenized form. The latter is the basis for programmability. Together this could enable the movement of digital assets and value across different platforms to be synchronized, potentially generating large efficiency gains through the simplification of the clearing and settlement process. Through our enhanced regulatory sandbox, we are currently exploring some of the potential new payment functionalities that come from interlinking money with various information triggers. 2

## Anchors and guardrails for the future of money

When thinking about the future of money, it is important to recognize that the current system, despite its flaws, rests on very solid foundations. The bar for innovation should therefore be reasonably high. There is a lot of hope, and a fair amount of hype, surrounding potential new forms of money. We should add a measure of humility to the mix. As we continue to innovate the form of money, we must make sure that we don't inadvertently undermine the basic elements that make money function well. Some of the purported new forms of money need to be critically assessed in this light. Cryptocurrencies, for example, do not offer a sound UOA, while stablecoins are susceptible to breaking par - and hence violate the singleness of money - even as they piggyback on existing national units of account.

The stability of the monetary system is tied to its inherent hierarchy. Standing at the top, central bank money (bank reserves and cash) are the ultimate means of payment. One level down, bank deposits are a form of credit in that they are promises to pay cash or to confer payment finality through ultimate settlement in the central bank balance sheet. Further down the pyramid, non-bank monies (e-money, stablecoins) are promises to pay bank deposits. At each layer of the hierarchy, diverse institutional mechanisms underpin the credibility of such a promise to pay, but it is still a promise to pay a higher

form of money. In normal times, the hierarchy matters little. In stress periods, however, the differentiation in the claims of various instruments along the hierarchy reasserts itself as agents shift into liabilities higher up in the hierarchy. 3  In this way, central bank money acts as an anchor for the whole system. All monies rely ultimately on recourse to central bank money, something that becomes most evident during crises.

No matter how the future of money evolves, I am therefore absolutely confident of one thing: the continued centrality of central bank money. I am equally confident that the future of money is not decentralized digital tokens which are completely untethered to central bank money. We will continue to have a critical role to play, one which we cannot outsource. We central bankers and regulators will therefore need to continue working hard to sustain the foundational trust that must underpin any well-functioning future monetary system.

Thank you very much.

- 1  See Borio, C (2019): ""On money, debt, trust and central banking"", BIS Working Papers No 763 for a more detailed discussion.
- 2  These include automated escrow agents to eliminate the need for manual approval and reduce the risk of non-payment or fraudulent claims; payment-versus-delivery with respect to goods for use in e-commerce; purpose-bound loans where funds are automatically directed to a designated recipient, such as a supplier, ensuring that a loan is used as intended.
- 3  For a more detailed exposition, see Mehrling, P (2013): ""The Inherent Hierarchy of Money"" pp. 394-404 in Social Fairness and Economics: Economic Essays in the Spirit of Duncan Foley, edited by Lance Taylor, Armon Rezai, and Thomas Michl, Routledge.",Sethaput Suthiwartnarueput
https://www.bis.org/review/r250617g.htm,Abdul Rasheed Ghaffour: Welcoming address - Sasana Symposium 2025,"Welcoming address by Mr Abdul Rasheed Ghaffour, Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the Sasana Symposium 2025, Kuala Lumpur, 17 June 2025.",2025-06-17 00:00:00,"## Abdul Rasheed Ghaffour: Welcoming address - Sasana Symposium 2025

Welcoming address by Mr Abdul Rasheed Ghaffour, Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the Sasana Symposium 2025, Kuala Lumpur, 17 June 2025.

* * *

Welcome to Bank Negara Malaysia and welcome to Sasana Symposium 2025.

Since BNM's establishment in 1959, Bank Negara Malaysia has seen the nation through many pivotal moments. From an economy that was mainly based on primary commodities to a highly diversified economy with strong global linkages. Today, we meet at a critical juncture.

- Global trade orthodoxy is being up-ended;
- Policy uncertainties are high; and
- Technological advancement is changing the way we work and operate.

We are approaching this environment from a position of strength. The latest highfrequency indicators such as the manufacturing industrial production index (IPI), services, exports and wages point toward a resilient growth of the Malaysian economy. Consumer spending continues to expand as reflected by the steady growth in retail trade activity, underpinned by favourable labour market conditions. While the cost of living remains a burning issue but inflation, at least, is low and steady. Against this backdrop, open discourse is important to gather the best ideas so that Malaysia can effectively respond to these external challenges, while we continue to drive the muchneeded structural reforms for Malaysia.

From its inception in 2023, Sasana Symposium has hosted engaging dialogues around the thinking, analyses and assessment of the economy and the financial system that we have shared in our flagship reports published in March. This year, we hope to continue the tradition of bringing to life the pages of our reports and visual displays of our policy and initiatives in practice. Through panel sessions, fireside chats and workshops, we share not only what we do, but why we do it. The sessions encapsulate the range of reforms and initiatives we are driving, which is aimed to make a meaningful difference for the . From topics like financial literacy; payment linkages; and digital assets to rakyat monetary stability; financial scams and even, healthcare reforms - these are the building blocks of a stronger, more resilient Malaysia.

Structural reforms are not something one institution or individual can tackle alone; it requires a whole-of-nation approach. One area where this is on full display is in healthcare reforms, where rising medical inflation demand a coordinated approach. Together with the Ministry of Health, the Ministry of Finance and key stakeholders, we are working to implement key initiatives, coined as RESET, to address the high medical inflation. This includes:

- R evamping medical and health insurance and takaful; r

- E nhancing price transparency; e
- S trengthening digital health systems; s
- E xpanding cost-effective care options; and e
- T ransforming provider payment mechanisms. t

The success of RESET hinges on the involvement of all stakeholders in building a more accessible and resilient healthcare system for Malaysians. More details on RESET and broader healthcare reforms will be discussed in the panel session - 'Rising Cost, Rising Stakes: Expediting Reforms to Address Medical Inflation' tomorrow, which will feature Yang Berhormat Datuk Seri Dr. Haji Dzulkefly Ahmad, Minister of Health, Yang Berbahagia Datuk Johan Mahmood Merican, Treasury Secretary-General, Ministry of Finance, Aakash Mohpal, Senior Economist from World Bank and myself.

In parallel, we continue advancing initiatives that align with our core mandates. One such initiative is the Qualified Resident Investor, or QRI Programme. After a successful pilot, we are officially rolling it out on 1 July 2025. It is already showing promising results, with strong inflows into our domestic financial market exceeding USD1 billion. This effort supports our goal of fostering two-way flows in the domestic financial market which helps to ensure orderly market conditions that support sustainable economic growth and stability of the foreign exchange rate.

As stewards of financial stability, we recognise the pace at which the digital asset landscape is evolving. Hence, we are also driving forward with digitalisation efforts to ensure Malaysia's financial system remains fit-for-purpose and able to serve the needs of the Malaysian economy. From the modernisation of RENTAS, our payment systems infrastructure, to the expansion of cross-border payment linkages, and now the exploration of asset tokenisation and other digital solutions, we aim to build a strong foundation for an adaptive and resilient economy.

In driving our green agenda forward, the Greening Value Chain (GVC) initiative - first introduced in Malaysia in 2022, is now gaining momentum. As Malaysia chairs ASEAN this year, we are also actively sharing our experiences and learnings to support regional efforts in building sustainable, climate-resilient ASEAN economies. I am also pleased to inform that the Climate Finance Innovation Lab (CFIL), an initiative under the Joint Committee on Climate Change (JC3), is now open for business. The CFIL serves as a collaborative platform to develop and test new financial solutions for climate and naturerelated projects. More details on this will be discussed tomorrow in the panel session 'Building Climate Journey: How Wide Ranging is the Funding Mechanism'.

## Ladies and gentlemen,

Reforms and policies are not mere ideas on paper. They can make a real difference in the everyday lives of Malaysians. And that is why Sasana Symposium goes beyond pages and panels. It showcases people benefiting from our policies too. Today and tomorrow will provide a chance for you to see how the financial sector initiatives take shape in ways you can see, feel, and connect with.

- iTEKAD, our social finance programme, has empowered microentrepreneurs to grow their businesses and create jobs in their communities. I invite you to visit iTEKAD, to meet and support the entrepreneurs whose stories reflect this Bazar

impact. You will meet Mohammad Zamzum who has expanded his business to the world by exporting his cooking paste to the after participating in iTEKAD. He is one of the over 10,000 microentrepreneurs onboarded in iTekad, where some former recipients are now zakat contributors. asnaf

- Even the wristlets you receive today are crafted with upcycled plastic embedded with shredded polymer banknotes - a visual reminder of BNM's role in fostering a resilient and sustainable economy.
- I also welcome you to explore the ASEAN Tunnel and exhibition, an immersive and interactive showcase of ASEAN's economic and financial journey - past and present.

In closing, I would like to extend my sincere appreciation to our guest of honour, Yang Amat Berhormat Prime Minister and to our esteemed moderators, panellists, speakers and participants for their insights shared over these two days. True to the spirit of ' ' which carries the meaning of 'learning and gathering', let this symposium Sasana continue to be a meeting of purpose where ideas converge, and reforms take root.

On that note, ladies and gentlemen, thank you.",Abdul Rasheed Ghaffour
https://www.bis.org/review/r250617d.htm,Gabriel Makhlouf: Publication of the Financial Stability Review 2025:1,"Opening remarks by Mr Gabriel Makhlouf, Governor of the Central Bank of Ireland, on the publication of the Financial Stability Review 2025:1, Dublin, 11 June 2025.",2025-06-11 00:00:00,"## Gabriel Makhlouf: Publication of the Financial Stability Review 2025:1

Opening remarks by Mr Gabriel Makhlouf, Governor of the Central Bank of Ireland, on the publication of the Financial Stability Review 2025:1 , Dublin, 11 June 2025.

* * *

Welcome to the Central Bank for the release of the first  Financial Stability Review of 2025.

As you know, the Financial Stability Review is not about what we expect to happen. Its focus is very much on what could happen. Specifically, it sets out our assessment of possible downside risks to the outlook and the capacity of the financial sector to withstand adverse shocks. And, since our last Financial Stability Review published in December, our assessment is that the risks facing the financial system have increased. That is mainly due to developments outside of Ireland, but with important implications for Ireland.

Since the beginning of the year, we have seen three interrelated shocks affecting the global economy. A material shift in trade policy; a sharp increase in policy uncertainty; and an increase in market volatility. The trade policy shifts by the US Administration and the countermeasures by its trading partners, have led to a marked increase in tariffs. This trade policy adjustment has also been accompanied by a sharp increase in policy uncertainty. For example, it remains unclear where tariffs between the US and its trading partners might settle over time. And, in April, we saw a sharp, if short-lived, spike in market volatility, given the unanticipated scale and scope of the so-called ""reciprocal"" tariff announcements by the US Administration.

In light of these developments, the global growth outlook has weakened. Short-term growth forecasts have been revised downwards across the world. And uncertainty around these forecasts is particularly elevated, given the range of potential outcomes around trade policy. In markets, prices of risky assets have largely recovered from their troughs during the April episode of heightened volatility. But we now see a reemergence of the previous disconnect between market volatility and measures of economic policy uncertainty. This leaves markets vulnerable to a sudden adjustment, if the underlying policy uncertainty is not resolved.

As a small open economy, with a high reliance on foreign direct investment from the United States, Ireland is particularly exposed to recent trade tensions and external macro-financial developments. In our Financial Stability Review published today we consider what these global developments mean for Ireland and the outlook for domestic financial stability.

In the short run, the main channel through which these developments are likely to affect the domestic economy is uncertainty as well as a reduction in external demand. There has already been some softening in consumer sentiment and industry engagement points to cautiousness amongst companies, at least for now, in terms of new investments. Next week we will discuss, in detail, the domestic economic outlook, when we publish our second Quarterly Bulletin of 2025. But we had already reduced our forecast for economic growth in March, on the back of higher uncertainty. Over the

medium-term, any reduction in activity by US owned multinationals, particularly in economically concentrated and trade sensitive sectors such as pharmaceuticals and ICT, could affect employment, tax revenue and investment. The economic effects of any such shifts are subject to significant uncertainty and would materialise over a longer horizon. From a financial stability perspective, any material slowdown in domestic economic growth could raise credit risks for Irish banks and negatively affect market sentiment towards the Irish sovereign.

Turning to financial markets, the sharp increase in global market volatility in April led to higher liquidity demands among certain groups of investment funds based in Ireland similar to the patterns that we saw globally. Overall, though, these demands were absorbed and markets continued to function in an orderly manner throughout that period. Given the large, internationally-focused, non-bank financial intermediary (NBFI) sector in Ireland, we have dedicated a part of today's report on how different segments of the sector responded to the heightened volatility, that we observed in April. At a global level, structural vulnerabilities in parts of the sector mean that the behaviour of non-banks could amplify future market stresses. This underscores the importance of continued progress in strengthening the regulatory framework for NBFI, including at a multilateral level. For the domestic economy, non-bank lenders or real estate investors that are heavily dependent on market-based financing may be sensitive to shocks in global financing conditions.

Beyond macroeconomic effects arising from policy shifts and international financing risks tied to the interplay between the pricing of treasuries and US debt sustainability, regulatory divergence with the US also poses financial stability challenges. The Central Bank is engaging proactively with the simplification agenda without compromising on the standards required to deliver on our mandate and maintain resilience across the domestic financial system.

As we outline in the Review, set against this backdrop, borrowers and the domestic banking system have built substantial resilience in recent years. These strong financial positions provide an important buffer against potential adverse shocks. Given the ongoing uncertainty, however, it is important that we are prepared for potential macro or market shocks, and that the financial system is maintaining -and indeed where necessary building-both financial and operational resilience for the period ahead. Cyber and climate related risks continue to be important sources of adverse shocks. Ensuring resilience remains a key focus of our supervisory and macroprudential work. In that context, we are also confirming today that the countercyclical capital buffer rate will remain at 1.5 per cent.

Let me finish off by taking a more balanced perspective between risk and opportunity. Much of what we are seeing now is a particularly swift realisation of one of a number of transitions that the economy is facing, with various implications across the near, medium and longer-term.  Understanding the drivers of these transitions, and the nature of their implications, provides clear motivation for policy to maintain and build economic resilience, so that households, businesses and the community as a whole can weather the inevitable storms, and take the opportunities that such transitions can also provide.

I have reflected before on a number of these transitions, such as demographic change, climate change and digitalisation, and fragmenting geo-economic relationships. The

external shifts we are seeing clearly present risks to the European and domestic economy. And I have focused on these, given that we are here today to talk about the Financial Stability Review. Equally, though, there are also opportunities for Europe and for Ireland: to harness the power of the Single Market, while remaining open to global capital and aligned with global standards; to move towards a genuine Savings and Investment Union, to enhance productivity growth and to forge new trade links with the rest of the world. These opportunities, done well, have the potential to contribute towards domestic and European financial stability, while also fostering long run economic growth.

Thank you for joining us this morning. I will hand you over to Director of Financial Stability Mark Cassidy to take us through the report, before answering your questions.",Gabriel Makhlouf
https://www.bis.org/review/r250617f.htm,"Olli Rehn: Europe's triple test - defence, decarbonisation and dynamism","Speech by Mr Olli Rehn, Governor of the Bank of Finland, at the Organisation for Economic Co-operation and Development (OECD) lecture series, Paris, 13 June 2025.",2025-06-13 00:00:00,"## Olli Rehn: Europe's triple test - defence, decarbonisation and dynamism

Speech by Mr Olli Rehn, Governor of the Bank of Finland, at the  Organisation for Economic Co-operation and Development (OECD) lecture series, Paris, 13 June 2025.

* * *

## Presentation accompanying the speech

Ladies and Gentlemen, Dear Friends,

Thank you for the kind invitation to contribute to the newly launched OECD lecture series by central bank governors. That said, I usually try to steer clear of full-blown lecturing - so I look forward to a lively dialogue following my opening remarks!

It is a real pleasure to be back at the OECD. I've always held the Organisation in high regard, particularly for its high-quality, rigorous work on structural reforms and evidencebased policy analysis.

Before the subject at hand, allow me first a personal recollection. Back in the early 1990s - when I was an even younger man than today - I chaired the Finnish Delegation to the Council of Europe. I made it my goal to join the Council's Economic Committee, which has parliamentary oversight of the OECD. We met a few times a year in these premises.

Whenever the meeting was over, I would head straight to the OECD basement bookstore. That was my trusted source of fresh reading material - valuable analytical raw material to use for my doctoral thesis. This was in the pre-internet era, when research still meant browsing real books, not just typing into a search bar or prompting ChatGPT.

So yes, I owe the OECD a sincere thank you for its indirect but invaluable contribution to my DPhil on corporatism and industrial competitiveness in small European states. A rather niche topic, perhaps - but, surprisingly, still relevant today. I can tell you that I had many times when reading the Draghi report on European industrial dØjà vu competitiveness!

Of course, the usual disclaimer applies: the OECD bears no responsibility for any shortcomings of the thesis - if indeed any are ever discovered.

Returning to today's subject, I shall speak about Europe's triple test, three major tests facing Europe: . defence, decarbonisation and dynamism

I'll start with the euro area's short-term outlook and monetary policy, before addressing the longer term strategic challenges that Europe - and many OECD countries - now face.

And for the more globally minded, please forgive me if I have a particular European streak in my talk. There is a good reason for this. Going way back, I wrote my first

longer article on the euro in 1992, titled 'The General Theory of Employment, Money and Integration' - no lack of self-confidence by a young chap, boldly paraphrasing Keynes! At that time, when the Maastricht Treaty had not yet been signed and Finland not even a member of the European Community, hardly could I imagine that the euro would take centre stage in my life - no regrets, as building Europe continues to be a most meaningful and constantly evolving project.

## Slide 2 - Power politics is overshadowing the world economy now with exceptional force

We are living through a profound geopolitical shift, concretely felt in Russia's illegal, brutal war in Ukraine and the tragic conflict in the Middle East, which took yet another new turn last night following Israel's air strikes against Iran's nuclear infrastructure and Iran's retaliation.

The post-war, rules-based international order is under pressure from authoritarian power politics. Leaders like Xi, Putin and Trump are, each in their own way, pushing for a world where might is right. A tri-polar order dominated by great power rivalry is unlikely to bring peace or prosperity.

The US is reassessing its global role, with a widening strategic distance from Europe. While some hope for a return to 'the old normal', there are few signs of that. Europe must face reality and take far greater responsibility for its own security, as the European pillar of NATO.

At the same time, US economic thinking has shifted. Protectionism has returned, and the US risks undermining its greatest advantage - its global talent pipeline. Actions against universities and immigration may hurt the country's long-term growth even more than tariffs.

Europe is getting ready to fill the void - once we move boldly to attract talent, invest in innovation and close the competence gap with the US, as highlighted in Mario Draghi's report published last September.

International cooperation remains essential. Few things unite economists more than our support for free trade. Europe must defend and deepen its network of trade agreements, particularly with emerging markets.

## Slide 3 - Growth in the euro area is clouded by trade tensions and elevated global uncertainty

The conditions remain favourable for a strengthening of euro area growth, despite tariffs and tariff threats.

In particular, strong real wage and employment developments and the easing of financing conditions due to lower interest rates support a gradual strengthening of growth. The positive growth impact of higher defence spending will also partly offset the adverse impact of tariffs.

According to the June forecast of the Eurosystem, euro area GDP will grow by 0.9% this year, 1.1% next year and 1.3% in 2027.

## Slide 4 - Inflation is currently at around the ECB's 2% medium-term target

Inflation in the euro area has declined to 1.9% (in May 2025), with core inflation at 2.3%. Service prices and wages have moderated roughly as expected, and energy prices have been easing since last year - at least until last night. Overall, inflation has stabilised at around our 2% medium-term target.

Trade tensions complicate the picture, of course. To illustrate the uncertainty surrounding tariffs, the ECB published alternative scenarios in the context of its forecast. The scenarios show that inflation risks are tilted to the downside. However, they do not describe all possible channels. For instance, serious disruptions to financial markets are not factored in.

Given this context, we decided at the ECB Governing Council last week to cut policy rates - the eighth time since last June. With uncertainty ahead, we retain full freedom of action and remain committed to price stability.

The recent inflation shock has taught us valuable lessons - especially the paramount importance of central bank independence and anchored expectations. These lessons will be summarized in the results of our ongoing strategy review, due to be published in the third quarter.

## Slide 5. Three and a half periods of euro area inflation, 1999-2025

To give you a broader context for the ECB strategy review, let's take a look at the short history of inflation in the euro area over the last quarter of century. I've divided it into . three and a half distinct periods

First , in the final years of the Great Moderation from 1999 to 2009, inflation averaged around 2%. , in the post-financial crisis period until 2021, inflation was Second exceptionally low, averaging just above 1%. , in 2021-23 inflation surged and Third averaged over 5%. Each of these periods was characterized by different drivers of inflation (or deflation!).

When we at the ECB Governing Council last reviewed our monetary policy strategy in July 2021, we had suffered nearly a decade of too low inflation. We opted for a symmetric inflation target of 2% over the medium term, which has served us well through the multi-crisis years.

While deciding that, we were on the brink of a period of dramatically accelerating inflation. After the surge of inflation and its peak at 10.6% in October 2022, euro area inflation was brought back down to the vicinity of the target, thanks to the ECB tightening monetary policy and to lower energy prices. Today we are in the fourth period, now roughly halfway through. As said, we've been on an easing cycle since last June.

For now, looking at headline inflation, we are in a good place: inflation has returned to around 2 percent, which is our medium-term target.

However, as all the friends of Europe's ""national"" sport know, in a football game the most dangerous halftime scoreline is 2-0. That's when complacency creeps in, and suddenly the game can take a drastic turn.

We face the same risk in monetary policy. Therefore, we must stay vigilant and monitor risks of inflation de-anchoring . As inflation is projected to stay to both directions below 2% in 2026, we must be mindful of not slipping towards the zero lower bound again, as happened in the 2010s.

Especially, we must focus on keeping the inflation expectations firmly anchored to our 2% target. That's why will remain alert and be ready to act with agility and Team ECB determination, as and if needed.

## Slide 6 - Europe is under challenge from the world of geopolitics - investment needed now in security and defence

Russia's war in Ukraine and the US foreign policy shift have made it clear that Europe must take greater responsibility for its own defence. In the short term, the best way to strengthen European security is to support Ukraine. At the same time, national and common European projects must be launched to strengthen the EU's own common defence capability.

Additional national defence spending remains essential - especially as many European countries still fall short of NATO obligations, which are likely to be tightened at the upcoming NATO summit. But at the same time, it is important to note that Europe's external security is a European public good. It can be improved most effectively with concrete common European solutions and joint procurement, not just by spending more. And if new spending is directed at developing the European defence industry and equipment, it will lead to broader economic benefits.

Recent research 1   has found, in the United States, that if increased defence spending supports private innovation, it can boost productivity growth and contribute to long-term economic dynamism. However, these benefits aren't automatic; they require investmentfocused spending, substantial and sustained commitments, and a private sector capable of leveraging technological advancements. For Europe, unlocking these benefits demands a robust innovation ecosystem, a dynamic and extensive EU single market, and better coordination of defence spending to achieve necessary economies of scale and foster spillover effects.

This brings us to common European financing. Joint defence solutions require joint financing. If common debt is opted for, it must be used efficiently for European public goods and backed by common future revenue. The EU budget can be reshaped accordingly, and efforts can be made to increase the EU's own resources.

However, such changes require unanimity from Member States, which is far from easy to achieve. That's why we need pragmatic creativity.

In this context, ideas like Bruegel's proposal for a European Defence Mechanism or for an EU defence development bank by a group of member states, are worth serious consideration. It would be a coalition of the willing and able, with participating states providing capital and managing common projects. Based on the template of the European Stability Mechanism, this model could enable rapid progress and allow nonEU countries (e.g the UK, Norway, Canada, Ukraine) to join as equal members.

## Slide 7 - EU free trade agreements: 45 in place with 76 countries, and more being negotiated

What about trade policy? Protectionism is back, as we know. Let's look at some scenarios. Our modelling shows that if the US were to impose 25% tariffs on all EU and Chinese goods imports, and if the EU and China were to respond in kind, global GDP could drop by over 0.5%. For the euro area, the hit to GDP could be as much as 1.5% in the first year.

For small, open economies like Finland - and indeed most EU Member States - the damage would be serious. Trade wars benefit no one.

The EU has responded calmly but firmly, proposing tariff reductions, preparing proportionate countermeasures and defending our interests. But it is also important to expand other trade partnerships.

In the light of US mercantilism, Europe is deepening its trade ties globally, especially with emerging and developing economies. The EU already has FTAs with over 70 countries, covering nearly half of its external trade. Agreements with Australia, India and Indonesia are in progress.

In my view, the EU-Mercosur FTA should be ratified without delay. The Latin American democracies are natural partners for Europe, and trade agreements are now as much about geopolitics as economics.

## Slide 8 - Green transition is a short-term challenge, but medium to long-term benefits are obvious

The green transition is not a luxury - it is Europe's only viable energy strategy. Unlike the US, we lack (cheap) domestic fossil fuels. The path to energy security lies in renewables, clean-tech and efficiency.

As Draghi put it: decarbonisation is a chance for Europe to lead in clean-tech and secure low-cost energy. It is not putting the brakes on growth: experience shows we can reduce emissions and grow at the same time.

Developments over the past decades (such as the de-coupling of economic growth and CO2 emissions) show that the green transition and economic growth are not mutually exclusive goals. Achieving further progress in this requires more decisive and consistent policy measures.

Yes, there are short-term costs - stranded assets and adaptation. But long-term productivity gains are real: more efficient systems, new markets and stronger energy

independence. For the EU, a net importer of fossil fuels, this is a win-win. It is a strategic imperative.

## Slide 9 - Europe is lagging the US in productivity growth - it is critical to revitalise economic dynamism

Europe's productivity growth has lagged behind that of the US. Investment in common defence and the green transition offer a chance to revitalise productivity growth - but only if we do the right things.

Unlike the US, Europe lacks deep capital markets and a unified innovation system. Defence spending won't drive growth unless it supports R&amp;D and leverages private sector capacity. The green transition can power productivity - if we invest in human capital and innovation.

That's why intensifying the work for a European safe asset and deeper capital markets is so important. They would support investment in common defence and the green transition, while enhancing financial stability.

Europe today is underperforming in channelling savings into investment. There are currently estimated to be up to 10 trillion euros in bank accounts, which is a vast potential to be even partly mobilised more productively for equity investment, offering higher return for European investors.

Safe assets are critical in attracting investment - and the backbone of monetary power. The EU's reform momentum for the Savings and Investment Union should now be accelerated by setting a clear, ambitious timeline for its completion, such as 1 January 2028, as Governor Francois Villeroy de Galhau of the Banque de France has suggested.

Above all, Europe must rediscover its traditional strength: talented people. We have top universities, skilled workers and a history of academic freedom. The US has relied heavily on imported talent - particularly in technologies. If that inflow weakens, Europe must be ready to lead again.

But talent won't come by accident. We need sound immigration policy, investment in education, and a culture that values research and risk-taking. Human capital is the foundation of long-term growth.

## Slide 10 - Conclusions: Europe's triple test

In a nutshell, strategic investment in defence, decarbonisation and human capital can revitalise Europe's economic dynamism. But only with coordinated action, credible fiscal rules and structural reform.

Let me end with a reflection on how Europe builds resilience - not just through policy or institutions, but through its modus operandi.

The European Union has always evolved by solving practical problems together, step by step. This is the essence of the community method - what the great scholar David

called : ""form follows function"", and where cooperation in one Mitrany functionalism area is creating spillovers that drive integration in others area - economic, security, political and human.

The EU's first and foremost founding personality understood this deeply Jean Monnet when he said: ""Europe will be built through concrete achievements which first create a de facto solidarity.""

Whether in coal and steel, in the single market, in the euro - or now in defence, the green transition and capital markets - Europe has advanced not only by a brilliant blueprint, but by acting concretely and staying the course. By confronting challenges together and finding shared solutions.

This logic remains as relevant today as ever. When we reinforce Europe's common defence, accelerate the green transition and invest in industrial competitiveness, we are not just fixing separate problems - but we are essentially reinforcing the fabric of Europe.

That is how Europe turns pressure into progress, and pragmatism into purpose. And if Europe succeeds in this now, it will benefit the whole world.

Thank you.

1  E.g. Antolin-Diaz and Surico (2025).",Olli Rehn
https://www.bis.org/review/r250617e.htm,"Luis de Guindos: ""More Europe"" and financial integration","Keynote speech by Mr Luis de Guindos, Vice-President of the European Central Bank, at the annual Joint Conference of the European Commission and the European Central Bank on European Financial Integration, Brussels, 12 June 2025.",2025-06-12 00:00:00,"## Luis de Guindos: ""More Europe"" and financial integration

Keynote speech by Mr Luis de Guindos, Vice-President of the European Central Bank, at the annual Joint Conference of the European Commission and the European Central Bank on European Financial Integration, Brussels, 12 June 2025.

* * *

## Introduction

I am once again delighted to speak at the annual joint conference of the European Commission and the European Central Bank on European financial integration. This is an important event for us as we come together to appraise and advance financial integration in Europe.

The recent sea change in US economic policy and the multilateral rules-based system has been an important wake-up call for Europe. The pattern of globalisation is set to shift significantly and give way to increased economic fragmentation on a global scale. Unreliability and unpredictability are likely to persist for years to come, making uncertainty a defining feature that will not be overcome any time soon. This uncertainty extends beyond trade to other domains such as monetary, fiscal or national security policy.

The European Union's success rests on the pillars of free trade and openness. Compromising these ideals threatens the very foundation upon which the EU is built. Multilateralism and international cooperation are the principles that form the basis of the EU's global governance and economic strategies. Despite this period of heightened geopolitical and policy uncertainty, the EU should stick to its values and strengthen its resolve. We must take this opportunity to strengthen the European project as its future depends on us and us alone.

While our conference is clearly centred on advancing financial integration, my main message today is that we must make progress on all fronts. The Single Market is the focal point and driving force of European integration, intrinsically linked to the EU's strategic objectives. 1   However, a true single market for goods and services within the EU remains elusive, hindered by persistent barriers and divergent national rules. National markets still often represent a major impediment to growth and innovation in sectors where global competition requires action on a European scale.

Progress on integration in the real economy - entailing the strengthening of the performance and scalability of European businesses - requires progress in its financing through banks and capital markets. But the banking union remains incomplete, while EU capital markets remain fragmented. We need to seize the moment and make progress on these three fronts in order to reinforce the Economic and Monetary Union and foster growth.

## The outlook for growth and inflation

Let me say a few words about the euro area economy. Compared with the situation a year ago, our concerns have shifted from high inflation to slow growth.

The euro area economy grew more than expected in the first quarter of 2025, by 0.6% quarter on quarter. This however reflects temporary factors likely to revert. Survey data point overall to weaker prospects in the near term. Higher tariffs and the stronger euro make it harder to export, and high uncertainty is weighing on investment. At the same time, the strong labour market, rising real incomes and easier financing conditions should support growth in the medium term. This outlook is confirmed by our projections, indicating real growth rates gradually increasing from 0.9% in 2025 to 1.3% in 2027. Inflation is currently at around our 2% medium-term target. Importantly, we see wage growth moderating from still elevated levels. In our new projections, it is set to average 2.0% in 2025, 1.6% in 2026 and 2.0% in 2027. The downward revisions for this and next year, mainly reflect lower assumptions for energy prices and a stronger euro.

Given the progress with inflation approaching our medium-term target on a sustained basis, we have been able to lower our key interest rates several times, by a total of 200 basis points since June last year.

Now, though, we face exceptional uncertainty generated by geopolitical fragmentation and the volatile trade policy. The euro area economy has proved fairly resilient to date, supported by a strong labour market. That said, there may be challenges ahead, considering the size and frequency of shocks amid elevated uncertainty. While it is impossible to predict exactly what will happen, these developments may well have a dampening impact on growth in the euro area. It is therefore important for us to closely monitor what is happening in the real economy, partly as an early indicator for the inflation outlook. With inflation around our 2% target, structural reforms and growthoriented fiscal policy become crucial to foster productivity and competitiveness in the EU.

## Financial integration in the EU

This brings me back to the European project. The Single Market continues to be a cornerstone of European integration and values, serving as a powerful catalyst for growth. Given the rapidly shifting geopolitical environment we face right now, the current juncture is the right moment to look inwards and make progress on competitiveness and growth by taking bolder steps towards a truly unified single market for goods and services. The fact that integration has advanced so little in the EU real economy has, to a large extent, failed to prompt decisive integration in the banking sector and EU capital markets.

Last year I lamented the fact that financial integration was back to the levels seen at the start of the monetary union. Today I can say that we have recently observed a positive trend in the price and quantity-based measures of financial integration. 2   Importantly, this holds true for measures of integration in an equity market which is critical for sourcing risk capital for innovative and high-growth companies. This improvement also applies to the banking market, which is key to financing the small and medium-sized enterprises that form the backbone of the euro area economy. At the same time, we are still far from the levels we might wish for a truly integrated financial market.

An incomplete banking union is a large gap in our institutional framework. Despite Single Supervisory Mechanism and Single Resolution Mechanism, deposit insurance remains at the national level. This leaves the link between banks and sovereigns impossible to sever. Confidence in the safety of bank deposits still varies across countries. The geographical location of a bank also influences the outcome of a resolution process, as there is no common backstop and divergencies in national laws persist. This level of integration in the banking sector is insufficient to facilitate crossborder lending, reduce intermediation costs, foster cross-border consolidation and significantly enhance financing capacity.

The same holds true for integration in EU capital markets. Harmonising regulations and removing national divergences are crucial to simplifying the regulatory framework and creating a single, resilient market. Furthermore, having established the Single Supervisory Mechanism for banks, we need to work towards integrated supervision of EU capital markets. This could be achieved gradually and considering specific sectoral features.

The European Commission has put forward a savings and investments union strategy which provides a range of policy actions regarding financial markets. The two panel sessions today consider key bottlenecks in our capital markets: attracting more investors and channelling investments into the future.

The European Union boasts a high saving rate, which often results in capital being exported outside of our borders. A more supportive environment for investment within the EU can be created by harmonising the regulatory framework and reducing red tape. Removing obstacles in tax, insolvency and corporate law would greatly facilitate crossborder investment. This in turn would render the EU capital market more attractive for investors. Capital will naturally follow integration in the real economy.

We can also do a better job at facilitating cross-border access to the European funds market. This would help to promote access to low-cost products for retail investors and the distribution of funds across the EU. Deep and integrated equity markets are crucial for providing the necessary financing to support the European economy, which would serve to enhance productivity and resilience. Better functioning markets across borders can ensure that EU firms have access to adequate sources of finance throughout their lifecycle.When their financing needs increase and cannot be met by small and fragmented European markets, companies can decide to list elsewhere, or even relocate their operations entirely. Enhancing access to venture capital is therefore a strategic aim to enable firms with high growth potential to list domestically.

## Conclusion

Let me conclude.

The call for ""more Europe"" resonates more strongly than ever. This arises from the growing risk of over-reliance on non-European powers and the decreasing importance of any single country on the global stage. High levels of uncertainty, elevated risks from geopolitical tensions and potential disruptions in global trade leave the EU's economic outlook fragile.

The use of the US dollar in international funding, payment and trade transactions, or as a reserve currency, will not be challenged in the short term. But the role of the euro can gradually expand, especially if we deliver on ""more Europe"". Dismantling long-standing barriers to full integration in the single market for goods and services and taking decisive steps towards a true banking and capital markets union will only enhance the international role of the euro.

The stakes have never been higher for Europe. To deliver on its fundamental values, Europe needs to deliver on the long-term growth and resilience of its economy. Completing the banking union and deepening Europe's financial markets are essential for allocating capital more effectively and providing benefits to savers. They are also essential to promote and retain innovative companies, as well as to attract talent and investment.

Banks and capital markets are not competing for a limited amount of investment opportunities ›- they are closely interconnected as parts of a wider financial ecosystem that finances the real economy. To move on to the next level, we need integration in the real economy and political will to give priority to the European project over national interests. There is no way around it. We need decisive progress on all three fronts.

1  Letta, E. (2024), ""Much More Than a Market: Speed, Security, Solidarity Empowering the Single Market to deliver a sustainable future and prosperity for all EU Citizens"", Institut Jacques Delors, France, 27 April.

2  See "" Indicators of financial integration and structure in the euro area"" on the ECB's website.",Luis de Guindos
https://www.bis.org/review/r250618b.htm,Jorgovanka Tabaković: Full support for a stable macroeconomic environment,"Address by Dr Jorgovanka Tabaković, Governor of the National Bank of Serbia, at the conference ""Investments in focus: global trends, local responses"", organised by the Foreign Investors Council and EBRD, Belgrade, 10 June 2025.",2025-06-10 00:00:00,"## Jorgovanka Tabakovi: Full support for a stable macroeconomic environment

Address by Dr Jorgovanka Tabakovi, Governor of the National Bank of Serbia, at the conference ""Investments in focus: global trends, local responses"", organised by the Foreign Investors Council and EBRD, Belgrade, 10 June 2025.

* * *

Dear colleagues, esteemed hosts, Mr Colangeli, Mr Petrovi,

Many times in life, everything seemed almost hopeless - bombing, COVID, many smaller or more personal crises - but life has always inevitably returned to normal. Never the same, but still normal. What is destroyed is rebuilt, what is broken is fixed, but only people remain permanently damaged by the behaviours they have experienced, and they remain outside of the normality that implies living in accordance with natural laws and cycles and in accordance with divine laws. And that is the greatest loss for humanity, but also for each individual. Especially for those for whom unnatural states offer an illusion of fulfilment - an illusion, and one of a limited duration. Anyone who doesn't understand how illusory those feelings are - I reminded my fellow bankers yesterday - should read the book ""The Circulation of Elites"" by Vilfredo Pareto or Peter Turchin's book on the hyperproduction of elites, of which there are more and more, while the seats in parliament, leadership positions in banks, and other institutions are limited in number. There is no room for everyone who believes they deserve a place in the elite.

And now, a response to my friend and colleague, Mr Zoran Petrovi:

These days

We owe a debt to future days and souls unborn Even if it means a sacrifice that won't be recognised, acknowledged or cared for For it is only when good times pass heavy days come and people have none to blame that they will remember that someone once knew how to create much from little because he respected even those who tripped him up and those who envied him They will recall the one who dared to stand to guard his roots and take the future in his hands For he believed in humankind. The rage will pass, the children will grow The immature will learn what wise men know Some will always blame others for being somebody's pawns

## for not realising in time that they lost much and gained little and that time - once gone - can't be reclaimed.

We won't be able to recover what was missed in the first part of the year, but we will do our best to make up for everything that was lost.

And before I move on to the topic of the state's relationship with foreign investors because of whom I put all other obligations aside to be here with you, just as I stand with you through every challenge you face - I would like to share some good news with you. News that illustrates how someone can always create something great from something small and leave it as a gift to the future. As of today, Serbia will have over 50 tonnes of gold in its FX reserves - and those who understand economics know that even the great Yugoslavia, since World War II, never had that much. This only illustrates what can be achieved with skill, knowledge and ability, as well as the determination not to let others do our job worse than us.

Esteemed colleagues, honoured hosts,

Let us remind ourselves of Adam Smith, and what he says in ""The Wealth of Nations"":

""It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest"", said Adam Smith. Everyone has their own interest and views movements from the perspective of their own interest, while the state is the one that considers the common good and works in the interest of all. When we go to the butcher, the baker, or anywhere else, we don't address the humanity of the butcher or the baker. We don't even appeal to their vanity, and we never talk to them about our needs. Instead, we speak about their advantages. For the most sustainable form of cooperation is one in which each side sees some benefit for themselves. This is the cooperation that endures. This does not mean that altruism does not exist, but it is most important to rely on predictable interests, rather than on good will.

When we apply this in the context of investments and policies, while taking into account the specificities of the time in which we operate, contributing to investment growth requires that we first question ourselves on a personal level, and then collectively. If we simply wait for others to provide us with ideal conditions, without examining what we can do ourselves, then we are already set up for failure.

In Serbia, we have ensured a favourable business environment, and it is up to the economy to take advantage of it - which it is doing successfully. Of course, when the period of the pandemic is analysed from a certain time distance, there will be individuals who will comment on what could have been done differently. Regardless of professional integrity, when evaluating any decision each of us must consider the context of the time and circumstances in which it was made. And that means we should draw lessons from everything that has happened and is happening, and never have a one-sided perspective. If, under difficult geoeconomic conditions, you manage to resolve inflation and ensure high growth in GDP, wages, and profits, while preserving fiscal parameters and FX reserves - I'd like to see the person who would say that Serbia doesn't have good policies!

## What are the conditions?

- We are working in a time of sudden and significant changes across all areas.
- We are living in a time of growing divisions in the world - not only between economies but also within national economies - with increasingly pronounced social polarisation and a deepening gap between the rich and the poor.
- We are making decisions in a period marked by forced measures, as a response to the measures of others, which were also imposed by necessity.
- We are entering a new era in which the common denominator for all developments is uncertainty, and the source of success lies in creativity of approach!

What should the responses be - global and local?

- Cooperation instead of division;
- Proactive rather than reactive policy;
- Respect for the short term, but without losing focus on the long term and on sustainable growth;
- The common good above personal interest!

And let us not forget that, as important as it is to make a good decision, it is equally important to avoid making a bad one! And it is well known that investments are never bad; only our decisions can be such.

Therefore, I will now talk about the investment environment in Serbia, global trends in investing, and our responses.

## Ladies and gentlemen,

I assume that the first thing that comes to mind when someone mentions the National Bank of Serbia is not investment, although there is a direct and strong connection and interdependence. If we consider that a stable and predictable economic environment is the first pillar of sustainable investment, then the association is clear!

Similarly, I believe that the relatively stable exchange rate of the dinar to the euro is the first association with the National Bank of Serbia, both for citizens and for the economy! And that stability, which makes decision-making and long-term project planning easier, is an important pillar of the investment environment.

I also believe that the best answer to the question of whether we have created a favourable investment environment is provided by the data.

- Fixed investment made up around 16% of GDP in 2014, while government investment stood at 2.2% of GDP. After ten years, fixed investment came to account for over 24% of GDP, and government investment exceeded 7.3% of GDP.
- The implementation of investment projects has not only significantly improved the overall infrastructure, it has also had a multiplier effect on new investments.
- The number of formally employed persons increased by almost 400 thousand and it is much easier to get a job today.

- The unemployment rate, which used to exceed 20%, dropped to 8.6%, and youth unemployment rate was cut by more than a half.
- The average GDP growth rate of Serbia over the past seven years of nearly 4%, and we are talking about real growth, speaks volumes about the environment we have created.
- Even under the conditions of extremely challenging global circumstances and the slow recovery of external demand, our growth of 3.9% last year was one of the highest in Europe.

A job well done is always the best marketing, and so Serbia's image in the world has changed significantly.

- Crucially, last year we obtained the status of an investment-grade country, a status we have long deserved.
- And the fact that investors have long rated us as an investment-grade country is evident from the data, which shows that over the past seven years, an average of around EUR 4 bn in foreign direct investments have been invested in Serbia annually, or 6.8% of GDP on average. A record was set last year with EUR 5.2 bn.
- Around 55% of these inflows go to export-oriented sectors, thus contributing to their growth even under conditions of anaemic external demand.
- The fact that around 80% of foreign direct investments consist of investments in equity capital and reinvested earnings shows that investors in Serbia are expanding existing projects and launching new ones, despite the challenges in their home markets.  These investments simultaneously bring new technology and more modern equipment, as well as new knowledge, which has also enabled the growth of overall factor productivity.

And when individuals - because they truly are few - ask us whether we are able to maintain stability without depleting FX reserves, and how long we can defend the exchange rate, I respond with a question: And did anyone believe that Serbia, during fiscal consolidation, when everyone predicted a decline in GDP, would achieve growth? We  achieved growth, just as during the pandemic we experienced the smallest decline in GDP compared to all other economies. These are the results of well-calibrated policies and the recognition of opportunities, which are based on the diversification of markets, sources of financing, and projects.

Moreover, it is a fact that no one can dispute, that our FX reserves are at an exceptionally high level, measured by all criteria, and they cover nearly seven months of goods and services imports! In the reports of all rating agencies, one of the key elements that positively distinguishes us from countries with comparable credit ratings is precisely the high level of FX reserves, which we have built over the past more than ten years.

No less important - we have become part of SEPA, for which we have long been prepared, but now we have the opportunity to make payment transactions with EU countries as well more efficient and cheaper. I say payment transactions with EU as well because we have long introduced in the domestic payments, which account for the majority of daily payments by citizens and businesses, the most modern services based on transactions that are completed in just 1.2 seconds. We have also developed a modern DOMESTIC payment card, taking care about the independence and reliability

of the national payment system. And what is the EU doing now? It is developing its own card system, not wanting to depend on other systems and their operational stability.

For our DinaCard, we have carefully selected partners, guided by the goal of international functionality, but also full security and independence of our system. We have achieved this through a partnership with Discover, which will positively impact the economy of Serbia, primarily merchants, who will now be able to accept payments by these cards, issued anywhere in the world.

## Ladies and gentlemen,

I said that we follow all relevant global trends, including global investment trends. We analyse where global capital is going today as the world rapidly changes under the influence of technological transformation, energy transition, and geopolitical tensions, because investments have never been evenly distributed across regions, sectors, or asset types. We are in a phase of structural capital reallocation on a global level.

One trend that stands out is digital transformation and the overwhelming allocation of the majority of capital towards artificial intelligence, cloud technologies, big data, cybersecurity, and fintech. These are no longer sectors of the future; they are the sectors of today, and here, funds from the United States and China dominate. In Serbia as well, the IT sector is experiencing strong growth, as seen in the export value of EUR 4.13 bn last year, which is ten times higher compared to ten years ago, when it was only around EUR 400 mn. The fact that its share in total service exports has increased from around 12% to nearly 29% confirms that this is substantial growth.

Another direction is green and sustainable investment, focusing on renewable energy sources such as solar, wind, and hydrogen, with funds also turning towards regenerative agriculture. Serbia's potential in this area is significant, and investments are increasingly following environmental, social, and governance standards.

The third trend is regionalisation, or investing closer to home markets (nearshoring), as a result of supply chain disruptions caused by the outbreak of the pandemic and the energy crisis. Shifting production closer to the European market opens up opportunities for countries like Serbia, which has an excellent geographic location, much like our DinaCard, which is expanding both East and West. Many companies are increasingly choosing Serbia as a manufacturing hub precisely for this reason, but especially because of the skilled workforce and free trade agreements with many countries, in whose conclusion a great deal of effort has been invested.

The fourth trend is infrastructure projects and the return of the state as an investor, including investments in infrastructure: roads, railway, energy, telecommunications, and digital infrastructure... Serbia stands out in this regard with strong investments in all parts of the country. I would like to remind you, Mr Colangeli, of the presentation of the EBRD's Transition Report, which dealt with navigating industrial policy, where you stated that by establishing good infrastructure, such as roads, railway, electricity, and the internet, Serbia facilitated investment and the opening of factories in its less developed regions. Such a policy has contributed to reducing regional income inequality, which is a goal as important as the quality of investments.

However, one of the important questions is: what next?

When it comes to the National Bank of Serbia, investors, as well as all agents in the country's economic system, can count on our full support for a stable macroeconomic environment.

- According to our May projection, inflation will continue to slow down  and by the end of the year approach the target midpoint of 3% - the level around which it will hover until the end of the projection horizon.  The data for May inflation, according to our now-cast model, support such an outcome, and I believe the data to be released on Thursday will confirm this.
- In June last year, we began to ease monetary policy at a cautious pace, assessing that it should remain restrictive for some time yet.
- Caution is important always, but even more so today when we are witnessing pronounced volatility in global commodity and financial markets. In such circumstances, it is expected that global inflation will decline somewhat more slowly, and that global economic growth will be lower due to disruptions in trade flows and production chains, as well as weaknesses in key growth drivers such as foreign trade, investments, and consumption.
- In Serbia, past monetary policy easing has fully passed through to interest rates in the money market and dinar lending market, while the easing of the European Central Bank's monetary policy has affected the price of euro borrowing. With the growth in credit demand due to the increase in disposable income, we have a y-oy growth in credit activity of 10.5% in April, which is also one of the channels supporting investments.

Ladies and gentlemen, Mr Colangeli, Mr Petrovi,

I will reiterate that a job well-done is the best marketing, and also the best indicator as to how we will work in the future.

I will repeat today that for the continued growth and development of every economy and society, including ours, stability and business certainty are key. Therefore, we must preserve stability in a challenging and competitive global environment, where changes are happening faster than ever in all areas of life and work! Without it, even the bestdesigned investment policies will not yield sustainable results!

On behalf of the National Bank of Serbia, I can promise:

- that relative exchange rate stability has no alternative,
- that we will support every investment that is in the interest of Serbia and our citizens.

We carefully follow all the creativity of the new era and respond cautiously - so that no measure becomes a target for us.

And let us never forget those who laid the foundations of the market economy, as I began with Adam Smith: The baker does not bake bread because he wants to feed us, but because he wants to make a profit. May our cooperation continue as honestly and openly as that.

I thank you and wish you a successful conference!",Jorgovanka Tabaković
https://www.bis.org/review/r250619h.htm,Tiff Macklem: The impact of US trade policy on jobs and inflation in Canada,"Remarks by Mr Tiff Macklem, Governor of the Bank of Canada, at the St. John's Board of Trade, St. John's, Newfoundland and Labrador, 18 June 2025.",2025-06-18 00:00:00,"

Remarks by Tiff Macklem Governor of the Bank of Canada St. John's Board of Trade June 18, 2025 St. John's, Newfoundland and Labrador

## The impact of US trade policy on jobs and inflation in Canada

## Introduction

It's a pleasure  to be here in Newfoundland and Labrador.  I want to thank the St. John's Board of Trade for the invitation to speak to you today. There is no better place to talk about trade than a community of exporters. The sea routes that begin and end in St. John's have helped feed, supply and build Canada and the world.

Port cities are attuned to global commerce. And until recently, the global economy had been recovering well from the hard years of the pandemic. Canada, a country that depends  on foreign trade, was benefiting. At the end of 2024, inflation in Canada had been close to the 2% target for months. Substantial interest rate reductions  had boosted household  and business  spending,  and exports were strengthening.  The economy had renewed momentum.

But then something happened.  Since President  Trump took office in January, the world has faced a dramatic escalation  in tariffs and pervasive uncertainty. In Canada, trade has been disrupted  and jobs have been lost. Businesses  have reevaluated their investment plans. Consumers have become more cautious. And Canadians  have told us that they expect higher prices for many imported goods.

The recent announcement that Canada and the United States agreed to negotiate  a new economic and security relationship  within 30 days is very welcome news. Restoring open trade between our countries is critical to jobs and growth in Canada. It is also important for prices and inflation.

Today I want to talk about the effect US trade policy has already had on the Canadian economy and what tariffs could mean for jobs and inflation if they were not rolled back.

I'll start  with trade. New US tariffs have already shaken Canadian exporters. After an initial  pull  forward to get ahead of tariffs, exports to the United States have

I would like to thank Fares Bounajm, Erik Ens and Olena Senyuta f or their help in preparing this speech.

fallen sharply. Canadian businesses  are doing their best to pivot to new overseas markets, but it's hard to replace our biggest  export partner right next door.

Then I'll  turn to jobs.  There have been layoffs in industries  affected by tariffs, and employment has fallen in trade-sensitive  sectors. What happens to the labour market next will depend critically on what happens  with the Canada-US trade relationship.  It will also depend on how much we can expand trade within our country and overseas.

Finally, I will explain the implications of tariffs for inflation. Higher tariffs that weaken growth and cut jobs put downward pressure on inflation. But higher tariffs also  add costs, which increase consumer prices.

The best way to avoid the job losses  and price increases caused by tariffs is to not have tariffs.

The impact of US trade policy on our exports and how it spreads through the economy matter a lot to families, businesses  and communities. Heightened geopolitical  tensions  are also weighing on Canadians.  We are living in a more shock-prone world.

At the Bank of Canada, we are proceeding  carefully with monetary policy. We want to see through the noise to set policy that supports the economy while ensuring  inflation remains low and stable for Canadians.

## The trade conflict has disrupted Canadian exports

To understand  how the trade conflict has affected Canadian trade, we have to look at where we were heading  before tariffs.

Canadian exports were growing in 2024 as the global economic recovery gained momentum, and the Bank expected them to continue to strengthen. 1   In our January Monetary Policy Report -the last one before the trade war-we forecast goods exports would grow roughly 2½% in 2025 and 3½% in 2026, outpacing overall growth in gross domestic product (GDP).

That all changed with the inauguration  of President Trump. Since February, the United States has imposed, suspended,  re-imposed  and partially rolled back tariffs on many countries. For Canada, the most important tariffs that remain in place are on motor vehicles, steel and aluminum, and these have had a big impact on Canadian  exports.

The changes in US trade policy have caused shifts in Canadian trade across two dimensions.  They've changed the timing of exports and imports. And they are changing the destination  of shipments.

First, timing. To get ahead of tariffs, businesses  that export to the United States immediately shipped  as much as possible.  Canada's  goods exports rose 10% in the first quarter of 2025 from the fourth quarter of 2024 ( Chart 1 ). Exports of

1 The auto sector was undergoing retooling last year, which masked the underlying strength in exports. With the retooling completed and solid global growth, exports were expected to strengthen further.

machinery and equipment and motor vehicles led the surge, but lumber, as well as consumer goods like food and pharmaceuticals,  also rose sharply.

First-quarter  imports were also up as Canadian  importers stockpiled US goods, building  inventories  before costs rose.

Chart 1: Tariff threats pulled forward Canadian exports to and imports from the United States



Source: Statistics Canada

The surge in trade and inventories  boosted the economy-Canadian  GDP growth was 2.2% in the first quarter.

But getting ahead of tariffs borrowed activity from the future, and we're now seeing a sharp reversal. Canadian  goods exports to the United States dropped more than 15% in April. This reflects both the payback from the first-quarter surge and the fact that tariffs are making Canadian goods more expensive in the United States. In April, exports of steel and aluminum products fell 11% and 25%, respectively, and motor vehicle exports were down almost 25%.

There has also been a second, less-dramatic shift caused by US trade policydestination.  As Canadian exporters have tried to adapt to US tariffs, trade with countries other than the United States has picked up ( Chart 2 ).

Chart 2: Exports to and imports from other countries have risen



Source: Statistics Canada

Canadian businesses-who  showed remarkable agility to digitalize  during the pandemic-are seeking out new suppliers  and new export partners  to replace US trade.

## There are clear and enduring benefits of trade diversification

Growing new markets for our exports builds scale and competitiveness.  But there's an added imperative-diversification  adds resilience.  Without diversity of supply, Canadian companies are vulnerable to supply problems, as we saw during the pandemic. Without diversity of demand, they're vulnerable to trade barriers, as we're seeing  now.

Here I want to mention the success your province has had in diversifying trade. About three-quarters  of Canada's goods exports go to the United States. But only about one-third of Newfoundland and Labrador's  goods exports are US-boundmostly oil and gas, fish and seafood, and nickel. The dependence on US markets has declined as local energy producers shift to other markets. More than half of the province's oil is now shipped by tanker to Europe and other countries, up from less than 10% 20 years ago. That's the Newfoundland and Labrador advantage-access  to tidewater, a reputation  for resilience and centuries of global trade experience. You've also been increasing your services exports-a valuable form of diversification that uses digital delivery to get to markets anywhere in the world. This is fuelling growth in the tech sector here in St. John's.

The rest of Canada also has opportunities  to expand services exports around the world. While goods still dominate, services now make up nearly a quarter of total exports, and they are growing faster than goods. Canada has been particularly

successful at exporting computer and information services, research and development, and technical services like engineering.

For goods exports, diversification is harder for landlocked industries  and communities. But we could make it easier. Eliminating  interprovincial  trade barriers and investing  in better east-west  transportation  links would grow our internal market. And our ports give Canada the opportunity  to expand overseas. But boosting  and diversifying trade within and beyond our borders requires infrastructure to move goods to market, including more efficient, high-capacity ports. 2

## Tariffs and uncertainty have weighed on employment

As exports weaken, the rest of the economy feels the slowdown. How much economic activity and employment slow will depend on the scope and duration of tariffs as well as on how Canadian  businesses  and governments respond.

We are already seeing the direct impact of tariffs on Canadian jobs in tradeintensive industries.  But so far, employment has held up in other industries.  To understand  where employment goes from here, let me explain how the labour market usually reacts to changes in the economy.

Employment typically adjusts  slowly to changes in economic activity. It's easy to understand  why. Hiring workers-finding the right match-is time-consuming and expensive. So is training  new workers. That's why, when demand picks up, employers typically begin by asking people to work longer hours. That's fine for a while, but if the strong demand persists,  businesses  start to increase hiring. So employment tends to pick up with a lag when the economy is strengthening.

That's what was happening  toward the end of last year. In June 2024, the Bank began lowering its policy interest rate to stimulate growth. As rate cuts accumulated, GDP growth picked up through the second half of last year. By the end of the year, employment growth was strengthening.  The unemployment rate began to decline, hitting  6.6% in January and February.

That's where we were when the trade war hit-mid-recovery. The lag in the labour market meant it didn't have the chance to fully recover before tariffs and uncertainty stalled momentum.

Some two million Canadian jobs rely on goods exports to the United States. US tariffs had a near-immediate impact on jobs in directly affected industries. Businesses  that are subject to tariffs know that US demand for their products will be lower, and they have cut jobs. Several Ontario auto parts and assembly plants have announced layoffs and production cuts, and manufacturing jobs are down

2  Diversifying our trade is not a new idea. Twelve years ago, I gave a lecture calling on businesses to intensify their efforts to develop new markets for their products and for new infrastructure investments to get those products to market. The United States had had a deep recession and weak recovery, and demand for Canadian goods had fallen. Then, as now, the reliance on a single market for the bulk of trade held us back. See T. Macklem, 'Regearing Our Economic Growth' (the W. Edmund Clark Distinguished Lecture, Queen's University, Kingston, Ontario, January 10, 2013).

55,000 since January. More broadly, we've seen a big decline in employment in trade-sensitive  sectors since the start of the year ( Chart 3 ).

Chart 3: Employment has declined in sectors reliant on exports to the United States

Employment, seasonally adjusted; index: 2023 = 1



Note: A sector is considered to have high reliance on exports to the United States if at least 35% of the sector's jobs depend on US demand. These include several manufacturing and transportation subsectors as well as commodities sectors including energy and forestry. Together, they make up about 10% of employment.

Source: Statistics Canada

Employment in other sectors, however, has continued to grow. But remember, employment usually responds  with a lag. Final domestic demand in Canada was soft in the first quarter, and if tariffs and uncertainty were to continue, households and businesses  will likely remain cautious. If demand stays soft, at some point more businesses  will cut jobs.

These dynamics are reflected in our business  surveys. Export-oriented businesses  quickly cut their hiring plans a lot in response  to US tariffs. And with a lag, other businesses  have scaled back their hiring intentions  ( Chart 4 ). If these cutbacks materialize,  we can expect overall employment to weaken further. We are watching closely for signs that weakness in the job market is broadening. 3

3  See F. Bounajm and T. Devakos, 'Benchmarks for assessing labour market health: 2025 update,' Bank of Canada Staff Analytical Note No. 2025-17 (June 2025).

## Chart 4: The employment outlook is weak, particularly for exporters

Expected employment growth over the next 12 months, relative to historical average



Note: Employment data are weighted by firm size. The historical average is taken from January 2022 through May 2025.

Sources: Business Leaders' Pulse

Last updated: May 31, 2025

To summarize, Canada's  dependence  on the US market underscores the importance of a new Canada-US trade deal that rolls back tariffs. The resilience of the economy and the labour market will also depend  on the ability of businesses  to expand to new markets within Canada and overseas, as well as on Canadian investment in infrastructure to get our goods to new markets.

## Inflation is . . . complicated

At the Bank, we are focused on where inflation is going-the underlying  trend. That's why it is so important to understand  the forces at work on inflation-which ones are temporary and which ones may last. That's easier said than done-and right now, it's complicated.

Once again, I'll start with where we were before tariffs. Headline  inflation was back down to the 2% target last summer. Core inflation, which strips out volatile components like energy, was still a bit higher than headline.  But by the end of 2024, there were no signs of broad-based  price pressures,  and inflation expectations had largely returned to normal. Monetary policy had worked to restore low inflation.

But then US tariffs arrived. Assessing  the inflationary impact of tariffs has been a moving target because the United States has repeatedly changed the size and scope of tariffs. The prospect of a new Canada-US trade deal offers hope that tariffs will be removed. But until we have a deal, inflation will be affected by both

US tariffs and Canadian counter-tariffs. So let's consider what each of these could mean for inflation.

I'll start  with US tariffs. As we've seen, tariffs have lowered our exports and weighed on employment. That puts downward pressure  on inflation in Canada. However, the increase in US tariffs raises prices in the United States, and that can spill over into Canada when we import those higher-priced  US goods, putting upward pressure  on inflation here.

Then there are the Canadian counter-tariffs. These also make US imports more expensive and put upward pressure  on inflation.

The net effect of tariffs on inflation is difficult to gauge. It's not as easy as saying a 10% tariff will increase the price of a product by 10%.

The pass-through  of higher costs from tariffs will depend  importantly on demand and on inflation expectations. If the economy slows and employment continues to weaken, the drop in demand will make it harder for businesses  to raise prices to reflect the full cost of tariffs. On the other hand, tariffs give companies something to blame for higher prices. That may make it easier for them to pass on the cost of tariffs. And higher inflation expectations  could also make it easier because people won't be surprised  to see higher prices.

History offers some guidance on the impact tariffs could have on inflation. During the 2018 tariff conflict with the United States, the retaliatory tariff on final goods was 10% and remained in place for just under a year. During that conflict, the pass-through  from price increases to consumer goods was high but incomplete. 4 If the current tariffs and counter-tariffs remain in place, past experience suggests pass-through  of about 75% of the costs of tariffs over roughly a year and a half.

So what tariff effects are we seeing  in inflation so far? It's still too early to see the direct effects of counter-tariffs in the inflation data, but we may be seeing some indirect effects related to trade disruption.  Many businesses  report they are already facing higher costs related to finding alternative suppliers  and developing new markets.

Inflation  is also being affected by other factors. In particular, the elimination  of the consumer carbon tax knocked 0.6 percentage  points off inflation, mostly due to lower gasoline  prices, and pulled headline  inflation down to 1.7% in April. This tax effect will remain in the year-over-year change in the consumer price index for the next 11 months before falling away.

Excluding taxes, inflation was 2.3% in April, slightly stronger than the Bank had expected and up from 2.1% in March. The Bank's preferred measures of core inflation,  as well as other measures of underlying  inflation, moved up in April. There is some unusual  volatility in inflation, but these measures suggest underlying inflation could be firmer than we thought.  Higher core inflation can be

4 In 2018, the US imposed tariffs of 25% on steel and 10% on aluminum. Canada retaliated with the same level of tariffs on US steel and aluminum as well as a 10% tariff on various products. This 10% tariff on final goods was the focus of our analysis of the pass-through. See A. Lam, 'Assessing tariff pass-through to consumer prices in Canada: Lessons from 2018,' Bank of Canada Staff Analytical Note (forthcoming).

partly attributed  to higher goods prices, including  food, and may be starting to reflect new costs related to US tariffs.

The Bank will be watching measures of underlying inflation closely to gauge how inflationary pressures  are evolving.

## The role of monetary policy

At the Bank, we're keeping a close eye on the job market and inflation. Further weakening in the job market will put more downward pressure on inflation. But if tariffs were to continue, they'll add costs. As I have said before, we can't let a tariff problem become an inflation problem.

Two weeks ago, the Bank's Governing Council maintained  the policy interest  rate at 2.75%. This was our second hold after seven straight  cuts. This included the cuts in January and March in the face of US tariff threats and increased uncertainty.

Yesterday, we published  the summary of Governing Council's deliberations leading  to the June 4 interest  rate decision. As reported, three factors particularly weighed on our decision. Uncertainty was still high. The Canadian economy was softer, but not sharply weaker. And there has been some additional  firmness in recent inflation data.

We also noted that the weaker the economy and the more downward pressure on inflation, the more there would be a need to lower the policy interest rate further. However, if the recent firmness in underlying  inflation were to persist,  it would be more difficult to cut the policy rate. Overall, my colleagues on Governing Council and I agreed there could be a need for a further reduction in the policy interest rate if the effects of US tariffs and uncertainty continued to spread through the economy and cost pressures  on inflation were contained.

The recent progress toward a new trade deal is encouraging,  and we are following developments closely. We are all invested in the future of the trade relationship  between Canada and the United States.

## Conclusion

It's time to wrap up.

I came to St. John's to talk about the global trade war and its impact on Canada's economy.

Canadian exports have fallen sharply owing to US tariffs. This is slowing the economy and weakening the labour market. That will put additional  downward pressure  on inflation. But if tariffs are not removed, we expect they will be passed through to higher consumer prices. These economic impacts underline  the importance of a new trade deal with the United States.

They also underscore the need to learn from this experience. Newfoundland and Labrador's  success in diversifying its markets and products shows us the way. The United States will always be our single biggest  trading partner, but we can improve our resilience  and grow our prosperity by expanding both our internal trade and overseas markets for our products.

At the Bank of Canada, our focus is on supporting  economic activity and jobs, while ensuring  inflation remains well controlled.  We will maintain price stability over time for Canadians.

Thank you.",Tiff Macklem
https://www.bis.org/review/r250618e.htm,"Claudia Buch: Simplification without deregulation - European supervision, regulation and reporting in a changing environment","Speech by Prof Claudia Buch, Chair of the Supervisory Board of the European Central Bank, at the Goldman Sachs European Financials Conference, Berlin, 11 June 2025.",2025-06-11 00:00:00,"SPEECH

## Simplification without deregulation: European supervision, regulation and reporting in a changing environment

Speech by Claudia Buch, Chair of the Supervisory Board of the ECB, Goldman Sachs European Financials Conference 2025

Berlin, 11 June 2025

The environment in which European banks are operating is changing fast [ ] . Technology is evolving rapidly, transforming how financial services are delivered and information is processed. Banks need to adapt their business models to sustain their long-term profitability. The risk landscape has changed significantly; geopolitical uncertainty is high. This requires good risk management, supervision, and regulation. At the same time, the benefits of post-financial crisis reforms are increasingly being questioned, the current supervisory and regulatory framework is being criticised as excessively complex. A weakening of global rules that help keep the financial system safe and sound is a real risk. 1

Simplification without deregulation requires strong guardrails. [ ]  Simplification means maintaining resilience with a more effective and efficient supervisory and regulatory framework; deregulation means weakening regulation and supervision at the expense of resilience. In practice though, it can be difficult to draw a clear line between simplification and deregulation. [ ]  The current rules are not there because the framework has intentionally been made too complex. Rules and procedures are there for a reason. Ensuring that simplification does not weaken resilience requires an evidence-based, European reform agenda that enhances efficiency and effectiveness. 2 3

The reform agenda should be evidence-based. Good policymaking requires assessing the effects of regulations, including potential unintended side effects. Evidence shows that the benefits of the current framework outweigh negative side effects: [ ]  improved regulation has led to more and better-quality capital in the European system without impairing the ability of banks to service the real economy. There is no trade-off between growth and resilience. Reporting standards have improved, providing timely and consistent information across countries. The Single Rulebook and European supervision provide a common framework, while duly considering the diversity of market structures and banks' business models. These are solid achievements - and a strong foundation for future growth and financial stability. 4

The reform agenda should enhance efficiency and effectiveness. We can improve the system and make it less complex. European banking supervision is pursuing an ambitious reform programme to become more effective and efficient, while remaining clearly focused on risks. The reform of the Supervisory Review and

Evaluation Process (SREP) that we are currently implementing is a key element. It will deliver tangible benefits to banks, without weakening their resilience. Our work complements task forces of the ECB's Governing Council and the European Banking Authority that are looking at different aspects of regulation, reporting and supervision. [ ] 5

We should seek European solutions. Looking beyond supervision, there is scope to simplify complex reporting and regulatory requirements. As supervisors, we cannot act alone - the ECB is not a regulatory authority. Policy decisions are needed to harmonise national rules that are relevant for banks across Europe. This would promote the single market and promote cross-border financial integration.

The resilience that was built over the past decade is no coincidence. It is the result of concrete policy action and good supervision in Europe. This is an achievement that should not be put at risk. Improvements should not come at the expense of weaker standards that would expose depositors and taxpayers to increased risk.

## The current framework delivers in terms of resilience

The European banking sector has remained resilient through a series of shocks in recent years. During the COVID-19 pandemic alone, euro area GDP declined by 6.6%. [ ]  Other shocks have followed: the energy crisis in 2022, the turmoil on international banking markets in March 2023 and, more recently, the announcements of new tariffs by the United States. Each of these episodes had the potential to put serious strain on the financial system. And yet, the banking sector emerged largely unscathed. Loan losses have declined, no systemic episode of banking sector stress has emerged. European banks have continued to service the real economy throughout (Chart 1). This is what resilience is all about. 6

## Chart 1: Bank vulnerability



Sources: ECB Supervisory Banking Statistics and ECB Statistical Data Warehouse.

Notes: The composite measure is based on a set of indicators along five dimensions: capital (Tier 1 capital ratio and leverage ratio), asset quality (non-performing loans ratio), management (cost-to-income ratio), earnings (return on equity and return on assets) and liquidity (loan-to-deposit ratio). Z-scores are calculated across all euro area countries and time periods. Positive values indicate higher than average bank vulnerabilities.

In part, the resilience observed in recent years stems from the extraordinary fiscal and monetary policy response to recent shocks. During the pandemic, swift and sizeable fiscal policy interventions supported the real economy and contained losses on banks' balance sheets. [ ]  Even today, a notable proportion of outstanding loans remain covered by pandemic-related public guarantee schemes. [ ]  Loan impairments did not materialise to the extent expected - not necessarily because banks were immune to the economic environment, but because policy absorbed much of the shock (Chart 2). After the global financial crisis, in contrast, the impairment rate increased significantly. 7 8

Chart 2: Loan impairments and real GDP growth in the euro area



Sources: Consolidated banking data (CBD2) and ECB Statistical Data Warehouse.

Notes: The impairment rate is calculated at system level as the ratio of yearly change in the stock of provisions over total exposures. The impairment rate considers total impairments. The rate of GDP growth of the euro area countries calculated using GDP at market prices.

Stronger regulation and more effective supervision have made banks more resilient and enabled them to take risks. Banks are now better capitalised and better able to absorb adverse shocks. Since the global financial crisis, the capitalisation of European banks has more than doubled in terms of their risk-weighted assets, from around 8% in 2007 to a little over 17% at the end of 2024. [ ]  The leverage ratio has increased to 5.9%, up from just above 5% in 2016. Since the pandemic, the composition of capital requirements has shifted towards higher macroprudential buffers that can be released in times of crisis (Chart 3). [ ] 9 10

Chart 3: Overall capital requirements and Pillar 2 guidance in Common Equity Tier 1 (CET1)



Source: ECB.

Better capitalisation has benefits for investors: more capacity to absorb losses means the risk for individual investors declines. If banks sail very close to the wind and are tightly capitalised, investors are more exposed to the risk of sudden losses or capital shortfalls in times of stress. This can lead to greater volatility in share prices, higher funding costs and, in extreme cases, losses. By contrast, well-capitalised banks are better positioned to weather shocks, maintain investor confidence, and sustain dividend payments over time.

As regards supervision, risk prioritisation and benchmarking have allowed for more consistent and forward-looking standards. As early as 2017, European banking supervision started dedicated work on interest rate risk in the banking book. Banks in Europe were better prepared for the sharp change in the interest environment that began in 2022. [ ]  In 2024, we intensified our work on geopolitical risks, 11

providing banks with a structured framework for how these risk drivers affect traditional risk categories. [ ] We can benchmark the performance and practices of banks across European countries. This is a clear advantage over national supervision. A good example is our benchmarking of credit risk provisioning practices under the IFRS 9 accounting standards. By comparing provisioning levels across banks with similar risk profiles, we can identify outliers to ensure a better recognition of credit losses. [ ]  Similarly, a targeted review of internal models, launched in 2016, has improved the reliability of internal models. [ ] Improvements made in reporting are no less significant. Since 2018, AnaCredit - a harmonised European credit registry - has provided granular data on banks' exposures to individual firms and sectors. The 12 13 14

insights drawn from AnaCredit have been valuable in designing pandemic-related support programmes for the real economy and understanding risks for the banking sector. [ ]  Similar information is needed to understand the impact of tariffs or climate-related risks on banks' credit risks. 15

Weekly liquidity reporting is another example of how recent changes in the framework serve us well in navigating current challenges. In September 2023, supervisory reporting templates were introduced, in coordination with the Single Resolution Board, to collect more frequent and timely liquidity data from significant banks. This was a response to the turmoil on banking markets in March 2023. We now have timely information on banks' liquidity positions, funding structures and potential vulnerabilities - including in times of stress. This avoids any risk that ad hoc requests during times of stress could be misinterpreted by markets.

The above are a few examples of how the current framework has enhanced the resilience of European banks. But the framework is admittedly complex, and there are opportunities to simplify it without compromising resilience.

## But the current framework is complex

Modern banks can be complex institutions, and the current framework reflects this complexity. Take capital regulation as an example. In principle, there could be a much simpler way to impose capital requirements on banks: by applying a leverage ratio - which sets capital requirements based on total assets - or by using standardised risk weights uniformly across all banks.

Proposals to simplify capital regulation were tabled during discussions on the post-crisis financial sector reforms. [ ]  However, they were often met with opposition from the industry. The main concern was that simplified requirements would not reflect the riskiness of different business models and portfolios. Instead, regulators opted to allow banks to use their internal risk models to calculate risk-weighted assets as a basis for capital requirements. Good internal models are key to good risk management. But maintaining and validating internal models consumes time and resources of banks and supervisors. Material changes to internal models require prior approval from supervisors. Streamlining the model landscape can thus contribute considerably to simplification without making the banking sector less resilient. 16

Generally, national rules are another key driver of complexity within Europe. The Single Rulebook significantly simplifies prudential regulation. But significant national variations remain within this harmonised prudential framework. These variations arise from differences in the transposition of EU directives into national law or from discretion exercised by Member States. Moreover, consumer protection laws, tax policies and insolvency regimes differ across Member States. This is not just an issue for supervisors: each and every bank operating across borders and offering products such as mortgages across Europe faces many different rules and regulations.

The international Basel standards are the foundation for the Single Rulebook, which applies across all banks and ensures a high level of resilience. At the same time, various exemptions from the Basel rules have been decided politically to reflect the specificities of particular banks or banking markets. Typically, such exemptions are subject to detailed conditions to avoid that they are overused or leave risks uncovered - thus potentially making implementation more complex. Also, it is important that transitional measures remain temporary in nature.

In the EU, the risk-based capital stack is complex. It comprises up to nine layers, including microprudential and macroprudential requirements and buffers, and it can be met with going and gone-concern funding instruments. [ ]  Within the SSM, the ECB sets supervisory requirements and guidance, while macroprudential policy is a national role with top-up powers at the ECB. Each element serves a specific purpose. But the different elements may interact in unintended ways. Banks may be reluctant to use capital buffers in times of need to avoid the stigma of cancelling payments on hybrid capital instruments. 17

[ ]  This framework can be reformed to make it simpler and more transparent. 18

Shifting the balance, making the framework less complex while maintaining resilience, requires proper impact assessments. We need to know whether rules serve their purpose, such as enhancing resilience, and whether there are negative side effects, such as reduced lending or increased costs of funding for the real economy. Frameworks for impact assessments exist. The Basel Committee on Banking Supervision, the Financial Stability Board and the European Commission have frameworks for assessing the effects of regulation. The results of these assessments are quite clear: there is no trade-off between resilience and growth, and the benefits of the post-crisis reforms outweigh the costs. [ ]  Similarly, there are national and European frameworks for cost-benefit analyses and impact assessments. [ ]  These frameworks can be used to assess both intended and unintended consequence of regulations - and of possible future changes. 19 20

## Enhancing the efficiency and effectiveness of the current framework

Since its launch, European banking supervision has developed its supervisory processes and methods to meet the highest international standards. In the early years, we focused on building consistency and establishing a common approach across countries. In recent years, focus has shifted to making supervision more efficient and effective while remaining clearly focused on relevant risks.

## Reforming the Supervisory Review and Evaluation Process

In 2022 the ECB invited an independent group of experts to assess the effectiveness and efficiency of the Supervisory Review and Evaluation Process (SREP). The experts found European supervision to be mature enough to evolve towards leaner processes and called for an even sharper focus on risk-based supervision. [ ]  Their recommendations inspired a comprehensive reform agenda: a reform of the SREP will be completed next year, building on the risk tolerance framework introduced in 2023; [ ]  an SSM culture project promotes a consistent supervisory mindset across the system; we are assessing our supervisory effectiveness; and we are extending the objectives of the SREP reform to further enhance efficiency, effectiveness and our risk-based approach to all supervisory activities. 21 22

The SREP reform has six main objectives.

Focusing risk assessments: assessing every risk with the same intensity each year and for each bank creates a heavy workload and is not very efficient. Our risk tolerance framework and a multi-year approach provide more flexibility to assess bank-specific risks. [ ]  For banks with low and stable risk profiles, the communication of the SREP outcome is being simplified. We began rolling out this simplified communication in 2023, and we have been extending it to more banks in 2024 and 2025. [ ] 23 24

Better integrating supervisory activities: insufficient coordination across different supervisory activities can create the impression that work is duplicated and overly burdensome. Improved planning offers better integration and information sharing across activities. For example, Joint Supervisory Teams can draw directly from on-site inspections and horizontal thematic reviews, removing the need to reach out to banks successively to obtain related information. At the beginning of each supervisory cycle, we inform banks of our plans so that they can allocate their resources accordingly.

Using the full supervisory toolkit: a key lesson from past episodes of banking stress is that supervisors must act more quickly to remediate critical findings in banks. [ ] Focusing findings on root causes provides better clarity to banks and faster follow up. If banks fail to adequately address weaknesses, we can impose qualitative requirements and take enforcement actions, such as periodic penalty payments. [ ] This ensures that risks are not only identified, but actively addressed. 25 26

Enhancing communication: faster escalation requires transparent communication. One step into this direction have been executive letters, which were introduced in 2021. Beginning with this year's SREP cycle, we have restructured and shortened the SREP decisions to ensure that they provide a comprehensive assessment for each risk area, the main concerns and the requirements for the bank. [ ] For most banks, we expect to adopt SREP decisions and notify banks by the end of October this year - up to two months earlier than in the past. Overall, banks can expect to see fewer qualitative requirements and recommendations in their annual SREP decisions and letters. We are placing greater emphasis on timely action and on issuing qualitative measures to banks as soon as a finding is identified, rather than waiting for the conclusion of the annual SREP. 27

Stabilising methodologies: complex, frequently changing methodologies are burdensome for supervisors and banks. Stable methodologies ensure consistency over time, making supervision more predictable for banks and improving benchmarking over time. We are therefore simplifying the approach to setting Pillar 2 capital requirements. The new approach is currently being tested and will be applied in the 2026 SREP cycle. [ ] 28

Making better use of IT systems and analytics : making the interaction between banks and supervisors more effective requires adequate technical solutions. We have thus invested into advanced IT systems and analytics. Through our supervisory data collection platforms such as CASPER and the IMAS portal, banks can automatically pre-validate their submissions and easily follow up on supervisory processes. [ ] We are currently harmonising and consolidating data and IT infrastructure across the ECB and the 29

national competent authorities. We use advanced analytics to efficiently comprehend bank data and detect weaknesses early.

The SREP reform is in its implementation phase. It builds on earlier decisions and is being implemented over a three-year period. Its benefits will therefore evolve over time. There will be no 'Big Bang'. We will monitor and share the progress made via indicators such as the duration of the SREP cycle, the length and clarity of SREP decisions, and information on open findings.

Assessing the effectiveness of supervision is a key element of our reform agenda. Monitoring indicators alone does not provide information about the effectiveness of supervision. A bank's financial ratios can improve for several reasons: better macroeconomic conditions and other exogenous factors, 'good risk management' within the organisation, or good supervision. Disentangling these effects is not easy, and it requires improvements of our analytical tools to better assess the effectiveness of our supervision.

Successfully delivering on our reform agenda requires a shift in supervisory culture. A more risk-based approach relies on teams that can exercise judgement and decide where best to direct supervisory attention. To support this transformation, we have launched an initiative to foster cultural change across European banking supervision. This includes enhancing coordination between the national competent authorities and the ECB.

## Enhancing supervisory efficiency and effectiveness and the focus on risks

Our objective to become more effective and efficient, while remaining fully risk-based, applies to all our activities. It does not stop with the SREP. Based on the experience of supervisors across the system and feedback from banks, we have thus developed the following workstreams.

## Improving decision-making and harnessing digitalisation

In 2024 alone, the ECB took 2,174 supervisory decisions. [ ]  The quality and speed of these decisions has direct implications for banks. Take fit and proper assessments, which all board members and key function holders in significant banks are subject to. These assessments account for just over half of supervisory decisions. [ ]  With the help of digital tools and a fast-track decision-making procedure, we reduced the average processing time from 109 days in 2023 to 97 days in 2024 [ ],  so well within the four months set out in the EBA guidelines. For certain appointments, such as renewals of mandates, we will further streamline the assessment process and the submission of documents. In addition, for authorisation procedures [ ]  we have developed a risk-based strategy using a traffic light approach to classify risks and streamline processes. 30 31 32 33

Moreover, we are currently piloting a fast-track process for the supervisory assessment of significant risk transfer in securitisations. [ ]  This new approach, which was developed in close dialogue with the industry, reduces the review time for sufficiently simple and standardised transactions while ensuring compliance with regulatory requirements. 34

## Internal models

Informative internal models are essential for banks to assess risks and maintain adequate capital levels. However, the time needed to remediate supervisory findings or implement material model changes is often too long. Simplification can be achieved through different channels. Banks can simplify their internal model landscape to focus more on the most relevant models within their organisation. Also, this year's review of the EBA's regulatory technical standards on model changes is a good opportunity to reduce the number of material model changes that require supervisory approval. [ ]  Moreover, within the ECB, more proportionate approaches could be used in the future to accelerate the approval process, and we will take industry feedback into account. 35

## Stress testing

Stress testing is a key instrument for banks' forward-looking risk assessments. It provides valuable information for setting banks' Pillar 2 capital guidance. But the current approach to supervisory stress tests is seen as costly, despite the recent improvements such as reducing the number of submission cycles from three to two. [ ]  Further progress is possible within the EU-wide stress tests - conducted together with the EBA - ahead of the next exercise in 2027. Moreover, top-down stress tests can support ongoing supervision and detect vulnerabilities to emerging risks while limiting costs. For that reason, we are increasingly using a more agile, desktop-based approach to support supervisors with forward-looking risk assessments. 36

## Capital-related decisions

Capital-related decisions include supervisory approvals for share buybacks, calls of Additional Tier 1 and Tier 2 instruments and the inclusion of interim profits in CET1 capital. [ ]  While these decisions are important for preserving sound capital positions, the underlying processes are often resource-intensive. We are improving our internal procedures to make them quicker and more risk-based, including through the use of digital tools. For banks, this will mean clearer expectations, more standardised templates and faster turnaround times. Feedback from banks will be taken into account to ensure that changes duly consider operational constraints. 37

## Reporting

Reliable reporting is crucial for supervisors and banks, but the current system is complex. National and European reporting frameworks coexist, and different authorities may collect similar information. The overall costs related to EBA supervisory reporting account for 1.4% of banks' total operating costs. [ ]  The political agreement on the Commission's proposal to streamline supervisory reporting and promote data sharing is thus highly welcome. [ ] 38 39

Already now, the reporting framework provides significant proportionality. For example, since 2021, smaller entities have to report less than 5% of the data required under the full FINREP. [ ]  But we want to go further. We are currently mapping the prudential reporting and disclosure landscape for significant and less significant institutions, considering national and European mandates, to identify overlaps, outdated requirements and areas where reporting can be streamlined. We are looking at ways to simplify by 40

adjusting materiality thresholds for reporting submissions, with the aim of incorporating them into ECB reporting standards.  In parallel, we are working with supervised banks to improve their internal information management systems, as these can hinder timely and high-quality reporting. [ ] Broader changes in reporting frameworks require structured cost-benefit analyses. Simply removing a few items in a standard reporting template does not reduce the fixed costs of maintaining the reporting infrastructure. Reforming the reporting regime can leverage existing frameworks for cost-benefit analyses at the European level. The Integrated Reporting Framework is a good example. It aims to consolidate existing European System of Central Banks (ESCB) statistical reporting as a first step towards integrating statistical, prudential and resolution requirements more broadly. [ ]  A cost-benefit assessment showed cost savings for the industry. [ ] 41 42 43

## Tackling complexity requires European solutions

As important as the simplification agenda is, we must not forget its objectives. Europe is strongly bankbased. Future growth and stability hinge upon the banking sector's ability to support the real economy. The capacity for fiscal policy to buffer shocks is likely to be more constrained than it has been in the past. We need to maintain a strong framework that continues to support both financial and operational resilience.

European banking supervision is doing its part to drive greater efficiency in the application of regulatory requirements. Unlike regulators, who define the legal framework, our role is to put the rules into practice translating them into risk-based supervisory action.

But we cannot tackle undue complexities alone. Achieving real progress requires joint action, including from European and national institutions. National rules need to be aligned with European frameworks, not diverge from them. National reporting requirements that duplicate or contradict European ones should be phased out. The European Commission can play a prominent role by ensuring that, as far as possible, new rules are introduced via regulations, and that when directives are still needed for legal reasons, they are implemented as consistently as possible. The EBA's ongoing work on supervisory and regulatory efficiency is an important step, which we fully support. [ ] 44

The changing environment requires regulatory changes that go beyond the simplification agenda. To complete the banking union, progress must be made on the crisis management and deposit insurance frameworks and on the European deposit insurance scheme. We must advance the capital markets union to reap the benefits of the Single Market.

1.

I would like to thank Markus Behn, Ties Busschers, Inês Cabral, Joachim Eule, Cornelia Holthausen, Frederic Hoppe, Korbinian Ibel, Eleni Koupepidou, Robert Lauter, Elena Mateva, Samuel McPhilemy, Muriel Pattyn, Markas Puidokas, Mario Quagliariello, John Roche, Costanza Rodriguez D'Acri, Sascha

Titze, Anneli Tuominen, Florian Weidenholzer, Roberto Ugena and Anton Van de Kraaij for their very helpful input and comments on an earlier version of this speech. All remaining errors and inaccuracies are my own.

2.

See Villeroy de Galhau,, F. (2024) ' ', November, Paris. Towards a realistic simplification, untying some of the knots in European Banking Regulation

3.

Campa, J.M. (2025), ' ', keynote speech at the 39th ISDA Annual General Meeting, Amsterdam, 15 May. Beyond Basel III: Charting Europe's Path to Resilient Finance

4.

See Buch, C. (2024), ' ', speech at the Eurofi Financial Forum 2024 in Budapest, 12 September, for an overview and references for previous work. See also the ('FRAME'), which is an online repository of studies on the economic impact of financial regulations maintained by the Bank for International Settlements. On the link between better capitalisation and lending to the real economy, see Financial Stability Board (2019), ' ', November, Basel. On the competitiveness of European banks, see Resti, A. (2025), ' ', In-Depth Analysis , European Parliament, April, Brussels; Heider, F. et al. (2025), ' ', In-Depth Analysis , European Parliament, April, Brussels; Mejino-López, J. and Véron, N. (2025), ' ', Study , European Parliament, May, Brussels. On potential negative side effects such as procyclicality in times of stress, see Couaillier, C. et al. (2024), ' ', Journal of Money, Credit and Banking , February. Building a resilient future: how Europe's financial stability fosters growth and competitiveness Financial Regulation Assessment: Meta Exercise Evaluation of the effects of financial regulatory reforms on small and medium-sized enterprise (SME) financing How have European banks developed along different dimensions of international competitiveness? How have European banks developed along different dimensions of international competitiveness? EU Banking Sector &amp; Competitiveness - Framing the Policy Debate Caution: Do Not Cross! Distance to Regulatory Capital Buffers and Corporate Lending in a Downturn

5.

EBA (2025), ' ', February, Paris; De Guindos, L. (2025), ' ', 3 May, Frankfurt. Board of Supervisors - Minutes of the meeting on 13 February 2025 Interview with Die Presse

6.

ECB (2021), ' ', April, Frankfurt. Annual Report 2020

7.

Darracq Pariès, M., Kok, C. and Rancoita, E. (2020), ' ', Financial Stability Review, May 2020 , ECB; European Systemic Risk Board (2021), ' ', February, Frankfurt. Macroeconomic impact of financial policy measures and synergies with other policy responses Financial stability implications of support measures to protect the real economy from the COVID-19 pandemic

8.

This pattern was observed in data collected during supervisory stress tests in 2023. The data include information about the maturity schedules of the guaranteed loans, thus also being indicative with regard to the amount of guaranteed loans are still outstanding today.

9.

The aggregate Tier 1 ratio represents banks' core capital (comprising Common Equity Tier 1 capital and Additional Tier 1 capital) as a percentage of their total risk exposure amount. Information on the CET1 ratio has only been available since the start of European banking supervision. The CET1 ratio was 15.9% at the end of 2024, up from 10.9% in 2014. See the ECB's . Supervisory Banking Statistics

10.

Overall capital requirements in the system have increased from 14.8% in 2020 to 15.6% today, driven largely by the countercyclical capital buffer increasing from an average of 0.1% to 0.7%. For details, see the ECB's and ECB (2024) ' ', December, Frankfurt. Supervisory Banking Statistics Aggregated results of the 2024 SREP

11.

Of course, other factors were at play, including regulatory technical standards devised by the European Banking Authority to identify supervisory outliers in terms of interest rate risk in the banking book, and the prevalence of central bank reserves in EU banks' liquid assets. See Enria, A. and de Guindos, L. (2022), ' ', The ECB Blog , ECB, 20 December, Frankfurt. Are banks ready to weather rising interest rates?

12.

Buch, C. (2024), ' ', keynote speech at the eighth European Systemic Risk Board (ESRB) annual conference on 'New Frontiers in Macroprudential Policy', Frankfurt am Main, 26 September; Wilkins, C. (2025), ' ', speech given at Fitch Ratings, London, 23 January. Global rifts and financial shifts: supervising banks in an era of geopolitical instability Geopolitics and financial stability: a plan beats no plan

13.

ECB (2024), ' ', July, Frankfurt. IFRS 9 overlays and model improvements for novel risks - Identifying best practices for capturing novel risks in loan loss provisions

ECB (2021), ' ', April, Frankfurt. 15. ESRB (2021), ' ', September, Frankfurt. Targeted Review of Internal Models - Project report Monitoring the financial stability implications of COVID-19 support measures

16.

See, for example, Haldane, A. and Madourous, V. (2012), ' ', speech at the Federal Reserve Bank of Kansas City's 366th economic policy symposium, 'The changing policy landscape', Jackson Hole, Wyoming, 31 August. The dog and the frisbee

17.

The risk-based capital stack in the EU includes: (1) the minimum requirement, (2) the Pillar 2 requirement, (3) the capital conservation buffer, (4) the buffer for global systemically important banks, (5) the buffer for other systemically important banks, (6) the countercyclical capital buffer, (7) the systemic risk buffer, (8) the sectoral variant of the systemic risk buffer, and (9) the Pillar 2 guidance. Not all banks are necessarily subject to all of these measures. The minimum requirement and the Pillar 2 requirement can be met with a mix of Common Equity Tier 1, Additional Tier 1 and Tier 2 capital. For a detailed description of the capital stack, see EBA (2024), ' ', July, Paris. Stacking Orders and Capital Buffers: Reflections on management buffer practices in the EU

18.

The ECB has previously noted that credit institutions might not be willing to use their buffers for additional lending due to concerns of being obliged to cancel Additional Tier 1 coupons and face the potentially negative reactions of market participants. See (OJ C 180, 29.5.2020, p. 4). See also BCBS (2022), ' ', October, Basel; and Behn, M., Rancoita, E. and Rodriguez d'Acri, C. (2020), Opinion of the European Central Bank of 20 May 2020 on amendments to the Union prudential framework in response to the COVID-19 pandemic (CON/2020/16) 2020/C 180/04 Buffer usability and cyclicality in the Basel framework

' ', Macroprudential Bulletin , No 11, ECB, October, Frankfurt. Macroprudential capital buffers - objectives and usability

19.

See Financial Stability Board, ' ', and Basel Committee on Banking Supervision (2022), ' ', December, Basel. 20. Assessing the effects of reforms Evaluation of the impact and efficacy of the Basel III reforms

For example, those of the or the in Germany. The European Commission's is an CPB Netherlands Bureau for Economic Policy Analysis National Regulatory Control Council Regulatory Scrutiny Board independent body that reviews and issues opinions on all major impact assessments and evaluations of EU legislation.

21.

Dahlgren, S., Himino, R., Restoy, F. and Rogers, C. (2023), ' ' , April, Frankfurt. See also Buch, C. (2024), ' ', The Supervision Assessment of the European Central Bank's Supervisory Review and Evaluation Process - report by the Expert Group to the Chair of the Supervisory Board of the ECB Reforming the SREP: an important milestone towards more efficient and effective supervision in a new risk environment

Blog , ECB, May, Frankfurt.

22.

ECB (2023), ' ', Supervision Newsletter , August, Frankfurt. Supervisors' risk tolerance: focusing on what matters most

23.

See footnote 25 and Section 2.5 of ECB (2024), ' ', Frankfurt. Supervisory methodology 2024

24.

More specifically, the outcome can be communicated by an operational letter instead of a SREP decision, if the Joint Supervisory Team does not issue new qualitative or quantitative requirements (in which case the previously issued requirements remain in place unless they have been remediated in the meantime). 25.

Board of Governors of the Federal Reserve System (2023), ' ', April, Washington D.C.; FINMA (2023), ' ', December, Bern. Review of the Federal Reserve's Supervision and Regulation of Silicon Valley Bank Lessons Learned from the CS Crisis

26.

Please add reference to previous communication on the escalation ladder and combined decisions.

27.

ECB (2025), ' ', Supervision Newsletter , SREP reform: towards more efficient and effective supervision

May, Frankfurt. Banks will receive more information on the new decision format during their Supervisory Dialogue with the relevant Joint Supervisory Team.

28.

Buch (2025), ' ', The Supervision Blog , ECB, March, Frankfurt. Reviewing the Pillar 2 requirement methodology

29.

CASPER refers to the ECB's , which allows external organisations and partners to securely submit structured data to the ECB. The ECB's allows supervised banks and third parties to submit information related to supervisory processes, track their status and exchange information with supervisors. Centralised Submission Platform IMAS portal

30.

Section 6.3.1 of ECB (2025), ' ', March, Frankfurt. ECB Annual Report on supervisory activities 2024

31.

Fit and proper assessments accounted for 50.7% of supervisory decisions in 2024. See Section 6.3 of ECB (2025), ' ', March, Frankfurt. ECB Annual Report on supervisory activities 2024

32.

Banks can initiate and monitor the progress of fit and proper assessments digitally. They receive standardised questionnaires, which include questions tailored to national legal requirements and the appointee's position, and are notified digitally of the final decision. Internally, we have developed the Heimdall tool which facilitates machine reading and analytics. This tool supports judgement and expert knowledge but does not replace it.

33.

These apply to licence applications, voluntary licence withdrawals and acquisitions of or increases in qualified holdings.

34.

ECB (2025), ' ', Supervision Newsletter , February, Frankfurt 35. Securitisations: a push for safety and simplicity

Article 143(5) of the Capital Requirements Regulation requires the EBA to develop regulatory technical standards on model changes for credit risk. See (OJ L 176, 27.06.2013, p. 1). Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (EU) 2013/575

36.

Submission cycles refer to the submission of data by banks and the quality assurance carried out by the ECB.

37.

(OJ L 74, 14.3.2014, p. 8). Commission Delegated Regulation (EU) No 241/2014 of 7 January 2014 supplementing Regulation (EU) No 575/2013 of the European Parliament and of the Council with regard to regulatory technical standards for Own Funds requirements for institutions

38.

EBA (2021), ' ', June, Paris. The 1.4% is based on 'annual total reporting costs' including ongoing and implementation costs. Study on the cost of compliance with supervisory reporting

39.

Directorate-General for Financial Stability, Financial Services and Capital Markets Union (2024),

' ', news article , European Commission, 18 December. Commission welcomes agreement on proposals to facilitate data-sharing and reduce reporting burden in EU financial services

40.

Smaller and less complex institutions are exempted from certain more detailed reporting, such as asset encumbrance. The ECB FINREP regulation also provides significant proportionality in reporting via data point reporting concepts for small entities. See , as amended. Regulation (EU) 2015/534 of the European Central Bank of 17 March 2015 on reporting of supervisory financial information (ECB/2015/13)

41.

ECB (2024), ' ', December, Frankfurt. Supervisory priorities 2025-27

42.

See the . Integrated Reporting Framework (IReF)

43.

These savings come, inter alia, from shifting from a template-based approach to a structured data model for reporting. See ECB (2021), ' ', December, Frankfurt. Cost-benefit assessment on the Integrated Reporting Framework analysis of high-level considerations and high-priority technical aspects

44.

EBA (2025), op. cit.",Claudia Buch
https://www.bis.org/review/r250618g.htm,"François Villeroy de Galhau: ""Where there is danger, a rescuing element grows as well""","Speech of Mr François Villeroy de Galhau, Governor of the Bank of France, at the Paris Finance Forum, Paris, 10 June 2025.",2025-06-10 00:00:00,"

## Paris Finance Forum - 10 June 2025

'Where there is danger, a rescuing element grows as well'

Speech by François Villeroy de Galhau,

Governor of the Banque de France

Press contact: Delphine Cuny (delphine.cuny@banque-france.fr)

Ladies and Gentlemen,

I am delighted to participate in this latest edition of the Paris Finance Forum, and I would like to warmly thank Augustin de Romanet and Jean-Charles Simon for their invitation. This year, Paris has once again demonstrated its vibrancy by climbing to fourth place in the OFEX i  ranking of global financial centres. The fact remains, however, that this has been an unprecedented year, both for the global economy and for finance. I propose taking solace in the words of the German poet Hölderlin: 'where there is danger, a rescuing element grows as well'. ii  I will outline three threats (1) before inviting us to take three winning gambles (2).

## 1) A pivotal year with a combination of three threats

## 1.1. (Geo)political unpredictability

The first threat is clearly (geo)political unpredictability, amplified this year by the shift in US policy.



From an economic standpoint, the global outlook - primarily in the United States - has been significantly weakened by the new US administration's shift towards protectionism  and  its  persistent  unpredictability.  But  it  is  also  undermining financial stability, causing exceptionally high short-term volatility, particularly in US bond markets, which have failed to play their traditional safe-haven role. Confidence in the dollar as an international reserve currency could be eroded, iii while the international role of the euro could be fostered as clearly explained by Christine Lagarde in Berlin a fortnight ago.

In this volatile environment, the ECB is a pillar of stability, having successfully normalised its monetary policy over the past year with eight successive cuts to short-term rates. I expressed this wish back in January, when our rates were still at 3%, that we would return to 2% by the summer. Since last Thursday, we

have been in the favourable '2 and 2' zone, with inflation forecast at 2% this year - which is our target - and our key rate at 2%, well below the US and UK levels  of  4.25%.  But  in  such  an  uncertain  environment,  this  favourable  zone does not mean a comfortable zone or a static zone: we will remain pragmatic and data-driven, and as agile as necessary.

## 1.2. Technological disruptions

The second threat comes from technological transformations in the financial sector.  These  developments  create  as  many  vulnerabilities  as  they  do opportunities,  particularly  in  two  critical  areas:  crypto-assets  and  artificial intelligence (AI).

Crypto-assets  are  back  in  the  spotlight,  particularly  stablecoins,  which  are mostly  backed  by  the  US  dollar iv   and  strongly  promoted  by  the  new  US administration.



They  pose  a  serious  risk  of  a  'de-Europeanisation'  and  privatisation  of  the currency, v  they currently have no robust federal framework in the United States and expose their users and the financial system to numerous financial risks. The development of AI is a decisive boost for productivity - whose gains can be estimated at between 0.3 and 1% per year -; but it may also contribute to the amplification of financial vulnerabilities. For example, AI market concentration could increase the risk of dependence on third party players. The use of the same  types  of  tools  could  also  amplify  herd  behaviour,  resulting  in  greater volatility and procyclicality.

## 1.3. Disintermediation of the financial system

The third threat stems from developments in the financial system itself. Twothirds of financial sector growth since 2008 has come from non-bank financial

intermediation (NBFI), vi  which now accounts for nearly 50% of global financial assets vii .



This development could help diversify the sources of financing for the European economy.  However,  in  recent  years,  several  episodes  have  highlighted  the vulnerabilities associated with NBFI: too opaque, highly interlinked, sometimes too leveraged. First, hedge funds, whose use of leverage is rising in Europe and the United States currently account for more than 50% of transactions in the secondary  European  government  debt  market.  While  they  can  contribute  to boosting market liquidity, they can potentially also amplify volatility in the event of tensions. Another area of vigilance is growth in private credit: in 2024, total assets under management in Europe reached EUR 430 billion, compared with EUR 150 billion  in  2014. viii   Banks'  exposure  to  these  private  funds  remains difficult  to  accurately assess for supervisors, and sometimes even the banks themselves, due to the opacity of the market and the multiple layers of leverage in the ecosystem.

## 2) Three winning gambles?

I want to turn now to three paradoxical gambles. Gambles because we haven't won yet and our game is not yet up to scratch. And paradoxical because they require shaking off our form of collective stupefaction, in order to transform these emerging threats into opportunities.

## 2.1. Regulation can help innovation to go hand in hand with stability

The first gamble is that well-tailored regulation can help to innovation go hand in  hand with stability. This is only an oxymoron in appearance: without trust, innovation can only be temporary; without innovation, financial stability is just

stasis. Crypto-assets are a good illustration of this. France and Europe were pioneers in the field, with the creation of the DASP status ix  in 2019, followed by the  adoption  of  a  harmonised  European  framework  based  around  the  MiCA Regulation. x  MiCA is a decisive step forward: it supports the secure and lasting development of tokenised finance while also helping to regulate dollar-backed stablecoins. Their rapid growth, which is set to accelerate further, must not come at the expense of European monetary sovereignty.

Our first response to the rapid development of dollar-backed stablecoins is the wholesale central bank digital currency (CDBC) and the digital euro, which will make it possible to maintain central bank money's key role in the digital world.

In  the  interbank  arena ,  the  Eurosystem is advocating a tokenised settlement offering in central bank money and is working to provide an initial solution to banks  and  financial  markets  by  the  start  of  2026,  to  be  followed  by  further stages.  These  'tokenised  bank  reserves'  will  constitute  a  secure  and  liquid settlement asset for financial players, in a highly dynamic payment universe and a financial sector undergoing tokenisation. In the retail arena , the Eurosystem is preparing to issue a digital euro. This 'digital banknote +' will also reduce our dependence on international networks, which account for 66% of card payments in the euro area. Its distribution will rely on a 'public-private partnership' with commercial banks, based on a balanced economic model.

At the same  time,  the emergence  of  euro-backed  alternatives -euro stablecoins, tokenised deposits, tokenised money-market funds - deserves, in collaboration with market participants, increased attention, including with regard to their cross-border use. The European authorities must also closely monitor the implementation of MiCA and start considering a possible 'MiCA 2' regulation that takes better account of these sovereignty issues.

Lastly, it is vital that we equip ourselves with adequate monitoring tools and a regulatory framework adapted to non-bank finance. In order to better account for the risks posed by interlinkages with the financial sector, the ACPR and the Banque de France, together with the AMF, are preparing a pilot systemic stress test this year involving banks, insurers and investment funds. This exercise has

no regulatory implications, but will allow us to better understand the nature of the risks and their transmission channels. It is a first in Europe, where no such exercise is being considered in the near term.

## 2.2. Europe can benefit from America's policy shift

The  second  paradoxical  gamble  consists  in  seizing  'Europe's  moment'  in response to America's radical policy shift. We have the ability to make this leap, provided  we  have  the  firm  and  lasting  will  to  do  so.  Let's  be  frank:  we  are currently falling short of the mark. We've got the right diagnosis, with the Draghi and Letta reports in 2024, then the strategy laid out by European Commissioner Albuquerque  in  March  2025.  But  what  we  need  now  to  act  is  a general mobilisation ,  based  around  3  imperatives  -  '3  i's', xi or,  if  you  prefer,  size multiplied by muscle multiplied by speed.



First, we need to better integrate the single market. This means capitalising on our size - which is equivalent to that of the United States - by removing internal barriers. Second, we need to invest better ,  giving greater priority to the most promising disruptive innovations and avoiding falling into the 'middle technology trap'  highlighted  by  Jean  Tirole. xii To  do  this,  we  need  to  develop  Europe's financial muscle through a genuine SIU . Europe lacks neither savings nor loans: it does lack secure and liquid assets to attract international investors, and lacks capital to finance innovation. Our main priority should therefore be to increase equity financing, which amounts to 215% of GDP in the United States for nonfinancial corporations, compared with 88% in the euro area .



In terms of venture capital, five times less funds were raised in the EU than the United States between 2013 and 2023. Institutional investors could be brought on  board  for  this,  taking  inspiration  from  the  French  TIBI  or  German  WIN initiatives, xiii  but scaled up to a European level. Pan-European funds could also be developed, with a new version of the European Tech Champions Initiative (ETCI) of the EIB open to private investors. Finally, we need to innovate faster with less bureaucracy. For the financial sector, this means adopting a European approach to simplification, xiv  consisting in making regulations less complex but without  eschewing  our  financial  stability  objective  or  the  international  Basel standards:  fewer  standards  but  better  implementation  to  make  them  more effective. I welcome the creation of two high-level task forces at the ECB and EBA on this issue, xv  which are expected to submit concrete proposals later this year.

But  to  turn  these  good  intentions  into  action,  we  need  to  set  a mobilising deadline, xvi  as Jacques Delors did in the past with 1   January   1993 for the single market, and 1 January 1999 for the single currency. It is up to the Commission to propose this deadline, but why not 1 January 2028? Whatever the case, we need to step things up a gear if we want to emerge from the Trump years on a stronger footing and with greater sovereignty.

## 2.3. France and Paris are in a stronger position within Europe

Finally, within Europe, we can take a gamble on France and the Paris financial centre. Although our country faces serious economic and fiscal challenges, it still has many strengths. Our businesses, from the largest - international leaders that rival Germany in number - to the youngest (some 400,000 firms were set up in 2024, 30% more than ten years ago). The gross financial savings of French

citizens, which amount to EUR 64 trillion, xvii placing France's financial institutions  among  the  leading  players  in  Europe.  Lastly,  the  Paris  financial centre that you represent - for the sixth year in a row France has been ranked the most attractive European country for foreign investors, xviii  and Paris is now the top tech ecosystem in Europe, according to the Global Tech Ecosystem Index 2025, xix ahead  of London, Stockholm  and Munich. The  Holroyd 'Attractiveness' law xx of June 2024 has also strengthened our postBrexit competitiveness by facilitating new stock market listings and supporting the financing of global trade.

*

I began with Hölderlin, and I shall conclude with Paul Valéry: 'The future is not what is going to happen, but what we are going to do'. xxi  Over the past ten years, we  have  succeeded  in  learning  the  lessons  from  the  crises  and  preserving financial  stability.  But  today,  history  is  accelerating,  and  Europe  and  France must for their part also move forward with regulation that combines innovation with stability, and with a general mobilisation that constructs the economic and financial  sovereignty  of  our  continent.  France  has  the  advantage  of  having Europe's leading financial sector. Our country combines both the strength and the ambition to seize this moment of acceleration . Thank you.

- i  Institut Louis Bachelier, Center for Financial Studies (2025), OFEX ranking, January
- ii  Hölderlin (F.) (1808), 'Patmos'.
- iii  Villeroy de Galhau (F.) (2025), Letter to the President of the Republic: From stupefaction, to general mobilisation, how to respond to America's policy shift, 9 April.
- iv Stablecoins backed by the US dollar account for 99% of market capitalisation . Source: Banque de France (2025), Financial Stability Report , to be published in June.
- v  Villeroy de Galhau (F.) (2025), Letter to the President of the Republic: From stupefaction, to general mobilisation. How to respond to America's policy shift, 9 April. Villeroy de Galhau (F.) (2025), 'A mobilising deadline for seizing 'Europe's moment'' Hearing before the National Assembly Foreign Affairs Committee, 14 May.
- vi  'NBFI refers to a system for raising funds and providing funding that involves players outside the traditional banking system' Source: Saillard (M.), Schwenninger (A.) and Watel (A.) (2023), 'Non-bank financial
- intermediation:vulnerabilities and challenges', Eco Notepad, Banque de France, September.
- vii  FSB (2024), Global Monitoring Report on Non-Bank Financial Intermediation , December.
- viii Buch (C.) (2025), ' Hidden leverage and blind spots : addressing banks' exposures to private market funds ', The Supervision Blog, 3 June. It should be noted that these estimates are based on market data due to a lack of official data sources on this market.
- ix  Digital Asset Service Provider, a status created under Law No. 2019-486 of May 2019, known as the PACTE Law ( Plan d'action pour la croissance et la transformation des entreprises - Business Growth and Transformation Law).
- x  Markets in Crypto-Assets (MiCA), Regulation EU 2023/1114 of 31 May 2023.
- xi Villeroy de Galhau (F.) (2025), Letter to the President of the Republic: From stupefaction to a general mobilisation. How to respond to America's policy shift, 9 April.
- xii Fuest (C.), Gros (D.), Mengel (P.-L.), Presidente (G.) and Tirole (J.) (2024), EU Innovation Policy - How to Escape the Middle Technology Trap , European Policy Analysis Group, April.
- xiii  Villeroy de Galhau (F.) (2025), ' Venturing into open waters to unlock Europe's innovative potential ', speech at Euronext Paris, 18 March.
- xiv  Villeroy de Galhau (F.) (2025), ' A European approach to simplification: avoiding three misconceptions and suggesting concrete milestones ', Eurofi Warsaw, 11 April.
- xv Villeroy de Galhau (F.) (2025), Presentation of the ACPR annual report, speech, 27 May.
- xvi Villeroy de Galhau (F.) (2025), ' A mobilising deadline for seizing 'Europe's moment '', speech before the National Assemble Foreign Affairs Committee, 14 May.
- xvii Banque de France (2025), Household savings - Q4 2024, 22 May.
- xviii  EY (2025), Annual barometer 2024, May.
- xix Dealroom (2025), Global Tech Index 2025, 21 May.
- xx  Law No. 2024-537 of 13 June 2024 aimed at increasing corporate financing and the attractiveness of French firms.
- xxi Valéry (P.) (1931), Glimpses of the Modern World .",François Villeroy de Galhau
https://www.bis.org/review/r250619b.htm,"Olaf Seijpen: Financial stability - it's not glamorous, but it matters","Speech by Mr Olaf Seijpen, Executive Board Member of Monetary Affairs and Financial Stability of De Nederlandsche Bank, at the opening of the 9th Macroprudential Conference, organised by De Nederlandsche Bank, Amsterdam, 18 June 2025.",2025-06-18 00:00:00,"## Olaf Seijpen: Financial stability - it's not glamorous, but it matters

Speech by Mr Olaf Seijpen, Executive Board Member of Monetary Affairs and Financial Stability of De Nederlandsche Bank, at the opening of the 9th Macroprudential Conference, organised by De Nederlandsche Bank, Amsterdam, 18 June 2025.

* * *

Good morning and welcome to the 9th Annual Macroprudential Conference. It is a pleasure to see so many distinguished representatives from central banks, regulatory institutions, the financial sector, and academia gathered here today. And welcome to our newly renovated building-a space designed not only for policy but also for people. Our new building is now partly open to the general public. As a central bank, we want to be transparent and accessible, and we wanted our new building to reflect that. And you know, people really take an interest. And I can imagine people are really excited to see so many macroprudential policy stars in person today.

This conference has always been a collaborative effort. From the very beginning, it has been jointly organized by the Deutsche Bundesbank, the Sveriges Riksbank and De Nederlandsche Bank. A macroprudential rock band if you will. And this year, we're thrilled to welcome a new band member: the Central Bank of Ireland. I would also like to extend my sincere thanks to the Scientific Committee for their dedication in shaping this year's programme. Your work behind the scenes makes all of this possible.

In these volatile times, transparency and accessibility are more important than ever. Macroprudential policy may seem like a niche field, reserved for specialists. But its impact is universal. Financial stability affects households, businesses, governmentsand ultimately, the trust that underpins our economies. And all the topics that we cover in this conference the coming two days, in all their diversity and richness and technical complexity - they are somehow related to this simple fact. Be it income-based tools to mitigate housing market risks, or QE and the bond market, or bank governance, to name just a few topics in the program.

Safeguarding that stability requires three things: patience, commitment and cooperation.

Let me begin with patience. The road to financial stability is long and often winding. It is not paved with quick wins or instant results. After the global financial crisis, governments, regulators and banks worked hard on a comprehensive reform of banking regulation that would boost buffers and make the financial sector more resilient. That has served us well. During the Covid pandemic, for example. Thanks to stronger buffers, banks were able to absorb losses and continue extending credit when the economy took a hit as a result of the lockdowns.

And it continues to serve us well. Especially now in these times of fundamental uncertainty. A resilient financial sector can help the economy to withstand shocks from trade barriers and geopolitical events. But it takes patience and hard work.

That brings me to the second theme: commitment. Financial stability seems like a natural state. We take out our phone and we pay. And the bread that we buy costs the same as it did last week. And when we wake up in the morning our savings are still in

our bank account. Financial stability is something that seems to be just there, unconditionally. But it really isn't. It is something we must continuously work for. It demands vigilance, coordination, and above all, the political will to act before the crisis hits.

Lately, there have been calls for simplifying banking regulation. I have sympathy for that. Banking regulation has indeed become very complex. This is certainly something we should look into.

But we should be careful not to confuse simplification with deregulation. Deregulation means effectively lowering buffers by relaxing the rules. That would increase both vulnerability in the banking system and the likelihood of financial crises. It would be a big mistake.

We should be wary of undoing the hard work that has gone into strengthening the financial system over the past decade and a half. Especially now, in this time of unusually high uncertainty, both on the economic and political front.

This requires commitment from regulators and governments. Because the system of international rules we have built to support financial stability and to create a level playing field is only as strong as our commitment to it.

Finally, cooperation. Financial stability is an international public good. Almost every challenge we face in our highly interconnected financial system is global in nature. And so must be our response. No country can safeguard financial stability alone.

If we want to meet today's challenges to financial stability, we have to continue to work together. And we need to stay committed to the institutions we have built to underpin that cooperation, such as the Basel Committee and the FSB. Global cooperation is harder in a fragmented world. But it is also more essential. During the global financial crisis, policymakers acted swiftly and in unison. We must preserve that capacity.

Patience, commitment, and cooperation. Let us use this conference to reaffirm these principles. Let us learn from each other, challenge each other, and inspire each other. But above all: let us enjoy the conference. And if you remember just one thing from this speech, let it be this: macroprudential policy may not be glamorous, it may not attract big crowds, you may not even make it to the support act. But it matters, and it is never boring.",Olaf Sleijpen
https://www.bis.org/review/r250619a.htm,Fabio Panetta: Monetary policy and macroeconomic forecasts - the last fifty years,"Speech by Mr Fabio Panetta, Governor of the Bank of Italy, at the Prometeia 50 Conference, Milan, 18 June 2025. ",2025-06-18 00:00:00,"

## Monetary Policy and Macroeconomic Forecasts: The Last Fifty Years

Keynote speech by Fabio Panetta*

Governor of Banca d'Italia

Prometeia 50 Conference

Milan, Museo della Scienza e Tecnologia, 18 June 2025

I would like to thank the Prometeia association for inviting me to take part in this conference, marking the fiftieth anniversary of its founding.

Since  1974,  Prometeia  has  contributed  to  the  Italian  economic  debate  with economic analyses and forecasts, in line with its original mission as the 'Association for  Econometric  Forecasts'.  Over  time,  it  has  come  to  play  a  prominent  role  by developing  its  own  modelling  tools  capable  of  generating  reliable  forecasts  and evaluating the impact of economic policies. 1

Over the past fifty years, the macroeconomic landscape has changed profoundly. Changes in shocks, progress in economic theory, and the experience gained have transformed the role of central banks, redefining how they safeguard the purchasing power of money and financial stability.

The tools available to central bankers have also evolved. The growing availability of data, together with advances in economic and statistical analysis, has enabled the development of more sophisticated forecasting models, better suited to grasp the complexity of today's economy.

In my remarks, I will focus on three interconnected areas: the conduct of monetary policy,  macroeconomic  modelling,  and  the  use  of  forecasts  in  central  banks' decision-making processes. Their proper interaction is a fundamental element for more informed, timely, and effective monetary action - especially in a constantly evolving environment.

* I would like to thank Stefano Siviero for his help in writing this speech.

1 Prometeia and Banca d'Italia were among the pioneers in the development of econometric models in Italy. In the 1960s, the Bank's econometric efforts drew the attention of Beniamino Andreatta, who later became one of Prometeia's main advocates. In 1969, he wrote: 'The path forward is the one already pursued by our central bank for years: to refine its interpretative frameworks and develop an increasingly sophisticated system for gathering the necessary statistical data.' (B. Andreatta, 'Il disegno della politica della Banca centrale e l'uso di modelli econometrici di flussi monetari', Bancaria , 1, 1969, p. 18).

## 1. Central bank independence, price stability, and forecasts

In the early 1970s - when, even in Italy, monetary policy was not yet separate from other public policies - forecasts, including those on inflation, were not considered essential. Central banks pursued intermediate objectives, such as the defence of the exchange rate or the growth of monetary aggregates, often using administrative tools. 2  Price stability was not yet their primary goal.

Since then, profound changes in the macroeconomic and institutional context, along with significant innovations in economic theory, have increased the importance of forecasts in monetary policymaking. As I will explain later, this evolution was not linear: phases of affirmation and consolidation alternated with periods of refining models and rethinking their role in guiding monetary policy.

A turning point came with the inflationary wave between the late 1970s and early 1980s. In response to that shock, many central banks gained independence and adopted mediumterm price stability as their stated primary objective. 3

Macroeconomic  forecasts  -  especially  those  concerning  inflation  -  thus  became  a structural and essential component of the monetary policy toolkit.

Independence, however, required greater transparency and accountability. Central banks were expected to explain and justify their decisions: the publication of forecasts, along with information on the models used, became an essential factor for transparency and accountability.

Today, almost all central banks regularly publish their forecasts. 4 This practice reflects the awareness of the crucial role of expectations in inflation dynamics and in the transmission of monetary policy. Publishing forecasts not only promotes transparency; it also helps guide  investors'  expectations,  thereby  strengthening  the  effectiveness  of  monetary policy.

This approach has radically transformed central bank communication. Fifty years ago, the prevailing view held that the effectiveness of monetary policy depended on its ability to surprise markets. Today, by contrast, most central banks explain their 'reaction function' 5

2 The administrative tools used at that time included credit ceilings, portfolio constraints, and foreign exchange controls.

3 The adoption of price stability as the direct goal of monetary policy is mainly associated with the work of Svensson, who introduced the concepts of inflation targeting and inflation forecast targeting. See: Lars E.O. Svensson, 'Inflation Targeting', in B.M. Friedman and M. Woodford (eds.), Handbook of Monetary Economics , vol. 3, Amsterdam, New Holland, 2011, pp. 1237-1302.

4 Banca d'Italia has done this since 2007, in line with Eurosystem decisions. Before the early 2000s, central banks rarely released public forecasts. Banca d'Italia only published some simulations in May 1992 using its quarterly model, to analyze public finance adjustment paths; these were essentially forecasts conditional on different fiscal scenarios.

5 The 'reaction function' describes how the central bank adjusts its policy tools in response to changes in the economic environment, in order to maintain price stability.

in order to guide market expectations. Some have gone even further, adopting forms of forward guidance 6 and, at times, publishing the expected path of official rates they deem consistent with achieving the inflation target. 7

## 2. Economic instability, monetary policy, and forecasts in the 2000s

Over  the  past  twenty  years,  the  main  macroeconomic  and  financial  variables  have experienced  wide  fluctuations  and  increased  sensitivity  to  shocks,  marking  a  clear break from the Great Moderation period, characterized by stable growth and the rapid absorption of shocks. 8

The phase of instability began with the global financial crisis of 2008-09, followed by the sovereign debt crisis in Europe, the post-pandemic recession, and the inflation spike triggered by the energy crisis (Figure 1).



Source: OECD.

(1) Standard deviation of year-on-year GDP growth rates calculated over a 12-quarter period.

The increased volatility has led to two important changes in the nature and role of the forecasts produced by central banks.

6 Forward guidance refers to explicit indications about the future stance of monetary policy. The ECB adopted formal forward guidance between 2013 and 2021, when inflation was below the 2 percent target and official interest rates were at their lower bound.

7 This  approach  has  been  adopted  by  the  central  banks  of  Sweden,  Norway,  and  New  Zealand.  Its benefits and risks are discussed by Ben Bernanke in his review of the Bank of England's forecasting tools:  B.  Bernanke,  'Forecasting  for  monetary  policy  making  and  communication  at  the  Bank  of England: a review', Bank of England, 12 April, 2024.

8 The term 'Great Moderation' refers to the final decades of the last century, when major economies appeared  to  follow  a  stable  trajectory,  marked  by  small  and  temporary  shocks  that  were  quickly absorbed.

The first one concerns the growing awareness of the need to consider not only the central scenario of forecasts, but also the distribution of surrounding risks - an approach known as risk management. In a highly uncertain environment, it is essential for central banks to adopt a robust policy strategy, capable of responding in a balanced way to a wide range of possible developments, rather than relying solely on the optimal policy for the most likely scenario.

This  orientation  has  profoundly  transformed  the  practice  of  forecasting,  establishing the development of alternative scenarios 9  and the systematic assessment of uncertainty around the central projection as standard components of the process. 10

In  effect,  the  succession  of  extraordinary  shocks  -  and  the  occasionally  substantial forecast errors they produced - have enhanced the informational content of forecasts, making them more comprehensive and context-aware tools.

The second change concerns the role of macroeconomic projections in the decisionmaking process of central banks, which at times has been partially reduced due to the sequence  of  major  shocks  mentioned  earlier  and  the  associated  forecast  errors.  For example, the inflation surge of 2021-23 - the most intense in the last forty years - was not anticipated, mainly due to the sharp rise in energy prices linked to the war in Ukraine.

In response to these developments, central banks have started to use forecasts more cautiously, integrating them with alternative analyses and indicators - particularly those relating to core inflation - and paying increasing attention to actual data. In the euro area, this approach - known as data-dependence - has led to favouring decisions taken on a meeting-by-meeting basis.

Today, monetary policy in the euro area is once again being conducted under conditions of heightened uncertainty.

The Eurosystem projections for the coming months indicate that inflation is likely to remain below the 2 per cent target for an extended period, alongside persistently weak economic activity.  Nevertheless,  the  macroeconomic  outlook  remains  subject  to  substantial  and difficult-to-quantify risks. These arise, on the one hand, from conflicting signals in US trade policy and, on the other, from the recent escalation of the conflict between Israel and Iran.

Against this backdrop, the ECB's Governing Council, at its most recent meeting, reaffirmed a flexible approach, keeping its options open. It will continue to take decisions on a meetingby-meeting basis, without pre-committing to a defined course for monetary policy.

9 In June 2025, for instance, the Eurosystem presented two alternative scenarios, alongside its economic projections for the euro area, in order to assess the impact of different US trade policies compared with the forecasting scenario deemed likelier.

10 This trend began with the Bank of England's inflation fan charts. See: E. Britton, P. Fisher, and J. Whitley, The  inflation  report  projections:  understanding  the  fan  chart ,  Bank  of  England,  Quarterly  Bulletin, March 1998, pp. 30-37. For the approach developed by Banca d'Italia, see: C. Miani and S. Siviero, 'A  non-parametric  model-based  approach  to  uncertainty  and  risk  analysis  of  macroeconomic forecasts', Banca d'Italia, Temi di discussione (Working Papers), 758, 2010.

## 3. Forecasting Errors and Learning by Doing

As mentioned, econometric models have made significant forecasting errors in recent years,  for  example  during  the  pandemic  and  the  high  inflation  phase  of  2022-23, reigniting debate about their reliability.

This is a crucial issue: major errors can compromise the timeliness and effectiveness of central bank actions, with tangible effects on price stability, growth, and employment.

In reality, most of these errors - particularly those relating to inflation - can be traced to the unpredictability of the exogenous shocks that occurred during that period, linked to geopolitical or environmental events rather than economic ones.

For example, the surge in energy prices between 2021 and 2022 was largely driven by Russia's manipulation of oil supply and its invasion of Ukraine. 11  Clearly, the ability to anticipate such events has little to do with the features of forecasting models.

A reassuring element, emerging from ex-post analyses, is that more than two-thirds of the forecasting error made by Banca d'Italia on 2022 inflation is attributable to the energy component; the figure rises to 80 per cent when food products are included (Figure 2). 12

Figure 2

## Contributions to inflation forecast errors in Italy

(percentage points)



Sources: Istat and based on Banca d'Italia's calculations.

(1) Forecast errors for the household consumption deflator growth rate.

11 F.  Panetta,  'Monetary  policy  after  a  perfect  storm:  festina  lente',  speech  at  the  3 rd International Monetary  Policy  Conference  organized  by  the  Bank  of  Finland  'Monetary  policy  in  low  and  high inflation environments', Helsinki, 26 June, 2024.

12 D. Delle Monache and C. Pacella, 'The drivers of inflation dynamics in Italy over the period 2021-2023', Banca d'Italia, Questioni di economia e finanza (Occasional Papers), 873, 2024. Similar assessments apply to the euro area. See: M. Chahad, A.-C. Hofmann-Drahonsky, A. Page and M. Tirpák, 'An updated assessment of short-term inflation projections by Eurosystem and ECB staff', ECB, Economic Bulletin , 1, 2023, pp. 61-55.

The lesson from the pandemic and energy crises concerns the need to refine the techniques for anticipating the behaviour of key exogenous variables, starting with energy prices themselves, which are notoriously volatile and particularly relevant for inflation.

It should be noted that the process of revising forecasting tools - initiated by Banca d'Italia and other central banks to account for exceptional events - is nothing new. The global financial crisis, for example, led to the introduction of mechanisms to simulate the effects of a potential credit crunch, 13   while  the  sovereign  debt  crisis spurred the development of tools to analyse 'unconventional' monetary policies.

In addition to the challenges posed by extraordinary shocks, there are well-known limitations relating to the nature of the data used in economic forecasts, which are often estimates and subject to subsequent revisions. Economic forecasters - unlike meteorologists - lack certainty even about current data. 14

Nevertheless, there are encouraging signs. Research by Banca d'Italia shows that, compared with the 2008 financial crisis, forecasts were adjusted promptly during the sovereign debt crisis and even more so during the pandemic. 15  The initial errors were still substantial, but the ability to correct them improved significantly.

Forecasting errors are, to a large extent, inevitable; the ability to learn from them is what makes the difference.

## 4. Which Models?

Today, semi-structural econometric models remain a central tool for both private forecasters - such as Prometeia - and central banks. 16  In the Eurosystem, national forecasts for the euro area often rely on models of this type.

Their resilience can be explained by their ability to reconcile two often conflicting needs: on the one hand, adherence to data; on the other, consistency with economic

13 L. Rodano, S. Siviero and I. Visco, 'Business cycle reversals and macroeconomic forecasts: tale of two recessions', in R. Bardozzi (ed.), Economic multisectoral modelling between past and future: a tribute to Maurizio Grassini and a selection of his writings , Florence, Firenze University Press, 2013, pp. 229-247.

14 F. Busetti, 'Preliminary data and econometric forecasting: an application with the Bank of Italy quarterly model', Journal of Forecasting , 25, 2006, pp. 1-23.

15 L. Rodano, S. Siviero and I. Visco, 2013, op. cit.

16 The construction of the semi-structural econometric model of Banca d'Italia began in 1963 by a working group coordinated by Antonio Fazio and Guido Maria Rey, under the direction of then-Governor Guido Carli.  Over  time,  several  generations  of  the  model  have  followed,  with  major  contributions from Franco Modigliani (in the initial phase) and Albert Ando (from 1982 to 2002). These generations were regularly documented in Bank publications, including: 'Un modello econometrico dell'economia italiana (M1BI)', Banca d'Italia, 1970; A. Fazio and B. Sitzia, 'The quarterly econometric model of the Bank of Italy. Structure and policy applications', Banca d'Italia, 1979; I. Visco et al., 'Modello trimestrale dell'economia  italiana',  Banca  d'Italia,  Temi  di  discussione  del  Servizio  Studi,  80,  1986;  G.  Galli, D. Terlizzese and I. Visco, 'Un modello trimestrale per la previsione e la politica economica: le proprietà di breve e di lungo periodo del modello della Banca d'Italia', Politica Economica , 5, 1, 1989, pp. 3-52.

theory. Purely statistical models, although sometimes more accurate in the short term, do not clarify the underlying economic mechanisms or ensure internal consistency between variables. In other words, they do not provide monetary authorities with the economic narrative that is indispensable for the analysis and communication of policy decisions. 17

At  the  other  extreme,  more  theoretically  sophisticated  models  may  fail  to  use empirical information efficiently. Semi-structural models, though involving inevitable compromises,  manage  to  integrate  a  wide  range  of  data  while  maintaining  a recognizable theoretical framework. 18

For  this  reason,  most  central  banks  continue  to  use  them,  alongside  a  range  of alternative  tools  within  a  'model  suite'.  Banca  d'Italia  also  follows  this  approach, using more statistical models for short-term forecasts and more theoretical ones for medium- and long-term projections.

## New Frontiers: Integrated Models and Computing Power

Recent  advances  in  computing  capabilities  are  opening  up  new  possibilities  for economic  analysis,  enabling  the  integration  of  macroeconomic  models  with microeconomic  analysis  tools.  This  combined  approach  has  made  it  possible  to address issues that macroeconometric models alone could not tackle effectively.

For  example,  analyses  by  Banca  d'Italia  show  that  the  quantitative  easing  policies adopted in the pre-pandemic period, contrary to some expectations, did not exacerbate inequalities but rather produced moderately positive redistributive effects. 19

The combination of micro and macro levels has also proven useful in other areas, allowing  for  the  estimation  of  potential  output  while  avoiding  the  'aggregation bias', 20   and  providing  more  accurate  measures  of  the  effects  of  credit  rationing during the sovereign debt crisis. 21

17 Policymakers need an 'economic narrative' to judge the reliability of a forecast scenario; data alone are not enough.

18 S. Siviero and D. Terlizzese, 'Macroeconomic forecasting: debunking a few old wives' tales', Journal of  Business  Cycle  Measurement  and  Analysis ,  3,  2007,  pp.  287-316;  M.  Caivano  and  S.  Siviero, 'Strumenti matematici a supporto delle decisioni di politica monetaria. Il caso della Banca d'Italia', in G. Boffi (ed . ), I modelli matematici di fronte alla crisi economica e finanziaria , Università Bocconi, Pristem/Storia, 31, 2013, pp. 49-78.

19 M.  Casiraghi,  E.  Gaiotti,  M.L.  Rodano  and  A.  Secchi,  'A  'reverse  Robin  Hood'?  The  distributional implications of non-standard monetary policy for Italian households', Journal of International Money and Finance , 85, 2018, pp. 215-235.

20 D. Fantino, 'Potential output and microeconomic heterogeneity', Banca d'Italia, Temi di discussione (Working Papers), 1194, 2018; D. Fantino, S. Formai and A. Mistretta, Firm characteristics and potential output: a growth accounting approach ,  Banca  d'Italia,  Questioni  di  economia  e  finanza  (Occasional Papers), 616, 2021.

21 L. Burlon, D. Fantino, A. Nobili and G. Sene, 'The quantity of corporate credit rationing with matched bank-firm data', Banca d'Italia, Temi di discussione (Working Papers), 1058, 2016.

## 5. Conclusions: The Future of Forecasts (and of Errors)

This  discussion  has  highlighted  several  promising  ways  to  enhance  the  reliability of  macroeconomic forecasts  -  including  the  systematic  analysis  of  error  sources,  the integration of macroeconomic and microeconomic models, and the use of alternative scenarios to account for uncertainty.

Future challenges will require even more advanced tools. It will be crucial to understand the  impact  of  long-term  trends  -  such  as  the  green  transition  -  and  to  harness  the potential offered by recent advances in data processing.

Artificial  intelligence  opens  up  interesting  perspectives  for  modelling  complex  and non-linear dynamics, as has already happened in the field of meteorology. 22  However, in the realm of monetary policy, the ability to provide an economic narrative remains essential:  for  this  reason,  even  the  most  advanced  models  must  be  accompanied  by interpretable and theoretically grounded tools.

Ultimately, forecasting the economy will never be an exact science. Economic agents, unlike physical particles, react to policies 23 , form expectations, and interact strategically. For this reason, error will always be part of the process, and precisely for this reason, models will always be a work in progress.

As  a  well-known  quote  has  it,  'It's  tough  to  make  predictions,  especially  about  the future'. 24

22 C.  Cookson,  'Weather  forecasting  takes  big  step  forward  with  Europe's  new  AI  system', Financial Times , 25 February, 2025.

23 This feature was highlighted by R.E. Lucas, 'Econometric policy evaluation: a critique', in K. Brunner and  A.H.  Meltzer  (eds.), The  Phillips  curve  and  labor  markets ,  Amsterdam,  North-Holland,  1976, pp. 19-46.

24 The quote has been variously attributed to Niels Bohr, Winston Churchill, and even Yogi Berra.",Fabio Panetta
https://www.bis.org/review/r250623k.htm,Frank Elderson: Europe at a crossroads - it is high time to complete the single market,"Keynote speech by Mr Frank Elderson, Member of the Executive Board of the European Central Bank and Vice-Chair of the Supervisory Board of the European Central Bank, at the Single Resolution Board (SRB) Legal Conference 2025, Brussels, 18 June 2025.",2025-06-18 00:00:00,"SPEECH

## Europe at a crossroads: it is high time to complete the Single Market

Keynote speech by Frank Elderson, Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB, at the SRB Legal Conference 2025

Brussels, 18 June 2025

Thank you for your kind invitation. It is a pleasure to join you this morning to discuss the key obstacles to completing the single European market from the ECB's perspective.

40 years ago Jacques Delors presented a now-famous , outlining a bold and comprehensive vision for completing the single European market. This historic document identified 279 obstacles, many of them legal in nature, that stood in the way of the free movement of goods, people, capital and services across Europe. ""White Paper""

Delors' White Paper did not come out of nowhere - it was conceived as a solution to tackle the challenges plaguing Europe in 1985: eurosclerosis [ ] , competitiveness crisis, paralysing political tensions. These 1

issues dominated the headlines of the time.

Policymakers overcame these obstacles with the Single European Act building on a clear and actionable timeline. And the rest, as they say, is history.

Fast-forward 40 years and we now stand at a similar crossroads in Europe, this time facing even greater challenges. Geopolitical fragmentation is on the rise, sparking demand for more strategic autonomy to ensure we remain the masters of our own destiny. Our economies are undergoing profound structural changes as we navigate the clean energy and digital transitions. Meanwhile, there is a growing concern we are losing out on competitiveness, which risks threatening European standards of living.

I will start my remarks today by taking a look at why deepening the Single Market matters. I will then cover some of the main obstacles hindering the Single Market from developing its full potential and conclude by outlining a possible way forward.

In this, I am guided by Jacques Delors' insight from 40 years ago, which could not be more relevant today -""The time for talk has now passed. The time for action has come.""

## Deepening the Single Market is key for prosperity and our mandates

Over the past decades the Single Market has delivered remarkable economic results and substantially improved the wellbeing of more than 440 million citizens across the continent.

ECB economists have found that the Single Market has added between 12% and 22% to long-run EU GDP [ ] . We saw a remarkable five-fold increase in the intra-EU trade of goods between 1993 and 2021 [ ] . And, importantly, the Single Market forms the bedrock of a predictable investment and business environment, founded on the rule of law. [ ] 2 3 4

Yet, markets remain fragmented and too many internal barriers are preventing the Single Market from developing its full potential.

This is particularly the case for services, which account for around 75% of the EU's GDP. Soberingly, 60% of barriers to trade in services are still the same as they were 20 years ago. And, worryingly, intra-EU services trade is no higher than services trade with non-EU countries, suggesting that the Single Market for services operates significantly below its potential.

This self-induced straightjacket comes with a significant price tag.

The that internal barriers to the Single Market are, on average, equivalent to a tariff of 44% for goods and a staggering 110% for services. These figures underline an ironic reality: while much of our focus is directed at the potential economic impact of external tariffs applied to goods traded with non-EU trading partners, we risk overlooking the far greater burden of self-imposed internal barriers. These barriers are weighing on our economy every single day. Fortunately, unlike external tariffs imposed on us by non-EU countries, the decision to address internal barriers lies entirely within our own competence. IMF estimates

One might ask: why should deepening the Single Market concern the ECB?

The establishment of a fully integrated single market could enhance the effectiveness of our monetary policy . The euro area's single monetary policy cannot be tailored to national circumstances. Economic theory identifies this as one of the inherent costs for countries joining a monetary union. However, merging currencies can still yield substantial net benefits when countries' economic cycles are closely synchronised, as this ensures that the ECB's single monetary policy is appropriate for all euro area countries. [ ]  A deeper internal market works as a catalyst for such synchronisation by aligning the economic structures of the countries subject to a single monetary policy. This is achieved either through enhanced risk sharing and the free movement of goods, services, capital and labour. [ ] 5 6

A more integrated single market is also crucial for effective banking supervision . Although we have a Single Rulebook in the banking union, national variations remain within this single prudential rulebook. In addition, foundational elements of the prudential framework, such as accounting standards, securities and insolvency laws, continue to differ across Member States, which adds unnecessary complexity. A more integrated banking system with more harmonised rules would yield significant benefits: it would make the allocation of credit inside the Single Market more efficient while providing opportunities for banks to grow and compete across borders. [ ] 7

Deepening the internal market also offers broader advantages . It could enhance euro area competitiveness by enabling businesses to scale up, achieve economies of scale and allocate resources more efficiently. Increased competition drives innovation and productivity, while harmonised regulations lower costs and reduce administrative burdens for firms across borders. This environment attracts investment, strengthens supply chains and enhances the euro area's strategic autonomy by reducing dependence on external markets. These advancements not only support the effectiveness of our monetary policy and banking supervision but also address the challenges of an increasingly fragmented geopolitical landscape. [ ] 8

But we cannot succeed if we have 27 different policies for our firms and industries.

We cannot succeed if we fail to recognise professional qualifications across the EU.

And we certainly will not succeed if we allow a self-defeating spiral of national fragmentation to take hold. Instead, any meaningful debate on growth, productivity and strategic autonomy must begin - and end with a firm commitment to completing the Single Market and to do so in a timely manner.

## Deepening the Single Market is a legal imperative

Completing the Single Market is not only necessary in light of the challenges of our times - it is also a legal imperative anchored in the EU Treaties.

Let me first recall that the ultima ratio of the Single Market is its completion. As long as barriers persist to the free movement of persons, goods, services and capital, the Single Market remains an unfinished promise.

Second, the completion of the Single Market is not just an aspiration - it is a legal obligation. Article 3.4 of the Treaty on European Union states unequivocally that 'the Union shall establish an internal market ' . Hence, the Single Market is nothing less than an explicit objective of the Union under the Treaties.

And third, the Treaties are very clear that the Single Market is a key lever to foster citizens' welfare and promote the Union's interests in the world. [ ]  This is important at a time when increasing strategic autonomy has become essential in light of geopolitical rifts and shifts. 9

Thus, completing the Single Market is not merely something that is 'nice to have', something we might do when the moment is right, something that depends on the political winds and tides. It is a legal imperative strongly anchored in the Treaties.

So, if the Treaties are crystal clear about the need to complete the internal market, one may ask: what are the main impediments to its full completion? And, more importantly, what can be done to address them?

## The 'troubling three' for the ECB

To be clear, Member States and EU institutions are in the driving seat when it comes to addressing the barriers hindering the Single Market - not central bankers or prudential supervisors. However, the ECB very much welcomes the recent momentum to deepen the internal market, and I would like to reflect on this important endeavour from our perspective.

Encouragingly, the challenge of completing the internal market is well understood. The Commission has accelerated its work on making the Single Market simpler, seamless and stronger. [ ]  As a first step, the 10

EU and the Member States must work together to prevent the emergence of new barriers. However, to achieve meaningful progress, the EU must also remove the barriers that obstruct the functioning of the Single Market.

In this regard, the European Commission's new single market strategy provides a clear and focused roadmap by identifying the ""terrible ten"" - the most significant barriers that must be addressed. [ ]  This prioritisation is both pragmatic and effective. While clearly all barriers need to be removed in the long term, the Commission's strategy wisely concentrates efforts on those whose resolution promises the greatest economic impact. 11

Let me highlight three key points relevant for delivering on our mandate.

## Overly complex EU rules

The first one is complexity. The key issue here is not complexity per se, but excessive complexity. As Albert Einstein wisely said, 'Everything should be made as simple as possible, but no simpler' . This principle applies equally to regulation.

EU market legislation must often balance a wide array of diverse market interests and national policy preferences, which inevitably results in complexity and diverging rules. In this context, we welcome ongoing simplification efforts provided they do not compromise the fundamental purpose of the rules. [ 12

] In this respect, it is important to emphasise that reducing complexity is best achieved through European harmonisation, not by lowering regulatory requirements. Harmonisation not only simplifies the legal framework but also makes it more seamless and, when based on best practices, stronger. As I stated earlier this year: don't cut rules, harmonise them. [ ]  After all these decades of European integration there is still no better way to simplify and to lower the regulatory burden than to reduce 27 regimes to one. 13

## Lack of Single Market ownership by Member States

Another main obstacle to advancing the internal market lies in the fact that it is a shared competence between the EU and the Member States. [ ]  Member States have legitimate policy interests that may have unintended consequences for the Single Market. Think about areas like consumer protection or health and safety. In these fields, national preferences differ, driving fragmentation and complexity in EU regulation. 14

Member States also contribute to market fragmentation through delayed transposition, incorrect application, or overly burdensome and unnecessarily divergent implementation of EU law - a practice commonly referred to as ""gold-plating"", although it would be more fitting to speak of 'lead-plating' as from a European perspective this practice results in something that is not shiny like gold but heavy like lead.

Such practices are also evident in banking supervision because the prudential framework also consists of EU directives that need to be transposed into national law.

For example, in several areas, including licensing and governance, rules differ across Member States because laws transposing EU directives are not fully harmonised. Dealing with a wide array of different national rules is far from ideal for the single European supervisor. Further harmonising the regulatory framework for the banking sector would further enhance our effectiveness as a bank supervisor.

While harmonisation within the internal market has typically been achieved through directives, there is an increasing reliance on regulations to legislate in the financial sector. Regulations offer a clear advantage: they do not require transposition into national legislation, thereby avoiding delays, transposition deficits and the risk of national preferences diluting the intended benefits of internal market rules. In areas where full harmonisation is currently politically or technically unfeasible, alternative approaches, such as introducing a ""28th regime"", could provide a practical and effective interim step.

## Complicated business establishment and operations

Finally, the establishment and operation of companies across the EU remains unnecessarily complex and costly, largely due to the fragmentation of legal rules across Member States. This hinders businesses, particularly start-ups, from scaling up effectively.

A related challenge persists in the banking sector where cross-border banking integration remains limited despite the banking union's Single Rulebook, Single Supervisory Mechanism and Single Resolution Mechanism.

The advantages of deeper cross-border banking integration are clear.

Eliminating barriers to integration would enable banks to achieve economies of scale and enhance risk diversification, with cross-border mergers offering opportunities for greater profitability. However, the current limited level of cross-border integration restricts the potential for private risk-sharing within the European banking market. This fragmentation also hampers banks' ability to optimise liquidity management, ultimately increasing risks to financial stability. [ ] 15

European banking supervision has taken important steps to tackle obstacles to cross-border banking integration. For example, we issued a guide affirming that cross-border mergers within the euro area will be treated the same as domestic mergers. [ ]  We clarified that European banking supervision will not hinder banks wishing to convert subsidiaries into branches. [ ]  Additionally, we made it clear that banks operating across borders through subsidiaries can apply for liquidity waivers to pool liquidity across legal entities. In short, we made it as clear as we could and let me repeat this message just as clearly today: as long as regulatory prudential requirements are met, we will not stand in the way of cross-border banking consolidation and cross-border integration more generally, very much to the contrary. 16 17

However, despite these efforts, progress on financial integration in the euro area remains limited. This indicates that remaining obstacles are influenced by factors unrelated to banking supervision. In this context, reaching a political agreement on the banking union's third pillar, a European deposit insurance scheme, is more critical than ever. Moreover, avoiding undue fragmentation of the single market and unjustified impact on the freedoms of the Treaty is critical.

Beyond progress on the banking union, advancing the capital markets union is equally critical, as the two are intrinsically linked and mutually reinforcing. [ ]  A stronger banking union, for instance, helps prevent shocks from spreading to broader capital markets, while robust capital markets diversify funding sources and reduce banking risks. 18

Currently, financial institutions looking to expand across borders face a fragmented landscape of national specificities and procedures, for example, securities, accounting and insolvency laws. Addressing these barriers through the harmonisation of securities laws, accounting frameworks and corporate insolvency rules is essential to fostering a truly integrated financial market.

Encouragingly, the Commission's savings and investment union (SIU) proposal, with the capital markets union as a key pillar, brings renewed momentum to these efforts. Swift implementation of the full SIU strategy requires decisive action. At EU level, this includes advancing policy initiatives on supervision, as well as trading and post-trading infrastructure. At national level, reforms such as taxation of cross-border investments remain crucial.

## Conclusion

Before concluding, let me offer one final practical suggestion drawing from our own experience with the Economic and Monetary Union. The success of the euro was, in part, built on the foundation of a clear and well-defined timeline in the Maastricht Treaty setting out a roadmap for economic convergence and the creation of a common currency.

Similarly, the adoption of the Single Market in 1993 crucially built on the timeline contained in the Single European Act of 1986, which was championed by Jacques Delors.

Also today, in light of the mounting challenges we face, we do not have time to waste.

Also today, we need to move forward and complete the Single Market.

To effectively drive progress, we need a clear and time-limited roadmap, which includes concrete interim milestones and - crucially - a final ""mobilising deadline"", as the governor of the Banque de France has called it. [ ] 19

We must undertake this endeavour jointly - EU institutions, Member States, businesses - ultimately all of us. Because, ultimately, completing the Single Market concerns all of us.

As Jacques Delors wisely said "" Europe is not just about markets. It is about a way of life .""

To protect that European way of life and to foster prosperity, strategic autonomy and competitiveness, our best course of action is to timely complete the Single Market. [ ] 20

Thank you for your attention.

The term ""Eurosclerosis"" was coined by German economist Herbert Giersch in a 1985 paper of the same name. He used it to refer to the economic stagnation and high unemployment characterising western Europe at the time.

2.

See Lehtimäki, J. and Sondermann, D. (2020), ' ', Working Paper Series , No 2392, ECB, April. Baldwin vs. Cecchini revisited: the growth impact of the European Single Market

3. See Council of the EU and the European Council (2024) , . 30th anniversary of the EU single market

4.

Elderson, F. (2025), ' ', keynote speech at the Italian constitutional court, Rome, 9 June. The rule of law as a constitutional pillar of European central banking

5.

Mundell's (1961) Optimum Currency Area theory evaluates the trade-offs between the loss of independent monetary policy and the benefits of deeper economic integration. It asserts that a single currency is most effective when adopted by countries with similar economic conditions and closely aligned policies, as this minimises the costs associated with relinquishing independent monetary policy.

6.

When regions in a monetary union face differing economic conditions, the absence of an independent monetary policy eliminates a key stabilisation tool, leaving economies vulnerable to slow and sometimes painful adjustments. A fully integrated single market, however, can enable private risk-sharing. In such a framework, households, firms, banks, and investors can more effectively diversify their activities across the union, sharing both risks and rewards. This private sector mechanism reduces the need for fiscal transfers, easing some of the economic constraints associated with operating under a single monetary policy. Furthermore, the free movement of goods, services, capital, and labour also plays a pivotal role in facilitating economic adjustments, fostering greater synchronisation across the Union and enhancing the appropriateness of a single monetary policy.

7.

See Majino-López, J. and Véron, N. (2025), , study, European Parliament, May. EU Banking Sector &amp; Competitiveness: Framing the Policy Debate

8.

Strengthening Europe's strategic autonomy is a top priority of the EU. To achieve this, Europe must bolster its strategic industries to reduce excessive dependencies, as highlighted in reports by and Mario Draghi

## . Enrico Letta

9.

See , Article 3.1 (one of the Union's aims is the well-being of its peoples) and Article 3.5 (in its relations with the world, the Union aims to promote its interests). Treaty on European Union

10. See European Commission (2025), , 29 January. A Competitiveness Compass for the EU

11.

See European Commission (2025), , 21 May. A Strategy for making the Single Market simple, seamless and strong

12.

As highlighted in our detailed legal opinion on the first omnibus package, there is also a risk that, in pursuing simplification, we may go too far and inadvertently undermine the very purpose of the rule. In principle, rules emerge as a solution to a problem, hence the goal of simplification should be to make regulations more efficient without compromising on their effectiveness. See . Opinion of the European Central Bank of 8 May 2025 on proposals for amendments to corporate sustainability reporting and due diligence requirements

13.

See Elderson, F. (2025), ' ', keynote speech at the Morgan Stanley European Financials Conference, London, 19 March. Resilience offers a competitive advantage, especially in uncertain times

14.

of the Treaty on the Functioning of the European Union. Article 4.2(a)

15.

See Buch, C. (2025), ' ', speech at the Warsaw School of Economics, Warsaw, 10 April and Montagner, P. (2025), ' ', article for Eurofi Magazine, Warsaw, 8 April. European banking integration: harnessing the benefits, containing the risks Cross-border banking in the EU: from national silos to an integrated market

16.

ECB (2020), ; Buch, C. (2024), ', speech at the Guide on the supervisory approach to consolidation in the banking sector Financial integration in Europe: where do we stand after the banking union's first decade?

' 'Globalisation: What's Next?' conference, Paris, 30 April.

Enria, A. (2021), ' ', speech at the Eurofi Financial Forum, Ljubljana, 9 September. How can we make the most of an incomplete banking union?

18.

See ECB (2024), ' ', 7 March and Eurogroup (2024), ' ', 11 March. These recent statements lay the groundwork for future progress on the capital markets union. Moreover, the recently published by Enrico Letta calling for a strong political commitment to empower the Single Market paves the way for a truly integrated financial market for the coming legislative term. Statement by the ECB Governing Council on advancing the Capital Markets Union Statement of the Eurogroup in inclusive format on the future of Capital Markets Union report

19.

Villeroy de Galhau, F. (2025), ' ', speech at a hearing before the National Assembly Foreign Affairs Committee, Paris, 14 May. A mobilising deadline for seizing 'Europe's moment

20.

See also Lagarde, C. (2025), ' ', Financial Times , 17 June. Europe's 'global euro' moment",Frank Elderson
https://www.bis.org/review/r250623j.htm,"Martin Schlegel, Antoine Martin, Petra Tschudin: Introductory remarks by the Governing Board, Swiss National Bank news conference","Introductory remarks by Mr Martin Schlegel, Chairman of the Governing Board of the SNB, Mr Antoine Martin, Vice Chairman of the Governing Board of the SNB, and Ms Petra Tschudin, Member of the Governing Board of the SNB, at the Media News Conference of the Swiss National Bank, Zurich, 19 June 2025.",2025-06-19 00:00:00,"## News conference

Embargo 19 June 2025, 10.00 am

## Introductory remarks by the Governing Board

## Martin Schlegel, Antoine Martin and Petra Tschudin

Chairman of the Governing Board / Vice Chairman of the Governing Board / Member of the Governing Board Swiss National Bank Zurich, 19 June 2025 © Swiss National Bank

## Ladies and gentlemen

On behalf of the Governing Board, it is my pleasure as Chairman to welcome you to the SNB's news conference. Petra Tschudin and I will begin by explaining the monetary policy decision and looking at inflation and economic developments. Antoine Martin will then present the Financial Stability Report. After our introductory remarks, we will as usual be pleased to take any questions you may have.

## Monetary policy decision

I will begin with our monetary policy decision. We have decided to lower the SNB policy rate by 0.25 percentage points to 0%. The new policy rate applies from tomorrow, 20 June 2025. Banks' sight deposits held at the SNB will be remunerated at the SNB policy rate up to a certain threshold. The discount for sight deposits above this threshold remains unchanged at 0.25 percentage points. 1 We remain willing to be active in the foreign exchange market as necessary.

Inflationary pressure has decreased compared to the previous quarter. With today's easing of our monetary policy, we are countering the lower inflationary pressure. We will continue to monitor the situation closely and adjust our monetary policy if necessary, to ensure that inflation remains within the range consistent with price stability over the medium term.

## Inflation forecast

Allow me to address the development of inflation in more detail. Inflation has declined further since the last monetary policy assessment. It decreased from 0.3% in February to -0.1% in May. This decline was mainly attributable to the development of prices in tourism and for oil products.

Compared to March, our new conditional inflation forecast is lower in the short term. In the medium term, there is hardly any change from March. The forecast is within the range of price stability over the entire forecast horizon (cf. chart). It puts average annual inflation at 0.2% for 2025, 0.5% for 2026 and 0.7% for 2027 (cf. table). Our forecast is based on the assumption that the SNB policy rate is 0% over the entire forecast horizon. Without today's rate cut, the forecast would have been lower.

This brings us to the economic outlook, which Petra Tschudin will present.

## Global economic outlook

The global economy continued to grow at a moderate pace in the first quarter of 2025. This was supported by the dynamic development in global manufacturing and global trade in goods. However, this was partly attributable to the fact that deliveries to the US were brought

1 Further information is available in the updated Instruction sheet governing interest on sight deposits. The SNB will continue to use liquidity-absorbing open market operations.

forward in anticipation of higher US import tariffs, which led to a significant increase in exports in many countries. But this effect is only temporary. The global economic outlook for the coming quarters has deteriorated due to the increase in trade tensions. Monetary policy has been left unchanged in the US. In the euro area, monetary policy has been eased further.

In our baseline scenario, we anticipate that growth in the global economy will weaken over the coming quarters. The higher US import tariffs are likely to curb global trade and lead to a loss of purchasing power for US consumers. Furthermore, the high level of trade policy uncertainty is having a negative impact on global investment momentum. Inflation in the US is likely to rise over the coming quarters. In Europe, by contrast, a further decrease in inflationary pressure is to be expected.

Our scenario for the global economy remains subject to high uncertainty. For example, trade barriers could be raised further, leading to a more pronounced slowdown in the global economy. At the same time, it cannot be ruled out that fiscal policy will support growth more strongly than expected.

## Swiss economic outlook

Swiss GDP growth was strong in the first quarter of 2025. However, this development was largely due to the fact that, as in other countries, exports to the US were brought forward. When adjusted for these effects, growth momentum was more moderate.

Following the strong first quarter, growth is likely to slow again and remain rather subdued over the remainder of the year due to the appreciation of the Swiss franc in recent months and weaker global demand. We expect GDP growth of 1% to 1.5% for 2025 as a whole. We currently also anticipate GDP growth of 1% to 1.5% for 2026. Unemployment is likely to continue to rise slightly.

The economic outlook for Switzerland remains uncertain. Developments abroad continue to represent the main risk.

I will now hand back to Martin Schlegel.

## Monetary policy outlook

Ladies and gentlemen, allow me to return to our monetary policy.

Over the last one and a half years, we have significantly eased our monetary policy, thereby countering the decline in inflation at an early stage. We took heightened downside risks into account with our interest rate cut in March. These downside risks have since materialised.

Inflation has declined further in recent months. Our new conditional inflation forecast is below that of the previous quarter in the short term. With our policy rate cut today, we are countering the lower inflationary pressure.

Ladies and gentlemen, we are today lowering the SNB policy rate to 0%, bringing it to the verge of negative territory. Between 2015 and 2022, negative interest was an important

instrument for ensuring price stability in Switzerland in an exceptional phase. However, we are also aware that negative interest can have undesirable side-effects and presents challenges for many economic agents.

With our easing today, we are ensuring appropriate monetary conditions. Nevertheless, uncertainty about the development of inflation is still elevated. We will continue to monitor the situation and adjust our monetary policy if necessary, to ensure price stability over the medium term.

In closing I would like to hand over to Antoine Martin, who will present the Financial Stability Report.

## Financial Stability Report

The SNB published its latest Financial Stability Report today. Since the publication of our last report in June 2024, the conditions relevant for the Swiss financial sector have deteriorated somewhat. Several factors are at play. Trade policy tensions have dampened the global economic outlook and led to a significant increase in financial market volatility, particularly during spring 2025. Furthermore, the interest rate environment in Switzerland has started to weigh on banks' profitability, especially for domestically focused banks. Profits constitute the first line of defence for absorbing losses in a stress event. In addition to these factors, vulnerabilities in the domestic mortgage and residential real estate markets persist. In this context, banks' capital and liquidity buffers remain key. They contribute to the banking sector's resilience and ongoing lending capacity.

## Important topics from this year's report

I would like to highlight three important topics from this year's report - regulatory developments, the dynamics in the Swiss credit market, and non-bank financial intermediaries (or NBFIs).

First, further progress has been made in addressing the weaknesses in the regulatory framework revealed by the crisis at Credit Suisse in 2023. The Federal Council has proposed a package of measures in the area of crisis prevention and crisis management. These include measures addressing the potentially high liquidity needs of banks in a crisis as well as others addressing the weaknesses in the capital framework. As we recently stated in the joint press conference of the Federal Council, FINMA and the SNB on 6 June, the SNB supports these measures. We consider their timely and comprehensive adoption essential for strengthening financial stability in Switzerland.

Second, the Swiss credit market has been facing notable changes over the past few years, including the structural shift that occurred with the acquisition of Credit Suisse by UBS and the regulatory changes resulting from the introduction of the final Basel III standards this year. As described in more detail in the report, credit volumes have continued to increase, and momentum has picked up recently. Following the acquisition of Credit Suisse by UBS, the

number of customers seeking to build credit relationships with a new bank has increased, and the banking sector has been able to meet this demand overall. Meanwhile, the implementation of Basel III Final has had no visible impact so far on credit market activity, and we do not anticipate significant effects on the banking sector's lending capacity going forward.

Third, this year's report contains a special topic on NBFIs, reflecting the importance of this sector as a potential source of risk to financial stability. NBFIs encompass financial institutions outside of the banking sector, including investment funds, pension funds and insurance companies. The Swiss NBFI sector is large and has grown faster than the banking sector over the past 15 years. The report examines the size and role of NBFIs and their interlinkages with banks. It highlights the need for sustained and coordinated efforts at both national and international level to assess and address potential vulnerabilities in this sector.

I will now hand back to Martin Schlegel.

Ladies and gentlemen, thank you for your attention.

## CONDITIONAL INFLATION FORECAST OF JUNE 2025

Year-on-year change in Swiss consumer price index in percent



Source(s): SFSO, SNB

## OBSERVED INFLATION IN JUNE 2025

|           | 2022   | 2022   | 2022   | 2023   | 2023   | 2023   | 2023   | 2024   | 2024   | 2024   | 2024   | 12025   | 12025   | 12025   | 12025   | 2022/2023 |2024   | 2022/2023 |2024   | 2022/2023 |2024   |
|-----------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|---------|---------|---------|---------|-------------------|-------------------|-------------------|
|           | a1     | |o2    | |e     | |4     | a1     | \e2    | |e     | |>4    | a      | \o2    | \28    | |o4     | a1      | |2      | |es     |                   |                   |                   |
| Inflation | 21     | 30     | 34     |        | 29 32  | 21     | 16     | 16     |        | 12 14  | 11     | 07      | 04      |         |         | 28                | 21                | 1.1               |

Source(s): SFSO

## CONDITIONAL INFLATION FORECAST OF JUNE 2025

|                                            | 2025   | 2025   | 2025   |     | 12026   | 12026   | 12026   | 12027   | 12027   | 12027   | 12027   | 2028   | 2028   | 12025}2026|2027   | 12025}2026|2027   | 12025}2026|2027   | 12025}2026|2027   |
|--------------------------------------------|--------|--------|--------|-----|---------|---------|---------|---------|---------|---------|---------|--------|--------|-------------------|-------------------|-------------------|-------------------|
|                                            | at     | |-2    | |e     | |o4 | lat     | |2      | |e8     | |>4 lat |         | \-2     | |23     | |>4 a1 | |-2    | [es               |                   |                   |                   |
| Forecast March 2025, SNB policy rate 0.25% | 04     | 03     | 04     | 06  | 08      | 08      | 08      | 08      | 08      | 07      | 08      | 08     |        |                   | 04                | 08                | 08                |
| Forecast June 2025, SNB policy rate 0.0%   |        | 0.0    | 01     | 03  | 04      | 05      | 05      | 06      | 06      | 0.7     | 07      | 07     | 07     |                   | 02°05             |                   | 07                |

Source(s): SNB",Martin Schlegel; Antoine Martin; Petra Tschudin
https://www.bis.org/review/r250623i.htm,Joachim Nagel: Target achieved – no reason to let up,"Keynote speech by Dr Joachim Nagel, President of the Deutsche Bundesbank, at the Frankfurt Euro Finance Summit, Frankfurt am Main, 16 June 2025.",2025-06-16 00:00:00,"## Joachim Nagel: Target achieved - no reason to let up

Keynote speech by Dr Joachim Nagel, President of the Deutsche Bundesbank,  at the Frankfurt Euro Finance Summit, Frankfurt am Main, 16 June 2025.

* * *

Check against delivery

## 1 Germany could be a success story

Ladies and gentlemen,

This is now the fourth time that I have had the honour and pleasure of speaking at the Frankfurt Euro Finance Summit. Thank you very much for your invitation. The name of this event is Agenda 2030-an equity story for Germany. Now, I am not known as much of a storyteller in my role as Bundesbank President. And attracting investors is not part of my job description, either. But I would like to reiterate here what I have been saying for some time: Germany could be a success story if it can decisively tackle and resolve its structural economic issues.

After being dubbed the sick man of Europe for a while, great hopes are now being placed in Germany's new Federal Government, both here and throughout Europe. This could actually become a real turnaround story. In a speech held in Berlin at the beginning of March, I outlined twelve key economic policy measures to boost growth in Germany. 1   I will touch upon these briefly again at the end. Today, however, I will be focusing on the topics of economic activity, price developments, and monetary policy.

## 2 Between the tariff shock and shaping the future

First, let us take a look at the economic situation and growth outlook in Germany. The German economy grew by 0.4% in the first quarter of this year, after contracting slightly at the end of last year. The expansion in the first quarter was surprisingly significant. It was due, in part, to anticipatory effects related to tariffs, while the underlying cyclical trend remains weak at present.

In the second quarter, economic activity is likely to more or less stagnate. Export business is undoubtedly suffering from US tariff policy. In addition, industry is seeing comparatively low capacity utilisation. Accordingly, firms have relatively little incentive to invest. Furthermore, household consumption is currently subdued. This is because the labour market is trending downward and wages are no longer rising as sharply.

According to our new Forecast for Germany, the economy will tread water on average this year. 2   However, the forecast was not able to take account of the fact that the revised rate of growth for the first quarter is now twice as high as originally reported. A slight increase in aggregate output therefore appears to be well within the realms of possibility on annual average.

In any case, this would then mark three years in a row with essentially no economic growth. However, there are now more and more signs that this long period of drought is coming to an end. The Bundesbank's economists consider it likely that German gross domestic product will see a noticeable rise of 0.7% in calendar-adjusted terms next year. For 2027, they are projecting a growth rate of 1.2%.

This means that, after this long drought, we have not quite reached a lush green oasis just yet. Instead, Germany's path forward remains challenging-between the tariff shock and shaping the future. On the one hand, US trade policy and geopolitical uncertainty are burdens. On the other hand, the fiscal package is bolstering economic activity.

On their own, the tariff hikes factored into the baseline scenario of the forecast and the heightened level of uncertainty could cost Germany around ¾ percentage point of economic growth over the medium term. There are three key factors here. First, tariffs are making German products less competitive in the key US sales market. Second, export business is suffering from the overall weakening of global economic growth caused by tariffs. Third, elevated uncertainty is dampening economic growth. The lack of planning certainty is paralysing firms' investment, in particular.

Alongside tariffs and greater uncertainty, the changes in exchange rates, financial market responses and commodity prices triggered by US economic policy are also having an impact on economic growth. But I would like to point out the following: the estimated growth losses for Germany of ¾ percentage point over the medium term represent just a snapshot of trade policy. It appears possible that the tariff dispute could either escalate or de-escalate at any time.

As I mentioned before, the growth-damaging effects of tariffs are offset by the positive growth stimulus from fiscal policy. Extensive scope for additional debt has been created for increased expenditure on infrastructure and defence. However, the exact shape that the new fiscal stance will ultimately take is still unclear. In the new Forecast for Germany, our experts estimate that the additional expenditure on defence and infrastructure alone could increase economic growth by a total of ¾ percentage point in 2026 and 2027.

Nevertheless, Germany's growth remains below the euro area average. According to the June Eurosystem staff projections, euro area economic output will rise by 0.9% this year. 3   Next year and the year after, the pace of growth is expected pick up slightly to 1.1% and 1.3%, respectively.

I recently gave an entire speech on the topic of  monetary policy in times of high . At this point, I would like to emphasise one thing in particular: the uncertainty 4 economic outlook is extremely uncertain at present. But it already seems as if exceptional uncertainty is almost becoming the new norm.

It is still very difficult to assess how the situation in the Middle East will develop following Israel's attack on Iran. We can all only hope that the conflicts in the Middle East will be resolved as quickly as possible. Every single person who has to suffer from war is one too many. The economic repercussions of the conflict in the Middle East are also impossible to predict at present. In the event of a prolonged and severe conflict, oil

prices could rise considerably, for instance. The economic outlook could then change markedly compared to what I am talking about today-in terms of both economic activity and prices.

## 3 2% target achieved

Alongside oil and gas prices, tariff policy and fiscal policy play important roles in future price developments. However, their currently expected impact on inflation is unclear.

For example, lower economic growth due to the tariff dispute could further reduce inflationary pressures. Conversely, tariff-related fragmentation of supply chains could result in higher costs, which would then lead to rising prices.

German fiscal policy will likely dampen inflation markedly in the short term if relief measures, such as the reduction in electricity tax and grid fees, come into effect. By contrast, greater expenditure on defence and infrastructure could drive aggregate demand and, indirectly, consumer prices over the medium term.

It is clear that the broad-based decline in commodity prices is already putting the brakes on inflation. And it is also clear that a stronger euro will reduce price inflation in both Germany and the euro area as a whole. The recent exchange rate movements were atypical for periods of heightened uncertainty in the financial markets. Unusually, the US dollar did not benefit from its status as a safe haven, but depreciated instead. Immediately after the announcements of US tariffs at the beginning of April, there was a slump in risk appetite amongst investors, leading to significant losses in the stock market amid high financial market volatility. The prices of US Treasuries also fell markedly.

In the new Eurosystem staff projections, exchange rate developments are another reason why the inflation forecast was revised downwards over the shorter term. For this year, the economists now expect euro area inflation of 2%. Next year, it is expected to temporarily fall markedly to 1.6%, before rising to 2% again in 2027.

In contrast to the projections that the ECB released in March, we are pleased to say that we are now likely to achieve the 2% target this year. According to initial estimates, euro area inflation declined to 1.9% in May. We are expecting comparable figures for the coming months. I am therefore confident that inflation will stabilise at 2% on a sustainable basis and that we will thus achieve our medium-term inflation target.

This holds true even if the inflation rate may temporarily dip below 2% next year, driven mainly by lower energy prices. It is unlikely that inflation will remain persistently below target. Underlying inflation and, above all, services inflation are too high for this to happen. According to initial estimates, services inflation declined significantly in May, but still stands at 3.2%.

## 4 No reason for monetary policy to let up

At the most recent meeting of the ECB Governing Council, we lowered the key ECB interest rates for the eighth time by 25 basis points. Due to the improved price outlook, I believe that this decision was appropriate. The key interest rate now stands at 2%. It is

thus exactly in the middle of the range for the natural rate of interest calculated by Eurosystem experts. 5   Despite all of the conceptual difficulties and uncertainty surrounding the natural rate of interest: 6   monetary policy is certainly no longer having a restrictive effect with the current key interest rates. In my view, this level of interest rates provides us with a very good starting position from which to respond to a wide variety of developments.

Current price data and inflation forecasts are signalling mission accomplished. We on the ECB Governing Council can certainly be satisfied with this. However, we cannot simply sit back and take it easy. Instead, it is vital that we keep our eyes and ears open for any risks to price stability. This also holds true given the current developments in the Middle East.

In light of the present uncertainty, cautious monetary policy and communication remain appropriate. The degree of uncertainty is already far too high. The ECB Governing Council should not add to this itself. As critical factors can change quickly in the current environment, we would be well advised to stay flexible. In other words, it is not sensible to make pre-commitments-neither for cutting interest rates again nor for keeping monetary policy unchanged. We should continue to make data-dependent decisions on a meeting-by-meeting basis and not rush into anything.

## 5 Spending alone is not enough

Allow me to conclude by summarising the most important points: for the German economy, there are signs that the long period of drought is coming to an end. However, the path ahead will not lead us straight to a green oasis, but will remain challenging-between growth-damaging tariff effects and growth-enhancing fiscal policy. Even if euro area inflation is back around 2% and will likely remain there in the medium term again after a dip, too, monetary policymakers have no reason to let up. Given the very high degree of uncertainty, the ECB Governing Council needs to be especially responsive and cautious.

Furthermore, with regard to economic policy, I would like to convey the following message: spending alone is by no means enough. Persistently higher growth in Germany can only be achieved if structural adjustments are made at the same time. To name just the key points: expanding the supply of labour, advancing the energy transition, creating better investment conditions for enterprises. This also includes strengthening incentives to work, accelerating planning and approval processes, and reducing excessive bureaucracy.

Then, additional government spending can bring growth to a consistently higher path if the extra funds are used effectively and efficiently for infrastructure, research, innovation, digitalisation, and defence. This could turn into a success story for Germany.

1  Nagel, J.,  Economic policy measures to boost growth in Germany | Deutsche Bundesbank, speech held at the Berlin School of Economics, Humboldt University of Berlin, 10 March 2025.

- 2  Deutsche Bundesbank (2025),  The Bundesbank's forecast for Germany: Economic recovery slowly getting started | Deutsche Bundesbank.
- 3  European Central Bank,  Eurosystem staff macroeconomic projections for the euro area, June 2025 .
- 4  Nagel, J.,  European monetary policy in times of high uncertainty | Deutsche , lecture at -Leibniz Centre for European Economic Research, Bundesbank ZEW 27 May 2025.
- 5  See Brand, C., N. Lisack and F. Mazelis (2025), Natural rate estimates for the euro area: insights, uncertainties and shortcomings, ECB Economic Bulletin, 1/2025.
- 6  Nagel, J.,  r* in the monetary policy universe: navigational star or dark matter? | Deutsche Bundesbank, lecture at the London School of Economics and Political Science, 12 February 2025.",Joachim Nagel
https://www.bis.org/review/r250623h.htm,Lesetja Kganyago: Students and universities as catalysts for change,"Inaugural address by Mr Lesetja Kganyago, Governor of the South African Reserve Bank, at Stellenbosch University, Stellenbosch, 20 June 2025.",2025-06-20 00:00:00,"

## Inaugural address by the 16th Chancellor of Stellenbosch University, Lesetja Kganyago, Endler Hall, Stellenbosch University, 20 June 2025

## Students and universities as catalysts for change

Greetings honoured guests, staff and students.

Rector  and  Vice-Chancellor  Professor  Deresh  Ramjugernath,  Chairperson  of  Council Dr Nicky  Newton-King,  I  thank  you  for  so  warmly  welcoming  me  into  the  Stellenbosch University community. Thank you also to my wife, Zibusiso, and my children for being here today, and, of course, my South African Reserve Bank colleagues for their support.

I consider it a profound honour to have been chosen to represent Stellenbosch University as its 16th Chancellor, not least because of this institution's role in shaping some of our country's greatest minds. I accept this role with a deep sense of responsibility, aware of the complex legacy that I inherit and the expectations that lie ahead. I look forward to doing my part, given the important role of universities in our democratic society. It is critical that we protect these institutions against threats to academic freedom.

When he was installed as Chancellor, Justice Edwin Cameron -a Stellenbosch alumnus -made a moving observation about why we should care about our universities, intellectual attainment and institutional excellence. 'For our own dignity,' he said.

' We do so for our own sense of self-worth as South Africans. ' 1

I  recently  shared a similar sentiment during an address I gave at another historic South African  University,  linking  this  to  the  importance  of  ethical  leadership  amid  threats  to academic freedom. 2

As incubators of knowledge, critical thinking and social change, universities are crucial to our future. They reflect who we are and what we aspire to be -and so we must fiercely protect their ability to nurture curiosity, innovation and diversity of thought.

For it is institutions like these that inspire young people to look outside of themselves and seek out solutions that make the world better.

This type of nurturing force may, for example, drive a group of medical students to raise the money  needed  to  launch  South  Africa's  first  transplant  support  unit ,  potentially  saving hundreds of lives.

I  am  of  course  referring  to  the  Save7  initiative,  which -after  an  innovative  fundraising campaign -was recently able to establish the Life Pod unit at Tygerberg Hospital. 3

The students behind the initiative are a huge credit to this institution, demonstrating that compassion and ingenuity are at the heart of its mission. Their work is a powerful example of how student leadership can drive real-world change.

There  are  countless  other  examples  of  how  Stellenbosch  students  and  alumni  have identified problems and taken bold steps to tackle them -like Francisca Darkoh, who, on top  of  being  a  Mandela  Rhodes  scholar  and  entrepreneur,  hosts  soup  kitchens  to  feed hungry students. Or Caitlin Lee, whose work supports female prisoners through donations from Stellenbosch students.

1  E Cameron, ' Installation of the 15th Chancellor of Stellenbosch University '. Kruiskerk, Stellenbosch, 18 May 2022. http://www.sun.ac.za/english/Documents/2022/20220518%20Edwin%20Cameron%20%20Installation%20as%20SU%20Chancellor%202.pdf

2 E L Kganyago. ' The role of ethical leadership amid threats to academic freedom ', Address by Lesetja Kganyago, Governor of the South African Reserve Bank, at Walter Sisulu University, Komani Campus, 6 May 2025. https://www.resbank.co.za/en/home/publications/publication-detail-pages/speeches/speechesby-governors/2025/address-by-lesetja-kganyago-governor-of-the-sarb-at-alter-sisulu-university-komanicampus

3  See ' Stellenbosch University medical students launch SA's first transplant support unit at Tygerberg Hospital ', 5 June 2025. https://www.sun.ac.za/english/Lists/news/DispForm.aspx?ID=11349

Just this week, on Youth Day, members of the university community walked 13 kilometres to raise funds to clear student debt, which remains a huge impediment to access to higher education -effectively locking underprivileged students out and stalling true transformation.

I draw great pride from knowing that I am now forever connected to an institution that has fostered this type of care for its students and society at large.

In 2018, I was humbled to receive an honorary Doctorate from this university. I felt back then, as I do now, the weight of my association with Stellenbosch -once a stronghold of apartheid-era Afrikaner nationalism and still contending with that legacy.

Like many others before me, I recognised the need to express in no uncertain terms that the pursuit of transformation is critical to this university's future.

It is true that, even in the iron grip of apartheid, there were members of the Stellenbosch University  community  who  were  vocal  in  their  opposition  to  the  regime -including  late Economist Sampie Terreblanche, whose work inspired wider resistance among the student body. 4

But  it  is  equally  true  that  change  came  far  too  slowly,  and  that  reluctance  to  transform persisted well into the country's democracy.

In ' Country of Grief and Grace ' , renowned poet Antjie Krog, who shares strong ties with this university, wrote about the deep wounds of apartheid, which -if  left  unconfronted -will continue to inflict pain in the future. 'Things may continue as before but in a different shade,' the poem ends. 5

It is no secret that in recent years Stellenbosch University has felt the weight of its past on the present.

Racism has no place in South Africa -least of all at an institution entrusted with shaping the country's  future  leaders. And  resistance  to  transformation  not  only  undermines  our

4  More on Professor Sampie Terreblanche's life and career can be accessed here: https://www.ekon.sun.ac.za/sampieterreblanche/#life-work

5  A Krog, 'Country of Grief and Grace', Down to my Last Skin , 2000, pp 88 -90.

commitment  to  justice  and  inclusion,  but  also  stifles  diversity  and  limits  the  depth  of intellectual  exploration.  It  remains  one  of  the  most  significant  obstacles  to  realising  our shared vision for this country's universities.

That  said,  I  would  be  remiss  not  to  acknowledge  the  work  this  institution  has  done  to prioritise Stellenbosch's transformation journey, especially over the past ten years under former Rector and Vice-Chancellor Professor Wim de Villiers.

Writing about De Villiers's leadership, Director of Stellenbosch University's Centre for Social Justice, Professor Thuli Madonsela, made the following remark: 'T ransformation is not for the faint-hearted or lily-livered … To lead amid storms requires huge reserves of emotional, social, spiritual and intellectual intelligence -plus agility. ' 6

We can take comfort in knowing that these qualities are in large supply at Stellenbosch University. We must nurture these if we are to rise to the challenges of our time.

Finally, it is worth saying that building up Stellenbosch University's deep reservoir of talent would not be possible without academic freedom.

There was a time in South Africa's history when academics spent much of their energy fending off threats to this sacred freedom.

In  1987,  students  and  alumni  gathered  in  their  thousands  across  the  country  to  protest regulations  that  would  give  the  apartheid  government  more  control  over  university appointments  and  curricula.  The  government  decree,  which  came  into  effect  on  19 October 1987, also instructed universities to act against anti-apartheid activists and report on  their  activities  to  the  then  Minister  of  Education  FW  De  Klerk.  Universities  were threatened with subsidy cuts if they failed to do so.

As a young student activist, I recall the collective outrage and widespread unity that led to a nationwide demonstration believed to be the biggest academic protest in our history. At this very institution, 300 students and academics bravely joined the protest action.

6  T Madonsela, ' Leading transformation is not for the faint of heart .' Originally published in City Press on 23 April 2023. https://socialjustice.sun.ac.za/blog/2023/05/thuli-madonsela-leading-transformation-is-not-forthe-faint-of-heart/

These  demonstrations  were  famously  depicted  in  a  series  of  paintings  by  Keresemose Richard Baholo, who was the first black student to earn a Master's degree in Fine Art from the University of Cape Town. 7  As some of you may know, these works were later lost in a fire set by students protesting for free higher education.

I say all this not only to express what is at stake as institutions like our own face attack - but to also highlight the immense privilege of being able to teach and learn, and sometimes fight, with the freedom we have to do so today.

We  must  safeguard  this  freedom  and  continue  to  honour  it  with  a  spirit  of  curiosity, engagement and critical enquiry.

As I step into this role, I do so with a deep commitment to the values that must guide us -integrity, courage and compassion. Let us continue to build a university that not only reflects the best of who we are, but also the best of what we can become.

Thank you.

7  See ' Academic freedom in a democratic South Africa '. Rhodes University 2013 archive. https://www.ru.ac.za/perspective/2013archive/academicfreedominademocraticsouthafrica.html",Lesetja Kganyago
https://www.bis.org/review/r250623g.htm,Christine Lagarde: Strengthening economies in a stormy and fragmenting world,"Speech by Ms Christine Lagarde, President of the European Central Bank, at the 9th National Bank of Ukraine and Narodowy Bank Polski (NBU-NBP) Annual Research Conference ""Economic and financial integration in a stormy and fragmenting world"", Kyiv, 19 June 2025.",2025-06-19 00:00:00,"SPEECH

## Strengthening economies in a stormy and fragmenting world

Speech by Christine Lagarde, President of the ECB, at the ninth Annual Research Conference 'Economic and financial integration in a stormy and fragmenting world' organised by the National Bank of Ukraine and Narodowy Bank Polski in Kyiv, Ukraine

Kyiv, 19 June 2025

It is an honour to be here in Kyiv - a city that has come to symbolise resilience, dignity and the enduring spirit of freedom. Kyiv stands not only as the heart of Ukraine, but as a beacon of what it means to hold fast to democratic values in the face of immense challenge.

As the great Ukrainian poet Taras Shevchenko once wrote, 'In your own house - your own truth. Your own strength and freedom.' Ukraine's fight today reminds all of Europe of this powerful truth: our security and prosperity rely on unity, on integration with our neighbours.

In the face of Russia's unjustified war of aggression, Ukrainians have demonstrated extraordinary courage and resilience in defence of their country.

In my remarks today, and in keeping with the theme of this conference, I would like to reflect on the historical lessons we have learned about strengthening and integrating economies in an increasingly stormy and fragmented world.

Experience shows that closer ties with the European neighbourhood can provide a strong foundation for Ukraine to rebuild and emerge stronger. And as geopolitical tensions rise and global supply chains fragment, the case for deeper regional cooperation has never been clearer.

Europe's own long history of integration offers valuable insights that can help guide Ukraine's path forwards. Two key lessons stand out.

First, while deeper integration increases the potential rewards, it also raises the risks if not managed wisely. Sound domestic policy frameworks are essential to maximise growth and safeguard stability.

Second, the benefits of integration are neither automatic nor permanent. Maintaining them depends on continuous reform - but reforms must also deliver tangible improvements for people's lives, and do so relatively quickly.

## The benefits of integration in a fragmenting world

During the Cold War, the Iron Curtain fractured the European economy. Trade between East and West fell by half. This division was like imposing a 48% tariff - leading to immense welfare losses and isolating the

Eastern bloc from global markets. [ ] 1

But the transformation since Europe's eastern enlargement has been nothing short of remarkable. On average, countries that joined the EU in 2004 have nearly doubled their GDP per capita over the past two decades.

Critically, this was not just about catching up from a low base. Between 2004 and 2019, the EU's new Member States saw their GDP per capita grow 32% more than comparable non-EU countries. [ ]  The difference was deeper economic integration - and those that were already highly embedded in the regional economy gained the most. 2

While all new members experienced gains, countries with stronger integration into regional value chains recorded nearly 10 percentage points higher GDP per capita growth compared with less integrated peers - regardless of geographic proximity. [ ] 3

This difference was driven mainly by technology and productivity spillovers. ECB research shows that a 10% increase in productivity among western EU firms translated into a 5% productivity gain for central and eastern European firms linked to their supply chains. [ ] 4

The case for regional integration is therefore clear - and in today's increasingly fragmented geopolitical landscape, it has become even more compelling.

First, regional integration underpins growth.

European economies are highly open, which means a world splintering into rival trading blocs poses clear risks to prosperity. Yet Europe's most important trading partner is Europe itself: around 65% of euro area exports go to other European countries, including the United Kingdom, Switzerland and Norway. For Ukraine too, Europe is the principal trading partner, accounting for over 50% of its goods trade in 2024.

By deepening economic ties - more closely linking neighbouring economies - we can reduce our exposure to external shocks. Rising trade within our region can help offset losses in global markets. Second, regional integration strengthens resilience.

One consequence of geopolitical fragmentation is the realignment of supply chains toward trusted partners. Nearly half of firms involved in external trade have already revised their strategies - or intend to do so - including relocating parts of their operations closer to home. [ ]  While this trend reduces strategic dependencies, it can also raise costs. 5

Yet large integrated regions can mitigate these costs by replicating many of the benefits of globalisation at the regional level. Supply chains can be reorganised regionally, allowing each country to specialise based on its comparative advantage within regional value chains.

Ukraine stands to benefit significantly from expanding these networks across the region - and the EU stands to benefit, too, from having Ukraine as a partner. [ ] 6

In the automotive sector, for example, Ukrainian firms already produce around 7% of all wire harnesses used in EU vehicles. [ ]  As the industry shifts towards electric vehicles, which require more complex wiring systems, Ukraine's manufacturing base is well positioned to scale up and play a larger role in the EU value chain. 7

Equally transformative is Ukraine's drone industry, which has become one of the most advanced in the region. Drones are not only a critical component of modern warfare, but also a technology with substantial spillover effects and far-reaching dual-use applications.

Indeed, the country's ambitious goal of producing 4.5 million drones by 2025 has accelerated innovation in materials science, battery technology and 3D printing. These advances are already finding civilian applications in sectors such as logistics, agriculture and emergency response.

In short, for both existing EU members and neighbouring countries like Ukraine, regional integration is both a path to prosperity and a strategic anchor in an increasingly fragmented world.

## Managing the risks of integration

But examining the experience of countries that have used regional integration as a platform for growth and reform reveals two important lessons.

The first is that if integration is not accompanied by appropriate reforms, it can create new vulnerabilities especially in the financial sphere.

Financial integration often brings volatile capital inflows, which can make it difficult to distinguish sustainable growth from unsustainable excesses in real time.

One way this can happen is when productivity gains in tradable sectors, such as manufacturing, drive up wages in those sectors, which then spill over into higher wages in non-tradable sectors and push up overall inflation. [ ] 8

While this effect is a normal feature of catching-up, it can make it easy to mistake genuine convergence for economic overheating. If foreign capital is in fact driving financial imbalances - such as unsustainable real estate booms - countries may exhibit the same patterns of rising wages and inflation, masking underlying vulnerabilities.

Another potential distortion is that capital inflows can significantly affect government fiscal positions by boosting tax revenues and creating the illusion of permanently greater fiscal space. This often leads to procyclical fiscal policies, with governments increasing spending or cutting taxes during boom periods only to face fiscal stress when inflows reverse or growth slows.

Both dynamics have been visible during Europe's recent experience with regional integration.

After the eastern enlargement, financial integration accelerated rapidly. Between 2003 and 2008, the new Member States experienced an extraordinary surge in capital inflows, averaging over 12% of GDP annually - twice the typical level for emerging markets globally. [ ] 9

Initially, this rapid financial integration brought clear benefits: it expanded access to credit, fuelled growth and enabled much-needed development. However, in many countries, foreign capital was disproportionately channelled into consumption and construction booms, while tax revenues rose sharply on the back of property transactions and buoyant domestic demand. [ ]  This led to widespread misallocation of private capital and inefficient public spending. 10

Capital flows then reversed sharply when the global financial crisis struck, exposing these imbalances. Between December 2008 and May 2013, external bank liabilities in non-euro area central and eastern European countries declined by an average of 27% - with some countries experiencing drops of more than 50%. [ ] 11

Yet the risks associated with financial integration can be avoided. Not all countries in the region were affected equally. Those that performed better typically shared two key features.

First, they had clear policies to channel foreign investment into productive sectors. Strong industrial strategies, a skilled workforce and integration into global supply chains helped direct capital towards manufacturing and tradable services - sectors that drive export growth and are less prone to unsustainable booms and asset bubbles. [ ] 12

Second, they maintained robust financial policy frameworks. Tighter capital requirements, active macroprudential measures and countercyclical buffers strengthened domestic banking sectors and curbed excessive mortgage lending. These tools enabled those countries to absorb large capital inflows without creating destabilising imbalances. [ ] 13

The lesson is clear: as countries integrate into the region, strong domestic policy frameworks are critical to ensuring that capital inflows support long-term growth rather than generating financial instability or inefficient allocation.

This insight is especially relevant for Ukraine today as it charts its path towards recovery. If reconstruction proceeds as planned, the country could attract significant capital inflows over the next decade. But without the right safeguards, that capital risks being misallocated - undermining long-term productivity instead of strengthening it.

There are encouraging signs. The EU-Ukraine Association Agreement and Deep and Comprehensive Free Trade Area have already driven significant reforms in the financial sector. Ukraine's banking regulation now aligns with more than 75% of EU standards, covering critical areas such as capital adequacy, governance and auditing. [ ] 14

The National Bank of Ukraine has adopted a risk-based supervisory model inspired by the Single Supervisory Mechanism - the system of banking supervision in Europe - markedly improving oversight. Despite extremely challenging circumstances, Ukraine is also modernising its capital markets consolidating exchanges, upgrading settlement systems and strengthening regulatory enforcement to attract long-term investors.

These reforms are already delivering results: in 2023, Ukraine's banking sector remained profitable and well capitalised despite the ongoing war - an outcome that would have been unthinkable a decade ago. Still, further progress is essential, especially in fiscal governance. Strengthening public investment management will be critical to ensure that reconstruction funds are allocated transparently and efficiently. This is not just about meeting external standards. It is about ensuring that every euro, and every hryvnia, delivers real returns for the Ukrainian people. [ ] 15

## Making integration sustainable

However, reforms cannot be treated as a one-time effort.

So, the second key lesson is that the benefits of regional integration are neither automatic nor permanent. Sustaining them requires continuous reform - and, just as importantly, it requires citizens to see visible, tangible improvements in their daily lives.

In this context, there are two risks to watch out for.

The first is that institutional reform momentum can fade if economic benefits do not follow quickly. Deeper regional integration typically begins with aligning framework conditions, such as legal systems, regulation and public administration. These areas often improve rapidly. But for the economic gains to materialise, domestic entrepreneurs and foreign investors must respond to the new incentives created and this takes time.

In the long run, evidence shows that countries with initially weaker institutions benefit the most from adopting higher standards. [ ]  But in the short run, if people only see the effort and not the payoff, public support for further reforms can weaken, putting long-term convergence at risk. 16

The second risk is that structural shifts in the economy may weaken the link between integration and economic convergence over time.

The integration of goods markets has traditionally driven convergence almost automatically, as foreign direct investment flows to countries with lower land and labour costs, supply chains relocate and lowerincome countries benefit from technology transfers.

As I mentioned earlier, this will remain an important mechanism even in an era of supply chain reshoring. But countries cannot rely on it as heavily as in the past. Future growth in intra-EU trade is expected to depend increasingly on services - particularly digital services.

However, research shows that services sector activity tends to concentrate in larger, more affluent urban areas that exhibit the hallmarks of a knowledge economy: high tertiary education rates, strong technology and science sectors and robust digital infrastructure. [ ] 17

This means that deeper integration alone will not guarantee broad-based convergence across all regions. Over time, countries will need to invest more in education, skills and digitalisation to ensure they can build high levels of human capital.

Maintaining the path of convergence is therefore not easy. But slowing down reform efforts is not the answer - especially in the shock-prone world we face today.

There is a clear link between strong institutions and economic resilience. ECB research indicates that, during the pandemic, regions with lower institutional quality experienced - all else equal - an additional decline of around 4 percentage points in GDP per capita compared with the ten regions with the highest quality of government. [ ] 18

As our economies are increasingly buffeted by global turbulence, institutional backsliding therefore risks creating a vicious circle: repeated shocks can undermine economic convergence and further erode public confidence in the reform process.

The best way for countries to sustain reform momentum is to recognise the importance of maintaining public support and, as far as possible, pair governance improvements with a focus on sectors where they have a clear competitive edge - and where deeper integration with the region can unlock significant and rapid growth opportunities.

This way, the benefits of reforms will be felt more quickly and more widely.

Ukraine is well positioned to put this into practice. Its IT sector is already relatively strong: IT services exports reached nearly USD 7 billion in 2023, making it one of the country's leading export sectors despite the war. [ ] 19

Ukraine also produces around 130,000 STEM graduates each year - exceeding Germany and France [ ] - and it ranks among the top five countries globally for certified IT professionals. [ ]  Successful IT clusters are active in several cities, and major foreign firms - including Apple, Microsoft, Boeing and Siemens have established R&amp;D operations in the country. 20 21

A dynamic defence tech ecosystem is also taking shape [ ] , with Ukrainian start-ups attracting almost half a billion US dollars in funding in 2024 - surpassing many of their peers across central and eastern Europe. 22

[ ]  Experience from countries like Israel suggests that such a foundation can enable the country to emerge as a broader technology hub in the years ahead. 23

If Ukraine stays the course on institutional reform and continues to adapt its economy to new opportunities, despite the stormy environment, it can emerge as a vital engine of growth and a key contributor to the region's future.

## Conclusion

Let me conclude.

Ukraine stands at a pivotal moment - facing the hardships of war, the challenge of reconstruction and the opportunity of deeper regional integration.

In a world marked by shifting geopolitical realities, such integration offers a clear path to recovery and lasting prosperity.

The recent history of regional integration shows not only its immense benefits, but also the importance of managing transitional risks through robust policy frameworks. It also underlines the need to sustain reform over time by ensuring that people feel its benefits.

I am confident that Ukraine will be able to fully realise its economic potential, turning the upheaval of today into the foundation for a dynamic future.

As Ivan Franko, one of Ukraine's greatest poets, once wrote: 'even though life is but a moment and made up of moments, we carry eternity in our souls.'

This enduring spirit captures the resilience and potential of Ukraine's people and its economy - a spirit that will continue to drive advancement and renewal in the years ahead.

1.

Campos, R., Heid, B. and Timini, J. (2024), ' The economic consequences of geopolitical fragmentation:

', VoxEU Column , Centre for Economic Policy Research, 1 July. Evidence from the Cold War

2.

Grassi, B. (2024), ' ', VoxEU Column , Centre for Economic Policy Research, 6 June. The EU miracle: When 75 million reached high income

3.

Beyer, R., Li, C.Y. and Weber, S. (2024), ' ', IMF Blog , International Monetary Fund, 3 December. The 2004 EU Enlargement Was a Success Story Built on Deep Reform Efforts

4.

Chiacchio, F., Gradeva, K. and Lopez-Garcia, P. (2018), ' ', Working Paper Series , No 2143, ECB, April. The post-crisis TFP growth slowdown in CEE countries: exploring the role of Global Value Chains

5.

Attinasi, M.G. et al. (2023), 'Global production and supply chain risks: insights from a survey of leading companies', Economic Bulletin, Issue 7, ECB;.European Commission (2025), ' ', Spring 2025 Economic Forecast , 19 May . Business adjustment to tensions in foreign markets: survey evidence

6.

For simulations of the effects on Ukrainian GDP of closer cooperation with the EU, see Darvas, Z. et al.

(2024), ' ', Policy Brief , Bruegel, 7 March. Ukraine's path to European Union membership and its long-term implications

7.

Automotive World (2023), ' ', 9 January. Made in Ukraine: Wire harness production continues in the west

8.

This is the so-called Balassa-Samuelson effect, which naturally arises as countries converge toward the productivity levels of higher-income economies. See Lein-Rupprecht, S.M., León-Ledesma, M.A. and Nerlich, C. (2007), ' ', Working Paper Series , No 827, ECB, November. How is real convergence driving nominal convergence in the new EU Member States?

9.

Visco, I. (2013), ' ', Biatec , Vol. 21, No 5, Národná banka Slovenska. The impact of the crisis on financial integration in Central and Eastern Europe

10.

Leiner-Killinger, N. (2011), 'Fiscal Vulnerabilities in the CESEE Countries: the Role of Fiscal Policy Structures and Budgetary Discipline', proceedings of the workshop on 'Limited Fiscal Space in CESEE: Needs and Options for Post-Crisis Reform' organised by the Oesterreichische Nationalbank, Vienna, February.

11. ECB (2013), ' ', Monthly Bulletin Bank funding and lending activity in central and eastern Europe

, July. 12.

Bogumil, P. (2014), ' ', Country Focus , Vol. 11, No 8, European Commission, September. Composition of capital inflows to Central and Eastern Europe (CEE) - is Poland different?

13.

Epstein, N., Goretti, M., Llaudes, R. and Velculescu, D. (2012), ' ', in Bakker, B.B. and Klingen, C.A., How Emerging Europe Came Through the 2008/09 Crisis - An Account by the Staff of the IMF's European Department , International Monetary Fund, August, pp. 155162. Poland: A Beacon of Resilience in Europe

14.

National Bank of Ukraine (2023), ' ', 19 February. NBU Presents European Commission with Assessment of Harmonizing Financial Services National Laws with EU Acquis as Part of Screening

15.

Ministry of Finance of Ukraine (2024), ' '. Roadmap for reforming public investment management system

16.

Chupilkin, M., Koczan, Z. and Plekhanov, A. (2025), ' ', EBRD Working Papers , No 305, European Bank for Reconstruction and Development. 20 years of EU membership: What explains the accession bonus?

Springford, J., Tordoir, S. and Resende Carvalho, L. (2024), ' ', Centre for European Reform, June. Why cities must drive growth in the EU's Single Market

18.

Filip, M.-D. and Setzer, R. (2023), ' ', Working Paper Series , No 3045, ECB. The impact of regional institutional quality on economic growth and resilience in the EU

19.

IT Ukraine Association (2024), ' ', 1 February. In 2023, Ukrainian IT Services Export Faced Its First Decline in Years

20.

N-iX (2019), , EU4Digital. Ukraine: the country that codes - IT Industry in Ukraine, 2019 Market Report

21.

Bandura, R. and Staguhn, J. (2023), ' ', Center for Strategic &amp; International Studies, 10 January. Digital Will Drive Ukraine's Modernization

22.

Halstian, M. (2025), ' ', Georgetown Security Studies Review , Center for Security Studies at Georgetown University's Edmund A. Walsh School of Foreign Service, 15 May. A First Point View: Examining Ukraine's Drone Industry

23.

CodeUA (2025), ' ', 21 March. Ukrainian Startups Raised $462 Million in 2024",Christine Lagarde
https://www.bis.org/review/r250623e.htm,"François Villeroy de Galhau: ""Credible but not static: in praise of monetary agility""","Speech of Mr François Villeroy de Galhau, Governor of the Bank of France, at the Economic and Monetary Union Laboratory (EMU Lab), Florence, 19 June 2025.",2025-06-19 00:00:00,"

## EMU Lab, Florence - 19 June 2025

'Credible but not static: in praise of monetary agility'

Speech by François Villeroy de Galhau,

Governor of the Banque de France

Press contact: Delphine Cuny (delphine.cuny@banque-france.fr)

Ladies and Gentlemen,

I am delighted to be in Florence and I wish to warmly thank Marco Buti for the invitation.

If  an  observer were to look only at the current macroeconomic data - and in particular the sustained convergence of headline inflation to our target of 2% - it might occur to him or to her that economic stability has been achieved… but on closer inspection, it is certainly not guaranteed for the future. This is the paradox I  will  explore  with  you  today,  using  this  simple  chart  that  combines  two dimensions: time and the scope of economic policies.



TIMING AND ECONOMIC POLICIES



|         | Monetary Policy   | Fiscal and Structural Policies   |
|---------|-------------------|----------------------------------|
| Present | +                 | -                                |
| Future  | u                 | ?                                |

1



I will come back to the left-hand column. But I want to stress the obvious: the other economic policy levers are not working well today. This is because we have overused the fiscal instrument through past crises (Covid, inflation) and, asymmetrically, we are correcting this too slowly today, from the United States to  my  own  country.  Conversely,  we  have  not  sufficiently  promoted  structural reforms for growth and productivity. The other obvious point is that unpredictability is peaking for the future, notably due to the policy shift by the new  US  administration.  Europe  knows  how  it  should  respond  to  seize  its moment, thanks to the Letta and Draghi reports. I commend them, here in Italy. A quarter of a century after our monetary sovereignty, we must now ensure our economic and financial sovereignty. But so far, Europe's reaction is too slow

and too weak: I call for a mobilising date , as Jacques Delors did with January 1, 1993, for the single market, for example 1 January, 2028 i . As a nice saying goes: 'The difference between a dream and a project is a deadline' ['La differenza tra un sogno e un obiettivo è una data di scadenza']. Monetary policy cannot do everything, and the euro area must not resign itself to being trapped in a state of controlled inflation but sluggish growth.

Today, I will focus on the two boxes on the left, and delve into two conundrums with you:

- -Why the current monetary situation is credible, but not static (I).
- -Why  the  monetary  policy  of  tomorrow  must  therefore  be  agile,  while remaining predictable (II).

## I. Credible but not static? The '2 and 2'

## 1.1 The current situation is satisfying…

Allow me to start with the obvious: inflation has been successfully brought back to target and this is excellent news. We are now in a good position in the euro area (EA), with inflation at 1.9% in May and forecast at 2.0 % for this year on average. Hence, our Governing Council, around President Lagarde, decided to cut  the  deposit  facility  rate  to  2%  at  our  meeting  two  weeks'  ago. Our latest projections  show  that  we  shouldn't  fear  in  Europe,  contrary  to  the  US,  an inflationary effect of tariffs. With this latest decision, our short-term policy interest rate is very close to the centre of estimates of the nominal neutral rate.

This '2 and 2' scenario of inflation close to target and policy close to neutral feels like back to normality, after nearly a contrasted decade, sequenced first with  below  target  inflation  and  recourse  to  a  number  of  non-conventional monetary policy instruments, followed by an opposite phase with the largest inflationary shock in decades and an inverted yield curve. Back to normal is a very positive step; nevertheless, in still abnormal times, it does not necessarily mean an end to the journey.

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This return to 2% inflation is also highly satisfying as the disinflation from the peak of 10.6% in October 2022 was much less costly in terms of output and employment than feared. The unemployment rate is at its lowest level since the launch of the euro, at 6%. Thanks to the credibility of the Eurosystem, this time, the effects of commodity price shocks quickly faded away and their propagation to core inflation was quite limited because medium-term inflation expectations remained broadly stable, providing a solid 'anchor"" to prices and wage-setting.





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As I have discussed in recent speeches ii , Banque de France research iii  suggests that, had inflation expectations been as poorly anchored as they were in the 1970s in the US, our policy rates would have had to peak around 8% instead of 4%. This central bank credibility doesn't come out of the blue. When politicians undermine central bank independence, they put in peril this credibility that allows central banks to stabilise inflation at a lower cost.

## 1.2… but not static

But this return to '2 and 2' should not give way to complacency and passivity. China's  mercantilism  and  the  current  US  administration's  erratic  tariff  policy have  severely  undermined  the  rules-based  international  trading  system.  In addition,  global  bond  markets  seem  increasingly  worried  by  public  debt sustainability  in  the  US  and  across  the  world,  and  we  already  see  signs  of tensions  at  the  very  long  end  of  yield  curves,  with  the  risk  of  international spillovers.



Furthermore, as we could see once again since Thursday, oil price strongly reacts to dramatic geopolitical events.

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It's now back to its pre 'Liberation day' level, but still far below the 2022 level, after  the  Russian  invasion  of  Ukraine.  We  will  monitor  closely  the  possible spillovers of energy prices. If ever these consequences happened to be lasting and propagating - i.e. affecting underlying inflation and inflation expectations ,  we  could  possibly  adapt  our  monetary  policy:  to  put  it  short,  no  automatic monetary reaction, but 'monetary agility' on which I will elaborate further.

Over the longer term, other supply shocks are likely to occur more frequently. Extreme  climate  events  are  also  likely  to  disrupt  supply  chains.  Information technologies are developing at a fast pace, with  AI and quantum computing likely to be the next technological shocks that will possibly increase productivity. More frequent  supply  shocks  will  not  mean  per  se higher  inflation ,  but  very probably a more volatile inflation , which could weaken the anchoring of inflation expectations.

Because the current  equilibrium  is  unstable,  we  must  above  all  avoid  being complacent. As we have now entered a territory close to the neutral stance, the natural rate R* becomes a less meaningful guidepost. The debate is no longer about  navigating  by  the  'stars'  to  wonder  whether  we  are  restrictive  or accommodative. It is about how to temper volatility in a world of uncertainty. Here agility and laying out a clear reaction function play a crucial role.

## II. Agile but predictable

Fair  enough  about  agility,  and  nobody  would  recommend  rigidity.  But  let  us acknowledge that it raises two serious questions.

a/ Agility does not mean that we should rush to come back to the 2% target at short notice, in case of inflation volatility. We have a medium-term orientation around our symmetric objective, which implies we do not have to respond to deviations from target at one point in time. Instead, we have to react to dynamics that risk pushing inflation off target: what matters is whether a deviation from target is more likely to increase or to decrease iv . And medium term means within our projection horizon.

b/ Agility should not imply that we are unpredictable or indecisive. In the past, when we had strong forward guidance, our actions were described as being on ""autopilot'. Today, we are sometimes accused of the opposite - ""flying blind"" or making ""ad hoc decisions."" I do not believe we are doomed to wander between these two extremes: it is time to return to a concept that has been less used in recent years - the central bank reaction function. We need to clearly state not what we will do, but how we think and will act, in a 'readable' way.

## 2.1 The central bank reaction function

What is the Eurosystem reaction function? Since 2023, our reaction function has been based on three criteria: the inflation outlook; trends in underlying inflation; and the transmission mechanism.

When inflation was surging and monetary policy was tightening rapidly, it was natural that the second and third criteria were emphasized. With high uncertainty about the inflation outlook, it was important to ensure that inflation expectations did  not  become  deanchored  and  the  underlying  inflation  criteria  was  this backstop.

Likewise it was important to assess how quickly changes in policy rates were transmitting to borrowers and ultimately  to the demand and supply of credit.

Indeed, the transmission lags have been at least as swift and satisfactory in this latest cycle as in previous ones: each rise in the deposit facility rate (DFR) was almost fully transmitted to bank loans to businesses and households within a year. Loan volumes in the euro area weakened sharply starting from the end of 2022, with a peak response 18 months after a rate hike. However, we must remain vigilant today to the broader transmission of monetary policy actions to financial  conditions.  In  particular,  we  need  to  be  careful  that  international spillovers via higher term premia in long term yields and the exchange rate do not counteract the desired monetary stance. I will come back to it.

## Inflation projections and the use of scenarios

That said, now that inflation has returned to target, with inflation expectations well anchored, we can put more weight on the first criteria, the inflation outlook.

But inflation projections rely on various assumptions. Developing scenarios and applying informed  judgment  about  possible  future  outcomes  can  assist policymakers. But scenario analysis is no panacea. First, we can only analyse in detail a few scenarios at a time, in practice one or two as we did early June with a severe and a mild scenario on trade. We will inevitably overlook certain shocks that do appear. Second, it might be difficult to assign probabilities to scenarios and therefore to use them for policy risk management, especially in periods of 'Knightian' uncertainty - not quantifiable.

Theoretically appealing approaches, like model averaging, are difficult to apply in  practice.  Instead,  we  could  consider  methods  inspired  by  robust  control. Specifically,  robust  control  aims  at  avoiding  the  worst  possible  outcome,  for example  easing  monetary  policy  exaggeratedly  when  an  inflationary  shock materializes. But this leads to making decisions and ruling out options based on hypothetical scenarios, irrespective of their likelihood. So scenarios will be an important  aid  to  decision-making  but  should  be  used  judiciously  rather  than systematically: not in all occurrences of ECB forecasts, and subject to discretion rather than rules in their policy implications.

Three principles of monetary agility

Given all this, let me give you several thoughts on what agility means:

- Speed of assessment .  In  rapidly  changing  circumstances  or  complex shocks, there is always the temptation to wait for additional data to obtain a fuller picture. To be agile is to do this analysis faster by exploiting new real-time data sources, incorporate new models from the latest research, survey  new  staff  analyses  on  risks  and  contingencies,  and  avoid  the excess of group thinking. For example, our analysis of the effects of tariffs have benefited from using daily shipping data and freight prices.
- Symmetric and state-contingent policy paths .  We rightly stress that our monetary action should be as ' persistent and forceful '  as needed v . But is there a contradiction between persistence in policy and agility? No, not if signals are understood to be state-contingent and we avoid being boxed in. If the state changes then so does the policy, including possibly its symmetric direction both ways. Persistence is only relevant in certain states of the world.
- Acting not stronger but sometimes faster . And what about a forceful response? If required, it is not compulsory to go in incremental steps. Of course, in the presence of new shocks, central banks may prefer a waitand-see  attitude,  in  line  with  Brainard's  principle  of  mitigation vi :  if  the effects of policies are uncertain, it is better to react less. But, conversely, waiting too long for events to materialize can result in substantial losses. The Banque de France research paper entitled 'The pitfall of cautiousness in monetary policy' has shown that this attitude can lead to a cautionary bias that undermines inflation expectations vii . This may imply shorter  and  swifter  interest  rate  cycles,  although  any  adjustments  still have to be orderly.

2.2 What should we do now?

High uncertainty surrounding the global economic outlook obviously calls for humility  about  our  ability  to  predict  future  inflation  and  monetary  action.  Our primary  duty  today  is  to  assess  risks.  I  mentioned  earlier  oil  prices,  while avoiding to draw automatic monetary conclusions. Overreacting, or conversely systematically 'looking through', would be contrary to the necessary agility. We should monitor at least two other sets of data:

- -Do inflation expectations reflect a risk of lasting spillover? They don't, so far,  as  medium  term  market  based  measures  of  inflation  expectations have recently remained clearly below 2% in 2026. The probability that inflation falls below 1.5% in 5 years is around 40% according to the pricing of options on inflation.

## MEDIUM TERM SURVEY AND MARKET BASED INFLATION EXPECTATIONS ARE ANCHORED BELOW 2%





Options derived

Note. Morte Cosed intabor expecttons (Socer-dayemoving average). Lastcomne lune 16 Sources: BloomGerp, BOF romnutabore inflation

probabilities





- -How is the exchange rate of the euro evolving? Since early 2025, the euro has  appreciated  by  11%  against  the  US  dollar:  this  came  a  bit  as  a surprise,  and  a  sign  of  increasing  relative  confidence  towards  Europe. Obviously, we have no target for the exchange rate, and the last decade since 2015 has seen a striking diminution of volatility of the pair.

## HISTORICAL AND RECENT FLUCTUATIONS IN THE USD/EUR EXCHANGE RATE





That  does  not  nevertheless  mean  any  'benign  neglect'  on  our  side:  the recent appreciation of the euro has a clear disinflationary effect. According to  our  elasticities,  its  magnitude,  for  a  10%  appreciation,  would  broadly compensate the inflationary effect of a possible 10 EUR increase of the oil price - which we are still quite far from as of today.

From today's perspective, the risk of undershooting our 2% inflation target is perceived  by  markets  as  greater  than  that  of  overshooting.  In  the  June projections,  headline  inflation  is  indeed  seen  to  fall  below  2%  in  the  second quarter  of  2025  and  to  continue  to  decline  into  early  2026,  with  a  trough  of around 1.4%.

## DOWNWARD REVISION OF INFLATION PROJECTION





Note. June MICE prayection nel and 30% (Dive ard 50% Dounds (pale Oe! Mach proieCYOT ism YEW. Sowees: ECB



This decline would be driven by all the main components, not only energy but also  core  inflation,  resulting  from  low  wage  growth  and  weak  demand.  The projected  increase  in  headline  inflation  to  2.0%  in  2027  is  amplified  by  a temporary upward impact from energy inflation, reflecting the introduction of the new Emissions Trading System (ETS2). This measure is desirable but far from certain both in its timing and modalities.

In such a context, we need to remain alert and agile, in all our next meetings. As Voltaire said 'Le doute n'est pas un état bien agréable mais l'assurance est un état ridicule viii ' ['doubt is not a very pleasant state, but certainty is a ridiculous one'].  With this due wisdom, let me only give two possible landmarks:

- (i) a neutral rate and a terminal rate are two different animals. They can happen to be in the same position, but they are not identical by nature.
- (ii)  the  current  assessment suggests that, barring a major exogenous shock, including possible new military developments in the Middle East, if monetary policy were to move in the next six months, it could be more in the direction of accommodation.

## Conclusion

According  to  a  great  Florentine,  Niccolò  Machiavelli,  two  forces  shape  the course of events: fortuna and virtù . Fortuna , or fate, stands for the unpredictable shocks that affect us - geopolitical tensions, technological disruptions, and other external forces beyond our control. Virtù , or courage, by contrast, reflects our ability  to  act  with  determination,  to  adapt,  and  to  anticipate.  In  a  context  of heightened  uncertainty,  the  tension  between  stability  and  volatility  puts  our monetary policy stance to the test. But through virtù -  our capacity for clearsighted and agile action - we can secure lasting success. Monetary policy can, along the principles suggested, remain not only agile, but also predictable and 'readable'.  Striking  this  balance,  we  ensure  that,  with  the  highest  ever confidence (at 83%) of our fellow European citizens, the euro remains ready to navigate an uncertain future.

- i  Elderson, F. (2025). Brussels. Europe at a crossroads: it is high time to complete the Single Market, 18 June.
- ii  Villeroy de Galhau, F. (2024) 'A Monetary Policy Perspective: Three lessons from the recent inflation surge'.
- Speech at New York University. 22 October.
- iii  Dupraz, S. and Marx, M. (2025) The benefits of well-anchored inflation expectations. March.
- iv  Villeroy de Galhau, F. (2024) Monetary Policy in Perspective (II): Three landmarks for a future of 'Great Volatility'. Speech at the London School of Economics. 30th of October.
- v  As noted in our Monetary Policy Strategy Statement of 2021
- vi  Brainard, W. C. (1967). Uncertainty and the Effectiveness of Policy. The American Economic Review , 57 (2), 411-425.
- vii  Dupraz, S., Guilloux-Nefussi, S. and Penalver, A. (2023): 'A Pitfall of cautiousness in Monetary Policy'. International Journal of Central Banking, vol. 19(3), pages 269-323, August.
- viii  Voltaire (1770), Letter to Frederick William, Prince of Prussia, 28 November.",François Villeroy de Galhau
https://www.bis.org/review/r250623c.htm, Andrew Bailey: Central Banking in extreme adversity,"Speech by Mr Andrew Bailey, Governor of the Bank of England, at the 9th National Bank of Ukraine and Narodowy Bank Polski (NBU-NBP) Annual Research Conference ""Economic and financial integration in a stormy and fragmenting world"", Kyiv, 20 June 2025.",2025-06-20 00:00:00,"## Andrew Bailey: Central Banking in extreme adversity

Speech by Mr Andrew Bailey, Governor of the Bank of England, at the 9th National Bank of Ukraine and Narodowy Bank Polski (NBU-NBP) Annual Research Conference ""Economic and financial integration in a stormy and fragmenting world"", Kyiv, 20 June 2025.

* * *

Governor Pyshnyy, when you invited me to speak today, I was in no doubt that I was going to be here in person. The UK and Ukraine share unbreakable bonds, which were recognised in the 100 Year Partnership signed in January. That Partnership cements our long-term friendship and lays the foundations for even greater collaboration in areas like science and technology, defence and energy - to go alongside the existing cooperation we have as central banks. As our Prime Minister said when he signed the Partnership, we are closer than ever. But more than that, I am quite simply in awe of what Ukraine confronts as a nation, what you face as a central bank, and how you have conducted yourselves during these most difficult of times.

Of course, it is now accepted good practice that we should all prepare for extreme events, and develop contingency plans to respond to a range of possible scenarios. But our contingency events don't begin to compare with what you have to deal with on a daily basis. To illustrate this point, we have learned from what you do when it comes to serious disruptions to payments systems and to everyday banking business.

Even though I have been determined to be here today, I can't claim - with all humility to appreciate properly your experience. We must give you all the help we can, and by doing so give a very clear message that our support is unconditional.

Before I joined the Bank of England forty years ago, I was an economic historian. History does matter - you know this painfully well. I don't subscribe to any simplistic view that history repeats itself, but I do believe that there are strands running through history. Long history has shaped your nation. The word nation is critical because the central question is do we share your belief in Ukraine's right to determine its own future. The answer must be yes.

It is also critical to a central bank in your position. Why is that? Modern central banking is built on the independence of the institution. This is critical to our ability to fulfil our objectives. But, we must be clear what this independence means, and what it doesn't mean. We are independent from governments under terms set out in legislation. However we are not independent of our people, the people we serve. Our independence is granted by their representatives in parliaments.

And, our independence extends as far, but not further than, the objectives that we are given by Parliament. Central banks are therefore an emanation of the nation state, and through that the people we serve.

We are responsible and accountable for our objectives. Our legitimacy and authority depend on our accountability. This is the essence of modern central banking. There are typically two objectives of modern central banking - monetary and financial stability. I

am going to spend most of the rest of my time setting out how we need to think of them together. But, before I do that, I want to make another important point about our frameworks, which relates to their ability to manage shocks.

These are the real tests of our policy frameworks in respect of monetary and financial stability. It's one thing to develop frameworks in relatively calmer times, but to persist they must be able to stand up and deliver in the face of big adverse shocks.

This has not always been the case in the past. Let me give one example, in the area of monetary policy. The classical Gold Standard emerged to prominence during the nineteenth century. It existed before then, albeit without the same prominence. The nineteenth century was not without economic shocks, but the Gold Standard of the day provided a system in which those shocks could be handled - not always with ease, but still it survived the tests. However, it could not survive the much larger shocks of the period between the two world wars.

In modern times we have combined floating exchange rates and free cross-border capital movements with independent monetary policy oriented towards the domestic objective of price stability. Central to achieving this objective are two things - the independence of the central bank, and a so-called nominal anchor, usually an inflation target which seeks to stabilise the real value of money. We regard this, rightly, as the best way to support activity in our economies. Let me borrow from your web pages: ""We care about the welfare of Ukraine and Ukrainians by ensuring price and financial stability as a guarantee of sustainable economic growth"".

The real test of these regimes is how well they have stood up to recent shocks. And, do they provide us with a suitable and helpful combination of the rigour of a nominal anchor - the inflation target - with some appropriate flexibility in how we respond to shocks without compromising the anchor? I think the answer is an encouraging yes.

We cannot prevent these shocks from happening - the causes are well outside our control. But we can prevent the inflationary consequences becoming embedded in our economies, and do so without causing consequences which undermine the legitimacy of our framework - avoiding the problem of the classical Gold Standard in the inter-war period. With the important qualification that the job is not, and is never, done, I think we can argue that a focus on domestic price stability and a nominal anchor has proved its worth.

Moreover, the task is both to respond to the shock itself when it hits, and then to the consequences of the shock, which can be quite different. This is where appropriate flexibility and strong transparency and accountability are critical.

Your experience has been extreme in so many respects, including this one. In the face of full scale war you have had to adapt a combination of interest rate and exchange rate policy instruments, FX restrictions and other tools as necessary. But, you have been very clear in public that after the security risks abate and appropriate macroeconomic conditions are established in place, you will return to conventional inflation targeting.

The message is clear. But more than that, and here the comparison with the Gold Standard is relevant, the commitment to get back to the established regime strikes me as both credible and critical.

To conclude, then, we can now start to assess whether the modern orthodoxy of domestic price stability with a nominal anchor in the form of an inflation target is robust in the sense that it can handle severe economic shocks. This is the critical test. And, I think we can be positive here, always accepting that the job is never done.

Let me move on to my second theme. What are we learning about how our two objectives - monetary and financial stability - fit together?

One of the most pleasurable parts of my job is travelling around the UK on a regular basis visiting businesses and hearing about their experiences. When I do this, I try also to visit schools, and speak to students and answer their questions. I usually say a few words at the start to summarise and describe what we do. My opening line is that as the central bank ""we are in the money business"".

It sometimes gets a smile. Monetary policy, as I have described, is about the real value of money, about price stability and low and stable inflation. It's about confidence in the future of money, the value of money in real terms. Financial stability is about ensuring the future nominal value of money.

Put simply, it is about confidence that the unit of money in one bank account is the same as the one in another bank account at another bank, and likewise that they will be equal to and freely exchangeable with a unit of central bank money, say a banknote. I call this the singleness of money.

It is to ensure this singleness that we pursue financial stability, and in doing so that we regulate banks. And it is why, in my view, these activities have to be in the responsibility of central banks. Unless we pursue and achieve both our monetary and financial stability objectives, we are not fulfilling our role of ensuring the stability of the money system - that's what it means to be in the money business.

It also follows in my view that there is not a hierarchy of our two objectives - one is not more important than the other. Rather, neither can be achieved satisfactorily without the other also being achieved. I can understand how it can seem odd to have to make this point, but to this day I sometimes hear it argued that there is, or ought to be, a hierarchy.

Two important points also need to be made here. The first is that by no means all of the financial system comprises money. Moreover, the share of the non-money system in the total has grown of late. The second point is that there can be evolution in the precise form that money takes. I will consider these two points in turn.

In order to understand the boundaries of money, it helps to define it. I will do this in two, very traditional, ways. The first is the uses of money. There are three: as a unit of account; as a store of value; and as means of exchange. The second definition is about forms of money. We tend to think of two forms of money: money in the accounts of commercial banks - bank deposits; and money in the accounts of central banks -

banknotes and reserve accounts held by banks. Central bank money is also often referred to as fiat money, in the sense that it has the full backing of the state. This is another reflection of the subtlety of the meaning of central bank independence as I described it earlier. It is to the sum of commercial and central bank money that the notion of singleness applies, and it is thus to this sum that ensuring the nominal value is preserved applies.

This said, when we look at the total financial system at present, by most accounts over half of it is not money, in the sense that it is held outside the banking system. We have adopted the term non-bank financial institutions to describe these institutions, or NBFIs for short. I tend to think of NBFIs as the world of investment. It is not a perfect distinction I admit. But the key difference is that when you invest in a non-bank, you do so on the basis that the nominal value of your investment is not assured. This is important, because to grow the economy requires risk taking via investment, quite a bit of which would not be compatible with the assurance of the nominal value of money.

Moreover, a key lesson of the global financial crisis was that banks needed to maintain higher standards of capital and liquidity in order to provide that assurance of nominal value. And it follows from that change to the standards of protection of money in banks, that the non-bank world expanded as some investment assets moved out of banks.

But there are at least three areas of potential difficulty in this arrangement on which we must be focused. The first concerns ambiguity. We have to be on the alert for the development of financial structures which are vague as to whether they are, or are not, inside the money system. In the run-up to the financial crisis, banks created so-called off-balance sheet vehicles which were assumed to be outside the money system.

But when problems hit, they found that investors in these vehicles assumed they were inside the bank, and the bank's own reputation came to depend on them being so. Problems ensued.

The second area of difficulty concerns risks which can originate outside the banking system but then spread into it. Banks and non-banks are often closely interconnected for instance in financial markets. As the non-bank system grows, so do these connections. This is why we are spending so much more time now assessing the risks that can arise from non-banks. It is one thing to distinguish banks and non-banks in functional terms, but that does not mean they are insulated from each other, far from it.

The third area of difficulty concerns a challenge that does arise nowadays, namely whether we have over-protected the banking system via excessive regulation, and in so doing pushed more risk into non-banks which would be more safely housed in banks. Put another way, have we increased overall financial stability risk by raising the bar too high in banks? It's a fair enough question, but intrinsically hard to answer.

I think the best way to approach this question remains to ask what it takes to preserve the singleness of money, because this is the heart of our concern with financial stability. And the answer is that we have rightly raised regulatory standards for banks in the light of a financial crisis, the effects of which continue to be felt almost 15 years on.

I will end with a few thoughts on the other issue I raised earlier, evolution in the forms of money, and what this implies. Mention of this point is often followed either by the word crypto or by the term digital money. I am not going to do justice to what is a very big issue, but a few points are salient here.

First, a few words on crypto. I see crypto as taking two forms: unbacked assets of the Bitcoin sort, and backed assets of the Stablecoin sort. I think it helps to see these two as distinct. Why? The Bitcoin sort does not have the characteristics of money critically, it does not purport to maintain nominal value, and thus fails the test of the singleness of money. Instead, it is an investment asset, with no real asset backing, and volatile in price.

It's a risky investment class and should be seen as such. The buyer should beware so-called caveat emptor applies. Stablecoins are different because they purport to have the characteristics of money and to be usable as such. There is nothing wrong with this, but to pass the test they must provide assurance of nominal value and pass the test of singleness of money. That is perfectly possible to achieve, though I would observe that many of the current versions do not quite achieve that test, not yet at least. In my view we should focus our attention on standards for stablecoins which ensure they do pass the test.

My second thought in the area of the evolution of forms of money concerns so-called digital currency.

What do we mean by this term? After all, money - in the form of central bank reserves - has been digital in form for many years. I think we mean, how do we get the benefits of new digital technologies in the area of payments - where money is a medium of exchange? For instance, how do we get the benefits of smart contracts in payments, and the benefits of using digital technology to fight fraud? I start with the presumption that there should be benefit here - it seems like a failure of imagination if we think otherwise. That said, I remain to be convinced that we need to create new forms of money - such as Central Bank Retail Digital Currency - to achieve this.

By the way, the word retail is important here - we are well on the way to having wholesale central bank digital money, but that is just a natural step on from the wholesale electronic money that we have had for thirty years in our case.

This brings me to my third and final thought in this area. Most payments these days are made in commercial bank money. That's natural - it's the form that all our bank accounts take, and we want to make payments straight from our accounts. Logically, then, if there are real benefits to digital technology in payments, we should want to see them in commercial bank money. The buzzword here is tokenised deposits - a bit of a mouthful, but really it is the application of digital technology to the form of money that we have today. The challenge is to apply this to both domestic and cross-border and cross-border currency payments. To be clear, I am not against stablecoins, but they do have to meet the test of singleness of money. I am not against Central Bank Retail Digital Currency, but I question why it is needed if innovation proceeds as I think it should.

That said, you may detect from what I have said that I do think commercial banks need to step up to the challenge of digital money provision.

## Conclusion

To conclude, we are living in a world of much larger economic shocks which have their origins outside economic causes. But, what the rest of us are experiencing is minor compared to the tragedy caused by the illegal invasion of your country. Our independence as central banks is grounded in the nation state and the people we serve. This makes it of critical importance that you can exercise your right to determine your future as a nation. I have set out what I regard as important issues for central banks and their twin objectives of monetary and financial stability.

I wish you every success in addressing these issues as a free, strong and independent Ukraine. And I look forward to a future of strong friendship and collaboration between the NBU and Bank of England, as well as between Ukraine and the UK. Never have we been closer, and we must remain that way.

## Thank you.

I would like to thank Karen Jude and Rhys Phillips for their help in the preparation of these remarks. I am grateful to the staff of the British Embassy Kyiv and FCDO colleagues for their help in making my visit possible.",Andrew Bailey
https://www.bis.org/review/r250623l.htm,Gabriel Makhlouf: Remarks - 100th anniversary of George Bernard Shaw winning the Nobel Prize for Literature,"Remarks by Mr Gabriel Makhlouf, Governor of the Central Bank of Ireland, at the launch of the coin to commemorate the 100th anniversary of George Bernard Shaw winning the Nobel Prize for Literature, hosted by the Museum of Literature Ireland, Dublin, 17 June 2025.",2025-06-17 00:00:00,"## Gabriel Makhlouf: Remarks - 100th anniversary of George Bernard Shaw winning the Nobel Prize for Literature

Remarks by Mr  Gabriel Makhlouf , Governor of the Central Bank of Ireland,  at the launch of the coin to commemorate the 100th anniversary of George Bernard Shaw winning the Nobel Prize for Literature, hosted by the  Museum of Literature Ireland, Dublin,  17 June 2025.

* * *

Good morning everyone. Thank you to the Museum of Literature Ireland for hosting this event. Let me also extend a warm welcome to the Right Honourable the Lord Mayor of Dublin, Councillor Emma Blain and to all our distinguished guests.

We are here today to the launch our coin to commemorate the 100 th   anniversary of George Bernard Shaw winning the Nobel Prize for Literature. We issue commemorative coins on behalf of the Minister for Finance. Their aim is to recognise figures, or events, of national importance and we are here today to celebrate one of Ireland's greatest literary geniuses, George Bernard Shaw. Shaw is one of Ireland's four Nobel Literature winners and, in fact, until 2016, was the only person to have won both a Nobel Prize for Literature and an Academy Award (in 1939). Bob Dylan joined him in that club in 2016.

This coin is a tangible tribute to one of the brilliant minds of the 20 th   century. He was awarded the Nobel Prize in 1925 ""for his work which is marked by both idealism and humanity, its stimulating satire often being infused with a singular poetic beauty"". Fintan O'Toole described him as the ""most globally influential Irish person in history"", noting praise from Jawaharlal Nehru, Albert Einstein and Winston Churchill.

Shaw was more than a literary figure. Thomas Mann, a fellow Nobel Laureate four years after Shaw, wrote in his obituary tribute that ""when we add the floodtide of essays, commentary, and amplifying criticism, embodying an all-embracing encyclopedic knowledge that draws equally on the natural sciences, theology, religious and general history, and especially on the social-economic sphere, always artistically leavened, full of esthetic charm, and unfailingly entertaining - when we add all this, we find ourselves face to face with a lifework of astonishing scope, apparently the fruit of continued inspiration, unceasing merriness, and of an indefatigable will to work.""

Shaw was also an orator who ""with his lyrical Irish accent [-] could turn the classical rhetorical tradition into something apparently intimate and conversatonal, without losing its rhythms and vigour"" (O'Toole). He was a man of formidable intellect and sharp wit and his works continue to resonate with audiences and scholars around the globe. As Mann also wrote, Shaw ""tirelessly wielded the shining sword of his word and wit"" against stupidity and ""did his best in redressing the fateful imbalance between truth and reality, in lifting mankind to a higher rung of maturity."" As O'Toole says, ""the most important aspect of his influence is not what Shaw taught people to think but he how taught them to think.""

In an era of alternative truths and disinformation bubbles, perhaps his work has become more relevant than ever.

## Conclusion

Before I conclude, I'd like to thank some of the people who've helped to organise this event. Specifically, I want to pay tribute to the Central Bank's Currency Centre team for the immense work they do each year on the collector coin series and I'd like to acknowledge the ongoing work of the Numismatic Advisory Panel who support the Bank's programme.

George Bernard Shaw left a significant legacy of theatrical, fictional, polemical, critical and philosophical writing. He wrote that ""an Irishman's heart is nothing but his imagination"" and his appreciation and understanding of Ireland had a profound influence on his career. We take great pride in the issuing of commemorative coins and we are delighted in issuing this coin today. Shaw would probably have found the notion of his face on a coin rather strange - and he would have complained that we were commemorating him at all, as he did when awarded the Nobel Prize - but I hope he would also appreciate the enduring recognition it represents.",Gabriel Makhlouf
https://www.bis.org/review/r250630f.htm,"Gan Kim Yong: Banking in a time of transition - how banks can drive opportunity, innovation and inclusion in a changing world","Keynote address by Mr Gan Kim Yong, Deputy Prime Minister and Minister for Trade and Industry, and Chairman of the Monetary Authority of Singapore, at the Association of Banks in Singapore (ABS) Annual Dinner, Singapore, 25 June 2025.",2025-06-25 00:00:00,"## Gan Kim Yong: Banking in a time of transition - how banks can drive opportunity, innovation and inclusion in a changing world

Keynote address by Mr Gan Kim Yong, Deputy Prime Minister and Minister for Trade and Industry, and Chairman of the Monetary Authority of Singapore, at the Association of Banks in Singapore (ABS) Annual Dinner, Singapore, 25 June 2025.

* * *

Chairman and Council Members of the ABS,

Distinguished guests,

Ladies and gentlemen

## Introduction

Good evening to all of you. I am very happy to join you this evening at the ABS Annual Dinner.

First and foremost, let me congratulate ABS and MAS on the launch of the Singapore Payments Network Limited (SPaN).

- a. Today, our national payments schemes such as FAST, GIRO, PayNow and SGQR are an indispensable part of the daily lives of both consumers and businesses, supporting payment transactions in Singapore and beyond.
- b. The formation of this new entity is indeed a timely move to strengthen our national payments infrastructure and drive further innovation within our payments sector.

Our banks are critical enablers for growth, transformation and mobility.

- a. Over the past six decades, Singapore's banking sector has been the cornerstone of our position as a global financial centre.
- b. Today, our banks are among the best-capitalised, most digitally advanced, and most regionally connected in the world.
- c. This has enabled Singapore to become a key node for capital in Asia, which in turn reinforces our position as a hub for trade, investments and talent.

However, we cannot take our achievements for granted.

- a. Even before the US' 'Liberation Day' tariffs, we have seen in recent years a raft of protectionist measures over trade, technology and resources, including import quotas, export controls, or investment screening requirements.
- b. Regardless of the outcome of the tariff negotiations, we must be prepared for

fundamental re-alignments in production and supply chains that will reorder both goods and capital flows.

These accelerating geo-economic disruptions are happening amidst other fundamental changes, including -

- a. Climate change, that necessitates a transition to a low-carbon future;
- b. The rising pace of technological change including AI and GenAI; and
- c. An ageing population here in Singapore and around the world, and the concomitant demand to better support their financial needs.

Let me speak on each of these in turn, and how our banks can respond to these shifts.

## Global Trade Transition

Let me start with the global economy.

- a. For now, the US has imposed a 10% baseline tariff on almost all countries while reciprocal tariffs have been deferred temporarily. The US has also imposed product specific tariffs - 50% on steel and aluminium; and 25% on auto and auto-parts and has also signalled that it may introduce other sectoral tariffs in time to come, such as on semiconductors and pharmaceuticals.
- b. Thankfully, the two largest economies of the world, the US and China, have reached an interim agreement on the tariff rates for their respective exports to each other, although negotiations between both sides are continuing.
- c. We are also still awaiting the outcome of the US' negotiations with its other key trading partners on reciprocal tariffs, including the EU, India, Japan, as well as a number of our Southeast Asian neighbours such as Malaysia, Indonesia, Thailand and Vietnam.
- d. Notwithstanding the outcome of these negotiations, it is not likely that the US will return to the status quo ante any time soon.
- i. There is growing bipartisan consensus within the US on the use of tariffs to achieve fair and balanced trade with the world, as well as to 'reshore' or 'nearshore' critical industries.
- ii. While many businesses are pushing back against the new tariffs, once they have invested in the US, they will have an even greater incentive to ensure that these tariffs will stay on to protect their investments.
- iii. And given the rising fiscal deficit, tariffs will increasingly be an important source of tax revenue for the US government - in fact, the latest projections indicate that these new tariffs will reduce the US budget deficit by US$3 trillion over the next decade.

Businesses must therefore adapt to a more sophisticated, complicated as well as protectionist global economic order.

- a. Tariffs will undermine market efficiencies, and therefore distort investment decisions based on traditional economies of scale.
- b. The growing emphasis on ""security of supply chains"" will further raise costs for businesses, given the need to invest in resilience.
- c. Firms will also face higher compliance costs due to new regulations and trade restrictions, and higher inventory costs to guard against disruptions.

As a small and open economy, our role as a hub is critical for our survival and success. These changes in the geo-economic landscape will therefore have profound implications for Singapore.

- a. This is why we have set up the Singapore Economic Resilience Taskforce to enhance our collective response and sense-making, help businesses and workers navigate these choppy waters, as well as to support them to reposition themselves in the longer-term this new landscape.
- b. For the financial services sector in particular, while our banks and other financial institutions may not be directly affected by the tariffs on goods, they may still be affected by the slowdown in overall economic activity.
- i. For example, financial institutions could see reduced trade-related financial services because of weaker trading activity.
- ii. Lending activities may also be weighed down, as firms hold back on their investment plans.
- c. At the same time, banks play a critical role in helping companies ride through these challenges.
- i. Some companies, especially SMEs, may face cashflow issues because of cancelled or deferred orders as a result of the tariffs, and may therefore need more working capital during this period.
- ii. These companies will need flexible financing options, so that they can have sufficient liquidity to overcome the tariff-induced disruptions.
- iii. I am heartened that our banks have stepped forward in this time of need. For example, some banks have offered temporary extensions of trade bills to SMEs, while others have provided temporary lines for working capital to their customers.

Banks should also take the opportunity to deepen the relationship with their customers, by supporting their growth and expansion into new markets.

- a. For example, banks can draw on their in-market expertise to assist companies looking to explore new opportunities overseas.
- b. This can then lead to new financing solutions to help companies enter new markets, diversify their supply chains, and develop new products and services.
- c. Banks can also help companies de-risk cross-border trade through trade finance instruments such as Letters of Credit; supply chain and receivables financing; as well as hedging tools to mitigate against currency risks.
- d. Last but not least, banks can guide companies to adopt digital trade platforms such as SGTraDex as well as TradeTrust.
- i. Such platforms can help reduce administrative and compliance costs for businesses, through tools such as electronic Bills of Lading and e-invoicing.
- ii. They can also enhance trust and inter-operability by providing real-time verification of trade documents.

I hope that our banks will empower companies in Singapore and in our region to turn uncertainties into opportunities, not just to manage their immediate risks but also to build new capabilities, expand into new markets, and strengthen their supply chains.

## Climate Transition

Let me now talk about the low-carbon transition.

Even though some countries have rethought their climate commitments, particularly in light of the US pulling out of the Paris Accords, the pace of climate change unfortunately has not slowed down, and in fact is accelerating. It is therefore important that we stay the course and remain committed to climate action; otherwise, we might be forced to make an even more drastic move and more costly transition in time to come.

Singapore is well-placed to catalyse the low-carbon transition within Asia. Over the years, we have established ourselves as a leading sustainable finance centre, with a well-developed ecosystem of international infrastructure development organisations, global financial institutions, and multilateral development banks.

In addition to building a strong network of like-minded public and private institutions, we need to establish clear, consistent and credible guidelines to drive effective climate financing action.

- a. In 2015, the ABS first published its industry guidelines on responsible financing, setting out minimum standards for banks to incorporate ESG considerations into their business and lending practices.

- b. Two years ago, MAS launched the Singapore-Asia Taxonomy (SAT) as a foundation to facilitate transition financing, with clear, credible, and science-based definitions of what constitutes green and transition activities.
- i. I am glad that our three local banks have integrated the SAT in their sustainable financing frameworks.
- ii. I am also heartened that major regional banks and global banks are using the SAT as a key reference document to engage their clients in this region.

To promote the use of the SAT, the Singapore Sustainable Finance Association (SSFA) will be launching its Guidance for Leveraging the SAT in Green and Transition Financing.

- a. Supported by MAS, this industry-led initiative provides practical guidance on how to apply the SAT.
- i. For example, the Guidance offers industry-agreed interpretations in areas where data gaps may exist or where further clarity is needed, such as on sunset dates and grandfathering rules. This will give market participants greater confidence to raise and deploy green and transition financing that are aligned to the SAT.
- ii. The Guidance also shares early thinking and emerging practices from industry players on the recognition of green and transition enabling and valuechain activities.

One example of an enabling activity is the financing of vessels that are dedicated to the construction, maintenance and operation of offshore wind farms.

While some of these enabling activities have not been recognised as green or transition activities under the SAT, they play a critical role in advancing the broader low-carbon transition. We hope that financial institutions can offer financing to support such activities, in line with their own sustainable financing frameworks.

We must also, at the same time, equip our professionals in our banks and financial institutions with the skills that are needed for sustainable finance in the region.

- a. Last year, MAS, together with the Institute of Banking and Finance (IBF), launched the Sustainable Finance Jobs Transformation Map (JTM).
- b. The JTM lays out the impact of sustainability trends on jobs in our financial sector, and identifies the skills that our workforce will need to develop in order to serve the growing sustainable finance market in the region.
- c. We have made good progress in advancing our upskilling efforts.
- i. Since the launch of the JTM, more than 4,000 financial sector professionals across 100 financial institutions have been trained in sustainable finance.

- ii. The IBF has also issued more than 8,000 Skills Badges to individuals who have completed IBF-accredited sustainable finance courses. This Skills Badge serves as an industry benchmark to recognise individuals' skills mastery and support skills-based hiring by our financial institutions.

To complement our ongoing efforts to upskill our existing workforce, we are also strengthening the talent pipeline of our future graduates. I am pleased to announce that NUS Business School will be introducing an undergraduate specialisation in Sustainable Finance.

- a. This specialisation will equip our students with key Sustainable Finance Technical Skills and Competencies identified by the JTM.
- b. NUS intends to enrol about 50 students in each academic year in this programme at the onset, and we hope to scale this up further over time.

These efforts will help to reinforce our role as a hub to drive climate finance, and catalyse our transition to net zero.

## AI Transition

Let me now speak about the AI transition.

In the short span of the past five years or less, AI has grown to become a core enabler of transformation within the financial sector, reshaping how financial institutions operate, how customers engage with financial services, and how banks drive innovation and productivity.

But to fully harness the potential of AI in the financial sector, we must identify potential ways that AI can drive greater business value, as well as potential use-cases that can bring value to our customers. One such area is in scams and fraud detection.

- a. Today, many banks are using AI and machine learning to improve their fraud surveillance capabilities to better detect suspicious fund transfers. However, these efforts are currently siloed within respective institutions.
- b. Together with the ABS and participating banks, MAS is studying the feasibility of combining interbank transactions across banks to enable real-time scam detection capabilities such as through transaction risk scoring and scam account detection.
- c. By harnessing AI and pooling data across banks, we can potentially detect the suspicious movement of funds across multiple accounts, and trigger prompt action to investigate or even pre-empt criminal activities.

As we leverage AI to transform the financial sector, we must also reskill and upskill our workforce to help our workers acquire the skills to use AI and take on higher value work.

- a. MAS, together with the IBF and Workforce Singapore (WSG), are partnering key stakeholders, including financial institutions and unions, to uplift AI and GenAI proficiency and drive workforce transformation within the sector.

- b. I am glad that six banks 1   have come forward to work with us on this pilot to identify job roles that will be impacted by AI, and to take steps to upskill and reskill their employees.
- c. We will share our learnings from this pilot with the wider industry, and develop upskilling and reskilling pathways that other financial institutions can reference and adopt.

We must also have in place appropriate guardrails to guide the development and adoption of AI.

- a. MAS is developing a set of guidelines on AI risk management that will provide financial institutions with greater clarity on our supervisory expectations. We will consult the industry on these guidelines later this year.
- b. In tandem, MAS is also collaborating with the financial industry to develop an AI governance handbook, that will serve as a practical guide for our financial institutions develop and deploy AI solutions properly. This will also be ready later this year.
- c. Together, these materials will establish guardrails to support the safe and ethical use of AI within the financial sector.

## Demographic Transition

Banks also play a key role in serving the needs of the community.

- a. I am very happy to note that the latest results of the Banking Trust Index for Singapore shows that public trust in the Singapore banking industry remains high.
- b. At the same time, the survey had indicated growing expectations for banks to positively impact society - in particular, it suggested that banks could strengthen public trust by enhancing customer centricity.

One segment that banks will need to pay closer attention to in the coming years is seniors, given our rapidly ageing population. It is important to enable our seniors to age well, and to do so, banks must enhance the accessibility, inclusivity and sensitivity of their services.

- a. From stationing dedicated ambassadors that are trained to connect with seniors, to the use of larger font sizes, high contrast displays and simplified interfaces for online platforms, banks can enhance the accessibility of their physical and online touchpoints to our seniors.
- b. Banks should also step up their outreach and support for the less digitally savvy, so that these seniors may also access digital banking services and not be left behind amidst the digital transformation.
- c. Banks can certainly do more to support seniors coping with cognitive decline, by

training frontline staff to recognise such customers and to handle them with respect and dignity.

I am happy to note that ABS will be setting up a taskforce to look into the evolving needs of our ageing population.

- a. Besides addressing the needs of our seniors, the taskforce will also look into estate administration issues, so that we can make this difficult process simpler and more convenient for their next of kin.
- b. I look forward to the recommendations of the taskforce in time to come.

## Conclusion

Friends, stakeholders, ladies and gentlemen. We have come a long way in establishing Singapore as a leading global financial centre.

This same spirit of agility, creativity and determination must continue to guide us. We must be bold to rethink old models, nimble to respond to emerging risks and opportunities, and unwavering to upholding trust and integrity.

This way, we can continue to build a financial system that will drive innovation and growth that will benefit our businesses and our people.

Thank you.

- 1  DBS, OCBC, UOB, Citibank, HSBC and SCB.",Gan Kim Yong
https://www.bis.org/review/r250625g.htm,Sabine Mauderer: Finding the right balance - the way forward for sustainability disclosures,"Speech by Dr Sabine Mauderer, Member of the Executive Board of the Deutsche Bundesbank, at the Bocconi School of Management Conference ""Sustainability disclosure: red tape or strategic tool for the future of business?"", Milan, 24 June 2025.",2025-06-24 00:00:00,"## Sabine Mauderer: Finding the right balance - the way forward for sustainability disclosures

Speech by Dr Sabine Mauderer, Member of the Executive Board of the Deutsche Bundesbank, at the Bocconi School of Management Conference ""Sustainability disclosure: red tape or strategic tool for the future of business?"", Milan, 24 June 2025.

* * *

Check against delivery

## 1 Introduction

Ladies and Gentlemen,

It is a pleasure to be here to talk about the role of sustainability disclosures, especially in times of political headwinds. Climate change, nature loss and the green transition of our economies have significant macroeconomic impacts that can translate into various economic and financial risks.

If we stick to current policies, global GDP could be 15% lower by 2050 compared to a world without climate change. 1   This is the outcome of our latest NGFS long term scenarios. And even in the short term, the impact on GDP could be substantial. Our recent publication of short-term scenarios shows that delaying the transition by just three years could cost almost 1% of global GDP by 2030. 2

Failing to identify climate and nature-related risks and to manage them properly can have serious consequences. For the real economy and therefore also for individual financial institutions and the financial system as a whole. So, understanding and managing these risks is essential.

## 2 Why sustainability disclosures matter

I am sure many of you are familiar with the principle ""you can only manage what you can measure"". Transparency and high-quality data are the foundation for effective risk management. Reliable data allow corporates and financial institutions to assess financial risks posed by climate change and nature loss.

Banks need to understand whether their corporate clients rely heavily on fossil fuels or ecosystem assets like water. ECB research shows that more than one-third-over €1.3 trillion-of bank loans to non-financial corporations  in the euro area are to sectors that are exposed to high risk of water scarcity. Dry soils can reduce agricultural yields or low rivers might constrain electricity generation. 3   Similarly, insurers have to know whether those assets, they insure, are vulnerable to extreme weather events.

For corporates, on the other hand, it is also important to know vulnerabilities in their supply chains, either related to water scarcity or other ecosystem services. Also, the pharmaceutical industry heavily relies on plants to produce and develop drugs.

Sustainability disclosures help companies identify these financial risks and build more resilient and sustainable supply chains.Corporates that identify and address sustainability risks early can benefit. At the same time, knowing those ecological risks can help companies to develop innovative, clean technologies. This can provide a competitive edge in the market and open up new business opportunities. And we all know, this is what Europe needs more than ever.

Finally, robust disclosure practices can send a signal to financial stakeholders and may make it easier for companies to access funding and attract investments.

## 3 Challenges

As you can see, there are strong merits to sustainability disclosures. Unfortunately, substantial data gaps persist. This makes it difficult for financial institutions and corporates across industries to integrate climate and nature risks into their risk management and decision-making processes. In recent years, we have seen encouraging progress in closing these data gaps, especially with regard to climate data.

With the Taxonomy and the Corporate Sustainability Reporting Directive (CSRD),  the EU has been the first mover on transparency regulations, intended to become a role model for many other regions. However, as you all know, the EU's regulatory framework has faced criticism.

One of the main criticisms relates to complexity. Sustainability reporting frameworks require a deep understanding of technical and regulatory details. Companies perceive the rules as too complicated and have expressed concerns about the high reporting burden, especially small and medium-sized enterprises. True is, that the EU taxonomy encompasses hundreds of pages. This is difficult to handle.

As a result, other regions have refrained from adopting the European approach. Instead, China, Malaysia and other countries have adopted a more principle-based approach to sustainability disclosure.

So the question is, what is the right approach for Europe? The answer is not black or white. A differentiated approach is needed. On the one hand, we see that Europe's economy needs to become more competitive. Uncertainties around global tariff policies and overcapacities from China add to the already low growth and low productivity in Europe. So it is important to reduce burdens for corporates, if there are alternatives.

On the other hand, I mentioned earlier, European corporates and financial institutions are exposed to climate and nature-related risks. So, transparency is crucial to identify potential risks and manage them properly.

Finally, we all know that there is the need to drive transformation towards low-carbon industries, globally. Otherwise we might end up in a hot house world scenario with all consequences. Europe has great opportunities to become a global leader in offering solutions, not only in the clean tech industry. But other regimes seek the same opportunities, esp. China. So, Europe needs to make its mind up.

## 4 A way forward-pragmatic solutions needed

Going forward, it is crucial to strike a balance between the need for comprehensive information and the reporting burden on companies. Pragmatic solutions are needed.

First, we are living in a world that keeps changing in many ways. Therefore, overly detailed rules might become outdated quickly, whereas general principles might be more sustainable. Principle-based approaches that focus on overarching principles rather than detailed rules, may provide an alternative, esp. for SME's.

At the same time, it is important to admit that there may be some downsides to principlebased approaches. They may leave room for different interpretations or misinterpretations of information.

My second point on a pragmatic approach is international alignment of standards. This is crucial to reduce regulatory burdens and ensures that data are comparable. One notable development in this direction has been the work of the International Sustainability Standards Board (ISSB).  The ISSB has created a global baseline for sustainability disclosures.

There are many benefits of aligning disclosure regimes across borders. It minimises the reporting burden for international companies and allows investors to compare. ISSB baseline standards have allowed many jurisdictions to make significant strides with regard to sustainability disclosures.

Many countries all over the world, such as Brazil, Canada, Australia, Kenya and Malaysia have adopted disclosure frameworks that are based on and aligned with the ISSB standards. Others such as India, Hong Kong and the United Kingdom plan to do so. This is a promising development. So we might want to see al closer a closer alignment with ISSB standards in Europe.

Consistent standards and formats are also essential for nature-related disclosures. While the chief focus in sustainability disclosures has been on climate change, it is crucial to recognise and consider the twin crises of climate change and nature loss.

Both crises are deeply interconnected and can reinforce each other. Nature-related disclosures are still in their early stages. Challenges include a lack of standardised metrics.

The Taskforce on Nature-related Financial Disclosures (TNFD) has taken a promising first step by developing a framework to report nature-related information. The ISSB is currently also exploring the development of new standards focusing on biodiversity.

Future frameworks should build on lessons learned from the development of climaterelated standards.

Third, the use of new technology will also be key. Technological advances, such as artificial intelligence and machine-readable reporting, have the potential to revolutionise the way we collect, analyse and share sustainability data. This can help corporates to build their sustainability disclosures on information that they are already collecting for other purposes, such as financial reporting.

Let me briefly give you two practical examples. First, the Bundesbank, the BIS Innovation Hub, the Banco de Espaæa and theECB have launched ""Project Gaia"". This is an AI tool that extracts climate-related indicators from public corporate reports, which helps to analyse climate risks in the financial system.

Second, on a recent trip to Japan, I visited a company that is working on AI-based solutions to assist businesses in sustainability reporting. It offers a platform where companies can easily and quickly enter financial and non-financial data needed for sustainability reports.

Harnessing new technologies can improve the quality and availability of the data needed to effectively manage climate and nature-related risks.

## 5 Conclusion

Ladies and Gentlemen,

Addressing the challenges related to sustainability disclosures and data requires collaboration across multiple stakeholders. We must develop solutions that are both ambitious and practical. The stakes are high-for the financial sector and for the resilience of our economies and societies. Without a healthy climate and a healthy planet, there can be no healthy economy. Thank you.

1  Network for Greening the Financial System (2024):  NGFS long-term scenarios for central banks and supervisors, 5 November 2024.

2  Network for Greening the Financial System (2025):  NGFS short-term scenarios for central banks and supervisors, 7 May 2025.

3  European Central Bank: The European economy is not drought-proof, 23 May 2025.",Sabine Mauderer
https://www.bis.org/review/r250623b.htm,Christopher J Waller: Welcoming remarks - IJCB Research Conference,"Welcoming remarks by Mr Christopher J Waller, Member of the Board of Governors of the Federal Reserve System, at ""Assessing the Effectiveness of Monetary Policy during and after the COVID-19 Pandemic"" 2025 IJCB Research Conference, hosted by the Czech National Bank and the International Journal of Central Banking, Prague, 23 June 2025.",2025-06-23 00:00:00,"## Christopher J Waller: Welcoming remarks - IJCB Research Conference

Welcoming remarks by Mr Christopher J Waller, Member of the Board of Governors of the Federal Reserve System, at ""Assessing the Effectiveness of Monetary Policy during and after the COVID-19 Pandemic"" 2025 IJCB Research Conference, hosted by the Czech National Bank and the International Journal of Central Banking, Prague, 23 June 2025.

* * *

Thank you, Aleš, and thank you to the Czech National Bank (CNB) for hosting this year's conference. The CNB also supported this conference in 2017. It is wonderful to have such a great relationship between the International Journal of Central Banking (IJCB) and one of our sponsoring institutions.

I would like to take a few minutes as the outgoing managing editor of the IJCB to emphasize the importance of this journal and the research it supports. 1   Central banks play an important role promoting the growth and effective functioning of their economies, and many of the decisions they make are influenced by careful and cuttingedge research. In fact, I recently gave a speech that discussed the importance of economic research in monetary policy decisions. 2   The IJCB, through this conference and its volumes, provides an outlet to share and disseminate research that adds to public knowledge and understanding and informs the operational and policy decisions of central bankers.

The value of central bank-focused research has long been known. In the summer of 2004, the Bank for International Settlements (BIS), the European Central Bank, and the Group of Ten central banks agreed to support the development of the IJCB to focus on the theory and practice of central banking. The journal has attracted distinguished managing editors, including my colleagues from the Federal Reserve; my immediate predecessor, Luc Laeven, from the European Central Bank; and the current managing editor, Antoine Martin, from the Swiss National Bank, who, unfortunately, could not be here today. We have the strong support now of nearly 55 sponsoring institutions, including the Czech National Bank and also the host of last year's conference, the Central Bank of Italy. Among the ways that central banks serve the public interest is as an ongoing source of economic research, and the strong commitment to the IJCB here in Prague and other capitals advances our collective interest in strong economies and financial stability.

Turning to this year's conference, we chose the theme based on events that have been very much on the minds of central bankers: ""Assessing the Effectiveness of Monetary Policy during and after the COVID-19 Pandemic."" The past several years have seen significant monetary policy actions across the globe in response to COVID-19-induced recessions, inflation higher than in several decades, unprecedented supply chain disruptions, and, in some countries, very tight labor markets. Early on, policymakers' responses appeared quite in sync, but with differing speeds of recovery and varying challenges faced by different types of economies, that changed over time. Additionally, geopolitical tensions and energy price shocks have introduced new complexities. So we

thought this conference could be a good place to come together and hear about the lessons we have learned from these common and different experiences.

Today and tomorrow we will be discussing the yield curve, policy rules, and monetary policy transmission. We also will look into banking issues such as loan issuance and financial stability. And we are lucky to have the Fed's Vice Chair for Supervision Miki Bowman here to give a keynote speech. As we go through these sessions, I hope we will all ask ourselves how this work can help policymakers do their jobs better. Through our conversation, I would ask you to share knowledge about each of these topics as they are pertinent around the world.

But before we get to those presentations, and what I hope will be vigorous discussion, let me recognize several people who made this event possible. Here at the CNB, Simona MalovanÆ and Martin Hodula helped organize this conference. Year round, the IJCB co-editors devote many hours of their time to review papers to keep the journal at its high-quality and high-impact status. These individuals are Ana Babus, Diana Bonfim, Huberto Ennis, Carlos Garriga (who is here with us today), Refet Gürkaynak, Òscar Jordà, Robin Lumsdaine, Fernanda Nechio, Steven Ongena, and Enrico Sete. Finally, for the past three years, the day-to-day smooth running of the journal couldn't have been accomplished without the editorial team at the BIS and the Board of Governors. A special thank you goes to my team: Kommaly Dias, Jane Ihrig, and Elie Singer, who worked to oversee the process.

And with that, I will step away from the microphone and put the spotlight where it should be, on the scholars presenting their work today. Thank you, and I believe Martin has a few words to get us started.

1  The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.

- 2  See Christopher J. Waller (2025), ""The Role of Economic Research in Central Banking ,"" speech delivered at the award ceremony for the winners of the Bank Al-Maghrib Prize for Economic and Financial Research, Bank of Al-Maghrib, Rabat, Morocco, May 14.",Christopher J Waller
https://www.bis.org/review/r250624c.htm,Sanjay Malhotra: Convocation address - Indian Institute of Technology,"Convocation address by Mr Sanjay Malhotra, Governor of the Reserve Bank of India, at the 58th Convocation, hosted by the Indian Institute of Technology, Kanpur, 23 June 2025.",2025-06-23 00:00:00,"## Sanjay Malhotra: Convocation address - Indian Institute of Technology

Convocation address by Mr Sanjay Malhotra, Governor of the Reserve Bank of India, at the 58th Convocation, hosted by the Indian Institute of Technology, Kanpur, 23 June 2025.

* * *

Chairman of the Board of Governors, Director of the Institute, Prof and Padma Shree Manindra Agrawal, winner of numerous awards, who was my senior here and who I hold in very high esteem, faculty members, staff, proud parents, family and friends of the graduating students, distinguished guests, and my dear graduating students, alumni, ladies and gentlemen.

Today marks the culmination of an exciting chapter for the graduating students, where you have not only learnt new things - academic and extra-curricular - but have also had an enjoyable and memorable experience. I extend a very warm congratulations to all the graduating students. Please give yourselves a huge round of applause.

To the parents and guardians, this moment belongs as much to you as it does to your children and wards. Your innumerable sacrifices, continuous support, unconditional love and unwavering encouragement have laid the foundation upon which these young achievers now stand. I know this is an emotional and proud moment for you. I have myself experienced these emotions when my sons graduated - one from IIT Bombay and the other from IIT Guwahati. My warmest congratulations to you as your ward steps into a new chapter in life.

Dear graduates, it is a special day for you as you enter a new and exciting phase of life. It is an equally special day for me and doubly so. First, this institute has had a transformational impact on me, my life and my thoughts. I remember with nostalgia my years at IIT. I still vividly remember my first day at IIT when my mother came to drop me with another batchmate. I recollect my days at Hall III and then Hall I, the healthy rivalry between Hall II and Hall III, phatta cricket, bulla, the various celebrations at Red Rose Restaurant on the campus and Chung Fa restaurant in the city, movies at L7, DEC 10 of which we were so proud, the iconic library, Culfest and the many friends that I made and treasure till date. The steel trunk which carried my belongings to IIT and which my loving wife has preserved till date is still with me. I still have my Wilson tennis racket, with which I religiously played every evening at the clay courts on campus. IITK has a special place in my heart. This convocation ceremony is even more special as I did not attend our convocation ceremony; in fact, we did not have a proper convocation ceremony, perhaps the only batch not to have it. So, it's an honour to be back here after thirty-six long years in a new and privileged role and be a part of the convocation ceremony today. Thank you, IIT, for this honour.

Times have changed a lot since I graduated. But there are certainly lessons which endure time. As a fellow-alumnus, roll number 85213, who has experienced life after campus, I will speak about four learnings from my journey.

## Learning for Life

Many of you would have got your dream jobs. Others, who plan to pursue further studies, would get them soon. With a degree from a prestigious institute and a good job in hand, please don't think that you have arrived. The moment you think you have arrived, you will stagnate. The moment you believe you know everything, you will stop growing.

This is just the beginning, only the first step. The degree has only laid a solid foundation and will take you thus far. You will need to build from here. You will need to learn when you change sectors, move across organisations within a sector, take up different roles within an organization and even within the same role in an organisation. Technology is advancing at a lightning speed. What you learnt yesterday would be outdated tomorrow as new ideas and tools emerge daily.

I can assure you that the institute has prepared you well for your life ahead. It has not only imparted you with knowledge which will be of immense use but, more importantly, equipped you with the most important tool - the tool of self-learning.

Like other IAS officers, I worked in diverse fields like urban management, land resources, industries, power, health, taxation, banking, finance, etc. Many of them were general management but many were highly technical and specialized, which had a steep learning curve. The IITK emphasis on basic sciences and core engineering subjects, its importance to the fundamentals of a subject, its priority to deriving the formulae rather than merely memorizing and applying them, its attention to problemsolving from first principles, and various other methods of problem solving have held me in good stead. IIT gave me the necessary tools for self-learning. I am sure it has given you too the same tools.

So, continue your quest for knowledge. Remember that learning is for life. The moment one is not learning, it is a signal that one is not growing; one is not advancing. It is knowledge which will keep you ahead of others. Its importance cannot be overemphasized. I urge you all, as Stephen Covey said, to continuously sharpen your saw and cut the grass under your feet.

## Question the status quo

My second learning pertains to the period between 2003 and 2006, when I was working in the United Nations. I was managing a project to improve productivity in the hand tools clusters in India. We hired a Total Quality Management expert for some of our interventions. He had long and diverse experience across organisations.

He challenged the forging units there to reduce the time taken in changing a die from about eight hours to less than an hour. All of them including the most advanced, productive and efficient forging units vehemently denied the possibility of reducing the time. When he failed after many days of trying to convince them to improve, he suggested some changes including installation of a video camera. This was tried in a unit. These small changes reduced the time to five hours. When asked, the supervisor, apart from other things, explained that the work started on time, as scheduled; no one was late; no one took an unscheduled tea break; all required equipment were pre-

arranged and kept ready for use; there was no wastage of time. The small changes and videography did the trick as everyone was being watched. What followed was a series of improvements or what are called kaizens, not only in the exchange of dies, but also various other processes - forging, grinding, electroplating, packaging, etc, as every process was questioned. We ended up reducing costs by about 10%.

I learnt to question the status quo. I learnt that there is always scope for improvement. This helped me improve efficiency in various organisations and departments that I worked in. It helped in reducing processing time of files. I reduced turnaround times for applications. It helped me make changes in laws, rules and procedures for the benefit of citizens and government alike, as I questioned the status quo.

As Albert Einstein famously said, ""The important thing is not to stop questioning."" When you question the status quo and ask questions, you open the door to new ideas and fresh perspectives. It is fuel for innovation; it drives you to explore, experiment, and create something better. So, no matter where you are in life or your career, never stop questioning the status quo and improving.

## Pursue virtuous Karma

The third learning pertains to my tenure as Secretary, Department of Personnel in the Government of Rajasthan in 2007-08. Promotions from the state civil service to the IAS were plagued with disputes and court cases. For almost about 20 years, no one was promoted to the IAS. My predecessors did not take up this issue as they thought it would be an exercise in futility as some aggrieved officer will approach the doors of the judiciary. When I was given responsibility for this department, I took up the gauntlet. I studied all the disputes and judicial pronouncements meticulously; decided on claims of seniority and promotion, without fear or favour; finalized and published the seniority lists; and after spending months on this mammoth exercise, sent the proposals to UPSC for promotion. Just when we were about to convene the meeting for promotion, one officer again approached the court and got a stay. Months of my hard work was brought to nought. Even though many officers commended me for the hard work and getting the matter so close to finalization, I was disappointed.

I had to leave for Princeton for my masters within a few days and could not pursue the case in the courts. After I returned, I was put in a different department. In a few years, the court lifted the stay. I was asked if I would be interested in giving finishing touches to the work I had initiated. Once bitten, twice shy, I did not take up the challenge this time. The work was completed by another officer. In recognition of his efforts, he was conferred with the state award for civil service.

I realized I did not follow my karma as I feared failure. I realized I needed to follow my karma boldly and decisively without bothering about the results.

Without going in to details of my journey thereafter, today, as I look back, I can confidently say that it is karma that largely determines outcomes and results. It is the path that one chooses that broadly determines the destination. Today, I appreciate how true Steve Jobs was when he said, ""You can't connect the dots looking forward; you can only connect them looking backward."" Right now, you may not fully grasp how your karma - each late-night lab session, each frustrating bug, and each decision that you

take - will impact your journey. You may not appreciate, how delayed gratification, the hallmark of all great leaders, will deliver bigger success over the longer term for the instant rewards foregone. But trust me, over time, the dots will connect and it will be in large measure due to your karma.

## Trust

My last learning is from the student days in IIT, when we were always short of money and under debt. Food at the mess was as good as it can be. We relied heavily on the hostel canteen. A samosa at that time costed 35 paise and a bottle of Thums Up 2 rupees and 25 paise. The canteen was managed by a person called Lala. Lala was loved by everyone. He would serve us till late in night and very generously gave us credit. Even outside hostel, we got credit from the juice vendor, the shops in Shopping Centre, etc. This may not be surprising. Lala knew us, recognizing us as hostelers. Other vendors too recognized us as students from the campus. What was surprising though was that we got credit even from some shopkeepers in Kanpur, who did not know us at all. Why did these shopkeepers give credit to us? It is because of their trust in the IIT students.

It is because people do business with people they trust. Trust is the foundation on which any relationship is built, whether it is marriage, friendship, or at workplace between the CEO and the employees, or between a company and its consumers.

It is trust in a person that makes him a leader; it is trust which makes people follow a leader. Integrity and ethics are paramount to develop trust. It is not easy to gain trust. To earn trust, a leader must have the courage to take difficult decisions. He must act in the interest of the employees and other stakeholders. He must be willing to accept responsibility. He must lead by example. He must possess the humility to learn from his mistakes. He must be just, transparent and respectful. Trust takes time to build. But it is easy to lose trust. To be a successful person, a successful leader, graduating students, try to gain trust and having gained it, preserve trust.

## Your time to shine

To conclude, dear graduating students, as you leave this campus today, have confidence in yourself. Dream big, but more importantly, act on those dreams. Make IIT Kanpur proud. Make your parents proud. Make India proud. But most importantly, make yourselves proud - proud by living lives of character, ethics and humility; lives filled with purpose, service and impact. As you step into tomorrow, carry with you the spirit of this institution, carry with you the love of your families, and carry with you the dreams of a billion Indians who believe in your potential.

Your journey of transformation began here at IIT Kanpur. Now, transform the world as leaders who are trustworthy; who continue learning for life; who question the status quo and who pursue virtuous karma.

May God bless you with all the very best in your journey ahead.

Thank you.

Jai Hind.",Sanjay Malhotra
https://www.bis.org/review/r250625c.htm, Andrew Bailey: Revisiting the Norman Conquest of $4.86. Thoughts for the world today,"Speech by Mr Andrew Bailey, Governor of the Bank of England, at Britain's return to the Gold Standard in 1925 revisited, hosted by the Bank of England, London, 24 June 2025.",2025-06-24 00:00:00,"## Andrew Bailey: Revisiting the Norman Conquest of $4.86. Thoughts for the world today

Speech by Mr Andrew Bailey, Governor of the Bank of England, at Britain's return to the Gold Standard in 1925 revisited, hosted by the Bank of England, London, 24 June 2025.

* * *

It is a great pleasure to have the opportunity to open this conference. You could say that it is an example of the endearing British sense of humour that we organise a conference on what is commonly regarded as one of the less good economic decisions in the country's history. You may add that what I have just said demonstrates another British characteristic, the calculated British sense of understatement. Actually, as I hope to show, there remain lessons to be learned from the events. And, I do follow the wise advice of Ken Arrow, that ""It will always be true that practical understanding of the present will require knowledge of the past.""  1

Two other things before I get properly started. First, my title is unashamedly a lift from the sub-title of Donald Moggridge's book on British monetary policy in the period , 2 which - as Adam Tooze has recently commented - is one of the best such sub-titles. On this, can I also say how nice it is that Susan will participate in the panel session today. It wouldn't be the same if we could not personally record the major contribution of Susan and Don in this field. And, it is of course sad that Don isn't with us.

The second point is to mention something that I find amusing about the events around the return to gold. Montagu Norman kept a diary, which is available on-line on the Bank's website. On the day it was announced by Winston Churchill at 4.30pm in the House of Commons, Norman wrote in large capitals in his diary, ""GOLD STANDARD"". In this day and age, I think we can describe it as putting the caps lock on and going full Trump.

On to more serious stuff. I am not going to give a full account of the events of 1925, I am going to be selective to illustrate a few points. One way to look at the episode is as a clash between domestic and international priorities. Norman took an international view - I will come on to describe it more fully. His biographer Andrew Boyle commented that he ardently believed that Europe could only begin to count on lasting peace and prosperity once Britain reinstated the gold standard . 3

In contrast, Don concluded forcefully that Norman failed to understand the domestic context, and showed very little apparent interest in doing so. The wild card in this is the position of Keynes. I will come onto this, but I do think the most pithy observation here came from Don when he observed that over time Keynes advocated almost every possible form of exchange rate arrangement.

I am going to set out very briefly, and rather selectively, some of the arguments on the international versus domestic cases, and then use these to draw out a few points that I think are of relevance today.

There are a number of strands to the international argument, but they come together in the conviction that the gold standard was the best form of monetary anchor at the time, that it was an open economy anchor in the sense that it had anchored across countries in a world of large capital and trade flows, and that in doing so before the First World War it had worked. It provided certainty on the terms of international trade and thus lowered transaction costs. Douglas Irwin has concluded that studies have attributed up to 20% of the growth of world trade between 1880 and 1910 to the benefits of greater certainty and lower transactions costs . Allied to this is the argument that before the 4 First World War adherence to the gold standard was an effective signal of credibility which had beneficial consequences for a country's external borrowing cost. Estimates put this benefit as up to 30 basis points . 5

I would add two further elements of the broad international argument for returning at the pre-war parity. The first is the view that the experience of hyper-inflation in a number of European economies after the First World War heightened the attraction of sticking to the pre-war anchor. The second is that returning to gold at the established parity, and lowering transactions costs by doing so, would benefit the City of London as a financial centre, and most particularly if the UK led the way in doing so.

The problem was of course that by returning in this way the burden of adjustment fell on domestic wages and prices. These had been sufficiently flexible in the late nineteenth century, but in the face of smaller economic shocks than were to emerge after 1925.

But at the pre-war parity sterling was overvalued - domestic prices were now higher relative to other countries. This was the essence of the Keynes critique, namely that a central bank with the objective of fixing the value of its currency in terms of gold could not use monetary policy to stabilise domestic prices, which should be the objective . In 6 stable times, the gold standard worked because there was no conflict between a fixed exchange rate and stable domestic prices. But that was not the case when the economic shocks were larger, and because domestic prices were relatively higher the impact was to force deflation. We can add to this that in terms of the impact on borrowing costs noted earlier, the actual evidence suggests that while countries returning to gold at pre-war parities did lower their costs of borrowing, those who devalued on return gained somewhat more, though the evidence is open to some interpretation . 7

A further problem that was revealed by the larger shocks that occurred after return concerned the asymmetry of adjustment. The gold standard did not provide an explicit remit for monetary policy. It was supposed to work on the basis of the price-specie flow mechanism set out by David Hume, where gold flows were determined by monetary conditions, backed up by central banks following the ""rules of the game"", with appropriate interest rate and balance sheet policies. In this way, prices would adjust to restore Balance of Payments equilibrium. Whether central banks always followed those rules in the pre-1914 gold standard is debated, but the system seemed to work, at least in in times of smaller shocks. But with the larger shocks of the late 1920s and 1930s, deviating from those rules mattered. The surplus countries (France and the US) sterilised gold inflows and thus prevented the equilibrating mechanism through domestic price adjustment. Irwin estimates that between 1928 and 1930, the US and

France demonetised 11% of the world's gold stock, thereby contributing to further deflation . 8

Before concluding on the relevance for today, I want to draw out a further point. As I noted earlier, it is quite hard to pin down exactly what exchange rate regime Keynes did prefer, as distinct from the ones he did not like. As Irwin notes, by 1925 he was certainly an opponent of the return to the pre-War parity under the gold standard.

But he favoured exchange rate stability and was sceptical that flexible exchange rates could solve Balance of Payments problems . He appreciated therefore that by 9 preferring domestic employment goals and exchange rate management, he was ruling out open capital flows. This put him at odds with Norman. In fact, James Meade - the subject of a new biography by Susan 10   - was one of the few economists of the period whose views were more aligned to the modern preference of free floating exchange rates, free trade and domestic monetary policy goals.

Turning to the relevance of 1925 for today's issues, I want to finish by drawing out three points where there are interesting parallels.

The first concerns the robustness of monetary regimes. The gold standard stood up to the test of the shocks of the nineteenth century, but did not stand up to the much larger shocks of the inter-war period, and particularly the late 1920s and 1930s. Our regime today, based on the nominal anchor of the domestic inflation target, was developed over the decade or so before the financial crisis. In contrast to the gold standard, I think that it has stood up well to the larger shocks of recent years starting with the financial crisis. Our judgement to date is that it has contributed well to reducing inflation persistence following the shocks of recent years.

The second point is closely related. Some countries went back onto gold and introduced flexibility by adjusting their parities from the pre-war level. As I described earlier, this was not the UK approach, and not only was this Norman's strong preference, but returning at the pre-war parity was the conclusion of both committees set up to examine the issue, starting with the Cunliffe Committee of 1918. In the wellknown words of former Chancellor Reginald McKenna to Churchill: ""There is no escape, you have to go back, but it will be hell"". For Churchill, it was a matter of ""Shackling ourselves to reality"" 11 . But this begs the question, how much flexibility can be included in an anchor without compromising it?

More recent UK history is interesting here. In the days immediately pre-Bank independence, the UK started with an inflation target range, and then switched to a point target.

This strikes me as a sensible limitation of flexibility to promote the credibility of the target. But after the financial crisis and the following recession, the target regime was modified to allow more flexibility in the pace of return to target where there are so-called trade-off conditions between activity and inflation. This ""constrained discretion"" is limited but useful flexibility. The appropriateness of flexibility therefore remains an important judgement.

The third point concerns international adjustment under the gold standard, and, as I noted earlier, the asymmetry between surplus and deficit countries when it came to socalled equilibrating gold flows.

This meant that surplus countries had the incentive and the ability to put more of the adjustment burden onto the deficit countries, as was the case with France and the US. The adjustment asymmetry point was subsequently built into the Bretton Woods regime. Today, we have another version of this issue when we look at the US-China trade position and the associated imbalances. The asymmetry may not be the same, or indeed present even, but it is reasonable to believe that it might be a feature.

To end, all of this reinforces for me the benefits of going back to review the 1925 decision - there is much to study and learn.

## Thank you.

I would like to thank Michael Anson, Oliver Bush, Karen Jude, Martin Seneca, Alan Taylor and Ryland Thomas for their help in the preparation of these remarks.

1  Kenneth Arrow: History: the View from Economic, in William N. Parker, Economic History and the Modern Economist, Wiley and Sons, 1986.

- 2  Donald Moggridge: British Monetary Policy 1924-1931: The Norman Conquest of $4.86, Cambridge University Press, 1972.
- 3  Andrew Boyle: Montagu Norman, Cassell and Company Ltd, 1967, P178
- 4  Douglas A Irwin: Trade Policy Disaster: Lessons from the 1930s. MIT Press, 2012, P4.
- 5  Maurice Obstfeld and Alan. M. Taylor: Global Capital Markets: Integration, Crisis and Growth. Cambridge University Press, 2004, P199
- 6  Douglas Irwin: Trade Policy Disaster, P34
- 7  Maurice Obstfeld and Alan. M. Taylor: Global Capital Markets, P218
- 8  Douglas Irwin: Trade Policy Disaster, P9 &amp; 20
- 9  Douglas Irwin: Trade Policy Disaster, P148-9.
- 10  Susan Howson (forthcoming) James Meade the Utopian Economist, Cambridge University Press, Cambridge, England.
- 11  P.J. Grigg, Prejudice and Judgement, Jonathan Cape, 1948. P184",Andrew Bailey
https://www.bis.org/review/r250630d.htm,Christine Lagarde: Culture and the economy,"Opening speech by Ms Christine Lagarde, President of the European Central Bank, at the 150th anniversary of the Münchner Opernfestspiele, Munich, 26 June 2025.",2025-06-26 00:00:00,"SPEECH

## Culture and the economy

## Opening speech by Christine Lagarde, President of the ECB, at the 150th anniversary of the Münchner Opernfestspiele

Munich, 26 June 2025

It is a pleasure to be here at the Munich Opera Festival.

This festival draws on a tradition that stretches back 150 years. And over the next five weeks, audiences will experience a rich variety of performances.

The programme includes some of opera's canonical heavyweights, like Mozart's Don Giovanni . But it also ventures into rarer territory, with works such as Strauss's Die Liebe der Danae .

But one work especially caught my eye: Fauré's Pénélope , which will be performed at the Bavarian State Opera for the first time at this year's festival. [ ] 1

Now, I can already hear some members of the audience thinking: 'Well, of course she chooses the French one.' Yes, but I would like to highlight Pénélope for an entirely different reason.

It is the perfect distillation of European culture - both past and present.

It is a story based on a Greek myth. After all, Pénélope is the loyal wife of Odysseus in Homer's Odyssey . It is a story reimagined as an opera, an art form with roots in late 16th century Italy. It was written in France and performed in the country's native language. And it is now being directed here in Munich.

This opera is an odyssey through European culture itself - from ancient Greece to modern Germany, via Italy and France. It is also the story of a resilient woman.

Pénélope was first performed in 1913, at the tail end of what became known as the first era of globalisation. [ ]  For decades prior, economies had prospered peacefully as flows of people, goods and capital crossed borders. Innovation, creativity and art were flourishing. 2

But we know what happened next.

The First World War erupted in 1914 and shattered everything. It was truly the war that 'ended peace' [ ]  -to use the historian Margaret MacMillan's phrase - and what followed was a period of outright fragmentation. A virtuous circle became a vicious one, and writers like Stefan Zweig pined for ' die Welt von Gestern '. [ ] 3 4

This was a vital lesson for Europeans, one that shaped the path of reconstruction in the decades that followed the Second World War. We committed to deeper integration, recognising that it would foster growth and cohesion. That in turn fostered a shared European culture, strengthening a sense of common purpose among countries.

But today, the dynamic is turning.

The economic order that has underpinned prosperity for much of the last 80 years is under strain. We are entering a world marked by renewed fragmentation and slower growth.

And just as in the past, this shift could have far-reaching consequences - not only for our economy, but also for our shared European identity and culture. But only if we allow that to happen.

I believe the most powerful way for Europe to counter fragmentation is through deeper integration ensuring that our shared culture remains a powerful force for unity in challenging times.

## Integration, growth and culture

European culture reflects our society and its history.

The word 'Europe' first emerged in ancient Greece, and its geographical and cultural connotations gradually expanded over the centuries. Indeed, the concept of Europe long predates the rise of nation states, which emerged primarily only from the late 18th century onwards. [ ] 5

For much of Europe's history, however, the ability to directly experience and enjoy the vast richness of its culture was the preserve of the few.

For centuries, it was only the wealthy who could explore Europe. Young aristocrats would often embark on 'Grand Tours' of Europe until the early 19th century.

And if you were not an aristocrat, like the young Goethe, then you had to find patrons with deep pockets. His journey to Italy in the 1780s, for instance, was funded by his friend and employer, the Duke of SaxeWeimar-Eisenach.

At the same time, however, culture itself has never been confined by borders - even if access to it was historically limited by wealth.

Mozart, for instance, was born in Salzburg, which was then part of the Holy Roman Empire. But his music and fame transcended geography, spreading far and wide across Europe. By the end of his short life, he was no longer 'Mozart of Salzburg'. He was simply called Mozart, in recognition that his cultural impact was continental.

But it was only 80 years ago - in the years that followed the Second World War - that European culture started to become truly democratised and made accessible to everyone.

In the early post-war era, a new generation of leaders in Europe chose cooperation over conflict. And in doing so, they ushered in a new era for our continent. A virtuous circle of integration, growth and culture emerged.

What began in 1951 with the European Coal and Steel Community gradually developed into the European Economic Community, established by the Treaty of Rome in 1957. [ ]  This vital step forward for integration created the 'four freedoms' - a common market for goods, services, capital and people. 6

Europe entered a period of extraordinary growth. The French, for instance, would later come to call the 30 years from 1945 to 1975 Les Trente Glorieuses .

This growth, propelled by expanding trade, provided the economic foundation for greater cultural engagement and access in western Europe.

Booming economies meant plentiful jobs, which gave European households more disposable income to spend on leisure. Innovation and productivity gains, as well as new social norms, gradually reduced working hours, giving families more free time for cultural pursuits.

Strong growth also boosted tax revenues, allowing resources to be devoted to expanding inter-regional infrastructure and other public goods.

For instance, Italy's Autostrada del Sole - or 'sun motorway' - was built over the course of the late 1950s and early 1960s. It connected Milan to Naples for the first time, passing through several major cities along the way. If they wished, travellers could now visit Milan's Duomo in the morning and stroll through the Cappella Sansevero in Naples by the evening.

Nor was Italy alone. Other countries in Europe were also pouring resources into their own national infrastructure projects during this period. And what began as investment for national use quickly became a gift for the continent - connecting cities, cultures and people across Europe.

As Europe became more interconnected, the four freedoms gradually became a reality in the daily lives of its citizens.

In the post-war boom, you no longer needed rich patrons to fund your travels. Tourism became a possibility for many families for the first time. By 1955, more than eight out of ten West Germans no longer regarded a vacation as a luxury. [ ] 7

And with the creation of the Schengen Area in the 1990s, European travel started to become truly frictionless. This reinforced the connection between the people of Europe and their shared cultural history.

Today, around 17 million Europeans live or work in an EU country other than their own. [ ]  For example, when I walk through the streets of Frankfurt am Main, where the ECB is based, I hear German, Spanish, French and Italian all being spoken. 8

This diversity lends a vibrancy to everyday life in Europe. Indeed, at my local coffee house in the city, the manager, who is German, often speaks to me in French. Und natürlich antworte ich ab und zu auf

## Deutsch . [ ] 9

Just as barriers fell away for European tourists and workers, they did so for students too - setting the stage for a new generation raised with the European ideal.

Europe's Erasmus programme has sent over 15 million students abroad since it was established in the 1980s, and it is clear that the experience opens new perspectives for these young Europeans. [ ]  Surveys find that Erasmus students have better cross-cultural skills, feel more European and are almost twice as likely to work abroad compared with non-participants. [ ] 10 11

Over the decades, we can see how integration, growth and a shared European culture and identity reinforced each other.

## The risks to culture in a fragmenting world

But today, this virtuous circle is coming under strain.

Instead of deeper integration, we see signs of growing fragmentation.

Trade barriers are multiplying globally, with the number of international trade restrictions tripling since 2019. [ ]  And inward-looking nationalism has gained strength - not only abroad, but also within Europe putting at risk decades of work to build European unity. 12

This fragmentation poses a challenge to Europe's growth model. Europe relies heavily on trading with the world - its trade-to-GDP ratio is about twice that of the United States - which makes it especially vulnerable to rising protectionism.

That is worrying because growth in Europe has already been losing momentum for some time now, gradually eroding living standards relative to our peers. We are also losing ground in sectors where we once led the world, while struggling to take the lead in emerging industries.

It might be tempting to think of these challenges as purely economic - to believe that competitiveness affects only material prosperity, while culture lives in a higher realm. But in reality, and as we saw during the post-war era, Europe's economic and cultural destinies are deeply connected.

If we consider the role that integration and growth have played in deepening and democratising European culture, it would be unrealistic to believe that division and stagnation would leave it untouched. History shows that when economies falter and turn inward, culture rarely remains unscathed.

We saw this perhaps most strikingly during the Middle Ages - when Europe, once integrated by the roads, libraries and institutions of the Roman Empire, fragmented.

A culture of innovation and learning faded. The fact that classical texts and scientific knowledge even survived the Dark Ages was in part thanks to monasteries, isolated pockets of learning in what had become a largely illiterate society - as vividly described by Umberto Eco in his novel The Name of the Rose . [ ] 13

Even in our recent past, we have seen how disunity and economic fragility can strain Europe's cultural fabric.

During the sovereign debt crisis 15 years ago, we struggled at first to find a collective way forward - and this had a direct impact on culture.

High levels of public debt forced governments to make painful spending cuts, and cultural budgets often bore the brunt. In several countries, spending on culture per person fell to about two-thirds of the EU average. [ ] 14

Our wider sense of shared identity also suffered. Before the crisis, most Europeans held a positive view of the EU. But between 2011 and 2013, that share fell sharply to less than one-third - a stark reminder of how quickly hardship can erode a sense of common purpose. [ ] 15

I am always mindful of this connection between the economy and culture as I carry out my responsibilities as ECB President. My primary task is to deliver price stability for the people of Europe, supporting purchasing power and sustainable growth.

But as someone who also cherishes our rich cultural life, I understand the wider implications of our role: our economic vitality and our integration are the bedrock of our European culture and identity. That connection runs so deep that we are even considering European culture as one of two themes for the next series of euro banknotes.

## A European response

It is my firm belief that the only way to truly fight fragmentation is to do the opposite - to unite.

But unity does not mean forcing artificial ties. In Europe, we are already bound by a deep reservoir of shared history and culture. True unity means drawing on that heritage - and removing the barriers that hold back our innovation and creativity - so that the virtuous circle between economy and culture, from which Europe has long drawn strength, can endure and grow.

Some of the barriers we face are economic. Lingering restrictions within our Single Market still hold back creative people from developing their ideas and driving progress across our continent. According to a recent survey, three-quarters of Europe's most innovative firms say that market fragmentation within the

EU is a serious obstacle to growth. [ ] 16

The International Monetary Fund has even tried to quantify the barriers we impose on one another. When expressed as effective tariff rates, the figure for services trade within Europe is 110% - far higher than anything currently threatened by our trading partners abroad. [ ] 17

But some of the barriers are cultural. In an era of tight public finances, access to the arts may be shrinking for many people. And this, too, carries economic consequences. Creativity does not exist in silos. The creative arts nourish innovation in every field.

Perhaps the most compelling historical example is Leonardo da Vinci. He is remembered first and foremost as an artist - yet he was also an engineer, an inventor, a scientist and a visionary urban planner. And today, research shows that this link between artistic creativity and economic innovation remains just as strong. Studies find that STEM graduates with a background in the arts are far more likely to file patents and launch start-ups - and many cite their creative training as a direct source of inspiration. [ ] So we need to bring down the barriers that still divide our countries, and lift the obstacles that hold back creative expression. 18

Encouragingly, the push to unlock Europe's cultural potential is gaining real traction.

One of the priorities of the European Commission is to make it easier for innovators to operate on a European scale. For instance, Creative Europe, the Commission's flagship cultural programme, aims to foster transnational cooperation among cultural organisations.

In 2024 alone, the programme funded new projects in 20 countries. Among them are several initiatives to translate Ukrainian literary works into more than a dozen European languages - showing how EU cultural policy is promoting cross-border collaboration and visibility. [ ] 19

Preserving Europe's cultural heritage is another area where support is deepening.

Through its cohesion policy, the EU invested around €12 billion in cultural heritage and creative industries between 2007 and the pandemic [ ]  - a level of commitment that continues through other new initiatives. 20

For example, the Commission is helping museums digitise their collections using advanced tools and infrastructure. With only 30% to 50% of Europe's cultural artefacts digitised to date, this work is crucial to protecting our cultural heritage in an increasingly digital world. [ ] 21

And the EU is actively working to strengthen a shared sense of European identity.

Since 2013, nearly 70 locations have received the European Heritage Label, marking their significance in our continent's cultural and historical fabric. [ ]  And one of this year's two European Capitals of Culture happens to be in Germany: Chemnitz. 22

By deepening our ties - both economic and cultural - we can unlock Europe's full potential. I am confident that we will find the unity we need. Because throughout our history, it is unity that has carried us through our greatest tests.

Even in our recent past, we overcame the pandemic and the energy crisis by acting together as Europeans. And these moments of solidarity have helped rebuild confidence in Europe.

Today, trust in the EU is at its highest level since 2007. [ ]  And if we sustain a virtuous circle of integration, growth and culture through bold action, that trust may yet continue to rise. 23

## Conclusion

Let me conclude.

At a time when the world is fragmenting, many things once set in stone can appear fragile - breakable, even. But as Fauré's Pénélope demonstrates, European culture endures.

Over a century after it premiered, and after a series of wars and crises that beset Europe during that time, here we are at the Munich Opera Festival, where the opera will be performed in the coming weeks.

The endurance of Pénélope - both as a woman and as an opera - reminds us how culture can outlast conflict and how it speaks to the resilience of our cultural spirit in the face of the gravest challenges.

As the artist Gerhard Richter once observed, 'art is the highest form of hope'. That hope resonates even more powerfully in today's fracturing world.

European integration was vital in fostering a common European culture and identity. In an era of renewed fragmentation, that shared culture can still hold us together - provided we continue to nourish it.

Thank you.

1.

Five performances of Pénélope will be given at the Munich Opera Festival over the course of mid to late July.

2.

O'Rourke, K. and Williamson, J. (1999), Globalization and History: The Evolution of a Nineteenth-Century Atlantic Economy , MIT Press.

3.

MacMillan, M. (2014), The War that Ended Peace: How Europe Abandoned Peace for the First World War , Profile Books.

4.

Translated as 'The World of Yesterday'. See Zweig, S. (1942), Die Welt von Gestern .

5.

Anderson, B. (1983), Imagined Communities .

6.

The European Coal and Steel Community was established in 1951 by the Treaty of Paris and came into force the following year.

7.

Before the Second World War, fewer than 15% of Germans had taken an annual holiday of more than five days. See Kopper, C.M. (2009), ' ', Journal of Tourism History , Vol. 1, No 1, March. The breakthrough of the package tour in Germany after 1945

8.

European Commission, ' '. Public documents

9.

Translated as 'And of course, I answer in German from time to time.'

10.

European Commission (2024), ' ', 17 June. Marking 37 years of Erasmus+: Key numbers and achievements

European Commission (2019), ' ', 20 May. Erasmus+: a turning point in the lives of 5 million European students

12.

Gopinath, G. (2024), ' ', speech at the Series on the Future of the International Monetary System, Stanford Institute for Economic Policy Research, 7 May. Geopolitics and its Impact on Global Trade and the Dollar

13.

Eco, U. (1983), The Name of the Rose , translated by William Weaver.

14.

See Graph 1 in Almeda, P. et al., . Public spending on culture in Europe 2007-2015

15.

Smętkowski, M. and Dąbrowski, M. (2019), ' ', Regional Science Policy &amp; Practice , Vol. 11, Issue 4, October, pp. 713-733. Economic crisis, Cohesion Policy and the eroding image of the European Union at the regional level

16.

European Investment Bank (2024), . Investment Report 2024/2025 - Innovation, Integration and Simplification in Europe

17.

International Monetary Fund (2024), 'Europe's Declining Productivity Growth: Diagnoses and Remedies', Regional Economic Outlook Notes , November.

18.

LaMore, R. et al. (2013), 'Arts and Crafts: Critical to Economic Innovation', Economic Development Quarterly , Vol. 27, No 3, pp. 221-229.

19.

European Commission (2025), ' ', 15 January. Creative Europe announces the results of its 2024 calls

20.

For the 2007-13 period, see ' '; for the 2014-20 period, see European Commission (2021), ' ', CREADIS3 final conference, 22 April. Cohesion Policy 2007-2013: Culture Support to the cultural and creative sectors through cohesion policy

21.

European Commission (2022), ' ', 5 July. Moving towards a new European collaborative cloud for cultural heritage

Copyright 2025, European Central Bank

22.

European Commission, ' '. European Heritage Label Sites

23.

Eurobarometer (2025), ' '. Standard Eurobarometer 103 - Spring 2025",Christine Lagarde
https://www.bis.org/review/r250625e.htm,John C Williams: The totality of the data,"Remarks by Mr John C Williams, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the NY CREATES Albany NanoTech Complex, Albany, New York, 24 June 2025.",2025-06-24 00:00:00,"## John C Williams: The totality of the data

Remarks by Mr John C Williams, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the  NY CREATES Albany NanoTech Complex, Albany, New York, 24 June 2025.

* * *

## As prepared for delivery

## Introduction

Hello, everyone. I'm so pleased to be here today.

One of the most enjoyable parts of my job is meeting with business and community leaders to learn more about our local economies-their challenges and opportunities, their long-established businesses and new industries. It's fitting that I started my visit in Schenectady, known as ""The City that Lights and Hauls the World."" And now I'm here at the Albany NanoTech Complex, a hub for innovative, cutting-edge nanotechnologies. Both cities, just 20 miles apart, have made-and continue to make-important contributions to our regional and national economies.

I'll talk a bit about that today, although my focus will be on the U.S. economy. I'll discuss what the soft and hard data are telling us, and how the totality of the data is informing my outlook for the economy.

Before I go further, I must give the standard Fed disclaimer that the views I express today are mine alone and do not necessarily reflect those of the Federal Open Market Committee (FOMC) or others in the Federal Reserve System.

## The Capital Region

As an economist and student of history, I can't help but start with a few words about the Capital Region. In the 1880s, when Thomas Edison created components for his electrical illumination system and the Schenectady Locomotive Works built engines, few could have imagined the ways that electricity and locomotives would transform entire societies and economies. They represent what economists call general-purpose technologies, or GPTs.

Today, many experts think that the latest GPT is artificial intelligence, or AI. And among the many research initiatives underway here are technologies that support the advancement of AI.

In the 140 years between these GPT bookends, this region has continued to invest in new industries and training for workers, helping to drive the health of the local economy.

## The Soft Data

Of course, all communities in the Federal Reserve's Second District-which includes the Capital Region-are affected by national trends. In recent months, the changing landscape around fiscal and trade policies has heightened economic uncertainty among consumers, business owners, and financial market participants.

As an economist and policymaker, I am always studying the data. Recently, there have been some interesting dynamics in both the soft data, which are typically survey measures of perceptions and expectations, and the hard data, which are economic readings of what has actually happened.

I'll start with the soft data. Over the past few months, surveys carried out by the New York Fed and others have highlighted a great deal of pessimism and uncertainty about the economic outlook. With respect to the Second District, our surveys of manufacturers and service firms indicate that economic activity has declined modestly, and concerns about tariffs are widespread. Several of my business contacts reported pulling back on capital spending and putting hiring on hold until the economic uncertainty lessens.

In the New York Fed's national Survey of Consumer Expectations, consumers' uncertainty remains elevated not just about inflation, but also about housing prices and their earnings growth. 1   According to this survey, households have scaled back their expected spending growth on nonessential items.

The soft data have also revealed some good news. Longer-run inflation expectations have remained stable. And with the pullback in tariffs since early April, short- and medium-term inflation expectations have receded back close to their pre-pandemic averages. These patterns are consistent with market-based measures of inflation compensation and with most other survey-based measures. This is critically important, because well-anchored inflation expectations are essential for sustained price stability.

That said, survey respondents report that uncertainty about inflation remains elevated.

## The Hard Data

As a policymaker, I have often said that my decisions are data dependent-but not datapoint dependent. I look at the totality of the data for underlying trends. I am particularly focused on those that affect the achievement of the FOMC's dual mandate goals of maximum employment and price stability, which is defined as 2 percent inflation over the longer run.

And what much of the hard data shows is that the U.S. economy remains in a good place.

With regard to real GDP growth, the data have been unusually noisy, reflecting frontrunning of tariffs. That said, consumer spending and investment have been resilient overall so far this year.

On the employment side of our mandate, labor market conditions have remained solid, with the unemployment rate at a little over 4 percent for the past year.

On the price stability side of our mandate, inflation has continued to come down from its COVID-era spikes. With the labor market in balance and wage pressures having abated, inflation, as measured by the personal consumption expenditures price index, has moved close to our 2 percent longer-run goal.

However, measures of underlying inflation-such as core inflation, which strips away volatile categories like food and energy-are still somewhat above our 2 percent target. And there are signs that tariffs are affecting specific categories of goods.

We are seeing evidence of these patterns in the Second District. In May, New York Fed staff fielded a special survey to gauge the extent to which New York and New Jersey businesses were passing on tariff-induced cost increases to their customers. Manufacturers indicated that over the past six months, the cost of their tariffed goods had risen by about 20 percent, on average. For service firms, the increase was about 15 percent. The survey's key finding is that about three-quarters of respondents in both sectors passed along at least some of these higher costs to their customers by raising prices. Indeed, almost a third of manufacturers and nearly half of service firms reported fully passing along all tariff-related cost increases. 2

What does this all mean for the economy going forward?

My answer is that we need to be vigilant in analyzing the totality of the data to see how conditions evolve.

## Monetary Policy

Given the continued uncertainty, the solid labor market, and inflation still above our 2 percent goal, the FOMC decided at its meeting last week to leave the target range for the federal funds rate unchanged at 4-1/4 to 4-1/2 percent. 3

Maintaining this modestly restrictive stance of monetary policy is entirely appropriate to achieve our maximum employment and price stability goals. It allows for time to closely analyze incoming data, assess the evolving outlook, and evaluate the balance of risks to achieving our dual mandate goals.

In addition, the FOMC continues to reduce its holdings of Treasury securities and agency debt and agency mortgage-backed securities. Despite market volatility related to trade policy and other developments, that process continues to go very smoothly.

## The Economic Outlook

In an uncertain environment, any number of outcomes can occur. But based on what the data tell us today, I expect uncertainty and tariffs to restrain spending and reduced immigration to slow labor force growth. As a result, I expect real GDP growth this year will slow considerably from last year's pace, to just over 1 percent.

With this deceleration of real GDP, I expect the unemployment rate to rise to around 4-1 /2 percent by the end of this year. I anticipate the tariffs enacted this year will boost inflation to around 3 percent in 2025, and then for inflation to gradually decline to 2 percent over the next two years as the tariff effects fade.

## Conclusion

Much of the soft data we've seen in recent months captures the heightened uncertainty about the path of the economy. But it's too early to say what the future trajectory of the hard data will be.

As always, I remain focused on the data, and that includes what I have learned on all this trip to the Capital Region. No matter what comes our way, I am committed to supporting maximum employment and returning inflation to our 2 percent longer-run goal.

1  Federal Reserve Bank of New York, Survey of Consumer Expectations  (May 2025).

2  Jaison R. Abel, Richard Deitz, Sebastian Heise, Ben Hyman, and Nick Montalbano, "" Are Businesses Absorbing the Tariffs or Passing Them On to Their Customers?,"" Federal Reserve Bank of New York June 4, 2025. Liberty Street Economics,

- 3  Board of Governors of the Federal Reserve System,  Federal Reserve issues FOMC statement, June 18, 2025.",John C Williams
https://www.bis.org/review/r250624a.htm,Christine Lagarde: Hearing of the Committee on Economic and Monetary Affairs of the European Parliament,"Speech by Ms Christine Lagarde, President of the European Central Bank, at the Hearing of the Committee on Economic and Monetary Affairs of the European Parliament, Brussels, 23 June 2025.",2025-06-23 00:00:00,"## Christine Lagarde: Hearing of the Committee on Economic and Monetary Affairs of the European Parliament

Speech by Ms Christine Lagarde, President of the European Central Bank, at the Hearing of the Committee on Economic and Monetary Affairs of the European Parliament, Brussels, 23 June 2025.

* * *

Charts accompanying the speech

It is a pleasure to be with you again for our regular exchange.

This year has been one of profound global economic and geopolitical uncertainty. As we navigate a world increasingly marked by fragmentation, uncertainty and conflict, Europe must reaffirm its role as a pillar of economic and political stability.

And with the foundations of global balance under strain, the international financial system is also entering uncharted territory. A key part of this evolving landscape is the rapid rise of crypto-assets and stablecoins. For this hearing, you asked me to elaborate on the emerging challenges and opportunities associated with these new digital assets.

First, however, I would like to update you on the ECB's assessment of the euro area economy and our monetary policy stance.

## The outlook for the euro area and the ECB's monetary policy

Eurosystem staff expect the euro area economy to grow by 0.9% this year, 1.1% in 2026 and 1.3% in 2027.

In the first quarter of this year manufacturing strengthened and the services sector grew moderately. At the same time, the labour market remained robust, with the unemployment rate at 6.2% in April, its lowest level since the launch of the euro.

Survey data point overall to some weaker prospects for economic activity in the near term. Higher tariffs and a stronger euro are expected to dampen exports, with high uncertainty delaying investment decisions.

But there are several factors that are keeping the economy resilient and that should support growth over the medium term. The strong labour market, rising real incomes, robust private sector balance sheets and easier financing conditions - partly due to our recent interest rate cuts - should help consumers and firms withstand the fallout from a volatile global environment. Defence and infrastructure investment should also bolster growth.

Risks to the growth outlook remain tilted to the downside, however. In particular, growth could slow in the event of a further escalation in global trade tensions and the associated uncertainties, deteriorating financial market sentiment and continued geopolitical tensions. That being said, a swift resolution to trade and geopolitical

tensions or a further increase in defence and infrastructure spending could spur activity by more than expected.

The global economic outlook continues to face exceptionally high economic and political uncertainty, but as I said recently, ""moments of change can also be moments of opportunity"". Support for the euro has reached an all-time high. Now is the time to 1 2 make the euro area economy more productive, competitive and resilient. We need to see targeted fiscal and structural policies and strategic investments. The proposals in the Competitiveness Compass should be adopted swiftly. The savings and investment union must be completed. And a legislative framework to pave the way for the potential introduction of a digital euro should be put in place rapidly. By making the right policy choices, we can leverage the current momentum to boost the economic perspectives for Europe and its citizens. 3

Inflation is currently at around our 2% medium-term target. Headline inflation decreased from 2.2% in April to 1.9% in May, reflecting a strong decline in services inflation after a temporary jump in travel-related services prices in April due to Easter. Core inflation excluding energy and food - also declined from 2.7% in April to 2.3% in May. Most indicators of underlying inflation continue to suggest that inflation will stabilise sustainably at our 2% medium-term target. Nominal wage growth continues to moderate and stood at 3.8% in the first quarter of this year, down from 4.1% in the fourth quarter of 2024. It should continue to follow its downward path as pressures to recoup past real wage losses fade.

The Eurosystem staff projections see inflation staying temporarily below 2% in 2026 driven in part by a stronger euro and a decline in energy commodity prices - before returning to target in 2027. Headline inflation is expected to average 2.0% in 2025, 1.6% in 2026 and 2.0% in 2027. The outlook for euro area inflation is more uncertain than usual, with frictions in global trade responsible for both upside and downside risks. Upside risks include a possible fragmentation of global supply chains, while downside risks include lower demand for euro area exports and countries with overcapacity rerouting their exports to the euro area.

With inflation set to stabilise around our 2% target on a sustained basis, earlier this month the Governing Council decided to lower the key interest rates again, by 25 basis points. At the current interest rate levels, we believe that we are in a good position to navigate the uncertain circumstances. Especially in the current conditions of exceptional uncertainty, we will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance. Our interest rate decisions will be based on the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission. We are not pre-committing to a particular rate path.

## Developments in stablecoins and crypto-assets

Let me now turn to the second topic, which is new forms of digital assets, including stablecoins and other crypto-assets.

Crypto-assets have become a fast-developing segment of the financial landscape. Unbacked crypto-assets - those that are not backed by physical or financial assets -

have seen their market capitalisation surge from less than €200 billion in early 2020 to around €2.7 trillion this year. This remarkable growth has been marked by investor speculation and extreme price volatility. These characteristics render such assets unsuitable as a reliable means of exchange and expose investors to significant risks.

For now, risks to the euro area's financial stability from crypto-assets appear limited. However, the rapid pace of developments, combined with data gaps that may create blind spots require closer monitoring. 4   Survey data from selected euro area countries suggest that around 10% of households hold crypto-assets, with around 14% expressing an interest in future purchases. 5   As holdings and valuations of crypto-assets rise, the risk for investors from sharp price corrections increases and could reverberate across the financial system. 6

As unbacked crypto-assets have risen in capitalisation, so have stablecoins. This specific type of crypto-asset aims to maintain a fixed value relative to one or more reference assets. Currently, 99% of stablecoins are denominated in US dollars. Stablecoins often act as an entry point to crypto-assets and facilitate crypto-asset trading. They also attract users by promising faster and cheaper corporate and retail cross-border payments.

At the same time, stablecoins are privately issued and notably pose risks for monetary policy and financial stability. These assets are not always able to maintain their fixed value, compromising their usefulness as a means of payment and a store of value. Moreover, a potential shift in deposits used for payments and savings - from banks to stablecoins - could adversely affect the transmission of monetary policy through banks. 7 Stablecoins must therefore be governed by sound rules, especially when they operate across international borders.

The European Union has taken a decisive step in this direction. The Markets in CryptoAssets Regulation is the world's first regulatory framework for stablecoins. It allows EUbased stablecoin investors to redeem their holdings at par value at all times and requires a substantial share of stablecoin reserves to be held in bank deposits, thereby minimising the risks for consumers and financial stability.

Most major jurisdictions, however - including the United States - are still working towards establishing their own regulatory frameworks. By way of example, Tether, the largest stablecoin issuer, is currently based in El Salvador, which lacks any prudential framework for stablecoins.

This fragmented approach prevents a global level playing field and can open the door to new risks and systemic vulnerabilities. We must therefore remain alert to developments in other jurisdictions and advocate for globally aligned regulations for stablecoins. 8

In this context, accelerating progress towards a digital euro is a strategic priority. Beyond addressing some of the risks posed by stablecoins, a digital euro would help safeguard Europe's bank-based financial and monetary system. Not only would it strengthen Europe's strategic autonomy, but it would also ensure an innovative and resilient European retail payments system.

## Conclusion

Let me conclude.

If we want to foster innovation and build resilience, deeper European integration, particularly in financial markets and payments, is not merely a political aspiration but a strategic necessity.

As the French writer Émile Souvestre wisely observed, ""there is something more powerful than strength, than courage, than genius itself: it is the idea whose time has come.""

Europe is that idea and now is the time to fully embrace it. This is what the citizens of Europe have entrusted us to do. 9

Thank you. I now stand ready to take your questions.

- 1  Lagarde, C. (2025), ""Earning influence: lessons from the history of international currencies"", speech at an event on Europe's role in a fragmented world organised by Jacques Delors Centre at Hertie School in Berlin, Germany, 26 May.
- 2  European Commission (2025), "" Standard Eurobarometer 103 - Spring 2025"", May.
- 3  ECB (2025), June. The international role of the euro,
- 4  Aerts, S. et al. (2025), "" Just another crypto boom? Mind the blind spots"", Financial , ECB, May. Stability Review
- 5  The ECB Consumer Expectations Survey - November 2024 covering selected euro area countries indicated that, on average, 9.7% of survey respondents (or at least one person in the household) owned crypto-assets, down slightly from the November 2022 figure. Most crypto-asset owners have a relatively low exposure: 54% of respondents reported holdings of below €1,000 and 91% of respondents reported holdings of below €20,000. Overall, this represents about 0.23% of household financial assets and 3% of total crypto-asset market capitalisation.
- 6  Although banks' exposure to crypto-assets is still small, it has been increasing. For example, the value of crypto-asset custody services provided by banks increased from €400 million in 2023 to €4.7 billion in 2024. Further information on interlinkages between the financial sector and crypto-assets can be found in Aerts, S. et al. (2025), op. cit.
- 7  Lane, P.R. (2025), ""The digital euro: maintaining the autonomy of the monetary system "", keynote speech at University College Cork Economics Society Conference 2025, Cork, 20 March.

- 8  See Financial Stability Board (2024), G20 Crypto-asset Policy Implementation , October, for an overview of the progress made in relation to Roadmap: Status report implementing the regulatory frameworks for crypto-assets and stablecoins. The report stresses how challenges, including the inconsistent implementation of the Financial Stability Board's framework, may hinder the effectiveness of these frameworks and lead to regulatory arbitrage.
- 9  The latest Standard Eurobarometer published by the European Commission shows that trust in the European Union has reached its highest level since 2007. See European Commission (2025), op.cit.",Christine Lagarde
https://www.bis.org/review/r250625a.htm,"Naoki Tamura: Economic activity, prices and monetary policy in Japan","Speech by Mr Naoki Tamura, Member of the Policy Board of the Bank of Japan, at a meeting with local leaders, Fukushima, 25 June 2025.",2025-06-25 00:00:00,"

Bank  of  Japan J u n e 2 5 ,   2 0 2 5

## Economic Activity, Prices, and Monetary Policy in Japan

Speech at a Meeting with Local Leaders in Fukushima

## TAMURA Naoki

Member of the Policy Board

## I. Economic Activity and Prices

## A. Current Situation of and Outlook for Economic Activity and Prices

I  will  begin  my speech by talking about developments in economic activity and prices in Japan. Simply put, my current assessment of these developments can be summarized into three points.

First, until March 2025, Japan's underlying inflation, measured by the consumer price index (CPI), had been on track toward achieving the price stability target of 2 percent and had been rising at a slightly faster pace than expected. Therefore, it could be judged that the likelihood of achieving the price stability target had increased further and the upward risks to prices had also grown further.

Second, regarding the U.S. tariff policy announced afterward, I assume that it will highly likely exert downward pressure on Japan's economic activity and prices. Nevertheless, the year-on-year rate of increase in the CPI is likely to continue rising at around 2 percent through fiscal 2027.

Third, despite the downward pressure, I take the risk to be low of Japanese firms' wage- and price-setting behavior reverting to the past behavior observed when wages and prices did not rise easily, and it is unlikely that underlying CPI inflation, which has been increasing, will turn downward.

Now, I will explain these points in more detail, touching on the Bank of Japan's outlook for economic activity and prices.

First, the Bank assesses that the economy has recovered moderately on the whole, although some weakness has been seen in part. In terms of the medians of the Policy Board members' forecasts -- as presented in the April 2025 Outlook for Economic Activity and Prices (Outlook Report) -- Japan's real GDP growth rate is expected to be at 0.5 percent for fiscal 2025, 0.7 percent for fiscal 2026, and 1.0 percent for fiscal 2027 (Chart 1). The forecasts were revised downward from those made  in January because  Japan's  economy  was  projected  to see a deceleration, mainly due to a slowdown in overseas economies induced by the impact of U.S.

Chart 1: The Bank's Forecasts for Real GDP

s.a., ann., tril. yen



|         | January 2025 Outlook Report   |    | April 2025 Outlook Report   |
|---------|-------------------------------|----|-----------------------------|
| FY 2025 | 1.1%                          | →  | 0.5%                        |
| FY 2026 | 1.0%                          | →  | 0.7%                        |
| FY 2027 | -                             |    | 1.0%                        |

Notes: 1. Forecasts are the medians of the Policy Board members' forecasts. Real GDP values for fiscal 2025 onward are calculated by multiplying the actual figure for fiscal 2024 by all successive projected growth rates for each year.

2. There are extremely high uncertainties regarding the future course of trade and other policies in each jurisdiction and the impact of these policies on economic activity and prices at home and abroad. The baseline scenario in the April 2025 Outlook Report was developed based on assumptions including the following: negotiations between jurisdictions will progress to some extent, and significant disruptions of global supply chains  will  be  avoided.  Attention  is  warranted  on  the  possibility  that  the  outlook  for  economic  activity  and  prices  could  change considerably depending on the future course of the policies in each jurisdiction and the response of firms and households in these jurisdictions to the policies.

Sources: Cabinet Office; Bank of Japan.

tariff  policy. Thereafter,  Japan's  economic  growth  rate  is  likely  to  rise,  with overseas economies returning to a moderate growth path.

Second, the year-on-year rate of increase in the CPI for all items excluding fresh food is slightly above 3.5 percent. In terms of the medians of the Policy Board members' forecasts presented in the April Outlook Report, the rate of increase is expected to be at 2.2 percent for fiscal 2025, 1.7 percent for fiscal 2026, and 1.9 percent for fiscal 2027 (Chart 2). The forecasts were revised downward from those made in January, mainly reflecting a decline in crude oil prices and the downward revision of the GDP growth rates. Nevertheless, the rate of increase is likely to continue rising at around 2 percent.

Chart 2: The Bank's Forecasts for the CPI

y/y % chg.



Notes: 1. Figures are the CPI for all items less fresh food, excluding the effects of the consumption tax hikes.

3. There are extremely high uncertainties regarding the future course of trade and other policies in each jurisdiction and the impact of these policies on economic activity and prices at home and abroad. The baseline scenario in the April 2025 Outlook Report was developed based on assumptions including the following: negotiations between jurisdictions will progress to some extent, and significant disruptions of global supply  chains  will  be  avoided.  Attention  is  warranted  on  the  possibility  that  the  outlook  for  economic  activity  and  prices  could  change considerably depending on the future course of the policies in each jurisdiction and the response of firms and households in these jurisdictions to the policies.
2. The locations of , △ , and ▼ in the chart indicate the figures for each Policy Board member's forecasts. The risk balance assessed by each Policy Board member is shown by the following shapes: indicates that a member assesses ""upside and downside risks as being generally balanced,"" △ indicates that a member assesses ""risks are skewed to the upside,"" and ▼ indicates that a member assesses ""risks are skewed to the downside."" The dotted black lines show the medians of the Policy Board members' forecasts.

Sources: Ministry of Internal Affairs and Communications; Bank of Japan.

## B. Wage and Price Developments

As I mentioned at the outset, my view is that Japan's underlying CPI inflation had been on track toward achieving the price stability target of 2 percent and had been rising at a slightly faster  pace  than  expected until  March 2025 -- prior  to  the  period  when the  Policy Board members made the aforementioned forecasts on the CPI for the April Outlook Report. This view is  based  on  factors  such  as  the  wage  and  price  situation  in  Japan  at  that  time. The situation has remained basically unchanged even up until now, and the CPI figures for April and May are higher than expected.

First, regarding wages, the provisional results of the 2025 annual spring labor-management wage negotiations show that wage growth has exceeded the solid wage growth achieved last year (Chart 3). In particular, the rate of increase in base pay in 2025 for small and mediumsized firms has been greater than that for large firms, compared with 2024. It is necessary to continue to monitor how the 2025 labor-management wage negotiations turn out and whether wage  hikes  spread  to  small  and  medium-sized  firms  that  do  not  have  labor  unions. Nevertheless, I believe that the momentum for wage hikes is strong enough at present.

Chart 3: Results of the Annual Spring Labor-Management Wage Negotiations

Rengo's sixth aggregate results (as of June 2)



Notes: 1. Figures for ""CPI inflation"" are for all items less fresh food, excluding the effects of the consumption tax hikes, on a calendar-year basis. 2. Figures for ""actual base pay increase"" and ""actual regular wage increase"" from 1991 to 2014 are those published by the Central Labour Relations Commission, while those from 2015 to 2024 are figures released by the Japanese Trade Union Confederation (Rengo). Figures are based on the wage negotiation results of labor unions for which the base pay increase is clear.

Sources: Central Labour Relations Commission; Ministry of Internal Affairs and Communications; Rengo.

Next, the year-on-year rate of increase in the CPI for all items excluding fresh food is slightly above 3.5 percent, and that for all items excluding fresh food and energy, for which prices fluctuate significantly, is slightly above 3 percent (Chart 4). This is mainly because firms have continued to pass on higher personnel expenses to selling prices and because there have been effects of the past rise in import prices and of the rise in food prices such as rice prices.

Chart 4: Consumer Prices

y/y % chg.



In relation to this, I would now like to raise four points I am focusing on in terms of price developments. The first point is developments in the seasonally adjusted month-on-month rate of increase in the CPI for all items excluding fresh food and energy on an annualized basis. This rate of increase provides a snapshot of recent CPI developments since it is not affected by price developments in the same month of the previous year. After hovering at low levels for a long time, the rate of increase rose sharply from 2022 to 2023, fueled by higher import prices. The CPI inflation rate subsequently settled down around the first half of 2024. However, due to what can be called another round of pass-through to selling prices of higher personnel expenses and other costs, the rate of increase has accelerated again since June 2024, maintaining an increase of around 3 percent on an annualized basis (Chart 5).

Chart 5: Consumer Prices (Annualized Month-on-Month Rate of Change)

s.a., ann., m/m % chg.



Note : Figures are the CPI for all items less fresh food and energy. Source: Ministry of Internal Affairs and Communications.

The second point is developments in services prices, which are important in assessing the degree of the pass-through of wages to selling prices. On the surface, the year-on-year rate of increase in services prices has tracked at somewhat below 2 percent (Chart 6). Nevertheless,

Chart 6: Consumer Prices (Housing Rent and Public Services)

y/y % chg.

Source: Ministry of Internal Affairs and Communications.



services  include  housing  rent 1 and  public  services, 2 which  are  considered  to  structurally follow developments in general prices with a significant time lag. 3 Therefore, it is important to note that housing rent and public services are pushing down increases in services prices

1 The small rate of increase in terms of the year-on-year rate of change in Japan's CPI for housing rent has  been  attributed  to  the  high institutional barriers  against  raising  rent,  and  because  surveys  on housing rent include ongoing rents, the impact of increases in new contract rents made at the time of a change of resident is not fully accounted for. A downward bias in housing rent is also created by the fact  that  a  quality  adjustment  to  housing  for  rent  in  terms  of  deterioration  from  aging  is  not incorporated. It is important to note that these effects are reflected not only in private housing rent but also in imputed rent, which has a large weight in the CPI.

percent for public services.

2 Public services in the CPI include not only items under legal prices and ordinance-based prices, regulated either by the central or local governments, but also items under licensed prices, which require the  approval  of  the  central  government  for  price  changes,  and items  under notified  prices,  whose changes are reported to the government. One of the reasons why the rise in such administered prices in Japan has been sluggish is that government subsidies for supplementing revenues are constantly injected to public firms, and administered prices do not sufficiently reflect operating expenses and depreciation costs of equipment (see Box 4 of the July 2016 Outlook Report). Although higher fire and earthquake insurance premiums and optional auto insurance premiums have recently pushed up the price of public services, the rate of increase remains sluggish when these premiums are excluded. 3 The weight in services prices is 36 percent for private housing rent (including imputed rent) and 25

overall. I refer to services prices that exclude these components as ""market-based services prices.""  These  prices  have  continued  to  grow  by  more  than  2  percent  in  recent  years. Moreover, prices of the two components, housing rent and public services, have also recently begun to rise gradually.

The third point involves developments in the price of fresh food. As fresh food prices fluctuate significantly  in  line  with  one-off  factors,  changes  in  these  prices  are  considered  to  be temporary, which is why fresh food is often excluded when assessing underlying inflation. In fact, developments in fresh food prices, when averaged out, more or less tracked overall price developments until around 2021, albeit with large fluctuations (Chart 7). However, since the

Chart 7: Consumer Prices (Fresh Food and Other Food)

CY 2020 = 100



Note: ""Fresh food"" consists of fresh fish and seafood, fresh vegetables, and fresh fruits. ""Food (less fresh food)"" consists of rice, raw meat, eggs, various processed food products, and dining-out.

Source: Ministry of Internal Affairs and Communications.

beginning of 2022, although the extent of fluctuation has remained large, the rate of increase in fresh food prices has risen much faster than that in overall prices, even when averaged out. This is mainly attributable to (1) lower supply capacity due to labor shortages, (2) an increase in  utility  and  shipping  costs  and  various  other  costs,  and  (3)  higher  personnel  costs  for producing fresh food. These factors cannot be considered temporary. Furthermore, there is a significant impact from irregular weather due to climate change, and many point out that such factors will continue to push up prices. The same holds true for food other than fresh food. A rise in the price of fresh food and other food has a significant negative impact on households and substantially affects their inflation expectations, which can give rise to sustained upward

pressure on prices. I therefore believe it necessary to closely monitor developments in fresh food prices.

Fourth, medium- to long-term inflation expectations have been rising gradually in a situation where prices in general have been increasing (Chart 8). The Tankan (Short-Term Economic

Firms

Chart 8: Inflation Expectations



Households

Economists

Notes: 1. Figures for firms in the left panel are based on the Tankan , and are averages of all industries and enterprises.

2. Figures for households in the middle panel are based on the Opinion Survey on the General Public's Views and Behavior .  Figures for the quantitative question are based on numerical values for expected inflation rates provided by respondents, and the average of those is calculated by excluding 0.5 percent of the highest and lowest figures, respectively, in order to avoid extremes. Figures for the qualitative question are estimated using the modified Carlson-Parkin method, quantifying the results of the 5-choice question, asking respondents their expectations for whether and to what degree prices will go up or down.

Survey of Enterprises in Japan) shows a moderate rise in firms' inflation outlook for general prices, with their inflation outlook for five years ahead remaining above 2 percent. The results of the  Bank's Opinion Survey on the General Public's Views and Behavior show that the median of households' inflation outlook for five years ahead has been significantly above 2 percent and the average outlook has recently been rising, although bias in expected price levels  should  be  taken  into  account.  The  outlook  among  experts  remains  somewhat  low compared with that of firms and households, but I personally believe that the focus should be placed on the inflation expectations of firms and households, who are the actual drivers of economic activity. I take these expectations to have already reached around 2 percent. Unlike the  United  States  and  Europe,  where  inflation  expectations  have  been  stable  at  around  2

Sources: JCER, ""ESP Forecast""; Bank of Japan.

percent, Japan has seen inflation expectations rise from a low level, and attention needs to be paid to whether any further rise is more than expected.

## C. Impact of U.S. Tariff Policy

Given the aforementioned price developments, my view was that achievement of the price stability target came close, but the ground shifted significantly following the announcement of the U.S. tariff policy (Chart 9). In the April 2025 Outlook Report released in early May,

Chart 9: Impact of Trade Policies Impact on Japan's Economic Activity and Prices The Bank's Forecasts for Real GDP and the CPI (April 2025 Outlook Report)

y/y % chg.



















|                                                  | GDP   | Inflation   |         | Real GDP      | CPI             | CPI                        |
|--------------------------------------------------|-------|-------------|---------|---------------|-----------------|----------------------------|
| Channel                                          |       |             |         | Real GDP      | Less fresh food | Less fresh food and energy |
| (1) Weaker global demand (2) Decrease in exports |       |             | FY 2025 | +0.5 ( -0.6 ) | +2.2 ( -0.2 )   | +2.3 ( +0.2 )              |
| (3) Decrease in corporate profits                |       |             | FY 2026 | +0.7          | + 1.7           | +1.8                       |
| (4) Exchange rate fluctuations                   |       |             |         | ( -0.3 )      | ( -0.3 )        | ( -0.3 )                   |
| (5) Supply-chain disruptions, etc.               |       |             | FY 2027 | +1.0 (-)      | +1.9 (-)        | +2.0 (-)                   |



Note: Figures in the right panel are the medians of the Policy Board members' forecasts. Figures in parentheses indicate changes from the January 2025 Outlook Report. There are extremely high uncertainties regarding the future course of trade and other policies in each jurisdiction and the impact of these policies on economic activity and prices at home and abroad. The baseline scenario in the April 2025 Outlook Report was developed based on assumptions including the following: negotiations between jurisdictions will progress to some extent, and significant disruptions of global supply chains will be avoided. Attention is warranted on the possibility that the outlook for economic activity and prices could change considerably depending on the future course of the policies in each jurisdiction and the response of firms and households in these jurisdictions to the policies.

the Bank revised downward its outlook for economic activity and prices from that made in January, mainly based on the assumption that tariff negotiations between jurisdictions will progress to some extent and significant disruptions of global supply chains will be avoided. Nevertheless,  the  Bank  does  not  expect  the  U.S.  tariff  policy  to  induce  a  massive  shock similar to the Global Financial Crisis or the COVID-19 pandemic. Naturally, the impact of the tariff policy varies from firm to firm and the Bank should assess the economic situation without preconceptions, but when looking at Japan as a whole, I believe the basic scenario is that Japan will be able to weather the impact, and the economy will merely experience a

Source: Bank of Japan.

slowdown. The main reason for this is that the direct impact of the U.S. tariff policy is limited to  export-oriented  manufacturers  and  firms  associated  with  those  manufacturers'  supply chains. Of course, the indirect impact also warrants attention, but the manufacturing industry accounts for only about 20 percent of GDP and about 15 percent of the number of employed persons in Japan. The year-on-year rate of increase in the CPI is likely to continue rising at around 2 percent through fiscal 2027, but if global production systems  are disturbed and supply chains are disrupted, prices in Japan may be pushed up, mainly through a rise in import prices.

Nonetheless, how U.S. tariff policy turns out and how firms respond to the policy are both fluid. Therefore, the Bank's outlook for economic activity and prices can be described as provisional  at  this  point  and,  depending  on  future  developments,  could  be  revised considerably, either upward or downward.  The Bank needs to carefully examine developments in Japan's economic activity and prices, but I think that particular attention should be paid to whether firms' wage- and price-setting behavior reverts to the past behavior observed when wages and prices did not increase easily.

## D. Firms' Price- and Wage-Setting Behavior in Japan

Now, I would like to look back at some of the changes observed in Japan's corporate behavior in recent years.

First, firms' price-setting behavior has become more active in terms of raising prices, and this trend has been taking root. Dividing the percentage of firms responding in the Tankan that output prices would rise, by the percentage of firms responding that input prices would rise, shows that this value dropped after the bursting of the bubble economy and remained at that level for a long time (Chart 10). Although not precise, this calculation gives a rough idea of how many firms facing higher input prices will raise their output prices. In other words, it shows  how active firms  are  in  terms  of  raising  prices.  From  2022,  however,  this  figure recovered to its previous level and has since remained at a relatively high level. This seems to be because the rise in input prices in recent years was so large that firms had no choice but to raise their output prices and, since numerous firms had to take similar action, the trend of raising output prices began to take root, which changed firms' perceptions and behavior.

Chart 10: Changes in Firms' Price-Setting Behavior

%



Note : Figures are based on the Tankan , and are for all industries and enterprises. There is a discontinuity in the data for December 2003 due to a change in the survey framework.

Source: Bank of Japan.

Next, firms' wage-setting behavior has also become more active. A regression using data from fiscal  1992  through  fiscal  2022 -- with the rate of increase in base pay  as  the  dependent variable and the inflation rate, nominal labor productivity, and medium- to long-term inflation

expectations as explanatory variables -- shows that the actual values of increases in base pay are clearly above the fitted values from fiscal 2023 onward (Chart 11). This suggests that firms' wage-setting behavior has become significantly more active in recent years.

Chart 11: Changes in Firms' Wage-Setting Behavior Base Pay Increase (Actual and Fitted Value)

%



Notes: 1. Figures for CPI inflation are for all items less fresh food, excluding the effects of the consumption tax hikes, etc. Figures for actual base pay increases from fiscal 1992 to 2013 are those published by the Central Labour Relations Commission, while those from fiscal 2014 onward are figures released by Rengo (the figure for fiscal 2025 is from Rengo's fourth aggregate results).

Base pay increase = 0.33 × CPI inflation (t-1) + 0.24 × nominal labor productivity growth (t-1)

2. The base pay regression for the estimation of base pay increases is specified as shown below. The estimation period is from fiscal 1992 to 2022.

+ 0.13 × medium- to long-term inflation expectations (t-1)

Sources: Cabinet Office; Central Labour Relations Commission; Ministry of Internal Affairs and Communications; Rengo; etc.

Unless there is a reversal in the wage- and price-setting behavior of firms, which has changed and has become more active, it is unlikely that underlying CPI inflation, which has been increasing toward the price stability target of 2 percent, will turn downward. Then, how high is  the  risk  of  firms'  wage- and price-setting  behavior reverting to  the  past  behavior? The impact of U.S. tariff policy is highly uncertain, making it difficult to predict precisely, but at this point in time, I take the risk to be low.

First, I expect that, with labor shortages continuing in the future, actual supply capacity will stay below demand, and wages and prices will be under upward pressure. The Bank's estimate of the output gap has been at around 0 percent recently, and this estimate seems likely to be pushed down because firms have been unable to operate their facilities sufficiently due to labor shortages (Chart 12). The high levels of order backlogs for construction and machinery

also suggest that supply capacity has been unable to adequately meet the robust demand for business fixed investment (Chart 13).

## Chart 12: Output Gap

%



inverted, DI (""excessive"" - ""insufficient""), % points

Notes: 1. Figures for the output gap are Bank staff estimates.

Source: Bank of Japan.

2. The Tankan factor utilization index is calculated as the weighted average of the production capacity DI and the employment conditions DI for all industries and enterprises. Capital and labor shares are used as weights. There is a discontinuity in the data for December 2003 due to a change in the survey framework.

Chart 13: Business Fixed Investment



Business Fixed Investment Plans

(

Tankan

)

Order Backlogs



Notes: 1. In the left panel, figures include software and R&amp;D investments and exclude land purchasing expenses. Figures are for all industries including financial institutions.

Sources: Cabinet Office; Ministry of Land, Infrastructure, Transport and Tourism; Bank of Japan.

2. In  the  right  panel,  figures  for  ""construction""  are  based  on  a  survey  of  50  major  construction  companies,  and  calculated  as  the  value  of construction work yet to be executed at the end of the last month of the quarter divided by the average value of construction work executed over the preceding 12 months. Figures for ""machinery"" are calculated as the value of machinery orders yet to be executed at the end of the last month of the quarter divided by the average sales over the preceding three months, and these data are seasonally adjusted.

Second, as firms have become accustomed to raising their prices, they have come to recognize again  the  importance  of  price-setting  strategies. According  to  the  Bank's  survey  of  firms conducted  during  the  period  from  November  2023  to  February  2024,  72  percent  of  the respondents said that they thought it preferable for prices and wages to rise moderately. I believe that, encouraged in part by various support measures by the government, it is highly likely that there will be a sustained shift among firms from management oriented toward costcutting, to management oriented toward growth by creating high added value.

## II. Conduct of Monetary Policy

## A. Future Conduct of Monetary Policy

Now, I would like  to turn to  the  Bank's  conduct of monetary policy. The  Bank  conducts monetary  policy  with  the  aim  of achieving  the  price  stability  target  of  2  percent  in  a sustainable and stable manner. Since the changes in the monetary policy framework made in March 2024, the Bank has returned to conventional monetary policy, employing the guidance of the short-term interest rate as a primary policy tool.

The Bank's outlook for prices is as follows. Underlying CPI inflation is likely to be sluggish for the time being, mainly due to the deceleration in the economy. Thereafter, however, it is expected to increase gradually, since it is projected that a sense of labor shortage will grow as the economic growth rate rises, and that medium- to long-term inflation expectations will rise.  In  the  second  half  of  the  projection  period  presented  in  the  April  2025  Outlook Report -- which covers the period through fiscal 2027 -- underlying CPI inflation is likely to be at a level that is generally consistent with the price stability target. On the other hand, the Bank's outlook for economic activity and prices can be described as provisional, and attention is also warranted on upside risks to prices. In this situation, I believe there is a good possibility that the price stability target will be achieved earlier than expected.

Given that real interest rates -- calculated as the nominal interest rate minus the expected rate of inflation -- are currently at significantly low levels, my basic thinking is that the Bank will analyze the data and various information without preconceptions, and will accordingly raise the policy interest rate and adjust the degree of monetary accommodation in a timely and appropriate manner in line with improvements in economic activity and prices, without haste

or delay. I do not expect uncertainties to be entirely cleared up, but at each Monetary Policy Meeting (MPM), the Bank has to decide the policy interest rate for the intermeeting period. When the likelihood of achieving the price stability target increases or, when upside risks to prices grow, I believe that the Bank may face a situation where it should act decisively, despite heightened uncertainties.

On the other hand, some have voiced the opinion that Japan's policy interest rate has remained under 0.5 percent over the past three decades, and that there is a significant barrier to raising the  rate  higher  than  0.5  percent.  However,  I do  not consider that  there is a barrier  of 0.5 percent for two reasons.

First is the change in the level of the inflation rate. In 2007 and 2008, when the policy interest rate stood at 0.5 percent, the year-on-year rate of increase in the CPI for all items excluding fresh food was at around 0.0 percent and around 1.5 percent, respectively, whereas the rate is slightly above 3.5 percent at present.

Second is the change in the level of lending rates of commercial banks (Chart 14). In 2007

Chart 14: Market Interest Rates and Lending Rates

%



Note : Lending rates indicate average contract interest rates on new loans and discounts of domestically licensed banks (6-month backward moving averages). Figures are yen-denominated loans on the banking book, excluding loans to financial institutions. Source: Bank of Japan.

and 2008, short-term lending rates were in the range of 1.5-1.7 percent, but the rate currently remains low at around 0.7 percent. 4 Interest rate spreads on loans seem likely to be narrowing significantly, but by more than can be explained solely by the decline in credit costs compared with 2007 and 2008. The same can be said for housing loans, for which the borrowing interest rate is still lower than that in 2007 and 2008.

## B. Plan for the Reduction of the Purchase Amount of Japanese Government Bonds

I have talked about the Bank's conduct of monetary policy, and now I would like to touch on the  plan  for  the  reduction  of  the  purchase  amount of Japanese government bonds (JGBs) decided at the June 2025 MPM (Chart 15). At the meeting, the Bank conducted an interim

## Chart 15: Plan for the Reduction of the Purchase Amount of JGBs (June 2025)

1. Long-term interest rates: to be formed in financial markets in principle

In principle, the Bank will reduce the planned amount of its monthly purchases of JGBs each calendar quarter as follows.

2. JGB purchases: appropriate for the Bank to reduce its purchase amount of JGBs in a predictable manner, while allowing enough flexibility to support stability in the JGB markets
2. 
3.  From April-June 2026 to January-March 2027 : about 200 billion yen
4. Until January-March 2026 : about 400 billion yen (the reduction plan decided in July 2024 will be maintained)
5.  The Bank will gradually reduce its purchase amount so that it can improve the functioning of the JGB markets in a manner that supports stability in the markets.

## Amount of monthly JGB purchases

## Reduction in a Predictable Manner





## Allowing Enough Flexibility

2.

In the case of a rapid rise in long-term interest rates, the Bank will make nimble responses by, for example, increasing the amount of JGB purchases.

1. The Bank will conduct an interim assessment of the plan at the June 2026 MPM.
3. The Bank is prepared to amend the plan at the MPMs, if deemed necessary.

assessment of the plan for the reduction in its JGB purchases decided at the July 2024 MPM, and then decided that (1) the Bank will reduce the planned amount of its monthly purchases of JGBs so that it will be about 2 trillion yen in January-March 2027; and (2) the amount will

4 Even omitting the impact of a time lag before a policy interest rate hike affects lending rates, there is a difference in the level of lending rates. The lowest lending rate before the policy interest rate increased to 0.5 percent was 1.3 percent in 2007 and 2008, whereas, in recent years, the rate has been at 0.4 percent.

be cut, in principle, by about 400 billion yen each calendar quarter until January-March 2026, and by about 200 billion yen each calendar quarter from April-June 2026. In addition, a t the June 2026 MPM, the Bank will conduct an interim assessment of the plan for the reduction of its purchase amount of JGBs. In principle, the Bank intends to maintain the plan for the reduction  after  the  assessment,  while  it  may  modify  the  plan  as  appropriate,  if  deemed necessary after reviewing the developments in and functioning of the JGB markets. At the meeting, it will also discuss a guideline for its JGB purchases from April 2027 and announce the results. These decisions were made based on the judgment that it is appropriate for the Bank to reduce its purchase amount of JGBs in a predictable manner, while allowing enough flexibility to support stability in the JGB markets.

At the June 2025 MPM, I voted against the proposal on changing the pace of reduction of JGB purchase amount, considering that there was no need for the Bank to change the pace of reduction in the amount of its monthly outright purchases of JGBs by 400 billion yen. This was because I judged that the Bank should allow long-term interest rates to be determined by the market and its participants, and that the level of amount outstanding of its JGB holdings should be normalized at the earliest possible time. Reducing the purchase amount at the pace decided at the June MPM will require longer time for the Bank to normalize its balance sheet --that  is,  to  reduce  the  amount  outstanding  of  its  JGB  holdings  to  a  level  where  further reductions are no longer necessary. The degree of JGB market functioning has stayed low, albeit having improved, and such aftereffects of the Bank's large-scale monetary easing will likely remain for some time. I therefore believe that, although it will take time, the Bank needs to  proceed  steadily  with  the  normalization  of  its  balance  sheet,  while  closely  monitoring market conditions.

Thank you.",Naoki Tamura
https://www.bis.org/review/r250623m.htm,Michelle W Bowman: Unintended policy shifts and unexpected consequences,"Speech by Ms Michelle W Bowman, Vice Chair for Supervision of the Board of Governors of the Federal Reserve System, at ""Assessing the Effectiveness of Monetary Policy during and after the COVID-19 Pandemic"" 2025 IJCB Research Conference, hosted by the Czech National Bank and the International Journal of Central Banking, Prague, Czech Republic, 23 June 2025.",2025-06-23 00:00:00,"## Michelle W Bowman: Unintended policy shifts and unexpected consequences

Speech by Ms Michelle W Bowman, Vice Chair for Supervision of the Board of Governors of the Federal Reserve System, at ""Assessing the Effectiveness of Monetary Policy during and after the COVID-19 Pandemic"" 2025 IJCB Research Conference, hosted by the Czech National Bank and the International Journal of Central Banking, Prague, Czech Republic, 23 June 2025.

* * *

Thank you for the invitation to join you today. 1   As the Federal Reserve's Vice Chair for Supervision, I am responsible for, among other things, leading the Board's Division of Supervision and Regulation in its work to promote the safe and sound operation of the U.S. banking system. While this includes the specific activities of bank supervision and regulation, the financial system reaches far beyond the banking system. Regulators must also monitor the effects of activities that extend outside this perimeter, for example activities that have migrated from banks to non-banks, or when there are broader market implications of regulatory actions and their potential effects on financial stability. Regulations should not be created in a static world of ""set it and forget it.""

Today, my remarks will focus specifically on how the passage of time-with underlying changes in the composition of the economy and the financial system, interest rate shifts, and patterns and preferences of banking and financial activity-can lead to unintended policy application and unexpected consequences. Regulators should consider these broader evolving dynamics as they craft regulations to endure beyond today's circumstances.

Typically, these effects are not contemplated in the scope of the usual cost-benefit analysis, as shifts occur over time after a new rule or regulation is implemented or enacted. But shifts can, in effect, become new policy choices with consequences that can pose significant issues.

One shift in particular is that of the supplementary leverage ratio increasingly becoming the binding capital constraint for the largest banks in the United States. The U.S. banking system includes two basic types of capital requirements: risk-based requirements that impose a capital ""charge"" based on the underlying risk of a particular activity, and leverage-based requirements that do not differentiate based on the risk characteristics of underlying assets. And while leverage-based capital requirements are generally intended to operate as a backstop to risk-based requirements, changes in the financial system and the broader economy can alter this relationship between capital requirements. This shift in the nature of leverage-based capital requirements, from backstop to binding constraint, was not driven by a deliberate policymaking process, but rather by the maintenance of a high level of reserves in the banking system, as well as the introduction of liquidity requirements that compelled banks to replace loans with high-quality liquid assets. 2

## Monetary Policy and Economic Outlook

Before turning to the main theme of my remarks, I would like to give a brief update on my outlook for the economy and monetary policy.

At the Federal Open Market Committee (FOMC) meeting last week, the Committee voted to maintain the target range for the federal funds rate at 4-1/4 to 4-1/2 percent and to continue to reduce the Federal Reserve's securities holdings. I supported this decision because the data shows a solid labor market and I would like to see further confirmation that inflation is close to our 2 percent target on a sustained basis.

If inflation remains near its current level or continues to move closer to our target, or if the data show signs of weakening in labor market conditions, it would be appropriate to consider lowering the policy rate, moving it closer to a neutral setting.

At this point, we have not seen significant economic impacts from trade developments or other factors, and the U.S. economy has continued to be resilient despite some slowing in economic growth. Private domestic final purchases (PDFP) growth slowed to a moderate pace in the first quarter, even as activity was partly boosted by a pullforward of spending on motor vehicles and high-tech equipment ahead of the implementation of tariffs. Although the pull-forward of spending appears to be unwinding, retail and motor vehicle sales through May provide further evidence that PDFP has softened so far this year.

The labor market appears to remain solid, with payroll employment rising about 140,000 per month, on average, in April and May, only slightly below the average monthly gains over the past two quarters. This pace of job gains appears consistent with the unemployment rate remaining at a low 4.2 percent through May, which is roughly unchanged since the middle of last year.

The labor market appears to be stable near estimates of full employment, with layoffs remaining low. The number of job openings relative to job seekers has moved roughly sideways since the middle of last year at, or a touch below, the pre-pandemic level. And the labor market no longer appears to be especially tight or a significant source of inflation pressures, as most wage growth measures have slowed closer to a pace consistent with 2 percent inflation.

Turning to inflation, we have seen a welcome return to further moderation of personal consumption expenditures (PCE) inflation over the past three months. The May consumer and producer price reports suggest that 12-month core PCE inflation stood at 2.6 percent in May, down meaningfully from its elevated reading of 2.9 percent at the end of last year. Similar to the past two years, elevated monthly inflation readings in January and February have been followed by low readings as we move into the spring.

On a 12-month basis, core PCE goods inflation has picked up somewhat since last December, but this has been more than offset by a considerable slowing in core PCE services inflation. It appears that any upward pressure from higher tariffs on goods prices is being offset by other factors and that the underlying trend in core PCE inflation is moving much closer to our 2 percent target than is currently apparent in the data. With housing services inflation on a sustained downward trajectory, and other core services inflation already consistent with 2 percent inflation, only core goods inflation remains somewhat elevated likely reflecting limited passthrough from tariffs.

With economic growth slowing, it is possible that recent softness in aggregate demand could be starting to translate into weaker labor market conditions. While still strong, the labor market appears to be less dynamic, with modest hiring rates, layoffs edging up from low levels, and job gains concentrated in just a few industries. With inflation on a sustained trajectory toward 2 percent, softness in aggregate demand, and signs of fragility in the labor market, I think that we should put more weight on downside risks to our employment mandate going forward.

Despite progress on lowering inflation, there are potential upside risks if negotiations result in higher tariffs or if firms raise goods prices independent of any tariff passthrough. Although we have not seen evidence of disruptive impacts on supply chains, changes in global trade patterns could lead to an increase in prices for goods and services. The current conflict in the Middle East or other geopolitical tensions could also lead to higher commodity prices.

I am certainly attentive to these inflation risks, but I am not yet seeing a major concern, as some retailers seem unwilling to raise prices for essentials due to high price sensitivity among low-income consumers and as supply chains appear to be largely unaffected so far.

Measures of policy and economic uncertainty have receded from recent highs, and measures of consumer and business sentiment have also improved in recent weeks after having dropped considerably. These developments reinforce my view that concerns will subside as more clarity emerges on trade policy. Businesses appear to be resuming investment and hiring decisions, as they feel increasingly confident that less favorable trade outcomes are unlikely to occur.

I remain focused on how new policies evolve and whether future data releases will provide perspective about their economic impacts. On trade policy, I expect that negotiations will ultimately result in lower tariff rates than are currently in place, consistent with the resumption of financial market optimism. Further, should we see effects on inflation this year, I expect that increased slack in the economy will limit this to a small, one-off impact.

Small and one-off price increases this year should translate only into a small drag on real activity. I also expect that less restrictive regulations, lower business taxes, and a more friendly business environment will likely boost supply and largely offset any negative effects on economic activity and prices.

In considering the risks to achieving our dual mandate, I fully supported the revised characterization of uncertainty and the balance of risks in our most recent monetary policy statement, pointing to the diminished uncertainty and removing the emphasis on risks to both sides of our mandate. In my view, it was appropriate to recognize that the balance of risks has shifted. In fact, the data have not shown clear signs of material impacts from tariffs and other policies. I think it is likely that the impact of tariffs on inflation may take longer, be more delayed, and have a smaller effect than initially expected, especially because many firms front-loaded their stocks of inventories. And, all considered, ongoing progress on trade and tariff negotiations has led to an economic

environment that is now demonstrably less risky. The change in our monetary policy statement appropriately incorporates this shift in the balance of risks as well as the rapid improvement in many measures of uncertainty.

As we think about the path forward, it is time to consider adjusting the policy rate. As inflation has declined or come in below expectations over the past few months, we should recognize that inflation appears to be on a sustained path toward 2 percent and that there will likely be only minimal impacts on overall core PCE inflation from changes to trade policy. We should also recognize that downside risks to our employment mandate could soon become more salient, given recent softness in spending and signs of fragility in the labor market.

Before our next meeting in July, we will have received one additional month of employment and inflation data. If upcoming data show inflation continuing to evolve favorably, with upward pressures remaining limited to goods prices, or if we see signs that softer spending is spilling over into weaker labor market conditions, such developments should be addressed in our policy discussions and reflected in our deliberations. Should inflation pressures remain contained, I would support lowering the policy rate as soon as our next meeting in order to bring it closer to its neutral setting and to sustain a healthy labor market. In the meantime, I will continue to carefully monitor economic conditions as the Administration's policies, the economy, and financial markets continue to evolve.

It is important to note that monetary policy is not on a preset course. At each FOMC meeting, my colleagues and I will make our decisions based on the incoming data and the implications for and risks to the outlook, guided by the Fed's dual-mandate goals of maximum employment and stable prices. I will also continue to meet with a broad range of contacts as I assess the appropriateness of our monetary policy stance.

Bringing inflation in line with our price-stability goal is essential for sustaining a healthy labor market and fostering an economy that works for everyone in the longer run.

## Policy Shifts and Unintended Consequences

In my responsibilities over bank regulation and supervision at the Federal Reserve, I intend to apply a pragmatic approach. We will review data and evidence, identify problems that need to be resolved, and develop efficient solutions to address those identified issues. 3   While the regulatory authority of the Federal Reserve is primarily related to the banking system, the of banking regulation and supervisory consequences efforts are not limited to the banking system. Bank regulation and supervision affect how financial activities are conducted, the cost and availability of credit and financial services, and even what types of entities provide those services. While it is important to consider the consequences of regulatory actions as they evolve over time, in cases where regulation may create or exacerbate financial stability risks, we must examine whether those risks are justified by the safety and soundness benefits of the regulation.

Bank-affiliated broker-dealers play a critical role in U.S. capital markets, including in Treasury market intermediation activities. Today I will discuss the lessons we have learned about how bank regulatory requirements, specifically leverage ratios in the United States, can have unintended consequences. Leverage ratio impacts on bank-

affiliated broker-dealers can have broader impacts, including market impacts like those observed in Treasury market intermediation activities. Once we've identified ""emerging"" unintended consequences-issues that were not contemplated during the development of a regulatory approach-we must consider how to revisit earlier regulatory and policy decisions.

As I will discuss in greater detail shortly, regulators must act quickly to address the growing problems with increasingly binding leverage ratios. In 2021, in connection with the expiration of temporary, emergency changes to the supplementary leverage ratio (SLR), the Federal Reserve committed to ""soon"" inviting public comment on potential modifications. 4   Over four years later, a proposal has not been issued, and problems with Treasury market intermediation continue to emerge. The time has come for the federal banking agencies to revisit leverage ratios and their impacts on the Treasury markets.

## Looking at the Data: Treasury Market Functioning

As a first step in this pragmatic approach, it is important to look at what the data says about Treasury market functioning. This is a necessary first step before we determine whether there are issues or problems that can be addressed through adjustments to bank regulatory requirements.

A review of Treasury market data provides a history of growing issues with Treasury market functioning. In recent years, U.S. policy debates have highlighted the need to take preventative measures to ensure smooth market functioning. One issue that continues to persist is low levels of Treasury market liquidity as the Board's semiannual noted. In addition, some dealers experienced balance sheet Financial Stability Report 5 pressure in intermediating record volumes of Treasury market transactions in the spring, at a time when reports from market participants also indicated reduced demand from other Treasury investors. 6

A survey of market participants from the Fed's most recent Financial Stability Report noted that more than a quarter of respondents cited Treasury market functioning as a risk to the U.S. financial system and the broader global economy. This was an increase from the same survey conducted last fall when 17 percent of those surveyed cited Treasury market functioning as a risk. 7

Recent changes to Treasury market clearing activities from the Securities and Exchange Commission's central clearing requirement for U.S. Treasuries were implemented to improve Treasury market functioning. Once fully implemented, these changes may improve market functioning. The Federal Reserve's Standing Repo Facility may also help to promote smooth functioning in the Treasury market. But it is unclear how the ongoing increases in the volume of Treasury issuance, the volume of Treasury securities outstanding, and changes to the Fed's balance sheet over time, may also affect market liquidity.

Treasury markets have experienced stress events as recently as the September 2019 repo market stress, and the so-called ""dash for cash"" in March of 2020. In early April, we also saw strains in Treasury cash markets. Although markets continued to function,

there were unexpected moves in Treasury yields, with an initial drop in yields followed by a sharp increase that seems to have been driven in part by the unwinding of the swap spread trade by leveraged investors in response to declining swap spreads.

We do not know exactly what circumstances may lead to a future stress event or how it will manifest, and continuing to impose unwarranted limits on dealers' intermediation capacity could exacerbate a future stress event in this critical market. But we do know that these events have raised concerns about the resilience of U.S. Treasury markets. Therefore, we should continue to actively monitor indicators of market functioning. Recent trends in both market liquidity indicators and survey responses suggest that this problem has persisted and may be becoming more severe. Low liquidity can create more volatility in prices, exacerbate the effects of market shocks, and threaten market functioning.

## Identifying the Problem: Looking Beyond Treasury Market Intermediation

Large bank-affiliated primary dealers play a vital role in the intermediation of U.S. Treasury markets. These dealers are subject to, not insulated from, the effect of banking regulation. While many factors can affect market liquidity, including the growing volume of Treasury issuance, Treasury market saturation, and interest rate volatility, we must consider whether some of the pressure is a byproduct of bank regulation. Due to the role of large banks in the intermediation of Treasury markets, there is a direct link between banking regulation and Treasury market liquidity, particularly when it comes to the growth of ""safe"" assets in the banking system and the increase in leverage-based capital requirements becoming the binding capital constraint on some large banks. In 2018, the Federal Reserve along with the Office of the Comptroller of the Currency (OCC) proposed significant changes to the enhanced supplementary leverage ratio (eSLR) that applies to the largest banks. 8   These revisions were never finalized, but the intent behind them was to return the eSLR to its traditional role as a backstop capital requirement instead of what has become a substantial balance sheet constraint.

The proposed change was designed to promote resilience in the banking system and to protect financial stability, while also maximizing credit availability and economic growth throughout the credit cycle. 9   During the COVID-19 pandemic, the Federal Reserve addressed constraints on the ability of U.S. banks to support efficient Treasury market functioning by temporarily excluding Fed reserves and Treasuries from the denominator of the SLR. 10

The central role of bank-affiliated broker-dealers in Treasury market intermediation has led us to take a close look at bank regulatory requirements to clarify how these requirements, particularly their calibration, may impact Treasury market functioning. Although designed to address low risk activities, like Treasury market intermediation, leverage ratios have become increasingly binding as a bank capital constraint as market conditions change.

While issues around the use of leverage ratios require close examination, a solid capital foundation in the banking system is critical to support safety and soundness and financial stability. Revisiting the calibration of leverage ratios to ensure that they remain

backstops instead of creating binding constraints, especially in times of stress, should not be interpreted as a critique of the role of capital in a robust regulatory and supervisory framework.

But to be clear, the of an overly restrictive leverage ratio go well beyond consequences just Treasury market intermediation, and impact a wide range of low-risk activities. Leverage capital requirements do not differentiate between the risk of different asset classes or exposures.

However, in periods when bank balance sheets are expanding-like the significant deposit inflows during COVID-19-leverage capital requirements can unintentionally become the binding constraint on both banks and their affiliates. This increases the amount of required capital as bank balance sheets grow, regardless of the underlying risk. When constrained in this way, bank-affiliated primary dealers may pull back on the market intermediation of low-risk assets like U.S. Treasuries. A binding leverage capital requirement can create perverse incentives for banks to shift their balance sheets into higher risk assets, since doing so could generate larger returns without requiring additional capital. This is simply a cause and effect of overly restrictive leverage capital.

The fact of leverage ratios becoming increasingly binding is evident in simple metrics like the ratio of risk-weighted assets to total leverage exposure. These are, respectively, the denominators of risk-based capital ratios and the SLR. Shortly after the SLR was adopted in the U.S. in the mid-2010s, this ratio stood at 48 percent in the aggregate for the eight largest U.S. banks, the global systemically important banks (G-SIBs). Since then, the ratio of risk-weighted assets to total leverage exposure has declined and currently stands at 40 percent, primarily due to higher reserves and other types of highquality liquid assets on bank balance sheets. This downward trend results in the SLR increasingly becoming the binding constraint and reflects banks' growing holdings of high-quality liquid assets, most of which carry a risk weight of zero under risk-based capital ratios but have a 100 percent weighting under capital ratios. leverage

## Efficient Solutions

One example of the SLR's unintended consequence is the erosion of liquidity in U.S. Treasury markets because it is driven, in part, by leverage ratio requirements increasingly becoming the binding constraints on the largest U.S. banks. This example also illustrates the necessity of evaluating tradeoffs in regulation and speaks to a larger issue with the calibration of leverage.

The banking regulators are uniquely positioned to both analyze and remediate components of the bank regulatory framework that may disrupt banks' participation in low-risk, but economically critical activities. This includes the exacerbation of Treasury market illiquidity. Treasury markets play a critical role in the U.S. and global financial systems, and we should be proactive in addressing the unintended consequences of bank regulation, while ensuring the framework continues to promote safety, soundness, and financial stability. 11   We should start by addressing potential constraints on Treasury market functioning before issues arise, lessening impacts from stress, and mitigating the need to intervene in future market events.

On Wednesday, the Board is scheduled to consider specific amendments to the eSLR, which is the requirement that applies at both the holding company and bank levels of the largest U.S. banks. While I do not want to front-run the proposal, I will note that the proposal's goal is to address a long-identified-and growing-problem with the calibration of this leverage requirement. The proposal would solicit public comment on the impacts of this miscalibration, potential fixes, and work to develop an appropriate and effective solution. This proposal takes a first step toward what I view as long overdue follow-up to review and reform what have become distorted capital requirements. This proposal, while meaningful, addresses only one element of the capital framework. More work on capital requirements remains, especially to consider how they have evolved and whether changes in market conditions have revealed issues that should be addressed.

In a few weeks, on July 22, the Federal Reserve will host a conference to bring together a wide range of thought leaders to discuss the U.S. bank capital framework, including the design and calibration of leverage ratios. Fixing the design and calibration of leverage capital requirements will not resolve every issue with U.S. Treasury market functioning. But, simple reforms to return leverage ratio requirements to their traditional role as a capital backstop could improve Treasury market functioning by building resilience in advance of future stress events. And this could reduce the chances that we would need to intervene in Treasury markets should a future stress event arise. While we know well the issues created by the eSLR, there are many potential improvements that could address other issues within the capital framework.

As I have noted previously, a broader set of reforms could include amending not only the leverage capital ratio, but also G-SIB surcharge requirements. We should also reconsider capital requirements for a wider range of banks, including the SLR's application to banks with more than $250 billion in assets, Tier 1 leverage requirements, and the calibration of the community bank leverage ratio.

The unintended shift over time in the eSLR increasingly becoming a binding capital constraint demonstrates that we need to think about regulatory policies in a dynamic way based on the evolution in the banking and financial systems, and the broader economy.

Other examples of regulations that must take into account the impact of economic growth and inflation include elements of the G-SIB surcharge, as well as regulatory thresholds that define the broader categories of banks. Thresholds like the $10 billion definition of a ""community bank"" and the $700 billion in total assets and $75 billion for cross-jurisdictional activity separating Category II and III banks determine which regulatory requirements apply to each group.

One way to prevent the original calibration from becoming divorced from the foundational policy decisions over time is to index the relevant G-SIB surcharge coefficients and regulatory thresholds to nominal gross domestic product. While approaches like indexing thresholds and requirements can make our regulations more robust and durable over time, we should also acknowledge the essential role of supervision as a tool to promote safety and soundness, and financial stability. Just as our capital requirements are intended to operate in a complementary manner, so do regulation and supervision act in a complementary way.

These are only a handful of relevant examples, but they are representative of an effective approach to regulatory reform. Regulations should not be created in a static world of ""set it and forget it."" The economy evolves over time, as do the banking and financial systems and the needs of businesses and consumers.

Increasingly, regulators are expected to conduct a more thorough and detailed analysis as part of the ordinary rulemaking process, which includes a proposal's costs and benefits. Yet, over time, we tend to devote fewer resources to the work of conducting maintenance of our regulations. Maintenance of the regulatory system should include reviewing the basis for earlier policy decisions, considering whether the policies embedded in regulations have been distorted over time through market developments, and examining whether emerging issues in the market should lead to further review and revision.

## Closing Thoughts

Thank you for the opportunity to join you today and to provide my views on the U.S. economic outlook and current regulatory proposals. In the United States, regulatory policy objectives are prescribed by law, and bank regulators focus primarily on promoting the safe and sound operation of U.S. banks, and financial stability. Despite this limited purpose, we must understand the consequences of regulations, which can extend well beyond the banking system. Recent trends-including providing more factbased and analytical support for proposals-are a positive step in achieving responsible regulation.

But we need a broad commitment to follow the approach I have just described. We must consider relevant data and information, identify the source of any problems or opportunity for greater efficiency, and then develop targeted and effective policy solutions and approaches.

1  The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.

- 2  See 12 CFR 249.3; 249.20 (defining categories of high-quality liquid assets based on asset characteristics).
- 3  See Michelle W. Bowman, ""Taking a Fresh Look at Supervision and Regulation (PDF)
- ,"" (speech at the Georgetown University McDonough School of Business, Psaros Center for Financial Markets Policy, Washington, D.C., June 6, 2025).
- 4  Board of Governors of the Federal Reserve System, ""Federal Reserve Board Announces that the Temporary Change to its Supplementary Leverage Ratio (SLR) for Bank Holding Companies Will Expire as Scheduled on March 31,"" press release, March 19, 2021, (""To ensure that the SLR-which was established in 2014 as an additional capital requirement-remains effective in an environment of higher reserves, the Board will soon be inviting public comment on several potential SLR modifications. The

proposal and comments will contribute to ongoing discussions with the Department of the Treasury and other regulators on future work to ensure the resiliency of the Treasury market."").

- 5  See Board of Governors of the Federal Reserve System,  Financial Stability Report (PDF)  (Washington, D.C., April 2025), 10-11.
- 6  Board of Governors, , at 32. Financial Stability Report
- 7  See Board of Governors, , at 3. Financial Stability Report
- 8  See Office of the Comptroller of the Currency and Federal Reserve System (2018), ""Regulatory Capital Rules: Regulatory Capital, Enhanced Supplementary Leverage Ratio Standards for U.S. Global Systemically Important Bank Holding Companies and Certain of Their Subsidiary Insured Depository Institutions; Total Loss-Absorbing Capacity Requirements for U.S. Global Systemically Important Bank Holding Companies,"" vol. 83 (April 19), pp. 17317-27. Federal Register,
- 9  See Office of the Comptroller of the Currency and Federal Reserve System (2018), ""II. Revisions to the Enhanced Supplementary Leverage Ratio Standards,"" Federal , vol. 83 (April 19), p. 17319, paragraph 3: ""Leverage capital requirements Register should generally act as a backstop to the risk-based requirements. If a leverage ratio is calibrated at a level that makes it generally a binding constraint through the economic and credit cycle, it can create incentives for firms to reduce participation in or increase costs for low-risk, low-return businesses.""
- 10  See, for example, Federal Reserve System (2020), ""Temporary Exclusion of U.S. Treasury Securities and Deposits at Federal Reserve Banks from the Supplementary ,"" vol. 85, (April 14), pp. 20578-79. Leverage Ratio (PDF) Federal Register,
- 11  For more information, see the press release in note 4 indicating that the Board would seek comment on changes to the SLR.",Michelle W Bowman
https://www.bis.org/review/r250623f.htm,Ida Wolden Bache: Policy rate reduced,"Introductory statement by Ms Ida Wolden Bache, Governor of Norges Bank (Central Bank of Norway), at the press conference following Norway's announcement of the policy rate, Oslo, 19 June 2025.",2025-06-19 00:00:00,"## Ida Wolden Bache: Policy rate reduced

Introductory statement by Ms Ida Wolden Bache, Governor of Norges Bank (Central Bank of Norway), at the press conference following Norway's announcement of the policy rate, Oslo, 19 June 2025.

* * *

Presentation accompanying the speech

Chart 1: Policy rate reduced to 4.25 percent

The Monetary Policy and Financial Stability Committee decided to reduce the policy rate by 0.25 percentage point to 4.25 percent. The economic outlook is uncertain, but if the economy evolves broadly as currently projected, the policy rate will be reduced further in the course of 2025.

Norges Bank is tasked with keeping inflation low and stable. The operational target is inflation of close to 2 percent over time. We are also mandated to help keep employment as high as possible and to promote economic stability.

We raised the policy rate sharply to tackle high inflation, and the policy rate has been held at 4.5 percent since December 2023. The tightening of monetary policy has contributed to cooling down the economy and to dampening inflation. The job of bringing inflation back to target is not done, but it is the Committee's view that the time has come to ease monetary policy somewhat.

In March, when we last presented forecasts, we signalled that the policy rate would most likely be reduced in the course of 2025. Since that time, inflation has slowed, and excluding energy prices, inflation has been lower than expected. At the same time, the inflation outlook for the coming year indicates that inflation will be lower than projected in March.

The Committee judges that a cautious normalisation of the policy rate will pave the way for inflation to return to target without restricting the economy more than necessary.

Chart 2: Cautious normalisation of the policy rate

The policy rate forecast presented is little changed compared with the policy rate path in March but is a little lower in the near term and a little higher further out.

With the current policy rate path, the average residential mortgage rate is projected to decrease from the current rate of 5.6 percent to 4.6 percent in 2028. In other words, we do not foresee a marked decline in interest rates or a decrease in interest rates back to the levels seen in the decade prior to the pandemic.

Let me say a bit more about the background for the decision and the Committee's assessments.

Chart 3: Inflation has slowed

After slowing through last year, inflation increased unexpectedly in the first few months of this year. This was one of the main reasons we did not reduce the policy rate at the monetary policy meeting in March, unlike what we had previously indicated.

Since then, inflation has moved down. CPI inflation was 3.0 percent in May. Excluding energy prices, which can fluctuate widely, inflation was a little lower and lower than we had expected.

While imported goods inflation is low, overall inflation is now being driven mainly by the rise in prices for domestically produced and services. There has been a marked increase in wage growth in recent years. The high growth in business costs will slow the process of disinflation ahead. It appears that wage growth will be markedly lower in 2025 than in 2024. We expect lower wage growth to help push down inflation further out.

## Chart 4: Sustained activity in the Norwegian economy

Activity in the Norwegian economy appears to be holding up well. Our Regional Network contacts report that growth has picked up since summer last year. After weak growth through last year, household consumption has increased so far this year. Housing investment, which fell markedly in recent years, has also picked up a little. Employment has increased in recent years, but unemployment has increased from a low level. Since March, unemployment has increased a bit more and been slightly higher than we had envisaged. This may indicate that there is a little more spare capacity in the economy than we assumed in March.

## Chart 5: International picture fraught with uncertainties

The military strikes in the Middle East the past week and significant changes in US policy have intensified the uncertainty surrounding the outlook. Higher tariff rates have weakened the economic growth outlook for our main trading partners. The effect of higher tariffs on economic growth in Norway appears to be limited. Norges Bank's Regional Network contacts report increased uncertainty owing to the trade conflicts, but only a few expect that to have a large impact on activity ahead.

Higher tariff rates pull inflation in different directions. The inflation outlook for Norway indicates slightly lower inflation. In the wake of the tariff increases, a number of commodity prices have fallen, which will likely reduce the rise in prices for imported intermediate goods.

US policy changes have led to bouts of financial market volatility. The krone exchange rate depreciated during the market turbulence in April but has since appreciated again and been stronger in the past week than we projected in March. After the publication of the monetary policy decision today, the krone weakened somewhat, as we had also assumed in our analyses.

Chart 6: Inflation down to target without a large rise in unemployment

With the current policy rate path, unemployment is expected to increase a little, to about pre-pandemic levels. Inflation is projected to slow to around 2 percent in 2028. Wages are expected to rise faster than prices ahead, and combined with a gradual decline in interest rates, most people will see their purchasing power increase.

Economic forecasts are always uncertain, and the degree of uncertainty is now greater than normal. An escalation of the conflict in the Middle East and trade policy uncertainty may lead to renewed turbulence in financial markets and could affect the growth outlook for both the global and Norwegian economy.

If the economy takes a different path than currently envisaged, the policy rate path may be adjusted. But our objectives stand firm. We will finish the job and ensure that inflation is brought all the way back to 2 percent.",Ida Wolden Bache
https://www.bis.org/review/r250630a.htm, Andrew Bailey: The UK economy in an unpredictable world,"Speech by Mr Andrew Bailey, Governor of the Bank of England, at the British Chamber of Commerce's Global Annual Conference, London, 26 June 2025.",2025-06-26 00:00:00,"## Andrew Bailey: The UK economy in an unpredictable world

Speech by Mr Andrew Bailey, Governor of the Bank of England, at the British Chamber of Commerce's Global Annual Conference, London, 26 June 2025.

* * *

There is a lot going on in the world around us. Escalation of the conflict in the Middle East drove up energy prices in the past few weeks but in the last few days they have come back down again. Global trade policies remain unpredictable. These are things that weigh on the global economy.

Elevated global uncertainty affects UK businesses too. We have heard that clearly through the Bank's Agents - and I have heard it when I talk to business leaders from across the country. Expectations for export sales have softened, investment decisions have been delayed, and supply chains adjusted - though on investment the messages delivered by the Prime Minister from this stage a few hours ago are positive and welcome news.

While I am on the subject of world developments, I visited Kyiv last Friday at the invitation of the Ukrainian National Bank. The experience was humbling. The moral case is clear: as a nation, Ukraine has the right to determine its own future. And that is what Russia does not accept. I strongly agree with successive UK Governments that we must give our full support to Ukraine on this. The strands of history run deep here, and it is our security that is at stake too. The moral argument is unassailable.

But there is more to the story for the UK economy then global events, and for the Monetary Policy Committee's decisions on interest rates. It is the wider developments in the domestic UK economy that matter, and that is what I will focus on today.

I will start with some background of relevance for the theme of this conference, before turning to the outlook for activity, inflation and monetary policy.

That background, I'm afraid, is one of slowing potential growth in the UK economy in recent decades. By Bank staff estimates, average annual growth rates in potential supply in the UK economy was above 2‰% in the years from 1990 and up to the global financial crisis. In the decade after the financial crisis, it halved to around 1…%. This is not a very good start to the story, although of course history does not dictate what happens in the future.

Slower potential supply growth reduces the rate at which economic activity can expand without generating inflationary pressures. Monetary policy has to respect this constraint; a temptation to boost growth by stimulating demand in an environment where supply is constrained would be both ineffective and counterproductive. Achieving price stability, by contrast, creates the environment that is supportive for sustainable growth.

Raising the potential growth rate of the economy is one of the most important challenges facing us as a society today. 1   It is the only source of sustainable improvements to the standard of living. And it is key to addressing other big challenges

we face - dealing with an ageing society, enhancing our defence capabilities, and responding to climate change. To do so we need to harness new technologies, invest in new skills in the labour force and build new trading relationships with the outside world.

Artificial Intelligence has the potential to be the next General Purpose Technology - like for example electricity before it - and could catalyse innovation and growth across the economy. That is an opportunity we must not miss.

Innovative and outward-looking UK businesses are essential to those efforts. After all, that is where the growth will come from. I am encouraged by the entrepreneurial spirit I meet as I travel with the Bank's Agents to visit companies and talk to business leaders. You never quite know what to expect on these visits, whether it is AI-supported street sweepers, quantum computing in space, or a business idea that appealed to me - how to get bikes onto the top of cars more easily to transport them. And it is encouraging to see business leaders from across the UK come together at this conference to seek practical, forward-looking solutions. I would like to thank you, Shevaun, and the British Chambers of Commerce for the leadership you provide.

Growth also requires strong institutions and public policies to provide a supportive environment. I welcome the Government's strong commitment to growth and its initiatives to strengthen the UK's relations to our trade partners. The Prime Minister's messages this morning were very positive and welcome news, setting out a course that can unleash further investments that will make a real difference to the UK economy.

The Bank of England has a role to play too, with our strong commitment to monetary and financial stability. These are important foundations for growth and prosperity.

So let me turn to the outlook for activity, inflation and monetary policy as we see it today.

The UK economy grew by 1.1% in 2024 when compared to 2023 overall, and by 1.5% when comparing the fourth quarter of 2024 with the fourth quarter of 2023. And while growth was weak in the second half of last year, it had a strong start to 2025 with 0.7% quarterly growth reported for the first quarter in the ONS's First Estimate. This is a bit stronger than we had expected in our May Monetary Policy Report - and by itself would raise the prospect that growth could turn out a bit stronger than we had been expecting in the second quarter too. So far so good.

But there are a couple of reasons why we think the UK economy will grow at a more moderate pace over the coming quarters.

First, the unexpected strength in the first quarter was driven by strong outcomes for volatile components of GDP in the monthly figures for March. This was possibly a result of front-loading of activity ahead of increases in Stamp Duty Land tax and Vehicle Exercise Duty, and with a temporary boost to trade ahead of the imposition of new tariffs on exports to the United States. Consistent with this, monthly GDP contracted by 0.3% in April.

Second, looking at the expenditure components of GDP, while business investment was strong in the first quarter, businesses tell us that heightened uncertainty and a weak demand outlook are weighing on investment intentions. That could point to slower

investment over coming months - although how it pans out remains to be seen, and again I was encouraged by what the Prime Minister had to say earlier. And, while real household incomes have risen quite strongly, consumption has not followed suit. The household savings rate, in other words, has gone up - and to quite a high level compared to past experience. We have not seen evidence yet to indicate any decline in the saving rate, with the implications that carries for consumption.

We should not be too surprised about this. Monetary policy remains restrictive to ensure that past inflationary pressures are squeezed out, with higher interest rates incentivising saving over consumption. And households are likely to smooth through rises in their real incomes following previous increases in the cost of living. This is consistent with what respondents to our annual household survey have told us. In our most recent survey from March, 27% say that higher interest rates was a reason why they had saved more than usual over the past year, and just over one-third reported having rebuilt their buffer of savings for a rainy day.

The labour market has been very tight in the past few years. But we are now seeing signs that conditions are easing. Employment growth is subdued, and several indicators of labour demand and hiring intentions have softened. Real time data from HMRC suggest that the number of payrolled employees fell by 0.4% in the three months to May, and have now fallen in each of the last 7 months, with a contraction of more than 100,000 people on the month. These data are often revised in later vintages, but surveybased measures and intelligence from the Bank's Agents corroborate the pattern of continued loosening.

That takes me to pay. We watch this very carefully. Wage growth remains an important factor behind the remaining persistence in services price inflation in particular. A sustainable disinflation in the UK economy after the big shocks we have faced relies on a normalisation of wage growth to levels consistent with the 2% inflation target.

This process still has some way to go. Annual private sector regular average weekly earnings (AWE) growth was 5.1% in the three months to April, down from 5.9% in the three months to January, having risen in the second half of last year. That said, AWE measures are reducing much as we have been expecting, and momentum in the latest data has softened. The latest data on pay settlements and pay expectations point to a significant decline in wage growth in the year ahead. The latest intelligence from the Bank's Agents continue to suggest average pay settlements for 2025 of 3.5 to 4.0%, closer to levels consistent with the inflation target.

What we are ultimately concerned about is the extent to which easing pay pressures feed through to consumer price inflation. So let me turn to inflation.

Headline CPI inflation fell sharply through 2023 and into 2024, before reaching the 2% target towards the middle of last year. This year inflation has taken a step up again, to 3.4% in the latest data for May, and we expect it to remain around 3.5% at least into the Autumn before returning to back towards our 2% target next year.

Against the backdrop of a continued gradual easing of price pressures in the UK economy, thanks to the restrictive stance of monetary policy, this increase in CPI inflation has owed largely to increases in energy prices and other regulated and

administered prices, such as water bills and Vehicle Excise Duty. Household energy prices contributed around a quarter of a percentage point to headline CPI inflation in May, and other regulated and administered prices added a little under half a percentage point.

The important point is that these price increases are not directly linked to underlying cost pressures in the UK economy - to the balance between aggregate demand and aggregate supply - in a way that would clearly require a monetary policy response. We should not expect them to persist. And we do not expect that they will rekindle domestic inflationary pressures via new second-round effects as we saw it after the big global shocks that drove inflation up to much higher levels in 2021 and 2022.

A key difference to that episode is that - as I have just described - conditions in the UK labour market are very different now compared to the very tight labour market we had then.

But we should recognise that this short-term pick-up in inflation introduces some further uncertainty into the near-term outlook for inflation. So we have to monitor very closely how this plays out. Some of the regulated and administrative prices could change again. And we have to ensure that second-round effects do not take hold.

Also on our watch list is food price inflation, which has risen materially, from 3.0% to 4.4% in May. The prices of meat, chocolate and non-alcoholic drinks have gone up the most, consistent with higher wholesale prices for beef, cocoa beans and coffee. These price increases are to an extent idiosyncratic, with reports of reductions in cattle herds and climate-related disruptions to coffee and cocoa production. But our Agency intelligence also highlights labour costs and costs related to new packaging regulation as wider factors at play. And, like energy prices, food prices are salient to consumers. We have to make sure that these increases do not feed through to second-round effects either. Although they have fallen back in the latest data, household inflation expectations have been increasing somewhat recently and remain at the upper end of the range that we would normally expect given the level of headline inflation.

As we look ahead, however, it is not least the evolution of services price inflation that will determine headline inflation - and service price inflation, more than goods price inflation, is affected by costs pressures in the UK economy, including pay. The overall picture here is that services price inflation is coming down gradually. But services price inflation remains elevated, at 4.7% in the latest data for May. We need to see disinflation continue - and that easing pay pressures feed through to consumer prices.

I will add a short remark on the increase in employer National Insurance Contributions. There are a number of ways this increase in the cost of employment could play out: it could be absorbed by firms, either in lower profit margins or through productivity improvements; it could be passed on to customers through higher prices; it could be reflected in lower wages; or it could lead firms to reduce employment. When we ask businesses, they tend to tick all the boxes. That is understandable. Firms' margins are the first to adjust. But I am beginning to hear a bit more evidence of adjustments through pay and employment.

With moderate growth and a softer labour market, a wider margin of slack in the UK economy will support continued disinflation in the domestic economy and a gradual return of headline inflation to the 2% target as we look beyond the near-term increase. In recent months, the evidence that slack is opening up has strengthened, especially in the labour market. But there remain uncertainties around the overall balance between supply and demand in the economy as well as the remaining inflation persistence in the system.

In the May Monetary Policy Report, we presented two scenarios to illustrate this. In one scenario, there could be weaker supply and more persistence in domestic wages and prices, including from second-round effects related to the near-term increase in CPI inflation and structural changes in the labour market. In another scenario, inflationary pressures could ease more quickly owing to greater or longer-lasting weakness in demand relative to supply, in part reflecting uncertainties globally and domestically. The mechanisms underlying both these scenarios remain relevant to our deliberations on the MPC, set alongside our broader assessment of risks.

And global risks are of course among them, including but not restricted to trade policy. Global uncertainty remains elevated. So while the direct impact from trade policies on world output may be smaller than we might have feared, the uncertainty associated with it nevertheless continues to have an impact on the UK economy. There have been significant moves in the oil price following the escalation of the conflict in the Middle East, although not always in the direction we may intuitively have expected. That only goes to show the unpredictability of events in the world today.

Overall, while the significant progress we have made on disinflation has allowed us to cut Bank Rate, we retain a restrictive monetary policy stance to squeeze out remaining persistence in inflationary pressures. There remain two-sided risks to inflation. Given the outlook, and continued disinflation, a gradual and careful approach to the further withdrawal of monetary policy restraint remains appropriate. Interest rates remain on a gradual downward path. But monetary policy is not on a pre-set path - and at the June meeting, there was not a strong enough case to cut Bank Rate.

As we meet for our August meeting in a few weeks' time, we will assess the situation afresh. Monetary policy needs to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term has dissipated further.

In an unpredictable world, low and stable inflation matters more than ever, because that - alongside the supportive initiatives being pursued by the Government - enables businesses and households to plan ahead and invest, a key foundation for sustainable growth in the UK economy.

Low and stable inflation is the best contribution monetary policy can make to growth and prosperity in the United Kingdom.

Thank you.

I would like to thank Hassana Babangida, Sarah Breeden, Julia Giese, Karen Jude, Huw Pill, Dave Ramsden, Andrea Rosen, Victoria Saporta, Martin Seneca, Michal Stelmach, James Talbot and James Walkington for their comments and help in the preparation of these remarks.

1  See  Growth: What does it take in today's world? - Lecture by Andrew Bailey | Bank of England",Andrew Bailey
https://www.bis.org/review/r250623d.htm,José Luis Escrivá: Navigating complexity - legitimacy and accountability in modern central banking,"Speech by Mr José Luis Escrivá, Governor of the Bank of Spain, at the International Legal Conference, hosted by the Bank of Spain, Madrid, 19 June 2025.",2025-06-19 00:00:00,"## JosØ Luis EscrivÆ: Navigating complexity - legitimacy and accountability in modern central banking

Speech by Mr JosØ Luis EscrivÆ, Governor of the Bank of Spain, at the International Legal Conference, hosted by the Bank of Spain, Madrid, 19 June 2025.

* * *

Good afternoon, distinguished guests, colleagues and friends,

It is a pleasure to be here with so many esteemed professionals-legal experts, academics, and central banking colleagues-gathered to reflect on the legal foundations that underpin our financial systems.

Let me begin by thanking the Minister for the Presidency, Justice, and Parliamentary Relations for his presence and thoughtful remarks. His reflections on the challenges facing the judicial system remind us that strong institutions, whether judicial or financial, are essential to the protection of citizens' rights and the proper functioning of a market economy.

Your presence here today, representing over forty institutions, sends a powerful message: that effective central banking does not rest solely on economic models or technical tools. It rests on sound, legal and institutional frameworks that provide the legitimacy, stability, and clarity necessary for central banks to fulfill their mandates in a complex and evolving world.

And yet, despite their importance, these frameworks are often overlooked. The legal architecture that underpins our financial systems tends to operate in the backgroundquiet, but essential. It is only when it is tested-in a crisis situation for example-that we are reminded of its central role. It is precisely this legal and institutional architecture that enables central banks and supervisors to act with both authority and legitimacy.

Legitimacy is the cornerstone of central bank independence. And the first lesson in this regard is clear: the legitimacy of an independent central bank ultimately rests on its ability to fulfil its mandate effectively. Trust is not granted in the abstract; it is earned through the consistent delivery of results-especially in preserving price stability, supporting financial stability, and more generally, operating with professionalism and discipline. When a central bank demonstrates such effectiveness, its independence is not only justified, but reinforced.

But mandate fulfilment alone is not enough. Legitimacy is closely tied to accountability. An institution's credibility grows when its powers are clearly understood, exercised transparently and subject to proper oversight. Without accountability, independence can appear opaque or unbounded. Without legitimacy, even the most technically sound decisions may struggle to gain public acceptance.

This brings me to the conversation we heard this morning-a rich and timely discussion on accountability. I would like to build on that by offering a perspective on how central banks, as independent institutions with evolving responsibilities, are adapting to the

challenges posed by growing complexity, the internationalization of our functions, and raising public expectations for transparency-and what all of this means for our legitimacy.

At Banco de Espaæa, we have seen firsthand how our role has evolved-both in scope and in visibility. Over the past two decades, we have undergone a profound transformation. In response to successive crises- from the global financial crisis to the pandemic, now to a more fragmented geopolitical landscape, and the different extreme climate change events- central banks have seen their mandates expand, their tools diversify, and their operating environments become more global and interconnected.

This transformation has enhanced our ability to manage multifaceted risks. But it has also introduced new tensions into our institutional model. Independence, once clearly anchored in a narrow price stability mandate, must now coexist with broader responsibilities. And with that broader remit come heightened demands for transparency, accountability and public engagement.

This brings us to a central challenge of modern central banking: the more complex our institutions become, the more essential it is that our actions remain firmly rooted in law. Our interpretation of our mandates must be rigorous, disciplined, and transparent. This is not just a matter of principle, it is a practical necessity for sustaining public trust and ensuring the long-term effectiveness of our decisions.

Let me elaborate. Today's central banks are no longer the institutions of the 1990s. We now operate across multiple policy domains: monetary policy, macroprudential and microprudential supervision, financial stability, payments infrastructure, resolution planning, and increasingly, areas such as climate change and digital transformation.

This multidisciplinary character brings both opportunities and challenges. It allows us to take a more holistic view of the financial system. But it also raises important questions about internal coherence, the balance between synergies and conflicts of interest, and how to ensure that each function serves the public interest without undermining the others.

As our internal structure becomes more complex, so does the risk of fragmentation or blurred lines of responsibility. Some functions require strict separation-what we often call ""Chinese walls""-while others benefit from integration. Striking the right balance is an ongoing task, requiring careful governance and robust operational frameworks. If complexity is not well managed, it can lead to inefficiency-or worse, erode legitimacy.

At the same time, our work has become increasingly international. Financial regulation, monetary policy, and the supervision of cross-border institutions are no longer purely national tasks. They require constant engagement with supranational bodies, peer institutions, and international legal frameworks. This internationalization enriches our perspective, but it also complicates the lines of accountability. Citizens and parliaments expect answers from national authorities, even when decisions are shaped by global negotiations.

In this context, institutional design matters. Today we are joined by many colleagues from Latin America. In contrast to the model of separate supervision that prevails in

much of the region, Banco de Espaæa integrates multiple functions under one roof. This multifunctionality, while complex, also offers advantages. Everything we do relates to banks-and the more perspectives we have on them, the better we can fulfill our responsibilities.

But multifunctionality also demands clarity. It requires us to be explicit about how decisions are made, how responsibilities are allocated, and how potential conflicts are managed. It requires us to be transparent not only in our outcomes, but in our processes.

Still, as academic literature reminds us, independent institutions with delegated powers can face a legitimacy deficit- especially when they stretch their mandates too far. As responsibilities expand, so too does the temptation to reinterpret existing mandates to cover new ground.

That temptation must be resisted.

In this context, two imperatives stand out.

First, a rigorous and narrow interpretation of our legal mandates. Central banks cannot take up the responsibilities of other institutions. As a non-elected body, we do not have the political mandate, or the full range of instruments required. Our primary objective must remain price stability. Other objectives-however important-must ultimately be pursued by those with democratic legitimacy to do so. It is for society to decide, through its political processes, how to prioritize and pursue them. In democratic societies, impartial institutions must exercise their delegated powers under clearly defined limits. We must constantly ask ourselves not only what we can do, but also and importantly, what we are entitled and expected to do. Our legitimacy depends on staying within the bounds of the legal frameworks that define us.

Second, a renewed and deeper commitment to accountability. We must explain our decisions not only in technical terms, but in ways that are intelligible, clear and relevant to the public. This goes beyond formal reporting to parliaments or publishing decisions. It requires fostering a culture of openness, clarity, and constructive engagement. It means explaining what we do, why we do it, what the limits of our competence are, and what consequences of our actions are likely to produce.

This effort becomes even more important in times of uncertainty. And uncertainty, as we all know, is the defining condition of our times. We are living through a moment of deep structural change in the global economy, from technological disruption and demographic change to geopolitical instability and the reconfiguration of global value chains.

These shifts are difficult to model, let alone predict. They generate shocks that are hard to classify and often require real-time judgment calls. In such a context, preserving independence requires a consistent, transparent and disciplined application of our mandates.

At Banco de Espaæa, we are aware of this responsibility. That is why the Governing Council has launched an external review of our Law of Autonomy from 1994. This law

was designed to align Spain's central bank with the requirements of the European System of Central Banks, granting it operational independence in monetary policy.

The current review effort assesses whether this legal framework remains fit for purpose. It will allow us to identify areas where reform may be needed to meet today's challenges.

We have also set up an Independent Evaluation Office, which underscores our commitment to excellence, ensuring that Banco de Espaæa not only adheres to rigorous internal evaluation procedures but also embrace external evaluations to improve our efficiency, take advantage of the possible synergies and maintain the highest standards of operational quality.

In parallel, under our Strategic Plan 2030, we are undertaking a comprehensive transformation of our organisational structures and operational processes. This transformation aims to transform deeply how we work, how we collaborate, and how we deliver public value.

One of the key pillars of this transformation is the move towards project-based work, which in our view enables greater flexibility, responsiveness and cross-functional collaboration. By moving away from rigid departmental silos, we are fostering a more integrated approach to problem-solving-one that encourages synergies across disciplines and promotes a shared sense of purpose.

Technology plays a central role in this process. We are investing in AI, expanding the use of data-driven analysis, and enhancing our supercomputing capabilities through a strategic partnership with the Barcelona Supercomputing Center. These tools will help us process vast amounts of information more efficiently, improve forecasting, and support evidence-based policymaking.

We are also deepening our focus on talent management. We are expanding training programmes, supporting internal mobility, and designing career paths that reflect the new skillsets demanded by a modern central bank. Our goal is to empower our staff to grow professionally while contributing to the institution's mission in meaningful ways.

Ultimately, these reforms are about more than internal efficiency. They are about reinforcing the legitimacy of Banco de Espaæa in the eyes of the public. In an era of rapid change and heightened scrutiny, we must demonstrate not only that we are capable, but that we are accountable, transparent, and committed to serving society.

Let me conclude with a simple but essential message: in an era of growing uncertainty, complexity and rising public expectations, the credibility of central banks will depend not only on what we do, but on how we do it.

To meet this scrutiny without compromising our effectiveness, we must reinforce our institutional self-discipline-through clear mandates, strong internal processes, a proper oversight, both internally and externally, and a deep culture of openness and transparency.

As we navigate this uncertain landscape, let us remain anchored in the principles that have long guided us: legal certainty, institutional discipline, and commitment to public service. These are not just the foundations of good governance-they are the foundations of public trust.

And in the end, trust is our most valuable asset. Let us earn it-every day, through every decision, with humility, transparency, and purpose.

Thank you.",Jose Luis Escrivá
https://www.bis.org/review/r250625k.htm,Anna Breman: Daring to think differently - on the Riksbank's monetary policy communication,"Speech by Ms Anna Breman, First Deputy Governor of the Sveriges Riksbank, at the Centre for Central Banking Studies, Bank of England,London, 25 June 2025.",2025-06-25 00:00:00,"SPEECH

DATE:

25 June 2025

SPEAKER:

First Deputy Governor Anna Breman

VENUE:

Centre for Central Banking Studies, Bank of England, London

## Daring to think differently -on the Riksbank ' s monetary policy communication *

Thank you for inviting me to this conference focusing on transforming monetary policy, and asking how we should think about uncertainty and risks. It is indeed an important topic in today's turbulent times.

Central banks often say that economic developments are uncertain or highly uncertain. This has definitely applied during the last five years. During that short time, we have experienced a pandemic, Russia's illegal invasion of Ukraine and the sharpest global inflation spike in decades. Added to this we now have escalating geopolitical conflicts and increased trade barriers. The new challenge is that the economic policy uncertainty in the world has increased (Figure 1) and that central banks need to take this into consideration.

Whether global disruptions will continue to be as common in the future, we cannot know. But there are nevertheless good reasons to be prepared for the fact that monetary policy may need to be conducted and communicated in a politically and economically more uncertain world in the future.

Central banks can do little about the uncertainty in the global economic and political environment in which they operate. Central banks shall, however, represent stability when other things are unsteady, not least through the task of

*  Speech at the conference ' Transforming Monetary Policy: How should we think about uncertainty and risks? ' , organised by the Centre for Central Banking Studies, Bank of England. I would like to thank Mikael Apel and Charlie Nilsson for excellent help with the speech, Carl Andreas Claussen, Charlotta Edler, Mattias Erlandsson, Jens Iversen, Caroline Jungner, Ann-Leena Mikiver, Åsa Olli Segendorf, Maria Sjödin, Ulf Söderström and Anders Vredin for valuable comments, and Elizabeth Nilsson for an excellent English translation.

Telephone: +46-(0)8-787 00 00, Website: riksbank.se



keeping inflation low and stable. 1 What we as policymakers can do is reduce uncertainty among households, firms and market participants about how the central bank assesses the situation, what key trade-offs it believes it faces, what risks it sees, and what it judges to be the most reasonable monetary policy path forward -in other words, to be as transparent as possible. The Riksbank often ranks highly in surveys of central bank transparency, which I am proud of. 2

In particular, it is the combination of three components in our communication that sets us apart from many central banks -where, if you like, we have dared to think a little differently and pushed transparency a little further. More specifically, we publish:

- a policy rate forecast
- alternative scenarios, and
- attributed minutes from the monetary policy meetings.

I intend to give you a review of our experiences with these three communication tools, hoping that it may provide some useful perspectives following the Bernanke review.

## Transparency facilitates communication and accountability

Being transparent is not always easy. Being transparent is not always easy. A high degree of transparency means showing forecasts that may need to be substantially revised later on, and exposing nuances across committee members that may be seen as division within a committee. One concern is that this in turn reduces the confidence that households, firms and market participants have in the central bank, making both monetary policy and its communication more difficult. I believe that this concern is exaggerated and that transparency is a facilitator, not least in turbulent times.

The Riksbank began publishing a forecast for its policy rate in 2007. In the same year, we started to include the names of the Board members with their contributions to the discussion in the minutes of the monetary policy meetings. Once you have a forecast for the policy rate, it is natural to start analysing alternative scenarios as well. We have therefore been using scenarios in our internal work and in our communication more or less since then. We have used

1  This role has also been increasingly emphasised by central bankers around the world, see, for example, Macklem (2025), Mann (2025) and Cippolone (2025).

2  See, for instance, Dincer, Eichengreen and Geraats (2022).

them both to illustrate what the expected consequences would be of a slightly different monetary policy than the one we intended to conduct in our main scenario, and to illustrate how policy would change if developments in the economy were to be different from what we had expected. Since 2023, scenarios have been a central and integral part of our Monetary Policy Report.

Transparency is important for accountability to the principal, in the Riksbank ' s case the Riksdag, the Swedish parliament. Transparency also serves the function of making it easier for households, businesses and markets to understand and predict how the central bank will react in different situations.

Before I turn to the Riksbank ' s experiences of the three communication tools it is worth emphasising that central banks are all different. Their mandates are different, monetary policy committees differ in size and structure, as do the processes by which a monetary policy is developed. This means that what works well for one central bank may not work as well, or even at all, for another. I shall return to this.

## The Riksbank's policy rate path -a forecast, not a promise

The Riksbank is one of few central banks that publishes a forecast for its policy rate that all or a majority of the Executive Board supports. Norges Bank and the Reserve Bank of New Zealand also publish policy rate forecasts, and the Federal Reserve gives an indication of how the policy rate will develop through its 'dot plots'. 3

In contrast, many central banks publish forecasts for other key variables, usually inflation and various measures of the real economy, such as GDP and unemployment. These forecasts are based on the central bank pursuing a particular monetary policy. In 2007, the Riksbank decided to both produce its own forecast for the interest and to communicate this forecast externally, and not just the forecasts for inflation and the real economy that this monetary policy is expected to result in. 4 We wanted to show that the entire forecast is consistent and saw few reasons to omit a forecast that we make anyway, and for such a

3  In a recommendation to the Federal Reserve, Ben Bernanke (2025) suggests that the Fed should start publishing a quarterly Economic Review, forecasting key macro variables, including the policy rate. The forecast would be ' owned ' by the staff, but could be based on input and comments from FOMC members.

4  One alternative, which the Riksbank applied prior to the changeover to our own policy rate forecast, is that forecasts for inflation and the real economy are based on the policies that the market expects the central bank to pursue, as measured by financial market pricing.

central variable. An evaluation we conducted after ten years also concluded that internal analytical work had improved with the introduction of a policy rate path. 5

From the point of view of accountability, it is also an advantage if it is clear what judgements the central bank has made on each occasion. An important part of ongoing monetary policy assessments is to examine whether interest rate forecasts appear reasonable on the basis of the information available at the time of the decision.

What possible reason could there be for not publishing an interest rate forecast, especially if one publishes forecasts for other variables? One may be that, as I mentioned earlier, central banks may have an institutional set-up that makes this more complicated. For example, some countries ' monetary policy committees have a number of members with their own economic secretariats that produce data and forecasts. This applies, for example, to the members of the Federal Reserve ' s Federal Open Market Committee from the various district banks. 6

Another reason may be the fear that the forecast will not be perceived as a forecast, but as a promise of the policy that will be conducted. If economic agents interpret it in this way, they may make decisions based on the published policy rate path in the belief that it will apply now and in the future. If conditions then change, as they almost always do, then monetary policy needs to change. The central bank may then be criticised for having 'tricked people'.

It is therefore crucial that it is made clear that the policy rate path is indeed a forecast - and that the transparency applies to the forecast, not the policy going forward. The latter is simply very difficult to be transparent about far in advance. The fact that the interest rate forecast is a 'forecast and not a promise' has been something of a mantra in the Riksbank ' s communication over the years.

This leads to a related potential problem with publishing an interest rate forecast, namely that the forecast is almost never accurate. As I have already mentioned, this in itself is not particularly remarkable. Monetary policy usually aims to bring inflation back to target within a reasonable time after a deviation. The forecast for inflation is therefore almost always that it will end up close to the target at some point within the forecast horizon. However, as the economy is constantly hit by various shocks, the policy rate path that is expected to produce this inflation trend

5  Sveriges Riksbank (2017).

6  However, see the recommendation and suggestion by Bernanke (2025) on how the Federal Reserve can still publish an interest rate forecast.

will need to be changed more or less constantly. The fact that interest rate forecasts are not seldom wrong is therefore 'a feature, not a bug'.

If you plot the interest rate forecasts over time, the results can sometimes be quite spectacular. In the years before the pandemic, it was quite common for a chart like the one below to be published in, for example, market newsletters, often with the head line 'the Riksbank hedgehog' or 'the rikshog' (Figure 2, left).

It is important to analyse the systematics in the forecasting errors. But the market ' s own interest rate expectations also follow a similar pattern (Figure 2, right). This is not because the market passively accepts the Riksbank ' s forecasts. It may well have a slightly different view of what monetary policy the Riksbank will pursue -as has often been the case -and this would then be reflected in market pricing. But the fact that both the Riksbank and the market often make roughly the same systematic forecasting errors may indicate that the uncertainty has tended to lead to a follow-the-leader behaviour where no one wants to stand out.

While it would have been desirable for the forecasts to be more closely aligned with actual outcomes and less systematically inaccurate, I think these figures are still a pretty good illustration of the quote usually attributed to John Maynard Keynes: 'When the facts change, I change my mind - what do you do, sir?'.

An important message here is that it is natural that interest rate forecasts turn out to be wrong, and that there is no drama in this. We have not found that this has affected public confidence in our ability to fulfil our mandate. The fact that we actually change our policy when circumstances change can be regarded as a sign that we take our mission seriously. Households, firms and market participants realise that it would be much worse if we did not adjust our policy, but instead strictly followed a policy rate path that was for some reason fixed once and for all, and which over time would lead to constantly worsening policy.

Evaluation of the impact of the policy rate on market pricing shows that there is a high degree of alignment in the short run, but less so in the longer run (Figure 3). It is, however, difficult to assess causality as market participants react in advance of a monetary policy meeting, often anticipating when a rate hike or rate cut will be delivered, even if it was not fully forecasted in the policy rate path. This is an example of market participants understanding the central bank reaction function.

It is of course important to continuously evaluate the effectiveness of monetary policy communication and be prepared to make changes. Recently, we made an important change in the communication of the policy rate path. Starting with the Monetary Policy Report in March 2024, the Riksbank began to communicate the forecast for the policy rate in a new way that clarifies the difference in how the Executive Board views the forecast for the policy rate in the near future and the

forecast for the longer term. The uncertainty of the forecast naturally increases in line with the forecast horizon, as the likelihood of new shocks hitting the economy increases.

In the section of the Monetary Policy Report that discusses the monetary policy deliberations, we focus on the Executive Board ' s assessment of the policy rate over the next three quarters (see Figure 4). As there is more information about economic developments in the near future, the Executive Board can forecast the near-term monetary policy decisions with greater certainty. The longer term policy rate path (three years ahead), which is also published, should rather be seen as a technical input to the long-term economic projections.

## Scenarios are important -even if you can ' t predict the unpredictable

A further advantage of a policy rate forecast is that it makes it easier to work with alternative scenarios, as it is a natural reference point for such scenarios. The combination of an interest rate forecast and alternative scenarios helps to emphasise that the forecast is indeed a forecast and not a promise.

Working with scenarios has become particularly important in recent years, when major disruptions have proven to be able to change conditions quickly and significantly. This is a conclusion that more and more people seem to be drawing. In his assessment of the Bank of England ' s forecasting process and related processes, Ben Bernanke advocated an expanded use of alternative scenarios, as a way of facilitating comparisons of possible policy options and making it easier to illustrate risks in the forecast. 7

As I noted earlier, alternative scenarios have been a tool in the Riksbank ' s internal analysis and external communication for about as long as we have published a policy rate path, that is, since 2007. 8 Until 2015, scenarios were described in a separate chapter. When we reviewed the design of the Monetary Policy Report, we subsequently switched to including scenarios when we wanted to specifically emphasise particular risks and uncertainties. In an environment of large and frequent macroeconomic shocks, there is an increasing need to be able to illustrate alternative paths for the economy. Starting with the April 2023

7  Bernanke (2024). The Bank of England has also started to introduce scenarios more in its communication, see for example Lombardelli (2025a). Bernanke (2025) also recommends that the Federal Reserve includes alternative scenarios and their implications in the proposed new quarterly Economic Review.

8  Leeper (2003) recommended early on that the Riksbank should start using alternative scenarios, in an evaluation of the Inflation Reports as they were then called.

Monetary Policy Report, we routinely present alternative numerical paths for inflation, GDP and the policy rate in each Monetary Policy Report. 9

The exact form that the scenarios should take is not obvious. They do not necessarily have to be quantified. The important thing is that they give a good picture of a development that central banks believe could occur and indicate how monetary policy will be conducted in such a case -that they tell a fairly detailed story.

Working with scenarios has its challenges. One purpose of alternative scenarios is to prepare households, firms and market participants for the fact that developments may be significantly different from the main scenario of the forecast. But the scenarios can only reflect known risks - you cannot predict the unpredictable. For example, at the end of 2019, no one probably considered including a scenario where a pandemic would suddenly break out. Similarly, by the end of 2021, few people were likely to consider analysing the economic impact in a scenario where Russia would attack Ukraine. But like most things, it is a matter of degrees and nuances, and with careful analysis and a certain amount of imagination, it is often possible to construct scenarios that are quite different from the main scenario.

Sometimes it even becomes inevitable to use scenarios when communicating monetary policy. For example, in its April Monetary Policy Report, the Bank of Canada chose not to present any main scenario at all, but instead two possible scenarios for future developments. 10 The reason was the uncertainty surrounding US tariff policy - what tariffs will ultimately apply and for how long, the extent of the retaliation by Canada and other countries, and what future trade negotiations could result in.

It may be worth emphasising that alternative scenarios for the policy rate, to the extent that they are quantified, are no more a promise of the policy that will be pursued in different situations than the policy rate path in the main scenario. It is unlikely that an alternative scenario will look exactly as it is described in advance, as there are always other things happening that also need to be taken into account.

9 The Account of Monetary Policy 2022 (Sveriges Riksbank, 2023) contains a section entitled 'Lessons from the upturn in inflation in 2022', in which one conclusion is that alternative scenarios should be integrated to a greater extent into the monetary policy strategy and communication. Increased use of scenarios was also a recommendation in the 2022 evaluation of monetary policy by Hassler et al. (2023).

10  Bank of Canada (2025). During the pandemic, the great uncertainty meant that the Riksbank also initially chose to publish alternative scenarios and no main scenario.

We have a clear example of this in the Riksbank ' s Monetary Policy Report from December last year. At that time, an alternative scenario was that inflation would rise towards 3 per cent (see Figure 5). It was based on the assumption that geopolitical concerns would increase further in the context of the trade conflict, leading to rising commodity prices and increased protectionism. We did not see this scenario as particularly likely, but at the beginning of the year inflation still rose to just below 3 per cent. 11 At the time, some observers wondered whether we should not raise interest rates in line with this scenario. But there was little evidence of the kind of indirect disruptions and secondary effects on which the scenario was based. Also, the higher inflation was largely the result of basket effects in the calculation of the CPI basket. We therefore chose not to react to the higher inflation.

To summarise, my assessment is that it will become increasingly common for scenarios to play a role in monetary policy communication. This is, of course, particularly true if the global macroeconomic environment continues to be characterised by large and frequent shocks. Scenarios become a natural way for the central bank to analyse and communicate different risks. 12 And, as is the case with most other communication tools, the more central banks use them, the more economic agents will become accustomed to and familiar with alternative scenarios.

The alternative scenarios also help the Board members discuss the nuances and differences in their views on the economic outlook. As far as the Riksbank is concerned, these are shown in the individual statements by the various members in the monetary policy minutes.

## Names in the minutes also increase transparency

In June 2007, the Riksbank started to record in the minutes of the monetary policy meetings who had said what. This is still unusual in the central banking world. To my knowledge, the only central bank that also includes names in its minutes is the Czech National Bank, which started doing so in 2020. 13

11  Inflation measured by the CPIF target variable amounted to 2.9 per cent in February and to 3 per cent excluding energy prices.

12  It is also possible that the use of scenarios and the internal discussion around them can reduce the risk of groupthink, where the Monetary Policy Committee becomes fixated on a single scenario. I discuss the risk of groupthink in Breman (2024).

13 Filáček and Kokešová Matějková (2022) report on the Czech National Bank' s experience of publishing names in the minutes. These are positive and similar to those of the Riksbank.

The Riksbank ' s research shows that the most notable effect has been that members take greater pains to explain their positions in detail. 14 This has led to an increase in the average length of the minutes (see Figure 6). However, this does not reflect that the discussion itself has become more extensive; on average, the contributions are longer but fewer. 15

It has also led to Board members referring more often to their own previous contributions and judgements, which was of course possible even when the minutes were anonymous. This could possibly be seen as an expression of Board members feeling greater responsibility for their stances over time, and changing their minds only if they have a good and well-founded justification for doing so. 16 This will make monetary policy more consistent and probably more predictable. A possible disadvantage could be if members stick too long to a view they have previously expressed.

My assessment is that the advantages outweigh the disadvantages, mainly because everyone can see how all the members have reasoned, what considerations they have made and what motives they emphasise. Outside observers can then decide for themselves how reasonable they think the arguments are.

The monetary policy decision is the end result of a several-week long analysis and thought process, with interaction between the Executive Board and the staff, and between the Executive Board members themselves. My impression is that this way of arriving at a monetary policy decision is far from unique to the Riksbank. It is probably more the rule than the exception that the members of most central banks have decided how to vote at some point during this process, even before the monetary policy meeting. To provide more insight into the previous policy process, the Riksbank ' s minutes contain a brief summary of the discussions during the preparatory meetings. It should also be emphasised that the Riksbank ' s

14  See Apel et al. (2025). One circumstance worth bearing in mind here is that we also began publishing the interest rate forecast in 2007. While it is reasonable to assume that the incentive for members to explain their individual positions in detail increased when their names started to be printed in the minutes, discussions on the interest rate forecast may also have contributed to the speeches and minutes becoming longer.

15 Former Executive Board member Martin Flodén describes it as follows: 'The fact that the minutes are published in this way has meant that we Executive Board members carefully prepare our contributions. There is therefore rarely any spontaneous exchange of views at the meeting. The important discussions and exchanges of views tend to take place instead at a number of meetings between the Executive Board and Riksbank employees in the weeks prior to the monetary policy meeting.' (Flodén, 2024). Another former Executive Board member Lars E.O. Svensson has described it in a similar way: 'The discussion at the final monetary policy meeting, which leads to the minutes with names in them, does not start from scratch, but is a culmination and summary of these meetings. Therefore, one would not expect too much spontaneity but rather the presentation of the essential summaries and the reasons for the decision by each member.' (Svensson, 2009, p. 27).

16  See Flodén (2024).

principal, the Riksdag, is satisfied with this arrangement from the point of view of the possibility of holding the Riksbank accountable.

Whether the names of the members should appear in the monetary policy minutes is probably a choice that the central bank can often make itself. Compared with publishing a representative policy rate forecast, this is likely to be less dependent on the institutional set-up. But the fact that so few central banks have chosen to publish the names in the minutes suggests that they fear there are some problems associated with this. It may be, for instance, that the central bank generally recognises the value of 'speaking with one voice' and believes that it would only add to uncertainty and confusion if individual, identifiable members were to detail their personal views on various issues - especially if they differ from those of the majority. Here I can only note that this is not something that the Riksbank has experienced as a problem, and that economic agents regard it as completely normal.

Of course, I can only account for the Riksbank ' s experiences during the almost eighteen years that we have included names in the minutes. In my view, this has increased the transparency of the judgements made by different members of the Executive Board on different issues, and this in turn has made it easier for households, firms and market participants to understand both the policies we are pursuing and how they might change. The media also routinely report on the discussion in the minutes. The minutes of the meetings are now regarded as one of the Riksbank ' s natural communication tools.

## Transparency builds trust

Let me summarise by emphasising three main points.

Firstly, in my experience, we build trust among both market participants and the general public by being transparent. The Riksbank ' s strategy of publishing a forecast for the policy rate, alternative scenarios and attributed minutes creates an understanding of monetary policy, and of the often difficult trade-offs it faces. Such an understanding increases confidence in monetary policy, rather than reducing it, which in turn makes the policy easier to conduct.

Secondly, 'one size does not fit all'. Central banks are different. These differences may have historical, political or cultural reasons. How transparent a central bank is, and can be, is not just a matter of its own ambitions or those of its principals. It also involves factors such as the design of the monetary policy framework and the composition of its Monetary Policy Committee. The fact that the Riksbank can be so transparent is explained not only by the fact that we have the ambition to be

so, but also by the fact that we have good conditions to be so. 17 Nevertheless, I believe that one should strive to attain the highest possible degree of transparency and, above all, that it should not be abstained from because of fears that something bad might happen if ' too much is revealed ' .

Third, of the three communication tools I have discussed, the use of alternative scenarios is the least dependent on the institutional set-up. Any central bank that presents forecasts, whether quantified or merely described in words, can also present scenarios of what might happen if events occur that prevent the main scenario from being realised. As I have already mentioned, this is something that I think more and more central banks will do, especially if the economic policy uncertainty we are experiencing today continues.

The theme of this conference is how we should think about uncertainty and risk. As I stated earlier, central banks cannot do much about the uncertainty in the global economic and political environment in which they operate. If this should prove to remain as turbulent in the future, the best thing central banks can do is to contribute to stability by trying to fulfil their mandate. I believe that a high degree of transparency is something that facilitates that work.

## References

Apel, Mikael, Marianna Blix Grimaldi, Lars Ahrenberg, Daniel Holmer and Arne Jönsson (2025), 'The effect of increased transparency on an individualistic monetary policy committee', forthcoming working paper, Sveriges Riksbank.

Bank of Canada (2025), Monetary Policy Report -April 2025 .

Bernanke, Ben S. (2024), 'Forecasting for monetary policy making and communication at the Bank of England: a review', Bank of England.

Bernanke, Ben S. (2025), 'Improving Fed Communications: A Proposal', Hutchins Center Working Paper #102, Hutchins Center on Fiscal &amp; Monetary Policy, Brookings Institution.

17  The Riksbank is a relatively small central bank. Everyone involved in the policy process works in the same building, the Executive Board is relatively small - five people, the members are full -time employees and individually accountable and they are involved in the process more or less from the start. There is an almost continuous dialogue on the economic outlook, forecasts, risks and considerations in a series of meetings throughout the process. This arrangement is probably a prerequisite for publishing a Monetary Policy Report in connection with the interest rate decision, with forecasts for the policy rate and other variables that are supported by a majority of the members of the Riksbank ' s Executive Board. For a description of the Riksbank ' s policy process, see Sjödin (2022).

Breman, Anna (2024), ' Monetary policy decisionmaking', speech at Lund University, 30 May, https://www.riksbank.se/globalassets/media/tal/engelska/breman/2024/tal-30maj-2024-breman-eng.pdf

Cippolone, Piero (2025), 'Navigating a fractured horizon: risks and policy options in a fragmenting world', speech at the conference 'Policy challenges in a fragmenting world: Global trade, exchange rates, and capital flow', Frankfurt am Main, 29 April.

Dincer, N. Nergiz, Barry Eichengreen and Petra Geraats (2022), 'Trends in Monetary Policy Transparency: Further Updates', International Journal of Central Banking 18, No. 1, pp. 331- 348.

Filáček, Jan and Lucie Kokešová Matějková (2022), 'Disclosing Dissent in Monetary Policy Committees', Research and Policy Notes 2/2022, Czech National Bank.

Flodén, Martin (2024), ""Communicating future monetary policy"", speech at Nordea, Stockholm, 17 April, Sveriges Riksbank.

Hassler, John, Per Krusell and Anna Seim (2023), 'Evaluation of monetary policy 2022' (only in Swedish), Report from the Riksdag 2022/23:RFR5.

Leeper, Eric (2003), 'An Inflation Reports Report', NBER Working Paper 10089.

Lombardelli, Clare (2025a), 'What if things are different?', speech at the Bank of England Watchers Conference, London, 12 May.

Lombardelli, Clare (2025b), ""Central bank communications and uncertainty"", speech at the Second Thomas Laubach Research Conference, Federal Reserve Board, Washington DC, United States, 16 May.

Macklem, Tiff (2025), 'Navigating tariff uncertainty', speech Calgary Economic Development, Calgary, Alberta, Canada, 20 March.

Mann, Catherine L. (2025), 'Holding the anchor in turbulent waters', speech at the conference ""35 years of flexible inflation targeting: Opportunities and challenges' at the Reserve Bank of New Zealand', Wellington, New Zeeland, 6 March.

Sjödin, Maria (2022), 'The path to a monetary policy decision', Economic Commentary No. 3 2022, Sveriges Riksbank.

Svensson, Lars E. O. (2009), 'Transparency under flexible inflation targeting: experiences and challenges', Economic Review, 1/2009 Sveriges Riksbank.

Sveriges Riksbank (2017b), 'The Riksbank's experiences of publishing repo rate forecasts', Riksbank studies, June 2017.

Sveriges Riksbank (2023), Account of monetary policy 2022 .

Figure 1. Economic Policy Uncertainty Index



Note. Refers to the whole world. The index is based on mentions of economic policy uncertainty in newspaper articles. The global measure is a GDP weighted average of national indices. These indices are standardised so that 100 corresponds to the average of mentions in the period 1997-2015.

Source: Economic Policy Uncertainty.

Figure 2. The Riksbank's forecasts and market expectations of the policy rate Per cent



Note. Market expectations refer to expectations according to forward pricing the day prior to the monetary policy meeting. Quarterly data.

Source: The Riksbank.

## Figure 3. Difference between t he Riksbank's forecast and market expectations of the policy rate

Percentage point differences



Note. Differences between the Riksbank's forecast for the policy rate and market -based expectations of the policy rate according to forward pricing at each monetary policy meeting during 2008-2025. Market expectations refer to expectations according to forward pricing the day prior to the monetary policy meeting, and have been converted to quarterly data. Differences in the 1- and 2-year horizon are moving averages of the past three observations, and differences in the 3-year horizon are moving averages of the past 6 observations.

Source: The Riksbank.

Figure 4. Policy rate forecast in the long and short term

Per cent



Note. From the Monetary Policy Report in March 2025. Solid line refers to outcome and dashed/dotted lines represent the Riksbank's forecast. Outcomes for the policy rate are daily data and the forecasts refer to quarterly averages. The upper image shows the forecast for the policy rate in the short run and is based on the long-term policy rate path in the lower left figure. The dotted line illustrates the fact that the forecast for the policy rate in the longer run is very uncertain.

Sources: Statistics Sweden and the Riksbank.

## Figure 5. The Riksbank's scenarios for inflation and the policy rate

Annual percentage change (left) and per cent (right)



Note. Scenarios from the Monetary Policy Report in December 2024. Solid line refers to outcomes, and stretches to the first quarter of 2025. Inflation refers to the CPIF. Quarterly data.

Sources: Statistics Sweden and the Riksbank.

## Figure 6. Number of sentences in the minutes

Number



Note. Data in the paper only cover the period 2000-2018.

Source: Apel et al. (2025).",Anna Breman
https://www.bis.org/review/r250625d.htm,"Michael S Barr: Opening remarks - ""Fed Listens""","Speech by Mr Michael S Barr, Member of the Board of Governors of the Federal Reserve System, at a Fed Listens event, hosted by the Federal Reserve Bank of Kansas City, Omaha, Nebraska, 24 June 2025.",2025-06-24 00:00:00,"## Michael S Barr: Opening remarks - ""Fed Listens""

Speech by Mr Michael S Barr, Member of the Board of Governors of the Federal Reserve System, at a  Fed Listens event, hosted by the Federal Reserve Bank of Kansas City, Omaha, Nebraska, 24 June 2025.

* * *

Thank you, President Schmid, and thank you to the Federal Reserve Bank of Kansas City for hosting this event. 1   The Federal Reserve, with its system of 12 distinct regional Federal Reserve Banks and the Board of Governors in Washington, D.C., was designed to ensure that monetary policy was a national decision with input from all parts of the country. The work of the District Reserve Banks, and events like this one, make sure that a wide range of views can inform President Schmid, me, Federal Reserve Chair Jerome Powell, and all of our colleagues on the Federal Open Market Committee (FOMC) as we come together in Washington to set monetary policy.

Let me spend just a moment on the economy and the outlook. The economy is currently on a sound footing, with low and steady unemployment, and disinflation having continued at a gradual, albeit uneven, pace toward our 2 percent target. Looking forward, however, I expect inflation to rise due to tariffs. Higher short-term inflation expectations, supply chain adjustments, and second-round effects may cause some inflation persistence. At the same time, tariffs may cause the economy to slow and unemployment to rise. There is still considerable uncertainty about tariff policies and their effects. Monetary policy is well positioned to allow us to wait and see how economic conditions unfold.

The broad objectives of monetary policy are clear and have been mandated by Congress-maximum employment and stable prices. Our strategy for getting there is laid out in the Fed's policy framework, which we plan to update later this year. And setting that strategy to reach our goals is informed by outreach like the session today.

Monetary policy decisions affect everyone. Stable prices are important for families and businesses to be able to plan for the future, and for sustainable and healthy labor markets. When we get it right, we can help foster broad and inclusive employment gains that benefit the American people. Our decisions play a role, for example, in the prices for agricultural commodities that are particularly important for businesses and consumers in this region. These decisions affect the labor market, including the challenges that businesses can face in finding qualified workers, which I know is a bigger issue in Nebraska, with lower unemployment than in some other places. But the Federal Reserve's role is a limited one-most of what affects the economy are the individual decisions of households and businesses.

The primary tool for monetary policy is short-term interest rates, which in turn can affect longer-term rates that you, your customers, and people in your communities pay to finance land and equipment and other inputs. Credit has always played a particularly important role in agriculture, so I know that interest rates matter a lot in this part of America. Let me emphasize that real-world rates are significantly affected by other forces in the economy, but Fed policy does play a role.

Monetary policy sometimes requires tradeoffs-a stance of policy that is necessary to lower inflation, for example, may also lower aggregate demand and slow the economy. Crucial in balancing our economic goals is determining how policy decisions affect households and businesses, which is why we are here to listen to you.

Businesses also have to balance their goals. Producers need to judge the strength of demand for their products and services, the trend in costs for their inputs, and the expected future costs for credit. These and other factors affect how businesses see tradeoffs as they make decisions about expanding operations and hiring. Workers need to balance their prospects for their wages keeping up with inflation or whether it's worth moving to find a better job. Your experience, and the experiences of your customers and the other people you serve, is an important input into the strategy the Fed will decide on for our long-term monetary policy framework.

We are going to consider everything we've learned in the past five eventful years since we last updated our framework, and we have learned a lot. But we can't do it without you, because you are who we serve. And so, since listening requires that one stop talking, I am going to wrap up by thanking everyone from the Omaha area and across the 10th District for agreeing to be part of today's gathering. I look forward to hearing what you have to say.

1  The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.",Michael S Barr
https://www.bis.org/review/r250630e.htm,Pan Gongsheng: A few observations on global financial governance,"Keynote speech by Mr Pan Gongsheng, Governor of the People's Bank of China, at the 16th Lujiazui Forum ""Financial openness, cooperation, and high-quality development amid global economic changes, Shanghai, 18 June 2025.",2025-06-18 00:00:00,"## Pan Gongsheng: A few observations on global financial governance

Keynote speech by Mr Pan Gongsheng, Governor of the People's Bank of China, at the 16th Lujiazui Forum ""Financial openness, cooperation, and high-quality development amid global economic changes, Shanghai, 18 June 2025.

* * *

Distinguished Party Secretary Chen Jining,

Former PBOC Governor Zhou Xiaochuan,

Mayor Gong Zheng, Deputy Director Wang Jiang, Minister Li Yunze, Chairman Wu Qing, Vice Minister Hu Haifeng, Administrator Zhu Hexin, and dear guests,

Good morning!

I would like to thank Shanghai Municipal Committee of the CPC and Shanghai Municipal People's Government, especially Party Secretary Chen Jining and Mayor Gong Zheng. Thank you for your care and support for the financial work and the People's Bank of China (PBOC). It is a great honor for me to be the co-chairperson of this year's Lujiazui Forum. After years of efforts, the Forum has grown into a communication platform with significant global influence and wide market reach. On behalf of the PBOC and other hosts, I would like to express warm welcome and sincere gratitude to everyone.

At last year's Forum, I discussed China's monetary policy stance and the evolution of monetary policy framework down the road. Over the past year, the PBOC has adopted an accommodative monetary policy stance and rolled out multiple monetary policy measures. The aggregate and structural policy tools have effectively supported the sustained economic recovery and financial market stability. At the same time, we have improved the monetary policy framework, optimized the intermediate monetary policy variables, cultivated policy rates, enhanced monetary policy transmission efficiency, diversified monetary policy toolkit, and strengthened policy communication and expectation guidance. The transformation of monetary policy framework is a gradual and ongoing process, and we will continue to conduct assessments and make refinements in the future.

Now, I would like to share with you my observations on global financial governance. This is a very broad topic. So I will focus on four issues: international monetary system, cross-border payment system, global financial stability system, and the governance of international financial organizations.

## I. On the International Monetary System

Throughout history, the international monetary system has never stopped evolving. The replacement of global dominant currencies reflects the profound change in the international landscape and the iteration of national competitiveness. In the 17th century, the Dutch Guilder became the early international currency. From the late 18th

century to the first half of the 20th century, the British pound was the dominant currency globally. After the World War II, the U.S. dollar established its dominance and has retained its status up till now.

As a global public good, the international currency, if dominated by the sovereign currency of a single country, has inherent instabilities. a sovereign currency First, issuer tends to prioritize its own interests over the supply of global public goods when its own interests conflict with the attribute as a global public good. fiscal and Second, financial regulatory issues of a sovereign currency issuer and the accumulation of structural problems in its domestic economy may generate financial risks with spillover effects, or even escalate into a global financial crisis. in times of geopolitical Third, tensions, national security concerns, or even wars, the global dominant currency tends to be instrumentalized or weaponized.

The above problems have driven growing global discussions on the reform of international monetary system. Over the past decade, the driving forces behind the shifts in the international monetary system stemmed primarily from the economic and financial dimensions in the wake of the global financial crisis, and hence the discussions were centered on economic and financial developments. The discussions this time around, however, are mainly driven by geopolitical issues. Broadly speaking, there are two lines of argument.

The first one is on how to weaken the excessive reliance on a single sovereign currency and its negative impacts, foster healthy competition among a few strong sovereign currencies, and put in place incentive-restraint mechanisms. A multipolar international monetary system can prompt sovereign currency issuers to strengthen policy constraints, enhance the resilience of international monetary system, and more effectively safeguard global economic and financial stability. Madam Lagarde, President of the European Central Bank (ECB), noted in her recent speech that the global order based on multilateral cooperation is fracturing, with uncertainty about the dominant role of the U.S. dollar, and the changing landscape could open the door for the euro to play a greater international role.

Over the past two decades, the evolution of international monetary system had two key features. the creation of the euro in 1999. The euro now accounts for The first was around 20 percent of global foreign exchange reserves, second only to the U.S. dollar. the steady rise of the RMB's international status after the global The second was financial crisis in 2008. The RMB has already become the world's second largest trade finance currency. Calculated on a comprehensive basis, the RMB has become the world's third largest payment currency. Besides, the weight of the RMB in the International Monetary Fund's Special Drawing Rights (SDRs) currency basket ranks third.

Going forward, the international monetary system is likely to continue its evolution towards a system where a few sovereign currencies coexist and compete with checks and balances. Be it a single sovereign currency or a small group of sovereign currencies serving as the global dominant currency, the sovereign currency issuers should assume their responsibilities by strengthening domestic fiscal discipline and financial regulation, and advancing the structural reform of the economy.

The second line of argument is on a super-sovereign currency serving as the global dominant currency, and discussions have been largely focused on SDRs. Dr. Zhou Xiaochuan, former governor of the PBOC, once raised this issue in 2009. Theoretically, SDRs can effectively overcome the inherent problems of a single sovereign currency as the global dominant currency. It offers greater stability in currency value and is better positioned to function as a global public good, as it can help manage global liquidity and facilitate crisis response. The SDR has the attributes of a super-sovereign currency.

Having said that, we still lack political consensus and will globally, if the SDR were to become a global dominant currency. Moreover, insufficient market scale, depth and liquidity have limited the role of SDRs. Turning SDRs into a global dominant currency requires member countries to build political consensus, which is not easy, given the current international landscape.  Optimizing operational arrangements is also needed to gradually expand the usage of SDRs. In terms of allocation and issuance the International Monetary Fund (IMF) issues SDRs mainly as part of mechanisms, crisis response and mostly in the form of a large one-off allocation. In the future, the IMF can issue SDRs regularly and expand the size of issuance. Regarding the scope we need to encourage private sector and market entities to use SDRs in of use, international trade, investment and financing, and to issue SDR-denominated bonds. We need to enhance the role of SDRs as a reserve asset, and establish the SDR settlement mechanism adaptable to large-scale usage.

## II. On the Cross-Border Payment System

The cross-border payment system serves as the artery of global funds flow. It is a keystone for facilitating international trade, investment and financing, and for safeguarding financial stability. It is also a vital pillar of the international monetary system. The evolution of the international monetary system towards coexistence of a few sovereign currencies and booming digital technologies will promote the diversification of the cross-border payment system, which will, in turn, accelerate the shifts in the international monetary system.

In recent years, problems faced by the traditional cross-border payment system have loomed large. there is a generational differences between traditional cross-border First, payments and emerging digital technologies. Problems of low efficiency, high costs, and poor penetration demand urgent resolution. cross-border payments Second, require coordination among different legal and regulatory frameworks, as well as among different stakeholders. Therefore, we need to enhance international cooperation. G20 and other international organizations attach great importance to promoting cross-border payments, and formulated a roadmap to enhance cross-border payments. the Third, geopolitical rivalry has escalated. The traditional cross-border payment infrastructures can be easily politicized, weaponized, and used as unilateral sanction instruments, thus undermining the international economic and financial order.

Against this background, there have been growing calls for improving the cross-border payment system. New payment infrastructures and settlement methods are continuously emerging, driving the global cross-border payment system onto a more efficient, secure, inclusive and diverse trajectory. This trend will continue to strengthen.

First, the cross-border payment system has become more diversified. In terms of currency usage, an increasing number of countries and regions are using local currencies for settlement, promoting the international use of a broader range of currencies. Cross-border payments dominated by a single sovereign currency are undergoing gradual changes. the rise of new cross-border As for payment channels, payment systems and regional multilateral payment systems, along with the traditional correspondent bank model, has diversified settlement channels and further improved the efficiency of cross-border payments. After over a decade of construction and development, China has basically established a cross-border RMB payment and clearing network featuring multiple channels and wide coverage.

Second, the interoperability of payment systems and payment ecosystems continues to improve. More countries and regions have extended the operating hours of their payment systems, adopted internationally standardized messaging formats, and promoted the interconnection of fast payment systems. These efforts have enhanced the efficiency of cross-border payments and reduced transaction costs. Countries and regions exemplified by Asia have made substantial progress in enhancing the interoperability of retail payment ecosystems through the interconnection of QR code payments, greatly facilitating cross-border payments by their residents.

Third, new technologies are used in cross-border payments at a faster pace. Underpinned by new technologies such as blockchain and distributed ledger, central bank digital currencies and stablecoins are thriving, making possible the simultaneous processing of payment and settlement. The development has fundamentally reshaped the traditional payment landscape, and significantly shortened the cross-border payment chain. It, however, has also posed great challenges to financial regulation. Technologies, such as smart contracts and decentralized finance, will further promote the evolution and development of cross-border payment systems.

## III. On the Global Financial Stability System

Before the 2008 financial crisis, the international community mainly relied on IMF, which is at the center of the Global Financial Safety Net (GFSN), for crisis response during and after crisis. After the 2008 financial crisis, ex ante prevention mechanisms such as financial regulatory rules were further strengthened.

On the one hand, the multi-layer financial safety net has continued to improve. I gave a speech on strengthening the financial safety net at the Boao Forum for Asia in March last year. in recent years, the IMF has continuously At the global level, enhanced its crisis response capabilities in times of crisis, strengthened its policy surveillance functions, and expanded the scope of policy surveillance. At the regional the European Financial Stability Facility, the Latin American Reserve Fund, the level, Chiang Mai Initiative in Asia, and the Arab Monetary Fund have been established successively, serving as important supports for financial stability in their respective regions. central banks in the major advanced economies such as At the bilateral level, the U.S. Federal Reserve and the ECB have injected liquidity into the markets during crisis through currency swap arrangements. The local currency swap cooperation among emerging markets has also progressed steadily. The PBOC has signed bilateral

currency swap agreements with central banks or monetary authorities in over 30 countries and regions. These swap arrangements have become an important part of the GFSN.

On the other hand, the crisis prevention system based on regulatory rules has been continuously refined. After the 2008 global financial crisis, the international community overhauled the global financial regulatory system through a number of major reforms, including issuing Basel III, enhancing the robustness of banking institutions, and strengthening the supervision of systemically important financial institutions (SIFIs). China has been actively involved in the formulation and implementation of international regulatory standards, and is one of the few economies that have fully implemented Basel III. China has developed a regulatory framework for SIFIs, and its systemically important banks have all met the total loss-absorbing capacity (TLAC) requirements. China has put in place a deposit insurance scheme capable of providing full protection for more than 99 percent of depositors. It has also issued and fully implemented regulations on asset management, which has significantly reduced the risk of shadow banking.

Currently, the global financial stability system is faced with some new challenges.

First, the regulatory framework remains fragmented. There is even a propensity to ""race to the bottom"". In recent years, due to domestic political headwinds, some countries have wavered in their implementation of international regulatory rules, such as Basel III. It may lead to regulatory arbitrage, and undermine global financial stability system. The international community should proactively implement the agreed regulatory reform measures, thereby preventing regulatory arbitrage and cross-border transmission of risks.

Second, the regulation on emerging areas, such as digital finance, remains insufficient. For example, global regulatory coordination is incommensurate with the quick-expanding crypto asset market, and coordination on climate risk-related regulatory framework is yet to be improved. Regulatory stance swings widely, and is highly prone to political influence. A harmonized regulatory standard on the adoption of artificial intelligence in the financial sector is also absent. The international community needs to strengthen coordination and bridge the gaps in regulation.

Third, the regulation on non-bank intermediaries remains lax. In the past two decades, the weight of non-bank intermediaries in global financing has risen significantly. Funding through non-bank intermediaries is relatively unstable and less transparent, yet the leverage is rising, which calls for enhanced regulation.

We believe that the key path to crisis prevention and resolution is to establish a diversified and efficient GFSN with a powerful IMF at its core, and to ensure the consistency and authority of global financial regulatory rules. This is also the path that we must follow through.

## IV. On the Governance of International Financial Organizations

After the World War II, starting with the founding of the IMF and the World Bank, the international community gradually built up a multi-tiered and multi-dimensional system

of international financial organizations, covering areas such as international policy coordination, financial regulatory rule-making, and multilateral development. These organizations have become major platforms for international financial governance, and they  play an important role in promoting global economic and trade growth as well as safeguarding global financial stability.

While global economic landscape keeps changing, quotas and voting power haven't seen any material adjustments for a long time in major international financial organizations, such as the IMF and the World Bank, as well as in some regional financial organizations. As a result, emerging markets and developing countries are significantly underrepresented, and this is incommensurate with their actual weight in the global economy. Moreover, the international community should also be well aware of the fact that a few member countries pursue unilateralism, and they have meddled in the governance and operation of international financial organizations. International financial organizations need to keep pace with the times and advance governance reforms to reflect in time the relative positions of member countries in the global economy and enhance the voice and representativeness of emerging markets and developing countries. International financial organizations should safeguard and practice true multilateralism, and improve governance efficiency.

Among all the international financial organizations, the IMF is at the core, and it plays a vital role in global economic and financial governance. The IMF is a quotabased international financial organization. The size of quotas determines the IMF's crisis response capacity in crisis, while quota shares determine member countries' voting power in the IMF and the amount of financing they have access to. The current quota shares can not reflect the relative positions of member countries in the global economy. An immediate quota share realignment in line with the consensus reached is crucial for the IMF to improve governance and enhance its legitimacy and representativeness.

The global economy is now facing heightened uncertainty. While improving their governance structures, major international financial organizations should further reinforce their roles in economic surveillance. They should assess objectively the risks facing the world and individual countries, and offer guidance to member countries to cement their support for economic globalization and the multilateral trading system. They should also strengthen policy guidance for member countries and enhance macroeconomic policy coordination to keep the international financial system stable.

## Dear guests,

Improving global financial governance requires more frequent dialogues and stronger cooperation among all parties. Staying committed to reform and opening-up and upholding a path of multilateralism, we will work actively to play a constructive role in helping foster a global financial governance system that is more equitable, fair, inclusive, and resilient.

To conclude, I wish the Forum a full success. Thank you.",Pan Gongsheng
https://www.bis.org/review/r250624b.htm,"Adriana D Kugler: Welcoming remarks - ""Fed Listens""","Welcoming remarks by Ms Adriana D Kugler, Member of the Board of Governors of the Federal Reserve System, at a Fed Listens event, hosted by the Federal Reserve Bank of New York, Schenectady, New York, 23 June 2025.",2025-06-23 00:00:00,"## Adriana D Kugler: Welcoming remarks - ""Fed Listens""

Welcoming remarks by Ms Adriana D Kugler,  Member of the Board of Governors of the Federal Reserve System, at a Fed Listens event, hosted by the Federal Reserve Bank of New York, Schenectady, New York, 23 June 2025.

* * *

Thank you, President Williams. And thank you to everyone who took the time to join us here today to offer your feedback. 1

It is my pleasure to be here in Albany, a region of the country that has been so critical to the growth of our nation's economy. One of the aspects I enjoy most about my job is having the opportunity to visit every region of the country and see how the economy is unfolding on the ground. I am happy to be able to do that again today.

The purpose of this event, specifically, is to receive your input as part of the Fed Listens public review of our long-run goals and strategy for monetary policy. We call this document our framework.  The Federal Open Market Committee (FOMC) last reviewed 2 this important document in 2019-2020. At that time Committee members decided it was appropriate to complete a similar review every five years. The 2025 review consists of three elements: a research conference, discussions and deliberations at our policy meetings, and, very importantly, events such as this. As Chair Powell said Fed Listens last month, in this review we are reconsidering aspects of our strategic framework in light of the experience of the last five years. I anticipate that consideration of changes to the framework, based on the information and perspectives gathered during this review, will be complete in coming months. As part of this process, I am paying particular attention to what we have learned about the economy in the past five years, and the way changes made in the last framework review were interpreted by the public. The Committee will also consider possible enhancements to the FOMC's policy communication tools.

But, of course, I enjoy hearing from the public on a regular basis, not just as part of our framework review. Obtaining that on-the-ground insight is an essential ingredient to my approach in making policy. As a Fed policymaker, who is also an academic economist, I am always analyzing data to better understand how the economy is developing. However, I feel strongly that it is best to add to that technical training by hearing from people across the country, people like you. I am proud to say that I have visited nearly every Fed District during my relatively short time on the Board, and I have plans to see the remaining Districts in the near future. It is important to hear from Americans for whom we make policy. I want to listen to the perspective of families considering significant purchases and employment decisions. I want to hear from business owners about investment and hiring plans. I want local leaders to tell me about how their communities are faring. This information matters greatly to me as a policymaker. I thank you for taking the time to share your stories.

Now the primary purpose of this event is for me and President Williams to listen to you, so I will stop here, and look forward to hearing from all of you. Thank you again.

- 1  The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.
- 2  For more information, see the Federal Reserve Board's website at  https://www. federalreserve.gov/monetarypolicy/review-of-monetary-policy-strategy-tools-andcommunications-2025.htm.",Adriana D Kugler
https://www.bis.org/review/r250701d.htm,Christine Lagarde: Strategy assessment - lessons learned,"Introductory speech by Ms Christine Lagarde, President of the European Central Bank, at the opening reception of the ECB Forum on Central Banking 2025 ""Adapting to change: macroeconomic shifts and policy responses"", Sintra, 30 June 2025.",2025-06-30 00:00:00,"## Christine Lagarde: Strategy assessment - lessons learned

Introductory speech by Ms Christine Lagarde, President of the European Central Bank, at the opening reception of the ECB Forum on Central Banking 2025 ""Adapting to change: macroeconomic shifts and policy responses"", Sintra, 30 June 2025.

* * *

As Nietzsche once observed, ""it is our future that lays down the law of our today.""

When we last reviewed our strategy four years ago, our thinking was shaped - quite naturally - by the recent past: a decade of too-low inflation, compounded by the pandemic.

But as Nietzsche warned, there is a danger in letting the past dominate our thinking. Sometimes, it is the future - still dimly understood - that is already shaping our present.

And soon after that review, the world changed in ways we had not foreseen.

The reopening of our economies after the pandemic brought about major sectoral shifts. Russia's invasion of Ukraine triggered a fundamental shift in energy markets.

The geopolitical landscape was upended, reshaping global trade. And structural changes in labour markets became increasingly apparent - driven by demographics, technological transformation, and evolving worker preferences.

Given all these developments, the fundamentals of our strategy have held up well - as they should, because a sound strategy must be robust to a changing environment.

Our symmetric 2% inflation target has proven effective in anchoring expectations even through some of the most severe and persistent shocks in recent economic history.

And our medium-term orientation has provided essential flexibility to absorb an extremely large shock - helping to reduce the overall cost of disinflation to the economy, while still enabling a timely return of inflation to target.

We therefore saw no need to revisit these core pillars - which is why we refer to the exercise we have just concluded as a strategy assessment rather than a review.

The central theme of our work has been to update the framework so that monetary policy can continue to deliver price stability in the face of the new types of shocks we are confronting.

This evening, without downplaying the other lessons learned, I would like to highlight three key conclusions that have emerged from this work.

They concern the nature of the new environment, how we assess the risks that arise from it, and how we have adjusted our reaction function to safeguard price stability in this new world.

## The changing environment

One word has dominated the public debate in recent weeks: uncertainty.

And this is one of the first key conclusions from our strategy assessment: the world ahead is more uncertain - and that uncertainty is likely to make inflation more volatile.

First, we see clear signs that supply shocks are becoming more frequent.

Model-based analysis by ECB staff shows that, during the recent inflation surge, such shocks played a much greater role in driving inflation than they had over the previous two decades. And even today, supply-side forces continue to generate inflation risks in both directions.

Second, we see mounting evidence that more regular supply disruptions are leading firms to adjust prices more frequently - thereby contributing to greater inflation volatility.

This is not simply an extrapolation from the most recent shock. Rather, it reflects a structural shift in how firms operate under conditions of permanently higher uncertainty.

Research shows that, in such an environment, firms tend to react more quickly to shocks - especially supply ones - in order to protect against potential future losses. 1   At the same time, they are more likely to adopt more flexible pricing strategies, which means prices may respond not just to major shocks, but also to smaller frictions and local disruptions. 2

Third, if inflation becomes more volatile, we could see non-linearities on both sides.

In our last strategy review, we rightly focused on the non-linear dynamics that emerge in a prolonged environment of too-low inflation - where interest rates are eventually pushed to their effective lower bound. That constraint can, in turn, feed into inflation expectations and risk creating a self-fulfilling low-inflation trap. And we remain alert to the possibility of renewed downside inflation shocks.

But recent experience has also revealed non-linearities on the upside.

Since firms are generally quicker to raise prices than to lower them, more frequent price adjustments mean inflation can rise quickly in response to large upside shocks. If wages then adjust only gradually to these price increases - as we saw in recent years inflation may remain above target for longer as wage growth slowly catches up. This, in turn, can raise the risk of inflation expectations de-anchoring on the upside. 3

## Assessing the distribution of risks

The next question that follows is: if the economic environment becomes more volatile, how can we make our economic assessment more robust?

Large shocks can trigger feedback loops and non-linear effects that inherently give rise to a broader range of possible outcomes. In a world of higher uncertainty, it is all the more important to augment the baseline with alternative risk scenarios.

This is why the second key conclusion of our assessment is the need for monetary policy to take into account risks and uncertainty, using a systematic but context-specific approach.

The ECB has used both scenario and sensitivity analysis for many years - deploying internal scenarios since the global financial crisis and publishing them for the first time during the pandemic.

But our experience in recent years has underscored the particular strength of scenario analysis in times of elevated uncertainty.

A clear example is Russia's invasion of Ukraine and the resulting energy price shock. In that case, scenarios provided insights that neither our baseline projections nor standard sensitivity analyses around the baseline could fully capture.

For instance, in March 2022 - just a few weeks after the invasion - our baseline projected inflation at around 5% for that year, based on market-implied energy futures. The sensitivity analysis suggested a slightly higher figure of about 5.5%. In contrast, the Ukraine war scenario already pointed to inflation exceeding 7% - close to the final annual figure of over 8%.

At the same time, there were moments when - in hindsight - publishing scenarios could have supported both our policymaking and our communication.

One example was the high uncertainty in 2021 about the speed of vaccine rollout and the nature of post-pandemic reopening, including the sectoral shifts in supply and demand across goods and services sectors, both in the euro area and globally. 4

Scenario analysis could have helped in illustrating that the range of possible inflation outcomes was unusually wide - and reduced the risk of projecting false certainty to the public.

This is why our updated strategy commits to ensuring that our policy decisions account not only for the most likely path of inflation and the economy, but also for the surrounding risks and uncertainty - including through the appropriate use of scenario and sensitivity analyses.

## The reaction function

So what should our reaction function be, if we know that the road ahead is likely to be more uncertain?

In our last strategy review, we explicitly acknowledged the risks posed by the effective lower bound. Our strategy statement called for ""especially forceful or persistent"" action when policy rates are close to the lower bound.

This ""asymmetric"" focus was grounded in the asymmetry of policy space and the downward inflation bias it can produce. The lower bound continues to constrain monetary policy in the face of large disinflationary shocks.

But the recent inflation surge has revealed upside non-linearities - and with them, the need for a two-sided reaction function, both in terms of forcefulness or persistence. This is the third key conclusion of our strategy assessment.

This is not about reacting to small or temporary deviations, but about a symmetric commitment to respond to inflation dynamics that could de-anchor inflation expectations in either direction.

When disinflationary shocks risk pushing policy rates towards the lower bound, acting forcefully early on helps minimise the time spent near that constraint. Likewise, when inflation overshoots raise the risk of a feedback loop between frequent price adjustments and staggered wage responses, forceful tightening at the outset is key to anchoring expectations.

We began our recent policy cycle with historically large rate hikes delivered at an unprecedented pace. Our analysis shows that, had we not acted, the probability of inflation expectations de-anchoring would have exceeded 30% in 2022 and 2023. 5

At the same time, this policy cycle also offered new perspectives on optimal policy paths.

One insight from our last strategy review was that, when rates are near the lower bound, persistence can substitute for forcefulness - helping to deliver the necessary policy stance with fewer side effects. Until recently, however, this concept had not been widely applied to tightening cycles.

Typically, forceful tightening follows an inverted V-shape - with rapid rate increases followed by relatively swift cuts. But as rates move deeper into restrictive territory, the costs and side effects of further tightening also grow.

At that point, it can become optimal to shift the focus from forcefulness to persistence even if, in principle, there is no upper bound constraining policy space.

Model simulations support this insight: forcefulness and persistence can act as substitutes, both capable of delivering the necessary disinflation. But persistence, in particular, can help limit the economic and financial stability costs compared with continued rate increases.

This was borne out in our own experience. When we entered what I described as the ""holding phase"", we placed greater weight on the persistence dimension. 6   This allowed the disinflation process to advance at a steady pace, while the so-called ""sacrifice ratio"" remained historically low compared with previous disinflation episodes. 7

Reflecting this experience, the Governing Council considers that its reaction function is best described as requiring ""appropriately forceful or persistent monetary policy action in response to large, sustained deviations of inflation from the target ."" in either direction

To this end, all our instruments remain available in our toolkit. But the word ""appropriately"" is important, as it underscores that the choice of instruments, and the intensity with which we use them, must reflect proportionality.

## Conclusion

Let me conclude.

Our strategy assessment has been an exercise in evolution, not revolution - and in fact, many of its conclusions are already reflected in our current policy conduct.

We responded to the recent inflation shock with initially forceful and then persistent action, aiming to steer inflation back to target as swiftly as necessary, but as painlessly as possible.

And scenario analysis is helping us to better understand the range of risks ahead - and how best to respond to them.

For example, our scenarios on potential US import tariffs have helped us navigate an uncertain global trade landscape, while also enabling us to communicate more clearly the two-sided risks shaping our current monetary policy stance.

At our last monetary policy press conference in June, I described our monetary policy stance as being ""in a good place"".

Following the conclusion of this strategy assessment, I would add that our monetary policy strategy is also in a good place - strengthened by experience, and better equipped for the challenges of the future.

To close the circle with Nietzsche: ""he who has a why to live can bear almost any how.""

Even as the world changes around us, we know our purpose. And we will do whatever is necessary to deliver on it - ensuring price stability for the people of Europe.

1  Kase, H. and Rigato, R. (2025), ""Monetary Policy, Supply Shocks, and Input-Output Linkages in the Euro Area"", mimeo.

2  Arndt, S. and Enders, Z. (2024), ""The Transmission of Supply Shocks in Different "", , No 938, Banque de France, January; Khalil, Inflation Regimes Working Paper Series M. and Lewis, V. (2024), ""Product turnover and endogenous price flexibility in uncertain "", , No 18941, Centre for Economic Policy times CEPR Discussion Paper Series Research, Paris and London, 22 March.

- 3  Lagarde, C. (2025), "" A robust strategy for a new era"", speech at the 25th ""ECB and Its Watchers"" conference organised by the Institute for Monetary and Financial Stability, Goethe University, Frankfurt am Main, 12 March.
- 4  Lagarde, C. (2021), "" Monetary policy during an atypical recovery"", speech at the ECB Forum on Central Banking ""Beyond the pandemic: the future of monetary policy"", Frankfurt am Main, 28 September.
- 5  Christoffel, K. and Farkas, M. (2025), ""Managing the risks of a de-anchoring of inflation expectations"", , ECB, forthcoming. Working Paper Series
- 6  Lagarde, C. (2024), "" Building confidence in the path ahead"", speech at The ECB and its Watchers XXIV Conference, organised by the Institute for Monetary and Financial Stability, Goethe University, Frankfurt am Main, 20March.
- 7  Deutsche Bundesbank (2024), "" The global disinflation process and its costs"", Monthly , July. Report",Christine Lagarde
https://www.bis.org/review/r250702a.htm,Joachim Nagel: Current and future monetary policy challenges facing the Eurosystem,"Text of the 20th Walter Eucken Lecture by Dr Joachim Nagel, President of the Deutsche Bundesbank, at the Walter Eucken Institute, University of Freiburg, Freiburg, 23 June 2025.",2025-06-23 00:00:00,"## Current and future monetary policy challenges facing the Eurosystem

20th Walter Eucken lecture

23.06.2025 | Freiburg im Breisgau | Joachim Nagel

Check against delivery.

- 1 Introduction
- 2 Operational framework for implementing monetary policy
- 3 Quantitative tightening
- 4 Monetary policy stance
- 5 Conclusion

## 1 Introduction

Ladies and gentlemen, I am delighted and honoured to be able to deliver the 20th Walter Eucken lecture.

' Good economic policy is regulatory policy ' -this motto has been the hallmark of the Walter Eucken Institute ever since it was founded. True to that guiding prin -ciple, your institution concerns itself in particular with the question of how our market-based and competitive order can be maintained and further developed.

Monetary policy does not always play the key role in such matters. Nor was Walter Eucken a specialist in monetary theory, but someone who was mainly concerned with the economic system in its entirety. Nonetheless, monetary sta -bility was a key factor underpinning his economic policy thinking.

One impressive example of this belief can be found in his  ' Principles of Economic Policy ' , where he writes:  ' All endeavours to realise a competitive framework are in vain unless a certain level of monetary stability can be assured. ' [1]

Though many decades have passed in the meantime, that statement still stands up today. And in my view, the fundamental idea behind that remark has since become the core principle for major central banks: guaranteeing price stability is their core mandate.

That said, Eucken ' s concept of how price stability should be maintained was very di ff erent to ours today. One page later he issues this stern warning:  '…  experi -ence shows that a monetary constitution which gives free rein to those in charge of monetary policy places greater con fi dence in them than it is advisably possi -ble to do. '

This, Eucken argued, harboured the danger that  ' [ … ] a monetary constitution that was not automatically constructed will be abused for in fl ation. '  It is a remark that articulated his fundamental scepticism about government control. This led Eucken to favour a  ' commodity-reserve currency '  system. [2]

Eucken ' s misgivings were picked up again decades later in the form of the timeinconsistency problem of Robert Barro and David Gordon. The time-inconsis -tency problem is a situation where policymakers are often tempted to deviate from their pledge to keep prices stable in the short run in order to stimulate the economy. Economic agents recognise this temptation, however, and adjust their in fl ation expectations accordingly. [3]

This ultimately drives up in fl ation without actually stimulating the economy. Policymakers and economic agents end up being worse o ff than they would have been if the price stability pledge had been credible and adhered to accordingly.

The time-inconsistency problem was mitigated by monetary policy being entrusted to an independent central bank with a clear mandate to preserve price stability. Otmar Issing transformed Eucken ' s dictum from the  ' primacy of mone -tary policy '  to a  ' primacy of price stability ' -and rightly so, in my view. [4]

In my speech today, I will assess this primacy of price stability from di ff erent angles while always looking to incorporate Eucken ' s regulatory perspective into my remarks. To this end, I would like to pick up on three topical monetary policy issues that the ECB (European Central Bank) Governing Council has been con -cerned with recently. I will therefore structure my lecture around the following key questions:

- First, the Governing Council last year adjusted its operational framework for implementing monetary policy and, as part of these changes, announced that structural monetary policy operations would be introduced in the future. How do these operations fi t in from a regulatory viewpoint? I will share some more details about these structural operations in just a few moments. ·
- Second, how is the run-o ff of the asset purchase programmes a ff ecting the stance of monetary policy, and which implications have been given insu ffi cient attention so far? ·
- And third, how should the current monetary policy stance be assessed? ·

So I will be beginning with some fairly abstract thoughts and become increas -ingly more speci fi c as my speech progresses.

## 2 Operational framework for implementing monetary policy

Let me begin with the Eurosystem ' s operational framework for implementing monetary policy. The purpose of the operational framework is to help steer short-term money market rates closely in line with the Governing Council ' s mon -etary policy decisions.

Decisions regarding the stance of monetary policy, meanwhile -in particular the level of the key interest rates -are taken by the Governing Council on the basis of its monetary policy strategy. And at the heart of this strategy is the primary objective of maintaining price stability.

## 2.1 Changes to the operational framework for implementing monetary policy

In March 2024, we, the members of the Governing Council, adopted changes to the operational framework for implementing monetary policy. These adjust -ments came about against the backdrop of the run-o ff of the extensive asset holdings and thus the gradual decline in excess liquidity. [5]

Excess liquidity is the name given to the reserves held by commercial banks with the Eurosystem above and beyond the banking system ' s structural liquidity needs. Structural liquidity needs arise, fi rst, from what are known as autono -mous factors over which we, as a central bank, have no direct in fl uence. These factors include the general public ' s demand for banknotes, for example. Second, structural liquidity needs come about because commercial banks are required to hold a minimum reserve.

The high level of excess liquidity can be traced back to the monetary policy asset purchase programmes adopted during the period of low interest rates. As the asset purchase programmes run o ff , this excess liquidity will gradually decline.

To prevent this from causing excessive fl uctuation in short-term money market rates, the Governing Council, as a precautionary measure, staked out a frame -work for steering money market interest rates in the future. Last year , we agreed to narrow the spread between the main re fi nancing rate and the deposit facility rate from 50 to 15 basis points.

This is the key lever for steering money market interest rates going forward. However, its impact will only become more visible as the balance sheet nor -malises, once excess liquidity has declined signi fi cantly. We will closely monitor how money market rates are discovered based on this change.

We will continue to conduct our weekly main re fi nancing operations and the three-month tenders based on the full allotment procedure. This means that banks will be able to tap into an extensive source of liquidity -and do so in return for a broad variety of collateral. This helps make sure that banks across the euro area are treated equally and enables banks to participate in our opera -tions, no matter what business model they run.

In addition, the Governing Council agreed in principle to introduce what are known as structural operations at a later stage. These are expected to be imple -mented in the form of structural longer-term credit operations and a structural portfolio of securities.

These operations will make a signi fi cant contribution to covering the banking sector ' s structural liquidity needs. You will remember how I explained that struc -tural liquidity needs come about due to autonomous factors, which can be pre -dicted relatively well, as well as the minimum reserve requirements.

## 2.2 Structural liquidity operations: assessment from a regulatory perspective

By agreeing on structural operations, we laid out some fundamental ground -work very early on. But how exactly these structural operations should be designed and how they will relate to each other once the monetary policy asset holdings have run o ff are matters for another day. There is still time to take these decisions.

Because in all probability, it will take a few years yet for the asset holdings to shrink to such an extent that we see a structural liquidity de fi cit again. Right now, though, there is nothing to stop us from formulating regulatory principles -inspired by Walter Eucken ' s line of thinking -that might provide guidance for the structural operations.

What matters  fi rst of all is that these structural operations should be, and should remain, strictly focused on their intrinsic purpose, which is to cover a substantial portion of the banking sector ' s structural liquidity needs. These operations are not there to fund individual Member States, banks or enterprises. Nor are they intended to stimulate lending. And they are most certainly not there to in fl uence the stance of monetary policy.

A key factor underpinning economic and monetary policy in the European Union is the requirement to act in accordance with the principle of an open market economy with free competition -that is a principle that has shaped the EU (European Union) ever since the Maastricht Treaty. It is about promoting the e ffi cient allocation of resources, which is an objective that is closely linked to economic growth and prosperity.

This principle echoes the thinking of Walter Eucken, who always stressed the importance of competition and the avoidance of market distortions. Structural operations should therefore be designed such that they do not interfere with rel -ative market prices and the allocation of resources any more than they have to.

In a structural portfolio, say, having fewer longer-dated bonds and more bonds with short maturities could help to reduce interference with the term premium. Limiting structural re fi nancing operations to sensible maturities would allow pol -icymakers to deliver a timely response to potential declines in liquidity needs.

Using a variable rate tender procedure for the re fi nancing operations would play a part in upholding competition among bank funding instruments and avoiding subsidy elements. Because then, banks '  demand and their alternative funding costs would be re fl ected in the interest rates they bid.

The speci fi c design of a structural portfolio raises a variety of granular questions, like which bond classes should be purchased? How can market price e ff ects and subsidy elements be minimised? These decisions are particularly challenging in a monetary union.

One thing is clear: the target volume of a structural portfolio should be sensibly proportionate to the volume of purchasable bonds. To avoid market distortions, only small portions of individual bond issues should be purchased.

One possible question from a regulatory perspective is whether corporate bonds belong in a structural portfolio in the fi rst place. Because the main bene fi ciaries of this would be large enterprises that can tap capital markets. This, in turn, could distort the allocation of resources.

And one matter that certainly merits consideration as regards public sector bonds is that we should not reduce the incentives for sound fi scal management as far as we can avoid it.

As you can see, then, some issues still need to be clari fi ed in future. We still have plenty of time to do this because the asset holdings are only running o ff slowly and excess liquidity levels will stay high for the foreseeable future.

Leaving this aside, there are practical reasons for introducing the structural longer-term credit operations fi rst and only turning to the matter of the struc -tural portfolio of securities at a later stage. That ' s because the extensive legacy bond holdings from the monetary policy asset purchase programmes will be taken into account when the structural operations are introduced -   the Governing Council agreed as much last year.

This leads the Bundesbank to expect that structural re fi nancing operations will be introduced fi rst and that a structural portfolio of securities will only be built up at a later stage. In addition, the Bundesbank believes that suitably designed structural re fi nancing operations will cover the bulk of the banking system ' s structural liquidity needs in future.

## 3 Quantitative tightening

Let me move away from this perhaps somewhat abstract discussion and more towards monetary policy in practice. The passive run-o ff of our asset purchase programmes is signi fi cant not only with regard to our operational framework for implementing monetary policy.

It also plays a role for monetary policy in practice, as it is tending to tighten the monetary policy stance. And it is doing so despite the fact that the Eurosystem has already loosened its monetary policy by lowering interest rates eight times since June 2024.

But does this not mean that these two measures are contradictory and that the run-o ff of the asset purchase programmes should therefore be stopped? The answer to this is a clear  ' no ' . Allow me to explain to you in more detail why I can give such a clear answer .

## 3.1 Steering monetary policy via key interest rates

The asset purchase programmes were introduced when the Eurosystem was operating close to the e ff ective zero lower bound on interest rates. As a result, it was hardly possible to further ease monetary policy to any signi fi cant extent by cutting key interest rates. In this context, the asset purchase programmes proved to be a useful instrument of monetary policy. This was because they enabled monetary policy to exert additional in fl uence on medium to long-term interest rates, in particular . In turn, this helped to stabilise price developments. [6]

However, considerable purchase volumes were needed to achieve a notable impact on in fl ation. For example, an overview study from the Journal of Monetary Economics shows that, in the euro area, purchases totalling around € 150 billion raised the price level by 11 basis points. [7]

While the macroeconomic e ff ects of quantitative easing have already been studied in great depth, quantitative tightening, especially for the euro area, remains a largely unexplored fi eld. In any case, the impact of quantitative tight -ening is likely to be weaker overall than the impact of quantitative easing. [8]

First, fi nancial markets were prepared at an early stage for the run-o ff of the asset purchase programmes. As a result, there is no noteworthy announcement e ff ect. Second, the Eurosystem ' s balance sheet will shrink by around  € 30 billion per month over the coming years.

For the sake of comparison: at its peak, the Eurosystem purchased bonds worth around  € 80 billion per month under the expanded asset purchase programme (APP (asset purchase programme)). Under the pandemic emergency purchase programme (PEPP (pandemic emergency purchase programme)), monthly pur chases amounted to more than  € 100 billion at times.

On the whole, the run-o ff of our asset purchase programmes should therefore have only a marginal impact on the monetary policy stance. And we also take this e ff ect into account indirectly when setting the level of key interest rates. This is because medium-term and long-term interest rates feed directly into the Eurosystem ' s in fl ation forecasts, which are a key foundation for our monetary policy decisions.

To sum up: the Eurosystem is now e ff ectively steering its monetary policy stance via key interest rates. This means that we can continue to allow the monetary policy purchase programmes to passively run o ff without any cause for concern.

## 3.2 Taking greater account of the impact on central bank fi nances

Thus far, I have focused on the desired monetary policy e ff ects of large-volume asset purchases for the purposes of quantitative easing. However, we must not lose sight of their side e ff ects. These include, for example, incentives for lending to less productive fi rms, widening wealth inequality, and rising real estate prices. [9]

Another possible e ff ect of large-volume asset purchases in the low interest rate environment was the rapid rise in in fl ation, when the monetary policy stance had to be tightened signi fi cantly. The income interest rates on the purchased medium-term and long-term securities on the assets side of the Eurosystem ' s balance sheet were largely fi xed. By contrast, the expenditure interest rates on the liabilities side of our balance sheet are variable, as banks '  balances are remu -nerated at the deposit facility rate.

The Eurosystem thus took on a high level of interest rate risk with the asset pur -chase programmes. This risk has materialised since we had to raise interest rates quickly and signi fi cantly in response to the wave of in fl ation. And this entails considerable balance sheet losses for the Eurosystem and the Bundesbank.

Let me make one thing clear: the primary objective of the Eurosystem is to main -tain price stability. On the ECB (European Central Bank) Governing Council, we do everything necessary to achieve this -even if using the speci fi c instruments required is likely to lead to a loss. There must be no doubt about this. And the balance sheet losses that we are incurring at present do not restrict our ability to maintain price stability.

However, in light of recent experience, we should only use the instrument of large-volume asset purchases at the lower bound in absolutely exceptional cases in future.

## 4 Monetary policy stance

Finally, let us touch upon day-to-day monetary policy business. Earlier , I described how quantitative tightening in fl uences the Eurosystem ' s monetary policy stance. But how should we assess the current monetary policy stance overall?

A well-known concept for this is the natural rate of interest. It is de fi ned as the real interest rate that would prevail if the economy were at normal capacity utili -sation and growing at its potential rate and if prices were stable.

As the natural rate of interest cannot be observed directly, it needs to be esti -mated. Eurosystem calculations using various models put the nominal natural rate of interest at the end of 2024 at between 1.75 % and 2.25   %. [10]

To put this into perspective: since the key interest rate cut at the monetary policy meeting at the beginning of June, the deposit facility rate, which is relevant to the monetary policy stance, has stood at 2 %. This is exactly in the middle of the range that I just mentioned. It is therefore likely that the Eurosystem ' s monetary policy is currently within neutral territory, even if the estimates are subject to great uncertainty.

Owing to this high degree of uncertainty, it would be risky to base decisions solely on the natural rate of interest. As a result, we on the ECB (European Central Bank) Governing Council always look at a wide variety of real and fi nancial indicators along the entire monetary policy transmission chain.

This provides us with the most comprehensive picture of the current monetary policy stance possible. Overall, we are now in a good position with regard to the interest rate level in anticipation of further developments in in fl ation.

For our future monetary policy stance, the greatest uncertainty at present -alongside events in the Middle East -is undoubtedly the unpredictable US (United States) trade policy. It is not only unclear how strong its e ff ects could be. It is also ultimately uncertain whether US (United States) trade policy will have an in fl ationary or disin fl ationary impact on the euro area.

This is because the end result depends on a large number of factors. These include the response to US (United States) tari ff s by the Federal Reserve, devel -opments in the exchange rate between the US (United States) dollar and the euro, any potential retaliatory tari ff s in Europe, and the impact on international supply chains.

The degree of uncertainty is exceptionally high. And this is the reason why the ECB (European Central Bank) Governing Council is now, more than ever, making its decisions on a data-dependent and meeting-by-meeting basis. So, if you were expecting me to give a detailed outlook of interest rates, then I am afraid that I will have to disappoint you. [11]

Critics may argue that our data-dependent and meeting-by-meeting approach provides fi nancial markets with too little clarity and that we should commit our -selves more fi rmly to a future path of interest rates. There is no doubt in my mind that Walter Eucken would be on our side here.

Eucken was critical of monetary policy aimed at active stabilisation, as it is the central bank that decides the appropriate level of interest rates, not the markets. To put it bluntly, central banks su ff er from Hayek ' s  ' pretence of knowledge '   which is to say, the presumption of possessing more knowledge than we actu -ally do. [12]

There is no question: setting the optimal level of interest rates to stabilise prices is an extremely challenging task. However, this task is by no means impossible, as shown by the average in fl ation of just over 2 % during the 25 years since the introduction of the euro.

But we can surely agree that the di ffi culty of this task is dependent on the degree of uncertainty. In times of high uncertainty, as we are experiencing right now, central banks should not claim to be able to see far into the future. The interest outlook should therefore be kept correspondingly short-term at present.

## 5 Conclusion

Ladies and gentlemen, I hope that my remarks have shown that the principles of Walter Eucken are still relevant to monetary policy today. The structural opera -tions planned for the future should therefore also be based on regulatory policy principles.

The gradual reduction of our current asset holdings is a necessary step towards monetary policy normalisation. Despite the gradual decline in asset holdings, the ECB (European Central Bank) Governing Council is steering the monetary policy stance e ff ectively via key interest rates.

These are within an appropriate range at present. Uncertainty remains high, especially following the US (United States) military strikes in Iran. It would there -fore be wise for us on the ECB (European Central Bank) Governing Council to continue focusing on fl exibility and data dependence.

I suspect that Walter Eucken, too, would have called for precisely this restraint and humility faced with the complexity of economic interrelationships. Thank you for your attention.

- See Eucken, W. (2004), Principles of Economic Policy [Grundsätze der Wirtschaftspolitik], 7th edition, Mohr Siebeck, p. 256. 1.
- A detailed review of the commodity-reserve currency system can be found in Friedman, M. (1951), Commodity-Reserve Currency, Journal of Political Economy, Vol. 59(3). 2.
- See Barro, R. and D. Gordon (1983), Rules, discretion and reputation in a model of monetary policy, Journal of Monetary Economics, Vol. 12(1), pp. 101 -121. 3.
- See Issing, O. (2004), On the primacy of price stability, Prague Spring Lecture, Liberální Institute, Prague, 10 June 2004. 4.
- This topic is explained in greater detail in Deutsche Bundesbank (2025), Review of the operational framework for implementing monetary policy: outlook for the Eurosystem balance sheet and structural operations, Monthly Report, June 2025. 5.
- See Rostagno, M., C. Altavilla, G. Carboni, W. Lemke, R. Motto and A. Saint Guilhem (2021), Combining negative rates, forward guidance and asset pur -chases: identi fi cation and impacts of the ECB (European Central Bank) ' s unconventional policies, Working Paper Series No 2564, European Central Bank. 6.
- See Fabo, B., M. Jančoková, E. Kempf and Ľ. Pástor (2021), Fifty shades of QE (quantitative easing): Comparing fi ndings of central bankers and aca -demics, Journal of Monetary Economics, Vol. 120, pp. 1 -20. 7.
- See Du, W., K. Forbes and M. Luzzetti (2024), Quantitative Tightening Around the Globe: What Have We Learned? NBER (National Bureau of Economic Research) Working Paper No 32321, April 2024. 8.
- See, for example, Acharya, V., T. Eisert, C. Eu fi nger and C. Hirsch (2019), Whatever It Takes: The Real E ff ects of Unconventional Monetary Policy, The Review of Financial Studies, Vol. 32(9), pp. 3366 -3411; Asriyan, V., L. Laeven, A. Martin, A. Van der Ghote and V. Vanasco (2024), Falling Interest Rates and Credit Reallocation: Lessons from General Equilibrium, Review of Economic Studies; Battistini, N., M. Falagiarda, A. Hackmann, and M. Roma (2022), Navigating the Housing Channel of Monetary Policy Across Euro Area Regions, Working Paper Series No 2752, European Central Bank. 9.
- See Brand, C., N. Lisack and F. Mazelis (2025), Natural rate estimates for the euro area: insights, uncertainties and shortcomings, ECB (European Central Bank) Economic Bulletin, 1/2025. 10.
- For more detailed comments on the impact of uncertainty on monetary policy, see Nagel, J. (2025), European monetary policy in times of high uncer -tainty, lecture at ZEW (Zentrum für Europäische Wirtschaftsforschung GmbH) -Leibniz Centre for European Economic Research, 27 May 2025, Mannheim. 11.
- See von Hayek, F. (1974), The Pretence of Knowledge, Lecture to the memory of Alfred Nobel, 11 December 1974. 12.",Joachim Nagel
https://www.bis.org/review/r250625b.htm,Philip R Lane: Monetary policy - new challenges,"Speech by Mr Philip R Lane, Member of the Executive Board of the European Central Bank, at the Barclays-Centre for Economic Policy Research (CEPR) International Monetary Policy Forum 2025, London, 24 June 2025.",2025-06-24 00:00:00,"## Philip R Lane: Monetary policy - new challenges

Speech by Mr Philip R Lane, Member of the Executive Board of the European Central Bank, at the Barclays-Centre for Economic Policy Research (CEPR) International Monetary Policy Forum 2025, London, 24 June 2025.

* * *

Since the extraordinary inflation surges in 2021-2022, the primary challenge facing monetary policy has been to return inflation to target in a timely manner .1   In terms of interest rate policy, this required a rapid hiking cycle from July 2022 to September 2023, followed by a ""hold at peak"" phase and then a gradual reversal of the restrictive stance starting in June 2024. 2   The gradualism in the easing phase reflected ongoing uncertainty about the speed of the disinflation process.

While headline inflation is currently around the target, services inflation still has some distance to travel to make sure that inflation stabilises at the target on a sustainable basis. Still, there has been sufficient progress in returning inflation to target to consider that this monetary policy challenge is largely completed. This assessment is reinforced by the accumulating evidence that the remaining services disinflation is well on track: first, the projection errors for inflation, including for the services subcomponent, have been relatively small during the disinflation process; second, both the wage tracker data and survey indicators suggest that further deceleration in wage growth can be expected in both 2025 and 2026, facilitating further declines in services inflation.

However, this disinflation challenge has been superseded by a new set of challenges and monetary policymakers have to make sure that the medium-term inflation target is protected in a volatile environment in which, amongst other factors, there is high uncertainty about the future of long-standing international trade system. 3   This uncertainty extends beyond the calibration of new tariff regimes and includes the possibility of a broader set of non-tariff barriers, a deeper intertwining of economic policies and security policies and possible revisions to the treatment of foreign portfolio investors and foreign direct investors. In addition to policy uncertainty, geopolitical tensions, such as Russia's unjustified war against Ukraine and the tragic conflict in the Middle East, remain a major source of uncertainty. Reflecting these developments, we have seen high volatility in energy prices this year and substantial currency repricing. There has also been considerable financial market volatility.

At the same time (and largely as an endogenous reaction to the changed security landscape), the fiscal outlook for the euro area has materially changed for the coming years, with the overall fiscal deficit looking set to remain above three per cent over the projection horizon. The near-term and medium-term implications for output and inflation of the structural changes associated with the green transition, the increasing business adoption of artificial intelligence applications and global shifts in comparative advantage are also highly uncertain, operating both on demand and supply with potentially different timelines.

Especially under current conditions of high uncertainty, it is essential to remain data dependent and take a meeting-by-meeting approach in making monetary policy

decisions, with no pre-commitment to any particular future rate path. In addition to observing how activity and inflation are actually behaving, data dependence also extends to the incoming data on policy settings outside the monetary domain, since shifts in international and domestic policy regimes are highly relevant for future inflation dynamics. In this environment, the primary task for monetary policy makers is to make sure that any temporary deviations from target do not turn into longer-term deviations.

This orientation explains our June decision to cut rates by 25 basis points. The June projections were conditioned on a rate path that included a quarter-point reduction of the deposit facility rate (DFR) in June: model-based optimal policy simulations and an array of monetary policy feedback rules indicated a cut was appropriate under the baseline and also constituted a robust decision, remaining appropriate across a range of alternative future paths for inflation and the economy. By supporting the pricing pressure needed to generate target-consistent inflation in the medium-term, this cut helps ensure that the projected negative inflation deviation over the next eighteen months remains temporary and does not convert into a longer-term deviation of inflation from the target. This cut also guards against any uncertainty about our reaction function by demonstrating that we are determined to make sure that inflation returns to target in the medium term. This helps to underpin inflation expectations and avoid an unwarranted tightening in financial conditions.

It is worth noting, in particular, that the robustness of the decision was also supported by a set of model-based optimal policy simulations conducted on various combinations of the trade scenarios discussed in the Eurosystem staff projections report, even when also factoring in upside scenarios for fiscal expenditure. By contrast, leaving the DFR on hold at 2.25 per cent could have triggered an adverse repricing of the forward curve and a revision in inflation expectations that would risk generating a more pronounced and longer-lasting undershoot of the inflation target. In turn, if this risk materialised, a stronger monetary reaction would ultimately be required.

Looking ahead, our monetary policy will have to take into account not only the most likely path (the baseline) but also the risks to activity and inflation. To this end, it will be important to explore how alternative rate paths hold up in various plausible sensitivity and scenario analyses, in order to make sure we minimise the risk of extended deviations from our medium-term target.

1  The views expressed in this contribution are personal and should not be interpreted as representing the collective view of the ECB Governing Council.

- 2  The monetary policy tightening also included moving the asset purchase programme (APP) and the pandemic emergency purchase programme (PEPP) into runoff mode and the expiry of the TLTRO III funding programme.

3  See Lagarde, C. (2025), ""Drawing a common map: sustaining global cooperation in a fragmenting world"", speech at the People's Bank of China in Beijng, 11 June.",Philip R Lane
https://www.bis.org/review/r250702b.htm,Denis Beau: What changes can we hope to see in the European banking sector's regulatory framework?,"Speech by Mr Denis Beau, First Deputy Governor of the Bank of France, at the General Assembly of the Office de Coordination Bancaire et Financière (OCBF) and the OCBF Services et Formation, Paris, 6 June 2025.",2025-06-06 00:00:00,"## Denis Beau: What changes can we hope to see in the European banking sector's regulatory framework?

Speech by Mr Denis Beau, First Deputy Governor of the Bank of France, at the General Assembly of the Office de Coordination Bancaire et FinanciŁre (OCBF) and the OCBF Services et Formation, Paris,  6 June 2025.

* * *

Mr President, Ladies and Gentlemen,

I would like to begin by thanking you for inviting me to take part in this lunch on the occasion of the General Assembly of the Office de Coordination Bancaire et FinanciŁre (OCBF) and . Unfortunately, the is OCBF Services et Formation geopolitical context less cheerful, given in particular the created by exceptionally high degree of uncertainty the shifts in policy and unpredictability of the new US administration, which is weighing on our economic and financial situation. As the Governor of the Banque de France recently stated in his annual Letter to the President of the Republic, this context must not overwhelm us; on the contrary, it should encourage us to take action to . France and Europe need regain control of our economic destiny more growth and . And the financial sector can and must act as one of the levers to help innovation address this need. In order to encourage and assist the financial sector in this endeavour, The debate is underway, should its regulatory framework be changed? particularly on what form such changes should take, against a backdrop where the United States intends to lean towards deregulation.

From my perspective as a supervisor, deregulation is not the right response to this through improvements question. Instead, the response should be better regulation that help to support growth and innovation on the one hand and to safeguard an asset our banking system, and financial system more broadly - in a world of proliferating shocks and great uncertainty.

- I) Among the improvements that could help to support growth and innovation, I would like to draw your attention to three of them that I believe are particularly important:
- a) . We have reached The first is the simplification of regulation and supervision the end of a cycle with the entry into force in Europe of the key parts of the banking package that transposes the Basel III Accords into law - CRR3 and CRD6. This regulatory effort proved absolutely vital following the 2007-08 crisis. The question is no longer the level of prudential requirements - they are appropriate and must therefore be maintained - but rather how to rationalise an excessively complex regulatory framework and the form that simplification should take, guided by a holistic approach.

This drive for simplification is being enthusiastically pursued within the European institutions, and is vigorously supported by the Banque de France and the ACPR. It targets regulation, supervision and reporting; covers microprudential and macroprudential aspects, as well as resolution. One of the objectives is to maintain high and uncompromising standards regarding risk management, while scaling

back the resources required for supervised entities, particularly those with the simplest risk profiles. Our position is that we should simplify the rules and apply a principle of proportionality, mainly by easing disclosure provisions and introducing flexibility in supervisory practices, without relaxing the requirements established by the Basel Accords.

- b) Next, we must reduce the fragmentation of the single financial market to better A growth gap has opened up between the European Union mobilise our resources. and the United States. The Draghi Report shows that since 2000 real disposable income per capita has increased almost twice as much in the United States as in the European Union. It is clear that one of the major challenges for Europe today is to boost productive investment, particularly in R&amp;D. To achieve this, we have an ""unknown resource"" in Europe, namely our vast private savings surplus. This resource is all the more precious given the significant government deficits - and do not allow us, at least in France, to return to a ""whatever it takes"" policy. In this regard, it is imperative that we act to make the Savings and Investment Union (SIU) a reality. We must fight fragmentation and create a single financing market to foster a better allocation of Almost 40 years after the Single European Act (1986) and 25 years after the savings. monetary union (1999), the bank financing market still operates largely within national borders.

The Banque de France and the ACPR therefore support four very concrete avenues for reform to create a genuine single financing market in the European Union: (i) the development of truly cross-border venture capital funds; (ii) the revitalization of securitisation within a transparent and secure framework; (iii) a single European supervision to ensure a common legal framework and avoid fragmentation; and (iv) a European shared ledger to reduce post-trade fragmentation.

Furthermore, the successful experience of the Banking Union and the Single Supervisory Mechanism should encourage us to now facilitate the use of crossborder waivers, so that liquidity and capital can flow more freely within banking groups in Europe.

- c) These regulatory adjustments are necessary, but they will not be enough on their own to successfully bring about the changes we hope to see. Mobilising all stakeholders - authorities, financial players, but also citizens and savers - is essential.

One of the major challenges is financial illiteracy, which is a real barrier for people to access productive savings and fully participate in the financial system. Financial illiteracy can lead to mistrust of markets and excessive investment in low-performing products, and thus stifle the mobilisation of savings for growth. Improving the financial education of our citizens is therefore crucial: we need to develop accessible and practical programmes to boost confidence and encourage better individual management of resources. And this is exactly the aim of the national financial education strategy - EDUCFI - spearheaded by the Banque de France since 2016.

Equally, savers and intermediaries must be made more aware of their responsibilities. The current approach is overly focused on rigid processes and strict compliance, tending to make players less accountable and discouraging initiative. Instead, we

should promote a relationship based on trust and autonomy, in which everyone knows their rights and responsibilities and acts with a complete understanding of the stakes. As a concrete example, the EDUCFI strategy provides personalised simulation tools prior to subscription to help savers better understand the impact of their choices (risk, return, horizon) and thus help them to be more autonomous in their decision-making.

- ii) Better regulation also means making improvements that must help to safeguard the asset that is our banking system for a Europe in control of its own destiny.
- a) To do so, we must first remain uncompromising on our high standards Obviously we must not yield to the temptation of a USregarding financial stability. style deregulation, which would sow the seeds of future financial crises. We must avoid a race to the bottom and continue to comply with the Basel III framework.

In Europe, the capital requirements for banks are generally well calibrated, as the However, we at the ACPR are receptive to calls for a EBA's stress tests have shown. lighter reporting and supervisory load for the smallest banks.

These objectives hold true for banks, but also for the non-bank financial sector and emerging sectors such as crypto-assets - here too, deregulation would not The interconnectedness of the financial be the right response to today's challenges. system, between non-bank players and between non-bank players and the banking system, is extensive, complex and constantly evolving, and it is thus imperative that we improve access to - and the quality of - the data that allows us to assess the main challenges that we face. That is why we are currently working on a system-wide in stress test to better understand the risks associated with the interconnections the financial sector. I would like to take this opportunity to thank the banks that participated alongside teams from the ACPR, the Banque de France and the AMF in the co-construction workshops. We are counting on banks' goodwill and sense of collective interest to participate actively in this exercise, as its success requires broad support.

- b) We must also maintain our ambitious course with regard to the risks associated with the major transitions.

This is particularly true of climate-related risks and our ESG commitment. Despite the United States' disengagement, we must persevere - we cannot act as if climate change and the financial risks it entails were not real. With its Omnibus project, the European Commission recently proposed a simplification package, which we welcome for the most part, despite certain points of concern. Nevertheless simplification must not mean abandoning our long-term goals.

Next, it is crucial that we continue our work on cyber risk management and the . Our everyday payments are too challenges of digitalisation more broadly dependent on non-European players, with 66% of card payments in the euro area relying on international card networks. Furthermore, the surge in stablecoins which are almost exclusively pegged to the US dollar and encouraged by the US government - raises a serious risk - over and above the financial stability issues that these products entail as they are neither ""stable"" nor ""coins"" - that our

## money will become ""privatised"".

c) Lastly, we must reconcile innovation and sovereignty in order to reassert our monetary sovereignty and maintain trust in our payments through three levers. The lever of : we pay close attention to promoting fair competition between regulation payment stakeholders through a clear and balanced framework. It was with this in mind that it was decided to extend the iPhone access to NFC antennas to non-Apple smartphone operators to ensure an open, level playing field. For new innovative players, the MiCA regulation sets out harmonised rules for crypto-asset service providers, while ensuring service-user protection by governing risks.

The lever of : strengthening our sovereignty also private sector service offerings involves supporting the development of pan-European payment solutions to ensure that tomorrow's secure and innovative payments are European. This is the case with private initiatives such as the ""Wero"" digital wallet, which we welcome for its potential to provide our fellow citizens with an innovative European payment solution.

Lastly, the lever of . In ""retail"" payments, the Eurosystem central bank money services is preparing to make a ""digital banknote +"" available to the general public, which will help to safeguard the sovereignty of our payments and currency. It is also actively working with commercial banks to maximise synergies between their private solutions and the digital euro. At the same time, the future European CBDC will offer an alternative to stablecoin settlement for tokenised transactions, allowing private players to innovate within a framework of trust.

***

To conclude, I would like to express my conviction that we are living through a pivotal moment in which Finance has a significant role to play in enabling us to regain control of our economic destiny. To this end, with you and our European partners, we have the opportunity and the responsibility to refine judiciously the regulatory framework of the European banking and financial system, to help it become a . Thank you for your attention. fully fledged tool of growth, stability and sovereignty",Denis Beau
https://www.bis.org/review/r250630c.htm,Sabine Mauderer: On the road to COP30 - mobilising climate finance,"Speech by Dr Sabine Mauderer, Member of the Executive Board of the Deutsche Bundesbank, at the London Climate Action Week (LCAW), event at the German Embassy, London, 25 June 2025.",2025-06-25 00:00:00,"## Sabine Mauderer: On the road to COP30 - mobilising climate finance

Speech by Dr Sabine Mauderer, Member of the Executive Board of the Deutsche Bundesbank, at the London Climate Action Week (LCAW), event at the German Embassy, London, 25 June 2025.

* * *

Check against delivery

## 1 Welcome

Ladies and Gentlemen,

Good afternoon, and thank you for the kind introduction. It is a great honour to be here with you today to discuss the way forward on the road to BelØm.

First of all, let me thank the German Embassy for organising this event and for bringing together such a distinguished and diverse group of leaders and experts. Events like this are so important, especially in the current context of numerous economic and geopolitical challenges that (threaten to) overshadow climate change.

It is essential to have spaces and forums where stakeholders from the public and private sectors, academia and civil society come together to exchange ideas on how to move ahead. The strong attendance here today is testament to our dedication and reflects our shared recognition that the serious risks arising from climate change have to be taken seriously.

## 2 The Role of the NGFS

I am proud to represent not only the Deutsche Bundesbank but also the Network for Greening the Financial System (NGFS),  which I have the honour to chair.

The NGFS is a global coalition of central banks and supervisors committed to addressing climate and nature-related risks in the financial system. Since its foundation in 2017 the NGFS has grown significantly, today boasting 145 members and observers. Our global and growing membership underscores the increasing international recognition of climate and nature risks.

Climate change is unfolding rapidly, right in front of our eyes, and poses profound risks to our economies and financial systems. It is more important than ever to continue our independent, data-driven and science-based work.

I am very glad to see colleagues from the Bank of England and my fellow Deputy Governor Paulo Picchetti from the Banco Central do Brasil in the audience today. Your institutions have contributed a lot to the work of the NGFS.

## 3 Climate inaction has high economic costs

The urgency of ambitious climate action cannot be overstated.

Work by the NGFS shows economic and financial risks arising due to climate change and nature loss.

Last November we released the latest update of our long-term climate scenarios. The scenarios show very clearly that climate inaction has high economic costs.

If we stick to current policies, global GDP could be 15% lower by 2050, compared to a world without climate change. 1   This does not include sea level rises, migration or nature loss.

I know that 2050 is, in practice, beyond the planning horizon of many corporates and political decision makers. That is why the NGFS has developed short-term climate scenarios with a time horizon of three to five years to help bridge this gap.

These scenarios also show that a delayed transition is expensive. Our stress scenarios assume extreme weather events. Our scenarios show that delaying the transition by just three years could reduce global GDP by almost 1% by 2030. 2

The NGFS scenarios are a public good, designed to help financial institutions and the real economy assess the potential impacts of climate change. I encourage you to make use of them to manage climate-related risks.

## 4 Scaling up global climate finance

Ladies and Gentlemen, addressing climate risks requires a collective effort to align global financial flows with climate goals.

To meet the goals of the Paris Agreement, global climate finance needs to be significantly scaled up from current levels.

The Baku to BelØm Roadmap to 1.3 Trillion is a key initiative in achieving that goal. 3 The roadmap provides a pathway for mobilising the capital needed for the transition to a low-carbon economy. I am particularly excited to hear more about this roadmap from AndrØ CorrŒa do Lago in a moment.

The public and the private sector must work hand in hand to scale up climate finance. But the biggest share has to come from the private sector, as public money has its limits and more and more challenges for public money are arising.

And I look forward to hearing from other participants here about how the financial sector can help to mobilise climate finance.

## 5 The role of the corporate sector

At the same time, climate finance is only one side of the coin. The other side is the lowcarbon transition of industries and businesses. It is important to bring the corporate sector on board.

They are the ones who will innovate, invest, and implement the changes needed to achieve climate goals. The renewable energy transition is key to addressing climate change. So, the energy sector plays a pivotal role in moving away from fossil fuels.

I am very happy that Greg Jackson from Octopus Energy will join our discussions and share his insights with us.

## 6 Conclusion

Ladies and gentlemen, let me conclude. As we move towards COP30,  the stakes could not be higher. Last month was the second-warmest May on record globally, just slightly cooler than May 2024. 4

Climate change is not a distant threat; it is a present reality. The decisions today will shape the world for generations to come. And let us remember that while the challenges are great, so too are the opportunities.

1  See:  NGFS Climate Scenarios for central banks and supervisors-Phase V | Network for Greening the Financial System

2  NGFS short-term climate scenarios, see: NGFS Short-term Climate Scenarios for central banks and supervisors | Network for Greening the Financial System

- 3  For an overview, see:  Baku to BelØm Roadmap to 1.3T | UNFCCC

4  Second-warmest May globally, dry/wet contrast across Europe in spring | Copernicus",Sabine Mauderer
https://www.bis.org/review/r250701b.htm,Olli Rehn: Securing Europe's future - financial resilience and strategic investment,"Speech by Mr Olli Rehn, Governor of the Bank of Finland, at the 10th RiskLab Finland, Bank of Finland and European Systemic Risk Board Joint Conference on AI and Systemic Risk Analytics, Helsinki, 27 June 2025.",2025-06-27 00:00:00,"## Olli Rehn: Securing Europe's future - financial resilience and strategic investment

Speech by Mr Olli Rehn, Governor of the Bank of Finland, at the  10th RiskLab Finland, Bank of Finland and European Systemic Risk Board Joint Conference on AI and Systemic Risk Analytics, Helsinki, 27 June 2025.

* * *

Professor Johnson, Ladies and Gentlemen,

It is a great pleasure to welcome all of you - both in person and online - to the 10th Joint Conference on AI and Systemic Risk Analytics. We are honoured to host this anniversary together with RiskLab Finland and the European Systemic Risk Board.

Back in 2015, the first SRA conference focused on topics like contagion, systemic risk, big data, and macroprudential policy. Those themes remain just as relevant today. But we've also seen a significant shift. Artificial intelligence, once emerging, is now central. So central, in fact, that it has become part of the title of this conference.

Over the past ten years, this event has consistently asked the hard questions: Where do new financial risks come from? How do they spread? And what tools can we use to understand them? Most importantly - what policies can help us mitigate them?

My predecessor, Governor Erkki Liikanen, who is now co-chair of the CFA Institute's Systemic Risk Council with Simon Johnson, offered three key messages in 2015 that still guide us today:

1. A deeper understanding of systemic risks improves regulation and macroprudential policy.
2. Expert judgement is essential, especially in imagining unlikely but serious scenarios.
3. Research must help us strike the right balance between simplicity and depth in regulation.

These points remain as relevant as ever. Although much has been achieved to enhance financial stability, vulnerabilities persist - especially in liquidity stress and market interconnections. This is why the analysis of contagion, market dynamics and tail risks must continue. We also need robust scenario analysis and modelling to guide decision-making.

Moreover, in today's climate, there is increasing pressure to simplify financial regulation. That makes independent research all the more critical in safeguarding the resilience of our financial system.

## Technology and Transformation

Technology is changing how we analyse data. In a world saturated with both information and disinformation, it's not just about access to data. It's about the ability to interpret it accurately and act on it swiftly.

AI is a powerful tool in this regard. But it also challenges us. We must continually upgrade our skills, update our methods, and ensure our decisions rest on sound, comprehensive analysis.

Digitalisation opens new opportunities but also exposes us to new threats. Cyber risks are not new, but geopolitical tensions make them more dangerous. Operational resilience is now a systemic issue. It demands international coordination and a clear understanding of how disruptions can spread through networks-both digital and financial.

We must also ask: will the benefits of AI be shared equally? Or will some regions fall behind? These are questions we'll explore more deeply shortly in our fireside chat with Professor Johnson.

## Stablecoins and Systemic Risk

Before closing, a few words about the European Systemic Risk Board where we have a busy week behind us.

On Tuesday we concluded the review of functioning of the Systemic Risk Board. In the future the ESRB will increasingly focus on the holistic assessment of systemic risks, especially by developing methodology for system-wide stress-testing. It is essential to understand better the key interconnections and true fundamental changes in the financial system.

One particular area which is currently under scrutiny is cryptos and especially stablecoins. Stablecoins are crypto assets pegged one-to-one to assets like US dollar, supposedly to keep a stable value. But they are unregulated and not backed e.g. by any central bank liquidity support.

With the view of policies and statements of the US administration, we are entering the era of licenced stablecoins on the other side of the Atlantic - but with serious spillovers and risks to our side.

Stablecoin markets have grown rapidly.

For instance, Tether was in volume the 7th largest buyer of US Treasuries last year, just behind the UK but ahead of Canada, Hong Kong and Germany. Size of the stablecoin market is now above 200 bn euro. US Treasury Secretary Scott Bessent has projected that the market could grow to 3 trillion USD by end of the decade, i.e. roughly 15-fold.

There is an obvious political motivation to strengthen the position of the US dollar and increase the demand for US Treasuries. But that does not come without major risks.

Especially concerning is the stablecoins' linkage to the traditional financial system through the interconnections, not least the one-to-one promise of paying USD (or any other currency that is promised).

That's why it is important to intensify the monitoring and deepen our understanding of the stablecoin markets and their interconnection with the regular banking and financial system.

## Closing

With these thoughts, it is my great pleasure to introduce today's keynote speaker: Nobel Laureate Professor Simon Johnson.

Professor Johnson is a renowned economist, known for his work on institutions, prosperity and financial crises. In 2024, he received the Nobel Prize in Economic Sciences alongside Daron Acemoglu and James Robinson. He is also Professor at MIT and co-chair of the CFA Institute's Systemic Risk Council.

I look forward to our conversation after his presentation. Please join me in warmly welcoming Professor Simon Johnson.

Thank you.",Olli Rehn
https://www.bis.org/review/r250702d.htm,Denis Beau: Fostering innovation within a framework of trust,"Speech by Mr Denis Beau, First Deputy Governor of the Bank of France, at the Pay Tech Day, Paris, 26 June 2025.",2025-06-26 00:00:00,"## Denis Beau: Fostering innovation within a framework of trust

Speech by Mr Denis Beau, First Deputy Governor of the Bank of France, at the Pay Tech Day, Paris, 26 June 2025.

* * *

- In today's geopolitical context, maintaining Europe's sovereignty has become a major imperative in all areas. The payment sector is no exception. Although our payment system is robust, it is heavily reliant on non-European technologies and players. And this dependency is set to increase with the rise of tokenised finance and stablecoins - which are almost exclusively pegged to the US dollar and are being championed by the new US administration.
- But this is no reason to feel defeated. On the contrary, as the Governor of the Banque de France said recently in his Letter to the President of the Republic, it should spur us into action. From my perspective as a central banker, working for an institution whose missions include safeguarding the security and efficiency of our payment system, our action should aim to reconcile innovation with fraud mitigation on the one hand, and innovation with sovereignty on the other. This dual objective is essential to guarantee trust in our currency and our payment instruments, and freedom of choice in how to pay. It is perfectly within our grasp, as we have significant strengths and experience at both the national and European levels - which I would like to recall and highlight today.
- I.   Regarding the reconciliation of innovation in retail payments with fraud mitigation:
- Clearly, the profound transformations in our payment ecosystem are creating new challenges for maintaining a high level of security.

The changes are resulting in , fuelled by technological innovation, rapid digitalisation the emergence of new -payment players and new private settlement assets notably stablecoins, which first appeared a few years ago and have developed rapidly in recent months.

The shifts are creating new challenges for payment security, as digitalisation has ; for example, ""spoofing"" led to unprecedented sophistication in fraud attempts where criminals impersonate someone from your bank. Fraudsters are also using in multiple languages, or to artificial intelligence to launch broad-scale attacks enhance social engineering techniques, for example with deepfakes or falsified documents.

To counter these challenges and prevent fraud from proliferating and eroding trust in our payment instruments, we can rely on a number of technical and regulatory - in France, the ACPR and the Banque levers, and on the work of our supervisors de France. For example, the mandatory IBAN-name checks introduced under the ""instant credit transfer"" package, due to come into force in October, will be extremely useful for preventing , notably after the hacking of a user's IBAN substitution fraud

email account. This is a concrete illustration of how new regulation can support and secure growth in innovative use cases, such as instant credit transfers. Another example is - an the sharing between banks of identifiers used to commit fraud initiative the Banque de France supports and for which it is prepared to provide a technical platform. Details of this sharing mechanism have been set out in a draft law submitted by the MP Daniel Labaronne, which has been approved by the National Assembly and is due to be examined soon by the Senate.

- But I would also like to highlight the usefulness and proven effectiveness in fraud prevention of bodies like the OSMP and CNMP in France (respectively the Observatory for the Security of Payment Means and the National , which encourage collaboration between all stakeholders Payments Committee) crucial to payment security, on both the supply and demand side. One of the OSMP's main successes is the concerted roll-out of strong customer . authentication (SCA), which has significantly reduced card payment fraud

Combating fraud also means constantly finding responses to new threats, . The OSMP's market but without absolving users of their responsibilities technology watch is designed to contribute to this goal. It has recently focused on finding responses to the quantum threat and on incorporating AI models into fraud prevention, and this year will concentrate on crypto-asset payment security.

To tackle cross-border threats and criminal networks, it would be useful to have bodies like the OSMP operating at the European level, and I sincerely hope the revision to EU payment services regulation (PSD3/PSR package), which is entering the trilogue phase, will lead to this.

- II.    In addition to being secure, innovation must be reconciled with sovereignty
2. There can be no doubt, the tokenisation of finance is no longer a distant prospect, but is becoming a tangible reality in markets, infrastructures and usages. It offers a dual promise: , and a more significant efficiency gains in asset transfers seamless, direct channelling of towards the of the real savings financing needs economy.

, But these promises will only be fulfilled if tokenisation is properly regulated so that the main risks are kept under control. The principal one is that of on non-European technologies, standards, actors and increased reliance settlement assets, and greater fragmentation of our European market.

- To mitigate these risks, we have three complementary levers at our disposal, which we need to use resolutely, jointly and rapidly:
- First, : we need to ensure a level playing field for payment actors, regulation by providing a clear and balanced framework - especially if a policy of deregulation is pursued at the global level, notably in the United States. This was the idea behind the decision to open up access to NFC antennae on Apple iPhones to other operators - to provide a framework for open competition. For new, innovative players, the MiCA regulation also establishes harmonised rules for issuers of stablecoins and other crypto-

assets, and for crypto-asset service providers, while also mitigating risks to end-users. But MiCA does not cover all the risks posed by tokenisation and its interconnections with traditional finance. One of the main ones is the threat of ""digital dollarisation"", where US dollar-backed stablecoins issued by non-bank, non-European players become the predominant settlement asset in transactions involving European users.

- The second lever is : service offerings from private sector players strengthening our sovereignty also means supporting the emergence and development of high-performance, pan-European payment solutions, to ensure Europe retains control over tomorrow's secure and innovative payments. This is why the Banque de France and the Eurosystem are supporting private initiatives such as the Wero digital wallet, and efforts to increase its interoperability with other European payment solutions; these are starting to bear fruit with the recent announcement of a partnership between EPI and EuroPA.
- The third and final lever is services in central bank money for retail payments and for the settlement of tokenised asset transactions . between intermediaries

For retail payments, the Eurosystem is preparing to issue a ""digital banknote+"" and is actively working with commercial banks to maximise synergies between their private solutions and this central bank digital currency. The project's objectives are critical and fall into two main categories: the first is guaranteeing access to public money at a time when digital payments and the digital economy are expanding. The second is helping to maintain and strengthen Europe's sovereignty over our payment ecosystem, in response to the threat of privatisation through payment solutions controlled by nonEuropean actors.

In parallel, as central bank money is the safest settlement asset and is universally accepted, the Eurosystem is building a DLT settlement solution in central bank to support the development of tokenised finance. The Governing Council has money decided to conduct the project in two phases:

- In the first phase, over the near term (by the second half of 2026), the , Eurosystem will provide actors with a central bank digital currency on DLT capitalising on the success of the experiments conducted in 2024. This first step is essential to ensure tokenised financial transactions are secure.
- The second phase can begin already and consists in exploring, in conjunction with all interested European players, the creation of a more integrated infrastructure - a ""shared European ledger"" - for recording, synchronising and processing financial transactions for all public and private European . This could help to market players create the Savings and Investments Union (SIU).
- To conclude, I would like to state my conviction that we are at a pivotal moment for our European payment system. Public and private stakeholders have an important and complementary role to play in maintaining our control over and the

singleness of our currency. Succeeding will imply reconciling innovation, security and sovereignty. This is a necessary condition for preserving trust in our currency, the euro, and our freedom of choice with regard to payment solutions. It is almost within our grasp, if we can resolve, collectively and rapidly, to use three important levers in combination: regulation, private initiatives and Eurosystem solutions. Naturally, the Banque de France will play a steadfast role in this.

Thank you for your attention.",Denis Beau
https://www.bis.org/review/r250630b.htm,Michael S Barr: Community development at the Federal Reserve,"Speech by Mr Michael S Barr, Member of the Board of Governors of the Federal Reserve System, at the Policy Summit 2025 ""Building Strong and Sustainable Communities"", hosted by the Federal Reserve Bank of Cleveland, Cleveland, Ohio, 26 June 2025.",2025-06-26 00:00:00,"## Michael S Barr: Community development at the Federal Reserve

Speech by Mr Michael S Barr, Member of the Board of Governors of the Federal Reserve System, at the Policy Summit 2025 ""Building Strong and Sustainable Communities"", hosted by the Federal Reserve Bank of Cleveland, Cleveland, Ohio, 26 June 2025.

* * *

Thank you, Eric, thank you to the conference organizers for asking me to speak today, and thank you, especially, to the practitioners here for the work you do in building stronger communities.  Your mission has also been at the center of my career in many 1 different roles as an academic, a practitioner, and a public official, starting as the Treasury Department's point person on community development way back in the 1990s.

Community development has been an important part of my work ever since, as a professor, a university leader, and, most recently, a banking regulator. I think this might help you understand how thrilled I am to have recently taken on the role of consumer and community development point person among the members of the Board of Governors, in support of Eric and his team and of the CD function throughout the Fed System.

Strong and sustainable communities are crucial to the Federal Reserve's mission of promoting a healthy economy and a stable financial system. Under the Community Reinvestment Act (CRA), the Fed has a statutory obligation to supervise how banks meet the credit needs of the communities they serve, consistent with safe and sound lending practices. Our community development work reinforces the benefits of this effort. More broadly, community development work helps the Fed support a strong and healthy economy. Our primary tool for doing this is monetary policy. Monetary policy influences interest rates and financial conditions to affect economic activity. We adjust interest rates in service of seeking price stability and maximum employment for the American people.

Let me spend just a moment on the U.S. economy and the outlook. The economy is currently on a sound footing, with low and steady unemployment, and disinflation having continued at a gradual, albeit uneven, pace toward our 2 percent target. Lowincome households can ill afford increases in prices, and that's why it is so important that we bring inflation back down to our target. Looking forward, however, I expect tariffs will put upward pressure on inflation. Higher short-term inflation expectations, supply chain adjustments, and second-round effects may cause some inflation persistence. At the same time, tariffs may cause the economy to slow and unemployment to rise. Low-income workers are often hit the hardest when the job market weakens. There is still considerable uncertainty about tariff policies and their effects. Monetary policy is well positioned to allow us to wait and see how economic conditions unfold.

Turning from monetary policy to community development, let me explain how community development also serves the goals of supporting a healthy economy that works for all Americans. While monetary policy matters a lot, other factors have to come

together for people to have good job opportunities. Businesses need access to credit to expand and hire, and in many communities that credit depends on the CRA, community development financial institutions, and a range of other public policies. Businesses need qualified workers, and in many places that depends on workforce development that is supported by community development organizations. Businesses that invest to create jobs need to believe in the future and believe in the future of the communities they serve. Thriving businesses and productive workers need safe, healthy, strong, and sustainable communities. These conditions are fundamental to achieving the Federal Reserve's goals that Congress has established.

## In Every Community

That is a big reason why the Fed's community development function is such an important part of the Federal Reserve System. Getting monetary policy decisions right requires a deep understanding of the conditions of local economies across the nation. This need is one of the reasons that the Fed was designed as an institution with a presence in every region of the country, ensuring that the experiences and perspectives of people from everywhere are considered in the decisions we make. It is why the Federal Reserve is actively seeking input from the public in formulating our long-term goals and strategy for monetary policy, with listening sessions around the country, including one right here at the Cleveland Fed. We want to hear from as many communities as we can, and an important way to do that is through our long-standing connections to organizations that are supporting strong and sustainable communities. In addition to the work you do, we value your perspectives, especially on how low- and moderate-income communities are faring in the economy. Federal Reserve policymakers depend on a lot of data, such as the unemployment rate, in making our decisions, but numbers can only go so far, and we also rely on actual experiences, on the ground, of people like you and those you serve.

Beyond providing insights on economic conditions, the Fed's community development function supports the economy by promoting access to credit and other financial services among small businesses and low- and moderate-income households and communities. This access is a cornerstone of economic opportunity and resiliency. By analyzing and disseminating information on local financial needs and highlighting successful approaches for attracting and deploying capital, the Fed's community development work advances economic vitality in communities across America.

The Fed staff who work on community development also work closely with the supervisors overseeing bank compliance with the Community Reinvestment Act. By ensuring that these two functions are working together, we can support financial institutions' awareness of promising opportunities to meet their obligations under the CRA. Beyond supporting these statutory obligations, the insights gathered by the Fed's CD function serve as an early warning system of risks in the financial system. CD programs help spot emerging trends that may, for example, reveal patterns of unfair treatment of borrowers or signal risks to the safety and soundness of lending practices in particular communities.

## What Makes Community Development Work

I've outlined the important role that support for community development plays at the Federal Reserve. Now I'd like to offer a few words on effective community developmentwhat works, and some ideas for how it might work even better. While we have learned a great deal over the years about promoting healthy and vibrant people and places, there are substantial opportunities to expand and adapt successful approaches to new areas. As an institution committed to conducting and disseminating high-quality, independent, and actionable research, the Federal Reserve will continue to conduct and support research on community development, and policymakers, including me, will highlight that research and engage with the public on new ideas for creating economic opportunity, particularly in low- and moderate-income communities.

This includes conducting original quantitative research to shed new light on evolving challenges, such as the Federal Reserve Bank of St. Louis' recent research looking into the incidence of youth disconnection from the labor force and education, and how that differs across communities. As far as collecting data, I would also point to our Community Perspectives Survey and the Small Business Credit Survey, which the Cleveland Fed has conducted since 2020. 2

Beyond collecting and analyzing data, the Federal Reserve's CD function also conducts qualitative research to understand the ""why"" behind the data. For example, the Philadelphia Fed recently published insights from their conversations with employers in the manufacturing as well as the leisure and hospitality sectors in Pennsylvania, New Jersey, and Delaware on how they are addressing staffing challenges. 3

Another way that the Fed helps advance knowledge is through convenings like the one we're a part of today. For example, the San Francisco Fed recently hosted the California Rural Success Summit, which aimed to connect rural stakeholders across the state and to showcase innovative efforts to enhance access to jobs and credit across rural California. 4  These convenings can also take the form of virtual events, such as the New York Fed's recent webinar exploring local approaches to developing and rehabbing affordable apartments. 5

These are a few of the ways that the Fed's community development work helps expand knowledge across the field. Communities also need to know how to apply that knowledge and have access to the partners and resources needed to do so. The Federal Reserve's CD function convenes local stakeholders who have a common interest in looking for ways to create opportunities and partnerships to better serve community development needs.

For example, the Federal Reserve Bank of Boston has been supporting community leaders for more than a decade through its Working Places Initiative, which helps local leaders work together to build strong, healthy economies and communities. 6   Similarly, through the Advance Together initiative, the Dallas Fed supports local communities across the 11th District that are addressing education and employment challenges to connect more Texans with quality jobs. 7   The Atlanta Fed helped to establish and continues to actively participate in the Metro Atlanta eXchange for Workforce Solutions, a connector for workforce developers in the area. MAX, as it is known, helps bring together employers with those involved in training, apprenticeships, and certification

programs to fill specific demands. 8   And, lastly, I would include the Occupational Mobility Explorer, an interactive tool developed by the Federal Reserve Banks of Cleveland and Philadelphia that allows workers to explore career paths and visualize how job skills can transfer to higher-paying occupations. 9

Fed CD staff also help investors and community development organizations connect with each other to explore mutually beneficial opportunities to work together. Through initiatives like the Kansas City Fed's Investment Connection and the Richmond Fed's Rural Investment Collaborative, the Federal Reserve helps communities identify potential financing partners who can move their ideas to action. 10

These are just some of the ways the Federal Reserve supports the work of community development practitioners, who, as I have described, in turn support the Federal Reserve's work of promoting a healthy economy and a safe and stable financial system. Thank you for the work you do and for sharing some time with me today as we work together now and into the future to achieve our community development goals.

- 1  The views expressed here are my own are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.
- 2  Additional information on the Community Perspectives Survey is available at https://fedcommunities.org/topics/community-perspectives-survey; additional information on the Small Business Credit Survey is available at  https://www. . fedsmallbusiness.org/reports/survey
- 3  See Ryotaro Tashiro and Keith Wardrip (2023), Hiring and Retaining Lower-Wage and Noncollege Workers during the Pandemic: Conversations with Employers (PDF) (Philadelphia: Federal Reserve of Philadelphia, March).
- 4  Additional information on the California Rural Success Summit is available on the San Francisco Fed's website at  https://www.frbsf.org/news-and-media/events/2025/05 . /california-rural-success-summit-2025
- 5  Additional information on the webinar is available on the New York Fed's website at https://www.newyorkfed.org/newsevents/events/regional\_outreach/2025/0408-2025.
- 6  Additional information on the Working Places Initiative is available on the Boston Fed's website at https://www.bostonfed.org/workingplaces.aspx.
- 7  Additional information is available on the Dallas Fed's website at  https://www. dallasfed.org/cd/at.
- 8  Additional information about the Metro Atlanta eXchange for Workforce Solutions is available at https://metroatlantaexchange.org.

- 9  Additional information about the Occupational Mobility Explorer is available on the Philadelphia Fed's website at  https://www.philadelphiafed.org/surveys-and-data /community-development-data/occupational-mobility-explorer.
- 10  Additional information about Investment Connection is available on the Kansas City Fed's website at https://www.kansascityfed.org/community/investmentconnection; additional information about the Rural Investment Collaborative is available on the Richmond Fed's website at  https://www.richmondfed.org/region\_communities/rural . /rural\_investment\_collaborative",Michael S Barr
https://www.bis.org/review/r250625f.htm,David Ramsden: Navigating an uncertain outlook - the signals from the labour market,"Speech by Sir David Ramsden, Deputy Governor for Markets and Banking of the Bank of England, at the Barclays-Centre for Economic Policy Research (CEPR) International Monetary Policy Forum 2025, London, 24 June 2025.",2025-06-24 00:00:00,"Opens

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## Navigating an uncertain outlook: the signals from the labour market - speech by Dave Ramsden

Given at the Barclays-CEPR Monetary Policy Forum 2025

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## Published on 24 June 2025

Dave Ramsden sets out his latest views on the UK economy and the outlook for inflation, drawing on the signals from the labour market in the context of an uncertain global and domestic environment.

## Speech

Thank you for inviting me to speak at the Barclays-CEPR Monetary Policy Forum, which gives me the opportunity to set out my latest thinking, in the light of last week's decision by the Monetary Policy Committee (MPC). The MPC decided by a majority of 6-3 to leave Bank Rate unchanged at 4.25%, and I was one of the three members who preferred to cut Bank Rate by 25bps.

Over the last eight meetings, a year in MPC terms, we have gradually eased policy restrictiveness in the UK, cutting Bank Rate four times, reflecting the progress made in the disinflation process to bring inflation back towards the 2% target sustainably in the medium term.



Sources: ONS and Bank calculations. (a) Core inflation is defined as CPI excluding food, beverages, tobacco and energy. CPI and core inflation data to May 2025, Bank rate to June 2025.

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The persistence of domestic inflationary pressures has been our key focus and we have taken a gradual approach to reducing policy restraint to ensure persistent inflationary pressures in domestic wage and price-setting are squeezed out so that inflation returns sustainably to the 2% target. Since the start of this year we have stressed that we are taking a 'gradual and careful' approach in light of the increasingly uncertain global and domestic environment, which is leading to two-sided risks to the outlook for inflation.[1] footnote

Today I want to set out how my thinking has evolved, building on a speech I gave in South Africa in February.[2] I'm going to focus on the labour market, since, notwithstanding all the global events, that is where I judge the most material developments have been in recent months. footnote

Although the MPC's focus on uncertainty has increased recently, uncertainty is not a recent phenomenon. Chart 2 shows that the Bank's in-house uncertainty index, as measured by the nine indicators which make up the index, has yo-yoed over the last ten years in response to a series of shocks starting with Brexit. It has picked up sharply again in the last year, driven in the most recent episode by trade policy uncertainty.

Sources: Baker et al (2016) , Bloomberg Finance L.P., Caldara et al (2019) , CBI, Consensus Economics, GfK, ICE Data Services, LSEG, S&amp;P Global, and Bank calculations. (a) The UK uncertainty index is calculated as the first principal component of nine proxies of economic uncertainty, based on data starting in 1985. See Box A of the May 2025 MPR for further detail on the proxies. The final data points are to May 2025. Opens Opens



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Uncertainty is typically thought of as widening the probability distribution of future events, making it harder to forecast what will happen next. More recently unpredictability has entered the MPC's lexicon to refer to events that are unforecastable based on past experience. The MPC has employed the term with regard to the recent shocks to the outlook for the global trading system. There is lots of empirical evidence showing how challenging shocks and the resulting uncertainty (and unpredictability) are for businesses and households.

Increasing uncertainty and unpredictability is a key driver for the Bank for progressing its response to the Bernanke review; enhancing our forecasting infrastructure and toolkit and building out scenarios to illustrate the mechanisms at work and the risks around those is of even greater importance. In particular the extent to which demand or supply weakness is impacting the UK economy as these can have different consequences for the extent and nature of inflationary pressures. Scenarios help to test the robustness of policy decisions, helping us to arrive at policy which will be robust to a range of alternative plausible futures for the economy.

## Developments in the UK economy …

Notwithstanding the prevailing uncertainty and the unpredictability of events, the main aggregates in the MPC's baseline forecast for GDP, inflation, unemployment and spare capacity have not changed much so far this year, as shown in Table 1.

Table 1: Baseline forecast summary (a)

|                             | 2025 Q2   | 2026 Q2   | 2027 Q2   | 2028 Q2   |
|-----------------------------|-----------|-----------|-----------|-----------|
| GDP                         | 0.8 (0.3) | 1.3 (1.5) | 1.5 (1.4) | 1.9       |
| CPI Inflation               | 3.4 (3.5) | 2.4 (2.6) | 1.9 (2.2) | 1.9       |
| Unemployment rate           | 4.6 (4.5) | 4.8 (4.6) | 5 (4.8)   | 4.9       |
| Excess supply/Excess demand | -½ (-¼)   | -¾ (-½)   | -¾ (-¾)   | -¼        |

(a) Figures in the table show the May 2025 MPR projections. Figures in parentheses show corresponding projections in the February 2025 MPR.

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The main features of the outlook are common to both our February and May MPR baseline forecasts. Underlying growth in GDP is forecast to continue to be weak, in part because of restrictive monetary policy. GDP growth from 2025 Q2 onwards is projected to be much weaker than the headline numbers for Q1 where there is clear evidence of front-loading of activity in response to the threat of tariffs.

The MPC is forecasting a hump in inflation for the remainder of this year which is in part due to past energy price rises and a number of one-off increases in administered prices. Because of weak growth in demand - relative to estimated supply growth - a margin of spare capacity (excess supply or a negative output gap) opens up over the forecast supporting the disinflationary process. A gradual fall in headline inflation is projected through 2026 with inflation returning to the 2% target in early 2027. Unemployment rises to around 5% over the forecast period.

We will publish updated baseline forecasts in August, which will also have to take account of the rapidly moving geopolitical developments in the Middle East.

## …with a focus on the labour market

Given the relative stability in the baseline forecast what is it about the outlook that has influenced my thinking? The short answer is the cumulative evidence of a continued material loosening in the labour market. As a result while I still think the risks to inflation continue to be two-sided I'm now attaching more weight to the downside risks in the medium term.

Assessing the state of the labour market has been challenging in recent years. This is in part due to issues with the official Labour Force Survey (LFS) series but also because some of the apparent trends, for example in the decline in participation and, more recently, the strength in the official earnings series have been very difficult to explain based on past experience. As a consequence, we have increasingly examined the trends in a wide range of labour market indicators. And I want to use the next section of my remarks to set out my latest assessment in three parts - first what we are seeing in terms of labour market quantities, second what we can glean from flows data, and third what is happening on the nominal side of the labour market.

The vacancies to unemployment (V/U) ratio has become our primary indicator of conditions in the labour market. As shown in Chart 3, the V/U ratio has come down significantly from its peak in mid-2022, with the majority of the move coming from falls in vacancies. We tend to use 2019 as a comparison point for the state of the labour market, given domestic demand and supply were seen to be broadly in balance, and relative to that pre-Covid reference point the V/U ratio is now materially lower.

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Sources: AA/WARC Expenditure Report, ONS and Bank calculations.(a) The equilibrium V/U ratio is estimated using an error-correction model over the period 1982-2024. The real cost of vacancy posting and hourly labour productivity are included as long-run determinants for the level of vacancies. The model also includes controls for short-term movements in these variables ( Stelmach et al, 2025 ). The final data points for both series in the chart are 2025 Q1, while diamonds represent projections for 2025 Q2. Opens

As vacancies have exhibited an upward trend over time Bank staff have estimated an equilibrium V/U ratio, also shown on Chart 3. The difference between the observed and equilibrium V/U ratio - the V/U gap - gives a measure of the degree of slack in the labour market. In the last couple of years the V/U gap has shown a reasonable correlation with Bank staff's estimate of the output gap, as shown in Chart 4. On that basis, the V/U gap suggests that a degree of economy-wide slack has now opened up.

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Sources: ONS and Bank calculations.(a) The final data points for both series in the chart are 2025 Q1, while diamonds represent projections for 2025 Q2.



This loosening is also increasingly apparent from the employment numbers. The latest PAYE data for payrolled employees, notwithstanding the potential for revisions, indicate that private sector employee numbers are now clearly in contractionary territory, as shown in Chart 5. Growth rates in the public sector are also falling back. Retail and hospitality, the sectors particularly impacted by the National Living Wage (NLW) and National Insurance Contributions (NICs) increases in April 2025, have fallen particularly sharply. Notwithstanding these early indications it will be some time before we can be more certain about how NLW and NICs increases will feed through into firms' hiring decisions, versus being passed on to consumers in price increases, or reduced wage growth or simply absorbed into firms' profit margins.

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Sources: Pay As You Earn Real Time Information from HM Revenue and Customs and Bank calculations. Latest data to May 2025.



The Bank Agents' measure of recruitment difficulties and the REC survey, which has been a pretty reliable leading indicator of the V/U ratio, points to some further loosening in the pipeline, as shown in Chart 6.

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Chart 6: Survey indicators point to further loosening in the pipeline Agents' reported recruitment difficulties(a) and REC survey's proxy for tightness

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Sources: Bank of England Agents; KPMG/REC UK Report on Jobs, ONS and Bank calculations(a) The Agents' scores are judgement-based assessments of economic conditions, based on the Agents' conversations with businesses. The recruitment difficulties score measures the scale of general recruitment difficulties across the economy. Latest data to May 2025.

It is important to stress that what we are seeing in terms of the outlook is a sustained cumulative loosening rather than a more abrupt weakening. The redundancy rate and notifications have picked up only very gradually and remain at a very low rate, though the notifications series shown in the left hand panel of Chart 7 does not cover the smallest businesses. A potential leading indicator of a more material increase ahead is the rise in Google searches for redundancy, shown in the right-hand panel of Chart 7.

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Chart 7: Redundancies have seen little movement though early signals of a rise Measures of redundancies(a)(b)

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Sources: Insolvency Service Redundancy Payment Services Database, Google Trends, ONS and Bank calculations.(a) Employers are required to submit an HR1 form at least 30 days before the first dismissal where 20 to 99 redundancies are proposed, and at least 45 days before the first dismissal where 100 or more redundancies are proposed.(b) Google searches show the seasonally adjusted average of trends for the terms: 'redundancies', 'redundancy calculator', and 'redundancy insurance'.

Turning to the LFS based flows data I'd like to start by recognising the ONS' efforts in re-introducing these data series, which help inform understanding of labour market dynamics. Although it is important to acknowledge that the relatively low sample sizes, while rising,

mean we shouldn't over-interpret what we take from these data.

With that said, I'd like to draw out what signal we can take from the inflows to unemployment, the 'separation rate' and the outflows from unemployment, the 'job-finding' rate. Typically, at the start of a more pronounced downturn there would be an uptick in the separation rate, as workers become unemployed. In parallel outflows from unemployment typically tick down slightly from the start of a downturn. Chart 8, with the job-finding rate inverted, suggests initial signs of that process re-emerging over the last year.

Sources: ONS Labour Force Survey and Bank calculations.



If the recent trends in flows persist then we may see signs of a more substantial weakening in the labour market emerging, which would risk unemployment rising more over the next year than in the MPC's baseline forecast.

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What are the implications for the nominal side? The private sector regular Annual Weekly Earnings (AWE) data does continue to be volatile, but the April reading of 5.1% was below our recent forecasts, as shown in Chart 9.



Sources: Bank of England Agents, DMP Survey, HMRC, KPMG/REC UK Report on Jobs, Lloyds Business Barometer, ONS and Bank calculations.(a) Private sector regular pay growth in the aqua line shows the ONS measure of private sector regular average weekly earnings growth (three-month average on same three-month average a year ago). Bank staff's indicatorbased model of near-term private sector regular pay growth is quarterly and uses mixed-data sampling (or MIDAS) techniques. Latest data points are for the three months to April 2025 for private sector regular pay and 2025 Q2 for the indicator-based model estimates.(b) Diamonds indicate projections or expectations for pay growth. Definitions of wage growth vary between each of the measures. The Agents' pay survey diamond shows respondents' expected average pay settlements in 2025, weighted by employment and sector. The DMP diamond shows average expected pay growth one year ahead for respondents to the May 2025 DMP Survey. Feb MPR pay growth projections are for 2024 Q4 to 2025 Q4, May MPR pay growth projections are for 2025 Q1 to 2026 Q1.

This follows the concerning pick-up in AWE growth rates in the second half of last year. Our indicator-based model estimates didn't take too much of a signal from the pick-up but the previous downward trend in wages did level off. Given these uncertainties the MPC anchored its expectations for earnings to the Bank's agents pay survey, which has had a good recent track record of predicting actual pay settlements. The survey was consistent with settlements falling from 5.4% in 2024 to 3.7% in 2025, which would be approaching rates consistent with the MPC's inflation target.[3] The latest intelligence from the Agents had continued to suggest footnote

Opens average pay settlements for 2025 of 3.5% to 4%. Further encouragement comes from the Bank's and Brightmine's settlements databases, which point to actual settlements since the start of the year in a range of 3% to 4%, although the sample is still partial at this stage.

## Developments in inflation

Headline CPI increased to 3.4% in May from 2.6% in March, so we are now seeing the hump in inflation that we had been expecting. The headline CPI number was in line with our shortterm forecast for 3.4% in Q2. This shows inflation peaking at 3.7% in September before easing back to around its current level by the end of the year. The main components of inflation are on different paths, as set out in Chart 10.

I have previously drawn attention to the extent to which we can draw conclusions from these components,[4] noting that the degree of symmetry in the respective rise and fall of each wave gives a gauge on the extent of inflation persistence. The key services ex. rents disinflation process is now clearly slower than its earlier inflationary rise and at 4.4% is uncomfortably high. It will stay elevated in the short term due in large part to the effects of various administered and one-off price increases. But given the high labour intensity of services the increasing evidence of a loosening in the labour market should continue to provide a disinflationary impulse. footnote

Turning to the other components of the CPI, rent inflation, having stayed stubbornly high, has finally started to fall relatively steeply.

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Sources: ONS and Bank calculations. Data to May 2025.



At the same time what is clearly evident from Chart 10 is the pick-up in food price inflation from the middle of last year. At 4.4% in May it was above our forecast and the level of food prices is now 36% above its level four years ago in spring 2021. This is significant because there is some evidence that food prices are particularly salient for households' perceptions of, and expectations for, inflation.[5] footnote

Core goods price inflation has remained subdued, tracking slightly below our short-term forecasts. To complete the picture, even before the latest geopolitical developments, energy price inflation was close to turning positive again in May after the best part of two years in negative territory.

## Uncertainty in the outlook - weak demand or weak supply?

When weighing up the risks to the inflation outlook as they have evolved in 2025, I've focussed on two qualitative scenarios for weak demand and weak supply. To more systematically address the mechanisms underpinning the main risks, Bank staff developed two quantitative scenarios which we included in the May MPR. In the staff's weaker demand scenario uncertainty played a bigger role than in our baseline forecast, weighing particularly on investment but also on household saving and leading to domestic inflationary pressures

Opens fading more quickly. In the weaker supply scenario, the current hump in headline inflation led to additional second round effects and more inflation persistence, underpinned by less loosening in the labour market and amplified by weak potential productivity growth.

More detail on the scenarios can be found in the May MPR[6] and in speeches from other MPC members. For the purposes of my remarks today the main evolution in my thinking is to put more weight on the mechanisms at play in the weaker demand scenario, which will be reinforced by the risks of a more significant loosening in the labour market. footnote

I remain alive to the risk that we will not see the recovery in productivity envisaged in the MPC's baseline forecast. And I am not ruling out that the wage setting process has become less flexible, for example through wage setting having become less contestable. Nor am I ruling out that mismatch may have become more pronounced in certain sectors. We will need to stay vigilant about the changing composition of inflation and the risk that rises in the most salient parts of the consumer basket, food and energy, increase the chances of second round effects from the current hump in headline inflation. Similarly, the MPC needs to pay close attention to any evidence that the later stages of the disinflation process, whereby lower wages growth feeds through into lower services prices growth is stalling.

These are all plausible considerations. But in my assessment of the risks to meeting our inflation target in the medium term they have been outweighed by the cumulative evidence across a wide range of indicators of ongoing labour market loosening.

## Implications for monetary policy

In terms of the MPC's June decision I assessed that the signals from the labour market provided a sufficiently strong case for a reduction in Bank Rate to 4%, to guard against the increasing risk that, in the medium term, inflation would settle at below our 2% target. Given the myriad uncertainties relating to global developments but also the UK outlook any policy approach has to be robust to alternative states of the world.

Before finalising my vote I challenged myself on whether sequential cuts in Bank Rate in May and June would be appropriate if it subsequently became clear that risks to inflation were actually weighted to the upside. It was a finely balanced judgement for me but I concluded that my approach was robust for two main reasons. First because even at 4% I assess that monetary policy would remain clearly in restrictive territory. So if evidence emerged that pointed to higher inflation in the medium term then Bank Rate could be held higher for longer than would otherwise be the case. Second given the environment we are operating in I think it is important that monetary policy is outlook dependent and should respond and be seen to respond when the evidence on the outlook requires it. I continue to take a watchful and

Opens responsive approach to setting policy. I think this is in line with the emphasis the MPC puts in its collective communications on policy not being on a pre-set path and that we will consider the degree of restraint which is required from meeting to meeting.

I see no inconsistency with my latest vote and the MPC's gradual and careful approach to the withdrawal of restrictiveness. This has served the MPC well over the last year as we have cut Bank Rate four times by a total of 100bps in total. And I believe it will continue to serve us well in these times of increased uncertainty and unpredictability, as long as the disinflation process is judged to be continuing, in order to return inflation back to the 2% target sustainable in the medium term.

With thanks to Ed Kent and Michal Stelmach for their assistance in preparing these remarks, and to Andrew Bailey, Josh Lillis, Andrea Rosen, Vicky Saporta, Martin Seneca, Fergal Shortall, Carleton Webb and Jan Zacek for their helpful comments and contributions.

1. The number of times we've used 'uncertain' or 'uncertainty' in the Bank's Monetary Policy Reports (MPR) has increased from 20 times in the August 2024 MPR, to 43 in the November 2024 MPR, 59 in the February 2025 MPR and 112 times in the May 2025 MPR.
2. Surveys, forecasts and scenarios: setting UK monetary policy under uncertainty - speech by Dave Ramsden | Bank of England
3. See What if things are different? - speech by Clare Lombardelli | Bank of England . Simple ready-reckoners suggest that wage growth around 3% and potentially a bit higher would be consistent with inflation at target.
4. Back to the Future 2: Keeping inflation close to the 2% target - speech by Dave Ramsden | Bank of England
5. As noted in the May 2025 MPR there is tentative evidence that households' inflation expectations have become more sensitive to price changes since the most recent period of very high inflation. That is consistent with estimates by Anesti et al (2025) , which suggest that households' inflation expectations tend to be more sensitive to price changes, specifically changes in food prices, following larger increases in inflation.
6. See Box A of the Monetary Policy Report - May 2025 | Bank of England",David Ramsden
https://www.bis.org/review/r250703h.htm,"Christine Lagarde, Philip R Lane: ECB press conference in Sintra - introductory statement","Introductory statement by Ms Christine Lagarde, President of the European Central Bank, and Mr Philip R Lane, Member of the Executive Board of the European Central Bank, at the conclusion of the 2025 assessment of the ECB's monetary policy strategy, Sintra, 30 June 2025.",2025-06-30 00:00:00,"## Christine Lagarde, Philip R Lane: ECB press conference in Sintra introductory statement

Introductory statement by Ms Christine Lagarde, President of the European Central Bank, and Mr Philip R Lane, Member of the Executive Board of the European Central Bank, at the conclusion of the 2025 assessment of the ECB's monetary policy strategy, Sintra, 30 June 2025.

* * *

Good afternoon, ECB Chief Economist Philip Lane and I welcome you to this press conference, on the occasion of the conclusion of the 2025 assessment of our monetary policy strategy.

The Governing Council recently agreed on an updated monetary policy strategy statement. You can find this statement  on our website, together with an  explanatory and the presenting the underlying analyses. overview note two occasional papers

I will start by putting this strategy assessment into the broader context. Philip Lane will then go through the updated strategy statement and explain what has changed and why, as well as what has remained unchanged.

Following the strategy review we carried out in 2020-21, the Governing Council committed to ""assess periodically the appropriateness of its monetary policy strategy, with the next assessment expected in 2025"". Such regular assessments ensure that our framework, toolkit and approach remain fit for purpose in a changing world.

And the world has changed significantly over the last four years. Some of the issues we were most concerned about back in 2021 - including inflation being too low for too long - have taken a rather different turn.

Not only did we see inflation surge, but some fundamental structural features of our economy and the inflation environment are changing: geopolitics, digitalisation, the increasing use of artificial intelligence, demographics, the threat to environmental sustainability and the evolution of the international financial system.

All of those suggest that the environment in which we operate will remain highly uncertain and potentially more volatile. This will make it more challenging to conduct our monetary policy and fulfil our mandate to keep prices stable.

During the strategy assessment, we asked: what do these changes mean for the way we assess the economy, conduct our policy, use our toolkit, take our decisions and communicate them? In seeking to answer this question, our mindset was forwardlooking.

On the whole, we concluded that our monetary policy strategy remains well suited to addressing the challenges that lie ahead.

But our strategy also needs to be updated and adjusted in certain areas, so that the ECB can remain fit for purpose in the years to come. The next assessment is expected in 2030.

With our updated strategy statement, we are taking a comprehensive perspective on the challenges facing our monetary policy, so that the ECB can remain an anchor of stability in this more uncertain world.

This is our core message to the euro area citizens we serve: the new environment gives many reasons to worry, but one thing they do not need to worry about is our commitment to price stability.

The ECB is committed to its mandate and will keep itself and its tools updated to be able to respond to new challenges.

Let me conclude by thanking, on behalf of the Governing Council, all the colleagues across the Eurosystem who have contributed to this assessment in a great team effort.

I now hand over to our Chief Economist Philip Lane and, following his remarks, we will be ready to take your questions.

* * *

Philip R. Lane: I'm going to focus on the 12 paragraphs of  The ECB's monetary policy strategy statement. What's important is that behind these paragraphs is a lot of work. The base layer is the two occasional papers. I'm sure you've already read the 400 pages in those two occasional papers. There's a lot of rich new analysis of many dimensions in those two occasional papers. Then we have the overview note, which the Governing Council worked on collectively and which basically provides the elaboration behind these 12 paragraphs. And I would say that in these 12 paragraphs, in this review, we essentially tried to review the economic assessment: where are we and where are we likely to be? That was one of the two work streams. That essentially primarily shows up in paragraph 1.

So paragraph 1, you might say, is one paragraph, but it's a very important paragraph because it essentially outlines the challenges that we may face. We had a similar paragraph last time, but last time the focus was essentially on a lot of factors that can give rise to a low-inflation world and a low interest rate world. Whereas the assessment this time of the Eurosystem staff behind this is that when we look where we are now in the structural changes facing the world economy, we have geopolitics, and a lot of this is in the direction of rolling back globalisation. Last time we were looking at globalisation as a force which did contribute to low inflation before the pandemic. There are many dimensions to geopolitics, but we are of course already living it and this is something we do think is going to shape the next five years. We already mentioned digitalisation the last time, but this time we're calling that as a separate and important element: artificial intelligence. Because, of course, I think for a long time it has been understood that the world economy automates and digitalises. That's been around for a while. That's mature. What's not mature and where there's really a wide range of possibilities is: what does it mean as the business sector and the public sector incorporate artificial

intelligence? I think we had already called out demography and the threat to environmental sustainability, and I think we're very correct to have done so five years ago. We've seen a lot on these fronts in these five years. Let me remind you: without immigration, the European labour force would be shrinking. So demography is not just a future trend, it's a year-by-year reality for us. And then this week, last week, this year, last year, all the time we see the impact of weather shocks and the impact of the green transition. By the way, investment in Europe in recent years would have been a lot lower without the green transition. It's the one solid driver of investment for many sectors at the moment. We call out all of these elements, but what's critical for our conclusion for monetary policy is that it creates uncertainty, it creates volatility, and we think what we may be faced with is larger deviations from our 2% target in both directions. So we have this two-sided risk assessment. And as I go through these paragraphs, essentially once we've identified this economic assessment, the natural question to ask is: how do we manage it? How does monetary policy manage this twosided risk? And essentially in what follows, we will turn to the monetary policy implications. But the other thing to note about paragraph 1 is that there is a new sentence. That's the final sentence. It is that we don't live in a bubble. We don't say monetary policy is the only game in town. And we do highlight here that a more resilient financial architecture - supported by progress on the savings and investments union, the completion of banking union and the introduction of a digital euro - would also support the effectiveness of monetary policy in this evolving environment. So, in other words, all of these structural changes are much more easily handled if we have a more resilient euro, European and euro-denominated financial system. And I think that's also important and maybe helps you to understand why we as Board members, and more generally the Governing Council, spend a lot of time talking about these wider issues. It's not a distraction from monetary policy. It's an important underpinning for monetary policy.

Paragraph 2 is unchanged because paragraph 2 is setting the legal context. We have a mandate given by the Treaty, and so to make the strategy statement self-contained, it's a reminder to you of the legal and Treaty constraints we live under. And that essentially remains the same as last time.

The third paragraph, because remember in the European Treaty there's not a super detailed definition of price stability, so it's important and this is something that evolved over the years: that in terms of measurement, we're focused on the Harmonised Index of Consumer Prices (HICP). And again, this is stable from last time. Last time we highlighted that we did think a reform of the HICP to include owner-occupied housing would be desirable. We continue to hold that view. But in the end it's for the European Statistical System to make progress on that. So what we say is that in the meantime we do take into account inflation measures that include estimates of the cost of owneroccupied housing. So, in other words, we create supplementary indicators. These are not official data, but we do take a look. And these would be relevant in scenarios where house prices were rising far more quickly or far more slowly than the overall inflation rate. By the way, this has not been particularly the issue in recent years. It would not have made a big difference in recent years, but of course in principle we could be in a situation in the future where it made a difference.

Paragraph 4 is again largely stable from last time. It's explaining why we target 2%, not zero, and that's a fairly mature topic: why you want to have a safety margin. We do, and

I think correctly this time, in the final sentence of paragraph 4 include intersectoral adjustment. In the last five years we've seen this massive change between goods prices and services prices. And actually it turns out that that's a very important consideration. It's a lot easier to handle an under 2% inflation target than if you're trying to hit zero. Essentially if you're trying to hit zero and the price of energy compared with goods rose, implicitly you need to drive down the price of goods. And we know for many reasons that deflation, even at the sectoral level, is difficult. So having a 2% target is reinforced by including intersectoral adjustment in that list. So, paragraph 4 says you need a safety margin.

Paragraph 5 says 2% is the best way to maintain price stability and that our commitment is symmetric. So what this symmetry means is that we consider negative and positive deviations from the target as equally undesirable. The last sentence, I think, has been critical in these years: having a clear target. You may have heard us all many times say 2%. It's not somewhere in the region of 2%. It's 2%. And having that clarity is very important for anchoring expectations, so I think it turned out that that choice we made to be precise about what our orientation is in the medium term is very important.

Let me turn to a paragraph where I think there has been an important change, a sensible change - something that you might say sounds so sensible, why are you talking about it? But it's worth highlighting the update. Last time, in 2021, we felt we needed to point out that the symmetry of the target doesn't mean that how we set monetary policy looks identical whether we're above the target or below the target. And so we pointed out that if we have a lower bound issue, we need to be appropriately forceful or persistent. What have we learnt from these five years? That remains true for below-target inflation, but actually it's equally true for above-target inflation. And what we actually did was we had a phase of being forceful. So from July 2022 to September 2023, we hiked a lot. And then we went into a persistent phase. So from September 2023 to June 2024, we had 4%. The overview note goes into more detail about why you need the blend of forceful and persistent. But when we reviewed this, peers said these were important concepts in relation to the lower bound, but they're equally appropriate concepts in relation to being above target. It's not, of course, in relation to blips. What we talk about here is in response to large, sustained deviations. So you have to first of all make the call. What we see in front of us is something that's materially away from 2% and that would remain away from 2% unless we responded. And this is why we say ""appropriately forceful or persistent"", because what exactly is appropriate depends on whether you are dealing with an upside shock, a downside shock and a wider set of issues. So that, I think, is important. Let me come back to this issue that we have a symmetric commitment and we're two-sided, but the headache is different on both sides. On the downside, the lower bound is the main headache. On the upside - and this reflects so much of the last number of years and reflects a lot of the work in the occasional papers - is possible non-linearities in price and wage-setting. What we learnt is that once inflation starts to build, it can take off and it can accelerate. You can get this non-linear dynamic. And that's why you need to be forceful on the upside. That's not really true for downside shocks. They tend not to accelerate, but downside shocks tend to get embedded because your ability to respond on monetary policy is different.

Going back to this point that it's not about smoothing out every deviation from 2% and it's large, sustained deviations: this is very much in the spirit of the medium-term orientation. And that's paragraph 7. So paragraph 7 is stable. We already had a medium-term orientation, I think, throughout the whole history of the ECB. And I think that's been very wise. Our commitment, in line with the opening remarks from the President, is that people should be able to count on our commitment to price stability. If we see a deviation, we will bring it back to 2%. And that's our medium-term orientation. There's one enrichment here, which I think makes sense. People often ask: how long is the medium term? And I think a very important discipline on that is in the final sentence now: ""subject to maintaining anchored inflation expectations"". That really defines the medium term. As you know, in recent years we mapped that into ""we will make sure inflation returns to target in a timely manner"". You need to impose some discipline on yourself as opposed to saying the medium term is always just over the projection horizon. The medium term means not so long that the anchoring of expectations is put at risk. So again, I think that's always been true, but it's better to be explicit about it. And maybe now, as journalists, if you ask Governing Council members in the future how long the medium term is, the medium term is how long it takes without putting into question the anchoring of expectations.

Paragraph 8 is our toolbox paragraph. We already said in 2021 that our primary instrument is the set of ECB policy rates. I do wonder, for those of you who were involved in looking at the ECB in 2021, how many of you fully believed that as we moved away from the lower bound, we would stop quantitative easing (QE) and we would stop forward guidance? But that was in our strategy and that's what we did. These are tools that make sense at the lower bound. They are not tools from a stance point of view that have the same role away from the lower bound. So one basic message is: already in 2021 we told you a lot about how the toolbox works, but we did obviously come back and look at this. It's an important topic. Let me highlight a couple of revisions here, or amplifications. One is that I think we are more articulate now about when these tools come into play. One is to steer the monetary policy stance when the rates are close to the lower bound. That's what we said last time. That's definitely a big category. But the second category is ""or to preserve the smooth functioning of monetary policy transmission"". March 2020 is one example. When the world's financial market was hit by the pandemic shock, central banks in general did a lot of asset purchasing, refinancing operations and other elements to stabilise the transmission of monetary policy. So again, what I would say is either it's because we're near the lower bound or there's some big drama causing an interruption to the transmission of monetary policy. But otherwise these instruments remain in the toolbox. They're available, but they're not used on a continuous basis. And so we list out these tools just as a reminder. Longer-term refinancing and asset purchases: those two would possibly be used either way. For the stance or for smoothing the transmission of policy. Whereas of course negative rates and forward guidance are more particular to the lower bound. So there is a differentiation within that category. We also said last time that we will respond flexibly to new challenges as they arise and we can consider new instruments. And of course we told you that we considered new instruments and we actually did it, because we did introduce the Transmission Protection Instrument in 2022. And then the last sentence is important because this is where a lot of the discussion in the last year has been. It is to look back at these this set of instruments and on a forward basis say, in the future, if we ever came to these situations, how

would we use these instruments? So we say in this important sentence: the choice of which one we use or which combination we use, the design - because on day zero, we usually have a press release or a legal act saying here's the design of our instrument and the implementation. So in other words, month by month, how we adjust it and how we bring it to an end in terms of exit. All of these, number one, will enable an agile response to new shocks. So let's not get locked into rigid programmes that would inhibit our ability to respond to new shocks. They will reflect the intended purpose. So there can be differences between a stance-orientated intervention and a transmissionsmoothing-type intervention. And then, of course, all of these will be subject to a comprehensive proportionality assessment. So in considering the choice of tools, the design and the implementation, we need the checklist of whether this is proportional to the challenge we face. So that's, as I say, the toolbox.

Then paragraph 9 is explaining how we make decisions. A lot of this is similar to last time. Last time we basically had to tell you that we've decided, rather than having a twopillar strategy where we have an economic pillar and a monetary pillar, we make an integrated assessment. And in that integrated assessment, for example, we take into account macro-financial linkages, financial stability and so on. So a lot of that remains, but maybe you might find this new sentence interesting. The second sentence is that in how we make decisions, we take into account not only the most likely path for inflation in the economy, i.e. in a projection for the baseline, we don't just look at the baseline, but also the surrounding risks and uncertainty. How do we do that? Including through the appropriate use of scenario and sensitivity analysis. This is something we have done forever, but it's probably true that it's not always visible in how we communicate. And also internally, of course, the science of how you should do scenarios and the science of how you should make sure your decisions are robust is always evolving. So we do want to make this clear. And in fairness for you and for others watching us, you can say ""I think I understand this decision in the context of the baseline, but I have a natural question: is it also robust to the risk assessment of the ECB?"" And I think that will be a step forward in the conversation about monetary policy. By the way, this is already reflected, importantly, because, as you may have noticed, what we've said in the last couple of years is that we make our decisions not only based on the inflation outlook, but also in relation to underlying inflation and the strength of monetary transmission. Because those two dimensions capture a lot of risk. Underlying inflation captured a lot of risk when we were bringing inflation down from 10% to 2%. The strength of monetary transmission captured a lot of risk as we moved interest rates, first of all, steeply upwards and then as we've been reversing. So the logic behind the threepronged reaction function that we've been using reflects these principles.

Paragraph 10 reaffirms, and I think everything we've learnt from the last four years validates the assessment that, in terms of price stability, climate change has profound implications in terms of the structure of the economy, the rise and fall of particular sectors, the cycle, including through the impact of weather shocks, and also in terms of how the financial system is adjusting. This is also a policy priority for the European Union and a global challenge. So we are committed to ensuring the Eurosystem fully takes into account, in line with the EU's goals and objectives, the implications of climate change and nature degradation for monetary policy and central banking. We added because we've already added it elsewhere - ""and nature degradation"" because

essentially it's the same headache. And in terms of our economic analysis, you've also seen it in our publications. The same underlying failure to incorporate the global public good of a sustainable environment permeates that.

Paragraph 11 reaffirms that clear communication is centre stage of our policymaking. We want effective communication at all levels. And this is why we think the layered and visualised approach to monetary policy communication is essential. Also, we want to adapt in this rapidly changing communication landscape. There's more on that in the overview note. And, as you know, the ECB has been rolling out new types of communication, including Espresso Economics on YouTube in recent times.

And then maybe in line with the idea that it's good housekeeping to have a regular calendar-based commitment, the next assessment of the appropriateness of the strategy will be in 2030.",Christine Lagarde; Philip R Lane
https://www.bis.org/review/r250701a.htm,Signe Krogstrup: Climate risks and financial stability - staying the course amid uncertainty,"Speech by Ms Signe Krogstrup, Governor of Danmarks Nationalbank, at the Danmarks Nationalbank's conference on ""Climate change and the green transition - implications for the financial sector"", Copenhagen, 19 June 2025.",2025-06-19 00:00:00,"## SPEECH

Governor Signe Krogstrup's speech at Danmarks Nationalbank's conference on Climate change and the green transition implications for the financial sector

## CHECK AGAINST DELIVERY

## CLIMATE RISKS AND FINANCIAL STABILITY - STAYING THE COURSE AMID UNCERTAINTY

Good morning, and welcome to Danmarks Nationalbank.

It is a great pleasure to host this conference and to welcome so many of you here today, colleagues, partners, and stakeholders, to share perspectives on the evolving risks that climate change poses to the financial sector.

## Climate agenda competing for attention in a complex global risk environment

Let me begin by acknowledging the broader context in which we meet. The global economy and financial system face multiple challenges and high uncertainty, stemming from geopolitical tensions and trade fragmentation to cyber risks and structural shifts.

These pressing concerns rightly command our full attention. But for that reason, they also risk overshadowing challenges such as climate change which are perceived as longer-term. This happens at a time when climate policies face stronger headwinds in some parts of the world. This may slow the global energy transition and speed up climate change and the associated risks.

Rather than looking away, the many concurrent challenges should reinforce our commitment to addressing them in a risk-based, prioritized manner. Here, climate change belongs to the group of risks we need to assess and address. Much like a wave on the horizon, we may not know



19 June 2025

its exact shape or timing, but we can be confident of its arrival. In some countries, it is already a first-order concern.

That is why I am particularly pleased we are convening today: To maintain focus on climate-related financial risks, and to continue sharing knowledge on how best to address them.

## Climate risks are intensifying and the transition remains uneven

The physical risks of climate change are becoming increasingly evident. Last year was the warmest on record globally, surpassing the previous record set in 2023. Projections suggest that global temperatures will remain elevated in the coming years. Europe is the fastest warming continent. Across the globe, extreme weather events are happening more often and becoming more severe.

The economic impact of these events is already substantial. Global losses from natural catastrophes continue to trend up. The majority of these are uninsured. Estimates of expected global GDP losses due to climate change are uncertain and vary across methods and models. But they tend to be revised upward over time. An often-cited recent example is the model-based long-term projection from the Network for Greening the Financial System, NGFS, which suggests GDP losses of up to 15 percent by 2050.

The transition remains too slow to reach the Paris goal of containing global temperatures to 1.5 to 2 degrees. Yes, clean energy adoption is increasing globally. But the use of fossil fuel-based energy is rising as well.

It is possible to design and implement ambitious climate policies, however, and there are encouraging examples. In China, fossil fuels now make up less than half of total installed power capacity. In the EU, our Emissions Trading System is expanding in scope and ambition, and having a real impact on incentives.

In Denmark, we are on our way to meet national climate goals. One of the key tools is our broad-based carbon taxation, which now also includes agricultural emissions. But Denmark is small, and our emissions will not dent global weather. Globally, only about a quarter of emissions are currently subject to carbon pricing.

In short, despite important efforts and examples of success, climate risks are still increasing, and so are the eventual costs of adaptation.

## Climate-related risks are relevant to central banks

So let me now turn to why we care about climate risks in central banks, and, more specifically, what we are doing at Danmarks Nationalbank.

It is important to emphasize that governments are in charge of climate policy for energy transition, and for mitigation and adaption strategies. The tools to achieve these political goals are fiscal, regulatory and structural policies; not monetary. There is broad consensus that a uniform carbon pricing scheme is the most cost-effective instrument to reduce emissions and incentivize private investment and consumption behavior. These are political decisions.

However, climate-related risks fall squarely within the purview of central banks. Climate change - and policies to address it - can affect core objectives of price and financial stability. This makes climate change relevant for most central banks, depending on the precise scope of their mandates.

This was not always considered the case, and central banks have had to learn new competencies for how to assess climate risks. But we are maturing, as our conference today illustrates. We are now at a stage where climate risks can be, and are, incorporated systematically into our analyses and operations, prioritised alongside all other relevant risks.

At Danmarks Nationalbank, our mandate comes in three parts: ensuring stable prices, maintaining safe and efficient payments, and safeguarding financial stability. Climate change affects all three. Let me highlight five areas of our climate-related work:

- Scenario analysis and risk assessment - to understand the macroeconomic and financial stability implications of climate change and inform our policy advice.
- Data collection and publication - to support transparency and assessment of climate-related financial exposures.
- Responsible investment practices - including integration of climate considerations in the management of FX reserves and regular reporting of the carbon footprint.
- Operational emissions tracking - to reduce the footprint of our own activities.

Beyond our own mandate, but as the government debt manager of the state:

- Issuance of green bonds - on behalf of and with instruction from the Ministry of Finance.

To do this work, we closely collaborate with external partners. These include the ECB, the European Banking Authority (EBA), the NGFS, as well as many of you in this room.

## Use of scenarios is key to understanding transmission of climate risks to the financial system

Let me say a few words about two central issues in assessing climate risks that are on our agenda, namely scenario analysis and data gaps. These issues will also be main themes at today's conference.

Following the Great Financial Crisis, stress tests and scenarios have become cornerstones of risk management in the financial sector.

Scenario analysis has also turned out to be highly useful for climate risk analysis. It helps us understand how climate-related risks might evolve and how the economy and the financial system might be affected.

But making scenarios for events based on science is complex. One month ago, the NGFS released new short-term scenarios. These offer a useful standardized and scientifically robust global framework to analyze the potential near-term impacts of climate policies and climate change. 1

There are important regional and local differences that need to be tweaked into such standardized scenarios. And some regional institutions are developing tailor-made scenario analysis. An example is the Fit-for-55 climate scenario analysis conducted last year by the three ESAs together with the ECB. 2  We may hear more about this at the conference today.

Danmarks Nationalbank has also carried out our own tailor-made local scenario analysis. Last year, we published a mapping of potential climaterelated events and their associated risks over the next decade for Danish credit institutions. 3  We have also collaborated with the Danish Research Institute for Economic Analysis and Modelling, DREAM, to develop a new

1  See The Network of Central Banks and Supervisors for Greening the Financial System (NGFS), Short-term scenarios, May 2025 ( link ).

3  See Niels Framroze Møller and Martin Oksbjerg, The most significant financial risks from climate change and green transition, Danmarks Nationalbank Analysis , no. 6, April 2024 ( link ).

2  See the European Supervisory Authorities and the European Central Bank, Fit-For-55 climate scenario analysis, November 2024 ( link ).

methodology to assess the impact of the transition for the Danish economy and banks. 4  We will hear more about this later today.

In our scenario work, we have mainly focused on transition risks. But in future work, I expect physical climate risks to gain a more prominent role in scenarios. Physical risks are materializing, and the ever-increasing global carbon emissions may speed things up. Acute physical risks such as droughts and floods require more attention. The impact varies by location and severity, but they can affect sectors like agriculture or real estate, and in turn, the value of collateral held by banks. Here, insurance coverage will be an important consideration when assessing the impact on the financial sector.

## Data gaps have historically been a major challenge, but there has been significant progress in recent years

Let me now turn to data gaps. Poor data availability and quality have long challenged climate risks.

Central banks and supervisors have a role to play in overcoming this obstacle. We can collect and publish data and ensure transparency in our assessments. Financial institutions also play a role. Banks can and should always ask their customers to share the information necessary. It is the responsibility of banks to detect, manage and disclose risks properly, including climate change risk.

We also need to use new data from existing sources. At least in Denmark, there is potential to make greater use of existing data sources for climate risk assessment. An example is data from the Technical University of Denmark. Researchers have developed highly detailed, nationwide flood scenarios in case of storm surges. 5  Storm surge is a central physical climate risk here in Denmark. In Danmarks Nationalbank we combine this with micro-level housing data to assess the impact on collateral values. This can in turn help assess financial risk related to storm surges.

While some data is out there to be used, there is clearly a lack of standardized comparable data on climate risks. More and better data are needed. The EU has introduced sustainability reporting requirements that may help address data gaps. The EU Omnibus Package, proposed earlier

4  See Søren Straarup Jensen, Jonas Deis-Bach, Marcus Mølbak Ingholt and Martin Oksbjerg, New methodology for assessing economic and financial risks of the green transition, Danmarks Nationalbank Economic Memo , no. 11, November 2024 ( link ).

5  See Kaspersen, Halsnæs, Sunding, Mik-Meyer and Drenck, Skader ved stormfloder i Danmark, DTU Management, april 2025 ( link - in Danish only).

this year, aims to simplify requirements. The goal is a worthy one, namely to reduce administrative burdens. But it has sparked debate over its potential impact on data availability. It is important that simplification does not come at the expense of systemic climate risk assessments. We need to follow this closely.

## This conference focuses on collaboration to assess and handle climaterelated financial risks

This brings me to our aim of this conference, namely collaboration on climate-related financial risks and how to assess these.

Risk assessment and risk management is familiar to us in the financial sector. We assess business cycle risks, liquidity and solvency risks, and macro-financial dynamics. In that light, climate risk assessment is not fundamentally different.

But climate risks are more complex and challenging in a number of ways. For one, we have no historical data to base our expectations on. Another complexity is the relationship between emissions, climate change, and the economy.

We all - central banks, regulatory agencies, financial institutions - can learn from each other on how to handle these challenges. And we can share best practices.

This conference is an opportunity to do exactly that. We have speakers from central banks like the ECB and the Bank of England, as well as representatives from the banking sector.

But because few of us understand the physics of climate change or the engineering of the green transition, we have to engage and learn from science as well. On that note, I am glad that we also have representatives from outside the financial sector today, including our next speaker Katherine Richardson from the University of Copenhagen.

## Main messages

Before I give the word to Catherine, let me conclude:

First, the urgency of climate-related risks is increasing. Climate risks should be assessed and prioritized alongside other key risks we are currently faced with.

Second, scenario analysis and reliable data are key for our ability to assess and address climate risks. Both need to be refined.

Finally, collaboration across institutions and countries is key for good climate risk analysis. The risks arising from climate change are global and multidisciplinary. Learning from each other and collaborating is not only useful - it is necessary.

With that, I very much look forward to hearing from our speakers today and engaging with all of you on this important work. Thank you.

## DANMARKS NATIONALBANK

## Climate risks and financial stability - staying the course amid uncertainty

Governor Signe Krogstrup

Conference on Climate Change and Green Transition, Danmarks Nationalbank, 19 June, 2025



## Climate agenda competing for attention in a complex global risk environment





## Climate risks are intensifying, and the transition remains uneven

## Global mean temperatures continue to rise

## Global energy supply remains largely fossil-based



Source: World Meteorological Organization





Source: Macrobond

## Climate-related activities in Danmarks Nationalbank



## Scenarios are key to understand climate-related risks and their implications





## Data gaps are still a major challenge, but there has been significant progress in recent years

An example of valuable data, combining scientific and financial information

## Scientific

## Financial

Highly detailed, nationwide flood scenarios from the Technical University of Denmark

Housing data to assess the impact on collateral values from the Danish credit register

=

DANMARKS NATIONALBANK

## Main messages

1

Climate risks are becoming increasingly urgent - risks should be assessed alongside other key risks



2

Scenarios and data are key to understand climate-related risks

3

Collaboration across institutions is necessary, as climate risks are global and multidisciplinary

## Thank you!

",Signe Krogstrup
https://www.bis.org/review/r250703c.htm,Kevin Greenidge: Driving instant payments in the Caribbean - a shared vision,"Remarks by Dr Kevin Greenidge, Governor of the Central Bank of Barbados, at the Fast Payment Systems FPS Workshop for Caribbean Countries, Bridgetown, 18 June 2025.",2025-06-18 00:00:00,"## Kevin Greenidge: Driving instant payments in the Caribbean - a shared vision

Remarks by Dr Kevin Greenidge, Governor of the Central Bank of Barbados, at the Fast Payment Systems FPS Workshop for Caribbean Countries, Bridgetown, 18 June 2025.

* * *

Good morning to all of you.

It is my great pleasure to welcome you to the Courtney Blackman Grande Salle of the Central Bank of Barbados for the Fast Payments Systems Workshop for Caribbean . We are truly honoured to host this meeting of the minds as we advance our Countries domestic payments infrastructure to be more inclusive, efficient, and resilient.

This workshop comes at a crucial juncture for the Central Bank of Barbados as we are onboarding a national instant payments system in Barbados, with the power to catalyse the payments landscape. Rolling out this national instant payment system will integrate our payments network; promote real-time settlement for retail, wholesale, egovernment, and securities payments; empower micro and small businesses; support greater system transparency and security, standardisation, and interoperability; and lower transaction and operating costs, as well as settlement times, all while promoting financial inclusion.

Across the globe, central banks are leading the most successful implementations of faster payment systems. These efforts are ensuring that national payments systems are safe, efficient, and accessible to all-especially the underserved and unbanked. As a central bank, we have the responsibility to provide this instant payment system as a public good, which will not only keep pace with innovation, but will also benefit our citizens, our financial sector, the economy as a whole, and our future.

As we at the Central Bank of Barbados are embarking on this journey, we are placing strong emphasis on meeting international standards, while achieving interoperability, built on a solid foundation of robust governance, and strong cybersecurity mechanisms. We are eager to learn from our regional partners' experiences and align ourselves with global best practices to shape an instant payments ecosystem that works for our unique context.

The workshop agenda over the next two days is both rich and relevant, allowing us to dive deep into the world of Instant Payment Systems. We will examine design principles, governance models, implementation strategies, and operational challenges. We will also explore the integration of overlay services, discuss cybersecurity risks, and consider the potential for cross-border applications. Importantly, we will also hear directly from central banks that have walked this path and have lessons to share with us.

We at the Central Bank of Barbados now have an incredible opportunity before us; to learn from global experts, like our partners joining us from the World Bank and the National Bank of Serbia, examine the experiences of other jurisdictions, and explore

just what it takes to successfully implement a faster payments network in Barbados. This workshop is not only timely-it is imperative. We now exist in a world where consumers and businesses expect instantaneous results in every aspect of their digital lives; payments cannot lag behind. Faster payments are no longer a luxury or a future possibility-they are the new standard.

So, I encourage everyone here to contribute actively to the discussions-to ask the tough questions, and to share your own insights and guidance. Let this be a collaborative space where we not only build knowledge, but build momentum as we continue the rollout of our national instant payments system.

I want to express my sincerest gratitude to our partners at the World Bank, whose support and keen technical expertise have been invaluable to the progress of this payments initiative thus far. I also acknowledge and thank my fellow regional central bank governors for their leadership, commitment, and willing collaboration as we move forward in this space.

As we embark on these two days of discussion and discovery, let us remember that faster payments are not just about technology, they are about creating systems that serve people better. They are about making our financial systems and economies more agile, our businesses more competitive, and our societies more inclusive, and our ultimate aim is to implement faster payments systems for all Caribbean countries.

Let us lead this transformation together-with purpose, with partnership, and with the public good at heart.

Thank you, and I look forward to the vibrant exchange of ideas that lies ahead.",Dr Kevin Greenidge
https://www.bis.org/review/r250703b.htm,"Hajime Takata: Economic activity, prices and monetary policy in Japan","Speech by Mr Hajime Takata, Member of the Policy Board of the Bank of Japan, at a meeting with local leaders, Mie, 3 July 2025.",2025-07-03 00:00:00,"

Bank  of  Japan J u l y 3 ,   2 0 2 5

## Economic Activity, Prices, and Monetary Policy in Japan

Speech at a Meeting with Local Leaders in Mie

## TAKATA Hajime

Member of the Policy Board

(English translation based on the Japanese original)

## I. Economic Activity and Prices

I will begin by talking about developments in economic activity and prices.

Overseas economies have grown moderately on the whole, although some weakness has been seen in part, reflecting trade and other policies in each jurisdiction. In the April 2025 World Economic Outlook (WEO), the International Monetary Fund (IMF) projects that the global economy will be  heavily  affected  by  U.S.  tariff  policy, while  also  highlighting further downside risk (Chart 1). However, looking at hard data, recent economic indicators suggest that  the  U.S.  economy has  grown moderately, despite concerns about the impact of tariff policy. While the Federal Reserve has kept its policy interest rate unchanged since the January 2025 Federal Open Market Committee (FOMC) meeting, some market participants expect it to start cutting the policy rate again (Chart 2). As for the outlook, I am of the view that a sharp economic slowdown triggered  by  credit  contraction, which  was  common during  past economic downturns, is unlikely, owing to the sound balance sheets of households, firms, and financial  institutions,  among  other  factors. Instead  of a  serious  recession,  I have been expecting the U.S. economy to grow only at a slower pace than its potential growth rate, mainly affected by a deterioration in consumer sentiment. Still, it is necessary to bear in mind that such an economic slowdown depends on the policies of the U.S. administration, and hence there are extremely high uncertainties, both upside and downside. Even if the economy remains robust  at  the  moment, the  longer concerns  about  tariffs remain, the greater the downward pressure on economic activity could become, due to heightened uncertainty, and thus it  is  necessary to carefully examine the  situation from  a  long-term  perspective. Meanwhile, as I will elaborate later, since it took office, the new U.S. administration has given priority to policies, such as tariffs, that have a negative impact on economic growth. If it were to pursue policies that have a positive impact on economic growth, such as reducing domestic taxes, the growth rate of the U.S. economy could be higher than expected. With regard to overseas economies, Europe, the United States, and China and other emerging economies have all leaned toward accommodative policies on both the fiscal and monetary fronts. With the  same  policy direction  adopted  around  the  world, attention  is also warranted  on  the possibility that this could, in combination, exert greater-than-expected upward pressure on economic activity and prices.

The aforementioned impact  of  U.S.  tariff  policy  will  likely  push  down Japan's  economy though such channels as a slowdown in overseas economies, a decline in domestic corporate profits and the associated slowdown  in wage  increases,  and postponement of firms'  and households' spending due to increased uncertainty. Against this backdrop, the Bank of Japan revised downward its outlook both for the GDP growth rate and prices in the April 2025 Outlook for Economic Activity and Prices (Outlook Report), compared with those presented in the January Outlook Report (Chart 3).

Nonetheless, in Japan's corporate sector, corporate profits have remained on an improving trend recently. Based on the Japanese Trade Union Confederation's (Rengo) sixth aggregate results, high levels of wage increases have also been agreed in the 2025 annual spring labormanagement wage negotiations (Chart 4). In the household sector, private consumption has maintained  its  moderate  increasing  trend  against  the  background  of  an  improvement  in employee income, despite weakness in consumer sentiment due to the impact of price rises and other factors (Chart 5). The inflation rate has been increasing recently due to the rise in food  prices,  such  as  rice  prices (Chart  6).  However,  private  consumption  is  expected  to continue  increasing  moderately,  with  wage increases  catching  up  with higher prices, reflecting the rise in wage growth and downward pressure on inflation mainly exerted by a decline in import prices.

Looking at medium- to long-term inflation expectations of various economic entities to assess underlying inflation, expectations have continued to rise steadily (Chart 7). In addition, the growth in the GDP deflator -- which indicates domestic inflationary pressure and had been mainly led by unit profits -- has increasingly been driven by a rise in unit labor costs since 2024, reflecting wage increases. As a result, the growth rates of unit profits and unit labor costs are becoming balanced, and signs of homemade inflation have finally emerged in that inflationary  pressure is  stemming not  only  from  import  price  factors  but from  domestic factors. In this regard, high levels of wage increases agreed in the 2025 annual spring labormanagement wage negotiations suggest that these trends will likely continue.

With firms facing supply-side constraints due to labor shortages -- in other words, a shift to a ""labor shortage economy,"" firms' wage- and price-setting behavior has been active. As far as

recent domestic developments suggest, I believe Japan's economy is at a stage where the price stability target is close to being achieved. Although I expect that this scenario will remain broadly unchanged even after the announcement of reciprocal tariffs in April, I would like to closely monitor whether the momentum toward achieving the price stability target, which has finally started to operate, will not be dampened by U.S. tariff policy. In particular, given the transmission channels to Japan's economy of the impact of U.S. tariff policy, I think it is necessary to pay attention to whether any adverse impact of tariff policy will materialize in terms of the following four points. First, whether business fixed investment will weaken, due to  heightened  uncertainty.  Second,  whether  exports  will become sluggish, given a global economic slowdown caused by U.S. tariff policy. Third, whether a decline in corporate profits will restrain the momentum for wage increases toward 2026, while also restraining selling prices. And fourth, whether the yen will appreciate, amid speculation over various policies of the  U.S.  administration,  thereby  pushing  down  corporate  profits  and  import  prices,  for example. I am paying particular attention to the possibility of significant market volatility, depending on the expectations for the new U.S. administration's policies as described in the fourth point.

## II. Recent Conduct of Monetary Policy

Let me now present my views on the Bank's conduct of monetary policy.

The Bank decided to raise the policy interest rate to around 0.5 percent in January 2025. This is because the Bank judged it appropriate to adjust the degree of monetary accommodation from the perspective of sustainable and stable achievement of the price stability target of 2 percent, as Japan's economic activity and prices had been developing generally in line with the Bank's outlook and the likelihood of realizing the outlook had been rising.

As I mentioned earlier, as far as domestic factors suggest, the price stability target is close to being achieved. In this situation, real interest rates, particularly the short-term rate, have been significantly negative, and accommodative financial conditions have been maintained (Chart 8).  Against  this  background,  I  consider  that  the  Bank should  continue  to  shift  gears  as appropriate; that is, proceed with further adjustment of the degree of monetary accommodation if it is confirmed that positive corporate behavior -- such as solid business

fixed investment, sustained wage hikes, and a continued price pass-through of cost increases -- is being maintained.

Yet, with the likelihood of a deceleration in the U.S. economy due to the impact of tariff policy,  careful  monitoring continues  to  be  warranted  on  the  risk  that  the  divergence  in monetary policy stance due to the difference in economic cycles between Japan and abroad could bring about high volatility in financial markets, particularly foreign exchange markets. In fact, looking back on its previous five cycles of policy interest rate hikes, excluding the most recent one, since Japan's shift to a floating exchange rate system in the 1970s, the Bank turned to rate cuts after the Federal Reserve cut its rate. In this sense, if the Federal Reserve resumes its rate cuts, that may reduce the flexibility of the Bank's monetary policy. Having said that, as I mentioned earlier, the U.S. economy is unlikely to see a serious recession, and the current situation is different from the periods after the collapse of the dot-com bubble around  2000  and  following  the  Global  Financial  Crisis  in  the  late  2000s.  Under these circumstances, I believe that the Bank is currently only pausing its policy interest rate hike cycle and should continue to make a gear shift after a certain period of ""wait and see."" There is persistent speculation of a rebound in U.S. inflation due to the imposition of reciprocal tariffs.  With  the  likelihood  of  policy  interest  rate  cuts  diminishing,  the  Federal  Reserve's policy conduct warrants attention through this summer.

Given that uncertainties regarding various U.S. policies remain high, I believe that the Bank is  required  to  conduct  monetary  policy  in  a  more  flexible  manner  without  being  too pessimistic. This is because the Bank may need to nimbly shift back to the rate hike cycle in response to policy changes in the United States, in addition to taking action in the case of increased downward pressure on the economy. At the same time, to maintain the momentum toward achieving the price stability target, which has finally come close, I believe that the Bank also needs to maintain its current accommodative monetary policy stance and thereby support the economic activity of firms and households, so that their behavior does not become overly negative.

At  the June  2025 Monetary  Policy  Meeting  (MPM), the  Bank  conducted  an  interim assessment of the plan for the reduction of its purchase amount of Japanese government bonds

(JGBs), taking into account the opinions collected from market participants. Based on the assessment, the Bank decided to continue to cut down its monthly purchase amount by about 400 billion yen each calendar quarter until January-March 2026, maintaining the amount and pace of the reduction decided in July 2024 (Chart 9). Thereafter, the amount of purchases will be reduced by about 200 billion yen each calendar quarter, so that it will be about 2 trillion yen in January-March 2027. By reducing JGB purchases, this plan is intended to normalize the JGB market and improve its functioning. Since the turmoil of bond markets at home and abroad in April 2025, yields on super-long-term JGBs have risen significantly, and market fragmentation has in turn occurred between the super-long-term zone and shorter maturity zones. At  the  same  time,  market  correlations  have  been  disrupted,  as  seen  in  the  rapid widening of swap spreads (Chart 10). Risk premiums have risen in particular segments of the yield curve, and the results of the latest May 2025 Bond Market Survey suggest a substantial decline in the degree of bond market functioning. As background to these developments, it has been pointed out that life insurers' demand for super-long-term JGBs has been marginal and that it has become difficult for dealers to engage in market making due to market volatility. Thus, I believe that the Bank should proceed with the reduction in its JGB purchases based on supply and demand conditions and liquidity of JGBs by maturity, with a view to improving the functioning of the market as a whole.

The Bank's plan for the reduction of its purchase amount of JGBs stipulates that, in principle, long-term interest rates are to be formed in financial markets, and that the Bank will reduce its purchase amount of JGBs in a predictable manner, while allowing enough flexibility to support stability in the JGB market. In my view, the Bank's JGB purchases thus far have served to hold back the amount of JGBs in the market by increasing the Bank's JGB holdings. In contrast, the reduction in purchases will supply the market with some portion of JGBs that the Bank has purchased to date, in effect resulting in an increase in the amount of JGBs in the market. Taking this into consideration, it can be said that the market is in a phase with one of the largest supplies of JGBs compared to the past. Chart 11 shows historical developments in the net issuance of JGBs, representing the annual change in the outstanding amount of JGBs issued. By deducting the annual change in the Bank's JGB holdings -- which factors in the amount of the Bank's JGB purchases that year -- from the net JGB issuance, the annual change in the outstanding amount of JGBs in the market can be derived, which represents, in effect,

the  supply  of  JGBs  to  the  market.  Thus,  the  impact  of the  reduction  in  the  Bank's  JGB purchases is reflected in this chart. As can be seen, there has been an increase in the supply of JGBs to the market since the start of the reduction in the Bank's JGB purchases in 2024, and the figure for fiscal year-end 2025 is estimated to reach a level comparable to that in the 2000s, when the annual change in the outstanding amount of JGBs in the market peaked. Given this, to prevent instability associated with the increase in the supply of JGBs to the market, I believe it is necessary to adjust the amount of the reduction and carefully examine how the market responds.

A rise in the risk premium on super-long-term JGBs tends to induce a deterioration in market functioning, with volatility spilling over to the entire yield curve. It should be noted that this may unintentionally give rise to the risk of monetary tightening effects transmitting widely across the market. Also, the formation of the risk-free yield curve in a stable JGB market serves as support for Japan's financial infrastructure. Needless to say, the reduction in the Bank's JGB purchases does not aim at giving considerations to the fiscal situation. That said, as I mentioned earlier, since the reduction in purchases in effect supplies the market with JGBs, I believe it is also necessary, from the perspective of improving the functioning of the market  as  a  whole, to ensure  the stability of the  market  while  maintaining  close communication among authorities. Looking back over the past year, there have been some unexpected changes in the market structure, such as the weakening investment demand for super-long-term JGBs. Given this, I believe it is necessary for the Bank to conduct another interim assessment of the plan for the reduction of its purchase amount of JGBs at the June 2026 MPM, and make amendments depending on the circumstances.

## III.  Looking  Back  at  a  Half  Century  of  Trade  Friction  and  Its  Impact  on  Japan's Economy

U.S. tariff policy has been drawing a great deal of attention. As I mentioned earlier, the Bank revised downward its outlook for the GDP growth rate and prices in the April 2025 Outlook Report in view of the tariff policy. The various policies of the new U.S. administration have drawn comparisons with those known as the Nixon shock of 1971. Thus, looking back at Japan-U.S. trade friction since the 1970s, I would like to present my views from a historical

perspective on the possible downward pressure on economic activity caused by the recent U.S. tariff policy.

## U.S. Current Account and Trade Deficits from a Long-Term Perspective

What must always be taken into account when discussing Japan-U.S. trade friction over the past half century is the existence of the U.S. current account deficit (Chart 12). To start with, the  background  to  the  1971  Nixon  shock  was  the intention  to  stem  the  outflow  of  gold reserves resulting from the continuing U.S. current account deficit. The main cause of this deficit, which has continued for over half a century, is the trade deficit. From the 1980s to the 1990s, the U.S. trade deficit was mainly with Japan and (West) Germany, but Japan accounted for the overwhelming proportion of the overall deficit (Charts 13 and 14). At its peak in 1991, Japan's share of the U.S. trade deficit reached 53 percent, leading observers to frame the U.S. trade deficit issue as a Japan-U.S. trade issue. At the time, foreign exchange markets were expected to function as a venue to correct the current account deficit, and the exchange rate adjustment pressure caused the yen and the deutsche mark to appreciate in Japan and (West) Germany, which both recorded a trade surplus. In this situation, the U.S. dollar/yen exchange rate drew particular attention.

Chart 15 shows historical developments in the U.S. dollar/yen exchange rate and Japan-U.S. trade friction. Trade friction occurred mainly in the textiles and steel industries in the 1970s, but this shifted to automobiles and household electrical appliances in the 1980s, and spread to semiconductors in the 1990s. Turning to foreign exchange markets, monetary authorities aimed to improve the trade balance and agreed on concerted market intervention to rectify the U.S. dollar's appreciation under the Plaza Accord in 1985. Furthermore, in 1995, which can be said to be the peak of Japan-U.S. trade friction in that decade, the yen appreciated to a level of nearly 80 yen against the U.S. dollar.

My  view  is  that  the  Japan-U.S.  trade  friction  that  intensified  from  the  1970s,  and  its consequences, are related to Japan's long-term stagnation following the collapse of the bubble economy. In other words, I believe that the post-bubble long-term stagnation was caused by the following two main factors: (1) asset deflation, and (2) a prolonged business environment in  which  it  was  difficult  to  depend  on  external  demand  due  to,  for  example,  the  yen's

appreciation caused mainly by trade  friction.  Looking back  once again, Japan's  economy continued to experience low growth from the 1990s, following the collapse of the bubble economy.  Although  a variety of structural factors, including  demographic  changes, contributed to the slowdown in growth, I believe that the major cause was the change in corporate behavior in the post-bubble period. To elaborate, let us take a look at Chart 16, which is also relevant to the two main factors I have just mentioned. As the chart shows, in the context of significant asset  deflation,  an increasing number  of firms sought to pursue management with minimum assets by paring down assets on their balance sheets and reining in investment. Many more firms also engaged in business restructuring, in which they held down margins and personnel expenses in their income statements to cope with mounting international competition mainly caused by trade friction. For individual firms, these moves were  a  rational  response  to  the  changing  business  conditions.  From  a  macroeconomic perspective, however, this approach caused Japan to fall into a shrinking equilibrium due to the ""fallacy of composition"" -- assuming that what is true of one member of a group is true for the group as a whole. In the pursuit of management with minimum assets and business restructuring,  firms  not  only  reined  in  business  fixed  investment  but  also  suppressed investment in human capital. These developments together are considered to have brought down Japan's potential growth rate for a prolonged period.

Let me elaborate on asset deflation, which is the first main factor behind Japan's long-term stagnation following the collapse of the bubble economy. At its peak in the 1980s, Japan accounted for nearly half of global market capitalization. Due to its growing presence in the asset market, as well as the fact that it accounted for nearly half of the U.S. trade deficit at the time, Japan was increasingly seen as an economic threat, and this is likely what made trade  friction  even  more  acute.  Subsequently,  from  the  1990s,  stock  prices  in  Japan  fell sharply and real estate prices stagnated (Chart 17). A significant decline in capital bases in real  terms drove firms to curtail investment and reduce interest-bearing debt. In addition, firms' concerns over funding stemming from post-bubble financial system instability led to hoarding  cash  and  deposits.  Historically,  European  countries  and  the  United  States  also experienced  asset  deflation  during  the  Great  Depression in  the  1930s,  and  so  did  some Scandinavian countries in the early 1990s. It has been pointed out that, for these countries, it was the expansion in external demand arising from currency depreciation that contributed to

recovery in economic activity. For example, the departure from the gold standard, among other factors, resulted in currency depreciation at the time of the Great Depression, leading to an expansion in external demand that helped the countries overcome deflation. In some Scandinavian  countries in  the  early  1990s,  the  boost  to  demand  arising  from  German reunification, in addition to currency depreciation, played a similar role.

In contrast, in Japan, despite the asset deflation, the harsh competitive environment vis-à-vis overseas economies, in which it was difficult to depend on external demand, was prolonged, mainly due to trade friction. This is the second main factor that caused the post-bubble longterm stagnation, which led firms to engage in business restructuring. In the aftermath of World War II, Japan had a geopolitical benefit for many years from the tailwind of global trade, serving as the manufacturing hub for the Western bloc. However, after the fall of the Berlin Wall in 1989, the geopolitical environment shifted, with the Soviet Union losing its power. Japan started to be seen as an economic threat, and this led trade friction with the United States  to  become  intensified  more  than  ever. The  yen,  meanwhile,  appreciated  rapidly  in foreign exchange markets (Chart 15). While trade friction involved not only Japan but also West Germany until the 1980s, Japan became the sole target in this conflict following German reunification, and this situation is also considered to have played a significant part in creating an environment in which it was difficult to depend on external demand. Japanese firms across a wide range of sectors, including those in the automobile industry, were called on to shift their  production  sites  overseas,  leading  to  a  hollowing  out  of  domestic  industries.  In  the semiconductor sector, for example, trade friction led to a placement of quotas that forced Japanese firms to curtail their share of production, resulting in a shift of major semiconductor production sites to other Asian economies, such as South Korea and Taiwan. 1 Thus, while Japan's presence was suppressed, being regarded as an economic threat, the rise of emerging economies -- especially those in Asia -- was promoted. China's entry into the World Trade Organization (WTO) in 2001 can be understood in this context. To sum up, under the trade friction until the 1990s, Japan, which accounted for the lion's share of the U.S. trade deficit,

1 Under the Japan-United States Semiconductor Agreement concluded in 1986 and 1991, the United States requested Japan to set a minimum target for the foreign share in the Japanese semiconductor market. It has been suggested that, partly as a result of this, Japan's share of semiconductor production, which stood at around 70 percent in the first half of 1980s, declined drastically from the 1990s.

was hampered not only by the continued appreciation of the yen but also by direct measures such as export quotas and voluntary export restraints.

The  upshot  is  that,  despite  the  yen's  appreciation,  Japanese  firms  left  their  export  prices unchanged to maintain price competitiveness. This led to the entrenchment of a situation where these firms needed to pursue management aimed at business restructuring and to hold down margins while being cautious about raising wages. In this situation,  firms chose to absorb increases in the price of raw materials over the long term by cutting costs rather than by passing the higher costs on to selling prices, and they eventually grew accustomed to this practice as being the norm. As a result, starting with export-oriented manufacturers at the top of the supply chain, cost reduction spread broadly across multiple layers of affiliated firms that maintained vertical corporate ties. On this score, U.S. and European firms achieved a horizontal division of labor by capitalizing on global supply chains, and focused on areas with  high  added  value,  such  as  planning  and  development.  Meanwhile,  many  Japanese manufacturers continued  with a business  model  of  vertical  integration  and  focused on maintaining  existing manufacturing  processes,  which  likely  gave  further  impetus  to  cost reduction. Japanese firms prioritized maintaining employment over raising employee wages and consequently established  a  work-sharing kind  of approach  to  setting wages.  In other words,  firms  maintained  existing  employment  as  far  as  possible,  mainly  of  full-time employees, while holding back on new hiring and restraining wage increases. 2 A series of events took place around this time that were emblematic of the situation. 3 In 2002, a major Japanese automaker decided on zero base pay increases, which was dubbed a ""shock."" In December of that year, the Japan Business Federation (Keidanren) declared an end to annual spring labor-management wage negotiations. Moreover, Rengo announced in 2003 that it would not make unified demands for base pay hikes. It took nearly two decades for this situation to be reversed, until the significant rise in base pay achieved in 2023.

2 It has been pointed out that the restraint on new hiring made it difficult for the generation entering the job market in the 1990s and early 2000s to find employment and swelled the ranks of non-regular employees -- a period referred to as the employment ice age.

3 See Watanabe, T., Bukka o kangaeru: Defure no nazo, infure no nazo [Thinking about prices: The mystery of deflation and inflation] (Tokyo: Nikkei Business Publications, 2024). In this book, the author  offers  the  hypothesis  that,  following  the  Japan  Federation  of  Employers'  Associations (Nikkeiren) indicating its stance in 1995 of advocating restraints on wages, labor and management held down wage hikes in exchange for protecting full-time employment.

In sum, my assessment is that, although Japanese firms weathered past trade friction and the cost competition with firms overseas due to the yen's appreciation by means of restructuring, mainly in terms of wages, and of cost reduction, including involving affiliates, this had the side effects of creating the norm that wages and prices do not rise and of bringing on the employment  ice  age.  It  also  likely  ushered  in  a  decline  in  Japan's  potential  growth  rate stemming from a lack of investment.

## Shift Away from Past Trade Friction, and Improvement in Asset Prices

Let us take a look at the situation in recent years. Since the 2010s, the asset deflation that led firms  to  pursue  management  with  minimum  assets  on  their  balance  sheets  has  improved significantly, as asset prices have risen, mainly in the stock and real estate markets (Chart 17). Firms have also managed to shift away from business restructuring, with the dissipation of the continued excessive appreciation of the yen that drove severe international competition in  terms  of  firms'  income  statements.  The  landscape  of  trade  friction  has  also  changed significantly.  Japan's  share  of  the  U.S.  trade  deficit  has  recently  fallen  to  6  percent,  a tremendous change from the early 1990s, when it accounted for more than 50 percent (Charts 13 and 14). Today, with Japan finding itself in a very different geopolitical position compared with the period around 1990, production sites have been brought back home out of concern over economic security, as exemplified by the shoring up of semiconductor production in Kumamoto and Hokkaido prefectures. This context is entirely different from when Japan was the target of U.S. ""containment"" strategies, so to speak, during the trade friction of the 1990s.

On the other hand, it has taken a long time to shift the persistent norm that wages and prices do not rise. An estimate shows that a shift in the corporate behavior mired in such a norm could take longer than expected, perhaps the decade it takes to form the next generation. 4 On this  point, it has been suggested that, in addition to the lower funding costs transmission channel, the financial and capital markets channel (stock prices and foreign exchange rates)

4 Taking an estimate using stock prices as an example, the following speech refers to the possibility that it may take time to recover from a long-term negative experience in the post-bubble economy: Takata, H., ""Economic Activity, Prices, and Monetary Policy in Japan,"" speech at a meeting with local leaders in Miyagi, February 19, 2025,

https://www.boj.or.jp/en/about/press/koen\_2025/ko250219a.htm.

was  also  significantly  effective  in  translating  the  benefits  of  lower  interest  rates  into  an improvement in the output gap (Chart 18). These findings indicate that the Bank's monetary easing was likely to have contributed to the shift away from the asset deflation and the socalled six headwinds -- including the headwind of the yen's appreciation -- both of which had prompted the changes in corporate behavior in the post-bubble economy. 5 I believe that the Bank's patient continuation of monetary easing over many years, and the resulting support for rises in asset prices and for the reversal in the excessive appreciation of the yen, laid the groundwork for reaching the inflection point of the norm shift, marking a historic change since the collapse of the bubble economy.

## Consideration of the Impact of Recent U.S. Tariff Policy

I have looked back on the history of trade friction over the past half century since the 1970s. On this basis, I would now like to present my views on the recent U.S. tariff policy. Although the policy is intended to bring manufacturing back to the United States, given that the country capitalizes on global supply chains and maintains high productivity through business models involving a horizontal division of labor, reshoring of U.S. manufacturing could actually result in restraining wages. For this reason, let me first note that I think it will be difficult for the United States to sustain high tariffs. 6

As seen in the IMF's forecasts presented in Chart 1, various institutions and firms, including market participants, have recently revised down their economic outlook in response to the

5 The  following have  been  pointed  out  as the  six  headwinds  faced  by  Japanese  firms:  the  yen's appreciation;  delayed  negotiations  on  economic  partnership  agreements;  high  corporate  tax  rates; rigidity in the labor market; environmental regulations; and high electricity costs. For details, see, for example,  Cabinet  Office, Annual  Report  on  the  Japanese  Economy  and  Public  Finance  2021 --Towards a resilient Japanese economy: Accelerating innovation towards an economic society with strength and flexibility , September 2021. This report is a summary of the Japanese original.

6 Although the tariff policy is also intended to reduce trade deficits, mainstream economics holds that elimination  of  constant  current  account  deficits,  or  correction  of  external  imbalances,  should  be achieved gradually through market mechanisms. It has been pointed out that policy intervention or any action that could undermine confidence in the currency will hinder the path to smooth correction. In Gendai nihon keizai: Makuroteki tenkai to kokusai keizai kankei [The modern Japanese economy: In relation to macroeconomic and global economic developments] (Tokyo: University of Tokyo Press, 1988), Professor Ryutaro Komiya argues that the U.S. current account deficit is attributable to its macroeconomic balance and undersaving, and that the impact of a single country's exchange rate adjustments is limited.

U.S. tariff policy. These downward revisions were made even in the absence of significant deterioration in current economic developments, on the assumption that downward pressure on economic activity will materialize in the future. This approach can be likened to a ""planned suspension""  of  public  transportation; in  other  words,  the  outlook  has  been  revised  down preemptively ahead  of the  advent  of the  ""typhoon""  of reciprocal tariffs. Therefore,  if the underlying assumption were to be revised, the economic outlook might accordingly change significantly. On this point, among the public policy commitments outlined by the new U.S. administration, the details of fiscal policy are still unclear. Partly because of this, various institutions' and firms' economic outlook appears to have factored in more of an economic deceleration caused by the tariff measures (Chart 19). It should be kept in mind that fiscal policy  measures,  such  as  tax  cuts,  and  deregulation,  all  of  which  are  included  in  the administration's commitments, could contribute to boosting future U.S. economic growth.

Here, let me reconfirm the direct impact of tariff impositions, with reference to supply and demand curves. Let us take a look at Chart 20. As shown in the left panel, the imposition of a tariff causes an upward shift in the supply curve, resulting in an increase in the price level from P 0 to P 1 and a decrease in the sales volume from S 0 to S 1 . As U.S. importing firms bear the burden of tariffs, U.S. consumers are also expected to bear the burden in the form of tariffs being passed on to selling prices (denoted by (1) in the left panel). Exporting firms will also bear a burden in the form of the drop in income arising from the imposition of tariffs (denoted by  (2) in  the left panel). The  extent  to  which the  burden  of tariffs  is  passed  on  to  U.S. consumers will depend on the price elasticity of demand for the products in question. For necessities for which domestic alternate production is difficult within the United States, the slope of the demand curve tends to be vertical, making it easier for tariffs to be passed on to prices. Meanwhile, if exporting firms do not pass on tariff hikes to prices, as some of them have announced recently, sales volumes will not change, and firms will need to pay significant costs equivalent to tariffs (denoted by (3) in the left panel). The right panel of Chart 20 shows the  impact  of  tariff impositions from the perspective of exporting countries. In a  manner corresponding to the  left panel,  a  decline in  sales  volume  due  to  higher  prices,  that  is,  a downward shift in the demand curve -- or a demand shock -- occurs, putting the economy under deflationary pressure. In sum, for exporting countries on which tariffs are imposed, if they pass on higher tariffs to prices, they will see a fall in demand (denoted by (2) in the left

panel), and if they do not, they will need to pay the costs equivalent to tariffs (denoted by (3) in the left panel), either way shouldering a significant burden.

Next, I would like to compare the trade friction until the 1990s with the recent U.S. tariff policy. Let me first reiterate what Japan went through under the trade friction. As was shown in Chart 14, Japan had an overwhelming presence in the U.S. trade deficit. In addition to the yen's appreciation, this resulted in direct measures by the U.S. government, such as imposing export quotas and encouraging voluntary export restraints on Japanese products. Although they were not the imposition of tariffs per se, these measures likely caused the upward shift in the supply curve, as shown in the left panel of Chart 20, and Japan alone faced deterioration in its competitive environment. To maintain competitiveness vis-à-vis other economies in the U.S.  market,  Japanese  firms  kept their  U.S.  dollar-denominated  selling  prices  unchanged despite the yen's appreciation, and thereby avoided the price pass-through. Consequently, they faced a severe impact to the extent that they had to bear the burden denoted by (3) in the left panel  of  Chart  20. They dealt with  this  burden by reducing costs  through  business restructuring, under which they held down wages and margins. In fact, research has shown that price markups of Japanese firms remained significantly suppressed compared with other countries for a long time. 7

By contrast, unlike the trade friction until the 1990s, recent U.S. tariff policy targets a wide range of countries and regions, so that Japan is not the only one affected. Moreover, as a result of  Japan's  industrial  advances  over  around  three  decades,  some  industries --such  as automobiles, semiconductors, and basic materials, including steel and chemicals -- have seen an increase in the weight of products for which alternate production is limited within the United  States.  In  this  situation,  the  price  elasticity for  their  products  may  have declined. Therefore, it will likely be easier for Japanese firms to pass on the recent tariff hikes to selling prices than it was in the past. Although the imposition of tariffs will inevitably have an impact in the form of lower demand, the extent of the impact is unlikely to be greater than what Japan went  through  in  the  1990s.  In  addition,  if  tax  cuts  and  other fiscal policy  measures are implemented  in  the  United  States,  depending  on  their  specifics,  an  increase  in  U.S.

7 See Aoki,  K.  et  al.,  ""Determinants  of  Price  Markups  at  Japanese  Firms  and  Implications  for Productivity,"" Bank of Japan Working Paper Series , no. 24-E-15 (December 2024).

consumers' purchasing power could, combined with the impact from improved asset prices, drive recovery in the sales volume from S 1 to S 0 by shifting the demand curve upward, as shown in Chart 21. Thus, the impact on Japan's economy, particularly corporate profits, will likely be limited, at least compared with the period of trade friction around 1990. In this context, the tariff policy is unlikely to bring about the kind of corporate behavior that leads to a shrinking equilibrium, such as restraining wages, which was once common in Japan.

I  would also like to point out that improvement in Japanese firms' financial positions has made them more resilient to global shocks. As Chart 16 illustrates, in terms of their balance sheets, firms have seen a reduction in debt, in addition to an improvement in asset prices; they have reduced excessive interest-bearing debt since the collapse of the bubble economy and thus achieved a rise in their capital adequacy ratios and an improvement in their financial positions, with their interest burden falling to the extent that interest income exceeds interest expenses (Chart 22). In terms of income statements, Chart 23 shows that corporate profits expanded more than eightfold in fiscal 2023 over the second half of the 1990s, reaching the highest level on record of around 80 trillion yen, and a further expansion is likely for fiscal 2024. The current situation of corporate profits remaining at  high levels  differs  from the economic recovery phase in the 2000s, and this has led to an increase in the overall level of corporate value. It can be said that Japanese firms have built up their resilience against shocks by lowering their break-even points over more than three decades to weather the adverse business environment brought about by trade friction and to  withstand even a  significant appreciation of the yen. I also think that Japan can be regarded as being a forerunner in that it is one of the few countries that has experience in addressing trade friction.

## Summary: Japan's History as a Forerunner in Addressing Trade Friction

As I noted earlier, the key to a further gear shift in monetary policy is the sustainability of positive corporate behavior. It is necessary to closely examine whether the impact of U.S. tariff  policy will  cause Japanese  firms' corporate  behavior  to  revert  to  the  pursuit  of management with minimum assets and business restructuring seen in the post-bubble period. Chart 24 is a conceptual diagram of how expansion in corporate profits is spreading across the  economy.  From  a  macroeconomic  perspective,  corporate  profits  have  expanded significantly  due  to  factors  such  as  the  efforts  of  firms  and the improved  competitive

environment in international markets. From a microeconomic perspective, however, the use of corporate profits as a source for wage hikes and price pass-through to business partners has been limited due to the norm that wages and prices do not rise. Firms have channeled most  of  their  profits  into  dividends  and  foreign  investment,  and  have  also  limited  their domestic business fixed investment. This situation has been improving since 2023 owing to some government initiatives, and it is expected that this improvement will benefit households, small and medium-sized firms, and regional firms equally, thereby achieving a virtuous cycle. Taking U.S. tariff policy into consideration, I will be paying close attention to whether there is any disruption of these improvements.

Looking  back  again  at  trade  friction  over  the  past  half  century, Japan's  real  economy experienced downturns from the 1990s under historically unprecedented situations -- such as the collapse of the bubble economy and mounting international competition. In this context, firms built up their resilience against shocks by reducing the size of their balance sheets and engaging in business restructuring. Likely side effects of this, however, were the shrinking equilibrium as a result of factors such as a long-term lack of investment and the norm that wages and prices do not rise. Japan is finally beginning to break free of this norm not only because of the unconventional monetary measures that the Bank implemented ahead of other central banks, but also because of the ""big pushes"" that helped to change firms' price-and wage-setting  behavior  over  the  past  few  years.  However,  concerns  have also  arisen  over whether recent U.S. tariff policy will disrupt these improvements. In fact, in the midst of economic  recovery  in  around  2000  and  in  the  mid-2000s,  Japan's  economy  ended  up experiencing  several  ""false  dawns,"" 8 or  temporary  economic  recoveries, interrupted  by global demand shocks. My expectation is that Japan will see a ""true dawn"" this time; I will pay close attention to whether ""this time is different"" and it will actually materialize. 9

8 Shirakawa, M., ""Way Out of Economic and Financial Crisis: Lessons and Policy Actions,"" speech at the Japan Society in New York, April 23, 2009,

9 Nakaso, H., ""Japan's Way toward Strong, Sustainable, and Balanced Growth: Assessment of the potential of the Japanese economy suggests the sun also rises,"" speech at a meeting hosted by the Japan Society and the City of London Corporation in London, October 5, 2017,

https://www2.boj.or.jp/archive/en/announcements/press/koen\_2009/ko0904c.htm.

https://www.boj.or.jp/en/about/press/koen\_2017/ko171005a.htm.

Meanwhile, looking back at the trade friction over the half past century also reveals that Japan was a forerunner in addressing trade friction by withstanding situations far more stressful than what we face today. Moreover, it is necessary to make an objective assessment of the differences from the past, not least the improvement in firms' financial positions over the 30 years  since  the  collapse  of  the  bubble  economy. In  this  sense, I  believe  being  overly pessimistic also poses a considerable risk. To reiterate, my view is that the Bank needs to support  economic  activity  for  the  time  being  by  maintaining  its  current  accommodative monetary  policy  stance. At  the  same  time,  I  believe  that  the  Bank  should  gradually  and cautiously  shift  gears  in  its  monetary  policy,  based  on  the  recognition  that  it  has  finally reached the point of returning from the implementation of unconventional monetary measures to policy conduct that is in line with what is seen in normal times, and that the ""true dawn"" is in sight. In doing so, the Bank will closely monitor developments in U.S. tariff policy and its impact on Japan's economy.

Thank you.



## Economic Activity, Prices, and Monetary Policy in Japan

Speech at a Meeting with Local Leaders in Mie

July 3, 2025

TAKATA Hajime Member of the Policy Board Bank of Japan

## Developments in Overseas Economies (IMF's April 2025 WEO)

Chart 1

Global Growth Rate y/y % chg.



Impact of Risk Scenarios on GDP &lt;World&gt; &lt;U.S.&gt;

Note: In the right panel, for details of the assumptions of each scenario, see Box 1.1. of the April 2025 World Economic Outlook (WEO). Source: IMF.



Consumer Confidence

The U.S. Economy

Policy Interest Rate

Employment and Prices

1966/1Q=100



%





%

y/y % chg.

Note: In the left panel, figures are from the University of Michigan's consumer sentiment index. In the right panel, figures are the medians of the target ranges for the federal funds rate. Figures for participants' projections are the medians of all participants' projections at the FOMC meetings.

Sources: Bloomberg; BLS; FRB; University of Michigan.

Chart 3

## GDP and Outlook for Economic Activity and Prices

GDP

Outlook for Economic Activity and Prices (April 2025 Outlook Report)

s.a., ann., tril. yen

y/y % chg.



|                    | Real GDP   | CPI (less fresh food)   | CPI (less fresh food and energy)   |
|--------------------|------------|-------------------------|------------------------------------|
| Fiscal 2025        | +0.5       | +2.2                    | +2.3                               |
| As of January 2025 | +1.1       | +2.4                    | +2.1                               |
| Fiscal 2026        | +0.7       | +1.7                    | +1.8                               |
| As of January 2025 | +1.0       | +2.0                    | +2.1                               |
| Fiscal 2027        | +1.0       | +1.9                    | +2.0                               |
| As of January 2025 | -          | -                       | -                                  |

Note: In the right panel, figures indicate the medians of the Policy Board members' forecasts (point estimates).

Sources: Cabinet Office; Bank of Japan.

## Corporate Sector and Wage Growth

## Corporate Profits

## Wage Growth Rate

s.a., tril. yen



s.a., tril. yen



y/y % chg.

Notes: 1. In the left panel, figures are based on the Financial Statements Statistics of Corporations by Industry, Quarterly . Excluding the finance and insurance industries.

Sources: Central Labour Relations Commission; Japanese Trade Union Confederation (Rengo); Ministry of Finance.

2. In the right panel, figures from 1980 to 2014 are those published by the Central Labour Relations Commission, while those from 2015 to 2025 are figures released by Rengo. Figures for 2025 are based on Rengo's sixth aggregate results.

Chart 5

## Private Consumption





## Real Private Consumption

## Employee Income

Notes: 1. In the left panel, Q1 = March-May, Q2 = June-August, Q3 = September-November, Q4 = December-February. Employee income = Total cash earnings ( Monthly Labour Survey ) Number of employees ( Labour Force Survey ). Figures for real employee income are based on Bank staff calculations using the CPI (less imputed rent). Figures from the Monthly Labour Survey are based on continuing observations following the sample revisions. Figures for 2025/Q1 are March-April averages.

Sources: Ministry of Health, Labour and Welfare; Ministry of Internal Affairs and Communications; Bank of Japan.

2. In the right panel, figures for real private consumption are the real Consumption Activity Index (travel balance adjusted) based on Bank staff calculations, which exclude inbound tourism consumption and include outbound tourism consumption. Figures in angle brackets show the weights in the index. Figures for 2025/Q2 are those for April.

## CPI Inflation

y/y % chg.



Source: Ministry of Internal Affairs and Communications.

Chart 7

## Inflation Indicators

Composite Index of

GDP Deflator

2. In the right panel, unit labor costs = nominal compensation of employees / real GDP.



Sources: Bloomberg; Cabinet Office; Consensus Economics Inc., Consensus Forecasts ; QUICK, QUICK Monthly Market Survey &lt;Bonds&gt; ; Bank of Japan.

## Real Interest Rate

Real Short-Term Interest Rate (1-Year)

Real Long-Term Interest Rate (10-Year)

%



%



Note: Figures for real interest rates are calculated by deducting inflation expectations from JGB yields for each maturity. Figures for inflation expectations are based on Bank staff calculations using the expectations of various economic entities (firms, households, and experts) at different horizons. Specifically, the data used in the calculations are as follows: for firms, the Tankan ; for households, the Opinion Survey on the General Public's Views and Behavior ; for experts, the QUICK Survey , the Consensus Forecasts , and inflation swap rates.

Sources: Bloomberg; Consensus Economics Inc., Consensus Forecasts ; QUICK, QUICK Monthly Market Survey &lt;Bonds&gt; ; Bank of Japan.

Chart 9

## Plan for the Reduction of the Purchase Amount of JGBs

1. Long-term interest rates: to be formed in financial markets in principle

In principle, the Bank will reduce the planned amount of its monthly purchases of JGBs each calendar quarter as follows.

2. JGB purchases: appropriate for the Bank to reduce its purchase amount of JGBs in a predictable manner, while allowing enough flexibility to support stability in the JGB markets
2. 
3.  From April-June 2026 to January-March 2027: about 200 billion yen
4. Until January-March 2026
5. : about 400 billion yen (the reduction plan decided in July 2024 will be maintained)
6.  The Bank will gradually reduce its purchase amount so that it can improve the functioning of the JGB markets in a manner that supports stability in the markets.

## Reduction in a Predictable Manner





## Allowing Enough Flexibility

2. In the case of a rapid rise in long-term interest rates, the Bank will make nimble responses by, for example, increasing the amount of JGB purchases.
1. The Bank will conduct an interim assessment of the plan at the June 2026 MPM.
3. The Bank is prepared to amend the plan at the MPMs, if deemed necessary.

## Degree of Bond Market Functioning

Yields on Long-Term and Super-Long-Term JGBs

DI for the Degree of Bond Market Functioning

%



DI  (""high"" - ""low""), % points



Note: In the right panel, the survey from February 2018 onward includes responses from major insurance companies, asset management companies, etc., in addition to those from eligible institutions for the Bank's outright purchases and sales of JGBs. Regarding the figures for February 2018, the reference data, which are based on responses only from eligible institutions for the Bank's outright purchases and sales of JGBs, are also indicated.

Sources: Ministry of Finance; Bank of Japan.

## Historically Large Annual Change in the Outstanding Amount of JGBs in the Market

Chart 11

(Supply of JGBs to the market surged due to the reduction in the Bank's purchases)

y/y % chg., tril. yen



- Notes: 1. Figures are on a book value basis and exclude short-term government securities.

Sources: Cabinet Office; Ministry of Finance; Bank of Japan.

2. Figures for FY2025 are estimated using the Cabinet Office's Economic and Fiscal Projections for Medium to Long Term Analysis (January 2025) and the Bank's plan for the reduction of the purchase amount of JGBs.

## U.S. Current Account

(Focus should be on the future course of twin deficits: current account and fiscal deficit)

ratio to nominal GDP, %



Note: Figures for fiscal balance is on a fiscal-year basis. Sources: Bureau of Economic Analysis (BEA); Congressional Budget Office (CBO).

U.S. Trade Balance by Country (Japan accounted for over half of U.S. trade deficit around 1990)

ratio to nominal GDP, %

Chart 13



## Largest Shares of U.S. Trade Deficit by Country/Region (China has replaced Japan)



1991

2024

Source: IMF.

Chart 15

## Historical Developments in U.S. Dollar/Yen Exchange Rate and Japan-U.S. Trade Friction

(Trade friction reached its peak in the early 1990s)

end of month, yen



Note: The descriptions of events in Japan-U.S. trade friction are based on White Paper on International Economy and Trade 2019, etc. Sources: Ministry of Economy, Trade and Industry; Bank of Japan.

## My View on Corporate Behavior in the Post-Bubble Period

Chart 17



## Asset Prices and National Wealth

(Japan was seen as an economic threat but then fell into asset deflation)

Stocks



National Wealth

Land

Note: Figures are based on the SNA. Dotted lines are based on the 1993SNA (benchmark year: 2000).

## Transmission Channels of Lower Interest Rates



- Notes: 1. Figures are based on a VAR model with coefficient restrictions using eight variables: output gap, interest rates (3-month), interest rate spreads (2-year minus 3-month, 5-year minus 2-year, 10-year minus 5-year), aggregate funding costs, nominal effective exchange rates of the yen, and stock prices.
3. In the right pie graph, figures show the 5-year cumulative effects.
2. Aggregate funding costs are the weighted average of bank lending rates and issuance yields for CP and corporate bonds.

Sources: Bloomberg; Bank of Japan; etc.

Chart 19

## Policy Status of the New U.S. Administration

|                    | Policy Status under the NewAdministration                                                                                                                                                                                                                                                                                       |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Tariffs            | ・ Imposition of reciprocal tariffs on all trading partners (10-50%), based on the results of America First Trade Policy investigations ・ China:54% (of which additional 24% tariffs have been suspended) ・ Canada and Mexico: 25% ( excl. USMCA-compliant goods ) ・ Steel andAluminum (50%), Automobiles (25%)              |
| Immigration        | ・ Declaration of a national emergency and initiation of procedures to control entry and deport undocumented migrants                                                                                                                                                                                                           |
| Budget             | ・ Permanent extension of Trump tax cuts and enactment of additional tax cuts under deliberation in the Senate and the House of Representatives ・ Cuts to government spending (establishment of the Department of Government Efficiency [DOGE], offer of early retirement to federal workers)                                  |
| Deregulation, etc. | ・ Declaration of a national energy emergency, promotion of oil and gas field development ・ Cancelation of EV mandates, withdrawal from the Paris Agreement ・ Easing of regulations on financial institutions (temporary shutdown of the CFPB, etc.) ・ Elimination of 10 existing regulations for each new regulation issued |

## Impact of Tariffs: Supply and Demand Curves (1)

Tariff-Imposing Country: Supply Shock

Tariff-Imposed Country: Demand Shock price





price

Note: The charts are based on Krugman, P., Obstfeld, M., and Melitz, M., International Trade: Theory and Policy , 10th ed. (Pearson, 2014), etc.

Chart 21

## Impact of Tariffs: Supply and Demand Curves (2)

Tariff-Imposed Country: Increased Demand Due to Fiscal Policy Measures in the Export Destination

price



## Improvement in Corporate Finance

Interest Balance

Capital Adequacy Ratio tril. yen





%

Note: Interest balance for small and medium-sized enterprises (SMEs) in the left panel includes dividend income. Sources: Cabinet Office; Ministry of Finance.

Chart 23

## Rapid Expansion in Corporate Profits

## Corporate Profits and Returns to Investors

Labor Share tril. yen





Notes: 1. Figures are based on the Financial Statements Statistics of Corporations by Industry, Annually , and exclude the finance and insurance industries.

Source: Ministry of Finance.

2. Labor share = personnel expenses / value-added. Value-added = operating profits + personnel expenses + depreciation expenses.

## My View on Mechanism of Expanding Corporate Profits and Ensuing Challenges Improved competitive

",Hajime Takata
https://www.bis.org/review/r250703a.htm,Anna Seim: The role of alternative scenarios in monetary policy communication,"Speech by Ms Anna Seim, Deputy Governor of the Sveriges Riksbank, at the 2025 ECB Forum on Central Banking, Sintra, 2 July 2025.",2025-07-02 00:00:00,"SPEECH

DATE:

2 July 2025

SPEAKER:

Deputy Governor Anna Seim

VENUE:

2025 ECB Forum on Central Banking, Sintra, Portugal

## The Role of Alternative Scenarios in Monetary Policy Communication *

Thank you for inviting me to speak today. While it is widely recognised that effective communication is a key part of monetary policy, communication strategies differ greatly across central banks. This is likely due to differences in institutional features that influence the possibilities and constraints that we face.

Since adopting a regime of flexible inflation targeting in 1995, the Riksbank has chosen a path of high transparency. 1 One reason for this is the fact that we are highly independent, and with that independence comes a need for accountability that is facilitated by transparency. A second rationale is that transparency can make monetary policy more effective if we succeed in managing the expectations of companies, households and markets.

To this end, we aim to convey the Executive Board's reaction function by publishing (i) a policy rate forecast (since 2007), (ii) alternative scenarios capturing perceived risks and how monetary policy will respond to different developments, and (iii) attributed minutes shortly after each policy decision. 2

In my remarks today, I will briefly comment on our policy rate path but focus on our work with alternative scenarios in the Monetary Policy Report.

*  Remarks made at the Panel on ' Central bank communication: current challenges ' at the 2025 ECB Forum on Central Banking in Sintra, Portugal. I would like to thank Matilda Kilström, Mika Lindgren and Maria Sjödin for excellent help writing the speech. I would also like to thank Charlotta Edler, Calum McDonald and Emelie Nordeman for proofreading, and other employees at the monetary policy department for their valuable comments.

1  The Riksbank is consistently ranked as one of the most transparent central banks in the world, see, for example, Dincer, Eichengreen and Geraats (2022) for a relatively recent assessment.

2  For a more comprehensive descriptions of the monetary policy communication of the Riksbank, see, for example, Thedéen (2025) and Breman (2025).



## Baseline policy: the policy rate path

Let me start with some background. Since 2024, we hold eight monetary policy meetings per year. At four of these we publish Monetary Policy Reports (MPRs) containing new forecasts. At the other four meetings there are no new forecasts but a Monetary Policy Update (MPU) that describes our assessments and motives for the monetary policy decision. A monetary policy decision consists of two parts: our decision on the current policy rate and our monetary policy assessment as conveyed in the MPRs and the MPUs.

We are one of few central banks publishing a forecast for the policy rate that reflects the majority view of the Executive Board. Figure 1 shows our most recently published policy rate paths. The policy rate path is consistent with the rest of our economic projections. Our other forecasts are thus contingent on the policy rate path. The path ensures that our inflation target of 2 per cent is met over a horizon that we deem reasonable, while taking the evolution of the real economy into account. It is also consistent with our assessment of the long-run neutral interest rate. 3

To arrive at the baseline path, we estimate and simulate different models, pursue sensitivity analysis and consider various alternative developments during the monetary policy process. By doing this we want to ensure that the policy embodied in the path has some key properties. One such property is that monetary policy should be efficient . We evaluate different paths to ensure that there exists no other policy rate path that would stabilise inflation and the real economy at a lower cost. We also assess if monetary policy is robust , i.e., if the policy rate path gives rise to acceptable outcomes even if developments that we assign low probabilities were to materialise. We also want monetary policy to be predictable . To ensure that our baseline projection has these features, we are working with a checklist indicating how a particular path performs in terms of these key criteria.

The policy rate path is our best estimate of the policy we would pursue if events unfold as we foresee, i.e., if no new shocks hit the economy. The path is therefore an example of contingent -or Delphic -forward guidance. It is a forecast, not a promise . 4 When shocks hit the economy, the path is revised. After almost 20 years of publishing policy rate paths, our assessment is that this strategy has been successful in managing expectations in the sense that there is a high degree of alignment between the policy rate path and market rates in the short term.

3 In my speech 'Neutral interest rate meaning, limitations and assessment' (Seim, 2024) I discuss the

concept of the neutral rate and the Riksbank's latest assessment of the long -term neutral rate.

4  For a discussion of this principle see, for example, Thedéen, (2025) and Seim (2025).

Figure 1. Policy rate forecast

Per cent



Note. Solid line refers to outcome and dashed line refers to the Riksbank's forecast. The shaded area shows the assessed interval for the neutral policy rate in the long run. Outcomes are daily rates and the forecasts refer to quarterly averages.

Source: The Riksbank.

## Policy rate path complemented by alternative scenarios

Since the only thing we can be sure of is that the future will not unfold as we expect, we complement the policy rate path with alternative scenarios.

At the Riksbank we have a long-standing tradition of working with and publishing alternative scenarios. 5 Scenarios have been part of our internal analysis as well as our external communication on and off since 2007, when we started publishing the policy rate path. Since 2023, they have been a more regular and prominent feature of the MPR.

It is easy to say that inflation can be higher or lower than in the baseline, but we can add clarity by being more specific. A scenario comprises a sequence of different types of shocks that materialise in a model universe made up of specific assumptions about, for example, the strength in the monetary policy transmission, price stickiness, and the state of the global economy. Each scenario produces a path of monetary policy that signals that this is how we are likely to react if the events described would occur.

To construct scenarios, we add shocks to the central projections. When called for, we also revise our assumptions about the workings of the economy. The scenarios

5  The usefulness of scenarios both for the purpose of sensitivity analysis and communication was highlighted by Leeper already in 2003, when evaluating the Inflation Reports by the Riksbank.

are often, but not always, symmetric in the sense that they capture both upside and downside risks to the policy rate forecast. 6 The monetary policy response can also be more or less symmetric. 7 Unlike fan charts, which visualize uncertainty based on historical forecast errors, scenarios are coherent macroeconomic narratives that enable us to be more precise about the possible developments that we envision. 8

The main purpose of these scenarios is to highlight uncertainty surrounding the overall outlook and the policy rate path, communicate which risks the Executive Board perceives as important, and convey our reaction function.

Scenarios can also be useful when assessing the robustness of the baseline policy. If we think of a stylised world where there are three plausible states - baseline and alternative scenarios 1 and 2 - it is possible to compute the optimal policy path obtaining in each of these environments and apply it to each state, to assess which choice gives rise to the most acceptable outcomes in all three cases. 9

## Narrative important

As I already discussed, the specifics of each scenario matter and the devil is often in the details.

Let me give one concrete example from the beginning of this year as shown in Figure 2. In December 2024, we published an alternative scenario in which rising tariffs and trade tensions would lead to higher inflation and weaker economic activity. The policy response in that scenario was to hike the policy rate to counteract second-round effects and the risk of inflation expectations becoming unanchored. Three months later, inflation outcomes were indeed higher, and in line with those in the December scenario. But the drivers of the higher inflation were fundamentally different: the increase was caused by temporary food-price shocks and the annual reweighting of the CPI, i.e., a 'basket effect'. 10 The underlying inflation outlook and economic activity were largely unchanged, so rather than tightening as in the scenario, we stayed the course set out in the

6  For example, in 2022 and 2023, the Riksbank published several alternative scenarios focusing on upside risks to inflation.

7 For example, if inflation is already high to begin with, the costs are higher if inflation surprises on the upside than if inflation is lower than expected. Monetary policy may therefore respond more forcefully in a scenario with higher inflation.

8  This type of scenario analysis was suggested in the Bernanke review of the Bank of England (Bernanke, 2024) and in Bernanke's proposal to improve Fed communications (Bernanke, 2025).

9  See, for instance, Lane (2024) for a discussion of how to assess robustness in the face of uncertainty. 10 For more information see the fact box 'Inflation effects of new weights in the CPIF' in the Monetary Policy Report from March 2025.

policy rate forecast from December. This example highlights the importance of details and that following up on previous scenarios in subsequent MPRs may promote credibility.

## Figure 2. Forecast and alternative scenarios for inflation and the policy rate

Annual percentage change (left) and per cent (right)



Note. Scenarios from the Monetary Policy Report in December 2024. Inflation refers to the CPIF. Solid line refers to outcomes and stretches to the first quarter of 2025. Data refers to quarterly averages.

Sources: Statistics Sweden and the Riksbank.

## Challenges when working with scenarios

Constructing useful scenarios is not trivial. A key question is how to choose them, which involves identifying the Executive Board's view of relevant risks. This may prove difficult. One example is the beginning of 2022, when, in hindsight, a useful scenario would have been one where inflation increased more rapidly and persistently than in the main scenario, and monetary policy had to respond more forcefully. 11 But given the long period of low inflation and policy rate close to the lower bound that preceded these events, it seemed unlikely that inflation would increase to levels not seen since the inflation target was introduced. The Riksbank was not alone in making this assessment.

It is also not obvious whether scenarios should be close to the baseline or more extreme, or how specific and detailed they should be. These two questions are

11  We did publish an alternative scenario with higher inflation in February 2022, focusing on the indirect and second-round effects of high energy prices, but it did not capture the risk that inflation would continue to increase during 2022.

related. Scenarios closer to the baseline are arguably easier to address with our model apparatus, but as stated above with reference to the December 2024 scenario, details then become crucial. If we opt for more extreme scenarios, finding appropriate tools for proper analysis may be more challenging. For instance, many of our econometric models rely on historical patterns, but in times of radical uncertainty, patterns can change. At present it is clearly very difficult to assess the economic effects of higher tariffs, and the general-equilibrium implications are not easily addressed in standard models. Another difficulty may be that highlighting certain developments can be sensitive, if there is a risk that expectations become self-fulfilling.

Since the Executive Board assumes responsibility for the scenarios and the policy responses that they entail, scenarios should ideally receive as much attention in the policy process as the baseline projection. But since the main scenario is central for our policy assessment, it is natural that it receives more attention. 12 In addition, we know that it is mainly the policy rate path that will be scrutinized and studied.

## Do scenarios work?

A key objective of scenarios is to highlight important risks and to signal that policy may well deviate from what is embodied in the policy rate path. We would like to avoid surprises and pave the way for alternative policy choices should they be warranted. Testing empirically to what extent scenarios actually make monetary policy more predictable is, however, not straightforward. One way to do this is by studying the deviation of market expectations of the policy rate from our baseline path. In the short term they are small, but there are episodes where deviations are larger, and markets seem not to believe the policy rate forecast. For example, during the inflation surge of 2022 expectations were more in line with the path communicated in one of the alternative scenarios. Of course, this does not necessarily mean that markets were affected by our scenario, but at the very least it seems they considered that scenario realistic.

We also know that market participants study our scenarios. In the beginning of this year some of them picked up on the fact that we did not act in accordance with our December 2024 scenario, despite inflation outcomes being very similar. As explained above, details were then helpful, and we have since started to revisit earlier scenarios in the MPR, with the aim of ultimately promoting credibility.

12  Flodén (2024) also notes that the policy process at the Riksbank tends to focus on the baseline projection, with scenarios typically receiving less attention.

## Concluding remarks

In conclusion, the policy rate path and carefully crafted alternative scenarios, are crucial communication tools that aim to paint a comprehensive picture of our reaction function.

In my view, scenarios are particularly useful when uncertainty is high. In more stable times, we can be more confident in our central projections. But when there is substantial uncertainty about where we are heading, it is natural to put more emphasis on 'what ifs'.

In terms of scenario design, it is not obvious how extreme or detailed they should be. But the closer we are to the baseline, the more important it may be to describe in more detail the mechanisms and driving forces that we assess to be central. Just focusing on the development of a few key variables may be too vague a narrative. We have also learned from experience that revisiting past scenarios in our MPRs is an opportunity to shed further light on our reaction function and, by doing so, to promote credibility.

Anecdotal evidence and data suggest that our monetary policy communication, which aims to make monetary policy more predictable, has been relatively successful in managing expectations, even in times of great uncertainty.

Thank you for listening!

## References

Bernanke, Ben S. (2024), 'Forecasting for mon etary policy making and communication at the Bank of England: a review', Bank of England.

Bernanke, Ben S. (2025), 'Improving Fed Communications: A P roposal', Hutchins Center Working Paper No. 102, Brookings Institution.

Breman, Anna (2025), 'Daring to be different -the Riksbank's communication strategy ', keynote address at the Bank of England's conference ' Transforming Monetary Policy: How should we think about uncertainty and risks? ', London June 25, 2025.

Dincer, N. Nergiz, Barry Eichengreen and Petra Geraats (2022), 'Trends in Monetary Policy Transparency: Further Updates', International Journal of Central Banking , Vol. 18, No. 1, pp. 331-348.

Flodén, Martin (2024), 'Impo rtant to communicate clearly despite constant uncertainty ', speech at Nordea, Stockholm April 17, 2024 .

Lane, Philip (2024), 'Monetary policy under uncertainty', k eynote speech at the Bank of England Watchers' Conference 2024, King's College London, London November 25.

Leeper, Eric M. (2003), 'An Inflation Reports Report', NBER Working Paper 10089.

Seim, Anna (2024), ' Neutral interest rate -meaning, limitations and assessment ', speech at the Riksbank, Stockholm November 26, 2024.

Seim, Anna (2025), ' The Interest Rate Path of the Riksbank ', presentation at Federal Reserve Board's ' 2nd Thomas Laubach Research Conference ' , Washington May 16, 2025.

Thedéen, Erik (2025), 'Monetary policy communication in practice', speech at the Swedish Economic Association, Stockholm June 2, 2025.",Anna Seim
https://www.bis.org/review/r250617p.htm,P Nandalal Weerasinghe: Launch of the Sustainable Finance Roadmap 2.0,"Keynote speech by Dr P Nandalal Weerasinghe, Governor of the Central Bank of Sri Lanka, at the launch of the Sustainable Finance Roadmap 2.0, Colombo, 5 May 2025.",2025-05-05 00:00:00,"## P Nandalal Weerasinghe: Launch of the Sustainable Finance Roadmap 2.0

Keynote speech by Dr P Nandalal Weerasinghe, Governor of the Central Bank of Sri Lanka, at the launch of the Sustainable Finance Roadmap 2.0, Colombo, 5 May 2025.

* * *

- Secretaries of the Government Ministries;
- Group Country Manager for Sri Lanka of the World Bank;
- Representatives of the European Union;
- Heads and Representatives of Other International Institutions and Partner Agencies;
- Other government officials;
- International and National Experts;
- Representatives of Financial Institutions and Associations;
- Esteemed Invitees joining us virtually;
- Colleagues at the Central Bank;
- Ladies and Gentlemen;

It's with great pleasure that I speak to you this morning at the launch of Sustainable Finance Roadmap 2.0, which is a milestone in the Central Bank's sustainable financing journey and a critical step forward in strengthening resilience, inclusiveness, and longterm sustainability of the financial sector and the economy.

This moment comes at a time when the world faces profound and interconnected challenges related to environment and social wellbeing.

- According to the Network for Greening the Financial System (NGFS) estimates, more than USD 4.2 trillion of financial assets could be at risk globally if the current climate-related impact trends continue.
- Based on the World Bank estimates, climate change could push an additional 130 million of the world population towards poverty unless decisive action is taken.
- In the Sri Lankan context, it is estimated that USD 10.85 billion is required for implementing the NDC's until 2030.

As you all may agree, the extreme weather events we have witnessed are no longer anomalies; they are signs of a shifting climate that will increasingly impact our agriculture, energy security, infrastructure, and livelihoods hence sustainable finance is no longer optional. It is an economic, social, and environmental imperative globally and here in Sri Lanka.

It was with this global reality in mind that the Central Bank of Sri Lanka launched its first Sustainable Finance Roadmap in 2019. That initiative set the foundation for integrating sustainability into our financial system, building awareness, and piloting green finance products.

Today, as we launch the Sustainable Finance Roadmap 2.0, we are reaffirming and strengthening that commitment.

First of all, I would like to extend my gratitude to the International Finance Corporation (IFC), for the technical guidance and the European Union for collaborating with IFC for funding the project under the Accelerating Climate-Smart and Inclusive Infrastructure in South Asia (EU-ACSIIS) program which was a timely intervention as we completed five years since the launching of the first roadmap.

I congratulate the project team and make this a point to thank all the stakeholders who engaged in the project and provided their valuable input and expert knowledge in developing a well-balanced Roadmap.

If I give you an essence of the context in which the Central Bank started this journey in 2016 with the joining of SBFN, the landscape for sustainable financing was more focused on environmental aspect of sustainability.

However, over the years, closer to a decade, many dimensions related to sustainable development have gained momentum.

As climate risk emerged as one of the major deterrents against financial stability it is the responsibility of the Central Bank to take initiatives to green the financial system in maintaining both price stability and financial stability as per the mandate vested upon CBSL.

- Climate change or the impact of climate events on the economy could be transformed into the financial sector in two ways.
- Supply side disruptions could trigger inflationary pressure weakening price stability while building up of non-performing portfolios following a catastrophe which could take a toll on financial system stability through a credit crisis.
- With the enactment of the new CBSL Act, Inclusiveness also comes under the duties of CBSL where we have strategized how financial inclusion could be achieved.

Climate-related events are becoming more common, which raises concerns over financial institutions' ability to manage their risks and to continue to provide financial services in certain segments and geographies. Financial authorities are taking steps to integrate climate risk in their financial stability assessments.

For example, Climate Scenario Analysis, Climate Stress Testing and Value chain analysis in relation to Green House Gas (GHG) emissions are carried out by the financial regulators and financial institutions in the global context.

On the other hand, decarbonization efforts have reached new heights with tightened regulations especially in the European region which is challenging for the local industries catering to such markets.

Simultaneously, reporting and disclosure requirements are getting streamlined globally with the introduction of accounting standards (S1 and S2) and other integrated reporting initiatives.

National level commitments including NDCs, National Adaptation Plan and Net Zero Plan were revisited, and ambitious targets have been set.

In this backdrop, the Central Bank policy interventions are necessary to ensure resilience while uplifting the inclusiveness among society for achieving greater prosperity. Particularly, we have incorporated the social aspect of sustainability into the Roadmap 2.0 as the New CBSL Act recognised inclusiveness as a duty of the Central Bank.

Further, the Roadmap 2.0 has given more emphasis to the internal risk management frameworks in addressing climate challenges in the financial sector, while focusing on green initiatives.

As you all know, the past few years have been a challenging period not only for the financial sector but for the whole economy. We have made considerable progress in terms of restoring stability, however the future challenges are not to be undermined.

I believe Sustainable Finance Roadmap 2.0 is one such policy initiative that will guide us towards how we, particularly as the financial sector, should strategize in terms of environmental and social challenges that may arise due to potential climate events.

In terms of the social aspect of sustainability the Roadmap 2.0 will serve for the broader theme of social justice with special emphasis on MSME's, vulnerable groups and gender equality. National Financial Inclusion Strategy (NFIS) Phase II will also be implemented as part of the Roadmap which is expected to promote Inclusive Green Financing (IGF).

We have challenges to overcome especially with inter institutional coordination and alignment with a national strategy in climate financing. More emphasis on adaptation financing remains to be addressed while different avenues to facilitate blended financing where the financial institutions can collaborate with the State need to be revisited.

While new challenges will emerge with the evolution of the subject area, implementation of the actions laid down in Roadmap 2.0 is very important as it will strengthen the foundation of the financial sector to gain more resilience against climate risks while uplifting financial inclusion among society.

We have maintained the momentum to be categorised as an advancing member country in terms of sustainable finance framework development and implementation in line with international trends and good practices as per the 2024 SBFN Global Brief. Successful implementation of RM 2.0 will position Sri Lanka at the forefront of the sustainable financing leadership in the region.

At the launching of Roadmap 2.0 my request to all the stakeholders who have validated this document is to extend your fullest cooperation in achieving the targets set in a timely manner and contributing to the area of sustainability both individually and collectively, understanding its criticality as a nation in driving the mandate on climate combating and social inclusiveness.

I hope you will extend your fullest cooperation and continue to engage with the Central Bank through the Stakeholder Committee and the Working groups to be formed in near future.

With that I will conclude my address, wishing you all the very best for your commitments and endeavours in this area in the future.

Thank you!",P Nandalal Weerasinghe
https://www.bis.org/review/r250617z.htm,Tuomas Välimäki: Preventing monkeys from running monetary policy operational frameworks,"Dinner speech by Mr Tuomas Välimäki, Board Member of the Bank of Finland, at the Bank of Finland & SUERF Conference on Monetary Policy Implementation ""Old Wisdoms and New Trends"", Helsinki, 11 June 2025.",2025-06-11 00:00:00,"## Tuomas Välimäki: Preventing monkeys from running monetary policy operational frameworks

Dinner speech by Mr Tuomas Välimäki, Board Member of the Bank of Finland, at the Bank of Finland &amp; SUERF Conference on Monetary Policy Implementation ""Old Wisdoms and New Trends"", Helsinki, 11 June 2025.

* * *

Dear friends, dear colleagues,

I start with two pledges. First, this will be my final intervention today, and second, I'll be brief.

Some of you know that we were supposed to hear an excellent dinner speech by Francesco Papadia, my dear friend and co-author. Unfortunately, he couldn't join us today here in Helsinki after all, but I will hint on what his messages to us would have been.

Francesco wanted to provide us with the big picture, by tackling the rise and fall of central bank balance sheet management indicating that the origin and the responsibility of sovereign spreads must be found in Rome, Paris, Helsinki and other Member State capitals rather than in Frankfurt.

In his draft speech, Francesco concluded that managing the central bank's balance sheet has proven to be a useful tool in times of market stress and at the lower bound, though its effectiveness in the latter case was limited, as seen in the prolonged failure to meet the inflation target. To his view, which I do share, this highlights the need for stronger preemptive measures to avoid reaching the lower bound, without raising the inflation target, while recognizing that policy trade-offs become more pronounced at very low rates.

For now, interest rate adjustments suffice, but balance sheet tools should remain available also for future use. When that time comes, we'll benefit from the lessons and data gathered, likely leading to a more cautious and informed application.

Having said this, I don't dare try to replace Francesco, but as we are here tonight at Suomen Pankki's Villa, well-fed, surrounded by some of the sharpest minds in monetary policy implementation and waiting for the dessert, let me share you a story that has absolutely nothing to do with interest rates, liquidity tiers, or central bank balance sheets.

It's a tale about monkeys. Five of them, to be precise.

In a behavioral experiment, five monkeys were placed in a cage. A banana was hung enticingly from the ceiling, just out of reach, but with a ladder leading up to it. Naturally, one monkey climbed the ladder. But the moment he did so, all the monkeys get sprayed

with cold water. Now, this was repeated with another brave monkey, with the same outcome. It didn't take long before they collectively realized that climbing the ladder equals group suffering. So they stop trying.

Then the researchers, those mischievous minds, replaced one monkey with a newcomer. This fresh monkey, unaware of the watery consequences, made it for the banana... and was immediately attacked by the others before he even reached the first step of the ladder. No water was sprayed, the researchers had turned off the system, but naturally the enforcement continued. One by one, each of the original monkeys was replaced, and always the newcomer tried to go for the banana, and faced the consequences by being attacked by all other monkeys and learned the unpleasant lesson. This went on until none of the original water-sprayed monkeys remained.

And yet, none of them went for the banana. Why?

Because, in their silent consensus, they knew that if one of us tries to reach the banana, we will all attack him. But why: Well, that's just how it's always been done.

Now, why am I telling you this at a dinner of a conference on monetary policy implementation?

Because operational frameworks, like monkey ladders, carry the weight of precedent. Once built, they are carefully tended, tweaked, interpreted, and defended. Over time, features introduced in response to specific conditions can petrify into unquestioned norms. Liquidity instruments designed for crisis-fighting may persist long after the crisis has passed. Interest rate corridor widths, collateral eligibility rules, counterparty lists, these can all become ladders no one dares climb, even when the water has long stopped spraying.

Of course, there is wisdom in continuity. We build on experience. We don't reinvent the operational wheel with every policy cycle. But there's a fine line between honoring best practices and blindly preserving them.

That is why gatherings like this, conferences that bring together practitioners, policymakers, and academics, are not just useful; they are essential.

They give us a chance to ask: Why do we do things the way we do? What assumptions underlie our tools? What elements of our framework are there because they work, and which are there simply because they've always been there?

Together, we explore the structure of our monetary policy operating frameworks. Not just to preserve them, but to improve them. We challenge each other, share our experiences, and spot the ladders we've stopped climbing, not because they're dangerous, but because we've forgotten why we ever feared them.

So, as we enjoy this evening, let's toast not only to the smooth functioning of our frameworks, but also to the courage to examine them critically, and to the discussions that keep us from turning into monkeys in tailored suits.

Thank you all for today. Now it's time for our final agenda item, the dessert.",Tuomas Välimäki
https://www.bis.org/review/r250703d.htm,Kevin Greenidge: Courage over circumstance - the extraordinary journey of a global financial leader,"Text of the 18th Olive Trotman Memorial Lecture by Dr Kevin Greenidge, Governor of the Central Bank of Barbados, at the Barbados Public Workers' Co-operative Credit Union on your 55th anniversary, Bridgetown, 21 June 2025.",2025-06-21 00:00:00,"## Kevin Greenidge: Courage over circumstance - the extraordinary journey of a global financial leader

Text of the 18th Olive Trotman Memorial Lecture by Dr Kevin Greenidge, Governor of the Central Bank of Barbados, at the Barbados Public Workers' Co-operative Credit Union on your 55th anniversary, Bridgetown, 21 June 2025.

* * *

## 1. Opening: The Power of Naming the Journey

Allow me to first offer my heartfelt congratulations to the Barbados Public Workers' Cooperative Credit Union on your 55th anniversary. This is no small feat. It is a legacy of resilience, vision, and service to people who, like me, started with very little, but dared to dream of more.

I consider it a privilege, and a profound honour, to stand before you this evening. And I do not take lightly the responsibility that comes with delivering the Olive Trotman Memorial Lecture. Sister Olive's name carries with it a quiet revolutionary spirit, a woman who saw dignity where others saw limits. A woman who acted not for recognition, but for transformation.

The theme of this evening, ""Courage, Not Circumstance: The Extraordinary Journey of a Global Financial Leader"", is deeply humbling. I never set out to be considered extraordinary. I simply wanted to solve problems, to make systems work better, to serve my country and region, and to honour the people and community who raised me.

Tonight, I want to share my journey. Not as a blueprint, but as an offering. Because every barrier I have broken was already cracked by someone like Olive Trotman. And every door I've walked through, someone else helped push open.

## 2. The Legacy of Olive Trotman

Many of you may already know some facts about Olive Trotman. She was a nurse. A trade unionist. A pioneer in the credit union movement. But these descriptions don't do her justice.

She wasn't only part of history. She helped make it.

Picture Barbados in the 1950s and 60s. Public servants were often living paycheque to paycheque. The financial system was exclusionary. Banks were formal, intimidating, and certainly not welcoming to women or the working class. Access to credit was a privilege of the few.

And here comes Olive, walking the halls of the hospital or government offices, with her brown valise in hand, quietly collecting deposits on behalf of the Civil Service Savings Society. She wasn't just offering a service. She was building trust. She was saying to her colleagues, ""You matter. Your money matters. Your future matters.""

As respected Professor the late Frank Alleyne pointed out, Barbados in the 1950s was still entrenched in a plantation economy. Wages were low, formal credit was out of reach for working people, and traditional financial institutions catered to a privileged few.

That one-woman operation became the foundation for what we now know as the Barbados Public Workers' Co-operative Credit Union, one of the most successful credit unions in the Caribbean.

But Olive Trotman didn't have a background in finance. She didn't hold a powerful office. What she had was a deep sense of responsibility and the courage to act.

What Olive Trotman understood before policy-makers caught on, was that financial inclusion is not simply about access. It's about dignity. It's about ensuring people have the means to build, to dream, and to withstand hardship.

In today's language, we might say she was de-risking households, strengthening social capital, and building economic resilience from the ground up. She was doing what we in central banking now champion, placing people at the heart of finance.

So, when I speak of my own journey, I do so in the shadow, and the light, of hers.

## 3. From Children's Home to University: My Foundation

My journey didn't begin with privilege or certainty. I was raised in Black Rock, spending part of my early life in a children's home. I understand what it means to begin from a place of uncertainty-to feel the quiet weight of starting behind while others seem to race ahead.

But here is what I discovered: there is a God-given power in each of us. A power that gives us courage. A power that allows us, even in the presence of fear or disadvantage, to move forward.

Let me draw an image for you.

Imagine courage as a car, one that carries you through the journey of life, even when you cannot see the entire road ahead. Like any car, it needs an engine. And God has already birthed that engine within you. It is a divine power that lives inside each of us. For God has not given us a spirit of fear, but a spirit of power. And just as a car needs wheels to transfer that internal power into forward motion-pushing past the friction and resistance of the road-you too need wheels to carry you through the challenges you will face.

For me, those four wheels are:

- A clear -you must know where you are going vision or goal
- A deep -a belief that you can do it, that it is already yours becoming
- Consistent and diligent work -whatever your hands find to do, do it well
- And -you must carry others with you on the journey love and compassion

These are the wheels that helped me move forward. They did not remove the obstacles. But they helped me rise above them. I want you to keep this imagery in mind as I take you through pivotal moments in my life's journey.

I attended The Alleyne School. And to be honest, I was not a top student. By the end of Fifth Form, I had not been entered for any CXC exams and was on track to leave with no certificates. But even then, the first wheel-began to turn. The easy path would vision have been to accept defeat, to let circumstance write my story. Instead, I decided I wanted to go to Sixth Form at Harrison College. That would require at least seven passes. So, I took a deep breath, walked into my principal's office, and asked for a second chance. And he gave it to me.

That second chance demanded everything I had. I had to complete in one year what others had done in two or three. I studied late into the night, sometimes by candlelight. I cut out distractions. I focused. That was the third wheel-in full motion. But diligent work none of that would have been possible without the second wheel. I had to believe belief I could succeed, even before the results came in. I sat eight CXCs and passed all with distinction.

That moment was a turning point. It confirmed that with vision, belief, and work, you can change the trajectory of your life.

I went on to Harrison College for Sixth Form, and then to the University of the West Indies at Cave Hill to study Management. And during my first year, a moment came that would permanently shape my direction.

I was visiting a church, and during the service, a visiting preacher from the USAsomeone who had never met me-called me up forward during service. He told me I would one day be a leader in this country. That I would teach people about economics, about the principle of the mustard seed, about saving, investing, and stewardship.

Whether or not it was truly prophetic does not matter. I chose to believe it. I made it mine. That word became my guiding . But belief without action is merely wishful vision thinking; you must - that's the second wheel in action - you become what you believe must become. I immediately changed my degree to Economics. I walked into the Central Bank and asked the Director of Economics, Dr. Boamah, what it would take for them to hire me. His answer was daunting: ""We take only one person per year, and only with First Class Honours.""

My response? ""Hold a spot for me. I'll be back in two years.""

Remember the third wheel is hard work Not just effort-strategic, relentless, excellence-. driven work.

I discovered I needed 11 As to achieve First Class Honours. I didn't settle for 11. I earned twenty. Twenty A's. Those grades weren't the result of luck or natural ability alone. They were the outcome of discipline married to direction, of late nights and early mornings, of saying no to distractions and yes to dedication. I worked deliberately. I stayed focused. But I also leaned on the divine engine within me-the power of faith and

purpose. That power pushed me up hills and through obstacles. And what kept the wheels turning were those three essentials: vision, belief, and hard work.

## 4. The Wheels on New Roads: From Local to Global Leadership

In 1995, I joined the Central Bank of Barbados. That vision I had carried for years was now reality. But this was not the end of the journey. It was a new road, with new terrain to navigate.

Over the next 17 years, I worked my way through the Bank, from Research Officer, Economist, Senior Economist, Chief, and eventually Director of Economics and Research. But here's what many don't understand: I wasn't climbing for titles. I was building capability. Each position was another mile on the road to something greater.

The first wheel-was with me every step. I would often go to the tenth floor of the vision Bank for meetings in the Governor's office. And during those visits, something would stir in me. I began to see myself in that role. I would quietly say to myself, ""I will be Governor someday.""

That's how extraordinary vision works. It begins as a whisper. If you give it space to grow, it becomes part of your DNA. It transforms how you work, how you prepare, how you show up every single day.

The second wheel-was what gave me strength to grow toward that vision. I did belief not wait for permission to act like a leader. I committed to becoming one. I believed I had something to contribute. I believed the role was possible for someone like me.

## And so I worked.

I earned a master's degree. I completed a doctorate. I published over two hundred academic papers. I took on difficult projects and delivered. I pushed myself beyond expectations. That was the third wheel-doing whatever my diligent, consistent work hands found to do with excellence.

But another wheel began to grow in importance too. I began love and compassion mentoring younger staff. I shared what I had learned. I tried to lift others as I climbed, because no journey is truly meaningful if you walk it alone.

After 17 years at the Bank, I knew it was time to grow in a new way. I needed international experience to become the leader I was meant to be. I set my sights on the International Monetary Fund.

And again, the same process unfolded. I had a new unfold- I would spend nights vision imagining what it would feel like to work there, walking those corridors, attending highlevel briefings, contributing to global economic dialogue. I meditated on it until it became real within me. And I until the door opened. worked diligently

In 2011, I joined the IMF as a Senior Economist. At the IMF, I worked on macroeconomic and structural reforms across Africa, Latin America, and the Caribbean. I contributed to major policy reviews on macro-financial surveillance, growth and

governance, and the resilience of small states. But what made me effective wasn't just technical training-it was my grounding in the realities of small island economies, combined with global insights about resilience, reform, and inclusive growth. I also got to understand the importance of buffers, of confidence, and of clear communication.

This is the power of a purpose-driven journey: each experience including, setbacks, builds upon the last, creating a vehicle capable of handling increasingly complex terrain.

## 5. Returning Home: The Ultimate Test of Global Leadership

In 2018, Barbados was facing a serious economic crisis. I was asked to return home. And I did-not for position, but for service. Because extraordinary leaders understand that true success is measured not by how far you travel from home, but by how much you can contribute when you return.

Together with an exceptional team, we designed the Barbados Economic Recovery and Transformation programme-BERT. This wasn't just technical policy; it was a national call to action requiring the courage to make difficult decisions on debt restructuring, on fiscal prudence, on governance reform. It required the hard work to negotiate with international partners, and the vision to protect what mattered most: pensions, wages, education, and social spending.

As a member of the negotiating team, I led engagements for the IMF, credit rating agencies, other international partners. I was part of every major policy decision, but I never forgot who those decisions affected: the vendor in the market, the teacher in the classroom, the retiree managing monthly expenses, credit union members like you.

BERT 2018 stabilised our economy. BERT 2022 achieved growth, embedded resilience and social protection. BERT 2025 focuses on transformation-deepening productivity, digitization, innovation, climate readiness, and human capital investment.

What I have learned through all of this is simple but profound: A vision or goal is not just about what you want. It is about what you are willing to become. You must see it. Speak it. Live it. Then work with clarity, with discipline, and with consistency until the world reflects what you already believe. Every step of that journey was powered by the divine engine within-and carried forward by the same four wheels: , , , vision belief hard work and . love

## 6. The Daily Discipline of Extraordinary Leadership

Now, as Governor, I want to share something personal about maintaining this fourwheel vehicle of leadership. Every morning before I get out of bed, I do my affirmations. I reflect on how blessed I am and give thanks. Then I affirm who I am and who I'm becoming. I then reflect on my goals for the day, the week and I see them being accomplished.

This isn't motivational theory-this is operational reality Having a positive mindset isn't . about ignoring reality. It's about choosing your response. It's about seeing challenges as opportunities and believing in the power of change.

Nothing sustainable in life comes without hard work.  A former central bank governor once reminded me how I burned the midnight oil to complete assignments. I'm intentional; some might even say intense. Malcolm Gladwell's 10,000-Hour Rule in Outliers supports this idea: mastery takes time and practice. Even the Bible teaches us: ""Whatever you do, work at it with all your heart.""

## 7. Building Roads for Others: The Legacy of True Leadership

But success isn't just about the destination you reach-it's about the roads you build for others to follow. I founded the Kevin Greenidge Charitable Trust, providing opportunities and encouraging positive lifestyles for disadvantaged Barbadian youth through educational scholarships, counselling, mentorship, and financial support.

This is the ultimate measure of extraordinary leadership: not just what you achieve for yourself, but what you build for others. Whether through volunteering, mentoring, or simply encouraging others, we create ripple effects of growth, positivity, and possibility.

## Your Journey Begins Now

To everyone beginning their own extraordinary journey, or like many of you continuing that journey remember this: isn't just a philosophy-it's a courage over circumstance daily practice.

Life will present you with challenges that seem insurmountable. You might start in a children's home, fail your first attempt at examinations, or face rejection from your dreams. These aren't disqualifications-they're qualifications for extraordinary leadership. They don't define you; they prepare you. I'm sure the lady we  honour tonight, would have shared similar experiences back in the day- but like me to have accomplished what she did Olive lived a life of courage over circumstance.

So, build your four-wheel vehicle of courage:

- A clear vision or goal-you must know where you are going
- A deep becoming-a belief that you can do it, that it is already yours
- Consistent and diligent work-whatever your hands find to do, do it well
- And love and compassion-you must carry others with you on the journey

Like I did years ago at Alleyne, Harrison College, and university, you can face challenges head-on. Embrace every learning opportunity. Build strong networks. Seek help when needed. Stay focused and resilient.

It won't always be easy. The road to global leadership never is. But with courage over circumstance, with your four-wheel vehicle of character, and with unwavering commitment to excellence, greatness isn't just within your reach-it's your destiny.

The journey from children's home to global leadership isn't just possible-it's inevitable for those brave enough to build the right vehicle and disciplined enough to stay the course.

Your extraordinary journey begins with a single decision: Will you let circumstances define you, or will you define your circumstances?

## 8. Leadership Rooted in People

Leadership, especially in economic and financial spaces, is often imagined as technical. And yes, there is a technical aspect to it. But at its core, it's moral, its people. Because every decision we make about maintaining the currency peg, ensuring we have enough foreign reserves, or regulating the financial services sector affects the lives of real people.

This is another way in which Olive's example lives on. She reminds us that financial systems must serve people and not the other way around.

She also reminds us that inclusion cannot be passive. It must be intentional.

This is why the credit union movement still matters so much today. Because while the world is racing toward digital banking and financial technology, and we wholeheartedly welcome those innovations, we must not lose sight of the foundational values: access, transparency, fairness.

The credit union was never just about money. It was about the power of people to come together, pool resources, and take control of their financial future. That principle is as revolutionary now as it was then.

As Governor, I've made it a personal mission to ensure that policy is not something done to people, but with them. When we review interest rates or inflation targets, we're not just crunching numbers. We're assessing whether a mother can afford groceries, whether a young man can get a loan to start a business, whether a teacher can save for her children's education.

Policy must be people-first.

When I returned home to take up the post of Governor, I was clear about one thing: policy is only as good as its impact on people.

At the Central Bank, we don't just look at numbers. We look beyond the numbers. We ask: do people understand how the economy functions? Are people saving, investing, and building wealth? How easy is it for Barbadians to navigate the banking system or make a payment?

That people-centred approach has shaped everything we've done since I took office.

We've made it a priority to improve how we communicate with the public. We launched our ""Explainers"" video series. We broke down policy in plain language, because people deserve to understand how interest rates, inflation, and foreign reserves affect their daily lives. Financial stability must be lived, not just reported.

We launched the Market Conduct Guidelines to hold financial institutions accountable for fair and transparent practices. This was not just a regulatory step. It was a moral one. Because how people are treated by their banks and insurance companies matters. Trust in the financial system begins with fairness.

We also prepared to take a bold step forward with the launch of BimPay, our national instant payments system. It is set to go live in 2026, offering 24/7,365 fast, efficient, secure digital payments to all. We will onboard your credit union and two other credit unions and other financial institutions to ensure that this platform is not just available, but accessible. This is financial inclusion in real time. This is the future of everyday money. And we are not stopping there. We have integrated financial literacy into our work. We have hosted economic forums in schools and community spaces. We are using social media not to entertain, but to educate. Because knowledge is power, but shared knowledge is empowerment.

Internally, I have insisted that we model the excellence we speak of. We are streamlining operations, modernising our IT infrastructure, and investing in our people. Leadership is not about pushing change onto others. It is about embodying the change yourself. That is the tone we are setting. And while we are focused on financial and economic reform, we are also thinking beyond the numbers. We are leading conversations on climate resilience, on economic transformation, and on the kind of future we want for Barbados.

Because I believe central banking should not sit on a hill above the people. It should walk alongside them. It should listen. It should lead with compassion and courage. That's a principle Olive Trotman lived by. And it's one I try to live by too even from a different office, in a different time.

## 9. The Power of Resilience and Vision

Leadership, especially in turbulent or uncertain times like those we live in today, demands resilience. There were moments in my career when it would have been easy to question the path. But each time, I reminded myself of my purpose and returned to the vision that first carried me forward.

When you commit to a vision and ground yourself in something larger than the moment, it becomes easier to navigate the hard days. I returned to my affirmations and meditation. I reminded myself who I am and that clarity of purpose must precede influence. And I remembered all the people, especially the young ones, who might look at my story and find their own spark of hope.

That's why I share my journey; not to boast, but to offer a mirror for others. Especially our youth. I want them to see that someone who came from humble beginnings can rise and lead. That circumstances don't define you, they prepare you.

And for those that have arrived at positions of leadership. I want to remind them that leadership is not about performing for applause. It's about being aligned. About ensuring that your choices, your tone, your energy reflect who you say you are. That is integrity, not performance, but congruence.

## 10. Message to the Next Generation: Vision, Belief, and Legacy

To the young people here tonight, and to those navigating their way through uncertainty, remember this: your beginning or circumstances does not define your becoming.

Greatness is not inherited. It is forged. Through vision. Through belief. Through disciplined action. From time to time, you may find yourself wondering if those big dreams you carry will ever become reality. I want you to know they can. And if you choose to believe in your potential and take one deliberate step forward each day, they will.

Start with what you have. Write down your goals. Build your mindset. Affirm your value. Then act. Daily. Consistently. With heart. It will not always be easy. But each decision you make now, every book you read, every time you rise after a setback, that is how you shape your future. That is how you honour those who came before and prepare the way for those who come after. That is courage!

Press forward. Be disciplined. Be daring. Be determined. Believe in your purpose, even before others recognize it. And when you rise, and you will, reach back. Mentor. Encourage. Create opportunities. Share your lessons. That is how we multiply success. That is how we build legacy.

## 11. The Legacy of Olive Trotman: A Vehicle Built for Others

But as we talk about building our own extraordinary vehicles, we must remember those who engineered the very roads we travel today. We must continue to honour Olive Trotman-a woman who understood that true leadership isn't about the vehicle you build for yourself, but about the infrastructure you create for others.

## Courage is not something you are born with. It is something you choose.

Olive Trotman chose courage, not once, but every single day. She chose it when she walked into government offices with her brown valise-her own carefully engineered toolkit for change. She chose it when she dared to believe that working people deserved dignity, access, and financial stability. She chose it when she created something that outlived her-institutions that continue to serve as vehicles of empowerment for generations.

Think about what Olive understood: the most powerful vehicle you can build is one that carries others forward long after you've completed your own journey.

And I have tried to choose courage too. I chose it when I asked for a second chance at Alleyne-when my academic vehicle seemed to have broken down before it even started. I chose it when I pursued a vision of global leadership long before it made sense to anyone else-when I was still tuning the engine of my ambition. I chose it when I left the comfort of international corridors to return home and serve during a time of

national crisis-when our country's economic vehicle needed emergency repair. I chose it every time I decided to live aligned with the truth I carry-that leadership is about service, not status.

## The Quiet Courage of Daily Discipline

I want to leave you with this profound understanding: courage does not always look Sometimes it looks like the mechanic's daily like bold speeches or grand gestures. discipline-getting up early to study when others sleep. Sometimes it looks like the humility to ask for help when your vehicle breaks down. Sometimes it looks like saying no to shortcuts that might get you there faster but compromise your integrity. And sometimes it looks like speaking up at the board meeting, even when your voice is shaking and you're the youngest person in the room.

But courage, like the engine of any extraordinary vehicle, is always about one thing: moving forward when it would be easier to stand still.

Every morning when you start your engine, when you grip the steering wheel of your life, remember that you're not just driving for yourself. You're creating tire tracks that others will follow. You're testing roads that will become highways for future generations.

## Building Roads That Last: The Ultimate Leadership Legacy

Let us honour Olive not just with words, but with the way we engineer our own vehicles of leadership. Let us honour her with the way we lead-ensuring our four wheels of courage, discipline, hard work, and vision are perfectly aligned. Let us honour her with the way we serve-using our vehicle not just to reach our own destinations, but to build better roads for others. That's what Public Workers, Cooperative Credit Union has done for the past 55 years and must continue to do.

Your four-wheel vehicle of courage, discipline, hard work, and vision isn't just meant to carry you from children's home to global leadership-though it will. It's meant to prove that such journeys are possible. It's meant to inspire others to build their own extraordinary vehicles. It's meant to demonstrate that isn't courage over circumstance just a personal philosophy-it's a blueprint for transforming communities, nations, and the world.",Dr Kevin Greenidge
https://www.bis.org/review/r250701e.htm,Zhu Hexin: Firmly advancing in-depth reforms and high-level opening-up in the foreign exchange sector to support high-quality economic development,"Speech by Mr Zhu Hexin, Deputy Governor of the People's Bank of China and SAFE Administrator, at the 16th Lujiazui Forum ""Financial openness, cooperation, and high-quality development amid global economic changes, Shanghai, 18 June 2025. ",2025-06-18 00:00:00,"## Zhu Hexin: Firmly advancing in-depth reforms and high-level openingup in the foreign exchange sector to support high-quality economic development

Speech by Mr Zhu Hexin, Deputy Governor of the People's Bank of China and SAFE Administrator, at the 16th Lujiazui Forum ""Financial openness, cooperation, and highquality development amid global economic changes, Shanghai, 18 June 2025.

* * *

Distinguished Party Secretary Chen Jining,

Former PBOC Governor Zhou Xiaochuan,

Mayor Gong Zheng, Deputy Director Wang Jiang, Governor Pan Gongsheng, Minister Li Yunze, Chairman Wu Qing, Vice Minister Hu Haifeng, and dear guests,

## Good morning!

It's a great pleasure to join you at the Lujiazui Forum. I would like to take this opportunity to exchange some ideas with you on firmly advancing in-depth reforms and high-level opening-up in the foreign exchange sector, with a view to better supporting high-quality economic development.

Since April, the international economic and trade order has faced severe disruptions, and global financial markets have experienced significant volatility. Under the strong leadership of the Communist Party of China (CPC) Central Committee, China has strengthened counter-cyclical adjustments to macroeconomic policies, effectively responding to external shocks. As a result, the foreign exchange market has remained generally stable despite the complex and challenging environment. Since the beginning of this year, the RMB exchange rate has moved in both directions with enhanced flexibility. The RMB exchange rate has appreciated by 1.6 percent against the US dollar and remained generally stable against a basket of currencies. China's foreign trade has demonstrated strong resilience, with the current account surplus staying within a reasonable and balanced range. Cross-border investment has become more active, with net increase in domestic bonds holdings by overseas investors at a relatively high level, and foreign buying of domestic equities increasing recently.

Looking ahead, China's foreign exchange market remains well-positioned to maintain overall stability. First, China's economy is expected to maintain its recovery China is stepping up the implementation of more proactive and growth momentum. and effective macroeconomic policies, placing greater strategic emphasis on expanding domestic demand and strengthening the domestic economic circulation, while also fostering and scaling up new quality productive forces. These efforts will strongly support steady and sound economic growth. Recently, multiple international organizations and investment banks have raised their growth forecasts for China in 2025. China Second, the balance of payments will maintain a basic equilibrium. remains unwavering in its commitment to opening-up, with strengthened policy measures to stabilize foreign trade and investment, and a steady expansion of financial

market access. These factors will help foster more balanced cross-border capital flows. Market Third, China's foreign exchange market will become more resilient. participants have become more mature and rational, with the proportion of corporate foreign exchange hedging and the share of RMB cross-border settlements in goods trade both rising to around 30 percent, significantly enhancing their ability to cope with exchange rate fluctuations. In recent years, we have also accumulated rich experience in managing various risks. Despite continued uncertainties and instabilities in the external environment, we have both the capability and confidence to maintain the sound operation of the foreign exchange market and keep the RMB exchange rate basically stable at an adaptive and equilibrium level, thereby creating a favorable environment for high-quality economic development.

## Ladies and gentlemen,

General Secretary Xi Jinping has emphasized the importance of staying committed to running our own affairs well and steadfastly expanding high-level opening-up, so as to counter the uncertainties of a rapidly changing external environment with the certainties of high-quality development. We will strike a balance between development and security, continue to deepen reform and opening-up in the foreign exchange sector, and promote the modernization of the foreign exchange governance system and governance capacity. Efforts will be made to build a sound foreign exchange management system featuring ""greater convenience, expanded opening-up, . We will unswervingly pursue a path enhanced security, and upgraded intelligence"" of financial development with Chinese characteristics, thus providing stronger foreign exchange support for China's high-quality economic development.

First, in terms of ""greater convenience"", we will continue to improve a foreign exchange policy system that rewards integrity with greater access, and proactively enhance the quality and efficiency of foreign exchange services for the real economy. We will step up reform and innovation in foreign exchange management, and grant greater convenience to entities with strong records of compliance and integrity, thus further facilitating the cross-border trade, investment and financing. Firstly, we will focus on sci-tech enterprises and small and mediumsized enterprises (SMEs) to make significant efforts in the areas of technology finance, green finance, inclusive finance, old-age finance and digital finance. Also, we will actively support the development of new quality productive forces, and provide comprehensive foreign exchange services along the entire chain for major national strategies, key areas, and weak links. Secondly, we will steadily advance by comprehensively optimizing the reform of bank foreign exchange operations management framework for pre-transaction due diligence, differentiated review during transactions, and post-transaction monitoring and reporting, thereby achieving a better balance between improving efficiency and managing risks. Thirdly, we will establish a policy evaluation mechanism and an ecosystem assessment mechanism for Taking alignment with national strategic goals, foreign exchange management. consistency with local development realities, and the tangible benefits delivered to enterprises and the public as key criteria, we will continuously boost the real impact of policies to ensure that people and businesses gain a stronger sense of fulfillment.

Second, in terms of ""expanded opening-up"", we will promote high-level institutional opening-up in the foreign exchange sector to support the

development of a new system for a higher-standard open economy. We will strengthen the overall planning and systematic integration of reforms, promoting RMB internationalization and the high-quality opening-up of the capital account in a coordinated manner. In addition, we will enhance the integrated management of domestic and foreign currencies, thus fostering a world-class business environment that is market-oriented, law-based, and internationalized. Firstly, we will deepen the streamline the reform of foreign exchange managements for direct investment, foreign exchange registration process for foreign direct investment (FDI), and shorten the negative list for fund use, so as to steadily support enterprises in participating in international cooperation across industrial and supply chains. Secondly, we will and refine the prudently and steadily expand the connectivity of financial markets, qualified foreign institutional investor (QFII/RQFII) program, thus facilitating foreign financial institutions in investing and operating in China. Thirdly, we will advance the shortening reform of foreign debt management by optimizing quota management, the ""negative list"" for the fund use of external debts, and gradually shifting the business of foreign debt registration to banks in an orderly manner. Fourthly, we will deepen improve the the development and opening-up of the foreign exchange market, product system, expand the range of market participants, and continue to enhance services for enterprises in managing exchange rate risks. Fifthly, we will support explore integrated reform and region-specific opening-up and development, innovation of foreign exchange management policies in pilot free trade zones, and actively support the development of key regions such as the Hainan Free Trade Port and the Guangdong-Hong Kong-Macao Greater Bay Area.

Third, regarding ""enhanced security"", we will strengthen the dual management framework of ""macro-prudential plus micro-regulation"" in the foreign exchange market to safeguard its stability and ensure national economic and financial security. Adhering to a bottom-line thinking, we will enhance open regulatory capabilities and risk prevention measures, fostering a positive interaction between highquality development and high-level security. Firstly, we will mitigate risks rising from We will intensify monitoring and early warning mechanisms for crossexternal shocks. border capital flows, strengthen macro-prudential management and expectation guidance, and maintain the RMB exchange rate at an adaptive and equilibrium level while ensuring a balanced international payments. Secondly, we will strengthen We will advance the shift to entity-based regulatory oversight in foreign exchange. approaches in the foreign exchange sector, crack down on illegal activities with heightened enforcement, and improve our capacity to identify and combat emerging criminal and illegal activities.

Fourth, in ""upgraded intelligence"", we will leverage advanced technologies such as artificial intelligence and big data to elevate the digital and intelligent capabilities of foreign exchange regulation. Through the development of ""Smart Foreign Exchange Administration"", we will provide more intelligent, efficient, secure, and user-friendly services to individuals and businesses. Simultaneously, we will enhance the intelligence, precision, and effectiveness of risk identification and regulatory oversight, empowering foreign exchange regulation with cutting-edge technological solutions.

Ladies and Gentlemen,

Currently, transformations of the world unseen in a century are unfolding at a faster pace. Confronted with drastic external changes, we will conscientiously implement the guiding principles of the Political Bureau meeting of the CPC Central Committee held on April 25, committing ourselves to both goal-oriented and problem-oriented approaches, staying attuned to market demand, and rolling out a basket of supportive policies to keep employment stable, sustain business operations, maintain market stability, and anchor the expectations.

Firstly, we will support foreign trade enterprises through multiple policy measures. We will further deepen the reform of trade-related foreign exchange management by launching a suite of facilitating policies. For example, we will launch high-level opening-up pilot programs for expanding cross-border trade, encourage banks to include more trade-related entities in emerging industries into the targets of facilitating policy support, optimize foreign exchange fund settlements for comprehensive foreign trade service providers, and facilitate the centralized overseas fund management for trustworthy engineering contracting firms. These policies are designed to support the innovation and development in trade.

Secondly, we will proactively facilitate cross-border investment and financing. We will implement a facilitating policy mix to better support the international economic and trading cooperation and exchange of personnel. For example, we will support research institutions across the country in attracting and leveraging foreign capital, further facilitate the cross-border financing and investment of technology-based companies, and shorten the negative list for the use of income generated under the capital account. We will promote nationwide the integrated RMB and foreign currency cash pooling program for multinational corporations, to facilitate the centralized use of fund within the corporate group. Through the pilot program for green foreign debt policies, we will encourage eligible enterprises to borrow foreign debts for green projects. Meanwhile, we will improve the fund management of domestic enterprises that list abroad by harmonizing the policies for domestic and foreign currency management, thereby facilitating the repatriation and domestic use of fund raised overseas. In the coming future, a batch of investment quotas under the Qualified Domestic Institutional Investor (QDII) scheme will be issued, to meet the reasonable overseas investment demand by domestic entities in an orderly manner.

Thirdly, we will implement a package of innovative policies related to foreign exchange businesses in the pilot free trade zones, to actively support the strategy of upgrading the pilot free trade zones. The policy package includes measures such as optimizing settlement processes for new international trade forms, and expanding the pilot program for Qualified Foreign Limited Partnerships (QFLP), among a total of ten facilitating policies.

## Ladies and Gentlemen,

Accelerating the construction of Shanghai as an international financial center is a major strategic decision made by the CPC Central Committee. It holds special significance in serving the new development paradigm and promoting high-quality economic growth. In recent years, remarkable progress has been made in developing Shanghai as an

international financial center. Today, Shanghai has evolved into a city with the most comprehensive financial market system, the most diverse range of financial institutions, and the highest level of financial opening-up in China.

Since the beginning of this year, we have continued to step up support for building Shanghai into an international financial center. Not long ago, the People's Bank of China (PBOC), the National Financial Regulatory Administration (NFRA), the State Administration of Foreign Exchange (SAFE), and the Shanghai Municipal People's Government jointly released the Action Plan for Further Facilitating Cross-Border . Recently, the PBOC and Financial Services in Shanghai International Financial Center the SAFE approved the plan for upgrading the functions of Free Trade Accounts (FTAs) in the China (Shanghai) Pilot Free Trade Zone and the pilot plan for comprehensive reform of offshore trade financial services in the Lin-gang Special Area.

Moving forward, we will continue to strengthen the provision of high-quality policies and services to support entities of all types in participating in international competition and cooperation in a safer, more convenient, and more efficient manner. This will further enhance the competitiveness and global influence of Shanghai as an international financial center.

To conclude, I wish the Forum a full success! Thank you!",Zhu Hexin
https://www.bis.org/review/r250702c.htm,Petar Chobanov: The effect of the eurozone - the experience of member states,"Speech by Mr Petar Chobanov, Deputy Governor of the Bulgarian National Bank, at the opening of the national discussion of the Economic and Social Council conference ""The effect of the eurozone. The experience of member states"", Sofia, 20 June 2025.",2025-06-20 00:00:00,"## Petar Chobanov: The effect of the eurozone - the experience of member states

Speech by Mr Petar Chobanov, Deputy Governor of the Bulgarian National Bank, at the opening of the national discussion of the Economic and Social Council conference ""The effect of the eurozone. The experience of member states"", Sofia, 20 June 2025.

* * *

## Ladies and gentlemen,

Thank you for inviting me to open today's event. The history of the euro is also part of Bulgaria's monetary history. Since the very adoption of the single European currency, our national currency has been pegged to it. Ever since we have been inextricably linked to the economies of the countries using the euro.

It is worth mentioning that the positive assessments by the European Commission and the European Central Bank about Bulgaria's readiness to join the euro area are a wellearned success for the efforts made. Despite the tense, uncertain and with an unclear future international environment, Bulgaria has managed to keep its stability and to make an enviable progress on the path of its economic integration. We have come a long way together and, of course, the challenges ahead of us remain. We need to continue purposefully and actively as a team in order to practically complete the process of our accession to the euro area.

We are entering the intense second phase of the communication strategy for the adoption of the euro. The actual final work on the introduction of the new currency in Bulgaria is underway.

The BNB has prepared a collection of summarised and systematised questions and answers, where the citizens and other interested parties can find answers to questions frequently asked by the public about the changeover to the euro. Today you can have a look at it and actively use it in the communication campaign. It is also published on the website of the Bulgarian National Bank.

In this historic transition period, we very much count on businesses, trade unions, consumer organizations. The preparation for the dual display of euro and lev prices for goods and services is at its final stage, and now it can practically be seen in some places. The advance information for the population about the upcoming changes, the clarifications on occurring issues and difficulties, and any support provided during the transition period, would ease the future use of the new currency in a calm and secure environment.

Trust in the business is an essential element of the economic situation, and I believe that the prices of goods and services will remain at a similar level and will not be a cause for tensions. Price stability is especially important for the development of the economy and affects people's living standard.

In this regard, we rely on the trade unions with their expertise to continue to be the link with the employed, to protect their interests, and to inform them about the important practical issues of the changeover.

Consumer organisations, actively engaged in protecting consumers' interests, providing information on their rights, and exercising control over traders, will continue to be an important factor for stability and trust in the economic processes.

We can mention Estonia and Lithuania as good examples for our country with regard to their entry into the euro area. As you know, they too operated under a currency board arrangement and participated in the Exchange Rate Mechanism II without changing their monetary regime. No major disruptions or problems have been seen in these countries, therefore we can expect with a high degree of certainty that our experience will also be successful and without major difficulties.

For us, the euro area is an opportunity, and yet a responsibility - together we should carry out a smooth transition and outline prospects for better well-being and development.

I wish you all productive work in the final stage of Bulgaria's accession to the euro area!

Thank you for your attention!",Petar Chobanov
https://www.bis.org/review/r250702e.htm,Rajeshwar Rao: Bridging the credit gap - the evolution of India's credit reporting infrastructure,"Keynote address by Mr Rajeshwar Rao, Deputy Governor of the Reserve Bank of India, at the TransUnion CIBIL's Credit conference, Mumbai, 1 July 2025.",2025-07-01 00:00:00,"## Rajeshwar Rao: Bridging the credit gap - the evolution of India's credit reporting infrastructure

Keynote address by Mr Rajeshwar Rao, Deputy Governor of the Reserve Bank of India, at the TransUnion CIBIL's Credit conference, Mumbai, 1 July 2025.

* * *

Ladies and gentlemen, Good Afternoon.

At the outset, let me thank the organisers for inviting me to deliver the keynote address at this milestone event and congratulate Trans Union CIBIL (TU CIBIL) on its 25th anniversary. Credit reporting and TU CIBIL have grown together in India and the company has made a significant contribution in expanding the footprint of credit reporting in the country. Credit reporting systems today operate as a key element in the national financial architecture, encouraging greater credit access, supporting financial inclusion, enabling effective supervision, and enhancing financial stability. This silver jubilee therefore also represents a significant milestone in TU CIBIL's ongoing contribution to strengthening this framework. This also gives us an occasion to reflect on how the information gap between the credit institutions and the borrowers has been addressed over time and the possible way ahead.

## Evolution of Credit Information Companies in India

To set a context to the theme of this speech, it may be worthwhile to reflect briefly on the evolution of credit information companies in India. The Reserve Bank had recognised the need for establishing a Credit Information Bureau for collection of credit information from lending institutions and for the provision of such information to the financial system and had set up a Working Group in 1999 for the purpose. Credit Information Bureau (India) Ltd. (CIBIL) was thereafter incorporated in 2000, and over the years, three other Credit Information Companies (CICs) have also started their operations in India.

A variety of challenges had hindered wider acceptance of credit information companies over the years. The key obstacles included inconsistent quality in data submitted by lenders and shortcomings in consumer protection mechanisms. Therefore, a committee was set up in 2013, to examine the issues hampering the sector and based on its recommendations, significant policy changes were made in 2014 . These included 1 standardisation of data formats for individual, corporate and micro finance borrower segments, institutionalizing the mechanism of Technical Working Group comprising of representatives from various regulated entities and introduction of Data Quality Index for improving data quality.

In the recent past, our focus has been on taking regulatory measures to improve quality of data and ensure faster redressal of customer grievances. Several policy measures have been taken to reduce information asymmetry, enhance data quality and improve customer satisfaction. Just to illustrate, these steps included mandating availability of free full credit report (FFCR) to individuals, appointment of internal ombudsman by CICs, extending the Reserve Bank's Integrated Ombudsman Scheme to CICs,

introduction of a framework for granting compensation to customers for delayed rectification of their credit information and increasing frequency of credit reporting. RBI directions have also mandated the CICs to display the list of suit-filed accounts of large defaulters and wilful defaulters on their website.

The role of data and emerging technology in enabling credit access is therefore extremely topical and relevant at this juncture. But if we were to go back in time, 25 years back, lack of information and high cost of access to information hindered access to credit to large segment of the populace, the financially excluded. It was in this scenario that credit reporting started to take root in the country, and we have traversed a long road since then. Apart from greater access to secured lending, the creditors gain confidence to underwrite unsecured loans, facilitated by access to credit information provided by the CICs as this reduces the information gap that existed earlier between even the prime borrowers and the lenders.

While CICs have undoubtedly played an important role in reducing the information asymmetry thereby facilitating better credit decisions, they are not going to be the only game in town to source the required data, as information asymmetries are also sought to be addressed through other complementary mechanisms. This trend is driven by the digitalization of financial services and electronification of records which has created a large repository of data which can be used to get better handle on economic trends, both micro and macro. This coupled with the growth of FinTechs and innovations in financial services, has created business opportunities to harness alternate data sets in order to gain a better understanding of financial behaviour and credit worthiness of individuals and entities. These insights can give a richer perspective than conventional analysis and provide an impetus to the measures taken to foster greater financial inclusion. Let me highlight a few of these developments, technology led, and regulator supported.

## CERSAI and CRILC

In 2011, the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI) was incorporated, initially for operating a registration process under the provisions of SARFAESI Act. Over the years, it has developed into a complete registry containing security interest of immovable, movable, intangible properties and assignment of receivables. By providing access to all kinds of creditors and the facility for filing of attachment orders and court orders, CERSAI delivers a comprehensive status of any encumbered / attached property. 2   The Central Repository of Information on Large Credits (CRILC), was set up in 2013 by the Reserve Bank to collect, store and disseminate information on large credits of scheduled commercial banks, all India financial institutions and certain non-banking financial companies. These initiatives have undoubtedly helped banks and other financial institutions in improving their credit administration besides providing vital inputs for supervisory risk assessment on build-up of credit risk in the financial system.

## Digital Public Infrastructure (DPI)

At the heart of the FinTech revolution in India is India's Digital Public Infrastructure (DPI) - a framework that integrates technology, markets, and governance to serve public interest. The DPI includes Unified Payments Interface (UPI) which is the flagship

instant mobile digital payments system, interoperable across any bank account or app, Aadhaar Digital ID for over a billion adults, Aadhaar Payment Bridge which facilitates cash transfers directly to beneficiaries' bank accounts, Aadhaar Enabled Payments System (AEPS) which is an interoperable network of biometric based cash withdrawal &amp; deposits, DigiLocker which is an e-Locker for storing verifiable credentials, Bharat Bill Payments System, now called Bharat Connect for bill fetch &amp; pay, and FastTag - a near field communication based toll charges and parking collections platform. This is supplemented by the Account Aggregator Framework, another cog in the DPI, which is a cross-sectoral framework for consented financial data sharing. Apart from facilitating credit delivery, this is an initiative towards open finance. It has now come a long way and is growing rapidly with onboarding of financial institutions, since guidelines were first issued in 2016. The inclusion of Goods and Services Tax Network (GSTN) as a financial information provider under the account aggregator framework is expected to give further impetus to cashflow based lending to MSMEs.

## Unified Lending Interface (ULI)

The latest addition in the Digital Public Infrastructure for credit is the Unified Lending Interface (ULI), designed to simplify and democratize credit access by offering lenders regulated, seamless access to verified borrower data. The convergence of Jan Dhan Accounts, Aadhar and Mobile Phones, popularly known as the JAM trinity, UPI and ULI, represents a significant advancement in India's digital lending infrastructure. One of ULI's standout features is its ability to tap into alternative digital data, enabling access to credit even for those without formal financial histories. Its integration with NABARD's e-KCC portal is expected to extend access to customers of District Central Co-operative and Regional Rural Banks, previously excluded from formal digital channels. Integration of state-level digitized data, such as land records and cooperative databases into the ULI framework, would provide novel cash flow-based lending solutions. Going forward, the potential for ULI to also harness data from e-commerce platforms and gig economy apps could open new doors for credit inclusion for small sellers, delivery workers, and freelancers.

## Improved access to credit

When we evaluate the outcomes of these measures, we can see the significant changes and benefits. Over the years, India's household debt as a percentage of GDP has increased and stands at ~43 percent in 2024. This rising trend is fuelled more by an expansion in the number of borrowers rather than just through an increase in average indebtedness . Despite some moderation observed recently, the growth in deployment 3 of bank credit under 'retail/personal loan' category witnessed a CAGR of approximately 17 percentage over the past five years. 4   Moreover, the composite Financial Inclusion (FI) - Index to measure and evaluate the extent of financial inclusion too has improved substantially from 49.9 in 2019 to 64.2 in in 2024 indicating progress in deepening of financial inclusion in the country . This reflects two important facets of credit that need 5 to be borne in mind. First, the availability of credit to individual borrowers has improved and second the improvement in the FI- Index reflects reduced frictions in credit delivery with consequential improvement in financial access.

## Digital initiatives for MSME sector

A targeted beneficiary of increased use of data and technology in credit decisions should be the MSME sector, which remains the backbone of India's economy. With over 7.34 crore enterprises, contributing nearly one-third of our GDP and 46% of exports, this sector is key to our economic future . Increasing the availability of credit to 6 the MSMEs has been a policy priority of the Reserve Bank and the Government of India. However, MSMEs have faced several challenges in accessing formal credit such as information asymmetry, excess documentation and lack of transparency. Here the role of CICs has become important. When commercial credit reporting is efficient, creditors need to rely less on relationship lending and soft information, and more on facts and fact-based analyses based on credit reports and other credit reporting products.

## Rise of FinTech Ecosystem

It needs to be recognised that of late FinTech players have emerged as powerful enablers, transforming how credit reaches previously unserved and underserved populations. By leveraging the power of technology, they have significantly lowered the cost and complexity of delivering financial services to the last mile. This has not only improved user experience but also addressed persistent challenges that had kept many outside the formal credit fold. Importantly, we are seeing a growing collaboration between FinTechs and traditional financial institutions. This partnership is particularly impactful in credit origination and supply chain finance, where it bridges gaps created by physical infrastructure and human resource constraints in remote and rural areas. For example, in FY 2024, FinTechs have processed approximately 47% of small ticket personal loans of less than 1 lakh, by count. 7

## Open Credit Enablement Network and Open Network for Digital Commerce

The Open Credit Enablement Network (OCEN) that facilitates interactions among lenders, borrowers, and loan service providers, effectively uniting all participants within the credit ecosystem on a common platform to streamline credit delivery, is also poised to be a significant part of the fintech landscape. It is expected to enable lenders to make more informed credit decisions by utilizing alternative data sources, such as cash flow information. Going forward, there is a promising scope for deeper integration between OCEN and the Open Network for Digital Commerce (ONDC). Such interoperability could democratise credit access further and open new avenues for MSMEs to participate in digital commerce, fostering broader economic growth on multiple fronts. 8

## Central Bank Digital Currency (CBDC) for credit disbursement

The proposed use of programmable CBDC for credit disbursement is another pioneering initiative. One commercial bank's pilot for tenant farmer lending under Kisan Credit Cards, where programmable CBDC ensures end-use monitoring, looks promising. Even without land records, tenant farmers are being extended formal credit, based on livelihood activity tracking. If successful, this model could be replicated for collateral-free loans to micro-enterprises, street vendors, and artisans, where end-use assurance allows for responsible, productive lending. The digital nature of such

disbursements also creates valuable digital footprints, which can enable further lending and reduce dependence on government schemes.

## Leveraging Tokenisation for Credit Delivery

Tokenisation i.e. generating and recording a digital representation of financial or real assets on a programmable platform could be an option that can offer enhanced efficiency, transparency and accessibility, and may be seen as the next step following dematerialisation and digitalisation. It could favour small and medium enterprises' (SMEs') access to credit by narrowing the information gap. Further, SMEs could improve their collateral offering by tokenising real assets or trade receivables, thus improving their standing in the credit markets 9 . Tokenisation may also enable simultaneous asset transfer and payment in a financial transaction, minimizing counterparty risk and thereby considerably reducing the need for collateral.

## Role of AI/ ML in facilitating credit delivery

One of the main challenges in the provision of credit facility, especially among underprivileged populations, is the absence of credit history. By using artificial intelligence (AI) and machine learning (ML), algorithms can evaluate alternative data from diverse sources to determine creditworthiness more accurately. In fact, it seems that time is not far when alternative data will no longer be alternate, but it will be the mainstream. This advancement would allow lenders to extend credit to individuals who were once deemed ineligible. Use of AI/ML could simplify the disbursement process by automating credit assessments and risk evaluations, which not only accelerates fund distribution but also cuts administrative costs, making it practical to offer small loans even in remote regions. Moreover, AI models excel at uncovering previously hidden insights in data, enabling financial institutions to more precisely forecast their clients' funding requirements and creditworthiness. They also streamline compliance workflows, such as Know Your Customer (KYC) procedures, which significantly cuts operational costs and increases their speed of lending. Microfinance and microloans which serve as crucial support systems for underserved communities are likely to be the biggest beneficiary of this advancement.

## Grameen Credit Score

Another initiative that is on the anvil is the Grameen Credit Score. This score will be in addition to the existing credit score and will be specifically designed to enhance financial inclusion in rural areas, particularly for members of self-help groups (SHGs). It aims to address the limitations of existing generic credit scoring systems by creating a tailored framework for assessing the creditworthiness of rural borrowers. This measure can improve access to formal credit for rural populations, including farmers and marginalized communities.

## Role played by the Reserve Bank

In this dynamically evolving scenario, the Reserve Bank has been endeavouring to create an enabling regulatory environment for fostering innovation and ensuring financial system integrity. With a view to put in place a regulatory framework for

FinTechs that maintains a balance between maximising their creative potential while minimising the idiosyncratic risks they pose to the financial system; the Reserve Bank issued a Framework for Self-Regulatory Organisation(s) in the FinTech Sector in 2024. The Reserve Bank Innovation hub, a wholly owned subsidiary of RBI, commenced an initiative to foster a vibrant infrastructure for facilitating the progress of FinTechs in the country. The initiative - Fintech and Startup Acceleration (FAST) - aims to connect the stakeholders, viz., the startups, incubators, accelerators, investors, regulators and banks and financial institutions to accelerate innovation and financial inclusion. Through the HaRBInger initiative, Reserve Bank is encouraging the global innovation community to solve real-world problems with a special focus on inclusive design and accessibility for differently abled persons in the digital finance journey. To foster continuous innovation, we have made the Regulatory Sandbox 'on tap' and 'theme-neutral'.

Even as we embrace these sweeping changes, we must remain cognizant of the need for addressing issues around data accuracy, data security, and model risk. These could present significant challenges in the effective deployment of data-driven systems. Inaccurate or incomplete data can undermine the reliability of analytical outputs and decision-making processes, while poor data security can expose organizations to breaches, resulting in legal liabilities and reputational damage. Additionally, the use of complex AI and machine learning models introduces concerns around model risk, especially when these models are not thoroughly tested, validated, or monitored for biases and performance drifts. Rigorous validation protocols, continuous monitoring, and robust governance frameworks are essential to ensure that these models remain fair, transparent, and aligned with regulatory and ethical standards. While we should be willing to embrace new technologies and modern regulatory approaches, the core values - integrity, transparency, and commitment to public service - should drive our innovation and initiatives towards financial inclusion. Innovation needs to be responsible and accountable. It should not be at the cost of an individual's rights regarding the use of their personal data.

## Looking ahead

The path ahead is filled with opportunity and responsibility. For the CICs let me outline two critical enablers i.e. (i) Enhancing Data Freshness and (ii) Improving Data Quality. Currently, credit data is refreshed on a fortnightly basis. We must aspire to more frequent updates. Real-time or near-real-time credit reporting will improve underwriting precision, enable timely reflection of borrower actions like loan closures or repayments and deliver a superior consumer experience. This shift requires investments in technology, process reengineering, and change management. But the rewards transparency, efficiency, and trust, far outweigh the costs. Similarly, data quality is the bedrock of responsible lending and Reserve Bank has always emphasised the importance of accuracy in regulatory submissions. It has been prescribed that CICs shall provide a data quality index score to the Credit Institutions (CIs) on a monthly basis to facilitate improvement in the quality of data submitted by CIs. Another key challenge is identity standardization. CICs rely on credit institutions to provide accurate and validated IDs. Without this, duplication and misreporting remain risks. We must move towards a unique borrower identifier, which is secure, verifiable, and consistent across the system.

We stand on the cusp of a transformative financial era where technology, policy, and innovation converge to democratise credit access. Various initiatives, collaborative partnerships and sustained regulatory support are laying the foundation for a more inclusive, resilient, and sustainable economy. But at the heart of a sustainable credit landscape lies an empowered consumer which is enabled when we have a financially aware and literate customer. While regulations mandate transparency and awareness, the responsibility needs to be fulfilled by all of us. Financial literacy cannot be achieved through a one-time campaign; it has to be a sustained commitment for all the institutions and entities involved. While the institutions in the financial system have done commendable work, the journey is far from complete. The setting up of Credit Information Companies was in one sense the starting point of this journey of financial inclusion and democratisation of credit. Even as the journey continues, the role of the CICs remains integral and important in realizing the vision of Total Financial Inclusion.

Thank You.

Inputs provided by Jyoti Prakash Sharma, Rituraj and Tarique Ansari are gratefully acknowledged.

- 1  Report of the Committee to Recommend Data Format for Furnishing of Credit Information to Credit Information Companies 2014, under the chairmanship of Shri Aditya Puri
- 2  https://www.cersai.org.in/CERSAI/aboutus.prg
- 3 Financial Stability Report, December 2024 - Reserve Bank of India
- 4  Deployment of Bank Credit by Major Sectors - Database on Indian Economy; personal loans include consumer durables loan, housing loan, advances against FDs /shares/bonds/, credit card, education loan, vehicle loan, loans against gold and other personal loans.
- 5  Annual Report 2025 - Reserve Bank of India
- 6  Understanding Indian MSME Sector - Progress and Challenges, May 2025 - Small Industries Development Bank of India (SIDBI)
- 7  Small is BIG - How Fintechs are Revolutionising Lending, 2024 - Experian
- 8  https://www.dbs.com/india/newsroom\_media/how-ocen-can-revolutionise-in-indiasmsme-lending-ecosystem.page
- 9  Leveraging tokenisation for payments and financial transactions, April 2025 Consultative Group on Innovation and the Digital Economy, Bank for International Settlements",Rajeshwar Rao
https://www.bis.org/review/r250623a.htm,Olaf Sleijpen: Central counterparties - central to protecting financial stability,"Speech by Mr Olaf Sleijpen, Executive Board Member of Monetary Affairs and Financial Stability of De Nederlandsche Bank, at the annual meeting of central counterparties, Amsterdam, 19 June 2025.",2025-06-19 00:00:00,"## Olaf Sleijpen: Central counterparties - central to protecting financial stability

Speech by Mr Olaf Sleijpen, Executive Board Member of Monetary Affairs and Financial Stability of De Nederlandsche Bank, at the annual meeting of central counterparties, Amsterdam, 19 June 2025.

* * *

It's a real pleasure to be here with you today-and not just anywhere, but in a place steeped in history. This magnificent building once housed the Admiralty of Amsterdam. Back in the 17th century, during the Dutch Republic, this was the nerve centre for naval protection-not just for this city, but for much of the country.

And how fitting it is that we gather here today for the annual meeting of CCP Global. Because, in your own way, you too are protectors. You safeguard the financial system. You stand as a buffer against instability. You ensure that financial services continue to flow-to businesses, to households, to society.

Your work matters. Deeply. And CCP Global plays a vital role in strengthening the resilience of CCPs around the world. So let me start by saying: thank you. Thank you for the work you do. And thank you for inviting me to be part of this important conversation between CCPs, central banks, and regulators.

When I joined the board of the Dutch central bank in 2020, I took on responsibility for Monetary Affairs, including Payments and Market Infrastructures. I had some familiarity with central clearing from my time overseeing pension fund supervision. And our paths crossed when I was working in the pension industry myself. But I'll admit-this world was still somewhat new to me.

What I did remember vividly, though, was the chaos of the 2008 financial crisis. Amid the turmoil of Lehman Brothers' collapse, the CCPs remained strongholds of stability and trust. And that made one thing very clear-central clearing is a cornerstone of financial stability.

But with great importance comes great scrutiny. Governments and regulators said: 'Thank you, CCPs. You know what? You are so important, you deserve more supervision.' And so, the spotlight turned to you-not just from central banks, but from market supervisors as well.

Enter CPMI-IOSCO, arguably the longest acronym in the world of financial regulation. For those who need a refresher: it's a collaboration between the BIS Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO). A marriage between central banks and market regulators. I had the honour of co-chairing the Policy Standing Group from 2022 until recently, and I now co-chair the Steering Group.

The Principles for Financial Market Infrastructures, launched in 2012, are one of our proudest achievements. Since then, we've worked to keep those principles relevant-by developing guidance and by applying them to new challenges and emerging risks.

Let me name a few of those challenges.

First: margining. The COVID-19 pandemic brought a 'dash for cash' that tested our systems. Margining, while essential for safety, also created liquidity strains. Initial margin spikes and variation margin hiccups caused serious challenges for market participants. Central banks had to step in to avert a crisis. It was a wake-up call. We needed better regulation, better practices.

Afterwards, policymakers and industry leaders came together to set standards for how margining could better contribute to safer and more stable markets. The community found that initial margining should most prominently be anti-cyclical. We formulated recommendations to that end and CCPs went on to implement them. The importance of strengthening margining was confirmed during the volatility following Russia's attack on Ukraine and during the turmoil in the UK gilt market. Without proper liquidity management in the form of margining, these events would have caused much more financial instability.

I think the work on margining is a great example of how the standard setting bodies and the sector, working together, can achieve great things. And now we have to finish what we started, notably implementing it in local regulation and in CCP practices. So to all of you I would say: continue the work on margining.

Second: non-default losses. We've made great strides in managing default risk and related losses. But what about cyber risk? Legal risk? Climate risk? These can also threaten CCPs and cause losses.

The risk of cyberattacks is particularly urgent. Market infrastructures occupy a unique position in the cyberthreat landscape. You may be targeted less often than banks-but if you are hit, the consequences could be enormous. That's because your systems are critical. And your numbers are few. If party A goes down, it can be difficult for party B to compensate. These features make CCPs an attractive target, in particular for nationstate actors who want to cause maximum disruption.

So CCPs need to stay alert to cyber risk, including managing possible losses if these risks materialise. At CPMI-IOSCO, we have been thinking hard about how CCPs should address non-default losses, keeping in place plans for recovery and orderly wind-down, and balance sheet capacity. We will share our findings with you soon.

Third: resolution. One of the deliverables of the last three years was the FSB report on instruments and resources in CCP resolution, that came about with the help of the industry and CPMI-IOSCO. Having the proper toolbox for CCP resolution is important, not only for the trust in CCPs, but also for providing clarity to clearing members and other stakeholders on what they can expect in crisis situations. It is now up to national regulators and the CCPs to implement the recommendations in this report.

So margining, non-default losses, resolution, this is all work in progress. What else do we see? As our work programme says: 'CPMI-IOSCO will continue its horizon scanning for emerging issues in FMI risk management'. I'd say, we should also take a look at what's right on our doorstep. I would call them the three 'ations' (with a letter t): digitalisation, non-bank financial intermediation and geo-economic fragmentation.

It may not surprise you that digitalisation brings opportunities and risks for CCPs. I already mentioned cyber risk. But what is the impact of Distributed Ledger Technology on clearing and settlement? Will there be an uptake of tokenised securities, derivatives, stablecoins? And what does digitalisation mean for trading, clearing and settlement? In the world that we know, trading takes place on a trading venue or over the counter, clearing at a CCP and settlement at a CSD. Will tokenisation change this? And if there is a mixture of roles, how will CCPs deal with this? How do we keep the right governance in place?

Then non-bank financial intermediairies, or NBFI. The NBFI sector has grown into a critical part of the financial system. It brings real benefits. NBFI offer a diversified source of funding. But they also carry vulnerabilities-liquidity mismatches, leverage, and inadequate margin preparedness.

The FSB has done a lot of work to make this part of the financial system more safe. Notably, it has put forward policy recommendations to enhance money market fund resilience, to address structural liquidity mismatch in open-ended funds, and to enhance margin practices. Recommendations which now have to be implemented by national jurisdictions.

But more recently we have also seen the growing importance of stablecoin issuers, payment service providers of all kinds, etcetera. What is the impact on CCPs? Can CCPs also mitigate risks caused by these new developments, for example by offering cleared repo? These are questions that both the industry and regulators will have to address.

I would like to end with some remarks on our work in the context of the current geopolitical climate. Global cooperation is harder in a fragmented world. But it is also more essential. Not only because our work almost by definition crosses borders. But also because geo-economic fragmentation, brings about new types of risk. Think of cyber risk, and the risk of strategic dependencies. In a world that is becoming more dangerous, a lack of international cooperation is an accident waiting to happen.

So how do we limit the impact of political fragmentation on the global standard setting community? It is important that, apart from continuing to do our jobs, we  stay committed to international cooperation and the institutions that support it, like the FSB and CPMI-IOSCO.

And I also look at you. CCP's are almost by nature global institutions that thrive on global cooperation and multilateralism. The more the industry can do by itself in order to improve the robustness and transparency of its activities, the better. So I would encourage CCP Global to continue its initiatives to strengthen CCP resilience: by

developing best practices among yourselves, by continuing to organise the global drills, by ensuring higher transparency around margins, and by improving the quality and frequency of the Public Quantitative Disclosure.

Compared to some other parts of the financial industry, the cooperation between CCPs, central banks and regulators is very constructive. I believe that's because we all think like risk managers. For you, safety and trust are your business model. For us central banks, it is our mission.

So let's treasure that cooperation. Let's nurture it, through meetings like this one, here in the former Admiralty of Amsterdam. Let's protect the world of clearing. Let's keep it safe, stable, and strong.

Thank you.",Olaf Sleijpen
https://www.bis.org/review/r250710a.htm,Gent Sejko: Bolstering credit to the agriculture sector,"Address by Mr Gent Sejko, Governor of the Bank of Albania, at the roundtable on bolstering credit to the agriculture sector, organised by the Bank of Albania and the Ministry of Finance, Tirana, 8 July 2025.",2025-07-08 00:00:00,"## Gent Sejko: Bolstering credit to the agriculture sector

Address by Mr Gent Sejko, Governor of the Bank of Albania, at the roundtable on bolstering credit to the agriculture sector, organised by the Bank of Albania and the Ministry of Finance, Tirana, 8 July 2025.

* * *

Dear Minister Minister of Finance,

Dear representatives of the banking sector,

Let me start by conveying my heartfelt thanks for your participation in this important roundtable discussion, co-organized with the Ministry of Finance. This event aims to identify the appropriate pathways and instruments for opening a new chapter regarding credit to the agricultural sector in Albania.

As we have emphasized in many previous discussions and communication platforms, lending to the agricultural sector has been-and continues to be-a structural weakness for both our economy and banking sector.

The comparison of the significant role that agriculture plays in the Albanian economy with the limited level of credit this sector receives from the banking sector, clearly illustrates this weakness. Agriculture accounts for around 20% of GDP of Albania and employs around 1/3 of population, yet it benefits less than 2% of total bank credit. Moreover, recent trends in the agricultural lending have not been encouraging.

The underlying reasons of the low level of credit to the agricultural sector-ranging from property ownership issues and high levels of informality, to the relatively high business risk and low productivity due to the absence of economies of scale-have been consistently discussed. Some of these problems still remain relevant, while others are gradually being addressed.

However, even in this challenging context - credit to the agricultural remains low. This deficiency must be addressed without further delay if we aim at boosting the stable development of this sector that is crucial for the Albanian economy.

Against this backdrop, the Bank of Albania has aligned its Financing Programme to Micro, Small, and Medium-sized Enterprises to emphasize the growth of credit to the agricultural sector.

This program, that involves all stakeholders in the banking sector, offers a reliable and sustainable source of low-cost funding to support lending of development projects in the agricultural sector, including agrotourism and the agro-food industry.

Last, the Government of Albania has undertaken concrete steps in this regard, by making available a sovereign guarantee scheme for loans granted to the agriculture sector.  This guarantee significantly mitigates the credit risk related with this sector, in turn considerably reducing one of the fundamental problems we have discussed, and the collateral.

We deem that both development projects provide a solid platform for progressing further as we make a new qualitative step in lending to the agriculture. Nevertheless, the success of this platform considerably dependents on the involvement and the commitment to utilising its instruments.

In this context, allow me to draw your attention to three important points.

- First, from the narrower perspective of the business interests you represent, I would like to highlight that the low level of lending to the agricultural sector should be considered equally both as a reflection of existing structural and operational problems, and as a potential indicator for the high returns you may have from investments in this sector. In light of this, I encourage you to give agricultural sector the attention and expertise it rightly deserves.
- Second, from the perspective of the overall economic development, the growth of the agricultural sector-aligned and progressing in parallel with other sectors of the economy-should be regarded as a crucial pillar for the long-term and sustainable development of Albania. From this standpoint, as primary actors in Albania's economic and financial landscape, you are encouraged to view lending to the agricultural sector as a strategic investment that yields positive returns for the country's sustainable and inclusive growth.
- Third, as key actors in the social life of the country, the support to the agriculture sector should also be viewed as a moral obligation toward Albania, the country where you safely carry out your business and in a profitable manner. Supporting the food supply chain industry remains a factor of vital importance for a country and its population.

Dear representatives of the banking sector,

I kindly invite you to consider the issues addressed above more as an appeal to your rational judgement than to your emotions. The Bank of Albania will not, under no circumstances, take measures that would jeopardise the soundness of your financial positions or undermine the financial stability interests of Albania in the long term.

That said, while safeguarding financial stability, I believe it is appropriate to engage in an open and transparent dialogue aimed at rethinking our approach to lending in the agricultural sector, in line with the long-term interests of the social and economic development of Albania.

Thank You!",Gent Sejko
https://www.bis.org/review/r250709a.htm,Vasileios Madouros: Opening statement - Oireachtas Select Committee on Budgetary Oversight,"Opening statement by Mr Vasileios Madouros, Deputy Governor of the Central Bank of Ireland, at the Oireachtas Select Committee on Budgetary Oversight, Dublin, 8 July 2025. ",2025-07-08 00:00:00,"## Vasileios Madouros: Opening statement - Oireachtas Select Committee on Budgetary Oversight

Opening statement by Mr Vasileios Madouros, Deputy Governor of the Central Bank of Ireland, at the Oireachtas Select Committee on Budgetary Oversight, Dublin, 8 July 2025.

* * *

Good afternoon Chair and Members of the Committee. Thank you for inviting us to appear before the Committee today.

I am joined by my colleagues Martin O'Brien, Head of our Irish Economic Analysis Division and Thomas Conefrey, Deputy Head in the same Division. We very much welcome the opportunity to engage with you on the outlook for the economy and the public finances.

In my opening statement, I will cover briefly our latest assessment of the economic outlook, as outlined in our June Quarterly Bulletin, as well as our latest economic advice to the Government, as outlined in the Governor's pre-Budget letter (PDF 3.04MB), published last week.

## The economic outlook

Let me start with the global context, because the key factors shaping the domestic outlook stem from developments abroad, but with important implications for Ireland.

Since the start of the year, we have seen a material shift in trade policy, with rising tariffs between the US and its trading partners, as well as a sharp increase in policy uncertainty.

In light of these developments, the global growth outlook has weakened. Short-term forecasts for world trade and economic activity have been revised downwards. And uncertainty around these forecasts is particularly elevated, given the range of potential outcomes around trade policy.

The openness of the Irish economy and the prominent role that FDI and multinational firms play domestically mean that Ireland is particularly exposed to changes in the global economic outlook as well as shifts in trade policy, and broader economic policy, in the US.

Given uncertainty over the future direction of US trade policy, our June Quarterly Bulletin presented projections for the economy under a baseline and a more adverse scenario.

These were based on different assumptions around the level and coverage of tariffs, the level and persistence of uncertainty and the future path of financing conditions.

In the baseline scenario, we expected Modified Domestic Demand to grow by 2.0 per cent in 2025 and by 2.1 per cent per annum on average in 2026 and 2027.

This is a downward revision to the growth outlook relative to our previous projections but the central outlook is still consistent with a full-employment economy.

The adverse scenario assumed persistently higher and broader tariffs, including due to retaliation from the EU. It also assumed that policy uncertainty would remain higher for longer and that financing conditions would be tighter.

In this scenario, annual average MDD growth would almost halve compared to the baseline, illustrating the sensitivity of economic activity to an escalation of trade tensions.

## The trade-offs facing the public finances

The economy and public finances are entering this period of heightened uncertainty from a strong position. But there are also underlying vulnerabilities that need to be managed carefully.

The exceptional growth in corporation tax receipts since 2015 and the strong pace of economic expansion in recent years have resulted in a marked increase in government revenues.

As a result, even with the substantial rise in government spending and some tax cuts, the headline budget balance has run substantial surpluses in recent years.

However, external developments mean that this benign combination of factors, namely, a rapidly growing economy and exceptional corporate tax receipts, could be at risk in the coming years.

In particular, risks to the fiscal position from lower corporate taxes and other MNEdependent taxes have increased given recent international developments.

And, excluding estimated ""excess"" corporation tax (and the impact of the Apple State Aid case), the budget balance has been in a persistent deficit position for 17 consecutive years.

At the same time, in the current juncture, an important public policy priority is the need for higher investment, both to address infrastructure deficits and to support the transition to net zero.

Indeed, these infrastructure deficits have become an increasingly significant factor constraining the supply side of the economy.

Addressing infrastructure deficits will not only help meet important societal and economic needs today, but also enable our economy to remain competitive amid a shifting geopolitical landscape.

Finally, looking further into the future, there are known future funding needs that the State needs to prepare for today.

Given demographic trends, Ireland is expected to see the largest increase in agerelated spending, on areas such as pensions, healthcare and long-term care, amongst the EU by 2050.

And we know already that the Future Ireland Fund, the establishment of which has been a very positive public policy intervention, will not be sufficient, on its own, to finance the higher level of public expenditure that will be required to meet the needs of an older population.

Overall, the current environment presents important trade-offs for fiscal policy. Between investing in infrastructure, but not adding excessively to demand in a capacityconstrained economy. Between addressing the funding needs of today, but also preparing for the funding needs of the future.

## Managing those trade-offs

While undoubtedly this presents a difficult balancing act, careful management of the public finances can contribute to achieving these multiple aims. So let me finish off by summarising our economic policy advice outlined in the Governor's pre-budget letter, in light of those trade-offs.

I will focus on three areas in particular.

First, it is important that the Government commits, and adheres to, a credible fiscal anchor that results in sustainable increases in net government expenditure over time. In the current context of the economy operating at capacity, it is important, from a macrostabilisation perspective, that the overall fiscal policy stance does not add excessively to demand.

Second, within that overall fiscal envelope, the public finances need to prioritise investment. Sustainably achieving the necessary rise in public investment requires creating sufficient economic and fiscal space, through offsetting choices in terms of current spending or taxation. Beyond demand management considerations, broadening the tax base is also important for addressing future funding needs and mitigating the reliance of the public finances on corporate tax receipts.

Third, public investment alone will not be sufficient to address the economy's infrastructure gaps. Measures that reduce delays, and, therefore, the ultimate costs, in the planning and building of infrastructure are needed to help ensure that the benefits of public investment for long-term growth are realised fully.  Measures that incentivise scale and investment in new machinery, equipment and technologies in the construction sector can also help enhance productivity and enable more sustainable delivery of housing and infrastructure. These structural policies can have an outsized impact on strengthening the supply side of the economy, complementing, and adding to the effectiveness of, additional public investment in infrastructure.

Thank you for your attention and we look forward to your questions.",Vasileios Madouros
https://www.bis.org/review/r250708d.htm,Eddie Yue: Unlocking value through China's resilience,"Keynote speech by Mr Eddie Yue, Chief Executive of the Hong Kong Monetary Authority, at the Bond Connect Anniversary Summit 2025 on ""Unlocking value through China's resilience"", Hong Kong, 8 July 2025.",2025-07-08 00:00:00,"## Eddie Yue: Unlocking value through China's resilience

Keynote speech by Mr Eddie Yue, Chief Executive of the Hong Kong Monetary Authority, at the Bond Connect Anniversary Summit 2025 on ""Unlocking value through China's resilience"",  Hong Kong, 8 July 2025.

* * *

Ladies and Gentlemen, good morning. It is an honour to join you today as we celebrate the 8th anniversary of the Bond Connect. The theme today, ""Unlocking Value through China's Resilience,"" could not be more timely. The global capital markets are undergoing profound transformation, driven by a host of factors including increasing trade tensions, geopolitical and economic shifts, and changing investment appetite and patterns. These changes are reshaping the way capital flows across the world, creating both new opportunities and challenges for market participants. Now, let me first share some observations about the macro trends.

## Macro trends:

The first trend is global diversification. Global capital markets have been on a rollercoaster driven by shifting policies and economic uncertainties. In light of these unpredictable swings, diversification stands out as the most essential investment strategy. Indeed we are now in a world of unprecedented choice and many more institutional investors are looking to further diversifying their portfolios. The strong investor response to the Hong Kong Government's recent issuance of HK$27 billion in green and infrastructure bonds is telling of the diversifying trend. This multi-currency issuance attracted participation from a wide spectrum of investors from more than 30 markets across Asia, Europe, Middle East, and the Americas, with total order at about 9 times of the issuance size. In particular, the 30-year HKD government bond was offered for the first time, further extending the HKD yield curve. The 20-year and 30-year RMB government bonds, which were first introduced last year, also received overwhelming support, doubling in issuance size from last year.

Against this backdrop of global trend for diversification, China's bond assets have emerged as a particularly compelling choice.

- First, China's bond market is the second largest in the world. Chinese bonds have the market depth and liquidity to become an increasingly important asset class among global investors.
- Secondly, China has a relatively low debt level, with the general government debtto-GDP ratio at around 84%, which is much lower than some major advanced economies. 1
- Thirdly, the low correlation between China's onshore market and major global markets, at just 0.1 over the past 10 years, makes China bonds a very good diversifier. 2
- Fourthly, the risk-adjusted return of China bonds is relatively attractive. Onshore RMB bonds had an annualised volatility of around 1.3% over the past year, significantly lower than the volatility in other advanced markets during the same period. 3

This combination of features of China's bond market as an attractive asset class for global investors seeking high-quality investments. In fact, according to a recent survey on central banks, over 30% of the respondents expect to increase their RMB holdings in the next five years.

The second trend is Mainland China's rapid wealth accumulation, particularly in institutional capital, which is creating new opportunities for their outbound investment. For example, China's national pension reserve fund grew to around USD 400 billion by the end of 2023. 4   Recent policy discussion also reaffirms that China encourages the national pension fund to cooperate with high-quality overseas investment managers to optimise its investment approach. 5   The new private pension scheme has already attracted over 60 million participants since its inception in 2022, with this rapidly growing pool of capital projected to reach nearly USD 1 trillion by 2030. 6   As Mainland institutional investors increasingly seek to diversify their portfolios and expand overseas asset allocation, there is significant potential for future growth in the Southbound Bond Connect, through Hong Kong's platform to invest overseas.

These two-way trends -- global investors' growing interest in RMB-denominated bonds and Mainland investors' expanding overseas allocations -- underscore the critical role of the Bond Connect as a gateway to facilitate cross-border capital flows between the Mainland and global financial markets. In a rapidly changing global financial landscape, the ability to adapt and innovate is key. Bond Connect exemplifies the power of collaboration and innovation in addressing the changing needs of investors, as it continues to evolve over the years.

## Policy work:

In the past year, we have been working closely with relevant Mainland authorities, especially with the People's Bank of China, to step up efforts to enhance the Bond Connect and its ecosystem. I wish to take the opportunity to make the following three announcements:

- First, under the Northbound channel, investors can already use Bond Connect bonds as collateral for the Hong Kong Monetary Authority (HKMA)'s RMB Liquidity Facility, margin collateral for OTC Clearing Hong Kong Limited (OTCC) derivative transactions, and for conducting offshore RMB bond repurchase (repo) transactions. We are expanding the offshore RMB repo business to also support re-hypothecation and cross-currency repo, and the CMU OmniClear will enhance the operational arrangements accordingly. These enhancements will be implemented in late August 2025.
- Secondly, the Southbound Bond Connect investor scope is expanded to include securities firms, fund companies, insurance companies and wealth management companies, formally effective from today. This will open up more channels to meet the growing demand from Mainland investors, addressing their needs for diversified asset allocation. It will also bolster the development of Hong Kong's bond market by widening the investor base and enhancing market liquidity, hence increasing Hong Kong's attractiveness to bond issuers and global investors.
- Thirdly, further to the announcement in May 2025, 30-year interest rate swaps (IRS) contracts have already gone live early last week (on 30 June) under the

Swap Connect, and IRS contracts using the Loan Prime Rate (LPR) as reference rate will be launched in the coming months.

Besides, we have been working on strengthening Hong Kong's financial infrastructure to support greater efficiency in the Hong Kong and Mainland Chinese bond markets. For example, the recent signing of a MoU between CMU OmniClear and LCH could facilitate the wider use of CNH bonds as collateral in the international market. This highlights the unparalleled role of Hong Kong's infrastructure in supporting investment in CNH-denominated debt securities by investors from all over the world.

## Looking ahead:

As investors navigate geopolitical changes and search for greater diversification, the Bond Connect will continue to serve as a key platform connecting China's bond market with the world. The HKMA will work closely with stakeholders to ensure that the platform will meet these changing needs -- by enhancing market liquidity (such as crossborder repo in the pipeline), strengthening risk management (with offshore CMOF bond futures under preparation), and further broadening the investment channels. The continuous development of Bond Connect will not only deepen market integration but also reinforce Hong Kong's unique role as a gateway between China and the international financial market. Thank you!

- 1 2023 General Government Debt (IMF Global Debt Database, Dec 2024).
- 2 Data source: Bloomberg.
- 3 Data source: Bloomberg.
- 4 2023.
- 5 2025 UK-China Economic and Financial Dialogue: policy outcomes.
- 6 China's Private Pension Market: A $988 Billion Opportunity (WSJ, November 2024).",Eddie Yue
https://www.bis.org/review/r250709e.htm,Andrew Hauser: What has Australian macroeconomic thought achieved in the past century – and where can it contribute in the next?,"Speech by Mr Andrew Hauser, Deputy Governor of the Reserve Bank of Australia, to mark the centenary of the Economic Society of Australia at the Australian Conference of Economists, Sydney, 9 July 2025.",2025-07-09 00:00:00,"

## Speech

## What Has Australian Macroeconomic Thought Achieved in the Past Century - And Where Can it Contribute in the Next?

Andrew Hauser



ƃ

Deputy Governor

Speech to mark the centenary of the Economics Society of Australia,

Australian Conference of Economists

Sydney - 9 July 2025

## Introduction

It is a great honour to address you on the 100th anniversary of the Economics Society of Australia. 1 ƃ Ƅ



It's an honour because, over that past century, Australian thinkers have helped develop some of the most important building blocks in open economy macroeconomics - the branch of economics that seeks to understand how the global trading economy works.

Those were significant - sometimes world-leading - intellectual achievements.

But they were more than just that. Because they also shaped the policies and institutions that helped Australia navigate the global economy of that period so successfully, delivering wealth and stability for its citizens.

Indeed Australian macroeconomic research has pulled that trick off twice. First, powering the ideas that lifted the country out of the Great Depression to flourish after the Second World War. And, second, helping to design a reform program that rescued the country from the slump of the 1970s, and led to more than a quarter century of recession-free growth.

Two Golden Ages, marshalling thought into action.

But to thrive in the next 100 years, Australia's researchers will need to go for the hat-trick.

And that's because the tectonic plates of the global economic system are once more in flux, as free trade is rolled back; geopolitical alliances shift; climate change accelerates; and productivity growth slows to a crawl in most developed countries.

Simply coping with such changes will take skill. Turning them to Australia's advantage - identifying and exploiting new trading structures and sources of growth - will require rich new thinking from Australian academia.

The good news is that many of today's policy problems lie at the very heart of Australia's intellectual comparative advantage. The challenge is whether we can relearn the lessons of the past - drawing in our best talent, strengthening the incentives for policy-relevant research, and forging deep links between academics and policymakers.

In my remarks today I want to look back at some of those successes of the past century, before posing some questions for the future.

## What is Australian macroeconomic thought?

But before doing so, I should try to clarify what I mean by Australian macroeconomic thought.

Is it macroeconomic research about Australia? By Australians? Conducted in Australia? It could be any of the above. But if you wanted a 'vibe', in the great Australian tradition of The Castle, I'd suggest three defining features: [  2]

- First, an emphasis on small open economy macroeconomics, with a particular role for the commodities and energy sectors. That reflects the nature of our economy and the challenges we face. But it also has global application: our context is also our comparative advantage.
- Second, a focus on solving practical real-world policy issues, rather than pushing forward more abstract frontiers. Many influential Australian macroeconomists have also served as senior public policymakers.
- Third, a world-leading capacity to develop the analytical tools necessary to drive successful economic policy - in particular small open economy quantitative macro-models and macroeconomic data.

## The past 100 years: Two 'Golden Ages' of Australian economic thinking [  3]

To illustrate how these themes played out over the past 100 years, I'm going to split the period into two halves. The first lies either side of the Second World War; the second straddles the economic reforms starting from the 1980s. Each in its own way can legitimately be called a Golden Age, in which Australian ideas both advanced the global knowledge frontier and delivered prosperity for Australia.

## The first Golden Age

The first period, from the birth of the ESA in the 1920s to the late 1960s, saw Australia pull itself out of the depths of the Depression and navigate a world war.

Australia's response to these challenges was shaped by its economic context as a small commodity exporter. For much of the period, the growth model relied on expanding exports of raw materials (primarily agricultural), using huge quantities of imported labour and capital. The central question in such an economy was how to maintain both internal and external balance, in the face of external shocks. To achieve these goals, the authorities relied primarily on centralised control. The exchange rate was pegged to sterling; credit volumes and interest rates were typically administratively set, and wage-setting was heavily institutionalised. Tariffs were used actively, in an attempt to protect and foster domestic industry, lift employment and reduce the economy's reliance on volatile global commodity markets. [  4] [  5]

Many great Australian thinkers helped shape this first Golden Age - but today I will focus on just two.

The first is Lyndhurst Giblin.

Giblin was a model Accidental Economist. He devoted his first 45 years to everything but the subject: he was part of the Klondike gold rush, served as a Tasmanian MP and received the Military Cross for gallantry on the Western Front. Yet little more than a decade after the First World War, Giblin had developed one of the most important building-blocks of macroeconomics. [  6]

As Government Statistician for Tasmania and later Ritchie Professor of Economics at the University of Melbourne, Giblin had a ringside seat for the Great Depression - which in Australia began in 1928 as commodity prices fell, accelerating in 1929 with the global slump. Giblin saw that sharp declines in world prices for agricultural produce - Australia's main export - would not only lower Australian farmers' incomes, but would also cause them to spend less. And that in turn would lower incomes for others, causing a slump to ripple out through the wider economy. That rippling could be far larger than the firstround impact alone, amplifying the domestic repercussions of a global shock.

Giblin set out this startlingly simple but revolutionary idea - the modern-day multiplier in all but name in a 1930 lecture. That's a year before Richard Kahn's seminal Economic Journal paper, and six years before Keynes' General Theory. What is today known universally as the 'Keynesian multiplier' could and perhaps should be called the 'Giblin-Keynes multiplier'. Yet neither Kahn nor Keynes made any reference to Giblin's work, or even appeared aware of its existence. [  7]

Giblin, however, was far less interested in global acclaim than he was in working out how Australia could rescue itself from the Depression - and that was a hotly contested question. The then Premier of New South Wales, Jack Lang, had a simple answer: default on state and Commonwealth debt to the United Kingdom and use the savings to stimulate domestic activity. But default risked destroying Australia's future borrowing capacity, rendering its economic model unworkable. [  8]

The Bank of England, in the form of the widely disliked Otto Niemeyer, had a different proposal: cut wages and balance the budget. Based partly on his multiplier analysis, Giblin worried that approach would be too deflationary. With Douglas Copland, Leslie Melville and others, he helped prepare the 1931 'Premiers Plan', which argued that Australia should accompany lower wages and a balanced budget with monetary easing to 'spread the loss'. A sharp devaluation against the British pound, executed the same year, provided further support to external competitiveness. Giblin framed the challenge as tackling an 'outside problem which is causing an inside problem' - concepts that years later would be formalised as external and internal balance. [  9] [  10]

Although Giblin used what would come to be thought of as a 'Keynesian' analytical tool (the multiplier), his policy prescriptions were decidedly un -Keynesian: this was no debt-financed fiscal expansion. Writing in the Melbourne Herald in 1932, Keynes himself recognised the plan 'saved the economic structure of Australia'. But he advised against its wider use, arguing that competitive devaluation or wage deflation would leave no-one better off, and advocating 'public works' rather than 'further pressure on money wages or a further forcing of exports'. [  11]

Giblin's thinking evolved in the same direction over time, and by the end of the Second World War he favoured using government spending to stabilise the economy and keep unemployment low. That view informed Australia's position at the Bretton Woods conference, where it argued that relaxing trade protections - a key goal of the United States - without also committing to full employment could leave countries like Australia badly exposed to external shocks. And it formed the core of the 1945 Full Employment White Paper, developed by Giblin alongside Melville and 'Nugget' Coombs - later the first Governor of the RBA - which set the basis for policy in much of the post-war period. [  12] [  13]

My second case study is Trevor Swan - regarded by many as Australia's greatest economist.

Swan made not one but two key contributions. The first is summarised in the 'Swan diagram', and extended in the 'Salter-Swan' model developed with fellow Australian Wilfred Salter. The model is designed to help think about policy coordination and trade-offs in a small economy like Australia, with trade and a fixed exchange rate. The model elegantly demonstrated many of the issues the country faced in the first Golden Age trying to achieve both internal and external balance. And it illustrated how different combinations of macroeconomic tools - including fiscal, wage, exchange rate and trade policy might be used to maintain both in the face of international shocks.

Swan's second seminal contribution was aimed at thinking through how to foster longer term economic growth. Swan showed that medium-term growth in real per capita labour income depends on the rate of technical progress, growth in the labour supply, and growth in the capital stock. This was a crucial insight for Australia, which relied heavily on high rates of immigration. Swan's framework showed that, in such circumstances, sustained growth in real incomes also required rapid growth in productive capital and technical progress. Without that, real incomes would stagnate or fall. Important messages for policymakers at the time - and still relevant today.

Swan's personal story is fascinating. Amongst other things, he was a perfectionist, and that - combined with his preference for supporting Australian economics - led him to publish his work slowly (if at all), and exclusively in local journals. As a consequence, much of the credit for his pioneering ideas on growth, including a Nobel prize, went to Robert Solow rather than Swan. But like Giblin, Australia mattered more to him than global fame. Alongside his role as ANU's first Professor of Economics, Swan [  14]

was Chief Economist to the Prime Minister's Department (in the 1950s) and a member of the RBA Board (from 1975-1985). [  15]

## The second Golden Age

The second Golden Age - from ideas to action - straddles either side of the deep economic reforms of the 1980s and 1990s.

The reforms overturned the paradigm of the first Golden Age. The exchange rate was floated. High tariffs were replaced with much freer trading arrangements. Constraints on the financial sector were released; and, in time, the central bank was made independent and asked to hit an inflation target. Of course, there was good luck too, as huge new export markets opened up in Asia. But taken together, these changes ushered in an extended period of prosperity for Australia. [  16]

The intellectual groundwork for the reforms was laid years earlier, as recognition dawned that frameworks of centralised control and protectionism were undermining, rather than protecting, competitiveness, productivity growth and living standards. This was far from unique to Australia, of course. But Australian thinkers again made important contributions to the evolving global consensus perhaps most notably on the case against trade protection, through the work of Max Corden. Corden showed that the economic costs of tariffs were much larger than previously recognised, once general equilibrium effects were accounted for. His work, including the concept of 'net effective rates of protection', which captured the impact of tariffs on imported inputs as well as outputs, remains widely cited - and, sadly, is highly topical again today. [  17] [  18]

Like his earlier compatriots, Corden did not just push forward academic thinking - he also rolled up his sleeves and got stuck into policymaking for Australia. His work had a profound impact on the enquiries led by John Crawford over the 1960s and 1970s calling for a rationalisation of tariffs. And it led, through the advocacy of Fred Gruen, to the Whitlam government's across-the-board 25 per cent cuts in tariffs in 1973, which began the long and winding road to free trade. The Tariff Board was renamed the Industries Assistance Commission - and two decades later became the Productivity Commission: quite a journey! [  19] [  20] [  21]

The reforms of the Second Golden Age reflected a dawning recognition that - subject to safeguards flexible market prices could facilitate adjustment to both internal and external shocks more effectively than administrative controls. These were not uniquely Australian ideas (Ross Garnaut called it 'the

Washington consensus come to Australia'). But strong advocacy by the government and wider public institutions helped them take root. And the overlay of specifically Australian policies - including the 1983-1996 Prices and Incomes Accord - helped maintain social and political support for reform. The strength of such equity considerations, familiar from Giblin's work in the 1930s, remains an important feature in Australian macroeconomic policy debates to the present day.

Across both Golden Ages, Australia also had a world-leading role in two areas of practical policymaking: quantitative macro-modelling; and economic data.

Australia's first general equilibrium macro-econometric model was developed in the early 1940s by who else - Trevor Swan! Indeed Swan's model has a decent claim to be among the first globally, coming after Jan Tinbergen's 1936 model of the Netherlands but more than a decade before Lawrence Klein and Arthur Goldberger's model of the United States. Once again, Tinbergen and Klein both received Nobel prizes; Swan (who didn't even publish his model during his lifetime) did not. From the early 1970s, the Treasury and RBA built a suite of state-of-the-art open economy macro-econometric models. ORANI, one of the most advanced large-scale computable general equilibrium models of the time, was used in the Crawford enquiries. And in the 1990s, Warwick McKibbin and Peter Wilcoxen developed the global hybrid DSGE/CGE model, 'G-Cubed', used most recently to provide widely cited assessments of the impact of US tariffs. [  22] [  23] [  24]

The strength of Australia's economic data has an even longer pedigree. As the first Government Statistician of New South Wales from 1886, Sir Timothy Coghlan produced a series of yearbooks that set global standards for the measurement of aggregate income and occupational classification in national censuses. Half a century later, Keynes' disciple Colin Clark helped bring modern national income accounting to Australia. And there have been many other examples of methodological trailblazing since then - including early adoption of survey sampling approaches and an integrated business register; and pioneering use of satellite imaging and integrated data sets. The critical importance of effective data gathering to Australia's economic success was reflected: in its independent institutional setting at the heart of government; in its job titles - the head economic adviser to government was for some time known as the 'Chief Statistician'; and in its ability to attract some of Australia's top minds, from Giblin, Sir Roland Wilson and Charles Wickens right up to today. [  25] [  26] [  27] [  28]

Before I leave this brief stroll through the past, I should acknowledge the key role that the ESA itself played in this history. Many of those I've talked about today were presidents of the Society; and many of their ideas appeared in its publications. Like Australian macroeconomics in general, a defining feature of the Society has been its focus on ideas that can be implemented, not just admired. Douglas Copland, ESA's first President, encouraged members to involve themselves in the practical affairs of government and business - a principle captured in the Society's aim 'to encourage the teaching and study of economics and its application to Australia'. The RBA has long been an active supporter of that program. Bernie Fraser held the Presidency of the Society while he was RBA Governor in the early 1990s, hosting central council meetings in the Bank's boardroom in Martin Place. And two of our current Department Heads played leading roles more recently: Jacqui Dwyer was an executive adviser on economics education; and Penny Smith was President of the NSW branch, supporting the launch of the Society's Women in Economics Network. [  29]

## Will there be a third Golden Age? The worry … and the call to arms

By any standards, then, the past century has been an extraordinary story - of world-leading thinking, deployed by the country's best academic minds, working hand-in-hand with policymakers, helping to pull the economy from the jaws of global turmoil and setting it on the path to prosperity.

So the killer question is this: can Australian macroeconomic thinking do it again, as the world economy is once more in flux?

Ask that question of the macro research community today, and some seem worried:

- about Australia's ability to attract, retain and grow top academic talent; [  30]
- about diminished academic incentives to work on issues of greatest policy relevance to Australia; and [  31]
- about perceptions of a weakened partnership between academia and policymakers. [  32]

Views differ on how serious those worries are. The best Australian research remains world-class. And we don't need to solve everything ourselves: the scope to draw on global thinking, adopting and adapting it to Australian conditions, is far greater than in Giblin's day.

But, where there are concerns, they should be seen as a call to arms, not a cause for despondency. And that's because the defining macroeconomic challenges of our age - the rolling back of free trade; the implications of shifting geopolitical alliances; climate change; and the need to reinvigorate productivity growth globally - lie right in our areas of comparative advantage.

The question is how to leverage that advantage. Let me break that into three sub-questions.

## How can we build on Australia's historical strength in open economy macro?

The long arc back to a more regionalised, less open, international trading system, coupled with the realities of climate change, poses fundamental questions for Australian macroeconomic research along at least three dimensions:

- First, how will the composition and geographical location of our export markets change in response to evolving trade policies and geopolitical alliances? What implications will those shifts have for domestic output, investment, labour markets and pricing? And how do we harness our natural and human resources to take advantage of those shifts?
- Second, how will global commodity demand change over time? How long will markets for 'traditional' minerals including coal, gas and iron ore - mainstays of the economic model in Australia today persist? Will markets for 'new economy' minerals and renewable energy sources take their place, and how can Australia best position itself to take advantage of such trends? [  33]
- And, third, how will these and other structural shifts change the sorts of shocks that stabilisation policy, including monetary policy, needs to respond to? How will that influence optimal policy design? And how might we need to adjust our thinking about trade-offs, across the different policy goals and tools available?

Understanding the macroeconomic risks, and opportunities, from these structural changes is a vital priority for research - to protect the economy, but also to ensure a clear path for future growth. The good news is there is a rich history of Australian macro research and modelling to draw on. The challenge is that this will only take us so far: dealing with tomorrow's world will require us to apply and extend that research to answer new questions. [  34] [  35]

## How can we deepen the links between academia and policymakers?

Second, how can we deepen the links between academia and policymakers - the secret sauce of the first two Golden Ages?

There are certainly some great examples today. Several Commissioners at the Productivity Commission are current or former academics, including Catherine de Fontenay, ESA's President. The Treasury's competition review has an expert advisory panel, including academics. And many of our top universities and think-tanks have groups focused on fostering engagement on macroeconomic policy issues. [  36]

One of the most profound issues of our time is how to reverse the productivity slowdown. This is by no means a uniquely Australian challenge - but the Second Golden Age demonstrated the power of harnessing academic ideas and policy to drive a long-term recovery in productivity. Important work is underway on this topic in the public sector, some of it in conjunction with academia: for example, researchers at the Productivity Commission, Treasury and RBA have analysed the causes of the productivity slowdown, its links to competition, innovation and dynamism, and the implications for the wider economy. And the Commission currently has five separate inquiries underway into potential practical reforms, which among other things will serve as inputs to the Government's Economic Reform roundtable in August. [  37] [  38] [  39]

A lot of research in this space makes use of Australia's excellent microdata. The availability, quality and breadth of Australian de-identified datasets on business and individuals is comparable to anywhere in the world - due in no small part to the excellent work of the Australian Bureau of Statistics, as well as the Australian Tax Office and Department of Social Services. Being at the forefront in this space offers scope for researchers to do globally relevant and frontier work, in an Australian context: the best of both worlds. For example, at the RBA we are currently using it to assess frontier questions around how monetary policy affects labour supply, and how pricing dynamics changed during the recent increase in inflation. [  40] [  41]

## How can we communicate the urgency of the challenge?

Third, what can we do as a community to communicate the urgency of the challenge, to show its importance and draw new talent into this vital work? Bringing academics, policy economists and policymakers together can help us reach a common understanding, of both the problems and the potential solutions. In that context, conferences like this one can be extremely powerful, as can the work of the ESA more generally. But it is crucial that both sides - policy and academia - buy in. And we need to focus, as a profession, on how we communicate our thinking. The Golden Ages were full of people like Giblin who specialised in translating big ideas into simple language. As Danielle Wood argued at last year's APS Economist conference, it has never been more crucial for economists to speak directly and plainly. [  42]

## The role of the RBA

Many of those I spoke with in preparing this speech emphasised the leading role that the RBA could play, as one of the most prominent consumers and producers of Australian macro research; and as a training ground. The RBA has a rich history at the leading edge of central bank research - and we remain engaged across a wide range of issues today. But as I've already noted navigating the complex and unpredictable world of tomorrow will pose big new challenges. [  43]

That's why, spurred on by the findings of the RBA Review, the Bank will be refreshing its research strategy, with a new set of priorities, identifying the big questions that need to be answered to support future policymaking. We'll use those priorities to hold ourselves to account - but we'll need external help too. Part of that will involve deeper collaboration on specific research topics, building on the centres of excellence here in Australia. And part of it will involve finding new ways to come together collectively, building on our existing workshops and conferences, and our six-monthly academic advisory panel. Here too there is more than an element of 'back to the future' - it was nearly 75 years ago when Coombs, as head of the Commonwealth Bank, the de facto central bank, first conceived of convening senior academics to critique the exercise of policy. As we face into a more complex world, we need that support and challenge more than ever. [  44] [  45] [  46]

## Conclusion

Let me conclude.

A 100th birthday is always a cause for celebration.

For Australian macroeconomics that is true with bells on.

Two Golden Ages, forged in response to fundamental shifts in the global paradigm - powered by worldclass thinking, ruthlessly applied to a single end - improving the lot of the Australian people.

As the global paradigm shifts again, the challenge is to go for the hat trick.

The good news is the policy questions facing us, and the world, lie four-square in Australia's areas of comparative advantage.

But to exploit that advantage, we need to relearn the lessons of the past - drawing in our best talent, strengthening the incentives for policy-relevant research, and deepening the links between academics and policymakers.

As a trading economy reliant on world markets, we have no choice but to respond. But we can go one better: by marshalling our best brains we can turn this challenging environment to our advantage.

At the RBA, we stand ready to play our part in this great endeavour.

Thank you.

## Endnotes

- I am particularly grateful to Jonathan Hambur for his assistance in writing this speech; he is truly a co-author. Thanks go also to Sam Munn and Emily Shaw for their research support; to Selwyn Cornish, Guy Debelle, Catherine de Fontenay, David Gruen, David Kalisch, Greg Kaplan, Andrew Leigh, Renee Fry-McKibbin, Warwick McKibbin, Alex Millmow, James Morley, Alex Rosen, Dennis Trewin, David Vines and Justin Wolfers for their helpful preliminary discussions; and to Anthony Brassil, Michele Bullock, Thomas Cusbert, Ian Harper, Sarah Hunter, Jarkko Jaaskela, Bradley Jones, Christopher Kent, Claude Lopez, Mick Plumb and Penny Smith for their comments and contributions on earlier drafts. [*]
- There is some debate as to exactly when the ESA began, and hence when the centenary should be celebrated. The proposal that a new society be established was first made by Lyndhurst Giblin in 1924 - a year he said 'might perhaps be called A.E.1 - the first year of economists in Australia': Coleman W, S Cornish and A Hagger (2006), Giblin's Platoon: The Trials and Triumph of the Economist in Australian Public Life, ANU E Press, Canberra. A Provisional Committee was established later in 1924 - but the New South Wales and Victorian branches were formed in May 2025, and a permanent Central Council only came into being in August of that year. So 2025 has a decent claim to be the ESA's 'official birthday' at the very least! I learned these and many other facts from a draft of Alex Millmow's excellent forthcoming history of the ESA. [1]
- Overseas readers may wish to consult Sitch R (director) (1997), The Castle, Motion Picture, Working Dog Productions, Australia. A vibe probably does not make a 'School' in the Chicago or Austrian sense, as Selwyn Cornish discusses in Cornish S (2008), 'Economics in Australasia', in SN Durlauf and LE Blume (eds), The New Palgrave Dictionary of Economics, Vo1 1, 2nd edition, Palgrave Macmillan, London, pp 308-313. There is also an excellent treatment of this question in Chapter 1 of Groenewegen P and B McFarlane (1990), A History of Australian Economic Thought, Routledge, London. While my speech focuses primarily on economists and academics active in the Australian economics community, there are of course also Australians working overseas at the frontier of global economic thinking. [2]
- The historical parts of this speech build heavily on the writings of, and conversations with, Selwyn Cornish, Alex Millmow and David Vines. [3]
- Overviews of this period include Keating M (2014), 'Chapter 20: The Evolution of Australian Macroeconomic Strategy Since World War 2', in S Ville and G Withers (eds), The Cambridge Economic History of Australia, Cambridge University Press, Port Melbourne, pp 438-461; Garnaut R (1994), 'Chapter 23: Trade Liberalization and the Washington Consensus in Australia, in J Williamson (ed), The Political Economy of Policy Reform, Institute of International Economics, Washington DC, pp 51-72; Millmow A (2010), The Power of Economic Ideas, ANU E Press, Canberra. [4]
- The history of Australia's evolving attitude towards tariffs is fascinating. Lyndhurst Giblin was a co-author of the influential 1929 Brigden Report (or The Australian Tariff: An Economic Enquiry to give it its true title), which advocated the maintenance of high tariffs as a means of sustaining national income. Paul Samuelson wrote a masterly summary of the intellectual provenance of this view in Samuelson PA (1981), 'Summing Up the Australian Case for Protection', Quarterly Journal of Economics, 96(0), pp 147-160. [5]
- For a concise summary of Giblin's life, see William Coleman's entry in King JE (ed) (2007), A Biographical Dictionary of Australian and New Zealand Economists, Edward Elgar, Cheltenham. For a more in-depth assessment, see Coleman, Cornish and Hagger, n 1. An evocative letter to the editor from Sidney Crawford in the Adelaide-based Advertiser marking Giblin's death described him as having 'the brain of an Einstein in the body of a prize fighter': Crawford S (1951), 'The Late Professor Giblin', The Advertiser, 7 March. [6]
- See Giblin LF (1930), Australia, 1930: An Inaugural Lecture, Melbourne University Press, Melbourne. Giblin's conception of the multiplier was certainly somewhat narrower than the modern understanding (see, for example, Markwell DJ (2000), 'Keynes and Australia', RBA Research Discussion Paper No 2000-04) - but the family resemblance is unmistakeable. [7]
- As is well known, the row over Lang's proposals was so fierce, it led to a split in the Australian Labor Party in 1931. [8]
- Among other achievements in his long career, Melville was also inaugural Professor of Economics, University of Adelaide; the first economist appointed by the Commonwealth Bank; leader of Australia's delegation to the Bretton Woods Conference; Australia's Executive Director, IMF and the World Bank; Vice-Chancellor of the ANU; and Director of the Tariff Board. [9]
- See Millmow, n 4, p 85. Interestingly, Giblin also tentatively supported a floating exchange rate - another idea that proved ahead of its time! [10]
- See Markwell, n 7, pp 20-21. [11]
- See Coleman, Cornish and Hagger, n 1; Markwell, n 7. [12]
- Coombs was also Economic Advisor, Treasury; inaugural head, Department of Postwar Reconstruction; leader of Australian delegations to the Hot Springs Conference in 1943, the Geneva conference that created the GATT (1946) and the Havana conference (1947) on international trade; Chancellor ANU; and Economic Advisor to Prime Minister Whitlam. [13]
- Unlike Giblin and the multiplier, the model is sometimes known as the 'Solow/Swan growth model'. Solow himself was gracious in recognising Swan's contribution: see Solow R (1997), 'Swan, Trevor W', in T Cate (ed), An Encyclopedia of Keynesian Economics, 2nd edition, Edward Elgar, Cheltenham and Northampton. [14]
- For further discussion of Swan's life and contributions, see Dimand RW and BJ Spencer (2008), 'Trevor Swan and the Neoclassical Growth Model', NBER Working Paper No 13950; Cornish S (2024), 'Trevor Winchester Swan: Life and Contributions to Economic Theory and Policy', Economic Record, 100(330), pp 281-437. [15]
- For a good overall summary of this period, see Berger-Thomson L, J Breusch and L Lilley (2018), 'Australia's Experience with Economic Reform', Treasury Working Paper. For discussions of Australia's financial, capital and exchange rate deregulation, see Grenville S (1991), 'The Evolution of Financial Deregulation', in The Deregulation of Financial Intermediaries, Proceedings of the RBA Annual Conference, 20-21 June; Debelle G and M Plumb (2006), 'The Evolution of Exchange Rate Policy and Capital Controls in Australia', Asian Economic Papers, 5(2), pp 7-29; Ballantyne A, J Hambur, I Roberts and M Wright (2014), 'Financial Reform in Australia and China', RBA Research Discussion Paper No 2014-10. [16]
- See, for instance, Kelly P (2000), 'The Politics of Economic Change in Australia in the 1980s and 1990s', in D Gruen and S Shrestha (eds), The Australian Economy in the 1990s, Proceedings of the RBA Annual Conference, 24-25 July; Garnaut, n 4. [17]
- For a short summary of Corden's work and impact, see Irwin D (2023), 'Trade Theory and Trade Policy: The Work of Max Corden, 1927-2023', VoxEU, 28 October. Corden's later work on 'Dutch Disease', with Bob Gregory and Peter Neary, would also prove vital for understanding the impact of the Noughties mining boom on the structure of the Australian economy. See, for instance, Corden WM and JP Neary (1982), 'Booming Sector and De-industrialisation in a Small Open Economy', The Economic Journal, 92(368), pp 825-848; Gregory RG (1976), 'Some Implications of the Growth in the Mineral Sector', Australian Journal of Agricultural Economics, 1(Jul), pp 1-28. More recent work includes: Fry-McKibbin R, M Greenwood-Nimmo, R Kima and V Volkov (2025), 'A Three-sector Structural VAR model for the Australian Economy', Journal of Economic Dynamics and Control, 170; Kulish M, J Morley, N Yamout and F Zanetti (2023), 'Dutch Disease, Unemployment and Structural Change', CAMA Working Paper No 38/2023; P Downe, K Hanslow and P Tulip (2014), 'The Effect of the Mining Boom on the Australian Economy', RBA Research Discussion Paper No 2014-08. [18]
- See Vines D (2021), 'A Productivity Commission: A Proposal for an Australian-style Approach to Creating a Policy-Reform Process for the UK', INET Oxford Working Paper No 2021-13. During his long career, Crawford was also Director of Research at the Department of Postwar Reconstruction; Inaugural head of the Bureau of Agricultural Economics; head of the Department of Commerce and Industry; head of the Department of Trade; and first Vice-Chancellor and then Chancellor, ANU. [19]
- Corden and Gruen had collaborated on a 1970 paper that set the scene for this change: Gruen FH and WM Corden (1970), 'A Tariff That Worsens the Terms of Trade', in IA McDougall and RH Snape (eds), Studies in International Economics: Monash Conference Papers, North-Holland, Amsterdam, pp 55-58. Interestingly, at the time, Whitlam [20]

motivated the 1973 cuts as being more about bearing down on inflation than on improving the functioning of the economy.

- Productivity Commission (2003), 'From Industry Assistance to Productivity: 30 Years of 'The Commission'', Productivity Commission Paper. [21]
- See, for instance, Higgins CI and VW FitzGerald (1972), 'An Econometric Model of the Australian Economy', Journal of Econometrics, 1(3), pp 299-265; Norton WE and JF Henderson (1972), 'A Model of the Australian Economy: A Further Report', RBA Occasional Paper No 3G; Jonson PD, ER Moses and CR Wymer (1977), 'The RBA76 Model of the Australian Economy', in WE Norton (ed), Conference in Applied Economic Research, Proceedings of the RBA Annual Conference, Sydney, 5-6 December; Murphy CW (1988), 'An Overview of the Murphy Model', in ME Burns and CW Murphy (eds), Macroeconomic Modelling in Australia, Australian Economic Papers, 27(Supp), pp 175-199; Taplin B, P Hilek, L Antioch, A Johnson, P Parameswaran and C Louis (1993), 'Documenting of the Treasury Macroeconomic (TRYM) Model of the Australian Economy', in S Ichimura and Y Matsumoto (eds), Econometric Models of the Asian Pacific Countries, Springer, Tokyo. [22]
- Dixon PB (1982), ORANI, A Multisectoral Model of the Australian Economy, North-Holland, New York. [23]
- See, for instance, McKibbin WJ, M Noland and G Shuetrim (2025), 'The Global Economic Effects of Trump's 2025 Tariffs', PIIE Working Paper No 25-13. [24]
- I am grateful to Australian Statisticians David Gruen, David Kalisch and Dennis Trewin for discussion on this topic. I have not done justice to their rich thoughts in this short summary - but the ABS' own publication is an excellent read: Australian Bureau of Statistics (25005), 'Informing a Nation: The Evolution of the Australian Bureau of Statistics 1905-2005', ABS Catalogue No 1382.0. [25]
- Like Giblin, Coghlan lived a very full life. Before becoming the Government Statistician he was assistant engineer to the Harbours and Rivers Branch of the NSW Public Works Department, in which role he helped design Sydney's water system! He had a side hustle as a journalist, writing under various aliases, and railing among other things against the destruction of Sydney's native flora. In later life he was the Agent-General for New South Wales in London. For more, see Hicks N (1981), 'Coghlan, Sir Timothy Augustine (1855-1926)', in B Nairn and G Serle (eds), Australian Dictionary of Biography, Vol 8, Melbourne University Press, Melbourne, pp 48-51. [26]
- See Australian Bureau of Statistics (2020), 'Improving Agricultural Crop Statistics Using Satellite Data', 26 June; Australian Bureau of Statistics, 'Data Integration', available at &lt;https://www.abs.gov.au/about/dataservices/data-integration&gt;. [27]
- Wilson was Australia's longest-service Treasury Secretary and later became Chair of Qantas and the Commonwealth Bank: Sir Roland Wilson Foundation, 'Sir Roland Wilson', available at &lt;https://srwfoundation.anu.edu.au/about/sirroland-wilson&gt;. Wickens helped establish the forerunner to the ANU, among other achievements: Hawkins J (2019), 'Charles Wickens: The Australian Government's First Economist', History of Economics Review, 73(1), pp 85-96. [28]
- Swan TW (1956), 'Economic Growth and Capital Accumulation', Economic Record, 32(2), pp 334-361; Corden M (1957), 'The Calculation of the Cost of Protection', Economic Record, 33(64), pp 29-51; Salter WEG (1959), 'Internal and External Balance: The Role of Price and Expenditure Effects', Economic Record, 35(71), pp 159-297; Swan TW (1980), 'The Principle of Effective Demand: A Real Life Model', Economic Record, 65(4), pp 378-398. [29]
- Jacqui Dwyer and colleagues at the RBA have described at some length the challenges of declining enrolments and poor diversity in economics in Australia: see, for example, Dwyer J (2024), 'The State of Economics', Address to The Economic Society of Australia, Sydney, 28 May. [30]
- Factors cited here include the intense pressure to publish in Top Five or A* economics journals, a list which no longer contains any Australian publications (Australian Business Deans Council (2023), '2022 ABDC Journal Quality List Released', Media Release, 16 March), and increased academic specialisation in narrow areas of theoretical research. Neither point is unique to Australia of course - indeed, recent research has challenged whether the increasing global concentration in top tier journals and institutions is good for economics in general: see, for instance, Freeman RB, D Xie, H Zhang and H Zhou (2024), 'High and Rising Institutional Concentration of Award-Winning Economists', 25 June, summarised in Rodrik D (2024), 'Is Economics in Need of Trustbusting?', Financial Times, 30 August. [31]
- Factors cited here include the perceived reluctance by some universities to release academics to support policy work, and a reduced focus on research in public policy institutions - a point echoed, for example, in the RBA Review: see recommendations 9 and 11.4 in Australian Government (2023), 'Review of the Reserve Bank of Australia - Final Report'. [32]
- See, for instance, the work of The Superpower Institute. Fascinatingly, Colin Clark predicted many of these issues 85 years ago, writing about the risks from burning fossil fuels faster than the environment can bear, and the opportunities from solar power: see Garnaut R (2012), 'Removing Climate Change as a Barrier to Economic Progress: Twenty-second Colin Clark Memorial Lecture', Economic Analysis and Policy, 43(1), pp 31-47 for a discussion of Clark's thinking. [33]
- See, for instance, Dungey M and A Pagan (2000), 'A Structural VAR Model of the Australian Economy', Economic Record, 76(235), pp 321-342. Examples of RBA work include Jaaskela JP and P Smith (2013), 'Terms of Trade Shocks: What Are They and What Do They Do?', Economic Record, 89(35), pp 145-159; Kulish M and DM Rees (2017), 'Unprecedented Changes in the Terms of Trade', Journal of International Economics, 108, pp 351-367; Hendy P and B Beckers (2024), 'How Do Global Shocks Affect Australia?', RBA Research Discussion Paper No 2024-10. [34]
- For example, many of the core models used by policy institutions are small open economy models with a resource sector, such as the RBA's macro-econometric MARTIN model (Ballantyne A, T Custbert, R Evans, R Guttmann, J Hambur, A Hamilton, E Kendall, R McCririck, G Nodari and D Rees (2019), 'Martin Has Its Place: A Macroeconometric Model of the Australian Economy', Economic Record, 96(314), pp 225-251) and DSGE DINGO model (C Gibbs, J Hambur and G Nodari (2018), 'DSGE Reno: Adding a Housing Block to a Small Open Economy Model', RBA Research Discussion Paper No 2018-04; Rees D, P Smith and J Hall 2016, 'A Multisector Model of the Australian Economy', Economic Record, 92(298), pp 374-408); Treasury's EMMA model (Bullen J, B Conigrave, A Elderfield, C Karmel, L Lucas, C Murphy, H [35]

Ruberl, N Stoney and H Yao (2021), 'The Treasury Macroeconometric Model of Australia: Modelling Approach', Treasury Working Paper No 2021-09).

- For example, UNSW's Institute of Global Finance; ANU's Centre for Applied Macroeconomic Analysis; and the University of Melbourne's Melbourne Institute. Think-tanks including e61 and the Grattan and Lowy institutes regularly produce policy-relevant research. [36]
- See, for example, Andrews D and D Hansell (2021), 'Productivity-enhancing Labour Reallocation in Australia', Economic Record, 97(3187), pp 157-169; Andrews D, J Hambur, D Hansell and A Wheeler (2022), 'Reaching for the Stars: Australian Firms and the Global Productivity Frontier', Treasury Working Paper No 2022-01; Hambur J (2023), 'Product Market Competition and its Implications for the Australian Economy', Economic Record, 99(324), pp 32-57; Champion M, C Edmond and J Hambur (2023), 'Competition Markups and Inflation: Evidence from Australian Firm-level Data PDF ' , Paper presented at the RBA Annual Conference, Sydney, 25-26 September; Hambur J (2023), 'Did Labour Market Concentration Lower Wages Growth Pre-COVID?', RBA Research Discussion Paper No 2023-02. [37]
- Productivity Commission (2025), 'PC Opens Consultation on Reform Areas for Productivity Inquiries', Media Release, 18 May. [38]
- Treasury (2025), 'Economic Reform Roundtable', available at &lt;https://treasury.gov.au/review/economicreform-roundtable&gt;. [39]
- Further detail on the ABS' development agenda 'Big Data, Timely Insights' is available at &lt;https://www.abs.gov.au/about/key-priorities/big-data-timely-insights-phase-2/about-program&gt;. [40]
- Other recent frontier work looks at how COVID-era support policies affected the economy, and the lessons for designing policy in response to future shocks, which may be extremely valuable in a more uncertain and volatile world. For example, the effects of Australia's JobKeeper program (Bradshaw N, N Deutscher and L Vass (2023), 'The Employment Effects of JobKeeper Receipt', Treasury Working Paper No 2023-04; Bishop J and I Day (2020), 'How Many Jobs did JobKeeper Keep?', RBA Research Discussion Paper No 2020-07; Andrews D, E Bahar and J Hambur (2025), 'The Effects of COVID-19 and JobKeeper on Productivity-enhancing Reallocation in Australia', Economic Record, 101(333), pp 142168), and the early superannuation release program (Sainsbury T, R Breunig and T Watson (2022), 'COVID-19 Private Pension Withdrawals and Unemployment Tenures', IZA Discussion Paper No 15399; Hamilton S, G Liu, J Miranda-Pinto and T Sainsbury (2023), 'Early Pension Withdrawal as Stimulus', IIEP Working Paper No 2023-02). [41]
- Wood D (2024), 'Here to Help: The Role of Economics in Contemporary Policy Challenges', Paper presented at the Australian Public Service Economist Conference, Melbourne, 25 November. [42]
- Past highlights include Debelle G and S Fischer (1994), 'How Independent Should a Central Bank Be?' in JC Fuhrer (ed), Goals, Guidelines, and Constraints Facing Monetary Policymakers, Federal Reserve Bank of Boston Conference Series No 38, North Falmouth, Massachusetts, pp 195-221; Borio C and P Lowe (2002), 'Asset Prices, Financial and Monetary Stability; Exploring the Nexus', BIS Working Paper No 114; Blanchard O and J Simon, 'The Long and Large Decline in I.S. Output Volatility', Brooking Paper on Economic Activity, 1(2001), pp 135-164. Current work assessing and critiquing [43]

overseas findings in the Australian context: Brassil A (2022), 'The Consequences of Low interest Rates for the Australian Banking Sector', RBA Research Discussion Paper No 2022-08; M Read (2024), 'Sign Restrictions and Supply-demand Decomposition of Inflation', RBA Research Discussion Paper No 2024-05.

- For example, Bruce Preston has written extensively on inflation expectation and fiscal monetary interactions, which is relevant to challenges around optimal policy mixes and policy trade-offs with supply shocks (e.g. Eusepi S and B Preston (2018), 'Fiscal Foundations of inflation: Imperfect Knowledge', American Economic Review, 108(9), pp 2551-2589). James Morley has written on neutral rates and output gaps, which is important in the context of the productivity slowdown (e.g. Kamber G, J Morley and B Wong (2018), 'Intuitive and Reliable Estimates of the Output Gap from a Beveridge-Nelson Filter', Review of Economic Statistics, 100, pp 550-566) and Greg Kaplan has shown how household heterogeneity can influence the impact of monetary policy, which is important in thinking broadly about the best policy mix in response to various shocks (e.g. Kaplan G, B Moll and GL Violante, 'Monetary Policy According to HANK', American Economic Review, 108(3), pp 697-743). Recent examples of external research with RBA staff and/or RBA models include Brassil A, C Gibbs and C Ryan (2025), 'Boundedly Rational Expectations and the Optimality of Flexible Average Inflation Targeting', RBA Research Discussion Paper No 2025-02; Gross I and A Leigh (2022), 'Assessing Australian Monetary Policy in the Twenty-first Century', Economic Record, 98(322), pp 271-295; Liu X, AR Pagan and T Robinson (2018), 'Critically Assessing Estimated DSGE Models: A Case Study of a Multi-sector Model', Economic Record, 94(307), pp 349-371. [44]
- For further details, see RBA, 'RBA Annual Conferences', 'Annual Research Workshops' and 'Academic Panel'. [45]
- Coombs' meetings are discussed in in Brown N (2001), Richard Downing: Economics, Advocacy and Social Reform in Australia, Melbourne University Press, Melbourne. [46]

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https://www.bis.org/review/r250708b.htm,Andrew Bailey: The meaning of reserve currency,"Panel remarks by Mr Andrew Bailey, Governor of the Bank of England, at the Andrew Crockett Memorial Lecture, on the occasion of the Bank for International Settlement's Annual General Meeting, Basel, 29 June 2025.",2025-06-29 00:00:00,"## Andrew Bailey: The meaning of reserve currency

Panel remarks by Mr Andrew Bailey, Governor of the Bank of England, at the Andrew Crockett Memorial Lecture, on the occasion of the Bank for International Settlement's Annual General Meeting, Basel, 29 June 2025.

* * *

It is a great pleasure to have the opportunity to make some remarks this afternoon. This is not just to be able to follow a fascinating and timely lecture, but also because I worked for Andrew Crockett at the Bank of England nearly 40 years ago. Andrew was inspiring to work for, one of the deepest thinkers about international economic policy and central banking. He also had a quite incautious side too. He was a practitioner of one of his favourite phrases - ""if you have never missed a plane, you obviously arrive at airports too early"". Andrew was also the creator of the Financial Stability Forum, and its first chair.

I want to spend my time developing a theme that has run though Maury's lecture, namely what has been the meaning of the term reserve currency, and what does it mean today. My conclusion is that it is best to think of the term as one that has evolved with the times, and continues to do so. Thinking of it as a constant term does not help to understand its meaning.

I will start with the nineteenth century meaning of the term. The monetary regime was the classical gold standard, and convertibility of domestic currency into gold at a fixed price was the nominal anchor of the system. The term reserve therefore referred to the gold reserves that were held to enable convertibility and the promise thereof.

The nineteenth century Bank of England spent time managing that reserve balance to create confidence in the promise of convertibility. Today, our banknotes still carry the words ""I promise to pay the bearer on demand, the sum of"". Nowadays, it means that someone can have another banknote, but under the gold standard it meant much more. This system did not put as much emphasis on financial stability, with the consequence that when crises occurred (as they did in that time), they were managed with a certain degree of adhocery. Hence, Walter Bagehot wrote his famous critique of the Bank.

There was rather more to the concept of reserve currency in this period. Sterling was the premier currency of international trade, built on trade with the British Empire, but extending further over time to the countries of the so-called Sterling Area. It is one of the questions in central bank Trivial Pursuit to name countries in the Sterling Area.

The collapse of this system between the wars led to the Bretton Woods system coming into existence and its heyday once full convertibility was restored. This system had the joint dollar-gold anchor in the form of a fixed dollar-gold rate and pegging of the major currencies. The consequence was a substantial growth of official dollar reserves, and the further emergence thus of the dollar as the reserve currency.

The system therefore had a joint anchor. Because Bretton Woods solved the so-called Trilemma by restricting capital flows, the threat of countries exhausting reserves was limited, but not sufficiently so to prevent difficult devaluations at times. Moreover, I tend

to think of the Triffin Dilemma as posing the question - what if the bluff of the dollar-gold tie had been called, and what would be the consequence?

From the early 1970s that system broke down. Countries moved to free float, with periodic attempts at management, and a lifting of restrictions on capital controls. Alongside this was the emergence of the domestic anchor of monetary policy, usually an inflation target. The dollar had become the predominant currency of international trade and payments.

The role and nature of reserves had changed. No longer were they a nineteenth century description of the central bank's balance sheet and its liquidity under the classical gold standard. Rather, they became a description of so-called official reserves typically, but not always, held by governments, though often managed by central banks. Their role was different, reflecting the changes to the solution of the Trilemma. As foreign exchange intervention to influence exchange rates came to an end, the role of reserves in many countries was to act as a bulwark against pressures from capital flows, as seen in the Asian crisis of the late 1990s.

A few numbers help here. The stock of FX reserves relative to global GDP increased from 3% to 11% between 1976 and last year.

During that period, foreign currency reserves as a proportion of global reserve assets including gold increased from 50% to 90%, while the dollar's share of foreign currency reserves declined from 80% to 57%. I take four points from these figures: the total stock of FX reserves has increased; the share of gold fell; the dollar's share fell as it moved from being the anchor currency to the largest currency; and the evidence further supports the view that the meaning of the term reserve currency has changed over time.

Today, with domestic monetary anchors, financial stability has become the focus of international co-ordination, the opposite of the gold standard arrangements. The meaning of reserve currency has changed again as a consequence. I would point to two important features of today's system.

First, the concept of reserve currency has a lot more to do with the supply and denomination of safe assets which act as security in the financial system, and are increasingly at the heart of it. This version of the concept of reserve currency has as much to do with the role of US Treasuries as a safe asset, that is present not just in official reserves but also to provide security and collateral in financial markets.

Second, these arrangements are backed up by the provision of contingent liquidity insurance in the form of central bank swaps and a repo facility. These arrangements underpin the role and primacy of the reserve currency.

I will end with two points which strike me as unfinished or emerging. First, at least for the large economies, it could be asked today, what is the point of official reserves? My view is that today their use is more to do with preserving financial stability in the event of stress. They may be needed to support financial system liquidity in situations of extreme stress.

My second point, as BIS colleagues have emphasised, is that we need to watch carefully the evolution of payments forms and whether innovation here introduces fragility into what I would call the ""money system"".

- If, for instance, stablecoins emerge as a new form of money, we have to decide how to ensure the singleness of money and therefore trust in money in this world, and what role the notion of reserve currency should play here.

To finish, thank you Maury for such a stimulating lecture. You pushed me to think further about the meaning of reserve currency. The conclusion I draw was that we need to emphasise more its adaptable nature, but thereby be very clear what it means in the world of today and tomorrow.

Thank you.",Andrew Bailey
https://www.bis.org/review/r250708a.htm,José Luis Escrivá: Monetary policymaking in a context of extreme uncertainty ,"Speech by Mr José Luis Escrivá, Governor of the Bank of Spain, at the ""Fourth high-level conference on global risk, uncertainty, and volatility"", jointly organised by the Swiss National Bank, the Bank for International Settlements, and the Division of International Finance of the Federal Reserve Board, Zurich, 13 May 2025.",2025-05-13 00:00:00,"

## Monetary Policymaking in a Context of Extreme Uncertainty

Biennial Conference on Global Risk, Uncertainty, and Volatility

Zurich

JosØ Luis EscrivÆ

Governor

## 13.05.2025

Good morning,

First of all, I would like to extend my sincere gratitude to the Swiss National Bank and the BIS for inviting me to this highly relevant and timely conference. One of the main challenges we are currently facing as policymakers is finding the right adjective to describe the kind of uncertainty we are dealing with: extreme, unprecedented, unpredictable? We are navigating a very complex policymaking environment characterised by a high degree of uncertainty. To begin with, let me explain why uncertainty is currently so high. The US Economic Policy Uncertainty Index shows that the degree of uncertainty surrounding economic policy in the United States is at extreme levels in general, and also in specific areas: monetary policy, fiscal  policy,  regulation,  and  trade  policy.  We  are  currently  experiencing  unprecedented levels of uncertainty in all of these areas. Trade is a clear example, but fiscal policy in the United States is similarly affected. The Congressional Budget Office projects, in the absence of new fiscal policies, persistent deficits of over 5% of GDP for the next decade and a debtto-GDP ratio rising from 100% to 150%.

No matter which area you look at, we are facing truly unprecedented developments. This is something  we  must  take  into  account  in  our  decision-making.  During  the  COVID-19 pandemic, we also faced unprecedented uncertainty, but this time the uncertainty is far more of the Knightian kind. 1 At that time, the shock, particularly the potential for adverse scenarios, was huge, but the direction and the nature of the shock were clear-cut. It was a significant negative supply shock. This time around is far more complex. Let me illustrate this  using  a  model-based decomposition of shocks in the recent inflationary episode. 2 It basically shows that it was possible, even in real time, to identify the nature of the shock as clearly supply-driven.

Today, while the impact on GDP is clearer, the impact on inflation is harder to predict due to potentially opposing dynamics.

I will discuss three key issues arising from this extreme uncertainty and the challenges for policymakers in relation to monetary policy. First, evaluation: we need to improve our tools and methods to better understand and assess this uncertainty. This involves defining the contours of uncertainty and structuring our internal work and decision-making in a way that puts  more  emphasis  on  the  balance  of  risks  to  the  central  scenario.  Second,  decisionmaking: we need to consider how to make decisions in such an uncertain environment. And third, communication: we need to consider how to effectively communicate our decisions and the uncertainty to the public and the markets.

## Evaluation

In the current environment, a central scenario is less informative than in past episodes of tension. Instead, we should rely more on well-designed fully-fledged alternative scenarios. The adoption of this approach is challenging, but steps were already being taken in this

1 Knightian uncertainty refers to a type of uncertainty where the probability of outcomes cannot be calculated or reliably predicted. This concept contrasts with measurable risks, where the outcomes and their probabilities are known or can be estimated.

2 See Kataryniuk, MartinezMartin, Pappa and Rast (2025) 'The heterogenous effects of demand and supply shocks', Banco de Espaæa Working Paper (forthcoming).

direction  even  before  the  recent  surge  in  uncertainty.  A  relevant  example  is  the  2024 Bernanke review of the Bank of England 's forecasting 3 which puts emphasis on managing uncertainty and discussing the balance of risks. In my view, the relevance of this issue is going to increase over time, for two main reasons. The first is related to the need to foster robustness in response to a situation of uncertainty. In this respect, Sargent and Hansen 4 have clearly explained the importance of robustness in modelling and for potential scenarios to deal with uncertainty and model ambiguity. Secondly, we need to improve transparency vis-à-vis the public, so that they know we are prepared for different scenarios. This means focusing less on the central scenario and more on alternatives.

All central banks are currently working on scenarios to assess the potential impact of policy shifts on tariffs. By way of illustration, at the Banco de Espaæa, we use different models to analyse past data and predict new economic states if certain events occur. For example, to evaluate the impact of the recent trade policy decisions taken by the new US Administration, we have combined two models: the well-known large-scale multi-country model NiGEM, and  an  internal  Banco  de  Espaæa  multi-sectoral,  multi-country  model.  Using  these  two models,  we  have  simulated  different  scenarios  over  a  three-year  horizon,  considering alternative tariffs configurations in the United States vis-à-vis the rest of the world and in the  rest  of  the  world  vis-à-vis  the  United  States.  To  better  understand  the  impacts  on inflation and on the complexity of the situation, we have also added parallel channels that might  be  more  demand-driven,  such  as  negative  confidence  shocks  and  financial uncertainty and volatility. This highlights the importance of combining different shocks and scenarios. As we add more elements, we must choose some to create a simplified view of potential new economic states.

Another key approach when facing an episode of high uncertainty is to monitor short-term developments using high-frequency data. This helps us capture early dynamics that lower frequency data might miss. For example, during the Valencia floods in Spain, we monitored credit card data, ATM withdrawals, employment data, tax data, VAT billing and port data to assess the impact.

Combining numbers with text and other non-structured information is challenging. By using neural models and AI techniques, we can detect non-linear patterns and turning points that traditional methods might miss. In the presence of high uncertainty, it is crucial to combine standard models and forecasting techniques with high-frequency data.

## Decision-making

Let me turn now to the issue of how to best take monetary policy decisions in a context of high uncertainty.

Here the terms that we normally use,  such as data-driven and full optionality, are more apposite than ever.  Given the developments in recent months, our initial reaction in the

3 Bernanke, B. (n.d.). Forecasting for Monetary Policy Making and Communication at the Bank of England: A Review. Bank of England. Retrieved from: https://www.bankofengland.co.uk/independent-evaluation-office/forecasting-for-monetarypolicy-making-and-communication-at-the-bank-of-england-a-review/forecasting-for-monetary-policy-making-andcommunication-at-the-bank-of-england-a-review

4 Hansen, L. P., &amp; Sargent, T. J. (2008). Robustness. Princeton University Press.

current situation should be cautious. This is because it is extremely challenging to predict the  impact  and  direction  of  potential  developments  and  their  net  economic  effects. Therefore, a cautious approach, as suggested by Brainard, 5 is appropriate in the short term.

At  the  same  time,  given  the  rapid  pace  at  which  developments  evolve,  the  most  likely scenario can change swiftly, and alternative scenarios can quickly become the new central one. Therefore, we need to act promptly. This requires us to be attentive and prepared to make the appropriate decisions.

In the wording of the recent ECB monetary policy statement, we introduced the concept of ""agility"", highlighting the need to be flexible and responsive. I view the current situation as one in which we must balance caution with agility. We need more time to fully understand various developments, but we also need to be ready to adapt swiftly. As is often the case in monetary policymaking, achieving this balance is an art.

## Communication

Let me finally deal with the issue of how to communicate our decisions in a context of high uncertainty.

Communicating  uncertainty  is  always  a  challenge  for  central  bankers. There  is a fundamental dilemma: if we express too much doubt or present too many alternatives, we risk appearing indecisive. Moreover, it is crucial for central banks to be seen as effective and committed to maintaining price stability with the necessary tools at our disposal.

At the same time, the assessment of certain situations takes time and requires additional information. For the sake of transparency, we need to convey this need, but this must be done  in  a  way  that  maintains  the  perception  of  our  commitment  and  avoids  appearing somewhat lost in the current situation. This is especially challenging in a highly uncertain environment.

T ools like the Bank of England's fan charts have been used since the mid -1990s. 6 However, the use of probability distributions can sometimes suggest that anything is possible. This is somewhat problematic and it may be difficult for certain observers to understand how these charts  are  constructed  and  how  they  should  be  used.  These  are  factors  that  limit  the usefulness of these tools for communication. Similarly, the Federal Reserve Board's FOMC dot  plot  charts  show  a  range  of  future  views,  but  they  also  involve  communication challenges. 7

If we are moving towards relying more on alternative scenarios rather than a central one, we need to communicate this shift effectively. This involves structuring our internal debates and

5 Brainard, W C (1967), 'Uncertainty and the Effectiveness of Policy', American Economic Review 57(2): 411-425.

6 Fan charts were pioneered by the Bank of England back in 1990.  They typically show the likelihood that a future inflation outcome falls within a specified range. However, they are silent on the underlying contingencies and policy reaction.

7 The Fed dot plots report the median, central tendency and range across (anonymised) individual FOMC members. The uncertainty range is largely a measure of disagreement across individual members, and there is no mapping between the individual FOMC members' views about inflation, the economy and the interest rate. Thus, preventing inference about the implicit reaction function.

discussions  on  the  balance  of  risks  with  stylised  scenarios  that  reflect  a  few  impactful alternatives to the central scenario and have a significant likelihood of materialising.

The job of the decision-making body is to reach consensus on these alternative scenarios and then to instruct staff to develop them in detail, presenting them alongside the central scenario. In my opinion, relying more on alternative scenarios is a relatively straightforward approach.

The challenge is how to communicate these alternative scenarios clearly and transparently to  the  public.  While  transparency  is  desirable,  it  can  also  lead  to  misinterpretations  or confusion. The simplicity of a central scenario for projections is straightforward, but as we de-emphasise it, we must find effective ways to communicate the shift.

Transparency is also desirable for our reaction function. Not only when we do (not) react to the central scenario, but also to show determination and readiness to react to alternative scenarios or to weigh them in our decision-making process, insofar as they are perceived as relevant and have a significant likelihood of occurrence. Probably at a certain point in time,  to  manage expectations  and  provide guidance  on understanding the  central bank reaction function, it would be desirable to move in this direction.

But at the same time, this is not easy. Imagine how complex it would be to include this in a formal statement. We are already sometimes criticised for being overly complex in how we communicate our actions and assessments, whether these relate to the economy, inflation, or  policy  decisions.  Introducing  discussions on  alternative scenarios would  make things even more complex. It could even lead to misinterpretations. A full appreciation that these are state-contingency commitments, and not exactly a central scenario, is by no means guaranteed.

An additional  source of both  complexity  and  confusion  has  to  do with  the  time-varying nature of the weight we give to alternative scenarios.

The appeal of a central scenario with projections lies in its simplicity and straightforwardness. However, as we begin to de-emphasise these central scenarios, the challenge becomes how to effectively communicate this shift. These are complex questions, and  while  I  do  not  have  all  the  answers,  I  firmly  believe  that  more  research  should  be conducted on these critical issues. This is shaping up to be a very important debate for the future.

Let me conclude. High uncertainty may become the new normal. Recent unprecedented developments suggest that this high uncertainty could be long-lasting. Innovations related to AI are accelerating and their impacts are extremely difficult to grasp. In parallel, we may be experiencing significant structural changes in the geopolitical landscape, and in political decision-making  at  the  global  level.  As  Nobel  Prize  winner  Douglass  North  wrote in Understanding the Process of Economic Change , 'it is evident that we have been and we are creating societies that are unique in comparison to anything in the past. […] To know the future, we have to know today what will be known tomorrow.' Let me complement this with another quotation from George Shackle: 'What does not yet exist cannot be known.' If we are in a new normal of uncertainty, we need to be prepared. This involves developing

analytical  tools,  organising  internal  discussions,  and  making  decisions  that  account  for alternative scenarios. Forward guidance may need to be reconsidered, and we must find effective ways to communicate uncertainty to the public and markets.

Thank you very much.",Jose Luis Escrivá
https://www.bis.org/review/r250708c.htm,Joachim Nagel: The German economy - navigating cyclical fluctuations and boosting long-term growth,"Text of the Eesti Pank Public Lecture by Dr Joachim Nagel, President of the Deutsche Bundesbank, at Eesti Bank, Tallinn, 7 July 2025.",2025-07-07 00:00:00,"## The German economy: navigating cyclical fl uctuations and boosting long-term growth

## Eesti Pank Public Lecture

07.07.2025 | Tallinn | Joachim Nagel

Check against delivery.

- 1 Introduction
- 2 German economy: current state and outlook
- 3 National policy measures to boost growth
- 4 The European dimension
- 5 Concluding remarks

## 1 Introduction

Thank you, Governor Müller, for your kind introduction and for the invitation. It is a great pleasure and honour for me to speak here today. I truly appreciate the warm hospitality of Eesti Pank. Since my arrival, I have spent an exciting weekend enjoying several concerts, a trip to the Estonian wilderness, and a walking tour of your beautiful Old Town.

Ladies and gentlemen, Estonia and Germany are connected in surprising ways. For example, the esteemed Estonian economist Ragnar Nurkse, in whose honour this lecture series is being held, attended Tallinna Toomkool. The school was also formerly known as the Domschule zu Reval, and its lessons were held in German.

Estonia and Germany have also shared a similar economic fate in recent years: Both countries ' economies have largely stagnated since the outbreak of the COVID (coronavirus disease)-19 pandemic.

Today, I want to share my thoughts on how the German economy reached its current state and how it could recover . I will structure my remarks around three key questions.

First, what is the current state of the German economy, and what are the main drivers shaping the economic outlook?

Second, what national structural reforms could help put the German economy back on a growth trajectory?

And third, how can we work together to improve the European policy framework to better support growth and security across the European Union?

## 2 German economy: current state and outlook

## 2.1 Current state of the economy

Let ' s begin by examining the current state of the German economy. In 2024, Germany ' s annual real GDP (gross domestic product) was only 0.4 % higher than in 2019. Similarly, Estonia ' s economy remained largely stagnant at its 2019 level. There are several reasons for this sobering growth experience in Germany. For one thing, the economy has been signi fi cantly impacted by recent crises.

As one of the most globally interconnected economies, Germany experienced supply chain disruptions during the COVID (coronavirus disease)-19 pandemic more acutely than many other nations. Moreover, Germany ' s heavy reliance on Russian natural gas made it particularly vulnerable to the sharp rise in energy prices.

Simultaneously, German industry has been experiencing a gradual loss in com -petitiveness in international markets. This decline is partly due to the increasing strength of global competitors, especially from China. It had already taken root well before the onset of the pandemic.

In addition to these external challenges, there are also various, persistent inter -nal obstacles to growth, which I will discuss in more detail shortly. Overall, potential output growth stands at a modest 0.4 %, and without signi fi cant policy changes, it is likely to remain at this low level.

## 2.2 Economic outlook

Against the background of these structural challenges, what are the short-term prospects of the German economy?

In the fi rst quarter of this year , the German economy grew by 0.4 %, rebounding from a slight contraction at the end of last year . This growth was stronger than anticipated, partly because concerns about rising tari ff s resulted in shipments being frontloaded. However, the underlying economic momentum remains weak.

The Bundesbank ' s June 2025 forecast indicates that the German economy is expected to more or less stagnate this year . Factoring in the stronger-thanexpected fi rst-quarter growth fi gures, a slight annual increase appears possible. However, this would still represent three consecutive years of minimal growth.

Our forecast aligns with recent predictions from the IMF (International Monetary Fund) and the European Commission, both of which project zero growth for 2025. The OECD (Organisation for Economic Co-operation and Development) is slightly more optimistic, projecting a growth rate of 0.4 %. Looking ahead, we see promising signs of recovery.

In 2026, the Bundesbank projects that the German economy will grow by 0.7 %. And in 2027, growth could reach 1.2 %. Compared to last December ' s forecast, the outlook for 2025 has thus been revised downward, while the forecast for 2027 has improved. The forecast is in fl uenced by two opposing factors.

On one hand, the tari ff hikes and heightened uncertainty are estimated to reduce the German economy ' s growth by approximately three-quarters of a per -centage point. This impact is primarily expected to a ff ect growth in 2025 and 2026.

The baseline forecast assumes that the additional tari ff s of at least 10 % imposed on all US (United States) trading partners since April will remain in place. Additionally, it accounts for the tari ff s on steel and aluminium as well as on cars and car parts. Finally, the forecast factors in a signi fi cant increase in uncertainty, in particular with regard to trade policy.

On the other hand, from 2026 onwards, the growth-dampening e ff ects of tari ff s are counterbalanced by positive growth impulses from German fi scal policy.

Signi fi cant leeway for increased debt has been established, and de fi cits are expected to rise. Amongst other things, this leeway will be used to fi nance addi tional defence and infrastructure spending. Our experts estimate that this extra spending could boost economic growth by a total of three-quarters of a percent -age point by 2027.

In our baseline forecast, the two opposing forces in e ff ect broadly cancel each other out. However, our projections are accompanied by considerable uncer -tainty. Trade disputes, geopolitical tensions, and speci fi cs of German economic and  fi scal policy all present risks.

For instance, an escalation of the trade con fl ict could increase GDP (gross domestic product) losses to one-and-a-half percentage points by 2027. In this risk scenario, the US (United States) tari ff hikes announced in early April, some of which are currently suspended, would take full e ff ect. This would be followed by renewed strong fi nancial market reactions and ongoing high uncertainty regarding US (United States) economic policy. It is also assumed that the EU (European Union) would retaliate with tari ff s on a similar scale.

The situation remains fl uid, with both escalation and resolution of these tensions being possible at any moment. Just to mention, in two days, on July 9th, the 90day pause on US (United States) reciprocal tari ff s will conclude. We will see what happens.

In summary, the German economy faces signi fi cant headwinds in the short term. Nevertheless, there are grounds for cautious optimism as we look to the future.

Before discussing policy measures to boost growth in Germany, let me take a moment to digress. In observing the public debate in Germany, it appears that the war in Ukraine still feels far removed for many people.

This contrasts sharply with the situation in Estonia, where a direct neighbour has become an immediate threat. Considering Estonia ' s history and recurrent strug -gle for independence, one could say: ' once more ' .

My impression is that the new German government understands the gravity of the situation. And I am con fi dent that it will take the necessary steps to enhance European security.

## 3 National policy measures to boost growth

Ladies and gentlemen, A politically strong Europe must be built on a solid eco -nomic foundation. And as we have seen, Germany has signi fi cant room for improvement in this regard. So, how can Germany enhance its growth potential?

A few months ago, I presented a comprehensive set of measures during a speech in Berlin. Let me summarise the key takeaways for you. I see three key areas where policymakers can enhance Germany ' s growth potential. [1]

## 3.1 Increasing labour supply

The fi rst area that needs to be addressed urgently is labour supply. As the baby boomers from the 1960s retire, the number of working individuals is declining, which diminishes our growth potential. Accordingly, policymakers must explore every avenue to increase labour supply in Germany.

One crucial option lies in increasing the working hours of part-time employees, especially women. While the employment rate of women in Germany is slightly above the European average, their weekly working hours are signi fi cantly lower .

This discrepancy partly stems from disincentives in the tax and social security systems that discourage longer working hours. Moreover, the lack of an ade -quate supply of childcare and elderly care facilities limits part-time workers ' ability to increase their hours. Improving these facilities can pave the way for longer working hours, thereby boosting our national labour supply.

Another key component is labour market-oriented migration. Currently, bureau -cratic hurdles and slow visa processes are hindering the e ff ective integration of workers from non-EU (European Union) countries. This represents one of several areas where Germany ' s backlog in digitalising public services is hampering growth. Simplifying recognition procedures for academic quali fi cations and cre -ating a centralised, digital point of contact for immigrants and their families can facilitate smoother transitions.

It is also vital to ensure that skilled workers remain in Germany over the long term. Currently, within two years of entering the labour market, more than 30 % of immigrants from other EU (European Union) countries leave again. Enhancing language courses and granting residency rights for workers ' family members can provide greater stability and integration. [2]

Additionally, we need to improve work incentives for recipients of the civic allowance. Research shows that the recent abolition of sanctions has signi ficantly decreased the transition of recipients into the labour market. Reinstating previous rules on grace periods, protected assets, and reporting obligations can help these individuals in their transition back to regular employment. [3]

Finally, we must harness the substantial potential of older individuals for addi -tional, often highly quali fi ed labour. Germany faces a unique challenge, as the ratio of retirees to working-age individuals is expected to worsen signi fi cantly over the next 15 years compared to the [4]

OECD (Organisation for Economic Co-operation and Development) average.

To mitigate the increasing ratio of working to retirement years, it seems advis -able to link the earliest possible retirement age, and subsequently the retire -ment age after 2031, to life expectancy. The year 2031 is signi fi cant, as by that time, the regular retirement age will have been increased to 67.

Estonia serves as a role model in this context, as it will start linking retirement age to average life expectancy in 2027. Germany would be wise to follow Estonia ' s example. [5]

Furthermore, it is time to reconsider the rule that permits early retirement without deductions for individuals who have worked for 45 years.

These measures would not only alleviate labour shortages and support eco -nomic growth, but also ease the fi nancial pressure on pension systems.

## 3.2 E ffi ciently transforming the energy sector

The second area that needs to be addressed is the transformation of the energy sector. Germany aims to achieve carbon neutrality by 2045. As a member of the European Union, Estonia, too, is expected to achieve carbon neutrality by 2050 under the European Climate Law.

This monumental task will necessitate signi fi cant investments in several key sectors. To ensure the energy transition is as e ffi cient as possible, Germany needs to adopt a comprehensive and cohesive strategy.

A key element of this strategy is implementing an e ff ective carbon pricing system across all sectors and regions. Currently, carbon prices di ff er across sectors. However, only a standardised carbon price will ensure that savings are made in the most cost-e ff ective areas. Therefore, it is crucial for Germany to advocate for consistent carbon pricing within the EU (European Union) and other economic regions.

Simultaneously, it is highly advisable to abolish climate-damaging subsidies. These subsidies undermine the economic incentives of carbon pricing by pro -moting fossil fuel consumption.

Another essential component is establishing a reliable and coherent framework for the energy transition. Given the long planning horizons and substantial investments needed, a clear policy direction is essential. The government needs to clarify how domestic renewable energy sources and energy imports will inter -act, considering potential supply bottlenecks, particularly during the winter months.

Moreover, policymakers should create economic incentives to better align elec -tricity supply and demand within Germany. Flexible electricity tari ff s and innova -tive approaches such as bidirectional charging for electric vehicles can help achieve this.

## 3.3 Reviving business dynamism

The third area in which Germany has signi fi cant room for improvement is busi -ness dynamism. Speci fi cally, improved conditions for start-ups and business investment are critical for guiding the German economy back onto a stronger growth path.

What needs to be done?

To begin with, Germany should reduce excessive bureaucratic burdens. Entrepreneurs often express frustration with increasing bureaucracy and regula -tion. The National Regulatory Control Council ( Normenkontrollrat ) has identi fi ed several promising avenues in this context. Moreover, implementing EU (European Union) rules as sparingly and e ffi ciently as possible can signi ficantly reduce compliance burdens. We should avoid ' gold plating ' , which refers to adding extra layers of regulation at the national level. [6]

Rather, the focus should be on facilitating start-ups and enhancing innovative capacity. Over one-half of company founders in Germany view bureaucratic hurdles and delays as problematic. Creating a ' one-stop shop ' for aspiring entrepreneurs to manage all typical tasks related to starting a business can unleash greater business dynamism. Innovative start-ups should be embraced, bene fi ting from a large domestic market and suitable funding opportunities. [7]

Lastly, simplifying and expediting administrative processes is essential for reviv -ing business dynamism. Faster planning and approval procedures can help mod -ernise infrastructure more quickly. Moreover , digitalisation, automation, and standardisation can all streamline administrative processes.

In this context, Estonia and Germany di ff er signi fi cantly. According to the World Bank, Estonia ranks among the most conducive countries for starting businesses in the EU (European Union) -namely on position 14, while Germany ranks much lower  namely on position 125. [8]

The 2025 Spring Report from the German Council of Economic Experts provides a detailed comparison of what it takes to start a company in both countries. The di ff erences are striking. [9]

Estonia ' s approach to founding a company exempli fi es e ffi ciency, featuring a fully digital, centralised system that enables entrepreneurs to complete the process quickly and with minimal bureaucracy.

The entire procedure can be completed online through a one-stop shop for administrative services known as the ' e-Business Register ' . It employs a stan -dardised template and allows users to apply for a VAT (value added tax) number at the same time. The costs of starting a company in Estonia are relatively low. Moreover, authorities process applications within fi ve working days, or within one day if the expedited option is selected.

This e ffi cient, fully digital system positions Estonia as a leader in facilitating entrepreneurship.

By contrast, Germany ' s process is more fragmented, necessitating interaction with multiple authorities and requiring signi fi cantly more time and e ff ort.

Founders must consult several institutions, including notaries, the local court, the trade o ffi ce, the tax o ffi ce, and the Federal Employment Agency if they plan to hire employees. Additionally, the costs of starting a company in Germany are considerably higher. Moreover, it takes an average of 35 days, which is consider -ably longer .

This is certainly another area where I believe Germany should follow Estonia ' s lead.

## 4 The European dimension

Implementing rigorous structural reforms at the national level is essential for boosting Germany ' s growth potential. However, for certain issues, we need to fi nd solutions and make progress at the European level.

## 4.1 Addressing geoeconomic and geopolitical challenges

One aspect of this is developing a uni fi ed European response to the geoeco nomic and geopolitical threats we face today. Europe is currently being con -fronted with an erratic and confrontational US (United States) trade policy.

So far , the European Commission has made every e ff ort to de-escalate the situa -tion. Simultaneously, however, the Commission is prepared to retaliate. I believe this is a reasonable approach.

Overall, Europe should remain committed to a rule-based international trade order and pursue free trade agreements with like-minded countries and regions. Commission President Ursula von der Leyen ' s recent proposal to enhance coop -eration between the EU (European Union) and members of the Comprehensive and Progressive Agreement for Trans-Paci fi c Partnership ( CPTPP (Comprehensive and Progressive Agreement for Trans-Paci fi c Partnership)

) represents a welcome and appropriate step in that direction.

Regarding geopolitics, Europe must assume greater responsibility for its own defence. In this context, it is crucial to enhance European coordination, including with non-EU (European Union) countries such as Norway and the United Kingdom, in military strategy, deployment, personnel build-up, procurement, and production capacities. This coordination will incur minimal fi scal costs and may even save money through increased synergies.

The EU (European Union) Commission ' s ' Readiness 2030 ' initiative aims to create space for additional national defence spending within the Stability and Growth Pact. I consider such temporary additional leeway for defence expenditure to be reasonable. It will enable European countries to act swiftly and adapt gradually to permanently higher defence spending.

Lastly, Europe should enhance its autonomy in the payments sector. Currently, Europe remains largely dependent on non-European payment providers. We still lack a digital payment solution that functions across the entire euro area and operates on European infrastructure.

Introducing a digital euro in both retail and wholesale variants could be a cor -nerstone for true autonomy in payments. I would encourage legislators to push forward with the digital euro project accordingly.

## 4.2 Boosting European integration

The second dimension we must focus on is fostering European integration.

The European Single Market has been a cornerstone of prosperity to date, allow -ing goods to fl ow freely across borders while fostering competition, innovation, and economic growth. However, signi fi cant barriers still exist when it comes to services. Cross-border trade in services is still far less developed than in goods, partly due to national regulations that restrict professional services such as legal advice, architecture, and engineering. While some regulations are justi fi ed, many are not, resulting in ine ffi ciencies and lost opportunities.

The digital revolution presents a unique opportunity to overcome these obsta -cles. Digital platforms, virtual collaboration, and online services are revolutionis -ing how businesses operate and interact. To fully harness this potential, we need to simplify regulations, reduce administrative burdens, and establish a truly uni fi ed digital marketplace. For example, the centralised EU (European Union) digital portal for public services established by the European Commission is a welcome step towards facilitating cross-border employment for professionals. This serves as a mechanism to give citizens easier access to services in other Member States.

By eliminating unjusti fi ed obstacles, we can unlock the full potential of the Single Market, enhance competitiveness, and ensure that Europe remains a global leader in innovation.

Energy is another area where deeper European integration can yield signi fi cant bene fi ts. Europe ' s energy markets are still fragmented, with infrastructure bot -tlenecks and national boundaries restricting the e ffi cient fl ow of electricity.

A more integrated European electricity market would enable us to better align supply and demand across borders, reduce reliance on costly reserve power plants, and accelerate the transition to renewable energy. To achieve this, we need to invest in cross-border infrastructure, modernise our grids, and eliminate regulatory obstacles that impede energy trade. By collaborating, we can not only achieve our climate goals but also enhance Europe ' s energy security and com -petitiveness in a rapidly evolving global landscape.

Last but not least, we must deepen the integration of European fi nancial markets. The European Savings and Investments Union can help mobilise the necessary fi nancing for additional investments, such as, for instance, for the green transition and the enhancement of defence capabilities.

Three key elements are at play here.

First, the European Savings and Investments Union can help diversify funding sources. Enhancing access to equity, market-based debt fi nancing and venture capital will enable the fi nancing of a broader range of investments.

Second, the European Savings and Investments Union will facilitate cross-border investments by harmonising regulations and breaking down barriers. This would ease the formation of pan-European companies, enabling them to harness costlowering economies of scale.

This point echoes Ragnar Nurske ' s ' balanced growth theory ' . Tailored to the situ -ation of high-income economies, one could paraphrase him in the following way: The limited size of the domestic market can constitute an obstacle to the applica -tion of capital by fi rms or industries, thus posing an obstacle to economic growth generally. [10]

Third, the European Savings and Investments Union will make Europe more appealing to external investors. This would increase both the quantity of avail -able fi nancing and reduce its cost.

Recent policy actions by the US (United States) administration have led interna -tional investors to start questioning the US (United States) dollar ' s safe haven status and to reassess the relative attractiveness of Europe as an investment location compared to the US (United States). Boosting growth in the EU (European Union) and making it an attractive investment destination presents an opportunity for Europe.

## 5 Concluding remarks

Ladies and gentlemen, Allow me to brie fl y summarise and share a few conclud -ing thoughts.

I began my speech by noting that economic growth has been weak in both Germany and Estonia over the past few years. In Germany ' s case, the economy is currently navigating a combination of cyclical fl uctuations and structural challenges.

This is a pivotal moment -a time for re fl ection, decisive action, and bold leader -ship. I am optimistic that the new German government will address the struc -tural issues with determination and help its economy to become one of Europe ' s growth engines.

In light of today ' s geopolitical and geoeconomic uncertainties, Europe ' s role is more crucial than ever . Let us seize this opportunity to deepen European integra -tion and emerge stronger together.

If we take the right actions, I am con fi dent that our two economies will soon share two key outcomes once again: vibrant economic growth and enduring security.

For now, I eagerly anticipate our discussion here and my ongoing conversations with Governor Müller. I look forward to exchanging ideas and the opportunity to learn from each other. Thank you for your attention.

## Foot notes:

- Nagel, J. (2025), Economic policy measures to boost growth in Germany, speech held at the Berlin School of Economics, Humboldt University of Berlin. 1.
- See Hammer, L. and M. Hertweck (2022), EU (European Union) enlargement and (temporary) migration: E ff ects on labour market outcomes in Germany, Deutsche Bundesbank Discussion Paper No 02/2022. 2.
- See Weber, E. (2024), The Dovish Turnaround: Germany ' s Social Bene fi t Reform and Job Findings, IAB (Institute for Employment Research)-Discussion Paper 07/2024. 3.
- For a comprehensive analysis of retirement timing in Germany, see Deutsche Bundesbank (2025), Early, standard, late: when insurees retire and how pension bene fi t reductions and increases could be determined, June Monthly Report. 4.
5. See Republic of Estonia Social Insurance Board (2025), Retirement age | Sotsiaalkindlustusamet [https://sotsiaalkindlustusamet.ee/en/pension-and-benefits/applyingpension/retirement-age]
- See Metzger, G. (2024), Start-up activity lacks macro-economic impetus -selfemployed people are becoming more important as multipliers, KfW (Kreditanstalt für Wiederaufbau) Entrepreneurship Monitor 2024, KfW (Kreditanstalt für Wiederaufbau) Research. 6.
- See World Bank Group (2025), . 7. Rankings [https://archive.doingbusiness.org/en/rankings]
- See German Council of Economic Experts (2025), Between hope and fear: Economic weakness and opportunities of the fi scal package, bureaucratic obstacles and structural change, Spring Report 2025, Chapter 3, Section 10. 8.
- See Nurkse, R. (1961), Problems of Capital Formation in Underdeveloped Countries, New York: Oxford University Press, p. 163. The original citation is: ' The limited size of the domestic market in a low income country can thus constitute an obstacle to the application of capital by any individual fi rm or industry working for the market. In this sense the small domestic market is an obstacle to development generally ' . 9.",Joachim Nagel
https://www.bis.org/review/r250710h.htm,Piero Cipollone: Shifting payment landscape - what a digital euro will bring,"Speech by Mr Piero Cipollone, Member of the Executive Board of the European Central Bank, at Bank of Slovenia, Ljubljana, 10 July 2025.",2025-07-10 00:00:00,"SPEECH

## Shifting payment landscape: what a digital euro will bring

## Speech by Piero Cipollone, Member of the Executive Board of the ECB, at Banka Slovenije

Ljubljana, 10 July 2025

It is a pleasure to speak to you today.

The ongoing shift in the way we pay is affecting the fundamental fabric of our economies. Whether we are consumers browsing digital marketplaces, entrepreneurs pursuing digital innovation, or decision-makers facing the digital transition, we are all involved in reshaping payments.

Payments are more than a means of settling transactions, they are the lifeblood of a modern economy. And in a digital world, our economies will only be as competitive, inclusive, autonomous and resilient as our payments are.

Slovenia has put the digital transformation at the heart of its economic strategy, aiming to place the country among the top five most digitalised economies in Europe by 2030. [ ]  An innovative and striving digital payments ecosystem can play a key role in this journey. 1

As a central bank, our responsibility is to accompany and enable this transition. We must ensure that the shift to digital payments enhances accessibility and efficiency, without creating fragmentation or new dependencies. [ ] 2

Let me be clear upfront: this does not mean abandoning cash. Cash serves us well, providing a European means of payment that is accessible, accepted throughout the euro area and continuously available.

People remain attached to cash for good reasons, and we are committed to continuing to provide it. [ ] 3

In fact, we will soon start preparations for a third series of euro banknotes which will bear a new design. [ ] 4

But cash cannot be used for online payments, which represent a growing share of our day-to-day transactions. So we need to extend its benefits to the digital sphere. By introducing a digital euro we would aim to offer a digital equivalent of cash, which preserves Europeans' freedom to pay with sovereign money, is free for basic use, preserves privacy, fosters resilience and is accepted throughout the euro area, for any digital payment. [ ] 5

In preparing for a digital euro, we are carrying out one of our core tasks as defined in the Treaty: providing a means of payment with legal tender status and issuing money as a public good. [ ]  Given this fundamental role, if we were the only player in payments that did not go digital, it would be fair to question 6

whether we would be fulfilling our mandate. By preparing for a digital euro, we are simply adapting to evolving technologies and preferences. [ ] 7

This is particularly important in a monetary union like the euro area [ ] , where 25 years after the launch of the euro, we still lack a European solution that enables people to pay digitally throughout the euro area and for all types of payments. And it is especially relevant today, at a time when dependencies on nonEuropean solutions could be weaponised. [ ] 8 9

A digital euro would be a public-private cooperation, with European payment service providers playing a key role in its distribution. This would allow them to retain fees and data and would also enable banks to maintain client relationships. By contrast, these relationships could be threatened by payment solutions that seek to bypass banks, such as stablecoins which are currently dominated by non-bank and nonEuropean issuers and mostly denominated in dollars.

Moreover, a digital euro would enable payment service providers to scale up and offer their solutions throughout the euro area by leveraging the digital euro's infrastructure and acceptance network. This would remedy the current state of digital payments, which is a case in point of the situation described by Mario Draghi, namely that the fragmentation of the European market along national lines prevents

European firms from being competitive on a European level, let alone globally. [ ] 10

In my remarks today, I will first explore the challenges presented by the current digital transition in payments. I will then explain how the digital euro offers opportunities to address them.

## The shifting landscape for payments

Slovenia offers an appealing snapshot of the transformation which is under way in many European economies. Slovenians are still deeply attached to cash: in 2024 nearly two-thirds (64%) of payments at physical locations in Slovenia were made in cash. Yet digitalisation has been advancing steadily, with the share of card payments at physical locations rising to 29% in 2024, up from 19% in 2016. [ ] 11

This development is not unique to Slovenia. Across the euro area, increasing digitalisation means that online shopping now accounts for over a third of day-to-day retail transactions, while cash payments have fallen to just 24% in value terms.

This shift underscores the importance for us as central banks to not only safeguard trust in money in physical form, but increasingly in digital form too. Our robust defence of cash stems directly from our mandate to issue money that Europeans can use and access throughout the euro area for their day-to-day transactions.

In fact, our work on the digital euro follows logically from our defence of cash. In a world where cash cannot be used for e-commerce transactions and where people also increasingly prefer to pay digitally at physical locations, we must provide a digital equivalent of cash. This will preserve the freedom of Europeans to pay, knowing that a digital euro will be accepted wherever they can opt to pay digitally. And it will allow merchants to reconcile their customers' preference to pay digitally with the benefits of cash as a means of payment that protects them from excessive fees and network disruptions.

If we failed to act, we would not only be failing to fulfil our mandate, we would also risk the digital transformation reversing the progress we have made with euro cash. At present we have no sovereign and inclusive digital means of payment with legal tender status. As a result, the growing use of digital payments risks entrenching our dependency on a small number of private non-European players, subjecting our money to the kindness of strangers. This dependency already results in higher fees for merchants and the transfer of taxpayers' money - in the form of lost seigniorage - outside of Europe.

So today I would like to emphasise three major challenges posed by the ongoing transformation.

The first is that the increased use of digital payments results in a growing reliance on non-European payment providers, which is cause for concern. Two-thirds of card-based transactions in the euro area are processed by international schemes. Some 13 euro area countries are entirely dependent on nonEuropean systems for payments.

Slovenia is a case in point. Despite efforts to promote local schemes, the Slovenian payments ecosystem remains reliant on international card schemes, which dominate the market.

This dependency on non-European payment solutions means that decisions taken outside Europe could affect European consumers' ability to seamlessly conduct everyday digital transactions, hindering Europe's strategic autonomy.

The second challenge is the persistent fragmentation of the European payments market.

Despite the clear benefits of integration, banks have not managed to unite the market. The lack of compelling commercial incentives, especially given the profitability and deep-rooted nature of national payment schemes, has discouraged investment in a pan-European solution. Additionally, coordination among banks, each with distinct interests, priorities and legacy investments, has proven difficult.

And even when the infrastructure and a European scheme are in place, like the TARGET instant payment settlement (TIPS) infrastructure and the SEPA Instant Credit Transfer scheme, we have not seen the emergence of pan-European instant account-to-account payment solutions at the point of sale. European providers do not have the incentive or the capacity to invest in competitive, user-friendly front-end solutions across the euro area.

For example, Slovenia's instant payment scheme, Flik, offers a promising user experience across various payment situations. However, its reach remains limited because it is only available to customers of Slovenian banks, excluding non-residents and domestic users of foreign banks. Moreover, merchant acceptance of Flik does not yet match that of traditional card payments, partly because its customer base is still limited. This reflects a vicious circle where limited acceptance discourages adoption and low adoption disincentivises acceptance by merchants. As well as reducing competition, this makes it impossible to scale up the solutions offered by payment service providers that are unable to massively invest in a European-wide acceptance network.

Instead, as the use of digital payments increases, we are left with a patchwork of domestic solutions that lack the reach and scale to compete effectively across the EU - and sometimes not even at the national level. In Slovenia, Karanta, a national scheme backed by the largest domestic bank, had a market share of just 0.20% in 2024.

This fragmentation is not just inefficient; it makes digital payments more expensive and less convenient than they could be, placing an unnecessary burden on both consumers and merchants. It is estimated that merchants across the euro area pay around €3 billion every year to process international debit cards.

The third challenge relates to the user experience offered by existing solutions. In Slovenia, for example, consumers are forced to use multiple apps, cards and platforms to make payments, resulting in a fragmented and often frustrating experience.

These issues are not specific to Slovenia. They reflect a wider European challenge: the lack of a European-wide acceptance network for an open digital payment infrastructure that matches the reality of our increasingly digital and interconnected economies.

## A digital euro for everyday payments

In light of these challenges, we need to ensure that the benefits of digital payments are enjoyed by all, while at the same time safeguarding our sovereignty and the trust that underpins our single currency.

A digital euro would ensure that central bank money remains universally accessible for everyday transactions, not just in physical form, but also digitally. It would guarantee that citizens can pay anywhere in the euro area using a trusted, risk-free instrument issued by the Eurosystem. This is consistent with the Eurosystem's mandate under the EU Treaties to issue the only means of payment that has legal tender status. A digital euro would be a modern expression of monetary sovereignty.

And let me say it again: the digital euro is not intended to replace cash. It would complement it. We recognise that people across the euro area, and especially in Slovenia, are strongly attached to cash. It remains a vital tool for inclusion, personal freedom and resilience. We are unwavering in our commitment to cash.

At the same time, our responsibility as a central bank is to ensure that, as payments become increasingly digital, citizens can continue to benefit from the trust and security that public money provides. In the long run, maintaining a direct link to a central bank-issued means of payment that is usable at the point of sale across all use cases may be essential in preserving trust in commercial bank money. [ ]  Moreover, without a public digital alternative, consumers and merchants would be increasingly dependent on the terms, prices, and data practices set by a few, mostly non-European, private actors. For instance, over the past few years the average net merchant service charges in the EU have nearly doubled, despite regulatory efforts to contain them. 12

Introducing a digital euro would provide an attractive alternative to foreign payment solutions and is the only way to ensure Europe's monetary sovereignty. It would guarantee that the euro can always be used for digital payments anywhere in the euro area, ensuring that Europeans retain the freedom to make transactions seamlessly and securely, independent of decisions taken outside the EU.

Moreover, the digital euro would address the persistent fragmentation that is hampering the retail payments market. The lack of incentives and coordination among European banks to develop a continentwide solution for payments at the point of sale is understandable but hard to overcome, given the significant investments that are needed to challenge entrenched foreign providers, their acceptance network and their proprietary standards. Instead, national payment solutions remain dependent on nonEuropean firms to offer a comparable in-shop payment experience, as is the case for cross-border or tapto-pay payments, for example.

So, just as the introduction of euro banknotes united Europe 23 years ago and brought tangible benefits to its citizens, the digital euro has the potential to create a truly integrated digital payments landscape that preserves the two-tier payment system and the healthy equilibrium between public and private money that has served us so well for so long. [ ]  As central bank money, it would have legal tender status, meaning it would be accepted everywhere, instantly generating powerful network effects. Leveraging its open standards and acceptance network would give European payment providers the scale and certainty they need to innovate and expand. 13

This would also benefit banks who are currently losing fees and data to the dominant international payment solutions and could soon also lose deposits to stablecoins, which are dominated by nonEuropean firms and are denominated in US dollars for 99% of their value.

For European payment service providers, establishing common standards through the digital euro would enable platforms such as Flik to extend their reach domestically and to operate across all euro area countries from the outset, just as easily as national schemes do within national borders. This would open up the market to fairer competition, forcing established players to adjust the costs they impose on merchants, particularly small and medium-sized enterprises. Consumers would ultimately benefit through lower prices.

We are designing the digital euro platform in such a way that it expands the range of possible conditional payments - think of automatic reimbursements in the event of train or flight delays, for example. This will increase choice and stimulate innovation, leading to a richer and more user-friendly experience for everyone. The digital euro would rely on a new settlement ledger, intended to support advanced payment functionalities, including conditional payments. Our prototyping and experimentation have shown that such payments can be implemented by leveraging application programming interfaces - or APIs as they're known. In recent months we have partnered with some 70 merchants, fintech companies, start-ups, banks and other payment service providers, including from Slovenia, to explore the potential of the digital euro to drive innovation. We will share our findings soon. [ ] 14

The digital euro would offer a comprehensive and smooth user experience for consumers that covers all use cases: payments in shops, online and between individuals. It would provide integrated online and offline functionalities all while upholding the highest privacy standards. The offline functionality would offer cash-like privacy, with transaction details known only to the payer and the payee. [ ]  Such an all-in-one solution does not currently exist, and its introduction would mark a significant step forward for Europe. 15

## Conclusion

Let me conclude.

Building an agile and robust digital payments ecosystem is essential for Europe's digital transformation. Ignoring this task risks further fragmentation and dependencies, resulting in a less convenient and more costly payment experience for consumers and merchants, including in Slovenia.

The digital euro offers a solution: a European public good that will complement cash, ensuring trust, sovereignty, and universal access to secure, cost-free payments across the euro area. It will empower people and businesses in Slovenia and beyond to transact easily and safely, online and offline, at home and across borders. And it will allow European private payment solutions to scale up and become more competitive.

Ultimately, the digital euro is more than a currency innovation - it is a public commitment to the future of Europe's digital economy. It embodies our shared values of openness, resilience and fairness, ensuring that as our economies evolve, no one is left behind and that Europe remains in control of its monetary destiny.

1.

Slovenian Ministry of Economic Development and Technology (2022), . Strategy for the digital transformation of the economy

2.

The Eurosystem has the statutory task of promoting the smooth operation of payment and settlement systems (see Article 127(2) of the Treaty on the Functioning of the European Union and Articles 3 and 22 of the Statute of the European System of Central Banks and of the European Central Bank).

3.

ECB (2025), ' '. The Eurosystem cash strategy

- 4.

ECB (2025), ' ' and ECB (2025), ' ', press release , 31 January. Future banknotes ECB selects motifs for future euro banknotes

5.

Cipollone, P. (2024), ' ', The ECB Blog , ECB, 1 November. The digital euro: what's in it for you?

6.

The Eurosystem (the ECB and the national central banks of the euro area) has the task of issuing euro banknotes, which have the status of legal tender (see Article 128(1) of the Treaty on the Functioning of the European Union and Article 16 of the Statute of the European System of Central Banks and of the European Central Bank). See also , OJ C, C/2024/669, 12.1.2024. Opinion of the European Central Bank of 31 October 2023 on the digital euro (CON/2023/34)

- 7.

See Article 1 of the : 'With a view to adapting the euro to technological changes and to ensuring its use as a single currency, this Regulation establishes the digital euro and lays down rules concerning in particular its legal tender status, distribution, use, and essential technical features.' Proposal for a Regulation of the European Parliament and of the Council on the establishment of the digital euro

- 8.

Lane, P.R. (2025), ' ', keynote speech at University College Cork Economics Society Conference 2025, 20 March. The digital euro: maintaining the autonomy of the monetary system

9. introductory statement at the Committee on Economic and Monetary Affairs of the European Parliament, 8

Cipollone, P. (2025), ' ', April. Empowering Europe: boosting strategic autonomy through the digital euro

10.

Draghi, M. (2024), , September. The future of European competitiveness

- 11.

ECB (2024), , December. Study on the payment attitudes of consumers in the euro area (SPACE)

12.

See Lane, P.R. (2025), ibid, and Panetta, F. (2023), ' ', speech at the CEPR-ECB Conference 'The macroeconomic implications of central bank digital currencies', Frankfurt am Main, 23 November. The cost of not issuing a digital euro

13.

See Lane, P.R. (2025), ibid. and Panetta, F. (2021), ' ', speech at the Elcano Royal Institute, Madrid, 5 November. Central bank digital currencies: a monetary anchor for digital innovation

14.

See ECB (2025), ' ', press release , 5 May and Cipollone, P. (2025), ' ECB partners with private sector through digital euro innovation platform Harnessing the digital future of payments: Europe's path to

Copyright 2025, European Central Bank

', speech at the France Payments Forum event 'Digital euro and the future of payments in Europe', Paris, 15 May. sovereignty and innovation

15.

See ECB (2025), ' ' and Daman, M. (2024), ' ', The ECB Blog , ECB, 13 June. Digital euro and privacy Making the digital euro truly private",Piero Cipollone
https://www.bis.org/review/r250710g.htm,Philip R Lane: The monetary agenda at the European Central Bank,"Remarks by Mr Philip R Lane, Member of the Executive Board of the European Central Bank, at the House of the Euro, Brussels, 9 July 2025.",2025-07-09 00:00:00,"SPEECH

## The monetary agenda at the ECB

## Remarks by Philip R. Lane, Member of the Executive Board of the ECB, at the House of the Euro

Brussels, 9 July 2025

My goal today in these remarks is to outline the current monetary agenda at the ECB. [ ] I will start with the monetary policy stance before turning to our updated monetary policy strategy. I will then briefly discuss the euro area bond market before concluding with a monetary perspective on the digital euro project. 1

## The monetary policy stance

In a recent speech, I assessed that the challenge of returning inflation to the target after the 2021-2022 inflation surges can be considered to be largely complete. [ ]  The orientation now for the monetary policy stance is to make sure that the current shocks and prospective new shocks hitting the economy do not lead to medium-term deviations of inflation from our two per cent target. 2

In terms of significant data developments in recent months, there has been a marked drop in energy prices and a substantial appreciation of the euro. These forces played an important role in the June 2025 Eurosystem staff macroeconomic projections. In addition, the fiscal outlook has materially changed for the coming years, with the overall fiscal deficit looking set to remain above three per cent over the projection horizon.

Guarding against the risk of temporary deviations from target turning into longer-term deviations was an important factor in our June decision to cut rates by 25 basis points. By supporting the pricing pressure needed to generate target-consistent inflation in the medium term, this cut helps ensure that the projected negative inflation deviation over the next eighteen months remains temporary and does not convert into a longer-term deviation of inflation from the target.

Currently, there is high uncertainty about the future of the international trade system. This uncertainty extends beyond the calibration of new tariff regimes and includes the possibility of a broader set of nontariff barriers, a deeper intertwining of economic policies and security policies and possible revisions to the treatment of foreign portfolio investors and foreign direct investors.

Especially under current conditions of high uncertainty, it is essential to remain data dependent and take a meeting-by-meeting approach in making monetary policy decisions, with no pre-commitment to any particular future rate path. In addition to observing how activity and inflation are actually behaving, data dependence also extends to the incoming data on policy settings outside the monetary domain, since shifts in international and domestic policy regimes are highly relevant for future inflation dynamics.

## Our updated monetary policy strategy

The emphasis on two-sided uncertainty about inflation dynamics very much reflects the analysis that underpins the recently announced update to our monetary policy strategy. [ ]  In addition to the geopolitical tensions outlined above, our updated monetary policy strategy statement also identified ongoing structural shifts related to digitalisation, artificial intelligence, demography, the threat to environmental sustainability and changes in the international financial system as suggesting that the inflation environment will remain uncertain and potentially more volatile, with larger target deviations in both directions, posing challenges for the conduct of monetary policy. 3

In terms of the implications for monetary policy, our assessment is that the symmetric two per cent medium-term inflation target - which has served us well and remains unchanged - is best protected by appropriately forceful or persistent monetary policy action in response to large, sustained deviations of inflation from the target in either direction, to avoid deviations becoming entrenched through de-anchored inflation expectations. In the event of significant disinflationary shocks, the effective lower bound on nominal interest rates needs to be taken into account. In the event of significant inflationary shocks, possible non-linearities in price and wage-setting need to be taken into account.

The flexibility of the medium-term orientation recognises that the appropriate monetary policy response to a deviation of inflation from the target is context-specific and depends on the origin, magnitude and persistence of the deviation. Subject to maintaining anchored inflation expectations, it also allows the Governing Council in its monetary policy decisions to cater for other considerations relevant to the pursuit of price stability.

The Governing Council bases its monetary policy decisions, including the evaluation of the proportionality of its decisions and potential side effects, on an integrated assessment of all relevant factors. Our updated strategy makes explicit that our monetary policy decisions incorporate not only the most likely path for inflation and the economy but also surrounding risks and uncertainty, including through the appropriate use of scenario and sensitivity analyses.

A systematic but context-specific approach to incorporating the surrounding risks and uncertainty can include, in addition to conducting a regular risk assessment, analysing the sensitivity of projections and policy choices to changes in the underlying technical assumptions and model parameters as well as exploring a range of alternative scenarios, especially in relation to specific risk events.

In the internal preparation of monetary policy decisions, ECB staff have conducted sensitivity and scenario analyses for many years. [ ]  In recent years, some of this analysis has been published: this includes scenarios related to the pandemic, the unjustified Russian invasion of Ukraine, the conflicts in the Middle East and trade policy uncertainty. As we implement the updated monetary policy strategy, the incorporation of risks and uncertainty will be enhanced both in the internal preparation of monetary policy decisions and, where appropriate, in the communication of our decisions. 4

While our primary instrument is the setting of our policy rates, the Governing Council may also employ other instruments, as appropriate, to steer the monetary policy stance when the policy rates are close to the lower bound or to preserve the smooth functioning of monetary policy transmission. The list of 'unconventional' instruments includes longer-term refinancing operations, asset purchases, negative interest rates and forward guidance. The incorporation of risks and uncertainty into monetary policy decisions also has implications for the use of such instruments. In particular, the choice, design and implementation of instruments will enable an agile response to new shocks and will appropriately reflect the intended aims, whether the calibration of the monetary policy stance or the protection of monetary policy transmission, subject to a comprehensive proportionality assessment. [ ] 5

## A more resilient euro area financial architecture

Our updated monetary policy strategy statement also assesses that: 'A more resilient financial architecture - supported by progress on the savings and investments union, the completion of banking union and the introduction of a digital euro - would also support the effectiveness of monetary policy in this evolving environment'.

It is beyond the scope of these remarks to review the full policy agenda in relation to the savings and investments union and the completion of banking union. Of course, the net gains from improving financial intermediation and financial integration depend on the scale of progress in implementing the pro-growth economic reform agenda, as laid out in the Draghi and Letta report. The European Commission's Competitiveness Compass provides a concrete roadmap for action, and its proposals, including on simplification, should be swiftly adopted.

Let me pick up on an important dimension of improving the euro area financial architecture by briefly discussing the potential value of an expanded pool of euro-denominated safe assets in making the euro area capital market more attractive for both European and global investors. [ ] 6

The bund is the highest-rated large-country national bond in the euro area. However, the stock of bunds is too small relative to the size of the euro area or the global financial system. Especially in the context of much smaller and less volatile spreads, other national bonds also directionally contribute to the stock of safe assets. While the residual potential volatility in spreads and the lower liquidity of these bonds ultimately put a ceiling on their contribution to the supply of safe asset supply, the overall attractiveness of the euro area bond market ultimately depends on each member state ensuring fiscal sustainability, including through the shared commitment to implement the European fiscal framework in a rigorous manner.

In principle, common bonds backed by the combined fiscal capacity of the EU member states should constitute a high-grade category of safe assets. However, the current stock of such bonds is simply too small to foster the necessary liquidity and risk management services (e.g. derivative markets and repo markets) that are part and parcel of serving as a safe asset. Moreover, as it stands, the stock of supranational euro bonds is currently projected to shrink over time, in view of the scheduled repayment of the NGEU bonds and, over time, the retirement of ESM bonds as the ESM loans get repaid.

There are several ways to expand the stock of common bonds. For instance, the member countries could decide to finance investment in European public goods through more common debt. From a public finance perspective, it is natural to match European public goods with common debt in order to align the financing with the area-wide benefits of such public goods. In addition to EU-wide initiatives, there could also be scope for common issuance by sub-groups of member countries in the context of possible 'coalition of the willing' shared investment projects.

Furthermore, in order to meet the rising global demand for euro-denominated safe assets more quickly, there are a number of ways to generate a larger stock of safe assets from the current stock of national bonds. [ ]  For instance, Olivier Blanchard and Ángel Ubide have proposed that the 'blue bond/red bond' scheme (which was originally floated in 2010) be re-examined. [ ] 7 8

Under the Blanchard-Ubide proposal, each member country would ringfence a dedicated revenue stream (for example, a certain amount of indirect tax revenues) that could be used to service commonly issued bonds. In turn, the proceeds of issuing common bonds (blue bonds) would be deployed to purchase a given amount of the national bonds (red bonds) of each participating Member State. This mechanism would result in a larger stock of blue bonds and a lower stock of red bonds. While this type of financial reform was originally proposed during the euro area sovereign debt crisis, the conditions today are far more favourable, especially if the scale of blue bond issuance were to be calibrated in a prudent manner in order to mitigate some of the identified concerns.

In particular, the Blanchard-Ubide proposal gives the example of a stock of blue bonds corresponding to 25 per cent of GDP. Just to illustrate the scale of the required fiscal resources to back this level of issuance: if bond yields were in the range of 2 to 4 per cent on average, the servicing of blue bond debt would require ringfenced tax revenues in the range of 0.5 to 1 per cent of GDP. While this would constitute a significant shift in the current allocation of tax revenues between national and EU levels, it would still leave tax revenues predominantly at the national level (the ratio of tax revenues to GDP in the euro area ranges from around 20 to 40 per cent). The shared payoff would be the reduction in debt servicing costs generated by the safe asset services provided by an expanded stock of common debt.

An alternative and possibly complementary approach that could also deliver a larger stock of safe assets from the pool of national bonds is provided by the sovereign bond-backed securities (SBBS) proposal. This proposal envisages that financial intermediaries (whether public or private) could bundle a portfolio of national bonds and issue tranched securities, with the senior slice constituting a highly safe asset. The SBBS proposal has been studied extensively (I chaired an ESRB report on it) and draft enabling legislation has been prepared by the European Commission. [ ] Just as with the blue bond/red bond proposal, sufficient issuance scale would be required in order to foster the market liquidity needed for the senior bonds to act as highly liquid safe assets. 9

Finally, in relation to the digital euro, our updated monetary policy strategy statement also states that introducing a digital euro would support the effectiveness of monetary policy. In particular, as I outlined in a recent speech, a digital euro could help maintain the monetary autonomy of the euro area by ensuring a direct retail role for central bank digital currency can help maintain the monetary autonomy of the euro area. [ ]  By supplementing physical cash with digital cash, this would improve resilience by modernising the traditional two-tier monetary system whereby both cash and bank deposits can be used as a medium of exchange. This modernised system would best protect the euro's capacity to serve as the medium of exchange and unit of account. [ ] 10 11

According to some advocates, an alternative approach to adapting the monetary system to a digital age would be to promote stablecoins, issued and operated by private sector intermediaries. There may be some potentially valid use cases for stablecoins, especially in relation to improving the efficiency of crossborder payments, at least compared to the incumbent global payments infrastructure. However, stablecoins lack key attributes of central bank money. Among other limitations, as highlighted in the recent Annual Economic Report, by the Bank for International Settlements, the supply of stablecoins is not elastic (unlike central bank money) since their issuance is driven by upfront purchases by customers. In contrast, central bank money can be issued elastically (especially during a crisis) by lending to counterparties or through open market operations. Additionally, one-to-one parity between the value of a stablecoin and the value of a currency cannot be guaranteed under all circumstances, such that stablecoins do not protect the singleness of money.

An effective medium of exchange requires that the monetary system and the payments system form a symbiotic ecosystem. Currently, the euro area payments system is highly fragmented along national lines and many customers are dependent on non-European card or e-wallet providers to make payments across the euro area. By mandating acceptance of the digital euro, instant network effects would help to unify the currently-fragmented market, reducing costs for merchants and indirectly also for households. Such an area-wide fast payment system is unlikely to develop in the absence of the area-wide payment rails provided by the digital euro infrastructure.

For these reasons, the digital euro is a high priority project for the Eurosystem, subject to the enabling legislation being adopted by the European Parliament and the Council of the European Union.

1.

The views expressed in these remarks are personal and should not be interpreted as representing the collective view of the ECB Governing Council.

2.

See Lane, P.R. (2025), ' ', speech at the Barclays-CEPR Monetary Policy Forum 2025, London, 24 June. Monetary policy: new challenges

3.

The monetary policy strategy statement, the accompanying overview note and the two occasional papers containing the Eurosystem staff analysis that supported the assessment exercise are available on the ECB's . website

4.

See also Lagarde, C. (2025), ' ', introductory speech at the opening reception of the ECB Forum on Central Banking 2025 on 'Adapting to change: macroeconomic shifts and policy responses', Sintra, 30 June; Lane, P.R. (2024), ' ', keynote speech at the Bank of England Watchers' Conference 2024, London, 25 November; and Lane, P.R. (2025), ' ', remarks at the Second Thomas Laubach Research Conference, Washington, D.C., 16 May. Strategy assessment: lessons learned Monetary policy under uncertainty The communication of monetary policy decisions: incorporating risks and uncertainty

5. See also paragraph 8 of the monetary policy strategy statement and section 3.3 of the overview note.

6.

This section draws on a recent speech. See Lane, P.R. (2025), ' ', keynote speech at the Government Borrowers Forum 2025, Dublin, 11 June. The euro area bond market

7.

For a discussion of alternative models for a European Debt Agency that would issue common bonds, see L.Bottazzi, C. Favero, R. Fernandez Fuertes, F. Giavazzi, V. Guerrieri, G. Lorenzoni and T. Monacelli (2025), ' ,' Monetary Dialogue Papers June 2025, ECON committee of the European Parliament. The conduct of ECB monetary policy under uncertainty

8.

Blanchard, O. and Ubide, Á. (2025), ' ', Realtime Economics , Peterson Institute for International Economics, 30 May; Leandro, Á. and Zettelmeyer, J. (2019), ' ', Capital Markets Law Journal , Vol. 14, No 4, pp. 488-517. Now is the time for Eurobonds: A specific proposal Creating a euro area safe asset without mutualizing risk (much)

9.

The SBBS proposal originated in the European Safe Bonds (ESBies) proposal. See Brunnermeier, M.K. et al. (2011), ' ', Euro-nomics , 30 September; Brunnermeier, M.K. et al. (2016), 'The Sovereign-Bank Diabolic Loop and ESBies', American Economic Review , Vol. 106, No 5, pp. 508-512; and Brunnermeier, M.K. et al. (2017), 'ESBies: safety in the tranches', Economic Policy , Vol. 32, No 90, pp. 175-219. See also Volumes I and II of the Report of the and European Commission (2018), ' ', 24 May. European Safe Bonds (ESBies) ESRB High-Level Task Force on Safe Assets Proposal for a regulation on sovereign bond-backed securities

Lane, P.R. (2025), ' ,' speech at the University College Cork Economics Society Conference 2025, Cork, 20 March. For a complete guide to the digital euro project (including its crucial role in delivering a euro area-wide point-of-interaction fast payments system), see the . The digital euro: maintaining the autonomy of the monetary system ECB's dedicated web page

11.

While it can be theorised that the euro area monetary system could probably remain functional even without a retail digital euro, the ECB is tasked with safeguarding monetary stability in all circumstances. Prudence calls for a monetary architecture that is resilient.

Copyright 2025, European Central Bank",Philip R Lane
https://www.bis.org/review/r250710d.htm,Eddie Yue: Launch of the Anti-Scam Consumer Protection Charter 3.0,"Welcome remarks by Mr Eddie Yue, Chief Executive of the Hong Kong Monetary Authority, at the launch of the Anti-Scam Consumer Protection Charter 3.0, Hong Kong, 9 July 2025.",2025-07-09 00:00:00,"## Eddie Yue: Launch of the Anti-Scam Consumer Protection Charter 3.0

Welcome remarks by Mr Eddie Yue, Chief Executive of the Hong Kong Monetary Authority, at the launch of the Anti-Scam Consumer Protection Charter 3.0, Hong Kong, 9 July  2025.

* * *

Good afternoon everyone. It is my great pleasure to welcome you all to the launch of the Anti-Scam Consumer Protection Charter 3.0.

Digitalisation has proven to be positive and constructive in many ways, such as the convenience brought by digital payments and online shopping. Unfortunately, increased digital activities have also made fraud and scams easier to set up and reach members of the public on an unprecedented scale. According to the Police, more than 44,000 cases of deception were recorded in 2024, representing a fourfold increase over the past five years.

While the Hong Kong Monetary Authority and the banking sector have been at the forefront in fighting digital fraud and scams, this fight cannot be won by any single party or sector alone. It requires cross-sectoral collaboration, bringing together the public and private sectors, as well as the community at large. That is why we launched the first two Anti-Scam Consumer Protection Charters in 2023 and 2024. More than 300 financial institutions and merchants participated in these two earlier Charters, committing not to send out messages with embedded links requesting key personal information, thereby raising public awareness against phishing scams.

However, digital fraud and scams have evolved far beyond phishing links. The threats of fraud and scams via online instant messaging or social media platforms, phone calls, and SMSs are becoming increasingly sophisticated.  Many of us, including myself, are receiving numerous suspicious messages and phone calls on a frequent basis. Some of these messages or calls may be advertising fake investment or job opportunities, while some pretend to be law enforcement agencies, family members, or friends. Scammers are even using technology such as deepfake to fabricate voices and images of government officials and reputable businessmen to try to make these fake online contents look more convincing.

To combat these evolving threats, it is crucial to collaborate with technology and telecommunications companies to tackle the problem at the platform level. Internationally, there is a growing recognition of the need to take down fraudulent contents and check the authenticity of advertisers more efficiently on these platforms. Here in Hong Kong, the Hong Kong Monetary Authority, together with our fellow regulators and great partners in our previous Charter 2.0, the Securities and Futures Commission, the Insurance Authority and the Mandatory Provident Fund Schemes Authority, have also been proactively reaching out to the technology and telecommunications companies to explore anti-fraud collaborations.

Today, we are taking a significant step forward by jointly launching the Anti-Scam Consumer Protection Charter 3.0 together with the major technology and telecommunications companies that operate in Hong Kong to combat fraud and scams.

We are glad to see many representatives from these companies here today, demonstrating their commitment to this initiative. We are also thankful to the support of the Consumer Council, the Hong Kong Association of Banks, the Hong Kong Police Force and the Office of the Communications Authority to this important initiative.

The Anti-Scam Consumer Protection Charter 3.0 consists of six principles specifically designed to proactively prevent and detect fraud and scams on online platforms and telecommunication networks. These principles focus on four main areas:

- The first area is on reporting.  Under the Charter 3.0, participating firms will provide users with reporting functions and provide financial regulators with a direct and efficient channel for reporting suspected fraud and scams for follow-up in a reasonable manner.
- The second area is on checking the identity of advertisers and ongoing monitoring of advertisements and contents. Firms participating in the Charter 3.0 will adopt a risk-based approach to facilitate verification of advertisers and put in place internal policies and tools to monitor advertisements and contents that promote financial products or services on their platforms, with a view to creating a safe online environment for users.
- The third area is on taking down fraudulent advertisements and contents. Participating firms commit to enforcing their own terms of service by detecting and removing financial scam advertisements or contents that violate their platform policies.
- Finally, educating the public to be aware and capable of recognising suspicious activities is always essential in stopping fraud and scams. We will work closely with participating firms to launch various anti-deception promotional campaigns through a wide range of platforms and channels to raise public awareness.
- At the panel discussions later this afternoon, representatives from the technology and telecommunications sectors will elaborate on how they apply the Charter principles in their daily work.

Charter 3.0 represents an important milestone in the collaboration among the financial, technology, and telecommunications sectors in fighting fraud and scams. It lays the foundation of cooperation from which we will further build upon. We thank the participating firms for your support and commitment to the Charter 3.0 and we will continue to work closely with each other to provide a safe online environment and protect the public from fraud and scams.

Thank you very much.",Eddie Yue
https://www.bis.org/review/r250710b.htm,Caroline Abel: Monetary and financial sector issues in Seychelles and how ATI training can help build human capital in these areas,"Intervention (virtual) by Ms Caroline Abel, Governor of Central Bank of Seychelles, at the Africa Training Institute (ATI) Steering Committee Meeting panel discussion ""Monetary and financial sector issues"", Victoria, 1 July 2025.",2025-07-01 00:00:00,"## Caroline Abel: Monetary and financial sector issues in Seychelles and how ATI training can help build human capital in these areas

Intervention (virtual) by Ms Caroline Abel, Governor of Central Bank of Seychelles, at the Africa Training Institute (ATI) Steering Committee Meeting panel discussion ""Monetary and financial sector issues"", Victoria, 1 July 2025.

* * *

Madam Chair, Hon. Minister of Economy and Finance of Madagascar, Rindra Hasimbelo Rabarinirinarison,

Director of AFS/ATI Mr Sukhwinder Singh,

All Colleagues attending the meeting,

Good afternoon.

Thank you for the opportunity to briefly share our experience in terms of monetary and financial sector developments, and capacity building received in these areas.

Major reforms in these two areas began late 2008, when Seychelles embarked on an IMF-supported macroeconomic reform programme. Aside from addressing the prevailing macroeconomic imbalances then, there was also a need to strengthen the regulatory framework and modernise the financial system. In addition, the Bank had to put in place the required market-based instruments to support the introduction of its new monetary policy framework. So, to better understand the extent of the task that laid ahead, we received technical assistance from the IMF in 2007, to assess the Bank's capacity building needs in the field of foreign exchange, bank supervision and monetary policy, aside from others.

With regard to monetary policy, reforms were crucial in view of the change in the foreign exchange regime. Whilst we started off with a reserve money targeting framework, over the years, the Central Bank of Seychelles has gradually moved towards providing more guidance to the domestic market. In 2019, the Bank adopted an interest-rate based framework, whereby the focus is on guiding short-term interest rate through the announcement of a Monetary Policy Rate by the Bank. We received extensive technical assistance throughout - from the design of the policy tools to the finer details of communication - and this was complemented by short-term courses that staff attended.

In terms of capacity building, the IMF, ATI and AFRITAC South have been very supportive. Our staff have benefitted from various training opportunities, both in-person and through online learning platforms. These have been in key areas, such as various aspects of monetary policy analysis and implementation, the Forecasting and Policy Analysis System (FPAS), nowcasting, liquidity forecasting and management, to name a few. To note that, at the Bank, the knowledge acquired is applied in daily operations and underpins many outputs, including the collection of statistics on the monetary, real, and external sectors, which align with IMF manuals and guidelines. With regard to the financial sector, support was received to align the Bank's supervisory framework with

best international practices. These focused on areas such as financial sector policies, bank supervision, AML/CFT, financial stability, and lately, climate change issues, amongst others. The Bank has been pursuing steps to strengthen its supervisory framework, so that it is more risk-sensitive and forward-looking, through its Risk-Based Supervision (RBS) framework. The Bank is also actively pursuing the climate change agenda, given the implications such a phenomenon could have on our economy. This is an area where we have reached out to various partners in an effort to build internal capacity, as we are conscious of the limited expertise that exists out there as well.

As we operate in an increasingly interconnected world, we also need to move in tune with innovations in the industry. The digitalisation of the financial sector brings countless opportunities and rewards, yet as we are all aware, very high risks. Another area that the Central Bank has been increasingly focusing on is cybersecurity, as this could have far-reaching repercussions. Just last week, the AFS completed a 5-day workshop for the Central Bank staff on strengthening cybersecurity practices, with particular emphasis on their application to both onsite and offsite banking supervision, as well as oversight of financial market infrastructures. The sessions provided valuable insights into identifying and assessing cyber risks, integrating cybersecurity into supervisory frameworks, and enhancing institutional resilience. Practical case studies and supervisory tools were also shared to support the effective implementation of cyber risk oversight across regulated entities and systemically important infrastructures.

Being a small economy, Seychelles faces certain challenges in terms of human resources. In general, the financial sector finds it difficult to meet its human resource needs, as often times, qualified labour in specialised fields is scarce, and everyone is chasing the same few candidates available. In this context, the training provided by institutions like ATI and AFRITAC South goes a long way in helping to bridge the gap for our existing staff.

As both global and domestic economies evolve, building capacity remains essential. Current discussions revolve around critical topics such as financing climate change adaptation and mitigation, tackling climate-related risks, FinTech innovations, the increasing role of artificial intelligence and machine learning, and cybersecurity. The IMF and its partners offer a wealth of resources - including training, seminars, conferences and technical assistance - to help member countries enhance their staff's technical capabilities, ensuring they are equipped to navigate these challenges and seize emerging opportunities.

To conclude, I would like to underscore the role and importance of organisations like ATI and AFRITAC South in supporting the development of national institutions, enabling the implementation of best practices across various jurisdictions. Moreover, shared experiences among participants and drawing on the knowledge of the lecturers help in building capacity at different levels. As such, I urge members to continue supporting the capacity development programmes of ATI and AFRITAC South, as collectively, we are all benefitting greatly from them.

Thank you.",Caroline Abel
https://www.bis.org/review/r250710c.htm,Elizabeth Genia: 42nd Green Climate Fund Board Meeting,"Keynote address by Ms Elizabeth Genia, Governor of the Bank of Papua New Guinea, at the closing dinner of the 42nd Green Climate Fund Board Meeting, Port Moresby, 2 July 2025. ",2025-07-02 00:00:00,"## Elizabeth Genia: 42nd Green Climate Fund Board Meeting

Keynote address by Ms Elizabeth Genia, Governor of the Bank of Papua New Guinea, at the closing dinner of the 42nd Green Climate Fund Board Meeting, Port Moresby, 2 July 2025.

* * *

Hon Deputy Prime Minister,

Hon. Minister Kilepa,

Executive Director Ms Duarte,

Distinguished Members of the Green Climate Fund Board,

Development Partners and Dear Friends,

Good evening to you All

It has been our pleasure to welcome you to our nation's capital, Port Moresby.

On behalf of the Bank of Papua New Guinea and all who have been involved this week, thank you for being here and for bringing your commitment, your questions, your expertise, and above all, your shared purpose.

We never take for granted what it means for Papua New Guinea to host a gathering like this.

It matters deeply to us that voices from Small Island Nations can be heard - not just in technical sessions or in written submissions, but with a seat at the table - in our own region - and with our own perspectives guiding the conversation.

In PNG, climate change is not a distant concept.

It is lived daily - along our coastlines - in our flood-prone valleys - and among our communities working to protect the forests that store carbon for the world.

When the Board of the Green Climate Fund makes room for countries like ours to contribute as thought partners, it sends a powerful message to us that you know - and you understand - the path we are travelling on.

We are sincerely grateful for the GCF's funding of 63 million dollars to assist with PNG's efforts to manage our forests more sustainably.

This support will have a real impact.

Not just for the environment, but for the livelihoods and wellbeing of the many people involved in sustainable forest management activities in Papua New Guinea.

It is an important contribution to global climate mitigation efforts and we commend the GCF for its unwavering leadership in driving global efforts toward climate-resilient development.

The deliberations this week have also reinforced the essential role institutions like the GCF play in ensuring that countries such as ours can access the support and resources necessary to tackle the climate crisis.

As a Central Bank, the Bank of PNG never imagined we would one day be leading green finance programs.

But as we've listened and learned, especially from other countries in our region, we've come to understand that if climate resilience is to be real, it must run through our entire economic system.

It must embrace the way we manage risk, regulate banks and think about growth.

We now recognize both the systemic risks of climate change and the powerful role that finance can play in mitigating them.

For Small Island Developing States (SIDS), resilience is not merely aspirational

- it is existential and Central Banks must take an active role in enabling the transition to low-emission, climate-resilient economies while safeguarding financial system stability.

Strategic alliances with development partners are essential and I would also like to acknowledge the invaluable support and strategic partnerships of some other key development allies

- including the Australian and New Zealand Governments, the French Development Bank, the International Finance Corporation, the Alliance for Financial Inclusion, and the Global Green Growth Institute.

With the help of our development partners, we have made some remarkable progress in laying the foundation for a sustainable finance ecosystem.

We launched our national Green Taxonomy, introduced our Inclusive Green Finance Policy, and established the Green Finance Centre under the Bank of Papua New Guinea to lead and coordinate our efforts.

Earlier this year, we hosted our inaugural Green Finance Summit, bringing international agencies, private investors, and domestic financial institutions together to align on a national climate finance roadmap.

These collaborations have helped us take practical steps, small at first, but building momentum;

- the momentum has been extraordinary - and it continues to grow.

Under our Sustainable Finance Roadmap, we are advancing two flagship green financial instruments:

- the Green Refinancing Facility and the Green Guarantee Facility.

Scheduled to go live by August 2025, these facilities will help de-risk and unlock climate-aligned lending across the banking sector.

We are also developing thematic bond guidance, with the aim of PNG's first green bond issuance in 2026

- a significant step towards diversifying our financing tools.

Papua New Guinea's green finance roadmap is strongly aligned with the GCF's strategic priorities;

- particularly in unlocking private capital, building institutional capacity, and supporting the market for green finance instruments in countries vulnerable to climate change.

None of these initiatives is about making a grand announcement.

It is about moving, steadily and with purpose, towards systems that serve both the people and the planet.

It has also meant asking ourselves hard questions.

About equity, about access, and about how to create conditions where private capital can work for public good, without losing sight of the needs of the most vulnerable.

We know we're still learning.

But we hope our experience might offer something useful to others, just as we've drawn so much from the examples and encouragement of fellow SIDS (small island developing states) and developing nations who are walking similar paths.

## To the GCF Board:

- thank you for spending this time with us.

For listening, for challenging and for believing that it is possible to shift the centre of gravity in climate finance to places like the Pacific, where the stakes are high;

- but the commitment to our combined global efforts to tackling climate change runs deep.

Please enjoy the rest of your stay in Port Moresby, and safe travels as you return home.

Tenkiu tru.",Elizabeth Genia
https://www.bis.org/review/r250709h.htm,P Nandalal Weerasinghe: Launch of key financial literacy initiatives,"Speech by Dr P Nandalal Weerasinghe, Governor of the Central Bank of Sri Lanka, at the Central Bank of Sri Lanka's assembly to mark a pivotal milestone in Sri Lanka's financial inclusion progression, Colombo, 3 July 2025.",2025-07-03 00:00:00,"## P Nandalal Weerasinghe: Launch of key financial literacy initiatives

Speech by Dr P Nandalal Weerasinghe, Governor of the Central Bank of Sri Lanka, at the Central Bank of Sri Lanka's assembly to mark a pivotal milestone in Sri Lanka's financial inclusion progression, Colombo, 3 July 2025.

* * *

It is with profound honor and privilege that I address this distinguished assembly today as we mark a pivotal milestone in Sri Lanka's financial inclusion progression - the launch of transformative initiatives under our Financial Literacy Roadmap. These groundbreaking programs embody our steadfast commitment to equipping every Sri Lankan with the essential knowledge, competencies, and mindset required to navigate the complexities of modern finance with confidence and wisdom.

## A Strategic Foundation for Financial Inclusion

The Central Bank of Sri Lanka, empowered by the provisions of the new Central Bank Act No. 16 of 2023, has embraced the mandate of promoting financial inclusion as a fundamental pillar of our institutional mission. While our dedication to financial inclusion spans decades of continuous effort, 2021 marked a paradigmatic shift as we launched Sri Lanka's inaugural National Financial Inclusion Strategy (NFIS), developed in strategic partnership with the International Finance Corporation (IFC). This comprehensive framework provided us with an ambitious vision, clearly defined objectives, and quantifiable benchmarks to enhance financial accessibility across every segment of our diverse society.

A defining achievement under the NFIS was the introduction of Sri Lanka's pioneering Financial Literacy Roadmap in May of last year. This meticulously crafted document establishes a comprehensive, long-term framework designed to achieve measurable advances in financial awareness, behavioral transformation, and overall economic wellbeing. The implementation of this roadmap benefits from the invaluable strategic and technical expertise of the United Nations Development Programme (UNDP).

## Addressing the Critical Gap: From Knowledge to Action

Today marks another transformative milestone as we operationalize one of the Roadmap's most critical pillars: Content Development and Harmonization. This strategic focus addresses a fundamental challenge that has long hindered our collective progress. While numerous institutions, including the Central Bank, have maintained active roles in promoting financial literacy, experience has demonstrated that fragmented approaches and sporadic interventions are insufficient to catalyze the profound, sustainable behavioral changes our society requires.

Previous surveys revealed that while many Sri Lankans possess adequate financial knowledge, significant behavioral gaps persist-evidenced by concerning patterns of over-indebtedness, inadequate budgeting practices, insufficient savings culture, and

susceptibility to financial fraud. This reality underscores a crucial truth: knowledge alone is insufficient; we must cultivate appropriate skills and attitudes that empower Sri Lankans to make prudent, informed and rational financial decisions.

Today's initiatives directly address these challenges with unprecedented scope and precision.

## Sri Lanka's First Comprehensive Financial Literacy Curriculum

I am delighted to unveil Sri Lanka's first comprehensive Financial Literacy Curriculum-a foundational resource meticulously designed to guide all future financial education endeavors nationwide. This comprehensive curriculum encompasses seven essential domains:

- The Economic Environment
- Financial Environment
- Personal Financial Management
- Financial Management for Micro, Small, and Medium Enterprises (MSMEs)
- Digital Financial Literacy
- Financial Consumer Protection
- Tax Literacy

The development of this curriculum represents a collaborative achievement of exceptional distinction, benefiting from the technical expertise of the University of Kelaniya. The content was developed through extensive consultation with key Central Bank departments and external subject matter experts, ensuring accuracy, contemporary relevance, and practical adaptability. We extend our profound gratitude to the UNDP, whose generous financial and technical support transformed this vision into reality.

This curriculum will be made publicly accessible in all three national languages through the Central Bank website, ensuring universal accessibility. We envision widespread adoption by educational institutions, vocational training centers, public agencies, and financial educators, thereby creating unprecedented consistency, credibility, and scalability across Sri Lanka's financial literacy ecosystem.

## Educational Video Series: Addressing Real-World Challenges

We are equally pleased to launch two comprehensive educational video series, developed through the generous support of the UNDP and Japan International Cooperation Agency (JICA). These professionally produced resources address prevalent financial challenges affecting our communities, including:

- Over-indebtedness and debt management
- Impulsive spending behaviors
- Savings habit development
- Risks associated with unauthorized deposit-taking schemes
- Recognition and avoidance of pyramid scams

I extend a sincere invitation to all media institutions, content creators, and social media influencers to join this vital mission. Your platforms possess the power to amplify our message and cultivate responsible financial behaviors across every community throughout Sri Lanka.

## Professional Certification: The CTFL Programme

Recognizing that delivering consistent, high-quality financial education requires skilled professionals, we proudly introduce the Certified Trainer in Financial Literacy (CTFL) programme. This innovative initiative, developed jointly by the Central Bank's Regional Development Department and the Institute of Bankers of Sri Lanka (IBSL), aligns perfectly with our content harmonization objectives. The programme aims to certify 100 trainers annually, with particular emphasis on public sector and banking professionals across all regions of our nation.

## Our Vision: Towards a Financially Literate Sri Lanka

These integrated efforts-curriculum development, public outreach through multimedia content, and capacity building through professional certification-collectively advance our inspiring vision: ""Towards a Financially Literate Sri Lanka.""

A financially literate citizen transcends the role of mere consumer; they become an empowered individual capable of making informed financial decisions, protecting themselves from fraud, planning strategically for the future, and ultimately contributing to inclusive economic growth and financial system stability. Financial literacy serves as a powerful instrument for reducing over-indebtedness, alleviating poverty, and breaking intergenerational poverty cycles.

Informed access to financial services enables individuals to manage their resources more effectively, save strategically for the future, and invest in opportunities that enhance their economic prospects. Over time, this reduces dependence on governmentfunded social security programmes. A forward-looking perspective on financial literacy emphasizes equipping future generations with essential financial capabilities, ensuring they possess the resilience to navigate economic challenges as adults. Thus, investing in financial literacy represents an investment with exceptional social and economic returns.

## Strategic Alignment with Central Bank Objectives

Our commitment to building a financially literate Sri Lanka is intrinsically linked to the Central Bank's core objectives. When individuals make sound, rational decisions regarding spending, borrowing, saving, and investing, they become less susceptible to financial distress, over-indebtedness, or exploitation by unauthorized entities. This enhanced financial resilience reduces systemic risks and strengthens the stability of our financial institutions.

Furthermore, when citizens understand economic variables such as inflation, interest rates, and currency movements, the transmission of monetary policy becomes more effective, aligning public behavior with national economic objectives. Financial literacy

also strengthens public confidence in financial institutions. Informed consumers are more likely to engage with the formal financial sector and hold financial service providers accountable for ethical and responsible conduct. In this manner, financial literacy supports both market discipline and inclusive growth toward a sustainable economy.

## Acknowledgments and Partnerships

The initiatives launched today represent the transformation of aspiration into concrete action. Their success depends upon the efficient, effective, and active support of our stakeholders, media partners, and generous donors. I firmly believe that through continued collaboration, we can achieve meaningful and lasting progress.

I extend heartfelt gratitude to the University of Kelaniya for their invaluable technical expertise and partnership. We eagerly anticipate deepening this collaboration through the Memorandum of Understanding (MOU) to be executed today, which will further enhance our joint efforts in promoting financial literacy across our nation.

Allow me to express our sincere appreciation to the United Nations Development Programme (UNDP), which has provided unwavering support since the inception of our Financial Literacy Roadmap implementation. We are equally grateful to the Japan International Cooperation Agency (JICA) for their steadfast commitment. We look forward to continuing our collaborative efforts to realize the anticipated outcomes of this transformative initiative.

I also acknowledge all stakeholder institutions, including the dedicated departments of the Central Bank of Sri Lanka, for their exceptional contributions. Your commitment and dedication will create lasting positive impact on the lives of countless Sri Lankans.

## A Collective Journey Forward

We recognize that this endeavor represents a sustained journey requiring continuous effort and active participation from all sectors of society. Government ministries, regulatory bodies, educational institutions, the private sector, media organizations, development partners, and community-based organizations all play crucial roles in transforming this vision into reality.

As we advance, I call upon all stakeholders to unite in this noble cause. Financial literacy must become a shared national responsibility-a collective commitment to our people's prosperity and our nation's economic resilience.

Moving forward, we will depend upon this broad-based coalition to drive our mission: implementing the financial literacy curriculum, promoting educational videos and outreach materials, supporting the CTFL programme, and continuously evaluating and refining our collective impact.

## Conclusion

Let us continue working together, united in purpose and unwavering in commitment, to build a financially aware, resilient, and empowered Sri Lanka. Together, we will create a legacy of economic empowerment that will benefit generations to come.

Thank you for your attention, your partnership, and your dedication to this transformative journey.",P Nandalal Weerasinghe
https://www.bis.org/review/r250709d.htm,Erik Thedéen: The road to the EU savings and investment union - do's and don'ts,"Speech by Mr Erik Thedéen, Governor of the Sveriges Riksbank, at a conference organised by SEB, Brussels, 3 July 2025.",2025-07-03 00:00:00,"## SPEECH

DATE:

3 July 2025

SPEAKER:

Erik Thedéen

VENUE:

Sofitel, Brussels

DOCUMENT CLASSIFICATION: OPEN

## The road to the EU savings and investment union -do's and don'ts

I would like to thank SEB for this invitation and the opportunity to share my thoughts on what is needed for a functioning savings and investment union within the EU, based on experiences from Sweden and the Nordic-Baltic region.

It will come as no surprise to anyone in this room that financing needs in Europe are substantial. Mario Draghi assesses the need for extra investments in the EU to be almost 5 per cent of GDP per year, for the next 5 years. Both public and private investments will have to increase to satisfy this requirement. A large part of the financing for these investments will need to come through debt and equity capital markets. Unfortunately, it is an equally well-known fact that European capital markets are not yet up to this task. Compared to the US, they are dwarfed, especially our equity markets. For instance, US market capitalisation makes up 60 per cent of global market capitalisation, roughly three times more than the EU. US capital markets are not only bigger, but they are more liquid and vibrant with far more IPOs, both in number and in value.

This is not only problematic for private companies and other actors demanding capital for investment purposes, with all the negative effects on growth and productivity that come with a lack of capital expenditure. It also means that European households are deprived of financial investment opportunities and thus receive a lower long-term return on their savings. This makes them relatively less wealthy than, for instance, their US counterparts, who invest in equities to a much greater extent.

Remedying this situation is therefore of the utmost importance. The Commission should therefore be commended for injecting new energy into this process, now in the form of a strategy towards a Savings and Investments Union, SIU.



However, in moving towards a true Savings and Investments Union, we need to acknowledge that the poor European figures hide a lot of heterogeneity. The Nordic-Baltic region, and especially Sweden, stands out as an exception, in some ways matching the capital markets of the US, at least in relative terms. As an illustration, although markets are much bigger in the US, market capitalisation as a share of GDP is comparable in Sweden with the US. And if we look at how much of household wealth is invested in equity markets, Sweden, with 36 per cent, is very close to the US with 39 per cent. In terms of venture capital, Sweden is number four in Europe -in absolute terms! Relative to the population, we are number one in Europe. This is also reflected in company dynamics. The number of unicorns per capita is among the top five in the world and number one in the EU. 1 This dynamism is not limited to Sweden -if we look at the Nordic region we have 17 per cent of all unicorns in the EU, with only five per cent of the population. So there are certainly examples of success in parts of the Union.

Is there anything for the rest of EU to learn from this? Yes - I think there is.

If you'll allow me, I would therefore like to elaborate a little on what I think is important to keep in mind, when moving towards a Savings and Investments Union. These will be my personal reflections, based on my experience from both the private and public sector, domestically and internationally. My intention is not to try to impose Swedish solutions on everybody else, but rather to identify some issues that I think will make our common path towards SIU easier and quicker. I basically want to make four points:

1. Look at what works and develop this, instead of trying to design grand pan-European solutions to start with.
2. Don't politicise and micro -manage instruments -good returns for savers require openness and broad investment opportunities.
3. There is no silver bullet -creating vibrant capital markets takes time, as it often involves changing both culture and institutions.
4. Turbulent geopolitical times can provide opportunities for Europe.

Now, moving to my first point -we need to move from a top-down to a more bottom-up approach, looking at the components of the capital markets that actually work in certain places, and use these as building blocks for our European edifice. This goes back to the comparison with the US, and the depth, width and scale of their markets. It might be tempting to try to achieve that kind of integration and scale by trying to force actors into a one-size-fits-all solution.

1  A unicorn is a start-up company valued at over US$1 billion which is privately owned and not listed on an equity market.

However, our experience with grand ideas of such a top-down character is poor and I don´t think that is due only to weak execution.

It is now 10 years since the Juncker Commission presented its plans for a Capital Markets Union, CMU, and although some reforms were achieved, progress has been anything but impressive. To take one example of the kind of top-down initiatives that have failed, we can look at the efforts to establish a Pan-European Personal Pension Product (PEPP). According to the European Court of Audit, the take-up of the PEPP after three years of existence is still negligible (about 0.002 percent compared to what the Commission envisaged up to 2030).

There seems to be numerous reasons for this failure, such as weak incentives for pension companies to offer the product, limited knowledge among households and structural obstacles, for instance different tax systems among member states. This illustrates the difficulties involved in launching broad initiatives before having properly identified the obstacles, the preparedness of the prospective buyers and sellers, and so on. Without making sure the proper 'plumbing' is in place, the chances are that these initiatives fail. Instead of going for such one-size-fits-all solutions, we should look at the experience from individual countries and regions and see what really works.

We need to dial down our national prestige and be open to import models and ideas from our neighbours. And it must not be restricted to neighbours. It is a fact that the relative success of Swedish capital markets, at least partly, reflects a strong influence from financial markets in the US and the Anglo-Saxon world in general.

This Anglo-Saxon influence, which has been a feature for several decades, has led to less emphasis on bank lending in corporate finance, compared to continental Europe, and a stronger focus on equities, shareholder value and retail market participation. As a small, export-oriented economy, we needed to look at what worked best in other countries; and in financial markets, that was the US and the UK. But the process was probably also helped by a cultural affection for the AngloSaxon world -people say Monty Python was more popular in Sweden than in the UK for instance. But we should also be humble and realise the importance of the huge financial crisis we had in the early 1990s -this made the need for change in the direction of more market-based solutions very clear to every Swede. It also paved the way for many important reforms, such as the reform of the pension system which gave further impetus to the proliferation of an equity culture.

This focus on leveraging what works in practice in different countries or regions also means we should not aim for one all-encompassing financial centre, or even one European stock exchange. Indeed, I think there are other ways to increase cross-border investment flows within Europe, one of which is increased

## SPEECH

interoperability of exchanges. This would enable us to gain from allowing regional centres to develop, maybe specialising in certain sectors or instruments. As an example, the clearing of commodities in the Nordic-Baltic region is almost exclusively performed in Oslo. With its fish- and oil-based economy, Norway has a comparative advantage in this field.

Regional specialisation can create the critical mass that makes the emergence of clusters of competence possible in such ancillary fields as investment management, legal services, accounting and more.  Such cluster effects can benefit European markets at large.

This kind of regional specialisation in capital markets is not only dependent on what we do in terms of reforming the financial system. It is also very much dependent on how well integrated our markets for non-financial goods are. If you see the possibility of expanding your activities in other countries, or better still, the whole of EU, you will be more inclined to try to raise funds outside your home country, for example by listing your company on a stock exchange that is not located in your own country. This illustrates the close interdependencies between financial markets and markets for goods and non-financial services -progress in one field is correlated to progress in the others as well. It is all about creating virtuous circles, as I will come back to in a moment.

When speaking of regional specialisation, it is perhaps appropriate to bring up the topic of how to organise supervision. It is clear that we cannot afford to have 27 different national interpretations of key EU regulation such as the Market Abuse Regulation, MAR, if we want to have a single capital market. But personally, I have not been entirely convinced of the benefits of moving to fully centralised supervision in Europe. Based on my own experience, local knowledge and expertise at the level of national supervisory authorities can be very valuable in many cases. However, when most or nearly all activities in a certain field are mainly concentrated in one or two centres -fund management in EU is a case in point - there may be situations where some more formal centralisation could be useful. In such situations, it might be preferable with centralised supervision, providing some transparency and influence for all member states. Otherwise, you have a quasi-decentralised system, with supervision left to one or two national supervisors.

You could describe my proposed way forward as ensuring that the things that work are taken up and allowed to grow organically. So how should we achieve this in practice? The basic prerequisite is that there is political will and pragmatism, free from prestige, to enable market participants to adopt state of the art methods of doing business -either by innovation, or by importing methods from other places. This would be what I ca ll 'institutional competition', where policy -makers feel the need to adopt policies that are best for their constituencies.

An interesting initiative to try to achieve something along these lines is the Spanish proposal for European competitiveness laboratories, where a more limited number of likeminded countries could come together and try out a common solution among themselves. Importantly, it would be voluntary, and all member states would be welcome to join the initiative. After a certain time, the Commission would assess the feasibility and usefulness of the solution, that is, if it works in reality. The Commission would then decide whether to drop the idea or present a proposal for introduction in the union.

As you may know, this method has been tried, only last month, with a number of countries agreeing on the requirements for a European savings product. I am not sure I agree with all the details of the proposed label, but I think the fact that the initiative has been taken is interesting and welcome -we need a more exploratory mind-set among policy-makers in the union.

There is certainly a role for federal initiatives, but these should mainly be focused on removing obstacles for organic, market-led development. One area that seems to be particularly problematic, often standing in the way of further integration, is the deeply entrenched fragmentation of insolvency legislation among member states. Harmonising this field has been somewhat of a Holy Grail in the struggle for a true capital markets union, proving extremely difficult in practice. There are two issues here. One is that fragmentation creates uncertainty as to what actually happens when a company in another country is distressed. This is bad for crossborder investment. The other issue is that many of the existing national insolvency regimes are quite cumbersome and take time. The recent failure of Northvolt, the Swedish battery producer, provides us with an interesting example. In its struggle to survive, Northvolt went for the US based Chapter 11 protection rather than using the Swedish system for restructuring. The reason? Chapter 11 provides quicker protection, enables new financing and allows management to retain control of the company. In the case of Northvolt, bankruptcy could not be avoided in the end, but the Chapter 11 protection did buy the company some time. Without being an expert in the field, I wonder if the concept of a 28 th regime in the EU might be useful to try here, maybe with strong Chapter 11 traits. Member states would then negotiate a common insolvency regime - one that is in parallel to existing national ones, leaving companies with the choice to use this legislation instead of national law. This should be a little bit like 'having their cake and eating it' for policy -makers and greatly facilitate cross-border activities.

The need and resolve to remove obstacles to integration is obvious in the Commission's recent consultation on identifying barriers linked to trading and post-trading, asset management and supervision. This is a very commendable and welcome initiative.

Moving on to my second point, I would like to underline the importance of refraining from politicising different kinds of savings- and investment instruments, and of avoiding micro-managing markets and market participants´ behaviour. As I said before, politicians should focus on removing obstacles to markets finding efficient solutions, not try to dictate what the market should look like. My feeling is that EU policy-making has tended to be a bit heavy-handed in this respect, but that this is starting to change. If you listen to the Commission, this is at least what they say, and I very much welcome this.

One thing I want to highlight in this context is the suggestion that savings- and investment instruments should contribute to fulfilling European policy goals. This may sound reasonable, but I do not think it is the best way of creating vibrant capital markets. If we want people to take the step from savings accounts to the stock market, we need to make sure that we maximise their chances of success, that is, to earn a better return on their savings. If we limit the investment universe, sectorally or geographically, this will unavoidably affect long-term returns. And if we force people to invest in certain sectors or jurisdictions, we assume a certain responsibility for the outcome. This can easily reduce their willingness to invest their savings in the capital market.

In the Swedish case, we have a very popular savings scheme called ISK, 'investments savings account'. This is a form of savings in which you can invest in equity, mutual funds or other kinds of securities. Presently around 40 per cent of all Swedes have such an account. Why has it become so popular? The main reason, as I see it, is simplicity, as the administrative procedure for paying capital income tax is very simplified. Instead of having to calculate the actual capital gains, you just pay tax on an imputed income, based on the value of your investments and a 'standard' rate of return 2 . This rate of return is set at the longterm government bond rate, plus 1 percentage point. In individual years, you can thus benefit or lose compared to regular taxation of the actual capital gains achieved when you sell an investment. It is only this year that a more explicit tax subsidy has been introduced, as the income on the first 15 000 euros of investments (approximately) are tax exempt 3 . The second reason for the popularity of the ISK investment savings account is the returns people have experienced. And here, the fact that there are no geographical limitations on which assets you can invest in has played a role. Swedes have partly invested in foreign markets and enjoyed high returns and sometimes also made currency

2 The imputed income is calculated as the average market value over a year multiplied by a 'standard' rate of return. The standard rate of return is defined as the long-term government loan rate plus one percentage point. In other terms, imputed income = average annual market value × (long-term government bond rate + 1 percentage point). The imputed income is taxed at the statutory rate of 30 percent. Actual cash flows from the asset holdings, i.e., dividends, coupons or realised capital gains, trigger no additional taxation. Losses are not tax deductible.

3  This threshold will be doubled next year.

## SPEECH

gains. This openness to investments in foreign assets is not considered problematic -not least as the home bias in investments is quite strong anyway, at around 40 percent of total investments.

My third point is a sobering one -well-functioning capital markets are nothing you create just like that. It takes time. There is no silver bullet. You need to change the culture and mind-set of people, which inevitably takes time. Individuals, companies, institutions and authorities alike have to make this adjustment. You also need, eventually, to have a complete eco-system of instruments and different kinds of financial firms with complementary offerings. This growth process also takes time.

You need a financial ecosystem where companies of different type, size and stage of development are able to finance and develop their business. You could see it as a 'financing chain', from FFF (Family, Friends and Fools), venture capital and public support for certain high-risk projects, via private equity, to public listings (IPOs) and the ability to raise new equity in public markets - each link must be strong. And the links are mutually supportive. The stronger the links late in the chain are, the higher the likelihood of money flowing into the earlier links. Or to be more concrete -if there is a thriving market for listed equity, where investors can exit an investment and make a profit, they are more inclined to make risky investments in the ea rlier stages of a company's development, e.g. through private equity. Here Sweden excels -the number of IPOs in Sweden in the last 10 years is higher than in Germany, France, the Netherlands and Spain combined. And the fact that the median size of Swedish IPOs is only one quarter of the median IPO size in the EU, illustrates the strong activity in the growth segment of the markets in Sweden. Strong links late in the financing chain are extremely important to ensure the continuous growth of successful start-ups. In fact, many companies experience an even greater financing need in the crucial scale-up phase. Often, it is easier to raise that capital in the public markets, provided the company has opted for a public listing at a relatively early stage.

How come Sweden has been able to develop such vibrant capital markets? I think it very much comes down to mind-set and culture. I have already touched upon the Swedish openness to Anglos-Saxon influence, which has led to the willing adoption of market-based solutions. But another important aspect is how people perceive the concept of risk and return. There are two aspects I think are important here. The first is the widespread understanding in Swedish society that higher expected returns require higher risk-taking and that volatility in returns is unavoidable. This widely held view has made it politically possible to design systems that encourage people to enter the stock market. The investment savings accounts I mentioned earlier are actually not a recent invention. We have had similar equity savings schemes in place for the last 40 years. As more and more

people have tried equity investment in these schemes with very good returns over the last several decades, more schemes and platforms have been launched. It is another example of a virtuous circle.

It has also made it possible to design the pension system so that it is in effect a vital part of our capital markets. With the major reform of the pension system, some 30 years ago, we moved from a regular pay-as-you-go, defined benefit system to a partly funded, defined contribution system. This means that 2.5 per cent of peoples´ salaries is allocated to and invested in mutual pension funds, according to the individual´s own choice 4 . This scheme is compulsory, in effect making every working citizen invested in the stock market. Today, 25 years after its introduction, these fund assets equal 43 per cent of GDP 5 . In addition, we have a relatively high share of the workforce covered by occupational pensions, where pension contributions paid by employers are also invested in equities by pension managers or funds individually chosen by each employee. The situation is similar in Denmark and the Netherlands.

These factors are important as organized pension savings can add significant investment volume to the individual savings of people and propel investment market growth. Swedish and Danish households have more financial assets, compared to GDP, than any other EU country 6 . These assets consist to a large degree of equity holdings, either directly or indirectly through pension savings. 7

But this readiness to invest people's pension savings in the stock market is not universal. In many countries, people and authorities seem to think that, since pension savings are so important for old age security, they should be invested with very low risk. In Sweden, people see it the other way around based on a positive personal experience of the long-term returns achieved on previous equity investments. The increased longevity of people underlines the need to start saving towards your pension early and include a meaningful share of equities in your portfolio.

The other aspect of risk and return is the need to understand and accept that, while beneficial in the longer run, equity investments are not risk-free in the short run. Swedish households have embraced this. From my time as CEO of the Stockholm stock exchange, I know that people tend to treat their equity holdings for what they are -long-term investments. They don 't panic when markets fall, or even crash, as we have seen examples of lately. If people are to engage in

4 C orresponding to 14 per cent of people's contributions to the public pension system .

5  We also have the so-called buffer funds in the public pension system. These are not linked to individuals but still contribute to the capital market by investing in a wide range of assets, including equities. Their total assets amount to ca 30 per cent of GDP.

6  Denmark 1.7 times the EU-average; Sweden 1.5 times the EU average

7  Both countries: 85 per cent equity -EU average: 60 per cent.

## SPEECH

investments with higher long-term returns, like the stock market, they need to experience that short-term volatility in prices and returns is in effect unavoidable, if you want to reap the long term benefits of owning equities.

All this boils down to what could be described as financial literacy -in theory and in practice. We need to create a virtuous circle whereby people, by experiencing good return s and 'surviving' market downturns, are willing to gradually engage more in equity investments. But to get there, we need to work broadly. In a recent study of the Swedish capital markets, the OECD notes that this culture is the result of a set of interconnected policy initiatives and choices that for decades have served to promote the use of equity markets. This has become selfsustaining, creating a virtuous circle where broad-based public interest drives market success and investment returns, which in turn increases interest further.

The last point I want to make is that, although these are turbulent, and in many respects worrying, times, there are also opportunities for Europe. We have taken for granted that everyone accepts what David Ricardo explained more than 200 years ago, namely that international trade is not a zero-sum-game and that all participating countries gain. Over the last few months, we have found ourselves in a scenario where this is no longer universally accepted. Trade barriers are being erected with negative consequences for both trade volumes and financial flows, consequences that are as yet impossible to determine.

However, when it comes to things like capital flows and relative attractiveness as a reserve currency, the situation is a bit different. It is obvious that market actors' confidence in US policies, and the US currency, has taken a hit from what is perceived as a lack of predictability, trade-distorting policies and fiscal irresponsibility. This has led to the beginning of a redirection of capital and flows. An illustration of this is the weakening of the dollar, something that has been very obvious for me as Governor of the Riksbank, as the krona has appreciated by 14 per cent against the dollar since the beginning of the year. And this should come as no surprise. The European Union has often been accused of being slow and bureaucratic, but in times when political predictability and stability are scarcer than ever, this painstaking focus on the rule-of-law can actually become a great asset. We were reminded of this by last year´s Nobel prize-winners in economic sciences -Daron Acemoglu, Simon Johnson and James Robinson -who have demonstrated the importance of societal institutions for a country's prosperity. Societies with a poor rule of law and weak institutions that exploit the population do not generate growth or change for the better.

So, as President Lagarde recently mentioned, there is now a window of opportunity to enhance the status of the euro as a reserve currency. But to make the most of this, we need to have capital markets that function so well that they mobilise European savings and also attract investments from third countries. This

is a further reason why we should do our utmost to make the Savings and Investments Union a reality.

Let me finally reiterate what I think is important for the success of the SIU:

1. We should focus more on what has proven to work and develop this in an organic way -allowing for multiple regional centers.
2. We should refrain from micromanagement and politicising instruments. Limiting where people can invest risks leading to lower long term returns.
3. We must have a broad scope and work long term, because it takes time to change cultural habits, and build functioning eco-systems.

And lastly -we should make the best possible use of this window of opportunity to make Europe an attractive place to invest, for people both inside and outside of EU. If we really make an effort the benefits should be great.

Thank you.",Erik Thedéen
https://www.bis.org/review/r250709c.htm,"Eli M Remolona: Digital, sustainable, inclusive - celebrating the 32nd anniversary of Bangko Sentral ng Pilipinas","Speech by Mr Eli M Remolona, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 32nd anniversary of the Bangko Sentral ng Pilipinas, Manila, 3 July 2025.",2025-07-03 00:00:00,"## Eli M Remolona: Digital, sustainable, inclusive - celebrating the 32nd anniversary of Bangko Sentral ng Pilipinas

Speech by Mr Eli M Remolona, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 32nd anniversary of the Bangko Sentral ng Pilipinas, Manila, 3 July 2025.

* * *

Magandang umaga! Happy anniversary.

Our theme today is digital, sustainable, inclusive. These are not just buzzwords. They are principles that shape the way we think, we work, and the way we serve.

But the center of it all is digitalization. It is everywhere.  Now with artificial intelligence (AI), it is impossible to ignore. The growing conversation around AI is still evolving and so are the expectations.

Goldman Sachs says there will be a significant 7-percent annual boost to GDP (gross domestic product) over the next 10 years. By contrast, Nobel Laureate, Daron Acemoglu sees a more modest gain of 1 percent a year.  He  cautioned that without thoughtful design AI would deepen inequality and centralize power. The truth likely lies somewhere in this region. This reminds me of Yogi Berra-the baseball player and coach. He said, when you come to a fork on the road, take it.

We are now at that fork. The real question is not whether to adopt AI, it is about how we use it, to empower rather than to displace.

To this end, we made some progress. In monetary policy we are leveraging generative AI to extract insights from non-traditional, unstructured high-frequency data.

These are especially helpful during periods of befuddling uncertainty.

In banking supervision, SupTech and RegTech are helping us streamline reporting and assess risks faster. These are essential as banks become more complex and interconnected.

In cybersecurity, we have launched ASTERisC*, rolled out the Financial Services Cyber Resilience Plan, and implementing the Anti-Financial Account Scamming Act. This will enhance the BSP's (Bangko Sentral ng Pilipinas) ability to combat cybercrimes. In payments, digital transactions have surpassed our 50 percent target. QR Ph was expanded to 178 local government units-encouraging broader adoption among small merchants and accelerating financial inclusion.

Likewise, Bills Pay PH has simplified payments for recurring bills like utilities and credit cards.

We have also made important strides for BSP. After all, technology is only as good as the people who use it.

As of this week, our refreshed website offers a faster and more responsive experience.

At 32, we are not just marking time, we are charting our direction. One, powered by innovation and rooted in sustainability and inclusion.

So, as we stand at this fork, let us not hesitate. Let us take it together with purpose and with target. Happy anniversary. Magandang umaga po!",Eli M Remolona
https://www.bis.org/review/r250709b.htm,Yannis Stournaras: Should central banks' mandate be revised?,"Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at ""Les Rencontres Économiques d'Aix-en-Provence 2025"", panel ""Should central banks' mandate be revised?"", Aix-en-Provence, 5 July 2025. ",2025-07-05 00:00:00,"## Yannis Stournaras: Should central banks' mandate be revised?

Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at ""Les Rencontres Économiques d'Aix-en-Provence 2025"", panel ""Should central banks' mandate be revised?"", Aix-en-Provence, 5 July 2025.

* * *

Good morning, everyone. Many thanks to the organisers for inviting me here today. It's a pleasure to be part of this distinguished panel.

Heraclitus, the Greek philosopher, famously asserted ""everything changes, and nothing stays"".

This observation is valid across all aspects of life, and central banking is no exception.

It was not that long ago when monetary policy was thought to be a policy instrument with limited influence, even by central bankers.

One notable central banker who held that view was Arthur Burns, who was Federal Reserve Chairman in the 1970s.

And so, when inflation started rising in the United States following the first oil price shock in the early 1970s, Burns kept his foot on the monetary-policy gas pedal.

U.S. President Nixon was facing re-election and Burns did not want to jeopardize Nixon's chances by allowing unemployment to rise.

Burns advocated wage-price controls - and not monetary policy - as the best way to prevent inflation.

What followed was the Great Inflation -- a combination of double-digit inflation and double-digit unemployment rates.

Not all central banks acted that way. Both the Bundesbank and the Swiss National Bank, to name two notable exceptions, tightened monetary policy in response to the 1970s oil price shocks.

As a result, their economies escaped from the oil price shocks in much better condition, both in terms of inflation and in terms of unemployment, than that of the United States.

That experience taught central banks a lesson: monetary policy needs to focus on inflation if it wants to prevent stagflation - that is, a combination of high inflation and high unemployment.

Today, no central banker would doubt that firm resolve is needed to tame inflation, even if, as in the period following the Covid shock, inflation was mainly supply-driven.

Consequently, the evolution of thinking about what central banks can - and cannot - do has been profound during the past 50 years.

## I. The evolving central bank mandate

Related to that, another significant change has been the adoption of price stability as the primary objective of central banks, reflecting the hard-learned lessons of the Great Inflation era in the 1970s, to which I just referred.

And many central banks have been granted political independence. Those two developments are intrinsically connected, because experience has shown that a politically independent central bank is best positioned to deliver price stability to its citizens.

The European Central Bank (ECB) is a prime example of a central bank that is both independent and legally bound to achieve price stability.

But the journey didn't end there. Fast forward to the Global Financial Crisis (GFC). That profound shock revealed structural vulnerabilities in the financial system. In response, many central banks broadened their mandates to include explicit financial stability objectives.

Central banks were granted sole or co-responsibility for macroprudential tasks effectively tools to prevent systemic risk.

In the euro area, this translated into a monumental institutional development: the creation of the banking union, entrusting the direct supervision of significant banks to the ECB, in close cooperation with national authorities.

This marked a pivotal step in strengthening financial stability, an important precondition for price stability.

More recently, the post-pandemic inflation surge and other structural shifts reignited the debate around inflation targets and policy frameworks.

The following question was addressed: are our current objectives, instruments, and operational frameworks truly fit for purpose in this highly uncertain and volatile world?

Should we revise our mandate by integrating other considerations, without compromising the primary objective of price stability?

## II. The ECB's monetary policy strategy: a stability anchor

My focus today will be on the Eurosystem. Our price stability mandate is enshrined in the Treaty on the Functioning of the EU. Why is this so vital? Because history has shown us the deep and lasting damage that can be caused by deviations from price stability.

How we deliver on our mandate is defined by our monetary policy strategy. Central to this strategy is our unambiguous and symmetric 2% inflation target over the medium term.

The point target was made explicit in 2021. It replaced a more complex formulation, providing greater clarity. It offered a stable reference point that is easy for the public to understand, enhancing wage and price setting, thereby strengthening the anchoring of inflation expectations.

Since its creation in 1999 and until the shocks of the early 2020s, the ECB delivered inflation close to 2% on average. This helped build credibility - a precious asset. Thanks to this credibility, even during the recent inflation surge, long-term expectations remained well anchored.

That, in turn, allowed us to act forcefully to bring inflation back to target, while also achieving a soft landing of the economy.

You might ask: why 2% and not zero? The answer lies in flexibility. An inflation buffer above zero provides monetary policy with space for interest rate cuts in the event of adverse developments and with a safety margin against the risk of deflation. It also addresses issues like downward nominal rigidities and measurement bias.

Several 1   academics and policymakers have called for raising the target above 2%. Such proposals have to be carefully weighed against potential risks to central bank credibility. 2   Frequent adjustments to the target risk undermining the credibility we have worked so hard to build. If markets expect the target to keep shifting, inflation expectations could de-anchor, making our job much harder.

Our focus on the medium term is equally important, as it gives us valuable flexibility. Monetary policy acts with long and variable lags. A medium-term approach enables us to navigate inflationary or deflationary pressures in a stepwise, gradual manner without overreacting in ways that might harm economic activity and employment. This approach allows us to look through short-lived supply-driven deviations of inflation from target, which are expected to dissipate over time.

An important strand of the literature explores monetary policy implications from heterogenous developments in prices across sectors. Such approaches underscore the critical importance of delving into granular data to help the understanding of how prices are changing in the economy. At the ECB, inflation analysis includes a broad range of measures encompassing headline and various metrics of underlying inflation, to help us assess the dynamics and drivers of inflation.

Our aim is to ensure that our policies are transmitted smoothly and effectively across member states and segments of the economy, in order to enhance the prosperity of our citizens. This is key in a monetary union where financial structures and economic conditions still differ widely.

## I. Rethinking Mandates: Responding to Emerging Challenges

Let me now turn to broader challenges that call for a forward-looking reassessment of central bank roles.

Central banks do not operate in a vacuum. In the euro area, we must navigate a particularly complex environment.

This environment is shaped by fragmented capital markets, persistent geopolitical tensions that impact energy markets and supply chains, the urgency of climate risks, and a pressing need to address the productivity gap vis-à-vis other major economic areas.

Let me be clear: central banks are not the main actors in resolving these challenges. That responsibility lies primarily with governments and legislators in Europe.

However, monetary policy has a vital supporting role: to provide an anchor of stability. By safeguarding our primary objective - maintaining low and predictable inflation - we secure a fundamental condition for sustainable growth. This, in turn, fosters confidence among households and firms, spurring investment and job creation.

Over the past year, as inflation has eased, we have been able to largely remove policy restrictiveness. This easing in financing conditions will make capital more affordable and accessible, which is essential for investment in a time of very high uncertainty.

The ECB has also been a frontrunner in contributing to some of these broader agendas. Within our mandate, we are actively integrating climate-related considerations into our operations, risk assessments, and supervisory and collateral frameworks. In our strategy assessment, climate remains a policy priority within our remit.

Yet, there is something that cannot change: monetary policy cannot drive Europe's transformation alone.

That's why we are pressing for progress in other areas, notably financial architecture. Such progress can support the effectiveness of our monetary policy, a point made clear also in our 2025 strategy assessment.

To mobilize investment at the scale needed to re-invigorate growth and ensure that the benefits flow seamlessly across borders, we need to finalise the Banking Union and deepen the Capital Markets Union.

A fully fledged ""Savings and Investments Union"" is essential. It will fundamentally improve how our financial system channels savings into productive investment, especially in critical areas like energy, defence, and innovation - all pressing priorities for our Union.

A more integrated union will allow the euro to take on a greater role as an international currency. This means not only sharing in the benefits that come with that global status, but also stepping up to the responsibility that comes with it - especially at a time when the world is increasingly marked by uncertainty and division.

Europe must rise to the occasion. The ECB is working towards the digital euro, a project that can strengthen the international role of our currency in the digital era. This initiative can increase efficiency, innovation and resilience while protecting our monetary sovereignty.

The current institutional setup poses an important obstacle because the ECB essentially operates without a genuine fiscal counterpart at the euro area level. A

permanent central fiscal capacity - a shared framework for managing public finances would be a true turning point, enabling coordinated investment and shared responsibility for growth-enhancing initiatives.

The Recovery and Resilience Facility (RRF) could serve as a valuable blueprint for the future. The creation of a common European safe asset can be a key instrument for deepening financial integration and resilience across the euro area. This, along with the elimination of internal barriers which fragment the European market as described in the Letta Report and in various IMF studies, and are in fact equivalent to internal high tariffs, will increase the rate of return on domestic investment, leading to a higher investment ratio as suggested by the Draghi Report, thus closing the investment and productivity gap with the US.

More ambitious proposals, such as the one recently put forward by Olivier Blanchard and `ngel Ubide, 3   deserve consideration: they could help create a deep and liquid EU bond market that could achieve greater global significance.

## V. The Fiscal and Monetary interactions

Let me elaborate more on the interplay between fiscal and monetary policy.

An enabling force to the achievement of price stability and financial stability is sound fiscal policy that supports monetary policy.

In the euro area, we learnt the hard way during the debt crisis that fiscal and monetary policies should be aligned, reinforcing each other. This could lead to more effective crisis resolution and stronger economic recovery, as exemplified in the handling of the pandemic.

The optimal outcome arises when both policies are aligned, but critically, with a clear understanding of their respective roles, responsibilities, and mandates.

Today, as political pressure builds in some jurisdictions to cut interest rates, coordination without subordination is paramount. It is critically important to maintain the central bank independence and ensure that policymakers can uphold their primary mandate of price stability.

## Conclusion

To conclude, in a world of constant flux, central bank mandates are not written in stone. They are continuously evolving in response to significant challenges and shifting economic landscapes.

Yet the foundation must remain firm. A firm, credible, clear commitment to price stability.

This is our best contribution to economic growth, job creation and the welfare of our citizens.

A more efficient architecture of the euro area can also play a vital role.

Thank you for your time. I look forward to our discussion.

- 1  See Blanchard, O., Dell' Ariccia, G., &amp; Mauro, P. (2010), ""Rethinking macroeconomic policy"", 199-215; Ball, L.M. (2014), ""The Journal of Money, Credit and Banking,  42, case for a long-run inflation target of four percent"", International Monetary Fund Working Paper No. 14-92; Williams, J.C. (2016), ""Monetary policy in a low R-star world"", , 23, 1-23. FRBSF Economic Letter
- 2  See Bernanke, Ben (2014), ""Modifying the Fed's policy framework: Does a higher inflation target beat negative interest rates?"", . Ben Bernanke's Blog at Brookings
- 3  See Blanchard, O. and Ubide, A. (2025), ""Now is the time for Eurobonds: A specific proposal"", Pieterson Institute for International Economics (PIIE), . Realtime Economics",Yannis Stournaras
https://www.bis.org/review/r250709f.htm,Rama Krishna Sithanen: Speech - Annual conference and meeting of the Community of African Banking Supervisors,"Speech by Dr Rama Krishna Sithanen, Governor of the Bank of Mauritius, at the annual conference and meeting of the Community of African Banking Supervisors (CABS), Balaclava, 23 June 2025.",2025-06-23 00:00:00,"## Rama Krishna Sithanen: Speech - Annual conference and meeting of the Community of African Banking Supervisors

Speech by Dr Rama Krishna Sithanen, Governor of the Bank of Mauritius, at the annual conference and meeting of the Community of African Banking Supervisors (CABS), Balaclava, 23 June 2025.

* * *

- Second Deputy Governor of the Bank of Mauritius
- Executive Secretary of the Association of African Central Banks
- Chairperson of the Community of African Banking Supervisors
- Delegates from AACB member central banks
- Guest Speakers and Resource Persons
- Members of the Press
- Ladies and gentlemen

## Good morning

It is a great pleasure for me to welcome you to Mauritius for the Annual Conference and Meeting of the Community of African Banking Supervisors (CABS). The presence of delegates from 30 AACB member central banks as well as representatives from 4 international institutions is testimony to the importance that is attached to supervision on the continent. I am sure that the topics on the agenda will stimulate enriching discussions.

I have been closely associated to the financial sector of both Mauritius and Africa for 46 years in different capacities, including as Minister of Finance for almost 10 years. The forum is appropriate for me to share a few insights as supervision requires much intuition and judgement apart from the conventional adherence to international best practices.

Supervisors play a commendable role in the stability of the financial system by ensuring the safety and soundness of financial institutions and have much responsibility on their shoulders. Further, the law provides you with extensive powers to request for whatever information you may deem necessary in pursuing your mandate. However, power goes hand in hand with accountability. This leads me to the first kernel of my intervention, namely effective communication.

## Ladies and gentlemen,

I am a fervent advocate of transparency within the parameters of the law. When communication is properly diffused, it gives credence to our reputation and eliminates the possibility of speculation. As a supervisor, I am aware that you may have to take difficult decisions on occasions. My advice will be not to procrastinate on matters as the cost of inaction could be even higher. But it should always be backed by substantive evidence supporting your conclusion and the recipient should be informed in a clear and concise manner.

My next point will be risk-based supervision which has emerged as a priority for many supervisors, including the Bank of Mauritius in view of resources constraint, enhanced performance and operational efficiency. The Bank of Mauritius has recently finalised its Risk-Based Supervisory Framework. While the framework marks commendable progress in the assessment and classification of risk, regular reviews will, nevertheless, be required to ensure its continued relevance in the face of a dynamic supervisory environment. However, I would like to emphasise one specific area, namely licensing. You may have the best framework to monitor, assess and mitigate risk but it will ultimately be futile if the licensing is deficient. A rigorous process should be in place before the grant of a banking licence. Compromising on the licensing criteria could result in protracted and costly resolution of the entity, often at the expense of public funds and private depositors.

Gone are the days when banks could be considered as regional or global in life but national in death. With economic integration and digitalisation of payment systems, financial systems have become intertwined. Failure of a bank in a country could have ripple effects on other countries, depending on the size of the bank and its systemic importance. It is, therefore, important for supervisors to have regular interaction through participation in supervisory colleges and otherwise for those banks which have expanded their footprints outside the home jurisdiction. I would even go one step further by suggesting that it should include simulation exercises on the possibility of the bank failing. A proactive approach should be adopted so that in the real situation, there is clarity on the steps to be followed.

## Ladies and gentlemen,

We should collectively chart out an ambitious pathway for Africa's banking sector as we cannot lag behind. Mauritius, which is the only IFC with an investment grade status on the continent has already taken necessary measures to strengthen the relevant frameworks. To that effect, our legislation, which dates back to 2004, needs a thorough overhaul. It will have to be morphed and adapted to cater for the latest developments. On this specific project, the Bank has received technical assistance from the IMF, and the relevant laws are in the process of being finalised. The authorities are also initiating the necessary procedures to request a Financial Sector Assessment Programme by the IMF and the World Bank. We have to be adaptive at a time when the financial services industry is going through sweeping changes.

Terms like digitalisation, FinTech, RegTech, Suptech and DLT are the buzzword these days. The Bank has an open door and open mind policy as far as innovation is concerned. However, the financial services provider should demonstrate that adequate systems are in place for risk management.

## Ladies and gentlemen,

I value technology as a game changer in the delivery of banking and financial services. It will not only increase speed and improve efficiency but also result in cost savings. One of my first decisions since I took office has been the establishment of a National FinTech Committee. This Committee also comprises other stakeholders in the financial services industry and has been tasked with elaborating a strategic plan to position Mauritius as a regional fintech and blockchain hub.

While digitalisation can elevate the Mauritian financial sector to new heights, it also introduces novel risks such as cyber security. At the level of the Bank, we have established the Mauritius Financial Sector Cyber Committee, the MFSCC, to enhance the cyber resilience and operational resilience of the Mauritius Financial Sector. Its role includes collaboration among financial institutions and catalyzing joint initiatives to increase cyber resilience capabilities and awareness.

It is also opportune for me to talk about climate change in this gathering. We may be from countries with different specificities and topologies, but our priority should be the same - preservation of the environment and protection of biodiversity. Our health and future depend greatly on the health of the planet. The future will be bleak if we do not act decisively. We are already in a state of climate emergency and time is now of essence to reduce our carbon footprint. The solution is to reduce greenhouse gas emission and to speed up the replacement of fossil fuel by clean renewable energy.

I will here make an appeal to all of you to place sustainability as a core priority. It is highly likely that investors will look at sustainable business practices before entrusting their funds in the different jurisdictions in Africa. At the level of the Bank, the greening of our financial system is in progress. Some of the initiatives include the issue of guideline on climate related and environment financial risk management including disclosure of climate change risks, and release of a guide for the issue of sustainable bonds. The Bank has also rolled out its climate change stress testing exercise to assess the resilience of the banking sector to climate events over the medium term.

At the Bank, we have kickstarted data initiatives as far back as 2021 and we have created a database of climate-related risk drivers since July 2023. Our future plans include the devising of a comprehensive data directory for metrics on climate-related risks and sustainable finance which will include past observations, forecasts as well as realized climate-related financial losses by sector. In my view, having appropriate metrics to measure risks and potential rewards from sustainable finance is a key enabler for operationalizing taxonomies. We are working in close collaboration with the European Union and Agence Française de DØveloppement for upskilling our competency in climate change.

## Ladies and gentlemen,

I am particularly worried about the repercussions of the geoeconomic fragmentation in currency markets and wider financial stability. International investors are becoming more risk-averse, delaying investment decisions and are showing an increased tendency towards 'friendshoring', that is they are investing mainly in regions that are strategically placed. For African jurisdictions, which are geographically and economically far from global consumer markets, there is the risk of reduced financial flows and increased currency volatility. Fighting a depreciating currency while ensuring ample foreign exchange liquidity in an open market has always been one of the toughest tasks for central banks. I hope that today's conference will cover how to adapt the supervisory landscape to the geoeconomics fragmentation.

Ladies and gentlemen,

I am convinced that the different themes will yield interesting and constructive discussions, and, above all, the CABS conference will identify solutions and insights that can be implemented by our member central banks. I am sure that our partners from the Bank for International Settlements and Making Finance Work for Africa will enrich the debate, by bringing perspectives from their own research and wide-ranging experience.

Let us continue to work together to build a stronger, more vibrant financial system for our continent.

On this note, I wish you all fruitful deliberations in today's event as well as in tomorrow's plenary session and a pleasant stay in Mauritius. I hope that you can spare some free time to visit our beautiful island.",Rama Krishna Sithanen
https://www.bis.org/review/r250716a.htm,Michael S Barr: Expanding financial inclusion,"Speech by Mr Michael S Barr, Member of the Board of Governors of the Federal Reserve System, at ""Unleashing a financially inclusive future"", the second annual financial inclusion conference, hosted by the Federal Reserve Board, Washington DC, 15 July 2025.",2025-07-15 00:00:00,"## Michael S Barr: Expanding financial inclusion

Speech by Mr Michael S Barr, Member of the Board of Governors of the Federal Reserve System, at ""Unleashing a financially inclusive future"", the second annual financial inclusion conference, hosted by the Federal Reserve Board, Washington DC, 15 July 2025.

* * *

Thank you, Eric; thank you to the Fed staff who have organized this second annual financial inclusion conference; and thank you all for being here. 1

I have long believed that financial inclusion is a crucial component of a safe and fair financial system. Working to improve financial inclusion has been an important part of my career, starting in 1995 when I joined the Treasury Department and worked with colleagues to build Community Development Financial Institutions, strengthen the Community Reinvestment Act, and launch the New Markets initiative. At the University of Michigan, financial inclusion was key to programs I worked on to support minority entrepreneurship.

With the support of both the public and private sectors, there have been many improvements and advancements in financial inclusion over the last three decades, evidenced by the decline in the rate of people who are unbanked and the increasing reach and success of programs such as the Bank On initiative that better meet the needs of low-income customers. I welcome this progress, but there is so much more to do to deepen and widen financial inclusion to many millions of people in America who could benefit from it. Better access to affordable financial services, geared to the needs of underserved families and entrepreneurs can help them to build more secure lives, stronger communities, and a stronger American economy.

Financial inclusion contributes to the Federal Reserve's mission of promoting a healthy and growing economy and a safe and stable financial system. Consumers are twothirds of economic activity, so access to credit for low-and-moderate income households and small businesses helps the economy to grow. In addition, the Fed has an important role in implementing a series of laws passed by Congress related to access to credit, such as the Community Reinvestment Act. As we learned during the Global Financial Crisis, household finances are crucial to a strong and stable financial system.

In my remarks today, I would like to go through several ways that the public and private sectors are helping to increase financial inclusion. Those efforts include greater access to bank accounts and financial services, faster payments services, responsible smalldollar lending methods, and the use of alternative data to promote credit access. These efforts have shown promise in expanding financial inclusion.

## Bank Account Access Is the Foundation to Financial Inclusion

Financial inclusion begins with access to basic bank account services. While financial services are evolving rapidly-with new forms of financial intermediation, payment

services, and even deposit-like money claims-it is still the case that access to a bank account is the foundation for helping families and businesses get the financial services they need. Bank accounts provide access to direct deposit of paychecks, benefit payments and tax refunds. Bank accounts provide connections to peer-to-peer payment systems, and for the vast majority of retail and wholesale payments. Bank accounts are also often the entry point for access to credit for households and businesses.

According to the Federal Deposit Insurance Corporation's 2023 National Survey of , the number of Americans without bank Unbanked and Underbanked Households accounts is at the lowest it has been since the survey began in 2009. Yet, there remain groups that struggle with low account access, including those who are disabled, those without a high school diploma, and minority groups, among others. Households that include someone of working age with a disability are three times as likely to be unbanked as working-age households without a disability. Meanwhile, Hispanic and African American households and American Indian and Alaskan Native households are five and six times as likely, respectively, to be unbanked as White households. 2   The unbanked cite account opening costs, unpredictable or high fees, and high minimum balance requirements as among the top reasons for not obtaining bank accounts. 3

## Expansion of Banking Access

One private-sector program that has helped to address barriers to account access is the Bank On program, supported by the Cities for Financial Empowerment Fund (CFEF). Bank On is led by coalitions of regional financial institutions, community groups, and local governments working together to bring households into the financial system. CFEF certifies that Bank On accounts meet standards including low minimum deposits for account opening; low maintenance, overdraft, or other unexpected fees; and free branch ATM, online, and mobile banking.

Over 46,000 bank branches nationwide offer a certified Bank On account. An important way that the program has spread and taken root in communities is through the coalition model, which involves establishing relationships with local and state governments, public officials, and community organizations. These partners, engaged with and trusted by their communities, have helped overcome apprehension about bank accounts and helped drive the outreach needed for any business to find new customers. The Federal Reserve System has long been a partner of the Bank On Initiative. In 2006, the Federal Reserve Bank of San Francisco was a partner in creating the first coalition. At the St. Louis Fed, the publicly available Bank On National Data Hub (BOND) was created in 2017 to help identify the availability of certified accounts. Bank On coalitions across the country continue to partner on engagement, outreach, and data collection with their regional Reserve Banks, to offer safe and affordable bank accounts.

## Faster Payments

Financial inclusion also requires timely access to funds. People living paycheck to paycheck incur the greatest costs of waiting for these funds. One of the primary benefits of a bank account over time is facilitating payments. Technological advances have driven improvement in this area, sometimes only incrementally, but the more recent advent of real-time payments-especially new services for instant or immediate

payments-has the potential to make a big leap forward in service to households and businesses. Cash-strapped households and businesses need access to their funds right away, and they need reliable ways to pay expenses when they are due (and when they have the funds to pay them).

Low-income households may need quick access to make just-in-time transactions, such as same-day utility bill payment through their bank or to quickly receive funds from a family member to cover an emergency expense like an unanticipated car repair. While the benefits of getting instantaneous access to paychecks are obvious, the value of controlling precisely when and in what order payments settle may be less appreciated. With real-time payments, households and businesses can have better control over payment flows, helping them, for example, to avoid unexpected and unwelcome overdraft and nonsufficient funds fees.

Many other countries are seeking methods to improve the speed of payments. In India, for example, the implementation of the Unified Payments Interface (UPI), which is the country's digital instant funds transfer system, has allowed consumers to see some of these benefits in action. UPI is available for free on a customer's mobile device and can be used for merchant payments, bill payments, and money transfers, among other things. Since its implementation, the Reserve Bank of India has noted an increase in financial inclusion, particularly in rural areas where bank branch access is difficult. 4

We have seen the benefits of technological advancement and innovation here in the U. S. as well. Today, technologies to improve the speed of payments are being implemented across platforms and products, providing consumers various ways to move money quickly and easily. The Federal Reserve, as a part of its mission to foster a safe, efficient, and widely accessible payments infrastructure, is playing a role as well. As we have in the past, and in collaboration with the private sector, we have worked to innovate the payment system using the latest technology to better meet the needs of businesses and households. In 2023, we launched FedNow, an interbank payment system for banks and credit unions of all sizes to instantly and securely transfer money for their customers, any time of the day, on any day of the year. 5   We are encouraged by innovative private-sector engagement with the new platform and instant payment services generally. We are already seeing early adopters rolling out new services that can benefit consumers. One example is the ability for gig-economy workers to gain instant access to earned wages, which can make a big difference in household cash flow management. We expect these types of innovations will continue to expand in the coming years and be delivered in new contexts, ultimately bringing broad benefits to liquidity-constrained households and small businesses that need to tightly manage payment inflows and outflows.

## Small-Dollar Lending

Access to small-dollar loans from banks can help consumers smooth through the ups and downs of income and expenses. I think many people would be surprised how widely this help is needed. According to the Fed's 2024 Survey of Household Economics and Decisionmaking, when asked how they would respond if confronted with an unexpected $400 expense, nearly 20 percent of adults said they would have paid at least in part by selling something; using a payday loan, deposit advance, or overdraft; or would not be able to pay for the expense. When looking at households with

incomes of under $25,000, this number increases to 46 percent. 6   Access to reasonably priced credit to cover these sorts of expenses is therefore a common need, especially among those with lower incomes. These households have no financial slack.

In contrast to the more costly and riskier sources of credit that I mentioned, we are seeing bank-offered products that are helping to increase access to safer, lower-cost forms of small-dollar lending. The Fed and other bank regulators took a helpful step in this regard in 2020 by issuing guidance. According to that guidance, responsible smalldollar loan programs must treat customers fairly, have effectively managed risks, and be underwritten based on prudent policies. That means, first, that products are offered in a way that most customers successfully repay their small-dollar loans in accordance with original loan terms, which is a key indicator of affordability, eligibility, and appropriate underwriting. Second, it means repayment terms, pricing, and safeguards minimize adverse customer outcomes, including cycles of debt due to rollovers or reborrowing. And finally, it means repayment outcomes and program structures enhance a borrower's financial capabilities by contributing positively to their record of servicing debts.

Most banks that have offered small-dollar loan products since 2020 follow these principles, and it has had a positive impact on the loan terms they offer. Loan terms have better matched customer needs and rates have come down. Small-dollar loans that have the potential to disrupt the market for costly alternative financial services are bank products that provide a straightforward application process, clear loan terms, certainty about approval, strong likelihood of repayment, and quick disbursement of funds. 7

## Alternative Financial Data

Another channel for improving financial inclusion is the use of alternative financial data to supplement the traditional measures that banks have relied on to judge the creditworthiness of borrowers with limited or no traditional borrowing history. For example, lenders can evaluate cash flow-steady income and bill payments-as a measure of the likelihood of loan repayment. Alternative data can help lenders take a ""second look"" for consumers who would otherwise not qualify based on the more traditional credit-score-based underwriting models. In addition to making less expensive and more suitable loans available, alternative data often allows faster loan decisions. This is an important consideration for low- and moderate-income borrowers, who tend to have little savings, and struggle with meeting an unexpected expense. 8 Technological advances such as application programming interfaces (APIs), a set of specifications that can allow software to communicate with each other, can also help lenders access permissioned consumer financial data that can be used for underwriting. APIs also facilitate automated application, decisionmaking, and fund delivery.

Let me conclude by returning to where I started, which is the crucial role of access to safe, transparent, and low-cost bank accounts as the gateway to financial inclusion. We have made great progress, but I am certain that there are still many people whose finances and lives could improve with a bank account suited to their needs and economic circumstances. I applaud the work of financial inclusion leaders in doing what they can to make bank accounts available and better tailored to the needs of low- and

moderate-income households. In thinking about how to better design financial products and services, we can build on many years of behavioral financial research and practice. Thank you.

- 1 The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.
- 2 Federal Deposit Insurance Corporation, 2023 National Survey of Unbanked and (FDIC, November 2024). Underbanked Households (PDF)

## 3 FDIC, 2023 National Survey.

- 4 Mohammad Imdadul Haque, Abdul Azeez N.P., and S.M. Jawed Akhtar, ""UPI and Financial Inclusion in Rural India: A Case Study,"" Development and Sustainability in 26 (2025), https://doi.org/10.1016/j.dsef.2025.100056. Economics and Finance
- 5 As an interbank payment system, the FedNow Service operates alongside other longstanding Federal Reserve payment services such as Fedwirefi and FedACHfi. The Federal Reserve is committed to working with the more than 9,000 banks and credit unions across the country to support the widespread availability of this service for their customers over time.
- 6 Federal Reserve Board staff analysis of survey results, published in the Economic (PDF) (Federal Reserve Board, May 2025). Well-Being of U.S. Households in 2024
- 7 The Pew Charitable Trusts, "" From Payday to Small Installment Loans (PDF),"" Brief (August 2016).
- 8 The Pew Charitable Trusts, ""Consumers want from their small-dollar-loans: Access /Certainty of approval, Affordability, and Speed,"" Issue Brief (May 2023).",Michael S Barr
https://www.bis.org/review/r250717e.htm,John C Williams: Summer of '25 - the data,"Remarks by Mr John C Williams, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the New York Association for Business Economics, New York City, 16 July 2025.",2025-07-16 00:00:00,"## John C Williams: Summer of '25 - the data

Remarks by Mr John C Williams, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the New York Association for Business Economics, New York City, 16 July 2025.

* * *

## As prepared for delivery

## Introduction

Good evening. I'm pleased to see my fellow economists and colleagues enjoying a long summer evening in the city in the best way possible-indoors and prepared for a robust discussion on the economic outlook.

I've been looking forward to this conversation for some time. But before we turn to the discussion and Q&amp;A, I'd like to take a few minutes at the start of the program to share my assessment of recent economic data and how it's informing my outlook for the economy. Particularly, I'll explain what the data are telling us in light of economic uncertainty, and how I expect the effects of tariffs to take shape.

Now is when I must give the standard Fed disclaimer that the views I express today are mine alone and do not necessarily reflect those of the Federal Open Market Committee (FOMC) or others in the Federal Reserve System.

## Soft Data/Hard Data

You all read the news and are familiar with the facts and figures. The changing landscape around trade policy has heightened economic uncertainty among households, businesses, and financial market participants. The response to these developments and the associated uncertainty has led to interesting and sometimes contrasting dynamics in both the soft data and hard data.

Soft data, such as the regional business surveys conducted by the New York Fed, have highlighted an elevated degree of uncertainty about the economic outlook over the past few months. All told, concerns about tariffs have been widespread, resulting in a reported pullback on capital spending.

Similarly, our national Survey of Consumer Expectations (SCE) shows that consumers' uncertainty along a number of dimensions remains elevated as well, leading many households to scale back on their expected spending growth on nonessential items. 1   In addition, survey respondents report that their uncertainty about future inflation remains elevated.

But some soft data have provided more encouraging news. For example, in the SCE, longer-run inflation expectations have remained stable, while short- and medium-term

inflation expectations have returned to their pre-pandemic ranges. This is critically important, because well-anchored inflation expectations are essential for sustained price stability.

Now I'll turn to some hard data. And by these measures, the U.S. economy remains in a good place.

Real GDP growth data have been unusually noisy, largely reflecting effects from the front-running of tariffs earlier this year. That said, the data are suggesting that economic growth has slowed relative to last year's pace.

All of this data-both hard and soft-feed into my assessment of how the economy is faring with regard to the Fed's dual mandate goals of maximum employment and price stability.

On the employment front, the most recent data show a solid labor market, as demonstrated by measures of unemployment, employment, vacancies, hiring, and quits. Job growth is slowing, but so is labor supply, owing to lower immigration. Overall, labor supply and demand are well balanced and there are no signs that the labor market is adding inflationary pressures.

With regard to price stability, inflation has continued on a gradual, albeit bumpy downward path toward our 2 percent longer-run goal. Based on my reading of the June CPI and PPI data, I estimate that the 12-month percent change in headline PCE inflation in June will be about 2-1/2 percent, and core inflation will be about 2-3/4 percent.

## The Effects of Tariffs

I often say that I look at the totality of the data to track underlying trends and evolving conditions. So, in addition to closely watching the data and trends that I just mentioned, I've been keenly watching the effects of tariffs on the prices of goods and services.

One question comes up a lot these days: ""All we hear about is tariffs, tariffs, tariffs. But then why hasn't inflation gone up?""

To answer this question, you need to dig into the details of how tariffs affect prices, and that means getting into the data at a more granular level.

We seeing initial effects of tariff increases on core goods prices. Specifically, for are items that are more exposed to higher tariffs-household appliances, musical instruments, luggage, tableware-price increases so far this year have been well above what one would expect based on past trends. Using granular import price data and linkages measured through input-output tables, we can see if these patterns occur broadly across categories of goods and services. 2   And in fact, there is a positive relationship between a category's exposure to tariffs and its price increase to date this year relative to its prior trend.

It's important to note that it's still early days for the effects of tariffs, which take time to come into full force. Combining enacted and announced tariffs, estimates of the

resulting average effective tariff rate range somewhere between 15 and 20 percent. But actual tariffs in effect in recent months were much smaller than that, as seen by the amount of tariff revenue collected each month. Net tariff receipts as a share of imports rose from about 2-1/4 percent in the first three months of the year to about 8 percent in May.

On top of that, it takes time for the tariff increases to pass through to domestic prices. In particular, businesses and consumers bought imported goods in droves in anticipation of the higher tariff rates, likely delaying their effects on domestic prices.

Nonetheless, businesses are very focused on tariffs and say that they expect to respond by increasing prices. A special New York Fed survey of businesses indicates that firms passed on at least some of the higher tariffs to their customers, with nearly a third of manufacturers and about 45 percent of service firms fully passing along all tariffinduced cost increases by raising their prices. 3

All in all, although we are only seeing relatively modest effects of tariffs in the hard aggregate data so far, I expect those effects to increase in coming months. Overall, I expect tariffs to boost inflation by about 1 percentage point over the second half of this year and the first part of next year.

Another element to the inflation outlook is that the lower foreign exchange value of the dollar we have seen this year likely will add somewhat to inflationary pressure going forward.

We won't know exactly the magnitude or timing of how these various factors will play out until we see more data. That's why I'll continue to be vigilant and monitor prices and broad movements over time to best assess evolving conditions.

## Monetary Policy

The combination of continued uncertainty, a solid labor market, and inflation still above our 2 percent goal led the FOMC to decide to leave the target range for the federal funds rate unchanged at 4-1/4 to 4-1/2 percent at its most recent meeting last month. 4

Maintaining this modestly restrictive stance of monetary policy is entirely appropriate to achieve our maximum employment and price stability goals. It allows for time to closely analyze incoming data, assess the evolving outlook, and evaluate the balance of risks to achieving our dual mandate goals.

In addition, the FOMC continues to reduce its holdings of Treasury securities and agency debt and agency mortgage-backed securities. That process continues to go very smoothly.

## The Economic Outlook

I'll conclude my remarks with the question that likely brought you all here this evening. What is my outlook for the economy?

Given all the uncertainty, a number of outcomes are possible. But based on what the data tell us today, I expect uncertainty and tariffs to restrain spending and reduced immigration to slow labor force growth. As a result, I expect real GDP growth this year to be about 1 percent.

With this slowdown in growth, I expect the unemployment rate to rise to around 4-1/2 percent by the end of this year. I anticipate inflation will come in between 3 and 3-1/2 percent in 2025, and then fall back to about 2-1/2 percent next year before reaching 2 percent in 2027.

## Conclusion

As the summer progresses and we look toward the remainder of the year and beyond, I'll remain focused on of the data-the soft data from surveys, the hard data we see in all the real GDP growth and consumer spending, and tariffs' effects on goods and servicesand what it ultimately means for the achievement of our dual mandate goals.

There's definitively heightened uncertainty about the path of the economy, but it's too early to say what the trajectory of the hard data will be. No matter what the future holds, I am committed to supporting maximum employment and returning inflation to our 2 percent longer-run goal.

Thank you for hosting me this evening. I look forward to your questions.

1 Federal Reserve Bank of New York, Survey of Consumer Expectations  (June 2025), and Survey of Consumer Expectations-Household Spending Survey  (April 2025).

- 2  Robbie Minton and Mariano Somale, ""Detecting Tariff Effects on Consumer Prices in Real Time,"" FEDS Notes, Board of Governors of the Federal Reserve System, May 9, 2025.
- 3  Jaison R. Abel, Richard Deitz, Sebastian Heise, Ben Hyman, and Nick Montalbano, "" Are Businesses Absorbing the Tariffs or Passing Them On to Their Customers?,"" Federal Reserve Bank of New York , June 4, 2025 Liberty Street Economics
- 4  Board of Governors of the Federal Reserve System,  Federal Reserve issues FOMC statement, June 18, 2025.",John C Williams
https://www.bis.org/review/r250701c.htm,Piero Cipollone: The quest for cheaper and faster cross-border payments - regional and global solutions,"Speech by Mr Piero Cipollone, Member of the Executive Board of the European Central Bank, at the Bank for International Settlements Annual General Meeting, Basel, 27 June 2025.",2025-06-27 00:00:00,"SPEECH

## The quest for cheaper and faster cross-border payments: regional and global solutions

## Speech by Piero Cipollone, Member of the Executive Board of the ECB, at the BIS Annual General Meeting

Basel, 27 June 2025

Cross-border retail payments are the subject of increasing attention. This is for two main reasons.

First, they play a growing role in the world economy, as international transaction volumes have been increasing at a faster pace than GDP growth. However, despite some improvements in recent years, many payment corridors remain poorly served, which results in slow transaction times and high costs and ultimately hinders economic growth and social cohesion. Moreover, this inefficiency undermines the benefits of globalisation, as the economic gains from lower trade barriers are diverted into rents within cross-border payment markets, rather than benefiting the businesses and households that make use of them.

Second, new risks are emerging. Geopolitical tensions, for instance, could lead to further fragmentation of global payment systems. Moreover, the expansion of stablecoins could introduce several additional challenges, including currency substitution risks and over-reliance on a limited number of dominant private issuers.

This is not a situation we can accept passively. We need continuous efforts to enhance cross-border payments, in line with the G20 Roadmap. And central banks, given their role in ensuring the smooth functioning of payment systems, have a major role to play. Significant work has already been undertaken at international level, notably by the Bank for International Settlements (BIS) and the Financial Stability Board (FSB).

Today, | would like to share our experience with cross-border payments from a regional perspective, emphasising how regional payment infrastructures can be part of the solution. | will then discuss our vision for advancing cross-border payments at the global level.

## The case for enhancing cross-border retail payments

Let me begin by underscoring the costs and risks of inaction.

Over the past few decades, the world has witnessed a surge in cross-border payments, driven by the globalisation of trade, capital and migration flows. According to some estimates, the value of crossborder retail payments could grow from close to USD 200 trillion last year to USD 320 trillion by 2032.

2]

Yet, the average cost of international retail payments remains high. For nearly one-quarter of global payment corridors, costs exceed 3%. And in too many cases, they are slow — one-third of retail cross- border took than business day be settled in 2024.3)

payments more one to Worryingly, there are signs that progress is stalling. The FSB's 2024 progress report revealed no improvements in costs and noted a deterioration in both costs and speed compared with 2023.4)

Geopolitical tensions further compound these challenges, as they risk fragmenting global payment systems and undermining the rules-based international order. This could challenge established correspondent banking networks and lead to greater complexity, higher costs and, in a worst-case scenario, the splintering of the global payment system into multiple, non-communicating blocs.

This raises three pressing issues.

First, high costs and slow transaction times are hampering economic integration and growth, with small and medium-sized enterprises (SMEs) bearing the brunt. For SMEs operating on tight margins, exorbitant fees discourage them from participating in cross-border trade.

Second, the world's most vulnerable groups — such as migrant workers sending remittances home — shoulder a disproportionate share of these costs. In many regions, sending money internationally remains prohibitively expensive. For example, the average costs of remittances to sub-Saharan Africa and South Asia stand at 7.7% and 6.2% respectively. As it stands, the global Sustainable Development Goal target of lowering remittance costs to 3% remains a distant goal. The impact that these fees would have on financial inclusion and cannot be overstated.

reducing well-being

Third, inefficiencies in cross-border payments have created a gap that alternative players, particularly in the crypto-asset space, are eager to fill. However, many of these solutions come with significant risks. Unbacked crypto-assets, for instance, are highly volatile and speculative in nature, creating risks for unsuspecting households and businesses and lending themselves to illicit activities.

Furthermore, stablecoins come with their own set of challenges, which the BIS described in detail in a special chapter of its Annual Economic Report published this week. Stablecoins carry credit risk, making them susceptible to runs, and pose fragmentation risks due to the multitude of stablecoins being issued. Some of these could end up trading at a discount, undermining the singleness of money.

8] Moreover, because a small number of issuers currently dominate the market, this could also give rise to concentration risks. Lastly, a key concern is the prevalence of US dollar stablecoins, which currently account for 99% of the global stablecoin market. These stablecoins provide an easy way to store value in dollars, considerably increasing the risk of currency substitution in the form of ""digital dollarisation"".""2l This phenomenon could have destabilising effects, particularly on emerging markets and less developed economies by impairing the effectiveness of domestic monetary policy. It may also increase the risk of capital flight in response to adverse economic shocks.

## Enhancing cross-border retail payments at the regional and global level

To address inefficiencies in cross-border payments, we must offer an alternative that connects various parts of the global payments system and delivers tangible benefits in terms of speed and cost. At the same time, this solution must respect the integrity, sovereignty and stability of all countries involved.

At the ECB, we are pursuing this on two levels — regional and global.

## Regional cross-border payments: the European experience

At the regional level, Europe serves as a compelling example of what an interconnected payments landscape might look like.

Of course, this has been facilitated by the creation of a single European market and the establishment of a monetary union. One of the key reasons for creating the euro was to support trade and investment by facilitating cross-border transactions. And the launch of our single currency offered a first solution to pay throughout the euro area — in the form of euro cash.

The logical next step was to develop European instruments for electronic euro payments. The Single Euro Payments Area (SEPA) emerged from close cooperation between the public and private sector to harmonise electronic euro transactions. As a result, individuals and businesses can make payments across the euro area at very low costs using credit transfers or direct debit.

The success of SEPA led to its expansion beyond the euro area and even beyond the European Union. Today, customers in 41 European countries can make euro payments quickly, safely and efficiently via credit transfer and direct debit, just as they would for domestic transactions.

We have also developed the TARGET Instant Payment Settlement (TIPS) service, which enables the settlement of instant payments across the euro area. Instant payments are further supported by a payment scheme-— the SEPA Instant Credit Transfer scheme — that provides harmonised rules, standards and protocols. Moreover, EU legislation has made it mandatory for banks to allow their customers to send and receive instant payment at low cost.

A key feature of TIPS is that it's a multi-currency platform. Taking advantage of this, Sweden and Denmark are using TIPS to facilitate fast payments in their respective currencies.) Norway will do the same as of 2028.4] Furthermore, we are implementing a cross-currency settlement service that will allow instant payments initiated in one TIPS currency to be settled in another. Initially, this service will between the euro area, Sweden and Denmark.43]

support cross-currency payments Within Europe, we are also supporting the Western Balkans in developing a regional fast payment system.4] As a service provider for TIPS, the Banca d'Italia is collaborating with the central banks of Albania, Bosnia and Herzegovina, Kosovo and Montenegro to develop an instant, multi-currency payment system based on TIPS software. North Macedonia may join the initiative at a later stage.45] The new platform will facilitate instant payments both within each participating country and across borders.

## Going global: interlinking fast payment systems

This shows the potential for strengthening regional integration in payments. However, let me be clear: regional integration must not come at the expense of global connectivity. It should not be used as a means to sever ties with global payment networks.

Our approach is that regional and global integration can go hand in hand through the interlinking of fast payment systems across regions and countries. Today, over 100 jurisdictions worldwide have implemented their own fast payment systems. Interlinking these systems has the potential to address inefficiencies and build lasting connections that are rooted in trade openness and balanced relationships between partners.

This approach offers several advantages. It would reduce costs, increase the speed and transparency of cross-border payments and shorten transaction chains. It would also enable payment service providers to conduct transactions without having to use multiple payment systems or a long chain of correspondent banks. Moreover, it would ensure that the platform for connecting and converting currencies is managed as a public good, thus avoiding closed loops and discriminatory pricing. Accordingly, the G20 Roadmap for Enhancing Cross-border Payments has identified interlinking as a key strategy for enhancing cross-border payments.U4] In this respect, the excellent work the Committee on Payments and Market Infrastructures (CPMI) is carrying out on payee verification could make a significant difference.

Last October, the ECB's Governing Council decided to take concrete steps towards interlinking TIPS with other fast payment systems to improve cross-border payments globally.!""2]

We will implement a cross-currency settlement service for the exchange of cross-border payments between TIPS and other fast payment systems worldwide."" This will allow us to explore interlinking TIPS with fast payment systems that have a compatible scheme, are interested in being involved and fully comply with the standards set by the Financial Action Task Force for combating money laundering and terrorist financing.

In addition, we are exploring the possibility of creating bilateral and multilateral links with other fast payment systems.

One possibility under consideration is connecting TIPS to a multilateral network of instant payment systems through Project Nexus, led by the BIS. By joining Nexus, TIPS could serve as a hub for processing instant cross-border payments to and from the euro area and other countries that use Tips.24

We are also currently assessing the feasibility of creating a bilateral link between TIPS and India's Unified Payments Interface!22], which handles the highest volume of instant payment transactions in the world25].

Interlinking fast payment systems has the potential to solve the shortcomings related to the messaging leg of cross-border transactions, by facilitating the message that the payer's bank in country A sends to the payee's bank in country B about the incoming transfer of funds. This would already go a long way towards improving the efficiency of cross-border payments.

However, what interlinking does not fully resolve is the settlement leg, through which money moves from the payer's to the payee's account. This still requires a bank that has access to both payment systems that are interlinked, or a credit relationship between a bank in country A and a bank in country B. This is particularly challenging, given the increasing retrenchment of the correspondent banking model.

In this context, we need to collectively exercise our creativity. | do not envisage a solution that could cover all possible corridors and use cases: there may be scope for tokenised forms of money, as well as a revival of the correspondent banking model, especially if we can reduce the associated risks.

In the realm of sovereign money, jurisdictions could agree to use their respective central bank digital currencies as settlement assets. In this respect, the current draft legislation on the digital euro provides for an approach that respects the sovereignty of non-euro area countries and mitigates potential risks for them. It does so by opening the possibility for residents of a partner country to use the digital euro, subject to an agreement with that country, complemented by an arrangement between the ECB and the respective central bank. 24]

Appropriate safeguards — such as individual holding limits for users — would ensure that the digital euro is used primarily as a means of payment and does not fuel currency substitution. Furthermore, the digital euro's design would include multi-currency functionality, similar to that of TIPS. In practice, this means that non-euro area countries could use the digital euro infrastructure to offer their own digital currencies, thereby facilitating transactions across these currencies.

## Conclusion

Let me conclude.

We find ourselves at a pivotal moment for cross-border payments. If we want to make decisive progress and increase their efficiency, we need to work together to develop new solutions. We must, however, be aware of the risks that some of the alternatives on offer may pose.

| would like to thank the BIS — and in particular the CPMI — for the active role they play in this area, not least by bringing us all together today, with representatives from A (Angola) to Z (Zambia). Each of us brings different needs and circumstances to the table. This raises two fundamental questions. What do we have in common? And what principles can guide our collective efforts?

First, we must harness responsible innovation to solve persistent challenges while mitigating the risks | have noted today. Central banks — by ensuring the safety and integrity of payment systems — play an important role in this regard. And by interlinking fast payment systems and exploring the use of central bank digital currencies, we can address settlement inefficiencies while safeguarding monetary sovereignty and financial stability.

Second, regional solutions can serve as a foundation for global progress. | have argued that regional payment integration can be an important part of the solution — provided it remains open to, and actively facilitates, interlinking at a global level. We firmly believe that this open, multi-currency interlinking approach can lay the groundwork for cheaper, faster and more transparent cross-border payments — without compromising the integrity, stability or sovereignty of the countries involved. By designing payment systems that are open, interoperable and multi-currency ready, we can ensure that regional initiatives contribute to global integration rather than fragmentation.

Finally, collaboration is central to our collective success. Forums such as the CPMI community of practice, as well as today's workshop, provide valuable opportunities for sharing knowledge and experiences. We will continue to find ways to work together to build resilient, inclusive and interconnected payment infrastructures that meet the needs of our people and economies. And we at the ECB remain committed to sharing our expertise and collaborating wherever we can add value. Thank for attention.

you your

1.

See paragraph 16 in G20 (2020), G20 Riyadh Summit Leaders' Declaration, 22 November; Financial Stability Board (2020), Enhancing Cross-border Payments — Stage 1 report to the G20, 9 April; Committee on Payments and Market Infrastructures (2020), Enhancing cross-border payments: building blocks of a global roadmap — Stage 2 report to the G20, Bank for International Settlements,13 July; and Financial Stability Board (2020), Enhancing Cross-border Payments — Stage 3 roadmap, 13 October.

2.

FXC Intelligence, Cross-border payments market sizing data. The estimates relate to cross-border retail transactions. When wholesale transactions are included, the total value of cross-border payments is estimated to have reached around USD 1 quadrillion in 2024. See Cerutti, E. M., Firat, M. and Hengge, M. (2025), ""Global Cross-Border Payments: A $1 Quadrillion Evolving Market?"", International Monetary Fund Working Papers, No 2025/120, 13 June.

3.

Payments — 2024 Report on Key Performance Indicators, 21 October.

4.

ibid., p. 2-4.

5.

ibid., p. 4.

6.

Panetta, F. (2022), ""For a few cryptos more: the Wild West of crypto finance"", speech at Columbia University, 25 April.

7.

Bank for International Settlements (2025), ""The next-generation monetary and financial system"", BIS Annual Economic Report 2025, 24 June.

8. June.

Eichengreen, B. (2025), ""The Genius Act Will Bring Economic Chaos"", New York Times, 17

9.

Stablecoins could rapidly gain traction and scale as big tech companies utilise their existing user base and data to promote and market them. See Committee on Payments and Market Infrastructures (2023), ""Considerations for the use of stablecoin arrangements in cross-border payments"", CPMI/ Report, Bank for International Settlements, October; and Panetta, F. (2021), ""Stay safe at the intersection: the confluence of big techs and global stablecoins"", speech at the UK G7 Presidency Conference on ""Safe Openness in Global Trade and Finance"", 8 October.

10.

See Brunnermeier, M., James, H. and Landau, J-P. (2021), ""The digitalisation of money"", BIS Working Papers, No 941, Bank for International Settlements, 19 May.

11.

News, 27 February; and ECB (2025), ""Danish krone now available in all TARGET Services"", press release, 23 April.

ECB (2024), joins TIPS, adding Norwegian krone to Eurosystem's instant payment service"", release, 29 November.

12. ""Norway press

13.

ECB (2024), ""TIPS to include cross-currency instant payments service"", 21 October.

14.

The National Bank of Serbia already operates a fast payment system: Instant Payments Serbia — NBS IPS system.

15.

ECB (2025), ""Roll-out of instant payment settlement service in Western Balkans"", MIP News, 17 January; and Banca d'ltalia (2025), ""Agreement for the creation of an instant payment system in the Western Balkans"", 10 January.

16.

Bank's Project Fast Global Tracker.

17.

Financial Stability Board (2024), G20 Roadmap for Enhancing Cross-border Payments -Consolidated progress report for 2024, 21 October.

18.

ECB (2024), ""Eurosystem launches initiatives to improve cross-border payments by interlinking fast payment systems"", MIP News, 21 October.

19.

This will be based on the European Payments Council's One-Leg Out Instant Credit Transfer scheme. 20.

Bank for International Settlements (2024), ""Project Nexus: enabling instant cross-border payments"", 5 November.

21.

Nexus, a project run by the BIS Innovation Hub Centre in Singapore, will initially connect the fast payment systems of Bank Negara Malaysia, Bangko Sentral ng Pilipinas, the Monetary Authority of Singapore, the Bank of Thailand and the Reserve Bank of India.

22.

Unified Payments Interface is an instant payments system developed by the National Payments Corporation of India and regulated by the Reserve Bank of India.

23.

Close to 500 million transactions per day. See Cornelli, G., Frost, J., Gambacorta, L., Sinha, S. and Townsend, R. M. (2024), ""The organisation of digital payments in India — lessons from the Unified Payments Interface (UPI)"", BIS Papers, No 152, December.

24.

See European Commission (2023), Proposal for a Regulation of the European Parliament and of the Council on the establishment of the digital euro, recital 49 and Chapter VI.

CONTACT",Piero Cipollone
https://www.bis.org/review/r250715c.htm,"Michelle W Bowman: Welcoming remarks - ""Unleashing a financially inclusive future""","Welcoming remarks (via prerecorded video) by Ms Michelle W Bowman, Vice Chair for Supervision of the Board of Governors of the Federal Reserve System, at ""Unleashing a financially inclusive future"", the second annual financial inclusion conference, hosted by the Federal Reserve Board, Washington DC, 15 July 2025.",2025-07-15 00:00:00,"## Michelle W Bowman: Welcoming remarks - ""Unleashing a financially inclusive future""

Welcoming remarks (via prerecorded video) by Ms Michelle W Bowman, Vice Chair for Supervision of the Board of Governors of the Federal Reserve System, at ""Unleashing a financially inclusive future"", the second annual financial inclusion conference, hosted by the Federal Reserve Board, Washington DC, 15 July 2025.

* * *

Good morning. I'm very pleased to welcome you to the second annual Financial Inclusion Conference hosted by the Federal Reserve Board. 1   Last year, at our inaugural event, I underscored that financial inclusion is essential for creating an economy that works for everyone, with innovation in the financial sector playing an important role. 2

This year's conference builds upon increased engagement across both the public and private sectors, with a collective effort to leverage technology to broaden financial service access and improve the financial well-being of consumers and small businesses. The Federal Reserve will continue to play an important role in these efforts through its research, community engagement, and regulatory approach. This work supports our ability to understand and communicate the state of financial inclusion, how banks support access to affordable financial services, and the role that our policies and practices play in promoting inclusion.

## Progress to Date

Banks of all sizes are working to improve access to financial services for all Americans. As I've noted in the past, the U.S. banking system is well-positioned to bring consumers and small businesses into the financial mainstream by providing access to safe, fair, and responsive financial products and services. 3   These efforts greatly benefit from our continued focus on broader access and innovation, including understanding how our supervisory and regulatory framework either supports or impairs a bank's ability to provide affordable financial services that are consistent with safety and soundness.

Innovation comes in many forms. One example is through banks' use of alternative data, which can enable banks to provide services like affordable small-dollar loans or to provide access to credit invisibles who may not have access to loans and other financial services from traditional lenders. 4   This growing area of focus also helps align financial service offerings with a customer's financial goals.

A well-functioning financial system provides a foundation for strong consumer financial health. To further this, the federal banking agencies recently published a request for information on check and payments fraud to help address the impact of this growing problem on banks and their customers. I am committed to working together with a wide range of state and federal partners, including law enforcement, to address this issue. 5

## A More Financially Inclusive Future

Although there has been significant progress in providing access to financial services, there is more work left to be done. We know that financial institutions, both small and large, are working to build innovative approaches to meet their customers' needs while maintaining the safety and soundness of the banking system.

## Today's Conference

The theme of this year's conference is ""Unleashing a Financially Inclusive Future."" Today, we will hear from a number of experts that will help to explore what the future might hold for financial inclusion. Our next presenter, Jo Ann Barefoot from the Alliance for Innovative Regulation, will discuss the role of banking industry innovation and policies in support of financial inclusion. Later in the day we will hear from three panels focused on topics including evolving products and practices, the role of mission-driven organizations, and how cross-border payment innovations can facilitate the movement of money around the world.

I would like to thank you all for joining us today and I will turn it over to Art Lindo, Deputy Director and Head of Policy in the Board's Division of Supervision &amp; Regulation, to introduce Jo Ann Barefoot.

Thank you for the opportunity to join you virtually today, and for your ongoing commitment to support a financially inclusive future.

- 1 The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.
- 2 See Michelle W. Bowman, "" Promoting an Inclusive Financial System (PDF),"" speech delivered at Financial Inclusion Practices and Innovations Conference at the Federal Reserve Board of Governors, Washington, D.C., July 9, 2025.
- 3 Bowman, ""Promoting an Inclusive Financial System.""
- 4 For more details on regulations related to alternative data use in credit underwriting and small-dollar lending, see Board of Governors of the Federal Reserve System, "" Interagency Statement on the Use of Alternative Data in Credit Underwriting,"" CA letter 19-11 (December 12, 2019), and Board of Governors of the Federal Reserve System, "" Interagency Lending Principles for Making Responsible Small-Dollar Loans,"" SR letter 20-14/CA 20-8 (May 20, 2020).
- 5 See Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency, ""Federal Bank Regulatory Agencies Seek Comment to Address Payments and Check Fraud,"" press release, June 16, 2025.",Michelle W Bowman
https://www.bis.org/review/r250715b.htm,Christopher J Waller: Demystifying the Federal Reserve's balance sheet,"Speech by Mr Christopher J Waller, Member of the Board of Governors of the Federal Reserve System, at the Federal Reserve Bank of Dallas, Dallas, Texas, 10 July 2025.",2025-07-10 00:00:00,"## Christopher J Waller: Demystifying the Federal Reserve's balance sheet

Speech by Mr Christopher J Waller, Member of the Board of Governors of the Federal Reserve System, at the Federal Reserve Bank of Dallas, Dallas, Texas, 10 July 2025.

* * *

Thank you, Lorie. Let me start by expressing my deepest condolences to the families and loved ones of those harmed by the flooding in the Hill Country. I cannot imagine the pain and anguish they are feeling. My prayers go out to all those affected.

Turning to my remarks for today, thank you also for the opportunity to speak to you about the Fed's balance sheet, one of the more complex, and, I believe, misunderstood aspects of the Federal Reserve's role as a central bank. To level set the conversation, 1 let me start with some simple facts. In August of 2007 our balance sheet was around $870 billion, equal to approximately 6 percent of nominal gross domestic product (GDP). Today it is around $6.7 , with a , which is about 22 percent of GDP. This trillion t is down significantly from its maximum size of nearly $9 trillion in early 2022 but still quite large. Since nominal GDP has essentially doubled since 2007, if our balance sheet had grown at the same rate, it would be around $1.7 trillion today-not $6.7 trillion.

An obvious question is why our balance sheet is so much larger than economic growth would have predicted. As an aside, let me point out that there is no consensus among economists about how large a central bank balance sheet should be, but it is logical to ask: if monetary policy worked when the balance sheet was 6 percent of GDP, why is it, and perhaps needs to be, proportionally so much larger now?

A major reason is that the Federal Reserve embarked on two major balance sheet policy initiatives over the past twenty years to respond to urgent problems in the economy. First, we engaged in quantitative easing, or QE, to provide support to the economy after the advent of the Global Financial Crisis and then again with the COVID19 pandemic. Second, we consciously changed our implementation framework for providing liquidity to the banking system by moving from a scarce-reserves system to an ample-reserves system. This change was necessary because there were shortcomings with the scarce-reserves approach-short-term rates were harder to control and required daily interventions in the markets by the Fed, and these problems were made worse when rates were at or near zero. The Federal Open Market Committee (FOMC) explicitly stated its commitment to ample reserves in 2019, when we were gradually shrinking our balance sheet, concluding that this approach would be used over the longer-run, and it soon proved very useful when the pandemic again brought rates to zero. 2

Although these are two fundamentally different reasons for changing the size of our balance sheet, we did them more or less at the same time. This has caused confusion, with some people thinking that the Fed is choosing to keep the balance sheet larger than it needs to be. This confusion is amplified by the fact that there are external forces that have boosted the size of our balance sheet that are not under the control of the Federal Reserve. My goal today in this speech is to disentangle each of these forces

and try to demystify the role of our balance sheet in conducting monetary policy. I also want to clarify issues that are currently being discussed in the public domain. I agree that the balance sheet needs to shrink but, as I will show, not by as much as some believe it should. I will also explain why the composition of the balance sheet matters as much as its size and how changes are needed there as well.

I know from teaching this topic over the years to my undergraduate students that unless you are an accountant or a banker, you would probably rather go to the dentist than listen to a speech about the Fed's balance sheet. I hope to explain it clearly enough that you can leave here and engage in the public debate with a better understanding of the issues. To do so, the approach I want to take is the following. Suppose the Fed had never used quantitative easing and simply decided to move to an ample-reserves system from a scarce-reserves system. How would the liability and asset sides of our balance sheet change in response to this one policy decision? After addressing this question, I will then discuss how QE affects our balance sheet and also some difficult tradeoffs that arise when engaging in QE.

## The Big Three Liabilities

For any balance sheet, we start with the asset and liability entries. Assets are things that are owned, and liabilities are things that are owed to others at a given point in time. I will start by listing the big three liabilities on the Fed's balance sheet and the characteristics of those liabilities. There are other types of liabilities (and capital) that must be accounted for, but they are too small to matter for the policy matters I want to discuss, so I will ignore them. After discussing these ""big three"" liabilities, we can consider what assets should be held to match those liabilities.

The first big liability of the Federal Reserve is currency outstanding. The Fed supplies U. S. dollars elastically to the public, based on demand, distributing dollars through banks. 3 That demand, which is not controlled by the Fed, is basically determined by how fast the economy-and thus the need for cash-is growing. At the end of 2024, the amount of dollars in circulation was $2.3 trillion. That is up considerably from around $800 billion in 2007 after which the overall balance sheet began growing sharply. Even in terms of GDP, currency has increased, from 5.5 percent of GDP in 2007 to almost 8 percent today. So, an important point that many do not realize is that the Fed's balance sheet has expanded, especially in nominal terms, from increased demand for U.S. currency. 4

What are the characteristics of currency as a liability? First, it is non-interest bearing. Second, it never ""matures"" as other debt obligations do. Let's just say that currency is different from other liabilities-it pays no interest, and you never get back your initial payment for acquiring it. If you come to the Fed and ask us to redeem a dollar bill, we will simply give you another dollar bill.

The second big liability is the Treasury General Account, or TGA. The Federal Reserve is the fiscal agent of the U.S. Treasury, which means that we are the bank for the U.S. government and the TGA is the Treasury's checking account. What are the characteristics of the TGA? First, it is a short-term liability that moves up and down as cash flows in and out of the account as the Treasury receives tax and other payments and pays its bills. Second, we do not pay interest to the Treasury on its account balances. Finally, given the asynchronous timing of payments and receipts, the TGA

can vary significantly, especially when the debt ceiling is binding. During 2024, it generally fluctuated between about $650 billion and $950 billion, briefly peaking at around $960 billion during the April tax season. Due to this year's debt ceiling constraint, the TGA fell from its 2024 average of $780 billion to about $325 billion recently, and with the debt ceiling just increased, there will be a quick rebuild in the coming weeks. So, it is not unusual for the TGA to fluctuate by several hundred billion dollars. This situation is very different than the one in 2007 when the TGA was deliberately held steady at $5 billion each day. This change reflects both how much federal spending has grown in that time and also a shift in accounting in 2015 to holding an estimated week's worth of federal payments in the TGA-a decision made by the Treasury to better manage its cash flow.

An important point that applies to both currency and the TGA is that the Federal Reserve does not have control over the size of these liabilities and hasn't been responsible for their sharp increases. Together, they represent about $3 trillion of our $6.7 trillion balance sheet, or roughly 10 percent of nominal gross domestic product. So, the size of the Fed's balance sheet, which is now about 22 percent of nominal GDP, is nearly half accounted for by these two liabilities that are not under the Fed's control. Those who argue that the Fed could go back to 2007, when its total balance sheet was 6 percent of GDP, fail to recognize that these two factors make it impossible.

The third big liability on the Fed's balance sheet is reserves, which are the funds that depository institutions hold in accounts at the Fed. In effect, these are the checking account balances of the banking system that are held at the Federal Reserve. What is the characteristic of reserves held by banks? First, much like the TGA, they are short term in nature and very liquid-in effect like digital cash. They are the safest and most liquid asset in the financial system and used to conduct payments between banks. The reserve balances that an individual bank holds can increase or decrease, depending on the flow of payments between banks. Much like the TGA, an individual bank's reserve holdings can be volatile. But these payments do not change the total amount of reserves in the banking system-they simply transfer them from one bank to another. So, while reserve balances of individual banks can move around, total reserves are more stable, and the total amount of reserves in the system is directly controlled by the Federal Reserve. Second, in October 2008, Congress authorized the Federal Reserve to pay interest on these liabilities. Besides ending the implicit tax on banks for holding reserves, it was a step aimed at helping the Fed conduct monetary policy effectively, which it does, but it is sometimes inaccurately criticized as a giveaway to banks. I will address this point a little later. But I mention it here because the amount of reserves in the system affects the total payment flow the Fed must make to banks at the current interest rate on reserves.

## Assets Backing These Liabilities

By the definition of a balance sheet, these liabilities must be matched by assets held by the Federal Reserve. Let's consider matching assets to our currency liability. As I said earlier, currency pays no interest and never matures. So, we can hold assets of any maturity length to offset our liability for currency. Since currency pays no interest, any interest earned off these assets is pure profit. Given that longer-maturity assets generally pay higher interest rates and are less volatile, it seems reasonable to hold longer maturity assets against our currency liability.

Now consider the TGA liability. We also pay no interest on the TGA. But, unlike currency, a problem with the TGA is that it can vary substantially, which makes total reserves in the system more volatile. This link to reserves is because when tax payments are made to the Treasury, we debit the payer's bank reserves and credit the Treasury's TGA account. When the Treasury makes a payment, we debit the TGA and credit the recipient bank's reserve account. Thus, volatile movements in the TGA affect the Fed's reserve management policy. There are two ways to deal with this situation: hold a buffer of reserves to ensure movements in the TGA do not affect market liquidity or hold short-maturity assets that we can expand or contract to sterilize movements in the TGA such that total reserves in the banking system are unchanged. 5   The first strategy suggests the buffer stock of assets could take the form of somewhat longer maturity, while the second strategy could require holding short-term assets that can easily be bought and sold with little interest rate risk.

That brings us to reserves. As I mentioned, reserves are a short-maturity liability which pay interest, which suggests that the Fed should consider holding short maturity assets against this liability. Treasury bills and short-maturity Treasury notes are the safest and most liquid assets, so it would make sense to hold them against reserves. If the interest rate earned on our short maturity Treasury assets is very close to the interest we pay on reserves, then our interest earnings from the Treasury are simply passed through to the banks. In this sense, our balance sheet is just another way to transfer interest payments on Treasury securities from the Treasury to the banks. 6

Because of the minimal spread between these two short-term interest rates, banks are largely indifferent to either holding reserves or the short-term Treasury securities we hold-both are highly liquid and pay roughly the same rate of return. But layer on top of this the fact that reserves are a bit more liquid than Treasury securities because banks don't have to buy or sell the Treasury securities to get reserves, and banks are willing to hold a lot of reserves. Since the Fed supplies these reserves, one might ask what it costs taxpayers to supply a large amount of reserves. From the Treasury's point of view, its interest expense is the same regardless of who holds the short-term Treasury securities. So, the Fed can provide all the liquidity that banks need at zero marginal cost, which makes me wonder why some want to make reserves scarce. I often use the following analogy to drive this point home: If governments could provide clean, safe drinking water for citizens at zero cost, why would they make it scarce?

Now, one could ask why pay interest on reserves at all? Why not keep the interest income generated on the assets we hold to back reserves and remit it back to the Treasury? This seems like a no brainer! But there are a few reasons that interest on reserves makes sense, including the following.

First, paying interest on reserves that is commensurate to the rate paid on short-term Treasury securities makes reserves attractive to banks, and holding reserves improves the functioning of the financial system by giving banks more liquidity and greater scope to settle payments in an orderly way. In contrast, if reserves bear no interest, then commercial banks will have strong incentives to avoid holding a lot of reserves, and instead hold short-term, interest-bearing assets like Treasury bills. If banks managed their liquidity only by buying and selling Treasury securities, several banks selling Treasury securities at the same time could flood the market and put undesirable upward

pressure on interest rates across the economy. An ample-reserves regime where we pay interest on reserves ensures that there are enough reserves in the banking system to avoid this kind of sell off in Treasury securities, helping to stabilize the financial system without any harm to banks or their customers.

The second part of the case for interest on reserves is that it isn't costing taxpayers any money. As I noted earlier, whether the Fed or banks hold the Treasury securities, the Treasury is paying interest on its debt. And, if the Fed is holding the Treasury securities, then the interest payment from the Treasury to the Fed on the Treasury bills is matched with an interest payment from the Fed to banks on their reserves. So, paying interest on reserves is not creating any additional expense to the Treasury.

But what is the appropriate level of ample reserves the Fed is trying to get to? There is no clear answer to this question and that is what we are trying to discern. We want to provide the amount of liquidity necessary, but we don't want to provide excessive liquidity that banks do not want or need.

One reason for increased demand for reserves is that since the Global Financial Crisis changes in banking regulations led to a large shift in demand for high-quality liquid assets. For example, bank liquidity regulations, such as the liquidity coverage ratio, encouraged banks to hold high quality liquid assets. As these regulations came into play, banks' demand for high-quality liquid assets, including reserves, increased tremendously relative to 2007.

I think of ample reserves as the threshold below which banks would need to scramble to find safe, liquid funding, something that would drive up the federal funds rate and money market interest rates across the economy. We have some experience with testing the level of ample reserves during an episode of stress in the financial system that occurred in 2019. At the start of that year, reserves stood at about 8 percent of nominal GDP, and we were continuing to reduce our balance sheet with no apparent stress among banks or otherwise in the financial system. In September 2019, reserves fell below 7 percent of nominal GDP, and stresses appeared in the financial system, requiring the Fed to step in and take action to add reserves. So, I start from the view that problems emerged when reserves fell below 8 percent of GDP. One might argue that banks are now larger relative to GDP, so they may desire a bit more reserves. Furthermore, there is also a genuine concern that it is not only the total amount of reserves that matters but also the distribution of reserves across the banking system. So, I would add a buffer to the 8 percent of GDP that I cited earlier and assume 9 percent is the threshold below which reserves would not be ample. That would mean, as of today, that $2.7 trillion of reserves is roughly ample-it could be more or less in practice, but let me use it as a benchmark.

So, putting the pieces of this hypothetical minimum balance sheet together, we have an estimated $2.7 trillion in reserve balances, $2.3 trillion in currency, and an average of $780 billion in TGA liabilities. This combined means the Fed should be operating with a balance sheet that is roughly $5.8 trillion dollars or 19 percent of GDP. Close to half of this proportional increase from 2007, as I noted, comes from currency and TGA growth outside the Fed's control, and the rest from a transition to an ample reserves regime that has been a necessary, efficient and more effective way of managing monetary policy.

In summary, if we had simply adopted an ample reserves system and backed these liabilities as I suggested without engaging in quantitative easing, there are three key takeaways: (1) we would be earning a net profit off of the assets backing currency and the TGA, (2) the assets backing ample reserves would simply be a way to transfer interest payments to the banks, and (3) we would hold short to medium term assets that could be bought or sold to neutralize large movements in the TGA to keep total reserves stable. With this balance sheet, the Federal Reserve would never run losses, the banks would have ample liquidity for market functioning, and the Fed would not face serious interest rate risk on its asset holdings.

## Today's Balance Sheet and Where We Are Heading

At this point there are going to be people somewhere shaking their fists and yelling that what I have said is simply false because the Federal Reserve is currently losing money on its balance sheet. Our interest expense on reserves is now exceeding our interest income on our asset holdings. This is all true. But this outcome is because of engaging in QE for many years since 2007, not because we are running an ample reserves system. Remember, what I have described so far is what an optimally designed balance sheet would look like if we had never engaged in QE and simply moved to an amplereserves system.

Let me now do the following. Assume we have a balance sheet that corresponds to an ample-reserves system, but now the Fed engages in QE as a means of conducting monetary policy to support the economy.

The Federal Reserve engaged in QE programs when the policy rate was driven down to zero because of severe shocks to the economy after the Global Financial Crisis and then because of the COVID-19 pandemic. Once the policy rate is at zero, the Federal Reserve is constrained in its ability to use its traditional tools to provide further support for the economy. The idea of QE is to buy longer-duration securities as opposed to short-duration assets. By increasing the demand for long-dated securities, the Fed drives up the price and drives down the yield on those securities. By lowering longerterm yields the Fed is able to loosen financing conditions to stimulate aggregate demand. The Fed typically buys longer-dated Treasury securities during QE, but it also bought agency mortgage-backed securities that have the implicit backing of the U.S. Treasury and are issued by Fannie Mae and Freddie Mac, the two governmentsponsored enterprises.

QE affects our balance sheet in material ways that differ from what happens if one is simply constructing the balance sheet to support ample reserves, currency, and the TGA. First, it increases the duration of our balance sheet beyond what we would hold just for currency. Longer-duration assets are more prone to interest rate risk, and the lower the interest rates on those assets, the lower interest income the Fed will receive far into the future. If interest rates rise suddenly or over time as the economy recovers, those assets lose value (in substantial amounts), which lowers the unrealized value of our portfolio. Second, we use short-term reserves to buy the longer duration assets which leads to a maturity mismatch between our assets and our liabilities. So, the additional reserves that are injected from QE may not be costless when short-term rates rise, as they did in 2022, meaning that interest paid on those additional reserves will exceed what is earned on the long-term assets that were purchased with them.

This effect highlights the fact that engaging in QE involves a tradeoff for the Federal Reserve-trying to support the economy in serious economic downturns at the zero lower bound while creating a maturity mismatch between our assets and liabilities that brings interest rate risk onto our balance sheet. This tradeoff does not happen if we simply structure our balance sheet to support an ample-reserves system. The decision to engage in QE requires the Federal Reserve to weigh the benefits and costs from this action. Those benefits and costs are often difficult to quantify at the time QE is undertaken. It is only with hindsight that we can fully assess them, which is one of the challenges of making policy in real time.

Where do we stand today? The Federal Reserve is operating with an abundant, or more than ample, level of reserves, and our securities holdings are tilted toward longerdated maturities. We are shrinking the balance sheet to get back to a size consistent with an ample reserves system. As of last month, banks had nearly $3.4 trillion of reserves with the Fed, accounting for about 11 percent of nominal GDP. 7   Given my rough estimate of the level of reserves needed to be ample, I believe we can likely continue to let a share of maturing and prepaying securities roll off our balance sheet for some time, reducing reserve balances. Of course, we will continue to carefully monitor financial markets as we go.

For me, the bigger problem with our balance sheet is that the maturity structure of our assets to support an ample-reserves system is not well matched. We have far too many long-term assets on our balance sheet relative to my arguments for how to structure the balance sheet. I argued that long-term assets should only be held against currency liabilities, which are $2.3 trillion. But we hold about $2.3 trillion in agency mortgagebacked securities alone! So the duration of our asset portfolio is far too long for the liabilities we need to hold for an ample-reserves system.

If the Fed moved forward with a maturity-matching strategy as I suggest, it would hold about half of its Treasury securities in shorter-dated bills. There have been some advocates who support moving toward the Federal Reserve having a Treasury securities portfolio whose composition mimics the breakdown, or ""universe,"" of total Treasury securities outstanding. This would mean having about 20 percent of our current balance sheet in bills. The argument for this maturity structure is that with this approach, the Fed's holdings would not be putting pressure on any one segment of the yield curve. This is a valid argument, but it would put more duration on our balance sheet and expose the Fed to potential income losses, as we have witnessed the past few years. Maybe that is a tradeoff we should make to avoid distorting our demand for Treasury securities relative to the market's demand. In the end, I support continuing the conversation about what the ultimate composition should be. My objective today was to try to clarify what an ample-reserves balance sheet should look like as a starting point for this conversation.

In the years ahead, moving our portfolio toward shorter-duration securities will be a slow process unless we were to take the dramatic step of selling existing securities to replace them with Treasury bills. When reserves hit their desired ample level and we need to increase securities holdings in line with growth in autonomous factors, like currency and the TGA, we can actively accumulate bills, if we do not take other actions sooner.

I hope that taking a deep dive into a few line items on the Fed's balance sheet has helped to see some issues that lie ahead. Though the FOMC has not finalized its desired efficient and effective size and composition of the balance sheet, it seems apparent that today's portfolio should be adjusted. And there are obvious steps to take. We are reducing the size of the balance sheet slowly and need to consider shifting it toward more bills. As we do so, we should do it gradually and predictably, so the markets and public are fully aware of our actions.

- 1  The views expressed here are my own and are not necessarily those of my colleagues on the Board of Governors or the Federal Open Market Committee.
- 2  In January 2019 the FOMC released the Statement Regarding Monetary Policy Implementation and Balance Sheet Normalization, which is available on the Board's website at  https://www.federalreserve.gov/newsevents/pressreleases /monetary20190130c.htm.
- 3  The Federal Reserve supplies currency on demand to ensure that commercial bank money trades one for one with currency. This creates certainty that a customer's demand to transform one unit of commercial bank money into a unit of currency will be met.
- 4  Judson (2024) estimates that a significant share of demand for U.S. currency comes from abroad, especially in the $100 denomination; see Ruth Judson (2024),  ""Demand for U.S Banknotes at Home and Abroad: A Post-Covid Update,""  International Finance Discussion Papers 1387 (Washington: Board of Governors of the Federal Reserve System, March).
- 5  For a discussion of the short-maturity assets approach, please see Annette VissingJorgenson (forthcoming), ""Fluctuations in the Treasury General Account and the Fed's Balance Sheet,"" FEDS Notes (Washington: Board of Governors of the Federal Reserve System).
- 6  For accounting purposes, our net interest income on these assets backing reserve balances would be near zero.
- 7  As I noted, there will be a replenishing of the TGA in coming weeks. This action will reduce reserves commensurately.

Note: On July 10, 2025, a typo was corrected in this sentence to change ""reserves"" to ""Treasury securities"": ""And, if the Fed is holding the Treasury securities, then the interest payment from the Treasury to the Fed on the Treasury bills is matched with an interest payment from the Fed to banks on their reserves.""",Christopher J Waller
https://www.bis.org/review/r250715a.htm,Sarah Breeden: Weathering the storm - stability in a changing climate,"Speech by Ms Sarah Breeden, Deputy Governor for Financial Stability of the Bank of England, at the Chapman-Barrigan lecture, London, 10 July 2025.",2025-07-10 00:00:00,"Opens

Skip to main content

## Weathering the storm: stability in a changing climate - speech by Sarah Breeden

Based on remarks given at the Chapman-Barrigan lecture

Opens

Published on 10 July 2025

Sarah Breeden, Deputy Governor for Financial Stability, shares some real world examples of how risks to price and financial stability from climate change are emerging now, and how they might grow going forward. She emphasises the importance of work at the Bank and in the wider financial sector to build awareness of and resilience to these risks.

## Speech

## Introduction

I wanted to start by saying what an honour it is to speak this evening at the annual Chapman Barrigan lecture. It is always special to come together to celebrate trailblazing women. And this series is a wonderful tribute to and legacy for Honor Chapman and Trish Barrigan, two outstanding, inspirational, pioneering leaders in property.

The lectures provide space for reflection and discussion on the forces shaping our economies and financial systems and IÕm delighted to contribute to that tradition tonight. ItÕs a time of profound change Ð technological, geopolitical, environmental. I plan tonight to explore the theme of our changing climate and the role of the Bank of England in delivering stability through that.

I am also greatly honoured to speak to such a distinguished crowd from the commercial property sector. The commercial property sector is undoubtedly a hugely important sector of the United KingdomÕs economy. It provides the physical space for businesses to operate, innovate and generate jobs. It attracts significant amounts of foreign capital as it does so. And it directly employs over 1 million people.

But it is also a sector that has over the years seen significant cycles of boom and bust and contributed to many financial stability challenges, both in the United Kingdom and overseas (including in the US even very recently). Understanding the challenges facing the sector is a critical part of our financial stability mission, and we are hugely grateful to the industry for the open and constructive engagement that you all provide.

Opens

Central to that engagement is the BankÕs commercial property forum (CPF). Such engagement has been crucial as recent years have not been quiet. Just in the last five years, the CPF has helped us to navigate the financial stability risks from a global pandemic and the transition to a higher interest rate environment, all against a backdrop of rising global uncertainty.

Today, the sector continues to face headwinds. The latest Bayes UK CRE lending Report shows that almost 70% of all outstanding debt (around £100bn in total) is due for repayment by 2027. Around 10% of debt matured in 2024 with a small minority in default and the rest restructured or extended. Refinancing pressures will likely be felt more acutely in sectors such as office and retail given the post-pandemic shift to more remote working and the continuing shift from physical to online shopping. The transition to higher rates is far from over.

But reassuringly, compared to before the financial crisis, bank lending standards have been much more conservative, and our stress tests show that the UK banking system is resilient to very large falls in CRE prices. Other players matter too, of course. Non-bank participation in the UK CRE sector has grown rapidly since the global financial crisis, adding welcome diversification to the supply of funding. But here I am mindful of vulnerabilities in the non-bank sector Ð most notably liquidity mismatches, leverage and valuation opacity Ð and the potential for increased risks that they bring ( FSB, 2025 ). Opens

But I do not wish to focus on those vulnerabilities tonight. Instead, I want to focus on the challenges of a changing climate. That matters for the Bank of England given our statutory responsibilities for monetary and financial stability. And it matters for you too, as the commercial real estate sector has both a key role to play in helping navigate the climate transition and a set of risks to manage as we do so.

These risks from a changing climate are not hypothetical or somewhere far off in the distance.

Last year was the warmest year on record, with annual average global temperatures exceeding 1.5¡C above pre-industrial levels. The IPCC estimates that average global temperatures are now more than one degree higher than pre-industrial levels. They are set to rise at 0.2¡C per decade, given past and ongoing greenhouse gas emissions[1]. And as average temperatures rise, so too does the risk of passing through Ôtipping pointsÕ as ice sheets collapse and weather patterns change, causing large, accelerating and potentially irreversible impacts[2]. footnote footnote

The rise in temperatures has already increased the frequency and intensity of extreme weather events both abroad and at home. In the UK, intense storm rainfall, like that seen in 2023-24 is now expected to occur once in every five years (compared to once in every 50 under a pre-industrial climate). Under a 2¡C pathway, that rises to once in every three years.

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The risks posed by this changing climate matter for individual firmsÕ safety and soundness, the resilience of the financial system as a whole and, through their impact on the macroeconomy, the outlook for inflation.

These are real risks that could materialise, and in some cases already are materialising, within the time horizons that the Monetary Policy Committee (MPC), Financial Policy Committee (FPC) and Prudential Regulation Committee (PRC) care about. Indeed, when I first started work on climate change at the Bank almost ten years ago, my challenge was to explain how it might be relevant to the core mandate of a central bank. I think the examples. IÕll cover today demonstrate clearly how that case has now been made.

## Price stability

Let me begin by looking at how the physical effects of climate change impact inflation, starting with food.

Severe weather events Ð droughts, floods and extreme temperatures Ð can significantly impact global agricultural prices. Those events have been occurring with increasing frequency and intensity in recent years.

Historical experience suggests that severe weather events can generate price increases of over 30% in global agricultural commodity prices ( de Winne and Peersman, 2021 ). As an economy that imports a high proportion of its food Ð around 40% Ð UK inflation is highly susceptible to such changes. Another study by Peersman (2022) showed that for a 1% unanticipated increase in globally-traded food prices, euro-area headline inflation rose by 0.1%. Our own work at the Bank of England shows broadly comparable results for the UK. Opens Opens

UK food prices are also affected by extreme weather events that take place at home. As we saw in 2023, excessive rainfall can have significant impacts on the supply of domestic agricultural products[3]. Beyond food production, weather events, such as extreme heat, also disrupt infrastructure, such as transport, that are critical to food supply chains[4]. footnote footnote

The impact of severe weather events on inflation extends beyond the food sector. A Bank of England study using county-level data for England over the years 1998-2021, shows that flooding impacts output and prices across sectors Ð including those that feed into core inflation ( Ficarra and Mari, 2025 ). It finds that the impacts differ across sectors, with some presenting as a demand shock and some as a supply shock.

What matters for monetary policy is the impact of such events on aggregate inflation. While most studies find negative impacts on GDP from extreme physical events, the estimated impact on aggregate inflation is less clearcut.

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As set out in work by the Network for Greening the Financial System (NGFS), severe weather events impact the economy through demand, supply, and financial channels, with the aggregate inflationary impact depending, in theory, on whether the demand or supply effects of the event dominate[5]. That is uncertain[6]. But as my colleague James Talbot has highlighted, there is a growing body of literature to suggest that supply effects dominate, meaning these events increasingly represent a trade-off inducing shock for monetary policy makers to deal with ( Talbot, 2025 ). footnote footnote

These impacts are likely to increase over time as temperatures rise further and shocks become more frequent and severe. In a study for the ECB, Kotz et al (2023) show that without adaptation measures, global food price inflation might increase by 1-3pp by 2035, increasing pressures on headline inflation by between 0.3-1.2 pp. They provide evidence that upward pressure from warmer temperatures on inflation is larger in warmer months and warmer countries, suggesting that the effects associated with climate change may be more pronounced as average temperatures rise. More broadly, the emerging literature between climate change and inflation suggests a non-linear relationship ( NGFS, 2024 ). The possible existence of Òtipping pointsÓ adds to the importance of this work. Opens Opens

In addition to considering these impacts on inflation from the physical effects of climate change, we need also to consider transition effects.

The UK government has for some time been implementing policies to transition to a less carbon-intensive economy, consistent with its commitment to reach net zero emissions by 2050. By reducing the physical effects of climate change, these actions will likely reduce the trade-offs monetary policy makers face in the long term. But they can have an impact on inflation in the shorter term.

Indeed I first discussed the role of carbon pricing in explaining some of the large rise and fall in inflation over 2021-23 in a speech I gave in January.

At its peak in October 2022, headline inflation reached 11.1% ( ONS, 2022 ), around 40% of which can be attributed directly to rising energy prices, especially gas and electricity. RussiaÕs invasion of Ukraine and the resulting disruptions to gas supply Ð a classic Ògas supply shockÓ Ð forms the prevailing narrative for the initial rise in inflation ( Alessandri and Gazzani, 2025 ). Opens Opens

But while the invasion was undoubtedly the most significant single driver, carbon prices also rose rapidly during this period. By the summer of 2022, the UK Emissions Trading Scheme (ETS) carbon price had roughly doubled relative to the previous year (Chart 1), in part reflecting several policy announcements that effectively tightened the (future) supply of carbon allowances in both the UK and EU[7]. The rise in wholesale gas prices will have also contributed to the increase in carbon prices ( Shin and Mari, 2025 ). footnote Opens

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Sources: Bank calculations. Data from LSEG and LSEG Commodities Research.Notes: The chart depicts the daily UKrelevant carbon price i.e. the EU ETS carbon price from 2005-2020, and the UK ETS carbon price from 2021-24. The EU ETS price has been converted from EUR to GBP. The London Stock Exchange Group (LSEG) UKA forecast (green dots) is in normal terms (adjusted for 2% inflation)

We estimate that around 1 percentage point of both the increase and subsequent fall in headline inflation over the 2021-23 period is likely to have originated from these changes to carbon policy (Chart 2, RHS). That reminds us that changes in carbon policies can have both inflationary and disinflationary impacts. Indeed looking over a longer horizon, changes in carbon policies have both pushed up and down on prices, albeit at much smaller magnitudes than in recent years (Chart 2, LHS).

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Source: Bank staff analysis based on Copeland et al (2025) Notes: The figure reports the historical contribution of the identified UK-relevant policy shock to UK headline inflation as estimated by the VAR model in Copeland et al. (2025) . To provide conservative estimates, the left-hand side chart is estimated using a Òlow carbon priceÓ sample period (June 2008 to December 2020) whereas the right-hand side chart is estimated using the full sample, which includes the Òhigher carbon priceÓ, period (June 2008 to April 2024). Opens Opens

The energy sector plays an important role in the transmission of carbon policy shocks to inflation (Copeland et al, 2025) . Our estimates suggest that multiple energy-related commodity prices Ð including carbon allowances, crude oil, and natural gas prices Ð increase in response to a shock. These rising costs are passed on to the energy prices faced by households and firms. And, via supply chains, energy intensive firms also pass these through to non-energy prices. Opens

The source of an energy price shock matters for monetary policy. We have estimated that a 1pp rise in energy price inflation originating from a shock in the carbon market has a roughly 25% larger impact on headline inflation relative to an equivalent shock arising in the gas market. It is also several months more persistent than if it had originated in the oil market (Chart 3).

Oil and gas prices have historically been, and are likely to remain, the primary drivers of energy prices: it takes an unusually large carbon supply shock to generate a 1pp rise in energy price inflation[8]. But carbon shocks are likely to grow in frequency and size over coming years, as carbon pricing schemes become more stringent, sectoral coverage widens, and as carbon prices are expected to rise (diamonds on Chart 1). It is however also likely that the drive to decarbonise, particularly in the power sector, will reduce the aggregate impact of carbon price shocks over the longer term. footnote

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Source: Copeland et al (2025) Notes: Impulse responses to the identified UK-relevant carbon policy shock, and the natural gas and oil supply shocks identified by Alessandri and Gazzani (2025 ) and KŠnzig (2021) . Responses are normalised to increase energy CPI inflation by 1 percentage point at peak. Estimation sample: June 2008 to April 2024 for the carbon and oil shocks, and to December 2023 for gas shock (owing to the shock series length). Note: our UK-specific reconstruction of Alessandri and GazzaniÕs gas shocks (which takes the UK NBP natural gas price change around event days) enables estimation over the full sample, and yields similar results. The solid line represents the median draw. The shaded areas are the 80 percent credible intervals. For comparability across shocks, these are standardised to increase energy price inflation by 1 percentage point (at peak), which is a common scaling choice in the literature for ease of interpretation (see, for example, KŠnzig (2025) and Ortubai et al (2025) ). It is worth noting, however, that this scaling choice means we are considering a particularly large shock in the carbon market: roughly 15 times bigger than a ÒtypicalÓ (1 standard deviation) shock over the sample period. Opens Opens Opens Opens Opens Opens

Understanding how these physical and transition risks transmit to inflation will be especially important for monetary policy makers.

ThatÕs because, as these examples show, climate shocks have a significant effect on energy and food prices. These items are bought regularly and have particular salience for households, meaning they have outsized effects on inflation expectations ( Bonciani et al, 2024 ) and so potentially wage and price setting behaviour. In addition, in a world where these shocks become larger, more frequent and more persistent, the risks of these second-round effects become even greater.

Indeed, as my colleague James Talbot recently set out ( Talbot, 2025 ), these shocks sound rather similar to the shocks monetary policy makers have faced in recent years Ð large, unpredictable, but persistent supply shocks in areas of salience for households. So monetary policymakers will need to understand the economic impact of these climate shocks and be ready to react as needed, if we are to keep inflation expectations anchored and inflation low.

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With climate change already influencing the economy, a better understanding of how monetary policy might need to respond to climate shocks matters for investors too, including those in CRE. Building our collective understanding of what is happening and the appropriate policy response is not an easy task. But it is one we must rise to.

## Financial stability

Climate change also matters for financial stability.

Back in 2022 our Climate Exploratory Scenario explored the financial risks posed by climate change for the largest UK banks and insurers.

The exercise concluded that climate change creates risks to households and businesses globally, and so for the financial system. It showed that if banks and insurers did not respond effectively, climate risks could cause a persistent, material drag on their profitability. Loss projections varied across participant type and climate scenario, but amounted to hundreds of billions of pounds. And losses would be significantly higher in a scenario with a late or disorderly transition and higher still in a scenario with no further policy action and so higher, and still rising, physical risks. Individual firms, and the financial system overall, would be much less resilient.

In that context, IÕd like to hone in on two specific examples where climate risks becoming more proximate could directly impact financial stability.

The first relates to a question that I Ð and other Bank colleagues Ð have raised of a possible Òclimate Minsky momentÓ, where the crystallisation of climate risk triggers broad asset repricing, perhaps similar to the impacts on asset prices we saw during Covid 19 or the start of the war in Ukraine.[9] footnote

The impact on repricing of any Ôtrigger climate eventÕ would of course depend on the source of the shock, how well climate risks are priced before it, the speed of any repricing, and if vulnerabilities in market-based finance further amplify it.

Analysis of these risks has to be global. The UK has already made much progress in its transition to net zero. It has also experienced fewer extreme weather events than other parts of the world. But as a small, open economy with a large financial centre, the UK is exposed to cross-border spillovers in global financial markets, and the global operations of large UK companies and UK-based Non-Bank Financial Institutions (NBFIs) mean they are of course vulnerable to climate developments overseas.

On pricing, there is evidence that climate risk is starting to be priced in assets such as corporate and sovereign bonds. But our analysis suggests that current prices neither fully account for the transition risks we could see as part of the transition, nor the physical risks we

Opens could see in its absence.[10] In this context, markets over time or in response to a significant climate event begin to place more weight on scenarios where climate risks result in a broadbased macro shock, characterised by inflationary shocks, sharp changes in interest rates, and increased risk premia. And that would of course mean that they re-evaluate upwards their pricing of climate risk today.

The speed of repricing is crucial for understanding financial stability impacts. Rapid repricing could occur if markets start pricing in severe physical climate risks or a disorderly transition, perhaps following acute physical disasters. Even gradual repricing could result in short bouts of rapid price movements.

This repricing could affect a wide range of assets. Scenario analysis undertaken by Bank staff suggests that a portfolio of long-duration G7 sovereign bonds could lose 10-20% of its value given interest rate risk and increasing risk premia (depending on the scenario).[11] Corporate credit spreads could widen, making the repricing of corporate asset classes even more significant. footnote

Source: Measuring climate-related financial risks using scenario analysis (Holden et al, 2024)



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Large UK NBFIs, which are more exposed to market risks like these than banks, might not be resilient to such a shock. The first-order repricing shock is of a similar size to the shock in last year's SWES.[12] Larger declines in sovereign bond prices could lead to uncertain behavioural responses by NBFIs, such as forced selling in excess of that observed in that exercise. footnote

These risks, and the tools to assess them, are evolving rapidly. It's important to take them seriously and fully understand the broader impacts, including potential behavioural responses. Following this work, we have a better understanding of how climate risks might impact financial markets. But there is more for us and for market participants to do. And to that end, we are further clarifying our expectations for banks and insurers through our recently published consultation paper .

Let me pause briefly on commercial property since assets here might also be vulnerable to sudden repricing. We are already seeing evidence of a Ògreen premiumÓ being paid for more sustainable office space[13]. That suggests that some climate risks are already priced in. However, a sharp reassessment of physical risks or the likelihood of a sharp and disorderly transition, may lead properties that are more exposed to severe weather events or that do not live up to sustainability standards to face a heavier discount. So there is work to do here too. footnote

Climate risks becoming more proximate can also impact financial stability through the withdrawal or a higher cost of insurance. As flood risks intensify, insurers may withdraw coverage or increase price. This is already happening in the US, where policy non-renewals correlate with regional climate risks.[14] footnote

Prospective homebuyers in flood prone areas might anticipate reduced insurance availability and higher premia, demanding discounts to house prices to compensate. Our November 2024 Financial Stability Report found that in the most pessimistic climate scenarios, the 1% of properties most exposed to increases in flood risk could lose around 20% of their value. And the potential fall in house prices for the 10% most exposed areas would be, on average, 6.5 times larger than in areas with a median level of risk.[15] footnote

Mortgage lendersÕ exposures are sensitive to house prices. A price fall would increase the loss given default on a property. If more properties were uninsured, potential losses faced by lenders in the event of flooding would also increase. We could see mortgage prisoners, where existing mortgage holders are unable to refinance their homes. Our CBES analysis found that in our late and no action scenarios mortgage losses faced by banks are around four times larger than in our early action scenario.

Changing insurance availability can also impact commercial real estate. It is estimated that 10% of commercial properties are in flood plains and the impact of flooding on affected businesses can be severe ( Crampton et al, 2025 ). The need for businesses to self-insure could also put downward pressure on their investment expenditure. Opens

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In the UK we have Flood Re for residential properties Ð a joint reinsurance initiative between the Government and the insurance industry. This limits the short-term financial impact of flooding on households, as around 90% of residential properties are insured. But commercial properties are not covered. And as physical climate-related risks increase over the long term, and the Flood Re scheme ends, financial stability risks could develop. What happens as we approach the end of Flood Re matters a lot.

These examples highlight how some of the risks to the financial system are becoming more proximate. Since the Bank first started its thinking on how climate change matters for the financial system we are in a much better place Ð managing climate risks is becoming increasingly embedded in our analysis and our actions, and our increased understanding of a host of risks has led us to feel better prepared. However, there is much more for us and market participants to do to minimise both the likelihood of climate risks materialising and their impact if they do.

## Conclusion

So where does this leave us? In 2019 I gave a speech titled ÒAvoiding the stormÓ. As I have hopefully highlighted for you this evening, the storm, or at least the beginnings of it, is already upon us. And so it is vital for us now to work out how to Òweather itÓ.

What does that mean for the real estate sector? Climate risks are real and tangible, and as they become more imminent, property valuations may change rapidly. Real estate owners and lenders could face significant risks, particularly if insurance protection becomes unavailable.

To manage these risks and support the transition to net zero, investment for adaptation and mitigation is crucial. Under current Government plans, all commercial property will need an EPC rating of B or above by 2030. 83% of commercial buildings in major cities currently fall below that standard[16]. The cost of transition will be substantial and require significant financing. Without the necessary funding, we risk stranded or ÒzombieÓ properties. footnote

As the central bank, our role is to provide the right macroeconomic and financial environment for this investment. That means two things: ensuring price stability and maintaining a strong and resilient financial system. And we need to do that in the face of physical and transition shocks. These are the most important actions we can take to ensure a stable foundation for economic growth. Our doing that will support us all in weathering the storm.

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I would like to thank Natalie Burr, Richard Button, Jennifer Clark, Hannah Copeland, Kemal Ercevik, Lennart Brandt, Lewis Holden, Caspar Siegert, Borro Wanengkirtyo, Rebecca Mari, Timothy Rawlings, Francine Robb and Nicola Shadbolt for their assistance in preparing these remarks. I would also like to thank Andrew Bailey, James Talbot and Huw Pill for their advice and comments.

1. IPCC Ñ Intergovernmental Panel on Climate Change Opens
2. Global Warming of 1.5¡C, IPCC (2020). Opens
3. Climate change: Supporting farmers and growers - House of Lords Library Opens
4. Impact of Climate Change on the UK Food System | Published in FSA Research and Evidence Opens
5. Acute physical impacts from climate change and monetary policy (2024), NGFS Technical Document Opens
6. In Ficarra and Mari (2025) , a one standard deviation increase in the number of UK floods was found to reduce regional output by 1% and raise regional inflation by 0.5% at the two-year horizon. However, the aggregate economy-wide impact can differ significantly depending on the sectoral composition and position in the supply chain of the area affected by flooding. Li (2024) applies the same identification approach across countries and finds that flooding has a much larger inflationary effect in developing economies relative to advanced ones, because of the larger supply shock it triggers. Opens
7. In 2021, the EU transitioned from Phase 3 to Phase 4 of the EU ETS. The UK left and established the UK ETS, which started in Phase 1. Both ETSs have scheduled a reduction in the supply of carbon permits, a decreasing share of permits being given out for free, and an expansion of sectoral coverage over the period 2021 to 2030.
8. For comparability across shocks, our estimates in Chart 3 are standardised to increase energy price inflation by 1 percentage point (at peak), which is a common scaling choice in the literature for ease of interpretation (see, for example, KŠnzig (2025) and Ortubai et al (2025) . It is worth noting, however, that this scaling choice means we are considering a particularly large shock in the carbon market: roughly 15 times bigger than a ÒtypicalÓ (1 standard deviation) shock over the sample period. The oil and gas price shocks needed to increase energy price inflation by 1 percentage point (at peak) are 5 times and 3 times bigger than a ÒtypicalÓ (1 standard deviation) shock over the sample period, respectively. Opens Opens
9. Avoiding the storm: Climate change and the financial system - speech by Sarah Breeden | Bank of England and From hot air to cold hard facts - speech by Andrew Hauser | Bank of England
10. Financial Stability Report - November 2024 | Bank of England
11. Measuring climate-related financial risks using scenario analysis | Bank of England
12. System-wide exploratory scenario | Bank of England
13. Sustainability and Value | Capital Markets: Central London Offices Research | 2023 | JLL Research Opens
14. Chairman Press | Chairman's Newsroom | Chairman | U.S. Senate Committee on The Budget Opens
15. Evidence is emerging that higher insurance premia are already affecting home prices in parts of the US, see for example Eastman, Evan and Kim, Kyeonghee and Zhou, Tingyu, Homeowners Insurance and Housing Prices (June 03, 2024). Available at SSRN: Homeowners Insurance and Housing Prices . Opens

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## Sarah Breeden

Deputy Governor, Financial Stability

©2025 Bank of England

Page 14",Sarah Breeden
https://www.bis.org/review/r250717a.htm,"Andrew Bailey: The future of the multilateral economic system, and some news on the UK payments infrastructure","Speech by Mr Andrew Bailey, Governor of the Bank of England, at the Financial and Professional Services Dinner, London, 15 July 2025.",2025-07-15 00:00:00,"## Andrew Bailey: The future of the multilateral economic system, and some news on the UK payments infrastructure

Speech by Mr Andrew Bailey, Governor of the Bank of England,  at the Financial and Professional Services Dinner, London, 15 July 2025.

* * *

Lord Mayor, thank you for inviting us back for a second time in your mayoralty.

I am going to use my time to tackle two subjects. I'm probably breaking a rule of good speech making because the connection between the two is slender - I'm not going to overdo the connection. They are both topical and highly relevant, that's my justification. The first is big picture - the world economic situation and the need to refocus and restore multilateral institutions. The second concerns payments here in the UK.

To say that the state of the global economy and the impact of tariff announcements is in the news and significant is an understatement. The shifts we have witnessed - and continue to witness - mark a generational change in the system of trade amongst nations. They are by no means the first such shifts, even if they are the most sudden and fundamental in the post-war era. Recent events have exposed fault lines in the multilateral system of relations between nations, including in the global trading system, and a perceived failure to deal with what are seen as persistent global imbalances.

What do I mean by the multilateral system? It's the economic assessment and governance that comes from two areas. First are the multilateral institutions - the IMF, World Bank, OECD and WTO, and - to recognise a personal interest as I Chair it - the Financial Stability Board. The second area is the multi-country decision-making bodies that reinforce these institutions - with the G20 and G7 being important here, as the source of co-ordination and consensus building in a number of key areas including trade.

It has become fashionable to look at the multilateral sphere and to ask why does it matter? Quite simply, it is about the pursuit of economic growth and stability through cooperation. These objectives matter a lot - they facilitate the benefits of openness through trade and capital flows. If the multilateral system works as intended, it need not be a winner takes all process, instead helping us to expand the pie rather than simply divide it up. But nor can the multilateral system produce discernibly unfair outcomes. These would not be sustainable.

As I mentioned, the current charge against the system is that it has allowed the build-up of persistent imbalances between countries. Moreover, these imbalances are considered, by those who make the charge, to be unsustainable. There is as you will appreciate a lot of judgement around what is persistent and what is unsustainable, and views will differ quite markedly on these points. The answer is not that any old imbalance is problematic.

Imbalances are an inherent part of the system. In the short term they reflect differences in national productivity and income. In the longer term, they reflect the fact that

countries are at different stages of economic development, with some catching up and others relatively slowing compared to the later developers. However, persistent imbalances are associated with misallocated resources and can motivate responses which can weigh on global growth. Over time, imbalances can also lead to financial stress.

If the global economic system is working efficiently, over time we should expect these imbalances to self-correct back to levels that are warranted by the longer-term fundamentals of the countries involved. You may ask, what are these fundamentals? An important one is that part of the world has populations that are on average ageing, and will continue to do so, and part does not. This will influence imbalances. Ageing tends to change the pattern of savings behaviour, and external current accounts are equal to saving minus investment in an economy.

When we talk about persistent excessive imbalances, we are looking for evidence that self-correction is not happening in a timely, orderly and symmetric manner. If so why, and what conclusions do we draw from that? A key part of my argument is that this part of the analysis and conclusion drawing must be done at the multilateral level. If it is only done at the national level, we will get less good policymaking.

Let me illustrate this with two contemporary, and I think obvious, cases: China and the USA. Between them, they account for almost 40% of the world's current account imbalances, so it's an obvious place to look. I will start with China.

China's current account surplus is at present 2.3% of national GDP and 0.4% of global GDP according to IMF data. It appears that the surplus primarily reflects the weakness of domestic consumption in China, which in turn reflects an investment and export-led growth strategy and weaker social safety nets domestically. Normally, as households' accumulated precautionary savings rise and productive investment opportunities decline, the national savings rate would fall. However, as Chinese incomes have increased, the self-correction mechanism has been weaker because the domestic incentives to save have remained strong.

Let me turn to the US. The US current account deficit is at present 3.9% of national GDP and 1% of global GDP. At the macroeconomic level it appears to reflect strong private consumption and a large fiscal deficit. Why has the self-correction mechanism not operated in the US? I think there are two reasons, which are both important. The first is what on the face of it looks like a success story, namely that the US has had stronger productivity and economic growth in recent times, reflecting particularly the success of its technology sector, and has thus maintained its industrial leadership in key growth sectors. The consequence of this is that domestic wealth has risen and foreign capital has flowed into the US allowing it to run a larger external deficit, thus reducing the downward pressure on domestic demand.

The second reason is that people outside the US have been willing to take on its obligations - i.e. buy its assets. The auto-correction element points to limits to the willingness to take on these obligations consistent with prospects for national income. But these limits tend to be higher - i.e. less constraining - in the case of the world's leading reserve currency, and this is what we see happening. I am not going to talk about reserve currency status this evening, beyond underlining that this illustrates the

benefits in economic terms. It's what Valery Giscard d'Estaing famously described as the ""exorbitant privilege"".

There may therefore be good reasons why the self-correction mechanisms on external imbalances are not working particularly powerfully. Indeed, I would note that today's imbalances are not especially large by historical standards.

Before suggesting some changes to multilateral processes, I want to draw out a number of key points from what I have just said.

First, the underlying drivers of imbalances are domestic macroeconomic policies. Trade policies and industrial policies can, and have, reinforced or at times frustrated the macroeconomic picture, so they are highly relevant. But I think they must be seen within the context of this macroeconomic picture, and this is exactly how I interpret the Articles of the IMF, as agreed at Bretton Woods.

Second, it follows from this that - and I say this in the spirit of constructive challenge and engagement, the best sense of multilateralism - the US does need to explain how it can regard its internal imbalance as sustainable and its external imbalance as not so, and how it envisages the internal balance responding to an adjustment of the external balance flowing from tariffs taking effect. And China needs to explain how it will tackle its persistently weak domestic consumption.

Third, the adjustment process is challenging. There are times when it has had to happen, but those have not been easy. Why is this the case? Deficit countries have historically faced far more pressure to correct excess current account balances than surplus countries. This typically takes the form of financial market pressure. This financial market pressure point is relevant notwithstanding the reserve currency argument that I made, simply because it is very hard to judge the limits of sustainability. We have seen market disturbance this year. We have to be highly alert to financial stability risks - something that I can assure you we are following closely.

Surplus countries do not face the same financing pressure. The pressure to adjust, as we are seeing, can come more through threats of tariffs and trade barriers. But increasing tariffs creates the risk of fragmenting the world economy, and thereby reducing activity. We can go back to Adam Smith and his contemporaries for the insight that trade expands activity by enabling specialisation, knowledge and technology sharing and productivity growth. There is therefore a common interest globally in tackling excess imbalances before dangerous levels of trade restrictions come into play, and before we face the prospect of difficult adjustment with macroeconomic volatility and financial instability.

This is where the multilateral system comes into play. While the IMF is not in possession of policy levers directly to address global imbalances, it has a crucial role in facilitating globally beneficial adjustment through its surveillance. The IMF plays a central role in casting a rigorous and independent eye over the economic and financial systems of individual countries, and the world as a whole, providing timely warnings of where problems are being stored up for the future and giving its members sound advice on how to mitigate risks. IMF assessments can forcefully highlight the dangers of unaddressed excess imbalances for both surplus and deficit countries, and provide

scenarios that illustrate the benefits of globally desirable paths for gradual and symmetric adjustment. With the support of its membership, the WTO can help to reduce tensions around imbalances by rebuilding confidence in a rules-based trading system, including around the issue of non-market policies, and particularly where these may be exacerbating excess imbalances. In other words, the WTO can help to achieve agreement amongst its members on the global rules of the road and how they are adhered to.

I am going to set out four proposals, which are deliberately modest and therefore a starting point for reform. There could be more ambitious reforms, but in my judgement we have to start by getting the foundations repaired. My four proposals are:

1. The IMF should strengthen its assessment of the implications of excess imbalances, including greater focus on spillovers, and greater depth of trade analysis.
2. The IMF advice that comes out of this assessment should have greater prominence and more ""bite"", for instance by increasing the emphasis on imbalances in Article IV reports.
3. The IMF should collaborate with the WTO, combining its macroeconomic expertise with the WTO's insights into the most challenging aspects of trade discussions to provide more nuanced assessments of the global trading system, and to enhance the traction of its messaging on industrial policies.
4. The IMF should be creative in deploying its convening power to help coordinate members around a set of mutually-agreed policies which mitigate risks associated with excess imbalances. There is merit here in reflecting on the lessons from the 2006 Multilateral Consultation exercise, and what could work better in future.

I don't underestimate the challenges here. I agree with Secretary Bessent that getting the basics right matters, and this is where the focus needs to be. Bringing industrial policies and subsidies into a macroeconomic framework is not straightforward. But it is fair to ask the question, and I think the IMF can answer it, and in doing so build on good work being done, for instance, by the OECD in this field.

Similarly, capturing the nature and extent of international spillovers and externalities from domestic policies is not easy, but it lies at the heart of what we must seek to do here.

Another important element of this approach must be to assess the potential for, and consequences of, imbalances unwinding sharply with implications for global financial stability. At the FSB, I look forward to working with the IMF on financial surveillance and particularly on developing system-wide approaches to testing and monitoring such as we did at the Bank last year with the System Wide Exploratory Scenario.

To do this, multilateral institutions and processes must have traction. Ruthless truth telling doesn't win popularity contests, and there is a risk of organ rejection. We must allow and encourage the international institutions to be assertive and consistent in calling out unsustainable situations and practices. This is critical for the reputation and legitimacy of the institutions.

I think history points to the fact that Westphalian States do not naturally embrace strong multilateral institutions and advice that will not always be welcome, unless they are in crisis. How to reconcile an open world economy with national interests is a very old issue. The rules of the process have to be accepted and the imposition of rules by one player, however dominant, isn't a recipe for sustained stability. I think it helps to remember that the key challenge we all face is to increase growth in the world economy: to grow the pie to support living standards for the people we serve, all of the time. It is as simple as that.

Lord Mayor, the second part of my remarks tonight is brief. It's about payments here in the UK. There are real opportunities to harness the potential of digital technology for retail payments both domestic and cross-border. It offers an opportunity to lower transaction costs, to reduce fraud, and to improve the functionality of payments - on this, it could make a real difference in reducing the scourge of late payments. I am sure there will be more ideas on benefits. In the last few months at the Bank we have successfully introduced the new Real Time Gross Settlement (RTGS) platform, which underpins settlement of wholesale and retail payments in this country. This change offers great opportunities for innovation across the landscape of payments. A big congratulations to my colleague Victoria Cleland and everyone involved in doing this.

There is more to do. So, we will take forward work in collaboration with the authorities and industry to design and deliver the next generation of UK retail payments infrastructure. This must be a priority, both to replace ageing infrastructure and as part of promoting growth in the UK.

This means a system of retail digital payments that keys off each of our bank accounts. There is a lot of debate globally at the moment on the future of payments - both domestic and cross-border. Today, most payments are made from bank accounts in what we call commercial bank money. This arrangement ties payments directly to the creation of credit in the economy.

There is an urgent need for innovation now in the area of payments, and the opportunity is there, no doubt about that. There may well be a role for stablecoins going forward, but I don't see them as a substitute for commercial bank money. Moreover, our job will be to ensure that those stablecoins that purport to be money are safe. Perhaps there may also be a role for retail central bank digital currency, but I remain to be convinced why the natural next step is to create a new form of money rather than put digital technology into retail payments and bank accounts.

This is an important step forward and one that I am excited about. We have an opportunity to show real leadership here, building on our world leading new RTGS.

Lord Mayor, we have some big challenges on the world stage, and some optimism and excitement here on payments.

Thank you.

I would like to thank Sonya Branch, Sarah Breeden, Victoria Cleland, Mark Joy, Karen Jude, Jeremy Martin, Harsh Mehta, Tom Mutton, Rhys Phillips, James Talbot and Matt Trott for their comments and help in the preparation of this speech.",Andrew Bailey
https://www.bis.org/review/r250715d.htm,Fabio Panetta: Finance and innovation for the future of the economy,"Speech by Mr Fabio Panetta, Governor of the Bank of Italy, at the annual meeting of the Italian Banking Association (ABI), Milan, 11 July 2025. ",2025-07-11 00:00:00,"## Italian Banking Association Annual Meeting

## Finance and innovation for the future of the economy

Speech by the Governor of Banca d'Italia Fabio Panetta

The international financial system has revolved around the dollar for decades: it has been an anchor for the monetary policies of many countries, a safe haven for investors in times of uncertainty, and the leading benchmark currency for global trade in goods and services.

Capital inflows into the United States - partly driven by persistent trade deficits  -  have  led  to  a  significant  accumulation  of  liabilities  toward  foreign creditors, increasing international investors' exposure to US market risks.

In recent years, two trends have amplified this exposure.

The first is the sharp rise in the stock market value of American big techs, further tilting global portfolios toward the US market.

The second is interest rate risk on dollar-denominated portfolios. After the global financial crisis, a protracted period of low yields and small term premiums encouraged the issuance of long-term securities, which were rapidly absorbed by investors. This led to greater exposure to interest rate risk on assets denominated in US dollars.

More recently, mounting global uncertainty has led to increased yield volatility. As a result, interest rate risk has become more costly to bear, as indicated by the rise in the term premium on long-term US Treasury securities (Figure 1).



Source: Bloomberg.

(1) The 10-year term premium is calculated using the model developed by T. Adrian, R.K. Crump and E. Moench, 'Pricing the term structure with linear regressions' , Journal of Financial Economics , 110, 1, 2013, pp. 110-138.

This  is  the  context  within  which  the  recent  developments  in  international financial markets have unfolded.

## 1. The weakening of the dollar

The  announcements  of  2  April  initiated  a  round  of  complex  negotiations between the United States and its main trading partners, generating instability in capital markets. At the same time, concerns grew about the sustainability of US public finances, culminating in a downgrading of the sovereign credit rating. For the first time in decades, the pivotal role of the dollar in the global financial system was openly called into question.

This prompted international investors to begin scaling back their exposure to the US market. Many of them opted to increase their hedges against exchange rate risk on the dollar (Figure 2) - the economic equivalent of a partial divestment of dollar-denominated assets - while simultaneously shortening the financial duration of their portfolios.

Yields  on  long-term  US  Treasury  securities  have  risen,  while  the  dollar has weakened, in a pattern that breaks with previous episodes of financial stress (Figure 3).

Even after the tensions had subsided, the US currency continued to lose ground, diverging from the interest rate differential between the United States and Europe (Figure 4). According to our estimates, more than half of the depreciation against

Figure 2



Sources: Based on Commodity Futures Trading Commission (CFTC) and London Stock Exchange Group (LSEG) data. (1)  Right-hand  scale.  Net  hedging  positions  of  investment  funds,  expressed  in  thousands  of  futures  contracts,  are calculated as the difference between long positions on euro-dollar futures (which profit from a depreciation of the dollar) and short positions (which profit from an appreciation).

## Response of US government bond yields and of the dollar to episodes of financial tension (1)



Source: Based on LSEG data.

(1) Episodes of financial stress include: the subprime mortgage crisis (2007), the collapse of Lehman Brothers (2008), the Greek crisis (2011), the euro-area sovereign debt crisis (2011), the Greek elections (2012), the Chinese stock market crash (2016), Brexit (2016) and the Silicon Valley Bank failure (2023). The red line indicates the response following 2 April 2025; the blue area represents the range between the minimum and maximum responses observed during past crises; see A. Foschi, 'Safety switches: the macroeconomic consequences of time-varying asset safety', Banca d'Italia, Temi di Discussione (Working Papers), forthcoming. - (2) An increase in the indicator corresponds to an appreciation of the dollar.



Source: Based on LSEG data.

(1) 'Germany's announcement' (vertical dashed line) refers to 4 March 2025, when Chancellor Mertz announced increased public spending on defence and infrastructure. The 'US tariff announcement' (dashed line) refers to 2 April 2025, when the US administration announced the introduction of new tariffs. - (2) Right-hand scale.

the euro since the beginning of March is attributable to a growing perception of risk associated with the US dollar.

## Repercussions for the European financial system

Lately there have been signs that Europe is beginning to benefit from growing currency diversification by international investors. In the past few months, inflows to foreign funds specializing in European equities and appetite for low-risk eurodenominated assets have both increased.

The extent of these movements remains limited, however. These developments are to be expected in the short term, when adjustments tend to occur more easily through the prices of financial assets than through volumes.

A large-scale reallocation of global portfolios is being hindered by the lack of concrete alternatives to the US financial system. The size and liquidity of US equity, bond and government securities markets far exceed those of other major financial centres (Figure 5).

In  the  medium  term,  however,  these  constraints  could  ease.  An  increase  in securities issuance by international players - coupled with greater diversification of global demand - could help provide credible alternatives alongside the US markets.

Figure 5



Sources: ECB (Centralized Securities Database), Bloomberg and World Federation of Exchanges. (1)  Holdings  on  31  December  2024.  Foreign  currency  values  are  converted  into  euros  using  the  year-end  exchange rate. Public sector and  corporate  debt  securities are expressed  at  nominal  value, equities at market  value. Geographical  classification  is  based  on  the  issuer's  residence.  -  (2)  Bonds  issued  by  non-financial  corporations.  (3) Includes Australia, Canada, Denmark, Japan, Norway, New Zealand, Sweden, Switzerland and the United Kingdom. (4) Ratio of trading volumes to market capitalization.

## 2. European financial integration

While a downsizing of the central role of US markets could spark tensions during the transition phase, it would also open up new opportunities for economies that until now have played a secondary role in the global financial system - Europe among them.

These are opportunities that must be created. They won't happen of their own accord.

More  underdeveloped  and  less  sophisticated  than  other  financial  centres, Europe's capital markets partly reflect  the  structural  traits  of  its  real  economy: the prevalence of small and medium-sized enterprises, primarily financed through bank credit; a large public sector that manages many services directly - such as healthcare, social security and insurance - that are often more strongly marketbased elsewhere; 1   and the low risk appetite of households, which tend to prefer safe forms of savings. 2

These traits feed into what is by now a consolidated trend: every year, the euro area invests less than it saves (€3.2 trillion against €3.7 trillion in 2024; Figure 6), while in the United States the reverse is true (€ 5.9 trillion versus €4.7 trillion), and it has a positive net international investment position equal to 10 per cent of GDP.

In other words, Europe exports not only goods but also savings, and it does so primarily towards the United States.

Yet what weighs most heavily on the development of Europe's capital markets is  another weakness: the financial system's fragmentation along national lines. 3 This is a profound and long-standing limitation: in 2025, the degree of integration of European financial markets remains comparable to the relatively low levels of twenty years ago. 4

1 In the United States, for example, workers' social security contributions flow into pension funds that invest them in long-term assets. In Europe, instead, pension systems are primarily based on the payas-you-go public pension model, whereby current contributions finance current pensions, generating no demand for financial instruments.

2 K. Bekhtiar, P. Fessler, and P. Lindner, 'Risky assets in Europe and the US: risk vulnerability, risk aversion and economic environment ' , European Central Bank, Working Paper Series, 2270, 2019, show that 70 per cent of European households report being unwilling to take on financial risks, compared with about 40 per cent in the United States.

3 The effects of European financial fragmentation are analysed in F. Panetta, 'Europe must think big to build its capital markets union', The ECB Blog, 30 August 2023; Banca d'Italia, 'The Governor's Concluding Remarks', Rome, 31 May 2024; E. Letta, Much more than a market: speed, security, solidarity. Empowering the Single Market to deliver a sustainable future and prosperity for all EU Citizens , April 2024; M. Draghi, The future of European competitiveness , September 2024.

4 ECB, Financial Integration and Structure in the Euro Area , June 2024.

## Savings and investment in the United States and the euro area in 2024 (thousands of billions of euros)



Sources: Bureau of Economic Analysis and Eurostat.

(1) Net savings flows are the difference between total investment and domestic savings.

While  fragmentation  may  be  a  constraint,  it  is  not  irreversible.  Targeted policies that play to the strengths of the European economy can make a decisive contribution to overcoming it, by providing the continent with the tools it needs to retain savings and to channel them towards productive investments.

## The European single capital market

Europe's economy offers three key strengths to investors: a highly skilled labour force, a large internal market, and a solid institutional framework based on the rule of law.

Effective  interaction  between  these  elements  can  unlock  extraordinary potential, but for this to happen, the single market must be fully functioning.

Significant progress has been made since the launch of the European project. Yet  the  single  market  remains  incomplete.  Its  four  pillars  -  goods,  services, labour and capital - are interdependent and must work as one. While my focus today is on the financial pillar, only full integration across all four areas will generate tangible benefits for citizens and businesses alike. 5

The European Commission - building on the guidance provided in the Letta and Draghi reports - has relaunched the Capital Markets Union (CMU), a project initiated in 2015 whose results so far have fallen short of expectations.

5 L.F. Signorini, panel discussion at the German-Italian Centre for European Dialogue on the 'Savings and Investment Union', VIGOnomics, Rome, 30 April 2025.

The CMU is an ambitious initiative, requiring action on multiple fronts: harmonization  of  corporate,  bankruptcy  and  tax  laws;  standardization  of disclosure  and  accounting  requirements;  and  the  strengthening  of  centralized market supervision.

But to make it fully operational, one more step is needed: the introduction of a European safe asset.

A common risk-free benchmark would provide a safe form of collateral, accepted throughout the Union, and would enable the development of strategic segments  such  as  corporate  bonds  and  derivatives.  It  would  enhance  the efficiency  of  central  counterparties  and  the  liquidity  of  securities  trading  and interbank  transactions,  and  would  promote  portfolio  diversification,  reducing risk concentration.

But the advantages of the CMU go well beyond the financial sphere.

According to Banca d'Italia  estimates,  an  integrated  capital  market  built around  a  common  risk-free  asset  could  lower  financing  costs  for  companies by  half  a  percentage  point,  stimulating  an  additional  €150  billion  in  annual investments. This alone could ultimately raise European GDP by 1.5 per cent.

Yet the benefits could be even more far-reaching.

A deeper, more diversified, European capital market would make it easier to finance the most dynamic, high-risk and high-value-added business ventures. It would support innovation and boost the competitiveness of Europe's economy. It would attract foreign capital, strengthening the international role of the euro.

It would mean creating high-quality, more productive and better paid jobs.

According to our estimates, in this scenario, the overall impact on GDP could be more than three times greater than that generated by an increase in investment alone. 6

## 3. Banks and technology

Today, technology is a decisive strategic lever for the banking sector. It can  boost  operational  efficiency,  strengthen  risk  analysis  and  management, and  enhance  service  quality.  Most  importantly,  it  can  help  consolidate  client relationships, one of the enduring strengths of banks.

6 M. Caivano, P. Cova, K. Pallara, M. Pisani and F. Venditti, 'The economic impact of European capital market integration', Banca d'Italia, Questioni di Economia e Finanza (Occasional Papers), forthcoming.

## Investments in technology and the digitalization of banking services

Over  the  past  ten  years,  the  ratio  of  technology  investment  by  Italian banks to operating expenses has risen by about 2 percentage points. 7  Spending on  highly  innovative  technology  projects  has  grown  at  an  even  faster  pace (Figure 7). 8



Source: Banca d'Italia, FinTech survey of the Italian financial system.

(1) Total investment in the two years as a proportion of operating expenses. The forecast for 2025-26 is based on the responses of the banks polled in the 2025 survey, on the assumption that operating costs remain unchanged.

Increased  resources  for  innovation  have  produced  tangible  results.  The intermediaries that invested the most were also those that achieved the greatest reductions in cost-to-income ratios.

These benefits also extend to customers. Today, three out of four Italians have access to internet banking, with significant time and cost savings. In 2023, online current accounts were 70 per cent cheaper than traditional ones. 9

Digitalization has made banking services more accessible. Despite the sharp reduction in physical bank branches - a trend under way for more than fifteen years - the share of households with at least one current account has increased. Innovation has favoured the inclusion of new customer groups, such as young people, who tend to prefer remote channels of interaction.

7 Different statistical sources provide different figures but converge on indicating increased investment in technology.

8 The data refer to the FinTech survey of the Italian financial system, conducted every two years by Banca d'Italia, starting in 2017; for the main findings, see the FinTech Survey page on the website.

9 Banca d'Italia, Survey on the cost of bank accounts for 2023, December 2024.

Alongside  plenty  of  benefits,  this  transformation  also  presents  some challenges for those segments of the population that are less financially literate or  less  familiar  with  technology.  Moreover,  for  some  services  -  such  as  the financing of small businesses or access to cash services - the lack of a physical footprint may be a constraint. 10

Banca d'Italia is working with the Ministry of Economy and Finance, the Italian  Banking  Association  and  Poste  Italiane  to  ensure  fair  and  widespread access to financial services. In order to succeed, the initiatives to be implemented must be based on concrete commitments from the banking system.

## Competitive factors for technological transformation

The technological revolution is entering a new, faster, and more intensive phase, driven by the advent of artificial intelligence and big data. In this setting, three  factors  are  decisive  for  the  competitiveness  of  financial  intermediaries: investment levels, the scope of technology use, and outsourcing choices.

## Investment levels

According to our FinTech survey, four out of five intermediaries have adopted strategies  for  digital  transformation.  Investment  intensity  varies  according  to operational scale. Large banks, with greater financial resources and more robust organizational  structures,  can  implement  complex  technological  projects  that smaller operators would find difficult to replicate.

Some smaller institutions  with  innovation-focused  business  models  are  an exception,  but  overall,  the  larger  the  bank,  the  higher  the  ratio  of  technology investment to total assets.

## Scope of technology use

As for the scope of technology adoption, most intermediaries - regardless of size - already use advanced solutions in their internal processes, from regulatory

10 The preliminary data of a sample survey of 5,000 micro-entrepreneurs indicate that 7 per cent of those polled reported the closure of a bank branch with which it had dealings in the last two years. Of these, three quarters mostly complained about difficulties relating to cash management, access to credit, and the loss of points of reference for financial consultancy services. Our analyses on access to credit by small- and medium-sized enterprises point to a steeper reduction in towns where the most branches were closed.

compliance checks to fraud prevention and customer assistance. Banks report that the use of AI models in these areas is widespread and growing. 11

The true competitive divide, however, lies in the use of artificial intelligence and big data for typical banking activities, first and foremost for creditworthiness assessments  -  an  area  currently  dominated  by  the  big  banks  (Figure  8).  These technologies  make  it  possible  to  process  a  broader  and  more  varied  set  of information than traditional models, thereby improving risk assessment models and the successful early detection of credit deterioration.



Source: Regional Bank Lending Survey (RBLS), 2024.

(1) The data refer to end-2024. Percentage of banks that have launched projects in their respective category. - (2) Includes projects under development and feasibility studies.

Knowing how to integrate these tools into decision-making processes will be crucial for competitiveness. According to our analyses, AI can broaden access to financing for creditworthy businesses with shorter credit histories or fragmented information. 12  Moreover, banks that make extensive use of these technologies tend to support the most dynamic entrepreneurial ventures more actively. 13

These  instruments  must  not,  however,  be  put  to  unquestioned  use.  These are  complex  technologies,  requiring  assessments  over  long  time  horizons  and throughout different phases of the economic cycle. Their integration into decision-

11 G. Trequattrini, 'Tecnologia e disuguaglianze: l'intelligenza artificiale nel mondo del lavoro e della finanza', speech at the Congresso nazionale First CISL, 11 June 2025.

12 N. Branzoli, E. Rainone, I. Supino, and A. Fuster, 'Screening and monitoring by banks that use AI and big data', Banca d'Italia, forthcoming.

13 S. Del Prete, S. Schiaffi, and G. Soggia, 'Birds of a feather flock together: the coupling of innovative banks and innovative firms', Banca d'Italia, forthcoming.

making  processes  requires  profound  awareness  on  the  part  of  banks  to  avoid distortions,  especially  as  regards  access  to  credit  for  households.  Europe's  AI regulation covers these aspects.

## Outsourcing strategies

When it  comes  to  developing  and  rolling  out  innovative  solutions,  larger banks tend to combine outsourcing with in-house R&amp;D. Smaller banks, by contrast, mostly rely on outsourcing. 14

These  choices  reflect  well-known  mechanisms:  investments  in  technology entail  high  fixed  costs  that  only  larger  institutions  can  consistently  sustain.  For smaller banks, outsourcing is therefore a gateway to innovation, but over time it can lead to dependency on external providers.

## The risks of technological innovation

New technologies present significant opportunities, but they also carry risks that, if not carefully managed, can render them ineffective or even harmful. In Italy, as elsewhere, both the frequency and severity of operational and cyber incidents are on the rise. 15

Artificial  intelligence  has  made  cyber  threats  and  fraudulent  activity  more sophisticated. 16  Developments in quantum computing could end up compromising the  efficacy  of  the  cryptographic  systems  on  which  the  security  of  financial transactions and payments, as well as of dematerialized assets is based; 17  we are already witnessing thefts of encrypted data, carried out with the goal of decrypting them once the technology becomes available.

To counter these risks, as part of its supervisory activities Banca d'Italia has stepped  up  controls,  both  on  financial  intermediaries  and  on  their  suppliers.  In

14 D. Arnaudo and S. Marchetti, 'Technology innovation in the Italian banking system and evolving risk profiles', Banca d'Italia, Banca d'Italia, forthcoming.

15 Banca d'Italia, Supervisory  Operational  or  Security  Incident  Reporting  Framework  -  Horizontal Analysis 2024 , June 2025.

16 The use of AI to create deepfakes or false identities is increasingly commonplace. Based on CERTFin data, in 2023 there were no records of cases like this, while in 2024 fake current accounts opened online with the help of these techniques made up 0.05 per cent of total new accounts (around 250 cases, out of 500,000); see CERTFin's 2025 report on security and IT fraud in banks, May 2025.

17 Estimates for the availability of quantum computers range from 3 to 20 years, depending on the goals considered.

particular,  it  has  urged  banks  to  strengthen  risk  management  for  specific  risks linked to outsourcing.

The implementation of the Digital Operational Resilience Act (DORA) marks a crucial step in this direction. The new regulatory framework requires operators to be fully cognizant of their supply chains and to adopt effective measures for preventing and managing major incidents.

Supervisory activities have brought widespread shortcomings to light: scant involvement of corporate bodies, patchy IT inventories, and insufficient controls on access to sensitive data. Banks themselves have confirmed these weaknesses: around  40  per  cent  only  expect  to  be  fully  compliant  with  DORA  starting  in September. 18  The most problematic areas remain the management of ICT risks and those related to outsourcing.

## 4. Monetary policy in the euro area

Over the past year, inflation in the euro area has returned close to the 2 per cent target. This has enabled the ECB Governing Council to lower the policy rate eight times, bringing it to 2 per cent.

The key issue now is whether the current level of interest rates is appropriate to keep inflation close to the target, avoiding protracted deviations in either direction.

The restoration of price stability and the ample room for policy manoeuvre means that the Governing Council is now in a good place to weigh its next moves carefully.

The latest Eurosystem projections suggest that inflation will decline to 1.4 per cent in early 2026, before returning to 2 per cent the following year. In a rapidly evolving and unstable global environment, this scenario is subject to a high degree of uncertainty.

The projections are based on assumptions about energy prices and the eurodollar exchange rate - two notoriously volatile variables - which the events of the past two weeks have already eclipsed. Geopolitical uncertainty in the Middle East has driven oil prices beyond the levels hypothesized; at the same time, the euro has appreciated against the dollar by much more than was projected.

A further, significant, source of uncertainty surrounds the tariffs that will be applied by the United States. The projections assume that the current measures

18 Findings of self-assessments requested by Banca d'Italia and compiled by the less significant banks.

remain in place, ultimately shaving half a percentage point off growth in the euro area between 2025 and 2027, with limited effects on inflation.

Higher tariffs and prolonged uncertainty over trade policies would have far more serious repercussions for growth 19 and could influence inflation as well.

A marked decline in the demand for European products in the US and a rerouting of Chinese goods towards our markets would exert downward pressure on prices. However, in extreme scenarios, higher trade barriers could break up global supply chains, driving up production costs and fuelling inflation.

Against this background, the Governing Council reaffirmed its intention to maintain a flexible and pragmatic approach, making decisions on a meeting-bymeeting basis in accordance with the available data and with their impact on the inflation outlook.

If downside risks to growth were to strengthen disinflationary trends, it would be appropriate to continue with monetary easing.

This  assessment  reflects  the  principles  that  were  reaffirmed  in  the  recent monetary policy review: the symmetry of the inflation target, the medium-term orientation, and the central role of interest rates in the toolbox.

The experience of the past decade - marked first by an extended period of very low inflation and then by major inflationary shocks - has highlighted the need to respond decisively to persistent deviations from the inflation target, in either direction, and to keep expectations firmly anchored.

It has also confirmed the importance of flanking the baseline scenario with an analysis of the risks and uncertainties surrounding it, including by drawing up alternative scenarios.

In  confirming  the  central  role  of  interest  rates,  the  Council  reiterated  the importance of being able to deploy all the instruments used in the past: purchases of public and private securities, long-term refinancing operations, negative interest rates,  and  forward  guidance  on  the  monetary  policy  stance.  While  they  must be used with discernment, these instruments can prove vital when official rates approach the lower bound or when dysfunctions occurred in the transmission of monetary policy.

19 Based on an adverse scenario developed by ECB experts, the negative impact on growth would triple if tariffs were brought to the levels announced by the US administration on 2 April and the EU were to adopt retaliatory measures.

Finally,  the  monetary  policy  strategy  review  provided  an  opportunity  to think  about  the  economic  implications  of  the  phenomena  that  are  transforming production:  geopolitical  tensions,  trade  fragmentation,  and  the  acceleration  of innovation, particularly in the field of artificial intelligence.

These factors could raise the frequency and intensity of the shocks that impact inflation.  Facing  them  will  require  timely  analyses,  rapid  decision-making,  and effective  communication,  also  founded  on  alternative  scenarios  and  sensitivity analyses.

## 5. Conclusions

The international financial landscape is undergoing a profound  transformation. Amid growing uncertainty about the role of the United States in the global economy, investors are seeking alternatives to the US dollar and to American markets, slowly initiating a partial rebalancing of global portfolios.

This scenario opens up new opportunities for Europe.

Opportunities that can only be seized by resolutely reviving the process of European integration, completing the single market and adopting common policies for innovation, productivity, and growth.

To this  end,  it  is  essential  that  the  Union's  financial  architecture  be  strengthened, creating the conditions to attract and retain capital. This means overcoming the current  fragmentation  of  the  financial  system,  completing  the  Capital  Markets Union, and providing investors with a common risk-free asset.

It is an institutional and political challenge, but it is also a chance to reduce Europe's dependence on external financial circuits and to enhance the potential of its economy.

The new financial world that is taking shape will be more uncertain, more volatile, and more competitive. Banks will increasingly have to rely on technology to remain efficient, profitable, and close to their customers. Artificial intelligence, strategic data use, and cybersecurity will be vital for competing successfully in the  future.  These  trends  come  with  a  significant  increase  in  operational  risks, demanding the attention of both intermediaries and supervisory authorities.

In an increasingly technological environment, human capital remains key: to face change effectively, banks will have to invest in people, in their skills, and in their ability to steer innovation.

In  the  coming  months,  monetary  policy  will  need  to  stay  flexible  and pragmatic.  The  return  of  inflation  to  the  2  per  cent  target  is  an  important  step forward, but the outlook remains subject to multiple risks. Against this backdrop, it will be essential to assess the inflation outlook and the risks to price stability on a meeting-by-meeting basis.

In a changing world, Europe has everything it needs to play a leading role, so long as it acts with determination, vision, and a spirit of unity.

Printed on EU-Ecolabel certified paper (registration number FI/011/001) The life-cycle environmental footprint of the paper used was offset by purchasing carbon credits and planting trees in Italy.",Fabio Panetta
https://www.bis.org/review/r250717c.htm,Claudia Buch: Hearing of the Committee on Economic and Monetary Affairs of the European Parliament,"Introductory statement by Prof Claudia Buch, Chair of the Supervisory Board of the European Central Bank, at the Hearing of the Committee on Economic and Monetary Affairs of the European Parliament, Brussels, 15 July 2025.",2025-07-15 00:00:00,"SPEECH

## Hearing of the Committee on Economic and Monetary Affairs of the European Parliament

Introductory statement by Claudia Buch, Chair of the Supervisory Board of the ECB, at the Hearing of the Committee on Economic and Monetary Affairs of the European Parliament

Brussels, 15 July 2025

Thank you very much for the opportunity to exchange views with you today and to provide an update on the European banking sector.

I would like to focus on two recent developments. The first concerns the recent tariff announcements and the uncertain impact on banks. The second is the ongoing discussion about how reducing the complexity of the regulatory and supervisory framework can contribute to growth and competitiveness.

Maintaining financial sector resilience and strengthening the Single Market should guide how Europe responds to these developments. We welcome the European Parliament's focus on resilience in its resolution on banking union. [ ]  Improved regulation and supervision have strengthened the European banking sector, thus promoting banks' ability to lend to the real economy and take risks. At the same time, further harmonisation of relevant national rules would reduce complexity and promote banking market integration. 1

Let me start by discussing how the recent tariff announcements could affect banks. The announcements and subsequent market reaction show how quickly heightened geopolitical risks can change the environment in which banks operate.

The initial market reaction to the announcements was relatively short-lived. Financial market activity spiked, resulting in higher volatility and margin calls. Banks' funding spreads temporarily widened but remain far from historical peaks. But although the financial system has so far remained resilient, we are closely monitoring potential spillovers from non-bank financial intermediaries to banks, especially given the currently high degree of geopolitical uncertainty.

The longer-term implications of higher tariffs for bank balance sheets will only become apparent over time. Higher tariffs slow down trade and can have a negative impact on growth and the financial health of firms. There is considerable uncertainty regarding how these effects will play out. While it is too early to see a deterioration in asset quality, credit risk and banks' provisioning needs may increase. [ ]  Banks must ensure that they have sufficient buffers to cope with adverse developments. The European stress test assesses banks' resilience under a common adverse scenario driven by geopolitical tensions, including higher tariffs, with the focus on the effects of an overall deteriorating macroeconomic environment. [ ] In 2 3

addition, banks need to assess their clients' exposures to higher tariffs and more fragile global value chains.

Generally, the European banking sector remains well capitalised and liquid. At the end of 2024 significant institutions had an aggregate Common Equity Tier 1 ratio of 15.9% and the leverage ratio stood at 5.9%.

Liquidity buffers have remained largely stable. [ ]  Profitability remained robust in 2024, with an average 4

return on equity of 9.9%, compared with 5.5% during the low interest rate period between mid-2015 and mid-2022. Preliminary data for the first quarter of 2025 suggest that profitability and funding conditions have remained broadly stable.

Yet there are initial signs of a deterioration in asset quality. The ratio of Stage 2 loans, which signals an increase in credit risk, had risen to nearly 10% by the end of 2024 compared with 8.4% in 2020. [ ]  The share of non-performing loans remains relatively stable at around 2%, although there are pockets of vulnerabilities, particularly in loans secured by commercial real estate. [ ] 5 6

The need for banks to maintain strong fundamentals guides European banking supervision's priorities. [ ] First, banks should strengthen their ability to withstand immediate macro-financial threats and severe geopolitical shocks. Geopolitical risk is not new, but it affects all traditional risk areas and requires the attention of banks' management and boards. Several ongoing supervisory initiatives address banks' management of geopolitical risk. [ ]  In the 2026 thematic stress test exercise, we will follow up on this year's stress test by asking banks to assess which firm-specific geopolitical risk scenarios could severely impact their solvency. [ ] 7 8 9

Second, banks should remedy persistent material shortcomings in an effective and timely manner. In particular, we focus on addressing deficiencies in banks' internal information systems, which are a prerequisite for sound decision-making. [ ]  Improvements in this area should allow banks to better manage risks and, at the same time, reduce their regulatory reporting costs. 10

Third, banks should strengthen their digitalisation strategies to remain competitive and manage their IT and cyber risks well. Digitalisation creates opportunities for non-banks to enter market segments traditionally occupied by banks. Rapidly evolving markets for crypto-assets and payment services are an example of this, with the corresponding risks being amplified by diverging global standards. In addition, banks' exposures to private market funds have grown in a rather complex way that may impede effective risk management. [ ] 11

These supervisory priorities ensure that banks' capitalisation is commensurate with the risks they take. Macroprudential policy complements our work by ensuring that sufficient buffers are available in case banking sector or macro-financial conditions deteriorate. [ ]  Banks take risks to finance the economy, and they need buffers if risks materialise. Resilient banks can manage and deal with risks without putting the stability of the financial system at risk. 12

The second development that has shaped discussions about banks over the past few months concerns how to maintain resilience while simplifying the supervisory and regulatory framework. Heightened risks call for both strong risk management standards and the removal of undue complexities, which impede the ability to respond swiftly to new developments.

We are thus reforming supervision to make it more efficient and effective while maintaining a clear focus on relevant risks. [ ]  Streamlining our procedures will lead to tangible benefits for banks in terms of faster and more targeted supervisory action. Reform of the Supervisory Review and Evaluation Process (SREP), which I have presented here during previous hearings [ ] , is a core component. The objectives of this reform programme guide all our supervisory activities, including on-site inspections. We are making the decision-making process on capital-related decisions, approvals of securitisations and authorisations faster and more risk-based, including through the use of digital tools. We are reducing the complexity of internal model approvals and the stress-testing process. And last but not least, we are mapping reporting requirements to identify and remove overlaps and increase proportionality. We anchor the objectives of this reform in European banking supervision culture, and we are closely monitoring the progress made. [ ] Our work is guided by one key principle: simplification should not weaken standards. Lowering resilience would be a dangerous road to go down. It would risk jeopardising the achievements made since the global financial crisis. 13 14 15

Resilience and growth go hand in hand. During the global financial crisis, a weakly capitalised banking sector dragged the real economy down. Since then, resilience has improved and excessive leverage has been reduced, which has supported the real economy's recovery. Banks remain vigilant to emerging risks and have been tightening credit standards since 2022 in response to higher interest rates and increased risks. That being said, there are no indications of credit supply constraints at an aggregate level related to bank capital requirements. [ ]  The stronger capitalisation of European banks has in fact contributed to financial stability. This is no small achievement, given that Europe's economy has suffered several shocks in the last ten years. 16

Looking ahead, deepening the Single Market and completing banking union is the most promising way to sustain growth and stability. We very much welcome the European Parliament's call to complete banking union, including the creation of a European deposit insurance scheme. The lack of an integrated banking market prevents banks from developing pan-European business models and strengthening their long-term profitability. [ ] 17

Regulatory harmonisation would contribute to simplification. Many rules related to bank governance, accounting or insolvency legislation differ across Member States because the laws enacting EU directives take national specificities into account, which adds to the complexity. While the ECB has harmonised options and discretions within European banking supervision, EU law allows Member States to have different rules at the national level. This fragmentation not only makes supervision complex but impedes the cross-border activity of banks.

ECB banking supervision stands ready to support this reform agenda and to deliver on our mandate. Our objective is effective, efficient and fully risk-based supervision, but we need the support of legislators and regulatory authorities to simplify reporting and regulatory frameworks. [ ]  Although the ECB is not a regulatory authority, we can contribute our expertise. Any changes made to the framework should be based on sound impact assessments and have the clear objective of maintaining the level of resilience that we have achieved so far. 18

Thank you very much.

1.

European Parliament (2025), , 8 May; ECB (2025), ' ', 9 July. European Parliament resolution of 8 May 2025 on Banking Union - annual report 2024 Feedback on the European Parliament's resolution on Banking Union annual report 2024

2.

ECB (2025), ' ', Financial Stability Review , May. Asset quality deterioration has remained contained, but credit risk and provisioning needs are likely to increase

3.

ECB (2025), ' ', press release , 20 January; EBA (2025), ECB to stress test 96 euro area banks in 2025

' ', press release The EBA launches its 2025 EU-wide stress test

, 20 January.

4.

The aggregate liquidity coverage ratio stood at 158% and the net stable funding ratio at 127% at the end of 2024.

5.

Stage 2 loans include assets that have shown a significant increase in credit risk since initial recognition.

6.

The non-performing loan ratio secured by commercial real estate stood at 4.6% at the end of 2024.

7.

ECB (2025), . Supervisory priorities 2025-27

8.

Buch, C. (2024), ' ', speech at the eighth European Systemic Risk Board (ESRB) annual conference on 'New Frontiers in Macroprudential Policy', Frankfurt, 26 September. Global rifts and financial shifts: supervising banks in an era of geopolitical instability

This reverse stress test will be conducted in the context of banks' internal capital adequacy assessment process.

10.

For more information on risk data aggregation and reporting, see ECB (2025), ' ', Supervision Newsletter , 19 February. Sound risk data reporting: key to better decision-making and resilience

11. Buch, C. (2025), ' ', The Supervision Blog , ECB, 3 June. Hidden leverage and blind spots: addressing banks' exposures to private market funds

12.

The ECB Governing Council recently stated that the current priority for macroprudential policy is to preserve bank resilience. See ECB (2025), ' ', 7 July. Governing Council statement on macroprudential policies

13.

Buch, C. (2025), ' ', speech at the Goldman Sachs European Financials Conference, Berlin, 11 June. Further information on ongoing initiatives aimed at simplifying processes for banks can be found in ECB (2025), ' ', Supervision Newsletter , 14 May; ECB (2025), ' ', Supervision Newsletter , 14 May; and ECB (2025), ' ', Supervision Newsletter , 14 May. Simplification without deregulation: European supervision, regulation and reporting in a changing environment Benefits from advanced technology infrastructure in supervision SREP reform: towards more efficient and effective supervision ICAAP: enhanced supervisory assessment for stronger capital management in banks

14.

Buch, C. (2025), ' ', Brussels, 27 March; Buch, C. (2024), ' ', Brussels, 18 November. Introductory statement at the Hearing of the Committee on Economic and Monetary Affairs of the European Parliament Introductory statement at the Hearing of the Committee on Economic and Monetary Affairs of the European Parliament

15.

Buch, C. (2025), ' ', speech at the Goldman Sachs European Financials Conference, Berlin, 11 June; Elderson, F. (2024), ' Simplification without deregulation: European supervision, regulation and reporting in a changing environment Preparing for the next decade of European banking supervision: risk-focused,

', speech at the '10 years SSM and beyond' event organised by Allen &amp; Overy, Frankfurt, 27 June; and ECB (2025), ' ', impactful and legally sound SREP reform: towards more efficient and effective supervision

Supervision Newsletter

, 14 May.

16.

See ECB (2025), ' ', 7 July. See also the results of the , particularly from the third quarter of 2022 onwards. The results of the survey are broadly consistent with the results of the ECB's ). See also a comparison of the results of the two surveys in Dimou, M., Ferrando, A., Köhler-Ulbrich, P. and Rariga, J. (2025), ' ', Economic Bulletin , Issue 2, ECB. Governing Council statement on macroprudential policies Euro area bank lending survey Survey on the access to finance of enterprises (SAFE Insights from banks and firms on euro area credit conditions: a comparison based on ECB surveys

17.

Majino-López, J. and Véron, N. (2025), , European Parliament, May; Beck, T., Bruno, B. and Carletti, E. (2025), , European Parliament, April; Heider, F., Krahnen, J.P., Schlegel, J. and Pelizzon, L. (2025), , European Parliament, April; Di Vito, L., Martín Fuentes, N. and Matos Leite, J. (2023), ' ', Occasional Paper Series , No 327, ECB, August. EU Banking Sector &amp; Competitiveness: Framing the Policy Debate How have European banks developed along different dimensions of international competitiveness? How have European banks developed along different dimensions of international competitiveness? Understanding the profitability gap between euro area and US global systemically important banks

18.

Buch, C. (2025), ' ', Brussels, 27 March. Introductory statement at the Hearing of the Committee on Economic and Monetary Affairs of the European Parliament",Claudia Buch
https://www.bis.org/review/r250728a.htm,Andriy Pyshnyy: National Bank of Ukraine press briefing - monetary policy decisions,"Speech by Mr Andriy Pyshnyy, Governor of the National Bank of Ukraine, at a press briefing on monetary policy decisions, Kyiv, 24 July 2025.",2025-07-24 00:00:00,"## Andriy Pyshnyy: National Bank of Ukraine press briefing - monetary policy decisions

Speech by Mr Andriy Pyshnyy, Governor of the National Bank of Ukraine, at a press briefing on monetary policy decisions, Kyiv, 24 July 2025.

* * *

Dear colleagues,

The Board of the National Bank of Ukraine has decided to keep its key policy rate at 15.5%. This will support the sustainability of the FX market and keep inflation expectations in check, contributing to further easing of the price pressure.

The NBU will stick to a rather tight monetary stance for as long as it is needed in order to ensure that inflation is steadily declining toward its 5% target over the policy horizon.

## As expected, inflation has started to decline, and inflation expectations remain under control

Inflation peaked in May, as expected, and went back to declining in June (14.3% yearon-year). At the same time, it was higher than forecast - primarily due to the impact of unfavorable weather conditions on supply of food products.

On the other hand, core inflation decreased (to 12.1%) somewhat faster than forecast. The still-high underlying price pressure reflected the effects from a rapid rise in food prices and businesses' significant expenses on raw materials and wages.

The situation on the FX market was sustainable, in particular thanks to the NBU's previous measures to tighten the interest rate policy. Fluctuations in the UAH/USD exchange rate were moderate, and the weakening of the hryvnia against the euro has had an insignificant inflationary effect so far.

The dynamics of economic agents' inflation expectations were mixed. Households' expectations deteriorated somewhat. Web search statistics also pointed to a moderate increase in households' attention to the topic of inflation.

In contrast, short-term expectations of financial analysts improved, while their mediumterm expectations remained stable, demonstrating their confidence in the temporary nature of the current inflation surge. Overall, expectations of all groups of respondents remained controllable and were below the inflation rate.

## Inflation will decline significantly by the end of this year, and it is expected to be brought to the target in 2027

The dynamics of inflation in the coming months will largely depend on the actual impact of weather conditions on the supply and prices of agricultural products. According to the

NBU's preliminary estimates, headline inflation may rise slightly in July and core inflation will continue to decline. In the following months, inflation is expected to turn onto the steady decline trajectory.

At the same time, taking into account more significant losses from the war and businesses' expenses continuing to pass through to prices, a worsened harvest forecast, and the effects from the actual easing of the hryvnia against the euro, the NBU has revised the forecast trajectory of inflation, projecting that inflation will decline more slowly. Inflation is expected to decelerate to 9.7% in 2025, 6.6% in 2026, and the 5% target in 2027.

The decline in inflation will be facilitated by monetary policy measures, gradual increases in harvests, moderate external price pressures, and improved labor market conditions against the backdrop of FX market sustainability and sufficiency of international financing.

Economic recovery will continue but will be restrained by the consequences of the war and the unfavorable impact of weather conditions and climate change on harvests

Fiscal stimuli backed by international financing continued to support economic growth in H1. However, the growth was restrained due to more intensive air attacks and further destruction of production facilities, infrastructure, and housing. The same factors stood behind the persistence of negative migration trends, causing labor market conditions to remain tense.

In addition, unfavorable weather delayed the sowing campaign and hampered future harvests, which, coupled with the gradual depletion of inventories from the harvest gathered last year, was a drag on food industry and transportation with a part of their capacities standing idle. In view of this, the NBU forecasts economic recovery to be slower than last year: real GDP will grow by 2.1% in 2025.

Going forward, the pace of recovery will depend on the course of the war. The baseline scenario of the NBU's forecast envisages that the economy will gradually return to normal functioning and the economy will grow by 2%-3% in 2026-2027.

At the same time, if conditions normalize quickly, private investment and consumption will increase significantly, offsetting the effects of the rapid fiscal consolidation, while GDP growth might reach 3%-3.5%.

Sufficient external financial assistance will be an important factor in maintaining macrofinancial stability under various scenarios

Ukraine continues to receive international support. In 2025, Ukraine is expected to receive external financial assistance in the amount of around USD 54 billion, of which the country has already received over USD 24 billion.

As for the remaining USD 30 billion, the largest inflows are expected under ERA Loans (USD 18 billion until the end of the year) and Ukraine Facility (USD 8 billion).

Further financing volumes may vary depending on Ukraine's defense and reconstruction needs. The baseline scenario of the NBU's macroeconomic forecast envisages receiving USD 35 billion in international assistance in 2026 and USD 30 billion in 2027. A third of these funds has already been announced by partners, and talks are underway regarding the rest.

Expected volumes of international support will be sufficient to finance the budget deficit without resorting to monetary financing, and to maintain the appropriate level of international reserves (USD 45 billion in 2026-2027, according to the NBU's forecast).  This will help ensure a sustainable situation in the FX market, the controllability of economic agents' expectations, and the gradual decline of inflation.

If security conditions normalize quickly and defense expenditures decrease, Ukraine may need less of official external support to maintain its defense capabilities.

## The course of the war and the lack of international financing are the main risks to economic and inflation developments

The war is grinding on and continues to pose the risk of a protracted decline in the country's economic potential, in particular due to the loss of people, territories, and production facilities. The speed of the economy's return to business-as-usual conditions will depend on the nature and duration of hostilities.

The risk of external financing running too low to be sufficient also matters, especially if security risks abate slowly. Specifically, part of the needed international assistance for 2026-2027 has yet to be confirmed.

## Other risks include:

- the emergence of additional budget needs, primarily those to maintain defense capabilities
- further damage to infrastructure, especially energy infrastructure
- a deepening of adverse migration trends and a widening of labor shortages on the domestic labor market
- a bigger-than-expected negative impact of weather conditions on this year's harvest
- less favorable external conditions amid rising geopolitical uncertainty and deglobalization, as well as heightened volatility in global commodity and financial markets.

Meanwhile, some positive scenarios are also likely to materialize.

They are primarily related to increased financial support from partners  and the international community's efforts to ensure a just and lasting peace for Ukraine.

To maintain FX market sustainability, keep expectations under control, and gradually bring inflation back to its 5% target within the policy horizon, the NBU Board decided to keep the key policy rate at 15.5%

The NBU's previous measures to tighten monetary policy proved effective: rates on hryvnia term deposits and domestic government debt securities rose. After that, demand for these instruments increased, and households' net purchases of foreign exchange fell significantly. This bolstered the sustainability the FX market and restrained price pressures.

Considering these positive effects, the reversal of the inflation uptrend in June, as well as the controllability of inflation expectations, the NBU sees no need to raise the key policy rate further. However, given the slower-than-expected decline in inflation and the balance of risks to price developments, the NBU currently sees no room for easing its interest rate policy either.

Holding the key policy rate steady at 15.5% is an important prerequisite for a sustainable slowdown of inflation toward its 5% target. At the same time, this decision will have no impact on lending, considering that banks are intensely competing for quality borrowers.

Lending conditions remain close to pre-COVID-19 levels and are at the peak of their affordability since the full-scale invasion, with lending developing briskly (net hryvnia loans to businesses have been surging by about 30% yoy in recent months).

The NBU will stick to a rather tight monetary stance as long as it is needed in order to ensure that inflation is steadily declining toward its 5% target over the policy horizon

Compared to the April forecast, the NBU's revised forecast already incorporates a longer maintenance of the key policy rate at 15.5% (until Q4 2025) and a slower reduction of it.

At the same time, the NBU will take into account changes in the balance of risks and will only switch to an easing cycle of interest rate policy when there is compelling evidence of there being no risks to the sustainable slowdown of inflation to its 5% target within the policy horizon.

Thank you for your attention!",Andriy Pyshnyy
https://www.bis.org/review/r250728g.htm,"Swaminathan J: Working together, growing stronger - responsible governance for a resilient Urban Cooperative Bank sector ","Valedictory address by Mr Swaminathan J, Deputy Governor of the Reserve Bank of India, at the Seminar for Directors of Urban Cooperative Banks (UCBs) ""Resilient cooperatives for the future: enhancing governance in a digital age"", held at the College of Agriculture Banking, Reserve Bank of India, Pune, 11 July 2025.",2025-07-11 00:00:00,"## Swaminathan J: Working together, growing stronger - responsible governance for a resilient Urban Cooperative Bank sector

Valedictory address by Mr Swaminathan J, Deputy Governor of the Reserve Bank of India, at the Seminar for Directors of Urban Cooperative Banks (UCBs) ""Resilient cooperatives for the future: enhancing governance in a digital age"", held at the College of Agriculture Banking, Reserve Bank of India, Pune, 11 July 2025.

* * *

Chairmen and Directors of Urban Cooperative Banks; Shri Jaikish, Principal of the College of Agricultural Banking; my colleagues from the Reserve Bank of India; ladies and gentlemen - a very good afternoon to all of you.

I am honoured to be here today to address you at the culmination of this seminar's deliberations on the theme 'Resilient Cooperatives for the Future: Enhancing Governance in a Digital Age'.

This seminar, thoughtfully organised by the College of Agricultural Banking, comes at a very appropriate time. The United Nations has declared 2025 as the International Year of Cooperatives, with the theme ' Cooperatives Build a Better World', recognising the vital role cooperatives play in building inclusive, fair, and resilient communities something that India's own cooperative movement has long exemplified.

With a proud history of over a century, cooperatives have become powerful engines of grassroots development. From Amul and IFFCO to SEWA and India Coffee House, India's cooperatives have shown how collective effort can drive both economic and social progress.

UCBs have long been an essential part of India's cooperative story, providing banking services to segments - often underserved by larger banks - small traders, self-employed individuals, salaried workers, and others in the informal sector. What sets UCBs apart is their deep-rooted presence in the community and their ability to offer personalised, responsive service, customers are at ease walking into their neighbourhood UCB branch. This reflects the essence of the cooperative model - banking built on relationships, local knowledge, and grassroots connection.

With this unique identity as a cooperative bank, comes a substantive responsibility. While UCBs are rooted in cooperative values, they are banks - licensed to accept public deposits and expected to operate with the same prudence, integrity, and accountability that banking demands. Banking is built entirely on the trust of depositors. Trust must be earned and protected every single day - through sound governance, effective risk management, and an unwavering commitment to depositors' interests.

Recognising both the importance of UCBs and the challenges they face, the Government and the Reserve Bank have taken several steps in recent years to support the sector's stability and growth. Based on the recommendations of the Expert Committee chaired by former Deputy Governor, Shri N. S. Vishwanathan, a four-tiered regulatory framework was introduced to bring proportionality in regulation. The

establishment of a sector-wide Umbrella Organisation was also facilitated to help address issues of scale, particularly in technology and capacity building. Recently, the priority sector lending guidelines for UCBs were revised in response to feedback from the sector.

While these measures reflect the commitment of the Reserve Bank and the Government to support and strengthen the UCB sector, lasting progress must ultimately come from within. Government and regulators can enable, but it is the internal resolve and discipline of each institution that will determine its long-term resilience. This calls for a renewed focus on governance, professional management, and strong internal systems. It is therefore essential that you, as Directors, take the lead in building institutions that are capable, forward-looking, compliant, and - most importantly - worthy of the trust placed in them.

Let me now turn to five key areas where, as Directors, your role is especially critical. These are not merely regulatory expectations - they are the essential building blocks of strong and sustainable institutions. In each of these areas, your focused attention and leadership can make a meaningful difference to the future of your banks.

## Strengthening Governance and Accountability

My first area is on strengthening governance and accountability. Time and again, our supervisory experience has shown that the root cause of distress in cooperative banks is not external shocks, but weak internal governance. Whether it is high levels of nonperforming assets, instances of fraud, or erosion of capital, the underlying issues often trace back to poor oversight, lack of independent judgement, and inadequate checks and balances at the Board level.

While you are not expected to manage the day-to-day operations - that is the responsibility of senior management - as Directors, your role is not to merely endorse decisions, but to actively engage, ask the difficult questions, and ensure that the bank is being run in a prudent, ethical, and transparent manner.

All dealings must be at arm's length, and related-party transactions must be approached with utmost caution and full transparency. This applies not only to lending decisions, but also to appointments and other administrative matters - please follow a fair and transparent process without fail.

Strong governance begins with active, informed, and independent Boards - Boards that place the long-term interests of the institution and its depositors above all else.

## Building Robust Assurance Functions

The second area I want to highlight is the importance of strong internal assurance functions - namely, risk management, internal audit, and compliance. These are not back-office support roles. They are your eyes and ears within the organisation, helping you identify risks early, monitor controls, and ensure that operations align with regulatory expectations and internal policies.

However, these functions can only be effective if they are given the independence, stature, and access they require. They must have the freedom to escalate concerns without fear. They must have the skills and seniority to command respect within the institution. And most importantly, they must have a direct line of communication with the Board - especially with the Audit and Risk Management Committees (especially for those UCBs, where we have mandated RMCs).

As Directors, you must engage actively with these functions - not just to review their reports, but to understand what is happening at the ground level. Ask questions. Seek clarifications. Ensure that red flags are not ignored or rationalised. A well-functioning risk, audit, and compliance setup is the foundation of a safe, well-run bank.

## Engaging Constructively with Auditors and Inspectors

The third area I would like to emphasise is your engagement with statutory and internal auditors, as also with supervisory teams. These stakeholders are not adversaries - they are valuable partners in safeguarding the health of your institution.

Auditors play a crucial role in independently validating the bank's financial position and internal controls. Their observations must not be treated as routine or transactional. Engage with them meaningfully. Understand the concerns they raise and ensure that necessary corrective action is taken - not just in form, but in spirit.

Likewise, the inspection reports issued by the Reserve Bank should be viewed as a tool for strengthening your bank - not as a fault-finding exercise. These inspections are a critical last line of defence, aimed at identifying risks before they become unmanageable.

As Directors, it is essential that you read these reports carefully, discuss them thoroughly at the Board level, and ensure time-bound action on the issues flagged. Avoid the temptation to look for comfort in favourable metrics alone. Instead, focus on understanding the root causes of any weaknesses and most importantly, in fixing them decisively.

## Embracing Technology with Responsibility

The fourth area I want to highlight is the growing importance of technology - and the need to adopt it with foresight and responsibility.

In recent years, customer expectations have changed dramatically. Digital payments, mobile banking, and round-the-clock service are no longer luxuries - they are now basic expectations.

Many UCBs are eager to offer internet and mobile banking, and that is a welcome aspiration. However, digital services require a strong and secure technological foundation. If the underlying systems are weak, the infrastructure outdated, or the staff unprepared, the bank - and its customers - become vulnerable to serious risks such as fraud, data breaches, and prolonged service disruptions.

Cybersecurity is not just a technical issue - it is a governance issue. The Board must be fully aware of the bank's digital capabilities and its cyber risk profile. Any decision to expand digital offerings must be based on a realistic assessment of readiness and must be accompanied by appropriate investment in systems, processes, and people.

Digital transformation should not be about ticking a box or keeping up with trends. It must be a strategic choice, aligned with your bank's risk appetite, customer profile, and operational capacity. Above all, it must be anchored in a commitment to provide secure and uninterrupted service for your depositors.

## Supporting Collective Strength through the Umbrella Organisation

The fifth area I want to highlight is the importance of collective action - and the opportunity that now lies before the sector through the Umbrella Organisation.

In today's environment, the challenge of limited scale has become more pressing for UCBs - particularly in areas such as technology adoption, cybersecurity, risk management, and compliance. As banking becomes more technology-intensive and regulatory expectations rise, the cost of staying competitive and secure is increasing. For many individual UCBs, making the necessary investments while maintaining profitability is becoming increasingly difficult. The creation of the National Urban Cooperative Finance and Development Corporation Ltd. (NUCFDC) - as an Umbrella Organisation - was a response to this evolving challenge.

The Umbrella Organisation is envisioned as a shared platform that can support member banks with common technology solutions, centralised services, capacity-building programmes, and improved access to modern tools and expertise. It can be a force multiplier - especially for smaller UCBs - allowing them to benefit from economies of scale while retaining their unique identity and local focus. NUCFDC is also expected to provide certain fund-based facilities to member banks such as supporting them in capital enhancement, providing refinance, and addressing short term liquidity requirements.

The success of this initiative, however, depends on broad-based and active participation. The cooperative movement has always drawn its strength from unity. The Umbrella Organisation offers an opportunity to renew that spirit - by building shared resilience for a digital and dynamic future.

## Conclusion

Let me conclude by reiterating that Urban Cooperative Banks matter. You represent a model that is built not just on profit, but on purpose.

As the financial landscape evolves, however, the expectations from you, especially as Directors, are also rising. Governance must be sharper. Risks must be better understood and managed. Technology must be adopted thoughtfully and securely. Above all, the trust of your depositors must remain non-negotiable.

Therefore, each of you has both the opportunity and the responsibility to shape the future of your institution.

The Reserve Bank stands with you - as a regulator, as a guide, and as a partner. Let us work together to ensure that UCBs remain a strong, resilient, and vibrant part of India's financial system.

Thank you, Jai Hind.",Shri Swaminathan J
https://www.bis.org/review/r250728f.htm,Michele Bullock: The Reserve Bank of Australia's dual mandate - inflation and employment ,"Speech by Ms Michele Bullock, Governor of the Reserve Bank of Australia, at the Anika Foundation Fundraising Lunch, Sydney, 24 July 2025.",2025-07-24 00:00:00,"

## Speech

## The RBA's Dual Mandate - Inflation and Employment

Michele Bullock

## * ƃ Ƅ

Governor

## Anika Foundation Fundraising Lunch

Sydney - 24 July 2025

I'd like to begin by acknowledging the Traditional Custodians of the land on which we meet and pay my respects to Elders past and present.

It's an honour to join you today at the Anika Foundation fundraising lunch. The Foundation supports vital work on youth mental health research, awareness and education, in which I have a strong personal interest.

I'm proud to uphold the tradition of the Reserve Bank Governor speaking at this event to support an organisation that is making a real difference.

My remarks today centre on the dual objectives of monetary policy: 'price stability', which means maintaining low and stable inflation; and full employment, which I will talk about in more detail later. 1 ƃ Ƅ



I'll explore how these aims have shaped the Monetary Policy Board's strategy in recent years. As part of that, I will reflect on the relationship between the labour market and inflation over that time, and how conditions in the labour market have evolved to the present day. 2 ƃ Ƅ

Now is a good time to revisit these subjects, following the agreement two weeks ago of an updated Statement on the Conduct of Monetary Policy, which sets out the common understanding of Government and the Board on key elements of the monetary policy framework.

But before I turn to that, I'll start with an update on recent monetary policy settings.

## Recent monetary policy settings

If you cast your mind back to 2022, you will recall that inflation was higher than it had been in decades, peaking at 7.8 per cent at the end of that year. It was this rise in inflation that required a tightening in monetary policy over 2022 and 2023, with the cash rate increasing from almost zero to 4.35 per cent over that period.

Over the past couple of years, we have made meaningful progress in bringing inflation down. Higher interest rates have been working to bring aggregate demand and supply closer towards balance. We expect headline inflation in the June quarter to be in the lower half of our 2-3 per cent target range although that partly reflects the ongoing effect of temporary cost-of-living relief. As that effect unwinds, we expect headline inflation to pick up to around the top of the band at the end of this year and into the first part of 2026.

To help look through temporary factors like this, we also pay close attention to trimmed mean inflation (published quarterly), which provides a good guide to underlying inflation trends. This measure has also been easing, but it's still a bit higher than headline inflation. At 2.9 per cent in the March quarter, year-ended trimmed mean inflation was under 3 per cent for the first time since 2021. [  3]

We expect trimmed mean inflation to fall a little further in the June quarter in year-ended terms. However, the monthly CPI Indicator data, which are volatile, suggest that the fall may not be quite as much as we forecast back in May. We still think it will show inflation declining slowly towards 2½ per cent, but we are looking for data to support this expectation. [  4]

Encouragingly, as inflation has slowed, the labour market has eased only gradually and the unemployment rate is relatively low. I'll have more to say on developments in the labour market later.

Since February, we have reduced the cash rate by 50 basis points. The Board continues to judge that a measured and gradual approach to monetary policy easing is appropriate. Global economic and policy developments have so far been largely in line with our baseline May forecasts, and the likelihood of a severe downside 'trade war' appears to have diminished. But there is still uncertainty and unpredictability in the global economy. The Board's view is that monetary policy is well placed to respond decisively to adverse international developments if needed.

Our longstanding strategy has been to bring inflation back to target while preserving as many of the gains in the labour market as possible. This approach meant that interest rates in Australia did not rise as high as they did in some other economies, and so we may not need to lower them as much on the way down.

We also know that Australians continue to feel cost-of-living pressures, with the average level of prices now notably higher than it was just a few years ago. That is why we want to make sure that inflation remains low and stable from here on in. Low and stable inflation is good for households, good for jobs, good for communities and good for the economy.

## Our goals of price stability and full employment generally reinforce each other

Stepping back from current policy settings and the inflationary episode of recent years, I now want to reflect on the framework that guides the Board's decisions more generally.

The RBA's monetary policy objectives are set out in legislation. Our overarching goal is to promote the economic prosperity and welfare of the Australian people, both now and into the future. For the Board, this means setting monetary policy in a way that best achieves both price stability and full employment. [  5] [  6]

These goals are often referred to as our 'dual mandate' and are longstanding objectives of the RBA.

Over time, low and stable inflation and full employment go hand in hand. Low and stable inflation - or price stability - is a prerequisite for strong and sustainable employment growth because it creates favourable conditions for households and businesses to plan, invest and create jobs without having to worry about inflation. So our two objectives are complementary over the longer term. [  7] [  8]

Even in the shorter term, the two objectives often go hand in hand. For example, when there are ups and downs in demand, inflation tends to rise as the labour market tightens, and fall as it loosens. So a monetary policy response that returns inflation to target will, in time, also move the labour market towards full employment. [  9]

But sometimes there are developments that push up inflation at the same time as they weigh down demand - and therefore employment. This includes sharp increases in energy prices and supply disruptions that push up prices more broadly. As I'll discuss in a moment, such 'negative supply shocks' were part of the reason for the high inflation of recent years, though they were not the only factor.

In the face of supply shocks that push up prices, we need to think about possible trade-offs: how do we balance our two goals in these circumstances?

If a supply disruption is temporary and modest, monetary policy should mostly 'look through' it. Raising interest rates makes little sense if inflation is expected to ease once temporary supply disruptions are resolved - it would only weaken the job market.

By contrast, when a supply shock is likely to have a longer lasting effect on the economy and inflation there may be stronger grounds for monetary policy to respond.

A key concern here is that the longer inflation stays high, the more households' and businesses' expectations for future inflation could increase. This could, in turn, lead to second-round effects on inflation as households and businesses build higher expectations into their decisions.

But if households and businesses instead maintain a high level of confidence that the Board will do what is needed to return inflation to target, inflationary shocks will have less effect on price and wage setting. That means we can look through adverse supply shocks to a greater extent - even those that we think could last for some time. [  10]

This highlights another important way in which our objectives are complementary - and it's something I want to emphasise. Having a strong track record of low and stable inflation puts us in the best possible position to support employment. It means there is less risk of inflation getting out of control, which allows inflation to be brought down with smaller increases in interest rates than otherwise. This in turn keeps the labour market closer to full employment.

That is why maintaining well-anchored inflation expectations is a key benefit of inflation targeting frameworks, as I will return to in a moment, and why it is important that inflation returns to be sustainably in our target range. [  11]

## The dual mandate in the post-pandemic period

So how did this dual mandate shape our policy response to the post-pandemic rise in inflation?

First, the starting point for our monetary policy settings mattered - these were of course very accommodative, with the cash rate effectively at zero.

Second, the causes of the pick-up in inflation were crucial. The initial pick-up in inflation was partly driven by some of the supply factors I have mentioned. Temporary disruptions in global supply chains during the pandemic led to strong increases in goods prices, and the war in Ukraine caused a spike in global energy prices.

But it was also clear that demand was part of the story. Accommodative fiscal and monetary policy settings in the pandemic period supported strong growth in demand for goods during lockdowns, and this demand strength interacted with supply constraints to amplify inflationary pressures. Then, as lockdowns eased and the economy started to recover, demand for services also recovered strongly. As a result, conditions in product markets and labour markets were very tight by mid-2022.

It was clear that we needed to increase interest rates to bring about a better balance between demand and supply, which would help to ease domestic price pressures. This need was reinforced by a concern that longer run inflation expectations could increase. If this happened, it would add to inflationary pressure and would ultimately require a larger policy response, and higher job losses. [  12]

Although it was clear that we needed to raise interest rates to slow demand growth, it was less clear how quickly demand pressures needed to ease, how persistent global shocks or their effects would be, and how much we could afford to 'look through' those effects.

The Board could have chosen to match the more significant rate increases of some other central banks to bring inflation back to target more quickly. But this could have risked a sharper and more persistent increase in the unemployment rate. [  13]

Instead, the Board judged that a measured approach was consistent with its dual mandate. We increased the cash rate quickly at first - but we didn't go as high as some other central banks. We then held the cash rate for over a year, even as some other central banks started easing monetary policy. Throughout, we kept a close eye on longer term inflation expectations, to ensure they remained anchored to the target.

This strategy was designed to rein in inflation while also preserving as many of the gains in the labour market as possible - an example of our dual mandate in practice.

How has this played out so far?

Since the peak of inflation in 2022, headline inflation has declined by over 5 percentage points. And over the same period there has been a relatively modest easing in labour market conditions. The unemployment rate has increased from around 3.5 per cent in mid-2022 to 4.2 per cent in the June quarter this year, and remains low by historical standards.

Crucially, the share of the population in work has remained around record highs; this is in contrast to declines in many other advanced economies (Graph 1). [  14]

Graph 1

## Employment-to-population Ratio*

Change from 2015-2019 average



* Data are quarterly averages of monthly data, except for New Zealand which is quarterly data; outliers during the COVID-19 pandemic have been truncated.
- ** Peer economies include the United States, the United Kingdom, Canada, Germany, the euro area, New Zealand and Sweden.

Sources: Eurostat; LSEG; RBA; Statistics Canada.

The fact that unemployment has remained low and employment growth has remained strong is remarkable - and very welcome.

And it is striking that the increase in the unemployment rate has been small compared with the large decline in inflation. This is especially true compared with previous episodes of disinflation in Australia (Graph 2). [  15]

Graph 2

## Disinflationary Episodes*

Cumulative change



* Episodes defined as periods between peak-to-trough headline inflation.
- ** Maximum increase in unemployment rate during disinflationary episode.

Sources: ABS; RBA.

Why is this?

Part of the answer is that the supply-driven price increases that I mentioned earlier did turn out to be temporary, even if they flowed through to the economy over a long period of time (Graph 3). As these supply disruptions eventually subsided and oil prices declined, price pressures eased. [  16]

Graph 3



* Excludes fuel; import-weighted.
- ** Freightos global container index; 2017-2019 average = 100.

Sources: LSEG; Oxford Economics; RBA.

And also as I mentioned earlier, the Board were very alert to the risk that inflation expectations could increase. Crucially, that did not happen. [  17]

Instead, households and businesses continued to believe that inflation would return to the target range (Graph 4). This limited any so-called 'second-round' effects on inflation, which allowed inflation to fall without a sharp rise in the unemployment rate.

Graph 4 Inflation Expectations and Inflation

Year-ended



* Computed using measures of household, market economist, union and financial market inflation expectations, over different time horizons.

Sources: ABS; Australian Council of Trade Unions; Bloomberg; Consensus Economics; Employment Research Australia; Melbourne Institute; RBA; Workplace Research Centre.

This demonstrates the point I made earlier about how our two objectives can be complementary. A history of low and stable inflation, and the resulting public confidence in the inflation target, enabled the Board to adopt a strategy that protected the labour market as much as possible while still ensuring inflation came down.

## How has the labour market adjusted in the current cycle?

I've already highlighted the comparatively modest increase in the unemployment rate over the past few years from a very low level, and that overall employment has continued growing. The rate of layoffs has increased only a little and remains at a remarkably low level by historical standards (Graph 5). The share of workers who are long-term unemployed also remains low.

These are good outcomes - as job losses are an especially painful way for the labour market to adjust to tighter monetary policy. Losing a job can be one of the most stressful events in someone's life, and it can have far-reaching implications for families and communities.

Graph 5

## Unemployment and Layoffs



While the unemployment rate has risen since its trough in late 2022, including an uptick in the month of June, there has been significant jobs growth in aggregate. Instead, the labour market has adjusted in some other - less disruptive - ways.

First, job vacancies have declined from a very high level as firms have slowed hiring activity. [  18]

Second, the average number of hours that people are working has declined. This follows a period when hours had increased sharply due to very strong demand for workers (Graph 6).

Having your hours cut is tough, but it's often preferable to losing a job altogether. And it's worth noting that some of this decline in hours has been voluntary, especially over the past year or so. [  19]

Graph 6



Third, there has been a decline in the share of workers voluntarily leaving their jobs (the 'quits rate'). This suggests there could be less need for firms to compete to attract and retain workers, implying less upward pressure on wages growth than otherwise (Graph 7). [  20]

Graph 7



In summary, the gradual easing in labour market conditions has so far been most evident in fewer job vacancies, reductions in hours worked and declining rates of voluntary job switching.

These shifts aren't without their challenges, but they all tend to be less disruptive than outright job losses.

I should note that the RBA can't wave a magic wand and control how adjustments in the labour market play out. Interest rates are too blunt an instrument for that, and I am not here to claim credit for the fact that the adjustment has so far taken place in a less costly way.

By the same token, because the labour market can adjust in different ways, we do not 'target' any one adjustment mechanism, such as a set number of job losses, as we seek to bring demand and supply back into balance. Indeed, there have been substantial job gains over this period.

## Are we close to full employment?

Let me bring the labour market story up to date.

Our overall assessment at the time of our most recent forecast in May was that there was still some tightness in the labour market, and we expected it to ease a little over the remainder of this year.

A broad range of indicators underpinned this assessment, and in many ways not much has changed. Firms still report significant difficulties finding labour , even if this constraint has eased somewhat recently. The ratio of vacancies to unemployed people remains high (Graph 8). At the same time, unit labour costs have been increasing strongly. [  21]

Graph 8

## Measures of Spare Capacity



* Trend.
- ** The ABS vacancies survey was suspended between May 2008 and November 2009.
- *** Share of firms reporting labour as a significant constraint.
- **** Average since 1978.

Sources: ABS; NAB; RBA.

In May we also highlighted the possibility that labour market conditions could be less tight than we thought. As I noted earlier, the low rate of job switching may imply less upward pressure on wage growth than otherwise. And the quarterly rate of underlying inflation has recently been around a pace that would be consistent with 2½ per cent in annual terms.

For that reason, our May forecasts for wages growth and inflation incorporated some downwards judgement to reflect the possibility that there is more capacity in the labour market - and the economy more broadly - than is suggested by our usual assessment.

Last week brought us the latest labour market data, which confirmed that the unemployment rate increased in the June quarter. Some of the coverage of the latest data suggested this was a shock - but the outcome for the June quarter was in line with the forecast we released in May. That on its own suggests that the labour market moved a little further towards balance, as we were anticipating. While the June monthly data showed a noticeable pick-up in the unemployment rate, other measures - such as the vacancy rate - have been stable recently. More broadly, leading indicators are not pointing to further significant increases in the unemployment rate in the near term. [  22] [  23]

Nevertheless, the risks we highlighted in May remain. As always, there is uncertainty around how labour market conditions stand relative to full employment, and we will continue to closely monitor incoming labour market data. Our August Statement on Monetary Policy will provide a full updated assessment of labour market conditions and the outlook.

## Concluding remarks

So, to conclude, our goals of low and stable inflation and full employment are closely linked and generally reinforce each other.

A critical feature of the recent high-inflation period is that longer term inflation expectations remained anchored. This has enabled the Board's monetary policy strategy of bringing inflation down in a relatively gradual way so as to limit the easing in labour market conditions.

Much of the rebalancing of demand and supply in the labour market that has occurred in recent years has been reflected in declines in job vacancies, hours worked and voluntary job switching. There are many ways the labour market can adjust. The RBA doesn't 'target' a specific outcome, like a certain unemployment rate or number of job losses, to reach full employment.

Monetary policy cannot control how the adjustment happens, but if it can occur while keeping employment strong - and even growing - that is a great outcome for workers, families, communities and the economy.

In the end, the best way to promote the economic welfare of Australians is by achieving low and stable inflation alongside full employment.

And that is what the Board is constantly striving for.

Thank you and I look forward to taking your questions.

## Endnotes

- Thank you to Samuel Evangelinos, Kevin Lane, Mike Major, Tim Taylor and Michelle Wright for excellent assistance in writing this speech. Thanks also to many of my colleagues for their comments and contributions on an earlier draft. [*]
- I discussed these objectives in my first speech as Governor in 2023: see Bullock M, 'Monetary Policy in Australia: Complementarities and Trade-offs', Speech at the 2023 Commonwealth Bank Global Markets Conference, Sydney, 24 October. [1]
- I have used the phrase Monetary Policy Board here, although for some of this period it was of course the Reserve Bank Board. [2]
- The trimmed mean rate is the average rate of inflation after 'trimming' away the largest price changes in the quarter (positive or negative). See RBA (2024), 'Box C: Headline and Underlying Inflation', Statement on Monetary Policy, August. [3]
- RBA (2025), Statement on Monetary Policy, May. [4]
- They were clarified by amendments to the legislation that took effect in March this year. In practice, however, our focus on price stability and full employment is unchanged. See Reserve Bank Act 1959. [5]
- The latest Statement on the Conduct of Monetary Policy states that the RBA's goal is to achieve 'sustained' full employment, which is defined as 'the current maximum level of employment that is consistent with low and stable inflation'. [6]
- Bullock, n 1. [7]
- To expand on this, it is also the case that when the labour market is persistently deviating from full employment, inflation will persistently deviate from its target. [8]
- The employment and inflation objectives are also complementary when there are influences that expand the productive capacity of the economy - like strong productivity growth, successful innovation and expansions in the capital stock. [9]
- Of course, there are limits here. The longer a central bank permits inflation to remain outside target, the more likely it is that inflation expectations will shift. And if they do, it will require even higher interest rates and unemployment to bring [10]

inflation back to target.

- Bullock M (2024), 'The Costs of High Inflation', Keynote Address to the Anika Foundation Fundraising Lunch, Sydney, 5 September. [11]
- See Bullock, n 11. [12]
- See, for example, Day I and K Jenner (2020), 'Labour Market Persistence from Recessions', RBA Bulletin, September; Cassidy N, I Chan, A Gao and G Penrose (2020), 'Long-term Unemployment in Australia', RBA Bulletin, December; Borland J (2020), 'Scarring Effects: A Review of Australian and International Literature', Australian Journal of Labour Economics, 23(2), pp 173-187; Kroft K, F Lange and MJ Notowidigdo (2013), 'Duration Dependence and Labor Market Conditions: Evidence from a Field Experiment', The Quarterly Journal of Economics, 128(3), pp 1123-1167; Cohen JP, AC Johnston and AS Lindner (2023), 'Skill Depreciation During Unemployment: Evidence From Panel Data', NBER Working Paper No 31120; Jarosch G (2021), 'Searching for Job Security and the Consequences of Job Loss', NBER Working Paper No 28481. [13]
- Much of the strength in employment in Australia has been driven by the non-market sector, particularly the health care industry owing to higher demand for disability and aged care. For more on this trend and how it has interacted with the broader labour market, see RBA (2025), 'Box C: Health Care Employment and its Impact on Broader Labour Market Conditions', Statement on Monetary Policy, February. [14]
- In Graph 2, the dates of the four episodes shown are Q3 1982 - Q4 1984, Q1 1990 - Q4 1992, Q3 2008 - Q3 2009, and Q4 2022 - Q4 2024. For more on this topic, see Ball L (1994), 'What Determines the Sacrifice Ratio?', in Mankiw NG (ed), Monetary Policy, The University of Chicago Press, pp 155-193. [15]
- See Beckers B, J Hambur and T Williams (2023), 'Estimating the Relative Contributions of Supply and Demand Drivers to Inflation in Australia', RBA Bulletin, June. [16]
- See Hunter S (2024), 'Inflation Expectations - Why They Matter and How They Are Formed', Speech to Citi Australia and New Zealand Investment Conference, Sydney, 16 October. [17]
- For the economists in the room, this suggests that the economy has been operating on the steeper portion of the 'Beveridge Curve'. [18]
- The share of workers that are underemployed has actually declined since mid-2024. [19]
- This could reflect a combination of there being fewer opportunities for job switching (especially for workers in the market sector) and also reduced willingness by workers to take the risk associated with switching jobs, (consistent with weak consumer sentiment). [20]
- See Hunter S (2024), 'Understanding the Journey to Full Employment', Keynote Address to the Barrenjoey Economic Forum, 11 September. [21]
- RBA (2025), Statement on Monetary Policy, May. [22]
- See Tan J (2025), 'How Useful are 'Leading' Labour Market Indicators at Forecasting the Unemployment Rate?', RBA Bulletin, April. [23]

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The Reserve Bank of Australia acknowledges the Aboriginal and Torres Strait Islander Peoples of Australia as the Traditional Custodians of this land, and recognises their continuing connection to country. We pay our respects to their Elders, past and present. Aboriginal and Torres Strait Islander peoples should be aware that this website may contain the names, images and voices of people who are now deceased.",Michele Bullock
https://www.bis.org/review/r250728e.htm,Rajeshwar Rao: Catalysing sustainable and green infrastructure financing for achieving net zero,"Inaugural address by Mr Rajeshwar Rao, Deputy Governor of the Reserve Bank of India, at the Conference on Green Infrastructure Finance, in collaboration with the Swiss Agency for Development and Cooperation (SDC) India, at the College of Agriculture Banking, Reserve Bank of India, Pune, 3 July 20205.",2025-08-05 08:04:00,"## Rajeshwar Rao: Catalysing sustainable and green infrastructure financing for achieving net zero

Inaugural address by Mr Rajeshwar Rao, Deputy Governor of the Reserve Bank of India, at the Conference on Green Infrastructure Finance, in collaboration with the Swiss Agency for Development and Cooperation (SDC) India, at the College of Agriculture Banking, Reserve Bank of India, Pune, 3 July 2025.

* * *

Distinguished guests, participants, colleagues, Ladies and Gentlemen,

Let me at the outset thank the organisers for having me here to share my thoughts on this important topic. Climate risks and green infrastructure financing, as a catalyst for achieving net-zero emissions, has to move over time from the margins of policymaking to the heart of global and national agenda and occasions such as these should help in this endeavour.

Climate change is a phenomenon which we are seeing and living through on a daily basis. With each passing year, the extremes of weather patterns are becoming more intense. Whether it is extreme rainfall, droughts, heat waves or cyclones, changes and aberrations have become the norm. The incidents of formation of heat dome over USA or the monsoon rains hitting Mumbai before the scheduled onset reflect recent examples of the climate change. The probability of changing weather patterns is going to be more regular and its economic impact very severe in the times to come. A recent report 1   on economic cost of extreme weather events estimates that over a ten-year period from 2014 to 2023, economic cost associated with climate-related extreme weather events amounted to $2 trillion. Notably, the estimated cost over the last two years taken together i.e., 2022 and 2023, was around $451 billion. Moreover Climateinduced disasters also disproportionately affect the poorest nations and communities.

The scale of the impact of events arising out of climate change therefore requires sizeable investments in technology and scale of finance to both build resilience and enable mitigation. As per OECD report 2 , the investment required for green and sustainable infrastructure is estimated at around USD 3 to USD 5 trillion per year until 2050. This is not just a nominal allocation of capital resources - it would require a significant shift of financial flows, complemented with appropriate policies, and reorientation of institutional priorities. The question is no longer about if but how to finance this transformation, which must then be our collective resolve going forward. Financing sustainable and green infrastructure can no longer remain a peripheral concern; it has to now become central to achieving both global and national net-zero targets, and for fulfilling the commitments of the Paris Agreement. These aspects are important for climate risk mitigation and facilitating a just transition. While more than 140 countries over the world have made commitments to net-zero targets-the real challenge lies in their achievement. Climate finance remains significantly off-track, fragmented, overly reliant on public funds and often inaccessible to the developing countries that need it most. So, the question before us is both urgent and clear: How do we catalyse sustainable and green infrastructure financing to deliver on the promise of net-zero? Let me share a few thoughts on this.

## Sustainable and Green Infrastructure - The need of the hour

For, the current period marked by climate related volatility, limited resources and widening inequality, sustainable and green infrastructure is likely to be a necessity. The infrastructure whether in the form of power plants, highways, apartments, commercial buildings, or fuel pipelines, must be taken as steppingstones towards achieving the goal of net-zero in carbon emissions and not emerge as barriers in achieving these targets.

According to a World Bank study , every single dollar invested in climate-resilient 3 infrastructure can save up to four dollars in avoided losses. Green and Sustainable infrastructure not only improves the quality of life through cleaner air, accessible mobility, and more efficient public services, while remaining climate friendly, it also helps in reducing vulnerability and inequality, particularly in communities that are prone to climate risks. Creation of climate resilient infrastructure reduces disaster risks and prevents catastrophic losses from floods, cyclones, and heatwaves. It also reduces the volatility of losses that may occur on corporate balance sheets in the face of physical climate risks, thereby help in improving financial stability. While the arguments for climate resilient infrastructure are compelling, the hurdles are many. It has been estimated 4   that less than 1.5% of total assets under management (AUM) of global investment funds are aligned with Paris goals. Green infrastructure pipelines in emerging markets remain underdeveloped and the climate finance gap which is estimated at over $2.5 trillion annually , is widening. 5

## Financing Sustainable and Green Infrastructure - Issues and Challenges

While discussing sustainable and green infrastructure, the first step is to establish a clear definition and reach a consensus on what qualifies as green infrastructure. The green taxonomy plays a critical role in this regard. The government has recently released the draft of the climate finance taxonomy for public consultation, which paves the way for much-needed uniform classification across the economy and financial system. The draft taxonomy lays down four essential criteria viz. avoidance of Green House Gas (GHG) emissions, reduction of GHG emissions intensity, adaptation solutions that reduce the risk of adverse impacts of climate change and research and development, for classification related to climate finance. But the key to enable sustainable and green infrastructure is technology. New technologies can lead to reduction in emission intensities, increase energy efficiency, provide alternate energy sources to help avoid GHG emissions, and build innovative solutions to drive adaptation and resilience towards mitigating the perils of climate change.

This dependence on technology is however both the enabler as well as the main constraint on the flow of finance. Let me elaborate a bit. Finance always follows the principle of risk and reward. Financial institutions adopt risk-based pricing for financial products, considering both the borrower's risk profile and the inherent risks associated with the proposal. The technologies underlying sustainable and green infrastructure are still evolving and are therefore less reliable regarding their future viability as compared to the traditional technologies, which are comparatively stable and have stood the test of time regarding cash flow generation. There may also be lack of technical expertise and capacity among the creditors in understanding these evolving technologies. Hence,

compared to traditional technologies, there are higher perceived inherent risks related to sustainable and green infrastructure technologies which then get reflected in their risk pricing. Sustainable and green projects thus often face higher upfront costs including capex requirements. The perceived risks associated with sustainable and green infrastructure limit access to debt financing for early-stage technologies, highlighting the need for greater equity investment (First Loss Default Capital). Other constraints relate to longer payback periods creating asset-liability mismatches, information gaps, lack of robust assurance and verification functions, which limit understanding and appraisal of these technologies to prepare investment-grade infrastructure projects i.e., those with well-defined cash flows, clear governance, and measurable impact metrics.

Climate change risks directly impact the real economy, and the financial sector in turn gets impacted on account of its credit exposure to the real economy. For the financial sector to perform a comprehensive risk assessment, relevant information flow from the real economy i.e. corporate/institutional borrowers in a timely manner is important. Given that climate change and climate risks is likely to impact a business segment consisting largely of MSMEs, unorganised sectors and un-listed corporates, creating an awareness and understanding amongst these borrowers on climate change risks and obtaining the required information becomes important.

Understanding climate change is an elaborate process involving the use of complex models to analyse the weather and climate patterns to predict the changes. Along with historical data, projections of climate variables such as rainfall, and temperature, are also inputs for forward looking risk estimations. However, the financial system or financial analysts have limited exposure to climate science. At the same time climate scientists have limited understanding of financial modelling and risk estimations. This creates a gap between these two input streams and that challenges us in accurately estimating the risks associated with sustainable and green infrastructure finance. The availability of climate related data with proper understanding about its sources and methodology of its estimation is essential for financial analysts to aid their decision making.

Since sustainable and green infrastructure technologies contribute to the reduction or avoidance of greenhouse gas emission intensity, a critical consideration for financing entities is to address the risks of green washing. For a creditor to fund any project which is intended to achieve reductions in GHG emissions, there is a need to clearly understand how these projected reductions are being quantified. It would also require a robust and independent Monitoring, Reporting, and Verification (MRV) function. Standardised processes and databases to inform and quantify such benefits would be necessary to increase the funding avenues for such infrastructure projects.

There are several building blocks or ecosystem enablers which are required to be fostered and promoted to remove the bottlenecks surrounding sustainable and green infrastructure projects. Without innovative financial instruments to mitigate early-stage risks, lack of availability of avenues for blended finance, many projects lack the scale or bankability needed to attract private capital. These limitations are further exacerbated in case of emerging market economies as inadequate financial instruments, and fragmented institutional coordination are critical constraints that are further exacerbated by poor sovereign ratings which leads to further increase in risk premium particularly

when trying to access global funds. Global funding, where available, is predominantly denominated in foreign currencies, exposing borrowers to exchange rate risks and consequently increasing the cost of financing - despite their need to access low-cost funds. Moreover, globally climate finance availability is spread across several funds which have different application procedures, eligibility criteria, and reporting standards, which makes it onerous and time consuming for ensuring flow of such funding. These factors lead to institutional paradox with capital seeking sustainability, while sustainable assets seeking capital are unable to scale up and access these funds.

## Catalysing the finance to Sustainable and Green infrastructure

Given the issues and challenges, our focus should be on identifying effective ways to mobilise the financing required to transform our infrastructure landscape toward green and sustainable development. Let me float a few ideas for you to ponder on. To unlock the required flows into green and sustainable infrastructure, we need a holistic reconfiguration of the financial ecosystem - one that rewires risk, institutionalises sustainability, and aligns incentives. We need to follow a building block approach whereby the ecosystem enablers are first put in place, thereafter harmonised and made consistent across all the sectors. We could categorise these enablers in two categories as endogenous and exogenous enablers. The endogenous enablers refer to the requirements of information flow, data gap bridging, MRV requirements, and building up of technical expertise. They can then act as the lynchpin between the availability and requirement of credit flow and cover the entire ecosystem right from the appraisal to disbursement and monitoring of finance related to sustainable and green infrastructure projects. These enablers will prepare the financial system to cater to the financing needs and facilitate the flow of funds with greater certainty.

The exogenous enablers would involve mechanisms that can be built to cater to the innate risks associated with green and sustainable infrastructure, which is requirement of risk capital, first loss default capital, concessional funding, quantum of funding, global funding, public and private capital mobilisation. Blended finance, which combines concessional public finance with private capital, is essential for bridging the bankability gap of green and sustainable infrastructure. There is a need for an adequate mix of public and private funding where the public funds crowds in the private funds through appropriate incentive structure. Specific mechanisms need to be enabled wherein global funds scale their mandates from project-level support to market-shaping interventions, also targeting underdeveloped sectors like adaptation infrastructure, and nature-based solutions. There is also requirement for Multilateral Development Banks (MDBs), Development Financial Institutions (DFIs), National Development Banks (NDBs) and Vertical Climate and Environmental Funds (VCEFs) to harmonise approach and operations and enable joint funding to enable shift from being direct lenders to catalytic partners and bring in economies of scale in sustainable and green infrastructure projects financing. Instruments like first loss guarantees, and subordinated debt, which can de-risk early-stage investments and crowd in institutional capital are also required.

Scalability of finance towards any cause comes either from policy nudges or market mechanisms that adequately incentivises risk taking. Once the endogenous enablers are in place, supported by exogenous enablers, innovative financial instruments such as sustainability linked loans, transition finance instruments, green debt securities etc.,

can get the required traction for enabling the flow of finance. Digital solutions are changing the way traditional finance works and that innovation needs to be channelised to the cause of sustainable and green infrastructure. Digital tools to automate MRV requirements, and data and information flows, can bring down compliance costs substantially. I would request all the tech enthusiasts to innovate and bring in solutions in this regard. To foster tech-based innovation in finance, RBI has instituted a regulatory sandbox wherein innovative solutions can be tested to provide market wide scalable solutions. RBI has also allowed 'Theme Neutral' applications as part of the 'On Tap' facility under the regulatory sandbox under which application containing any technology / theme can be made under various topics including sustainable finance and climate risk mitigation. Tokenization may soon enable fractional investment in infrastructure, opening new liquidity channels and investor bases. This approach needs to be explored for sustainable and green infrastructure. Fintech, blockchain, and AI have the power to streamline project verification, improve traceability, and democratise access to green and sustainable finance. We must capitalise on these efforts to establish an infrastructure pipeline of sustainable and green projects, a repository of vetted, investment-ready projects across sectors and regions. We must also empower local governments, indigenous communities, and civil society to lead climate infrastructure efforts. This may include decentralised renewable energy systems, sustainable land use practices, and community-based adaptation projects.

No country can achieve net-zero in isolation. Climate change is the quintessential global challenge and so too our response. There is a requirement of enhanced global cooperation in this regard which must also extend to technology transfer, R&amp;D funding, and skills development to enable development of technical expertise to identify, design, and structure bankable sustainable and green infrastructure projects. The focus needs to shift from project-based finance to overall market development with policy reforms, development of a project pipeline, and consistent regulatory frameworks, creating systemic conditions for fostering sustainable and green infrastructure finance. The international financial architecture also needs to be reoriented toward sustainability. The de-risking of sustainable and green infrastructure can work best when national, local, and multilateral institutions co-invest, signalling policy credibility and technical robustness. MDBs and global climate funds may need to revisit their governance structure to reflect the voice of recipient countries, particularly the global south and not just donor countries. Innovative financial instruments such as debt-for-climate swaps and climate-resilient debt clauses must also be scaled up to create fiscal space for green investments. We all need to work towards the creation of a reformed, empowered, and climate-aligned multilateral financial system.

## Conclusion - Financial Leadership - Call to Action

The transition to net-zero is not just about finance, but also about knowledge, trust, and solidarity. We are at the crossroads or in climate terms nearing a tipping point. This is a moment not only for climate policy, but for the financial leadership to act together. A sustainable and green infrastructure is the best legacy we can pass on to the future generations. As finance professionals and leaders, we need to act in unison to foster endogenous and exogenous enablers and build a robust ecosystem to scale climate finance to catalyse green and sustainable infrastructure in a prudent manner. We need to align our mandates and approaches with the country's net-zero pathways, innovate and strategise and collaborate globally, even as we may act locally. The Reserve Bank

of India has been proactive in its resolve to facilitate creation of a robust ecosystem wherein the assessment and mitigation of climate change risks are fostered and its impact on the economy and financial system is curtailed. In this context, we have followed a building block approach, focused on wide stakeholder consultation, capacity development, channelising flow of credit towards green finance, efforts to bridge limitations such as climate data gaps and modelling challenges, and building a conducive regulatory framework for risk assessment balancing compliance and conduct.

We need bold and urgent action to finance the future requirements. There is a need to catalyse the capital that helps to build the world we need. Sustainable and green infrastructure is the foundation of climate action, economic resilience, and social justice. It is a significant lever for us to achieve net-zero targets, protect our communities, and create a more equitable world. The future has been built and will continue to be built, one way or another. The question is: will it be sustainable? And what can we do to ensure it?

Let me leave you with these thoughts and wish you all successful deliberations and fruitful outcomes during these meetings.

Thank you.

Inaugural Address delivered by Shri M Rajeshwar Rao, Deputy Governor, Reserve Bank of India at the Conference on Green Infrastructure Finance on July 03 at College of Agriculture Banking, RBI, Pune in Collaboration with Swiss Agency for Development and Cooperation (SDC) India. Inputs provided by Sunil TS Nair and Saket Kumar are gratefully acknowledged.

1  https://iccwbo.org/wp-content/uploads/sites/3/2024/11/2024-ICC-Oxera-Theeconomic-cost-of-extreme-weather-events.pdf

- 2  https://www.oecd.org/en/publications/financing-climate-futures\_9789264308114-en /full-report.html
- 3  https://www.worldbank.org/en/news/press-release/2019/06/19/42-trillion-can-besaved-by-investing-in-more-resilient-infrastructure-new-world-bank-report-finds#:~: text=WASHINGTON%2C%20June%2019%2C%202019%20%E2%80%93,Reduction% 20and%20Recovery%20(GFDRR).

4  https://clarity.ai/research-and-insights/climate/only-1-5-of-global-investment-funds-arealigned-with-a-1-5oc-scenario-and-none-are-aligned-when-scope-3-is-considered/

5  https://www.un.org/en/climatechange/raising-ambition/climate-finance",Rajeshwar Rao
https://www.bis.org/review/r250717g.htm,Chang Yong Rhee: Post-pandemic monetary policy in Korea - toward an integrated policy framework,"Keynote speech by Mr Chang Yong Rhee, Governor of the Bank of Korea, at the joint 2025 conference of the Bank of Korea (BOK), the Asian Development Bank (ADB), and the Journal of International Money and Finance (JIMof), Seoul, 16 July 2025.",2025-07-16 00:00:00,"## Post-Pandemic Monetary Policy in Korea: Toward an Integrated Policy Framework

by Changyong Rhee'

Governor of the Bank of Korea

&lt;ADB-BOK-JIMF Conference 2025 Keynote Speech&gt;

|

## I. Introduction

Ladies and gentlemen, distinguished guests, Iam Rhee Changyong, governor of the Bank of Korea.

Thank you for joining us at this conference, co-hosted by the Bank of Korea (BOK), the Asian Development Bank (ADB), and the Journal of International Money and Finance (JIMF). I would like to express my sincere appreciation in particular to Dr. Donghyun Park of the ADB and Professor Joshua Aizenman of the JIMF for their invaluable contributions in organizing this gathering.

This year's conference focuses on fiscal and monetary policy in emerging markets. We learn the theories of fiscal and monetary policy through textbooks, but in the real economy, we often experience a great deal of trial and error when applying them. This challenge is even more pronounced in emerging economies, whose economic structures often differ significantly

1 This keynote speech was prepared with the assistance of Younghwan Park, Choongwon Park, Taesup Kim, Daeseong Han and Jaehoon Kang from the Monetary Policy Department at the BOK.

from those assumed in textbook models based on advanced economies. Accordingly, I believe that gatherings like this are especially valuable. They allow us to share policy experiences and to develop approaches tailored to each country's specific circumstances.

In this context, I would like to share Korea's experience in conducting monetary policy since the COVID-19 pandemic and the key policy lessons we have learned along the way.

Since the pandemic, the BOK's fundamental policy framework has been to pursue price stability through policy rate adjustments under an inflationtargeting regime. In response to a sharp and unexpected surge in inflation, we raised the policy rate from 0.5% to 3.5%. This marked the most rapid and substantial monetary tightening in Korea's history. Thanks to these measures, inflation gradually stabilized toward the target level, and we shifted our policy stance last year. We lowered the policy rate to 2.5% through four rate cuts.

However, we also encountered various policy challenges throughout this process. During the rapid rate hike cycle, we faced a sharp currency depreciation and financial market instability. As we shifted our policy stance, financial imbalances intensified. Afterward, political turmoil emerged, amplifying the trade-offs among policy objectives. In response, the BOK employed a combination of policy tools. These included interest rate adjustments, short-term liquidity provision, foreign exchange market intervention, macroprudential measures, and targeted lending facilities.

This approach aligns with the core principles of the Integrated Policy Framework (IPF). The IPF was formally introduced by the IMF in 2020. Even before that, many emerging market economies had already adopted and implemented such policy practices.

## II. BOK's Experience in Managing Trade-Offs Among Policy Objectives

I will now explain the BOK's experience in managing the trade-offs among policy objectives during the three different phases following the pandemic. These were the rapid rate hike phase, the policy transition period, and the rate cut phase.

## @ Phase of Interest Rate Hikes During the Second Half of 2022: Separate Responses to High Inflation and Instability in the Financial and Foreign Exchange Market

Let me begin with the second half of 2022. During this period, we applied the separation principle to address high inflation and instability in financial and FX markets.

At the time, the BOK had raised interest rates at the fastest and steepest pace in its history to curb inflation. However, throughout this process, financial stress and a sharp currency depreciation emerged at the same time. Amid growing credit risk aversion in financial markets, driven by the rapid rise in interest rates, a debt default at a local government-guaranteed project

triggered turmoil in the real estate project financing (PF) market.2 This anxiety quickly spread to the commercial paper (CP) and corporate bond markets, leading to a broad-based credit crunch. In addition to the instability in financial markets, the Korean won sharply depreciated in the FX market as the Federal Reserve tightened its monetary policy stance more aggressively than expected.

Faced with this intensifying conflict between price stability and financial stability, the BOK determined that a timely and effective separate response was necessary. That was a combination of policy measures aimed at stabilizing domestic and external conditions.

On the domestic front, we continued raising interest rates to contain inflationary pressure. At the same time, we provided short-term liquidity to ease excessive risk premiums in the market. To this end, the BOK conducted repo purchases and expanded the range of collateral for lending facilities and securities for open market operations. The government also activated the Bond Market Stabilization Fund and implemented CP and corporate bond purchase programs. As a result of these efforts, market conditions stabilized rapidly. The corporate bond credit spread narrowed from 180 bp in November 2022 to 70 bp by February 2023. The liquidity injection was temporary and targeted in nature, so it did not undermine the overall monetary tightening policy stance. Also, it was in line with Bagehot's dictum,

2 On Sept. 28, 2022, Gangwon Province decided to file for corporate rehabilitation on behalf of the Gangwon Jungdo Development Corporation. As a result, 205 billion won in Legoland project financing ABCP (rated A1) backed by the corporation's loan receivables was not repaid on Sept. 29. In response to the growing fallout from the incident, on Oct. 11 Gangwon Province pledged to honor its guarantee obligation and ultimately repaid the 205 billion won on Dec. 15.

as we applied interest rates above market levels.

On the external front, the BOK adopted a policy mix of a ""big step"" rate hike in October 2022, as well as FX market intervention, in order to moderate the pace of the currency depreciation. In Korea, the FX derivatives market is relatively small and dominated by short-term transactions. This structural feature makes the market particularly vulnerable to rapid depreciation. Sharp exchange rate movements can trigger margin calls on hedging positions, thereby amplifying downward pressure on the currency. Considering this vulnerability, we tried to adjust market expectations smoothly by managing the pace of depreciation rather than targeting a specific exchange rate. This approach contributed substantially to stabilizing the FX market, which shows a classic example of how the IPF can be effectively applied in economies with underdeveloped FX markets.

In addition, the BOK entered into a FX swap agreement with the National Pension Service (NPS) to ease spot FX demand for overseas investments. The NPS also benefited, as hedging was advantageous for risk management and returns during a period of unprecedented sharp currency depreciation. This FX swap agreement was a win-win strategic measure for both institutions.

## @ Period of Monetary Policy Transition in August 2024: Response to Intensifying Financial Imbalances

Moving on to the second experience, it concerns the response to worsening financial imbalances in August 2024 during the transition period of monetary policy by combining interest rate adjustments with

## macroprudential policy.

Looking at the circumstances, both domestic and external conditions provided sufficient room to moderate the extent of monetary tightening. Inflation had clearly slowed in Korea, as well as in many other countries. In fact, some advanced economies had already begun cutting their policy rates ahead of Korea. However, as expectations of a policy pivot by the Federal Reserve became widespread, domestic market interest rates declined sharply, even before the BOK initiated its rate cut. This led to a rapid easing of financial conditions. As a result, housing prices in Seoul surged at an annualized rate of 20% in August 2024. Household loans also increased by nearly 10 trillion won in a single month.

Against this backdrop, concerns emerged that a policy pivot by the BOK could further accelerate the rise in housing prices and exacerbate financial imbalances. In particular, Korea's household debt-to-GDP ratio stood at around 90%, already high enough to constrain private consumption. 3 Moreover, the concentration of credit on the real estate sector, which has low productivity, posed a threat to the long-term growth potential. In addition, real estate accounts for a significantly larger share of household and financial institution assets in Korea than in other major economies. All this made it necessary to address this issue appropriately.

Based on this assessment, the BOK judged it appropriate to first propose to

3 According to Kwon et al. (2023) and to Cecchetti et al. (2011), a panel regression analysis showed that when the household debt-to-GDP ratio exceeds 80% and 85%, respectively, it has a negative impact on economic growth.

the government that it strengthen macroprudential policy measures, and then to adjust monetary policy only after confirming the effectiveness of those measures. Accordingly, we held the policy rate steady in August 2024. Unlike other advanced central banks, the BOK does not have its own macroprudential tools to directly address financial imbalances. Therefore, we proposed strengthening relevant regulations through consultation with the government. In response, the government broadened the scope and raised the interest rate applied to the Debt Service Ratio (DSR) regulations.

Supported by the Bank's rate freeze and by the government's macroprudential strengthening, housing prices and household loans began to moderate after September. As concerns over financial imbalances alleviated, we were able to carry out two consecutive rate cuts in October and November.

This close coordination between monetary and macroprudential policies provides a clear example of how the IPF can be effectively applied in economies that face structural vulnerabilities concerning household debt. It also underscores the importance of maintaining a firm macroprudential stance during the monetary easing phase.

## @

## Phase of Policy Rate Cut in January 2025: Increased Domestic and External Uncertainties and Exchange Rate Volatility

Lastly, our third experience was in January 2025 during the easing phase. At that time, domestic political turmoil and heightened external uncertainties

simultaneously intensified downward pressure on growth and increased volatility in the exchange rate. We responded to this situation by combining policy rate adjustments with a lending program.

In December 2024, Korea faced an unexpected declaration of martial law followed by impeachment proceedings. This sharply dampened economic sentiment. The Consumer Sentiment Index fell to levels comparable to those last seen during the Global Financial Crisis (GFC) and during the early stages of the COVID-19 pandemic. The Business Sentiment Index also declined significantly.

Although Korea had gone through impeachment proceedings in 2004 and 2016, the situation then was different. Favorable external conditions at that time, such as China's rapid economic growth and a strong semiconductor market, helped restore sentiment and contain market instability.

This time, however, the external environment was less favorable. Trade uncertainty had heightened, global competition intensified, and the Federal Reserve paused its rate cuts. As a result, the won-dollar exchange rate rose to 1,480, the highest level since the GFC. At the same time, downward pressure on growth further increased and Korea's 2025 growth was expected to fall well below earlier projections.

Given the downside risks, the need for further rate cuts became stronger. However, heightened exchange rate volatility raised concerns that further cuts might worsen depreciation pressure. A rapid decline in the currency's value could not only fuel inflation and threaten financial stability, but could

also undermine international confidence in Korea's political and economic fundamentals. It could potentially raise concerns about a downgrade in the sovereign credit rating.

In light of these risks, the BOK decided to keep the policy rate unchanged in January 2025. Instead, we increased the amount of our Bank Intermediated Lending Support Facility by five trillion won to help offset downward economic pressure.4 This facility is a targeted credit program aimed at supporting small and medium-sized enterprises (SMEs) and the selfemployed. It provided effective relief to those most affected by weakening consumer sentiment, particularly the self-employed. Meanwhile, its impact on interest rate differentials and exchange rate volatility remained limited. In February, as domestic political conditions began to stabilize, despite continued external uncertainty, we were able to deliver an additional policy rate cut to support the economy. This experience illustrates how lending facilities in conjunction with interest rate policy can serve as an effective policy mix in responding to simultaneous domestic and external shocks.

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## III. Lessons Learned So Far

In responding to the trade-offs through policy combinations, the BOK has gained many valuable insights. Today, I would like to highlight three key lessons: the importance of policy cooperation between the central bank and

4 The BOK's Bank Intermediated Lending Support Facility is a program that provides low-interest funds to banks in proportion to their lending performance. As of the end of 2024, the BOK supported 30 trillion won for 105 trillion won in bank loans (9.8% of banks' total SME loans outstanding).

the government, the challenges of policy communication, and the flexibility of policy mix application.

The first lesson is the importance of policy coordination between the central bank and the government.

Where policy instruments are dispersed across multiple institutions, close cooperation is essential. In Korea, four agencies—the Ministry of Economy and Finance, the BOK, the Financial Services Commission, and the Financial Supervisory Service—convene weekly to share updates on the economic and financial landscape. This regular communication provides a foundation that enables each institution to pursue its own policy mandates independently, while ensuring timely and effective coordination when needed.

However, unlike other advanced economies, the BOK does not possess its own macroprudential policy tools or micro-level supervisory authority. As a result, when there are differences in views concerning the strength or direction of policy, there is a risk that the speed and effectiveness of the response may be compromised. Accordingly, in the longer run, it is important to enhance the legal and institutional framework to strengthen the central bank's role in macroprudential policymaking.

The second lesson concerns the challenges of policy communication.

Under a floating exchange rate regime, monetary policy can be clearly communicated through the message ""the exchange rate is left to the market, while macroeconomic stability is pursued through inflation targeting.""

However, when multiple policy tools are used, it becomes more difficult to intuitively convey such an approach to the market. If communication is unclear, policy effectiveness may also be diminished. Therefore, strengthening communication strategies and diversifying the tools become essential.

Indeed, when the BOK applied separation principle in the second half of 2022, some critics raised concerns that the Bank might be placing greater emphasis on financial stability at the expense of price stability. Given these concerns, there was a real risk that inflation could become entrenched if inflation expectations were not managed in a timely manner. In response, in October 2022 the BOK started presenting conditional Base Rate forecasts from Monetary Policy Committee members for the upcoming three-month period. This marked a clear shift away from the strategic ambiguity of the past. It also helped to quantitatively convey the direction of monetary policy and to shape market expectations that the Bank's tightening stance would be maintained and that inflation would stabilize.

Based on this experience, the need remains to further strengthen communication concerning policy direction. However, Korea is a small open economy with limited control over external shocks. Recognizing these constraints, the BOK is exploring ways to provide more concrete and effective guidance to the market.

Our third lesson is that the policy mix should be designed and applied flexibly, in accordance with countryand time-specific conditions.

Economic circumstances vary not only across countries, but also evolve over time within a single country. This means there is no one-size-fits-all solution. What matters is to design an optimal policy mix suited to a country's specific structure and to the nature of the shocks it faces.

Today, Korea has been able to respond more flexibly to currency depreciation than in the past. This is due to foreign exchange reserves exceeding 400 billion dollars and to structural improvements in the FX market. Since the GFC, the main drivers of capital flows have shifted from non-residents to residents, while overseas portfolio investment has expanded significantly. As a result, Korea has transitioned from a net debtor into a net creditor with 1.1 trillion dollars of net external assets.5 These changes have significantly strengthened the Korean economy's capacity to absorb any exchange rate shock.

Accordingly, while Korea previously had adopted a fixed or managed floating exchange rate regime, it now allows the exchange rate to be determined, in principle, by market forces. The BOK responds only when exchange rate volatility becomes excessive, using a combination of interest rate adjustments and FX market intervention to moderate the pace of movement.

Going forward, the BOK will continue to respond swiftly to internal and external shocks by conducting monetary policy and flexibly using other policy

5 Korea's net international investment position shifted from a negative USD 36.45 billion in 2000 to a positive USD 80.88 billion in 2014, and it reached USD 1,102.04 billion as of the end of 2024.

tools as appropriate to the circumstances. We will also make ongoing efforts to improve the financial and economic structure.

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## IV. Concluding Remarks

Today, I have shared how the BOK has addressed the growing trade-offs among policy objectives since the pandemic through a range of combined policies and I've touched on some of the key lessons we have learned in the process.

Seeking an optimal policy mix under any given set of economic conditions is a shared challenge not only for Korea, but also for all the policymakers from each country, international organizations, and the academic community gathered here today.

I sincerely hope that Korea's experience and the policy lessons shared today can make a modest yet meaningful contribution to helping other countries find better solutions and to strengthening the theoretical foundation of the IPF.

Thank you for your time and attention.

## References

Adrian, T. and Gopinath, G., 2020. Toward an Integrated Policy Framework for Open Economies. IMF Blog, July 13.

- Bank for International Settlements (BIS). 2022. Macro-Financial Stability Frameworks and External Financial Conditions. Report submitted to the G2o Finance Ministers and Central Bank Governors, July.
- BIS. 2024. Credit and Resource Allocation in EMEs: Taking Stock of Two Decades of Falling Interest Rates. BIS Bulletin No. 91, Sept. 5.

Cecchetti, S.G., Mohanty, M.S. and Zampolli, F., 2011. The real effects of debt. BIS Working Papers No. 352.

International Monetary Fund (IMF). 2020. Toward an Integrated Policy Framework. IMF Policy Paper, September.

- IMF. 2023. Integrated Policy Framework—Principles for the Use of Foreign Exchange Intervention. IMF Policy Paper, December.
- Kwon, D., Kim, D., Lee, S. and Ahn, J., 2023. Analysis of Household Credit Accumulation Risks and Policy Implications. BOK Issue Note, No. 2023-14, April 28.
- Lee, A., Nah, S. and Chae, D., 2023. Integrated Policy Framework and its Policy Implications. Korean Economic Forum 16(1), 83-115.
- Rhee, C.Y. 2024. An Integrated Policy Framework: Application to Korea's Monetary Policy. Speech at the Bank of Korea, Dec. 23.

Rhee, C.Y., and Park, Y.H., 2024. The Bank of Korea's Policy Response During the High Inflation After COVID-19. In Monetary Policy Responses to the PostPandemic Inflation, edited by B. English, K. Forbes, and A. Ubide, 251-266. CEPR Press and the ICMB.",Chang Yong Rhee
https://www.bis.org/review/r250728i.htm,"Adnan Zaylani Mohamad Zahid: Fundamentals of money - its origin, concept and operation in the modern economy","Panel presentation by Mr Adnan Zaylani Mohamad Zahid, Deputy Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the Muzakarah Cendekiawan Syariah Nusantara 2025, Bangkok, 16 July 2025.",2025-07-16 00:00:00,"## Adnan Zaylani Mohamad Zahid: Fundamentals of money - its origin, concept and operation in the modern economy

Panel presentation by Mr Adnan Zaylani Mohamad Zahid, Deputy Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the Muzakarah Cendekiawan Syariah Nusantara 2025, Bangkok, 16 July 2025.

* * *

## Presentation slides accompanying the speech

I would like to begin by expressing my sincere appreciation to the organiser INCEIF's ISRA Institute for the invitation to speak and for their efforts in convening this important forum. Events such as this play a vital role in fostering dialogue, sharing insights, and strengthening our collective resolve to advance Malaysia's Islamic financial system.

The theme of today's event, 'Transformation of an Integrated Islamic Financial System' is both timely and relevant. It invites us to reflect on the evolving dynamics of Islamic finance industry, and more importantly, how we can collectively shape a resilient and forward-looking Islamic financial ecosystem.

As we navigate an increasingly complex global environment, Malaysia's Islamic financial sector must continue to adapt, innovate, and uphold its commitment to sound governance and inclusive growth, whilst upholding the Shariah principles.

## Financial innovation calls for thinking beyond tradition

The financial landscape is evolving with many technological advancements and innovations. This shift is redefining the concept of money, necessitating a deeper exploration into its modern forms and implications. We are witnessing explorative transition from traditional instruments such as cash, coins, and digital wallets to emerging use cases like Central Bank Digital Currencies (CBDCs), stablecoins and asset tokenisation.

As we delve into such advancements, Shariah considerations must be considered. Our journey may face some challenges due to our limited understanding based on traditional thinking on the nature and essence money (for example, conceptualising money as commodity). Relying solely on mainstream interpretations may present limitations, including challenges in ascertaining future-proof policy responses and Shariah considerations.

In this regard, allow me to share in this Muzakarah today, an alternative view on money. Rethinking money beyond traditional frameworks may deliver a well-informed and future-proof policymaking.

## Mainstream understanding of money is based on commodity perspective

Why does money exist and how did money emerge and developed in early human societies? The most common story is probably already familiar to all of you. This narrative is also usually told in introductory economic textbooks, even in some central banks' publication.

The mainstream narrative is that - before money exists, people barter things or commodities with each other. For example, one goat is exchanged for one bushel of corn. But this system is difficult, as the 'double coincidence of wants' is difficult to achieve.

Money is said to solve this problem of 'double coincidence of wants'. Instead of every individual trying to match their commodity with other people's desired commodity, one commodity serves as a universally-accepted countervalue.

Because money facilitates market exchange, it is defined as a medium of exchange. Therefore, any medium of exchange is considered as money. However, this story is based on economists' assumption of humans as rational beings, acting as individuals solely to maximise their own utility or benefit. If we look at actual societies in history or 'primitive' societies that exist in modern times, does this story hold?

## Alternative view suggests money originated as credit

A society that operates purely on a barter system never existed. In 'primitive' societies, goods are circulated via gifts or social reciprocity or redistribution mechanism. Notice that social reciprocity is a kind of debt, except that is not legally enforced and is not precisely quantified.

Money, as a unit of account, first appeared as a measure of debt. Credit relations could and did exist without markets and medium of exchange. For example, debts arising from compensation for destruction of property, blood money, or authorities' imposition of tax.

Credit system and banking predate the first coinage by thousands of years. In ancient Mesopotamia, thousands of cuneiform tablets were found, many of which are deposit receipts and monetary contracts. Sometimes, these tablets become a bearer instrument, similar to modern promissory notes.

The earliest coins found around 700 BC are made from electrum, an alloy of gold and silver from Lydia (in modern day Turkey). But this coin's value is too high for small transactions. Evidence suggests coins are first used for state's expenditures, not day-today activities. Thus, money in the form of coinage developed as a social and governmental phenomenon.

## In reality, all monies we use today are transferable credit / IOUs

There are more than one type of money and each is used by different people:

- Currency in Circulation (CIC) - made up mostly of physical banknotes, the rest are coins.

- Bank deposits - most common type of money now. For convenience, people keep money stored electronically in their bank accounts, such as current accounts or savings accounts.
- Central bank reserves (CB reserves) - a special type of money used by commercial banks.

All these types of money are special IOUs because it is transferable to other people as everyone in the economy. Each type of money represents an IOU from one sector of the economy to another.

Each type of money is used by different people and institutions. Consumers use CIC or bank deposits to make payments to each other. Bank deposits are also used in transactions between banks and their customers.

For payments and settlement between banks, CB reserves are used. In Malaysia, these CB reserves are operated in our RENTAS system. CB reserves are also used by the central bank in their monetary operations.

## Current monetary system is a credit system of assets and liabilities

All the monies we have today are financial assets. They are claims on an agent or someone else. Non-financial assets such as land or gold are not claims on anyone they are commodities.

Because financial assets are claims, they are also financial liabilities. One person's financial asset must be someone else's or institution's debt. Commodities, or nonfinancial assets, do not have a corresponding debt or liability.

Money is both an asset and a liability, and the monetary system is a credit system of asset and liabilities. There is no physical form, only data points and entry balances. As this stylised diagram indicates ( refer to slide 6), all the money we have today are interconnected. Each type of money is recorded twice, as assets and liabilities on different balance sheets.

Bank deposits are liabilities of commercial banks. They represent debt obligation of the commercial bank to their depositors. Physical CIC, although usually not seen by the public as liabilities, are in fact, IOUs, book-keeping entries inscribed on paper and coins.

## Different types of money are issued by different issuers as liabilities

Not all money are issued by the central bank. In fact, most money in the economy are issued by the commercial banks, in the form of bank deposits. Money issued by central banks are public money, since it is backed by the state, while money issued by commercial banks are private money, as they are claims on the commercial banks themselves.

It is important here to clarify that when money is issued, either by the central bank or commercial banks, they are issued as liabilities of the issuer, not as assets.

Analogically, if a person buys a new phone on an instalment basis, he/she now owes the phone shop (the seller) and has effectively 'issued' a liability, in exchange for the new phone.

Deposit liabilities are exchanged for other IOUs. For example, when a customer deposits physical cash in a bank, the bank issues its new liability in the form of new bank deposits which is the customer's new asset. The customer will see his account credited.

Most deposits however, are created when banks make loans by creating a matching deposit in the borrower's bank account. The bank do not lend out CIC nor existing bank deposits to the borrower.

## Loan does not come from existing money, but rather, loan creates new money

The money creation process by the commercial banking system is not generally understood by the public, despite numerous publications by many central banks after the global financial crisis in 2008.

One misconception still widely held is that banks simply act as intermediaries of money between savers and borrowers. In this understanding, money that is lent to the borrowers comes from existing deposits, i.e., deposits create loans. The reality is, as explained earlier, money in the form of bank deposits are created by commercial banks in their act of lending, i.e., loans create deposits.

Banks are still intermediaries, but in credit. If someone wants to buy a house from a seller, the bank intermediates between the buyer and seller, by substituting the buyer's IOU for its (the bank's) own IOU.

A second misconception is that bank lending are limited by the amount of CB reserves. The higher the reserve requirement, the lesser the money multiplies. In reality, the central bank targets the interest rate as its monetary policy tool, not the amount of reserves. Commercial banks then decide how much to lend based on profitable opportunities.

## Trust ensures money in the credit-based system, works

Money, as an IOU, requires trust. An IOU is only accepted if the issuer is trustworthy. When the 'I' and the 'U' are strangers, institutions are needed to establish and maintain the trust. In this manner, any money that is issued can be used elsewhere in exchange for goods and services.

On bank deposits (commercial bank money), people must trust that it can be withdrawn for cash and the value of bank deposits stay at par to CIC. This is maintained in a few ways:

- Ensuring acceptability for tax payments. This ensures that money will always find a willing receiver, i.e., the government.

- Deposit insurance scheme provides assurance that withdrawals can always be made up to a certain amount.
- Access to central bank liquidity via various facilities. The central bank will always accommodate the banking system's need for liquidity, provided that the commercial bank is financially sound.

Most importantly, for people to use money, they must trust that its value does not change much from time to time. This monetary stability is maintained by the central bank through, first, clear objectives and second, the ability to meet the objectives, equipped with suitable tools.

## Promoting monetary stability is part of key mandates of BNM

As per the Central Bank of Malaysia Act 2009 (CBA 2009), one of the principal objectives of BNM is to promote monetary stability conducive to the sustainable growth of the Malaysian economy, along with ensuring financial stability.

BNM is mandated to pursue the primary monetary stability objective of 'maintaining price stability' while giving 'due regard to the developments in the economy'.

- Price stability means preserving the domestic purchasing power which will help facilitate long-term sustainable growth and ensure that inflation is kept low and stable.
- Economic growth happens when the size of the economy increases over time measured by the gross domestic product (GDP).
- Sustainable growth is the rate at which the economy can keep growing at a steady pace over a long period to ensure positive outcomes for the economy

In essence, monetary policy is one of the primary tools to manage inflation through its effect on overall demand conditions. Although it is necessary, it is not sufficient on its own to fully address the issue. This will be complemented with other relevant measures.

## Overnight Policy Rate as monetary policy tool to achieve monetary stability

BNM, through its Monetary Policy Committee (MPC), executes monetary policy responsibility by determining and adjusting the Overnight Policy Rate (OPR). The OPR is the sole indicator used to signal the stance of monetary policy and is announced through the Monetary Policy Statement (MPS).

During strong demand and high inflation, BNM raises the OPR which makes it more expensive for banks to borrow money. Consumer borrowing becomes more expensive, while savings become more attractive. These discourage spending and investment, eventually lowering demand. This dampens the pressure on prices, containing inflation.

Relying on monetary policy alone is not sufficient to address rising inflation. In addition to that, monetary policy takes effect with a lag (estimated to be up to 2 years). The

outcome depends on the impact to the behaviour of banks, consumers, businesses and the overall demand. This delay means prices might continue rising for a while before stabilising.

Therefore, addressing inflation would require other complementary policy tools to influence prices borne by households, especially those affected by supply factors. For example, fiscal policy can complement monetary policy to manage inflation.

## Closing

Reflecting on the updated understanding of the 'modern money as credit', this brings about the need to assess on whether there should also be an updated or alternative view on modern money and its creation from the Shariah perspective.

I believe this Muzakarah will serve as a good avenue for the great minds of the Shariah fraternity to have a meaningful discussion with regards to this pertinent topic.

There is indeed no straight forward answer to this and would require in-depth analysis and detailed assessment both from theoretical and implementation perspectives. It involves continuous dialogue with key stakeholders i.e. Shariah scholars, regulators, macro-economists, industry practitioners, as well as the public, where relevant.

To conclude, I wish to thank the organiser for having me today. It has been an honour to speak in front of esteemed and prominent Shariah leaders from various parts of the Nusantara.

I sincerely hope that my presentation today does justice to the recently published BNM Working Paper on ' Fundamentals of Modern Money and its application to Central Bank by the research team at Digital Currency (CBDC) - An Exploratory Shariah Analysis' the Islamic Finance Department of BNM, which can be accessed publicly on the BNM Website. I wish the attendees a fruitful discussion throughout this Muzakarah, insyaAllah.

Thank you.",Encik Adnan Zaylani Mohamad Zahid
https://www.bis.org/review/r250728h.htm,Adriana D Kugler: A view of the housing market and US economic outlook,"Speech by Ms Adriana D Kugler, Member of the Board of Governors of the Federal Reserve System, at the Housing Partnership Network Symposium, Washington DC, 17 July 2025.",2025-07-17 00:00:00,"For release on delivery 9:15 a.m. EDT July 17, 2025

A View of the Housing Market and U.S. Economic Outlook

Remarks by

Adriana D. Kugler

Member

Board of Governors of the Federal Reserve System at the

Housing Partnership Network Symposium

Washington, D.C.

July 17, 2025

Thank you, Robin.  And thank you for the opportunity to speak with you today on the important topic of housing and how housing fits in with the broader economy. 1

First, I want to step back and say that housing-our homes-has a central role in our lives beyond what statistical reports capture.  Housing matters greatly for our welfare because shelter is a basic human necessity.  Our homes-be it city apartments, farmhouses passed through generations, or suburban dwellings-are among the most significant places in our lives.  In terms of household finances, housing is an important source of wealth for many American families.  Housing also supports access to good jobs, because the jobs people can take depend on where they live and how far they need to commute.

In addition, the housing sector matters a great deal to the economy as a whole, and it is an important channel through which monetary policy is transmitted.  That is why I study it closely as a member of the Federal Open Market Committee (FOMC).  From the perspective of the labor market, many workers have ties to housing-related sectors, including construction, real estate, and the mortgage finance industry.  And because housing is a large fraction of household wealth, the housing market influences consumer spending.  From the price-stability perspective, shelter has a large weight in measures of inflation.  Specifically, shelter is currently 16 percent of the expenditures in the basket used to calculate the personal consumption expenditures (PCE) price index, which is the FOMC's preferred inflation measure. 2

1 The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.

2 Shelter has an even larger weight in the consumer price index-it is 35 percent for the index including all urban consumers.

Today I will discuss several aspects of housing affordability in the U.S., a topic that I know is important to many of you, as it is to me.  When studying affordability, it is important to distinguish between the cost of shelter, by which I mean the cost of occupying a home, and the costs of purchasing and owning a home.  I will discuss each of these in turn, with the common theme being that both are elevated from a historical perspective.  Next, I will discuss some supply and demand factors that explain how we got to this point and offer some thoughts on how these influences might evolve.  Finally, I will discuss my overall outlook of the U.S. economy and its implications for monetary policy.

## Cost of Shelter

I will start with a discussion of the cost of shelter, which is not only needed for survival, but is also a large portion of household budgets.  Because of this, increases in shelter prices leave less for families to spend otherwise.  It is common to measure the price of shelter with rents because rent reflects the price of occupying a home.  Rents surged early in the pandemic recovery, rising 8.3 percent over the 12 months ending in December 2022.  This year, rent growth eased to 3.8 percent over the 12 months ending in May. 3 The recent increase in multifamily construction has contributed to this moderation.  For lower-end properties, we have not seen as much of a cooling in rental inflation, in part because new construction has been aimed at the high end of the market.

3 The figures cited are calculated from the rent of tenant-occupied housing component of the PCE price index.

Even with the slowdown in rent growth, rents continue to rise faster than overall inflation, as was the case before the pandemic. 4

Nevertheless, rents have not risen at a faster pace than household incomes.  The constant-quality cost of a rental unit relative to the median family income is currently no higher than its average from 2014 to 2019.  The share of renters spending more than 30 percent of their income on rent was about the same in 2023 as it was in 2019, about 40 percent in both years.  Of course, this fraction is high, indicating that rental housing is a large expense for many families.  This ratio is significantly higher for certain groups.  In 2023, 43 percent of Hispanic households spent more than 30 percent of their income on rent, while 47 percent of Black households spent that share.  For households whose head did not attend college, the figure is 46 percent. 5

## Cost of Homeownership

While shelter is a necessity, homeownership is an opportunity because it is a pathway for families to build wealth.  It also provides a greater sense of stability because owner-occupants do not have to worry about a landlord deciding not to renew the lease. Like renting, the costs of purchasing and owning a house are elevated.

The cost of homeownership is related to several factors.  One is the cost of purchasing a home.  Like rent, house price growth has slowed from the fast pace seen a few years ago, and this slowing has been more pronounced for higher-priced homes. Zillow's index for high-value homes increased 1 percent per year over the past three

4 From 2015 to 2019, the rent component of the PCE price index rose 3.7 percent per year, more than double the rate of increase of the PCE price index excluding rent and owner-occupied shelter, 1.2 percent per year.

5  Calculations are based on household-level data from the 2023 American Community Survey provided by IPUMS; see Steven Ruggles, Sarah Flood, Matthew Sobek, Daniel Backman, Grace Cooper, Julia A. Rivera Drew, Stephanie Richards, Renae Rodgers, Jonathan Schroeder, and Kari C.W. Williams (2025), IPUMS USA, version 16.0 [dataset] (Minneapolis, Minn.:  IPUMS), https://doi.org/10.18128/D010.V16.0.

years, whereas it increased 3 percent per year for low-value homes. 6 Despite this slowdown, the level of prices is quite high, even relative to income.  The ratio of house prices to median family income is about 20 percent higher than its average from 2014 to 2019.

In addition, the costs associated with owning a home are also elevated.  Mortgage rates have ranged between 6 and 7.5 percent in the past several years.  Property taxes have risen along with home values.  Homeowners insurance premiums have increased as insurers seek to offset expenditures tied to recent natural disasters and the rising cost of replacing structures.  Federal Reserve Board staff research shows that, factoring in high house prices, mortgage rates, property taxes, and homeowners' insurance, the costs of owning a home relative to median income in 2023 were at the highest level seen since 1980. 7

Given these costs, it is no surprise that some families cannot afford a home. Board staff research shows that increases in mortgage rates reduce purchases by lowerincome borrowers, especially low-income first-time homebuyers. 8 And, indeed, the homeownership rate of heads of households younger than 45 decreased from 2022 to 2024.  This decline is a partial reversal of changes seen in the previous few years when a combination of very low interest rates and fiscal support caused ownership rates to rise. Yet, on net, the ownership rate for several groups remains above levels recorded before

6 This reference reflects data through May.  Zillow's high-value index reflects value for homes within the 65th to 95th percentile range for a given region, and the low-value index reflects value for homes within the 5th to 35th percentile range for a given region.  See Zillow Research (2025), 'Housing Data,' webpage, https://www.zillow.com/research/data.

7  See Raven Molloy (2025), comment on 'America's Housing Supply Problem: The Closing of the Suburban Frontier?' by Edward Glaeser and Joseph Gyourko, paper presented at the Brookings Papers on Economic Activity Conference, held at the Brookings Institution, Washington, March 28.

8  See Daniel Ringo (2024), 'Monetary Policy and Home Buying Inequality,' Review of Economics and Statistics (March), pp. 1-46.

the pandemic.  In 2024, homeownership rates for household heads aged 35 to 44 were 62 percent, 2 percentage points above their 2019 level.  The ownership rates for Black households were 4 percentage points higher, and the rate for Hispanic households was 1.5 percentage points higher. 9

## Demand Factors

The relative affordability of housing is the outcome of the forces of supply and demand.  Let me first focus on the long-run trends on the demand side, where household growth-that is, the change in the number of households over time-plays an important role.  Household growth is a function of population growth and household size.  In the 10 years before the pandemic, the U.S. population rose slightly less than 1 percent a year. Immediately following the pandemic, population grew at a faster rate, reflecting a higher volume of immigration.  That trend has since reversed.  Academic research examining immigration flows finds that rent growth increases in the short run after a wave of immigration, but these rent increases may not persist if the housing supply expands over time to meet the increase in housing demand. 10 In fact, a study found that increases in immigration do lead to more residential construction. 11 In terms of the whole population, the Census Bureau projects that population growth will ease over the next 10 years but

9  The homeownership statistics are from the Housing Vacancy Survey; see U.S. Census Bureau (2025),

'Housing Vacancies and Homeownership,' webpage, https://www.census.gov/housing/hvs/index.html. 10 See Albert Saiz (2003), 'Room in the Kitchen for the Melting Pot:  Immigration and Rental Prices,' Review of Economics and Statistics, vol. 85 (August), pp. 502-21; Albert Saiz (2007), 'Immigration and Housing Rents in American Cities,' Journal of Urban Economics, vol. 61 (March), pp. 345-71; Abeba Mussa, Uwaoma G. Nwaogu, and Susan Pozo (2017), 'Immigration and Housing:  A Spatial Econometric Analysis,' Journal of Housing Economics, vol. 35 (March), pp. 13-25; Umut Unal, Bernd Hayo, and Isil Erol (2024), 'The Effect of Immigration on Housing Prices:  Evidence from 382 German Districts,' Journal of Real Estate Finance and Economics (May), pp. 1-39; and Ibrahim Alhawarin, Ragui Assaad, and Ahmed Elsayed (2021), 'Migration Shocks and Housing:  Short-Run Impact of the Syrian Refugee Crisis in Jordan,' Journal of Housing Economics, vol. 53 (September), 101761.

11  See Libertad Gonzalez and Francesc Ortega (2013), 'Immigration and Housing Booms:  Evidence from Spain,' Journal of Regional Science, vol. 53 (February), pp. 37-59.

remain positive, based on mortality rates, birth rates, and the age distribution of the population. 12 Thus, population growth should put less upward pressure on demand for housing going forward.

Let me turn to some cyclical forces on the housing demand side, with some factors pushing demand in opposite directions.  A strong labor market for several years has fueled demand for both renting and owning housing, while the recent increase in mortgage rates and other costs of ownership have damped demand for owning.

## Supply Factors

Turning to housing supply, it is no surprise to those in this room that it has been increasing at too slow of a rate relative to demand.  Research shows that growth of the housing stock has declined steadily since the 1960s and 1970s.  Specifically, it estimates that if the housing stock had expanded at the same rate from 2000 to 2020 as it did from 1980 to 2000, there would be 15 million more housing units in the U.S. 13

Research finds that local regulations are an important factor constraining the housing supply, leading to higher house prices. 14 In response, some state and local governments have begun to enact policy changes aimed at relaxing these supply restrictions.  For example, in 2020 Minneapolis enacted a large-scale zoning reform that

12  The Census Bureau makes a range of population growth projections under various assumptions about immigration.  This statement refers to its projections under its baseline immigration assumption and its low-immigration assumption.  Under its high-immigration assumption, population growth would be about in line with that seen over the past decade.

13  See Edward L. Glaeser and Joseph Gyourko (2025), 'America's Housing Supply Problem:  The Closing of the Suburban Frontier?' NBER Working Paper Series 33876 (Cambridge, Mass.:  National Bureau of Economic Research, May), https://www.nber.org/system/files/working\_papers/w33876/w33876.pdf.

14  For summaries on the literature, see Joseph Gyourko and Raven Molloy (2015), 'Regulation and

Housing Supply,' in Gilles Duranton, J. Vernon Henderson, and William C. Strange, eds.,

Handbook of

, vol. 5 (Amsterdam:  North-Holland), pp. 1289-1337; and Nathaniel

Regional and Urban Economics

Baum-Snow and Gilles Duranton (2025), 'Housing Supply and Housing Affordability,' NBER Working

Paper Series 33694 (Cambridge, Mass.:  National Bureau of Economic Research, April),

eliminated parking requirements for new development, encouraged apartment development in commercial corridors, and permitted duplex and triplex construction on all residential lots. These zoning reforms may have boosted construction in Minneapolis. Other states and cities have also implemented policies intended to increase the number of housing units, but it is still too early to tell whether these changes will meaningfully affect house prices or rents.

Material and labor costs for home construction have increased about 25 percent in real terms since the mid-2000s. 15 Recent policy changes at the national level could further increase those costs.  Anecdotal reports, including those in the Beige Book, suggest that changes in immigration policy are starting to restrict the supply of construction workers.  Research has found that past declines in immigration have reduced residential construction while increasing housing prices. 16 In terms of tariff policy changes, to date there has been some effect on homebuilder costs.  The National Association of Home Builders estimates tariff policy, including tariffs on steel and aluminum, has increased the cost of new construction by about 3 percent of the average price of a new home, and additional tariffs, such as the one proposed on imported lumber, could raise construction costs further.

Another aspect of housing supply is the number of homes for sale.  Elevated interest rates have made it much less appealing for existing owners who have a mortgage with a low fixed rate to sell and purchase a different house, because doing so would require them to take out a new mortgage at a much higher rate.  Therefore, the supply of

15  See Glaeser and Gyourko, 'America's Housing Supply Problem,' in note 13.

16  See Troup Howard, Mengqi Wang, and Dayin Zhang (2024), 'Cracking Down, Pricing Up:  Housing Supply in the Wake of Mass Deportation,' working paper, October.

existing homes for sale in the past few years has been much lower than normal.  Board staff research shows that this 'rate lock-in' effect has boosted house prices in markets that were already tight in 2019, because the decrease in homes for sale was proportionally larger than the decrease in the number of potential buyers. 17

Considering all these factors in concert, the housing market has gone through some pronounced swings over the past four years.  Looking through these ups and downs, growth in demand for shelter has continued to outpace supply, putting upward pressure on rents across a wide range of locations and types of families.  Although rent growth has not been faster than income growth, rental expenditures are still a large fraction of income for many households.  House prices have risen, too, and combined with elevated mortgage rates and increases in other ownership costs, the costs of owning a home are high relative to Americans' incomes.

Looking forward, growth in housing demand may soften over the second half of this decade because of a slowdown in population growth.  But even with this softening, it is not clear that growth in the housing supply will be large enough to meet demand. Prospects for house prices and rents over the next few years also depend materially on the economic outlook, to which I will turn now.

## Economic Outlook

I will start by saying that while my discussion so far has focused on the housing market, I look at economic conditions across the entire economy and in every region of the country when making monetary policy decisions.  Thus, I pursue the monetary policy

17  See Aditya Aladangady, Jacob Krimmel, and Tess Scharlemann (2024), 'Locked In:  Mobility, Market Tightness, and House Prices,' Finance and Economics Discussion Series 2024-088 (Washington:  Board of Governors of the Federal Reserve System, November; rev. May 2025),

https://www.federalreserve.gov/econres/feds/locked-in-rate-hikes-housing-markets-and-mobility.htm.

that I believe will achieve our dual-mandate goals of maximum employment and price stability for all Americans.

Overall, I see the labor market as stable and resilient, and economic activity moderating some.  In contrast, I see upward pressure on inflation from trade policies, and I expect additional price increases later in the year.  While I am monitoring policy developments in many areas, I continue to see trade developments as the key drivers of the U.S. economic outlook.

Starting with price stability, based on data received this week, it is estimated that the headline PCE price index rose 2.5 percent on a 12-month basis in June, a somewhat stronger gain than the 2.3 percent recorded in May.  Core inflation, which excludes volatile food and energy costs and is a good guide for future inflation, came in at about 2.8 percent in June, also higher than in May.  Both headline and core inflation have shown no progress in the last six months.  While core services inflation decreased relative to the end of last year, core goods inflation has pushed up inflation recently.

I see firmer core goods inflation as already partially reflecting the pass-through of increased tariffs, which has been shown by research done at the Fed. 18 In addition, CPI and PPI reports released in the past two days show that increases in core goods prices were more broad-based in the month of June. While many forecasters may have been expecting a sooner and sharper increase in overall inflation, there are many reasons to think that larger effects of tariffs are still coming.  First, businesses built up inventories ahead of anticipated tariff increases, giving them leeway to still sell goods at pre-tariffed

18  See Robbie Minton and Mariano Somale (2025), 'Detecting Tariff Effects on Consumer Prices in Real Time,' FEDS Notes (Washington:  Board of Governors of the Federal Reserve System, May 9), https://www.federalreserve.gov/econres/notes/feds-notes/detecting-tariff-effects-on-consumer-prices-inreal-time-20250509.html.

prices.  Second, given the many changes in implemented tariff policies, businesses may not yet be passing the higher tariffs to their selling prices because they are waiting for greater clarity.  Third, businesses, especially larger ones, may also be waiting to capture market share from others that hike prices sooner.  Fourth, the current environment of stillelevated short-run inflation expectations makes it easier for workers to seek higher wages and business to charge higher prices, which could increase the persistence of price hikes going forward.  Fifth, tariff rates could increase further, as seen in newly proposed reciprocal tariffs for several countries and the new tariffs on copper introduced last week, putting further upward pressure on prices.

Other unforeseen shocks, such as geopolitical ones, may further push inflation upward soon.  Board staff research shows that increased geopolitical risk is associated with high inflation in the U.S., with effects peaking about two years after the geopolitical shock. 19 Renewed tensions in the Middle East, together with the possibility of an extension and escalation of the Russian invasion of Ukraine, are important geopolitical risks to monitor.

Turning to the employment side of our mandate, I see a labor market that has been stable and resilient.  The June employment report showed that employers added a robust 147,000 jobs, boosted by jobs in the state and local government sector.  Private payroll employment increased by 74,000, showing some moderation relative to previous months. Additionally, the unemployment rate has stayed in a narrow and historically low range for more than a year.  Layoff measures have remained subdued, and the ratio of job

19 See Dario Caldara, Sarah Conlisk, Matteo Iacoviello, and Maddie Penn (2024), 'Do Geopolitical Risks Raise or Lower Inflation?' working paper, April.

vacancies to unemployed workers has largely been stable at a level that suggests demand and supply for labor are roughly balanced.

## Conclusion

Considering the near-term outlook that I just outlined, I see that the U.S. economy has remained resilient, with labor markets appearing to be stable and close to full employment.  Inflation, meanwhile, remains above the FOMC's 2 percent goal and is facing upward pressure from implemented tariffs.  Moreover, I judge that inflation is likely to increase further as tariff effects build up during the rest of the year.

Given the stability in the employment side of our mandate, with the unemployment rate still at historically low levels, elevated short-run inflation expectations, and goods inflation rising due to the upward pressure from tariffs, I find it appropriate to hold our policy rate at the current level for some time.  This still-restrictive policy stance is important to keep longer-run inflation expectations anchored.  Moving forward, I will make policy decisions based on incoming economic data, the evolving outlook, and my assessment of risks to both sides of our dual mandate.

Thank you for the opportunity to speak with you today.",Adriana D Kugler
https://www.bis.org/review/r250717f.htm,José Luis Escrivá: The future of the European financial system,"Speech by Mr José Luis Escrivá, Governor of the Bank of Spain, at a forum, organised by Elkargi, Bilbao, 10 July 2025.",2025-07-10 00:00:00,"## JosØ Luis EscrivÆ: The future of the European financial system

Speech by Mr JosØ Luis EscrivÆ, Governor of the Bank of Spain, at a forum, organised by Elkargi, Bilbao, 10 July 2025.

* * *

It is a true pleasure to be here today at this forum organised by Elkargi. I would particularly like to thank Elkargi's Chair, Lander Arteche, and General Manager, Zenón VÆzquez, for their kind invitation.

Events like this are an opportunity to share reflections and, above all, to listen. To listen to those who best understand the reality of the productive system, the challenges of accessing finance and the opportunities that emerge in an environment of change.

And if anything defines the present moment, it is precisely that: change. Change that is far-reaching, swift and, in many respects, uncertain. Against this backdrop, talking about the future of the European financial system is more than a theoretical exercise: it's a discussion about how we are going to finance and sustain growth, innovation and social cohesion in Europe in the coming decades.

That's why today I'd like to share a few thoughts on how we can build a European financial system that is stronger, more integrated and better equipped for the challenges of the 21st century.

As has been evident for some time, the international environment facing Europe has become more complex and, in many respects, more adverse.

Geopolitical fragmentation, with the emergence of blocs vying for technological, trade and military hegemony, is undermining the multilateral order that has underpinned European prosperity for decades. This is compounded by rising levels of armed conflict, which, aside from its tragic consequences, have direct repercussions on trade flows, global value chains and, of course, the international financial system.

All of which generates a climate of deep uncertainty, one that is proving persistent and appears somewhat structural.

Against this backdrop, Europe - with its significant external dependencies in energy, technology and finance - has grown more vulnerable. Add to this rapid technological change - spearheaded by the United States and China - and demographic decline, and the urgency of a strategic response becomes all the more evident.

In the face of this increasingly complex and uncertain world, Europe needs to articulate a clear, ambitious and cohesive strategic response. It is not a question of raising barriers or retracting from the world, but of strengthening our economic and technological foundations in order to project ourselves more robustly on the international stage.

Doing so means placing the internal market at the core of our growth strategy, providing a resolute boost to productivity, accelerating the technological transformation and decarbonisation and reinforcing our economic and defence sovereignty.

Competitiveness is, without question, the central pillar of this agenda. To advance it effectively, coordinated action between European institutions and Member States is essential. The cornerstones of this agenda include:

- Strengthening the internal market, removing the barriers that prevent European firms from growing and scaling up.
- Simplifying the regulatory frameworks that affect firms.
- Coordinating trade, industrial and competition policies, ensuring a framework conducive to the development of strategic industries.
- Developing a robust defence industry that advances the European Union's (EU) strategic autonomy.
- Diversified, efficient and resilient financing.

Government investment is fundamental to driving this agenda forward, as a means of equipping Europe with the infrastructure and public goods that this transformation demands, as well as mobilising private investment and generating a multiplier effect on the economy as a whole. In particular, EU-wide public goods - such as cross-border energy grids, common digital platforms and shared defence capabilities - are key to reinforcing the EU's cohesion, competitiveness and strategic autonomy.

At the heart of the European competitiveness strategy lie small and medium-sized enterprises (SMEs), the true backbone of our continent's productive system. They account for more than 75% of jobs and over 50% of value added in the EU's nonfinancial private sector. These figures are higher still in Spain. 1

Yet the true importance of SMEs goes beyond the quantitative metrics: they are also drivers of innovation. Indeed, many of the most disruptive start-ups emerge within this ecosystem. Their agility, creativity and customer proximity allow them to quickly identify opportunities and develop solutions.

However, if they are to establish themselves, scale up and compete in an increasingly demanding global environment, these firms need a framework that smooths access to the single market and appropriate sources of financing. Insufficient scale and financing remain structural barriers for many start-ups.

Against this background, the two legislative packages recently put forward by the European Commission - one focused on developing the single market and the other on supporting start-ups and scale-ups - represent significant steps forward. In particular, the proposal to create a ""28th Regime"" for innovative SMEs - enabling them to operate under an EU-wide framework - is a promising initiative that ought to be processed swiftly and decisively.

In countries such as Spain, where the average firm size is especially small, 2  these measures could prove transformational.

But if the economic transformation strategy is to be truly viable, Europe's financial system must be up to the challenge. This means having a financial architecture capable of effectively channelling resources where they are needed most.

However, there continue to be structural weaknesses in the European financial system that dampen its responsiveness:

- Excessive fragmentation across national jurisdictions.
- Heavy reliance on bank intermediation.
- Shallow capital markets with little integration.

Overcoming these shortcomings is key if Europe is to maintain its strategic ambition. To this end, we must make headway towards a more cohesive, efficient and resilient financial system. A system underpinned by three core pillars:

1. The euro, as the cornerstone of the payments system and a strategic asset for European sovereignty.
2. A solid and competitive banking system.
3. Deep, integrated and accessible capital markets.

Allow me to begin with the first of these: the euro.

The euro is more than just a currency. First, it is a tool for developing European identity and economic sovereignty. The euro is currently the world's second most used currency and accounts for 20% of global currency reserves, compared with 58% for the dollar. Going forward, its global standing will largely depend on Europe's success in transitioning towards a more productive, competitive and autonomous economy.

The euro also serves as the backbone of the European payment system, a role that has been further strengthened by the advancements made in the Single Euro Payments Area (SEPA). However, 72% of retail card payments in Europe are still made using nonEuropean networks. This dependency is becoming entrenched with the emergence of new digital wallet providers and could be exacerbated by the expansion of dollardenominated stablecoins.

Against this backdrop, the digital euro project takes on a strategic dimension. As legal tender backed by the central bank and complementing cash, the digital euro could serve as a basis for private payment solutions while reducing external dependencies. It also presents an opportunity to consolidate SEPA and protect it against future risks.

In the wholesale arena, where a digital form of the euro is already in use, the challenge lies in adapting key infrastructures, such as TARGET (the European platform for secure, real-time settlements between central banks and commercial banks), to emerging technologies such as tokenisation and distributed ledger technology. The aim here will be to ensure these infrastructures' interoperability with private platforms that use these technologies, thus improving the financial system's efficiency, transparency and security.

The second pillar of our financial architecture is the banking system. In Europe, bank loans account for 92% of corporate finance, and this high concentration means that the banking system must be solid, competitive and resilient.

The Basel III regulatory reforms introduced in the wake of the global financial crisis have contributed decisively to strengthening the sector. Capital and liquidity ratios have improved substantially and European banks have proven notably resilient to recent crises, such as the pandemic and the energy crisis.

In parallel, the creation of the banking union, along with the Single Supervisory Mechanism and the Single Resolution Mechanism, has been key to ensure financial stability in the euro area. The banking union, though, remains incomplete. There is a pressing need to move towards implementing a European deposit insurance scheme, which would help reduce national fragmentation and definitively sever the link between sovereign and bank risk.

Furthermore, cross-border mergers remain scarce and need to be facilitated. Such mergers would pave the way for banks that are more capable of funding Europe's key priorities (digitalisation and defence, for instance) and would help to reduce financial system fragmentation, improve the efficient allocation of capital across the continent and bolster resilience to economic shocks by diversifying geographical and operational risks.

Another key aspect is the regulatory framework. We need regulation that is not only strong, but also clear, simple and efficient. Simplification does not imply relaxing solvency or liquidity requirements, nor does it mean deregulation. It means reducing unnecessary complexities, eliminating overlaps and building a more predictable and consistent legislative environment.

This will entail a comprehensive review of European rules (including Level 2 and Level 3), to avoid overlaps and update reporting requirements by eliminating those that are now obsolete. In short, we will need a holistic and integrated view of regulation, to enable banks to operate more effectively without compromising the system's stability.

Capital markets are the third pillar of our financial architecture. Developing and integrating Europe's capital markets is a prerequisite if we want to diversify financing sources, especially for SMEs.

As the representatives from Elkargi here with us well know, today SMEs rely almost entirely on bank loans for their financing. And while this has its advantages (in knowyour-customer aspects, for instance), it also makes them more vulnerable to banking sector shocks and changes in bank loan conditions. 3

This is why we need to broaden and diversify the sources of corporate finance, which naturally brings us to the important task of deepening and integrating Europe's capital markets.

Making headway with the capital markets union (recently reframed as the savings and investment union) is a financial priority and a core element of Europe's strategy to raise productivity, attract investment and strengthen its global competitiveness.

In this context, I would like to highlight two particularly significant initiatives:

First, the development of financing options for small innovative companies and startups, particularly in their early stages. It is essential to facilitate early access to financing for these firms, whether through venture capital funds or similar arrangements, and support them in their subsequent growth. The aim of this is clear: to make sure that these firms can thrive in Europe and do not have to relocate to other, more favourable jurisdictions. Some European countries, such as Sweden, have successfully created dynamic financial ecosystems that can serve as reference for other Member States.

Second, the review of the securitisation framework, with a view to smoothing the transfer of risk (including that associated with loans to SMEs) to other financial system participants. The 2017 reform did not have the expected impact, and the European Commission has recently announced a new proposal to reduce operational costs and improve risk sensitivity. Aware of its potential for boosting lending to firms, the Banco de Espaæa is assessing this proposal with interest.

As we have seen, completing and integrating the capital markets is vital. Only thus will we be able to offer our firms, especially the most innovative and dynamic ones, a financial ecosystem that allows them to grow, compete and lead the economic transformation that Europe needs.

And this brings me to my concluding point.

Europe faces a crossroads. The global environment has changed and, with it, so have the rules of the game. But we are also faced with a historic opportunity to construct a stronger, more resilient and more autonomous economy. An economy capable of sustaining its citizens' social well-being and its geopolitical standing in an increasingly uncertain world.

To this end, Europe's financial system must be an active and key part of the solution. We are called to complete it, integrate it and equip it for the challenges of the 21st century. Only then will European firms, in particular our SMEs, be guaranteed the resources they need to grow, innovate and create quality employment.

At the Banco de Espaæa we will continue to work towards this objective. Because a strong financial system is not an end in itself; it is a tool for achieving economic progress and the well-being of European citizens.

1 77.1% and 60.9%, respectively, according to 2024 data taken from the Annual Report on European SMEs 2024/2025. European Commission (May 2025).

2 Micro enterprises (1-4 employees) account for 34.6% of employment (30.1% in the EU) and 28.8% of real value added (20.1% in the EU).

- 3  Indeed, European Central Bank surveys show that credit standards have tightened more for SMEs than for large firms since 2021.",Jose Luis Escrivá
https://www.bis.org/review/r250728d.htm,Shinichi Uchida: Japan's economy and monetary policy,"Speech by Mr Shinichi Uchida, Deputy Governor of the Bank of Japan, at a meeting with local leaders, Kochi, 23 July 2025. ",2025-07-23 00:00:00,"

J u l y 2 3 , 2 0 2 5

Bank  of  Japan

## Japan's Economy and Monetary Policy

Speech at a Meeting with Local Leaders in Kochi

## UCHIDA Shinichi

Deputy Governor of the Bank of Japan

(English translation based on the Japanese original)

## Introduction

It  is  my  pleasure  to  have  the  opportunity  today  to  exchange  views  with  leaders  in administrative, economic, and financial areas in Kochi Prefecture. I would like to take this chance to express my sincere gratitude for your cooperation with the activities of the Bank of Japan's Kochi Branch. Today, I will explain Japan's economic activity and prices, as well as the Bank's conduct of monetary policy.

## I. Current Situation of and Outlook for Economic Activity and Prices

I  will  start  by  talking  about  developments  in  economic  activity  and  prices.  Please  take  a look at Chart 1. Japan's economy has recovered moderately, although some weakness has been seen in part. As for the outlook, Japan's economic growth is likely to moderate due to the effects of trade and other policies in each jurisdiction. Thereafter, however, the growth rate  is  likely  to  rise,  with  overseas  economies  returning  to  a  moderate  growth  path.  That said, there are extremely high uncertainties regarding the future course of trade and other policies in each jurisdiction and the impact of these policies on economic activity and prices at  home  and  abroad.  The  outlook  I  just  explained  is  developed  based  on  assumptions including  the  following:  negotiations  between  jurisdictions  will  progress  to  some  extent, and significant disruptions of global supply chains will be avoided.

Considering this, I would like to explain three key factors in projecting future developments in  Japan's  economy:  (1)  trade  policy  in  each  jurisdiction  and  its  impact  on  the  global economy;  (2)  the  impact  of  such  trade  policy  on  Japan's  economy;  and  (3)  the  rise  in consumer prices, including food prices, and developments in private consumption.

## Trade Policy in Each Jurisdiction and the Global Economy

Please  refer  to  Chart  2.  Since  early  spring  of  this  year,  the  environment  surrounding economic activity and financial markets at home  and abroad has been changing significantly due to the series of tariff policies introduced by the United States. International organizations have significantly revised their economic projections downward. That said, at present, while deterioration in economic indicators worldwide has been seen mainly in soft data,  including  confidence  indicators,  hard  data  --  such  as  economic  growth  rates  and

employment  indicators  --  have  not  deteriorated  as  much,  reflecting  factors  such  as front-loading due to the increase in U.S. tariffs.

Please  refer  to  Chart  3.  In  the  United  States,  the  increase  in  tariffs  is  likely  to  push  up consumer prices through a rise in import prices, while in the real economy, it is likely to push down  firms'  and  households'  spending  by  way  of  elevated  inflation  and  heightened uncertainties. Looking at the upper left-hand graph, business sentiment in the United States (red line and green dotted line) has deteriorated somewhat since the announcement of new tariffs. Moreover, consumer sentiment (blue line) has deteriorated substantially, mainly due to growing concerns over future inflation.

Turning to the upper right-hand graph, while the impact of tariff hikes on consumer prices has been limited on the whole so far, the prices of some goods for which the United States is  heavily dependent on imports -- such as household electrical appliances, furniture, and toys -- have risen. On this point, U.S. imports increased rapidly in the first quarter of 2025, as shown in the lower left-hand graph. Since it is possible that many products currently on sale in the United States were imported before the tariffs were imposed, close examination of  price  developments  over  the  next  few  months  is  warranted,  as  is  examination  of  the impact on private consumption and other factors if prices increase.

Meanwhile, looking at the lower right-hand graph, the U.S. unemployment rate (red line) has been more or less flat, at around 4 percent. This likely reflects the recent decline in the labor force participation rate (blue line). While U.S. labor market indicators have a tendency to  fluctuate  and  thus  require  further  monitoring,  labor  supply  has  weakened,  possibly affected by the change in U.S. immigration policy. Labor market conditions have remained tight, but wages are unlikely to come under strong upward pressure, since labor demand has weakened, as seen in the number of newly employed persons.

With regard to future developments, the main scenario is that tightness in U.S. labor market conditions will gradually ease as labor demand sees a moderate deceleration, generally in line  with  the  deceleration  in  labor  supply.  In  this  case,  it  is  unlikely  for  second-round inflationary effects to be exerted through wage increases. On the other hand, if consumer

prices rise substantially due to the impact of tariff hikes and labor market conditions remain tight,  the  risk  of  inflation  will  be  of  concern.  Conversely,  if  labor  market  conditions deteriorate considerably, policy responses are likely to take account of a potential economic slowdown. Therefore, developments in consumer prices and labor market conditions over the  next  few  months  are  key  in  assessing  the  U.S.  economy  and  the  Federal  Reserve's conduct  of  monetary  policy.  In  addition,  these  developments  are  likely  to  affect  global financial and capital markets, including the foreign exchange market.

Meanwhile, the Chinese economy has continued to show relatively high growth, mainly due to  the  effects  of  government  measures,  including  subsidies  to  promote  purchasing  of durable  goods,  and  to  the  front-loading  of  exports.  However,  these  positive  effects  are expected to wane, and issues such as sluggishness in the real estate market and the high youth  unemployment  rate  have  persisted.  Moreover,  with  the  Chinese  economy  initially facing the issue of structural excess production, there are Japanese firms that have shown concern that the condition of international commodity markets, including the prices of basic materials in Asian markets, may deteriorate due to exports from China.

European economies have been relatively weak, with a deterioration in consumer sentiment and a reactionary decline in exports following front-loading. Meanwhile, there have been some  strong  developments,  such  as  a  recovery  in  global  demand  for  IT-related  goods, mainly  led  by  AI-related  products.  It  seems  that  an  increasing  number  of  experts  are viewing developments in other IT-related goods somewhat cautiously, as front-loading for these  goods  has  likely  paused,  although  these  views  may  change  depending  on  future developments in tariffs.

As I just explained, among recent developments in the global economy, while the impact of tariffs on confidence indicators can be observed, assessing hard data is difficult given, for example, the timing of front-loading and the reactionary decline. Going forward, I believe close attention is warranted on the direct impact via trade and  the impact of deteriorating sentiment on business fixed investment and private consumption.

## Trade Policy in Each Jurisdiction and Japan's Economy

Next, I will talk about the impact on Japan's economy. Please take a look at Chart 4. The results  of  the  June  2025 Tankan (Short-Term  Economic  Survey  of  Enterprises  in  Japan) released by the Bank on July 1 indicate that business sentiment has deteriorated in some manufacturing industries, mainly due to the impact of U.S. tariff policy, but has stayed at a favorable level overall.

Moving on to Chart 5, corporate profits have continued on an uptrend regardless of industry and firm size. Looking at the right-hand table, manufacturing firms have revised their profit projections  for  fiscal  2025  downward,  expecting  a  decline  of  8.4  percent.  However, nonmanufacturing firms, which have not been affected as much by the trade policies, have revised their profit projections for fiscal 2025 upward, and the profit levels of manufacturing firms through fiscal 2024 had been high. Therefore, projected profits in the corporate sector overall have continued to be at a relatively high level, with the projected decline of 5.7 percent in fiscal 2025 close to the increase of 5.6 percent in fiscal 2024.

Please refer to Chart 6. Business fixed investment has continued on a moderate increasing trend, and this fiscal year's investment plans in the left-hand graph indicate that this trend will  be  maintained.  The  right-hand  graph  shows  developments  in  machinery  orders  and construction  starts,  which  are  leading  indicators  of  business  fixed  investment.  These indicators  have  also  continued  to  show  an  increasing  trend  and  there  seems  to  be  no significant change in firms' appetite for investment at this stage. Of course, with extremely high uncertainties regarding trade and other policies, many exporting firms may have put off revising their business fixed investment plans. That said, there have been many reports from firms in a wide range of industries that they consider labor-saving and efficiency-improving investment to be essential given intensifying labor shortages, and that they  plan  to  steadily  move  forward  with  the  investments  they  deem  necessary  from  a mediumto long-term perspective, such as investments for digitalization and decarbonization, regardless of how tariff policies unfold.

Chart  7  illustrates  the  employment  and  income  situation.  Looking  at  the  final  aggregate results  of  annual  spring  labor-management  wage  negotiations  --  presented  in  the  upper

left-hand  graph  --  this  year's  agreed  wage  growth  rate  was  5.25  percent,  which  was somewhat higher than last year and the highest level in 34 years. Developments by firm size and  type  of  employment  --  presented  in  the  lower  left-hand  table  --  show  that  the  wage growth  rate  for  unions  that  have  99  or  less  members  has  increased  the  most  from  the previous  year.  Moreover,  the  results  of  other  surveys  --  such  as  those  conducted  by  the Japan Chamber of Commerce and Industry -- indicate that micro, small, and medium-sized firms,  which  are  facing  severe  labor  shortages,  plan  to  conduct  wage  hikes  similar  to  or somewhat higher than those in fiscal 2024, with some raising wages as a defensive step. Therefore, the impact of tariff policies does not seem to have been significant at the time of this year's annual spring labor-management wage negotiations.

Reflecting  such  high  wage  growth  rates,  scheduled  cash  earnings  --  presented  in  the right-hand graph -- have continued to be on a clear increasing trend, albeit with fluctuations due to the number of working days and other factors. Meanwhile, the number of employed persons has continued to increase steadily, mainly in the information and communications industry and in the medical, healthcare, and welfare services industry, both of which have faced  severe  labor  shortages.  Against  this  backdrop,  employee  income  --  which  is  the product of wages per employee and the number of employed persons -- has continued to see a relatively high year-on-year increase, and is currently at around 4 percent.

Thus, although tariff policies are expected to have a negative impact, the business plans of Japanese firms assume that profits will remain at a high level, albeit with a decline, and that they will continue with fixed investment and human capital investment.

That said, future developments require attention. The course of tariff negotiations between jurisdictions  remains  uncertain  and  firms  have  yet  to  deal  with  their  effects.  Regarding Japan's economy as a whole, I think that (1) the baseline scenario is that economic growth will  moderate  temporarily,  as  I  mentioned  at  the  outset,  amid  a  slowdown  in  overseas economies and a decline in domestic corporate profits and other factors, and (2) there are high uncertainties over Japan's economy and risks are skewed to the downside.

The direct impact of U.S. tariff hikes on Japanese firms is likely to first appear in export profitability or export volume, depending on whether the firms pass on the increased costs due to the tariffs to selling prices in the United States. Looking at Chart 8, export prices, especially those of passenger cars to North America, have clearly fallen since April this year. That said, as transactions observed at this point seem to have been mainly between parent companies in Japan and their sales subsidiaries in the United States, the actual selling prices of subsidiaries will be determined by factors such as the future competitive environment in the U.S. markets. As such, Japanese firms' export and sales strategies and the magnitude of the impact on their profits will depend, for example, on the specific tariff rate levels and how firms in other jurisdictions will react.

Considering  these  factors  on  the  assumption  that  negotiations  between  jurisdictions  will progress to some extent, profits in the corporate sector overall will continue to be at a high level, even if exporters' profits are pushed down, as shown in the June 2025 Tankan . With regard to wage-setting, the baseline scenario is that, since an acute sense of labor shortage will persist, the recent trend of firms actively raising wages and prices will continue.

However, if the negative impact of tariff policies turns out to be greater or more prolonged than  expected,  there  is  concern  that  the  trend  of  wage  hikes  observed  over  the  past  few years  could  weaken  through,  for  example,  greater  pressure  on  domestic  supply  chains  in export  industries  to  reduce  costs  or  adverse  effects  on  private  consumption  and  the nonmanufacturing sector. Considering the extremely high uncertainties regarding developments  in  the  global  economy  and  global  financial  and  capital  markets,  close attention is warranted on such downside risks to Japan's economic activity and prices.

Moreover,  future economic  developments  concerning  these points will vary across industries,  firms,  and  regions,  and  such  developments  cannot  be  fully  understood  using macro data alone. In particular, the Bank, through dialogue with business managers, aims to carefully gauge in a timely manner how these uncertainties will affect firms' decision-making,  such  as  about  investment.  I  would  thus  like  to  ask  you  all  for  your continued cooperation in, for example, interviews conducted by the Bank's branches.

## Developments in Consumer Prices and Private Consumption

I  would now like to discuss the third factor, which is developments in prices and private consumption.  Please  refer  to  Chart  9.  As  presented  in  the  left-hand  graph,  consumer sentiment in Japan has recently deteriorated, mainly against the background of a rise in food prices, such as rice prices, and uncertainties regarding tariff policies. The right-hand graph shows developments in real private consumption. Consumption of nondurable goods (green dotted  line)  including  food  has  continued  on  a  decreasing  trend,  reflecting  consumers' increased thriftiness, mainly due to the rise in food prices. On the whole, however, private consumption  (red  line)  has  maintained  a  moderate  increasing  trend,  supported  by  an improvement in the employment and income situation. Regarding the outlook, since wage increases  are  expected  to  continue,  as  I  explained  earlier,  their  developments  relative  to price increases will be important.

Please take a look at Chart 10. The year-on-year rate of change in the consumer price index (CPI, all items less fresh food) -- represented by the red line -- was in the range of 3.0-3.5 percent for June 2025. The main reason behind inflation in recent years is the increase in food prices (light blue bars). The first increase was seen from 2022 through 2023, led by a rise  in  import  prices.  Although  it  paused  in  the  first  half  of  last  year,  food  prices  have increased again since the second half of last year, mainly due to the rise in rice prices.

Meanwhile,  the  year-on-year  rate  of  increase  in  services  prices  (pink  bars)  rose  through 2023, and thereafter has been more or less flat. Wage increases have continued to push up services prices -- although the pace has not accelerated -- as a moderate underlying trend.

Looking  ahead,  the  Bank  expects  the  impact  of  higher  rice  prices  and  other  cost-push factors  to  eventually  wane,  partly  owing  to  various  government  measures.  Meanwhile, underlying  inflation  excluding  cost-push  factors  is  determined  by  the  output  gap,  which captures  the  utilization  of  labor  and  capital  in  the  overall  economy,  and  by  medium-  to long-term inflation expectations, which indicate firms' and households' views on prices over a somewhat longer horizon.

Please  refer  to  Chart  11.  As  shown  in  the  left-hand  graph,  the  output  gap  (red  line)  is currently  at  around  zero  percent.  Since  the  actual  growth  rate  of  Japan's  economy  is projected to remain roughly in line with the potential growth rate for the time being, it is likely that the gap will remain at around the current level. Thereafter, it will improve again as the actual growth rate rises. Meanwhile, labor shortages have intensified, partly due to a deceleration  in  the  pace  of  increase  in  labor  force  participation  of  women  and  seniors, which has supported labor supply to date. There have also been cases where, due to labor shortages, firms -- particularly in nonmanufacturing industries, such as accommodations as well  as  eating  and  drinking  services  --  are  unable  to  raise  their  capacity  utilization  rates even when their facilities are underutilized, which I believe is also being observed in Kochi Prefecture.  In  this  sense,  upward  pressure  on  wages  and  prices  could  be  stronger  than suggested by the output gap.

Moreover, the upper right-hand graph shows that medium-  to long-term inflation expectations  have  risen  moderately  in  recent  years,  with  firms'  behavior  shifting  more toward raising wages and prices. This trend is expected to continue going forward, although the pace is likely to be sluggish due to deceleration in the economy, and then to increase again.  After  the  turn  of  this  fiscal  year,  price  hikes  have  spread  from  rice  to  other  food products as well, and consumer prices have risen by more than what the Bank or market participants  had  expected.  This  suggests  that,  at  least  with  regard  to  food  prices,  firms' price-setting behavior has changed significantly compared to the past. As similar trends can be  seen  in  related  areas,  such  as  dining-out,  the  Bank  will  monitor  the  extent  of  these developments.  After  all,  since  food  products  are  closely  tied  to  daily  life  and  purchased frequently, they are likely to have a relatively stronger influence on people's views on prices. While it is difficult to observe medium- to long-term inflation expectations directly, since the past few years have been a period of major change, the Bank will carefully gauge these developments, including micro-level changes in corporate behavior.

Please look at the lower right-hand table. In sum, the Bank's outlook for prices is as follows. The effects of the rise in food prices are expected to wane. Underlying inflation is likely to be sluggish temporarily, mainly because economic growth is likely to moderate due to the effects of trade policy in each jurisdiction. The year-on-year rate of increase in the CPI (all

items  less  fresh  food)  could  fall  below  2  percent  at  some  point  through  fiscal  2026. Thereafter, actual inflation and underlying inflation are both expected to increase gradually, since it is likely that, in line with the increase in the economic growth rate, tightness in labor market conditions will become more evident, and a growing number of firms will shift their behavior  more  toward  raising  wages  and  prices.  The  Bank  expects  to  achieve  the  price stability target of 2 percent sometime during the second half of the projection period of its latest Outlook for Economic Activity and Prices -- namely, the period from the second half of fiscal 2026 through fiscal 2027.

## II. The Bank's Conduct of Monetary Policy

## Future Conduct of Monetary Policy

Next, I will discuss the Bank's conduct of monetary policy.

As  I  have  already  explained,  amid  a  slowdown  in  overseas  economies,  it  is  likely  that Japan's economic  growth will moderate and underlying inflation will be sluggish temporarily. In addition, given that there remain extremely high uncertainties regarding the trade policy of each jurisdiction and its effects on domestic and overseas economies, risks to economic activity and prices are both skewed to the downside. In light of these points, it is important  to  firmly  support  economic  activity  by  maintaining  accommodative  financial conditions. At the Monetary Policy Meeting (MPM) held last month, the Bank decided to keep the policy interest rate unchanged at 0.5 percent. Please refer to Chart 12. As shown in the left-hand graph, the real interest rate -- calculated as the nominal interest rate minus the expected rate of inflation -- is significantly negative. Moreover, as shown in the right-hand graph, the Tankan results indicate that financial institutions have continued to take an active lending stance, and that issuance conditions for corporate bonds have remained favorable on the whole. Japan's financial conditions have been accommodative.

As  for  the  future  conduct  of  monetary  policy,  given  that  real  interest  rates  are  at significantly low levels, if the aforementioned baseline scenario of the outlook for economic activity  and  prices  is  realized,  the  Bank,  in  accordance  with  improvement  in  economic activity and prices, will continue to raise the policy interest rate and adjust the degree of monetary accommodation.

In  this  regard,  the  Bank  will  examine  whether  the  outlook  will  be  realized,  without  any preconceptions. As I have explained, it is not entirely clear how trade negotiations between jurisdictions will evolve; it is also not entirely clear from each jurisdiction's economic data to date how economic activity and prices at home and abroad, as well as global financial and capital  markets,  will  develop.  I  would  like  to  pay  close  attention  to  these  factors,  as there are extremely high uncertainties and as domestic and overseas economies seem to be at  a  critical  juncture.  These  factors  also  have  the  risk  of  putting  downward  pressure  on prices in Japan. On the other hand, there has been upward pressure from cost-push factors, especially  for  food  prices.  My  attention  will  therefore  be  on  how  such  upward  and downward pressure may affect the outlook for prices through, for example, firms' wage- and price-setting behavior.

Under the premise that the outlook for economic activity and prices comes with uncertainty, the  Bank  needs  to  adjust  monetary  policy  to  best  balance  the  upside  and  downside  risks from the perspective of maintaining stability in economic activity and prices. This is called the risk-management approach, and the Bank aims to take this kind of orthodox and robust monetary policy approach, especially now when uncertainties are extremely high.

## Plan for the Reduction of the Purchase Amount of Japanese Government Bonds

Please refer to Chart 13. I would now like to talk about the Bank's purchases of Japanese government  bonds  (JGBs).  Under  large-scale  monetary  easing  conducted  from  2013,  the Bank had purchased large amounts of JGBs from the market to stabilize the entire yield curve at a low level. It concluded this policy framework last year, and has been reducing its purchase amount of JGBs in a planned manner. Specifically, the Bank decided to reduce the amount of its monthly outright purchases, which had been close to 6 trillion yen, by about 400 billion yen each calendar quarter through March 2026.

Please take a look at Chart 14. The Bank's plan for the reduction of the purchase amount of JGBs is  based  on  the  idea  that,  in  principle,  long-term  interest  rates  are  to  be  formed  in financial markets. The move is thus aimed at reducing the Bank's market presence, which had  increased  substantially  as  a  result  of  large-scale  monetary  easing,  and  thereby improving  the  functioning  of  the  JGB  markets.  The  functioning  of  the  JGB  markets  has

actually been improving as the Bank makes headway in reducing its JGB purchase amount. This can be seen, for example, in the increase in the transaction volume for cash JGBs -- as presented  in  the  left-hand  graph  --  particularly  for  on-the-run  issues,  and  in  the  fact  that JGB yields -- as presented in the right-hand graph -- are moving more in line with various economic indicators, market participants' views on future monetary policy, and developments  in  overseas  interest  rates.  That  said,  as  the  Bank's  JGB  holdings  have remained substantial,  market  participants  and  many  others  have  continued  to  express  the view that improvement in market functioning is still only halfway accomplished and thus there is considerable room for further progress.

Let me go back to Chart 13. Taking this view of market participants into account, at the MPM  held  last  month,  the  Bank  decided  on  a  new  reduction  plan  for  JGB  purchases through March 2027. Specifically, it will continue to reduce the monthly purchase amount by  about  400  billion  yen  each  calendar  quarter  through  March  2026,  in  line  with  the previous plan, and from April 2026 onward, will moderate the pace of reduction to about 200  billion  yen  each  calendar  quarter.  As  a  result,  flow-based  monthly  purchases  in January-March 2027 will be about 2 trillion yen, which is equivalent to about one-third of monthly purchases before the start of reductions.

As I mentioned earlier, in principle, long-term interest rates are to be formed in financial markets, and to further advance this, it is desirable for the Bank to continue reducing its purchase amount of JGBs. On the other hand, if the pace of reduction is too fast, this may have an unforeseen impact on market stability. Notably, JGB purchases and the holdings of market participants  will  increase  in  terms  of  both  flow  and  stock  as  the  reduction  of  the Bank's  purchase  amount  moves  forward.  Given  this,  the  Bank  decided  that  it  was appropriate to slow the pace of reduction, taking into account market participants' views. In addition, the plan decided at the June 2025 MPM continues to allow enough flexibility to support stability in the JGB markets. That is to say, if an exceptional case, such as a rapid rise in long-term interest rates, should take place, the Bank will make nimble responses by, for  example,  increasing  the  amount  of  JGB  purchases.  It  will  also  conduct  an  interim assessment  of  the  new  reduction  plan  at  the  June  2026  MPM  while  reviewing  the

developments in and functioning of the JGB markets. If deemed necessary, the Bank may modify the plan as appropriate.

The  large-scale  monetary  easing  conducted  from  2013,  combined  with  government measures, cleared the personnel surplus that was at the root of the deflationary economy, and labor shortages are currently a driving force behind changes in corporate behavior and in Japan's economic structure. I believe large-scale monetary easing was a necessary policy for  Japan's  economy.  On  the  other  hand,  there  is  no  such  thing  as  a  free  lunch,  and  the overall effect of the easing on Japan's economy will not be definite until the exit process is complete. I believe it can be judged that the easing had positive effects on Japan's economy only after the Bank makes a successful exit.

Restoring  interest  rate  formation  to  the  original  state  where  rates  are  determined  by  the market  requires  predictability.  On  the  other  hand,  there  is  no  precedent  for  the  current situation,  in  which  the  Bank  must  normalize  policy  from  the  state  during  the  yield  curve control period, when it had an overwhelming presence in the JGB markets. A certain degree of  flexibility  to  prepare  for  unexpected  developments  is  essential  to  avoid  causing  a situation where rapid interest rate fluctuations adversely affect economic activity and prices. Similarly,  the  Bank  has  taken  various  measures  to  strike  the  right  balance  from  an  early stage,  such  as  expanding  the  range  of  10-year  JGB  yield  fluctuations  under  yield  curve control.  While  these  efforts  have  sometimes  been  said  to  be  ambiguous  or  difficult  to understand,  they  have,  after  all,  allowed  the  Bank  to  proceed  with  normalization  while maintaining market stability. Going forward, the Bank will continue to aim to understand developments  in  the  JGB  markets  as  accurately  as  possible  through  its  operations  and through  dialogue  with  market  participants,  and  to  take  appropriate  steps  to  bring  the markets closer to their original state.

It should be noted that, in designing policy measures, the Bank is paying close attention to the  potential  adverse  effects  of  rapid  interest  rate  fluctuations  on  economic  activity  and prices. It goes without saying that the aim is not to support the financing of the government. The Bank decided at the June 2025 MPM to slow the pace of reduction and to maintain a mechanism that allows for flexibility, from such a perspective.

## III. Economy of Kochi Prefecture

In closing, I would like to talk about the economy of Kochi Prefecture. Please take a look at Chart 15.

The share of manufacturing in the prefectural economy has been low compared with other prefectures, while the share of services, construction, and other nonmanufacturing has been high,  yielding  an  industrial  structure  supported  by  domestic  demand.  For  this  reason,  the direct impact on Kochi Prefecture's economy of trade and other policies abroad has so far been  limited,  and  the  economy  has  continued  to  pick  up  gradually  as  domestic  demand, including private consumption, has been firm. Tourism demand is expected to increase this year, partly due to the broadcast of a television drama series set in the prefecture.

That  said,  looking  at  Kochi  Prefecture's  economy  from  a  longer-term  perspective,  the population  is  declining  at  a  faster  pace  than  the  national  average  --  as  indicated  in  the left-hand graph -- and the prefecture faces the threat of natural disasters, such as a massive earthquake in the Nankai Trough off the Pacific coast. On this point, the local government has  positioned  the  issue  of  population  decline  as  its  top  priority  in  the  Kochi  Prefecture Strategy for Creating a Vibrant Future, formulated in  March 2024. This strategy includes efforts to raise the income of young people through industrial development and to promote sharing in childcare and housework between the genders. In the strategy revision for fiscal 2025,  the  prefecture  has  adopted  pioneering  approaches  to  population  decline,  including measures to ensure sustainable public services. Moreover, to prepare for a potential Nankai Trough earthquake, the prefecture has made steady progress in, for example, making homes earthquake-resistant,  constructing  tsunami  evacuation  towers,  and  implementing  triple defense measures against tsunamis at Urado Bay.

Population  decline  and  disaster  prevention  are  major  issues  that  Japan  as  a  whole  must address.  Thus,  Kochi  Prefecture's  unique  and  ambitious  initiatives  will  serve  as  an important guidepost for the entire country if realized. I would like to conclude my remarks by  expressing  my  hope  that  Kochi  Prefecture  will  become  a  model  for  a  sustainable regional community. Thank you very much for your attention.

## Japan's Economy and Monetary Policy

Speech at a Meeting with Local Leaders in Kochi

July 23, 2025

## UCHIDAShinichi

Deputy Governor of the Bank of Japan

## Introduction

- I. Current Situation of and Outlook for Economic Activity and Prices
- II. The Bank's Conduct of Monetary Policy
- III. Economy of Kochi Prefecture

Real GDP



Note: The dotted line shows the medians of the Policy Board members' forecasts in the April 2025 Outlook Report. Sources: Cabinet Office; Bank of Japan.

I. Current Situation of and Outlook for Economic Activity and Prices

1

Chart 2

## Global Economy

Global Growth Rate (IMF Projections)

IMF (April 2025) Projections by International Organizations



| y/y %chg.     |   CY 2024 | CY 2025 [Projection]   | CY 2026 [Projection]   |
|---------------|-----------|------------------------|------------------------|
| World         |       3.3 | 2.8 (-0.5)             | 3.0 (-0.3)             |
| United States |       2.8 | 1.8 (-0.9)             | 1.7 (-0.4)             |
| Euro area     |       0.9 | 0.8 (-0.2)             | 1.2 (-0.2)             |
| China         |       5   | 4.0 (-0.6)             | 4.0 (-0.5)             |

## OECD (June 2025)

| y/y %chg.   |   CY 2024 | CY 2025 [Projection]   | CY 2026 [Projection]   |
|-------------|-----------|------------------------|------------------------|
| World       |       3.3 | 2.9 (-0.4)             | 2.9 (-0.4)             |

- Notes: 1. In the left-hand chart, ""April 2025 projection"" shows the IMF's ""reference forecast"" in the April 2025 World Economic Outlook (WEO). ""April 2025 projection (risk scenario)"" shows the range of projected outcomes should the upside and downside risks presented in the April 2025 WEO materialize.
2. In the right-hand chart, figures in parentheses indicate changes from January 2025 projections for the IMF and December 2024 projections for the OECD.

Sources: IMF; OECD.

## U.S. Economy



I. Current Situation of and Outlook for Economic Activity and Prices

Chart 4

## Corporate Sector (1)

Business Conditions (Tankan)

## Large Enterprises

Small Enterprises





I. Current Situation of and Outlook for Economic Activity and Prices

## Corporate Sector (2)

## Corporate Profits

Large Enterprises

|                                |                                | FY2024 (Actual value)   | FY2024 (Actual value)   | FY2025 (Projection)   | FY2025 (Projection)   |
|--------------------------------|--------------------------------|-------------------------|-------------------------|-----------------------|-----------------------|
|                                |                                |                         | Revision rate           |                       | Revision rate         |
| All industries and enterprises | All industries and enterprises | 5.6                     | 3.9                     | -5.7                  | -0.6                  |
| Large enterprises              | Manufa- cturing                | 6.0                     | 3.3                     | -8.4                  | -5.6                  |
| Large enterprises              | Non- manufa- cturing           | 2.4                     | 2.8                     | -1.3                  | 2.5                   |

Profit Projections (Tankan)

Small and Medium-Sized

Enterprises



Note: In the left-hand and middle charts, figures are current profits based on the Financial Statements Statistics of Corporations by Industry, Quarterly and exclude ""finance and insurance."" Figures from 2009/Q2 onward exclude pure holding companies. In the right-hand chart, figures are current profits. Sources: Ministry of Finance; Bank of Japan.

5

I. Current Situation of and Outlook for Economic Activity and Prices

Chart 6

## Corporate Sector (3)

## Business Fixed Investment Plans



Leading Indicators of Business Fixed Investment s.a., ann., tril. yen



- Notes: 1. In the left-hand chart, figures are based on the Tankan , including software and R&amp;D investments and excluding land purchasing expenses. R&amp;D investment is not included before the March 2017 survey. Figures are for all industries including financial institutions.
2. In the right-hand chart, figures for machinery orders in the private sector exclude orders for ships and orders from electric power companies. Figures for 2025/Q2 are April-May averages.

Sources: Cabinet Office; Bank of Japan; Ministry of Land, Infrastructure, Transport and Tourism.

## Results of Spring Wage Negotiations

Results by Type of Employment



and Firm Size

## Wages



total wage increase

| (persons)           | CY 2024 final results   | CY2025 final results   | CY2024 → CY2025   |
|---------------------|-------------------------|------------------------|-------------------|
| Regular employees   | 5.10%                   | 5.25%                  | +0.15%pt          |
| (1,000 or more)     | 5.24%                   | 5.39%                  | +0.15%pt          |
| (300 to 999)        | 4.98%                   | 5.08%                  | +0.10%pt          |
| (100 to 299)        | 4.62%                   | 4.76%                  | +0.14%pt          |
| (99 or less)        | 3.98%                   | 4.36%                  | +0.38%pt          |
| Part-time employees | 5.74%                   | 5.81%                  | +0.07%pt          |

- Notes: 1. In the upper left-hand chart, figures from 1980 to 2014 are those published by the Central Labour Relations Commission, while those from 2015 to 2025 are figures released by Rengo. Figures for base pay increase and regular wage increase are aggregated values of the wage negotiation results of labor unions for which the base pay increase is clear. 2. In the right-hand chart, Q1 = March-May, Q2 = June-August, Q3 = September-November, Q4 = December-February. Figures from 2016/Q1 onward are based on continuing observations following the sample revisions.

7

Sources: Ministry of Health, Labour and Welfare; Japanese Trade Union Confederation (Rengo); Central Labour Relations Commission.

I. Current Situation of and Outlook for Economic Activity and Prices

## Export Prices



Chart 8

## Household Sector

## Consumer Sentiment

Real Private Consumption

s.a.





- Notes: 1. In the left-hand chart, figures for the Economy Watchers Survey are those for the current economic conditions DI. 2. In the right-hand chart, figures for total real private consumption are based on the Consumption Activity Index (Real).

Sources: Bank of Japan; Cabinet Office.

9

I. Current Situation of and Outlook for Economic Activity and Prices

## Prices

CPI



Chart 10

## Output Gap and Inflation Expectations

## Output Gap

%

Medium- to Long-Term Inflation Expectations





Policy Board Members' Forecasts

|                                            | FY2025     | FY 2026    |   y/y %chg. FY 2027 |
|--------------------------------------------|------------|------------|---------------------|
| CPI (all items less fresh food)            | 2.2 (-0.2) | 1.7 (-0.3) |                 1.9 |
| CPI (all items less fresh food and energy) | 2.3 (+0.2) | 1.8 (-0.3) |                 2   |

Assumptions:

2. Significant disruptions of global supply chains will be avoided.
1. Negotiations between jurisdictions will progress to some extent.
3. Notes: 1. In the left-hand chart, figures for the output gap are staff estimates. The Tankan factor utilization index is calculated as the weighted average of the production capacity DI and the employment conditions DI for all industries and enterprises. The capital and labor shares are used as weights. Shaded areas denote recession periods. 2. For details of the approach used in the upper right-hand chart, see Box 4 of the April 2024 Outlook Report.
3. In the lower right-hand table, figures in parentheses indicate changes from the January 2025 Outlook Report.

11

Sources: Bank of Japan; Cabinet Office; QUICK, ""QUICK Monthly Market Survey &lt;Bonds&gt;""; Consensus Economics Inc., ""Consensus Forecasts""; Bloomberg.

Ⅱ. The Bank's Conduct of Monetary Policy

## Financial Conditions

Real Interest Rate (1-Year)

Lending Attitudes of Financial Institutions as Perceived by Firms





Notes: 1. In the left-hand chart, figures for the real interest rate are calculated as government bond yields (1-year) minus the composite index of inflation expectations (staff estimates). 2. In the right-hand chart, figures are based on the Tankan and are for all industries. There is a discontinuity in the data for December 2003 due to a change in the survey framework. Sources: Bank of Japan; QUICK, ""QUICK Monthly Market Survey &lt;Bonds&gt;""; Consensus Economics Inc., ""Consensus Forecasts""; Bloomberg.

Chart 12

## Ⅱ. The Bank's Conduct of Monetary Policy

## Plan for the Reduction of the Purchase Amount of JGBs (June 2025 MPM)

1. Long-term interest rates: to be formed in financial markets in principle
2. JGB purchases: appropriate for the Bank to reduce its purchase amount of JGBs in a predictable manner, while allowing enough flexibility to support stability in the JGB markets

In principle, the Bank will reduce the planned amount of its monthly purchases of JGBs each calendar quarter as follows.

- 
- Until January-March 2026                                   : about 400 billion yen (the reduction plan decided in July 2024 will be maintained)
-  From April-June 2026 to January-March 2027 : about 200 billion yen
-  The Bank will gradually reduce its purchase amount so that it can improve the functioning of the JGB markets in a manner that supports stability in the markets.

## Reduction in a Predictable Manner





## Allowing Enough Flexibility

1. The Bank will conduct an interim assessment of the plan at the June 2026 MPM.
2. In the case of a rapid rise in long-term interest rates, the Bank will make nimble responses by, for example, increasing the amount of JGB purchases.
3. The Bank is prepared to amend the plan at the MPMs, if deemed necessary.

13

## Ⅱ. The Bank's Conduct of Monetary Policy

Chart 14

## Functioning of and Developments in the JGB Markets

## Inter-Dealer Transaction Volume

## JGB Yields





Note: In the left-hand chart, figures are the sum of daily transaction volumes of 2-year, 5-year, 10-year, 20-year, 30-year, and 40-year JGBs via Japan Bond Trading. Sources: Japan Securities Dealers Association; QUICK; Japan Bond Trading; Bank of Japan; Bloomberg.

## Economy of Kochi Prefecture



Saga District Tsunami Evacuation Tower



Note: In the left-hand chart, figures from fiscal 2012 onward are based on Japanese residents. Data are aggregated by fiscal year for years before 2013 and by calendar year from 2013 onward.

Sources: Ministry of Internal Affairs and Communications; Kuroshio Town Tourism Network.",Shinichi Uchida
https://www.bis.org/review/r250717b.htm,Michael S Barr: Booms and busts and the regulatory cycle,"Speech by Mr Michael S Barr, Member of the Board of Governors of the Federal Reserve System, at the Brookings Institution, Washington DC, 16 July 2025.",2025-07-16 00:00:00,"For release on delivery 10:00 a.m. EDT July 16, 2025

Booms and Busts and the Regulatory Cycle

Remarks by

Michael S. Barr

Member

Board of Governors of the Federal Reserve System at

The Brookings Institution

Washington, D.C.

July 16, 2025

Thank you for the opportunity to speak to you today. 1 I am here to discuss one of the most important resources that policymakers have: the lessons of history.  In discharging my responsibilities at the Federal Reserve, I have been thinking a lot about history.  Its study provides the opportunity to step out of the particular circumstances of today to inform our understanding of the core issues at the heart of financial regulation. While we must be attentive to new and even unprecedented challenges, experience shows that understanding the lessons of history gives policymakers a great advantage.  Many of the decisions we face today have, in some form, been confronted by previous generations of policymakers.

In these remarks, I want to discuss a particular pattern in the history of the financial system, which is the relationship between regulatory weakening and the economic and financial cycle of booms and busts.  My intent is not to re-hash wellexamined facts or to go over past historical episodes chapter and verse.  Rather, I aim to offer a perspective on this historical throughline that focuses on the regulatory cycle.

It's widely accepted that the economy and financial system experience cyclical booms and busts.  Booms have historically been characterized by a multitude of good things.  These can include fast economic growth, workers who had been sidelined entering the workforce and improving their lives, and financial innovations that often make credit or investments more readily available.  At the same time, some of the characteristics of a boom economy, such as rapid increases in credit and in financial market activity, as well as greater risk-taking and leverage, can sow the seeds of busts.  In busts, economic activity and lending contract and asset prices decline.  This can lead to

1 The views expressed here are my own and are not necessarily those of my colleagues.

rapid deleveraging and dislocation throughout the financial system, which worsen the downturn, causing job losses and business closures, homes lost and lives upended.

There are usually multiple causes that drive booms and make busts so terrible, some unique to each individual episode.  But one factor that is common to many past cycles of boom and bust is weakening financial regulation.  Weakening regulation often drives risk-taking and increases bank fragility during the boom, making the ensuing bust more painful.  Indeed, economic research suggests that weaker regulation leads to more bank failures, setting the stage for worse recessions. 2 Moreover, because the financial system evolves so rapidly, regulation must also continuously adjust.  Much regulatory weakening occurs simply when regulators fail to keep pace, while at other times, there is a deliberate action to lower regulatory burden that ends up miscalculating the risk involved.  Let me be clear here that, when I refer to regulatory weakening, I mean not only direct deregulatory actions by regulators or legislators, but also failure of the regulatory framework to keep up with changing circumstances.

In principle, financial regulation should incentivize banks to engage in responsible risk-taking and build up resources in good times, so that they can deal with times of financial stress and continue their vital role in the economy in bad times.  The prosperity that accompanies a healthy economy should allow banks to invest in improved risk management and strong financial resources.  However, a healthy economy can also reduce the effectiveness of regulatory constraints on bank risk-taking.  This can occur for a host of reasons, including behavioral biases, political pressure, market dynamics, and

2 For example, see Paul H. Kupiec and Carlos D. Ramirez (2013), 'Bank Failures and the Cost of Systemic Risk:  Evidence from 1900 to 1930,' Journal of Financial Intermediation , vol. 22 (3), pp. 285-307; and Kris James Mitchener (2005), 'Bank Supervision, Regulation, and Instability during the Great Depression,' The Journal of Economic History , vol. 65 (1), pp. 152-85.

the tendency for innovation to move more quickly than regulators.  These dynamics can result in regulatory weakening during boom times.  When actively pursued, this weakening often appears justified at the time and may be implemented by well-meaning policymakers who simply miscalculate the long-run effects of their actions.

My purpose in these remarks is to recount several boom-and-bust episodes in American history and identify some lessons that can guide policymakers entrusted with the responsibility of promoting a strong and stable banking system.  This history demonstrates the connection between regulatory weakening and cycles of boom and bust. I don't mean to suggest that more regulation is always better or that repealing and reforming regulations isn't sometimes appropriate to remove obsolete rules and relieve unnecessary burden.  But, if we can at least agree that regulation should seek to limit devastating financial crises, then the history that I will describe today offers some lessons for anyone thinking about regulatory policy.

There are, of course, lots of examples to choose from, both in the United States and abroad, but I'll focus on the Great Depression, the Savings and Loan (S&amp;L) crisis, and the Global Financial Crisis.  I will then discuss some possible reasons that similar episodes could recur and conclude with some thoughts on the lessons we can learn.

## The Great Depression

Let's start with the biggest and most widely studied bust in U.S. history, the Great Depression.  Scholars continue to debate its causes, which were multiple and complex. One compelling argument focuses on the failure of regulation to keep pace with the innovations of the Roaring Twenties.  As I said, I view such regulatory stagnation as a form of weakening.  This weakened regulatory environment played a role in setting the

stage for and then exacerbating the bust.  Weakened regulation that had failed to keep up with the times left banks unable to weather shocks to the economy.  The banking sector's collapse was a significant factor in making the Great Depression the most severe economic crisis that this country has ever experienced. 3

The Roaring Twenties expansion was powered by the post-war recovery and technological advances in transportation, manufacturing, and communications.  Stock markets grew quickly to help finance this innovation, while residential and commercial real estate investment surged and swelling demand for consumer durables led in turn to increased demand for financing. 4 As credit needs escalated, there was intensifying competition among banks; savings and loan institutions (S&amp;Ls); and rapidly growing nonbank finance companies, trust companies, and other financial vehicles.

The 1920s were also characterized by high levels of financial speculation, both inside and outside the banking sector.  Banks engaged in speculation through nonbank affiliates and supported speculation by lending.  At the same time, many banks were relatively thinly capitalized and overly concentrated, especially given the lack of federal deposit insurance at the time.  In addition, many states had prohibitions on branching that prevented banks from diversifying their portfolios and inhibited local competition,

3 Ben Bernanke (1983), 'Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression,' American Economic Review , vol. 73 (3), pp. 257-76.

4

See Arthur E. Wilmarth Jr. (2003), 'Does Financial Liberalization Increase the Likelihood of a Systemic

Banking Crisis? Evidence from the Past Three Decades and the Great Depression,' in Benton E. Gup, ed.,

(Santa Barbara:  Greenwood Publishing

Too Big to Fail: Policies and Practices in Government Bailouts

Group), pp. 77-105; and Barry Eichengreen and Kris Mitchener (2003), 'The Great Depression as a Credit

Boom Gone Wrong,' BIS Working Papers No. 137 (Basel, Switzerland:  Bank for International

Settlements, September) https://www.bis.org/publ/work137.pdf.

keeping many struggling banks alive. 5 The stock market boomed, margin lending grew dramatically, and insider trading and market manipulation were rampant.

As the financialization of the economy increased, the regulatory framework failed to keep up.  Outdated branching restrictions remained, failing to reflect the size and dynamism of the modern economy.  Banks gained permission to engage in new activities, such as real estate lending and certain activities in the securities markets; however, capital requirements and other rules were not adjusted to reflect potential increased risks from these new activities. 6 The cumulative effect of these events was a significantly weakened regulatory environment and a substantial buildup in risk, without a commensurate increase in resources to allow the sector to withstand the risks posed.

Looking back, we know that, when the economic shock hit, the banking system magnified that shock.  The boom of the Roaring Twenties started to go bust in 1929, when the fast growth of the past decade turned to contraction, followed by a series of financial and banking crises.  In all, approximately 9,000 of the nation's 23,000 banks failed, resulting in major losses to depositors, given the lack of federal deposit insurance, and a significant contraction in credit that deepened and lengthened the economic

5 National banks received authorization to engage in branching, subject to state law, in 1927 but interstate branching remained prohibited.

6 Before 1900, national banks were prohibited from underwriting, dealing, or investing in securities. However, federal authorities loosened these restrictions by allowing national banks to establish bond departments that could underwrite, sell, and invest in debt securities.  Although restrictions on dealing in stock remained, national banks were able to circumvent these restrictions by organizing affiliates that engaged in the full range of activities with regard to both stocks and bonds.  Federal regulatory authorities did not interfere with these affiliate activities.  Scholars continue to debate the extent to which this underwriting activity was risky for the banks.  See Wilmarth Jr., 'Does Financial Liberalization Increase the Likelihood of a Systemic Banking Crisis?' (see note 4); and Eugene Nelson White (1986), 'Before the Glass-Steagall Act:  An Analysis of the Investment Banking Activities of National Banks,' Explorations in Economic History , vol. 23 (1), pp. 33-55.

downturn. 7 Notably, banks in states that had more robust regulatory frameworks-for example, those that applied higher capital requirements-had lower rates of failure. 8

In response to the financial collapse in the Great Depression, Congress adopted reforms aimed at addressing risks that had driven those panics.  Among these steps, Congress established the Federal Deposit Insurance Corporation and federal deposit insurance to reduce the risk of bank runs and protect retail depositors.  Congress increased regulatory oversight of banks and separated commercial and investment banking.  Congress also enacted strong securities laws and created the Securities and Exchange Commission (SEC).  Overall, these steps helped stabilize the financial sector and ushered in a long period of quiescence in banking.

## The Savings &amp; Loan Crisis

My second example today is the S&amp;L crisis of the 1980s and early 1990s, which did substantial harm to millions of Americans and the financial system and was extremely expensive to resolve.  In this episode, in contrast to the Great Depression, affirmative deregulation led to excessive risk-taking by S&amp;Ls, as well as banks, during a boom period.  As circumstances soured, revealing weaknesses, Congress attempted to bolster the S&amp;L sector by loosening the regulatory framework further.  This failed to resolve the underlying stress and instead further fueled the buildup in risk-taking, worsening the losses in the subsequent bust.

7  See Federal Reserve History (2013), 'Bank Holiday of 1933,' webpage,

https://www.federalreservehistory.org/essays/bank-holiday-of-1933; Board of Governors of the Federal Reserve System (1934), 20th Annual Report, 1933 (Washington:  Board of Governors); and Social Security Administration (n.d.), 'Social Security History,' webpage, https://www.ssa.gov/history/bank.html; and David C. Wheelock (n.d.), 'The Great Depression:  An Overview,' Federal Reserve Education,

https://www.federalreserveeducation.org/resources/lessons/lesson--great-depression-introduction-essaywheelock.pdf.

8 See Mitchener, 'Bank Supervision, Regulation, and Instability' (see note 2).

Let me first set the stage.  The years leading up to the S&amp;L crisis were characterized by dramatic growth in business credit, in the course of the economic expansion that began in 1982.  At the beginning of this period, the S&amp;L sector primarily served the residential real estate market because of restrictions on S&amp;L activities.  These restrictions eased over the 1980s, allowing S&amp;Ls to get significantly larger and engage in new kinds of lending; however, these changes were not accompanied by sufficient regulatory enhancements to account for increased risks.  This expansion in S&amp;L activity also presented new competition with commercial banks, which had themselves built up significant risks as they expanded into new activities. 9

At the same time, both S&amp;Ls and banks were increasingly under pressure due to both high inflation and high interest rates, which disrupted their funding models. 10 Competition for customer funds increased dramatically, especially because of the rise of money market mutual funds, which had grown rapidly.  When Congress removed outdated deposit rate caps to allow banks and S&amp;Ls to more effectively compete for funds, it did so without implementing adequate safeguards against these institutions taking on excessive risk.  This led many S&amp;Ls to engage in increasingly risky projects to compensate for escalating funding costs.  Banks also increased their deposit rates and took on more risk.

As vulnerabilities at S&amp;Ls became evident, Congress, federal regulators, and the states attempted to bolster both sectors with the hope of allowing them to outgrow those

9 Federal regulators, as well as many state legislatures and state banking authorities, expanded the scope of permissible activities for banks during this period.

10 For example, S&amp;Ls made long-term, fixed rate residential mortgage loans, funded with short-term retail liabilities.  As rates increased, S&amp;Ls' existing mortgage portfolios decreased in value, because of their fixed rates.  At the same time, S&amp;Ls were forced to pay higher rates on their liabilities.  This situation threatened their continued viability.

weaknesses.  For instance, Congress and the states reduced restrictions on S&amp;Ls' ability to invest in commercial and consumer loans. 11 These changes contributed to the boom in commercial real estate lending, which became a key source of vulnerability.  In addition, Congress and the Federal Home Loan Bank Board, the federal S&amp;L regulator at the time, weakened capital requirements and the enforcement of those requirements for the S&amp;L sector. 12 This allowed institutions to become weaker and poorly capitalized entities to stay afloat, leaving S&amp;Ls as a whole badly positioned to weather adverse conditions.

The bust, when it came, was severe.  S&amp;L losses continued to mount throughout the 1980s.  Many banks also experienced severe stress.  These difficulties were amplified by an eventual decline in real estate values and problems in the agricultural and energy sectors.  In 1980, there were just under 4,000 S&amp;Ls.  By 1989, that number had fallen to below 3,000, with over 500 of the remaining institutions insolvent as judged by book value.  And over 1,600 banks failed between 1980 and 1994.  Regulatory weakening had propped up tottering institutions, allowing zombie institutions to persist, accumulating much greater losses than they otherwise would have.  The process of cleaning up the sector began in earnest in the late 1980s and continued into the mid-1990s, with a final

11 Many states simultaneously relaxed their own activities restrictions for state charters to allow for real estate investment.

12 For instance, the Federal Home Loan Bank Board reduced net worth requirements for federally insured S&amp;Ls to allow troubled S&amp;Ls to avoid closure and hopefully recover once interest rates declined.

cost of $160 billion, roughly 5 percent of gross domestic product at the time. 13 And the cost of resolving insured banks that failed during this period was $36 billion. 14

Congress implemented significant reforms in response to the S&amp;L crisis, including stricter capital and accounting requirements, limits on insured depository institutions' investment powers, and expansions of regulators' enforcement authority. These changes paved the way for stability in the banking sector for some time.

## The Global Financial Crisis

I'll turn now to my final example, the Global Financial Crisis, which had devastating effects for the millions of people who lost their livelihoods, their homes, and their businesses.

In the decade leading up to the crisis, America experienced rapid credit growth and a housing boom.  There was optimism about the benefits of financial innovation, such as securitization of home loans, and belief in the power of market discipline as a form of self-regulation.  Home prices and mortgage debt accelerated in tandem, driven by a mutually reinforcing cycle of optimism, with home prices roughly doubling between 1997 and 2006, and even larger increases in mortgage debt. 15 Amid this boom, lending standards dropped, driven by investor demand for mortgage-backed securities, which

13 This figure refers to the cost of resolving S&amp;Ls that failed during the crisis.  See Alane Moysich (1997), 'The Savings and Loan Crisis and Its Relationship to Banking,' in History of the Eighties--Lessons for the Future, vol. 1: An Examination of the Banking Crises of the 1980s and Early 1990s (Washington:  Federal Deposit Insurance Corporation), pp. 167-88, https://www.fdic.gov/resources/publications/historyeighties/volume-1/history-80s-volume-1-part1-04.pdf; and U.S. Bureau of Economic Analysis (2025), Gross Domestic Product, via FRED, Federal Reserve Bank of St. Louis, June 26, https://fred.stlouisfed.org/series/GDP (accessed July 15, 2025, 1982:Q4 used as gross domestic product reference point).

14 This figure reflects costs associated with bank failures from 1980 through 1994.

15 See Federal Housing Finance Agency (2025), All-Transactions House Price Index for the United States, via FRED, Federal Reserve Bank of St. Louis, May 27, https://fred.stlouisfed.org/series/USSTHPI (accessed July 15, 2025); and Board of Governors of the Federal Reserve System (2019), Mortgage Debt Outstanding, All holders, via FRED, Federal Reserve Bank of St. Louis, December 12, https://fred.stlouisfed.org/series/MDOAH (accessed July 15, 2025).

were increasingly opaque and risky in their design but still highly rated by the rating agencies.  There was substantial growth in the over-the-counter (OTC) derivatives market, including new forms of credit derivatives.  Money market funds boomed, becoming increasingly linked to the off-balance sheet business of banks. 16 These developments led to the emergence of large, short-funded, and interconnected financial entities-both banks and nonbanks.

The regulatory environment failed to keep up with these changes in activity and the increasing complexity of financial institutions and markets, and regulatory weakening heightened vulnerabilities.  The Gramm-Leach-Bliley Act, enacted in 1999, permitted the creation of financial holding companies that could engage in the full range of financial activities; however, the act did not put in place a regulatory framework commensurate with the full range of financial risks and permitted nonbank firms such as investment banks and insurance conglomerates to compete with banks wholly outside its framework. The Commodity Futures Modernization Act of 2000 exempted OTC derivatives transactions from virtually all regulation and oversight by the Commodity Futures Trading Commission and SEC.

In the lead-up to the crisis, regulators cut oversight further.  A striking image from the time featured the head of one financial regulatory agency wielding a chainsaw to

16  For example, many banks created asset-backed commercial paper (ABCP) programs as conduits that allowed them to fund bank assets without bringing them on balance sheet, thereby avoiding regulatory capital treatment.  However, this approach created significant risks because the primary holders of ABCP were money market mutual funds, which are ultra-sensitive to payment delays and themselves subject to run risk.  Money market funds also similarly funded other parts of banks' balance sheets in the lead-up to the crisis.  In addition, other private cash-like instruments, such as auction rate securities, repurchase agreements based on ABCP, and other short-term debt instruments that were treated like money created new vulnerabilities as they grew and subsequently collapsed.

demonstrate his commitment to slashing regulations. 17 The competitive landscape and regulatory lacuna led to a race to the bottom in standards for underwriting and issuing mortgage loans and securities, and transactions became increasingly funded by opaque and unstable short-term wholesale funding.  Consumers were left unprotected as the subprime crisis grew.  In addition, the largest investment banks, which were overseen by the SEC, increased their leverage with heavy reliance on short-term funding, leaving them increasingly vulnerable to any losses.  These are just a few examples of the widespread failures in financial regulation and supervision that occurred in both the banking and nonbanking sectors in the lead-up to the crisis.

The resulting recession and financial crisis saw the deepest and longest contraction in economic activity since the second world war, the collapse of large financial institutions, significant government support to keep the financial system afloat, and a prolonged period of slow growth.

In response to this crisis, Congress passed the Dodd-Frank Act, a reform package that, among other things, strengthened bank capital, addressed off-balance sheet exposures, and provided for stress testing.  Consumer protections were strengthened, and a new Consumer Financial Protection Bureau was established.  Supervisors ramped up forward-looking supervision.  In addition, banking regulators adopted capital and liquidity reforms, which substantially improved the resiliency of the banking sector. Studying the role that regulatory weakening played in the crisis provides a powerful reminder of the importance of preserving these regulatory gains.

17  Binyamin Appelbaum and Ellen Nakashima (2008), 'Banking Regulator Played Advocate over Enforcer,' Washington Post , November 23.

## Lessons for Policymakers

Reviewing these three examples together, it is striking to see the pattern of regulatory weakening during a boom, including the failure of the regulatory environment to keep pace with the evolving financial sector, and how this weakening lays the foundation for a subsequent bust.  Why do we continue to see these cycles?

Some reasons are psychological, others political.  Humans have short memories, especially for experiences we might like to forget.  The further we get from a crisis, the more its causes fade from memory and the less likely a recurrence seems.  We become more likely to view regulations as unduly burdensome and place less value on the protection they offer from downside risk.  The financial sector itself lobbies hard to weaken regulation, which is often effective when the last crisis seems far away.

Credit cycles, financial innovation, and the evolving needs of the economy are also significant contributors.  As the economy changes, so do financing needs.  This makes it harder to recognize when things are running too hot.  In addition, regulators are understandably cautious about restraining innovations that have societal benefits, which may hinder their ability to reduce associated risks.  Longstanding regulations can be subject to regulatory arbitrage, making them less effective as activities migrate outside the regulated system.  These dynamics make the financial sector unstable, feeding the boom-and-bust cycle.

## How can we do better?

The first lesson is to approach the financial system with a through-the-cycle perspective and avoid thinking 'this time is different.'  In each of the booms I have covered, there was a heady confidence that market discipline would control risk-taking,

that downside risks were so implausible as not to merit attention, and that easing regulation was justified.  With such confidence, insufficient thought was given to how regulatory weakening might create new vulnerabilities.  A bit of humility would have helped.  While it is true that regulation must evolve with the economy and financial system, we need to recognize that relaxing rules can create vulnerabilities.  Changes in the markets themselves can also weaken the effectiveness of regulations.

The second lesson is that policymakers should resist the pressure to loosen regulations or to refrain from imposing regulation on new activities during the boom times.  With past economic downturns in the rearview mirror, regulations start to be seen as a limitation on growth, rather than necessary protection against vulnerabilities.  As became evident in past episodes, vigilant supervision and prudent rules on risk-taking are important to prevent future crises.  While there is a tradeoff, it is important to have appropriate protections in place to reduce the risks and costs of the resulting busts.

Third, regulation cannot be static.  If regulation fails to keep up with evolution of the financial sector, it can create new risks or hinder growth.

To conclude, an important lesson we can draw from U.S. financial crises is the role that ill-advised weakening of the bank regulatory framework played in those crises. It is well within our ability, and is our duty as regulators, to learn from these episodes to avoid making the same mistakes.  In doing so, we can help to ensure that the financial system is prepared to weather downturns and continue to serve households and businesses.",Michael S Barr
https://www.bis.org/review/r250728j.htm,Lisa D Cook: AI - a Fed policymaker's view,"Speech by Ms Lisa D Cook, Member of the Board of Governors of the Federal Reserve System, at the National Bureau of Economic Research, Summer Institute 2025, session ""Digital Economics and Artificial Intelligence"", Cambridge, Massachusetts, 17 July 2025.",2025-07-17 00:00:00,"For release on delivery 1:30 p.m. EDT July 17, 2025

AI: A Fed Policymaker's View

Remarks by

Lisa D. Cook

Member

Board of Governors of the Federal Reserve System at the

National Bureau of Economic Research, Summer Institute 2025:  Digital Economics and Artificial Intelligence

Cambridge, Massachusetts

July 17, 2025

Thank you, Avi.  It is an honor to be back with you at the NBER Summer Institute. Thanks to you, Erik, and Catherine for organizing these insightful and thought-provoking sessions this summer. 1

Artificial intelligence (AI) is advancing across the globe and permeating every corner of the economy at an incredibly rapid rate.  This has significant implications for Federal Reserve leaders, both as policymakers and managers of the organization.  AI is transforming the economy, including by accelerating how quickly we generate ideas and making workers more efficient, and that, in turn, will affect both sides of our dual mandate of maximum employment and price stability.  AI also is beginning to affect the way we conduct economic research within the Federal Reserve System, with the potential to make some tasks more efficient, harness nontraditional data in new ways, and broaden and deepen economic analysis.

I believe we are at an inflection point.  As I have stated before, I, like some of you here today, see AI as the next general-purpose technology (GPT) 2 .  As many of you in this room know and have written about, GPTs, like the printing press or electric power, matter immensely to innovation. 3 Similar to those seminal advances, AI will likely spread throughout the economy more broadly, spark innovation, and improve over time.

1  The views expressed here are my own and not necessarily those of my colleagues on the Federal Open Market Committee.

2 See Lisa D. Cook (2023), 'Generative AI, Productivity, the Labor Market, and Choice Behavior,' speech delivered at the National Bureau of Economic Research Economics of Artificial Intelligence Conference, Toronto, September 22, https://www.federalreserve.gov/newsevents/speech/cook20230922a.htm.

3 For the original notion of general-purpose technology, see, for example, Timothy F. Bresnahan and Manuel Trajtenberg (1995), 'General Purpose Technologies 'Engines of Growth'?' Journal of Econometrics, vol. 65 (January), pp. 83-108.  For an assessment of how IT can boost productivity in the early 21st century, see Boyan Jovanovic and Peter L. Rousseau (2005), 'General Purpose Technologies,' in Philippe Aghion and Steven N. Durlauf, eds., Handbook of Economic Growth, vol. 1B (Amsterdam:  Elsevier), pp. 1181-224.  More recently, Eloundou and others (2024) note that generative artificial intelligence could be a GPT and provide a framework for assessing that; see Tyna Eloundou, Sam Manning, Pamela Mishkin, and Daniel Rock (2024), 'GPTs Are GPTs: Labor Market Impact Potential of LLMs,' Science, vol. 384 (6702), pp. 1306-08.

Among large language models (LLMs), the highest scores on benchmark intelligence tests have almost doubled over the past 12 months, according to the Artificial Analysis Intelligence Index. 4 The competition to improve is fierce:  The leaderboard for the AI lab offering the best model switched six times in the past half a year.  And the technology is diffusing rapidly.  ChatGPT launched about three years ago, and now more than half a billion users engage with the internet-based LLM weekly. 5 LLMs are super cool and grab the headlines, but there is a lot more to AI, which can be an important driver of productivity. Advances in multimedia generation is another way to think of AI's fast advancement.  It took human creators decades to move from silent pictures to 'talkie' movies; AI models accomplished this advance in less than a year.

AI is poised to alter the contours of the global economy.  In doing so, it has the potential to materially affect both sides of the Fed's dual mandate.  On the maximum-employment side of the mandate, AI can generate new tasks and jobs and possibly eliminate others, similar to many past technological innovations.  On the price-stability side of our mandate, AI can improve productivity, which can lower inflationary pressures, but it can also boost prices in the interim, as AI adoption may lead to a surge in aggregate investment.  Studying the net effects of AI on the economy over time will be critical to setting appropriate monetary policy.  However, at the Fed, we are not only considering AI's implications for the economy but also employing strategies to harness the technology's power inside our walls.

4 See the chart 'Frontier Language Model Intelligence, Over Time' on Artificial Analysis's website at https://artificialanalysis.ai/#frontier-language-model-intelligence-over-time; the index calculation is described at https://artificialanalysis.ai/methodology/intelligence-benchmarking.

5 See 'Ideas to Power Democratic AI' on OpenAI's website at https://cdn.openai.com/global-affairs/9c98a71f-7d2f4566-9da7-4a7628c60bea/oai-ideas-to-power-democratic-ai-june-2025.pdf.

Commensurate with rapid improvements in AI, its adoption is accelerating across government and industry.  As a result, there is an urgency for the Fed to both study AI's effects and capture more of its benefits to maintain a highly productive workforce and extract additional insights from new economic analysis.

Having spent much of my career studying the innovation production function and collecting and examining data on the economic effects of technology, productivity, and innovation, I am coupling caution with this optimism.  This is consistent with my view when I was a research associate here at NBER and when I first spoke about AI at the NBER AI meeting in Toronto in 2018 before I joined the Board of Governors.  While I see AI adoption as broadly beneficial to the economy and society, I know from economic history and the history of technology that there could be many multidimensional challenges to adopting it.  With that in mind, I will start by offering general principles I believe guide our society's engagement with AI.  Next, I will describe recent progress on AI research at the Fed.  I will then say a bit about both the opportunities and constraints I see affecting the wider adoption of AI.  Finally, I will offer some brief remarks on how AI factors into my thinking on monetary policy.

## Responsible AI Adoption

I want to start by stressing that any organization engaging with this technology should take a thoughtful and structured approach to AI adoption.  I can offer four guiding principles for what I view as responsible AI adoption.

First and foremost is establishing strong governance and risk management.  A central tenet of good governance should be the mindset that humans are in the loop, because it ensures that people guide AI rather than allow AI to guide us.  In a speech last year, I told a story about how Benjamin Franklin lost a game of chess to a machine called the 'Mechanical Turk' 6 Of course, there was a human chess master hidden inside.  What might seem like a silly tale contains an important lesson for organizations and governments deploying AI: Like the Mechanical Turk, ultimately the human inside the machine is still in charge.  Relatedly, organizations also must be careful about privacy, cybersecurity, and leakage of confidential and internal information.

A second principle is that education and training of staff are critical to get and keep employees at the technological frontier. A third principle is empowerment.  Teams within organizations should be encouraged to learn by doing and engage hands-on with AI technologies in controlled environments. Finally, a fourth principle is experimentation.  Organizations should maintain a spirit of openness while retaining the ability to halt projects that do not meet rigorous standards.

## AI Research at the Fed

Like many other leading organizations and researchers around the world, the Federal Reserve is working hard to understand AI's implications for our mission and our own work.  To be clear, the FOMC is not using AI in developing or setting policy, but rather to aid staff in their other tasks such as writing, coding, and research.  For example, we have been deepening our understanding of the capabilities of LLMs and other machine learning models to produce economic insights. 7 Several Fed papers document what we are learning. Board economists

6 See Lisa D. Cook (2024), 'Artificial Intelligence, Big Data, and the Path Ahead for Productivity,' speech delivered at 'Technology-Enabled Disruption:  Implications of AI, Big Data, and Remote Work,' a conference organized by the Federal Reserve Banks of Atlanta, Boston, and Richmond, Atlanta, October 1, https://www.federalreserve.gov/newsevents/speech/cook20241001a.htm.

7  See Anton Korinek (2023), 'Generative AI for Economic Research:  Use Cases and Implications for Economists,' Journal of Economic Literature, vol. 61 (December), pp. 1281-317; Anton Korinek (2024), 'LLMs Level Up-

Wendy Dunn and Nitish Sinha, with coauthors Ellen Meade and Raakin Kabir found that LLMs have surprisingly good understanding of economic topics discussed in the FOMC minutes. 8 In a recent paper, Board economist Paul Soto measured AI research and development by examining firms' earnings conference calls using deep learning. 9   Richmond Fed economist Anne Hansen, with coauthors, John Horton, Sophia Kazinnik, Daniela Puzzello and Ali Zarifhonarvar found partial success in simulating the Survey of Professional Forecasters' panel using an LLM and create synthetic forecasters that often achieve superior accuracy, particularly at medium- and long-term horizons. 10 A paper by Mary Chen, Matthew DeHaven, Isabel Kitschelt, Seung Jung Lee, and Martin Sicilian used machine learning techniques on a variety of unstructured textual data to identify and forecast financial crises. 11 Another paper, by Leland Crane, Emily Green, Molly Harnish, Will McClennan, Paul Soto, Betsy Vrankovich, and Jacob Williams, harnessed the ability of an open-weight model to read Work Adjustment and Retraining Notifications to create a real-time measure of layoffs. 12 As our researchers examine LLMs and other machine learning techniques critically, some research has demonstrated the benefits of AI, and other

Better, Faster, Cheaper:  June 2024 Update to Section 3 of 'Generative AI for Economic Research:  Use Cases and Implications for Economists,' published in the Journal of Economic Literature 61(4),'

https://www.aeaweb.org/content/file?id=21046; and Anton Korinek (2024), 'LLMs Learn to Collaborate and Reason:  December 2024 Update to 'Generative AI for Economic Research:  Use Cases and Implications for Economists,' published in the Journal of Economic Literature 61(4),' https://www.aeaweb.org/content/file?id=21904.

8  See Wendy Dunn, Ellen E. Meade, Nitish Ranjan Sinha, and Raakin Kabir (2024), 'Using Generative AI Models to Understand FOMC Monetary Policy Discussions,' FEDS Notes (Washington:  Board of Governors of the Federal Reserve System, December 6), https://doi.org/10.17016/2380-7172.3678.

9  See Paul E. Soto (2025), 'Research in Commotion:  Measuring AI Research and Development through Conference Call Transcripts,' Finance and Economics Discussion Series 2025-011 (Washington:  Board of Governors of the Federal Reserve System, February), https://doi.org/10.17016/FEDS.2025.011.

10  See Anne Lundgaard Hansen, John J. Horton, Sophia Kazinnik, Daniela Puzzello, and Ali Zarifhonarvar (2024), 'Simulating the Survey of Professional Forecasters,' available at SSRN:  http://dx.doi.org/10.2139/ssrn.5066286. 11

See Mary Chen, Matthew DeHaven, Isabel Kitschelt, Seung Jung Lee, and Martin J. Sicilian (2023), 'Identifying Financial Crises Using Machine Learning on Textual Data,' Journal of Risk and Financial Management, 16(3): 161, https://doi.org/10.3390/jrfm16030161.

12  See Leland D. Crane, Emily Green, Molly Harnish, Will McClennan, Paul E. Soto, Betsy Vrankovich, and Jacob Williams (2024), 'Tracking Real Time Layoffs with SEC Filings:  A Preliminary Investigation,' Finance and Economics Discussion Series 2024-020 (Washington:  Board of Governors of the Federal Reserve System, April), https://doi.org/10.17016/FEDS.2024.020.

research has provided important insights about its limits and where we should be careful about AI.

By actively engaging with and learning about AI tools in our research, we not only enhance our analytical capabilities, but also gain invaluable insights into the broader economic implications of AI.  Researchers at the Fed are also examining the state of AI adoption and the potential of AI to affect our economy. A timely indicator of generative AI (GenAI) adoption in the U.S. has been developed by St. Louis Fed economist Alexander Bick, along with his coauthors Adam Blandin and David Deming, through a repeated survey. 13 They also find that, so far, GenAI adoption for uses outside of work has been faster than personal computer (PC) adoption after its introduction.  In the workplace, they find GenAI adoption has happened at a similar pace as occurred with PCs.  Work from David Byrne and Paul Soto, along with coauthors Martin Baily and Aidan Kane, suggests that GenAI has the potential to be a GPT and could benefit the economy in other ways too such as by being an invention that itself leads to more innovation. 14

In addition, Fed staff from across our divisions keep abreast with the rapid developments in GenAI by engaging regularly with other researchers and experts from academia, other central banks, and the industry through various seminars, workshops, interviews, and invited presentation series.

Simultaneously, the research at the Fed is proceeding deliberately and cautiously, as many AI tools are not yet ready to be put into production.  For example, Leland Crane, Akhil

13  See Alexander Bick, Adam Blandin, and David J. Deming (2024), 'The Rapid Adoption of Generative AI,' NBER Working Paper Series 132966 (Cambridge, Mass.:  National Bureau of Economic Research, September; revised February 2025), https://www.nber.org/papers/w32966.

14 See Martin Baily, David Byrne, Aidan Kane, and Paul Soto (2025), 'Generative AI at the Crossroads:  Light Bulb, Dynamo, or Microscope?' working paper, https://doi.org/10.48550/arXiv.2505.14588.

Karra and Paul Soto show that when it comes to real-time analysis, LLMs suffer from lookahead bias and frequently get confused by the vintage nature of economic data releases. 15 Even for historical analysis, the researchers note:  'From the perspective of historical analysis, an LLM may not reliably recall the details of real time data flow during historical episodes, limiting the reliability of historical analysis.'

## The Speed of Adoption

Our experience with AI at the Fed is also informative about why we are not seeing more widespread adoption of AI in the economy, despite its remarkable pace of improvement and the apparently large potential economic gains.

First, as in all industries grappling with AI, the workforce must be trained to take advantage of a rapidly changing technology that is strikingly different from previous technologies.  Often, the premise of technology has been to automate routine tasks where the steps involved are predetermined.  The premise of AI is different from technologies of the past. AI promises to augment areas of work involving human judgement, which do not follow any predetermined steps.  Thus, education and training must evolve.

Second, large organizations learn to use new tools through hands-on experimentation and shared experiences, and it takes time for the knowledge to diffuse.  Some of these are planned and organized, while others are more organic and spontaneous.  For example, earlier this year, the Board hosted an AI expo where AI early adopters shared their experiences with AI and innovative AI use cases.  Events such as this showcase cross-functional, cross-organizational

15 See Leland D. Crane, Akhil Karra, and Paul E. Soto (2025), 'Total Recall?  Evaluating the Macroeconomic Knowledge of Large Language Models,' Finance and Economics Discussion Series 2025-044 (Washington:  Board of Governors of the Federal Reserve System, June), https://doi.org/10.17016/FEDS.2025.044.

collaboration among participants throughout the Federal Reserve System and demonstrate how AI-driven solutions could address challenges in areas such as economic analysis, financial stability, and operations.  These venues provide excellent avenues for sharing successes and failures in trying out different use cases and, in many cases, enable the broader community to engage with prototypes of AI applications.  In addition to demystifying AI and encouraging its use, these events try to establish and promote cultural norms of responsible AI usage, which generates ideas related to the types of problems AI is better or worse at solving.

Finally, organizations will also have a rational desire to be selective about which advances to adopt when the technology is rapidly changing.  For example, we are seeing that some highly effective prompting strategies for older models are no longer necessary for thinking models.  As with any new general-purpose technology, there is likely to be an extended period of learning by doing.  This will be particularly important for the high-profile LLM models.  With these models, even the developers are not fully aware of their capabilities, and organizations, including the Fed, learn about their abilities and limitations only once they are put to use.

## Implications for Monetary Policy

Given what we know, as well as what we learn from researchers like you, we are thinking carefully about the implications of AI for monetary policy.  As AI filters through the economy, it has the potential to affect both sides of our dual mandate in different ways.

As with other technological innovations, AI is poised to reshape our labor market, which in turn could affect our notion of maximum employment or our estimate of the natural rate of unemployment.  I see it as likely that AI will allow workers to be more productive while also changing the tasks associated with any given job.  As with many technological breakthroughs, a certain set of jobs may be replaced.  We must recognize the challenges and potential pain this may bring, and we are watching this closely.  A successful response to these disruptions will be of paramount importance but lies outside the mandate of monetary policy.  Fortunately, new types of employment, whether tasks or occupations, are also being created.

In terms of price stability, AI is likely to boost productivity and could help the economy achieve higher growth while reducing inflationary pressures, because those productivity improvements can counter labor cost increases.  In addition, the ability of AI to process and analyze ever larger amounts of data will likely lead to advances in scientific research and innovation, resulting in an increased arrival rate of ideas, further amplifying its effect on productivity.  As I have noted in recent speeches, it is possible that the disinflationary effect of AI could, over time, counter any factors putting upward pressure on inflation. 16 It is also possible that AI could boost prices in the interim, as adoption of the technology might require a surge in aggregate investment.

I am constantly monitoring incoming data, the ever-evolving outlook, and a broad range of risks to both sides of the dual mandate.  I tend to be cautiously optimistic when I anticipate what AI could bring to the economy, but much uncertainty remains.  As I have laid out for my institution specifically and the economy broadly, AI is a technology that is rapidly evolving, and it is good to be humble about our understanding of its exact effects on our economy and the timing of those effects.

16  See Lisa D. Cook (2025), 'Opening Remarks on Productivity Dynamics,' speech delivered at 'Finishing the Job and New Challenges,' a monetary policy conference hosted by the Hoover Institution, Stanford University, Stanford, Calif., May 9, https://www.federalreserve.gov/newsevents/speech/cook20250509a.htm.

## Conclusion

To conclude, I see us at a moment of inflection where AI is being deployed as a generalpurpose technology.  Babies born today will ask what life was like before LLMs, just as today's college students quiz us about what life was like before the internet and mobile phones.  This is a moment for excitement and optimism, but also one we are taking seriously at the Federal Reserve.  As I have described, AI will both change the economy for which we set policy and change how we can best operate as a central bank.

Much more remains to be learned and understood about how AI will affect our economy and our everyday lives.  This is why gatherings and discussions like these in the 48th session of the NBER Summer Institute are so important.  I am excited to learn about the careful and insightful research presented by former colleagues, graduate students, and many others at the Summer Institute, and I look forward to listening to the remaining discussions today.

Thank you.",Lisa D Cook
https://www.bis.org/review/r250728k.htm,Rosanna Costa: Chile's June 2025 Monetary Policy Report,"Presentation by Ms Rosanna Costa, Governor of the Central Bank of Chile, before the Finance Commission of the Honourable Senate of the Republic, Santiago de Chile, 18 June 2025.",2025-06-18 00:00:00,"

## MONETARY POLICY REPORT PRESENTATION BEFORE THE FINANCE COMMISSION OF THE HONORABLE SENATE OF THE REPUBLIC*

Rosanna Costa Governor Central Bank of Chile 18 June 2025

## Introduction

Madam  President  of the Senate's Finance Commission,  senators members  of  this Commission, ladies, gentlemen,

As I usually do, I would like to begin by thanking the Commission for periodically inviting the Central Bank to present its views on recent macroeconomic developments, as well as the outlook and implications for monetary policy.

This is the view that is presented in detail in the June 2025 Monetary Policy Report (MPR), which was published this morning.

Today's IPoM is set against a global backdrop that has become considerably more uncertain. The wide-ranging increase in tariffs announced by the United States in early April has had significant repercussions on the external scenario.

Although the impact of these events on global activity remains to be seen, there is a consensus that it will be negative and will affect the American economy the hardest.

For emerging economies, however, it is estimated that this time around the magnitude of the effects will be limited, as financial conditions have responded favorably. This is in contrast with what has been observed in previous periods of uncertainty, where higher risk led to reduced demand for emerging assets.

The escalation of the war in the Middle East introduces yet another factor of uncertainty into this scenario. This situation intensified after this Report's statistical closing date (11 June), so its impact was not considered in the central projection scenario. For the time being, the scope, progression and potential impact on the external and local economies are unknown, so it is a factor that needs to be closely monitored.

Domestically, activity was more dynamic in the first quarter, thanks to the impact of some transitory factors. Meanwhile, inflation has evolved in line with expectations and the upside risks that arose during the first part of the year have moderated.

The  central  projection  scenario,  which  I  will  detail  shortly,  presents  no  major  changes compared with the one delivered in March. GDP is still expected to evolve around the trend in the coming quarters, with inflation converging to 3% in the first half of 2026.

In the medium term, the escalating trade conflict and war tensions in the Middle East and geopolitical tensions in general will continue to affect the economic outlook, thus increasing the likelihood of more negative scenarios.

Let me now describe the contents of the Report, which form the basis for the monetary policy decision and the outlook that we communicated at our meeting yesterday (Tuesday).

## The macroeconomic scenario

As I  said,  the  tariff  increases  announced  by  the  US  government  in  early April  have  had significant repercussions on the global economy.

In the Financial Stability Report we presented to this Commission a month ago, we noted that this has led to a considerable increase in global economic uncertainty, in a context where other risk factors such as geopolitical conflicts and high fiscal debt in some countries remain (Figure 1).

The  tariff  increase  will  clearly  have  a  negative  impact  on  global  activity.  However,  the changing  development  of  the  process  -including  announcements,  retaliation  by  other countries and postponements- makes it difficult to make a definitive assessment of its short, medium- and long-term impact.

In fact, US authorities have made several announcements in recent weeks that have failed to influence global markets significantly, partly due to uncertainty about which of the various announcements will prevail.

Global  financial  markets  have  not  reacted  as  usual  to  highly  uncertain  events,  with  an increase in perceived risks relating to US financial assets. As explained in one of the Report's boxes,  this  may  reflect  the  reduced  predictability  of  the  institutional  and  public  policy framework  in  the  United  States,  along  with  the  deterioration  of  its  historical  strategic alliances and growing concerns about its fiscal accounts (Figure 2).

Meanwhile,  there  is  consensus  that  the  United  States  will  bear  the  brunt  of  the  tariff adjustments  in  terms  of  both  activity  and  inflation.  In  this  scenario, a ccording  to  the information available at the time of the IPoM's statistical close, the Federal Reserve adopted a more cautious stance regarding the federal funds rate. This afternoon, the Fed's Monetary Policy Committee will announce its decision on monetary policy and update its projections, which will give us a clearer picture of the situation.

In  emerging  economies,  including  Chile,  the  higher  relative  risk  of  US  assets  has  led  to financial conditions evolving more benignly than would be expected in the event of a shock of this magnitude. Consequently, long-term interest rate spreads vis-à-vis the United States have narrowed in several economies, currencies have strengthened against the dollar, and stock markets have risen.

Locally, as in other emerging economies, the impact of the trade conflict on activity has not been  substantial.  High-frequency  information  does  not  indicate  any  notable  changes  in previous trends in Chile's foreign trade, with exports and imports of goods maintaining their dynamism. Furthermore, confidence indicators show no signs of being permeated by external circumstances (Figure 3).

Regarding inflation, the outlook has evolved in line with expectations, with core inflation (i.e., the CPI that excludes volatile items) showing a lower than anticipated trajectory. Thus, in May, the annual variation of total and core CPI reached 4.4% and 3.6%, respectively (4.7% and 3.9% in February). The smaller increase in core CPI was particularly influenced by the prices of certain food products and services (Figure 4).

In this regard, an important development in recent months has been the moderation of the upside  risks  to  inflation  that  arose  earlier  this  year.  On  the  one  hand,  two-year  inflation

expectations have gradually realigned with the 3% target, while, on the other, the cost shocks of previous quarters have not caused higher-than-expected second-round effects (Figure 5).

Activity was more dynamic than expected in the first quarter, which was again related to the performance  of  the  export  sectors.  During  this  period,  non-mining  GDP  grew  by  1.2% quarter-on-quarter in its deseasonalized series (compared to 0.7% in the previous quarter). The contribution of fruit, manufacturing and fish harvesting stood out, as was the improved performance of several services and trade sectors. The latter were supported by the increased inflow of foreign tourists (Figure 6). The latest Imacec showed a certain reversal of some supply factors, while the services sector maintained its dynamism.

Domestic demand continued to increase as anticipated. Private consumption expanded again in the first quarter, particularly for goods. This occurred in the context of mixed developments in the main spending fundamentals. On the one hand, debt levels and the financial burden have fallen further, while wages continue to grow strongly, associated with recent legislative changes (Figure 7).

In terms of labor costs, our Business Perceptions Report and Survey of Expectations and Price Determinants indicate some degree of concern among firms about the future trajectory of labor costs. Moreover, they are increasing at a time when the labor market is experiencing slow job creation and a rising unemployment rate (Figure 8).

In the case of gross fixed capital formation (GFCF), there was no quarterly variation at the beginning  of  2025,  in  either  its  machinery  &amp;  equipment  or  its  construction  &amp;  works components. By sector, the dynamism of mining investment continues to contrast with the fragile condition of other industries (Figure 9).

However, leading indicators point to a stronger investment momentum going forward. Highfrequency data suggest that GFCF has performed more favorably recently, notably capital goods  imports.  In  addition,  the  Capital  Goods  Corporation's  latest  survey  of  large-scale projects significantly increased investment amounts budgeted for this and the next few years, particularly in mining and energy. Moreover, there is a considerable volume of additional initiatives in the pipeline. (Figure 10).

Let me now elaborate on the projection scenario of this IPoM. I stress again that the most recent  developments  in  the  Middle  East  are  not  included,  as  the  conflict  broke  after  the statistical close of the Report and their unfolding is still unpredictable.

Having clarified this point, our projection scenario is similar to our forecasts of the last six months. Compared to the December and March IPoMs, it is worth noting a somewhat more dynamic activity in the short term, and a moderation of upside risks regarding inflation, with a similar timeframe for its convergence to the 3% target.

However, risks have grown significantly abroad. The tariff hikes announced by the United States  is  an  unprecedented  event  of  considerable  magnitude.  So  far,  the  reaction  of  the financial markets has been benign, and no substantial real effects have been observed. But scenarios of a worsened external situation with more severe than expected impacts on the global economy cannot be ruled out.

In  the  central  scenario,  the  international  outlook  contains  few  adjustments.  Compared  to March,  the  growth  of  trading  partners  is  reduced  by  one  tenth  of  a  percentage  point  on average for the period 2025-2027 (2.6%), a revision that is bigger for the United States. This limited correction responds to two main factors: one, a significant part of the effects of the trade conflict had already been factored in last March, with a substantial cut in projected growth for the United States; and two, the markets' response has mitigated the impact of the financial channel (Figure 11).

About commodity prices, our copper price projection remains unchanged at around US$4.3 per  pound  between  2025  and  2027.  Our  forecast  for  the  oil  price  is  lowered  somewhat, although, as I mentioned, this does not consider events happening after the statistical close (Figure 12).

The central scenario assumes that the impact of trade tensions on the Chilean economy will be  limited.  The  boxes  in  the  Report  describe  the  assessment  we  made  to  arrive  at  this assumption.

First of all, to date we know that a fraction of domestic shipments to the US are subject to a 10% tariff. The information available shows that trade with the rest of the world has not been affected and we believe that a shift in exports' destinations would have a minor impact on activity.

Likewise, the more positive evolution of financial variables such as interest rates or stock prices and the small downturn in local agents' expectations would anticipate limited effects on  investment.  In  any  case,  if  the  conflict  in  the  Middle  East  escalates  further,  global uncertainty could spiral and affect the external and local economies.

As for  inflation,  trade  diversions  would  reduce  the  prices  of  some  products  imported  by Chile. This will be mainly concentrated in durable goods, adversely affecting the annual CPI variation, which is assumed to accumulate around 0.3 pp throughout the projection horizon (Table 1).

Thus, the majority of this IPoM's forecast revisions originates in domestic factors.

The  GDP  growth  range  for  2025  is  revised  to  2.0%-2.75%  (1.75%-2.75%  in  March). Importantly, as the year progresses and reliable information becomes available, the size of the activity forecast range is reduced. In this case, in the June IPoM it should be cut by 25 basis points, from 1 pp in March to 0.75 pp now. In September we will narrow the range again, by up to half a percentage point.

This year's revised growth range is the result of its better performance in early 2025. This leaves a higher starting point for activity -and a less negative output gap in the near termwhich  is  expected  to  converge  to  a  trend-consistent  pace  of  expansion  as  the  transitory elements that contributed to the higher growth in early 2025 fade out.

For 2026 and 2027, GDP growth ranges remain at 1.5%-2.5%. These estimates factors in the effects of the worsened external scenario and the impacts of a more positive GFCF outlook (Table 2).

The greater dynamism anticipated for investment will be centered mainly on large mining and energy projects, whose planned amounts are revised with special emphasis for the second half of this year. Thus, the GFCF growth estimate is maintained at 3.7% for 2025, while for 2026 and 2027 it is raised to 3.6% and 3.3%, respectively (2.2% and 2.9% in March).

Private consumption will continue to expand by around 2% over the projection horizon. The dynamism of real labor income and the fall in households' financial burden, among other elements, will lend support to this component of expenditure (Figure 13).

Turning  to fiscal spending, for 2025  the central scenario incorporates the  growth contemplated in the last Public Finances Report, including the administrative adjustments mentioned  therein.  Thereafter,  it  considers  the  committed  expenditures  indicated  in  said report.

The inflation trajectory is mostly unchanged from our March forecast, so it is still expected to touch the 3% mark in the first half of 2026. This is the result of several factors combined. On the one hand, a somewhat more dynamic domestic demand, coupled with somewhat more depreciated real exchange rate levels over the projection horizon. On the other hand, there is the lower inflation resulting from export diversions and the aforementioned lower outlook for fuel prices. In this scenario, core inflation will stand around 3% towards the end of 2025 (Figure 14).

## Monetary policy

Yesterday we held our fourth Monetary Policy Meeting of the year, in which we decided to keep the monetary rate at 5%.

In the statement informing the decision, we noted that during the last few months inflation has evolved in line with projections and the upside risks that arose early in the year have moderated.

We added that activity has outpaced projections. However, recent events in the Middle East introduce a new source of uncertainty, the unfolding of which could lead to more complex scenarios.

Regarding the future evolution of monetary policy, we indicated that, if the central scenario of the June IPoM materializes, in the following quarters the MPR will be approaching its range of neutral values. We will assess the future movements of the MPR considering the evolution  of  the  macroeconomic  scenario  and  its  implications  for  the  convergence  of inflation.

## The MPR corridor and sensitivity scenarios

As usual, the IPoM contains the corridor for the MPR. It accounts for scenarios other than the central one, in which monetary policy behaves differently.

I  cannot  overemphasize  that  neither  the  central  scenario  nor  this  corridor  represents  a commitment by the Board on the future trajectory of the MPR. They are intended to provide

more detailed information on possible paths. As I just mentioned, it will be macroeconomic developments and the outlook for inflation that will determine the course of the Board's decisions.

In this IPoM, the upper bound of the MPR corridor -where the rate would be higher than assumed  in  the  central  scenario-  represents  a  situation  in  which  domestic  demand strengthens more than expected.

This  could  come  from  a  context  where  business  and  household  confidence  improve significantly, maybe due to easing global tensions, an improved local growth outlook or better than expected investment effects on the labor market and income.

The lower bound of the corridor -where the rate would be lower than estimated in the central scenario- reflects a scenario in which the external outlook deteriorates, negatively affecting the local and global economies.

This could occur if trade tensions flare up and/or global uncertainty soars, causing financial markets to revert to behaviors similar to those of past risk aversion episodes, including a depreciation of the peso. On top of the financial repercussions and the fall in global demand, there would be the added impact of agents' greater pessimism, with a downward effect on domestic demand.

International  events  also  define  other  sensitivity  scenarios  inside  the  MPR  corridor.  The supply shock associated with the tariffs imposed and the impacts of trade diversions on the local economy could be different from those of the central scenario, in particular the reaction of the prices of the goods our country imports (Figure 15).

## Concluding thoughts

Dear senators, let me wrap this presentation with some brief remarks.

For many years in our presentations to this Commission, we have been drawing attention to certain macroeconomic factors.

For one, our economy has resolved the major imbalances of previous years. Thus, we have recovered growth rates consistent with our potential and inflationary pressures have been controlled, beyond the impact that the unfreezing of electric power rates during the past year had on the temporary rise in inflation.

For another, we have constantly drawn attention to the fact that, once the major imbalances have been overcome, we need to evaluate and implement changes that will allow us to boost our medium-term growth.

This has declined over the last decade and resuming a path of greater growth is a high priority, as it is the way to improve the living conditions of our citizens, by helping them to meet their expectations and satisfy their needs. That is why I have been bringing up this element in my closing remarks since my first presentations to this Commission.

Another characteristic feature of recent years has been the constant emergence of new sources of uncertainty. We have witnessed shocks of varied types and origins. Global ones, such as the  pandemic,  the  war  in  Ukraine,  trade  tensions  and,  in  recent  days,  the  escalation  of conflicts  in  the  Middle  East. Also,  local  shocks  of  great  significance,  such  as  the  social outburst, the withdrawals of pension savings and the uncertainty generated by the constituent processes.

We have been able to cope with these shocks, cushion their effects, and achieve our goals. This has been possible thanks to hard work, efforts, and an adequate and credible policy framework.

Dealing with a significant rise in inflation, largely caused by domestic factors, was not easy. It  required  a  major  tightening  of  monetary  policy,  which  was  aided  by  the  government's halting the delivery of over-stimulus to consumption, as reflected in the fall in fiscal spending in  2022.  This  stopped  a  flow  that  would  have  continued  to  fuel  an  imbalance  between revenues and expenditure. All this in a local environment of high uncertainty, as I said before, which resulted in a depreciation of our currency, the opposite of what was required in the inflationary situation we were experiencing.

Back to the present. The projections contained in this IPoM do not differ much from what has been our assessment of the economy during the last few IPoMs. We see activity evolving around its trend in the coming quarters and inflation heading towards its 3% target.

At this point, please let me give you a brief account of our monetary policy actions of the last few months.

A key element of our communication in this period was the need for caution. After having cut the MPR significantly in 2023 and 2024 -625 basis points from its peak in October 2022- and having succeeded in bringing inflation back to the 3% target, at the end of last year we were faced with several new sources of risk to inflation.

On the one hand, we were assimilating a significant rise in power prices that compensated for a previous temporary freeze. Our assessment was that this was an important shock, but monetary policy had room to accommodate it without requiring further monetary tightening. In fact, we cut 100 basis points off the benchmark rate in the second half of 2024, when said unfreezing was already underway.

On the other hand, during the second half of 2024, other shocks had been accumulating, but they were of a smaller magnitude compared to the rise in electric bills. Among other things, we saw a depreciation of the peso and an increase in labor costs.

In last December's IPoM, we estimated that annual CPI inflation would be close to 5% during the first half of 2025 and stated that there were risks that new shocks could push it even higher.  In  fact,  over  the  course  of  the  first  quarter,  some  measures  of  two-year  inflation expectations moved away from the 3% target, reflecting the importance of these risks.

In this context, we remarked that we would maintain a cautious position, awaiting to see whether these risks materialized or not, holding the rate steady at several meetings.

With almost the entire first half of the year behind us, we can see that the inflation outlook has matched our expectations. Inflation came close to 5% in March, but has been declining to 4.4% annually, with no second-round effects above historical levels. More importantly, its foreseen convergence to 3% during the first half of 2026 has been consolidating.

Thus, inflation expectations have realigned with its target, while the exchange rate, beyond significant fluctuations, is near its levels of those in the last IPoM which, in turn, are below those of the end of 2024. In any case, labor costs are still increasing rapidly, which may marginally fuel unexpected inertia.

In any case, this process presents some singularities. We do not see an endogenous force fueling inflationary pressures that need to be neutralized. We see an economy that is growing, somewhat above expectations, but mainly for one-off reasons, and inflation converging to the target.

Therefore, in an unchanged scenario, the change we propose for monetary policy is rather to adjust the timing of our decisions.

That  said,  significant  challenges  lie  ahead.  Global  uncertainty  about  the  impact  of  trade tensions is high. The very characteristics of the process have made it difficult to assess its consequences. Whether due to the changing nature of the process or to the atypical behavior of the financial markets, it has been difficult to evaluate its consequences.

The war in the Middle East is a major new focus of attention. It is a significant war in a complex zone. As I mentioned before, for now we do not know its scope, progression, and potential effects on the local and world economies.

These geopolitical tensions are framed against a backdrop of high public debt at a global level and growing demands to finance defense spending and other needs. This set of factors is keeping markets on their toes. In addition, we have seen unusual reactions to risk aversion events, which could change in future episodes.

There is no doubt that we are living in uncertain and changing times. Week after week, new facts are added to our analyses and projections, challenging us to face unprecedented global situations.  From a long-term perspective, this has been the case since the creation of the Central Bank of Chile back in 1925. A public institution exposed to the evolution of local and global environments that have required high capacities to adapt and innovate. In these 100 years, the Central Bank has been accumulating experience and building technical teams with a high degree of knowledge and commitment.

In  the  periods  ahead  we  will  need  to  be  especially  careful  in  evaluating  every  piece  of information. Allow me to briefly mention the work the Bank has done with new data sources, which  feed  the  work  presented  in  several  boxes  of  this  IPoM  and  will  be  important  for monitoring the economy as it evolves.

Every other year, we organize an international conference on the use and development of statistics at the global level, which brings together leading experts in the field. Its most recent version, the centennial, was held two weeks ago. In it, one of the most prominent international

speakers recognized our institution as a world leader in the use of microdata for the design of macroeconomic policy. This mention is not a coincidence, nor is it the only time this work has been mentioned, and it reflects the Bank's sustained effort to strengthen its analytical capabilities through the use of granular information.

In  contexts  of  high  uncertainty,  such  as  we  are  now  experiencing,  a  timely  and  accurate diagnosis  of  economic  agents'  behavior  is  required  to  effectively  guide  monetary  policy. Although traditional macroeconomic statistics are fundamental in normal contexts, their lack of  immediacy  and  granularity  constrains  their  usefulness  in  volatile  scenarios.  As  I mentioned, the use of microdata has made it possible to monitor in real time the effects of trade  tensions  and  compare  the  current  response  with  previous  episodes.  This  work  is described in this IPoM.

Dear senators, if I can identify one pattern in the more than three years that I have been presenting quarterly reports to this  Commission, it is no doubt the sustained presence of sequential disruptive events. Our most likely scenario posits that the effects of trade tensions on Chilean activity and inflation will be limited. But this may change. The trade shock we are facing is unique in both its magnitude and variability. The complexity of the external scenario -a mix of political, economic, and military conflicts- could escalate. In fact, what has happened in the Middle East is a sign of how important some factors that in the past were considered unlikely have become.

As we have said repeatedly, our country is not immune to international events. Ours is a small economy open to trade and financial exchange. This has allowed us to grow, reduce poverty and improve our living standards over forty years. We cannot ignore that the current events jeopardize the institutionality that the world has been building for decades. It can only be recovered and strengthened through the efforts of the international community.

Once again, and beyond the prospects of convergence of both activity to its trend and inflation to its target, we must be alert to developments in the external and local scenarios. At the same time, we must continue to strive to improve our possibilities of absorbing and cushioning shocks. The Central Bank, as always, will work to keep inflation in line with the 3% target and safeguard financial stability. This is the best contribution our institution can make to our fellow citizens.

Thank you.



(1) Dotted line shows average tariff considered in the March 2025 IPoM. Yellow diamond marks average tariff after April 2nd announcements. Blue diamond marks average tariff as of April 12th, following the increase to 145% of the tariff for China. Red diamond shows average tariff as of June 11th (statistical cutoff for this IPoM). (2) Global Economic Policy Uncertainty Index, EPU. (3) Trade Policy Uncertainty Index, TPU.

Sources: Central Bank of Chile, US International Trade Commission, Tax Foundation, Baker, Bloom &amp; Davis (2016); Caldara, Iacoviello, Molligo, Prestipino &amp; Raffo (2020).



(1) Daily data in moving seven-day averages. (2) Evolution of each series with respect to the day prior to the beginning of each uncertainty episode (day zero). (3) Latin America considers the simple average of Brazil, Colombia, Mexico, and Peru. (4) For details, see Box  I.1 in June 2025 IPoM. TW II (Commercial war II)

Sources: Central  Bank of Chile and Bloomberg.

Figure 3



(1) Series in moving quarterly averages. Real data correspond to preliminary monthly estimates using price indexes of the groupings. Seasonal adjustment made using X13-ARIMA. (2) Value above (below) 50 indicates optimism (pessimism).

Source: Central Bank of Chile, GfK Adimark and Icare/Universidad Adolfo Ibáñez..



(1) Prior to 2025, series consider the 2023 CPI benchmark basket and the splicing made by the Central Bank of Chile. (2) Dashed vertical line marks statistical cutoff date for March IPoM. (3) Sum of Administered and indexed services (A&amp;I) and Other services.

Sources: Central Bank of Chile and National Statistics Institute (INE).

Figure 5





(1) Dotted vertical line marks statistical cutoff date for March IPoM. Dots show latest available data (17 June). (2) For the surveys, median responses are shown. (3) EOF considers the survey for the first two weeks of each month through January 2018. From February 2018 onwards, the last survey published in the month is used. In the months in which the survey is not published, the last available survey is considered. (4) Breakeven inflation considers average prices of the last 10 days of each month. For June 2025, the average of the eight working days of the month up to the 11th is used.

Source: Central Bank of Chile y Bloomberg.



(*) Other includes Construction and EGW.

Source: Central Bank of Chile.

(*) Calculated based on seasonally adjusted series of real LCI, usual hours worked and employment.





Sources: Central Bank of Chile and National Statistics Institute (INE).





Source: National Statistics Institute (INE).



(*) Series in moving quarterly averages. For methodological details, see boxed minutes in September 2024 IPoM.

Sources: Internal Revenue Service (SII), Customs Office, and Central Bank of Chile.



(1) X13-ARIMA is used for seasonal adjustment. Others includes forestry, manufacturing, public works, ports, and technology.  (2) Moving annual sum of projects submitted and admitted to the SEIA. For each quarter the amounts admitted, qualified and awaiting qualification are considered. Others includes agriculture, equipment, forestry, transportation infrastructure, water &amp; port infrastructure, fishery, and environmental sanitation.

Sources: Central Bank of Chile, Capital Goods Corporation (CBC) and  Environmental Evaluation Service (SEIA)

Figure 11 Average growth forecasts for 2025-2026 in respective IPoM (real annual change, percent)



Sources: based on investment banks (JPM, DB, Barc. and GS), Consensus Forecasts, IMF, and respective statistics bureaus.



- (f) Forecast. (1) Actual price is average for each year. Dotted lines denote 2025-2027 forecasts contained in each IPoM.
- (2) Average WTI - Brent oil barrel.

Sources: Central Bank of Chile and Bloomberg.

Table 1 Effects of a 10% tariff (*) (percentage points of GDP, cumulative 2025-2027 change)

## I. Effects on activity

## II. Effects on inflation













94

eunuaiiy

- (*)  Activity estimation methodologies in Briones et al. (2025) and Inflation estimation methodologies in Pustilnik et al. (2025).

Source: Central Bank of Chile.

Table 2



(f) Forecast.



Source: Central Bank of Chile.

Figure 14



(*) Considers 2023 benchmark basket and Central Bank of Chile splicing. Sources: Central Bank of Chile and National Statistics Institute (INE).





Figure 15 MPR corridor (*) (quarterly average, percent)



Source: Central Bank of Chile. (*) The 2025, 2026 and 2027 calendar considers two monetary policy meetings every quarter. The corridor was built following the methodology described in Box V.1 in the March 2020 IPoM and Box V.3 of the March 2022 IPoM. It includes the June EEE, the June pre-meeting EOF and the quarterly average smoothed forward curve as of 11 June. For details, see methodological note in Figure II.8, Chapter II, June 2025 IPoM. EEE: Economic Expectations Survey; EOF: Financial Traders Survey.",Rosanna Costa
https://www.bis.org/review/r250714a.htm,"Darryl Chan: Sustaining financial stability amid uncertainty, fragmentation and rapid innovation","Opening remarks by Mr Darryl Chan, Deputy Chief Executive of the Hong Kong Monetary Authority, at the joint conference on ""Sustaining financial stability amid uncertainty, fragmentation and rapid innovation"", organised by the Hong Kong Institute for Monetary and Financial Research (HKIMR), the International Monetary Fund (IMF), and the Bank for International Settlements (BIS), Hong Kong, 14 July 2025.",2025-07-14 00:00:00,"## Darryl Chan: Sustaining financial stability amid uncertainty, fragmentation and rapid innovation

Opening remarks by Mr Darryl Chan, Deputy Chief Executive of the Hong Kong Monetary Authority, at the joint conference on ""Sustaining financial stability amid uncertainty, fragmentation and rapid innovation"", organised by the Hong Kong Institute for Monetary and Financial Research (HKIMR), the International Monetary Fund (IMF), and the Bank for International Settlements (BIS), Hong Kong, 14 July 2025.

* * *

Hyun ( Hyun Song Shin, Economic Adviser and Head of the Monetary and Economic ), Department, BIS

Jason ( ), Jason Wu, Assistant Director, Monetary and Capital Markets Department, IMF distinguished guests, ladies and gentlemen, good morning.

It gives me great pleasure to welcome you to today's conference jointly organised by , the Hong Kong Institute for Monetary and Financial Research (HKIMR), the International Monetary Fund (IMF), and the Bank for International Settlements (BIS).

The theme of this conference aptly summarises the complex and unsettling global economic and financial landscape. The world today faces a confluence of challenges, chief of which are uncertainty and fragmentation.  Innovation greatly improves efficiency and promotes growth.  But the disruption it brings, and the speed with which it advances, also poses tremendous challenges to the way we used to monitor and manage risks and vulnerabilities. Putting together all these known and unknown risks, it makes the task of sustaining financial stability all the more challenging.

We have a strong line-up of speakers for this two-day conference. For sure there will be plenty of insightful sharing and exchange regarding these important topics. If I may, by way of raising the curtain, share some initial thoughts and observations.

Let me start with fragmentation in global trade. In recent years reshoring or friendshoring has been widely discussed and, to some degree, being put into action. Yet, wholesale relocation of supply chains has proven difficult and uneconomical due to the entrenched integration of global supply chain with local production ecosystems and end markets. The result is therefore a web of more diversified supply chains, with connector economies playing a more significant role. However, with the recent wide-spread tariff measures, some of which may highlight the significance of local value added content, it seems the end game is far from settled.

Already, recent data indicates a decline in new export orders across many economies, signalling a slowdown in global trade. Over time, this could lead to more persistent dislocation of supply chains and increased fragmentation in a global trading system that aimed to optimise economic efficiency. The uncertainties are slowing down investments as people take a wait-and-see approach, pending more clarity on the future of global trades.

The twists and turns on the trade front have brought volatility to financial markets, unsettled by the potential supply shock brought by much elevated tariff levels, and its implications on US inflation outlook and future interest rate path. This has added new complexities to the global financial system that already had to grapple with a multitude of vulnerabilities including elevated asset valuations, rising debt levels, and increased leverage among non-bank financial institutions (NBFIs).

At one point, the markets seemed to be casting doubts on what used to be regarded as safe haven assets. The effect was immediately felt in this region with the abrupt unwinding of long-USD positions and the widespread appreciation of Asian currencies. The episode also exposed the degree of unhedged forex positions by some exporters and financial institutions in the region. That said, recent market movements amid continued uncertainties seemed to suggest that risk-on exuberance is back. There could be multiple reasons behind the swing in market sentiments. The question is whether excessive complacency is being built up that may come back and haunt us.

Let me turn to innovation. The advancement of artificial intelligence (AI) has drawn much discussion about its potential to revolutionise various aspects of finance, from risk management to customer service, as well as the potential risks of AI models and algorithms to the financial system.

In the world of finance, the equally exciting, and perhaps more imminent, issue is the emergence of tokenisation. In its latest annual economic report, the BIS devotes a full chapter to the discussion of the next-generation monetary and financial system, including the very hot topic of stablecoins. The intellectual rigour behind the study, in particular the very concept of a ""unified ledger"", presents us with an excellent framework to get a glimpse of what the future of finance may hold in the form of tokenisation.

I hope Hyun would be kind enough to share some of the thoughts with us. Suffice it to say, at this point, that Hong Kong is bringing stablecoins under regulation, and that we are at various stages of putting together the building blocks of the unified ledger. It would be interesting to look back, hopefully in the not too distant future, how things have evolved in this space.

Ladies and gentlemen, we are living in a world of uncertainty. Policymakers should adopt an agile approach that is capable of responding to a wide range of scenarios, while ensuring effective communication of their policy reaction functions. Let me highlight a few things that central banks and regulators should do to address emerging risks and safeguard financial stability.

First, we need to continuously enhance our surveillance frameworks for risk monitoring. I mentioned non-banks in my earlier discussion. As an example, the HKMA has developed a holistic surveillance framework to help us better monitor systemic risks in the financial system. The framework uses granular data sets, including trade repository data on over-the-counter derivatives and transaction-level data on bank loans, to reconstruct NBFIs' portfolios and risk exposures. Together with textual analysis and

conventional indicators, the framework gives us a fuller picture of NBFIs' market positions and potential vulnerabilities, as well as early warning indicators for closer monitoring and follow-up actions.

We have also been experimenting with AI tools to enhance financial stability monitoring, leveraging its ability to distil insights from large pools of data, particularly documentbased data such as research reports and news articles. This capability is particularly valuable in identifying emerging risks that may not be captured by traditional indicators.

Second, the rapid pace of financial innovation calls for timely regulatory preparedness. We seek to encourage a culture of responsible innovation. Again, using AI as an example, we aim to reap its benefits while effectively managing its risks. To this end, the HKMA has launched a Generative AI sandbox which provides a risk-controlled environment for banks to develop and test innovative solutions. The sandbox enables us to understand how banks intend to use AI, gauge the potential risks, and assess the need for supervisory guidance.

Last but not least, multilateral collaboration is crucial. Despite the threat of economic fragmentation, the global financial system is highly interconnected. It makes perfect sense that central banks, regulators, and international organisations like the IMF and the BIS continue to collaborate closely and safeguard the resilience and stability of the financial system. Only by delivering on this goal, we can continue to have the trust of the people that we serve.

With that, it remains for me to thank all speakers and participants for joining us at this conference, which I am sure will be a great occasion for fruitful and insightful exchange. Thank you.",Darryl Chan
https://www.bis.org/review/r250717h.htm,Chia Der Jiun: Remarks on the MAS Annual Report 2024/2025,"Opening address by Mr Chia Der Jiun, Managing Director of the Monetary Authority of Singapore, at the MAS Annual Report 2024/2025 Media Conference, Singapore, 15 July 2025.",2025-07-15 00:00:00,"## Chia Der Jiun: Remarks on the MAS Annual Report 2024/2025

Opening address by Mr Chia Der Jiun, Managing Director of the Monetary Authority of Singapore, at the MAS Annual Report 2024/2025 Media Conference, Singapore, 15 July 2025.

* * *

Good afternoon and thank you for joining us today for the release of the MAS Annual Report for Financial Year 2024/2025.

I will be sharing on key areas across central banking, financial sector development and regulation, as well as key highlights of our financial performance.

## Recent Economic Developments

Let me begin by touching on recent economic developments and monetary policy.

The global economy was on an even keel at the turn of the year, with inflation moderating and growth near potential. In our region, inflation was well-anchored in key ASEAN economies, well within the respective central bank targets.

The tariff announcements in April this year have induced complex dynamics to global inflation and growth.

- a. On the demand side, the direct effects of tariffs on trade, and the uncertainty of tariff policy will have a restrictive impact on global demand and will likely be disinflationary outside the US.
- b. On the supply side, tariffs and escalatory countermeasures, to the extent that they materialise, have the potential to cause supply chain inefficiencies, bottlenecks and disruptions, and pose an inflationary risk over time.

At this juncture, the impact of tariffs and uncertainty have yet to assert in a major way. Tariff deadlines have been rolled back, while businesses have front-loaded orders ahead of threatened tariff increases.  For now, economic activity and output have been resilient, but front-loading will not continue indefinitely and will have to be paid back. Consumption and investment will likely soften in the months ahead. Consistent with this, forward looking survey-based indicators of consumer and business confidence are slipping.

Considerable uncertainty remains, and the outlook ahead is subject to a wider than usual range of outcomes. There is a range of possibilities around the extent and scope of tariffs, whether trade agreements are concluded and prove to be durable, and whether escalating trade conflicts recur.

We take a cautious view of the outlook, and our base case is that global economic activity will slow in H2 2025, with inflation dampened for the year.

I will turn now to the Singapore economy. Singapore's GDP growth has held up better than expected in H1, but is likely to slow in H2 2025, in line with our Let me expectation for slowing global economic activity and external demand. elaborate.

- a. Singapore's aggregate economic activity held up well in H1, with inflation at a subdued level.
- b. Notably, the (released yesterday) show that GDP growth of Advance Estimates 4.3% year-on-year in Q2 was somewhat stronger than expected.  This was supported by the trade-related sector, with exports benefiting from the deferral of tariff implementation and frontloading activity.
- c. In H2 2025, we expect tariffs to hit production and exports with a lag, especially when the boost from frontloading dissipates. Forward-looking surveys of businesses indicate cautious business sentiments and are consistent with this softening outlook.
- d. Overall, Singapore's GDP growth is expected to be subdued over the rest of the year.

In January this year, MAS began to unwind the restrictive monetary policy settings that had been in place between 2021 and 2024 to dampen the pass-through of high global inflation to Singapore and moderate overall price pressures in the economy.

- a. Singapore's Core Inflation eased to around 2% year-on-year in Q4 2024, and further to 0.6% year-on-year in the first 5 months of this year.

## In H2 2025, our expectation is that inflation remains subdued.

- a. The negative global demand drags as well as the diversion of excess global goods production would weigh on Singapore's imported prices.
- b. Domestic cost pressures would also moderate alongside slowing economic activity and the possible emergence of some slack in the domestic economy.
- c. On the other hand, the lagged pass-through of previous administrative cost increases could firm inflation slightly.

Overall, core inflation should remain subdued with a resurgence of underlying price pressures unlikely.  We are alert to risks on both sides.  Disinflationary impulses could be stronger if the impact of tariffs on economic activity is more severe; while inflationary pressures could re-surface if geopolitical conflict or supply chain dislocations or disruptions escalate.

Amidst elevated uncertainty in the global environment, MAS will be continuously updating our assessment of economic conditions and the likely outlook for growth and inflation.

At the same time, fundamental shifts and changes to the global economy will begin to take shape in the months and years ahead. Tariffs and other trade restrictive practices and geopolitical fragmentation will bring about deeper changes to trade, investment flows and supply chains.  Our economy and businesses will need to navigate these changes by strengthening connectivity and linkages, diversifying revenue streams and building more resilient business models.

MAS' mandate to secure medium-term price stability will provide an anchor of stability for the Singapore economy in these times of uncertainty and fundamental change .

## Developments in Singapore's Financial Sector

## Financial markets and financial stability

I will turn now to developments in the financial markets and financial stability.

While policy and macroeconomic uncertainty is high globally, financial markets for now appear to be pricing in a relatively benign outcome. Equity markets have recovered from the turbulence in April and rallied to new highs. Credit spreads are tight. Volatility indices are at low levels. Asian currencies have strengthened in spite of tariff threats.

The disjoint between risks to the global economy and benign market pricing means that financial markets are vulnerable to sharp pullbacks and bouts of volatility if risk scenarios crystallise. The triggers could include an escalation of trade conflict, geopolitical conflict and heightened concerns by investors over unsustainable policies.

## MAS is vigilant to risks and developments in global markets transmitting to Singapore.

- a. The trade-weighted Singapore Dollar has appreciated within the policy band in recent months against a context of broad-based US Dollar depreciation.
- i. The Singapore Dollar's appreciation against the US Dollar has been in line with that of major international and regional currencies.
- ii. The appreciation of the Singapore Dollar against the US Dollar has been accommodated within the policy band, while the extent of the Singapore Dollar Nominal Effective Exchange Rate (S$NEER) appreciation has been tempered by the trade-weighted basket of currencies.
- b. Meanwhile, domestic interest rates have been falling across the yield curve broadly in tandem with trends in the region, reflecting capital inflows.
- c. Overall, domestic markets have continued to function normally.  MAS will continue to be vigilant to, and act to curb any excessive volatility in the tradeweighted currency and domestic money markets.

MAS is also placing more emphasis on stress testing to assess domestic financial system stability. This year, MAS has applied a more severe scenario, which adds a sharp tightening in global financial conditions, alongside heightened financial market volatility, a trade shock and persistent elevated levels of policy uncertainty. Our key findings are:

- a. Singapore banks have strong capital buffers and healthy liquidity profiles, and should weather a global recession and tightened financial conditions, for an extended period.
- b. Corporates and households are generally resilient as debt servicing capacities are healthy, and they have good financial buffers.
- c. Nonetheless, there are segments of businesses and households that are more vulnerable and should exercise vigilance.
- i. In particular, smaller firms in the externally-oriented sector could face risks to revenue and liquidity from reduced orders, and should take steps early to provision for liquidity buffers and diversify their revenue sources, including by tapping on the new Business Adaptation Grant.
- ii. Similarly, households with less stable incomes should plan their finances prudently and avoid taking on large new loan commitments during this period of uncertainty.

## Financial Services growth outlook

I now turn to developments in the financial sector.

In 2024, the financial services sector grew by 6.8%, more than double the 3.1% growth in the preceding year.

- a. The sector's average growth rate for 2021-2024 is 4.7%, keeping us on track to meet the Industry Transformation Map (or ITM) 2025 target of 4% to 5% per annum over 2021-2025.
- b. We are also on track to meet the ITM 2025 target of 3,000-4,000 net jobs created per annum. The average annual net jobs created for 2021-2024 was 4,400 1 , with more than 90% of these going to locals.

## Growth was broad-based.

- a. Banking sector growth remained resilient, with total assets growing at 6.8% Compound Annual Growth Rate (CAGR) over 2021-2024.
- b. The insurance industry also expanded, with total assets increasing by 3.6% in 2024 over 2023, to S$456.4 billion.
- c. Singapore continues to grow as a leading FX hub in Asia, with the FX average daily traded volumes surpassing S$1.5 trillion in 2024.

- d. The corporate debt market registered strong growth in 2024, with total issuance increasing more than 30% from the previous year to exceed S$300 billion.
- e. Assets under management (AUM) in Singapore grew 12.2% year-on-year to exceed S$6 trillion, driven by both Traditional and Alternative sectors. 2   It marks the first time that Singapore's AUM exceeded S$6 trillion.
- f. Alongside the broader asset management industry, the wealth management sector also experienced strong growth.
- g. Singapore continues to be a trusted and attractive wealth management The recently announced centre underpinned by high standards of regulation. regulatory actions against 9 financial institutions (FIs) for anti-money laundering breaches reflect our expectation that FIs uphold sound and risk-proportionate AML /CFT practices.
- h. We are working with FIs Singapore continues to welcome legitimate wealth. in Singapore to improve their practices so that they are sound, effective and efficient.  Our financial eco-system will be tough on suspicious and illegitimate monies, but welcoming and efficient to legitimate wealth. This will provide a strong and sustainable basis for the continued growth of the wealth management sector.

## Looking ahead, we do not expect financial sector growth to continue at the pace of the last few years.

Amidst prevailing global uncertainties, MAS will continue to strengthen the competitiveness and capabilities of our financial sector as well as the resilience and security of digital financial services. Let me provide an update on our efforts in 3 areas:

- a. First, fostering responsible AI adoption in the financial sector.
- b. Second, supporting Asia's transition to a low-carbon economy.
- c. Third, enhancing the resilience and security of digital financial services.

## Fostering responsible AI adoption in the financial sector

AI adoption in the financial services industry globally is expanding rapidly.  AI has been applied as internal productivity tools, to automate back-office processes and software development, augment customer relationship management and advisory services, and assist in risk management and screening of suspicious transactions.  AI will increasingly be a competitive differentiator between FIs and financial centres.

Our aim is for our FIs and workforce to be positioned well to adopt and use AI, so that they are competitive, here and internationally.  MAS is working on multiple fronts to strengthen the AI capabilities of Singapore's financial sector and our workforce.

First, we are anchoring AI competencies of FIs in Singapore.

- a. More than 30 FIs have established AI functions in Singapore to work on AIrelated projects. Among them, several serve as Global AI Competency Centres. Beyond building specific use-cases to drive value creation, a number of these FIs are incubating and implementing AI solutions in Singapore before scaling deployment to other markets.
- b. We welcome more FIs to build AI capabilities in Singapore and join the growing community of AI practitioners within our financial sector.

Second, we are supporting FIs which are earlier in their AI adoption journey with resources to start and scale. On this front, MAS has established the Pathfinder programme, or PathFin.ai.

- a. This programme is a collaborative initiative with the industry, where FIs share with one another their knowledge and experiences in successfully implementing AI use-cases.
- b. By curating a library of use-cases, industry-validated solutions and best practices among these FIs, the programme seeks to reduce the time and effort to search, select and effectively implement AI solutions.
- c. The programme also partners with established training providers to provide skills training that is aligned with the AI solutions chosen by FIs.
- d. Today, 20 FIs covering banking, insurance, capital markets and payments have been onboarded to the Pathfinder programme. We welcome more FIs to join the programme.

Third, as FIs increase the scale and scope of AI adoption, they also need to step up governance and risk management practices for the responsible use of AI. MAS is developing supervisory guidance to FIs, focusing on key risks associated with AI use.

- a. There are key risks around model, data, technology, and third-party risks. Poor management of these risks can result in wrong or even harmful information used in internal decision-making or advice given to customers and investors.
- b. Last year, MAS conducted a thematic review of AI use in key banks and found varying levels of maturity in AI risk management.  We published an information paper sharing our observations from the review and good practices on AI model risk management.
- c. To clarify our supervisory expectations and foster robust practices in the industry, we are developing a set of supervisory guidelines on AI risk management. This is intended to address the governance and controls around the development and deployment of AI in FIs, covering pertinent issues such as evaluation, testing and explainability.

- i. For example, in our thematic review, we observed a range of practices on AI risk materiality assessment and how to evaluate and test AI during development.
- ii. Our supervisory guidelines will highlight key risk dimensions that should be covered during AI risk materiality assessments, and key areas to evaluate and test during AI development.
- d. In parallel, we are working through the MindForge consortium on an AI governance handbook that will serve as a companion and good practice guide for FIs implementing the upcoming supervisory guidelines. 3
- i. For example, it would discuss approaches for managing third-party AI risks that are highlighted in MAS' guidelines.
- e. The consultation on MAS' supervisory guidelines and the MindForge handbook will be published towards the end of this year.

Fourth, we will upskill the financial sector workforce so that they can do more with AI assistance.

- a. This year, MAS and the Institute of Banking and Finance Singapore (IBF) are stepping up efforts to identify and prepare relevant courses to uplift the GenAI proficiencies of financial sector professionals.
- b. As shared by DPM Gan Kim Yong at the ABS Annual Dinner on 25 June 2025, IBF is collaborating with 9 FIs to pilot how AI can augment and transform 8 existing job roles. Insights from this pilot will help guide both the industry and IBF in planning for workforce transformation in the years ahead and to meet the upskilling and reskilling needs of the financial sector workforce.

Through these 4 initiatives, we will support FIs and the workforce in the AI adoption journey so that AI solutions are developed and deployed safely and responsibly, and the workforce is provided with the skills to perform job roles transformed by AI.

## Supporting Asia's transition to a low-carbon economy

I will now provide updates on our efforts in sustainable finance.

Singapore, and MAS, take a long term view of staying the course on sustainability, despite the current uncertainties and headwinds internationally in climate action.

We remain committed to support the region's transition to a low-carbon economy, and are well-placed to do so. The momentum for sustainable finance in Southeast Asia remains positive, with sustainable finance activity continuing to strengthen. Singapore is

ASEAN's largest market for green, social, sustainable, and sustainability-linked (or GSSSL) bonds and loans, with such loans originated from Singapore in 2024 reaching a new high, at over S$48 billion.

We continue to make good progress in the implementation of initiatives to support the financing of Asia's transition.

- a. First, through the Singapore-Asia Taxonomy (or SAT), MAS is encouraging the use of clear and credible definitions for green and transition finance.
- i. In the past twelve months, we have enhanced the interoperability of the SAT with the EU and China taxonomies through the Multi-Jurisdiction Common Ground Taxonomy, and published an information note on its adoption among local and foreign FIs and corporates.
- ii. The Singapore Sustainable Finance Association also provided guidance to FIs on structuring credible green and transition financing instruments aligned with the SAT.
- iii. I am glad that our three local banks have integrated the SAT in their sustainable financing frameworks, and major regional and global banks are also using the SAT as a key reference document to engage their clients in the region.
- b. Second, MAS is bringing together partners through the Financing Asia's Transition Partnership (or FAST-P) platform to de-risk investments and catalyse the flow of private capital for green and transition projects.
- i. The FAST-P office has been set-up with a dedicated management team. This will facilitate the deployment of up to US$500 million of concessional capital from the Singapore Government into the three FAST-P partnerships, alongside capital from other partners. A partnership with British International Investment was just announced.
- ii. The office will continue to work closely with asset managers, banks, and commercial and concessional investors, to promote innovative blended finance solutions for sustainable infrastructure in the region.
- c. Third, MAS is working with industry partners through the Transition Credits Coalition (or TRACTION) to develop high integrity transition credits that can accelerate early retirement of coal and its replacement with clean energy.
- i. Building on its interim report which identified key attributes needed to support credible transition, TRACTION will publish its final report at COP30, covering other critical enablers to scale and build confidence in transition credits.
- ii. We welcome feedback from industry as we develop this work further.

## Enhancing resilience and security of digital financial services

As digital financial services are now pervasive and essential for consumers in daily transactions, ensuring the operational resilience of digital financial services is mission critical for FIs. Any prolonged disruption not only brings significant inconvenience to customers but also risks undermining public trust and confidence in FIs.

MAS expects FIs to uphold high levels of resilience and availability for the key services they provide, and be able to safely and swiftly recover services when a disruption occurs . To do this well, an FI has to apply the standards for disruption and recovery to services and not just systems. This will require the FI to plan for resilience and recovery across multiple systems to ensure service continuity.

MAS is giving particular focus this year to the resilience of retail payments services.

- a. MAS has been in discussion with NETS Group and the banks over the past year and they will soon launch stand-in capabilities for NETS electronic point-ofThis allows customers to continue to make contactless payments sales systems. at merchant point-of-sale terminals, subject to a transaction limit, when a participating bank's system is disrupted.
- b. We will next work with FIs to develop similar solutions for QR code payments which have been gaining traction as a mode of payment.

The financial sector must also start taking steps to build resilience against future threats. The cyber risks arising from quantum computing is one such area. While quantum computing is currently not at a mature stage, the technology is developing rapidly and could eventually render current encryption techniques obsolete, putting at risk sensitive customer data and financial transactions.

It is not too early to act now.  In anticipation of the future threat posed by quantum-powered decryption, MAS has conducted trials to study the viability of quantum-safe solutions for adoption in financial services.

- a. In November 2024, MAS and Banque de France announced the completion of a milestone experiment using Post-Quantum Cryptography to secure international electronic communications.
- b. Today, I am pleased to announce the successful completion of our conducted in collaboration with a Quantum Key Distribution (or QKD) sandbox, number of banks and technology partners.
- i. This sandbox trialled QKD for securing sensitive financial communications. We will soon be publishing a technical report detailing the results and takeaways. The report will also highlight challenges for future work. We are confident that further work by the industry can address these challenges and enable wider adoption of QKD in time to come.

MAS will continue to engage FIs to prepare for a quantum-safe transition.

- a. MAS published an advisory in February 2024 highlighting measures FIs should consider in their quantum transition efforts.
- b. MAS will start to engage FIs to prepare a roadmap towards quantum-safe transition, as a full transition is complex and will take time.  We will review how FIs manage their cryptographic inventory and identify critical assets to be prioritised for quantum-safe migration.

Let me now touch on scams.

## MAS continues to work with banks and payment service providers to further strengthen our defences against scams.

- a. Over the past year, banks have phased out SMS one-time passwords for digital token user account logins and authentication of card transactions.  This makes it harder for scammers to fraudulently access customer accounts or validate unauthorised transactions.
- b. Some major retail banks have also implemented pre-transaction warnings for large value transfers made via digital banking. This offers a cognitive break for individuals who may be victims of a scam, before they proceed with the transfer. MAS continues to work with the remaining banks to implement this.

## We have also seen growing take-up of measures such as Money Lock to safeguard bank customers' monies.

- a. By preventing digital transfers of locked funds, Money Lock limits the potential losses should a customer's digital banking access be compromised.
- b. As of 31 May 2025, at least 350,000 customers have signed up to use Money Lock and set aside close to S$28 billion of savings, more than triple the numbers reported in our last annual report.
- c. This is encouraging and we hope more customers will take advantage of this service.

Despite the progress that we have made, scams remain a concern.

- a. Today, scams involving self-effected transfers account for the largest proportion of scam losses.
- b. Many such cases are investment scams or government official impersonation scams, where victims are deceived into thinking they are transferring money for legitimate investment opportunities or following the instructions of government officials.
- c. Worryingly, these scams continue to proliferate and increase in sophistication.

To combat evolving scam typologies, we need to do better collectively as a society to combat all types of scams.

Vigilance by each of us as consumers remains an important first line of defence.  We should be sceptical of requests to transfer money, take time to verify their legitimacy, and promptly report suspected scams to our banks and the authorities.

Banks will play their part and implement stronger safeguards to disrupt scam transactions.

The first set of safeguards relates to transaction surveillance and cooling-off periods.

- a. Under the Shared Responsibility Framework, banks have implemented real-time fraud surveillance to detect rapid drainage of material sums from customer accounts. This came into effect on 16 June 2025.
- b. Customers can expect some delays in their payment transactions as banks may perform additional checks.
- c. Banks will also progressively introduce cooling-off periods for high-risk activities, such as increasing transaction limits or changing contact details. This gives individuals who may be victims of scams an opportunity to re-assess their actions and mitigate financial losses.

We are also looking to further strengthen the user authentication toolkit to defend against phishing.

- a. MAS is working with banks to enable the use of a FIDO-compliant hardware token (or FHT) for higher risk internet banking payments and transfers.
- b. A FHT needs to be plugged in to the device that an individual uses to approve a transaction. Doing so makes it difficult for scammers to remotely make unauthorised transactions.
- c. Consumer engagements are being conducted to identify customer pain-points in the adoption journey and how the transition can be made smoother. More details will be announced when ready.

Each of these measures by MAS and the banking industry to fight scams will introduce more frictions and delays for users of financial services. While the industry will do its best to minimise the inconvenience and give time for customers to get used to the new measures, as a society we will have to make the choice for more security and less convenience.

## MAS Financial Results for FY2024/25

I now turn to MAS' financial results.

For the financial year ended 31 March 2025, MAS recorded a net profit of S$19.7 billion. This comprised:

- a. investment gains of S$31.4 billion,

b. partially offset by a negative currency translation effect of S$3.4 billion, and

- c. net cost from MAS' money market operations to manage banking system liquidity and other expenses of S$8.3 billion.

Global markets performed well during the financial year. All asset classes across bonds and equities, developed and emerging markets posted healthy returns. There is year to year volatility in investment gains and over the past 10 financial years, it was, on average, S$14.8 billion.

The negative currency translation effects of S$3.4 billion were due mainly to the Currency translation strengthening of the Singapore Dollar against the US Dollar. effects arise when MAS' Official Foreign Reserves (or OFR), held in foreign currencies, are reported in Singapore Dollars. Such effects do not affect MAS' ability to conduct monetary policy or support financial stability. The OFR are meant to be used in foreign currency, to support the Singapore Dollar in times of currency weakness, or to provide US Dollar funding to the banking system during times of financial stress.

Like many central banks, MAS incurs interest expense from money market operations (or MMO) to mop up excess liquidity in the banking system. The cost of MMO is a product of the volume of MMO and the interest rate which eased slightly over the year. Income from the Reserves Management Government Securities (or RMGS) held by MAS partially offset some of these interest expense.

While MAS maintains a globally diversified OFR portfolio, given ongoing uncertainties and risks in the global economy and financial markets, our investment performance and net profit may be impacted in the coming years.

## Conclusion

That concludes my remarks and I thank you for your attention.

- 1  Excludes jobs in holding companies.
- 2  Alternative managers include private equity, venture capital, hedge fund, real estate and REIT managers.
- 3  The Project MindForge consortium comprises over 30 financial industry participants including banks, insurers, asset managers and technology partners coming together to identify the opportunities and risks of Gen AI in the financial sector.",Chia Der Jiun
https://www.bis.org/review/r250728l.htm,Christopher J Waller: The case for cutting now,"Speech by Mr Christopher J Waller, Member of the Board of Governors of the Federal Reserve System, at the Money Marketeers of New York University, New York City, 17 July 2025.",2025-07-17 00:00:00,"For release on delivery 6:30 p.m. EDT July 17, 2025

The Case for Cutting Now

Remarks by

Christopher J. Waller

Member

Board of Governors of the Federal Reserve System at the

Money Marketeers of New York University

New York, New York

July 17, 2025

Thank you, John, and thank you for the invitation to speak to you today.

My purpose this evening is to explain why I believe that the Federal Open Market Committee (FOMC) should reduce our policy rate by 25 basis points at our next meeting. 1 I used to tell my junior research colleagues that presentations are not murder mysteries-just tell the audience up front 'who did it' by telling them the main point.  So let me follow my own advice and state up front the reasons I believe we should cut the policy rate at our meeting in two weeks.

First, tariffs are one-off increases in the price level and do not cause inflation beyond a temporary surge.  Standard central banking practice is to 'look through' such price-level effects as long as inflation expectations are anchored, which they are.

Second, a host of data argues that monetary policy should be close to neutral, not restrictive.  Real gross domestic product (GDP) growth was likely around 1 percent in the first half of this year and is expected to remain soft for the rest of 2025, much lower than the median of FOMC participants' estimates of longer-run GDP growth.  Meanwhile, the unemployment rate is 4.1 percent, near the Committee's longer-run estimate, and headline inflation is close to our target at just slightly above 2 percent if we put aside tariff effects that I believe will be temporary.  Taken together, the data imply the policy rate should be around neutral, which the median of FOMC participants estimates is 3 percent, and not where we are-1.25 to 1.50 percentage points above 3 percent.

My final reason to favor a cut now is that while the labor market looks fine on the surface, once we account for expected data revisions, private-sector payroll growth is near stall speed, and other data suggest that the downside risks to the labor market have

1 The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.

increased.  With inflation near target and the upside risks to inflation limited, we should not wait until the labor market deteriorates before we cut the policy rate.

Let me explain my reasoning by starting with my view of economic activity. Given the ups and downs of monthly indicators of GDP this year, we can best get a view of the performance of the economy by combining the first- and second-quarter numbers. With the data in hand, estimates suggest that real GDP increased at an annual rate of about 1 percent in the first half of this year, compared with 2.8 percent in the second half of 2024.  That comparison is important not only for the extent of the slowdown, which is considerable, but also because it is well below most estimates of the potential growth rate of the economy.  Based on forward-looking indicators, I don't expect a rebound in the second half-in fact, most forecasts suggest that real GDP growth will remain around 1 percent at an annual rate.  While the recent tax bill has a significant number of elements that will spur economic growth in the future, not much of those effects will show up this year.

The slowdown in GDP is evident in consumer spending, which constitutes about two-thirds of economic activity.  After hovering near 3 percent last year, real personal consumption expenditures (PCE) growth is estimated to have stepped down to 1 percent in the first half of this year.  This morning the Commerce Department announced June retail sales.  The data are consistent with this forecast, as the increase is on the heels of a couple of soft monthly readings.  As we move forward this year, consumer spending is expected to continue to grow at a similar pace, tempered by the expected slowing in growth of real disposable income because of the temporary effects of tariff increases.  I

will say more about tariffs when I discuss inflation, but in assessing the near-term momentum of the economy, tariffs could well be a factor.

Turning to the 'soft' data, this picture of declining momentum is consistent with what I am hearing from my business contacts and other sources.  The Fed's July 16 th Beige Book reported mixed evidence on economic activity across Federal Reserve Districts, with 5 reporting slight or modest gains and the remaining 7 having flat or declining activity. 2 This mixed news is also found in surveys of purchasing managers where there is a continuing contraction in manufacturing and a slight expansion in nonmanufacturing activity.  Given that firms outside manufacturing represent the large majority of businesses, this implies a modest expansion in activity.

Now let's talk about the labor market.  The headline numbers from the June jobs report looked reassuring-the unemployment rate stands at 4.1 percent, within the range it has been for the past year, and payroll gains were reported as 147,000, essentially the same as in May.  But looking a little deeper, I see reasons to be concerned.  Half of the payroll gain came from state and local government, a sector of employment that is notoriously difficult to seasonally adjust this time of year.  In contrast, private payroll employment grew just 74,000, a much smaller gain than in the previous two months, and that is consistent with other surveys you might have read about that found a drop in private-sector employment. 3 I focus on private-sector employment not only because it is the lion's share of employment, but also because it is a better guide to the cyclical movement in employment than counting public and private sector together.  As I used to

2 The Fed's Beige Books are available on the Board's website at

https://www.federalreserve.gov/monetarypolicy/publications/beige-book-default.htm.

3 The employment services firm ADP reported that private sector employment declined by 33,000 in June.

tell my students, the Federal Reserve's job should be to maximize private-sector employment, not government employment.

And there is another reason to cite the slowdown in private-sector hiring.  A pattern in data revisions in recent years tells us that the private payroll data are being overestimated and will be revised down significantly when the benchmark revision occurs in early 2026.  Accounting for the anticipated revision to the level of employment in March 2025 and extrapolating forward, private-sector employment gains last month were much closer to zero. 4 This is why I say private-sector payroll gains are near stall speed and flashing red.

This is only one month of data, I realize, and one possible factor in the slowdown in private-sector hiring could be a deceleration in net immigration this year, although it will take time to get a clear picture of how immigration is affecting employment.  But other data support the idea of a slowdown in hiring.  There are widespread media reports of the difficulty new college graduates are encountering in finding jobs, and, in fact, the unemployment rate for new grads is at a 10-year high, far above the level before the pandemic. 5

Looking across the soft and hard data, I get a picture of a labor market on the edge.  The Job Openings and Labor Turnover Survey reports continued low rates of firing but also low rates of hiring.  I suspect this is a hangover of a labor market that was very

4 My estimate of the anticipated revision is based on the difference between the currently published level of payroll employment and the count of employment from the Quarterly Census of Employment and Wages (QCEW), which is used to benchmark the payroll employment figures.  The QCEW data, which are currently available through 2024:Q4, suggest that the monthly change in payroll employment has been overstated by roughly 60,000 per month since March 2024.

5  See Federal Reserve Bank of New York (2025), 'The Labor Market for Recent College Graduates,' webpage, https://nyfed.org/collegelabor.  Through March, college-educated workers aged 22 to 27 had an unemployment rate of 5.8 percent, up steadily since mid-2022 and far above the 3.6 percent rate in January 2020.

tight after the pandemic, leaving employers resistant to let go of qualified workers for fear of renewed labor shortages.  That said, purchasing managers report caution and even some pauses on hiring.  The June 4 th Beige Book reported declining labor demand in every single Federal Reserve District, and the July 16 th Beige Book emphasized that labor demand continued to be less than labor supply in many industries.  With hiring already low, at a certain point, declining demand would overcome any instinct to hold on to workers, and if that attitude does shift, it implies that a larger and more sudden reduction in payrolls and an increase in the unemployment rate are a risk.

To sum up here, I see the hard and soft data on economic activity and the labor market as consistent:  The economy is still growing, but its momentum has slowed significantly, and the risks to the FOMC's employment mandate have increased.

Let's turn to the inflation data.  In the past two days, we received June consumer and producer price data that give us a good idea of the inflation rate based on PCE, the FOMC's benchmark for monetary policy.  After several months of readings that moved the 12-month inflation rate closer to the FOMC's target, the consumer price index and the producer price index suggest that total PCE inflation moved up to around 2.5 percent in June, and core inflation likewise rose to roughly 2.7 percent.  I believe these data reflect some modest effect from tariff increases, which began in February, and I believe there are further tariff-induced increases to inflation to come later this year, with the asterisk that there remains a lot of uncertainty about how trade agreements or escalations in trade conflicts may affect that outcome.

To understand how tariffs are affecting prices, I have been following not only the Bureau of Labor Statistics monthly data, but also studies of high frequency price data.

For example, some researchers this year are tracking the short-run price impact of tariffs on goods prices in real time by examining product-level price data from online stores of large U.S. retailers. 6 Using data through mid-July, they find that, on net, imported goods prices have increased modestly while domestic goods prices are little changed.  Looking across country of origin, Chinese goods imports have seen the most persistent and steady price increases.  That said, to date, the data point to very small goods price increases relative to the size of the tariff rates.

This finding is consistent with my view that a large share of tariff increases won't be passed through to consumers.  My presumption has been that consumers will have to pay about one-third of the price increases from higher tariffs, with the remainder split between foreign suppliers and U.S. importers.  So if there is a permanent increase to import tariffs of about 10 percent, I expect this will raise PCE inflation three-tenths of 1 percent this year, and that this increase would fade over the next year or so. 7

I can think of a couple of other reasons that may limit the impact on consumers. The first is that the slowing down of the rollout of many tariffs, with multiple postponements for continuing negotiations, may be giving U.S. importers time to substitute finished or intermediate goods to domestic suppliers or foreign sources subject to lower tariffs.  A second reason is that, faced with the slowing economy that I have described and the likelihood that tariffs will be weighing on consumer spending, foreign

6 For a discussion of the methodology by Cavallo, Llamas, and Vazquez, see Alberto Cavallo, Paola Llamas, and Franco Vazquez (2025), 'Tracking the Short-Run Price Impact of U.S. Tariffs,' working paper (Cambridge, Mass.:  HBS Pricing Lab, July),

https://www.pricinglab.org/files/TrackingTariffs\_Cavallo\_Llamas\_Vazquez.pdf.  And updates of the price data can be found on the HBS Pricing Lab website at https://www.pricinglab.org/tariff-tracker.

7 For a full rationale of this estimate, see Christopher J. Waller (2025), 'The Effects of Tariffs on the Three I's:  Inflation, Inflation Persistence, and Inflation Expectations,' speech delivered at 'Structural Shifts and Monetary Policy,' 2025 Bank of Korea International Conference, Bank of Korea, Seoul, South Korea,

producers and importers may be finding ways to hold the line on prices to maintain their presence on store shelves and hold on to customers.  In fact, slowing demand increases competition for all firms, and consumers may benefit.  Finally, despite all of the discussion of supply chain disruptions, tariff effects on supply chains are completely different than what happened during the pandemic.  In the pandemic, supply chains were actually broken:  Many workers were not working, factories were idle, and waves of COVID were hitting at asynchronous times across the globe.  In contrast, in the case of the higher tariffs, we know exactly where things are being produced, and nothing is broken-firms are simply arguing about prices and who will eat the tariffs.  Once that gets resolved, goods will flow naturally across the globe but potentially using different routes.

It is possible, of course, that tariffs may have a larger effect on inflation than I expect, but that won't affect my view of the implications for monetary policy.  As I have said many times, tariff increases are a one-time boost to prices that do not sustainably increase inflation.  In the absence of an unanchoring of inflation expectations and an acceleration of wage growth, which we have not seen, tariffs won't and can't permanently increase the inflation rate.  What does this mean for monetary policy? Research shows that central bankers should-and, in fact, do-look through price-level shocks to avoid needlessly tightening policy in times like these and damaging the economy. 8

8 Edward Nelson documents central banks' views of various price shocks.  As long as inflation expectations are anchored, both nominal wage growth and inflation in the post-shock period should be able to continue at pre-shock rates, as neither has been upset by a rise in inflation expectations, and output and employment can also grow along paths that are undisturbed by the shock.  See Edward Nelson (2025), 'A Look Back at 'Look Through,' ' Finance and Economics Discussion Series 2025-037 (Washington:  Board of Governors of the Federal Reserve System, May), https://www.federalreserve.gov/econres/feds/a-look-back-at-lookthrough.htm.

The key question for monetary policy right now is what we can discern about the underlying rate of inflation-that is, the rate excluding tariffs-based on the fundamentals of the economy.  Federal Reserve Board staff has done work to try to estimate tariff effects on PCE prices. 9 Using that methodology, if I subtract estimated tariff effects from the reported inflation data, I find the inflation numbers for the past few months would have been quite close to our 2 percent goal.  You're not going to hear 'mission accomplished' from me, but what this tells me is that underlying inflation has been lower than what is reported and close to our objective.

Besides tariffs, I don't expect an undesirable, sustained increase in inflation from other forces.  Among the reasons for this are that the rate of growth in labor compensation is down considerably in the past year or two, and, with the softening labor market, I do not expect workers will be able to get large wage increases going forward. Combining this with solid rates of productivity growth implies inflation should continue around 2 percent.

Two more points support my inflation outlook, and I will only summarize them here since I discussed them at length in my June outlook speech. 10 The first addresses the question of whether I could be making the same kind of mistake my FOMC colleagues and I made in 2021 and 2022 in expecting inflation increases to be only transitory when they turned out to be persistent.  But unlike then, there is no pandemic disrupting labor, goods, and services supply around the world, and economic growth is

9 For a detailed discussion of the methodology to detect tariff effects on inflation, see Robbie Minton and Mariano Somale (2025), 'Detecting Tariff Effects on Consumer Prices in Real Time,' FEDS Notes (Washington:  Board of Governors of the Federal Reserve System, May 9),

https://www.federalreserve.gov/econres/notes/feds-notes/detecting-tariff-effects-on-consumer-prices-inreal-time-20250509.html.

10 See Waller, 'The Effects of Tariffs on the Three I's,' in note 7.

now slow and slowing, rather than expanding rapidly.  These differences bring me to the second point, which is that unlike in 2021 and 2022, when expectations of future inflation rose, today the measures of expectations I watch remain firmly anchored. 11

To sum up, tariffs have boosted, and will continue to boost, inflation a bit above the FOMC's 2 percent objective this year, but policy should look through tariff effects and focus on underlying inflation, which seems to be close to the FOMC's 2 percent goal, and I do not see any concern for forces driving it persistently higher.

As I hope will be evident by now, the evidence of a slowing economy, and all the factors I have cited weighing on economic activity, mean that the risks to the FOMC's employment mandate are greater, and sufficient to warrant an adjustment in the stance of monetary policy.  Based on June's Summary of Economic Projections, the current target range for the federal funds rate of 4-1/4 to 4-1/2 percent is 125 to 150 basis points above the participants' median estimates of the longer-run federal funds rate of 3 percent. While I sometimes hear the view that policy is only modestly restrictive, this is not my definition of 'modestly.'

In fact, the distance that must be traveled to reach a neutral policy setting weighs heavily on my judgment that the time has come to resume moving in that direction.  In June, a majority of FOMC participants believed it would be appropriate to reduce our policy rate at least two times in 2025, and there are four meetings left.  I also believeand I hope the case I have made is convincing-that the risks to the economy are weighted toward cutting sooner rather than later.  If the slowing of economic and employment growth were to accelerate and warrant moving toward a more neutral setting

11 I consider survey-based measures of inflation expectations unreliable, and the market-based measures that I watch have remained firmly anchored.

more quickly, then waiting until September or even later in the year would risk us falling behind the curve of appropriate policy.  However, if we cut our target range in July and subsequent employment and inflation data point toward fewer cuts, we would have the option of holding policy steady for one or more meetings.

For this reason, I believe it makes sense to cut the FOMC's policy rate by 25 basis points two weeks from now.  And looking to later this year, if, as I expect, underlying inflation remains in check-with headline inflation data reporting modest, temporary increases from tariffs that are not unanchoring inflation expectations-and the economy continues to grow slowly, I would support further 25 basis point cuts to move monetary policy toward neutral.",Christopher J Waller
https://www.bis.org/review/r250827f.htm,Jorgovanka Tabaković: Overview of recent monetary and macroeconomic trends in Serbia,"Introductory speech by Dr Jorgovanka Tabaković, Governor of the National Bank of Serbia, at the presentation of the August Inflation Report, Belgrade, 13 August 2025.",2025-08-13 00:00:00,"

## Introductory speech at the presentation of the Inflation Report -August 2025

Dr Jorgovanka Tabaković, Governor

## Ladies and gentlemen, esteemed members of the press, dear colleagues,

Welcome  to  the  presentation  of  the  August Inflation  Report ,  where  we  will  briefly present our view of macroeconomic developments, new macroeconomic projections and monetary policy decisions adopted in the period since the previous Report .

***

The y-o-y inflation continued to slow down during April and May, consistent with our expectations outlined in the previous Report . However, it accelerated again in June, to 4.6%, and then further to 4.9% in July, due to the rise in unprocessed food prices and the increase in global oil prices following the outbreak of the conflict between Israel and Iran. Although I will elaborate on food prices later in my address, I would like to begin by highlighting the movement of fruit prices in recent months, considering their impact on headline inflation. Influenced by adverse weather conditions (first, frost in the spring, followed by extremely hot and dry weather in June), the yields of many fruits turned out considerably lower than usual, which caused a notable increase in their prices. Given that adverse weather conditions are increasingly affecting agricultural seasons,  the  NBS  has  undertaken  several  activities  in  order  to  have  this  issue addressed  in  a  systematic  manner.  We  have  had  discussions  with  all  relevant stakeholders. We have also approached the Association of Serbian Insurers to explore the  possibility  for  making  insurance,  as  a  form  of  protection,  more  accessible  to agricultural  producers. In  addition,  we  have  proposed  to  other  institutions  concrete measures which, in our view, could help mitigate the negative effects of climate-related



Chart 2 Y-o-y inflation and change in contribution of main CPI components to y-o-y inflation



Sources: SORS and NBS calculation.

factors on food supply and prices. More details on the measures aimed at ensuring food market stability can be found in one of our text boxes.



Source:

Core inflation (CPI excluding food, energy, alcohol and cigarettes) exhibited similar yo-y  dynamics  as  headline  inflation.  It  slowed  down  in  April  and  May,  then  slightly accelerated in June, to 4.7%, where it stayed in July. This was the first time since April last year that core inflation fell below the level of headline inflation. In one of the text boxes, you can read about the impact of climate-related factors on fruit supply and prices in the domestic market and in Europe as well. Now I will share only one fact: the y-o-y rise in fruit prices measured around 36% in July and on that account only, y-o-y inflation in July was 0.5 pp higher than in April. Most other countries of the region also recorded inflation growth in June due to the hike in the prices of food and energy.



The  mentioned  factors  -  adverse  weather  conditions  at  the  start  of  this  year's agricultural season and higher global oil prices - are the main reason why, according to our new central projection, in the remainder of the year the y-o-y inflation rate is expected to hover around the upper bound of the target tolerance band (3±1.5%), which  is  higher  than  envisaged  by  our  May  projection.  Thereafter,  inflation  will

gradually slow down over the course of next year, averaging 4.0%, and approaching the target midpoint at the end of 2026. Factors contributing to the anticipated inflation slowdown  over  the  projection  horizon  include  the  continued  restrictive  monetary conditions, a high base effect for food prices - particularly fruit and vegetables, lower imported inflation, and the weakening of the US dollar against the euro.

As a consequence of heightened uncertainty surrounding the trade policies of leading global  economies  and  pronounced  geopolitical  tensions,  as  well  as  protests  and blockades at home, both investment and consumer confidence have weakened. This reflected on Serbia's economic growth in Q2, which, according to the Statistical Office of the Republic of Serbia, maintained the same y-o-y dynamics as in Q1, measuring 2%.  Similar  to  previous  quarters,  the  growth  was,  in  our  assessment,  driven  by services, followed by manufacturing - where the effects of increased serial production of electric vehicles at Stellantis in Kragujevac and the acceleration of tyre production have  become  evident.  In  contrast,  construction  and  energy  declined,  exerting  a dampening effect on GDP.

Lower than expected growth in Q2 and the available data of the Statistical Office of the Republic of Serbia on the production of wheat, certain fruit  cultures, and the areas under autumn crops - along with relatively unfavourable weather conditions in the past few  months  -  indicate  that  this  year's  agricultural  season  will  be  weaker  than  the average assumed in our May projection. Accordingly, the new GDP growth projection for this year has been revised down to 2.75%. Nonetheless, we still expect economic activity to accelerate in the second half of the year, supported by the continued growth in automobile production and exports, as well as the implementation of infrastructure projects planned under the 'Leap into the Future - Serbia Expo 2027' programme.

GDP growth projection for the next two years is still in the 4-5% range. However, owing to the specialised international exhibition Expo 2027, in 2027, we expect a growth rate closer to the upper bound of the projected band, as a more notable rise in contribution is likely from services, on the production side, and from net exports, on the expenditure side. Private consumption will be boosted by higher disposable income and positive labour  market  trends.  Growth  in  fixed  investments  will  be  driven  by  corporate profitability in previous years, continued inflows of FDIs in equity capital, planned public capital expenditures on projects in transport, energy and utility infrastructure, as well

as  more  favourable  borrowing  conditions  on  account  of  the  past  monetary  policy easing. From next year, export growth is also expected to receive a push from the anticipated acceleration of economic growth of our most important trading partners. However, due to the planned investments and rising domestic consumption, imports are  projected  to  grow  faster  than  exports  next  year  as  well,  which  will  result  in  a negative contribution of net exports. Serbia's stepped-up growth in the medium run, underpinned  by  the  preserved  favourable  fundamentals  and  a  planned  rise  in investments  and  productivity,  should  push  up  potential  output  and  accelerate  the process of Serbia's real convergence towards advanced countries.





Higher imports of goods and services compared to exports contributed to a current account deficit of approximately EUR 2 bn (4.7% of GDP) in the first half of the year. The  export  of  goods  increased  by  10.8%  y-o-y  during  the  January-June  period, propped up by higher manufacturing exports, with the largest contribution coming from industries related to the automobile sector. Additionally, the revision of goods exports data for the last year and the first quarter of this year by the Statistical Office of the Republic of Serbia, amounting to over EUR 2 bn, indicates that exports have shown strong  resilience  to  the  negative  effects  of  persistently  low  external  demand  and problems in the European automobile industry. Goods imports increased by 11.4%, driven primarily by higher imports of intermediate and consumer goods.

FDI inflow in the first six months came at EUR 1.5 bn, down by around 40% from the same period in 2024, partly reflecting the  above  average  one-off inflows  last  year, eroded investment confidence globally, and the postponement of some investments due  to  protests  and  blockades  at  home.  However,  in  the  past  two  months,  it  was

observed that the dynamics of FDI inflows approached the average monthly levels recorded last year. Hence, higher inflows in the remainder of the year relative to the first half of the year can be realistically expected. This trend will also be influenced by the alleviated global uncertainty following the agreement on tariffs, although numerous questions regarding the implementation of these agreements remain open.

Taking all of the above into account, we project that the current account deficit as a share of GDP will range between 5.0% and 5.5% this year and the next, and that it will be largely covered by net FDI inflows, which are projected at around 4.5% of GDP. Subsequently, in 2027, due to higher export of services, the current account deficit is expected to fall to around 4% of GDP and to be fully covered by net FDI inflows.



Improved  balance  of  payments  movements  and  diminished  FX  demand  of  energy importers added to appreciation pressures from April onwards. To preserve the relative stability of the dinar exchange rate against the euro, the NBS participated in the foreign exchange market mostly as the net buyer. Not only was the amount of FX sales from the start of the year entirely offset, but the NBS's interventions in the foreign exchange market  also  added  EUR  130  mn  to  FX  reserves  until  end-July.  The  country's  FX reserves were thus EUR 28.3 bn at end-July, remaining well above reserve adequacy metrics  and  representing  an  important  pillar  of  defence  against  external  risks.  The structure of FX reserves shows that the share of gold is currently almost 17% and that its quantity has reached 50.9 tonnes. In one of our text boxes, you can find detailed information about the mentioned revision of data on exports, but also on external debt, and you will see that our exports demonstrated even greater resilience to reduced

external  demand  and  that  our  external  position  is  even  stronger  than  indicated  by previous data, i.e. data before the revision.

The first half of the year saw a fiscal deficit of 0.4% of GDP and a primary balance surplus of 1.3% of GDP. Total revenue gained 1.9% y-o-y in real terms, mostly guided by higher income tax revenue amid continued positive trends in the labour market, while VAT revenue declined from the same period last year even though disposable income went up. At the same time, fiscal expenditure rose 4.8% in real terms, guided by higher outlays for pensions and public sector wages, as well as capital expenditure. Even  though  the  medium-term  fiscal  framework  plans  a  more  expansionary  fiscal policy to accommodate the implementation of investments under the 'Leap into the Future - Serbia Expo 2027' programme, we think this will not generate any major inflationary effects given that most of the expenditure growth relates to government capital expenditure which boosts potential output at the same time. Furthermore, the planned deficit of 3% of GDP will not undermine the downward trajectory of the share of  public  debt  in  GDP,  which  equalled  44%  at  end-June  (according  to  the  national definition) and was well below the 60% Maastricht criterion.



Source: Ministry of Finance.

***

In the period since the previous Report , we have not changed the level of the key policy rate, which has stood at 5.75% since last September. When making such decisions, we assessed that a cautious monetary policy remains necessary due to pronounced geopolitical tensions, rising protectionism, and a higher-than-expected increase in food prices in recent months, both in the international and domestic markets.

Here, I would like to emphasise that the key policy rate is not the rate at which the NBS borrows from other banks for a one-week period to satisfy the need for liquidity, as was mistakenly interpreted in the public in recent weeks. On the contrary, by conducting reverse  repo operations,  we  are  mopping  up  structural  liquidity  surpluses  from  the market and preventing them from having an inflationary impact.

As a result of the past easing of our monetary policy and the continued monetary policy easing by the ECB this year, borrowing costs in both dinars and euros have decreased for businesses and citizens. I would especially like to underline that interest rates on housing loans, credit card debt, and  current account  overdrafts for households are aligned with the limits set by the amendments to the Law on the Protection of Financial Service  Consumers,  which  contributes  to  the  growth  in  households'  disposable income. In addition, the approval of subsidised loans under more favourable conditions under the government's youth housing loan programme has helped bring down the interest rate on new housing loans to 4.3% in June.

More  favourable  borrowing  costs  and  continued  easing  of  credit  standards  have contributed to the continued double-digit y-o-y growth in lending to the non-monetary sector, which reached 10.8% in June. Corporate lending growth was similar to that in March  (7.1%),  driven  by  working  capital  and  investment  loans,  while  lending  to households accelerated to 14%, supported by faster growth in both cash and housing loans.  The  growth  in  lending  activity,  along  with  the  preservation  of  banks'  asset quality, helped keep the share of NPLs in total loans at a minimal 2.3% in June.



Household savings continue to grow steadily - over the past 13 years, dinar savings have increased elevenfold, reaching over RSD 200 bn at the end of July. At the same time, FX savings have nearly doubled, from EUR 8.3 bn to EUR 15.8 bn. This reflects confidence  in  the  domestic  financial  sector  and  indicates  healthy  sources  of  credit growth, both now and in the future.

Decisions on future monetary policy will also be made cautiously, on a meeting-bymeeting basis, depending on the pace of inflation slowdown and the movement of its key drivers from both domestic and international environments, while also taking into account the effects on financial stability and economic growth.

***

What is common to all central banks around the world today is that geopolitical and trade  tensions are  at  the  heart  of  global  macroeconomic  challenges  -  and, consequently, at the centre of their decision-making. Another shared reality for us, the monetary policymakers, is that in an environment of frequent and significant shocks, we  cannot  be  too  explicit  about  our  future  intentions  regarding  monetary  policy. However, we must be ready to respond swiftly and decisively. That is why the answer to the question of what kind of monetary policy central banks will pursue in the coming period is highly complex. The same is true for the answers to the questions whether they will continue to lower their key rates or whether the monetary easing cycle, in which nearly all central banks currently are, is nearing its end. You can read more about this in one of our text boxes.



Sources: central banks of the above countries.

An important lesson from the past years of strong shocks is that  inflation  can  rise suddenly due to supply-side constraints, and not just due to robust aggregate demand. It  is  also  important  to  always  be aware  of  these  constraints and recognise that we cannot  ignore  them  regardless  of  the  fact  that  monetary  policy  measures  cannot directly address them. The most illustrative example of this is climate factors. Their increasing frequency and intensifying effects have led to a more persistent impact on food prices, making these factors a significant determinant of inflation expectations, which in  turn  increases  the  need  for  a  monetary  policy  response.  For  this  reason, central  banks  advocate  for  a  comprehensive,  interinstitutional  and  cross-sectoral approach  aimed  at  mitigating  the  negative  effects  of  climate  factors,  which  have become the new normal. A part of the NBS's institutional response to climate change is  transparent  communication  about  its  potential  impact  on  ensuring  sustainable economic growth and development, as this helps raise public awareness of the issue.

## Ladies and gentlemen, dear colleagues,

Let us conclude. The world we live in is becoming increasingly complex, with external shocks  growing  more  frequent  and  severe.  Although  monetary  policymakers  have always had to deal with uncertainty, in recent years it has reached levels not seen in modern history. We have faced a pandemic, conflicts in Europe and the Middle East, and the worst energy shock since the 1970s. Meanwhile, rising geopolitical tensions are reshaping global economic and trade flows, introducing new rules, and demanding rapid responses and adaptation to emerging circumstances. In addition, climate and environmental crises are increasingly posing existential threats and challenging the stability and resilience of the entire economic system. Technological changes, such as digitalisation and artificial intelligence, bring enormous opportunities for development and progress, but also complex challenges.

Therefore,  overcoming  current  global  challenges  requires  a  unified,  proactive  and strategic approach from economic policymakers. I would like to reiterate that we have taken concrete steps aimed at mitigating the effects of climate factors. Of course, the NBS, in coordination with other economic policymakers in the country, will strive to further strengthen domestic fundamentals and our resilience to external risks, enhance the ability to respond quickly and adequately, and maintain stability in every sense the stability of prices, financial system, exchange rate, and thus overall

macroeconomic stability. These are not empty promises but a reality confirmed and documented by concrete data, recognised and highlighted by all relevant international institutions,  including  Fitch,  which  in  July  maintained  our  positive  outlook  for  an upgrade to investment-grade credit rating.

Finally, it is always important to keep in mind that the good results from previous years oblige us to continue working in the same way in the future - in the best general interest and  to  ensure  that  Serbia  remains  an  attractive  destination  for  investment  and business. The period of the past 13 years, during which I have been at the helm of the NBS,  has  been  marked  by  a  wide  range  of  challenges,  some  of  which  were unprecedented. Yet even under such circumstances, in cooperation with the President and the government of the Republic of Serbia, we managed to maintain stability, which has become the first thing that comes to mind when the NBS is mentioned. We will continue in the same way going forward, because nothing is a given forever, and the challenges  ahead  require  dedicated  work  and  maximum  engagement  of  all  those responsible for economic policy.

In the remainder of the conference, my colleagues from the Economic Research and Statistics Department will present our projections in more detail. After that, we will be happy to answer any questions you may have.",Jorgovanka Tabaković
https://www.bis.org/review/r250827a.htm,Christopher J Waller: Technological advancements in payments,"Speech by Mr Christopher J Waller, Member of the Board of Governors of the Federal Reserve System, at the Wyoming Blockchain Symposium 2025, Teton Village, Wyoming, 20 August 2025.",2025-08-20 00:00:00,"## Christopher J Waller: Technological advancements in payments

Speech by Mr Christopher J Waller, Member of the Board of Governors of the Federal Reserve System, at  the Wyoming Blockchain Symposium 2025, Teton Village, Wyoming, 20 August 2025.

* * *

Thank you for inviting me to speak today on payments innovation. 1   It is an exciting time to work in payments. While I have always been interested in the topic, I would have never imagined decades ago that payments would generate this amount of enthusiasm, where now some of the coolest jobs in tech are working in this area.

The payment system is experiencing what I have called a ""technology-driven revolution,"" where the latest advances in computing power, data processing, and distributed networks have fueled growth in innovative new payment services. 2   This includes 24/7 instant payments, user-friendly digital wallets and mobile payment apps, and stablecoins and other digital assets. Alongside these new services sits enabling technology, such as artificial intelligence (AI), that has the potential to improve the precision and efficiency of the underlying payment products even further.

While there has been a lot of excitement, and admittedly sometimes hype, around the possibilities of these new technologies, there have also been some who have been fearful or skeptical of innovation in this space. But we only have to look to history to see that the evolution of the payment system has long been a story of technological advancement.

In any payment transaction, three things happen. First, an object is bought and paid for with another object. Second, there is a technology for conducting this transaction. Finally, there is a technology for recording the history of the transaction and ownership of the objects. For example, I can go to the grocery store and buy an apple and use a digital dollar in my checking account to pay for it. I tap my debit card on a card reader to conduct the transaction. Finally, the machine prints out a receipt, which is the record of the transaction. The same process applies to the crypto world. I buy a meme coin and use a stablecoin as the means of payment. The transaction takes place using a smart contract. Finally, the transaction is recorded on a distributed ledger. 3   There is nothing scary about this just because it occurs in the decentralized finance or defi world-this is simply new technology to transfer objects and record transactions. There is nothing to be afraid of when thinking about using smart contracts, tokenization, or distributed ledgers in everyday transactions.

The technologies available today might be new, but leveraging innovative technology to build new payment services is not a new story. What I'd like to emphasize today is that the private and public sectors can both embrace innovation within their respective roles.

First, I will recap how I generally approach these issues. I am a strong believer in the benefits of the free market. I hold the view that it is generally the private sector that can most reliably and efficiently allocate resources and take risks to explore the value of new technologies. I also see firsthand the important role the Federal Reserve plays in

fostering a payment and settlement system that is both safe and efficient. Such a system promotes a vibrant economy, since it allows for participation from a broad range of individuals and businesses without requiring them to invest heavily in bilateral arrangements. 4

I would argue that broadly, there have been two models of payments innovation, which can be useful in characterizing the longer-term arc of payments evolution, as well as some recent developments. The first is private sector-driven innovation. As I have noted, this should be the default model. The second approach is where public sector entities like the Fed build platforms that enable the private sector to offer services to their customers. This should be done only rarely, and in instances where there is a specific market need. Both models are important in the payments ecosystem, and I'll walk through some historical and recent examples.

Let's take the first model of private sector-led innovation and use payment cards as an example. Early cards were metal plates or cardboard, then they incorporated magnetic strips, then chips, and now I tap my phone to pay. In the early days of consumer credit used for transactional purposes, privately operated card companies seized on the availability of new technology to support automated card authorizations and processing, continually upgrading over time, to build what are now global networks of interconnected banks that support the preferred payment method for consumers and many small businesses in the United States. 5  Here, the private sector demonstrated its ability to effectively build a payment service that met the needs of consumers, all based on proprietary technology. Even still, card networks interact with the broader payments, clearing, and settlement ecosystem, benefitting from Fed-operated payment infrastructures for settlement of interbank obligations. 6

Stablecoins are the latest example of private sector-led innovation in payments. 7   The original use of stablecoins was to facilitate crypto trading. Crypto-asset prices can be volatile and as with any financial market, there is a need for traders to move out of relatively risky positions into safer ones with a stable asset price. As the stablecoin market matured, firms found that the properties of stablecoins using distributed ledger technology- including 24/7 availability, fast transferability, and their freely circulating nature -could be attractive for other use cases as well. That includes providing a means to access and hold U.S. dollars, particularly in countries with high inflation or without easy or affordable access to dollar cash or banking services. In fact, I believe that stablecoins have the potential to maintain and extend the role of the dollar internationally. Stablecoins also have the potential to improve retail and cross-border payments.

I spoke about the maturing stablecoin market in February of this year, and, at the time, I noted the need for a regulatory regime for stablecoins in the U.S to provide regulatory clarity and reduce regulatory fragmentation for market participants. 8   Last month, the GENIUS Act became the first major crypto-asset legislation to become law. This was an important step for the payment stablecoin market and could help stablecoins reach their full potential. Stablecoins, like card payments, are a private sector-driven innovation. And, like card payments, we see connections to the traditional payments, clearing, and settlement ecosystem. For example, many stablecoin arrangements use legacy payment services to fund and redeem stablecoin balances.

In addition to stablecoins, the use of AI in payments is an area where we are seeing significant private sector-led innovation. Here, AI is not serving as payments infrastructure but as an enabling technology that could bring considerable benefits to both private and public sector-operated payment services.

It may surprise some to learn that, within the financial sector, the payments industry has long been at the forefront of AI adoption. This is true for several major waves of AI technology. Since the early 1990s, payment firms have used machine learning for things like detecting fraud and money laundering, or predicting payment flows and trends. 9

More recently, as large language models and generative AI have matured, payments innovators have used the technology to further enhance fraud detection and compliance systems and to make the cumbersome process of reconciling payments files more accurate and efficient. Agentic AI systems, which operate autonomously by planning and executing multistep processes, appear to be the next wave of AI advancement. While agentic AI is still in its early days, payments innovators in the private sector are once again channeling the promise of this technology and rapidly building out various use cases.

Now, let's touch briefly on the second model of public sector innovation of payments infrastructures to support the private sector. Almost since its founding, the Federal Reserve has provided core clearing and settlement infrastructure to maintain the safety and efficiency of the payment system. The Fed has consistently upgraded the infrastructure over time using the latest available technology. For example, in the early 20th century, interbank transfers were effected through telegraph wires-an early version of Fedwire-then through emerging forms of electronic payment messages. Now fastforward to this century where we have interbank payment systems that process transactions in real time. 10   Banks, payment services providers, and even fintechs have used the infrastructure provided by the Fed to build payment services that their customers demand.

All of this is to demonstrate that the evolution of the payment system has long been a story of technological advancement. Much of this evolution has been led by private sector innovators. Key components have been supported by the Federal Reserve, either providing core infrastructure as a payment system operator or in convening the industry around specific solutions like payment standards. 11   These complementary roles have led to a U.S. payment system that operates safely and efficiently and serves as a backbone for commerce in the U.S. and globally. That is why it is important for the Federal Reserve to continue to embrace technological advancements to modernize its services and continue to support private sector innovation.

The Fed is also conducting technical research on the latest wave of innovations, including tokenization, smart contracts, and AI in payments. As a payment system operator, it is important to understand trends in payments technology so that we can continue to support private sector firms that leverage our infrastructures, as well as understand whether emerging technologies could provide opportunities to improve our existing platforms and services. Finally, we engage with innovators like you to better understand new technologies and their potential to improve payments. In fact, it is my

belief that the Federal Reserve could benefit from further engagement with innovators in industry, particularly as there is increased convergence between the traditional financial sector and the digital asset ecosystem. We are working on ways to further that engagement, so stay tuned.

- 1  Thank you to Alex Sproveri and Kirstin Wells of the Federal Reserve Board for their assistance in preparing this text. The views expressed here are my own and not necessarily those of my colleagues on the Federal Reserve Board.
- 2  See Christopher J. Waller, "" Reflections on Stablecoins and Payments Innovations,"" speech delivered via webcast at the 2021 Financial Stability Conference, cohosted by the Federal Reserve Bank of Cleveland and the Office of Financial Research, Cleveland, OH, November 17, 2021.
- 3  See Christopher J Waller, ""Centralized and Decentralized Finance: Substitutes or Complements?"" speech delivered at the Vienna Macroeconomics Workshop, Institute of Advanced Studies, Vienna, Austria, October 18, 2024. Crypto-asset generally refers to any digital object traded using cryptographic techniques.
- 4  See Christopher J. Waller, ""What Roles Should the Private Sector and the Federal Reserve Play in Payments?"" speech delivered at The Clearing House Annual Conference 2024, New York, NY, November 12, 2024.
- 5  Data from the 2024 Diary of Consumer Payment Choice survey show that more than three-quarters of U.S. consumers prefer credit or debit cards for in-person payments. See Berhan Bayeh, Isaiah Nardone, Shaun O'Brien, and Hailey Phelps, 2025 Findings (Federal Reserve Financial from the Diary of Consumer Payment Choice (PDF) Services, 2025).
- 6  See Susan Herbst-Murphy, ""Clearing and Settlement of Interbank Card Transactions (PDF),"" Payment Cards Center Discussion Paper (Federal Reserve Bank of Philadelphia, October 2013).
- 7  See Christopher J. Waller, "" Reflections on a Maturing Stablecoin Market,"" speech delivered at A Very Stable Conference, San Francisco, CA, February 12, 2025. For the purposes of this speech, I will define stablecoins as a type of digital asset designed to maintain a stable value relative to a sovereign currency and backed at least one-to-one with safe and liquid assets.
- 8  See Christopher J. Waller, ""Reflections on a Maturing.""
- 9  For example, Visa began using neural networks for fraud detection as early as 1993. See Rajat Taneja, ""30 years of AI and counting,"" , September 14, Visa Perspectives 2023, https://corporate.visa.com/en/sites/visa-perspectives/innovation/thirty-years-of-aiand-counting.html.
- 10  See Christopher J. Waller, ""What Roles Should the Private.""

11  See Christopher J. Waller, ""Payments Innovation, Technical Standards, and the Federal Reserve's Roles"" speech delivered at the Federal Reserve Bank of Minneapolis, Minneapolis, MN, May 17, 2024.",Christopher J Waller
https://www.bis.org/review/r250811b.htm,Michelle W Bowman: Thoughts on the economy and community bank capital,"Speech by Ms Michelle W Bowman, Vice Chair for Supervision of the Board of Governors of the Federal Reserve System, at the Kansas Bankers Association 2025 CEO & Senior Management Summit, Colorado Springs, Colorado, 9 August 2025.",2025-08-09 00:00:00,"## Michelle W Bowman: Thoughts on the economy and community bank capital

Speech by Ms Michelle W Bowman, Vice Chair for Supervision of the Board of Governors of the Federal Reserve System, at the  Kansas Bankers Association 2025 CEO &amp; Senior Management Summit, Colorado Springs, Colorado, 9 August 2025.

* * *

Thank you for inviting me to speak to you today. 1   It is wonderful to join you again this year, now as the Fed's Vice Chair for Supervision. Since assuming this important financial regulatory role, we have hit the ground running-addressing some of the most critical matters in the bank regulatory space, all of which fall under the broad categories of improving efficiency, transparency, and fairness. Often, the ""headline"" issues coming out of the Federal Reserve and the other banking regulators are ones that affect the largest firms. And many are critical for both economic growth and financial stability.

But banks of all sizes, especially community banks, play a vital role in our economy and financial system, and we are continuing to directly engage as we draft regulatory and supervisory reforms. Community banks drive local economic growth, and they play a central role in the financial health of the customers and communities they serve, but these banks also face unique challenges.

I will begin today by sharing my outlook on the economy and an update on the recent meeting of the Federal Open Market Committee (FOMC) before I dig a bit deeper into community banking issues.

## Update on the Most Recent FOMC Meeting

At last week's FOMC meeting, I dissented from the Committee's decision to hold the policy rate at its current level. Today I'd like to share some additional perspective about my views on the economy. So far this year, the FOMC has held the target range for the federal funds rate steady at 4-1/4 to 4-1/2 percent. Earlier this year, I believed our policy stance was appropriate, giving time to allow the Committee to monitor the progress of inflation toward our goal and to better understand the impacts of the Administration's policies on the economy.

At the June FOMC meeting and in a speech shortly following that meeting, I began to lay out my reasoning to support the process of beginning to gradually lower the federal funds rate in July based on my assessment of signs of fragility in labor market conditions. 2   In my view, economic conditions appeared to be shifting, and as a result, we should reflect this shift in our policy decisions. Inflation has moved considerably closer to our target, after excluding temporary effects of tariffs, and the labor market has remained near full employment. As my dissent statement notes, with economic growth slowing this year and signs of a less dynamic labor market becoming clear, I see it as appropriate to begin gradually moving our moderately restrictive policy stance toward a neutral setting. Taking action at last week's meeting would have proactively hedged against the risk of a further erosion in labor market conditions and a further weakening in economic activity.

## Economic Conditions and Outlook

The U.S. economy has been resilient so far this year. Underlying economic growth has slowed markedly, but despite increasing signs of fragility as the latest employment report more clearly shows, the labor market appears to remain near estimates of full employment.

So far this year, consumer spending softened while residential investment declined, contributing to a much slower increase in private domestic final purchases compared to strong gains in 2024. Consumer spending on both goods and services has risen only modestly, reflecting slow gains in disposable personal income, lower levels of liquid savings, and high credit card utilization by lower-income households. Housing activity has declined, including in single-family home construction and sales, as listings of homes for sale are growing and house prices are falling, which suggests weakness in housing demand to a level last seen during the financial crisis.

Although the unemployment rate remained historically low at 4.2 percent in July, the latest employment report confirmed some of the signs of fragility and reduced dynamism in the labor market that I discussed at last week's FOMC meeting without the benefit of having seen the July report. The unemployment rate moved back up in July and was close to rounding up to 4.3 percent, largely reflecting reduced hiring as businesses continue to retain existing workers instead of increasing layoffs. The employment-to-population ratio has dropped significantly this year, suggesting more softening in labor market conditions than the unemployment rate implies.

Payroll employment growth slowed sharply to only 35,000 jobs per month over the three months ending in July. This is well below the moderate pace seen earlier in the year, likely due to a significant softening in labor demand. The sharp slowdown partly reflects the downward revision to payroll employment in both May and June, which, to put it in perspective, is comparable only to a few other two-month revisions over the past 30 years. In addition, job gains have been centered in an unusually narrow set of industries that tend to be less affected by the business cycle. For example, healthcare and social services have more than accounted for total job gains over the past three months, and the share of industries with job gains over the last six months dropped in July to a historically low level.

Turning to price stability, the 12-month measure of core personal consumption expenditures (PCE) inflation stood at 2.8 percent in June, a bit lower than at the end of last year. However, after removing estimates of one-off tariff effects on goods prices, core PCE inflation would have been lower than 2.5 percent in June, which is significant progress and much closer to our 2 percent target. This progress reflects a considerable slowing in core services inflation, which is consistent with recent softness in consumer spending and the labor market no longer being a source of inflation pressures.

The underlying trend in core PCE inflation appears to be moving much closer to our 2 percent target than is currently shown in the data. With housing services inflation on a sustained downward trajectory and other core services inflation already consistent with 2 percent inflation, only core goods inflation remains elevated-likely reflecting limited passthrough from tariffs.

In terms of risks to achieving our dual mandate, as I gain even greater confidence that tariffs will not present a persistent shock to inflation, I see that upside risks to price stability have diminished. With underlying inflation on a sustained trajectory toward 2 percent, softness in aggregate demand, and signs of fragility in the labor market, I think that we should focus on risks to our employment mandate.

With the memories of pandemic worker shortages still fresh, businesses have chosen to maintain, instead of reducing, their work forces in response to the slowing economic conditions. And they seem to be more willing to reduce profit margins as they are less able to fully pass through higher costs and raise prices given the weakness in demand. If demand conditions continue to soften, businesses may need to begin to lay off workers, recognizing that it may not be as difficult to rehire given the shift in labor market conditions.

On trade policy, foreign suppliers are absorbing some of the new tariffs, and importers are shifting to lower tariffed sources. Slack in the economy should also allow for only limited one-time price effects this year and very little, if any, ""second-round"" effects on inflation in the medium term. I also expect that less restrictive regulations, lower business taxes, and a more friendly business environment are likely to boost supply and offset any tariff-related effects on economic activity and prices over the medium term.

## The Policy Decision and the Path Forward

With tariff-related price increases likely representing a one-time effect, my view is that inflation will return to 2 percent after these effects dissipate. Because changes in monetary policy take time to work their way through the economy, it is appropriate to look through temporarily elevated inflation readings and therefore remove some policy restraint to avoid weakening in the labor market.

As I recognize that economic conditions are shifting, I believe that beginning to move our policy rate at a gradual pace toward its neutral level will help maintain the labor market near full employment and ensure smooth progress toward achieving our dual mandate. I see the risk that a delay in taking action could result in a deterioration in labor market conditions and a further slowing in economic growth.

Before our next meeting in September, we will receive a range of additional economic data and information, including another employment and two inflation reports. A proactive approach in moving policy closer to neutral, from its current moderately restrictive stance, would help avoid a further unnecessary erosion in labor market conditions and reduce the chance that the Committee will need to implement a larger policy correction should the labor market deteriorate further.

In my view, it is also important that the Committee's approach to monetary policy decision making is consistent over time-especially when we face shifting economic conditions. I recognize and appreciate that other FOMC members may see things differently and that they were more comfortable with leaving the target range for the policy rate unchanged. I am committed to working together with my colleagues to ensure that monetary policy is appropriately positioned to achieve our dual goals of maximum employment and price stability. In the meantime, I will continue to carefully

monitor the incoming data and information as the Administration's policies, the economy, and financial markets continue to evolve.

I have discussed many times in the past that, in recent years, the monthly labor market data have become increasingly difficult to interpret, in part, reflecting declining survey response rates and the changing dynamics of immigration and net business creation. It is crucial that U.S. official data accurately capture cyclical or structural changes in the labor market in real time so that we can more confidently rely on these data for monetary and economic policymaking. So, I remain cautious about taking too much signal from data releases, but I see the latest news on economic growth, the labor market, and inflation as consistent with greater risks to the employment side of our dual mandate.

My Summary of Economic Projections includes three cuts for this year, which has been consistent with my forecast since last December, and the latest labor market data reinforce my view. I want to reiterate, though, that monetary policy is not on a preset course. At each FOMC meeting, my colleagues and I will make our decisions based on each of our assessments of the incoming data and the implications for and risks to the outlook, guided by the Fed's dual-mandate goals of maximum employment and stable prices. I will also continue to meet with a broad range of contacts to discuss economic conditions as I assess the appropriateness of our monetary policy stance going forward.

## Prioritizing Community Banking Issues

Turning back to community banking, I'd like to share some thoughts about how we identify the key issues facing community banks and prioritize them in our regulatory and supervisory reform efforts.

My approach to prioritizing these issues remains consistent and clear-it starts with outreach. Throughout my time as a member of the Board, I have focused on meeting with and listening to community bankers to better understand the unique challenges they face. What are the most significant threats to their business? How have regulations harmed or improved their ability to operate safely and soundly? How have competitive factors evolved within their communities? How do they see the business of banking evolving with the introduction of new technologies? Engaging with you and other community bankers has been a critical input to informing my views on the current state of bank regulation and supervision, which also shapes my priorities for regulatory and supervisory initiatives.

As regulators seek to identify problems in the bank regulatory system and craft approaches to address them, it is imperative that we focus on issues that impact community banks. And I am very pleased to announce that the Board will host a conference focused on community banking in Washington, D.C., on October 9th to ensure that our work is fully informed. We will bring together bankers, industry experts, academics, and other stakeholders to discuss and identify matters targeted to support our ongoing work.

We will continue to fully engage and to understand these banks' concerns. And, apart from fraud, which I'll discuss in more detail in a moment, the Federal Reserve has already started looking at elements of the bank regulatory framework unique to

community banks. This includes the community bank leverage ratio (CBLR), liquidity sources and regulatory expectations, and rethinking capital options and operations for mutual banks.

The CBLR is a good example of a well-intentioned measure that underachieved in providing regulatory relief. The CBLR is an optional framework that was designed as an alternative to risk-based capital measures for community banks. A community bank that complies with the CBLR is deemed to comply with risk-based capital requirements. 3

Statutory limitations on the CBLR restricted the framework to between 8 and 10 percent for qualifying community banks. 4   The agencies initially established the CBLR at 9 percent just as I joined the Board in late 2018. 5   In rationalizing this setting, the agencies focused primarily on how many banks would be eligible to opt into the framework at their current capital levels and whether it could essentially retain the same high level of capital in the system.

Implicit in this approach seems to be a view that Congress intended the agencies to keep the same overall amount of capital supporting community banks. However, by statute, Congress provided a range, and the low end is the standard leverage double ratio capital requirement of 4 percent. The regulators also retained many of the same restrictive definitions, like the definition of qualifying tier 1 capital with associated exclusions and caps, that apply more generally to the largest institutions. While there were 4,022 community banks as of the first quarter of 2025, only 1,662 had opted into the CBLR. 6

Notably, data show that smaller community banks are more likely to have adopted the CBLR framework. About 53 percent of eligible community banks with assets less than $1 billion have opted in, compared to 26 percent of community banks with assets exceeding $1 billion. These smaller community banks play a significant and unique role in the U.S. economy through their support of local businesses, job creation, and investing in their communities.

In my view, it is time to consider modifications to the CBLR framework that make it a more attractive framework and will encourage more banks to adopt it. We should also consider whether it was appropriately designed and calibrated to fulfill the Congressional intent to achieve regulatory relief. For example, reducing the CBLR requirement from 9 percent to 8 percent could not only allow more community banks to adopt the framework but also increase balance sheet capacity for all CBLR firms, facilitating additional support for local economies through lending.

Since the 2023 failure of Silicon Valley Bank, there has been increased scrutiny on the liquidity sources banks use. Some policymakers have expressed skepticism of longestablished and reliable sources of liquidity, particularly liquidity provided by the Federal Home Loan Banks. One proposal, which is perhaps a solution in search of a problem, is to push for an expanded use of the discount window. Under this view, regulators (through requirement or supervisory pressure) would require banks to pledge and maintain assets at the discount window. Banks would be expected to use the discount window as a daily liquidity source, even when other, lower-cost liquidity sources are available like FHLB. But this solution seems to have bypassed the threshold question of

whether there is a problem. Effective reform efforts require actual identification of a problem and a practical approach relying on an informed view of the business of banking.

Other small bank concerns have persisted for even longer. Mutual banks have existed since the early 1800s but have long faced limited capital options and restrictions on managing capital distributions. 7   I have spoken about these issues in detail in the past, so I will not rehash them today. In the past, when regulators prioritized regulatory reform by asset size alone, they neglected critical issues that affect smaller institutions. Our responsibilities as prudential regulators should be broadly focused on banks of all sizes, ensuring relief across the broad range of asset sizes.

What I have discussed so far today is not an exhaustive list of the work underway at the Board and in partnership with the other agencies. On June 23, the Board announced that reputational risk would no longer be considered in the examination process. 8   To implement this lasting change, we are updating guidance, examination manuals, handbooks, and other supervisory materials to ensure the durability of this approach, which is a critical step in addressing the problem of de-banking. A few additional initiatives include changes to provide transparency and efficiency in the supervisory process, better defining ""safety and soundness,"" reviewing and updating relevant asset thresholds used in establishing supervisory categories and regulatory requirements, and rationalizing and updating Bank Secrecy Act and anti-money-laundering requirements.

We have reached a point of opportunity for community banks. It is time to build a framework that supports their strength and vitality, recognizing their unique characteristics so they can prosper long into the future.

## Fraud in the Financial System

While the upcoming community bank conference will enable us to explore a number of new and longstanding challenges, we are already aware of many that demand attention. Direct outreach with the banking industry has provided insight into economic and financial conditions across a wide range of communities and a close-up perspective of bankers' concerns. A common theme from these discussions is that fraud continues to pose material challenges and risks to banks and their customers. The sophistication of the techniques fraudsters use has greatly expanded, yet the tools to detect fraud have not kept pace.

Consider the fraud risks introduced by artificial intelligence (AI). During a recent banking conference at the Fed, Sam Altman, the CEO of Open AI joined me for a fireside chat on AI in the banking and financial industry. 9   The discussion highlighted how AI can be used to undermine common multifactor security measures. Banks must be able to identify new types of fraud where AI tools mimic customer voices and images, including by video. It is important that AI developers, bankers, and regulators focus on developing tools that can detect this type of activity enabling them to confirm a customer's identity in real time, training their teams to spot signs of AI-driven impersonation.

While banks have important responsibilities to detect and prevent fraud, we should also consider proposals to help mitigate the risks of fraud. For example, liability for fraud may not always rest with those best positioned to prevent or detect it. Limits on information sharing among firms may leave them more vulnerable to fraud threats and activities. This vulnerability could be addressed through better socialization of the methods and approaches criminals use to perpetrate fraud, and more effective enforcement and information sharing among law enforcement and financial institutions.

In addition, in mid-June, the Federal Reserve, FDIC, and OCC published a request for information (RFI) seeking comment on addressing payments and check fraud. 10   Check fraud has grown substantially over the past several years, resulting in financial harm to banks, especially community banks, and the consumers and businesses who are the victims of fraud. While this has been a well-known problem for several years, efforts by regulators have been slow to advance and seem to have done little to address this growing threat.

While the RFI is an important first step, addressing fraud will require a coordinated strategy involving banks, federal and state regulators, law enforcement, bank customers, the postal service, and others in the payments and tech industry. We must improve communication, ensure that there's appropriate accountability and that responsibility for preventing fraud and liability are appropriately assigned, and revise outdated regulations like Regulation CC implementing the Expedited Funds Availability Act.

The RFI comment period closes on September 18, and I encourage all stakeholders to share their views. We must have a comprehensive strategy to develop and implement an effective, coordinated approach, and your input is vital to getting that approach right. I look forward to reviewing these comments.

## Closing Thoughts

Community banks are the cornerstone of the banking and financial system, supporting local communities and their customers. Too often, these banks have been overlooked, with too little attention paid to longstanding and emerging issues and industry and consumer concerns.

The Fed's upcoming community bank conference will provide a welcome opportunity to hear from bankers, industry, and academics about the unique issues and challenges they face. Looking ahead, I will continue to include and prioritize a review, refinement, and reform of regulations to address these concerns.

1 The views expressed in these remarks are my own and do not necessarily reflect those of my colleagues on the Board of Governors of the Federal Reserve System or the Federal Open Market Committee.

- 2 See Michelle W. Bowman, ""Unintended Policy Shifts and Unexpected Consequences (PDF),"" speech at Assessing the Effectiveness of Monetary Policy during and after the COVID-19 Pandemic, a research conference sponsored by the International Journal of Central Banking and the Czech National Bank, Prague, Czech Republic, June 23, 2025.
- 3 Economic Growth, Regulatory Relief, and Consumer Protection Act (PDF), Pub. L. No. 115-174, 132 Stat. 1296 (2018), § 201.
- 4 Id. The CBLR framework is available only for more traditional community banks, taking into account off-balance sheet exposures, trading assets and liabilities, total notional derivatives exposures, and other factors determined by the banking agencies.
- 5 84 Fed. Reg. 61,776 (PDF)  (November 13, 2019).
- 6 Federal Deposit Insurance Corporation, , 2025, (PDF) Quarterly Banking Profile Volume 19, Number 2, at 20-21.
- 7 See Michelle W. Bowman, ""Brief Remarks on the Economy, and Perspective on Mutual and Community Banks (PDF),"" remarks at the New England CEO Summit, Portsmouth, New Hampshire, January 31, 2025.
- 8 See Board of Governors of the Federal Reserve System, ""Federal Reserve Board Announces That Reputational Risk Will No Longer Be a Component of Examination Programs in Its Supervision of Banks,"" press release, June 23, 2025.
- 9 Board of Governors of the Federal Reserve System,  Fireside Chat, Vice Chair for Supervision Michelle W. Bowman and Sam Altman, OpenAI CEO  (July 22, 2025).
- 10 See Board of Governors of the Federal Reserve System, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corporation, ""Federal Bank Regulatory Agencies Seek Comment to Address Payments and Check Fraud,"" press release, June 16, 2025.",Michelle W Bowman
https://www.bis.org/review/r250811a.htm,"Abdul Rasheed Ghaffour: Ideate, innovate, co-create - shaping the future of finance","Opening remarks by Mr Abdul Rasheed Ghaffour, Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at MyFintech Week 2025, Kuala Lumpur, 5 August 2025.",2025-08-05 00:00:00,"## Abdul Rasheed Ghaffour: Ideate, innovate, co-create - shaping the future of finance

Opening remarks by Mr Abdul Rasheed Ghaffour, Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at MyFintech Week 2025, Kuala Lumpur, 5 August 2025.

* * *

This year marks a significant milestone. For the first time, we are co-hosting MyFintech Week (MyFW) with a coalition of ecosystem partners: The Securities Commission Malaysia (SC), the Asian Institute of Chartered Bankers (AICB), Malaysia Digital Economy Corporation (MDEC) and the Fintech Association of Malaysia (FAOM). This collaboration is more than symbolic. It embodies the spirit of this year's theme: 'Ideate, Innovate, Co-Create: Shaping the future of finance'. The challenges before us require whole-of-ecosystem solutions. And the future we are building demands that policymakers, regulators, technologists, investors and innovators sit at the same table.

By way of background, the idea for this expanded edition of MyFW was first conceived three years ago in a bilateral conversation between Bank Negara Malaysia and the Securities Commission. That shared vision has since flourished into a truly ecosystemwide, regionally resonant initiative. To all our partners, thank you for your leadership and commitment. This event belongs to all of us today.

Let me begin with our economic landscape. Malaysia's economy remains on a strong footing despite global headwinds. Bank Negara Malaysia (BNM) has revised our GDP growth forecast for this year to a range of between 4% and 4.8%, reflecting heightened uncertainties on global trade. This outlook remains supported by resilient domestic demand and sustained investment in infrastructure for strategic sectors under the national development plans.

Meanwhile, inflation is projected to remain moderate, with headline inflation expected to average between 1.5% and 2.3% in 2025. This revision in projection reflects the continued easing in cost and a steady demand outlook. In this environment, the impact of domestic policy measures is expected to remain contained.

Turning to the ringgit, as of market closing yesterday, it has appreciated by 5.55% against the US dollar and 1.8% against our major trading partners. Our sound economic fundamentals and coordinated efforts to promote balanced and orderly currency flows will continue to support the ringgit.

Structural reforms continue to underpin Malaysia's resilience - strengthening fiscal discipline, attracting high-quality investment and expanding economic opportunities. Progress in strategic areas such as energy transition, digital infrastructure, and highvalue manufacturing is laying the foundation for a more inclusive and competitive economy.

These reforms are important, not just for growth but also for currency stability. This is especially vital in today's environment, where shocks are more frequent, and volatility

increasingly becoming a norm. The ringgit, like many emerging market currencies, has felt the weight of these uncertainties from time to time. Yet this year, we have seen some encouraging signs where the tailwind from reforms has, in part, led to renewed investor interest and provided support to the ringgit.

This brings us to the core of this year's MyFW. The financial sector is being reshaped by three powerful forces: digitalisation, sustainability and demographic shifts. Technologies such as generative AI and blockchain are transforming business models and redefining consumer expectations. Malaysia's net-zero targets demand innovative financial solutions, while an ageing population calls for inclusive and forward-looking financial policies in long-term welfare, healthcare and social protection. These realities are reflected in the three tracks of this year's programme: , 'Finance for the Future' and . 'Finance for Change' 'Finance for a Resilient Ecosystem'

The first track, 'Finance for the Future', focuses on building a digitally enabled, forwardlooking financial system. Malaysia has made strong progress in modernising our payment systems. We now rank second globally in QR payment adoption. DuitNow has become a common feature of our daily life, and regional linkages are expanding, enabling real-time, low-cost transactions across borders.

We are also enhancing wholesale payment systems to support market resilience and cross-border flows. This includes exploring the future of money through Project Mawar, our wholesale central bank digital currency (CBDC) pilot, and collaborations with the BIS Innovation Hub. Digitalisation is also transforming insurance and takaful, with innovations like digital roadside assistance. Digital banks, as well as digital insurers and takaful operators that will soon be licensed, are set to bring fresh thinking, digital-native models and a sharper focus on underserved segments,  improving customer experience and catalysing broader transformation across the industry.

But a future-ready system needs more than new technology and business models. It calls for secure digital identity and data sharing frameworks, robust data governance, effective cybersecurity, and a regulatory foundation that enables inclusive, responsible and trusted innovation.

To this end, we are advancing several key initiatives. The Digital Asset Innovation Hub, launched collectively with the industry, enables experimentation with real-world use cases such as programmable payments and supply chain finance. These efforts complement our Regulatory Sandbox and work by the SC, which has provided a regulatory framework for digital asset investments since 2019.

Digital assets are increasingly shaping financial services, offering efficiency and new delivery models. Their potential is significant and cannot be ignored. At the same time, our approach remains guided by clear principles. We are open to innovation that brings genuine value to the economy and supports productive use cases. But we also remain cautious of developments that introduce undue risks or operate outside the safeguards needed to preserve financial stability and public trust.

With that in mind, I am pleased to share three forthcoming regulatory developments.

1. First, we have released a Discussion Paper on Artificial Intelligence today, outlining our regulatory and developmental approach, including priority areas for industry-led collaboration and responsible adoption of AI in financial services.
2. Second, by year-end this year, we will issue an Exposure Draft on Open Finance, setting out our vision for a data-driven and customer-permissioned data sharing ecosystem.
3. Third, we will publish a Discussion Paper on Asset Tokenisation, outlining potential use cases and safeguards for safe adoption of tokenisation.

## Ladies and gentlemen,

The second track, 'Finance for Change', explores how finance can be a force for good, covering financial literacy, climate action, inclusive insurance and social protection. At its heart, this track recognises that finance must not only support the economy, but also uplift communities.

A central pillar of this agenda is Value-Based Intermediation (VBI). In Malaysia, VBI is gaining traction as a defining characteristic of Islamic finance. It emphasises ethical finance, social purpose and long-term impact. With principles rooted in fairness, shared responsibility, and public good, Islamic finance has much to offer in addressing issues such as climate vulnerability, intergenerational equity and financial exclusion. Today, Islamic banking accounts for over 47% of total financing, while takaful commands 26% of total net contributions, reflecting the growing mainstream relevance of Islamic finance and also VBI.

Social finance is a vital component of VBI. With the right governance and integration, social finance can unlock capital for underserved communities, micro-enterprises, and essential services such as education and healthcare.

We are also fostering innovation through the Climate Finance Innovation Lab, under the Joint Committee on Climate Change with the industry. This initiative brings together public, private and philanthropic players to test new financial instruments, including those based on Islamic finance, that can address environmental and socioeconomic risks in a cohesive manner.

To further empower global changemakers, I am pleased to share that BNM, together with the MIFC Leadership Council and six strategic partners, has launched the MIFC Global Impact Challenge 2025. This year's challenge focuses on empowering fintech and impact-driven startups to develop solutions that strengthen social resilience and tackle climate challenges. Submissions are open until 18 August 2025, and I warmly invite you to be part of this journey.

The third and final track, 'Finance for a Resilient Ecosystem', focuses on strengthening our foundations, ensuring it remains strong, reliable and adaptable. Resilience is more than having capital buffers. It is about building systems that can withstand stress, institutions that can evolve with the times, and people who are equipped to lead change.

With this in mind, we have curated sessions for this year's MyFW to address the fintech funding landscape, anti-scam strategies, cyber resilience, and the development of future-ready talent equipped with the skills, adaptability and leadership needed for the future.

Today, resilience must be embedded in every layer - from operational continuity and data security to technology governance and public trust. As digital adoption grows, so does the potential for scams, cyber threats and third-party risks. Our response must be coordinated and forward-looking.

A recent example is the National Fraud Portal, a landmark initiative led by PayNet together with regulators, enforcement authorities and the financial industry. It enables rapid tracing of stolen funds across financial institutions and thus increases the prospect of recovery.

Ladies and gentlemen,

As we approach the final phase of the Financial Sector Blueprint 2022-2026, it is timely to reflect on what has been achieved and what remains to be done. The Blueprint has shaped a more inclusive, resilient and innovation-ready financial sector. But the future demands greater agility, deeper collaboration and bolder thinking.

We have begun work on the next phase, a new set of priorities and strategies beyond 2026. This next iteration will ensure our financial system continues to evolve with clarity and ambition. We are working closely with the SC to align our visions, recognising that Malaysia's financial future must be built on coherence and shared purpose.

Let me leave you with three questions to guide your conversations this week:

1. First, how do we embed value-based finance as the foundation for serving the economy and society?
2. Second, what incentive structures are needed to align behaviours with long-term value creation, across institutions, investors and consumers?
3. Third, what models of co-creation and collaboration are needed across sectors and borders to deliver systemic impact at scale?

Let's use this week to surface bold ideas and challenge each other to think differently. On behalf of BNM and our partners, thank you for joining us. I wish you a productive, engaging and inspiring MyFW 2025.

Thank you.",Abdul Rasheed Ghaffour
https://www.bis.org/review/r250827b.htm,John C Williams: All the stars we cannot see,"Remarks by Mr John C Williams, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the Bank of Mexico 100th Anniversary Conference, Mexico City, Mexico, 25 August 2025.",2025-08-25 00:00:00,"FEDERAL RESERVE BANK of NEW YORK Serving the Second District and the Nation

SPEECH

All the Stars We Cannot See
August 25, 2025
John C. Williams, President and Chief Executive Officer

Remarks at the Banco de México Centennial Conference, Mexico City, Mexico
As prepared for delivery

Introduction

Good afternoon. It's a privilege to be a part of the celebration of Banco de México's Centennial. I was especially honored when
Governor Rodriguez asked me to discuss a favorite topic of mine-and one that economists have obsessed over for even longer
than a century. Of course, I am talking about r-star, the natural rate of interest.

What's fascinating about variables like r-star is that while they are unobservable, they go to the very heart of monetary theory and
practice. Just as the septillion stars we cannot see are vital to the existence of the universe, the constellation of economic stars is
critical to our understanding of the economic universe we inhabit.

Today I will address three questions pertaining to the importance, measurement, and use of time-varying unobservable variables
at central banks. While I will focus primarily on r-star, I should emphasize from the start that most of what I'll talk about is
applicable to a range of variables-including the closely related u-star and y-star.

My remarks will center around the stars from a ""longer-run"" perspective-that is, the ""normal"" values expected to prevail after
cyclical fluctuations have fully played out and the economy is expanding at its trend rate in the absence of upward or downward
pressures on inflation.

Before I go further, I'll provide the standard Fed disclaimer that the views I express today are mine alone and do not necessarily
reflect those of the Federal Open Market Committee (FOMC) or any others in the Federal Reserve System.

Why Central Banks Care

Tll start with the first question: If r-star, u-star, and y-star cannot be observed or directly measured, why do central banks care so
much about them? Are they too abstract and elusive to be of practical value?

The short answer is that they play a central role in macroeconomic theory and have important implications for the conduct of
monetary policy. R-star is the real short-term interest rate that is expected to prevail when the economy is at full strength and
inflation is stable. Y-star is potential GDP. And u-star is the level of unemployment when an economy is at its potential. When the
stars perfectly align, it means the economy has reached an equilibrium where its resources are fully utilized. As seen in Figure 1, y-
star and r-star tell us what the economy looks like in that equilibrium.

Therefore, the star variables provide key benchmarks for the economy and, in the case of r-star, the stance of monetary policy.*
This role of the stars is nicely illustrated by the Taylor rule, which stipulates that the interest rate should depend on the inflation
rate, the deviation of output from y-star, and r-star.? In addition, r-star has another important implication for monetary policy: A
low r-star implies the economy can encounter more frequent and longer periods when monetary policy is constrained by the
effective lower bound on nominal interest rates, potentially impeding the achievement of a central bank's inflation goals and other
macroeconomic objectives.?

Uncertainty Clouds the Sky

The central role of the natural rate of interest has long been recognized by leading monetary theorists ever since the Swedish
economist Knut Wicksell wrote about it in 1898.4 And in the 1960s, the concepts of y-star and u-star gained attention in the
context of macroeconomic stabilization policy.5

Through the decades, economists routinely stressed that natural rates are neither fixed in time nor easy to discern.® Regarding r-
star, the economist John H. Williams said in 1931 that ""the natural rate is an abstraction; like faith, it is seen by its works."" Milton
Friedman noted in 1968 that economists had yet to devise a method to accurately estimate both the natural rate of interest and
unemployment, observing that ""the 'natural' rate will itself change from time to time.""® And in our paper on estimating r-star and
y-star, Thomas Laubach and I concluded with: ""Estimates of a time-varying natural rate of interest, like those of the natural rates
of unemployment and output, are very imprecise and are subject to considerable real-time mismeasurement."" The uncertainty
surrounding the stars is not a failure of theory or data. Rather, it is inherent to the problem of estimating a time-varying,
potentially nonstationary, unobserved variable in a dynamic and constantly changing global economy.

This uncertainty complicates policymaking in practice. Figure 2 updates a chart from my work with Athanasios Orphanides that
illustrates this challenge.'° It compares real-time and retrospective estimates of the natural rate of unemployment in the United

Ohatan fan nbn ta anar Cana hathenan naal Henan A ane nant antimatan nf otan baw haan aieahla and Liehle nancistant And this

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The challenges in measuring natural rates can have profound policy and economic consequences. Indeed, monetary policymakers'
overreliance on what turned out to be mistaken views of natural rates contributed to poor macroeconomic performance and
unmooring of inflation expectations in the U.S. during the late 1960s and 1970s.""

Measuring the Stars
So, given the uncertainty around the stars, how do central banks measure them?

There is a large existing literature on measuring y- and u-star, so I will devote my limited time to measuring r-star. This issue
gained in importance in the 1990s when people started using versions of the Taylor rule for monetary policy analysis. The original
Taylor rule assumed r-star was 2 percent, which prompted a number of natural questions-pardon the pun-from policymakers: Is
2 percent the right number? Does it change over time? And how would we know?"" These questions also led to a surge of research
on these topics, including my own.

To infer r-star from data, three approaches have emerged: 1) using a statistical method to extract a longer-run trend, 2) basing it
on financial market or survey data, and 3) looking at r-star's effects on economic data.'3 Each potentially provides useful
information, but each also poses significant challenges.

As shown in one of my papers with Thomas Laubach, univariate statistical methods such as the HP filter generally do not provide
reliable measures of r-star. In particular, these estimates can be overly influenced by large macroeconomic disturbances, such as
the inflation of the 1970s or the pandemic.'4

Financial market and survey data are more promising sources of information in that they can tell us what people think about r-
star. That said, market participants face the same challenges in measuring the stars that economists do, and therefore they do not
really serve as truly independent sources of information on r-star. This is what I have referred to as a ""hall of mirrors.""'5 Indeed,
market- and survey-based measures can give a false sense of precision since the reported values do not convey the uncertainty
underlying them.

In addition, financial market measures of r-star are contaminated by liquidity and risk premiums, making a direct read of ""what
the markets think"" elusive. Various term structure models have been developed that aim to provide a better measure of r-star, but
these estimates can vary widely.'® In any case, recent research suggests that market-based measures have not been better
predictors of future interest rates than model estimates, and as such are not particularly useful independent guides to r-star.'7

That leaves us with model-based estimates of r-star that, in the spirit of the quote from John H. Williams, aim to infer r-star by its
""works""-that is, from its effects on the economy. A variety of such models have been developed over the past quarter century.
Although they differ in details, the core assumption is that aggregate demand depends in part on the difference between the real
interest rate and r-star. Thus, by observing the movements of demand, real interest rates, and other relevant macroeconomic
variables, one can infer the likely value of r-star.

With open capital markets, r-star is inherently a global phenomenon affected by global movements in supply and demand for
savings. For that reason, I will focus on global trends affecting r-star rather than on differences across countries.

Model-based estimates of r-star in many countries exhibited a sizable downtrend over the quarter-century leading up to the
COVID-19 pandemic.!® Figure 3 shows GDP-weighted averages of estimates of trend GDP growth and r-star from the Holston-
Laubach-Willams (HLW) model for Canada, the Euro Area, the United Kingdom, and the United States for 1986 to 2025.19 A
variety of factors contributed to this decline in r-star, including fundamental shifts in demographics and productivity growth.

Two powerful demographic trends have affected r-star: People are generally living longer, and birth rates are declining. Overall life
expectancy in member countries of the Organization for Economic Co-operation and Development (OECD) has increased
dramatically over the past several decades and is expected to grow further. At the same time, falling birth rates have led to stalling
population growth. For example, among OECD economies, population growth averaged about 1 percent during the 1970s and
1980s, but it is now averaging about one-quarter of a percent per year. And this figure is expected to turn negative in about 15
years.?°

Amid these demographic shifts, the growth in global labor productivity-the amount produced per worker hour-has slowed. For
example, productivity growth for the four economies shown in Figure 2 decreased from about 2 percent over 1996 to 2005 to
about 1 percent over 2006 to 2023.

The combination of slowdowns in population and productivity growth implies a slower rate of trend GDP growth and therefore
less demand for investment to support a growing economy than before. This slowdown in trend growth of potential output is seen
in the HLW estimates shown in the figure. In addition, greater longevity boosts the supply of savings as households build larger
nest eggs for their longer period of retirement.

The big question today is whether the era of low r-star will endure. The global demographic and productivity growth trends that
pushed r-star down have not reversed. As seen in the figure, the HLW estimates of trend growth for four economies remain
relatively low, similar to the levels that prevailed directly before the onset of the pandemic.

Of critical importance, the GDP-weighted estimates of r-star for these four economies-Canada, the Euro Area, the United
Kingdom, and the United States-are around half of a percent, similar to the comparable real-time estimates from the period prior

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estimates of r-star between the third quarter of 2018 and the first quarter of 2025.°? Based on this evidence, the era of low r-star
appears far from over.

Putting the Stars to Work
So, I've talked about why central banks care about star variables and how they measure them.
Now I will address the third and final question: How are star variables used by central banks?

Despite the uncertainty around these time-varying unobservablevariables, model-based estimates of r-star, u-star, and y-star
provide valuable information on how the economy and interest rates will likely evolve over the medium term. And, as I mentioned,
estimates of r-star are foundational to considering the potential effects of the effective lower bound and strategies to mitigate its
effects.?3

In addition to their role in internal analysis, the stars have increasingly become an aspect of central bank transparency and
communication. Transparency-including the clear communication of a central bank's strategy and reasoning behind policy
decisions-is a key principle in conducting monetary policy. As Alan Taylor recently noted, ""there is value for central banks in
communicating policymakers' beliefs about the neutral interest rate whether it be some collective view or that of any individual
member.""?4

Many central banks now regularly communicate their analyses of star variables, including r-star, u-star, and y-star. For example,
the Banco de México, Riksbank, Norges Bank, and Central Bank of Brazil publish ranges of estimates of r-star.?5 The Bank of
Canada and European Central Bank publish ranges of staff estimates.2° And the FOMC publishes policymakers' estimates of the
natural rates of interest and unemployment as part of the Summary of Economic Projections.?""

Although these estimates are useful for analysis and transparency, policymakers are well advised to avoid placing too great
confidence in precise estimates of the stars in making real-world assessments and decisions. Given the wide range of uncertainties,
acting as if one knows the star variables when making policy can lead to persistent deviations of inflation from the target that risk
unmooring inflation expectations.2°

Fortunately, research has shown that approaches that don't rely as much on estimates of starred variables and instead ""follow the
data"" perform well when uncertainty is very high. One such approach is ""difference rules,"" where the short-term nominal interest
rate is raised or lowered in response to inflation and changes in economic activity. Hybrid approaches that combine some aspects
of the response of Taylor-type rules and difference rules have been shown to perform well in models in the presence of a wide
range of uncertainties.""9 Of course, in the end, policy decisions must be based on the totality of information and assessments,
including those related to risks.3°

Don't Give Up

Tll end my remarks where I started. For over 125 years, economists have grappled with a dilemma: How can a concept at the very
heart of monetary theory be so vexing to quantify? The star variables are either explicitly or implicitly at the core of any
macroeconomic model or framework one can imagine. Wishing away the economic stars does not change that.

In that context, it is important that we do our best to understand the factors that influence the stars and the uncertainties related
to them. In this way we can attain the best understanding of the forces affecting the evolution of the economy and monetary policy
as we carry out our mandates.

These issues have been challenging central bankers since even before the founding of Banco de México. For the past quarter
century, central banks have been at the forefront of this research, and I very much hope that will continue. Thank you.

Figures por

1 Thomas Laubach and John C. Williams, 2003. ""Measuring the Natural Rate of Interest,"" The Review of Economics and Statistics 85(4): 1063-70; Athanasios Orphanides
and John C. Williams, 2002. ""Robust Monetary Policy Rules with Unknown Natural Rates,"" Brookings Papers on Economic Activity, 2: pp. 63-145.

? John B. Taylor, 1993. ""Discretion versus Policy Rules in Practice,"" Carnegie-Rochester Conference Series on Public Policy 39, pp. 195-214.

3 David Reifschneider and John C. Williams, 2000. ""Three Lessons for Monetary Policy in a Low-Inflation Era,"" Journal of Money, Credit and Banking 32(4), Part 2: 936-
66; Thomas M. Mertens and John C. Williams, 2021. ""What to Expect from the Lower Bound on Interest Rates: Evidence from Derivatives Prices,"" American Economic
Review 111(8): 2473-505.

4 Knut Wicksell, 1898. Interest and Prices: A Study of the Causes Regulating the Value of Money. Translated by R. F. Kahn, London: Macmillan, published 1936.

5 See Arthur M. Okun, ""Potential GNP: Its Measurement and Significance,"" American Statistical Association, Proceedings of the Business and Economics Statistics Section
(1962); Milton Friedman, 1968. ""The Role of Monetary Policy,"" American Economic Review 58(1): 1-17; Athanasios Orphanides and John C. Williams, ""Monetary Policy
Mistakes and the Evolution of Inflation Expectations,"" in Michael D. Bordo and Athanasios Orphanides, eds., The Great Inflation: The Rebirth of Modern Central Banking
(Chicago: University of Chicago Press, 2013, 255-88), and references therein.

6 For additional references, see John C. Williams, ""R-Star: A Global Perspective,"" remarks at the ECB Forum on Central Banking, Sintra, Portugal, July 3, 2024.
7 John H. Williams, 1931. ""The Monetary Doctrines of J. M. Keynes,"" The Quarterly Journal of Economics 45(4): 547-87.

8 Milton Friedman, 1968. ""The Role of Monetary Policy,"" American Economic Review 58(1): 1-17.

° Thomas Laubach and John C. Williams, 2003. ""Measuring the Natural Rate of Interest,"" The Review of Economics and Statistics 85(4): 1063-70.

10 Athanasios Orphanides and John C. Williams, 2002. ""Robust Monetary Policy Rules with Unknown Natural Rates,"" Brookings Papers on Economic Activity, 2: pp. 63-145.

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569-83, and John C. Williams, ""The Perennial Problem of Predicting Potential"" (FRBSF Economic Letter 2017-32, November 6, 2017), for further discussion of challenges in
estimating potential output.

41 Athanasios Orphanides and John C. Williams, ""The Decline of Activist Stabilization Policy: Natural Rate Misperceptions, Learning, and Expectations,"" Journal of Economic
Dynamics and Control 29(11): 1927-50; Athanasios Orphanides and John C. Williams, ""Monetary Policy Mistakes and the Evolution of Inflation Expectations,"" in Michael D.
Bordo and Athanasios Orphanides, eds., The Great Inflation: The Rebirth of Modern Central Banking (Chicago: University of Chicago Press, 2013, 255-88).

12 John C. Williams, ""Measuring the Natural Rate of Interest: Past, Present, and Future,"" remarks at the Thomas Laubach Research Conference, Board of Governors of the
Federal Reserve System, Washington, D.C., May 19, 2023.

13 John C. Williams, ""R-Star: A Global Perspective,"" remarks at the ECB Forum on Central Banking, Sintra, Portugal, July 3, 2024.
14 Thomas Laubach and John C. Williams, 2016. ""Measuring the Natural Rate of Interest Redux,"" Business Economics, 51: 57-67.

45 John C. Williams, 2017. Comment on ""Safety, Liquidity, and the Natural Rate of Interest,"" by Marco Del Negro, Marc P. Giannoni, Domenico Giannone, and Andrea
Tambalotti, Brookings Papers on Economic Activity, 1: pp. 235-316.

16 See Sophia Cho and John C. Williams, ""Are Financial Markets Good Predictors of R-Star?,"" Liberty Street Economics, August 25, 2025.

17 Alan M. Taylor, Lennart Brandt, and Vitor Dotta, ""Does R* Predict Policy Rates?,"" note prepared to accompany remarks made by Alan Taylor at the ECB Forum on Central
Banking in Sintra, Portugal, July 2, 2025; Sophia Cho and John C. Williams, ""Are Financial Markets Good Predictors of R-Star?,"" Liberty Street Economics, August 25, 2025.

18 John C. Williams, ""The Global Growth Slump: Causes & Consequences,"" a public lecture hosted by Macquarie University, Sydney, Australia, June 27, 2017.

19 The HLW estimates for the United Kingdom are no longer updated or published. The UK estimates used here are based on the UK model's parameter estimates from the
fourth quarter of 2019.

20 United Nations, World Population Prospects: The 2024 Revision.
21 Compare to Williams (2017).
22 Sophia Cho and John C. Williams, ""Are Financial Markets Good Predictors of R-Star?,"" Liberty Street Economics, August 25, 2025.

23 David Reifschneider and John C. Williams, 2000. ""Three Lessons for Monetary Policy in a Low Inflation Era,"" Journal of Money, Credit and Banking 32(4): 936-66;
Andrea Ajello, Isabel Cairé, Vasco Cardia, Thomas A. Lubik, and Albert Queralto, 2020. ""Monetary Policy Tradeoffs and the Federal Reserve's Dual Mandate,"" Board of
Governors of the Federal Reserve System, Finance and Economic Discussion Series, no. 2020-066, August.

24 Alan Taylor, ""Unexpected Curves,"" remarks at the ECB Forum on Central Banking in Sintra, Portugal, July 2, 2025. See also Glenn D. Rudebusch and John C. Williams on
the value of publishing interest rate projections: ""Revealing the Secrets of the Temple: The Value of Publishing Central Bank Interest Rate Projections,"" in John Y. Campbell,
ed., Asset Prices and Monetary Policy (University of Chicago Press, 2008), 247-84.

?5 Bank of Mexico, Quarterly Report, January - March 2025; May 28, 2025; Riksbank, Monetary Policy Report, June 2025; Norges Bank, Monetary Policy Report, 2/2025,
June 18, 2025; Central Bank of Brazil, Monetary Policy Report, June 2024.

26 Bank of Canada, Assessing the U.S. and Canadian Neutral Rates: 2025 Update, June 2025; European Central Bank, Estimates of the Natural Interest Rate for the Euro
Area: An Update, published as part of the ECB Economic Bulletin, Issue 1/2024.

27 Board of Governors of the Federal Reserve System, Federal Reserve Board and Federal Open Market Committee release economic projections from the June 17-18 FOMC.
meeting, June 18, 2025.

28 John C. Williams, ""Uncertainty and Robust Monetary Policy,"" remarks at the Reykjavik Economic Conference, Reykjavik, Iceland, May 9, 2025.
29 Athanasios Orphanides and John C. Williams, 2007. ""Robust Monetary Policy with Imperfect Knowledge,"" Journal of Monetary Economics 54(5): 1406-35.

3° John C. Williams, ""R-Star: A Global Perspective,"" remarks at the ECB Forum on Central Banking, Sintra, Portugal, July 3, 2024.

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",John C Williams
https://www.bis.org/review/r250827e.htm,Michelle W Bowman:Embracing innovation,"Speech by Ms Michelle W Bowman, Vice Chair for Supervision of the Board of Governors of the Federal Reserve System, at the Wyoming Blockchain Symposium 2025, Teton Village, Wyoming, 19 August 2025.",2025-08-19 00:00:00,"## Michelle W Bowman:Embracing innovation

Speech by Ms Michelle W Bowman, Vice Chair for Supervision of the Board of Governors of the Federal Reserve System, at the Wyoming Blockchain Symposium 2025, Teton Village, Wyoming, 19 August 2025.

* * *

Good afternoon and thank you to the organizers of the 2025 Wyoming Blockchain Symposium for inviting me to speak to you today. 1   It is an honor to be included in this year's event, which is being held at a critical moment for American leadership in the digital asset space. We are at the beginning of what appears to be a seismic shift in the way we think about money, value, and the fabric of our financial system. This shift is not just about incremental changes or tweaks to the existing system. What we are witnessing has the potential to fundamentally transform the way we live, work, and interact in society.

It is inspiring to be together with all of you, as thought leaders engaged in developing technologies that could help shape the financial system in the future. You don't need a tech background to appreciate the opportunity that blockchain provides to the financial system.

Financial services innovation drives faster, safer, cheaper, and more customized products that more efficiently meet the needs of consumers and businesses. Digital processes like wire transfers and ACH disrupted the need to move large amounts of physical currency and other hard assets, making the system more efficient and safer. Through technology, there is opportunity to transform how we think about transferring assets.

Throughout recent history, whether previous transformations involved industrialization, communications, or the internet, each of these advances had a profound and lasting impact on our society. While the future is unknown and unknowable, I expect we will look back at some point to consider the impact of blockchain, AI, and quantum computing and marvel at the transformation of everyday business processes. Time will tell, but the opportunities and possibilities that lie ahead may be profound.

Of course, you know better than most that bank regulators approach technology and periods of change with caution and skepticism, concerned about rapid growth, new business models, greater interconnectedness and interdependence, often focusing only on the risks. But risks may be offset or at least determined to be manageable when we recognize and consider the potentially extensive benefits of new technology.

Today, I'd like to address the Federal Reserve's approach to thinking about technology and tools like blockchain in context of bank supervision, including recent developments, the cost of supervisory focus on ""reputational risk,"" and principles for a tailored regulatory framework that accommodates technology.

## Reframing the Regulatory Mindset

Bank regulators work to promote safety and soundness in the financial system through regulation and supervisory practices. Our goal is not just a safe and sound banking system, but one that also serves its intended purpose of supporting consumers, businesses, and communities, and fostering economic growth. To accomplish this goal, regulators strive to strike a balance between managing risks that threaten safety and soundness, while also creating an environment that allows new technologies to take root and grow.

Innovation outside the banking system often complements the development and use of technology within the banking system, and often far outpaces that growth. As you're all aware, many groundbreaking tech innovations have been pioneered by developers outside of the traditional banking system.

## Developments in the Banking System

We are seeing a number of promising developments in the banking and financial system, and I'll start with tokenization.

While progress on tokenization is moving ahead, it's helpful to identify and understand the problem that it is intended to solve. One clear friction is in the transfer of asset ownership, which includes both completing the asset transfer-which may involve reregistering securities, or transferring physical assets-and coordinating the timing of the purchase and sale. Asset transfer frameworks are designed to minimize the risk of transaction failures, and have historically relied on escrow agents and manual processes. Tokenization has the potential to facilitate faster ownership transfer, mitigating some of these well-known risks and potentially lowering costs in the process.

Tokenized assets enable a transferor to pass title without changing a custodian or moving any physical security or asset. Many banks and international organizations have begun projects to develop this technology, but we have not yet seen broad adoption. It is possible that we could see a ""tipping point"" where the processes themselves are wellestablished, and legal frameworks have been updated to permit a wider range of activities relying on the new technology, and tokenized asset transfers become more of a market standard.

There are other potential advantages to tokenization, including expanding access to capital markets and facilitating near real-time payments. The speed and cost of wholesale payments, especially internationally, is a longstanding problem that tokenization could help to address. Banks of all sizes, including community banks, can benefit from efficiency gains that flow from asset tokenization. New technology and processes can open the door to direct, faster, and lower cost payments.

While tokenization may be part of the solution to a number of known frictions in the banking system, the blockchain technology that it relies upon has already changed how banks seek to engage with their customers. For example, while digital assets have been considered to be risky, many banks are improving their tech stacks and security infrastructure to provide digital asset custody services to a wider range of retail customers. Very few bankers, and even fewer regulators, anticipated that the market would accommodate this development even just a few years ago. Yet we've seen much progress and a growing appetite for traditional bank engagement in this space. We are

also seeing positive signs in the evolution of the digital asset user experience, making digital assets more accessible and easier to use.

One recent development-Congress passing the GENIUS Act and the President signing it into law-has brought stablecoins to the forefront of many discussions. And they are now positioned to become a fixture in the financial system, with implications and opportunities for the traditional banking system, including the potential to disrupt traditional payment rails. Congress tasked the banking agencies with creating a regulatory framework for stablecoins, and we are working with our colleagues in the other agencies to move forward.

It is essential that banks and regulators are open to engaging in new technologies and departing from an overly cautious mindset. Regulators must understand new products and services and recognize the utility and necessity of embracing technology in the traditional financial sector.

So how do we accomplish this? Some of you may have had direct experience with regulators and the banking system, as you attempted to engage in this type of partnership with banks through the introduction of new technology and services. I am sure that many of you were not satisfied with these interactions. When you start from a world of possibility, where you move fast and break things to make rapid improvements, you may struggle with the complex and rigid regulatory constructs familiar to bankers and regulators. In this world, inertia can easily set in and pose resistance to anything not deemed within the realm of ""traditional"" banking activities.

Despite this past inertia, change is coming.

Bank regulators are taking important steps to create a framework for digital assets and the adoption of blockchain technology within the banking system. These steps will promote accessibility to banking products and services by removing supervisory impediments that have stood in the way of bank relationships. I am also encouraged by the promise of this technology, by its ability to solve problems and improve the efficiency of the traditional financial system.

To this point, I have noted several use cases that have already been adopted or are in development within the banking system, but I would also like to encourage the industry to engage with regulators to help us understand blockchain and its potential to solve other problems. What is the value proposition of any new product or approach? What problem is it intended to address? And how should regulators consider both the risks and benefits, so we can provide a path to allow its use within the banking system?

We have already seen some initial benefits of bank AI adoption, and I continue to be encouraged by the significant ongoing investments being made in AI and in machine learning. These technologies have the potential to transform how business is conducted, including the way we detect and prevent fraud, manage risk, and provide customer service. During a recent banking conference at the Fed, Sam Altman, the CEO of Open AI, joined me for a fireside chat on AI in the banking and financial sector. 2 One highlight from our discussion was the two-sided nature of how technology can

impact banking transactions-just as AI can undermine customer verification methods designed to identify and mitigate fraud, AI tools can also be leveraged to detect and mitigate fraud.

I see a similar challenge with blockchain technologies. Some bankers have expressed concerns about new technologies posing a threat to traditional business models and practices. But the banking system is constantly evolving, and technology can change the banking system regardless of how banks and regulators choose to respond. We must choose whether to embrace the change and help shape a framework that will be reliable and durable-ensuring safety and soundness and incorporating the benefits of both efficiency and speed-or to stand still and allow new technology to bypass the traditional banking system altogether. From a regulator's perspective, the choice is clear.

I am open to these discussions, and I look forward to learning more. Many of you have a great deal to share and have new ideas about the best regulatory approach to blockchain and digital assets. Let me start with a specific request on fraud: how can new technologies be leveraged to fight fraud? Fraud is a major challenge in the financial services sector, and if blockchain or other new tools could mitigate it, we should explore those use cases. If fraud can be addressed using new technology, we should make sure that the regulatory framework does not stand in the way. I see this as an exciting opportunity for collaboration between industry and the Fed. 3

The promise of technology and advances like AI are already positioned to impact parts of the banking and financial system. Ideally, changes will occur with the willing embrace of regulators-allowing use cases to proliferate in a way that benefits the banking system. If this is not our approach, then we risk the banking system becoming less relevant to consumers, businesses, and the overall economy. As a result, the banks will play a diminished role in the financial system more broadly. Those who follow developments in bank regulation have hopefully recognized some positive steps that demonstrate our commitment to embrace change. I am committed to changing our culture and attitude toward the adoption and integration of technology and new products and services.

## The Hidden Role of Reputational Risk

In late June, the Board announced that reputational risk would no longer be considered in our supervisory process. 4  To implement this lasting change, we are updating guidance, examination manuals, handbooks, and other supervisory materials to ensure the durability of this approach, which is a critical step in addressing the problem of debanking. I am also considering whether we need a regulatory change to provide greater transparency and certainty about this approach. It is not the role of examiners or policymakers to direct which customers or industries to serve or which products to offer. That decision lies solely within the purview of bank management, limited by the safety and soundness of the institution,, the legal activities of its customer, and risks, if any, to financial stability.

Over time, ""reputational risk"" emerged as a priority area that policymakers emphasized for examinations. Exams or reviews focused on reputational risk have often lacked a sufficient nexus to financial risk and safety and soundness considerations that are the appropriate focus of our supervisory activities.

Let me be clear. We must adopt an approach that does not penalize or prohibit a bank from banking a customer engaged in legal activity. This approach must allow and encourage banks to provide banking products and services to any legal business, without disfavoring any particular viewpoints, businesses, or industries.

## The Importance of Outreach

The industry-whether traditional finance, community banking, or digital assets-should expect a constructive engagement with our supervisors when discussing strategies and approaches for innovation. As regulators, we must engage in a way that enables our supervisory teams to understand the technology or innovation under consideration and have an open-minded view about the benefits and possibilities of a new approach, while also understanding effective mitigation strategies to address any risks. Banks should be encouraged to explore new technology, to engage in discussions with their regulators about how they can be deployed, and what reasonable supervisory expectations should apply. In this context, a healthy dialogue and a commitment to learning ensures the bank and examiner relationship can be collaborative rather than antagonistic in tone.

Innovators, banks, and regulators must develop a constructive relationship, and this relies on a commitment to ongoing outreach. As I have demonstrated throughout my tenure as a regulator at both the state and federal levels, I am committed to outreach that enhances my understanding of industry preferences, challenges and better ways to engage with both developers and adopters. We should build an examination workforce that requires skills development and informed judgement to address evolving business preferences, practices and expectations. In a step toward doing so, last week, I announced that the Fed's ""novel supervision"" activities would be reintegrated into our Reserve Bank examination staff. This will reestablish the role of the normal supervisory process in monitoring banks' so-called ""novel activities."" 5

Our approach should consider allowing Federal Reserve staff to hold de minimus amounts of crypto or other types of digital assets so they can achieve a working understanding of the underlying functionality. While there are many resources available to learn about these financial products, and we will soon be establishing a framework for supervising issuers of these assets, there's no replacement for experimenting and understanding how that ownership and transfer process flows.

I certainly wouldn't trust someone to teach me to ski if they'd never put on skis, regardless of how many books and articles they have read, or even wrote, about it. We should consider whether limits on staff investment activities may be a barrier to recruiting and retaining examiners with the necessary expertise and for existing staff to better understand the technology.

## Building a Tailored and Proportional Regulatory Framework

Going forward it will be necessary to continue to implement a tailored approach to these new technologies in our supervisory activities, an approach that balances the supervisory and regulatory expectations in a way that is commensurate with risk.

What would this look like in practice? It needs to include regulatory certainty, tailoring, safety and soundness, consumer protection, and maintaining America's reputation for providing an open environment for innovation. Regulators should abide by these principles in developing this framework.

The first principle is essential. That is regulatory certainty. Justifying investing in new blockchain development specifically for the banking industry, or even repurposing existing blockchain technologies for this sector, requires significant investment. Why would you make that investment without a clear understanding about how regulators will evaluate new use cases in a highly regulated industry? Would you choose to partner with banks, knowing that this will bring regulatory scrutiny and uncertainty, or would you develop alternatives outside of the banking system? Your industry has already experienced significant frictions with bank regulators applying unclear standards, conflicting guidance, and inconsistent regulatory interpretations. We need a clear, strategic regulatory framework that will facilitate the adoption of new technology, recognizing that in some cases, it may be inadequate and inappropriate to apply existing regulatory guidance to address emerging tech.

Having clear and transparent rules is not effective if these rules are unnecessarily burdensome and restrictive. So, my second principle is that rules must be wellcalibrated and tailored to address risks. Well-calibrated regulation promotes responsible innovation while also aligning incentives for long-term growth and stability. Tailoring rules and supervision requires regulators to approach each use case based on particular facts and circumstances, rather than applying expectations designed for an imaginary ""worst-case"" scenario that differs from the actual use case. We cannot adopt a one-size-fits-all approach. Regulators must recognize the unique features of these new assets and distinguish them from traditional financial instruments or banking products.

A third principle is that frameworks must be consistent with generally applicable rules and requirements. Customer-facing products must comply with consumer protection laws, including those prohibiting unfair, deceptive, or abusive acts or practices. We must think carefully about appropriate regulations to protect consumers and investors, maintain bank safety and soundness, and preserve the stability of the financial system. Any legal framework must also include appropriate Bank Secrecy Act and anti-moneylaundering requirements, to fulfill the important policy objectives of these requirements.

Finally, we need to build a framework that allows the United States to continue to be the best place in the world to innovate. Failing to do so could jeopardize American competitiveness over the long run. Regulators have taken preliminary steps to support blockchain technology within the banking system, as well as to eliminate deterrents for banks to provide services to the digital asset industry. I am confident that with the benefit of ongoing outreach and education we will build a framework that is fair, efficient, and transparent.

## Closing Thoughts

We stand at a crossroads: we can either seize the opportunity to shape the future or risk being left behind. By embracing innovation with a principled approach, we can define the course of history and fulfill our responsibility to promote the safety and soundness of the banking system and financial stability.

We are mindful of the potential risks and vulnerabilities that result from rapid transformation. We are cautious about the unintended consequences, and our mindset, and policies guide us toward minimizing risks. But we must pay equal attention to the benefits side of the equation. Innovation and regulation don't need to be on opposite ends of the spectrum. In fact, they complement each other. A more modern, efficient, and effective financial system furthers key regulatory objectives-promoting safe and sound banking operation, financial stability, and economic growth.

1 The views expressed here are my own and are not necessarily those of my colleagues on the Board of Governors of the Federal Reserve System or the Federal Open Market Committee.

- 2 Michelle W. Bowman, "" Fireside Chat with OpenAI CEO Sam Altman,"" conducted at the Integrated Review of the Capital Framework for Large Banks Conference, Washington, D.C., July 22, 2025.
- 3 See Board of Governors of the Federal Reserve System, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corporation, ""Federal Bank Regulatory Agencies Seek Comment to Address payments and Check Fraud,"" press release, June 16, 2025. Comments on the RFI are due on September 18, 2025.

4 Board of Governors of the Federal Reserve System, "" Federal Reserve Board Announces That Reputational Risk Will No Longer Be a Component of Examination Programs in Its Supervision of Banks,"" press release, June 23, 2025.

5 See Board of Governors of the Federal Reserve System, ""Federal Reserve Board Announces That It Will Sunset Its Novel Supervision Program And Return to Monitoring Banks' Novel Activities Through the Normal Supervisory Process,"" press release, August 15, 2025.",Michelle W Bowman
https://www.bis.org/review/r250827d.htm,Jerome H Powell: Monetary policy and the Fed's framework review,"Speech by Mr Jerome H Powell, Chair of the Board of Governors of the Federal Reserve System, at ""Labor markets in transition: demographics, productivity, and macroeconomic policy"", an economic symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, 22 August 2025.",2025-08-22 00:00:00,"For release on delivery 10:00 a.m. EDT (8:00 a.m. MDT) August 22, 2025

Monetary Policy and the Fed's Framework Review

Remarks by

Jerome H. Powell

Chair

Board of Governors of the Federal Reserve System at

'Labor Markets in Transition:  Demographics, Productivity, and Macroeconomic Policy,' an economic symposium sponsored by the Federal Reserve Bank of Kansas City

Jackson Hole, Wyoming

August 22, 2025

Over the course of this year, the U.S. economy has shown resilience in a context of sweeping changes in economic policy.  In terms of the Fed's dual-mandate goals, the labor market remains near maximum employment, and inflation, though still somewhat elevated, has come down a great deal from its post-pandemic highs.  At the same time, the balance of risks appears to be shifting.

In my remarks today, I will first address the current economic situation and the near-term outlook for monetary policy.  I will then turn to the results of our second public review of our monetary policy framework, as captured in the revised Statement on Longer-Run Goals and Monetary Policy Strategy that we released today.

## Current Economic Conditions and Near-Term Outlook

When I appeared at this podium one year ago, the economy was at an inflection point.  Our policy rate had stood at 5-1/4 to 5-1/2 percent for more than a year.  That restrictive policy stance was appropriate to help bring down inflation and to foster a sustainable balance between aggregate demand and supply.  Inflation had moved much closer to our objective, and the labor market had cooled from its formerly overheated state.  Upside risks to inflation had diminished.  But the unemployment rate had increased by almost a full percentage point, a development that historically has not occurred outside of recessions. 1 Over the subsequent three Federal Open Market Committee (FOMC) meetings, we recalibrated our policy stance, setting the stage for the labor market to remain in balance near maximum employment over the past year (figure 1).

1 For example, after the July 2024 employment report, the 3-month average of the unemployment rate had increased more than 0.5 percentage point above its lowest value over the previous 12 months.  For more information, see Claudia Sahm (2019), 'Direct Stimulus Payments to Individuals,' in Heather Boushey, Ryan Nunn, and Jay Shambaugh, eds., Recession Ready:  Fiscal Policies to Stabilize the American Economy (Washington:  Hamilton Project and Washington Center for Equitable Growth, May), pp. 67-92,

https://www.brookings.edu/wp-

This year, the economy has faced new challenges.  Significantly higher tariffs across our trading partners are remaking the global trading system.  Tighter immigration policy has led to an abrupt slowdown in labor force growth.  Over the longer run, changes in tax, spending, and regulatory policies may also have important implications for economic growth and productivity.  There is significant uncertainty about where all of these polices will eventually settle and what their lasting effects on the economy will be.

Changes in trade and immigration policies are affecting both demand and supply. In this environment, distinguishing cyclical developments from trend, or structural, developments is difficult.  This distinction is critical because monetary policy can work to stabilize cyclical fluctuations but can do little to alter structural changes.

The labor market is a case in point.  The July employment report released earlier this month showed that payroll job growth slowed to an average pace of only 35,000 per month over the past three months, down from 168,000 per month during 2024 (figure 2). 2 This slowdown is much larger than assessed just a month ago, as the earlier figures for May and June were revised down substantially. 3 But it does not appear that the slowdown in job growth has opened up a large margin of slack in the labor market-an outcome we want to avoid.  The unemployment rate, while edging up in July, stands at a historically low level of 4.2 percent and has been broadly stable over the past year.  Other indicators of labor market conditions are also little changed or have softened only

2 In early September, the Bureau of Labor Statistics will publish a preliminary estimate of benchmark revisions to the level of nonfarm payrolls as of March 2025, based on data from the Quarterly Census of Employment and Wages.  Data available to date suggest that the level of nonfarm payrolls will be revised down materially.  The final benchmark revision will be incorporated into the monthly employment data in February 2026.

3 The total downward revision of 258,000 between May and June was spread across private-sector industries as well as state and local government employment, particularly education, and reflected both additional information from surveyed establishments and the re-estimation of seasonal factors.

modestly, including quits, layoffs, the ratio of vacancies to unemployment, and nominal wage growth.  Labor supply has softened in line with demand, sharply lowering the 'breakeven' rate of job creation needed to hold the unemployment rate constant.  Indeed, labor force growth has slowed considerably this year with the sharp falloff in immigration, and the labor force participation rate has edged down in recent months.

Overall, while the labor market appears to be in balance, it is a curious kind of balance that results from a marked slowing in both the supply of and demand for workers. This unusual situation suggests that downside risks to employment are rising.  And if those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment.

At the same time, GDP growth has slowed notably in the first half of this year to a pace of 1.2 percent, roughly half the 2.5 percent pace in 2024 (figure 3).  The decline in growth has largely reflected a slowdown in consumer spending.  As with the labor market, some of the slowing in GDP likely reflects slower growth of supply or potential output.

Turning to inflation, higher tariffs have begun to push up prices in some categories of goods.  Estimates based on the latest available data indicate that total PCE prices rose 2.6 percent over the 12 months ending in July.  Excluding the volatile food and energy categories, core PCE prices rose 2.9 percent, above their level a year ago. Within core, prices of goods increased 1.1 percent over the past 12 months, a notable shift from the modest decline seen over the course of 2024.  In contrast, housing services inflation remains on a downward trend, and nonhousing services inflation is still running

at a level a bit above what has been historically consistent with 2 percent inflation (figure 4). 4

The effects of tariffs on consumer prices are now clearly visible.  We expect those effects to accumulate over coming months, with high uncertainty about timing and amounts.  The question that matters for monetary policy is whether these price increases are likely to materially raise the risk of an ongoing inflation problem.  A reasonable base case is that the effects will be relatively short lived-a one-time shift in the price level. Of course, 'one-time' does not mean 'all at once.'  It will continue to take time for tariff increases to work their way through supply chains and distribution networks.  Moreover, tariff rates continue to evolve, potentially prolonging the adjustment process.

It is also possible, however, that the upward pressure on prices from tariffs could spur a more lasting inflation dynamic, and that is a risk to be assessed and managed.  One possibility is that workers, who see their real incomes decline because of higher prices, demand and get higher wages from employers, setting off adverse wage-price dynamics. Given that the labor market is not particularly tight and faces increasing downside risks, that outcome does not seem likely.

Another possibility is that inflation expectations could move up, dragging actual inflation with them.  Inflation has been above our target for more than four years and remains a prominent concern for households and businesses.  Measures of longer-term inflation expectations, however, as reflected in market- and survey-based measures,

4 Using the consumer price index and other information, an estimate of the contribution of housing services to 12-month core PCE inflation in July was 0.7 percentage point, while core services excluding housing contributed 2.0 percentage points.  The contribution from each of these categories remains slightly above its average during the 2002-07 period, during which core PCE inflation averaged about 2 percent.  In contrast, the contribution of core goods to 12-month core PCE inflation in July was about 0.25 percentage point, compared with the 200207 average of -0.25 percentage point.

appear to remain well anchored and consistent with our longer-run inflation objective of 2 percent.

Of course, we cannot take the stability of inflation expectations for granted. Come what may, we will not allow a one-time increase in the price level to become an ongoing inflation problem.

Putting the pieces together, what are the implications for monetary policy?  In the near term, risks to inflation are tilted to the upside, and risks to employment to the downside-a challenging situation.  When our goals are in tension like this, our framework calls for us to balance both sides of our dual mandate.  Our policy rate is now 100 basis points closer to neutral than it was a year ago, and the stability of the unemployment rate and other labor market measures allows us to proceed carefully as we consider changes to our policy stance.  Nonetheless, with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.

Monetary policy is not on a preset course.  FOMC members will make these decisions, based solely on their assessment of the data and its implications for the economic outlook and the balance of risks.  We will never deviate from that approach.

## Evolution of Monetary Policy Framework

Turning to my second topic, our monetary policy framework is built on the unchanging foundation of our mandate from Congress to foster maximum employment and stable prices for the American people.  We remain fully committed to fulfilling our statutory mandate, and the revisions to our framework will support that mission across a broad range of economic conditions.  Our revised Statement on Longer-Run Goals and

Monetary Policy Strategy, which we refer to as our consensus statement, describes how we pursue our dual-mandate goals.  It is designed to give the public a clear sense of how we think about monetary policy, and that understanding is important both for transparency and accountability, and for making monetary policy more effective.

The changes we made in this review are a natural progression, grounded in our ever-evolving understanding of our economy.  We continue to build upon the initial consensus statement adopted in 2012 under Chair Ben Bernanke's leadership.  Today's revised statement is the outcome of the second public review of our framework, which we conduct at fiveyear intervals.  This year's review included three elements: Fed Listens events at Reserve Banks around the country, a flagship research conference, and policymaker discussions and deliberations, supported by staff analysis, at a series of FOMC meetings. 5

In approaching this year's review, a key objective has been to make sure that our framework is suitable across a broad range of economic conditions.  At the same time, the framework needs to evolve with changes in the structure of the economy and our understanding of those changes.  The Great Depression presented different challenges from those of the Great Inflation and the Great Moderation, which in turn are different from the ones we face today. 6

At the time of the last review, we were living in a new normal, characterized by the proximity of interest rates to the effective lower bound (ELB), along with low growth,

5 For more details, see the information available on the Board's website at https://www.federalreserve.gov/monetarypolicy/review-of-monetary-policy-strategy-tools-andcommunications-2025.htm.

6 See Jerome H. Powell (2019), 'Challenges for Monetary Policy,' speech delivered at 'Challenges for Monetary Policy,' a symposium sponsored by the Federal Reserve Bank of Kansas City, held in Jackson Hole, Wyo., August 23, https://www.federalreserve.gov/newsevents/speech/powell20190823a.htm.

low inflation, and a very flat Phillips curve-meaning that inflation was not very responsive to slack in the economy. 7 To me, a statistic that captures that era is that our policy rate was stuck at the ELB for seven long years following the onset of the Global Financial Crisis (GFC) in late 2008.  Many here will recall the sluggish growth and painfully slow recovery of that era.  It appeared highly likely that if the economy experienced even a mild downturn, our policy rate would be back at the ELB very quickly, probably for another extended period.  Inflation and inflation expectations could then decline in a weak economy, raising real interest rates as nominal rates were pinned near zero.  Higher real rates would further weigh on job growth and reinforce the downward pressure on inflation and inflation expectations, triggering an adverse dynamic.

The economic conditions that brought the policy rate to the ELB and drove the 2020 framework changes were thought to be rooted in slow-moving global factors that would persist for an extended period-and might well have done so, if not for the pandemic. 8 The 2020 consensus statement included several features that addressed the ELB-related risks that had become increasingly prominent over the preceding two decades.  We emphasized the importance of anchored longer-term inflation expectations to support both our price-stability and maximum-employment goals.  Drawing on an

7 See François Gourio, Benjamin K. Johannsen, and David López-Salido (2025), 'The Origins, Structure, and Results of the Federal Reserve's 2019-20 Review of Its Monetary Policy Framework,' Finance and Economics Discussion Series 2025-065 (Washington:  Board of Governors of the Federal Reserve System, August), https://doi.org/10.17016/FEDS.2025.065.

8 A 2020 paper by Caldara and others discusses the structural factors behind the slow evolution of changes in the natural rate of unemployment, trend productivity growth, the natural rate of interest, and the slope of the Phillips curve; see Dario Caldara, Etienne Gagnon, Enrique Martínez-García, and Christopher J. Neely (2020), 'Monetary Policy and Economic Performance since the Financial Crisis,' Finance and Economics Discussion Series 2020-065 (Washington:  Board of Governors of the Federal Reserve System, August),

https://www.federalreserve.gov/econres/feds/monetary-policy-and-economic-performance-since-the- financial-crisis.htm.

extensive literature on strategies to mitigate risks associated with the ELB, we adopted flexible average inflation targeting-a 'makeup' strategy to ensure that inflation expectations would remain well anchored even with the ELB constraint. 9 In particular, we said that, following periods when inflation had been running persistently below 2 percent, appropriate monetary policy would likely aim to achieve inflation moderately above 2 percent for some time.

In the event, rather than low inflation and the ELB, the post-pandemic reopening brought the highest inflation in 40 years to economies around the world.  Like most other central banks and private-sector analysts, through year-end 2021 we thought that inflation would subside fairly quickly without a sharp tightening in our policy stance (figure 5). 10 When it became clear that this was not the case, we responded forcefully, raising our policy rate by 5.25 percentage points over 16 months.  That action, combined with the unwinding of pandemic supply disruptions, contributed to inflation moving much closer to our target without the painful rise in unemployment that has accompanied previous efforts to counter high inflation.

9 See David Reifschneider and John C. Williams (2000), 'Three Lessons for Monetary Policy in a Low-Inflation Era,' Journal of Money, Credit and Banking, vol. 32 (November), pp. 936-66; Michael T. Kiley and John M. Roberts (2017), 'Monetary Policy in a Low Interest Rate World,' Brookings Papers on Economic Activity, Spring, pp. 317-72, https://www.brookings.edu/wpcontent/uploads/2017/08/kileytextsp17bpea.pdf; James Hebden, Edward P. Herbst, Jenny Tang, Giorgio Topa, and Fabian Winkler (2020), 'How Robust Are Makeup Strategies to Key Alternative Assumptions?' Finance and Economics Discussion Series 2020-069 (Washington:  Board of Governors of the Federal Reserve System, August), https://www.federalreserve.gov/econres/feds/how-robust-are-makeup-strategiesto-key-alternative-assumptions.htm; and Ben S. Bernanke, Michael T. Kiley, and John M. Roberts (2019), 'Monetary Policy Strategies for a Low-Rate Environment,' AEA Papers and Proceedings, vol. 109 (May), pp. 421-26.  On average inflation targeting, see Thomas M. Mertens and John C. Williams (2019), 'Monetary Policy Frameworks and the Effective Lower Bound on Interest Rates,' AEA Papers and Proceedings, vol. 109 (May), pp. 427-32.

10 See Ekaterina Peneva, Daniel Villar, and Jeremy Rudd (2025), 'Retrospective on the Board Staff's Inflation Forecast Errors since 2019,' Finance and Economics Discussion Series 2025-069 (Washington: Board of Governors of the Federal Reserve System, August), https://doi.org/10.17016/FEDS.2025.069.

## Elements of the Revised Consensus Statement

This year's review considered how economic conditions have evolved over the past five years.  During this period, we saw that the inflation situation can change rapidly in the face of large shocks.  In addition, interest rates are now substantially higher than was the case during the era between the GFC and the pandemic.  With inflation above target, our policy rate is restrictive-modestly so, in my view.  We cannot say for certain where rates will settle out over the longer run, but their neutral level may now be higher than during the 2010s, reflecting changes in productivity, demographics, fiscal policy, and other factors that affect the balance between saving and investment (figure 6).  During the review, we discussed how the 2020 statement's focus on the ELB may have complicated communications about our response to high inflation.  We concluded that the emphasis on an overly specific set of economic conditions may have led to some confusion, and, as a result, we made several important changes to the consensus statement to reflect that insight.

First, we removed language indicating that the ELB was a defining feature of the economic landscape.  Instead, we noted that our 'monetary policy strategy is designed to promote maximum employment and stable prices across a broad range of economic conditions.'  The difficulty of operating near the ELB remains a potential concern, but it is not our primary focus.  The revised statement reiterates that the Committee is prepared to use its full range of tools to achieve its maximum-employment and price-stability goals, particularly if the federal funds rate is constrained by the ELB.

Second, we returned to a framework of flexible inflation targeting and eliminated the 'makeup' strategy.  As it turned out, the idea of an intentional, moderate inflation

overshoot had proved irrelevant.  There was nothing intentional or moderate about the inflation that arrived a few months after we announced our 2020 changes to the consensus statement, as I acknowledged publicly in 2021. 11

Well-anchored inflation expectations were critical to our success in bringing down inflation without a sharp increase in unemployment.  Anchored expectations promote the return of inflation to target when adverse shocks drive inflation higher, and limit the risk of deflation when the economy weakens. 12 Further, they allow monetary policy to support maximum employment in economic downturns without compromising price stability.  Our revised statement emphasizes our commitment to act forcefully to ensure that longer-term inflation expectations remain well anchored, to the benefit of both sides of our dual mandate.  It also notes that 'price stability is essential for a sound and stable economy and supports the well-being of all Americans.'  This theme came through loud and clear at our Fed Listens events. 13 The past five years have been a painful reminder of the hardship that high inflation imposes, especially on those least able to meet the higher costs of necessities.

Third, our 2020 statement said that we would mitigate 'shortfalls,' rather than 'deviations,' from maximum employment.  The use of 'shortfalls' reflected the insight that our real-time assessments of the natural rate of unemployment-and hence of

11 See Ina Hajdini, Adam Shapiro, A. Lee Smith, and Daniel Villar (2025), 'Inflation since the Pandemic: Lessons and Challenges,' Finance and Economics Discussion Series 2025-070 (Washington:  Board of Governors of the Federal Reserve System, August), https://doi.org/10.17016/FEDS.2025.070.

See also, for example, Jerome H. Powell (2021), 'Transcript of Chair Powell's Press Conference,'

December 15, https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20211215.pdf#page=16.

12 See Hess Chung, Callum Jones, Antoine Lepetit, and Fernando M. Martin (2025), 'Implications of Inflation Dynamics for Monetary Policy Strategy,' Finance and Economics Discussion Series 2025-072 (Washington:  Board of Governors of the Federal Reserve System, August), https://doi.org/10.17016/FEDS.2025.072.

13 For additional information, see the report Fed Listens: Perspectives from the Public, which summarizes the 10 Fed Listens events hosted by the Board and the Federal Reserve Banks during 2025.

'maximum employment'-are highly uncertain. 14   The later years of the post-GFC recovery featured employment running for an extended period above mainstream estimates of its sustainable level, along with inflation running persistently below our 2 percent target.  In the absence of inflationary pressures, it might not be necessary to tighten policy based solely on uncertain real-time estimates of the natural rate of unemployment. 15

We still have that view, but our use of the term 'shortfalls' was not always interpreted as intended, raising communications challenges.  In particular, the use of 'shortfalls' was not intended as a commitment to permanently forswear preemption or to ignore labor market tightness.  Accordingly, we removed 'shortfalls' from our statement. Instead, the revised document now states more precisely that 'the Committee recognizes that employment may at times run above real-time assessments of maximum employment without necessarily creating risks to price stability.'  Of course, preemptive action would likely be warranted if tightness in the labor market or other factors pose risks to price stability.

The revised statement also notes that maximum employment is 'the highest level of employment that can be achieved on a sustained basis in a context of price stability.' This focus on promoting a strong labor market underscores the principle that 'durably achieving maximum employment fosters broad-based economic opportunities and benefits for all Americans.' The feedback we received at Fed Listens events reinforced

14  See Christopher Foote, Shigeru Fujita, Amanda Michaud, and Joshua Montes (2025), 'Assessing Governors of the Federal Reserve System, August), https://doi.org/10.17016/FEDS.2025.067.

Maximum Employment,' Finance and Economics Discussion Series 2025-067 (Washington:  Board of 15  See Brent Bundick, Isabel Cairó, and Nicolas Petrosky-Nadeau (2025), 'Labor Market Dynamics, Monetary Policy Tradeoffs, and a Shortfalls Approach to Pursuing Maximum Employment,' Finance and Economics Discussion Series 2025-068 (Washington:  Board of Governors of the Federal Reserve System, August), https://doi.org/10.17016/FEDS.2025.068.

the value of a strong labor market for American households, employers, and communities.

Fourth, consistent with the removal of 'shortfalls,' we made changes to clarify our approach in periods when our employment and inflation objectives are not complementary.  In those circumstances, we will follow a balanced approach in promoting them.  The revised statement now more closely aligns with the original 2012 language.  We take into account the extent of departures from our goals and the potentially different time horizons over which each is projected to return to a level consistent with our dual mandate.  These principles guide our policy decisions today, as they did over the 2022-24 period, when the departure from our 2 percent inflation target was the overriding concern.

In addition to these changes, there is a great deal of continuity with past statements.  The document continues to explain how we interpret the mandate Congress has given us and describes the policy framework that we believe will best promote maximum employment and price stability.  We continue to believe that monetary policy must be forward looking and consider the lags in its effects on the economy.  For this reason, our policy actions depend on the economic outlook and the balance of risks to that outlook.  We continue to believe that setting a numerical goal for employment is unwise, because the maximum level of employment is not directly measurable and changes over time for reasons unrelated to monetary policy.

We also continue to view a longer-run inflation rate of 2 percent as most consistent with our dual-mandate goals.  We believe that our commitment to this target is a key factor helping keep longer-term inflation expectations well anchored.  Experience

has shown that 2 percent inflation is low enough to ensure that inflation is not a concern in household and business decisionmaking while also providing a central bank with some policy flexibility to provide accommodation during economic downturns.

Finally, the revised consensus statement retained our commitment to conduct a public review roughly every five years.  There is nothing magic about a five-year pace. That frequency allows policymakers to reassess structural features of the economy and to engage with the public, practitioners, and academics on the performance of our framework.  It is also consistent with several global peers.

## Conclusion

In closing, I want to thank President Schmid and all his staff who work so diligently to host this outstanding event annually.  Counting a couple of virtual appearances during the pandemic, this is the eighth time I have had the honor to speak from this podium.  Each year, this symposium offers the opportunity for Federal Reserve leaders to hear ideas from leading economic thinkers and focus on the challenges we face.  The Kansas City Fed was wise to lure Chair Volcker to this national park more than 40 years ago, and I am proud to be part of that tradition.



Jackson Hole Economic Policy Symposium Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming

August 22, 2025

## Monetary Policy and the Fed's Framework Review

Jerome H. Powell Chair, Federal Reserve Board Board of Governors of the

Federal Reserve System



## Figure 1: Unemployment Rate

Monthly



Note: Seasonally adjusted.

Source: Bureau of Labor Statistics, Unemployment Rate, retrieved from FRED, Federal Reserve Bank of St. Louis.



## Figure 2: Nonfarm Payroll Gains



Note: Seasonally adjusted. The red dots reflect the May (140.67) and June (149.67) readings as of the employment report released July 3. Values reported are a three-month moving average.

Source: Bureau of Labor Statistics, All Employees, Total Nonfarm, retrieved from FRED, Federal Reserve Bank of St. Louis.

Note: Percent change from preceding period. The vertical line separates yearly GDP data from half-yearly GDP data. Annual GDP values represent Q4:Q4 comparisons, and half-year GDP values represent Q4:Q2 and Q2:Q4 comparisons. Seasonally adjusted.





Source: Bureau of Economic Analysis, Real Gross Domestic Product, retrieved from FRED, Federal Reserve Bank of St. Louis.



## Figure 4: Price Indexes for Components of Core PCE Inflation



Note: Core goods inflation is the change in the personal consumption expenditures (PCE) price index excluding energy and food. Core services inflation is the change in the PCE price index excluding energy services. The data for July 2025 are estimates based on consumer price index and producer price index data.

Source: Bureau of Economic Analysis.



## Figure 5: Forecasts Made in December 2021

|                       | 2021 Q4/Q4 core inflation   | 2022 Q4/Q4 core inflation   | End-2022 policy rate   |
|-----------------------|-----------------------------|-----------------------------|------------------------|
| SEP median            | 4.4%                        | 2.7%                        | .9%                    |
| Blue Chip consensus   | 4.4%                        | 2.6%                        | .5%*                   |
| Primary Dealer median | 4.4%                        | 2.5%                        | .75%                   |

Note: SEP is Summary of Economic Projections.

* Blue Chip reports projections of the 3-month T-bill rate in the fourth quarter.

Source: Federal Reserve Board; Blue Chip; Federal Reserve Bank of New York.



## Figure 6: Longer-Run Federal Funds Rate: Summary of Economic Projections and Survey of Primary Dealers



Note: The green shading is the central tendency from the Summary of Economic Projections. The blue shading represents the 25th to 75th percentile of responses from the Survey of Primary Dealers.

Source: Federal Reserve Board; Federal Reserve Bank of New York.



Jackson Hole Economic Policy Symposium Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming

August 22, 2025

## Monetary Policy and the Fed's Framework Review

Jerome H. Powell Chair, Federal Reserve Board Board of Governors of the

Federal Reserve System",Jerome H Powell
https://www.bis.org/review/r250827c.htm,Kazuo Ueda: Japan's labor market under demographic decline - evolving dynamics and macroeconomic implications,"Remarks by Mr Kazuo Ueda, Governor of the Bank of Japan, at the panel ""The policy implications of labor market transition"" at ""Labor markets in transition: demographics, productivity, and macroeconomic policy"", an economic symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, 23 August 2025.",2025-08-23 00:00:00,"

August  23,  2025

Bank  of  Japan

## Japan's Labor Market under Demographic Decline: Evolving Dynamics and Macroeconomic Implications

Remarks at the Panel on ""The Policy Implications of Labor Market Transition"" at the Jackson Hole Economic Policy Symposium Hosted by the Federal Reserve Bank of Kansas City

## UEDA Kazuo

Governor of the Bank of Japan

## Introduction

Let  me  begin  by  thanking  the  organizers  for  inviting  me  to  this  conference.  This  year's theme,  ""Labor  Markets  in  Transition,""  is  highly  relevant  to  Japan.  Our  labor  market  is indeed undergoing a significant transformation, but the direction and underlying causes are somewhat unique to our country.

For many years after the burst of the asset price bubble in the early 1990s, the combination of  near-zero  inflation,  economic  stagnation,  and  structural  policies  aimed  at  stimulating labor supply masked the demographic pressures on labor market tightness. The large-scale monetary  easing  since  2013,  together  with  post-COVID-19  global  inflation,  has  finally pushed  inflation  into  positive  territory.  Wages  are  now  rising,  and  labor  shortages  have become  one  of  our  most  pressing  economic  issues.  Today,  I  would  like  to  discuss  the evolution of Japan's labor market  and  its interaction  with  broader  macroeconomic developments.

## I. Demographic Trends

Like many other countries, Japan's demographics have been shaped by two major forces. First, the birth rate (total fertility rate) fell sharply from around 4 to around 2 in the 1950s, resumed  its  decline  in  the  early  1980s,  and  stood  at  1.15  in  2024.  Second,  the  life expectancy of men rose from 63.6 years in 1955 to 81.1 years in 2024, and that of women rose from 67.8 years in 1955 to 87.1 years in 2024. As a result, the working-age population peaked in 1995, while the total population peaked later, in 2008 (Chart 1).

Whether  population  decline  leads  to  tighter  labor  markets  and  higher  wages  depends  on how it is perceived by households and firms as well as on other drivers of the dynamics of the economy.

Chart 2 shows the Tankan (Short-Term Economic Survey of Enterprises in Japan) diffusion index for employment conditions. There was a brief period of tightness in the late 1980s to early 1990s, driven by an overheated economy and asset price inflation. The approaching decline in the working-age population also prompted firms to hire more workers. However, the bubble's collapse and subsequent financial instability ushered in prolonged stagnation,

compounded  by  the  Global  Financial  Crisis.  Labor  markets  remained  loose  despite demographic  decline.  Only  with  the  large-scale  monetary  easing  of  the  mid-2010s  did conditions begin to tighten.

## II. Rising Participation of Women and Seniors

Rising labor force participation rates have mitigated the impact of demographics on labor supply. Labor force participation among women and seniors has increased sharply since the early 2010s, more than compensating for the fall in the working-age population (Chart 3). The participation rate of women aged 15-64 reached 78 percent in June 2025 -- up from around 60 percent in the early 2000s.

Research  attributes  this  to  both  policy  and  social  changes:  expansion  of  social  insurance coverage  to  part-time  workers,  greater  childcare  and  after-school  care  capacity,  and  a gradual shift in norms toward supporting women's employment. For seniors, as a result of legal  reforms  made  so  far,  firms  are  required  to  ensure  employment  until  age  65  and  to make efforts to ensure employment opportunities until age 70.

That  said,  the  scope  for  further  increases  is  limited.  The  current  female  labor  force participation rate is already comparable to Northern European economies. The labor force participation rate for people aged 65 and over was above 25 percent in 2024, which was the second highest among OECD countries, after South Korea.

Two  areas  could  still  expand  labor  supply,  though  both  would  require  significant  policy effort. First, increasing the share of full-time work among women and extending working hours:  Currently,  only  around  50  percent  of  women  workers  are  regular  employees, compared with around 80 percent for  men.  This would  require  measures  such  as  further expanding  after-school  care  capacity.  Second,  foreign  labor:  Although  foreign  workers account for only around 3 percent of the labor force, their contribution to labor force growth from  2023  to  2024  exceeded  50  percent. 1 Further  increases  would  require  a  broader discussion.

1   The share of foreign workers in the labor force is based on the number of people.

## III. The Return of Wage Growth

Turning to wage developments, the story involves both labor market dynamics and inflation expectations.

For decades, wages remained stagnant despite occasional labor market tightness. From the mid-1990s until 2022, base wage growth for regular full-time workers remained within the range of minus 1 percent to plus 1 percent, mirroring similarly muted CPI inflation for all items  excluding  fresh  food  (Chart  4).  The  absence  of  wage  growth  reflected  both  rising participation -- expanding labor supply -- and entrenched deflationary expectations. In that environment,  firms  assumed  competitors  would  not  raise  prices  and  thus  refrained  from raising  their  own  prices  or  wages,  even  in  the  face  of  higher  costs  or  stronger  demand. Breaking out of this equilibrium required a large external shock.

Post-COVID-19 global inflation provided that shock. CPI inflation for all items excluding fresh food peaked at 4.2 percent in early 2023, and expectations of positive inflation began to take hold. We have now seen three consecutive years of high rates of wage increases in the  annual  spring  labor-management  wage  negotiations,  with  this  year's  5.25  percent increase -- based on total wage increase -- marking a 34-year high. Notably, wage growth is spreading from large enterprises to small and medium enterprises (SMEs).

Barring a major negative demand shock, the labor market is expected to remain tight and continue to  exert  upward  pressure  on  wages.  But  structural changes  beyond  participation rates are also shaping labor market outcomes.

## IV. Greater Labor Mobility

Labor  mobility  has  risen  from  historically  low  levels.  In  the  past,  regular  full-time employees rarely changed jobs, and firms faced little pressure to raise base wages to retain staff. Recently, competition for workers has intensified. As shown in the left-hand panel of Chart 5,  the  number  of  regular  employees  switching  jobs  has  been  increasing,  especially among younger generations. 2

2   For details on the recent labor mobility in Japan, see Bank of Japan (2025) and Ikeda et al. (2025).

Rising wages are reinforcing this mobility. Some SMEs unable to match wage growth have closed or merged, releasing workers into the broader market. The right-hand panel of Chart 5  suggests  a  possible  shift  of  labor  from  low-  to  high-productivity  firms,  potentially mitigating  demographic  headwinds.  This  may  be  one  instance  where  moderate  wage increases under labor shortages lead to efficiency-improving reallocation.

## V. Substitution of Labor with Capital

Persistent  shortages are also prompting investment in  labor-saving technologies. Firms in labor-intensive sectors such as accommodations, eating and drinking services, and retailing are  leading  this  shift  (Chart  6). 3 Software  investment  growth  in  these  industries  is outpacing that  in  other  sectors.  More  broadly,  investment  in  labor-saving  technology  has become a key driver of capital spending. 4

AI use among Japanese firms remains in its early stages (Chart 7). Studies point out that many routine tasks -- performed relatively more often by women and non-regular workers -can  be  automated  by  technology. 5 However,  in  Japan,  much  of  the  employment  growth over the past decade has been among women, while the share of non-regular workers has been  declining.  The  youth  unemployment  rate,  which  in  some  countries  seems  to  be affected by AI adoption, is at a 30-year low in Japan. So far, AI adoption has not generated significant  labor  market  disruption.  Whether  it  will  provide  just  enough  substitution  to offset demographic decline remains to be seen.

## Concluding Remarks

In sum, demographic shifts that began in the 1980s are now producing acute labor shortages and persistent upward pressure on wages. They are also driving significant adjustments on the  supply  side  of  the  economy  --  through  higher  participation,  increased  mobility,  and capital-labor substitution.

3   For a discussion on recent investment under the labor shortages in Japan, see Chikamatsu, Ikeda, and Yagi (2024).

4 In  a  large-scale  corporate  survey  conducted  by  the  Bank  of  Japan  as  part  of  its  ""Review  of Monetary Policy from a Broad Perspective,"" many firms cited labor shortages as the reason for their current proactive stance on capital investment. For more details, see Bank of Japan (2024).

5   See, for example, De La Rica and Gortazar (2016) and Brussevich et al. (2018).

These forces will complicate the relationship between labor market conditions, wages, and prices.  We  will  continue  to  monitor  these  developments  closely  and  incorporate  our assessment of evolving supply-side conditions into the conduct of monetary policy.

Thank you very much for your attention.

## References

Bank  of  Japan.  2024.  ""Results  of  the  Survey  regarding  Corporate  Behavior  since  the Mid-1990s: Economic Activity, Prices, and Monetary Policy over the Past 25 Years from Firms' Perspective."" Regional Economic Report (Annex) .

------. 2025. ""(Box 3) Labor Market Conditions and Labor Mobility across Firms."" Outlook for Economic Activity and Prices April 2025.

Brussevich, Mariya, Era Dabla-Norris, Christine Kamunge, Pooja Karnane, Salma Khalid, and  Kalpana  Kochhar.  2018.  ""Gender,  Technology,  and  the  Future  of  Work."" International Monetary Fund Staff Discussion Notes 2018, no. 007.

Chikamatsu, Kyosuke, Shuichiro Ikeda, and Tomoyuki Yagi. 2024. ""Effects of Demographic Changes on Medium- to Long-Term Business Fixed Investment."" Bank of Japan Review Series , no. 2024-E-7.

De La Rica, Sara and Lucas Gortazar. 2016. ""Differences in Job De-Routinization in OECD Countries: Evidence from PIAAC."" IZA Discussion Papers, no. 9736.

Ikeda, Shuichiro, Ushio Kawano, Yoshibumi Makabe, Kohei Takata, and Tomoyuki Yagi. 2025. ""Effects of Demographic Change on Labor Market and Wage Developments."" Bank of Japan Review Series , no. 2025-E-2.

## Japan's Labor Market under Demographic Decline: Evolving Dynamics and Macroeconomic Implications

Remarks at the Panel on ""The Policy Implications of Labor Market Transition"" at the Jackson Hole Economic Policy Symposium Hosted by the Federal Reserve Bank of Kansas City

## August 23, 2025

## UEDA Kazuo

Governor of the Bank of Japan

Chart 1

## Japan's Population Trends



Source: Ministry of Internal Affairs and Communications. Note: Figures from 1950 to 1971 exclude Okinawa Prefecture.

## Labor Market Tightness in Japan



Note: Based on the

Tankan

. There is a discontinuity in the data for December 2003 due to a change in the survey framework.

Source: Bank of Japan.

2

Chart 3

## Labor Force Participation in Japan



Notes: 1. Figures for 2025 in the left-hand panel are January-June averages.

2. In the right-hand panel, the projection for the working-age population is by the National Institute of Population and Social Security Research. The projection for the number of employed persons is calculated based on projections by the Japan Institute for Labour Policy and Training.

Sources: Ministry of Internal Affairs and Communications; National Institute of Population and Social Security Research; Japan Institute for Labour Policy and Training.

## Developments in Wages and Prices in Japan



Notes: 1. The CPI figures exclude the effects of the consumption tax hikes etc.

2. Figures for base pay increases from 1991 to 2013 are those published by the Central Labour Relations Commission, while those from 2014 to 2025 are figures released by Rengo.

Sources: Ministry of Internal Affairs and Communications; Japanese Trade Union Confederation (Rengo); Central Labour Relations Commission.

4

## Chart 5

## Labor Mobility in Japan



Notes: 1. Figures in the left-hand panel are the shares of regular employees in their 20s to 50s who changed jobs in the past year. 2. Figures in the right-hand panel are staff estimates, using microdata from the Financial Statements Statistics of Corporations by Industry, Quarterly , for firms that responded to the survey for the statistics for eight consecutive quarters. High/low productivity firms are defined as those in the top/bottom tercile within each period and industry. The diamond markers indicate medians of deviations in the rate of change in the number of personnel from that of the entire sample. The bands indicate 95 percent confidence intervals calculated using the bootstrap method.

Sources: Mynavi, ""Job Change Trends Survey 2025 (2024 Results)""; Ministry of Finance.

## Substitution of Labor with Capital in Japan

Industries with Labor Shortages and Software Investment

Chart 7



Firms' Stance on the Use of Generative AI

Results of Fiscal 2024 Survey

",Kazuo Ueda
https://www.bis.org/review/r250901g.htm,Lesetja Kganyago: Overview of the South African economy,"Address by Lesetja Kganyago, Governor of the South African Reserve Bank (SARB), at the 105th annual Ordinary General Meeting of the SARB shareholders South African Reserve Bank, Pretoria Friday, 8 August 2025.",2025-08-08 00:00:00,"## Lesetja Kganyago: Overview of the South African economy

Address by Lesetja Kganyago, Governor of the South African Reserve Bank (SARB), at the 105th annual Ordinary General Meeting of the SARB shareholders South African Reserve Bank, Pretoria Friday, 8 August 2025.

* * *

Good morning, ladies and gentlemen.

The global economy is experiencing a turbulent year. So far, it has proven resilient, despite the shocks from wars and tariffs. We should not overstate this. Late last year, the International Monetary Fund (IMF) still expected growth of 3.2% for 2025, which is now down to 3%. But in April, it was expecting 2.8%, so we have actually had some upward growth revisions. For all that has happened in the first half of the year, it is surprising that growth has held up this well, and that forecasts are moving up rather   than down.

That said, there are not many reasons to feel safe. In the United States (US), businesses have front-loaded imports, and many have been in wait-and-see mode as a way of dealing with tariff uncertainty. It is now increasingly clear that tariffs will settle at high rates. The Yale Budget Lab calculates the effective tariff as of August at 18.3%, the highest since 1934. This implies significant price pressures that will have to be absorbed somewhere in the system. In this context, it is unsurprising that the US Federal Reserve has been keeping policy rates on hold, with the stance still somewhat on the restrictive side.

In other regions, it has been clearer that trade disruptions are not causing significant inflationary pressure. The main concern has been that supply chain disruptions would push up prices, seeing as most other countries have taken an enlightened approach and refrained from raising their own tariffs to match US measures. As the year has developed, what we have seen is mostly modest disinflationary effects, stemming from weaker demand and excess capacity. A weaker dollar has also been supportive of other countries, especially emerging markets. This has given many central banks the scope to ease policy rates and adopt more neutral policy stances.

In South Africa, our preliminary assessment is that tariffs and the other uncertainties in the global economy are causing modest damage to growth while leaving inflation broadly unchanged. The US is a large trading partner for South Africa, but it is not as important as Europe, China or the Southern African Development Community (SADC). Our exports to the US mostly consist of commodities  some of which are exempted  and manufactured products such as cars. Some parts of the agricultural sector are exposed, but total agricultural exports are only about 3% of our total exports to the US.

For our latest forecast round, we factored in a higher tariff rate. This moved our growth projection lower for the year down by about 0.1 percentage points. This is a setback, but not catastrophic.

Unfortunately, our growth rate for the year is still looking low, close to 1%. This continues a stagnation trend that has been in place for roughly a decade. The economy

grew at about 4% a year during the 2000s, then slowed down steadily during the first half of the 2010s, and has hovered at growth rates of about 1% ever since. As we have said repeatedly in our monetary policy statements, the drivers of weak growth are mainly structural and require structural reforms. Put in plainer language, without economic jargon, we need the trains to run and the cities to function. Given the reform momentum underway - perhaps best illustrated by improved electricity availability - we see some scope for better growth in the coming years. We also believe National Treasury's efforts to stabilise debt can bolster confidence. In addition, the economy is enjoying some support from lower interest rates, with the yield curve shifting lower over the past year or so, and our policy rate down by 125 basis points since September 2024.

Like almost all other economies, we suffered high inflation during the global inflation surge of 2022 and 2023. However, inflation decelerated sharply in 2024. We have had space to ease rates because inflation has been well contained, with prices up 3% over the past 12 months. There have been notable risks to prices this year, such as the spike in oil prices after the bombing of Iran in June, and the sharp depreciation of the rand back in April. But these risks have been resolved quite rapidly, and inflation has remained moderate.

Looking ahead, inflation is expected to rise over the next few months. Food inflation has picked up, mainly because of meat prices. Fuel prices are also falling more slowly now, compared to the recent past. However, we expect this uptick in headline inflation to be temporary, and we look forward to inflation coming back to around 3% over the medium term, which is at the bottom of our 36% target range.

To the extent that inflation settles at 3%, and that inflation expectations continue their move lower, the Bank's forecasting model shows lower interest rates if inflation remains contained at current levels. Given that this is the year of uncertainty, I do not want that projection to be mistaken for a promise. Events may not unfold exactly in line with our forecasts.

Moving beyond monetary policy, we have started a new strategy cycle this year. One important change is that we have streamlined our strategic focus areas to just three: price stability, financial stability, and payments. These are the three integral functions of the SARB: our fundamental value to society is money that holds its value, and that can be used in a stable financial system to make payments efficiently. Elevating these three roles will help keep the organisation focused on its unique contribution to the well-being of South Africans.

For financial stability, we conduct macroprudential policy led by our Financial Stability Department to protect the health of the overall system, and we undertake microprudential policy through our Prudential Authority to ensure the health of individual regulated institutions. We also have the Corporation for Deposit Insurance to make sure depositors' money is safe, even in the event of a bank failure, up to a limit of R100 000, which covers most depositors in the country.

Our financial system has remained resilient over the years. We have, nonetheless, recently needed to take several enforcement actions regarding individual institutions.

We are also paying special attention to new technologies, particularly artificial intelligence. These offer new efficiencies but also pose new threats, for instance, through sophisticated and more dangerous cyberattacks.

For payments, it has been a year of exciting developments, given our Payments Ecosystem Modernisation project. In South Africa, we have long taken pride in our relatively sophisticated payments systems, but the truth is that we have fallen behind some of our peers. New digital technologies have emerged. In countries such as Brazil, digital retail payments have spread rapidly across society. Meanwhile, here in South Africa, cash - a technology that is literally centuries old - remains the single most popular form of payment.

We are happy to provide notes and coin to the economy, and we want these offerings to be world class, too. But cheap, safe and fast digital payments would offer many benefits to South Africans, and we intend to see that the gains of technological advancement are shared and not reserved for the small fraction of consumers who carry the latest smartphones. To do this, the SARB has been proactively working with the private sector to scale up a fast payments system in the country that will be more accessible, efficient and affordable. We also expect these efforts will attract innovative firms to help South Africa regain its place at the forefront of the payments frontier, instead of lagging behind. In SADC, we continue our journey to modernise our payment ecosystem, and have been working with other central banks in the region to deliver more efficient and cost-effective cross-border payments.

Apart from our three focus areas of price stability, financial stability and payments, the SARB also undertakes a range of other work that supports the apex objectives.

For this year, our international engagements have been particularly important, given South Africa's presidency of the Group of Twenty (G20). Clearly, this is not the easiest year to manage a forum like the G20, which is consensus-based, given the disagreements between member countries. Still, together with National Treasury, we have been able to host constructive meetings for the Finance Track. At Zimbali last month, it was possible to agree on a communiquØ for the first time since October 2024. The personal feedback I have received has also shown just how much our G20 partners appreciate the warm welcome we have shown them as South Africans.

We are also focused on maintaining a strong balance sheet. In this year's accounts, you will see the results of significant reforms undertaken last year. A notable figure is our unusually large profits, of R118 billion after tax, and I can tell you we have received queries prior to this meeting from shareholders wanting to understand this number. Most of it reflects the R100 billion received from National Treasury as part of the new Gold and Foreign Exchange Contingency Reserve Account (GFECRA) settlement agreement. This strengthened our capital position so that we could also pay out a portion of the GFECRA funds to government, which is the legal owner of these balances, and we could do so without selling off foreign exchange reserves.

On that subject, I can also report that foreign exchange reserves are now around US$68 billion, up by about US$20 billion over the past 10 years. We are a long way from having the strongest reserve position among emerging markets, but we are no longer the laggard we once were.

The South African economy no doubt has its vulnerabilities, but it also has strengths, and I am proud to say the SARB is one of them.

This SARB would not be the institution that it is without its people. The past five years have been one of intense change for the organisation, which for decades was largely office-based. We started our previous strategy journey with the onset of COVID-19 and a hard lockdown. We quickly had to adapt our operations, first to remote work and later to a hybrid way of work due to renovations of our Head Office, which is nearing completion. It is perhaps fitting then that as we begin the next five-year strategy cycle, we do so from our refurbished Head Office.

On Monday, 4 August, the first group of SARB staff began their full-time return to the office. We believe this will reinvigorate a culture of collaboration, helping us to continue serving the people of South Africa with excellence.",Lesetja Kganyago
https://www.bis.org/review/r250901h.htm,Lesetja Kganyago: From fragility to strength - the role of price stability,"Address by Mr Lesetja Kganyago, Governor of the South African Reserve Bank, at the National School of Government, Pretoria, 12 August 2025. ",2025-08-12 00:00:00,"

## Address by Lesetja Kganyago, Governor of the South African Reserve Bank, National School of Government 12 August 2025

From fragility to strength: The role of price stability

## Good evening.

Let me start today's address with two questions. First, if you compare South Africa to other countries, how do we rank in relation to growth? And second, how do we rank for inflation? 1

As you know, economic growth in South Africa has been weak, averaging a mere 0.8% annually over the past ten years. This growth performance is worse than that of 87% of other economies. 2 The few countries doing worse than us are those that suffered major  disasters,  like  war  or  macroeconomic  collapse.  Examples  include  Sudan, Lebanon  and  Ukraine.  Given  that  we  have  had  peace  and  basic  macroeconomic stability, South Africa's growth is extremely disappointing.

What about inflation? Here again we underperform. Our average inflation rate over ten years is 5.1%. 3 This is not a catastrophe. Venezuela and Zimbabwe have excessive inflation rates of 9 000% and 251% respectively.

1 The statistics in this section are based on the full International Monetary Fund World Economic Outlook database for April 2025.

2 Using just 2024, South Africa ranks in the 12th percentile, still worse than nearly nine of 10 other countries.

3 The precise 10-year average is 4.995%.

However, our inflation performance is still mediocre. Our price level is more than 60% higher than it was in 2015. Something that cost R60 ten years ago now costs about R100. 4

In a nutshell, we are in the bottom 10% of the class for growth and the bottom 30% for inflation. This is not the kind of country report you want.

How did we get here, and what can we do about it?

Let us turn to macroeconomic policy.

I'll start with the path travelled by monetary policy and then discuss broader issues of macroeconomic policy interaction.

Inflation targeting in South Africa got underway in the year 2000. Like many countries, we came to inflation targeting after other approaches were tested and failed. Also like many other countries, once we started inflation targeting, we found it worked, certainly better  than  previous  frameworks.  We  stopped  losing  money  on  foreign  exchange interventions, inflation moved lower and interest rates also shifted down.

This was a period of serious macroeconomic reform in South Africa. In hindsight, it seems like a golden age - and inflation targeting, together with exchange rate flexibility and prudent fiscal policy that reduced debt, were the pillars of the new architecture.

By the end of the decade, the central bank had consolidated its framework and built credibility, helping the country survive the Great Financial Crisis. Indeed, at the time, that crisis seemed primarily like a failure of the North Atlantic economies, and there was considerable excitement that emerging markets would decouple from advanced economies and lead the world in growth. 5

4 The consumer price index was at 61 points for 2014; by 2024 it was 99.3 points.

5 See, for instance The Economist , 'The Decoupling Debate', March 2008, the blurb of which read:

'As America's economy struggles to stay aloft, the developing world is learning to spread its wings.'

Unfortunately,  this  theory  did  not  pan  out  -  not  for  South Africa,  and  not  for  other emerging market stars, like Brazil, either. In the 2000s, South Africa's economic growth averaged 3.5% a year. Between 2010 and 2016, it slowed from 3% to 1.9% to less than 1%. 6

Initially, this was interpreted as a temporary setback. Given this diagnosis, monetary policy prescribed a low repurchase rate, generally below inflation, and the 3% to 6% target range was treated as an implicit target of 5.99%. 7

As the decade wore on, however, it became clear that growth was not improving. The problem was larger than weak demand, and inflation pressures were intensifying. In 2013, South Africa stood out as one of the 'fragile five', the economies most vulnerable to  tightening  global  financial  conditions.  Part  of  our  weak  growth  problem  was highlighted by the 2015 Nenegate incident, which showed the scale of waste and corruption involving state capture.

With inflation higher at around 6% and weaker economic growth, the SARB changed course. Between 2014 and 2016 interest rates rose from 5.5% to 7%. We stopped treating  the  top  of  our  3%  to  6%  range  as  the  implicit  target  and,  in  2017, communicated our preference to target the 4.5% midpoint as our objective.

A lower inflation rate would enable policy to ease and support the economy despite the various factors dragging growth down. It would also allow policy to be more flexible, even if inflationary shocks materialised. Improving the credibility of monetary policy could  strategically  offset  the  deteriorating  fiscal  position,  slowing  growth  and  the effects of weakened institutions.

By the end of the decade, inflation had come down nicely and inflation expectations had largely adjusted to 4.5%. Other policy adjustments helped too, in particular the

6 Using the International Monetary Fund World Economic Outlook data, South Africa's growth was 3.04% in 2010; 2.4% in 2012; 1.4% in 2014; and 0.67% in 2016.

7 For a discussion, see L Kganyago, 'Inflation targeting at 21 - lessons for the future', 8 September 2021. Available at: https://www.resbank.co.za/content/dam/sarb/publications/speeches/speeches-bygovernors/2021/gov-

kganyago/A%20public%20lecture%20by%20Lesetja%20Kganyago%20Governor%20of%20the%20S outh%20African%20Reserve%20Bank%20at%20Stellenbosch%20University.pdf

emphasis on better capacitating the state and moving faster on reforms to the energy market.

But just as the domestic situation was stabilising, the external environment was taking a turn for  the  worse. The  COVID-19 pandemic hit just a few months into  the new decade. It was followed by the worst global inflation surge in a generation, plus rising geopolitical  risks,  with  wars  in  Ukraine  and  the  Middle  East.  This  year  has  added another crisis, that of global trade.

Despite all this turbulence, prices today are very close to where they would have been since  2020,  with  inflation  consistently  at  4.5%.  Inflation  expectations  have  stayed within  our  target  range  and  are  currently  close  to  the  midpoint. 8 This  is  a  good illustration of the power of monetary policy to shape long-run inflation outcomes.

If monetary policy is the main determinant of longer-run inflation, and if South Africa is a relatively bad inflation performer, then we must take responsibility for this. That was why the independent review of monetary policy, commissioned by National Treasury, concluded that policy was not ambitious enough. We were not realising the full benefits of inflation targeting. 9

We heard much the same message from a range of local and foreign experts at our research conference in Cape Town earlier this year. Most speakers argued that we should be aiming for 3% inflation. One even argued for 2%. We finished with a strong consensus that our inflation target should be lower. 10

This is no great surprise. After all, the original 3% to 6% target band was meant to be narrowed to 3% to 5% and then 2% to 4%. There was no plan to have 3% to 6% last for a quarter century. Our peers have all lowered their targets. We have just been

8 The Bureau for Economic Research survey of inflation expectations for the second quarter of 2025 showed average expectations at 4.3% for 2026, 4.5% for 2027 and 4.4% over the next five years.

9

The third recommendation of the report reads as follows: 'The current definition of the target - a 3-

6% band - is not ambitious enough and significantly reduces the benefits that the inflation-targeting framework could otherwise provide.' See P Honohan and A Orphanides, 'Monetary policy in South

SA-TIED Working Paper

Africa, 2007-2021',

: 208, 2022, pp 37. Available at: https://sa- tied.wider.unu.edu/sites/default/files/SA-TIED-WP208.pdf

10 Conference materials, including videos of all the sessions, are available at: https://www.resbank.co.za/en/home/what-we-do/research/Biennial

laggards in this regard. This is why we show  up as a comparatively high inflation country from a global perspective. 11

What can we do about this?

As the International Monetary Fund has pointed out, the procedures for setting South Africa's inflation target are not transparent. 12 We can refer to precedents since 2000, when the 3% to 6% target was announced. In the 2000 Budget Speech former Finance Minister Trevor Manuel said: 'The Governor of the Reserve Bank and I have agreed on a target band of 3% to 6%. The objective is to bring inflation within this band by 2002.' However, this arrangement is not codified in law.

It is clear that the South African Reserve Bank (SARB) has a constitutional obligation to  protect  the  value  of  the  currency,  and  so  we  cannot  accept  a  target  that  is inconsistent with price stability. However, there are advantages to setting targets as agreed on between the SARB and National Treasury. We have been consulting on such an agreement for several years now and we would like to see the existing 3% to 6% target reformed.

As the saying goes, 'opportunity knocks', and over the past year that opportunity has come fast on the completion of the technical work on the optimal inflation target.  Actual inflation has eased to 3%, presenting us with a chance to achieve permanenty lower inflation, at low cost - what economists call 'opportunistic disinflation'. The question was how to respond.

Given the strong case for moving to a lower target at some point, it did not make sense to ignore this. But we also did not have a new target. What we did have was an existing target  range  that  stretched  from  3%  to  6%  -  or,  as  former  SARB  Governor  Tito Mboweni liked to say, from 6% to 3%.

11 C Loewald, R Steinbach and J Rakgalakane, 'Less risk and more reward: revising South Africa's inflation target', SARB Working Paper 25/05, 2025, especially pp 7. Available at: https://www.resbank.co.za/content/dam/sarb/publications/working-papers/2025/less-risk-morereward.pdf

12 International Monetary Fund, 'South Africa: Central Bank Transparency Code Review', 2024. see for instance pp 24. Available at: https://www.imf.org/en/Publications/CR/Issues/2024/12/02/SouthAfrica-Central-Bank-Transparency-Code-Review-557776

Historically, as discussed earlier, we have aimed for different points of the range: at one point  the  6%  upper  bound  was  the  de  facto target,  and  since  2017  we  have focused  on  the  4.5%  midpoint. These  precedents  set  forth  a  way  for  the  SARB's Monetary Policy Committee (MPC) to express its preference for 3% within the existing target range.

We laid the groundwork for the shift at our May MPC meeting by publishing a scenario with a 3% inflation objective. We also said in our statement that we considered this 3% scenario more attractive than the 4.5% baseline.

At our July meeting, we then formally announced our preference for inflation to settle at 3%, the bottom end of the target range, and we published a forecast to get there.

At both these meetings, we also cut interest rates. And we showed that our forecasts for a 3% objective had lower rates going forward than the projections for the target midpoint.

Indeed, for 4.5%, our model shows interest rates settling roughly where they are now, at  7%. A  3%  objective,  by  contrast,  delivers  an  over  100  basis  point  reduction  in interest rates. After our July meeting and the communication about the 3% objective, markets started pricing in lower future interest rates.

There is a lesson here, and that lesson is that lower inflation allows for lower rates. This logic is not always intuitive, and indeed many people think a lower target means higher rates. So let me unpack the reasoning.

In our modelling framework, the normal or neutral policy rate is about 7.25%. 13 Of this, 4.5  percentage  points  is  inflation  compensation  and  2.75  percentage  points  is attributed to global rates plus country risk. 14

13 This refers to the neutral rate estimate, defined as the interest rate which neither accelerates nor slows inflation and economic activity, and which would prevail in an economy in the absence of shocks, where inflation is at target and output growth is in line with the economy's potential. 14 For a chart of this disaggregation, see the presentation for the April 2025 Monetary Policy Review

How do we get that 7.25% down? If we lower inflation to 3%, then we can take 1.5 percentage points of inflation out. But lowering inflation to 3% will also reduce inflation volatility and country risk, the latter, perhaps by half a percent. As country risk and inflation falls, we could aim for a neutral policy rate of something more like 5.25%.

This is something we hope to deliver with our new preference for having inflation settle at the lower end of our 3% to 6% target range. This cannot be a promise, but it can be a serious aspiration.

Hopefully this has got you excited about lower interest rates and the practical reforms we can implement to get there. I hope you will also have noticed that the secondbiggest driver of interest rates is country risk - because doing something about that brings me to the other key topic of this speech: macroeconomic policy interaction.

Much of our country risk problem is that we keep forecasting debt stabilisation and it does not happen. Relative to gross domestic product (GDP), debt has risen in every year since 2008. As National Treasury points out, we have experienced one of the fastest debt increases of any country. We also have one of the highest debt levels in comparison to our peer group. 15

To address this, it sometimes seems that there are only painful choices: spending cuts or tax increases. But to my mind, the bigger picture is not so bad. The fiscal position may be strained but we have independent and credible monetary policy. This means we can still achieve a reasonably attractive macroeconomic mix.

release, slide 9, available at: https://www.resbank.co.za/content/dam/sarb/publications/monetarypolicy-review/2025/MPF%20presentation%20April%202025.pdf. The 4.5% inflation compensation is

equivalent to the inflation target midpoint.

15 See for instance Figure 1.3 of National Treasury's Medium Term Budget Policy Statement for 2024, available at:

https://www.treasury.gov.za/documents/mtbps/2024/mtbps/FullMTBPS.pdf?utm\_source=chatgpt.com

Specifically, if there were widespread confidence that debt levels were heading lower, this would create space for monetary policy to support growth through lower interest rates. 16

All the drivers point in the same direction: credible fiscal consolidation would lower country risk.  Improved investor confidence would also help the rand, which eases inflation. Tight fiscal policy might reduce demand  but that would also be disinflationary. 17

Imagine sitting for an Economics exam and getting the following question: 'What is the correct monetary policy response for a small open economy where growth is weak, inflation is low and the fiscal authority is tightening policy?' Your professor is going to expect you to say, 'looser monetary policy'.

Incidentally, I have heard that students nowadays use artificial intelligence (AI) for their homework, so I posed this exact question to DeepSeek and ChatGPT. Both suggest more accommodative monetary policy. 18 I am not saying we should be using AI to set macroeconomic policy. But it is a reminder that there is a textbook solution that can be applied to our macroeconomic problems. And yet it is largely missing from our public macroeconomic conversation.

Unfortunately,  rather  than  considering  the  macroeconomic  mix,  we  sometimes  get stuck debating consolidation versus growth. It is sometimes asserted that South Africa does not have a debt problem, it has a growth problem. No doubt, sustained, high

16 For a discussion, see in particular section 9 of C Loewald, D Faulkner and K Makrelov, 'Time consistency and economic growth: a case study of South African macroeconomic policy', SARB Working Paper : 20/12, 25 November 2020. Available at:

https://www.resbank.co.za/content/dam/sarb/publications/working-

papers/2020/10421/WP%202012.pdf

17 In a standard Taylor rule, like the one used in the MPC's Quarterly Projection Model, weaker demand would also make the output gap more negative, putting downward pressure on interest rates. 18 ChatGPT: 'In a small open economy facing weak growth, low inflation, and simultaneous fiscal tightening, the appropriate monetary -policy response is to pursue a more accommodative stance in order to stabilize aggregate demand and anchor inflation expectations.' DeepSeek: 'For a small open economy facing weak growth, low inflation, and fiscal tightening , the optimal monetary policy response should aim to stimulate demand without triggering capital flight or currency instability .'

growth could solve our debt problem. But it does not follow that the economy is capable of flourishing in the context of fiscal fragility. 19

Instead, we need to appreciate how our growth problem is endogenous to our fiscal situation. It is growth negative to have a high and rising tax burden - especially where the quality of spending is low. It hurts to have high long-term borrowing costs and a sub-investment grade credit rating. These factors help explain why fiscal multipliers in South Africa are so small. Extra government spending does little or nothing for total output. 20

This shows why growth on its own will not solve our fiscal problems without fiscal adjustment.  It  is  also  the  reason  we  absolutely  cannot  attempt  an  expansionary strategy  that  aims  for  growth  at  the  expense  of  macroeconomic  stability,  with  the justification that growth will itself be stabilising in the end. The best thing we could do for  growth,  on  top  of  structural  reforms,  is  to  deal  decisively  with  the  country  risk premium. It is not growth or stabilisation; it is growth through stabilisation. And that is because de-risking the economy, in addition to boosting confidence, would open up monetary policy space.

This way of thinking also raises new funding opportunities for government. Our recent fiscal debates have mostly focused on growth, revenue and spending: how fast can the economy grow, how much more tax can be extracted and what should happen to spending? But there is a fourth consideration, which is how debt is financed. All these are the preserve of National Treasury.

19 On the austerity-stimulus debate, see J Bianchi et al, 'Fiscal stimulus under sovereign risk', 2023, and references therein. Available at:

https://www.nber.org/system/files/working\_papers/w26307/w26307.pdf

20 T Janse van Rensburg, S de Jager and K Makrelov. 'Fiscal multipliers in South Africa after the Global Financial Crisis', SARB Working Paper : 21/07, 2021. Available at:

https://www.resbank.co.za/en/home/publications/publication-detail-pages/working-papers/2021/fiscalmultipliers-in-south-africa-after-the-global-financial-cr

We all know debt financing is a huge spending item, 5% of GDP, more than spending on health, policy and basic education. 21 This reflects a large stock of debt. But it also reflects the interest rates on that debt. 22

I have already covered what keeps the short-term policy rate high. But long-term rates are even higher: the 10-year bond yield is just below 10%, about 300 basis points above the short-term rate. Our 2048 bond is higher still. As economists say, our yield curve is very steep. This reflects risks that are not present in the overnight cash rate, mainly  credit  risk.  You  are  asking  investors  to  lock  in  exposure  for  decades,  and endure losses if debt does not stabilise and rates rise further. They are willing to bear that risk - but at a high price.

With nominal GDP growing at about 5%, paying 10% interest to borrow long term, eventually crowds out private investment and other government spending priorities. If we borrow to pay only interest on existing debt, we open ourselves up to a debt spiral. There are  some  unwise  responses  to  this  fact,  like  urging  the  SARB  to  monetise government debt. But there are also some constructive responses.

If we can reduce interest rates through permanently lower inflation, and by de-risking, we can finance debt at lower costs. This would make a big difference. Just to put some indicative numbers on this, for a debt stock of R5 trillion, every percentage point you save in interest is worth R50 billion. By contrast, a one percentage point increase in value-added tax raises about R30 billion. 23 And we could realistically save on debt costs.

It is not my role to set the issuance strategy. That is the work of National Treasury. But good monetary policy can help create opportunities for fiscal policy, which a nimble debt manager could seize. The objective should be unlocking a virtuous circle, where lower interest rates improve fiscal dynamics, and better fiscal dynamics in turn lower

21 See E Godongwana, Budget Speech , 12 March 2025. Available at: https://www.treasury.gov.za/documents/national%20budget/2025/speech/speech.pdf, p. 3

22 This helps explain why South Africa's debt-service costs are significantly higher than those of peers, as demonstrated in National Treasury, 2025 Budget Review , 12 March 2024, pp 1-2 Available at: https://www.treasury.gov.za/documents/national%20budget/2025/review/FullBR.pdf

23 Based on Table 4.3 of the March 2025 Budget Review, available at:

https://www.treasury.gov.za/documents/National%20Budget/2025/review/FullBR.pdf

rates.  Doing  this  requires  a  macroeconomic  set  up  where the  SARB and  National Treasury play complementary roles.

Ladies and gentlemen, to conclude, there are clear microeconomic problems behind our unfavourable growth performance. The proper response to this is structural and governance reforms, which are ongoing. It is vital that these continue at pace. There is no chance we can develop a flourishing economy without reliable infrastructure and functional municipalities.

In  addition  to  these  microeconomic  reforms,  there  is  a  significant  opportunity  to achieve a better macroeconomic mix. With a lower inflation target and fiscal policy that firmly prioritises debt stabilisation, we could achieve sustainably lower interest rates. This would give monetary policy more space to support growth, and it would give fiscal policy respite from high debt costs.

South Africa is a macroeconomic underperformer. But with the right reforms we could do much better.

Thank you.",Lesetja Kganyago
https://www.bis.org/review/r250901f.htm,"Sanjay Malhotra: Inaugural address - ""FIBAC 2025""","Inaugural address by Mr Sanjay Malhotra, Governor of the Reserve Bank of India, at the Annual Financial Institution Benchmarking and Calibration (FIBAC) 2025 Conference, organised jointly by the Federation of Indian Chambers of Commerce and Industry (FICCI) and the Indian Banks' Association (IBA), Mumbai, 25 August 2025.",2025-08-25 00:00:00,"## Sanjay Malhotra: Inaugural address - ""FIBAC 2025""

Inaugural address by Mr Sanjay Malhotra, Governor of the Reserve Bank of India, at the Annual Financial Institution Benchmarking and Calibration (FIBAC) 2025 Conference, organised jointly by the Federation of Indian Chambers of Commerce and Industry (FICCI) and the Indian Banks' Association (IBA), Mumbai, 25 August 2025.

* * *

It gives me immense pleasure to participate in the FIBAC annual conference for this year. It brings together distinguished thought leaders and stakeholders of the Indian economy and our financial ecosystem to deliberate on critical and contemporary issues facing the economic landscape of our country. The topic of the Conference ""Charting New Frontiers"" is very relevant and topical as we respond to the new challenges of tariffs and geopolitical uncertainties. I am sure that the discussions in this conference will be very fruitful and provide deeper insights and guidance to all stakeholders, especially businesses, regulators and governments. This is all the more important as we strive to contribute in our journey for a by 2047. I compliment FICCI Viksit Bharat and IBA for organising this annual conference.

## I. India's' Story of Resilience and Stability

We celebrated our 79th Independence Day ten days ago. We have made huge progress since our independence. Our advancement spreads across sectors education, health, agriculture, industries, infrastructure, science and technology, defence, governance, finance, etc. The Indian economy has expanded manifold. It continues to be a symbol of resilience and hope. The achievements of the Indian economy despite unprecedented challenges in the last few years are undoubtedly creditable and widely recognised.

The Indian economy today is characterised by robust macroeconomic fundamentals. Indian economy rebounded strongly post-COVID and recorded an average annual growth of around 8 per cent during the last four years (2021-22 to 2024-25), supported by strong domestic demand - both private consumption and fixed investment - amidst challenging global economic conditions. The IMF has projected that India will be the fastest growing major economy. We are all set to become the third-largest economy in the coming years. Inflation levels have generally reduced after implementation of the inflation targeting. Headline inflation recorded an eight year low of 1.6 per cent in July this year.

India's fiscal situation too has seen significant improvement after the post-COVID counter-cyclical fiscal response with a focus on the quality of expenditure. The union government's fiscal deficit to GDP ratio is budgeted to moderate from a high of 9.2 per cent to 4.4 per cent of GDP in 2025-26. Quality of expenditure has improved. Central government's effective capital expenditure which includes capital grants-in-aid to the states is budgeted at 4.3 per cent of GDP for 2025-26. Corporate balance-sheets are healthy. Banks are well capitalised, with sufficient liquidity buffers, robust asset quality and reasonable profitability. My compliments to the industry, especially the banking sector for this impressive performance.

India's external sector has also strengthened considerably over the last decade. The current account deficit (CAD) has remained well within the sustainable limit in recent years - it was 0.6 per cent of GDP in 2024-25. This is due to robust services exports and strong remittance receipts despite higher merchandise trade deficit. Capital flows have generally exceeded the CAD, adding to our foreign exchange reserves which stood at 695 billion USD as on August 15, 2025, providing merchandise imports cover of over 11 months.

Proactive fiscal and monetary policies, structural reforms, massive upscaling of both physical and digital infrastructure, improved governance and enhanced productivity and competitiveness, have all contributed to this impressive performance.

We are at a critical juncture as we navigate the choppy global economic environment characterised by heightened trade uncertainty and persisting geopolitical tensions. We need to push the frontiers of growth. We all must step up our efforts to address the emerging challenges and capitalise on the opportunities ahead. Generations of freedom fighters gave us a free India, a Swatantra Bharat. We need to now work for a Samridh Bharat, a prosperous India. In this backdrop, I thought it appropriate to speak on what we need to do together to further build on our economic development. I have divided this into five major areas - monetary policy, regulation, financial inclusion, customer service and technology.

## II. Monetary Policy

The role of monetary policy in economic prosperity is critical. One of the major conduits of macroeconomic stability in India during recent years despite multiple shocks, has been the decline of inflation. Sharp spikes in food prices, volatile oil prices, global supply chain disruptions, and geopolitical tensions could have significantly stoked inflation. However, proactive policy measures by the Reserve Bank, including timely interest rate adjustments and liquidity management, alongside prudent supply side measures by the government, have helped contain generalisation of price pressures. Anchored inflation expectations too have supported stable consumption patterns and improved investor confidence. The primary objective of monetary policy in terms of price stability has significantly contributed to the strength of India's macroeconomic fundamentals. At the same time, the Reserve Bank has not lost sight of the objective of growth. For example, before covid, when growth was slowing, and in recent months, when inflation was benign and growth needed to be supported, the Monetary Policy Committee (MPC) reduced the policy repo rate. We will continue to conduct monetary policy with the primary objective of price stability keeping in view the objective of growth.

## III. Regulation of Banks and NBFCs

## Importance of regulation

Despite increase in other sources of credit, the banks, NBFCs, HFCs and AIFIs regulated by RBI still provide about 73 per cent of the credit needs of the real economy with banks providing about 53 per cent. This shows the continued importance of RBI regulated entities in meeting the credit needs of the economy.

It has been our endeavour to regulate these entities with an aim to ensure that the financial system remains healthy and grows sustainably. Here I would like to mention that regulations are akin to friction. If friction is too less, one will fall while walking and if it is too much, progress will be impeded. Regulations provide the necessary friction to promote financial stability and safety of depositors hard-earned money. However, stringent regulations may impede growth of the economy. The art of regulation-making lies in finding the right balance between safety and growth - ""the right amount of friction"". Pursuit of this balance, or optimal regulation, is indeed our constant endeavour in the RBI.

## Our approach to regulation making

Our regulatory framework is based on five principles or characteristics:

- a. First, we have gradually pivoted from being prescriptive to largely principle based.
- b. Second, we have espoused the idea of proportionality to strike a fine balance between costs and benefits of regulation. Impact analysis is an integral component of this.
- c. Third, we are consultative in our approach. We realise that we need to understand the perspectives of all stakeholders. We organise outreach with industry, associations, banks, NBFCs and other regulated entities. We have also operationalised 'connect to regulate' for direct connection with our stakeholders. We seek your active support in giving feedback and suggestions for better regulation-making.
- d. Fourth, we attempt to be evidence based. We gather information through our interaction and outreach as also through our supervisory teams. Some of the REs may be feeling the burden of our information seek from them. But, information is important for regulation-making. We seek your assistance in this regard.
- e. Fifth, we are agile and we adapt with change in context, availability of new information, and the evolving landscape. We have not hesitated in relaxing a stringent rule, once deemed necessary, if the context changes and the cost-benefit balance reverses.

What we do as a matter of practice, has now been institutionalised through the recently released ""Framework for Formulation of Regulations"" which codifies this approach, that I just highlighted.

## Regulatory Developments in Recent Past

Entering into this calendar year, we have rationalised the applicable prudential norms for Urban Cooperative Banks (UCBs) to accord flexibility in their operations; we restored the applicable risk weights for lending to NBFCs as risks abated. Similarly, the provisioning requirement for government guaranteed security receipts were reviewed in view of their sovereign nature. We have updated the priority sector lending (PSL) guidelines to boost credit to underserved segments. We rationalised run-off factors,

which will potentially lead to a cumulative improvement in LCR of about 6 percentage points for the system as a whole. Similarly, we have come out with comprehensively rationalised regulatory framework for investments in Alternative Investment Funds (AIFs), co-lending, non-fund-based facilities, project finance, and gold loans to name a few. These are examples of how we have been agile, consultative, evidence-oriented, principle-based, and proportional in our regulation-making.

## Proposed regulations

Going forward, we will continue this approach. Our focus will be three-fold. First and foremost, we will continue strengthening financial stability. We intend to implement Basel III guidelines for market, credit and operational risk from 1.4.2027, for which credit risk and ECL related draft guidelines are proposed to be issued soon. The Forms of Business circular is also planned to be finalised quickly.

Second, we will endeavour to enhance ease of doing business. We have already rationalised the returns that regulated entities have to submit to us. We are in the process of consolidating all the regulations for various categories of regulated entities. In our pursuit of making principle-based framework, we have given autonomy to the board of the respective entities to frame policies. While the intent was to leave detailed policy-making to the judgement of the bank, it has resulted in overburdening the boards of the regulated entities. Therefore, we are trying to rationalise the macro-policies that need to be approved by the Boards of the regulated entities, and leave the procedural and routine matters with the management so that the Board gets quality time to deliberate on strategic and important matters.

Third, we are examining measures to expand bank credit towards productive sectors and reduce cost of intermediation.

As announced earlier, we propose to set up a Regulatory Review Cell with the mandate to review each regulation in a comprehensive, objective, systematic and structured manner. The objective of the review shall be to assess each regulation with focus on efficiency; its impact in terms of cost and benefit; its requirement in the current context and market realities; consistency and clarity especially across different regulations; and potential of unaddressed or emerging risks, among other things. The Cell shall organise its work in such a manner that each regulation is reviewed at least once in every 5-7 years. The Cell will interact with major financial sector industry bodies.

## IV. Financial Inclusion

Economic development is incomplete if it is not inclusive. We believe in the adage ""if . We need to take you want to go fast, go alone; if you want to go far, go together"" everyone together and especially those at the bottom of the pyramid. We have made considerable progress in financial inclusion over the years as reflected in the Financial Inclusion (FI)-Index constructed by the RBI which is based on the three dimensions of financial inclusion, 'Access', 'Usage' and 'Quality'. Notwithstanding the considerable progress, FI-Index point towards scope for further improvement in usage and quality while also addressing gaps in access.

Let us remember we have a responsibility to all the people of our country, almost twothirds, of which resides in rural areas. While, we have provided banking access to almost all villages within a radius of 5 kilometres, there is scope to further enhance it. Business Correspondents (BCs) are an effective channel for providing services in sparsely populated areas of our country. This channel needs to be strengthened to improve the quality, consistency and reach of financial services. Not only is there is a scope to augment them, but there is also a need to train them and expand the number of services they can provide. On one hand, this will make the BCs financially viable and sustainable; on the other hand, it will improve quality and reach of services.

Towards the objective of financial inclusion and to ensure uninterrupted access to the financial services, banks have launched a country-wide campaign from July 1, 2025 to September 30, 2025 at Gram Panchayat level. I urge all the banks to step up their efforts through these camps towards enhancing the coverage of re-KYC and the social security schemes. I also seek your support to Financial Literacy Centres (FLCs) and Centres for Financial Literacy (CFLs), being operated under our aegis.

Another area of focus is the Micro, Small, and Medium Enterprises (MSME) sector which contributes significantly to employment, exports and output. There is a significant credit gap to MSMEs. Banks and NBFCs should make special efforts to boost formal credit to them. They should leverage the public digital infrastructure like the Unified Lending Interface (ULI), in this endeavour.

## V. Customer Service

Consumers are the raison detre or the purpose of our being. Customer-centricity is fundamental for sustainable growth of any business.

## Conduct related regulations

At the Reserve Bank, we are passionately driven by the objective of customer-centricity. Key Fact Statement and integrating explicit conduct related aspects in our regulations are some examples in this regard. Recently released revised guidelines on prepayment charges and draft guidelines on settlement of claims in respect of deceased customers also reflect our customer-first approach.

## Consumer service by REs

Similarly, regulated entities must focus on excellent and seamless service and experience, creating customer delight. They need to be transparent, fair, and responsive. While digitalization is a key, the human aspect too cannot be neglected, for which training, especially on behavioural aspects, needs to be emphasized.

I had on an earlier occasion urged the Banks to enable the use of CKYCR at KYC touch points. I had also highlighted that the number of grievances escalating to the RBI Ombudsman is very high. It was also expected that each RE has an effective grievance redressal mechanism, where officers are suitably empowered to take decisions in consumer interest. I exhort the regulated entities to make further improvements in these areas.

Further, we are in the process of reviewing the Internal Ombudsman framework at the level of REs to further strengthen it and ensure that complaints get resolved effectively within the institution itself. We are also reviewing the RB-IOS to enhance its effectiveness, transparency and customer-centricity as an alternate grievance redressal mechanism. Further, we intend to enhance the consistency and adequacy of compensation awarded under the Ombudsman framework. We also plan to expand the set of services, non-timely provision of which may be liable for payment of penalty.

Consumer's trust is vital not only for the regulated entity but also for the stability and resilience of the banking system. To build and maintain trust, it is essential that regulated entities (REs) put in place a robust and effective mechanism to redress the grievances of aggrieved customers proactively in a just, transparent, timely and affordable manner. They should periodically assess the types of complaints, conduct a root cause analysis and implement systemic corrective measures in product design, processes, and employee conduct. It is further suggested that customer satisfaction related KPIs are included in performance appraisal and variable pay of key functionaries.

## VI. Technology to enhance credit and efficiency

Use of technology is a sine quo non for any business. It has become the core engine for improving decision making and customer service, moving far beyond its traditional role of driving efficiency. Regulated entities need to accelerate its adoption as they strive to enhance credit and reduce costs.

RBI too has adopted technology in all its functions. The Account Aggregator (AA) ecosystem is empowering customers with control over their financial data. ULI is making credit delivery seamless, making it truly transformative. We will further strengthen these platforms. We have implemented PRAVAAH platform for improving services to regulated entities. We will continue to embrace technology including AI and ML and expect our regulated entities too invest in it.

## VII. Concluding remarks

To conclude, I would like to emphasise that while we might seem to be on opposite sides - with the regulated entities trying to accelerate growth and the regulators focusing on stability, we actually have the same objectives. We are in the same team with a shared vision of a . There is no tussle between financial stability and Viksit Bharat growth. Financial stability and price stability do not inhibit growth. Far from it, they are essential for sustainable growth.

I look forward to working together with the regulated entities to improve the efficiency and effectiveness of financial intermediation to ensure that the due benefits reach the people of our nation. Likewise, on the demand side, I urge the industry to invest boldly and champion the entrepreneurial spirit that defines our nation. At a time, when balance sheet of banks and corporates are at their best, they should come together and drive the animal spirits to create an investment cycle which is so important at this juncture.

Lastly, in your respective roles, I urge you not to ever lose sight of the people you are serving. At the cost of sounding a bit sermonic, I must say that if there is any doubt in your mind, espouse the philosophies of Gandhi's Talisman . Take , or Antyodaya decisions keeping in mind how your actions will impact the most vulnerable person of our country.

I wish the conference a huge success.

Thank you. Namaskar. Jai Hind.",Sanjay Malhotra
https://www.bis.org/review/r250902c.htm,Abdul Rasheed Ghaffour: Launch of the Tun Ismail Ali Center of Excellence,"Opening remarks by Mr Abdul Rasheed Ghaffour, Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the Launch of the Tun Ismail Ali Center of Excellence
Asia School of Business, Kuala Lumpur, 14 August 2025.",2025-08-14 00:00:00,"## Abdul Rasheed Ghaffour: Launch of the Tun Ismail Ali Center of Excellence

Opening remarks by Mr Abdul Rasheed Ghaffour, Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the Launch of the Tun Ismail Ali Center of Excellence Asia School of Business, Kuala Lumpur, 14 August 2025.

* * *

It is a privilege to welcome you to the official launch of the Tun Ismail Ali Centre of Excellence ('TIA CoE'). The Tun Ismail Ali Centre builds upon Bank Negara Malaysia's longstanding commitment to policy-relevant research and institutional development. Previously known as the Tun Ismail Ali Chair and housed at Universiti Malaya, the Tun Ismail Ali Centre of Excellence, has now merged with the ASB Central Banking Research Centre and will continue under the patronage of the ASB.

This reflects the evolution in both ambition and scope, building on its legacy of enhancing academic excellence in monetary and financial economics. Since its reconstitution late last year, the Centre has brought together leading scholars and practitioners to deliberate and address pressing policy issues such as changing international monetary system dynamics, macro-financial linkages, and monetary policy challenges. These efforts show the Centre's role in linking research with real-world issues confronting policymakers, especially central bankers.

In reflecting on the Centre's journey, on behalf of the Bank, I would like to express our profound appreciation to Universiti Malaya for graciously hosting the Centre for over two decades since its establishment in August 2000. I would also like to record our deepest gratitude to Tan Sri Dr. Zeti Akhtar Aziz, for her visionary leadership of the Bank and the Centre's initial founding in UM. As we look ahead, we are optimistic that with an expanded mandate and a new home at the ASB, the Centre will scale new heights in advancing thought leadership and policy-relevant research.

## Ladies and gentlemen,

We gather at a time of great transformation in the global monetary and financial system - where long-standing boundaries of central bank mandates are being tested by unprecedented structural shifts. Developments such as geoeconomic fragmentation, climate change, and the rapid digitalisation of finance are increasingly shaping the broader economic landscape, with far-reaching implications for the global financial and monetary system. If unprepared, central banks risk being caught off guard by brewing risks which could challenge incumbent systems and established frameworks.

Tun Ismail once said, 'The Central Bank works in an imperfect world, with instruments whose influence is only imperfectly understood, in seeking to attain objectives imperfectly focused and stated only in broad general terms. As such, the central banking profession is imperfectly defined and the decision-making process certainly not free from uncertainty and anxiety. To be successful, therefore, the central banker needs to have the serenity to accept what cannot be changed, the courage to change what cannot be accepted and most important, the wisdom and experience to differentiate one

This quote remains deeply relevant today, where navigating the new from the other.' 1 economic landscape demands central bankers to display good judgment, resilience and above all, adaptability.

This must still, of course, be grounded in intellectual rigour and sound research. It is therefore especially insightful to draw upon the work of scholars and subject matter experts at the frontier of thought. In this instance, I would like to highlight some of the foundational work by today's guest of honour, Professor Robert Merton, particularly on how we conceptualise the financial system itself.

Professor Merton's work 2   on the functional perspective of financial intermediation reminds us that it is the - not the - that matters most. Whether it is a bank function form or a blockchain protocol performing maturity transformation or credit intermediation, it is important to understand the underlying risks, rather than just the institution undertaking them. In this way, Professor Merton's insight equips policymakers to not only interpret change, but to see through it, thus enabling clearer insights for policies.

For central banks, focusing on the rather than the of financial innovation is function form essential - especially amid developments that are reshaping our operating landscape. To illustrate this, we need to look no further than examples provided by the accelerated pace of innovation in the financial sector, including the rise of tokenised platforms and non-bank financial intermediaries. 3

Looking at functions helps us keep a focused view on sizing up the key risks to our mandates from digitalisation and innovation, including potential implications to monetary transmission and overall economic and financial stability.

## Ladies and gentlemen,

Bank Negara Malaysia has long been a proponent of evidence-based policymaking. Over the years, the Bank's flagship publications have expounded economic and financial policies that are anchored on comprehensive and sound analysis. We trust the Centre shares this mission and becomes a leading voice in monetary and financial economics, both in the region and globally, especially in areas which we have long pioneered and championed. To this end, we are committed to furthering global policy discourse in the areas ripe for exploration such as geoeconomic fragmentation, climate change, artificial intelligence and Islamic finance.

It is fitting that the Centre is inspired by a man whose intellect, wisdom, integrity, work ethic and dedication to nation-building became, and still remain, a hallmark of excellence in public service. Many years on, his conduct continues to inspire us to break new grounds in pursuit of progress for the people and the nation. In having the privilege to track paths forged by Tun Ismail Ali and my esteemed predecessors like Governor Zeti, I am time and time again reminded that we stand on the shoulders of giants.

As we reflect on the founding of Tun Ismail Ali Centre of Excellence up to today, we also honour the legacy of Tun Ismail, a man whose leadership was defined by always

putting nation above self. He was a central banker extraordinaire and a true statesmanwell ahead of his time. May this Centre embody his spirit of principled leadership and policy excellence as we meet the challenges of an increasingly complex world.

## Thank you.

Gunasegaram, P. (2021). . Bank Negara Malaysia. p.171. 1 Tun Ismail Ali: Paragon of Trust and Integrity

Merton, R. C. (1995). . 2 Financial innovation and the management and regulation of financial institutions Journal of Banking &amp; Finance, 19(3-4), 461-481.  https://doi.org/10.1016/0378-4266(95)00002-P

Bank for International Settlements. (2025). . 3 Annual economic report 2025 https://www.bis.org/publ/arpdf /ar2025e.htm",Abdul Rasheed Ghaffour
https://www.bis.org/review/r250901d.htm,Christine Lagarde: Beyond hysteresis - resilience in Europe's labour market ,"Opening panel remarks by Ms Christine Lagarde, President of the European Central Bank, at ""Labor markets in transition: demographics, productivity, and macroeconomic policy"", an economic symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, 22 August 2025.",2025-08-22 00:00:00,"SPEECH

## Beyond hysteresis: resilience in Europe's labour market

Opening panel remarks by Christine Lagarde, President of the ECB, at the annual Economic Policy Symposium 'The policy implications of labour market transition' organised by the Federal Reserve Bank of Kansas City in Jackson Hole

Jackson Hole, 23 August 2025

Alexis de Tocqueville - one of the keenest observers of early American democracy - once wrote: 'History is a gallery of pictures in which there are few originals and many copies.'

In monetary policy, too, we often look to past cycles for guidance, expecting familiar patterns to repeat themselves. But this cycle has proven to be original in striking ways.

Major central banks have undertaken the most aggressive tightening in a generation. At the outset, there were understandable concerns about how such a rapid and substantial adjustment would affect labour markets.

Historically, disinflation has come at a cost. Since the 1960s, the 'sacrifice ratio' has typically been around

1. [ ]  In practice, this means that permanently lowering inflation by 1 percentage point has cost about 1% of GDP in forgone output. 1

And given Europe's well-known structural rigidities, it was reasonable to assume that a sharp tightening could lead to rising unemployment [ ] , which might then become entrenched through hysteresis effects (Slide 2). [ ] 2 3

Even in the United States - with its more flexible labour market - many feared that a significant rise in unemployment would be required to bring inflation under control.

Instead, we find ourselves in a very different position from what many expected: in both the euro area and the United States, inflation has fallen sharply, and at a remarkably low cost in terms of employment. [ ] 4

In fact, in the euro area we have seen the opposite of hysteresis: employment growth has been significantly stronger than historical patterns would have predicted.

Traditionally, Okun's law suggests that employment tends to grow at roughly half the pace of real GDP. Yet between the end of 2021 and mid-2025, cumulative employment rose by 4.1% - an increase of 6.3 million of people in employment - while real GDP increased by 4.3%. That implies an employment elasticity nearly twice as high as Okun's relationship would suggest.

For monetary policymakers, the key question is why this atypical employment response has occurred and whether it signals a broader shift in how inflation will respond to different types of shocks.

Part of the answer lies in global factors. Monetary tightening helped bring inflation back to target, but it coincided with other forces that supported activity: an easing of supply constraints worldwide, a steep drop in energy prices and proactive fiscal policies - all of which help explain the unusually low sacrifice ratio. [ ] At the same time, Europe's experience reflects distinctive domestic drivers. Three features have shaped its labour market performance. 5

First, a delayed wage response to inflation that supported higher employment; second, a reduction in hours worked, driven by labour hoarding and changing preferences; and third, an expansion in labour supply that kept pace with rising demand.

## The response of real wages to inflation

Although the euro area has faced a complex mix of shocks in recent years, the dominant force was a major negative supply shock, as post-pandemic bottlenecks coincided with the cut-off of Russian gas. [ ] Historically, supply shocks of this scale would have quickly passed through to nominal wages, with real wage growth often outpacing productivity. [ ] 6 7

For example, after the oil shocks of the 1970s, real wages [ ]  in Europe rose by around 20% between 1972 and 1976, while productivity increased by only 15% (Slide 3, left panel). A similar pattern occurred during major demand shocks such as the global financial crisis (Slide 3, middle panel). 8

This time, however, the response was different - which was the first distinctive feature of this episode. Real wages fell by nearly 2% between late 2021 and early 2023, and only gradually caught up with cumulative productivity growth early last year (Slide 3, right panel).

This unusual pattern reflects a European labour market that has become more flexible in some respects, while remaining rigid in others.

Most notably, formal automatic indexation of wages to inflation has all but disappeared: in the 1970s it covered around half of all private sector employees, whereas today it applies to only about 3%. For more than half of private sector workers, inflation now plays no formal or automatic role in wage setting. [ ] At the same time, nearly 60% of workers remain covered by multi-year collective agreements which take inflation into account but adjust only gradually - a nominal rigidity that created a lag in wage adjustment relative to prices. [ ]  Research also suggests that as the workforce ages, union priorities are shifting, with greater emphasis on pensions and employment protection relative to wage growth. [ ] 9 10 11

ECB analysis confirms that this delayed real wage response acted as a shock absorber. By widening the gap between productivity and labour costs, it eased unit labour cost pressures and supported firms' profitability, while also making labour relatively more attractive than capital. Both dynamics encouraged firms to expand hiring.

For example, the 'factor substitution' effect is estimated to have accounted for around a quarter of total employment growth since the end of 2019, with most of this impact occurring after the onset of the energy crisis. [ ] 12

This effect was particularly important in manufacturing, which was hit harder than services by negative shocks. That divergence helps explain some of the cross-country heterogeneity in employment growth in the euro area. [ ]  Yet, at the aggregate level, manufacturing employment still remained well above what Okun's law would predict (Slide 4, left panel). 13

A key factor was firms' ability to pass on higher input costs, which boosted profit margins and led to a steeper fall in sectoral real wages (Slide 4, right panel). Real wages in industry, measured using sectoral value-added deflators, fell by almost 11% at the trough. [ ] 14

For comparison, in euro area countries where automatic wage indexation remains in place, the decline in real wages was more limited, and the link between output and employment was notably weaker than for the euro area aggregate. [ ] 15

## The reaction of hours worked

However, the increase in employment in the euro area has been accompanied by a decline in average hours worked - the second distinctive feature of the labour market.

Average hours remain 1% below their pre-pandemic level, equivalent to about four hours fewer per worker per quarter, or a reduction in labour input of roughly 1.3 million full-time jobs (Slide 5).

Two factors help explain how employment could rise even as hours fell. [ ] 16

The first is labour hoarding, which curbed job losses in firms facing weaker demand - particularly those hit by the energy crisis - but at the cost of fewer hours worked.

The ECB's labour hoarding indicator rose to almost 30% in the third quarter of 2022 - nearly double its pre-pandemic average - and climbed even higher in manufacturing (Slide 6, left panel).

This behaviour reflected broader labour market tightness: survey evidence suggests employers viewed hoarding as less costly and less risky than rehiring later in an even more competitive market. Fears of future labour shortages - probably reinforced by Europe's demographic outlook - also played a role. [ ] 17

The fall in sectoral real wages, together with unusually high profit margins, in turn made it easier for firms to sustain this strategy. [ ] 18

The second factor is a shift in worker preferences towards shorter hours, which constrained firms' ability to raise hours per employee and left them more reliant on hiring. [ ] 19

Average hours worked in Europe have been in long-term decline, driven roughly two-thirds by an increase in part-time employment, much of which is voluntary. [ ]  Since late 2021, however, the decline has 20

stemmed mostly from a fall in the number of long hours worked [ ]  and from reduced overtime among fulltime workers, especially in industry. 21

While part of this shift is cyclical, it also has a structural component. Over the past decade, preferences for long working hours have declined in parallel with the recorded drop in overtime (Slide 6, right panel). [ ] 22

## Increasing labour supply

Still, for these two features - lower real wages and fewer hours worked - to be compatible with higher employment, labour supply had to respond.

This is where the third feature comes in: the surge in the labour force in recent years. On demographics alone, Europe's capacity to expand its labour supply is already constrained. By 2040, the working-age population [ ]  is projected to shrink by around 3.4 million. Since 2002, the number of 23

people over 60 has risen by 28 million, while that of those aged 15-60 has fallen by 2.4 million, and of those under 14 by 2.8 million.

Yet after a brief dip during the lockdowns, the labour force was back to its pre-pandemic level by the end of 2021 - and has since grown by about six million people.

This reflects continued increases in participation and employment, particularly among women and older individuals, extending trends already in motion before the pandemic. ECB analysis suggests that without the compositional shift towards older workers - who often enter the labour market directly into employment

- the unemployment rate today would be around 6.6% rather than 6.3%. [ ] 24

Even more important, however, has been the rise in both the number and participation rate of foreign workers.

Although they represented only around 9% of the total labour force in 2022, foreign workers have accounted for half of its growth over the past three years. [ ]  Without this contribution, labour market conditions could be tighter [ ]  and output lower. 25 26

In Germany, for example, GDP would be around 6% lower than in 2019 without the contribution of foreign workers (assuming no behavioural changes among domestic workers). Spain's strong post-pandemic GDP performance - which has helped support the euro area aggregate - also owes much to the contribution of foreign labour. [ ] 27

## Implications going forward

Looking ahead, it is difficult to say with confidence whether the patterns of recent years will persist, given the complex interplay of cyclical and structural forces. Drawing conclusions about future sacrifice ratios from current developments could therefore be misleading.

But it is worth taking a broader look at some underlying trends.

First, the demographic trend is likely to continue. And this is not just a European story: new research suggests that 2023 was likely to have been the first year in human history when the global fertility rate fell below the replacement rate. [ ] 28

Migration could, in principle, play a crucial role in easing labour supply constraints in selected regions. But in all plausible scenarios - even those assuming high migration - the euro area's working-age population will continue to shrink (see illustration for the 20-64 age group in Slide 7, left panel).

Moreover, political economy pressures may increasingly limit inflows, and even when migration is significant, its impact on easing labour shortages depends on how closely migrants' skills match vacancies in key sectors. [ ] 29

Second, labour hoarding could persist as a feature of the employment landscape. As demographic trends constrain hiring and preferences shift towards shorter hours, firms may find it harder to increase labour input during upswings. This, in turn, could strengthen incentives to hoard labour during downturns.

Third, these same forces could weigh on labour productivity. In Europe, productivity growth has historically displayed a pronounced cyclical pattern (Slide 7, right panel), in part because firms tend to reduce hours rather than shed workers in downturns. [ ] 30

If lower job turnover continues to slow labour reallocation, it is likely to reduce the efficiency of job matching. By contrast, the stronger post-pandemic productivity growth in the United States has been linked to higher labour market churn. [ ]  An ageing population is also found to slow productivity growth. [ ] In such a scenario, Europe might escape the unemployment hysteresis that plagued past cycles, but at the cost of a decline in productivity. 31 32

However, this is of course not the only possible path. This view focuses solely on labour market dynamics and overlooks the potential for automation and artificial intelligence to boost productivity and investment, which may well also be spurred by a shrinking population.

## Conclusion

Let me conclude.

The European labour market has come through recent shocks in unexpectedly good shape, helped by a mix of global tailwinds and domestic strengths.

But we should be cautious in assuming that this unique constellation of forces will last. To borrow from de Tocqueville, we should not expect copies of past cycles to guide us through original ones.

By understanding the sources of recent resilience, we can be better prepared for the next shock, whatever shape it may take.

## Annexes

23 August 2025

1.

Deutsche Bundesbank (2024), ' ', Monthly Report , July. The global disinflation process and its costs

2.

However, the ECB staff macroeconomic projections did not expect a surge in unemployment. In March 2022, the projections saw unemployment at 7.3% in 2022, 7.2% in 2023 and 7.0% in 2024. In reality, it came in at 6.8%, 6.5% and 6.4%, respectively.

3.

Blanchard, O.J. and Summers, L.H. (1986), ' ', NBER Macroeconomics Annual 1986 , Vol. 1, in Fischer, S. (ed.), MIT Press, Cambridge, pp. 15-90. Hysteresis and the European Unemployment Problem

4.

For a discussion about the post-pandemic US labour market developments, see for example Eusepi, S. and Ayşegül, Ş (2025), 'Assessing Maximum Employment: A Flow-based Approach', NBER Working Paper, No 33878, May.

5.

See also the discussion in Forbes, K., Ha, J. and Kose, M.A. (2025), ' ', VoxEU, 28 July 2025. The post-pandemic disinflation: Low sacrifice, high prices

6.

ECB (2025), ' ', Occasional Paper Series , No 371, June. A strategic view on the economic and inflation environment in the euro area

7.

Battistini, N., Grapow, H., Hahn, E. and Soudan, M. (2022), "" "", Economic Bulletin , Issue 5, ECB. Wage share dynamics and second-round effects on inflation after energy price surges in the 1970s and today

8.

Compensation per employee deflated by the GDP deflator. The general pattern also holds if wages are deflated by HICP inflation or by the private consumption deflator.

9.

See footnote 6 and Koester, G. and Grapow, H. (2021), "" "", Economic Bulletin , Issue 7, The prevalence of private sector wage indexation in the euro area and its potential role for the impact of inflation on wages

ECB.

10.

Bates, C., Bodnár, K., Healy, P. and Roca I Llevadot, M. (2025), ' ', Economic Bulletin , Issue 1, ECB. Wage developments during and after the high inflation period

11.

Lesch, H. (2004), ' ', Intereconomics , Vol. 39, Issue 2, pp. 102-108. For some recent examples of how collective agreements take the interests of older workers into account, see Eurofound (2025), , Publications Office of the European Union, Luxembourg. Ageing societies and challenges for collective bargaining policy Keeping older workers in the labour force

12.

Consolo, A. and Foroni, C. (2024), ' ', Economic Bulletin , Issue 4, ECB. Drivers of employment growth in the euro area after the pandemic - a model-based perspective

13.

For example, in Germany employment in manufacturing has declined by 4.2% since the end of 2019.

14.

The fall in real wages was also facilitated by fiscal measures, which - according to ECB analysis compensated households for about a third of their welfare loss, though with significant differences between countries. See Amores, A. F., Basso, H.S., Bischl, S., De Agostini, P., De Poli, S., Dicarlo, E., Flevotomou, M., Freier, M., Maier, S., García-Miralles, E., Pidkuyko, M., Ricci, M. and Riscado, S. (2023), 'Inflation, fiscal policy and inequality: The distributional impact of fiscal measures to compensate consumer inflation', Occasional Paper Series, No 330, ECB.

15.

For example, in Belgium real wages (deflated by the GDP deflator) did not decline and had already caught up with productivity by early 2023. In turn, employment grew cumulatively at only around half the pace of output.

16.

For an overview of other factors supporting this trend, see Arce, O., Consolo, A., Dias da Silva, A. and Mohr, M. (2023), ' ', The ECB Blog , ECB, 7 June. More jobs but fewer working hours

17.

Berson, C., Botelho, V., Dias da Silva, A., Foroni, C., Mohr, M., Schroeder, C. and Weissler, M. (2024),

' ', Economic Bulletin , Explaining the resilience of the euro area labour market between 2022 and 2024

Issue 8, ECB.

18.

Botelho, V. (2024), ' ', Economic Bulletin , Issue 4, ECB. Higher profit margins have helped firms hoard labour

19.

Arce, O and Sondermann, D. (2024), ' ', The ECB Blog , ECB, 6 May. Low for long? Reasons for the recent decline in productivity

20.

Botelho, V., Consolo, A. and Dias da Silva, A. (2021), ' ', Economic Bulletin , Issue 6, ECB. Hours worked in the euro area

21.

Defined as more than 49 hours per week.

22.

Berson, C. and Weissler, M. (2025), ' ', Economic Bulletin , Issue 3, ECB. Who wants to work more? Revisiting the decline in average hours worked

23.

Aged 15-74.

24.

Berson, C., Dias da Silva, A. and Weissler, M. (2025), ' ', Economic Bulletin , Issue 1, ECB. The role of demographics in recent developments in the unemployment rate

25.

Foreign workers are defined as members of the euro area labour force who are not citizens of a euro area country.

26.

Immigration increases both labour supply and demand, so the net effect of lower inflows can be ambiguous.

27.

Arce, O., Consolo, A., Dias da Silva, A. and Weissler, M. (2025), ' ', The ECB Blog , ECB, 8 May. Foreign workers: a lever for economic growth

28.

Fernández-Villaverde, J. (2025), ' ', slides, Penn Institute for the Study of Markets, 31 May The Demographic Future of Humanity: Facts and Consequences

29.

See footnote 27.

30.

See footnote 19.

31.

Dias da Silva, A., Di Casola, P., Gomez-Salvador, R. and Mohr, M. (2024), ' Labour productivity growth in

', Economic Bulletin , Issue 6, ECB. 32. the euro area and the United States: short and long-term developments

Maestas, N., Mullen, K. J. and Powell, D. (2023), ' ', American Economic Journal: Macroeconomics , Vol. 15, No 2, pp. 306- 332. The Effect of Population Aging on Economic Growth, the Labor Force, and Productivity

Reproduction is permitted provided that the source is acknowledged.

Media contacts",Christine Lagarde
https://www.bis.org/review/r250901c.htm,Christine Lagarde: Panel remarks at the International Business Council of the World Economic Forum,"Panel remarks by Ms Christine Lagarde, President of the European Central Bank, at the International Business Council of the World Economic Forum, Geneva, 20 August 2025.",2025-08-20 00:00:00,"## Christine Lagarde: Panel remarks at the International Business Council of the World Economic Forum

Panel remarks by Ms Christine Lagarde, President of the European Central Bank, at the International Business Council of the World Economic Forum, Geneva, 20 August 2025.

* * *

The global economy is at a challenging juncture. But despite recent trade tensions and substantial uncertainty, global growth has remained broadly steady so far.

This resilience has been mainly driven by tariff-induced distortions of economic activity. In the first quarter of the year, for example, we saw strong global frontloading as importers boosted their inventories in anticipation of higher tariffs.

That has led to stronger than expected growth. The International Monetary Fund finds that global growth for the first quarter of 2025 was 0.3 percentage points higher than it had projected back in April - with international trade and investment driving activity. 1

Recent trade deals have alleviated, but certainly not eliminated, global uncertainty, which persists on account of the unpredictable policy environment. One index of global trade policy uncertainty has fallen by roughly half from its peak in April, but remains well above its historical average. 2

The euro area economy proved resilient earlier this year in the face of a challenging global environment. This has largely been due to two factors.

First, Europe's export-oriented economy has benefited from the global frontloading, growing by more than expected in the first quarter of the year.

Sectors with higher export exposure to the United States - such as pharmaceuticals, which account for over one-fifth of euro area exports to the United States - recorded strong output growth during this time.

Of course, with tariff hikes now being implemented, this effect is now reversing and the expected slowdown in euro area growth was already evident in the second quarter of this year.

The second factor underpinning the economy has been stronger private consumption and investment, which have contributed positively to growth. Moreover, the labour market remains robust. The unemployment rate - standing at 6.2% in June - has changed little over the past year, while the labour force has continued to grow.

Looking ahead, according to the Eurosystem's June projections, growth is expected to slow in the third quarter as frontloading unwinds. The recent trade deal agreed between the European Union and the United States imposes higher tariffs on euro area goods relative to the US tariff regime before April.

The trade deal establishes an effective average tariff estimated to lie between 12% and 16% for US imports of euro area goods. This effective average tariff is somewhat higher than - but still close to - the assumptions used in our baseline projections last June. 3

It is worth noting that the outcome of the trade deal is well below the severe scenario for US tariffs of over 20% for euro area goods envisaged in the June projections. At the same time, uncertainty persists as sector-specific tariffs on pharmaceuticals and semiconductors remain unclear.

ECB staff will factor the implications of the EU-US trade deal for the euro area economy into the upcoming September projections, which will guide our decisions over the coming months.

While the United States is - and will remain - an important trading partner, Europe should also aim to deepen its trade ties with other jurisdictions, leveraging the strengths of its export-oriented economy.

Europe has a strong track record to build on. As the number one trading partner for 72 countries, the EU already has the largest network of trade agreements in the world. 4

1  The IMF projects global growth to be 3.0% for 2025 as a whole, which is 0.2 percentage points higher than in the reference forecast of its April World Economic Outlook. See IMF (2025), ""Global Economy: Tenuous Resilience amid Persistent "", , July. Uncertainty World Economic Outlook

- 2  As at 11 August 2025. See ""Daily Trade Policy Uncertainty (7-day Moving Average)"" in Economic Policy Uncertainty.
- 3  See the "" Eurosystem staff macroeconomic projections for the euro area, June 2025"".
- 4  European Commission, "" EU competitiveness"".",Christine Lagarde
https://www.bis.org/review/r250902d.htm,Tuomas Välimäki: Where can stability be found if the anchor comes loose? Dollar turbulence and the euro's international role,"Speech by Mr Tuomas Välimäki, Board Member of the Bank of Finland, at the Bank of Finland's stakeholder event, Helsinki, 14 August 2025.",2025-08-14 00:00:00,"## Tuomas Välimäki: Where can stability be found if the anchor comes loose? Dollar turbulence and the euro's international role

Speech by Mr Tuomas Välimäki, Board Member of the Bank of Finland, at the Bank of Finland's stakeholder event, Helsinki, 14 August 2025.

* * *

Presentation accompanying the speech

## Where can stability be found if the anchor comes loose? Dollar turbulence and the euro's international role

First, may I also wish you a very warm welcome to this Bank of Finland stakeholder event. Governor Rehn's depiction of monetary policy in these times of uncertainty leads us nicely to the theme of my talk, which is the possible, though unlikely, prospect of a change occurring in the status of the global economy's anchor.

One consequence of the recent actions of the United States administration is that the dollar's standing as a safe haven and reserve currency has been the focus of more critical scrutiny. From the Eurosystem's perspective it is essential to look at how the euro's role in global financial markets can be developed in the present environment.

I shall briefly examine the factors behind the dollar's turbulence seen in the first part of the year and the opportunities to strengthen the role of the euro and European investment assets. I must emphasise at this point that I am not in any way calling for the euro's role to be strengthened at the expense of the fundamentals of the global economy.

The task of central banks is, above all, to stabilise the value of money and purchasing power. Trust in the monetary economy is both a premise for stability and a consequence of it. Wishing for or fostering change could be a risky undertaking, given this context. With the forces of change pushing on independently of us, our task is to analyse developments closely and to seek to strengthen the euro's position and its stability.

The US dollar is still by far the most important reserve currency, even though its share of global currency reserves has fallen from over 70% to less than 60% since the creation of the euro. At the end of 2024, the euro's share was about 20%. This is slightly higher than in the early years of the euro, but is lower than it was about 15 years ago, when its share was nearly one quarter. 1   The euro is still clearly the world's second most important reserve currency, even after the European sovereign debt crisis and the extended period of negative interest rates.

The euro is also second only to the dollar in other metrics too, such as in international debt, loans, deposits and foreign exchange turnover.

However, the euro's role in the global economy should not be taken for granted. Nor should its current position be seen as optimal. The circumstances for strengthening the

euro's role are now remarkably good - unfortunately, perhaps. For this to happen, however, there needs to be deeper economic integration in Europe. I shall return to this point.

There have been extraordinary signs this year that the dollar's dominance is being shaken. Underlying this has been the US economic policies.

This was perhaps most clearly highlighted in April, when the tariff announcements and questioning of the central bank's independence gave rise to a widespread reaction in the markets. The unpredictability of US policy is continuing, and there is still no end to the twists and turns - despite the many trade agreements that have been provisionally reached.

Besides trade policy, there has also been turbulence in the geopolitical environment. The United States has altered its stance towards its allies to such an extent that some countries, at least, might in the future be less willing than today to invest in the US.

At the same time, the US has introduced various economic policy reforms which, according to economists, will add further to the already large budget deficit. Although high debt levels are a problem in many economies, investors have started to question how sustainable the debt trajectory is in the United States, especially in a situation where the credit rating has weakened and there are repeated budget disputes in Congress.

There are also smaller and more technical considerations that do little to enhance the confidence of those investing in US debt securities - such as the country's loss of its AAA credit rating and the regular demands by Congress to raise the debt ceiling.

At the same time, there are indications that institutions regarded as stable are being undermined. Besides challenging the independence of the central bank, there have also been quarrels with the judicial system, and key economic statistics are starting to be politicised.

These actions have had an exceptional impact on the dollar. The exchange rate no longer follows yield spreads in the way we have been used to. The dollar has depreciated, even though US interest rates have risen in relation to the euro area.

The reaction of financial markets has not been limited to the weakening of the dollar. Following the turbulence of the tariff announcements, many of the established correlations in the financial markets were 'broken' for a short while. During the worst of the turbulence the dollar, US stocks and (long-term) Treasury bonds lost value. US government bonds also fell in value against swap rates, and the cost of hedging against dollar depreciation rose on the options market. This is exceptional, as the dollar and US government bonds have long been regarded among international investors as safe havens from crises and they have invested in these partly for this reason.

It was good news that amid the tariff upheavals there was some safe haven demand for euro area assets, and the markets functioned almost without difficulty.

Uncertainty over US assets has subsequently faded somewhat, but has not disappeared. The dollar is still considerably weaker than at the start of the year, and the unpredictability of US policy is, generally speaking, keeping investors on their toes.

For foreign investors, the dollar's negative correlation with share prices has traditionally provided a safeguard, and so the foreign exchange risk has often not been fully hedged. But now, investors have, with reason, been questioning whether this can be relied upon as before. There is evidence that, since April, international investors have been hedging their dollar positions more than previously. This has accelerated the weakening of the dollar, although it is not the only reason for this. The prices of currency options have also now been restored a little.

The demand for euro area debt securities has been strong. Foreign central banks have been active in buying euro government bonds, and the demand for corporate bonds has also been strong. Market participants are reporting that investors have been looking for alternatives to the dollar. This view is also supported by statistical data on the investment streams of funds and US debt securities. Nevertheless, on the basis of activity in the equity markets, it seems that tax reductions and the passion for technology have restored the optimism of investors towards the dynamic corporate landscape of the United States.

My own interpretation of these market indicators is that there are early signs that investor interest is shifting from the dollar to the euro and other currencies. So far, however, the evidence to support this is rather thin and does not yet reveal any fundamental shift. It remains to be seen whether the swings earlier in the year were just a shift in the tactical positioning of investors or whether investors are altering their investment strategies more permanently. From the viewpoint of orderly market functioning, the hope in any case is that capital movements will occur in a controlled manner in the longer run.

Based on market fluctuations, the way in which investors view the United States as an investment destination seems to have changed, at least to an extent. But what do investors themselves say?

Two surveys have recently been carried out that allow us to try to determine what major investors are thinking. The ECB's Institutional Investor Dialogue includes some of the largest asset management companies, while the OMFIF's Global Public Investor survey includes central banks and other important investors in public assets.

You can infer from the surveys, first of all, that investors do intend to structurally alter the allocation of investments away from the dollar, in part towards Europe. Many have already reduced their tactical US allocations.

Secondly, trade policy and geopolitics, as well as the situation more generally in the United States, are a cause of widespread concern, and this does have an impact on investment decisions.

And thirdly, investors do not believe that the dollar's reserve currency status will crumble, and the expectation is that changes will occur slowly. The position of the dollar

is nevertheless of such importance that even a small-scale shift of international investors from the dollar to the euro would bring a considerable amount of additional investment to Europe.

The surveys therefore verify the signals given by market indicators. Although no significant shift has occurred so far, the actions of the United States have caused investors to ponder alternatives to the dollar. I must add here that I shall be very interested to hear about how you view the situation.

Europe and the euro now have an opportunity to benefit from investor interest. The role of euro area sovereign bonds as a global safe haven appears to have strengthened in recent months. But what can we do better in order to attract more investors to Europe?

We have really quite a considerable opportunity now if we make the right choices and work together towards a common goal.

Let's consider for a moment what features are actually required of a global reserve currency. To begin with, the economy in question must normally be large and growing, with debt at a sustainable level. Stable and strong institutions are also clear advantages for the euro. We must maintain and strengthen these basic pillars in Europe in the future, too. Europe's position will also be underpinned in the coming years by bolstering its capacity to defend itself. These already feature broadly on the agenda of Europe's politicians.

Deeper, more liquid and more unified capital markets would also support the international use of the euro. The wide-ranging promotion of a savings and investments union is at the heart of this, and we at the Bank of Finland, and in the Eurosystem, are seeking to play our part in these developments.

In the current geopolitical environment, the role of a digital euro as a new European means of payment has become more significant. A more effective payment system, for instance regarding wholesale and cross-border payments, would in other respects, too, improve the effectiveness of European financial markets and boost the euro's attractiveness. 2   We will also see to the euro's availability in all circumstances, even outside the euro area, through the ECB's liquidity facilities. This, too, will foster the euro's international role.

I would nevertheless like to concentrate today on the sufficiency of safe investment assets. We are still lacking a common and safe European investment asset. As we know, the discussion about financing Europe's defence is especially topical. Could we also at the same time strengthen the euro's ability to function as a global reserve currency? Or to put it another way, could we kill two birds with one stone?

First let's consider what we mean by a safe investment asset.  3

A safe investment asset is an asset for which there is the greatest confidence that its value will be preserved in all circumstances. Such assets are highly creditworthy in that the probability of the issuer defaulting is extremely low. They are also very liquid, making them easy to sell in almost all circumstances. Safe investment assets therefore tend to retain their value or even gain in value in times of crisis in the markets.

Safe investment assets bolster risk assessment in financial markets, as other securities and their risk level are priced in relation to these safe assets. This improves market transparency and reduces financing costs.

Safe investment assets are also used as collateral and as underlying security in many market segments that are important for the functioning of the financial markets, especially in the repo market, in derivatives and in central bank refinancing operations. Without a sufficient amount of high-quality collateral, key financing channels can freeze up. This is what we saw in the global financial crisis that began in 2008.

US government bonds have long met the conditions for being safe investment assets. They have formed an anchor for global markets - a foundation for pricing international finance, and a safe haven for investors to move to when the pricing uncertainties related to other investment assets exceed a certain tolerance level.

The existence of safe investment assets is therefore essential to the functioning of the markets. The United States benefits in various ways from being an issuer of safe investment assets.

As US government bonds are considered a safe investment, there is extensive demand for them globally. This reduces the country's financing costs. The US enjoys this socalled 'convenience yield', a premium which investors are willing to pay for the benefit of holding US bonds. Envious onlookers might instead call this, in the words of Giscard d'Estaing, an 'exorbitant privilege'.

Extensive international demand also means that there is unending additional capital for financing investments in the United States. What's more, the US can also rely on an inflow of capital in crisis situations. Looking at the euro area, it would be advantageous if its monetary policy were to be transmitted more evenly across the euro countries in crisis situations too - instead of yield spreads widening between countries, as tends to happen nowadays.

Can the euro's international role be fostered by increasing the amount of safe investment assets in the euro area?

As I noted earlier, the euro and the European sovereign bond markets would appear to meet the basic requirements for becoming international safe investment assets.

However, although our sovereign bond market is large - in excess of EUR 10 trillion - it is only about one third the size of its US counterpart. The position of the debt securities market in the euro countries is further weakened by it being fragmented on the basis of the various issuers.

As a consequence, we actually have a lot fewer safe, highly creditworthy investment assets. The closest to a safe investment asset that we have in the euro area is the German 10-year Bund, but the volume of these is small from the perspective of the global financial markets.

Regarding the completion of Europe's capital markets union, it is important that we have a sufficient supply of euro-denominated safe investment assets for the purpose of

financing the growing investment needs and for bolstering the euro's international position.

Within the current framework, more safe investment assets for Europe could be found in the medium term by improving the credit ratings of the EU's Member States. An improvement in member countries' debt sustainability would also be desirable from this perspective.

If Europe was able to offer a genuinely safe and liquid investment asset equivalent to US government bonds, it would provide investors with a credit-risk free, liquid, homogeneous alternative as a foundation for their investment portfolios. This would also advance the wider use of the euro. In the surveys I mentioned earlier, investors specifically identified the absence of a safe investment asset as being the biggest obstacle to expanding the euro's reserve currency role, although they also pointed to the temporary nature of common debt (EU bonds), and the inadequate liquidity of the government bond markets.

The creation of investment assets is not, of course, a sufficient justification in itself for accumulating public debt, but there is currently a justified need in Europe for debt financing both nationally and on a common basis, because capital is needed for the necessary strengthening of Europe's common defences.

Europe already has a significant amount of common European debt [left-hand graph]. But even these debt securities do not behave like safe investment assets.

What, then, do we need to do to ensure any future common European debt is to be more like a safe investment asset?

A clue can be gained by looking at a comparison of the debt securities of particular institutions. The interest rate on ESM debt is the lowest among EU institutions [righthand graph]. The ESM is well capitalised. This emphasises the need for common revenue streams in order that common debt can really be a safe investment asset.

A safe asset requires not only a clear and credible guarantee structure but also certain more technical properties, such as the inclusion of active futures trading in the most important bond indices, permanent and homogeneous issuances and active collateral usage in the repo market.

Nevertheless, current institutional structures do not allow the creation in the euro area of an instrument with an adequate guarantee structure. An investment asset that is genuinely like the US government bonds would require either a common tax base, a federal budget or other institutional division of responsibilities within which you could issue homogeneous and credit-risk free debt securities.

The creation of genuinely safe investment assets would therefore require significant changes to European institutions. I do nevertheless believe that a well-designed common European safe asset - whether in the form of eurobonds, common debt securities or some other structure - could constitute a safe investment asset and its benefits could be distributed more widely among Member States. The euro countries' 'convenience yield' should not concern only German bonds. Public debate on the

different alternatives is already under way. Covering borrowing with common revenue streams is critically important, however.

But I would also emphasise at the same time that alongside the creation of a common safe investment asset, it is also important to strengthen national safe investment assets.

To finish with, I shall run through a few concluding remarks. The role of the euro in international financial markets is robust, but it should not be taken for granted. The latest actions by the United States have raised questions among investors about the role of the dollar, and Europe now has a unique opportunity to strengthen its own position. This is not an end in itself, but, rather, a stronger international role for the euro would support growth in the euro area economy and the strategic autonomy of the euro area in a changing world.

This requires us to work in a determined manner to foster economic growth, ensure debt sustainability, maintain stable institutions and deepen the capital markets.

There should be a focus on increasing the amount of safe investment assets, particularly now when there are discussions in connection with the financing of defence spending. A safe investment asset is not merely a technical financial detail - it is an essential element of a capital market that finances investments. With common input at EU level, it should be possible to improve the efficiency of budgeting and borrowing.

As always, major reforms are challenging and take time, but nothing can be completed if it's never been started. To paraphrase President Kennedy: We choose to do things not because they are easy, but because they are hard.

If we are to succeed, the EU must develop a strategy which would allow the creation of additional, genuinely common, safe investment assets and would improve the debt sustainability of Member States. This would foster economic growth and the stability of the financial markets, and would also deepen the capital markets union and strengthen the euro's role as an international currency.

Thank you for your kind attention. With that said, I now look forward to hearing you views on the development of the market and on ways to strengthen the role of the euro.

1 The euro's international role is examined in more detail in the ECB's annually produced report 'The international role of the euro', which was published in June this year.

2 I have spoken about the importance of a digital euro and payment modernisation in various other contexts, such as in a speech entitled  'A digital euro could be a cornerstone for payments' (in Finnish), on 15 May 2025, and another entitled  'Finnish payment and settlement systems should be developed for a future common European market' (in Finnish), on 10 March 2025.

3  I have discussed this earlier in a blog post:  https://www.eurojatalous.fi/fi/blogit/2025 /turvallinen-sijoituskohde-on-paaomamarkkinoiden-ankkuri/, (in Finnish) on 30 April 2025.",Tuomas Välimäki
https://www.bis.org/review/r250902b.htm,"Junko Nakagawa: Economic activity, prices, and monetary policy in Japan","Speech by Ms Junko Nakagawa, Member of the Policy Board of the Bank of Japan, at a meeting with local leaders, Yamaguchi, 28 August 2025.",2025-08-28 00:00:00,"

Bank  of J a p a n

August  28,  2025

## Economic Activity, Prices, and Monetary Policy in Japan

Speech at a Meeting with Local Leaders in Yamaguchi

## NAKAGAWA Junko

Member of the Policy Board

## I. Current Situation of Economic Activity and Prices

## A. Current Economic Developments Abroad

I will first briefly touch on the current situation of overseas economies (Chart 1). Although tariff negotiations between the Japanese and U.S. governments have resulted in an agreement recently, and  progress  has  been  made  in  negotiations  and  agreements  on  trade  and  other policies in each jurisdiction, there remain many uncertainties in this regard. With respect to global business sentiment, as of July 2025, the Purchasing Managers' Index (PMI) for the services industry has been clearly above 50 -- the break-even point between improvement and deterioration -- while the PMI for the manufacturing industry has been at around 50. Let me outline the projected growth rate of the global economy in terms of the weighted averages, which are calculated using countries' share in Japan's exports as weights and the growth rate in the World Economic Outlook (WEO) compiled by the International Monetary Fund (IMF). Specifically, it is projected that the growth rate for 2025 and 2026 will decelerate to the range of 2.5-3.0 percent, and the rate for 2027 will return to around 3 percent, which is broadly in line with the average growth rate since 1980. These projections for 2025 and 2026, released in July, have been revised slightly upward from those in April.

## B. Current Economic Developments in Japan

The Bank of Japan judges that Japan's economy has recovered moderately, although some weakness has been seen in part. In what follows, I would like to explain current developments in Japan's economy from two aspects: the corporate sector and the household sector.

## 1. Corporate sector

Let me start with the corporate sector (Chart 2).

I  would like to start with the Financial Statements Statistics of Corporations by Industry, Quarterly , and consider the latest data for the January-March quarter of 2025. Current profits for all industries and enterprises, excluding the finance and insurance industries, decreased by 2.6 percent quarter on quarter; however, on a year-on-year basis, current profits for the same quarter increased by 3.8 percent, which is a high level at around the historical peak. By industry, although current profits of manufacturers decreased by 2.4 percent year on year, they have remained at high levels on the back of the recovery in IT-related demand, mainly

for AI, and the increase in orders related to business fixed investment. Meanwhile, current profits  of nonmanufacturers increased  by  7.0  percent  year  on  year, and  this is mainly attributable  to robust demand  for  digital-related  investment, solid  demand  for  services, including inbound tourism demand, and progress in price revisions.

As  for  business  fixed  investment, the  aggregate  supply  of  capital  goods --a  coincident indicator of machinery investment -- has been resilient, supported by demand for AI- and labor saving-related investments. Despite being affected by delays in construction projects due to high construction material prices and labor shortages, private construction completed (nonresidential) --a  coincident  indicator  of  construction  investment --has  increased moderately,  supported  by  strong  construction  demand  related  to,  for  example, logistics facilities and urban redevelopment.

Next, I will turn to industrial production and exports (Chart 3). Industrial production was more or less flat for the April-June quarter. Automobile production has decreased recently due  to  the  reactionary  decline following  the  increased production  at  some  automakers, although capacity utilization rates have remained high, supported by solid demand at home and abroad. With robust AI-related demand, such as for data servers, production of electronic parts and devices has increased, induced by front-loading of production in Asia in preparation for the possible introduction of sectoral tariffs on semiconductors by the U.S. government. I will outline developments in real exports through July, shown in the right panel of Chart 3. Real exports increased for the January-March quarter, reflecting the front-loading due to tariff hikes. Since April, they have been close to the historical peak on the whole; although exports of some goods such as automobile parts have decreased in reaction to the prior front-loading, exports of IT-related goods have seen a front-loading.

Let me now outline developments in real exports by region and by type of goods (Chart 4). By region, exports to the United States increased in the January-March quarter by 8.5 percent on  a  quarter-on-quarter  basis,  likely  due  to  the  front-loaded exports  of  goods  such as automobile parts, reflecting tariff hikes. Thereafter, exports to the United States decreased by 3.3 percent in the April-June quarter on a quarter-on-quarter basis and by 4.9 percent in July relative to the April-June quarter, partly reflecting a reactionary decline following the front-

loading. That said, the level of exports to the United States has been maintained on the back of resilient demand in the country. Exports to Europe have continued to be relatively weak, reflecting subdued business fixed investment in the region. Exports to China have remained more or less flat at low levels due to the leveling-off of demand for semiconductor production equipment, as Chinese manufacturers' increased competitiveness has led to a shift to local production. Exports to the NIEs, ASEAN, and some other Asian economies have increased. This reflects the  front-loading  of  exports  in  preparation  for  the  possible  introduction  of sectoral  tariffs  on  semiconductors  by  the  U.S. government,  with  solid  global AI-related demand. Moving on to the right panel of Chart 4, which shows developments in exports by type of goods, exports of automobile-related and IT-related goods have seen a front-loading due to the increase in tariffs, while exports of automobile-related goods have also seen a subsequent reactionary decline. Exports of capital goods have picked up as a trend, albeit with fluctuations, supported by resilient demand for semiconductor production equipment. Exports of intermediate goods have been flat at low levels, due to oversupply in Asia.

To examine the impact of tariffs on the corporate sector, it will be necessary to assess the latest data.

## 2. Household sector

I will now turn to the employment and income situation and private consumption.

The  employment and  income  situation  has  improved  moderately.  Chart  5  shows  that  the number of employed persons has continued to increase steadily. As for the number of regular and  non-regular  employees,  the  calendar  year  2019,  the  year  before  the  outbreak  of  the pandemic, is used as the base year. The number of regular employees has been on a moderate uptrend,  mainly  in  the  information  and  communications  industry  and  in  the  medical, healthcare, and welfare services industry, both of which have faced severe labor shortages. The number of non-regular employees has been somewhat below the level observed before the pandemic, partly because firms have made a shift from non-regular to regular employment. On the wage side, nominal wages per employee have continued to increase steadily. The final aggregate results of the 2025 annual spring labor-management wage negotiations compiled by the Japanese Trade Union Confederation (Rengo) show that the average year-on-year rate

of increase in wages for regular employees agreed in the negotiations is 5.3 percent, and that for small and medium-sized firms also stands at 4.7 percent, both following the high levels for 2024 (Chart 6). In light of the employment and wage developments mentioned so far, employee income -- which is the total amount of wages earned by all employees -- has seen a considerable increase on a year-on-year basis in nominal terms. In real terms -- based on the consumer price index (CPI) for all items excluding imputed rent -- the year-on-year rate of  increase  in  employee  income has  risen  recently,  after  having decelerated  mainly as  a reflection of the rise in inflation.

Let me now outline private consumption (Chart 7). Despite weakness in consumer sentiment due to the impact of price rises and other factors, private consumption has remained resilient because,  as  noted  earlier,  the  number  of  employees  has increased  and  firms  have  made progress in revising wages to reflect the results of the 2025 annual spring labor-management wage negotiations. Looking at the Consumption Activity Index (CAI), which is calculated by combining  various  sales  and  supply-side  statistics,  nondurable  goods  consumption  has continued to be relatively weak, reflecting consumers' increased thriftiness due to the rise in the price of food they buy on a daily basis. Nevertheless, services consumption in particular has seen a moderate increasing trend against the backdrop of the improvement in the income situation.

## C. Current Price Developments in Japan

Next, I would like to talk about current price developments in Japan (Chart 8).

Consumer prices have continued to see high growth, mainly due to the effects of the rise in the price of rice and other food items, in a situation where more firms have revised prices to reflect  increases  in,  for  example,  wages  and  distribution  costs.  The  year-on-year  rate  of increase  in  the  CPI  for  all  items  excluding  fresh  food  has  declined to  around  3  percent, because of the earlier decline in commodity prices and a deceleration in the rate of increase in energy prices that reflects government support to alleviate the increased burden of fuel oil prices.  Meanwhile,  despite  downward  pressure  stemming  from  subsidies  for  high  school tuition, the rate of increase in the CPI for all items excluding fresh food and energy has shown

a slight acceleration, registering 3.4 percent, due mainly to the effects of higher mobile phone charges.

The breakdown of the year-on-year rate of change in the CPI for all items excluding fresh food and energy shows that the rate of increase in goods prices has accelerated due to the effects of the rise in the price of rice and other food items. The rate of increase in general services prices decelerated for some months after the turn of the year due to a dissipation of the upward pressure on prices brought about by the resumption in 2024 of the price survey of charges for package tours to overseas. Thereafter, however, the rate of increase in general services prices has returned to an uptrend, which shows that dining-out has also been affected by the price pass-through of personnel expenses and other costs and by rising food prices.

The year-on-year rate of increase in the producer price index (PPI) has fallen to around 2.5 percent,  mainly  due  to the  effects  of  stabilized  commodity  prices,  the  yen's  appreciation relative to the previous year, and government support to alleviate the increased burden of fuel oil  prices. The  rate  of  increase  in  the  services  producer  price  index  (SPPI,  excluding international transportation) has marked 3 percent, mainly on the back of the rise in personnel expenses.

Let me now consider data on factors affecting the price developments that I have just outlined (Chart 9). While crude oil prices have decreased, the FAO Food Price Index has risen. In this situation, the rate of change in the import price index on a yen basis has declined year on year, amid the downward pressure stemming from the price of commodities such as crude oil, coupled with the impact of the yen's appreciation. Nevertheless, the import price index on a yen basis has been higher than that on a contract currency basis.

I will explain the core indicators of the CPI, which the Bank releases regularly (Chart 10). The left panel of Chart 10 provides some major indicators for capturing the underlying trend in the CPI, which are estimated by the Bank's staff as explained in the footnotes of this chart. The right panel of the chart shows the share of items in the CPI for all items excluding fresh food, whose prices have increased or decreased from a year earlier. Turning to Chart 11, the left panel shows the distribution of the year-on-year price changes for items that make up the

CPI for all items. The tails of the distribution have been extended upward, and the simple median has been at around 2 percent.

The rate of increase in some of these core indicators has recently slowed, mainly due to a decline in the rate of increase in energy prices, which have a large weight in the CPI. Yet, with the effects of the rise in food prices, such as rice prices, being observed in a wide range of items from summer 2024, the share of price-increasing items and the rate of increase in the core indicators of the CPI have been on a rising trend.

In this situation, medium- to long-term inflation expectations have risen moderately on the whole. Such expectations have risen more significantly over the past few years than in the past.  The  Bank  deems  that  this  reflects  factors  such  as  the  recent  price  developments mentioned earlier and firms' behavior shifting more toward raising wages and prices. Future developments in these factors therefore warrant careful attention.

## II. Outlook for and Risks to Economic Activity and Prices

## A. Prospects for Firms' and Households' Economic Activity

Let me now turn to the prospects for the economic activity of firms and households in Japan.

Exports and industrial production are projected to be negatively affected, for the time being, by  the  reactionary  decline  following  the  front-loading  due  to  the  increase  in  U.S.  tariffs. Moreover,  they  are  expected  to  show  some  weakness  reflecting  a  slowdown  in  overseas economies. Thereafter, however, as overseas economies return to a moderate growth path, exports and industrial production are likely to head toward a recovery.

Corporate  profits, while  being  at  high  levels,  are  likely  to  turn  to  a  decline,  mainly  in manufacturing, reflecting the effects of the  deterioration in export profitability due to the increase in U.S. tariffs and of the slowdown in overseas economies. Thereafter, corporate profits  are expected to return to an improving trend due to factors such as an increase in domestic and external demand.

As  for  business  fixed  investment,  heightened  uncertainties  over  trade  policies  and  the deterioration in the profit environment could result in a downward revision of investment plans, although labor-saving investment and moves to clear order backlogs are expected to provide some support. That said,  business fixed  investment is  likely  to  regain its  growth momentum. This is because, with reduced uncertainties regarding future profits given the agreement on tariff rates between Japan and the United States, firms will be able to actively undertake  forward-looking  investment,  such  as  that  for  capacity  expansion  and  for restructuring supply chains.

Nominal employee income is likely to continue to see a steady increase for the time being, reflecting the results of the annual spring labor-management wage negotiations. Although the pace of increase in income is projected to decelerate temporarily due to a decline in corporate profits, its growth momentum is likely to increase thereafter, in line with a recovery in profits.

Private consumption is highly likely to remain more or less flat; although a rise in scheduled cash  earnings  reflecting  the  results  of  the  2025  annual  spring  labor-management  wage negotiations is expected to provide some support, consumption is likely to be pushed down by the rise in food prices in particular. Thereafter, private consumption is projected to return to a moderate increasing trend, since the improvement in real employee income is likely to become pronounced, as firms revise their wages reflecting higher corporate profits and as the pace of price rises moderates.

I will outline the results of the Bank's June 2025 Tankan (Short-Term Economic Survey of Enterprises in Japan) (Chart 12). The Bank assessed that business sentiment, at the time of the survey, stayed at a favorable level on the whole. However, the forecast in the Tankan for three months ahead worsened for both manufacturing and nonmanufacturing, marking a 6 percentage  point  deterioration  for  all  industries  and  enterprises.  The  year-on-year  rate  of increase in business fixed investment plans for fiscal 2025 reported in the June Tankan was at a relatively high level of 9.4 percent. The results of the upcoming September Tankan will also be very important in examining the changes arising from factors such as progress in trade policy negotiations between jurisdictions since the June survey.

## B. Outlook for Economic Activity and Prices

Now, I would like to explain the Bank's outlook for Japan's economic activity and prices, in terms of the forecasts of the majority of the Policy Board members, released after the July 2025 Monetary Policy Meeting (MPM) (Chart 13).

The real GDP growth rate is projected to be 0.6 percent for fiscal 2025, 0.7 percent for fiscal 2026, and 1.0 percent for fiscal 2027, in terms of the median of the Policy Board members' forecasts.

These real GDP projections are more or less unchanged from those in the April 2025 Outlook for  Economic Activity and Prices (Outlook Report). Japan's economic growth is likely to moderate temporarily, since it is projected that trade and other policies in each jurisdiction will lead to a slowdown in overseas economies and to heightened uncertainties, and that these will push down Japan's exports and business fixed investment. Thereafter, Japan's economic growth rate is likely to rise, with overseas economies returning to a moderate growth path.

The year-on-year rate of change in the CPI for all items excluding fresh food is projected to be 2.7 percent for fiscal 2025, 1.8 percent for fiscal 2026, and 2.0 percent for fiscal 2027, in terms of the median of the Policy Board members' forecasts. Likewise, the rate of change in the CPI for all items excluding fresh food and energy is projected to be 2.8 percent for fiscal 2025, 1.9 percent for fiscal 2026, and 2.0 percent for fiscal 2027.

Compared with the previous Outlook Report released in April, the CPI projections for fiscal 2025 saw a relatively large upward revision of 0.5 percentage points, mainly due to the effects of the rise in food prices. This outlook for prices likely reflects roughly the same factors as the previous Outlook Report, such as the pass-through of higher wages and distribution costs to  selling  prices,  as  well  as  the  effects  of  the earlier  rise  in  rice  prices  being  observed in processed food and dining-out. The baseline scenario of the outlook for prices is as follows. Underlying CPI inflation is likely to decelerate temporarily as the inflationary pressures that I just mentioned wane over time and Japan's economy decelerates due mainly to the effects of the trade policy in each jurisdiction. However, it is likely that the mechanism by which wages and prices rise moderately in interaction with each other will be maintained. Thereafter,

underlying CPI inflation is expected to increase gradually, alongside the rise in medium- to long-term inflation expectations, since it is projected that a sense of labor shortage will grow as the economic growth rate rises. In the second half of the projection period of the July Outlook Report, underlying CPI inflation is likely to be at a level that is generally consistent with the price stability target.

## C. Risks to Economic Activity and Prices

There are high uncertainties regarding this outlook for economic activity and prices. I will describe three risks that I am paying attention to.

The first risk involves Japanese firms' wage- and price-setting behavior and its impact on economic activity, prices, and inflation expectations. If firms, in response to tariff policies, have to focus much more on cost cutting over passing on cost increases to selling prices, moves  to  reflect  price  rises  in  wages  could  weaken.  On  the  other  hand,  there  is also  a possibility that upward pressure on wages and the pass-through of higher wages to selling prices  will  strengthen,  and  that  price  rises  will  affect  household  sentiment  and  inflation expectations. This is because, while it is likely that firms' price revisions in response to past inflation are still in progress, firms' behavior has shifted more toward raising wages and prices, and there has been growing expectation that labor market conditions will remain tight.

The second risk concerns the impact of how the rise in supply costs due to trade policies affects economic activity and prices. Firms around the world may go beyond the price passthrough of the increase in tariff rates and adopt more dynamic pricing policies. Costs for restructuring  supply  chains  could  also  lead  to  a  rise  in  import  prices  or  to  significant fluctuations in foreign exchange rates and international commodity prices. If these supply factors cause a substantial rise in prices that outweighs the rise in wages, and households' defensive attitude toward spending consequently strengthens further, this could in turn push down the economy.

The third risk is the evolving situation regarding trade and other policies in each jurisdiction and its impact on trade activity and business and household sentiment. The recent increase in wide-ranging  tariffs  is  expected  to  impact  global  trade  activity,  and  the  heightened

uncertainties regarding trade policies are likely to affect business and household sentiment around the world and global financial and capital markets. This in turn could push down domestic  and  overseas  economies.  Conversely,  the  U.S.  and  European  economies  in particular could turn out to be stronger than expected, if, in response to the possibilities just mentioned,  their  governments  implement  expansionary  fiscal  policies based  on  their respective economic measures and political decisions.

## III. The Bank's Conduct of Monetary Policy

I would now like to look back at the Bank's decisions made at the MPMs held in June and July 2025.

At the most recent MPM in July, in light of the outlook for Japan's economic activity and prices that I described earlier, the Bank decided to maintain its guideline for money market operations, which stated that it would encourage the uncollateralized overnight call rate -- its policy interest rate -- to remain at the target level of ""around 0.5 percent.""

At the June 2025 MPM, the Bank decided on a new plan for the reduction of its purchase amount of Japanese government bonds (JGBs) (Chart 14). Specifically, the Bank will reduce the planned amount of its monthly purchases of JGBs so that it will be about 2 trillion yen in January-March 2027; the amount will be cut down, in principle, by about 400 billion yen each calendar  quarter  until  January-March  2026,  and  by  about  200  billion  yen  each  calendar quarter  from  April-June  2026.  The  Bank  also  decided  at  this  meeting  to  carry  out  the following at the June 2026 MPM. First, it will conduct an interim assessment of the new plan for the reduction in its JGB purchases; in principle, the Bank intends to maintain the reduction plan, while it may modify the plan if deemed necessary after reviewing the developments in and functioning of the JGB markets. Second, it will discuss a guideline for its JGB purchases from April 2027 and announce the results.

With regard to the future conduct of monetary policy, given the current level of real interest rates, shown in the left panel of Chart 15, if its outlook for economic activity and prices is realized, the Bank will accordingly continue to raise the policy interest rate and adjust the degree of monetary accommodation.

Considering that high uncertainties remain regarding the future course of trade and other policies in each jurisdiction and the impact of these policies, the Bank will make monetary policy decisions as appropriate by continuing to carefully assess data and information as it becomes available.

Thank you.



## Economic Activity, Prices, and Monetary Policy in Japan

Speech at a Meeting with Local Leaders in Yamaguchi

August 28, 2025

## NAKAGAWA Junko Member of the Policy Board Bank of Japan

## Overseas Economies

## Global PMI

s.a., DI

Chart 1



## Outlook

y/y % chg.

Note: Figures for manufacturing are the J.P.Morgan Global Manufacturing PMI.

- Figures for services  are the J.P.Morgan Global Services PMI Business Activity  Index. Source: Copyright  © 2025 by S&amp;P Global Market Intelligence,  a division  of S&amp;P Global Inc. All rights reserved.



Note: Figures are the weighted  averages of real GDP growth rates using countries'  share in Japan's exports as weights.  The real GDP growth rates are compiled  by the IMF, and the rates from 2025 onward are its projections  in the April 2025 WEO and the July 2025 WEO Update . Figures for advanced economies are those for the United States, the euro area, and the United Kingdom.  Figures for emerging  and commodity-exporting economies are those for the rest of the world.

Sources: IMF; Ministry of Finance.

2. Shaded areas denote recession  periods.

## Corporate Sector in Japan

## Corporate Profits

## Coincident Indicators of Business Fixed Investment

s.a., ann., tril. yen



s.a., CY 2020=100

Source: Ministry of Finance.

Sources: Cabinet Office; Ministry of Economy, Trade and Industry; Ministry of Land, Infrastructure, Transport and Tourism.

## Corporate Sector in Japan

Chart 3

## Industrial Production

s.a., CY 2020=100



Note: Shaded areas denote recession  periods. Source: Ministry of Economy,  Trade and Industry.

## Real Exports and Imports

s.a., CY 2020=100



Note: Based on Bank staff calculations.  Figures for 2025/Q3 are those for July. Sources: Ministry of Finance; Bank of Japan.

## Corporate Sector in Japan

## Real Exports by Region

## Real Exports by Type of Goods

s.a., 2020/Q1=100



s.a., 2020/Q1=100

## Employment and Income Situation in Japan

Chart 5

## Number of Employed Persons

s.a., mil. persons



s.a., CY 2019=100

Note: Figures for regular employees and non-regular employees prior to 2013 are based on the ""detailed tabulation"" in the Labour Force Survey .

- Source: Ministry of Internal Affairs and Communications.

## Nominal Wages per Employee

y/y % chg.



- Notes: 1. Q1 = March-May, Q2 = June-August, Q3 = September-November, Q4 = December-February. Figures for 2025/Q2 are those for June.
- Source: Ministry of Health, Labour and Welfare.
2. Figures from 2016/Q1 onward are based on continuing  observations following the sample revisions.

## Employment and Income Situation in Japan

## Results of Spring Wage Negotiations

## Employee Income

total wage increase, y/y % chg.

|                              |   2022 |   2023 |   2024 |   2025 |
|------------------------------|--------|--------|--------|--------|
| Regular employees            |    2.1 |    3.6 |    5.1 |    5.3 |
| Large firms                  |    2.1 |    3.6 |    5.2 |    5.3 |
| 1,000 or more                |    2.1 |    3.7 |    5.2 |    5.4 |
| 300 to 999                   |    2   |    3.4 |    5   |    5.1 |
| Small and medium-sized firms |    2   |    3.2 |    4.5 |    4.7 |
| 100 to 299                   |    2   |    3.3 |    4.6 |    4.8 |
| 99 or less                   |    1.9 |    2.9 |    4   |    4.4 |
| Part-time employees          |    2.3 |    5.1 |    5.7 |    5.8 |
| CPI (less fresh food)        |    2.3 |    3.1 |    2.5 |    3.3 |

- Notes: 1. The figures for the breakdown by the number of regular employees  are aggregated values based on the number of union members.  Part-time  employees include fixed-term employees.
- Sources: Japanese Trade Union Confederation  (Rengo); Ministry of Internal Affairs and Communications.
2. The CPI figure for 2025 is the January-July average.

.

y/y % chg.



- Notes: 1. Q1 = March-May, Q2 = June-August, Q3 = September-November,  Q4 = December-February. Figures for 2025/Q2 are those for June.
3. Figures from 2016/Q1 onward are based on continuing  observations following  the sample revisions  of the Monthly Labour Survey .
2. Nominal employee income = Total cash earnings ( Monthly Labour Survey ) Number of employees ( Labour Force Survey )
4. Figures for real employee  income are based on Bank staff calculations using the price indicators  shown in parentheses.
- Sources: Ministry of Health, Labour and Welfare; Ministry of Internal Affairs and Communications.

## Private Consumption in Japan

Chart 7

## Real Private Consumption

s.a., CY 2015=100

- Notes: 1. Figures for consumption  of households exclude imputed rent. 2. ""Disposable  income etc."" consists  of disposable  income and adjustment for the change in pension  entitlements.  Real values are based on Bank staff calculations using the deflator of consumption  of households.



Source: Cabinet Office.

## Real Private Consumption by Type

s.a., cumulative chg. from 2022/Q1, %

- Notes: 1. Based on Bank staff calculations. Figures for the CAI (travel balance adjusted) exclude inbound tourism consumption  and include outbound tourism consumption.
2. Nondurable goods include goods classified  as semi-durable  goods in the SNA.
- Sources: Bank of Japan; etc.
3. Figures in angle brackets show the weights  in the CAI.



## Inflation Indicators

## Inflation Indicators

## CPI (Excluding Temporary Factors)

y/y % chg.

- Notes: 1. Administered  prices consist  of public services  and water charges.
2. The CPI figures are Bank staff estimates  and exclude the effects  of the consumption  tax hike, free education policies,  travel subsidy  programs, and mobile phone charges.



y/y % chg.

|                            | 24/Q4   | 25/Q1   | 25/Q2   | 25/Q3   |
|----------------------------|---------|---------|---------|---------|
| CPI                        |         |         |         |         |
| Less fresh food            | 2.6     | 3.1     | 3.5     | 3.1     |
| Less fresh food and energy | 2.3     | 2.7     | 3.2     | 3.4     |
| Less food and energy       | 1.6     | 1.5     | 1.6     | 1.6     |
| PPI                        | 3.8     | 4.2     | 3.4     | 2.6     |
| SPPI                       | 3.2     | 3.5     | 3.5     | 3.0     |
| GDP deflator               | 2.9     | 3.3     | 3.0     |         |
| Domestic demand deflator   | 2.4     | 2.7     | 2.2     |         |

- Notes: 1. Figures for the PPI are adjusted for the hike in electric power charges during the summer season. Figures for the SPPI exclude international  transportation.
3. Figures for 2025/Q3 are those for July.
2. Figures for ""food"" in the CPI exclude those for alcoholic beverages.
- Sources: Cabinet Office; Ministry of Internal Affairs and Communications;  Bank of Japan.
- Source: Ministry of Internal Affairs and Communications.

## Factors Affecting Consumer Prices

Chart 9

## International Commodity Prices

## Import Price Index

oil: $/bbl, copper: 100 $/t, monthly avg.,

Note: The FAO Food Price Index consists  of the price indices  of cereals, vegetable oils, sugar, meat, and dairy products.



- Sources: Bloomberg; FAO; Nikkei Inc.

y/y % chg.

Source: Bank of Japan.

CY 2020=100



## Core Indicators of the CPI

## Trimmed Mean etc.

## DI of Price Changes

y/y % chg.

Notes: 1. Based on Bank staff calculations using the CPI excluding  the effects  of the consumption  tax hikes, free education policies,  and travel subsidy  programs. The CPI figures from April 2020 onward are Bank staff estimates  and exclude the effects  of measures such as free higher education.





% points

%

2. The trimmed mean is calculated by excluding items that belong to a certain percentage  of the upper and lower tails of the price change distribution  (10 percent of each tail) in order to eliminate the effects  of large relative price changes.  The mode is the inflation  rate with the highest  density  in the price change distribution.  The weighted  median is the average of the inflation  rates of the items at around the 50 percentile  point of the cumulative distribution  in terms of weight.

Note: The diffusion index (DI) is defined as the share of increasing items minus the share of decreasing items. The share of increasing/decreasing  items is the share of items for which price indices increased/decreased  from a year earlier. Based on Bank staff calculations using the CPI (less fresh food) excluding  the effects  of the consumption  tax hikes, free education policies,  and travel subsidy programs. The CPI figures from April 2020 onward are Bank staff estimates  and exclude the effects  of measures such as free higher education.

Sources: Ministry of Internal Affairs and Communications;  Bank of Japan.

Sources: Ministry of Internal Affairs and Communications;  Bank of Japan.

## Inflation Expectations

Chart 11

## Distribution of Actual Price Changes

y/y % chg.



Note: Figures are based on the year-on-year  price changes for each CPI item. Source: Ministry of Internal Affairs and Communications.

## Survey Results and BEI

y/y, ann. avg., %



Notes: 1. Figures for households  are from the Opinion Survey on the General Public's Views and Behavior , estimated  using the modified  Carlson-Parkin method for a 5-choice question.

3. The BEI (break-even inflation)  rate is the quarterly average of the yield spread between  fixed-rate coupon-bearing  JGBs and inflation-indexed  JGBs. Figures from 2008/Q2 to 2013/Q4 are calculated using yield data for issue No. 16 of inflation-indexed  JGBs, which matured in June 2018.
2. Figures for firms show the inflation outlook of enterprises  for general prices (all industries  and enterprises,  average) in the Tankan .

Sources: Bloomberg;  Bank of Japan.

## Business Conditions and Fixed Investment (June 2025 Tankan )

## Business Conditions

DI (""favorable"" - ""unfavorable""), % points



Notes: 1. Based on the Tankan . All enterprises.  There is a discontinuity  in the data for December  2003 due to a change in the survey framework.

Source: Bank of Japan.

## Planned and Actual Business Fixed Investment

y/y % chg.



- Notes: 1. The Tankan figures include investments  in software and research and development  (R&amp;D) but exclude land purchasing expenses.  R&amp;D investment  is not included before the March 2017 survey. The figures are for all industries  including  financial institutions.
2. Shaded areas denote recession  periods.
- Sources: Cabinet Office; Bank of Japan.
2. The figure for private nonresidential  investment  for fiscal 2025 is that for 2025/Q2.

Chart 13

## Outlook for Economic Activity and Prices (as of July 2025)

y/y % chg.

|                              | Real GDP            | CPI (all items less fresh food)   | (Reference) CPI (all items less fresh food and energy)   |
|------------------------------|---------------------|-----------------------------------|----------------------------------------------------------|
| Fiscal 2025                  | +0.5 to +0.7 [+0.6] | +2.7 to +2.8 [+2.7]               | +2.8 to +3.0 [+2.8]                                      |
| Forecasts made in April 2025 | +0.4 to +0.6 [+0.5] | +2.0 to +2.3 [+2.2]               | +2.2 to +2.4 [+2.3]                                      |
| Fiscal 2026                  | +0.7 to +0.9 [+0.7] | +1.6 to +2.0 [+1.8]               | +1.7 to +2.1 [+1.9]                                      |
| Forecasts made in April 2025 | +0.6 to +0.8 [+0.7] | +1.6 to +1.8 [+1.7]               | +1.7 to +2.0 [+1.8]                                      |
| Fiscal 2027                  | +0.9 to +1.0 [+1.0] | +1.8 to +2.0 [+2.0]               | +2.0 to +2.1 [+2.0]                                      |
| Forecasts made in April 2025 | +0.8 to +1.0 [+1.0] | +1.8 to +2.0 [+1.9]               | +1.9 to +2.1 [+2.0]                                      |

Note: Figures in brackets indicate the medians  of the Policy Board members' forecasts  (point estimates). Source: Bank of Japan.

## Plan for the Reduction of the Purchase Amount of JGBs (June 2025)

1. Long-term interest rates: to be formed in financial markets in principle

In principle, the Bank will reduce the planned amount of its monthly purchases of JGBs each calendar quarter as follows.

2. JGB purchases: appropriate for the Bank to reduce its purchase amount of JGBs in a predictable manner, while allowing enough flexibility to support stability in the JGB markets
2.  Until January-March 2026
3. : about 400 billion yen (the reduction plan decided in July 2024 will be maintained)
4.  The Bank will gradually reduce its purchase amount so that it can improve the functioning of the JGB markets in a manner that supports stability in the markets.
5.  From April-June 2026 to January-March 2027: about 200 billion yen

## Reduction in a Predictable Manner





## Allowing Enough Flexibility

2. In the case of a rapid rise in long-term interest rates, the Bank will make nimble responses by, for example, increasing the amount of JGB purchases.
1. The Bank will conduct an interim assessment of the plan at the June 2026 MPM.
3. The Bank is prepared to amend the plan at the MPMs, if deemed necessary.

## Financial Conditions in Japan

Chart 15

## Real Interest Rate (1-Year)

%



Note: Figures for the real interest rate are calculated as government  bond yields (1-year) minus the composite  index of inflation expectations  (Bank staff estimates).

- Sources: Bloomberg;  Consensus  Economics Inc., Consensus Forecasts ; QUICK , QUICK Monthly Market Survey &lt;Bonds&gt; ; Bank of Japan.

## Lending Attitudes of Financial Institutions as Perceived by Firms

DI (""accommodative"" - ""severe""), % points

Note: Figures are based on the Tankan and are for all industries.  There is a discontinuity  in the data for December 2003 due to a change in the survey framework. Source: Bank of Japan.

",Junko Nakagawa
https://www.bis.org/review/r250901b.htm,Tiff Macklem: Flexible inflation targeting in a shock-prone world,"Remarks by Mr Tiff Macklem, Governor of the Bank of Canada, at the Bank of Mexico 100th Anniversary Conferene, Mexico City, Mexico, 26 August 2025.",2025-08-26 00:00:00,"## Tiff Macklem: Flexible inflation targeting in a shock-prone world

Remarks by Mr Tiff Macklem, Governor of the Bank of Canada, at the Bank of Mexico 100th Anniversary Conferene, Mexico City, Mexico, 26 August 2025.

* * *

It is wonderful to be here in Mexico City with you to celebrate Banco de MØxico's 100th anniversary. This is a significant milestone in a storied history that has spanned the Great Depression and the surge in silver prices, post-World War II stabilization, central bank independence and, finally, flexible inflation targeting.

For many central banks, including Banco de MØxico and the Bank of Canada, flexible inflation targeting 1   has become our guiding light, helping us to achieve our monetary policy mandates. So far, it has been more successful and more durable than anything that came before. But the evolution of monetary policy didn't end with the adoption of inflation targeting. And to continue to deliver for the people we serve, central banks need to periodically review our frameworks to ensure they are still fit for purpose.

In my remarks today, I'll begin by recalling some of the frameworks of the past, how the pitfalls of those frameworks led to inflation targeting and how inflation targeting has performed over the past few decades.

Then I'll consider some of the structural changes underway in economies across the globe. Big structural changes don't happen smoothly and there are often shocks along the way. So I'll discuss what monetary policy can and cannot do in a more shock-prone world. And I'll share the ways the Bank of Canada is adapting how we implement flexible inflation targeting to confront new realities, including more frequent supply disruptions and elevated uncertainty.

Finally, I'll come back to the idea of periodically reviewing the framework to ensure it is still the best way to meet our objectives. In Canada, we are reviewing our monetary policy framework now to prepare for its renewal next year. I'll outline the questions we are asking ourselves, particularly against the backdrop of this more shock-prone world. Perhaps I'll spoil it a bit by telling you that one thing we aren't revisiting this time around is the 2% inflation target itself.

## Inflation targeting as a way to do better

To understand where we are, it's important to understand where we came from.

After World War II, central banks stopped pegging their currencies to the price of gold and, together with their national governments, tried different ways to stabilize the economy and inflation. For a while, inflation stayed low and relatively stable in most major economies. But by the late 1960s, global inflationary pressures began to build. And when major oil-producing countries sharply cut production in 1973, the shock to oil prices caused inflation to surge in much of the world.

In Canada, as in many other countries, the government resorted to wage and price controls. These controls generally worked to hold down inflation while they were in place. But they did little to address the underlying causes of inflation. So once the controls were removed, inflation jumped back up. And keeping prices artificially low led to shortages.

To try to address the root causes of inflation, many central banks turned to money growth targeting. Since ""inflation is always and everywhere a monetary phenomenon,"" 2 the favoured solution of the time was to suppress money growth. From 1975 to 1981, monetary policy in Canada was guided by a series of successively lower growth targets for M1-a narrow measure of money consisting mainly of physical currency and funds held in chequing accounts. Monetary policy successfully reduced M1 growth, achieving every target. But inflation continued to rise. The framework failed because the relationship between money, prices and income was not stable. As Bank of Canada Governor Gerald Bouey famously put it, ""We didn't abandon M1, M1 abandoned us."" 3

Some countries adopted a fixed exchange rate framework-pegging their currency to that of a larger country to control inflation. Of course, this worked only if the larger country successfully controlled inflation. There was also the added problem of instability, particularly when policies in different countries were not aligned.

As you know well, Mexico fixed its exchange rate to the US dollar for many decades. But the collapse of oil prices in the early 1980s led to budget shortfalls, and the central bank expanded the supply of money to finance the deficit. That, combined with the devaluation of the currency, led to a surge in inflation. Structural reforms in the late 1980s helped, but price pressures stayed elevated.

Clearly, the monetary policy frameworks of the day were not delivering price stability. Central banks needed something different, and their wish list was clear: The framework had to be simple-targeting intermediate variables, such as money growth, had proven to be too complicated. It had to be flexible-central banks needed to be able to gear monetary policy to conditions in their own country. And it had to control inflation over time, while still allowing individual prices to adjust with shifts in demand and supply.

Inflation targeting combined with a floating exchange rate fit these criteria. 4

In 1990, the Reserve Bank of New Zealand became the first central bank to adopt inflation targeting. Nine months later, in 1991, the Bank of Canada was the second. At that time, I was a newly minted PhD doing research and analysis at the Bank. I can tell you it was an exciting time as we figured out how to take inflation targeting from an unproven concept to a full-fledged monetary policy framework that worked both in theory and in practice. Along the way, many other central banks joined us, including Banco de MØxico.

Since those early days, inflation targeting has proven to be a big success.

Take Canada and Mexico. In the 25 years leading up to the pandemic, inflation in Canada averaged very close to the 2% target and was inside the 1% to 3% band about 80% of the time. By comparison, in the 25 years before that, inflation averaged just

above 6% and was much more variable. Here in Mexico, inflation averaged 130% in 1987. The 3% target was adopted in 2002 with a band of 2% to 4%. From the early 2000s to the pandemic, inflation averaged about 4%. In both our countries, inflation targeting led to much lower and more stable inflation.

Inflation targeting has also made central banks' ability to deliver price stability more credible, making the framework resilient. Over time, inflation expectations have become better centred on the target and less sensitive to short-run fluctuations in inflation. This has been reinforced by a transformation in how central banks engage with the public. Inflation targeting is inherently transparent-the central bank sets a numerical target for inflation and publicly commits to achieving that target. The central bank also explains how its monetary policy actions will achieve the target. This creates accountability. When central banks are clear about their objective, explain how they will achieve that objective and then deliver on it, that builds credibility.

In Canada, the pandemic tested our framework like never before. We faced huge shocks to both demand and supply, a deep recession and then a rapid rebound. As the economy reopened, inflation rose sharply, hitting 8.1%-a 40-year high. To be clear, this was not a failure of the framework. Russia's unprovoked invasion of Ukraine was unforeseeable, and we misjudged the strength and persistence of inflation in 2021 and early 2022. But once it was clear that high inflation was not temporary, the framework guided our response, and we raised the policy interest rate forcefully to bring inflation down. It was a painful adjustment for many Canadians, but in the summer of 2024 inflation returned to 2%. And we got there without causing a recession or major job losses.

The credibility of our 2% target was the foundation for this success. While short-term inflation expectations in Canada rose temporarily when the inflation crisis hit, long-term inflation expectations remained anchored. After we started raising interest rates and inflation began to ease, short-term expectations normalized. We told Canadians our actions would reduce inflation and then they saw inflation start to come down. This reinforced the credibility of our target and made it easier to get inflation all the way back to 2%.

The experience here in Mexico was similar. Indeed, I want to salute Banco de MØxico for raising interest rates ahead of the Bank of Canada and many other central banks. Your timely and decisive response made your economy resilient to the pressures of high inflation and helped ensure that long-term inflation expectations remained anchored. Your actions reinforced the credibility of your target.

My point here is that the measure of success is more than whether inflation stays at the target. It's also how the framework performs in the face of big shocks like a global pandemic.

## More structural change and uncertainty

This brings me to where we are today. The world is changing.

The structural tailwinds of peace, globalization and favourable demographics are turning into headwinds, and the world looks increasingly prone to shocks. Elevated

sovereign debt, slower economic growth and lagging productivity also make our economies more vulnerable. These vulnerabilities are compounded by intensifying geopolitical risks and more frequent climate events. In addition, new technologiesincluding artificial intelligence-are set to disrupt existing industries and create new ones.

On top of these structural shifts, the rules of global trade are being overturned. Steep new US tariffs and the unpredictability of US policy have reduced economic efficiency and increased uncertainty. As the United States' biggest trading partners, Mexico and Canada are particularly affected. With businesses in both our countries looking for new suppliers and new markets, cross-border supply chains are shifting.

Headwinds that limit supply could mean more upward pressure on inflation going forward.  And more frequent supply shocks could mean more variability in inflation.

Unfortunately, monetary policy cannot undo the economic impacts of the structural shifts ahead. Nor can it offset the hit to efficiency from higher tariffs and the reconfiguration of trade. And we can't reduce the uncertainty caused by the policies of other countries or by shocks that are outside our control.

But we can work to improve our understanding of these supply shocks and their impacts on our economies. We can also adapt our analysis, our decision-making and our communication to confront elevated uncertainty. What we can't do is let increased volatility and elevated economic uncertainty sow doubts about our commitment to price stability. Let me expand.

## Improving information and models of the supply side

At the Bank of Canada, we've increased our use of non-traditional data and surveys to better understand how businesses and consumers are adapting to structural change and shifts in US policy. We have also stepped up our outreach across Canada. My colleagues on the Bank's Governing Council and I regularly travel to different regions of the country to meet with community and business leaders. We get to see first-hand how economic disruptions are affecting people and impacting business decisions. This, in turn, allows us to make more informed policy decisions.

We are also investing in new economic models that capture what is happening in specific sectors of the economy and the interconnectivity between sectors. We're developing these new models because our existing models were ill-equipped for the COVID-19 shock. Those models focused on the overall economy, which was in excess supply during that period, so they missed the inflationary consequences of bottlenecks and shortages in certain sectors.

Recent events-from geopolitical tensions to US tariffs-have only reinforced the need for models that can help us evaluate how sectoral disruptions affect the broader economy and what that could mean for monetary policy.

## Managing uncertainty in an unpredictable world

Better information and analysis can reduce uncertainty, but they won't offset the fundamental unpredictability of a more shock-prone world. If we can't avoid uncertainty, we need to accept it and manage it as best we can.

When faced with elevated uncertainty, point forecasts for where the economy and inflation are headed become less useful as a guide. This means two things. First, when the future is more clouded, we naturally put more weight than usual on recent data until we have a better sense of how the economy is responding to new shocks. And second, we put less weight on the base-case projection and more weight on the risks. Here, scenarios can help. Scenarios allow us to examine how our economy could evolve depending on different assumptions about key unknowns. Different assumptions can point to different economic effects, allowing us to consider how monetary policy could respond in each case. This helps us understand how our policy decisions will hold up across a range of outcomes.

Let me give you an example. At our last few interest rate decisions at the Bank of Canada, we used scenarios rather than conventional forecasts because US trade policy was simply too unpredictable. In April, we considered two scenarios-one with high US tariffs and retaliatory tariffs around the world, and one with modest tariffs and little retaliation. In July, we considered three scenarios-one based on tariffs that were in place or had been agreed as of late July, a second with much higher tariffs and a third with lower tariffs. 5   By using scenarios, we were able to take a monetary policy decision that would fit a range of economic outcomes. The scenarios also highlighted just how important the Canada-United States-Mexico trade relationship is for the Canadian economy.

## Enhancing our decision-making and communication

We have also adapted our governance and communication. In a world with more supply shocks, we face more hard choices-we can't stabilize inflation and output at the same time. And when we are faced with more uncertainty, the likelihood of our getting things wrong is higher. Hard choices and uncertainty increase the risk of public disappointment, frustration and criticism. That's why it's important for central banks to remain independent from the political process. But we can't hide behind our independence. We need to draw on a diversity of views, and we need to be transparent and accountable in everything we do.

At the Bank of Canada, we've added two external Deputy Governors to our Governing Council. And we've improved transparency by holding a press conference after every interest rate decision, releasing a summary of our policy deliberations and expanding our media presence.

High inflation in 2022 was a reminder that even though inflation was low and stable for years before the pandemic, central banks cannot take public trust for granted. We need to constantly earn that trust-by being clear about our objectives, accountable for our actions and humble in the face of uncertainty.

## A framework fit for purpose

We've been targeting inflation for almost 35 years in Canada. Every five years we review and renew our monetary policy framework with the federal government. These reviews are a strength of our system. They give us the opportunity to assess performance and consider whether our current framework remains the best one for the future.

Our last renewal was in 2021, so the next one is coming in 2026. Ahead of this review, we took a close look at our policy response to the pandemic emergency, particularly our use of exceptional policies. 6   It's important we take on board the lessons of the pandemic so that we're ready for future crises. For our framework review, we are asking three sets of questions.

First, in a world more prone to supply shocks, what are the implications for inflation and the economy? How should monetary policy respond? When should we look through supply shocks and when should we lean against them or even into them? Should our response depend on the size and persistence of the shock, or on the state of the economy? In short, how can we best use the flexibility in the framework in the face of supply shocks?

Second, with more supply shocks and greater volatility in inflation, what is the best way to measure core inflation? At the Bank of Canada, we've used various measures of core inflation over the past few decades. And in practice we often use an even broader range of indicators to assess underlying inflation. Going forward, what's the best approach-narrow or broad-and what are the best indicators?

The third set of questions relates to the interaction between monetary policy, housing affordability and inflation. Many Canadians are struggling to find affordable housing, a common issue across many countries, including Mexico. Monetary policy cannot directly increase the supply of housing-that's an issue for elected governments. But, through interest rates, monetary policy does have a direct effect on the demand for housing. And housing is a big part of the consumer price index in Canada, so the cost of housing affects inflation. Therefore, it's worth examining how monetary policy affects housing sector dynamics, and how best to factor housing affordability into our focus on overall price stability.

As I said at the start of my remarks, there's one key question we won't be asking this time around. In our reviews since 1995, we've repeatedly asked whether 2% is the right target. We've considered whether the target should be lower or higher. We've also weighed alternatives to inflation targeting, including price-level targeting and nominal GDP targeting. Each time, we've concluded that targeting 2% inflation is the right framework for us.

The experience since the last renewal in 2021 has only reinforced this conclusion. The 2022 spike in inflation was a painful reminder of just how much Canadians don't like high inflation. We also know that Canadians generally understand and support the 2% target. That familiarity has helped anchor inflation expectations through thick and thin, including through the pandemic crisis.

In short, the 2% target has proven its worth in achieving price stability over time. We are already facing a more uncertain and unpredictable world. Now is not the time to question the target.

## Conclusion

It's time for me to wrap up.

Inflation targeting has worked well for central banks over the past few decades. It was tested by the global financial crisis, the pandemic and the post-pandemic surge in inflation. Unlike the monetary policy frameworks that came before, inflation targeting has proven durable-a framework for all seasons. As Banco de MØxico embarks on its next century, that is something to celebrate.

Central banks are at their best when they learn from the past and prepare for the future. To prepare for more structural change and greater volatility, central bankers need to reduce uncertainty where we can and manage it where we can't. This means better information and richer models. It means putting more weight on the risks and considering monetary policy that is robust to more than one outcome. It means being open, accountable and free of political influence. This is how we build and maintain the trust of the people we serve. We need to earn that trust every day.

The Bank of Canada and Banco de MØxico have a long history of working together, and your expertise has been an invaluable resource to us on many occasions. So I am honoured that you invited me here today to celebrate this historic occasion with you. Your centennial is a testament to the rich history of central banking around the world. If I can leave you with one message today, it is that in a more uncertain world, the value of public confidence in central banks and our ability to deliver price stability is greater than ever. Thank you.

I would like to thank Jing Yang, Oleksiy Kryvtsov, Louis Poirier and Kun Mo for their help in preparing this speech.

1  Flexible inflation targeting is a monetary policy framework used by central banks to manage inflation while also allowing them to consider other economic goals such as stabilizing output. The framework is centred on a target for inflation. But its flexibility means monetary policy can respond to temporary economic shocks and work to smooth fluctuations to help stabilize the broader economy.

2  M. Friedman, (New York: Asia Publishing Inflation: Causes and Consequences House, 1963).

- 3  See House of Commons of Canada, Minutes of Proceedings and Evidence of the (32 Parliament, 1 Standing Committee on Finance, Trade and Economic Affairs nd st Session, volume 1, 1983).

- 4  A floating currency allows a central bank to focus on controlling inflation rather than on maintaining a pegged exchange rate. In many circumstances, it also helps the economy absorb and adjust to shocks.
- 5  See Bank of Canada, and Bank of Canada, Monetary Policy Report-April 2025 . Monetary Policy Report-July 2025
- 6  See Bank of Canada, Review of the Bank of Canada's Exceptional Policy Actions (January 2025). During the Pandemic",Tiff Macklem
https://www.bis.org/review/r250902a.htm,Christine Lagarde: Building European autonomy - cooperation and the rule of law,"Dinner speech by Ms Christine Lagarde, President of the European Central Bank, at the 2025 ECB Legal Conference ""Building Europe's autonomy: law, institutions, cooperation"", Frankfurt am Main, 1 September 2025.",2025-09-01 00:00:00,"## Christine Lagarde: Building European autonomy - cooperation and the rule of law

Dinner speech by Ms Christine Lagarde, President of the European Central Bank, at the 2025 ECB Legal Conference ""Building Europe's autonomy: law, institutions, cooperation"", Frankfurt am Main, 1 September 2025.

* * *

It is a real pleasure to join you tonight at the 2025 ECB Legal Conference. This year's theme raises one of the defining questions of our time: how can Europe advance its ? autonomy while remaining committed to multilateral cooperation and the rule of law

Throughout the day you have been discussing the many ways in which Europe is trying to build its capacity to respond to the major challenges of our era - whether in the area of defence, the economy or technology. Yet I understand that behind these specific issues lie deeper questions that cut across them all.

Three key questions come to mind.

First, how is ""European autonomy"" defined in EU law in particular? Second, how can the EU's pursuit of geopolitical and geoeconomic autonomy coexist with its commitment to multilateral cooperation? And third, how do rule-of-law norms relate to the independence of central banks in today's world?

## The definition of European autonomy

Autonomy can mean many things, and different people use the term in different ways. Most would agree, however, that autonomy is about Europe's ability to act collectively, guided by its own values and interests.

We are at a global juncture where autonomy - or sovereignty, to use another term - is making a comeback as a central organising principle of international affairs. Yet the European model of autonomy seems to me to be distinct from others in two important respects.

First, European autonomy is autonomy. It is not the autonomy of a single collective sovereign state, but of a group of Member States that have pooled some of their powers and exercise certain public functions together through common institutions. In other words, European autonomy is autonomy without a conventional state-type sovereign. Autonomy exercised through EU institutions under EU law is a form of shared sovereignty projected onto the world stage.

This, of course, poses challenges. In the EU, action on a global scale requires unanimity, or at least broad agreement, in the form of majority voting, which can sometimes be slow and cumbersome. And for some, this might appear to be a weakness. But Europe's constitutional order is based on checks and balances, and this

also applies to autonomy-building. European autonomy is based upon competencesharing under the Treaties, compromise and a commitment to follow rules that include and balance different perspectives.

Second, the EU - more so than other major powers - has tied its autonomy to commitments made under international law. The Treaty on European Union makes this abundantly clear, stating that in its relations with the wider world, the EU must contribute to ""the strict observance and the development of international law."" Even in creating space for itself to make autonomous choices on the international scene, the EU and its Member States remain bound to their international legal commitments.

In financial and trade matters, this translates into respecting international agreements whether International Monetary Fund (IMF) programmes or Basel Committee standards - and seeking out cooperative multilateral solutions within established legal frameworks, such as the World Trade Organization.

## Squaring European autonomy with multilateralism

But this brings me to my second question: is this definition of European autonomy not increasingly contradictory?

At first sight, reconciling autonomy with international law and multilateral cooperation looks like a paradox. On the one hand, the EU, like other major powers, wants to defend its interests and act decisively. On the other, it wants to remain integrated with an international rules-based system. But I believe that law can align these two central notions, autonomy and cooperation, without compromising either.

First, autonomy can be exercised in a way that is both flexible and bounded. Autonomybuilding inevitably involves high-level political judgements. Law in these areas is not always black and white. Rules have exceptions, and their interpretation requires careful attention to their purpose. Legal advisers know this well: law provides for discretion to policymakers but also sets outer limits. Respecting those limits - the ""red lines"" set by EU and international law - is essential if autonomy is to remain anchored in the rule of law.

Second, international law is itself co-determined. In shaping and exercising its autonomy, Europe - or any other jurisdiction - cannot unilaterally define what international law means and expect others to follow. But, where necessary, we can advocate for reforms that reflect new global realities. The key point is that our interpretations must be part of a global conversation. Engaging with other perspectives is a necessary part of building a truly multilateral order - even one that gives countries more space to pursue ""sovereign"" economic policies.

## International rule of law, cooperation and central bank independence

Now, since we are at a central bank, we cannot let dinner be served without mentioning central bank independence!

But bringing independence to the table is more than a central banker's reflex. I believe that central bank independence perfectly illustrates the model of autonomy I have been

outlining. Autonomy does not mean unbound power. Independent courts, specialised agencies, a free press - these all belong to the infrastructure of constitutional democracy as the essential checks and balances of public authority. And so do independent central banks.

Independence is, at its core, a rule-of-law guarantee. By committing to independence in law, countries around the world secure credibility for their monetary policy. And as we have seen on several occasions, that credibility ultimately affords greater autonomy to central banks - allowing, for example, policy tools to be adopted during crises without de-anchoring inflation expectations . 1

In Europe, the EU Treaty explicitly protects the ECB and national central banks from political instructions. Beyond the EU, the IMF promotes central bank independence, sometimes making it an explicit component of financial programmes. Independence thus becomes not only a domestic legal rule, but also a feature of the international financial rule of law - a condition for trust among states, markets and institutions.

And this trust is also the basis of cooperation between central banks themselves. Central banks work together on the assumption that each one of them remains mandate-driven and protected from undue political interference.

Of course, independence does not mean immunity from accountability. The rule of law demands transparency, responsibility and clear mandates. In Europe, the Treaties provide mechanisms to ensure that independence goes hand in hand with accountability.

## Conclusion

Let me conclude.

The topics you are discussing at this conference are closely interwoven. European autonomy means acting decisively and collectively on the world stage to uphold our values and interests. Multilateralism means doing so in concert with others, under shared rules and through trusted institutions.

Far from being opposed, the two reinforce one another. Back in 1989, at another critical juncture, Jacques Delors called for Europe to be ""powerful enough to command respect and to promote our values of freedom and solidarity."" 2

The rule of law is not the enemy of autonomy; it is its foundation. The backbone of autonomy in a civilised world is the rule of law.

Consider the ECB: its independence, grounded in treaty law, gives Europe and its currency credibility and strength. More broadly, the EU can pursue its policy choices effectively precisely because they are framed by legal commitments that others recognise and respect.

The success of European autonomy should not be judged by how much Europe can do alone, but by how much and how well it can build and sustain the multilateral order. If the EU can stand on its own feet - technologically, militarily and economically - it will

be a stronger partner. And its commitment to law and cooperation will enhance its legitimacy and impact.

As we enjoy our evening, let us remember that our laws are bridges, not walls. Their purpose is not to isolate, but to bind Member States together internally and bind Europe to the wider world externally. The challenge before us is to remain bold yet collaborative, independent yet interdependent. And if we see it like this, the challenge may serve as an opportunity for Europe to grow stronger and more united.

Thank you very much.

1  For a discussion on the interaction between instrument effectiveness and credibility see Nakamura, E., Riblier, V. and Steinsson, J. (2025), , Beyond the Taylor Rule Federal Reserve Bank of Kansas City, August.

- 2  ""Soyons assez puissants pour nous faire respecter et pour promouvoir nos valeurs de libertØ et de solidaritØ."" See Delors, J. (1989), "" Speech at the opening session of the 40th academic year of the College of Europe"", Bruges, 17 October .",Christine Lagarde
https://www.bis.org/review/r250901e.htm,Rajeshwar Rao: Rethinking regulations in an interconnected financial system ,"Inaugural address by Mr Rajeshwar Rao, Deputy Governor of the Reserve Bank of India, at the DoPT MDP on Financial Market Regulations at the Indian Institute of Management Kozhikode (IIMK), Kozhikode, 18 August 2025.",2025-08-18 00:00:00,"## 'Rethinking Regulations in an Interconnected Financial System"" 1

Participants  of  the  'Management  Development  Programme  on  Financial  Market Regulations', Professors, ladies, and gentlemen. A very good morning to all of you!

2. At the outset, I would like to thank IIM, Kozhikode for inviting me here. It is a pleasure to  address  such  a  diverse  gathering,  ranging  from  policy  veterans  to  important stakeholders across the financial landscape. The contents of programme span the issues around the regulatory framework of a diverse mix of entities operating in the financial markets including banks, securities firms, and insurance entities.
3. Financial markets span a wide array of products starting with money markets, G Secs,  forex,  equities,  commodities,  and  derivatives.  These  products  are  traded bilaterally,  over  the  counter,  or  increasingly  on  electronic  trading  platforms  or  on exchanges. The entities are diverse, and they are active in many of these markets. They are regulated by different regulators depending on the nature of entities and/or their  activities.  The  markets  are interconnected with spillover risks from one set of market activities into another, increasingly becoming a point of concern from the point of view of financial stability. In my remarks today, I would like to, therefore, share a few perspectives on the need for market and entity regulations and their interplay, the tools employed by the regulators and the challenges faced in framing regulations for a rapidly evolving and interlinked financial ecosystem; and conclude by sharing a few thoughts on the way forward.

## The role and evolution of financial sector regulations in India

4. To set the stage, it is essential to start by tracing the evolution of financial sector regulations in India, which commenced with the establishment of the Reserve Bank of India (RBI) in 1935. The Bank's remit was expanded in 1949 to cover regulation and supervision of commercial banks 2 . This was succeeded by empowering it to regulate and supervise non-banking institutions 3  now commonly referred to as Non-Banking

1  Inaugural Address delivered by Shri M Rajeshwar Rao, Deputy Governor, Reserve Bank of India - August 18, 2025 - at the DoPT MDP on Financial Market Regulations at the Indian Institute of Management Kozhikode (IIMK). Inputs provided by Chandni Trehan Saluja and Nilesh Dnyanoba Gawade are gratefully acknowledged.

2 https://rbi.org.in/history/Brief\_Chro1935to1949.html

3 Act 055 of 1963: Banking Laws (Miscellaneous Provisions) Act, 1963 (https://www.casemine.com/act/in/5a979d964a93263ca60b70c7)

Financial  Companies  (NBFCs)  in  1964 4 and  thereafter  Urban  Co-operative  Banks (UCBs) in 1966 5 .

5. The year 1991 is extremely significant as it ushered in key economic reforms which helped to transform and grow our economy. The reforms in the financial sector started in  a  way,  with  the  implementation  of  the  recommendations  of  the  Narasimham Committee on financial  sector  reforms.  The  entry  of  private  banks,  introduction  of prudential  norms  for  banks,  and  alignment  of  capital  adequacy  requirements  with global standards based on the recommendations of the Committee and conferring of statutory powers to the Reserve Bank to exercise greater oversight over the NBFCs were important policy landmarks during this period. This together with the subsequent changes in the monetary policy framework 6 , the liberalisation of the exchange control regime and the grant of powers to regulate the Payment and Settlement Systems as well as the money, foreign exchange, and government securities (G-Sec) markets to the  Reserve  Bank,  have  collectively  influenced  the  changes  in  the  approach  to regulation making at the Reserve Bank.
6. The Securities and Exchange Board of India (SEBI) was statutorily entrusted with regulation  and  development  of  the  securities  market  in  the  year  1992 7 .  The subsequent decades saw establishment of new financial sector regulators in the form of the Insurance Regulatory and Development Authority of India (IRDAI) to oversee the  regulation  of  the  insurance  and  reinsurance  sectors  and  of  the  Pension  Fund Regulatory and Development Authority (PFRDA) for pension funds. More recently in 2020, the International Financial Services Centres Authority (IFSCA) was created to regulate  and  promote  financial  products,  services,  and  institutions  within  India's International Financial Services Centres. Collectively, these regulators play a critical role in the journey of transforming India's financial system into a more resilient, marketdriven,  and  consumer-centric  ecosystem,  while  facilitating  sustainable  economic growth of the country.

4 Chapter IIIB of RBI Act, 1934.

5 https://rbi.org.in/history/Brief\_Fun\_UrbanCoopBanks.html

6 From abolishing to automatic monetization through ad-hoc T bills to Multiple Indicators approach from 1998 to 2009, followed by a transition period with pre-conditions to kick in inflation as the nominal anchor guided the monetary policy from 2013 to 2016 and, thereafter, the Flexible Inflation Targeting framework: https://rbi.org.in/commonman/english/Scripts/speeches.aspx?Id=3161

7 SEBI was established in 1988 as a non-statutory body for regulating securities market.

## Approach for Regulation making

7. The market-oriented laissez-faire approach towards Regulation of financial markets with  minimal  regulations  operates  on  the  assumption  that  self-regulation  will  be effective.  However,  this  view  has  been  contested  by  some  economists  and policymakers  who  argue  that  regulation  is  not  just  necessary  but  essential.  They contend that the idea of inherently self-correcting markets is more of an ideological fad than a factual occurrence, and that effective oversight is crucial to ensure stability, transparency,  and  protection  of  the  financial  sector  against  systemic  risks . Nobel Laureate Joseph Stiglitz in his influential book Freefall: Free Markets and the Sinking of the Global Economy writes, ' The crisis has made it clear that self-regulation - which the financial industry promoted and which I view as an oxymoron - doesn't work .' Time and again it has been proven that financial regulation is essential not only to prevent market failures, but also to protect consumers and safeguard the stability and resilience  of  the  broader  economy,  particularly  in  times  of  crisis. The  common misconception that regulation inherently imposes restrictive barriers, is inaccurate.  A well-designed  financial  oversight  framework  underpinned  by  thoughtfully  crafted regulations not only ensures a level playing field but also fosters sustainable growth and development.

## How do we regulate financial systems 8

8. Before delving into the specific approaches to regulation-making, it is important to first  reflect  on  the  broader  frameworks  for  financial  system  regulation,  especially considering that alternative models of financial oversight are in vogue.
9.  The  regulatory  oversight  architecture  for  financial  systems  can  be  broadly categorised  into three  main  models .  The  first  model  is  known  as  ' sectoral  or traditional model' , in which each of the financial sector authorities is responsible for both - prudential and conduct aspects of the specific financial sector, i.e., banking, insurance,  securities  and  market  integrity.  This  approach  has  been  followed  by countries like India, Brazil, Hong Kong and Mexico and remains the most commonly used  model  around  the  world.  However,  challenges  arise  in  such  a  model  while

8 https://www.bis.org/fsi/publ/insights8.htm and

https://www.researchgate.net/publication/290574692\_Approaches\_to\_Financial\_System\_Regulation\_An\_International\_Compar ative\_Survey

dealing with financial conglomerates, whose activities blur the boundaries between different types of financial institutions. Such trade-offs can be smoothed by introducing complementary  arrangements,  like those adopted  by Indian Financial Sector Regulators (FSRs), which I will discuss later.

10.  An  alternative  approach  is  the  ' integrated  model' ,  where  a  single  agency oversees all oversight functions including regulations across the finance industry. This model was adopted by Singapore in 1984 as a consequence of reforms in financial oversight architecture. Later Scandinavian countries adopted similar models, followed by the UK, which established a single Financial Services Authority (FSA) in 1997. Further, countries like Russia, Japan, Germany and South Korea have adopted this model  in  their  financial  architecture.  While  this  approach  offers  a  cohesive  and streamlined framework for overseeing the financial sector, enabling unified decisionmaking,  reduced  regulatory  arbitrage,  and  improved  co-ordination,  it  may  present some operational challenges  like  risk  of  possible  single  point  of  regulatory  failure, dilution of sectoral focus and reduced flexibility in addressing the needs of different sub-sectors.
11. The third model involves grouping responsibilities either according to regulatory and supervisory goals or according to sectors, i.e., partially integrated approach . The ' Twin Peaks ' model is an example of this, where two separate agencies manage each  of  the  prudential  oversight  and  conduct  of  business  for  all  types  of  financial institutions. This model was first adopted in Australia in 1997, followed by Netherlands in  2002  and  thereafter  introduced  in  Canada  and  South  Africa.  After  the  Global Financial Crisis (GFC), the UK restructured its regulatory framework by replacing the integrated model with Twin Peaks model by bifurcating FSA in two institutions - the Financial  Conduct  Authority  which  focuses  on  market  conduct,  and  the  Prudential Regulation Authority (under the aegis of Central Bank) responsible for the prudential regulation  and  supervision  of  banks,  building  societies,  credit  unions,  insurers  and major investment firms. The Twin Peaks model leverages potential synergies arising in  the  prudential  or  the  business  conduct  oversight  of  various  types  of  financial institutions but faces similar challenges of lack of sectoral focus as in the integrated model and co-ordination challenges as in sectoral model.

12.  The Two Agency model  is  another  example  of  the  partially  integrated  model where one agency is responsible for the regulation and supervision of both solvency and conduct of business for banks and insurance companies, and a second agency is responsible for market integrity and the securities business. It is currently in place in jurisdictions such as France, Italy, Malaysia, Saudi Arabia, etc.
13. The models in the United States (US) and the European Union (EU) have special characteristics. While in the US functions have been assigned to various agencies at the federal and state level, in the EU, countries within the euro zone share a single prudential supervisory authority for significant banks. More recently, after the GFC, the macroprudential policy and resolution functions were the areas which were added to the financial oversight architecture, which may or may not involve separate agencies depending on the type of model adopted.
14.  Each  model  includes  trade-offs  between  synergies  and  potential  conflicts  of interest and challenges. The decision to adopt a financial oversight model depends on the structure and evolution of the financial sector, legal, cultural, and political economy considerations  as  well  as  past  experiences  like  dealing  with  financial  crises. Whichever be the model, one of the key features of any financial oversight architecture is the Central Bank remains the primary or lead authority. Its leadership in coordinating with other regulatory entities reinforces the coherence, resilience, and credibility of the overall financial oversight architecture.
15. Let me now touch upon the approaches adopted by regulators for the regulationmaking process.  While  there  may  be  differing  views  on  the  most  apt  approach  to regulations, there is no 'one size fit all' approach. Regulators use different approaches and tools to address varied types of problems for effective regulation.

## Principle vs. Rule vs. Outcome based regulation

16. Principle based regulation is qualitative and uses high-level statements with an explanation of the underlying intent. It gives flexibility and freedom to a Regulated Entity  (RE)  to  innovate  by  developing  new  products  and  services  without  being constrained by prescriptive rules. However, it is open to subjective interpretation and can therefore pose challenges for both REs and supervisors, thus limiting enforcement and accountability. It may also be less effective in areas like consumer protection,

where clear and actionable directions are essential. In the context of Reserve Bank as a banking regulator, the Prudential Framework for Resolution of Stressed Assets 9 is an example of principle-based regulation.

17. Rule-based regulation, on the other hand, requires an RE to comply with specific, prescriptive requirements. It leads to better clarity, compliance, and consistency, as it simplifies the understanding of regulations for an RE and consumer alike. However, it may lead to a 'check-the-box' mentality, resulting in compliance by REs in letter but not  in  spirit.  The  REs  may  also  face  challenges  when  dealing  with  complex  and dynamic  issues  where  nuanced  judgment  is  required.  The  Master  Directions  on Priority  Sector  Lending  -  Targets  and  Classification 10 can  be  considered  as  an example of a rule-based regulation issued by the Bank.
18.  Another  approach  which  has  gained  prominence  of  late  is  the  outcome-based regulation, with focus on desired outcomes or results rather than prescribing specific processes  and  tools.  This  approach  sets  ""what""  is  the  desired  outcome,  while providing flexibility on ""how"" to achieve it. The RBI's Directions on Digital Lending 11 emphasise on the desired  outcome,  i.e.,  transparency  and  fairness  for  borrowers, rather than getting into specifics like lending rates or methods.
19.  Striking  the  right  balance  amongst  these  approaches  is  critical  to  creating  an enabling, and effective regulatory environment while encouraging innovation, given the complexities of today's dynamic financial landscape.

## Activity vs. Entity based regulation

20. Activity-based regulation prescribes regulatory obligations for specific activities, independent of the entity undertaking them. It works on the principle of 'same activity, same  risk,  same  rules'.  The  Directions  issued  on  Financial  Services  provided  by Banks 12 can be categorised as activity-based regulation.

9 https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11580&amp;Mode=0

10 https://rbi.org.in/scripts/NotificationUser.aspx?Id=12799&amp;fn=2754&amp;Mode=0

11 https://rbi.org.in/Scripts/NotificationUser.aspx?Id=12848&amp;Mode=0

12 https://www.rbi.org.in/scripts/BS\_ViewMasDirections.aspx?id=10425

21. In contrast, entity-based regulation aims to bolster the resilience of activities with focus on the entity. This approach encompasses governance, prudential and conduct requirements, reinforced by supervisory interventions. Given that an entity's overall resilience is shaped by the composition of its activities, entity-based regulations place targeted restrictions - an essential feature of such regulation. The prudential norms on capital adequacy are in nature of entity-based regulation.
22. Given the distinct regulatory domains, and keeping in view the objective of financial stability,  regulators  often  adopt a hybrid approach that integrates elements of both activity-based  and  entity-based  regulation.  Such  a  tailored  regulatory  framework enhances the comprehensiveness and resilience of oversight mechanisms. It allows regulators to respond more effectively to market developments and emerging risks, thereby  strengthening  the  overall  regulatory  architecture  and  promoting  a  sound, stable, and inclusive financial system. 13

## Rules based vs. Risk based approach 14

23.  Rules-based  regulation  focusses  on  adherence  to  regulatory  prescriptions regardless of the level of risk. Though beneficial at times, the approach should factor in principle of proportionality, as not all entities carry same amount of risk to financial stability or consumer protection.

24. Adopting a risk-based approach enables regulators to frame regulations that are both effective and proportionate in the dynamic financial environment of today. This also helps in directing scarce regulatory and supervisory resources in optimal manner while also fostering innovation and financial inclusion. The Scale Based Regulation issued by RBI for Non-Banking Finance Companies (NBFCs) 15  and revised regulatory framework  for  Urban  Co-operative  Banks  (UCBs) 16 ,  can  be  thought  of  as  recent examples of a risk-based approach.

## Market vs. entity regulation

25.  Market-based  regulation  focuses  on  the  overall  structure  and  functioning  of financial  markets,  while  entity-based  regulation  deals  with  the  prudential  norms,

13 https://www.fsb.org/uploads/P160724-2.pdf and https://www.bis.org/fsi/fsipapers19.pdf

14 https://www.fsb.org/uploads/P160724-2.pdf

15 https://www.rbi.org.in/Scripts/BS\_ViewMasDirections.aspx?id=12550

16 https://rbi.org.in/Scripts/NotificationUser.aspx?Id=12416&amp;Mode=0

conduct, solvency, and internal risk management of individual financial institutions. Although  each  Financial  Sector  Regulator  (FSR)  such  as  the  RBI,  SEBI,  IRDAI, PFRDA, or IFSCA has its distinct regulatory domain, activities of many of their REs overlap. Depending on their activities, these entities may fall under multiple regulatory frameworks, resulting in differential oversight and heightened operational complexity. For  example, a mutual fund or an insurance company participating in government securities market or a bank participating in corporate bond market. To address such overlaps, FSRs are increasingly adopting a co-ordinated approach to regulation and supervision, with the broader goal of ensuring financial stability.

## Challenges in regulation making

26. Regulation making is a complex process starting from identification of risks or gaps in existing regulations, evaluation of options to address them and finally coming out with an appropriate and effective regulation which is intended to address the risks for the  entity  and  for  the  financial  system  (prudence,  resilience  and  stability)  and/or empower the consumers and ensure fair conduct amongst entities (conduct issues). While treading this path, the regulators are often confronted with many challenges. Let me highlight a few of them.

## Balancing innovation and stability 17

27.  Innovation  in  the  financial  sector  has  brought  about  transformative  changes. However, the rapid pace of innovation, also leads to regulatory gaps or grey areas. Innovations  often  take  shape  of  new  business  models  and  partnerships  with  third parties, who are outside the regulatory ambit of the FSRs. It is the job of the regulator to plug these loopholes by framing rules in such a manner that allows innovation to thrive but provide sufficient guardrails to ensure that financial system remains stable and resilient. The regulators are therefore adopting a more agile and forward-looking approach - like the development of regulatory sandboxes and enhancing dialogue with key stakeholders for integrating the new players into the regulatory framework, while being mindful of financial stability.

17 https://rbi.org.in/Scripts/BS\_SpeechesView.aspx?Id=1453

## Keeping pace with emerging risks and technologies

28. The regulators need to keep pace with dynamically changing markets and deal with emerging risks and technologies. This requires regulators to devise approaches to ensure that consumers are treated fairly and also ensuring the safety of the financial system, while providing space for innovation. I would like to highlight two examples of the challenges faced by the regulators.

## (I) Climate risk

29. Addressing climate change not only requires transition towards sustainability, but also integration of climate related financial risks into regulatory framework. Regulators across the world are debating whether climate risk warrants a separate framework or should it be embedded within existing risk categories. There is also ongoing discussion on whether climate risk oversight should form part of Pillar 2 (supervisory review), or Pillar 1 (capital and liquidity requirements). This continues to engage the attention of the standard setting bodies, industry and other stakeholders and there is a need to strike  right  balance  to  harmonize  environmental  stewardship  with  maintenance  of financial stability. 18

## (II) Emerging technologies

30. New  technologies  improve  ease  of  doing  business,  reduce  operational  and compliance  costs,  but  they  also  pose  challenges  for  regulation.  There  are  three primary challenges in regulating these technologies: (i) the unpredictable nature of business  models  that  rely  on  emerging  technologies,  (ii)  data  privacy,  security, ownership,  and  control,  and  (iii)  the  artificial  intelligence  (AI)  conundrum. 19  One example  of  new  business  models  is  Banking-as-a-Service  (BaaS)  model  which increases scale and speed of distribution of financial products but could also lead to significant business conduct risks. Regulators face a dilemma: whether to come out with  a  framework  before  such  financial  innovations  happen  or  allow  markets  to develop, risking unanticipated systemic risks and exploitative consumer practices. 20 Additionally, regulators must navigate capacity constraints and legal complexities in crafting effective regulations.

18

https://www.bis.org/review/r231115f.pdf

19

https://digitalregulation.org/3004297-2/

20

https://www.bis.org/review/r231115f.pdf

31. Here too, we have adopted a cautious approach while coming out with regulations like  digital  lending  directions  covering  partnerships  between  FinTechs  (as  Lending Service  Providers)  and  REs,  introduction  of  Video  based  Customer  Identification Process (V-CIP) etc., in these emerging technology areas. The RBI had constituted a committee  to  develop  a  robust,  comprehensive,  and  adaptable  Framework  for Responsible  and  Ethical  Enablement  of  Artificial  Intelligence  (FREE-AI)  for  the Financial Sector 21 which has come out with a principle-based approach to AI adoption in the financial sector.

## Reducing regulatory burden and ensuring compliance

32. India has made notable progress in improving its business environment over the years, however, there is still ample scope for further improvement. Regulatory burden and compliance costs pose challenges to REs, more so for smaller REs. Regulators not only need to do a delicate balancing act of reducing the burden and compliance cost for the REs but also need to ensure that it does not hinder the efficient functioning of markets. The Reserve Bank has pioneered some initiatives over time, which I would like to highlight:

- a)  To  reduce  compliance  burden,  RBI  had  constituted  a  Regulatory  Review Authority (RRA) in 1999, followed by establishment of the second RRA (RRA 2.0)  in  2021.  The  RRA  2.0  led  to  withdrawal  or  repeal  of  a  total  of  1,673 circulars, and discontinuation/ online conversion/ merger of 78 returns.
- b)  The 'Connect 2 Regulate' Platform has been introduced on RBI's website to broaden  involvement  of  members  of  the  public  and  stakeholders  in  policy formulation and review, thereby making the process more consultative.
- c)  The 'PRAVAAH' (Platform for Regulatory Application, VAlidation and AutHorisation), a secure and centralised web-based portal for any individual or entity  to  seek  authorisation,  license  or  regulatory  approval  on  any  reference made to the Reserve Bank has been launched to enhance the efficiency of processes related to granting of regulatory approvals.
- d)  To formalise participatory and responsive regulation making and demonstrating RBI's  commitment  to  enhanced  transparency  and  consultative  approach  a comprehensive Framework for the Formulation of Regulations was issued on

21 https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&amp;ID=1306

May  7,  2025 22 .  It  lays  down  broad  principles  for  drafting,  amending,  and reviewing regulations by the Reserve Bank.

- e)  The Reserve Bank is in the process of setting up a Regulatory Review Cell that would review all regulations every five to seven years.

## Data, capacity and resource constraints

33. Another area which continues to engage the attention of the regulators is the lack of  precise  data  to  effectively  formulate  new  policies.  Rapid  evolution  of  financial technologies  has  led  to  an  exponential  increase  in  the  volume  of  data  generated, however,  challenges  remain  with  respect  to  comprehensiveness,  credibility,  and accuracy of such information. Though regulators are equipping themselves with the latest tools and skills, the pace at which requirements are evolving is breath-taking. This requires continued capacity building within the regulators.

## Inter-Regulatory co-ordination

34.  As  alluded  to  earlier,  the  Indian  financial  sector  is  characterised  by  significant heterogeneity,  comprising  of  varied  players  governed  by  multiple  FSRs,  each responsible for entities operating under its purview. This demands robust and effective inter-regulatory  co-ordination  to  facilitate  consistent  policy  making.  To  address  this challenge, an integrated approach to oversight has been adopted by the Financial Sector  Regulators  (FSRs)  for  financial  conglomerates  operating  across  multiple sectors,  based  on  the  'lead  regulator'  principle.  Joint  supervision  and  periodic bilateral/multilateral discussions with such financial conglomerates are some of the tools adopted as a part of this approach.

35. The Financial Stability and Development Council (FSDC) headed by the Finance Minister and its Sub-Committee, headed by RBI Governor, where all heads of FSRs are  represented, provides  a  platform  for  combined  assessment  of  risks  from  the financial stability perspective and plays a pivotal role, for inter-regulatory co-ordination on the matters where there is overlap among FSRs. Such platforms help in further strengthening inter-regulatory co-ordination for wider development of financial sector in India.

22 The key processes include (a) public consultation through issuance of a draft and a statement of particulars highlighting interalia the objective of the regulation, (b) impact analysis (to the extent feasible), (c) issuance of general statement of response to the public comments received, and (d) periodic review keeping in view aspects such as the stated objectives, experience gained, relevance in a changed environment, and the scope for reducing redundancies.

36. However, there could be certain areas, such as increasing partnerships between the technological firms and the REs, where activities may fall outside the remit of any of the FSRs, exposing the REs to risks arising out of these activities. Addressing such risks,  many  a  times  becomes  challenging  for  regulators  and  requires  effective  coordination among international regulators/ supervisors so that they do not lead to a systemic crisis. This remains a complex area for regulators, given the concerns around privacy, confidentiality, and enforcement.

## Way forward

## Principle and outcome-based approach

37. There is no perfect regulatory approach, however, principle and outcome-based regulation is generally found to be more suitable for mature markets. Nevertheless, even developed economies use rule-based framework when it comes to safeguarding interests  of  consumers.  We,  at  the  Reserve  Bank  are  gradually  shifting  towards principle and outcome-based regulations, as it gives operational flexibility to the REs for conduct of their operations and tailor their activities to their unique needs, while adhering to the regulatory framework for delivering the outcomes expected from them.

## Forward looking and proactive approach

38. Regulators are often confronted with complex challenges while framing regulations,  necessitating  adoption  of  a  forward-looking  approach.  Addressing emerging  risks  calls  for  nuanced  and  adaptive  strategies  to  ensure  resilience. Regulators must adopt a more proactive mindset to help build a financial system that is both resilient and adaptable. Being proactive entails embracing innovation and fully leveraging data and technology. They need to further leverage technology to enhance their  efficiency  -  both  internal  and  supervisory,  carry  out  regulatory  horizon  risk scanning and boost regulatory effectiveness. Usage of rapidly evolving technologies and collaboration with domain experts is need of the hour for the regulators to stay abreast of the evolving changes in the financial system.

## Regulatory Impact Assessments (RIAs)

39.  Regulatory  Impact  Assessments  (RIA)  are  increasingly  being  recognised  as essential  tools  for  policy  makers,  enabling  the  development  of  policies  that  are grounded in evidence, clear in their purpose, proportionate in design, and responsive to real world conditions. These tools can be useful to strike a balance, by guarding

against  both  unnecessary  compliance  burden  and  regulatory  gaps,  while  boosting public confidence and enhancing international standing. Two essential elements of RIA are (i) Cost Benefit Analysis of the regulations, which can be evaluated either through  qualitative  or  quantitative  parameters  or  through  a  mix  of  both  and  (ii) consultation with a broad spectrum of stakeholders. While the latter leads to enhanced transparency, fostering trust, and improvement in the quality and effectiveness of the regulations,  the  former  helps  determine  the  optimal  solution  for  addressing  the problem while ensuring efficient allocation of resources.

40. Another important area is timely review of regulatory prescriptions and reporting mechanisms with a view to streamlining/ rationalising them and making them more effective. Such timely reviews not only reduce compliance requirements but also offer the regulators an opportunity to review the appropriateness of regulations in line with evolving market practices and developments. Regulators should endeavour to adopt best practices in their regulatory approaches, both ex-ante, to assess potential impact and avoid unintended consequences and ex-post, to assess actual impact and support course correction while enhancing future rule design, so that together, they ensure that regulation is both 'right the first time' and 'kept right over time'.

## Enhancing compliance

41. The regulators should have a broader vision of enhancing compliance by REs to make it easier for them to comply with regulations. This can be done by simplifying regulations, enhancing their clarity and removing redundancies and duplications. The Reserve  Bank  has  been  emphasising  on  clarity  in  regulations  and  has  started including examples, FAQs and illustrations as a part of its regulations for the benefit of the REs. To provide a high-level overview of the regulatory landscape and serve as a broad point of reference for general understanding of the REs, the Reserve Bank had come out with a Handbook titled 'Regulations at a Glance' 23 . Further, the Reserve Bank  is  in  the  process  of  consolidating  more  than  8,000  regulations  issued  by Department of  Regulation,  under  30-35  thematic  subjects.  The  regulators  need  to persist  with  such  initiatives  for  enhancing  the  responsiveness  of  the  REs  and development of the financial sector.

23 https://rbi.org.in/Scripts/BS\_PressReleaseDisplay.aspx?prid=59862

## International and domestic regulatory co-operation

42. Given the cross sectoral operations of entities, there is a need for the FSRs to move away from siloed, sector-specific regulations towards cross-functional principlebased regulations. This co-ordination will foster innovation and enable the REs to offer services  across  different  domains  as  also  ensure  that  they  have  appropriate  risk management protocols. This would also help in capping regulatory arbitrage, while simultaneously  reducing  compliance  requirements  for  the  REs.  Additionally,  cooperation  among  regulators  across  jurisdictions  is  essential  for  sharing  insights, expertise, and resources to enable more efficient regulation without compromising on quality. 24 International standards serve as a valuable reference point; however, they must be adapted to local contexts and conditions, as a 'one size fits all' approach is neither practical nor effective in today's diverse regulatory landscape.

## Consumer centricity

43. We need to consider the impact that regulations can have on one of the most important stakeholders in financial system i.e., consumers. Regulators have remained conscious  of  the  need  to  empower  consumers  and  safeguard  their  interests.  To advance this objective, they must think beyond conventional approaches. Behavioral economics  offers  a  powerful  tool  in  this  regard,  providing  valuable  insights  into consumer behavior and decision-making processes. It equips the regulators with an advanced  set  of  policy  instruments,  most  notably,  behavioral  nudges 25 ,  which  can complement conventional regulatory frameworks by achieving the desired outcomes at far lower compliance costs, thus presenting a more efficient and socially beneficial policy alternative. 26

## Conclusion

44. Regulatory policy in the financial sector must strike an optimal balance between the  critical  need  for  stability  and  objectives  of  fostering  innovation,  efficiency,  and competition. While it is necessary to minimise systemic risks and protect consumers, it  should  not discourage creativity, innovation, or healthy market dynamics. On the other  hand,  an  overemphasis  on  innovation  and  competition  -  without  adequate

24 International Regulatory Co-operation - Policy Brief by OECD April 2020

25 According to Thaler and Sunstein (2008, p. 6), a nudge is any aspect of the choice architecture that alters people's behavior in a predictable way without forbidding any options or significantly changing their economic incentives. To count as a mere nudge, the intervention must be easy and cheap to avoid. Nudges are not mandates.

26 https://behaviouraleconomics.pmc.gov.au/blog/more-nudges-value-behavioural-economics-regulation

safeguards - can lead to financial instability, resource misallocation, and ultimately loss of confidence in the system. Finding this right balance is particularly important for India, given the immense size and heterogeneity of economy, growing aspirations, and  substantial  investment  needs  to  sustain  high  growth  and  development.  The regulators must consistently strive to achieve this equilibrium. As Mahatma Gandhi said, ' You may never know what results come of your actions, but if you do nothing, there will be no result .'

Thank you once again for the opportunity to share my thoughts with you. I wish all participants an enriching and successful deliberations in the programme.",Rajeshwar Rao
https://www.bis.org/review/r250910f.htm,Christine Lagarde: Cutting through the noise - exercising good judgment in a world of change,"Welcome address by Ms Christine Lagarde, President of the European Central Bank and Chair of the European Systemic Risk Board, at the ninth annual conference of the ESRB, Frankfurt am Main, 3 September 2025.",2025-09-03 00:00:00,"## Christine Lagarde: Cutting through the noise - exercising good judgment in a world of change

Welcome address by Ms Christine Lagarde, President of the European Central Bank and Chair of the European Systemic Risk Board, at the ninth annual conference of the ESRB, Frankfurt am Main, 3 September 2025.

* * *

It is my pleasure to welcome you to the ninth annual conference of the European Systemic Risk Board (ESRB).

Having done my fair share of scuba diving, allow me to begin with a brief detour beneath the waves.

Submarines rely on sonar to navigate unseen depths and detect hidden dangers. Yet the ocean is never silent: it is filled with shifting currents, marine life and, increasingly, noise from human activity. In some waters, that background noise has doubled every decade for the past 60 years, 1   making it harder to pick out the signals that really matter. But no matter how unfamiliar the waters are, the technical principles remain the same. Those trained to listen can always discern the echoes of real danger.

So it is with our financial system. We too are navigating waters where the currents are shifting rapidly. Geopolitical fragmentation, climate change and rapid digital innovation are reshaping where finance flows and through which channels. The noise is getting louder and the landscape more complex, but the echoes of risk remain familiar.

Our task, like that of the submariner, is to listen carefully and to separate signal from noise. However much the structures of finance may change, the patterns of risk endure. As Charles Kindleberger reminded us: ""Financial crises are a hardy perennial."" By recognising their recurring signals, we can keep such crises in check and preserve stability.

Today I would like to reflect on how we can safeguard financial stability in a changing system by cutting through the noise to recognise the risks that endure.

## The financial system's architecture is changing, but its functions and risks have not

This task has become ever more demanding. In the past, when Europe's financial system was dominated by banks, detecting risks often meant closely reading banks' balance sheets. That world has changed. Europe's non-bank financial sector has expanded rapidly. In relative terms it is now larger than that of the United States, amounting to 3.8 times GDP compared to 3.1 times in the U.S. 2   At the same time, banks' activities are intertwined with those entities and increasingly with new entrants such as fintech platforms. The line between ""banks"" and ""non-bank financial institutions "" has blurred to the point where the old conceptual distinction is no longer a useful guide. 3

So how do we cut through the noise created by this new complexity? Two constants can help us.

The first is that financial activities, however novel their appearance, are almost always variations on a few timeless functions: transacting, saving and borrowing; investing and sharing risk; insuring and hedging; and transforming maturity.

Likewise, the risks that arise from these functions - namely credit, market, liquidity, underwriting and operational risks - are equally enduring. And we know from experience that the tools to contain them remain familiar: capital and liquidity buffers, reliable data and secure infrastructure.

The second constant is the framework of sound risk management and supervision. These principles endure best when they are set globally. This is why banks remain governed by global standards developed by the Basel Committee, and why the Financial Stability Board is extending that framework to new financial activities.

This does not mean a reluctance to adapt to new realities. On the contrary, it is about using a stable framework for regulators and supervisors to 'cut through the noise'.

That is why the ESRB has argued for an activity-based and system-wide approach to financial stability. 4   By 'looking through' the outer shell of both traditional and novel financial entities, we can assess the activities and risks that truly matter. 5   And by viewing the system as a whole, rather than as a collection of individual firms, we can better understand how risks propagate across these institutions.

## Applying timeless principles to new issues: the specific case of stablecoins

How does this perspective apply to new financial entities that are emerging across the financial landscape? Take the crypto-asset sector. For example, stablecoins are issued with the promise of maintaining a stable value against a reference asset. For now, they are used mainly as a bridge to and from the crypto ecosystem and as a tool to facilitate crypto-asset trading. But they also aspire to take on more traditional functions, such as serving as a means of exchange.

At first sight, these entities and activities may seem novel. But we do not need to wait for them to mature to realise that they are reintroducing old risks through the back door. 6 The categories of risk they create are not new. They are risks long familiar to supervisors and regulators.

The most evident is liquidity risk. We know the challenges posed by institutions that invest in risky assets while promising investors redemption at short notice and at par. Such entities must mitigate the risk of a run by ensuring that they have sufficient liquidity to meet redemptions swiftly: this is why the ESRB has been sounding the alarm on certain types of money market funds, for example. 7

In the case of stablecoins, the EU's Markets in Crypto-Assets Regulation (MiCAR) seeks to address this risk in two ways. First, stablecoin issuers must allow EU investors

to always redeem their holdings at par value. Second, stablecoin issuers must hold a substantial share of reserves in bank deposits.

But gaps remain. One example is so-called multi-issuance schemes, where an EU entity and a non-EU entity jointly issue fungible stablecoins. In such cases, MiCAR 8 9 requirements do not extend to the non-EU issuer. In the event of a run, investors would naturally prefer to redeem in the jurisdiction with the strongest safeguards, which is likely to be the EU, where MiCAR also prohibits redemption fees. But the reserves held in the EU may not be sufficient to meet such concentrated demand.

The risk of liquidity mismanagement across jurisdictions is one we have seen before. Banking groups, for example, are already required to ensure that reserves are available in the part of the group where and when they are needed. This is why requirements such as the net stable funding ratio and liquidity coverage ratio apply at every level of consolidation. Multi-issuance schemes replicate these very same risks within a single entity.

We know the dangers. And we do not need to wait for a crisis to prevent them.

That is why we must take concrete steps now. European legislation should ensure that such schemes cannot operate in the EU unless supported by robust equivalence regimes in other jurisdictions and safeguards relating to the transfer of assets between the EU and non-EU entities. This also highlights why international cooperation is indispensable. Without a level global playing field, risks will always seek the path of least resistance.

## Conclusion

Let me conclude.

Today you will be looking at many of the ways in which finance is changing at breakneck speed, through new technologies, new actors and new forms of finance. Yet as the crypto-asset sector shows, the echoes of risk remain familiar: liquidity strains, leverage, sudden loss of confidence, and hidden interconnections.

Our task is to cut through the noise of novelty while remaining anchored in the perennial principles of good risk management, supervision, and effective policy. I am confident that institutions such as the ESRB can adapt to change while keeping crises in check.

I look forward to hearing your ideas on how macroprudential policy can rise to these challenges. With this, I am pleased to open the ninth annual conference of the European Systemic Risk Board.

- 1  Animal Welfare Institute, . Ocean Noise

- 2  Pelizzon, L. et al. (2025), "" Growth of non-bank financial intermediaries, financial stability, and monetary policy"", Adapting to change: macroeconomic shifts and policy , ECB, Frankfurt am responses - ECB Forum on Central Banking 30 June-2 July 2025 Main.
- 3  Acharya, V.V. et al. (2024), "" Where Do Banks End and NBFIs Begin?"", NBER , No 32316, April 2024. Working Paper
- 4  ESRB (2024), November. A system-wide approach to macroprudential policy,
- 5  This principle is reflected in MiCAR as ""same activities, same risks, same rules"" and combined with the principle of technological neutrality. See Recital 9 of  Regulation (EU) 2023/1114 of the European Parliament and of the Council of 31 May 2023 on markets in crypto-assets, and amending Regulations (EU) No 1093/2010 and (EU) No 1095 /2010 and Directives 2013/36/EU and (EU) 2019/1937, OJ L 150, 9.6.2023, p. 40.
- 6  See Policy Digest 4 in ESRB (2024), op. cit.
- 7  See Policy Digest 1 in ESRB (2024), op. cit.
- 8  See the ECB's  Non-paper on EU and third country stablecoin multi-issuance published on the Council of the EU website in April 2025.
- 9  See Portes, R. (2025), ""The stablecoin loophole that could expose the EU"", Financial , 25 July. Times",Christine Lagarde
https://www.bis.org/review/r250910d.htm,John C Williams: Hat tip to the data,"Remarks by Mr John C Williams, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the Economic Club of New York, New York City, 4 September 2025.",2025-09-04 00:00:00,"## John C Williams: Hat tip to the data

Remarks by Mr John C Williams, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the Economic Club of New York, New York City, 4 September 2025.

* * *

## As prepared for delivery

## Introduction

Thank you for the kind introduction. I'm delighted to be back at the Economic Club of New York. I've worn many hats here at the Club: one as a longtime member, one as a repeat guest, and one as chair. I am pleased to see how the Club's programming continues to evolve in service of its important mission.

Before turning to the conversation with Sonali Basak and taking your questions, I'd like to take the next 10 minutes or so to share my outlook for the economy and how I see the path forward in the current moment.

I'll put my Federal Reserve hat back on now and give the standard Fed disclaimer that the views I express today are mine alone and do not necessarily reflect those of the Federal Open Market Committee (FOMC) or others in the Federal Reserve System.

## Economic Uncertainty Is for Certain

There's a lot to say about where the economy stands against the backdrop of the Federal Reserve's dual mandate goals. I'll start with what we've learned from the data in recent months and how it relates to maximum employment and price stability.

The GDP data oscillated quite a bit in the first half of this year, largely reflecting the effects from the front-running of tariff increases. Looking through the downs and ups in the data, growth in the first half of the year was about 1-1/2 percent, well below last year's 2-1/2 percent pace.

This slowdown in growth reflects a variety of factors influencing the supply and demand sides of our economy. Much lower immigration and the sizable increase in tariffs reduce both the productive capacity of the economy and demand. In addition, the changing landscape around trade policy has increased economic uncertainty among households and businesses, weighing on demand. We have seen this in the surveys and outreach that are conducted within the Fed's Second District and across the country. While the extent of tariff increases is becoming clearer, there is still substantial uncertainty surrounding the path of trade policy and its effects on the economy.

## Seeing the Whole Picture

GDP and related measures are an important part of the overall picture. But my view is informed by a wide variety of other economic indicators as well. And those are

consistent with a picture of an economy that is growing, albeit more slowly than last year.

Looking at the totality of the data over the past year, there has been a gradual cooling in labor market conditions to levels similar to those that prevailed in the years prior to the pandemic. You can see this pattern in the data on hiring and quits rates, vacancies, and survey measures of jobs' and workers' availability. And this cooling is consistent with the gradual slowing of wage growth that we've seen.

In addition, there has been a notable slowdown in payroll employment growth in recent months, but this is likely the result of lower growth in both demand supply, and reflecting in large part the effects of reduced immigration on the labor force.

I draw three conclusions from the labor market indicators. First, the labor market is currently in balance and not adding to inflationary pressures. Second, the gradual cooling in the labor market is consistent with the slowing in overall economic growth and my assessment of monetary policy being modestly restrictive. Third, as we are seeing today, when there are sharp changes in labor supply, it can be challenging to assess the rate of job growth consistent with that of labor supply. I therefore put greater weight on other indicators of the of labor market conditions in assessing the level strength of the labor market.

## The Tariff-Inflation Relationship

Now I'll pivot to price stability. Over the past year, the core services components of inflation have evolved broadly in line with gradual progress toward our longer-run 2 percent goal. Based on the 12-month percent change in the personal consumption expenditures (PCE) price index, headline inflation was 2.6 percent in July, and core inflation was 2.9 percent. These figures are modestly higher than comparable numbers from a year ago.

The big story here, of course, is tariffs. There are clear signs that tariff increases are affecting consumer prices and that trade diversion is taking place. One area where we can clearly see the initial effects of tariff increases is in core goods prices. Price increases for items that are exposed to higher tariffs have been well above what one would expect based on past trends and in the absence of tariffs. 1

The realized aggregate effects of tariffs so far have not been as large as expected earlier in the year, but it's still early days, and it will take time for them to come to be fully realized. Combining enacted and announced tariffs, estimates of the average effective tariff rate range between 15 and 20 percent. By comparison, net tariff receipts as a share of imports rose from about 2-1/4 percent in the first three months of the year to around 10 percent in July. This is a sizable increase for sure, but well short of the increase implied by a straight read of the announced tariffs.

Fortunately 2   And longer-run inflation expectations have remained stable, while shortand medium-term inflation expectations, after increasing modestly earlier in the year, have returned to their pre-pandemic ranges. 3   This is critically important, because wellanchored inflation expectations are essential for sustained price stability.

All in all, I expect tariffs will boost overall prices by a total of between 1 and 1-1/2 percent, with these effects continuing through the first half of next year. That's my current estimate, but there is a great deal of uncertainty about these effects. As we collect more data, we will get a better understanding of the magnitude and timing of tariffs' effects. I'll continue to monitor prices and broad movements in inflation over time to assess evolving conditions.

## Monetary Policy

The Federal Reserve's monetary policy stance has been modestly restrictive, as seen through the slowing of inflation and wage growth and the gradual cooling of the labor market. This policy stance is appropriate given that inflation has remained above our 2 percent target while the labor market has been generally consistent with maximum employment. With that backdrop, the FOMC decided to leave the target range for the federal funds rate unchanged at 4-1/4 to 4-1/2 percent at its meeting in late July. 4

Looking ahead, if progress on our dual mandate goals continues as in my baseline forecast, I anticipate it will become appropriate to move interest rates toward a more neutral stance over time. This expectation reflects a delicate balancing of risks to our mandate goals. On the one hand, we need to keep the labor market in balance to ensure that the effects of tariffs do not spill over into a longer-lasting broad increase in inflation. On the other hand, maintaining a stance of ""too restrictive policy for too long"" could increase risks to our maximum employment mandate.

My approach to these assessments is, as always, entirely focused on the totality of the data and what it tells us about the relative risks to achieving our maximum employment and price stability goals.

Let me briefly comment on the Fed's balance sheet. The FOMC continues to reduce its holdings of Treasury securities and agency debt and agency mortgage-backed securities, and that process is going very smoothly. With take-up at the overnight reverse repo facility now quite low, the level of reserves has already started to decline and is expected to decline more meaningfully going forward as our asset holdings continue to shrink and other liabilities rise. We continue to closely monitor a range of indicators related to the ampleness of reserves.

## Economic Outlook

I will conclude with my economic outlook. Let me say at the outset that a number of outcomes are possible given all the uncertainty. But based on what the data tell us today, I expect the combined effects of trade and immigration policies and associated uncertainty to continue to weigh on growth. As a result, I expect GDP growth this year to be between 1-1/4 and 1-1/2 percent.

With this slowdown in growth, I expect the unemployment rate to gradually rise to about 4-1/2 percent next year. And I expect PCE inflation to come in between 3 and 3-1/4 percent this year, before declining to around 2-1/2 percent next year, and reaching 2 percent in 2027.

## Conclusion

A lot has happened since I last stood at this podium. But you won't be surprised to hear that my penchant for ""data dependency"" has not altered. The outlook remains uncertain, and the data can shift in unexpected ways. In navigating these uncertain waters, I remain laser focused on supporting maximum employment and returning inflation to our 2 percent longer-run goal on a sustained basis.

Once again, I'm honored to be back at ECNY. And I'm looking forward to the rest of the program. Thank you.

1 Minton, Robert, and Mariano Somale (2025). ""Detecting Tariff Effects on Consumer Prices in Real Time,"" FEDS Notes. Washington: Board of Governors of the Federal Reserve System, May 9, 2025.

- 2 Federal Reserve Bank of New York,  Global Supply Chain Pressure Index (GSCPI) (July 2025).
- 3 Federal Reserve Bank of New York, Survey of Consumer Expectations  (July 2025).
- 4 Board of Governors of the Federal Reserve System,  Federal Reserve issues FOMC statement, July 30, 2025.",John C Williams
https://www.bis.org/review/r250902k.htm,Ryozo Himino: Japan's economy and monetary policy,"Speech by Mr Ryozo Himino, Deputy Governor of the Bank of Japan, at a meeting with local leaders, Eastern Hokkaido, 2 September 2025.",2025-09-02 00:00:00,"

September  2,  2025

Bank  of  Japan

## Japan's Economy and Monetary Policy

Speech at a Meeting with Local Leaders in Eastern Hokkaido

## HIMINO Ryozo

Deputy Governor of the Bank of Japan

(English translation based on the Japanese original)

## Introduction

Thank you for joining us today. Thank you also for your support for the Bank of Japan and its Kushiro Branch and Obihiro Office.

## I. Economic Activity and Prices

Let me begin by discussing the outlook for Japan's economic activity and prices. One factor that could sway the outlook is the direction taken by the new U.S. administration.

## The Philosophy and Policies of the New U.S. Administration

Eight  months  have  passed  since  the  new  U.S.  administration took  office,  and  I  tend  to believe I have learned a lot about its approaches. However, the unexpected developments I face almost daily make me realize that there are still things to be learned.

So, I am still in the process of formulating my view, but if I could offer some personal and tentative reflections, I would argue that there are three characteristics that define the current administration's way of thinking.

First,  the  administration  adopts  a  holistic  approach  and  treats  political,  economic,  and cultural matters, as well as domestic and international affairs, as integral parts of a single, inseparable policy agenda.

Second,  while  it  is  highly  flexible  in  its  tactical  decisions,  switching  its  approaches  as situations evolve and choosing when to press ahead, pause, or make temporary retreats, the administration  remains persistent  in  its  strategic  choices  about  what  it  ultimately  aims  to attain.

Third, it is unfettered from conventional wisdom and orthodoxy, focuses on facts that define the  locus  and  sources  of  power,  and  explores  opportunities  that  have  thus  far  not  been exploited.

Consider,  for  instance,  trade  policy. Our  textbooks  teach  early  on that  the  rationale  for preserving a free trade system lies in the principle of comparative advantage -- each country

specializes in what it produces best, thereby promoting an international division of labor, enhancing global economic efficiency and growth, and ultimately benefiting all countries. The conclusion, therefore, is that the global community should work together to pursue a positive-sum game. This is part of the foundational logic of the Washington Consensus, and I believe it contains much truth.

However,  this  framework  does  not  necessarily  capture  all  aspects  of  the  matter.  A superpower tends to possess a market large enough for its trade policy to influence import prices.  It  also  has  sufficient  leverage  to  deter  retaliatory  tariffs  from  trading  partners. According to the theory of optimal tariffs, for such superpowers, imposing moderate tariffs may improve the terms of trade and be more advantageous than forgoing tariffs. 1

Moreover, given today's geopolitical environment, it is increasingly important to consider economic security and ensure strategic autonomy and indispensability.

Additionally, some argue that the most efficient economic system is not necessarily ideal in terms of fairness and distribution, and that a government's redistribution policies may not be sufficiently  effective. This  kind  of argument  may  become  more  relevant  as  we  face increasing social and economic divides.

Even considering tariffs alone, one may thus detect a confluence of various elements: an economic goal (i.e., better terms of trade), foreign policy considerations (economic security), and  a  political  agenda  (fairness  and  distribution).  An  element  of  cultural  protest  against intellectual  elites  may  be  at  play  as  well,  alleging  that  they  have  defended  neoliberal systems and the resultant extreme inequality on the grounds of economic efficiency. Tariffs may thus be seen as a manifestation of a broad, transversal movement involving economics, diplomacy, politics, and culture.

In this light, discussing U.S. policy solely in terms of tariffs is too narrow an approach. A more  holistic  perspective  on  the  policy  is  needed  to  assess  the  mediumto  long-term

1 Nicholas  Kaldor, ""A  Note  on  Tariffs and  the  Terms  of  Trade,"" Economica 7,  no.  28, (1940): 377-80.

outlook for Japan's economic activity and prices. That said, given that I am not an expert in politics, diplomacy, or culture, in  the  remarks that  follow,  let  me  focus  on  the  near-term effects of tariff policy.

## The Impact of Tariff Policy

Even the narrower task of identifying the channels and assessing the degree of impact U.S. tariff policy has on Japan's economic activity and prices is not easy.

First off, it is not simple even to assess the impact of the direct channel, in that U.S. tariffs make Japanese exports difficult.

If a Japanese exporter chooses to maintain export prices, selling prices in the United States will be raised by the amount of the tariffs, and demand may go down. On the other hand, if the exporter chooses to lower export prices to avoid hikes in U.S. selling prices, its profit margins will be squeezed.

In practice, however, the full manifestation of tariff impacts can be delayed. Exporters may record a temporary increase in sales if there is a front-loading of exports ahead of a tariff hike.  If importers maintain  resale  prices  relying  on  existing  inventories, demand for  the products may not be immediately affected.

Uncertainties are not limited to the timing and lags of tariff impacts. For example, if the product in question is an essential item, and the Japanese exporters compete mainly against exporters in jurisdictions facing similar tariff rates, sales may not decline much even in the case where the cost increase due to tariffs is passed on to U.S. customers.

Moreover, since 2021, although the Japanese yen has depreciated significantly, in general, Japanese  firms  have  kept  their  U.S.  dollar-denominated  export  prices  largely  unchanged, which has translated into higher yen-denominated export prices (Chart 1). While conditions are likely to vary by firm, Japanese exporters as a whole may have greater leeway in their pricing policy today than during the period in the past when they suffered from the yen's extreme appreciation.

Another  transmission  channel  we  need  to  look  at  is  the  one  through  uncertainty.  The planned U.S. ""reciprocal tariff"" rate on Japan has progressed from 0 percent to 24 percent, then 10 percent, 25 percent, and then to 15 percent. The tariff rates announced for China and Southeast Asian economies, where the competitors and production bases of Japanese manufacturers  are  located,  have  also  fluctuated.  These  uncertainties  make  it  extremely difficult  for  Japanese  manufacturers  to  decide  where,  when,  and  how  much  to  produce, export, and invest.

Japan and the United States struck a trade deal in July. This is a major step forward toward alleviating the uncertainties the Japanese  economy  faces.  Nevertheless,  negotiations between  the  United  States  and  some  other  countries  are  still  ongoing,  and  some  of  the specific  conditions  on  sector-specific  tariffs  have  not  been  decided.  The  transmission  of trade policy to national economies is also uncertain. Overall, it can be said that the global economy still faces a heightened level of uncertainty.

The  third potential  channel involves a broader  slowdown  in  the  global  economy, particularly in the U.S. economy, which would lead to lower Japanese exports. Tariffs could raise import prices in the United States, pushing up inflation and dampening consumption. Heightened uncertainties constrain economic activity.

Indeed, the International Monetary Fund (IMF) projected in July a growth rate of the global economy for 2025 that was lower by 0.3 percentage points than the projection it released in January, and stated that risks to the outlook are tilted to the downside. The projection for the growth rate of the U.S. economy was lower by 0.8 percentage points (Chart 2).

U.S. growth in the second quarter, however, was stronger than expected (Chart 3 [left-hand panel]).  Moreover,  the  impact  of  tariff policies  on  U.S.  consumer  prices  has  not  been conspicuous so far (Chart 3 [middle panel]). Nevertheless, as tariff revenue in the United States has jumped already and the producer price index (PPI) for processed goods appears to have picked up, it is argued that exporters will eventually raise export prices, importers' inventories will turn over, tariffs will be passed on, and the effects on consumer prices will become clear.

It  is  also  argued  that  uncertainty  regarding  tariffs  may  have  already  started  to  affect household and business sentiment and employment in the United States (Chart 3 [right-hand panel]).  Should  the  inflationary  effects  of  tariffs  become  more  visible,  the impact  on consumer  spending  could  be  further  deepened.  The  effects  of  changes  in  immigration policies have also been a topic of discussion.

On the other hand, some argue that if the U.S. administration sets tariff rates in line with the theory of optimal tariffs and uses the resulting revenue for domestic tax cuts, the net impact on the U.S. economy could be positive. Others anticipate positive effects of factors such as the acceleration of the AI revolution, deregulation, changes in environmental policy, and the fall in energy prices.

Clearly, developments in the U.S. economy warrant close attention.

The fourth possible channel is through the financial markets. The markets went through a volatile  phase in  early  April. Although market sentiment has now largely returned to the state  seen  before  April,  continued  close  monitoring  of the  financial markets is also warranted.

We  have  looked  at  the  four  potential  channels  of  the  impact  of  tariff  policy  and  the possibility that the actual economic impact could prove to be larger or smaller than initially expected. How, then, has the impact materialized in Japan?

Prices of Japanese automobile exports to the United States have fallen sharply. The Bank's Tankan (Short-Term Economic Survey of Enterprises in Japan) shows that firms in certain industries  have  revised  downward  their  assessments  of  business  conditions  and  profit projections. We often hear from business leaders that they are concerned about the outlook.

Nonetheless, at the macroeconomic level, export prices on a contract currency basis have been  stable.  Although  it  is  difficult  to  assess  export  volumes,  as  there  has  been  some front-loading and a subsequent decline, their level overall has stayed close to historically high  levels.  Industrial  production  has  also  been  flat.  Business  sentiment,  firms'  profit

projections, and their fixed investment plans remain elevated (Chart 4). A material impact on wage increases for the current fiscal year and on the level of summer bonuses has not been seen. Private consumption has also been resilient.

The most plausible explanation for this is that tariff effects are taking time to surface. An alternative  interpretation  is  that  the  effects  are  smaller  than  initially  feared.  On  the  other hand, the impact may prove to be larger than anticipated. Moreover, the U.S. administration may roll out policies we have yet to foresee. We need to keep all these scenarios in mind.

Considering what I have explained, our baseline scenario assumes that the effects of trade policies  will  eventually  materialize,  leading  to  a  slowdown  in overseas  economies and  a decline in domestic corporate profits. In this situation, although factors such as accommodative  financial  conditions are  expected  to provide  support,  Japan's  economic growth is likely to moderate. That said, there are risks in both directions: the impact could be smaller or larger than expected. At the moment, the risk of a larger-than-expected impact may deserve greater attention. Over time, however, with overseas economies returning to a moderate growth path, Japan's economic growth rate is likely to rise.

## Outlook for Prices

Let us now turn to the outlook for prices. Our baseline scenario at this point is as follows: The actual inflation rate, driven notably by a rise in rice prices and its transmission to other items, currently exceeds the 2 percent price stability target by a considerable margin, but will  decline  in  due  course.  Meanwhile,  the  underlying  inflation  rate  remains  below  2 percent, but is gradually rising and approaching 2 percent. The rise may experience some temporary halts, but the mechanism in which wages and prices rise in interaction with each other will be maintained and eventually push up the underlying inflation rate to 2 percent.

When we say that the underlying inflation rate is currently below 2 percent, some find this argument confusing while others question its validity, pointing out that actual inflation has remained above 2 percent for more than three years now and often stayed even  above 3 percent.

Underlying  inflation  rate  refers  to  the  inflation  trend  excluding  the  effects  of  temporary fluctuations -- that is, the rate toward which inflation is expected to settle once the effects of transitory shocks fade.

Let me illustrate this with the latest consumer price index (CPI) data (Chart 5). In July, the headline CPI inflation rate stood at 3.1 percent, materially exceeding the 2 percent target. This  figure  reflects  downward  effects  from  the introduction of subsidies  on gasoline  and other items. These effects will be temporary in terms of their negative contribution to the year-on-year  inflation  rate.  However,  within  the  3.1  percent headline  CPI  inflation  rate, food prices contributed by 2.1 percentage points. The food price hike is largely due to a surge  in  rice  prices  and  its transmission  to  other  items;  this could  also  be  considered  to involve  temporary  elements.  Excluding  such  temporary  upward  and  downward  elements may  help in assessing  the  underlying  trend.  When  excluding food  and  energy  prices  to eliminate  the  effects  of gasoline  subsidies  and  rice  price  surges,  the  inflation  rate  is 1.6 percent, still short of the 2 percent target.

In  practice,  identifying  which  elements  are  temporary  and  which  are  underlying,  and choosing  what  to  exclude  and  what  to  include  in  assessing  underlying  inflation  require difficult judgments. To make estimations more robust, the Bank employs multiple analytical approaches.  In  addition  to  excluding  volatile  items,  we  use  structural  models  to  estimate trend inflation and monitor medium- to long-term inflation expectations among households, firms, and market participants. Synthesizing these methods, we have found that, while the underlying  inflation  rate  hovered  between  0  and  1  percent  in  the  2010s,  it  has  recently approached 2 percent. That said, we do not yet consider it to have reached the 2 percent mark.

Accordingly, while actual inflation is currently elevated, our main scenario envisions that it will decline as temporary factors dissipate.

Looking back, starting from 2021, we observed global commodity price hikes, including in the prices of crude oil and wheat, followed by the yen's depreciation, both of which pushed

import prices upward. Since 2023, the import price index has declined, but domestic supply shocks on fresh food and then on rice have successively driven up prices.

Over this period, we have witnessed a pattern in which temporary inflationary factors are successively replaced by new ones.

Yet, this  string  of temporary upward shocks  may well  be  coincidental,  and  a  downward shock could be forthcoming. Some may argue that, indeed, the downward impact on prices from U.S. tariff policy is already in the pipeline.

That said, allow me to explore two alternative interpretations.

The first relates to conditions in Japan. One hypothesis is that, in an era when deflationary norms were prevalent in society, temporary downward shocks had a strong disinflationary impact. More recently, however, falling import prices and other downward shocks have had limited effect, while temporary upward shocks have exerted a broader impact. Behind these changes in the effects of downward and upward shocks, several underlying developments may  be  at  work,  including  labor  shortages,  evolving  attitudes  toward  pricing  and  cost pass-through among firms and consumers, and rising inflation expectations.

Among  the  three  potential  underlying  developments,  let  us  look  at  the  effects  of  labor shortages.

The output gap in the Japanese economy is currently estimated to be around zero, implying that the economy's supply capacity and aggregate demand are broadly balanced. However, according to the Bank's Tankan survey, firms report limited spare production capacity and acute labor shortages (Chart 6 [left-hand panel]).

The  Bank's  staff  estimated  the  industry-specific  elasticity  in  substitution  between  capital and  labor. 2 The  estimation  exercise  found  low  elasticity  in  a  significant  number  of

2 Bank of Japan, ""(Box 2) Labor Supply Constraints and the Substitutability between Capital and Labor,"" Outlook for Economic Activity and Prices , January 2025.

industries,  particularly  in  the  nonmanufacturing  industries  such  as  hotels  and  restaurants (Chart  6  [right-hand panel]).  Labor  shortages  might  not  always  be  offset  by  expanding capital investments in these industries.

Lower slack in the economy tends to push up inflation. A chart illustrating this relationship is  known as  the  Phillips  Curve.  The  output  gap  is  usually  used  on  the  horizontal  axis  to show the level of slack, but to focus on the link between labor shortage and inflation, I have added  a  version  using  unemployment  rates  on  the  horizontal  axis,  as  was  done  in  the original Phillips Curve  presented  in  A.  W.  Phillips's  1958  paper  (Chart  7). 3 This representation seems to show the relationship more explicitly. It also appears that we are now operating in a steeper portion of the curve.

Upward  pressure  on  wages  and  prices  may  therefore  be  greater  than  suggested  by  the estimated output gap.

It is not a simple matter, however, to identify whether underlying trends are interacting with temporary shocks. True, structural changes often emerge first as idiosyncratic phenomena localized only in weak-link segments, not as clear system-wide trends. Many idiosyncratic phenomena, however, are genuinely temporary. If we inadvertently interpret them as initial signs of structural shifts, policy responses may become unnecessarily erratic.

The  second  alternative  interpretation  of  the  recent  string  of  temporary  upward  shocks  to prices is that they are the result of the global shift from the deflationary environment of the 2010s to an inflationary one in the 2020s.

Several explanations have been offered: 4 Deglobalization driven by geopolitical tensions is undermining cost efficiency attained through the international division of labor.

3 A. W. Phillips, ""The Relation between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861-1957,"" Economica 25, no. 100 (1958): 283-299. In this paper, Phillips shows wage growth rate on the vertical axis.

4 See,  for  example,  Charles  Goodhart  and  Manoj  Pradhan, The  Great  Demographic  Reversal: Ageing Societies, Waning Inequality, and an Inflation Revival (Palgrave Macmillan, 2020).

Demographic  changes  are  leading  to  global  labor  shortages.  Climate  change  and  related policies are resulting in cost increases.

However, these arguments typically operate on longer time horizons. As such, it remains difficult to determine how much weight to put on them in forming our current assessment.

These  two  alternative  perspectives  imply  upside  risks  to  prices.  On  the other  hand, downside risks may also need to be considered.

For instance, if trade policy shocks work to moderate Japan's economic activity via various channels as discussed earlier, the moderation will exert downward pressure on prices and wages. Exporting firms could reduce export prices to offset tariffs, and if this leads to these firms shifting  back  to  the  previous  norm  of  prioritizing  cost-cutting, this could  stall  the emerging mechanism in which wages and prices rise moderately in interaction with each other, which has been a key driving force behind the gradual rise in underlying inflation.

If trade policy shocks cause a global economic slowdown, this would depress crude oil and other  commodity  prices.  Moreover,  given  that  some  countries  already  have  significant excess production capacities, countries that lose access to the U.S. market may lower export prices to increase sales in other parts of the world, including Japan. These factors could also exert further downward pressure on Japan's price levels.

To date, we have not seen clear signs of such effects, but we cannot exclude the possibility that they could emerge in time.

In summary, our baseline scenario is that the impact of the recent surge in rice and other food prices will gradually subside, leading to a decline in headline inflation. Meanwhile, the underlying inflation rate is gradually approaching 2 percent, and although this progress may be  temporarily  stalled  by  slower  economic  activity  due  to  tariff  impacts,  we  expect  it  to eventually  stabilize  around  levels  consistent  with  our  2  percent  price  stability  target.  As noted, however, there are both upside and downside risks to this outlook (Chart 8).

## II. Monetary Policy

Given  the  baseline  scenario  for  Japan's  economic  activity  and  prices  as  well  as  the associated upside and downside risks, how should the Bank conduct monetary policy over the coming period?

## Monetary Policy Outlook

Economic activity and prices are mainly driven by real interest  rates, which are nominal interest rates minus inflation expectations. Despite the three policy interest rate hikes by the Bank thus far, real interest rates have remained at significantly low levels, as inflation has stayed strong.

Therefore, if the baseline scenario described earlier is realized, it would be appropriate for the Bank to continue, in accordance with improvement in economic activity and prices, to raise the policy interest rate and adjust the degree of monetary accommodation (Chart 9).

That  said,  as  previously  noted,  there  are  risks  to  economic  activity  and  prices  in  both directions. Without any preconceptions, we will continue to monitor the economy closely to see if the baseline scenario unfolds as expected.

In May, at the annual conference hosted by the Bank's Institute for Monetary and Economic Studies,  we  had  the  pleasure  of  welcoming  President  John  C.  Williams  of  the  Federal Reserve Bank of New York. A renowned economist, President Williams has long studied monetary policy under uncertainty.

I took the opportunity to ask him what approach central bankers should take to cope with the current environment of heightened uncertainty.

His  responses,  as  I  understood  them,  may  be  summarized  as  follows:  Uncertainty  has always been the defining feature of the monetary policy landscape. Uncertainty does not tell us to go gradually or fast, or to take small steps or big steps. A lesson around uncertainty is

not to try to figure out exactly the optimum answer for a given forecast or a given model, but to think about an approach that works well across multiple scenarios that we can face. 5

This,  I  believe,  is  an  insightful  and  valuable  perspective. Risk  and  uncertainty will  never disappear from the landscape for policymakers. We must continually assess the balance of risks, both upside and downside, and respond in a timely and appropriate manner to ensure that, even if conditions deviate from the baseline scenario, the damage is reasonably well contained.

## Plan for Reducing the Bank's Government Bond Purchases

In the 2010s, the Bank started to purchase long-term Japanese government bonds (JGBs) on a large scale as a means of monetary easing. In March last year, however, the Bank decided that guiding the short-term interest rate, rather than purchasing JGBs, was the primary tool in conducting monetary policy.

In  July last  year, the  Bank adopted a plan to gradually reduce its JGB purchases, from a pace of around 6 trillion yen per month to around 3 trillion yen in the spring of 2026. This June, we conducted an interim assessment of the plan, and decided to extend the plan by another year, with the  aim of reducing  the  monthly purchase  amount further, to approximately 2 trillion yen in the spring of 2027 (Chart 10).

Since a portion of JGBs held by the Bank matures each month and is redeemed, the Bank's total JGB holdings will gradually decline as it reduces purchases according to the plan.

The balance sheet of a central bank could have an influence on the economy through both its  asset  and liability  sides.  The  implications  of  a  reduction  in  JGB  purchases  can  be analyzed from multiple perspectives. I would like to share several of the considerations that guided my personal thinking when I participated in the decisions taken in March and July last  year  and  again this  June. Please  note that these reflect  my personal views. I  suppose other members of the Policy Board may have other perspectives.

5 President Williams' responses appear toward the beginning of the video on the Bank's YouTube channel: (https://www.youtube.com/watch?v=1XLWWSoB\_Ok).

First, would the reduction have direct effects on prices? The size of the Bank's liabilities is roughly  equivalent  to  the  sum  of  banknotes  in  circulation  and  deposits  held  by  financial institutions at the Bank. This total is referred to as the monetary base. If the Bank reduces its holdings of JGBs, thereby shrinking the asset side of the balance sheet, the liability side and accordingly the monetary base will also contract.

Monetarists,  who  were  dominant  in  the  late  1970s  amid  U.S.  inflation,  maintained  that changes in the monetary base lead to corresponding changes in the money stock, i.e., the total amount of deposits held at private financial institutions, and that the money stock in turn affects prices.

However, the absence of a stable relationship between these three variables became evident shortly after the Federal Reserve adopted monetary targeting.

That  said,  Claudio  Borio  and  his  colleagues  at  the  Bank  for  International  Settlements analyzed 70  years  of  data  across  32  countries  and  found that  the  strength  of  the  link between money growth and inflation depends on the inflation regime: it is one-to-one when inflation is high (above 5 percent) and virtually non-existent when inflation is low. 6 They caution that their findings say little about causality, but if policy were based solely on the experience  of  advanced  economies  during  periods  of stable inflation,  and left excessive money in place unnecessarily, this might carry its own risks.

The second perspective focuses on the impact on economic activity. The size of the Bank's JGB holdings  influences  long-term  interest  rates  via  what  is  known  as  the  stock  effect. However, the Bank's analysis suggests that short-term interest rates have a far larger impact on the real economy than medium- or long-term rates, and that the effect of super-long-term rates is quite limited. 7 Therefore, as long as we have a room to adjust the short-term policy

6 Claudio  Borio,  Boris  Hofmann, and  Egon  Zakrajsek, ""Does Money Growth Help Explain  the Recent Inflation Surge?,"" BIS Bulletin , no. 67, 26 January 2023.

7 Bank of Japan, Comprehensive Assessment: Developments in Economic Activity and Prices as well as  Policy  Effects  since  the  Introduction  of  Quantitative  and  Qualitative  Monetary  Easing  (QQE) , September 2016.

rate up and down, easing or tightening should primarily be conducted by guiding the policy rate, and not by adjusting the JGB purchase amount.

Third, the Bank's purchases and holdings of JGBs affect the functioning of the JGB market. The Bank conducted a review of monetary policy from a broad perspective and published the  outcome  at  the  end  of  last  year.  According  to  the  review's  findings,  bid-ask  spreads begin  non-linear  widening  when  the  share  of  the  Bank's outstanding  holdings  of  an individual JGB issue exceeds 50 percent. Moreover, once the share exceeds 70 percent, an increase in the Bank's purchases can even reduce overall market trading volumes (Chart 11 [left-hand and middle panels]). Currently, the Bank's holdings exceed these thresholds for many issues (Chart 11 [right-hand panel]).

To restore sound functioning of the JGB market, it is desirable to bring these levels down. The smaller the Bank's new purchases, the faster this ratio will decline. However, if hasty reductions in purchases result in a rapid rise in long-term interest rates and in the need to conduct an ad-hoc increase in the purchase amount, fixed-rate purchase operations, or the Funds-Supplying Operations against Pooled Collateral, this could harm market functioning even more. The Federal Reserve's experience in 2019, when it had to suspend its balance sheet reduction amid market disruptions, serves as a useful guide here, suggesting the need to balance the two goals of recovering market functioning and maintaining market stability.

Fourth, there may be effects on the functioning and stability of the banking system. When the Bank of Japan purchases JGBs from the market, it pays for them by crediting the reserve accounts that financial institutions hold at the Bank. Once these reserves are created, even if the  ownership changes,  the  overall  quantity  of  reserves  in  the  banking  system  cannot  be changed by  the  financial  institutions' choices.  Currently,  reserves  at  the  Bank  occupy around  one fifth  of  financial  institutions' total  assets.  Perhaps  they  significantly  exceed institutions' need.

At the same time, financial institutions require a certain level of reserves at the Bank for liquidity  management  purposes.  As  the  Federal  Reserve  often  emphasizes, an excessive reduction of reserve balances could pose risks to financial stability and market stability. The

stock of JGBs held by the Bank of Japan changes more slowly than the flows of monthly purchases, and the reserves financial institutions hold at the Bank are unlikely to become excessively  low  in  the  near  term.  Nonetheless,  as  we  move  forward  with the purchase amount reduction, it may be warranted to start exploring the JGB monthly purchase amount consistent with appropriate reserve levels.

Fifth, the Bank's balance sheet affects its financial position. Effects on the Bank's financial position should not be a primary consideration in policy decisions. However, as the Bank's balance sheet grows larger, its financial volatility becomes greater. I do not believe that the current  size  of  the  Bank's  balance  sheet  presents  a  serious  risk  of the Bank  recording negative equity. Moreover, negative equity does not impede the Bank's ability to conduct monetary policy.

Nevertheless, from the standpoint of maintaining confidence in the Bank and minimizing risks in this regard, it would be prudent to reduce the size of the balance sheet over time.

These perspectives may be usefully considered in designing the Bank's plan to reduce its JGB purchases. I believe the plan should be based on the principle that long-term interest rates are to be formed in financial markets and should provide predictability while allowing enough flexibility to support market stability.

The Bank's balance sheet also includes exchange-traded funds (ETFs) and Japan real estate investment  trusts  (J-REITs) on  the  asset  side.  While  the  Bank  still  purchases  JGBs,  it decided in March last year to discontinue purchases of ETFs and J-REITs. Although JGBs have  maturities,  these  other  assets  do  not,  and  simply  discontinuing  purchases  will  not automatically reduce their outstanding amount.

Previously, the Bank also had on its balance sheet the stocks it had purchased from financial institutions  for  financial  stability  purposes.  The  Bank  sold  these  purchased  stocks  over  a long  period  of  time  so  as  to  minimize  the  market  impact,  successfully  completing  the process  in  July.  Building  on  the  knowledge  acquired  through  this  process,  we  will  think about how to deal with outstanding ETFs and J-REITs.

## On the Economy of Eastern Hokkaido

Lastly, let me say a few words about the economy of Eastern Hokkaido.

Each  region  of  Eastern  Hokkaido,  such  as  Nemuro,  Kushiro,  and  Tokachi,  has  its  own characteristics  and,  building  on  these  characteristics,  each  has  attained  unique  economic development.  I  understand  that  new  initiatives  are  being  undertaken  to  make  further headway with the achievements made so far (Chart 12).

For  example,  the  agricultural  industry  is  pushing  forward  with  digital  transformation utilizing self-driving and other farm machinery. The fisheries sector is experimenting with marine- and land-based aquaculture. At the spaceport that opened as the first private-sector facility  of  its  kind  in  Asia,  the  launch  and  landing  of  a  reusable  vertical  rocket  was successfully carried out. Other examples include the revitalization of hot springs towns, the development of  large-scale  port  facilities  capable  of accommodating large cargo  vessels, and the redevelopment of urban districts. Beyond these, numerous other initiatives are being pursued through the efforts of many.

The  economy's  growth  will  also  be  supported  by  recent  developments  such  as  the designation of the Hidakasanmyaku-Erimo-Tokachi National Park, Japan's largest national park; the opening of the 410-kilometer-long Hokkaido East Trail; and the extension of the Trans-Hokkaido Expressway.

I would like to express my deep respect for these efforts and offer my wishes for continued progress in the region's economy.

This concludes my remarks. I now look forward to engaging in an exchange of views. I am keen to hear your views about current business conditions, to learn about the initiatives you are  taking,  and  to  elicit  your  opinions  and  feedback  on  the  policies  and  activities  of  the Bank.

## Japan's Economy and Monetary Policy

Speech at a Meeting with Local Leaders in Eastern Hokkaido

September 2, 2025

## HIMINO Ryozo

Deputy Governor of the Bank of Japan

## Introduction

## I. Economic Activity and Prices

The Philosophy and Policies of the New U.S. Administration The Impact of Tariff Policy Outlook for Prices

## II. Monetary Policy

Monetary Policy Outlook

Plan for Reducing the Bank's Government Bond Purchases

On the Economy of Eastern Hokkaido

## I. Economic Activity and Prices

## Prices of Exports from Japan

CY2020=100



Source: Bank of Japan.

1

## I. Economic Activity and Prices

Chart 2

## IMF World Economic Outlook (WEO) Growth Projections

World

## United States

%





U.S. dollar/yen

## U.S. Economy



Tariff Revenue

## I. Economic Activity and Prices

Chart 4

## Business Conditions of Japanese Firms ( Tankan )

## Business Conditions

Business Fixed Investment

Corporate Profits



CY

- Note: In the left-hand panel, figures are for all enterprises. The latest figures for actual results are for June 2025, and the latest figures for forecasts are for September. In the middle and right-hand panels, figures are for all industries and enterprises. Figures in the right-hand panel include software and R&amp;D investments and exclude land purchasing expenses.

Source: Bank of Japan.

## Consumer Price Index

y/y % chg.



Source: Ministry of Internal Affairs and Communications.

## I. Economic Activity and Prices

5

## Output Gap and Labor Shortages

Chart 6

Output Gap

Capital-Labor Substitutability by Industry



inverted, DI (""excessive"" - ""insufficient""),

Notes: 1. In the left-hand panel, figures for the output gap are staff estimates. The Tankan factor utilization index is calculated as the weighted average of the production capacity

6 DI and the employment conditions DI for all industries and enterprises. The capital and labor shares are used as weights. Shaded areas denote recession periods. 2. In the right-hand panel, figures for the elasticity of substitution are calculated by estimating CES production functions by industry using the following variables from the Financial Statements Statistics of Corporations by Industry, Quarterly : value added, tangible fixed assets (excluding construction in progress), and the number of employees. Value added is the sum of operating profits, personnel expenses, and depreciation expenses. The estimation period is from 2000/Q1 to 2024/Q2. Sources: Ministry of Finance; Cabinet Office; Bank of Japan.

## Output Gap and Prices

## Phillips Curve

## Unemployment and Prices

CPI less fresh food and energy (y/y % chg.)





CPI less fresh food and energy (y/y % chg.)

Note: Figures are biannual from 1983 to 2025. The red lines show developments from 2022 onward. The output gap and unemployment rate are six months ahead of the CPI. Sources: Bank of Japan; Ministry of Internal Affairs and Communications.

## Ⅱ . Monetary Policy

7

Chart 8

## Outlook Report (July 2025)

## Outlook for Economic Activity and Prices

## Outlook for Economic Activity

-  Underlying CPI inflation is likely to be sluggish, mainly due to the deceleration in the economy. Thereafter, however, underlying CPI inflation is expected to increase gradually, since it is projected that a sense of labor shortage will grow as the economic growth rate rises.
-  Japan's economic growth is likely to moderate, as trade and other policies in each jurisdiction lead to a slowdown in overseas economies and to a decline in domestic corporate profits and other factors. Thereafter, Japan's economic growth rate is likely to rise, with overseas economies returning to a moderate growth path. Outlook for Prices
-  In the second half of the projection period, underlying CPI inflation is likely to be at a level that is generally consistent with the price stability target.

## Medians of the Policy Board Members' Forecasts

## Risks to the Outlook

|                                            | Fiscal 2025   | Fiscal 2026   | Fiscal 2027   |
|--------------------------------------------|---------------|---------------|---------------|
| Real GDP                                   | 0.6 (+0.1)    | 0.7 (-)       | 1.0 (-)       |
| CPI (all items less fresh food)            | 2.7 (+0.5)    | 1.8 (+0.1)    | 2.0 (+0.1)    |
| CPI (all items less fresh food and energy) | 2.8 (+0.5)    | 1.9 (+0.1)    | 2.0 (-)       |

- There have been positive developments in trade and other policies, such as negotiations between Japan and the United States resulting in an agreement.

## Fiscal (y/y % chg.)

- That said, high uncertainties remain regarding negotiations between jurisdictions and the impact of trade and other policies on economic activity and prices at home and abroad.

## Risk balance

- Risks to prices are generally balanced.
- Risks to economic activity are skewed to the downside for fiscal 2025 and 2026.

Assumptions: 1. Negotiations between jurisdictions will progress to some extent. 2. Significant disruptions of global supply chains will be avoided. Note: Figures in parentheses indicate changes from the April 2025 Outlook Report.

## Future Conduct of Monetary Policy

## Outlook Report (July 2025)

- As for the conduct of monetary policy, given that real interest rates are at significantly low levels, if the aforementioned outlook for economic activity and prices will be realized, the Bank, in accordance with improvement in economic activity and prices, will continue to raise the policy interest rate and adjust the degree of monetary accommodation.
- In this regard, considering that high uncertainties remain regarding the future course of trade and other policies in each jurisdiction and the impact of these policies, it is important for the Bank to carefully examine factors such as developments in economic activity and prices as well as in financial markets at home and abroad, and judge whether the outlook will be realized, without any preconceptions.
- With the price stability target of 2 percent, the Bank will conduct monetary policy as appropriate, in response to developments in economic activity and prices as well as financial conditions, from the perspective of sustainable and stable achievement of the target.

9

## Ⅱ . Monetary Policy

1. Long-term interest rates: to be formed in financial markets in principle

Chart 10

## Plan for the Reduction of the Purchase Amount of JGBs (June 2025 MPM)

2. JGB purchases: appropriate for the Bank to reduce its purchase amount of JGBs in a predictable manner, while allowing enough flexibility to support stability in the JGB markets

In principle, the Bank will reduce the planned amount of its monthly purchases of JGBs each calendar quarter as follows.

- 
-  From April-June 2026 to January-March 2027 : about 200 billion yen
- Until January-March 2026                                 : about 400 billion yen (the reduction plan decided in July 2024 will be maintained)
-  The Bank will gradually reduce its purchase amount so that it can improve the functioning of the JGB markets in a manner that supports stability in the markets.

## Amount of monthly JGB purchases

## The Bank's JGB holdings

## Reduction in a Predictable Manner





## Allowing Enough Flexibility

2. In the case of a rapid rise in long-term interest rates, the Bank will make nimble responses by, for example, increasing the amount of JGB purchases.
1. The Bank will conduct an interim assessment of the plan at the June 2026 MPM.
3. The Bank is prepared to amend the plan at the MPMs, if deemed necessary.

## Functioning of JGB Market

## Share of BOJ Holdings and Spread

## Share of BOJ Holdings and Transaction Volume

0.8

Share of JGB Holdings &lt;End of Fiscal 2024&gt;

elasticity of the effect of BOJ purchases (flows) on transaction volume





0.02

impact of the share of BOJ holdings on the bid-ask spread, bps

Note: In the left-hand and middle panels, the share of BOJ holdings is calculated for each issue number.

Sources: QUICK; Japan Bond Trading; Ministry of Finance; Bank of Japan.

In the middle panel, the shaded area denotes the 99 percent confidence interval.

## On the Economy of Eastern Hokkaido

Hokkaido Spaceport

Digital Transformation of Agriculture Industry

Hidakasanmyaku-ErimoTokachi National Park



Hokkaido East Trail



B





Sources: Japan Dairy Council; Taiki Town; Kushiro City; TOYO Inc.; Doto Trail Club.



11

Chart 12

Kushiro Port



Extension of Trans-Hokkaido Expressway

",Ryozo Himino
https://www.bis.org/review/r250902j.htm,Christopher J Waller: Let's get on with it,"Speech by Mr Christopher J Waller, Member of the Board of Governors of the Federal Reserve System, at the Economic Club of Miami, Miami, Florida, 28 August 2025.",2025-08-28 00:00:00,"## Christopher J Waller: Let's get on with it

Speech by Mr Christopher J Waller, Member of the Board of Governors of the Federal Reserve System, at  the Economic Club of Miami, Miami, Florida, 28 August 2025.

* * *

Thank you, Jon, and thank you for the opportunity to speak to you today. 1

Since I last spoke on the economy and monetary policy on July 17, economic data have reinforced my view of the outlook and my judgment that the time has come to ease monetary policy and move it to a more neutral stance. 2

In July, I argued that, looking through tariff effects, with underlying inflation near target and the upside risks to inflation limited, the Federal Open Market Committee (FOMC) should not wait until the labor market deteriorates before we cut the policy rate. Based on all the data in hand, I believe this argument is even stronger today, and that the downside risks to the labor market have increased.

In July, I warned that job creation was weaker than it seemed in the payroll numbers and that data due in early September would indicate that payroll growth will be significantly lowered when annual revisions are made next spring. But even before then, job creation came in soft in the employment report for July, and May and June were revised down sharply, for a three-month average pace for total nonfarm payroll growth of only 35,000. After accounting for these revisions and what we will learn in a couple of weeks, the data are likely to indicate that employment actually shrank over those three months. I will have more to say about labor market data revisions and how they should be treated in evaluating the monthly jobs report, one of the most valuable tools we have for judging economic conditions.

I favored reducing the federal funds rate by 25 basis points at the FOMC's July meeting, and subsequent data on the labor market and inflation indicate this was the right call. That also seems to be the message from financial markets, which now expect a 25- basis-point cut at the FOMC's September meeting and put significant odds on an additional one or two cuts at the final two meetings of 2025. As I will discuss, factoring out estimates of the temporary effects of import tariffs, underlying inflation remains close to 2 percent. I believe the data on economic activity, the labor market, and inflation support moving policy toward a neutral setting. Based on the median of FOMC participants' estimates of the longer-run value of the federal funds rate, neutral is 125 to 150 basis points lower than the current setting. While I believe we should have cut in July, I am still hopeful that easing monetary policy at our next meeting can keep the labor market from deteriorating while returning inflation to the FOMC's goal of 2 percent. So, let's get on with it.

Economic activity has slowed significantly in 2025 from 2024. Growth for the first half of the year was 1.4 percent. i   Looking ahead, the limited evidence we have is consistent with continued sluggish growth. We don't have much data for the second half, but smoothing through the monthly volatility, retail sales for July suggest that consumers are continuing to spend, albeit at a slower pace than last year. Meanwhile,

manufacturing output in the report on industrial production was flat in July, and according to purchasing managers, new orders for manufacturing are consistent with a modest decline in the next few months. For the large majority of businesses outside of manufacturing, new orders are consistent with roughly flat production in the coming months.

Many forecasters have said they expect household and business spending and investment decisions will be weighed down by tariffs-those enacted, and the uncertainty about tariff levels in the future. Tariffs affect the costs and profits of businesses and, to the degree that they raise prices, also affect the real disposable income of consumers. Some businesses will be directly affected by tariffs, but many more will be affected by how tariffs crimp household spending. Tariff effects on households and businesses also will weigh on employment. All of this is consistent with what my business contacts are telling me, which is that they are postponing investment and hiring because of the uncertainty about how tariffs will affect their input costs and demand for their products. That said, I'm starting to hear some rumblings that businesses cannot sit on the sidelines forever. So we could see, at least, investment projects that were postponed begin to pick up, which would be positive for the economy. But how employment decisions evolve is more up in the air. I will be monitoring these business decisions because they are key to how activity will unfold in the second half of the year.

Returning to the labor market, risks are continuing to build. In my July 17 speech, I said that private-sector job creation was nearing stall speed, and the data received since then have put an exclamation point on this statement. I always say that one month is not a trend, but now we have three months of weak job-creation data from the Current Employment Statistics. After revisions included in the July report, private-sector job creation averaged 52,000 in May, June, and July, about half the rate in the first quarter of 2025. The headline numbers, including public-sector workers, are, as I noted earlier, even worse, but I tend to focus on the private sector as a better indication of the underlying momentum in the labor market.

That's the picture after the unusually large revisions to May and June payrolls and the soft reading for July that was included in the latest jobs report. In addition to those revisions, on September 9 we will get a preliminary estimate of what to expect in the annual ""benchmark"" revisions to 2025 early next year. I estimate that monthly job creation will be reduced by an average of about 60,000 a month. 3   That would mean that private-sector employment actually shrank, on average, in the past three months and that job creation earlier in the year was weaker than currently reported. 4

I have heard the argument that declining labor supply due to lower immigration means that low jobs numbers aren't as bad as they look and that the ""breakeven"" number for keeping the unemployment rate steady is declining. To those people, I would say: Yes, these estimates have been falling, but I haven't heard anyone say the breakeven level is negative. Supply-side changes can't account for the ugly jobs numbers of the past three months.

Other data support the idea that labor demand may be on the edge of a sharp decline. For example, wage growth for people switching to new jobs is lower than for people staying in the same job, the opposite of what we see in a strong labor market. A few years ago, the rate of people quitting their jobs surged, and job switchers were getting

substantially larger raises than those staying in their jobs. Today the quits rate is back down to its mid-2010s level, and these individuals must be switching jobs for reasons other than gains in compensation.

Another sign of a weakening in the labor market is that the unemployment rates for some cyclically sensitive groups of workers, such as teenagers, are up sharply this year, to levels, again, similar to those in the softer job market of the mid-2010s. Supplementing this hard evidence of falling labor demand is the consistent story from my business contacts that they are not hiring. The mix of reasons is not only uncertainty over tariff policy and slowing demand for their goods and services, but also, increasingly, uncertainty over how to use artificial intelligence, which is especially freezing hiring for some entry-level jobs. 5

This softening in labor demand is occurring at the same time, as I noted earlier, that there is a decline in labor supply. I often hear the argument that the unemployment rate is the key labor market indicator because it reflects what is happening in both demand and supply. And given that the current unemployment rate is 4.2 percent, close to most estimates of maximum employment and barely changed over the last year, this suggests that the labor market is solid. While I would normally agree with this statement, I do not think it is accurate now. I believe that any decline in labor supply is only masking weakening demand in the labor market. Whether or not supply is down, weakening demand is not good, and it is specifically what monetary policy is intended to address.

Before I move on from the labor market, let me address a question of some public debate recently, which is the quality of the payroll data. As should be obvious from these remarks and others I have delivered, I consider the monthly jobs report, including its estimate of payroll employment, an absolutely indispensable tool in evaluating the economy and setting monetary policy, and that view is close to unanimous among economic forecasters and policymakers. Considering how important this data is in getting an accurate and reliable read on the state of the labor market, it is entirely appropriate to examine the quality of the jobs numbers and the process by which they are collected. There is always room for improvement in data collection and analysis. In fact, the Bureau of Labor Statistics (BLS) and other agencies that collect economic data have benefited from expert committees of outside advisers who have provided advice on ways to improve data quality.

There has been substantial commentary since the last jobs report regarding the declining response rate of establishments and individuals in the employment survey and the outsized revisions of the data. This commentary has raised questions about the quality of the employment survey data. So I want to address this issue and clarify some facts about the survey response and the revisions. When the BLS sends out the establishment survey for a given month, it gives firms three months to return the surveythey can return it in the first month, the second month, or the third month. Some firms do not respond at all. Firms that submit their responses in the first month are the basis for the initial, or preliminary, payroll estimate. Those firms that respond in the second month get added to the first-month responders to get an updated number, which yields the first revision that is published a month later. Then the firms that respond in the final month provide the BLS with the final numbers for the original month. This is the second revision and is the official payroll estimate for that month.

A decade ago, the response rate for the first month was 75 percent, meaning threefourths of the firms surveyed responded immediately. But the initial response rate has fallen to 60 percent recently. Does that imply that the overall response rate for the entire three-month period has fallen? No, response rates by the final estimate have not fallenabout 95 percent of firms responded a decade ago, and that is how many are responding now. What has happened is that U.S. firms are slower in returning the survey. Ten years ago, if the survey had been sent to 100 firms, 75 would respond in the first month, and 20 firms would respond in the next two months. But now only 60 firms respond in the first month, and 35 firms respond in the second and third months. But in both cases, 95 out of 100 firms surveyed responded. 6

What are the implications of this delayed response pattern? First, if more data come in later in the survey period, then the initial estimate is less likely to accurately represent the final estimate, which means you are more likely to get significant revisions in the second and third months. The revisions do not mean the quality of the data has declined; it simply reflects the fact that more data is coming in late in the survey period.

A second point is that revisions have been, on average, negative for the past couple of years, and while the recent revisions were large, revisions have not been getting bigger, on average, based on an analysis recently issued by economists at J.P. Morgan. 7   They did find that large revisions are often associated with major turning points in the labor market. One possibility is that the recent large revisions in the payroll data for May and June indicate the labor market is at an inflection point and may worsen in coming months.

Overall, the delay in responses does mean that we can expect initial reports to be noisier and more prone to revision. One month of data has never constituted a trend, but it is going to be especially important to take near-month payroll data with a grain of salt and form a picture of the labor market based on several months of results and a range of other labor market indicators. I hope my analysis of the labor market shows you that I do exactly that.

Let me now turn to the outlook for inflation. Earlier this month, we received consumer and producer price information for July that allows for an estimate of inflation based on personal consumption expenditures (PCE), the FOMC's preferred measure. Based on those reports, PCE inflation increased 2.6 percent over the 12 months ended in July, and PCE inflation excluding volatile food and energy prices increased 2.9 percent. We will get the official data tomorrow.

Inflation has increased since the first quarter, but these numbers include the effects of import tariff increases, which, with inflation expectations anchored, I continue to expect will only temporarily raise inflation. Federal Reserve staff has extracted the tariff effects of inflation, and their latest estimates imply that without these effects, underlying inflation continues to run close to the FOMC's 2 percent target. 8

There is still considerable uncertainty about how much more, and how quickly, tariffs will pass through to consumer prices. I have seen estimates that vary widely in the share of tariffs borne by exporters, importers, and consumers, and that tells me that one must be careful not to presume that some will bear a lot more than others. I continue to

assume that the three groups affected by tariffs will share the costs roughly equally-onethird, one-third, and one-third. Most forecasts are for 12-month inflation to continue to slowly increase for a couple more months, with monthly tariff effects dissipating by early 2026.

I believe that monetary policy should look through the tariff effects on inflation. With underlying inflation close to 2 percent, market-based measures of longer-term inflation expectations firmly anchored, and the chances of an undesirable weakening in the labor market increased, proper risk management means the FOMC should be cutting the policy rate now. I felt this way in July, and all the evidence since then has led me to feel more strongly about it today. Based on what I know today, I would support a 25 basis point cut at the Committee's meeting on September 16 and 17. While there are signs of a weakening labor market, I worry that conditions could deteriorate further and quite rapidly, and I think it is important that the FOMC not wait until such a deterioration is under way and risk falling behind the curve in setting appropriate monetary policy.

My eagerness to move now is supported by my view that monetary policy is moderately restrictive. In June, the median of FOMC participants estimated that the longer-run value of the federal funds rate, akin to what it would be now without restricting or stimulating the economy, is 3 percent. With the target for the federal funds rate in a range of 4.25 percent to 4.5 percent, that means we are 1-1/4 to 1-1/2 percentage points above neutral.

While I judge that the FOMC should have begun this process in July, based on the data in hand, I don't believe that a cut of larger than 25 basis points is needed in September. That view, of course, could change if the employment report for August, due out a week from tomorrow, points to a substantially weakening economy and inflation remains well contained.

I think there is a growing consensus that monetary policy needs to be more accommodative, and even some recognition that it would have been wise to begin this process in July. I don't believe that policy has fallen substantially behind the curve, but one way to signal that I don't intend to allow that happen is to talk about where we go after September. Like other participants, I will be updating my economic projections just before the next FOMC meeting, including my assessment of the appropriate level of the federal funds rate at the end of this year and next. The totality of the data and the outlook will determine how quickly I believe we need to move policy to a neutral setting, but as I stand here today, I anticipate additional cuts over the next three to six months, and the pace of rate cuts will be driven by the incoming data.

1  The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.

2  See Christopher J. Waller (2025), ""The Case for Cutting Now,""  speech delivered at the Money Marketeers of New York University, New York, July 17.

3  My estimate of the anticipated revision is based on the difference between the currently published level of payroll employment and the count of employment from the

Quarterly Census of Employment and Wages (QCEW), which is used to benchmark the payroll employment figures. The QCEW data, which are currently available through 2024:Q4, suggest that the monthly change in payroll employment has been overstated by roughly 60,000 per month since March 2024.

- 4  I also look at timely data that Federal Reserve staff maintains in collaboration with the employment services firm ADP to construct a measure of weekly payroll employment, which covers about 20 percent of the nation's private workforce. This measure is comparable to the one ADP publishes. The current May-July contour for the staff measure of ADP-based private employment is broadly consistent with that of the Current Employment Statistics numbers. And in the weeks after the July jobs report's reference period, preliminary estimates from ADP show continued deterioration.
- 5  If artificial intelligence (AI) is affecting employment decisions, an important question for policymakers is whether such effects are temporary or permanent. Like many other innovations, AI will most likely shift displaced workers into new roles.
- 6  The initiation rate has fallen significantly since the onset of the pandemic. This is an area where additional resources dedicated to recruiting participants could improve data collection.
- 7  See J.P. Morgan (2025), ""US Focus: Jobs Revisions,"" webpage, August 15, https://markets.jpmorgan.com/research/email/scx/1h6t2ulk/GPS-5056358-0/dcb73cdb097b-4cdc-807f-bccb79320a11.
- 8  For a detailed discussion of the methodology to detect tariff effects on inflation, see Robbie Minton and Mariano Somale (2025),  ""Detecting Tariff Effects on Consumer Prices in Real Time,""  FEDS Notes (Washington: Board of Governors of the Federal Reserve System, May 9).
- i  On August 29, on page 2, a correction was made to the growth rate for real gross domestic product in the first half of 2025. The corrected sentence reads: ""Growth for the first half of the year was 1.4 percent.""",Christopher J Waller
https://www.bis.org/review/r250902h.htm,Fatih Karahan: Recent economic and financial developments in Turkey,"Speech by Dr Fatih Karahan, Governor of the Central Bank of the Republic of Türkiye, at the briefing on the Inflation Report 2025-III, Istanbul, 14 August 2025.",2025-08-14 00:00:00,"## Fatih Karahan: Recent economic and financial developments in Turkey

Speech by Dr Fatih Karahan, Governor of the Central Bank of the Republic of Türkiye, at the briefing on the Inflation Report 2025-III, Istanbul , 14 August 2025.

* * *

Distinguished Members of the Press, Esteemed Guests,

Welcome to the briefing we hold to convey the main messages from our Inflation Report.

We are saddened by the successive loss of four distinguished Central Bank figures, Mr. Rüdü Saracolu, Mr. Hasan Ersel, Mr. Süreyya Serdengeçti, and Mr. Ercan Kumcu, who left a lasting mark on the history of the Bank.

Each of them served the public at different times and in different capacities at our Bank. I commemorate them once again with gratitude, and offer my condolences to their loved ones.

Distinguished Guests,

Our tight monetary policy is gradually yielding results.

Domestic demand has continued to slow down and demand-side disinflationary effects have increased. The disinflation has continued uninterruptedly since June 2024. Underlying trend indicators suggest that disinflation is on track.

We value the progress we have made in achieving price stability, To this end, we will continue to use all monetary policy tools decisively in the coming period.

In my presentation, I will first share our assessments of the global economy, the macroeconomic outlook, and the monetary policy. Later on, I will present our mediumterm projections. After the presentation, our Deputy Governors and I will be answering your questions.

As usual, our Inflation Report includes boxes on prominent issues on the agenda as well as our thematic analyses.

Distinguished Guests,

I would first like to address the recent key global economic developments.

Although the uncertainty around global trade policies have eased somewhat thanks to bilateral agreements, it remains elevated.

As it's known, agreements imposed lower tariff rates than those initially announced. However, high sectoral tariffs remain in effect.

Uncertainty regarding many countries and sectors persists.

Moreover, geopolitical risks continue to weigh on the global economic outlook.

The adverse impact of these uncertainties and risks on expectations regarding global economic activity are still apparent.

The recent slight decline in uncertainty has also led to a modest improvement in the global growth outlook.

That said, we see that growth projections remain below January levels.

Energy commodity prices have risen somewhat over the previous reporting period due to geopolitical developments.

However, weak demand conditions and production increases limited this rise.

On the non-energy side, industrial metal prices, increased due to tariffs.

Despite differing country dynamics, rate cuts generally continued after April.

However, the pace of cuts varies based on inflation and growth outlooks.

Accordingly, policy rate expectations and pricing also show movements in both directions.

Due to high indebtedness, risk perceptions regarding bond yields have relatively increased in the recent period.

On the other hand, equity markets have been performing well on a global scale.

Against this background, we see that portfolio preferences have shifted towards equities.

Before moving on to the domestic outlook, I would like to emphasize that global uncertainty, despite having decreased somewhat, continues to weigh on the global economic outlook and financial markets.

Esteemed Guests,

## Macroeconomic Outlook

Now, I would like to share our observations on domestic macroeconomic developments.

As an intended result of our tight monetary policy, demand composition remains balanced.

In the first quarter of 2025, the annual growth of private consumption decelerated.

The contribution of private consumption to growth declined significantly compared to the pre-tightening period. Meanwhile, the contribution of net exports has become more balanced.

The moderation in demand composition is also apparent on a quarterly basis. While private consumption declined, net exports made a positive contribution to growth due to the increase in exports and decrease in imports.

Accordingly, with financial conditions remaining tight in the first quarter of the year, domestic demand weakened and external balance improved.

In the second quarter, the rate of increase in industrial production decelerated.

Excluding the typically volatile sectors, industrial production declined slightly on a quarterly basis.

Having risen in the first quarter, the services production index edged down in the second quarter as of May.

A similar trend is also apparent in the index of production in construction. In sum, production indicators were generally on a moderate course.

As a related indicator, capacity utilization rate in the manufacturing industry remained flat in the second quarter.

In July, capacity utilization declined compared to the previous month and the previous quarter's average.

Accordingly, capacity utilization has been hovering below the historical average for the past year.

Regarding the labor market, the headline unemployment rate remained well below its historical average, albeit with a slight increase in the second quarter.

Meanwhile, broadly defined indicators are still at high levels due to their differing dynamics.

In this context, data on applications per job openings also points to a rise.

This outlook is similar to that of 2018 tightening period.

When evaluating the labor market, it is essential to consider a broader set of data that also includes the indicators I have talked about.

Sometimes, key indicators, such as the unemployment rate, and other labor market indicators can send mixed signals.

The chart displays the Composite Labor Market Index, which is derived from a variety of labor market indicators and provides a comprehensive outlook.

While an increase in the index, indicates tightening in the labor market on an annual basis, a decrease indicates easing.

Hence the index implies that labor market is less tight than the unemployment rate suggests.

You can take a look at our box study on this particular topic for details.

In the second quarter domestic demand continued to lose momentum.

Excluding gold, retail sales followed a more moderate course. Indeed, the index's growth rate, excluding gold, slowed in the second quarter compared to the previous quarter.

This chart shows the trend-adjusted retail sales volume and expenditures on goods in household's final consumption.

First, I would like to note that, the divergence between these series after 2024 could be attributed to factors such as i scope differences and variations in the deflators used.

In the chart, we see that consumption of goods has fallen below the trend following the monetary tightening. Retail sales continue to lose pace. This trend is more evident when gold is excluded.

Card spending r increased in the second quarter and edged up in July.

Deviations from the trend also confirm the loss of momentum in card spending.

As we discussed on the CBRT Blog, the data adjusted for rising card usage preferences in recent years aligns more closely with private consumption.

This adjusted data allows us to better observe the loss of momentum in consumption expenditures.

The Business Tendency Survey data is also consistent with moderation in domestic demand led by monetary tightening.

Indeed, manufacturing firms' registered domestic orders hover around the previous periods' average.

Considering the data on demand as a whole, the disinflationary impact of demand conditions increased in the second quarter.

The average of the output gap indicators based on alternative methods implies a nearneutral, negative level in the first quarter of the year.

Output gap remained negative in the second quarter as well. Therefore, as financial conditions remained tight, demand conditions aligned more closely with the disinflationary path in this period. We expect this outlook to last for the remainder of the year.

In the context of economic activity, I would like to briefly mention the current account deficit.

Despite a slight increase in the second quarter, the current account deficit remained moderate in line with the domestic demand.

Looking at the details, exports continued to rise amid recent uncertainty regarding trade policies and weak global demand.

Imports declined in the first quarter but picked up in the second. This was partly driven by demand brought forward due to these uncertainties. The rise in the euro-dollar parity had a positive impact on the foreign trade and services balance.

Provisional data for July points to an improvement in the trade balance.

Against this background, we estimate that the current account deficit-to-GDP ratio was around 1.3 percent in the second quarter.

We forecast that this ratio will remain below its long-term average in 2025.

Meanwhile, energy prices and global trade policies continue to pose upside risks to the current account deficit.

Distinguished Participants,

Following this brief review of domestic economic activity, I will now share our assessment on the inflation outlook.

The disinflation process that started in June 2024 continues uninterruptedly despite the volatility in financial markets as well as geopolitical developments.

Consumer inflation decreased to 33.5 percent in July, a significant decline about 42 points from its peak in May 2024. Leading data suggest that this course continues in August, as well.

Despite being above the midpoint we projected, inflation has remained within our forecast range since the previous reporting period.

Although inflation stood below market expectations in the last three months in a row, the inertia in the services sector remains above our projections, remaining as a risk factor to forecasts.

The underlying inflation indicators registered a partial increase in April due to the developments in financial markets. In the following months, we witnessed a moderate course in indicators.

Underlying inflation posted a temporary rise due to month-specific factors in July. This was mainly driven by the price increases in services items with a strong tendency toward time-dependent price setting.

Analyzing three-month moving averages reveals a further gradual deceleration in the underlying inflation.

On the other hand, the average of six indicators we monitor show that the annualized underlying inflation is below 27 percent.

Median inflation, which performs better in forecasting, implies that underlying inflation hovers around 25 percent. A comparison of these figures with consumer inflation, which is 33.5 percent, suggests that disinflation will continue.

As I mentioned before, leading indicators for August also point to a gradual slowdown in underlying inflation.

Across subgroups, services inflation, which had recorded a gradual slowdown, increased somewhat in July due to items with strong tendency toward time-dependent price-setting such as communication, health and rent.

In the period following April, core goods inflation rose slightly due to exchange rate developments, yet this proved temporary.

Inflation in the food group lost some pace despite the agricultural frost. Although the frost had an adverse impact on fruit prices in the first half of the year, the favorable course of vegetable prices offset this to some extent. In this period, the deceleration in prices of the other food group has also been supportive.

In the energy group, we have recently witnessed the effects of the lump sum taxes and administered prices coupled with the uptick in global energy prices amid the geopolitical turmoil.

In this respect, if we were to look into the details of the main groups, commodity prices settled on a downtrend in March on account of the expectations towards global trade and growth, as you may remember. Accordingly, we revised our assumptions downwards for commodity prices, chiefly crude oil, in the second Inflation Report of the year.

However, geopolitical events of June reversed this picture. As I mentioned in the first part of my presentation, international commodity prices increased, driven by the energy group led by oil prices.

Meanwhile, climate conditions continue to affect food prices.

In tandem with increasing temperatures in recent months, we see drought getting more severe in certain areas.

Plant production forecasts indicate losses in yields due both to agricultural frost and rising temperatures.

We consider that drought, which is getting more severe, adds to the upside risks to food prices in the upcoming period.

Across subgroups, the highest annual inflation is recorded in the services group.

However, I need to underline that services inflation registered a notable decline in the last one year period.

However, we see that services items with a strong tendency toward time-dependent price setting and backward indexation add to the inertia in services inflation.

In fact, a closer look at cumulative inflation in the first seven months highlights education and rent items.

Inflation in education services followed a brisk course in the first seven months due to the hikes in private school fees. We will monitor the effects of the developments in private university tuition fees in the couple of months ahead.

The education services is followed by the rent item, while services items highly sensitive to demand conditions follow a milder course. Restaurants and hotels subgroup poses an example to this case.

Let's take a closer look at rent inflation.

Seasonally adjusted data indicate that monthly rent inflation has remained flat at around 4 percent in recent months.

As seen in the chart on the right, the annualized recent trends imply a course approximately 15 points below the current annual rent inflation rate of 63.6 percent. This indicates that rent inflation will continue to decline.

This downward course is confirmed both by the Retail Payment System (RPS) microdata and the rates of rent increases monitored through residential property valuation reports.

However, we should also note that rent inflation is more persistent than we had projected, due to supply-side factors specific to the housing sector, such as earthquakes and urban transformation.

The persistence in rents is clearly evident when services are analyzed in terms of rent and non-rent.

In services excluding rent, annual inflation differentiated considerably on the downside and underlying inflation shows a gradual slowdown.

The recent underlying annualized inflation for this group is at around 37 percent.

As previously emphasized, inflation expectations play a pivotal role in the disinflation process.

Compared to the first two Inflation Reports of the year, we see that inflation expectations have declined across all sectors.

In this slide, we present inflation expectations of market participants over various time horizons. Accordingly, it is anticipated that inflation continues to decline gradually.

Even though inflation expectations have improved, they are still above our inflation forecasts. In this respect, they continue to pose a risk to the disinflation process.

This requires us to maintain our tight and decisive monetary policy stance.

## Monetary Policy

Distinguished Participants,

The developments and data I have outlined so far have a clear message. We maintain our tight monetary policy stance and gradually collecting the results.

In this part of my speech, I would like to talk about our monetary policy stance.

As I indicated in the presentation, we have seen an improvement in the inflation outlook.

Against this background, we cut the policy rate by 3 points to 43 percent in July, while maintaining the necessary tightness in monetary policy.

Our tight monetary policy stance will ensure the continuity of the disinflation process.

In addition, we are reinforcing the monetary transmission with macroprudential measures against divergence and potential volatility in expectations among economic agents.

We also maintain an effective liquidity management strategy based on liquidity conditions.

As you know, the instruments we use to support our tight monetary stance can be grouped under three main categories:

We aim to increase the share of Turkish lira deposits and gradually reduce FXprotected deposit accounts (KKM) through regulations targeting deposits.

We prevent fluctuations in loan demand through regulations on loan growth.

And we manage excess Turkish lira liquidity in the system through our liquidity measures.

Recently, Turkish lira liquidity has increased with the improvement in our reserve position.

We sterilize the resulting excess liquidity in this period through deposit buying auctions and reverse swap transactions.

On the other hand, to mitigate the volatility in money market interest rates, we have also provided funding through repo auctions, taking into account the distribution of liquidity.

Our liquidity management strategy maintains money market interest rates close to the policy rate.

Now, I would like to share the latest developments regarding the financial conditions that are critical to the transmission of our monetary policy.

According to recent data, deposit and commercial loan rates are approximately 53 percent, and consumer loan rates are approximately 62 percent on a compounded basis.

In this context, the policy rate cut has been reflected in deposit and loan pricing in line with our expectations.

After the July Monetary Policy Committee decision, consumer loan rates dropped by 5.3 points and commercial loan rates dropped approximately by 5.5 points compared to the first week of July.

Thanks to our monetary policy stance and the macroprudential framework, the level of deposit rates continues to support the transition to Turkish lira and formation of new savings.

Personal loan growth picked up due to increased credit card spending as of the second quarter onwards.

As I mentioned before, consumers' shift from cash to card payments also influences credit card balance developments.

Consumer loans excluding credit cards are growing at a more moderate pace.

It is essential to maintain a pace of consumer credit growth that supports the rebalancing of domestic demand.

Excluding the loan categories exempt from the limits; Turkish lira commercial loan growth is in line with monthly growth limits and loan demand.

Approximately half of the Turkish lira commercial loan growth stems from the loans exempt from monthly growth limits.

As you may know, in order to strengthen the monetary transmission mechanism and achieve financial stability, we had lowered the monthly growth limit for FX loans to 0.5 percent.

Consequently, the slowdown in FX loan growth has become more pronounced, consistent with this measure.

In February, we terminated openings and renewals of KKM accounts for legal entities.

Currently, the remaining KKM balance for real persons is at 12 billion dollars.

Once the balance further declines, we will be able to terminate the openings and renewals of KKM accounts this year.

The demand for Turkish lira deposits has been strong recently, and the share of the Turkish lira is above the value before the volatility in financial markets.

In fact, the share of Turkish lira deposits is 60 percent, close to its historical average. This outlook remains about the same when mutual funds are included.

The decline in the KKM balance increases the share of Turkish lira deposits. Thus, the monetary transmission mechanism is strengthened and risks to the central bank's balance sheet are mitigated.

## Distinguished Guests,

With the uncertainty about tariffs waning, Türkiye, like other emerging economies, started to re-attract capital flows in May.

When we look at non-residents' positions, we see that the improvement observed after April has become more evident especially in July.

Gross reserves increased by 50 billion dollars to 174 billion dollars in August 8, 2025 from 124 billion dollars in March 2024.

Meanwhile, net reserves excluding swaps rose by 114 billion dollars to 50 billion dollars.

Our decisive tight monetary policy stance has contributed to the improvement in risk and volatility indicators as well.

We believe that the positive trend in risk indicators will continue as long as we sustain our tight monetary policy stance so as to reduce inflation as well as the uncertainty surrounding it.

## Medium-Term Forecasts and Interim Targets

Dear Participants,

Following the economic outlook, I have summarized, which outlines the background of our forecasts, I would now like to share our new medium-term forecast communication strategy with you.

As of this Inflation Report, we have decided to change the framework for presenting medium-term forecasts.

Before getting into the details, I would like to highlight two key concepts of our new approach: the ""forecasts"" we will announce in our Inflation Reports, and the ""year-end interim targets"" that will serve as a commitment and anchor.

In other words, from now on, alongside our ""inflation forecasts,"" which we may revise depending on the flow of data, we will present ""interim targets"" that will not be changed unless extraordinary circumstances occur between report periods.

These interim targets represent the inflation levels we are committed to achieving in the short term during the disinflation process as inflation converges toward 5%.

In this context, interim targets will serve as a reference in determining the endogenous monetary policy path, ensuring that inflation converges to the interim targets within the control horizon.

At this point, it is important to remind the concept of the ""control horizon"" which refers to the period when monetary policy decisions have their highest impact on inflation.

Given the lagged effects of monetary policy, the control horizon for Türkiye is defined as the period between 12 and 24 months from now.

You can follow our new framework, which we have discussed in detail in the relevant Zoom-in section in the Report.

Before going into the details of our inflation forecasts and interim targets, I would like to share the main assumptions underlying our forecasts.

As I mentioned at the beginning of my speech, the recent easing of uncertainty following the announcement of tariff rates has slightly improved global growth expectations. Therefore, we have revised our assumptions regarding external demand upward.

In light of rising commodity prices driven by geopolitical tensions, we have updated our assumptions for crude oil and import prices upward.

On the other hand, our assumption for food prices has remained unchanged for 2025 compared to the previous report, while it has been revised upward for 2026.

When forming our forecasts and interim targets, we have assumed that the tight stance in monetary policy will be maintained until price stability is achieved. Additionally, we assumed that coordination in economic policies will continue.

In this context, we forecast inflation to be between 25% and 29% by the end of 2025. For the end of 2026, our forecasts indicate that inflation will decline to a range of 13% to 19%.

Due to easing global uncertainties and inflation declining to lower levels, we have narrowed the forecast range compared to the previous report period.

As I mentioned earlier, these values reflect the inflation forecasts and corresponding forecast ranges we had previously shared with you. However, in this Report, I will also share our year-end interim inflation targets.

We maintain the 24% inflation forecast for the end of 2025 as our interim target for that year. For 2026 and 2027, we have set our interim inflation targets at 16% and 9%, respectively.

After inflation declines to 9% in 2027, we foresee it stabilizing at 5% in the medium term.

In the past, if there were any changes to our inflation forecasts, we shared the sources of those revisions.

From this Report onward, we will make such communication if the actual year-end inflation deviates from the interim target. If such a deviation occurs, we will explain its sources in the first Inflation Report of the following year.

In the previous report, we shared the 12% inflation forecast for 2026. Under our new approach, we have now set the 2026 ""interim inflation target"" at 16%. Analyzing the 4 percentage point difference, we find that higher food price assumptions have contributed 0.9 percentage points. The underlying inflation and inertia added 1.9 percentage points, and import prices in Turkish lira, largely reflecting updates to the oil price assumption, added 1.2 percentage points.

During the disinflation process, we will maintain our tight monetary policy stance to achieve our interim targets.

One of our top priorities is to keep domestic demand at disinflationary levels through the monetary policy measures we adopt. We will define the necessary measures by taking into account realized and expected inflation, and its underlying trend in a way that ensures the tightness required by the interim targets.

Maintaining our cautious stance, we expect inflation to decline steadily in the upcoming period. Our decisive approach in monetary policy will continue to support the disinflation process through moderation in domestic demand, real appreciation of the Turkish lira, and improvement in inflation expectations.

With the continued downward trend in expectations and the ongoing decrease in services inflation, the decline in the underlying inflation will continue throughout the remainder of 2025. The fiscal policy coordination will also contribute to this process.

To sum up, we will decisively maintain our tight monetary policy stance until price stability is achieved.

We set the policy rate to ensure the level of tightness required by the projected disinflation path. In this process, we take into account inflation realizations, underlying inflation and inflation expectations.

I would like to emphasize that we adopt a prudent, inflation-focused, and meeting-bymeeting approach when deciding on policy steps and their magnitude.

If we foresee a significant and persistent deterioration in inflation, we will effectively use all monetary policy tools at our disposal.

## Distinguished Guests,

I would like to emphasize once again in this meeting that price stability is a prerequisite for sustainable growth and increased social welfare.

In the disinflation process, we will continue to do whatever it takes to bring inflation down in line with our interim targets.

## Distinguished Participants,

As I conclude my remarks, I would like to thank all of my colleagues who have contributed to the writing of the Report, primarily the members of the Monetary Policy Committee, the Chief Advisors and the staff of the Research and Monetary Policy Department, and everyone that have contributed to the press conference.

Now, along with our Deputy Governors, we can proceed to the Q&amp;A session.",Fatih Karahan
https://www.bis.org/review/r250901a.htm,Ida Wolden Bache: Cautious normalisation of the policy rate ,"Introductory statement by Ms Ida Wolden Bache, Governor of Norges Bank (Central Bank of Norway), at the press conference following Norway's announcement of the policy rate, Oslo, 14 August 2025.",2025-08-14 00:00:00,"## Ida Wolden Bache: Cautious normalisation of the policy rate

Introductory statement by Ms Ida Wolden Bache, Governor of Norges Bank (Central Bank of Norway), at the press conference following Norway's announcement of the policy rate, Oslo, 14 August 2025.

* * *

Presentation accompanying the speech

Chart: Policy rate held unchanged at this meeting

Norges Bank's Monetary Policy and Financial Stability Committee decided to keep the policy rate unchanged at 4.25 percent. The economic outlook is uncertain, but if the economy evolves broadly as currently envisaged, the policy rate will be reduced further in the course of this year.

The central bank is mandated by government to ensure low and stable inflation. The operational target is inflation of close to 2 percent over time. At the same time, we are mandated to help keep employment as high as possible and to promote economic stability.

The central bank sets the policy rate eight times a year. Each rate decision is preceded by a thorough process, where the Committee meets multiple times. Norges Bank staff present analyses and alternative monetary policy stances. The Committee members always engage in thorough discussions, where the objective is to arrive at a decision that can be backed by all the members. The rate decision is published together with a summary of the discussions and the trade-offs made.

## Chart: The policy rate was raised rapidly and substantially in recent years

The world economy has been hit by unusually large shocks in recent years, and we have had to navigate uncharted territory with regard to interest rate setting. After the outbreak of the pandemic and lockdown, we reduced the policy rate to a historically low level with the aim of dampening the downturn and preventing higher unemployment from becoming entrenched. When inflation surged in the wake of the pandemic, we tightened monetary policy rapidly and significantly. The interest rate increases have helped cool down the economy and reduce inflation.

## Chart: Inflation has come down substantially from the peak

Inflation peaked at 7 percent and has since more than halved. Earlier this week, incoming data indicated that consumer price inflation is now down to 3.3 percent.

The inflation surge was triggered by an import price shock. Import prices have since fallen sharply, and a key driver of inflation in Norway is now the rise in prices for domestically produced goods and services.

Chart: The employment ratio is now higher than before the pandemic

When the economy recovered after the pandemic, unemployment fell to a very low level and the number employed increased markedly. As the economy cooled in recent years, unemployment increased again. This is confirmed by both the number of unemployed registered with the Norwegian Labour and Welfare Administration (Nav) and LFS data from Statistics Norway. While the Nav figures show that registered unemployment is now back to about the same level as before the pandemic, the LFS unemployment data indicate that unemployment has risen somewhat further. Either way, we see that the employment ratio is higher than in the period before the pandemic.

## Chart: Cautious normalisation of the policy rate

The policy rate was held at 4.5 percent for a year and half. In June, we began a prudent easing of monetary policy. With a cautious normalisation of the monetary policy stance, we are paving the way for inflation to return to target without a strong increase in unemployment.

We place emphasis on being transparent about our assessment of the monetary policy outlook. When we publish the policy rate decisions, we also provide a verbal indication of our assessment of the monetary policy outlook going forward. Our signals about the monetary policy outlook are not promises. If the economy takes a different path than envisaged, the policy rate path may be adjusted.

In March, the inflation figures indicated that inflation was unexpectedly high. The decision to keep the policy rate unchanged in March did not come as a great surprise, whether for the financial market or those who closely follow the central bank. In June it was different. The decision to reduce the policy rate in June did come as a surprise to many.

We do not want to surprise economic agents. But our decision will always be based on our mandate and assessment of the outlook. In the period to the June meeting, underlying inflation fell more than expected. This reassured us that much of the increase in inflation earlier this year was temporary.

The policy rate forecast we presented in June indicated one or two additional rate cuts in the course of the year. We have not drawn up new forecasts now, but the information we have received so far indicates that the outlook for the Norwegian economy has remained broadly in line with the outlook in June. Excluding the volatile component energy prices, inflation has been as projected. The labour market also appears to have evolved as expected.

The US imposed new tariffs over the summer, which are overall a little higher than we had assumed in June. The tariffs could heavily impact some firms, but the direct effect on activity in the Norwegian economy will likely be limited, as is also expected to be the case with regard to inflation in Norway.

Chart: Krone exchange rate has shown little change over the summer

When I was here last year, the krone exchange rate received much attention. The exchange rate had weakened quite a bit over the summer months.

Measured by a weighted average of trading partner currencies, the exchange rate is now at about the same level as a year ago. But the exchange rate has varied against different currencies. Against the euro, the krone is a little weaker than a year ago, while it is stronger against the US dollar. Since the beginning of the year, the US dollar has depreciated against a host of currencies.

When we published the policy rate decision in June, the krone exchange rate depreciated - in line with what we had expected. In the following week, the krone weakened somewhat more at the same time as oil prices fell. Since that time, the krone exchange rate has held broadly steady, but is a little weaker than we had assumed in June.

## Chart: Inflation down to target without a marked increase in unemployment

The Committee judges that a restrictive monetary policy is still needed but that it will likely be appropriate to continue with a cautious normalisation of the policy rate ahead. The job of tackling inflation has not been fully completed. But inflation has been significantly reduced from the peak, and with lower wage growth there are prospects that inflation will continue to decline. With lower inflation, household purchasing power is expected to continue to increase.

Our decision to start easing monetary policy does not mean that the Norwegian economy is faring poorly. But we do not want to restrain the economy more than needed. We expect the economy to expand at a moderate pace in the years ahead. After falling to a very low level, residential construction activity is now showing signs of picking up. On the other hand, the oil services industry, which has prospered in recent years, is expected to show slightly slower growth ahead.

The uncertainty surrounding the economic outlook is greater than normal, and the future path of the policy rate will depend on economic developments. With a rate path in line with the June forecast, inflation is projected to be around 2 percent in 2028, while unemployment is projected to increase a little.

The June forecast indicates a decline in the policy rate to about 3 percent in 2028. As such, we do not envisage a large decline in the policy rate, and we do not foresee a decrease in interest rates back to the levels seen in the decade prior to the pandemic.",Ida Wolden Bache
https://www.bis.org/review/r250910e.htm,Darryl Chan: Opening remarks - Climate Business Forum: Asia Pacific 2025,"Opening remarks by Mr Darryl Chan, Deputy Chief Executive of the Hong Kong Monetary Authority, at the ""Climate Business Forum: Asia Pacific 2025"", Hong Kong, 9 September 2025.",2025-09-09 00:00:00,"## Darryl Chan: Opening remarks - Climate Business Forum: Asia Pacific 2025

Opening remarks by Mr Darryl Chan, Deputy Chief Executive of the Hong Kong Monetary Authority, at the ""Climate Business Forum: Asia Pacific 2025"", Hong Kong, 9 September 2025.

* * *

John (Gandolfo), Mary (Schapiro), Jon (Moore), distinguished guests, ladies and gentlemen,

Good morning. It gives me great pleasure to welcome you to the Climate Business Forum: Asia Pacific 2025. This is the second time we co-host the Forum with the International Finance Corporation, which anchors the Hong Kong Green Week that features over 40 sustainability-themed events organised by more than 60 international and local institutions.

It is encouraging to see so many of you across the world joining us here to continue and advance this important dialogue on climate business.

It has indeed been a challenging year, navigating a ""climate change"" in climate conversations, while addressing the escalating climate impacts at the same time.

Hong Kong remains firmly committed to sustainability. For example, in June this year Hong Kong has been profiled by the IFRS Foundation to have targeted full adoption of the ISSB Standards.

Just yesterday, the Hong Kong Monetary Authority (HKMA) published the prototype of an enhanced version of sustainable finance taxonomy that extends the sector coverage to manufacturing and information and communications technology. The prototype also introduces criteria for transition activities and incorporates a new category on climate change adaptation.

Around a year ago, the HKMA launched the Sustainable Finance Action Agenda that guides our sustainability efforts in discharging our mandates in banking supervision, investment and market development. We also closely collaborate with fellow regulators and stakeholders from public and private sectors, locally and globally, to ensure that Hong Kong as a financial centre does its part in facilitating Asia's transition.

We stay the course because we believe it is the right thing to do, and the necessary thing to do. We also believe that we should do it right.

Let me give you two telling examples. First, quietly and steadily, the share of renewables in global electricity generation has been on the rise, having now surpassed one-third and is set to grow to two-thirds by mid-century. 1   That can translate into abundant business opportunities, especially in growing economies in the Asia Pacific.

Second, zooming in Hong Kong, we have seen a steady growth in the sustainable debt market. The total green and sustainable debt issued in Hong Kong exceeded US$84 billion in 2024, up 61% year-on-year. The momentum continued, with the issuance volume totalling US$34.3 billion in the first half of the year, or a 15% year-on-year increase. This is yet another indicator of the growing demand for climate financing and the opportunities ahead.

But we also need to address questions surrounding climate actions. While we may sympathise with the high-level goals of energy transition, biodiversity preservation and climate resilience, it is challenging to reach consensus when we delve into the practical issues of how, at what speed, and at what cost.

This is especially true in the Asia Pacific. Some of the emerging markets that are heavily dependent on fossil fuels are struggling to safeguard the rights to development of the current generation. It is however the same population that is the most susceptible to the dire consequences of climate change.

We do need to reflect on the climate agenda, taking into account the legitimate concerns. Not to look for convenient excuses to give up, but to come out stronger with robust and affordable climate actions.

There may well be more questions than answers. But there is one thing that we know for sure. It is through open and constructive dialogues that we find our way forward. We are truly grateful therefore to have with us today some of the most experienced and visionary practitioners. I encourage you to take the opportunity to share, discuss and debate what is needed to achieve a low-carbon, inclusive and resilient transition.

With that, I wish today's conference a great success. Thank you.

1 BNEF New Energy Outlook 2025",Darryl Chan
https://www.bis.org/review/r250910c.htm,Jorgovanka Tabaković: Strong commitment and flexibility in engagement on the climate and nature agenda,"Address by Dr Jorgovanka Tabaković, Governor of the National Bank of Serbia, at the Network for Greening the Financial System (NGFS) annual outreach meeting with plenary members and observers from Europe, Belgrade, 3 September 2025.",2025-09-03 00:00:00,"## Jorgovanka Tabakovi: Strong commitment and flexibility in engagement on the climate and nature agenda

Address by Dr Jorgovanka Tabakovi, Governor of the National Bank of Serbia, at the Network for Greening the Financial System (NGFS) annual outreach meeting with plenary members and observers from Europe, Belgrade, 3 September 2025.

* * *

Dear colleagues,

First of all, I want to say that I am Jorgovanka Tabakovi, Governor of  the National Bank of Serbia in the third term, and it is my 13th year in the NBS. I want to stress how important this NGFS forum is for us. My presence and that of Vice-Governor Ana Ivkovi are a proof of how important you are for us.

We at the NBS welcome the proposed strategic objectives of the NGFS as they are capacity building oriented.

First, I want to thank all of you, especially the NGFS Secretariat and Dr Sabine Mauderer, for all the work that you are doing with such professional passion. Without passion there are no results.

We took nature and resources for granted for centuries, but now we have reached the time of consequences of many devastating actions and the lack of actions.

During the next several minutes I will share with you the guiding principles of the National Bank of Serbia on the climate and nature agenda and our views on the establishment of the NGFS European regional group.

- I will start with a general conclusion that during almost ten years since the first UN conference on climate change in Paris we have moved from the starting point, but not as fast as we wanted. But down this road, we learned that we need flexibility in setting the path toward the goal that is unchanged - to reach net zero by 2050. And this is my first general point - we need strong commitment but also

FLEXIBILITY in engagement on the climate and nature agenda in Europe also.

- Another point is that, as much as we need ambitious goals, it is even more important to have REALISTIC and ACHIEVABLE GOALS. To have goals adjusted to real circumstances in order not to stay just some number on the paper that we will adjust upon discretion. Proposed changes to EU climate regulations and directives are going in this direction and this is the approach that we should follow.
- We also need institutions to have INDEPENDENCE - de facto and de jure. We don't want goals such as climate to be withdrawn from the agenda by a vocal but influential minority, especially those that gained the most from the industries that have highly negative environmental impacts, often associated with pollution. Those that will lose the most from green transition.

- This is why Europe can lead this transition. We are behind some regions in innovation, but Europe is by far more advanced in orderly green transition. Continuation of strategic support from the highest level will be the most important to push the climate and nature agenda forward.
- An important precondition for sustainable results is also active engagement of ALL INSTITUTIONS AND ALL PARTICIPANTS. Governments are obliged to act, but companies and households too. Companies should learn to look beyond the short-term horizon when assessing green and clean projects that usually call for higher investments in the initial phase - generating lower profits first, and higher after that. As Adam Smith said: « The baker does not bake bread because he wants to feed us, but because he wants to make a profit ». Companies need to put their money, or better to say - to invest in their future, but we must be vocal in explaining profitability ""of making that bread"" in the medium and long run.
- Equally important in today's fast-changing world is to have expert but simple communication about climate risk impact on GDP. We all know that central banks are highly equipped for this job. We have developed excellent analytical instruments, and now we must share the results of our analyses and communicate them publicly - like you said: transparent, transparent, transparent more frequently. Each of us, on each occasion.
- NGFS long term climate scenario with the new damage function that shows an even greater impact of climate change on GDP than previously estimated is an excellent tool for this. Short-term climate scenarios for central banks and supervisors also. But we must act together by putting it into a context of devastating effects on jobs, salaries, house prices, overall inflation, purchasing power- so that it can be understood by each individual.

To sum up. The fact is that we are late and we cannot turn the clock back. That privilege we don't have. But we must collaborate, with all institutions included. We don't need some GREAT and complex climate plans and bills, but simplified, realistic and sustainable frameworks. We also need flexibility in designing future instruments and measures. We do have the European framework to guide us, and we also have our national plans to follow.

As for the European regional group - I believe that NGFS statistics confirms that European countries are the most engaged in this format of networking. The fact that almost 45% of membership refers to European countries is a clear sign that we already have strong engagement by the European membership. For the EU candidate countries - like my Serbia - European regional group can be a very good platform today to hear about plans and implementation of the EU climate agenda, so that we can be better prepared once we become members.

## Dear colleagues,

Many times in life, everything seemed almost hopeless, like in COVID - but life has always inevitably returned to normal. Never the same, but still normal. What is destroyed is rebuilt, what is broken is fixed, but the cost could have been much smaller. We have the obligation to clearly communicate the huge loss arising from climate inaction. We have to go beyond our tasks prescribed by the law - and bring together all institutions to work on this joint task, rather than lose energy on uncoordinated actions.

We do have our personal opinions diverging on different areas, but the need for huge actions on climate issues is unquestionable. So, we have a good starting point and let's continue to use it, but louder.

Sabine, I believe in you and your leadership in this job. Thank you for your patience.

Thank you!",Jorgovanka Tabaković
https://www.bis.org/review/r250916c.htm,Eddie Yue: Opening remarks - Green Fintech Symposium,"Opening remarks by Mr Eddie Yue, Chief Executive of the Hong Kong Monetary Authority, at the 2025 Green Fintech Symposium, co-hosted by the Hong Kong Monetary Authority (HKMA), Hong Kong, 12 September 2025.",2025-09-12 00:00:00,"## Eddie Yue: Opening remarks - Green Fintech Symposium

Opening remarks by Mr Eddie Yue, Chief Executive of the Hong Kong Monetary Authority, at the 2025 Green Fintech Symposium, co-hosted by the Hong Kong Monetary Authority (HKMA),  Hong Kong, 12 September 2025.

* * *

Good afternoon everyone. Welcome to the 2025 Green Fintech Symposium, co-hosted by the Hong Kong Monetary Authority (HKMA) and the Hong Kong Institute of Bankers. This is the closing event of the highly successful Hong Kong Green Week.

Over the past week, Hong Kong has been buzzing with productive dialogue, effective collaboration, and fresh ideas. Under the theme ""Forging a Sustainable Future Together"", more than 60 local and international institutions joined forces in Hong Kong Green Week to deliver more than 40 conferences, forums, workshops, and expos.  The enthusiasm from around the world truly underscores Hong Kong's standing as AsiaPacific's leading green and sustainable finance hub.

Today, we celebrate the power of innovation in sustainability and the role green fintech plays in tackling pressing sustainability challenges. Earlier this year, we launched the 2025 Green Fintech Competition, inviting fintech pioneers around the world to showcase solutions across five key areas, from greening supply chains and supporting SMEs' sustainability journey, to advancing climate risk modelling, facilitating sustainable investment and driving carbon market transparency.

The Competition attracted more than 140 entries from 26 jurisdictions. Compared to 2023, it was a 63% increase. This remarkable response highlights the growing global interest and commitment to leveraging fintech innovations for sustainable development, despite discouraging news headlines that we read from time to time.  Indeed, earlier this year, a Big 4 firm published its findings that out of a sample of 4,000 companies, 83% made R&amp;D investment in low-carbon products and services as they saw a strong business case irrespective of the noises.

Looking back at the last competition of two years ago, we witnessed participants who have since gone on to achieve remarkable success, bringing their innovative solutions to life in the financial sector and beyond. These trailblazers have set an inspiring benchmark, one that challenges this year's participants to push the boundaries even further.

This afternoon, you'll hear from the five winners of the Competition, each showcasing pioneering ideas and their practical applications. I encourage you to visit their booths afterward to dive deeper into their cutting-edge technologies and impactful projects.

Our theme today, ""Creating Synergies Through Finance"", reminds us that no single organisation or sector can solve climate change alone. Our vision is clear: we must forge partnerships across finance, technology, academia, and businesses to effectively confront the complex, interconnected challenges posed by global climate change.

Climate change transcends traditional boundaries, affecting areas such as public health, supply chains, energy systems, and natural ecosystems. It demands agile and integrated responses - responses that green fintech can help deliver by merging financial expertise with technological innovation.  This empowers us to scale up climate risk analytics, enhance accountability in carbon markets, craft sustainable financial products, and mobilise investments needed for a greener economy.

At the HKMA, we are proud to champion these efforts and lead the charge in advancing green fintech. Earlier this year, we published an adoption practice guide that highlights how green fintech can accelerate banks' net-zero journeys.  We also hosted a FiNETech event focusing on green fintech and rolled out a series of training sessions to help banks build capacity and empower them to integrate green fintech more effectively into their day-to-day operations.

Beyond capacity building, we are showcasing real-world applications of green fintech. Our cloud-based platform equips banks with vital data to better assess and manage physical climate risks, bridging climate modelling and financial risk management. Meanwhile, through Project Ensemble, we are enhancing the liquidity and depth of the carbon markets by exploring how tokenisation can improve the issuance, trading, and retirement of carbon credits - including those conducted across borders. Together, these projects show how collaboration and innovation can break down silos and amplify impact.

Looking ahead, Hong Kong's green fintech ecosystem can shine as a model of inclusive and sustainable growth both regionally and globally. By nurturing partnerships across financial institutions, tech innovators, academia, and policymakers, we can accelerate innovation, scale sustainable solutions, and drive market transformation.  The cross-pollination of ideas and expertise cultivates fertile ground for pioneering tools and business models that address the challenges of climate change mitigation and adaptation.

To all participants, partners, and guests: your presence here is more than symbolic. The connections and collaborations born from today's conversation bring us closer to a future where financial flows support the preservation of our planet and prosperity for all.

So let ""Creating Synergies Through Finance"" be our call to action. Let's bridge gaps, overcome challenges, and innovate boldly. Together, we can make finance the catalyst for a greener world. Let's move forward with shared purpose and determination. Thank you.",Eddie Yue
https://www.bis.org/review/r250916a.htm,"Joachim Nagel: Banking regulation - as complex as necessary, as simple as possible","Speech by Dr Joachim Nagel, President of the Deutsche Bundesbank, at the13th regulatory conference, Frankfurt am Main, 12 September 2025.",2025-09-12 00:00:00,"## Joachim Nagel: Banking regulation - as complex as necessary, as simple as possible

Speech by Dr Joachim Nagel, President of the Deutsche Bundesbank, at the13th regulatory conference, Frankfurt am Main, 12 September 2025.

* * *

Check against delivery

## 1 Introduction

Ladies and gentlemen, it gives me great pleasure to open the thirteenth regulatory conference. A warm welcome, too, to our speakers and panellists.

To kick off my speech today, I would like to take you on a brief excursion into the world of medicine. For a long time, hospitals striving to lower the number of deaths from infectious diseases used to deploy a whole host of measures: regularly airing the rooms, frequently changing the bed covers, isolating patients, and giving doctors special protective clothing to wear.

Then, in the mid-19th century, a Hungarian physician called Ignaz Semmelweis introduced a simple rule: All doctors and medical students were to wash their hands with a chlorinated solution before every examination. The results were spectacular: The mortality rate dropped within the space of a few months from more than ten per cent to less than three per cent.

The solution to the problem I will be talking about in just a moment is certainly not quite as simple, and the effect might be smaller as well. But you can probably tell what I'm getting at: Sometimes, a simple, yet appropriate solution to a problem is better suited than a complex bundle of measures.

Today's European banking regulation is just such a complex bundle of measures. It sets out to achieve different objectives, relying on a multitude of instruments that are often intertwined. Banking regulation in its current form came into being in a long and iterative process. New capital instruments were introduced, minimum requirements were raised, and additional capital buffers were created. Further requirements were added-like the leverage ratio-alongside new resolution rules.

The outcome: Our banking system today is far more resilient than it was prior to the 2007 global financial crisis. We have seen compelling evidence of this in recent years: Neither the coronavirus pandemic nor the energy crisis, nor the turmoil in the  US banking market in 2023, spelled any serious danger for the European banking system.

In terms of resilience, then, the European banking system has delivered in every respect imaginable. That's unreservedly positive. And it's something that's worth stressing over and again. But an honest stocktake also means acknowledging that banking regulation today is more complex than it ever was.

Just over six months ago, I joined my  ECB Governing Council colleagues JosØ Luis EscrivÆ (Banco de Espaæa), Fabio Panetta (Banca d'Italia) and François Villeroy de Galhau (Banque de France) in writing a letter to Maria Luís Albuquerque, the European Commissioner responsible for Financial Services and the Savings and Investments Union. 1  In that letter, we called on the European Commission to widen its simplification initiative to also include the banking sector. In the Eurosystem, we are now working on this topic as part of a High-Level Task Force. 2

I will begin my speech by briefly outlining what exactly is meant by the term ""simplification""-and what is not. After that, I will give you an idea of the complexity of the existing own funds regulation in Europe and explain why this can lead to inefficiencies. I will then close my speech by explaining, with the aid of four concrete thought-provoking impulses, how effective banking regulation could be simplified.

## 2 What does simplification mean?

Let me start with the question of what simplification means exactly-and what it doesn't. I think it's important to emphasise that simplification in banking regulation is not synonymous with deregulation. What we want to avoid at all costs is a potential situation where we jeopardise the stability of the banking system or underestimate risks.

Rather, simplification stands for a targeted reduction of unnecessary or perhaps even counterproductive complexity. In other words, we are striving to make regulation clearer, more understandable and more efficient-while continuing to safeguard the stability of the banking system. True to the motto: as simple as possible, as complex as necessary.

One vivid example of simplification can be found in the area of disclosure requirements and reporting standards. At the European and national levels, there are already numerous initiatives aimed at eliminating reporting overlaps and at streamlining and harmonising reporting requirements. One concrete example is the joint initiative with BaFin to discontinue the reporting scheme for loans of €1 million or more at the end of 2026. For that to happen, the necessary legal amendments will have to have been made by then.

But there are other fields of banking regulation, too, where it's worth exploring the topic of simplification. Because today's banking regulation is the result of multiple reforms that were often rolled out in response to specific crises and new challenges. Those reforms had to take different interests and objectives into account. Every single measure had a good reason for existing.

But over time, these have grown to become an ever more dense mesh of regulations. Many rules are intertwined, some overlap, others are difficult to understand or arduous to implement. That's not to fault the legislators-rather, it is the outcome of a long and complicated process of negotiations.

That is why we at the Bundesbank asked ourselves: What would optimal banking regulation look like if we had the opportunity to rewrite it today entirely from scratch? Even things that work well need to be evaluated at regular intervals-that's neither unusual nor reprehensible. In monetary policy, incidentally, that's something we do as a

matter of course. Just recently, we conducted another assessment of our monetary policy strategy. And an approach that has proven its worth in monetary policy can benefit banking regulation as well.

## 3 Own funds regulation: the status quo

How does the complexity of European banking regulation manifest itself-and what unintended side effects can it have? I'd like to spend some time focusing on own funds regulation. It's a good example of the complexity that I'm talking about.

Nowadays, European banks are faced with a plethora of parallel own funds requirements. These requirements pertain to the capital regime and to the resolution regime. The capital regime governs the amount and type of own funds a bank has to hold on a going concern basis. The aim is to safeguard the solvency and stability of the bank in its day-to-day operations and to cushion losses from ongoing business.

The capital regime incorporates four key capital requirements, three of which are riskweighted and one of which is unweighted. Risk-weighted means that assets are weighted differently depending on their risk content. A collateralised loan to a reliable debtor is thus assigned a smaller risk weight than an unsecured loan to a risky debtor. Weighting is a way of more precisely capturing credit risk.

Banks need to meet three requirements for their risk-weighted assets-for common equity tier 1 capital, additional tier 1 capital and total own funds. Let's make these terms-that are perhaps a little abstract to some-more tangible. Common equity tier 1 capital includes, for example, shares issued by the bank or retained earnings. This form of capital is the best at absorbing losses. Contingent convertible bonds, also known as CoCo bonds, are an important instrument when it comes to additional tier 1 capital. They are automatically converted from debt to equity if specific trigger events occur. Tier 2 capital primarily includes subordinated liabilities.

Banks are also required to comply with a leverage ratio. In simple terms, this involves measuring tier 1 capital in relation to total assets-without risk weighting. 3  The leverage ratio curbs banks' debt and provides an additional layer of protection alongside the riskweighted capital requirements.

If a bank is being wound up-i.e. in the case of a ""gone concern""-the resolution regime contains further requirements. The aim here is to enable even banks whose insolvency could jeopardise financial stability to be wound up in an orderly manner-without placing a burden on the taxpayer.

The resolution regime governs the way this should work in Europe. The minimum requirement for own funds and eligible liabilities  (MREL) is one element of it. Again, it includes both risk-weighted and unweighted components. To meet the requirements imposed by the resolution regime, banks are permitted to use not only equity capital but also certain instruments of debt capital. Global, systemically important institutions are also subject to international standards such as total loss-absorbing capacity  (TLAC).

All in all, large banks in Europe have to meet up to nine different own funds requirements. We have a number of different requirements side by side, so we're

talking about horizontal complexity here. On top of that, there's also vertical complexity, with these requirements consisting, in turn, of multiple stacked layers.

All European banks must meet certain minimum requirements-that's the first layer. Then, there are various capital buffers to be met in the second layer. Looking at riskweighted capital requirements, these include the capital conservation buffer, the buffer for systemically important institutions, the countercyclical capital buffer and the systemic risk buffer. In some cases, minimum requirements and buffers are the same across all banks, and in others they are bank-specific or country-specific-and they can change over time, too. Pillar 2 guidance creates a third layer, in the form of an additional capital reserve recommended by supervisors. And the resolution regime consists of multiple layers as well.

If your mind's already in overdrive, you wouldn't be alone-many banks and financial investors feel the same. The complexity becomes problematic if it leads to inefficiencies or if the individual elements get in each other's way. I'd now like to briefly highlight two key problem areas.

First, the multitude of capital requirements makes it difficult for banks, supervisors and market participants to readily work out which requirement is binding in a given case. That's because the answer to that question will depend on many factors-the capital structure and the buffers available, to name a couple.

Second, there are a number of side effects and interactions that can undermine the actual objectives behind the rules. For instance, double counting of own funds towards buffers and parallel minimum requirements reduce the buffers available for use. And this, in turn, can lead to a situation where supervisors release buffers but banks cannot actually use them. This problem is already well documented. 4

Another example is that large banks often meet some of their requirements with additional tier 1 capital, such as contingent convertible bonds. As a result, they have less common equity tier 1 capital to cushion losses.

Crisis measures have different trigger points and this discrepancy can also prove problematic. From a capital regime perspective, it makes sense to set the trigger point as late as possible, as this would ensure that banks also use their buffers and maintain lending. From a resolution angle, however, this might then leave insufficient capital to facilitate orderly resolution.

As you can see, complex regulation leads to undesirable side effects in some cases-which undermines the actual purpose of regulation.

## 4 Possible areas of action

How could we significantly reduce the complexity of own funds regulation? I would like to present four thought-provoking impulses to achieve this.

## 4.1 Reduce the number of own funds requirements

A first approach would be to reduce the number of own funds requirements. Changes could be made to the capital regime so that only common equity tier 1 capital would be eligible. This would already halve the number of parallel requirements for banks in a going concern scenario. That would leave one risk-weighted requirement and one unweighted requirement for common equity tier 1 capital.

In the case of additional tier 1 capital, in particular, there have been doubts for years as to whether it can actually absorb losses as intended in a going concern scenario.[5] And the international experience of the past few years also shows that, in crises, additional tier 1 capital often only absorbs losses when the bank is already on the verge of failure. [6] If banks were to consistently rely on common equity tier 1 capital instead, banks' loss-absorbing capacity on a going concern basis would be significantly strengthened. This is because common equity tier 1 capital covers losses without constraints and is not subject to repayment or conversion. In addition, this would make the capital regime much clearer and less complex.

## 4.2 Separate capital and resolution regimes more clearly from each other

A second approach would be to separate the capital regime and the resolution regime more clearly from each other. To this end, in the resolution regime, for each riskweighted and unweighted requirement we could allow only those instruments that do not form part of common equity tier 1 capital under the capital regime-i.e. additional tier 1 capital, tier 2 capital and subordinated liabilities.

These would then only be eligible in the resolution regime. That way, the funds earmarked for resolution would remain unaffected by losses in normal business operations and really would be available in the event of a crisis. This is because even if common equity tier 1 capital offers the best loss-absorbing capacity, it may already be largely depleted in the case of a resolution due to double counting in the capital and resolution regimes.

Clearly separating the capital and resolution regimes would have another advantage: The requirements would no longer overlap. This would allow banks to use their capital buffers at any time without at the same time violating a minimum requirement.

The complexity of the resolution regime could be further reduced by allowing only subordinated liabilities. Instruments such as senior bonds could therefore no longer be used to cover the requirements. This would facilitate effective resolution, as subordinated instruments can be written off or converted into equity in a targeted manner. And this without any undesirable side effects on the financial system.

## 4.3 Pool capital buffers

A third approach would be to pool the various capital buffers. The aim here is not to undermine the existing division of tasks between European and national supervisory authorities. It's about simplifying regulation within the existing competences.

One of several options would be to combine the countercyclical capital buffer and the systemic risk buffer from national macroprudential supervision to form a single,

releasable buffer. In periods of stress, it could then be flexibly released by supervisors and used by banks. If supervisors release the buffer during a period of stress, banks' own funds requirements fall. And this helps them to continue lending to enterprises and households.

## 4.4 Introduce a small bank regime

My fourth approach is that for small banks, the own funds requirements could be simplified even more strongly. In many areas, small banks are already subject to the principle of proportionality. Proportionality in banking regulation means that supervisory requirements depend on banks' size, business model, complexity and risk profile. The aim is to avoid imposing the same extensive regulations on smaller and less complex institutions as on large, international banks.

However, the capital requirements that currently apply to small banks in Europe are similarly complex to those of large banks. In the capital regime, there is therefore still considerable potential to strengthen proportionality. This is because the complex requirements of the risk-based regime, with their exceptions and special rules, pose major challenges for small banks.

Inspiration for simplification can be found in Switzerland, for example. There, small banks can voluntarily opt for a regime in which the risk-weighted requirements no longer apply.[7] This would be worth considering for small, less complex and low-risk banks in the  EU, too. This would eliminate the time-consuming calculation and documentation of risk-weighted assets, as well as many reporting and disclosure requirements. In return, the leverage ratio, i.e. the requirement for tier 1 capital in relation to unweighted assets, would be increased accordingly.[8] The exact level of the leverage ratio would still have to be determined.

On balance, the complexity of small banks' capital requirements would decrease significantly, but their resilience would remain intact. So here, too, simplification does not mean deregulation, but simpler yet effective regulation.

Taken together, the proposed measures could significantly reduce the complexity of European banking regulation and reduce undesirable side effects. All this without jeopardising the stability of the banking system. They might perhaps even further increase it.

## 5 Conclusion

Ladies and gentlemen, at the beginning of my speech, I spoke about the doctor Ignaz Semmelweis. Although his simple hand-washing measure was a resounding success, it was not immediately welcomed by all his colleagues. However, the importance of hand hygiene ultimately prevailed worldwide and is now considered one of the most important and simplest measures for preventing infections.

And when it comes to reducing the complexity of banking regulation, too, we still have some persuading to do. This is because it is often intuitively assumed that a complex

issue such as the stability of banks can only be tackled with equally complex regulation. But if I have been able to convince you of one thing today, then hopefully of the following: it is worth critically questioning the complexity of our banking regulation.

Recognising the problem is mostly quite simple-finding the optimal solution, by contrast, is often much more difficult. I have already presented a number of specific ideas to you today. Let me briefly summarise these again:

First, we could make common equity tier 1 capital the only eligible capital in the capital regime. This would halve the number of own funds requirements.

Second, we could restrict eligibility in the resolution regime to instruments that do not belong to common equity tier 1 capital. The requirements in the capital and resolution regime would thus be clearly separated.

Third, macroprudential capital buffers could be combined and designed in such a way that they can be released more easily and flexibly in the event of a crisis.

Fourth, the requirements could be simplified further for smaller, low-risk banks. Instead of complex, risk-weighted requirements, a higher, but uncomplicated leverage ratio would be preferable.

One thing is clear: We are at the beginning of a long journey. The four ideas need to be further substantiated analytically and examined for possible side effects. In addition, many details would need to be carefully defined and thoroughly explored.

With this speech, I would like to further advance the discussion with our national and European partners. For I am convinced that we should move forward boldly on this path. Simplification is feasible-true to the motto: as complex as necessary, as simple as possible. Thank you for your attention.

- 1  Joint letter from the Bundesbank President and the Governors of the Banque de France, the Banca d'Italia and the Banco de Espaæa to Commissioner Albuquerque on banking regulation
- 2  What is the ECB High-Level Task Force on Simplification?
- 3  See Own funds | Deutsche Bundesbank  for a detailed explanation of the various types of capital.
- 4  See, for example, ESRB (2021), Report of the Analytical Task Force on the overlap between capital buffers and minimum requirements, December 2021, orBCBS (2022), Buffer Usability and Cyclicality in the Basel Framework, 5 October 2022.
- 5  See BCBS (2022): Evaluation of the impact and efficacy of the Basel III reforms, 14 December 2022.
- 6  BCBS (2023), Report on the 2023 banking turmoil, 5 October 2023.

## 7 Dossier on small banks | FINMA

8  Admati, A. and M. Hellwig (2013), The Bankers' New Clothes. What's Wrong with Banking and What to Do about It, Princeton University Press, also argue for the leverage ratio as the only requirement in capital regulation.",Joachim Nagel
https://www.bis.org/review/r250916b.htm,Brad Jones: Anti-fragility and the financial system ,"Opening remarks by Mr Brad Jones, Assistant Governor (Financial System) of the Reserve Bank of Australia, to FINSIA: The Regulators, Sydney, 12 September 2025.",2025-09-12 00:00:00,"## Brad Jones: Anti-fragility and the financial system

Opening remarks by Mr Brad Jones, Assistant Governor (Financial System) of the Reserve Bank of Australia, to FINSIA: The Regulators, Sydney, 12 September 2025.

* * *

Thank you to FINSIA for the opportunity to be here with you.

For industry and those of us in the policymaking community charged with the responsibility of promoting stability, structural change in the external operating environment is making for unusually challenging times. I am not talking about standard business cycle uncertainty here, but rather a new era of strategic, technological and operational disruption that is cutting across the financial system and wider society in complex ways.

But my main point today is that while these challenges will require a laser-like focus on resilience over the coming years, this does not have to come at the expense of innovation, competition and efficiency. Far from it - these objectives can be mutually reinforcing. As industry and regulators, our challenge here is to work creatively to build a financial system that has an 'anti-fragile' character. A system that is vulnerable to disruption - geopolitical, technological, or otherwise - has inherent fragility and is more likely to break when stressed. By contrast, and to invoke Nassim Taleb's characterisation, an anti-fragile system is one that can not only weather most storms but stands to benefit from disruptive change.

## A new era of disruption?

The international system is undergoing seismic adjustment - on a scale and speed unseen in eight decades. The wheels of globalisation are grinding with more friction. Key tenets of the rules-based international order are being challenged. The strategic environment is becoming more contested and complex. And for financial institutions, and even nations, self-insurance against a wide range of scenarios is assuming more prominence than at any time since the end of the Cold War. In short, the era of the peace dividend is over.

We are also navigating a period of rapid technological transformation. As the financial system is increasingly digitalised, the surface for cyber-attacks is expanding, fuelling a new cyber arms race. Cloud computing is helping to alleviate single points of failure, but concentration risk in cloud and other advanced technology service offerings risks amplifying third-party dependencies. Quantum computing will also raise its own set of challenges and opportunities. And while artificial intelligence (AI) could unleash a burst of productivity across industries and economies, my discussions with international counterparts reveal concerns about its potential to accelerate fraud, misinformation and other sources of financial instability. One example is contagion and herding risk, where parties could come to rely on similar models trained on similar data that therefore generate similar actions - including in a crisis. Moreover, the complexity of AI systems developed outside the regulatory perimeter means that systemic vulnerabilities could grow in a way that is not obvious to the boards of financial institutions or supervisors.

The resilience of the financial system to disruptions to critical infrastructure - the electrical grid and telecommunications network - is also a growing focus internationally. These challenges are not just limited to cyber intrusions, surging energy demands from big data and extreme weather events. In April, cascading power outages on the Iberian Peninsula affected 50 million households and prompted the Spanish Government to declare a national emergency. While economic activity declined by almost half its daily level, these disruptions would have been worse still had the functioning of key financial infrastructure also been compromised. And small, low orbit satellites are increasingly being viewed as an important source of 'all hazard' redundancy when mainland telecommunications capabilities are stressed, as seen in Ukraine and elsewhere.

## Anti-fragility - building resilience through innovation and dynamism

Confronted with extreme-but-plausible sources of systemic disruption, it might be tempting for financial system regulators to prioritise resilience over all else, including innovation, competition and efficiency. But I'm not persuaded that casting these objectives as a trade-off - resilience on the one hand, or innovation, competition and efficiency on the other - is a helpful framing. Rather, the opportunity we must grasp is to have these concepts mutually reinforce one another.

To that end, the RBA's Payments System Board has long had a mandate to support competition and efficiency in a manner that is consistent with stability in the financial system. My colleagues and I are well aware of the regulator curse, otherwise known as 'the stability of the graveyard', where an excessive desire to minimise risk in the system could come at the cost of robbing it of all vitality and therefore its ability to support economic growth over the long term.

With that in mind, our recently updated Strategic Plan places considerable emphasis on harnessing the forces of innovation, dynamism and competition to better promote resilience in the Australian payments system and across our financial market infrastructure more generally. 1   It is in this sense that we are striving to give our system an 'anti-fragile' character. Let me provide some recent examples.

First, under a rebooted Industry Resilience Initiative, the RBA and APRA are working with the major banks, Australian Payments Plus and AusPayNet to enhance existing capabilities and develop new ones to ensure essential payment services can continue to operate in the event of a significant disruption to our payments system. This 'all hazards' initiative is one of the key pillars of a significant program of work the Council of Financial Regulators are progressing with industry to strengthen the resilience of our financial system to geopolitical and operational risk. This includes a system-wide mapping of potential vulnerabilities.

Second, as the vision for Australia's future account-to-account (A2A) payments takes shape, the RBA is engaging with industry to ensure that resilience is baked into new technological solutions. Following our Risk Assessment in March, we recently set out a Public Interest Framework to guide industry in their strategic planning for the future A2A system. 2   This is a technology agnostic, principles-based framework that prioritises the reliability of the payments system through robust contingency and recoverability arrangements, alongside new functionality spurred by competitive tension and

innovation. As a practical example, we view interoperability - the ability for systems to connect to each other - as integral to promoting resilience, competition and efficiency. In good times, end users will have greater choice over service providers; when systems go down, contingency options will be available.

Third, given advances in quantum computing will pose a risk to the secure exchange of payment details, we are strongly supporting industry efforts to migrate to the Advanced Encryption Standard (AES), which is viewed as a quantum-safe solution. Nefarious actors are already storing vast amounts of data with the expectation of breaking current encryption standards down the track - a strategy known as 'harvest now, decrypt later'. In the absence of greater urgency and effective industry coordination, there is a risk that the migration to the AES for card payments will occur too slowly, leaving end users exposed to increased risk of fraud. This could undermine trust in card payments and the wider financial system.

Fourth, in an effort to promote more competition in financial market infrastructure (FMI), the Payments System Board recently raised the threshold beyond which firms are required to comply with the Financial Stability Standards for Securities Settlement Facilities. This step, where the annual settlement activity threshold increased from $200 million to $40 billion, has already helped to streamline clearing and settlement facility licence applications for small firms, and we hope to see more entrants emerge to stimulate competition and diversify risk across the FMI landscape.

Fifth, we have been engaged in two projects - Acacia and Mandala - aimed at strengthening the efficiency and resilience of wholesale and cross-border payments. In Project Acacia, we are working alongside the Digital Finance Cooperative Research Centre, industry partners and regulators to better understand how innovation in financial infrastructure and digital money, including central bank digital currency, might uplift the functioning of Australia's wholesale financial markets. 3   We are also preparing to support Treasury and ASIC in a review of the enhanced regulatory sandbox to ensure it best supports innovation and resilience across the payment and FMI ecosystem. At the same time, we are collaborating with central bank partners on Project Mandala, which aims to develop protocols to automate regulatory compliance processes in cross-border payments using new types of ledger arrangements. The aim here is to make crossborder payments more transparent, faster and safer.

Finally, we are assisting the Government to advance and implement its payments regulatory reform agenda - including reforms to the Payment Systems (Regulation) Act and licensing arrangements. These reforms will boost regulatory clarity for industry and strengthen the ability of financial regulators to promote innovation, competition and resilience in the system. Without this, network and other effects mean that the payments industry could tend towards anti-competitive outcomes, where dominant players impose barriers to entry that raise costs for businesses and consumers and stifle the sort of positive disruption that startups often introduce.

## Concluding remarks

To conclude, ensuring our financial system remains strong and resilient has never been more important. If we are to meet this challenge head on, we will need to harness the forces of innovation, competition and dynamism more fully and more creatively. My

colleagues and I at the RBA and on the Payments System Board are committed to working constructively with industry to make this happen. Australians are depending on all of us here to get this right.

Thank you, and I look forward to your questions.

Thanks to colleagues in Payments Policy Department for their assistance in preparing these remarks.

- 1  Payments Systems Board (2025),Annual Report 2025 (forthcoming).

2  RBA (2025), ' Decommissioning of the Bulk Electronic Clearing System: RBA Risk Assessment', March; RBA (2025), 'Public Interest Framework for a Successful Accountto-Account Payments System', July.

3  RBA (2025), ' Project Acacia: RBA and DFCRC Announce Chosen Industry Participants and ASIC Provides Regulatory Relief for Tokenised Asset Settlement Research Project', Media Releases No 2025-18, 10 July.",Brad Jones
https://www.bis.org/review/r250911n.htm,Rama Krishna Sithanen: Current economic conditions and outlook,"Statement by Dr Rama Krishna Sithanen, Governor of the Bank of Mauritius, at the post Monetary Policy Committee (MPC) press conference, Port Louis, 13 August 2025.",2025-08-13 00:00:00,"## Rama Krishna Sithanen: Current economic conditions and outlook

Statement by Dr Rama Krishna Sithanen, Governor of the Bank of Mauritius, at  the post Monetary Policy Committee (MPC) press conference, Port Louis, 13 August 2025.

* * *

Ladies and gentlemen, members of the media, good afternoon.

It is my pleasure to welcome you all to this press conference to brief you on the gist of the 75 th  MPC meeting held today.

I shall now provide you with an overview of the international and domestic economic developments which the MPC carefully scrutinised during its policy deliberations before taking its decision.

## International Economic Developments

Let me start with the international economic developments.

Since the last MPC meeting, developments on US tariffs have remained at the forefront of global economic headlines, reflecting ongoing concerns about trade policy and its broader implications. While several trade deals have recently been finalized, offering some relief and contributing to a decline in uncertainty, apprehension still lingers. The finalized agreements mark progress toward more predictable trade relations, yet the overall landscape remains cautious as stakeholders await further clarity on many unresolved issues. This mix of progress and lingering doubt continues to shape market sentiment and international economic strategies.

The IMF, in its World Economic Outlook Update July 2025 report, revised its growth projections upwards from the April 2025 reference forecast, from 2.8 per cent to 3.0 per cent for 2025, and from 3.0 per cent to 3.1 per cent for 2026. The upgrade reflected positive trade negotiations for some important countries, like China, and front-loading effects. However, the IMF highlighted that uncertainty over the magnitude and impact of the trade shock persists and compared to the pre-April 2 forecast in the previous report, global growth is still revised downwards by 0.2 percentage points for this year.

Meanwhile, the World Bank, in its Global Economic Prospects June 2025 report, had scaled down its global growth forecast to 2.3 per cent in 2025 and 2.4 per cent in 2026. The OECD, in its June 2025 Economic Outlook, also projected global growth to slow to 2.9 per cent in 2025 and 2026.

Risks to the global growth outlook are tilted to the downside. The evolution of trade policy will be a decisive factor for the final global growth outcome. Unfavourable trade developments may dampen growth prospects for major economies, heighten financial stress, and undermine economic confidence, potentially leading to reduced investment spending. Spiralling inflationary pressures, as global value chains unravel, could magnify the potential impact on real disposable income.  Fresh bouts of geopolitical conflicts and weather-related events pose additional headwinds to the global economy.

Global inflation remains above many central banks' targets, despite recent declines. However, the lagged effects of the imposition of global trade tariffs and rising trade protectionism are starting to be felt across regions and are expected to drive global inflationary pressures. Some advanced economies such as the US and UK are even confronting a new build-up in inflation, as reflected in their incoming data for inflation. The IMF projects global inflation at 4.2 per cent in 2025 and 3.6 per cent in 2026. Notable upside risks to the global inflation outlook could arise from widespread trade protectionist measures, fragmentation of global value supply chains, and currency manipulations to preserve external competitiveness.

Crude oil prices have broadly stabilized since June 2025, reversing earlier gains from supply disruptions as a result of the conflict in the Middle East region. Oil prices are expected to settle under the US$65 per barrel mark for the rest of 2025, but uncertainty over the effect of tariffs on demand persists.  Global food prices moved up in June 2025, amidst concerns about the repercussions of trade developments on production and demand. By contrast, the Freightos Global Baltic Index, which measures global container freight rates worldwide and used as a bellwether for shipping costs, retreated across the last two months, reflecting softening demand as frontloading pressures dissipated. The freight market remains sensitive to geopolitical developments and tariff policy shifts, with rate corrections expected to continue through year-end.

Central banks globally are increasingly inclining towards a forward-looking and datadriven approach towards monetary policy.  The ongoing uncertainty has prompted many towards the route of caution. Since the beginning of 2025, a vast majority of policy rate decisions has been to stay put, taking into consideration the balance of risks to the inflation outlook and trade-related uncertainties. The US Fed has so far refrained from taking any policy action in 2025, holding its policy rate steady in the range of 4.25 to 4.50 per cent at its July 2025 meeting, as it weighed growth concerns against inflation risks. The ECB lowered its policy rate by 25 basis points in June 2025 to 2.00 per cent but kept the status quo at its July meeting. The BoE lowered its policy rate by 25 bps to 4.00 per cent at its August 2025 meeting but indicated the likely ending of its monetary policy easing cycle soon.

## Domestic Economic Developments

On the domestic front, real GDP growth was lower at 4.2 per cent in 2025Q1, compared to 5.2 per cent in 2024Q4, dragged down by contractions in the 'Accommodation and and sectors. Other sectors registered positive food service activities' 'Construction' growth. On the demand side, consumption expenditure was the main driver of growth in 2025Q1 while investment spending remained lacklustre. The output gap continued to narrow as the economy moved closer to its potential.

Incoming data for tourist arrivals suggest that the ' Accommodation and food service sector bounced back in 2025Q2. Mauritius welcomed 658,909 tourists in activities' 2025H1, up by 2.1 per cent compared to 2024H1. On this trajectory, it is likely that the target of 1.4 million tourists for this year will be met. Reflecting the improvement in arrivals, gross tourism earnings increased by 6.8 per cent y-o-y in 2025H1 to Rs47.4 billion and are forecast to reach around Rs97.0 billion for the year.

Looking ahead, both domestic and trade policy uncertainty are expected to weigh on the economic outlook. The negative effects of further changes in global trade policies and the impact of fiscal consolidation measures will have non-negligible ramifications on key sectors of the economy. Some important sectors, which are already operating in a highly fragile and uncertain economic context, may register lower-than-expected growth rates. Whereas the Bank had projected GDP growth for 2025 to be within a range of 3.0-3.5 per cent at the May MPC meeting, latest developments and lingering uncertainty point towards GDP growth of around 3.0 per cent for this year.

There are some early signs that the labour market is starting to cool off. The unemployment rate increased from 5.7 per cent in 2024Q4 to 6.0 per cent in 2025Q1. Youth unemployment stood at 19.8 per cent while the female unemployment rate rose to 8.0 per cent in 2025Q1. Growth in wages, measured through nominal y-o-y changes in the Wage Rate Index (WRI), moderated to 6.6 per cent in 2025Q1 compared to double-digit growths recorded in the previous four consecutive quarters.

Inflation in Mauritius is on the rise. Headline inflation edged up for the fourth consecutive month to 3.1 per cent in July 2025. Y-o-y inflation remained high at 5.2 per cent. The increase in inflation largely reflected the impact of budgetary measures, which include higher taxes on demerit goods and additional excise duties on cars. CORE inflation, which measures underlying inflationary pressures in the economy, has remained relatively sticky, upheld by higher prices of services and wage increases.

As the one-off effects of budget-related price hikes dissipate, inflation is projected to remain firmly anchored within the Bank's target range of 2 to 5 per cent through the rest of 2025. Y-o-y inflation is projected to subside and headline inflation is projected at around 4.0 per cent for 2025, roughly 0.5 percentage point higher compared to the previous forecast of 3.5 per cent. Nevertheless, the outlook for inflation remains subject to important upside risks, mainly stemming from abroad. Tariff-related price hikes may result in broader price pressures as they feed through global value supply chains. The trajectory of commodity prices is also highly contingent on geopolitical tensions and climatic conditions.

The current account deficit as a ratio to GDP widened to 5.1 per cent in 2025Q1, from 4.8 per cent in 2024Q1, reflecting primarily a larger deficit in the goods and secondary income accounts, as well as lower surplus on the services account. Preliminary estimates show that the current account deficit will continue to widen in 2025Q2, reaching some 7.3 per cent of GDP, mostly due to a higher trade deficit considering the surge in vehicle imports.  The external sector situation is expected to improve during 2025H2.

On a calendar year basis, the current account deficit is projected to improve to 6.2 per cent of GDP in 2025, from a deficit of 7.0 per cent of GDP in 2024, as higher surpluses in the services and primary income accounts are expected to mitigate the impact of the widening trade deficit. An overall balance of payments surplus of Rs9.3 billion is expected in 2025.

The Mauritius IFC continues to attract healthy financial flows as global cross-border investment activities remain resilient despite the challenging global conditions brought about by the growing global uncertainty amid US new tariff policy.

The Gross Official International Reserves (GOIR) of the country remain comfortable, providing adequate buffers against potential external shocks. The GOIR stood at US$9.7 billion as at end-June 2025, representing 13.2 months of import cover (based on import bill of calendar year 2024), compared to USD 8.2 billion at end-June 2024. The GOIR has risen while the Bank has started to refund the external borrowings (Swaps and Repos) contracted during the Covid pandemic.

## Money Market

Let me now turn to latest developments in the money market. The Bank has been issuing BoM securities to address the excess liquidity situation. Since the beginning of the financial year, a total amount of Rs12 billion was mopped up through BoM Bills issued in the 91-Day tenor, at weighted yield ranging between 4.13 to 4.29 per cent.  As at 1 August, outstanding BOM securities amounted to Rs128 billion.

The overnight deposit facility remained an effective monetary policy tool absorbing the bulk of rupee excess remaining in the system.  Since last MPC, on average, an amount of Rs52 billion was placed on overnight deposit with the Bank at the rate of 3 per cent.

## Foreign Exchange Market

On the domestic FX market, there was a noticeable improvement in FX flows. From 03 January to 11 August 2025, banks purchased a total amount of US$4,6 billion, that is, about US$866 million more than what they were able to during the same period of 2024.  They also sold US$4.8 billion to the market over this period, approximately US$972 million more than in 2024.

Significant inflows were seen from the accommodation and financial sectors during the last week of June 2025. Holders of FX disposed of FX mainly to meet end of financial year requirements but also benefitted from favourable market movements with the appreciation of the Euro against the USD. However, USD remained under pressure with increased demand from importers seeking to benefit from the appreciation of the rupee against the USD.

In May and June 2025, there were exceptionally high sales of FX by banks and FX dealers to importers of motor vehicles. For instance, in June 2025 only, 6,926 motor vehicles was sold in Mauritius. This represented an amount of around USD200 million of FX outflows.

Since the beginning of the year, CEB and STC have purchased USD145 million and USD365 million, respectively, from the market to meet both, their current payment obligations and, concurrently to reduce their outstanding swaps/lines of credit.  The backlog has been significantly reduced but there are still new requirements on a daily basis.

Since the last MPC, the Bank intervened twice to sell US$40 million on the market. Total FX interventions by the Bank since the beginning of the year amount to US$90 million, compared to US$195 million between 03 January and 12 August 2024.

The rupee continues to reflect key economic fundamentals of demand and supply, as well as international currency movements. Between 07 May and 05 August 2025, the rupee exchange rate appreciated by 0.42 per cent against the US dollar but depreciated by 2.66 per cent against the euro and 0.56 per cent against the Pound sterling.

## Financial Stability

I will now highlight the main developments in respect of risks to financial stability, as a resilient financial system enhances the transmission of monetary policy and supports macroeconomic stability.

Risks to financial stability were at a moderate level in the first half of 2025 and are expected to stay so for the rest of 2025. The banking sector remains resilient to an array of potential adverse events, propelled by its strong capital and liquidity buffers complemented by the robust prudential regulatory regime. The banking sector holds strong solvency buffers, with a Capital Adequacy Ratio of 21.8 per cent in March 2025. The sound liquidity buffer is evidenced by the Liquidity Coverage Ratio of 281.6 in June 2025, hovering well above the minimum threshold of 100 per cent.

The assessment of risk to financial stability from the household sector indicates a marginal increase in the second quarter of 2025. The indebtedness of the household sector went up slightly to reach an estimated 39 per cent of GDP in June 2025. Still, the capacity of households to service their debt obligations remains healthy. The debt servicing costs relative to GDP is projected to be around the historical trend level. As a result, credit risk from the sector is anticipated to remain low. The ratio of nonperforming loans (NPL) for the household credit portfolio to total bank credit lingered around historical lows at 1.7 per cent in March 2025. In addition, favourable labour market conditions and subdued inflation are buttressing the financial capacity of the household sector.

The financial soundness of the corporate sector is broadly stable, though some sectors exhibited vulnerabilities notably in the agro-industrial and construction segments. The asset quality of the corporate credit portfolio of banks registered a deterioration in the first quarter of 2025, with the NPL ratio going up to 5.1 per cent. Nonetheless, debt sustainability in the sector is sound as business leverage relative to GDP hovers around its lowest levels in the last 15 years.

The banking sector continued to support the economy with sustained credit flows. The annual growth of bank credit to the private sector was 11.0 per cent in June 2025, driven by growing household and corporate credit portfolios. Credit to the corporate sector went up by 10.1 per cent while household credit rose by 12.3 per cent in June 2025.

The quality of the credit portfolio of the banking sector remained broadly sound, despite a rise in the NPL ratio to 3.6 per cent in March 2025, from 3.4 in December 2024. Banks held sufficient provisions to cover for potential losses, with a coverage ratio of

62.5 per cent. This prudent provisioning strategy highlights the preparedness of banks to absorb credit-related shocks.

The Bank conducts regular stress tests to evaluate the resilience of the banking sector to potential macroeconomic, credit, interest rate, exchange rate and liquidity shocks. The latest stress test results confirm the soundness of the banking sector to adverse but plausible shocks. The sound buffers maintained by the banking sector are broadly adequate to mitigate potential risks as they arise.

The Bank continues to proactively monitor potential threats in the evolving macrofinancial landscape to maintain price and financial stability.

## MPC Decision

I will now focus on the decision of the MPC.

The MPC discussed latest observations on the global and domestic economy.

The MPC noted that, despite announced breakthroughs in trade talks, the international trade ecosystem is still marred with uncertainty. The fallout of new tariffs on growth and inflation across markets and regions remain highly unpredictable.

The Bank has to balance its responsibility to control inflation against concerns that rising tariff and global trade war may slow economic growth. On the domestic front, growth prospects are highly delicate and surrounded by downside risks. Inflation has been on the rise recently, although on account of some transient factors.  Upside risks to the inflation outlook dominate.

From a pragmatic standpoint, considering the prevailing economic uncertainties, it was deemed more judicious to maintain the status quo as a prudent course of action. While the current uptick in y-o-y inflation may be viewed as transitory, with the impact from the budgetary measures fading gradually, the risks from higher prices due to tariffs may be more pernicious and long-lasting than expected, especially in a context where domestically-generated inflation and services inflation remain sticky.

Moreover, with regard to the domestic FX market, it has been found that the increase in the policy rate engineered during the first MPC of this year and parallel rise in money market rates through supporting money market liquidity management operations had a positive impact on interest rate differentials, FX flows and the rupee exchange rate. The measures rolled out by the Bank to restore order in the FX market have borne their fruits as well.

Additionally, global uncertainties against the backdrop of evolving trade policies, ongoing geopolitical tensions and uneven recovery across major economies warrant a cautious and data-dependent approach to monetary policy.

As a result, the MPC unanimously decided to keep the Key Rate unchanged at 4.50 per cent per annum at its meeting today.

It is a finely balanced decision due to global uncertainties

The MPC will continue to closely monitor economic developments and stands ready to meet in between its regular meetings and take appropriate actions to achieve its dual mandate of maintaining price stability and of promoting orderly and balanced economic development.

Thank you.",Rama Krishna Sithanen
https://www.bis.org/review/r250911d.htm,Leonardo Badea: Opening speech - 11th edition of the Annual Scientific Conference of the Romanian Academic Economists from Abroad (ERMAS),"Opening speech by Mr Leonardo Badea, First Deputy Governor of the National Bank of Romania, at the 11th edition of the Annual Scientific Conference of the Romanian Academic Economists from Abroad (ERMAS), Iași, 30 July 2025.",2025-07-30 00:00:00,"## Leonardo Badea: Opening speech - 11th edition of the Annual Scientific Conference of the Romanian Academic Economists from Abroad (ERMAS)

Opening speech by Mr Leonardo Badea, First Deputy Governor of the National Bank of Romania, at the 11th edition of the Annual Scientific Conference of the Romanian Academic Economists from Abroad (ERMAS), Iai, 30 July 2025.

* * *

Honoured speakers and audience, Ladies and gentlemen,

On behalf of the Board of the National Bank of Romania, it is my great pleasure to welcome you to this year's ERMAS Conference. Together with our long-standing partners - Babe-Bolyai University and the ERMAS Association - we are delighted to open the eleventh edition of this important academic event here in Iai, one of Romania's most prestigious university centres.

In today's world, marked by overlapping crises and growing uncertainty, the ERMAS Conference provides a vital forum for promoting sound public policies and transparent decision-making. The National Bank of Romania has a strong tradition of working with the academic community to advance research and dialogue in key policy areas, especially those related to monetary policy and the banking sector.

This is the second time the ERMAS Conference is being held in Iai, and we are grateful to our host, Alexandru Ioan Cuza University. As the oldest higher education institution in Romania, the university is not only rooted in tradition but also highly dynamic-just like the city of Iai itself, which I encourage you to discover during your stay.

Since its first edition in 2014, the ERMAS Conference has grown into a landmark for the Romanian economic academic community. Each year, it brings together distinguished Romanian economists working abroad in leading institutions-universities, central banks, and research centres-who contribute with cutting-edge research and fresh perspectives on pressing economic and financial topics.

This year's agenda reflects a strong commitment to improve the quality of economic debate. It addresses current challenges with renewed insight and provides policyrelevant recommendations.

We are also honoured to welcome prominent professors from Oxford, UCLA, McGill, the University of Pennsylvania, and the London School of Economics. I warmly greet Professors Adams, Giorcelli, Goncalves, Marinescu, Manelici, and Vasquez, and thank them for their valuable contributions to the field of economics.

Distinguished participants,

The National Bank of Romania has long supported high-quality research as a credible source of policy advice. Our economists actively contribute to academic work, with a

particular focus on monetary policy and financial stability. I am especially proud that four papers presented at this year's conference are authored by NBR staff.

In this context, allow me to briefly address the recent economic developments that shape the current challenges faced by policy makers. We are navigating a period of deep uncertainty, both globally and at home. This stems from recent macroeconomic developments, including inflationary pressures linked to new fiscal consolidation measures.

Moreover, we face growing political and social tensions, making the job of monetary, fiscal, and macroprudential policymakers even more complex.

Uncertainty in policymaking is not a new topic. This discussion was initiated by William Brainard in his 1967 seminal article, ""Uncertainty and the Effectiveness of Policy,"" published in the American Economic Review. There, he formulated the so-called conservatism principle, which requires cautious action when policymakers are confronted with uncertainty. While originally framed in the context of monetary policy, I believe this principle remains highly relevant today, not only for monetary authorities, but equally for fiscal and macroprudential policy, especially given the prevalence of exogenous shocks to the macro-financial system in recent years.

In monetary policy, we have clearly entered a new normal. Gone is the era of ultra-low interest rates. As John B. Taylor has emphasized, effective monetary policy should be both predictable and firm, while also responsive to significant deviations of inflation from its target.

Yet today's world is far from the so-called ""vanilla"" environment once familiar to markets. The COVID-19 pandemic and the war in Ukraine have pushed nominal interest rates to high or even very high levels-though often still negative in real termsacross both developed and emerging economies.

In this new context, the idea that interest rates must respond strongly to inflation deviations appears to need a reconfiguration.

As Thomas Sargent and Neil Wallace pointed out in their 1981 article ""Some macro-financial shocks affect not only monetary but Unpleasant Monetarist Arithmetic,"" also fiscal policy.

Today, institutions like the IMF and the Federal Reserve are actively debating how interest rates should behave in an inflationary environment driven increasingly by adverse supply-side shocks, or cost-push shocks.

In this regard, I would like to mention a recent contribution by Adam Shapiro, currently Vice President of the Economic Research and Regional Analysis Department at the Federal Reserve Bank of San Francisco. His 2024 article focuses on disentangling the roles of demand and supply factors in inflation dynamics, a question at the core of today's policy challenges.

His work reminds us of the need to revise inflation-targeting strategies as the structure of our economies continues to evolve.

These reflections are timely and necessary across many areas of economics and finance. That is why the topics of this conference are not only relevant but also deeply welcome.

Over the next three days, we will hear and debate over research presentations on a wide range of topics, including green economics, education and financial literacy, inflation and monetary policy, development and inequality, financial markets, and behavioural economics, among others.

To conclude, I look forward to the inspiring discussions, the valuable insights from our keynote speakers, and the opportunities for connection during the social events.

With that, I wish you all fruitful debates and a meaningful experience here in Romania.",Leonardo Badea
https://www.bis.org/review/r250911b.htm,Eli M Remolona: Digital pathways to financial security,"Speech by Mr Eli M Remolona, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Ceremonial Signing and Go-Live for Project OFxPERA, Manila, 29 July 2025.",2025-07-29 00:00:00,"## Eli M Remolona: Digital pathways to financial security

Speech by Mr Eli M Remolona, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Ceremonial Signing and Go-Live for Project OFxPERA, Manila, 29 July 2025.

* * *

To our partners in the financial sector, colleagues in government, ladies and gentlemen, Magandang araw po sa inyong lahat.

Today's event is more than a launch. It is a shift in how we think about banking. Your bank account should give you easy access to all sorts of other financial services.

That is what is called open finance. At its core, it is about connection. Your customer's consent, banks, and third-party providers of financial services can securely share financial data through application programming interfaces or APIs.

This makes insurance, investments, and other financial services simpler, smarter, and more personalized.

We actually borrowed this idea from Brazil. Banco Central do Brasil embedded open finance into Pix. Pix is their real-time payments system.

Today, around 49 million Brazilians consented to their data being shared-allowing them to send money, switch banks, and access credit with ease. This is what happens when systems connect, and users are empowered.

This brings us to open finance or PERA.

The Personal Equity and Retirement Account or PERA was introduced in 2016 to help Filipinos save for the long term. It is voluntary, tax-advantaged, and open to everyone. But uptake has been slow-with just 6,100 accounts as of June 2025.

We know the appetite for financial health is there. So, what is missing?

Sometimes, the challenge is not always the product. Sometimes, it is the pathway. By making PERA the starting point for open finance, we build this pathway. PERA now becomes part of a seamless digital ecosystem, making saving and investment simpler for everyone.

At the same time, the project also allows us to jumpstart open finance from concept to practice.

So, now users can explore their options more clearly, thanks to consent-driven data sharing via the account information services. Users can save more easily with the payment initiation services that automate contributions.

This is more than innovation. It is financial health. We are part of builders with banks, asset managers, regulators, and civil society.

The success of PERA and open finance depends on how closely aligned we are in systems and in purpose.

Maraming salamat po at mabuhay tayong lahat.",Eli M Remolona
https://www.bis.org/review/r250911g.htm,Sarah Breeden: Building trust and supporting innovation in the multi-moneyverse,"Speech by Ms Sarah Breeden, Deputy Governor for Financial Stability of the Bank of England, at the Bank of England and Warwick Business School Innovation in Money and Payments Conference, London, 3 September 2025.",2025-09-03 00:00:00,"## Sarah Breeden: Building trust and supporting innovation in the multimoneyverse

Speech by Ms Sarah Breeden, Deputy Governor for Financial Stability of the Bank of England, at the Bank of England and Warwick Business School Innovation in Money and Payments Conference, London, 3 September 2025.

* * *

## Introduction

It's a hugely exciting time to be following innovation in money and payments. Just as the introduction of electronic transfers, the development of the ATM, and the launch of instant retail payment systems unlocked fundamentally new ways of transferring money in increasingly cheaper, more convenient and faster ways, today new technology is heralding new ways of making payments. As our lives become more interconnected, and more technology-driven - whether that's through the ubiquity of the internet, or the increased adoption of AI - money and payments need to keep up.

I wanted to use my time this morning to set out the UK context for this innovation and change, setting out how our work across the authorities and industry fits together into a vision for an innovative, vibrant, ""multi-money"" system. That means a system characterised by choice across different forms of money and payment; with technology driving faster, cheaper, and more innovative payments for the benefit of business, households, and users of financial markets; and - critically - with the whole system underpinned by trust in money itself.

As central bankers, we can do three things to deliver this vision.

First, we provide the necessary underlying infrastructure. That is vital given the important role of central bank money for settling the most critical payments in the economy.

Second, we provide regulatory frameworks and supervise both financial market infrastructures, like payment systems, and banks as issuers of private money.

And third, we can set an overall strategy to help enable the innovation which drives better outcomes for users of payments, greater efficiencies, new functionalities, and ultimately economic growth; whilst also ensuring that these benefits don't come at the cost of our wider public policy goals, such as monetary and financial stability.

Different jurisdictions are adopting different approaches as they respond to these innovations. Today I'll explain the UK's approach.

## Providing infrastructure

To start with infrastructure, in April of this year, the Bank of England launched its new Real Time Gross Settlement service - RT2. As the most liquid, risk-free asset available, central bank money is the most appropriate settlement asset for the most systemic

transactions in the financial system. And so, as the financial system evolves, and new technologies drive innovation in trading and settlement, our payments infrastructure must keep pace to preserve the role of central bank money at the heart of the financial system - including in a tokenised world.

My colleague, Victoria Cleland, has spoken  about RT2's capabilities, so I won't cover in detail. But suffice to say, RT2 is a state-of-the-art, world-leading wholesale payments system which gives the UK the platform to build the next generation of market infrastructure.

Already today, RT2 has functionality which can enable settlement in central bank money for assets traded and settled in other systems, including those traded 'on-chain' in programmable and distributed ledgers (DLT). And next year we will launch our synchronisation lab that will allow central bank settlement to be fully integrated with transactions happening on other ledgers - again including programmable and distributed ones. I cannot emphasise enough how critically important this infrastructure is in supporting the next generation of trading and settlement in wholesale financial markets.

The design phase of our Digital Pound project has allowed us to explore the potential for central bank provision of retail infrastructure, by developing a blueprint for how a digital pound could work - considering, for example, how to make sure digital money can be used even where connectivity isn't available. This blueprint, due to be published next year, will set out the key design elements necessary to support the Bank and HM Treasury in assessing the policy case for a digital pound.

Importantly, all this is not just theoretical work. The Digital Pound Lab, launched last month, enables industry to work with us in some hands-on experimentation to test the capabilities of a digital pound and digital money more broadly. Whilst these aren't live transactions, the lab allows us to explore the role of central bank provided infrastructure in supporting private sector innovation and gives the private sector a place to innovate and experiment.

And finally in the wholesale space, along with the BIS Innovation Hub, our  DLT innovation challenge  is looking at whether wholesale central bank money can be transacted and settled on an external programmable ledger outside of the control of the central bank - furthering our understanding of the functionality and role of a wholesale central bank digital currency.

## Designing regulatory frameworks

Central banks and regulators also have a role in regulating both issuers of money and the financial market infrastructure (FMIs) which provide the means for moving money and assets around the financial system.

Having the right regulatory frameworks in place is vital for innovation to thrive. Appropriate management of risk, and avoiding costly failures, will support broader adoption of new innovations. But designing those regulatory regimes in a world as fastmoving as the one we're currently in is challenging - we have to be, and we are, open to 'learning as we go'.

One practical way we are doing that is the Digital Securities Sandbox, an initiative launched with our colleagues at the FCA.

The Digital Securities Sandbox is a regulated live environment, where we can learn from how tokenisation and DLT-based transactions take place in the real world. By initially limiting the scale of transactions we can do that learning safely, without putting financial stability at risk. This approach ensures that our regulatory regimes keep pace with innovation, and the risks posed, taking a forward-looking approach to maintaining financial stability, whilst also allowing meaningful activity to take place now.

Tokenisation isn't just happening in securities. We need tokenisation of money too if we are to exploit the full benefits of 'on chain' settlement. Broadly that tokenised money could take three forms: a central bank issued digital currency (or an 'on chain' representation of central bank money); a tokenised commercial bank deposit; or a stablecoin.

The UK set out the necessary legislation for a regulatory regime for stablecoins in 2023. In parallel, the Bank and the FCA have been engaging with industry to develop the more detailed rules of that regime.

For our part, we've been engaging closely with industry and listening attentively to feedback on our 2023 proposals for a regulatory regime for systemic stablecoins. We'll be setting out some revised proposals for consultation later this year, including revised proposals that would allow systemic stablecoins to hold a portion of their backing assets in a subset of high quality liquid assets (HQLA) such as short-dated government securities.

This change addresses feedback that our initial approach would not support the predominant business model amongst stablecoin issuers, which relies on income from backing assets, whilst continuing to ensure that stablecoins that are widely used as money are safe. It also helps to smooth the 'cliff-edge' between the FCA's rules and the additional requirements we would place on systemic issuers. We look forward to engaging further with industry through the consultation process before finalising our regime.

It's not just business models that have developed since we first put out proposals for a regulatory framework for stablecoins. Whilst we initially focused on stablecoins being used for retail payments, new use cases are emerging as financial markets move onchain.

My view is that central bank money must remain the settlement asset for systemically important markets to ensure we don't introduce unnecessary financial stability risks. After all, even well-regulated, fully-backed private money has a degree of risk which is not the case for central bank money. That's why the launch of RT2 is so critically important to supporting safe innovation.

But central bank money isn't needed for all settlement now and it won't be needed for all settlement in the future. That's why there will be an important role in the financial system for privately issued money: both tokenised deposits and stablecoins.

Tokenised deposits could deliver the benefits of programmability and instantaneous settlement, using a product with which customers are already familiar, whilst also being packaged up with credit provision as per the traditional banking model. A steady and reliable supply of credit to the real economy is a key enabler of economic growth and is an area we will remain focused on as innovation in money progresses.

In the meantime, stablecoins, for a long time the preserve of crypto markets, are beginning to go 'mainstream'. Given they are an existing form of 'digitally native' money, their safe adoption could unlock faster, cheaper settlement for cross border transactions as well as supporting trading of tokenised securities. We want to explore these wholesale financial market use cases further in our Digital Securities Sandbox by exploring how stablecoins, as well as tokenised deposits, can be used as the 'cash leg' for settling securities issued in the sandbox.

Regardless of the exact form of digital money, our job as a central bank and prudential regulator is to make sure that the regulatory regimes for these new forms of private money ensure that businesses and households are able to enjoy the benefits of innovation whilst being able to continue to trust the money they use, at all times. That way we can innovate sustainably, without compromising financial stability.

## Setting strategy: a vision for the UK payments landscape

With so much change going on across infrastructure and regulation, it is crucial that public authorities, including central banks, set clear strategy to guide investment and innovation.

In July 2025, the UK's Payments Vision Delivery Committee (PVDC), set up under HM Treasury's National Payments Vision, announced  a new model to deliver the next generation of UK retail payments infrastructure.

This model embeds a more proactive role for the UK authorities in setting joint strategy in retail payments. It creates the new Retail Payments Infrastructure Board (RPIB), chaired by the Bank of England in its capacity as a systems operator, to translate that strategy into the next level of design. Industry will chair a delivery company, responsible for procuring and funding the next generation infrastructure. Pay.UK, the Payment System Operator, will continue, as today, to do their vital job of running the systemically important interbank payment schemes through this period of change.

At the same time, HM Treasury also published its  Wholesale Financial Digital Markets StrategyOpens in a new window, setting out how digitalisation and developments in DLT as well as other technology such as AI and quantum computing present an opportunity to optimise, and ultimately transform financial markets. Across its infrastructure provision and regulatory roles, the Bank will have a key role to play in supporting this strategy, for example through the issuance of the UK's Digital Gilt DIGIT - using a platform in the Digital Securities Sandbox.

Later this year PVDC will publish its strategy and a Payments Forward Plan. It is not my intention to front-run those publications, but perhaps I can set out my own view on what all of these developments mean for payments and money in the UK.

My vision for the UK payments landscape is one of a ""multi-money"" mixed ecosystem, where different forms of money play their own roles, maximising utility for UK businesses and households. But to maximise benefits as well as safeguard financial stability and trust in all forms of money, this system must be underpinned by interoperability. That means that both the hard, technical infrastructure and the 'soft' infrastructure such as regulatory standards will need to be harmonised - or at least compatible - across different forms of money allowing them to be freely and frictionlessly exchanged at par.

This payments ecosystem would be resilient - as households and businesses could easily switch between different forms of money and payment, whether that's bank notes, traditional or tokenised commercial bank money, stablecoins, or a digital pound. It would allow innovation to thrive in a competitive environment; avoiding the pitfalls of allowing ""walled gardens"" to emerge, where the network effects which are inherent to successful payment systems over time deliver suboptimal outcomes for users such as high fees or a need to maintain multiple accounts, apps, or wallets. And, as I  discussed earlier this year, interoperability and harmonisation could lay the necessary groundwork for much needed improvements in cross-border payments.

## Conclusion

I hope these remarks have helped to set the scene for the fascinating discussions that will take place at this conference. As the central bank, it is not our job to 'pick winners' when it comes to innovation. Rather, we need to support a thriving, dynamic, and competitive landscape with interoperability at its core. That interoperability underpins what central bankers describe as 'singleness' of money and therefore trust in money itself. Trust in money is our core concern - and we will be laser focused on ensuring that it is preserved, whilst also ensuring new technologies and innovations drive economic growth and better outcomes for the businesses and consumers who use payments every day.

I would like to thank Francine Robb for her assistance in drafting these remarks. I would also like to thank Andrew Bailey, David Bailey, Victoria Cleland, Dayo Forster and Nimra Mahmood for their helpful input and comments.",Sarah Breeden
https://www.bis.org/review/r250911i.htm,François Villeroy de Galhau: A shared conviction for Europe,"Speech of Mr François Villeroy de Galhau, Governor of the Bank of France, delivered for the departure of Robert Holzmann, Governor of the Oesterreichische Nationalbank, Vienna, 3 September 2025.",2025-09-03 00:00:00,"## François Villeroy de Galhau: A shared conviction for Europe

Speech of Mr François Villeroy de Galhau, Governor of the Bank of France, delivered for the departure of Robert Holzmann, Governor of the Oesterreichische Nationalbank, Vienna, 3 September 2025.

* * *

This conviction is rooted primarily in the long term and it is important to measure how far we have come over the last 25 years. The euro is a tremendous popular success: support for our single currency has never been stronger (83% in the euro area ). To say i that Robert and I have not always agreed on monetary policy decisions is an understatement, but I know few people holding such different positions who have remained such good friends. This tells us two things: first, that Robert is a very likeable person and, second, that along with our colleagues, we have always been able to discuss and then decide. In 2021-22, the Governing Council of the European Central Bank (ECB) was confronted with soaring inflation. Robert, last week I read in the FAZ that you were referring to the ECB's past ""mistakes"". I can reassure you that you can rest easy on that score. I don't believe we made mistakes. You can even be proud of our decisive and effective monetary action. In less than three years, we have brought inflation back down to our 2% target, without any economic pain in terms of recession or unemployment. The victory over inflation has now been secured.

In order to consolidate this victory in the long term, we Europeans must defend the independence of central banks in the face of the serious regressions of the Trump administration. No, this is not an anomaly of democracy. On the contrary, independence has been conferred by democracy, and it is attacking this independence in contradiction with American law that is dangerous for democracy. No, independence is not just for us central bankers; it serves all citizens. And no, independence is not an obstacle to reasonably low interest rates: on the contrary, it is a prerequisite for them, as it allows inflation to be controlled in the long term and anchors the expectations of economic agents. Faced with the risks of 'privatisation' and 'de-Europeanisation' of the currency posed by the rise of stablecoins, we Europeans are strong supporters of the digital euro for retail payments, as well as a wholesale digital currency for financial markets.

Now more than ever, we Europeans need to translate this success in terms of monetary sovereignty into economic and financial sovereignty. Our two countries and Europe now have a choice: either they continue with the low growth, low productivity and low innovation of the last thirty years, or they opt for a general mobilisation. ii   And, clearly, the recent ""tectonic"" upheavals iii    are increasing the challenges: the protectionist shock together with the shock of unpredictability unleashed by the Trump administration are detrimental to both price stability and growth.

Our destiny is in our own hands. I really hope that this general mobilisation comes quickly - much more quickly. The Draghi and Letta reports in 2024 and the European Commission's Savings and Investment Union strategy can be summarised in three points, the three ""i's'': integrating the single market more, investing better through a Savings and Investment Union, and innovating faster by cutting bureaucracy - or to use physiological words, we need to multiply economic size by financial muscle and speed

of execution. At the same time, the euro area - including my own country - needs stable and sustainable public finances to meet these challenges.

i  European Commission,  Standard Eurobarometer 103 - Spring 2025 ii  Villeroy de Galhau (F.) (2025),  Letter to the President of the French Republic: From

stupefaction to a general mobilisation, how to respond to America's policy shift, 9 April Holzmann (R.) (2025), , speech, 22 May iii Monetary policy and structural tectonic shifts",François Villeroy de Galhau
https://www.bis.org/review/r250911k.htm,Tuomas Välimäki: The Payment and Settlement System Simulator Seminar has grown into a unique forum for both users and researchers,"Opening speech by Mr Tuomas Välimäki, Board Member of the Bank of Finland, at the 23rd Payment and Settlement System Simulator Seminar, Helsinki, 28 August 2025. ",2025-08-28 00:00:00,"## Tuomas Välimäki: The Payment and Settlement System Simulator Seminar has grown into a unique forum for both users and researchers

Opening speech by Mr Tuomas Välimäki, Board Member of the Bank of Finland, at the 23rd Payment and Settlement System Simulator Seminar, Helsinki, 28 August 2025.

* * *

Dear colleagues, dear friends,

It is my great pleasure to welcome you all to the 23rd Simulator Seminar here in Helsinki.

I am Tuomas Välimäki. Since 2018, I have served as a Member of the Board of the Bank of Finland, with responsibility, among other things, for Payment systems. Before joining the Board, I spent almost a quarter of a century in various roles at the Bank. This has given me a broad perspective on monetary policy, financial stability, as well as market operations and infrastructures.

With this background, I fully appreciate the value of computational models in economic and financial analysis. Whether we are assessing the impact of new tariffs on the Finnish or euro area economy, or exploring broader systemic developments, we need to rely on robust analytical tools. Yet models alone are not enough. We must take a holistic perspective, we need to understand the broader context, analyze interdependencies, and identify systemic effects. Simulation tools and infrastructure data are crucial in this quest.

Simulation, at its core, is about representing real-world processes in a safe and costeffective way. From flight simulators to military training and even climate modelling, simulation enables us to explore complex and risky scenarios without real-world consequences. Payment and settlement system simulators are part of this family. Thanks to advances in computing power and accessibility, they allow us to study system dynamics under stress, assess liquidity needs, and test the implications of new settlement mechanisms safely, effectively, and at a relatively low cost.

The first simulator seminar was held in 2003, just one year after the physical euro was introduced as the common legal tender in 12 countries. At that time, key research questions related to the impact of the transition to the forthcoming TARGET2 payment system that was to replace our national BOF-RTGS. To ensure a smooth transition, we opted to simulate the process. This led to the launch of the first generic BoF Simulator in 2004, and four years later, to a successful integration into TARGET2. Over time, TARGET2 has evolved into T2 Services, and likewise the BoF Simulator has advanced into the Simulation Tool. Most recently, this Tool was used in a Europe-wide stress test of the payment systems. To me this was an excellent example of the Tool's success.

Also, the annual simulator seminar has grown into a unique forum for both users and researchers. It not only showcases the latest developments but also fosters the exchange of ideas and experiences across the community. I hope this seminar offers

valuable support for the practical application of the BoF Simulator. I encourage you to take full advantage of this opportunity: ask questions, challenge assumptions, and share your insights throughout the sessions.

We are also looking ahead. After almost a quarter of a century with similar events, the time might be ripe for something new. Should we refocus these seminars? For example, shouldn't we try to integrate them more closely with other topical issues in central banking, like CBDCs or the level of excess liquidity in the banking sector? Digital euro or US dollar stable coins are hot topics wherever central bankers meet these days. Everyone agrees that they might reshape payment flows, but opinions differ on how and to what extent this happens. Maybe simulation tools can shed some light on this.

Similarly, after the end of large-scale asset purchases central bank balance sheets have been shrinking across the world. We know that interbank flows shifted significantly when banking sectors moved from balanced liquidity conditions to abundant reserves. I believe most of us would agree there will be major changes in the interbank flows as we return towards neutral liquidity levels, but we would probably disagree where the new normal lies. Again, simulation tools could prove particularly valuable in this type of analysis.

During tonight's dinner at the Bank of Finland's Villa, we will invite you to an open discussion on the role and positioning of this seminar among other events in the field. Your views will be essential in shaping the concept, its future direction, and ensuring it continues to serve the needs of its community.

Finally, let me extend my sincere thanks to all the speakers, discussants, and colleagues who have made this seminar possible. I wish you a rewarding and insightful seminar, and a very pleasant stay here in Helsinki.

Thank you!",Tuomas Välimäki
https://www.bis.org/review/r250916d.htm,Christine Lagarde: Stability through balance - rethinking power in a connected world,"Speech by Ms Christine Lagarde, President of the European Central Bank, on the occasion of the 25th anniversary of Institut Montaigne ""Conversations pour demain"", Paris, 15 September 2025.",2025-09-15 00:00:00,"## Christine Lagarde: Stability through balance - rethinking power in a connected world

Speech by Ms Christine Lagarde, President of the European Central Bank, on the occasion of the 25th anniversary of Institut Montaigne ""Conversations pour demain"", Paris, 15 September 2025.

* * *

It is a great honour to be invited to celebrate the 25th anniversary of the Institut Montaigne with you. For a quarter of a century, this institution has stood out for its independence of thought. That independence has given its work both credibility and influence.

As a central banker, independence has a special meaning for me. In this uncertain world, institutional independence is a key source of stability and trust. 1

But the question of independence extends far beyond monetary policy. As Michel de Montaigne once wrote, ""La plus grande chose du monde, c'est de savoir Œtre à soi"". [The greatest thing in the world is to know how to belong to oneself.]

Today, Europe and its Member States are asking what it takes to ""belong to oneself"" in a world where the foundations of the international order are shifting.

Since the 17th century, independence has always been guaranteed by balance. Countries built systems of strategic balance to prevent the strong from dominating the weak.

From the Westphalian age until the first half of the 20th century, this balance rested on hard power: the ability to balance others through military force.

After 1945, it shifted towards soft power among Western states: balance was achieved through rules and norms to which all agreed.

Today, it rests on system power: the ability to manage the dependencies created by the infrastructures and technologies that bind us together.

Safeguarding independence in a world of system power is the defining challenge of our time.

And to succeed, Europe must transform - to restore strategic balance in this new era. Only then can we prevent interdependence from descending into cycles of coercion that would ultimately weaken us all.

## The path to system power

In modern European history, three distinct paradigms of power stand out.

The first is hard power. For centuries, the independence of European states rested on military strength - the ability to defend oneself by force in a world of feudal and imperial hierarchies.

The Peace of Westphalia in 1648 marked a turning point in international relations. Under the Westphalian order, each state had the exclusive right to govern its territory without external interference.

This laid the groundwork for international law, or at least norms of coexistence. Yet in practice, balance of power still meant military competition, an equilibrium maintained as much by arms races as by agreements or marriages of convenience.

As a result, this system had its limits. When the equilibrium held, it provided peace. When it broke, escalation was swift and uncontrollable. Twice in the space of a few decades, Europe descended into catastrophe.

To avoid a return to the unstable balance-of-power dynamics, a second paradigm emerged after 1945 and gained momentum after the fall of the Berlin Wall: soft power.

Power was no longer exercised only through armies, but through the ability to create and enforce rules, norms and values. Multilateral frameworks and institutions were created that aligned national interests with collective stability. 2

As long as countries complied with these rules and accepted enforcement, there was no need for an explicit balancing of military or economic capabilities. Independence was safeguarded by global institutions - and enhanced by the ability to shape those institutions in one's favour.

This period coincided with a sevenfold rise in global GDP per capita. Over a billion people were lifted out of poverty. And the world experienced the longest stretch in modern history without direct war among major powers.

In this rules-based world, Europe thrived. It became a so-called ""regulatory power"", able to project its influence not through armies but through markets.

As the leading trading partner for 72 countries, Europe exported not only goods but also standards, shaping corporate practices and laws worldwide - a phenomenon known as the ""Brussels effect"".

But open markets and shared standards led to a third paradigm of power emerging: system power. Some countries embedded themselves in global trade and financial networks in ways that gave them leverage over others.

At the time, this shift went largely unnoticed. Many assumed globalisation and democratisation were permanent, and that trade partners would not become adversaries. And because economic interdependence had reached unprecedented levels, it was assumed that no country could coerce another without hurting itself.

Today, US-EU trade is worth around €1.5 trillion annually, EU-China trade about USD 900 billion, and US-China trade around USD 650 billion.

Is that sufficient? Probably not.

It is now clear that asymmetries matter.

A country that controls a raw material or a critical technology can hold ""escalation dominance"" even over partners with much larger markets. When the United States raised tariffs, China used its leverage and struck back at choke points in US supply chains.

Other forms of power have not disappeared - as Russia's unjustifiable invasion of Ukraine, and now its violation of Polish and Romanian airspace, have brutally reminded us. But the recognition of system power is profoundly reshaping policymaking worldwide. Achieving primacy in complex networks - or disentangling oneself from them - has become a central goal.

We see some countries building alternative financial infrastructures, like China's Crossborder Interbank Payment System (CIPS) and Russia's financial messaging system SPFS, to shield themselves from US sanctions.

We see a new ""great race"" for mining resources and trade routes that secure access to metals and rare earths.

And we see a rapid turn towards state intervention: China is spending more than 4% of GDP 3   on industrial policy, and the United States - once the bastion of free market rules - is now taking direct government stakes in chip and mining companies.

Some look at these policies and lament their inefficiency. But efficiency is not the goal. The goal is to secure the foundations of economic and political primacy.

Here lies Europe's challenge. It thrived in the rules-based era as a regulatory power. But it was not designed for a world of system power. And it failed to develop its military power on the grounds that regulatory power prevailed.

If Europe wants to preserve its independence in this new world, it must transform.

## Operating in a world of system power

Europe's overriding goal in this changing order is clear: to defend its values, without compromising its principles, and act with complete independence.

To do so, we need to uphold as much as possible, at the global level, a system based on the rule of law, which remains the aspiration of most nations.

But we must be realistic. If major powers, encouraged by military might, are turning away from multilateralism and embracing the logic of system power, we need to be prepared.

The aim cannot be to stoke global tensions. It cannot be to dominate others. It must be to restore balance by reducing asymmetric dependencies - so that coercion becomes self-defeating and people in sovereign countries can live in freedom.

Interdependence can then once again serve as a pillar of stability rather than a source of fragility.

For the EU, this requires three changes: pooling, coherence and coalitions.

First, pooling at European level.

The strategic autonomy agenda, launched in 2016, recognised that balance required developing autonomy in critical technologies.

Several initiatives, including the Chips Act, the Net-Zero Industry Act and the Critical Raw Materials Act, have taken shape and more - on artificial intelligence (AI), the cloud and other emerging technologies - are in the pipeline.

But these policies are still ultimately managed at the national level, demonstrating, unfortunately, that national frameworks cannot deliver true independence.

For example, the European Court of Auditors has judged it ""very unlikely"" that Europe will reach its semiconductor target of 20% of global production by 2030. 4   In batteries, the EU holds just 10% of global capacity, whereas China's CATL alone controls 40%. 5 And in AI, US institutions produced 40 notable models in 2024, compared with Europe's three. 6

The fundamental problem is scale. National policies cannot produce globally competitive firms in sectors where the major issue is critical size. This leaves us at an impasse: either we are forced to rely on costly, second-rate domestic products that erode our competitiveness, or we remain captive to the very dependencies we are trying to reduce.

The only way out is a new European approach to economic policy, combined with a new way of taking decisions.

Enrico Letta and Mario Draghi have already said everything there is to say about the Internal Market and its current quixotic state, as well as its potential. And what are we doing?

Europe should extend qualified majority voting. As I have argued before, it is not a weakening of democracy. It is the only way to exercise it fully: by pooling our resources and our capacity to achieve the required scale in these strategic fields, we give citizens back their ability to shape events, and Europe its independence in a world of rival powers, where size and the scale effect are critical. 7   This is how decisions are taken at the ECB - and it works.

Second, coherence.

In this age of system power, weakness in one domain cannot be offset by strength in another, because dependencies now cut across sectors.

We saw this in 2018, when the United States threatened to cut European firms off from its financial system if they continued trading with Iran.

This dynamic was particularly evident when Russia invaded Ukraine: our reliance on Russian gas was used in an attempt to deter us from taking retaliatory measures. That failed - but Europe paid a heavy price: soaring energy costs and five quarters of lost growth.

And we saw another example in our recent trade negotiations with Washington, where concerns about maintaining US support for Ukraine appeared to influence the willingness of some Member State to intensify the economic stand-off - even if that meant settling for a weaker deal.

The lesson is simple: Europe cannot rely solely on its economic influence or regulatory leadership. Those strengths can be neutralised if there are chinks in the armour elsewhere. Europe needs the full range of instruments of a unified state.

Europe is working on this, albeit possibly too laboriously and too slowly. Defence spending is set to rise significantly. Reaching 5% of GDP by 2035 will mean more than €300 billion in additional funding each year.

Europe has already committed over $200 billion in support for Ukraine, making it the largest donor. In doing so, it is restructuring its defence industrial capacity - including through the ""Build with Ukraine"" initiative - and reducing reliance on external equipment.

Steps are also being taken to strengthen the international role of the euro. The digital euro, in particular, would offer a sovereign alternative to foreign payment systems and the potential to expand the euro's reach in cross-border transactions.

But this progress is being hindered by indecision. The digital euro is still awaiting a legislative act. Energy prices remain tied to gas because investment in grids, interconnectors and clean baseload power is too slow. And defence procurement is still fragmented across the 27 Member States, undermining scale and interoperability.

Third, coalitions.

A world of system power demands a different approach to foreign economic policy. We cannot - and should not - reshore everything. Independence instead requires a layered strategy.

The best option is to keep global institutions at the centre by supporting the International Monetary Fund (IMF) and the World Trade Organization (WTO) as anchors of an open trading and financial system and helping them evolve to meet new challenges.

Just as nuclear deterrence relied on verification and dialogue, economic deterrence today requires frameworks for transparency and cooperation, even among rivals. The IMF and the WTO could take on this role, monitoring subsidies, restrictions and export controls, and offering platforms for dialogue in times of crisis.

In doing so, they would help ensure that interdependence becomes a stabilising factor not a weapon. 8

Where universal consensus is out of reach, we should form coalitions of the willing - at times even with rivals - when our interests converge, whether on climate change, migration, or other common challenges. 9

And where vital security interests are at stake, we must rely on like-minded coalitions prepared to act together. Independence therefore requires us to build partnerships that share risks and create common stakes in stability.

That may mean forming coalitions to pool raw materials, secure access to advanced chips, or protect digital infrastructure. It may also require adopting a more realist approach to trade: one based less on universal values than on defending concrete interests.

This will require Europe to adapt, given our longstanding commitment to multilateral frameworks and international law. But we have a unique advantage. As the world's largest trading network, we can leverage this position to forge new agreements and deepen strategic partnerships. And we still have many like-minded partners across the globe.

## Conclusion

Jean Monnet once observed that ""People only accept change when they are faced with necessity, and only recognise necessity when a crisis is upon them"".

The Westphalian order was born of the necessity to end 30 years of war. The post-war multilateral order was forged in the ruins of two world wars.

Today, we may again face such a moment of necessity, as power is exercised through the very systems on which we all depend, even at the risk of breaking them apart.

At stake is our independence. Europe must be stronger, more aligned, more realistic. Only then can unilateral disruption be made self-defeating.

Stability in this new age will not come from the domination of one over many, but from turning shared vulnerabilities into shared strengths - through a new concept of strategic balance.

Crisis has always driven reinvention. But perhaps this time, we can recognise necessity before it becomes tragedy and shape a balance that preserves independence in an interdependent world.

1  Lagarde, C. (2025), "" Central bank independence in an era of volatility"", Lamfalussy Lecture at the Lamfalussy Lectures Conference organised by the Magyar Nemzeti Bank, 27 January.

- 2  Nye, J.S. (2013), ""Hard, Soft, and Smart Power"", in Cooper, A., Heine, J. and Thakur, R. (eds.), , Oxford University Press, The Oxford Handbook of Modern Diplomacy August, pp. 559-574.
- 3  Garcia-Macia, D., Kothari, S. and Tao, Y. (2025), ""Industrial Policy in China: "", , No 2025/155, Quantification and Impact on Misallocation IMF Working Papers International Monetary Fund, 8 August.
- 4  European Court of Auditors (2025), , 28 Microchips: EU off the pace in a global race April.
- 5  Kang, L. (2025), "" Global EV battery market share in 2024: CATL 37.9%, BYD 17.2%"", , 11 February. CnEVPost
- 6  Stanford University Human-Centered Artificial Intelligence (2024), Artificial Intelligence . Index Report 2024
- 7  Lagarde, C. (2025), "" A ""European moment"" in an inverted world"", speech on the occasion of the conferral of the Sutherland Leadership Award in Dublin, Ireland, 2 April.
- 8  Farrel, H. and Newman, A. (2025), ""The Weaponized World Economy: Surviving the New Age of Economic Coercion"", , September/October 2025, 19 August. Foreign Affairs
- 9  Blanchard, O. and Pisani-Ferry, J. (2025), ""Maintaining Progress in a Post-American "", 6 March. World Project Syndicate,",Christine Lagarde
https://www.bis.org/review/r250911j.htm,Martin Schlegel: Communication – an important element in fulfilling the Swiss National Bank's mandate,"Speech by Mr Martin Schlegel, Chairman of the Governing Board of the Swiss National Bank, at an event organised by the Ticino Bankers' Association, Vezia, 10 September 2025.",2025-09-10 00:00:00,"## Martin Schlegel: Communication - an important element in fulfilling the Swiss National Bank's mandate

Speech by Mr Martin Schlegel, Chairman of the Governing Board of the Swiss National Bank, at an event organised by the Ticino Bankers' Association, Vezia, 10 September 2025.

* * *

## Ladies and gentlemen

Thank you for inviting me to be here with you today at this event organised by the Ticino Bankers' Association. Events like this are a valuable chance for us to hear firsthand about what's going on in the economy. It is essential for us to know what is happening on the ground. How are exporters coping with the new tariffs? What are the most promising innovations in finance? How is artificial intelligence affecting the way people work? To better understand topics like these, our SNB delegates talk with about a thousand companies over the course of the year. The members of our Governing Board also regularly visit various organisations and associations across the country.

Such visits are not just a valuable opportunity for the Swiss National Bank to hear from industry experts and the public. They are also a chance for us to explain what we do and why. It is important for us to be understood - and not just by market experts. Of course, these experts need to understand our monetary policy and how we implement it. But we also place a high value on explaining ourselves to government, parliament and the public. We want to be transparent about our goals and how we achieve them.

In this context, today I would like to talk about our communication - how we have adapted it over time, and how we will develop it further.

## Developing communication over time

Central banks used to be far more reserved in their communication. Before the 1990s, they rarely spoke publicly. When they did, they were often vague. There was a belief that monetary policy was more effective if markets were caught off guard.

The SNB held its first press conference on monetary policy in 1974. Like many other countries, Switzerland had recently transitioned to a system of flexible exchange rates. As a result, the Swiss franc's value against the US dollar and other currencies was no longer fixed and could change quickly. Such fluctuations are felt most strongly in a small open economy like Switzerland's. For this reason, the SNB started to hold press conferences comparatively early. It was important to inform markets regularly about our monetary policy decisions.

Central banks have become more active in their communication over the last decades. This change also reflects a broader trend in society. Governments and companies communicate more today than in the past. For central banks, this trend towards increased communication is also rooted in economics. More importance is now attached to the role of expectations. Expectations influence how people act. For

instance, if prices are expected to rise, workers demand higher wages and firms increase their selling prices. Anchoring expectations can avoid such a dynamic. This requires the central bank to communicate clearly and credibly its commitment to keeping inflation low.

Around the turn of the millennium, many central banks changed their strategies to focus more explicitly on inflation. The SNB introduced a new monetary policy strategy in 1999. We have kept its core elements ever since and made adjustments when necessary. It lays out how the SNB fulfils its mandate to ensure price stability while taking due account of economic developments. The strategy consists of three elements: First, we define price stability as an inflation rate between 0% and 2% per annum. Second, at each monetary policy assessment we publish a medium-term conditional inflation forecast, which serves as the main indicator for the monetary policy decision and is a key element in its communication. And third, we implement our monetary policy using the SNB policy rate and, if necessary, by means of additional measures. Communication is at the centre of this strategy.

## Motivation behind central bank communication

Why does communication play such a central role for us? Communication helps us to shape market expectations about interest rates so that they are conducive to price stability. When you hear the words 'monetary policy', you may well think of the SNB policy rate - and for good reason. A news headline after one of our monetary policy assessments typically mentions the SNB policy rate. While the spotlight is on the current level of the policy rate, monetary policy is also very much about expectations. Where will inflation be in the future? How will interest rates develop going forward? Decisions by firms and households hinge on these expectations. And these expectations depend in part on how we communicate.

With our communication, we can convey our commitment to price stability and explain what we do to keep prices stable over the medium term. When we communicate this commitment clearly and credibly, the public and markets expect inflation to remain within our definition of price stability in the long term. As a result, they also expect interest rates to be at levels consistent with price stability.

I have talked about how communication helps us ensure price stability through anchoring inflation expectations. There is also another reason why it matters. Communication is an important part of accountability. The Federal Constitution entrusts monetary policy to the SNB and grants it independence. In return for its independence, the SNB must be accountable. When we decide about our monetary policy, we are not allowed to take instructions from government or parliament or anybody else. For this reason, we must be accountable and explain our decisions, so that the public is informed of our actions.

## Established and new means of communication

Speeches like today's are one of our established means of explaining our monetary policy. There are many others. The SNB reports regularly to the Federal Assembly. We discuss the economy with the Federal Council, and inform it about our monetary policy.

The Governing Board holds news conferences to explain its monetary policy decisions and present its view of the economy, including Q&amp;A sessions afterwards. Governing Board members give interviews and take part in panel discussions.

The SNB publishes a range of reports, including the Annual Report, the Financial Stability Report and the Quarterly Bulletin. We regularly publish press releases. On our website, we provide a large amount of data, technical guidelines and background notes.

Alongside these established channels, we are also continuing to develop new means of communicating our monetary policy. Since 2022, we have doubled the frequency of the news conferences and now hold one after each monetary policy assessment. Last year we launched a new publication, the SNB Economic Notes. In these notes, staff present insights on current topics based on their research at the SNB. For a wider public, we have introduced 'The SNB explained', which provides straightforward answers to common questions about the SNB on our website. We will also start to publish the slides from presentations given by Governing Board members at external events, to show the topics they address.

Today, I am pleased to announce the addition of a further means of communicating our monetary policy. Starting with the next quarterly assessment, we will publish a summary of our monetary policy discussions. The summary will be published four weeks after the monetary policy decision. It will cover the two days of the monetary policy assessment and provide our view of the economic and monetary situation. The new summary will present the main points from the Governing Board's discussions. It aims to promote a better understanding of how we apply our monetary strategy to the situation at hand.

With the publication of this summary, the SNB is taking part in an international trend. It has become standard practice for central banks to report on their monetary policy discussion. These reports are tailored to the individual central bank. Our summary will reflect our legal and institutional setting and the particular context of Switzerland. Like the Federal Council and cantonal governments, the SNB's Governing Board is a collegial authority. Each member of the Governing Board brings their own views to the table. We discuss these and then reach a collective decision. Once the decision is taken, it is presented with one voice.

This brings me to the issue of transparency and its limits. Transparency about our goal and how we intend to achieve it supports the fulfilment of our mandate. It strengthens credibility and allows the public to understand our actions. At the same time, more transparency is not always better. It is essential that the Governing Board can conduct open discussions during its monetary policy assessments. Reporting on these discussions must not discourage any participant from expressing their views freely. It is equally important that the SNB communicate clearly and consistently about its monetary policy. For these reasons, the summary will not include details of individual positions. Rather it will present the deliberations and decision of the Governing Board collectively.

## Conclusion

To conclude, communication is a key element in fulfilling our mandate. We have therefore decided to introduce a summary of our monetary policy discussion, to

complement our existing means of communication. This reflects the significance of transparency about our goals and how we achieve them. The last few years have shown how quickly economic conditions can change - from the pandemic to shifts in global trade policy. It is important that the public understands how we apply our framework to current conditions in order to ensure price stability.

I started this speech by talking about visits like this one to the Ticino Bankers' Association. They give us a valuable opportunity to explain what we do. We often set out how we assess the state of the economy and present our monetary policy. Today, I have addressed a fundamental topic - our communication. I hope I have shown how important communication is for us as an independent central bank in the fulfilment of our mandate. We have adapted our communication over time and continue to develop it further - always with the aim of fulfilling our mandate as well as possible.

The speaker would like to thank Raphael Reinke for his support in preparing this speech. He also thanks Claudia Aebersold, Alain Gabler, Christoph Hirter, Carlos Lenz, Tanja Zehnder and the SNB Language Services.",Martin Schlegel
https://www.bis.org/review/r250911h.htm,Piero Cipollone: The digital euro - ensuring resilience and inclusion in digital payments,"Introductory statement by Mr Piero Cipollone, Member of the Executive Board of the European Central Bank, at the Committee on Economic and Monetary Affairs of the European Parliament, Brussels, 4 September 2025.",2025-09-04 00:00:00,"## SPEECH

## The digital euro: ensuring resilience and inclusion in digital payments

## Introductory statement by Piero Cipollone, Member of the Executive Board of the ECB, at the Committee on Economic and Monetary Affairs of the European Parliament

Brussels, 4 September 2025

It's my pleasure to be back for our regular update on the digital euro.

This is the ECB's fourteenth exchange of views on the digital euro with this Committee. | have personally had the honour of addressing you five times. Our previous discussions covered a wide range of issues, including the preservation of access to central bank money, the digital euro's role as an anchor for monetary and financial stability, the need to safeguard strategic autonomy and the benefits the digital euro would have for various stakeholders.)

Today | would like to focus on two dimensions that have received less attention but are nonetheless fundamental for making the euro fit for the future: resilience and inclusiveness. In an increasingly digital world exposed to new geopolitical and operational risks, we must protect the euro's availability for all Europeans at all times. Article 133 of the Treaty on the Functioning of the European Union reminds us of our shared responsibility to safeguard the integrity of our currency and take the measures that are necessary for its continued use.2]

As a digital form of cash issued by the European Central Bank, the digital euro will complement physical cash, which remains key for resilience and inclusion. The digital euro will ensure that all Europeans can pay at all times with a free, universally accepted digital means of payment, even in case of major disruptions.

## Strengthening resilience in the digital age

At present, with the core of our digital payment systems provided by non-EU providers, 4] our capacity to act swiftly and independently — particularly in times of crisis — could be constrained.

Digital payments bring many advantages such as speed, convenience and efficiency. But they crucially depend on the strength of our digital infrastructure. And when critical services are interrupted, citizens expect public authorities to ensure continuity. So what would happen if we weren't in a position to ensure payments continuity? We would be blamed for not having acted when we could.

Payment services are not a luxury but are as essential to daily life as electricity or clean water. As a basic service, there must be a payment solution that is always available to all. This is especially critical in today's world of rising geopolitical tensions and ever more sophisticated cyberattacks.

Recent EU initiatives to strengthen civil and military readiness and enhance the EU's ability to prevent and respond to threats have underscored the importance of preparing for extreme crisis scenarios, and we must take this responsibility seriously. Incidents such as the sabotage of undersea cables in the Gulf of Finland and the Baltic Sea are stark reminders of how fragile our infrastructures can be.

And disruptions are not only the result of geopolitics or security crises. Think of the power and network outages in Spain and Portugal this past spring, during which many people were unable to pay because they had no cash on hand. Such events show why safeguarding our system is vital. Europeans turn to us at the ECB — and to you, the co-legislators — for decisive action and practical steps to prevent such upsets in the future.

Today, cash is our only true fallback and we are strongly committed to ensuring that it remains available, accessible and accepted throughout the euro area. But as society increasingly moves away from cash, and as cash itself may be difficult to access in emergencies, especially if cash distribution networks are disrupted, we need to complement it with a digital version. 1

Against this background, the digital euro can have a meaningful impact. Not just as a technological innovation, but as a public good that strengthens Europe's resilience. The EU Council is already making progress in this direction, with invaluable contributions from several Member States which recognise the urgent need to strengthen our resilience.

The digital euro would in fact support business continuity in times of crisis by providing additional payment rails on top of the existing private solutions. In other words, by having alternative payment options in place, we would enhance resilience by ensuring that there is always spare capacity in the system.

In terms of resilience, three features of the digital euro stand out.

First, the technical infrastructure for processing transactions will be distributed across at least three different regions, each equipped with multiple servers. In the event of a regional disaster or cyberattack, this will allow payments to be automatically rerouted, ensuring uninterrupted operations.

Second, the ECB will develop a dedicated digital euro app that will be made available to all and will allow users to switch easily between payment service providers offering the digital euro. Under normal circumstances, this fallback option will ensure flexibility. But in the event of a cyberattack on one or more providers, it would guarantee continuity. For example, if a cyberattack caused the outage of a bank's own app, but the bank's backend services were still functioning, customers would still be able to access their accounts with that bank through the ECB's digital euro app. Or if a bank became unable to operate at all, its customers could use the ECB's digital euro app to easily switch to a bank that has not been affected by the cyberattack.

This dimension of resilience is one reason why we at the ECB have recommended that the legislation on the digital euro makes it mandatory for payment services providers to support the digital euro app provided by the ECB.

Third, the offline functionality"" will provide an extra layer of security by allowing payments to be made even when internet connectivity is disrupted or cash is hard to access — for example, during a power outage or a natural disaster.) It is therefore vital that the legislation ensures citizens can easily and securely access the digital euro offline, including through options such as setting offline payments as the default42] and automatic funding of offline holdings.""

## The digital euro's practical benefits for inclusion

Now let me turn to inclusion.

As public institutions, we must ensure that no one is left behind as we move to an even more digital economy. For decades, cash has been a cornerstone of financial inclusion — offering accessibility, autonomy and trust.44] We cannot afford to lose these benefits through inaction.

Safeguarding inclusion must be more than a principle — it must translate into practical steps that address the barriers people face in their daily lives, as also highlighted by European consumer associations. These barriers are real. They range from not owning a smartphone, to limited digital literacy, to user interfaces that are not designed with accessibility in mind."" To give you an idea how important accessibility is, more than 30 million Europeans are blind or partially sighted and at least 34 million are deaf or hard of hearing. If we are to build a truly inclusive digital economy, as we are mandated to do in the payment space, we must also cater for the accessibility needs of these citizens — and many others. The digital euro, as a public good, would guarantee access for all citizens — no matter where they live, how much they earn or how digitally skilled they are. Our strategy for this task is two-pronged. The first aspect of our strategy is technological design. The ECB will make sure that the digital euro is designed to be inclusive from the ground up. We are working closely with associations that represent vulnerable groups to better understand their needs so that we can build the technology around them.44 We are also conducting user research, including focus groups with vulnerable and digitally excluded consumers, to understand how the digital euro can mitigate entry barriers and address other pain points.

And we are exploring adaptive user interfaces — such as voice commands, large-font displays and simplified workflows — so that the digital euro will work for people with accessibility needs or limited digital literacy.

These special features will be supported by the ECB's digital euro app, which will give users easy access to basic digital euro services and will go beyond the requirements of the European Accessibility Act 18] The need for inclusiveness once again underscores the importance of requiring all payment service providers to support an app provided by the ECB.

The second aspect is customer support at the country level. We are engaging with entities that could provide dedicated support if designated by an individual Member State — such as local authorities, libraries and post offices. These entities could provide free assistance and access to digital euro services. which would be a practical way of helping those most at risk of digital exclusion.

## Conclusion

Let me conclude by stressing that resilience and inclusion are cornerstone features of cash, and they must remain so in the digital age. Legal tender must always be accessible to everyone in our monetary area.

As we prepare a digital legal tender — the digital euro — to complement physical cash, it is our shared responsibility to bring these trusted features of cash into the digital era. This will maintain confidence in our currency, the euro.

The ECB is supporting the ongoing work by the European Commission and EU Council on resilience and inclusion. But for the digital euro to actually enhance the resilience of payments in the euro area, it must first become a reality.

Last March euro area leaders called for stepping up the pace on a digital euro, notably to ""support a competitive and resilient European payment system and contribute to Europe's economic security'.19I Progress in the legislative process will allow us to move forward in parallel and provide Europeans with a clear and specific timeline for when they can expect the digital euro to become a reality, ensuring easy access to a resilient means of payment that will protect Europe's economic security.

Thank you for your attention.

1.

See previous introductory statements at the Committee on Economic and Monetary Affairs of the means of payment: insights into the digital euro preparation phase"", 14 February; Cipollone, P. (2024),""Erom dependency to autonomy: the role of a digital euro in the European payment landscape"", 23

2.

Article 133 of the Treaty on the Functioning of the European Union provides that ""Without prejudice to the powers of the European Central Bank, the European Parliament and the Council, acting in accordance with the ordinary legislative procedure, shall lay down the measures necessary for the use of the euro as the single currency. Such measures shall be adopted after consultation of the European Central Bank'.

3.

Cipollone, P. (2025), ""Making euro cash fit for the future"", The ECB Blog, ECB, 4 August.

4.

Today, people in 13 euro area countries rely solely on international card schemes or mobile solutions for in-store payments. In addition, only a limited number of European countries offer a domestic payment option for online shopping. See ECB (2025), Report on card schemes and processors, 27 February.

5.

This has become even more evident in recent months, particularly with the passage of the Genius Act in the United States, which aims to promote crypto-assets and US dollar-backed stablecoins worldwide. See also Eichengreen, B. (2025), ""The Genius Act Will Bring Economic Chaos"", The New York Times, 17 June.

6.

Niinist6, S. (2024), Safer Together — Strengthening Europe's Civilian and Military Preparedness and react to emerging threats and crises"", press release, 26 March 2025.

7.

## See footnote 3.

8.

The ECB collaborates with the European Commission on the EU Preparedness Union Strategy, which emphasises the role of cash in strengthening societal resilience. We are also working closely with the national central banks of the euro area to enhance crisis preparedness and ensure that cash remains available during emergencies. See footnote 3.

9.

See Working Party on Financial Services and the Banking Union (Digital Euro Package) (2025), Digital euro -WP meeting on 15-16 May -ECB slide presentation -Eurosystem analysis on resilience, 15-16 May.

10.

Offline digital euro payments would be validated ""peer-to-peer"", meaning the payer and payee would directly verify that the transfer of value between them had been carried out, without any third-party involvement.

11.

During a power outage the devices of the payer and payee would need to have sufficient battery power.

12.

This would mean all proximity digital euro payments below a certain threshold would automatically be conducted offline.

13.

This would be much like an automated way of withdrawing cash from an ATM, but without the need to physically go to a machine. The automatic funding feature would give people assurance that even in a crisis they would always have some digital euro available on their phone, ready to use regardless of connectivity.

14.

Concerning inclusiveness, cash provides payment and savings options for people with limited or no access to digital payment methods, making it crucial for the inclusion of socially vulnerable citizens. This concerns people with disabilities, people with no or insufficient digital skills and people of low literacy. Concerning autonomy: cash gives people control over their own money, regardless of any decisions (e.g. on credit policies or fees) by their bank and its systems. See Euro Retail Payments Board (2021), Report of the ERPB Working\_Group on Access and Acceptance of Cash, 25 November.

15.

European Consumer Organisation (2023), BEUC's recommendations on the legislative framework for the digital euro, 29 September.

16.

For instance, the recent private sector solutions aiming to offer interconnectivity among domestic schemes are ""digital only"" solutions. They will leave behind anyone unable or unwilling to use a smartphone app or without a sufficiently new smartphone.

17.

Vulnerable groups face significant barriers in accessing digital payment services. Older adults and people with low financial and digital skills often grapple with complex user interfaces, onboarding and multi-step authentication processes, which can discourage them from using digital payment services. Additionally, a lack of guidance or tutorials tailored to their needs can foster mistrust and fear of fraud. Similarly, people with physical impairment face accessibility challenges arising from physical infrastructure, such as payment terminals and digital interfaces that do not support assistive technologies.

18.

For instance, the Eurosystem is considering specific adjustments, such as allowing users to complete all actions from the keyboard only or supporting screen readers.

19.

“In a more fragmented and digital world, accelerating progress on a digital euro is key to support a competitive and resilient European payment system, contribute to Europe’s economic security and strengthen the international role of the euro. We invite the President of the Eurogroup to report regularly on progress with these initiatives.” See General Secretariat of the Council (2025), Euro Summit Meeting — Statement, 20 March.

CONTACT

Copyright 2025, European Central Bank",Piero Cipollone
https://www.bis.org/review/r250911a.htm,Fritzi Köhler-Geib: BIS Innovation Hub projects in action,"Remarks by Dr Fritzi Köhler-Geib, Member of the Executive Board of the Deutsche Bundesbank, at the Fireside Chat at the BIS Innovation Summit, Basel, 10 September 2025.",2025-09-10 00:00:00,"## Fritzi Köhler-Geib: BIS Innovation Hub projects in action

Remarks by Dr Fritzi Köhler-Geib, Member of the Executive Board of the Deutsche Bundesbank, at the Fireside Chat at the BIS Innovation Summit, Basel, 10 September 2025.

* * *

## Check against delivery

## 1 Global challenges call for global solutions and collaboration

Throughout my career, including my time at the World Bank and the IMF,  I have learnt that collaboration amongst individuals with diverse backgrounds and areas of expertise is a key ingredient for finding successful solutions to the challenges of our times. This is especially true when addressing global issues that we are all facing-challenges as varied as the risks posed by climate change, rapid advancements in technology, such as artificial intelligence or the development of crypto-assets, as well as the everevolving cybersecurity landscape.

In such an internationally diverse context, fostering collaboration not only enhances the quality of the solutions we develop but also ensures that their implementation is more adaptable and effective across countries and regions.

As Bundesbank President Joachim Nagel highlighted in his keynote at this summit, the BIS Innovation Hub is a prime example of how central banks can pool their (BISIH) expertise and resources to develop solutions to these global challenges. 1

Speaking from my perspective as the Bundesbank board member responsible for the Research Centre, IT,  Data and Statistics, and Risk Control, one particularly relevant example of this is the rapid technological transformation of the financial sector. Cryptoassets and stablecoins are playing an increasingly important role. To better understand their implications for our mandate, we are stepping up our research activities into the future of finance. In this context, I have high hopes that initiatives such as the BIS Innovation Hub's Project Atlas will prove to be valuable tools. Atlas developed a data platform for analysing the economic relevance of crypto-asset markets and decentralised finance. Experiments like this can enable entirely new types of analyses to examine the economics underlying crypto-assets.

## 2 Central banks stand to benefit from a range of outputs from BISIH projects

Central banks stand to benefit from a broad range of outputs from BISIH projects, both in terms of subject matter and the maturity levels of the solutions. These outputs go all the way from insights of joint early-stage experimentation and knowledge sharing, to developing centralised data platforms and integrating technical solutions within individual institutions.

I told you just now about how projects like Atlas could allow us to comprehensively analyse crypto-asset markets, which is a highly relevant topic for the Bundesbank's Research Centre. An  example in a different field, namely quantum-safe cryptography, is the knowledge gained from joint experimentation between  IT teams from different central banks, as demonstrated in Project Leap. Project Leap supports the financial system's resilience against quantum threats by testing  and implementing post-quantum cryptography. Project Gaia, meanwhile, demonstrates how individual institutions can collaborate to address a common challenge: it provides a generative AI-based tool that extracts structured data from unstructured company reports, such as ESG disclosures, to assess climate-related risks.

Together, these projects highlight the tangible benefits of BISIH outputs and underscore how innovation can help central banks address both current and emerging challenges in very different areas.

## 3 Internal cultural and technical ecosystem key to project success

Further strengthening a culture of trust, transparency and close collaboration within and between organisations is essential for driving innovation. Equally important is the further preparation of our technical infrastructure to ensure that BISIH solutions can be operated in a robust, scalable and secure manner.

Sharing resources, knowledge and best practices is key to successfully leveraging the innovative achievements of individual central banks. We therefore welcome BIS initiatives aimed at building communities and developing shared-source frameworks that allow us to co-develop solutions, maintain control over critical infrastructure and data, and benefit from collective progress. The Bundesbank is fully committed to this approach and plays an active role in developing and implementing BISIH projects.

## 4 Conclusion

The BIS Innovation Hub is a place where new models can be developed to find joint solutions to a wide range of global challenges that matter a great deal to central banks. By embracing collaboration, innovation and knowledge sharing, we can address these challenges more effectively and shape the future of central banking together.

1  https://www.bundesbank.de/en/press/speeches/future-proofing-central-banks--965812",Dr Fritzi Köhler-Geib
https://www.bis.org/review/r250911e.htm,Michele Bullock: Technology and the future of central banking at the Reserve Bank of Australia,"Text of the 60th Shann Memorial Lecture by Ms Michele Bullock, Governor of the Reserve Bank of Australia, Perth, 3 September 2025.",2025-09-03 00:00:00,"## Technology and the Future of Central Banking at the RBA

## Michele Bullock *

Governor

## Address to the 60th Shann Memorial Lecture

Perth — 3 September 2025

## Good afternoon.

I'd like to begin by acknowledging the Whadjuk people, the Traditional Custodians of the land on which we meet today. I pay my respects to their Elders past and present and extend that respect to all Aboriginal and Torres Strait Islander peoples joining us today.

It's a privilege to be here to deliver the 60"" Shann Memorial Lecture.

Edward Shann was a pioneer of economics in Australia. He's remembered not just for his deep knowledge and wide-ranging interests, but also for his curiosity, intellectual energy and strong sense of social responsibility. *

In May 1963, the RBA's first Governor, HC Coombs, delivered this lecture. Coombs — who was both a student and friend of Shann — remarked humbly that 'others more capable have assessed the

significance of his work, both for economic history and economics in Australia, and for the conduct of public affairs'. A worthy acknowledgement.

The lecture delivered by Coombs focused on the drivers of productivity growth and his message still resonates today. Coombs spoke about the vital role of trade, research and development, private investment, access to credit, entrepreneurship and education — core pillars of a strong economy then, and still relevant today.

In that speech, Coombs said:

'Economic progress relies on the capacity of creative humans but that, with the changes in the character and complexity of society, this creativeness cannot be realised merely by an absence of restraint but requires a total environment, both favourable and geared to take advantage of it.'

Coombs' words — and his reflections on the work and influence of Shann — remind us that economic progress doesn't happen in isolation. It depends on how well we shape the environment around innovation and creativity. That's why it feels especially timely to be speaking with you today about a major structural shift reshaping Australia's economy — one that, if harnessed effectively, could unlock new waves of innovation, creativity and future productivity growth.

New technologies — including artificial intelligence (AI) and digitalisation — are evolving rapidly. They're already transforming industries and changing how we work. It's an exciting time, full of promise. But with opportunity comes complexity. At the RBA, we're thinking deeply about how to respond, not just as policymakers but as an institution.

As a central banker, two questions are front of mind when it comes to technology.

1. What do these technological shifts mean for the economy, and for our financial and payment systems as policy makers?
2. How can we harness technology to strengthen the way we operate as a central bank?

These questions matter to us because while our mission to promote the economic prosperity and welfare of the Australian people remains constant, the environment in which we pursue it is evolving rapidly. Technology is reshaping how businesses operate, how Australians interact and transact with one another, and how government and public institutions like ours adapt and adjust policies. Everyone is navigating this change.

Today, I will first discuss the impact of technological change on our economy, including what we are hearing from businesses through our liaison program (including here in Western Australia). Then I'll cover how we at the RBA are adapting to this changing landscape. As a central bank, we need to find the right balance between innovation, resilience and reliability. I'll talk through some of our meaningful technology-related innovations — past and present — as well as how we're equipping the RBA for tomorrow's challenges. And then I'll conclude with how we are further building our capability to inform policy with data and technology, as well thinking ahead to broader policy questions such as the future of money.

## Technology and the economy

There is a lot we don't understand about how the current technological change will affect our economy, both in Australia and globally. That doesn't stop a variety of very firm opinions on what the future will look like. But I think most people would agree that there is a great deal of opportunity for innovation and productivity growth — key drivers of economic growth and people's living standards. By nature I am

optimistic about this but it does remain to be seen how developments in technology will impact not only the economy as a whole but individuals within the economy.

Some view AI as the next general-purpose technology, much like electricity. When such transformative technologies emerge, they often generate waves of innovation as they become integrated across industries and transform the wider economy. Recent analysis from the Australian Government suggests that generative AI alone could contribute between $45 billion and $115 billion annually to the Australian economy by 2030. 2

Beyond AI, the Productivity Commission estimates that data sharing and access in a mature digital environment could add an additional $10 billion to Australia's annual economic output. ? Evidence suggests firms' profitability is boosted by technology. Firms with directors who have tech expertise tend to see a greater impact on their profitability from technology adoption. *

But this transformation is not just about profits — it is part of a much larger societal shift. Technological change has always reshaped the labour market, and AI is no exception. As AI continues to reshape industries and economies, it is not just the tools and processes that are evolving — it is the very nature of work. While many experts anticipate a net increase in jobs, it is likely to be more nuanced: some roles will be redefined, others might be displaced, and entirely new ones will be created. °

Adjustments like this can be challenging for individuals. That's why it is so important that we have a resilient and adaptable workforce. But some individuals are likely to need support through these disruptions and there will be a need for investment in training and education. These fall outside of the scope of monetary policy.

As a central bank, our most effective contribution is to maintain low and stable inflation, keep the economy in aggregate close to full employment and support financial stability. These are the foundations that help the Australian people navigate these structural changes.

That said, we recognise that behind every data point are people, households, businesses and communities. We keep that front of mind when setting monetary policy. An important way we stay connected to these lived experiences is through our liaison program, where we engage directly with businesses and other groups to understand how these shifts are playing out on the ground.

We recently surveyed the businesses in our liaison program about technology adoption (Figure 1). It painted a nuanced picture. A large share of businesses told us they have invested in technology over the past five years and intend to invest further over the next three years. These firms are increasingly investing in AI and technology to automate processes.

## Figure 1

## Share of Firms Investing in Technology*



* — Share of firms reporting moderate and significant investment in selected categories.
- ** Refers to Artificial Intelligence/Machine Learning.

Source: RBA.

Businesses told us that they are cautiously optimistic that they can lift their productive capacity from investment in technologies. Most firms viewed technology investment as having been a key driver of efficiency gains over the past five years. Yet not all investments had or were expected to yield immediate or direct returns. We also heard from firms that significant spending on cyber resilience, system upgrades and compliance-related technologies, while essential, have added to operational costs and may continue to boost headcount without a corresponding rise in revenue, especially in the short term.

Looking ahead, firms told us that they are hopeful that further investment in technological developments will drive an improvement in labour productivity growth. Yet, they also recognise that technology alone will not be a panacea. Gains will depend on complementary changes in skills, workflows and organisational culture.

As I mentioned, AI and robotics are emerging as an increasing focus for firms' forward investment plans. Firms mainly expect these tools to augment labour, automating repetitive tasks and redesigning the composition of roles. Firms thought they may initially see an increase in their headcount as they design and embed new technologies, though this may be followed by a small decline as they mature in

their adoption of new technologies. Lower skilled roles may decline, while demand for higher skilled roles is expected to grow, continuing (and perhaps even fast-tracking) a decades-long trend away from routine manual work. © While AI may eventually automate even some higher skilled tasks, firms tell us that it is too early to fully understand what this means for their workforce beyond the next few years. Some roles may change and the demand for different or new skills may in turn increase.

As policymakers, we are closely monitoring the impact of technological change on the economy. And like these firms, the RBA is also actively exploring how technology can enhance efficiency and reshape the way we operate across our broad range of responsibilities.

## A changing landscape: The RBA's response to technological change

Like other organisations, central banks are grappling with technological transformation. It is one of our key challenges and a frequent topic of discussion with international colleagues.

Before I turn to the RBA's response to technological change, I want to emphasise one important point: while the environment in which we operate continues to evolve rapidly, the RBA's core mandate remains unchanged (Figure 2).

Figure 2: Key Functions of the RBA

eo



&amp;

Conduct monetary policy









Regulate the payments system

Provides critical payment settlement services

Manage Australia's gold and foreign exchange reserves

Serve the public interest

As Australia's central bank, we play a vital role in the financial system and the economy. As you know, we conduct monetary policy with the aims of maintaining low and stable inflation and full employment, and we also support the stability of the financial system. But we do more than this and our responsibilities touch many aspects of everyday life. We regulate the payments system and issue Australia's banknotes. We operate critical payment settlement services, provide banking and registry services to government agencies and international institutions, and manage Australia's foreign exchange reserves. Through all of these functions, we serve the public interest.

As I mentioned, technological innovation — both inside and outside the RBA — continues to reshape the landscape within which we perform these functions.

Cloud computing, mobile apps, biometrics and tokenisation, and the exponential growth in data are redefining how financial services are delivered by firms. Payments are faster, credit decisions are potentially smarter and services are more accessible for many.

Like other organisations, these advances are transforming every aspect of our work — from how we operate, to how we inform monetary policy decisions, support financial stability, and promote efficiency

and resilience of the payments system.

We are exploring the future of money through digital currencies, and investigating how we can leverage new technologies to evolve the payments and settlement system. We are applying AI to deepen our understanding of economic conditions and enhance the ways we work.

To make the most of these opportunities, we are investing in and modernising our systems and building new capabilities. We are recruiting people with diverse expertise across economics, finance, data science, computer science and public policy, and leveraging the intellectual curiosity and versatility of all our people to tackle complex problems.

But we can't do this in our own bubble.

One of my priorities as Governor is to open the RBA more to outside views and perspectives. I am keen to strengthen collaboration with universities and external experts. By engaging more broadly, we can enrich our thinking, challenge our assumptions, and ensure our work remains relevant and can adapt to the evolving economic landscape.

I am confident that these changes — both in innovative technology and our approach to research — will help us to improve our services. But innovation also brings challenges. Cyber threats, data privacy risks, scams and the rise of non-traditional players, including technology firms offering financial products — just to mention a few — mean we need to be thoughtful about how we bring technology into our policy and operations.

Like our global counterparts, the RBA must strike a careful balance: fostering innovation and efficiency, both across the economy and within the institution to support growth and productivity, while safeguarding financial stability and resilience. When technological innovation intersects with our core responsibilities, we play a critical role in monitoring and stewardship.

## Meaningful innovation: From past to present

Before turning to the future, it's worth pausing to reflect on the RBA's contribution to innovation in the past and some of the advancements that have tangibly improved the lives of Australians and strengthened our financial system. Often, this was done cooperatively with the private sector. These are not just stories from the past; they are examples of how we have drawn on disciplines including scientific research, data science, economics and engineering to solve real-world problems. They are also examples of external collaboration.

Let's start with money, specifically banknotes.

In the late 1980s, the RBA pioneered the use of polymer as the material for banknotes, making them more durable and secure than traditional paper banknotes. The polymer material was jointly developed by the RBA and the CSIRO. Australia's first polymer banknote, released in 1988, featured a clear window with a hologram — a security feature that was groundbreaking at the time. Between 1992 and 1996, we introduced the world's first full set of polymer banknotes, leading to over $1 billion in savings through reduced counterfeiting and replacement costs compared with paper banknotes. ""

Between 2016 and 2020, we upgraded the security features of Australia's banknotes, an initiative underpinned by our scientific research and development program. ®

While cash use for payments has declined significantly since the 1990s, it remains essential for many Australians and is a reliable backup to electronic payments. That is why maintaining cash as a resilient and secure means of exchange remains a key priority for the RBA.

As Australians increasingly shift to electronic payments, we have expanded the RBA's capabilities to support this transformation. For example, we supported the industry in their collaborative innovation toward the development of the New Payments Platform (NPP), launched in 2018. The NPP has revolutionised how Australians move money, enabling real-time payments, 24 hours a day, seven days a week. ° This was an example of how we as the regulator could promote the public interest (efficiency, competitiveness and safety) and to help with the coordination of industry efforts to innovate collaboratively.

This modernisation has been important in supporting the RBA to deliver payments from Australian government agencies to households during economic shocks. During the pandemic, for example, on Sunday 15 August 2021, nearly 700,000 COVID-19 support payments were processed and received by Australians, demonstrating our ability to respond rapidly during national emergencies.

To support industry's development of the NPP, we developed the Fast Settlement Service, which provides near-instant interbank settlement, typically in less than one second. This ensures that when Australians make NPP payments, the bank-to-bank component is settled almost immediately.

To put these developments into perspective: in the mid-1990s, Australians wrote millions of cheques each year, and a cheque in 1998 could take up to five business days to clear after being deposited. It also involved moving a lot of paper around between banks. Today, an electronic transfer sent from one bank account to another can clear and be available in seconds (Figure 3).

Figure 3: Speed of Transactions

## Mid-1990s



A cheque could take up to 5 business days to clear after being deposited



An account-to-account transfer can clear and be available in the recipient's bank account in seconds





So, how is the RBA preparing for what is next?

Let me take you behind the scenes to show how we are building the capability that will shape the next chapter of central banking in Australia for the benefit of all Australians.

## Equipping the RBA for tomorrow's challenges

Behind the scenes, we are undergoing a transformation to equip us to meet the challenges of a rapidly evolving financial landscape. Given our role as a central bank, we need to be careful about how we

bring technology into our policy and operations — we know we need to balance risks but also move with the times!

We are investing in modern systems, strengthening our data capabilities and bringing together crossdisciplinary teams to tackle complex problems with greater agility and insight.

We are exploring how technologies can enhance our understanding of economic conditions, improve forecasting and support more informed decision-making. We are also modernising the infrastructure that underpins Australia's payments and settlement systems, ensuring they remain secure, resilient and fit for purpose in a digital age.

Importantly, we are fostering a culture of innovation across the institution — encouraging experimentation, learning from failure and creating space for new ideas to emerge. We are also engaging more openly with external partners — universities, research institutions and industry experts — to bring in diverse perspectives and challenge our thinking.

of this is easy. We have to do all of this at the same time as we continue to deliver on our various mandates. And I would not be honest if I didn't say that the staff are feeling the weight of the heavy change agenda. But the expected rapid technological change over coming years brings exciting opportunities. Among the most promising and complex are big data, data science and AI, which have the potential to transform the RBA — from how our people perform their day-to-day tasks to how we assess financial stability risks and the analysis that informs monetary policy. So we need to try to move as quickly as we can.

If we can apply them effectively, these tools will allow us to turn vast volumes of complex, structured and unstructured information into valuable insights.

So what are we doing? Our transformation rests on three pillars:

1. Knowledge in the digital age — using data and other information intelligently to generate deeper insights and support better decisions.
2. Resilient infrastructure — building secure, scalable platforms that enable efficient data management and strengthen the resilience of our operations.
3. Technical capability -securing the coding, data science and engineering expertise to build, adapt and apply tools and solutions that support our mission and help deepen our understanding of complex economic dynamics.

These pillars are not just technical upgrades to our skills and systems. We think of this as part of a broader cultural and strategic shift that we are undertaking. They support our goal to be more agile with our work, more transparent and to continue to be responsive to the needs of the Australian public.

## Knowledge in the digital age

We are deepening our expertise in advanced analytical methods, including the application of data science and AI techniques, while investing in systems that enable secure and effective data use.

Together, this will position us to deliver faster, more insightful analysis, and remain a trusted, forwardlooking institution in an increasingly complex landscape.

Management of knowledge is central to our legacy as a public institution. We invest heavily in how we manage information and data, and the insights they generate. The integrity of these assets underpins our accountability, the reliability of our policy delivery.

It also enables us to document the rationale behind our decisions and, where possible, make that information accessible, through publications and public records. This public access is a cornerstone of trust in the RBA.

We have a long tradition of managing both quantitative and qualitative data to build a robust knowledge base.

To give you a sense of scale:

1. We hold archival records that cover 200 years of Australia's economic and financial history — spanning 4.6 kilometres of shelf space!
2. Our digitisation program helps preserve the information content of our archival records, and enables advanced search and analysis, including through machine learning and AI.
3. Our broader analysis draws on over 125,000 data time series, with around 5,000 of these updated daily, adding approximately 100,000 new data points each day.
4. Altogether, the structured and unstructured data supporting our analysis and operations consumes around 7.5 petabytes of storage.

So you can see why investing in knowledge — its storage, management, integrity and use — is so important to us.

## Resilient infrastructure

Infrastructure modernisation is a strategic investment in our ability to serve Australians reliably, securely, sustainably and at scale. As with everything we do, we take a risk-based approach. I'll talk more about this in a bit, but we need to make sure our infrastructure is reliable and resilient because of the importance of our policy and operations. It means that we — like many other central banks — may move a little slower than organisations with a different risk appetite that are at the cutting edge. It's a balance.

Our current infrastructure improvements span the entire organisation. From modernising our networks through to upgrading systems for Al-compatibility and strengthening operational resilience, we are laying the foundation for a more agile and efficient, but still highly resilient institution.

There is a lot to do and we are nowhere near finished. But a recent key milestone has been the migration of our banking activities to cloud platforms.

As the banker to Australian government agencies, we play a critical role in delivering payments such as pensions, JobSeeker, youth allowance and tax refunds, quickly and reliably. To support these critical functions, we have migrated to cloud platforms, enhancing resilience, scalability and security.

In the 2024/25 financial year, we processed:

- ¢ 348 million domestic payments and 1 million international payments for the Australian Government, totalling $846 billion and $20 billion respectively.
- e 58 million collection-related transactions for the Australian Government, amounting to $876 billion.

You can see from these numbers why having a modern, resilient infrastructure is important.

Another key part of our transformation is how we manage, store and process data. Like many organisations, including other central banks, we are using code to manage and configure our

infrastructure so that we can improve security and reduce incidents as well as improve the productivity of our IT teams.

We recently acquired an enterprise-grade graphics processing unit (GPU). This has helped us to follow other firms in taking a step forward in our AI capabilities. It means we can develop and run advanced Al-driven analytical tools at scale. As you can see, the team are genuinely excited about the possibilities.

By combining this new local capability with our secure cloud environments, we are able to use a hybrid approach. As a central bank, we are careful about the security of our information (as you would expect us to be!). So we are moving in a measured way, utilising on-premises or cloud environment as we see appropriate.

## Technical capability

An example that illustrates the RBA's evolving mindset is the transformation of our internal business coding community.

It began as a grassroots initiative quite a number of years ago, driven by a small group of technically proficient enthusiasts solving research and business problems through code. And quickly became a wellestablished part of how we operate. Today, around 450 staff — or one in four employees — use coding as a core part of their daily work.

From the outset, this community embraced an open-source mindset: sharing knowledge freely, collaborating actively and refining solutions together. It is now supported by a central function that connects staff to proactively solve problems and ensures that knowledge is preserved. And staff are increasingly using Al-powered coding tools to be more efficient and improve code quality. This means more people, including less-experienced coders, can use these techniques.

This is not just about writing better code. It is about building a culture that values experimentation, collaboration and continuous learning. I think this is what a modern, forward-looking central bank looks like. It is also about leveraging technology to explore information from multiple angles, challenge our assumptions and ensure we have considered a broad spectrum of perspectives in our policy decision-making.

## Innovation with intention: A risk-based approach

Innovation brings opportunity but also risk. As you might expect from a central bank, our approach is not about disruption. It is about deliberate, well-managed evolution. This doesn't mean that we avoid risk — we aim to make informed choices to manage risks, by striking the right balance between innovation and stability.

We understand that the benefits of technology do not appear overnight. Productivity gains often lag behind adoption. *® Real value comes from the complementary investments — in skills, processes and infrastructure — that allow us to use new tools effectively but without undue risks to critical operations.

One of the foundations of our approach to innovation has been a commitment to clear guardrails. In a world where change is accelerating, effective risk management is essential.

In every case, it is not the technology alone that delivered value, it is how we embedded it into our operations, aligned it with our policy goals and ensured it served the public interest.

We take a risk-informed approach across all areas of our work, recognising that digital technologies introduce new challenges, such as cybersecurity threats, and reshape existing ones, including operational or resilience risks. This has sometimes meant that we have moved a little slower than some would have liked. But given the importance of our policy and operations, I think that was appropriate.

That said, we do need to make sure that our risk management framework is fit for purpose as we innovate.

With this in mind, we are strengthening our risk governance. We are introducing a refreshed risk operating model and clarifying accountabilities. Risk will be better embedded in our strategy setting and prioritisation, allowing us to make more informed, timely decisions that align with our public mandate. The new Governance Board will also help us to think about how we best balance innovation and risk.

## Informing policy with data and technology

Like many other central banks around the world, the RBA is actively exploring the implications of emerging technologies, particularly AI, and how they can support our mission. To be clear, we are not using AI to formulate or set monetary policy or any other policy. Instead, we are looking to leverage it to improve efficiency and amplify the impact of staff efforts in areas such as research and analysis.

Across the RBA, we are looking at ways to use digital innovation to strengthen our analytical capabilities, better inform policy decisions and build resilience. Whether through new tools, richer data or closer collaboration, technology is changing how we work — and will, I hope, ultimately help us deliver more effectively for the Australian public.

Like many others, in our economic research we are using advanced techniques, including machine learning and granular datasets to produce close to real-time indicators and deepen our understanding of key economic questions. These include understanding inflation trends, how the labour market is evolving, and where households may be financially vulnerable.

I want to highlight three different ways our researchers are leveraging technology to better inform monetary policy:

1. unlocking insights through microdata
2. unlocking institutional knowledge through AI
3. turning words into insights.

## Unlocking insights through microdata

Advances in computing power are helping us to better analyse large-scale unit record data, offering deeper insights into household behaviour, retail trends and lending patterns. This granularity helps us build more sophisticated models to identify risks and monitor vulnerabilities in the financial system. For example, we can analyse data from securitised mortgages, large retailers and financial institutions more efficiently than before.

One recent initiative is helping us take a step forward in this space by improving our understanding of how economic shifts impact household dynamics and wealth: the Wealth, Housing and Asset Module (WHAM!) pilot. Developed with partner agencies, this pilot integrates data on housing, superannuation and firms' ownership in the ABS's secure ecosystem. ++

This tool will enable deeper analysis. And deeper analysis leads to more informed policy. Over time, the pilot will expand in scope, supporting even more insights into Australia's evolving economic landscape. +2

## Unlocking institutional knowledge through Al

The RBA has generated a vast body of insights over the years. This institutional knowledge has been well documented. But as it has grown, people have increasingly found it hard to tap into this source of knowledge. As you can see in Figure 4, there's been a large increase in the number of internal and external RBA analytical documents produced since 1985.

Figure 4: Powering Policy with RBAPubChat

## Quantifying our institutional knowledge

65k words

June 1985

5m words

25.5m words

June 2025

To make the most of this information, we have designed and begun testing a new Al-powered tool — RBAPubChat — a smart chatbot that stands for the 'Conversation Hub for Analysis and Thought'. It helps staff ask policy-relevant analytical questions and get useful summaries of our existing knowledge base spanning 40 years.

Tools like this are becoming essential. The growing volume of data and the accelerating pace of analysis have led to exponential growth in our internal knowledge. RBAPubChat draws on nearly 20,000 internal and external RBA analytical documents.

It is more than a search tool. It supports comprehensive reviews of past work, provides context for new analysis and the building blocks for new thinking, and constructively challenges existing insights. It also makes sure we don't reinvent the wheel!

## Turning words into insights

For the past 25 years as part of our liaison program, the RBA has held more than 22,000 conversations with firms from all industries. This information has been recorded in detailed summary notes. These discussions offer something that raw data alone cannot — they are the real-life story behind the numbers, which gives us colour to better understand the economy.

What businesses tell us helps us to understand what is driving changes in prices, wages and investment decisions and why, and complements official statistics in shaping monetary policy.

As the volume of these notes grew, now exceeding 22 million words, we needed a better way to tap their full value. So, our researchers developed a secure text analytics tool using natural language processing. +? Simply put, this tool turns text into data and helps us search, analyse and extract insights from this vast pool of qualitative information to assess its meaning (Figure 5).

Figure 5: Our AI Tool for Liaison



It allows us to:

- e identify patterns and emerging themes
- e track sentiment across industries
- e detect signals on price pressures or firm-level uncertainty
- e generate aggregated indicators, such as sentiment scores and topic trends.

By combining our existing analysis of structured statistics with data made from rich qualitative insights in text, we are building a more complete picture of the Australian economy.

Our new text analytics tools, developed using natural language processing, adds a powerful third lens to monitor shifts in business conditions in near-real time, while preserving confidentiality. It does not replace the 125,000 (and growing) time series statistics we rely on, rather it complements them.

Early work using this new tool is promising. For example, when we incorporate our new liaison-based textual indicators into model-based nowcasts using machine learning methods, we can improve the accuracy of wage growth forecasts, outperforming a traditional Phillips Curve model.

Importantly, this tool does not replace expert human judgement, rather it enhances it. It helps our analysts get to the heart of what businesses are saying, faster and more effectively. It also allows our teams to contextualise aggregated insights, across themes or firms, and compare them against historical patterns with speed and precision. All of this together feeds into our monetary policy decisionmaking processes.

## Policy innovation: Thinking ahead

As policymakers, we are also thinking ahead — particularly about the future of money itself.

Innovation in payments and digital currency is a key part of that journey.

One of our strategic priorities is shaping the future of money in Australia, particularly in wholesale markets. We are actively exploring how emerging forms of digital money and supporting infrastructure could make payments and settlements more efficient and resilient.

This work reflects a growing imperative: to think ahead strategically, not just react, in a rapidly evolving payments and technology landscape.

In recent years, the RBA has led or contributed to several research initiatives, domestic and multijurisdictional, examining the potential role, benefits and risks of central bank digital currencies (CBDCs).

One of the most significant, to date, was the CBDC Pilot Project in 2022-2023, conducted in collaboration with the Digital Finance Cooperative Research Centre (DFCRC). This project marked an important first step in engaging industry to explore potential use cases for a CBDC in a live transactional environment with 'real money, real assets'.

What set this pilot apart compared with much of the existing research on CBDCs at that time was that the CBDC was issued as a real legal claim on the RBA. This allowed us to uncover a wide range of legal, regulatory, technical and operational considerations that would come with issuing a CBDC in practice.

One key insight from the pilot was the strong industry interest in the tokenisation of financial and other (real) assets using distributed ledger technology (DLT). +* Building on this, we launched Project Acacia, again in partnership with the DFCRC. This experimental research initiative is exploring how different forms of digital money and supporting infrastructure could enable the development of wholesale tokenised asset markets.

Project Acacia is testing a diverse set of settlement assets, including stablecoins, bank-issued deposit tokens and a pilot CBDC, as well as new applications of banks' existing Exchange Settlement Accounts at the RBA.

A novel aspect of this project is its use of multiple distributed ledger platforms, both private and one public-permissioned platform, rather than relying solely on an RBA-operated platform. This approach allows us to explore how innovation can be supported while maintaining appropriate risk controls.

The build-and-test-phase of Project Acacia is now underway. The insights we gain will deepen our understanding of tokenisation, especially how opportunities and risks vary across different asset types and settlement models.

Ultimately, initiatives like the CBDC pilot and Project Acacia are more than technical experiments. They are policy-relevant explorations that help us consider how trust, efficiency and resilience can be preserved in the financial system of the future.

## Conclusion

As we look ahead, one thing is clear: the future of central banking will be shaped by how we choose to engage with new technologies in a meaningful way.

At the RBA, we are actively exploring how emerging technologies, including AI and digitalisation, could influence the economy and reshape the environment in which we pursue our monetary policy mandate.

What might these shifts mean for productivity, potential growth and inflation dynamics? Could they alter the labour market or expand the economy's supply capacity without generating inflationary pressure? How will investment in their enabling capital, such as data centres and energy infrastructure, spillover to the economy?

These are open questions, and we need to be alert to different possible impacts.

We are also considering the implications for financial stability. Our latest Financial Stability Review included a focus on digitalisation, and we continue to work closely with our peer agencies in the Council of Financial Regulators to assess both the risks and opportunities that come with rapid technological change. *°

In parallel, we are modernising the infrastructure that underpins Australia's payments and settlement systems, ensuring they remain secure, resilient and fit for purpose in a digital age.

But technology alone does not deliver value. It is how we integrate it into our systems, manage its risks and empower people, within and beyond our institution, that truly drives progress. That is why we are fostering a culture of innovation at the RBA: encouraging experimentation, learning from failure, and engaging more openly with external partners to bring in diverse perspectives and challenge our thinking.

As I shared earlier, this last point is especially important to me. Tapping into diversity of thought, strengthening academic partnerships and deepening the policy impact of our research ensures our work remains relevant, rigorous and aligned with the evolving needs of the Australian economy.

Getting this right will position us strongly for future waves of technological change — changes that are not only accelerating in pace but growing in scale and impact. There is much to be optimistic about.

Thank you.

## Endnotes

* This has truly been a team effort. I would like to thank Claude Lopez, Kate McLoughlin, Callan Windsor and Sue Black for excellent assistance in preparing this speech, as well as Samuel Evangelinos, Ravi Ratnayake, Jenny Lui, Jasmine McEvoy, Finn Lattimore, Joel Fernando, Nic Gray, Grant Turner, Kylie Stewart, David Emery, Alison Clark, Alastair Bor, Jeanne Atkinson, Martin Carlisle, Jacqui Dwyer, Martin Western, Nick Mitchell, Chay Fisher, Matt Boge, Julian Wakim, Greg Dicinoski, Lachlan McCahon, Patrick Elkington, Stephen Smith for their input. Thanks also to many of my colleagues for their comments and contributions on an earlier draft.
- 1 Shann Lecture from 1963: RBA, 'Secretary's Department -Lectures -Governor -University of Western Australia -Edward Shann Memorial Lecture -1960-1964', RBA Unreserved.
- 2 Productivity Commission (2025), 'Harnessing Data and Digital Technology — Interim Report', August; Department of Industry, Science and Resources (2024), 'Submission to the Select Committee on Adopting Artificial Intelligence (AI)', No 160.
- 3 Productivity Commission, n 2.
- 4 Nguyen K and J Hambur (2023), 'Adoption of Emerging Digital General-purpose Technologies: Determinants and Effects', RBA Research Discussion Paper No 2023-10.

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https://www.bis.org/review/r250910b.htm,Abdul Rasheed Ghaffour: Catalysing Asia's finance for people and planet,"Keynote address by Mr Abdul Rasheed Ghaffour, Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the Asian Venture Philanthropy Network (AVPN) Global Conference 2025, Hong Kong, 10 September 2025.",2025-09-10 00:00:00,"## Keynote Address by Governor Abdul Rasheed Ghaffour at the AVPN Global Conference 2025 Hong Kong | 10 September 2025

' Catalysing Asia ' s Finance for People and Planet '

We are now a quarter of the way into the Asian Century. The question is no longer whether Asia will grow, but how we will grow, and whether the prosperity we create will be one ' without regret ' -because with great growth, comes great responsibility.

Despite remarkable advances, prosperity across our region remains uneven. Hundreds of millions have entered the middle class, yet too many are still left behind in informal work, with limited access to finance or social protection.

At the same time, planetary pressures are mounting. Asia is the world ' s growth engine and increasingly a major driver of global emissions. It is also where climate impacts are felt acutely. As advanced economies recalibrate their sustainability agendas, Asia cannot afford to slow down. In fact, this is our moment to accelerate -not to compete, but to ensure our vulnerabilities do not widen.

The paradox is clear. The same forces that are driving Asia ' s rise could, if left unchecked, undermine its future. Yet even with these challenges, Asia has what it takes to build a prosperity that is inclusive and sustainable.

First, the world ' s centre of economic gravity has already shifted east. It is expected to sit between India and China in less than 5 years -decades earlier than once predicted by my fellow Malaysian, Professor Danny Quah . Asia today already accounts for over 60% of global growth . Intra-Asia trade now exceeds trade between Asia and the rest of the world, and is expected to grow by 400 billion US dollars annually in the coming years . [1] [2] [3] [4]

Second, we sit on a vast pool of long-term capital. Our region is associated with a high savings rate , state-run pension systems, sovereign wealth funds, and family-owned conglomerates. These have both the capacity and the mandate to think in decades, not quarters. In countries like Malaysia and Indonesia, the depth of Islamic finance adds a distinctive reservoir of patient, risk-sharing capital. [5]

Third, behind this structural advantage lies a cultural one. In much of Asia, the self is understood through relationships and duties within a longterm, interdependent moral order. Here, tradition and social harmony matter more than individual autonomy. If aligned with today ' s challenges, these cultural instincts -expressed through our capital structures -give Asia a unique advantage to mobilise capital for lasting prosperity without regret.

Within Asia ' s story, ASEAN is becoming a central chapter. The Association of Southeast Asian Nations is emerging as a steady source of growth in an increasingly uncertain and multipolar world.

Today, ASEAN is already the world ' s fifth-largest economy. Its combined GDP of more than 3.9 trillion US dollars , projected to exceed 5 trillion before 2030 , will put it behind only the US, China, Germany by the end of the decade. [6] [7]

Underpinning this momentum is a growing population of 670 million people, with a median age of 30 . This decade, ASEAN is expected to add over 130 million middle-class consumers , and this is equivalent of creating a new Japan. [8] [9]

What is striking is not only the scale, but the resilience of growth. While not a straight line, GDP growth has averaged 4.8% for the past 2 decades -through financial crises, pandemic and a shifting global order. This resilience is why ASEAN is at the heart of global supply chains, from agro-commodities to semiconductors, and natural resources to new frontiers in batteries. [10]

This past year, as part of Malaysia ' s chairmanship of ASEAN, I have seen unprecedented interest in the region. From Hanoi to Denpasar, leaders in business and government have been leaning in for greater regional integration. But beyond trade within ASEAN, there is growing interest for investment and strategic partnership with Southeast Asia. Rising risk premia in the West -amid the changing geopolitical landscape and new trade linkages -together with Southeast Asia ' s growth trajectory, makes our markets increasingly attractive.

Here, there are immense opportunities for impactful investment. Take for instance electricity consumption per capita in ASEAN which, on average, is about 3,500 kilowatt hours -far below the 6,000-kilowatt hour benchmark for a modern economy . At the rate which ASEAN countries have been building power generation capabilities, it would take them between 21 and 327 years to reach this level of electrification, even if they relied on coal . This is why the ASEAN Power Grid is a breakthrough and transformative -meeting rising demand and powering growth, while leapfrogging to cleaner, more connected energy systems. [11] [12] [13]

Some markets in the region can serve as safe launchpads: they carry the same challenges common across ASEAN, but with the stability and financial depth to de-risk innovation. And Malaysia is certainly one of them.

But a frontier is only valuable if capital can flow and models can scale. To translate promise into investable reality, financial systems in Asia must get three things right.

First, we need to do better at structuring risks to mobilise capital at scale. Governments today are carrying heavy fiscal burdens, the highest in recorded history, exceeding 100 trillion US dollars . Given the immensity of the sustainable development challenge we face, this finite fiscal space means public budgets alone cannot finance this transition that we need. [14]

However, Asia today mobilises less blended finance for infrastructure than Africa . This is not because the opportunities are lacking, but because risks are insufficiently priced and pipelines are under-prepared. But if we can present the region ' s challenges not as unknowns but as quantified risks, we can unlock the vast pools of capital which is already sitting in Asia. [15]

And here, Islamic finance offers a structural advantage, giving us ready-made infrastructure for risk-sharing. Sukuk tied to real assets, profit-andloss partnerships, zakat and waqf as catalytic first loss -this is a financial architecture built for blended finance. In markets like Malaysia and Indonesia, where Islamic finance is mature, the foundations are ready. The question is, what might we build together on top of it?

The second imperative is to build platforms for inclusive productivity. Technology has allowed us to reach people once beyond the financial frontier. Innovations like well-interlinked payment systems, e-KYC and open data protocols are bringing in millions of people out of informal systems. Digitalisation and AI are helping us manage risk better, reducing funding costs and enabling more tailored services.

But inclusion must go beyond access and efficiency. Credit must flow into assets that build resilience and productivity, not just consumption. We already see sparks of this. In Malaysia, the iTEKAD programme (which in Malay means ' I am determined ' ) is offering blended financial solutions to microentrepreneurs. These are de-risked by grants and seed capital -some of which is from zakat , a form of obligatory almsgiving in Islam used to support the poor and needy. iTEKAD also offers structured training on relevant business skills, and has improved well-being for more than 9,000 microentrepreneurs that participated in the programme, dignifying them not only with increased revenue but also the ability to create jobs for others. Some who began at roadside stalls now serve international markets. Imagine if we could scale structures like this across Asia, promoting inclusive growth and lifting millions from survival to enterprise. [16]

Third, we need to back ecosystems, not just one-off projects. In the 20th century, Asian governments famously employed industrial policy to pick winners. From steel to shipbuilding and microchips to K-pop, this approach produced miracles. But the sustainable development paradox we face today is too complex and capital-intensive for the state alone. What we now need is not so much industrial policy but industrial co-creation: where governments convene corporates, financiers, technologists and communities to co-design ecosystem solutions.

Malaysia is beginning to model this. The Climate Finance Innovation Lab (CFIL) is now open for business to prototype new financial solutions for climate and nature-related projects. The Greening Value Chain (GVC) initiative is aligning anchor corporates with their SME suppliers to decarbonise entire supply chains through financing and technical support. These are early signs of this new kind of industrial co-creation.

## Ladies and gentlemen,

In closing, Asia has what it takes to address the immense challenges we face today. It is through platforms like the AVPN -where funders across all pools of capital converge with innovators and policymakers -that these strengths can be aligned and further amplified. It will be because we -here in in this room -chose to creatively deploy our abilities to build lasting prosperity which generations to come will look back on without regret. And with that, thank you very much for the invitation and your kind attention.

## References

[1] Allianz Global Investors. (2021, January 18). Asia Post Covid-19 . Allianz

Economic Research. https://www.allianz.com/en/economic\_research/insights/publications/specials\_fmo/2021\_01\_18\_AsiaPostCovid19.html

[2] Quah, D. (2011). The global economy's shifting centre of gravity. Global Policy , 2 (1), 3-9. https://doi.org/10.1111/j.1758-5899.2010.00066.x

- [3] International Monetary Fund. (2024, November). Regional economic outlook for Asia and Pacific: Resilient growth but higher risks . https://www.imf.org/en/Publications/REO/APAC/Issues/2024/10/31/regional-economic-outlook-for-asia-and-pacific-october-2024

[4] World Economic Forum. (2025, January). How Asian markets will respond to changes in demand &amp; trade . World Economic Forum. https://www.weforum.org/stories/2025/01/how-asian-markets-respond-changes-demand-and-trade/ . According to this report, ' Nearly 60% of Asia ' s trade is now conducted with regional trade partners, up from 53% in 2000. ' The WEF projects ' that intra-regional trade will continue to rise 65%, or $400 billion per year by 2030. '

[5] Wong, C. (2024, July 4). Are Asians saving too little or too much? And what does this mean for insurance? Peak Re. https://www.peakre.com/media/sbzlxdzo/are-asians-saving-too-little-or-too-much-and-what-does-this-mean-for-insurance-2.pdf

[6] World Bank. (2024). GDP (current US$) . World Development Indicators. https://data.worldbank.org/indicator/NY.GDP.MKTP.CD

[7] International Monetary Fund. (2025). World Economic Outlook: GDP, current prices (NGDPD) . https://www.imf.org/external/datamapper/NGDPD@WEO/OEMDC/ADVEC/WEOWORLD

[8] Database.Earth. (2025). Median age in South-Eastern Asia . https://database.earth/population/south-eastern-asia/median-age

[9] SCB Thailand. (2024). The rising of middle class in ASEAN . Siam Commercial Bank. https://www.scb.co.th/en/personalbanking/stories/business-maker/the-rising-of-middle-class-in-asean

[10] Yap, L. P., &amp; Ramli, I. M. (Eds.). (2024, September). Services and investment liberalisation in ASEAN (ERIA Research Project Report FY2024 No. 18). Economic Research Institute for ASEAN and East Asia (ERIA). https://www.eria.org/uploads/Services-and-Investment-Liberalisationin-ASEAN.pdf

[11] ASEAN Centre for Energy. (2024, September). The 8th ASEAN Energy Outlook (AEO8): 2023 -2050 . ASEAN Centre for Energy. https://aseanenergy.org/the-8th-asean-energy-outlook/

[12] Wirjawan, G. (2024, March 14). The Paradox of Sustainability: A Critique of the Modern World's Approach to Sustainable Development . Shorenstein Asia-Pacific Research Center, Stanford University. https://aparc.fsi.stanford.edu/publication/paradox-sustainability

[13] Wirjawan, G. (2024, March 14). The Paradox of Sustainability: A Critique of the Modern World's Approach to Sustainable Development . Shorenstein Asia-Pacific Research Center, Stanford University. https://aparc.fsi.stanford.edu/publication/paradox-sustainability . These calculations exclude Brunei and Singapore, which have already reached the 6,000 kWh benchmark.

[14] UNCTAD. (2024, June 25). Global public debt hits record $102 trillion in 2024, striking developing countries hardest . United Nations Conference on Trade and Development. https://unctad.org/news/global-public-debt-hit-record-102-trillion-2024-striking-developingcountries-hardest

[15] Convergence Blended Finance. (2025). The State of Blended Finance 2025. Convergence.

[16] Bank Negara Malaysia. (2025). iTEKAD initiative. https://www.bnm.gov.my/itekad accessed 4 September 2025",Abdul Rasheed Ghaffour
https://www.bis.org/review/r250917a.htm,Andriy Pyshnyy: National Bank of Ukraine press briefing - monetary policy decisions,"Speech by Mr Andriy Pyshnyy, Governor of the National Bank of Ukraine, at a press briefing on monetary policy decisions, Kyiv, 11 September 2025.",2025-09-11 00:00:00,"## Andriy Pyshnyy: National Bank of Ukraine press briefing - monetary policy decisions

Speech by Mr Andriy Pyshnyy, Governor of the National Bank of Ukraine, at a press briefing on monetary policy decisions, Kyiv, 11 September 2025.

* * *

Dear colleagues,

The Board of the National Bank of Ukraine has decided to keep its key policy rate at 15.5%. This will enable the central bank to further maintain proper monetary conditions necessary for sustainability of the FX market and controllability of expectations, as well as for bringing inflation to the 5% target.

The NBU stands ready to respond flexibly to changes in the balance of risks.

## The inflation rate is settling on a downward trajectory but remains high

The growth in consumer prices slowed for three consecutive months, to 13.2% yoy in August. Such decline in headline inflation was somewhat faster than the NBU had forecast. Core inflation decelerated as well, to 11.4% yoy, which was close to the forecast.

These developments were driven by a number of factors. The growth in raw food prices decelerated noticeably thanks to the arrival of the new harvest to the market. This, in turn, restrained the growth in prices for processed foods.

Other core inflation components - services and non-food products - also trended down. This was facilitated by both the NBU's previous monetary policy measures and an easing of labor market mismatches. The inflation expectations of households and financial analysts improved in August. However, the expectations of the majority of respondent groups remained in double-digit territory. In addition, web search statistics showed that households' attention to the topic of inflation was still high.

Inflation is expected to continue declining. This will be supported primarily by further effects from the arrival of new harvests and the NBU's actions to maintain the sufficient attractiveness of hryvnia assets and to safeguard FX market sustainability.

## The inflows of external assistance are sufficient to maintain an adequate level of international reserves and finance the budget deficit

Ukraine has received more than USD 30 billion in international financial assistance since the start of the year. External support remained significant over the past months. In July and August, international partners transferred USD 7.5 billion to Ukraine. This enabled Ukraine to increase its international reserves (to USD 46 billion in August) and cover critical budget expenditures.

The progress of European integration reforms and effective cooperation with the IMF are an important precondition for receiving funds earmarked by the partners for Ukraine.

## The course of the war continues to be the key risk to inflation dynamics and economic development

The war is continuing. Recently, the intensity of air attacks and destruction has increased, which has heightened the risks of a decline in the country's economic potential, particularly due to the loss of people, territories, and production facilities. Furthermore, the risks of additional budget expenditures, including those for defense, have become more pressing.

Other risks include:

- insufficient and/or irregular arrival of external financing in the coming years
- a deepening of adverse migration trends and a widening of labor shortages on the domestic labor market and
- less favorable external conditions amid rising geopolitical uncertainty and deglobalization, as well as heightened volatility in global commodity and financial markets.

Meanwhile, some positive scenarios may also materialize.

They are primarily related to increased military and financial support from partners and the international community's efforts to ensure a just and lasting peace for Ukraine.

To maintain FX market sustainability, keep expectations under control, and gradually bring inflation back to its 5% target over the policy horizon, the NBU Board decided to keep the key policy rate at 15.5%

Nominal yields on hryvnia instruments have remained virtually unchanged over the last few months. However, in real terms, they have increased slightly due to slower inflation and improved inflation expectations.

As a result, household investments in term deposits and hryvnia domestic government debt securities continued to grow, while the net demand for FX from the public remained moderate.

Ensuring the attractiveness of hryvnia savings and a sustainable situation in the FX market remain important factors for controlling inflation expectations and further reducing inflation.

The NBU stands ready to respond flexibly to changes in the balance of risks.

The NBU's July macroeconomic forecast envisages the start of a key policy rate easing cycle in Q4 2025. Although inflation is settling on a downward trajectory, inflation risks persist.

The National Bank will be closely monitoring the situation. If inflation risks materialize and/or increase, the NBU is prepared to postpone cutting its key policy rate or take additional measures, if required.

Thank you for your attention!",Andriy Pyshnyy
https://www.bis.org/review/r250924h.htm,"Tiff Macklem: Global trade, capital flows and Canada's prosperity ","Remarks by Mr Tiff Macklem, Governor of the Bank of Canada, at the Saskatchewan Trade and Export Partnership and the Greater Saskatoon Chamber of Commerce, Saskatoon, Saskatchewan, 23 September 2025.",2025-09-23 00:00:00,"

Remarks by Tiff Macklem Governor of the Bank of Canada Saskatchewan Trade and Export Partnership and the Greater Saskatoon Chamber of Commerce September 23, 2025 Saskatoon, Saskatchewan

## Global trade, capital flows and Canada's prosperity

## Introduction

Good afternoon. It's a great pleasure to be here in Saskatoon, and I want to thank the Saskatchewan Trade and Export Partnership and the Greater Saskatoon Chamber of Commerce for the invitation.

Canada is a trading nation.

We rely on exports for around a third of our income, and we use that income to buy the things we need from abroad. The share of exports in Saskatchewan's gross domestic product (GDP) is even higher, roughly 45%-that's the highest in the country. Saskatchewan provides commodities to the world-wheat, canola, potash, oil and gas, uranium and more. And it imports a range of goods, particularly motor vehicles and machinery and equipment, mostly from the United States.

Unfortunately, trade is under attack.

Globally, trade friction has been increasing for the past dozen years, and now the United States has swerved sharply to protectionism. The large increase in US tariffs is weakening global demand, disrupting supply chains, raising prices and putting the Canadian and global economies on permanently lower paths.

These shifts in trade also have implications for international capital flows. Together with unsustainable US fiscal deficits, persistent trade imbalances have the potential to increase financial stability risks globally.

Saskatchewan, like most of Canada, is caught in the crossfire.

New US tariffs on steel, aluminium, motor vehicles, copper and softwood lumber are hurting businesses and affecting workers across the country. But here in Saskatchewan, it's actually China's move to effectively block Canadian canola exports into its market that is causing the biggest trade impact.

Around the world, trade is more fragmented, trade with the United States is more difficult, trust is low, and new risks to financial stability are emerging. As an open economy closely integrated with the United States, Canada is particularly affected.

That is what I want to talk about today.

I will begin with a longer-term perspective, outlining four megatrends in global trade and capital flows that are transforming the global economic and financial landscape: Global trade growth has slowed. The United States is no longer the dominant trading nation, but it still dominates global financial flows. And global trade imbalances are widening again. President Trump did not precipitate these megatrends, but his policies will likely reduce trade with the United States further and could dent the US dollar as the global safe asset.

Then I'll discuss the implications for Canada and the world. For Canada, the ramifications of a new relationship with the United States are immense. And one thing is clear: we can't afford to wait this out. Canadian leaders-business, political and economic leaders-need to chart a new course. We should have been making these changes 15 years ago. But the next best time is now.

The United States will always be a crucial trade partner. But we need to find new markets for our products and new products for our markets. We need to improve our productivity to compete globally. And we need to attract foreign capital. Around the world, countries and corporations are looking for new partners. Canada should be top of the list.

## Shifting global trade and financial flows

With that plan for my remarks, let me begin with the four megatrends.

## Global trade growth has slowed

First, global trade growth has slowed. You can see this in Chart 1 , which shows global trade as a share of GDP.

In the first 65 years after the Bretton Woods Agreement was signed in 1944, global trade grew faster than the global economy. Open trade brought specialization, innovation and economies of scale. It drove investment and productivity. For consumers, open trade increased selection and lowered prices. Trade spurred income growth across countries, reduced global poverty and raised standards of living.

But since about 2010, trade growth has slowed-it's no longer growing faster than GDP. Some slowdown was inevitable. Once most economies were participating in open trade, there was less capacity to expand trade further.

Still, part of this slowdown reflects shifting politics. The benefits of open trade have not been evenly shared. When low-cost producers in exporting countries undercut domestic producers, workers who lost their jobs lost more than they gained. This has eroded public and political support for globalization, resulting in a pull-back from open trade.

As a result, trade barriers have been rising for the past dozen years. And now we're in a new era of US protectionism. US tariffs have not been this high since the early 1930s ( Chart 2 ).

Chart 1: Global trade as a share of GDP has stopped growing



Note: The Irwin estimate is from D. A. Irwin, ""Globalization is in retreat since the Second World War,"" Peterson Institute for International Economics (October 2022). Penn World Table refers to A. Heston, R. Summers and B. Aten, ""Penn World Table Version 6.3, Center for International Comparisons of Production, Income and Prices,"" University of Pennsylvania (August 2009).

Sources: Irwin (2022), Penn World Table and World Bank via Haver Analytics Last observation: 2024

## Chart 2: US tariffs have not been this high since the 1930s

US weighted average tariff rate, annual data



Sources: US International Trade Commission and Bank of Canada calculations Last data plotted: September 4, 2025

US tariffs are doing two things. They're reducing bilateral trade with the United States. And they're rerouting trade as exporters look for ways to get around the tariffs or seek out new partners.

China, in particular, has been ramping up trade with the Global South for several years, and this has accelerated with new US tariffs ( Chart 3 ).

Chart 3: China's exports to countries other than the United States have risen



Note: ASEAN refers to the Association of Southeast Asian Nations.

Sources: China's General Administration of Customs via Haver Analytics and Bank of Canada calculations Last observation: August 2025

## The United States no longer dominates global trade

China's entry to the global trade system and rapid growth over the past 25 years bring us to the second megatrend: the United States no longer dominates global trade. Chart 4 shows trade flows between countries in 2000 and 2019. These charts are courtesy of Hélène Rey at London Business School and her co-authors.



The change is dramatic. In 2000, the United States was dominant. Now, the global trading network has three main hubs-China, the United States and the euro area. The global trade network has also become far more complex than it was 20 years ago.

As China expanded its trade, it also moved up the value chain. Twenty years ago, advanced economies were happy to buy low-tech consumer goods produced by state capitalism in China. Prices were low, which benefited US consumers. But now China is competing head-to-head with the United States and other countries in advanced manufacturing and high tech.

The global trade system is designed for private companies competing in an open marketplace. But in China, trade is being used as an instrument of state-directed growth that gives Chinese companies an advantage over their competitors. In response, advanced countries have increasingly embraced industrial policy across a widening spectrum of strategic industries.

China's ascendence and use of industrial policy have also spurred the swerve in US trade policy. US tariffs on Chinese goods peaked in April at about 150%. Since then, tensions have de-escalated considerably. But the effective tariff rate on China remains high, at about 40%, and both countries have imposed export restrictions on some strategically important products.

## The United States still dominates financial flows

This brings me to the third megatrend. While the United States no longer dominates trade, it continues to dominate global financial flows ( Chart 5 ).



The United States has the biggest equity and debt markets. The size and dynamism of the US stock market fuel growth companies. The depth and liquidity of the US Treasury market, along with very low perceived credit risk, have made US Treasury bills the global risk-free asset. This has increased demand for US dollars and made the US dollar the global reserve currency.

Providing safe assets to the world has its benefits. The United States can borrow money to finance growing fiscal deficits at a lower rate than it could otherwise.

For many global investors, the question now is whether US dominance in global financial flows will ebb as the United States pulls back from trade and runs large fiscal deficits.

The recent performance of the US dollar may be telling us something. Typically, we'd expect US tariffs to support the US currency. But, instead, the greenback has depreciated, and the price of gold-another safe asset-has risen. President Trump's 'Liberation Day' shook global confidence, and the dollar's safe-haven role was called into question. Stock markets have since recovered, but the dollar has depreciated by about 10% against other major currencies since the start of the year, and the price of gold is up over 40%.

It's too early to know if this is the start of a new era. For now, the greenback remains dominant, and-without a clear alternative-I suspect it will remain the global reserve currency for the foreseeable future. But for many, its value as a hedge in times of stress has been dented. And President Trump's attempts to influence the Federal Reserve are raising questions about the continued independence of US monetary policy.

## Global imbalances persist

The final megatrend I want to touch on is the persistence of global imbalances. 1 By this I'm referring to the persistent trade deficit in the United States and the large and continuing surpluses elsewhere, especially in China and the European Union ( Chart 6 ).

## Chart 6: Trade imbalances are

growing

Goods and services balance as a share of world GDP, annual data



Sources: International Monetary Fund and Eurostat via Haver Analytics Last observation: 2024

1  Global imbalances typically refer to large current account deficits and surpluses. But since the largest part of these are the trade imbalances, I focus on trade surpluses and deficits in this speech. The current account is the trade balance plus net income from abroad and current transfers.

International capital flows are the flip side of trade imbalances.

To fund its trade deficit, the United States relies on net capital inflowsforeigners purchasing US debt and equity-as well as foreign direct investment. In other words, the United States must attract savings from abroad because it does not save enough at home. In contrast, China and the European Union both have excess savings.

Domestic factors are the main reason for the widening of imbalances between these major economies. China's consumption has been persistently weak. Households in China hold high precautionary savings because social safety nets are not well developed, and the property sector has been shaky. In the European Union, investment has been weak relative to savings because opportunities are less attractive, especially in high tech.

The opposite is true in the United States. Consumption and investment are high, fiscal deficits are large, and the savings rate is low. So the United States is running a trade deficit, and the biggest counterparts are the European Union and China.

Imbalances are not inherently bad-global capital flows are part of a wellfunctioning international trade and financial system. But risks accumulate when the imbalances grow unsustainably and the necessary adjustments do not take place.

Countries or regions with a trade surplus-in this case, China and the European Union-generally face little market pressure to adjust. Usually, most of the adjustment would be forced onto the country with a trade deficit-the United States. But because the US dollar is the global reserve currency, foreign investors have been willing to finance US spending. So imbalances persist.

Why do we care? Because we've seen it go wrong before. In the lead-up to the 2008-09 global financial crisis, imbalances built up as China ran large trade surpluses and the United States ran large trade deficits. The US subprime mortgage implosion was a product of flawed financial innovation and lax regulation. But the massive inflows of foreign capital to the United States made a local problem global-and they sparked the worst financial crisis since the Great Depression.

Global imbalances narrowed after the crisis, but they've started to grow again. Because of insufficient domestic savings, the US fiscal deficit must be funded in part by foreign investors, and they could become less enthusiastic about US assets. At the same time, US government debt is increasingly being purchased by non-bank financial intermediaries, particularly hedge funds using highly leveraged strategies. This is increasing leverage at the very core of the financial system. These are vulnerabilities.

And, no, US tariffs probably won't fix global imbalances. Lower US imports from the rest of the world will likely come at the cost of lower US exports. As long as the United States is spending more than it's producing, it needs to import more than it exports.

## The shifts have global implications

These megatrends have global implications. And now new US tariffs combined with the unpredictability of US policy are increasing uncertainty, shifting relationships, weakening global demand and reducing the efficiency of global supply.

Countries around the world are adjusting their supply chains and seeking out new partners. China's reach into emerging-market economies is increasing. New partnerships support China's quest for a multipolar world, where the United States has less geopolitical weight. The European Union, too, is making changes-beyond simply diversifying trade-by tackling internal challenges that have hampered its competitiveness.

The global economic fallout from the US trade war has so far been milder than first predicted-both because US tariffs are not as high as initially feared and because retaliatory tariffs were limited. But the full impact has yet to be seen. Many US households remain cautious about spending, and US employment growth has slowed. In the euro zone, growth looks to be softening as US tariffs weaken exports. In China, export substitution to Asian markets has offset the worst effects of US tariffs so far. However, businesses are investing less, and growth is expected to slow.

What can governments around the world do? When the United States raised tariffs sharply in the 1930s with the Smoot-Hawley Tariff Act , most leading nations responded by erecting their own trade barriers. The combined impact was severe, contributing to the depth and persistence of the Great Depression. This time, countries have avoided an escalating global trade war. That's good, but they could go further by strengthening trade ties where possible.

The era of open trade with the United States may be over, but the rest of us can still deepen trade with others. To do this, we will need our multilateral institutions-particularly the World Trade Organization and the International Monetary Fund (IMF)-to work together better to address the problems of unbalanced trade and the lack of adjustment.

Together, countries also need to be prepared for new financial stability risks. We need financial supervisors to strengthen surveillance of financial vulnerabilitiesespecially as hedge funds and other non-bank financial intermediaries play an increasingly important role in the financial system. Here the IMF and the Financial Stability Board need to work together to identify potential systemic risks.

For their part, businesses need to consider both geopolitical risks and the resilience of supply chains along with efficiency. More industrial policy means chief executive officers need to think about how their corporate strategies interact with national priorities. These national priorities may allow businesses to take more risks to fuel growth, but they should not be used to create monopolies.

Central banks also have a role to play, but it is limited. Monetary policy cannot undo the damage caused by tariffs. At best, monetary policy can smooth the path in the short term, supporting economic growth while ensuring inflation is well controlled.

## What it all means for Canada

This brings me to the impact and implications here at home-in both the short term and the longer term.

## The tariff shock is hurting economic growth and employment

First, the near term. Trade growth in Canada had slowed well before the reelection of President Trump: trade as a share of GDP stopped increasing in about 2000.

But Canadian exports have declined sharply since President Trump imposed new tariffs on Canada and created considerable uncertainty with tariff threats and reversals. The pain is falling primarily on a few key sectors: steel and aluminium and motor vehicles. Last month, tariffs were increased or extended to more goods, including copper and softwood lumber. High tariffs are also being imposed on exports that are not compliant with the Canada-US-Mexico Agreement (CUSMA). While most of Saskatchewan's exports comply with CUSMA and are not affected by US tariffs-at least not directly-the hit from China's tariffs on canola is significant.

The economic impact has been a whipsaw: Growth held up at the start of the year as exporters shipped all they could to get ahead of the tariffs. This reversed in the second quarter-exports dropped almost 27% and GDP contracted by 1.6%.

The sharp drop in exports is hurting the job market. The unemployment rate rose from 6.6% in February to 7.1% in August. Hiring and employment in tradeaffected sectors are down sharply, and employment growth in the rest of the economy has slowed. Many businesses have also told us they have paused investment plans given elevated uncertainty about US trade policy.

## Canada's long-term prosperity requires change

In the longer term, increased trade friction with the United States means our economy will work less efficien tl y, with added costs and less income.

Chart 7 shows the Bank of Canada's assessment of the growth path for the Canadian economy before US tariffs-the blue line-and with US tariffs based on trade policy as of the end of July-that's the orange line. We can see that the orange line is permanently below the blue line. Monetary policy cannot undo the efficiency costs of US tariffs-it can't bend the orange line back up to the blue no-tariff line. Nor can counter-cyclical fiscal stimulus.

But positive structural reform could.

Canada has a choice. We can live with the structural impact of a more protectionist United States-the lower path. Or we can improve our productivity and competitiveness and bend the orange line back up to, or even above, the blue line.

Chart 7: Higher tariffs will put the economy on a permanently lower path

Level of

real



Sources: Statistics Canada and Bank of Canada calculations and estimates

Last data plotted: 202604

Canadians have embraced the power of economic patriotismelbows up . But now we need to roll up our sleeves and do the hard work to be more competitive.

We need to diversify our trade by growing our internal market and finding new overseas markets. And we need to improve our productivity and make ourselves more attractive to investors. That work has started, and I've spoken about all these things before, so let me be brief but clear.

There are some things we could do quickly at little fiscal cost-if we have the determination. There is momentum to eliminate interprovincial trade barriers. We need to take a comprehensive approach that lowers the cost of doing business across the country. This includes removing trade barriers and many small regulatory differences. It also includes mutually recognizing provincial labour accreditation for many professions. We also need to remove unintended barriers to investment by shortening regulatory approvals and reducing regulatory uncertainty.

Then there are other things that require investment and will take time to build, but the sooner we start, the sooner we will reap the benefits. Here I would include better east-west transportation links to grow our internal market and get our products to overseas markets. I'd also include new port capacity to reduce our dependence on the United States.

If we can get our products overseas, we have some of the best market access in the world. Canada has trade agreements with 50 countries beyond the United States. But businesses and governments could do more to leverage these agreements. We need to learn from the past: the recession in 2009 highlighted how vulnerable we are to a drop in US demand, and everyone talked about diversification then, too. But not much happened. This time we need to follow through.

Finally, we also need to nurture and support our long-standing strengths. We have the ingredients to attract more foreign capital. We have effective governments and rule of law. We have abundant energy and other resources. We have a diversified industrial structure. We have strong labour force participation, a good immigration system and broad access to quality education. But our immigration system has been strained, and our universities and colleges are facing a financial squeeze. We can't take our strengths for granted.

Increasing productivity and improving our competitiveness may not be every Canadians' biggest priority. But if we can bend the orange line back up to or above the blue line, everything from housing to health care becomes more affordable. Productivity growth is what sustains increases in our standard of living.

## Conclusion

I need to wrap up.

But before I do, let me return to the role of monetary policy in all this. Tariffs have weakened our exports and GDP growth, slowed the job market and added costs. Monetary policy cannot undo the damage caused by tariffs, but it has a role to play supporting the economy through this period of adjustment while maintaining price stability. Last week, the Bank lowered its policy interest rate to better balance the risks we face as the economy adjusts to a new trade relationship with the United States. We are proceeding carefully with particular attention to the risks and uncertainties. And as we demonstrated last week, we are prepared to respond to new information. We will support economic growth while ensuring inflation remains well controlled.

But as we all deal with the immediate fallout of global fragmentation and rising protectionism, business leaders and policy-makers alike need to think about the deeper structural weaknesses that threaten the resilience of the Canadian economy. There is no better time than now to deepen investment, improve productivity and expand our market.

We have the capacity to overcome the negative impact of new trade restrictions with the United States. Elbows up has been galvanizing, but now we need to roll up our sleeves. There is a lot of hard work to do.",Tiff Macklem
https://www.bis.org/review/r250922c.htm,Chiara Scotti: Stablecoins in the payments ecosystem - reflections on responsible innovation,"Speech by Ms Chiara Scotti, Deputy Governor of the Bank of Italy, at the Economics of Payments XIV conference, Rome, 18 September 2025.",2025-09-18 00:00:00,"## index

Ladies and gentlemen, distinguished guests and colleagues,

Welcome to the XIV edition of the 'Economics of Payments Conference'. It is a pleasure to host this prestigious gathering of policymakers, regulators, academics, and private sector professionals who are at the forefront of the evolution in payments. Banca d'Italia, in collaboration with the Committee on Payments and Market Infrastructures (CPMI), is pleased to welcome you for two days of rigorous dialogue, data-driven insights, and collaborative vision-setting. In a period marked by both profound uncertainty and unparalleled opportunities spurred by technological innovation, such dialogue is more essential than ever.

This year, we are especially delighted to welcome Professor Fernando Alvarez, from the University of Chicago, and Miguel Diaz, Head of Strategy at the BIS Innovation Hub, as keynote speakers. The program features 27 papers across 7 themed sessions, showcasing perspectives from central banks, international institutions, academia, and fintech.

Sessions span topics from the macroeconomics of digital currencies, payments, and payment choices to the granular realities of payment instrument adoption, cross-border payments and remittances, interoperability, and financial stability. Additional poster sessions will allow for deep dives into new data and methods for the study of retail payments and into the nuts and bolts of payment infrastructures.

With its rich menu, the conference offers not only food for thought but hopefully some viable considerations for guiding practice and policy. The variety of topics in fact confirms the vivacity of payments in the current environment, which makes an integrated view comprising technical, academic, and policy perspectives crucial to support innovation that is secure, efficient, inclusive, and resilient.

And it is hard to speak about payments innovation without mentioning the increased role played by the crypto-assets market and stablecoins. In the

remainder of my remarks, | will thus focus on recent developments in the stablecoin market, an area that has attracted growing interest for its potential use cases but that continues to present relevant challenges.

On the one hand, that is, stablecoins are often presented as promising tools for lowering transaction costs, enhancing efficiency, and enabling 24/7 availability. [2] On the other hand, they carry inherent vulnerabilities such as run risk and interconnectedness, which could lead to financial stability concerns. Having discussed these risks in other venues, 8! today | would like to focus on two open issues: regulatory fragmentation and multi-issuance models.

## Market snapshot and recent developments

Stablecoins are digital tokens recorded on distributed ledgers ('on-chain') that aim to maintain a stable value relative to a reference asset, including fiat currency such as the US dollar or euro. In the case of fiat currency, stability is achieved by ensuring -or attempting to ensure -convertibility at par value, on demand. Unlike unbacked crypto-assets, such as Bitcoin or Ether, stablecoins are designed to be redeemable and anchored to external value reserves which are often, but not always, held in (the form of) liquid and low-risk assets. [4]

As of last week, global crypto-asset capitalization exceeded 4 trillion US dollars. Stablecoins now represent nearly 300 billion dollars -about 7.5 per cent of the crypto market -marking a 75 per cent year-over-year growth.

The sector remains heavily concentrated.!5! Tether's USDT accounts for 56 per cent of the market; followed by Circle's USDC with 25 per cent. [6] Together, these two US dollar-pegged stablecoins dominate 80 per cent of the space. In total, stablecoins that aim to maintain parity with the USD make up 98 per cent of the global market.

In stark contrast, euro-denominated stablecoins account for about 620 million dollars in market capitalization -about 0.2 per cent of the total. The largest are EURC (Circle) and EURS (Stasis), collectively holding 60 per cent of this subsegment.

At present, stablecoin demand is spurred by four main drivers. 71 First, stablecoins primarily serve as a transactional bridge for entering and exiting the crypto-asset

ecosystem. !8 Their role is closely tied to enabling liquidity flows across trading platforms and decentralized finance (DeFi) protocols, where they function as readily transferable digital tokens.

Second, in emerging markets plagued by inflation, currency volatility, and high remittance costs, stablecoins may offer an alternative to more traditional solutions to store value and transfer funds, such as those operated by banks and money transfer operators (MTOs). 91

Third, although retail adoption is still limited, many companies are testing stablecoin integrations for programmable B2B payments. [10] Some stablecoins issuers have partnered with major payment networks to embed stablecoin use in settlement layers.

Fourth driver is the potential for illicit activity -such as fraud, money laundering, and sanctions evasion -which can overlap with the other use cases and remains a significant concern. Stablecoins' ease of use, global accessibility, and the limited traceability of certain protocols make them particularly susceptible to misuse. Although accurately quantifying such activity remains challenging, ""1 these features underscore the need for strong regulatory oversight and effective monitoring mechanisms as their adoption grows. /121

A recent analysis has attempted to quantify the primary use of the existing stablecoins described above. !""31 According to this research, crypto trading activities represent the most important use case (about 90 per cent of volume) while payments use cases (cross-border remittances, corporate treasury and P2P) represent a small fraction (roughly 6 per cent). Whether stablecoins truly offer a faster and more cost-effective alternative to traditional payment channels (e.g. banks and remittance services) remains an open question. In this regard, it is worth noting that while various types of crypto products are used as a means of payment, only stablecoins pegged to a single fiat currency are suitable for this function, also because they offer a high level of customer protection through the right to redemption at their nominal value. !""41

According to the World Bank, the average global cost to send a 200 USD remittance in 2024 stood at around 6.5 per cent, with significant regional variation depending on provider, corridor and regulatory framework.!""5! Other sources!"" estimated that using stablecoins to send a 200 USD remittance from sub-Saharan

Africa reduces costs by approximately 60 per cent compared to traditional methods.!""7] And some market operators claim that stablecoins can enable lowcost settlement, with transaction fees often below 0.01 USD on certain Layer 2 networks.!8] However, these figures typically exclude critical components of the payment chain -such as 'last mile' delivery costs, on/off-ramp fees, and foreign exchange charges. As a result, the overall efficiency of stablecoins may be overstated, particularly when evaluated against the full end-to-end expense of cross-border payments.

Focusing on the largest stablecoins (Circle and Tether) a recent analysis run by the IMF!""91 confirms that Tether's USDT is more popular in regions with the most emerging economies -Africa and the Middle East, Asia and the Pacific, and Latin America and the Caribbean -while Circle's USDC is more prevalent in regions with more advanced economies, i.e. Europe and North America.

As to the use of euro-denominated stablecoins, while data remains rather limited, early evidence suggests that they are primarily exchanged against dollardenominated stablecoins. Internal analyses/20 also indicate that the euro-dollar exchange rate may influence the market capitalization of euro-denominated stablecoins: periods of euro depreciation tend to coincide with increased demand for euro stablecoins, possibly reflecting European investors' search for positive returns during dollar appreciation.

Traditional institutions are responding to shifting dynamics in the stablecoin market and to the growing use cases just described. Several banks in the US and Europe have announced plans to issue their own stablecoins, often citing client demand for more efficient digital payment solutions. Recent strategic alliances -involving large international banks and crypto-exchanges -aim to bridge the gap between fiat and crypto ecosystems. Meanwhile, some BigTech platforms are developing embedded stablecoin solutions.

## Challenges and risks

As the financial system continues to evolve, stablecoins and other innovative instruments deserve our close attention. These instruments may offer novel solutions to long-standing issues in payments and financial intermediation, particularly in the cross-border context. However, their growth also raises important questions about governance, stability, their potential misuse for illicit

purposes, and the consistency of oversight across jurisdictions. [21 As we navigate this landscape, it is essential that we remain open to the opportunities presented by modern technologies, while carefully evaluating their potential impact on the broader financial system. Striking the right balance between enabling innovation and safeguarding key policy objectives -such as financial stability, monetary sovereignty, financial inclusion, consumer protection, and trust in money -remains a major challenge for public authorities.

Today | would like to highlight two vulnerabilities that, in my view, are particularly relevant, not only because of their potential systemic impact, but also because of the specific institutional and regulatory context in which we operate.

## Regulatory fragmentation

At an international level, several jurisdictions have either adopted or are finalizing dedicated regulatory frameworks for crypto-assets. 22] While the institutional approaches may differ, they all share the same objective: to establish clear rules that enhance legal certainty, strengthen consumer protection, and safeguard market integrity. | will focus on a comparison between the European and American frameworks, sharing some preliminary thoughts with you.

Both the EU's Markets in Crypto-Assets Regulation (MiCAR) and the US Genius Act provide a regulatory regime for stablecoins, including licensing regimes, operational and compliance requirements, and restrictions on the composition of reserve assets for issuers. However, the two frameworks differ in important respects, particularly when it comes to scope, enforcement, and the degree of holders' protection.

In terms of scope, the US framew (Jork is narrower, focusing specifically on payment stablecoins. By contrast, MiCAR applies to a much broader category of crypto-assets that are not already covered by existing financial regulation. In terms of enforcement, MiCAR introduces a robust supervisory framework for crypto-asset service providers (CASPs), requiring authorization from national competent authorities and imposing detailed obligations regarding governance, capital, the segregation of client assets, and the conduct of business. The Genius Act takes a lighter-touch approach and currently leaves many service providers outside its scope. 23! Regarding crisis management, MiCAR requires stablecoin

issuers to draw and maintain recovery and resolution plans, whereas the Genius Act provides only limited tools.

Another difference concerns redemption fees. MiCAR requires that stablecoin issuers guarantee the redemption of single-currency stablecoins at par without imposing fees, while the US rules allow for users to be charged for payment stablecoins. [241

In addition, unlike the Genius Act, MiCAR addresses issues of market abuse directly. In this sense, the European framework adopts a broader approach to investor protection and market integrity.

Other jurisdictions are moving in different directions. For instance, in the United Kingdom, draft legislation published by the UK Treasury!251 proposes that only stablecoins issued from within the UK should be subject to regulatory oversight -those issued abroad could still be traded on UK exchanges. Meanwhile, Japan, Singapore, and Hong Kong have developed their own models. These divergences raise concerns about regulatory fragmentation and the potential for arbitrage, which could undermine supervisory coherence.

This brings me to the second issue | would like to discuss today.

## Multi-issuance stablecoins

Multi-issuance stablecoins (MISC) are tokens issued under a single brand by multiple entities operating in different jurisdictions. Those tokens are fully fungible, regardless of the issuer.!26] Under this scheme, EU stablecoin issuers could receive redemption requests from third-country token holders. If sufficient reserves are unavailable in the EU to meet these requests, the third-country entity is expected to transfer assets.

Although this architecture could enhance global liquidity and scalability, it poses significant legal, operational, liquidity and financial stability risks at EU level, particularly if at least one issuer is located outside the European Union. In these cases, liquidity risk is heightened, as each co-issuer could be held liable for the entire outstanding token volume, even though they only hold a small fraction of the corresponding reserve assets, simply because holders, whether resident or non-resident, view all tokens as interchangeable. This can lead to a mismatch

between obligations and available reserves, especially if redemptions are concentrated in the EU while reserves are held abroad or on the balance sheets of other issuers.

Further complications arise from inter-issuer agreements, such as reserve rebalancing mechanisms, which may shift liabilities across jurisdictions in an uncoordinated manner. In a crisis, these flows could be triggered rapidly, leaving authorities with limited oversight and delayed reaction capacity. This structure challenges not only the prudential resilience of the individual issuers, but also the integrity of the broader regulatory framework.

This structural fragility is exacerbated by legal and operational risks. When an EUbased issuer holds reserves in a foreign currency (i.e. US dollars), those assets are usually located in the country where they were issued, often outside the EU. This means the reserves may be subject to foreign capital controls, regulatory restrictions, or settlement delays, particularly in times of market stress. Without strong safeguards -such as regulatory equivalence, the mutual enforceability of redemption rights, and the free transfer of reserve assets across borders -these arrangements become more vulnerable, opening the door to fragmented investor treatment, moral hazard, and broader systemic vulnerabilities.

In addition, in a multi-issuance model, third-country issuers are not necessarily subject to the same consumer protection, transparency, and disclosure requirements as those set out in MiCAR. This asymmetry may leave European token holders with lower levels of protection. 271

To mitigate these risks and avoid regulatory blind spots, issuance should be limited to jurisdictions that uphold equivalent regulatory standards, ensure redemption at par, and enforce cross-jurisdiction crisis protocols. The robustness of a multi-issuer framework hinges on strong cross-border cooperation among supervisory authorities, including mechanisms to consistently monitor and verify the adequacy of reserves in terms of size, quality, and location. [281

Without such coordination, there is a real risk of regulatory arbitrage, whereby activity gravitates towards the jurisdiction with the least stringent regulations, thereby undermining financial stability and investor confidence. For this reason, clarity at the legislative or standard-setting level would be both timely and

valuable -helping to establish a common playing field, to prevent free-riding, and to promote a more coherent and resilient global approach to stablecoin oversight.

## In search of a path: policy reflections

Amidst growing risks and challenges, innovation is reshaping the financial ecosystem. Stablecoins, other crypto-assets, tokenized deposits, central bank digital currencies, and additional novel instruments are being explored as potential solutions to reduce frictions in the payments landscape.

For this transformation to be meaningful and sustainable, these new forms of money and services must address users' needs, without compromising financial stability, market integrity, and inclusion. But the pace of change, the complexity of emerging use cases, and uneven regulation across jurisdictions require a consistent and forward-looking policy response.

Let me share a few reflections on how we might navigate these uncharted waters.

First, international cooperation remains vital because digital technologies transcend borders. Guidelines and recommendations by international standards bodies and the G20's roadmap on cross-border payments provide a solid foundation on which to develop an effective regulatory framework. But fastmoving progress demands continuous dialogue, adaptable frameworks, and shared accountability.

Second, innovation must be fostered responsibly, establishing clear rules and standards that balance openness to new technologies while safeguarding financial stability, consumer protection, and sound market functioning.

Third, data are critical. To identify risks early and to tailor effective responses, we need common metrics and close collaboration with the scientific community and the private sector in order to develop better tools and models.

Returning to the topic of stablecoins, we need specific safeguards for multiissuance stablecoins, which pose complex cross-border challenges. These arrangements require a high degree of trust and transparency between jurisdictions. Key safeguards should include regulatory equivalence, mutual

enforceability of redemption rights, and the absence of legal or operational barriers to asset transfer, especially during crisis periods. [291 One of the key lessons (learnt) from the global financial crisis is that ring-fencing cannot substitute coordination. In a globally interconnected system, divergence only amplifies risks.

Supervisory frameworks also need to evolve. Activities such as staking, yield farming, and crypto-lending often replicate traditional banking functions but without equivalent oversight. The principle of 'same activity, same risk, same regulation' must guide our approach.

Finally, competition must be preserved. While stablecoins may comply with financial regulations, their integration into global digital platforms could create potential market imbalances. Ensuring a level playing field is critical for protecting consumer choice and maintaining trust. In this regard, the European Commission's 2024 review of the definition of relevant markets for antitrust purposes is a timely and welcome step.

Through all of this, the role of central banks remains clear: to provide certainty in uncertain times. We must enable innovation while preserving trust, encourage competition while ensuring cohesion, and support progress without compromising prudence.

The path ahead may be complex but it is also full of potential. It is a path that we must navigate together -with clarity, coordination, and commitment.

## ENDNOTES

* (#fobtinate1029-padwlmicola Branzoli, Michele Lanotte and Stefano Pietrosanti for their assistance in preparing this welcome address.
- 1 Banca d'Italia -Conference on the Economics of Payments (https://www.bancaditalia.it/media/agenda/2025-09-18\_conference-onthe-economics-of-payments/).
- 2 Currently, more than 100 fast payments systems -such as Target Instant Payments Systems (TIPS) -exist at international level, allowing the settlement of payment on a 24/7 basis. Many jurisdictions are exploring interlinking arrangements between their domestic FPS and those of other countries in

order to increase the efficiency of cross-border payments. See Frost, J., Wilkens, P.K., Kosse, A., Shreeti,V. and Velasquez, C., 'Fast payments: design and adoption', BIS Quarterly Review, 2024.

- For an in-depth analysis of this aspect, see: C. Scotti et al, 'The Financial Stability Implications of Digital Assets' (2022), C. Scotti 'Financial and Tax Regulation for the Digital Era: Charting the Path Forward' (2025); Banca d'Italia, 'The Governor's Concluding Remarks' (2025).
- R. Ahmed and |. Aldasoro (2025), 'Stablecoins and safe asset prices', BIS Working Paper 1270.
- S. Cecchetti and K. Schoenholtz (2025), 'Crypto, tokenization, and the future of payments', CEPR Policy Insight No 146.
- According to the latest published report, as of 30 June 2025, USDT was backed by the following asset categories: approximately 80 per cent in cash, cash equivalents, and other short-term depositsincluding U.S. Treasuries and repurchase agreements -5.4 per cent in precious metals, 5.5 per cent in Bitcoin, 6.2 per cent in secured loans, and slightly less than 3 per cent in other investments. Corporate bonds were also present but represented less than 0.01 per cent of the total reserves. As for USDC, as of 31 July 2025, the token was primarily backed by US Treasuries and repurchase agreements, which accounted for around 86 per cent of the reserves. The remaining 14 per cent was held as cash at regulated financial institutions.
- Notably, although the structure of stablecoins resembles that of money market funds, their demand does not behave as though they were safe assets. See Aldasoro et al. (2025), 'Stablecoins, money market funds and monetary policy', Economics Letters, Volume 247, 112203.
- The US Federal Reserve Board estimates that more than 80 per cent of trade volume on major centralized crypto exchanges involve stablecoins. See Christopher J. Waller, 'Reflections on a maturing stablecoin market', Board of Governors of the Federal Reserve System, February 12, 2025; 'Share of Trade Volume by Pair Denomination', The Block

(https://www.theblock.co/data/crypto-markets/spot/share-of-tradevolume-by-pair-denomination), September 10, 2025.

- See Auer et al. (2025), 'DeFiying gravity? An empirical analysis of cross-border Bitcoin, Ether and stablecoin flows', BIS Working Paper n.1265.

## 10 A survey run by Artemis

(https://reports.artemisanalytics.com/stablecoins/artemis-stablecoinpayments-from-the-ground-up-2025.pdf), involving a sample of 33 stablecoins-based payments companies and firms on different type of stablecoins payments (B2B, P2P, B2C, Card etc.), B2B payments are the most

important, ($36 billion), followed by P2P ($18 billion run), card-linked payments ($13.2 billion), B2C ($3.3 billion), etc.

- 11 According to Chainalysis, stablecoins represent 63 per cent of all crypto transaction volume associated with illicit activity in 2024 -see Chainalysis 2025 Crypto Crime Report.
- 12 Italy's Financial Intelligence Unit, 'Annual Report 2024': Manna et al. (2025) 'Report on crypto-assets and the risk of money laundering' and Chainalyis, '2025 Crypto Crime Trends: Illicit Volumes Portend Record Year as On-Chain Crime Becomes Increasingly Diverse and Professionalized', 15 January 2025.
- 13 Boston Consulting Group, 'Stablecoins, five killer tests to gauge their potential', 2024.
- 14 See Regulation (EU) 2023/1114 (MiCAR), Titles IV, which set out requirements for stablecoins, including redemption at par value and consumer protection measures for e-money tokens pegged to a single fiat currency.
- 15 World Bank Remittance Prices Worldwide, March 202 (https://remittanceprices.worldbank.org/sites/default/files/rpw\_main\_repo rt\_and\_annex\_q224.pdf)5.
- 16 Chainalysis (2024): The 2024 Geography of Crypto Report, October.
- 17 Although stablecoins may address the aforementioned frictions, they can pose risks, especially when denominated in a foreign currency and operating from a foreign jurisdiction. These risks include currency substitution and potential loss of seigniorage, as well as volatile capital flows. In addition, currency substitution could undermine the ability of authorities to control the monetary policy. For more information, see CPMI's 'Considerations for the use of stablecoin arrangements in cross-border payments', October 2023.
- 18 al6zcrypto, 'State of Crypto Report 2024"".
- 19 M. Reuter, 'Decrypting Crypto: How to Estimate International Stablecoin Flows', IMF Working Paper, June 2025.
- 20 Di lorio et al (2025), 'The euro-stablecoin market and the impact of MiCAR', Banca d'Italia, mimeo.
- 21 See, for example, Ma, Y. et al. (2025), 'Stablecoin Runs and the Centralization of Arbitrage', NBER Working Paper Series n. 33882; Lyons, R.K. and G. Viswanath-Natraj (2023), 'What keeps stablecoins stable?', Journal of International Money and Finance, Volume 131, 102777; Aldasoro, et al. (2025), 'Stablecoin growth -policy challenges and approaches', BIS Bulletin n. 108.
- 22 See Regulation (EU) 2023/1114 of the European Parliament and of the Council of 31 May 2023 on markets in crypto assets, article 2.4 (Scope), and Working Group on Digital Assets (2025) 'Strengthening American Leadership in

## Digital Financial Technology (https://www.dwt.com/-/media/files/insights/2025/digitalassetsreporteo1

## 4178.pdf?

## rev=1ffa9b21bfd444d0aeebbcc85d77421f&amp;hash=585A49728392A2D56B 493670411D593E)'.

- 23 In the United States, Congress is working on the so-called Clarity Act, which will introduce definitions and compliance requirements for the rest of the digital asset ecosystem.
- 24 Neither the Genius Act nor MiCAR allows for interest payments to stablecoin token holders. In Europe, this provision also applies to CASPs. Without an explicit prohibition on exchanges acting as a distribution channel for stablecoin issuers or business affiliates, this requirement can easily be circumvented or undermined. On this point, see Banking Policy Institute (2025), 'Closing the Payment of Interest Loophole for Stablecoins'.
- 25 New crypto-asset rules to drive growth and protect consumers -GOV.UK (https://www.gov.uk/government/news/new-cryptoasset-rules-to-drivegrowth-and-protect-consumers)

26

See General Secretariat of the Council of the European Union (2025), 'Nonpaper on EU and third country stablecoin multi-issuance (ttps://data.consilium.europa.eu/doc/document/WK-4742-2025-COR1/en/pdf)'.

- 27 Odinet, C. and A. Tosato (forthcoming, 2026), 'Regulating Stablecoins: Comparing MiCAR and the GENIUS Act', Notre Dame Law Review Reflection.
- 28 A further element confirming this need is the fact that stablecoin holders could be prompted to massively demand the return of their value as a result of turbulence concerning issuances linked to less stringent jurisdictions. This could lead to systemic effects capable of undermining the payment system and financial stability.
- 29 Arnal J. (2025), 'Multi-issuance stablecoins and MiCA's first real credibility test (https://www.ecri.eu/publications/policy-briefs/multi-issuancestablecoins-and-mica%E2%80%99s-first-real-credibility-test)'.",Chiara Scotti
https://www.bis.org/review/r250924g.htm,Jerome H Powell: Economic outlook ,"Speech by Mr Jerome H Powell, Chair of the Board of Governors of the Federal Reserve System, at the Greater Providence Chamber of Commerce 2025 Economic Outlook Luncheon, Warwick, Rhode Island, 23 September 2025.",2025-09-23 00:00:00,"## Jerome H Powell: Economic outlook

Speech by Mr Jerome H Powell, Chair of the Board of Governors of the Federal Reserve System, at the Greater Providence Chamber of Commerce 2025 Economic Outlook Luncheon, Warwick, Rhode Island, 23 September 2025.

* * *

Thank you. It is a pleasure to be back here in Rhode Island. The last time I had the opportunity to speak to the Greater Providence Chamber of Commerce was in the fall of 2019. I noted then that, ""if the outlook changes materially, policy will change as well."" 1

Little did any of us know! Just a couple of months later, the COVID-19 pandemic arrived. Both the economy and our policy evolved dramatically in ways no one could have predicted. Along with actions by Congress, the Administration, and the private sector, the Fed's aggressive response helped stave off historically severe downside risks to the economy.

The COVID pandemic came on the heels of the painfully slow decade-long recovery from the Global Financial Crisis. These two back-to-back world historical crises have left behind scars that will be with us for a long time. In democracies around the world, public trust in economic and political institutions has been challenged. Those of us who are in public service at this time need to focus tightly on carrying out our critical missions to the best of our ability in the midst of stormy seas and powerful crosswinds.

Throughout this turbulent period, central banks like the Fed have had to develop innovative new policies that were designed to deliver on our statutory goals during times of crisis, rather than for everyday use. Despite these two unique, extremely large shocks, the U.S. economy has performed as well or better than other large, advanced economies around the world. As always, it is essential that we continue to look back and learn the right lessons from these difficult years, and that process has been ongoing for more than a decade.

Turning to the present day, the U.S. economy is showing resilience in the midst of substantial changes in trade and immigration policies, as well as in fiscal, regulatory and geopolitical arenas. These policies are still emerging, and their longer-term implications will take some time to be seen.

## Economic Outlook

Recent data show that the pace of economic growth has moderated. The unemployment rate is low but has edged up. Job gains have slowed, and the downside risks to employment have risen. At the same time, inflation has risen recently and remains somewhat elevated. In recent months, it has become clear that the balance of risks has shifted, prompting us to move our policy stance closer to neutral at our meeting last week.

GDP rose at a pace of around one and a half percent in the first half of the year, down from 2.5 percent growth last year. The moderation in growth largely reflects a slowdown

in consumer spending. Activity in the housing sector remains weak, but business investment in equipment and intangibles has picked up from last year's pace. As noted in the September Beige Book, a report that gathers qualitative information from across the Fed System, businesses continue to say that uncertainty is weighing on their outlook. Measures of consumer and business sentiment declined sharply in the spring; they have since moved up but remain low relative to the start of the year.

In the labor market, there has been a marked slowing in both the supply of and demand for workers-an unusual and challenging development. In this less dynamic and somewhat softer labor market, the downside risks to employment have risen. The unemployment rate edged up to 4.3 percent in August but has remained relatively stable at a low level over the past year. Payroll job gains slowed sharply over the summer months, as employers added an average of just 29,000 per month over the past three months. The recent pace of job creation appears to be running below the ""breakeven"" rate needed to hold the unemployment rate constant. But a number of other labor market indicators remain broadly stable. For example, the ratio of job openings to unemployment remains near 1. And multiple measures of job openings have been moving roughly sideways, as have initial claims for unemployment insurance.

Inflation has eased significantly from its highs of 2022 but remains somewhat elevated relative to our 2 percent longer-run goal. The latest available data indicate that total PCE prices rose 2.7 percent over the 12 months ending in August, up from 2.3 percent in August 2024. Excluding the volatile food and energy categories, core PCE prices rose 2.9 percent last month, also higher than the year-ago level. Goods prices, after falling last year, are driving the pickup in inflation. Incoming data and surveys suggest that those price increases largely reflect higher tariffs rather than broader price pressures. Disinflation for services continues, including for housing. Near-term measures of inflation expectations have moved up, on balance, over the course of this year on news about tariffs. Beyond the next year or so, however, most measures of longer-term expectations remain consistent with our 2 percent inflation goal.

The overall economic effects of the significant changes in trade, immigration, fiscal and regulatory policy remain to be seen. A reasonable base case is that the tariff-related effects on inflation will be relatively short lived-a one-time shift in the price level. A ""onetime"" increase does not mean ""all at once."" Tariff increases will likely take some time to work their way through supply chains. As a result, this one-time increase in the price level will likely be spread over several quarters and show up as somewhat higher inflation during that period.

But uncertainty around the path of inflation remains high. We will carefully assess and manage the risk of higher and more persistent inflation. We will make sure that this onetime increase in prices does not become an ongoing inflation problem.

## Monetary Policy

Near-term risks to inflation are tilted to the upside and risks to employment to the downside-a challenging situation. Two-sided risks mean that there is no risk-free path. If we ease too aggressively, we could leave the inflation job unfinished and need to

reverse course later to fully restore 2 percent inflation. If we maintain restrictive policy too long, the labor market could soften unnecessarily. When our goals are in tension like this, our framework calls for us to balance both sides of our dual mandate.

The increased downside risks to employment have shifted the balance of risks to achieving our goals. We therefore judged it appropriate at our last meeting to take another step toward a more neutral policy stance, lowering the target range for the federal funds rate by 25 basis points to 4 to 4-1/4 percent. This policy stance, which I see as still modestly restrictive, leaves us well positioned to respond to potential economic developments.

Our policy is not on a preset course. We will continue to determine the appropriate stance based on the incoming data, the evolving outlook, and the balance of risks. We remain committed to supporting maximum employment and bringing inflation sustainably to our 2 percent goal. Our success in delivering on these goals matters to all Americans. We understand that our actions affect communities, families, and businesses across the country.

Thank you again for having me here. I look forward to our discussion.

1  See Jerome H. Powell (2019),  ""Building on the Gains from the Long Expansion,"" speech delivered at the Annual Meeting of the Greater Providence Chamber of Commerce, Providence, Rhode Island, November 25, paragraph 21.",Jerome H Powell
https://www.bis.org/review/r250924c.htm,Chang Yong Rhee: Korea's integrated policy framework story - extending into the effective lower bound era ,"Text of the 2025 Michel Camdessus Central Banking Lecture by Mr Chang Yong Rhee, Governor of the Bank of Korea, at the International Monetary Fund, Washington DC, 18 September 2025.",2025-09-18 00:00:00,"## Korea's Integrated Policy Framework Story: Extending into the Effective Lower Bound Era

Speech by

## Rhee, Chang Yong

Governor of the Bank of Korea

2025 Michel Camdessus Central Banking Lecture

∗

International Monetary Fund

September 18, 2025

I am grateful to Ahrang Lee, Moon Sun Bae, Seunghyeon Lee, and Na Young Park from the Bank of Korea's Office of the Advisor to the Governor for their assistance in drafting this speech. I'd like to thank Tobias Adrian, Yongsung Chang, Gita Gopinath, Pierre-Olivier Gourinchas, Joong Shik Kang, Kenneth Kang, Jae Won Lee, Soohyung Lee, Ki Young Park, Alfred Schipke, Hyun Song Shin, Sethaput Suthiwart-Narueput, and Filiz Unsal for valuable comments. The views in this speech do not necessarily represent the official views of the Bank of Korea or its Monetary Policy Board.

Thank you for inviting me today-it's a tremendous privilege to give a speech in honor of Mr. Michel Camdessus, the longest-serving and highly esteemed Managing Director in the IMF's history. Seeing the distinguished speakers who came before me, I feel humbled to be standing at this podium today. Perhaps being an IMF alumnus worked in my favor, and I want to express my special gratitude to Managing Director Georgieva for giving me this opportunity.

When choosing today's topic, the Integrated Policy Framework (IPF) 1   came to mind without much deliberation. As Paul Krugman noted, it shows 'IMF's surprising intellectual flexibility,' 2   and I believe the IPF is a significant achievement the Fund can be proud of. 3   As Director of the Asia and Pacific Department, I witnessed this process closely, observing the countless rigorous debates by the Fund's economists, and the difficult task of reconciling sharp differences among member countries. The IPF was built on the intellectual drive and insight of David Lipton, Gita Gopinath, and Tobias Adrian in the early stages, and it may not have become the Fund's official view without MD Lagarde's and MD Georgieva's deep empathy for the challenges facing emerging market economies.

Today, as Governor of the Bank of Korea, I plan to cover two subjects. First, I'll look back at how Korea and the IPF have evolved together-how the framework has guided Korea's policy development, and conversely, how our experiences have helped shape the IPF itself. Second, as a newly advanced economy facing rapid population aging, Korea risks reaching the effective lower bound (ELB) in the distant future. I will examine whether unconventional monetary policy (UMP) tools, widely used in Japan and other advanced economies, can work for us, and if not, what alternatives might be available. These tools will be discussed in the context of whether the IPF scope can be expanded going forward.

1  Basu et al. (2025), which builds on their 2020 working paper 'A Conceptual Model for the Integrated Policy Framework'; Adrian et al. (2021).

2  Krugman (2012)

3  The 2022 BIS study on Macro-Financial Stability Frameworks highlighted the importance of an integrated policy mix-akin to the IPF-based on the experiences of central banks in Asian and Latin American emerging markets (Borio et al. 2022).

## Evolution of the IPF: From Korea's Perspective

Among the policy tools within the IPF, the most well-known are foreign exchange intervention (FXI), capital flow management measures (CFMs), and macroprudential policies. From an Asian perspective, the starting point of these discussions can be traced back to 1997.

At that time, under an IMF program, Korea adopted a floating exchange rate system and restrictive monetary and fiscal policies in line with the Washington Consensus. Malaysia, in contrast, responded with capital controls-an unorthodox prescription. Both countries experienced significant economic pain but recovered relatively quickly. Even today, there's no clear answer about which approach was superior. However, the crisis made one thing clear: the danger of foreign exchange (FX) mismatches. Asian economies reached a shared conclusion that external debt management was crucial and that building self-insurance through adequate foreign reserve accumulation was necessary.

However, when the 2008 Global Financial Crisis (GFC) erupted, they realized this approach alone wasn't sufficient. Unlike the Asian crisis, which stemmed from internal problems, the GFC originated from difficulties in advanced economies' financial institutions. Prior to the crisis, Korea maintained strict FX supervision over domestic banks but didn't pay sufficient attention to foreign bank branches that sourced massive short-term dollar funding from headquarters. We did not anticipate that major global banks could face dollar liquidity shortages, 4   or that hedging-related derivatives trading could trigger serious problems.

When the crisis hit, foreign bank branches operating in Korea couldn't roll over their short-term debt and shipbuilders-a key export industry-faced contract cancellations. This delayed expected dollar inflows, forcing them to buy dollars to close forward contracts previously sold for hedging. 5   The combined effect created a dramatic 60% won depreciation over seven months, severely destabilizing the FX

4  Lee and Rhee (2012)

5  Korean shipbuilders held $42 billion in net USD forward short positions in 2008, equivalent to 21% of the country's FX reserves or 13% of external debt. (Park and Kwon, 2010) With daily trading volume collapsing from $11 billion in Q1 to $4 billion in Q4, conversion of a portion of these positions into spot USD demand drove the exchange rate higher.

market until the Fed established temporary currency swap lines with four EM central banks, including Korea.

Following the GFC, Korea recognized the new need to manage foreign bank branches' FX liquidity and derivatives-related FX volatility risks. We introduced measures to curb capital surges, including Caps on FX Forward Positions and the FX Stability Levy, extending them to foreign bank branches. From Korea's standpoint, these were macroprudential tools, and the IMF Financial Sector Assessment Program (FSAP) also acknowledged them as legitimate macroprudential instruments. 6   The OECD, which initially viewed them as violations of the Code of Liberalization, subsequently amended the Code although it took several years until 2019.

Meanwhile, advanced economies' quantitative easing (QE) in the aftermath of the GFC sparked broader interest in the IPF beyond Asia, particularly in Latin America. QE drove capital surges into emerging markets, appreciating their currencies. Brazilian Finance Minister Mantega famously declared: 'We're in the midst of an international currency war,' arguing that capital controls and FXI were 'legitimate measures of self-defense.' 7   These instruments were now recognized not as deviant measures by a few countries, but as policy tools emerging markets could widely adopt.

Korea represents perhaps a unique case, having experienced the necessity and effectiveness of IPF tools firsthand at each stage of development-from emerging to advanced economy-over the past thirty years. The IPF's FXI guidelines identify three frictions warranting intervention to safeguard price and financial stability: FX mismatch, unanchored inflation expectations, and shallow FX markets. 8   Before 2000, Korea faced all three-we had substantial foreign currency debt, and neither inflation targeting nor floating exchange rates were well established. From the mid2000s, inflation expectations began anchoring, and from 2014, Korea became a net creditor in international financial markets, with the frictions gradually easing.

However, when I took office as Governor in 2022, FXI still remained necessary due to shallow FX markets. In the second half of 2022, as the Fed implemented four

6  IMF (2014)

7  Speech in São Paulo (2010); Mantega (2011)

8  IMF (2023)

consecutive 'giant step' rate hikes, the won-dollar exchange rate rose sharply. When the won depreciated faster than market expectations, margin calls were triggered on FX derivative contracts. As market participants scrambled to meet collateral requirements, domestic money markets also tightened. While the Bank of Korea recognized flexible exchange rates as important shock absorbers, we had to temporarily intervene-not to target a specific level, but to slow the excessively rapid depreciation and buy some time for markets to address margin calls. This episode demonstrates how FXI becomes inevitable when structural vulnerabilities exist in FX markets. 9

Domestically, macroprudential measures have taken on greater importance. Household debt in Korea has steadily risen to 90% of GDP-well above the threshold where it begins to weigh on economic growth. 10   Since I took office, we've worked closely with supervisory authorities to reduce the ratio toward 80% steadily to enhance capital allocation efficiency. Recently, we decided to slow down the easing cycle in light of macroprudential concerns. 11   Going forward, I believe the day will come when Korea no longer needs FXI and CFMs, once our government bonds are included in global advanced-economy indices and ongoing FX market reforms bear fruit. But macroprudential policies will continue to be important in supporting financial stability.

## UMP, a New Tool in IPF?

Having examined the IPF's evolution, let me now turn to a more forward-looking perspective. I understand the IPF is currently exploring the inclusion of fiscal policy as another tool. 12   In addition, I am particularly interested in whether UMP could be incorporated as a new IPF instrument. One might wonder how UMP relates to the IPF's original scope, as the IPF focuses on managing external shocks, while UMP addresses monetary policy at the ELB. However, if we take an expansive view that the

9  Korea's daily FX turnover (7.9% of GDP) is close to the emerging market average (5.6%) but well below advanced economies (30.3%). FX forwards, with significant offshore trading, comprise 50.1% of all transactions, far exceeding spot (24.7%) and FX swaps (19.5%). (Source: BIS, as of 2022)

10  Lombardi et al. (2017)

11  See Rhee (2025) for a more detailed discussion.

12  Basu and Gopinath (2024)

IPF seeks to coordinate policy instruments to address main frictions in EMs, I think UMP could be integrated into the framework.

Global crises provide several instances where emerging markets have adopted UMPs. Once regarded as taboo, these measures became more acceptable after advanced economy central banks actively employed them, thereby reducing the stigma effect. Indeed, during the pandemic, multiple emerging markets implemented QE alongside large-scale fiscal stimulus. 13

A memorable case for me was Indonesia. In 2020, at the peak of COVID-19, Bank Indonesia launched the Burden-Sharing Program involving direct purchases of government bonds in the primary market. It explained that, given the small size of its government bond market, large-scale bond issuance could have pushed up interest rates and risked a credit rating downgrade, necessitating measures to ensure market functioning. Despite concerns over fiscal monetization, the program helped Indonesia overcome the crisis without a credit downgrade and meet its 3%-of-GDP fiscal deficit target two years later as planned. With the pandemic being an exceptional situation, market reactions remained relatively benign.

Should Korea face a similar situation, I would likely draw on Bank Indonesia's approach while addressing fiscal monetization concerns. For example, the government could provide equity to establish a Special Purpose Vehicle (SPV), and the central bank could purchase senior bonds issued by the SPV to channel funds where needed, underpinned by proper governance and a transparent exit strategy. Government equity would absorb credit risks first, preserving the central bank's lossminimization principle while avoiding massive bond issuance and rating concerns. This approach resembles the U.S. Treasury and Fed's Main Street Lending Program during the pandemic, as Kenneth Kang and I discussed in an IMF staff note. 14

However, my main interest lies not in global crisis situations, but in whether individual emerging markets can use UMP when facing secular stagnation at the ELB. Korea increasingly faces this possibility due to extremely low birth rates and rapid aging, and Asian emerging markets like China and Thailand face similar risks. In my 2022 Jackson Hole paper co-authored with Douglas Laxton, we expressed

13  For details, see Kirti et al. (2022).

14  Kang and Rhee (2020)

reservations about UMP for emerging markets in general. These economies typically have fragile fundamentals, heavy foreign currency debt, and un-anchored inflation expectations. Large-scale fiscal and monetary expansion makes it difficult to maintain policy credibility, raising risks of speculative attacks and sharp depreciation.

That said, Korea is no longer a typical emerging market. Inflation expectations are wellanchored, fiscal discipline is trusted, and Korea has been a net external creditor for over a decade. Therefore, I often hear advice that Switzerland and Sweden-small open 'advanced' economies-would be more suitable models for Korea. In response to the ELB, Switzerland used large-scale FXI and negative interest rate policies to ease Swiss franc appreciation pressure, while Sweden chose QE to lower long-term rates. Research indicates that both QE and FXI worked mainly through currency depreciation. 15

I believe Korea should proceed cautiously in following their examples. Surely, FXI could boost inflation via depreciation. Yet unintended risks could arise, as the won is not fully convertible like the Swiss franc and Swedish krona. Persistent expectation of depreciation could spark capital outflows, potentially causing 'surplus bankruptcy' from dollar liquidity shortages, despite our net creditor status. 16   Moreover, if perceived as targeting export competitiveness, FXI could trigger trade disputes.

What about QE similar to Sweden's? Korea's relatively small government bond market could make it easier to lower long-term rates. However, this might create severe collateral scarcity by draining high-quality liquid assets from the market. In particular, non-bank financial institutions without access to central bank reserve accounts could face real liquidity strains. If QE shifts our corridor system to a floor system, the lower opportunity cost of holding reserves would shrink the interbank market, impairing liquidity redistribution. 17   Experience from advanced economies shows that such market activity is hard to revive once lost.

15  Sweden's QE (1% of GDP) increased inflation by 0.1% and GDP by 0.1% via a 0.7% real depreciation (Klein and Zhang 2025, Kolasa et al. 2025). Switzerland's FXI prevented appreciation by 17% and raised GDP by 5.5% (Cwik and Winter 2024).

16  Exchange rate swings can amplify dollar losses for global investors in local-currency assets, triggering capital outflows from emerging markets. Carstens and Shin (2019) named this migration of currency risk as 'Original Sin Redux.'

17 Admittedly, QE implementation could still maintain a corridor system, as Sweden did by absorbing

Furthermore, we would confront the dilemma facing advanced economies today. Potential balance sheet losses from QE normalization could make central banks hesitant to raise interest rates-what Carmen Reinhart termed 'fear of hiking.' 18   If large-scale losses materialize, both institutional reputation and operational independence could be compromised. Indeed, the Fed and the ECB now appear to be taking a more cautious stance about potential side effects of QE.

Most importantly, policy effectiveness is questionable. As seen in Japan in the early 2000s and Sweden in the late 2010s, 19   even when QE lowers long-term rates, its impact may not reach households and companies effectively. In Korea, currency depreciation now offers smaller export benefits due to supply chain relocations and the dominant currency paradigm, 20   while posing greater financial stability risks through potentially non-linear depreciation in our shallow FX market. In such circumstances, large-scale QE would more likely fuel real estate inflation than stimulate the real economy, further worsening our already critically low birth rate.

Given these considerations, FXI or QE appear ill-suited to Korea.

## Funding for Lending as a New IPF Tool?

As an alternative to UMP, I would like to propose considering a funding for lending (FFL) scheme, despite potential controversy. In FFL, central banks provide lowinterest funding to private financial institutions, which then channel credit to targeted sectors. In fact, FFL is more widely employed by central banks worldwideboth advanced and emerging-than many realize. 21

Korea also has long used this lending facility known as the Bank Intermediated Lending Support Facility. In the 1980s, it functioned as an automatic rediscounting

liquidity from long-term bond purchases through short-term 'Riksbank Certificates' and reverse repos. Nevertheless, the duration risk from holding long-term bonds remains, creating exposure to capital losses in the event of rate hikes.

18  Reinhart (2025); The IMF (2019) and Borio (2020) have termed this 'modern fiscal dominance' or 'subtle forms of fiscal dominance'.

19  Flodén (2022) assessed that the Riksbank's asset purchases strengthened confidence in the inflation target, but the decline in long-term interest rates was small relative to the cost, and there are no clear signs that QE led to a fall in the financing costs of households and companies.

20  Gopinath et al. (2020)

21  For detailed surveys, see BIS (2023) and Kirti et al. (2022).

system for commercial papers with a strong industrial policy focus and a scale reaching over 10% of GDP at its peak. 22   Today, this program has shrunk to about 12% of GDP, amid growing calls for its abolition given its quasi-fiscal nature.

Yet, our monetary policy decisions early this year demonstrated the potential for this facility to complement monetary policy. In Korea, the unexpected and unnecessary martial law declaration last December caused the economy to contract sharply. Consumer sentiment and domestic demand, especially sales by the self-employed, plummeted, warranting rate cuts. However, at the January Monetary Policy Board meeting, we maintained rates, because political uncertainty had turned overseas investor sentiment negative, causing our currency to fall to its lowest level since the GFC. Rather than immediately cutting rates, we used the lending facility to provide targeted support to the self-employed and SMEs while waiting for political uncertainty to ease. This illustrated how such targeted measures can address the limitations of interest rate policy as a 'blunt tool.'

Could these lending facilities serve as an alternative when interest rates approach the ELB? As textbooks tell us, fiscal policy is more effective than monetary policy in a liquidity trap, and monetary policy should not become 'the only game in town.' 23   In that context, I wonder whether quasi-fiscal tools such as FFL could be more effective than UMP.

I am fully aware that the use of quasi-fiscal tools has long been controversial in the central banking community-particularly regarding fiscal dominance and central bank independence. However, I hope we can have a slightly different perspective for two reasons. First, QE is not completely immune from criticism of this nature as it effectively supports government financing by relieving debt-service burden. Moreover, to lower long-term interest rates, QE must be implemented on a large scale, making it difficult to avoid side effects such as asset price inflation and thereby worsening inequality. If risky assets are purchased, it may be perceived as bailing out financial institutions rather than supporting the real economy, contributing to public distrust of central banks-as reflected in movements like Occupy Wall Street. As an

22  Kwon (2020)

23  El-Erian (2016)

unelected power, 24   central banks and their independence are more vulnerable than elected officials to the loss of public trust.

Second, theoretically, when specific sectors are particularly depressed, it becomes socially optimal to tilt wealth distribution toward agents who spend more in those sectors, boosting demand where needed most-though private agents fail to internalize this benefit, as shown by Farhi and Werning (2016). This aggregate demand externality can justify targeted or sector-specific monetary policy interventions like FFL. 25   In this context, just as ongoing work on the IPF incorporates fiscal policy, I wonder whether FFL can be introduced as an additional policy tool for the IPF.

Needless to say, employing FFL requires careful institutional design to mitigate risks of fiscal dominance and independence erosion. This should include reasonable quantity limits, usage restrictions, and exit strategies-all pre-determined. Government credit guarantees must be provided when the lending facility exceeds a certain scale-a practice adopted by several countries during crises. With that in mind, I hope the IMF would explore whether this approach could be a valuable addition to the policy toolkit.

Before concluding, I'd like to say a few words about another tool relevant to ELB situations: forward guidance. Following the GFC, advanced economy central banks actively used unconditional forward guidance (UCFG) 26   to escape the ELB, providing information about future monetary policy qualitatively or based on specific timeframes or thresholds. While multiple experiences proved UCFG's effectiveness in signaling policy commitment, most central banks have now turned away from it during post-pandemic high inflation due to perceived lack of policy flexibility.

That said, I do not believe conditional forward guidance (CFG) should also be ruled out. 'Conditional' FG presents an endogenous interest rate path consistent with the economic outlook. Previously, the Bank of Korea maintained the view that even CFG was problematic, concerned that markets might interpret guidance as a promise despite its conditional language, and that credibility would suffer if rates deviated

24  Tucker (2018)

25  Filiz Unsal provided this insight.

26  Laxton and Rhee (2022)

from pre-announced levels. However, this conservative approach withholds useful information from markets and weakens incentives to enhance internal forecasting capabilities by avoiding external scrutiny.

To improve this practice, the Bank of Korea is conducting FG pilot tests. Staff present quarterly growth and inflation forecasts for the next two years alongside corresponding interest rate paths. Six Monetary Policy Board members, excluding myself, then indicate their views on the rate path for the next year using dots. 27 While the growth and inflation forecasts are public, the interest rate paths remain internal. Instead, we publish a dot plot showing Board members' views over a threemonth horizon-markets call this the 'K-dot plot.' 28   If this system takes root with expanded horizons, we expect it to become an effective channel for monetary policy communication, including under the ELB.

## Concluding Remarks

Let me wrap up with some final thoughts.

I have discussed the historical development of the IPF and various policy tools that Korea and other emerging economies might consider in an ELB situation. Yet, considering that the ELB risk in Korea is mainly driven by structural factors like population aging and low birth rates, I believe the best policy to counter the ELB is not reactive fiscal or monetary intervention, but proactive prevention through structural reforms. 29   This is why, since taking office as Governor, I have led the Bank of Korea to expand its research beyond monetary policy to include structural issues tied to long-term growth, such as labor force participation, immigration, and regional development. These are the types of reforms that address root causes rather than symptoms.

27  The Governor does not participate to preserve policy flexibility. A separate pilot allows members to plot 2-3 dots per horizon to indicate probabilistic rate views.

28  The K-dot plot presents members' policy rate views conditional on a common staff baseline. In comparison, FOMC members use their own assumptions to generate independent forecasts in the Fed's dot plot.

29  Former Governor of the Bank of Japan, Masaaki Shirakawa also expressed a similar view in his autobiography (Shirakawa 2018).

Nevertheless, we must be prepared for the possibility that we may inevitably enter an ELB environment in the distant future. The policy options I suggested today will surely be controversial, but I look forward to the IMF's continued engagement on this critical issue, and the development of a richer playbook for policy responses.

In sum, I hope that Korea's IPF story, forged during its journey from an emerging to an advanced economy, can serve as a useful reference for other countries navigating similar transitions. Thank you once again for inviting me to deliver the Camdessus Lecture.

Thank you.

## References

| Adrian, T., Erceg, C., Kolasa, M., Linde, J., & Zabczyk, P., 2021, 'A Quantitative Microfounded Model for the Integrated Policy Framework,' IMF Working Paper No. 21/292.   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Bank for International Settlements, 2023, 'Funding for Lending Programmes,' Report by the Markets Committee, January 2023.                                                  |
| Basu, S., Boz, E., Gopinath, G., Roch, F., & Unsal, F., 2025, 'Integrated Monetary and Financial Policies for Small Open Economies,' Econometrica, forthcoming .            |
| Basu, S., & Gopinath, G., 2024, 'An Integrated Policy Framework (IPF) Diagram for International Economics,' IMF Working Paper No. 24/38.                                    |
| Borio, C., 2020, 'Monetary Policy and Fiscal Dominance,' BIS Working Papers.                                                                                                |
| Borio, C., Shim, I., & Shin, H. S., 2022, 'Macro-financial Stability Frameworks: Experience and Challenges,' BIS Working Paper No. 1057.                                    |
| Carstens, A., & Shin, H. S., 2019, 'Emerging Markets Aren't Out of the Woods Yet,' Foreign Affairs Magazine, March.                                                         |
| Cwik, T., & Winter, C., 2024, 'FX interventions as a form of unconventional monetary policy,' SNB Working Papers No. 4/2024.                                                |
| El-Erian, M., 2016, 'The only game in town: Central banks, instability, and avoiding the next collapse,' Random House.                                                      |
| Farhi, E., & Werning, I., 2016, 'A Theory of Macroprudential Policies in the Presence of Nominal Rigidities,' Econometrica, 84(5), 1645-1704.                               |
| Flodén, M., 2022, 'My thoughts on the Riksbank's asset purchases,' Speech presented at Handelsbanken, Stockholm, Sweden, Sveriges Riksbank.                                 |
| Gopinath, G., Boz, E., Casas, C., Díez, F., Gourinchas, P., &Plagborg-Møller, M., 2020, 'Dominant Currency Paradigm,' American Economic Review, 110 (3).                    |
| International Monetary Fund, 2014, 'Republic of Korea: Financial System Stability Assessment,' IMF Country Report No. 14/126.                                               |
| D., Liu, Y., Martinez Peria, S., Mishra, P., & Strasky, J., 2022, Economic and Financial Policies During COVID-19: An Database,' IMF Working Paper No. 22/114.              |
| 'Tracking Announcement-Level                                                                                                                                                |
| Kirti,                                                                                                                                                                      |

Kolasa, M., Laseen, S., &amp; Linde, J., 2025, 'Unconventional Monetary Policies in Small Open Economies,' IMF Working Paper No. 25/66.

Krugman, P., 2012, 'The IMF and Capital Controls,' The Opinion Pages of The New York Times.

Kwon, S., 2020, 'An Analysis of the Quasi-fiscal Activities of the Bank of Korea from the Perspective of Historical Institutionalism: Focusing on the Bank Intermediated Lending Support Facility,' Journal of Budget and Policy (in Korean).

Laxton, D., &amp; Rhee, C. Y., 2022, 'Lessons from Unconventional Monetary Policy for Small  Open  Economies  and  Emerging  Markets,'  Jackson  Hole  Symposium Proceedings.

Lee, H., &amp; Rhee, C., 2012, 'Lessons from the 1997 and the 2008 Crises in the Republic of Korea,' ADB Economics Working Paper Series No.298.

Lombardi, M. J., Mohanty, M., &amp; Shim, I., 2017, 'The Real Effects of Household Debt in the Short and Long Run,' BIS Working Papers No. 607.

Mantega,  G.,  2011,  'Statement  at  the  Twenty-Third  Meeting  of  the  International Monetary and Financial Committee,' April 16.

Park, Y., &amp; Kwon, K., 2010, 'Impact of FX Hedging by Shipbuilders on the Foreign Exchange Market,' Bank of Korea Monthly Bulletin (in Korean).

Reinhart, C. M., 2025, 'Monetary Policy and High Government Debt,' BIS 24th Annual Conference, June 27.

Rhee, C. Y., 2025, 'Post-Pandemic Monetary Policy in Korea: Toward an Integrated Policy Framework,' Journal of International Money and Finance, forthcoming.

Shirakawa,  M.,  2018.  'Central  Bank:  39  Years  of  Experience  as  a  Central  Banker [Japanese edition],' Toyo Keizai Inc. Korean edition published as 'What Can We Learn from Japan's 30 Years of Experience?' (2024), Buki Publishing.

Tucker, P., 2018, 'Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State,' Princeton University Press.",Chang Yong Rhee
https://www.bis.org/review/r250922d.htm,Kevin Greenidge: Boosting financial resilience - managing risk and uncertainty for macroeconomic stability and growth,"Speech by Dr Kevin Greenidge, Governor of the Central Bank of Barbados, at the Caribbean Knowledge Forum 2025, organised by the CAF and The University of the West Indies, Sagicor Cave Hill School of Business and Management, Bridgetown, 19 August 2025.",2025-08-19 00:00:00,"## Kevin Greenidge: Boosting financial resilience - managing risk and uncertainty for macroeconomic stability and growth

Speech by Dr Kevin Greenidge, Governor of the Central Bank of Barbados, at the Caribbean Knowledge Forum 2025, organised by the CAF and The University of the West Indies, Sagicor Cave Hill School of Business and Management, Bridgetown, 19 August 2025.

* * *

Colleagues, partners, and friends, thank you to CAF and The University of the West Indies for convening this Forum in Barbados. You set a clear purpose, build shared understanding across institutions, and ask us to translate knowledge into real outcomes for Caribbean people. That is what I intend to do today, with clarity, candour, and a plan.

The case for resilience in one sentence : we will not control the shocks that hit us, but we can control the buffers, rules, and systems that decide whether a shock becomes a crisis or just a difficult quarter.

## 1. Where We Stand Now

The global picture matters for small, open, tourism intensive economies. Most outlooks put Latin America and the Caribbean near two percent growth in 2025, with tighter financing conditions and elevated uncertainty. That is not a strong external wind at our back. It demands stronger domestic anchors and smarter risk tools.

We also face a structural risk that sits above the cycle. Small states suffer materially higher disaster losses than larger economies. On average, annual disaster costs for small states sit near two percent of GDP, several times the burden in larger countries. In the Caribbean, individual events can erase years of capital formation in one night.

Two facts focus the mind. Hurricane Maria inflicted damage on Dominica estimated at about two hundred twenty six percent of GDP in 2017. Hurricane Dorian caused about three point four billion dollars of losses in The Bahamas in 2019, near one quarter of GDP. These are not outliers, they are signals for policy design.

## 2. What We Have Learned in the Region

Discipline pays. Jamaica put in place fiscal rules, independent oversight, and a mediumterm plan. The result was a reduction in public debt from around one 144 percent of GDP in 2012 to about 72 percent in 2023, with a clear path toward sixty percent by 2028 under law. The lesson is simple, anchors work when they bite.

Barbados pursued a home-grown adjustment called BERT with the IMF's Extended Fund Facility and leveraged the Resilience and Sustainability Facility for climate and financial stability reforms. By June 2025, public debt had fallen from 178.9 percent of GDP in 2018 to 102 percent at end-July 2025, reserves covered more than nine months of imports, and all program targets met. That progress is real, but it is not the finish line.

On risk transfer, the region built something the world studies. CCRIF, our parametric insurance pool, pays quickly when people need it most. After Hurricane Beryl in 2024, CCRIF disbursed across several members, including a large payout to Grenada and additional payouts to utilities and fisheries covers.

We also innovated with state contingent finance. Barbados' blue bond embedded clauses that pause debt service after a qualifying natural disaster or a pandemic, a direct way to preserve scarce foreign exchange and redirect cash to relief. Debt pause clauses moved from concept to use, with first real world triggers after Beryl. The lesson is simple; resilience requires proactive design, not reactive fixes.

## 3. The Pillars of Financial Resilience We Must Strengthen

I will set out six pillars. Each pillar comes with a policy ask, an example, and a metric we should track.

Pillar one: macro anchors and buffers that absorb shocks (keep the economy liquid during shocks, keep policy credible, and stop a disaster from turning into a macro crisis.)

## Policy ask

- Lock a clear debt anchor and fiscal rule, publish an annual fiscal risk statement that quantifies expected disaster losses and the financing stack
- Embed automatic liquidity relief in the debt stock, and codify contingency draw procedures, including preclearance for emergency spending
- Manage the liability profile for risk. Lengthen average time to maturity, raise the share of fixed rate debt, and keep adequate reserves.

## Examples

Barbados' framework permits temporary deferral of principal and interest after a qualifying disaster or a pandemic. Since 2018, instruments include natural disaster clauses that allow capitalized interest and a two-year deferral when objective triggers are met. The medium-term debt strategy sets a sixty percent debt anchor by fiscal year 2035 to 2036 and defines rollover and interest rate risk indicators. Contingent liquidity stands in place through an IDB disaster line and a World Bank Disaster Risk Management Development Policy Loan with Cat DDO approved in April 2025. BOSS Plus retail notes broaden the investor base and lengthen maturities.

## Metrics to track

- Primary balance delivered, interest to revenue ratio, and months of reserves
- Average time to maturity, share of fixed rate debt, and share of the portfolio with disaster or pandemic clauses
- Days from disaster to first budget release, days to Cat DDO draw, and days to CCRIF payout reaching the treasury

Pillar two: layered risk financing that pays quickly and predictably (this pillar is about getting cash in quickly when a shock hits).

## Policy ask

- Build and maintain a standing stack of instruments that convert disasters into manageable budget events, from budget buffers to insurance to contingent credit to swaps
- Size coverage to asset exposure, set clear attachment points, and pre-arrange draw and payout procedures so execution is automatic

## Examples

- Layer A, budget buffers and immediate liquidity: define a contingency line for the first seventy-two hours, with pre-arranged authorizations
- Layer B, CCRIF parametric insurance: after Beryl in 2024, CCRIF paid out across several members in days, including a large payout to Grenada, plus utility and fisheries covers, and significant payouts to Jamaica on cyclone and excess rainfall. Cumulative payouts since inception are near US$400 million.
- Layer C, sovereign cat bond or reinsurance: Jamaica renewed a US$150 million World Bank facilitated cat bond in 2024 for seasons through 2026. This complements CCRIF and does not add debt.
- Layer D, contingent credit that draws fast: Barbados secured a US$30 million World Bank Cat DDO in April 2025, pre-approved liquidity upon a declared emergency.
- Layer E, resilience swaps and guaranteed loans:
- September 2022 blue loan and debt for nature conversion, more than US$150 million refinanced, about US$50 million savings over fifteen years directed to conservation, with disaster and pandemic clauses.
- November 2024 debt for climate swap, nearly US$300 million, guarantees from multilateral partners, about US$110 million savings over ten years for the South Coast Water Reclamation Project, with sustainability linked targets and disaster and pandemic clauses.
- Layer F, national micro and meso covers: Extend microinsurance for fishers and farmers, and parametric covers for utilities and cooperatives. Micro means individual households or small businesses. Meso means coverage taken out by a utility, cooperative, or financial institution on behalf of its members or customers. After Beryl, CCRIF paid Grenada's electric utility and fisheries cooperative under meso policies. This kind of non-sovereign cover speeds network restoration, protects livelihoods, and reduces pressure on the government budget.

## Metrics to track

- Days from event to cash in the treasury, measured in days for each layer.
- CCRIF coverage versus modeled losses and exposure.
- Number of participating utilities and sectors holding meso or micro parametric covers.

Pillar three: climate smart debt and capital markets (this pillar is about changing your debt so you do not have to send cash out during a shock).

## Policy ask

Standardize disaster and pandemic clauses across sovereign borrowing, extend where feasible to SOE debt and public private partnerships, and complement clauses with upper layer risk transfer, for example cat bonds, to limit tail risk.

## Examples

- Barbados: instruments since 2018 include natural disaster clauses with objective triggers and two-year deferrals. The legal framework allows temporary deferral after qualifying disasters or a pandemic.
- Region: Grenada pioneered hurricane clauses in its 2015 restructuring and activated a clause after Beryl in 2024. Belize's 2021 blue bond carries disaster protections.
- Complementarity: Jamaica uses a sovereign cat bond rather than clauses in the debt stock, which delivers liquidity without adding debt when a severe event hits.

## Metrics to track

- Share of the debt stock with disaster or pandemic clauses.
- Number of automatic pauses triggered, and days of cash flow relief gained
- Presence and size of upper layer risk transfer, for example cat bonds or reinsurance

Pillar four: resilient and inclusive financial systems (this is about keeping financial intermediation, payments, and confidence intact during stress)

## Policy ask

- Maintain strong capital and liquidity buffers
- Run climate and cyber stress tests
- Strengthen resolution and deposit insurance frameworks
- Treat cyber as a macrofinancial risk with timely incident reporting and sector wide exercises that include payments and core public systems

## Examples

- Annual system wide cyber stress tests that include payment rails and telecom dependencies
- Supervisory rules with clear timelines for incident reporting and remediation
- Joint tabletop exercises across banks, payment providers, telecoms, and key public agencies

## Metrics to track

- Coverage of cyber incident reporting across supervised entities
- Findings and remediation from annual cyber stress tests
- Mean time to recovery for real time gross settlement and instant payment rails

Pillar five: modern payments and digital public goods (lower transaction costs, widen inclusion, and keep commerce running during shocks.)

## Policy ask

- Deliver national instant payments with mandatory participation for core institutions, and connect regionally through CAPSS to lower cost, raise speed, and sustain commerce during shocks
- Centralize customer due diligence utilities and e KYC to cut onboarding time and cost while keeping compliance strong
- Guarantee access with at least one no fee basic bank account per bank

## Examples

- Regional cross border rails : CARICOM central banks agreed in principle to adopt the CARICOM Payments and Settlements System to deliver instant local currency payments across the region. The pilot includes Barbados, The Bahamas, and ECCB member states. The design mirrors real-time systems that have lowered costs elsewhere.
- National instant payments : Barbados has already moved to procure and implement a national instant payments solution, with mandatory participation to ensure interoperability. This is good policy because it reduces costs for households and firms, widens inclusion, and supports resilience
- Inclusion baseline : Banks in Barbados now offer at least one account with no maintenance fee, which can be linked to instant payments and digital wallets for rapid social transfers aftershocks.

## Metrics to track

- Instant payment adoption rate among adults and firms, and average transaction fee levels.
- Onboarding time using e KYC, and coverage of shared CDD utilities.
- Share of adults with a no fee account, and time to deliver emergency transfers at scale

Pillar six: partnerships that move cash and capacity, not just communiquØs (secure affordable long tenor finance for resilience reforms and standardize tools that raise execution quality)

## Policy ask

- Align CAF, the IMF's RSF, the IDB, the World Bank, CDB, Afreximbank, and private capital in a coherent program, with affordable, long tenor finance tied to macro critical reforms
- Standardize regional public goods for capacity, for example climate budget tagging, shared e KYC standards, shared cyber playbooks, and training for risk officers and project managers

## Examples

- Barbados' program sequence with the EFF and RSF to lock reforms and finance resilience

- Co-financing models that pair liability management operations, for example swaps, with hard investment in water and coastal resilience
- Regional toolkits issued jointly by central banks and finance ministries, adopted across members rather than bespoke in each country.

## Metrics to track

- Share of public investment that passes climate and disaster screening
- Average time from project appraisal to first disbursement, and annual execution rates
- Number of agencies certified on shared e KYC and cyber playbooks, and frequency of joint exercises

## 4. What We Must Stop Doing

I will be blunt. We must stop treating resilience as a list of projects with photos. Think in balance sheets, cash flows, and triggers. We must stop assuming that grants will arrive on time and at scale. Grants are welcome, they are not a strategy.

We must stop defaulting to debt after every shock. Debt has a place, but our first action should be to trigger insurance and pause clauses we already paid for, then draw contingent credit, then use budget contingencies, and only then seek new borrowing.

We must stop underestimating cyber risk. A payments outage during a disaster multiplies harm. The IMF's analysis is clear on the macro risk that cyber incidents pose. Build cyber into prudential supervision and national risk assessments now.

We must stop tolerating friction in cross border payments that punishes our exporters, our diaspora, and our small firms. If CAPSS can lower cost and cut days to minutes while keeping compliance strong, finish the pilot and scale it.

## 5. Where to Push Next, with Timelines and Accountability

First, make disaster risk visible in the budget. Use a fiscal risk statement that quantifies expected annual losses, shows the financing stack, and lists contingent liabilities. The IMF and World Bank have templates. If the average annual loss sits near two percent of GDP for small states, and higher for some Caribbean countries, then plan for it rather than hope it away.

Second, complete layered risk financing. Increase CCRIF coverage to keep pace with asset growth and urban exposure. Add or renew cat bonds where model risk is acceptable for the peril, and negotiate parametric features to suit local hazard profiles. After Dorian and Maria, nobody needs persuasion that seconds matter. The question is whether we pay for cover in advance or pay a lot more after the fact.

Third, mainstream state contingent debt. Push for pause clauses in all new multilateral and bilateral loans, and negotiate triggers that match our hazard patterns. Where market access allows, include such clauses in domestic and external bonds. Early adopters have shown the way.

Fourth, harden the financial system. Require cyber incident reporting across regulated entities. Run joint supervisory cyber exercises. Use IMF style simulation tools to stress test payment networks against cyber incidents. Share findings with industry and fix gaps.

Fifth, finish the digital rails. Deliver instant payments nationally and connect regionally through CAPSS. Centralize e KYC and CDD utilities to reduce onboarding time and cost while meeting compliance obligations. Ensure mandatory participation so that no consumer or business is stranded on the wrong network. These are not technology projects, they are competitiveness and resilience projects.

Sixth, keep inclusion at the center. Policies like no maintenance fee bank accounts are not small. They move the base of the pyramid into the formal system and improve the reach of social protection in a crisis. Link them to instant payments, and integrate them with social protection systems so transfers reach people quickly after shocks.

## 6. What Success Looks Like in Three Years

This Forum should not end with good conversations. It should end with targets we can measure.

- Debt and buffers : debt on a firm downward path with clear primary surplus targets in place, at least three months of import cover in reserves, and disaster clauses embedded in a meaningful share of the debt stock.
- Risk transfer : CCRIF coverage sized to current exposures, at least one cat bond or contingent credit line in place per high risk sovereign, and time to cash under thirty days from event to treasury receipt.
- Payments and inclusion : instant payments live nationally and connected regionally through CAPSS, with adoption above eighty percent among adults and small firms, and widespread availability of no maintenance fee accounts.
- Cyber resilience : supervisory cyber incident reporting implemented, at least one system wide cyber stress test completed each year, and measurable improvement in recovery times for critical payment services.

## 7. Hard Truths and a Commitment

I promised you candour. Here it is.

We often underinvest in maintenance and project execution, then we blame financing when assets fail early. We sometimes protect yesterday's subsidies more than we protect tomorrow's resilience. We sometimes avoid difficult reforms because they are politically costly. These habits cost more than any grant we hope to receive.

My commitment is simple. We will keep macro anchors credible. We will push layered risk financing. We will treat payments and cyber as core infrastructure. We will insist on inclusion so that resilience is felt by the most vulnerable, not just measured in reports.

## 8. Closing

CAF and UWI have given us a forum designed for practical exchange. The Caribbean does not need another slogan. We need disciplined execution, honest measurement, and the will to do hard things before the next storm. We cannot calm the seas. We can build stronger balance sheets, stronger systems, and stronger institutions. That is financial resilience. That is how we turn uncertainty into stability and stability into growth. Thank you.",Dr Kevin Greenidge
https://www.bis.org/review/r250918d.htm,"Yannis Stournaras: Greece as a strategic investment gateway - stability, sustainability and transformation","Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the Athens International Investment Summit (AIIS) ""Greece as a strategic investment gateway: stability, sustainability and transformation"", Athens, 16 September 2025. ",2025-09-16 00:00:00,"## Yannis Stournaras: Greece as a strategic investment gateway stability, sustainability and transformation

Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the Athens International Investment Summit (AIIS) ""Greece as a strategic investment gateway: stability, sustainability and transformation"", Athens, 16 September 2025.

* * *

## Introduction

It is a great honour to address this gathering of distinguished policymakers, investors and business leaders at the Athens International Investor Summit. Allow me to extend my warm thanks to Minister of Finance Kyriakos Pierrakakis for hosting this important event, as well as Prime Minister Kyriakos Mitsotakis, Vice President Kostis Hatzidakis and to our international partners who have joined us today to engage in a constructive dialogue on Greece's economic future. This Summit, convening at the Stavros Niarchos Foundation Cultural Center, reflects Greece's re-emergence as a confident, outward-looking economy that is ready to attract investment, drive innovation and strengthen its role within Europe and the world.

We meet at a time of heightened uncertainty in the global economy . Rising protectionism, shifting geopolitical alignments, climate change, and the rapid pace of technological transformation are reshaping the environment in which we all operate. Yet, while challenges abound, opportunities also emerge - particularly for economies that demonstrate resilience, adaptability and strategic foresight. Greece today is one such economy.

## The global and European economic environment

The international economic system is undergoing profound transformation, with long-standing principles now under strain . The recent surge of protectionist trade measures, led by the United States, resulted in historically high tariffs on strategic partners, including the European Union. While a temporary EU-US agreement in July has prevented a full-blown trade war, uncertainty remains elevated, undermining investor confidence and disrupting global supply chains.

The euro area has shown resilience and is set to accelerate in the period ahead . The outlook has improved with growth for 2025 revised upwards to 1.2% (from 0.9% previously), reflecting better-than-expected incoming data, related to a frontloading of exports at the beginning of the year, and carry-over from historic revisions. The stronger contribution of domestic demand - driven primarily by investment and supported by private consumption - is providing additional momentum to growth this year. Looking ahead, favourable financing conditions, improving investment sentiment, and resilient demand are expected to support economic growth, even though risks due to trade policy uncertainty and geopolitical tensions are tilted to the downside.

The ECB's monetary policy stance has been pivotal in anchoring price stability across the euro area. Since mid-2024, in response to a sustained decline in inflation,

the Governing Council has reduced policy rates by a total of 400 basis points, before pausing as of July. Following a stepwise, meeting-by-meeting and data-dependent approach, the ECB ensured the return of inflation back to 2% this summer (from a euroarea high of over 10% in the autumn of 2022). Inflation is expected to average 2.1% this year, supported by lower energy prices and a stronger euro, and decline below 2% throughout 2026. The Governing Council's latest decision to keep policy rates unchanged underscores its prudent, wait-and-see approach in a fluid and uncertain environment. Going forward, the Governing Council future decisions on interest rates will be based on our assessment of the inflation outlook and the risks surrounding it.

The ECB has mastered a ""soft landing"", that is a balancing act of safeguarding price stability, while at the same time fostering  an environment conducive to investment, sustainable growth and financial stability. The Governing Council's decisions have ensured an orderly easing of financing conditions. Favourable financing conditions, along with rising real incomes and an anticipated increase in public investment in infrastructure and defence, are expected to underpin a gradual recovery of the euro area economy over the medium term. Preserving the credibility of monetary policy requires flexibility and readiness to adjust the policy stance in a timely manner if needed. By keeping inflation expectations firmly anchored to our medium-term target, monetary policy acts as a stabilising force - ensuring price stability, bolstering macroeconomic resilience and mitigating risks to financial stability.

Amid global uncertainty, European assets have become a safe haven, highlighting an important opportunity for the euro . Investors' flight from US Treasuries earlier this year demonstrated declining confidence in US economic policy, while euro area bonds attracted substantial inflows. This shift underscores the potential for the euro to strengthen its role as a global reserve currency. However, this is not automatic: it requires that Europe deepens integration, eliminates internal barriers to trade in goods and services, completes the Banking Union, and advances towards a European Savings and Investment Union. In particular, in order to increase its investment ratio, it needs to raise the rate of return on domestic investment and channel the largest part of its excess savings into it.

European initiatives in infrastructure, defence and green and digital transitions represent a fundamental shift in policy . Plans such as the Competitiveness Compass, the Clean Industrial Deal and ReArm Europe mark decisive steps in building strategic autonomy, enhancing competitiveness, and ensuring resilience. For Greece, these initiatives offer vast opportunities for co-investment in energy, infrastructure, logistics and technology.

## Greece's economic performance and outlook

Against a turbulent economic environment, Greece has demonstrated remarkable resilience and recorded positive performance . GDP rose by 2.3% in 2024, outpacing the European average by a large margin, and this momentum continued into early 2025. In the first half of the year, the economy grew by 2% y-o-y, supported by private consumption, net exports and investment.

Particularly noteworthy is investment, which has shown a strong momentum in recent years . Since 2019, investment has been steadily increasing (+60% up to 2024),

covering part of the large investment gap that emerged during the debt crisis. Its contribution to annual GDP growth has averaged 1.6 percentage points (pps) postpandemic, significantly higher than the euro area average of just 0.3 pps. Still, a substantial investment gap remains between Greece and the euro area: despite this strong momentum, investment in Greece is expected to reach 16.3% of GDP in 2025, compared with 21.1% in the euro area.

Foreign direct investment (FDI) rose markedly last year, coming to about 2.5% of GDP - the second highest level in the past twenty years. Overall, the rise in FDI reflects the improved business environment following the recent credit rating upgrades of the Greek economy, as well as the completion of privatisation projects.

The medium-term outlook remains positive, with growth expected to outperform the euro area average . According to Bank of Greece latest projections, GDP is forecast to grow slightly above 2% in 2025, 2026 and 2027, almost double the euro area average, despite rising uncertainty in the international economic environment. Private consumption and investment will remain the key drivers of growth. This trajectory will allow Greece to continue converging towards the EU average in terms of per capita income, assuming, of course, that reforms continue steadily and investment projects are implemented in a timely manner.

However, inflation has shown persistence, exceeding the euro area average . Headline inflation has hovered around 3% this year, driven by services and food prices, wage growth and strong tourism demand. Overall, it is projected to remain elevated at around 3.1% in 2025 before gradually easing to 2.6% in 2026, mainly reflecting the Greek economy's positive output gap, against an estimated negative output gap in the euro area.

## The labour market continues to improve, though challenges remain .

Unemployment has fallen to 8.6% in the second quarter, down from 9.8% a year earlier, with employment growth broad-based across sectors. Yet labour shortages in construction, manufacturing and tourism persist, reflecting demographic pressures and skills mismatches. Wage growth has strengthened, enhancing household incomes but raising competitiveness concerns.

The current account balance is expected to improve in 2025 , supported by resilient export performance, higher travel receipts from an extended tourist season, as well as lower interest payments due to falling interest rates. Nonetheless, challenges remain. Greece's export base is still concentrated in lower-technology goods and services, import dependency remains high, and any slowdown in euro area demand or renewed trade disruptions could weigh on performance. Addressing these vulnerabilities requires continued investment in competitiveness, diversification, infrastructure, skills, and higher value-added production.

For Greece, the direct impact of the new tariffs is expected to be limited, given our relatively low trade exposure to the United States. The risks are more likely to be indirect, as a slowdown in global trade could dampen demand for Greek goods and services and weigh on growth prospects. Heightened uncertainty in international markets also discourages investment, as businesses hesitate to commit capital in an unstable environment. Yet, in this challenging context, Greece stands out as a positive

exception: recent credit rating upgrades for both the sovereign and Greek banks underscore the economy's improved fundamentals and resilience, offering reassurance to investors at a time of elevated global volatility.

## Fiscal and financial stability

These dynamics highlight that stability has been restored - but to sustain it, fiscal and financial foundations remain crucial .

Greece's fiscal performance has been exceptional, strengthening confidence and sustainability . In 2024, the general government achieved an overall surplus of 1.3% of GDP, the first since 2019, with a primary surplus of 4.8% - one of the highest in Europe. Public debt fell sharply to 153.6% of GDP, a post-2010 low, marking the largest debt reduction among EU Member States.

Greece's fiscal outlook remains robust, with high primary surpluses (above 3% of GDP) and public debt on a steady downward trajectory . These achievements reflect both sustained gains from tackling tax evasion and strengthening tax compliance, combined with prudent control of public spending. Building on this foundation, the government has announced a new package of tax cuts and investment incentives, targeted at middle-income households, families and young workers. Fully financed within the EU fiscal framework, these measures aim to raise disposable incomes, strengthen local communities and support structural change, while safeguarding fiscal sustainability. They are also expected to deliver a modest boost to growth in 2026-27.

The government's commitment to early repayment of official sector loans sends a strong signal of fiscal discipline and confidence. The planned repayment of EUR 31.6bn of GLF loans by 2031 - a full decade ahead of schedule - will accelerate debt reduction, lower future financing needs, and enhance creditworthiness. By reinforcing fiscal credibility, this initiative not only eases the requirements for future fiscal adjustment but also helps to safeguard intergenerational fairness, relieving future taxpayers from part of today's fiscal burden.

The Greek banking system has emerged significantly stronger, underpinned by solid fundamentals. Capital ratios have improved, profitability has increased, and nonperforming loans have fallen to historic lows. Liquidity remains robust, while successive credit rating upgrades have firmly placed Greek banks within investment-grade territory. The recently published 2025 EU-wide stress test results further confirm their resilience, showing that Greek banks would maintain capital levels comfortably above regulatory requirements - and outperform the European average - even under adverse macroeconomic scenarios. These achievements create a stable foundation for banks to finance investment and support the real economy more effectively.

## Structural challenges

Despite the significant progress described earlier, Greece still faces longstanding structural challenges . Regulatory complexity, frequent changes in the legal framework, delay in the delivery of justice and inefficiencies in the judicial system, inter alia, undermine transparency and investor confidence. Addressing these requires determined reforms in governance and the rule of law.

Labour productivity and structural competitiveness remain below European peers . Although labour cost competitiveness has improved markedly since the crisis, the level of productivity still lags behind despite recent productivity growth, and Greece's integration into EU value chains remains limited. Investment in R&amp;D, technology adoption, and skills development must be scaled up.

Housing affordability has emerged as a pressing economic and social concern . Rising rents and property prices, particularly in metropolitan areas and key tourist destinations, stemming from mismatches between supply and demand, are eroding household purchasing power - especially for those with lower income. Policy interventions must focus on increasing housing supply, encouraging regional development, and ensuring access to affordable housing.

Demographic trends, inequality, and social cohesion present further challenges . Population decline, skills mismatches, and regional disparities continue to weigh on long-term growth. At the same time, social inclusion policies are needed to ensure that growth remains equitable and sustainable.

## Strategic investment opportunities

Addressing these structural challenges will require significant investment, and Greece offers compelling opportunities for such strategic investment in the years ahead . The combination of macroeconomic stability, improved creditworthiness, and EU funding creates an attractive environment for investors.

Energy transition and renewables are central to Greece's growth strategy . Investments in wind, solar, and offshore projects, coupled with upgrades to grids and interconnections, as well as increasing storage capacity for electricity, will support the green transition while enhancing energy security. Greece's geography offers unique potential for the country to become a clean energy hub in Southeast Europe - and an investment magnet.

Logistics and infrastructure investments can turn Greece into a regional hub. Ports, marinas, and transport networks are gateways linking Europe, Asia, and Africa. Modernising these assets will reinforce Greece's role in global supply chains and deliver long-term returns for investors.

Digital transformation and services present dynamic growth prospects . Greece's tech ecosystem is expanding rapidly, supported by venture capital and government initiatives. Investment in AI, big data, and digital infrastructure can unlock productivity gains across sectors. For investors, this means early access to one of Europe's fastestgrowing technology markets.

Innovation and R&amp;D are vital to moving up the value chain . Linking research with industry, providing fiscal incentives, and strengthening partnerships will help transform Greece into a knowledge-based economy. This creates opportunities not just for domestic firms, but for international investors seeking high-value projects.

The defence industry also offers a new area for strategic engagement . Greece is committed to deeper European defence cooperation, and active participation in international programmes can expand domestic production, add value, and reduce reliance on imports.

## Policy priorities and reforms

Harnessing these opportunities requires parallel reforms and policy priorities.

Safeguarding fiscal sustainability must remain the cornerstone of economic policy . Compliance with European fiscal rules, combined with prudent debt management, ensures credibility and market confidence.

Fiscal reforms should make policy more growth-friendly and equitable. A more progressive tax system, improved spending efficiency, and reduced administrative burden will boost productivity and fairness.

The timely absorption of EU funds is critical for sustaining investment momentum . Greece has received over EUR 21bn in RRF disbursements so far, covering nearly 60% of its allotted resources. Ensuring swift and effective use of these funds will accelerate green and digital transitions.

Labour market reforms are also needed, to enhance human capital and address demographic pressures. Upgrading education, expanding training programmes, incentivising female and youth participation, and attracting skilled workers are essential for raising potential growth.

The banking system should strengthen intermediation and alternatives sources of finances should be available to business and households . The new Microfinance Fund and access to capital markets can broaden financing sources for SMEs and innovative enterprises, complementing bank credit.

## European context and strategic autonomy

But Greece's path forward is inseparable from Europe's wider strategic trajectory. The EU's initiatives in technology, infrastructure, higher integration and defence reflect a collective response to global uncertainty. Greece is well positioned to benefit from and contribute to - these efforts.

Completing the Banking Union and establishing a European Savings and Investment Union are urgent priorities . These steps would strengthen financial integration, improve risk sharing, and mobilise savings for investment across Europe.

Europe must also establish a permanent fiscal capacity to finance common priorities. Building on the successful model of NextGenerationEU, a European safe asset (such as a Eurobond) would enhance resilience and competitiveness and facilitate more investment into the euro area, while supporting the international role of the euro.

For Greece, alignment with Europe's strategic autonomy agenda is both an opportunity and a responsibility. By advancing reforms, safeguarding stability, and offering investment opportunities, Greece can emerge as a reliable partner for investors and a strong contributor to European prosperity.

## Conclusion

Greece today is a story of stability, resilience, and opportunity - truly a strategic investment gateway in Southeast Europe. The economy has proven its capacity to withstand shocks, restore fiscal discipline, rebuild its banking sector, and attract international investment.

For investors, Greece represents stability, sustainability and transformation - the very pillars of this Summit's theme . We invite you to join us in advancing the energy transition, modernising infrastructure, driving digital innovation, and strengthening services. The path for Greece is not only to converge with Europe, but also to actively contribute to shaping a stronger, more resilient Europe.

Thank you very much.",Yannis Stournaras
https://www.bis.org/review/r250924b.htm,Joachim Nagel: Exports under pressure - why Germany needs to act now,"Speech by Dr Joachim Nagel, President of the Deutsche Bundesbank, to the Harvard Club Rhein-Main, Frankfurt am Main, 17 September 2025. ",2025-09-17 00:00:00,"## Joachim Nagel: Exports under pressure - why Germany needs to act now

Speech by Dr Joachim Nagel, President of the Deutsche Bundesbank, to the Harvard Club Rhein-Main, Frankfurt am Main, 17 September 2025.

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Check against delivery

## 1 Introductory remarks

Ladies and gentlemen,

Your membership of the Harvard Club is an expression of your ties to Harvard University.

I myself have visited Harvard a number of times and have given lectures there. So I can certainly understand your enthusiasm for the institution. Its academic excellence, cosmopolitan atmosphere and the inspiring culture of debate have impressed me every time.

## 2 Negative impact of US policy

All the more shocking did I find the US administration's crackdown on the university. Research funding was cancelled, and foreign students had their visas revoked. The government evidently wanted to make an example of the university.

If such measures stand up in court, they jeopardise academic freedom and the liberty of teaching. And they could damage the reputation of one of the world's most prestigious higher education institutions.

There are worrying trends emerging elsewhere in the United States, too. As President of the Bundesbank, I am particularly concerned about the treatment currently being meted out to the US Federal Reserve: the discrediting and defamation of the Fed's leadership, the unabashed challenges to its independence.

I have a great deal of respect for the way in which Jay Powell is handling the verbal attacks-how he is focusing on his job and fulfilling his mandate.

If the Fed's independence were to be politically undermined in a lasting way, it would have grave repercussions. It would jeopardise US economic and financial stability and endanger the country's prosperity.

But it could also tempt short-sighted politicians in other countries to put pressure on their independent central banks, badgering them to lower interest rates more sharply than a stability-oriented mindset would consider advisable. For instance, in response to a cyclical flash in the pan or to provide fiscal relief for a state heavily in debt.

Anyone familiar with the capital market knows, of course, that the policy rate is just one factor among many that influences long-term interest rate levels. Inflation expectations also play a role. And when inflation expectations rise, risk premia lead to higher capital market rates.

Policy rate cuts do not, in and of themselves, automatically entail fiscal relief. In fact, the opposite is sometimes true. Indeed, there were signs that attacks on the Fed may have contributed to a steepening of the US yield curve on corresponding trading days: lower yields at the short end and higher yields at the long end. This shows that financial markets are fully cognisant of the importance of central bank independence.

A clear mandate for stable prices and the ability to go about this task in an independent manner: these are the prerequisites for us, as central banks, to be able to credibly and successfully combat inflation. 1

Another area in which the US administration is straying from the path of stability and reliability that it has trodden to date is in trade policy. By doing so, it is not only harming its trading partners-people in the United States are also going to feel the consequences. Because tariffs and other trade restrictions reduce prosperity across the board.

When the European Union reached a deal with the US administration in July, the talk was of two major benefits. First, it means that we're spared a trade war where both sides seek to outdo each other with countermeasures. Second, the agreement around tariffs was supposed to have eased uncertainty. Exporters, so it was said, would now know where they stand.

That only applies, of course, so long as the US administration considers itself bound by the agreement. Recent threats and restrictions raise doubts as to whether the agreement will hold up for long.

But even if it lasts, US tariffs will weigh on European exporters. German firms, in particular, will suffer.

But buyers of European goods in the United States will suffer as well. The average US tariff on EU goods is likely to increase tenfold, from 1.5% under the previous administration to around 15%. At more than 16%, US tariff rates vis-à-vis all trading partners are now at their highest level since the 1930s.

## 3 Current monetary policy

Who ultimately bears the burden of tariffs will become clear over time. That's not up to the government, but the markets.

The fact that consumers in the United States are feeling the effects of tariffs in the shape of higher prices is undisputed, though. And costs are on the rise for firms that use European goods as inputs, too. It is not yet clear how much this is stoking inflation.

However, falling sales and narrowing margins are also weighing on exporters in Europe. They are not going to be able to sell the same quantities at the same price.

This will continue to weigh on the already weak growth in the euro area and Germany, albeit not as heavily as the tariffs that were originally threatened would have done. Overall, GDP losses are likely to remain modest.

At the beginning of the year, front-loading in anticipation of higher tariffs had given a boost to economic activity. The euro area economy has since returned to a more moderate growth path.

The ECB staff macroeconomic projections published last week are somewhat more optimistic for the current year than they were in June. ECB staff now expect economic growth of 1.2% instead of the 0.9% previously projected. Looking ahead to the next two years, they are anticipating growth of 1.0% and 1.3%. However, US trade policy will continue to add an element of uncertainty to the assessment.

Unlike the effects of US tariffs on growth, the picture in terms of price effects in the euro area is less clear. Overall, tariffs could even have a slight dampening effect on inflation through their impact on the exchange rate.

Taken by itself, the announcement of US tariffs might have pointed towards an appreciation of the US dollar, with tariffs dampening import demand in the United States and driving up prices.

In actual fact, the dollar has depreciated significantly against the euro. This is seen as indicative of doubts around the greenback's status as a safe haven.

The increased external value of the euro against the US dollar is leading, for instance, to lower import prices in the euro area. Since crude oil is traded in US dollars worldwide, you might notice it when you go to the petrol station, say.

The ECB staff's inflation outlook remains consistent with our medium-term inflation target of 2%: they're expecting an average inflation rate of 2.1% for this year and are reckoning with 1.7% and 1.9% in 2026 and 2027 respectively.

In the light of this picture for inflation, I think the Governing Council of the ECB was right to keep policy rates unchanged when it met last Thursday.

We'd be well advised to remain cautious in the face of the prevailing uncertainties. Our data-dependent and meeting-by-meeting approach to making decisions has proven its worth.

The current monetary policy stance leaves us well positioned to respond to unexpected changes.

## 4 The reasons for Germany's weak exports

The discussion around tariffs has undoubtedly put a damper on the German export industry.

After all, the United States is our most important trading partner: goods worth more than €160 billion were exported to the United States last year. 2   That's more than one-tenth of total German exports.

An article in the Bundesbank's July Monthly Report, though, shows that German exports had already begun to falter long before the recent trade conflict. 3   The Bloomberg news agency reported on this in a story headlined ""Germany Can't Blame Trump for Slide in Exports"". 4   That's true.

Neither can the blame for Germany's weak exports be laid solely at the feet of Russia's war against Ukraine and the energy crisis that it triggered. Nor can the COVID-19 pandemic be made fully responsible.

There is no doubt that both events weighed heavily on the German economy. However, the Monthly Report article explains that Germany has been losing market shares in international trade since 2017-i.e. even before COVID-19 hit and Russia launched its invasion.

In the past, foreign trade was often the engine of growth in Germany. Exports were the driving force behind economic upturns in many cases.

This engine is now stuttering. Our experts have been looking into the reasons behind this, as only those who know the causes of the losses can draw the right conclusions for economic policy.

It's a fact that not only the growth of German sales markets has slowed. German exports have actually seen significantly weaker growth. This means that the German export industry has suffered global market share losses.

If Germany's exports had kept pace with the sales markets, the growth in the German economy between 2021 and 2024 would have been almost 2‰ percentage points higher. That's a significant amount-particularly if we consider that the German economy more or less stagnated during this period.

Our experts have developed a new empirical approach to explore the causes of the losses of export market shares in more depth. This makes it possible not only to distinguish between supply-side and demand-side developments, but also to look at key categories of goods and trading partners.

Supply-side effects capture how a country's competitiveness has changed in terms of individual economic sectors or in certain destination markets. This enables a detailed analysis and assessment of international competitiveness.

Without going into the technical details of this method, I would like to summarise the key finding from the study. The decline in the German economy's export market shares since 2017 can be explained, in particular, by a deterioration in competitiveness.

Around three-quarters of the decline since 2017-and an even higher share since 2021-can be attributed to supply-side effects, in other words a reduction in competitiveness.

But why is this the case? A whole host of reasons need to be mentioned here.

One of which is certainly the high energy prices in Germany. They are placing a heavy burden on energy-intensive sectors, in particular, such as the chemical and metal industries. Although energy prices have also risen in other countries following Russia's attack on Ukraine, those increases have not been on a comparable scale.

Another one-off development of recent years was the supply chain disruptions during the COVID-19 pandemic. They hit German industrial firms harder than other countries. This also highlighted the risks of unilateral dependencies.

As a result, key sectors such as the machinery industry and electrical industry became less competitive. However, numerous other sectors also recorded losses-these were broadly based overall. This points to fundamental structural problems in the German economy, which many firms are facing.

These structural problems include the shortage of skilled workers, rising unit labour costs, a high tax burden and considerable levels of bureaucracy. According to a study by the ifo Institute, the latter has cost the German economy up to €146 billion per year to date. 5   Many firms view bureaucracy as a barrier to investment.

In addition, there is growing competitive pressure from China. 6

While the German export industry is losing market shares in many sectors and markets, China is gaining more. This is mainly due to China's continuous improvement in its competitive position, particularly in the area of medium and high-tech industrial goods, as shown by the Bundesbank's analysis.

In addition to competitiveness, Germany's export goods mix-a guarantee of success for decades-also contributed to the losses in market share.

Many German firms specialise in products that have recently experienced a decline in demand around the world. This explains just over one-third of the total losses in market share since 2017.

For instance, the German automotive industry has been suffering from weak global demand since around 2018, especially in China amid falling demand for cars with internal combustion engines.

Another example of an industry that plays a relatively significant role in Germany's export goods mix is aerospace technology. It, too, has been suffering from lower global demand for some years now.

## 5 Urgent action is needed

Pressure to take action is therefore patently obvious.

It is up to firms to develop competitive products. And German politicians can take effective measures to boost competitiveness.

Smart economic policy strengthens supply conditions in Germany. It is now a matter of reducing bureaucracy, promoting the immigration of skilled workers in a targeted way, creating incentives to work and making investment more attractive from a tax standpoint.

Boosting the efficiency of the energy transition and diversifying supply chains are other core building blocks for strengthening and making our economy more resilient.

I outlined these and other points in my speech at Humboldt University following the recent general election. 7   There I discussed how we in Germany could return to a higher path of growth.

Six months have passed since then and a new Federal Government has taken office. It should be noted that it has already initiated measures to improve supply conditions.

I am thinking, for instance, of the new option of applying a declining balance depreciation for equipment investments, referred to as the ""investment booster"". Or of the reduction in the electricity tax for industrial firms.

But that is not enough. More improvements are needed. Important reforms are still outstanding. But, on Monday, ""the autumn of reforms"" begins.

At the end of the last legislative period, the Bundestag amended Germany's Basic Law and opened up new fiscal scope. Now it's a matter of making targeted, rapid and efficient use of this new scope to ensure that more investment is actually made. Namely in projects that increase our growth potential.

According to the Bundesbank's calculations, the new scope for borrowing is unfortunately being used to a considerable degree to create other fiscal leeway. Legislators should ensure that the additional funds are also used for additional investment. 8

Our aim must be to make the German export industry more competitive again. At the same time, our goal should be to boost domestic dynamics so that our growth model is less dependent on exports. After all, a strong domestic economy in Germany and Europe is the key to becoming more independent from the rest of the world and achieving sustainable growth.

We must not forget what we can build on. Germany has many strengths: these include highly skilled workers, a strong industrial base and a high level of innovative capacity. These strengths need to be drawn on.

And what we also mustn't forget is the economic potential rooted in deepening European integration.

Europe should see the US tariffs as a wake-up call and take the opportunity to rapidly advance the European single market. We should at long last create the savings and investments union in Europe so that it becomes more attractive to invest here. For Europeans and non-Europeans alike.

Former ECB President Mario Draghi made numerous proposals on how to make Europe more competitive. Our task is now to implement these proposals. Thus far, only a fraction of these have been achieved.

At the same time, Europe should open up to other economic areas and seek free trade agreements. The recently negotiated free trade agreement between theEU and the Mercosur countries is an important achievement in this direction.

I sincerely hope that the agreement will be ratified soon. Further agreements with other countries should follow. And then perhaps also somewhat faster than the EU-Mercosur agreement, which was under discussion for over 25 years.

Europe's locational advantages are now very clear: Europe stands for the rule of law. Europe is a values-based, reliable partner and respects academic freedom.

Europe has a central bank whose independence is neither jeopardised nor challenged. And with 450 million inhabitants, the EU is the world's largest single market.

Europe must now work more closely together and become more resilient.

One of the founding fathers of the European project, Jean Monnet, coined the phrase: ""Europe will be forged in crises and as the sum of the solutions adopted for those crises"". That still holds true today. And I am confident that the ""sum of the solutions"" can be a good one.

1 Cukierman, A., S. B. Webb, B. Neyapti (1992),  Measuring the Independence of Central Banks and Its Effect on Policy Outcomes, The World Bank Economic Review, Vol. 6, No 3, pp. 353-398, Klomp, J., J. de Haan (2010),  Inflation and central bank independence: a meta-regression analysis, Journal of Economic Surveys, Vol. 24, pp. 593-621, Jung, A., D. Romelli, E. Farvaque (2025),  Do central bank reforms lead to , ECB Working Paper No 3049. more monetary discipline?

- 2  Federal Statistical Office (2025),  Die Vereinigten Staaten sind Deutschlands wichtigster Handelspartner.
- 3  Deutsche Bundesbank (2025),  What's behind the sustained decline in German export market shares?, Monthly Report, July 2025.
- 4  Randow, J. (2025),  Germany Can't Blame Trump for Slide in Exports, Bundesbank Finds, Bloomberg.com, 14 July 2025.

- 5  ifo Institute (2024), , Entgangene Wirtschaftsleistung durch hohen Bürokratieaufwand study commissioned by the Chamber of Commerce and Industry for Munich and Upper Bavaria. Sum for the period 2015 to 2022.
- 6  Deutsche Bundesbank (2024),  Competitive pressure from China on Germany and other advanced economies, in: Global and European setting, Monthly Report, November 2024.
- 7  Nagel, J. (2025), Economic policy measures to boost growth in Germany, speech held at the Berlin School of Economics, 10 March 2025.
- 8  Deutsche Bundesbank (2025), Public finances, Monthly Report, August 2025.",Joachim Nagel
https://www.bis.org/review/r250924e.htm,Joachim Nagel: Building blocks for a strong and sovereign Europe,"Speech by Dr Joachim Nagel, President of the Deutsche Bundesbank, at the Rhine-Main area management group of the Friedrich-Ebert-Stiftung, Frankfurt am Main, 22 September 2025.",2025-09-22 00:00:00,"## Joachim Nagel: Building blocks for a strong and sovereign Europe

Speech by Dr Joachim Nagel, President of the Deutsche Bundesbank, at the RhineMain area management group of the Friedrich-Ebert-Stiftung, Frankfurt am Main, 22 September 2025.

* * *

## Check against delivery

## 1 Introduction: recognising the signs of the times

Ladies and gentlemen,

Europe's sovereignty is currently being challenged by various angles, such as enhancing defence capabilities. It would also appear advisable for Europe to become more economically independent. For instance, we depend on non-European providers for payments and many digital services. The EU Member States need to work together more closely and also step up cooperation with willing third countries. After all, it is important for us to represent our common values and interests as best as we can.

But it is not just European sovereignty that is being challenged. Doubts have also arisen on the other side the Atlantic regarding the safe-haven status of the US dollar. Immediately after the US tariff announcements at the beginning of April, exchange rate movements were atypical for periods of heightened uncertainty in the financial markets. The US dollar did not benefit from its status as a safe haven, but depreciated instead. It seems possible that international investors' loss in confidence will persist.

This certainly does not signal the end of the  US dollar as the world's leading currency, but Europe should recognise the signs of the times. Despite the adverse circumstances, we are called upon to do whatever is necessary to ensure that Europe and the euro continue to play an important role on the world stage in the future. I'd like to explain this in more detail in three steps, starting with the question of what we mean by a strong euro.

## 2 A strong euro-what does that mean?

Above all, strength means stability. A currency's purchasing power should remain stable over time in order to maintain price stability. Price stability ensures stable economic conditions that make long-term planning possible. In this vein, you, in your group of managers, are connected to us on the ECB Governing Council: if we do our job well-in other words fulfil our mandate-you are better able to fulfil your tasks, for instance when making business investment decisions.

A strong and stable currency also requires stability-oriented fiscal policy and overall predictable policies. Military clout is also necessary to ensure external security if the worst comes to the worst. Other key conditions for the strength or international importance of a currency are deep, liquid and open capital markets as well as a wide range of high-quality safe assets.

The euro is currently the second most important currency in the world. Its share across various indicators of international currency use stood at around 19% in 2024. 1   This was largely unchanged from previous years. The gap to the US dollar is large, but so is the advantage over other currencies.

Recent exchange rate developments have led to economic policy debates. 2   The euro has appreciated by 12.5% against the US dollar since the beginning of the year. This raised concerns in some cases that the euro-US dollar exchange rate had reached a level that was placing an excessive strain on the euro area export industry.

However, it is more meaningful to look at how the euro has developed against the currencies of several trading partners. Its effective appreciation in the year to date came to only 5.7% against a group of 18 partner currencies. This figure was 6.2% against a group of 41 partner currencies. Simply analysing the euro's gains against theUS dollar thus overstates how much the German export industry is being burdened.

Nevertheless, revised data indicate that the price competitiveness of both Germany and the euro area has deteriorated in recent years. 3   According to Bundesbank calculations, the recent appreciation of the euro has contributed to the price competitiveness of the German economy and the euro area no longer being favourable, but rather neutral. Overall, I am not concerned about the euro's current valuation level.

The depreciation of the US dollar this year can be attributed to various factors. Most recently, differences in interest rate developments on both sides of the Atlantic played a role in particular, influenced by the expected course of monetary policy in the two economic areas.

As mentioned earlier, the first signs of a loss in confidence in the US currency caused by political factors emerged after the day President Trump dubbed ""Liberation Day"" in April. In addition, the tax and fiscal package, the Big Beautiful Bill, has led to growing fears about US debt sustainability. Increasing concerns about the independence of the US central bank has also harmed confidence in the dollar. It appears that it is no longer seen unreservedly as a safe haven.

However, it is neither on the cards nor desirable for the US dollar to be replaced as the world's leading currency. Nevertheless, there are tendencies towards greater diversification of foreign reserve assets. In this respect, the question of greater global importance of the euro is perfectly justified. In my view, a stronger international role for our single currency would be desirable.

This is because, not least, it promises funding cost advantages for Member States and enterprises. However, of course this would not change the fact that favourable financing conditions also require stability-oriented fiscal policy. Sound fiscal policy pursued by euro area countries tends to result in there being more high-quality and safe government bonds in the euro area. That is likely to support the international role of the euro.

## 3 Strengthening Europe's sovereignty

Let us now turn to step two: promoting European sovereignty. Needless to say, geopolitical changes have injected new urgency into this topic. Protectionist tendencies were already evident before the new US administration made its drastic pivot in trade policy.

In an increasingly fragmented world, it is especially important for Europe to make the best possible use of its single market's potential. Strikingly, estimates by the International Monetary Fund have shown that trade barriers within the European Union in 2020 were equivalent to tariffs of 44% for industrial products and as high as 110% in the case of services. 4   There are still considerable barriers to be removed.

Moreover, greater integration of European financial markets would be a huge opportunity and highly welcome. 5   I have already made the case for this on numerous occasions. 6

European households' high level of savings should be better channelled towards more innovation, productivity and competitiveness. 7   Our savings are urgently needed to finance the green and digital transitions in Europe, as well as defence spending.

The Savings and Investments Union would simplify cross-border investment and enable a more efficient use of funds. The cost of capital is likely to decline in the case of a larger and more diverse supply of capital. Thus, financially stronger integration in Europe could also close gaps if funding sources dry up due to geo-economic fragmentation. Moreover, a better distribution of risks across borders would be possible, making the European economy more resilient to shocks. 8   All in all, progress in the Savings and Investments Union is expected to significantly increase Europe's economic strength and attractiveness.

Ladies and gentlemen, it is not just the new geopolitical environment that supports strengthening European sovereignty. In addition, there is a second reason that could potentially create new realities: stablecoins.  A lot of fuss about nothing; we shouldn't get unnecessary worked up about this-you might be thinking this or something along these lines. For me, it is important to contextualise current developments and prospects in a rational way.

Stablecoins are digital tokens issued by private issuers, which aim for value stability. Their value is therefore tied to assets. In practice, these are currently often assets denominated in US dollars such as government bonds or bank deposits. Stablecoins have thus far played a limited role, but their market is growing. This is because they offer something that does not exist like this elsewhere, such as programmable payments for non-banks, meaning that delivery-versus-payment transactions can be carried out immediately and automatically.

In July, US President Donald Trump signed the ""GENIUS Act"". This regulatory framework is intended to further expand the dominance of the US dollar through stablecoins. As the regulation requires every stablecoin to be fully backed and the backing can be in the form of short-term US Treasuries, the GENIUS Act supports demand for short-term US Treasuries.

The Bank for International Settlements (BIS)  took a close look at stablecoins in its latest Annual Economic Report. 9   To quote the BIS directly, Stablecoins as a form of sound money fall short, and without regulation pose a risk to financial stability and monetary sovereignty."" 10

In my view, stablecoins do indeed carry risks. A loss of confidence could lead to redemptions of stablecoins on a massive scale and fire sales of reserve assets-with spillover effects on money and bond markets. And yes, such crypto-assets should not be allowed to spread in an uncontrolled manner. In Europe, the Markets in CryptoAssets Regulation, or MiCA,  has established a regulatory framework for crypto-assets, including stablecoins. The regulatory guidelines should be updated and refined where necessary.

But stablecoins hold opportunities as well as risks. In certain areas of application, such as the direct and automated delivery-versus-payment transactions I mentioned earlier, they can offer added value and complement existing structures in a useful way. Overall, framework conditions should remain innovation-friendly-not least with respect to European issuers' euro-pegged stablecoins.

In the digital financial system of the future, Europe must be mindful of its sovereignty. That is another reason why, here in Europe, we want to take a different approach to digital central bank money than, say, the United States. In the United States, digital central bank money is prohibited by executive order. This brings me to the third step I want to discuss today.

## 4 Promoting digital central bank money

European digital central bank money could help to strengthen the role played by the euro internationally. It would be an important milestone for the Savings and Investments Union, and a logical response to stablecoins.

There are two types of digital central bank money: the retail variant could be used at any time by anyone wishing to make an electronic payment-whether at the point of sale, when shopping online or for payments among friends. The wholesale variant would be used to settle transactions between financial institutions in central bank money using new technologies. Both types of digital central bank money could help to strengthen the euro area's resilience, autonomy and efficiency in the field of payments.

Let me briefly turn to the current situation regarding the digital retail euro. It is intended as a digital supplement to cash that would be available free of charge anywhere in the euro area. In mid-July, the ECB published its third progress report on the digital euro preparation phase. 11   Work on the draft rulebook has progressed further, with advances in technical testing, user research and engagement with stakeholders.

It is crucial for the Eurosystem's work that the necessary legislation is adopted as quickly as possible at the European level: the digital euro needs a legal basis before a decision can be taken on its introduction. As things stand, it probably won't be possible to launch the digital euro before 2028.

In my view, the time is ripe for central banks to offer a digital complement to cash. People's needs and preferences have changed. They are tending to use less and less cash. But they value cash characteristics, like privacy. The digital euro would meet the highest standards of data protection and privacy. In addition, an offline solution would be available even without an internet connection or given technical disruptions.

Banks and other payment service providers could use the public infrastructure for the digital euro as a basis for innovation. So far, cash is the only European means of payment that is accessible and accepted throughout the euro area. For our electronic payments, we often have to rely on a handful of non-European companies.

The digital euro would make one of Europe's critical infrastructures more independent. This seems more important than ever in view of growing geopolitical tensions and uncertainties. The same applies to wholesale digital central bank money.

The ability to settle large-value critical financial market transactions in central bank money based on distributed ledger technology, or DLT,  would have the following advantages: more efficient-that is, faster-settlement processes, a higher degree of automation, programmability, streamlined and thus cheaper settlement processes, and reduced settlement risks.

In an exploratory phase, the Eurosystem tested three solutions together with financial market participants. 12   Market demand was high and participants expressed their interest in a continuation after the trial phase. In early July, the ECB presented a dualtrack strategy for the settlement of DLT transactions. 13

""Pontes"" is the short-term track, which is intended to provide a pilot solution by the end of 2026 to link DLT platforms to our TARGET services. The aim is to offer a swift and pragmatic solution to meet the high market demand. It is important to act as quickly as possible so that market participants do not opt for alternatives such as stablecoins. The long-term track ""Appia"" aims to achieve an innovative and integrated financial ecosystem in Europe. This solution is also intended to be globally compatible.

At the end of this chapter on the meaning and purpose of digital central bank money, it's important to add that changing needs and technologies demand a response. We central banks have to move with the times. Even in an increasingly digital world, the euro should and will remain an attractive means of payment for all. The Eurosystem has played a pioneering role with its extensive work on digital central bank money.

## 5 Conclusion: Take fate into our own hands

In conclusion, I have outlined the key building blocks for a strong and sovereign Europe. These can complement each other, mutually amplify their impact and combine to form an impressive whole. The launch of the retail digital euro and wholesale digital central bank money would be milestones for the Savings and Investments Union. All of the building blocks would counteract existing and potential fragmentation. They would also help to strengthen the role played by the euro internationally.

For one thing, the US dollar is no longer seen unreservedly as a safe haven. For another, dollarisation could increase if US dollar stablecoins become more widespread.

For the foreseeable future, it appears neither realistic nor desirable for the euro to replace the US dollar as the world's key currency. However, it certainly would be both possible and desirable for the international importance of the euro to increase.

In a world of change, Europe should not surrender to its fate, but should confidently take it into its own hands. On that front, we can take the words of Henry David Thoreau as encouragement, or even a warning:  What a man thinks of himself, that it is which determines, or rather indicates, his fate."" We have strong foundations: democracy, the separation of powers and the rule of law. Independent media, independent statistics collection, an independent central bank. We have our single market, successful firms and highly skilled workers.

I have no doubt that we are prepared to take the three steps I've outlined-for a strong euro, for a sovereign Europe, for a modern and resilient European payments system with the digital euro. If we take these steps, we will increase Europe's economic strength, attractiveness and independence.

1  European Central Bank (2025), The international role of the euro, p. 2.

- 2 Deutsche Bundesbank, Financial Markets, August 2025 , supplementary information in the Monthly Report: Measures of the appreciation of the euro in the monetary policy debate.
- 3 Deutsche Bundesbank, Financial Markets, August 2025 , supplementary information in the Monthly Report: Recent data revisions indicate less favourable price competitiveness in Germany and the euro area.
- 4  International Monetary Fund,  Regional Economic Outlook for Europe, October 2024: A Recovery Short of Europe's Full Potential, p. 18.
- 5  For an overview of the Savings and Investments Union, see European Commission (2025), Factsheet: Savings and Investments Union-European Commission  und Questions and answers on the Savings and Investments Union. For a comprehensive study on the capital markets union, see European Central Bank (2025),  Capital markets union: a deep dive-Five measures to foster a single market for capital, Occasional Paper No 369.
- 6  For example, Nagel J. and F. Villeroy de Galhau (2022),  Time for a genuine capital markets union | Deutsche Bundesbank  and Nagel J. (2024),Joint European responses to the challenges we face | Deutsche Bundesbank.
- 7  Letta, E. (2024), Much more than a market, pp. 28 ff., Draghi, M. (2024),  The future of European competitiveness, Part A, pp. 63 ff., ECB (2024), Financial Integration and Structure in the Euro Area.
- 8  Walch, K. and B. Weigert, Die Zukunft des europäischen Finanzsystems-die Bedeutung von Resilienz und Integration,  ifo Schnelldienst 7/2024: The Future of the European Financial System | Journal (Complete Issue) | ifo Institute.

- 9  Bank for International Settlements, The next-generation monetary and financial system, Annual Economic Report 2025.
- 10  Bank for International Settlements (2025),  Press release: Next-generation monetary and financial system takes shape, based on a tokenised unified ledger: BIS.
- 11  European Central Bank (2025),  ECB publishes third progress report on the digital euro preparation phase.
- 12  European Central Bank (2025),  The Eurosystem's exploratory work on new technologies for wholesale central bank money settlement.
- 13  European Central Bank (2025),  ECB commits to distributed ledger technology settlement plans with dual-track strategy, Deutsche Bundesbank (2025),  Digital money: options for large-value payments in central bank money | Bundesbank publications.",Joachim Nagel
https://www.bis.org/review/r250922e.htm,Michele Bullock: Opening statement - House of Representatives Standing Committee on Economics,,2025-09-24 06:48:00,"## Michele Bullock: Opening statement - House of Representatives Standing Committee on Economics

Opening statement by Ms Michele Bullock, Governor of the Reserve Bank of Australia, to the House of Representatives Standing Committee on Economics, Canberra, 22 September 2025.

* * *

Good morning, Chair and members of the Committee.

These hearings are an important part of the accountability process for the Reserve Bank and my colleagues and I are pleased to be here to answer your questions.

I'm pleased to see the new members of the Committee. As you would be aware, the RBA's mission is to promote the economic prosperity and welfare of the Australian people, now and into the future. We do this by conducting monetary policy with the aim of maintaining low and stable inflation and full employment, and we also support the stability of the financial system. But our responsibilities go beyond this - we work to support a reliable, efficient and competitive payments system, deliver efficient and effective banking services to Australian government agencies and provide secure and reliable banknotes.

There have been some important changes at the RBA since we appeared before the previous incarnation of this Committee in February. From 1 March, the amended Reserve Bank Act 1959 came into force, creating a new Monetary Policy Board and a separate Governance Board.

And since we last met with the Committee, the Monetary Policy Board has lowered the cash rate target - our key monetary policy tool - by a further 50 basis points to 3.6 per cent, following the 25 basis point cut decided by the previous Board in February.

I will start with some background to these monetary policy decisions and the outlook for the Australian economy. I will then make some remarks on the payments system and banknote distribution. I will finish off with an update on our progress towards achieving the objectives of the RBA Review.

## Inflation and employment

As I noted, the Monetary Policy Board conducts monetary policy with the aim of maintaining low and stable inflation and full employment. The Statement on the Conduct of Monetary Policy - which was updated in July - sets out our agreement with the Government that an appropriate goal is consumer price inflation between 2 and 3 per cent. To achieve this, we set policy such that inflation is expected to return to the midpoint of the 2-3 per cent   target range. But there is flexibility around the timeframe in which we meet our inflation objective to balance this with meeting our full employment objective - achieving the maximum level of employment that is consistent with low and stable inflation in the medium term.

Consistent with this, the Board's strategy to achieve our dual mandate over the past three years or so has been to bring inflation sustainably back to target within a reasonable timeframe while allowing the labour market to adjust gradually towards full employment.

On the first part of our mandate, inflation has fallen substantially since the peak of 7.8 per cent in 2022 and is now within the 2-3 per cent   target range. The higher interest rates over that period helped to put downward pressure on inflation and to keep inflation expectations anchored. Underlying (trimmed mean) inflation - which removes the more volatile components of the index - fell to 2.7 per cent over the year to June 2025. Headline inflation, which has been affected by temporary cost of living relief measures, was 2.1 per cent over the year.

On the second part of our mandate, labour market conditions are close to full employment. The unemployment rate of 4.2 per cent in August remains low by historical standards and the share of the population with a job is close to a record high - this is good news! While labour market conditions have eased a little since we last met, with the unemployment rate rising a little, we assess that some tightness remains. Though there is always considerable uncertainty around this assessment.

Throughout this adjustment towards full employment, the economy has continued to expand - and growth in economic activity has also picked up since we last met, driven by the recovery in private demand. In terms of jobs, there are 1.1 million more Australians in employment than in mid-2022, which is clearly a welcome development for those individuals, their families and the wider Australian economy.

## Recent monetary policy decisions and the economic outlook

Over the period since we last met with the Committee, the Board judged that it was appropriate to ease monetary policy to keep inflation close to target and the labour market at full employment. As I mentioned, we have lowered the cash rate by a total of 75 basis points since the start of the year to now be 3.6 per cent after being held steady for a time at 4.35 per cent since November 2023.

RBA forecasts from the August Statement on Monetary Policy suggested that underlying inflation will moderate a little further to around the midpoint of the  23 per cent   range. These forecasts were conditioned on the market-implied cash rate path at the time, which included some further modest easing of monetary policy. The recent interest rate cuts are expected to support spending by households and businesses, and growth in the Australian economy is expected to pick up a little further over the next year. The recovery in household consumption growth is forecast to be sustained as real incomes continue to grow. Since the August meeting, domestic data have been broadly in line with our expectations or if anything slightly stronger - the Board will discuss this and other developments at our meeting next week.

But forecasts are just that - forecasts. And the economic outlook continues to be clouded by uncertainty. This is especially so the further into the future we look. So we need to be alert to the risk that circumstances may change and be prepared to respond if necessary. The global environment is particularly uncertain and unpredictable, but monetary policy is well placed to respond if it seems international developments could

have a material impact on Australia's economy. There is also a risk that the recent pickup in growth in domestic economic activity is not sustained, or, on the other hand, it could be materially stronger than we anticipate. Finally, there may be more excess demand in the economy and labour market outcomes may be stronger than expected. We are mindful that productivity growth has not picked up and growth in unit labour costs remains high.

The Board will remain attentive to the data and the evolving assessment of risks to guide its decisions.

We've made real progress in bringing inflation down. But our job is to make sure it stays within the target range in a way that's sustainable - not just for now, but for the long term. Low and stable inflation is important because it means that households and businesses can plan, invest and create jobs without having to worry about inflation.

Before I move on to other parts of the RBA's work, I want to acknowledge what many Australians have been through over the past few years.

We know that high inflation has pushed prices up across the board over the past few years. As my colleague Sarah Hunter explained in a fireside chat last week, while inflation has fallen materially, the price level isn't coming back down. The higher price level has affected everyone-whether you're paying a mortgage, renting, running a business, or just trying to make ends meet. It's been especially tough on people with lower incomes and those in more vulnerable situations. This is why, as I've said, it's so important that inflation remains low and stable.

## Payments system

Another critical area of work for the RBA is our regulation and oversight of the payments system. We are conducting a review of surcharging and merchant card payment costs. We published a Consultation Paper in July, which outlined the Payment System Board's preliminary views. The current framework has effectively been in place for around 25 years and it has served its original aims. But recent and likely future changes in the payments system mean that it is less fit for the future. We have received over 170 submissions in response to the consultation - we value this strong engagement and are now following-up with stakeholders to discuss submissions in further detail. It is fair to say that different stakeholders come at the issue from different perspectives, and we've seen this reflected in a wide range of views. The task now for our Payments System Board is to carefully consider all this feedback, so that we arrive at policy settings that best promote competition, efficiency and safety in the card payments system.

We also thank the Parliament for recently passing amendments to the Payment Systems (Regulation) Act 1998. These amendments will modernise Australia's payments regulatory framework so that a broader range of participants in the payments system - such as three-party schemes, mobile wallets and buy-now-pay-later providers - will be included in our regulatory oversight. We will soon consult to identify the priority areas that should be addressed under the expanded remit. We want to ensure that Australia's payments system remains world class well into the future.

## Banknote distribution

Another issue I would like to update the Committee on is recent developments in the cash distribution system. Cash remains a critical part of a resilient and inclusive payments system for all Australians. Although the use of cash for everyday payments has declined in recent decades, 1‰ million Australians depend on it to participate in the economy, including more vulnerable groups and Australians in regional areas. Cash also continues to be used as a store of wealth, particularly during periods of economic uncertainty, and can be a useful backup for electronic methods of payment. As a result, cash in circulation is around $105 billion, which is a record high level. The RBA is committed to supporting the Australian Government's policy objective to ensure cash remains a viable means of payment for as long as Australians want or need to use it.

As you are aware, the cash distribution system has faced significant challenges over recent years. Lower transactional use has made it more costly to store, process and distribute cash. These issues are most pressing for rural and regional areas where these services are most expensive. As you know, the logistics of moving cash to bank branches, ATMs and retailers is undertaken by cash-in-transit companies and the industry needs to work together towards a more sustainable distribution system. Linfox Armaguard, the main provider of these services, has faced financial strain and has been receiving industry funding for the past year.

The Council of Financial Regulators (CFR), which I chair, together with the ACCC, have met several times this year to discuss the challenges the industry is facing. In July, the CFR and ACCC jointly consulted on a proposed regulatory framework for cash distribution services. This would establish essential guardrails to support resilience and fair access to critical cash distribution services. The CFR and ACCC are currently reviewing feedback from the consultation, and expect to advise Government on options for the design of a regulatory framework in the near future.

As the issuer of Australian banknotes, the RBA also plays a key role in cash distribution. We provide banknotes to the major banks, who distribute these to the broader community. We provide incentives to support efficiency of distribution, encouraging banks to hold cash across the country, trade with each other and ensure notes of appropriate quality. We recognise that these arrangements need to adapt given changes in the industry, and so we are also reviewing the incentives we provide on wholesale banknotes to ensure they remain fit for purpose. We continue to work with industry participants to develop solutions that will best meet the needs of the community.

## Progress towards achieving the objectives from the Review of the RBA to be fit for the future

The RBA Review provided a valuable opportunity to reflect on the RBA's monetary policy analysis, decision-making and transparency. As you know, we incorporated meaningful changes prior to the commencement of the new Monetary Policy Board including press conferences after each meeting, publishing more information on our forecasts and key judgements, the media statement following meetings being issued by the Board rather than the Governor and the minutes of the Board meeting providing a more fulsome record of the discussion. We have an ongoing commitment to communication and transparency, and one recent change is to publish an unattributed

record of votes in the post-meeting statement. I believe these changes have and will continue to be valuable in enhancing the communication and accountability of our decisions.

The establishment of the Governance Board is also supporting the efforts we are making to strengthen the Bank's management, culture and operations including lifting risk management practices to meet the challenges of a modern central bank.

And more generally, we have made substantial progress in responding to the recommendations of the Review and to embed meaningful and lasting change. I can already see the impact of these changes. We are seeing signs of cultural shift, underpinned by a commitment to be more open and dynamic, which we will build on in coming years. While much has been achieved, we recognise that this is an ongoing journey of transformational change and continuous improvement.

The Governance Board will report on our progress on achieving the objectives of the Review by the end of this year. These changes are all designed to strengthen our ability to do our work and enhance the welfare of the Australian people

Thank you for listening. My colleagues and I look forward to answering your questions.",Michele Bullock
https://www.bis.org/review/r250924a.htm,Rajeshwar Rao: Balancing innovation and prudence - AI's role in India's financial future,"Keynote address by Mr Rajeshwar Rao, Deputy Governor of the Reserve Bank of India, at the 3rd edition of the CNBC-TV18 Banking Transformation Summit ""Banking that builds Bharat: AI-powered, credit-driven"", Mumbai, 16 September 2025. ",2025-09-16 00:00:00,"## Balancing Innovation and Prudence- AI's Role in India's Financial Future 1

Distinguished guests, participants, ladies and gentlemen, a very good evening.

I  am  delighted  to  address  this  august  gathering  of  distinguished  persons,  and  key stakeholders across the financial spectrum in the banking transformation summit on the  theme  of  'Banking  That  Builds  Bharat:  AI-Powered,  Credit-Driven',  which  is extremely contextual and relevant and encapsulates the spirit of Viksit Bharat .

## Introduction

2.  The Indian banking system has time and again exhibited its capability to embrace and adapt to newer technologies. Beginning from the early days of computerization in the  1980s,  to  spread  of  ATMs  in  the  1990s,  the  expansion  of  internet  and  mobile banking in the 2000s, interoperable infrastructure for payments, data repositories and data  sharing  since  2010s,  the  banking  sector  has  adapted  successfully  to  the requirements  of  the  changing  times  and  has  over  the  period  made  banking  more efficient and inclusive. Banking has now entered into a new phase of evolution driven by  digital  democratization.  A  prime  example  is  the  homegrown  Unified  Payments Interface  (UPI),  which  has  made  India  a  global  leader  in  digital  payments  which reinforces our belief that responsible innovation can be a powerful driver of progress.
3.  The Government of India has articulated an ambitious vision of 'Viksit Bharat' i.e., transforming India into a developed country by 2047. This sets the tone for the next step  in  our  technological  journey  of  financial  sector  and  more  specifically,  in  the banking sector. Under Viksit Bharat, the goal is for every adult to not only have a bank account, a target largely achieved under Jan Dhan Yojana 2 , but also have access to affordable credit, insurance, and investment options. The endeavour of banking sector should be to ensure that benefits of banking, more so of credit accessibility, is made available to customers across all segments on a fair, transparent and affordable basis.

1   Keynote Address delivered by Shri M Rajeshwar Rao, Deputy Governor, Reserve Bank of India on September 16, 2025 at 3rd edition of the CNBC-TV18 Banking Transformation Summit on 'Banking That Builds Bharat: AIPowered, Credit-Driven' in Mumbai. Inputs provided by Chandni Trehan Saluja and Abhishek Kumar Narwal are gratefully acknowledged.

2  Accounts have grown from 14.72 crore in 2015 to over 56.16 crore by August 2025, with around 67% in rural/semiurban areas and 33% of Jan Dhan accounts were opened in urban/ metro -https://www.pib.gov.in/PressNoteDetails.aspx?NoteId=155102&amp;ModuleId=3 areas.

## Measures taken by RBI

4. In last five years, between 2019-20 to 2024-25, the bank credit growth has been averaging around 10.5 percent 3 . It is also seen that the share of retail credit has grown to 33 per cent 4  while the share of credit to Micro, Small &amp; Medium Enterprises (MSME) sector has been growing steadily, forming 18 per cent of total bank credit as of March 2025. Before delving into the role of new technologies, let me briefly first touch upon the steps taken by RBI over the years to increase flow of credit.
5.  The RBI has undertaken several measures to expand both the reach and depth of credit by reducing friction, increasing access points, and lowering the cost of financial service  delivery.  Key  initiatives  include  Aadhaar-based  KYC,  the  Central  KYC Registry,  the  revised  Priority  Sector  Lending  norms,  Partial  Credit  Enhancement Guidelines,  and  the  Account  Aggregator  framework 5 .  In  response  to  the  growing digitalisation  of  credit,  the  Digital  Lending  Guidelines 6  were  introduced  to  ensure transparency, fairness, data privacy, while enabling fund flow to wider sectors. The RBI has also enabled formal credit access through frameworks like Trade Receivables e-Discounting System (TReDS) for MSMEs, co-lending models between banks and NBFCs, and targeted refinancing schemes.
6.  More recently, the RBI has, in collaboration with its subsidiary RBI Innovation Hub (RBIH), tested a prototype of the Public Tech Platform for Frictionless Credit 7  to enable seamless digital data flow to lenders. Building on this, the Unified Lending Interface (ULI) 8  is  being developed to transform credit delivery by integrating access to both financial and non-financial data such as digitised land records, Goods and Services Tax Network (GSTN) data, property records, and satellite data along with services like e-KYC,  the  Account  Aggregator  framework,  and  Credit  Guarantee  Fund  Trust  for Micro and Small Enterprises (CGTMSE). This ecosystem aims to make lending faster, cheaper, and more accessible to underserved segments. Together, this digital public

3  Handbook of Statistics on the Indian Economy, 2024-25 - Table 44 - Scheduled Commercial Banks - Select Aggregates - Adjusted Bank Credit (excluding the impact of a merger of non-bank with a bank since July 28, 2023). Handbook of Statistics on the Indian Economy, 2024-25 - Table 45 - Sectoral Deployment of Non-Food Gross

4 Bank Credit - Share of Non-Adjusted Personal Loans

5 https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&amp;Id=10598

6 https://rbi.org.in/Scripts/NotificationUser.aspx?Id=12848&amp;Mode=0

7 https://rbi.org.in/scripts/BS\_PressReleaseDisplay.aspx?prid=56200

8 https://rbihub.in/unified-lending-interface/

infrastructure and an enabling regulatory framework would help to drive inclusive credit growth.

## Gaps in access to formal credit

7.  Having said that, a lot of distance still needs to be traversed, as the gap in credit penetration persists. Even today, only around 25 per cent of India's adult population have formal access to institutional credit 9  while in the MSME sector (which forms ~30 per cent of GDP) 10 , only part of their credit needs is met by formal institutions 11 .  While the Financial Inclusion Index developed by RBI has shown steady improvement, rising from 53.9 in March 2021 to 67.0 in March 2025 12  reflecting the growth in account ownership and credit access, scope remains in effecting improvement in the usage and quality of services delivered. The gap between inclusion and credit access is a challenge and an opportunity to banking fraternity. The credit needs to not only grow in terms of volume and numbers but also needs to be directed towards productive, sectors that deliver higher multipliers such as MSMEs, infrastructure, informal sectors, and  rural  population,  to  achieve  not  just  the  goal  of  ' Viksit  Bharat '  but  to  have  a ' Samaveshi Viksit Bharat' .

## The new wave in banking- Artificial Intelligence

8.  Driving the next credit revolution will require harnessing new technologies. Over time, the role of technology in finance has shifted from improving operational efficiency to fully automating and centralizing previously manual, fragmented processes. Among emerging technologies, Artificial Intelligence (AI) stands out for its vast potential from strengthening  internal  operations  and  risk  management  to  delivering  faster,  more seamless  customer  experiences.  Reports  indicate  that  nearly  70%  of  Banking, Financial Services, and Insurance (BFSI) organisations in India have an enterprise level AI strategy in FY 2024 13 . An RBI study of banks' annual reports also shows a sharp rise in references to AI, underscoring its growing strategic importance 14 . While

9  https://newsroom.transunioncibil.com/more-than-160-million-indians-are-credit-underserved/

10 https://www.pib.gov.in/PressReleasePage.aspx?PRID=2142170

11

https://www.sidbi.in/uploads/Understanding\_Indian\_MSME\_sector\_Progress\_and\_Challenges\_13\_05\_25\_Final.p df

12  https://www.rbi.org.in/scripts/FS\_PressRelease.aspx?prid=60875&amp;fn=2754 dated July 22, 2025

13  NASSCOM AI Adoption Index - India]

14 RBI Bulletin - How Indian Banks are Adopting Artificial Intelligence?

[https://rbi.org.in/Scripts/BS\_ViewBulletin.aspx?Id=22931]

both  demand-side  factors  (profitability,  competition,  compliance  efficiency)  and supply-side drivers (tech advances, data growth, new business models) influence AI adoption, supply-side forces remain the primary catalyst.

9. AI as a discipline has evolved over decades and has seen rise of machine learning systems  which  can  learn  from  historical  data  to  make  decisions,  often  with  high accuracy. Indian banks and non-banks, embarked on AI journey nearly a decade ago, mainly handling at that time, large volume of information and supplementary analysis which added value without displacing established systems. The adoption has since moved from deployment of AI for back-office functions for efficiency enhancements to more varied use cases such as in the areas of fraud risk management, optimising IT operations, facial recognition for KYC, credit scoring, claim processing, and customer focused services. As observed in the surveys conducted by RBI in 2023 and 2024 15 , more than three-fourth of the banks have deployed AI-powered chatbots for customer service. This marks a fundamental shift in which AI is no longer just an enabler but a part of the decision-making process, product design, and customer engagement.

## AI across the credit lifecycle

10. Though, the banks have been using AI in some areas of lending, there is potential use  cases  for  its  usage  across  other  areas  of  the  credit  lifecycle.  I  would  like  to highlight a few of them:

## (i) Credit Inclusion

11. An important use case would be in the way credit is assessed and distributed. This would require supplementing existing assessment methods with broader data based and  more  refined  analysis,  whereby  financial  institutions  could  gain  additional perspectives  on  risk  and  capability  of  the  potential  borrowers.  This  would  be  a significant game changer to address the credit requirement of the millions of 'credit invisibles', i.e., people with no formal credit history or new to credit customers. Given the  availability  of  a  variety  of  digital  footprints  which  customers  have,  AI  can  be leveraged to peruse alternative data sets, to assess their creditworthiness. This would mean a paradigm  shift  from  asset-based  lending  to  cash-flow  and  alternate  databased lending, promoting a journey towards inclusive digital finance. Government of

15  RBI Trends and Progress of banking in India - 2023-24 (Para 10 under Chapter IV)

India also has recognised the potential of alternate data to drive financial inclusion and has started initiatives such as the 'Grameen Credit Score' 16  which aims to provide underserved communities with formal credit access by analyzing alternative financial data, including UPI transactions, government subsidy receipts, and utility payments.

## (ii) Turnaround Time

12. AI enables banks to process large volumes of customer data quickly, accelerating credit  decisions  and  service  delivery.  This  is  especially  valuable  in  time-sensitive sectors like MSME working capital, where AI can analyse diverse datasets like bank statements, payment histories, GST filings, e-invoices, TReDS receivables, and public records. It also aids lenders in assessing seasonality, supply chains, inventory cycles, customer concentration, and overall creditworthiness of MSMEs.

## (iii) Credit Appraisals

13.  The  banks  can  embrace  AI  algorithms  for  leveraging  behavioural  analytics  by analysing  vast  amounts  of  transactional  data  for  detecting  patterns  indicative  of creditworthiness  and  stable  financial  behaviour,  leading  to  more  accurate  credit assessments and improved decision-making processes.

## (iv) Customized Credit Solutions

14.  AI's  ability  to  dynamically  assess  customer  preferences  and  behaviour  can empower banks to offer customized credit solutions tailored to an individual's financial capacity. This not only improves loan accessibility but also ensures that borrowers receive fair and structured financial products that align with their needs.

## (v) Early Warning Signals and Provisioning

15. AI-based early warning systems can help lenders monitor credit portfolios more effectively through dynamic risk scoring and real-time default probability tracking. By flagging  early  signs  of  financial  stress,  these  systems  protect  the  lender's  balance sheet while giving borrowers a chance to course-correct. The goal, ultimately, is not just to lend more but to lend better.

16 https://www.pib.gov.in/PressReleasePage.aspx?PRID=2112198

## (vi) Document Management

16. AI also plays a key role in automating document verification by using techniques like  Optical  Character  Recognition  (OCR)  to  read  and  process  information  from documents  -  especially  handwritten  documents  which  are  generally  unstructured, allowing for automated extraction of data thus reducing rejections. It can also examine the  visual  characteristics  of  the  documents  to  detect  forgery,  tampering,  or modifications and accurately process large volumes of records, classifying, extracting, and  validating  key  data,  thereby  improving  efficiency  and  minimizing  errors  in  the lending process.

## (vii) Customer Support and Grievance Redress

17.  One promising use case of AI is the development of multilingual chatbots and voice  assistants  which  enable  customers  to  interact  with  banks  in  their  native language. This is a revolutionary change as by localizing the user experience, the AI can enable more people across different languages, literacy levels, and abilities to confidently use formal banking services.
18. Banks are also experimenting with using AI powered virtual assistants to enable staff to respond to customer queries which can enhance customer experience. Timely resolution of customer queries boosts trust in the banking system and encourages deeper engagement, furthering financial inclusion. As digital access has expanded, so has customer complaints. This highlights another use case for AI. It can efficiently categorize, prioritize, and route complaints, enabling faster, proactive resolution by detecting patterns and addressing root causes before issues escalate into grievances.

## (viii) Loan Servicing

19.   AI-powered loan servicing platforms can create personalised repayment solutions and reduce operational errors across servicing and portfolio management. They can also  provide  new  ways  of  loan  servicing  by  supporting  collections  and  recovery through  prioritised  outreach  strategies.  AI  can  help  to  strengthen  compliance  with auditable trails of measures initiated for recovery.

## (ix) Fraud Risk Management and Cyber Security

20. AI also holds potential in safeguarding the financial system itself. As cybercriminals increasingly use AI for sophisticated attacks, Regulated Entities (REs) can leverage

AI-driven  tools  to  protect  customers  and  detect  threats.  AI  can  monitor  large transaction volumes in real time, flagging anomalies that may assist in detecting fraud or money laundering.

## Collaboration for Credit Revolution

21. With fintechs advancing rapidly, REs are increasingly partnering with them across the credit lifecycle. A key model-Digital Lending, involves embedding processes like KYC,  credit  assessment,  and  collection  directly  into  fintech  platforms.  While  such collaborations enhance financial inclusion and innovation, they also bring risks such as blurred accountability, data misuse, inadequate grievance redressal, and potential mis-selling. The guiding principle to address this remains the premise that regardless of the model used, accountability ultimately rests with the regulated entity.

## Risks and challenges of AI - New dimensions and the Ethical imperative

22.   Technological advancements come with challenges that REs must recognize, as these  risks  can  undermine  the  benefits  of  innovation.  For  example,  the  recent Supreme Court ruling 17  on video-based e-KYC highlighted that mandatory automated processes may create barriers for people with disabilities, underscoring the need for fairness  and  accessibility  in  technology  adoption  to  avoid  exclusions.  AI,  without proper controls, can introduce risks like algorithmic bias, lack of transparency, ethical concerns, and systemic vulnerabilities. It can also amplify existing risks such as thirdparty  dependencies,  concentration,  model,  cyber,  and  data  privacy  risks.  Let  me highlight a few:

## (i) Third-party dependency

23. As AI adoption grows, financial institutions increasingly rely on complex networks of  external  providers,  cloud  platforms,  AI  vendors,  and  data  aggregators.  These interdependencies create vulnerabilities where a disruption or breach in one link can cascade across multiple institutions, disrupting critical services. The complexity and opacity  of  these  layers  makes  it  difficult  to  identify  risks,  which  may  accumulate unnoticed and spread rapidly during shocks.

17 https://api.sci.gov.in/supremecourt/2024/17879/17879\_2024\_13\_1501\_61229\_Judgement\_30-Apr-2025.pdf

## (ii) Market Correlation

24. A critical  vulnerability  of  AI  is  its  potential  to  synchronize  behaviors  across  the financial system. When institutions use similar models trained on overlapping data, their  decisions  on  asset  pricing,  credit  assessment,  trading,  and  others  may  align, creating  hidden  linkages.  This  can  amplify  market  stress,  spread  shocks  rapidly, worsen  liquidity  shortages,  increase  asset  price  volatility,  and  trigger  sharp,  selfreinforcing market swings.

## (iii) Cyber Risk

25. The integration of AI into financial systems-especially through new interaction methods and increased reliance on specialized providers expands the cyber threat landscape in unpredictable ways. AI's strengths, such as reliance on large datasets, open interfaces, and automated decisions, also create vulnerabilities. Malicious actors can exploit these through adversarial attacks or compromised training data, potentially corrupting  AI  outputs.  Even  a  single  breach  can  disrupt  critical  operations  across multiple REs and undermine trust in AI across the sector.

## (iv) Model Risk

26.  Unlike  traditional  models  built  on  clear  rules  and  well  laid  out  assumptions,  AI models operate through dense, opaque algorithms, which we also refer to as 'black boxes' and evolve with the data they consume. This introduces the risk of prejudice within models where biased data, opaque design, or untested assumptions may lead to biased outcomes of model. Such distortions can lead to unfair credit assessment, excluding  deserving  segments,  or  conversely  extending  credit  where  risks  are understated.

## (v) Data Risk

27.  AI  is  only  as  strong  as  the  data  that  shapes  it  and  this  leads  to  a  host  of vulnerabilities emanating from data quality. Currently, while most of the financial data is structured, much of it is fragmented across systems, often in inconsistent formats, sometimes incomplete or outdated, or skewed by historical biases. When such data flows into AI models, it can produce results that may appear authentic, but suboptimal and in some cases may produce wrong outputs. Over-reliance on such models can quietly turn data gaps into large-scale misjudgments and wrong business decisions.

## (vi) Legal Certainty and Intellectual Property Right issues

28. AI models are often trained on publicly available data, like news stories, articles, and  explainer  videos,  etc.,  and  may  lead  to  intellectual  property  and  copyright infringements.

## (vii) Concentration Risk

29.  Reserve  Bank's  Financial  Stability  Report 18 has  pointed  out  the  high  market concentration in critical third-party providers of cloud/ AI services, noting that heavy reliance on a small number of tech players could create single points of failure.  Such concentration risks are compounded by the vertical integration of certain providers, who supply not just models but also the underlying infrastructure and datasets.

## (viii) Frauds and disinformation

30. While AI is transforming many of the processes of financial institutions, the rise of Generative AI has also lowered the barriers for fraud, putting powerful deception tools in the hands of malicious actors. Deepfakes can mimic voices, faces, and documents with unsettling accuracy, while AI-generated phishing lures, fake identities, and forged credentials can slip past traditional checks.
31. In light of these multi-faceted risks, some of which I have touched upon, it becomes crucial  that  adoption  of  AI  in  banking  sector  must  be  done  in  a  responsible  and measured  manner.  The  excitement  around  AI's  benefits  should  not  overshadow prudent risk management. In this context, the following aspects become even more crucial.

## (i) Governance

32. A robust governance is indispensable for ensuring the integrity of data, the reliability of  models,  and  mitigating  the  risks  associated  with  adoption  of  AI.  The  financial institutions should have in place a comprehensive strategy for AI adoption. It should be accompanied by clear policies, risk appetites, criticality, and impact assessments

18 RBI FSR - June 2025 (Para 1.42 under Chapter 1)

https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/0FSRJUNE20253006258AE798B4484642AD861CC35BC 2CB3D8E.PDF

as well as ethical standards that cascade through the organisation. Robust monitoring and  reporting  mechanisms  should  be  put  in  place  to  ensure  alignment  between innovation goals and institutional stability. Further, in a regulated industry like banking, it is essential to understand how a model arrives at its decisions, making explainability a  critical  requirement.  Thus,  there  is  a  need  for  financial  institutions  to  invest  in Explainable AI frameworks that provide clear, auditable reasons for loan decisions. Strong governance is central to managing AI-driven model risk.

## (ii) Human-in-the-loop

33. While AI can automate and recommend, the humans should be responsible for the decisions. The financial institutions while adopting AI for business processes should implement the principle of human-in the-loop to ensure that AI is leveraged as a tool to support and enhance human decisions and not replace them.

## (iii) Maintaining Data quality and security

34. High-quality data is the backbone of safe and effective AI in finance. While the RBI already collects data through supervisory reports, regulatory returns, and surveys, the introduction  of  model  risk  guidelines,  aligned  with  global  best  practices,  will  soon extend this scope to include data on AI models used by regulated entities. Financial institutions  should  therefore  adopt  robust  data  strategies,  incorporating  diverse, reliable indicators that reflect  both the scale  of  AI  adoption  and  associated vulnerabilities.
35. When AI is used for credit decisioning or financial inclusion, especially through alternative  data,  customer  data  becomes  central,  making  privacy  and  security paramount. The Digital Personal Data Protection (DPDP) Act, 2023 provides the legal framework for responsible data use, and financial institutions must ensure compliance through consent-based, privacy-first data handling practices.

## (iv) Research and Development

36. Continued investment in research and development is critical for advancing the capabilities of AI in lending lifecycle for unlocking new opportunities. Research efforts of the financial institutions should focus on improving data quality and accessibility, developing  novel  AI  algorithms  for  enhancing  credit  inclusion,  and  addressing  key

challenges related to bias, fairness, and interpretability in credit evaluation as well as enhancement of in-house capabilities to manage concentration risk of providers.

## (v) Industry Collaborations

37.  Collaboration  and  knowledge-sharing  among  industry  stakeholders,  including financial  institutions,  fintech  companies,  and  academic  institutions  is  essential  for driving innovation and addressing common challenges in AI-driven credit processes. This  can  foster  the  development  of  best  practices,  standards,  and  frameworks  for responsible  AI  use,  promoting  transparency,  fairness,  and  accountability  in  credit evaluation. Some of the initial areas where the industry can collaboratively work is harmonising AI taxonomies and developing common benchmarks and metrics.

## Regulatory guardrails for new technologies

38. As AI adoption gains traction, regulatory oversight is crucial in ensuring an efficient, responsible and fair adoption. Recognising the increasing usage of model-driven credit assessments  and  decision-making  in  REs,  the  RBI  had  issued  a  draft  circular  on model risk management in credit 19 , setting out expectations on governance, validation, monitoring,  and  accountability.  Building  on  this  foundation  and  recognising  the increasing usage of models by the REs, not only for credit functions but also for wide spectrum of processes across functional and operational domains, the Bank is in the process of expanding the scope of these guidelines and would be issuing overarching Model Risk Management Guidelines applicable across all models. As technologies like AI are generally not adopted uniformly across the sector and owing to presence of a varied type of entities with different scales, the principle of proportionality has to be also factored in. The objective would be to ensure that all REs can adopt technologies best suited to their business models and customer needs, while effectively managing risks  such  as  explainability,  algorithmic  bias,  resilience,  and  over-automation 20 .  In continuation  of  this  approach,  the  recently  released  report  of  the Committee  on Framework for Responsible, Efficient, and Ethical AI (FREE-AI) 21 , has laid out seven

19 https://www.rbi.org.in/scripts/bs\_viewcontent.aspx?Id=4479

20 RBI Annual Report 2024-25: VI.19 under Chapter VI (Regulation, Supervision and Financial Stability)

21  FREE-AI Committee Report

[https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/FREEAIR130820250A24FF2D4578453F824C72ED9F5D5 851.PDF] `

guiding sutras for trustworthy AI, and emphasized the need for a robust model risk management framework by REs.

## Conclusion

39.  Over  the  decades,  Indian  banking  sector  has  exhibited  its  ability  to  integrate meaningful technological advancements. As AI transforms financial services, it's clear this is a development which is not a mere upgrade but a major shift impacting products, processes, and operations. From the risk perspective, the long-term implications of AI adoption on the financial system remain uncertain but exhibit potentially far-reaching consequences.  It  is  therefore  imperative  for  the  financial  sector  to  approach  AI adoption  with  foresight,  investing  not  just  in  innovation,  but  also  in  resilience  by building strong governance structure, diversifying dependencies, engaging in continual assessment of emerging risks, and ensuring their AI strategies align with long-term  safety  and  sustainability  of  the  financial  system.  Ensuring  that  AI-driven decisions  are  ethical,  unbiased,  and  transparent  will  be  paramount  in  building  a sustainable, AI-powered financial future. This calls for ' optimistic vigilance ' wherein AI and  other  technologies  in  banking  are  neither  feared  nor  embraced  blindly  but ' navigated' .  The  RBI,  on  its  part,  will  continue  to  provide  an  enabling  regulatory environment so that together we can build a banking system that truly builds Bharat, and not just builds, but transforms Bharat.
40. Let me sign off with the thought 'Trust is the currency of banking'. Even as we broaden the credit coverage using algorithms and digital interfaces, maintaining the trust will be our biggest challenge and also our biggest responsibility.

Thank you.",Rajeshwar Rao
https://www.bis.org/review/r250922b.htm,Erik Thedéen: The banks need to have more active liquidity management,"Speech by Mr Erik Thedéen, Governor of the Sveriges Riksbank, at a meeting with monetary policy counterparties, hosted by the Sveriges Riksbank, Stockholm, 11 September 2025.",2025-09-11 00:00:00,"SPEECH

DATE:

11 September 2025

SPEAKER:

Erik Thedéen

VENUE:

Sveriges Riksbank

TIME:

13.00

## The banks need to have more active liquidity management

Welcome to the Riksbank!

Today I am going to talk about the challenges faced by the Riksbank and other central banks in designing their operational frameworks when normalising their balance sheets (see Figure 1) and how this affects the Swedish banks. For several years, the amount of central bank liquidity in several countries has been at or near record levels, due to monetary policy-driven asset purchases. But that is now changing. 1

My message here today is that our monetary policy counterparties, the banks, need to prepare for the fact that there will soon be substantially less central bank liquidity in the Swedish banking system. They need to adapt to managing their liquidity in the market. This makes greater demands of the individual bank to have both operational capacity and a willingness to lend and borrow on the overnight market. At the same time, the banks should always be able to use the Riksbank's lending facilities without hesitation when needed. They not only can, but should, use them when the money market is for some reason struggling to reach equilibrium and overnight rates are moving erratically. The Riksbank's lending facilities are there to be used and are the basis for stable interest rate formation.

The banks' liquidity management is important for the entire financial system and for the Riksbank, as it is important for the Riksbank's operational framework, and also for Swedish financial stability.

1 The theme of this speech is also discussed in the article 'Banks need more active liquidity management' in Financial Stability Report 2025:1, Sveriges Riksbank (2025).

Telephone: +46-(0)8-787 00 00, Website: riksbank.se



## Central bank liquidity will decrease

Central bank liquidity refers to the banking system's total claims on the central bank in domestic currency. It is created solely by the central bank, either through asset purchases or through collateralised lending and repos. The banks can place central bank liquidity as overnight deposits with the central bank -so-called central bank reserves. These reserves are the most liquid and secure financial assets that serves as means of payment between banks. Or they can invest it in longer-term market operations, such as certificates issued by the central bank. In Sweden, the Riksbank issues certificates in which the banks can invest central bank liquidity. The Swedish banks have in recent years had large holdings of both reserves and certificates (see Figure 2). In several other countries, banks can only place central bank liquidity with the central bank as overnight deposits -central bank reserves.

When we have had these unusually high levels of central bank liquidity, banks have held considerably more reserves than they actually need to make their payments. We are now in a situation where we and several other central banks are reducing our holdings of securities, known as quantitative tightening (for Sweden, see Figure 3). This reduces central bank liquidity in the banking systems (for Sweden, see Figure 2). If quantitative tightening continues, according to the most recent monetary policy decision, central bank liquidity in the Swedish banking system is estimated to be around SEK 400 billion in 2030. However, the Riksbank has not determined this amount on the basis of considerations relating to the operational framework, it is primarily a result of the policy decision to finance the foreign exchange reserve in Swedish kronor.

Many central banks currently steer short-term market rates towards the central bank deposit rate, or the floor of the interest rate corridor that typically exists between the rates in the central bank's deposit and lending facilities. Since the abundance of central bank reserves has been created by the central bank supplying liquidity through the purchase of securities, such systems have come to be known as supply-driven abundant reserves systems.

In the past, many central banks, including the Riksbank, relied on banks' demand for central bank reserves and applied traditional interest rate corridor systems to meet this demand. Central banks aimed to steer short-term market interest rates towards the centre of the interest rate corridor, and the amount of central bank reserves was relatively small. Reversely, if there are large amounts of central bank liquidity, central banks with a corridor system can drain liquidity in various ways to reduce the amount of reserves. Such systems have come to be known as ""scarce reserves systems"" in the international debate (for a stylized classification of central banks' frameworks, see Table 1).

The Riksbank's operational framework currently has a narrow interest rate corridor and is adapted to function with different amounts of central bank liquidity. The banks should primarily be able to obtain the liquidity they need via other banks, for example via overnight loans, or with the help of the Riksbank's standing lending and deposit facilities and open market operations.

However, the Riksbank is also continuously reviewing how the operational framework functions and is currently considering some adjustments to strengthen incentives for the banks to participate in the overnight market, while at the same time not hesitating to borrow from the Riksbank if necessary. There are three changes in particular that we are looking at. One potential change is to widen the interest rate corridor, i.e. the difference in interest rates between the deposit and lending facilities. Another possible change is to lower the interest rate premium for the supplementary liquidity facility. A third is mandatory test transactions, where our counterparties pledge collateral to borrow from the Riksbank. I will tell you more about these potential measures later in this speech.

## The banks' liquidity management is affected by the Riksbank's operational framework

The Riksbank's operational framework is an interest rate corridor system with standing deposit and lending facilities that are used to steer the short-term market rate towards the policy rate. The facilities allow the banks to invest or borrow unlimited central bank reserves with overnight maturity. Currently, the deposit rate is 10 basis points below the policy rate and the lending rate is 10 basis points above it. It is this range of 20 basis points that forms the interest rate corridor. There is also a supplementary liquidity facility with an interest rate of 75 basis points above the policy rate. An important feature of the Riksbank's operational framework is that it is integrated with the payment system and that the use of the standing facilities is automated. This means that unsettled intraday credits and deficits in the payment system at the end of the day are automatically converted into overnight loans in the Riksbank's standing lending facilities, as long as the banks have sufficient eligible securities to pledge as collateral.  But also that the banks have access to central bank reserves when the instant payment system is open 24 hours a day, 7 days a week, all year round. 2

The banks should be comfortable and confident in using our facilities to access central bank reserves quickly and efficiently when needed. This applies both to

2  The monetary policy night can be said to be one hour long, as transfers of reserves via intraday credit from the large-value payment system (RIX-RTGS) to the instant payment system (RIX-INST) are closed between 18.00 and 19.00.

access to intraday credit, whenever the payment system is open, and to overnight loans to cover any deficit at the end of the day. But there also needs to be a balance of liquidity between the banks, as liquidity is not evenly distributed; some banks may have surpluses while others have deficits. Therefore, the existence of a functioning overnight market is crucial. The overnight market refers to the market in which banks balance liquidity with each other before the end of the day, until the next day. In a corridor system like the Riksbank's, the idea is that banks borrow reserves from each other on the overnight market so that they are redistributed from banks with surpluses to banks with deficits. As a result, the banking system as a whole should not need a large amount of central bank liquidity.

The Riksbank conducts weekly market operations with the aim of providing or withdrawing liquidity from the banking system. Its purpose is to balance the liquidity position of the banking system so that the central bank reserves are close to zero during the maturity of the certificate or repo, thus better balancing the borrowing and lending needs of different banks in the overnight market. The pricing in the open market operation also provides guidance on the level of interest rates that should be the starting point for interest rate setting in the market for short-term maturities in Swedish kronor.

If one or more banks have a liquidity deficit, there is always one or more banks that have an equally large surplus. The approach is based on the understanding that the reserve holdings of different banks can vary from day to day, so that an individual bank's surplus of reserves today may be a deficit tomorrow. There is therefore a long-term economic interest for banks to balance one another's reserve positions over time by trading on the overnight market. For this to happen in practice, banks need to trust one another and establish business relationships among themselves.

The interest rate corridor is intended to create incentives for the banks to even out surpluses or deficits among themselves as far as possible on the overnight market, as they can offer each other more attractive interest rates than if banks with surpluses invest reserves in the Riksbank and banks with deficits borrow from the Riksbank. If the corridor is wide enough, banks will seek to borrow from one another at an overnight rate close to the centre of the corridor. As the overnight rate acts as an anchor for longer-term interest rates, the level of the policy rate thus propagates through the economy in line with monetary policy intentions. We can conclude that the Riksbank's operational framework has functioned well, with money market rates close to the policy rate (see Figure 4), during periods when the size of our balance sheet has fluctuated considerably.

At present, banks mainly choose to balance liquidity among themselves via unsecured overnight loans. We expect the need for overnight loans to increase as

central bank liquidity continues to decline. Banks may then want some of the overnight loans to be collateralised. Liquidity smoothing can equally well be done through overnight repos or collateralised loans if the banks prefer. Regardless of which markets the banks prefer to use, the Riksbank's policy rate, via the overnight rate, will serve as the anchor for Swedish money market rates. The overnight market must function well enough to prevent and reduce the risk of liquidity disruptions in the banking system, while facilitating the mitigation of such disruptions when they do occur. 3 The Riksbank is prepared to cooperate with market participants to help remove infrastructural barriers (e.g. last time of day for cleared repos) and promote a more liquid repo market and collateralised lending.

## Most central banks have steered the overnight rate towards the 'floor'

The main contributors to the large amount of central bank liquidity in the Swedish system are the financing of the foreign exchange reserves with Swedish kronor and the monetary policy securities purchases from 2015 until 2022. When central banks expanded their balance sheets by buying securities, they injected large amounts of central bank liquidity into the banking system as payment for the securities -considerably more than the banks demand.

When this happens, short-term market rates are pushed down towards the central bank deposit rate. To influence the setting of interest rates in the money market, most central banks then chose to stabilise overnight rates in the market with different variants of supply-driven floor systems.

Many central banks that have applied floor systems in an environment of excess central bank reserves see several advantages in doing so, even when central bank reserves are declining as a result of quantitative tightening. One of the benefits is that the banks always have ample access to the safest and most liquid financial asset -central bank reserves -to settle payments and fulfil regulatory requirements for sufficient liquidity and to counter liquidity shocks. At the same

3  If the central bank only wants to achieve clear signalling of monetary policy, where the focus is solely on steering market rates, it can follow Knut Wicksell's suggestion to lend against good quality collateral at the same rate as it accepts deposits at the central bank. Wicksell argued that the costs and possible losses that the application of an interest rate corridor of 0 basis points could entail for the central bank should be covered by the seigniorage and that the government should cover the central bank's losses, see Wicksell (1919).

The proposal highlights the need for the central bank to consider both monetary policy and stability aspects in the design of the operational framework. An excessively narrow interest rate corridor provides little or no incentive for banks to use market solutions to price and manage risk. The central bank will have a large footprint in financial markets and take over risk that banks should manage themselves. This contributes to distorting the pricing of financial assets and weakening the incentives for banks to limit the risks on their balance sheets.

time, they clearly steer the overnight rate towards the central bank deposit rate, which becomes the most important policy rate.

However, floor systems also have some disadvantages. For example, they provide weak incentives for banks to balance liquidity among themselves in the market. When most banks have a surplus of central bank reserves and can deposit them risk-free at a favourable rate with the central bank, they tend to do so instead of lending to other banks that are currently short of liquidity. This is because the banks with a surplus do not think they earn enough from lending to other banks. One way to put it is that the opportunity cost is simply too low when market rates are close to the central bank's deposit rate. Banks with liquidity shortages can then turn to the central bank to obtain central bank reserves instead. This tends to increase the demand for central bank reserves, which means that the central bank lends additional reserves to banks that could have borrowed the reserves already held by other banks. This increase in central bank reserves, which has been experienced by Norges Bank and others, makes it more difficult to normalise the central bank's balance sheet after quantitative easing. However, central banks can prevent such a development by increasing the opportunity cost of reserves, thereby strengthening banks' incentives to balance liquidity among themselves. 4

Floor systems also mean that the central bank must somehow ensure that the banking system always has a sufficiently large liquidity surplus towards the central bank, either by purchasing securities or by lending. Otherwise, the central bank will not be able to influence market interest rates as intended by the chosen monetary policy. Both purchases and collateralised lending result in the disappearance of high-quality securities from the market, securities that banks could have acquired themselves to meet liquidity requirements. The liquidity of the markets for these securities may also deteriorate. This risks contributing to the banks relying even more on the central bank instead of acting on the market themselves. If central bank reserves are cheaper and more favourable than raising liquidity in the market, the incentives for banks to limit liquidity risks on their balance sheets on their own are weakened.

4  Discussed in Bernhardsen and Kloster (2010) and Borio (2023), among others. A quota system means that individual banks may invest a certain proportion, or quota, of their deposits at a favourable rate, usually the central bank's policy rate, and invest the remainder of their deposits in excess of the quota at a less favourable rate. In Norway, the quota is based on the size of the individual bank (balance sheet total) and banks are allowed to place the deposits specified by the quota at Norges Bank's policy rate and the remainder of their deposits at a rate 100 basis points below the policy rate. In Switzerland, The SNB uses a system of tiered remuneration. This encourages liquidity redistribution between sight deposit account holders and thereby promotes an active money market. For sight deposits up to a certain threshold, the SNB policy rate is applied. Sight deposits above this threshold are remunerated at the SNB policy rate minus a discount, see SNB Implementation of Monetary Policy.

## Challenges in balancing the amount of central bank reserves

Central banks are now asking themselves how much central bank reserves are needed in the banking systems to fulfil their monetary policy and financial stability tasks effectively and without unintended side effects.

Experience has shown that floors and corridors can both steer money market rates to where the central bank wants them to go. Therefore, the discussion on how central banks should design their policy regimes in this situation has mainly centred on financial stability. As the conditions in the financial system vary from country to country, central bank governance systems will also differ somewhat. This also means that there is not necessarily one single optimal system.

One factor that determines how well a particular policy regime contributes to financial stability is the design and functioning of the money market. As the banking systems and institutional set-up of countries affect the structure of the money market, it is natural that different countries choose different operational frameworks.

Experience with shocks also seems to influence how different central banks view appropriate responses. For example, the banking turmoil that occurred in March 2023, when Silicon Valley Bank and Credit Suisse experienced very severe liquidity problems, showed that the ample amount of central bank reserves already in the banking system was not enough to prevent and avoid liquidity crises.

It highlights some universal factors that are important for the operational framework, such as the fact that banks should not shy away from using the liquidity facilities provided by central banks. The standing facilities should not be associated with any stigma. In addition, the banks must have the operational capacity to provide collateral so that the liquidity facilities can be utilised. I will return to this a little later.

## Several central banks stick to the floor system with some adjustments

Several central banks have clearly communicated that they will continue to apply floor systems even when their balance sheets are normalised, but in slightly different ways.

When central banks with floor systems want to reduce their securities holdings, they have to choose how to maintain the banking system's liquidity surplus towards the central bank. Should they supply the banking system with sufficient central bank reserves by buying and holding securities, i.e. a supply-driven floor system, or by meeting the banking system's demand for central bank reserves through lending and repos, i.e. a demand-driven floor system? For example, the Riksbank's operational framework is currently designed to be able to provide the

amount of central bank reserves required by the banks in a flexible manner. However, the Riksbank does not do this by lending within the framework of the operational framework, but by allowing the banks to choose how much of the surplus liquidity is invested in certificates. The rest will remain as reserves.

In a demand-driven floor system, the central bank does not need to hold as many securities as in a supply-driven floor system. On the other hand, the loans and repos that add to the reserves will tie up collateral, which is largely securities.

The Federal Reserve (Fed) and the Bank of Canada (BoC) have communicated that they will maintain the liquidity surplus of the banking system by buying and holding securities, that is, through supply-driven floor systems. 5 At the same time, they emphasise the importance of functional demand-driven facilities, such as standing lending and overnight repo facilities, to avoid disorderly interest rate setting in the markets.

In contrast, the Bank of England (BoE), the ECB and the Reserve Bank of Australia (RBA) have communicated that they are moving to demand-driven floor systems. 6 This means that, in addition to their standing overnight lending facilities, they will also offer the banks the opportunity to borrow as much reserves as they wish at longer maturities.

In this way, the aim is to provide the amount of reserves that banks themselves estimate they need and the amount of reserves needed to stabilise short-term market rates sufficiently close to the central bank's deposit rate.

## Stigma and opportunity costs are important factors

Central bank balance sheets should not tie up more resources and risks than necessary, but they should be elastic and able to expand when banks' need for central bank reserves increases in the event of market stress or crisis.

However, there are a few important preconditions for this to work. Both concern what drives banks' behaviour. This includes the opportunity cost of central bank reserves and also a possible stigma.

If the banks are to economize on central bank reserves and not demand more than they need, the interest rate cannot be too favourable when banks place reserves with the central bank. Conversely, it must not be too cheap for banks to

5  See Williams (2025), Perli (2025) and Logan (2025) for the Fed and Gravelle et al. (2023) for the BoE.

6  See Bank of England (2024), Benjamen (2025) and Saporta (2025) for the BoE, Schnabel (2024) for the ECB and Kent (2025) for the RBA.

borrow from the central bank. But how high the opportunity cost needs to be for banks to favour market-based liquidity management remains to be seen.

Then there is the issue of stigma. In this context, it can be described as a fear on the part of banks of being ' labelled ' -of being perceived as weak if they turn to the central bank to borrow -even though this is economically rational and not an expression of weakness. For demand-driven floor systems to work, banks must be willing to use central bank instruments to obtain liquidity when they need it. If the banks instead try to avoid it, there is a risk that they will not demand enough central bank reserves to keep interest rates close to the deposit rate. Stigma can also be a problem for supply-driven floor systems as individual banks may run out of reserves and need to borrow in stressed situations, as the experience of the liquidity crisis in spring 2023 shows.

The BoE, the ECB and most recently the RBA try to apply a sufficiently high opportunity cost for reserves by ensuring that the interest rate on lending in the weekly open market operations is higher than the interest rate on reserves. 7 The idea is to provide banks with sufficient incentives to smooth liquidity among themselves in the interbank market.

These three central banks aim to ensure that banks themselves demand the amount of central bank reserves they really need and thus the amount needed to maintain a floor system. They use weekly open market operations with primarily one-week maturities to offer fixed-rate lending with full allotment of the desired loan amounts, and against high-quality collateral.

At first glance, it may seem that the differences between the operational frameworks of the various central banks are greater than the similarities. But in fact, there are many similarities between them. For example, if the Riksbank introduces a regular market operation to offer longer-term lending at full allotment, we are effectively implementing monetary policy in the same way as the BoE, but with a higher opportunity cost for reserves. The Riksbank did this during the coronavirus pandemic by offering three- and six-month loans at the policy rate with full allotment and against eligible collateral.

7  For the ECB, this spread is 15 basis points, and for the RBA 10 basis points. The BoE, on the other hand, applies the same interest rate, the Bank Rate, to both weekly lending and reserves. However, the BoE estimates that the cost of providing collateral in the form of Level A assets (government securities) for credit at the BoE amounts to around 5 basis points, which should help to strengthen the incentives for market-based liquidity management, see Saporta (2025).

## The banks need to manage their liquidity more actively

As the amount of central bank liquidity in the Swedish banking system decreases, banks need to adapt their liquidity management so that the liquidity that is already there can be balanced in an efficient manner. It is particularly important that this works well in the future, as central bank liquidity is unevenly distributed within the banking system (see Figures 5 and 6) and the liquidity position of individual banks is affected differently at different stages of the Riksbank's quantitative tightening measures.

At the Riksbank, we have identified a number of factors that the banks need to take into account in particular to avoid disruptions on the overnight market and more volatile market rates in the long run.

## 1. Banks need to become more active and improve their operational capacity

By being more active in trading with other banks on the overnight market and, if necessary, borrowing from the Riksbank, banks can counteract unexpected fluctuations in short-term market rates. This is in the interests of all participants.

There is some activity in the overnight market today (for unsecured loans, see Chart 7), but not all banks are participating. For a long time, some banks have consistently chosen to keep a relatively large amount in central bank reserves, as a liquidity buffer, and place these in the Riksbank's overnight deposit facility. They should instead invest that buffer in Riksbank Certificates and get a higher interest rate. If the banks should one day have a shortage of central bank reserves, they can either use the overnight market or borrow from the Riksbank's lending facility with the certificates or other securities as collateral.

Since 2015, the number of monetary policy counterparties has increased from 15 to 29 banks. The new counterparties are mostly medium-sized or smaller banks and emerged when the banking system had a large structural liquidity surplus and there was little need to balance reserves.

Since 2020, half of our counterparties have never participated in interbank overnight market transactions. In addition, 9 counterparties currently have no collateral with the Riksbank, and 14 counterparties have never borrowed from the Riksbank's lending f acility. These banks need to gain experience in both actively participating in trade with other banks and borrowing from the Riksbank. It may be perceived as convenient to have reserves at the Riksbank, but if an individual bank hoards reserves, it creates problems for the system as a whole, as the central bank's reserves are then not distributed to the banks that need them at the time. This may also ultimately affect the individual bank, as it may create an

imbalance in interest rate setting in short-term fixed income markets. So both the system as a whole and the individual bank benefit from cooperation.

## 2. Opportunity cost may be increased

Since 2023, banks have been able to invest their entire liquidity surplus in Riksbank Certificates, which are securities issued by the Riksbank with a one-week maturity. Yet the amounts that banks leave as overnight deposits at the Riksbank, with an interest rate 10 basis points below the policy rate, amount to between SEK 50 and 250 billion. The fact that the banks retain a surplus of reserves in this way may be due to the existence of a too low opportunity cost, that is, the cost of 10 basis points that a bank incurs by placing central bank liquidity as reserves compared with placing it in certificates.

This means that the Riksbank may need to raise its lending rate and simultaneously lower its deposit rate, or in other words widen the interest rate corridor. This, in turn, may lead to the banks investing a larger share in certificates, to less reserves remaining in the banking system and to the banks having to use the overnight market to a greater extent.

## 3. Some banks are reluctant to use the Riksbank's lending facility

There are banks that state that they do not want to use the Riksbank's standing lending facility or to create reserves by selling back certificates to the Riksbank, because they are concerned that other banks will perceive this as a sign of weakness. Thus, it is a question of the stigma I mentioned earlier.

This reluctance to borrow from our facilities has been evident when there has been volatility in the money market, as has sometimes been the case when there has been high demand for Riksbank Certificates, resulting in less central bank reserves in the system on some days. But the facilities are there to make it easier for the banks. Their very purpose is to be utilised so that the banks can lend demanded volumes at attractive rates even in periods of tight liquidity. Banks taking advantage of this business opportunity can make a positive contribution to interest rate formation. 8 The banks should not have any written or unwritten internal rules or behavioural orders stating that they may never ""be short"" or borrow from the Riksbank.

8  This is a theme addressed by the BoE in Green (2025)

## Concluding thoughts

Let me summarise our most important message. As the Riksbank continues to reduce its holdings of Swedish securities, the banking system's liquidity surplus in Swedish kronor towards the Riksbank is declining. The banks therefore need to prepare for the fact that there will be significantly less central bank liquidity available in the banking system.

In such an environment, it will become more common for some banks to have a reserve shortfall on some days while others have a surplus. In future, the banks will need to be able to equalise this difference between themselves. This will place greater demands on the banks' ability and willingness to be active on the overnight market in relation to other banks, and to both borrow and invest in the Riksbank if necessary.

My message to you, our monetary policy counterparties, is to review your operational capacity now, to be active and to borrow and lend reserves among yourselves. In this way, you will be prepared when the liquidity surplus in the banking system continues to decrease. You should therefore endeavour to balance your reserves among yourselves, but it is also essential that, both for your own needs and to help support the market, you should be able to use our lending facility to access reserves without hindrance. It is natural to borrow from the Riksbank to cover temporary liquidity shortages. This is how the operational framework is supposed to function.

As I mentioned initially, the Riksbank continuously reviews the functioning of the operational framework and whether there is room for improvement. At this stage, we are considering making changes in three areas. If we decide to proceed with one or more of these points, we will first send the proposal out for consultation to the relevant market participants.

First, we are considering widening the interest rate corridor between our standing deposit facility and the marginal lending facility to strengthen the incentives for banks to borrow from one another in the overnight market.

Second, we are considering lowering the interest rate on the Supplementary Liquidity Facility to make it slightly cheaper to borrow from the Riksbank against other eligible collateral such as covered bonds and municipal securities. This would better reflect the long-term normal price differential in the market between loans against government securities and loans collateralised by these other securities.

Third, we are considering introducing mandatory test transactions, where our monetary policy counterparties pledge collateral to borrow from the Riksbank at

longer maturities. If we do this, it is to ensure that the banks can borrow quickly and efficiently from the Riksbank if necessary.

The functioning of our operational framework is of course central to the Riksbank. If our counterparties are operationally prepared and active in the overnight market, this benefits both monetary policy and financial stability. But these issues are not only in our interest. It is also positive for the banks to have more opportunities to manage their liquidity at favourable interest rates.

## References

Bank of England (2024), ""Transitioning to a repo-led operational framework"", Discussion paper, 9 December 2024, https://www.bankofengland.co.uk/-/media/boe/files/paper/2024/transitioningto-a-repo-led-operating-framework.pdf

Benjamin, Nathanaël (2025), ""Getting liquidity where it is needed"", speech at the OMFIF Economic and Monetary Policy Institute, 16 July 2025.

Getting liquidity where it is needed - speech by Nathanaël Benjamin | Bank of England

Bernhardsen, Tom and Arne Kloster (2010), ""Liquidity management system: Floor or corridor?', Staff Memo No. 4, Norges Bank.

Liquidity management system: Floor or corridor, Norges Bank Staff Memo 4/2010)

Borio, Claudio (2023), ""Getting up from the floor"", BIS Working Papers, no. 1100, 24 May 2023.

## Getting up from the floor

Gravelle, Toni, Ron Morrow and Jonathan Witmer, (2023), ""Reviewing Canada's Monetary Policy Implementation System: Does the Evolving Environment Support Maintaining a Floor System?"", Bank of Canada Staff Discussion Paper, 15 May 2023.

Green, Megan (2025), ""A feature not a bug"", Bank of England, Speech, 24 June 2025.

https://www.bankofengland.co.uk/-/media/boe/files/speech/2025/june/speechmegan-greene-national-institute-of-economic-and-social-research.pdf

Kent, Christopher (2025), ""The RBA's  Monetary Policy Implementation System -Some Important Updates"", Reserve bank of Australia, Speech, 2 April 2025.

## https://www.rba.gov.au/speeches/2025/sp-ag-2025-04-02.html

Logan, Lorie (2025), ""Opening remarks for panel titled Post-Pandemic Challenges for Monetary Policy Implementation"", Federal Reserve bank of Dallas, speech, 25 August 2025.

Opening remarks for panel titled 'Post -Pandemic Challenges for Monetary Policy Implementation' - Dallasfed.org

Perli, Roberto (2025), ""The Evolution of the Federal Reserve's Monetary Policy Implementation Framework, Federal Reserve Bank of New York, speech at the SIPA Columbia University and New York Fed workshop ""Monetary Policy Implementation Workshop: Unwinding Large Central Bank Balance Sheets"", 22 May 2025.

The Evolution of the Federal Reserve's Monetary Policy Implementation Framework - FEDERAL RESERVE BANK of NEW YORK

Saporta, Victoria (2025), ""Learning by Doing"", Bank of England, Speech, 11 June 2025.

https://www.bankofengland.co.uk/speech/2025/june/victoria-saporta-speech-atthe-bank-of-finland-and-suerf-conference-monetary-policy-implementation

Schnabel, Isabel (2024), ""The Eurosystem's operational framework"", the ECB, Frankfurt am Main, speech, 14 March 2024.

https://www.ecb.europa.eu/press/key/date/2024/html/ecb.sp240314~8b609de7 72.en.html

Sveriges riksbank (2025), 'Banks need to have more active liquidity management', article, Financial Stability Report 2025:1 , 28 May 2025.

Banks need to have more active liquidity management

Välimäki, Tuomas (2025), 'A new dawn, a new day, a new life for monetary policy implementation', Bank of Finland, speech, 11 June 2025.

https://www.suomenpankki.fi/en/news-and-topical/speeches-andinterviews2/2025/a-new-dawn-a-new-day-a-new-life-for-monetary-policyimplementation/

Wicksell, Knut (1919) Riksbanken och Privatbankerna (the Riksbank and the private banks), Ekonomisk Tidskrift, 21 (2), pp. 177-88.

Williams, John (2025), 'On the Optimal Supply of Reserves', Federal Reserve Bank of New York, speech at the SIPA Columbia University and New York Fed workshop ""Monetary Policy Implementation Workshop: Unwinding Large Central Bank Balance Sheets"", 22 May 2025.

On the Optimal Supply of Reserves - FEDERAL RESERVE BANK of NEW YORK

## Figures and tables

## Figure 1. Central banks normalise their balance sheets

Central banks' balance sheet totals as a share of GDP



Source: The central banks and national statistics authorities.

## Figure 2. The banking system's liquidity surplus is also declining and is expected to be around 400 billion by 2030

Billion SEK



Note. The increase in reserves between October 2019 and February 2023 was due to the Riksbank limiting the allocation of Riksbank Certificates to varying degrees. Source: The Riksbank.

## Figure 3. The Riksbank's securities holdings in kronor is decreasing

Billion SEK



Note. Nominal amounts, SEK billion. The dashed bars are a projection of the Riksbank's securities holdings based on an assumption that sales of nominal government bonds will continue until the end of December 2025 and then cease, and on a technical assumption regarding the sale of various issues of nominal government bonds. These assumptions may be adjusted to some extent in 2025. The series in the figure end in the second quarter of 2028, which is the last quarter of the Riksbank's three -year forecast horizon. Source: The Riksbank.

## Figure 4. Overnight rates track the Riksbank's policy rate well

Per cent



Note: Refers to transactions with maturity overnight. Volume weighted interest rates, calculated as a monthly average. Transactions on the last day of the year is excluded due to year-end effects.

Source: The Riksbank.

Figure 5. The amount of central bank liquidity decreases proportionally more among the five largest banks and is broadly unchanged among other banks Billion SEK



Note. The banking system's liquidity surplus vis-à-vis the Riksbank is the sum of reserves and certificates. The five largest banks are also the five largest monetary policy counterparties.

Source: The Riksbank.

Figure 6. The amount of central bank reserves placed overnight in the Riksbank's deposit facility varies widely across banks

Billion SEK



Source: The Riksbank.

Figure 7. Tentative signs that the interbank market is recovering

Billion SEK



Note: Refers to unsecured loans overnight between monetary policy counterparties and the turnover is per quarter.

Source: The Riksbank.

Table 1. Different frameworks and how they relate to different amount of reserves

| Framework          | Corridor system   | Corridor system    | Floor system   | Floor system   |
|--------------------|-------------------|--------------------|----------------|----------------|
| State              | Normal            | QE                 | Normal         | QE             |
| Amount of reserves | Scarce to Ample   | Scarce to Abundant | Ample          | Abundant       |",Erik Thedéen
https://www.bis.org/review/r250918h.htm,Christian Hawkesby: Opening remarks - Financial Services Council Annual Conference,"Opening remarks by Mr Christian Hawkesby, Governor of the Reserve Bank of New Zealand, at the annual Financial Services Council Conference (FSC25), Auckland, 11 September 2025. ",2025-09-11 00:00:00,"## Christian Hawkesby: Opening remarks - Financial Services Council Annual Conference

Opening remarks by Mr Christian Hawkesby, Governor of the Reserve Bank of New Zealand, at the annual Financial Services Council Conference (FSC25), Auckland, 11 September 2025.

* * *

## Tn koutou katoa

Thank you for the chance to join the conference for the regulatory fireside chat.

It's the fourth year in a row that I've had the opportunity to participate, and the first time as Governor under this interim 6-month term.

I want to acknowledge that it's been a challenging period for the Reserve Bank of New Zealand (RBNZ), as we face a test of trust and confidence in us as an organisation.

It's typical for the RBNZ to be ""in the news"" for our policy decisions, publications and research. But for too long this year the RBNZ has been ""the news"", following the departure of the Governor in March, the loss of our Board Chair in August, and everything in between.

Trust and confidence in our economic institutions is what underpins our financial system and supports economic prosperity for New Zealanders.

That is why I want to assure you that we are resolutely focused on our mandate of delivering low and stable inflation in medium term, and a resilient and enabling financial system. Because this is our best contribution to enable you and your clients to have the confidence to Transform for Tomorrow - the theme of this year's conference.

One of the things that gives me confidence that we are well placed to deliver on our mandate is the governance changes that we have undergone, as part of our own transformation over the past 7 years.

Previously, from a legal perspective, the Governor was the RBNZ, as the sole decision maker on monetary policy, and all other policy and operational matters. Rolling the clock forward, we now have a well-established Monetary Policy Committee (MPC) responsible for formulating monetary policy, and a dedicated RBNZ Board responsible for Prudential Policy decisions amongst other things. The Governor chairs the MPC and is a member of the RBNZ Board.

This governance structure means that in times like these with turnover in leadership, we have the continuity to push ahead with an ongoing emphasis on delivering our mandate.

For the MPC, the main focus this year has been judging the impact of increased global trade barriers following so-called Liberation Day back in April. This has been challenging. While headline inflation has settled back in our 1-3 percent target range, the memory of high inflation is still in the minds of households and consumers, and the

lessons of supply chain disruptions on inflation are still fresh from the period of Covid19, the Russian invasion of Ukraine and local weather events.

In the May Monetary Policy Statement, we assessed that on net the bigger impact of the rise in trade barriers was the hit to global demand, weaker global growth, and consequently less medium-term inflation pressure in New Zealand.

By the August Monetary Policy Statement, the main surprise was how much of a hit to domestic household and business confidence had occurred. The economy appeared to stall in the middle of the year, creating even more economic slack, and scope to lower the Official Cash Rate (OCR) even further.

While our central projection for the OCR is to fall to around 2.50% by the end of the year, that could occur faster or slower depending on how the economic recovery evolves. Further data on the speed of New Zealand's economic recovery will be what influences the future path of the OCR.

For the RBNZ Board, the main focus has been on delivering a review of capital settings for the deposit taking industry to meet our mandate of a resilient and enabling financial system.

Building on the Capital Review of 2019, this work acknowledges what has changed since, including: new legislation; new supervisory, enforcement and resolution tools and powers; a new Financial Policy Remit with a focus on competition, efficiency and innovation; and the international landscape for capital settings. We have put forward two options for capital setting that we think are strong, simple, proportionate and internationally comparable.

Feedback is vital for us to get this right. The consultation closes on the 3rd of October, and we are looking forward to receiving written submissions in response to our proposals. I know that feedback will get us to a better final decision by the end of the year.

Closer to home for members of the Financial Services Council, I want to assure you that we continue to be committed to completing the review of the Insurance (Prudential Supervision) Act 2010 (IPSA). In August, Cabinet agreed to a set of recommendations to progress an amendment Bill to make changes to IPSA - which you can view on our website.

This is not about having more regulation. But rather, having a regulatory framework that is fit for a modern financial system, with graduated regulatory tools and powers, and an internationally comparable approach. This will be a key focus for 2026.

Finally, we are proud that in our latest Relationship Charter survey 97% of regulated insurers rated their relationship with the RBNZ as 'good' or 'very good'. This was up from 81% the previous year.

We know that we need to work together with you with transparency and respect to continue to earn your trust and confidence, and to support you to Transform for Tomorrow.

N te rourou, nku te rourou, ka ora ai te iwi.

With your contribution and our contribution, the people will prosper.

Thank you.

I am happy to take questions.",Christian Hawkesby
https://www.bis.org/review/r250918g.htm,Tiff Macklem: Monetary Policy Decision,"Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada and Ms Carolyn Rogers, Senior Deputy Governor of the Bank of Canada, at the press conference following the monetary policy decision, Ottawa, Ontario, 17 September 2025.",2025-09-17 00:00:00,"## Tiff Macklem: Monetary Policy Decision

Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada and Ms Carolyn Rogers, Senior Deputy Governor of the Bank of Canada, at the press conference following the monetary policy decision, Ottawa, Ontario, 17 September 2025.

* * *

Good morning. I'm pleased to be here with Senior Deputy Governor Carolyn Rogers to discuss today's monetary policy decision.

Today, we lowered the policy interest rate by 25 basis points, bringing it to 2.5%.

Through the recent period of trade upheaval, Governing Council has been proceeding carefully, paying particular attention to the risks and uncertainties facing the Canadian economy. Three developments have shifted the balance of risks since our July decision.

First, Canada's labour market has softened further.

Second, although there are still some mixed signals, on balance, recent data suggest the upward pressures on underlying inflation have diminished.

Third, with the removal of most retaliatory tariffs by Canada, there is less upside risk to future inflation.

Considerable uncertainty remains. But with a weaker economy and less upside risk to inflation, Governing Council judged that a reduction in the policy rate was appropriate to better balance the risks going forward.

The Bank will continue to assess the risks, look over a shorter horizon than usual, and be ready to respond to new information.

Let me provide some details on what we've seen since July.

After remaining resilient to sharply higher US tariffs, global growth is now showing signs of slowing. US consumers are cautious and employment gains have slowed. US inflation has picked up in recent months as businesses appear to be passing on some tariff costs to consumer prices. In China, GDP growth was resilient in the first half of the year but appears to be softening as investment weakens.

The Canadian economy is being affected by both US tariffs and the unpredictability of US trade policy.

GDP declined by 1.6% in the second quarter, largely as expected. Exports to the United States fell sharply-both as payback for the pull-forward of activity in the first quarter and because tariffs are dampening US demand.

Tariffs are having a profound effect on several key sectors, including the auto, steel and aluminum industries. Chinese tariffs on canola, pork and seafood, new US tariffs on copper, and higher US tariffs on softwood lumber will spread the direct impacts further.

Uncertainty is also weighing on the economy. Business investment contracted in the second quarter. Many businesses have told us they have paused investment plans given elevated uncertainty about US trade policy. Businesses are also concerned that demand in Canada will weaken as the economic fallout broadens.

There were some signs of resilience: consumption was stronger than expected in the second quarter and housing activity increased. But in the months ahead, low population growth and weakness in the labour market will likely weigh on household spending.

Employment has declined in the past two months, increasing the unemployment rate to 7.1%. In addition to significant job losses in sectors that rely on US trade, employment growth in other parts of the economy has slowed as businesses have scaled back their hiring intentions. Wage growth has continued to ease.

Turning to inflation, CPI inflation was 1.9% in August, the same as at the time of the July . Excluding taxes, inflation was 2.4%. Preferred measures of Monetary Policy Report core inflation have been around 3% in recent months, but on a monthly basis, the upward momentum seen earlier this year has dissipated. A broader range of indicators, including the alternative measures of core inflation and the distribution of price changes across CPI components, continue to suggest underlying inflation is running around 2‰%.

The federal government's recent decision to remove most retaliatory tariffs on imported goods from the United States will mean less upward pressure on the prices of these goods going forward.

Still, the disruptive effects of shifts in trade will add costs even as they weigh on economic activity. It is difficult to predict the extent of cost increases, where they will show up, and how they could be passed through to consumer prices.

With some stability in US tariffs in recent weeks, near-term uncertainty may have come down a little. But the focus is shifting to the upcoming review of the Canada-United States-Mexico Agreement. New US threats to use tariffs as an instrument of geopolitical pressure are also contributing to global uncertainty.

At this rate decision, there was clear consensus to lower our policy rate for the first time since March. We will continue to assess the impacts of tariffs and uncertainty on economic activity and inflation. We are paying close attention to how exports evolve given the impact of US tariffs and changing trade relationships; how much this spills over into business investment, employment and household spending; how the cost effects of trade disruptions and reconfigured supply chains are passed on to consumer prices; and how inflation expectations evolve.

We are focused on ensuring that Canadians continue to have confidence in price stability through this period of global upheaval. We will support economic growth while ensuring inflation remains well controlled.

With that, the Senior Deputy Governor and I would be pleased to take your questions.",Tiff Macklem
https://www.bis.org/review/r250918f.htm,Christine Lagarde: This time is never different - the importance of safeguarding financial stability,"Welcome address by Ms Christine Lagarde, President of the European Central Bank, at the 10th European Central Bank Annual Research Conference ""The next financial crisis?"", jointly organised with Stanford's Hoover Institution, Frankfurt am Main, 17 September 2025. ",2025-09-17 00:00:00,"## Christine Lagarde: This time is never different - the importance of safeguarding financial stability

Welcome address by Ms Christine Lagarde, President of the European Central Bank, at the 10th European Central Bank Annual Research Conference ""The next financial crisis?"", jointly organised with Stanford's Hoover Institution, Frankfurt am Main, 17 September 2025.

* * *

It is my pleasure to welcome you all to the ECB Annual Research Conference, a flagship event that brings together researchers from academia and central banks with policymakers.

This year's conference, organised jointly with the Hoover Institution, bears a provocative title, ""The Next Financial Crisis?"". The question mark, of course, is deliberate. It signals inquiry rather than prediction, and it frames our goal for the next two days, which is to examine how we can safeguard financial stability in an era of rapid transformation.

We must keep two points in mind when thinking about this topic. First, throughout the post-war era, the global financial system has been in constant transformation - and the pace has only accelerated with advances in technology. And second, what appears new often reflects old risks in a different form.

Here I am reminded of Carmen Reinhart and Kenneth Rogoff's history of financial crises, ""This Time Is Different"". The book's subtitle, tellingly, is ""Eight Centuries of Financial Folly"". After eight centuries of experience, I think it is fair to say that this time 1 is never different.

And that is why research plays such an important role in helping to safeguard financial stability. Through rigorous analysis and a solid understanding of the past, research helps us see how innovation advances and reshapes the economy, while also bringing potential risks into sharper focus so that policymakers can address them proactively.

Research is particularly vital in helping us to understand the implications of the profound transformations that have reshaped the financial system since the global financial crisis.

One of the major structural shifts in the financial system over the past two decades has been the growing footprint of non-bank financial institutions - the focus of today's first session.

In the euro area, non-banks - ranging from investment funds and insurance corporations to money market funds and securitisation vehicles - have expanded from about 140% of GDP in 1999 to close to 400% today. 2

Accordingly, they play an increasingly important role in financing the real economy and in managing the savings of households and firms. Non-banks now account for over 60% of the euro area financial sector. 3

The banking sector - the focus of today's second session - is also operating in a fastchanging landscape driven both by technological innovation and by the emergence of non-banks.

For starters, technology challenges banks' business models through the rise of fintechs 4 as well as new innovations like stablecoins if they gain substantial traction. 5

On top of this, technology also amplifies both the speed and scale at which these risks can materialise.

The events of March 2023, when three US banks collapsed in five days, highlighted how social media can act as a powerful conduit for panic and contagion 6   - all the more so now that banking services are available on smartphones. 7

The bank and non-bank sectors are not just changing rapidly, they are also highly interconnected. In the euro area, for example, banks' asset exposures to non-banks are considerable and, on average, account for around 10% of significant institutions' total assets. 8

Given these transformations in the financial system, astute supervision and regulation the focus of the third session, taking place tomorrow at the conference - remains critical.

Guided by the insights of cutting-edge research, it is incumbent on policymakers to remain alert to financial stability risks as and when they emerge. These risks may present themselves in new guises, arise in industries well versed in obscure terminology, and be cloaked in the language of innovation.

But in substance, the underlying types of risk are often the usual suspects. Non-banks face liquidity and leverage risks, banks face maturity transformation and run risk, and stablecoin issuers face redemption and reserve risks.

Europe is sometimes accused of overregulating. But the role of supervision and regulation is not to hold back innovation or structural transformation. On the contrary, it is to contain the risks that may accompany these changes. This helps to ensure that innovation can take root and thrive.

With this in mind, Europe is now implementing an ambitious simplification agenda under the direction of the European Commission.

Simplification does not necessarily mean deregulation. It means maintaining resilience with a more effective and efficient supervisory and regulatory framework. 9  And the discussions over the next two days will add insights to the debate on the efficient design of supervision.

But before our sessions begin, the conference opens with a much-anticipated keynote by Raghuram Rajan. Raghu's experience combines a distinguished academic career with public service as Chief Economist of the International Monetary Fund and as the 23rd Governor of the Reserve Bank of India. His keynote will reflect on the relationship between monetary policy and financial stability.

We will not have all the answers on ensuring financial stability at the close of this conference. But by testing ideas, comparing evidence and engaging in rigorous debate, we can make policy more robust in the face of an uncertain future.

At a time of rapid transformation in the financial system, some may think the old risks no longer apply. But research and experience demonstrate otherwise. As the French critic Jean-Baptiste Alphonse Karr observed, "" Plus ça change, plus c'est la mŒme chose "" - the more things change, the more they stay the same.

In other words, this time is never different. I wish you an engaging and productive conference.

Thank you.

- 1  Reinhart, C.M. and Rogoff, K.S. (2009), This Time Is Different: Eight Centuries of , Princeton University Press. Financial Folly
- 2  In terms of assets. See Pelizzon, L. et al. (2025), ""Growth of non-bank financial intermediaries, monetary policy, and financial stability"", ECB Forum on Central Banking, 30 June - 2 July.
- 3  Pelizzon, L. et al. (2025), op. cit.
- 4  Garcia, T. et al. (2025), ""Digital banking: how new bank business models are "", , ECB, May. disrupting traditional banks Financial Stability Review
- 5  Flannery, M.J. (2023), ""How the Rise of Stablecoins Could Threaten Traditional Banks' Lending Capacity"", 10 January; see also Lannquist, A. (2025), ""Stablecoins are trending, but what frictions and risks are getting overlooked?"", Atlantic Council, 8 July.
- 6  Board of Governors of the Federal Reserve System (2023), ""Review of the Federal Reserve's Supervision and Regulation of Silicon Valley Bank"", 28 April; see also Dosumu, O.E. et al. (2023), ""Panic bank runs, global market contagion and the financial "", , Vol. 228, July. consequences of social media Economics Letters
- 7  Garcia, T. et al. (2025), ""Digital banking: how new bank business models are "", , ECB, May. disrupting traditional banks Financial Stability Review
- 8  Franceschi, E. et al. (2023), ""Key linkages between banks and the non-bank financial "", , ECB, May. sector Financial Stability Review

9  Buch, C. (2025), ""Simplification without deregulation: European supervision, regulation and reporting in a changing environment"", speech at the Goldman Sachs European Financials Conference 2025, 11 June.",Christine Lagarde
https://www.bis.org/review/r250918e.htm,Piero Cipollone: What resilience takes - strengthening the financial system in an era of heightened risk,"Keynote speech by Mr Piero Cipollone, Member of the Executive Board of the European Central Bank, at the Resilience Conference, hosted by De Nederlandsche Bank, Amsterdam, 17 September 2025.",2025-09-17 00:00:00,"SPEECH

## What resilience takes: strengthening the financial system in an era of heightened risk

## Keynote speech by Piero Cipollone, Member of the Executive Board of the ECB, at the Resilience Conference hosted by De Nederlandsche Bank

Amsterdam, 17 September 2025

At a time of digital and geopolitical disruptions, enhancing our financial sector's resilience is critical to protect the stability and prosperity of our economy.

Money is ultimately a matter of trust. That trust rests on the stability of prices, the stability of the financial system and the smooth functioning of payments that keep our economies moving every day. These are at the heart of a central bank's mandate. Trust in money depends, above all, on our ability to deliver on these tasks, thereby safeguarding the value of the currency.

History has shown this mechanism at work. In moments of crisis, people and firms have turned to their central bank for reassurance that the financial system will not collapse. Such reassurance was given in July 2012 by the then ECB President, Mario Draghi, when he famously said that, within its mandate, the ECB was ready to do ""whatever it takes"" to preserve the euro. As an unequivocal commitment to safeguarding our currency, this statement removed unwarranted fears, restored confidence, and strengthened the resilience of the financial system and the wider economy.

Credibility and trust are the most valuable assets a central bank has, and they are tested repeatedly. During the COVID-19 pandemic, the ECB acted swiftly and decisively to stabilise markets with its pandemic emergency purchase programme. When war returned to Europe and inflation surged, our policy responses once again anchored trust. This has been confirmed by surveys: Eurobarometer data show that trust in the ECB remained broadly stable through both the pandemic and the inflation shock.

[2] Confidence and credibility have tangible economic benefits. Our analysis indicates that if inflation expectations had been as poorly anchored as they were in the 1970s, policy rates would have had to climb to around 8% at the peak of the tightening cycle, imposing enormous costs on households and firms.

But while central banks provide the ultimate line of defence, enhancing the resilience of the financial system is a shared responsibility, because only if we can collectively withstand shocks are we able to provide continuity and stability when it matters most. This is a top priority for all of us, public and private sector alike. In times of disruption, it is our preparedness and ability to act decisively that ensures the financial system can continue to function and payments can continue to flow.

Today | will first reflect on what financial sector resilience entails in an era of heightened risks. | will then discuss the role of the ECB in fostering private sector resilience, in offering backstop functions and in modernising central bank money — our financial system's anchor of stability.

## Resilience in an era of heightened risk

## Protecting vital functions to preserve the resilience of the financial system

Preserving the resilience of our financial system entails, first and foremost, protecting its vital functions.

We are all familiar with the key role of payment and financial market infrastructures. They are the arteries that allow money and financial assets to circulate smoothly through the economy. Much like the arteries in the human body, if they are blocked, the entire system is put at risk. A failure in any of these functions reverberates quickly through households, firms and governments alike.

So what happens when one of these functions fails? Recent episodes can provide some answers.

When payments fail, the economy freezes and citizens look to the central bank for reassurance. This was illustrated most dramatically by the power blackout in the Iberian Peninsula on 28 April this year. As power and telecommunications services went down, digital payments collapsed. Card spending fell by over 40%, e-commerce dropped by more than 50% and overall consumption in Spain plunged by a third in a single day. Even in unaffected regions, citizens sought a safe and reliable backstop. What they turned to was central bank money in the most basic, resilient form available — cash — and cash withdrawals surged to well above normal levels.)

Liquidity can disappear just as suddenly. In March 2023 Silicon Valley Bank lost USD 42 billion of deposits in a single day, the largest and fastest bank run in US history. In the digital age, what once took weeks or months can unfold in hours.4! Without the immediate intervention of the Federal Reserve System and the Federal Deposit Insurance Corporation, guaranteeing all deposits and launching a new funding programme, the collapse of Silicon Valley Bank could have sparked wider depositor flight across regional banks and escalated into a systemic panic.

The lesson from these cases is clear: when private channels seize up or infrastructures fail, it is the central bank that must step in to preserve stability. And in today's world, marked by geopolitical fragmentation, rapid technological change, rising cyber threats and the growing impact of climate change, the risk of such disruptions is rising.

## An era of heightened risk

We are living through an unusual constellation of risks, where geopolitical, technological and environmental forces interact and amplify one another. This makes resilience not just a desirable attribute but the foundation of stability itself. And in the trade-off between efficiency and resilience, we must increasingly err on the side of resilience.

Let me highlight three sources of risk.

The first is geopolitical fragmentation, which is reshaping global trade and finance. Global trade policy uncertainty may have fallen somewhat from its peak in April, but it has picked up again more recently and still remains well above historical norms. In this environment, traditional shock absorbers that work via diversified trade networks and cross-border financial holdings are at risk of being eroded. As a result, crises may well become more frequent, including rare but highly disruptive tail events.

Fragmentation also increases the temptation to weaponise existing dependencies. We see this in the sphere of payment systems and currencies, which are increasingly wielded as instruments of

## influence.

Europe is particularly exposed. Today, 65% of card payments in the euro area are processed by two non-European companies, and 13 of the 20 euro area countries rely entirely on these international schemes. Meanwhile, mobile payment apps, which are largely controlled by global technology firms, are rapidly gaining ground, already accounting for nearly 10% of retail transactions and expanding at double-digit rates. These trends pose strategic questions for Europe's financial sovereignty, particularly in a world where access to financial infrastructures can be restricted as a tool of coercion.

This is not a matter of protectionism. Foreign companies can help to bring competition and innovation to our markets. But we should not be dependent on them for the smooth functioning of payments in Europe. In a world where our dependencies can be used against us, independence is a precondition for resilience. Ensuring that we have domestic, pan-European payment solutions should be part of the ""march to independence' we need to undertake, to use the words of ECB President Christine Lagarde.

## [8]

The second source of risk is technology. Innovation is transforming the very nature of money and financial services. Global stablecoins denominated in foreign currencies and crypto-assets promise efficiency, but, if widely adopted, could undermine monetary sovereignty.

At the same time, the digitalisation of finance is vastly expanding the attack surface. Cybersecurity has therefore become a critical concern. In a recent survey, three in five central banks reported an increase in the frequency of cyberattacks on their financial systems in the past year alone."" The stakes are enormous. The global cost of cyber risk is estimated to exceed USD 200 billion per year. 41] A single successful attack on a systemically important financial market infrastructure could erode confidence and disrupt the entire financial system. Building cyber resilience is therefore not just a technical requirement; it is essential for financial stability and for trust in money.

Adding to the challenges of geopolitical fragmentation and technological vulnerability is a third source of risk: climate change, which acts both as a trigger of immediate shocks and a long-term structural threat. More frequent and more intense extreme weather events, such as heatwaves, floods and wildfires, can disrupt infrastructures directly and pose financial stability risks.""2] Between 1980 and the end of 2023, EU Member States suffered more than €738 billion in losses from these kinds of events.

[13]

Together, these forces create an environment of heightened vulnerability. Geopolitics, technology and climate change are interconnected challenges that feed into one another and magnify systemic fragility. In such a world, resilience becomes a critical factor in safeguarding financial stability and ensuring the economy can withstand the shocks that lie ahead.

This means that all actors in the financial system must step up their levels of preparedness. And | am heartened to see that Member States — like here in the Netherlands — and the European Commission are making a decisive contribution to this effort as part of their overall preparedness strategies.14]

## The role of the central bank in enhancing the resilience of the financial system

So what is our role as a central bank in enhancing resilience in practice? We have a dual responsibility.

First, we must act as the backstop of last resort when the system comes under acute stress. When markets freeze, when payments falter and when confidence evaporates, it is the central bank that must step in to prevent collapse.

Second, but just as importantly, we must strengthen the system proactively, so that these backstops are rarely, if ever, needed. That means making sure that the private sector is as resilient as possible through our supervisory and oversight functions so that the financial system can absorb shocks rather than transmit them.

This duality is fundamental. The public relies on us to serve as emergency firefighters when a crisis strikes and to oversee fire-resistant structures that make crises less likely and less damaging.

## Defences that reduce the likelihood of intervention

Let me start with the four key elements that form our first line of defence, aimed at minimising the need for intervention.

## Monetary policy

The first is our monetary policy framework, which ensures that liquidity flows smoothly and that financial conditions are aligned with our intended policy stance. The framework is designed to allow us to respond to shocks in either direction as we pursue our primary mandate of price stability. It also helps us address risks in financial markets that could hamper the effective implementation and singleness of our monetary policy.""

We have a broad range of tools that we can use as necessary to fulfil our mandate. These include main refinancing operations and longer-term refinancing operations, standing facilities such as the marginal lending facility, and asset purchase programmes covering both public and private assets.

Crucially, all refinancing operations are conducted through fixed-rate tender procedures with full allotment.""©] Moreover, they are supported by a broad collateral framework that accepts both marketable and non-marketable assets. This inclusiveness ensures that a wide range of counterparties can access central bank liquidity. Time and again, this approach has proved its worth during crises, acting as a built-in cushion against external shocks. Liquidity is, after all, the lifeblood of the financial system, enabling payment, settlement and clearing systems to operate seamlessly — even under stress.

## Payment, clearing and settlement systems

Resilience also depends on the smooth functioning of payment, clearing and settlement systems. We contribute to this in two ways.

First, our TARGET Services""4 facilitate the free flow of central bank money, securities and collateral across Europe. These services allow the ECB, together with the national central banks, to provide a

risk-free asset for settling transactions between financial institutions in central bank money. Settlement in central bank money is the international standard precisely because it is the least risky and most reliable form of money. 48]

Second, the Eurosystem promotes the safety and resilience of payment, clearing and settlement systems through its oversight mandate. This mandate extends beyond financial market infrastructures to also include electronic payment instruments, schemes and arrangements, as well as critical service providers.42] To manage operational risks, the Eurosystem has notably set out comprehensive requirements, which include business continuity measures, timely recovery strategies (including the use of secondary sites) and specific provisions for information security, cyber resilience, physical security, outsourcing and IT risk management.2 We also collect information on interdependencies within the financial ecosystem to support crisis management. This allows us to quickly identify key points where disruptions could occur during an adverse event and to map possible contagion paths.

## Banking supervision

Another crucial function forming our first line of defence is the supervision of banks. Supervised banks are required to maintain capital and liquidity buffers commensurate with their risk profiles, as well as strong governance and risk management frameworks, 24)

They must also have robust business continuity, recovery and communication plans in place. Critical functions must be restored within predefined recovery time objectives. For highly critical systems, such as real-time settlement and interbank payment interfaces, this means restoration within hours to prevent liquidity freezes or cascading failures.

Our supervisory framework has proven its value. Despite facing significant challenges, including the pandemic, Russia's war in Ukraine and the fastest monetary tightening in decades, European banks have remained resilient. Instead of amplifying these shocks, they have absorbed them, underlining the importance of supervision as a means of ensuring resilience. 24]

## Cyber resilience

Let me turn to a particularly cross-cutting challenge: cyber risk. In an era of geopolitical tensions and rapid technological advancements, cybersecurity has become a top priority. And cyberattacks are increasingly used to target the financial sector. For instance, the number of cyber incidents reported to the ECB by significant banks doubled between 2022 and 2024.25] Defending our financial system is not just a financial necessity, but a matter of European security.

We have therefore made a significant effort to strengthen cyber resilience in the euro area. In 2024 the ECB conducted a cyber resilience stress test of 109 banks.24! Additionally, our staff have developed an approach for macroprudential cyber resilience stress testing.25] Furthermore, | chair the Euro Cyber Resilience Board for pan-European Financial Infrastructures, which brings together central banks, market participants, Europol and the European Union Agency for Cybersecurity.29] This kind of collaborative platform between the public and private sectors is crucial for sharing intelligence, preventing and detecting attacks, and coordinating a rapid response.24 It reflects the scale and

seriousness of the threat, and underscores the need to embed resilience deeply in our financial ecosystem.

## Backstops of last resort

Let me now address what happens when prevention is not enough and crises arise. In such cases, our second line of defence must come into action. This is when central banks are called upon to provide three credible backstops.

## Liquidity

The first backstop is the ECB's role as lender of last resort. When markets freeze, the central bank serves as the ultimate supplier of liquidity. Without this safety net, liquidity shocks can quickly spiral into solvency crises and systemic collapse. We have seen the importance of this role time and again. During the pandemic, for example, we complemented liquidity operations with capital relief measures for banks, freeing up an estimated €1.8 trillion for lending and loss absorption. 28] These interventions ensured the continued flow of credit to households and businesses, effectively preventing a credit crunch that could have deepened the recession.

## Financial market infrastructures

The second backstop is keeping payment and settlement systems running. The Eurosystem operates the TARGET Services, including T2 (our real-time gross settlement system) and T2S (our panEuropean securities settlement platform). Together, these form the backbone of Europe's financial infrastructure. T2 alone processes roughly 90% of the total value settled by large-value payment systems in euro — more than €1.8 billion every single day.

These infrastructures are designed with resilience at their core. Their two-region/four-sites architecture provides for both interand intra-regional failover. This ensures that even in the most extreme circumstances — like natural disasters, pandemics, cyberattacks or terrorist incidents — critical payment and securities settlement operations can continue, with interruptions of service kept to a minimum.

In addition, through TARGET Instant Payment Settlement (TIPS), we enable payment service providers to facilitate instant money transfers between individuals and firms. These can be completed within seconds, at any time of the day and on any day of the year. TIPS settles these payments in central bank money, and operational resilience is achieved through its three-site set-up. This infrastructure will become even more important as instant payments increasingly become the norm, and especially as payment service providers will be required to offer customers an instant payment



service as of next month.

## Cash in the digital era

The third backstop is the availability of central bank money for day-to-day retail payments.

Cash plays a vital role in this regard. For over two decades, banknotes in circulation have consistently exceeded 10% of euro area GDP. And in periods of stress — for example, the global financial crisis, the Greek sovereign debt crisis, the pandemic, Russia's invasion of Ukraine and most recently the power blackout in the Iberian Peninsula in April 2025 — demand for cash surges as citizens seek the security of central bank money. 22]

Looking ahead, a digital euro would serve as an additional safeguard to enhance the resilience of digital retail payments by offering a digital form of cash. This would complement the resilience provided by physical cash, which, while essential, cannot be used for online transactions — which now make up one-third of our day-to-day transactions. As | explained two weeks ago in the European Parliament, a digital euro would allow Europeans to pay at all times with a universally accepted digital means of payment, even in the event of major disruptions. Business continuity would notably be ensured through the distribution and automatic rerouting of transaction across three different regions, each equipped with multiple servers. Furthermore, the digital euro's offline functionality would provide an extra layer of security by allowing payments to be made even when internet connectivity is disrupted or access to physical cash distribution networks is limited. 24

## Conclusion

Public institutions, and central banks in particular, have a unique responsibility to ensure the resilience of the financial system. Our duty is twofold: to build strong lines of defence that keep the system strong in normal times, and to provide credible backstops when all else fails.

This is how we anchor trust. Resilience is not an abstract ideal — it is what ensures households can access their money, firms can finance their investments and governments can fund essential services, even in the darkest hour. It is what enables the economy to keep functioning when shocks hit.

History has shown that in times of crisis, people instinctively turn to their central bank. What they seek is reassurance that the system will endure. That reassurance can only be provided if we have built resilient institutions, infrastructures and money.

In a world shaped by geopolitical tensions, technological disruption and climate change, this responsibility has grown even greater. But it is also clearer than ever. By ensuring resilience, we preserve stability. By preserving stability, we sustain trust. And by sustaining trust, we safeguard the value of our currency for the people of Europe.

This is, and will always remain, our core mission.

1.

Draghi, M. (2012), ""Verbatim of the remarks made by Mario Draghi"", speech at the Global Investment Conference, London, 26 July.

2.

Dreher, F. (2024), ""Trust in the ECB — insights from the Consumer Expectations Survey"", Economic Bulletin, |ssue 3, ECB.

3.

Cipollone, P. (2025), ""Making\_euro cash fit for the future"", The ECB Blog, 4 August; and Faella, F. and Zamora-Pérez, A. (2025), ""Keep calm and carry cash: lessons on the unique role of physical currency across four crises"", Economic Bulletin, |lssue 6, ECB, forthcoming.

4.

Koont, N., Santos, T. and Zingales, L. (2024), ""Destabilizing Digital 'Bank Walks"", NBER Working Papers, No 32601, National Bureau of Economic Research, June. 5.

See ""Daily Trade Policy Uncertainty (7-day Moving Average)"" in Economic Policy Uncertainty Index, Economic Policy Uncertainty.

6.

Farrell, H. and Newman, A. (2025) ""The Weaponized World Economy — Surviving the New Age of Economic Coercion', Foreign Affairs, September/October.

7.

Klein, A. (2024), ""Payment systems' changing role from economic growth to the new foreign policy lever"", Commentary, The Brookings Institution, 13 February.

8.

Lagarde, C. (2025), ""'C'est le début d'une marche vers l'indépendance' de |'Europe"", podcast interview on L'invité de 8h20, France Inter, Radio France, 31 March; and Lagarde, C. (2025), ""Tariffs will be negative the world over"", podcast interview on The Pat Kenny Show, Newstalk, 2 April.

9.

Cipollone, P. (2025), ""The quest for cheaper and faster cross-border payments: regional and global solutions"", speech at the BIS Annual General Meeting, Basel, 27 June; and Lane, P.R. (2025), ""The Cork Economics Society Conference 2025, Cork, 20 March.

10.

Central Banking staff (2025), ""Cyber attacks rise in three-fifths of jurisdictions — Central banks lacking incident response team report highest rate of attacks"", Central Banking, 18 August.

11.

Jamilov, R., Rey, H. and Tahoun, A. (2021), ""The Anatomy of Cyber Risk"", NBER Working Paper, No 28906, National Bureau of Economic Research, June.

12.

Chabot, M. and Bertrand, J-L. (2023), ""Climate risks and financial stability: Evidence from the European financial system"", Journal of Financial Stability, Vol. 69, December; and ECB/ESRB Project Team on climate risk monitoring (2021), ""Climate-related risk and financial stability"", ECB, July.

13.

Climate-ADAPT, ""Economic losses and fatalities — Summary results — 1980 to 2023"", European Environment Agency; and Directorate-General for Climate Action (2025), ""5 things you should know about extreme weather"", news article, European Commission, 9 July.

14.

European Commission (2025), ""Communication on the European Preparedness Union Strategy"", 26 March.

15.

European Central Bank (2025), An overview of the ECB's monetary policy strategy — 2025.

16.

""Full allotment"" means that the Eurosystem satisfies all bids received from counterparties against eligible collateral at the fixed rate set by the Governing Council.

17.

Bindseil, U. (2025), ""TARGET Services: the backbone of European financial markets"", The ECB Blog, ECB, 14 July.

18.

See Bank for International Settlements (2012), Principles for financial market infrastructures, April.

19.

For more on the ECB's oversight mandate, see our web page on oversight.

20.

The relevant Eurosystem requirements are set out in the following main standards/frameworks: the schemes and arrangements) and the CROE (Cyber resilience oversight expectations for financial market infrastructures, part of the broader Eurosystem Cyber Resilience Strategy).

21.

See ECB, Understanding the banking union and ESFS.

22.

banking\_system"", speech at The Brookings Institution, Washington D.C., 25 April.

23.

Elderson, F. (2025), ""Resilience offers a competitive advantage, especially in uncertain times"", speech at the Morgan Stanley European Financials Conference, London, 19 March.

24.

ECB Banking Supervision (2024), ""ECB concludes cyber resilience stress test"", press release, 26 July; and McCaul, E. (2024), ""Enhancing banks' resilience against cyber threats — a key priority for the ECB"", The Supervision Blog, ECB, 26 July.

25.

Vermeulen, R., Sydow, M., Brousse, C., Cascdo, F., Fique, J., Marques, C., Nyholm, J. and Virel, F. (2025), ""Cyber resilience stress testing from a macroprudential perspective"", Macroprudential Bulletin, Issue 27, ECB, 10 March.

26.

See ECB web page on Euro Cyber Resilience Board for pan-European Financial Infrastructures.

27.

Cipollone, P. (2024), ""Building\_a solid cyber defence for the new geopolitical season"", speech at the tenth meeting of the Euro Cyber Resilience Board for pan-European Financial Infrastructures, Frankfurt-am-Main, 21 November.

28.

ECB Banking Supervision (2020), ""ECB Banking Supervision provides further flexibility to banks in reaction to coronavirus"", press release, 20 March.

29.

The obligation, laid down in the Instant Payments Regulation, will apply from 9 October 2025. 30.

Faella, F. and Zamora-Pérez, A. (2025), ""Keep calm and carry cash: lessons on the unique role of physical currency across four crises"", Economic Bulletin, |ssue 6, ECB, forthcoming.

31.

introductory statement at the Committee on Economic and Monetary Affairs of the European Parliament, Brussels, 4 September.

CONTACT",Piero Cipollone
https://www.bis.org/review/r250922a.htm,Ida Wolden Bache: Policy rate reduced to 4 percent,"Introductory statement by Ms Ida Wolden Bache, Governor of Norges Bank (Central Bank of Norway), at the press conference following Norway's announcement of the policy rate, Oslo, 18 September 2025.",2025-09-18 00:00:00,"## Ida Wolden Bache: Policy rate reduced to 4 percent

Introductory statement by Ms Ida Wolden Bache, Governor of Norges Bank (Central Bank of Norway), at the press conference following Norway's announcement of the policy rate, Oslo, 18 September 2025.

* * *

Presentation accompanying the speech

Chart 1: Policy rate reduced to 4 percent

Norges Bank's Monetary Policy and Financial Stability Committee decided to reduce the policy rate to 4 percent.

Norges Bank is tasked with keeping inflation low and stable. The operational target is inflation of close to 2 percent over time. We are also mandated to help keep employment as high as possible and to promote economic stability.

In response to the inflation surge in 2022, we raised the policy rate sharply and rapidly. The tightening of monetary policy has contributed to cooling down the Norwegian economy and to dampening inflation. In June, we began a cautious normalisation of monetary policy. Incoming data since June indicate that there is a little less spare capacity in the economy, and that inflation may remain elevated for a little longer than projected in June. Therefore, we will probably not reduce the policy rate ahead as quickly as envisaged before summer.

The policy rate decision is always preceded by thorough discussions in the Committee. At this meeting, the Committee considered keeping the policy rate unchanged but concluded that a rate cut is now appropriate. The job of bringing inflation back to target has not been completed, but a cautious easing of monetary policy will pave the way for returning inflation to target without restraining the economy more than needed.

## Chart 2: Cautious normalisation of the policy rate

If the economy evolves broadly as currently projected, the policy rate will be reduced further in the course of the coming year. We do not envisage a large decrease in the policy rate ahead. The forecast presented today is consistent with one rate cut per year in the coming three years. In the projections, the average interest rate on residential mortgage loans declines to a little more than 4.5 percent in 2028, which is markedly higher than the level in the decade before the pandemic.

The economic outlook is uncertain, and history has shown that the policy rate can be both higher and lower than indicated by our forecast.

Let me say a few more words about the background for the decision and the Committee's assessments.

Chart 3. Growth in the Norwegian economy has picked up

Mainland economic growth has picked up and more than we had expected. Norges Bank's Regional Network contacts expect sustained growth to the end of the year. After a sharp decline in construction, contacts in the construction industry now expect an upswing in activity, while contacts in oil services, where activity is strong, expect weak growth.

In the labour market, developments have been as expected. Unemployment has risen since its lowest level three years ago, but in recent months unemployment has changed little.

The recent upswing in economic growth has occurred without firms increasing their workforce to the same extent. It therefore appears that potential output is slightly higher than previously assumed.  Among the firms surveyed in the Regional Network, a slightly larger share is facing recruitment difficulties.

## Chart 4: The pace of disinflation has slowed

Inflation has fallen back substantially from the peak, but the pace of disinflation has slowed. According to last week's data, consumer price inflation now stands at 3.5 percent. Excluding the volatile component energy prices, inflation has been close to 3 percent over the past year.

The inflation surge was triggered by an import price shock. Import price inflation has since come down, while domestic inflation is sustained by high services inflation. Business costs have increased due to the high level of wage growth in recent years. Developments so far indicate high wage growth this year too, but not as high as last year.

## Chart 5: Inflation down to target without a large increase in unemployment

Our decision to reduce the policy rate does not mean that we believe that the Norwegian economy is faring poorly. Given the current rate path, unemployment is projected to increase a little further. With a gradual slowing of wage growth ahead, inflation is projected to move down and stand at close to 2 percent in 2028. Wages are still expected to rise faster than prices and, combined with slightly lower interest rates, most people will likely see an improvement in their purchasing power.

Forecasts are not promises. International cooperation and trade policies are in flux, creating uncertainty about the outlook for inflation and growth both at home and abroad despite the fact that tariffs appear to have been clarified to a further extent over summer.

There is also uncertainty about wage growth and its impact on domestic inflation going forward. If the outlook indicates that inflation will remain elevated for longer than projected, a higher policy rate than currently envisaged may be required. If the outlook indicates that inflation will return to target faster or labour market conditions weaken, the policy rate may be lowered faster.

But our objectives stand firm. We will finish the job and ensure that inflation is brought all the way back to 2 percent.",Ida Wolden Bache
https://www.bis.org/review/r250918b.htm,"Claudia Buch: Financial stability, supervision and regulation - building a 21st century infrastructure for better, evidence-based policymaking","Keynote speech by Prof Claudia Buch, Chair of the Supervisory Board of the European Central Bank, at the BIS Innovation Summit, Basel, 10 September 2025.",2025-09-10 00:00:00,"## SPEECH

## Financial stability, supervision and regulation: building a 21st century infrastructure for better, evidence-based policymaking

## Keynote speech by Claudia Buch, Chair of the Supervisory Board of the ECB, BIS Innovation Summit

10 September 2025

Let me begin by thanking the organisers of the BIS Innovation Summit for inviting me to speak."" This Summit provides an important platform to explore how innovation is reshaping the future of finance, with this year's theme of future-proofing central banks. Some 17 years after the great financial crisis, banks are operating in a very different landscape. In Europe, institution-building has progressed through the banking union. Digital innovation and new business models have transformed the way finance operates, and artificial intelligence (Al) is likely to accelerate these trends even further. The risk environment has changed significantly, and geopolitical risks are heightened. All of this has an impact on financial safety and soundness, financial sector regulation and supervisory decision-making.

The financial sector came through this period relatively unscathed. The benefits of financial sector reforms may therefore be easily forgotten. Some even conclude that the financial sector (and thereby the real economy) would be better off with lighter regulation and supervision. Of course, regulation and supervision must continue to evolve, and improving effectiveness and efficiency can be useful to reduce unnecessary complexity. But rolling back core safeguards or weakening resilience in the name of ""lighter-touch"" oversight would be to ignore what history has told us many times: we tend to extrapolate from the recent past and underestimate the vulnerabilities and fault lines that have built up in the financial system. ""This time"" is unlikely to be different.2]

Any decision on the future of financial regulation and supervision thus needs to holistically assess the effects of reforms and to take changes in the external environment into account. This is what ""evidence-based policymaking"" is about. It begins by defining a broad policy objective. In the case of the post-crisis policy agenda: to reduce the likelihood of financial crises and their potential impact. The second step is to define concrete, measurable indicators related to the policy objective. In a third step, suitable policy measures are defined, and their impact is assessed ex ante. Fourth, the impact of these measures can be assessed. This provides information on the benefits of the regulatory and supervisory framework, along with potential unintended side effects. This ""policy cycle"" ensures that the evidence base is continually updated and that confounding factors are taken into account. The significant fiscal support for the real economy (and indirectly for the financial sector) during recent shocks is a case in point.

Evidence-based policy requires a 21st century infrastructure providing timely empirical evidence, using all available data and the best analytics to inform policy debates. Relevant elements of such an

infrastructure already exist. In the policy and academic world we have made significant progress towards developing key building blocks.

Yet, the elements of the infrastructure to inform supervisory and regulatory decisions have often not kept pace with the rapidly changing environment. Microdata sets can typically not be shared among authorities, let alone internationally; repositories of models and of analytical results are rare; analytical work performed by authorities often remains internal to official institutions; and external academic work may not be sufficiently targeted to inform relevant policy debates.

Further developing a 21st century infrastructure for evidence-based policymaking and supervision will ensure that policy decisions are based on sound evidence. It can allow us to harness the benefits of technological innovation. This requires work on five mutually reinforcing pillars:

- &gt; evaluation frameworks that create the conditions for systematic learning and for assessing the effects and potential unintended side effects of supervisory and regulatory decisions in a structured way;
- &gt; repositories and meta-analyses that pool dispersed findings into cumulative knowledge;
- &gt; data centres and common documentation to ensure that measurement is consistent and scalable;
- &gt; innovation in modelling and analytical tools that expand the frontier of what can be analysed and monitored; and
- &gt; structured exchanges with the research community that channel expertise towards policy-relevant questions.

The BIS has an important role to play in advancing each of these pillars — by fostering collaboration among authorities, pooling knowledge, and supporting the development of the infrastructure that evidence-based policymaking requires.

## Evaluation frameworks

Over the past decade, the Financial Stability Board (FSB) and the Basel Committee for Banking Supervision have developed frameworks to evaluate policy and regulatory decisions. These frameworks can be used to inform current policy debates. Public consultations are a key element of these evaluation frameworks, seeking input from various stakeholders, including from the institutions affected, but also from academics and non-governmental organisations.)

In 2017 the G20 endorsed the FSB Framework for the Evaluation of Post-Crisis Financial Sector

Reforms, 41 Implementation proceeds in two steps. First, relevant topics are identified by scanning for potential unintended effects or areas where reforms may not be delivering as intended. This initial stage involves consultations with stakeholders, while quantitative indicators and qualitative inputs are used to narrow down priority areas for evaluation. In the second stage, different methodological

approaches are applied to assess the effects of reforms. These approaches range from descriptive analysis to more advanced econometric identification strategies, using microdata and macrodata.

This framework has been used to analyse several aspects of the post-crisis reform agenda, such as the impact on lending to small and medium-sized enterprises, on infrastructure finance or the effects of the too-big-to-fail reforms. Overall, these studies find that the benefits of the reforms outweigh any potential, unintended consequences.

Likewise, the Basel Committee has an extensive analytical agenda, including systematic impact assessments. The first key element is a Regulatory Consistency Assessment Programme, which examines whether countries have incorporated Basel standards into national legislation in a timely and consistent manner. In addition, the Committee evaluates the quantitative impact of Basel III standards on banks' balance sheets and on the broader financial system. These impact assessments rely on large-scale data collections from banks worldwide, combined with scenario analyses and stress teststyle methodologies.

Such evaluation frameworks significantly reduce the costs of evaluations, which can indeed be high if organised in an ad hoc manner. The frameworks guide the choice of empirical techniques, including descriptive statistics, qualitative results and econometric identification techniques, all of which have their merits. Early planning is important, as collecting relevant data and information ex post can be very costly. Improving the data infrastructure can thus significantly contribute to the evaluation of regulation and supervision.

Relatedly, discussions on streamlining reporting requirements should be guided by sound cost-benefit analyses. Frameworks for this exist at the national and European level, and the Organisation for Economic Cooperation and Development (OECD) has carried out useful surveys of the available frameworks.] When changing statistical reporting requirements, the ECB is required to conduct a systematic assessment of the merits and costs of the new data collection.

## Repositories and meta-analyses

There is plenty of empirical evidence on the effects of supervision and regulation. Using this evidence to make more informed policy decisions requires easy access to a comprehensive set of studies. Maintenance of repositories and conducting of meta-analyses is essential for this. By design, repositories are open to the public and benefit from the input of academics and external analyses.

The Bank for International Settlements (BIS) maintains a repository which can form the nucleus for additional work. The Financial Regulation Assessment: Meta Exercise (FRAME) contains studies on the effects of capital and liquidity regulation as well as the too-big-to-fail reforms. This repository currently contains 83 studies and 139 quantitative impact estimates from 15 countries, classifying each across 18 dimensions — such as country, time period, bank type, or regulatory ratio — to enable a structured comparison of results.42]

A meta-analysis based on the studies compiled in FRAME reveals significant heterogeneity in the estimated effects of capital requirements on loan growth.) The average effect is positive: a 1 percentage point higher capital ratio is associated with around 0.4 percentage points higher loan growth. Studies that account for general-equilibrium effects find stronger impacts than partialequilibrium analyses. Moreover, the transitional impact of higher capital standards differs from the long-run effect: during the build-up phase, when banks need to increase their capitalisation and resilience to shocks, tighter requirements may weigh on lending. In the steady state, higher capitalisation supports credit growth. As regards liquidity requirements, the net stable funding ratio has a countercyclical effect on bank lending. Banks with more stable funding prove to be more resilient in downturns and less procyclical in expansions.

Repositories are used in many other fields as well. In medicine, for example, the Cochrane organisation provides a repository of impact assessments. There are, in fact, parallels between the fields of medicine and finance: as with a specific medical treatment, regulations and supervisory action can have intended effects and unintended consequences, which may require a change in the ""therapy"". But, without clearly identifying cause and effect, without separating the treatment and the control group, one may draw the wrong conclusions.

Generally, using Al tools can significantly reduce the cost of building repositories by improving automating the identification, classification and summarising of relevant studies. On the development side, natural language processing and machine learning can be used to extract and cluster key findings, methodologies and policy implications from large volumes of analytical studies. In ECB banking supervision, for example, we are using an Al tool ""Athena"" to retrieve key information quickly when performing day-to-day supervision tasks.""4] AI tools deployed internally ensure that confidential information is protected. On the searchability side, large language models (LLMs) can make it easier to consult repositories by asking questions through chatbots, such as ""What does the literature say about the impact of countercyclical capital buffers based on the most relevant underlying studies?"".

Tools available on the market, such as Semantic Scholar and Connected Papers, already help researchers navigate scientific literature through semantic mapping. Integrating these tools and LLMs into repositories of studies that assess the effects of regulation and supervision can streamline maintenance and development, making the evidence base more comprehensive and user friendly.

At the ECB, we are developing the Athena database to consolidate relevant regulations, guidelines and supervisory methodologies. Currently, we are developing and testing these tools for internal use, but we are very open to sharing the project's outcomes with other authorities. To the extent that only public information is included, regulatory databases could also be made available externally once quality assurance tests have been carried out.

Providing platforms for sharing codes and results is another important use case for repositories. To inform policy discussions, it is typically not necessary to share microdata. Sharing codes, protocols and analytical results can be sufficient.

The International Banking Research Network (IBRN) is an example of how common questions can be answered without sharing data. Since its establishment in 2012, the IBRN has brought together central banks and international institutions to study the cross-border transmission of shocks and the effects of

financial regulation. Each participating authority runs a common empirical exercise on its confidential supervisory data. The results are then compared across countries. This approach preserves data confidentiality while making it possible to obtain robust, cross-country evidence. External academics can join the country teams, research results are published, shared and discussed at research conferences. One example is a cross-country study, which shows that liquidity shocks can transmit to lending through international banks, the concrete effects depending on banks' balance sheet structures, use of internal capital markets, and access to official liquidity facilities"") This evidence would not have been visible from looking at aggregate data alone, and it helps policymakers better anticipate the cross-border effects of shocks and interventions.

The Network of Central Banks and Supervisors for Greening the Financial System is another example of a forum for developing common analytical tools and sharing results.

Within ECB Banking Supervision, we have created a Virtual Lab, which is a cloud-based collaboration platform offering Al capabilities and a user-friendly environment for sharing and developing codes.4] Not only has the Virtual Lab enhanced collaboration within European banking supervision, it has also allowed us to work with non-EU authorities in interdisciplinary, cross-functional teams.

This collaborative approach contributes to the creation of public goods by making information and resources accessible to a broader audience.

## Data centres and common data documentation

Good policy analysis needs good data. This means that what is available should be correctly documented, and that access rights and governance structures around access rights should be clearly established. At the national level, data centres are available that allow external researchers to access and use microdata. |NEXDA is a network of granular data providers in central banks, statistical authorities, and international organisations.

As part of its efforts to foster high-quality research, the ECB has launched a pilot project granting external researchers controlled access to anonymised bank-level data. The initiative tests different modes of data access, including through research data centres in national central banks, and can pave the way for a permanent infrastructure for research use of ECB-managed datasets.) In European banking supervision, we have created is a single data lake ""Agora"" which integrates large volumes of structured data in a centralised supervisory data source, allowing for more efficient monitoring of information and access rights.

## Promoting and harnessing innovation

The above examples show that evidence-based policymaking and data-driven supervision can benefit from innovation in modelling and data processing. Given the ongoing structural changes in economic and financial markets, the modelling of structural breaks in the data and the use of novel techniques to analyse interactions between newly emerging markets (such as the cryptocurrency market) and the

core financial system are particularly promising. The BIS Innovation Hub can play an important role in facilitating and sharing innovative solutions.

ECB Banking Supervision is using suptech tools for modelling and analytical work./5] In addition to the tools already mentioned, we are using a tool ""Navi"" to analyse networks and to visualise and navigate institutional structures and interlinkages within the financial system. Another tool, Gabi, optimises regression models on a large scale, enabling supervisors to perform stress tests on a large set of models. These tools strengthen the ability to monitor emerging risks and adjust supervisory strategies based on deeper, data-driven insights. Gabi can also facilitate collaboration with external academics, allowing for the exchange of ideas and methodologies that can enhance the robustness and effectiveness of stress-testing frameworks.

Looking ahead, further investment in technology and digital solutions will be a key priority for European banking supervision to support an efficient and evidence-based supervisory process.

## Communication and network building

Policymakers face urgent questions but often lack the time and resources to gather the necessary evidence. Researchers, meanwhile, have the analytical tools and skills to provide relevant evidence but focusing on policy-relevant research, including replication studies, may not always be incentivised by academic journals.

Bridging the gap between policymaking and academia is essential if we want evidence-based supervision to keep pace with innovation and the risk landscape. We can achieve this by creating dedicated workstreams, engaging proactively with the academic community and establishing structured formats for exchange. By channelling the questions that matter most to the people best placed to answer them, we can turn collaboration into a core strength of 21st century supervision.

One example of the ECB's involvement with the academic community is our participation in the Marie

Sktodowska-Curie Actions (MSCA) Industrial Doctoral Network on Digital Finance."" European banking supervision's involvement includes hosting six doctoral candidates on its premises for 12 months. These researchers will work with our suptech team on various research topics related to digital finance.

Another flagship initiative is the ECB Banking Supervision annual research conference, which provides a forum for leading academics, policymakers and supervisors to exchange views on key supervisory challenges and emerging risks.

## Summing up

The changing risk landscape and the digitalisation of financial services affect growth and financial stability. Understanding how requires up-to-date information and analysis, including sound impact assessments of financial sector regulation and the effectiveness of supervision.

Developing a 21st century infrastructure is key to generate, share and act upon robust evidence. This embeds rigour and accountability into the policy process itself. This infrastructure can build on existing elements and harness innovation, particularly through the use of Al tools.

Evaluation frameworks, repositories, meta-analyses, and data centres are key elements of this infrastructure. They provide the empirical foundation for supervision and regulation at a time when the value of post-crisis reforms is being contested. This infrastructure supports our agenda of conducting efficient, effective and risk-based supervision.

1.

| would like to thank Filippo Bartoli, Konstantin Bottenberg, Vincenzo Chiarella, Theodoros Mastrokostopoulos, and John Roche for their very helpful input and comments on an earlier version of this speech. All remaining errors and inaccuracies are my own.

2.

Reinhart, C.M. and Rogoff, K.S. (2011), This Time Is Different: Eight Centuries of Financial Folly, paperback ed., Princeton University Press. In his recent book, Rogoff discusses the implications of the recent ""low for long"" interest rate environment, concluding that ""... the odds that the system can reset without having a serious crisis seem low'. See Rogoff, K.S. (2025), Our Dollar, Your Problem — An insider's view of seven turbulent decades of global finance, and the road ahead, Yales University Press, New Haven and London, p. 278.

3.

FSB, Consultations.

4.

FSB (2017), ""Framework for Post-Ilmplementation Evaluation of the Effects of the G20 Financial

5.

FSB (2018), ""Evaluation of the effects of financial regulatory reforms on infrastructure finance"", 20 November; FSB (2019), ""Evaluation of the effects of financial regulatory reforms on small and medium-sized enterprise (SME) financing"", 29 November; FSB (2025), ""Evaluation of the Effects of the G20 Financial Regulatory Reforms on Securitisation"", 22 January; FSB (2021), ""Evaluation of the effects of too-big-to-fail reforms"" 1 April.

6.

Thedéen, E. (2024) ""Charting the course: prudential regulation and supervision for smooth sailing"", Speech, 23 October

7.

BIS, Current data collection exercises.

8.

OECD (2020), Regulatory Impact Assessment, OECD Best Practice Principles for Regulatory Policy, OECD Publishing, Paris; OECD (2014), Regulatory Compliance Cost Assessment Guidance, OECD

Publishing.

9.

ECB (2016), The ECB's merits and costs procedure in the field of European statistics, November.

10.

Boissay, F., Cantu, C., Claessens, S. and Villegas, A. (2019), ""Impact of financial regulations: insights from an online repository of studies"", BIS Quarterly Review, Bank for International Settlements, 5 March.

11.

ibid.

12.

ECB Banking Supervision (2025), ""Benefits from advanced technology infrastructure in supervision"", Supervision Newsletter, 14 May.

13.

Buch, C.M. and Goldberg, L.S. (2014), /nternational Banking and Liquidity Risk Transmission: Lessons from Across Countries, Working Paper, No 20286, National Bureau of Economic Research, July.

14.

McCaul, E, (2024), ""From data to decisions: Al and supervision"", article for Revue Banque, 26 February.

15.

ECB, Pilot project for research access to confidential statistical data

16.

ECB Banking Supervision (2025), op. cit.

17.

The network is funded by the European Union's Horizon Europe research and innovation programme.

## CONTACT

## European Central Bank",Claudia Buch
https://www.bis.org/review/r250924d.htm,Stephen I Miran: Nonmonetary forces and appropriate monetary policy,"Speech by Mr Stephen I Miran, Member of the Board of Governors of the Federal Reserve System, at the Economic Club of New York, New York City, 22 September 2025.",2025-09-22 00:00:00,"For release on delivery Noon EDT September 22, 2025

Nonmonetary Forces and Appropriate Monetary Policy

Remarks by

Stephen I. Miran

Member

Board of Governors of the Federal Reserve System at

The Economic Club of New York

New York, New York

September 22, 2025

I'd like to thank the Economic Club of New York for the invitation to speak today. 1   This is my first time speaking in my new capacity as a member of the Federal Reserve Board.  As such, I would like to be transparent on my thinking.  Subsequent to last week's meeting of the Federal Open Market Committee (FOMC), it should be clear that my view of appropriate monetary policy diverges from those of other FOMC members; I view policy as very restrictive, believe it poses material risks to the Fed's employment mandate, and would like to explain why.

There's no perfect means for determining appropriate monetary policy at any given time.  That said, rules of a Taylor type are a useful way to gauge where the federal funds rate should be set based on the prevailing macroeconomic conditions and outlook. Let me first say that I find these types of policy rules to be useful as indications, but I am not slavishly devoted to them.

The Taylor rule suggests policymakers ought to think about three key variables in determining the appropriate fed funds rate:  inflation, the neutral rate of interest, and the output gap.  As one might expect, changes in inflation and employment-one way of framing the output gap-receive due attention from Fed officials.  However, changes in the neutral rate, or the policy rate that would be neither expansionary nor contractionary when the economy is at full employment, are often underappreciated.

Some argue that leaving the neutral rate, which I will refer to as r*, out of the conversation makes sense because it is unobservable and therefore highly uncertain.  But so are potential growth and the natural rate of unemployment, yet they are frequently updated and discussed.  Because many r* estimates are based on empirical models

1 The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.

requiring a great deal of time-series data, they can be backward-looking and slow to adjust.  Moving too slowly to update a rapidly changing neutral rate raises the risk of policy mistakes.

R* reflects the balance of saving and investment in an economy and it evolves over time with demographics, productivity, fiscal policy, and other factors.  It is my view that previously high immigration rates and large fiscally driven decreases in net national saving, both of which raise neutral rates, were insufficiently accounted for in previous estimates of neutral rates.  Monetary policy was not as tight as many believed.  That same effect may be taking place today, but in the opposite direction.  In my view, insufficiently accounting for the strong downward pressure on the neutral rate resulting from changes in border and fiscal policies is leading some to believe policy is less restrictive than it actually is.

Today, I will give explicit consideration to nonmonetary factors-such as shifts in border and tax policy, trade renegotiation, and regulatory dynamics-that can have substantial effects on the appropriate setting for monetary policy.  I'll focus on the factors that have changed most meaningfully over the course of 2025 as they relate to my expectations for inflation, r*, and the output gap, emphasizing ones I feel are underappreciated.

Before I proceed, I want to be clear:  I am not attempting to provide an impossible degree of precision, but a general ballpark.  Based on this analysis, I believe the appropriate fed funds rate is in the mid-2 percent area, almost 2 percentage points lower than current policy.  The Federal Reserve has been entrusted with the important goal of promoting price stability for the good of all American households and businesses, and I

am committed to bringing inflation sustainably back to 2 percent.  However, leaving policy restrictive by such a large degree brings significant risks for the Fed's employment mandate.

## Policies Impacting Inflation

Rents

I'll start with inflation.  The general approach I take is to assume all components of inflation that I'm not explicitly addressing will continue at their current run rates.  I look forward to breaking down my expectations for other components of inflation in the future, but today I'll focus on what I consider to be first-order changes to the inflation forecast.

Housing represents nearly 16 percent of the personal consumption expenditures (PCE) price index, and more than double that in the consumer price index (CPI). Housing affordability is highly influential for Americans' perception of, and experience of, the economy.

Because measured inflation incorporates rental inflation with a lag, it has remained elevated above market rents for several years, infamously 'catching up.'  While an index of all-tenant rents took time to incorporate the spike in new rents in 2021 and 2022, that gap subsequently closed, indicating the catch-up is complete. 2   Now, new rent indices show this inflation is well below all-tenant inflation, around 1 percent annualized. 3

2 See Lara Loewenstein, Jason Meyer, and Randal J. Verbrugge (2024), 'New-Tenant Rent Passthrough and the Future of Rent Inflation,' Economic Commentary 2024-17 (Cleveland:  Federal Reserve Bank of Cleveland, October), https://www.clevelandfed.org/publications/economic-commentary/2024/ec-202417new-tenant-rent-passthrough-and-future-of-rent-inflation.

3 This number comes from the Bureau of Labor Statistics' new tenant repeat rent survey, minus the most recent (too-noisy) observation.  A similar number comes from a weighted average of single-family data from Cotality and multifamily data from Apartment List.

Rents for all tenants will fall toward this low rate as people moving or renewing leases sign at current market rates, and I expect CPI rent inflation will decline from its current level of roughly 3.5 percent to below 1.5 percent in 2027.  This implies a roughly 0.3 percentage point decline in total PCE inflation; by early 2028, I expect that effect to grow to a 0.4 percentage point decline.  Per a Taylor rule, that works out to an appropriate fed funds rate roughly half a percentage point lower than current shelter inflation would imply. 4

One might characterize this view on rental inflation as optimistic.  However, I believe forecasters have underappreciated the significant impact of immigration policy on rent inflation-both on the way up and, now, on the way down.  Work by Albert Saiz finds an elasticity of rents with respect to immigrant occupants of about 1. 5   Net immigration averaged roughly 1 million per year in the decade leading up to the pandemic. 6   Given that roughly 100 million Americans rent, net zero immigration going forward would imply 1 point lower rent inflation per year.

## Policies Affecting r*

## Population growth

The border story is also, in my view, affecting neutral rates.  Steady-state population growth matters for neutral rates, and U.S. border policy has changed markedly, from effectively open borders to potentially negative net migration.  Further, these effects may interact with a structurally aging population, which increases the supply

4 Throughout, I'm using my expectations for future economic variables to indicate where policy ought to be today.  This is necessary because of the uncertain lags with which monetary policy affects the economy. 5 See Albert Saiz (2003), 'Room in the Kitchen for the Melting Pot:  Immigration and Rental Prices,' Review of Economics and Statistics, vol. 85 (August), pp. 502-21.

6 See Congressional Budget Office (2025), The Demographic Outlook: 2025 to 2055 (Washington:  CBO, January), https://www.cbo.gov/publication/60875.

of capital and reduces demand for investment.  Indeed, analysis by Etienne Gagnon and others shows that demographic changes may have already lowered the neutral rate by over 1 percentage point since 1980. 7

The U.S. population has grown by around 1 percent annually in recent years, driven in large part by illegal immigration.  Already in the first half of this year, roughly 1.5 million of these immigrants have left the country, according to the Current Population Survey, though this number may be an overestimate due to nonresponse issues. 8 Assuming some overcounting, it is plausible to me that 2 million illegal immigrants will have exited the country by year-end, thereby reducing annual population growth from 1 percent to 0.4 percent.  Based on estimates from both Weiske and Ho, a 1 percentage point drop in annual population growth can reduce r* by 0.6 percentage point.  So, the expected decline in U.S. population growth equates to a nearly 0.4 percentage point drop in the neutral fed funds rate. 9

Labor market statistics and anecdotal evidence suggest border policy is exerting a major impact on the economy.  While the effect would likely normalize over time, this reduced level of population growth is also consistent with zero net immigration in 2026 and 2027.  It was just a few long years ago that there was widespread discussion about whether most developed economies would, due to declining fertility rates, converge to

7 See Etienne Gagnon, Benjamin K. Johannsen, and David Lopez-Salido (2021), 'Understanding the New Normal:  The Role of Demographics,' IMF Economic Review, vol. 69 (June), pp. 357-90.

8 See, for instance, Jeffrey S. Passel and Jens Manuel Krogstad (2025), 'U.S. Unauthorized Immigrant Population Reached a Record 14 Million in 2023,' Pew Research Center, August 21.

9 See Sebastian Weiske (2016), 'Population Growth, the Natural Rate of Interest, and Inflation,' working paper, Goethe University Frankfurt; Paul Ho (2024), 'How Do Demographics Influence r*?' Economic Brief 24-18 (Richmond:  Federal Bank of Richmond, June),

Japan's low interest rates without significant immigration; those economic dynamics are still a force, albeit among many others.

## Increases in national saving from trade policy

Additionally, trade renegotiation and the tax legislation recently passed by the Congress should also affect r*.  I think of this primarily through the increase in national saving-that is, the net supply of loanable funds.

With respect to tariffs, relatively small changes in some goods prices have led to what I view as unreasonable levels of concern.  While my read of the elasticities and incidence theory is that exporting nations will have to lower their selling prices, I also believe tariffs will lead to substantial swings in net national saving.

The Congressional Budget Office estimates tariff revenue could reduce the federal budget deficit by over $380 billion per year over the coming decade. 10   This is a significant swing in the supply-demand balance for loanable funds, as national borrowing declines by a comparable amount.  A 1 percentage point change in the deficit-to-GDP (gross domestic product) ratio moves r* by nearly four tenths of a percentage point, according to the average of estimates summarized by Rachel and Summers. 11   This 1.3 percent of GDP change in national saving reduces the neutral rate by half a percentage point. 12

10 See Phill Swagel (2025), 'An Update About CBO's Projections of the Budgetary Effects of Tariffs,' CBO Blog, August 22, https://www.cbo.gov/publication/61697.

11 See Ł ukasz Rachel and Lawrence H. Summers (2019), 'On Secular Stagnation in the Industrialized World,' NBER Working Paper Series 26198 (Cambridge, Mass.:  National Bureau of Economic Research, August), https://www.nber.org/papers/w26198.

12 Mehrotra and Waugh (2025) show a tariff shock should result in an immediate 30 basis point reduction in short-term interest rates.  The policy rate would then gradually increase over the ensuing five years, finishing at a point slightly above the initial steady state.  See Neil Mehrotra and Michael E. Waugh (2025), 'Tariffs, Trade Wars, and the Natural Rate of Interest,' NBER Working Paper Series 34206 (Cambridge, Mass.:  National Bureau of Economic Research, September), https://www.nber.org/papers/w34206.

Tariffs are not the only means by which trade policy is affecting the supply of loanable funds.  Loans and loan guarantees pledged by East Asian countries in exchange for relatively low tariff ceilings have reached $900 billion. 13   These guarantees entail an exogenous increase in credit supply, which research suggests would be around 7 percent. 14   Using Council of Economic Advisers' (CEA) estimates of the interest elasticity of investment and Michael Boskin's interest elasticity of saving, this would further reduce neutral policy rates by around two tenths of a  percentage point. 15 Increases in national saving from tax policy

The large tax law passed this year also has a strong effect on national saving. 16 There are, of course, other consequences of the tax law besides the increase in net national saving, which I'll discuss later in the context of the output gap.

13 This $900 billion is only a subset of the more than $3 trillion of U.S. investment pledges made by foreign countries in recent months.  While this pledged investment would certainly be expected to lead to new activity, the bulk of it would likely leave the supply-demand balance for loanable funds, and therefore r*, relatively unchanged.  This is because, apart from the $900 billion in loan guarantees, much of these commitments are in the form of direct investment, which is less likely to exert pressure on r* despite a strong positive impact on output.  Gokceli, Fidrmuc, and Ghosh (2022) find no evidence that FDI crowds out domestic investment in developed OECD countries; see Emre Gokceli, Jan Fidrmuc, and Sugata Ghosh (2022), 'Effect of Foreign Direct Investment on Economic Growth and Domestic Investment:  Evidence from OECD Countries,' European Journal of Business Science and Technology, vol. 8 (2), pp. 190-216. 14 Work done by Bachas, Kim, and Yannelis (2021) indicates that loan guarantees contribute to increased credit supply, and the elasticity estimated in their work suggests that loan guarantees of this magnitude imply an exogenous 7 percent increase in credit supply.  To translate this into an effect on r*, estimates of the interest elasticity of investment demand and the interest elasticity of saving supply can be used.  The former can be backed out from the UCC elasticity of investment and the interest elasticity of UCC (which multiply to the interest elasticity of investment).  Using this approach with parameters from Council of Economic Advisers (2025c) yields an interest elasticity of investment of approximately negative 0.3. Meanwhile, estimates from Boskin (1978) are used for the interest elasticity of saving.  Boskin uses multiple estimation strategies and finds estimates centered around 0.3.  See Natalie Bachas, Olivia S. Kim, and Constantine Yannelis (2021), 'Loan Guarantees and Credit Supply,' Journal of Financial Economics, vol. 139 (March), pp. 872-94.

15 See Michael J. Boskin (1978), 'Taxation, Saving, and the Rate of Interest,' Journal of Political Economy, vol. 86 (April, part 2), pp. S3-S27; Council of Economic Advisers (2025c), 'The One Big Beautiful Bill:  Legislation for Historic Prosperity and Deficit Reduction,' white paper (Washington:  CEA, June), https://www.whitehouse.gov/research/2025/06/the-one-big-beautiful-bill-legislation-for-historicprosperity-and-deficit-reduction.

16 The OBBB is likely to have three distinct effects that are relevant for determining the optimal federal funds rate.  The first is that reduced deficits lead to increased national saving, which reduces r*.  The second is that increased investment demand raises r*.  The third is that consumption multiplier effects will

The CEA calculates an increase in national saving of $3.83 trillion over the next 10 years (relative to the previous policy baseline), resulting from economic growth induced by tax policy. 17   This represents roughly 1.3 percent of GDP, implying a half of a percentage point reduction in r* and the appropriate policy rate through the RachelSummers channel. Indeed, the federal deficit in the second and third fiscal quarters of this year was nearly $140 billion less than in the comparable period last year.  This is a small sample size but indicative, in my opinion, of the direction of the deficit.

On the other hand, the CEA estimates that the tax law will generate annual investment increases of up to 10 percent in the next several years relative to the previous policy baseline.  This should be associated with an increase in r*, and thus the appropriate fed funds rate, of around three tenths of a point.  Let me also note that while I am relying partially on previous CEA research at the moment, I look forward to working more with Board staff and their forecasts in the coming months.

## Effect of deregulation and energy on r*

America's regulatory patchwork has become a material impediment to growth. 18 Economists tend to underappreciate the economic impact of regulations, largely because qualitative factors can be difficult to study empirically.  In many cases, a regulation can serve as an infinite tax rate, prohibiting activity altogether.  An interdiction on output because a special snail is found in a region will restrict output much more than any finite tax.

temporarily increase actual output over potential output.  This final effect is discussed in a subsequent section.

17 Relative to the pre-law, current-policy baseline.

18 Deregulation likely has two distinct effects relevant for determining appropriate policy.  First, increased TFP will raise the marginal product of capital and thus r*.  Second, deregulation leads to a more rapid increase in potential output than actual output.

Regulation hinders productivity growth, restricts capacity, and ultimately helps fuel inflation.  Regulators may have good reason for doing so (maybe they value the snail), but we must be clear-eyed about the economic consequences.

Deregulation raises the neutral rate of interest by increasing the marginal product of capital. 19   Analysis by Dawson and Seater shows that half of the output effects of deregulatory policy are channeled improvements in total factor productivity (TFP), the key ingredient to greater living standards and higher real wages for workers. 20   Previous CEA research on the benefits of deregulatory efforts suggests a roughly 0.5 percent annual boost to growth over a 20-year period, whereas CEA research on new energy policies suggests something closer to a 0.1 percent annual boost over a 10-year period. 21 The cumulative effect of these policies is anywhere from a 3 to nearly 9 percent increase in TFP, translating to about a 0.1 to 0.2 percentage point increase in r*. 22

## Policies Impacting the Output Gap

Tax policy

I'd like to shift from r* to the third component of the Taylor rule, the output gap, which reflects actual production's strength relative to the economy's potential.

Analogously, policymakers frequently think of the employment gap as the difference

19 A standard Cobb-Douglas approach implies that a k % increase in TFP should induce a k % increase in r*. 20 See John W. Dawson and John J. Seater (2013), 'Federal Regulation and Aggregate Economic Growth,' Journal of Economic Growth, vol. 18 (June), pp. 137-77.

21 See Council of Economic Advisers (2025a), 'The Economic Benefits of Current Deregulatory Efforts,' white paper (Washington:  CEA, June), https://www.whitehouse.gov/wp-content/uploads/2025/08/TheEconomic-Benefits-of-Current-Deregulatory-Efforts.pdf; Council of Economic Advisers (2025b), 'The Economic Benefits of Unleashing American Energy,' white paper (Washington:  CEA, July), https://www.whitehouse.gov/wp-content/uploads/2025/03/The-Economic-Benefits-of-UnleashingAmerican-Energy.pdf.

22 This calculation again relies on an interest elasticity of investment implied by Council of Economic Advisers (2025c) and an interest elasticity of saving from Boskin (1978).  Increase in r* is from a baseline of 1.5 percent. There are, of course, other items that might affect productivity growth, like artificial intelligence, but consistent with my discussion of inflation, I am assuming that current trends continue except for the policy shocks I am discussing.

between the actual unemployment rate and the lowest sustainable rate of unemployment that doesn't gin up inflation.  While the substantial tax and spending cuts recently passed by the Congress increase net saving and therefore reduce r*, there are countervailing increases in appropriate policy via the output gap.

The tax law should significantly push out the economy's supply side, an important change to help minimize the potential for inflationary shocks.  Reduced business and individual tax rates stimulate additional capital accumulation and labor supply.  However, these work through expanding potential and actual GDP and thus should leave the output gap relatively unchanged.  Aggregate demand, however, is also boosted by reduced taxes on seniors and lower-wage workers, balanced somewhat by cuts to entitlement spending and student lending.

Relative to a pretax law policy baseline, CEA calculations using Congressional Budget Office estimates found a static $80 billion or so reduction in revenue and a $130 billion or so reduction in annual spending over a decade.  Despite a greater reduction in spending than taxes, the literature consistently finds the tax multiplier to be larger than the spending multiplier. 23   This implies an increase of actual output over potential of approximately $50 billion in the short run, or an increase in the output gap of nearly 0.2 percent of GDP.  This translates into an increase in the appropriate federal funds rate of around 0.1 percentage point under the standard approach to the Taylor rule.

23 Ramey's literature review finds an average tax multiplier of negative 1.78 and an average government spending multiplier of 0.74; see Valerie A. Ramey (2019), 'Ten Years after the Financial Crisis: What Have We Learned from the Renaissance in Fiscal Research?' Journal of Economic Perspectives, vol. 33 (Spring), pp. 89-114.

The balanced-approach rule, which doubles the weight on the output gap and was favored by former Chairwoman Janet Yellen, would imply a 0.2 percentage point increase. 24 Regulatory and energy policies

Returning to deregulatory and energy policies:  Typically, when a regulatory barrier is removed, there is an immediate increase in potential output, but it takes time for actual output to catch up.  I expect recent policies to have this effect.

Using the same estimates for TFP as I used earlier, this suggests 0.2 to 0.6 percentage point of downward pressure on the output gap over the next couple of years. 25   That translates into a policy rate that is 0.1 to 0.3 point lower under a standard Taylor rule, or doubly as strong under the balanced-approach rule.

## Adding It All Up

To sum this all up, first we must adjust r* relative to a baseline based on the factors I've described.  A variety of models reviewed by Gianluca Benigno and others arrive at a median real estimate for r* of 1.3 percent, and a range of around 1 to 2 percent. 26   Applying Okun's law with a natural unemployment rate of 4 percent, and PCE inflation at 2.6 percent, the standard Taylor rule approach implies the appropriate nominal fed funds rate prior to the forces considered today should be about 3.9 percent. A balanced approach suggests 3.6 percent.  These are not all that far from where the FOMC has set interest rates!

24 See Janet Yellen (2017), 'The Economic Outlook and the Conduct of Monetary Policy,' speech delivered at the Stanford Institute for Economic Policy Research, Stanford University, Stanford, Calif., January 19, https://www.federalreserve.gov/newsevents/speech/yellen20170119a.htm.

25 A persistence coefficient of 0.89 per quarter is estimated via a simple AR(1) regression on the output gap over time.

26 See Gianluca Benigno, Boris Hofmann, Galo Nuno, and Damiano Sandri (2024), 'Quo Vadis, r*?  The Natural Rate of Interest after the Pandemic,' BIS Quarterly Review (March), pp. 17-30.

Including the shocks I've considered, I get a new real r* that is 1 to 1.2 percentage points lower, or near zero.  That sounds low, but I think it's important to take these models seriously , not literally, and as I've said, I think these models sometimes don't do a great job incorporating policy changes of the type I've discussed at the frequency I need.  Instead, I suspect existing backward-looking estimates are too high because they insufficiently account for recent changes to fiscal and border policies that are depressing r*.

We can also look to financial markets.  My preferred market-implied measure of r* is the five-year, five-year-forward rate on U.S. Treasury Inflation-Protected Securities. That's around 2.3 percent, meaning the new real r* would be 1.1 percent when applying new policy pressures.

Including the inflation and output channels along with the median model-implied r*, the fed funds rate should be around 2 to 2.25 percent under the standard Taylor rule approach.  The balanced approach implies a rate around 1.5 to 2 percent.  If we instead use the market-implied r*, these numbers would all be one full point higher. 27

To help correct for the risk that the model-implied rate is too low, I weight its likelihood at two-thirds and give the market-implied r* a one-third weighting.  I've given market pricing just one-third partially because I believe it is incorporating a policy premium to reflect uncertainty around trade policy.  Using these weights results in an appropriate fed funds rate of approximately 2 percent under the balanced approach and

27 All calculations in this paragraph sum up the previous calculations in this speech and add them to either of the initial r* estimates.

- 2.5 percent under the standard rule, although a simple summation ignores issues of timing. 28

To be clear, I don't want to imply more precision than I think is possible in economics.  Assumptions and approximations abound.  Nevertheless, I must stake out a position, and this is my best ballpark estimation.

The upshot is that monetary policy is well into restrictive territory.  Leaving shortterm interest rates roughly 2 percentage points too tight risks unnecessary layoffs and higher unemployment.  Thank you for this opportunity to share how I think about monetary policy at the moment; I'd be happy to take some questions.

28 The slight discrepancies between this range and my forecasts in the Summary of Economic Projections are due to timing; some of the forces I've analyzed kick in over time, and others-like the output gapsameliorate over time.

|                                                         | Standard Taylor Rule   | Standard Taylor Rule   | Same under Both Rules   | Same under Both Rules   | Balanced- Approach Taylor Rule   | Balanced- Approach Taylor Rule   |
|---------------------------------------------------------|------------------------|------------------------|-------------------------|-------------------------|----------------------------------|----------------------------------|
| Ex-Ante Appropriate FFR (bps) Effect on optimal FFR of… | Low                    | 426 High               | Low                     | High                    | Low                              | 396 High                         |
| Forces affecting π t : Rent disinflation                |                        |                        | -47                     | -60                     |                                  |                                  |
| Forces affecting r*: Deregulation + energy              |                        |                        | 4                       | 20                      |                                  |                                  |
| OBBB                                                    |                        |                        | -6                      | -31                     |                                  |                                  |
| Population growth                                       |                        |                        | -36                     | -36                     |                                  |                                  |
| Trade policy                                            |                        |                        | -62                     | -73                     |                                  |                                  |
| Forces affecting (y t - ȳ):                             |                        |                        |                         |                         |                                  |                                  |
| Deregulation + energy                                   | -11                    | -32                    |                         |                         | -23                              | -63                              |
| OBBB                                                    | 8                      | 8                      |                         |                         | 16                               | 16                               |
| Ex-Post Appropriate FFR (Midpoint) (bps)                | 249                    | 249                    | 249                     |                         | 206                              | 206                              |

Note:  Table weights for ex-ante r* are 2/3 from the model-implied results from Benigno and others (2024) and 1/3 from the market-implied rate from Treasury Inflation-Protected Securities.  FFR is federal funds rate.  OBBB is One Big Beautiful Bill.",Stephen I Miran
https://www.bis.org/review/r250918c.htm,Arthur Yuen: Building capacity for developing transition finance ecosystems in Asia,"Keynote speech by Mr Arthur Yuen, Deputy Chief Executive of the Hong Kong Monetary Authority, at the Capacity-building Alliance of Sustainable Investment (CASI) Sustainability Forum on ""Building capacity for developing transition finance ecosystems in Asia"", Hong Kong, 12 September 2025.",2025-09-12 00:00:00,"## Arthur Yuen: Building capacity for developing transition finance ecosystems in Asia

Keynote speech by Mr Arthur Yuen, Deputy Chief Executive of the Hong Kong Monetary Authority, at the Capacity-building Alliance of Sustainable Investment (CASI) Sustainability Forum on ""Building capacity for developing transition finance ecosystems in Asia"", Hong Kong, 12 September 2025.

* * *

Dr Ma (Chairman of CASI), Professor He (Director of HKU Jockey Club Enterprise Sustainability Global Research Institute), Paul (Managing Director, Global Partnerships &amp; Client Solutions, CFA Institute), ladies and gentlemen, good morning.

It is a pleasure to be back at the Capacity-building Alliance of Sustainable Investment (CASI) Sustainability Forum. Let me first thank fellow co-hosts - CASI, HKU Jockey Club Enterprise Sustainability Global Research Institute, and CFA Institute - for hosting this meaningful event again in Hong Kong.

It is encouraging to have so many of you joining us in person and online on the final day of the Hong Kong Green Week to discuss this pressing issue in Asia - how to build capacity for transition finance.

Asia plays a critical role in the global efforts to decarbonise. In fact, one may say that the battle for net zero will be won or lost here in Asia. The region accounts for over half of the world's emissions, warming twice as fast as the global average.  At the same 1 time, it is home to many emerging and developing economies whose growth remains heavily reliant on fossil fuels. These economies are also among the most vulnerable to the impacts of climate change, such as extreme weather events and biodiversity loss.

The International Monetary Fund (IMF) estimates that emerging and developing Asia would need to invest at least US$1.1 trillion per year into climate actions. Yet actual investment falls short by about US$800 billion. 2   To bridge this gap, and to steer Asia through its dual challenges of socioeconomic development and decarbonisation, it is imperative that we build an ecosystem which can facilitate fund flows to where they are the most needed - the brown-to-green transition.

While transition finance is gaining traction, it still represents a relatively small fraction of the sustainable finance markets. Transition bonds and sustainability-linked bonds (including transition-linked bonds), for instance, account for less than 10% of the sustainable bond markets in the ASEAN Plus Three. 3   That number needs to grow, and can grow with a conducive ecosystem.

The HKMA is steadfast in our commitment to nurturing the sustainable finance ecosystem in Hong Kong and beyond. Last October, we launched our Sustainable Finance Action Agenda, setting out both visions and a concrete action plan to consolidate Hong Kong's role as the region's sustainable finance hub. We endeavour to provide the industry with guidance that is sufficiently forward-looking and comparable with other major markets, as well as stepping up capacity-building efforts to nurture

talent and sharpen their competitive edge. To bring our vision to life, we have begun taking steps to address the pain points faced by the industry by closing gaps in standards, readiness, information, and talents.

""What is green?"" is one of the most frequently asked questions by the industry, highlighting a need for clarity on the definition. To address the gap in standards, the HKMA published Phase 1 of the Hong Kong Taxonomy for Sustainable Finance as an enabling tool to help market participants make informed decisions regarding green and sustainable finance and to scale up relevant capital flows.

We are making steady progress on this front. Earlier this week, we launched a consultation on the prototype of Phase 2A taxonomy. In this phase, we expand sector coverage by adding manufacturing as well as information and communications technology (ICT) to the original four sectors. We also increase the number of economic activities from 12 to 25, and provide updates to technical screening criteria for some Phase 1 activities.

More importantly, we added transition elements to the taxonomy, including interim decarbonisation targets, supportive measures, and sunset dates. A new environmental objective on climate change adaptation is also introduced to address the growing funding needs for managing physical risks and responding to extreme weather events. Looking ahead, we will continue our engagement with stakeholders to refine and update the taxonomy.

That naturally leads to the next question: ""How do we transition?"", bringing us to the discussion of the gap in readiness. In order to enhance banks' resilience and management of risks associated with the real economy's transition, the HKMA has been supporting banks' transition planning efforts through different policies.

In December 2024, to facilitate information sharing and to encourage banks to step up their transition planning, the HKMA issued some good practices based on the results of an earlier survey.

In addition, we have been working on a set of draft guidelines to provide guidance on transition planning, and we have consulted the industry on the draft guidelines and understand that banks would like to have more clarity and details. We are revising the guidelines based on the feedback received, and will continue to engage the industry as we move forward.

Let us now turn to the gap in information and the question: ""What do we know?"". Without consistent and comparable information, it is challenging for the entire ecosystem to assess and respond to climate-related risks and opportunities. As a leading hub for sustainable finance, Hong Kong is committed to promoting climate and sustainability-related disclosure. Last year in December, the Government launched a roadmap which shows our commitment to adopting the ISSB Standards.

For the banking sector, it is also vital to enhance transparency and align disclosures with international standards. The Basel Committee issued a disclosure framework on

climate-related financial risks in June this year. The HKMA will leverage on both ISSB Standards and the Basel disclosure framework to enhance sustainability disclosure requirements for the sector.

Currently, we are undertaking preparatory work, including analysing the current sustainability disclosure landscape, challenges and practices of the industry, to inform the policy formulation process. We will work out a proposal setting out the timeline and approach for implementing the requirements.

Last but not least, we need to ensure that there are sufficient talents to support the smooth operation of the markets. To this end, the HKMA has spared no effort in capacity building to help the industry unlock its full potential. For instance, since 2022, we have been administering the Government's Pilot Green and Sustainable Finance Capacity Building Support, or CBSS. Under the CBSS, we subsidise students and working professionals for sustainable finance-related training and qualifications. To date, more than 7,600 reimbursements have been approved, amounting to over HK$42 million. The HKMA is also the first Regional Anchor to work with the International Finance Corporation on the Alliance for Green Commercial Banks, which organises a diverse range of capacity building events for both front-line practitioners and senior executives from banks in Asia. The Alliance currently has 18 member banks and will keep reaching out to more.

These efforts have helped the industry raise awareness and narrow skill gaps. In our latest study, ""Capacity Building for Future Banking, 2026-2030"", 89% of respondents identify sustainable finance as a major growth opportunity. They also note that the banking professionals in Hong Kong now possess a greater understanding of sustainable finance products, such as green bonds and green project finance. Nevertheless, the study also finds that new gaps have emerged in more specialised skills and the understanding of emerging markets.

Capacity building needs evolve together with the market. To this end, in November 2024, the HKMA launched the Professional Level of Enhanced Competency Framework - Green and Sustainable Finance module, also known as the ECF-GSF. This helps the middle and senior-level banking practitioners acquire knowledge and develop skills in specialised domain areas covering upcoming market developments and regulatory trends. We will also continue to enhance the CBSS to cover a more diverse range of courses and qualifications to meet the evolving needs of the industry.

We have a rich agenda today, and I will not keep you any longer. Let me conclude by saying that we, at the HKMA, firmly believe that Hong Kong can and should play an enabling role in Asia's transition. And we will continue to collaborate with like-minded institutions to ensure that the industry is equipped with the knowledge and know-how to facilitate this transition.

I wish you all a fruitful event today. Thank you.

1 https://wmo.int/news/media-centre/rising-temperatures-and-extreme-weather-hit-asiahard

- 2 https://www.imf.org/en/Publications/Departmental-Papers-Policy-Papers/Issues/2024 /01/29/Unlocking-Climate-Finance-in-Asia-Pacific-Transitioning-to-a-Sustainable-Future541458
- 3 https://www.adb.org/sites/default/files/publication/1059781/asia-bond-monitor-june2025.pdf",Arthur Yuen
https://www.bis.org/review/r250924f.htm,Michelle W Bowman: Views on the economy and monetary policy ,"Speech by Ms Michelle W Bowman, Vice Chair for Supervision of the Board of Governors of the Federal Reserve System, at the 2025 Kentucky Bankers Association Annual Convention, Asheville, North Carolina, 23 September 2025.",2025-09-23 00:00:00,"## Michelle W Bowman: Views on the economy and monetary policy

Speech by Ms Michelle W Bowman, Vice Chair for Supervision of the Board of Governors of the Federal Reserve System, at the 2025 Kentucky Bankers Association Annual Convention, Asheville, North Carolina, 23 September 2025.

* * *

Good morning. 1   I would like to thank the Kentucky Bankers Association for the opportunity to join you again for your annual convention, this time with an important difference. Earlier this year, the President nominated, and the Senate confirmed, me as the Fed's Vice Chair for Supervision. It's the first time someone with community banking experience has served in this role, and I am working to make sure that the Federal Reserve is addressing the issues I have discussed with you and other community bankers over the past nearly seven years that I've been a member of the Board of Governors.

It is really a pleasure to be with you again, and especially in Asheville, North Carolina, after the terrible flooding this area experienced last year.

Since the Federal Open Market Committee (FOMC) met for our September meeting last week, I thought I would share my views on the U.S. economy and monetary policy, including on my policy vote.

## Update on the Most Recent FOMC Meeting

At last week's FOMC meeting, the Committee voted to lower the target range for the federal funds rate by 1/4 percentage point, bringing it to 4 to 4-1/4 percent, and to continue to reduce the Federal Reserve's securities holdings. In my view, the Committee should have begun lowering the policy rate at the July meeting, so, of course, I supported reducing the policy rate at this meeting.

For several months, I have been pointing out signs of potential labor market fragility. Since the June FOMC meeting and in public remarks following that meeting, I have argued that increasing signs of weakening labor market conditions provide a basis for beginning to move the policy rate closer to neutral to proactively support the employment side of our mandate. Recent data have revealed a materially more fragile labor market along with inflation that, excluding tariffs, has continued to hover not far above our target. Given this shift in labor market conditions, I am pleased that we have finally begun the process of removing policy restraint, reflecting the economic conditions and the balance of risks to our employment and inflation goals. Assuming the economy evolves as I expect, last week's action should be the first step to bring the federal funds rate back to its neutral level.

## Economic Conditions and Outlook

The U.S. economy has been resilient, but I am concerned about the weakening in labor market conditions and softer economic growth. I am also more confident that, as trade policy has become more certain, tariffs will have only a small and short-lived effect on inflation going forward.

GDP growth slowed to a modest pace in the first half of the year, as consumer spending softened and both investment in residential and commercial real estate and federal government purchases declined. A surge in high-tech investment, likely related to interest-rate-insensitive AI and data-center projects, accounted for at least half of the increased demand in the first six months of the year, while there was weakness in other categories. The incoming data for July and August point to an improvement in thirdquarter consumer expenditures.

Declines in housing activity, including single-family home construction and sales, have been accompanied by higher inventories of homes for sale and falling house prices, suggesting that housing demand has also weakened. Elevated mortgage rates may be exerting a more persistent drag as income growth expectations have declined while house prices remain high relative to rents. Given very low housing affordability, existing home sales have remained depressed since 2023 and at levels only comparable with the early 2010s following the financial crisis. I am concerned that, in the current environment, declines in house prices could accelerate, posing downside risks to housing valuations, construction, and inflation.

Turning to the labor market, conditions have weakened this year as shown by the rise in the unemployment rate and essentially flat payroll employment, which rose only about 25,000 per month since April. This is down sharply from the moderate pace of job gains seen earlier in the year and well below estimates of breakeven rates, due to softening in labor demand. The unemployment rate moved up to 4.3 percent in August, largely reflecting reduced hiring as businesses continue to retain existing workers instead of increasing layoffs. Wage growth has slowed closer to a pace consistent with 2 percent inflation, indicating that the labor market is no longer a source of inflation pressures.

Although still near full employment, the labor market has become more fragile and could deteriorate more significantly in the coming months. The unemployment rate has increased notably among groups that tend to be more affected by the business cycle, including teenagers. And the employment-to-population ratio has dropped significantly this year, showing more softening than the unemployment rate implies. Layoffs have edged up from low levels and could rise quickly if the economy weakens further since hiring rates have remained low. One consequence of a less dynamic labor market this year is the significant increase in the number of long-term unemployed workers.

Payroll employment growth has been concentrated in just a few services industries that tend to be less affected by the business cycle, with healthcare, social services, and leisure and hospitality more than accounting for all job gains since April. The share of industries with positive job growth over the last six months dropped below 50 percent in August to a historically low level.

Actual payroll employment may have started to fall in recent months given the sizable upward bias in the published data implied by the Q1 Quarterly Census of Employment

and Wages report. Although less immigration likely explains some of the slower payroll gains and economic growth this year, immigration does not fully explain the slowing. The surge in immigration likely boosted the rise in unemployment through mid-2024, and lower immigration may now be masking a steeper rise in unemployment this year. In addition, these immigrants likely make a smaller contribution to economic activity than the average U.S. worker, as they tend to work in jobs and industries with lower wages and lower productivity. 2

On price stability, we have seen some progress in lowering inflation, excluding one-off tariff effects on goods prices. Based on the latest consumer and producer price reports, 12-month core PCE inflation likely stood at 2.9 percent in August. However, after removing estimated tariff effects, core PCE inflation has hovered around 2.5 percent in recent months, which is significant progress and within range of our target. This progress reflects a considerable slowing in core services inflation, which is consistent with recent softness in consumer spending and the labor market no longer being a source of inflation pressures.

The underlying trend in core PCE inflation appears to be moving much closer to our 2 percent target than is currently shown in the data. With housing services inflation on a sustained downward trajectory, and further progress on other categories within core services inflation, only core goods inflation remains elevated, likely reflecting limited pass-through from tariffs.

In terms of risks to achieving our dual mandate, as I gain even greater confidence that tariffs will not present a persistent shock to inflation, I see that upside risks to price stability have diminished. With softness in aggregate demand, and signs of fragility in the labor market, I think that we should focus on risks to our employment mandate and preemptively stabilize and support labor market conditions.

Memories of pandemic worker shortages are still fresh, and businesses have so far chosen to maintain, rather than to reduce, their workforce in response to the slowing economic conditions. They also seem to be more willing to reduce profit margins as they are less able to fully pass through higher costs and raise prices given the weakness in demand. If demand conditions do not improve, businesses may need to begin to lay off workers, recognizing that it will not be as difficult to rehire given the shift in labor market conditions.

On trade policy, foreign suppliers are absorbing some of the new tariffs, and importers are shifting to lower-tariffed sources. Slack in the economy should also allow for only limited one-time price effects this year and very little, if any, ""second round"" effects on inflation in the medium term. I expect that lower immigration will continue to lessen demand and reduce inflation, especially on housing services. I also expect that less restrictive regulations, lower business taxes, and a more friendly business environment are likely to boost supply and offset any tariff-related effects on economic activity and prices over the medium term.

## The Policy Decision and the Path Forward

So far this year, even with inflation within range of our target, the Committee has focused primarily on the inflation side of the dual mandate. Now that we have seen

many months of deteriorating labor market conditions, it is time for the Committee to act decisively and proactively to address decreasing labor market dynamism and emerging signs of fragility. In my view, the recent data, including the estimated payroll employment benchmark revisions, show that we are at serious risk of already being behind the curve in addressing deteriorating labor market conditions. Should these conditions continue, I am concerned that we will need to adjust policy at a faster pace and to a larger degree going forward.

I recognize and appreciate concerns that we have not yet perfectly achieved our inflation goal. Because our dual mandate places equal weights on the two goals, we should turn our focus toward the side of the mandate that is showing signs of deterioration or fragility even though inflation is above but within range of our target. This should be especially the case since forecasters widely expect inflation to significantly decline next year, and as further deterioration in labor market conditions would likely lead to more persistent damage to the employment side of the mandate that would be difficult to address with our tools.

In my role as monetary policymaker, I am agnostic about why shocks happen, I take conditions as they are, and I make monetary policy decisions to support the economy. The credibility and effectiveness of the Federal Reserve depend on the public's trust that we will not bring a value judgment into our assessment of the underlying conditions.

Economic research is clear that, when conditions exist like those we are currently facing, monetary policy should de-emphasize inflation. The U.S. economy is experiencing aspects of a negative supply shock from higher tariffs that is also affecting aggregate demand. Since these conditions are unlikely to lead to persistent effects on inflation, and because changes in monetary policy take time to work their way through the economy, optimal policy calls for looking through temporarily elevated inflation readings. Therefore, we should proactively remove some policy restraint on aggregate demand to avoid damage to the labor market and a further weakening in the economy, provided that long-run inflation expectations remain well anchored.

In addition, putting tariffs aside, the U.S. economy may also be experiencing an extended productivity surge, in large part because of recent technological advances. And productivity growth has likely been higher than reported due to the downward benchmark revisions to payroll gains. These developments reinforce the case for removing policy restraint because monetary policy should accommodate productivity shocks that raise potential output.

In light of all these considerations, in my view, it was appropriate to begin the process of moving policy toward a more neutral stance at this meeting, and it has been for several months. In thinking about the path forward, I supported revising the characterization of the policy outlook in the post-meeting statement. It is important we signal that last week's action includes a forward-looking view of additional adjustments. If the statement had not included a reference to additional cuts, it would have signaled to markets that the Committee would not be responsive to weakening labor market conditions.

I am concerned that the labor market could enter into a precarious phase and there is a risk that a shock could tip it into a sudden and significant deterioration. Characterizing

an appropriate forward-looking view of additional policy adjustments is important because it shapes the expected path of short-term interest rates, which, in turn, affects longer-term interest rates, including mortgage and corporate bond rates, that are key for household and business decisionmaking. Cutting the policy rate 25 basis points and signaling additional adjustments at upcoming meetings should allow longer-term interest rates to remain materially lower than earlier this year and help to support the economy.

Finally, I should note that the rising downside risks to employment and the potential for greater damage to the labor market underscore the need to shift our focus away from overemphasizing the latest data points. A strict interpretation of data dependence is inherently backward looking and would guarantee that we remain behind the curve, requiring us to overcorrect in the future. I think we should consider reframing our focus from overweighing the latest data to a proactive forward-looking approach and a forecast that reflects how the economy is likely to evolve going forward. This approach would better position us to avoid falling behind the curve and then having to implement abrupt and dramatic policy actions.

During this intermeeting period, I will continue to carefully monitor the incoming data and information as the Administration's policies, the economy, and financial markets continue to evolve. Before our next meeting in October, we will have received one additional month of employment and inflation data. I will also continue to meet with a broad range of contacts to discuss economic conditions as I assess the appropriateness of our monetary policy stance going forward.

It is important to note that monetary policy is not on a preset course. At each FOMC meeting, my colleagues and I will make our decisions based on each of our assessments of the incoming data and the implications for risks to the outlook, guided by the Fed's dual-mandate goals of maximum employment and stable prices.

## Closing Thoughts

Before we move on to the discussion, I'd like to touch on the supervision and regulatory work underway. We have made a lot of progress in the past few months since I officially became the Vice Chair for Supervision. And Congress has been hard at work considering important banking and digital assets legislation and the passage of the GENIUS Act. 3

In addition to working to implement the Fed's responsibilities under this law, we are making significant progress on a number of priorities in supervision and regulation. Early in my tenure, I described my approach that would require taking a fresh look at our activities. 4

While we are making progress in a number of areas, there is much left to do. Some of this work will include improving the M&amp;A process; reviewing the appropriateness of capital requirements for all banks, including revising the community bank leverage ratio and approaches for mutual banks; and addressing payments and check fraud (our request for information comment period ended last week). We are continuing to

enhance examiner training and development, and we will continue to prioritize economic growth and safety and soundness in the bank regulatory framework. I look forward to sharing details with you during our discussion.

Thank you again for the invitation to join you today. It's a pleasure to spend time with our nation's community bankers.

1  The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.

- 2  See George Borjas (2015), ""The Slowdown in the Economic Assimilation of Immigrants: Aging and Cohort Effects Revisited Again,"" , vol 9 Journal of Human Capital (4), pp. 483-517; and Congressional Budget Office (2024), Effects of the Immigration (Washington: CBO, July). Surge on the Federal Budget and the Economy
- 3  The Guiding and Establishing National Innovation for U.S. Stablecoins Act was enacted on July 18, 2025.
- 4  Michelle W. Bowman,  ""Taking a Fresh Look at Supervision and Regulation,"" (PDF) (remarks at the Georgetown University McDonough School of Business, Psaros Center for Financial Markets and Policy, Washington, D.C., June 6, 2025).",Michelle W Bowman
https://www.bis.org/review/r250924j.htm,Sabine Mauderer: Seizing the moment - strengthening Europe's role in global financial markets,"Speech by Dr Sabine Mauderer, First Deputy Governor of the Deutsche Bundesbank, at the Bundesbank's Representative Office in New York, New York City, 23 September 2025.",2025-09-23 00:00:00,"## Sabine Mauderer: Seizing the moment - strengthening Europe's role in global financial markets

Speech by Dr Sabine Mauderer, First Deputy Governor of the Deutsche Bundesbank, at the Bundesbank's Representative Office in New York, New York City, 23 September 2025.

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Check against delivery

## 1 Introduction

Good evening, everyone.

It is a pleasure to welcome you to our reception here at our representative office in New York. For many years, this office has served as a bridge between the Bundesbank and participants in US financial markets.

Our annual event has become a cherished tradition. I greatly value the opportunity to engage in open discussions with you. This exchange is a testament to the continued importance of transatlantic relations, and I am happy to see so many familiar faces here tonight.

Much has changed since we met last year. We have seen significant shifts in financial markets and the political landscape. Tonight, I would like to reflect on these developments and their implications for Germany and Europe.

I am especially pleased to welcome Tammo Diemer, a member of the Executive Board of the German Finance Agency, which manages German government debt.  Tammo's expertise and insights into the Bund  market will enrich our discussions and I really look forward to hearing your views in a moment.

## 2 Europe's markets have gained momentum

One of the most striking developments in international financial markets this year has been the broad-based depreciation of the US dollar. Of course, the US dollar remains the world's leading reserve currency. However, global investors are increasingly planning to diversify their portfolios. European markets could benefit from this shift amid global uncertainty.

The growing interest in Europe is evident from capital flows into euro area bond and equity markets. As a result, the euro has appreciated. Its nominal effective exchange rate reached an all-time high in September 2025 . 1

In addition, there has been a notable rise in bond issuance in euro by companies from outside the euro area. Investors have especially looked to German government bonds (Bunds). Bunds have served as a safe haven during episodes of market stress this year. Moreover, the German government's fiscal package-€500 billion, especially for

infrastructure-has raised hopes for stronger growth and positive spillover effects across Europe.

## 3 Seizing the moment: strengthening Europe

These developments are encouraging. They underscore the growing appeal of European financial markets. What matters now is to make the most of this momentum. To achieve this, Germany and Europe have got some work to do. Let me highlight three aspects:

First, structural reforms and productivity-enhancing investments are essential to boosting economic growth. Cutting red tape is crucial for fostering innovation and unlocking more growth. Policy initiatives have to address the shortage of skilled workers. This can happen through targeted immigration policies.

Second, geopolitical shifts have underscored the urgent need to invest in our own security. Germany and Europe will strengthen their defence capabilities and bolster the resilience of critical infrastructure.

A third critical priority is to mobilise private capital for investments in innovative technologies. Although most of European financial regulation is aligned, Europe's capital markets are still too fragmented. Further integration is absolutely necessary and indeed progress is underway. Cross-border investments would become easier and businesses could tap into larger and more diverse pools of capital for funding.

This would be especially beneficial for small and medium-sized enterprises, which often rely heavily on traditional bank loans. By improving access to capital markets, we can unlock private capital and drive innovation forward.

Mobilising private finance is especially important in the face of limited fiscal space. The size of the fiscal package may seem big, but the challenges are even bigger.

We have seen bond yields rise since the beginning of the year in many countries, including Germany, especially longer-term yields.

Against this background, I want to stress that sound public finances and using limited resources strategically are essential for maintaining the trust of investors. Public investments should be focused on areas that drive long-term growth and innovation.

## 4 Conclusion

In conclusion, the growing interest from international investors is a testament to the trust in Europe's stability and potential. Now is the time to seize this moment to strengthen our position internationally and build a more resilient and dynamic Europe.

On that note, I am delighted to hand over to Tammo Diemer, who will provide deeper insights into developments in the Bund market. Tammo, it was a pleasure to celebrate the Finance Agency's 25th anniversary with you last week. So, ""happy birthday"" again, and the floor is yours. Thank you.

- 1  See European Central Bank: Daily nominal effective exchange rate of the euro.",Sabine Mauderer
https://www.bis.org/review/r250924i.htm,Burkhard Balz: The digital €uro - a game changer for European merchants,"Welcome speech by Mr Burkhard Balz, Member of the Executive Board of the Deutsche Bundesbank, at the Handelskonferenz, Brussels, 24 September 2025.",2025-09-24 00:00:00,"## Burkhard Balz: The digital €uro - a game changer for European merchants

Welcome speech by Mr Burkhard Balz, Member of the Executive Board of the Deutsche Bundesbank, at the Handelskonferenz, Brussels, 24 September 2025.

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Check against delivery

## 1 Introduction

Ladies and gentlemen,

A very good morning to you all. It is my great pleasure to welcome you all to this event today here in Brussels. As a former Member of the European Parliament, I have enjoyed countless memorable moments in this vibrant city. Returning to Brussels, a city that embodies the spirit of European unity. It always feels like coming home and today is no exception.

When we first envisioned today's event, we had planned to host it at the House of the Euro, just a stone's throw away from where we are now. However, the overwhelming interest in this topic quickly forced us to look for a larger venue. I would like to express my heartfelt thanks to Dr. Eckert and his team here at the Representation of the State of Hessen to the European Union for stepping in at short notice and generously offering us the use of their premises.

The remarkable turnout today speaks volumes about the high level of interest in the digital euro and its importance in helping to shape the future of Europe's financial ecosystem. While much of the recent public debate has focussed on financial institutions, and understandably so given their crucial role in maintaining stability and trust in the financial system, today we turn our attention to another stakeholder group whose role is equally as vital: I am, of course, referring to merchants.

Merchants are not just participants in the digital euro project-they are its driving force. As the critical link between consumers and the financial system, merchants are uniquely positioned to unlock the full potential of this innovation.

The digital euro is not just about transforming payments: it's about empowering businesses, enhancing the customer experience, and redefining the future of European commerce. Together, we will examine how this initiative can help merchants thrive in an increasingly digital economy while ensuring that Europe remains at the forefront of global commerce.

## 2 Developments and challenges in the European payments landscape

As we gather here today to discuss the future of payments in Europe, we must recognise the profound changes shaping the world around us. Geopolitical tensions, rising protectionism, economic uncertainty, and rapid technological advancements are redefining the landscape.

In this environment, our over-reliance on non-European payment providers is not just a challenge-it's a risk to Europe's sovereignty. While the introduction of the euro was undoubtedly a milestone in European integration, our payments infrastructure has not kept pace with the demands of the digital age.

Nearly two-thirds of all card payments in the euro area depend on non-European providers. This is not just a statistic-it's a vulnerability that threatens our ability to compete and innovate in the global economy. What is more, 13 out of the 20 euro area member states have no national card scheme of their own. As a result, payments in Europe are largely dependent on international schemes, primarily those in the United States.

And Europe's dependencies in the digital age are likely to increase if we do not fundamentally take matters into our own hands. To succeed, we need a European payment system that delivers real value-not just to consumers, but also to the merchants who bring the European Single Market to life every day.

## 3 The digital euro-implications for merchants

What tangible benefits can the digital euro bring to merchants, a backbone of our economy? This question will certainly be explored in greater depth today. However, allow me to briefly highlight three key advantages that the digital euro could offer.

First, the digital euro promises a seamless payment experience. Whether at the point of sale, in eCommerce, or peer-to-peer transactions, it aims to simplify payments across borders-throughout the entire euro area and potentially beyond.

In particular, merchants which operate across countries and offer both in-store as well as online shopping could introduce a single payment method in all their payment systems. Importantly, it is designed to integrate effortlessly into existing payment systems, ensuring a smooth adoption process for merchants and service providers.

Second, the digital euro is being built with resilience in mind. By offering both online and offline functionality and adhering to open technical standards, it seeks to provide the highest levels of trust, security, and reliability for businesses and consumers alike.

Third, the digital euro has the potential to foster a more competitive and innovative payments market. By introducing a pan-European payment infrastructure, it could reduce dependencies, promote transparency, and create fairer acceptance conditions for merchants.

Of course, the practical realities for merchants will be decisive. Above all, the digital euro must be cost-effective and competitive, offering an economically viable solution for daily operations.

It is not about replacing existing payment methods but about complementing them-enriching the market and enabling broader reach. To truly become a game changer, the digital euro must address real challenges, deliver tangible benefits, and integrate seamlessly into the European retail ecosystem.

Naturally, there are still important questions to resolve. That is why your voice-and your active participation in today's conference-are so important. Together, we can shape a digital euro that works for everyone.

## 4 Conclusion

Ladies and gentlemen,

Today's conference is about dialogue, sharing views and working together to turn vision into reality. Henry Ford is quoted as once saying: ""Coming together is a beginning, staying together is progress, and working together is success.""

It is through this spirit of collaboration that we can transform the digital euro into a true game changer for European commerce. Let us seize this opportunity to shape the future of European payments together. I look forward to the insightful discussions and diverse perspectives that will emerge from today's conference. Together, we can build a stronger, more innovative Europe.

I now have the pleasure of giving the floor to the Vice President of the European Commission, Valdis Dombrovskis.

Thank you for your attention.",Burkhard Balz
https://www.bis.org/review/r250930e.htm,Sergio Nicoletti Altimari: Innovation and cooperation for modern statistics,"Speech by Mr Sergio Nicoletti Altimari, Deputy Governor of the Bank of Italy, at the 10th SDMX Global Conference ""Smarter data for better insights"", Rome, 29 September 2025.",2025-09-29 00:00:00,"## Sergio Nicoletti Altimari: Innovation and cooperation for modern statistics

Speech by Mr Sergio Nicoletti Altimari, Deputy Governor of the Bank of Italy, at the 10th SDMX Global Conference ""Smarter data for better insights"", Rome, 29 September 2025.

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Ladies and gentlemen, dear colleagues and guests,

It is a great pleasure to welcome you to the SDMX Global Conference - a gathering of some of the most dedicated and innovative professionals in official statistics. On behalf of the Bank of Italy and the organizers, I extend a warm welcome to all of you - here in person and online.

This conference stands at the crossroads of three powerful forces shaping our institutions today: the explosion of data in digital societies, rapid technological innovation, and the growing need for interoperability among those who produce and govern data.

These forces come together in SDMX - the Statistical Data and Metadata Exchange Standard - a true cornerstone of modern statistical cooperation.

## 1. The Evolution of Statistical Data Exchange

Let us take a moment to reflect on how far you have come.

In earlier decades, the exchange of statistical information between central banks, national statistical offices, and international organizations was mainly manual, fragmented, and inconsistent. Even modest updates could involve long delays, duplicated efforts, and inconsistent interpretations.

SDMX emerged in response to this reality. Launched as a collaborative initiative by leading international organizations - comprising the BIS, ECB, Eurostat, IMF, OECD, UN, World Bank and more recently ILO - SDMX was designed to harmonize statistical processes, streamline reporting burdens, and above all, to make data exchange efficient, transparent, and reusable.

Today, SDMX is much more than just a data transmission protocol. It is a shared language, a community of practice, and a technical backbone for the global statistical system.

## 2. Why SDMX is so relevant today?

In today's world of speed, complexity and global interdependence, SDMX plays a vital role. It ensures that the statistical systems we depend on - for monetary policy, economic monitoring, social planning, or sustainability - remain responsive, interoperable, and fit for purpose.

Decisions now demand data that is reliable, well-documented, and delivered faster than ever. Central banks need a real-time view of the economy and early warnings of financial risks. Statistical offices must track complex realities - from supply chains to climate to digital economies - with unprecedented detail and agility.

In this context, SDMX makes a difference. It enables:

- automation of data flows from providers to users,
- standardization of concepts and definitions,
- transparency and trust in how statistics are produced,
- and, above all, collaboration across institutions and borders.

## 3. An ever-increasing adoption

Even if precise data are lacking, surveys show a steady rise in SDMX adoption worldwide . Multilateral organizations have built repositories and registries that provide 1 central access to validated, high-quality data. These are not just technical milestones they are institutional reforms that enable better policymaking.

In the EU, central banks now use SDMX pipelines to transmit monetary statistics to the ECB and the IMF, cutting reporting delays and reducing manual work. National statistical offices apply SDMX to harmonize data and metadata, simplifying integration, improving coherence, and lowering costs.

The Bank of Italy has supported SDMX from the start - contributing to technical and statistical working groups, developing open-source tools, and, as a founding BIS member, promoting the involvement of the global central banking community.

Equally important is our partnership with ISTAT. The Italian Statistical Office has been a major contributor to SDMX, and both institutions have greatly benefited from this collaboration.

## 4. Challenges and opportunities

The road ahead brings both opportunities and challenges.

Data is growing exponentially, with new, unstructured sources from satellites, social media, and beyond. Tools like Artificial Intelligence offer huge potential - but also call for new rules of integration and governance.

At the same time, expectations are changing calling for more transparency, machinereadable standards, real-time analysis.

SDMX must keep evolving - open to innovation, yet rigorous on quality and comparability.It's a demanding task, but this community has shown time and again that it can rise to the challenge.

## 5. Goals for the Conference

Over the next three days, you will explore these themes in depth.

Here we have representatives from more than 50 countries representing almost 150 institutions and private companies.

You will hear from practitioners who have implemented SDMX solutions in diverse institutional settings. You will discuss the upcoming features in the 3.0 specification. You will share lessons from capacity-building projects and examine how SDMX is being used in emerging areas like environmental statistics and AI-driven validation.

But beyond the technical sessions, this conference is of course about building relationships and strengthening a global community where experience is shared, problems are tackled collectively, and innovation is fostered.

## 6. Concluding remarks

Let me conclude.

The core mission of SDMX is simple, yet powerful: to share data more effectively across institutions worldwide. By doing so, it helps build a stronger, more resilient system of trusted statistics - a foundation for better choices and better decisions.

But SDMX is more than a technical tool. It is a symbol of cooperation and trust, of our shared commitment to work together. In a world increasingly divided by conflict, tension, and fragmentation, this spirit of collaboration is a precious asset.

It is our duty - and our privilege - to keep this spirit alive. I am confident that this Global Conference, here in Rome, will reaffirm that commitment and strengthen it for the future.

I wish you all rich discussions, fresh ideas, and above all, an inspiring conference.

1  See BIS, , IFC Report n.17, Feb. 2025. SDMX adoption and use of open source tools",Sergio Nicoletti Altimari
https://www.bis.org/review/r250930h.htm,Denny H Kalyalya: Remarks - launch of the 2025 Banking and Non-Banking Industry Survey Report,"Remarks by Dr Denny H Kalyalya, Governor of the Bank of Zambia, at the Launch of the 2025 Banking and Non-Banking Industry Survey Report by PwC, Lusaka, 16 September 2025.",2025-09-16 00:00:00,"## Denny H Kalyalya: Remarks - launch of the 2025 Banking and NonBanking Industry Survey Report

Remarks by Dr Denny H Kalyalya, Governor of the Bank of Zambia, at the Launch of the 2025 Banking and Non-Banking Industry Survey Report by PwC, Lusaka, 16 September 2025.

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Country Senior Partner - PwC Zambia

Members of the Board of Directors of Commercial Banks and Non-Bank Financial Institutions.

Chief Executive Officers of Commercial Banks and Non-Bank Financial institutions. Representatives of Financial Sector Regulators.

Distinguished Invited Industry Stakeholders.

Members of the Press and other representatives of the Media.

Ladies and Gentlemen.

It is a great honour and privilege for me to once again, officiate at the launch of this year's Survey Report on the financial sector by PricewaterhouseCoopers (PwC) Zambia.

On behalf of the Bank of Zambia and indeed on my own behalf, I wish to commend PwC for this initiative of conducting the survey and compiling the results, which are an independent view of the state of the Zambian banking and non-bank financial sectors.

Ladies and Gentlemen, this survey, has over the years provided very useful information to us as regulators and the entire financial sector. The information also validates our position with regard to the key risks prevalent in the sector.

PwC has conducted the Banking Industry survey since 2016 and broadened the scope to include non-bank financial institutions in 2018 which equally play an important role in the sector and economy.

Ladies and Gentlemen, the 2025 Survey Report raised a lot of important issues, however, my brief comments this morning will focus on three top issues raised by respondents:

- State of the local economy,
- Cybersecurity, and
- Digital transformation and innovation

To begin the with, the Bank of Zambia has on several occasions and at different forums, highlighted the economic state of our country, and some specific measures we have been taking to address some of the challenges as well as take advantage of opportunities.

I will begin by highlighting the outcome of the Monetary Policy Committee (MPC) Meeting held from August 11-12, 2025, Meeting.

The Monetary Policy Committee decided to maintain the Monetary Policy Rate at 14.5 percent. Since March 2025, inflation has been on a downward trajectory falling to 13.0 percent in July from 16.5 percent in March 2025. As of end of August, it further dropped to 12.6 percent.

Inflation is now projected to fall within the target band of 6-8 percent in the first quarter of 2026. The key drivers for this outturn were, improved supply of maize, lower fuel prices, and the appreciation of the Kwacha against major currencies.

The key drivers of the lower inflation forecast are lagged effects of the appreciated exchange rate as well as food and energy prices. The improved inflation outlook also reflects past monetary policy measures as well as structural and fiscal policy reforms.

The Committee assessed that the risks to the inflation outlook remain tilted to the downside and mostly related to the expected increased earnings from copper exports and subdued crude oil prices, working through the exchange rate and expectations channels.

The committee, however, noted that at its current level, inflation was still well above the 6-8 target band. In addition, while market expectations of inflation have moderated, they are still quite elevated relative to the target band. There are also lingering uncertainties associated with evolving global trade policies and persistent geopolitical tensions, hence the decision to maintain the MPR at 14.5 percent.

Distinguished Guests, allow me now to turn to the industry report that is being launched today.

The issue of cybersecurity rising to the top of the list of priorities for Zambian banks resonates with risks on our radar as Bank of Zambia. The escalating cyber threats targeting the sector is of great concern.

Malicious actors such as criminal organisations and hacktivists, continuously exploit vulnerabilities to steal sensitive data, disrupt operations, and undermine trust. The sector has become an attractive target due to the rapid growth of Zambia's Digital Financial Services (DFS), fueled by increased mobile phone penetration, and the demand for more accessible and convenient financial solutions.

Additionally, the interconnectedness of financial systems with the mobile operators and other third parties has widened the sector's exposure to cyber and fraud risks, creating a vast and complex ecosystem vulnerable to cyber threat and frauds.

Of particular concern is the increase in insider threats. As rightly stated in the report, banks are reporting more cases in which compromised employees collude with external actors to facilitate cyberattacks. This trend is troubling because it strikes at the very heart of institutional integrity. This is a call to the sector to strengthen internal controls as well as employee vetting.

Ladies and Gentlemen, allow me to reiterate the need for greater collaboration among banks, regulators, Government agencies, and technology partners, which is extremely

essential, if we are to build a resilient and secure financial system. As we embrace digital transformation, let us also strengthen our capacity to defend against the evolving threats that accompany it.

In response to these challenges, the Bank of Zambia has taken steps to enhance the financial sector's cyber resilience. In 2023, the Bank issued Cyber and Information Risk Management Guidelines, aimed at ensuring that financial institutions are adequately prepared for cyberattacks and have appropriate recovery mechanisms in place. The Bank has also conducted cyber risk On-site examinations across the sector. These examinations are aimed at enhancing cyber resilience in our institutions by pointing out weaknesses and appropriate remedial measures.

In addition, BoZ has developed a Strategic Plan for 2024-2027, with a key objective of Strengthening Cyber Resilience and Fraud Mitigation in the Financial Sector. One of the initiatives of this strategy is the establishment of the Financial Cyber Incident Response Team (FinCIRT), a trusted center that will enhance sector-wide cyber resilience by providing a structured and coordinated approach to managing fraud and cyber threats.

The report notes the importance of sharing information about emerging threats and best practices. This is one area where the industry needs to improve and we expect that with the FINCIRT, improved information flow will facilitate concerted effort in managing cyber risk.

The third key observation from the survey results brings to light, digital transformation and innovation, as another priority that is shaping the future of our financial sector. This is not surprising, because the shift towards greater digitisation and efficiency has become a defining feature of modern banking and competitiveness.

Distinguished Guests, technology such as Artificial Intelligence (AI) continues to evolve, it will open new opportunities for our banks to sharpen their competitive edge, deliver more value to their customers, and adapt more effectively to a rapidly changing digital landscape.

As part of our strategic plan, one of the keys activities is to enhance supervisory technology. Tech-driven solutions will enable real-time data analysis and help to identify emerging risks and systemic issues within the financial sector. Additionally, automation will reduce the manual workload and improve efficiency.

Ladies and Gentlemen, amidst the challenges, the banking sector continues to exhibit resilience on the back of strong capital, good asset quality and sustained profitability. Liquidity conditions have also improved since the second half of 2024 into 2025.

Let me conclude by commending PWC once again for the valuable insights this survey provides. Let us all take interest and act on the findings by devising appropriate response measures to the risks identified for the growth and stability of the sector.",Denny H Kalyalya
https://www.bis.org/review/r250930c.htm,Philip N Jefferson: Monetary policy frameworks and the US economic outlook,"Speech by Mr Philip N Jefferson, Vice Chair of the Board of Governors of the Federal Reserve System, at ""Monetary policy in the shadow of geopolitical tensions and trade conflicts"", the fourth International Monetary Policy Conference, hosted by the Bank of Finland, Helsinki, 30 September 2025.",2025-09-30 00:00:00,"## Philip N Jefferson: Monetary policy frameworks and the US economic outlook

Speech by Mr Philip N Jefferson, Vice Chair of the Board of Governors of the Federal Reserve System, at ""Monetary policy in the shadow of geopolitical tensions and trade conflicts"", the fourth International Monetary Policy Conference, hosted by the Bank of Finland, Helsinki, 30 September 2025.

* * *

Thank you, Governor Olli Rehn, for the invitation to visit the lovely city of Helsinki and participate in the Bank of Finland's International Monetary Policy Conference. 1   I highly value the opportunity to interact with, and learn from, my fellow central bankers, so thank you again for having me.

When considering the Bank of Finland, the European Central Bank (ECB), and the Federal Reserve in the U.S., it is easy to point out some differences, including our mandates and our economies. But there are also important similarities across these central banks. As independent central banks, our objective is to set policy that will result in the best outcomes for the people we each serve. Another similarity, and one I would like to focus on today, is that both the ECB and the Fed see value in establishing and clearly articulating to the public a framework on how we each approach monetary policymaking. And, in fact, both the ECB and the Fed published revisions to our individual framework documents earlier this year. Such revisions lead to more robust frameworks that help support the mission of central banks across a broad range of economic conditions, including those that are also shaped by geopolitical tensions and trade conflicts, as is the theme of this conference.

Today, I will briefly review  some consistent themes that emerged from the two revised documents. Then, I will discuss in more depth the changes to the Fed's  Statement on Longer-Run Goals and Monetary Policy Strategy, which Chair Powell announced in his Jackson Hole speech in August. Finally, I will offer my views on the economic outlook and its implications for U.S. monetary policy.

## Consistent Themes

Understanding the work of other central banks and speaking with their policymakers is a healthy exercise. This is particularly true when studying other banks' overarching frameworks. The ECB's Monetary Policy Strategy Statement dates to the central bank's founding in 1998. The Fed is quite a bit older, but it still took us longer to offer a formal framework to the public. The Fed's Statement on Longer-Run Goals and Monetary Policy Strategy was first issued in 2012, under Chair Ben Bernanke's leadership. At the time, Fed leaders took note that other peer central banks issued public statements of their frameworks and saw value in doing so. While the two documents differ in length and touch on some slightly different topics, reflecting each bank's unique mandate, there are several similarities. One is that the governing bodies of both the ECB and the Fed target 2 percent inflation. Another is that they both have a commitment to revisiting

and revising their framework periodically. Also, both revised documents de-emphasized their previous focus on operating near the effective lower bound (ELB) of interest rates in favor of considering a broad range of economic circumstances.

Overall, both documents describe the central bank's understanding of its monetary policy mandates and its broad approach to achieving them. However, neither is a mandatory policy prescription. Indeed, each framework provides a structure within which its respective policymakers can develop their individual policy views. That is a good thing. It is a sign of a healthy, independent central bank. Robust discussions where alternative viewpoints are considered are more likely to lead to effective policies and better outcomes for the people we serve.

## The Fed's Revised Framework

Now, let me turn specifically to the framework document my Federal Open Market Committee (FOMC) colleagues and I finished revising in August. The Fed's dual mandate to foster maximum employment and stable prices, which was given to us by the U.S. Congress, underpins the Fed's monetary policy framework. Our commitment to delivering on our dual mandate is unwavering. The revisions to our framework will support that mission across a broad range of economic conditions.

We often refer to the framework document as the ""consensus statement."" We call it that because it reflects the consensus view of the FOMC-and because having a nine-word title for a two-page document is a bit verbose!

The FOMC created the revised consensus statement after conducting a public review, the second time the Committee has done so. That review consisted of three elements: first, we held events around the U.S., where members of the public could Fed Listens share their views with policymakers; second, we hosted an academic research conference that featured presentations from leading experts, including former Chair Bernanke; and third, we convened a series of policymaker discussions and deliberations at FOMC meetings this year, supported by staff analysis.

The statement is designed to give the public a clear sense of how we think about monetary policy, and that understanding is important both for transparency and accountability, and for making monetary policy more effective. The changes implemented as a result of this review were a logical progression, not a change in course, grounded in our ever-evolving understanding of our economy. I will make note of four adjustments  to the consensus statement and discuss each in turn.

First, the revised consensus statement removed language emphasizing the ELB as a defining feature of the economic landscape. Instead, it states that our monetary policy strategy is designed to promote maximum employment and stable prices across a broad range of economic conditions. This revision, reflecting a move away from the post-financial crisis era of historically low interest rates, makes our framework more robust. It is useful to recall that at the time of the FOMC's previous framework review, during 2019 and 2020, policymakers were considering an economy that had for many years demonstrated low growth, low inflation, and a very flat Phillips curve-meaning that inflation was not very responsive to slack in the economy. The overarching concern for central bankers at that time was how to operate with interest rates near the ELB. Today,

of course, we are operating in a very different environment, at least in part brought on by the economic consequences of the COVID-19 pandemic.

Second, the revised framework embraces a flexible inflation-targeting approach at all times and eliminates a ""makeup"" strategy that would be employed in certain circumstances. The experience since the pandemic highlights different challenges to achieving our inflation mandate, such as supply shocks, sectoral developments, and nonlinear inflation dynamics. The flexible inflation targeting in our revised framework allows us to take a balanced approach in promoting our goals, considering the extent of departures from them. The revised framework appropriately emphasizes the Committee's commitment to ensuring that longer-term inflation expectations remain well anchored.

Third, the revised consensus statement provides clarity around how the Committee thinks about maximum employment. The 2020 version of the statement indicated that the Fed would mitigate ""shortfalls"" from maximum employment. The shortfalls strategy grew out of the insight that real-time assessments of the natural rate of unemploymentand hence of ""maximum employment""-are highly uncertain. However, the use of the word ""shortfalls"" created some communications challenges, as it was not intended to be a commitment to always avoid preemption or to ignore tight labor market conditions. As a result, it was removed from the consensus statement. Instead, the revised document more precisely states that ""the Committee recognizes that employment may at times run above real-time assessments of maximum employment without necessarily creating risks to price stability."" 2  As Chair Powell pointed out, preemptive action could well be warranted if tightness in the labor market or other factors pose risks to price stability. The revised statement defines maximum employment as ""the highest level of employment that can be achieved on a sustained basis in a context of price stability."" 3

Fourth, and closely aligned with the change I just discussed, the FOMC clarified its approach to monetary policy in times when the employment and inflation sides of our mandate may be at odds. The revised statement says that, in such periods, the Committee will follow ""a balanced approach in promoting them, taking into account the extent of departures from its goals and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate."" The revised language more closely aligns with the original 2012 statement. It is also consistent with the Committee's actions during the 2022-24 period, when the departure from our 2 percent inflation target was the overriding concern.

While I have highlighted multiple changes, it is also important to note the continuity  with the Fed's past framework statements. The document continues to explain how we interpret the mandate Congress has given us and describes the policy framework that we believe will best promote maximum employment and price stability. We also continue to believe that monetary policy must be forward looking and consider the lags in its effects on the economy. We have never set a numerical goal for employment because the maximum level of employment is not directly measurable and changes over time for reasons unrelated to policy. Likewise, we maintained our commitment to a 2 percent inflation objective because that is a key factor helping keep longer-term inflation expectations well anchored. And we remain committed to conducting a public review roughly every five years.

While the framework provides a structure through which to think about policy decisions, I will continue to determine the appropriate stance of monetary policy based on the incoming data, the evolving outlook, and the balance of risks. Consistent with such a determination, I would like to share with you my current outlook for the U.S. economy.

## Economic Outlook

Recent data indicate that U.S. economic growth has moderated, and the risks to both sides of our dual mandate have shifted. Employment growth has slowed because of weaker growth in labor supply and a softening in labor demand. The uptick in the unemployment rate suggests that demand has fallen by a bit more than supply and that the downside risks to employment are rising. Meanwhile, higher tariffs are showing through to higher inflation for some goods. I expect that the effects of tariffs on inflation, employment, and economic activity will further show through in coming months.

The softening of labor market activity comes as overall economic activity has moderated this year. In the first half of 2025, U.S. GDP  grew at about a 1.5 percent annual rate, which reflects a marked cooling from last year's 2.5 percent growth rate. The slowdown in economic activity in the first half of this year was primarily driven by weaker consumer spending. That said, U.S. retail spending picked up over the summer. Overall, I expect the U.S. economy to maintain the first half's rate of growth through the remainder of the year.

In terms of the labor market, there has been notable slowing in both labor supply and labor demand. Net immigration into the U.S., an important contributor to workforce growth, has dropped sharply. At the same time, total employment growth has slowed. Over the past three months, American employers have added just 29,000  jobs to payrolls  a month on average. The recent pace of employment growth has been the slowest since the U.S. economy recovered from the COVID-19 pandemic recession, which is largely explained by the slower growth in the labor force. There are other measures of the labor market that also bear watching. For example, the ratio  of unfilled jobs to unemployed Americans seeking work remains near 1. And measures of job openings and initial jobless claims have been mostly moving sideways.

A low level of job creation would historically put upward pressure on the  unemployment rate, though so far that effect has been muted because of the decline in labor force growth. The U.S. unemployment rate in August was 4.3 percent, a still relatively low rate, and up just 0.1 percentage point from August of the previous year. The unemployment rate could edge a bit higher this year before moving back down next year.

Turning to the other side of our dual mandate, it remains notable that inflation has slowed considerably from the highs that occurred when the economy reopened after pandemic disruptions. Inflation, however, remains somewhat above our 2 percent target, and the tariffs that have been announced and implemented so far are showing up in some goods prices. Overall, personal consumption expenditures (PCE) prices rose 2.7 percent over the 12 months ending in August. Core PCE inflation-which removes volatile food and energy prices-was 2.9 percent in August. Often, it is helpful to study the three major components of core PCE inflation. Currently, core goods prices have been rising, reflecting tariff effects. In contrast, core services inflation, outside of

housing, has generally trended sideways this year, while housing inflation appears to be on a gradual downward trend.

I view the uncertainty around my baseline outlook as especially high, mainly due to the new policies being introduced by the current U.S. Administration and their effects on employment and inflation. As the changes in these policies are finalized and we have more time to judge how they are affecting the economy, I expect some of the broader uncertainty around the U.S. economy to diminish.

## Monetary Policy

Considering the outlook I described, I see the risks to employment as tilted to the downside and risks to inflation to the upside. It follows that both sides of our mandate are under pressure.

While tariff-related inflation is apparent in the prices of some goods, it is also notable that it so far has been lower than what many forecasters predicted this spring. Several factors-including the final tariff rates, the extent of pass-through to consumer prices, the effects on supply chains, overall economic conditions, and what happens to longer-run inflation expectations-will influence the scope and persistence of the related rise in inflation. Short-term inflation expectations have come down from the peaks reached in the second quarter, and most measures of longer-run inflation expectations have been largely stable, suggesting that the American people understand our commitment to returning inflation to our 2 percent target. As such, I expect the disinflation process to resume after this year and inflation to return to the 2 percent target in the coming years.

With the unemployment rate at 4.3 percent, the labor market is softening, which suggests that, left unsupported, it could experience stress. To balance the risk of persistent above-target inflation and the risk of a deteriorating labor market, I supported a 25 basis point cut in our target range at the last FOMC meeting. This change moved our policy rate  closer to a more neutral stance while maintaining a balanced approach to promoting our dual-mandate objectives.

With respect to the path of the policy rate going forward, I will continue to evaluate the appropriate stance of monetary policy based on the incoming data, the evolving outlook, and the balance of risks. I will also consider and assess information about government policies and their effects on the economy.

## Conclusion

In this room, I know that I am not alone in putting careful thought and attention into what should be the proper path of monetary policy moving forward. I have found the Fed's consensus statement to be a valuable tool in helping me organize my thinking and take a grounded approach to policymaking. I know that similar documents at your central banks also provide wise counsel to pursue your mandates.

Thank you again for the invitation to speak here and for allowing me to engage in the sharing of ideas.

- 1  The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.
- 2  The consensus statement is available on the Federal Reserve Board's website at https://www.federalreserve.gov/monetarypolicy/monetary-policy-strategy-tools-andcommunications-statement-on-longer-run-goals-monetary-policy-strategy-2025.htm.
- 3  See note 2 for the Fed's consensus statement.",Philip N Jefferson
https://www.bis.org/review/r250930a.htm,Vasileios Madouros: The macroprudential mortgage measures ten years on - taking stock,"Text of the Cantillon Lecture by Mr Vasileios Madouros, Deputy Governor of the Central Bank of Ireland, at the 48th Dublin Economics Workshop, Dublin, 19 September 2025.",2025-09-19 00:00:00,"

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## Vasileios Madouros, Deputy Governor speech at Dublin Economics Workshop

19September 2025 Speech



## The Macroprudential Mortgage Measures Ten Years on: Taking Stock!

Cantillon Lecture, at the 48"" Dublin Economics Workshop

Twenty years ago, Ireland was in the midst of an unsustainable, credit-driven property boom, rooted in weak lending standards. Those shaky macro-financial foundations, amplified by underlying fiscal vulnerabilities, eventually led to lreland's financial and subsequent economic crisis. Ten years ago, as the economy was recovering from that crisis, the Central Bank introduced new macroprudential measures to guard against the risk of such an episode reoccurring. Or, as Governor Patrick Honohan put it at the time, to ""protect the new generation [that is] establishing households -and the nation at large, from the risk of a repetition of what happened before""

Date From y Date To

The introduction of the measures did not happen in a vacuum. At an international level, the global financial crisis led to widespread reforms to the regulatory architecture, from stronger prudential standards to an enhanced approach to supervision. The post-crisis financial architecture also saw the introduction of a new policy framework altogether: macroprudential policy. This entailed a shift in thinking, by explicitly taking a system-wide lens on resilience and focusing on the interaction between finance and the broader economy.: The mortgage measures were Ireland's first macroprudential intervention. Indeed, back in 2015, we were amongst the first European adopters of mortgage market interventions with an explicit macroprudential objective. A decade on, these are now well established tools at a global level.

The measures have not been without debate. When they were first proposed, the Central Bank received the highest number of responses to any of our consultations, surfacing a range of strongly-held views amongst the public. This is not surprising. The measures affect people very directly. Buying a house is the most important financial decision that most people will make in their lives. And mortgages are the largest form of borrowing by households. So the measures matter for individuals, and they matter for the economy as a whole. Indeed, | would characterise the measures as being amongst the most important public policy interventions introduced by the Central Bank, both from a macro-stabilisation perspective and from a consumer protection perspective.

In that context, now that we have a decade of experience with the mortgage measures in place, | wanted to take this opportunity to take stock of the lessons we have learned over the past decade. How have the measures fared over that period? What have we learned about how they affect the economy, and where do we need to make further progress? And what lies ahead?

## The why and the how

But let me start with what a brief reminder of the why and the how of the measures.

On the why, put simply, they aim to ensure that lending standards in the mortgage market remain sustainable over time. In doing so, they support the resilience of borrowers, lenders and the broader economy. And they seek to prevent the emergence of an adverse and unsustainable feedback loop between credit and house prices.

These can come across as somewhat abstract concepts. But, as we learned ina very painful way in Ireland -the damage of not achieving these objectives is anything but abstract. The costs of the financial crisis on society were very large. These costs were clearly felt by the large number of mortgagors that were over-indebted and found themselves in financial distress. But they were also felt by those not in the mortgage market, because the financial crisis morphed into an economic crisis, affecting everyone in the country. And some of these costs have been persistent. For example, the long-lasting scars of the crisis on the construction sector are still weighing on housing supply today, with significant adverse effects on younger generations. On different metrics, the Irish financial crisis was amongst the most costly, even compared against systemic crises in other advanced economies (Chart 1). And, of course, behind all these numbers are people, for whom the damage of the financial crisis was deeply personal.

## Chart 1: The costs of the Irish financial crisis were very large, even compared to other systemic crises in advanced economies



Source: Laeven and Valencia (2020), 'Systemic Banking Crises Database II'. IMF Econ Rev 68, 307361.

This broad lens is important in terms of how we think about the objectives of the measures. Unlike what | sometimes hear, the measures, like all our regulatory interventions, are not there to 'protect the banks'. They are there to guard against the damaging effects of unsustainable mortgage lending on society as a whole, now and into the future.

On the how, the measures effectively constrain the share of new mortgages that lenders can extend at higher levels of indebtedness. But let me highlight three elements of their design in particular.

- e First, there are two limits: one based on the size of the loan relative to borrowers' income (LTI) and one relative to the value of the property (LTV). These have different, but complementary, aims. The LTI limit acts as a longterm anchor between developments in the mortgage market and household incomes and supports mortgage affordability, while the LTV limit provides a buffer against house price falls and the risk of negative equity.
- e Second, the measures are not designed to act as hard caps. The framework incorporates so-called 'allowances, meaning that lenders can extend a share of new lending above the limits. These allowances are important and provide flexibility for individual circumstances to be taken into account by lenders. Because, ultimately, the measures are not there to replace lenders' own responsible lending standards, they are there to act as system-wide guardrails.
- e Third, there is a differential treatment by borrower type. The evidence is clear that, other things equal, first-time buyers (FTBs) have had a lower default propensity than second and subsequent buyers (SSBs).: The role of SSBs in housing market dynamics is also very different: as they already own a home, in an environment of rising house prices, they have additional resources available for future purchases and, therefore, a greater propensity to amplify cycles.' So the LTI limit is set at 4 times income for FTBs, and 3.5 times income for SSBs.

The design of the measures has been tailored to the structure of the Irish mortgage and housing markets. And, importantly, that design has evolved since their introduction in 2015, as we have learned more about their operational effectiveness over time, a theme that I'll come back to later.

## How have the measures delivered against their objectives over the past decade?

So what have we learned about the effectiveness of the mortgage measures in achieving their objectives over the past decade? Analytically, this is not an easy question to answer with precision. The macro-financial benefits of the measures are not directly observable: indeed, they stem from the absence of things, such as unsustainable booms and busts, over-indebtedness or the emergence of widespread financial distress. The benefits of the measures are also long-term in nature: they may not be immediately obvious today, but they can become more evident in times of stress.

What we do know is that the broader environment in which the measures have been operating over the past decade has been testing -and, in the second half of the decade, shock-prone. For much of the period, the process of post-crisis balance sheet repair by both banks and households was still ongoing. In the housing market, we have had a persistent shortage of supply relative to demand, putting upward pressure on the cost of places to live, whether to buy or to rent. Halfway through the decade we saw the onset of a global pandemic, followed by the energy crisis triggered by Russia's invasion of Ukraine, very high inflation and sharply rising interest rates.

So what have we learned about the effectiveness of the measures in that environment?""

Let me start with resilience. An environment of rising house prices relative to incomes could have created the conditions for a ramp-up in highly-indebted households. Indeed, that was precisely the pattern in the last housing cycle in the 2000s (Chart 2). And we know that it is highly-indebted households that are both most vulnerable to default, and also more likely to cut spending ina downturn, amplifying economic stresses.2 The measures have guarded against such dynamics. Indeed, unlike the last cycle, the increase in house prices has not led to a sharp increase in highly-indebted mortgagors. Mortgage credit has been flowing to the economy in aggregate, but the measures have constrained the emergence of a tail of highly-indebted households.

## Chart 2: Unlike the last cycle, rising house prices relative to incomes have not led to an increase in highlyindebted borrowers



Source: Central Bank of Ireland and CSO.

In turn, these more sustainable lending standards have contributed to lower levels of financial distress amongst mortgagors. For a prolonged period, Ireland had much higher levels of new mortgage defaults than the rest of the EU. Even as late as 2019, when the economy had recovered and unemployment was low, new mortgage defaults in Ireland were double the EU average. That gap has now closed, pointing to greater underlying resilience of borrowers (Chart 3). And, if one looks deeper, where we have seen evidence of distress, whether it is those that opted for payment breaks at the start of the pandemic, or those borrowers that did flow into default in the more recent episode of high inflation and rising interest rates, that distress has predominantly manifested in mortgages issued before the financial crisis, at much weaker lending standards (Chart 4).° Of course, there are limits to how much we can infer from this. Government interventions supported households in response to the big shocks of the past decade -whether the pandemic or the cost of living crisis. But the evidence points to a strengthening of underlying resilience of borrowers and lenders.

## Chart 3: New flows into mortgage default in Ireland have converged to the euro area average over the past decade



Source: EBA Risk Dashboard

Note: EU average consists of AT, BE EE,FI,FR,DE,IE,LT,LU,NL, PT, ES &amp; IT.

## Chart 4: Mortgages that defaulted over 2023-2024 were predominantly issued at weaker lending standards before the financial crisis



Source: Central Bank of Ireland.

While the mortgage measures have strengthened resilience of new borrowers, the long shadow of past unsustainable lending practices remains, as evident by the cohort of borrowers on long-term mortgage arrears. While we have seen a marked reduction in the number of mortgage accounts in long-term arrears in recent years, there is still more to be done. So we remain focused on arrears resolution. We have continuously challenged regulated entities to do more to support borrowers experiencing financial difficulty, and particularly those in long-term mortgage arrears. When a borrower is in, or facing arrears, our expectation is that regulated entities provide appropriate and sustainable solutions and engage with broader, system-wide solutions, such as mortgageto-rent or personal insolvency arrangements. And, as part of our modernised Consumer Protection Code, which comes into effect early next year, we have incorporated important amendments to strengthen the Code of Conduct on Mortgage Arrears.

What about the impact of the measures on guarding against an adverse feedback look between credit and house prices? Of course, and | need to be very clear on that, the mortgage measures do not, and indeed cannot, target house prices. House prices are affected by a range of factors, most fundamentally the balance between the underlying demand for, and supply of, housing in the economy. What the mortgage measures do seek to achieve is guard against an unsustainable relationship between credit and house prices from emerging, similar to what we saw in the 2000s. That is a subtle distinction, but an important one.

Again, analytically, it is not easy to gauge with precision what might have happened in the absence of the measures. Still, there now is a body of evidence that macroprudential measures in the mortgage market reduce house price growth relative to what might otherwise have been the case (Chart 5). The measures can also reduce the tail of expectations of future house price increases, which can act as an important amplification mechanism, if market participants borrow on the expectation of rapidly rising house prices in the future. Indeed, in Ireland, we did see a meaningful reduction in the tail of house price expectations upon the introduction of the measures (Chart 6).

## Chart 5: Cross-country evidence suggests that the introduction of mortgage measures lowers house prices growth



Source: Morretti and Riva (2025). Note: Treatment variable is the introduction of borrower-based measures in a given country (LTV or income-based limits). Outcome variable is the growth in the house price index. Shaded areas report 90% confidence intervals.

## Chart 6: The tail of positive house price growth expectations in Ireland fell after the introduction of the mortgage measures



Source: McCann and Riva (forthcoming).

Of course, over the past decade, we have seen continued increases in house prices relative to incomes in Ireland. This begs the question as to the drivers of those house price developments.

For me, a good diagnostic is the relationship between house prices and rents: effectively the rental yield. In the period before the financial crisis, house prices increased much faster than rents, leading to a compression in the rental yield. That is consistent with loose credit conditions playing a key role in driving house prices. Over the past decade, however, rents and house prices have both increased significantly, and both have risen faster than incomes (Chart 7). The rental yield has been broadly stable. That is consistent with the underlying factor driving house prices (and rents) being the imbalance between demand and supply for housing (Chart 8). Put differently, while the symptom of high house prices is evident in both the cycle of the 2000s and the current cycle, the underlying diagnosis is very different. And, what we have not had, is unsustainable lending standards further amplifying these house price dynamics.

## Chart 7: The relationship between rents and house prices is very different to the last cycle, pointing to supply-demand imbalances as the main driver of house prices



Source: CSO and Central Bank of Ireland calculations.

## Chart 8: Growth in the total housing stock has not kept up with the increase in Ireland's population over the past decade



Source: CSO and Central Bank of Ireland calculations.

Pulling this all together, the measures have played an important role in strengthening resilience of borrowers, lenders and the broader economy over the past decade. They have also guarded against the emergence of an adverse feedback loop between house prices and credit that we might have seen, had unsustainable lending practices emerged. These are substantial macrofinancial benefits, especially in the environment of heightened economic volatility that we have been experiencing.

## Weighing benefits and costs

Of course, as policymakers, we do not aim for resilience at any cost. That would not serve society well. Like all policy interventions, the mortgage measures entail both benefits and costs from the perspective of the economy as a whole. Our job is to balance these.

Conceptually, the mortgage measures can entail economy-wide costs through different channels.* For example, they can weigh on aggregate consumption through the required increase in savings by prospective homeowners to access mortgage finance or through the impact of the measures on house prices and, therefore, household wealth. There are also potential channels to business activity too. For example, small businesses often post residential property as collateral to access finance. So, by dampening house price growth, macroprudential measures can weigh on business borrowing and activity. Beyond those aggregate effects, we are very conscious that the measures have particular effects on certain segments of the population, especially some potential first-time buyers. 12

It was precisely because of the balance between benefits and costs, which we continuously aim to strike, that we recalibrated the measures in 2022, witha focus on first-time buyers. This was an important, and difficult, decision by the Central Bank, so let me elaborate briefly on the reasons.

The mortgage measures, and especially the LTI limit, had become increasingly binding over time, particularly for first-time buyers, amid the continued growth in house prices relative to incomes (Chart 9). Now, if house prices are rising faster than incomes because of weakening lending standards or unsustainable credit dynamics, the fact that the measures are becoming more binding is a feature, not a bug: they are doing their job. But if house prices are rising faster than incomes due to structural factors -for example, underlying shifts in the supply of housing -that can affect the cost-benefit calculus of the calibration of the measures.

## Chart 9: Amid rising house prices relative to incomes, the measures had become very binding for firsttime buyers



Source: Central Bank of Ireland.

In our analysis, part of the increase in house prices relative to incomes since the introduction of the measures had been due to structural factors. The recovery in housing supply had been slower than we had expected upon the introduction of the measures. Indeed, a more persistent pattern was becoming apparent, with fewer homes being built, for a given level of house prices relative to incomes, compared to the past (Chart 10), implying a gradually increasing cost of the measures.

## Chart 10: Since the financial crisis, fewer houses are being built, for a given level of house prices relative to incomes



Source: CSO, PTSB/ESRI, Central Bank of Ireland calculations.

Note: Completions prior to 2011 have been obtained by taking total estimates of (ESB) electricity connections and removing average number of connections in each year that are unrelated to dwelling completions.

The flexibility embedded in the measures through the allowances meant that the framework had been able to mitigate the effects of these slow-moving changes over time. But we also wanted to ensure the measures were fit for the future. In that context, and given a broader strengthening of resilience of borrowers and lenders over the same period, we judged that we had some policy space to ease some of the costs of the measures, without disproportionally eroding their benefits. So we increased the LTI limit for FTBs from 3.5 to 4 times incomes, partly offset by a reduction in the allowances at the same time. We also made some other important adjustments, such as simplifying the framework for allowances and switching the differential between borrower types from the LTV limit to the LTI limit. These all reflected lessons learned over time around the operational effectiveness of the measures.

As you would expect, we have been evaluating carefully the impact of these targeted adjustments. For example, some of the research we have conducted on the borrower-level impact of the changes points to some easing of costs through an increased probability of first-time buyers buying a newly-built property as well as greater access to mortgage finance by younger households.!3 At the same time, the analysis also points to certain borrowers in Dublin purchasing more expensive homes following the recalibration, without that necessarily being explained by the quality characteristics. And while those borrowers account for around 2.5% of total market activity, this highlights some of the very real trade-offs that we face in considering the calibration of the measures.

As | mentioned, that was not an easy decision for the Central Bank. Ultimately, though, it was a manifestation of the fact that we always seek to weigh the benefits and costs of our interventions, based on evidence, from the perspective of the public good.

## Deepening our understanding -priority areas

While we have learned a lot over the past decade, both from our own experience and the experience of others, deepening our understanding of the impact of the measures is a continuous process. From a policymaker's perspective, | wanted to highlight two priority areas in particular.

The first relates to the analytical framework for weighing the costs and benefits of the measures. This applies to macroprudential policy overall, given that is still a relative 'young' discipline. By comparison, though, over the past 15 years, we have made substantial progress in developing a framework for assessing the benefits and costs of different levels of bank capital.14 For interventions like the mortgage measures, no such widely-accepted analytical framework exists globally.

At the Central Bank, we have been building our capabilities in this area in recent years. For example, we have augmented some of our macroeconomic models to incorporate transmission channels for the mortgage measures, allowing us to better assess the trade-offs.!5 We have also conducted research that seeks to compare the costs of the measures in terms of economic activity in the central case with the benefits in terms of reducing volatility of output.!* These are good starting points, though | would say that, at this stage, they are still nascent attempts to get us towards a comprehensive framework for weighing benefits and costs.

There are also important conceptual questions that we need to tackle to make progress in this area. For example, most of the macroeconomic costs of the mortgage measures operate on the demand side of the economy, so should not have a permanent effect on the level of output. By contrast, the costs of financial crises are persistent, with some studies pointing to permanently negative effects on the size of the economy."""" Another example is that the benefits of the measures stem from making low probability events less damaging, a bit like an insurance payout. Whereas the costs of the measures are there in central expectation, similar to the premium on insurance. Unlike (most) insurable events, though, we cannot have a firm grip on the probabilities of these tail events, given how infrequent financial crises are.

The second area that | would highlight as important to focus our analytical efforts on is the interaction between the mortgage measures and different aspects of the broader housing market.

One important dimension is the interaction between the mortgage measures and housing supply. And, specifically, whether the measures affect how responsive supply is to house prices. We know that parts of the country where the mortgage measures have been most 'binding', because of higher house prices relative to incomes -are also the parts of the country where we have seen the biggest increase in housing supply (Chart 11). On the face of it, at least, this would suggest that housing supply has been responding to price signals. But this has also been explored more formally, with research suggesting that, accounting for constructions costs, there had been no change in the responsiveness of supply to house prices since the measures were introduced.*® Put differently, lower levels of housing supply than in the past can be explained by the rising cost of construction over time, rather than a lower sensitivity to house prices.

## Chart 11: Housing supply has been responding to price signals, despite the measures being more binding



Source: CSO and Central Bank of Ireland. Note: Completions per 1,000 pop. = units completed / 1000's of population (per county). Population data based on CSO annual population estimates.

Another important dimension is the interaction between the mortgage measures and the rental market. Instinctively, it is natural to think that looser mortgage credit conditions might mean less pressure on the rental market, as more people are owner-occupiers. But, all else equal, more households in owner-occupation can also mean a smaller stock of rental properties available to remaining renters, with an unclear effects on rents. Ultimately, this is an empirical question -but the evidence remains sparse and mixed. Some of our own analysis has found that the introduction of the measures was associated with a modest increase in rental yields in the short term, albeit driven mainly by reduced house price growth, rather than higher rental growth (Chart 12).1? But other studies find a bigger effect of mortgage restrictions on rental growth and also highlight potential dependencies with other aspects of the rental market, such as the presence of institutional investors.""

## Chart 12: Estimated impact of the introduction of the mortgage measures on rents and house prices



Overall, while we have learned a lot over the past decade, there is still further to go. | do not want this to come across as of academic interest. These questions matter for policy, and, therefore, they matter for the public that we serve. Ultimately, evidence-based policy is part of our DNA at the Central Bank. So it is a priority for us to continue to deepen our understanding of the effects of the measures, like all our policy interventions.

## Looking ahead

Let me finish off by looking ahead. Of course, especially in light of the current levels of geoeconomic uncertainty globally, it can seem a fool's errand to make statements about the future with much confidence. But, if | take a step back, my own judgement is that -over the course of the next decade, the environment in which the mortgage measures will operate may well be more challenging than the one that prevailed over the past decade. There's three reasons for that.

First, the financial crisis is now increasingly in the rear view mirror for many. From a political economy perspective, internationally, there is increasing focus on the ability of the financial system to support growth, which risks manifesting as a pro-cyclical turn of the global regulatory cycle. From the perspective of the financial system, the process of post-crisis balance sheet repair is now largely complete and there is greater focus on growth and expansion. From the perspective of the public, naturally, attention is on today's challenges -including around housing affordability -rather than concerns about the costs of financial crises of the past.

Second, domestically, there is, rightly, growing focus on policy measures to increase housing supply.2! This means that, over the next decade, we are likely to see higher housing market transactions -and, in turn, an associated increase in mortgage market activity. With house prices already elevated relative to household incomes, this combination of factors has the potential to create the conditions for rising indebtedness across the household sector, especially if lending standards in the mortgage market were to weaken.

Finally, from a broader macroeconomic lens, we are facing a number of ongoing structural shifts, related to geopolitics, fragmentation of the global economy, artificial intelligence, demographics and the increasing frequency of extreme weather events due to climate change. These suggest that the environment for economic activity and inflation (and, therefore, also interest rates) will remain highly uncertain and, indeed, potentially more volatile. Put differently, we are facing a world with the potential for more frequent and larger supply-side shocks, which could test the financial position of households.

It is precisely in such a more challenging environment that the benefits of the measures are also likely to be higher. So how do we ensure that they continue to do their job over the next decade? Let me cover three dimensions guiding our approach.

First, we will continue to evaluate the measures on an ongoing basis, as we have done to date. If you look at the mortgage measures now, and compare them to when they were first introduced a decade ago, they have not been static. There have been adjustments to their design, to their calibration and to our overall policy strategy.22 This is important. To remain fit for purpose over time, all policy frameworks need to be able to evolve, amid broader structural changes in the economy and the financial system. And the fact that we have made adjustments is indicative that we are -and will remain -responsive to those changes, where justified by evidence.

Second, we will continue to deepen our understanding of the benefits and the costs of the measures. To do so, we will not just rely on our own analysis. We also want to engage with external researchers, to benefit from broader perspectives and expertise. More broadly, as | mentioned upfront, when we first introduced the measures, we were amongst a very small number of European countries to have explicit macroprudential measures in the mortgage market. Now, these are a widely employed tool by macroprudential authorities across Europe, so we can also learn from others' experience.

Third, throughout, we will place particular emphasis on engagement, transparency and accountability. This is relevant to all our policy interventions, but it is especially important for interventions like the mortgage measures, which affect people very directly. Actively engaging with, and listening to, a broad range of stakeholders, and being transparent about our judgements and the rationale behind them, are essential foundations for accountability. This is the approach we have taken over the past decade -and our commitment to openness and transparency will remain steadfast into the future. Indeed, that will become even more important if the operating environment does become more challenging over the next decade.

## Conclusion

Let me conclude. | am very conscious that | have spoken about the mortgage and housing markets from a macro-financial lens. But there is a critical societal dimension to the very real challenges people are facing in accessing affordable housing -whether to rent or to buy. At its core, that affordability challenge stems from the imbalance between housing supply and demand. Rightly, therefore, the core focus of public policy is on measures to boost housing supply. As that happens, it is important that dynamics in the mortgage market, which ultimately underpins housing activity, remain sustainable. That is the role of the mortgage measures.

Over the course of the past decade, the measures have become increasingly accepted by the public that we serve in Ireland. This is an important foundation, because -looking ahead to the next decade -the environment in which the measures operate may well become more challenging. But that is also when the value of these interventions will be higher. Our focus will be on ensuring that the measures continue doing their job, always weighing their benefits and costs, from the perspective of the public good.

Thank you for your attention.

[1] | am very grateful to Mark Cassidy, Edward Gaffney, Niamh Hallissey, Patrick Haran, Conor Kavanagh, Gerard Kennedy, Eoin O'Brien, Cian O'Neill, and Maria Woods for their advice and suggestions in preparing these remarks.

[2] Honahan (2014) 'Household indebtedness -rhetoric and action', address at the Money Advice and Budgeting Service Annual Conference.

[3] Makhlouf (2021) 'Birth, growth and towards maturity: macroprudential policy in Ireland, remarks at the ESRI.

[4] For more information, see our macro-prudential mortgage measures framework (PDF 934.08KB).

[5] See, for example, Kelly et al (2015) 'Designing Macro-prudential Policy in Mortgage Lending: Do First Time Buyers Default Less?, Central Bank of Ireland, Research Technical Paper, 2015, No. 2 (PDF 1.53MB) and Giuliana (2019) 'Have First Time Buyers continued to default less?' Central Bank of Ireland, Financial Stability Note, 2019, No. 14 (PDF 1.03MB).

[6] See Box 5 in Central Bank of Ireland (2021) 'Consultation Paper 146: Mortgage Measures Framework Review' (PDF 1.47MB).

[7] For asummary of insights that can be drawn from the research and analysis carried out by Central Bank staff since the introduction of the measures, see Gaffney et al (2025), 'Borrower-based mortgage measures: lessons from Ireland's experience since 2015', Central Bank of Ireland, Signed Article, 2025, No. 4 (PDF 661.87KB).

[8] For Irish evidence on highly indebted households and default risk, see Lydon and McCarthy (2011) 'What Lies Beneath? Understanding Recent Trends in Irish Mortgage Arrears', Central Bank of Ireland, Research Technical Paper, 2011, No. 14 (PDF 618.5KB), and McCarthy (2014) 'Dis-entangling the mortgage arrears crisis: The role of the labour market, income volatility and housing equity', Central Bank of Ireland Research Technical Paper, 2014, No. 2 (PDF 476.15KB). For Irish evidence on highly-indebted households and spending, see Le Blanc and Lydon (2019) 'Indebtedness and spending: What happens when the music stops? (PDF 3.6MB), Central Bank of Ireland, Research Technical Paper, 2020, No. 14, and Fasianos and Lydon (2021) 'Do households with debt cut back their consumption more in response to shocks? Central Bank of Ireland, Research Technical Paper, 2021, No. 14. (PDF 2.35MB)

[9] On payment breaks during the pandemic, see Gaffney and Greany (2020) 'COVID-19 payment breaks on residential mortgages', Central Bank of Ireland, Financial Stability Note, 2020, No. 5 (PDF 890.31KB).

[10] For Ireland, see, for example, Kelly et al (2018) 'Credit conditions, macroprudential policy and house prices', Journal of Housing Economics, Vol 41, and Acharya et al (2022) 'The anatomy of the transmission of macroprudential policies' Journal of Finance, Vol. 77, Issue 5. For international evidence, see Richter et al (2019), 'The cost of macroprudential policy' Journal of International Economics, Vol. 118, Pogoshyan (2019) 'How effective is macroprudential policy? Evidence from lending restriction measures in EU countries', IMF Working Paper, WP/19/45, and Moretti and Riva (2025) 'The impact of borrower-based measures: an international comparison' Central Bank of Ireland, Staff Insights.

[11] Aikman et al (2021) 'The macroeconomic channels of macroprudential mortgage measures', Central Bank of Ireland, Financial Stability Note, 2021, No. 11 (PDF 308.06KB).

[12] See, for example, Gaffney (2019), 'Mortgage borrowers at the loan-toincome limit', Central Bank of Ireland, Financial Stability Note, 2019, No. 11 (PDF 366.47KB).

[13] Singh and Yao (2025) 'The impact of higher LTI ratios: evidence from Ireland', Central Bank of Ireland, Research Technical Paper, 2025, No. 13 (PDF 2.14MB).

[14] See, for example, BIS (2019) 'The costs and benefits of bank capital -a review of the literature', BIS Working Paper, No. 37 and for Irish related research on this topic, see McInerney et al. (forthcoming) 'Rightsizing bank capital for small, open economies', International Journal of Central Banking (PDF 1.35MB).

[15] Mclearney (2020) 'Macro-financial linkages in a structural model of the Irish economy', Central Bank of Ireland, Research Technical Paper, 2020, No 3 (PDF 14.23MB).

[16] See Athanasopoulos et al. (2025), 'The costs and benefits of borrower based measures -a macroeconomic framework', Central Bank of Ireland, Research Technical Paper, 2025, No 14 and Banerjee et al. (forthcoming), 'Income-based tools to mitigate housing market risks: Where might we have been without them? (PDF 2.14MB)'.

[17] See, for example, Furceri and Mourougane (2012) 'The effect of financial crises on potential output from OECD countries' (PDF 877.72KB), Journal of Macroeconomics, vol 34, Chen et al (2019) 'The Global Economic Recovery 10 Years After the 2008 Financial Crisis', IMF Working Paper, WP/19/83 and Cecchetti et al. (2009) 'Financial Crises and Economic Activity"" NBER Working Paper, No. w15379.

[18] Gunnewig-Monert and Lyons (2024) 'Housing prices, costs, and policy: The housing supply equation in Ireland since 1970' , Real Estate Economics, Vol. 52.

[19] Yao et al (2025) 'Mortgage measures and rental yields in Ireland', Central Bank of Ireland, Staff Insights, No 5.

[20] Carro et al. (2022) 'Heterogeneous effects and spillovers of macroprudential policy in an agent-based model of the UK housing market' Bank of England Staff Working Paper, No. 976, Castellanos et al. (2024) 'The aggregate and distributional implications of credit shocks on housing and rental markets (PDF 2.74MB)', ECB Working Paper Series, No. 2977, Cima and Kopecky (2024) 'Housing policy, homeownership and inequality' TEP Working Paper, No 724.

[21] See Central Bank of Ireland (2024) 'Economic policy issues in the Irish housing market (PDF 1.09MB)'.

[22] BIS CGFS (2023) ""Macroprudential policies to mitigate housing market risks -country case study: Ireland,"" (PDF 556.95KB).",Vasileios Madouros
https://www.bis.org/review/r250930b.htm,Swaminathan J: Transforming public sector banks for a Viksit Bharat,"Address by Mr Swaminathan J, Deputy Governor of the Reserve Bank of India, at the PSB Manthan 2025, Gurugram, 12 September 2025.",2025-09-12 00:00:00,"## Swaminathan J: Transforming public sector banks for a Viksit Bharat

Address by Mr Swaminathan J, Deputy Governor of the Reserve Bank of India, at the PSB Manthan 2025,  Gurugram,  12 September 2025.

* * *

Secretary, DFS, Shri M. Nagaraju, other senior officials from the Government, Chairman and MDs of SBI, MD CEOs and EDs of Public Sector Banks, and my other colleagues, a very good morning to all of you.

I am honoured to be here at PSB Manthan 2025. Personally, this gathering feels like a homecoming, a return to a familiar space of dialogue and shared purpose, where the concerns, aspirations, and vision of our public sector banks take centre-stage.

The very word Manthan or churning has timeless symbolism in our traditions. It reminds us that progress rarely comes easily; it requires effort, reflection, and perseverance. Much like a family coming together to deliberate and debate for the common good, PSB Manthan brings together policymakers, regulators, and bankers to churn our collective experiences and insights so that we may draw out the nectar of transformation.

I commend the Department of Financial Services for nurturing this platform over the years, and for ensuring that it continues to evolve as a space where ideas are debated, challenges are confronted, and the future course of PSBs is shaped with collective wisdom.

## The Context: Resilience amidst Global Headwinds

We meet today at a time when the global environment remains marked by uncertainty. Geopolitical tensions, shifting trade alignments, climate transitions, and rapid technological disruptions are reshaping the contours of growth and finance worldwide.

Yet, amidst these headwinds, the Indian economy continues to demonstrate resilience and stability. This confidence is not only evident in domestic sentiment but has also been reinforced by global assessments, most recently the upgrade of India's sovereign rating outlook by S&amp;P.

Much of this resilience rests on the strength of our banking system. Over the past decade, Indian banks, and particularly our public sector banks, have undergone a remarkable turnaround. Balance sheets have been repaired, capital strengthened, and asset quality improved. At the same time, PSBs have deepened their traditional role as anchors of financial inclusion while also keeping pace with the wider digital transformation of the sector. Their contribution to Jan Dhan Yojana, to direct benefit transfers, and to the expansion of UPI in semi-urban and rural centres, reflects how PSBs combine scale with reach to serve the real economy.

Periods of comfort, however, can create the risk of complacency and mistakes are typically made in good times. Therefore, the challenge before PSBs today is not only to stay clear of the earlier shortcomings but to build on the gains of the past decade and

transform themselves further. PSBs have to remain strong, adaptable, and future-ready to contribute meaningfully to the vision of a Viksit Bharat by 2047.

## The Banyan Tree Metaphor: Transforming PSBs from providers of stability to enablers of new growth

As we reflect on what this transformation entails, I am reminded of a powerful symbol from our own banking history. Many of you will recall that when the State Bank of India was established in 1955, its logo was a sprawling banyan tree. The choice was deliberate, for the banyan has long been revered as the tree of life. its deep roots embody stability, its sturdy trunk represents resilience, and its wide canopy offers protection to all.

In later years, however, the banyan tree logo was replaced by the now familiar blue circle with a keyhole, designed by the National Institute of Design 1 . While the banyan conveyed strength and shade, it also drew criticism for casting such a dense canopy that little else could grow beneath it, which seemed at odds with the image of a modern and accessible bank.

Today, for the PSBs, the task is not only to provide shade and shelter to millions of households and enterprises but also to ensure that beneath their canopy, new growth flourishes in the form of abundant and affordable credit to MSMEs, start-ups, women entrepreneurs, and rural enterprises.

In that spirit, I find the banyan tree still a fitting metaphor for our PSBs. Its  roots, trunk, , and together capture the five pillars on which PSBs can aerial roots, branches canopy build their future. These five pillars in today's context are  strong governance, financial resilience, innovation and adaptability, people and culture, and an all inclusive customercentricity.

## Deep Roots: Governance and Assurance - evolve to meet new risks

The banyan tree can survive storms because of its deep roots. They may not be visible, but they are the true source of its longevity and stability. For banks, these roots are strong governance and assurance.

It means boards that are engaged, leadership that is accountable, and decisions that are transparent and ethical. Regulation can guide, but governance must come from within. Supervisory intervention can fix, but it cannot substitute for an internal culture of integrity.

The assurance functions, including risk management, compliance and internal audit, give depth and resilience to governance. They provide boards with independent and reliable perspectives, helping them act with foresight rather than hindsight.

Governance today must also evolve with changing times.  Boards need sharper tools, such as real-time insights that flag emerging risks or customer concerns. As banks

adopt artificial intelligence and data driven systems, assurance must also extend to these new domains. Ensuring fairness, transparency, and accountability in automated decisions is becoming as important as monitoring credit or operational risk.

Deep roots allow a tree not only to survive but also to nurture new growth. In the same way, strong governance supported by robust assurance will allow banks to take on fresh initiatives with confidence, knowing that these are built on a stable foundation of trust.

## The Sturdy Trunk: Financial Strength and Resilience

The trunk of the banyan tree stands tall and sturdy, holding the entire tree together through calm and storm. For our banks, the trunk is financial strength and resilience.

Over the past decade, PSBs have strengthened their capital position and improved asset quality. These gains must now be protected and deepened.  Banks should hold forward looking capital buffers that reflect their risk profile and growth ambitions  rather than simply complying with regulatory floors. Asset quality must also be managed with a preventive mindset, using early warning systems and predictive analytics to identify stress before it becomes a crisis.

True resilience today goes beyond capital and credit.  It also means operational resilience.  With customers relying on banks for 24x7 digital access, even short disruptions can erode trust and create systemic impact. Banks must therefore strengthen their technology infrastructure, cyber safeguards, vendor oversight, and business continuity planning so that services remain secure and uninterrupted under every circumstance.

A strong trunk allows the tree to support new branches and new growth. For PSBs, resilience both financial and operational is what will allow them to expand and support India's development priorities with confidence.

## Aerial Roots of Renewal: Innovation and Adaptability - for an open, adaptive, tech driven banking

The banyan tree constantly sends down aerial roots, which in time become fresh pillars of support. For our banks, these aerial roots are innovation and adaptability.

In today's financial landscape, technology is no longer optional. Modernising core IT systems and adopting advanced analytics are essential to remain competitive. AI/ML can strengthen fraud detection, improve credit assessment, and personalise customer engagement.

Innovation is not just about new tools. It is also about smarter ways of delivering them. PSBs should consider shared technology platforms and joint development of digital infrastructure to leverage economies of scale, reduce costs, and ensure consistency in customer experience. They can also experiment with what is known as a digital twin , a 2

virtual model that mirrors a real process such as the working of a branch or the journey of a customer applying for a loan. By testing changes on the digital twin first, banks can identify bottlenecks and improve efficiency before making changes in the real world.

Adaptability also means openness to new partnerships. Collaborating with FinTechs including the Unified Lending Interface (ULI), and using other open banking interfaces can bring the best of both worlds - the reach and trust of PSBs combined with the agility of innovators.

Yet, greater reliance on technology inevitably increases vulnerability. Cybersecurity, vendor oversight, and business continuity must therefore be built into every digital initiative by design.

Aerial roots renew the strength of the banyan tree and allow it to spread further. For PSBs, continuous innovation and adaptability will ensure that their canopy remains relevant, and that fresh growth can thrive beneath it.

## Living Branches and Leaves: People and Culture - from processoriented service to empathetic people centric culture

The branches and leaves are what people first notice when they see a banyan tree. For banks, they represent employees who bring strategy to life through everyday actions.

A large, committed workforce remain the most valuable asset of PSBs, even in an age of artificial intelligence. No algorithm can replace trust, empathy, and human judgment. To keep the branches strong, investment in human capital is vital. Staff must be equipped with new skills in digital banking, cybersecurity, and analytics. Training should be practical and engaging, including simulation-based learning.

Equally important is staff attitude and culture. Every customer should feel respected, not merely processed or attended to. True service comes from an empathetic customer first approach. PSBs must therefore nurture a culture of professionalism, empathy, and accountability so that their people remain the strongest ambassadors of trust.

## The Canopy of Trust and Inclusion - from transaction driven banking to customer centric, trust-based inclusion

The canopy of the banyan provides shade to all. For PSBs, it represents their enduring role in customer centricity and financial inclusion. From Jan Dhan to direct benefit transfers, from self-help groups to MSME lending, PSBs have given millions of Indians financial dignity. This role must continue and evolve, for today's customers expect not just access but also convenience, speed, and fairness. Meeting these expectations requires services that are transparent and responsive.

Customer centricity begins with trust. Every complaint is a test of confidence. By not giving room for complaints and by resolving issues, when they arise, promptly and fairly, banks can strengthen that trust and ensure that customers feel empowered in every interaction.

## Conclusion

In villages, it is under the banyan tree that people gather to seek counsel, to deliberate, and to find shade in times of need. In much the same way, citizens look to PSBs not only for loans and deposits but also for inclusion, stability, security, and progress. Let us commit to nurturing this banyan tree so that it remains a symbol of trust and resilience and contributes decisively to the realisation of a Viksit Bharat by 2047. Thank you. Jai Hind.

1 The Hindu Business Line. ""From Banyan Tree to Keyhole: NID Designed the New Iconic Logo for SBI."" The Hindu Business Line, August 10, 2022. Available at: https://www.thehindubusinessline.com/money-and-banking/from-banyan-tree-tokeyhole-nid-designed-the-new-iconic-logo-for-sbi/article64328336.ece

2 IBM. ""What Is a Digital Twin?"" IBM Research - Think, 5 August 2021. Available at: https://www.ibm.com/think/topics/what-is-a-digital-twin",Shri Swaminathan J
https://www.bis.org/review/r250929m.htm,Joachim Nagel: Introductory remarks - Sibos 2025 conference,"Introductory remarks by Dr Joachim Nagel, President of the Deutsche Bundesbank, at the opening plenary of the Sibos 2025 conference, Frankfurt am Main, 29 September 2025.",2025-09-29 00:00:00,"## Joachim Nagel: Introductory remarks - Sibos 2025 conference

Introductory remarks by Dr Joachim Nagel, President of the Deutsche Bundesbank, at the opening plenary of the Sibos 2025 conference, Frankfurt am Main, 29 September 2025.

* * *

## Check against delivery

Ladies and gentlemen,

Payments and settlement have become more fascinating and more political than ever. This is because we are seeing a number of challenging developments at the same time:

- The rapid development of new technologies that many describe as disruptive.
- The changing landscape of financial market infrastructures. For example, instant payments have been introduced. And we see ongoing endeavours to connect existing Financial Market Infrastructures and to expand their services in terms of operating hours and functionalities.
- The creation of new forms of payment instrument such as crypto-tokens, stablecoins and tokenised deposits. Some of these may offer functionalities that have not been possible thus far. But they may also entail previously unknown risks and partially evade traditional regulation.
- The clearly successful entry into the field of transaction banking by market participants who have not previously been concerned with payments. These include fintech and bigtech companies. The former often bring superior technological solutions, while the latter have almost unlimited financial power and customer access. Both are able to leap-frog other companies, because they do not have to deal with incumbent  IT systems.

All of these developments harbour both opportunities and risks at the same time. Let me begin by addressing the opportunities. As caretakers of payment and settlement systems, we have a great opportunity here:

- New technologies offer the possibility of creating a truly smart economy. An economy in which the settlement of contracts is largely automated, supported by digital money, distributed ledger technology  (DLT) and smart contracts.
- The vision of a settlement environment where goods and services, information and money flow synchronously may become a reality.
- This could save us time, costs and risks as well as release huge potential for growth.

However, a well-balanced assessment also has to take account of the risks. Many things could go wrong. We cannot support innovation for innovation's sake alone. Let

me mention the most important guardrails and guiding principles that we must keep in mind:

The anchor role of central bank money must not be weakened. Trust in money requires stability of prices. Therefore, we, as central banks, will not accept any developments that weaken our ability to implement monetary policy effectively. We will ensure that the euro remains the dominating currency here in the euro area.

Furthermore, the financial stability must not be endangered. That means: First, we have to make sure that large-value payments are settled in central bank money. They may use but with wholesale central bank digital currencies Second, we have DLT, (CBDC). to ensure that new instruments and new infrastructures cannot create distorted incentives that could contribute to potential bank runs or increased market volatility. Third, all financial actors must be subject to proper regulation. A level playing field is essential in regulation. Our current regulations-be it anti-money laundering  (AML), countering financing of terrorism (CFT),  principles of financial market infrastructures (PFMI),  or anything else-must be applied equally to anyone who provides financial services. These are my guardrails and guiding principles.

To conclude, I would like to briefly mention the overwhelming efforts by central banks and others towards dealing with these developments and finding the right answers to the challenges they present.

Many central banks are exploring and testing digital forms of money, that is  CBDC. Many are also discussing new forms of ledgers that could potentially support multiple forms of digital money. Central banks are cooperating in a wide variety of technical projects organised through the BIS Innovation Hub. Many of us are in almost constant exchange with market participants and operators of Financial Market Infrastructures to find the best solutions for the future of transaction banking.

And that is why I and many of my fellow central bankers are here today. Please allow me to express my appreciation to SWIFT for organising this week of exchange and discussion. I am sure that all of us are going to learn a lot. Thank you.",Joachim Nagel
https://www.bis.org/review/r250929k.htm,Christopher J Waller: The next frontier of payments innovation,"Speech by Mr Christopher J Waller, Member of the Board of Governors of the Federal Reserve System, at Sibos 2025, Frankfurt am Main, Germany, 29 September 2025.",2025-09-29 00:00:00,"## Christopher J Waller: The next frontier of payments innovation

Speech by Mr Christopher J Waller, Member of the Board of Governors of the Federal Reserve System, at  Sibos 2025, Frankfurt am Main, Germany, 29 September 2025.

* * *

Thank you for inviting me to speak here today. 1  The theme for Sibos this year, ""the next frontiers of global finance"" is a fitting one. We are indeed witnessing a new frontier of innovation in payments and the broader financial system. New technologies like distributed ledgers, tokenized assets, smart contracts, and artificial intelligence (AI) have the potential to make payments smarter, faster, and more efficient. I know many of you in the audience today represent firms that are using the latest cutting-edge advances to bring new global solutions to the market.

The conference theme also accurately captures that we are at the frontier. I often next note that the modern history of payments is a story of technological innovation. 2   The history spans from the last century, when payments and securities transfers were converted from paper to electronic solutions, to the present day when we increasingly have payment systems that process transactions in real time, 24/7.

Lastly, the conference theme recognizes the global nature of payments and financial infrastructures that underpin international commerce. Of particular focus in this domain are cross-border payments, which involve transactions across a layered and complex set of networks and experience frictions that contribute to higher costs, slower speeds, limited transparency, and barriers to access. Multiple opportunities for improvement exist in international payments, including improvements to smaller-value remittances, business-to-business payments, and collateral management in capital markets.

As we enter the next frontier, let us remember that this is not a new story and that we should not fear new technologies, nor new types of providers. Instead, we should ask how new technologies could benefit all types of actors, including the most sophisticated financial firms as well as consumers, while not losing sight of the need for guardrails that promote safety for consumers and the broader financial system. In addition, we should ask how new technologies could be used to upgrade the infrastructures that serve as critical components to the global financial system, in a way that maintains and extends safety and resilience. These are the topics I will consider today.

## Choice and competition

I approach these issues fundamentally as an economist and as a firm believer in the free market. In particular, I would highlight the importance of choice in how markets function and how competition develops. In general, choices encourage competition, leading to better quality products and services. Businesses innovate to differentiate products, including by incorporating new technical capabilities. This improves market responsiveness to consumer demand. Businesses also incorporate new technologies to compete on cost and efficiency. I see stablecoins, for example, as simply another

choice available to consumers and businesses, where they have signaled a need in the market to further improve payments. 3   I believe that we must take this articulated need seriously and respect the ability of the private sector to develop solutions.

This dynamic is nothing new. Market participants have long had choices in the types of payment instruments they use. Public and private forms of money coexisting, in multiple forms, is in fact a common feature in all developed economies. In the United States, consumers have had central bank money in the form of cash, commercial bank money in the form of deposits in a bank account, and nonbank money (or ""e-money"") in the form of a funds balance on a nonbank payment app. Stablecoins are simply a new form of private money and will exist alongside these other payment instruments, provided consumers accept them as safe, low-risk assets with regulatory protections. 4

Consumers and businesses have for decades also had a choice of providers of payment services and financial products including banks, card networks, nonbank payment service providers, and, more recently, other fintechs. Having a choice of providers is important because needs and preferences vary among consumers and businesses. I may choose one provider if I want to park my emergency fund in a highyield savings account, and I may choose different providers if I want to process a crossborder payment, pay someone with a QR code, or buy a crypto-asset. A choice of providers also encourages competition on cost, speed, efficiency, and user experience.

Additionally, firms have options for payments and financial infrastructure, which is important because firms might choose to route money or securities on different rails depending on business needs. Some may value speed; some may prefer the ability to batch payments and settle on net to capture liquidity savings. Some will prefer the features of a centralized financial market infrastructure and its built-in regulatory guardrails; some may prefer to transact on public blockchains, with different models for achieving security and integrity. Having multiple options is also good for public policy objectives like promoting resilience across the broader payment system.

## Assessing benefits of the next frontier of innovations

Given this backdrop of new technologies and new entrants within a competitive market, let's explore how this could lead to positive economic outcomes.

First, will the next frontier of innovations translate to lower costs? An influx of new market entrants certainly has the potential to drive down costs as they compete for customers, particularly if blockchain-based transactions prove to be cheaper. If stablecoins present a lower cost alternative to consumers and businesses, I am all for it. We are already seeing this dynamic develop outside of the United States, where U.S. dollar stablecoins are an attractive option in countries in which access to dollar banking services is expensive or limited. We also know that cross-border payments, in particular remittances, are relatively expensive. This is attributable in part to the complexity of transactions involving multiple infrastructures, currencies, and intermediaries. One way in which innovative technologies could translate to lower costs is through efficiency gains.

This brings me to my second question: how might new technologies improve the efficiency of the payment system? Distributed ledger technology, or DLT, is rapidly

becoming an efficient infrastructure for 24/7 transactions, recordkeeping, and data management by enabling multiple platforms, parties, assets, and functions to be combined in new ways. As an example, DLT-based platforms can support 24/7 realtime payments and securities transfers by using programmable functionalities like smart contracts to enhance operational efficiency and automate more complex financial transactions. With the ability to specify the precise time at which a transaction settles and under what conditions, DLT-based platforms have the potential to increase the flexibility and efficiency of settlement for money and assets.

Many cross-border payments today rely on the correspondent banking model-a network of bilateral banking relationships that enables financial institutions to access foreign financial systems and to conduct business across jurisdictions without establishing physical and legal presence in every market they serve. While correspondent banking has been the backbone of global payments for decades, this model faces several challenges, including high transaction costs, slower processing times, and a global decline in correspondent banking relationships. While these frictions are attributed in part to the process of sending payments through a complex chain of correspondent banks, I should note that not all frictions are barriers to overcome. Certain frictions are purposely built into the global payment system for compliance and risk-management reasons, such as preventing money laundering and countering the financing of terrorism. 5

DLT-based platforms have the potential to improve upon the existing correspondent banking model, and private-sector firms are pursuing multiple approaches to do so. One way is through the ""stablecoin sandwich"" model, in which fiat currency in one country is converted first into a stablecoin, then that stablecoin is transferred to another individual, and then converted back into the local fiat currency at its destination. Another way is through the use of tokenized deposits, where banks represent deposit liabilities on a blockchain for wholesale and cross-border transactions. Either model has the potential to improve transparency, cost, and timeliness, while balancing the need for safety and integrity of the transfer. DLT-based platforms generally (and stablecoins, specifically) may also present opportunities for efficiency gains in remittance payments, where today, money transfer operators rely on large global networks of agents and preposition capital in various currencies to pay out customers in different jurisdictions. These examples also demonstrate that innovation is not an issue of ""TradFi"" versus ""DeFi,"" but rather poses an opportunity to harness the complementary strengths each has to offer, especially at a time where we are seeing increased convergence between the two.

Importantly, efficiency will depend on the extent to which DLT networks can interoperate with one another and with traditional payment rails. This is particularly true because payments exhibit significant network effects. Fortunately, numerous privatesector advances in interoperability are emerging given this market need, and as an operator of core payment and settlement infrastructure, we at the Federal Reserve continue to assess how we can improve our existing rails that serve private-sector firms.

Let's turn from DLT to AI. AI can further improve the efficiency of payments in a number of ways, including through automating manual tasks, detecting fraud or compliance risks, and now with agentic AI, executing tasks on behalf of a person or company quickly and cheaply through the use of AI agents. 6   Let's again take the example of

cross-border payments, which involve multiple jurisdictions, each with its own compliance requirements. Firms are increasingly exploring AI and machine learning (as well as smart contracts) to automate compliance activities.

Third, can new technologies and products maintain and build trust in the digital ecosystem? I believe they can. One common criticism of stablecoins is that they will somehow undermine the trust in money. Under regulatory frameworks like the GENIUS Act in the United States, payment stablecoins will be backed at least 1 to 1 with safe, liquid assets and users will be able to redeem their stablecoins at par. I have long advocated that a right-sized regulatory framework can address concerns related to safety and financial stability, while allowing stablecoins to scale on their own merits. 7

As with any technology, ecosystem operators will need to assess and manage risks, including cybersecurity. As payments shift to new rails and include stablecoins, tokenized assets, and smart contracts, new opportunities for cyberattacks will emerge. Achieving security and resilience means ensuring these digital platforms are hardened against misuse, with redundancy and safeguards in place that match the scale of domestic and global payments. Building resilience requires both the private and public sectors to work together on standards, cybersecurity, and risk management, so that innovation goes hand-in-hand with safety.

## Roles of the private and public sectors

This brings me to the roles that the private and public sectors can play at the next frontier of payments innovation. I often argue that the private sector can most reliably and efficiently allocate resources and take risks to explore the value of new technologies. 8   The private sector is also best positioned to serve consumers and provide products and services that meet their needs. You don't want the government to decide what technologies are in or out, or decide what consumers want. Further, the private sector brings a depth and level of technical expertise required to translate new technologies into practical improvements for payments.

The role of the public sector is to support the private sector in specific circumstances where that is useful. At the Federal Reserve, that means serving as a convener to solve coordination problems, providing regulatory clarity when within our specific remit, and operating core payment and settlement infrastructure that the private sector uses. Complementary private and public roles can contribute to a safe and efficient payment system.

Looking ahead, I believe it is important to understand how the Federal Reserve can continue to support private-sector innovation. One way is to conduct research and experimentation on emerging technologies. At the Federal Reserve, we are conducting hands-on research on the latest wave of innovations, including tokenization, smart contracts, and AI in payments. We do this to understand how private-sector innovators will use these to improve payments, as well as identify any opportunities to upgrade our own payment infrastructures.

Another way is to engage actively with industry on innovations. That is why, in three weeks, I am convening industry leaders and U.S. policymakers to discuss how to further improve the payment system. That is also why I appreciate coming to events like

Sibos, where industry experts within the private sector engage with public-sector officials to discuss how we can best navigate the next frontier of innovations. Thank you.

- 1 Thank you to Alex Sproveri, Kirstin Wells, and Priyanka Slattery of the Federal Reserve Board for their assistance in preparing this text. The views expressed here are my own and not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.
- 2 See Christopher J. Waller, "" Technological Advancements in Payments (PDF),"" speech delivered at the Wyoming Blockchain Symposium, Teton Village, WY, August 20, 2025.
- 3 See Christopher J. Waller, "" Reflections on Stablecoins and Payments Innovations,"" speech at ""Planning for Surprises, Learning from Crises"" 2021 Financial Stability Conference, Cleveland, OH, November 17, 2021.
- 4 See Christopher J. Waller, ""Reflections on Stablecoins and Payments.""
- 5 See Christopher J. Waller, "" Interlinking Fast Payment Systems,"" speech delivered at the Global Fintech Fest 2024, Mumbai, India, August 28, 2024.
- 6 For additional discussion on AI in payments, see Christopher J. Waller, ""Technological Advancements in Payments.""
- 7 See Christopher J. Waller, "" Reflections on a Maturing Stablecoin Market (PDF),"" speech delivered at A Very Stable Conference, San Francisco, CA, February 12, 2025.
- 8 See Christopher J. Waller, ""What Roles Should the Private Sector and the Federal Reserve Play in Payments? (PDF)"" speech delivered at The Clearing House Annual Conference 2024, New York, NY, November 12, 2024.",Christopher J Waller
https://www.bis.org/review/r250929l.htm,"Denis Beau: Innovate to simplify, simplify before innovating - some ideas for effective, risk-based supervision","Speech by Mr Denis Beau, First Deputy Governor of the Bank of France, at the Supervision Innovators Conference, Frankfurt am Main, 24 September 2025.",2025-09-24 00:00:00,"## Denis Beau: Innovate to simplify, simplify before innovating - some ideas for effective, risk-based supervision

Speech by Mr Denis Beau, First Deputy Governor of the Bank of France, at the Supervision Innovators Conference, Frankfurt am Main, 24 September 2025.

* * *

Ladies and gentlemen,

There is now across Europe that financial sector regulation, broad consensus supervision and reporting have become . overly complex, costly and burdensome This leads to heavy operational burdens for financial institutions, which must allocate significant resources to ensuring compliance, sometimes at the expense of innovation and agility. This complexity also weighs on supervisors, who must carry out extensive controls and sometimes devote disproportionate resources in terms of the results ultimately achieved.

The for this situation is well known: . It is one of the key remedy simplification recommendations of the Draghi and Letta reports, and we have already begun work on simplification within the SSM, notably with the revision of the SREP, which we want to make more flexible and effective.

However, we must recognise that simplifying regulation, supervision or reporting is not As Leonardo da Vinci so aptly put it, ""Simplicity is the ultimate always so simple! sophistication"".

On the one hand, supervisory rules and processes do not simply result from excessive bureaucratic zeal. These rules were often introduced for good reasons; it is rather . On the other hand, any simplification their accumulation that poses a problem process inevitably raises the question of . The consensus is that we must how far to go , i.e. without dismantling the entire preventive framework simplify without deregulating that protects us from a new financial crisis.

In this context, can provide part of the solution. It enables us to build technology powerful tools - known in our supervisory jargon as ""SupTech"" tools - to optimise the management of our supervisory processes. However, technology cannot do everything, and it is often more effective to consider simplifying the processes themselves embarking on the construction of SupTech tools: before beware of technosolutionism!

Therefore, we need to reflect on the best way to -combine technological innovation our SupTech approaches to make our supervision with simplification measures more effective. To contribute to this discussion, I would like to share with you today some lessons we have learned from our SupTech experience at the ACPR in recent years (I), before discussing our current roadmap and future plans (II).

I/ In terms of sharing experiences, I would like to point out three pitfalls  to avoid and, conversely, a few best practices to favour.

1/ The , as I mentioned a few moments ago, is believing that SupTech tools first pitfall alone can solve all problems. Of course, new technologies - particularly artificial intelligence (AI) - can help us manage the inherent to our work wealth of information as financial supervisors. However, innovation must not be a crutch that allows us to continue moving in the wrong direction.

For example, technology is not designed to that manage the ambiguity of concepts often results from the complexity of regulations or supervisory processes. Quite the contrary: for new technologies to be deployed effectively, it is essential to have reliable, . consistent and properly structured data

Reporting issues illustrate this point very well: for a time, some argued that banking sector reporting would , replaced by supervisors having direct access to disappear granular data from institutions. In principle, this seems like an excellent idea. However, for it to work in practice, it would require of the information extreme standardisation systems of all European banks, which currently seems beyond reach. Without such standardisation, this would in practice amount to the transferring to supervisors burden of selecting the relevant information for each statistical concept to be measured, which would not only be excessively costly but would also have the major disadvantage of leading to . a loss of accountability on the part of institutions

- 2/ The to avoid is entrusting the design of SupTech tools solely to IT second pitfall specialists and developers, on the pretext that their technological expertise will necessarily enable them to identify the most effective solutions. In our experience, this type of approach, which is entirely , inevitably results in supply-driven solutions in ... and therefore end up gathering dust on the shelf. Furthermore, search of a problem my experience with IT projects has led me to understand that the quality of tool design is essential for effective adoption. It is therefore crucial to design our SupTech tools in with the business lines, not only to ensure their , but close collaboration relevance also to guarantee their , knowing - and this is an additional difficulty - that usability user expectations are growing alongside the progress of ""everyday technologies"".
- 3/ The is believing that is enough to build third pitfall starting with users' ideas SupTech tools that can simplify our activities. While this often simplifies the daily work of supervisors, it does not necessarily reduce the overall complexity of processes

.

The various specialists in supervisory roles often have a very clear idea of what they consider to be or . When asked, they therefore tend time-consuming repetitive tasks to first imagine SupTech tools that could perform these types of tasks for them. This is obviously a , and we at the ACPR have carried out several such very laudable goal projects in the recent years. However, this generally leads to "" "" - limited small victories actions that are useful for a few people, but not necessarily significant for the , especially when development and maintenance costs are organisation as a whole taken into account.

Furthermore, this type of project tends to to those transfer the burden of complexity responsible for developing and maintaining SupTech tools. A tool developed to automate a complex process is likely to be . This entails practical complex itself

maintenance difficulties: after a certain amount of time - sometimes not so long, given the turnover of teams! - there is a risk that no one will fully understand how a complex tool works in depth, and that we will collectively lose control of what we are doing.

Conversely , if we want the SupTech strategy to have a , it strong and lasting impact must be used to bring about a profound transformation of core business processes , those that truly structure the activity of a supervisory authority. To achieve this, we must first combine bottom-up and top-down approaches when selecting projects: for example, cumbersome and complex processes then, after analysis, mapping out them, and SupTech tools. We must also take simplifying only then building change issues into account at this stage. While this is not so easy to achieve in management practice, , i.e. the strategic SupTech vision keeping the ""big picture"" in mind at the , is undoubtedly the best way to ensure that the objective of simplification highest level and efficiency is at the heart of the approach and that technology provides support . exactly where and when it is needed

II/ Based on these convictions, sometimes hard-won, about the ""best practices"" of a SupTech approach, what are we actually doing at the ACPR and what do we plan to do in the near future?

1/ First, let me say a few words about how we have designed and implemented our and the role of AI within it. AI can, of course, improve SupTech strategy since 2018 through increased automation - as has been seen with search and data productivity visualisation tools. However, the ACPR's ambition is also to empower its agents with . The aim is not to replace our agents with machines, but to create new capabilities teams of . In this ""augmented supervisors""  capable of doing more and better context, the various AI technologies naturally support modern, risk-based supervision , facilitating market mapping and by detecting weak signals and atypical behaviour enabling the analysis of between financial players. The ""LUCIA"" tool, interconnections for instance, is used by the ACPR during on-site AML/CFT inspections and enables inspectors to examine a series of atypical transactions detected by mapping of large volumes of banking transactions.

2/ At the same time, the rapid evolution (and sometimes obsolescence) of new technologies encourages the swift achievement of ""quick wins"" that serve as milestones on the path to more strategic objectives. Since 2018, the ACPR has therefore run an to equip its teams with . This approach experimentation programme new digital tools has enabled the ACPR to gradually develop a series of practical tools that meet various operational needs, such as the automatic translation of technical documents, the transcription of telephone conversations, the analysis of advertising content, the preanalysis of regulatory reports, etc.

3/ The rise of , particularly ""large language models"" (LLMs), marked a generative AI . Recognising their potential for supervisory activities, the new stage in our strategy ACPR organised a ""Tech Sprint"" in early 2024, bringing together external data scientists and supervision experts. The highly promising results demonstrated the true potential of these technologies for supervisory activities. Following the Tech Sprint, and based on the prototypes and ideas developed there, the ACPR launched an initial . For instance, the ACPR has developed a tool called "" cycle of experiments on LLMs

"", which can extract the characteristics of life insurance products from their ""key Veridic information documents"" in order to classify them according to their level of complexity, a risk factor for policyholders. This is another concrete illustration of the potential of AI for risk-based supervision.

Fundamentally, the arrival of LLMs has led us to review all the SupTech tools that have already been developed. The aim is to update, supplement, or even redesign or replace these tools, using more cost-effective and efficient solutions.

4/ To take things further and, in particular, to ensure that the SupTech approach can be used to simplify our operating methods more decisively, we must clarify our vision of how AI can and will change things for us as supervisors. I am particularly thinking of ""office automation"" AI with generalist ""co-pilot' assistants, as well as ""agentic"" AI with specialised assistance tools - the next step in the evolution.

This is what we are currently working on. The first step is to clearly identify the main challenges to be overcome. I would like to highlight three of these here. The first concerns . While the use of the public cloud for data confidentiality and processing our projects clearly accelerates their development and adoption, it raises very sensitive issues of "" "" that should lead us to prioritise technical choices that do not sovereignty favour the dominant non-European providers of current cloud services. The second challenge is to effectively use the new tools at their disposal, for training our staff example by teaching them how to write prompts. At the same time, we must also make them aware of the risks associated with these tools.

Ultimately, capitalising on the potential of new technologies will necessitate addressing even more fundamental questions regarding the evolution of supervisory professions: to what extent should analysis be entrusted to machines versus humans? How will LLMs transform our relationship with information and reporting? It is here that the overall vision I mentioned earlier will be crucial.

5/ Finally, our SupTech strategy naturally incorporates a , with the European element aim of contributing to the integration of banking supervision within the SSM and capitalising on all possible synergies. To this end, we have participated in the development of several tools for the SSM, most recently a natural language query tool integrated into the Athena application. We stand ready to develop new tools, provided they align with our objectives - namely, that innovation must serve simplification . and vice versa

The ACPR is also proud to have organised a SupTech Week at the beginning of July, featuring presentations from the ECB, the Bundesbank, the Banca d'Italia and the Banco de Espaæa. This is another aspect of European integration that is close to my heart - and I will conclude on this point: the wealth and creativity that we Europeans demonstrate when we share our experiences and ideas.

Today is Supervision Innovators Conference, like the previous editions I have attended, perfectly illustrates this! Let us harness this creativity and collective spirit of innovation to achieve the ""supreme sophistication"" of simplicity!

Thank you for your attention.",Denis Beau
https://www.bis.org/review/r250929j.htm,"François Villeroy de Galhau: ""The Savings and Investments Union - (finally) turning an idea into actions""","Speech of Mr François Villeroy de Galhau, Governor of the Bank of France, at the conference ""Where do savings go?"", jointly organised by the Association Européenne de l'Économie Financière et des Régulations (AEFR) and the Réunions d'Économie Financière (REF), Paris, 11 September 2025.",2025-09-11 00:00:00,"

## Speech



## 'The Savings and Investments Union: (Finally) turning an idea into actions'

Published on the 11th of September 2025

AEFR/REF Conference 'Where Do Savings Go?'

Paris, 11 September 2025

Speech by François Villeroy de Galhau, Governor of the Banque de France



Ladies and gentlemen,

It gives me great pleasure to speak before you to mark the publication of the 158th edition of the Revue d'économie financière,   which is devoted to an essential question: 'Where Do Savings Go?' I would like to pay a friendly tribute to the remarkable work of the AEFR, its President Pervenche Bérès, and the two coordinators, Marie-Laure BarutEtherington and Pierre Bollon. Today, I shall focus on one of the three main issues they raise: mobilising European savings to support the European economy. For that, I shall take another look at a project that is not new but has recently had something of a 'makeover': the Savings and Investments Union (SIU). To keep it brief, clear and concrete, I shall start by recalling three stylised facts about European savings and investment (1), before going on to dispel three doubts (2) and then proposing five principal levers for finally turning an idea into actions (3). i

## 1.Three stylised facts about European savings and investment

1.1. Europe does not lack savings or credit, it lacks equity.

image ImageThématique Governor Europe Catégorie Speech



gross disposable

income.

AEFR 11 September 2025

First of all, the euro area has a significant and frequently overlooked asset: a higher household saving ratio than in the United States - 15.3% of gross disposable income compared with 10.8% across the Atlantic. The gap is less stark in financial savings - due to the size of real estate savings in Europe - but the main problem is how these financial savings are allocated: they are predominantly invested in low-risk assets and far less in shares or investment funds. Europe has a wealth of savings but it lacks equity capital, which is vital to enable firms to innovate due to the higher associated risk. Non-financial corporation (NFC) equity financing amounts to just 85% of GDP in the euro area, compared with 220% of GDP in the United States. Conversely, euro area NFCs have higher levels of debt.

## 1.2. Europe does not lack investment, it lacks productive investment, and above all innovative investment

image ImageThématique Governor Europe Catégorie Speech



Sources: OECD, GFCF by asset Note: Productive investment is the total GFCF minus construction (dwelings, other buildings and structures etc.)

AEFR 11 September 2025

As a share of GDP, total investment   in the euro area is almost the same as in the United States. However, productive investment (excluding investment in construction) is much lower in the euro area (10.5% of GDP compared with 14.3%). In innovative investment in particular - calculated as the sum of investment in ICT, software, databases and research and development - the gap between the two countries was already significant in 2020 (8.8% of GDP compared with 5.1%), and it has since continued to widen. ii

## 1.3. A 'European' puzzle: a surplus of financial savings but a high cost of equity

image ImageThématique Governor Europe Catégorie Speech



‘Source:

Eurostat,

Banque de

France calculations

‘Note:

The euro

area's

(EA)

net lending

position is

the savings

surplus generated

(businesses and

households)

financing surplus

and the

general goverment

financing deficit.

Average Cost of Equity (CoE)



'Source: Damodaran (NYU). 'Note: CoE for total markets (including financial industry). The cost of equity is the rate of return that investors require for holding a stock. It can be derived from the Capital Asset Pricing Model (CAPM)

AEFR 11 September 2025

For more than a decade, Europe has had a net financial savings surplus EUR 400 billion last year or 2.6% of GDP - which is invested in the rest of the world, especially in the United States; or it lacks productive investment - which is basically just another way of saying the same thing. But at the same time, the cost of equity remains higher on our continent than in the United States, and half of our large firms' capital is held by non-residents, a significant portion of whom are American. iii

I'm not describing this landscape to depress you, but rather to shed light on the goals of the Savings and Investments Union. We've often talked about reducing fragmentation. Yes, but firstly to achieve a quantitative goal: mobilising European savings for European investment. Even more importantly, it's about achieving a qualitative goal: supporting innovation in key sectors (digital and artificial intelligence, energy, defence). On a broad level, in 'macro' terms, we have plenty of financial resources to bolster the European economy in the face of America's radical policy shift.

iv

.

## 2. Dispelling three doubts

The idea of a Savings and Investments Union was first put forward back in 2014, and the amount of time that has since passed occasionally gives rise to scepticism.

## 2.1. 'Why would this time be any different?'

The project has had a new name since last year and is part of Commissioner María Luís Albuquerque's portfolio. This is much more than just a change of brand: today, the SIU adds together, or unites, the old Capital Markets Union and Banking Union projects. We have finally stopped making that slightly theological distinction between banks and markets. Most of all, the new brand explains 'what for' rather than just talking about the means: we've gone from a plethora of technical measures - over 30(!) - in the Commission's 2015 and 2020 plans, to a strategic ambition endorsed by political leaders.

## 2.2 'You're just paving the way for the US champions'

A second doubt - which is less openly admitted - is that by reducing fragmentation and regulatory barriers, the SIU simply leaves the door wide open for US champions. There's clearly an advantage to keeping European markets open - notably to lower the cost of equity - but we have the means to develop European champions - because yes, we do have some, in banking, insurance and asset management. We need to pay closer attention to them on a political and strategic level - including to those in corporate and investment banking (CIB) which is a field too often neglected. And, of course, we need more cross-border consolidation to achieve critical mass.

2.3 'It's not a lack of funding but a lack of projects'.

The third doubt is the suggestion that the real obstacle may not be a lack of financing but a lack of projects and economic opportunities in Europe. Let's be honest, both could be true. But the answer here is 'topdown': the Letta and Draghi reports combine a deepening of the single market and a Savings and Investments Union, economic sovereignty and financial sovereignty. Rather than asking ourselves where to start, it is high time we put a complete package on the table. And that we mobilise around a deadline for putting all this into place.   Jacques Delors succeeded when he set 1 January 1993 for the single market and 1 January 1999 for the single currency. In Strasbourg yesterday, the Commission President mentioned a 2028 roadmap for the first time. We now need to really emphasise this, and go even faster. v vi

## 3. Five levers for turning an idea into actions

I shall now take the risk of prioritising five concrete levers for action. Only five, compared with the 21 in the excellent roadmap published in March by the Commission. But a 'Top 5' to focus our energy on the central objective of increasing equity and venture capital. So I will not talk this evening about securitisation or innovative market technologies or simplification - without deregulation - or about euro-denominated safe assets, which are four desirable components, but which do not bring in capital. The order here is of no particular importance, and none of the levers can claim to be a 'silver bullet', the surefire solution. But each can and must be launched, unconditionally.

## image ImageThématique Governor Europe Catégorie Speech

## &gt; 5 concrete levers

Amounts raised by the 10 largest VC funds created in the US and Europe between 2019 and 2023 (billion euros)

+ A genuine European supervisory framework for investment funds
* The creation of an optional « 28"" regime »
* The gradual development of European retirement savings and pension funds
+ Public-private partnerships
* The launch of savings products

'Sources : Invest Europe, National Venture Capital Association, IMF, Banque de France calculations



AEFR 11 September 2025





'Source : Crunchbase, Banque de France calculations



4

- 1) A genuine European supervisory framework for investment funds , based on the American SEC model, as proposed by Christine Lagarde, because it is vital to accelerate the scale-up from national to 'panEuropean' funds that are therefore genuinely cross-border. Between 2014 and 2025, venture capital funds raised the equivalent of 0.39% of GDP in the United States, while in Europe they raised less than a fifth of that, or 0.07% of EU GDP. What's more, the European venture capital fund that raised the most money from 2019 to 2023 - which is actually Swedish, so from outside the euro area - is smaller than the tenth largest venture capital fund in the United States.
- 2) The creation of an optional '28th regime' could lower administrative costs for firms, especially the 'cost of failure'. As highlighted by Olivier Coste in particular, Europe's higher restructuring costs compared to the United States can discourage risk taking on the continent. The consultation on the 28th regime launched by the Commission in July 2025 is therefore a promising step forward, although questions still need to be answered: will the regime be just for start-ups or for all firms? Will it apply only to new inflows or to existing structures as well? Will it initially include only insolvency and company law, or will it also include labour and tax laws? Ideally it should combine ambition with speed. But if we have to choose, it will be better to go fast than to aim too broadly. vii viii
- 3) The Commission is stressing the need to gradually develop European retirement savings and pension funds , which could generate significant social and economic gains; they could provide long-term and patient savings. In Europe, the funds in the Netherlands and the Nordic countries are by far the most developed, and these countries manage to combine both strong social cohesion and better innovation.
- 4) The development of ambitious public-private partnerships in venture capital is another way of increasing the size of funds. There are some national initiatives - BPI France and TIBI in France, WIN .in Germany. But here again we need to scale up to a European level: the EIB/EIF's European Tech Championship Initiative (ETCI) has enabled joint investments of EUR 2 billion in venture capital funds; let's aim for at least EUR 10 billion. ix

5) This leaves the retail sector and the launch of savings products that are accessible to households. I hear two objections to this: investing in equity capital should be left to the professionals, to institutional investors. Yes, but we should not underestimate the potential of the retail sector for increasing the political ownership of the 'Union' or the financial literacy of European citizens. Second, it will ultimately be a question of taxation, and there will be a need for European harmonisation or at the very least substantial tax breaks. The former is a somewhat utopian vision, while the latter, in my view, are not essential at this stage. There is genuine scope for simplification and standardisation. The 'Finance Europe' label launched in June by France, in conjunction with Spain and Germany in particular, is a first positive step. The Swedish model, based on the widely distributed ISK investment savings account, is one example that has proved its worth: at the end of 2023, 51% of Swedish households' financial savings was invested in listed shares, compared with just 21% in the euro area. x xi

I shall conclude with another of the treasures found in this new issue of the REF, the rediscovery of the Dickens classic, A Christmas Carol. In a single night, the old money-lender Ebenezer Scrooge radically changes his attitude to savings and discovers the joys of sharing them... or, in our case, of using them wisely. It's a similar awakening that I would like to see in Europe, centred around a genuine SIU. We will probably need more than one night, but it is high time we set ourselves a mobilising deadline and transformed a good idea into a few concrete actions: a little, done well and seen through to the end. Thank you for your attention. xii xiii

AEFR (2025), 'Où va l'épargne ?', Revue d'économie financière No. 158, 2nd quarter. i

- Measured as the volume of gross fixed capital formation (GFCF). ii
- Defined as the return an investor requires in order to purchase or retain a firm's share given the risk it poses (Banque de France (2017), ' Cost of equity and corporate profitability in France ', Eco Notepad blog, 4 October). iii
- Villeroy de Galhau (F.) (2025), Letter to the President of the French iv

Republic: From stupefaction to a general mobilisation, how to respond to America's policy shift , 9 April.

- Villeroy de Galhau (F.) (2025), 'A mobilising deadline for seizing 'Europe's moment' , speech, 14 May. v
- Von der Leyen (U.) (2025), 2025 State of the Union Address , speech, Strasbourg, 10 September vi
- vii
- Coste, O. and Coatanlem, Y. (2024), 'The Cost of Failure and the Quest for Competitiveness: Disruptive Innovation as a Catalyst'. IEP Policy Brief No. 24, IEP Bocconi
- European Commission (2025), 28th regime - a single harmonized set of rules for innovative companies throughout the EU , 8 July. viii
- Wachsturms und INnovationskapital für Deutschland (Capital and growth for innovation for Germany). ix
- Investeringssparkonto. x
- European Savings Institute (2025), 'Households' long-term savings and stock market participation in Europe' , February. xi
- Slama (A.-G.) (2025), 'Charles Dickens et le « miracle » en économie', Revue d'économie financière No. 158, 2nd quarter, pp. 249-256. xii

Dickens (C.) (1843), A Christmas Carol, Chapman &amp; Hall, London. xiii

## Download the full publication



The Savings and Investments Union: (Finally) turning an idea into acti... (PDF - 526.35 KB)

",François Villeroy de Galhau
https://www.bis.org/review/r250930i.htm,Michael Atingi-Ego: Shaping Africa's financial future in the age of artificial intelligence,"Keynote address by Mr Michael Atingi-Ego, Deputy Governor of the Bank of Uganda, at the Annual Meeting on Banking Supervision and Financial Policy Implementation, Kigo, 23 September 2025.",2025-09-23 00:00:00,"## Keynote Address: Shaping Africa's Financial Future in the Age of Artificial Intelligence

Governor Michael Atingi-Ego, Bank of Uganda Annual Meeting on Banking Supervision and Financial Policy Implementation Lake Victoria Serena, Kigo, Uganda -September 23, 2025

As prepared for delivery

Distinguished dignitaries, eminent resource persons, dear delegates, ladies and gentlemen,

Good morning and welcome to the Pearl of Africa!

## Opening: A Moment of Unprecedented Transformation

We convene here on the shores of Lake Victoria at an extraordinary moment in financial history—when artificial intelligence has moved from experimental technology to fundamental business transformation. This is not merely another technology upgrade; AI represents a general-purpose technology that will define whether Africa leads or follows in the next chapter of global financial development.

I extend profound gratitude to the Financial Stability Institute of the Bank for International Settlements and the Macroeconomic and Financial Management Institute of Eastern and Southern Africa for choosing AI as our theme.

Your foresight reflects an understanding that we stand at a crossroads where our decisions today will determine Africa's financial trajectory for decades to come. Your consistency and commitment in enhancing capacity and knowledge, demonstrated by holding this annual event, brings together policymakers from across our central banks to address the most critical issues of our time.

The numbers tell a compelling story of acceleration. Global AI investment in financial services surged from $35 billion in 2023 to a projected $97 billion by 2027. Major institutions like JPMorgan Chase report $1.5 billion in AI-driven value creation, while Citi projects AI could add $170 billion to global banking profits by 2028!. AI could contribute up to $13 trillion to the global economy by 2030."" This is no longer about pilot projects—76% of financial services companies have announced AI initiatives.

The Dual Reality: Promise and Peril

' JPMorgan Chase (2024): ""2024 Investor day transcript"", JPMorgan Chase &amp; Co, May.

? McKinsey Global Institute report: Bughin, J., Seong, J., Manyika, J., Chui, M., Joshi, R. (2018), Notes from the AI frontier: Modelling the impact of AI on the world economy

Let me be direct about our position. Artificial Intelligence is not coming to African finance—it has arrived. Across our region, AI algorithms are already making credit decisions for farmers in Kenya, detecting fraud in mobile money transactions in Uganda, and powering chatbots that serve millions of previously excluded customers. In the past 18 months alone, generative AI has accelerated this transformation exponentially.

Africa enters the AI era with distinct advantages. Our young, digitally native populations embrace new technologies rapidly. Our mobile-first financial ecosystems generate rich data streams that AI systems require—Uganda alone processes over 300 million mobile money transactions monthly, generating invaluable data for Al-driven insights. Most importantly, we have a proven track record of leapfrogging traditional infrastructure through innovation born of necessity.

Yet we face an ""AI divide"" that could be more consequential than any digital gap we have previously encountered. While 60% of jobs in advanced economies are exposed to AI disruption, only 26% in low-income countries face similar exposure. This sounds protective, but it is actually concerning—it suggests our economies may be structured in ways that limit Al's beneficial applications.

The concentration risks are stark. A handful of firms control the AI supply chain: Nvidia holds over 90% of AI chip markets, while Amazon, Microsoft, and Google dominate cloud infrastructure. OpenAI's GPT-4 alone accounted for 69% of generative AI market revenue in 2023. This concentration creates systemic vulnerabilities that could cascade across our financial systems.

## The Central Banker's Imperative: Four Critical Challenges

As central bankers and financial supervisors, we face four immediate imperatives that demand coordinated action:

First, we must transform our supervisory capabilities. How do we monitor AI systems we do not fully understand? Traditional model risk management frameworks, designed for simple scorecards, are inadequate for deep learning systems that function as ""black boxes."" We need new approaches to validate algorithmic bias detection, monitor data drift, and ensure explainable AI decisions—particularly for high-risk applications like credit scoring and fraud detection.

Second, we must ensure AI serves financial inclusion, not exclusion. Al-powered credit scoring using alternative data can revolutionise access to finance for millions of unbanked Africans. But if algorithms are trained on biased historical data, they will perpetuate and amplify existing inequalities at scale. We must demand fairness testing, representative training data, transparency, explainability, and clear accountability mechanisms from AI systems operating in our jurisdictions.

Third, we must prepare for a transformed cyber threat landscape. AI does not just change how financial institutions operate—it transforms how attackers operate.

While it enhances our fraud detection capabilities, it also enables sophisticated deepfakes, automated social engineering, and polymorphic malware? that evades traditional defences. Our cyber resilience frameworks must evolve to address prompt injection attacks, data poisoning, and novel AI-specific vulnerabilities'.

Fourth, we must become active participants in global AI governance. The European Union's AI Act classifies credit scoring as ""high-risk,"" imposing strict transparency requirements. Ethiopia has established a comprehensive national framework for AI. Similar frameworks are emerging globally. If we remain passive observers, we risk facing regulations designed without consideration for African contexts, needs, or capabilities.

## A Strategic Framework for African Leadership

Let me propose a concrete path forward—one that positions our region as active shapers, not passive adopters, of AI in finance.

Immediately, we must harness regionalism. A regional network would pool our collective expertise, share threat intelligence, and coordinate regulatory approaches. No single African central bank possesses the resources to fully understand and oversee AI risks alone. Together, we have formidable capability. MEFMI's covening power could be leveraged for a platform to create an African Financial AI Academy— developing homegrown capabilities rather than remaining dependent on external consultants.

We must create AI regulatory sandboxes with shared learnings. These controlled environments will allow us to observe how AI systems behave under real conditions while maintaining consumer protection and financial stability. The Bank of Uganda commits to exploiting its regulatory sandbox for related innovations and would be in a position to appropriately share pertinent findings shared across the MEFMI network.

We must assert data sovereignty while enabling innovation. Our citizens' financial data represents a strategic national asset. We need frameworks that keep sensitive data under our legal and supervisory jurisdiction while allowing beneficial AI innovation to flourish. This includes establishing clear rules for cross-border data flows and cloud service governance, implementing data classification, quality standards, purpose limitation, and privacy-preserving techniques.

We must invest systematically in human capital. The Bank of Uganda is implementing comprehensive AI training for supervisory staff, but we need regional

3 Polymorphic malware, which changes its code to evade detection, poses a significant threat to mobile money systems in Africa by facilitating fraud and unauthorized transactions. Traditional antivirus methods struggle to detect these evolving threats, prompting increased adoption of AI-driven real-time monitoring and fraud detection solutions to protect financial ecosystems, especially in countries like Uganda where mobile money fraud is prevalent

4 Injection attacks insert malicious code into systems to manipulate mobile money transactions, while data poisoning corrupts AI training data, undermining fraud detection; both are serious risks for Africa's financial tech, demanding robust cybersecurity and AI safeguards to protect users and data integrity.

programs to build deep technical expertise. These developments pose challenges with skill sets and human capacity. We must educate and train our staff to reach and stay at the technological frontier without neglecting the traditional subject matters of central banking.

## An Action Agenda for Responsible AI

To translate these imperatives into practice, we could pursue a multi-faceted action agenda:

1. Put people at the centre with ""Responsible-by-Design"" AI. Require financial institutions to evidence, before deployment, that AI systems meet five tests: materiality, fairness, explainability, robustness, and human oversight. For high-risk uses—credit decisions, AML/CFT monitoring, fraud detection—human-in-the-loop must be a default, not an afterthought.
2. Upgrade model risk management for the AI era. Traditional validation frameworks must be extended for deep learning and generative models. This means independently checking where data comes from and how it moves, reviewing key settings in AI models, watching for changes in data over time, testing how systems perform under tough conditions, and actively looking for any unfair or biased outcomes.
3. Treat data governance as prudential infrastructure. Data is now a systemic asset requiring classification, quality standards, purpose limitation, privacy-preserving techniques, and clear data localisation and cross-border transfer controls consistent with national law.
4. Build cyber resilience for Al-enabled threats. We must accelerate the adoption of threat-intelligence sharing, including red-teaming that incorporates prompt-injection and model-evasion tests', software bill of materials requirements (SBOMs) for critical vendors®, and tabletop exercises simulating simultaneous disruptions.
5. Invest in supervisory technology and skills. To supervise AI, we must use AI responsibly. Priority tools include real-time dashboards, anomaly detection, Natural Language Processing pipelines (a step-by-step process that takes raw text and transforms it into useful insights), and nowcasting models. The Bank of Uganda has embarked on a Big Data Initiative, including enhancing supporting infrastructure, data analytics capabilities, supervision technologies, and efficient interlinked digital payment channels.

5 Prompt-injection and model-evasion tests mean deliberately trying to trick AI with sneaky inputs that force it to mess up or break its own rules—making sure it can't be fooled or bypassed easily.

° Critical vendor SBOMs must list all software components with version and supplier info, clearly show dependencies, be in a machine-readable format, updated with every change, and be easily accessible for security checks—ensuring full transparency and faster risk detection in the supply chain.

6. Make collaboration our comparative advantage. We can explore an ambitious agenda, including establishing a Regional AI Supervisory College, launching an AI Risk &amp; Resilience Playbook, and setting up a shared threat-intelligence hub focused on our region.
7. Lead by example through public-sector modernisation. Central banks should be key movers on responsible AI, digitising internal workflows, applying AI to statistics and research, and publishing model cards for transparency.

## Critical Questions for Our Deliberations

As we embark on these discussions, I urge you to reflect on several key questions:

How can we strengthen our monitoring frameworks and statistical systems to measure Al's impact on financial stability? Conversely, how can we safely leverage AI to enhance our own capabilities, including cutting-edge tools for nowcasting and realtime analytics?

How can we strengthen our collaborations to actively engage in regional and international dialogues on common AI concerns? The recent EU Act on AI and Ethiopia's national framework show us that governance is a global priority, and we must learn from each other's journeys.

How can we double down on our efforts to strengthen our data capacity? Large, quality data repositories are the fuel for AI models and essential to becoming the central bank of the future.

## The Stakes: Getting This Right

If we navigate AI thoughtfully, we can build financial systems that serve every African—from smallholder farmers accessing credit through AI-based alternative scoring to small businesses receiving real-time financial advice. The adoption of digital channels for financial services is accelerating, advancing inclusion but also introducing new risks. By harnessing AI for both inclusion and productivity while strengthening safeguards, we can capture the benefits and contain the threats.

If we get this wrong—if we allow biased algorithms to determine who gets credit, if we let cyber vulnerabilities expose our payment systems, if we fail to build domestic AI capabilities—we risk creating a more exclusionary financial system than we have today, one that deepens financial exclusion and concentrates power in foreign technology giants.

## A Call for Collective Action

Over the next two days, we have an extraordinary opportunity to move from discussion to implementation. The expertise assembled here—from the BIS's Leonardo Gambacorta to insights on the Financial Stability Board's report,

contributions from MEFMI and distinguished speakers like Jean-Louis Perrier— provides us with world-class guidance for our continent's unique context. But expertise alone is insufficient. We need binding commitments to collective action. What commitments will you make?

## Conclusion: The Future We Must Choose

Standing here beside Lake Victoria, Africa's largest lake and a source of life for millions, I am reminded that great bodies of water are fed by many tributaries. Similarly, our Al-enabled financial future will be shaped by many contributions—the policies we implement, the standards we set, the collaborations we forge, and most critically, the leadership we demonstrate.

We have a choice that will echo through generations. We can be passive recipients of AI systems designed elsewhere for other markets, accepting whatever digital colonialism brings. Or we can be active architects of AI applications that serve African needs, values, and aspirations.

At its core, finance runs on trust. AI will not change that—if anything, it raises the bar. People will accept AI in their financial lives when they see that it is fair, explainable, and secure, and that there is accountability when things go wrong. Our job as central banks and supervisors is to anchor that trust.

The algorithms that will govern credit decisions for millions of Africans, the systems that will protect our payment infrastructure, the models that will guide monetary policy—these are being designed now. We must ensure African interests, African values, and African innovations are embedded in these systems.

The future is not predetermined. It is ours to choose and ours to build. But only if we act with urgency, wisdom, and unprecedented collaboration.

Let us begin that work today, here at Kigo, on the shores of Lake Victoria, where the future of African finance will be shaped by the decisions we make together. Let us leave with a shared commitment to harness AI for inclusion and productivity, to harden our systems against new risks, and to ensure that the benefits of this technology accrue to every citizen we serve.

With those remarks, it is my great pleasure to declare this meeting open. I wish you all successful deliberations and a pleasant stay in Uganda.

Thank you. God bless!",Michael Atingi-Ego
https://www.bis.org/review/r250929g.htm,"Piero Cipollone: Digital euro - protecting our freedom, autonomy and security","Keynote speech by Mr Piero Cipollone, Member of the Executive Board of the European Central Bank, at the Baltic digital euro conference ""Payments & policy in a changing environment"", organised by Bank of Estonia in cooperation with Bank of Latvia and Bank of Lithuania, Tallinn, 29 September 2025.",2025-09-29 00:00:00,"SPEECH

## Digital euro: protecting our freedom, autonomy and security

Keynote speech by Piero Cipollone, Member of the Executive Board of the ECB, at the Baltic digital euro conference 'Payments &amp; Policy in a Changing Environment' organised by Eesti Pank in cooperation with Latvijas Banka and Lietuvos bankas

Tallinn, 29 September 2025

I often think about the ECB's role as the guardian of the euro.

The euro is more than just a currency. It is a commitment, a commitment to stability, to unity and to a shared European destiny. A destiny built on peace and prosperity. Yet, as we look to Europe's borders not too far from here, the challenges to peace and prosperity are all too visible.

Europe has faced these challenges with determination and a great resolve to go further. It is bolstering its readiness, strengthening its capacity to prevent and respond to threats and reinforcing the very foundations of our common security. [ ] 1

At the ECB, our aim is clear: to uphold Europe's economic and financial stability in a world that never stands still. Price stability is the primary objective of our monetary policy. And we also help to preserve financial stability by supervising banks, adopting macroprudential policy measures and overseeing payment systems.

But today is an opportunity to discuss one vital element in our ongoing efforts to deliver stability: ensuring that central bank money - our sovereign money, which Europeans use every day in the form of cash remains universally accessible for everyday transactions.

To achieve this, cash needs to be available not just in physical form, but also digitally. As legal tender, a digital euro could be used wherever digital payments are accepted. It would preserve our freedom to choose how we pay. [ ] 2

In my speech today, I would like to focus on how the digital euro will bolster Europe's unity, safeguard our autonomy and strengthen our resilience in the face of ever-evolving challenges.

## Sharing a currency: more than just money

Sharing a currency is about sharing more than just money. It affirms that our future is bound together. [ ] It unites us. 3

When the Baltic States joined the euro area, it was not just an economic decision. It was a commitment to stability. And even more, it was a declaration of belonging, of choosing, in the strongest possible way, to be part of the European project. [ ] 4

Sharing a single currency has a strong geopolitical dimension. My predecessor on the ECB's Executive Board, Fabio Panetta, once remarked that our monetary union 'is as close as it gets to a collective economic defence clause. An attack against one of its members would be an attack against all of them' because it would affect a key element of our shared sovereignty. [ ] 5

Sharing a common currency also fosters a sense of belonging that transcends national borders, one that builds on and contributes to our European identity. [ ]  This is also reflected in citizens' support for the euro, which is rooted largely in shared values. It provides a powerful anchor of stability, cementing Europeans' trust in their money even in times of crisis. [ ] 6 7

The bedrock of our currency is central bank money, embodied by the banknotes that we have in our wallets. When Estonians, Latvians and Lithuanians hold euro banknotes in their hands, they hold a tangible reminder that they are part of a united Europe.

In a world that grows more fragmented by the day, there are strong reasons to preserve and reinforce our money in the years ahead.

That is why we are designing a new series of banknotes, which will celebrate our shared culture and Europe's natural heritage. [ ] 8

And that is why we are getting ready to issue a digital euro. As payments become increasingly digital, central bank money must evolve to keep pace and remain an option for the people of Europe.

Between 2019 and 2024 the share of cash used at physical point of sale locations in the euro area fell from 72% to 52% in terms of volume, and from 47% to 39% in terms of value. [ ]  And as the role of online payments has grown, the role of cash in all day-to-day transactions has been declining at an even faster pace: between 2019 and 2024 its share fell from 68% to 40% in volume terms and from 40% to 24% in value terms. 9

At its heart, the digital euro would ensure that European people and businesses retain the freedom to pay with cash in their daily transactions. It would allow them to pay digitally using sovereign money anywhere ] 10

in the euro area, at all times. [

## Safeguarding our autonomy and economic security

The digital euro is not merely a 'nice to have'. As the use of cash declines, Europe is increasingly dependent on non-European payment solutions. This puts us at the mercy of decisions made elsewhere.

Two-thirds of card-based transactions in the euro area are processed by international schemes. Today, in 13 out of 20 euro area countries, daily in-store payments depend entirely on these schemes. Estonia,

Lithuania and Latvia are a case in point: electronic payments are booming, yet global card networks dominate, putting everyday transactions squarely in the hands of non-European companies.

This excessive dependency not only hampers competition, resulting in higher fees for merchants that translate into higher prices for consumers. It also calls our sovereignty into question by threatening our ability to act independently in one of the areas most critical for the functioning of our economy: money.

In the face of this challenge, the digital euro would safeguard Europe's autonomy. Introducing a digital euro would provide an attractive alternative to non-European payment solutions, ensuring that Europe sets its own standards for how Europeans pay. [ ] 11

A digital euro would give people the freedom to transact seamlessly and securely, without being dependent on decisions made outside the EU. With the digital euro, Europeans would remain in control of their money, their choices and their future.

The digital euro will also empower European payment companies. By providing a powerful infrastructure, open standards and a European-wide acceptance network, a digital euro would allow these companies to scale up their solutions across the continent in a cost-efficient way. And they would be able to use the digital euro platform to offer innovative services that would make life easier for consumers and businesses, as evidenced in the report we published last Friday, which presents the findings from our innovation partnerships with market participants. [ ] 12

Today, even the most advanced innovations in the area of retail payments - including those from Baltic banks and fintechs - struggle to cross national borders. Tomorrow, the digital euro, thanks to its wide acceptance as legal tender, will open borders for these solutions, strengthen competition, foster innovation and ensure Europe can shape the future of European payments on its own terms.

## Strengthening our resilience

The digital euro will strengthen European resilience. Payment systems are a vital part of our daily lives as utterly indispensable as other critical infrastructures like energy.

Digital payments are fast and convenient but they depend on the resilience of our digital infrastructure. If critical services fail, people expect public authorities to maintain continuity. This is not hypothetical: incidents like sabotage in the Baltic Sea remind us how fragile our systems can be.

Everyone in society has a part to play in strengthening resilience. It is a shared responsibility and, especially for central bankers, a top priority. [ ] 13

The digital euro, alongside physical cash, can take on a leading role in preserving Europe's resilience. It is not just a technological innovation - it is also a public good that will bolster Europe's strength, stability and adaptability under pressure.

The digital euro is designed with three critical features in mind. [ ] 14

First, its infrastructure will be distributed across at least three regions, each equipped with multiple servers. So in the face of a cyberattack or one of many other hypothetical crisis scenarios, digital euro payments can continue - disruptions should not bring the system to a standstill.

Second, the ECB will provide a dedicated digital euro app, which will let you switch seamlessly between providers. This means you will be able to continue using your digital euro even if some providers are hit by an outage.

Third, the digital euro will also function offline, adding another layer of security and reliability. Even if the internet is down, ATMs are out of order or you have no phone signal, you will still be able to pay with digital euro.

These features have been significantly improved by active contributions from several euro area countries, including the Baltic States. [ ]  Drawing on this rich source of expertise and experience also ensures that the digital euro harnesses best practices from all over Europe, which both reflects the foundational EU principle of unity through diversity and strengthens our ability to withstand major crises. 15

## Conclusion

At its core, our shared currency is a declaration: we choose unity over division, community over isolation and common destiny over fragmented paths.

This idea is embedded in every facet of what we do at the European Central Bank. It is at the very heart of our work on the digital euro: we are designing a safe, reliable and universally accessible form of central bank money for the digital age.

And as ECB President Christine Lagarde said earlier this month 'The digital euro is not just a means of payment; it is also a political statement concerning the sovereignty of Europe.' [ ] 16

The digital euro offers a digital form of the very same cash that we all use every day, from Lisbon to Tallinn. It would be a European solution based on European infrastructure. It can protect our freedom, our autonomy and our security. And it can make European payments more competitive and resilient.

European leaders highlighted this in their Euro Summit Statement in March. They emphasised that in a more fragmented and digital world, accelerating progress on a digital euro is key to supporting a competitive and resilient European payment system and contributing to Europe's economic security. [ ] 17

But a project of this scale cannot succeed if the ECB, the national central banks, the European Commission and European legislators work alone. It requires expertise, creativity and commitment from all stakeholders, especially the national communities who bring local insight and innovation from every corner of Europe.

Through close dialogue and active engagement at events like today's, we can shape a digital euro that truly simplifies everyday payments for Europeans and protects their freedom, autonomy and security. In doing so, we are not just shaping the future of payments - we are reaffirming Europe as a place where innovation serves the public good, where resilience meets opportunity and where our shared currency continues to unite us in an increasingly challenging world.

1.

Niinistö, S. (2025), ' ', Report by the Special Adviser to the President of the European Commission . Safer Together - Strengthening Europe's Civilian and Military Preparedness and Readiness

2.

See also Cipollone, P. (2024), ' ', The ECB Blog , ECB, 1 November, and Cipollone, P. (2024), ' ', The ECB Blog , ECB, 25 June. The digital euro: what's in it for you? Maintaining the freedom to choose how we pay

3.

An imagined community becomes real when people share values, perceive a common fate and feel bound together. The euro reinforces this, making the EU tangible and highlighting a shared destiny among its users. See Risse, T. (2003), 'The Euro between national and European identity', Journal of European Public Policy , Vol. 10, No 4, pp. 487-505.

4.

The Baltic States' reintegration into Europe was seen as a true homecoming. After regaining independence, they have framed their political identities in terms of the East-West divide, highlighting their deliberate alignment with European institutions and values. See Hülsse, R. (2006), 'Imagine the EU: the metaphorical construction of a supra-nationalist identity', Journal of International Relations and Development , Vol. 9, pp. 396-421.

5.

See Panetta, F. (2022), ' ', Lectio Magistralis on the occasion of the conferral of an honorary degree in Law by the University of Cassino and Southern Lazio, Cassino, 6 April. Europe's shared destiny, economics and the law

6.

See Buscha, F., Muller, D. and Page, L. (2017), 'Can a common currency foster a shared social identity across different nations? The case of the euro', European Economic Review , Vol. 100, pp. 318-336 and Negri, F., Nicoli, F. and Kuhn, T. (2020), 'Common currency, common identity? The impact of the Euro introduction on European identity', European Union Politics , Vol. 22 , No 1, pp. 114-132.

7.

Bergbauer, S., Hernborg, N., Jamet, J.-F. and Persson, E. (2020), 'The reputation of the euro and the European Central Bank: interlinked or disconnected?', Journal of European Public Policy , Vol. 27, No 8, pp. 1178-1194.

8.

See ECB (2025), ' ', press release, 15 July and Cipollone, P. (2025), ' ', The ECB Blog , ECB, 4 August. ECB launches design contest for future euro banknotes Making euro cash fit for the future

9.

See ECB (2024), , December. Study on the payment attitudes of consumers in the euro area (SPACE)

10.

See Cipollone, P. (2025), ' ', introductory statement at the Committee on Economic and Monetary Affairs of the European Parliament, Brussels, 14 July. The digital euro: legal tender in the digital age

11.

Cipollone, P. (2025), ' ', introductory statement at the Committee on Economic and Monetary Affairs of the European Parliament, Brussels, 8 April. Empowering Europe: boosting strategic autonomy through the digital euro

12.

See ECB (2025), , September and Cipollone, P. (2025), ' ', keynote speech at the conference 'The future of payments: CBDC, digital assets and digital capital markets', hosted by Bocconi University, the Centre for Economic Policy Research and the European Central Bank, Milan, 26 September. Digital euro innovation platform - Outcome report: pioneers and visionaries workstreams Preparing the future of payments and money: the role of research and innovation

13.

Cipollone, P. (2025), ' ', keynote speech at the Resilience Conference hosted by De Nederlandsche Bank, Amsterdam, 17 September. What resilience takes: strengthening the financial system in an era of heightened risk

14.

Cipollone, P. (2025), ' ', introductory statement at the Committee on Economic and Monetary Affairs of the European Parliament, Brussels, 4 September. The digital euro: ensuring resilience and inclusion in digital payments

15.

European Central Bank (2025), , 16 May. Digital euro - WP meeting on 15-16 May - ECB slide presentation Eurosystem analysis on resilience

Copyright 2025, European Central Bank

Lagarde, C. (2025), ' ', 19 September. Preliminary remarks during the press conference following the Eurogroup meeting in Copenhagen

17.

General Secretariat of the Council (2025), , Council of the European Union, Brussels, 20 March. Euro Summit meeting - Statement

Reproduction is permitted provided that the source is acknowledged.

Media contacts",Piero Cipollone
https://www.bis.org/review/r250929i.htm,Asahi Noguchi: Transformation of the global economy and developments in monetary policy,"Speech by Mr Asahi Noguchi, Member of the Policy Board of the Bank of Japan, at a meeting held by the Sapporo Chamber of Commerce and Industry, Sapporo, 29 September 2025.",2025-09-29 00:00:00,"

Bank  of  Japan

September 29, 2025

## Transformation of the Global Economy and Developments in Monetary Policy

Speech at a Meeting Held by the Sapporo Chamber of Commerce and Industry

## NOGUCHI Asahi

Member of the Policy Board

## Introduction

It is my pleasure to have the opportunity to speak at this meeting. In my speech today, I would like to offer my overview of how the focus of monetary policy of central banks, including the Bank of Japan, has changed to date in light of the global economic environment, which has undergone a major transformation in the wake of the Global Financial Crisis (GFC) and the COVID-19 pandemic. Since April 2021, I have been involved in monetary policy conduct as a Policy Board member of the Bank. Before that, as an academic researcher, I was engaged in analyzing monetary policy and other macroeconomic policy measures. Today, I will talk about developments in monetary policy from the past and into the future by trying to get back to a scholarly, somewhat holistic point of view.

Triggered mainly by the GFC from  2008  and  the COVID-19  pandemic from  2020, the monetary policy of major central banks shifted dramatically from conventional policy, in which the central bank guides the interest rate as a policy tool, to unconventional policy, such as quantitative easing (QE). To come right to the point, the changes brought about by this policy shift to a considerable extent have been irreversible. Although many major central banks have returned from  unconventional  policy to  conventional  policy,  their policy framework is very different from what it looked like before the GFC. That is, these central banks  are now conducting  monetary  policy in  the  context  of reserve balances that are significantly larger than before the GFC.

The crucial thing is that, despite such changes in policy measures, the established role of a central bank -- which is to ensure sustainable price stability by guiding the policy interest rate -- is not undermined. In response to the globally high inflation in the wake of the pandemic, many central banks in the United States and Europe discontinued unconventional policy and actively raised their policy interest rates, successfully containing inflation on the whole. This suggests that, in the end, adjusting policy interest rates is an effective tool in maintaining price stability, and that central banks' large reserve balances do not impede this process.

Turning to the Bank of Japan, at the March 2024 Monetary Policy Meeting, the Bank changed its unconventional policy -- namely, the framework of Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control and the negative interest rate policy -- and returned

to conventional policy, in which it guides the policy interest rate as a primary policy tool. The Bank made this decision because it judged at that point that it was now within sight that the price stability target of 2 percent would be achieved in a sustainable and stable manner. The Bank also raised the policy interest rate in July 2024 and again in January 2025, judging that the likelihood of achieving the target was increasing.

For a long time, prices and wages barely rose in Japan despite improvements in economic conditions.  However,  the  impact  of  global  inflation following  the pandemic  spread throughout the country in the form of higher import prices, causing Japan's economy to be struck with the kind of high inflation it had not experienced for a prolonged period. As a result, wages -- which tended to decline and not rise after the collapse of the bubble economy in the early  1990s -- have recorded their highest growth since the bubble period. This  is partly because, while labor market conditions had begun to tighten due to labor shortages before the pandemic, they have now grown tighter across a wider range of industries following the pandemic. These developments indicate that Japan's economy is transitioning from a very unique  economy with a ""zero  norm"" --which  assumes  that both prices  and  wages are unchanged -- back to a normal, growing economy -- where both prices and wages continue to rise in interaction with each other.

Another change in monetary policy was that the Bank in July 2024 decided on a guideline for reducing its purchases of Japanese government bonds (JGBs) for the period until March 2026. Subsequently, the Bank in June 2025 decided on a guideline for the period until March 2027. This  means that the Bank will slowly reduce its balance sheet, which expanded with the conduct of unconventional policy, to restore the functioning of the JGB market. I personally think the Bank should take sufficient time in reducing its JGB purchases to minimize any disruptive impact on the market. Going slowly is possible because, as I mentioned earlier, the large size of the balance sheet will not hinder the conduct of monetary policy aimed at price stability. Rather, under the current policy framework, the smooth conduct of monetary policy necessitates that the Bank's balance sheet remain at a decent size.

Especially since April 2025, the global economy has faced large downside risks arising from U.S. tariff policy. It is not yet clear at what point and to what extent these risks will be resolved.

On the other hand, various economic indicators for Japan show steady progress in achieving the 2 percent price stability target. This suggests that the need to adjust the policy interest rate is increasing more than ever. Put differently, in terms of making policy decisions, upside risks to prices and economic activity in Japan are currently outweighing the downside risks. In this sense, it can be said that monetary policy in Japan is now entering a phase in which a careful assessment of the situation is necessary.

## I. Developments in the Global Economy and Macroeconomic Policy Since the 2000s A. From Economic Globalization to Deglobalization

In the early 2000s, the global economy entered an era marked by widespread globalization, in  the  sense  of  the  expansion  of  cross-border  economic  activity.  This  trend  was  driven particularly  by  emerging  economies  such as  China, India,  Russia, and  Brazil. These  four countries came to be known as the BRICs after an acronym coined by Goldman Sachs in a 2001  report. 1 Moreover,  Europe  saw  the  introduction  of  a  single  currency,  the  euro,  in January  1999,  with  banknotes  and  coins  entering  circulation  in  January  2002.  This represented deeper economic integration among European countries.

A major catalyst for reversing this trend was the GFC, which began with the collapse of the U.S. investment bank Lehman Brothers in September 2008. The underlying cause was the U.S. subprime mortgage problem, triggered by a reversal of credit for mortgages extended to low-income borrowers,  which  had  expanded  unsustainably. The  resulting  financial  shock spread  to  other  countries,  setting  in  motion  what  has  been  called  a  ""once-in-a-century"" economic crisis comparable only to the Great Depression.

Countries around the world subsequently experienced rapid economic contraction, and their public finances were hit hard. This is because an economic downturn typically reduces tax revenues while driving up government spending. In 2009, concerns surfaced about Greece, which had long-standing fiscal  problems. These  concerns  soon  spread  to  other  European countries, and by 2010 had grown into what became known as the European sovereign debt

1 Jim O'Neill, ""Building Better Global Economic BRICs,"" Goldman Sachs Global Economics Paper , no.  66  (November  2001), https://www.goldmansachs.com/pdfs/insights/archive/archive-pdfs/buildbetter-brics.pdf.

crisis.  The  five  euro  area  countries  that  were  seen  as  facing  a  particularly  severe  fiscal situation were Portugal, Italy, Greece, Spain, and Ireland. The severity of the crisis was such that, at one point, it was feared that the euro might collapse.

As I will  discuss later,  governments and central banks across the world responded to the financial and economic crisis that began in 2008 with a variety of policy measures. As a result, some economies began to gradually recover from the 2010s onward. The pace of recovery was extremely slow, however, and the global economy as a whole increasingly appeared to be in what former U.S. Treasury Secretary Lawrence Summers termed ""secular stagnation."" 2

Against this background, the process of globalization began to reverse, and the trend toward deglobalization gradually gathered strength. In June 2016, the United Kingdom in a national referendum voted to leave the European Union. In the United States, concerns about the threat posed by China gained momentum and, in October 2018, then-Vice President Mike Pence delivered a speech marking the onset of what has since come to be called the ""new Cold War"" between the United States and China. Most recently, the second Trump administration, which took  office  in  January  2025,  has  introduced a new tariff  policy that poses a fundamental challenge to the postwar international trade system advocating the expansion of free trade.

## B. Macroeconomic Policy in the Wake of the GFC

Amid  these  developments  in  the  global  economy,  the  most  significant  watershed  in  the evolution of macroeconomic policy, including monetary policy, was the GFC that began in 2008. Prior to this crisis, the global economy -- or more specifically, advanced economies from the mid-1980s to the early 2000s -- experienced a period of relative stability in both output  and  prices,  a  period  known  as  the  Great  Moderation. 3 Regarding  the  conduct  of macroeconomic  policy,  the  established  approach  had  been  that  the  role  of  ensuring macroeconomic  stability --such  as  stability  in  prices,  employment,  and  income --fell primarily to conventional monetary policy, while the primary role of fiscal policy was public

2 View Summers' recorded remarks at a panel discussion at the Fourteenth Jacques Polak Annual Research Conference held by the International Monetary Fund in Washington D.C., November 8, 2013, 1:32:54, https://www.imf.org/en/Videos/view?vid=2821294542001.

3 Ben  Bernanke,  ""The  Great  Moderation,""  remarks  at  the  meetings  of  the Eastern  Economic Association in Washington D.C., February 20, 2004.

goods provision and income redistribution. However, the ""once-in-a-century"" shock of the GFC forced governments and central banks to adopt entirely new approaches.

One such approach was the full-fledged shift to unconventional monetary policy. Until then, monetary policy had relied solely on guiding the money market rate as the policy interest rate. That is, to realize stable growth in prices and employment, central banks lowered their policy interest  rates  when  deterioration  in economic  conditions led  to  a  decline  in  prices  and employment, and raised policy interest rates in the opposite case. However, confronted by rapid economic contraction following the GFC, many central banks were forced to lower their policy interest rates to around 0 percent (Chart 1). These central banks then embarked on a new dimension of monetary policy by expanding their purchases of various assets, including long-term government bonds. This unconventional monetary policy measure of making largescale asset purchases is generally known as quantitative easing or QE. Incidentally, the Bank of  Japan  pioneered  this  QE  policy and  implemented  it from  2001  to  2006  to  overcome deflation in the country.

The primary objective of unconventional monetary policy, typified by QE, was to purchase more assets and thereby apply an easing effect to overall financial conditions, including real long-term interest rates. Furthermore, some central banks -- including the Bank of Japan -introduced a negative interest rate policy, under which a negative interest rate is applied to current  account  balances  held  by  financial  institutions  at  a  central  bank, and yield  curve control, in which they controlled not only short-term but also longer-term interest rates. It can be said that, similar to QE, these policy measures were aimed at an enhanced easing of overall financial conditions. In this regard, unconventional monetary policy differs from conventional monetary policy, because the latter focuses on the effects generated through the transmission of interest rate changes in the money market to other financial markets.

The second distinctive approach of macroeconomic policy in the wake of the GFC was that, alongside unconventional monetary policy, many countries and regions once again began implementing fiscal policy as an economic stimulus measure. While there were exceptions, such  as  Japan  in  the  1990s,  fiscal policy  had  long  been  largely  absent  from  the  global macroeconomic toolkit. Immediately after the  GFC, however,  many  countries introduced

fiscal  stimulus  measures,  such  as  the American  Recovery  and  Reinvestment Act  (2009) implemented by the Obama administration in the United States. This marked the return of fiscal policy as an integral part of macroeconomic policy.

However, this coordination of fiscal and monetary policy aimed at overcoming economic stagnation was quite short-lived. The reason for this is that, after fiscal concerns arose in Greece in 2009 and escalated into the European sovereign debt crisis, many countries began to turn to austerity measures out of fear of further deterioration in their fiscal situation. The upshot was that, despite patient monetary easing by central banks, escaping from low growth and  low  inflation  proved  difficult,  and  extremely  low  nominal  interest  rates  became entrenched in many countries and regions. In Europe, for instance, not only policy interest rates but also long-term interest rates were occasionally negative in the second half of the 2010s  (Chart  2).  This  was  the  clearest  manifestation  of  what  Summers  termed  ""secular stagnation."" In the end, the resumption of macroeconomic coordination had to wait until the onset of the COVID-19 pandemic.

## C. Global Inflation Stemming from the COVID-19 Pandemic

The pandemic that first broke out in 2020 utterly transformed secular stagnation in the global economy. Initially, the pandemic triggered a sharp decline in production activity -- the largest such decline since the GFC. Conditions then reversed, however, with rapid inflation emerging across countries and regions. In response, many central banks in the United States and Europe began implementing strong monetary tightening measures in 2022, with a view to curbing high inflation and thereby achieving their inflation targets. From around mid-2024, given their progress in bringing inflation down toward the target rate, these central banks gradually lowered policy interest rates to appropriate levels.

When the pandemic started to spread, governments first imposed restrictions on economic activity  to  contain  infections.  Income  and  consumption  in  each  country  decreased  and inflation  slowed  as  a  result,  since  many  of  the  infection  prevention  measures  not  only intensified supply-side constraints but also reduced demand. As economic activity began to resume in spring 2021, however, prices started to rise in many countries and regions. Two factors  were  at  work  here:  supply-side  constraints  and  excess  savings.  Specifically,  the

contraction in economic activity brought about by the pandemic created supply bottlenecks in different places through disruptions in supply chains and logistics networks; however, since these bottlenecks took time to resolve, supply-side constraints materialized once economic activity  resumed.  In  addition,  curbed  consumption  and  public  support  led  households  to accumulate savings during the pandemic, and these excess savings fueled a surge in pent-up demand after the resumption of economic activity. This surge in demand in the absence of a normal supply capacity inevitably drove a sharp acceleration in inflation worldwide.

Many experts and policymakers initially regarded high inflation in the post-pandemic period as  merely  a  temporary  phenomenon  that  would  subside  naturally  once  pent-up  demand dissipated and supply-side constraints waned. In reality, subsequent developments unfolded quite differently. From 2021 to 2022, consumer price inflation reached 9 percent in the United States, 11 percent in the United Kingdom, and 10 percent in the euro area. Many countries and regions faced their highest level of inflation since the early 1980s (Chart 3).

Essentially, the reason inflation was this high was excess demand at the macroeconomic level --that  is,  aggregate  demand  exceeded  aggregate  supply  at  full  employment.  This  was particularly evident in the U.S. economy. In the United States, the unemployment rate, which had risen sharply during the pandemic, started to decline in 2021, whereas the job vacancy rate soared. As a result, the ratio of job openings to unemployment reached roughly 2 (Chart 4). The fact that the average of this ratio since the 2000s has been around 0.7 implies that such tight labor market conditions had hardly ever been seen in the United States. Firms facing  job  vacancies  typically  try  to  secure  a  workforce  by  raising  wages.  In  the  postpandemic period, however, wage hikes instead set off an upswell in employees leaving their jobs in search of higher wages, a phenomenon known as the Great Resignation. Labor market conditions in the United States tightened further in consequence, propelling wage growth to its highest rate since the early 1980s, when prices and wages were locked in an upward spiral (Chart 5).

Compared to the United States, inflation in Europe was less demand-driven and more cost push-driven. Inflation was mainly caused by rising energy prices, partly reflecting the fact that Russia's invasion of Ukraine in February 2022 brought about an energy supply shortage

in  neighboring  Europe.  That  said,  even  in  Europe,  excess  demand  led  to  a  significant tightening of labor market conditions. Many  European  countries reached near-full employment by 2022 and,  in  some  countries,  there  were  concerns  about  excessive  wage increases.  In  the  United  Kingdom,  for  example,  wage  growth  at  one  point  marked  a historically  high  level  of  over  7  percent;  services  prices,  which  are  susceptible  to  wage increases, rose in turn, leading to persistent high inflation that has lasted to the present day (Chart 6).

## II. Japan's Economy Making Progress in Overcoming the Zero Norm A. Exiting from Prolonged Deflation and Zero Inflation

The global economy first shifted from secular stagnation, in which the economy experienced low inflation and low interest rates in the wake of the GFC, to a temporary deceleration phase following the COVID-19 pandemic, and then to what experts call a high-pressure economy, in which high inflation rates and low unemployment rates coexist. 4 This shift in the global economic  environment  unquestionably  affected  Japan's  economy.  Japan,  ahead  of  other economies, had already fallen into secular stagnation in the 1990s, and the consequent rigidity in its economic structure developed into a semi-permanent condition, reflected in people's beliefs and in the social norm. However, intense pressure from global inflation ushered in by the pandemic shattered such beliefs and upset the norm, in the sense that it eliminated the persistent rigidity in prices and wages, although this was accompanied by the pain of inflation.

Japan's economy faltered for a significantly protracted period after the collapse of the bubble economy in the early 1990s. In particular, following the financial crisis in the second half of the 1990s, the economy fell into severe deflation where unemployment rates surged and both prices and wages continued to decline. In the first half of the 2000s, the economy picked up somewhat, buoyed in part by the effects of the U.S. subprime bubble, but deflation was not dispelled. In the wake of the GFC in 2008, the economy once again experienced a serious surge in unemployment rates and a decline in prices and wages. The Bank started its large-

4 Arthur M. Okun, ""Upward Mobility in a High-Pressure Economy,"" Brookings Papers on Economic Activit y,  no.1, The  Johns  Hopkins University  Press  (1973),  and  Janet  L. Yellen,  ""Macroeconomic Research after the Crisis,"" remarks at the 60th annual economic conference sponsored by the Federal Reserve Bank of Boston titled ""The Elusive 'Great' Recovery: Causes and Implications for Future Business Cycle Dynamics,"" October 14, 2016.

scale  monetary easing policy in  2013,  against the  background  of  ""Abenomics""  under  the second  administration  of then-Prime  Minister  Abe.  Aided  by  the  tailwind  of  moderate recovery in the global economy, this easing policy contributed significantly to improvement in  Japan's economic conditions, especially the recovery in employment (Chart 7). Japan's economy thereby managed to dispel deflation, in the sense of a sustained decline in prices. Nevertheless, the policy target of ""2 percent in terms of the year-on-year rate of change in the consumer price index,"" as spelled out in the joint statement issued by the government and the Bank in January 2013, was ultimately not achieved in the 2010s.

As I explained, before the onset of the pandemic, prices and wages declined and did not increase  in  Japan's  economy  for  nearly  30  years.  In  a  normal  economy,  when  economic conditions improve, employment expands, and labor market conditions tighten in the way that they did in Japan during the Abenomics period, prices and wages rise, and conversely fall when economic conditions worsen. This economic cycle operates consistently overseas, and  did  in  Japan  as  well  through  the  1980s,  before  the  collapse  of  the  bubble  economy. Subsequently, however, a very unique situation became entrenched in Japan, in which prices and wages ceased rising, almost as if frozen, despite an improvement in economic conditions.

In a complete about-face from that situation, Japan's economy is currently experiencing high inflation for the first time in decades. The direct cause of this turnaround has been the strong cost-push pressure on domestic prices, resulting from  a surge in  import prices caused by global inflation in the wake of the pandemic. If this were the sole cause, however, inflation would have subsided at the point where the surge in import prices abated. In fact, cost-push inflation in the past, such as what was seen in 2008, was only temporary. At present, however, what we see is that the rate of increase in the consumer price index (CPI) has remained high despite the decline in yen-denominated import prices, with the sizable contribution of the increase  in  rice  prices,  which  is  a  special  factor  (Chart  8).  The  current  high  inflation  is therefore probably due to a major shift in firms' price- and wage-setting behavior.

## B. How the Zero Norm with Regard to Prices and Wages Emerged

Now, let me explain the background as to why prices and wages remained unchanged in Japan's  economy.  The  cause  may  be  that,  through  the  experience  of  deflation  and  zero

inflation that started in the 1990s, the widespread belief that prices and wages do not rise had become deeply entrenched among firms and households. When people come to believe that prices and wages will not rise, they in fact become less likely to do so. This is what is referred to as  the zero  norm  with  regard to  prices and wages. 5 People's perceptions of prices and wages exert a significant influence on their developments.

The  zero  norm  with  regard  to  prices  and  wages  implies  that  firms  actually  continued  to restrain prices and wages. They did so because, for them, it was a rational business strategy. In a sense, it may be natural for firms to restrain wages as much as possible, as wages basically represent costs for firms. As for prices, although it could be considered that firms in general would raise selling prices whenever they have the chance, they in fact often avoid raising prices as much as possible even when faced with a certain degree of higher costs or stronger demand. One reason for this is that price hikes carry a high possibility of leading directly to a  significant decline in sales volume. While cutting prices tends to induce competitors to lower their prices as well, price hikes do not necessarily draw competitors to follow suit. Another reason to avoid raising prices is to retain frequent customers; since consumers' daily purchasing behavior is by and large routine, price hikes may trigger customer defection. 6

As I have explained, even if demand or costs increase somewhat, under certain circumstances firms intentionally ignore the increase and choose to keep selling prices unchanged. To put it differently, firms opt to raise prices only when they are certain that the price hikes will not significantly reduce sales volume, or when costs increase to the extent that the firms cannot secure  adequate  profits  without  passing  on  the  increase.  During  the  period  of  secular

5 The price and wage norm refers to the implicit beliefs people have about how prices and wages evolve. The concept was first proposed in the early 1980s by the American economist Arthur Okun. See Arthur M. Okun, Prices and Quantities: A Macroeconomic Analysis , The Brookings Institution (1981).

6 Such  cases  of  firms  being  averse  to  price  hikes  suggest  that the  downward-sloping  individual demand curve they face is kinked at the prevailing prices. The conventional explanation for this kinked demand is the asymmetric behavior of competitors. Okun, on the other hand, argues that the reason why  firms  are  more  averse  to  raising  prices  than  lowering  them  is  the  fear  of  damaging  their relationship of trust with frequent customers. Meanwhile, Takashi Negishi attributes this aversion to asymmetry in the communication of information to customers. See Okun, op. cit, ch. 4, and Negishi, T., Microeconomic Foundations of Keynesian Macroeconomics , North-Holland Publishing Co. (1979).

stagnation after the collapse of the bubble economy, the mindset of prioritizing cost-cutting spread among Japanese firms, as price hikes would have directly resulted in a decrease in sales volume or profits. This entrenched mindset therefore drove firms to avoid price hikes for a prolonged period.

It should be noted that Japanese firms remained capable of maintaining selling prices because they were able to continue restraining wage costs. As the ultimate objective of firms is to maximize profits, they attempt to minimize wage costs. This is not always possible, however, because excessively restraining wages may make it difficult to recruit new employees or may cause an exodus of existing employees. Both situations tend to  happen more often when employment  increases  on  the  whole  due  to  economic  improvement  and  labor  market conditions are tight. Thus, firms wishing to retain a sufficient workforce raise wages in line with the actual trend in the labor market. Then, in such cases, unless they can absorb the cost of  wage  hikes  by  improving  productivity,  firms  will  have  no  choice  but  to  pass  on  cost increases to selling prices, thereby elevating the prices of their products.

This brings us to the point that the reason why CPI inflation remained extremely low in Japan from the 1990s until quite recently is that many firms were able to restrain wages, which allowed them to continue to avoid raising selling prices. 7 In Japan's economy, it was not until near the second half of the 2010s that employment increased and labor market conditions started tightening. The labor market prior to that continued to be a buyer's market (Chart 7). In particular, there was a considerable imbalance in labor market conditions for people who were recruited during the so-called employment ice age, from the second half of the 1990s through  the  2000s.  During  that  period,  many  new  workers  were  shut  out  of  regular employment. This suggests that  firms were  able  to secure  a  sufficient  workforce  without raising wages.

Another reason why Japan's wage growth rate remained at around 0 percent lies in the unique structure of its employment system. Japan's labor market can be broadly divided into two

7 This kind of wage restraint is referred to as wage markdowns, as contrasted with price markups. See Aoki, K., Hogen, Y., and Takatomi, K., ""Price Markups and Wage Setting Behavior of Japanese Firms,"" Bank of Japan Working Paper Series , no. 23-E-5 (April 2023).

categories: regular employment that is premised on long-term employment and non-regular employment that is premised on temporary employment. Since it is difficult to dismiss regular employees, faced with secular stagnation after the collapse of the bubble economy, many firms reduced the new recruitment of regular employees and instead increased that of nonregular employees. At the same time, those firms embarked on an employment approach to restrain  the  wages of  existing  regular employees as much as possible. Their management strategy of retaining regular employees in exchange for wage freezes was generally accepted by labor unions. This is how the  unique situation in  which prices and wages barely rose became entrenched in Japan's economy for an extremely long period from the mid-1990s.

## C. Breaking the Zero Norm

The zero norm with regard to prices does not simply mean that the inflation rate -- meaning the average rate of increase in prices of various goods and services -- is close to 0 percent; it refers to the severity of price rigidity -- in that prices of individual items barely change. Indeed, if the rates of change in individual prices are 0 percent, the average will also be 0 percent, so the inflation rate is generally low in an economy where price rigidity is strong. On the other hand, even if the average rate of price increase is around 0 percent, individual prices of goods and services could be changing flexibly in line with supply and demand in each market. Thus, price rigidity is not always strong when the inflation rate is around 0 percent. To grasp the degree of price rigidity more accurately, it is necessary to examine not only the average rate of price increase, but also the price change distribution, particularly the share of items for which prices are unchanged.

The unusual nature of Japan's economy with the zero norm, which persisted from the second half of the 1990s, can be confirmed by comparing its price change distribution with that of other economies at the time. For example, when comparing the price change distribution by item  between  Japan  and  the  United  States  in  10-year  increments,  there  is  a  significant difference in both the position of the peak of the distribution and its dispersion, particularly from the 2000s (Chart 9). Specifically, in Japan, many items cluster around the point where the rate of price change is 0 percent, and the degree of concentration is high. By contrast, in the United States, the largest number of items cluster around the rate of price increase of about 2 percent, but the degree of concentration is low, and the overall dispersion of price changes

is significant. In other words, price rigidity clearly increased to a striking degree in Japan's economy.

It is worth noting that, from the late 1990s, price rigidity increased in Japan mainly in services and housing rent, not in goods (Chart 10). In this regard, since wages likely represent the majority of the costs of providing services, this rigidity of services prices can be interpreted as reflecting the fact that wages stopped rising in the country. While it is rare for there to be no change in wages or housing rent as in this case, these elements are known to be essentially stickier than goods prices. This is because, in terms of employment and the housing rental business, it is particularly costly to match jobseekers to jobs and potential tenants to housing. Apart from part-time work and other non-regular forms of employment, considerable costs and time are required for jobseekers to find a job that meets their criteria and for firms to search  for  necessary  human  resources.  As  both  employers  and  employees  try  to  avoid repeatedly  incurring  these  costs,  employment  relationships  tend  to  be  continuous.  This implies that, in the labor market, the mechanism whereby supply and demand are adjusted through changes in wages does not function well, or only sluggishly. The same can be said of housing rent. Basically, what had been essentially sluggish changes in wages and housing rent hardly occurred in Japan from the late 1990s.

The zero norm with regard to prices and wages had been as solid as bedrock in Japan, but is now finally about to be broken. This is particularly clear from the change in shape of the price change distribution. While there is far less clustering around 0 percent compared to the prepandemic period, the overall distribution has shifted to the right and the 2-4 percent range has become thicker (Chart 11). It can be said that the distribution is currently returning to the original shape seen around 1990, when price rigidity was not yet strong.

Moreover, although the rigidity of housing rent is still strong, the rigidity of services prices is gradually weakening (Charts 10 and 11). This trend in services prices is likely to continue, considering that the wage growth rate is close to that in the bubble period, as wage increases have gained much more momentum and have taken root much more firmly, driven by the annual spring labor-management wage negotiations over the past few years (Chart 12). The rate of increase in the services producer price index (SPPI) has begun to remain stable at

around 3 percent; this is particularly pronounced in services with a high labor cost ratio, where wages account for a large share of total costs (Chart 13). Going forward, it will be important for this trend to steadily expand to small and medium-sized firms and regional economies, and for the mechanism in which wages and prices continue to rise moderately in interaction with each other to be established as a new norm.

## III. Conduct of Monetary Policy After the COVID-19 Pandemic

## A. Macroeconomic Policy Responses to the Pandemic and Lessons Learned

As  the  global  economy  is  finally  making  progress  in  overcoming  post-pandemic  high inflation,  it  faces  a  new  risk --U.S.  tariff  policy,  the  outcome  of  which  is  being  closely watched.  Despite  the  significant  uncertainty  posed  by this  and  other factors,  the core challenge for many governments and central banks is the same: how to maintain near-full employment while keeping inflation rates close to the target level. Regarding the conduct of monetary policy, major central banks face a common challenge: while monitoring economic conditions, they must adjust policy interest rates appropriately and, at the same time, reduce their balance sheets, which expanded as a result of unconventional policy, to an appropriate level.  This  means  that  central  banks  all have the task  of  managing  balance  sheets  that expanded significantly following the GFC while smoothly fulfilling their traditional mandate of maintaining price stability through policy interest rate adjustments.

Let us remind ourselves why central banks' balance sheets expanded to their current levels and what the significance of this expansion is. In essence, the expansion was the result of policy measures adopted to support economies that were shrinking due to the GFC and the pandemic,  and  it  can  be  assessed  that these measures certainly  achieved  their  purpose, considering that they served a particularly significant role in responding to the pandemic.

When COVID-19 broke out across the world, governments imposed restrictions on economic activity to prevent the spread of infection. In many cases, this gave rise to the need for income support for individuals and firms, which caused fiscal deficits to expand rapidly. At the same time, to support rapidly shrinking economies, central banks such as in the United States and Europe halted monetary tightening -- which they had embarked on as their economies were recovering  from  the  downturn  triggered  by  the  GFC --and  instead  reverted  to  monetary

easing. However, because inflation had been low, most central banks in the United States and Europe had little room to lower interest rates. Many monetary easing measures inevitably took the form of QE through the expansion of purchases of government bonds and other assets. As a result, central banks' balance sheets expanded rapidly once again (Chart 14).

In other words, the pandemic ultimately resulted in coordination between fiscal and monetary policy on a global scale, through fiscal expansion by governments and monetary easing by central banks. This fiscal-monetary policy mix further amplified the demand-boosting effect of fiscal expansion by holding down interest rates through monetary easing. In this context, Athanasios Orphanides -- economist and former governor of the Central Bank of Cyprus -noted that, with extraordinary fiscal expansions by governments during the pandemic, the expansion  of  central  banks'  balance sheets  through  asset  purchases  kept  the  cost  of government  debt  finance  low,  thereby  helping  to  both  prevent  economic  stagnation  and support reflation of the economy. 8

The  expansionary  fiscal  policies  in  tandem  with  monetary  easing implemented  in  many countries during the pandemic presumably also led to the expansion of asset balances in the private sector. That is, when a government increases its debt, those liabilities become assets for the private sector, and unless the government achieves a fiscal surplus, the assets will remain, even if the asset holders change. This means that as long as private economic entities are  non-Ricardian, in the sense that  they do not expect the value of the assets to decline through future tax increases, part of the excess savings accumulated during the pandemic should be regarded as assets remaining permanently in the private sector. Although the stock effect of government debt may have gradually declined, in that the real value of these asset balances  subsequently  diminished  due  to  inflation,  the  expansion  of  assets  in  the  private sector surely contributed to a certain extent to post-pandemic economic recovery. 9

8 Athanasios Orphanides, ""The Power of Central Bank Balance Sheets,"" IMES Discussion Paper Series , no. 2021-E-10, Institute for Monetary and Economic Studies, Bank of Japan (August 2021). 9 The effect of the opposite situation, in which deflation promotes consumption through a rise in the

real value of assets, is known as the Pigou effect, taken from Arthur Cecil Pigou, who first proposed this theory.

Provided that their purpose was to support and revive the economy, macroeconomic policy responses to the pandemic can be considered to have been quite successful. This is because the  coordination  of  fiscal  and  monetary  policy  functioned  fully,  as  I  described.  Similar macroeconomic coordination was achieved temporarily after the GFC, but its impact was limited, since many countries and regions turned to fiscal austerity following the European sovereign debt crisis. As a result, subsequently the global economy long remained mired in a state of secular stagnation with low growth, low inflation, and low interest rates.

The lesson here is that we should not have underestimated the effects of macroeconomic coordination implemented after the pandemic's outbreak; the subsequent surge in inflation seen mainly in the United States and Europe indicates that the coordinated policies were actually far more effective in boosting demand than originally anticipated. Until this high inflation  materialized,  many  experts  and  policymakers  paid  little  attention  to  the  risk  of inflation, being more concerned about the risk of deflation due to the pandemic. Even after inflation picked up, it was initially assumed to be a temporary phenomenon. This may have been because many experts remained firmly wedded to the secular stagnation hypothesis that low growth and low inflation cannot be reversed through macroeconomic policy.

## B. A New Stage of Conventional Monetary Policy

Once it became clear that post-pandemic high inflation was not merely temporary, central banks  in  the  United  States  and  Europe  rapidly  shifted their  monetary  policy  to  contain inflation. That is, they discontinued QE and returned to the conventional policy of raising policy interest rates. Globally, central banks kept interest rates high by means of policy rate hikes over a period of roughly two years, from around spring 2022 to around summer 2024, although the period in question varied by country and region.

Central banks, including those in the United States and Europe, seem to have transitioned seamlessly from unconventional to conventional policy, but how was this possible? This is an  important  issue,  since  the  ""exit  problem"" --that  is,  the  concern  that,  while  adopting unconventional monetary policy was easy, exiting from it might be difficult -- had long been a topic of debate among experts. Reality has shown, however, that the transition itself did not

pose any particular challenges: many central banks, such as those in the United States and Europe, steadily raised policy interest rates, and inflation was indeed contained (Chart 15).

The reason the transition in the monetary policy regimes was so smooth is that the way central banks adjusted policy interest rates differed substantially before and after the introduction of unconventional policy. Before the introduction, the banks controlled the money market rate as  the  policy  interest  rate  by  adjusting  the  amount  of  funds  through  daily  money  market operations. To guide the money market rate toward the target level, reserve balances held by financial  institutions at  the  central  bank  were  kept  close  to  the  minimum  needed. This  is because, if reserve balances exceed the required amount, there will be a surplus of funds in the market, causing the money market rate to fall below the target level.

Following the outbreak of the GFC in 2008, the U.S. Federal Reserve (FRB) and the Bank of England (BOE) were among the first to implement QE. In April 2013, the Bank of Japan introduced QQE as part of its large-scale monetary easing policy. Moreover, the European Central Bank (ECB), which had already implemented a negative interest rate policy, began full-fledged QE in March 2015. After the onset of the pandemic in 2020, central banks in Canada, Australia, New Zealand, and other countries likewise began QE. As a result of their asset purchases, the reserve balances and balance sheets of central banks expanded (Chart 14). Therefore, to raise policy interest rates in the same manner as they did prior to QE, central banks need to return their reserve balances close to pre-QE levels by selling assets. However, selling assets on such a scale all at once carries extremely high risks, as it could disrupt the financial markets.

This led central banks to adopt the approach of controlling policy interest rates by setting and then raising or lowering the interest rate applied to reserve balances -- that is, the interest rate on current account balances held by financial institutions at the central bank -- and in that way adjusting the money market rate as the policy interest rate. 10 If a central bank pays a certain amount of interest on reserve balances, much of the excess funds held by financial

10 In some countries and regions, financial institutions are required to deposit a certain amount of reserves at the central bank. In many of these cases, including in Japan, the interest rate is only applied to excess reserves. However, for the sake of simplicity, this speech assumes that the interest rate is applied to the total amount of reserve balances.

institutions will presumably be absorbed into reserve balances through interbank lending and borrowing,  thus  preventing  the  money  market  rate  from  falling  significantly  below  the interest rate on reserve balances. In practice, the lower bound on the money market rate is slightly below the interest rate on reserve balances, on account of costs for the intermediation of funds among financial institutions and other factors (Chart 16). The point is that, if a central bank intends to adjust the money market rate as the policy interest rate, it simply needs to adjust the interest rate on reserve balances, rather than adjust the supply of funds.

Adopting this approach, the FRB raised its policy interest rate in December 2015 for the first time  since  halting  QE.  Following  the  pandemic,  other  central  banks  also  ended  QE  and returned to interest rate policy, similarly taking the approach of adjusting policy interest rates by guiding the interest rate on reserve balances. In that sense, this new approach to controlling policy interest rates has spread rapidly among major central banks and is now one of their standard methods.

It is important to note that, while this current standard method may be novel, it is essentially a  conventional  monetary  policy  measure,  in  that  it  seeks  to  ensure  price  and  economic stability by adjusting the policy interest rate. In the history of economic thought, the role of interest rate adjustments in price stability is said to have been first proposed by the British economist Henry Thornton, who was active around the beginning of the 19th century. Back then, however, the BOE -- which had begun to function in practice as a central bank -- set the de  facto  policy  rate  mainly  through  the  discounting  of  commercial  bills,  and  Thornton's discussion of monetary policy was based on this premise. 11 In other words, it is natural for specific methods of monetary policy conduct to evolve over time.

## C. Basic Concept of Balance Sheet Policy

As I have described, under the current policy regime, unlike before the GFC, the amount of a  central  bank's  reserve  balances  and the  size  of its  balance  sheet  do  not  directly  impose restrictions on its monetary policy. Large reserve balances or a large balance sheet does not make  it  more  difficult  to  contain  inflation  through  monetary  tightening.  This  is  because raising the interest rate on reserve balances can serve as a way to tighten monetary policy.

11 Henry Thornton, An Enquiry into the Nature and Effects of the Paper Credit of Great Britain (1802).

On the other hand, this does not mean that it is appropriate for a central bank to maintain an excessively large balance sheet. That is, a central bank is allowed to intervene in markets only to the extent that this is necessary for fulfilling its basic mandate of maintaining price and financial market stability. In other circumstances, it is preferable for the central bank to be market-neutral, meaning it should exert as little influence on the markets as possible. From this perspective, a central bank with an excessively large balance sheet should reduce the amount outstanding of its assets with due consideration to market stability, and thus leave the determination of asset prices to the markets as much as possible.

That said, in the process of reducing the balance sheet, a central bank must be most careful not to impede the core component of monetary policy, namely, controlling the money market rate. This concern is not merely hypothetical: in 2019, when the United States was in the midst  of  quantitative  tightening,  money  market  rates  actually  rose  sharply  (Chart  17). Confronted with this situation,  the  FRB attempted to  stabilize  the  market  by  temporarily supplying liquidity and ultimately halted quantitative tightening altogether.

This experience demonstrates that, when adopting a monetary policy approach that involves guiding the interest rate on reserve balances as a policy tool, a central bank must carefully monitor whether it holds a necessary amount of reserve balances to adequately control the money market rate. When the interest rate on reserve balances rises, financial institutions profit  more  from  holding funds  in  central  bank  current  accounts. Thus,  their  demand  for reserves, or the amount of funds they seek to hold in the current accounts, increases. Moreover, uncertainties arise regarding financial institutions' demand for reserves, as such demand is influenced  by,  for  example,  regulatory  requirements or market  structures. Therefore,  if  a central bank engages in excessive quantitative tightening and reduces the supply of reserves too much relative to demand, it may not be able to adequately control the money market rate. That is the essence of what happened in 2019 in the United States.

Another reason why it is appropriate for a central bank to maintain ample reserve balances is financial market efficiency. As in the case of the United States, when money market rates deviate  substantially  from  the  interest  rate  on  reserve  balances,  the  opportunity  cost  for financial  institutions  to  hold  reserves  increases  accordingly.  Conversely,  to  minimize  this

opportunity cost, it is necessary that a central bank firmly control the money market rate via the interest rate on reserve balances by maintaining ample reserve balances. 12

The Bank of Japan's reserve balances and balance sheet remain significantly large, and it is currently unlikely that the money market rate will deviate from its lower bound. For the time being, therefore, the Bank can move forward with reducing its balance sheet without facing this issue. However, even if the balance sheet's shrinking to an appropriate size is a long way off, controlling the money market rate will likely be the most important challenge for the Bank.

## IV. Toward the Establishment of the 2 Percent Inflation Norm

Many major central banks have come close to successfully containing high inflation and are currently making careful adjustments to their monetary policy to achieve both price stability and sustainable economic growth. By contrast, it was not until March 2024 -- when these central banks were already in their final phase of monetary tightening -- that the Bank of Japan returned to implementing conventional policy. This was owing to the existence of the zero norm with regard to prices and wages, a situation unique to Japan's economy. It is true that post-pandemic global inflation acted as a so-called big push that played a role in starting to break down the zero norm. However, prices and wages in Japan stopped rising in the second half  of  1990,  when  severe  deflation  occurred,  and  subsequently  barely  rose  for  nearly  a quarter of a century. Considering this context, before changing its monetary policy, the Bank needed to carefully examine whether the zero norm, which had been as solid as bedrock, had been  sufficiently  eroded,  and  whether  the  rigidity  of  prices  and  wages had  been  truly overcome.

Price  developments  in  the  post-pandemic  period  also  reveal  how  the  situation  in  Japan differed from other economies. In many countries and regions, high inflation in the wake of the pandemic first emerged as a surge in producer prices, and most of this surge was passed on  directly  to  consumer  prices.  When  producer  prices  rose  in  Japan,  however,  the  pass-

12 This issue is frequently discussed in connection with the Friedman rule regarding the opportunity costs of holding money. See Lorie Logan, ""Ample Reserves and the Friedman Rule,"" keynote speech at the ECB Conference on Money Markets, Frankfurt am Main, November 10, 2023.

through to consumer prices was limited (Chart 8). This suggests that, fearing that sales would decline if they raised prices, many firms that sell products to consumers did not pass on the cost increases to selling prices immediately, but instead bore the cost increases themselves, at  least  temporarily. That  said,  corporate  profits  have  been  growing  on  the  whole,  which should be interpreted as a gradual progression of cost pass-through (Chart 18). The fact that the rise in producer prices has mostly been reflected in a corresponding rise in consumer prices when inflation began rising again in the second half of 2024, with a certain time lag, is also evidence that it is becoming easier for firms to pass on cost increases to prices.

Another phenomenon unique to Japan associated with the zero norm is that expected inflation rates  for  a  long  time  remained  below  the  2  percent  inflation  target.  If  their  inflation expectations are anchored at around the inflation target, people see deviations of the observed inflation rate from the target rate as only temporary. In such an environment, it is easier for a central bank to bring the observed inflation rate back to the inflation target, since people generally make decisions based on the targeted inflation rate. This is evident by how high inflation stemming from the pandemic subsided in about two years. In Japan, however, where the zero norm was entrenched, firms and households acted on the premise of zero inflation, which  resulted  in  prices  and  wages  barely  rising.  In  this  situation,  even  if  prices rose temporarily due to cost-push factors, it was difficult to realize the stable achievement of 2 percent inflation.

Even  in Japan,  however, various indicators of inflation expectations are gradually approaching 2 percent in the current inflationary phase (Chart 19). This signifies that now, during  the  prolonged  period of  inflation  exceeding 2  percent,  firms and  households have started to slowly factor in inflation. In other words, it seems clear that people are acting on the assumption that the economy will not return to zero inflation. Many corporate managers used to believe that they could not raise wages because they could not raise prices, and made actual business decisions based on this belief. Recently, however, many firms have expressed their intention to continue raising wages to an extent significantly exceeding the 2 percent inflation target. Stable achievement of the 2 percent target will finally become possible when such wage-setting behavior of firms is established as a new norm.

Japan's economy is in the midst of shifting away from the zero norm and adapting to the new 2 percent norm. In this process, the recent rise in prices has taken a toll on households, as they have not experienced inflation for a long time. One reason why this has been a burden for households is that the current inflation was triggered by cost-push factors resulting from a rise in import prices, and price increases exceeding wage growth were inevitably prolonged. Since the rise in import prices has already slowed, the rate of increase not only in producer prices but also in consumer prices will probably slow as well, as the price pass-through of cost  increases  peaks  out.  Still,  it  may  take  some  more  time  for  real  wages --which  are calculated by excluding the effects of inflation from nominal wages -- to turn to an uptrend.

I  personally  believe  that  the  Bank  needs  to flexibly adjust  its  monetary  policy while examining price developments, in response to economic developments at home and abroad at the time. This is because, now that Japan's economy is making progress in overcoming the zero norm, it is increasingly important from the standpoint of price and economic stability for the Bank to adjust the degree of monetary accommodation with appropriate timing. When Japan's economy was experiencing prolonged zero inflation, downside risks to prices required more attention than upside risks, and maintaining accommodative financial conditions was therefore a top priority. In the current situation, however, where it is likely that  the labor market is close to full employment and that the output gap has almost reached 0 percent, it is necessary to consider not only downside risks but also upside risks. When focusing only on the domestic economic situation, I believe Japan will, in the not-too-distant future, require a new policy perspective that addresses the upside risks. On the other hand, as Japan's economy faces significant downside risks stemming from the U.S. tariff policy, it is necessary that the Bank assess underlying inflation as carefully as possible for the time being.

Thank you.



## Transformation of the Global Economy and Developments in Monetary Policy

Speech at a Meeting Held by the Sapporo Chamber of Commerce and Industry

September 29, 2025

NOGUCHI Asahi Member of the Policy Board Bank of Japan

## Central Bank Policy Interest Rates

%



Note: Figures for the Federal Reserve (FRB) are the upper limits of the target range for the federal funds rate. Figures for the European Central Bank (ECB) are the interest rates on the main refinancing operations.

Sources: Bank of England (BOE); ECB; FRB; Reserve Bank of Australia (RBA); Bank of Japan.

Chart 1

## 10-Year Government Bond Yields

%



Source: Bloomberg.

Chart 3 High Inflation in the United States and Europe

United States

United Kingdom

Germany



Note: Figures for Germany prior to reunification are those for the former West Germany. Figures for the United Kingdom prior to 1989 are from data compiled by the BOE, and those from 1989 onward are from Office for National Statistics (ONS) data. Sources: BOE; OECD; ONS.

## Job Vacancies in the United States

ratio of job vacancies to unemployed persons

Chart 5 Prices and Wages in the United States



y/y % chg.



Note: Figures for nominal wages are for hourly wages. Source: BLS.

## Prices and Wages in the United Kingdom

y/y % chg.



Note: Figures for nominal wages are for weekly wages (excluding bonuses). Source: ONS.

## Employment Situation in Japan

Chart 7

## Number of Employed Persons and Unemployment Rate

Labor Market Conditions s.a., mil. persons



inverted, DI (""excessive employment"" - ""insufficient employment""), % points

Sources: Ministry of Internal Affairs and Communications; Bank of Japan.

## Prices in Japan

y/y % chg.



Sources: Ministry of Internal Affairs and Communications; Bank of Japan.

## Distribution of Consumer Price Changes

Chart 9

Japan

United States





Note: Figures for Japan are based on items excluding fresh food and energy. Those for the United States are based on items excluding energy. Sources: BLS; Ministry of Internal Affairs and Communications.

## Price Revisions in Japan

## Share of Items for Which Prices Were Unchanged

## Frequency of Price Revisions

weight in the CPI for all items less fresh food, %



% per month



- Notes: 1. In the left panel, figures are the share of items for which year-on-year price changes were within plus or minus 0.5 percent. The figure for fiscal 2025 is the April-July average.

Source: Ministry of Internal Affairs and Communications.

2. In the right panel, figures are calculated based on the proportion of cities where the average price of individual items changed from the previous month (12-month backward moving averages). Data exclude fresh food, electricity, manufactured and piped gas, water charges, and housing rent. Temporary price changes due to, for example, consumption tax hikes and special sales are not incorporated.

## Distribution of Consumer Price Changes in Japan

Chart 11

## All Items Less Fresh Food and Energy

Source: Ministry of Internal Affairs and Communications.



## General Services Less Housing Rent

share of the number of items, %



## Wage Growth in Japan

y/y % chg.



Note: Figures from 1994 to 2013 are those published by the Central Labour Relations Commission, while those from 2014 to 2025 are figures released by the Japanese Trade Union Confederation (Rengo).

Sources: Central Labour Relations Commission; Rengo.

## Services Producer Prices in Japan

Chart 13

y/y % chg.



y/y % chg.

Note: Figures exclude the effects of consumption tax hikes.

Source: Bank of Japan.

## Central Bank Balance Sheets

%

## Ratio to Nominal GDP



Note: BOC stands for Bank of Canada.

Sources: Data from central banks and statistical authorities.

## Prices and Policy Interest Rates

United States

United Kingdom

%



Sources: BOE; ECB; FRB; OECD; ONS.

%

Chart 15



Euro Area

%



## Money Market Rate in Japan

%



%

Source: Bank of Japan.

Chart 17

## Money Market Rates in the United States

## Repo Market

Federal Funds (FF) Market

%



deviation from the lower limit of the FF target range, %



bil. USD

Note: In the right panel, figures for IOER from July 29, 2021, onward are the figures for interest on reserve balances (IORB). Source: Federal Reserve Economic Data (FRED).

## Corporate Profits in Japan

s.a., tril. yen



s.a., tril. yen

Note: Figures exclude the finance and insurance industries. Source: Ministry of Finance.

## Inflation Expectations in Japan

Indicated by Markets

Chart 19

Estimated by BOJ, by Type of Economic Agent

%





%

Note: In the left panel, the BEI (break-even inflation) rate is the yield spread between fixed-rate coupon-bearing JGBs and inflation-indexed JGBs.

The dotted line represents the rate calculated based on inflation-indexed  JGBs issued before October 2013. Sources: Bloomberg; Consensus Economics Inc., Consensus Forecasts ; QUICK, QUICK Monthly Market Survey &lt;Bonds&gt; ; Bank of Japan.",Asahi Noguchi
https://www.bis.org/review/r250929f.htm,Piero Cipollone: Preparing the future of payments and money - the role of research and innovation,"Keynote speech by Mr Piero Cipollone, Member of the Executive Board of the European Central Bank, at the conference ""The future of payments: CBDC, digital assets and digital capital markets"", hosted by Bocconi University, the Centre for Economic Policy Research and the European Central Bank, Milan, 26 September 2025.",2025-09-26 00:00:00,"SPEECH

## Preparing the future of payments and money: the role of research and innovation

Keynote speech by Piero Cipollone, Member of the Executive Board of the ECB, at the conference 'The future of payments: CBDC, digital assets and digital capital markets', hosted by Bocconi University, the Centre for Economic Policy Research and the European Central Bank

Milan, 26 September 2025

In this age of accelerated change, digitalisation is redrawing the map of finance and payments. It's imperative to make sure this transformation translates into genuine innovations that improve people's lives and the efficiency of our economies, while preserving financial stability. In that respect, dialogue between research and policy is not just a nice to have - it is a necessity.

Today, I want to pay tribute to the large body of research that we rely on in our quest to answer the enduring question for central banks: how can we adapt our money in the face of change, while preserving the smooth functioning of payment systems, the effectiveness of monetary policy, and financial stability?

This quest lies at the core of our mandate as a central bank. One of our fundamental tasks is to issue money. In the retail space, central bank money takes the form of cash that people can use for everyday payments. For transactions between financial institutions, central bank money is the ultimate risk-free settlement asset, a key pillar of our financial system. So, we have a duty to ensure it remains fit for purpose, even as preferences and technologies evolve.

To fulfil our mandate, we need state-of-the-art research: not just in economics and finance, but also user, market and technological research. This will be key in unlocking the economic benefits of efficient and resilient means of payment, both today and in the future.

In my role at the ECB, I ask myself the same questions day after day. How are digitalisation and new technologies reshaping the payments landscape? And what does this mean for our role in issuing money and overseeing payments systems? This is where research comes in: it allows us to be forward-looking in a structured way. We cannot remain stuck in the past, nor can we afford to act on instinct. Not when the foundations of our monetary system - trust, stability and sovereignty - are at stake.

With all this in mind, we must set a clear course of action and embrace our responsibility as central bankers to help shape the future of payments in the public interest.

The ECB has already taken important steps along this path, together with the euro area national central banks. We have modernised our oversight framework to keep up with the rapid transformation of the payments market. [ ]  We are working to enable settlement of distributed ledger technology (DLT) 1

transactions in central bank money in the course of next year. [ ]  And we are getting ready to issue a digital form of cash for day-to-day transactions - a digital euro. 2

In the process, we have been working closely with market stakeholders.

For instance, 60 industry participants were involved in testing real and mock transactions to explore possible ways of making private DLT platforms interoperable with the Eurosystem's market infrastructures. This testing covered a wide range of securities and payments use cases, including the first issuance of a digital bond by an EU sovereign using DLT. This has paved the way for two projects we launched earlier this year, both of which have immediate potential to create an efficient and integrated European market for digital assets. Project Pontes will link market DLT platforms and TARGET Services to enable settlement of DLT-based transactions in central bank money, starting in a year's time. Project Appia will explore a more integrated, long-term solution, for instance in the form of a shared ledger integrating central bank money, commercial bank money and other assets, or through a network of interoperable platforms that reduces market frictions and fosters innovation.

Turning to the digital euro, in October 2024 we established an innovation platform to experiment together with market stakeholders. This morning, we published the initial results of this work. [ ]  These partnerships with close to 70 participants - including merchants, banks, fintech companies and researchers demonstrate that central bank money itself can support innovation by enabling new applications, fostering market growth and ultimately simplifying everyday payments and processes for people and businesses. The success of this initiative encourages us to continue on this path. 3

Building on the valuable insights gained from the first round of experimentation, we continue to engage with market participants to refine and expand the scope of these activities. Their feedback will help us shape the next round of the innovation platform, with concrete activities likely to be announced in early 2026. We hope to again elicit strong interest from stakeholders in order to maximise the potential for innovative ideas.

Let me now explain how we have been using research in these modernisation efforts. I will cover three main topics, focusing mainly on retail payments, as I have discussed our vision for innovation in wholesale payments on other occasions [ ] . 4

First, I will discuss how research guides us as we adjust to technological changes, showing us how central bank money has continuously evolved to bring innovation while anchoring stability.

Second, I will talk about how research informs our understanding of the way digitalisation is transforming not just the role of public and private money, but also the structure of retail payment markets.

And finally, I will discuss how research helps us to look ahead, anticipate risks and seize opportunities as we shape the future of central bank money.

Central bank money: stability and innovation throughout history

One of the ECB's most critical challenges is to conceive and design the future of central bank money, especially for day-to-day payments, where it currently only exists in the form of physical cash. [ ] For centuries, society has entrusted central banks with providing cash: a safe and stable medium of exchange which reassures us that our money will always function properly. [ ]  If we didn't have euro cash, would we be as confident that the euro would retain its role as a unit of account, and that our money would keep its nominal value at all times? Cash underpins our trust in money and our monetary sovereignty. 5 6

Throughout centuries of societal transformation, central bank money has remained deeply embedded in the fabric of people's daily lives, evolving alongside technology. And since the launch of the euro, we have all been able to rely on euro cash for day-to-day payments, safe in the knowledge that we can always pay privately and securely, anywhere in the euro area. These characteristics are the bedrock of our trust in public money - and also in other forms of money, because those can always be converted into cash.

However, the use of cash in daily transactions continues to decline, challenging the central role of cash as we know it: in the form of banknotes and coins. [ ]  Because it is not available in digital form, central bank money risks becoming marginalised as a mean of payment, thereby shifting the balance between public and private money, which has served us well until now. 7

In recent years, central banks around the world - including the ECB - have been reflecting on how to adapt the means of payment they offer as technologies and preferences change. Most notably, they have been exploring the possibility of issuing a digital equivalent to physical cash. [ ] 8

Economic research reminds us that this effort is far from unprecedented. Throughout history, central banks have repeatedly stepped up to face disruption, adapting and innovating so that they can continue to provide a solid foundation for our financial systems, starting with money itself.

A striking example comes from the United States during the free banking era [ ]  in the 19th century, when 9

the lack of a common monetary anchor eroded trust in the convertibility of the various forms of money in circulation at the time. This was not an isolated instance - in fact history offers many similar lessons. Many episodes of free banking and competing currencies ultimately gave way to a public monopoly on issuing banknotes [ ]  that, when delegated to central banks with sound institutional foundations, resulted in more stable financial systems. [ ]  Adjustment costs were gradual, so commercial banks continued lending with no significant signs of disintermediation. This was no accident - it reflected careful policy design to ensure a smooth adjustment process, yielding long-lasting gains for all stakeholders. 10 11

If we were to extract one single lesson from this large body of economic research, it would be this: as technology and preferences evolve, we must keep central bank money fit for purpose and ensure it remains at the heart of the payments system, in order to avoid monetary instability and preserve the singleness of money.

This is a key reason for preparing to issue a digital euro: providing a digital equivalent to cash would preserve the role of central bank money as a retail means of payment in the face of societal and technological changes. However, this is a delicate task, as it is crucial to maintain a healthy balance between central bank money and commercial bank money. This principle has inspired the design of the digital euro from the very beginning. [ ] 12

## Retail payments in the digital age

To preserve this healthy balance, payments systems should remain flexible in their design [ ] , meaning they should be structurally open and capable of adapting to new practices and technologies. 13

The central bank's role therefore involves supporting an open, competitive market where private actors drive efficiency and innovation without creating instability - benefiting consumers and businesses alike. While setting competition policy is not the responsibility of the central bank, we are mandated to ensure the efficiency and soundness of payment systems, so we must be alert to retail payments market dynamics. [ ] 14

Looking at Europe's retail payments market, there is cause for concern.

Most European retail payment solutions remain national, covering only a few use cases and lacking panEuropean reach. This is a case in point of the situation described in the Draghi report [ ] : because European solutions remain fragmented, they do not generate the scale, scope and network effects that are necessary to be competitive at European - let alone global - level. This results in duplication of investment and smaller markets that hamper innovation by not fulfilling their potential on both the supply and demand sides. The ramifications are clear: today Europeans rely on a handful of mostly nonEuropean providers for their daily digital transactions - undermining competition, limiting choice and slowing innovation, often in ways that go against both the public interest and fair competition. [ ] 15 16

The scholarly works of Baxter [ ]  and of Rochet and Tirole [ ]  show why payment markets tend to concentrate. Payments markets are two-sided: consumers prefer payment solutions that are widely accepted by merchants, and merchants prefer the solutions that are widely adopted by consumers. This means that the success of a payment solution relies on strong network effects and powerful feedback loops, which tend to concentrate markets and create 'winner-takes-most' dynamics. 17 18

The digitalisation of payments - from cards [ ]  to apps [ ]  and beyond [ ]  - is intensifying these forces. And new risks are emerging as large tech platforms can leverage their wide customer base and bundle payment services with the other products and services they offer. This raises further barriers to entry for smaller European competitors, increases fees for merchants and traps unaware consumers in walled gardens. [ ]  If left unchecked, these forces could not only shape how we pay [ ]  but also change the nature of finance and society as we know it. [ ] 19 20 21 22 23 24

Moreover, new instruments bring new risks, along with new opportunities. Stablecoins issued by nonEuropean firms could create additional dependencies. And stablecoins denominated in foreign currencies could create currency substitution risks. [ ]  Stablecoins are growing and their role in the financial system 25

has expanded from supporting crypto-asset transactions [ ]  to facilitating cross-border payments. This can be a springboard for stablecoins to compete in domestic payments by partnering with dominant global payment networks. [ ] 26 27

Stablecoins are a technological novelty that promises to make payments faster or cheaper. However, as highlighted in several papers presented at this conference, they could also pose real risks to financial stability and banking intermediation. [ ]  Runs on stablecoins could trigger fire sales, sudden deposit shifts and volatility in bank liquidity, amplifying funding pressures. [ ] 28 29

These dynamics also have the potential to affect our monetary policy. [ ]  As these assets grow within the financial system, they could raise the cost of bank deposit funding, putting pressure on banks' capacity to extend credit - particularly in the euro area, where banks retain a key role in financing the economy. This, in turn, may disrupt monetary policy transmission, shift demand for central bank liquidity and complicate the ECB's management of short-term interest rates. These challenges are further amplified by the fact that currently 99% of stablecoins are denominated in US dollars. 30

## Shaping the future of payments

The good news is that public authorities are not powerless in the face of these challenges.

Regulation and enforcement are powerful instruments. [ ]  They help shape markets, set boundaries and reduce risk of abuse. 31

Yet regulation alone cannot generate the necessary scale, scope and network effects that are key to credible competition, which would make the payments market genuinely contestable. [ ]  And even the best-crafted regulation will face its limits if the underlying market structure remains skewed [ ]  and evolves faster than regulators can react. 32 33

In other words, while rules can shape behaviour, rules alone cannot establish a truly level playing field or effectively challenge oligopolistic dynamics in such a market.

For decades, cash was a powerful 'outside option' - a simple, reliable fallback that preserved choice and kept markets competitive. However, as cash use declines and digital payments rise, this safeguard weakens.

The digital euro would change this by making central bank money available for digital payments, preserving that crucial pillar of freedom to choose an outside option. [ ] But it goes beyond that. 34

Guided by academic insights [ ]  and leveraging the legal tender status [ ]  of central bank money, we have designed the digital euro to allow payment service providers to compete across the euro area. The digital euro would provide open standards that European market players could use to offer payment services on a pan-European level. 35 36

With the digital euro rulebook and Eurosystem infrastructure, private providers could scale their payment solutions across Europe at lower costs. In other words, the key to success would be innovative services rather than network size. Without the digital euro, European solutions might not succeed on their own in competing throughout the euro area and across use cases against the solutions that currently dominate the market.

The report we publish today shows that in the private sector there is strong appetite for developing such innovative services using the unique features of the digital euro platform, and there are actors ready to deliver such services.

One of the development avenues we have looked at involves transactions that can be triggered along many more dimensions than is currently the case, considerably expanding payments options for users. At the risk of oversimplifying, we are no longer thinking of payments as just a transfer of money between payer and payee, but as a richer set of instructions that includes information on when the payment will be processed. This makes conditional payments - such as pay-on-delivery- possible. The digital euro's reservation of funds feature makes it possible to release funds only once certain conditions set by users are met, strengthening trust and customer protection. Market participants highlighted how the digital euro would also facilitate services such as encrypted e-receipts, which would only be accessible to the payer and the seller, help them with returns and warranties, and contribute to reducing paper waste. And market participants' ideas do not stop there: the digital euro would enable user-friendly features such as voicecontrolled transactions or conversational artificial intelligence agents. And it would make it possible to automate business-to-business payment flows, helping to speed up payments, reduce paperwork and cut costs.

Furthermore, we are designing the digital euro back-end platform to accommodate the most advanced privacy-enhancing techniques and to include future ones as soon as they are ready to be deployed in large-scale payment systems. This will keep the digital euro at the technological frontier in terms of privacy protection. And we will play an active part in pushing that frontier forwards. We will work closely with universities and experts to continue exploring practical research on new privacy-enhancing techniques, aiming to evaluate their potential use in digital euro payments.

The findings of the digital euro innovation platform demonstrate that innovation in the retail space does not depend only on stablecoins - it can flourish using central bank money. In fact, the digital euro would reduce the risk that stablecoins pose to banks. With the digital euro allowing banks to offer consumers access to convenient, widely accepted and innovative payment services, consumer and merchants would have fewer incentives to turn elsewhere.

## Conclusion

The questions that central bankers are facing today are not fundamentally new - they always revolve around stability and trust - but the context is changing rapidly. Digitalisation is transforming the payments landscape and its future.

Historian and philosopher of science Thomas Kuhn once observed that Newton's three laws of motion had been 'less a product of novel experiments than of the attempt to reinterpret well-known observations'. [ ] As technologies and preferences change, central banks are reinterpreting their role in issuing central bank money. And this transformation is accompanied by a change of paradigms on the research side. Many of you in this room, including the pioneers and visionaries that have participated in digital euro innovation partnerships, are at the forefront of this new field of research. 37

These insights are already helping us as we seek to ensure that the new world of payments will not benefit the few but the many, and that people and firms retain trust in money.

Thank you for your attention.

1.

Our oversight requirements are set out in the SIPS Regulation ( ), the PISA framework ( ), and the CROE ( ), which is part of the Eurosystem's broader ). Regulation (EU) 2025/1355 of the European Central Bank of 2 July 2025 on oversight requirements for systemically important payment systems (ECB/2025/22) Eurosystem oversight framework for electronic payment instruments, schemes and arrangements Cyber resilience oversight expectations for financial market infrastructures cyber resilience strategy

- 2.

See ECB (2025), ' ', press release , 1 July. ECB commits to distributed ledger technology settlement plans with dual-track strategy

3.

ECB (2025), , September. Digital euro innovation platform - Outcome report: pioneers and visionaries workstreams

- 4.

See, for instance, Cipollone, P. (2024), ' ', keynote speech at the Bundesbank Symposium on the Future of Payments, 7 October. Towards a digital capital markets union

5.

Cipollone, P. (2025), ' ', speech at Banka Slovenije, Ljubljana, 10 July. Shifting payment landscape: what a digital euro will bring

6.

Tommaso Padoa-Schioppa identified two key shifts behind the establishment of central banks: replacing commodity money with paper money, and substituting bank deposits for physical currency. These two developments, along with the central bank's unique power to issue its own liabilities, put central banks at the centre of the entire network of payment systems in the economy. See Padoa-Schioppa, T. (2004), The Euro and Its Central Bank: Getting United After the Union , MIT Press, Cambridge.

7.

Between 2019 and 2024 the share of cash used at physical point of sale locations fell from 72% to 52% in terms of volume, and from 47% to 39% in terms of value. See ECB (2024), , December. Study on the payment attitudes of consumers in the euro area (SPACE)

8.

Numerous central banks worldwide are actively exploring retail central bank digital currency (CBDC) projects. See Di Iorio, A., Kosse, A. and Mattei, I. (2024), ' ', BIS Papers , No 147, June. See also Auer, R., Cornelli, G. and Frost, J. (2023), ' ', International Journal of Central Banking ', October, pp. 185-214. Embracing diversity, advancing together results of the 2023 BIS survey on central bank digital currencies and crypto Rise of the Central Bank Digital Currencies

9.

The free banking era was an 80-year period of turbulence characterised by fragmented, state-issued banknotes, widespread counterfeiting and persistent financial instability. See Eichengreen, B. (2019), ' ', NBER Working Paper Series , No 25426, January; Rolnick, A.J. and Weber, W.E. (1983), 'New evidence on the free banking era', American Economic Review , Vol. 73, No 5, pp. 1080-1091. For more about state banknotes, see Rockoff, H. (1974), ' ', Journal of Money, Credit and Banking, Vol. 6, No 2, May, pp. 141-167. From commodity to fiat and now to crypto: what does history tell us? The Free Banking Era: A Reexamination

10.

For an analysis of the case of England, see Presnell, L.S. (1956), Country Banking in the Industrial Revolution , Oxford University Press, Oxford. For an analysis of the case of Switzerland, see Baltensperger, E. and Kugler, P. (2017), Swiss Monetary History since the Early 19th Century (Studies in Macroeconomic History) , Cambridge University Press, Cambridge. One notable exception to this trend was Scotland in the 18th and early 19th century. See Bordo, M. (2021), ' ', NBER Working Paper Series , No 29171, August. Central bank digital currency in historical perspective: another crossroad in monetary history

11.

For an analysis of the case of Sweden, see Grodecka-Messi, A. and Zhang, X. (2025), ' ', Sveriges Riksbank Working Paper Series , No 454, August. For an analysis of the case of Canada, see Grodecka-Messi, A. and Zhang, Central Bank Liquidity Support, Bank Lending, and the End of Currency Competition

X. (2023), ' ', Journal of Economic Dynamics and Control , Vol. 154, September. See also Xu, C. and Yang, H. (2024), ' ', Journal of Financial Economics , Vol. 157, July. Private bank money vs central bank money: A historical lesson for CBDC introduction Real effects of supplying safe private money

12.

In the case of a digital euro, the combination of no remuneration, a holding limit and a waterfall system with commercial bank accounts would avoid the risk of destabilising outflows of deposits from banks. To calibrate the digital euro holding limits, the ECB has been developing a methodology that focuses on balancing user-friendly payments with monetary policy and financial stability considerations. The methodology involves a deep assessment of how holding limits might impact the broader economy, including effects on bank liquidity, reserves and the overall transmission of monetary policy. See ECB (2024), , 10 December. Preliminary methodology for calibrating holding limits

Padoa-Schioppa, T. (2004), ' ', speech delivered at the Bank of Korea's Conference on Payment Systems, Seoul, 13 May. Shaping the payment system: a central bank's role

13. 14.

This is also reflected in the Article 22 of the Statute of the European System of Central Banks and of the European Central Bank, which tasks the ECB with promoting the efficiency and soundness of clearing and payment systems. Moreover, according to Article 127(1) of the Treaty on the Functioning of the European Union, the ECB must act in accordance with the principle of an open market economy with free competition, favouring an efficient allocation of resources.

15.

See Draghi, M. (2024), ' . 16. The Draghi report: A competitiveness strategy for Europe

Cipollone, P. (2024), ' ', speech at the ECB conference on 'An innovative and integrated European retail payments market', Frankfurt, 24 April. Innovation, integration and independence: taking the Single Euro Payments Area to the next level

17.

Baxter, William F. (1983), 'Bank interchange of transactional paper: Legal and economic perspectives', Journal of Law and Economics , Vol. 26, No 3, October, pp. 541-588.

18.

See: Rochet, J.C. and Tirole, J. (2002), 'Cooperation Among Competitors: Some Economics of Payment Card Associations,' Rand Journal of Economics , Vol. 33, No 4, pp. 549-570; Rochet, J.C. and Tirole, J.

(2003), 'Platform Competition in Two-Sided Markets,' Journal of European Economic Association , Vol. 1, No 4, pp. 990-1029; Rochet, J.C. and Tirole, J. (2006), 'Two-Sided Markets: A Progress Report,' Rand Journal of Economics , Vol. 37, No 3, pp. 645-667.

19.

Two-thirds of card-based transactions in the euro area are processed by international schemes. Some 13 euro area countries are entirely dependent on non-European systems for payments. In the United States, three networks process about 85% of transactions. See: Wang, L. (2025), ' ', Kilts Center at Chicago Booth Marketing Data Center Paper . Regulating Competing Payment Networks

20.

For example, Apple's dominance in mobile devices and its control over mobile wallets on iOS has raised antitrust concerns, prompting a formal investigation by the European Commission. See: European Commission (2024), , press release, 19 January. 'Antitrust: Commission seeks feedback on commitments offered by Apple over practices related to Apple Pay'

21.

See BIS (2019), 'Big techs in finance: opportunities and risks', Working Paper , No 1129.

22.

See Cipollone, P. (2024), ' ', keynote speech at the Economics of Payments XIII Conference organised by the Oesterreichische Nationalbank, Vienna, 27 September. Monetary sovereignty in the digital age: the case for a digital euro

23.

For instance, mobile payment services are becoming more intertwined with related markets such as ecommerce, social media, digital advertising and cloud services. While this integration offers certain advantages to consumers, it also has the potential to strengthen market dominance across these interconnected industries, raise barriers to entry and hinder future innovation. See OECD (2025), ' ', background material for Session 4 at the 146th meeting of the Competition Committee . Competition in mobile payment services

24.

Tirole, J. (2023), 'Competition and the Industrial Challenge for the Digital Age', Annual Review of Economics , Vol. 15, pp. 573-605.

25.

See Bank for International Settlements (2025), ' ', BIS Annual Economic Report , 24 June; Cipollone, P. (2025), ' The next-generation monetary and financial system The quest for cheaper and faster cross-border

', speech at the BIS Annual General Meeting, 27 June; and Lagarde, C. (2025), ' ', welcome address at the ninth annual conference of the ESRB, 3 September. 26. payments: regional and global solutions Cutting through the noise: exercising good judgment in a world of change

Adachi, M., Da Silva, P., Born, A., Cappuccio, M. Czák-Ludwig, S., Gschossmann, I., Pellicani, A., Philipps, S. Plooij, M., Rossteuscher I. and Zeoli, P. (2022), ' ', ECB Macroprudential Bulletin , July. Stablecoins' Role in Crypto and Beyond: Functions, Risks and Policy

27.

In just over a year the number of actively used stablecoins rose from roughly 60 to more than 170, and global market capitalisation climbed from about USD 125 billion to roughly USD 255 billion - with some 90% of that value concentrated in two issuers and about 99% being US dollar-denominated. See: Aldasoro, I. et al. (2025), 'Stablecoin growth - policy challenges and approaches', BIS Bulletin , No 108. 28.

William, C. and Phelan G. (2025), ' ', Journal of Financial Stability , Vol. 78, June. Digital currency and banking-sector stability

29.

See Azar, P. et al. (2024), ' ', Economic Policy Review, Vol. 30, No 2, Federal Reserve Bank of New York, November; Charles-Emmanuel, C. (2025), ' ', Occasional Paper Series , No 353, ECB; and Bains, P. et al. (2022), The Financial Stability Implications of Digital Assets Toss a stablecoin to your banker

' ', Fintech Note , IMF, Regulating the Crypto Ecosystem: The Case of Stablecoins and Arrangements

September.

30.

For a full discussion on this aspect, see: Lane, P. (2025), ' ', keynote speech at University College Cork Economics Society Conference 2025, 20 March. The digital euro: maintaining the autonomy of the monetary system

31.

In Europe, the intervention of EU regulators - e.g. through the Interchange Fees Regulation - was necessary to reduce the risk that dominant players set excessive fees. For examples outside the EU, see Payment System Regulator (2025), ' ', and U.S. Department of Justice (2024), ' , press release. MR22/1.10 Market review of card scheme and processing fees: final report Justice Department Sues Visa for Monopolizing Debit Markets

See European Court of Auditors, (2025), ' ', special report , 01/2025. Digital payments in the EU - Progress towards making them safer, faster, and less expensive, despite remaining gaps

33.

The UK Payment Systems Regulator concluded that standard competition remedies are unlikely to address weak competition in UK card scheme and processing markets. In particular, it found that Mastercard and Visa are in a stronger position than alternative providers because acquirers would face substantial costs, challenges and complexity to implement substitutes, and acquirers and merchants have limited ability to steer consumers toward alternative payment methods. See UK Payment Systems Regulator (2025), ' '. MR22/1.10 Market review of card scheme and processing fees: final report

34.

The draft Digital Euro Regulation guarantees free basic payment for consumers. It also introduces caps on merchant charges and mandates reporting and monitoring of payment costs of existing comparable means of payment to calibrate the appropriate cap.

35.

For a discussion on this, see: Usher, A., Reshidi, E., Rivadeneyra, F. and Hendry, S. (2021), ' ', Staff Discussion Paper , Bank of Canada, 20 July; and Liu, Y., Reshidi, E. and Rivadeneyra, F. (2023), ' ', Bank of Canada, 17 May. The Positive Case for a CBDC CBDC and Payment Platform Competition

36.

Cipollone, P. (2025), ' ', introductory statement at the Committee on Economic and Monetary Affairs of the European Parliament, Brussels, 14 July. The digital euro: legal tender in the digital age

37.

Kuhn, T. S. (1962), The Structure of Scientific Revolutions , University of Chicago Press.

## You may also be interested in:

Digital euro innovation platform - outcome report: pioneers and visionaries workstreams

Download PDF",Piero Cipollone
https://www.bis.org/review/r250930d.htm,Leonardo Villar-Gómez: Intervention - 36th Capital Market Symposium,"Remarks by Mr Leonardo Villar-Gómez, Governor of the Central Bank of Colombia, at the 36th Capital Market Symposium, organised by Asobancaria, Cartagena, 14 August 2025.",2025-08-14 00:00:00,"## Leonardo Villar-Gómez: Intervention - 36th Capital Market Symposium

Remarks by Mr Leonardo Villar-Gómez, Governor of the Central Bank of Colombia, at the 36th Capital Market Symposium, organised by Asobancaria, Cartagena, 14 August 2025.

* * *

Greetings to all attendees of this Capital Market Symposium, and thanks to Asobancaria for the invitation and the opportunity to participate in this event.

I would like to share with you some remarks on the role that will Banco de la Repœblica play in the administration of the Contributory Pillar Savings Fund of the pension System, in accordance with the legal framework approved by the Congress of Colombia and currently under review by the Constitutional Court.

## Banco de la Repœblica role in the Administration of the Contributory Pillar Savings Fund of the Pension System

Law 2381 of 2024 established this Fund as a special account, which will be administered by in its capacity as the Government's fiscal agent. Banco de la Repœblica For this purpose, the Bank must ensure a strict separation between the Fund's resources and its own resources. In addition, its administration must be completely independent of monetary, foreign exchange, and credit policy functions, as well as the management of foreign reserves.

As you know, this Law establishes that, in the contributory pillar, pension contributions made by all workers will include a pay-as-you-go component administered by Colpensiones, corresponding to contributions on income between 1 and 2.3 legal monthly minimum wage in force (SMMLV in Spanish). Since a portion of these contributions currently goes to the individual savings component, the change will result in a significant increase in the resources that Colpensiones will receive once the reform comes into force. In the future, this situation will be reversed, because the payment of pensions by Colpensiones will require greater resources than those demanded by the current system.

Under these conditions, the Law stipulated that the excess resources that Colpensiones will temporarily receive over a period of two to three decades, compared to what it would have received under the previous regime, should be saved in the Contributory Pillar Savings Fund (FAPC) and that this Fund be administered by Banco de la . The resources received through the FAPC will be channeled into the capital Repœblica market through professional administrators to generate returns that will help the government cover its pension obligations in the future.

Considering that today, before the reform comes into force, Colpensiones has a significant deficit, the Colombian Government transfers resources that are part of the public expenditure that are approved annually in the national budget, which also affectshe country's fiscal deficit. The creation of the Contributory Pillar Savings Fund (FAPC), administered by , is designed in such a way that said Banco de la Repœblica

Fund is allocated calibrated revenues to ensure that neither the National Government's current pension expenditure nor the economy's aggregate savings are affected.

In principle, this should also allow the flow of resources currently directed to the capital market through the Pension Fund Administrators (PFAs), which will decrease due to the lower contributions that these PFAs will receive, to be offset by the resources channeled to the capital market through the FAPC.

It is important to emphasize that the temporary surplus of resources that will be allocated to the FAPC will most likely be insufficient to cover future pension obligations. The bill itself estimates that the FAPC will be fully depleted by 2070, which means that the Government will need to provide additional resources to cover the corresponding deficit.

The challenge of making the pension system sustainable in the long term will likely require adjustments to the system's parameters, particularly regarding retirement ages and affiliates' contribution rates. The need to move in this direction remains pressing and is not in any way affected by the role as financial resources administrator that will assume. Banco de la Repœblica

## Preparation for the Structuring of the Contributory Pillar Savings Fund

The Bank's staff has carried out multiple activities to prepare for its role as administrator of the Fund, even before the issuance of the regulatory decree, which, as I will mention later, was issued on May 28.

Based on the processes currently implemented in its other mandates, such as the Savings and Stabilization Fund of the General System of Royalties and the management of foreign reserves, the Bank seeks to implement for the Contributory Pillar Savings Fund the best practices in internal governance for decision-making, contracting portfolio administrators and monitoring their management, and operational capacity, among others.

Regarding internal governance, in February, the Bank's Board of Directors approved the creation of the Administrative Committee of the Contributory Pillar Savings Fund, an internal body that will make administrative, operational, and contractual decisions for the administration of the Fund. It also approved the creation of the Department of the Contributory Pillar Savings Fund within the structure of the Bank's Office of the Deputy Executive Governor.

I would like to emphasize that in the administrative decisions taken by Banco de la , particular attention was given to ensuring that those responsible for Repœblica administering the Fund within the Bank remain independent from the technical staff responsible for implementing monetary, foreign exchange, and credit policy. This is part of the necessary measures, controls, and mechanisms to ensure that the administration of the Fund does not interfere with the Bank's functions as established in the Constitution.

Regarding the contracting processes, the Bank has extensive experience in designing rigorous selection and monitoring processes for portfolio managers. Based on these best practices, during the first four months of this year we drafted an invitation letter to participate in the process and a draft contract that will serve as the basis for contracting during the transition period. Additionally, as part of the preparation phase, we held discussions with trust companies, stock brokerage firms, life insurance companies, and pension fund administrators to share the main characteristics of the contracting process during the transition period, including the investment objective, minimum requirements for applying, the use of guarantees or insurance policies, and the use of competitive mechanisms for selection and determination of management fees, among others. These discussions allowed us to gather the perspectives and main concerns of potential administrators of the Fund, with the aim of advancing this phase as far as possible.

Additionally, on May 9, the Ministry of Labor issued the Single Regulatory Decree of the General Pension System, which includes a chapter dedicated to the Contributory Pillar Savings Fund, establishing the conditions under which the transfers of resources from Colpensiones and the Administrators of the Complementary Individual Savings Component ( , Administradoras del Componente Complementario de Ahorro Individua ACCAI in Spanish) to the Fund must be carried out. The Decree authorizes the Bank to define the technical, operational, and compensation conditions to receive these resources, including timelines.

To this end, the Bank's staff prepared a draft External Regulatory Operational Circular, which was presented on June 13 to the institutions responsible for transferring resources to the Fund, a process during which we received comments that are currently under review. We expect to have a finalized external circular in August, which will enable Colpensiones and the ACCAI to move forward with the necessary IT developments for the proper transfer of resources and information.

I would like to highlight the progress we have made in designing the selection process for the four expert members of the Steering Committee, which must be carried out by the Board of Directors. Currently, there is a draft External Resolution of the Board of Directors that defines the required profiles, the methodology for evaluating candidates' resumes, and the selection process, among other aspects. However, further progress in this selection process of the four expert members of the Steering Committee by the Board requires the corresponding government regulations to be in force, which is not legally clear under the current circumstances, as the decrees issued were based on a law whose validity has been suspended by the Constitutional Court.

On May 28, Decree 574 was issued, establishing the regulations applicable to the administration of the Fund, most of which must be implemented by the Bank prior to the Fund's commencement of operations, which, as is known, was scheduled for July 1st.

This Decree established the main characteristics of the Fund, the requirement to enter into a contract with the Ministry of Finance for its management, the Bank's functions as administrator, and the provisions regarding the Fund's accounting and governance.

As part of this last point, the Decree defined the functions and conditions under which the Steering Committee will operate as the Fund's highest decision-making body, the Bank's functions as Secretary of this Committee, and the criteria that the Bank's Board of Directors must apply to select the four expert members who will make up the Committee, together with the three government members, the Minister of Finance and Public Credit or their delegate, the Minister of Labor or their delegate, and the Director of the National Planning Department.

The Decree issued on May 28 also established a twelve-month transition period, since, at least initially, the four expert members of the Steering Committee will not have been appointed and, therefore, the Committee will be unable to operate. According to the Decree, during this twelve-month period, the Bank will establish the conditions for the temporary contracting of portfolio administrators, and the resources must be invested under conditions similar to those of the moderate-risk mandatory pension fund currently managed by the PFAs.

Around the time Decree 574 was issued, considering that by the end of May there were just over four weeks left before the new regime was scheduled to enter into force on July 01, informed the Ministry of Finance and the Financial Banco de la Repœblica Regulatory Unit (URF in Spanish) of the need to include, within the transition, what I called ""the transition within the transition."" In particular, we proposed that, for a few months, the resources of the FAPC could be invested in an interest-bearing deposit at itself, under the same maturity and interest rate conditions that Banco de la Repœblica the Bank grants to National Treasury deposits. This request, which was well received by the Ministry at the time, aimed to minimize the risk that the Fund's resources would remain uninvested while completing the procedures required to contract the first portfolio administrators.

This situation, caused by the short time available between the government's regulation and the expected entry into force of the Law, illustrates the additional problems that may arise following the suspension of the law by the Constitutional Court on June 17. In fact, since that date, it has not been possible to move forward with the signing of the inter-administrative contract between the Bank and the Ministry of Finance, even though the text of the contract had been practically agreed upon. The legal possibility of initiating the selection and contracting of portfolio administrators by Banco de la , as well as of advancing the appointment process for the four experts to the Repœblica Steering Committee, has also been suspended. For these and many other reasons, we believe that additional adjustments to the transition contained in Decree 574 are likely to be required, since the dates set forth therein would not be consistent with the Law's entry into force, which will eventually be defined by the Constitutional Court.

On July 10, I sent a letter to the Constitutional Court in which I requested that, in the event that the Law is declared constitutional, the effective date of the Law and the System be clearly established. In this communication, I requested that the entry into force of the System be deferred to a date at least three months after the publication of the ruling declaring the constitutionality of the Law. This time window is required to carry out a series of activities previously mentioned, such as signing the interadministrative contract and the development of the various stages required in the process of contracting the FAPC administrators.

As I have stated publicly, this request was never intended to hinder the entry into force of the pension reform. On the contrary, everything the Bank has done since the Law was initially approved, more than a year ago, has been aimed at fulfilling, as effectively as possible, the obligations established by the legislature and complying with the regulations issued by the National Government throughout this year.

## Definition of the Regulations on Investment Policy and Decumulation and their Impact on the Capital Market

I must mention at this point that, to date, certain aspects of the Law's regulations have not yet been issued by the government. Particularly important are the regulations to be issued by the National Government regarding the Fund's investment regime and its decumulation. These regulations are essential to ensure that this decumulation is consistent with the intent of the legislature from the moment the Law enters into force.

Article 92 of the Law establishes that the functions of the Steering Committee include the approval of the eligible assets for the Fund, the risk and return objectives, the reference portfolios, if any, and the evaluation policy to which portfolio administrators must adhere, among others. Therefore, we expect the Fund's investment regime to establish the general guidelines that must be considered by the Steering Committee in order to fulfill these functions, without going into the definition of details that will fall under the Committee's responsibility.

Best practices in the regulation of pension funds by the Organization for Economic Cooperation and Development (OECD) suggest avoiding asset limits that prevent adequate portfolio diversification. These OECD recommendations also clearly discourage the use of minimum investment levels for any asset or investment class, except in exceptional and temporary circumstances for compelling prudential reasons. We hope that many of these observations will be considered by the National Government in the regulations to be issued.

Different government entities have made projections regarding the Fund's future revenues, which, in the first months, range between 1.4 and 2.6 trillion Colombian pesos per month. Depending on these estimates and the decumulation regulations, the Fund is expected to reach its maximum value between 2048 and 2057. Considering these projections, the Fund is expected to be considerable in size and to have an impact on the local capital market. The contracting processes implemented by the Bank will seek the participation of a broader set of entities in the administration of the FAPC in the medium and long term, as well as the development of financial products consistent with the investment horizons of the different generational subaccounts and the risk-return profile defined by the Steering Committee.

## Closing remarks

Banco de la Repœblica will continue to offer its full collaboration so that all parties involved can work in a coordinated manner and with the necessary speed, thus ensuring the proper implementation of the Contributory Pillar Savings Fund once the Constitutional Court issues its ruling on the constitutionality of the Law and sets the date on which, according to the Court, it should come into effect.

Thank you very much.",Leonardo Villar-Gómez
https://www.bis.org/review/r250925e.htm,Eddie Yue: Opening remarks - Hong Kong Fixed Income and Currency Forum 2025,"Opening remarks by Mr Eddie Yue, Chief Executive of the Hong Kong Monetary Authority, at the Hong Kong Fixed Income and Currency Forum 2025, Hong Kong, 25 September 2025.",2025-09-25 00:00:00,"## Eddie Yue: Opening remarks - Hong Kong Fixed Income and Currency Forum 2025

Opening remarks by Mr Eddie Yue, Chief Executive of the Hong Kong Monetary Authority, Hong Kong Fixed Income and Currency Forum 2025, , 25 at the Hong Kong September 2025.

* * *

Good morning, distinguished guests, ladies and gentlemen. It is my great pleasure to join Kelvin (Chairman, Securities and Futures Commission) in welcoming you at today's Hong Kong Fixed Income and Currency (FIC) Forum 2025.

Asian fixed income markets have seen remarkable growth over the past decade. From 2009 to 2024, the issuance volume of Asian international bonds grew at an average annual rate of 16%, significantly outpacing the global average of less than 4%.  Hong Kong has been a main driver of this growth, accounting for nearly 30% of Asian international bond issuances in 2024 and consistently topping regional league tables.

As for foreign exchange, Hong Kong continues to be the fourth largest market globally. Our offshore RMB market remains unparalleled, handling over 70% of global RMB payments and hosting a growing array of RMB-denominated products.  Our leadership in the FIC space has been underpinned by a robust ecosystem of issuers, investors, and market participants.

However, policy shifts, evolving trade relationships, and the rapid pace of technological change are reshaping the global landscape. Investors' priorities are evolving, with growing demand for sustainable finance, digital innovation, and diversification across different markets.  Amidst these changes, what can we do to further grow this ecosystem and break new grounds?

This is what prompted the Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA) to join forces and form the FIC Task Force, to take stock of how we are doing, and explore what more we can do. Over the past few months, our teams have engaged with members of the community, including various industry stakeholders and Hong Kong Exchanges and Clearing Limited (HKEX), to gather insights on potential measures that can enrich our FIC ecosystem and strengthen our competitiveness.

The feedback from our extensive engagement has enabled us to develop a Roadmap for the Development of Fixed Income and Currency Markets, which will be released today. This roadmap is not only a collection of initiatives; it is a forward-looking strategy designed to reinforce Hong Kong's strengths while seizing new opportunities.  It also underscores our commitment to maintaining Hong Kong's leadership as a key player in the global financial system.

As we look to the future, our goal is not simply to grow markets but to enhance their quality, resilience, and connectivity. This means ensuring that our markets support innovation, whether in the form of new instruments like tokenised bonds; or by

integrating and embedding technologies across platforms, geographies, and asset classes; or by meeting the growing demand for green and socially responsible investments.  Equally important is the need to deepen liquidity and provide more efficient tools for risk management, ensuring that our ecosystem remains robust in the face of global challenges. As interest in Mainland and RMB-denominated assets accelerates, driven by China's growing economic influence and trade partnerships, Hong Kong is well-positioned to facilitate the wider adoption of the currency in trade, investment, and settlement, as well as seizing the opportunities that arise.  This would continue to be one of our focus areas.

Our ability to adapt, innovate, and lead has been the foundation of our success as an IFC. With your support, I am confident that we will not only navigate challenges ahead but also contribute meaningfully to the future of global financial markets. This forum brings together market leaders and experts to discuss the future of FIC markets, and this collective dialogue is essential for charting our path forward.

Thank you. I wish you all a productive and inspiring forum today.",Eddie Yue
https://www.bis.org/review/r250925d.htm,"Martin Schlegel, Antoine Martin, Petra Tschudin: Introductory remarks by the Governing Board, Swiss National Bank news conference","Introductory remarks by Mr Martin Schlegel, Chairman of the Governing Board of the SNB, Mr Antoine Martin, Vice Chairman of the Governing Board of the SNB, and Ms Petra Tschudin, Member of the Governing Board of the SNB, at the Media News Conference of the Swiss National Bank, Zurich, 25 September 2025.",2025-09-25 00:00:00,"## News conference

Embargo 25 September 2025, 10.00 am

## Introductory remarks by the Governing Board

## Martin Schlegel, Antoine Martin and Petra Tschudin

Chairman of the Governing Board / Vice Chairman of the Governing Board / Member of the Governing Board Swiss National Bank Zurich, 25 September 2025 © Swiss National Bank

## Ladies and gentlemen

On behalf of the Governing Board, it is my pleasure as Chairman to welcome you to the SNB's news conference. We will begin by explaining the monetary policy decision and looking at inflation and economic developments. I will then present our decision to publish summaries of the monetary policy discussion. After our introductory remarks, we will as usual be pleased to take any questions you may have.

## Monetary policy decision

I will begin with our monetary policy decision. We have decided to leave the SNB policy rate unchanged at 0%. Banks' sight deposits held at the SNB will be remunerated at the SNB policy rate up to a certain threshold. The discount for sight deposits above this threshold still stands at 0.25 percentage points. We remain willing to be active in the foreign exchange market as necessary.

Inflationary pressure is virtually unchanged compared to the previous quarter. Our monetary policy helps to keep inflation within the range consistent with price stability and supports economic development. We will continue to monitor the situation and adjust our monetary policy if necessary, in order to ensure price stability.

## Inflation forecast

First I will look at the development of inflation. Inflation has increased slightly since the last monetary policy assessment. It rose from -0.1% in May to 0.2% in August. This increase was mainly attributable to higher inflation in tourism and on imported goods.

Inflationary pressure has barely changed compared to June. While inflation is likely to be slightly higher in the short term, in the medium term our conditional inflation forecast remains unchanged. The forecast is within the range of price stability over the entire forecast horizon (cf. chart). As in the previous quarter, it puts average annual inflation at 0.2% for 2025, 0.5% for 2026 and 0.7% for 2027 (cf. table). Our forecast is based on the assumption that the SNB policy rate is 0% over the entire forecast horizon.

I will now hand over to Antoine Martin, who will address the global economic outlook.

## Global economic outlook

Global economic growth slowed somewhat in the first half of 2025. In the US, in particular, developments were less dynamic than in 2024. Growth momentum remained subdued in the euro area, while China recorded solid growth. Global economic developments are being dampened by US tariffs and ongoing high uncertainty. Inflation has risen in the US in recent months. As downside risks to employment have simultaneously increased, monetary policy there has nonetheless been eased recently. In the euro area, inflation has been close to the central bank's target and key interest rates have been left unchanged.

In our baseline scenario, we anticipate that growth in the global economy will be subdued over the coming quarters. US tariffs are likely to curb global trade and reduce the purchasing power of US households. Furthermore, continuing high uncertainty is having a negative impact on companies' investment activity. Inflation in the US is likely to remain elevated for some time. In the euro area, on the other hand, inflation is expected to stay close to target.

Our scenario for the global economy remains subject to high uncertainty. For example, trade barriers could be raised further, leading to a more pronounced slowdown in the global economy. However, it also cannot be ruled out that the global economy will prove more resilient than expected.

This brings us to the situation in Switzerland, which Petra Tschudin will present.

## Swiss economic outlook

Economic growth in Switzerland was weak in the second quarter. After increasing strongly in the first quarter, GDP expanded by just 0.5%. The major fluctuations in the first half of the year were principally due to the pharmaceuticals industry. Value added there rose strongly in the first quarter because deliveries to the US were brought forward. A corresponding countermovement occurred in the second quarter, while the services sectors supported the economy. Unemployment has risen further in recent months.

The economic outlook for Switzerland has deteriorated due to significantly higher US tariffs. The tariffs are likely to dampen exports and investment especially. Companies in the machinery and watchmaking industries are particularly affected. To date, the impact on other industries - notably in the services sector has been limited. Many economic indicators therefore still point to a stable situation and moderate growth. We continue to expect GDP growth of 1% to 1.5% for 2025 as a whole. As a result of the tariffs and the high level of uncertainty, we expect growth of just under 1% for 2026. In this environment, unemployment is likely to continue rising.

The economic outlook for Switzerland remains uncertain. The main risks are US trade policy and global economic developments.

I will now hand back to Martin Schlegel.

## Monetary policy outlook

Ladies and gentlemen, allow me to return to our monetary policy.

In recent quarters, we significantly lowered the SNB policy rate. This easing of our monetary policy has helped to ensure that inflation has not declined further since May. Our monetary policy continues to have an expansionary effect. Our new conditional inflation forecast thus indicates that, assuming an unchanged SNB policy rate, inflation is likely to increase slightly in the quarters ahead.

We have decided today to leave the SNB policy rate unchanged. The medium-term inflation outlook has remained virtually the same compared to the previous quarter. Over the entire forecast horizon, our conditional inflation forecast is within the range consistent with price stability, which we equate with an inflation rate of between 0% and 2%.

The US tariffs present a major challenge for affected companies and are likely to dampen economic activity. Against this backdrop, our monetary policy is also supporting economic development.

Uncertainty about inflation and economic developments is still elevated. We will continue to monitor the situation and adjust our monetary policy if necessary, to ensure price stability over the medium term. We remain willing to be active in the foreign exchange market as necessary.

## Publication of summary of monetary policy discussion

I would now like to turn to the subject of our communications, a subject to which we attach great importance at the SNB. Communication is not an end in itself, but rather helps us to fulfil our mandate. Firstly, because it supports the transmission of monetary policy, and secondly, because it serves as a means of rendering account.

In order to be understood as well as possible, we are constantly working on our communications. To this end, we will be publishing a summary of our discussion at the monetary policy assessment. The first of these will be published on our website four weeks from today. The summary will especially highlight how we assess changes in the economic environment and the monetary policy measures that we derive from them.

When drafting these summaries, we will be guided by our institutional framework. The Governing Board is a collegial body that communicates its decisions externally with one voice. The summaries will set out various considerations and arguments from the discussion, but without attributing them to individual members of the Governing Board. At our monetary policy assessments, we conduct our discussions openly - and, above all, with an open mind as to the outcome. A culture of frank discussions is central to our decision-making, and our summaries will safeguard this openness.

Ladies and gentlemen, thank you for your attention. We will now be pleased to take your questions.

## CONDITIONAL INFLATION FORECAST OF SEPTEMBER 2025

Year-on-year change in Swiss consumer price index in percent



Source(s): SFSO, SNB

## OBSERVED INFLATION IN SEPTEMBER 2025

|           | 2022   | 2022   | 2022   | 2023   | 2023   | 2023   | 2023   | 2024   | 2024   | 2024   | 2024   | 2024   | 12025   | 12025   | 12025   | 12025   | 2022|2023|2024   | 2022|2023|2024   | 2022|2023|2024   |
|-----------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|---------|---------|---------|---------|------------------|------------------|------------------|
|           | ell    | |o2    | |es    | |4     | (ell   | \e2    | |es    | |o4    | ai     | |o2    | [23    | |o4    | a1      | |o2     | |es     | |e      |                  |                  |                  |
| Inflation | 21     | 30     | 34     | 29     | 32     | 21     | 16     | 16     | 12     | 14     | 11     | 07     | 04      | 0.0     |         |         | 28               | 2.1              | 14               |

Source(s): SFSO

## CONDITIONAL INFLATION FORECAST OF SEPTEMBER 2025

|                                               | 2025   | 2025   | 2025   | 2026   | 2026   | 2026   | 2026   | 2027   | 2027   | 2027   | 2027   | 2028   | 2028   | 2028   | 2025|2026|2027   | 2025|2026|2027   | 2025|2026|2027   | 2025|2026|2027   |
|-----------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|------------------|------------------|------------------|------------------|
|                                               | a1     | |-2    | |e     | |4     | a1     | |22    | |e8    | |>4 a1 |        | \e2    | |28    | |o4 ai | |22    |        | [es              |                  |                  |                  |
| Forecast June 2025, SNB policy rate 0.0%      |        | 0.0    | 01     | 03     | 04     | 05     | 05     | 06     | 06     | 0.7    | 07     | 07     | 07     |        |                  | 0.2              | 05               | 07               |
| Forecast September 2025, SNB policy rate 0.0% |        | 02     |        | 04     | 05     | 05     | 06     | 06     | 06     | 07     | 07     | 07     | 07     | 08     |                  | 02               | =05              | 07               |

Source(s): SNB",Martin Schlegel; Antoine Martin; Petra Tschudin
https://www.bis.org/review/r250929e.htm,"P Nandalal Weerasinghe: Why central bank independence matters - in crisis, in recovery, and beyond","Speech by Dr P Nandalal Weerasinghe, Governor of the Central Bank of Sri Lanka, at the 75th Anniversary Oration of the Central Bank of Sri Lanka, Colombo, 29 August 2025.",2025-08-29 00:00:00,"Why Central Bank Independence Matters - in Crisis, in Recovery, and Beyond

75 th Anniversary Oration of the Central Bank of Sri Lanka by Governor Dr. Nandalal Weerasinghe 29 August 2025

1



## Why Central Bank Independence Matters - in Crisis, in Recovery, and Beyond

## 75 th Anniversary Oration of the Central Bank of Sri Lanka

## by

## Governor Dr. Nandalal Weerasinghe

## 29 August 2025

## 1. Opening remarks

I am deeply honoured to be delivering this oration on the occasion of the 75 th Anniversary of the Central Bank of Sri Lanka (CBSL). As the Governor of this great  national  institution,  I  accepted  the  task  of  delivering  this  oration  on central  bank  independence  at  this  landmark  moment  with  a  deep  sense  of responsibility, knowing that the work of central bankers is never complete. The lessons the country, its people, the Central Bank, its staff and leadership have learnt  over  this  long  history  must  be  recorded  and  shared,  enabling  future generations to build on and contribute to the prosperity of the people of Sri Lanka better.

Before I begin, I would like to take this opportunity to extend my heartfelt thanks to all well-wishers and stakeholders - especially the dedicated staff - for their invaluable contributions towards achieving the objectives of the Central Bank over the past 75 years. In particular, I wish to express my deep gratitude to the members  of  the  Central  Bank  Boards  and  the  staff  for  their  exceptional commitment over the past three years. Their tireless efforts played a pivotal role  in  stabilising  the  economy  and  laying  the  foundation  for  a  swift  and sustainable recovery from the most profound socio-economic crisis Sri Lanka has faced since independence.

Seven and a half decades ago, in 1950, our nation took a momentous step towards economic sovereignty with the establishment of the Central Bank of Ceylon.  This  was  a  decision  that  our  founder  Governor  John  Exter  noted  as

demonstrating  our  'intention  to  achieve  genuine  economic  freedom  as  a corollary of the political freedom' that Sri Lanka had gained just 2 years earlier. Looking back, we see that the journey of the CBSL has been one of continuous learning and evolution to enable such freedom through 'the fuller use of the nation's human and material resources and a rising standard of comfort for all' as described by Exter.

Today, we will reflect on how the CBSL has evolved over last 75 years and the need  to  protect  gains  in  terms  of  independence  and  accountability.    While addressing  some  common  myths  and  criticism,  I  will  also  examine  the challenges that central bank independence faces amid evolving domestic and global pressures. Accordingly, over the next hour, I expect to carefully build my case  on  why  and  how  every  Sri  Lankan  must  preserve  the  Central  Bank's independence and its accountability to protect the bedrock of stability for our nation to thrive in the period ahead.

## 2. Understanding central bank independence

## 2.1 What is central bank independence?

Deutsche Bundesbank President Joachim Nagel recently stated that 'independence is part of the DNA of central banks'. Allowing a central bank to make its decisions and operate without being influenced by the government or politicians  for  short-term  political  milage  is  called  independence.  This  will allow  a  central  bank  to  focus  on  its  mandates,  such  as  maintaining  price stability  and  financial  system  stability.  While  political  institutions,  and  by extension fiscal institutions, typically focus on a shorter horizon such as an election cycle, institutions such as central banks function best with independence, since maintaining stability, the core function of central banking, is a long-term necessity for any economy pursuing prosperity.

Moreover, central bank independence does not imply complete detachment from  the  government;  rather,  it  is  the  ability  to  exercise  technical  and professional  judgement in pursuing its objectives,  without  interference  from the government for short-term political gains.

At  the  same  time,  independence  does  not  mean  that  a  central  bank  can formulate  and  execute  policies  without  being  answerable  to  anyone.  The independence  of  a  central  bank  comes  with  greater  accountability  and transparency.

That central bank independence is beneficial to modern economies is backed by both theoretical approaches and practical case studies, including Sri Lanka. Jerome Powell, the Chairman of the Federal Reserve stated in 2024 that 'the record is pretty clear' that central bank independence is 'a good institutional arrangement that serves the public well.' Central bank independence, which has been often discussed in literature across multiple spheres including goal independence,  instrument  independence,  operational  independence  and financial independence, seeks to protect central bank policies from the shortterm pressures of electoral swings, i.e., pressures that help win votes today but can  cause  damage  to  the  economy  for  years  to  come.  Empirical  evidence shows  that  central  bank  independence  is  associated  with  lower  and  more stable inflation without the trade-off of long-term growth stagnation. 1

During  the  last  three  decades  in  particular,  there  has  been  a  strong  trend toward enhancing central bank independence, in both advanced and emerging economies. Notable examples include the Bank of England Act 1998, which created the independent Monetary Policy Committee; the European Central Bank's  statutory  independence  enshrined  in  EU  treaties;  and  reforms  in countries  such  as  Chile  (1989),  South  Africa  (1996),  Indonesia  (1999),  India (2016) and Brazil (2021).

## 2.2 Why does independence matter?

In  the  first  place,  central  bank  independence  matters  because  it  allows monetary policy to be shaped to support long-term economic stability without being subject to short-term political pressure. Economic theory, and especially

1 See, for example, Cukierman, A., Webb, S., and B. Neyapti (1992), 'Measuring the Independence of Central Banks  and  Its  Effect  on  Policy  Outcomes',  Alesina  &amp;  Summers  (1993)  - 'Central  Bank  Independence  and Macroeconomic Performance', Berger, de Haan &amp; Eijffinger (2001) - 'Central Bank Independence: An Update of Theory and Evidence', and Dall'Orto Mas et al. (2020) - 'The Case for Central Bank Independence: A Review of Key Issues'.

the time inconsistency problem put forward by Kydland and Prescott, suggests that governments and politicians may encourage short-term growth or alleviate temporary  rises  in  unemployment,  often  by  money  creation  or  simply  by keeping interest rates artificially low. As discussed earlier, this, in turn, leads to very  high  levels  of  inflation  with  eventual  adverse  consequences  for  people and, of course, the credibility of the central bank.

If  the  central  bank  is  independent  and  has  a  clear  mandate,  which  in  most cases is aimed at maintaining price stability, it can help a central bank to stand against such temptations and act objectively on available data in pursuit of its longer-term objectives. This builds trust among markets and the public, helps contain cost of living pressures, prevents wage-price spirals, keeps inflation expectations  well-managed, makes production costs more predictable,  and therefore sets the stage for being able to maintain economic stability, thereby producing positive spillovers that ultimately improve public welfare.

Central bank independence is also a critical requirement for maintaining the stability of the financial system. The ability of a central bank to enforce micro and macroprudential regulation uniformly across all deposit-taking institutions, irrespective of their ownership structure and devoid of political or market influence would ensure a sound and stable financial system.

Central bank independence facilitates financial innovation as well. The IMF's 2024  working  paper  titled 'A  New  Measure  of  Central  Bank  Independence' shows that financial independence and governance autonomy are foundational  for  central  banks  to  experiment  with  new  instruments  and technologies. Essentially, independence is not just about maintaining stability, it is also the engine that allows central banks to shape the future of finance.

As  I  will  discuss  in  a  later  section,  unfortunately  the  Sri  Lankan  public  and businesses had to learn the hard way the repercussions of lack of central bank independence and the consequences of fiscal dominance during the buildup to the 2022 crisis. While many do not speak about this anymore, Sri Lankans also  experienced  the  benefits  of  allowing  the  Central  Bank  to  operate independently, most notably the sharp disinflation process and protecting the financial  sector  from  near-collapse,  both  of  which  enabled  the  economy  to record a rapid rebound from the depth of the crisis.

## 2.3 Role of accountability

Alan  Blinder,  former  Vice  Chair  of  the  Federal  Reserve  and  Professor  of Economics,  stated  that  'because  monetary  policy  actions  have  profound effects on the lives of ordinary people, a central bank in a democracy owes these  folks  an  explanation  of  what  it  is  doing,  why,  and  what  it  expects  to accomplish. It's their economy, not ours.'

It has to be emphasised that independence cannot stand alone. Central bank independence is not an end in itself. It must be matched with strong provisions to ensure accountability. Because independence has been granted to fulfill the central bank's mandate, the institution is obliged to explain, and ex post justify its decisions. Independence and accountability are essentially two sides of the same  coin.  Central  banks  do  not,  and  should  not,  operate  in  a  vacuum. Therefore,  as  institutions  in  the  service  of  the  general  public,  central  banks must ensure that the public and politicians see their decisions as underpinned by their mandate and the broader interest of society.

Therefore, for the central bank's independence to be democratically legitimate (Bernanke,  2010),  there  must  be  a  two-way  dialogue.  As  an  institution  that directly affects people's lives, the central bank must be open to scrutiny while consistently explaining and justifying its actions, openly, clearly, and in ways that resonate with the ordinary member of the public.

Transparency helps bridge independence and accountability. This commitment  to  a  high  degree  of  openness  about  policies,  operations, governance and outcomes focuses on explaining the central bank's work not just to the financial elite but to every citizen, no matter how bitter the truth may be or how painful the central bank decisions may appear to be. As the South African  Reserve  Bank  Governor  Lesetja  Kganyago  said,  'For  society  to appreciate our roles, we…have got to take society along with us, such that when central banks come under attack, it is not just going to be us defending our independence.' This is why broader society must understand what the central bank does and why it does so. This is why central banks need to be accountable and transparent.

## 2.4 Global case studies

Beyond theory, experience across countries shows us, time and again, that independent central banks can act decisively, conducting credible monetary policy  and  safeguarding  financial  system  stability,  even  during  periods  of turmoil.

## 2.4.1 When independence has worked

Take  New  Zealand,  for  example.  Since  gaining  independence  in  1989,  the Reserve  Bank  has  been  a  pioneer  in  inflation  targeting.  Its  clear  mandate, operational autonomy, and commitment to transparency enabled it to respond swiftly during crises such as the Asian Financial Crisis and the Global Financial Crisis.  By  adjusting  policy  rates  and  supporting  domestic  banks  through liquidity facilities, it helped  anchor  inflation expectations  and  stabilise markets.

Canada's experience is similarly instructive. Since 1991, the Bank of Canada has  operated  within  a  well-defined  inflation-targeting  framework.  It  has successfully navigated multiple shocks - from the dot-com bubble to the 2008 financial crisis - through a combination of conventional and unconventional monetary  tools.  Its  data-driven  decisions  and  transparent  communication have consistently reinforced market confidence.

In  the  United  Kingdom,  the  Bank  of  England  was  granted  operational independence  in  1997.  During  the  Global  Financial  Crisis  and  subsequent fiscal shifts, it responded with timely interest rate adjustments and quantitative easing. Its ability to act free from political interference has preserved public trust and ensured that monetary policy remains effective.

Sweden's  Riksbank,  independent  since  1999,  responded  to  the  Global Financial Crisis with aggressive rate cuts and liquidity support. Its credibility allowed it to act countercyclically, softening the downturn and enabling a faster recovery than many of its peers.

Germany's Bundesbank,  long  regarded  as  a  symbol  of  monetary  discipline, played a pivotal role in post-war recovery and in managing inflationary shocks throughout  the  20th  century.  Though  monetary  policy  now  rests  with  the European  Central  Bank,  the  Bundesbank  continues  to  oversee  banking supervision and financial stability, reinforcing its legacy of independence.

The  European  Central  Bank  itself,  institutionally  independent  by  design, demonstrated remarkable resolve during the euro area sovereign debt crisis. Despite  political  divisions,  it  launched  bold  liquidity  operations  and  the landmark Outright Monetary Transactions programme - underpinned by Mario Draghi's now-famous commitment to 'do whatever it takes.'

In  the  United  States,  the  Federal  Reserve's  operational  independence  has enabled it to implement unconventional policies such as quantitative easing and  forward  guidance.  Analysts  have  noted  that  this  independence  helped prevent inflation expectations from de-anchoring, even amid political uncertainty and trade tensions.

Amongst  emerging  market  economies,  Chile  offers  a  compelling  case  of  a country  that  enshrined  central  bank  independence  in  its  constitution  to overcome  a  history  of  persistent, high inflation. For decades,  political interference and weak institutional frameworks meant that the Central Bank of Chile  was  unable  to  secure  the  stability  of  the  currency,  with  inflation frequently  reaching  triple  digits.  However,  in  1989,  Chile  made  a  landmark decision  by  enshrining  the  central  bank's  independence  directly  into  its constitution  through  the  Basic  Constitutional  Act;  the  nation  collectively committed to prioritising long-term stability over short-term political expediency.  The  Central  Bank  of  Chile  has  since  brought  inflation  down  to stable,  single-digit  levels,  providing  the  essential  foundation  for  sustained economic growth and investor confidence.

The experience of India also provides useful insights. For decades, the Reserve Bank of India (RBI) has navigated a path of evolving independence, seeking to balance  its  mandate  of  monetary  stability  with  the  demands  of  a  rapidly developing nation. This created an environment that, at times, required difficult and steadfast policy decisions. However, India has consistently demonstrated a commitment to strengthening the RBI's role, culminating in the formalisation

of its inflation-targeting framework and the amendment to the Reserve Bank of India Act of 1934 in 2016. This landmark legislative step enshrined a clear and singular objective for the central bank: to maintain price stability, while keeping in mind the objective of growth.

These examples show us that independence is not merely a legal construct - it is a functional enabler of stability, credibility, and innovation.

## 2.4.2 When independence was compromised

Agustin  Carstens,  former  General  Manager  of  the  Bank  for  International Settlements  (BIS),  aptly  observed  that, 'through  history,  we  have  had  quite substantial  episodes  where  monetary  policy  mismanagement  has  led  to devastating effects - in inflation, in financial systems, affecting the wellbeing of individuals and firms, oftentimes bringing countries to the brink.'

Germany's hyperinflation in the 1920s, Argentina's recurring debt and inflation crises,  Zimbabwe's collapse in the late 2000s, and the United States' Great Inflation  of  the  1960s  and  1970s  -  all  serve  as  reminders  of  the  risks  when central  banks  are  pressured  to  finance  fiscal  deficits  or  support  short-term political  goals.  Writing  his  autobiography  in  2018,  Paul  Volcker,  former Chairman of the US Federal Reserve, reminisced that, in 1979, when he was summoned by the US President to be appointed as the Chairman of the Federal Reserve, he made the following three points  to the President: '[that he] felt strongly about the independence of the Federal Reserve; the Fed would have to deal head-on with inflation; and [he] would advocate tighter policies than Miller [the  previous  Fed  Chair]  had.'  Volcker  and  the  Federal  Reserve  under  him managed  to  tame  high  and  stubborn  inflation  only  through  appropriate monetary policies they implemented as an independent institution.

As  we  reflect  on  these  global  experiences,  we  see  that  the  lesson  is  clear: central bank independence is not a privilege but a necessity. The ability of a central bank to act decisively, maintain credibility, and provide a steady anchor in  the  storm  of  economic  uncertainty,  is  the  result  of  independence.  This independence is what allows central banks, including ours, to safeguard the future of economies.

## 3. From the Monetary Law Act of 1949 to the Central Bank Act of 2023 3.1 Pressing need for new legislation on central banking

Over  the  past  75  years,  the  Monetary  Law  Act  of  1949  (MLA)  has  been  the subject  of  much  discussion  and  debate.  I  will  not  attempt  to  revisit  every argument about its strengths and weaknesses. However, I believe we can all agree on one fundamental point: the MLA was a piece of legislation far ahead of  its  time.  It  incorporated  many  forward-looking  features  and  provisions designed to facilitate sound central banking practices and principles - some of which remain relevant even today.

While  the  MLA  had  served  its  purpose  for  decades,  it  had  not  undergone  a comprehensive review in  line  with  the  evolving  challenges  of  monetary  and financial stability. By the early 2000s, it was increasingly evident that the MLA was  outdated,  both  in  terms  of  institutional  design  and  in  providing  the credibility  required  for  modern  monetary  policymaking.  Sri  Lanka  was  also preparing to move towards a Flexible Inflation Targeting (FIT) framework in line with global best practices, a regime that demands a clear mandate for price stability,  greater  independence,  and  robust  accountability  mechanisms. Without reform, the existing legal framework risked undermining credibility and weakening the effectiveness of monetary policy.

Another key deficiency of the MLA was that the success of policymaking was person dependent. This was recognised by John Exter, who, while proposing the establishment  of  a  central  bank  for  Ceylon,  also  noted  that  its  success  in serving  the  nation  would  depend  on  'proper  skill  and  understanding  in  its management'. Referring to the relationship with the Government, Exter noted that 'the effectiveness of co-operation and coordination between  the Monetary  Board  and  the  Government  will  depend  more  upon  the  men occupying the key positions at particular times than upon any legal formula, no matter how carefully or elaborately it might be worked out.'

History bears out Exter's insight. While the autonomy of the Central Bank was compromised  from  time  to  time,  there  were  notable  instances  where  the Monetary Board exercised independent judgement - even with the Secretary to the Treasury as a member. Two examples stand out:

- In December 1959, the Monetary Board raised the Bank Rate to counter inflationary and balance of payments pressures. This move, perceived as contrary  to  Government  policy,  prompted  the  Minister  of  Finance  to direct the Board to reverse the decision and assume responsibility for the action.
- In  2019,  the  Monetary  Board  restricted  monetary  financing  to  the Government, recognising its adverse consequences. This decision, too, was reversed in 2020 following Government instructions.

These episodes confirm Exter's view that 'good central banking is less good law than good practice' and that 'the exact degree of independence of the Central Bank is likely to vary from time to time'.

Recognising  these  deficiencies  and  evolving  needs,  the  CBSL  initiated  a process to modernise its governing legislation in 2017. 2 In April 2018, a Cabinet Memorandum was submitted seeking approval in principle for reforms to the country's Central Bank law. The subsequent approval gave momentum to the drafting of a new Central Bank Act (CBA), with the CBSL playing a lead role in shaping the provisions. The drafting was  guided by three overarching objectives:

- i. Strengthening the governance of the institution
- ii. Securing independence and accountability to support the adoption of FIT and ensure durable price stability
- iii. Enhancing financial sector oversight and resilience.

The  draft  legislation  reflected  several  critical  reforms:  Price  stability  was formally  recognised  as  the  primary  objective  of  the  CBSL,  supported  by  a strengthened  institutional  setup  for  monetary  policy  formulation.  Clearer checks  and  balances  were  introduced,  alongside  updated  provisions  for monetary  operations  and  instruments,  and  greater  exchange  rate  flexibility. Importantly, the draft sought to safeguard the financial strength of the CBSL, institutionalise  stronger  fiscal-monetary  coordination,  and  impose  limits  on monetary financing to avoid the pitfalls of fiscal dominance.

2 It must be noted that there was a short-lived attempt in early 2000s to rewrite the MLA as well.

The new Central Bank Bill was consistent with global standards on independence, governance, and accountability. Following multiple rounds of consultations with stakeholders, the Bill was finalised and submitted to  the Parliament in 2019. However, the political environment at the time prevented its passage, and the reform was left in abeyance.

## 3.2 An Aside: What if the New CBA had been in place during the crisis?

The failure to enact the new CBA in 2019 was a missed opportunity of historic proportions. Had this legislation been passed, Sri Lanka would have entered the subsequent years with a stronger, more independent Central Bank - better equipped to withstand the pressures that ultimately led to the crisis.

Under the revised framework, the CBSL would have been empowered to resist excessive  monetary  financing,  maintain  a  credible  commitment  to  price stability, and allow greater exchange rate flexibility. The prohibition of monetary financing  could  have  helped  keep  inflation  under  control.  Moreover,  the absence of Central Bank financing might have compelled the Government to avoid  ill-timed  and  reckless  tax  cuts  -  decisions  that  severely  damaged  Sri Lanka's external credit ratings. A firm commitment to price stability through a flexible inflation targeting regime would have allowed the exchange rate to act as an automatic stabiliser, curbing excessive demand pressures caused by a suppressed currency. These institutional safeguards could have prevented the build-up of vulnerabilities that ultimately pushed the economy to the brink.

Instead, what prevailed was the public reprimanding of Central Bank officials by political and fiscal authorities - actions applauded by many who failed to grasp the long-term benefits of Central Bank independence. Even if the crisis, rooted  in  fiscal  mismanagement,  could  not  have  been  entirely  avoided,  an empowered and independent Central Bank would have acted sooner and more decisively, mitigating the severity of the economic distress faced by our people.

Sri  Lanka's  recent  experience  has  reaffirmed  a  fundamental  truth:  as  often repeated in global central banking circles, central bank independence is not a luxury - it is a necessity. The journey toward a modern, rules-based central bank policy framework was never a mere technical exercise. It was, and remains,

essential to ensure that monetary policy and financial stability policies serve the  broader  public  interest  rather  than  short-term  expediency.  The  efforts undertaken before 2019 show that the CBSL recognised this imperative well in advance.  The  subsequent  crisis  has  underlined,  in  stark  terms,  the  cost  of delay in strengthening independence and accountability as well as the cost of not exercising available independence and accountability even under the MLA.

## 3.3 How the Central Bank helped stabilise the economy following the crisis - even under the MLA

Patrick Honohan, former Governor of Bank of Ireland, opined in 2024 that 'price stability and prevention of crises are indeed the core goals of central banking. But it is the central bank's ability to react effectively to crisis situations that most  test  their  skills  and  preparedness.  Over  the  years,  failure  to  contain financial crises has entailed enormous economic costs.'

Sri Lanka faced such a test in 2022 - an unprecedented crisis marked by severe balance of payments pressures, social and political unrest, and a profound loss of  confidence  in  institutions,  all  while  an  external  debt  default  loomed.  The roots of this crisis lay in structural weaknesses, persistent fiscal imbalances, and a series of imprudent policy decisions that created an unsustainable debt burden and mounting external pressures.

Under intense domestic and international pressure, the Government eventually  sought  IMF  assistance  and  announced  a  debt  standstill  as  an interim  measure,  paving  the  way  for  debt  restructuring  negotiations.  This culminated  in  an  Extended  Fund  Facility  (EFF)  arrangement  with  the  IMF  in 2023.

As documented elsewhere, the Government and the Central Bank implemented a bold stabilisation package. Notably, replacing the MLA with the new  CBA  enshrined  greater  independence  and  accountability  in  the  new legislation. However, since the CBA was enacted only in September 2023, most stabilisation measures had to be executed under the MLA. This underscores an important  truth:  even  under  the  MLA,  stability  could  be  achieved  when  the

Central Bank exercised its  available  independence  with  strong  coordination with fiscal authorities.

Still  under  the  MLA,  the  CBSL  adopted  an  extensive  array  of  measures  to stabilise the economy from its dire straits since the onset of the crisis in early 2022.  Monetary  policy  was  tightened  significantly  in  April  2022,  following  a substantial depreciation of the Sri Lanka rupee in March as the exchange rate was allowed a measured adjustment. These measures, though painful, were necessary. They brought inflation down from a peak of nearly 70 per cent in September 2022 to single digits  by mid-2023  and  maintained price  stability since  then.  This  disinflation  process  has  been  hailed  globally  as  one  of  the fastest in recent history.

Equally  critical  was  safeguarding  the  financial  system.  At  the  height  of  the crisis,  many predicted a banking collapse. Yet Sri Lanka avoided a systemic banking crisis - a remarkable achievement given the depth of the economic and  debt  turmoil.  Had  a  banking  crisis  materialised,  public  deposits  would have been at risk, trust in the financial system shattered, and the economic rebound severely compromised.

As these measures took hold, macroeconomic conditions improved steadily supported by greater fiscal discipline and consolidation. Inflation fell sharply, risk premia eased after debt restructuring, and the external sector stabilised. The  Central  Bank  worked  tirelessly  to  restore  public  confidence  -  through frequent  communications,  press  briefings,  and  transparent  explanations  of policy decisions. This commitment to openness anchored inflation expectations and stabilised markets, laying the foundation for recovery.

## 3.4 Provisions for independence and accountability in the New CBA

The  enactment  of  the  CBA  in  2023  marked  a  landmark  structural  reform, significantly  strengthening  the  independence  of  the  CBSL  to  perform  its streamlined mandate.

## 3.4.1 Key provisions on independence and accountability

Several key provisions underscore this transformation, including the following:

- The CBA establishes the Central Bank's primary objective as achieving and maintaining domestic price stability, which takes precedence over all other functions. Ensuring financial system stability is recognised as the secondary objective (Section 6). This prioritisation reflects the critical responsibility entrusted to the CBSL as the sole authority to maintain low and stable inflation for the greater public good.
- In  addition  to  the  Governing  Board,  which  oversees all  activities  other than  monetary  policy,  the  Act  introduces  a  Monetary  Policy  Board (Section 11) tasked with formulating monetary policy and implementing a flexible exchange rate regime in line with the Flexible Inflation Targeting (FIT) framework. This institutional arrangement reinforces the importance of sound and independent monetary policymaking.
- The Secretary to the Treasury is excluded from the Central Bank's policy boards, ensuring greater independence. Provisions are in place to ensure that members of the Boards have the required competencies, integrity, and ethical conduct.
- Recognising the need for fiscal-monetary coordination, the Act establishes  a  Coordination  Council  comprising  the  Governor  and  the Secretary  to the Treasury  (Section  83). This forum  facilitates the exchange of information and views to support coherent policy formulation while preserving institutional autonomy.
- The CBA explicitly prohibits monetary financing of fiscal deficits (Section 86), thereby eliminating the risk of fiscal dominance. While provisional advances to the Government are permitted, they are subject to stricter conditions than under the previous Monetary Law Act.
- Under the FIT framework, the inflation target is jointly determined by the Minister  of  Finance  and  the  Central  Bank  through  a  Monetary  Policy Framework Agreement (Section 26). If the target is missed, the Central Bank  must  publicly  disclose  the  reasons,  outline  remedial  measures, and  specify  the  timeframe  for  returning  inflation  to  target-ensuring transparency and accountability.

- The Act mandates the publication of a Monetary Policy Report every six months, detailing recent inflation trends, the medium-term outlook, and associated risks, and informing the public on monetary policy implementation and the achievement of objectives as well (Sections 27 and 80). Additionally, within four months of the financial year's close, the Central Bank must publish an Annual Report reviewing economic conditions, policy objectives, and the performance of its policies (Section 80).
- Section 80 also provides for the Governor, members of the Board and Deputy Governors to be heard by the Parliament.
- The CBSL enjoys full administrative and financial autonomy (Section 5), enabling  it  to  manage  its  internal  affairs  independently  -  an  essential prerequisite for credible and effective central banking.
- The appointment of the Governor and members of the Governing and Monetary  Policy  Boards  requires  the  approval  of  the  Constitutional Council (Sections 15 and 19). Clear provisions govern their removal by the executive and legislative branches of the Government in the case of misconduct or negligence, ensuring accountability without compromising independence.
- The  Act  explicitly  prohibits  any  person  or  entity  from  attempting  to influence  the  Governor,  Board  members,  or  employees  of  the  Bank (Section 5),  reinforcing  the  principle  that  the  autonomy  of  the  Central Bank must always be respected.

While the CBA addresses the need to rely on individuals it is still necessary for properly appointed members to exercise independence empowered by CBA. It is  only  then  the  provisions  of  the  CBA,  which  require  well-thought-out appointments to be made with the involvement of the executive, as well as the legislative through the Constitutional Council.

## 3.4.2 How do CBA provisions  on  independence  and  accountability,  and activities since the introduction of the CBA benefit the nation?

- Prior to the enactment of the CBA, the CBSL could finance fiscal deficits through mechanisms such as providing advances to the Government or

purchasing  Government  securities  in  the  primary  market.  Successive Governments increasingly relied on such monetary financing, despite its adverse implications for macroeconomic stability. Excessive Government borrowing from the CBSL contributed to an expansion in the money supply, generating excessive demand-driven inflationary pressures.  In  many  instances,  monetary  financing  conflicted  with  the CBSL's  mandate  of  maintaining  price  stability  and  undermined  the effectiveness of monetary policy transmission. Such monetary financing no longer occurs under the CBA.

- Several provisions have  been  made  in  the CBA  to increase the accountability of the Central Bank under the FIT framework. If the Central Bank fails to meet the inflation target by a margin determined under the agreement for two consecutive quarters, the CBSL must publicly explain the reasons and outline corrective actions. Accordingly, under section 26 of the CBA, the Monetary Policy Board of the Central Bank should submit a report to the Parliament through the Minister of Finance, explaining the failure to achieve the inflation target, the remedial actions proposed to be taken by the Central Bank, and an estimate of the time period within which the inflation would reach the target.

Accordingly, the Central Bank has submitted and made available to the public  several  reports  as  inflation  remained  below  the  target  and recorded a period of deflation mainly due to supply side factors. Such information would be useful in improving the awareness of the public on the reasons for inflation volatility, future path of inflation as well as risks on  inflation  projections,  thereby  facilitating  informed  decisions  by  the economic  stakeholders,  leading  to  well  anchored  expectations  on inflation.

- Further, with the improved accountability of the Central Bank, there is evidence that public trust in policy decisions has improved, which has significantly  supported building business confidence, positive investor sentiments, etc.

- One  of  the  most  transformative  features  of  the  CBA  is  the  formal designation of the CBSL as the Macroprudential Authority in Sri Lanka. This designation empowers the CBSL to independently monitor systemic risks  and  proactively  safeguard  financial  system  stability,  an  essential foundation  for  system  stability.  The  Act  provides  the  CBSL  with  a comprehensive legal mandate and a suite of tools to mitigate systemic risk, contain unsustainable credit growth and leverage, and ensure the uninterrupted functioning of the financial system, even under adverse economic conditions. Together, these tools enable the Central Bank to address emerging systemic risks with precision and agility, protecting the deposits of the public while ensuring the stability of the financial system.
- To ensure public oversight on the health of the financial system, the CBSL is required to publish an annual Financial Stability Review. This comprehensive publication assesses the health of the financial system, identifies  emerging  risks  and  vulnerabilities,  outlines  the  corrective measures  undertaken  by  regulators,  and  tracks  progress  on  crossagency recommendations. In doing so, it not only strengthens institutional accountability but also reinforces public confidence in the resilience and integrity of the financial system.
- In addition to the reforms introduced under the CBA, the CBSL has also played a pivotal role in strengthening the broader legal framework that governs Sri Lanka's financial sector, ensuring that institutional reforms are  supported by a strong and coherent legislative foundation. With  a view to strengthening the resilience of the banking sector and reinforcing the integrity of the regulatory framework, the Banking Act was amended in  June  2024.  This  comprehensive  reform  introduced  a  wide  range  of critical  enhancements  to  modernise  and  strengthen  the  regulatory landscape. Stronger governance requirements were extended across the entire sector, including state-owned banks. Importantly, greater autonomy and strengthened legislation have allowed enforcing similar regulations across all banks, irrespective of their ownerships structure.

- Another key milestone in this effort was the enactment of the Banking (Special Provisions) Act, No. 17 of 2023, which strengthens the CBSL's role  as  the  Resolution  Authority,  empowering  it  to  take  timely  and decisive  action  in  addressing  distressed  financial  institutions.  This landmark  legislation  introduced  critical  features,  including  enhanced resolution powers, robust financial safety net mechanisms, and statutory recognition for the Deposit Insurance Scheme,  thereby reinforcing public confidence and the stability of the financial system. The Act also established clear procedures for the orderly winding-up of licensed banks, while allowing resolution measures to be extended to Licensed Finance Companies when appropriate.
- Meanwhile,  the  Central  Bank  has  intensified  its  efforts  to  advance financial  inclusion  and  enhance  financial  literacy,  while  steadfastly safeguarding the integrity of the financial system. These initiatives are not merely social objectives - they are fundamental to ensuring the effective transmission of monetary policy and preserving financial stability. In this context,  the  Bank  has  engaged  extensively  with  a  wide  spectrum  of stakeholders, both domestic and international, while also reaching out to grassroots communities. Such engagements are designed to deliver tangible  benefits  to  the  public  and  businesses  alike,  fostering  a  more inclusive and resilient financial ecosystem.

## 4. Addressing common myths and criticism

As  Raghuram  Rajan  observed  in  2017, 'any  public  job  involves  both  undue praise and unfair criticism… yet it is the latter that is probably more useful in helping you sharpen your message.' In that spirit, let me take this opportunity to  address  in  this  section  some  of  the  common  myths  surrounding  the functions and operations of the Central Bank of Sri Lanka.

## 4.1 Is there no coordination between  the Central Bank and the Government?

While  independence  is  vital,  it  does  not  and  must  not  mean  operating  in isolation.  Coordination  between  monetary  and  fiscal  authorities  remains

essential.  The  CBA  ensures  this  through  the  establishment  of  a  statutory Coordination  Council,  where  representatives  from  both  the  CBSL  and  the Ministry  of  Finance  meet quarterly  to  review  economic,  fiscal,  and  financial conditions, emerging risks for better policy coordination and timely decisions to address concerns.

In  addition,  we  continue  to  work closely  with the Government, international financial  institutions,  and  other  regulators,  particularly  in  the  areas  of  crisis management and financial system oversight. We do this through bodies like the Financial  Sector  Crisis  Management  Committee  and  the  Financial  System Oversight Committee.

## 4.2 Is  the  CBSL  beyond  Sovereignty  and  accountable  only  to  external agencies such as the IMF?

The CBSL is an arm of the State and functions as a public corporation under the Constitution of the Republic. The CBA provides a robust framework to ensure the CBSL's accountability to Parliament and, ultimately, to the people of Sri Lanka.

Appointments to the positions of Governor and members of the CBSL's Boards are made by the Executive and the Legislature, subject to checks and balances through the Constitutional Council, as stipulated in the Constitution and the CBA.  Once  appointed,  however,  these  appointees  are  expected  to  operate independently of political affiliations and irrespective of who appointed them. The  Executive  may  remove  the  Governor  or  any  Board  member  with  the approval of the Constitutional Council, subject to the safeguards in the CBA.

The  Ministry  of  Finance  shares  responsibility  for  setting  the  inflation  target jointly  with  the  CBSL.  If  no  agreement  is  reached,  the  Cabinet  of  Ministers determines the target to be achieved by the CBSL. Unlike in the past, the CBA now mandates that Parliament or its Committees summon the Governor, Board members, and Deputy Governors at least once every four months to review the CBSL's functions. If any policy or operation is perceived to deviate from the CBSL's mandate, it can be questioned during these sessions, ensuring strong democratic oversight.

The  CBSL  also  serves  as  the  Government's  representative  in  fostering international  relations  with  institutions  such  as  the  International  Monetary Fund (IMF). Currently, Sri Lanka is engaged in the EFF arrangement with the IMF. While  the  programme's  economic  and  financial  policies  are  prepared  in consultation  with  the  IMF,  they  remain  fully  owned  by  the  Sri  Lankan authorities.

## 4.3 Is the CBSL's financial independence a new concept?

The  CBSL's  independence  is  not  entirely  a  new  thing,  but  it  has  been significantly strengthened under the CBA. Even under the MLA, the CBSL was vested with a high degree of financial independence  - the ability to operate without  relying  on  Government  funding.  Accordingly,  the  former  Monetary Board of the CBSL was entrusted with the power to approve the CBSL's budget. Similar  provisions  are  available  in  the  CBA,  enabling  the  CBSL  to  operate without reliance on the Government's financial allocations, which could have jeopardised the independence of the CBSL. At the same time, all expenditures are  subject  to  internal  governance,  Board  oversight,  and  external  audits, ensuring  transparency  and  accountability.  The  CBSL  is  also  required  to maintain transparent financial reporting and is subject to independent external audits, which have been in place for several decades to ensure discipline in the financial operations of the CBSL. New law enforcements under the CBA have further strengthened the financial and operational independence of CBSL, by way of clearly defining the profit transferring ability of the CBSL and provision for recapitalisation, if needed, to ensure that the CBSL will remain financially sound and capable of fulfilling  its  core  mandate  without  the  fear  of  making losses or capital depletion.

## 4.4 Independence vs. expectations: What can the CBSL truly deliver?

Misunderstanding the CBSL's objectives and functions often leads to unrealistic expectations about what the CBSL can deliver and how it should operate. Our core objective is to achieve and maintain domestic price stability. Alongside this, we are also tasked with securing financial system stability. Both

objectives are pursued, aiming to encourage and promote long term economic stability and growth.

A frequent misconception is why the CBSL does not directly promote economic growth or development. Questions often arise as to why the Bank does not actively empower businesses - particularly MSMEs - promote exports, develop industries, or alleviate poverty. The answer lies in our mandate: the CBSL's role is to create an enabling environment of stability, within which the Government and  other  authorities  can  implement  growth-oriented  policies.  History  has shown that when central banks pursue multiple, often conflicting objectives with limited tools, the result is inefficiency and instability. Central banking is fundamentally about stability.

Another common misunderstanding is that the CBSL fixes the exchange rate. Under  the  current  flexible  exchange  rate  regime  mandated  by  the  CBA,  the value  of  the  Sri  Lanka  rupee  is  determined  by  market  forces  of  supply  and demand. The CBSL intervenes only to build reserves and smooth excessive volatility - not to fix or target a specific rate.

When these roles are misunderstood, criticism could arise, especially when difficult but necessary policy decisions are made in the long-term interest of the economy.

## 4.5 The Central Bank's role in conducting agency functions

Since its establishment, the CBSL has been entrusted through various statutes with the responsibility of carrying out various other functions on behalf of the Government. Such functions include public debt management, management of  the  Employees'  Provident  Fund,  exchange  control  (later  foreign  exchange management), financial intelligence and regional development.

The  need  for  the  CBSL  to  carry  out  agency  functions  on  behalf  of  the Government has arisen due to the public trust placed in the CBSL as well as the absence  of  other  acceptable  institutional  arrangements  to  carry  out  such functions  elsewhere.  Some  of  these  functions  have  resulted  in  conflicting objectives for the CBSL, necessitating establishing and strengthening firewalls in the governance structure of the CBSL. At times, allocation of resources to

carry out agency functions is a severe strain on human resources and dilutes the core functions of the Central Bank.

Accordingly, the implementation of concessional loan schemes for targeted sectors by the CBSL has been phased out. The CBSL's regional engagement has shifted towards enhancing financial inclusion and improving financial literacy among the public under the current set up. This is in line with the Government's efforts to strengthen the development finance function under the Ministry of Finance, ensuring a more focused institutional framework for such initiatives.

Furthermore, the transfer of the public debt management function from the CBSL is currently underway, with the establishment of a dedicated Public Debt Management  Office  under  the  Ministry  of  Finance.  This  marks  another important step in ensuring that operational responsibilities are properly aligned with the appropriate institutions, while allowing the CBSL to focus more on its core monetary and financial stability mandates.

Looking ahead, as the market matures and suitable institutional arrangements are  made,  the  CBSL  has  no  objection  to  transferring  the  remaining  agency functions out of the Central Bank as well. This will enable us to focus fully on the CBSL's core objectives and better utilise our resources towards maintaining stability.

## 5. Concluding remarks: Preserving independence

In an often complex and unpredictable political and economic environment, preserving the independence of the Central Bank is not merely important - it is indispensable to safeguarding the stability and prosperity of a nation.

History  and  global  experience  demonstrate  that  central  banks  with  clearly defined  mandates,  well -established  boundaries,  and  adequate  operational autonomy are best positioned to deliver on their promises. A clear mandate not only  guides  the  institution  but  also  provides  a  transparent  benchmark  for accountability  to  both  policymakers  and  the  public.  Narrowly  defined  roles prevent central banks from straying into policy domains that rightly belong to elected governments. The CBA enshrines this clarity for the CBSL.

Transparency and open communication - on our mandate, policy actions, and their  rationale  -  are  essential  to  building  public  trust.  Adopting  global  best practices  in  disclosure  and  accountability  serves  as  a  powerful  safeguard against  undue  influence.  At  the  same  time,  independence  does  not  mean isolation. Effective macroeconomic management requires constructive dialogue  and  coordination  between  the  Central  Bank  and  the  Government, particularly on fiscal, monetary, and financial sector policies. The CBA provides a  legal  framework  for  such  coordination  without  compromising  autonomy. Recent  experience  during  Sri Lanka's economic  crisis, financial sector vulnerabilities,  and  debt  restructuring  illustrates  how  close  collaboration  anchored in mutual respect for roles - can accelerate stability and recovery.

Christine  Lagarde,  the  President  of  the  European  Central  Bank,  recently observed  that  'while  recent  research  suggests  that  de  jure  central  bank independence has never been more prevalent than it is today, there is no doubt that the de facto independence of central banks is being called into question in several parts of the world.' In this context, a timely reminder to policymakers across  the world  of Alan Blinder's  enduring  advice  that  'central  bank independence is a fine institution that ought to be preserved where it exists and emulated where it does not' could be profoundly relevant.

Having  witnessed  both  the  benefits  of  independence  and  the  costs  of  its absence, I firmly believe it is the responsibility of future generations to protect, preserve, and promote the independence of the Central Bank. Only then can it continue to serve as a steadfast anchor of stability - an essential foundation for sustainable growth and shared prosperity.

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| Nagel, Joachim, 'ECB's Nagel Says Holding Rates Makes Sense After Eight Cuts', Bloomberg, 25 July 2025                                                                                     |
| Powell, Jerome H., 'Fed's Powell Defends Central Bank Independence as Challenges Loom', Reuters, 09 July 2024                                                                              |
| Tucker, Paul,'Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State', Princeton University Press, 2018                                                     |
| Weerasinghe, P. Nandalal, 'Inflation - Public Enemy NumberOne', Annual Research Symposium, University of Colombo, Colombo, November 2023                                                   |

Weerasinghe, P. Nandalal, 'Evolution of Monetary and Exchange Rate Policy in Sri Lanka and the Way Forward', Olcott Oration, Ananda College, Colombo, 2017

Rajan, G. Raghuram, 'I do What I do', Harper Collins, 2017

Volcker, Paul A., 'Keeping at It: The Quest for Sound Money and Good Government', Public Affairs, 2018

Wijewardena, W.A., 'A Revisit to Central Bank Independence: How to Resolve the Emerging Issues?', 68th Anniversary Oration, Central Bank of Sri Lanka, Colombo, 2018",P Nandalal Weerasinghe
https://www.bis.org/review/r250925b.htm,Rosanna Costa: Chilean economy and digital payments - progress and challenges,"Presentation by Ms Rosanna Costa, Governor of the Central Bank of Chile, at the Chile Day, London, 16 September 2025.",2025-09-16 00:00:00,"

## CHILEAN ECONOMY AND DIGITAL PAYMENTS: PROGRESS AND CHALLENGES 1

Rosanna Costa Governor, Central Bank of Chile

16 September 2025

Good morning. I would like  to  thank  InBest  for  this  forum.  It  is  always  a  pleasure  to  share  this occasion with such a distinguished audience. This instance has become a long-standing tradition to showcase the progress and oppor tunities of our country.

Just  under  a  month  ago,  the  Central  Bank  of  Chile  celebrated  its  centennial-100  years  of commitment to the country's welfare. Today, I would like to dedicate my presentation to the two central aspects of our mandate: price stability and the normal functioning of  payments, both of which guide every decision we make with responsibility and a long-term vision.

I will begin by examining the evolution of the Chilean economy amid external tensions, its outlook and implications for  monetary policy and inflation. Last  week we published our Monetary Policy Report for September 2025. I will draw on that document for th e first part of my presentation.

In the second part I will refer to how the means of payment have evolved in Chile. The use of digital payments has grown rapidly over the last decade in our country, with the Central Bank playing a significant role in supporting this transformation. Looking ahead, the challenges remain significant . I will take this opportunity to outline them and the initiatives we plan to develop.

Let me now present a quick overview of Chile's recent macroeconomic developments.

## I. Recent macroeconomic development: September 2025 Monetary Policy Report

This year has been marked by a considerable uncertainty on the international front. In early April, the US government announced a widespread increase in tariffs applied on all countries. This process has been quite volatile, but we continue to anticipate that it will have negative effects on global activity.

So far, the impact of tariffs at the global level has been moderate. On economic activity , the available data shows significant changes in global trade flows, caused by anticipated imports ahead of the new tariffs in the United States, especially in the first part of the year.

On inflation , there are early signs of the effect s in the latest US CPI data. These showed a rise in inflation for goods most exposed to tariffs, although this was offset by falls in the prices of other items  in  the  basket.  In  other  countries,  including  Chile,  no  repercussions  have  been  observed,

1  Present ed at the Chile Day meeting in London, U.K.



although several observers predict that trade diversions could put some downward pressure on inflation in the short-term.

The  benign  response  of  financial  conditions so  far  has been  better than  what  could  have  been anticipated given the magnitude of the events. This has mitigated the negative impacts of these events, especially for emerging economies.

However, the global scenario remains complex, fraught with geopolitical, economic and institutional tensions, and there are significant risks of an abrupt reversal in financial conditions .

Turning to the local economy, Chile has resumed a growth trajectory in line with its trend growth, close to 2% annual rate. Our latest monetary policy report highlights that activity has been in line with our forecasts, confirming the reversal of some transitory elements identified in the first quarter (Figure 1).

Figure 1



(*) Others include agricultural and forestry activities, fishing, utilities and waste management, and construction. Source: Central Bank of Chile.

Unlike economic activity, domestic demand was more dynamic than expected in the second quarter. Investment accelerated, particularly in machinery &amp; equipment. The upturn in investment has been largely  driven  by  large-scale  projects  related  to  the  mining  and  energy  sectors,  coupled  with somewhat more favourable financial conditions and improved business confidence.

Multiple indicators continue to point to a favourable evolution of this component of demand. Among them are the evolution of capital goods imports and the cadastre of the Capital Goods Corporation for the second quarter, which once again showed an improvement in the investment outlook for the five -year period 2024-2028 (Figure 2).



Figure 2



(*) Corresponds to the last five CBC cadastres for the five-year period 2024-2028. Sources: Central Bank of Chile and Capital Goods Corporation (CBC).

Private consumption has also displayed greater-than-expected growth in the second quarter. The increase  in consumption has  been  accompanied  by  favourable  developments  in  some  of  its fundamentals, such as the financial situation of households and consumer expectations. In addition, labour income has continued to rise, albeit at a slower pace than it did in previous months (Figure 3).

Figure 3



(1) A value above (below) 50 indicates optimism (pessimism). Dotted horizontal lines correspond to the 2020-2025 averages for each index. (2) Estimate based on seasonally adjusted series of the real ICL, usual working hours and employed persons. Sources: Central Bank of Chile, GfK Adimark and National Statistics Institute.



Against this backdrop, our last monetary policy report forecasts an improved outlook for activity and demand. The main adjustments are in investment and consumption. In both cases, this is influenced by the higher starting point left by the most recent figures and improving fundamentals, including improving consumer and business confidence, as well as better financial conditions (Figure 4).

Investment remains primarily focused on large mining and energy projects. Mining projects are underpinned by a sustained demand outlook which have kept copper prices resilient, associated with  technological  change,  the  development  of  clean  energy,  and  increased  defense  spending. Energy  projects,  in  turn,  are  supported  by  growing  demand  driven  by  the  adoption  of  new technologies.

Figure 4



For economic activity, GDP growth forecast ranges have undergone moderate changes. On the one hand, as I mentioned, unlike domestic demand, economic activity has performed in line with last June's forecasts. On the other hand, a significant portion of increased domestic spending is directed towards imported goods, which is reflected in a higher projected current account deficit (Figure 5). This couples with the negative effects of various factors on mining output. Thus, for 2025, the lower bound of the range forecast in June is raised to 2.25%-2.75%. For 2026, it is adjusted up to 1.75%2.75% (1.5%-2.5% in June) and is maintained at 1.5%-2.5% for 2027.



Figure 5



Moving on to inflation, the annual variation in headline CPI has continued to decline as expected, reaching 4% annually in August. It is important to note that recent monthly inflation data have shown unusual volatility, making accurate interpretations of underlying trends more challenging. Bear in mind that between June, July, and August, we went from monthly CPI variations of -0.4% to 0.9%, now to 0%.

Core inflatio n-CPI excluding volatile prices-has been above our forecasts. In August, its annual variation stood at 3.9%, higher than a few months before and the projections made in our June monetary policy report. When we look at the behaviour of its components, we see increases in both goods and services (Figure 6). This takes place in a context of increased demand and elevated costs.

Figure 6



(*) Before 2025, the headline inflation series considers the 2023 reference basket and the splicing made by the Central Bank of Chile. Sources: Central Bank of Chile and National Statistics Institute.



Considering all these factors, we forecast only slightly larger headline inflation for  the  next year. However, the upward correction in core inflation forecast is more significant. All in all, we expect headline CPI to converge to the 3% target in the third quarter of 2026, roughly a quarter later than our June forecast. However, given the greater persistence of the core component, we must closely monitor its evolution, precisely because it is a better indicator of trends than total inflation (Figure 7).

Figure 7



(*) Before 2025, the headline inflation series considers the 2023 reference basket and the splicing made by the Central Bank of Chile. Sources: Central Bank of Chile and National Statistics Institute.

Let me now turn to the implications of this analysis for monetary policy, I would like to begin by recalling that at our monetary policy meeting last week, we decided to maintain the MPR at 4.75%.

We made this decision in a context in which, again, the projected path for headline inflation in the September Report is similar to trajectory outlined in the June Report, but with higher core inflation over the next twelve months higher than we considered in June. Given that this component of the CPI  tends  to  be  more  persistent,  there  is  a  greater  need  to  closely  monitor  its evolution and fundamentals.

Furthermore, we communicated that we will evaluate the next movements of the MPR considering the evolution of the macroeconomic scenario and its implications for inflationary convergence.

In  the  current conditions, the  risk  of  greater inflation persistence  calls  for  gathering  more information before continuing the process of leading the MPR to converge to its neutral range.

For some years now, our MP Report contains the MPR corridor. These are sensitivity exercises which, while maintaining GDP growth within the expected ranges, require somewhat different monetary policy action. It  is  important  to  reiterate  that  neither  the  central  scenario projections nor  this



corridor constitutes a commitment by the Board regarding the future trajectory of monetary policy. They are based on a set of assumptions, which may or may not become a reality.

Therefore, we always reiterate that monetary policy decisions are made on a meeting -bymeeting basis, analysing the data we collect, how it fits into the macroeconomic scenario, and what it implies for the convergence of inflation to the 3% target.

Before moving on to the next part of my presentation, I would like to reiterate that the Central Bank of Chile will conduct monetary policy to ensure that inflation converges to the 3% target, which is a fundamental aspect of macroeconomic stability and the people's well-being.

## II. The evolving landscape of retail payments in Chile: where we are and where we are headed

Facilitating payments has been a core function of central banks since their origin, with the issuance of legal tender one of the most visible expressions of that role.

At  the  Central  Bank  of  Chile,  our  mandate  includes  not  only  preserving  price  stability  but  also safeguarding the normal functioning of internal and external payments. For much of our 100-year history,  this  has  meant meeting the  public's  demand  for  cash.  For  instance,  by  1964,  the  Bank operated thirteen branches and seven agencies across the country to fulfil this need. 2 /

But times have changed. Over the past decades, payments have become increasingly digital, and the use of cash is steadily declining. This is a global trend and Chile is no exception.

As the digital economy grows, access to electronic means of payment becomes essential. Individuals and households without such access risk being left behind of an increasingly important part of the economy.  Much  like  mobile  phones  or  the  internet,  digital  payments  are  no  longer  a  luxury  or convenience, they are increasingly becoming a necessity.

In this context, while central banks' mandates on payments remain unchanged, the way we interpret and act on those mandates is evolving. Increasingly, our focus is shifting towards digital payments.

In this part of the presentation , I will describe the rapid growth of digital payments in Chile over the past  decade,  the  role  that  the  Central  Bank  has  played  in supporting this transformation, the initiatives we are currently pursuing, and some of the challenges that lie ahead.

## A decade of transformation in Chile's payment industry

Over  the  past  ten  years,  Chile's  payment  industry  has  undergone  a  profound transformation, becoming a vibrant sector with many growth opportunities.

2 / For more details see C. Carrasco (2009), 'Banco Central de Chile 19251964 Una Historia Institucional '.



One of the most striking figures from our last Payment Systems Report, published just one month ago, is that during the last year, the average number of digital payments per person in Chile reached 374. This includes both card transactions and account-to-account payments. In simple terms, people in Chile are now making digital payments at least once a day-and the total value of these payments amounts to 112% of GDP (Figure 8).

This  marks a significant shift from 2016, when the average was 80 digital payments per person, representing 60% of GDP. That is, total transaction value has nearly doubled, while the number of transactions has grown more than 4 -fold. If we look specifically at card payments, they accounted for 32% of household spending back then. Today, that figure has more than doubled, to 74%.

Figure 8



Sources: Central Bank of Chile based on data from Financial Market Comission.

This  growth  is  largely  driven  by  high  levels  of financial inclusion.  In  Chile,  anyone  can  open  a simplified account and access a debit or prepaid cardoften free of charge or at very low cost. A recently  developed, robust network of acquirers and sub-acquirers ensures that these cards are widely accepted by merchants across the country.

Also, Chile was one of the first countries in the world to have instant account-to-account payments. That system, operated by a private company and regulated by the Central Bank, processes millions of transactions daily, mostly between individuals.

Looking  ahead,  we  expect  this  momentum  to continue. Innovation and  new  technologies  are lowering barriers to entry, enabling new business models and services for consumers. At the same time, the Fintech Law passed in 2023, and the ongoing development of an Open Finance System are designed to foster competition and further expand the market.



In recent years, many new payment companies-including issuers of prepaid cards and acquirershave  entered  the  Chilean  market,  some  of  them  from  abroad.  We  see  this  as  a  strong  sign  of confidence in the future of digital payments in Chile. As I will discuss below, despite high adoption rates, there is still significant room for growth (Figure 9).

Figure 9



- (1) Corresponds to the 12-month cumulative number of transactions ending in March each year, divided by the total population over 15 years of age.
- (2) Corresponds to the total number at the end of March each year.
3. Sources: Central Bank of Chile based on data from Financial Market Comission.

## The role of the Central Bank in supporting safe and inclusive payment innovation

The Central Bank of Chile has played a key role in enabling the transformation of retail paymentsensuring that innovation happens in a safe, orderly, and inclusive manner.

A major milestone came in 2017, with changes to the regulation of payment cards. These reforms laid the foundation for the adoption of the four-party model, which opened the market to multiple acquirers and sub-acquirers, fostering greater competition and expanding access. Before that, in the threeparty model, the roles of issuer and acquirer were combined into a single entity.

Since this industry is prone to innovation and dynamism, regulation has continued to evolve. Some updates have fine -tuned prudential requirements, but others were aimed at providing a framework for new business models such as the 'cross-border acquiring', 'on us' payments, and more recently the integration of payment cards into public transport systems.



At the heart of our regulatory approach is a clear objective: to ensure that retail payments function reliably and securely. To achieve this, we impose prudential requirements -including capital and liquidity standards- to mitigate credit and liquidity risk. We also require robust risk management policies to address operational, fraud, and cybersecurity risks.

A  key  concept  in  our  framework  is  'payment  responsibility'-the  need  to  clearly define who  is ultimately responsible for fulfilling payment obligations to merchants or other payment receivers. This clarity is essential, given our legal mandate to safeguard the integrity of the payment system.

However, regulating issuers and acquirers alone is not enough. Behind the scenes, financial market infrastructures-the  'plumbing'  of  the financial system-play  a critical role  in  ensuring  that payments  are final, and  that  clearing  and settlement processes  minimize  credit,  liquidity,  and operational risks.

While the Central Bank has long regulated large-value payment systems, it wasn't until 2020 that retail  payment infrastructures were brought under our regulatory umbrella. The Retail Payments Clearinghouse regulation introduced finality to retail transactions and strengthened the clearing and settlement process through prudential standards.

As  I  previously  noted,  Chile's  instant  account-to-account  payment  system,  operated  by  a  private entity, has been in place for years. Without making much ado about it in international fora, Chile was  one  of  the first countries counting with  instant  payments.  More  recently,  since  2024,  the clearinghouse processing these payments has been formally established as an infrastructure subject to prudential requirements. One notable outcome is that the system is now more resilient-and liquidity needs for participants have dropped significantly.

Soon, debit and credit card payments will also be processed under this framework. Clearing will take place through Visa and Mastercard's clearinghouses, and settlement will occur in the Central Bank's RTGS system, using central bank money.

But  this  is  not  the  end  of  the  story.  The regulation also  promotes  interoperability  between clearinghouses and allows room for exploratory projects. These features are designed to encourage competition and support ongoing innovation in the payments ecosystem.

## Adapting regulation to a rapidly evolving payments landscape

As the payments ecosystem continues to evolve, so too must the regulatory framework and the role of the Central Bank.

New business models have emerged-and more will follow. Naturally, many of these innovations were not foreseen when the current regulatory framework was first designed. While we've been able to adapt the rules over time, there are cases where legal constraints limit our ability to respond. In such instances, new legislation, like the recently enacted Fintech Law, becomes essential.



One emerging regulatory challenge is the rise of Banking as a Service (BaaS) -a model where banking products are offered by third parties, often fintechs, through digital platforms. We are beginning to see such initiatives in Chile. From a regulatory standpoint, this raises important questions: Do these models introduce new risks? And if so, how should they be addressed?

A more immediate challenge is the expansion of account-to-account (A2A) payments to merchants. Today, most A2A transactions in Chile occur between individuals. However, in many countries, this method is increasingly used for payments to businesses. While in Chile the technical infrastructure already exists, the user experience remains cumbersome without dedicated interfaces and services tailored for merchants.

Some banks  and fintechs -including  payment initiators -are  developing solutions in  this  space. However, these efforts are often fragmented, limiting their potential. This raises a key question: Can these initiatives be made interoperable?

We believe the answer must be yes. Expanding A2A payments to merchants would enhance the resilience of the retail payment system. But to achieve this, interoperability is essential.

There are different paths to interoperability. In some countries, central banks have stepped in to provide public infrastructure for retail payments-marking a shift from their traditional focus on large-value  systems.  In  Chile,  we  have  historically  taken  a different approach:  the  public  sector regulates  and  supervises,  while  the  private  sector  develops  and  operates  most  infrastructures. Following this approach, we are studying how our Central Bank can leverage its regulatory authority to facilitate and foster interoperability across existing and future private initiatives. Nonetheless, we are not neutral about the desired outcome. We expect to see increasing use of A2A transfers for P2B payments in the coming years, and will take the necessary steps to make it happen.

Another important challenge is to strengthen the infrastructures that support digital payments. As digital transactions become  more  prevalent,  the  systems  that  process  them  take  on  a  systemic importance. Any disruption is  not just an inconvenience-it can mean lost economic activity. The implementation of the Retail Payments Clearinghouse regulation has made this clearer, and we may need to further strengthen prudential requirements for these systems.

Finally, as more participants enter the ecosystem and alternative rails for instant payments emerge, we must ensure that our RTGS system can handle the growing volume of payment instructions. Expanding its capacity is a complex task that requires careful planning and foresight.

## III. Looking ahead: emerging technologies and their impact on payments

As  the financial system  evolves,  some technological developments -though not directly tied to retail  payments-  are  beginning  to  intersect  with  them  in  meaningful  ways.  These innovations require forward-looking thinking and proactive exploration.



One of the three chapters in our latest Payment Systems Report is dedicated to tokenized assets. These are a new class of digital assets that embed traditional information about the  underlying assets, along with predefined rules governing ownership, transfer, and trading.

While the market for tokenized assets remains small compared to traditional financial instruments, it  is  growing  rapidly.  If  these  assets  become  more  widely  adopted, existing financial market infrastructures  will  need  to  adaptparticularly to  interact  with  the  technologies  that  support tokenization, such as Distributed Ledger Technology (DLT).

For example, if securities are  increasingly  issued  on DLT platforms, settling these transactions in central  bank  money  would  require  central  bank  systems  to  communicate  with  those platforms. There are several ways to achieve this, including synchronization mechanisms or the issuance of a wholesale Central Bank Digital Currency (CBDC) that is native to these systems.

To explore these possibilities, the Central Bank of Chile is preparing to launch a Proof of Concept for a wholesale CBDC. This initiative is  not  a  commitment to issuing a CBDC but rather aims to gain hands-on  experience  with  this  technology, identify potential gaps,  and  strengthen  our  internal capabilities. The  project  will  simulate  the  transfer  of  tokenized  assets  between  agents  on  a blockchain ledger, using a wholesale CBDC as the settlement instrument.

Another innovation with disruptive potential is  Stablecoins.  These  are  digital  assets  pegged  to reference currencies, like the US dollar, and backed by reserves such as fiat currencies or government bonds.  Dominated  by  USDT  and  USDC,  which  together  hold  nearly  80%  of  the  USD  300  billion market,  stablecoins  are  used  for  cross-border  transfers,  crypto  trading,  and settling tokenized transactions on DLT platforms. Although their use in retail payments remains mostly theoretical, it is important to consider and be prepared for scenarios where this could start happening.

In Chile, the Fintech Law assigns regulatory responsibilities to two institutions. The Financial Market Commission (CMF) oversees market conduct for cryptoasset service providers-such as exchanges and custodians-similar to how it regulates securities. Meanwhile, the Central Bank is empowered to regulate the prudential aspects of stablecoins, but only if they are issued by entities supervised by the CMF as issuers of means of payment.

Globally, regulatory efforts are gaining momentum. In the United States, for example, the GENIUS Act  aims  to  regulate  stablecoins,  and international bodies  like  the  Financial  Stability  Board  have issued  guidelines  and  best practices for  Global  Stable  Coins.  These efforts could  accelerate  the growth of stablecoins, especially those with global reach.

However, in Chile, enforcing international standards on global stablecoins presents challenges. The Fintech  Law  requires  issuers  to  be  established  locally  and  supervised  by  the  CMF.  Even  if  that requirement  were lifted, extraterritoriality  remains  a  barrier.  This  creates  a potential regulatory challenge that must be acknowledged and addressed as the ecosystem evolves.



After a decade of significant achievements in modernizing the payment system and with inflation projections that reflect both our accomplishments and the challenges we face, the path forward requires  an  agile  monetary  policy  capable  of  responding  promptly  to  emerging  risks  and  an increasingly  robust financial system  with  a  modern,  safe,  and  resilient  payment  system.  In  this context, we reaffirm that the mandate of price stability and financial stability has guided our work over the past 100 years and will continue to be the cornerstone of our future actions. The ongoing challenges call on us to redouble our efforts, strengthen our capabilities, and continue to act with independence,  technical  rigor,  and  public  commitment.  The  Central  Bank  of  Chile  remains committed to the well-being of the people and the development of our country.",Rosanna Costa
https://www.bis.org/review/r250929d.htm,Michelle W Bowman: Thoughts on monetary policy decision-making and challenges ahead,"Speech by Ms Michelle W Bowman, Vice Chair for Supervision of the Board of Governors of the Federal Reserve System, at the Forecasters Club of New York Luncheon, New York City, 26 September 2025.",2025-09-26 00:00:00,"## Michelle W Bowman: Thoughts on monetary policy decision-making and challenges ahead

Speech by Ms Michelle W Bowman, Vice Chair for Supervision of the Board of Governors of the Federal Reserve System, at the Forecasters Club of New York Luncheon, New York City, 26 September 2025.

* * *

Good afternoon. Thank you for the invitation to speak to you. I am delighted to have the opportunity to address this distinguished group of macroeconomic forecasters. Today I will discuss how I approach monetary policy decisionmaking, and I will then describe some of the challenges we will likely face in the years ahead. 1

Before turning to the main topic of my remarks, I would like to provide some context about my background and how that shapes my approach to my role as a policymaker. After serving for nearly seven years on the Board of Governors, earlier this year, the President appointed me as the Federal Reserve's Vice Chair for Supervision. My role as a financial regulator and my previous experience as a state bank regulator and community banker in Kansas give me a unique perspective on how to approach my responsibilities as a monetary policymaker. This experience informs how I think about economic conditions and the balance of risks to economic activity, the labor market, and inflation in assessing the appropriate stance and direction of policy.

As you know, the Federal Reserve conducts monetary policy to support a strong and stable economy that works for all Americans. In doing so, the Federal Open Market Committee (FOMC) conducts its responsibilities according to the congressionally mandated goals of maximum employment and price stability. The Fed pursues these goals by adjusting its monetary policy stance using a variety of tools, including setting interest rates, providing forward guidance about the expected future path of policy, and adjusting the size and composition of our balance sheet. Our primary monetary policy tool is the federal funds rate, a key interest rate for overnight borrowing by commercial banks that influences other interest rates throughout financial markets. Lower interest rates tend to stimulate demand-for housing, cars and other durable goods, and for business investment-which boosts economic activity and has the potential to push up inflation. Higher interest rates tend to slow the economy and tend to push inflation down.

Achieving both of these goals is challenging when they are in tension. Policy actions to tame inflation, like raising the target range for the federal funds rate, can have an adverse effect on employment. By contrast, policy actions aimed at supporting employment that is below its maximum level can potentially increase risks to price stability. These are just a few of the challenges we face as policymakers. With that background, I will share more on my approach to our monetary policy responsibilities and the use of our existing toolkit. I consider my approach in terms of flexibility in shifting the focus on policy objectives when needed and a limited footprint in financial markets.

## A Flexible Approach to Policymaking

Pursuing the objectives of the dual mandate at the same time means that we generally seek to achieve the maximum level of employment that is consistent with price stability. But the monetary policy objectives are not always complementary. Because our dual mandate places equal weight on both maximum employment and price stability, when these objectives are in tension it is important not to favor one side of the mandate over the other. In that circumstance, we should be flexible and direct our focus to the side of the mandate that deviates the most from its goal or that shows the greater risk of persistently departing from it. Hesitating to address existing or emerging departures from the dual-mandate goals, due to self-limitations stemming from an unwillingness to depart from outdated past policy communication, increases the likelihood that policymakers will need to implement abrupt and large policy corrections.

As we all remember in 2021, supply and demand imbalances, amplified by extraordinary stimulus from fiscal and monetary policies, led to a sharp rise in inflation over just a few months. By the second half of that year, amid growing inflationary pressures, it became clear that our monetary policy stance was too accommodative and that the FOMC needed to move toward a tighter policy stance. On a 12-month basis, total consumer price index (CPI) inflation rose from about 1-1/2 percent in early 2021 to about 9 percent in mid-2022. We began increasing the policy rate at the March 2022 FOMC meeting, when reported CPI inflation was already at about 8 percent and core personal consumption expenditures inflation was above 5 percent.

In my view, the accommodative forward guidance the Committee adopted in the September and the December 2020 postmeeting statements, which put more weight on the employment side of our mandate, pushed the mandated goals out of balance and contributed to the delay in the removal of monetary policy accommodation in 2021. 2 That forward guidance made it much more difficult for the FOMC to react to new information suggesting that risks and uncertainties had evolved in response to pandemic-related changes in the economy. This ultimately restricted our ability to respond to rising inflationary pressures before seeing any progress on the labor market. Ultimately, delaying taking appropriate action while inflation started to increase left us in a position in which we needed to course correct and catch up by raising the policy rate in large increments over a number of months.

Recognizing the substantial risk that unacceptably high inflation could persist, and once the conditions in the labor market were moving toward the FOMC's goal of maximum employment, by the end of 2021 I shifted my focus to the inflation side of our mandate and to bringing inflation down toward our 2 percent goal. At the time, I argued in favor of taking prompt and forceful policy action to get inflation under control, which I saw as our primary responsibility at that time, as it had begun to impose a heavy burden on households and businesses. Of course, tightening policy and then maintaining a restrictive stance to lower inflation could have resulted in costs and risks to the labor market, but I saw far greater costs and risks in allowing inflation to persist. And, importantly, maintaining the commitment to restoring price stability is the best course to sustain a strong labor market and an economy that works for everyone.

As I noted in recent remarks, we are now facing a very different economic environment. 3 Over the past several months, I have been pointing to a shift in economic conditions and in the balance of risks to our employment and inflation goals, calling attention to signs of potential labor market fragility. And I have argued that increasing signs of

weakening labor market conditions provide a basis for proactively supporting the employment side of our mandate.

Recent data show a materially more fragile labor market along with inflation that, excluding tariffs, has continued to hover not far above our target. Given this shift in labor market conditions, at last week's FOMC meeting I supported beginning the process of removing policy restraint and bringing the federal funds rate back to its neutral level.

Up until the July FOMC meeting, even with inflation within range of our target, the Committee has focused primarily on the inflation side of the dual mandate. Now that we have seen many months of deteriorating labor market conditions, it is time for the Committee to act decisively and proactively to address decreasing labor market dynamism and emerging signs of fragility. In my view, the recent data, including the estimated payroll employment benchmark revisions, show that we are at serious risk of already being behind the curve in addressing deteriorating labor market conditions. Should these conditions continue, I am concerned that we will need to adjust policy at a faster pace and to a larger degree going forward.

I recognize and appreciate concerns that we have not yet perfectly achieved our inflation goal. But under a flexible approach to policymaking, it is appropriate to focus on the side of the mandate that is showing signs of deterioration or fragility even though inflation is above but within range of our target. This shift is appropriate now because forecasters widely expect inflation to significantly decline next year, and as further deterioration in labor market conditions would likely lead to more persistent damage to the employment side of the mandate, that would be difficult to address with our tools.

With tariff-related price increases likely being a one-time effect, my view is that inflation will return to 2 percent after these effects dissipate. Because changes in monetary policy take time to work their way through the economy, it is appropriate to look through temporarily elevated inflation readings and therefore remove some policy restraint to avoid weakening in the labor market, provided that long-run inflation expectations remain well anchored.

In addition, putting tariffs aside, the U.S. economy may also be experiencing an extended productivity surge, in large part because of recent technological advances. And productivity growth has likely been higher than reported due to the downward benchmark revisions to payroll gains. These developments reinforce the case for removing policy restraint because monetary policy should accommodate productivity shocks that raise potential output.

In light of all these considerations, in my view, it was appropriate to begin the process of moving policy toward a more neutral stance at last week's FOMC meeting, and it has been appropriate to do so for several months. Moreover, the rising downside risks to employment and the potential for greater damage to the labor market underscore the need to shift our focus away from overemphasizing the latest data points.

In the past, I have supported data dependence as an approach that incorporates incoming data into the decisions that lie immediately ahead and further into the future. Our experience during and following the pandemic highlights the difficulty in assessing

the current state of the economy and predicting how it will evolve in the presence of major supply- and demand-side shocks, possible structural changes in the economy, and real-time data and measurement uncertainty. With unusually high uncertainty around the state of the economy and the economic outlook, and with significant risks to our employment and price stability goals, judging where the economy is headed in the future is much more challenging. Therefore, it made sense in the past to consider and be informed by the incoming data and its implications for the outlook in assessing the appropriate path for monetary policy.

But today we are facing different conditions. I am concerned that the labor market could enter into a precarious phase, and there is a risk that a shock could tip it into a sudden and significant deterioration. An inflexible and dogmatic view of data dependence gives an inherently backward-looking view of the economy and would guarantee that we remain behind the curve, requiring us to catch up in the future.

I think we should consider shifting our focus from overweighting the latest data points to a proactive forward-looking approach and making a forecast that reflects how the economy is likely to evolve going forward. Because policy actions take time to flow through to, or have their full effect on, the economy, labor markets, and inflation, it is important that we are making predictions about where the economy is headed and to act on those forecasts in real time. A forward-looking approach ensures that monetary policy can help support the economy. It also better positions us to avoid falling behind the curve and then having to implement abrupt and dramatic policy actions. In my view, it is more effective to act promptly and decisively in the face of fragility than to be forced to dramatically adjust policy after damage has occurred.

## A Limited Footprint - the Fed's Balance Sheet

I will turn now to discuss my views about how we use our balance sheet. As the runoff in our securities portfolio proceeds following extensive asset purchases during the pandemic, there are several issues with important implications regarding the size and the composition of the Fed's balance sheet in the longer run.

Over the longer run, my preference is to maintain the smallest balance sheet possible with reserve balances at a level closer to scarce than ample. First, a smaller balance sheet would minimize the Fed's footprint in money markets and in Treasury markets. Of course, in order to efficiently implement monetary policy, it is necessary to have some footprint in these markets. Second, holding less-than-ample reserves would return us to a place where we are actively managing our balance sheet, identifying instead of masking signals of market stress. In my view, actively managing our balance sheet would give a more timely indication of stress and market functioning issues, as allowing a modest amount of volatility in money markets can enhance our understanding of market clearing points.

Lower levels of reserves may also incentivize banks to engage in more active management of their liquidity positions and liquidity risks. Finally, a lower terminal level of reserves and a smaller balance sheet as a percentage of gross domestic product (GDP) would provide the FOMC with the optionality to respond to future shocks or economic downturns without worrying whether there is enough room to expand the balance sheet as a potential tool.

In terms of the composition of the Fed's securities holdings in the longer run, I strongly support having a System Open Market Account portfolio that consists only of Treasury securities to minimize the effects of the Federal Reserve's holdings on the allocation of credit across the economy. Holding agency mortgage-backed securities (MBS), or other non-Treasury securities, could be seen as selective credit allocation.

I also look forward to revisiting the Committee's consideration of potential sales of our agency MBS holdings. Simply relying on MBS runoff will not allow returning to a Treasury-only portfolio within a credible time frame.

The longer-run maturity structure of the Federal Reserve's Treasury securities holdings is also an important consideration. One benefit of a Treasury portfolio maturity structure that mirrors the broader Treasury market is that the Fed's holdings would be ""neutral."" This means that these holdings would not disproportionately affect the pricing of any given maturity of Treasury security or provide incentives for the issuance of any given type of Treasury security. A balance sheet tilted slightly toward shorter-dated Treasury securities would allow a more flexible approach.

For example, the FOMC could reduce its shorter-dated Treasury securities holdings in favor of longer-dated Treasury securities if the Committee wanted to use the balance sheet to provide monetary policy accommodation without expanding the size of its securities holdings. This approach would be similar to the FOMC's maturity extension program in 2011 and 2012, sometimes referred to as ""Operation Twist."" It will be important to consider the potential costs and benefits to the Federal Reserve's Treasury securities maturity structure and the best ways to achieve the desired maturity structure over time.

## The Nature and Use of Emergency Tools

I will turn now to the role for and the availability of policy tools like lending programs and facilities. During periods of extreme financial system stress, the Federal Reserve has the authority, with the approval of the Secretary of the Treasury, to use tools, including lending facilities, to directly support the effective functioning of key financial markets and the flow of credit throughout the economy. During the pandemic, the Board extensively relied on the creation of lending programs that were designed to serve as backstops to support market functioning and the flow of credit during times of stress. The temporary nature of these types of lending facilities that are activated only during times of severe financial market stress makes them an attractive alternative to other tools. Lending programs are most effective as backstops when loans are offered at a penalty rate and are of short duration. When appropriately calibrated, they can help promote market functioning and the effective transmission of monetary policy but also limit the Federal Reserve's overall footprint in financial markets in the longer term.

Despite their demonstrated effectiveness during times of financial market dysfunction, my view is that emergency lending facilities should be reserved for the single-purpose use in emergency circumstances and should not be institutionalized. In other words, they should not be converted to permanent standing facilities. Instead, they should be

activated for only the most exceptionally stressed circumstances. Institutionalizing an activity that was created to temporarily respond to emergency conditions essentially normalizes an extreme emergency response to market illiquidity.

I am concerned that converting emergency facilities created in the depths of a crisis into permanent standing facilities would potentially increase the Fed's footprint in financial markets and have adverse implications, such as distorting private-sector market dynamics and market pricing during normal, noncrisis times. My preference is to rely on these types of facilities only on an emergency basis to address exceptional circumstances. This approach ensures that potential counterparties transact in the private market during times of normal or even mildly stressed market conditions.

A better option would be to announce the short duration of a facility at the time it is created and be clear that it will only exist while the conditions prevail. During the pandemic, we demonstrated the ability to bring these facilities online quickly, so communication reiterating that we stand ready to do it again, even if only on a ""just in time"" basis, may, on its own, have a beneficial effect on market dynamics.

I will conclude this part of my discussion by highlighting a current regulatory proposal that would return the enhanced supplementary leverage ratio (eSLR) to a backstop rather than a binding constraint for bank-affiliated broker-dealers.

## Treasury Market Intermediation

Even though the U.S. financial system is strong and resilient, over time there have been periods of market stress and volatility in Treasury market intermediation. And there are strong indications that leverage capital requirements may be contributing to vulnerabilities in the Treasury market, particularly in the face of unusually high trading volumes.

In late June, the Board, along with the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, approved a proposal to modify the eSLR, which applies to the U.S. global systemically important banks (G-SIBs). Although leverage ratios are intended to serve as a capital ""backstop"" to risk-based measures, the eSLR has become increasingly binding over time. This bindingness has been substantially driven by economic growth, inflation, and the level of reserves in the system. When leverage requirements become a firm's binding capital constraint, they can disincentivize low-risk, low-margin activities. Broker-dealer affiliates of the G-SIBs are significant participants in Treasury market intermediation, and the effect of a more binding eSLR has been to diminish the market intermediation capacity of these intermediaries. This was never the intent of the eSLR. The eSLR proposal would help return this leverage requirement to a more appropriate role as a capital backstop. This important, proactive step would also preserve the role of the eSLR in promoting safety, soundness, and financial stability, and that, as proposed, is also fully consistent with our international agreements.

In addition, once the GENIUS Act is implemented, stablecoin issuers are required to hold reserves equivalent to the value of stablecoin issuance, which can include U.S. Treasuries. 4   This additional demand could compound future episodes of Treasury market liquidity stress, increasing the importance of eSLR reform to ensure Treasury market functioning. Once finalized, the eSLR proposal would provide additional balance

sheet capacity for G-SIBs to intermediate U.S. Treasury market activities. This change will help build market resilience and reduce the likelihood both of market dysfunction and of the need for the Fed to intervene, by implementing temporary modifications to the eSLR.

Reforming the eSLR would also directly address some of the problems that a permanent Federal Reserve facility like the standing repo facility (SRF) is intended to alleviate-for example, mitigating temporary repurchase agreement (repo) rate spikes at month-, quarter-, and year-ends caused by large banks being unwilling to provide a sufficient supply of Treasury market liquidity. In my view, adjusting leverage capital requirements could help refocus the role of the SRF as a liquidity backstop for Treasury market intermediation, rather than normalizing its use and enabling rate arbitrage to drive usage in periods of calm.

Although at the July 2021 FOMC meeting I voted to convert ongoing open market operations into a permanent facility, I did so with significant reservations because, as I noted earlier, my preference would be to not institutionalize operations that addressed temporary market emergencies. At that time, I stated that we should have remained attentive to the unintended consequences of an SRF and be prepared to adjust its parameters as needed to address those effects.

In its current form, the SRF has a minimum bid rate set equal to the discount window primary credit rate, which is also equal to the top of the target range for the federal funds rate. As a result, the SRF, by design, is not fully positioned to serve only as a backstop during times of market dysfunction and stress. My preference would be for a minimum bid rate higher than the top of the federal funds rate target range in order to emphasize that the SRF's purpose is to serve only as a backstop. A rate above the top of the target range would be more likely to discourage use of the facility outside of exceptional market-wide episodes of acute stress. It seems likely that a rate that's not set at a sufficiently high level might still be considered an option for primary dealers experiencing idiosyncratic pressures outside of market-wide disruption. In my view, providing an outlet for dealers that experience these kinds of pressures should not be the intended purpose of this facility.

While creating a ""release valve"" to provide greater market liquidity has been a goal of the SRF, I remain concerned that one of its unintended consequences is to distort market signals by artificially affecting repo rate dynamics. It is not the Fed's role to replace or arbitrage private-market activities.

Having a minimum bid rate on the SRF that is not sufficiently elevated relative to market rates risks suppressing or distorting valuable signals stemming from overnight money markets. While balance sheet runoff is entering a new phase, it is especially important to be able to observe underlying reserve and money market conditions.

## Challenges for Monetary Policy Ahead

Throughout my tenure at the Federal Reserve Board, the U.S. economy has experienced many challenging times, including below-target inflation and low unemployment; the effects of the COVID-19 experience, with high unemployment, strong demand enabled by fiscal support, supply chain disruptions, and high inflation;

several bank failures; extraordinary immigration; and last year's recalibration of our monetary policy stance. The problems we face are often different and require agility in our understanding of how the economy works and is likely to evolve.

I will turn now to briefly discuss some challenges for monetary policy in the years ahead, including the potential for supply shocks, the transmission of monetary policy to long-term interest rates, the housing market, the artificial intelligence (AI) investment boom, and the ways that I see some of these factors affecting the neutral rate of interest.

## Supply Shocks

Supply shocks, which move economic activity and inflation in opposite directions, can be challenging for monetary policy to address because they can put the pursuit of the dual-mandate goals in conflict. 5   The development of new technologies that raise productivity is an example of a positive supply shock that increases potential output, while supply chain disruptions are an example of a negative supply shock. To properly address these shocks, for situations in which the policy objectives are in tension, as implied by the FOMC's revised Statement on Longer-Run Goals and Monetary Policy Strategy, we need to consider how large and persistent the deviations implied by the shock to the price-stability and maximum-employment mandates will likely be. 6 Importantly, supply shocks can also affect demand, and so we need to assess how the relative effects on supply and demand are likely to evolve.

Tariffs can be seen as a negative shock to the supply of imported goods but can also be viewed as a surcharge on demand for imported goods. Like any surcharge on sales, the effects on inflation are likely short lived, as reduced demand increases slack in the economy and restrains any follow-on price increases, assuming that inflation expectations remain anchored. Therefore, it makes sense for monetary policy to mostly look through the one-off effect on prices and put more weight on the likely more persistent effects on demand and employment.

A step-down in population growth is also a negative supply shock, as it slows the increase in the labor force and output. This development would also represent a negative shock to demand, with the two effects roughly balancing out over time. However, the source of the shock, whether due to lower immigration or the aging of the population, seems relevant. While aging of the population is a gradual process that is less likely to generate sudden deviations in either of our mandates, a shock to immigration can have sharper effects on demand in the near term, as supply is likely to adjust more slowly-for example, housing.

## Term Premiums

A second challenge for monetary policy would be a significant rise in longer-term interest rates driven by higher term premiums, which could offset a reduction in the expectations component stemming from monetary policy easing. This scenario would weaken the transmission of changes in the policy rate to economic activity, as investment decisions of households and businesses are dependent on longer-term rates, such as mortgage rates and corporate bond yields. Although term premiums increased when the FOMC recalibrated the policy stance toward the end of last year, they have come down significantly so far this year, allowing for a reduction in longerterm interest rates.

A further rise in the term premium could reflect higher compensation for expected inflation and increased risks that monetary policy may need to address future shocks to real activity or inflation. Some of the factors that could lead to higher term premiums would be concerns about fiscal sustainability and the FOMC's credibility to achieve its inflation goal.

## Housing Market

A third challenge for monetary policy would be a sharp housing market correction. Although supply factors have been weighing down on housing activity for a while, demand factors appear to have recently become the dominant force. Elevated mortgage rates may be exerting a more persistent drag, as income growth expectations have declined while house prices remain high relative to rents. Given very low housing affordability, existing home sales have remained depressed despite higher inventories of homes for sale. I am concerned that declines in house prices could accelerate, posing downside risks to housing wealth and inflation in the years ahead.

## Artificial Intelligence

Finally, the surge in AI investment could also be challenging for monetary policy. Investment in new technologies is likely to raise productivity and lower inflation in the medium term. Although the additional investment also boosts demand, the effects on productivity and supply are likely to occur relatively quickly, and the economy is less likely to tighten appreciably in the near term. In this case, monetary policy should refrain from restraining aggregate demand, as any deviation from maximum employment is likely to be temporary.

There is a risk that expectations of returns on these high-tech investments may be too optimistic and raise financial stability concerns. Although tech companies can largely self finance these investments, or easily access bond and equity markets, if expectations of future revenues do not materialize, we may see a large correction in equity markets and a slump in investment spending due to over-capacity. Such a correction would lead to a contraction in aggregate demand through lower household wealth and lower expected profits.

## Neutral Rate of Interest

Some of the factors discussed here may be key influences on the neutral interest rate, or r*. The two factors that I am more attentive to are slower population growth and fiscal sustainability risks. Although these factors have opposite effects on the balance between savings and investment and r*, I see slower population growth and the aging of the population as more prominent factors in pulling down the neutral interest rate. If fiscal sustainability concerns are not addressed in the years ahead, by stabilizing or reversing the upward trajectory of the federal debt-to-GDP ratio, I am afraid that r* and interest rates could rise and crowd out private investment.

## Closing Thoughts

Before we move on to the discussion, I'd like to touch on the supervision and regulatory work under way. We have made a lot of progress in the past few months since I

became the Vice Chair for Supervision. And Congress has been hard at work considering important banking and digital assets legislation and the passage of the GENIUS Act.

In addition to working to implement the Fed's responsibilities under this law, we are making significant progress on a number of priorities in supervision and regulation. Early in my tenure, I described my approach to take a fresh look at our supervision and regulatory framework. 7

We have made progress on a wide range of priorities in these past few months, including

- proposed changes to rationalize the large financial institution ratings framework that applies to the largest banking institutions to emphasize material financial risk
- proposed revisions to the eSLR to return it to its traditional role as a capital backstop and limit the risk of further disruptions to Treasury market activities
- removed reputational risk from the examination toolkit, instead prioritizing material financial risk
- published a request for information on payments fraud activities to develop a plan for a better and more coordinated response (and, here, I would note that the comment period just closed on September 18)
- proposed improvements to reduce the volatility of supervisory stress tests by imposing reasonable and transparent parameters on the tests
- reviewing regulatory reporting requirements to improve the validation of information collected a form is renewed, rather than rubber-stamping every time the renewal of collections that may no longer be effective or useful

While we are making progress in a number of areas, there is much left to do. Some of this work will include improving the mergers and acquisitions process; reviewing the appropriateness of capital requirements for all banks, including revising the community bank leverage ratio and approaches for mutual banks; and addressing payments and check fraud. We are continuing to enhance examiner training and development, and we will continue to prioritize economic growth and safety and soundness in the bank regulatory framework.

Thank you again for the invitation to join you today. It's a pleasure to be here, and I look forward to our discussion.

1  The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.

2  See Michelle W. Bowman (2023),  ""Reflections on the Economy and Monetary Policy,"" (PDF)  remarks delivered at the Utah Bankers Association and Salt Lake City Chamber Banker and Business Leader Breakfast, Salt Lake City, Utah, November 28; and Michelle W. Bowman (2024),  ""Risks and Uncertainty in Monetary Policy: Current and Past Considerations,"" (PDF)  remarks delivered at ""Frameworks for Monetary Policy, Regulation, and Bank Capital,"" Spring 2024 Meeting of the Shadow Open Market Committee, hosted by the Manhattan Institute, New York, April 5.

- 3  See Michelle W. Bowman (2025),  ""Unintended Policy Shifts and Unexpected Consequences,"" (PDF)  remarks delivered at ""Assessing the Effectiveness of Monetary Policy during and after the COVID-19 Pandemic,"" a research conference sponsored by the International Journal of Central Banking and the Czech National Bank, Prague, Czech Republic, June 23; Michelle W. Bowman (2025),  ""Thoughts on the Economy and Community Bank Capital,"" (PDF)  remarks delivered at the Kansas Bankers Association 2025 CEO &amp; Senior Management Summit, Colorado Springs, Colorado; and Michelle W. Bowman (2025), ""Views on the Economy and Monetary Policy,"" (PDF)  remarks delivered at the Kentucky Bankers Association Annual Convention, Asheville, North Carolina, September 23.
- 4  The Guiding and Establishing National Innovation for U.S. Stablecoins Act was enacted on July 18, 2025.
- 5  See Hess Chung, Callum Jones, Antoine Lepetit, and Fernando M. Martin (2025), ""Implications of Inflation Dynamics for Monetary Policy Strategies,""  Finance and Economics Discussion Series 2025-072 (Washington: Board of Governors of the Federal Reserve System, August).
- 6  The FOMC's revised Statement on Longer-Run Goals and Monetary Policy Strategy is available on the Board's website at  https://www.federalreserve.gov/monetarypolicy /files/FOMC\_LongerRunGoals.pdf.
- 7  See Michelle W. Bowman (2025),   ""Taking a Fresh Look at Supervision and Regulation,"" (PDF)  remarks delivered at the Georgetown University McDonough School of Business, Psaros Center for Financial Markets and Policy, Washington, D.C., June 6.",Michelle W Bowman
https://www.bis.org/review/r250929c.htm,Darryl Chan: Opening remarks - Treasury Markets Summit 2025,"Opening remarks by Mr Darryl Chan, Deputy Chief Executive of the Hong Kong Monetary Authority, at the Treasury Markets Summit 2025, Hong Kong, 26 September 2025.",2025-09-26 00:00:00,"## Darryl Chan: Opening remarks - Treasury Markets Summit 2025

Opening remarks by Mr Darryl Chan, Deputy Chief Executive of the Hong Kong Monetary Authority, at the Treasury Markets Summit 2025, Hong Kong, 26 September 2025.

* * *

Distinguished guests, members and friends of the TMA, ladies and gentlemen, good morning.

## Opening

On behalf of the HKMA and the TMA, a very warm welcome to the Treasury Markets Summit.

This year marks the TMA's 20 th   anniversary. Today's Summit is a timely opportunity for us to reflect on the development of Hong Kong's treasury markets in the past two decades, and to celebrate the TMA's contributions to the process.

## Treasury market development

I will focus on the growth and transformation of the money markets, the foreign exchange (FX) market, and the bond market.

## HKD and CNH money markets

Let me start with the core Hong Kong dollar interbank market of placements, borrowings, and swaps. In 20 years' time its average daily turnover has more than doubled to HK$558 billion in 2024.

Meanwhile, the CNH money market has grown hand in hand with the phenomenal expansion of offshore RMB business in Hong Kong. The journey was marked by several milestones, not least the launch of RMB RTGS (real-time gross settlement) in 2007, introduction of RMB liquidity facility by the HKMA in 2012, and the establishment of the CNH HIBOR fixing by the TMA in 2013.  The active CNH money market enables market participants to efficiently manage their liquidity, providing a strong foundation for the growth of offshore RMB business.

## FX market

Turning to the FX market, again we have seen vibrant activities and growth. Hong Kong's daily FX transactions has grown by more than six times over 20 years to US$670 billion in 2024, elevating our global ranking from the sixth place to the fourth.

RMB FX activities registered exponential growth. Take the USD/RMB pair for example, the daily turnover increased by almost 20 folds, from slightly over US$10 billion in 2010 to almost US$200 billion in 2024.

## Bond market

Our bond market has also evolved from a relatively localised market to a sophisticated, diversified, and innovative segment of Hong Kong's financial system. The outstanding amount of Hong Kong dollar debt securities rose from $664 billion in 2005 to over $2.8 trillion in 2024, thanks to the expansion of government and corporate issuances, the rise of green and sustainable bonds, and more recently the pioneering of digital bond issuances.

Hong Kong is also a major G3 bond issuance centre in Asia, with outstanding G3 debt securities standing at US$566 billion at the end of 2024. A more remarkable achievement is the rapid expansion of the offshore RMB bond market.  Since the issuance of the first dim sum bond in 2007, the market has attracted a wide range of issuers including sovereigns, local governments, corporates, financial institutions, and international organisations.  At the end of last year, the outstanding amount of offshore RMB debt securities reached RMB1.3 trillion.

## TMA's developments

Riding on the remarkable evolution of Hong Kong's treasury markets, the TMA has played a significant role in promoting best practices, fostering industry collaboration, and strengthening market competitiveness and development. I would focus on three perspectives: people, products, and market.

## The people

First and foremost, people. Since its inception, the TMA has been continuously enhancing the professionalism of market practitioners to meet evolving market demands.  In 2011, the TMA introduced the Code of Conduct and Practice.  In 2018, it took up the administration role for the HKMA's Enhanced Competency Framework on Treasury Management.

Last year alone, the TMA administered professional qualification education programmes and examinations for 200 industry practitioners, and offered professional training sessions and seminars to more than 1,500 participants.

Members are the cornerstone of the TMA's success. With industry support, the TMA's membership has grown to a total of 75 Institutional Members and over 3,300 Individual Members.  Last year, the TMA took the initiative to broaden its membership base by admitting full-time post-secondary students.

## The products

Let's turn to products that support the development of treasury products and services to meet market demands. Since 2006, the TMA has introduced a comprehensive set of FX and interest rate benchmarks including Spot USD/HKD, Spot USD/CNH, CNH HIBOR, and HONIA. The robustness of the FX benchmark fixings is underpinned by the smooth transition in 2016 to a transaction-based regime, and the credibility of all the benchmarks is upheld by independent, professional audit to ensure compliance with IOSCO requirements.

In particular, the introduction of HONIA as an alternative reference rate, its smooth running alongside HKD HIBOR, and the successful LIBOR transition locally, would not have been possible without the support of the TMA in raising market awareness and readiness.

## The market

On the market front, TMA as a member of the Global Foreign Exchange Committee has actively promoted the adoption of the FX Global Code, so that Hong Kong institutions subscribe to the global principles of good practice for the wholesale FX market. The effort has been well recognised by the global FX community.  The TMA also partners with the HKMA in conducting semi-annual FX turnover surveys.  The survey, together with the BIS Triennial Survey, provides useful insights on the development and emerging trends of Hong Kong's FX market as compared to our global peers.

## Conclusion

Ladies and gentlemen, I've done quite a bit of stock-taking, mainly for the purpose of reminding ourselves that we've gone a long way to grow the market. And looking ahead there are still a lot of opportunities to be tapped, a lot of work to be done. Just yesterday, for example, the HKMA and the SFC jointly published a roadmap that will serve as an action plan that steers coordinated efforts to make Hong Kong a more competitive marketplace for fixed income and FX activities.  The roadmap is a product of extensive engagement with market participants including many of you.  I thank you and trust we will put our act together to realise the vision.

Going forward, TMA will continue to be a trusted partner of the industry and the regulators, with increased focus on reflecting market views and presenting policy recommendations to make Hong Kong's treasury markets more efficient, more competitive, and more forward looking.

Let me conclude by expressing my heartfelt gratitude to members of the Council, Executive Board and the various Committees of the TMA for their valuable contribution, and to all institutional and individual members for their unfailing support. My thanks also go to the TMA team, past and present, for their dedication and commitment. Together we will scale new heights for Hong Kong's treasury markets and financial industry in more decades to come.

May I wish you all a productive and fruitful summit. Thank you.",Darryl Chan
https://www.bis.org/review/r250929b.htm,Eddie Yue: With challenges come opportunities – Hong Kong as the global offshore RMB business hub ,"Keynote address by Mr Eddie Yue, Chief Executive of the Hong Kong Monetary Authority, at the Treasury Markets Summit 2025, Hong Kong, 26 September 2025.",2025-09-26 00:00:00,"## Eddie Yue: With challenges come opportunities - Hong Kong as the global offshore RMB business hub

Keynote address by Mr Eddie Yue, Chief Executive of the Hong Kong Monetary Authority, at the Treasury Markets Summit 2025, Hong Kong, 26 September 2025.

* * *

Distinguished guests, members and friends of the TMA, ladies and gentlemen,

Good afternoon. It is a great pleasure to welcome you all to this year's Treasury Markets Summit.  Thank you very much to our esteemed panel speakers for their insightful contributions and thought-provoking discussions on the forces shaping global financial markets.

We gather here today at a pivotal moment, as geopolitical tensions, the resurgence of tariffs, and rapid AI innovations reshape the global financial landscape. These dynamics present both challenges and opportunities for Hong Kong.  Among the opportunities, two stand out.  First, global investors seeking to diversify their portfolios with exposure to China increasingly turn to Hong Kong.  Our familiar legal system, robust regulations, and world-class market infrastructure makes us their gateway of choice.  Second, as Chinese corporates expand overseas, they choose Hong Kong to manage their international operations, drawn by our unique position as part of China yet globally connected, supported by top-tier financial and professional services.  In both directions, Hong Kong serves as the vital bridge between China and the world, and I am confident that our role as an international financial centre (IFC) will only further strengthen in the years to come.

One of Hong Kong's core strengths as an IFC is our unique role as the global offshore RMB business hub. This position has been reinforced by our ability to adapt to emerging trends and meet the evolving needs of global markets.  A significant milestone in this journey is the Fixed Income and Currency (FIC) roadmap jointly announced with the Securities and Futures Commission (SFC) yesterday.  This roadmap charts the course for further developing Hong Kong's FIC markets, capitalising on the growing prominence of RMB-denominated debt instruments in global fundraising and asset allocation.

With this backdrop in mind, today, I would like to share our recent progress and future direction in the offshore RMB market, organised around three key themes: capacity, connectivity, and agility.

## Capacity

The first theme, Capacity, reflects Hong Kong's relentless efforts to expand its offshore RMB business. While RMB deposits in Hong Kong have remained largely stable at around RMB1 trillion, various RMB business segments have grown remarkably, demonstrating the increased efficiency and velocity in our RMB ecosystem.  Let me highlight a few examples:

- In terms of RMB financing, outstanding RMB loans have surged to RMB840 billion, a more than three-fold increase since 2022;
- Dim sum bond issuance has also grown rapidly, with the outstanding amount of dim sum bonds expanding by over 60% from three years ago to RMB1.27 trillion in the first half of this year;
- In terms of payments, the RMB RTGS handles a consistently high level of turnover of RMB2-3 trillion daily;
- On the trade settlement front, RMB trade settlement reached RMB15 trillion in 2024, a 60% increase from 2022, with over RMB7 trillion already recorded in the first half of this year.

This impressive growth, particularly in RMB trade settlement, opens significant opportunities for banks in Hong Kong. To further bolster our capacity, with the unwavering support of the People's Bank of China (PBoC), we launched the RMB Trade Financing Liquidity Facility (RMB TFLF) earlier in February.  Unlike traditional liquidity facilities, this was the first one designed specifically for market development purpose.  In the past, offshore RMB interbank funding costs could fluctuate notably from time to time, which was not conducive for RMB business development.  The RMB TFLF addresses this by providing banks in Hong Kong with stable RMB funding referencing onshore interest rates, enabling RMB trade finance lending to corporate customers.  The facility has received positive feedback, and with the operational experience gained, we are now ready to take it to the next level.

As foreshadowed in the Chief Executive's 2025 Policy Address, we will introduce an RMB Business Facility, a multi-dimensional upgrade of the trade finance facility, with an aim to further support real economic activities. Details will be sent to banks later today.  Let me share some highlights.  This new facility, to be rolled out in phases, will:

- offer longer tenors of up to one year and remove the additional 25 basis points in interest calculation;
- go global by allowing banks to on-lend the funds to their overseas intragroup banking entities for in-scope activities;
- broaden its scope beyond trade financing to also cover RMB direct investment and working capital; and
- streamline operations by enabling collateral substitution and transitioning to automated collateral management via the CMU triparty repo service.

We look forward to seeing banks leverage the new facility to channel offshore RMB funding from Hong Kong to global markets. Alongside this, we will also enhance the existing RMB Liquidity Facility to provide banks with greater flexibility in managing shortterm funding, further solidifying Hong Kong's position as the offshore RMB business hub.

Promoting the dim sum bond market remains a top priority. We see immense potential to attract a broader range of issuers, including governments, central banks, corporates, multilateral institutions and overseas firms.  To enhance market liquidity, we are also looking into more risk management tools, such as government bond futures and improved repurchase and collateral options, empowering bondholders to manage their assets more effectively.   As announced by the PBoC yesterday (25 September), today we are jointly launching with Mainland authorities cross-boundary repo business.  This

allows offshore investors (especially Bond Connect investors) to access the onshore repo market, providing an additional channel for liquidity management and costeffective funding.  This will further enhance the investment and allocation value of RMB assets, making RMB bonds more attractive to international investors, thereby promoting RMB internationalisation and consolidating Hong Kong's position as an offshore RMB business hub.

Additionally, a more robust yield curve would strengthen the offshore RMB bond market. I am grateful for the valuable recommendations from the TMA Working Group under the Market Development Committee, some of which have shaped our Government bond issuance programmes and joint initiatives with the PBoC.  The Working Group is now exploring ways to boost secondary market trading of CNH bonds, and I look forward to their recommendations.

Hong Kong's role as a connector between the Mainland and international markets is more vital than ever. As discussed in today's panel, the growing trend of Mainland corporates expanding globally presents a unique opportunity.  We encourage these enterprises to set up corporate treasury centres in Hong Kong, leveraging our strategic position and world-class financial services.  Similarly, we also encourage Mainland banks to use Hong Kong as a base for their regional and overseas business management to better support Chinese companies going global.

Finally, we encourage the introduction of new RMB products to capitalise on emerging opportunities. An example is the launch of Shanghai Gold Exchange's first offshore gold delivery vault in Hong Kong, and the listing on its International Board of RMBdenominated gold contracts for delivery in Hong Kong.  These initiatives tie in with the HKSAR Government's vision to develop Hong Kong's gold market, reinforcing our role as a dynamic financial hub.

## Connectivity

The second theme, Connectivity, underscores Hong Kong's role as a vital link between markets, particularly through the various Connect Schemes with the Mainland. Since the launch of Stock Connect in 2014, other Connect Schemes like Bond Connect, Wealth Management Connect, and Swap Connect have deepened financial integration and cooperation between Hong Kong, the Mainland, and global markets.  Over 1,000 international institutions are active in these schemes, a testament to their success.

The HKMA has been working closely with Mainland authorities to strengthen our crossboundary connection. Recent measures to enhance connectivity include:

- Expanding Southbound Bond Connect to include securities firms, fund companies, insurance companies and wealth management companies, while improving settlement times and supporting multi-currency bond settlement;
- Developing offshore RMB repo business using Northbound Bond Connect bonds as collateral, supporting re-hypothecation of bond collaterals during the repo period, and cross-currency repos;
- Including Northbound Bond Connect bonds as eligible margin collateral at OTC Clearing Hong Kong Limited; and
- Enriching Swap Connect with new product types.

Looking ahead, the HKMA will continue to explore, with our Mainland counterparts, ways to further deepen the mutual market access schemes and support the development of offshore RMB-denominated products.

## Agility

Finally, the theme of Agility reflects our commitment to future-proofing Hong Kong's financial market infrastructure. Our world-class, multi-currency, multi-dimensional payment and settlement platform, with extensive domestic and overseas system linkages has long positioned us as a regional hub for payment and settlement of funds and securities.  As technology reshapes the global financial industry, to stay ahead, we established CMU OmniClear Limited in October last year, a significant step towards modernising and commercialising CMU.

The transition to CMU OmniClear reflects our vision for a more integrated and efficient system, enabling CMU to swiftly meet market demands in a rapidly evolving financial landscape. Designed and modernised to enhance operational capabilities, it would deliver a broader range of service offerings for market participants.

CMU OmniClear builds on CMU's legacy of custodising debt securities, especially offshore RMB bonds, while supporting Bond Connect and digital bond issuances. This year, CMU OmniClear partnered with Hong Kong Exchange and Clearing Limited (HKEX) to lay the foundation for a multi-asset class custodial platform.  It is also expanding its global network, forging cross-border linkages with more central securities depositories to facilitate Mainland investors' access to offshore securities.  These advancements reduce transaction costs and enhance market efficiency, reinforcing Hong Kong's appeal to international investors.

## Closing

In closing, I would like to reiterate that, as we navigate the complexities of the global financial landscape, the HKMA remains steadfast in our mission to uphold Hong Kong's status as a leading international financial centre.  Our focus on Capacity, Connectivity, and Agility positions us to seize emerging opportunities and tackle challenges with confidence and resilience.

I look forward to working together to achieve our shared vision for Hong Kong's financial future. Thank you.",Eddie Yue
https://www.bis.org/review/r250929a.htm,Michael S Barr: Preserving the dynamism and credibility of stress testing,"Speech by Mr Michael S Barr, Member of the Board of Governors of the Federal Reserve System, at the Peterson Institute for International Economics, Washington DC, 25 September 2025.",2025-09-25 00:00:00,"For release on delivery 1:00 p.m. EDT September 25, 2025

Preserving the Dynamism and Credibility of Stress Testing

Remarks by

Michael S. Barr

Member

Board of Governors of the Federal Reserve System at

Peterson Institute for International Economics

Washington, D.C.

Thank you for the opportunity to speak to you. 1

Today, I would like to discuss a vital tool for supervising the safety and soundness of the largest banks and preserving the stability of our financial system.  I was there, at the Treasury Department in 2009, when stress testing was first used in the United States in the heat of battle, an ad hoc measure to reverse a loss of confidence in U.S. banks that was a major force then driving the Great Recession.  By examining how the balance sheets of banks would be affected by a worsening of financial and economic conditions, this process was intended to reveal weaknesses that could threaten the solvency of banks and prevent them from playing their central role in the economy. 2

Stress testing ultimately succeeded in helping to restore confidence during the crisis, and in the aftermath this battle-tested tool became a formal and integral part of the effort to repair the ensuing damage and strengthen the banking system.  Stress testing has continued to evolve in the years since then to maintain that strength and help limit the chances of another devastating financial crisis.  Stress testing changed as its purpose changed from wartime to peacetime-from mitigating the crisis to preserving safety, soundness, and stability.  It has changed as banks and regulators learned more about how stress testing works in practice and as part of an otherwise evolving supervisory and regulatory framework for banks that must necessarily adjust as finance itself evolves.

Adjusting regulation in this dynamic environment is challenging, and one of those challenges is dealing with unintended consequences.  The Federal Reserve made changes

1 The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.

2 The stress tests during the Global Financial Crisis also included measures to address bank balances sheet weaknesses in a timely manner under stressed conditions, further supporting confidence, as discussed below.

to stress testing in 2020 intended to make it more predictable and to better integrate it with overall capital regulation, but those changes are now at the center of litigation brought by large banks.  The Fed responded in April by proposing more changes intended to address these criticisms.  But as I explained in voting against those measures, I believe these steps will substantially impair stress testing, concealing rather than revealing crucial weaknesses in the risk management of individual banks and in the stability of the financial system. 3   As the Federal Reserve Board considers these changes, I believe we should focus on how best to address the original purpose-and preserve the effectiveness-of stress testing.  As I will explain, I believe that the best way to further these goals is to separate stress testing from capital requirements in order to maximize the informative value of the tests and their results and untangle them from the larger and complex task of setting capital requirements.  I will lay out that alternative approach toward the end of these remarks, but first I believe it is helpful to take a step back and recall how stress testing has evolved to this point, then turn to where it should go from here.

It all began during the Global Financial Crisis.  Capital markets froze, resulting in business failures and prompting the need for unprecedented public-sector intervention. Credit to households and businesses slowed to a trickle, and millions of people were losing homes and jobs.  By the fall of 2008, there was a broad-based lack of confidence in the banking system, as large banks faced questions about their exposures to losses

3 Board of Governors of the Federal Reserve System, 'Statement on Stress Test Proposal by Governor Michael S. Barr,' press release, April 17, 2025,

https://www.federalreserve.gov/newsevents/pressreleases/barr-statement-20250417.htm.

related to real estate and other assets.  These were questions that large banks in many cases couldn't credibly answer because of the complexity and opacity of their direct and indirect exposures to mortgages at the center of the crisis.  Without this information, investors assumed the worst, driving down equity prices of banks, which complicated efforts by banks to bolster their balance sheets.

Restoring confidence in the banking system required credible information from a reliable source.  Treasury worked with the Federal Reserve to design the Supervisory Capital Assessment Program (SCAP) to test the capital adequacy of what were determined to be the 19 most systemically important banking and financial institutions. In addition, Congress had provided a backstop in the form of the Troubled Asset Relief Program (TARP), the Federal Deposit Insurance Corporation (FDIC) had backstopped bank funding through guarantees, and the Federal Reserve had stepped up in significant ways to bolster the financial system and the economy.  The existence of a government backstop played a big role in the success of the first stress test.  With the use of public funding on the line, the rigor and transparency of the stress test was doubly important. 4

## Rebuilding Confidence in the Largest Banks

There were five aspects of the SCAP that are elemental to stress testing and have been present in the different tests since then.

First, there was the use of a severe but plausible scenario for macroeconomic conditions.  The scenario assumed a deeper and more prolonged recession than forecasters expected.  Because of the focus on housing-related losses, the scenario's

4 At the point of the stress tests results, taxpayers had already acquired an actual stake in all but one of the 19 SCAP institutions, which had accepted a total of just under $190 billion in funding from the emergency Troubled Asset Relief Program (TARP). Banks could go to TARP to get more capital if needed after the stress test, but most were able to tap market sources and repay TARP.

assumption of a further severe decline in housing prices was essential to rebuilding confidence.

Second, there was the use of economic models to translate a given scenario into quantified losses for each bank.  The banking regulators worked together to develop models to map the stress scenario into a range of associated loss rates for different loan categories and iterated with the banks to assess their specific exposures.

Third, based on the extent of those projected losses, the test arrived at a firmspecific amount of capital that each bank would need in order to withstand this stress and keep lending to customers.

A fourth aspect of the SCAP and subsequent stress tests was the public disclosure of the scenario, the basic testing methodology, and, most importantly, firm-specific results.

And lastly, in addition to the balance sheet data and other numbers related to the stress test, the Federal Reserve produced a qualitative supervisory assessment of the banks' capital planning decisions and processes.

One essential element of that first test is that the supervisors reviewed and assessed the data and modeling assumptions used by the banks, which helped to provide credibility for the loss estimates.  The result of the SCAP was that 10 of the 19 tested institutions were required to raise capital sufficient to keep them above regulatory minimums if the scenario were to materialize-a total of $75 billion.  The 10 were given six months to develop capital plans to meet their stress test minimums.

The SCAP was remarkably successful.  There was skepticism that the test would be sufficiently severe or transparent to be credible, and bank stock prices were volatile

due to speculation about what the stress test results would reveal.  But bank stocks recovered after the results were announced in May.  Most banks that had been struggling to raise capital were able to do so, with 9 of the 10 able to find private sector sources of funding by the six-month deadline. 5   Credit default swaps for large banks returned to levels seen before the acute stage of the crisis. 6   Bank lending was slower to recover, but stabilizing the banks helped stop the crisis and the U.S. economy started the long process of recovery that July.

## Supporting the Resilience of the Largest Banks

I have compared the SCAP to a battlefield campaign, and while the financial crisis certainly felt like combat at the time, my point is to emphasize the unique challenge of making financial regulatory policy in an emergency.  The goal was to restore public trust in banks that were under fire, and as the job shifted to preserving that trust, it was apparent that there should be an ongoing role for stress testing in peacetime as well. Starting with the yearly stress test established in 2010 with the Dodd-Frank Act and continuing with the integration of stress testing into the Federal Reserve's annual Comprehensive Capital Analysis and Review (CCAR), the peacetime approach focused on institutionalizing bank resilience and risk-management practices.  The Federal Reserve Board conducted the first CCAR exercise in 2011.  CCAR was an overall assessment of the capital planning processes of banks, which included quantitative and qualitative components.  Either of those components could form the basis for an objection

5 Troubled Asset Relief Program: Bank Stress Test Offers Lessons as Regulators Take Further Actions to Strengthen Supervisory Oversight (GAO, September 2010), https://www.gao.gov/assets/gao-10-861.pdf. 6 Seung Jung Lee and Jonathan D. Rose, 'Profits and Balance Sheet Developments at U.S. Commercial Banks in 2009,' Federal Reserve Bulletin, September 2, 2010,

https://www.federalreserve.gov/pubs/bulletin/2010/articles/profit/default.htm.

by the Fed to firm plans to distribute capital to shareholders, distribution which would reduce the capital available that the firm could use to buffer its losses.

The quantitative evaluation of a firm's capital adequacy was driven by the results of the Dodd-Frank Act Stress Test, or DFAST. 7   It departed from the SCAP in at least two important ways.  First, rather than making the severe scenario just a more negative version of the current consensus forecast, the Fed built a process to develop thematic forward-looking scenarios using macroeconomic models calibrated to historical data. 8 Some parts of the scenario design framework are purposely countercyclical under normal conditions-for instance, the minimum peak unemployment rate is set at 10 percent.  The countercyclicality of stress test scenarios is an attempt to lean against pro-cyclical effects that can make borrowers appear overly resilient in good times, something which could cause the model to significantly understate the magnitude of borrower defaults when the economy turns. 9

The second way that the Dodd-Frank stress test departed from CCAR is that most losses under DFAST are projected by applying models developed and operated by the Federal Reserve based on data provided by the banks.  Using Fed-developed and validated models provides for independent risk assessments.  The granular data provided

7 The number of financial institutions that participated in the annual DFAST exercise has varied from 18 to 33 between 2013 and 2025.

8 See 12 CFR pt. 252, appendix A (The Federal Reserve's Policy Statement on the Scenario Design Framework for Stress Testing).  Although stressed losses in DFAST are projected for a two-year time horizon, the macroeconomic scenario itself is on a three-year time horizon.  This reflects the fact that the CCAR capital planning exercise performed by the banks goes out three years.  Moreover, a three-year scenario provides the public with greater transparency regarding the entirety of the conditions assumed as part of the macroeconomic cycle contemplated in the test.  The number of scenario variables has increased notably from SCAP and the early days of CCAR.

9 Ben Bernanke, Mark Gertler, and Simon Gilchrist, 'The Financial Accelerator in a Quantitative Business Cycle Framework,' in Handbook of Macroeconomics, Vol. 1, 1999, (ScienceDirect, 1999), https://www.sciencedirect.com/science/article/pii/S157400489910034X.

by banks has been valuable in ensuring that the stress tests are truly risk sensitive and in understanding broader trends and interconnections in the financial system.

In addition to this quantitative test, CCAR assesses the ability of banks to determine their capital needs in the future.  Supplementing the DFAST model administered by the Fed, each bank projects its income over the stress scenario using its internal models, providing supervisors with a view of governance and risk management of the bank's capital planning process.  If a bank did not pass either the quantitative or qualitative evaluation, the Board of Governors was able to object to the capital plan and restrict the firm's shareholder distributions.

Over time, several criticisms of CCAR's approach emerged.  The first was that CCAR was wholly separate from the process used to set a bank's basic, risk-based capital requirements.  Large banks also criticized CCAR for a lack of transparency and predictability that resulted in them pre-committing to lower capital distributions and higher levels of capital.

In 2020, the Federal Reserve Board addressed these bank criticisms by creating the stress capital buffer (SCB).  To address the criticism that CCAR was additive and wasn't integrated into capital planning, the SCB combined the basic capital requirement for banks with one equal to a bank's projected capital ratio decline during the stress test plus a year's worth of planned dividends, linking components of the capital framework. To address the claim that CCAR lacked transparency and predictability, the SCB

requirement was set for each participating bank at a level that reflected its losses in the stress test and provided banks with flexibility to change their dividends in real time. 10

Another bank criticism was that CCAR's use of a qualitative assessment was subjective.  The SCB dropped the qualitative objection and recast the assessment of capital planning practices as a traditional supervisory exam.

By more directly integrating stress testing into capital regulation, the SCB increasingly moved stress testing away from supervision and toward the regulatory arena, a consequential decision.  While this change was intended to promote consistency and predictability, in retrospect, it may have reduced some of the value of the exercise, in that it reduced the range of facts and circumstances the Board would take into account when evaluating an individual firm's capital adequacy.  As a result, the Board's flexibility to adjust capital adequacy determinations based on the unique features of different firms, including different business models and risk profiles, was constrained.

When I became Vice Chair for Supervision in 2022, we continued the process of evolving the stress test as necessary.  In particular, the Fed conducted multiple scenarios not directly connected to setting banks' capital requirements. 11   Using additional scenarios has helped us to understand how a broader range of risks might affect the banking system.  For example, we've explored a stagflation scenario and looked at the failures of large non-bank counterparties.  Using multiple scenarios has helped to keep our risk-assessments dynamic.

10 As part of its efforts to address concerns about transparency, in early 2019 the Fed finalized a proposal to augment its disclosures regarding its stress testing models.  84 Fed. Reg. 6784 (2019).

11 See Michael S. Barr, 'Multiple Scenarios in Stress Testing,' speech at the Stress Test Research Conference at the Federal Reserve Bank of Boston, Boston, MA, October 19, 2023. https://www.federalreserve.gov/newsevents/speech/barr20231019a.htm.

## Benefits and Effects of the Current Stress Testing Framework

Before turning to the legal challenges of the current stress test framework, I would be remiss not to emphasize the value of that framework.  The stress test has been a critical element that led to strengthening both the quantity of capital in the banking system and the risk-management capabilities of large banks.

Since the Global Financial Crisis, large banks have more than doubled their riskbased common equity capital ratios-from roughly 5 percent to 12 percent or more.  At the same time, they have made meaningful improvements in their ability to measure, monitor, and manage their own risks.  The stress test has directly contributed to both.

Despite this success, some have argued for what they term 'full transparency' of the test.  But the criticism can be misleading because two important points are often omitted.  First, the Federal Reserve already provides substantial information about the design of the test and has expanded those disclosures over time.  Banks are far from uninformed. They receive substantial information about the models in annual model methodology disclosures. 12   Any material model changes are phased in over two years, with full explanation. Second, what critics call 'transparency' is not disclosure of basic information about the rigor and methodology of the test essential for its credibility; instead, it is the equivalent of handing out the questions to the test in advance.  That would fundamentally undermine the rigor of the test, which is intended to assess resilience under conditions not fully known in advance, just as in a financial crisis.

12 See, e.g., Board of Governors of the Federal Reserve System, 2025 Supervisory Stress Test Methodology (Board of Governors, June 2025), https://www.federalreserve.gov/publications/files/2025-june-supervisorystress-test-methodology.pdf; Board of Governors of the Federal Reserve System, 2024 Supervisory Stress Test Methodology (Board of Governors, March 2024),

https://www.federalreserve.gov/publications/files/2024-march-supervisory-stress-test-methodology.pdf.

In short, the framework strikes a deliberate balance: providing banks with enough information about scenarios and models to ensure fairness and accountability, while preserving the rigor that makes the stress test an effective safeguard.

## Challenges to the Current Stress Testing Framework

In December 2024, bank trade associations brought suit against the Board of Governors, challenging the role of stress testing in setting SCB requirements for large firms.  The trade associations have challenged what they contend is the opacity of certain elements of the stress testing process and have argued that the models and scenarios should be released in proposed form to promote transparency and facilitate public comment.  In anticipation of, and in response to, this litigation, the Board announced that it would disclose and seek public comment on all of the models that determine the hypothetical losses and revenue of banks under stress, as well as the annual stress scenarios.  The Board also proposed to change its rules to average stress testing results over two years to reduce the year-over-year volatility in the capital requirements that result from annual stress testing.

These proposed changes represent a policy choice to respond to the litigation by enhancing transparency and promoting public participation, and they are not intended to materially affect overall capital requirements.  But in my judgment, they are a mistake that will make stress testing less rigorous and nimble.

Subjecting the stress testing models to the notice and comment process could lead them to ossify, and their dynamism and effectiveness may fade.  Stress testing models are inherently complex and require adjustments to maintain accuracy and relevance to appropriately account for quickly developing risks.  Changes in the models would require

new notice and solicitation of comment, and the time lag and burden in making changes would be significantly extended.  We saw this type of ossification play out before the Global Financial Crisis, when supervisory stress testing of Fannie Mae and Freddie Mac became formulaic and failed to capture escalating risks, with dire consequences. 13

An additional problem is that the comment process may have an uneven effect, since banks have an incentive to object to aspects of the models that result in higher capital requirements and not to highlight the areas in which the models underestimate downside risk.  Responding to these comments could create a one-way ratchet that successively weakens capital requirements.

Knowing the details of the stress test in advance will also increase the likelihood that banks are able to game the results to lower their capital requirements.  We have seen examples of how firms have been able to game stress tests.  For instance, some firms started to use so-called 'macro hedges' in the late 2010s.  Many of these macro hedges were hedges against a deep recession, similar to a stress test scenario, and these shortterm hedges were cheap because investors assessed these scenarios as extremely unlikely (they were far 'out of the money' in option terms).  The hedges reduced projected capital losses in the stress tests by billions of dollars for some banks.  But they weren't credible protection from the effects of a recession because maintaining these hedges would become prohibitively expensive as the economy moved into an actual downturn.  This is just one example of attempts to game the stress tests, that were eventually addressed

13 Scott Frame, Krisopher Gerardi, and Paul Willen, 'The Failure of Supervisory Stress Testing: Fannie Mae, Freddie Mac, and OFHEO,' Federal Reserve Bank of Boston Working Paper No. 15-4 (Federal Reserve Bank of Boston, October 2015), https://www.bostonfed.org/publications/research-departmentworking-paper/2015/the-failure-of-supervisory-stress-testing-fannie-mae-freddie-mac-and-ofheo.aspx.

through the supervisory process.  But this example underscores how full disclosure of the Fed's stress models and scenarios would enable banks to optimize stress test results by, among other things, adjusting their balance sheets based on their knowledge of where the models underprice risk, in order to reduce their capital requirements without materially reducing risks.

Banks are likely to change their behavior in other ways that increase risk.  Banks may invest less in their own risk management if the test becomes too predictable.  Full disclosure of the Board's models may encourage concentration across the banking system in assets that receive comparably lighter treatment in the test, which could create risks to financial stability.  And banks are likely to reduce their management buffers, making it more likely that they would breach their required buffers and minimums in the event of stress.  The upshot is that a full-transparency stress testing regime can increase systemic risks because risk is underestimated and capital is too low.  The stress tests could lose their credibility.  A loss in credibility is bad for the banks, the banking system, financial stability and, ultimately, American families and businesses.

## An Alternative Path Forward

As an alternative to these proposed changes, I would favor prioritizing the rigor of the stress testing framework by separating stress testing from binding regulatory capital requirements, which would instead be increased commensurately. 14   The Dodd-Frank Act requires that the Board conduct stress tests on large banks 'to evaluate whether such companies have the capital, on a total consolidated basis, necessary to absorb losses as a

14 See Daniel Tarullo, 'Reconsidering the Regulatory Uses of Stress Testing,' Hutchins Center Working Paper #92 (Brookings, May 2024), https://www.brookings.edu/wpcontent/uploads/2024/05/WP92\_Tarullo-stress-testing.pdf.

result of adverse economic conditions.' 15   While these results can and should still play a role in informing supervisory and management assessments of the appropriate capital level for particular banking organizations, decoupling the stress test results from the preliminary SCB would enable the Board to preserve essential aspects of stress testing, including the generation of credible and detailed information on the risk exposures of banks and how their capital levels would be affected by a stress event.  Such information would be valuable in the supervision of banks in normal times and especially important if banks and the financial system are again threatened by crisis.

If the stress tests are no longer used to inform the calculation of a firm's preliminary SCB requirement, the legal justification for publishing the models and scenarios for comment would be eliminated, and I've already discussed the policy grounds for not publishing them.  So, the Board could abandon the notice and comment proposal.

The Board could approach these statutorily required tests primarily as a supervisory exercise and could thereby retain flexibility to design and adjust the models and scenarios as appropriate to ensure their rigor and robustness.  Moreover, as authorized by the Dodd-Frank Act, the Board could run multiple scenarios to provide greater dimension to the assessment of risks. 16   As history teaches us, shocks and crises can manifest through a range of channels, and testing a large bank's unique profile under a range of risks is more likely to yield high-value information about a bank's likely resilience to potential stress events.  The net result of these changes would be to increase

15 12 U.S.C. § 5365(i)(1).

16 12 U.S.C. § 5365(i)(1)(B) ('The Board of Governors-(i) shall provide for at least 2 different sets of condition under which the evaluation required by this subsection shall be conducted, including baseline and severely adverse.') (emphasis added).

the nimbleness, dynamism, and effectiveness of our current stress testing framework. The Board's continued publication of firm-specific results would promote transparency and market discipline.

So that this change does not reduce overall capital in the system, SCBs could instead be set entirely by regulation.  For most non-G-SIBs subject to the SCB requirement, the current 2.5 percent buffer floor likely remains an appropriate level.  For G-SIBs with a lot of trading, past stress tests have routinely indicated that SCBs should likely be set higher than the 2.5 percent floor, and any regulatory capital measure designed to replace the current SCB framework would need to account for this gap. While further analytical work is required, the shortfall generated by decoupling the stress tests from the SCB may be largely addressed by a regulatory capital requirement linked to the risks in the trading book, with perhaps some other adjustments as required to maintain appropriate capital levels.  If, over time, stress testing results indicate that this replacement regulatory capital measure routinely exceeds or falls short of the capital levels required to provide adequate resilience to stress conditions, the Board could revise the regulatory measure through a notice-and-comment process, informed by data gathered in the stress testing process.

This proposed approach of decoupling the stress tests from regulatory capital and increasing regulatory capital to make up the shortfall in the SCB appears to me to be the best way to retain the value of stress testing as a supervisory exercise while maintaining appropriate levels of capital in the system.  However, replacing the current framework of individualized SCBs-informed by firm-specific stress test results-with broadly applicable, formulaic regulatory capital requirements would result in a diminution of the

risk sensitivity reflected in SCB requirements.  That is, capital levels for firms that are subject to the stress tests would be relatively less tailored than they currently are and less reflective of the unique business models, exposures, and risk profiles of a particular firm.

To address this loss in risk sensitivity, I would propose that, in exceptional circumstances, the Board could use its capital directive authority to impose individualized capital requirements on specific firms to account for a firm's particular circumstances, including its capital structure, riskiness, complexity, financial activities, and other appropriate risk-related factors. 17   This would be similar to the United Kingdom's Pillar II-B requirements and those of other jurisdictions. 18   While these requirements could be informed by the stress test results in part, they would also take into account qualitative factors and supervisory judgment.  Because these individualized requirements would consider the specific risks of a firm, they would be adjusted to reflect a specific firm's risk profile.  While I don't believe it would be advisable for this type of exercise to become the default manner for setting capital requirements, in exceptional cases, it would preserve some of the tailoring benefits of the current SCB regime in a manner that comports with the changes I have discussed.  Furthermore, it would preserve the ability for the Board to address stress results that demonstrate significant deficiencies in capital adequacy under a stressed scenario, when the firms are otherwise in compliance with regulatory capital requirements.

17 12 U.S.C. § 3907(a)(2).  Other statutes provide the Board with authority to impose individualized capital requirements through the issuance of orders.  See, e.g., 12 U.S.C. §§ 1844(b), 1467a(g)(1). 18 See Bank of England, 'CP16/22 - Implementation of the Basel 3.1 Standards: Interactions with the PRA's Pillar 2 Framework,' chapter 10 (BOE, November 30, 2022),

https://www.bankofengland.co.uk/prudential-regulation/publication/2022/november/implementation-ofthe-basel-3-1-standards/interactions-with-the-pras-pillar-2-framework.

With these changes, stress testing could maintain its flexibility and adaptability and therefore could retain its value as an effective tool for identifying idiosyncratic risk in a major bank and ensuring that capital is sufficient to address the risk.  Among the benefits would be the space this approach would allow for continued innovation in stress testing.  Such innovation is vital as finance evolves and banks continue to seek ways to reduce supervisory and regulatory requirements.  This approach could allow for scenario design and modeling advancements unencumbered by the limitations I've spoken of imposed by the notice-and-comment process.

In conclusion, I believe it is critical to maintain the dynamism and rigor of stress testing so that supervisors, banks, and the public understand the underlying vulnerabilities in the banking system and at the largest banks and understand that these firms are holding sufficient capital to address these vulnerabilities.  I have deep concerns that the set of changes the Board is now considering risks reliance on a stress test that can no longer effectively assess the resilience of the largest banks and lacks credibility, thus putting our financial system and economy at risk.",Michael S Barr
https://www.bis.org/review/r250922f.htm,Sethaput Suthiwartnarueput: Responsible financial innovation in ASEAN,"Speech by Dr Sethaput Suthiwartnarueput, Governor of the Bank of Thailand, at the Bangkok Digital Finance Conference ""Building the ASEAN financial corridor"", Bangkok, 16 September 2025.",2025-09-16 00:00:00,"## Sethaput Suthiwartnarueput: Responsible financial innovation in ASEAN

Speech by Dr Sethaput Suthiwartnarueput, Governor of the Bank of Thailand, at the Bangkok Digital Finance Conference ""Building the ASEAN financial corridor"", Bangkok, 16 September 2025.

* * *

It is a great pleasure to be here at the Bangkok Digital Finance Conference 2025, under the theme of ""Building the ASEAN Financial Corridor"", which we are organizing together with our partners at GFTN.

It is a particular pleasure to speak on this topic, because ASEAN has made remarkable progress in this area - progress that we can all be proud of.

If we look at digital finance, particularly payments, ASEAN has leapfrogged many cardheavy economies. We skipped decades of card-based legacy systems and moved directly to digital.

Today, QR codes and mobile wallets are used more widely in ASEAN than in many advanced economies. In Indonesia, QRIS now connects over 30 million merchants nationwide. In Malaysia, DuitNow has become a nationwide standard. In Thailand, PromptPay now handles over 75 million transactions daily, reaching more than 70 percent of the population.

And this leadership in payments extends not only domestically, but also across borders. Thailand now has around eight QR code linkages - among the highest in the world. ASEAN, I am proud to say, is one of the first regions in the world to connect real-time payment systems across borders, beginning with the Thailand-Singapore PromptPayPayNow linkage, the world's first cross-border fast-payment connection.

I am also glad to see progress in extending these bilateral linkages into a multilateral framework through Project Nexus, which is advancing steadily. This initiative will lay the foundation for even greater connectivity - not just within ASEAN, but also with partners beyond the region.

What is particularly heartening is that the region's innovation has been anchored in inclusion. Its benefits have been broad-based and tangible. A street vendor in Bangkok or Jakarta, or a small shop owner in Manila - with nothing more than a QR code printed on a piece of paper - can now receive instant payments at little to no cost.

This is innovation that truly supports inclusion. And inclusivity has been central to ASEAN's approach. This is not innovation for the sake of innovating. It is not innovation just to move faster. It is innovation to bring more people along.

But with great progress come new challenges and greater risks. Faster payments also mean faster fraud - a growing challenge across the region, not only in Thailand. Crossborder linkages add layers of compliance complexity, particularly for AML and CFT. And

greater inclusion means that more vulnerable groups - the less financially and technologically prepared, the elderly, and rural populations - are increasingly exposed to scams and fraud.

So, this is the challenge we now face: how do we continue the progress we have made? How do we make it sustainable and lasting? And how do we make it more responsible?

For that, I believe it is important to think about a framework for responsible innovation.

When we think about innovation, the natural temptation is to see technology as the solution - particularly in an environment like this today, with so many fintech firms and innovators. We often think of technology as the answer to many challenges: making things faster, cheaper, smarter, more convenient, and available 24/7.

But history shows us that technology on its own is not enough. For innovation to become lasting progress - to make it truly sustainable, not just in the ""green"" sense, but in the sense of being enduring, responsible, and resilient - at least three elements must come together.

First, technology, which is absolutely necessary as the enabler of new possibilities.

Second, economic incentives, which must be aligned to ensure sustainability, scalability, and inclusiveness.

And third, a legal and regulatory framework, which is essential to put guardrails in place - to provide resilience in the event of failure.

Having a framework to rein in innovation is not about putting a brake on innovation, but about putting a guardrail to make innovation more effective and lasting.

This brings me to a theme I will return to: resilience in failure. Too often, we ask only the question, ""Can it work?"" or ""Does it work?"" - and that is a fair question. But we do not ask often enough the harder question: ""What happens when it doesn't work?""

We must make sure that what we build works not just in good times, but also in bad times. What matters is not only whether the system works when things go right, but whether it holds up when things go wrong.

Now, this perspective comes naturally from a regulator - because when things go wrong, it is regulators and central banks that are asked to step in.

Take the example of the Global Financial Crisis in 2008. The financial system was built on sophisticated products, enabled by advanced technology, but it collapsed when trust evaporated. Stability was not restored by technology. It was restored by central bank intervention - by providing liquidity, by giving guarantees, and by re-establishing confidence.

The lesson is clear: the success of any innovation is not measured in normal times, but in its resilience under stress. And central bankers exist not to celebrate smooth functioning, but to ensure that trust and stability are maintained in crises.

That was 2008. But the same lesson applies today. Let me now turn to three examples: digital payments, tokenization, and open data.

First: digital payments - the case of PromptPay in Thailand.

The technology has been transformative. It delivered on its promise, transforming retail payments for a broad mass of people, advancing inclusion, and providing faster, cheaper, and more accessible payments for all.

But again, technology alone was not sufficient. The very features that made PromptPay successful - its speed, low cost, and inclusiveness - also fueled scams and fraud. Fraudsters often call, pretending to be police officers or bank officials, warning victims of ""suspicious activity"" and urging them to transfer money immediately via PromptPay. Others promote fake investment schemes, exploiting fear and greed to target the most vulnerable. And they take advantage of PromptPay's very strengths - instant speed and low cost - which also make transfers irreversible once sent.

So what is needed are the other two elements of the framework: the right economic incentives, and a strong legal and governance framework. Fraud prevention cannot rely on technology alone. Banks need liability-sharing frameworks, stronger KYC and identity checks, and incentives to cooperate in monitoring suspicious activity - rather than shifting the burden onto consumers.

The lesson here is clear: fast and cheap is not enough. Safeguards and shared responsibility are essential if digital payments are to be responsible, sustainable, and lasting.

Second: tokenization - tokenized money.

The technology promises efficiency, transparency, and programmability through smart contracts. It holds tremendous potential. But it also comes with risks.

Stablecoins are based on trust - and that trust can be very fragile. We saw this in the Terra/Luna collapse of 2022, which wiped out tens of billions of dollars and eroded confidence for millions of users. We have also seen how anonymity can enable shadow economies and allow AML/CFT rules to be bypassed.

So the technology is powerful. It holds tremendous promise. But it must be complemented by the other two pillars: the right economic incentives, and a strong legal and governance framework.

And money, again, is not just technology. It rests on long-lasting and enduring foundations. As I have said in other venues when speaking about the future of money, there are certain fundamentals that must not be undermined - because they have served us well.

These foundations include money functioning as a unit of account to define value, money acting as a means of payment to enable exchange, and a trusted system of transfer. And very importantly, the singleness of money. That singleness - the guarantee that all money is exchanged at par - is easily broken if redemption rules are unclear or if confidence starts to evaporate. That is why these three foundations of money must remain, no matter how its form evolves.

I have no doubt that with technology and tokenization, the form of money will evolve. But we must ensure that this evolution does not undermine the fundamentals of money that have made it work so well. Clear redemption rights, disclosure standards, AML /CFT safeguards, and aligned incentives are essential to keep that trust - the trust that has taken so long to build - intact.

The lesson here is that when we think about tokenized money, we must also prepare for failure scenarios. We must ask what happens when a stablecoin breaks par, or when confidence suddenly evaporates. Guardrails and accountability must be built into the design from day one.

Third: data-driven finance.

We see examples in Open Banking in the UK, and in what we are working on here in Thailand through our initiative called ""Your Data."" Again, the technology has tremendous potential and promise - secure data-sharing platforms that expand consumer choice and competition. But here, as with the other cases, the common theme is clear: technology alone is not sufficient.

In Europe, regulators introduced GDPR to give consumers ownership of their data, and the PSD2 directive required banks to share data with fintech through secure APIs. Yet even with these frameworks, many banks resisted sharing. And consumers often struggled with long, complex consent forms they barely understood.

In Thailand, we face the same challenges. The same tension exists. It is clear that telling consumers their data belongs to them is not enough if they lack the tools, the understanding, and the bargaining power to decide how that data is used.

So again, technology must be complemented with governance. Rights must be simple, enforceable, and meaningful. Incentives must make participation worthwhile for both banks and fintech. And consumers must be able to understand how their data is shared, used, and monetized - not simply through a long, complicated ""yes/no"" consent form.

The lesson here is this: technology can make data flow, but without clear rules and aligned incentives, adoption stalls, scaling becomes impossible, and consumers remain powerless.

The conclusion to draw from these cases is this: technology is a key enabler, but on its own it is not enough. For digital finance to be trusted, responsible, lasting, and inclusive, it must also be anchored in sound governance and supported by the right economic incentives.

This is the principle behind some of the work we are doing. In the Bank of Thailand's SAN Project, for example, we are testing tokenization for settlement to ensure interoperability across DLT networks and existing infrastructure. The prototype shows strong promise. But its lesson is the same as all the others: technology alone is not enough. Without governance, standards, and regional cooperation, tokenization could create fragmentation rather than reduce it.

Our collaboration with the Hong Kong Monetary Authority is one step forward. And we hope ASEAN can build on this partnership to ensure that our financial corridor is not only fast and innovative, but also open, interoperable, and trusted.

So, as we begin two days of discussion on a wide variety of topics - AI, quantum computing, tokenization, green finance, and more - I would like to leave you with just one question. And by ""you,"" I mean all of us: fintech, innovators, banks, regulators. That question is this:

""Have we built the governance and incentives to make these technologies serve everyone - in both good times and bad?""

With that, let me close by wishing all of you a fruitful two days of discussion.

Thank you very much for your attention.",Sethaput Suthiwartnarueput
https://www.bis.org/review/r251002m.htm,Mārtiņš Kazāks: Opening speech - Latvia Fintech Forum 2025,"Opening speech by Mr Mārtiņš Kazāks, Governor of the Bank of Lativa, at the Latvia Fintech Forum 2025, Riga, 1 October 2025.",2025-10-01 00:00:00,"## Mrtiš Kazks: Opening speech - Latvia Fintech Forum 2025

Opening speech by Mr Mrtiš Kazks, Governor of the Bank of Lativa, at the Latvia Fintech Forum 2025, Riga, 1 October 2025.

* * *

Ladies and gentlemen, distinguished guests, colleagues and friends,

It is a privilege to address you today. Gathered here are innovators, policymakers, entrepreneurs, and visionaries who are shaping the future of finance in Europe. We are here to share ideas, one another, and to reflect on how Latvia, and Europe to inspire as a whole, can seize the opportunities in fintech space and encourage our citizens and economies develop it and benefit from it.

## Europe's fintech opportunity

In 2025, the size of European fintech market slightly exceeds 70bn euros (according to MordorIntelligence 1 ). By 2030, it is projected to almost double, growing at an annual rate of 15%. By comparison, traditional banking grows at around 6% per annum (according to McKinsey ). 2

In late 2022, fintechs accounted for 5% (or between 128-175bn euros) of global banking sector net revenues. This share is expected to double to over 342bn euros by 2028 . 3 This tells us three things: first, fintech has already secured an important role in the financial system; second, it is still small compared to traditional finance; and third, it has enormous potential to expand and add value to its customers, all of us.

Fintech may today be a small stream beside the wide river of traditional banking. But it is a stream gaining strength, carving new paths, and carrying with it the force to reshape the financial landscape.

## Growth areas and new value

Where will the next wave of fintech growth come from?

In Lavia we have built a unique foundation for . We are ready to payments and crypto see new forms of payments and new tokenized assets to flow into the financial system. Alongside them, peer-to-peer lending and crowdfunding are expanding access to finance for households and small businesses.

Additional innovation drivers are:

- AI - transforming finance at a fast pace, it makes risk models smarter and provides customers with tailored advice, safer accounts, faster decisions, and services that feel personal.
- Embedded Finance - creates fantastic opportunity to expand services woven into digital platforms. For the financial sector, this means new distribution channels and deeper integration with the real economy.

- Digital assets and tokenization offer new ways to invest, transfer, and store and create value for customers, they mean greater liquidity, lower costs, and more efficient capital markets.

These innovations and your novel ideas will make Europe's economy stronger, our financial sector more competitive, and services more accessible and affordable for customers.

## Latvia's Contribution

Now let me turn to Latvia. Our ambition is clear: we want Latvia to be a European fintech hub. This ambition is backed by focused and concrete actions by Latvijas Banka:

- Last year we opened the possibility for fintechs to connect directly to our payment system. 7 companies have already used this opportunity, and more than 10 are in the pipeline.
- At the beginning of this year, we introduced a pre-licensing process for crypto companies. Today, more than 15 firms are currently under review.
- We have designed changes in the regulation to allow fintechs to obtain the socalled small bank license and the necessary changes in the law are now moving through parliament
- Latvia's regulator is now highly recognized across Europe for its accessibility and strong risk management by many international market participants.

We are not just observers of the fintech revolution. We are building the launchpad, so that innovation can take off from Riga and expand to whole of Europe.

## Call to Action

So, what comes next? Latvia offers a set of clear advantages for fintechs: an accessible regulator, direct access to the central bank's payment system, a crypto pre-licensing process, an innovation hub with a dedicated supervisory team, and a competitive tax system (0% tax rate on reinvested profits), startup law (allows to receive state aid, investment benefits, grants and up to 45% for the remuneration of highly qualified workers).

Now, you - entrepreneurs, innovators, the fintech community, must take the leap, leading the charge in innovation and boldly shaping the future of finance across Europe.

- First, to compete on speed, improved embrace AI and digital services customers' experience, and efficiency.
- Second, seize the opportunities within the MiCA regulation and the upcoming Open Finance framework, creating innovative services that customers will love to use.
- Third, the is on its way. Fintech can use it as a backbone to design Digital Euro services and solutions that would make Europe more sovereign, resilient, efficient, and competitive.
- Fourth, with banks, academic institutions, IT build long-term partnerships service providers, and international players.

- And finally, we all must . Latvia's market is small; therefore, our vision is think big global. Every product needs to be designed to scale globally.

In other words, our fintechs must think not like craftsmen, but like architects of Europe's financial future.

Colleagues, the future of finance is being written right here, right now, by us. It is not whether fintech will transform our economy. The question is: are you ready to lead this transformation?

Let us make sure that Latvia is one of its co-authors. Let us work together, regulators, innovators, and investors, to seize the opportunity, to build trust, and to deliver innovation that benefits our people and our economies.

For that to happen, all public and government institutions need to work together. A launchpad alone is not enough,because we also need mission control, navigation systems, and safety protocols. History favors those who act with courage. Let us be bold and build a powerful launch system from which Latvia's fintech rocket can take off, sharing the success, creating wealth, and securing the future of our societies

Thank you!

1 Europe Fintech Market Size, Growth Analysis (2025-2030) | Research Report

- 2 Fintech Transformation Sets Signposts for Retail Banking's Future
- 3 Article: European Fintech Mapping 2024 - Fine",Mārtiņš Kazāks
https://www.bis.org/review/r251002l.htm,"Yannis Stournaras: New technologies, crypto, stablecoins and payments - a central bank perspective","Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the Crypto-Research Conference ""New technologies, crypto, stablecoins and payments: a central bank perspective"", Athens, 29 September 2025.",2025-09-29 00:00:00,"## Yannis Stournaras: New technologies, crypto, stablecoins and payments - a central bank perspective

Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the CryptoResearch Conference ""New technologies, crypto, stablecoins and payments: a central bank perspective"", Athens, 29 September 2025.

* * *

Ladies and Gentlemen, Dear Colleagues,

I am glad to be here today, addressing an audience that is keen on discussing new technologies, from both the academic and the business perspective.

Crypto-relevant technologies, which are the focus of discussion today, are bringing change and, in many cases, disruption in the financial industry. But, being a central banker for many years, I would like to stress that, with whatever new technologies and new ideas, our core concern always remains to maintain stability and confidence in the financial system.

The world of crypto, developed mostly over the last decade, has radically challenged our way of thinking about financial assets, about the concept of money and about the set up of market infrastructures that support payment and settlement systems.

We all see the impressive figures involved in the crypto industry: The stablecoin sector only, constitutes a 250 billion dollar market today. It is assessed that 27 trillion dollars 1 moved through stablecoins last year - more than VISA and Mastercard combined. And the initial public offering (IPO) of a stablecoin giant last June was followed by an immediate sharp surge of its share prices.

Hence, we see that crypto instruments are now far from being a niche sector; they have become a substantial part of the financial ecosystem. But it is yet to be seen how the new ecosystem, the crypto-ecosystem, balances its explosive growth with regulation and public trust. This is, in my view, the focus of interest, especially from a central bank perspective.

Blockchain technology was for years considered a synonym to crypto assets (like bitcoin) and was associated with increased risks for investors and for the financial sector. And perhaps rightly so, as the crypto world had developed in a regulatory vacuum that is only now being contained by legislation - however, only in certain jurisdictions and in different ways.

In the last few years, blockchains and the wider Distributed Ledger Technology have gained momentum in the financial sector, both in the so-called Decentralized Finance (or DeFi), but also in institutional financial activities. Distributed ledger technology is transforming the financial ecosystem - but it also requires adjustments in business models as well as in the regulatory and supervisory set up.

Decentralised Finance (DeFi) is a segment of the crypto-asset universe that has expanded rapidly over the last few years. It represents a novel way of providing financial services to retail users, such as decentralized lending and payments. Usually it does not create novel financial products, but mimics those provided in traditional financial markets through technology-enabled innovation. However, certain features such as how assets are held, how trust is generated and how the system is governed, distinguish it from traditional finance. It is important to note that, in fact, DeFi is in many ways subject to the same vulnerabilities as traditional finance, including those caused by excessive leverage and risk taking, liquidity mismatches and interconnectedness. Its novel technology and method of service provision can, however, amplify certain vulnerabilities and incur additional specific risks.

But, as said, the momentum of Distributed Ledger Technology has extended in the financial sector beyond the Decentralized Finance space. This technology is increasingly used at institutional level by credit institutions, financial markets and clearing and settlement systems in various use cases such as securities issuance, payments, tokenized deposits and funds. DLT is linked to the tokenization process, which is also gaining momentum with experiments and real world cases. Real world assets, such as bonds, equities and ownership rights on almost any object can be represented as tokens offering innovative services.

According to the BIS, tokenisation can help to enhance the efficiency of markets, reduce settlement risk, broaden investment access and spur the creation of new financial services. Similar to key monetary innovations of centuries past, the tokenisation of money and financial assets has the potential to expand the universe of possible contracting outcomes to support economic growth. However, significant challenges remain, notably the need for scalable platforms, regulatory clarity and robust infrastructure . 2

Many issues and questions emerge in the context of the crypto-space: For example, regarding holders' rights and protections, governance, and private law provisions. Public attention on such issues became greater as certain fraud episodes occurred, revealing severe weaknesses in the crypto ecosystem.  Legislation does not address all issues or addresses them differently across jurisdictions. Various countries have introduced ambitious rules for the crypto market: the European Union (with the ""MiCA"" Regulation), the US (with the GENIUS Act), as well as certain major Asian countries . 3

The European Union rules (MiCA) put more emphasis on conduct obligations, consumer protection and liability regimes. The DLT Pilot regime, another piece of relevant European legislation, facilitates trading and settlement of financial instruments in DLT-based platforms, permitting the use of various types of blockchains which could satisfy specific requirements.

The US rules (GENIUS Act) focus on operational requirements and very strict bankruptcy protections, particularly for the stablecoin market. It is interesting to note, in this context, that these new bankruptcy rules for stablecoin holders are indicative of the US administration's push to embed crypto into the financial system, as the protections offered could be seen as comparable to deposit protections and thus could make the crypto instruments competitive with bank deposits.

Divergence of regulatory approaches across different jurisdictions creates risks: Cryptomarket participants have to compete in an uneven space, navigating a complex patchwork of rules or risking to lose access to key markets. For regulators there are equally high risks, as the global legislative environment presents loopholes and gives rise to regulatory arbitrage. Hence, there is an obvious need for a global effort to harmonise rules and ensure a sufficiently level playing field for financial market participants. In my view, this is an important workstream that needs to be undertaken soon by international bodies, in cooperation with market participants.

Now let's come to a crucial question: How have these developments impacted the area of payments? And what are the actions of central banks in this context?

Looking at the European Union, it can be said that, where existing payment channels are quite developed, safe and diverse, the chances of crypto-instruments' use for payments have so far been poor. This is true, in particular as regards retail payments within the Euroarea. The reasons are understandable: In retail payments the use of a payment instrument and its acceptance by merchants requires a high level of trust in all involved parties and intermediaries.  Safety, convenience and broad availability are also a must. Adoption of any new payment instrument would be driven by a perception of added value and concrete benefit by the users - which, till now, seems to be lacking in the case of crypto-instruments, as understood by European citizens.

Nevertheless, current developments towards interoperability and integration with existing financial infrastructures, in combination with the entering into force of MiCA regulations, could potentially increase the interest in owning and using crypto-assets, especially the ones that qualify as stablecoins.

In this area, some central bank actions are worth mentioning.

It is true, of course, that retail has traditionally been a territory for innovation in commercial bank money. The role of central banks, till recently, was mainly the role of regulator or overseer. The Eurosystem and EU central banks have, furthermore, acted as catalysts in supporting selected market reforms, for example when the Single European Payments Area (SEPA) was adopted. Central banks have also provided central infrastructures for innovative retail solutions, for example for Euroarea-wide instant payments via the common platform of TARGET services (""TIPS"").

In a new reality, we see a growing importance of retail payments as they become more and more digital: There is mounting public debate on their functionalities and their costs for consumers and merchants; moreover, retail payments often become part of fiscal or social policies. Retail payments are also increasingly associated with monetary sovereignty and geopolitical power. The Big Techs and their rising power worldwide have given rise to political debates and regulatory action around retail payments. The same has happened with big card schemes.

Against this backdrop, central banks are now called to play a much more pro-active . Central bank money for direct retail use has not changed for a role in retail payments long time and consists of banknotes and coins. Acceptance of cash is broad but its use is dropping.  In the new landscape central banks and the Eurosystem monitor closely

crypto- use in payments; but in parallel they recognize that retail central bank money will also need to embrace new technologies and offer new and more attractive solutions to consumers.

So, there is an understandable broader move of central banks towards offering a digital form of retail central bank money. is part of that worldwide move. But, Digital euro besides following global trends, the digital euro  is a central bank initiative with broader and important objectives:

- It aims to strengthen monetary sovereignty over retail payment instruments, by reducing dependence on non-Euroarea schemes and providers.
- It can ensure broad and cost-free accessibility to a digital retail payment instrument for all citizens; thus it crucially contributes to social inclusion.
- It provides a safe and trustworthy alternative for retail payments in digital form that can be always available for users and will follow strict and fully transparent operating rules under public supervision.
- It opens further innovation possibilities for banks and payment institutions that will offer digital euro to their clients in combination with other financial services. Thus it can enhance the payments ecosystem with a minimal cost burden.
- It aims to become a resilience tool that would support continuity of financial transactions in cases of emergency or geopolitical anomalies where private payment rails might be disturbed or unable to operate.

As you may know, political dialogue on a legislative package on the Digital Euro is in progress at the European Union bodies and we hope it will soon conclude. The Eurosystem has started technical preparation already in 2023 and is ready to accelerate its work when legislation is finally agreed and adopted.

Another crucial parallel initiative of the Eurosystem in retail payments is to achieve interconnectedness of Euroarea retail payment infrastructures with the ones of other geographical areas, in and beyond Europe. The initiative involves, for example:

- the fast retail payment system of India with which consultations are underway with a view to set up an interlinking mechanism that would serve both Euroarea and Indian retail users;  and
- the South-East Asian regional initiative ""Nexus"", which constitutes a hub where the Euroarea retail payment rail could participate

These actions unfold in the context of an effort to facilitate payments across different currency areas, along the policy objectives set by G20 which aim to reduce costs and increase speed and transparency in global cross-border payments.  Furthermore, these actions are intended to expand the use of Euroarea retail payment instruments and infrastructures and strengthen the international role of the Euro.

Market infrastructures for payment and settlement constitute an area where radical transformation is taking place. Central banks focus more on the infrastructures underlying wholesale transactions and are currently taking actions for reforms, following market trends. In previous decades, reforms in the area of infrastructures referred to dematerialization and digitalization; now the next major leap forward is , tokenization

which introduces a programmable platform where claims are processed, removing the traditional separation of different functions (such as messaging, reconciliation and settlement).

But its success relies on a foundation of trust, that can only be provided by central bank money and the connectivity it ensures for different key elements of the financial system. So, Central banks are not only witnessing but are also participating in tokenization activities which create a next-generation monetary and financial system, which should be adequately regulated and monitored, potentially with new tools.

The , in particular, conducted relevant exploratory work within 2024, by Eurosystem providing solutions for wholesale settlement on Central Bank Money using DLT. The results of this work were very successful: More than 200 transactions were realised within a 6-month period, with 60 market participants, with a total value of 1.6 billion euros. Following that successful exercise, the Eurosystem has announced that it continues with a view to provide wholesale settlement on Central Bank Money for DLTbased use cases with a so-called ""dual strategy"" . In specific: 4

The Eurosystem is to provide a based on interoperability that short-term solution pilots a link between distributed ledger technology platforms and TARGET Services. That solution will in practice offer central bank money settlement for DLT-based transactions in relevant platforms and will be ready for production next year. The Bank of Greece is actively participating in this project and is working towards end-to-end solutions involving settlement of domestically issued tokenized assets, in cooperation with market participants.

In parallel, the Eurosystem is developing a workstream towards a long-term solution involving DLT-based infrastructure. This workstream is focused on the concept of a European hub that will shape an innovative, integrated financial ecosystem.

Both these actions are given priority: Considering that over 60% of European banks are using or exploring DLT and that securities issuances in DLT are increasing 5 , we as central bankers feel that we in some way need to ""re-imagine"" central bank money. The innovations are to enable market participants to manage trading, settlement and custody on a single platform, available 24/7, 365 days a year. Trading and settlement would be synchronized, while new business models can be used to automate conditional transactions.

It should be noted that the Eurosystem actions develop in coordination with international initiatives developing under the Bank for International Settlements (BIS).

We expect broader benefits from the implementation of such new technologies in our market infrastructures in central bank money: The risks of fragmentation and lack of interoperability are avoided and thus DLT and tokenization can reduce the cost of access to capital markets, especially for small-scale enterprises. And new opportunities are opened for the establishment of an integrated European capital market for digital assets, contributing to more efficient flow and use of capital and savings.

In conclusion, I would like to stress that

- The financial industry is faced with disruptions and is rapidly trying to adapt to new realities.
- Users of payment services and market participants have high expectations for seamless interactions, so there is growing demand to facilitate payments, including the ones across currency areas.
- In this context, many initiatives develop, involving new forms of digital money and assets in both the wholesale and retail payments area.
- International coordination is key, in particular as regards legislation on cryptoinstruments.
- Central banks are a vital part of the new reality. They remain vigilant and are taking bold actions that embrace innovation. They do this, while they aim to ensure financial stability, monetary sovereignty and public trust.

1  Morgan Stanley, , upd. July 29, 2025 Stablecoins could change how money moves

- 2 III. The next-generation monetary and financial systemOpens in new tab- BIS Annual Economic Report 2025
- 3  Japan, Singapore, Hong Kong, S.Korea, U.Arab Emirates. Brazil is also advanced in preparing relevant legislation.
- 4  ECB commits to distributed ledger technology settlement plans with dual-track strategy Opens in new tab- ECB Press Release, 1 July 2025
- 5  ECB, Pierro Cipollone speech, Paris, 15 May 2025",Yannis Stournaras
https://www.bis.org/review/r251002i.htm,Mário Centeno: 10 years of the Single Resolution Mechanism - a decade delivering a more resilient financial system,"Opening remarks by Mr Mário Centeno, Governor of the Banco de Portugal, at the conference ""10 years of the SRM - a decade delivering a more resilient financial system"" marking the tenth anniversary of the Single Resolution Mechanism, hosted by the Banco de Portugal, Lisbon, 29 September 2025.",2025-09-29 00:00:00,"## MÆrio Centeno: 10 years of the Single Resolution Mechanism - a decade delivering a more resilient financial system

Opening remarks by Mr MÆrio Centeno, Governor of the Banco de Portugal, at the conference ""10 years of the SRM - a decade delivering a more resilient financial system"" marking the tenth anniversary of the Single Resolution Mechanism, hosted by the Banco de Portugal, Lisbon, 29 September 2025.

* * *

Distinguished guests, colleagues and friends, good morning.

It is with great honor that Banco de Portugal hosts this conference, marking the tenth anniversary of the Single Resolution Mechanism.

In fact, the achievements of the Single Resolution Mechanism in this last decade cannot go unnoticed:

- A whole new framework was established with the creation of the:
- Single Resolution Board - the central resolution authority within the Banking Union;
- as well as the Single Resolution Fund, which is now capitalized with around 80 billion euro and is fully mutualized.
- Resolution plans have been prepared for all institutions, setting out the preferred strategies in case of failure.
- The appropriate loss-absorbing capacity has been built up for about every bank,
- while other dimensions of resolvability are also showing significant progress.

And most importantly, the system was put to the test in two real-life resolution cases and showed ability to act swiftly and efficiently. It was able to preserve financial stability and protect taxpayers' money.

During this period, the banking sector also became more stable and resilient:

- Banks in the Banking Union are better capitalized than they were a decade ago.
- Their balance sheets are overall stronger and healthier.
- Non-performing exposures have declined, while the increased loss-absorbing capacity makes them more capable of withstanding more severe shocks.

This progress is particularly noticeable in Portugal. In the past ten years:

- the CET1 [Common Equity Tier 1] ratio has increased from 12.4% to 17.9%,

- the NPL [Non-Performing Loan] ratio has fallen from a peak of 17.9% to 2.3%,
- profitability as measured by the Return-on-Assets has improved from 0.1% to 1.4%,
- and all banks became compliant with the applicable MREL [Minimum Requirement for Own Funds and Eligible Liabilities] requirements.

These achievements are the reflection of a collaborative undertaking.

- First, among EU Member States, which have agreed on a single framework for supervision and resolution in the Banking Union, reflected in the solid institutional framework that is now in place.
- Second, and no less importantly, it is also the result of the work carried out within the Single Supervisory Mechanism and the Single Resolution Mechanism, as well as the efforts of banks themselves.

At its core, the Banking Union is a project of integration and trust. Trust among Member States, trust between authorities, trust in institutions, and trust from citizens that our financial system can withstand crises without jeopardizing stability or fairness.

This project was born out of a collective awareness on the need for deeper integration, in response to the severe financial and sovereign debt crises that tested Europe so deeply. At that time, we learned the hard way that financial fragility cannot be dealt with in isolation.

The first decade of this European project has lived up to its promises and the Single Resolution Mechanism has proven to be a cornerstone of stability and confidence in the Banking Union.

It is however essential to keep in mind that the past decade has also brought new challenges: from the pandemic to geopolitical shocks, from cyber-risk to the expanding frontiers of finance, with the emergence of digital assets and new market players.

As I have been repeatedly saying, financial stability cannot be taken for granted, especially in the current times of uncertainty.

The European banking sector and banking activity remain to a large extent fragmented, which is certainly a reflection of the fact that the Banking Union is an unfinished project.

To that end, we need to go deeper in trust. We need stronger common institutions, supervisors capable of acting consistently across borders and resolution authorities able to intervene decisively irrespective of national borders.

We need to move forward and pull efforts to continue with the Banking Union and develop the EU capital Markets. These are essential for a competitive and integrated financial system, as well as to channel Europeans' high savings into productive investment in Europe.

I am certain that today's discussions will bring to light both sides of this picture:

- on the one hand, the significant progress already achieved;
- on the other hand, the work that still lies ahead of us.

The agenda is ambitious: it promises a comprehensive overview of the essential elements that make up the Single Resolution Mechanism and to reflect on the way forward, through the voices of those who know this field best and who will greatly enrich our understanding and debate.

I would like to take a moment to acknowledge the breadth of expertise represented in today's program, bringing together perspectives from European and national authorities, international organizations, academia, the legal field and public policy. This diversity will enrich our discussions and will help draw valuable lessons.

This conference is, above all, an opportunity for dialogue. An opportunity to strengthen our collective understanding and reinforce our shared commitment to financial stability.

The first ten years of the Single Resolution Mechanism have shown what Europe can achieve when it acts together, with determination and vision. The next ten years must be guided by the same ambition.

I wish you all a very fruitful and stimulating conference.

Thank you .",Mário Centeno
https://www.bis.org/review/r251002g.htm,P Nandalal Weerasinghe: AI innovation and digitization in  the banking sector - creating sustainable value to the economy and society,"Speech by Dr P Nandalal Weerasinghe, Governor of the Central Bank of Sri Lanka, at the Inauguration of CMA Sri Lanka Silver Jubilee International Management Accounting Conference, Colombo, 16 September 2025.",2025-09-16 00:00:00,"## P Nandalal Weerasinghe: AI innovation and digitization in the banking sector - creating sustainable value to the economy and society

Speech by Dr P Nandalal Weerasinghe, Governor of the Central Bank of Sri Lanka, at the Inauguration of CMA Sri Lanka Silver Jubilee International Management Accounting Conference, Colombo, 16 September 2025.

* * *

It is an honour and a privilege to address you today at the inauguration of this significant event, the Silver Jubilee International Management Accounting Conference of CMA Sri Lanka. Twenty five years of dedication to excellence in management accounting, shaping professionals and making a difference.

Please allow me to begin by warmly congratulating CMA Sri Lanka on this historic milestone, its leadership, and every member, past and present, who contributed to this journey.

I am honored to stand before you today to speak on a topic that is not only shaping the future of finance but fundamentally redefining it. We find ourselves at a pivotal moment, where technology has evolved beyond being just a tool for efficiency, becoming a transformative force driving sustainable value for both our economy and society.

For centuries, banking has been built on the pillars of trust, security, and human relationships. While these principles remain untouchable, the digital age has introduced new dynamics. The digital revolution in banking is no longer a future concept; it is our present reality. Customers are now living in a world of instant and seamless on demand services, and they expect the same from their financial institutions as well. This is where Artificial Intelligence (AI) and digitization step in. They are the twin engines driving a profound transformation, moving us from a traditional, transaction-based model to one that is intelligent, predictive, and customer-centric.

Similarly, the traditional role of the management accountant, once rooted in historical data and manual reporting, is rapidly evolving. The dawn of technologies like machine learning, predictive analytics, and robotic process automation has liberated us from the tedious, repetitive tasks of data entry and reconciliation. This shift is not about job replacing, but rather, about a profound and necessary upskilling. It is about elevating the management accountant from a 'number cruncher' to a 'strategic foresight architect'.

Therefore, this is more than a story of technology; it is a story of purpose. Our collective responsibility is to harness this power to not only drive business and economic growth but also to foster a more inclusive, resilient, and prosperous society.

The 2008 financial crisis taught us the substantial societal cost of inadequate risk assessment. Today, AI-powered models can analyze vast, unstructured datasets from market trends to social sentiments to predict credit risk with unprecedented accuracy. This leads to more responsible lending, fewer defaults, and greater financial stability.

Today, we see that the banking industry is undergoing an unprecedented transformation. Traditional models, once reliant on physical infrastructure and manual processes, are getting replaced by digital ecosystems powered by AI-driven intelligence. This evolution is not merely technological. It represents a structural shift toward data-centric, customer-oriented, and sustainability-focused banking.

For example, AI-powered automation streamlines banks' back-end processes, from loan applications to compliance reporting. By using machine learning and robotic process automation, banks can eliminate manual errors, accelerate workflows, and reduce operational costs. This efficiency is not just about saving money, it is about reallocating bank's most valuable resource, i.e., human capital, focusing on strategic thinking, complex problem solving, and building deeper customer relationships.

AI is no longer confined to experimental applications; it has become a strategic imperative. AI-driven automation enhances process accuracy, reduces operational costs, and accelerates service delivery. Advanced machine learning models enable realtime fraud detection, predictive credit scoring, and proactive compliance monitoring. Through hyper-personalization, AI delivers tailored financial solutions, improving customer engagement and trust.

Beyond efficiency, AI is bracing defenses. It is considered one of the most effective weapons against fraud and financial crime. AI algorithms can analyze billions of transactions in real-time, detecting and predicting anomalies with an accuracy that human oversight simply cannot match. This enhances the security posture and protects the integrity of the financial system, which is a non-negotiable part of the social contract.

Furthermore, real-time transaction monitoring, as pioneered by major banks around the world, uses machine learning to identify and prevent fraudulent activity instantly. This does not just protect the bank; it safeguards the financial well-being of millions of customers by building a more secure and trusting financial ecosystem. Empirical studies indicate that AI adoption could reduce global banking expenditures by hundreds of billions of dollars annually, while simultaneously improving productivity and resilience.

The significance of AI and digitization extends beyond institutional efficiency. It covers broader socio-economic objectives, where AI powered credit assessment models leverage alternative data sources, granting access to credit for previously underserved populations.

The traditional banking model often left behind vast segments of the population. However, AI can analyze non-traditional data sources such as mobile phone usage or utility payment history to assess the creditworthiness of individuals and small businesses who lack a formal credit history. And also, banks can use AI to create personalized financial products and offer tailored financial advice, making banking more accessible for everyone.

Moreover, digital platforms and voice-enabled technologies democratize banking services, bridging gaps for rural communities and individuals with disabilities. Furthermore, AI-powered chatbots and virtual assistants are making banking services available 24/7, transcending geographical and physical barriers. A customer in a remote village can now access financial advice or apply for a loan with the same ease as

someone in a major urban city. This is not just convenience, it is a democratization of financial services, breaking down the old walls of exclusivity.

And also, as we collectively strive for a more sustainable future, banks are at the forefront of financing green initiatives. AI facilitates the evaluation of Environmental, Social, and Governance (ESG) metrics, thereby channeling capital toward green investments and climate-resilient projects. By analyzing vast datasets, we can better assess the sustainability of our investments and financing activities. AI can help us track and report on green initiatives, ensuring our actions align with our commitments. Moreover, our own digital transformation, enabled by AI, reduces our carbon footprint by minimizing paper usage, physical travel, and energy consumption. This is about using technology to build a more sustainable and ethical business model.

On the contrary, as we embrace these technologies, we must address concerns around data privacy, algorithmic bias, and the ethical use of AI. We must ensure that this technological revolution is inclusive and that no one is left behind. This requires a commitment to robust governance frameworks, transparency, and a continuous investment in upskilling the workforce. In addition, we must be transparent in our use of AI, ensuring that our models are fair, ethical, and free from discrimination.

The future of banking is not just about moving money, it is about moving society forward. It is about leveraging the immense power of AI to create a financial system that is not only robust and profitable but also accessible, and a force for positive change. Our role is no longer confined to the back office. We must be the bridge between financial data and strategic decision-making. We must understand not only the technology but also its ethical implications, ensuring our AI models are fair, unbiased, and transparent. We are the champions of value creation, and by embracing this transformation, we can guide our organizations to not only be profitable but also to be pillars of a more resilient, equitable, and sustainable world.

As we see, the fusion of AI innovation and digitization in the banking sector is more than a technological shift, it is a fundamental reimagination of our role in the world. It is about moving from being a mere financial service provider to a true partner in customers' financial lives. By embracing this transformation responsibly and strategically, we can unlock unprecedented value, not just for our institutions, but for a more inclusive, prosperous, and sustainable economy and society.",P Nandalal Weerasinghe
https://www.bis.org/review/r251002e.htm,José Luis Escrivá: Introductory remarks - 9th Annual Conference of Mediterranean Central Banks,"Introductory remarks by Mr José Luis Escrivá, Governor of the Bank of Spain, at the 9th Annual Conference of Mediterranean Central Banks ""Harnessing innovation and integration for sustainable and inclusive development in the Mediterranean region"", hosted at the Central Bank of Egypt, Cairo, 1 October 2025. ",2025-10-01 00:00:00,"## JosØ Luis EscrivÆ: Introductory remarks - 9th Annual Conference of Mediterranean Central Banks

Introductory remarks by Mr JosØ Luis EscrivÆ, Governor of the Bank of Spain, at the 9th Annual Conference of Mediterranean Central Banks ""Harnessing innovation and integration for sustainable and inclusive development in the Mediterranean region"", hosted at the Central Bank of Egypt, Cairo, 1 October 2025.

* * *

It is a great honour to welcome you to the 9th edition of the Conference of Mediterranean Central Banks, held this year in the vibrant city of Cairo. I would like to begin by expressing my gratitude to our hosts-the Central Bank of Egypt-and to the rest of our co-organizers: the Organization for Economic Co-operation and Development (OECD), the European Institute of the Mediterranean (IEMed), and the Union for the Mediterranean (UfM), and, in particular, to Governor Abdalla, Ambassador Florensa, Deputy Secretary General of the Union for the Mediterranean, Meltem Büyükkaraka, and OECD Director, Luiz de Mello. I am also very grateful to you all for your participation in this conference.

Today's is the 9th edition of a series that was jointly initiated by the European Institute of the Mediterranean and the Banco de Espaæa, with the first edition held in Barcelona in October 2014. Since then, the initiative has steadily grown in scope and relevance, becoming an important platform for dialogue and cooperation in economic and financial relations across the Euro-Mediterranean region. I cannot stop emphasizing the decisive commitment of IEMed, which has been instrumental in sustaining the success of the Conference throughout all these years.

The last edition of this conference took place in February 2024 in Split, amid a highly uncertain global environment. At that time, the wars in Ukraine and the Middle East with their devastating human consequences- were weighing heavily on the outlook, hampering the recovery of the global economy.

Today, unfortunately, the situation has not improved, and the global economic outlook remains fragile. The wars in Ukraine and Middle East are still ongoing with an intolerable toll in human lives. In addition, rising geopolitical tensions, in part stemming from the back-and-forth over the imposition of tariffs by the United States, continue to fuel extraordinary uncertainty and volatility, posing serious risks to global growth.

In this context, policymakers face complex challenges. For central banks, the focus is on navigating the path toward monetary policy normalization, guided by a datadependent, meeting-by-meeting approach. On the fiscal side, many countries must urgently address high debt levels and borrowing costs through credible consolidation strategies. Over the medium term, structural reforms are essential to boost growth potential and tackle key transitions -notably the green and digital ones-.

Today, the very foundations of the multilateral order are being tested by rising geopolitical tensions, protectionist tendencies, and the proliferation of unilateral measures. Yet, it is precisely in such times of uncertainty and division that the value of

multilateralism becomes most evident. Only through robust and inclusive international cooperation can we effectively tackle global issues that transcend borders-be it climate change, technological disruption, or financial instability. Multilateral institutions and frameworks provide the legitimacy, expertise, and coordination mechanisms necessary to forge common solutions and prevent the escalation of conflicts. We must therefore not only preserve, but actively reinforce the multilateral system, ensuring it remains fit for purpose in a rapidly evolving world. This requires renewed commitment to dialogue, mutual respect, and the search for consensus, even when interests diverge. By working together, we can build a more stable, prosperous, and sustainable future for all.

This year's theme, ""Harnessing Innovation and Integration for Sustainable and Inclusive Development in the Mediterranean Region,"" could not be more timely. Today we have the opportunity to address a number of issues that are of the outmost importance for our countries, and in particular, to central banks.

We begin with a deep dive into Artificial Intelligence -a technology that is reshaping the financial sector and central banking itself. AI offers powerful tools for productivity and risk management, but also raises ethical and regulatory questions. As central banks, we must lead the way in ensuring responsible innovation.

We then turn to the urgent issue of financing the green transition. Climate goals require unprecedented levels of investment and coordination. Central banks can play a catalytic role in mobilizing capital, aligning incentives, and supporting sustainable finance frameworks.

In the afternoon, we will address financial inclusion, with a focus on women entrepreneurs and SMEs. These actors are vital to our economies, yet remain underserved. Tackling informality, promoting gender-sensitive policies, and expanding access to finance are essential steps toward inclusive growth.

Finally, we will explore financial integration across the Mediterranean. Integration is not just about connectivity -it is about coherence, resilience, and shared prosperity. Reducing regulatory fragmentation and improving digital infrastructure are key to unlocking the region's potential.

This conference aims to be more than a series of sessions-it is a platform for dialogue, collaboration, and shared learning. Let us use this opportunity to exchange ideas, challenge assumptions, and build bridges across borders and institutions.

Let me stop here, by expressing once again my gratitude to the co-organisers of this event, and in particular to our host, the Central Bank of Egypt, for making this conference possible, and to wish all the participants a productive and inspiring day of discussion and a pleasant stay in Cairo.

Thank you.",Jose Luis Escrivá
https://www.bis.org/review/r251002b.htm,Piero Cipollone: Innovating for stability - central bank money in the digital era,"Welcome address by Mr Piero Cipollone, Member of the Executive Board of the European Central Bank, at an event hosted by the Deutsche Bundesbank for central bank representatives attending the Sibos conference, Frankfurt am Main, 30 September 2025.",2025-09-30 00:00:00,"## Piero Cipollone: Innovating for stability - central bank money in the digital era

Welcome address by Mr Piero Cipollone, Member of the Executive Board of the European Central Bank, at an event hosted by the Deutsche Bundesbank for central bank representatives attending the Sibos conference, Frankfurt am Main, 30 September 2025.

* * *

Almost exactly one year ago, I gave a speech - also here at the Bundesbank - outlining a vision for the future of digital finance and the role of central bank money in this new ecosystem. 1

Fast forward 12 months, and the pace of transformation seems to have quickened even more. Innovative digital payment solutions and digital assets are receiving increasing attention, with market participants scrambling to position themselves favourably to ensure they do not miss out. The opportunities and risks are being discussed at length. 2

So what does this mean for central banks? Today, I will argue that we need to innovate to keep central bank money at the technological frontier so that it can continue to act as an anchor of trust and stability for the financial system. I will also discuss the implications for retail, wholesale and cross-border payments.

## Keeping central bank money at the forefront of technology to preserve its role as an anchor of trust and stability

Our vision has not changed: central bank money must remain the anchor of trust and stability at the heart of the financial system. In retail transactions, cash provides immediate and risk-free settlement directly between the payer and the payee. In wholesale markets, settlement in central bank money eliminates counterparty risk and provides finality in large-value transactions. In both cases, trust in private money relies on its convertibility with central bank money.

In other words, central bank money is the glue that holds the singleness and unity of our currency in place and secures the integrity of our financial system. And as finance becomes increasingly digital and new technologies emerge, we must adapt to ensure that central bank money remains reliable and available. This is the only way we can stay true to our mandate of issuing central bank money - the only risk-free settlement asset - and ensure that payment systems function smoothly. It will also encourage digital innovation and keep it safe.

I know that many of you share the Eurosystem's vision and - like us - are working hard to make it a reality. For central bank money to keep its stabilising and unifying role in the future of finance and payments, it must stay at the forefront of technology. This is the pre-condition for preserving the balance between public and private money that has served us well until now.

## Implications for retail, wholesale and cross-border payments

Within the Eurosystem, we have considered the implications of the digital transformation for our own role in retail, wholesale and cross-border payments.

## Retail payments

With everyday retail payments becoming increasingly digital, the role of physical central bank money - cash - is being reduced, creating risks to competition, inclusion, resilience and monetary sovereignty. And for the euro area, the risk to integration is particularly concerning - cash as the legal tender has always provided a means of payment that can be used everywhere across our monetary union. This is why we are working on a digital euro. 3

But we have not forgotten about banknotes: we are still working on making them safer, more durable and more accessible. We are redesigning them to ensure they remain relatable. And we are advocating a strengthening of their legal tender status to ensure they continue to be widely accepted. 4

## Wholesale payments

The starting point for wholesale payments is different, because central bank money already exists in digital form and plays a central role. In the euro area, T2 is used to settle over 90% of the value of large payments between financial institutions. TARGET2Securities has harmonised securities settlement in central bank money across borders. And the new Eurosystem Collateral Management System has just gone live, providing a harmonised platform for collateral operations across the euro area. We are also preparing for the move to T+1 settlement by 2027 to reduce counterparty risk, and are learning from the experiences of those of you who have already done so.

Our challenge today is to preserve the centrality of central bank money for wholesale settlement as new technologies emerge. Not because we are selfishly or ideologically trying to protect our own role, but because we want to avoid reintroducing credit risk or liquidity fragmentation into the system. As we are being told by market participants themselves, this is crucial for digital asset markets to develop confidently and safely. It is also in keeping with the principles for financial market infrastructures. 5

Although the full potential and limits of these new technologies - and thus the pace and magnitude of their adoption - remain uncertain, we cannot ignore them. If we take the film industry as an analogy, the switch from DVD to Blu-ray marked a significant improvement. However, as the internet became faster and more widely available, a true paradigm shift occurred: streaming emerged and more or less completely replaced physical media in providing access to digital content.

We cannot exclude that a similar shift might happen with the digitalisation of finance, Markets are already experimenting with tokenised securities and distributed ledger technologies (DLT) , which promise efficiency gains, programmability and new 6 possibilities for integrating trading, settlement and custody services. But without the anchor of central bank money, these experiments risk creating new silos, new

dependencies and new vulnerabilities. That's why we want to ensure that central bank money remains available in this new environment, and in so doing prevent fragmentation that would strip this innovation of the benefits it offers.

A year ago I outlined my vision of how to respond to this challenge. Today, we are turning that vision into reality. The Eurosystem has successfully tested the settlement of wholesale transactions in central bank money using distributed ledger technology. 7   We have now launched Project Pontes, which will provide a bridge between new DLT platforms and TARGET settlement services. 8   A first release will be available in a year's time, allowing tokenised transactions to be settled in central bank money. We are also working on how to make digital assets deployable as collateral for our monetary policy operations.

We have also launched Project Appia, which will explore longer-term approaches for more efficient and integrated capital markets in Europe by leveraging distributed ledger technologies. 9   Appia could offer a shared ledger integrating central bank money, commercial bank money and other assets for market services. Alternatively, it could take the form of a network of interoperable platforms to reduce market frictions and foster innovation. This could lay the foundation for a truly European digital capital markets union that would be integrated from the outset.

## Cross-border payments

Beyond domestic payments, we are also increasingly called upon to take action when it comes to cross-border payments, which too often remain slow and expensive. By cooperating internationally, we can help deliver on the objectives of the G20 Roadmap 10 in a way that is more respectful of the sovereignty and financial stability of our respective countries than some alternatives that might trigger currency substitution. 11 Many of us are already working on common projects, such as Project Agora steered by the Bank for International Settlements (BIS). This is a promising avenue that will nevertheless require time to get up and running. While working on this, we also need to provide quicker answers to satisfy customer and market needs. We can do so by sharing common platforms that allow for cross-currency settlement. This currently happens in the euro area, where other European countries such as Denmark and Sweden use these common platforms, with Norway also set to use them soon. 12 Alternatively, we can interlink our fast payment systems. For instance, the Eurosystem is exploring interlinking our TARGET Instant Payment Settlement (TIPS) system with those of other countries. We started exploring this option with Project Nexus and India's Unified Payments Interface. 13   Similarly, we recently announced that we will start working with our Swiss colleagues to link our fast payments systems, 14   and we are already discussing with other possible partners.

## Conclusion

Our role as central banks has always been to provide the safest settlement asset at the core of the financial system. We have innovated constantly and must do so once again.

Digitalisation and tokenisation are reshaping payments and finance. This is creating anxiety and a rush to find quick fixes. To avoid fragmentation, instability or resources being wasted, a steady hand is needed to provide a vision and outline the way forward.

As central banks, we have a key role to play: our task is to ensure and reassure markets that central bank money remains available, safe and efficient in this new environment, and will continue to fulfil its role in preserving financial stability and trust in our currencies.

Technology can help us achieve greater efficiency and resilience. If we succeed in using it to our advantage, we will have seized the moment, helping to maximise the opportunities and minimise the risks in the public's best interests.

- 1  Cipollone, P. (2024), "" Towards a digital capital markets union"", keynote speech at the Bundesbank Symposium on the Future of Payments, 7 October.
- 2  See BIS (2025), "" The next-generation monetary and financial system"", BIS Annual . Economic Report 2025
- 3  Cipollone, P. (2025), "" The digital euro: legal tender in the digital age"", introductory statement at the Committee on Economic and Monetary Affairs of the European Parliament, Brussels, 14 July, and Cipollone, P. (2025), ""The digital euro: ensuring resilience and inclusion in digital payments"", introductory statement at the Committee on Economic and Monetary Affairs of the European Parliament, Brussels, 4 September.
- 4  See Cipollone, P. (2025), "" "", , ECB, 4 Making euro cash fit for the future The ECB Blog August.
- 5  Bank for International Settlements (2012), Principles for financial market , April. infrastructures
- 6  For instance, global DLT-based fixed income issuance reached €3 billion in 2024, which represented a 260% increase over the prior period. For more information, see Association for Financial Markets in Europe (2025), ""AFME Launches Data Report "", , 10 February. Series on DLT-Based Capital Market press release
- 7  ECB (2025), The Eurosystem's exploratory work on new technologies for wholesale , June. central bank money settlement
- 8  See the ECB's webpage on Project Pontes  for more details.
- 9  ECB (2025), ""ECB commits to distributed ledger technology settlement plans with "", , 1 July; and ECB (2025), dual-track strategy press release Focus Session -. Advancing TARGET Services with DLT transactions in central bank money

- 10  See paragraph 16 in G20 (2020), , Leaders' Declaration - G20 Riyadh Summit 22 November; Financial Stability Board (2020), Enhancing Cross-border Payments , 9 April; Committee on Payments and Market Infrastructures Stage 1 report to the G20 (2020), Enhancing cross-border payments: building blocks of a global roadmap - Stage , Bank for International Settlements,13 July; and Financial Stability 2 report to the G20 Board (2020), , 13 October. Enhancing Cross-border Payments - Stage 3 roadmap
- 11  Cipollone, P. (2025), "" The quest for cheaper and faster cross-border payments: regional and global solutions"", speech at the BIS Annual General Meeting, Basel, 27 June.
- 12  ECB (2024), "" TIPS to include cross-currency instant payments service"", 21 October.
- 13  ECB (2024), "" TIPS to connect to other fast payment systems globally"", 21 October.
- 14  The Eurosystem and the Swiss National Bank will explore linking TIPS with the Swiss Interbank Clearing Instant Payments (SIC IP) system. The project will run until 2026 and will test feasibility and benefits. See ECB (2025), ""ECB and SNB explore link "", , 29 September. between instant payments systems MIP News",Piero Cipollone
https://www.bis.org/review/r251002c.htm,Burkhard Balz: Welcome address – Sibos 2025 Conference,"Welcome speech by Mr Burkhard Balz, Member of the Executive Board of the Deutsche Bundesbank, at the central bank reception on the occasion of the Sibos 2025 Conference, Frankfurt am Main, 30 September 2025.",2025-09-30 00:00:00,"## Burkhard Balz: Welcome address - Sibos 2025 Conference

Welcome speech by Mr Burkhard Balz, Member of the Executive Board of the Deutsche Bundesbank, at the central bank reception on the occasion of the Sibos 2025 Conference, Frankfurt am Main, 30 September 2025.

* * *

Check against delivery

## 1 The next frontiers of global finance

Ladies and gentlemen,

Sibos 2025 is taking place under the motto The next frontiers of global finance. Of course, in this context, the word ""frontier"" should not be understood in an exclusionary sense, but rather as an invitation. The word frontier implies, that this is the forefront-the place to be for cutting-edge discussions about transaction banking, for meeting leading financial experts and practitioners, and for professional networking.

To my mind, Swift is exactly the right organisation to host such a huge get-together. Swift is a global community of more than 11,000 banks, a truly unique structure that serves as an ideal basis for innovation and further development.

This makes Swift itself to one of the most pioneering and respected players in finance. This collaborative network not only drives progress but also fosters a spirit of partnership that is essential in navigating the complexities of the financial world. The success of Swift over the decades and the huge response to Sibos are impossible to ignore.

Could there be a more fitting place than Frankfurt to talk about shifting frontiers? Frankfurt am Main has long been a crossroads of commerce and politics in Europe. From the late Middle Ages, the emperors of the Holy Roman Empire were traditionally elected and later also crowned here in Frankfurt. And throughout its history the city has leveraged its central position to host major trade fairs, making it a hub of exchange and diplomacy.

Today, although it is not the capital of Germany, Frankfurt is still a powerhouse of finance in Europe. It is the only city in the world which hosts two central banks at the same time. And so, what better place to hold a central bank reception? We are delighted that so many of you have chosen to join us tonight.

## 2 The frontiers are moving

The term ""central bank"" comes from the world of transaction banking. The central bank is the bank in the middle, the hub for the payment system, so to speak. By providing central clearing and settlement, the central bank provides key services to the world of finance. Even nowadays, the good old hub-and-spoke model, as leveraged in RTGS systems, for example, is the superior form of transactions settlement in terms of speed

and costs. Take T2 as an example: 957 direct participants and 71 ancillary systems settle their transactions in central bank money. 1

But the frontiers of finance are moving. You are all aware of signals of potentially significant ongoing changes: CBDC,  stablecoins, tokenisation, instant payments, artificial intelligence, BIS Innovation Hubs, Fin›Techs, BigTechs, unified ledgers-and so on. What's more, the current geopolitical situation presents other challenges.

However, looking back, it is clear that despite many adversities, continuous work by financial market infrastructures, regulators, market participants and not least by central banks has improved transaction banking significantly over the last five years.

These achievements are the result of our efforts both as overseers and policymakers. At the same time, we are directly contributing to the development of safer and more efficient financial market infrastructures. This holds true, in particular for the RTGS systems that are still and will remain at the core of payments and settlements.

Let me briefly mention a selection of remarkable developments taking place in many parts of the world to underline my statement: We are seeing a great deal of ongoing efforts to connect RTGS systems across borders or even to develop new regional RTGS systems. Launched in 2020, theBUNA payment system, connecting 22 countries in the Arab world, provides multi-currency safe settlement services to foster exchange, trade and regional integration.

Two years later, the Pan-African Payment and Settlement System started to provide these services for the African Union in local currencies. In the meantime, it serves at least 18 countries. In the south of Africa, the Southern African Development Community RTGS system, was founded as far back as 2013. However, it gained momentum as more and more countries were able to access it. At least 16 are participating actively now.

A similar development can be seen in East Africa, where the East African Payment System continues to attract participants. In Latin America six countries formed SIPA-the Sistema de Interconexión de Pagos-to connect their national RTGS systems in 2017, which is also a fairly recent development.

Fast payment systems hold a pivotal role in the interlinking of modern payment infrastructures. By enabling instant cross-border transactions, they not only enhance efficiency but also make a meaningful impact on people's daily lives. These systems promote financial inclusion, bridge gaps between communities, and bring us closer to realizing a truly integrated global economy.

Looking to Asia, we have the Regional Payment Connectivity Plan of ASEAN,  which encompasses a whole range of interlinkages between instant payment systems in South Asia and beyond.

Many countries in South America operate instant payment systems. The most prominent of these is PIX in Brazil founded in 2020. Discussions are currently taking place under the working title ""PIX-internacionales"" to connect various instant payment systems in Latin America, involving countries such as Mexico and Colombia.

And there is more. Across the globe, we are seeing endeavours to improve interlinkages and interoperability to enhance efficiency and safety of payments. And central bankers are at least supportive of, if not responsible for, these improvements. The global implementation of ISO 20022, along with the discussion on extending opening hours and access to central bank-owned systems, also plays a crucial role.

To make the international network of payments safer and more efficient, every additional connection counts. This is true as long as interoperability to the global system is ensured. The Bundesbank, together with the Eurosystem, remains strongly committed to supporting these improvements in payment, settlement and liquidity provision. We support the Global Road Map for improving cross-border payments, we aspire to interlink TIPS with others, and we are working to modernise our own systems. To mention just one example, our new European Collateral Management System went live this year.

And last but not least, we are breaking new ground in RTGS systems by enhancing our TARGET services. With Pontes, we aim to provide a settlement service in central bank money for DLT-based transactions, starting-hopefully-from next year's SIBOS.

## 3 Let's cooperate at the frontier

I have mentioned the geopolitical situation which has become much more turbulent. However, at the same time, we can see that all countries are and remain interested in trade and exchange. All countries wish to reap the huge benefits that stem from international trade. It follows that all countries must have an intrinsic interest in operating efficient and safe cross-border payment and settlement systems.

In addition, this is an aim that we as central bankers support anyway. After all, wellfunctioning and securely operated cross-border systems support financial and monetary stability. This is, what I call, our heritage. And that's why we have gathered here at Sibos and at this central bank reception tonight.

I warmly welcome you all to this event. Relax, enjoy, chat to your colleagues and let's try to speak at least to one unfamiliar person. At the frontier, every connection counts.

Thank you.

1  Source: TARGET annual report 2024.",Burkhard Balz
https://www.bis.org/review/r251002o.htm,"Serey Chea: Bridging financial technology, trust and regulation","Keynote speech by Her Excellency Dr Serey Chea, Governor of the National Bank of Cambodia, at the Asia Finance Forum ""Bridging financial technology, trust and regulation"", Manila, 25 September 2025.",2025-09-25 00:00:00,"

## KINGDOM OF CAMBODIA

## NATION RELIGION KING

Keynote Speech by H.E. Dr. Chea Serey Governor, National Bank of Cambodia Asia Finance Forum: Bridging Financial Technology, Trust and Regulation Asian Development Bank Headquarters, Manila | 25 September 2025

## Good morning!

## Excellencies, Distinguished Guests, Ladies and Gentlemen,

First, | would like to thanks the Asian Development Bank, the Ministry of Finance of Luxembourg, and the Centre for Finance, Technology and Entrepreneurship for inviting the National Bank of Cambodia to share our views at the Asia Finance Forum on the topic of Bridging Financial Technology, Trust and Regulations.

| see our proceedings today as more than a technical discussion. To me, it is a human one. It is about designing systems that are not only efficient, but inclusive. Not only secure, but empowering. Not only fast, but fair.

Across our region, finance is shifting from an exclusive service to an essential public utility. The digital revolution has given us unprecedented speed and reach—but also unprecedented responsibility. Our task is not only to ask what technology can do, but to decide what it should do—and ensure that in moving forward, we bring everyone with us.

Technology is often praised for its speed, its scale, and its power to disrupt. But in the financial sector, its true value is not measured by novelty—it is measured by necessity. The real question is whether it closes gaps, connects systems, and serves people where they are.

In Cambodia, our financial system is still young and still evolving. Over the past two decades, we have seen remarkable progress—rapid economic growth, significant poverty reduction, and a maturing banking sector. Yet these gains remain fragile, and our system has grown along parallel tracks. Banks have largely served the urban population. In rural areas, e-wallets and mobile money became the tools of choice. Meanwhile, millions continued to depend almost entirely on cash. The result was a fragmented landscape—redundant, inefficient, and uneven in access.

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Our response was not to replace these channels, but to connect them. In 2020, we launched Bakong—a digital payment system developed by the National Bank of Cambodia using distributed ledger technology. Contrary to some headlines, Bakong is not a central bank digital currency. It is an interoperable, peer-to-peer platform linking banks, microfinance institutions, and payment service providers into a single ecosystem. Its mission is simple but ambitious: to bring the digital economy to everyone—urban or rural, banked or unbanked.

Today, Bakong connects 70 institutions, supports over 34 million user accounts, and has processed more than 600 million transactions worth over USD 147 billion—more than three times the size of Cambodia's GDP. Yet beyond the numbers, its impact is seen in daily life. A farmer in Kampong Thom province can receive a remittance from a relative abroad in seconds. A street vendor in Siem Reap-Angkor can accept payment from a tourist's Mastercard or Visa card with a simple QR scan. A student in Phnom Penh can pay university fees with one click on her phone. With each transaction, Cambodian citizens are building a digital financial identity—opening doors to future access to credit, savings, and insurance.

Our strategy has focused on expanding infrastructure, improving literacy, reducing fees, and designing products that meet people where they are. For households, this has meant lowering the cost of remittances. The World Bank reports that the global average remains around 6.2%. For individuals sending $200 home each month, this translates to over $12 lost in fees, often equivalent to an entire day's wages. In contrast, Cambodian workers in Malaysia using mobile apps or over-the-counter services can now transfer money home through Bakong with a flat fee of just 10 RM for transfers up to 2500 RM—averaging a cost of only 0.12%.

For small businesses—the backbone of our economy—financial inclusion means access to tools that reduce onboarding costs and improve cross-border compliance. Through initiatives like the Financial Transparency Corridor, we are ensuring that MSMEs can integrate into the digital economy, not be left behind by it.

Financial inclusion is often measured in accounts opened or transactions processed. But what should matter more is the human measure—of whether people feel empowered, protected, and connected to economic opportunity.

Cambodia's Digital Economy and Society Policy Framework 2021-2035 puts inclusion at the center of our digital transition—not as an outcome, but as a design principle. Because inclusion is not a charitable goal. It is a strategic necessity. Systems that leave people behind ultimately fail.

Bakong in this regard is not innovation for its own sake—it is purposeful design. It reflects Cambodia's real economic and social dynamics. It reduces friction, lowers costs, and extends formal financial services to those once left outside the system.

For us, this is what technology should do: respond to context, reinforce trust, and deliver inclusion. And for regulators and central banks, the lesson is clear: we do not need to chase the newest innovation—we need to build the right ones for our people, our institutions, and our future.

But let us acknowledge a simple truth: technology without trust is just code. If technology is the visible scaffolding of a modern financial system, then trust is the foundation beneath it—invisible, yet indispensable. No matter how advanced our systems become, they cannot operate without the confidence of those they are meant to serve.

For individuals, trust means safety—of funds, of data, of rights. For institutions, it means clarity—of rules, of compliance, of jurisdiction. And for regulators, it means ensuring that digital infrastructure is not only secure and accessible, but resilient enough to withstand economic shocks, policy shifts, and even political headwinds.

This has become especially clear in today's complex geopolitical climate. Across the region, bilateral tensions remind us that financial infrastructure cannot exist in a vacuum. Cross-border systems must be built not just on technical compatibility, but on institutional trust, regulatory alignment, and mutual respect.

Cambodia's efforts to establish interoperable QR payment systems with regional partners are grounded in this principle. Whenever there are strong regulatory cooperation and goodwill, implementation is smooth and impactful. But we have also learned that technical readiness alone is not enough. The success of cross-border financial systems depends equally on regulatory cooperation, institutional alignment, and mutual trust.

Sound regulation, therefore, is more than a technical safeguard—it is a stabilizer. When systems are transparent, rights are protected, and standards are clearly defined, financial infrastructure can function even regardless possible diplomatic strains. It creates a zone of continuity, serving people regardless of political climate.

Our commitment to regional initiatives such as the ASEAN Regional Payment Connectivity Framework and the Financial Transparency Corridor reflects this belief: in a region as dynamic and diverse as ours, trust and regulation must form the bedrock of resilience.

Too often, regulation is seen as an obstacle to innovation—a system of control designed to slow things down. But in our view, regulation is infrastructure. When designed with foresight and flexibility, it becomes the platform on which responsible innovation can flourish.

Regulation should serve not only as a safeguard against innovation's risks, but also as a framework that channels innovation toward the greater good of society.

At the National Bank of Cambodia, our regulatory philosophy is one of guided collaboration. We define the vision, safeguard stability, and provide an enabling

environment. The private sector, in turn, brings the ideas, the products, and the reach to turn that vision into reality.

Bakong itself was made possible by this partnership model. Rather than imposing rigid requirements, we invited banks, financial institutions, payment service providers and fintech companies into a shared space with clear rules and aligned incentives. The result is a system that is secure, competitive, and inclusive—without being prescriptive.

Bakong was not simply a central bank project. It was the result of close engagement with banks, financial institutions, payment service providers, and our technology partner, Soramitsu. We co-designed, tested, and adapted the system through dialogue, not decree.

We are also working across government institutions—linking digital payments to tax collection, utility payments, and social protection disbursements. This whole-ofgovernment approach ensures that financial technology reinforces state capability and public service—not just market growth.

We've taken the same approach in cross-border integration. Cambodia now has bilateral agreements for QR payment interoperability with multiple countries such as Japan, Korea, Malaysia, Laos PDR, Vietnam, and Thailand, and reaches China and the world via Alipay+ and UnionPay International. These connections allow users to pay across borders instantly, securely, and at a fraction of traditional costs. But to make this work, we had to co-design regulatory frameworks, establish joint supervisory protocols, and align on dispute resolution and compliance expectations.

We also continue to engage in international initiatives such as mBridge and the Universal Trusted Credentials project. These are not just experiments in technology— they are experiments in regulation as architecture: rules and standards designed to enable new possibilities, not constrain them.

The future of finance is not a race between countries or companies. It is a collaborative construction project. And those who build together—build stronger.

## Excellencies, Distinguished Guests, Ladies and Gentlemen,

We stand in an extraordinary moment—rich with possibility, yet demanding responsibility. Progress will not come from technology alone, but from the choices we make in how we use it.

Our mandate as central banks and financial authorities has expanded. It is no longer enough to safeguard stability—we must also design systems that are trusted, inclusive, and worthy of the people they serve. Systems that protect the dignity of the farmer, the factory worker, the entrepreneur, and the student. Systems where access is universal, resilience is built in, and trust is non-negotiable.

To bridge financial technology, trust, and regulation is not simple. But it is essential. We cannot only regulate what exists; we must enable what should exist.

Let us use this forum not just to trade ideas, but to forge alliances. Not just to connect systems, but to connect values. If we succeed, we will leave behind more than infrastructure—we will leave behind a legacy of empowerment, security, and shared prosperity.

Because when finance works for all, society thrives. And when trust anchors our systems, there is no limit to what our people can achieve.

Thank you for your attention.",Dr Serey Chea
https://www.bis.org/review/r251002n.htm,Adnan Zaylani Mohamad Zahid: Speech - National Financial Literacy Symposium 2025,"Speech by Mr Adnan Zaylani Mohamad Zahid, Deputy Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the Fourth National Financial Literacy Symposium, Kuala Lumpur, 2 October 2025. ",2025-10-02 00:00:00,"## Adnan Zaylani Mohamad Zahid: Speech - National Financial Literacy Symposium 2025

Speech by Mr Adnan Zaylani Mohamad Zahid, Deputy Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at  the Fourth National Financial Literacy Symposium, Kuala Lumpur, 2 October 2025.

* * *

A warm welcome to everyone. It is my honour to welcome everyone to the fourth National Financial Literacy Symposium (NFLS). Beyond just another conference, we hope this symposium will be a catalyst for progress and change. We gather here to ignite ideas, to turn insights into action, and to shape a future where every Malaysian is empowered with the confidence to make sound financial choices.

Research must not sit idle in journals or remain confined to theory. It must move, inspire, and transform lives. If we recall the 2023 NFLS, one study revealed a critical gap in our financial education system: the lack of capacity-building in schools. That insight did not end as a report. It became the spark for the Financial Education Network's train-the-trainers programme, equipping educators nationwide to multiply impact in classrooms. This is what happens when research meets resolve. Real change can happen.

This year, under the theme ""Shaping a Financially Resilient Nation: Well-informed and Inclusive Financial Ecosystem,"" we confront the toughest challenges at the heart of financial literacy and capability. We are shining a light on the gaps in our ecosystem and committing to close them. We need to do this. Because empowering Malaysians with the right knowledge, tools, and skills is not a luxury but a necessity. In a world of financial complexity, we must build resilience, inclusion, and confidence.

We are also making a slight shift this year. Instead of issuing a call for papers, we are taking a deep dive into three pressing challenges that demand our collective attention.

First, the Financial Capability and Inclusion Demand Side Survey 2024 revealed a paradox. Financial knowledge among Malaysians has improved from 60.2% in 2021 to 62.9% in 2024. Yet, behaviours are not shifting. Only 58% of Malaysians actively save for the future, and many cannot withstand a RM1,000 emergency. This is a wake-up call: knowledge alone is not enough. It must translate into action, confidence, and resilience.

Second, digitalisation is changing how we engage with money, with transactions becoming faster, easier, and in some situations, seemingly more affordable while being very accessible, from e-wallets to Buy-Now-Pay-Later schemes. But with convenience comes risk. The same survey found that 31% of Malaysians spend more impulsively online, while scams are rising sharply. Worse still, digital exclusion is real: those with limited digital literacy or poor connectivity risk being left behind. We must ensure that digital financial literacy goes beyond mastering apps or platforms.

Third, Malaysia is fast becoming an ageing nation within the next decade. The share of older Malaysians is rising each year. Yet, financial readiness has not kept pace; only 36% of EPF members meet the basic retirement savings benchmark. This is not just a demographic trend, it is a financial preparedness challenge of national importance. Retirement planning, healthcare financing, protecting seniors from financial fraud - we must act decisively to safeguard their future wellbeing.

## Distinguished guests,

Tomorrow, YAB Perdana Menteri will launch a new National Strategy for Financial Literacy (NS2.0). The new strategy takes a sharper, more inclusive, and action-oriented approach to address today's realities while preparing for future needs. The approach goes beyond information-sharing. For success, it must also be a long-term commitment to behavioural change, one that adapts to the evolving financial landscape, and the diverse experiences people have with money. One  of Malaysia's unique strengths is our rich tapestry of multi-racial and multi-religious communities which we can also harness to enhance the delivery of financial education that resonates deeply. A promising path to strengthen our messages to Muslim communities is Islamic financial literacy, which offers a powerful framework rooted in ethical and purposeful financial behaviour.

For example, in our attitude towards debt. Prophetic traditions discourage debt as it could be burdensome. Nonetheless, if one takes on debt, and we would be hard pressed not to take on debt to meet our various needs today, repayment is a must. Indeed, many traditions cite that the Prophet Muhammad would not perform funeral rites on the deceased until the family or friends stepped forward to repay the deceased's debts. Many clear principles can be derived from the teachings responsible financial management, avoiding over indebtedness and the importance. Under NS2.0, these and similar workstreams will be further pursued, to add to the corpus of financial literacy from religious and societal values.

## Ladies and gentlemen,

Allow me a little digression. The importance of repaying debts goes beyond good individual financial management. In another workstream that the Bank is undertaking, we present a perspective that the modern financial system and modern money, are the credits and debits, assets and liabilities, on the balance sheets of financial institutions, in other words, debts. To sustain this system that fundamentally supports and facilitates economic activity, is the need to ensure financial stability, of which is we look deeper, is in essence, the need to ensure that by and large, debts incurred are repaid. Hence, our financial literacy initiatives, indeed are tightly intertwined and contribute not only to financial resilience, but also the broader financial stability and economic growth itself.

Under our new strategic direction, we are also proud to introduce the FEN Research Community or FENRC. We now have a dedicated platform to advance impactful financial literacy research - with a special focus on supporting the most vulnerable segments of our society. Hence, today's session is an opportunity to gather ideas on priority areas, and to hear your thoughts on how FENRC can thrive - as a community that nurtures collaboration, and drive research that is both practical and transformative.

With this in mind, today's Symposium will spotlight three priorities for building a financially resilient Malaysia:

1. Bridging the gap between knowledge and action by using trust, behavioural insights, and practical solutions to turn awareness into lasting financial habits.
2. Preparing for an ageing population by developing strategies that help Malaysians plan for retirement, manage healthcare costs, and stay financially secure in later life.
3. Harnessing the power of communities by leveraging Malaysia's strong sense of community and trusted local voices to ensure financial literacy is inclusive, relatable, and impactful for all.

## Ladies and gentlemen,

I hope we can all leave today with a clear purpose and action plan. Whether you are a researcher, regulator, or practitioner, your role is crucial.

To the researchers: we need evidence that speaks to real challenges and inspires real solutions. Research grounded in reality is a powerful force for change.

To the practitioners: innovate with purpose. Design products, tools, and programmes that are intuitive and impactful, so that every Malaysian has the chance to thrive.

To the regulators: create the right conditions for good ideas to flourish. Safeguard innovation, while protecting the most vulnerable.

The Financial Education Network remains committed to building a financial literacy ecosystem that is inclusive, resilient, and ready for the future. My hope is that this Symposium sparks fresh ideas, meaningful collaboration, and renewed purpose. What this really means is that NFLS is more than a symposium. It is a call to action. The insights, debates, and evidence we gather here must shape real decisions, influence real behaviour, and strengthen the financial resilience of Malaysians from every walk of life. Let us carry forward the spirit of collaboration between regulators, researchers, educators, and industry so that together, we can build a nation that is not only financially literate, but also financially confident and future-ready.

Thank you.",Encik Adnan Zaylani Mohamad Zahid
https://www.bis.org/review/r251002a.htm,Christine Lagarde: Trade wars and central banks - lessons from 2025,"Keynote speech by Ms Christine Lagarde, President of the European Central Bank, at the Bank of Finland's 4th Monetary Policy Conference ""Monetary policy in the shadow of geopolitical tensions and trade conflicts"", Helsinki, 30 September 2025.",2025-09-30 00:00:00,"## Christine Lagarde: Trade wars and central banks - lessons from 2025

Keynote speech by Ms Christine Lagarde, President of the European Central Bank, at the Bank of Finland's 4th Monetary Policy Conference ""Monetary policy in the shadow of geopolitical tensions and trade conflicts"", Helsinki, 30 September 2025.

* * *

Here in Finland, the idea that economics cannot be separated from geopolitics is hardly new. During the early 1990s, as the Soviet Union collapsed, Finland lost more than 10% of its GDP when trade with its eastern neighbour suddenly evaporated. 1

Few countries know better the costs of ignoring geopolitical realities.

Today, the rest of Europe is facing a similar reckoning. We find ourselves in a new world - one where policymakers can no longer confine themselves to traditional economic and financial variables. Now, we must factor ""geoeconomics"" into our analyses.

The term was coined in 1990 by Edward Luttwak, who described geoeconomics as ""the admixture of the logic of conflict with the methods of commerce"". It is not protectionism in the old sense of sheltering vulnerable industries. Instead, it is trade deployed as a tool of power, a strategy of influence and dominance.

This approach has been around for some time, most visibly during the US-China trade disputes that unfolded during the first Trump Administration. The unjustified war in Ukraine and the sanctions that followed have also reshaped the European landscape. But 2025 marks the first year in which Europe itself has been on the receiving end.

We currently face the highest tariffs since the days of Smoot-Hawley in the 1930s, imposed by our largest trading partner. Global trade is being reshaped as other countries respond to tariffs directed at them. And in the span of just a few months, we have seen a surge in trade uncertainty and sharp swings in exchange rates.

So now is a good time to take stock of what we have learned so far, and what this implies for monetary policy.

## Trade wars: expectations versus reality

A year ago, most would have assumed that US tariffs rising from 1.5% to 13% would trigger a major adverse shock to the euro area economy. Indeed, most trade models judged the imposition of tariffs to be, on net, negative for euro area growth and likely positive for inflation, at least in the short run.

This was broadly our internal assessment in December of last year, albeit surrounded by considerable uncertainty. Three channels were usually seen as decisive in producing such an outcome.

First, retaliation. Reciprocal tariffs were expected to raise import costs and reverberate through supply chains. In most models, this retaliation channel was by far the largest driver of higher short-term inflation. 2

Second, the exchange rate. Tariffs were expected to trigger a depreciation of the euro against the dollar - driven by expectations of higher US rates and a smaller US trade deficit - thereby amplifying imported inflation. 3

Third, uncertainty. Elevated trade policy uncertainty was expected to weigh heavily on business investment and growth, often more than the direct effect of tariffs on exports themselves. This was expected to be the largest negative force on growth.

Yet some of these assumptions have not been borne out.

This is because the tariffs were not an isolated economic event, but a symptom of a broader geopolitical shift - one that triggered political economy dynamics beyond the reach of standard models.

Start with retaliation.

In Europe and globally, it has so far been limited. In response to the US tariffs on steel and aluminium, the EU announced counter-tariffs on around €26 billion worth of American goods, but suspended them once a deal was struck in July.

Pressure from major industrial groups to avoid a prolonged cycle of tit-for-tat measures, as well as concerns about jeopardising US support for the war in Ukraine, ultimately outweighed pure economic calculus.

As a result, we have not yet seen significant supply chain disruption. Global supply chain pressures remain contained, and in the euro area, bottleneck indicators are close to historical averages.

If anything, rather than blocked supply chains, the euro area is facing rising imports. The euro area's trade deficit with China has risen by around 10% this year, although this was driven more by weaker Chinese demand than by diverted trade flows.

The exchange rate has also not behaved as expected.

Rather than depreciating, the euro has appreciated substantially. Since the start of this year, it has risen by 13% against the US dollar, while the nominal effective exchange rate has increased by 6.5% and the real effective exchange rate 4   by 5%.

This reflects the fact that the imposition of US tariffs coincided with a broader reevaluation of the country's position in the global financial system.

Investors began to question whether the US dollar would continue to warrant its status as the ultimate safe-haven currency - another political-economy factor that narrow, tariff-focused models excluded by assumption.

The international role of the euro has helped insulate us from the resulting exchange rate volatility, with 52% of our imports invoiced in our own currency. But many key imports, especially commodities, are still priced in dollars.

The euro's appreciation has therefore contained imported inflation from supply chains, while at the same time placing an additional drag on growth.

The effects of uncertainty have been more in line with expectations. The expected cumulative impact of tariffs and uncertainty on growth is around 0.7 percentage points between 2025 and 2027, compared with our projections last December.

Still, these effects have not been as strong as we anticipated. For example, only about a quarter of the downward revision for next year, compared with December last year, is due to uncertainty.

This is partly because trade policy uncertainty fell faster than we expected once the deal with the United States was concluded. It is also because the euro area has taken internal measures to boost growth that have helped counter external weakness.

In particular, governments in Europe have committed to the largest increase in rearmament in decades, with some reversing years of underinvestment. Government investment is now expected to add 0.25 percentage points to growth 5   between 2025 and 2027, offsetting around one-third of the trade shock. 6

The EU has also pushed ahead with new trade agreements, which will support growth. The Mercosur and Mexico deals now being adopted cover more than 3% of extra-euro area goods exports, while agreements currently under negotiation account for a further 6%. 7

This is another example of a response that models could not capture beforehand: trade pressures have led European governments to re-evaluate their broader trade and security relationships, prompting an endogenous investment response.

All in all, with no retaliation and an appreciating exchange rate, tariffs have had little inflationary impact so far, with their adverse effects mainly limited to growth. Those effects, however, have been relatively moderate thanks to the domestic response.

## Evaluating the balance of risks

In an environment of high uncertainty, understanding the nature of shocks is a precondition for getting the baseline projection right.

But capturing the balance of risks is just as crucial, so that we are prepared for a situation in which the baseline may prove obsolete and can act pre-emptively, if necessary.

This was a key conclusion of our recent strategy review: to emphasise more risks and uncertainty in our decisions, not just central projections.

Initially, we viewed the risks to growth from US tariffs as tilted to the downside.

This assessment was informed by extensive scenario analysis, including escalation scenarios and possible offsetting forces - notably the growth impact of a sustained increase in defence and infrastructure spending.

Overall, these scenarios have consistently shown that the most salient risks - those that could push growth furthest from its current path - lie on the downside rather than the upside.

For example, ECB staff find that severe escalation in trade tensions could lower growth cumulatively by about 1 percentage point over the projection horizon. 8   The potential boost from higher defence spending would not be sufficient to offset this, even if all countries were to deliver fully on their NATO commitments.

This tilt in the risk balance remains in place today. But at our last meeting, we judged risks to growth to be more balanced, because the likelihood of major tariff-related downside risks materialising had fallen owing to the new trade deal.

Meanwhile, we judged inflation risks to be two-sided, with plausible scenarios that could push inflation off track in either direction. But as new information has come in, the range of risks on both sides has also narrowed.

In particular, the absence of significant EU retaliation has reduced the risk that higher import tariffs might drive inflation above the baseline. Our scenario analysis also points to inflation risks that remain well contained.

If trade tensions were to reignite, staff project only moderately lower inflation in 2027, reflecting weaker growth. Higher spending on defence equipment, by contrast, would only modestly raise inflation, given its relatively small weight in the consumption basket.

Staff have also examined scenarios that would affect prices more directly: on the downside, Chinese export prices being lowered further as a strategic response to tariffs; and on the upside, more pronounced bottlenecks in global supply chains.

In both cases, however, the impact would be limited under reasonable assumptions, with inflation in 2027 differing by only 0.1-0.2 percentage points. 9

## Policy implications

So what does this imply for our monetary policy?

I have said that we are in a good place. This was largely a reference to the fading of the large inflation shock we faced in recent years, which is now essentially over in the euro area.

But there are also three additional reasons why it applies to the current situation.

First, because trade shocks are not creating new inflationary pressures, we are not confronted with the classic policy trade-off where the central bank faces stalling growth and rising inflation.

This has already allowed us to cut policy rates by 100 basis points since December cushioning the impact while keeping medium-term inflation on track.

Second, insofar as we can model the future, the risks to inflation appear quite contained in both directions.

Third, with policy rates now at 2%, we are well placed to respond if the risks to inflation shift, or if new shocks emerge that threaten our target.

At the same time, we are navigating a far more difficult environment than before - beset by war, tariffs and uncertainty - which we must also factor into our policy.

If we consider the ""known knowns"", the risks appear well bounded.

But there are also ""known unknowns"" - above all, how euro area companies will adapt to this new setting. Firms are still running down inventories and absorbing the shock in margins, so the full effects of US tariffs have yet to become clear. 10

Finally, there are the ""unknown unknowns"": in a world of geoeconomics, new trade and geopolitical shocks will remain a constant feature of our environment.

How these forces play out will have unavoidable effects on monetary policy - not only through their impact on growth, but also on potential growth.

If firms interpret the new environment as a lasting confidence shock, we could see investment shift out of the euro area. Preliminary staff analysis suggests that, all else 11 being equal, tariffs are likely to weigh negatively on potential growth.

Lower potential growth would, in turn, put downward pressure on real rates and reduce the policy space available.

But other paths are possible if governments act decisively and give firms new reasons to be confident.

One factor often overlooked in the tariff debate is that our internal market is far more important for trade than the global market. Staff analysis shows that an increase of just 2% in intra-euro area trade would be enough to offset the loss of exports to the United States caused by higher tariffs. 12

This is a compelling reason to implement the reforms identified in recent reports from Mario Draghi and Enrico Letta, in particular simplifying burdensome regulation, completing the Single Market and building a genuine European capital market.

The same reforms would also help European companies adopt artificial intelligence more rapidly. 13   This would result in a positive shock for potential growth, helping to balance the negative forces coming from abroad.

In short, nothing about our future is fate - and there is no room for complacency by any party.

For our part, we cannot pre-commit to any future rate path, whether one of action or inaction. We must remain agile, and ready to respond to the data as they come in.

## Conclusion

Let me conclude.

This is an unusual time to be a monetary policymaker.

We can take comfort in having overcome a large inflation shock after the pandemic, and in how the economy has coped so far with an upheaval in trade relations.

And yet, we must remain alert to the possibility that not all the consequences are visible today - and that new shocks may still lie ahead.

As we look to the future, we do so mindful of Finland's long tradition of - courage sisu and inner strength in the face of uncertainty.

Sisu is not a show of fleeting bravery, but rather a fierce determination and perseverance to continue fighting even when times get tough.

We are in a good place today, but that place is not fixed. Our task is to sustain it with agility, humility and a firm grounding in the data.

1  Analysis finds that the trade shock alone can explain between 4.7 and 5.9 percentage points of the loss in GDP. See Gulan, A. (2021), ""Can large trade shocks cause crises? "", , Bank The case of the Finnish-Soviet trade collapse Blogs - Bank of Finland Bulletin of Finland, 5 May.

- 2  Gnocato, N. et al (2025), "" "", , CEPR, 30 Tariffs across the supply chain VoxEU Column May.
- 3  Jouvanceau, V., Darracq PariŁs, M., Dieppe, A. and Kockerols, T. (2025), ""Trade wars and global spillovers. A quantitative assessment with ECB-global"", Working Paper , No 3117, ECB, Frankfurt am Main, September. Series
- 4  Deflated by consumer price inflation.
- 5  This estimate also includes wages, government consumption and transfers.

- 6  Government investment as a ratio to GDP is expected to be cumulatively almost 0.6 percentage points higher over the period from 2025 to 2027 than projected in December last year.
- 7  With South Korea, India, Australia, Malaysia, Thailand, Indonesia and the Philippines.
- 8  European Central Bank (2025), ""Eurosystem staff macroeconomic projections for the euro area, June 2025"", Frankfurt am Main, June.
- 9  European Central Bank (2025), ""Eurosystem staff macroeconomic projections for the euro area, September 2025"", Frankfurt am Main, September.
- 10  Organisation for Economic Cooperation and Development (2025), OECD Economic , Outlook Interim Report September 2025: Finding the Right Balance in Uncertain Times OECD Publishing, Paris, September.
- 11  European Central Bank (2025), ""The outlook for euro area business investment -"", , Issue 4. findings from an ECB survey of large firms Economic Bulletin
- 12  The United States accounts for 10% of total euro area exports, and the new tariffs are expected to reduce euro area exports to the United States by approximately 9%, translating to a 0.9% decline in overall euro area exports - roughly €66 billion. Making up for this shortfall in direct trade would require a 2% increase in intra-euro area trade.
- 13  European Investment Bank (2025), Investment Report 2024/2025: Innovation, , March. integration and simplification in Europe",Christine Lagarde
https://www.bis.org/review/r251002k.htm,Olli Rehn: Monetary policy in the shadow of geopolitics and trade tensions,"Introductory remarks by Mr Olli Rehn, Governor of the Bank of Finland, at the Bank of Finland's 4th Monetary Policy Conference ""Monetary policy in the shadow of geopolitical tensions and trade conflicts"", Helsinki, 30 September 2025.",2025-09-30 00:00:00,"## Olli Rehn: Monetary policy in the shadow of geopolitics and trade tensions

Introductory remarks by Mr Olli Rehn, Governor of the Bank of Finland, at the Bank of Finland's 4th Monetary Policy Conference ""Monetary policy in the shadow of geopolitical tensions and trade conflicts"", Helsinki, 30 September 2025.

* * *

Presentation accompanying the speech

Ladies and Gentlemen,

It is my great pleasure and honour to welcome you all to the Bank of Finland's 4th monetary policy conference on the timely and critical topic of ""Monetary policy in the shadow of geopolitics and trade tensions.""

This is a subject of critical importance today. Politics and economics have always been intertwined, but now geopolitical tensions and tariff wars make up a unique set of challenges. The long-time anchors of economic stability-open trade, global governance, and predictable international relations-are under strain. In this new reality, we must better understand the uncertainties of the more fragmented world.

I will say a few words on central banks' strategies in this 'new normal' shortly. Let me first introduce today's programme and speakers.

I am especially honored to welcome our first keynote speaker, Philip Jefferson, ViceChair of the U.S. Federal Reserve Board of Governors. Vice-Chair Jefferson, your insights on these matters are invaluable, and we are eagerly anticipating your views on the challenges facing monetary policy today. Thank you so much for joining us.

We are likewise very much looking forward to listening to Christine Lagarde, President of the European Central Bank, later today. Her leadership, policy insight and stamina are essential as we pursue teamwork to ensure price and financial stability, thus supporting the foundations of sustained growth and employment in the euro area.

Today, we are also very pleased to welcome Chief Economic Advisor Reza Moghadam from Millennium Capital Partners. Reza is a voice of great experience - having served in key positions at the IMF, e.g. as European Director - and he will give us a keynote with case studies on different types of market reactions to geopolitics and monetary policy.

We are likewise most honored to have with us Professor Eric Leeper of the University of Virginia, who will be speaking on the fiscal foundations of inflation. This is a crucial topic, as fiscal and monetary policies seem to be more interconnected than ever, and Professor Leeper's expertise will surely challenge and inform our thinking.

After the coffee break we'll have a most interesting and topical policy panel, in which experienced policymakers Governor Erik ThØdeen of Sveriges Riksbank, Deputy Governor Clare Lombardelli of the Bank of England and Deputy Governor AgnØs

Benassy-QuØrŁ of Banque de France discuss monetary policy making in times of uncertainty. Our board member Tuomas Välimäki will moderate the discussion.

Led by our distinguished speakers and panelists, we have today a great opportunity for a substantive and lively discussion, and for seeking new elements for thinking about sound policy decisions.

Let me now set the scene by briefly reflecting recent developments in monetary policy strategy.

The strategy of the European Central Bank has been reviewed and renewed twice during the current decade, first in 2021 and then in 2025. The 2021 strategy review was preceded by a long period of low inflation and of interest rates at the effective lower bound.

## Slide 2. Old inflation target and asymmetry .

The ECB's old pre-2021 definition of price stability, ""below, but close to 2%"", was open to different interpretations. The 2% inflation was often interpreted as a ceiling.  There was an evident need for clarification.

Recent research by Bank of Finland economists, applying text analysis and language models to communication, indicates that the ECB's policy preferences were indeed during the first two decades of the euro, as the ECB was more averse to asymmetric inflation above 2% than below 2% (Haavio et al. 2024). Such asymmetry in preferences gave rise to in monetary policy. a disinflationary bias

## Slide 3. The ECB's 2020-21 strategy review .

That was one key reason for launching the strategy review of 2020-21. The most important change in the revised strategy was the introduction of a symmetric 2% . inflation target over the medium term

Applying the same text analysis tools to the most recent period, the BOF researchers have found suggestive evidence that the ECB's policy preferences have become after the new strategy was adopted in 2021 (Haavio et considerably more symmetric al. 2025).

Moreover, so-called make-up strategies, such as average inflation targeting, were dealt with in depth during the 2021 strategy review. In the end we did adopt a strict makenot up strategy, as it would have posed major analytical, policy and communication challenges. Yet, our strategy still contains an element that would allow compensating for too low inflation, if we were ever to fall back into a liquidity trap.

## Slide 4. Three and a half eras of inflation in the euro area

This year's ECB strategy assessment took place after a period of high inflation, in the context of pervasive uncertainty. We judged that the new (2021) definition of price stability has served Europe well - especially considering that the 2021 review aimed at a strategy that works in a low inflation environment, while we were in fact hit by a

sudden upward inflation shock and a surge in inflation. Perhaps this is not so surprising, as any inflation targeting framework is a strategy to contain high inflation.

Hence, we took the view of ""if it ain't broke, don't fix it"", and decided to keep the definition . The clarity of the point target has helped to anchor inflation unchanged expectations and contribute to clear communication.

Furthermore, was reconfirmed in the 2025 Strategy the medium-term orientation Assessment. It allows for temporary deviations from the 2% inflation target and thus gives monetary policy flexibility to ""look through"", if inflation varies e.g. due to temporary supply shocks.

## Slide 5. The 2025 Strategy assessment

However, there are also novel elements in the 2025 Strategy Assessment.  The updated strategy calls for , new ways to analyse and communicate uncertainty especially with the help of . This is a key lesson of the shocks that scenario analysis have hit the euro area recently. Scenario analysis can be useful in mapping possible developments, outlining consistent narratives and preparing policy responses. The right response is always context-specific, as different uncertainties lead into different types of policy trade-offs. (ECB 2025)

Drawing from past experiences, the updated strategy also states that the ECB should react or to significant positive or negative deviations of inflation forcefully persistently from the 2% target.

Both approaches were used in the ECB hiking cycle from June/July 2022.  First, the ECB acted by swiftly raising the policy rate. In the second phase, it acted forcefully by communicating that the rate would be kept at the given elevated level persistently as long as necessary to curb inflation - i.e. at the 4% level from September 2023 till June 2024.

Likewise, in the current easing cycle since June 2024 we have acted consistently by bringing the policy rate from 4% to 2% in 12 months.

More generally, a policy response to significant deviations from target forceful enables . Even so, there may come a point to keep inflation expectations firmly anchored where -relying on clear communication and guidance rather than further persistence rate hikes-can become a more effective approach. Recent work by BOF economists indicates that persistence may deliver a more favourable stabilization trade-off, i.e. a (Ambrocio et al. 2024). lower sacrifice ratio

Yet, these are not the only challenges confronting central banks today. Today's international monetary system is under pressure from both geopolitical confrontation and technological disruption. History reminds us that often such transitions, from the end of the gold standard to the collapse of Bretton Woods, have brought instability and inflation.

As President Christine Lagarde has said, this is truly ""a global euro moment."" We have a great opportunity to make the euro a trusted global anchor of stability. This calls for a

strategic rethink and bold action, so that it can support a healthier rebalancing of the global monetary order.

Ladies and Gentlemen,

I cannot possibly close my intro without reference to one uninvited elephant in the room, i.e. the challenge to independent central banks.

Both theory and real-world experience underline the critical importance of central bank independence. To illustrate the point, we can compare the recent interest rate hiking cycle to earlier similar cycles.

Inflation did surge to uncomfortable levels in many economies. Yet central banksincluding the ECB, the Bank of England, Sveriges Riksbank, and the Federal Reservewere able to bring inflation down rather swiftly without inflicting severe damage on real activity.

While many factors played a role, research and policy experience suggest that central bank independence and credible inflation targets were crucial.  The recent cycle contrasts sharply with, say, the 1970s when inflation remained persistently high after the oil shocks, or the early 1980s, when the Federal Reserve under Paul Volcker had no choice but to steer the economy into a recession to tame inflation.

Volcker truly stood tall, also physically at 6 feet 7 inches or 201 centimeters! While there is a little Paul Volcker in every central banker, I must say I very much prefer to tame inflation without imposing vast economic ramifications and social and human costs that were unavoidable in his era. That is precisely why central bank independence - and the credibility it brings - is so essential.

Welcome and thank you all again for your presence - and I hope you will find today's conference both stimulating and informative!

## References

Ambrocio, G., Haavio, M., and McClung, N. (2024): Monetary policy announcements and sacrifice ratios. 12/2024 Bank of Finland Discussion Paper

ECB (2025): Report on monetary policy tools, strategy and communication. ECB 372/2025 Occasional Paper .

Haavio, M., Heikkinen, J., Jalasjoki, P., Kilponen, J., Paloviita, M. and Vänni, I. (2024): Reading between the lines - uncovering asymmetry in the central bank loss function. 6/2024. Bank of Finland Discussion Paper

Haavio, M., Heikkinen, J., Jalasjoki, P., Kilponen, J. and Paloviita, M. (2025): ECB's evolving communication and policy preferences since 2021 strategy review. Bank of 3/2025. Finland Discussion Paper

Powell, J. (2025): Monetary Policy and the Fed's Framework Review. Speech given August 22, 2025, at ""Labor Markets in Transition: Demographics, Productivity, and

Macroeconomic Policy,"" an economic symposium sponsored by the Federal Reserve . Bank of Kansas City, Jackson Hole, Wyoming",Olli Rehn
https://www.bis.org/review/r251002d.htm,Lesetja Kganyago: More or less regulation - responding to a changing global environment,"Keynote address by Mr Lesetja Kganyago, Governor of the South African Reserve Bank, at Stellenbosch University, Stellenbosch, 25 September 2025. ",2025-09-25 00:00:00,"

## Keynote address by Lesetja Kganyago,

## Governor of the South African Reserve Bank, at Stellenbosch University, 25 September 2025

More or less regulation: Responding to a changing global environment

Good evening.

It  is  always a great pleasure to engage with the students and staff of Stellenbosch University. I extend my gratitude to the Law Faculty for the invitation to speak with you today.

In my capacity as Chancellor of this university, I wish to acknowledge Mr Gys Steyn for establishing the Gys Steyn Chair in Financial Regulation Law. In South Africa, we need more interdisciplinary academic work on financial stability issues to both inform policy and build stronger relationships with financial regulators and policymakers.

I have been involved in financial sector policymaking for close to four decades, both locally  and  internationally.  Over this time,  financial  stability  risks  have  continuously evolved, and financial regulators have, on far too many occasions, been too slow to identify and respond to them. As we have seen with the Great Financial Crisis (GFC), regulators' inability to anticipate these risks clearly demonstrated the enormous cost of overlooking these issues.

Today,  I  will  address  the  global  regulatory  landscape  and  tackle  the  following  four questions:

1. Why is the financial sector subject to regulation?
2. How did we get to Basel III and what has it cost us?
3. How are the risks to the financial system evolving?
4. How do we develop the necessary skills to manage risks effectively?

## Why is the financial sector subject to regulation?

Consider a scenario where you arrive at your bank and you are suddenly unable to withdraw your savings because the institution cannot meet its obligations. An even more serious scenario would be a banking crisis occurring alongside  an economic crisis like the one we experienced during COVID-19 - where you not only lose your job but all your savings as well.

The goal of financial regulation is to prevent economic and financial crises by building a  system  we  can  all  trust.  This  means  requiring  banks  to  keep  a  financial  safety cushion to absorb unexpected losses, while at the same time protecting people and businesses from scams, cheating and illegal trading.

The nature of the financial system is such that there are often long lags between when someone makes a commitment and when you find out if that commitment is really valid. If you go to a shop and buy fruit, and the fruit is rotten, you will know within a few days, and you can go right back to the store and address the problem. But if you put your money into the financial system - in a bank maybe or with an asset manager - you may only want it back much later, perhaps years later, at which point you could get a bad surprise that they are unable to repay you.

At  that  point,  there  is  often  not  much  that  can  be  done.  The  money  is  gone,  the company is insolvent, and for you, it is a disaster. It is also often a social disaster, because financial failures often lead to larger crises. In the equilibrium where everyone trusts  the  system,  those  resources  help  support  economic  activity.  But  in  the equilibrium where trust breaks down, everyone rushes to withdraw their funds, and buying power goes out of the hands of productive users - to under the mattress.

This helps illustrate why financial crises are so expensive. As Carmen Reinhart and Ken  Rogoff  famously  documented,  banking  crises  are  associated  with  significant declines in output and employment, with the unemployment rate, on average, rising by 7 percentage points. 1 The real value of government debt also explodes. Financial crises are among the most traumatic events a country can experience.

Financial  regulation  is  meant  to  address  these  problems.  Even  though  everyone acknowledges that regulation can be burdensome, we agree it is necessary because the problem of financial instability is so severe. Unfortunately, we do not always agree on how much to regulate. There is a pendulum - regulation tends to tighten straight after a crisis, when safety is a priority and losses are fresh in everyone's minds. But then  over  time  the  memories  fade  and  the  burden  of  the  regulatory  constraints becomes more visible, and deregulation sets in again. I have seen this pendulum swing back and forth several times in my nearly forty years as a policymaker, and it is moving again today.

## What factors shaped the development of the current regulatory regime?

The last big swing of the pendulum followed the GFC of 2007-09. That crisis revealed how  decades  of  deregulation,  particularly  in  the  United  States  (US),  had  enabled financial  institutions  to  pursue  riskier  activities  with  minimal  and  poorly  designed regulatory checks and balances. Banks did not understand the risks associated with new products such as mortgage-backed securities, and they did not have enough capital to absorb losses.

To address these problems, Basel III focused on overhauling bank capital requirements. The goal was twofold: (i) to improve the quality of capital by prioritising shareholder equity over debt, and (ii) to modify the required ratio of this high-quality equity relative to a bank's total assets.

1 C M Reinhart and K S Rogoff, 'The aftermath of financial crises', National Bureau of Economic Research Working Paper Series No. 14656 , Cambridge, Massachusetts, January 2009.

South Africa was not one of the countries that experienced a financial crisis during the GFC,  although  we  certainly  experienced  an  economic  downturn.  Still,  the  GFC experience clearly exposed the shortcomings of Basel II, and so we applied ourselves seriously to implementing Basel III.

We did this in a rigorous way, with robust analysis and extensive consultations among regulators and financial institutions. In my roles as Director-General of the National Treasury, and Deputy Governor and now Governor of the South African Reserve Bank, I have personally dedicated a considerable amount of time to discussing the various elements of Basel III with colleagues from other jurisdictions and with local financial institutions.

In common with developments in other jurisdictions, critics of the new regulations have argued that Basel III has imposed substantial economic costs, making borrowing more expensive and restricting credit extension. However, the most effective policy changes have some short-term costs that are ultimately outweighed by medium- and long-term benefits.

In 2024, we initiated a call for research proposals to assess the economic impact of Basel III's implementation in South Africa. Contrary to some expectations, the findings suggest only an insignificant negative impact on economic activity at the aggregate level,  as  many  financial  institutions  met  the  higher  capital  requirements  by  using retained earnings. 2 At a more granular level, some smaller, less capitalised banks and specific  borrowers  have  been  more  affected.  But  the  research  seems  clear  that adverse effects have been modest and localised, rather than large and widespread.

The analysis also  reveals  that  banks  increase  their  capital  ratios  not  only  to  meet regulatory requirements but also in response to other emerging risks. An example is fiscal weakness: when confidence in government debt deteriorates, it affects banks holding  such  debt. 3 These  factors,  in  turn,  can  raise  borrowing  rates  and  reduce

2 See S Merrino and L Harris, 'Basel III and South African banking: Assessing the effects', South African Journal of Economics 93(1), pp 3-5.

3 See G Dell'Ariccia et al., 'Managing the sovereign-bank nexus', International Monetary Fund Departmental Paper No. 18/16 , 2018.

lending, thereby amplifying the impact of any regulatory changes. 4 It is important not to attribute all changes to regulatory requirements.

The closures of Silicon Valley Bank in 2023, followed by several other banks and the takeover  of  Credit  Suisse  by  UBS,  serve  as  a  potent  reminder  that  the  current framework is not perfect. Poor governance and unsustainable business models cannot be offset by any sensible amount of capital. 5 Regulatory systems must continuously evolve in response to emerging economic and financial risks. The challenge for us as regulators is that we often find ourselves in a reactive position, struggling to identify emerging risks due to the inherent complexity of the global financial system.

This  brings  me  to  my  third  question: How are the risks to the financial system evolving?

In  the  field  of  cancer  treatment,  you  will  find  that  for  some  cancers,  the  largest contributor to a reduction in mortality is not new medication, but rather the reduction of risk factors. A prime example is smoking: as the number of people who smoke has declined, there has been a significant decline in lung cancer cases and the subsequent need for treatment.

When we consider deregulation, we must ask ourselves whether the risk factors with the potential to destabilise the financial system have diminished. My assessment is that  these  risk  factors  have  increased  substantially.  Allow  me  to  provide  a  few examples.

Macroeconomic and geopolitical instability

4 See K Makrelov et al., 'Fiscal risks and their impact on banks' capital buffers in South Africa', South African Journal of Economics 91(1),  pp116-134.

5 See S Dahlgren et al., 'Assessment of the European Central Bank's supervisory review and evaluation process: Report by the Expert Group to the Chair of the Supervisory Board of the ECB', April 2023.

The global environment is marked by elevated macroeconomic and geopolitical risks. The Bank for International Settlements (BIS), in its 2025 Annual Report, 6 identifies the current historically high debt levels across many countries as a major risk to the global financial system. Similarly, in South Africa, we have also observed a build-up of fiscal risks.

Meanwhile,  global  policy  uncertainty  has  risen  to  unprecedented  levels.  This, combined  with  geopolitical  tensions  and  economic  fragmentation,  undermines  the global economy's capacity to act decisively in the face of major economic and financial shocks.

If we desire lighter-touch regulation, we must first reverse the current macroeconomic and geopolitical trends. The world is living too dangerously for us to be dismantling defences now.

## Crypto assets and decentralised finance

The second risk factor is the emergence of crypto assets and decentralised finance. Cryptocurrencies, stablecoins, non-fungible tokens and decentralised finance platforms  make  it  challenging  to  identify  beneficial  owners  and  prevent  money laundering and the financing of terrorism. The sustained growth rates of over 50% in some crypto assets suggest the formation of large asset bubbles. 7 , 8

These impacts will be amplified by the growing interconnectedness between traditional financial systems and crypto markets as well as the borderless nature of cryptocurrencies. Although  some  jurisdictions,  including  the  United  States  and  the European Union, have passed legislation to regulate stablecoins, current growth rates suggest that the build-up of financial risks continues.

6 See BIS, Annual Report 2024/25 , June 2025.

7 See S L Náñez Alonso et al, 'Bitcoin's bubbly behaviors: Does it resemble other financial bubbles of the past?', Humanities and Social Sciences Communications 11(1), p 715.

8 As of 25 August 2025, the annual return on the Bloomberg Bitcoin Index is 83.9 %.

## Technological advancements and financial innovation

Technological advancements and financial innovation present a double-edged sword. While innovations  such  as  artificial  intelligence  promise  to  make  financial  services cheaper, faster and more accessible, their reliance on complex and often untested systems creates new operational dangers. A failure in one of these core systems could trigger a cascading event, threatening the stability of the system. 9

And, while financial innovation can foster greater competition and drive inclusion, it may also encourage increased risk-taking. 10

Regulators failed to foresee how the bundling of high-risk subprime mortgages into complex financial instruments could trigger the GFC. Today, the financial landscape is marked by even higher levels of complexity. In this context, it is often difficult to clearly identify the vulnerabilities until they trigger a crisis.

## Climate change

We are also confronted with risks associated with climate change. Various institutions have attempted to estimate their impact. The most recent scenarios from the Network for Greening the Financial System indicate that, under a 'current policy' scenario, the physical  impacts  of  climate  change  -  such  as  more  frequent  and  severe  extreme weather events - could result in global GDP losses of around 15%.

Our own work shows that the South African banking sector's exposure to transitionsensitive sectors is approximately 35% of total credit exposure, which suggests a high vulnerability to transition risks. 11

9 See Financial Stability Board, 'The financial stability implications of artificial intelligence', November 2024.

10 See E Feyen et al., 'Fintech and the future of finance: Market and policy implications', World Bank Group, 2023.

11 See P Monnin et al.,  'Transition and systemic risk in the South African banking sector: Assessment and macroprudential options', South African Reserve Bank Working Paper Series WP/24/12 , July 2024.

The Financial Stability Board's Roadmap for Addressing Financial Risks from Climate Change 12 identifies four priority areas: (i) improving  disclosure; (ii) data; (iii) vulnerability  analysis;  and  (iv)  developing  appropriate  regulatory  and  supervisory practices and tools. The most recent progress update, published in July, indicates that while significant progress has been made, the work is still foundational in nature.

In South Africa, we have already published guidance notes for insurance companies and banks on climate-related disclosure, governance and risk management practices. However,  our  ability  to  effectively  address  climate-related  risks  is  hindered  by considerable data gaps and the unreliable estimates of their possible impacts.

What is particularly concerning is that every year some institution provides estimates about the frequency and severity of extreme weather events expected over the next 30 years, only for us to realise a year later that these estimates underestimated the actual  impact  of  the  events.  Efforts  to  achieve  greater  coordinated  climate  change mitigation should become a bigger focus.

## Non-bank financial institutions

A final risk is the growth of non-bank financial institutions. These institutions play a crucial role in the financial system, yet often operate outside the regulatory framework. Their diverse nature, rapid evolution, interconnectedness with the traditional banking system, and inherent vulnerabilities - such as liquidity mismatches and leverage present significant challenges to financial regulators.

In addition, there are many other risk factors that justify more, not less, regulation, including cybersecurity and money laundering risks. In the case of South Africa, the Financial Action Task Force (FATF) greylisting underscores some of the gaps in our financial regulation.

While  there  may  be  limited  scope  for  deregulation,  there  is  considerable  room  to improve  regulation  and  make  certain  functions  more  effective.  For  example,  risk

12 The roadmap is available at https://www.fsb.org/2025/07/fsb-roadmap-for-addressing-financial-risksfrom-climate-change-2025-update/

weights  assigned  to  infrastructure  projects  in Africa  remain  excessively  high,  even though their failure rates are lower than in other jurisdictions. 13 Further, government bonds  are  still  classified  as  high-quality  liquid  assets,  even  in  jurisdictions  facing imminent fiscal crises.

Therefore, risk assessment must become more reflective of the current economic and financial environment.

I  will  now  turn  to  my  final  question: How do we develop the necessary skills to manage risks effectively?

Different  groups  will  make  different  contributions  to  financial  stability.  Academics, policymakers and market practitioners all have different roles.

Many of you here today are likely to be university-based financial regulation experts. Whether your  background  is  law,  economics  or  actuarial  science,  your  role  as  an academic is both unique and crucial in helping society navigate changing and often challenging  environments.  At  its  core,  your  responsibility  is  simply  to  educate individuals and conduct high-quality research. This work is absolutely fundamental to navigating the complexities of the regulatory landscape. Allow me to explain.

Becoming  a  proficient  regulator,  like  many  other  professions,  requires  a  solid interdisciplinary foundation and the ability to think critically. Many of these foundational skills  must  be  developed  during  university  training.  The  rapidly  changing  financial sector requires regulators to continually develop new skills, and training programmes must adapt to these new conditions. This begs the question: How many universities in South Africa offer postgraduate training in financial market operations and regulation? The answer, regrettably, is not many, despite the financial sector being the largest in the South African economy.

13 See W Gbohoui et al., 'Sub-Saharan Africa's risk perception premium: In the search of missing factors', International Monetary Fund  Working Paper No. 2023/130 , June 2023.

When it comes to research, its purpose is not only to inform, but also to hold financial regulators  and  firms  accountable.  It  is  a  critical  component  in  improving  policy development and ensuring accountability in the regulatory environment.

Sometimes, poor university research is used to justify flawed policies or to discredit public institutions. As we contend with a proliferation of misinformation, it is essential for the academic community to ensure its members adhere to the highest academic standards to improve policymaking.

## Conclusion

In conclusion, the global environment has become more uncertain, and many of the critical  risk  factors  for  financial  stability  have  intensified.  T o  effectively  navigate  the modern financial landscape, central banks and regulators must embrace technology such as artificial intelligence for risk analysis, rapidly integrate climate-related risks into supervisory frameworks, and enhance international and cross-sector collaboration to prevent regulatory divergence.

We do not need deregulation. Instead,  we can regulate more smartly, but the risk environment requires us to step up, not step back. The most effective policy actions are those that are informed by robust analysis and which are coordinated across policy areas,  institutions  and  countries.  In  this  environment,  academic  institutions  play  a critical  role  by  providing  research,  holding  financial  regulators  accountable,  and protecting their independence.

Thank you.

## References

Bank for International Settlements (BIS). 2025. Annual Report 2024/25. Basel: BIS.

Dahlgren, S et al. 2023. 'Assessment of the European Central Bank's Supervisory Review and Evaluation Process: Report by the Expert Group to the Chair of the Supervisory Board of the ECB'.  Frankfurt am Main: European Central Bank.

Dell'Ariccia, G et al. 2018. 'Managing the sovereign-bank nexus', International Monetary Fund (IMF) Departmental Paper No. 18/16 . Washington, DC: IMF.

Feyen, E et al. 2023. 'Fintech and the future of finance: Market and policy implications' Washington, DC: World Bank Group.

Financial Stability Board (FSB). 2024. 'The financial stability implications of artificial intelligence', Basel: FSB.

Gbohoui, W, Oudedraogo, R and Some, Y M. 2023. 'Sub-Saharan Africa's Risk perception premium: In the search of missing factors'. International Monetary Fund (IMF) Working Paper No. 2023/130. Washington DC: IMF .

Makrelov, K et al. 2023. 'Fiscal risks and their impact on banks' capital buffers in South Africa'. South African Journal of Economics 91(1): 116-134.

Merrino, S and Harris, L. 2025. 'Basel III and South African banking: Assessing the effects'. South African Journal of Economics 93(1): 3-5.

Monnin, P, Sikhosana, A and Singh, K. 2024. 'Transition and systemic risk in the South African banking sector: Assessment and macroprudential options'. South African Reserve Bank (SARB) Working Paper Series WP/24/12. Pretoria; SARB.

Náñez Alonso, S L et al. 2024. 'Bitcoin's bubbly behaviors: Does it resemble other financial bubbles of the past?' Humanities and Social Sciences Communications 11(1): 715.

Reinhart, C M and Rogoff, K S. 2009. 'The aftermath of financial crises'. American Economic Review 99(2): 466-472.",Lesetja Kganyago
https://www.bis.org/review/r251002f.htm,Frank Elderson: From charting the course to staying the course - the path ahead for climate and nature risk supervision,"Keynote speech by Mr Frank Elderson, Member of the Executive Board of the European Central Bank and Vice-Chair of the Supervisory Board of the European Central Bank, at the ECB industry dialogue on ""Climate and nature risk management: taking stock and looking ahead"", Frankfurt am Main, 1 October 2025.",2025-10-01 00:00:00,"SPEECH

## From charting the course to staying the course: the path ahead for climate and nature risk supervision

Keynote speech by Frank Elderson, Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB, at the ECB industry dialogue on ""Climate and nature risk management: taking stock and looking ahead""

Frankfurt am Main, 1 October 2025

## Introduction

Good morning and a very warm welcome to our industry dialogue on climate and nature-related risks 4]

(C&amp;N)

It is great to see so many of you here today to share your views, discuss progress and explore solutions to the challenges we still face. Together, we have all come a long way since we first started discussing C&amp;N risks in 2019.

Back then, the idea of C&amp;N risks featuring structurally in banks' risk appetite, risk management and stress-testing frameworks seemed a distant goal.

Today, however, we can see that banks across Europe have made impressive strides in building the capacity to account for C&amp;N risks. Thanks to the hard work of many — not only in the boards but also in front offices, risk management and internal audit, to name just a few areas — considerable expertise has been built up. As a result, European banks have made good progress in identifying and managing C&amp;N risks — and, crucially, in seizing the business opportunities from the transition that our economies are undergoing. Industries such as cement, steel, energy and shipping are part of the backbone of the European economy, yet they are also some of the largest contributors of emissions. With that in mind, | am particularly pleased that representatives from the corporate sector will speak to us about their own decarbonisation and adaptation journeys later today. Close collaboration between corporates and banks is an essential driver of decarbonisation, and the associated transition finance presents a clear business opportunity for banks.

## Supervisors and banks have taken action

But let me start by taking you back ten years, almost to the day, to Mark Carney's landmark speech on the tragedy of the horizon! — a speech that brought climate change squarely into the realm of financial stability. Decisive action has been taken since then.

When the ECB started discussing C&amp;N risks with banks, we were moving very much in lockstep with many other prudential authorities around the world, drawing on the experiences and practices developed in the Central Banks and Supervisors Network for Greening the Financial System (NGFS). Back in 2019 the NGFS had 45 members; today it has grown to 149 central banks and supervisors that all agree on the relevance of C&amp;N risks in the pursuit of their mandates. |]

But supervisors have not been alone in taking action: insurers, investors, financial market participants and banks have charted a course from awareness to preparedness.

Looking at the banks under our supervision, we see that they now have the institutional architecture in place to identify, monitor and manage C&amp;N risks.4] This means that all banks have defined key risk indicators for climate risk and have included climate risk in their stress-testing frameworks, while the vast majority of banks also have frameworks in place to start quantifying some capital needs.

That being said, there is still more work to do to make sure that banks are applying sound practices across all relevant portfolios, exposures and risk categories, and that they are effectively implementing their policies across the board. And we also need to continue improving measurement and estimation methodologies and broaden the risk management toolkit to enhance banks' resilience ahead of time.

In light of this greater preparedness and the challenges that remain, some may wonder about the path ahead for C&amp;N risk supervision. Are we staying the course in ensuring that banks adequately manage their C&amp;N risks? And do current discussions about banks' competitiveness have an impact on our commitment?

## Staying the course remains crucial

Let me start with the first question: are we staying the course? Considering the materiality of the climate and nature crises, taking a step back is not an option.

C&amp;N risks are not just appearing at distant time horizons but are becoming an increasingly immediate concern for financial stability and economic growth.

Consider that, in the next five years, extreme weather events could account for a loss of up to 5% of euro area economic output. That would be a shock similar in magnitude to the great financial crisis. Analysis by the ECB, the University of Oxford and the London School of Economics shows that too much water, too little water or polluted water pose the most urgent risk to economic output in the euro area

The insurer Munich Re reports that damage from natural disasters has already increased from an average of USD 131 billion per year over the past 30 years to USD 320 billion in 2024 alone.) Similarly, Swiss Re records insured losses climbing by 5% to 7% every single year] And the trend is only moving upwards.)

Science is also clear about what is still to come: global heating is on the brink of passing 1.5 degrees; the world is on track for an average temperature increase of 3.1 degrees by the end of the century"". and Europe, the fastest-warming continent, is heating up at twice the global averagel!2] And just earlier this week the European Environmental Agency warned that the degraded state of our natural ecosystems is putting our European way of life at risk.23]

From a risk-based perspective, there is no other option but to stay the course and continue to ensure that banks are resilient to all material risk drivers.

Taking a step back on C&amp;N risks would mean failing to account for a material factor that determines banks' soundness. No matter where political headwinds are blowing, the risks from climate change will stay, be it from physical or transition risks — and likely a combination of both.14]

It is therefore no surprise that climate-related risks continue to feature in the ECB's supervisory priorities. This is in line with the Basel Core Principles""), which were revised only last year, including to explicitly refer to climate-related risks, and the NcFs.45]

And it is not just the supervisory community that recognises the need to stay the course:

""Climate change is a fact and its effects are being felt all around us ... every step counts ... tenth of a degree matters.""

every

""The cost of climate change is going up. This is not a short-term thing that's going to go away.""""&amp;]

""Our clients are in transition to net zero. That's unabated some of the despite challenges.""""I

""If insurance is no longer available ... no more mortgages ... the financial sector as we know it ceases to function ... capitalism as we know it ceases to be viable.""29]

Now, these words do not come from me, the Basel Committee or the NGFS. These are your words. And by this | mean the words of CEOs and board members of major banks and insurers.

The message closely mirrors that of the banks we supervise, which now overwhelmingly consider C&amp;N risks as a material source of financial risk.24

## The path ahead for climate and nature risk supervision

As C&amp;N risks are material and their manifestations will only become more frequent and more severe, it is critical that supervisors continue to focus their attention on them. What does this mean in practice? First, as we approach the end of the multi-year programme launched by the ECB in 2020, C&amp;N risk management in European banks has reached a stage of maturity that we can now move from a foundational to a business-as-usual approach in our supervision. In short, this means that our Joint Supervisory Teams monitor each individual bank and follow up, ensuring that any outstanding findings are adequately remedied in a timely manner. It also means that C&amp;N risks will feature in our standard and regular supervisory activities such as on-site inspections, fit and proper assessments, provisioning analysis or the baseline and adverse scenarios in stress tests.

Second, while we acknowledge that banks' C&amp;N risk management has become more robust, it remains crucial that banks make self-sustained progress in applying sound practices more comprehensively. This is because, in many cases, we see that sound practices are often only applied to a subset of relevant exposures, geographical areas or risk categories. For instance, a bank's C&amp;N risk management may not cover all of its relevant assets, or a bank may focus only on transition risks but not on physical risks — and vice-versa — in certain portfolios. Additionally, some of the prudential transmission channels, such as operational or market risk, receive far less attention compared with credit risk.

Let me use real estate lending as an example. Although mortgage lending is a sizeable share of most European banks' business, it is not always fully incorporated into their C&amp;N risk management frameworks. This means that some banks consider only transition risks in their collateral valuation, while neglecting physical risks. And even when banks do account for both physical and transition risks, or have established key risk indicators, they do not consistently link them to concrete follow-up actions in their risk management.

That is why our supervisory teams will continue to track progress and urge banks to implement sound practices across all material portfolios, geographical areas and risk categories, covering both physical and transition risks.

For banks to do this, a vital prerequisite is having reliable, meaningful and comparable data from companies. Therefore, excluding too many firms from the Corporate Sustainability Reporting Directive (CSRD) could impair the availability of comparable information about important parts of our economy.

22] And as the legislators highlighted in the CSRD in the absence of ""a consensus on the information that undertakings should report, there will be significant increases in terms of cost and burden for reporting undertakings and for users of such information""22).

Third, with regard to transition planning considering banks' preparedness in managing C&amp;N risks, banks under our supervision are well positioned to meet the prudential transition planning requirements that will come into effect in 2026.24] We will therefore approach transition planning in a gradual and targeted way in dialogue with the industry and focusing on new elements regarding C&amp;N risks in the European Banking Authority's Guidelines on the management of environmental, social and governance risks.

And lastly, allow me to say a few words on good practices, which we will have the opportunity to discuss later today.

Good practices are not new requirements. Good practices are not intended to create additional complexity or to continuously raise the bar.

Instead, from our vantage point as pan-European supervisor, where we can look closely at the inner workings of banks across the continent, we have compiled a repository of effective approaches that are already being applied in banks.

We view this repository as a useful tool for banks to explore potential avenues for meeting supervisory expectations. Clearly, the way the good practices are used will not be the same at each and every bank, given their different characteristics and business models. In other words, banks can have sound C&amp;N risk management by implementing practices not (yet) listed in our repository. And for the avoidance of any doubt, applying the ECB's good practices will not be seen as a prerequisite for compliance with the European Banking Authority's guidelines.

Importantly, good practices can help banks address challenges in specific areas where we know some are struggling. For example, quantifying and managing the financial risks stemming from the degradation of our natural ecosystems remains a complex task.25] We are, however, seeing a growing set of good practices in the area of nature-related risks being adopted by many banks across Europe.

26] That's why we plan to include these examples in the updated set of good practices that we aim to publish later this year.

## Preparedness gives European banks a competitive edge

Before concluding, allow me to focus for a moment on the transition of our economies more broadly. Reading the news nowadays, one might wonder: is the transition in full swing, or has it stalled? Let's consider a few figures.

Since the Paris Agreement was adopted, renewable energy has increased by 140% and investment in clean energy has increased by 80%. And in Europe, our emissions have fallen by almost 40% compared to 1990.

Arecent report by PwC found that, of the 4,000 firms that made climate commitments last year, 47% have upheld them, 37% have become more ambitious, and only 16% have dialled back.24 In addition, last year saw the world add 585 gigawatts of new renewable energy capacity — an increase of almost 20% compared with the previous year.25! interestingly, 91% of these new renewable projects were more cost-effective than any fossil fuel-based alternatives.

These and many more examples led The Economist to conclude that we are moving from a time of ""greenwashing' to one of ""greenhushing"" — which means getting on with the job of decarbonisation without making a fuss, 29]

With carbon neutrality by 2050 enshrined in the binding European Climate Law, many players across the economy are already making significant progress on their decarbonisation journeys.

But it is also no surprise that the transition continues to require vast investment. Achieving the binding EU intermediate target of reducing emissions by 55% by 2030 requires around €1.2 trillion of investment — not in total, but every single year, 29]

This vast financing need presents a business opportunity for banks to help their clients to navigate the transition.

Our latest euro area bank lending survey shows a net increase in demand for loans to green firms and businesses undergoing transition, highlighting the growing demand for transition finance.

Having the data and information architecture from risk management in place helps banks to support clients transitioning in sectors they know very well. By way of example, some banks are leveraging corporate power purchase agreements to increase their financing of renewable energy projects. Beyond lending, banks can also capitalise on transition finance by offering advisory services to assist their clients on their decarbonisation pathways, diversifying their revenue streams.

Moreover, the global sustainable finance market has seen notable growth in recent years. Assets under management in sustainable funds grew by around 80% between 2020 and 2024, while sustainable bonds increased threefold between 2019 and 2023. European banks are emerging as industry leaders in these fields. Maintaining this competitive edge is therefore crucial, as we reflect on the broader competitiveness of banks and Europe as a whole.

## Conclusion

Let me conclude.

Over the past few years, we have witnessed impressive progress in building the capacity to account for C&amp;N risks in the banking sector. Banks and supervisors have successfully charted the course towards ensuring banks are resilient to these risks, while also positioning themselves to seize the opportunities presented by the green transition.

In the face of changing climates — whether economic, political or indeed at the level of our planetary ecosystem — we cannot afford to delay, dilute or defer our efforts. Instead, we must stay the course.

This means making sure that banks manage their risks effectively, remedy remaining inadequacies in a timely manner andremain resilient going forward.

Collaboration will be key if we are to succeed. Today's dialogue, which brings together banks, supervisors, financial market participants and, crucially, representatives of the real economy, is a testament to the value of working together.

| would therefore like to thank you all for participating in this dialogue and | wish you all a fruitful discussion.

Thank you for your attention.

1.

In European banking supervision we have typically referred to climate-related and environmental risks, or C&amp;E risks. For the purposes of this speech, | will consider the terms ""environmental risks"" and ""nature-related risks"" as interchangeable.

2.

Carney, M. (2015), ""Breaking the tragedy of the horizon — climate change and financial stability"", speech at Lloyd's of London, 29 September.

3.

In addition to the steps taken from a supervisory perspective, the ECB takes climate change and nature degradation into account equally seriously in the pursuit of its price stability mandate. See Elderson, F. (2025), ""Deepening our commitment to confronting the climate and nature crises"", welcome address at the International Monetary Fund OEDNE/World Bank Group EDS19 Constituency Meeting, Luxembourg, 4 July; and Lagarde, C. (2025), ""Strategy assessment: lessons learned"", introductory speech at the opening reception of the ECB Forum on Central Banking, Sintra, 30 June.

4.

must continue"", The Supervision Blog, ECB, 11 July.

5.

Losses from the droughts, heatwaves and floods that hit the EU this summer are estimated at €43 billion; this figure could climb to €129 billion by 2029, and that is likely to be an underestimation. See Usman, S., Parker, M. and Vallat, M. (2025), ""Dry-roasted NUTS: early estimates of the regional impact of 2025 extreme weather"", 14 September.

6.

Mauderer, S. and Stracca, L. (2025), ""Climate risks: no longer the tragedy of the horizon"", The ECB Blog, ECB, 9 July.

7.

Ceglar, A., Danieli, F., Heemskerk, I., Jwaideh, M. and Ranger, N. (2025), ""The European economy is not drought-proof"", The ECB Blog, ECB, 23 May.

8.

While the damage from natural disasters (corrected for inflation) averaged USD 131 billion per year worldwide over the past 30 years, it averaged USD 236 billion over the past ten years and USD 268 billion over the past five years. See Munich Re (2025), ""Climate change is showing its claws: The world is getting hotter, resulting\_in severe hurricanes, thunderstorms and floods"", 9 January.

9.

Swiss Re Institute (2025), Natural catastrophes: insured losses on trend to USD 145 billion in 2025, sigma report, 29 April.

10.

For Germany alone, climate-related damages between 2000 and 2021 were estimated to amount to €145 billion, and without effective climate protection, Germany faces damages of up to €900 billion between now and 2050. See DIW Berlin (2025), ""Zwei Jahrzehnte Klimakostenforschung: Praventiver Klimaschutz als volkswirtschaftlicher Vorteil"", DIW Wochenbericht, No 38/39, pp. 613-619.

11.

United Nations Environment Programme (2024), Emissions Gap Report 2024, 24 October; Intergovernmental Panel on Climate Change (2023), Climate Change 2023 Synthesis Report — Summary for Policymakers, March; Some recent research even suggests that the threshold of 3 degrees may already be reached by 2050. See Deutsche Physikalische Gesellschaft (2025), ""Globale Erwarmung beschleunigt sich — Ein Aufruf zu entschlossendem Handeln"", 24 September. 12.

Copernicus Climate Change Service and World Meteorological Organization (2024), European State of the Climate — Summary 2023, April.

European Environment Agency (2025), Europe's environment and climate: knowledge for resilience, prosperity and sustainability, 29 September.

14.

For more information on why C&amp;N risks form part of a comprehensive view on banks' resilience and are the opposite of being political, see Elderson, F. (2025), ""What good supervision looks like"", keynote speech at the 24th Annual International Conference on Policy Challenges for the Financial Sector, 12 June.

15.

The Basel Core Principles state that ""Banks should understand how climate-related risk drivers may manifest through financial risks, recognise that these risks could materialise over varying time horizons (which may go beyond their traditional capital planning horizon), and implement appropriate measures to mitigate these risks. Supervisors are also expected to consider climate-related financial risks in their supervision of banks, to assess banks' risk management processes, and to require banks to submit information that makes it possible to assess the materiality of climate related financial risks.""

16.

In addition, also the European Insurance and Occupational Pensions Authority continues to consider climate-related risks in the exercise of its mandate. See European Insurance and Occupational Pensions Authority (2024), ""Final Report on the Prudential Treatment of Sustainability Risks for

Insurers"", 7 November; and European Insurance and Occupational Pensions Authority (2025), ""EIOPA risk assessments"", 23 July.

17.

Steven van Rijswijk, CEO of ING Group. See ING (2023), ""ING publishes 2023 Climate Report"", 5 October.

18.

Evan Greenberg, CEO of Chubb. See Vanderford, R. (2024), ""Pricier Insurance Makes Sense as Climate Risk Grows, Chubb CEO Says"", The Wall Street Journal, 7 May.

19.

Bill Winters, CEO of Standard Chartered. See Furness, V. (2025), ""StanChart pledges to cut emissions linked to oil and gas bonds"", Reuters, 21 February.

20.

Gunther Thallinger, Member of the Board of Management and Chairman of the Sustainability Board, Allianz. See Carrington, D. (2025), ""Climate crisis on track to destroy capitalism, warns top insurer"", The Guardian, 3 April.

21.

More than 90% of banks under our supervision now consider C&amp;N risks as material, while back in 2021 only 56% reached this conclusion.

22.

Opinion of the European Central Bank of 8 May 2025 on proposals for amendments to corporate sustainability reporting and due diligence requirements (CON/2025/10),

23.

See Recital 15 of Directive (EU) 2022/2464 of the European Parliament and of the Council of 14 December 2022 amending Regulation (EU) No 537/2014, Directive 2004/109/EC, Directive 2006/43/EC and Directive 2013/34/EU, as regards corporate sustainability reporting (Text with EEA relevance) (OJ L 322, 16.12.2022, p. 15).

24.

must continue"", The Supervision Blog, ECB, 11 July.

25.

See Elderson, F. (2025), ""Nature's bell tolls for thee, economy!"", speech at the Naturalis Biodiversity Center, Leiden, 22 May; and Ceglar, A., Danieli, F., Heemskerk, |., Jwaideh, M. and Ranger, N. (2025), ""The European economy is not drought-proof', The ECB Blog, ECB, 23 May.

26.

Banks have significantly improved their nature risk management in recent years. While in 2022 almost 40% of banks had not yet defined a formal approach for managing nature risks, today only 7% lack a clear strategy. Around three-quarters of banks today are using quantitative approach to monitor and manage nature-related risks. Although many banks have yet to systematically link their materiality assessments to a risk management response, the ECB recognises the steps taken to develop sophisticated tools for risk quantification and management.

27.

PwC (2025), ""PwC's Second Annual State of Decarbonization Report"", 20 March.

28.

International Renewable Energy Agency (2025), Renewable capacity statistics 2025, March.

29.

vo The Economist (2025), ""The remarkable rise of ""greenhushing"""", 29 July.

30.

European Commission (2024), ""Securing\_our future — Europe's 2040 climate target and path to climate neutrality by 2050 building a sustainable, just and prosperous society"", Commission Staff Working",Frank Elderson
https://www.bis.org/review/r251001a.htm,Sarah Breeden: Bumps in the road?,"Speech by Ms Sarah Breeden, Deputy Governor for Financial Stability of the Bank of England, at the Cardiff Business School, Cardiff, 30 September 2025.",2025-09-30 00:00:00,"Opens

Skip to main content

## Bumps in the road? - speech by Sarah Breeden

Given at Cardiff Business School

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Published on 30 September 2025

In this speech, Sarah Breeden sets out her view on why the recent 'hump' in inflation is unlikely to lead to additional inflationary pressure. She notes that while the underlying disinflationary process looks to be on track, policymakers face a balancing act as they manage the risks around this outlook.

## Speech

## Introduction

Good afternoon and thank you for the invitation to speak here at Cardiff Business School. It's a real pleasure to be here in Cardiff - a city that has shown the world the value of teamwork, whether through rugby at the Principality Stadium or in its history as a hub of global trade, as well as the importance of innovation, as exemplified by the regeneration of Cardiff Bay. Similarly, Cardiff Business School has been at the forefront of nurturing future leaders and thinkers, equipping them with the skills to navigate the ever-changing economic landscape. It is the economic landscape that I wish to focus on today. And specifically, the path that inflation has taken over the past year.

Inflation has come down significantly since it hit double figures in late 2022, supported by the restrictive stance of monetary policy. But the road has not been smooth. Having fallen back to our 2% target last year, headline inflation has risen again, back up to 3.8% in the latest data for August. And we think it will have increased again to around 4% for September.

This is too high. While we expect inflation to begin to fall back from next month and gradually return to target thereafter, it is right that we question the risks around this projection. Specifically, does this latest 'hump' in inflation represent a mere 'bump' in the road? Or is it a sign that the disinflationary process is veering off track - that inflation is proving sticky not bumpy, meaning our hump is in fact a plateau?

As I do, I'll look at this through three lenses:

1. What new shocks have we faced and are they likely to generate additional second-round effects?
2. Are the old shocks playing out as expected or is there news we need to respond to?
3. What have we learnt about the impact of our policy? I will then look to bring this all together and set out what it means for my policy approach going forward.

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This 'hump' has not been a surprise. Indeed, the MPC had been forecasting a pick-up in inflation over 2025 since the time of the February MPR, with inflation then expected to rise to 3.5% in June and to peak at around 3.7% in Q3 (Figure 1). And the increase reflected factors largely unrelated to domestic inflationary forces - what I will call 'external' factors - such as administered prices like water, tax and previous falls in energy prices dropping out of the annual comparison.

Source: Bloomberg Finance L.P., Department of Energy Security and Net Zero, ONS and Bank calculations.



(a) Component-level Bank staff projections from January to June 2025 made at the time of the February 2025 MPR. For further detail see footnotes for Chart 2.19 in the February 2025 MPR. MPC projection for CPI inflation in 2025 Q3 made at the time of the February 2025 MPR.

We have received some upside news since then, with inflation now expected to peak a little higher, reaching 4.0% in September. This news too has largely reflected external factors. Using the May MPR for comparison[1], upside news to energy and food prices accounts for almost all of the surprise (Figure 2), with the stronger than expected outturns for services inflation in April and July explained by administered or erratic factors, such as recent volatility in airfares[2]. footnote footnote

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Sources: ONS and Bank calculations.



(a) Component-level decomposition of the news between the latest ONS CPI data and Bank staff projections from April to July 2025 made at the time of the May 2025 MPR. The projection for September shows the component-level decomposition of the news between the Bank staff projection at the time of the August 2025 MPR and the May 2025 MPR.

The rise in UK food price inflation, which reached 5.1% in August, reflects in large part a sharp increase in some agricultural commodity prices and so provides little signal on domestic inflationary pressures. Part of that rise in agricultural prices reflects adverse weather events. As I set out in a speech earlier this year ( Breeden, 2025 ), severe weather events can have significant impacts on agricultural commodity prices. And, as an economy that imports a high proportion of its food - around 40%[3] - UK inflation is highly susceptible to such changes. Indeed, over the past year droughts in major coffee-producing regions like Brazil and heavier than usual rainfall and plant diseases in some cocoa producing regions in Africa have pushed up on prices. footnote

There are likely to be some UK-specific factors at play too behind the rise in food prices. The increase in the National Living Wage and the change to the threshold at which employers start paying NICs are thought to have pushed labour costs higher. A new framework to reduce packaging waste (EPR) has also provided some upward pressure.

Are these likely to lead to additional second-round effects?

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Externally driven cost shocks like these matter most when they lead to inflation persistence or second round effects - when wages and other prices increase in response, keeping inflation higher for longer. Such second-round effects were important following the 2022 inflationary episode.

It has long been our central case that this 'hump' in inflation would not lead to additional second-round effects. In comparison to our experience in 2022, the peak is expected to be much lower (almost a third of the size), the labour market is much looser and the demand environment weaker, all of which mean that the chance of follow-on wage and price rises is much lower. Notwithstanding the recent upside surprise in inflation I just described, all three of these things still hold true.

Nevertheless, the significant rise in household inflation expectations since the recent lows in 2024 has given me some pause for thought (Figure 3).

Sources: Bank of England/Ipsos Inflation attitudes Survey, Citigroup, YouGov and Bank of England calculations.



(a) Bank/Ipsos data show the median responses from the Bak/Ipsos IAS. A methodological break occurred during the Covid pandemic that means a degree of caution should be taken when making long-run comparisons with these data. The methodology notes linked in the latest IAS release for February 2025 provide more information. Data are not seasonally adjusted and the latest data points are for 2025 Q3. Since August 2022, the YouGov/Citigroup survey has been based on updated response buckets. Data are not seasonally adjusted and the latest data points are for September 2025. Dashed lines represent the series averages over 2010-19.

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That household inflation expectations should rise in response to realised inflation is not unexpected ( Weber et al, 2022 ), particularly during periods of high inflation ( Pfauti 2024 ). But we have seen, in addition, an increase in the sensitivity of expectations to food prices. Indeed recent Bank staff analysis extending Anesti et al (2025) shows that the sensitivity of household inflation expectations to food prices has almost doubled in recent years[4] (Figure 4). Since household inflation expectations can influence pay demands in the wage-bargaining process, if expectations were to continue to rise with further increases in food prices, this could be a cause for concern. Opens Opens footnote

Sources: Citigroup, ONS, YouGov and Bank calculations.



(a) The chart shows the estimated coefficients from regressions of changes in Citi/YouGov one year ahead household inflation expectations on changes in the contributions of food price inflation and core CPI inflation to headline CPI inflation. The pre-2022 estimation period runs from 2005 Q1 to 2021 Q4, while the post-2022 estimation period runs from 2022 Q1 to 2025 Q2.

Whether the rise in household inflation expectations ultimately passes through into higher wages depends also on the outlook and behaviour of firms. Evidence from the literature suggests that, similar to households, firms' expectations are sensitive to current inflation, and this sensitivity can increase during high inflation episodes ( Yotzov et al, 2024 ). Recent moves in firms' inflation expectations have though been much more muted than those of households (Figure 5).

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Sources: DMP Survey and Bank calculations.



(a) CPI expectations are based on the questions 'As a percentage, what do you think the annual CPI inflation will be in the UK, both one year from now and three years from now?'. Own-price expectations are based on the question 'Looking ahead, 12 months from now, what approximate percentage change in your average price would you expect in each of the following scenarios: lowest, low, middle, high, highest'. Respondents were then asked to assign a probability to each scenario. A point estimate is constructed by combining the five scenarios with the probabilities attached to them. Firms that do not set regular prices are not asked about their own-price expectations. All series are presented as three-month moving averages.

There is little evidence in the literature to suggest conclusively whether firms' or households' expectations ultimately matter most for wage growth. That said, only around 10% of households in the latest Bank/Ipsos survey say they will respond to higher inflation expectations by pushing for higher pay with their current employer. This share has been broadly unchanged for the past ten years, despite the recent rise in wage growth, suggesting perhaps that firms' rather than households' expectations matter most.

The relative importance of firms' and households' inflation expectations is likely also to be state dependent. I find it plausible that the bargaining power of firms is greater when the labour market is looser. And so it is important context that a range of indicators point to a significant degree of slack having opened up in the labour market recently. Covid-aside, the unemployment-to-vacancies ratio is at levels not seen since 2015 and the balance between staff availability and demand in the REC survey is at levels not seen since 2008. Net desired hours wanted by workers are now also at levels not seen since 2015.

We need also to consider how firms would react to any additional wage pressure. The weaker demand environment, compared to 2022, reduces their ability to pass wage increases through to prices, making it more likely that any increase will be absorbed in firms' margins. Indeed,

Opens the Business Insights and Conditions Survey (BICS) suggests firms are now more concerned about demand than inflation. In late 2022, around twice as many firms in the BICS were concerned about rising inflation as were concerned about falling demand. As of September this year, that ratio has inverted.

## Are old shocks playing out as expected?

In addition to understanding new shocks, we must of course also monitor whether disinflation from the 'old' 2022 shock is continuing as we expected, particularly given the noticeable stalling in the downward trajectory of services price inflation over 2025.

Services consumer price inflation has been broadly flat over recent months, at a little under 5%. This remains notably above target consistent levels (around 3%) and above levels recorded in other advanced economy regions, such as the Euro Area, where it is running closer to 3%. This could be taken as a signal that the disinflationary process from the 2022 shock is veering off track in the UK, with persistence taking longer to dissipate and with our hump turning into a plateau.

Much of this apparent slowing in disinflation can in fact be explained by the administered prices I described earlier. And as my colleague Swati Dhingra points out in an recent op-ed, these can also help explain a chunk of the difference in services price inflation between the UK and the Euro Area (Figure 6, LHS). Inflation in services set by administered and indexed prices, such as water bills and education, combined with private rent growth, is three times higher in the UK than in the Euro Area, while prices in 'market-based' services such as leisure and hospitality grew at similar rates. Indeed, the recent increase in UK administered pries, combined with the lingering strength in private rent growth, explains over 90% of the EA-UK services inflation gap.

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Sources: ONS and Bank calculations.

- (a) Administered and indexed prices as sewerage, dental, vehicle excise duty, tram, underground and bus transport, communications, TV licence fees, social rents, and education which comprise one-quarter (24%) of the UK services basket.

Euro Area inflation statistics do not separate out private and social rents in HICP. We typically consider social rents to be administered, so include both private and social rents with administered prices for both the UK and Euro Area. Including rents within market-based services does not materially alter the story.

(b) The low variance measure is calculated by weighting each component of services inflation by the inverse variance of the change in 12-month inflation of that component from 12 months previously. The maximum adjusted weight is capped at twice its original value. The trimmed mean measure excludes the 10% largest and 10% smallest price changes. The latest data points shown refer to August 2025.

We can also take some comfort that the disinflation process is continuing from measures of underlying services price inflation, which have continued to fall back (Figure 6, RHS). But even these measures remain at levels above what would be considered target consistent.

This strength in services inflation appears to reflect persistence in wage growth, rather than additional persistence in firms' pricing behaviour. A simple Autoregressive Distributive Lag (ARDL) model estimated by Bank staff, shows that the level of core services inflation (excluding rents) seen since mid-2023 can be well explained by wage growth and producer price inflation (Figure 7). There was some unexplained strength in 2025 Q2, but this can be rationalised by those unusually strong increases in administered prices I described earlier.

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Sources: ONS and Bank calculations.



- (a) Estimated contributions to core services inflation excluding rents are based on autoregressive distributed lag regressions of services inflation on metrics of pay growth and manufacturing PPI inflation.

While wage growth continues to fall back, it remains above levels that can be explained by economic fundamentals. The latest intelligence from our Agents however continues to suggest that pay growth will fall back to around 3.7% by the end of the year - a level that is consistent with the latest data on pay settlements too. This outlook is pretty much unchanged on the start of the year. And this suggests to me that there is little to suggest that persistence in wage growth will prove any more sticky in light of the 'hump' than we had anyway expected.

Looking further ahead, wage growth is expected to fall back further over 2026. Year-ahead expectations for wage growth in the DMP Survey have crept down further to around 3.6%.and I expect this in turn to pass through to lower services price inflation.

Taken together, therefore, I judge the underlying disinflationary process from past shocks to remain on track. Wage growth has fallen back and I have little reason not to believe it will continue to do so as we look ahead, bringing services inflation lower alongside it.

What have we learnt about the impact of policy?

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Of course past increases in Bank Rate have contributed to this disinflationary process by weighing on demand.

We set out our latest model-based estimates for the impact of Bank Rate in the August MPR (Figure 8). Precise estimates of the impact are inevitably uncertain, and there is evidence to suggest that the relationship can change over time ( Mumtaz, 2010 ). This could result from non-linear or asymmetric effects of monetary policy ( Stenner, 2022 ) or from underlying changes in the structure of the economy. Opens Opens



Sources: Bank of England, ONS and Bank calculations.

(a) The estimates for the contribution of the OIS curve to the level of UK GDP are the sum of the impacts on consumption, business investment, housing investment and the net imports offset in the MPC's baseline projections. The net imports offset component reflects that part of the reduction in consumption from higher interest rates will arise from lower spending on imported goods, which mechanically pushes up GDP. These estimates are based on the standard treatment of the impact of changes in Bank Rate and the OIS curve in the Bank's forecasting models. Bank staff estimate the impact of changes in the OIS curve between each Monetary Policy Report on the level of GDP, and these are then summed to obtain estimates of the total contributions. The estimates incorporate an impact from changes in the OIS curve on the level of GDP that persists over several years. The level of the aqua bars in the first data point in 2021 Q3 therefore reflects the estimated impact on demand of changes in the OIS curve from several years prior to that date. The effects of the estimated impact of changes in the OIS curve on sterling exchange rates have been excluded. The final data are for 2025 Q2.

These uncertainties have made it important for the MPC to consider bottom-up analysis alongside top-down model-based estimates of monetary policy transmission. By doing so we look to judge how restrictive we are with policy. One of the clearest indicators that higher interest rates have weighed on demand has been the rise in the household savings ratio which now stands at just over 10% (although other factors - precautionary motives related to heightened uncertainty or structural factors - could have played some role too).

Opens

As set out in the August MPR, several of these bottom-up indicators suggest the impact of past increases in Bank Rate on the level of GDP is now around its peak. For example, survey evidence from the NMG and the DMP show that the numbers of households and firms reporting higher interest rates as a reason for higher saving or constraining capital spending are falling. Nonetheless, the impact of some channels continues to build. For example, 3.4 million mortgage holders expect to see an increase in payments over the next three years, compared to 2.8 million expecting a decrease (Figure 9).



Sources: Bloomberg Finance L.P., FCA Product Sales Data and Bank calculations.

(a) There are around 8,908,000 mortgages in the UK. There are 100 squares, each representing 1% of the total current stock of UK mortgages (around 89,080 mortgages), rounded to the nearest 1%. The projection uses the OIS curve as at 31 August 2025 and the latest available data (2025 H1) on the stock of outstanding mortgages. Changes in payments on variable-rate mortgages are calculated using the implied change in the OIS curve, and changes in payment on fixed-rate mortgages are calculated by assuming that mortgagors refinance onto a typical fixed rate implied by the OIS curve at the point that their fixed-rate contract ends. Mortgages with less than £1,000 outstanding are excluded. These data do not include buy-to-let mortgages or mortgages that are off balance sheet of authorised lenders, such as securitised loans or loan books sold to third parties.

It is partly through demand, which in turn feeds through into inflation expectations, that the restrictive stance of monetary policy is expected to lean against remaining persistence. But monetary policy restrictiveness may also plausibly influence inflation expectations directly, by reassuring the strength of the inflation anchor which in turn can move inflation via price or wage setting decisions.

Opens

Looking ahead, although the impact of past rises in Bank Rate looks to be around their peak, they will still be weighing on the level of demand and so continue to contribute to the disinflationary process. While the degree of restrictiveness has fallen over the past 18 months as the MPC has reduced Bank Rate, I still judge the current monetary policy stance to be restrictive and so continuing to squeeze persistence from the system.

## The inflation and policy outlook

Taken together, what does this mean for my outlook for inflation and so policy?

I do not see evidence that the disinflation process is veering off-track. Instead it remains my central case that the 'hump' will prove just a bump in the road. As I set out:

- The current 'hump' has been driven by external shocks that are not a reflection of domestic inflationary pressures.
- With a looser labour market and weaker demand than in the 2022 inflation episode, I continue to see it as unlikely that we will see additional second-round effects.
- The underlying disinflationary process from past shocks remains on track. Wage growth has fallen back and I have little reason to believe it will not continue to do so. This should, in turn, pass through to lower services price inflation next year.
- Monetary policy continues to contribute to the ongoing disinflationary process. While the degree of restrictiveness has fallen over the past eighteen months, I still judge the monetary policy stance to be restrictive and to be squeezing persistence from the system.

But there are, of course, risks around these conclusions. And I am mindful of the risk of moving to a high inflation track, particularly after four years of above target inflation.

First, it is possible that new shocks will materialise. As my colleague Meagan Greene set out last week, there are reasons to believe we have entered an age of supply shocks ( Greene, 2025 ). We have experienced a series of repeated supply shocks over recent years, and transformational trends such as climate change and geoeconomics mean it is possible (perhaps even probable) that we may see more going forward.

Second, there might have been a structural change in firms' pricing behaviour so that the 'hand-off' from lower wage growth to services price inflation may not occur as we are expecting.

I described earlier how services price inflation has been explicable given wage growth over recent years. But there are some signs that suggest that the pricing behaviour of firms remains consistent with a high inflation regime. The price microdata underlying the CPI show that the net share of services prices (excluding catering and accommodation) increasing each

Opens month has not shown any meaningful moderation since 2022 (Figure 10). This might just reflect additional (one-off but repeated) cost shocks. But it might also indicate something about firms' margins, or their ability and willingness to push through price changes.



Sources: ONS and Bank calculations.

(a) Chart shows a 12-month rolling average. The latest data points refer to August 2025.

Third, it might take longer for the degree of slack in the economy to squeeze the remaining persistence from the system.

Indeed, as we set out in the August MPR, there remains significant uncertainty over the degree of slack in the economy. Model-based estimates of the output gap based on capacity utilisation and labour market data suggest a margin of slack has opened up. However, the signal from nominal indicators remains consistent with a margin of excess demand (Figure 11).

I place more weight on the capacity utilisation and labour market measures, and so judge that a degree of slack has opened up. However, this disconnect - and in particular its scale - is a reminder of the nominal puzzle that we face. Indeed, it is possible that the degree of slack is smaller; the degree of persistence larger; or the mechanisms between them weaker than we have assumed. In any of these cases, it might take longer for inflation to return sustainably to target.

Opens



Sources: ONS and Bank calculations.

(a) The model is estimated over 2000-2025 Q2 using the two-step estimator from Doz et al (2011) , obtained from running the data through a Kalman filter and smoother once. The first factor of the dynamic factor model is interpreted as a measure of slack. The factor is then mean-variance adjusted to the MPC's baseline output gap estimate over 2000-2025 Q2. The labour market block is estimated using survey indicators of slack and the vacancy gap. The capacity utilisation block includes a range of surveys of capacity utilisation also used in the left panel of this chart. The nominal block contains measures of pay and underlying inflation. The data are shown to 2025 Q2. Opens

In such a world it may be tempting to wait to see the 'whites of disinflation's eyes' before looking to reduce the restrictiveness of policy further. But managing the upside risks to inflation in this way brings risk in the other direction: holding policy too tight for too long comes with costs to output and employment, which could then pull inflation below target .

More broadly, there are downside risks to demand which could also pull inflation below target further out. I have for some time seen risks to the outlook for consumption given that it is predicated on a substantial decline in the savings rate. Our previous projections of material declines in the savings rate have failed to materialise, possibly signalling a structural change in household savings behaviour. And heightened uncertainty whether for domestic or global reasons might weigh on demand too.

## Conclusion

We expect inflation this month to peak at 4%, well above our target. It is too high and it is our job return it to target sustainably.

Opens

The good news is that this ""hump"" reflects external shocks, and in the current environment it is unlikely, in my judgement, to lead to additional inflationary pressures. Moreover, I have not seen any evidence yet to suggest that the underlying disinflationary process from past shocks is veering off-track. So far so good.

However, the path ahead is not assured. Indeed we face risks on both sides - that greater persistence means inflation turns out to be sticky not bumpy, and that unexpectedly weak demand causes an unanticipated easing in price pressures. Steering a path that manages both risks is not easy.

With this context, I will be focused on identifying those indicators that give me confidence that the future disinflationary process - in particular the 'hand-off' from wages to services price inflation - is remaining on track. Indicators of pricing intentions, from surveys and intelligence from our Agents, will be important here, as will conversations like those I have had in Cardiff today underlining the important part you're playing in the team trying to understand what's going on in the economy. Indeed we might think of indicators such as these as signposts that help determine whether we are likely to veer off track. And they will therefore be key in determining when it might be appropriate to remove further restrictiveness.

I would like to thank Nicola Shadbolt for her assistance in drafting these remarks. I would like to thank Emily Fry and Swati Dhingra for their work comparing administered services price inflation in the UK and Euro Area. I would also like to thank Giulia Gardin, Matthew Naylor, Ivan Yotzov, Meghna Shrestha and Andrea Sisko, Rupert de Vincent-Humphreys, Carleton Webb, James Talbot, Martin Seneca and Andrew Bailey for their helpful input and comments. The views expressed here are not necessarily those of the Monetary Policy Committee (MPC) or the Financial Policy Committee (FPC).

1. Our short-term inflation forecasts only extend six months, and so we use the May MPR forecast, as we do not have a component-level forecast for the February MPR for July and August. The narrative for the news relative to April, May and June would be the same if we used the February MPR for comparison.
2. The upside news to services price inflation in April and July primarily represented a larger than expected impact from the increase in Vehicle Excise Duty in April ¼pp and from and volatility in airfares in July 0.2pp.

## 3. UK Food Security Index 2024 - GOV.UK Opens

4. While a 1 percentage point increase in the contribution of food prices to CPI inflation was historically associated with a roughly 1 percentage point increase in the Citi/YouGov measure of one-year ahead household inflation expectations, this effect has increased to 1.8 percentage points since 2022.",Sarah Breeden
https://www.bis.org/review/r250925c.htm,"Cosmin Marinescu: Speech - ""New technology for old markets"" conference","Speech by Mr Cosmin Marinescu, Deputy Governor of the National Bank of Romania, at the inaugural edition of the ""New Technology for Old Markets"" conference, Chișinău, 19 September 2025.",2025-09-19 00:00:00,"## Cosmin Marinescu: Speech - ""New technology for old markets"" conference

Speech by Mr Cosmin Marinescu, Deputy Governor of the National Bank of Romania, at the inaugural edition of the ""New Technology for Old Markets"" conference, Chiinu,  19 September 2025.

* * *

Dear Governor Dragu, Distinguished colleagues, Esteemed guests, Ladies and gentlemen,

It is an honor to address you today at the inaugural edition of the ""New Technology for Old Markets"" conference - a truly remarkable event that brings together Banque de France, the National Bank of Moldova and the National Bank of Romania.

Today's event is about more than ideas - it is about building bridges between authorities, countries, and generations. And for me, personally, it is also about celebrating the strong and enduring partnership between the National Bank of Romania and the National Bank of Moldova - a partnership rooted in trust, shared history and a joint vision for the future.

This year holds special significance for us in Romania: we are marking the 145 th anniversary of the National Bank of Romania. For nearly a century and a half, we have navigated financial storms, embraced economic transitions, and adapted to shifting market realities.

But never have we faced such a profound wave of transformation as the one driven by the digital era that is reshaping the entire society as well as the working platform for public policies, particularly for fiscal and monetary policy.

The theme of our conference - New Technology for Old Markets - could hardly be timelier. We live in a world where change does not politely knock at the door - it rushes in, demands full attention, and resets the rules.

Emerging economies like ours stand at a crossroads: digital transformation brings great opportunities for growth and inclusion - but also demands unprecedented speed and resilience. We must not only follow the trend - we must set it.

Digital transformation is no longer a side project; it is the main stage, it is the core of competitiveness, as emerging economies stand at a turning point.

From real-time payments to digital credit scoring, from open banking to risk assessment, we are witnessing how the financial ecosystem reinvents itself, how technology broadens access to finance. But transformation must have well defined duties and objectives. The challenge is to ensure that innovation serves the real economy and that it strengthens resilience rather than creating new vulnerabilities.

In less than a decade, the rise of innovative technologies such as cryptocurrency and blockchain led to the next leap in financial technologies, driven by decentralization, automation, and personalized services.

The pandemic was a game changer that forced digital-first strategies into the mainstream, leading to an increased role of emerging technologies in reshaping the financial system.

As a result, today we are talking more and more about how and when the financial and monetary landscape will be significantly transformed by solutions like Central Bank Digital Currency, Distributed Ledger Technology, or Artificial Intelligence.

This is precisely why, from our perspective, the technological challenges ahead are creating new premises.

They enhance the quality and efficiency of monetary policy implementation, and promote stronger, convincing and credible coordination between public policies.

Nowadays, the focus is not just on speed and convenience, but also on security of payment systems. Consumers now expect fast and secure solutions, whether it's contactless payments, digital wallets, or instant payments.

Recognizing the role of Fintech companies and open banking to the competition, the National Bank of Romania provides startups with mentorship and expertise to develop innovative solutions and to efficiently test them. We, at the National Bank of Romania, recognize that the transition from pilot projects to systemic adoption requires not just technology, but international coordination and shared standards.

Yet, technology alone cannot carry us forward. The human dimension is equally vital and this is where leadership, in all its diversity, becomes the cornerstone of progress. I am proud that this conference also gives a platform to women leaders in the financial sector, providing an opportunity for them, to mentor and to inspire the next generation. A digital economy built without gender equality would be a missed opportunity to be stronger, more creative and sustainable.

## Ladies and gentlemen,

Structural transformations must be seen from a broader, national perspective. Two decades ago, Romania embarked on the most significant country project in its recent history: accession to the European Union. Romania's economic and social development has been defined by the achievement of that visionary endeavor.

Now, the Moldovan authorities are making true efforts to accelerate the accession of the Republic of Moldova to the EU. We extend the most sincere congratulations for the significant progress towards achieving this national objective.

Our countries have always been working closely together, especially during periods of crisis. In challenging geopolitical situations, our countries have proven to be reliable counterparts.

As former economic advisor of the President of Romania for ten years, I was engaged in many projects of assistance and cooperation with the Republic of Moldova. In the last few years, Romania has been sharing its energy resources with the Republic of Moldova, in the context of the energy crisis generated by Russia's unjust war against Ukraine.

The National Bank of Moldova has a special role in preparing the country for accession to the European Union, in terms of aligning the regulatory framework and its activities with the EU legislation. For this purpose, I hereby confirm the continuous and consistent institutional and professional assistance from the National Bank of Romania.

Our institutions are not only defined by symbolic ties - a simple comparison of the two logos would be revealing. We are brought together by much deeper and structural ties.

The National Bank of Romania is a major, dedicated supporter of the National Bank of Moldova in its full commitment to strengthen its institutional capacity, in meeting its mandate. The key priorities are strengthening the financial stability of the country, modernizing the banking infrastructure and harmonizing legislation with the EU standards.

Here, again, the bilateral cooperation between the National Bank of Romania and the National Bank of Moldova stands as a model of how shared expertise and vision make us better prepared for these changes.

I would like to make a special reference to the twinning programs financed by the EU with the aim to strengthen banking regulation and supervision, corporate governance and risk management in the financial sector of the Republic of Moldova. NBR was lead partner and the Dutch and Lithuanian colleagues were junior partners.

## Dear guests,

The accession process to the European Union is clearly defined by one fundamental issue: the economic convergence. And the Republic of Moldova must gradually achieve this, such as to successfully cope with major geostrategic and security challenges.

Over the past two decades, Romania registered the fastest economic advance among EU countries in terms of real convergence. Even if the persistence of regional disparities is still a challenge, it is obvious that economic growth was supported by integration into the EU, institutional changes and increased foreign investment.

In the future, Romania remains firmly committed to its strategic goal of joining the euro area and actively contributes to monetary policy within the EU. I personally consider that the eurozone accession could be the next strategic country project of Romania for the next decade.

Over the last years, inflation, long-term interest rates and the budget deficit have been much above the reference values corresponding to the Maastricht criteria. These vulnerabilities remind us that financial stability cannot be taken for granted.

At the same time, they underline the necessity of decisive measures and reforms, which must be seen as investment in resilience and credibility, laying the foundation for stronger, more balanced economic growth over the long term.

Equally important, financial sustainability depends on addressing the twin deficits that burden our economy these years: the public deficit and the current account deficit. These macroeconomic imbalances are not only sources of vulnerabilities but also a test of policy coherence. Correcting them requires decisive action, transparent dialogue, and a consistent alignment of fiscal, monetary, and structural policies.

These efforts strengthen not only our path towards euro area accession, but also our long-term competitiveness and prosperity within the European Union.

Distinguished colleagues,

Today we are facing major geostrategic and security challenges, and our national banks are key pillars of economic and social development for our countries. In a rapidly changing world, we, as central bankers, must support our countries to achieve solid progresses, while being faithful to the European values.

In the end, allow me to share this perspective:

Markets may be old - some as old as the nations they serve - but their capacity to reinvent themselves is limitless. What matters is not the age of the market, but the freshness of our approach.

The next chapter of our economic story will not be written by those who wait for change, but by those who lead it. Let us be among them. Let us be the architects of a financial future that is innovative, inclusive and responsive to today's realities.

Thank you, and I wish you all an inspiring and forward-looking conference. I wish you productive sessions and consequential discussions.

Moreover, I'm sure that both our hosts, through their hospitality efforts, and our distinguished guests will make this event a fruitful and memorable experience.

Finally, I want to express my warmest congratulations to Governor Anca Dragu for all she does at the National Bank of Moldova, as leadership and good governance in supporting the European path of the Republic of Moldova!

Felicitri, drag Anca, felicitri echipei BNM i mult succes în continuare!

Thank you very much!",Cosmin Marinescu
https://www.bis.org/review/r250925a.htm,"Gabriel Makhlouf: Growing pains - how demographics, migration and technology will reshape Europe's workforce","Speech by Mr Gabriel Makhlouf, Governor of the Central Bank of Ireland, at the Organisation for Economic Cooperation and Development seminar series ""The Lectures of the Governor"", Paris, 22 September 2025.",2025-09-22 00:00:00,"## Speech by Governor Gabriel Makhlouf to OECD

22 September 2025

Speech



## Growing pains: how demographics, migration and technology will reshape Europe's workforce

## Lecture at the OECD

Good morning and thank you for the invitation to speak here today.  It is a pleasure to be back at the OECD and to talk about a topic that is rarely far from the top of the policy agenda, namely labour market developments. Whether it is in relation to long-run growth prospects or the drivers of inflation, labour market dynamics play a crucial role. 1

My speech will today will cover three inter-related topics.

First, I will reflect on the resilience of labour markets over the last five years, highlighting the key developments that have seen employment in the euro area grow steadily, despite a sequence of negative shocks.

Next, I will explore how looming demographic challenges, ageing populations, declining fertility and shrinking work forces, will drag on employment growth and therefore economic growth in the coming decades, with migration only offering a partial, albeit important, solution to the challenge.

As demographic headwinds bite, finding ways to boost labour force participation and productivity becomes even more important as a driver of economic growth. Despite this, policy reforms to structurally raise participation rates in Europe have been slow in coming. On top of this, recent productivity trends for the euro area are not good.  In the final part of my speech I will discuss how new technologies, and artificial intelligence (AI) specifically, can be harnessed to boost productivity, and how this interacts with some of the labour market dynamics.

## The Euro Area Labour Market 2019-2025: a quiet champion

In the face of unprecedented shocks in recent years, the Euro area labour market has held up exceptionally well. This performance is all the more remarkable when we recall the hysteresis that characterised previous downturns. And it's why I refer to it as the 'quiet champion'.

The labour market entered the pandemic in good shape. Monthly unemployment in the euro area reached a low of 7.2 percent in March 2020, reflecting steady, if unspectacular, growth since around 2015. Notably, around two-thirds of the expansion of the labour force in the years prior to the pandemic was immigration from outside of the euro area. Around this time, falling unemployment and rising job vacancies were also contributing to tighter labour market conditions, seen as a key driver of wage growth. 2

The pandemic triggered an immediate labour market disruption. Labour demand ground to a halt as job openings collapsed (PDF 946.55KB). Unemployment peaked at 8.6 per cent in August 2020. However, the euro area's response differed markedly from other regions, particularly the United States which saw a much larger unemployment spike. The difference reflected the extensive use of job retention schemes across Euro area countries, which maintained employment relationships while reducing working hours. These policies helped to support incomes in the face of an exceptional shock, but also facilitated a smoother recovery once economic activity resumed.

By the third quarter of 2021, little more than 18 months after the start of the pandemic, the employment rate in the euro area was above pre-pandemic levels, at 69 per cent of the working age population. Post-pandemic labour market dynamics have, however, proved to be more than just a rebound. Employment has continued to grow despite further shocks such as the war in Ukraine and rising geopolitical tensions, with the euro area employment rate hitting 70.8 per cent in late 2024; unemployment hit an all-time low of 6.2 per cent in late 2024 and has remained around that level since.

Several factors contributed to this resurgence.

On the demand side, post-pandemic pent-up demand, especially in consumer facing services, boosted the demand for workers. The slow adjustment of real wages - falling by around 2 per cent between 2021 and 2023 - was another important factor. As wage adjustment to the inflation surge lagged, this acted as a 'shock absorber', making labour more attractive than capital and thereby supporting labour demand. points to the combined role of high profit margins and falling real wages in providing financial space for firms to hoard labour during the recovery from the crisis, especially in manufacturing. 3 4 ECB analysis 5

On the supply side, the labour force in the euro area increased by over 8 million between 2021 and 2025, growing at an average annual rate of 1.2 per cent.   This is almost four times the rate of growth we saw prior to the pandemic. And, much like the earlier period, migration has been an important source of workforce growth. Eurostat data shows that almost half of the increase in the size of the labour force is from foreign workers, that is, non-euro area nationals. In addition, foreign workers have also seen a larger increase in their employment rate in recent years, relative to nationals. The combined effects on GDP are large: has estimated that 4 of the 5 percentage point cumulative increase in GDP between 2019 and 2024 is attributable to foreign workers. 6 the ECB

This is a euro area picture. When we look at individual countries, the relative role played by migration and increasing employment and participation rates differs. For example, growth in Italy, with a relatively lower participation rate, has been helped more by higher participation rates of nationals. Whereas the likes of Germany, with a declining working age population, has relied more on an influx of foreign workers to offset the effects of the population ageing. Some countries, like Ireland and Spain have relied on both channels, with higher participation rates and inward migration boosting employment growth in both countries.

I emphasise the migration channel for two reasons. First, assumptions about migration patterns can have a big impact on population growth estimates, as I outline below. Second, in the euro area, migration happens : there was an almost identical increase in the share of high-skilled migrant and national employment between 2015 and 2023. This suggests that migration also matters for productivity growth.  I return to this in the next section that looks at longer-term demographic trends. across the skill distribution 7

## Longer-term demographic trends where cyclical meets the structural

Looking ahead, at a euro area level some labour market cooling is expected over the current forecast horizon, through to end-2027. The September ECB staff macroeconomic projections have annual employment growth averaging around 0.5 per cent over the next two years, a significant drop-off compared to the recent experience. 8

Some of this reflects a cooling of labour demand. We are already seeing this in job vacancies, which have declined from their post-pandemic peaks, although at the country level we see in these trends. For example, job postings in Spain and Italy remain around 50 per cent above pre-pandemic levels; whereas in Germany and France, the figure is closer to 15-20 per cent, reflecting more labour market cooling in these countries. cross-country differences

The employment growth slowdown also reflects demographic factors that were initially rather slow moving, but are now beginning to bite. I have previously talked about this as the 'quick-quick' phase of demographic change: a period when the population structure in many countries will go through a rapid transition phase, culminating in a far larger retired and elderly population, essentially an inversion of the population pyramid (PDF 1.35MB) that has characterised many developed countries for decades. Between 2024 and 2027, the euro area working age population is (or 1.5 million workers between the ages of 15 and 64).  Some countries see large declines, for example Latvia (-4.8 per cent), Lithuania (-3.4 per cent), Greece (-2.6 per cent), Portugal (-2.1 per cent), Germany (-1.5 per cent) and Austria (-1.3 per cent). Even among those countries treading water - such as Belgium, France, Spain, the Netherlands, Finland and Cyprus, all start to see their working age populations decline from 2027 onwards. The longer-term impact is stark: the 'old-age dependency ratio' in the euro area, that is, the population aged 65 and over as a proportion of the population aged 15-64, is set to increase sharply from 33.7 in 2022 to 51.2 in 2050. projected to fall by 0.7 per cent

These trends will exert varying, and sometimes contradictory, effects on inflation. An older population with lower consumption and higher savings could place downward pressure on aggregate demand, limiting price growth in certain sectors. This aligns with the 'secular stagnation' hypothesis, which has argued that ageing societies are more prone to disinflationary forces. At the same time, a shrinking working-age population will tighten labour markets in the absence of increases in labour force participation rates. This puts upward pressure on wages that feed into services inflation. Moreover, as older cohorts consume more health care and age-related services; relative price increases in those areas may become more entrenched. The balance of these effects is hard to predict, but one potential outcome is higher structural inflation in labourintensive, non-tradable sectors (i.e. services), even as weak aggregate demand keeps headline inflation subdued. This creates an environment in which inflation dynamics are increasingly segmented, complicating the job of central banks that aim to stabilise prices economy-wide.

Returning to demographic trends, the workforce in Ireland is also ageing, although the trend somewhat lags what we see in other European countries. There are two main reasons for this. First, during the early-2000s will continue to support growth in the working age population in the near-term. However, rapidly falling fertility rates since then, Ireland's fertility rate was 1.5 in 2023, down from almost 2 in 2003, and converging on the EU average of 1.4, means that from the mid-2030s onwards, Ireland has one of the fastest ageing populations in Europe, rapidly closing current gaps in the dependency ratio, when compared to other countries. Central Bank of Ireland analysis (PDF 1.19MB) projects the long-term growth rate of the economy to slow by 2050 to below half its historic average growth rate observed over the last half century. relatively higher fertility rates 9

The second mitigating factor is migration. A shows how inward migration has been central to Ireland's growth story. Over the period 1995-2020, all European countries saw an increase in the share of international migrants in their population, but Ireland's trajectory stands out: from just over one-in-twenty international migrants in the population in 1995, by 2020 this was one-in-five, similar to figures for Austria, Germany and Sweden.  As the report notes, while it can have large impacts, net migration is hard to predict, and, in the case of Ireland at least, it has been historically under-predicted. However, even of net migration returning to pre-pandemic levels of around 40,000 per year sees Ireland's labour force growth stay in positive territory through to 2047. In a low migration scenario - just under half this level - the labour force starts to contract much earlier, from 2041 onwards. recent report by Ireland's Department of Finance (PDF 2.71MB) baseline assumptions (PDF 2.71MB)

The point here is not so much to get bogged down in population or migration projection scenarios - which, as I said, are highly uncertain - but rather to highlight the extent to which migration can help mitigate the demographic and growth drag from ageing populations and falling fertility rates. This could allow time for governments to develop and implement other policies, mainly around labour force participation and productivity, as I discuss in the final section of my speech.

Some final thoughts on migration.

The preceding discussion focuses on the direct impact of migration, that is, on numbers in work. However, as , among others, has shown, migration supports growth beyond direct effects. This includes the potential for positive net fiscal impacts, i.e. taxes and contributions that migrants pay compared to the benefits and public services they receive - fostering trade linkages and contributing to job creation and entrepreneurship. OECD research

And while migration can offset some of drag on economic growth from unhelpful demographic dynamics - as well as helping to , we cannot ignore the growing political and social resistance to immigration in many countries. smooth out cyclical labour market fluctuations

For me it emphasises the importance of robust evidence and building a narrative that is based on facts. Research has shown that perceptions about migration can be wide of the mark, be it about the number and characteristics of migrants, or their economic contribution to society. It is important that decision makers continue to have a solid evidence base on the impact of migration on our economies, including how it interacts with demographic trends. OECD research and analysis provides a valuable evidence base to support effective decision-making.

## Shrinking not sinking 10

Migration can mitigate some of the effects of the coming demographic changes, but it cannot push back the tide. In this section, I now want to look at other how increasing labour force participation and productivity growth can help.

As I have said previously, with shrinking populations, increasing labour force participation is a necessary part of the solution. For the working age population, it is important that reforms to tax and benefit systems remove disposable income cliff-edges and tax wedges that can impinge on incentives to work. In this regard, ongoing on how tax and benefit systems affect incentives to work provide an important public policy role. OECD research

We also need to look beyond the traditional definition of working age population as 1560/64 years of age and boost participation in the post-60/65 population. In a world of longer and , sustaining living standards will need people to work beyond what is currently considered 'typical' retirement age. A recent on making the labour market work for older workers puts it well: lifespans health spans OECD report

'To sustain living standards and address structural labour shortages, many countries will need people to work beyond 60 or 65. This requires labour market policies and employer practices that support the hiring, retention and most importantly the employability of mid-to-late career workers. Employers, employees, governments and social partners all have a role in promoting lifelong learning, improving job quality and promoting healthy workplaces to ensure the employability, well-being and economic contribution of older workers in an evolving world of work.'

The impact of increased labour force participation in the post-60/65 population is potentially large. Take the old-age dependency ratio as an example. Defining the working age population as 15-69 instead of typical 15-64, and taking Eurostat's current population projections, the euro area dependency ratio in 2050 is 36.6 instead of 51.2; in Ireland it 'falls' from 43.2 to 29.1. To put these changes in context, allowing for a 'high migration' scenario in population projections results in a relatively small decrease in the euro area 2050 dependency ratio, to just 48.9; for Ireland, it falls to 40.8. 11 12

Shifting our perceptions of the working age population can alleviate some unpleasant demographic arithmetic. However, given relatively lower participation rates in general for older workers, these effects likely represent the upper-end of potential upside scenarios to raising participation rates. Having said that, labour force participation rates have increased for the 65-69 age group in recent years, from 13 to 18 per cent in the euro area between 2019 and 2025, and from 23 to 30 per cent in Ireland over the same period. For comparison, the participation rate of 65-69 year olds in the US in 2024 was . 33.4 per cent

Thus far, my remarks have focused on the role of the size of the working age population in growth. I will finish with a brief discussion on the other fundamental growth driver, namely productivity.

In previous speeches I have highlighted the drivers of weak productivity growth in Europe, and policies to try and improve it. On the policy front, implementing the proposals in the and reports - mainly around completing the Savings and Investment Union and removing barriers that restrict trade in goods and services in the EU single market - must be a priority. You will not be surprised to hear that this was a topic of conversation at last week's meeting of EU Finance Ministers and Central Bank Governors. Draghi Letta

But here I want to talk specifically around developments in AI. We are still in the early take-up phase of a technology that is itself rapidly evolving. But it is already clear that are faster compared to historical episodes of new technology roll-outs, such as the advent of the personal computer.  What we have seen so far in terms of the , including in my own organisation, suggests that it has the potential to disrupt existing employment patterns, both as a substitute for existing labour through the automation of certain tasks and as a complement to existing skills. Together, this will create new opportunities for workforce growth and productivity gains. We need to prepare now for the changes that are coming. This means, among other things, more flexible labour markets that allow for worker mobility within and between firms, as well as across sectors and occupations. It also means providing training opportunities for workers - both younger and older - to drive upskilling and support transitions to new roles that may not even exist yet. AI adoption rates use of AI 13

In many ways, this is revisiting the ' ' debate in Europe. Speaking at the OECD, many of you will be familiar with the concept, but flexicurity is essentially about balancing flexibility for employers and security for workers so that firms and workers can adjust efficiently to economic changes and new technologies, while also maintaining social inclusion and competitiveness. flexicurity 14

In the early-2000s, flexicurity became synonymous with labour market structural reforms. As you will have seen from our , the ECB's Governing Council considers it important for governments to adopt growth-enhancing structural reforms that can strengthen the euro area economy in the current environment. 15 September decision

In the context of AI, and given the , we must reduce both bureaucratic and financial hurdles to starting, and scaling-up, a recurring theme in both the and reports.  Reforms that align and streamline hiring procedures across the euro area will help to minimise risks to firms of adopting new technology, as well as encouraging greater cross-country worker mobility, which will be particularly important for high-demand digital or AI skills. Related to this, mutual recognition of skills and aligning this to the national university and vocational training programmes at the country level will help to balance supply and demand for skills at a European level. Better coordination around the passporting of worker benefits, be it pensions, training credits or even health insurance - would also encourage mobility across firms, sectors and countries. As AI shifts the demand for skills, active labour market programmes that focus on reskilling, not just younger, but also mid-career workers, linking back to my earlier discussion - will be important. role of start-ups in driving innovation historically (PDF 411.04KB) Draghi Letta

## Conclusion

Despite a series of negative shocks in recent years, employment in the euro area has steadily grown, driven by strong post-pandemic demand and increased labour force participation, bolstered by inward migration. Looking ahead, demographic shifts will slow employment growth. Migration offers a partial solution, but the dividend from raising labour force participation rates is arguably greater. And, we need to be thinking about participation in the context of new generations living longer and healthier lives.

Raising productivity growth will be fundamental for sustaining living standards. The rollout and rapid adoption of AI has led to much hype about its productivity promise, but the eventual impact remains highly uncertain.  Nonetheless, flexible labour markets and proactive reskilling of workers across the age distribution will be essential to maximise the productivity enhancing potential of these new technologies.

To sum up, what the data is telling us is that our societies are facing a series of important choices if we want to sustain or improve our future living standards (or, perhaps more accurately, for some of us at least, the living standards of our children and grandchildren).

We could of course just accept that living standards will worsen but I see little evidence that poorer living standards are likely to be tolerated by the majority of our citizens. I suppose we could also see an increase in fertility rates but I am not sure this would solve the challenge on its own and, on the evidence, that would require a significant reversal in recent trends.

Our choices are likely to involve improvements in our productivity, an increase in labour market participation and inward migration. In my view a combination of these, they are not mutually exclusive - offer us the most effective route to building the best opportunities for our grandchildren.

I do not suggest that this will be straightforward. To help us to choose well, we will need researchers and organisations such as the OECD to set out the facts in an accessible way and enable informed choices to be made by policymakers, and which can be understood by our citizens.

[1] Thank you to Rea Lydon, Daragh Clancy, Rob Kelly and Conor O'Shea for their help in preparing these remarks.

[2] See, for example, the discussion on wage growth dynamics and labour market tightness in the . In 2014, there were more than ten unemployed persons for each job vacancy; by 2019, this had fallen to around four unemployed persons for each job vacancy. Despite an initial collapse in job vacancies (PDF 946.55KB) at the onset of the pandemic, the post-pandemic rebound would see this ratio almost halve again. December 2019 Eurosystem macro projections

[3] Monitoring wage dynamics after the inflation surge was important for monetary policy makers concerned about 'second round effects' that could drive inflation persistently about target. See for example, my November 2021 remarks 'Inflation dynamics in a pandemic: maintaining vigilance and optionality', where I highlight this risk. The development of more forward-looking and real-time wage trackers - such as the and the , developed by the Central Bank of Ireland and the jobs site Indeed - have provided crucial information on wage dynamics. ECB Negotiated Wage Tracker Indeed Wage Tracker

[4] On real wage dynamics during the inflation surge, see . President Christine Lagarde's 2025 speech at the Kansas Fed Symposium in Jackson Hole, Wyoming

[5] One of the flip sides of labour hoarding is lower productivity growth, measured as output per worker. Understanding the reasons for weak productivity during the postpandemic recovery was a key issue for the Governing Council in recent years. For more on this, see Chapters 2 and 3 of the ECB/Eurosystem 2025 Strategy Review . Occasional Paper 'A strategic view on the economic and inflation environment in the euro area' (PDF 3.02MB)

[6] For context, this is only marginally lower than the average annual growth rate of the US labour force between 2022 and 2024. With euro area unemployment rates changing little over this period, increases in the labour force map almost directly to increases in employment.

[7] Beyond productivity effects, the concentration of migrant workers in certain sectors is also notable. For example, healthcare in Ireland is a case-in-point. (2023) show that almost one quarter of nurses and midwives were from outside Ireland, while more than 7 in 10 new doctors registered in 2022 were trained abroad. Government statistics

[8] The slowdown in employment growth is not unique to Europe. For example, the IMF WEO (April 2025) has employment growth in the United States at 0.5 per cent in 2026, in part due to a large slowdown in inward migration. This is down from a 2021-23 average of almost 3 per cent.

[9] The fertility rate measures the number of live births per woman. See for more on fertility statistics and trends. Eurostat (2025)

[10] This catchy title is from the . Economist magazine's September 13 th , 2025 edition

[11] I use Eurostat's calculations from March, 2023. EUROPOP23

[12] The 'high migration' scenario assumes 33 per cent more immigration than in the baseline from non-EU countries in each year covering the projection horizon. For the euro area, the baseline assumption is for approximately net 1 million non-EU migrants each year from 2026 onwards, down from almost 4 million in 2022, a figure significantly boosted by Ukrainian's fleeing the war with Russia. For comparison, net immigration into the EU from 2015-19 averaged 1.4 million per year.

[13] For more on this, see, amongst others, , , , and . Anthropic (2025) Kazinnik and Brynjolfsson (2025) Babina and Fedyk (2025) Hampole et al. (2025) Agrawal, Gans and Goldfarb (2025)

[14] For OECD publications on the topic, see, for example . The also notes how 'Denmark's wellfunctioning 'flexicurity' facilitates reemployment of workers displaced by the energy transition.' 'Flexicurity and the Economic Crisis 2008-2009: Evidence from Denmark' (Eriksson, 2012) (PDF 1.66MB) 2021 OECD Economic Survey for Denmark

[15] See, for example, the on 'Towards Common Principles of Flexicurity'. 2007 Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions",Gabriel Makhlouf
https://www.bis.org/review/r251007k.htm,François Villeroy de Galhau: The international role of the euro and the development of European safe assets,"Speech of Mr François Villeroy de Galhau, Governor of the Bank of France, at the European Stability Mechanism (ESM), Luxembourg, 2 October 2025.",2025-10-02 00:00:00,"



## Speech







## « The international role of the euro and the development of European safe assets »

Published on the 2nd of October 2025

ESM, Luxembourg -2 October 2025

Speech by Francois Villeroy de Galhau, Governor of the Banque de France



## Ladies and Gentlemen,

It is a great pleasure to speak before you today in Luxembourg. | would like to express my sincere gratitude to my friend Pierre Gramegna, Managing Director of the European Stability Mechanism (ESM). Luxembourg holds a unique place in the history of European integration. It is the birthplace of Robert Schuman. But it is less known that, in 1963, Luxembourg listed the world's first international bond denominated in a foreign currency, an innovation that helped finance one of the most strategic projects of its time: the Autostrada del Sole, linking northern and southern Italy.

Since 1963, much progress has been made in facilitating cross-border financing, and we managed together the tremendous success of the euro: let me pay tribute here to Pierre Werner and his 1970 report. Yet, dramatic changes in the new world order over the past three years call for a bold step forward to strengthen the international role of the euro.



The US administration's aggressive protectionist stance and defiant attitude toward international cooperation are increasing global uncertainty and fragmentation. Confidence in the dollar as the safehaven currency could be reviewed by market players. ! Financial innovations, like stablecoins, may change the dynamics of the international monetary and financial system.! Some consider that our international system is at risk of falling into the ""Kindleberger trap"", iii with no clear hegemonic power acting as a stabilizer and public goods provider.

As dramatic and dark as these changes may seem, we are fortunate to face them having the euro, and they are an opportunity for our currency. 'v We shall not be naive in believing that the euro will replace the US dollar soon. Let me also be clear: promoting the international role of the euro does not mean expecting its exchange rate to rise. We have no exchange rate target, but we are very attentive to the possible effects of a stronger euro on the inflation outlook.

Surprisingly, this international role was not stipulated in the objectives of the European treaties as the euro was originally created for internal purposes. Yet, the reasons that led the ECB until recently to favour a neutral stance on the euro's global role, notably the fear of losing control over monetary policy, are no longer valid. In her seminal speech in Berlin last May, President Lagarde mentioned three key factors to reach the full potential of a ""global euro"" Y : (i) geopolitical credibility, (ii) legal and institutional integrity, and (iii) economic resilience. As my colleague José Luis Escriva recently put it, there is a chance to move toward an international monetary system that relies less on one single global currency. ¥! Today, | will focus on the economic pillar and the relevant tools we can use to enhance the international role of the euro. The debate is no longer about the strategic ""why', it is about the practical ""how'.

| will first discuss how increasing the external appeal of our single currency goes in parallel with strengthening internal integration (I).

Second, | will share some remarks on how we can make progress on issuance of a European safe asset (Il).

## I. Strengthen internal integration to boost external attractivity

First emergency: Single market and Savings and Investments Union

| firmly believe that the attractiveness of our currency ultimately stems from deepening integration within our Union. In this respect, there is a 'happy coincidence' between the Eurosystem's /nternal/ objectives and the external dimension of the euro. ""! Deeper, more attractive and easier to navigate European capital markets would encourage savings to stay here in Europe, strengthen the financing of our companies and boost their innovation and competitiveness. This in turn would drive greater demand for euro-denominated assets and bolster the euro's international role. To this end, our task is clearly defined: completing the Single market and establishing a genuine Savings and Investments Union (SIU), as outlined in the Letta and Draghi reports. V!! .

26 years after having established our monetary sovereignty, it is high time to complete our economic sovereignty and financial sovereignty. One practical and yet critical step is to set a clear, ""mobilizing"" deadline ix Jacques Delors succeeded when he set 1 January 1993 as the deadline for the Single market and 1 January 1999 for the single currency. Why don't the Commission and the Council put forward now such a comprehensive package, with a clear implementation date? The 1/1/2028 would be thirty-five years after the single market. But, if we don't react fast, we are at serious risk that the window of opportunity will close. This is my strong call in Luxembourg, perhaps the last possible call.

Let me sum up the crucial mobilisation with three 'i's.' * .



## 3 IMPERATIVES FOR BEEFING UP THE EUROPEAN ECONOMY



2

ESM+2 OCTOBER 2025





European Stability Mechanism -Luxembourg

First, we need to integrate the Single market more. In purchasing power terms, our single market is worth EUR 17.9 trillion, which makes it nearly as big as that of the US (EUR 18.4 trillion*!). However, it is less attractive because it remains still fragmented.

Second, Europe must /nvest and save better. The euro area household saving ratio is more than 15% of gross disposable income, which is 4 points higher than in the US (11% of GDI). *"". This financial windfall is insufficiently channelled into European corporate equity financing. Nonfinancial corporation (NFC) equity financing amounts to just 85% of GDP in the euro area, compared to 220% of GDP in the United States. This is one of the main reasons why Europe lags behind on innovation, and still more on disruptive innovation. We need to beef up European venture capital. Between 2014 and 2025, venture capital funds raised the equivalent of 0.39% of GDP in the United States, compared to 0.07% for European players.



image ImageThématique Money Catégorie Speech

European Stability Mechanism - Luxembourg



To turn ideas into actions and to focus on equity, | propose to prioritize five levers, out of the 21 proposed in the Commission roadmap. The order does not matter, but all of them must be launched unconditionally and urgently:

- (i) a genuine European supervisory framework for investment funds to accelerate the scale-up from national to ""pan-European"" funds.
- (ii) the creation of an optional ""28th regime"" with a common EU-wide set of business law rules with the aim of lowering administrative costs for firms doing business in several EU countries. Although certain questions remain, the Commission consultation on the subject is a promising step forward.
- (iii) the gradual development of European retirement savings and pension funds.
- (iv) the implementation of ambitious public-private partnerships. Drawing on the experience of the EIB and its European Tech Champions Initiative (ETCI), we should leverage private investors in the venture capital market by public funds.
- (v) introducing European retail investment products through simplification and standardization. The Commission is already working on a blueprint for a European savings product.

Third, we need to innovate faster. Less bureaucracy, but also more technology including in our core business of currency. The rapid surge of stablecoins in USD, dominated by American players, *""' raises the risk that our money will become ""privatised"" and ""de-Europeanised."" In this context, the creation of a wholesale central bank digital currency (CBDC), as well as a digital euro for retail, are both urgently needed, not only to strengthen our economic and financial sovereignty, but also enhance the global standing of the euro.



Some additional paths to leverage the euro

Beyond the Single market and the SIU, we must also explore other paths. Giving greater prominence to invoicing in euros is one of them. Excluding

US exports and intra-euro area trade, around 60% of global exports are invoiced in US dollars and less than 25% in euros. *""Y image ImageThématique Money Catégorie Speech

European Stability Mechanism - Luxembourg



Admittedly, invoicing denomination stems largely from private and complex decisions *"" , and exhibits a persistent pattern. *™' Still, geopolitical alignment plays a role in this choice, as China illustrates with the renminbi. We could leverage EU negotiations with trade partners that have been hit hard by America's new protectionist measures (e.g. India, Switzerland, Indonesia).

Furthermore, some of our actions as Eurosystem can make euro invoicing more attractive. The provision of euro liquidity lines to non-euro area central banks (so called EUREP) can be expanded further, which, together with deeper capital markets, would make it more attractive for firms and banks to fund and invoice their commercial activities in euros. xvilln addition, pushing forward the use of central bank digital money for wholesale transactions on distributed ledger platforms could also contribute to facilitating trade denominated in euros. *"""" Central banks along with the ECB are also working to make cross-border payments faster and more efficient by connecting instant payment systems across jurisdictions. Today TARGET services already accept other currencies such as those of Sweden and Denmark; tomorrow they should be interconnected to India, Switzerland, but also in my view possibly UK, Canada or Brazil.

Ultimately, we must reinforce the virtuous cycle between growth, size of capital markets, and international currency use.** But, on top of this, a sufficient amount of safe assets helps create a reliable environment for investors, even in times of stress. This virtuous circle explains the rise of the US dollar since the end of World War Il. Europe has the potential to set in motion a similar self-reinforcing cycle. But this will be much more powerful if we promote deep and liquid markets for European safe assets.

ll. A catalyst for the international role of the euro: developing the market safe assets.

Let me say upfront that advocating for a European safe asset does not and cannot mean advocating for fiscal indiscipline or mutualization. There is little doubt that fiscal consolidation must take place and can be achieved in Member States where it is needed, starting with my own country. As my colleague Joachim Nagel noted, this will improve sovereign bond ratings and thus the amount of national assets perceived as safe. **!

Let's face it: there is a relative scarcity of safe assets in Europe.

image ImageThématique Money Catégorie Speech

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Even when combining supranational debt (a little over 1 USD trillion) with sovereign bonds rated at least AA in the Euro area [S&amp;P] (almost 9 USD trillion), the total amounts to barely 33% of U.S. Treasuries (over USD 30 trillion). How can we expand the supply of European safe assets? There is no silver bullet, but broadly speaking we have three main levers at our disposal: **!

- A. Merging existing supranational debt

- B. Transforming existing national sovereign debt into genuine European sovereign debt

- C. Creating and rolling over new supranational debt

Each option involves a trade-off between feasibility and ambition. Let me briefly dig into each of them.

image ImageThématique Money Catégorie Speech

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A. Merging existing supranational debt (Commission, ESM, EIB) may appear straightforward. The impact in terms of size would be limited — on aggregate it would amount to around € 1.2 trillion — but the signalling effect would be powerful. It would nevertheless require addressing some legal complexities, as these are institutions with different legal foundations. To circumvent the latter, an option may be to purchase or to pool these securities and issue a common Eurobond in exchange, with a common debt agent. And this brings us to the next set of options: transforming existing debt.

B. We could transform part of sovereign debt into supranational debt (or, even better, into genuine European sovereign debt) through financial engineering. **'! Various solutions have been proposed since the euro area crisis and, in some cases, have even been put in draft legal texts. These essentially involve pooling or withdrawing a large share of sovereign bonds, issuing Eurobonds in exchange, and introducing seniority structures to ringfence a ""safe"" tranche against default risk**"" . This ""partial transformation"" would help to create more European safe assets without adding to the EU's fiscal burden: up to €6 trillion in supranational bonds in the Euro area, **Y together with the remaining AA-rated sovereign bonds.

The ""blue/red bonds"" option, proposed in 2010 by Delpla and von Weizsacker and more recently by Blanchard and Ubide **""' consists in replacing part of sovereign debt by supranational ""blue bonds"" issued by the EU (up to 25% of the aggregate GDP), backed by Member States' tax revenues, and ranked legally senior to national ""red bonds."". Appealing as it looks, it raises some issues, for instance about the coordination between national and supranational debt issuers during the ""transition"" period, or the liquidity of remaining ""red bonds"" as the market share of ""blue bonds"" gradually increases.



A second financial engineering option, the so-called ""ESBies"", has been proposed among others by Brunnermeier.**"""" It consists in a securitisation arrangement that would, in principle, be easier to implement than capital-based structures like a European Debt Agen xxvill Rebranded as sovereign bond-backed securities (SBBS), a proposal was put forward by the Commission in 2018. While this initiative was met at the time with limited support, it is worth revisiting it with fresh eyes.

## European safe assets is to build on and enhance existing EU

frameworks, such as SURE and NGEU. ** The launch of the NGEU programme in 2021 marked a milestone in European debt markets. The Commission's recent measures (a unified funding approach, the launch of repo facilities)*** are fostering a more complete and integrated EUbond market. Investors' appetite has been strong, with EU-bonds quickly gaining recognition as a credible benchmark asset for international investors. A (limited) possible start would be to roll over the existing NGEU debt, rather than reimbursing it from 2028.

The main advantage of leveraging the success of NGEU lies in its comparative technical simplicity. We are talking about plain vanilla bonds, that are widely accepted by markets. Politically, it remains more challenging: some may consider that aiming for a common debt is not timely when some large Member States face strained public finances. As said, this should not be seen as a license for some countries to free-ride. Rather, joint debt should be issued to fund only investments that raise potential growth and finance European public goods. We could consider, for example, some EU-bonds issuance earmarked for financing the new needs in defence infrastructures and their industrial integration xxl replicating the NGEU model.

Let me sum up and look ahead. All the options | have just highlighted are worth our renewed attention. May I, here in Luxembourg, revisit the spirit that guided Pierre Werner in 1970, and later Jacques Delors, who drew inspiration from it in his 1989 report, and take three lessons from them?

1. First, to set a clear long-term ambition: for them, it was a single currency; for us today, it is the creation of a euro-denominated safe asset.
2. Second, to accept pragmatic steps along the way: | propose that begin by exploring various avenues for developing euro safe assets each of which would significantly increase the volume available. If several coexist for a time, they may later converge. But if none exist within three years — the duration of the first phase of the Werner Plan — the consequences would be far more serious.
3. Third, to stay the course regardless of international monetary



turbulence — and precisely because of it. We all know that the Werner Plan had to contend with the collapse of the Bretton Woods system in 1971... yet it remained, albeit with extended timelines, the inspiration behind the EMS and later the EMU.

Today, we do not face at this stage the same kind of international monetary crisis, but we no longer have more flexibility with timelines. This must be Europe's moment — and the euro's moment. It is now or never: emerging currencies will not wait for us.

Let's come back to the first Eurobonds issued here in 1963. The truth is that these bonds were denominated in dollars at the time. Our challenge today is to develop true Eurobonds, i.e. bonds issued in euros at the European level and that are seen as sovereign bonds.

Financing tools carry with them more than financial capacity. They materialize a vision. Today, we are once again called upon to show our spirit of ambition. Our Union now faces even greater challenges, which demand collective solutions — from defence and security to the green and digital transitions. And our Union must complement its monetary sovereignty with economic and financial sovereignty.

By completing this unfinished work, we would not only honour the pioneering spirit of Robert Schuman and the founding fathers, but even more serve well our fellow European citizens by building confidence in our shared future.



| i Posen (A.S.) (2025), “The New Economic Geography”, Foreign Affairs, 19 August ii Landau, (J. P.), « Un monde financier sans actifs sirs », Les Echos, 20                                                                                                                                                                                    |
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| August                                                                                                                                                                                                                                                                                                                                        |
| ili Kindleberger (C.) (1973), The World in Depression, 1929-1939. Berkeley: University of California Press                                                                                                                                                                                                                                    |
| iV Rey (H.) (2025), « Une fenétre d’opportunité pour l’euro », Le Monde, 11 May Y Lagarde (C.) (2025), Earning influence: lessons from the history of                                                                                                                                                                                         |
| international currencies, speech, 26 May vi Escriva (J.L.) (2025), The future of payments and the international role of the euro, speech, 18 September vii Villeroy de Galhau (F.) (2025), A mobilising deadline for seizing “Europe’s                                                                                                        |
| moment’, speech, 14 May vil                                                                                                                                                                                                                                                                                                                   |
| Letta (E.) (2024), Much more than a market, April. Draghi (M.) (2024), The future of European competitiveness, September Villeroy de Galhau (F.) (2025), A mobilising deadline for seizing “Europe's                                                                                                                                          |
| X moment’, speech, 14 May * Villeroy de Galhau (F.) (2025), Letter to the President of the Republic, 10                                                                                                                                                                                                                                       |
| xi GDP PPP in current euro in 2024, source: AMECO/European Commission, October 2024. Villeroy de Galhau, (F.) (2025), The Savings and Investments Union:                                                                                                                                                                                      |
| xii (Finally) turning an idea into actions, speech, 11 September xill As of dollar stablecoins 99% of the                                                                                                                                                                                                                                     |
| August 2025, represented market, with two issuers (Tether and Circle) accounting for 90% of the total. Source: Sentora Research xiV Excluding U.S exports and intra-euro area trade. See Figure 4 in Boz (E.) et al., (2025), “Patterns of Invoicing Currency in Global Trade in a Fragmenting World Economy”, IMF Working Paper No. 2025/178 |
| Amiti (M.), Itskhoki (O.), Konings (J.) (2020), “Dominant Currencies: How Choose Currency Invoicing And Why It Matters”, NBER Working Paper                                                                                                                                                                                                   |
| Firms n°27926                                                                                                                                                                                                                                                                                                                                 |
| xvi Boz (E.) et al. (2022), “Patterns of invoicing currency in global trad                                                                                                                                                                                                                                                                    |
| New evidence”, Journal of International Economics, Vol. 136 *vll                                                                                                                                                                                                                                                                              |
| Schnabel (I.), Panetta (F.) (2020), The provision of euro liquidity through the ECB’s swap and repo operations, Blog, 19 August xvill ECB (2025), Eurosystem expands initiative to settle DLT-based                                                                                                                                           |
| transactions in central bank money, 20 February                                                                                                                                                                                                                                                                                               |
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payments by interlinking fast payment systems, 21 October

* Lagarde (C.) (2025), Earning influence: lessons from the history of international currencies, speech, 26 May
- xxi Nagel (J.) (2025), ""Building blocks for a strong and sovereign Europe"" speech, 22 September

ll Lane (P.) (2025), ""The euro area bond market', speech, Dublin, 11 June; Gossé (J.-B.), Mourjane (A.) (2021), ""A European safe asset: new perspectives"", Bulletin n°234, article 6, Banque de France, April xxlll | ane (P.) (2025), ""The euro area bond market', speech, Dublin, 11 June xxiv For a comprehensive comparative analysis of some of the options discussed in this speech, see Leandro (A.), Zettelmeyer (J.) (2019), ""Creating a Euro Area Safe Asset without Mutualizing Risk (Much)', Working

## Paper, PIIE

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https://www.bis.org/review/r251007e.htm,John C Williams: Prepare for the unexpected,"Remarks by Mr John C Williams, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the Klaas Knot Farewell Symposium, organised by De Nederlandsche Bank (DNB), Amsterdam, Netherlands, 3 October 2025.",2025-10-03 00:00:00,"## John C Williams: Prepare for the unexpected

Remarks by Mr John C Williams, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the Klaas Knot Farewell Symposium, organised by De Nederlandsche Bank (DNB), Amsterdam, Netherlands, 3 October 2025.

* * *

## As prepared for delivery

Thank you for the kind introduction. It's a great honor to speak at this event recognizing our esteemed colleague and friend, Klaas Knot.

As is often the case among central bankers, Klaas and I first met on a rubber raft floating down the Snake River in Wyoming's Grand Teton National Park. It was August 2011. Klaas was a rookie monetary policymaker at the time, having been in his role as president of the Dutch National Bank for less than two months. I, on the other hand, was a relatively grizzled veteran with nearly six months under my belt as president of the San Francisco Fed.

While we were leisurely cruising downstream, enjoying the wonderful views of nature, our raft suddenly came upon a black bear and two cubs who were-equally leisurelycrossing the river right ahead of us. Carefully, the raft pilot steered us near enough to the bears for close-up photos, but not so near as to get between the mama bear and her cubs-the one thing even a city slicker like me knows never to do. We didn't appreciate it at the time, but this adventure was an omen for the many challenges we would face navigating the unexpected in the years to come.

Since that momentous raft trip, I have had the great privilege of working closely with Klaas as he wore his various hats: as president of the Dutch National Bank, as a member of the board at the Bank for International Settlements (BIS), and in the leadership roles he held at the Financial Stability Board (FSB).

In all the years I have known Klaas, I have been impressed by the consistently high standards to which he holds himself and others. A high standard of grounding decisions in principles and strategy. A high standard of disciplined and impartial thought and analysis, one in which the evidence leads to the conclusion rather than the other way around. And a high standard of clear and concise communication-often with quintessentially Dutch directness. I experienced all of these high standards firsthand at many BIS meetings, when Klaas respectfully but pointedly probed my analysis or conclusions.

Today, I will do my best to meet Klaas's high standards as I describe key principles that have been critically important for successful monetary policy in the past and are essential for navigating the uncertain waters ahead. To cut to the chase, when it comes to monetary policy, central banks must prepare for the unexpected.

Before I go further, I need to provide the standard Fed disclaimer that the views I express today are mine alone and do not necessarily reflect those of the Federal Open Market Committee (FOMC) or others in the Federal Reserve System.

## Expect the Unexpected

A key lesson of the past 20 years is to expect the unexpected. Over that period, we've faced the global financial crisis, the euro crisis, the long period of zero or even negative interest rates, COVID-19, Russia's war on Ukraine, and most recently, seismic shifts in the global trade and geopolitical environment.

Unpredictable change and uncertainty will certainly continue to be with us for the foreseeable future. Consider, for example, the effects of ongoing global demographic shifts, artificial intelligence, and potentially transformative innovations in our financial systems.

If history teaches us to expect the unexpected, then what does that mean for monetary policy? First and foremost, it underscores the need for principles and strategy that provide the foundation for decision-making across a wide range of circumstances. This does not mean a playbook for every conceivable situation-that is doomed to fail. Instead, it is a consistent overarching strategy that shapes and informs decisionmaking. Second, it means having the ability and readiness to act as needed for any situation that arises. Third, it implies being clear-eyed and disciplined in adapting to and communicating the changing economic landscape and resulting policy trade-offs and decisions. It's important to be nimble in execution even as one is steady in strategy.

I am happy to say that all three of these features are foundational to the recent reviews of monetary policy frameworks conducted by the European Central Bank and the Federal Reserve, as well as policy frameworks used by many other central banks. 1

So far, I have stayed at a very high level. I will now get into some specifics of how these observations translate into real-world practice. I will organize this discussion across three broad categories, corresponding to three key principles of successful monetary policy: accountability, transparency, and well-anchored inflation expectations. 2

## Owning the Responsibility

I will start with accountability: Central banks must own the responsibility to deliver price stability have the independence of action and the ability to achieve it. and

In the distant past, many central bankers believed that monetary policy could only play a minor role in reducing inflation, while others thought that inflation was completely outside of their control. 3   The end result was persistently high inflation and economic stagnation. History has taught us that central banks can be more successful at delivering sustainably low inflation when they are accountable for their decisions and can act independently. Today, central bankers around the world recognize that 4, 5 attaining and maintaining price stability is their job to do.

But it is not enough to be accountable and independent: central banks must have the appropriate tools to carry out their mandates. Outside of the hallways of central banks,

monetary policy is commonly understood through the overly narrow lens of setting the current short-term interest rate. All the attention is on what the ECB, the Fed, or another central bank will ""do"" at its next policy meeting.

Of course, this focus is not entirely surprising since central banks generally use the short-term interest rate as the primary policy instrument. And the academic literature, including the Taylor Rule and all of its variants, has reinforced this notion that equates monetary policy to setting of the short-term rate. Indeed, there even has been a label attached to it: ""conventional monetary policy."" By implication, other monetary policy actions that have been used-such as forward guidance and balance sheet policies-are deemed ""unconventional,"" and therefore somewhat suspect.

However, this narrow understanding of monetary policy is alien to the history of monetary economics and central bank practice. A reading of Milton Friedman and Anna Schwartz's pathbreaking history of the Federal Reserve during the Great Depression dispels the notion that monetary policy is limited to setting the short-term rate and instead emphasizes broader measures of liquidity and longer-term interest rates. 6   The same is true for Alan Meltzer's detailed history of the Federal Reserve. 7

In this regard, I am reminded of Ben Bernanke's speech from 2002, titled ""On Milton Friedman's Ninetieth Birthday."" In it, Ben provided a clear and succinct overview of the Friedman and Schwartz critique of Federal Reserve policy during the Great Depression.

8   Of particular note is the example of the spring of 1932, when the Fed briefly engaged in open market purchases to support broad liquidity, which was beginning to have an effect on the economy. But this policy was soon abandoned, as the Fed reverted to the view that the low level of nominal interest rates indicated an expansionary monetary policy. Ben famously finished the speech by acknowledging these mistakes. And he promised not to repeat them-a vow he would soon uphold through leading the Fed's actions during the global financial crisis.

Around the same time, and well before ""unconventional"" policies had that name, monetary economists from different schools of thought-including Ben McCallum, Athanasios Orphanides and Volker Wieland, Gauti Eggertsson and Mike Woodford, Ben Bernanke and Vicent Reinhart, Alan Auerbach and Maury Obstfeld, and my own work with Dave Reifschneider -described how monetary policy could be effective even 9 in situations where nominal short-term rates were very low. These are not ""emergency,"" ""crisis,"" or ""break-the-glass"" policies, but those that are well within the long tradition of monetary theory and practice. Of course, how and when to use policies depends on the circumstances and the risks policymakers are facing. But this is a matter of tactics and implementation, not of principle or strategy.

## Commitment to Transparency

The second principle is transparency-including the clear communication of a central bank's framework, an explicit numerical longer-run inflation target, and the reasoning behind policy decisions.

For central banks, transparency enhances accountability and keeps them clearly focused on achieving their goals. For households and businesses, an explicit and

credible inflation target helps take some of the uncertainty off the table so they can focus on planning for their future. By improving the public's understanding of a central bank's goals and actions, the central bank can enhance the effectiveness of monetary policy at stabilizing inflation and the economy. 10, 11 , 12

Based on a foundation of clear goals and strategy, central banks are better able to communicate their thinking behind policy decisions and how they relate to policy goals. This is often done through economic forecasts, reports, and speeches. Transparency around the factors that influence policy decisions can, in turn, improve the public's understanding of the policy reaction function, thereby enhancing the effectiveness of policy. 13   Indeed, many central banks have increasingly provided detailed macroeconomic analyses of factors relevant for monetary policy, including staff or policymaker estimates of the output gap and the natural rate of interest. 14

There is no single best way to achieve transparency-this is not one size fits all. Instead, the approach must conform to the institutional structures and practical realities of each jurisdiction. The Monetary Policy Reports of the Riksbank and Norges Bank, to name two examples, provide very clear summaries of the views of their policy committees, including their assessments of the distribution of the path of future interest rates. 15   In contrast, central banks with large committees or a mix of internal and external members have not done so. Such differences across central banks may be more a feature than a bug: One of the benefits of greater transparency and the variety of different practices is that we can all learn from each other's experiences as we strive to further improve communications consistent with our institutional structures and needs.

## Importance of Inflation Expectations

The third key principle of successful monetary policy is well-anchored inflation expectations. This principle has become a bedrock of modern central banking, as economic analysis and history have shown that anchoring inflation expectations is important in maintaining low and stable inflation. 16, 17

Well-anchored inflation expectations short-circuit so-called second-round effects in wage and price setting that exacerbate and prolong the impacts of the kinds of shocks we saw during the 1970s. They also create a more favorable short-run trade-off in achieving inflation and employment objectives. 18

Central banks help anchor expectations by owning the responsibility to deliver price stability, publicly committing to an explicit inflation target, and taking the actions needed to ensure price stability. The connections between policy communications and actions, inflation outcomes, and expectations are at the core of robust policy strategies. 19

Unlike the stylized textbook model of monetary policy, a robust policy approach recognizes that the economy is changing and uncertain. It also views the anchoring of expectations, or the lack thereof, as the outcome of monetary policy actions and communications, not an assumed fact.

## When the Facts Change

I have talked about the importance of three key principles: ownership of price stability and independence of action, transparency about goals and strategy, and a focus on anchored inflation expectations. But like that family of black bears on the Snake River, the unexpected is always waiting around the bend. These principles and lessons provide a strong foundation for monetary policy that prepares us for the unexpected challenges and uncertainties we face ahead.

Thank you.

- 1 European Central Bank, Our 2025 monetary policy strategy assessment, June 30,2025, and Board of Governors of the Federal Reserve System,  2025 Statement on Longer-Run Goals and Monetary Policy Strategy, August 22, 2025.
- 2 John C. Williams, Connecting Theory and Practice, remarks at Hoover Institution Monetary Policy Conference, Stanford, California, May 3, 2024.
- 3 Christina D. Romer and David H. Romer, ""Lessons from History for Successful Disinflation,"" University of California, Berkeley, May 12, 2024.
- 4 Luis I. JÆcome and Samuel Pienknagura, 2022. "" Central Bank Independence and ,"" 2022/186 Inflation in Latin America-Through the Lens of History IMF Working Papers (September).
- 5 D. Filiz Unsal, Chris Papageorgiou, and Hendre Garbers, 2022. ""Monetary Policy ,"" 2022/022 (January). Frameworks: An Index and New Evidence IMF Working Papers
- 6 Milton Friedman and Anna Jacobson Schwartz. 2008. A Monetary History of the (Princeton: Princeton University Press). United States 1867-1960
- 7 Allan H. Meltzer, 2003. . A History of the Federal Reserve: Volume 1, 1913-1951 Chicago: University of Chicago Press, 2003; and Allan H. Meltzer, 2010. A History of . Chicago: University of Chicago the Federal Reserve: Volume 2, Book 1, 1951-1969 Press; and Allan H. Meltzer, 2010. A History of the Federal Reserve: Volume 2, Book 2, Chicago: University of Chicago Press. 1970-1986.
- 8 Ben S. Bernanke, On Milton Friedman's Ninetieth Birthday, at the Conference to Honor Milton Friedman, University of Chicago, Chicago, Illinois, November 8, 2002.
- 9 Bennett T. McCallum, 2000. ""Theoretical Analysis Regarding a Zero Lower Bound on Nominal Interest Rates,"" Journal of Money, Credit and Banking 32(4): 870-904; Athanasios Orphanides and Volker Wieland, 2000. ""Efficient Monetary Policy Design ,"" 14(4): 327near Price Stability Journal of the Japanese and International Economies 65; Gauti B. Eggertsson and Michael Woodford, 2003. ""The Zero Bound on Interest "" 2003(1): Rates and Optimal Monetary Policy, Brookings Papers on Economic Activity 139-211; Ben S. Bernanke and Vincent R. Reinhart, 2004. ""Conducting Monetary "" 94 (2): 85Policy at Very Low Short-Term Interest Rates, American Economic Review 90; Alan J. Auerbach and Maurice Obstfeld. 2005. ""The Case for Open-Market

"" 95 (1): 110-37; David Purchases in a Liquidity Trap, American Economic Review Reifschneider and John C. Williams, 2000. ""Three Lessons for Monetary Policy in a "" 32(4): 936-66. Low-Inflation Era, Journal of Money, Credit and Banking

- 10 Anthanasios Orphanides and John C. Williams, 2004. ""Imperfect Knowledge, ,"" in Ben S. Inflation Expectations, and Monetary Policy The Inflation-Targeting Debate, Bernanke and Michael Woodford (eds.). Chicago: University of Chicago Press for NBER, pp. 201-34. Glenn D. Rudebusch and John C. Williams, 2008. ""Revealing the Secrets of the Temple: The Value of Publishing Central Bank Interest Rate Projections,"" in , John Y. Campbell (ed.), Chicago: University of Asset Prices and Monetary Policy Chicago Press for NBER, pp. 247-84.
- 11 Michael Woodford, 2012. ""Methods of Policy Accommodation at the Interest-Rate ,"" in , proceedings of the Federal Reserve Lower Bound The Changing Policy Landscape Bank of Kansas City Jackson Hole Economic Policy Symposium, August 30September 1, pp. 185-288.
- 12 Eric T. Swanson and John C. Williams, 2014. ""Measuring the Effect of the Zero Lower Bound On Medium- and Longer-Term Interest Rates,"" American Economic 104(10): 3154-85. Review
- 13 Rudebusch and Williams 2008.
- 14 John C. Williams, All the Stars We Cannot See, remarks at the Banco de MØxico Centennial Conference, Mexico City, Mexico, August 25, 2025.
- 15 Sveriges Riksbank, Monetary Policy Report, September 2025; Norges Bank, Monetary Policy Report 3/2025, September.
- 16 John C. Williams, ""Inflation Targeting and the Global Financial Crisis: Successes and Challenges,"" Essay presentation for the South African Reserve Bank, Conference on Fourteen Years of Inflation Targeting in South Africa and the Challenge of a Changing Mandate, Pretoria, South Africa, October 31, 2014.
- 17 See Orphanides and Williams ( 2004); Athanasios Orphanides and John C. Williams, 2005. "" Inflation Scares and Forecast-Based Monetary Policy,"" Review of 8(2): 498-527; and Athanasios Orphanides and John C. Economic Dynamics Williams, 2007. "" Inflation Targeting under Imperfect Knowledge,"" Economic Review , 1-23. There is a large theoretical and empirical literature on the formation of 2007 expectations. See, for example, George W. Evans and Seppo Honkapohja, 2001. (Princeton: Princeton University Press); Learning and Expectations in Macroeconomics Ulrike Malmendier and Stefan Nagel, 2016. "" Learning from Inflation Experiences,"" The 131(1): 53-87; Olivier Coibion, Francesco D'Acunto, Quarterly Journal of Economics Yuriy Gorodnichenko, and Michael Weber, 2022. ""The Subjective Inflation Expectations of Households and Firms: Measurement, Determinants, and Implications,"" Journal of 36(3): 157-84, and references therein. Economic Perspectives

- 18 Athanasios Orphanides and John C. Williams, 2013. ""Monetary Policy Mistakes and the Evolution of Inflation Expectations,"" in The Great Inflation: The Rebirth of Modern , ed. by Michael D. Bordo and Athanasios Orphanides, Chicago: Central Banking University of Chicago Press, 255-97.
- 19 Orphanides and Williams , and . 2004   2005,  2007, 2013",John C Williams
https://www.bis.org/review/r251007q.htm,Christine Lagarde: Monetary policy and financial stability - past lessons for future resilience,"Keynote speech by Ms Christine Lagarde, President of the European Central Bank, at the farewell symposium for De Nederlandsche Bank President Klaas Knot ""Europe in the world - challenges and opportunities"", Amsterdam, 3 October 2025.",2025-10-03 00:00:00,"SPEECH

## Monetary policy and financial stability: past lessons for future resilience

Keynote speech by Christine Lagarde, President of the ECB, at the farewell symposium for DNB President Klaas Knot, ""Europe in the world -Challenges and Opportunities""

Amsterdam, 3 October 2025

It is a pleasure to be here in Amsterdam.

At today's symposium, we are saying a fond farewell to an outstanding colleague and friend. Klaas, you can look back on a remarkable career in public service at the national, European and global levels.

You were at the helm of De Nederlandsche Bank for over 5,000 days 4 In that time, you were a gifted communicator, conveying complex themes to the Dutch public in clear but never simplistic terms.

As a member of the Governing Council, you participated in over 330 meetings, overseen by three different ECB Presidents. | won't put you on the spot by asking you who your favourite was. You can tell me later — no pressure.

Being one of the elders on the Governing Council, your voice carried a weight that helped to forge policy consensus at the most critical of moments — be it during the pandemic or during the sharpest inflation shock in a generation.

And with experience comes wisdom. As Chair of the Financial Stability Board (FSB), you used that wisdom to advance the global agenda on financial stability, shaping international standards and coordination.

Klaas, you are known for reminding colleagues who tend to talk at length to be more ""impactful"" in their interventions. Well, now the pressure is on me. | promise to be as ""impactful"" as | can.

So today, | would like to focus on the two themes that have defined your career: monetary policy and financial stability. And in so doing, | will discuss the powerful role that regulation and supervision can play in reducing the potential trade-offs between them.

## The interaction between monetary policy and financial stability

Financial stability and price stability are preconditions for each other.2] Yet history shows that in the pursuit of price stability, monetary policy can face two key trade-offs with implications for financial stability.

The first can occur when monetary policy rapidly tightens. Higher interest rates help to curb inflation, but they can put pressure on banks by eroding asset values and asset quality, even as rising net interest margins offer them some relief.)

We saw this during the 1980s, when the Federal Reserve rapidly tightened monetary policy to bring down high inflation.

Combined with US deregulation in the late 1970s, which encouraged riskier lending and weaker oversight, this monetary tightening was one of the key factors in the emergence of the savings and loan crisis. That led to the failure of roughly 1,300 savings institutions owing to the maturity mismatch on their balance sheets.

The second trade-off for monetary policy can arise during or following an extended period of monetary accommodation.

When inflation is below target, low rates can help stimulate demand and push inflation back towards target. But in an environment where regulation is relatively weak and especially where rates remain low for an extended period, they can also encourage borrowing, risk-taking and the build-up of financial imbalances.

These dynamics highlight how monetary policy can affect financial stability not only through banks' balance sheets but also via market valuations and investor risk appetite.&amp;!

Crucially, financial vulnerabilities may keep building even after rates begin to rise. We saw this in the lead-up to the global financial crisis of 2008.

Low rates earlier in the decade fed the US credit and housing boom that later unravelled — years after the Federal Reserve had begun to gradually tighten. And in the euro area, the sharp rise in private debt in some countries was a key driver of imbalances that built up before the crisis.

The lesson for policymakers was clear. Insufficient regulation and supervision had allowed risks to build unchecked, leaving monetary policy as de facto the only tool available to confront the fallout.

This placed an undue burden on central banks, forcing them to shoulder responsibilities that could have been better managed through stronger safeguards in the first place. That insight powered the construction of a stronger regulatory and supervisory framework after 2008.

The post-2008 regulatory and supervisory framework was a turning point for the interaction between monetary policy and financial stability. It served as a powerful lever in mitigating the trade-offs between them and, accordingly, increased monetary policy's room for manoeuvre.

## Monetary policy in extraordinary times

This was most visible during two extraordinary periods for monetary policy that followed in the wake of the global financial crisis.

The first period was when inflation was too low.

Central banks across advanced economies turned to a set of new — and, at the time, unconventional — tools to meet their price stability mandates, including large-scale asset purchase programmes and the introduction of negative interest rates.

These were significant measures to fight a significant challenge. And at the time, there were vocal concerns that these measures would fuel financial instability.©] Certainly, asset prices and housing valuations did rise notably during this period.

But crucially, given the stronger regulatory and supervisory regime, rising asset prices did not translate into excessive leverage in the banking system. In fact, banks in the euro area deleveraged in the decade after the global financial crisis. Similarly, private sector debt as a share of GDP also fell during that time.

And here in the Netherlands, we saw how macroprudential policy acted as the first line of defence against financial imbalances.

Under your leadership, Klaas, the DNB strengthened the macroprudential framework, introducing higher capital buffers and stricter risk weight requirements to guard against housing market risks. These measures kept in check vulnerabilities that might once have spilled over into broader financial instability.

After years of below-target inflation, the second period came unexpectedly — when euro area inflation surged to record highs after the pandemic and the energy shock sparked by Russia's invasion of Ukraine.

In the Netherlands, for example, inflation rose rapidly, peaking just above 17% in September 2022 — almost six times the rate recorded a year earlier.

Once again, we faced an extraordinary situation — and the ECB had to step up. Alongside the unwinding of its asset purchases, it raised rates ten times by a cumulative 450 basis points, the fastest tightening in its history.

And once again, there were concerns about the financial stability implications of such a rapid tightening.42

Tighter financing conditions risked straining borrower debt service and triggering market repricing. That, in turn, could have exposed financial institutions to vulnerabilities from falling asset values, maturity mismatches and weaker asset quality.

While there were some notable bank failures during this period, the global financial system overall remained broadly resilient to rising rates.

In the euro area, for example, banks were supported by stronger capital and ample liquidity buffers. Strong supervision also helped. Even before the inflation shock hit in full, the Single Supervisory

Mechanism had factored interest rate risks into its supervisory work programme.)

Moreover, in line with the outcome of its strategy review, the ECB's Governing Council was regularly assessing the links between monetary policy and financial stability as part of its policy deliberations.12]

The experience across these two monetary policy eras confirmed the lessons of 2008. Stronger regulation and supervision were able to contain financial exuberance and limit vulnerabilities. They allowed monetary policy to focus on its job of delivering price stability.

In this regard, Klaas, you have a knack for good timing. When you left the Governing Council last July, inflation had fallen substantially from its historic peak and stood at our target of 2% that same month.

## A global financial system in transformation

Does the progress we have made in strengthening the regulatory and supervisory framework mean that policymakers can now let their guard down? The answer, of course, is no.

Today's global financial system looks very different from the one that stood on the brink in 2008.43] Two key shifts stand out compared with then.

The first has been the massive structural transformation that has taken place, the most striking change of which has been the growing footprint of non-banks in financial intermediation.

In the euro area, non-banks — ranging from investment funds and insurance corporations to money market funds and securitisation vehicles — have grown from about 250% of GDP in 2008 to more than 350% today.

Non-banks are also highly interconnected with the banking sector."" In the euro area, banks' asset exposures to non-banks are sizeable, averaging around one-tenth of significant institutions' total assets.)

At the same time, a second key shift is becoming increasingly evident — namely, signs of regulatory fatigue, which is creating an uneven playing field for financial institutions.

In particular, investment funds, despite their increasing systemic importance, operate under far lighter rules compared with the banking sector. That has in part helped to fuel their growth.

One of the reasons behind this regulatory fatigue is that the post-2008 global regulatory framework has arguably been a victim of its own success.

In policymaking, 17 years is a long time. Not only do painful memories fade, but so too does the recognition that the financial stability the world now enjoys is thanks to the robustness of that global regulatory framework established back then.

This fading sense of urgency, together with concerns that banks' competitiveness vis-a-vis non-banks is threatened by the uneven playing field, has ignited calls to revisit the existing set of financial rules and regulations.

## The importance of levelling up regulation and supervision

So how should policymakers react to these shifts in the financial system?

In short, it is vital that policymakers adapt regulation and supervision to this challenging environment. They should do so not by /owering standards for banks, but by /evelling them up for non-banks that are involved in bank-like activities, or with significant links to the banking sector.

That helps to address banks' concerns about the uneven playing field. And better supervision of nonbanks would make potential financial stability risks that have lain dormant in darker corners of the economy more visible, allowing policymakers to pre-empt them.

Klaas, as FSB Chair, you have been a powerful voice in warning against the dangers of regulatory rollback."" And under your leadership, the FSB advanced ambitious policy recommendations on strengthening rules for non-banks.

They covered money market fund resilience), liquidity mismatches in open-ended funds8), margin preparedness] and, most recently, leverage in non-banks.'22l This is not to mention the FSB's important work on other areas of financial stability risk.24)

As a central banker, | cannot pretend to be an unbiased observer in these discussions. Because if the regulatory and supervisory spotlight were to be broadened to non-banks, monetary policy would benefit too.

If risks were to build outside the banking system, beyond the current reach of regulators and supervisors, the trade-offs that were evident before 2008 may re-emerge, with monetary policy de facto being the only tool to ""get in all of the cracks"" and rein in financial exuberance. (221

That would be a suboptimal outcome, one that potentially constrains central banks' full freedom to defend price stability.

So as referees on the playing field, it is vital that policymakers resist regulatory fatigue and redouble their efforts to extend stronger global rules to non-banks involved in bank-like activities, or with significant links to the banking sector.

At the same time, after a decade of adding regulation, this is a good moment to take stock and assess how regulation can be simplified to avoid duplication and unnecessary burdens on financial institutions.

In this respect, the ECB High-Level Task Force on Simplification is developing proposals for simplifying the European prudential regulatory, supervisory and reporting framework for the European Commission's consideration.

The goal is not to relax rules, nor undo what has been achieved. Instead, the task force is exploring how to reduce undue complexity in selected aspects of the capital structure, reporting and supervision, while also maintaining the resilience of banks and fostering greater integration and harmonisation in EU frameworks.

## Conclusion

Let me conclude.

| have spoken this evening about one Dutch elder — you, Klaas. Hopefully | have done so ina relatively impactful manner. But | would like to finish by citing another Dutch elder.

In his Adagia, the humanist Erasmus gathered the wisdom of past centuries for the benefit of those living in the present. Among the proverbs that still resonate today is, ""Prevention is better than cure"". [23]

In the Netherlands in particular — often said to have witnessed the world's first financial bubble, though historians debate its true scale!~4] — that lesson endures: vigilance is wiser than complacency.

This principle lies at the heart of sound regulation and supervision. As the financial system evolves, regulators and supervisors must retain visibility of potential risks, since preventing instability is always less costly than repairing the damage afterwards. It also helps to limit the potential trade-offs between monetary policy and financial stability.

Policymakers should not wait for another financial crisis to be reminded of how high the stakes are. It is imperative to extend oversight to non-banks involved in bank-like activities, or with significant links to the banking sector — and policymakers must do so sooner rather than later.

Thank you.

1.

DNB (2025), Klaas Knot: 14 years in 14 figures (and 5 videos), 30 June.

2.

ECB (2025), An overview of the ECB's monetary policy strategy, 30 June.

3.

speech at the Deutsche Bundesbank symposium ""Bankenaufsicht im Dialog"", 8 November.

4.

History of the Eighties: Lessons for the Future. Vol. 1, An Examination of the Banking Crises of the 1980s and Early 1990s, Federal Deposit Insurance Corporation (FDIC), Washington DC.

5.

Workstream on macroprudential policy, monetary policy and financial stability (2021), ""The role of financial stability considerations in monetary policy and the interaction with macroprudential policy in the euro area"", Occasional Paper Series, No 272, ECB, Frankfurt am Main, September.

6.

See, for instance, the discussion in European Parliament (2015), ""The ECB's Quantitative Easing — Early results and possible risks"", December; see also BIS (2015), 85th Annual Report: 1 April 2014-31 March 2015, June.

7.

Private sector debt as a share of euro area GDP fell by 11 percentage points from its 2009 peak to 138% by the end of the following decade. See Eurostat, Private sector debt, consolidated -% of GDP.

8.

HICP in the Netherlands was 3.0% in September 2021.

9.

In parallel, it also established the Transmission Protection Instrument in July 2022. See ECB (2022),

""The Transmission Protection Instrument', press release, 21 July.

10.

For the euro area, see ECB (2023), Financial Stability Review, May; for the United States, see Office of Financial Research (2023), ""OFR Finds Elevated Threats to U.S. Financial Stability Due to Inflation, Ongoing Geopolitical Risks, and Global Conflicts"", press release, 6 December; for a global perspective, see World Bank (2022), ""Risk of Global Recession in 2023 Rises Amid Simultaneous Rate Hikes"", press release, 15 September. 11.

As noted in Enria, A. (2023), ""Well-run banks don't fail — why governance is an enduring theme in banking crises"", speech at the 22nd Annual International Conference on Policy Challenges for the Financial Sector organised by the World Bank, International Monetary Fund and Federal Reserve System, 1 June.

12.

ECB (2025), ""An overview of the ECB's monetary policy strategy — 2025"", 30 June; and ECB (2021), ""An overview of the monetary policy strategy — 2021"", 8 July.

13.

Paulson, H.M., Jr. (2010), On the Brink: Inside the Race to Stop the Collapse of the Global Financial System, Business Plus.

14.

Acharya, V.V., Cetorelli, N. and Tuckman, B. (2025), ""Where Do Banks End and NBFIs Begin?"", ECB Annual Research Conference 17-18 September.

15.

Franceschi, E. et al. (2023), ""Key linkages between banks and the non-bank financial sector"", Financial Stability Review, ECB, May.

16.

Knot, K. (2025), ""How is the water? Continuing \_our work to preserve financial stability"", speech at the Bank of Spain and CEMFI Fifth Conference on Financial Stability, Madrid, 12 June.

17.

18.

FSB (2023), ""Revised Policy Recommendations to Address Structural Vulnerabilities from Liquidity

Mismatch in Open-Ended Funds"", 20 December.

19.

FSB (2024), ""Liquidity Preparedness for Margin and Collateral Calls: Final report"", 10 December.

20.

FSB (2025), ""Leverage in Nonbank Financial Intermediation: Final report"", 9 July.

21.

See, for instance, FSB (2023), ""High-level Recommendations for the Regulation, Supervision and Oversight of Crypto-asset Activities and Markets: Final report', 17 July; FSB (2023), ""High-level Recommendations for the Regulation, Supervision and Oversight of Global Stablecoin Arrangements: Final report"", 17 July; and FSB (2025), ""ESB Roadmap for Addressing Financial Risks from Climate Change: 2025 Update'.

22.

Stein, J.C. (2013), ""Overheating in Credit Markets: Origins, Measurement, and Policy Responses"", speech at the ""Restoring Household Financial Stability after the Great Recession: Why Household Balance Sheets Matter"" research symposium sponsored by the Federal Reserve Bank of St. Louis, St. Louis, Missouri, 7 February.

23.

Erasmus (1500), Adagia.

24.

See, for instance, Goldgar, A. (2007), Tulipmania: Money, Honor, and Knowledge in the Dutch Golden Age, University of Chicago Press.

CONTACT",Christine Lagarde
https://www.bis.org/review/r251007a.htm,Andrew Bailey: Challenges to financial stability,"Speech by Mr Andrew Bailey, Governor of the Bank of England, at the Klaas Knot Farewell Symposium, Amsterdam, 3 October 2025.",2025-10-03 00:00:00,"## Andrew Bailey: Challenges to financial stability

Speech by Mr Andrew Bailey, Governor of the Bank of England,  at the Klaas Knot Farewell Symposium, Amsterdam, 3 October 2025.

* * *

It is a great pleasure to be here today to celebrate Klaas's time as President of De Nederlandsche Bank and Chair of the Financial Stability Board. But more than that, to recognise Klaas as a very good friend and colleague.

Klaas's time as Governor covered most of the period since the financial crisis. But his career goes further back, both at the DNB and the Ministry of Finance here in the Netherlands. He has seen it all, and has been at the heart of rebuilding financial stability. It is I think therefore appropriate to concentrate on the theme of financial stability.

I am going to focus on a number of key questions. What has been achieved in the time since the crisis? What appears to be the challenge today to these achievements? And where do we go from here? There have been times in recent years when we might have treated these questions as matters of more academic speculation, that's not so today. They are real questions up for debate and challenge. I know that Klaas will want to be part of answering them. And Klaas, you need no encouragement from us, please do get stuck in, with your trademark elegance and force, the hallmark of Dutch football that you are such a keen supporter of.

What has been achieved in the field of financial stability since the financial crisis? Answer - a lot. Yes, today's world is a highly uncertain and unpredictable place sadly. We have experienced very large shocks - a pandemic, the longest war in Europe since 1945, I could go on.

But we have come through, so far at least, without a crisis of financial stability of the sort that has been seen in the past. Likewise, we have not had a major and lasting recession during these recent shocks.

But, this all reminds us that bad things happen in the world, and they can affect financial stability, this is always possible. That said, we start with a financial system that is much more resilient, which is a much better place to be. We have a banking system that after a long-haul post-crisis appears to be sustainably earning its cost of capital in terms of returns. This is reflected in market pricing, with market price-to-book value more consistently above unity.

Another lens through which to look at this point is to examine arrears and loan losses across the recent period of economic shocks. The evidence points to resilience here such losses have been low by historical standards. Of course, this benefits banks and their shareholders, but it also helps consumers as customers and economies generally. Customers get better outcomes and particularly when they avoid having their business closed, losing their job, or having their home repossessed. The benefits of financial stability are real and tangible. Yes, but they may not be perceived as such. One of the challenges of financial stability is that it is a state of being in which success comes

when things don't happen, and don't go wrong. It is therefore susceptible to the problem of ""out of sight, out of mind"", in other words under-appreciated.

But, I am conscious that this story alone leaves open the charge that we have achieved the so-called stability of the graveyard. Nothing moves, there are no big dramas, because the system is moribund. Not true, is my response. The financial system has evolved and continues to do so. The record of the last 15 years indicates that the financial system has played its part in supporting economies through a series of severe shocks, and has acted to absorb rather than amplify these shocks. I would emphasise here that financial stability is not an end in itself. Rather, the goal is to support economic activity, a point I will come back to later.

When we look at the developments of the last 15 years or so we should also recognise how the financial system has changed, and it certainly has. I am not going to give an extensive review of the changes, but rather pick out a small number of key points and seek to explain their broader significance.

The first major change that we have seen is a rebalancing of the overall scale of global financial intermediation with an increase in the non-bank sector relative to banks. The non-bank sector is not, of course, homogenous, a point I will come back to. I think it is worth drawing out a number of closely related points that underline this shift in balance between banks and non-banks. The first is one that, I think, was clear during the financial crisis, and provides a backdrop to the changes that were to come. It is that the financial crisis was severely exacerbated by the concentration of assets and exposures on the balance sheets of banks which were too volatile and hard to value in a stress, and thus created too much uncertainty around the stability and ultimately solvency of banks.

One of the eternal questions that gets posed during such a stress is whether for banks it is a solvency or liquidity event. The presumption is that the latter is ok in the sense of manageable while preserving going concern, while the former is not. But the problem is that we only know the answer to this question ex-post. Illiquidity is a symptom which tends to point towards doubt around future solvency, but does not answer the question conclusively, either ex-ante or contemporaneously. The question is better put as whether there is sufficient uncertainty around future solvency to cause stress through illiquidity. The answer to this question in many, if not all, problem cases during the crisis was yes. From that answer, it is a logical step to conclude - as we did - that the tools of liquidity assistance available to central banks - let's call them the traditional Bagehot tools - should be reinforced and supplemented by tools of resolution, and this rightly became an important part of the post-crisis agenda for national authorities and the FSB, an agenda that Klaas has played a major part in leading.

We have made huge progress on the resolution agenda. Alongside that, we have also made huge progress on the Basel agenda for reforming the prudential regulation of banks. At this point, I must make the - obvious I hope but it has to be made anyway comment that we must finish off implementation. Linking this back to the re-balancing of the bank and non-bank financial sectors, these developments help to explain why the rebalance has been a sensible and logical development. It has been a foundation reducing the probability of crisis in the banking system.

But, some of the argument for this was apparent at the time of the crisis, and some was less apparent. I think what has become more obvious over the last 15 years is why this change matters for financial stability, and what it tells us about the future. For me at least, this is where the concept of the singleness of money, and trust in money, comes in, and how it underpins the regulation of banks. Put simply, why were some assets problematic for banks in the crisis, and why did it matter?

The distinctive feature of banks is that their liabilities are typically substantially in the form of money deposits. In the regulatory world, it is deposit taking that is unique to banks. Most of the stock of money in our systems is commercial bank deposits.

These deposits underpin the functions of money - its role as store of value, unit of account and means of exchange or payment. The critical property of money is trust in its nominal value.

Put simply, a Pound or euro in my account has the same value as a Pound or euro in another account, and thus when we make payments we do not have to worry about variable nominal value. This is a key foundation of financial stability, and thus of public trust. In the crisis it was the uncertainty about the future solvency of banks that undermined this trust and thus ended financial stability itself. The underlying issue here was increasing doubts on whether the liabilities of banks did satisfy the properties of the singleness of money. So, a key objective of the post crisis reforms has been to rebuild confidence in the singleness of, and trust in, money.

However, if I stopped the account here, it would fall into the trap of adapting an oldfashioned view of banks that they are only deposit-takers, and not involved in activities which get loosely called investment banking. In what I regard as one of the best books on financial crises, Gary Gorton described the 2008 crisis in the US as a run on repo, prime broker balances, and asset-backed commercial paper. 1

At first sight, this appears critically to muddy the distinction between banks and nonbanks. Can we be confident we know where the boundary lies? The lessons here are that the critical feature of banks is the singleness of money and the public's trust in the assured nominal value of their money. Moreover, since banks are ultimately single entities, their reputation and that trust depends on confidence in their balance sheets as a whole (which is not, of course, to ignore that their capital structures must involve lossbearing in both going and gone concern states). In other words, we must be very focused on the money system in our economies and its stability.

That said, our economies rely on financial risk taking, and that is essential to support investment and growth. To achieve this, it's crucial in large parts of the non-bank system that there is not assured nominal value for the liabilities so that risky investment proceeds. It is critical that we maintain this distinction between banks and non-banks, and it is well understood by the public.

I will, however, add two important qualifications.

First, banks must of course take risks - that should not need to be said, but just in case. The point is that the risks must be managed to preserve the assured value of money. Most non-banks do not need to do this. But, second, some non-banks do write liability

contracts which contain promises of future value of one sort or another. Insurance is a very good example of this.

My key point here is that over the last fifteen years post crisis, the distinction between banks and non-banks and the importance of the money system has become better understood and defined. It is not new at all, but it has been important to define it under today's conditions. Failure to do so was a major flaw that led to the financial crisis.

There has to be a ""however"" though, and this brings in the second of the three big changes in financial intermediation that we have seen since the financial crisis. The ""however"" is that it would be a mistake to think that the greater scale of non-bank finance, and the distinction between money and non-money liabilities has led to a comprehensive separation of these two parts of finance. The two are as inter-connected as ever, but in ways that have changed. And, this is absolutely key to understanding financial stability today and the risks to it.

Let me use a prominent example. There has been a major change in the nature of trading in most major government debt markets, resulting in a much expanded nonbank presence and often much more leverage attached to newer trading strategies. But the banking system remains the ultimate source of liquidity for these activities. Banks' activities in prime brokerage have expanded substantially and rapidly. The financing is typically secured and margined to protect against risk. Often, this relies on another of the major post-crisis developments, namely the expansion of central clearing.

These developments are consistent with the post-crisis direction of policymaking, to strengthen infrastructures like clearing houses, put them at the heart of the system, and thereby manage and reduce the risk of serious systemic stress which threatens financial stability. There is a good case that these developments have to date worked. However, rather like the overall growth of non-bank finance, we should not be surprised that a stronger infrastructure has led to the growth, for instance, of more leveraged trading activities. Our job as authorities is to understand these developments and assess and if necessary tackle any vulnerabilities that they may give rise to. That's all work that Klaas has led in the FSB, and we are continuing.

I would describe developments such as the growth of leveraged trading as putting the post-crisis financial system to work. We may or may not like all of them, and they give rise to new risks, but we shouldn't be surprised that the system responds and evolves.

Another example of post-crisis developments in non-bank finance is private assets private equity and private credit. These may fall into a somewhat different behavioural category, namely there may be aspects of public markets which encourage going private. Our job is to assess the consequences for financial stability purposes. It is not to presume that such developments are per se bad, but rather to ask questions and assess them with rigour and be transparent with our conclusions. In the lead up to the crisis, there was a different culture, more of an absence and at times disapproval of such scrutiny, and the consequences were regrettable.

A third big change in financial intermediation post-crisis that I would highlight is the growth of crypto assets. I'm not convinced that the cause of this was a response to postcrisis regulation. It seems to me to be more an outcome of technological advances. But

it falls into the category of new areas that require thorough assessment of possible vulnerabilities and their financial stability implications. I don't regard crypto as a homogenous world, and the distinction between investments and money helps with understanding the distinction. Crypto of the Bitcoin variety falls into the risky investment category, whereas stablecoins used for retail and wholesale payments, rather than just to support crypto trading, fall into the money category, or should do. Understanding the implications of this distinction is important for designing the approach to regulation. But, I will go further than that and say it should enable better stablecoins to emerge than would do in a world in which the distinction was not understood and followed up.

This point takes me to the last important theme I want to cover today, and again one that is closely associated with the leadership that Klaas has undertaken.

Today, we face a growing challenge to the post-crisis system of financial regulation. It comes with a number of descriptions and reasons. One is an old point made by Hyman Minksy, that as time passes memories of a financial crisis fade and this leads to a questioning of the continuing need for the responses. This creates the risk of history showing signs of repeating itself, remembering back for instance to the strength of the deregulation argument before the financial crisis. Those of us, like Klaas, who are veterans of dealing with the financial crisis, don't tend to forget, but I can see evidence in today's world of the truth of Minsky's observation.

But I don't think the Minsky theory is the end of the story. Another argument made is what gets described as the need for regulatory simplification. I think a reasonable interpretation of this argument is that it is perhaps natural that the response to an event as big as the financial crisis becomes over-complicated, and the passage of time exposes the need to stand back and take a hard look at whether some parts of the response are too complicated, or excessive. There is truth in this, and we should take up the challenge and respond - and we are doing so. But, again I don't think this is the full story on the reasons for the growing challenge to financial regulation.

A third argument I detect concerns the distributional effects of the regulatory changes, and comes in a few forms. The first is that the response to the financial crisis has changed the financial system and has thereby gone too far to create winners and losers. A second form of this argument is that the post-crisis regulatory system is inflexible and does not allow innovation. These are important arguments about competitiveness that we need to assess carefully. Brushing them off will not do. Again, where there is truth in the argument, we should respond.

The fourth argument I can see in may ways is the most fundamental namely that the regulatory system is impeding growth in economies. This is a very important challenge, for the simple reason that the potential growth rate of many developed economies has slowed markedly since the financial crisis, and particularly the growth of productivity. And since productivity is a main determinant of the growth of living standards, the evidence of a very flat growth in GDP per capita underlines the importance of this point.

So, we have four challenges to the state of financial regulation, all of which amount in different ways to saying that we have overdone it post-crisis. In my remaining time, I

probably can't do each or any of them proper justice, but this debate is now so central to what we are doing that it has to be taken on and given due consideration. To remind him again, I hope Klaas will be part of this effort.

I will start with the Minsky passage of time point. First of all, I think Minsky was right, and current events are illustrating his point. As I mentioned earlier, success in financial stability is when nothing happens, and not much has happened relative to the scale and nature of the shocks we have had - Covid, Ukraine etc. It is convenient to think, nothing has happened, job done with regulation, I rest my case for the benefits. But meanwhile, the argument is growing that since nothing much has happened, we must be overdoing it on regulation.

The answer to all of this is that it rightly pushes us to ground the case for regulation and keep doing so, because ""out of sight, out of mind"" does not lead to good long-run outcomes. Moreover, since the world constantly changes, it is a mistake to freeze the regulatory system because it appears to have worked in the recent period of time. Here I think it is important to set out the specific outcomes we seek in the financial system when we say we are aiming for financial stability. What I have in mind here are outcomes as follows: First, we want a system where confidence in banking is maintained in the face of economic shocks and where resolution regimes enable the continuity of financial services if a bank fails. Second, we want to maintain the singleness of money, including where new types of non-bank that have grown up in the crypto world seek to issue money for real-world payments purposed. Third, we want robust market and payments infrastructure that operates without interruption and recovers quickly from rare disruptions. Fourth, we want financing from banks and nonbanks to the real economy that is sustainable through the economic cycle and avoids excess supply of debt followed by debt overhang. These are big building block outcomes that we have to articulate, otherwise the debate on regulation is dangerously ungrounded

Let me turn to the second challenge, the point on simplification. Regulation probably does go in cycles, and we should recognise this and respond. Post-crisis it was straightforward to advance a cost-benefit case for increasing regulation, and this happened. By the way, in my experience governments were very much part of this process, it wasn't just central banks and regulators. But pro-cyclical regulation is not a good or stable state of the world, and we should recognise this. There is little doubt that in some areas we collect too much data. There is also a growing risk that because of this, as the pro-cyclical tide turns, we are inhibited from collecting necessary data in new areas of risk. So, we must, and I think are, responding positively to the simplification challenge. Another case of simplification is the adoption of a simpler capital regime for small deposit takers, in the UK the so-called ""Strong and Simple"" regime.

The third challenge is the competitiveness one. As I mentioned, this comes in several forms - you have skewed competitiveness by regulating, and you have prevented innovation by doing so. These are basically the same argument taking on different forms. Here, too, we must respond, and we have to ground the response in the core building block arguments. The danger here, to be frank, is that arguments that are interest based - and I don't say this in a critical way, it's a matter of fact - swamp the fundamental ideas based grounding of financial regulation. We have seen this before -

its another form of the Minsky argument. It is the case that post-crisis regulation did intentionally change the competitive balance of banks and non-banks, for the reasons that we had ended up pre-crisis with an unstable and dangerous banking system which had lost the anchor of the singleness of money. That anchor could only be put back in place with massive state intervention at an unacceptable cost to taxpayers.

Today, I would argue that the financial system is not only more stable, but also generally earning returns which meet basic commercial objectives. It is up to firms then to increase their returns further, nothing is wrong with that. But there is a point in the third challenge. We must enable safe innovation and development of the financial system, otherwise competitiveness is an issue and it will undermine achieving the goal of financial stability. This enablement needs however to happen within a system that is grounded in the core ideas and principles. Yes, I'm back to points like the singleness of money again.

The fourth challenge, the growth issue, is crucial. We face a huge challenge on this front. However, I push back at the line of argument that post-crisis financial regulation caused the fall in productivity growth, by restricting business investment in the economy. I think it is a rather different line of argument. Big shifts in productivity growth over history have been shaped by advances in so-called general purpose technology things like the steam engine, electricity etc. We had such an advance before the financial crisis, through ICT and the internet. Over time, the contribution of these advances to economic growth does run out - that's as distinct from their contribution to the level of economic activity. I think this is more what we have seen post-crisis, but the timing is coincidentally awkward for separating out causes.

All of that said, we need a financial system that is ready and able to finance the next general purpose technology advance, which I would guess is AI. This is the important question today. In my view this must be a stable financial system, grounded in the core areas and principles of financial stability, but one that must be set up to support growth.

To finish, all of these four challenges have a point to them. We cannot behave as if the case for financial stability can ignore them. That said, if the baby is thrown out with the bath water so to speak, and financial stability is relegated in terms of its importance, we won't achieve our objectives. There is no trade-off between financial stability and objectives like growth and competitiveness.

But nor is our system perfect in every respect and fit for an ever-changing world. Our system must be constantly assessed and adapted as needed. But that process must be grounded in the core principles and ideas of financial stability. Klaas, you have been a leader in ensuring we do this, and I hope and believe you will go on being so.

Thank you.

I would like to thank Nathanaºl Benjamin, Sarah Breeden, Karen Jude and Sam Woods for their comments and help in the preparation of this speech.

1  Gary Gorton, 'Misunderstanding Financial Crises: Why We Don't See Them Coming'. Oxford University Press, 2012.",Andrew Bailey
https://www.bis.org/review/r251007g.htm,Olaf Sleijpen: Counting what's missing - building sustainability statistics in a data-scarce world,"Speech by Mr Olaf Sleijpen, President of De Nederlandsche Bank, at the opening of the Irving Fisher Committee Satellite Seminar on ""Sustainability data issues and central banks"", Amsterdam, 4 October 2025.",2025-10-04 00:00:00,"## Olaf Sleijpen: Counting what's missing - building sustainability statistics in a data-scarce world

Speech by Mr Olaf Sleijpen, President of De Nederlandsche Bank, at the opening of the Irving Fisher Committee Satellite Seminar on ""Sustainability data issues and central banks"", Amsterdam, 4 October 2025.

* * *

A warm welcome to you all, welcome to De Nederlandsche Bank. And thank you for giving me the opportunity to come to the office on a Saturday. I must say I don't do this very often, except on very special occasions. And this is a very special occasion. We are proud to host the Satellite Seminar of the Irving Fischer Committee on Sustainability data issues and central banks' experience.

And I think it is rather fitting to hold this seminar on World Animal Day. Because in a way statisticians are like animals. There are many different species of you, you are essential to the economic ecosystem, but you are not always treated very well. And some of you are even under threat from some nasty examples of Homo sapiens.

So on a day like this, and also on World Statistics Day later this month, it is good to remind the world how crucial reliable data are for global progress. Good data, and good statistics based on that data, are key to making informed decisions in a complex world and a modern economy.

Now let's zoom in a bit on the role of central banks. Central banks play an important role in providing high-quality statistics on the economy and the financial sector. That is because, as monetary authorities and often also as financial supervisors, central banks gather a lot of data. And we have the skills and the knowledge to organise, analyse, and interpret these data to draw meaningful conclusions.

In this rapidly evolving world, there is a need for statistics that are both timely and responsive to current developments. This is particularly the case for data on sustainability and climate risk. Climate change and nature degradation form a risk for financial institutions, financial stability and long-term economic development and may impact price developments. And that's why climate change and nature degradation are well within the mandate of central banks and prudential supervisors..

There is huge demand for reliable statistics on climate risk. But sustainability data and statistics are still a relatively new field. There are still significant data gaps. For financial institutions, there are currently no global and consistent legal requirements to submit sustainability data. Reporting mandates still differ greatly in terms of stringency and scope across countries.

So the situation is not ideal. But given the urgency of the climate problem and the demand for data, we cannot wait for the perfect dataset. We need to get to work with what we have and collect and make use of existing and available sustainability data.

Over the past years, many of us have gained experience in unlocking the value of these data. And today we are here to share these experiences and ideas for the future of sustainability data and statistics.

Alternative data sources can be of great value here, and looking at today's schedule I am glad to see that multiple sources are being explored, from payment system data to data from companies' balance sheets.

A great example of an alternative data source that I recently became aware of is PortWatch. This is an open platform designed by the IMF that uses satellite data to monitor and simulate disruptions to maritime trade flows. It turns out you can use PortWatch to simulate the effects of alternative climate scenarios on world trade. The platform shows that the impact of climate change on the economy, and therefore on the financial sector, is broad. Indeed, climate change is a many-headed monster.

On top of using alternative data sources, new data science techniques can also help generate better statistics and insights.

For example, we rely on many different data sources to create sustainable finance statistics, and these datasets often need to be combined. In many cases, a unique identifier or clear definitions are still missing. So this is quite a complex task. New data science techniques can be of great help here.

Because one thing is really important. And that is that we should aim for consistency and transparency in how data is collected and stored. Whether this means linking macro to micro data, combining reported, satellite, modelled or proxy data, or merging data from public and commercial sources. Because if we don't, we will only make it harder to compile and harmonise statistics to enable comparison across countries.

Another example of new data science techniques is nowcasting. This is a technique that may help overcome specific challenges stemming from the dependency on data that become available only following a delay. Commercial data on carbon emissions for instance. At DNB and in cooperation with the ECB, we have therefore applied a data science technique called 'nowcasting'. Thanks to this technique we can provide more timely carbon statistics for the euro area, as users of our data have often requested.

In a world that is scaling back on corporate sustainability reporting, there will obviously be an impact on the availability of source data to compile statistics. One possible outcome is that we will need to rely more on modelled and imputed data for the time being. This makes it all the more important to base these data on transparent and harmonised methods across jurisdictions.

So, to wrap up, we need to be creative, we need to be smart, and we need to work together. And that's also what this seminar is about. Climate change is a global problem, and there is a global need for better data. The issue is new and complex and we are all facing the same types of challenges, so cooperation is both logical and necessary. The Data Gaps Initiative is a very good example of this. Also, committees like the IFC provide a valuable platform for cooperation.

I understand this seminar is only the first stage of a true statistics tour through the Netherlands. The ISI World Statistics Congress kicks off next Monday in The Hague. But for some, a full week of statistics is still not enough. Here at DNB on the 13th and 14th of October, we will host the International Working Conference on primary emissions data at the product level.

But let's not get ahead of ourselves. Tonight, we are taking you on a boat tour along the canals of Amsterdam. After all, somewhat in the spirit of World Animal Day, statisticians can be seen as a special kind of animal, and we do care about your wellbeing.

I wish you a wonderful day.",Olaf Sleijpen
https://www.bis.org/review/r251007o.htm,Gabriel Makhlouf: Remarks - British Irish Chamber of Commerce ,"Remarks by Mr Gabriel Makhlouf, Governor of the Central Bank of Ireland, at the British Irish Chamber of Commerce, Dublin, 2 October 2025.",2025-10-02 00:00:00,"## Gabriel Makhlouf: Remarks - British Irish Chamber of Commerce

Remarks by Mr  Gabriel Makhlouf, Governor of the Central Bank of Ireland, at the British Irish Chamber of Commerce, Dublin, 2 October 2025.

* * *

Thank you for the invitation to join you this afternoon.

My remarks today will discuss the economic outlook in a period of global change and our regulatory approach in the changing environment.

But before I talk about that, I'd like to touch briefly on the importance of the relationship between Ireland and the United Kingdom. In a time when fragmentation and global uncertainty are straining international relationships, the economic and social bond between the two nations is a testament to a deep and shared resilience. Everyone in this room knows the links across these islands are about much more than a market. It is a deep-rooted relationship, sector to sector, business to business, families and friendships intertwined.

From the Central Bank of Ireland's perspective, the relationship is not an abstract concept but something that's very real. Ireland has a globally interconnected financial ecosystem that has a strong connection with its counterpart in the UK. As many of you in the financial industry know, we have an excellent relationship with our colleagues at the Bank of England, PRA and FCA, and we will continue to share information and knowledge, coordinate on supervisory standards, and assist each other in the delivery of our mandates. This strong working relationship ensures that capital flows remain secure, payment systems are resilient and that the integrity of our financial markets are maintained, not least through periods of significant change such as we are experiencing today.

## A changing external environment

The global economy has been fragmenting along geopolitical lines for nearly a decade, but this trend has accelerated, marking a swift transition with implications across the short, medium, and long term, alongside the other significant, and more familiar, economic transitions of ageing societies, a changing climate and an increasingly digitalised world. Recognising and understanding these transitions is fundamental if we are to shape policies that build economic resilience, enabling households, businesses, and communities to navigate challenges and seize opportunities. International trade in goods has entered a new and profoundly unfamiliar period. Global trade is being reshaped as countries and businesses respond to tariffs directed at them.

For Ireland, as an open and very well-connected economy, an environment of trade barriers coupled with policy unpredictability is unwelcome. The new agreement between the EU and the US, although yet to be fully implemented, has provided some welcome stability. In the first half of this year, the Irish economy demonstrated resilience, with robust consumption and investment, but headwinds persist. Continued expected growth in real disposable incomes, amid a stable labour market, labour force participation is

high and unemployment low, supports the forecast for continued growth in consumer spending. Overall, our latest projections anticipate a slowdown from 2.9 per cent growth this year to just over 2 per cent in the coming years. 1

The question is how best to sustain what has been a positive trajectory over the last few years into the medium-to-long term. Analysis indicates an economy one per cent smaller relative to a tariff-free scenario, driven by lower investment and a shift in exports to non-US markets. 2   To maintain the economic success of recent years in the face of current and more medium-term challenges, Ireland will have to focus in particular on addressing its infrastructure gaps.  Efficient infrastructure delivery, supported by enabling processes, innovative approaches and scaled investments, can enhance productivity, reduce costs, and maximise economic benefits.

## Regulating in a changing environment

To state the obvious, the financial system has an important role to play here. The sector has been undergoing its own rapid change over recent years, not least as a result of technological innovation. Increasingly, we are seeing the importance of operational and cyber resilience to the rapid evolution of artificial intelligence and its use. This provides many opportunities, although if not adequately managed it can also pose many risks.

When I think of our response to these changes, three things come to mind: cooperation in the face of fragmentation; adapting with the times; and always sticking to the fundamentals.

First, whether it's climate or cyber or innovation, it is clear that what we are increasingly dealing with are global changes and challenges. They are common to us all, they cannot be confined to borders, and require global cooperation if they are to be addressed effectively.

I know that both Ireland and the UK are committed to international cooperation and multilateralism. For one thing, I see it reflected in the open, engaged and internationally active nature of our central banks and regulators.

We and our counterparts in the UK both know that having an international financial centre entails international responsibilities, including a commitment to effective regulation, actively engaging with the international rule-setting bodies as well as supervising institutions on behalf of, and in cooperation with, other jurisdictions. These responsibilities also come with international scrutiny, be it from organisations such as the IMF, or simply other peer regulators who want assurance that their citizens are being protected when served by Irish-based firms.

We embrace this responsibility. And, along with our core domestic mandate, it is why we place such importance on the proper and effective regulation and supervision of the financial sector, something that I know is also at the heart of our UK colleagues' approach.

Second in the face of rapid technological change financial regulation needs to keep up with financial innovation. And in many ways the UK has led the way in terms of responding to the innovation in financial services. We have been adapting too,

becoming more future focused, and better anticipating and responding to the changes taking place in our financial system.

This includes establishing an Innovation Sandbox Programme, and I expect that some of you will have engaged with both the programme and our Innovation Hub as part of your operations in Ireland. We support innovation in the financial sector and recognise the benefits it can bring.

Third, navigating change is complex and we shouldn't pretend otherwise. And, while it is important to be adaptable, in times of rapid change central banks and regulators need to remain anchored to the fundamentals and remember that no matter how novel or innovative something is, the importance of good governance, good risk management and delivering in the interests of consumers, investors and the wider economy doesn't change.

In my view regulation plays a vital role in ensuring the effective functioning of our financial system. It enables innovation, competition, and cross border activity, while ensuring the system operates in the best interest of consumers and the wider economy, both in good times and bad.

Our regulatory approach at the Central Bank of Ireland is underpinned by six principles. Regulation must be forward looking, connected, proportionate, predictable, transparent and agile. These principles are increasingly relevant to meet the challenges of today as well as the opportunities and risks that are ahead of us.

## Conclusion

And the opportunities are clear, as Mario Draghi and Enrico Letta set out last year, reports written for the EU, but which should be of wider interest. We need to recognise that the world we have been familiar with has changed and that,  coupled with the ongoing march of demography, digitalisation, and a warming climate, more change is ahead. I suggest that the stage is now set for us to seek new partners, build new relationships, adopt new frameworks and create new paradigms for the world that our children and grandchildren will inhabit.

At the Central Bank of Ireland, we are guided by the objective set out in our founding legislation that our ""constant and predominant aim shall be the welfare of the people as a whole.""  We will remain focused on delivering the stability, resilience, and protections that consumers and the wider economy need and the public expects. Our focus will be neither to regulate for growth nor regulate for risk but to regulate for the orderly and proper functioning of financial markets so that they deliver positive outcomes for the economy and for our citizens.

I wish you all well, both for the remainder of this conference and for your continued work bringing together people and businesses in our two countries.

1 Central Bank of Ireland Quarterly Bulletin No.3 2025

2  See  On the fault line? The Irish economy in a time of geoeconomic fragmentation (PDF 1.4MB) - Central Bank of Ireland 2025",Gabriel Makhlouf
https://www.bis.org/review/r251002h.htm,Madis Müller: Presentation of Bank of Estonia's Annual Report 2024,"Speech by Mr Madis Müller, Governor of the Bank of Estonia (Eesti Pank), to the Riigikogu (the unicameral Parliament of Estonia), at the presentation of Bank of Estonia's Annual Report 2024, Tallinn, 18 September 2025.",2025-09-18 00:00:00,"## Madis Müller: Presentation of Bank of Estonia's Annual Report 2024

Speech by Mr Madis Müller, Governor of the Bank of Estonia (Eesti Pank), to the Riigikogu (the unicameral Parliament of Estonia), at the presentation of Bank of Estonia's Annual Report 2024, Tallinn, 18 September 2025.

* * *

## Check against delivery

Members of the Riigikogu.

Thank you for the opportunity to present a review of the activities of Eesti Pank in 2024.

I will also speak about the main events in the economy and the financial sector, and about the difficulties that have been caused as the world has become more uncertain.

I would like first to state that in 2024 Eesti Pank carried out all of its core tasks, which cover maintaining price stability and implementing monetary policy in the euro area, managing the currency reserves of the state, ensuring the circulation of cash and operation of payment systems, and securing financial stability in Estonia. Eesti Pank also produces economic and financial statistics and economic analysis, works internationally with partners, and advises the government on matters of monetary and economic policy.

## Topics of particular note last year were

- inflation falling in the euro area, which allowed the European Central Bank to start cutting interest rates after having had to raise them rapidly
- signs of recovery starting to appear in the Estonian economy
- security deteriorating in Europe, which required services that are vital for society to be made more resilient to any crisis. For the central bank this primarily means that we must invest more in securing our activities against any crisis and ensuring that payment services and the circulation of cash are fully resilient.

I will begin with the topic that is most important for the central bank, which is maintaining price stability. We at the Governing Council of the European Central Bank became sufficiently confident last June that the rate of inflation in the euro area had come down enough and was on track to reach the target of 2%. This meant we could start cutting central bank interest rates gradually. We had had to raise them sharply in the preceding couple of years, after which they had remained at record high levels for nine months. Lower interest rates make borrowing cheaper, leaving borrowers more money at hand and making investment more affordable for businesses. We have now cut interest rates in the euro area eight times, and the main interest rate at the central bank has now come down by half from its peak of 4%. The key interest rate for borrowers in Estonia is the six-month Euribor, which follows the movements in the European Central Bank's interest rates. It peaked at above 4% but has now come down to close to 2%, falling by almost half, as the central bank rates have gradually been cut.

We also continued to bring the balance sheet of the European Central Bank back to its normal level, after it had expanded because of the crisis measures taken in earlier years. Those measures have been taken to support economic activity in the euro area during the years of crisis. All of the asset purchase programmes of the central bank have now been terminated and purchases are no longer being made, and the reinvestment of maturing bonds was also ended last year. The balance sheet of the European Central Bank was shrunk by almost half a trillion euros last year.

The general economic environment continued to be affected last year by the war Russia started in Ukraine, which has deepened geopolitical instability and pushed up prices of energy and commodities. The new wave of uncertainty was caused by the sharp change in US trade policy after the US presidential elections, as additional tariff barriers started to appear in trade between countries.

Statistics Estonia revised its recent figures for growth in the Estonian economy and now found that instead of GDP growing constantly throughout all of last year, there was actually a decline in it. I should state though that a much larger set of statistical indicators need to be considered if reliable conclusions are to be drawn about the economy and the most objective possible assessment made. Those statistical indicators include many that point to the economy recovering, as retail sales, industrial output, exports and several other key indicators were all rising last year for example. The economy is recovering, but it is doing so quite slowly. The purchasing power of the average wage, which is the gross wage adjusted for inflation, has risen, but by the end of last year it had reached the same level that it was at in May 2021 before the energy crisis and the sharp rise in cost of living.

Inflation staying high and its impact on the purchasing power of people in the country remains a concern. The cost of living rose last year by around 3.5%, but inflation in Estonia this year is expected to be 5-6%, of which about a third will come from tax rises. The remainder will mainly come from growth in wages and from prices for food rising because commodities prices have risen on global markets. Real incomes will not increase this year, because the rise in the average wage will only just exceed inflation in the consumer basket, while the income tax rate rose at the start of this year. They may be expected to do so from next year, when the tax-free threshold is extended to all taxpayers and as inflation falls.

It is good to see that the labour market in the euro area and in Estonia has resisted very well, even when the economy was facing challenging times. Unemployment has risen in Estonia, but by less than would be considered normal during such a recession. Companies have preferred to keep their employees on the payroll in the expectation of better times ahead, and to avoid redundancies because finding new staff may prove more expensive and difficult as there is a shortage of skilled labour in Estonia. Companies have instead sacrificed part of their expected profits, and so labour costs hit a record level last year as a share of corporate profit.

That people in Estonia have kept their jobs and their incomes have increased in euros has helped them cope with their financial obligations. They have managed this despite the weakness in the economy and interest rates being much higher than they had been in earlier years. The resilience of companies was aided by the buffers that they built up

in the years before the recession, and so although the share of problem loans at the banks has increased a little, it still remains small.

We at Eesti Pank consider that the measures taken so far to ensure stability in the financial sector are appropriate in the current environment. The risks however have increased. The growth in the amount lent to households and companies by the domestic financial sector and from abroad at the end of 2024 exceeded long-term nominal GDP growth, and it accelerated even further in 2025. We consequently consider it reasonable to maintain the countercyclical capital buffer rate at 1.5% to reduce the risks to the banking sector from rapid growth in lending. Yearly growth in lending in Estonia has been among the fastest in the euro area at almost 10%, while the average in the euro area has been below 3%. We must be aware that geopolitical tensions causing a new recession in the economy could increase the amount of problem loans. In that case it would become necessary to maintain the current larger capital buffers of the banks, even though their own funds are sufficient to cover worse loan losses than expected.

Geopolitical tensions could also hinder banks that are trying to access capital from international money and capital markets, and so restrict the loan supply. A large part of the liabilities of the banking sector are local deposits, but other sources of funding have notably increased as a share of the financing of the banks in recent years. Proximity to an aggressive Russia has probably increased the risk level of Estonia and its neighbourhood in the eyes of foreign investors, and international financial markets have been volatile, but the Estonian banks have been successful in their bond issues.

An important topic that has arisen across Europe and in Estonia is the need to assess whether various regulations are holding enterprise back, including enterprise in the financial sector. I am personally part of a high-level working group handling this at the European Central Bank, but we are also assessing proposals made by the Estonian banks and other financial companies that would for example make reporting simpler.

The third main topic I mentioned earlier was security in a crisis, which we are working on throughout the whole of the Eesti Pank organisation.

Crisis readiness affects the operations of the central bank itself, and also its role in the operation of the two vital services of cash circulation and payment services. During the large-scale electricity blackout in Spain and Portugal in the spring, food and other essentials could only be bought for cash. This was a clear reminder for all of us of how important it is to hold some funds as physical cash. Digital payments are convenient, but we must be ready and able to cope if they stop working. We ran several business continuity exercises during the year at Eesti Pank, and organised exercises with other institutions, banks and other businesses to practice cooperation and sharing responsibility in the event of a crisis. We helped providers of vital cash circulation services compile their risk analyses and continuity plans. We run the crisis exercise and resilience tests every year so that Estonia would be as ready as possible to deal with any disruption to the circulation of cash or any interruption to payments. We ran a larger crisis exercise in the spring together with the banks and we focused closely on working together with local governments.

We updated last year the resilience requirements for payment systems for the banks providing vital services, which are currently Swedbank, SEB, Luminor, LHV and Coop Pank, to be certain that payments would continue to function in even harsher circumstances if even greater dangers were to be realised. We are working with the commercial banks to develop backup solutions, including offline card payments that are intended principally for use in shops, petrol stations and chemists that provide vital services in a crisis. These would allow vitally important purchases to be made even if the information systems of the banks are not functioning, there is no communication connection, or the card schemes are down.

We took the initiative to launch discussions on how to find backup solutions that could ensure resilience of operation at the European Union level as well. An example of this is the ongoing preparations of the European Central Bank to bring the euro into circulation in a digital form. One feature of the digital euro is that it would equally allow digital payments to be made when there is no internet connection, and this would make European payment systems more autonomous and more resilient to any crisis in future. The digital euro project is currently in its preparatory phase and the legal basis that is needed for it is under discussion in the European Parliament and at the Council. I would invite anybody who is interested in this topic to attend the international conference on the digital euro being organised at the end of September by Eesti Pank together with the Latvian and Lithuanian central banks.

We also ran exercises for how to cope with a financial crisis. It is unlikely that any such crisis would occur in Estonia, but if it did, then it would have a widespread impact across the financial system. This is why the Nordic and Baltic states worked together last year to hold a third crisis exercise that also involved supervision and resolution authorities at the European Union level. It is important when running such exercises to map the potential weak points and ways that they could be remedied.

I may now also say a few words about Eesti Pank's constitutional role as an economic policy adviser to the government. We have regular meetings with members of the government, the President of the Republic and the parties in the Riigikogu, and I would like to highlight how experts from Eesti Pank contributed to the expert group on competitiveness set up in 2023 by the Economic Affairs Committee of the Riigikogu. The result of this work was the first report on competitiveness, which was released last year, and the conclusions of which were discussed in the Riigikogu as a question of national importance. We held a high-level public seminar at Eesti Pank with international experts that concentrated on increasing productivity in the economy and the role of the state in achieving this. The second report by the expert group was presented to the Riigikogu in June this year, and on 24 September an international seminar based on report will be held. We believe it is important that this work continue in the years ahead.

Our message on the state finances has always been that orderly state finances are the cornerstone of growth in economy. Orderly state finances means more than having a fiscal deficit that is lower than planned for one-off or temporary reasons, as happened last year and is highly likely to happen again this year. There should be a long-term plan for the needs and possibilities of the state that is based on sustainable fiscal rules and that gives confidence to local businesses and foreign investors. The exemption

clause from the European fiscal rules allows countries, including Estonia, to run a fiscal deficit of up to 4.5% of GDP if it is used to strengthen national defence. There are two restrictions on this though, as the deficit may only be increased temporarily and the increase must be specifically targeted. The temptation to make the maximum use of the additional fiscal space, including by spending it for other purposes, could threaten the sustainability of the state finances in the longer term. Permanently higher spending by the state requires there to be a larger revenue base.

Eesti Pank analysed competition between the banks in the Estonian lending market at the start of 2024, and found that concentration is higher and competition generally weaker in Estonia's small market than in most other European countries. Together with Finantsinspektsioon we made several proposals for ways to make it simpler and cheaper to transfer a housing loan from one bank to another. We proposed removing the requirement to have the transaction notarised when a mortgage is moved from one bank to another and the conditions of the contract do not change, and we proposed that the requirement to have a property revalued every time a loan is refinanced could be lifted. Clients would also gain if banks were no longer able to charge three months of interest when the client wants to terminate their loan contract early. The legislative changes were not made in 2024, but the government has by now started working on several of those proposals. I may add that competition has improved in the housing loan market in recent years, and the margins on housing loans have narrowed. This does not mean though that our proposals are no longer relevant.

Eesti Pank worked with the Ministry of Finance to produce a draft act for the rounding rule for small coins, which was passed by the Riigikogu last year and came into force at the start of this. We have seen that the change happened smoothly, with the heavy lifting done by merchants in Estonia, who worked hard to ensure the rounding rule was applied successfully at checkouts in shops. I would like to thank the Estonian Traders Association for their excellent and proactive cooperation in this. The changes meant that Eesti Pank no longer needs to produce tonnes of one and two-cent coins that are not used for payment and place a heavy burden on the environment. We have also continued to work with Omniva to allow people to exchange their coins for larger banknotes. This has all improved the recirculation of coins substantially, as last year we issued 30% fewer circulating coins than in the previous year, while 64% more coins were returned to us from circulation. So many one and two-cent coins were returned to us that we were able to trade them with the Latvian central bank at the start of this year as we exchanged our one and two-cent coins for two-euro coins from them. This was an excellent example of successful cooperation between multiple partners.

From our statistical work I would like to highlight the closer cooperation with Statistics Estonia to service the forecasting and economic analysis models of Eesti Pank. Analysts at Eesti Pank can now access several pseudonymised microdata registers and databases, which should help them to understand better what is happening in the economy. It should also make our analysis and political advice even more accurate. We use the microdata in analysing the labour market, in economic research, and in studying the productivity and competitiveness of businesses.

Developing new methods of analysis will help us understand better how climate change affects inflation and economic growth. We worked with the European Central Bank and other central banks in Europe to assess how climate risks and the goals of the green

transition will affect the financial sector, and last year we analysed the carbon intensity of the corporate loans portfolios of the banks. We also monitor climate targets in the Eesti Pank investment portfolio, and as an organisation we are trying to reduce the carbon footprint of our activities.

An important part of our international cooperation is representing Estonia at the International Monetary Fund. The increase in the IMF quota has been a current topic for several years, and it is needed so that the IMF can maintain its capacity to lend. The Riigikogu has approved the increase in the Estonian quota, but the national legislative processes have not yet been completed in several member states, and so last year Eesti Pank extended its bilateral loan contract with the IMF to 2027.

The profits of Eesti Pank recovered last year, and that has allowed us to resume the practice of transferring a quarter of the central bank's profit from the previous year to the state budget. We continue to look to organise the work of the central bank as efficiently and effectively as possible, and as part of this we share support services with Finantsinspektsioon, which is housed in the same buildings as us, and we monitor carefully that our activities do not overlap. We finally succeeded this year in selling Maardu Manor, which is not needed for the core activities of the central bank but took several years to sell. The bank made a profit of 74 million euros last year. The Supervisory Board of Eesti Pank decided to transfer a quarter of this, or 18.5 million euros, to the state budget. Since 1992 Eesti Pank has allocated a total of 192 million euros from its profit to the state budget.

We also continued to build up the Eesti Pank capital buffers so they would be sufficient for the central bank to carry out its core activities. Our long-term plan is to reach the average level of the central banks in the euro area, and at the end of 2024 this meant we needed to raise the capital buffers several times from their level of 715 million euros.

A few words now on what lies ahead for the economy. Unfortunately we should not hope that the economy will recover at the same speed that it did after earlier recessions. This is partly because we have become wealthier as a nation and raising our level even further is a stiffer challenge for growth than it was in earlier years. Interest rates have come down a long way, which benefits people and companies, but there remains a lot of uncertainty about the future. This encourages saving, and putting money to one side rather than spending or investing it. Neither is it clear what form global trade relations will take, though the rules on trade between the European Union and the USA are a little better defined than they were in the summer.

Eesti Pank held a public seminar on trade barriers in the spring, at which businesses and experts spoke. The general opinion was that there will be no return to the past and that it is necessary to adapt to the new circumstances. This gives even greater priority to resolving the pinch points in competitiveness in Estonia, and to the ability to be part of the changed value chains. It is important to work with the business environment that we have and to eliminate the bottlenecks that choke the development and growth of companies. Efforts at the level of the European Union are also important, and we should make better use than we have so far of our potential in the large single market, and we should develop the single capital market so that we can fund the needs of Europe for development and defence.

Eesti Pank is keen to offer its advice and its efforts for these topics, though our core task remains maintaining price stability.

Thank you for your attention and I am ready to answer any questions you may have.",Madis Müller
https://www.bis.org/review/r251008g.htm,Ayman M Al-Sayari: Keynote speech - opening ceremony of Money20/20 Middle East,"Keynote speech by His Excellency Mr Ayman AlSayari, at the opening ceremony of Money20/20 Middle East, Riyadh, 15 September 2025.",2025-09-15 00:00:00,"## Ayman M Al-Sayari: Keynote speech - opening ceremony of Money20 /20 Middle East

Keynote speech by His Excellency Mr Ayman AlSayari, at the opening ceremony of Money20/20 Middle East, Riyadh, 15 September 2025.

* * *

I extend my warm greetings to distinguished guests, ministers, industry leaders, and global delegates.

That an event as internationally renowned as Money20/20 is being held here in Riyadh is a testament to Saudi Arabia's rising prominence as a global hub for financial innovation.

Under the auspices of Saudi Vision 2030, and guided by the Financial Sector Development Program and the Fintech Strategy, Saudi Arabia's transformation into a leading Fintech hub is well underway.

In my remarks today, I would like to share with you highlights of this ongoing transformation, and offer my perspectives on notable drivers of this momentum.

The extraordinary growth of the sector has been in keeping with our national ambitions and commitment to global excellence:

- The sector has experienced a remarkable threefold expansion - growing from 82 Fintech companies in 2022 to 281 as of August 2025 - reflecting the Kingdom's success in enabling robust growth.
- It has also attracted market-leading cumulative investments of over 8.9 billion SAR as of July 2025, cementing its status as one of the most attractive sectors for investors.

A highlight of this progress has been the payments ecosystem in Saudi Arabia - now firmly established as one of the most digitally advanced in the world. Electronic payments accounted for 79 % of total retail payments in 2024, while the total number of electronic payments grew to 12.6 billion in 2024, from 10.8 billion in 2023.

This growth is not just a reflection of our ambition, but also of the ability to innovate, and deliver solutions that solve industry challenges.

The successes that the financial sector has achieved to date have leveraged Saudi Arabia's diverse and distinctive competitive advantages:

- The Kingdom's geographical location positions us as a gateway to a diverse regional market, connecting the Middle East, Africa, and Asia.
- Our nation is home to a large, tech-savvy population with high smartphone penetration, creating a receptive target market for Fintech innovations supported by advanced financial infrastructure.

- The regulatory environment is supportive, allowing new solutions to be nurtured, tested and scaled for global impact.

Crucially, SAMA is committed to encouraging the entrance of international innovators through its ongoing efforts to support and invest in the Kingdom's financial ecosystem, while embracing and sustainably scaling up innovative business models.

In particular, partnerships with international payment companies, who have successfully established a presence in the Kingdom, are enhancing the domestic ecosystem by enabling technology and knowledge transfer and providing improved choice and flexibility for consumers while also stimulating economic growth.

Global investor confidence in Saudi Arabia as a safe, attractive, and growth-ready destination continues to be further strengthened, reinforcing the Kingdom's leadership in payment infrastructure.

At SAMA, our responsibility extends beyond oversight we place great emphasis on shaping an environment that fosters prudent innovation while ensuring stability and accessibility.

In proactively supporting the development of the Fintech ecosystem, our objective is to ensure equitable market opportunities, accessible common infrastructure, and the creation of a clear and accommodative regulatory environment.

Through a robust and agile regulatory framework, we strive to protect consumers and the financial system while encouraging the development and application of novel technologies.

Key regulatory initiatives to foster Fintech growth include the Regulatory Sandbox which has been one of the most successful initiatives of its kind globally, as well as Fintech Saudi and the Makken program, created in collaboration with the CMA.

More recently, SAMA has launched a new e-Services Portal - a unified digital gateway that offers seamless access to SAMA's digital services.

The portal aims to improve user experience and streamline regulatory interactions, ensuring that licenses, approvals, and supervisory oversight decisions are processed with greater efficiency.

SAMA is also investing in advancing critical national infrastructure that underpins the financial services industry. A flagship initiative launched this year is a blueprint for the modernization of the Real Time Gross Settlement System. This effort will support continued financial sector expansion, enhance interoperability and efficiency, while enabling sophisticated vulnerability detection to ensure financial stability.

Check clearing infrastructure is also being upgraded, through adoption of industryleading standards within the Central Electronic Clearing Centre at SAMA, and will soon enable same day clearing for checks, thus increasing the velocity of circulation of money in the economy and enabling development of new payments use cases.

Regulatory decisions such as SAMA's recently announced clearance for securitization of residential mortgage-backed securities will accelerate market development.

Finally, as market participants globally explore institutional use cases for stablecoins, SAMA and other global regulators are enhancing cross-jurisdictional cooperation to assess risks and enhance financial stability safeguards.

In a world where opportunities and risks transcend borders, we recognize that true progress cannot be achieved in isolation.

Fintech thrives when knowledge, standards, and infrastructure are harmonized, and partnerships ensure that innovation is not fragmented.

Fintech innovations, from instant payments to open banking, are creating opportunities that are inherently cross-border in nature.

Simultaneously, the interconnected nature of the global financial system means that risks can also travel across borders in real time.

Collaboration is therefore the foundation of a safe, inclusive, and innovative global financial system, and will be critical in taking the sector forward.

At SAMA, we are firmly committed to collaboration with our international peers and see these partnerships as fundamental for prudent innovation.

The Fintech industry will continue to set the direction of travel for the whole of financial services. There are many exciting developments on the horizon, from AI through to tokenization, and beyond.

Collaboration will be key to ensuring these new technologies receive the support they need to scale effectively, balanced against the prudence required to maintain financial stability.

I must therefore conclude my remarks by thanking the organizers, partners and attendees for coming together to organize Money 20/20. This event will serve as an important platform for such collaboration - to share the ideas, insights, and experiences that are shaping the future of finance.

As we move forward, we at SAMA remain committed to serving as an open, forwardlooking, and trusted partner in Fintech innovation.

Thank you.",Ayman M Al-Sayari
https://www.bis.org/review/r251008i.htm,Gent Sejko: Launching ceremony of the First SEPA Transaction – Albania,"Address by Mr Gent Sejko, Governor of the Bank of Albania, at the Launching Ceremony of the First SEPA Transaction – Albania, Tirana, 7 October 2025.",2025-10-07 00:00:00,"## Gent Sejko: Launching ceremony of the First SEPA Transaction Albania

Address by Mr Gent Sejko, Governor of the Bank of Albania, at the Launching Ceremony of the First SEPA Transaction - Albania, Tirana, 7 October 2025.

* * *

## Your Excellency, Ambassador Gonzato,

Distinguished Executives of the Banking Sector,

## Ladies and Gentlemen,

## Honoured Guests,

Today, on this special day, we witness a historic moment for the Albanian financial market: the launch of the first euro transaction processed under the Single Euro Payments Area, known as SEPA. This is not merely a technical development in the payment system, but a cornerstone in Albania's path toward integration into the European financial infrastructure.

Albania's accession to SEPA, finalized in November of last year, represents the culmination of a structured process through which the Bank of Albania, in close collaboration with all commercial banks and financial institutions, diligently fulfilled the necessary technical and regulatory requirements. Today, 11 commercial banks operating in Albania are ready to provide SEPA services for citizens and businesses.

This milestone is not a matter of coincidence, but the outcome of a long-standing journey by the Bank of Albania and the Albanian financial institutions, which have worked step by step, with steadfast commitment, to lay the foundations for a modern and robust payment system.

Allow me to highlight some of the key steps taken in this regard, as:

- the harmonisation of legislation and regulatory framework with that of the European Union (EU);
- the compilation of the necessary documentation and communication with the relevant EU institutions;
- the modernisation of national payment infrastructure, in line with the European standards;
- the gradual reduction of domestic payments fees; and
- the close collaboration with all stakeholders, commercial banks as well as with national and international institutions.

The Bank of Albania has played a decisive role in this process. Membership in SEPA was a strategic objective of the Bank of Albania, directly linked with the European Union's New Growth Plan and the regional project ""Modernising the payment system in the Western Balkans"". Under its leadership, with the valuable assistance of the World

Bank and through effective coordination with all domestic stakeholders, the timely fulfilment of the required criteria and the operational launch of services were ensured. This achievement enhances Albania's capacity to attract funds and to assertively progress towards the membership in the European Union.

Our journey needed time, dedication and partnership. Today we are proud that Albania is part of this Single European System. Now begins the second phase: the full utilization of this standard by banks and businesses, the education of users, and the enhancement of payment digitalization. The Bank of Albania calls upon all commercial banks and financial institutions to actively promote SEPA services, to inform their clients of the tangible benefits, and to invest in the continued enhancement of the digital platforms. Only through the joint cooperation and unwavering commitment of all stakeholders can Albania fully realize the potential of this historic step toward integration.

## Dear participants,

SEPA translates our vision of financial integration into tangible benefits for citizens and businesses: lower costs, faster transactions, and enhanced security.

## In more concrete terms:

- Significantly lower fees: transferring money from Albania to SEPA member countries costs up to five times less than before;
- Faster transactions: electronic payments are quicker, more secure, and more convenient;
- Transparency and equality: a payment from Tirana to Rome costs no more than a payment within Tirana itself. At the same time, fees on incoming payments will also reduce considerably.

This European standard now becomes a reality for Albania, placing our payment infrastructure on the same level as that of EU countries. Integration into SEPA, combined with the expansion of digital payments, is expected to generate savings of around EUR 20 million in the first year only, with progressive growth in the years to come.  By way of comparison, AIPS EURO system of the Bank of Albania - operational since January 2022 - has saved the domestic market around EUR 140 million. This shows that SEPA's impact will be even broader, endorsing lower costs and enhanced operational efficiency for both citizens and businesses.On a broader scale, integration in SEPA is translated into social and regional benefits. This includes reducing informality, lowering the costs of remittances, fostering financial inclusion and converging with the European market.

- According to estimates by the World Bank, a 10% increase in digital payments results in a 2% reduction in informality.
- The Albanian emigrants and their families may save up to ten of millions of euro annually by sending remittances through SEPA-compliant baking channels.
- At the regional level, until now, cross-border payments between businesses in the Western Balkans have cost up to ten times more than within the EU. Under SEPA, this cost is reduced to levels comparable to those in the European Union market.

I would like to emphasise once again that this development is not mealy a technical achievement in the field of payment systems. Integration into SEPA makes our financial market more competitive, strengths investor confidence and brings Albania closer to the highest standards of the European Union. From a strategic perspective, it enhances the readiness for future EU financial integration, making our infrastructure more suitable for upcoming innovations and strengthening ties with capital markets.

Last, I would like to highlight that the practical impact for the Albanian citizens and business is three-fold: lower fees, faster processes and stronger operational guarantees.

## Dear friends and partners!

This moment is only the beginning. The Bank of Albania will continue to work meticulously to ensure a modern and resilient financial system which is oriented towards the needs of both citizens and economy. We remain fully committed to transforming this process into a platform for innovation and financial inclusion, empowering the Albanian businesses and citizens, while bringing them close to Europe.

We could not have reached this milestone without the unwavering support of our international partners - particularly the European Commission, the European Payments Council and the World Bank - who have been steadfast collaborators. I take this opportunity to express our gratitude to them.

I would also like to extend my thanks to the commercial banks and partner financial institutions, which have invested and collaborated closely to achieve this new standard for the Albanian citizens and businesses.

Finally, the greatest gratitude goes to the staff of the Bank of Albania, who, with dedication and professionalism made this historical achievement possible.

Today, Albania has entered a new chapter of its financial history. Let us seize this opportunity with wisdom and determination, ensuring that its benefits reach every family, every business and every segment of our economy.

## Thank you!",Gent Sejko
https://www.bis.org/review/r251008d.htm,Christine Lagarde: Hearing of the Committee on Economic and Monetary Affairs of the European Parliament,"Speech by Ms Christine Lagarde, President of the European Central Bank, at the Hearing of the Committee on Economic and Monetary Affairs of the European Parliament, Strasbourg, 6 October 2025.",2025-10-06 00:00:00,"## Christine Lagarde: Hearing of the Committee on Economic and Monetary Affairs of the European Parliament

Speech by Ms Christine Lagarde, President of the European Central Bank, at the Hearing of the Committee on Economic and Monetary Affairs of the European Parliament, Strasbourg, 6 October 2025.

* * *

Charts accompanying the speech

It is a pleasure to be with you again for our regular dialogue.

In recent months we have faced a period of heightened uncertainty. Yet, despite these challenges, the euro area economy has held up well.

This resilience is no coincidence. It reflects, in no small part, the strength of two achievements we sometimes take for granted: our Single Market and our single currency, the euro.

As a foundation for stability and a powerful symbol of European unity, both at home and abroad, the euro is one of Europe's greatest assets.

But in today's geoeconomic world, the likelihood of larger and more diverse economic shocks is expected to remain a constant feature of our environment. This prompts an important question: in this new global landscape, what role should the euro play on the world stage?

I will focus specifically on this question in my remarks today. However, let me first provide an overview of our assessment of the euro area economy and our monetary policy stance.

## The outlook for the euro area

Over the first half of the year the economy grew by 0.7% in cumulative terms, thanks to resilient domestic demand. Stronger growth in the first quarter partly reflected frontloading of global trade ahead of expected tariff increases. Growth was lower in the second quarter as this effect reversed.

Sluggish export performance, driven by higher tariffs, a stronger euro and increased global competition, is expected to hold growth back for the remainder of the year. However, the effect these headwinds have on growth should fade next year. At the same time, survey indicators suggest that services continue to grow, signalling some positive underlying momentum in the economy.

Despite softening labour demand, the labour market remains a source of strength and is expected to support consumer spending. Consumer spending and investment should

both benefit from our past interest rate cuts feeding through to financing conditions. Investment should also be underpinned by substantial government spending on infrastructure and defence.

As a result, ECB staff expect the economy to grow by 1.2% in 2025, by 1.0% in 2026 and by 1.3% in 2027.

Risks to economic growth have become more balanced as the likelihood of major tariffrelated downside risks materialising has fallen, owing to the new trade deal. At the same time, risks remain that renewed trade tensions could further dampen exports, investment and consumption. By contrast, higher than expected defence and infrastructure spending and productivity-enhancing reforms would add to growth. Geopolitical tensions remain a major source of uncertainty.

Inflation remains close to our 2% target. According to Eurostat's flash estimate, it edged up to 2.2% in September, from 2.0% in the previous three months, mainly due to higher energy inflation. Core inflation - excluding energy and food - remained at 2.3%. Indicators of underlying inflation remain consistent with our 2% medium-term target. Real wages have caught up with levels seen before the inflation surge. Nominal wage growth was 3.9% in the second quarter, down from 4.0% in the previous quarter and 4.8% in the second quarter of last year. Forward-looking indicators, including the ECB's wage tracker, suggest that wage growth will moderate further and contribute to easing domestic price pressures.

The ECB staff projections see headline inflation averaging 2.1% in 2025, 1.7% in 2026 and 1.9% in 2027. Inflation excluding energy and food is expected to fall from 2.4% in 2025 to 1.9% in 2026 and 1.8% in 2027, owing to the stronger euro and declining labour cost pressures. Notably, the outlook for euro area inflation remains more uncertain than usual, with a still volatile global trade policy environment responsible for both upside and downside risks. At the same time, as new information has come in, the range of risks on both sides has narrowed.

## The ECB's monetary policy stance

With inflation currently at around 2% and expected to remain at around that level over the projection horizon, we can say that the disinflationary process is over. At its most recent meeting, the Governing Council therefore decided to keep its key interest rates unchanged.

We are determined to ensure that inflation stabilises at our 2% target in the medium term. We will continue to determine the appropriate monetary policy stance by following a data-dependent and meeting-by-meeting approach. In particular, we will base our interest rate decisions on our assessment of the inflation outlook and the risks surrounding it, in light of the incoming economic and financial data, as well as the dynamics of underlying inflation and the strength of monetary policy transmission. Therefore, we are not pre-committing to a particular rate path.

## The international role of the euro

Let me now turn to the international role of the euro, your chosen topic for today's hearing.

The international standing of currencies evolves slowly. For decades, the US dollar has been the dominant global currency, while the euro has firmly established itself as the second most used currency worldwide. This is evident in our latest report on the international role of the euro. 1

However, the world is in transition. Geopolitical shifts and heightened policy uncertainty remind us that no currency's global position is guaranteed. In this changing landscape, there is a unique opportunity to create conditions to strengthen the euro's role on the global stage.

International currencies can appreciate in times of global stress as they attract safe haven inflows. Yet, there is no mechanical relationship between the global status of a currency and its exchange rate.

At the same time, raising the euro's global standing would bring tangible benefits. For instance, greater use of the euro in trade invoicing would reduce transaction costs for exporters and shield prices in the euro area from exchange rate volatility. Moreover, increased foreign demand for euro-denominated assets would lower borrowing costs for households, businesses and governments - in the context of the United States, this is often referred to as the ""exorbitant privilege"". 2

We will not realise the full benefits of a stronger international role of the euro unless we adopt the right policies. To seize the benefits while avoiding the risks, Europe must do its homework and strengthen its foundations. 3

First, from an economic standpoint, we need to create the conditions for sustainable growth and investment. Completing the Single Market remains essential to unlocking Europe's full potential. At the same time, we must integrate and deepen our capital markets, taking concrete steps towards completing the savings and investments union, for which an ambitious timetable is critical. We look forward to the European Commission's forthcoming initiatives in this regard, notably the Single Market roadmap and the proposal for strengthening capital market supervision. Moreover, additional steps like joint financing of public goods - such as defence - would help establish a safe and liquid pool of EU public debt. One year on from the publication of Mario Draghi's report on the future of European competitiveness, the time has come to put words into action.

Second, on an institutional level, we must safeguard investors' trust in the institutions and policies that underpin our currency, including by upholding the rule of law and defending central bank independence.

Third, from a geopolitical perspective, we must maintain our commitment to open trade and strike new agreements with global partners. At the same time, Europe must invest in its security to navigate an increasingly uncertain world.

These responsibilities rest, first and foremost, with governments and legislators. The ECB's role is to safeguard price stability, ensure financial stability and improve the financial and payments infrastructure that supports the euro. We are committed to continue supporting an environment in which the euro can thrive.

For example, by extending swap and repo lines to key partners, we safeguard against euro liquidity shortages abroad disrupting the smooth transmission of our monetary policy - which in turn encourages those partners to transact more in euro. Moreover, our work on settling transactions in central bank money using distributed ledger technology supports the development of Europe's digital capital markets, while aiming to enhance wholesale payment systems. 4   Likewise, we are working on a digital euro and pursuing initiatives to enhance cross-border payments in euro, which could potentially facilitate international cross-border transactions in the future.

## Conclusion

Let me conclude.

The euro was born out of a vision of a stronger and more united Europe. Today, that vision must adapt to meet the challenges posed by profound geopolitical shifts and to seize the opportunities offered by digital transformation.

The euro can be more than the currency of a continent and a symbol of unity - it can become a global anchor of trust. But vision alone is not enough. Europe needs bold reforms to turn this vision into reality. Now is no longer the time to just discuss reforms; now is the time to implement them.

Together, let us move forward with determination to deliver the Europe our citizens deserve and to strengthen the euro for the future.

- 1  See ECB (2025) , June. The report shows that the The international role of the euro euro accounts for around a fifth of international currency use, behind only the US dollar - which accounts for around 55% - but well ahead of other currencies.
- 2  For example, research indicates the US Government saves up to 2% in interest costs per year on foreigners' Treasury holdings. See Jiang, Z., Krishnamurthy, A. and Lustig, H. (2021) ""Foreign Safe Asset Demand and the Dollar Exchange Rate"", The Journal of Finance, Vol. 76, No 3, pp. 1049-1089.
- 3  Lagarde, C. (2025), ""Earning influence: lessons from the history of international currencies"", speech at an event on Europe's role in a fragmented world organised by Jacques Delors Centre at Hertie School in Berlin, Germany, 26 May.
- 4  ECB (2025) ""ECB commits to distributed ledger technology settlement plans with dualtrack strategy"", press release, 1 July.",Christine Lagarde
https://www.bis.org/review/r251008c.htm,Colm Kincaid: Towards our future financial wellbeing,"Speech by Mr Colm Kincaid, Deputy Governor of the Central Bank of Ireland, at a Roundtable of the Financial Services Ireland, Dublin, 2 October 2025.",2025-10-02 00:00:00,"## Colm Kincaid: Towards our future financial wellbeing

Speech by Mr Colm Kincaid, Deputy Governor of the Central Bank of Ireland, at a Roundtable of the Financial Services Ireland, Dublin, 2 October 2025.

* * *

Good morning, and thank you to Financial Services Ireland for the invitation to speak to you today. Today's Roundtable provides an opportunity to discuss the issues that go to the heart of building a financial system that serves people and the wider economy, and responds effectively to the needs of those who depend on that system.

The Central Bank of Ireland's founding legislation states ""the constant and predominant aim of the Central Bank shall be the welfare of the people as a whole"". Since taking up the role of Deputy Governor (Consumer &amp; Investor Protection) in August, I have spent time engaging with the public we serve, the firms we regulate and others in public life with this statutory aim in mind.

These engagements have given me the opportunity to hear how the landscape facing consumers and investors is evolving, the role being performed by the firms we regulate and how the Central Bank might work better to achieve our statutory aim. This has included sitting with people in community groups, charities, sports clubs, budgeting advisors, consumer advocates, healthcare workers, representatives of rural areas as well as industry leaders and regulatory colleagues in other jurisdictions facing challenges similar to those we face in Ireland today.

A common theme emerging from these conversations is that the risks to the welfare of the people as a whole are changing. I will come back to this a little later in my remarks. But first I will spend some time discussing recent changes the Central Bank has made to better support consumers and investors, and some priority themes for our work in the immediate period ahead.

## Our new supervisory approach

Earlier this year we introduced our more integrated approach to how we supervise financial services. Our new approach does not change the safeguarding outcomes we 1 are pursuing - protection of consumer and investor interests, the integrity of the financial system, the safety and soundness of firms, and financial stability - and we remain a risk-based, outcomes focused regulator. However, in moving to this new approach we have recognised that changes in the financial system require more joined up holistic responses with multi-disciplinary teams working together to deliver our supervisory priorities in a more effective way.

This is an important development in how we are transforming the Central Bank of Ireland to deliver better outcomes for the public we serve. So I would like to start my remarks by explaining how our new supervisory approach aims to achieve better outcomes for consumers and investors. There are three points to make:

1.

1. Our new supervisory approach does not change the protections for consumers and investors or the high standards we expect of the firms we regulate to secure their customers' best interests.

Rather, with our new supervisory model, we are recognising that to achieve these outcomes in the face of a changed risk landscape, we need to work differently. In particular, we are recognising that the big challenges faced by consumers and investors increasingly transcend traditional regulatory concepts such as 'prudential' or 'conduct'. Take the implications of digitalisation as just one example.

Today's challenges also require that the Central Bank tap into the full breadth of its resources and tools in the face of more interconnected issues, including how we continue to use our statutory powers of enforcement most effectively. In doing so, with our new Consumer Protection Code and Supervisory Model combined, we are raising the bar in terms of the protections consumers and investors should receive. Consistent with our simplification goals, we are also recognising that better, clearer rules and regulatory processes enhance consumer and investor outcomes.

2. Our 'new approach' is not entirely new. We have done integrated supervision before and seen it be successful where traditional, less integrated approaches would have failed to deliver good outcomes.

Cases in point include our work on foot of the Global Financial Crisis to improve lending standards and how borrowers are treated in arrears, migrating our financial system through Brexit, keeping it functioning through COVID-19, making sure firms put the right supports in place for consumers facing rising costs of living, and safely migrating customers of Ulster Bank and KBC to new service providers (including requiring redress in cases where firms got it wrong).

By formalising these approaches into a new framework, we aim to make working in this more integrated way our default, rather than something we step up to for specific projects or in times of crisis.

3. We recognise we still have work to do to improve how we achieve our safeguarding outcomes.

This includes implementing enhancements on foot of the OECD Review of the Central Bank of Ireland' Supervisory Functions 2024 2  to improve how we measure and demonstrate our effectiveness, use data, engage with consumers and protect the vulnerable. 3   We will also continue to enhance how we use our Consumer Advisory Group and our engagements with stakeholders to inform and improve our work.

Some specific consumer and investor priority themes for the Central Bank

Consumer Protection is at the heart of everything the Central Bank does. 4   Our new approach to supervision builds on that fact and aims to maximise the mutually reinforcing aspect of the components of our statutory mandate (from price stability to the safety and soundness of firms to the quality of financial services consumers and investors receive). So, I am loath to single out specific pieces of work under the banner of 'consumer and investor protection'. That said, I thought it would be useful to call out three high level themes for the Central Bank's work in the period ahead, with the protection of consumers and investors specifically in mind:

- How firms operate and the consumer/investor experience : We will aim to ensure firms are well run, secure their customers' interests and effectively manage any conflicts of interest by placing consumers and investors at the heart of decision making. We will complete our review of the handling of customer complaints to ensure firms raise their standards in this area ahead of the new requirements of our Code coming into force. This includes that firms carry out better root cause analysis of the complaints they receive. I continue to hear that consumers and investors do not always receive the quality of service they paid for and deserve (and people working in financial services to whom I spoke acknowledged this). I continue to believe there is much firms can do to improve their basic level of customer service. We will support the Government's Action 5 Plan on Insurance Reform and work to enhance how investors access capital markets to provide for their future. We will enhance how we use our conduct of business returns and other data to better target and plan our supervisory engagements.
- Digitalisation : We will focus on how digital innovation can support consumers and investors, including through our Innovation Hub, Sandbox and implementation of our Consumer Protection Code's requirements for digital financial services. We will progress implementation of the Access to Cash legislation as well as the design of a Digital Euro, so that consumers continue to have choice now and in the future. We will maintain our focus on enhancing operational resilience, recognising the significant impact service disruption has on consumers.
- Financial crime : Safeguarding the integrity of the financial system and consumer interests by combatting financial crime needs to be a priority for all firms and agencies involved with financial services. Our work will include raising consumer and investors' awareness of how to protect themselves against frauds and scams, using our status as Trusted Flagger to require criminal content to be taken down by online platforms, as well as detecting and punishing unauthorised providers and market abuse. We will assess fraud detection and prevention controls within mobile apps and other payments services.  We will also work with other law enforcement and government agencies to improve our national framework in the face of the rising threat financial crime poses to our society.

## Continuing to build for the future

I want now to come back to the point I made at the outset about the changing nature of the risks to our statutory aim i.e. 'the welfare of the people as a whole'.

Every conversation I have had since taking up my new role has re-affirmed for me that, increasingly, the challenges we face require more collaborative solutions. In short, we

face problems we will either solve together as a society or not at all (fraud, digital safety, climate change, increased complexity in how financial services are provided and used, geopolitical uncertainty - the list goes on). So we need to get better at working together to find solutions to our shared problems. This includes reaching out to others across the wider system and crossing boundaries between financial services and other sectors to find new solutions to new problems.

I suggest there are four essential components to making progress in the face of these challenges:

## 1. All of us involved in financial services must support a better social conversation on financial well-being .

The past decade has seen a growing focus on the concept of well-being. This has included a global movement and collection of initiatives that seek to go beyond Gross Domestic Product (GDP) as a sole measure of economic progress by developing more comprehensive metrics to assess national wellbeing, inclusivity, and environmental sustainability. In June of this year, the 6 Government published its 'Understanding Life in Ireland: The Well-being . It outlines Ireland's performance on thirty-five indicators, Framework 2025' across eleven dimensions, in the Government's Well-being Framework. This seeks to move beyond using just economic measures in gauging our progress as a country. At an international level, the concept of ' wellfinancial being' specifically has been included as a key cross cutting theme in the recently revised G20/OECD High Level Principles on Financial Consumer Protection. Work is now underway at OECD level to develop a conceptual financial well-being framework. The Central Bank of Ireland has supported these developments - both nationally and internationally. This includes our work at the G20/OECD Working Party on Financial Consumer Protection, Education and Inclusion (which looks specifically at these Principles) and the other EU and international fora where we are active.

Other agencies are also playing their part of course. Not least amongst these is the Competition and Consumer Protection Commission, the Financial Services and Pensions Ombudsman, the Data Protection Commissioner, Commisiœn na Mean, An Garda SíochÆna, the Money Advice and Budgeting Service, healthcare agencies and providers and countless community groups, charities and organisations across our country. They all make a contribution to financial well-being.

But in the end of the day it is you in industry who provide the services consumers and investors need. It is you who can play the most direct role in practical terms to help the individual consumer or investor to support their own financial well-being. And I do recognise there are industry initiatives already underway that contribute on this front. But I urge you to get more active in this social conversation about how the emerging concept of 'financial well-being' can shape the future of financial services and our economic progress more generally.

2.

2. The rules should support a shared vision of financial well-being. Here, I am confident that we have a mature rulebook (at both national and EU level) and that the reforms of our new Consumer Protection Code make it fit for purpose for the period ahead. However, this will only hold true if regulated entities implement these reforms. It will be a priority for the Central Bank to see that they do. This includes taking a consumer-centric view of regulatory responsibilities (and not just those in the Code) as well as initiatives such as simplification. We will also consult shortly on the extension of the Code to credit unions' core activities. And again, the legislation the Central Bank oversees sits of course within a wider framework of law and law enforcement which must be joined up to deliver the right outcomes.

When we talk about rules these days one's mind turns quickly to the vibrant discussion about how to simplify the EU and Irish regulatory regime. It is an important topic on which my colleague Deputy Governor McMunn recently outlined the Central Bank's perspectives. 7   I would only add, in the context of our discussion today, an invitation to you - as the CEOs of regulated entities - to also bring the simplification mindset to the processes you implement for your customers, including where you are implementing regulatory requirements. Too often have we seen regulatory requirements cited as the reason why a customer experience is not satisfactory only to find that the improvements consumers are seeking can in fact be made. Or we see where a customer centric approach results in meaningful disclosure to consumers, while a less thoughtful application of the very same rules simply furnishes the consumer with reams of unhelpful material. As well as continuing to consider the rules themselves, I believe there is a lot more we can do to simplify financial services for consumers and investors, and reduce costs, by taking a more thoughtful and customer-centric approach to how the rules are implemented and experienced by consumers and investors.

3. Our approach to supervision must keep pace with the risk landscape we face . The good news here is that we have international standards against which we can measure ourselves: the G20/OECD High Level Principles on Financial Consumer Protection. In December 2024, the Central Bank of Ireland became the first authority in the world to have its approach to supervision assessed against these Principles by the OECD. The OECD found the Central Bank to be mature, sophisticated and strongly committed to upholding these international standards. The OECD also made recommendations to further strengthen our supervisory approach. We are implementing these Recommendations through our new integrated supervisory model.
4. We need to recognise that, as consumers and investors, we have a responsibility look after our own financial well-being. But we need to be supported to do so . There are a number of reforms in the new Consumer Protection Code that touch on this component. For example, we have modernised our concept of 'vulnerability' to better recognise the different types of vulnerability a consumer can now face. Evolving our shared understanding of the new requirements in the Code will be a priority in the year ahead.

But perhaps the most pressing item I see under this heading is supporting the National Financial Literacy Strategy. As consumers and investors we need to have a better understanding of the benefits of financial services and how to navigate the risks. This is of course a particular focus in the context of the EU's Savings and Investment Union which is seeking to increase retail participation in capital markets.  There are other examples too where work is needed to support consumers and investors to get the full benefit of the financial services that are available to them.

With these components in place, I believe we can aspire to greater financial well-being and, with that, more resilience to the shocks that will surely come.

## Concluding remarks

Ireland is seen as a country with high standards of consumer and investor protection, and the Central Bank of Ireland is seen internationally as a mature and sophisticated consumer protection authority. Our new Consumer Protection Code and integrated Supervisory Model build on these strong foundations. So we can have confidence in our approach for the future.

But we should also be humble enough to recognise that, in part, our jurisdiction's strength in consumer and investor protection is a product of the scale of the challenges and misconduct we have had to confront (not least from the Global Financial Crisis, the fallout from which has taken many forms). We should also be honest that while cultural change for the better is underway in many quarters, it has a distance to travel before we can be assured that the lessons of the past have indeed been learned.

Finally, we should acknowledge that the supervision of regulated firms by the Central Bank of Ireland will not solve all the problems facing users of financial services in the period ahead. Increasingly, the solutions will require coordinated action by a range of public bodies (including the Central Bank), the financial services industry and other (non-financial services) industry sectors. In this context, we will need to find new ways of working together to ensure our financial well-being.

Let's start the conversation.

- 1  Transforming Regulation and Supervision
- 2  See:  Financial Consumer Protection in Ireland: A Review Of The Central Bank Of Ireland's Supervisory Functions (PDF 2.07MB)
- 3  The recommendations of the OECD review are grouped under six themes:

Theme 1. Ensuring consumers continue to be protected as part of the Central Bank's integrated supervisory approach.

Theme 2. Measuring and demonstrating the effectiveness of the financial consumer protection supervisory functions of the Central Bank.

- Theme 3. Engaging with consumers and consumer groups.
- Theme 4. Informing and educating financial consumers.
- Theme 5. Protecting consumers experiencing vulnerability.
- Theme 6. Using data in financial consumer protection supervision.
- 4  See:  Consumer Protection Code
- 5  See:  The future of customer engagement and banking channels - Remarks by Director of Consumer Protection, Colm Kincaid at the BPFI National Banking.
- 6  See: Well-being and beyond GDP, OECD.
- 7  See:  ""Shocks and shifts - regulation and supervision in a changing world"" - Remarks by Deputy Governor Mary-Elizabeth McMunn at the IOB",Colm Kincaid
https://www.bis.org/review/r251008f.htm,Christine Lagarde: Turning openness into strength - the moment of the euro,"Speech by Ms Christine Lagarde, President of the European Central Bank, at the Business France event ""Business en Européens"", Paris, 7 October 2025.",2025-10-07 00:00:00,"## Christine Lagarde: Turning openness into strength - the moment of the euro

Speech by Ms Christine Lagarde, President of the European Central Bank, at the Business France event ""Business en EuropØens"", Paris, 7 October 2025.

* * *

""The dollar may be our currency, but it's your problem.""

When John Connally, President Nixon's Treasury Secretary, spoke these words in the 1970s, he was describing a world dominated by the dollar, where other countries had little choice but to bear the consequences of US policies.

Half a century later, these words still resonate. Earlier this year, when turbulence was emanating from the United States, investors turned to the euro as a safe haven. This was of course a sign of confidence in Europe. But we also felt the costs, in the form of upward pressure on the exchange rate.

Europe is more open than any other major economy. Our exports reached nearly €4 trillion last year. But this openness also makes us more exposed in a world where trade and geopolitics are increasingly intertwined, and where spillovers are often unavoidable.

In this context, the international role of the euro can no longer remain a secondary question. It is central to Europe's ability to turn the euro from a safe-haven currency into a truly global currency, and to turn our weaknesses into lasting benefits.

That is why this evening I would like to reflect on how the euro's global role can evolve and how it can become a true source of strength and resilience for our exporters in particular, but also for our economy as a whole.

## Exchange rates and global currencies

The main concern often associated with a greater international role of the euro is the potential for a stronger exchange rate. Here, we need to make two important clarifications.

First, there is no mechanical, long-term relationship between a currency's global status and its exchange rate.

Since the end of Bretton Woods, the dollar has been through long periods of both weakness and strength while remaining the dominant reserve currency. In fact, movements in the dollar's real effective exchange rate have shown little correlation with changes in its share of global foreign exchange reserves. 1

These movements have been shaped mainly by cyclical factors, such as monetary policy or trade dynamics, as well as by shifts in market sentiment and risk perception in the short run. By contrast, the dollar's reserve status has rested on structural

foundations - the size of the US economy, the depth of its markets, the ingenuity and productivity of its businesses and its geopolitical weight.

The same is true of the euro.

In the first two decades of the euro's existence, its global role and exchange rate often moved almost in lockstep - rising together in the first decade, and declining together after the global financial crisis. 2   But since the start of the third decade, the link between them has broken apart.

Of course, in periods of transition between dominant currencies, there may be upward pressure on the exchange rate as investors accumulate assets. But such shifts are normally driven by long-term investors who move gradually to avoid disrupting markets.

By contrast, sharp movements in exchange rates are typically the result of short-term investors responding to immediate shocks.

Second, there is indeed a connection between being perceived as a safe haven currency and experiencing appreciation during global shocks. Even so, this does not mean that such appreciations become more costly the more a currency is used globally.

Consider the United States. When the dollar receives safe-haven inflows, the unrivalled depth of US financial markets both limits the extent of appreciation and channels those inflows in ways which offset their contractionary effects.

US Treasury yields decline when foreign investors seek US dollar-denominated fixedincome assets. 3   Research shows that global demand for these safe assets compresses Treasury yields by up to 2 percentage points in the long run, which is known as the infamous ""exorbitant privilege"". 4   Lower yields then reduce financing costs across the economy and support productive investment. 5

At the same time, because around 95% of US imports are invoiced in dollars , 6 American exporters are largely shielded in the near term from exchange rate swings on their foreign inputs and energy.

However, in economies that are less globalised yet still seen as safe havens, the opposite tends to be true. For example, the Swiss franc and the Japanese yen.

Both attract safe-haven inflows in times of stress. But since they lack the market depth of larger currencies, they are more exposed to sharp upward pressure on their exchange rates.

Such inflows rarely lead to sustained investment. They are often driven by global risk aversion rather than a genuine confidence in the receiving economy, and financial markets are not deep enough to absorb them on a sustained basis.

In short, being both a safe-haven currency and a truly international one offers a certain degree of insulation and control that smaller issuers simply do not enjoy.

## Where does the euro area stand today?

Today, the euro area finds itself somewhere in between.

Earlier this year, following the US Administration's tariff announcements, capital flowed into euro-denominated assets seen as safe havens and the euro appreciated sharply.

Certain features of being a global reserve currency already provide us with protection. Our foreign exchange markets are deep - turnover in USD/EUR is around 20 times higher than for EUR/CHF or EUR/JPY - which helps contain appreciation pressures on the euro during episodes of accelerated portfolio inflows. And with 52% of our imports invoiced in euro, the costs of exchange rate volatility are partly cushioned.

But we still lack the capital market depth to fully benefit from such inflows.

The combined AAA and AA-rated sovereign bond market in the euro area amounts to just €6.6 trillion - just one-fifth the size of the US Treasury bond market. Our equity markets are less than half the size of those in the United States, and they allocate capital less efficiently: since 2009, they have generated returns that are five times lower.

Our financial system even struggles to channel our own savings into productive investment. More than €11.5 trillion of household savings are still held as deposits, equivalent to one-third of total liquid assets.

In this setting, instead of stimulating growth, safe-haven inflows above all else risk pushing the euro up and leaving exporters with higher costs.

This is the frustration many of you feel today. In a way, we are ""innocent bystanders"" of policy decisions made in Washington and of portfolio allocation decisions made worldwide, which we don't have much influence over.

It is not a sustainable position. We cannot remain a passive safe haven, absorbing the shocks created elsewhere. We need to be a currency that shapes its own destiny.

The way forward is to strengthen the international role of the euro, so that we move from being ""in between"" to being a full international currency, with all the benefits that entails.

Crucially, this would not only help protect us in a more volatile world. The reforms needed to get there would also, paradoxically, make us less vulnerable to external shocks, whether from exchange rates or from tariffs.

For example, American firms export a great deal - close to €3 trillion each year - but their domestic market is so strong that developments in global trade matter much less. In the United States, foreign trade makes up only about half as much of GDP as it does in the euro area.

Some of the preconditions for similar resilience are already present in Europe: our internal market carries more weight for trade than the global market, but we know it could be stronger still.

Our analyses show that an increase of just 2% in intra-euro area trade would be enough to offset the loss in exports to the United States caused by higher tariffs. 7

## Becoming a stronger global currency

How can we go about taking the next step?

First, we must create the conditions for capital to flow into growth within Europe so that we can reap the benefits of inflows and then attract even more investment as part of a virtuous circle. A stronger euro area economy will also make the euro a stronger and more credible currency abroad.

The fundamental task here is to remove the obstacles that are preventing us from having truly integrated product and capital markets that can compete with those in the United States.

Our weaker performance compared with the United States largely reflects internal barriers of our own making: including fragmented regulations, tax regimes, bankruptcy rules and incomplete capital markets. Structural challenges such as high energy costs, low productivity and reluctance to finance common projects are also, to a large extent, within our own control.

Today, almost three-quarters of EU firms at the forefront of innovation say that fragmentation limits their opportunities. 8   If we cap the potential of our own innovators, how can we expect outsiders to invest here with confidence that their capital will grow?

Unless we complete the Single Market and build a genuine savings and investments union, Europe will not be capable of either absorbing or channelling capital inflows efficiently.

Second, we must create the conditions for those outside Europe to use the euro more when conducting transactions so that we can benefit from more invoicing in euro.

The EU is already the leading trading partner for 72 countries, representing almost 40% of global GDP. Two-fifths of global trade is invoiced in euro.

But we can go further.

We can forge new trade agreements. The agreements reached or those still being negotiated give us an idea of our potential, with research suggesting that these new agreements could boost EU exports to their partners by as much as 40% by 2032. 9

It also means enabling the euro's wider use through cross-border payment infrastructure and protecting the stability of euro funding markets.

We are working on a digital euro and pursuing initiatives to enhance cross-border payments in euro. These include enabling cross-currency settlements in our TARGET

Instant Payment Settlement service and interlinking it with other fast payment systems outside the EU. This will make the euro more accessible, more affordable and more reliable for our partners.

In addition, during a crisis, our partners must also be sure that they can count on euro liquidity.

That is why the ECB provides a backstop with its network of liquidity lines in stressed market conditions. These tools safeguard against shortages in euro liquidity abroad, support financial stability and protect the smooth transmission of our monetary policy.

Finally, we need to uphold our institutional integrity.

If we want investors to place their capital in Europe, or our partners to use the euro for trade, they must have full trust in our institutions.

In this respect, Europe has a major advantage: our democratic checks and balances, and the independence of our central bank. These are powerful tokens of stability in a world where institutional integrity is increasingly being put to the test. Today, trust in the EU is at its highest since 2007, 10   while many U.S. institutions have fallen to their lowest levels over the same period. 11

But our institutions must also show that they can act to remain credible - and this is where our biggest challenge lies.

They must be capable of taking the decisions that deepen our Single Market, complete our capital markets and strengthen our geopolitical role. In practice, that also means bolstering our defence capabilities and forging sustainable, strategic partnerships. If they fail to do so, they will fall short of citizens' expectations and our credibility will inevitably be eroded.

That is why Europe should not shy away from new ways of making decisions together, including extending qualified majority voting where needed.

## Conclusion

Let me conclude.

For the last twenty years, following on from reforms to France's foreign trade framework, Business France has given French exporters greater visibility and support. Today, we must do the same for the euro, giving it a clearer and stronger place in the world.

Not a currency that passively attracts safe-haven inflows, pushing the exchange rate higher and raising costs for exporters. Instead, we want a currency in which investors can place lasting trust.

Antoine de Saint-ExupØry once said, « L'avenir n'est jamais que du prØsent à mettre en ordre. » In other words, the future is nothing more than today's decisions that need to be put in order.

If we strengthen the foundations of the euro now, we can transform our openness into resilience, and our weaknesses into strengths. And we can ensure that, in the future, the euro will continue to stand as a pillar of stability and strength for Europe, even in a more uncertain world.

- 1  Net of mechanical valuation effects.
- 2  ECB (2024), "" The international role of the euro"", June
- 3  Rey, H. et al. (2024), "" "", , No 32756, Elephants in Equity Markets NBER Working Paper July.
- 4  For example, research indicates that the US Government saves up to 2% in interest costs per year on foreigners' Treasury holdings. See Jiang, Z., Krishnamurthy, A. and Lustig, H. (2021), ""Foreign Safe Asset Demand and the Dollar Exchange Rate"", The , Vol. 76, No 3, pp. 1049-1089, June. Journal of Finance
- 5  Chen, Z. et al. (2025), "" The US as the Global Equity Safe Haven"", 30 January.
- 6  Swegal, H. ( 2025), ""The role of foreign currencies in BLS import and export price "", , U.S. Bureau of Labor Statistics, September. indices Monthly Labor Review
- 7  The United States accounts for 10% of total euro area exports, and the new tariffs are expected to reduce euro area exports to the United States by approximately 9%, translating to a 0.9% decline in overall euro area exports - roughly €66 billion. Making up for this shortfall in direct trade would require a 2% increase in intra-euro area trade, all other things being equal.
- 8  European Investment Bank (2025), Investment Report 2024/2025: Innovation, 5 March. integration and simplification in Europe - Executive Summary,
- 9  Joint Research Centre (2024), ""New trade agreements to result in positive cumulative impact on EU agri-food trade balance"", 22 February.
- 10  European Commission (2025), ""Eurobarometer shows record high trust in the EU, and strong support for the euro and a common defence and security policy"", press , Brussels, 28 May. release
- 11  Gallup, Confidence in Institutions.",Christine Lagarde
https://www.bis.org/review/r251007r.htm,Mary-Elizabeth McMunn: Through the cycle – regulation and supervision in an uncertain world,"Remarks by Ms Mary-Elizabeth McMunn, Deputy Governor of the Central Bank of Ireland, at the Compliance Institute Annual Conference, Dublin, 3 October 2025.",2025-10-03 00:00:00,"## Mary-Elizabeth McMunn: Through the cycle - regulation and supervision in an uncertain world

Remarks by Ms Mary-Elizabeth McMunn, Deputy Governor of the Central Bank of Ireland, at the Compliance Institute Annual Conference, Dublin, 3 October 2025.

* * *

Good morning everyone, and many thanks to SØamus and Michael for the invitation to speak to the Compliance Institute's Annual Conference this year. 1

Given the important role compliance professionals play in ensuring the financial system is well run, you are key stakeholders for Central Banks and Regulators, and so I am delighted to address you all this morning.

The theme of today's conference, ""Compliance leadership in an uncertain world"", is very appropriate one. And from the breadth and complexity of topics on the agenda today it is easy to see why!

Indeed uncertainty and complexity are a challenge that all leaders are having to navigate, and so today I would like to share some perspectives on this uncertain world.

I will first set out some of the macro challenges facing the financial sector, before delving a little deeper in terms of what that means for you and for us.

And lastly, I will touch on the turning regulatory cycle, including the simplification agenda, given it is regulators and compliance professionals who are the coalface of implementing the regulatory and supervisory framework.

## Risk Environment

But first, the risk environment we are all operating in.

I think we can all agree that we are living through challenging and uncertain times.

Times of great geo-political change, and potentially of great geo-economic fragmentation.

But also times of huge, and indeed rapid, technological progress, reshaping our daily lives.

Both of these could have profound implications for our economy and our financial system, and come alongside other great structural shifts, including an escalating, and in many ways a potentially existential, climate challenge.

While we have all been taking about geo-political, technological and climate change for a number of years now, the pace and scale of that change has clearly accelerated this year. Once tail risks and events are now looking much less unlikely; and we are all having to navigate a transition to a potentially structurally very different world.

Navigating such change is not something new for us, and indeed both regulators and industry have built up plenty of muscle memory responding to crises. Probably more muscles and more memories than we would wish to have!

Like many in this room my career has spanned the financial crisis, the euro crisis, Brexit and Covid - and for a number of years now responding to an increasingly volatile and risky world. Lessons learned and changes made throughout that time have helped us all navigate the recent series of shocks - facing them with agility, better data, stronger risk management capabilities, and with a system bolstered and buffered by the resilience we have collectively built over the last decade.

The depth, breadth and pace of change underway, however, leaves no room for complacency.

This is why vigilance, resilience and agility would be my watch words for the period ahead.

And I would reiterate what I said in my first speech as Deputy Governor this year: We need to be prepared for both short term shocks and long term shifts, for novel as well as traditional risks, and for resilience, both financial and non-financial, to be tested in different ways. 2

## Managing risks and seizing opportunities - the long and the short of it

But let me unpack that a little, and speak about responding to change and challenge, both in terms of seizing any opportunities while managing the risks.

For it is of course the financial system's job to both take and manage risk, and indeed there are risks from not taking your opportunities.

Part of the challenge, however, is that what we are dealing with is both cyclical and structural, meaning we are managing both significant risks and uncertainty in the near term, as well as adapting to an accelerated transition to a longer term different world.

Let me take some examples, around these geo-economic, digital and climate transitions.

In terms of geopolitics , we have all been navigating the short term shocks and shifts taking place this year, and indeed geopolitical risk has been a focus of supervisors for a number of years.

For me it is a classic example of where macro meets micro, and in our Regulatory and Supervisory Outlook this year we set out a framework for thinking about geopolitical risk and its transmission channels. 3   This includes the impact of risks crystallising through the traditional risk channels we grapple with, from credit, liquidity and market risks, to business model and operational risks.  As well as ensuring you are managing the risks to your consumers in the face of these macro-economic headwinds.

There is also the clear risk that regulatory fragmentation follows geo-political ones, and the risks from divergent regimes and lowering of requirements is something I know is on your minds too. 4

But in addition to an unprecedented short term policy uncertainty at a global level, we are also faced with the potential continuation of a recent trend towards geo-economic fragmentation over the longer term.

While both of these are obviously a challenge for a small open economy like Ireland and one we are very much alive to, our commitment to open markets and our international financial sector is for me an enduring strength, one which can help us seize opportunities even in the midst of fragmentation.

In terms of digitalisation, the speed at which it is moving makes it feel sometimes like the short and the long term are rapidly converging.

And while we are all grappling with the operational risks and challenges we are facing in an increasingly technological financial sector, as I have said before the digital transition, done right, has immense potential - delivering better outcomes for consumers, investors, and the wider economy. 5

And so it is crucial that you are ready to capitalise on that potential. That you are proactively and appropriately adapting your business models, strategies and systems to do so, to make sure you and your consumers are not left behind. 6

For we want the benefits of innovation to accrue to the wider system. This is something we have sought to foster through our policy, our supervision, our innovation engagement and innovation sandbox as well as our catalyst role in the field of payments.

In terms of climate change , this remains a key challenge for both society as a whole as well as for the delivery of our mandate - from monetary policy, to financial stability and the safety and soundness of firms, as well as ensuring the financial system is operating in the best interest of consumers and the wider economy.

While the conversation on climate may have abated, the risks certainly have not. Nor have the necessary actions which we all must take. Indeed the challenge looks only to be growing.

In the short run, we are already seeing the impacts from more frequent extreme weather events; and we are becoming increasingly aware of the challenges and risks from tipping points. 7   Supervisors and firms have rightly become more focused on understanding the climate and environmental risks to firms, which can come in many different forms. 8

And in the long run, while there are obviously significant risks from climate change, there are also opportunities from the transition to a net zero economy, and the financial sector has a big role to in play mobilising private finance as part of this solution.

We often talk about avoiding pro-cyclical affects, and lending through the economic cycle - in good times and bad. In that regard, I would suggest it is in the long term interest of the sector, and us all, to look through the political cycle on climate change, to manage the risks and seize the opportunities as we look to meet this long term challenge facing the world.

## Responding to uncertainty and change

So, we are all swimming in uncertainty, navigating complexity and riding the waves of rapid change - a theme that also came out in your recent survey of heads of compliance, and one which I am sure many will empathise with. 9

But how do we respond? Well there are no easy answers, but let me share some perspectives.

First, is to recognise that in such times, the roles of regulators, supervisors and compliance officers are all the more important (though also all the more challenging!).

For amidst uncertainty and rapid change it is crucial we stick to, and deliver, the fundamentals, which for me start with effective risk management and governance, underpinned by a strong ethical culture and driven by a proactive approach to managing the risks and uncertainties facing your business, and your customers. This of course includes actively considering those customer's interests in the changing and uncertain world.

Compliance, including policies and risk management, but also its role in culture, education, and challenge, are a crucial part of these fundamentals and I would suggest the voice of compliance is increasingly important in this environment.

And so it is important for you to recognise, and to continue to execute, the leadership role compliance officers and risk professionals play in creating the right culture in regulated entities.

For compliance should not be seen as a burden, nor something that needs to be ticked off, but rather as a key an enabler of well-run businesses. The best firms recognise this, they champion it through tone from the top and deliver it through their governance and their culture.

For us at the Central Bank the challenging external environment re-enforces the need for us to be forward looking, risk-based, outcomes focused and proportionate, all principles of our new supervisory approach. 10   As well as the need to ensure we are maximising the best use of our collective resources, while adapting to the changing world around us.

This is something we have been focused on for a number of years now, recognising that in the face of these fundamental changes we cannot stand still, and to continue to deliver on our mandate in a changing world, we must change too.

I would also say the needs to be adaptive to this changing regulatory framework external environment - and indeed it has been, and let me briefly take two flagship examples, one domestic and one international, to illustrate this.

As you all know this year we completed our review of the Consumer Protection Code , which is the cornerstone of the Central Bank's consumer protection regulatory framework. 11

The review focused on modernising the code to reflect the provision of financial services in a modern world. For consumers, it introduced a package of protections that better reflect how they are accessing financial services in a digitalising financial system. And for firms the integrated regulatory format, and clearer articulation of their Code obligations, will help them better deliver in the best interests of their consumers.

The Code is something I know there is huge support for, and I know the implementation of the updated Code will be a focus of us all in the period ahead. This is important as we want to see the new Code contributing to building trust in the financial system and for consumers to have the confidence that it will work to deliver positive outcomes for them, important in a time of such uncertainty and change.

Secondly, this year saw the take effect, and I know Digital Operational Resilience Act implementing DORA has been a significant piece of work for industry and regulators alike. But I couldn't think of a more important regulatory initiative to meet the challenges of the times, given the key role digital operational resilience plays in modern financial services, and the key external dependencies the financial system has in terms of technology and outsourcing.

As such the importance of this framework, the requirements it introduces and the information it provides cannot be overstated. While the submission of registers of information was a significant task - indeed the first of its kind, a complex exercise and there are learnings, it was also crucial one and will provide key information on the ICT third-party service providers to regulated entities, and those that are critical to the system.

Lastly let me touch on another way we are responding to this changing external environment. In a rapidly changing and increasingly complex world communication and engagement are all the more crucial. Which is why we have put such an emphasis on being more open and engaged, improving the clarity and coherence of our communications with the sector, and deepening our relationships with our international peers.

Engagement, openness and transparency is something I firmly believe in, for it delivers better policy, more effective supervision and better outcomes.

While something we working on, I would say it cuts both ways. You also need to be engaging with us, asking for clarification if we are not clear, and raising issues in an open, transparent and timely manner.

As a supervisor I always found open and respectful dialogue and exchange really helpful, clarifying potential misunderstandings and indeed deepening understanding on both sides. And so I  encourage my teams, and would encourage regulated firms (and indeed you in the room) to continue to engage in such dialogue.

## Regulatory cycle - simplification vs de-regulation

Let me finish not on the economic cycle, but rather the regulatory one, given another feature of today's uncertain and changing environment is a focus on regulation and growth.

The first thing I would like to say is that regulation plays a key role in our economy and the financial system - supporting innovation, competition and productivity, while ensuring the system operates in the best interest of consumers and the wider economy, both in good times and bad.

The second is to say that in the face of the volatile and rapidly changing times facing our economy and financial sector a robust regulatory and supervisory framework is all the more important; and indeed that framework has stood up well in recent years.

Having said that, given the economic challenges facing Europe, and the renewed focus on competiveness, it is understandable that there is also a renewed focus on the regulatory framework, and how it could be simplified, to reduce any unnecessary complexity and costs.

While financial regulation is only one part of that focus, it is obviously a key focus for you and for us.

Contrary to popular belief, regulators and supervisors want simplification.

It is not in our interest to be wading through unnecessary complexity and processes, and we want to be more effective and achieve our outcomes in better and more efficient ways. As such we are keen to simplify both regulation and supervision, provided it is done in a way that does not compromise on our ability to deliver on our mandate.

For this reason we at the Central Bank are serious about simplification, and are focused on it both domestically and internationally. We are engaged in many conversations on this at the ECB, across the three ESAs and in Brussels. And we are assessing our own domestic frameworks, and have asked for and received ideas from the sector.

While serious about simplification, and while engaging with the sector, this does not mean that we will always agree on where, or how far, to simplify.

Indeed as I have said before one person's unnecessary burden can often be another's important protection.

Furthermore, we cannot simplify so much that we do not capture complex risks, indeed financial regulation is complex in part because financial services is complex.

Nor does our seriousness about simplification mean that we have changed our minds on the important objectives we are trying to achieve. We have not. Rather we recognise, and are open to, the potential for more efficient and effective ways of achieving them.

Equally, simplification cannot mean no new rules. In a world of rapid change regulation standing still risks regulation falling behind.

And indeed history has shown that financial regulation not keeping pace with financial innovation, often leads to financial crises. 12

Lastly, as anyone involved in the regulatory process will know, simplification won't be simple and it won't be quick. Which is not to say that there are no quick wins, or that there aren't simple things we can do to make a difference for you and for us. There are.

And indeed we have already been delivering them, including more integrated engagement through our new supervisory approach, enhanced F&amp;P and authorisation processes, consulting on amendments to the funds framework, and streamlining reporting requests to name but a few, and with more to come. At EU level we are also delivering, including through ECB Banking Supervision 13  and at the ESAs.

But as we have said before, and as the public would rightly expect of its independent Central Bank and Regulator, we will call out the risks should the legitimate aims of simplification slide into de-regulation. 14   As that clearly would not be a good outcome for our economy or our citizens.

You as compliance professionals have an important role to play here too. For the risks from the regulatory cycle are not just about a changing of rules, it can also relate to a culture and adherence to those rules, with weakening compliance or more of a tick box approach.

So as I said before, the voice of compliance is an important one at this time, as is your continued role in embedding regulation and proactive risk management as part of the culture of a well-run firm.

## Conclusion

Let me conclude.

The external environment is a challenging one, characterised by significant uncertainty and volatility and a period of potentially rapid structural change.

The sector has been weathering this change well, thanks to the resilience built over the last decade as well as improvements in Governance, compliance, risk management and culture.

Given the rapid change underway and ahead, in the nature, shape and digitalisation of the global economy and financial system, it is important we remain vigilant, maintain resilience, and ensure we are agile and adapting to the changing nature of financial services, the opportunities it provides and the changing nature of resilience it implies.

And lastly, there is an onus on policymakers, regulators and industry alike to heed our history, and to remember the lessons of the past.

## Thank you

- 1  Many thanks to Cian O'Laoide for his help preparing these remarks.
- 2  See McMunn  ""Shocks and shifts - regulation and supervision in a changing world"" April 2025.
- 3  See Central Bank of Ireland Regulatory &amp; Supervisory Outlook 2025 (PDF 2.15MB).
- 4  See Compliance Institute Survey September 2025 (PDF 1.02MB).
- 5  See McMunn  Central Banks and innovation - delivering our mandate in a digitalising world  May 2025.
- 6  See Madouros Catching and keeping up - payments innovation in Ireland  March 2025.
- 7  For example se Carbon Brief  Nine ""tipping points"" where a changing climate could push parts of the Earth system into abrupt or irreversible change.
- 8  For example, almost 75% of euro area banks corporate loans to are extended to companies highly dependent on one ecosystem service.  ECB Occasional Paper:   Living in a world of disappearing nature: physical risk and the implications for financial stability (PDF 1.21MB).
- 9  See Compliance Institute Survey September 2025.
- 10  See Central Bank of Ireland: Our Approach to Supervision (PDF 324.62KB)  February 2025.
- 11  See Makhlouf Consumer Protection Code Review Discussion Paper (PDF 2.21MB).
- 12  See also Barr: Booms and Busts and the Regulatory Cycle  July 2025.
- 13  See for example Donnery As simple as possible, but not simpler  September 2025.
- 14  See also:  Dear CEO Letter - Key Regulation and Supervision Priorities 2025 (PDF 98.28KB)February 2025.",Mary-Elizabeth McMunn
https://www.bis.org/review/r251008e.htm,Fabio Panetta: Solidarity and cooperation - from local communities to global stability,"Speech by Mr Fabio Panetta, Governor of the Bank of Italy, at the Conference ""Cooperative financial institutions in the 21st century for global economic and social development"", Rome, 8 October 2025.",2025-10-08 00:00:00,"## Fabio Panetta: Solidarity and cooperation - from local communities to global stability

Speech by Mr Fabio Panetta, Governor of the Bank of Italy, at the Conference ""Cooperative financial institutions in the 21st century for global economic and social development"", Rome, 8 October 2025.

* * *

Ladies and Gentlemen,

It is a great pleasure to welcome you to Rome and to open this conference on the role of cooperative financial institutions in the twenty-first century.

This Jubilee year is dedicated to hope, a virtue that looks to the future, but cannot flourish without solidarity, justice, and a strong sense of responsibility towards future generations. These are not abstract ideals, but the very foundations of resilient societies and stable economies.

Let me address two economic themes that are closely linked to these principles.

The first is cooperative finance - a model that, through proximity and mutual trust, has long promoted inclusion and balanced growth.

The second is the debt burden of low-income countries - a challenge that reminds us that solidarity must reach beyond national borders if we are to create the conditions for global stability and prosperity.

Both issues are rooted in the same idea: credit and debt are not just financial instruments, but expressions of trust and responsibility. And when debt in poor countries becomes unsustainable, that very sense of responsibility calls on creditors and debtors alike to work together to find solutions that are equitable and conducive to growth.

## 1. Cooperative banks in a changing world

Cooperative finance has long been rooted in communities. Its democratic governance, its focus on members' needs and its tradition of responsibility make it a distinctive model for intermediation. Long before the principles of environmental, social and governance (ESG) responsibility became common parlance, cooperatives were already putting them into practice.

Over time, these institutions have expanded access to finance for households and small businesses, supporting millions who would otherwise have been excluded. Their importance is evident in both advanced and developing economies: they foster inclusion, resilience, and sustainable growth.

In Europe alone, cooperative banks employ over 700,000 people and serve more than 90 million members. They are also well-represented outside Europe, with about 100 1

million members. 2   Credit unions are present in more than 100 countries, counting over 400 million members. 3   In regions facing poverty, conflict or climate stress they often remain the only reliable providers of credit.

Research shows that their relationship-based lending helps to smooth credit cycles, 4 sustain customers during downturns and promote more balanced and sustainable growth. Far from being less efficient than commercial banks, many cooperatives 5 6 match them in profitability and credit quality, while also reducing inequality. 7

## Emerging challenges

The cooperative model is not without weaknesses. Its small size hinders economies of scale, its concentration in local markets reduces diversification, and its strong community ties may blur risk management. In advanced economies, the declining share of small and medium-sized enterprises in total production is reducing demand for traditional relationship lending. The rising share of intangible assets in firms' balance sheets - such as software, data, and intellectual property - complicates screening and credit risk management for small lenders.

In this environment, cooperative banks can no longer rely solely on their historical advantages over commercial banks. Expanding loan portfolios, a strategy that once sustained the growth of cooperative intermediaries, has become more difficult and entails higher risks. Cooperatives will need to adapt their strategies, leveraging innovation and partnerships, while remaining faithful to their founding mission of serving communities.

## 2. From local credit to global solidarity

Just as social capital is the foundation for cooperative credit within local communities, 'international social capital' is essential to revitalize multilateral cooperation. The same principles - trust, responsibility, and solidarity - that sustain cooperatives at the local level must guide the international community in supporting poor countries and addressing poverty, inequality, and the burden of unsustainable debt.

## Progress and persisting inequalities

Over the past decades, humanity has achieved extraordinary progress in reducing extreme poverty. The share of people living on less than the bare minimum fell from over 40 per cent in 1990 to 11 per cent at the end of the last decade. In absolute terms, this means a decline from 2.3 billion to 900 million individuals. 8   Unfortunately, in recent years, due to multiple shocks, this progress has stalled.

The success achieved has not been universal. In sub-Saharan Africa, the picture is tragically different. Here, the number of people living in extreme poverty almost doubled between 1990 and 2020, reflecting rapid demographic growth and more modest reductions in poverty rates - from 55 to 46 per cent. 9

## Debt as a barrier to development

While poverty remains widespread, low-income countries are once again facing a familiar challenge: unsustainable levels of public debt. This burden not only constrains economic development, but also hinders poverty reduction and undermines social stability.

These countries account for just 2.5 per cent of global GDP and 1.4 per cent of global public debt, but they are home to 1.8 billion people - nearly one quarter of humanity. Their weight in the global economy may be small, but the human consequences of their plight are immense. In such social and political circumstances, debt reduction is not only an economic necessity, it is a moral duty. Furthermore, poverty is a powerful driver of irregular migration, which is putting increasing strains on many advanced economies.

The debt-to-GDP ratio peaks of the 1990s led to unprecedented initiatives for debt cancellation (the Heavily Indebted Poor Countries initiative, HIPC). Today, debt ratios among poor countries are below those peaks, yet vulnerabilities have resurfaced. Over the past fifteen years, median debt levels have risen sharply, from 30 per cent of GDP in 2010 to 50 per cent in 2024, while debt servicing costs have escalated, diverting resources from schools, hospitals, and infrastructure. 10

The evolving creditor landscape complicates achieving an agreement on debt restructuring. Alongside multilateral institutions and the Paris Club, private investors and new bilateral lenders - most prominently China - now play a central role. This enlargement, while offering more financing options, has made coordination during crises more difficult and weakened traditional mechanisms for debt resolution.

It would therefore be misleading to think that simply replicating the HIPC initiative today, in such a profoundly changed context, would be sufficient. Innovative approaches and a substantial reformulation of the terms of the discussion are instead necessary.

## Towards a renewed multilateral response

The complexity of today's debt challenge requires a comprehensive and coordinated global response, one that encompasses crisis prevention, debt relief, and growth promotion.

For countries caught in unsustainable debt cycles, restructuring is essential. The Common Framework endorsed by the G20 in November 2020 11   was a step forward, bringing traditional and new creditors to the same table. Yet implementation has been slow and uneven, revealing the need for greater transparency, predictability, and speed. Unfortunately, the current geopolitical climate is diminishing hopes of a coordinated global response to debt.

Restructuring is the last resort, prevention remains central. Liquidity strains can be mitigated through cheaper refinancing, affordable lending, and innovative instruments such as climate-resilient debt clauses, which suspend payments in the event of natural disasters. Furthermore, developing local currency debt markets would reduce these countries' dependence on foreign financing, thereby mitigating their exposure to currency fluctuations and allowing them to fund long-term investment programmes.

Ultimately, however, the safest way to restore debt sustainability is to foster balanced and inclusive growth. Debt relief must therefore be paired with reforms that strengthen institutions and broaden the tax base. Financial support is most effective when tied to clear performance-based frameworks.

The international community should explore innovative solutions, such as debt-fordevelopment swaps, which channel resources into education, health, and climate action. Initiatives like Italy's recent proposal to free up funds for African countries and reinvest them in locally owned development programmes are a promising path.

The debt of low-income countries is not a peripheral issue but a central global challenge. Failure to act will leave 1.8 billion people behind, with consequences for global stability and justice. Multilateral cooperation is not a burden: it is a strategic investment. At a time of fragmentation and nationalism, we must renew our commitment to solidarity.

The reduction of debt, when accompanied by reform and growth, can turn a crushing burden into a lever for development, a tool for eradicating poverty, and a catalyst for inclusive prosperity.

## 3. Conclusions

The brief reflections I have shared today point to a single truth: solidarity is a necessity, not an option. The fact that the world these days seems to overlook this statement does not make it untrue. Solidarity is the foundation for resilient communities, the engine of sustainable economies, and the glue that holds an increasingly fragile world together.

We must preserve and nurture our social capital, both locally and globally. Cooperation can be laborious, but it is precious because it is an investment in stability, security, and justice.

Leaving almost two billion people behind is hardly a reliable foundation for stability and prosperity, worldwide as well as in advanced economies. Let us therefore ensure that credit, whether extended within a village or across nations, serves its highest purpose: to build trust, to foster dignity, and to lead the way towards a more just and humane world.

1  Source: European Association of Co-operative banks, Key statistics, 2023.

- 2  Source: websites of the members of the International Cooperative Banking Association.
- 3  Source: World Council of Credit Unions.
- 4  Among others, see G. Barboni and C. Rossi, 'Does your neighbor know you better? The supportive role of local banks in the financial crisis', , Journal of Banking &amp; Finance 106, 2019, pp. 514-526; and G.M. Caporale, S. Di Colli and J.S. Lopez, 'Bank lending

procyclicality and credit quality during financial crises', 43, 2014, Economic Modelling pp. 142-157.

- 5  P. Coccorese and S. Shaffer, 'Cooperative banks and local economic growth', , 55, 2, 2021, pp. 307-321. Regional Studies
- 6  For a comprehensive review of the performance of cooperative banks, see D. McKillop et al., 'Cooperative Financial Institutions: A Review of the Literature', , 71, 2020. International Review of Financial Analysis
- 7  V. Peruzzi, P. Murro and S. Di Colli, 'The distributional impact of local banking. Evidence from the financial and sovereign-debt crises', European Journal of Political , 80, 2023. Economy
- 8  Source: World Bank, Poverty and Inequality Platform. This transformation was largely driven by the rapid economic development of emerging Asian economies, particularly China. In East Asia and the Pacific, the extreme poverty rate dropped from 76 per cent to 2 per cent, lifting 1.2 billion people out of destitution.
- 9  Today, sub-Saharan Africa alone accounts for 580 million of the world's poorest, representing over two thirds of the global total.
- 10  In some cases, interest payments consume more than 18 per cent of government revenues.
- 11  The Common Framework for Debt Treatments (Common Framework) is an agreement between the G20 and Paris Club countries to promote coordination among official creditors with the aim of facilitating timely and orderly debt restructurings for the world's poorest countries, on a case-by-case basis.",Fabio Panetta
https://www.bis.org/review/r251008b.htm,Michelle W Bowman: Welcome remarks - 2025 Community Banking Research Conference,"Welcome remarks (via pre-recorded video) by Ms Michelle W Bowman, Vice Chair for Supervision of the Board of Governors of the Federal Reserve System, at the 2025 Community Banking Research Conference, St. Louis, Missouri, 7 October 2025.",2025-10-07 00:00:00,"## Michelle W Bowman: Welcome remarks - 2025 Community Banking Research Conference

Welcome remarks (via pre-recorded video) by Ms Michelle W Bowman, Vice Chair for Supervision of the Board of Governors of the Federal Reserve System, at the 2025 Community Banking Research Conference,  St. Louis, Missouri, 7 October 2025.

* * *

Welcome to the 2025 community banking research conference. 1   While I regret that I cannot join you in person this year, I would like to take a moment to acknowledge the contributions this conference has made and continues to make in promoting research on community banking and related issues.

Since 2013, this conference has synthesized insights and perspectives from research and regulatory and banking communities with a single goal: deepening our understanding of the community bank business model in order to better inform future policy decisions.

We share this goal, and the sponsorship of this event with the Conference of State Bank Supervisors (CSBS) and the Federal Deposit Insurance Corporation (FDIC). We are proud of this ongoing partnership with CSBS and FDIC and the effort to further actionable bank industry research.

As the former Kansas state bank commissioner and a community banker, I very much appreciate the goals of this conference. And again this year, the organizers have included valuable research and created a conference program that includes a wide range of perspectives that create an opportunity for discussion and debate.

Ensuring the future and viability of the community banking industry continues to be a top priority, especially as the President appointed me to serve as the Vice Chair for Supervision of the Federal Reserve Board.

This position, which was created under the Dodd-Frank Act in 2010, requires the Vice Chair to ""develop policy recommendations for the Board regarding supervision and regulation of depository institution holding companies and other financial firms supervised by the Board"" and to also ""oversee the supervision and regulation"" of these firms.

It is an honor and an absolute privilege to be entrusted with these important responsibilities, and I look forward to working with all of our stakeholders in the financial industry to modernize supervision and regulation that allows for continued economic growth and innovation in the banking system and that enhances the critical role of community banks.

Community banks are the cornerstone of local economies, providing credit to local customers and businesses with few alternatives for accessing financial services. The

community bank relationship model requires just that relationship. Direct knowledge of and a connection with the community, which makes this banking model truly unique and even more valuable.

But this model continues to face challenges-challenges that I am confident this conference will explore in greater detail that will help us to inform future policy developments.

When I spoke at this conference last year, I described a framework for community banking regulation for the future.

In those remarks, I discussed the necessary building blocks for building an effective framework, which include

- reviewing, reconsidering, and indexing the asset size thresholds that are used throughout our current supervisory and regulatory framework;
- gaining a better understanding of the tradeoffs of regulation;
- identifying the hidden costs of supervision and supervisory guidance;
- streamlining the mergers and acquisitions review and approval process; and
- identifying ways to promote new bank formation.

Since that time, the Federal Reserve has already launched several initiatives to advance these goals, but there's more work ahead.

We are refocusing supervisory efforts on core material financial risks, reviewing the CAMELS ratings framework, revising the community bank leverage ratio, and considering ways to improve the treatment of mutual banks. We are also prioritizing work to assist in the fight against fraud.

In the coming years, this conference will be an important mechanism for continuing to explore challenges facing the banking industry, and especially community banks. And with the work we are undertaking, we will continue to prioritize changes to the community bank regulatory and supervisory framework that will allow community banks to continue to thrive.

Over the years, this conference has highlighted the important role community banks play in our economy, the impacts of regulation on our banks, the disproportionate cost burden from regulation on our nation's smallest banks, and the importance of having a strong diversified network of community banks. It is critical that our regulatory and supervisory framework continues to support a network of these banks across and throughout the country so that they are positioned to support the economy and to meet the credit needs of their communities.

As I work with staff across the Federal Reserve to enhance the Fed's supervision of banks, I'm reminded how the research presented at this conference over the years, along with the findings from the CSBS annual survey of community banks, has consistently demonstrated the need for regulatory tailoring. This has given us a better perspective to understand and measure the cost of compliance.

In short, this conference truly matters.

Each year, the research presented here moves us forward; improves our understanding; and, combined with other insights from key stakeholders and our own experiences, enables us to make better regulatory and supervisory decisions.

From the first year of the conference in 2013, we've seen a number of changes in the banking and financial systems, in our economy, and in our supervisory and regulatory structures. The research presented here each year has evolved with these changes and has delivered critical and timely insights.

I'm so pleased that this conference has not strayed from its original mission and continues to provide a forum for the discussion of thoughtful, timely research into our country's unique community banking business model.

Community banks are vital to the U.S. economy and to the thousands of smaller local economies they serve across the country. It's important that we continue to study and understand the important role they play.

This conference helps to increase this understanding.

In addition to presenting thoughtful research, it provides an opportunity for open dialogue between community bankers, academics, regulators, and policymakers.

In these ever-changing times, the unique combination of research presented in combination with real-world perspectives provides insights that help to ensure that the community banking model endures well into the future.

This conference is just one aspect of the Federal Reserve System's engagement on issues affecting community banks. Outreach to banks of all sizes, including community banks, has been a top priority for my work because your voices must be a part of the conversation in Washington. In a few days, the Board will host a Community Bank Conference in D.C., bringing together bankers, industry experts, and other stakeholders to discuss and identify the most relevant issues facing the industry.

This event will be live-streamed on the Board's website and will include several unique and exciting speakers and panelists, covering a number of current issues.

Thank you for your continued interest and engagement in supporting this conference.

1  The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.",Michelle W Bowman
https://www.bis.org/review/r251007b.htm,Kazuo Ueda: Japan's economy and monetary policy,"Speech by Mr Kazuo Ueda, Governor of the Bank of Japan, at a meeting with business leaders, Osaka, 3 October 2025.",2025-10-03 00:00:00,"

October  3,  2025

Bank  of  Japan

## Japan's Economy and Monetary Policy

Speech at a Meeting with Business Leaders in Osaka

## UEDA Kazuo

Governor of the Bank of Japan

(English translation based on the Japanese original)

## Introduction

It is my great pleasure to have the opportunity today to exchange views with a distinguished gathering  of  business  leaders  in  the  Kansai  region.  I  would  like  to  take  this  chance  to express  my  sincerest  gratitude  for  your  cooperation  with  the  activities  of  the  Bank  of Japan's branches in Osaka, Kobe, and Kyoto. When I visited this region last year, I had the opportunity to tour the construction site of Expo 2025 Osaka, Kansai. Since then, I have wished for the Expo's success, and since its opening this April, I have been delighted to see it thriving every day, welcoming over 22 million general visitors from Japan and abroad. I would like to express my sincere respect to everyone whose efforts made this possible.

Today, I look forward to hearing your candid opinions, which will be useful in the Bank's policy  decisions  and  business  operations.  Before  hearing  from  you,  I  would  like  to  talk about developments in Japan's economic activity and prices and explain the Bank's thinking on the conduct of monetary policy.

## I. Economic Activity and Prices

## Current Situation of and Outlook for Economic Activity

I  would  like  to  begin  by  discussing  the  current  situation  of  and  outlook  for  economic activity  in  Japan.  The  Bank  assesses  that  Japan's  economy  has  recovered  moderately, although some weakness has been seen in part.

Please take a look at Chart 1, which shows developments in the corporate sector. The results of the Bank's Tankan (Short-Term Economic Survey of Enterprises in Japan) released two days  ago  show  that  business  sentiment  has  improved  in  some  manufacturing  industries, reflecting firms' view that the agreement in the Japan-U.S. tariff negotiations has reduced uncertainty  in  the  outlook.  The  results  also  show  that  business  sentiment  has  been  at  a favorable level on the whole. Turning to Chart 2, while corporate profits in manufacturing have been affected by factors such as a deterioration in export profitability reflecting  U.S. tariff  policies,  profits  on  the  whole  have  remained  at  high  levels,  at  around  the  historical peak. Looking at profit projections for this fiscal year in the table on the right, profits of firms in manufacturing are now expected to fall by 8.6 percent, which is around the same level as in the previous survey in June. However, in nonmanufacturing, where the impact of

U.S. tariff policies is relatively limited, profit projections remain more or less unchanged from the actual profits of the previous year, and overall, corporate profits are expected to remain at a relatively high level.

Please turn to Chart 3. Starting with exports, shown in the left panel, the overall trend has continued to be more or less flat, although there have been a front-loading and a subsequent reactionary decline  due to  the  increase  in  U.S.  tariffs,  mainly  in  automobiles,  since  early spring of this year. Next, business fixed investment, shown in the right panel, has continued to  exhibit a moderate increasing trend, and business fixed investment plans for this fiscal year also indicate that the growth momentum in investment has been maintained. Anecdotal information  from  firms  suggests  that  many  are  committed  to  firmly  moving  ahead  with investments that are necessary from  a medium-  to  long-term  perspective, such as labor-saving and efficiency-improving investments to address labor shortages and digital-related investments.

Next, let us look at the household sector. Please see Chart 4. As for private consumption, although consumption of nondurable goods has continued on a decreasing trend, reflecting consumers' increased thriftiness due to the rise in food prices, overall consumption has been resilient  against  the  background  of  an  improvement  in  the  employment  and  income situation.

Chart 5 shows more details on the employment and income situation. Looking at nominal wages in the left panel, scheduled cash earnings have continued to rise steadily, reflecting the  high  wage  growth  rate  achieved  in  the  annual  spring  labor-management  wage negotiations.  In  addition,  summer  special  cash  earnings  (bonuses,  etc.)  also  have  been increasing  firmly,  reflecting  factors  such  as  firms'  strong  business  performance  in  the second half of fiscal 2024. Meanwhile, wage increases have been widely observed, as seen, for example, in the increase in the minimum wage from the previous fiscal year marking the largest rise on record. The number of employees has also continued to grow, particularly in industries facing severe labor shortages, and the rate of increase in employee income -- that is,  nominal wages multiplied by the number of employees  -- has remained at a relatively high level.

As  I  have  described,  while  U.S.  tariff  policies  have  negatively  affected  the  profits  of Japanese exporting firms, so far there are no signs that the effects have spread to Japan's economy  as  a  whole,  including  business  fixed  investment  and  employment  and  wage developments.

Looking ahead, although private consumption is expected to remain resilient, supported by an  improvement  in  employee  income,  Japan's  economic  growth  is  likely  to  moderate temporarily,  as  overseas  economies  are  likely  to  decelerate  under  the  impact  of  tariff policies, putting downward pressure on exports and business fixed investment. Thereafter, however, Japan's economic growth rate is likely to rise, with overseas economies returning to a moderate growth path.

## Current Situation of and Outlook for Prices

Next,  I  would  like  to  talk  about  developments  in  prices.  As  shown  in  Chart  6,  the year-on-year rate of increase in the consumer price index (CPI) for all items excluding fresh food has been in the range of 2.5-3.0 percent recently. The main driver of the price increases has  been  developments  in  food  products,  including  rice.  In  the  chart,  the  light  blue  bars show the contribution of food prices to the overall rate of change in the CPI. They show that more than half of the increase in the CPI is attributable to higher food prices.

The rise in food prices, particularly rice prices, is largely driven by temporary supply-side factors rather than a sudden rise in consumer demand. Therefore, once these factors subside, the contribution of food prices to the overall increase in the CPI is expected to gradually recede.  For  this  reason,  the  Bank's  baseline  scenario  in  the  July Outlook  for  Economic Activity and Prices (Outlook Report) is that the year-on-year rate of increase in the CPI for all  items  excluding fresh food is likely to fall below 2 percent at some point through the next fiscal year.

Looking ahead, the Bank expects that, despite the impact of U.S. tariff policies and other factors, a sense of labor shortage will grow as the economic growth rate rises, and mediumto  long-term  inflation  expectations  will  rise.  As  a  result,  it  is  likely  that  underlying  CPI inflation -- that is, inflation excluding the effects of temporary factors such as developments

related  to  food  --  will  increase  along  with  actual  inflation  and,  in  the  second  half  of  the projection period of the Outlook Report, will reach a level that is generally consistent with the price stability target of 2 percent.

## Points to Monitor at This Juncture

There are various uncertainties surrounding the baseline scenario for economic activity and prices that I have just described. I would like to discuss three key points that are important when assessing developments in Japan's economic activity and prices at this juncture.

The  first  point  concerns  developments  in  overseas  economies.  The  Bank  expects  that, although  overseas  economies  will  experience  a  temporary  slowdown  reflecting  trade  and other policies in each jurisdiction, they will then return to a moderate growth path. However, this outlook could change considerably depending on economic and policy developments in major economies, especially the future course of the U.S. economy.

So far, tariff policies have had no major negative impact on the U.S. economy, which has continued to grow moderately, as seen, for example, in the fact that quarter-on-quarter real GDP growth turned positive in the April-June quarter. Corporate profits have been solid, especially among high-tech firms, and business fixed investment has continued to increase moderately, driven mainly by AI-related investment. Private consumption has been resilient, supported by durable goods.

However,  as  shown  in  the  left  panel  of  Chart  7,  the  pace  of  employment  growth  in  the United  States  has  slowed  notably  since  the  summer.  Even  so,  the  rise  in  the  U.S. unemployment rate has remained modest, as can be seen in the middle panel. This is likely due  to  the  simultaneous  slowdown  in  labor  supply  reflecting  strict  U.S.  immigration policies.  Meanwhile,  although  consumer  prices  in  the  United  States,  shown  in  the  right panel, have been rising for some goods, the pass-through to selling prices of increased costs due  to  tariffs  has  so  far  been  limited.  That  said,  there  is  no  doubt  that  tariffs  are  being imposed widely on U.S. imports, so the question is when and in what form the impact will manifest. If U.S. firms bear the burden of the increase in import costs, the deterioration in corporate profits will exert downward pressure on employment and income in the United

States. The slowdown in U.S. employment growth I mentioned earlier may be a sign that such developments are beginning to emerge. Furthermore, if firms are unable to fully take on  the  increased  costs  and  pass  them  on  to  selling  prices,  consumer  prices  will  rise, negatively affecting private consumption.

The Federal Reserve recently decided to cut the policy interest rate for the first time in nine months, focusing on downside risks to employment, and this policy is expected to support the U.S. economy. That said, regarding the outlook for the economy, Chairman Powell has stated  that  inflation  risks  are  tilted  to  the  upside  and  employment  risks  are  tilted  to  the downside, which suggests that considerable uncertainties remain. The future course of the U.S. economy and the conduct of monetary policy under these circumstances could have a significant  impact  on  Japan's  economic  activity  and  prices  through  developments  in  the global economy and changes in global financial and foreign exchange markets. The Bank will therefore continue to closely monitor the situation.

The second point concerns how U.S. tariff policies will affect profits and the wage- and price-setting behavior of Japanese firms. The fact that a tariff rate of 15 percent has now been set will lead to reducing uncertainty surrounding U.S. tariff policies. How individual firms adapt their business strategies based on this tariff rate is likely to become clear going forward.

Looking  at  the  results  of  the  September Tankan ,  firms  in  nonmanufacturing,  where  the impact of tariffs is relatively limited, are highly likely to maintain high levels of profits on the whole. On the other hand, as mentioned earlier, firms in industries with a high export share, such as automobiles, expect in their profit projections for this fiscal year that their profits will fall considerably.

Even so, the high level of profits accumulated by firms, including in these industries, should act as a buffer to some extent, so it is likely that the mechanism in which wages and prices rise moderately in interaction with each other will essentially remain in place. However, if uncertainty regarding overseas economies and trade and other policies remains high, firms may place stronger emphasis on cost-cutting and may weaken their efforts to reflect price

increases  in  wages.  The  Bank  will  continue  to  closely  examine  firms'  views  through  its Head Office and branches to see whether these risks materialize going forward. I would also like to take this opportunity today to seek your views.

The  third  point  concerns  developments  in  food  prices.  While  the  current  price  rises  can essentially be regarded as largely due to temporary factors, there are some views that they are  becoming  more  attributable  to  the  pass-through  of  increased  personnel  expenses  and distribution  costs  to  selling  prices  of  food.  Therefore,  depending  on  firms'  wage-  and price-setting  behavior,  it  is  possible  that  price  rises  will  persist  for  longer  than  expected. Conversely, attention is warranted on the fact that, if prolonged food price increases lead to a deterioration in household sentiment, this could dampen private consumption and act to push down inflation.

## II. The Bank's Conduct of Monetary Policy

Next, I would like to talk about the Bank's conduct of monetary policy.

The  environment  surrounding  economies  at  home  and  abroad  has  changed  substantially since the introduction of U.S. tariff policies was announced in April. The tariff policies have created  uncertainty  for  the  global  economy,  including  the  U.S.  labor  market  and  price developments, and the unprecedentedly high tariff rate of 15 percent will exert downward pressure on Japan's economy. Given these factors, it is important, first of all, to maintain accommodative financial conditions and thereby firmly support economic activity. For this reason, the Bank, at the Monetary Policy Meeting (MPM) held last month, decided to keep the policy interest rate unchanged at 0.5 percent.

Regarding  the  future  conduct  of  monetary  policy,  as  shown  in  Chart  8,  given  that  real interest rates are at significantly low levels, if the baseline scenario for economic activity and  prices  outlined  so  far  is  realized,  the  Bank,  in  accordance  with  improvement  in economic activity and prices, will continue to raise the policy interest rate and adjust the degree of monetary accommodation.

To determine whether economic activity and prices are improving, the Bank will, for the time being, monitor factors such as the points I mentioned -- namely, developments in the global economy, especially the U.S. economy; the impact of U.S. tariff policies on Japanese firms' profits and wage- and price-setting behavior; and price developments, including food prices.

The  Bank  will  carefully  examine  the  likelihood  that  the  baseline  scenario  for  economic activity  and  prices  will  be  realized,  as  well  as  both  upside  and  downside  risks,  and  will make monetary policy decisions as appropriate and without any preconceptions.

## Concluding Remarks

Finally, I would like to say a few words about the Bank's efforts to reduce the size of its balance sheet.

Under the large-scale monetary easing framework that lasted for more than a decade, the Bank conducted purchases of Japanese government bonds (JGBs) with the aim of keeping long-term interest rates stable at low levels, and of exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) to lower risk premiums in the markets. As a result, the  Bank's  balance  sheet  has  expanded  to  a  particularly  large  scale  compared  with  other major central banks.

While  these  were  all  necessary  measures  to  overcome  deflation,  now  that  the  Bank  has returned to normal monetary policy -- focused on guiding short-term interest rates -- another major challenge is to return its enlarged balance sheet to an appropriate size.

Since  last  summer,  the  Bank  has  been  gradually  reducing  its  purchase  amount  of  JGBs, which account for the majority of the Bank's assets, so that it can improve the functioning of the  JGB  markets  in  a  manner  that  supports  stability  in  the  markets.  Moreover,  at  last month's MPM, the Bank decided to start selling its holdings of ETFs and J-REITs to the market in a manner that avoids inducing destabilizing effects on the financial markets as much as possible.

Although the process of reducing the size of the balance sheet is gradually making progress, given its large scale, this process is expected to continue for quite a long time. The Bank will  continue  to  manage  its  balance  sheet  as  appropriate,  drawing  on  sources  such  as precedents from overseas.

Thank you very much for your attention.

October 3, 2025

## UEDAKazuo

Governor of the Bank of Japan

## Japan's Economy and Monetary Policy

Speech at a Meeting with Business Leaders in Osaka

## Introduction

- I. Economic Activity and Prices

- II. The Bank's Conduct of Monetary Policy Concluding Remarks

## Corporate Sector (1)

Business Conditions (Tankan)



- I. Economic Activity and Prices

Chart 2

## Corporate Sector (2)

Corporate Profits

Profit Projections (Tankan)



y/y % chg.

|                                   | FY2024 (Actual value)   | FY2025 (Projection)   | FY2025 (Projection)   |
|-----------------------------------|-------------------------|-----------------------|-----------------------|
|                                   |                         |                       | Revision rate         |
| All industries and enterprises    | 5.6                     | -4.8                  | 0.9                   |
| Manufa- cturing Large enterprises | 6.0                     | -8.6                  | -0.2                  |
| Non- manufa- cturing              | 2.4                     | -0.7                  | 0.6                   |

Note: In the left-hand chart, figures are current profits based on the Financial Statements Statistics of Corporations by Industry, Quarterly and exclude ""finance and insurance"" and ""pure holding companies."" In the right-hand chart, figures are current profits.

Sources: Ministry of Finance; Bank of Japan.

## Corporate Sector (3)

## Exports and Production

## Business Fixed Investment





- Notes: 1. In the left-hand chart, figures for 2025/Q3 are July-August averages.
2. In the right-hand chart, figures for Tankan (actual) include software and R&amp;D investments and exclude land purchasing expenses. R&amp;D investment is not included before the March 2017 survey. The figures are for all industries including financial institutions.

3

- Sources: Ministry of Economy, Trade and Industry; Bank of Japan; Ministry of Finance; Cabinet Office.
- I. Economic Activity and Prices

## Household Sector

Real Private Consumption



Note: Figures for total real private consumption are the real Consumption Activity Index (travel balance adjusted) based on staff calculations, which exclude inbound tourism consumption and include outbound tourism consumption.

Chart 4

## Employment and Income Situation



Source: Ministry of Health, Labour and Welfare.

5

## I. Economic Activity and Prices

Chart 6

## Price Developments



## U.S. Economy

## Labor Market

## Consumer Prices

## Number of Employees

Unemployment Rate



Note:  In the left-hand chart, figures are for nonfarm payroll employment. Source: Haver.

II. The Bank's Conduct of Monetary Policy

## Future Conduct of Monetary Policy

## July 2025 Outlook Report

- As for the conduct of monetary policy, given that real interest rates are at significantly low levels, if the aforementioned outlook for economic activity and prices will be realized, the Bank, in accordance with improvement in economic activity and prices, will continue to raise the policy interest rate and adjust the degree of monetary accommodation.
- In this regard, considering that high uncertainties remain regarding the future course of trade and other policies in each jurisdiction and the impact of these policies, it is important for the Bank to carefully examine factors such as developments in economic activity and prices as well as in financial markets at home and abroad, and judge whether the outlook will be realized, without any preconceptions.
- With the price stability target of 2 percent, the Bank will conduct monetary policy as appropriate, in response to developments in economic activity and prices as well as financial conditions, from the perspective of sustainable and stable achievement of the target.

7

Chart 8",Kazuo Ueda
https://www.bis.org/review/r251008a.htm,Joachim Nagel: Introductory statement - Annual General Assembly of the Hellenic Federation of Enterprises,"Introductory statement by Dr Joachim Nagel, President of the Deutsche Bundesbank, at the Annual General Assembly of the Hellenic Federation of Enterprises, Athens, 7 October 2025.",2025-10-07 00:00:00,"## Joachim Nagel: Introductory statement - Annual General Assembly of the Hellenic Federation of Enterprises

Introductory statement by Dr Joachim Nagel, President of the Deutsche Bundesbank, at the Annual General Assembly of the Hellenic Federation of Enterprises, Athens, 7 October 2025.

* * *

Check against delivery

## 1 Greece-a story of success

Ladies and gentlemen,

It is a great pleasure for me to be here in Athens, and a great honour to address such a wonderful audience.

As a rule, I try not to comment on the affairs of other countries, let alone offer advice. But today, I must make an exception. I feel compelled to express my deep admiration for Greece's remarkable economic transformation over the past decade.

Greece has come a long way in recent years, overcoming significant challenges with enduring determination. The implementation of difficult but necessary reform has been instrumental in this progress.

Greece's economic performance has been impressive. In 2024, GDP grew by 2.3%, far outpacing the euro area average of 0.8%. Similar growth of around 2% is expected for 2025.

The Greek labour market, too, has shown remarkable improvement, with unemployment falling to a record low of 8%. While this is still above the euro area average of 6.2%, it represents significant progress. Challenges such as high youth unemployment and seasonal labour shortages persist. However, employment growth has been in line with the euro area average, and wage growth has been slightly stronger.

The rapid reduction of the public debt ratio following the coronavirus pandemic stands out as a notable achievement. While the largest contribution towards this came from exceptionally strong nominal GDP growth, the role of primary surpluses was equally important. Maintaining a steady and solid fiscal course was key to restoring confidence.

Nevertheless, the debt ratio remains high. Greece's determination to stay on course, however, is clear: the government plans to continue to achieve primary surpluses and reduce the debt ratio even further.

Confidence is also likely being bolstered by the fact that the agreed target of around 2% for the primary balance ratio is still in place. In order to solidify the trust that has been rebuilt, it is essential to stick to the agreed plan and fiscal rules.

A key challenge lies in the rising costs of financing as favourable loan terms gradually expire and market conditions take on greater significance. However, the trust that has been established ensures that Greece's financing conditions remain competitive on an international scale.

In my view, Greece is well-positioned to refinance itself through the markets. Current refinancing costs are about on par with those of Spain and even lower than those of France and Italy.

Greece has made remarkable strides in implementing structural reform. However, as I am sure you would agree, there are still significant challenges ahead.

Greece's achievements are commendable, but its journey is not yet complete. By staying the course on reform, Greece can secure a future of sustainable growth, fiscal stability, and shared prosperity.

What Greece has achieved over the past decade is not only a success story for this nation-it is an inspiration for all of Europe. It shows that reform, though challenging, does pay off.

This lesson is especially pertinent to other euro area countries, including my own, Germany, where structural challenges also demand urgent attention.

## 2 Germany-time to speed up on the path to reform

On that note, I would now like to turn my attention to Germany.

A major problem in the German economy is the persistently weak growth in productivity. Productivity is the engine of prosperity. It is a major driver of economic growth, it sustains our standard of living, and equips us to tackle the challenges of tomorrow.

However, this engine has been faltering for some time now. Productivity growth has slowed significantly over the past few decades-not just in Germany, but globally, too.

In recent years, this trend of decline has worsened. Between 1992 and 2024, German labour productivity per hour grew by an annual average of 1.1%. However, since 2018, this figure has dropped to just 0.3%.

The causes of weak productivity growth in Germany are both cyclical and structural. The cyclical factors include labour hoarding and weak investment in light of monetary tightening. The structural challenges relate to demographic change, rising production costs and excessive regulation.

To reignite productivity and foster growth, the government must take decisive action. It should

- reduce red tape to ease the bureaucratic burden on businesses;
- lower barriers to market entry, particularly in the services sector;

- provide appropriate funding for research and development whilst improving conditions for startups;
- secure skilled labour by strengthening work incentives for women and the elderly, and by attracting skilled labour from abroad;
- advocate for a deeper EU single market, especially in services, and complete the Capital Markets Union to improve access to financing.

Moreover, the digital transition offers immense possibilities for boosting productivity. Technologies like artificial intelligence and automation hold the potential to unlock efficiency gains, but only if we create the right environment for them to be adopted.

Ladies and gentlemen, the economic challenges and the reasons for weak growth differ from country to country, but every member of the euro area would benefit from boosting its growth in productivity.

Productivity is the key to our economic future. To safeguard our prosperity, we need to set the course for economic policy so that productivity can grow more strongly once again.",Joachim Nagel
https://www.bis.org/review/r251014e.htm,François Villeroy de Galhau: Fintechs and sovereignty - three pillars to be strengthened together,"Speech by Mr François Villeroy de Galhau, Governor of the Bank of France and Chair of the Prudential Supervision and Resolution Authority (ACPR), at the ACPR-AMF Fintech Forum, Paris, 9 October 2025.",2025-10-09 00:00:00,"

## Speech



## 'Fintechs and sovereignty: Three pillars to be strengthened together'

Published on the 9th of October 2025

ACPR-AMF Forum Fintech - Paris, 09 October 2025

Speech by François Villeroy de Galhau, Governor of the Banque de

France Chairman of the ACPR

Ladies and Gentlemen,



I am delighted to welcome you today to the Banque de France for this sixth edition of the Fintech Forum, organised jointly by the ACPR and the AMF, whose chair, Marie-Anne Barbat-Layani, I wish to warmly welcome. In a context that is volatile to say the least, the ACPR remains attentive to the ecosystem, which is the very purpose of this Forum. Let me stress once again that fintechs require from us just as much attention, dialogue and consideration as other traditional players. These are also the commitments of our Fintech Charter that are regularly reviewed: our response rate to initial contacts within two weeks, as stipulated in the Charter, remains consistently high at 98%. Once the authorisation process has begun, response times are 10 days (compared to 9.5 days last year). In early October, the ACPR also set up a Directorate for Innovation, Data and Technological Risks, bringing together the divisions responsible for innovation and those responsible for AI and cyber supervision, thereby effectively combining innovation and regulation. This Forum provides an opportunity for regulatory dialogue with the ecosystem. But it also strives to be strategic: this year's theme is sovereignty. I would like to share our conviction that the development of the fintech ecosystem can, and must, strengthen our sovereignty through three pillars: financing the economy (I), money (II), and lastly new technologies (III).

## I. Sovereignty and the financing of the economy

## 1. The financing of the economy requires 'stimulus' from fintechs



I will begin with the first 'pillar of sovereignty': the financing of the economy. Today, implementing a genuine Savings and Investments Union (SIU) is an essential step towards establishing European economic and financial sovereignty. Europe does not lack savings or credit, it lacks equity. And Europe does not lack total investment, but rather innovative investment: there is obviously a strong link between these two observations.

## image ImageThématique Europe Investissement Catégorie Discours







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L'EUROPE NE MANQUE PAS D'INVESTISSEMENT TOTAL, MAIS D'INVESTISSEMENT INNOVANT





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L'Europe ne manque pas d'épargne, ni de crédit, mais de fonds propres

It is vital to strengthen support for innovation in key areas of sovereignty, such as digital technology and artificial intelligence (AI), decarbonised energy, and defence, by mobilising more European financial savings. The fintech ecosystem, at the forefront of innovation, can play a role in making our economies more 'sovereign' in terms of financing, for example by fostering new financing channels amid the tokenisation of finance .  The European pilot regime  supports this process by offering market infrastructures the opportunity to use blockchain technology within a simplified framework. i

## 2. Despite their dynamism, fintechs still lack equity capital



The fintech ecosystem in France is reaching a first stage of maturity, with over 1,000 fintechs, 50,000 employees, and a number of major players. It has proved its resilience: despite a sharp decline in fundraising in 2023 and 2024, the ecosystem has consolidated and held its ground. This tightening of financing conditions has led fintechs to double down on their efforts in order to achieve profitability.

Fundraising rebounded in the first half of 2025, with an increase of more than 20% compared to mid-2024, initially driven by a few large transactions, often backed by non-European investors. This trend, however, remains fragile. Today, the ecosystem needs more equity, particularly from European investors.

## image ImageThématique Europe Investissement Catégorie Discours AUGMENTER LES FONDS PROPRES ET LE CAPITAL-RISQUE







Sources

Invest

Europe,

National

Venture

Capital

Associaton,

FMI, caiculs

de la

Banque de

France

:

Crunchbase, calculs

de la

Banque de

France

## &gt; 5 leviers concrets

+ Une supervision réellement européenne des fonds d'investissement
+ Lacréation d'un « 28° régime »
+ Le développement progressif de fonds d'épargne-retraite et de pension européens
* Des partenariats public-privé ambitieux pour le capital risque
+ Le lancement de produits d'épargne

2

FORUM

FINTECH

+9

OCTOBRE

2025



Une priorité donc pour l'UEI : augmenter les fonds propres et le capital-risque

I advocate an agenda focused on five concrete priorities in terms of equity and venture capital: iii a) a genuine European supervisory framework for investment funds in order to hasten the transition from national to 'pan-European' funds. b) the creation of an optional '28th regime"" comprising a common EUwide set of business law rules, with the aim of reducing administrative costs for companies operating in several EU countries. The Commission's consultation on the subject is a promising step forward. c) the gradual development of European retirement savings and pension funds.

d) the implementation of ambitious public-private partnerships. By extending the EIB's experience and its European Tech Champions Initiative (ETCI), we should leverage the influence of private investors in the venture capital market through public funds.



- e) the introduction of European retail investment products through simplification and standardisation.

## II. Sovereignty and money

## 1. Maintaining the pivotal role of central bank money

The second ""pillar of sovereignty"" is monetary. The rapid and potentially massive growth of stablecoins, most often backed by the US dollar and strongly supported by the new US administration, could undermine our monetary sovereignty acquired through the euro. In particular, it could lead to the disorderly proliferation of private settlement solutions and a growing dependence on non-European and unregulated players. How should we respond? First, by completing the European regulatory framework - the MiCA Regulation.   This framework would benefit from the much stricter regulation of the multi-issuance of the same stablecoin within and outside the European Union, to reduce arbitrage risks in times of stress. I also advocate, along with the Chair of the AMF, for the European supervision of crypto-asset issuers, exercised by ESMA. iv v vi

Furthermore, maintaining the pivotal role of central bank money. This requires the Eurosystem to offer a wholesale digital euro for the interbank market and a retail digital euro for the general public. The first project is less well known and less high-profile than the second, but it is even more important. The Eurosystem and the Banque de France are actively working on this as part of the Pontes project: by next year, a pilot solution will enable financial intermediaries to settle their tokenised assets in central bank money, either through TARGET services or via a distributed ledger of the Eurosystem. In the second stage, the Eurosystem intends to propose, as part of the Appia project, a shared ledger where tokenised central bank money, tokenised bank deposits and tokenised assets could be exchanged on the same platform. This will help overcome many technical obstacles to the integration of European capital markets. This 'wholesale' digital currency has therefore become a high priority: we must accelerate our efforts, and the Banque de France will do everything in its power to contribute to this acceleration. vii viii

## 2. Promoting the private supply of tokenised money

While the provision of a CBDC is essential, it is not intended to cover all uses in the tokenised economy. In addition, it is necessary to have tokenised commercial bank money, equivalent to traditional commercial bank money in our monetary system. Why shouldn't European banks consider the USD-backed stablecoin market, since that is where the market is today? But they should be just as focused on their natural market of tomorrow: EUR-backed stablecoins. In that regard, I welcome the launch of a first consortium of nine European banks, following the first initiative of a French bank. The technical choice remains open between tokenised deposits or EUR-backed stablecoins issued by banks: we could have both , but we must not end up with neither. The cooperation of all market players, particularly French fintechs, is therefore necessary and urgent in order to develop these innovative use cases. ix

## III. Sovereignty and technology

## 1. Mastering new technologies



I will conclude with a third pillar in which fintechs are often pioneers: new technologies. Fintechs offer immense opportunities for the financial sector, both in terms of improving internal efficiency and customer services. However, they create a number of vulnerabilities; I will take the example of AI and quantum computing. The development of AI is a decisive boost for productivity, but it may also contribute to the amplification of financial vulnerabilities. For instance, market concentration in AI, in terms of specialised hardware, cloud services or pre-trained foundation models, could increase the risk of dependence on third parties. Similarly, while quantum computing offers new capabilities in terms of computing and metrics, it also poses major risks in terms of data confidentiality and security for all financial players. x

Regulation can help to support the adoption of these new technologies within a secure framework. The European AI Act applies to the financial sector, and in particular to ""high-risk"" AI systems. It will take full effect from August 2026. I welcome the fact that the ACPR has been designated as the market supervisory authority for high-risk use cases in the financial sector in the draft organisation recently presented by the French Ministry of Finance. Fortunately, a significant part of the requirements set out in the AI Act are already included in sector-specific regulations. We are actively preparing for this role and intend to continue to involve market participants through regular meetings with the industry. The ACPR will take particular care to minimise the regulatory burden on institutions by adopting a risk-based approach and exploiting all possible synergies with its ""usual"" supervisory tasks. xi xii

Central banks can also set an example by developing their technological expertise. As regards quantum computing, the Banque de France, one of the pioneers in this field, is conducting experiments in collaboration with several other central banks and financial institutions. At the same time, we encourage all financial institutions to commit to the post-quantum transition without delay; we will play our role in monitoring this transition, but also in influencing it as co-chair [with Canada] of the G7 working group on quantum technologies.

## 2. Strengthening our collective resilience



In an environment marked by cyber risk; the European DORA Regulation has applied to all financial entities since January 2025; it introduces very concrete measures: institutions must now regularly test the security of their information systems and report major incidents. As regards cloud services specifically, let me point out that, even though critical IT service providers are subject to supervision, financial institutions, including fintechs, remain responsible for their own risks. They therefore need to remain in control of the entire subcontracting chain, and regularly audit their IT service providers. These audit tasks can be shared between institutions, as is the case in the German banking sector: strength lies in unity. xiii

I will conclude with the words of Jean Monnet: 'Sovereignty withers when it is frozen in the forms of the past.' Conversely, fintechs, the spearheads of innovation in the financial sector, have the power to promote financial, monetary and technological sovereignty. Rest assured that the ACPR is committed to supporting you during this period of rapid transformation in the financial sector, so that innovation continues to go hand in hand with stability. Thank you for your attention. xiv



Tokenisation involves issuing, recording and exchanging assets in the form of digital tokens on Distributed Ledger Technology (DLT) platforms. EU Regulation of 30 May 2022 setting up a pilot regime for market infrastructures based on distributed ledger technology. It enables existing or new market infrastructures to use DLT in a simplified framework for trading or settlement activities involving ""tokenised"" financial instruments. It aims to promote innovation and experimentation within a framework that ensures investor protection, market integrity and financial stability. i ii iii

Villeroy de Galhau (F.) (2025), 'Savings and Investments Union:

(Lastingly) Turning an Idea into Action, Savings Go? ', 11 September

' AEFR/REF Conference 'Where do

Assouan (E.) (2025), 'La Banque de France, au défi de la tokénisation de la finance et des stablecoins'  Revue Banque, September; BénassyQuéré (A.) (2025), "" Is tokenization a game-changer for the International Monetary System ?"", Op-ed, 15 September. iv

Regulation (EU) 2023/1114 on digital operational resilience for the financial sector v

Barbat-Layani (M.-A.), Villeroy de Galhau (F.) (2024), « European supervision: crypto first! Op-ed, 14 November. vi viiECB (2025), « ECB commits to distributed ledger technology settlement plans with dual-track strategy », communiqué de presse, 1er juillet.

European Shared Ledger viii

Tokenised interbank payment instruments ix

The cloud is a method of organising and managing IT for businesses, enabling them to remotely access and use standardised IT services provided by IT service providers. x

Villeroy de Galhau (F.) (2025), « 'Where there is danger, a rescuing element grows as well' , Paris Finance Forum, 10 June xi

The AI Act (Regulation (EU) 2024/1689 laying down harmonised rules on artificial intelligence) xii

Regulation (EU) 2022/2554 on digital operational resilience for the financial sector xiii

Monnet (J.) (1976), Mémoires xiv

",François Villeroy de Galhau
https://www.bis.org/review/r251014f.htm,Galia Borja Gómez: Economic outlooks across emerging market economies,"Opening remarks by Ms Galia Borja Gómez, Deputy Governor of the Bank of Mexico, at the 2025 Central Banking Seminar, for the panel ""Economic outlooks across emerging market economies"", organised by the Federal Reserve Bank of New York, New York City, 10 October 2025.",2025-10-10 00:00:00,"## Galia Borja Gómez: Economic outlooks across emerging market economies

Opening remarks by Ms Galia Borja Gómez, Deputy Governor of the Bank of Mexico, at the 2025 Central Banking Seminar, for the panel ""Economic outlooks across emerging market economies"", organised by the Federal Reserve Bank of New York, New York City, 10 October 2025.

* * *

Good morning. It is an honor to participate in this 2025 Central Banking Seminar at the Federal Reserve Bank of New York, thank you very much for inviting me. Before I begin, let me note that the views I will be sharing are my own and not necessarily represent the official position of Banco de MØxico or its Board of Governors.

## Recent Context and Monetary Policy Challenges

In recent years, we have taken decisions during unprecedented times, requiring an extensive analysis of the factors driving price dynamics, the nature of the shocks we have faced, and a strong commitment to our constitutional mandate to preserve the purchasing power of our currency. Since the pandemic, Mexico has navigated through a complex economic landscape. Inflation peaked at 8.70% in August 2022. In response, at the Central Bank we acted in a timely and decisive manner by raising the policy interest rate to achieve a restrictive stance. As various economic shocks have faded, our monetary policy has evolved in line with the inflationary outlook and prevailing macroeconomic conditions. However, new challenges have emerged. Uncertainty has recently increased, particularly regarding shifts in global trade policies.

Monetary policy is shaped by the prevailing conditions. Likewise, the shocks that each economy experiences, their magnitude and duration, are key in determining the course of action of a central bank. That is why I find it useful to take a step back and review Mexico's recent economic context. Back in 2021, supply and demand imbalances caused by the pandemic intensified a global inflationary process unseen in decades. At Banco de MØxico, we began a monetary tightening cycle to address these pressures and anchor inflation expectations. By 2022, new shocks emerged with the onset of the conflict in Ukraine, which led to substantial inflationary pressures in both international commodity prices and fertilizers. At the Central Bank we continued with the tightening cycle to consolidate a robust stance. Financial markets faced high volatility in 2023, driven by stress in U.S. regional banks and later by the conflict in Gaza. On the monetary policy front, we acted cautiously by raising the interest rate to a historic 11.25% early in the year and maintaining it for a full year to help the disinflationary process take hold.

The 2024 elections in Mexico and in the U.S. brought some market volatility as well. Despite this, inflation continued to drop. This allowed us to begin a gradual easing cycle with moderate rate cuts. Since the beginning of the year 2025, the board assessed that the inflationary outlook was in a new phase, where the previous global shocks had faded, and that a calibration of the monetary stance became appropriate. That did not mean that the job was done, but rather that inflationary pressures were similar to others

seen in the past, that were not generalized and mainly came from supply shocks. Hence, these challenges could be addressed with a different interest rate level.

## Key Determinants of Inflation and Global Trade

A determinant of inflation is economic activity. After the severe contraction in 2020, the following years registered robust growth rates. However, a significant deceleration process took place in 2024, in which the economy grew by only 1.4%. That was mainly due to the decline in investment as the major infrastructure projects were completed and the slowdown that typically accompanies the transition to a new administration. While 2025 is expected to see weaker aggregate demand due to the fiscal consolidation announced by the Ministry of Finance, a moderate expansion is projected for 2026. In both years economic growth is expected to remain below its potential. Under these slack conditions an additional decline in inflation is anticipated.

Another important determinant of inflation that I would like to address is the exchange rate. Despite the uncertainty we have faced at recent events the Mexican peso has been resilient. Banco de MØxico has had a flexible exchange rate for three decades. This means we do not aim for a specific level for the exchange rate, but instead focus on keeping market conditions stable and functioning properly. We cannot rule out that volatility could increase again anytime. Since the exchange rate represents a transmission channel of monetary policy and a determinant of inflation, it is always important to closely monitor it. Under an inflation forecast targeting regime like the one we have, inflation expectations play an important role in the conduct of monetary policy. Short term expectations have improved and remain now within the variability range. Our monetary stance has helped keep long term expectations anchored, and going forward we must ensure they continue to do so at all times.

Regarding this year·s shifts in global trade policies, new tariffs on Mexican exports are critically important, given that the U.S. market accounts for approximately 80% of our country's total exports. A clear sign of our industries' resilience is the significant and widespread increase in the adoption of USMCA benefits between 2024 and July 2025. This broader use strengthens regional supply chains, enhances the competitiveness of our industries, and provides certainty for trade and investment flows.

## Strength of Macroeconomic Fundamentals

To sum up, I would like to share some final remarks. Over time, Mexico has consolidated solid macroeconomic fundamentals, characterized by a series of factors that have contributed not only to its stability, but also to its ability to face complex and volatile economic scenarios. These fundamentals have been the result of prudent economic policies and continuous adaptation to an increasingly complex global environment. Mexico has an independent central bank that is focused on its constitutional mandate. A prudent and responsible monetary policy has been adopted in accordance with the circumstances we have faced. The authorities have a strong commitment with a flexible exchange rate regime. Also, Mexico maintains a sufficient amount of international reserves under different metrics and a Flexible Credit Line with the IMF (USD 35 billion), which together with our flexible exchange rate regime, serves as a buffer against possible external shocks.

Mexico maintains a small and stable current account deficit as a proportion of GDP. We have a solid financial system that remains well-capitalized and has proven to be resilient in the face of global crises, thanks to a framework of prudent regulation and supervision. The government is committed with the fiscal consolidation and to maintain a debt to GDP ratio around 50%. At Banco de MØxico, we remain fully committed to our constitutional mandate of ensuring low and stable inflation, in order to safeguard the well-being of society and contribute to the sustainable development of the country.

Thank you.",Galia Borja Gómez
https://www.bis.org/review/r251013e.htm,Lesetja Kganyago: Exchange rates and tariffs,"Address by Mr Lesetja Kganyago, Governor of the South African Reserve Bank, at the Kgalema Motlanthe Foundation Drakensberg Inclusive Growth Forum, Drakensberg, 10 October 2025. ",2025-10-10 00:00:00,"

## Address by Lesetja Kganyago, Governor of the South African Reserve Bank, at the Kgalema Motlanthe Foundation Drakensberg Inclusive Growth Forum, 10 October 2025

## Exchange rates and tariffs

## Introduction

Ladies  and  gentlemen,  thank  you  for  the  opportunity  to  address  you  today.  I  am grateful to former President Kgalema Motlanthe and his Foundation for convening this forum, and it is a pleasure to be with you all here in the beautiful Drakensberg.

The theme chosen for my address -exchange rates and tariffs -speaks to both an old problem and a new one. The old problem is the alignment -and misalignment -of exchange rates. This remains a subject of perennial interest in global macroeconomics,  with  each  decade  marked  by  its  own  controversies.  The  new problem is tariffs, which is new in the sense that, until this year, we lived in a world where all  the  leading  countries  favoured  openness  to  trade,  and  had  done  so  for decades. We no longer live in that world. What does this mean for our economy?

## Exchange rate effects of tariffs

Let  me  start  with  the  relationship  between  tariffs  and  the  exchange  rate,  and specifically with the textbook account. The textbook says that, when a country imposes tariffs on trade, it will make itself more expensive. For instance, tariffs on cars or fridges

make  imports  costlier  and  allow  domestic  producers  to  charge  higher  prices. 1 Furthermore, as people reduce their consumption of traded goods, they supply less currency to foreign exchange markets, which tends to strengthen the local exchange rate. 2

Economists  like  to  talk  about  the  real  exchange  rate,  which  is  the  exchange  rate adjusted for the difference in inflation between two countries. The textbook account makes it pretty clear that tariffs tend to appreciate a country's real exchange rate , by moving both the domestic price level and the exchange rate itself. 3

At the beginning of this year, it seemed the simple textbook account was all we needed to understand the world. The new United States (US) administration moved quickly towards much higher tariffs. The dollar promptly appreciated; by some measures, it hit a  multi-decade  high  in  January. 4   US  inflation  also  started  to  edge  up,  and  the differentials with major trading partners began widening. All this made the US more expensive to trade with.

The  twist,  however,  is  that  from  January  onwards,  the  dollar  has  weakened. Depending on the measure used, it has depreciated by around 7 -8% from its January peak. There isn't much evidence that foreigners are dumping their US assets, but there is evidence that they are hedging their dollar positions more aggressively. 5  We must also bear in mind that the dollar has been relatively strong over the past few years, so it made sense that it would correct towards more normal values, not least because US interest rates have eased lower.

One implication of all this is that 2025 has been a better year for emerging markets than many had feared. The adverse scenario for emerging markets was a wicked mix

1 Ralph Ossa 'In a world of trade tensions, what do tariffs really do?' 11 April 2025. Available at: https://www.wto.org/english/blogs\_e/ce\_ralph\_ossa\_e/blog\_ro\_11apr25\_e.htm

2  For instance, see this post by Greg Mankiw (author of a famous introductory economics textbook): https://gregmankiw.blogspot.com/2025/03/kevin-hassett-forgets-econ-101.html

3 Davide Furceri et al. 'Macroeconomic consequences of tariffs' October 2018. Available at: https://www.imf.org/-/media/Files/News/Seminars/2018/ARC2018/s4-furceri.ashx

4  For instance, the US Federal Reserve compiles nominal and real broad dollar indices which go back to 2006; both hit their highest recorded values in January 2025.

5 Hyun Song Shin et al. 'US dollar's slide in April 2025: the role of FX hedging' 20 June 2025.

of a strong dollar, high US interest rates, and tariffs that hurt our export industries. While  we  still  have  the  tariffs  to  grapple  with,  the  other  factors  have  been  more favourable.

For South Africa, it has been a year marked by rising terms of trade, a stronger and less volatile rand, and lower domestic interest rates across the yield curve. Given the risks involved, this is one of the more positive outcomes we could have hoped for. It is a relief that things did not turn out worse.

## The exchange rate and growth

We cracked open the textbook earlier  to  check  the  standard  relationship  between tariffs and the exchange rate, so let us now do the same for the economic effects of an  exchange  rate  appreciation.  The  way  this  subject  is  usually  introduced  in economics  classes  is  through  the  Mundell -Fleming  framework.  This  simple  and elegant model demonstrates that currency depreciation boosts growth, given certain assumptions. The short version is that a cheaper currency leads to importing less and exporting more, which expands aggregate output. Equivalently, a stronger currency is considered growth negative.

Once again, the reasoning is clear, but the textbook conclusion seems to be at odds with the facts. Should rand appreciation really be viewed as bad news? It is puzzling, because  for  much  of  the  past  10  years  or  so,  we  have  generally  had  a  weaker exchange rate, yet this has coincided with extremely low growth.

Indeed, back in the late 2000s, it was often argued that South Africa's real exchange rate was too strong and too volatile. 6  This indicator has since become significantly weaker and less volatile. 7  If you consider indicators of purchasing power parity, such as the simple Big Mac Index, you see that for the rand to have the same buying power in  the  US  as  it  does  here,  the  exchange  rate  would  need  to  be  around  50 -60% stronger.  8  More sophisticated measures of purchasing power parity suggest that equal

6 Ricardo Hausmann. 'Final recommendations of the International Panel on ASGISA' May 2008 Available at: https://growthlab.hks.harvard.edu/files/growthlab/files/161.pdf

7  For instance, the Bank for International Settlements' real effective exchange rate (REER) measure was 27% stronger for the period 1994 -2014 versus 2014 -2025, and the standard deviation of the series was about 10 percentage points higher.

8  https://www.economist.com/interactive/big-mac-index

buying power would require an exchange rate close to R8 per dollar. 9  It seems clear that the rand has been cheap, yet this has not triggered more growth. As far as I can tell,  the  main effect  has  been  to  stop people  talking  much  about  the  real  effective exchange rate.

One explanation for this missing growth relationship is that a currency  sometimes reflects larger developments in a country, in the same way that a share price speaks to the heath of a company. If a country looks good, investors are impressed, and the currency appreciates. By the same token, if they lose confidence, they sell. When you have good news stories,  such  as  structural  reforms,  fiscal  discipline  and  effective governance, you get growth, and at the same time you get currency gains. When you have bad news stories, such as state capture, unsustainable debt growth and junk status, growth weakens and the currency follows suit. This reminds us that while a competitive exchange rate is indeed a valuable policy good, it is no panacea. Worse still,  a  currency  can  be  undervalued  for  all  the  wrong  reasons,  in  which  case  the standard benefits do not apply.

Another consideration is that growth benefits from imports as well as exports. 10  It is really not the case that exporters are always winners, importers are losers, or that countries  should  compete  to import  as little  as  possible -even  if  that  mercantilist thinking gains some traction from time to time.

For a start, export industries often benefit from imported components, and much the same goes for most other industries. Indeed, capital goods for investment are often imported, and almost all economies will find it more efficient to buy these items on global  markets  rather  than  develop  them  domestically.  For  instance,  most  airlines acquire their planes from Boeing or Airbus. This may help explain why many emerging markets  tend  to  invest  more  when  their  currencies  are  stronger,  and  this  extra investment raises growth. 11

9 This references the World Bank's purchasing power parity (PPP) conversion factors: For South Africa, they estimate a factor of 7.4 in 2024, which means that for PPP to hold, the rand should have traded at 7.4 to the US dollar last year, rather than its actual exchange rate of 18.3. 10 Lawrence Edwards and Ayanda Hlatshwayo. 'Exchange rates and firm export performance in South Africa' January 2020. Available at:

https://www.wider.unu.edu/sites/default/files/Publications/Working-paper/PDF/wp2020-1.pdf 11 Steve Brito et al. 'Real Exchange Rates, Economic Complexity, and Investment' 10 May 2018. Available at: https://www.imf.org/en/Publications/WP/Issues/2018/05/10/Real-Exchange-RatesEconomic-Complexity-and-Investment-45867

That  does  not  mean  you  should  aim  for  the  strongest  exchange  rate  possible,  of course. But it does suggest a balanced approach that also considers the benefits of imports.

## South Africa's exchange rate policy and dynamics

As you know, in South Africa we have long applied a policy of exchange rate flexibility. We came by this the hard way: we used to intervene in the exchange rate, and we got burnt, losing billions of dollars and credibility as well, because the interventions did not achieve their goals.

Our policy of flexibility has worked well for us. The exchange rate acts as a shock absorber for the economy, repricing assets and tradables to keep locals competitive, even  during  events  like  commodity  price  movements.  Because  South  African households and firms do not hold a lot of foreign currency debt, sharp declines in the rand do not create financial instability -which has been a major problem in some other economies. And the South African Reserve Bank has been able to build credibility around  its  inflation  target,  ensuring  that  rand  movements  do  not  pass  through  to inflation at a high rate.

All that said, there are still some aspects of our exchange rate regime that are hard to enjoy.  One  is  the  trend  of  depreciation.  Everyone  remembers  when  the  rand  was stronger -at seven to the dollar, for example, compared to seventeen now. Another is volatility. While we still do not have much evidence that volatility disrupts economic activity in South Africa, South Africans certainly like to joke about how the rand has more mood swings than a teenager, or that it is the drama queen of emerging market currencies.

Our commitment to a free-floating exchange rate is now 27 years old -we started in 1998 -and I would like to suggest that we are now outgrowing some of this drama and settling down to a more mature stage of life.

One of the key drivers here is the shift towards permanently lower inflation. As many of  you  will  know,  this  year  we  expressed  a  preference  for  inflation  to  settle  at  the bottom of our 3 -6% target range. As we have often argued, our inflation rate is out of line with our peers and competitors. Most advanced economies target 2%. Emerging markets used to be much higher, but nowadays they commonly target rates between

2% and 4%, with a middle-income median of 3%. We have stuck with a 3 -6% target range for 25 years -a quarter of a century -but this range is too high and too broad. It has left us as inflation outliers.

Unfortunately, if you aim for a high inflation rate, you end up raising prices faster than other  countries.  The  implication  is  that  you  need  your  currency  to  depreciate,  to compensate and keep the real exchange rate stable. The result is a kind of ' damnedif-you-do, damned-if-youdon't' trap: either you get a perennially weaker currency, with all its disappointments, or you don't , and you lose competitiveness.

This no longer applies if you have an inflation close to that of your peers -as we now do. To give a clear example, there used to be a large gap between our inflation rate and the US inflation rate. In 2016, it was 5 percentage points. Last year, the difference was  less  than  1  percentage  point,  and  it  is  expected  to  stay  small.  Under  these circumstances, the exchange rate should behave differently too.

I would also like more people to recognise that rand volatility has declined. Optionimplied  volatility  is  now  at  long-term  lows.  Yet,  outside  of  financial  markets,  most people still believe the rand is a highly volatile currency. The only problem with this view is that it no longer describes the facts in front of us.

A  last  point  I  would  like  to  see  more  widely  recognised  is,  back  in  1998,  we  had negative foreign exchange reserves. That made us vulnerable. We filled in that hole during the 2000s, and we have gradually grown reserves since. I am not sure if it is widely  appreciated  how  much  stronger  our  position  has  grown.  In  August,  we surpassed US$70 billion for the first time. While that is partly a story about gold prices, it is not just about gold. For the first time, we satisfy all the major reserve adequacy metrics,  including  the  International  Monetary Fund's own  measure.  Alongside  our positive  net  international  investment  position,  our  external  position  is  arguably  as strong as it has ever been. If the rand gets uncomfortably strong, we would be happy to accumulate more reserves.

## Conclusion

Ladies  and  gentlemen,  to  conclude,  global  conditions  are  clearly  challenging.  The domestic environment has its challenges too. Fortunately, it is not all bad news. So far this  year,  global  conditions  have  changed  in  ways  that  are,  unexpectedly,  quite

supportive of emerging markets, with a weaker dollar, stronger terms of trade, and lower interest rates. South Africa has shared in these benefits. You asked me to talk about exchange rate conditions, and I have explored how an exchange rate shapes output, and how our South African policy conversation has evolved over the years. We have travelled a long road, but a welcome destination is now in sight. South Africa's external position has strengthened markedly. So, when people tell you the rand is a weak and volatile currency, encourage them to think again.

Thank you.",Lesetja Kganyago
https://www.bis.org/review/r251014j.htm,Abdul Rasheed Ghaffour: Welcoming remarks - Global Islamic Finance Forum 2025,"Welcoming remarks by Mr Abdul Rasheed Ghaffour, Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the Royal dinner in conjunction with the Global Islamic Finance Forum (GIFF) 2025 ""Bridging tradition and tomorrow - advancing business, empowering communities"", Kuala Lumpur, 12 October 2025.",2025-10-12 00:00:00,"## Abdul Rasheed Ghaffour: Welcoming remarks - Global Islamic Finance Forum 2025

Welcoming remarks by Mr Abdul Rasheed Ghaffour, Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the Royal dinner in conjunction with the Global Islamic Finance Forum (GIFF) 2025 ""Bridging tradition and tomorrow - advancing business, empowering communities"", Kuala Lumpur, 12 October 2025.

* * *

Allow me to begin by extending my heartfelt gratitude to the Royal Patron of Malaysia's Islamic Finance Initiatives, His Royal Highness Sultan Nazrin Shah, for gracing us this evening. It is a privilege to welcome His Royal Highness, and all of you - distinguished guests, ladies and gentlemen - to this Royal Dinner, held in conjunction with the Global Islamic Finance Forum (GIFF) 2025.

GIFF convenes visionary minds and leaders on a platform that forges meaningful connections. Our presence here reflects a shared commitment and purpose, united in advancing Islamic finance.

Today, we stand at a strategic crossroad. Rapid global shifts and growing expectations for Islamic finance invite us to reflect on where we must go next. One path - lies in continued incremental progress, refining what already exists. The other calls for transformational shifts with strong leadership, redefining and elevating the role of Islamic finance to shape a more inclusive and sustainable financial system.

Transformation is not a departure from proven foundations that have served us well. Rather, it is a bold reimagination of what might be possible - a way to deepen our purpose and reaffirm our commitment to the values that define us. In our pursuit of advancing the Islamic finance industry, this means:

- First, widening the application of risk-sharing structures such as Mudarabah and Musharakah to foster inclusive economic participation, catering to more diverse risk-reward options;
- Second, positioning Islamic finance as the primary choice for halal economy development and sustainable finance; and
- Finally, unlocking the full potential of waqf and zakat as impact-driven financial tools. This involves developing clearer waqf investment frameworks, enhancing zakat governance and transparency, and better measuring outcomes through social return on investment (SROI).

These ideas are strategic opportunities for Islamic finance to chart greater prosperity for future generations. The relevance of Islamic finance tomorrow will depend on the choices that we make today - choices that reinforce our leadership, inspire innovation, and attract the next generation of talent to propel Islamic finance to greater heights.

Ladies and gentlemen,

As we navigate this complex terrain, let us remain anchored in our values and united in our vision. For Malaysia, our journey in Islamic finance has not only been shaped by deliberate policy direction, but also a deep-rooted commitment to value-based finance that transcend financial metrics. Initiatives like the implementation of the Value-Based Intermediation; integrated application of social finance; and framework for green and sustainability sukuk - demonstrate how Islamic finance can serve a meaningful purpose - one that promotes inclusivity; sustainability; and integrity.

Globally, we are encouraged by the growing alignment among regulators, international organisations, and private sector stakeholders who share similar aspirations. This convergence presents a timely opportunity to strengthen cross-border collaboration and scale impact - ensuring that Islamic finance plays a central role in shaping a more resilient and values-driven global financial system. As we move forward, let us be reminded of the verse from Surah AI-'Imran (3:103): ""And hold firmly to the rope of Allah all together and do not become divided."" This verse calls on us to be united and steadfast in our cause, beautifully encapsulating the spirit of collective strength and shared purpose that must underpin our efforts for greater impact.

In closing, I strongly believe that GIFF 2025 offers an opportune moment to reflect; reconnect; and reimagine - what Islamic finance can deliver. As we stand at the intersection of tradition and innovation, let us draw inspiration from the unwavering leadership of His Royal Highness Sultan Nazrin Shah in advocating the transformative potential of Islamic finance to address global challenges - which has brought visibility to Malaysia's Islamic finance ecosystem. His Royal Highness played a pivotal role - in shaping the discourse of Islamic finance and championing its alignment with the United Nations Sustainable Development Goals. His vision for Islamic finance to catalyse global sustainable development continues to inspire the industry to think boldly and act with purpose.

With that, let us now embrace a moment of reflection and inspiration. Thank you.",Abdul Rasheed Ghaffour
https://www.bis.org/review/r251014c.htm,"Eddie Yue: Opening remarks - 15th Annual International Conference on the Chinese economy ""Macroeconomic management and structural transformation""","Opening remarks by Mr Eddie Yue, Chief Executive of the Hong Kong Monetary Authority, at the 15th Annual International Conference on the Chinese economy ""Macroeconomic management and structural transformation"", hosted by the Hong Kong Institute for Monetary and Financial Research, Hong Kong, 14 October 2025.",2025-10-14 00:00:00,"## Eddie Yue: Opening remarks - 15th Annual International Conference on the Chinese economy ""Macroeconomic management and structural transformation""

Opening remarks by Mr Eddie Yue, Chief Executive of the Hong Kong Monetary Authority, at the 15th Annual International Conference on the Chinese economy ""Macroeconomic management and structural transformation"", hosted by the Hong Kong Institute for Monetary and Financial Research, Hong Kong, 14 October 2025.

* * *

Distinguished guests, ladies, and gentlemen, good morning and welcome to the Annual International Conference on the Chinese Economy, hosted by the Hong Kong Institute for Monetary and Financial Research. The 15 th   anniversary of this conference marks a significant milestone in this journey of exploring China's economic transformation and its implications for the global economy.

## The changing global economic landscape

The global economic landscape is changing, shaped by multiple transformative forces. The theme of this year's conference, ""Macroeconomic Management and Structural is particularly timely as China is at the forefront of these Transformation,"" transformations. Its journey, therefore, offers valuable insights for economies worldwide.

As we explore the drivers of these changes, it becomes clear that several key factors are at play. On the global side, the urgent need to address climate change is driving the growth of climate finance, which is enabling the transition to a low-carbon economy and the development of new markets such as renewable energy and green technologies. Meanwhile, advancements such as cost-effective artificial intelligence (AI) models, are creating new opportunities.

Alongside these factors, supply chain restructuring, triggered by geopolitical uncertainty and the push for domestic resilience, is introducing new complexities. Demographic trends, such as ageing populations and evolving labour supply dynamics, are also reshaping consumption and investment patterns. Economies must adapt to these shifts while pursuing growth and resilience.

Against this backdrop, China's economic journey has been remarkable, driven by rapid industrialisation, integration into the global supply chain, and a focus on innovation and sustainability. Under the National 14th Five-Year Plan, the country has emphasised high-quality growth, sustaining progress by facilitating industrial upgrades, fostering service-oriented growth, and strengthening domestic consumption.

## China's industrial upgrading

For decades, manufacturing has been central to China's economic success. The country's industrial structure has continued to optimise and be upgraded, enabling a shift up the value chain from labour-intensive production to advanced, high-tech manufacturing that delivers greater value-added growth. For example, equipment and

high-tech manufacturing accounted for more than half of China's total industrial output in 2024. By leveraging domestic innovation, China has developed sophisticated production capabilities and become an integral part of the global supply chain, accounting for roughly 30% of total global manufacturing growth over the past five years . 1

China's industrial upgrading has also been accompanied by a concerted effort to pursue a green transition, leading the world in investments in renewable energy and green technologies aimed at reducing emissions and creating new industries. As a result, the country has seen a significant expansion in its renewable energy infrastructure, with the cumulative installed capacity of renewable energy sources, such as solar and wind power, now accounting for 56% of the nation's total energy capacity . 2

As China's industrial upgrading continues, new opportunities are created for growth and innovation in human-capital-intensive industries, such as research and development. By fostering a culture of innovation and implementing market-oriented reforms, these industries can drive productivity growth, strengthening the virtuous cycle between industrial sophistication and services expansion.

## The expanding service sector

Fuelled by the ongoing industrial upgrading and the growing complexity of manufacturing capabilities, a ripple effect has spurred demand for services such as logistics, finance, and marketing. As the service sector continues to expand, its role in driving economic growth has become increasingly prominent, with its contribution rising from 48% to 56% over the past decade. As a result, the sector has emerged as a significant source of job creation, with considerable potential for future expansion and development as demand for high-quality services is likely to increase, both domestically and internationally.

A vibrant financial services industry is central to this growth. By efficiently mobilising domestic savings and channelling capital to the service sector, it can unlock new growth possibilities. With advances in digital finance and cross-border capabilities, we can expect to see even greater efficiency and access to global markets for Chinese service providers as market reforms continue to progress.

## The rise of domestic-led consumption

China's industrial base upgrade and growing service sector have led to a significant increase in per-capita disposable income. This growth, combined with rapid urbanisation encompassing two-thirds of the population, has created a vast and dynamic middle class of over 400 million people 3 . As a result, consumption patterns are shifting from goods to services, with per-capita spending on services rising by 7.4% in 2024, driving 63% of the overall growth in per-capita consumption expenditure 4 . These emerging patterns are likely to redefine the economy, with domestic demand becoming a central pillar.

By consolidating domestic circulation, China is enhancing its resilience against global uncertainties and reducing its exposure to external shocks. Despite having a lower

average propensity to consume compared to other economies at a similar stage of development, China possesses considerable opportunities for long-term growth. To unlock this potential, supportive policies are important, and the recent initiatives indeed aimed at expanding access to financial services and strengthen household spending. Moving forward, institutional reforms that foster a diverse range of long-term financial products can help cater to the evolving needs of the population, unlock household savings, and propel economic growth. This, in turn, will help maintain momentum in industrial upgrades, diversify growth drivers, ultimately achieving a balanced and sustainable economic trajectory.

## Conclusions

In a shifting global environment, China's pursuit of high-quality growth through industrial upgrading, the cultivation of a dynamic services sector, and the strengthening of domestic demand offers valuable lessons for driving the prosperity cycle for sustainable development. This experience holds broader implications for the rest of the world, especially as China embraces the next chapter of economic development under the new National 15th Five-Year Plan.

With its unique position, Hong Kong is ready to make significant contributions to the country's development. The city's deep and vibrant capital markets can facilitate fundraising for Chinese enterprises, promoting a more efficient funding ecosystem that supports technological innovation and real economy transformation. Additionally, Hong Kong's strong global connectivity can continue fostering the seamless exchange of goods, services, and knowledge between China and the rest of the world, further solidifying its position as a crossroads for international trade, investment, talent and innovation.

This conference is a valuable forum to explore these themes in depth. The papers to be presented will delve deep into China's industrialisation journey, and explore the broader implications for the macroeconomy going forward.

Building on the conference' success of the past 14 years, I am confident that the discussions taking place today and tomorrow will be engaging and insightful. The collective expertise of our distinguished speakers and participants will provide actionable takeaways for policymakers, businesses, and researchers alike.

I wish the conference every success, and thank you once again for joining us.

- 1 Xinhua News Agency, September 2025
- 2 Xinhua News Agency, January 2025
- 3 Xinhua News Agency, December 2023
- 4 Qiushi, June 2025",Eddie Yue
https://www.bis.org/review/r251013c.htm,Michelle W Bowman: Community banking - looking toward the future,"Speech by Ms Michelle W Bowman, Vice Chair for Supervision of the Board of Governors of the Federal Reserve System, at the Community Bank Conference, hosted by the Board of Governors of the Federal Reserve System, Washington DC, 9 October 2025.",2025-10-09 00:00:00,"## Michelle W Bowman: Community banking - looking toward the future

Speech by Ms Michelle W Bowman, Vice Chair for Supervision of the Board of Governors of the Federal Reserve System, at the Community Bank Conference, hosted by the Board of Governors of the Federal Reserve System, Washington DC, 9 October 2025.

* * *

As we wrap up today's conference, I would like to thank all of the moderators and presenters on today's panels. And of course, Secretary Bessent for sharing his perspectives on community banks, and the many community bankers, and state bank regulators and others who attended today's event in person or virtually. I would also like to recognize our staff whose hard work made today's conference possible.

Community banks drive local and regional economic growth, and they play a central role in the financial health of the customers and communities they serve. 1   These banks often pursue unique business models-ones that are not easily replicated by larger banks, including the relationship banking model that is a central tenet of community banking. In today's environment, many community banks are embracing innovation and continuing to evolve to better serve their customers in the current and future financial system. The focus of today's conference has been on community banks, how they continue to innovate, and how they rise to the challenge to support their customers as the financial landscape continues to change.

Legislators and regulators are also rising to the challenge to ensure that the community banking system continues to thrive, through the critical task of ensuring that supervision and regulation are appropriately tailored. Our support for community banks cannot just be lip service; it must translate into specific actions that right-size regulation and apply appropriate supervisory standards, specifically in identifying the appropriate definition of a community bank, in establishing appropriately tailored regulatory thresholds, and in approaching supervision focused on material financial risk.

So, what is a community bank for this purpose? Generally, the regulatory framework uses the blunt tool of fixed asset thresholds. We know that relying solely on fixed asset thresholds is imperfect, at best. They fail to account for economic growth and inflation over time, resulting in firms with stable growth, consistent business models, and no change in risk profile crossing asset thresholds. These firms become subject to increasingly complex and burdensome regulatory requirements and supervisory expectations. This is clearly not the intended or desired outcome, in that crossing these fixed thresholds has the unintended consequence of ""pushing down"" standards designed for larger and more complex banks to smaller and less complex ones. Compounding this problem is the overlapping and inconsistent thresholds used to define banks of different sizes and engaged in different activities. We should ask whether this additional complexity is necessary or even helpful, and to what extent it impairs economic growth.

A simple fix would be for policymakers to adjust the community bank and other thresholds based on growth-and apply that adjusted threshold consistently-indexed to

adjust for future growth. This approach would preserve the policy choice established when the threshold was initially set.

Defining a community bank is an important first step, but it is just that, a first step. The next question is how to appropriately tailor regulations for these and other firms. Over the years, I have supported an approach to regulation grounded in asking some simplebut critical-threshold questions. What problem does each new and existing regulation solve? What are the costs of this approach? And importantly, what alternative approaches are available? When we look back at existing regulations, we can clearly identify areas for improvement. For example, the community bank leverage ratio, or ""CBLR,"" was designed as an optional framework to risk-based capital alternative requirements for community banks. A community bank that opts into the CBLR framework and complies with the established ratio is deemed to comply with risk-based capital requirements.

But if we look back at the history of the CBLR, the agencies approached the task of calibration primarily by evaluating how many banks would be eligible to opt in and calibrating the requirement to maintain the same high level of capital in this population of banks. In my view, this approach failed to achieve the relief Congress intended, and more fundamentally, failed to answer the critical questions we must consider in the rulemaking process.

Let me turn to another area that needs to be addressed, the applications process. This process can also negatively impact community banks. It requires banks to seek approval from the Federal Reserve and other state and federal regulators for regulatory permission to engage in a transaction or activity. But this process can be unpredictable in terms of timing and information necessary to be ripe for consideration and approval. The costs of delay can be significant, damaging the value of the target bank, creating uncertainty for bank employees and customers, and resulting in costly delays for critical systems, integration contracts, and service agreements, potentially damaging the reputation of both firms.

The remedy is simple-regulatory application review should be effective, timely, and efficient. Banks should have a clear understanding of the information they must provide to complete the application well in advance. The standards for approval must be clearly defined and available to the public. And regulators should be prepared to act on a complete application within the statutory time frames. We have an opportunity to take a new approach, and we are doing so. We cannot accept the opacity of the status quo, especially when the ""fix"" is as simple as clear standards, clear forms, and prompt attention to and action on applications.

One area where we have improved transparency relates to mutual bank capital, which I have spoken about a number of times. Yesterday, the Board issued a series of frequently asked questions and two templates for mutual banks to use as they consider engaging in raising capital. These provide options for mutual banks to issue capital instruments that could qualify as tier 1 common equity or as additional tier 1 equity. These approaches are just a start-we are open to further refinement and improvement once mutuals have an opportunity to review and work to implement this new approach.

I will conclude with a discussion about how we ensure that the supervisory process is appropriate for community banks. Regulators are once again working to incorporate ""tailoring"" to more effectively allocate supervisory and bank staffing resources. This allows the calibration of supervisory activities that are appropriate to a bank's size, risk, complexity, and business model. This approach is not new, but it has simply been ignored in recent years. Regulators have significant leeway in designing supervisory approaches, which may include issuing guidance that is technically non-binding but often plays a role similar to a regulatory requirement.

## How do we address this problem?

First, through greater transparency. Supervisory practices often escape public and internal scrutiny. They are developed with little public input, and they are not subject to public notice and comment requirements under the Administrative Procedure Act. Supervisory practices are not scrutinized after an exam because of the activity's designation as ""confidential supervisory information"" (CSI). ""CSI"" includes a broad array of bank and supervisory materials and actions taken in an exam context. The Fed continues to revise and redirect our supervisory practices, including the shift in focus toward material financial risk. These efforts would be most effective if accompanied by revisions to the definition and scope of CSI, which would promote greater public transparency and accountability.

Second, calibration of supervisory standards. Supervisory findings inform bank ratings, which can have follow-on effects like limiting options for mergers and acquisitions activity; raising the cost of liquidity; or diverting resources away from other, more important bank management priorities. We need to ensure that supervisory practices are appropriately calibrated so that a bank's supervisory ratings reflect its financial condition and material financial risks.

## Closing Thoughts

Before we close out today's conference, I would like to again thank all of our attendees, both those here with us and those online. We appreciate the continued support for community banks across the United States. I would especially like to thank the community bankers who work tirelessly to support their customers, businesses, and local economies. Thank you for joining us today.

In my role as the Vice Chair for Supervision, my responsibilities extend across banks of all sizes, from the largest GSIB to a single-branch community bank operating in an underserved rural market. The Fed's regulatory and supervisory approaches to this wide range of firms must be tailored to address the unique characteristics of each type and size of institution. A one-size-fits-all approach that pushes down requirements from the larger banks to the smallest ones results in overregulation and excessive supervision that is not appropriate for the size, risk, complexity, and business model of community banks. Today, we have the opportunity to right-size the frameworks for each size of institution, and I look forward to working together with my colleagues at the FDIC and OCC to accomplish this goal, through sensible reforms and more appropriate supervisory approaches.

- 1  The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.",Michelle W Bowman
https://www.bis.org/review/r251013a.htm,Carolyn Rogers: Productivity's competitive edge,"Remarks by Ms Carolyn Rogers, Senior Deputy Governor of the Bank of Canada, at the Canadian Club Toronto, Toronto, Ontario, 9 October 2025.",2025-10-09 00:00:00,"

Remarks by Carolyn Rogers Senior Deputy Governor To the Canadian Club Toronto October 9, 2025 Toronto, ON

## Productivity's competitive edge

## Introduction

Good morning.

In March last year, I gave a speech about the urgent need to improve Canada's productivity. I said that instead of thinking of productivity as some obscure economic statistic, we need to think of it as a reflection of our collective ability to improve living standards, drive growth and remain resilient in a rapidly changing world. I also stressed that improving productivity in Canada is a shared responsibility-one that spans the public and private sectors.

The speech seemed to add a little fuel to a debate that has been going on for some time-a debate about how Canada can best shake off its long-standing productivity slump. That debate took on even more urgency less than a year later, as a new administration in the United States implemented a series of trade policies that represent a massive shock to the Canadian economy.

Meanwhile, Canadians are still grappling with a higher cost of living. Inflation has been back within the Bank of Canada's target band of 1%-3% for a year and a half now, but life is more expensive than it was. This is frustrating for everyone, and it's particularly stressful for those in lower-income brackets and for young Canadians who are trying to get a start in life.

Higher productivity won't make Canada immune to US trade policy, but it would help buffer the effects of tariffs. And it's the clearest path to boosting real wages, making life more affordable. For businesses, higher productivity offsets rising input costs, so it helps maintain margins and preserve price competitiveness. And a more productive economy is more attractive to investors and trading partners.

The bottom line is that there was an urgency to improving our productivity before, and that urgency has only increased.

So what's the holdup, you might ask? If productivity is so important and improving it is so urgent, why is it so hard to move the dial?

The short answer is that, like with most difficult problems, the solution involves trade-offs. There is almost never a solution that gives you all of what you want

and none of what you don't want. And like most policy trade-offs, views differ on the best way to balance them.

Today I want to illustrate this challenge by diving deeper into one policy area that has a big effect on an economy's productivity: competition.

I'll lay out some of the economic theory on the relationship between competition and productivity and highlight, very briefly, what the research tells us. And I'll explain some of the policy trade-offs that emerge when you set out to increase competition.

Then I will try to make it all a bit more real by talking about competition in a sector we pay a lot of attention to at the Bank of Canada: the financial sector.

## Competition and productivity

The idea that competition can improve productivity is pretty intuitive. We like our hockey analogies these days, so you could think of it this way: you always skate a little harder in the game than you do in practice. And when the game starts, the tougher the opponent, the harder you skate.

Economic theory and research on competition generally align with that intuition. Theory teaches us that competition works through a variety of channels. I'll mention three.

First, competition disciplines firms, forcing them to look for ways to reduce costs and inefficiencies so that the business can survive. Second, it encourages businesses to innovate so that they can differentiate their product or service and get an edge over other firms. Third, competition leads to the reallocation of resources in the economy. Firms that are efficient and innovative will attract more customers and more investment. Those that aren't won't keep up and will eventually exit the market. The result is that resources are continually allocated to their most efficient, productive use.

Research provides plenty of empirical evidence to support the theory. Studies from Statistics Canada, 1  the Organisation for Economic Co-operation and Development (OECD) 2  and the International Monetary Fund 3  find that when markets become more competitive-through deregulation, trade liberalization or competition enforcement-firms tend to become more efficient, adopt technology faster and innovate more.

Firm-level studies reinforce these findings. The Bank's own research highlights how important a dynamic business environment is for overall productivity-an environment where underperforming firms continually exit and resources are reallocated to new, more productive firms. 4

1  J. Baldwin and B. Yan, 'Empirical evidence from Canadian firm-level data on the relationship between trade and productivity performance,' Statistics Canada Economic Analysis Research Paper Series No. 97 (June 2015).

2 OECD, OECD Economic Surveys: Canada 2025 (Paris: OECD Publishing, 2025).

3  International Monetary Fund, Middle East and Central Asia Department, 'Quantifying Gains from Trade Liberalization,' IMF Staff Country Reports, volume 2023, issue 224.

4  S. Abraham, D. Brouillette, A. Chernoff, C. Hajzler, S. Houle, M, Kim and T. Taskin, 'Potential output in Canada: 2025 assessment,' Bank of Canada Staff Analytical Note No. 2025-14 (June 2025); and D.

Another insight from research is that, for the overall economy, competition can matter more in some sectors than others. 5  For example, productivity gains in sectors that provide intermediate inputs to other sectors can lead to larger gains throughout the economy. This is particularly true in network sectors-those that serve everyone. Think telecommunications, energy and transportation. Canada's own Competition Bureau recently commissioned research in this area, and the results are compelling. 6

Competition can also affect investment-another ingredient that's critical for productivity. If a market is highly concentrated, dominant firms may have the resources to invest but lack the incentive to do so. However, too much competition in a sector can lead firms to invest less or cause market gaps. Think of sectors that require very large initial investments or a high level of sustained investment-pharmaceuticals is a good example. This relationship between competition and investment is often illustrated with an upside-down U. Investment increases as markets become more competitive, up to a certain point. Beyond that optimal point, more competition can hinder investment as firms become less profitable and their resources become constrained.

We also know that competition can sometimes result in market distortions and disruptions. New entrants challenge incumbents, putting pressure on established business models. While this can benefit consumers, it can also introduce risks. Rapid innovation can outpace regulatory safeguards, leaving consumers exposed to fraud or predatory practices. And often the gains from disruptive competition or innovation aren't evenly distributed, particularly in the short term. This can leave vulnerable populations behind.

Finally, there are markets where the public good is not well served by open competition. In markets where universal access is important, or where public health and safety are at stake, innovation is still important, but disruption can be a problem. Most of us would agree that leaving things like education or health care entirely to competitive market forces would not deliver the societal outcomes we want.

So there you have the policy challenge: how to provide incentives to encourage competition while minimizing the disruptive effects that often come with it. An economy with too little competition will lag in innovation and efficiency and struggle to attract investment. An economy with too much competition can also have underinvestment and is more likely to experience instability and market failures. Either way, it will damage productivity.

Policy-makers manage these trade-offs using a mix of legal, regulatory and incentive-based tools. Competition laws aim to keep the playing field level and reduce the abuse of market power. In industries like utilities or transportation, where natural monopolies often exist, regulation will be aimed at maintaining fair access and stable pricing. And where market forces alone may not be enough to

Brouillette, T. Devakos and R. Wheesk, 'Total factor productivity growth projection for Canada: A sectoral approach,' Bank of Canada Staff Analytical Note No. 2024-12 (May 2024).

attract and promote investment, incentive-based tools such as tax policy, research grants and protection of intellectual property are used.

Of course, these tools involve their own trade-offs, and their effectiveness can wane over time or distort markets as conditions change. New technology, innovation and changing consumer preferences can upset competitive dynamics. Sometimes this takes years; sometimes it happens very suddenly. If policies designed to balance competition don't change as needed, they will create or exacerbate negative outcomes for consumers-and for productivity.

Now, to make all this a little more relatable, I'd like to look at a sector of the Canadian economy that offers up a good case study for many of the concepts and trade-offs I just covered.

## Competition in Canada's financial sector

The financial sector-and more specifically, banking-is a good example of a network sector, which I described earlier. There is a big investment in shared infrastructure and a network of players that both compete and cooperate to deliver services. Almost everyone uses it, and it's critical to the smooth functioning of the economy. The banking sector facilitates the movement of money and channels savings into loans and investments that help businesses and the economy grow.

It's one of those sectors where gains in productivity should propagate throughout the economy, but also one where the negative effects can be magnified if things go wrong. So it's a sector where policy-makers should regularly ask themselves if we've got the level of competition right. Have we got the right balance between promoting safety and stability and encouraging innovation and growth?

If you look at our track record, it would be hard to argue that Canada isn't delivering on the safety and stability objective. The last Canadian bank failure occurred about 30 years ago. Since then, banking regulation has unquestionably tightened in Canada. There have been increases in capital and liquidity requirements, the creation of a bail-in framework and many improvements in supervision. The proof is in the results, though. Canada's banking system has performed well through a number of major economic shocks, including the 200809 global financial crisis and, more recently, the COVID-19 pandemic.

It would also be hard to argue, on any objective measure, that Canada's banking system is anything other than an oligopoly. The six largest banks collectively hold about 93% of all banking assets. To state the obvious, this is a very high level of concentration. Canada's big banks are also consistently more profitable than their peers in most advanced economies.

High levels of profitability and concentration aren't necessarily bad. Profitability contributes to stability. As a former bank regulator, I can tell you that a bank that gets behind on its earnings is more likely to take on extra risk to try to make up ground. And the concentration of Canada's banking sector is often cited as one of the main factors contributing to its stability. The relatively small number of players keeps competitive pressure from providing incentives for too much risktaking. It also makes supervision of that risk easier.

However, many argue that this level of concentration has clear negative impacts on productivity, innovation, capital allocation, cost and consumer choice. 7

In the current environment, the balance between stability and competition in the financial sector is part of the debate about how to get underperforming economies back into growth mode. The United States has made several announcements aimed at reducing regulation in their financial sector. And earlier this year, the United Kingdom's Chancellor of the Exchequer, Rachel Reeves, called regulation a 'boot on the neck of business' and told regulators that they should 'take up the call to not bend to caution and boldly regulate for growth.' 8

The debate hasn't become quite that colourful in Canada, but there are reasonable calls for reflection here, too, and our regulators are listening. Canada's Superintendent of Financial Institutions says he sees room to tolerate a bit more risk in the system, particularly in the requirements for new entrants. 9  And the Office of the Superintendent of Financial Institutions has been actively streamlining its rules, rescinding 20 regulatory guidelines in the past year.

Two important changes are coming soon to Canada's financial sector that will help boost competition, and I want to take a minute to tell you about them.

## Real-Time Rail

I'll start with Real-Time Rail, a project to modernize our payments system. Canada is the only country in the G7 without a real-time payments system. You've probably noticed that retail payments, other than cash, don't move directly from the sender's account to the receiver's. You pay a utility bill or make a payment to your credit card online, and you see the money leave your account right away. But it doesn't show up in your utility account or on your credit card until the next day or sometimes longer. This is because these payments currently settle on an overnight basis.

Real-Time Rail will speed this up. It will allow businesses and consumers to move money directly and instantly, anytime of the day or night. And once this is in place, we will be able to link our faster payments system to those in other countries, giving us the ability to move money across borders more quickly, too.

In addition to making payments faster, Real-Time Rail will also make payments more competitive by providing more firms with direct access to the payments system. 10  Our current payments system-the highway that moves money around the economy-restricts access to a small number of regulated financial institutions. Other firms can gain access only by going through one of these players. For example, if you are a technology firm that has designed an app to make payments easier or cheaper, you need to find a partner bank to gain

7  OECD (2025); and Competition Bureau Canada, 'Strengthening Competition in the Financial Sector,' submission to the Department of Finance's public consultation on strengthening competition in the financial sector (2023).

8  Sky News, 'Rachel Reeves delivers Mansion House speech,' YouTube video, 0:08-23:29, July 15, 2025.

9  P. Routledge, 'Speech from the Superintendent at the Global Risk Institute Summit 2025' (Toronto,

Ontario, September 17, 2025).

access to the payments highway. The partner bank will, of course, charge you for this service.

Modernizing our payments system will allow more firms, including non-banks, to access the payments highway. We need to ensure the highway remains safe and efficient, though. So, firms that aren't regulated financial institutions need to register with the Bank of Canada and meet a core set of requirements under the Retail Payment Activities Act (RPAA). 11  The Bank's role in supervising payment service providers under the RPAA started last month.

Canada's Real-Time Rail system is now in test mode and should be ready for launch late next year. It's been a long time in the works and has suffered several delays, so it will be great to see it finally roll out. The experiences of countries that have already introduced instant payment systems show that these systems have real benefits. And a study last year by the C.D. Howe Institute estimated that Real-Time Rail could deliver more than $3 billion in efficiency gains to Canada's economy over its first five years. 12  This is a clear example of the productivity benefits that can come from more competition in a network sector.

## Open banking

A second innovation in the works in Canada is open banking.

In essence, open banking shifts control of your financial data from your bank to you. It creates a set of rules and standards that lets you safely choose to share your data with other banks or with third parties such as budgeting apps, investment tools or credit applications. This has all kinds of potential uses, but one very important one is that it will make it easier to compare banks and to switch between them.

Canadians don't switch their banking relationships very much. A survey of 4,000 Canadians in 2020 found that only 6% had switched banks in the past year. 13  A more recent survey reported that 69% of Canadians haven't switched their primary bank in the past decade, and 29% have never switched bank accounts. 14 Now, I am willing to put some of this down to good service and satisfied customers. But not all. If you have ever tried to move your banking relationship, you will know how daunting it is: the hours of research, reams of paperwork, missed payments, delayed deposits and the fees-lots of fees.

Picture a future where you could load your banking data securely into an application that would research and recommend options for you to save money. You could then pick a new bank and have your data sent directly to it so that it can use your data to qualify you for the products you want. Your credit and payment history are all there; you're not starting from zero. Your new bank could also recreate the direct deposit and direct debit instructions you have so that your payroll shows up on time and your rent, car lease and hydro bill continue to get

11  Payment service providers will also need to be members of Payments Canada. For more details, see Payments Canada, 'The Real-Time Rail: Canada's fastest payment system.'

12  T. Koeppl and J. Kronick, 'The Need for Speed: The Benefits of Faster Payments and How to Achieve Them,' C.D. Howe Institute (2023).

13  Government of Canada, 'Consumer switching behaviour' (2022).

14  FICO, '2024 Bank Customer Experience Survey: Canada' (2024).

paid. Combine open banking with Real-Time Rail, and not only is this a more convenient process, but it's faster, too.

There's work to do, but this is a future within reach. The Canadian government first introduced the idea of open banking in its 2018 budget and put in place an initial legislative framework with the Consumer-Driven Banking Act , which was passed in June last year. Further legislation is needed to bring this idea to life, as well as regulations that require financial institutions to participate and minimum standards for other firms that want to get involved. Then the technical standards need to be developed, along with a regime to approve and oversee non-bank participants. We will need to maintain safeguards for customer data and minimize the risks of fraud. Just like with the payments highway, we want it to be open, but we also need it to be safe.

Real-Time Rail and open banking are two initiatives that promise to improve competition in a sector that is critical to Canada's economy. They are both close to implementation, but each needs a final push to get across the finish line.

## Conclusion

Let me conclude with two messages for you to take away.

First, Canada has a long track record of financial stability that we can be proud of. We shouldn't take it for granted. Nor should we sit on it. The stability of our system is an asset we can use and a strength that affords us opportunities. Greater contestability, more new entrants and more innovation in our financial sector would lead to competition that's good for consumers, for productivity and for our economy. We should lean into it. There are important innovations on the doorstep, and we need to get them over the finish line.

Second, as the world heads into a period of greater economic nationalism and more industrial policy, we need to resist the urge to add protections. Instead, we should look for ways to encourage more innovation and greater competition. I focused my remarks today on the financial sector because it fits with the Bank's mandate and my own background. But there are other sectors of the Canadian economy where more competition would contribute to productivity and growth. Getting rid of competitive protections between provinces is an obvious place to start, but it shouldn't be where we end. We need to think bigger than that.",Carolyn Rogers
https://www.bis.org/review/r251009d.htm,Burkhard Balz: Empowering Europe - how the digital euro unlocks digital sovereignty,"Speech by Mr Burkhard Balz, Member of the Executive Board of the Deutsche Bundesbank, at the Global FinTech Fest, Mumbai, 9 October 2025.",2025-10-09 00:00:00,"## Burkhard Balz: Empowering Europe - how the digital euro unlocks digital sovereignty

Speech by Mr Burkhard Balz, Member of the Executive Board of the Deutsche Bundesbank, at the Global FinTech Fest, Mumbai, 9 October 2025.

* * *

Check against delivery

## 1 Introduction

Ladies and Gentlemen,

I am delighted to be a part of the sixth edition of the Global FinTech Fest-one of the largest FinTech conferences in the world. The fest brings together FinTech leaders from all over the globe.

To this day, 19 years ago, one of the most important steps in the history of the internet took place: Google acquired YouTube for only 1.65 billion U.S. dollar. 1   Today, YouTube is the biggest video sharing platform worldwide, dominating the global market.

This is just one example of Big Techs, predominantly from the U.S., dominating global digital markets. In sectors such as e-commerce and social media, where innovations and the strategic use of large datasets play a central role, companies like Google, Apple, and Amazon, are taking key roles. This holds also true for digital retail payments in Europe with Visa, Mastercard, and PayPal having large market shares.

As global geopolitical uncertainty rises, not only India has been put in a tight spot. For Europe, it reiterated the need to strengthen our strategic independence without hesitation. The digital euro represents a cornerstone of European digital sovereignty.

## 2 European Payments under Geopolitical Uncertainty

Let me focus on European cross-border payments for a moment. At present, almost two-third of all card payments in the euro area are processed by non-European, predominantly U.S.-based, providers such as Visa and Mastercard.

And almost two-thirds of all area economies lack a domestic payment solution. Only a little more than one third (35%) possess their own, independent, and domestic solution-one of them Germany with its Girocard. However, these payment solutions are typically limited to national usage and to specific applications. Cross-border payments within the euro area usually require the infrastructure of international providers.

Furthermore, e-commerce payments are dominated by non-European providers as well. For instance, in Germany PayPal is the major payment method used for online shopping with a market share of almost 30%.

Additionally, new providers face difficulties entering the market as they must compete against established, mostly American competitors. Technological developments have further reinforced these dependencies.

The popularity of these non-European systems is understandable-they are convenient, reliable, and usable across borders.

Yet, payment systems are not just a technical matter; they are critical infrastructure. An impairment of these systems could result in severe financial and economic consequences. Moreover, non-European actors like the international card schemes decide e.g. on the scheme fees to be paid by European banks and private providers gain valuable insights into economic and personal relationships, raising concerns about data sovereignty.

Looking forward, recent developments suggest that stablecoins might further increase the reliance on non-European firms in the payment industry. The U.S.-administration supports the crypto market and promotes the issuance of privately emitted stablecoins, pegged to the U.S. dollar. These could rapidly expand their presence, particularly in cross-border payments and digital applications. However, widespread use of U.S. dollardenominated stablecoins may present significant threats to the euro area: European sovereignty in payments would be at risk.

This dependency raises questions on Europe's digital sovereignty. Europe needs its own, open, and trustworthy infrastructure for payments. The digital euro can become a strategic anchor in this regard.

The challenges we face in Europe are mirrored worldwide. The G20 have made faster, cheaper, more transparent, and more inclusive (cross-border) payments a global priority. India, for instance, has demonstrated the power of innovation in this area with its Unified Payments Interface. Other jurisdictions are similarly exploring digital currencies and new settlement arrangements, while also considering how their local payment systems and currencies-such as the Indian rupee-can play a stronger role in facilitating trade and financial flows. These developments underline that the debate about digital money and payments is not a European one alone-it is a truly global endeavor.

## 3 Strategic Response of the Digital Euro

Let me turn, now, to the European response, to our vision of a digital euro, which will boost autonomy, efficiency, and resilience of the European payments sector.

First, the digital euro will improve the autonomy of the European payment system. Europe cannot afford to heavily rely on foreign providers for critical infrastructure like payments. The digital euro would operate entirely on European infrastructures, granting a degree of operational independence.

Moreover, the digital euro will improve the autonomy of every single European citizen. This ""digital twin"" of cash shares many of its characteristics. Like cash, it would be state-guaranteed, always available, provide a higher degree of privacy than other

digital payment methods, and it would be usable all-over Europe. Whether in stores, online shopping, or transferring money to friends-the digital euro is designed to make payments simple, secure, and data-efficient. Additionally, offline payments would be possible to a limited extent, ensuring functionality even during internet or power outages. The digital euro translates into freedom of choice, which digital payment method Europeans would like to use.

Secondly, the digital euro would establish a unified payment zone within the euro area. Uniform European standards would guarantee a strong and future-proof payment system, while also simplifying cross-border transactions. Same standards, same scheme, same ""payment rails"" across Europe. Hence, the digital euro would enhance efficiency within the euro area. In addition, the digital euro could prospectively also used abroad-although this is not our main objective in the near future.

Thirdly, the digital euro would strengthen the resilience of euro area economies against competing currencies and stablecoins by preserving the anchoring function of central bank money. Unlike stablecoins, which are prone to liquidity and credit risks, the digital euro would provide a secure and reliable alternative. Stablecoins, particularly those pegged to the U.S. dollar and not regulated within Europe, are not a viable substitute from a European perspective.

However, this ambitious project will take time. At the Bundesbank, we anticipate a gradual introduction no earlier than 2028. This is also due to the legislative process for the introduction of a digital euro by the European co-legislators which is still ongoing.

## 4 Conclusion

Ladies and Gentlemen,

Let me conclude by highlighting a crucial insight from the non-digital world.

As the American baseball player Hank Aaron said ""In playing ball, and in life, a person occasionally gets the opportunity to do something great. When that time comes, only two things matter: being prepared to seize the moment and having the courage to take your best swing.""

I am confident that Europe has got the opportunity to do something great and I can assure you: The Eurosystem is prepared to enhance the efficiency, resilience, and autonomy of European retail payments.

With the support of courageous legislators, I am confident that Europe will take its best swing.

Thank you very much for your attention!

1  https://www.spiegel.de/wirtschaft/milliardendeal-google-uebernimmt-videoportalyoutube-a-441664.html",Burkhard Balz
https://www.bis.org/review/r251014b.htm,Sanjay Malhotra: Driving inclusive and sustainable growth through digital public infrastructure and FinTech,"Keynote address by Mr Sanjay Malhotra, Governor of the Reserve Bank of India, at the Global Fintech Fest, Mumbai, 8 October 2025.",2025-10-08 00:00:00,"## Sanjay Malhotra: Driving inclusive and sustainable growth through digital public infrastructure and FinTech

Keynote address by Mr Sanjay Malhotra, Governor of the Reserve Bank of India, at the Global Fintech Fest, Mumbai, 8 October 2025.

* * *

I am very happy to participate in this 6th edition of the Global FinTech Fest (GFF). It is a premier forum where the wizards of technology intersect with the experts of finance. It is a unique forum where young innovators, brimming with bold ideas, converge with the steady wisdom of experienced leaders. This synergy which shapes solutions to common challenges reflects the true spirit of the GFF. This event also reflects India's ambition to remain at the cutting edge of digital innovation. Over the years, the GFF has gained from strength to strength. I congratulate the organisers for this huge achievement.

In my remarks today, I wish to reflect on our Digital Public Infrastructure (DPI) and FinTech journey so far, the next phase of deepening and widening inclusion and sustainability, and the way ahead for FinTechs to translate these opportunities into tangible outcomes.

## DPI as the Engine for India's Growth Story

DPI underpins India's digital transformation over the last decade or so. It rests on three layers, that have played critical roles in addressing barriers to inclusion and enabling innovation at scale.

One, the anchored by Aadhaar with more than 1.4 billion enrolments, has identity layer, made it possible to authenticate identity instantly. It has also enabled millions to open bank accounts and participate in the formal financial system through electronic KYC. It is at the core of Direct Benefit Transfer (DBT) for government benefits.

Two, the which translates identity into action. Aadhaar Enabled payments layer Payment System (AePS) has enabled banking through micro-ATMs and facilitated access even in remote locations. Unified Payments Interface (UPI) has allowed close to 490 million unique users to make nearly 20 billion transactions every month, almost half of the global real-time payment volumes.

Three, the has reshaped how financial services are delivered. Take any data layer government department, for instance. There is a tremendous amount of digitalisation that has happened in each department. I was in the Revenue Department earlier. With almost all income data now digitised, filing an income tax return in India takes only a few minutes. On average, returns are processed in 10 days and many taxpayers receive their refunds within 24 hours. We are among the world leaders in tax filing and processing systems.

Similarly, the Goods and Services Tax (GST). It is a unique model with no parallel in the world. 28 states, 8 UTs and the centre - all with a different GST statute passed by

different legislatures, but still the same except the name of the state. This unification of GST has been possible because of the backbone provided by the Goods and Services Tax Network (GSTN). All this has created a lot of digital data comprising the . data layer Further, DigiLocker with over 590 million users, has enabled citizens to store and share documents securely in a digital form.

## FinTech complementing the DPI

Complimenting these three layers of DPI, we have a vibrant FinTech ecosystem. The foundation of DPI allows FinTechs to set up quickly, scale rapidly, and deliver targeted solutions to not only address current but also future challenges. India is today home to over 10,000 FinTech companies, with cumulative investments exceeding USD 40 billion over the past decade.

The sector's phenomenal growth and future potential is underpinned by several key strengths, apart from the robust DPI. These include a large and deep pool of skilled technology talent, a vibrant financial ecosystem spanning payments, lending, insurance, pensions, wealth management, etc. which is supporting FinTech innovation, and enabling policies and regulatory frameworks which are facilitating FinTechs.

Regular engagement with the FinTech ecosystem is central to this approach. RBI has been proactive in engaging with the FinTech sector, as is borne out by nearly 500 interactions with FinTech entities during FY 2024-25 alone. In addition, through structured platforms such as and we interact regularly with FinTeract Finquiry, innovators and entrepreneurs in the FinTech ecosystem. Since March 2024, we have conducted 15 structured sessions under , covering over 1,100 FinTech Finteract representatives. In addition, 14 open interactions with more than 600 participants have been held under since June 2024. Finquiry

The Reserve Bank has also established a FinTech Repository to collect key information on activities, products, and technologies, enabling more informed and evidence-based policymaking for the FinTech sector.

Recognising the diversity in the FinTech Sector, we have, so far, granted recognition to a Self-Regulatory Organisation (SRO) in the FinTech Sector. This will enable FinTechs which are not directly regulated to operate within a calibrated framework with baseline governance standards and best practices developed by the industry itself.

Over the past decade, India has shown how technology, thoughtfully designed and implemented at scale, can be a force multiplier for sustainable economic development. The FinTech industry, has made it possible to deliver financial services at population scale, at an affordable cost. We will continue the facilitation for FinTechs to make use of the DPI and financial ecosystem for the collective benefit of the economy. This synergy between public rails and private innovation, has been the bedrock of India's success in several domains, including digitalisation of payments.

## The Next Phase of India's Digital Journey

The first phase of India's digital journey was about building the foundation and expanding access to financial services such as savings, insurance, investments. The

next phase is about universalising and deepening impact by using data responsibly. I will talk about five areas. Some work has been done in all these areas but more needs to be done. These are: (a) aggregation and leveraging financial data; (b) the digital rupee; (c) asset tokenisation; (d) artificial intelligence; and (e) digital frauds.

## Aggregation and Leveraging Financial Data

## Account Aggregator (AA)

First, we need to develop DPI for data integration across various data sources to widen and deepen financial inclusion. The Account Aggregator (AA) framework is one such endeavour. It is empowering individuals to share their financial data safely with regulated entities. This ecosystem has seen notable progress with 17 AAs, 650 Financial Information Users (FIUs), 150 Financial Information Providers (FIPs), 160 million accounts being served, and 3.66 billion data requests from FIUs processed by AAs. Many important government owned data sources like the GSTN have been included in the AA framework.

On its part, the RBI is in the process of introducing standards designed to improve customer onboarding processes, enhance user interfaces, strengthen data security, and increase transparency in consent management and data sharing under the AA framework.

While there is huge potential for the AA framework to grow, its success will depend on two critical aspects, namely, integration with more financial information, especially information which is vital for assessing the financial status of an individual, and interoperability across account aggregators.

## ULI

The Unified Lending Interface (ULI) is another landmark step in data aggregation. Credit remains the lifeblood of inclusive growth. Despite best efforts by the Government, RBI, and the banking system, and huge progress made in this regard, a vast credit gap still persists. The ULI seeks to bridge the gap by enabling efficient, datadriven, and inclusive credit delivery.

Since its launch in August 2023 till October 03, 2025, the ULI pilot has now expanded to 120 data sources/services, 58 lenders including banks, NBFCs, co-operative banks with 3.2 million loans sanctioned and 1.75 trillion in lending. The ULI is also enabling use of data by lenders to build alternative credit models, thereby helping expand credit to newto-credit segments lacking credit history.

## Digital Rupee (e)

Second, India's Central Bank Digital Currency (CBDC), the Digital Rupee (e) represents a critical new rail in the DPI architecture. Since its launch in December 2022, the retail e pilot today has 19 banks and 7 million users, enabling person-to-person (P2P) as well as person-to-merchant (P2M) transactions. Interoperability with UPI is also enabling wider adoption of the e without compromising user convenience.

Programmability features in e are unlocking new paradigms in purpose-driven direct benefit transfers, subsidies, and targeted lending. These features have been leveraged by some state governments demonstrating the potential for making subsidy delivery and DBT more effective. For instance, Gujarat's G-SAFAL scheme uses programmable CBDC (p-CBDC) to provide livelihood assistance, allowing beneficiaries to spend subsidies only on whitelisted agri-inputs within a geofenced area. Similarly, Andhra Pradesh's DEEPAM 2.0 scheme provides LPG subsidies through p-CBDC, which is redeemed on delivery of gas cylinders by the registered gas agencies.

## Asset Tokenisation

Third, asset tokenisation offers new possibilities for Indian financial markets in expanding access, improving transparency, and enhancing settlement efficiency through smart contracts.

I am happy to announce that the Reserve Bank has conceptualised the Unified Markets Interface (UMI), as a next-generation financial market infrastructure. UMI will have the capability to tokenise financial assets and settlements using wholesale CBDC. Early results from the inaugural pilot on the issuance of Certificate of Deposit, in improving market efficiency are encouraging.

## Artificial Intelligence

Fourth, AI holds the potential to fundamentally enhance the next generation of DPI in two complementary ways. First, by integrating AI into existing DPI layers, user experience and efficiency can be significantly improved. For example, conversational payments can simplify transactions for users with low digital literacy and bring millions into the formal economy. Second, AI itself can be developed as a public goods infrastructure.

The report of the FREE-AI committee constituted by RBI has also highlighted the importance of building foundational public goods for AI in finance, including a standardised financial sector data infrastructure, compute resources, and the development of indigenous AI models, tailored to the needs of the financial system.

## Digital Frauds

Fifth, the rapid expansion of digital finance has also created new challenges such as digital frauds and cyber threats. The Reserve Bank has instituted several customer protection measures, such as two-factor authentication (2FA), tokenisation of card on file, and providing customers with the control to switch off transactions to secure digital transactions.

The recently announced principle-based framework on authentication of digital transactions will provide further impetus to enhancing consumer convenience while strengthening trust in digital transactions. Exclusive internet domains, '. bank.in' and '. fin.in', for banks and financial institutions, and designated numbering series, i.e., '1600xx' for transactional and service calls, and '140xx' for promotional communications by regulated entities, are other initiatives to enhance security and public trust in digital transactions.

MuleHunter.ai, developed by the Reserve Bank Innovation Hub has been scaled up from about 5 banks at the beginning of this year to 21 banks. Unlike earlier approaches, this is enabling them to use system-wide learning to improve detection of mule accounts. Work is also underway on the Digital Payments Intelligence Platform (DPIP), which will leverage latest technologies to provide shared intelligence for fraud detection and prevention in near-real time.

These measures will enhance customer safety and trust in digital payments. We all need to redouble our efforts to keep our systems safe, secure and fraud proof.

## Conclusion

We stand at an important juncture in our digital finance journey. The past decade has demonstrated how technology can expand access and empower businesses. The next phase must build on this strong foundation, while keeping trust and stability at its central theme. The role of FinTechs in this next phase will be even more crucial. FinTechs can be the architects who design and construct digital highways and also the products and services on this digital highway that generate social and economic value.

I would like to leave five thoughts for the FinTech industry to consider.

1. One, build for Inclusion:  while there may be higher profits to be made by deepening access to the haves and the privileged, prioritise building systems to expand financial services to the unaccessed, unreached and unserved segments of society.
2. Two, adopt customer-first approach: As Steve Jobs said, ""Get closer than ever to your customers. So close that you tell them what they need well before they realize it themselves"". Design products and services that are easy to use and accessible for all, with assistive technologies ensuring vulnerable groups such as senior citizens, individuals with limited digital literacy, and the specially abled are not left behind. As I have said at other fora, strive to design services so well that there is no need for customer service in the first place.
3. Three, innovate in credit delivery: Extend the success of digital payments to credit delivery, especially to small businesses and individuals.
4. Four, prioritise trust and compliance: Embed strong data protection, transparency, and safeguards for consumers into every product and service.
5. Five, think global, anchor local: Engage with international partners, share learnings, adopt global best practices, and strengthen India's role in shaping the future of digital finance.

By embracing these principles and building on India's unique strengths of DPI, a vibrant ecosystem, a digitally connected population, enabling policies, and tech talent, FinTechs can bridge digital divides, foster healthy competition, and drive innovation.

In doing so, FinTechs will not only secure their own growth but also play a pivotal role in driving progress and contributing to the vision of Viksit Bharat 2047.

In this hall, we have people with both the foresight and the capability to act. Let us harness this opportunity and together shape a shared future of inclusive, sustainable, and innovation-driven growth.

Thank you. Jai Hind.",Sanjay Malhotra
https://www.bis.org/review/r251009a.htm,Michael S Barr: Community banking - the cornerstone of building communities,"Speech by Mr Michael S Barr, Member of the Board of Governors of the Federal Reserve System, at the 2025 Community Banking Research Conference, St Louis, Missouri, 8 October 2025.",2025-10-08 00:00:00,"## Michael S Barr: Community banking - the cornerstone of building communities

Speech by Mr Michael S Barr, Member of the Board of Governors of the Federal Reserve System, at the 2025 Community Banking Research Conference, St Louis, Missouri, 8 October 2025.

* * *

Thank you for the invitation to speak to you today. 1   I value the opportunity to spend time with community bankers and fellow federal and state bank regulators. This conference, now in its 13th year, is always a great forum for those interactions. All of us benefit from the research presented here, which helps us understand the opportunities for banks to strengthen communities, and the challenges that community banks face. So, I want to thank the researchers presenting. Thank you also to the Federal Deposit Insurance Corporation (FDIC) and the Conference of State Bank Supervisors (CSBS) for co-sponsoring this gathering, and to the Federal Reserve staff who each year do their part to bring it about. More broadly, I very much appreciate the close and longstanding collaboration between the Federal Reserve, the CSBS, and the FDIC.

Throughout my career, a major focus of my work has been building stronger communities. To do much of that building, households and small businesses need access to credit, and I have known for a long time that community banks and community bankers play an indispensable role in the towns, rural areas, and cities they serve. Stronger community banks mean stronger communities.

Community banks, sometimes the only banking option in a community, offer a consequential difference in customer experience. Even in communities that may also have local branches of larger banks, there is often a considerable, and I think meaningful, differentiation in the customer satisfaction at a community bank. At branches of larger banks, the customer experience can be subject to layers of authorizations involving phone calls and approvals (or denials) from people who are not part of the community and may lack a deep understanding of local industries and conditions. Much of this relates to the understandable need for larger institutions to adopt more standardized and centralized processes, powered by technology, to boost efficiency and lower costs. It is easier than ever before to apply for an increasing variety of loans online, and this is something that community banks are taking advantage of as well. But this is where the benefit that community banks provide really shows.

Community bankers are part of their communities. They know and care about their customers. They have an inherent advantage in understanding the needs and the challenges of local businesses and households. This is not just a matter of being friendly and welcoming to customers. Beyond the numbers on a loan application, what community bankers understand about their neighbors is ""soft information"" that can be used to make better credit decisions. Relationship banking, especially with local business owners, is critical for those businesses-but also for community banks-because it gives them an ongoing edge in the ever-intensifying competition from larger banks and nonbank lenders. Knowing your customer is also crucial in preventing crime, such as fraud, which remains a top concern for community bankers.

The pressure of competition is a very real challenge for community banks, but the advantages I speak of are real as well. I know you heard yesterday from several banks, including those that are modestly sized and have competed very effectively with much larger banks. Community banks have earned the trust and the business of people in their communities because of an understanding that the banks' successes depend on their communities succeeding. Those common interests are a powerful force that drives customer retention amid all the competition.

What is the future of community banking? I note that the session immediately after my remarks today is ""Innovation and Technology in Small Business Lending."" Indeed, technology is a big part of this year's conference, so you won't be surprised to hear me say that I believe it is a big part of what will determine the future of community banking. I know you've already gotten the results of this year's Annual Survey of Community Banks by CSBS, where ""technology and related costs"" ranked second as a concern, behind only cybersecurity, which is itself largely about technology. Most respondents said that the adoption of new or emerging technologies was very or extremely important, and not a single banker said it wasn't important at all.

Until fairly recently, the big technological disruption in banking came from fintech and an onslaught of new lending from nonbanks. This year's CSBS survey reported the largestever increase in respondents who saw heightened competition from nonbank payment services firms. Larger banks are also competing with community banks online. Increased choice for small businesses and consumers is a good thing, but community banks have had to continue to innovate to compete. Community banks often turn to third-party service providers to help them offer products and services to compete with larger banks and fintechs. Managing the risks related to these third-party arrangements has been a considerable job for community banks. The Fed and other regulators have offered guidance about this task, to serve as a resource and to make the supervisory implications of third-party risk management as predictable as possible.

As with many of the big questions facing community banking, technology represents risk and opportunity. It allows community banks to reach customers more effectively and to offer new products and services, but it also demands investment and vigilance. One of the challenges for community banks is to adopt technologies or form partnerships that allow them to deepen customer relationships but not attenuate or replace them. In interactions with Federal Reserve supervisors about third-party services, banks tell us that they hear a lot of sales pitches for algorithmic lending, outsourcing customer service, and the like, when what they are really looking for is an app that can enhance relationship banking: their natural advantage.

Any discussion about technological advances has to give prominent attention to artificial intelligence, and I note that later this morning a paper on the use of AI technology will be part of an upcoming session. Before I get into what AI might mean for community banking, let me say that AI has been of particular interest to me, and I have spoken about it several times this year, because of the technology's potential to transform both our economy, and in other fundamental ways, how we live and interact with each other in society. 2   While there is high uncertainty about these outcomes, I believe that the speed at which AI is being implemented means that we should all be thinking about the full range of possibilities and be prepared for any one of them to come to pass, perhaps sooner than we think.

AI was included for the first time in the CSBS survey in 2024, when AI for customer support was an important focus for 31 percent of respondents, a share that jumped to 47 percent in this year's survey. Of course, earlier forms of AI have been used by larger banks in customer service for many years, and the big development for community banks seems to be that newer forms of GenAI could be lowering costs and expanding access enough to make it cost-effective for smaller institutions.

Customer service is one obvious area where AI could change community banking, but there are others. Cybersecurity and fraud have been and continue to be leading concerns for community bankers, and AI represents new opportunities for addressing these concerns. It is my understanding that automated fraud detection, in particular, hasn't been cost effective for some community banks, which haven't been able to compete with larger banks that have the economies of scale to deploy these services. But the huge buildout in AI capacity now underway, along with the explosion in the number of firms seeking to get into AI-based services, may have the potential for driving down costs enough to make AI-based fraud detection more feasible for community banks.

Yet, AI represents new risks as well as new opportunities. 3   In addition to community banks worrying about criminals defrauding them or their customers with forgeries on checks or in credit card transactions, they face a new threat from entirely forged identities, with so-called ""deepfakes."" Deepfakes use GenAI to recreate voices and images of real people, allowing fraudsters to hold convincing conversations using simulated voices that sound like the individual they are impersonating, responding in ways that person might realistically respond. Using only a brief sample of audio and access to information about individuals on the internet, criminals employing GenAI can impersonate a close relative in a crisis or a high-value bank client seeking to complete a transaction at their bank. What was once the stuff of movies is now a reality, and a lot is at stake. The direct and indirect costs of all cybercrimes have already grown from 1 percent to 10 percent of global gross domestic product. 4   The use of deepfakes in cybercrime is growing very quickly. According to one source, there has been a twentyfold increase in deepfake attacks over the last three years. 5

Community bankers also need to be aware of the potential for AI to affect customers' livelihoods. I tend to be an optimist about the potential for AI to make workers more productive, raise living standards, and create more jobs in new industries, but I am realistic in my expectation that it could cause considerable dislocation of workers and businesses, at least in the short run. 6   Communities dependent on a small number of employers or a single industry that is significantly affected by AI could experience these dislocations. At the same time, the large investments underway in data centers, many of them in remote or rural areas where electricity is less expensive, could bring new business for community banks. For example, during the most recent Community Advisory Council (CAC) meeting, the Federal Reserve Board heard about a major data center built in Ellendale, North Dakota, a community of less than 1,500 people. The CAC member noted that the addition of a major data center had vastly increased the community's needs for services. At this point it is hard to tell how much AI will truly transform the economy and banking, but I think that community bankers will need to be prepared to change, as ever, if your communities are affected.

I have covered a couple topics so far today. I have spoken about the advent of fintech, and the way it is transforming banking and competition between community banks and larger banks-risks and opportunities. I have spoken about technology more generally, and specifically about how artificial intelligence may change the economy and banking. Many of these uncertainties echo those that most workers and businesses are facing in our fast-evolving economy. One group of people that I believe have dealt very effectively with a changing economy are community bankers. Considering the changes that have swept over our banking and financial system over the decades, if you are a community banker sitting here today, that itself is a testament to your ingenuity, resilience, and adaptability. But I would be remiss if I didn't discuss a further challenge to community banks in this regulatory environment-deregulation of large banks.

As community bankers well know, it was not community banks that fueled the 2008 financial crisis-it was the largest, most complex firms whose excessive risk-taking nearly brought down the system. In the years since, strong reforms-higher capital, tougher liquidity requirements, and rigorous stress testing-have helped to safeguard our economy. Yet recent proposed rollbacks in capital standards for the largest banks, in the supervisory framework for large financial institutions, and in the rigor of stress testing of large banks threaten to erode those protections. These shifts would not make the system safer; they would leave community banks once again exposed to the fallout if the largest players stumble. Because we cannot afford to repeat those mistakes, I have spoken out against weakening standards for large banks, and I will continue to do so.

In closing, I'll note my admiration for community bankers who know how to confront uncertainty, to sort out the risks and the opportunities, and make the decisions and investments that have allowed community banks to continue to play the indispensable role you serve for your customers and communities. We all share an interest in responsible regulation, which means promoting the safety and soundness of community banks and compliance with applicable law but also ensuring that regulation is appropriate to the size, business model, and risk profile of regulated institutions. We all want community banks to succeed and continue to play their important role in the communities they serve. One reason that I believe community banking has a bright future is that all the people here today recognize the unique and essential function of community banks in our financial system and are helping to support community banking.

Thank you.

1  The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board and the Federal Open Market Committee.

2  See Michael S. Barr, ""Artificial Intelligence and the Labor Market: A Scenario-Based Approach,"" speech delivered at the Reykjavík Economic Conference 2025, Central Bank of Iceland, Reykjavík, Iceland, May 9, 2025.

- 3  See Michael S. Barr, "" Deepfakes and the AI Arms Race in Bank Cybersecurity,"" speech delivered at the Federal Reserve Bank of New York, New York, NY, April 17, 2025.

- 4  International Monetary Fund, , Chapter 3 (October Global Financial Stability Report 2024). See also, "" Why We Need Global Rules to Crack Down on Cybercrime,"" World Economic Forum, January 2023.
- 5  ""Fraud attempts with deepfakes have increased by 2137% over the last three years,"" Signicat, February 20, 2025, https://www.signicat.com/press-releases/fraud-attemptswith-deepfakes-have-increased-by-2137-over-the-last-three-year.
- 6  See Michael S. Barr, ""Artificial Intelligence and the Labor Market: A Scenario-Based Approach.""",Michael S Barr
https://www.bis.org/review/r251009b.htm,Michael S Barr: Economic data and research in Indian country,"Speech by Mr Michael S Barr, Member of the Board of Governors of the Federal Reserve System, at the Center for Indian Country Development Tenth Anniversary and Data Summit, Minneapolis, Minnesota, 8 October 2025.",2025-10-08 00:00:00,"## Michael S Barr: Economic data and research in Indian country

Speech by Mr Michael S Barr, Member of the Board of Governors of the Federal Reserve System, at the Center for Indian Country Development Tenth Anniversary and Data Summit, Minneapolis, Minnesota, 8 October 2025.

* * *

Good afternoon. Thank you for the invitation to be here to help mark the 10th anniversary of the Center for Indian Country Development (CICD) and to further the goal of advancing development through better data. 1   It's a privilege to be in the presence of so many tribal leaders, Federal Reserve colleagues, policymakers, researchers, and practitioners all working to advance Native economies. My experiences traveling with CICD and engaging in CICD's work have been a meaningful part of my time at the Federal Reserve.

At the Board of Governors, I serve as the oversight governor for our Division of Consumer and Community Affairs, which supports the community development function across the Federal Reserve System. It's a role that means a great deal to me. Community development has been a cornerstone of my career-as a governor, banking regulator, and earlier in my career as a scholar, university leader, and the Treasury Department's point person on community development in the 1990s.

I'd like to focus my remarks today on why I think the work you all are doing is critical to the prosperity of Native nations and Indigenous communities, and why that success matters for our country.

Two years ago, I traveled to western Montana with CICD staff. We visited the Blackfeet Indian Reservation, which is home to the Blackfeet Nation, and the Flathead Indian Reservation, which is home to the Confederated Salish and Kootenai Tribes.

On our visit, I saw examples of tribal leaders diversifying their economies through tribally owned enterprises-and then leveraging revenues from those enterprises to reinvest in their communities. I heard from business leaders struggling with supply chain challenges and community members pulling together to address housing supply and affordability issues. 2   At a community roundtable, financial leaders talked about credit needs in their regions including challenges with limited credit and access to financial services and distance from banks.

These issues take center stage in CICD's research. And in our conversations, research served as a springboard for a variety of community members and leaders to come together to explore solutions. This is why community engagement is a critical part of community development, and a huge value add for the Federal Reserve as we seek to understand how people are experiencing the economy.

I see this same spirit of working together on behalf of a better future-grounded in research-on display here today.

## Economic Gaps and Data Needs in Indian Country

There remain persistent economic gaps in Indian Country based on many metrics. Native Americans have lower household income, and poverty is a significant problem on reservations. 3   According to the Federal Reserve's Survey of Household Economics and Decisionmaking (SHED Survey), Native American households consistently report a lower likelihood of having the cash to pay for a $400 emergency expense, which is a common measure of financial security. 4   Looking at the labor force, unemployment is higher for Native American workers than for workers overall. Research has also documented a lack of financial institutions near reservations, which restricts capital and credit availability. A recent study showed that Native-owned small businesses were less likely to receive the financing they applied for, even though they were much more likely to apply for small amounts of credit. 5   Native Americans also face a higher cost of homeownership.

Economic downturns can exacerbate gaps, such as when social-distancing measures during the COVID-19 pandemic disproportionately harmed sectors such as gaming and entertainment in which many tribally owned businesses are concentrated.

Addressing these persistent challenges requires coordination with local leaders to achieve progress. During my first stint at the Treasury in the 1990s, I co-chaired a working group whose objective was to reduce barriers to mortgage lenders and expand access to credit in Indian Country, with pilot programs in the Navajo Nation and Oglala Sioux Pine Ridge Reservation. The working group helped map out a clearer process for residents to obtain mortgages by coordinating tribal governmental, federal, and lender roles. 6   I see this as an example of potential progress that can be made when national and local leaders and the private sector leverage research and come together to find solutions, but also as a reminder that these are long-standing problems that are still with us today.

In other ways, tribal governments have been proactive in diversifying their revenue streams and innovating in their use of economic data to make evidence-based decisions. Native Community Development Financial Institutions (CDFIs) are addressing credit gaps in their communities with culturally informed lending practices and financial services. There are many examples of initiatives targeting specific economic challenges. We see signs of progress, including positive trends in Native American employment and household income. But we'll only know whether we're making economic gains in Indian Country over time if we have timely, high-quality data disaggregated for Native peoples and geographies. Data dashboards are not just for researchers. They help tribal nations and decisionmakers in many capacities make informed decisions about how to allocate resources, design interventions, and monitor economic growth.

We know that Indian Country has sometimes been referred to as the ""asterisk nation"" as a result of insufficient sample sizes of Native Americans in national datasets. Experiences in which external researchers used data in ways that were harmful to tribal communities have also contributed to mistrust of research and data in Indian Country. At the same time, many tribal governments have limited resources to allocate toward their own data collection.

## Research and Data Advancements

Research and data advancements in Indian Country are changing this narrative. Over the past decade, CICD's research has advanced our understanding of the pillars of tribal economies and potential interventions. 7   We've learned more about the role of tribal governments and tribal enterprises in local and regional economies, and the ways tribal treasuries are distinctive from those of local and state governments. CICD's research has helped us understand how infrastructure gaps such as broadband access can impede economic growth and leave communities more vulnerable to economic shocks. And it's provided research insights on strategies for increasing access to capital and credit in Native communities.

Much of this research has taken place in collaboration with Native organizations, tribal governments, and economic development practitioners. In some of these areas, such as research on the practices and outcomes of Native CDFIs, CICD and its collaborators have provided some of the first systematic quantitative analysis in the field.

CICD has also developed a suite of data tools that empower community members and decisionmakers to explore economic conditions at local to national levels and monitor trends over time.

## Indian Country's Relevance to the Broader Economy

This work to advance economic research and data in Indian Country matters to the overall economy. The Federal Reserve promotes a healthy economy and a stable financial system for everyone, and that simply cannot be done without supporting strong and sustainable communities in Indian Country. Research tells us that Native economies are closely intertwined with local and regional economies. Examples include tribal casinos attracting visitors to surrounding businesses and Native enterprises subcontracting with non-Native-owned businesses.

CICD's mission supports the Federal Reserve's community development function, which works to promote access to credit, investment, and financial services in low- and moderate-income communities, and foster a better understanding of their economic conditions. This happens in a few ways.

As members of the Federal Open Market Committee, my colleagues and I decide on the appropriate setting for monetary policy. In this role, it's vital that we understand how a variety of individuals, institutions, and communities experience the economy. Research from CICD and community development teams here in Minneapolis and across the Federal Reserve System sheds light on economic circumstances in our communities.

As important as it is, monetary policy isn't the main thing that matters to a healthy economy. Businesses, financial practitioners, nonprofits, community leaders, and decisionmakers at many levels all need research and data to make evidence-based decisions and promote thriving and economically resilient communities. The community development function provides this research and convening power to advance our collective understanding of local financial needs.

Our community development work also provides timely, on-the-ground insights on developments in the financial system. A prime example of this is the series of surveys CICD conducted during the COVID-19 pandemic. These surveys provided real-time glimpses of the challenges that tribal governments, businesses, and community leaders were facing as a result of the pandemic.

In addition, under the Community Reinvestment Act, the Federal Reserve has a statutory obligation to supervise how banks meet the credit needs of the communities they serve, consistent with safe and sound lending practices. And that very much includes communities in Indian Country. And we need good data and analysis to fulfill our statutory obligations.

What it comes down to is that the Federal Reserve does our best work when we understand what's happening in communities, and that includes the rich variety of communities across Indian Country.

## Learning from Indian Country

As we look to the future, decisionmakers inside and outside of Indian Country can learn from the ways tribal governments have served their communities and guided their economies through many challenges. In my visits with tribal leaders, I have been inspired by their long-range vision-considering how decisions today will affect their ability to care for their communities for generations into the future.

I've also come to appreciate their grit and creativity in meeting community needs, whether it be through starting a tribal bank to meet local financial service needs, leveraging tribal enterprises to create employment opportunities, or innovating in their use of economic data to tailor public services to their communities.

Much has been said about the economic challenges in Indian Country, but perhaps what has impressed me the most in my visits is the sense of optimism for the future from so many people I have met, despite these challenges.

Thank you for the important ways you are coming together to use research and data to propel your communities forward. It's an honor to be here with you.

1  The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.

2  See the Federal Reserve of Minneapolis website at  https://www.minneapolisfed.org /speeches/2021/us-senate-testimony-housing-for-native-americans-review-of-federalprograms-barriers-and-opportunities  and  https://www.minneapolisfed.org/article/2024 /native-americans-pay-more-to-finance-home-purchases-than-white-borrowers.

3  Federal Reserve Bank of Minneapolis, Native Community Data Profiles.

- 4  Board of Governors of the Federal Reserve System, Economic Well-Being of U.S. (Washington: Board of Governors, May 2025). Households in 2024
- 5  See the Federal Reserve of Minneapolis website at  https://www.minneapolisfed.org /article/2024/native-entrepreneurs-face-credit-access-challenges.
- 6  U.S. Department of Housing and Urban Development and U.S. Department of the Treasury, One-Stop Mortgage Center Initiative in Indian Country: A Report to the (PDF)(Washington, DC: HUD, 1999). President
- 7  Casey Lozar, Caryn Mohr, and Ryan Nunn, ""Insights from a Decade of Economic Research in Indian Country,"" article (Federal Reserve Bank of Minneapolis: April 3, 2025).",Michael S Barr
https://www.bis.org/review/r251008h.htm,T Rabi Sankar: Responsible Artificial Intelligence (AI) – balancing innovation with financial stability,"Keynote address by Mr T Rabi Sankar, Deputy Governor of the Reserve Bank of India, at the at the Global Fintech Festival, Mumbai, 7 October 2025.",2025-10-07 00:00:00,"## T Rabi Sankar: Responsible Artificial Intelligence (AI) - balancing innovation with financial stability

Keynote address by Mr T Rabi Sankar, Deputy Governor of the Reserve Bank of India, at the at the Global Fintech Festival, Mumbai, 7 October 2025.

* * *

## Opening and Context Setting

Good afternoon, distinguished policymakers, members of academia, industry leaders and innovators. It is both a pleasure and a responsibility to address this gathering on a subject that is poised to shape the future of finance, society, and governance alikeResponsible Artificial Intelligence.

AI has rapidly evolved from an academic discussion less than a decade back to become an integral part of our daily lives. We encounter it when we unlock our phones, interact with chatbots, and increasingly, when accessing financial services. In just a few years, AI has evolved from an enabling technology to a foundational driver of how individuals and businesses make decisions.

Globally, AI is already reshaping financial systems. From digital credit underwriting to conversational banking assistants, AI is demonstrating its ability in ways unimaginable a decade ago. India, too, has been a notable participant in this journey.

Yet, as with all powerful innovations, AI carries a dual narrative. It promises extraordinary efficiency, inclusion, and innovation, but if left unattended, could pose unprecedented threats. As Stephen Hawking said in 2016 at the launch of the Centre for the Future of Intelligence (CFI), ""the rise of powerful AI will either be the best or the worst thing ever to happen to humanity. We do not yet know which."" It is acknowledged widely that AI could be the permanent answer to poverty and disease. But equally there have been concerns from AI experts - ranging from concern around bad actors using AI for bad things to the more fundamental concern that human existence is irrelevant once machines achieve superintelligence. I do not intend to dwell on these widely divergent possibilities but only to highlight the limited point that while the benefits of AI are transformative, they need to be used responsibly. In finance, the margin for error is even narrower as financial institutions are built on trust and economies prosper on stability. Therefore, the integration of AI in financial systems must be approached as a matter of profound responsibility with due recognition and mitigation of risks.

## AI for the Financial Sector

## The Benefits

The promise of Artificial Intelligence in finance is by now well recognised. At its core, AI can expand financial access, strengthen safeguards, and reimagine efficiency. It can lead to better credit assessment through use of alternative data (like transaction

patterns, utility payments, etc.) of unbanked customers. Ability to use massive data sources could help in real-time detection of frauds through identification of unusual transaction patterns, or improve market risk modeling.

Operational efficiency and cost reduction can get a paradigm shift using AI, e.g., in back-office processes, KYC, loan processing etc. Chatbots and virtual assistants would achieve 24x7 customer support. Data extraction from financial documents (e.g., invoices, contracts) through Natural Language Processing (NLP) could make document processing seamless.

In the investment and trading space, the ability of AI models to detect short-term price inefficiencies are already being harnessed. Other benefits include allocation optimisation, use of big data to forecast market movements etc. AI driven RegTech applications help regulated entities with better compliance outcomes. Automated monitoring helps detection of suspicious transactions and generates faster compliance.

AI has the potential to significantly expedite financial inclusion through alternative credit scoring models while language interfaces will remove language barriers and reach digitally limited customers. Investment advice becomes affordable to small investors through robo-advisors.

## The Risks

But these benefits come with significant risks. AI systems are trained on vast amounts of data. It is natural that the learning from the data would also extend to learning the bias inherent in data. AI systems trained on biased historical data are likely to perpetuate or amplify historical discrimination in, for example, credit profiling, or hiring. Even small biases in training data can lead to systematic exclusion of population groups from accessing financial services. Algorithmic opacity would make it difficult to identify possible biases.

The 'Black Box' problem of AI models, or, in other words, the lack of explainability, makes these models non-transparent. This makes it hard for regulators and auditors to understand how decisions are made, which, in turn, undermines accountability. Regulatory actions, or denial of service to customers, would typically require reasons to be communicated. Absence of explainability may thus constrain the use of such tools.

There are systemic risks typical to AI systems, such as herding behaviour when AIdriven trading models get widely used, which can amplify volatility. AI misjudgments can trigger market dislocations. Such problems are amplified by the possibility that it becomes difficult to assign responsibility when an AI makes a harmful or erroneous decision. Legal frameworks would always find it difficult to catch up with fast moving technology. Over-reliance on automation could result in losing oversight or delayed intervention when things go wrong. There is also the ethical issue of using behavioral data for manipulative cross-selling or risk profiling.

Then there is the ongoing debate about AI and job displacement. Whether AI will displace jobs in the long run would depend on whether it is like other transformative changes in history like the Industrial Revolution or the invention of electricity or whether it is a fundamentally different kind of change. Max Tegmark, founder of Future of Life

Institute argues that while all past technologies amplified human ability but did not replace human intelligence, AI is the first technology that creates intelligence itself.

Recognizing these risks is not to diminish the promise of AI, but to underline the importance of adopting it responsibly through safeguards, governance, and foresight.

## Balancing Innovation with Stability

The key question is, how do we enable innovation while safeguarding systemic stability? This balance is a necessity for ensuring that AI strengthens rather than undermines the financial system. If regulatory frameworks are too rigid, they can dissuade experimentation, reducing AI to a tool deployed only by the largest players. On the other side, unbridled adoption, particularly in high-impact areas, could create vulnerabilities that are invisible until they snowball into crises.

The balance is not only about restraint; it is also about actively encouraging innovation. This requires policies that create safe spaces for experimentation, such as sandboxes, facilitate open digital infrastructures, and provide access to quality data, enabling firms to innovate with confidence. It also requires incentives for responsible innovation, so that firms see governance not as a burden but as a competitive advantage.

## Responsible AI - Guiding Principles

As we reflect on the transformative potential of AI, it becomes imperative to anchor its adoption within a framework of principles. The RBI took a proactive step through setting up the FREE-AI Committee, which has articulated a set of guiding sutras for responsible and ethical adoption of AI in the financial sector. These principles are intended to serve as touchstones for all stakeholders.

At the core is the principle of trust, the bedrock of finance. Every deployment of AI must reinforce, not diminish, the trust of consumers, institutions, and society. Equally important is a people-first orientation, ensuring that technology serves human needs. The report emphasizes innovation over restraint, coupled with fairness and accountability in outcomes. AI can inform decisions, but it cannot own them. The accountability must always rest with human actors and institutions deploying AI.

The principle of 'understandable by design' underscores the need for transparency, ensuring that AI decisions are explainable to both regulators and consumers. And above all, safety and resilience must be built into every layer of adoption.

Alongside regulatory oversight, it is equally critical to encourage industry-led codes of conduct, self-regulation, and the institutionalisation of ethical standards. This collaborative approach ensures that responsibility is not a mandate of regulators but a shared culture across the fintech ecosystem.

## RBI's Approach and Role

The RBI has always fostered ""innovation within safeguards."" Through calibrated guidance, supervisory oversight, and structured engagement with industry, the RBI aims to foster an ecosystem where financial innovation flourishes without compromising

systemic stability. As AI reshapes the financial landscape, this approach remains unchanged - progress and prudence must go hand in hand.

RBI has also taken initiatives for the industry through RBIH, such as MuleHunter.ai™ for combating the menace of mule accounts. Unlike the traditional rule-based systems currently used by banks, MuleHunter.ai™ offers greater accuracy and precision with significantly low false positive rates. Currently, the model has been deployed in about 20 commercial banks. In addition, work is also underway to explore a Digital Payments Intelligence Platform (DPIP), that can analyse and assign a risk score to transactions on a real time basis.

## Ringfencing and Guardrails

While AI holds immense promise, the financial system demands the highest degree of prudence. Critical infrastructures and institutions must be ringfenced from unchecked risks that could arise from untested or poorly governed AI deployments. The objective is not to obstruct innovation but to ensure that its application never compromises the stability or integrity of the system.

To this end, practices such as stress-testing of AI models under diverse scenarios, redteaming to identify vulnerabilities, and the adoption of explainability tools and standards are indispensable. These mechanisms would help regulators and institutions alike to supervise AI outcomes, detect weaknesses before they escalate, and ensure that AIdriven decisioning can be understood and, if necessary, challenged.

Equally important is that AI systems are subjected to rigorous oversight and layered with inherent checks. Financial AI applications must be designed such that they cannot inadvertently destabilize markets, payment systems, or consumer confidence.

This approach demands ""safety by design"" rather ""safety as an afterthought."" Safeguards must be embedded throughout the lifecycle, from conception and data training to model validation and real-world application. Retrofitting safety once risks have materialized is inadequate and potentially destabilizing.

## Research, Innovation, and Collaboration

Embedding AI in finance is not a one-time exercise. It demands continuous research, experimentation, and learning, as models, techniques and risks evolve rapidly. It also calls for partnerships among industry, academia, regulators, and start-ups. Codeveloping solutions, sharing knowledge, and stress-testing innovations must be fostered.

Entities should have in place systems for responsible data governance, ethical sourcing of data, and privacy-by-design in every model. They should develop common standards, toolkits, and disclosure mechanisms so that model design, training data, and decision logic can be explained to regulators and customers. Safeguards such as digital watermarking of synthetic content should be explored to deter misuse. Internal policies and processes must be revised to embed AI risk assessment into the product lifecycle. Continuous monitoring, stress scenarios, and independent audits should be institutionalised.

## The Way Forward

As we look ahead, the path for responsible AI in India's financial sector is exciting yet deliberate, demanding a phased approach that balances innovation, inclusion and stability.

Alongside technological progress, the human element remains central. AI literacy for consumers to understand both the potential and risks of AI will be critical. Just as financial literacy has been a national priority, the coming decade will require a parallel focus on AI literacy, for individuals to engage confidently and safely with these new tools.

In the short term, the focus needs to be on awareness and capacity building. Financial institutions, technology providers, and regulators must train personnel, strengthen internal governance structures, and introduce initial risk frameworks to ensure that AI deployment is encouraged with focus on safety. Awareness campaigns and workshops can also help smaller institutions and FinTechs integrate AI responsibly.

In the medium term, the FREE-AI principles should guide the industry practice. AI can begin to play a substantial role in SupTech, credit decisioning, and financial inclusion. In parallel, the industry should develop its own governance standards, self-regulatory codes, and ethical guidelines to complement regulatory oversight.

In the long term, India can aspire to become a trusted global hub for responsible AI in finance. By demonstrating how innovation can coexist with strong safeguards, India can set an example for emerging economies and the Global South, attracting talent, investment, and collaboration.

## Concluding Remarks

As we conclude, it is essential to reiterate that AI must remain a force for good empowering individuals, strengthening institutions, and enhancing the resilience of our financial system. Its promise will be realised only when adopted responsibly, with constant attention to societal impact.

Responsible AI should not be framed merely as a regulatory requirement, but as a matter of business ethics. Every model deployed, every decision automated, and every service enabled through AI must reinforce the confidence of consumers, provide fair access, and respect the dignity and privacy of all participants.

Let me leave you with five guideposts. Not as tasks, but as a collective mission: the 5Ts

1. Trust  - Commit to building AI systems that uphold and enhance the trust in the system. Embed responsibility and ethics in every algorithm.
2. Transparency  - Reinforce clarity and explainability in AI, ensuring that decisions can be understood, audited, and questioned when necessary.

3.

3. Training  - Invest in training to nurture a world-class AI talent within our financial ecosystem. Ensure India leads in creating, not just consuming.
4. Technology for Good  - Let innovation be guided by purpose. The test of every AI application must be whether it advances inclusion, resilience, and efficiency.
5. Togetherness  - Above all, we must work together. Regulators, industry, academia, and global partners, to collaborate and co-develop.

Through shared commitment, ethical deployment, and continuous vigilance, we can ensure that AI fulfils its promise as a transformative enabler.",T Rabi Sankar
https://www.bis.org/review/r251007x.htm,Ida Wolden Bache: Climate change and monetary policy,"Lecture by Ms Ida Wolden Bache, Governor of Norges Bank (Central Bank of Norway), at the Norwegian School of Economies (NHH), Bergen, 7 October 2025.",2025-10-07 00:00:00,"## Climate Change and Monetary Policy

Lecture by Governor Ida Wolden Bache at NHH - Norwegian School of Economics on 7 October 2025.

## Introduction

Thank you, Helge, for that kind introduction! It is a great pleasure to be here at NHH - Norwegian School of Economics. And since I know you like to divide people into two groups, those who walk on escalators and those who don't, I can assure you that I did not stand still on the escalator at Flesland Airport when we arrived here in Bergen yesterday!

The world has also not been standing still in recent years. The pandemic, Russia's invasion of Ukraine and global trade uncertainty have caused large movements in the economy and financial markets. We have been reminded that inflation can rise rapidly when high demand and significant supply-side shocks interact. When inflation surged in 2022, we raised the policy rate sharply and rapidly, and only this year have we started a cautious easing of monetary policy. However, the job of tackling high inflation has not been fully completed. From our current standpoint, we do not envisage a large decline in the policy rate ahead.

However, history has shown us that the policy rate may turn out to be higher or lower than currently projected. We must be prepared for economic prospects to change due to structural changes and new unexpected events. The security policy landscape is changing. Technology is developing rapidly. The population is ageing, and governments in many countries are weighed down by high debt. At the same time, global warming continues.

Curbing global warming is one of the greatest challenges of our time. 2024 was the hottest year since systematic measurements began. More intense storm rainfall, flooding and drought remind us that cutting greenhouse gas emissions is urgent.

Chart

: Climate change and transition

This brings me to the topic of my speech today, which is what climate change and the transition to a low-carbon economy might mean for monetary policy - and what monetary policy might mean for this transition.

To address these questions, we first need to discuss how climate change affects the economy and the variables relevant to policy rate setting.

## Economic effects of energy transition

It is then helpful to distinguish between climate changes in themselves and the changes resulting from the transition to a low-carbon economy.

Let us start with the transition. A successful transition requires largely replacing fossil energy sources with renewable sources such as solar, wind and hydropower. This transition is being driven by policy measures such as emissions taxes and subsidies, by the emergence of new technology and changes in consumer and investor preferences.

Chart : Substantial emissions remain to be cut

We still have some way to go before Norway's emissions targets are met, either by making cuts in Norway or by buying allowances.[1] The target is to reduce greenhouse gas emissions by at least 55 percent relative to 1990 by 2030 and at least 70-75 percent by 2035. In 2024, emissions in Norway had been reduced by just above 12 percent relative to the 1990 level. The largest reductions since then have been achieved in manufacturing. Over the last ten years, road traffic emissions have also declined substantially, while the electrification of the petroleum installations on the Norwegian continental shelf has helped cut emissions from oil and gas production.[2]

According to a survey conducted by Norges Bank in August this year, approximately 40 percent of firms are planning to invest in order to reduce their emissions in the coming years.[3] Many firms are also investing to direct production towards green markets and products.

Chart : Higher emissions prices incentivise cuts

Looking ahead, higher costs related to greenhouse gas emissions will strengthen incentives to cut emissions. A large share of the Norwegian business sector is either subject to carbon tax or required to buy emissions allowances in the EU Emissions Trading System (EU ETS), or both. However, current emissions prices, in particular for manufacturing, are far lower than what it would cost to cut all emissions. The political authorities have clearly signalled that domestic carbon taxes will increase in the years ahead. At the same time, emissions allowance prices are expected to rise. This means that GHG emissions will become more expensive in the period to 2030 and to 2040,

Chart : Much of Norway's oil and gas has been extracted

The design of climate policy ahead will be significant for the Norwegian oil and gas industry.

As these calculations from the Norwegian Offshore Directorate show, Norwegian oil and gas production will decline over time.[4] A substantial proportion of the resources has already been extracted. The pace of the decline in activity will depend on for example exploration activity and willingness to invest, which may in turn be influenced by Norwegian and international climate policies. The scenarios shown in the chart define a range of possibilities.

Today, oil and gas exports account for almost half of Norway's total exports, and the petroleum sector accounts for more than 20 percent of total investment in the Norwegian economy. The activity on the continental shelf has significant spillovers to the rest of the economy. Norway has developed a significant oil services industry which also operates abroad. As activity on the Norwegian shelf and internationally declines, firms and labour engaged in activity on the continental shelf will have to redirect towards other activities.[5]

## Chart : Decline in petroleum investment

Yet investment is still being made on the shelf, and petroleum investment has increased markedly in recent years, reflecting the launch of a number of development projects in 2022 in response to the petroleum tax package and high oil and gas prices. Investment in these projects will fall markedly ahead and will likely not be fully replaced by new projects. This will result in a decline in overall investment over the next three years. Signals from the largest oil and gas companies indicate that investment will then be relatively stable until the mid-2030s.[6]

## Chart : Power sector investment will increase

The transition also generates new activity and creates new jobs. I have already mentioned investment in greenhouse gas emissions reduction and in new product development. Investment in the power grid and renewable energy is also planned to meet the increased demand.[7] In addition, investment is being made in carbon capture and storage. Considerable investment has already been made at the plant in Øygarden outside Bergen, with further substantial investment planned.[8]

The transition will also have consequences for electricity prices. Norway is connected to the European energy market. The EU's goal is that an increasing share of its energy production is from sources such as solar, wind and hydropower. At present, we lack the storage facilities to balance production fluctuations from these sources. The transition to renewables may therefore result in less stable electricity production, resulting in increased price volatility, which could also pass through to Norwegian electricity prices, as we experienced in late 2024. Calm weather in Germany combined with lower temperatures resulted in a surge in Norwegian electricity prices.

## Economic effects of climate change

Chart

: Climate change and transition

The transition to a low-carbon economy will therefore impact the economy through many channels. However, global warming in and of itself also has substantial economic consequences.[9]

For Norway, a warmer climate is not entirely negative, as it could boost crop yields, make it possible to work outdoors more frequently and attract more tourists. However, this is not the case in large parts of the world. Extreme heat sometimes makes it impossible to work outdoors and labour becomes less productive. Global food production may be particularly affected. A number of studies indicate that agricultural output may fall and push up global agricultural prices over time.[10]

Chart

## : More extreme weather

A warmer climate also means more unstable weather and rising sea levels. Droughts, floods and hurricanes can cause major damage to crops, buildings and infrastructure. The number of extreme weather events has also increased in Norway in recent years, and Storm Amy is just the most recent. The chart shows the number of municipalities affected by severe natural events.[11] Reconstruction costs can be high, and over time, higher insurance payouts linked to weather events can lead to higher insurance premiums. But investment to upgrade buildings and infrastructure to withstand such events will also impose costs on society.

Damage caused by extreme weather affects the output side of the economy. Until the damage is repaired or the next crop is harvested, the potential to supply goods and services is lower than before. This may stoke inflation. If extreme weather events occur frequently, price volatility can also intensify.

Chart

## : Extreme weather affects food prices

In a global market, the ripple effects from a single event can be far-reaching. The rapid rise in food and beverage inflation in Norway over the past year can in part be traced back to the sharp rise in coffee and cocoa prices, and further to droughts in Brazil and heat waves in West Africa. Last autumn, olive oil was among the food products with the highest rise in prices, due to lower olive production in Europe as a result of droughts in Spain and Italy the preceding year.[12]

Coffee, cocoa and olive oil account for a small share of Norway's consumption, and the jumps in prices had little effect on the inflation outlook. However, with a more variable climate, we may see pronounced jumps in prices for food and other climatesensitive goods more frequently.

Extreme weather affects us all both directly and indirectly. Researchers at Norges Bank have examined the relationship between weather events in Norway and the income, wealth, property transactions and consumption of all households.[13] Two findings are of particular interest. In areas affected by extreme weather events, affected households' labour income and consumption decline compared with unaffected households. This is despite the fact that households in Norway are almost fully insured against the risk of damage caused by climate-related events. In addition, property prices then decline, likely because the area is perceived as more unsafe or because natural events that affect local jobs make the area less attractive.

If global warming continues, more Norwegian buildings will be in areas exposed to flooding, landslides and storm surges. Many of these buildings are mortgaged. Norges Bank has estimated the share of commercial real estate loans that may be exposed to storm surge risk in 2021 and 2090, respectively, and the share could more than double. Looking ahead, more bank exposures could be to buildings in risk zones. This applies in particular to banks with considerable exposure in Western Norway. Borrowers living in risk zones may have to pay higher interest rates.

## What does the transition and climate change mean for monetary policy?

Based on what I have said so far, what are the implications for variables that are important for monetary policy?[14]

First, the transition and climate change can affect consumer prices. A larger share of renewable energy in electricity production may lead to more variable electricity prices, while more frequent extreme weather events may give rise to higher volatility in other prices, particularly for food. Moreover, higher temperatures could drive up global food prices. Taxes and allowances affect relative prices but can also push up near-term inflation overall.

Second, the demand side of the economy will be affected. While the need for both higher investment to cut emissions and a larger supply of renewable energy will increase demand, lower petroleum investment will have a gradual dampening effect.

Finally, there are the effects on potential economic output. Both the phasing out of fossil-based productive capital and climate-related damage can dampen potential output. Moreover, potential output is determined by productivity growth, which depends on whether climate-related investment generates more economic productivity than other investment.

Norges Bank has been tasked by the authorities to keep inflation low and stable. The target is inflation of close to 2 percent over time. Monetary policy shall be forwardlooking and flexible so that it can contribute to high and stable output and employment. Monetary policy is also intended to counteract the build-up of financial imbalances.

Both climate change in itself and the transition to a low -carbon economy can impact inflation, output, employment and other variables that are important when we set the policy rate.

So, what does this mean for monetary policy?

Chart

: The Phillips curve - the economy's supply side

When we in Norges Bank address new issues, macroeconomic models are often used as a framework. Let us begin with a key relationship in our models, the socalled Phillips curve.

The Phillips curve describes a positive relationship between output and inflation. When output is high relative to potential economic output, demand for labour, goods and services pushes up wages and prices. Conversely, price and wage inflation will be low when output is low relative to potential output.

Let us first examine the consequences of a change in demand for goods and services. Higher investment to reduce emissions or increase the supply of renewable energy is an example of such changes.

## Chart : Demand shock

In the chart, the economy is assumed to be in an equilibrium, with inflation at target, π*, and output at potential - illustrated by point A. Firms meet higher demand by increasing output, and capacity utilisation increases, pushing up inflation. If we move up the Phillips curve, from A to B, a central bank whose aim is to keep inflation low and stable will respond by raising the policy rate. This helps cool the economy and thus provides room for the increased investment. The higher policy rate brings the economy back to the starting point.

In this case, there is little or no trade-off between stable inflation and high and stable employment.

Now let us see what can happen in the event of a transient supply shock. One example may be that crops are destroyed abroad, which pushes up imported goods prices.

Chart : Supply shock (step 1)

The Phillips curve now shifts up. Those demanding goods and services must pay more to purchase the same as before. For unchanged output, y*, inflation rises above the inflation target and moves from point A to point B in the chart.

The task of monetary policy is to curb inflation. The question is then by how much and at what cost.

## Chart : Supply shock (step 2)

In principle, the central bank can raise the policy rate to such an extent that inflation rapidly returns to target. The impact is transmitted through reduced demand. The cost is lower output and employment, illustrated by point C in the chart. In other words, the result is a short-term trade -off between keeping inflation stable and employment high and stable.

## Chart : Supply shock (step 3)

For a central bank that gives weight to both inflation and employment, the result in our chart, point C, is not a reasonable trade-off. The Bank can instead choose to raise the policy rate somewhat less, resulting in inflation somewhat above target for a period while output approaches potential. This is shown by point D.

## Chart : Supply shock (step 4)

As the subsequent harvest results in normal yields, imported inflation will move down again, and the Phillips curve shifts back to the starting point. The central bank can then reduce the policy rate, bringing us back to the starting point (A).

This example has much in common with the situation we have faced in Norway, following the import price shock in the wake of the pandemic. We could have brought inflation back to target by implementing larger rate hikes more rapidly, but by spending some time to bring inflation down, we have avoided a large increase in unemployment.

Looking ahead, we have to be prepared for climate-related events to be a more frequent source of supply and demand shocks. If there are larger and more frequent supply shocks, we will have to weigh the two monetary policy objectives against each other more often.

Some might ask whether it is obvious that the central bank should raise the policy rate at all if inflation rises due to a weather-related event.

We largely disregard short-term fluctuations in individual prices. We would normally only change the policy rate if we expect changes in individual prices to spill over to other prices and wages and lead to a broad-based change in consumer price inflation. For example, there was little reason to worry about persistent inflation on account of the sharp rise in cocoa prices earlier this year. If inflation rises, we must assess whether we expect the rise to be temporary or whether there is a risk of a more persistent rise.

Climate change may lead to more frequent individual climate events that push up prices. If the central bank chooses to look through each individual event, average inflation over time could exceed the target.[15] If firms and households begin to expect this and assume higher inflation when setting prices and wages, inflation may become entrenched. This may make it more costly to bring inflation down to target.

Climate-related events may therefore make it more difficult to ensure price stability ahead. By looking through temporary changes in inflation, we can avoid causing unnecessary variations in unemployment. But if we raise the policy rate too little when inflation increases, we run the risk of inflation expectations rising and confidence in the inflation target weakening.

## How will the neutral interest rate be affected?

So far, I have discussed how climate-related events may lead to shocks to both the supply and demand side of the economy that monetary policy must respond to. Climate change and the transition may also have consequences for the normal interest rate level in the long term or what we often refer to as the neutral rate.

The neutral interest rate cannot be observed and must therefore be estimated and could also change over time. After the financial crisis in 2008, global interest rates declined and eventually so did our estimate of the neutral interest rate. In the years preceding the pandemic, the neutral rate was very low. In recent years, we have again revised up our estimates and we now envisage that a normal policy rate level can lie in the interval between 2.25 percent and 3.5 percent somewhat further out.

How climate change and the transition will affect the normal interest rate is uncertain. The transition to a low-carbon economy requires substantial investment. This may pull in the direction of a higher neutral interest rate. On the other hand, the neutral interest rate may decline if uncertainty regarding the path of climate policy and the consequences of climate change curb the willingness to invest or lead to a stronger desire to save. Productivity growth also affects the neutral interest rate. If climate-related investment crowds out more productive investment in the near term, this will pull in the direction of a lower neutral interest rate. If the transition over time contributes to higher productivity growth, this may indicate a higher neutral rate.

As you well know, many questions remain unanswered,

## Should monetary policy take climate considerations into account?

The mandate for monetary policy is laid down by the political authorities. The current monetary policy regulation has remained unchanged since 2018. The Ministry of Finance announced earlier this year that the mandate will be reviewed. Thus, the

Ministry has requested that Norges Bank assess our experience of the current regulation and the lessons we and other central banks have learned from large supply-side shocks in recent years.

In a review of the mandate, it would be natural to discuss the tasks of monetary policy and the weight given to the various objectives. One question could be whether to include climate considerations in the monetary policy mandate.

Determining Norges Bank's mandate is the responsibility of the political authorities but allow me to emphasise some factors that I think should be included in that discussion.

A key consideration when formulating the monetary policy mandate is that the objectives must be consistent with what the Bank's instruments can influence.

Norges Bank's policy rate is not a targeted instrument for contributing to climate transition as it has a broad impact and affects virtually all parts of the economy. Targeting specific industries or investment projects is not possible.

The responsibility for reducing greenhouse gas emissions and the most effective instruments to do so are in the hands of the political authorities. The pricing of these emissions is important as it provides a clear signal about what we should do less and more of.

Norges Bank's monetary policy toolkit has the instruments needed to maintain inflation at close to 2 percent over time. The transition requires investments - many with uncertain earnings that lie far into the future. It is safer to make such investment in an environment of low and stable inflation.

Stable prices also make it easier to distinguish between changes in the prices of individual goods and a general rise in prices. For example, the signal from higher carbon taxes becomes easier to capture, pulling the transition in the right direction.

Conclusion

Chart

: The earth is heating up

Let me conclude. In 2025, ten years have passed since the signing of the Paris Agreement, when a target was set to limit global warming to 1.5°C above preindustrial levels. Significant rises in temperature in recent years are a serious warning. The less we manage to limit global warming, the more serious the consequences for weather, nature and people will be. There is considerable uncertainty regarding future temperature developments, which also leads to considerable uncertainty about the economic consequences of climate change and energy transition. In the conduct of monetary policy, we will in any case need to take into account that climate change may entail more frequent supply-side shocks in the economy ahead. Flexible inflation targeting makes us well equipped to meet such shocks.

## Footnotes

- [1] Norway's emissions target is set out in the Climate Change Act and reported to the UN as part of Norway's commitments under the Paris Agreement. This target will mainly be achieved through national measures and in collaboration with the EU.
- [2] See the Norwegian Environment Agency: Norske utslipp og opptak av klimagasser, for emission data. [Norwegian greenhouse gas emissions and absorption] (in Norwegian only).
- [3] Responses are from a special topic in the autumn 2025 Regional Network survey. The survey covers Norwegian firms, excluding oil and power companies.
- [4] Norwegian Offshore Directorate (2025) ""Resource report 2024""
- [5] According to the assessment in Official Norwegian Reports (NOU) 2023:30, there are positive prospects of resources freed up from the petroleum activities and the oil services industry finding use in other areas of the economy. See Official Norwegian Reports (NOU) 2023: 30 - at regjeringen.no [in Norwegian only]
- [6] The petroleum investment estimates are based on Statistics Norway's investment survey, investment forecasts from the Norwegian Offshore Directorate, information on investment plans provided by oil companies and oil and gas futures prices.
- [7] We assume here that the offshore wind projects at Sørlige Nordsjø II and Utsira Nord will be completed. There is considerable uncertainty surrounding these projects. For them to be completed, cost levels in the offshore wind industry will likely have to fall appreciably from current levels. The estimates for the other components are based on analyses from the Norwegian Water Resources and Energy Directorate, Statistics Norway's investment survey, Statnett's estimates for own investment and other information about investment plans in the power sector.

## [8] See Equinor

- [9] The Network for Greening the Financial System (NGFS), in which Norges Bank participates with other central banks and supervisory authorities, has prepared research -based scenarios. The scenarios show that an orderly and early transition will cause less economic damage than one that is delayed and abrupt. In a scenario

where the world reaches net zero emissions by 2050, losses in output are relatively small, while in a scenario where little is done to stop climate change, economic losses may be substantial. Link: NGFS Climate Scenarios for central banks and supervisors - Phase V | Network for Greening the Financial System

[10] See projections of food price inflation and overall inflation arising from a warmer global climate in Kotz, M. et al. (2024), 'Global warming and heat extremes to enhance inflationary pressures', Communications Earth &amp; Environment 5:116 , www.nature.com

[11] Natural events are defined as severe when direct damages amount to at least 5 percent of residents' labour income in the municipality.

[12] In the chart, the ""price of the good in Norway"" refers to the price component included in the CPI -ATE. The bars show the cumulative change in prices from when the event occurred until the rise in prices was at its most pronounced.

[13] Espegren, C., S. M. Galaasen, E. Garcia-Appendini and M. Mæhlum (2025) ""Weathering the Storm: The effects of Natural Disasters on Households under Universal Insurance"" Unpublished manuscript. Draft available via the following link: dropbox

[14] For a review of the macroeconomic and monetary policy effects of climate change and the transition to a low -carbon economy, see NGFS (2024) Climate change, the macroeconomy and monetary policy, NGFS Technical Document

[15] Beaudry, P., T.J. Carter and A. Lahiri (2023) The Central Bank's Dilemma: Look Through Supply Shocks or Control Inflation Expectations? | NBER",Ida Wolden Bache
https://www.bis.org/review/r251007m.htm,Isabel Schnabel: Resisting deregulation - safeguarding bank resilience in an evolving financial landscape,"Speech by Ms Isabel Schnabel, Member of the Executive Board of the European Central Bank, at the farewell symposium for De Nederlandsche Bank President Klaas Knot ""Europe in the world - challenges and opportunities"", Amsterdam, 3 October 2025.",2025-10-03 00:00:00,"SPEECH

## Resisting deregulation: safeguarding bank resilience in an evolving financial landscape

## Speech by Isabel Schnabel, Member of the Executive Board of the ECB, at the farewell symposium in honour of Klaas Knot

Amsterdam, 3 October 2025

Geopolitical tensions, soaring asset valuations and financial innovation have put the topic of financial stability back on the agenda. But today, people are talking about hedge funds, bond market functioning, private credit, valuations of Al companies and stablecoins. They rarely mention banks.

There is a good reason for this. As Klaas Knot explained at the latest ECB Annual Research Conference, in recent periods of financial stress banks have acted as shock absorbers rather than shock amplifiers. And this has been largely due to the comprehensive banking regulation introduced after the global financial crisis (GFC) of 2008.

Today, however, these regulations are increasingly being questioned in an environment of growing nationalism and economic fragmentation, impeding international collaboration. In Europe, too, calls for the deregulation of banks are becoming louder.

In my remarks today, | will argue that it is essential to preserve the resilience banks have built up following the post-crisis reforms. While the financial system has evolved and the sources of financial instability have shifted, banks continue to play a central role in the euro area, both for financing the real economy and for monetary policy transmission.

Governments should therefore resist joining a ""race to the bottom"" when it comes to financial regulation. They should rather focus on increasing the efficiency of current regulation, while making the broader financial system more resilient and strengthening European integration and sovereignty.)

## Deep and lasting scars left by the global financial crisis

The global financial crisis of 2008 was one of the most painful and costly episodes in recent economic history. It exposed the fragility of banks that were under-capitalised and under-regulated, plunging economies into deep recession. Public bank bailouts and a persistent rise in unemployment contributed to an erosion of trust in institutions and helped plant the seeds of political polarisation.

In the wake of the crisis, public debt-to-GDP ratios surged sharply, increasing by 20 to 60 percentage points across euro area economies within a few years. This culminated in the European sovereign debt crisis a few years later (Slide 2, left-hand chart).

The need to repair the balance sheets of governments, firms and households resulted in a prolonged period of economic weakness. Hysteresis effects caused long-term damage to potential economic growth through reduced investment and lower productivity. 21 Almost two decades later, the euro area is still growing significantly below the pre-GFC trend (Slide 2, right-hand chart).

In response to this traumatising experience, the international community agreed on a comprehensive package of banking sector reforms. These included the introduction of Basel Ill, the establishment of macroprudential policies and the strengthening of resolution regimes. Creating the European banking union was an important part of this drive to make the banking system more resilient.

Overall, these reforms have proven a success. 3] Today, the capital ratios of euro area banks are more than double their pre-crisis levels, and liquidity coverage ratios are well above the minimum requirements, in spite of the gradual withdrawal of excess liquidity by the ECB (Slide 3).

## Effective reforms helped banks withstand stress

Higher capital and liquidity buffers have supported bank lending to firms and households even in periods of crisis and heightened uncertainty, considerably alleviating the economic and social damage of the shocks that hit the euro area economy in recent years.

The first was the COVID-19 pandemic of 2020, which led to the largest drop in output since the Second World War. Financial markets faced acute stress as investors fled to quality in a ""dash for cash"" and non-bank financial intermediaries (NBFls) were forced to shed assets through fire sales.

One of the main reasons a systemic crisis was averted was the soundness of banks' balance sheets, which also made large-scale monetary and fiscal interventions more effective.4] Banks became an anchor of stability, extending credit to liquidity-strained firms.

Together, these factors prevented a credit crunch, which would have further exacerbated the macroeconomic fallout.

The second example of financial stress occurred just a few years later, when inflation surged to levels not seen in decades and central banks around the world embarked on an unprecedented tightening cycle. Many market participants were caught off guard when central banks globally reversed course in 2022.

Banks were hit by the sudden materialisation of interest rate risk, with their assets losing value as interest rates rose. Bank runs at Silicon Valley Bank and other medium-sized banks in the United States in the spring of 2023 showed that a sudden and unexpected turnaround in interest rates after a long period of low interest rates can have detrimental implications for banks.

Yet euro area banks managed to deal with the rise in interest rates thanks to strong fundamentals. They benefited from diversified funding, hedging of interest rate risk and manageable maturity mismatches, as supervisors had insisted on balanced asset-liability management. This helped avoid distress in the banking sector.

Overall, euro area banks have weathered these two crises remarkably well, confirming that the postGFC banking sector reforms — while not perfect — have delivered on their promise: to protect taxpayers by avoiding another costly systemic crisis.

## Banks face new financial risks

While banks are safer today, the financial system has developed further and undergone some fundamental structural changes, giving rise to new financial risks. In a rapidly evolving environment, regulation must adapt.

## The rise of non-banks

The most visible change has been the structural shift in the financial sector from banks to NBFIs. While in 1999 banks' financial assets exceeded those of non-banks by around 70%, NBFls have by now outpaced banks in terms of total assets (Slide 4, left-hand chart).

As a result, the share of non-banks in total credit granted has risen sharply from 12% to 30% (Slide 4, right-hand chart). This suggests that credit activity has migrated to where regulation is less strict.

At the same time, banks and non-banks are intricately intertwined through lending, funding, securities holdings and risk transfer arrangements, as they have endogenously adapted to the regulatory environment.

In the euro area, significant linkages between banks and non-banks exist on both the assets and the liabilities side (Slide 5, left-hand chart). Today, 14% of the largest banks' assets and 22% of their liabilities reflect business with NBFls, some of which are connected to banks through ownership linkages.

The largest part of bank funding from NBFls consists of uninsured deposits, which are particularly vulnerable to changes in market conditions. Moreover, such links are highly concentrated in a small group of systemically important banks, with 20% of banks accounting for around 90% of total loan and securities exposures and 95% of funding exposures (Slide 5, right-hand chart).

This implies that risks from liquidity mismatches or financial leverage in euro area investment funds may easily spill over into the banking sector (Slide 6, left-hand chart). Such spillovers can be further amplified by common exposures in the event of fire sales. Hedge funds, bond funds and pension funds in particular have significant derivative exposures, which may give rise to margin calls and forced selling at times of market volatility (Slide 6, right-hand chart).{2]

Hedge funds have also gained importance in European sovereign bond markets, where they account for a significant share of electronic trading volumes (Slide 7, left-hand chart). There is a risk that market volatility could be amplified significantly if highly leveraged hedge funds unwind their positions quickly, which could adversely affect banks via repo markets, even if the direct exposures remain small (Slide 7, right-hand chart).

Overall, the shift towards less regulated NBFIs has not made the financial system safer. In fact, it has created new channels of contagion across sectors, with the strongest effect on systemically important banks.

This leaves the financial system fragile and requires a holistic and systemic approach to regulating both banks and non-banks, one which takes interconnections across sectors into account. In particular, this means that a macroprudential framework is needed for the NBFI sector, too. This was one of the key areas of reform promoted by the Financial Stability Board under Klaas Knot's chairmanship.4

## The new kid on the block: stablecoins

Amore recent and similarly important trend has been the wave of digital innovation currently reshaping the financial system, bringing with it both new opportunities and risks."" The most important, albeit still nascent, development is the advent of stablecoins, which have created new interconnections between banks, crypto markets and traditional asset markets.2]

Stablecoins' original appeal lies in the access they provide to crypto markets, while also offering a cheap and fast way of sending money across borders, bypassing the traditional correspondent banking system.)

If they were more widely adopted, the implications for the financial system and its stability would be significant, as has also been stressed by the Financial Stability Board 14]

Since stablecoins combine money-like demandable liabilities with reserve assets that could turn illiquid during crises, they are subject to the risk of runs. The largest US stablecoin is already approaching a size comparable to the largest US money market funds (Slide 8, left-hand chart).{45)

In the event of such runs, spillovers to the rest of the financial system, especially to banks, are likely. There are both direct and indirect linkages.

Most importantly, stablecoins affect the funding structure of banks. If depositors shift into stablecoins backed by bank deposits, stable retail deposits are replaced by more concentrated and potentially more volatile wholesale deposits, increasing the risk of sudden outflows.

Since the EU's Markets in Crypto-Assets Regulation (MiCAR) entered into force in 2023, large deposits from crypto exchanges and stablecoin issuers with euro area banks have risen notably, from less than €1 billion in 2024 to more than €6 billion by mid-2025 (Slide 8, right-hand chart). While this is still small relative to the exposed banks' total assets, it may reach systemically relevant levels if the rapid growth of stablecoins continues.""4

Indirect linkages would emerge if a run on stablecoins led to fire sales of reserve assets. Stablecoin issuers today hold US Treasury securities in amounts comparable to those held by entire countries, such as Norway or Germany (Slide 9, left-hand chart). Already today, their short-term US debt holdings account for roughly 3% of the market, exerting an impact on yields.""18)

Such sizeable holdings mean that, in times of stress, stablecoins could amplify financial instability. Forced redemptions would trigger rapid sales of Treasury securities, leading to a sudden deterioration in market liquidity, pushing up short-term rates and impairing banks' access to funding.

In spite of their apparent similarity, stablecoins and money market funds react quite differently to shocks, as shown by recent ECB research."" For example, when US policy tightens, prime money market funds typically attract inflows, whereas stablecoin market capitalisation shrinks significantly (Slide 9, right-hand chart).

Summing up, just as for NBFls, given the various interconnections, financial stability risks from stablecoins are likely to spill over to the traditional banking sector in the event of a crisis.

## No time for bank deregulation

The message for governments and financial regulators is clear: now is not the time for deregulation. Not only are the potential costs of deregulation large, but the benefits are doubtful too. In particular, there is no evidence for the claim that regulation has made European banks less competitive. On the contrary, ECB research shows that higher capitalisation improves banks' profit efficiency.29] All else being equal, a bank with a CET1 ratio of 18.5% — corresponding to the 75th percentile of the distribution — is about 2 percentage points more efficient than a bank with a CET1 ratio of 13.5% — corresponding to the 25th percentile (Slide 10, left-hand chart).!24)

These findings contradict the claim that higher capital requirements make European banks less competitive. Rather, better capitalisation makes the banking sector more resilient and leaves banks better able to fund the real economy.

In addition, high capital requirements are no impediment to bank profitability.!22] Helped by rising interest rates, euro area banks have been able to increase their profitability, narrowing the gap in price-to-book ratios relative to their US peers (Slide 10, right-hand chart).

## Making regulation more efficient

Protecting the benefits of banking stability does not mean that regulation cannot be improved. Years of building safeguards have led to duplications, overlaps and inefficiencies. In addition, the way existing regulation by means of directives is transposed into national law often differs from country to country, creating an uneven playing field for banks across the euro area. This can be exacerbated by member states' ""goldplating"".22]

Efficient regulation and supervision imply that the ultimate goal — a stable and resilient banking sector — can be achieved at minimal cost. As we speak, ECB Banking Supervision is actively working to streamline its supervisory processes in its ""next-level supervision"" project. At the heart of this is a comprehensive reform of the Supervisory Review and Evaluation Process (SREP).4]

Regulation offers similar room for increasing efficiency. For example, there could be space to increase proportionality for less complex institutions without making them less safe,25]

But such efforts often come with trade-offs. For example, one of the most complex features of today's banking regulation is the use of internal models to determine regulatory requirements, which was introduced at the request of the banking sector. Complexity could be reduced significantly by choosing less granular, but potentially more robust methods, like the standardised approach. However, this is likely to lead to higher, not lower overall capital requirements.

Bank reporting is another key area in which efficiency can be improved.

Banks' reporting frameworks for statistical, prudential and resolution data remain fragmented, and financial institutions must comply with a patchwork of requirements across countries and authorities.

The ECB's initiative to establish an Integrated Reporting Framework (lReF) and the wider integration project under the Joint Bank Reporting Committee are important steps towards harmonising reporting requirements across Europe.24

By moving towards greater integration and automation, the reporting burdens on banks can be alleviated significantly, while fulfilling the authorities' data needs and improving data quality for decision-making.

## Fostering integration through the savings and investments union

Another important way to improve efficiency is through greater financial integration, in particular by completing the banking union. The European banking market remains fragmented (Slide 11, left-hand chart). This is due to differences in rules across countries, the lack of a European deposit insurance scheme, political opposition to cross-border bank mergers and gaps in the resolution framework, especially owing to the still missing public backstop and the absence of a credible framework for liquidity in resolution.

As a complement to the banking union, an integrated capital market can further improve the funding of the economy, promote innovation and growth and encourage risk sharing across the union, indirectly also benefiting the banking sector.

While some progress has been made in financial integration, particularly when compared with the lull after the European sovereign debt crisis, there is still significant scope for fully exploiting the benefits of an integrated European financial system (Slide 11, right-hand chart).

## Enhancing European sovereignty by embracing innovation

Lastly, the new geopolitical landscape calls for greater European sovereignty. One key project in this area is the introduction of a digital euro.24 Given the safeguards envisaged, this project should be welcomed by banks as it will help them to retain a central role in the European payment infrastructure. Another strategic project is the exploration of the potential use of distributed ledger technology or tokenisation for settling wholesale transactions in central bank money. 28]

By embracing innovation, we can also strengthen the international role of the euro as a reserve, funding and invoicing currency, thereby fostering economic and financial stability, with benefits for the European banking sector.

## Conclusion

Let me conclude.

Recent years have taught us an important lesson that is all too easily forgotten: when regulations work, no one notices. But if they fail, the consequences are immediate, far-reaching and devastating. Even today, we are still suffering from the economic fallout of the 2008 global financial crisis.

Thanks to the reforms put in place over the past 15 years, euro area banks have become safer. A sound banking system was at the heart of the euro area economy's resilience during recent crises.

Preserving this stability will help ensure that banks can continue to serve the economy even when faced with geopolitical fragmentation, technological revolution and climate change.

Rather than softening bank regulation, we should make sure that those areas of the financial system that pose new risks to the economy and banks, such as non-banks or stablecoins, are regulated appropriately without stifling innovation.

A global push towards deregulation does not challenge this view, as the benefits from long-term financial stability undoubtedly outweigh the short-term gains from deregulation.

Therefore, with European banks being strong and profitable, governments would be ill-advised to weaken bank resilience. Instead, we need more efficient regulation, deeper European integration and greater sovereignty, all of which serve the same goal: a strong European economy. And a strong economy means stronger banks that are better able to fulfil their core role — serving the real economy. Thank you.

## Annexes

3 October 2025

## Slides

1.

In her keynote at today's event, Christine Lagarde highlights the importance of financial regulation and supervision in supporting monetary policy to achieve price stability. See Lagarde, C. (2025), ""Monetary policy and financial stability: past lessons for future resilience"", speech at the farewell symposium for DNB President Klaas Knot, Amsterdam, October.

2.

See Dovern, J. and Zuber, C. (2020), ""How economic crises damage potential output — Evidence from the Great Recession"", Journal of Macroeconomics, vol. 65(C).

3.

See BIS (2022), Report on the evaluation of the impact and efficacy of the Basel III December.

reforms,

4.

See Schnabel, |. (2021), ""The sovereign-bank-corporate nexus — virtuous or vicious?"", speech at the LSE conference on Financial Cycles, Risk, Macroeconomic Causes and Consequences, Frankfurt am Main, January.

5.

See ECB (2023), Financial Stability Review, May.

6.

See Acharya, Viral V., Cetorelli, N. and Tuckman, B. (2024), ""Where Do Banks End and NBFIs Begin?"", NBER Working Paper No 32316.

7. the

See ECB (2023), Financial Stability Review, special feature on key linkages between banks and non-bank financial sector, May.

8.

See ESRB (2025), EU Non-bank Financial Intermediation Risk Monitor 2025, No 10, September.

9.

While these interconnections can be destabilising, the opposite may also be true. For example, when euro area mutual funds faced significant outflows in March 2020 at the time of the COVID-19 pandemic, banks with access to the ECB's lender of last resort facilities provided non-banks with liquidity, thereby stabilising the financial system. See Breckenfelder, J. and Hoerova, M. (2023), ""Do non-banks need access to the lender of last resort? Evidence from fund runs"", ECB Working Paper Series, No 2805, May.

10.

See FSB (2024), ""Enhancing the Resilience of Non-Bank Financial Intermediation"", July.

11.

See BIS (2025), Annual report, June.

12.

Stablecoins are designed to maintain a constant value, typically one dollar or one euro, by offering par convertibility on demand. To this end, issuers hold reserves mainly in fiat-denominated short-term assets, such as US Treasuries, high-quality commercial paper, repurchase agreements or bank deposits.

13.

See Schaaf, J. (2025), ""From hype to hazard: what stablecoins mean for Europe"", The ECB Blog, July.

14.

See FSB (2023), ""High-level Recommendations for the Regulation, Supervision and Oversight of Global Stablecoin Arrangements"", July.

15.

See Kosse, A., Glowka, M., Mattei, |. and Rice, T. (2023), ""Will the real stablecoin please stand up?"", BIS Papers, No 141.

16.

In part, this reflects the need to comply with reserve requirements, 30% of which need to be deposits with banks, with the share rising to 60% for systemic stablecoins.

According to the most optimistic private sector estimates, the US dollar stablecoin market may grow as high as USD 4 trillion. So far, the volume of stablecoins in other currencies is negligible. See MEXC Exchange news item (2025), No Longer $3 Trillion: Citi Increases 2030 Stablecoin Market Cap Prediction, September.

18.

See Ahmed, R. and Aldasoro, |. (2025) ""Stablecoins and safe asset prices"", BJS Working Paper, No 1270.

19.

See Aldasoro, |., Cornelli, G., Ferrari Minesso, M., Gambacorta, L. and Habib, M. (2025), ""Stablecoins, money market funds and monetary policy"", Economics Letters, Elsevier, vol. 247(C).

20.

The relationship between capital requirements and profit efficiency is non-linear, suggesting that capital ratios improve profit efficiency only up to a point. However, that point is higher than the median level of the CET1 ratio of SSM-supervised banks.

21.

For further details, see Behn, M. and Reghezza, A. (2025), ""Capital requirements: a pillar or a burden for bank competitiveness?"", ECB Occasional Paper Series, forthcoming.

22.

See Jones, L., Alsakka, R., ap Gwilym, O. and Mantovan, N. (2022). ""The impact of regulatory reforms on European bank behaviour: A dynamic structural estimation"", European Economic Review, vol. 150(C).

23.

Elderson, F. (2025), ""Resilience offers a competitive advantage, especially in uncertain times"", speech at the Morgan Stanley European Financials Conference, London, March.

24.

Buch, C. (2025), ""Simplification without deregulation: European supervision, regulation and reporting in a changing environment', speech at the Goldman Sachs European Financials Conference, Berlin, June.

25.

See Donnery, S. (2025), ""Making banking simple: one market, one rulebook"", speech at the Handelsblatt Jahrestagung Bankenaufsicht, April.

26.

See ECB (2024), ""The Eurosystem Integrated Reporting Framework — an overview"", December.

27.

See Cipollone, P. (2024), “Monetary sovereignty in the digital age: the case for a digital euro”, speech at the Economics of Payments XIII Conference organised by the Oesterreichische Nationalbank, September, and Lane, P. (2025), “The digital euro: maintaining the autonomy of the monetary system”, speech at the University College Cork Economics Society Conference, March. 28.

See ECB (2025), “Bridging innovation and stability: the Eurosystem’s exploratory work on new technologies for wholesale central bank money settlement’, July.

Copyright 2025, European Central Bank",Isabel Schnabel
https://www.bis.org/review/r251007l.htm,Philip R Lane: The conduct of monetary policy,"Keynote speech by Mr Philip R Lane, Member of the Executive Board of the European Central Bank, at the European Central Bank Conference on Monetary Policy 2025 ""Bridging science and practice"", Frankfurt am Main, 6 October 2025.",2025-10-06 00:00:00,"SPEECH

## The conduct of monetary policy

Keynote speech by Philip R. Lane, Member of the Executive Board of the ECB, at the ECB Conference on Monetary Policy 2025: bridging science and practice

Frankfurt am Main, 6 October 2025

My aim today is to explain the conduct of monetary policy in the euro area. | will first outline the approach to monetary policy that is embedded in our monetary policy strategy statement. Next, | will review the current inflation outlook. Finally, | will outline the considerations most relevant for our nearterm policy decisions.

## The monetary policy strategy of the ECB

Our recently-updated monetary policy strategy statement provides a comprehensive strategic framework for many dimensions of monetary policy.!2] Here, | will focus on the elements that are most directly relevant for monetary policy decision making.

Paragraph five of our monetary policy strategy statement states:

The Governing Council considers that price stability is best maintained by aiming for two per cent inflation over the medium term. The Governing Council's commitment to this target is symmetric. Symmetry means that the Governing Council considers negative and positive deviations from this target as equally undesirable. The two per cent inflation target provides a clear anchor for inflation expectations, which is essential for maintaining price stability.

The point target of 2.0 per cent provides valuable clarity; the symmetric commitment reinforces this clarity by treating positive and negative deviations as equally undesirable. Such clarity would not be provided by a zonal inflation target, which would require households, firms and market participants to continuously re-assess which part of the zone constituted the de facto current operational target for monetary policy.

Of course, a clear target does not mean that the ECB seeks to deliver inflation at two per cent at all times. In particular, paragraph seven explains:

The Governing Council confirms the medium-term orientation of its monetary policy strategy. This allows for inevitable short-term deviations of inflation from the target, as well as lags and uncertainty in the transmission of monetary policy to the economy and to inflation. The flexibility of the medium-term orientation takes into account that the appropriate monetary policy response to a deviation of inflation from the target is context-specific and depends on the origin, magnitude and persistence of the deviation. Subject to maintaining anchored inflation expectations, it also allows the Governing Council in its monetary policy decisions to cater for other considerations relevant to the pursuit of price stability.

In terms of origin, different types of shock may move inflation and real economic activity in the same direction (as in the case of demand shocks) or create a temporary trade-off (as in the case of supply shocks): the medium-term orientation provides flexibility to look through temporary shocks to inflation that may dissipate on their own accord, thus avoiding unnecessary volatility in activity and employment.) In terms of magnitude and persistence, a small, transitory shock clearly poses less risk to the medium-term anchor than a larger, more persistent shock. In any event, the lags in the transmission of monetary policy mean that it would not be practical to respond to inflation shocks that are expected to dissipate quickly.

In turn, paragraph eight ties the setting of monetary policy to delivering the two per cent target over the medium-term:

The Governing Council is committed to setting monetary policy to ensure that inflation stabilises at the two per cent target in the medium term.

That is, the ECB follows an inflation targeting regime, but with substantial flexibility provided by the medium-term orientation. This means that monetary policy decisions are firmly grounded by the commitment to stabilise inflation at two per cent over the medium term, with due regard for the value of flexibility under the circumstances that prevail at any given point in time.

Paragraph nine elaborates on the inputs into these monetary policy decisions:

The Governing Council bases its monetary policy decisions, including the evaluation of the proportionality of its decisions and potential side effects, on an integrated assessment of all relevant factors. In particular, it takes into account not only the most likely path for inflation and the economy but also surrounding risks and uncertainty, including through the appropriate use of scenario and sensitivity analyses.

The second sentence in paragraph nine is new and is an important articulation that monetary policy decisions are made under uncertainty, such that it is essential to take a wide-angled perspective that incorporates not only the baseline path but also the surrounding risks and uncertainty. This sentence also reflects the reality that much of the policy debate is about risk management, especially under current conditions of elevated uncertainty.

Indeed, an important conclusion of the 2025 update of our monetary policy strategy is that an array of structural changes is likely to make uncertainty a defining characteristic of inflation environment for the rest of this decade. In particular, paragraph one states:

Ongoing structural shifts related to geopolitics, digitalisation, artificial intelligence, demography, the threat to environmental sustainability and changes in the international financial system suggest that the inflation environment will remain uncertain and potentially more volatile, with larger target deviations in both directions, posing challenges for the conduct of monetary policy.

Finally, paragraph six highlights that the biggest threat to the medium-term inflation target comes from large, sustained deviations from the target. In particular, paragraph six states:

To maintain the symmetry of its inflation target, the Governing Council recognises the importance of appropriately forceful or persistent monetary policy action in response to large, sustained deviations of inflation from the target in either direction, to avoid deviations becoming entrenched through de- anchored inflation expectations. In the event of significant disinflationary shocks, the effective lower bound on nominal interest rates needs to be taken into account. In the event of significant inflationary shocks, possible non-linearities in price and wage setting need to be taken into account.

Taken together, these elements of the monetary policy strategy statement provide essential foundations for the conduct of monetary policy. Still, at any given point in time, these strategic principles have to be converted into an operational approach to making monetary policy decisions.

In particular, there is a clear difference between ""standard"" phases in which there may be inflation shocks but not to the degree that would constitute ""large, sustained deviations of inflation from the target"" and ""acute"" phases in which the central bank must act with appropriate force or persistence to avoid deviations becoming entrenched through de-anchored inflation expectations. If a deviation of inflation from the target is in the intermediate range that is neither ""small and transitory"" nor ""large and sustained"", the appropriate monetary policy response will be nonzero but will also necessarily be more restrained than the scale that constitutes ""appropriately forceful or persistent"".

In this range, the optimal calibration of monetary policy is a question of cyclical adjustment within a more narrow interval for the policy rate. By and large, the monetary policy literature has primarily focused on such cyclical adjustments, with many models examining the optimal monetary policy response to relatively ""small"" shocks that can be captured by linearised treatments of the dynamic adjustment of the economy and inflation.

In contrast, the frequency of ""large, sustained"" deviations of inflation from the target is relatively rare. Indeed, in the absence of an extraordinary constellation of shocks (such as the combination of the pandemic and Russia's unjustified invasion of Ukraine), a large and sustained deviation of inflation from the target would most likely result from a persistent failure in the conduct of monetary policy, with an insufficient response to cyclical shocks fostering an incremental, cumulative drift away from the target that de-anchored inflation expectations through a lack of policy responsiveness to material inflation shocks. 41

In what follows, | turn to analysing the current inflation outlook before outlining some considerations for the conduct of monetary policy in the near term.

## The baseline inflation outlook

In this section, | discuss some features of the baseline in the September 2025 staff macroeconomic projections. | turn to the surrounding risks in the final section.

As a preliminary caveat, the baseline is conditioned on the prevailing economic and financial data at the time the projections are constructed, including the expected path for short-term policy rates that is embedded in the market curve. Since the projection exercises are comprehensive in scope, it is only of limited value to attempt ""real-time updates"" in between projection exercises that are based on the mechanical impact of shifts in individual variables, since a shift in any given variable may reflect a broader underlying dynamic process that jointly affects many variables. For this reason, | focus on the September projections rather than attempting to comment on the subsequent data flows.

Under the baseline, inflation is projected to average 2.1 per cent in 2025, 1.7 per cent in 2026 and 1.9 per cent in 2027. Compared to the 2021-2024 inflation rates of 2.6 per cent, 8.4 per cent, 5.4 per cent and 2.4 per cent respectively, the current inflation outlook is much more benign. At the same time, the projected downward deviations from the 2.0 per cent medium-term target warrant close examination.

It is analytically helpful to differentiate between energy inflation and non-energy inflation (the aggregate of food, goods and services inflation). Under the baseline, non-energy inflation is projected to stand at 2.5 per cent in 2025, 2.0 per cent in 2026 and 1.9 per cent in 2027 (see Chart 1). Relative to the 2021-2024 non-energy inflation rates of 1.5 per cent, 5.1 per cent, 6.3 per cent and 2.9 per cent, we can interpret the baseline as indicating that further non-energy disinflation will take place in the coming quarters before stabilising at around two per cent.

Within the non-energy category, Chart 2 shows that further disinflation is projected both for the food and services categories. Food inflation is projected at 2.9 per cent in 2025, 2.3 per cent in 2026 and 2.3 percent in 2027; services inflation is projected at 3.4 per cent in 2025, 2.7 per cent in 2026 and 2.3 per cent in 2027. The inflation rate for non-energy industrial goods (the NEIG category) is relatively flat at 0.6 per cent in 2025, 0.4 per cent in 2026 and 0.8 per cent in 2027.

The projected further ongoing disinflation in non-energy inflation can primarily be connected to the anticipated further deceleration in wage growth: growth in compensation per employee is expected to decelerate from 3.4 per cent in 2025 to 2.7 per cent in 2026 and 2027. This profile of wage growth deceleration is cross-validated by the ECB wage tracker and an array of survey evidence. In turn, wage deceleration reflects the recovery in real wage levels after several years of above-average nominal wage increases and the softening in labour market conditions.

Ongoing disinflation also reflects euro appreciation, the spillover from energy deflation, and the deflationary impact of lower export prices from China. Furthermore, the 2024-2025 inflation rates were also pushed up as governments reversed the array of fiscal subsidies that were introduced to mitigate the surge in the cost of living in 2022-2023; these effects wash out of the inflation data in 2026. The lagged impact of our past phase of a restrictive monetary policy stance contributed to disinflation by moderating domestic demand, which put downward pressure on both wage growth and profit growth.

In combination, these forces are projected to level out in 2026-2027, such that non-energy inflation is projected to stabilise at around two per cent. The switch from a disinflation dynamic to a projected stable inflation rate around the target has been supported by the 200 basis points in rate reductions since June 2024 and, of course, is conditional on delivering a target-consistent monetary policy stance over the projection horizon.

The baseline for energy inflation presents quite a different profile. Energy inflation is projected at -1.6 per cent in 2025, -1.1 per cent in 2026 and 2.4 per cent in 2027. The projected 3.5 per centage point jump in energy inflation in 2027 is in part related to the impact of the scheduled introduction of the EU Emissions Trading System 2 (ETS2) in 2027, which should have a one-off impact on the energy price level.

This profile for energy inflation should be understood in the context of the extraordinary surge in energy inflation during 2021-2022 (Chart 3). Having initially declined during the first year of the pandemic to -6.8 per cent in 2020, energy inflation rose to 13.0 per cent in 2021 and 37.0 per cent in 2022. Subsequently, there has been a mild deflation pattern, with energy inflation at -2.0 per cent in 2023 and -2.2 per cent in 2024. Accordingly, we can interpret the energy inflation projections for 2025

and 2026 as reflecting ongoing-albeit-weaker energy deflation in the aftermath of the extraordinary surge in the relative price of energy during 2021-2022.

An important open question is whether the projected jump in energy inflation in 2027 reflects the end of this energy deflation episode or is rather just a one-time deviation from an ongoing correction process by which the relative price of energy re-attaches to its trend line after the extraordinary 20212022 surge. In turn, the level and direction of energy inflation has spillover implications for food, goods and services inflation rates: a material departure from the baseline energy inflation path would also trigger a material departure from the baseline non-energy inflation path.

| will return to the discussion of energy inflation in the context of the risk assessment in the next section.

Chart 1 Non-energy inflation and September 2025

projections



Sources: Eurostat, September 2025 ECB staff macroeconomic projections and ECB calculations.

Notes: The latest observations are for the third quarter of 2025 (flash estimate).

Chart 2 Components of non-energy inflation and September 2025

## projections



Sources: Eurostat, September 2025 ECB staff macroeconomic projections and ECB calculations.

Notes: The latest observations are for the third quarter of 2025 (flash estimate).

## Chart 3

Energy inflation and September 2025 projections



Sources: Eurostat, September 2025 ECB staff macroeconomic projections and ECB calculations.

Notes: The latest observations are for the third quarter of 2025 (flash estimate).

The near-term conduct of monetary policy

Striking the balance between the baseline assessment and the risk assessment in determining the monetary policy decision at any given meeting is not straightforward and the guidance from the research literature on the setting of monetary policy under uncertainty is highly nuanced, with no universal results. In particular, it is highly context-specific as to: (i) whether the risk assessment should call for a ""wait and see"" approach or, alternatively, trigger an immediate response due to insurancetype risk management considerations; and (ii) whether a rate move should be attenuated or amplified by risk considerations.

In the coming weeks and months, it makes sense to follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance, with no-precommitment to a particular rate path. In particular, our interest rate decisions will be based on our assessment of the inflation outlook and the risks surrounding it, in light of the incoming economic and financial data, as well as the dynamics of underlying inflation and the strength of monetary policy transmission. In addition to the evolution of the baseline inflation outlook, shifts in the risk distribution will also matter for our rate decisions: an increase in the likelihood or intensity of downside risk factors would strengthen the case that a slightly-lower policy rate might better protect the medium-term inflation target; alternatively, an increase in the likelihood or intensity of upside risk factors would indicate that maintaining the current policy rate would be appropriate in the near term.4

The downside risks highlighted in our September 2025 inflation risk assessment include: a stronger euro; the risk that higher tariffs could lead to lower demand for euro area exports and induce countries with overcapacity to further increase their exports to the euro area; the risk that trade tensions lead to greater volatility and risk aversion in financial markets, which would weigh on domestic demand and would thereby also lower inflation.

By contrast, inflation could turn out to be higher under some upside scenarios: a fragmentation of global supply chains could push up import prices and add to capacity constraints in the domestic economy; a boost in defence and infrastructure spending could also raise inflation over the medium term; extreme weather events, and the unfolding climate crisis more broadly, could drive up food prices by more than expected.

More broadly, we also assess the risks to economic growth, in view of the relation between economic slack and medium-term inflation pressures and, especially if inflation is close to target and subject to maintaining anchored inflation expectations, the consideration that the flexibility of our medium-term orientation also allows us in our monetary policy decisions to cater for other considerations relevant to the pursuit of price stability.

In September, we assessed that risks to economic growth have become more balanced, especially relative to the downside risks of more severe configurations of policy-induced trade and financial fragmentation that were much debated in the April-May period. While recent trade agreements have reduced uncertainty somewhat, the overall impact of the change in the global policy environment will only become clear over time. Moreover, a renewed worsening of trade relations could further dampen exports and drag down investment and consumption. A deterioration in financial market sentiment could lead to tighter financing conditions, greater risk aversion and weaker growth. Geopolitical tensions, such as Russia's unjustified war against Ukraine and the tragic conflict in the Middle East, remain a major source of uncertainty.

By contrast, higher than expected defence and infrastructure spending, together with productivityenhancing reforms, would add to growth. An improvement in business confidence could stimulate private investment. Sentiment could also be lifted and activity spurred if geopolitical tensions diminished, or if the remaining trade disputes were resolved faster than expected.

In thinking about these risk factors, two important considerations are the impact on energy prices and the impact on the euro. In relation to the former, the above analysis of recent energy inflation serves to underline the high amplitude of energy prices and the possible spillovers from energy inflation to food inflation, goods inflation and services inflation. At the same time, it is clear that the sensitivity of overall inflation to energy inflation is state dependent and will be lower under subdued demand conditions than if demand were buoyant. In the current context, a further open question is the extent to which the substantial increase in the relative price of energy during 2021-2022 will bear down on energy inflation in the coming years due to the ""error correction"" mechanism by which deviations from the long-term trend relative price are reversed over time.4

Similarly, in relation to the exchange rate, a persistent movement in the euro on average has a multiyear impact on economic activity and inflation. However, these effects will be larger than the average if euro appreciation is more due to external factors (such as weakness in main trading partners or portfolio rebalancing due to an increase in the risk premium in overseas financial markets) and smaller than the average if more due to domestic factors (such as a surge in domestic demand or a decline in the domestic risk premium). In particular, the pricing power of domestic firms will be lower in the former case (such that euro appreciation induces firms to cut prices in an attempt to protect market share) than in the latter case (such that euro appreciation might be taken as an opportunity to boost profits).

In addition to the inflation outlook and the risk assessment, monetary policy decisions also turn on the strength of the transmission mechanism and, more broadly, overall financial conditions. In this context, ongoing assessments of the strength of monetary transmission remains of central importance, especially in view of shifts in the structure of the financial system and the complex relation between aggregate credit dynamics and aggregate demand conditions.&amp;

The incoming data flow will help us assess the relative likelihoods, timing and impact of these alternative risks, in addition to providing guidance on possible future revisions to the staff baseline projections. In addition to the financial and macroeconomic data, we will also learn from the latest editions of an array of internal and external surveys. In relation to our internal surveys, these include: the Corporate Telephone Survey (CTS); the Bank Lending Survey (BLS); the Survey on Access to Finance (SAFE); the Consumer Expectations Survey (CES); the Survey of Professional Forecasters (SPF); and the Survey of Monetary Analysts (SMA).

Procedurally, our approach to monetary policy must remain open-minded if we are to properly incorporate the evolving information on the inflation outlook and the surrounding risks. In particular, as stated by President Lagarde at the Bank of Finland conference last week: ""For our part, we cannot pre-commit to any future rate path, whether one of action or inaction. We must remain agile, and ready to respond to the data as they come in.""

The views expressed in this speech are personal and should not be interpreted as representing the collective view of the Governing Council of the ECB.

2.

The monetary policy strategy statement is here; an accompanying overview note is here. The underlying Eurosystem staff analysis is contained in two ECB occasional papers: Nickel, C. and al. (2025), ""A strategic view on the economic and inflation environment in the euro area"" ECB Occasional Paper Series, No. 371 and Kamps, C. et al. (2025), ""Report on monetary policy tools, strategy and communication"" ECB Occasional Paper Series, No. 372.

3.

See also Nakamura, E., Riblier, V. and Steinsson, J. (2025), ""Beyond the Taylor Rule"", Federal Reserve Bank of Kansas City Symposium, Jackson Hole.

4.

On the importance of a reactive monetary policy in providing clarity on the central bank's reaction function and thereby supporting the anchoring of inflation expectations, see Bauer, M., Pflueger, C. and Sunderam, A. (2024), ""Perceptions about monetary policy,"" Quarterly Journal of Economics, Vol. 139, Issue 4, pp. 2227-2278.

5.

In recent years, we have heavily emphasised the importance of underlying inflation indicators for understanding medium-term inflation indicators. My focus today is on non-energy inflation as a useful indicator of underlying inflation. See also Lane, P.R. (2024), ""Underlying inflation: an update"", Speech at the Inflation: Drivers and Dynamics Conference 2024 organised by the Federal Reserve Bank of Cleveland and the ECB, 24 October 2024; Lane, P.R. (2023), ""Underlying inflation', Speech at Trinity College Dublin, 6 March 2023; Lane, P.R. (2022), ""Inflation diagnostics"", ECB Blog, 25 November 2022; Banbura, M., Bobeica, E., Bodnar, K., Fagandini, B., Healy, P. and Paredes, J. (2023),

""Underlying inflation measures: an analytical guide for the euro area,"" ECB Economic Bulletin, Issue 5.

6.

While the current risk distribution does not indicate that an increase in the policy rate is a significant possibility in the near term, the future direction of the policy rate over a longer horizon has two-sided risks.

7.

Given the importance of regulatory and tax policies for energy prices, the relative price of energy also operates through political economy channels. An alternative view of the sharp increase in the relative price of energy during 2021-2022 is that it effectively accelerated an increase in the trend in the relative price of energy that would have played out over a longer horizon in the absence of the pandemic and Russia's war against Ukraine. The potential strength of error correction mechanisms for

the relative price of goods versus services has been flagged in recent years. Our risk assessment also highlights the potential impact of climate change on the trend in the relative price of food. 8.

Our monetary policy assessment also includes an assessment of the strength of monetary policy transmission. | will turn to this topic in a separate speech in the coming weeks.

CONTACT

Copyright 2025, European Central Bank",Philip R Lane
https://www.bis.org/review/r251007p.htm,"Steven Maijoor: Unlocking Europe's financial potential - innovation, regulation, and trust","Speech by Mr Steven Maijoor, Executive Board Member and Chair of Supervision of De Nederlandsche Bank, at the OPTIC event of the Association for Financial Markets in Europe (AFME), Amsterdam, 7 October 2025.",2025-10-07 00:00:00,"## Steven Maijoor: Unlocking Europe's financial potential - innovation, regulation, and trust

Speech by Mr Steven Maijoor, Executive Board Member and Chair of Supervision of De Nederlandsche Bank, at the OPTIC event of the Association for Financial Markets in Europe (AFME), Amsterdam, 7 October 2025.

* * *

Thank you. Recently, we hosted Paul Krugman at the Dutch central bank for a discussion on the US, Europe, and financial markets. He was fairly upbeat about the outlook for Europe, especially as compared to what's happening on his side of the Atlantic. But he was pretty clear about one thing in particular: Europe is lagging behind when it comes to the level of depth and integration of its financial markets. Europe's financial markets are fragmented, in all kinds of ways. And because of that, we are missing out on generating venture capital, we are missing out on financing solutions for businesses, we are missing out on innovation. And because of that, economic growth in Europe is lower than it could be. It's all in the Draghi report. But of course this is nothing new. We have known it for years.

Removing barriers to the integration of our financial markets is top of mind for European policymakers, central banks, and supervisors. And I think the initiatives by the European Commission to promote a Savings and Investment Union are a great help. The economics are simple. But as you know, the political process is complicated and takes time. National habits, national traditions, vested interests, you name it.

So it is worthwhile to look at other ways to make European markets more efficient. New technologies offer a lot of potential here. Technological advancement is a key driver in financial markets. We see this, for example, in the efforts to shorten the settlement cycle to T+1, planned for October 2027. At DNB we support this joint effort by all entities in the settlement chain. And we hope it will be a trigger to further streamline inefficiencies in the settlement cycle.

This is only one example where we can make progress. More generally, we as central banks and supervisors support the use of new technologies to make markets more efficient. We do so in two ways: by providing the necessary infrastructure, and by conducting supervision so that users can be assured that the new technology is safe.

Let me first say something about infrastructure. DLT is of course the buzzword here. And the times when regulators thought this was some new kind of sandwich are long gone. Distributed-ledger technology can play an important role in harmonising European market infrastructures. As it matures, DLT could provide a way to overcome persisting inefficiencies in the post-trade market. We recognise that. We fully support it.

However, this comes with a little disclaimer. By inviting a regulator to give the opening keynote, I'm sure you knew what you were in for. DLT would mean a radical shift in record-keeping in finance. It cannot be introduced overnight. Important questions still need to be answered on how to safely adapt policy and regulation to support it. Also, existing systems would have to be updated, while the change agendas are full of other

priorities, such as ISO20022 migration. Most importantly, it is vital for public and private parties to work together to create a manageable path forward.

Last year, DNB and five Dutch market parties participated in the ECB Trials in DLTbased securities settlement in central bank money. This year, the Eurosystem is keeping up the momentum by launching two projects, Pontes and Appia. With Pontes, the ECB has committed to providing a link between eligible DLT-based platforms and TARGET Services in the short term. This would mean that as soon as Q4 of next year, DLT-based settlement of digital assets will be possible in the Pontes project. And a couple of years later, it will become part of TARGET Services. With Appia, the Eurosystem, in cooperation with market stakeholders, will deliver a blueprint for a futureproof financial infrastructure, where central bank money continues to serve a key role as a settlement asset.

DNB continues to fully support these projects, with the aim of extracting maximum benefit from public-private collaboration. We are also looking at whether and how to adjust the collateral management frameworks for Eurosystem credit operations. This includes investigating the potential for mobilising collateral in DLT arrangements for this purpose.

With these efforts, we are doing what we can as central banks to facilitate adoption of new technology. It is up to you in the private sector to demonstrate where it will be used. In financial infrastructure, successful adoption depends on network effects. If we all pull the cart in different directions, it won't move. So today I would also like to encourage you to think about the use cases together. Industry organisations like AFME may be able to provide help to get different institutions aligned. And if you have any doubts or questions about the regulatory fit of use cases, we are here to discuss them with you in our Innovation Hub.

Next to supporting the infrastructure, using innovation for the common financial good requires something else from central banks and regulators.

To illustrate, let's go back to 17th century Amsterdam, which became a staging ground for financial innovation. One of the developments that proved instrumental to the Dutch economic and financial success of that period was the emergence of a stablecoin avant la lettre. My colleagues from the Bank for International Settlements and the Dutch Central Bank have written a very thoughtful piece on the Bank of Amsterdam and its proto-stablecoin, the Guilder. Allow me to quickly summarise.

Four centuries ago, many different metal coins circulated in the Netherlands. Exchanging one coin for another happened in the streets. You can imagine how cumbersome trading was.

But then, in 1609, the Bank of Amsterdam was founded. Its services were simple. The Bank of Amsterdam allowed merchants to deposit their metal coins - any coins that were in circulation - into a deposit account. It would then value these coins against each other and credit merchants with Bank Guilders. And this would allow for easy transactions between deposit accounts.

This is a great example of innovation. Just as the entire financial system is indeed proof of our immense human creativity.

The reason that we still have a well-functioning financial system today, after so many centuries, is because, sooner or later, the litmus test for any financial innovation is the public's trust. That trust is the true bedrock of our financial system. That trust allows for innovations to be incorporated into the financial system and further advanced. Or it allows innovations to be identified as flawed and cast aside. And in order to build that trust and to make sure that financial markets function well, we long ago found out that we need public regulation and supervision.

And it is to a lack of trust that the Bank of Amsterdam ultimately fell victim. That happened once the bank started doing more than its charter allowed. Under political pressure, it moved away from full reserve banking to issuing loans.

Eventually, it was the combination of flawed governance and a lack of transparency that led to the downfall of the Bank of Amsterdam. These factors allowed the bank's management to operate in violation of its founding principles. Despite this opacity, it did not take the general public long to figure out the bank's vaults were emptying out rapidly. A revelation that led to several severe runs on the bank. The institution never really recovered from this breakdown of public trust and it was ultimately dismantled in 1820.

Since then, the public's trust in the financial system has been reinforced by rules and regulations - and, of course, the supervision and enforcement of those rules and regulations. Whether they deal with governance, transparency or other aspects of trustworthiness. Today we know that good regulation is the backbone of trust in the financial system.

Let me take the example of stablecoins. Despite their name, these assets are not always stable and pose additional risks to the core of the financial system due to the way their reserves are managed. A report by Moody's suggest that the largest 25 fiatbacked stablecoins de-pegged more than 600 times in 2023. Moreover, as many stablecoins have strong links with the crypto-sector, stablecoins could become a key channel through which risks spill over from the crypto-sector.

In order for the market to be able to grow sustainably, we need to have proper rules, regulation and supervision. The Financial Stability Board has set guidelines for the contours of these rules. In the EU we have now fully implemented the FSB's guidelines in MiCAR. It is concerning that so many other jurisdictions have not yet done so. Especially given the inherently cross-border nature of stablecoins and the fact that they continue to rise sharply - especially USDdollar-denominated stablecoins.

If we do not have proper legislation and supervision, future scandals will happen. With every scandal, trust in the system will be eroded. This may mean, for example, that people active in trading in particular will not reap the benefits of DLT in the near future.

I am thinking back to the discussion we had with Professor Krugman. It made me realise that sometimes we Europeans are too pessimistic about our future. We have

tremendous potential. We are the world's third largest economy. In a world where everything seems uncertain and money seems to be able to buy anything, we have strong institutions governed by the rule of law. This is a force not to be underestimated. Because strong institutions and regulations ensure that new techniques and products are not a highway to the next crisis, but pass the test of time. These are strengths we can build on as Europeans.

But we can do better than we are doing now. And now is the time to tap into that unfulfilled potential. By making our financial markets more efficient. Lawmakers, central banks, supervisors and market participants must all contribute, all in their respective roles. In the SIU. By building a solid infrastructure. By developing use cases. And by designing and enforcing regulation that fosters stability and trust.

I trust you are with me on this.",Steven Maijoor
https://www.bis.org/review/r251007d.htm,Rhys R Mendes: Underlying inflation - separating the signal from the noise,"Remarks by Mr Rhys R Mendes, Deputy Governor of the Bank of Canada, at the Ivey Business School, London, Ontario, 2 October 2025.",2025-10-02 00:00:00,"

Remarks by Rhys Mendes Deputy Governor of the Bank of Canada Ivey Business School October 2, 2025

London, Ontario

## Underlying inflation: Separating the signal from the noise

Good afternoon . It's great to be here in London at the Ivey Business School.

I always enjoy having the opportunity to speak with future business leaders. And I think, in our increasingly complex world, it is more important than ever to bridge the gap between the C-suite boardroom and the work we do at the Bank of Canada. With that in mind, I'm going to talk about a concept that is useful in many domains, including both business and economics: separating the signal from the noise.

Let me put it in business terms first. Imagine you're listening to a company's earnings call. You need to be able to separate the noise -the CEO talking about 'optimizing impact' or 'leveraging synergies'from the signal -say, a sustained decline in revenues.

Central bankers do exactly this with inflation. We need to strip out the noise so that monetary policy can respond to the signal. Today, I am going to explain how and why we do this. But first, let's go over some basics.

Canada has a 2% target for consumer price index (CPI) inflation, or total inflation. This target helps households, businesses and financial markets know what to expect with prices. Our job at the Bank is to keep inflation close to that target. We do this by adjusting our policy interest rate.

But interest rate changes work with lags. This means we cannot -and should not -try to react to every wiggle in the monthly inflation numbers. To achieve our 2% target, we have to cut through the noise and identify the part of inflation that is lasting. This lasting, or persistent, part of inflation is what we call ' underlying inflation. ' It ' s our signal.

My speech today is all about how we assess underlying inflation. One of the ways we do so is by looking at measures of core inflation. But I want to be clear that core inflation is not the only indicator we use. We've always taken a broader approach.

So I'll begin by explaining what core inflation is and why central banks look at it. And I'll introduce you to some of the measures of core inflation we use at the Bank. Then I'll go over

I would like to thank Mikael Khan and Luis Uzeda for their help in preparing this speech.

how we use core inflation and other indicators to cut through the noise and see the signal. And I'll explain how doing this helps us achieve our 2% target for total inflation.

Then I want to say a few words about the future of our inflation-targeting framework. Every five years, we review and renew our framework agreement with the federal government. Our next renewal is in 2026. One of the things we ' re considering this time around is how we assess underlying inflation -including how we use measures of core inflation in our analysis and in our communications. This is particularly important in a world that has become more prone to major shocks, such as the trade conflict.

Let's begin.

## What is core inflation, and why do we use it?

I do a lot of outreach with Canadians as part of my job. And people often ask me: does the Bank target total inflation or core inflation? And, if we target core inflation, does that mean we ignore costs that affect people every day -like prices for food, gasoline or rent? Let me answer this right now: our target is overall inflation, not core inflation.

It might be helpful at this stage to clarify some terminology. Underlying inflation and core inflation are two commonly used -and commonly confused -terms. They ' re related, but distinct.

Let me start with underlying inflation. Underlying inflation is a concept, not a statistical measure. It tries to capture the persistent -or lasting -part of inflation that is related to economic fundamentals. These fundamentals can include things like imbalances between overall supply and demand in the economy and sustained cost pressures.

We care about underlying inflation because we don't want to react to noise. It can take up to two years for changes in the policy interest rate to have their full effect on inflation, so reacting to temporary movements could end up causing more volatility.

Because underlying inflation can't be observed directly, we have to use other indicators to assess it. Measures of core inflation are one way we do this.

Now, let me clarify what core inflation is. Put simply, measures of core inflation take total inflation and try to filter out short-term noise to capture the more stable, underlying trend. They typically do this by removing volatile price changes. 1 For example, one common way of measuring core inflation is to exclude food and energy because price changes in those categories are often short-lived.

Ideally, a measure of core inflation should be less volatile than total inflation, while still tracking total inflation's movements over the long term. This means that if you were to look at both measures on a chart, the core inflation line would usually be smoother than the line for total inflation, with smaller swings from one month to the next ( Chart 1 ). This is because measures of core inflation tend to reflect the factors that affect inflation over time, rather than isolated shocks.

1 For different approaches to measuring inflation persistence, see F. Pivetta and R. Reis, ' The persistence of inflation in the United States, ' Journal of Economic Dynamics and Control 31, no. 4 (2007): 1326 -1358.

## Chart 1: Core inflation is less volatile than total inflation

Year-over-year percentage change



Note: The range of core measures includes CPI-trim, CPl-median, CPI-common, CPIXFET and CPIX. CPIXFET excludes food and energy prices. CPIX excludes eight volatile components of the consumer price index. All measures of core inflation exclude indirect taxes.

Source: Statistics Canada

Last observation: August 2025

At the Bank, we've been targeting inflation for more than three decades. And over that time, we ' ve used several different measures of core inflation. What this experience has taught us is that there ' s no single, perfect measure of core inflation. Every measure, however well designed, will, at times, send misleading signals.

From 1991 to 2016, our primary gauges for core inflation simply excluded a fixed set of volatile components. Then, in 2016, we embraced a more dynamic and flexible approach. We adopted a trio of preferred core measures:

- CPI-trim, which removes the top 20% and the bottom 20% of price changes each month
- CPI-median, which lines up all the monthly price changes from lowest to highest and picks the one in the middle
- CPI-common, which aims to track price changes that are common across categories

These measures served us well in the pre-pandemic period. However, as inflation surged after the pandemic, CPI-common became difficult to use in real time due to unusually large historical revisions. 2 That's why , in 2022, we stopped including CPI-common in our set of preferred measures.

2 E. Sullivan, ' Examining Recent Revisions to CPI-Common, ' Bank of Canada Staff Analytical Note No. 2022-15 (October 2022).

And while our remaining two preferred measures have generally been helpful, they were less reliable during some periods. This is yet another reminder that, when assessing underlying inflation, we must look at a range of different types of indicators.

## Assessing underlying inflation

Before I get into how we assess underlying inflation, I'm going to take you back to the importance of separating the signal from the noise. I magine you're now leading the rollout of a new app. Some users are raving about the app 's interface, some are complaining that the app crashes when syncing, and a few others are making jokes or posting sarcastic memes. The jokes and memes are the noise in this example, while both the positive feedback and complaints are signals.

When you go to make updates, would you tailor your response to just one complaint? It seems more likely that you' d look at many different reviews to try to build a picture of how the app is performing -and what needs to be done to improve it.

This is how we look at assessing underlying inflation. Our preferred measures of core inflation are an important input into this process, but they are only one input. Just like with the app, w e can't base our entire assessment on one piece of feedback.

So let's lif t the veil on our process a bit.

The starting point is, of course, total inflation. In August, total CPI inflation was 1.9%. At a glance, that seems pretty good -almost right at our 2% target. But our preferred measures of core inflation were giving us a very different signal -they were around 3%. One important reason for this difference was the removal of the consumer carbon tax. 3 Inflation excluding taxes was 2.4% in August.

If we look more closely at core inflation, we see that all the measures we monitor rose at the start of 2025. In August, our preferred measures of core inflation were around 3%, but alternative core measures were around 2½%. So while our core measures were all telling us that underlying inflation had risen, they were giving us mixed signals on its actual level.

Beyond core inflation, measures that track the breadth of inflation -or how widespread inflationary pressures are -were consistent with inflation at around 2½%. Let me show you what this looks like. The top panel of Chart 2 shows the distribution of inflation rates across the CPI basket in the pre-pandemic period. It looks like a perfect mountain because these rates are spread out evenly around the 2% target. Looking at the bottom panel, you can see the mountain is currently tipping to the right, meaning the distribution is tilted moderately to the upside.

3 The consumer carbon tax was removed in April 2025. Its removal has the temporary effect of decreasing the level of the CPI by 0.6% from April 2025 to March 2026.

## Chart 2: The distribution of inflation rates across the CPI basket is tilted to the upside

Density of year-over-year percentage change, monthly data



Note: This distribution displays price changes to the 55 components in the CPI basket. CPI components exclude indirect taxes and are weighted by their respective basket weights. The dashed line indicates the 2% inflation target. Sources: Statistics Canada and Bank of Canada calculations

Last observation: August 2025

Similarly, the share of CPI components growing faster than 3% is now above its historical average, while the share of components rising by less than 1% has dipped slightly below ( Chart 3 ). And Chart 4 shows how the current breadth of inflation relates to total inflation. Where we were in August would historically have been consistent with total inflation of about 2½%.

Chart 3: The share of CPI components growing above 3% has risen

Deviation from historical average



Sources: Statistics Canada and Bank of Canada calculations Last observation: August 2025

Chart 4: The breadth of price pressures suggests inflation of around 2.5%



Note: The trend is estimated using a linear regression based on a sample from January 1995 to August 2025. Sources: Statistics Canada and Bank of Canada calculations Last observation: August 2025

On balance, the evidence pointed to underlying inflationary pressures above the 1.9% level of total inflation but below the 3% level suggested by the Bank's preferred core measures. Most indicators pointed to underlying inflation in the vicinity of 2½%.

I want to emphasize a couple of points about this assessment. First, it is meant to provide a rough sense of where we believe underlying inflation stands. It is not intended to be taken as a precise estimate.

Second, recalling that underlying inflation is a concept rather than a measure, we don't always put a number on it. Often, our assessment of underlying inflation leads us to conclude that it is largely consistent with the signal coming from our preferred measures of core inflation. When this is the case, we don't need to be explicit about underlying inflation.

But this was not the case at the time of our July and September 2025 interest rate decisions. Underlying inflation was roughly half a percentage point lower than our preferred measures. That difference might not seem like much, but in the realm of monetary policy, it is important. Half a percentage point can mean the difference between a decision to hold interest rates steady or to cut them.

This brings me to another important point. When we assess underlying inflation, we don't just need to know its level, we also need to know what factors are behind it and how persistent those factors are likely to be. To figure that out, we look at the details of the components within the CPI basket.

Two broad categories have stood out in recent months as being responsible for much of the upward pressure on inflation ( Chart 5 ). The first is inflation in prices for shelter services, which continues to trend down but is still well above its pre-pandemic average. The second is inflation in prices for goods other than energy, which has risen and is now above its prepandemic average.

Chart 5: A rise in inflation in prices for goods excluding energy is offsetting a decline in inflation in shelter services prices

Deviation of year-over-year percentage change from historical average (1995-2019)



Sources: Statistics Canada and Bank of Canada calculations

Last observation: August 2025

But when we looked ahead, we saw reasons to believe that underlying inflation would ease. For example, rental markets are softening, which should help keep inflation in prices for

shelter services on a downward trend. And growth in inputs costs has largely normalized, which should help cool inflation in non-energy goods prices.

As you can see, a lot more than just our preferred core measures goes into our assessment of underlying inflation.

So, I've defined underlying inflation and explained how it differs from core inflation. I've also gone over some of the indicators we look at when assessing underlying inflation. Now let's talk about the future -and the renewal of our monetary policy framework.

## Underlying inflation and the renewal of our monetary policy framework

Every five years, we review and renew our monetary policy framework. These regular reviews are a strength of our system. They give us the opportunity to assess the framework's performance, reflect on what is working well and consider whether our current approach remains the best one for the future.

As I said at the start of my speech, how we assess underlying inflation -including how we use measures of core inflation -is one of the themes we are looking at ahead of our 2026 renewal. Separating the signal from the noise is never an easy thing to do when it comes to inflation. But, in the current environment, it's more important than ever .

As Governor Tiff Macklem has said, the structural tailwinds of peace, globalization and favourable demographics are turning into headwinds -and the world looks increasingly prone to shocks. 4 More frequent supply shocks could mean more variability in inflation. So we need to think about how we assess -and talk about -underlying inflation as we confront this new reality.

Before I dive in, I want to be clear that this review is still underway, so I won't have any definitive answers today. But I can share some of the questions we're exploring on this theme, along with some of our findings so far. I will break this down into three parts.

First, I'll talk about how we are re-examining some aspects of our current core measures. Second, I'll discuss some new measures and methods we 're exploring as part of our broader assessment of underlying inflation. And third, I'll explain some of the work we're doing around how we talk about underlying inflation.

## Can we improve our existing measures of core inflation?

I hope I've established by now that measures of core inflation are not the whole story, but they are an important element. With this in mind, we're asking ourselves if there are ways we could improve our existing measures of core inflation. 5

Some of you have probably heard of one of the trickiest components of the CPI basket: mortgage interest costs. When we increase interest rates, we want inflation to come down.

4 See T. Macklem, ' Flexible inflation targeting in a shock-prone world ' (speech to the Bank of Mexico, Mexico City, Mexico, August 26, 2025).

5 T his work is not confined to just our preferred measures. We're looking at how all our core measures treat difficult components.

But when interest rates go up, inflation in mortgage interest costs also goes up automatically. And because many Canadians have fixed terms on their mortgages, renewal at new rates happens only gradually. So the effect on inflation can be persistent.

This poses a challenge because movements in mortgage interest costs can obscure the broader response of inflation to changes in our policy rate. It can be a source of noise.

Some of our core measures automatically exclude inflation in mortgage interest costs, while others have been designed to filter it out when its movements become extreme. While this is a good idea in theory, it hasn't always worked out in practice.

Let me give you an example. After we started raising the policy interest rate in 2022, CPI-trim correctly began to filter out mortgage interest costs. But since it ' s a relatively large component, its persistent exclusion limited CPItrim's scope to exclude other, more temporary, sources of upward pressure on inflation. Because of this, CPI-trim was 2.5% in December 2024, while an alternative version that pre-excluded mortgage interest costs was 2.1%. The alternative measure was far closer to where we thought underlying inflation was at that time.

One question we are asking ourselves is whether we should revise our preferred measures and our alternative measures of core inflation so they all pre-exclude mortgage interest costs. It's something we're considering carefully, particularly as we think about how monetary policy and imbalances in the housing market interact -which is one of the other major topics we're exploring as part of our 2026 renewal.

## Are there any new measures of core inflation we should look at?

Improvements to our existing measures are just the first part of this work. The second part is exploring new measures of core inflation. These would not necessarily be replacements for our existing core measures, but rather enhancements.

And we need to treat each potential new core measure like an MBA case study, asking ourselves whether there is a strong enough business case to include it in our already broad suite of indicators.

One measure that has gained attention in recent years is multivariate core trend inflation, or MCT. 6 This measure isolates the persistent part of inflation. It then decomposes that persistent part into two categories: inflationary pressures that are common across many prices in the economy and those that only affect prices in specific sectors. 7

Initial results look promising ( Chart 6 ). 8 MCT appears to be effective at telling us when the persistent part of inflation is coming from common movements across many prices. This is important because we can address these broad pressures with monetary policy.

6 J. H. Stock and M. W. Watson , 'Core Inflation and Trend Inflation,' Review of Economics and Statistics 98, no. 4 (2016): 770 -784.

7 Specifically, MCT uses a state-space approach, where the persistent component is modelled as a latent, driftless random walk -a process commonly used in the signal extraction literature.

8 L. Uzeda, ' PULSE Check: Underlying Inflation and Its Drivers ,' Bank of Canada Staff Analytical Note (forthcoming).

~ 6: The multivariate core trend inflation measure breaks down the persistent component of ion

Year-over-year percentage change



Sources: Statistics Canada and Bank of Canada calculations Last observation: August 2025

A downside of MCT is that it will be affected by revisions, meaning the monthly estimate may change over time. 9

Another idea we're exploring is whether artificial intelligence -specifically, using a clustering algorithm technique -can help us measure core inflation . Early results are good, but we're still assessing the robustness of this approach.

## How should we talk about underlying inflation?

This brings me to the third area of work: how we talk about underlying inflation and measures of core inflation.

We ' ve long labelled one or more measures of core inflation as our ' preferred ' measures. And we've said these preferred measures are ' an operational guide to help the Bank achieve its inflation target .' At times, this language may have led markets to place more emphasis on the preferred core measures than we do.

In practice, our preferred measures are just some of the many indicators we use to achieve our inflation target. So this raises questions. Should we broaden our list of preferred measures? Or perhaps even end the practice of identifying some measures as 'preferred' ?

9 MCT is generated using a two-sided filter approach, which makes revisions to recent estimates almost inevitable. But, unlike CPI-common, our testing suggests that large shocks don't lead to significant historical revisions . In August, MCT was slightly above 2%. This was because of persistence of sector-specific inflation while the broader component has normalized.

There are no easy answers. While all core measures sometimes give misleading signals, our preferred measures have generally proven to be helpful. And more often than not, they have provided us with a clear way to talk about underlying inflation. But we also don't want Canadians or financial markets to become overly focused on a single indicator.

Regardless of where we ultimately land, we can do more to make clear what indicators we actually look at. To this end, we 're planning to start publishing an interactive dashboard next year to house our broad array of inflation indicators. While we already do this to some degree, our new inflation dashboard will include more measures and be easier to use.

## Conclusion

It's time for me to wrap up . It's our job at the Bank of Canada to ensure your money retains its value. We do that by keeping inflation close to 2%. We just went through a period where inflation was much higher than 2%. This was painful for all Canadians. Our 2% inflation target served as an anchor that helped us restore price stability. So, while we are reviewing some aspects related to our inflation-targeting framework, one thing we are not reviewing this time around is the 2% target itself.

But the world around us is changing. The abrupt swings in US trade policy have shocked Canada's economy. And we're facing structural change and rising geopolitical conflict. With these shifts come the potential for more and larger shocks. That means greater volatility in prices and the possibility of higher inflationary pressures. In this environment, cutting through the noise is more important than ever.

As I said earlier, research and consultations for our 2026 renewal are ongoing. When faced with more uncertainty, we need to make sure we have the right tools to understand the factors affecting inflation. And we need to make sure we are being clear when we explain how we are using those tools.

Thank you for your time. I' d be happy to answer your questions.",Rhys Mendes
https://www.bis.org/review/r251007c.htm,Philip N Jefferson: Economic outlook and the Fed's monetary policy framework,"Speech by Mr Philip N Jefferson, Vice Chair of the Board of Governors of the Federal Reserve System, at the Drexel Economic Forum, Drexel University LeBow College of Business, Philadelphia, Pennsylvania, 3 October 2025.",2025-10-03 00:00:00,"## Philip N Jefferson: Economic outlook and the Fed's monetary policy framework

Speech by Mr Philip N Jefferson, Vice Chair of the Board of Governors of the Federal Reserve System, at the Drexel Economic Forum, Drexel University LeBow College of Business, Philadelphia, Pennsylvania, 3 October 2025.

* * *

Thank you, Dean Madan. I appreciate the opportunity to speak here at Drexel University and to visit Philadelphia, an area where I have spent much of my personal and professional life. 1   I will not go on too much about the City of Brotherly Love other than to say I am considering jogging up the steps of the art museum before I catch my train home.

It is an honor to take part in the inaugural Drexel Economic Forum and to meet some of the students, researchers, and business leaders who are here. It is an important time for these groups to hold this event because there is much to discuss about the quickly evolving economy. For my part, as a Federal Reserve policymaker, I am committed to achieving the dual mandate given to us by Congress of promoting maximum employment and stable prices. Delivering on these goals matters to communities, families, and businesses across the country, including right here in Philadelphia.

To inform our discussion  today, I will share with you my economic outlook and offer my current view of monetary policy before sharing with you some highlights from the Federal Reserve's newly revised monetary policy framework. After my remarks I look forward to answering a few questions.

## Economic Outlook

Looking broadly across the U.S. economy, I see that growth has moderated this year, and the risks to both sides of our dual mandate have shifted. Employment growth has slowed because of weaker growth in labor supply and a softening in labor demand. The uptick in the unemployment rate relative to the start of the year suggests that demand has fallen by a bit more than supply and that the downside risks to employment are rising. Meanwhile, higher tariffs are showing through to higher inflation for some goods. I expect that the effects of tariffs on inflation, employment, and economic activity will further show through in coming months.

In the first half of 2025, U.S. GDP  grew at a 1.6 percent annual rate, which reflects a marked cooling from last year's 2.4 percent growth rate. The slowdown in economic activity in the first half of this year was primarily driven by weaker consumer spending. That said, U.S. retail spending picked up over the summer. Overall, I expect the U.S. economy to maintain the first half's rate of growth through the remainder of the year.

In terms of the labor market, we did not receive the September jobs report this morning because of a lapse in federal government funding. While this is less than ideal, I never focus on a single report; rather, I look across an array of indicators to assess the labor market and the economy.

The available data from both government and private-sector sources point out that labor supply and demand are slowing together, as reflected in the ratio of  job openings to unemployed  Americans seeking work. A few years ago, available jobs well exceeded the unemployment level. That came back into balance over the past year or so. Data released earlier this week showed the unemployment level slightly exceeded openings this summer, but what economists call the V/U ratio remains near 1. Similarly, last week the Labor Department reported that initial jobless claims continue to mostly trend sideways. Net immigration into the U.S., an important contributor to workforce growth, has dropped sharply, and that is a factor restraining a more significant increase in unemployment.

Turning to the other side of our dual mandate, it is notable that inflation  has slowed considerably from the highs that occurred when the economy reopened after pandemic disruptions. Inflation, however, remains somewhat above our 2 percent target, and the tariffs that have been announced and implemented so far are showing up in some goods prices. Overall, personal consumption expenditures (PCE) prices rose 2.7 percent over the 12 months ending in August. Core PCE inflation-which removes volatile food and energy prices-was 2.9 percent in August.

Often, it is helpful to study the three major components of core PCE inflation  to better understand what is driving overall price measures. Currently, core goods prices, which declined modestly last year, have been rising, reflecting tariff effects, although it is also notable that the increase so far has been smaller than what many forecasters predicted this spring. Meanwhile, core services inflation, outside of housing, has generally trended sideways this year, while housing inflation appears to be on a gradual downward trend.

I view the uncertainty around my baseline outlook as especially high, mainly due to the changes in government policies and the challenges around assessing their net effects on employment and inflation. As the changes in these policies are finalized and we have more time to judge how they are affecting the economy, I expect some of the broader uncertainty around the U.S. economy to diminish.

## Monetary Policy

Considering the outlook I described, I see the risks to employment as tilted to the downside and risks to inflation to the upside. It follows that both sides of our mandate are under pressure.

While tariff-related inflation is apparent in the prices of goods, tariff increases typically represent a one-time change in the price level. The scope and persistence of the related rise in inflation will be determined by several factors-including the final tariff rates, the extent of pass-through to consumer prices, the effects on supply chains, overall economic conditions, and what happens to longer-run inflation expectations. Short-term inflation expectations have come down from the peaks reached in the second quarter, and most measures of longer-term inflation expectations have been largely stable, suggesting that the American people understand our commitment to returning inflation to our 2 percent target. As such, I expect the disinflation process to resume after this year and inflation to return to the 2 percent target in the coming years.

As I noted above, trends across several data series indicate that the labor market is softening, which suggests that, left unsupported, it could experience stress. To balance the risk of persistent above-target inflation and the risk of a deteriorating labor market, I supported a 25 basis point cut in our target range at the last FOMC meeting. This change moved our policy rate  closer to a more neutral stance while maintaining a balanced approach to promoting our dual-mandate objectives.

With respect to the path of the policy rate going forward, I will continue to evaluate the appropriate stance of monetary policy based on the incoming data, the evolving outlook, and the balance of risks. I will also consider and assess information about government policies and their effects on the economy.

## The Fed's Revised Framework

Now that I have discussed my outlook and the latest policy decision, I want to turn to an important document that I use to guide those decisions: the  Statement on Longer-Run Goals and Monetary Policy Strategy. This statement is designed to give the public a clear sense of how we think about monetary policy. As Chair Powell discussed at his Jackson Hole speech, a revised version of that document was issued in August. 2

The framework document, often called the consensus statement, was first issued in 2012, under Chair Ben Bernanke's leadership. The Fed's dual mandate, established by Congress, to foster maximum employment and stable prices underpins this framework. Our commitment to delivering on our dual mandate is unwavering. The revisions to our framework will support that mission across a broad range of economic conditions.

The FOMC revised its consensus statement after conducting a public review. That review consisted of three elements: first, Reserve Banks hosted events; Fed Listens second, the Board hosted a research conference; and third, we convened a series of policymaker discussions at FOMC meetings this year, supported by staff analysis. The changes implemented as a result of this review were a logical progression, not a change in course, grounded in our ever-evolving understanding of our economy. I will make note of four adjustments  to the consensus statement and discuss each in turn.

First, the revised consensus statement removed language emphasizing the effective lower bound (ELB) as a defining feature of the economic landscape. Instead, it states that our monetary policy strategy is designed to promote maximum employment and stable prices across a broad range of economic conditions. This revision, reflecting a move away from the post-financial crisis era of historically low interest rates, makes our framework more robust. It is useful to recall that at the time of the FOMC's previous framework review, during 2019 and 2020, policymakers were considering an economy that had for many years demonstrated low growth, low inflation, and a very flat Phillips curve-meaning that inflation was not very responsive to slack in the economy. The overarching concern for central bankers at that time was how to operate when shortterm interest rates are near the ELB. Today, of course, we are operating in a very different environment, at least in part brought on by the economic consequences of the COVID-19 pandemic.

Second, the revised framework embraces a flexible inflation-targeting approach at all times and eliminates a ""makeup"" strategy that would be employed in certain

circumstances. The experience of the U.S. economy since the pandemic highlights different challenges to achieving our inflation mandate-such as supply shocks, sectoral developments, and nonlinear inflation dynamics. The flexible inflation-targeting strategy outlined in our revised framework allows us to take a balanced approach in promoting our goals by considering the extent of departures from them. The revised framework appropriately emphasizes the Committee's commitment to ensuring that longer-term inflation expectations remain well anchored.

Third, the revised consensus statement provides clarity on how the Committee thinks about its legislated goal of maximum employment. The 2020 version of the statement indicated that the Fed would mitigate ""shortfalls"" from maximum employment. This shortfalls strategy was partly motivated by our recognition that real-time assessments of the natural rate of unemployment-and hence of ""maximum employment""-are highly uncertain. However, the use of the word ""shortfalls"" created some communications challenges, as it was not intended to be a commitment that the Committee would never follow preemptive policy actions or ignore tight labor market conditions. As a result, we have removed it from the consensus statement. Instead, the revised document more precisely states that ""the Committee recognizes that employment may at times run above real-time assessments of maximum employment without necessarily creating risks to price stability."" 3   As Chair Powell pointed out, preemptive action could well be warranted if tightness in the labor market or other factors pose risks to price stability. The revised statement defines maximum employment as ""the highest level of employment that can be achieved on a sustained basis in a context of price stability.""

Fourth, and closely aligned with the change I just discussed, the FOMC clarified the approach that it would take to monetary policy in times when the employment and inflation sides of our mandate may be at odds. The revised statement says that, in such periods, the Committee will follow ""a balanced approach in promoting them, taking into account the extent of departures from its goals and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate."" The revised language more closely aligns with the original 2012 statement. It is also consistent with the Committee's actions duringthe 2022-24 period, when the departure from our 2 percent inflation target was the overriding concern.

I have just highlighted a series of changes that we made to the framework statement, but it is also important to note the continuity  with past versions of our statement. The document continues to explain how we interpret the mandate Congress has given us and describes the policy framework that we believe will best promote maximum employment and price stability. We also continue to believe that monetary policy must be forward looking and consider the lags in its effects on the economy. We have never set a numerical goal for employment because the maximum level of employment is not directly measurable and changes over time for reasons unrelated to policy. Likewise, we maintained our commitment to a 2 percent inflation objective because that is a key factor helping keep longer-term inflation expectations well anchored, thus supporting both sides of our dual mandate. And we remain committed to conducting a public review roughly every five years.

## Conclusion

The FOMC remains fully committed to fulfilling its statutory mandate, and the revisions to the framework will support that mission across a broad range of economic conditions. Thank you for allowing me to share with you details of the revised monetary policy framework and my views on the current economic outlook. I hope both will serve as jumping-off points for your discussions over the rest of the afternoon. Once again, I am honored to take part in this inaugural event and look forward to our conversation.

1  The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.

- 2  Jerome Powell (2025), "" Monetary Policy and the Fed's Framework Review,"" speech delivered at ""Labor Markets in Transition: Demographics, Productivity, and Macroeconomic Policy,"" a symposium sponsored by the Federal Reserve Bank of Kansas City, held in Jackson Hole, Wyo., August 22.

3  The consensus statement is available on the Federal Reserve Board's website at https://www.federalreserve.gov/monetarypolicy/monetary-policy-strategy-tools-andcommunications-statement-on-longer-run-goals-monetary-policy-strategy-2025.htm.",Philip N Jefferson
https://www.bis.org/review/r251007s.htm,Phil Mnisi: Eswatini's Cybersecurity Awareness Month,"Speech by Mr Phil Mnisi, Governor of the Central Bank of Eswatini, at the National Cybersecurity Awareness Month ""Secure Eswatini, be safe online"", Ezulwini, 6 October 2025.",2025-10-06 00:00:00,"## Phil Mnisi: Eswatini's Cybersecurity Awareness Month

Speech by Mr Phil Mnisi, Governor of the Central Bank of Eswatini, at the National Cybersecurity Awareness Month ""Secure Eswatini, be safe online"", Ezulwini, 6 October 2025.

* * *

His Excellency, the Right Honourable Prime Minister,

Honourable Minister for Information, Communication and Technology (ICT),

Other Cabinet Ministers present here today,

Honourable Members of both Houses of Parliament,

Chief Executive, Eswatini Communication Commission,

National Commissioner of Police Service,

Esteemed Stakeholders on National Cybersecurity

Government Officials

Captains of Industry

Members of the media

Distinguished ladies and gentlemen

## Introduction

It is an honour to stand before you today as we launch our National Cybersecurity Awareness Month. While the 2025 theme is ""Secure Eswatini, Be Safe Online,"" I intend to cover an important component of this theme entitled ""Securing Trust: Building a Cybersecure Banking Ecosystem."" This subject is particularly important to banking because trust serves as a backbone and is a foundational element in the financial sector, representing the assurance that funds are secure, transactions are confidential, and systems are resilient. In the absence of trust, transactions and investments may decrease. In the current digital environment, trust is closely linked to cybersecurity.

Over the past decade, digital transformation has changed how people conduct financial transactions, shifting from in-person banking to the use of mobile devices. Various innovations have led to faster payment processes. For instance, the Eswatini Payment Switch, developed and launched by the Central Bank late last year, enables instant lowvalue payments between participating institutions. These changes have positively impacted financial inclusion and economic activity in Eswatini.

Yet, the same digital technologies that bring efficiency and access have also made banks' prime targets for cybercriminals and cyber-attacks. Our licensed banks have not been spared. Some have experienced cyber breaches. We are also aware of fraudulent schemes, such as ""facata"" scams, targeting our customers.

Cybercrime within the banking sector results in not only significant financial losses, but also substantial recovery expenses and potential systemic risks that may disrupt payment systems and erode market confidence. Most importantly, loss of trust in digital security threatens the stability of the entire financial system, making cybersecurity as essential as managing liquidity and capital in the banking ecosystem.

## Role of the Central Bank

The Central Bank is responsible for maintaining financial stability and ensuring the integrity of the financial system. Cyber resilience is an essential element of this responsibility.

In recent years, we have issued guidelines on cybersecurity and cloud computing to provide minimum standards for financial institutions. We continue to strengthen our supervisory frameworks, ensuring that banks and fintechs adopt risk-based approaches to managing cyber threats.

In line with the requirements of the National Cybersecurity Strategy, we are also envisaging the establishment of a Financial Sector Cyber Security Incident Response Team (CSIRT). A benchmarking visit by CBE to a peer Central Bank with a functioning financial sector Security Operations Centre (SOC) has recently been completed. The lessons learned-both in terms of regulatory frameworks and operational models-will guide us as we move swiftly to operationalize a Financial Sector CSIRT. One major advantage we saw is they have is that their Cybersecurity Act, passed by Parliament, explicitly designated the Central Bank as the Financial Sector CSIRT, hence they had the legitimate power to execute their plans, which are collaborated with their Cyber Security Agency. We foresee and may propose a similar approach, depending more on our cybersecurity laws to achieve the same result as we work in partnership with ESCCOM.

Recognizing that cybersecurity is a shared responsibility, we are also setting up initiatives to drive sector-wide collaboration. These will include the formation of a working group comprising representatives from financial institutions, mechanisms for threat intelligence sharing, and the conduct of joint cyber drills.

## Building a Cybersecure Banking Ecosystem

Establishing a cybersecure banking ecosystem requires the involvement of various stakeholders, including banks, fintech companies, regulators, service providers, government agencies, and individual citizens, as it cannot be achieved by the Central Bank alone.

## For Our Banks:

Cybersecurity should be a board-level priority for financial institutions. The threat of cyber-attacks is a core business risk; therefore, invest appropriately, empower CISOs, and build a security-focused culture throughout the organization.

Regular drills must be conducted, incident response plans must be maintained, and institutions must actively participate in sector-wide simulations. Innovation, too, must be secure by design-embedding security from the earliest stages of system and product development to ensure that customer trust is never compromised.

For Government and Regulators:

We must work together to harmonize national policy, protect critical national infrastructure, and ensure our legal and legislative frameworks keep pace with rapid technological change.

## For Our Citizens:

This is where the National Cybersecurity Awareness Month is most critical. We must educate our employees, our customers, and especially our youth. One way the Central Bank supports awareness is through Section 4 of Legal Notice 62 of 2016, which requires financial institutions to allocate budgets for consumer education.

Cyber hygiene must become second nature. Some simple, disciplined steps can make an enormous difference:

Use strong, unique passwords or, even better, a reliable password manager.

Enable Multi-Factor Authentication (MFA) on all accounts.

Be suspicious of unsolicited emails, texts, or calls asking for personal information-the banks will never ask you for your password.

Always accept that you may be under attack.

## Significance of Cybersecurity Awareness Month

This month is not for banks alone. It is for everyone, including government agencies, businesses, schools, communities, and citizens. Cybersecurity is not only about complex systems. It is also about adopting simple daily habits, such as using strong passwords, being vigilant against suspicious emails, regularly updating software, protecting personal data, and reporting incidents promptly.

To our banks and financial institutions, I call upon you to continue investing in cybersecurity, embedding resilience into every aspect of your operations.

To our employees, I urge you to remain vigilant, to report incidents without fear, and to treat cybersecurity as part of your professional duty.

To our customers and the public, ""you, too, are guardians of trust."" By practising safe digital habits, you safeguard not only your own finances but also the stability of our financial system.

## Closing

Cybersecurity is no longer optional. It is essential. It is the foundation of digital trust, financial inclusion, and sustainable growth.

As the Central Bank, we reaffirm our commitment to leading and supporting this effort. But we cannot do it alone. Every institution, every professional, and every citizen must play a part.

Let us work together to secure trust, to build resilience, and to ensure that our financial system remains strong and stable in the face of evolving cyber threats.

Thank you very much.",Phil Mnisi
https://www.bis.org/review/r251030a.htm,Luís Máximo dos Santos: 10 years of the Single Resolution Mechanism - a decade delivering a more resilient financial system,"Closing remarks by Mr Luís Máximo dos Santos, Vice-Governor of the Banco de Portugal, at the conference ""10 years of the SRM - a decade delivering a more resilient financial system"" marking the tenth anniversary of the Single Resolution Mechanism, hosted by the Banco de Portugal, Lisbon, 30 September 2025.",2025-09-30 00:00:00,"## Luís MÆximo dos Santos: 10 years of the Single Resolution Mechanism - a decade delivering a more resilient financial system

Closing remarks by Mr Luís MÆximo dos Santos, Vice-Governor of the Banco de Portugal, at the conference ""10 years of the SRM - a decade delivering a more resilient financial system"" marking the tenth anniversary of the Single Resolution Mechanism, hosted by the Banco de Portugal, Lisbon, 30 September 2025.

* * *

Ladies and gentlemen,

Distinguished guests,

Dear colleagues and friends,

As we move towards the close of today's conference, allow me to share a few final observations.

This event is part of the celebrations marking the tenth anniversary of the Single Resolution Mechanism, taking place throughout 2025, with the main highlight being the conference hosted by the Single Resolution Board on 15 October in Brussels.

This anniversary is more than a symbolic milestone.

It is an opportunity to underscore the importance of banking resolution as a vital pillar of the Banking Union and to acknowledge the remarkable journey of cooperation, innovation, and perseverance that has defined the SRM over its first decade.

At the same time, it is also a valuable occasion to identify areas where improvements are still needed and to set priorities for future action.

For me personally, today carries an additional layer of significance.

As one of the longest-serving members of the Plenary Session of the Single Resolution Board, I have had the privilege of witnessing the development and consolidation of the Single Resolution Mechanism first-hand.

Not so long ago, banking resolution was still, in many respects, uncharted territory. The prospect of a European mechanism for the orderly resolution of failing banks seemed little more than an ambitious aspiration.

Over the past decade, however, we have seen this vision evolve into a fully-fledged operational framework, with established authority, robust tools and a proven track record.

We began by preparing resolution plans for every bank and in the meantime have made significant progress on resolvability, moving from abstract plans and idealised strategies into tangible capabilities, supported by testing, and refined through systematic review and practical exercises.

We directed and oversaw the successful build-up of loss-absorbing capacity across the Banking Union - an endeavour that was far from simple, especially for smaller and medium-sized institutions, but one that has provided a much stronger foundation to our framework.

We established the Single Resolution Fund, which is now capitalised with around €80 billion and is fully mutualised.

More recently, we have also navigated the demanding and complex debate on the review of the Crisis Management and Deposit Insurance framework (CMDI), which despite its challenges, has led to an agreement that represents a step forward in refining our regime.

And - crucially - we have faced real resolution cases that tested our ability to act under pressure and demonstrated that bank failures can indeed be managed in an orderly way if the right tools are in place.

To celebrate this anniversary, we were fortunate to hear from an outstanding group of speakers and panellists.

I am grateful that they have agreed to share their knowledge, insights, and experiences, providing us with a rich reflection on the past decade and on the future of banking resolution.

Their participation here today is itself a testimony to the importance of the Single Resolution Mechanism in Europe's financial landscape.

Today's discussions have offered a rich overview of what has been achieved in the past decade, the legal underpinnings of our regime, and the challenges ahead.

The first exchanges reminded us that resolution is deeply embedded in the broader pursuit of financial stability, resilience, and integration in Europe, while also pointing out persisting gaps and areas for improvement in our framework.

The second part of the debate focused on the legal dimension of banking resolution. Over the past decade, the courts have played an active role in consolidating the framework, providing credibility and legal certainty through case law. This interaction between policy, practice and judicial scrutiny has been decisive in ensuring the legitimacy of resolution and in reinforcing confidence in our regime.

Finally, attention turned to the road ahead.

Increasing readiness through testing and operationalisation was identified as a central priority, alongside adapting to the CMDI review and preparing for new sources of uncertainty, such as cyber-risk and geopolitical tensions.

This forward-looking debate captured the dual spirit of this anniversary: celebrating what has been accomplished while keeping our eyes firmly on the future and on the work that still lies ahead.

Throughout the day, we have also had the privilege of hearing from other distinguished guests.

Dominique provided very important insights about the evolution of the SRM, also sharing its proposition for a stronger, more capable and more efficient mechanism.

Wolfgang Münchau provided food for thought concerning the economic and political landscape and warned about existing challenges and threats on the horizon, including related to stablecoins.

Commissioner Maria Luís Albuquerque, unfortunately unable to join us in person, shared her views about the progress achieved in the first decade of the SRM, while also pointing out future priorities for the continued reinforcement of financial stability.

In reflecting on today's discussions and on these past ten years, I believe that three final thoughts stand out.

First, that the SRM - despite some shortcomings - is a genuine success story of European integration.

The progress achieved in this first decade shows that when Member States and European institutions work together with determination and purpose, it is possible to build an entire framework - from its legal foundations to the skills and capabilities that currently exist in the Banking Union - and to make it effective in addressing financial crises and safeguarding financial stability.

The SRM embodies the idea that shared challenges require shared solutions, and that through unity and joint effort Europe can achieve important milestones.

Second, that the past decade has given us reasons for confidence, but it has also shown us that the progress achieved so far is not enough.

The framework is far from being flawless, the work is far from being completed and the challenges ahead are substantial. The next ten years will surely demand the same spirit of collaboration and resilience that has brought us this far.

Deepening the Banking Union must remain a priority if we want it to be truly equipped for the challenges that lie ahead.

Completing its third pillar will continue to be essential to ensure that citizens across Europe can place the same level of trust in the protection of their deposits, regardless of where their bank is located.

Only then will the Banking Union live up to its promise of fairness, confidence and cohesion, and only then can we achieve the level of integration in the European banking markets that we have been aspiring to and that is necessary for the growth and resilience of the European economy.

The recent review of the crisis management and deposit insurance (CMDI) framework has represented progress in refining our regime.

Yet, while it is fair to acknowledge that more could have been achieved, important advances were made. But the final outcome fell short of the ambition that many of us believed necessary. This should not, however, weaken our resolve. On the contrary, it should reinforce our determination to keep pushing for the reforms still required, so that the framework is fully fit for purpose.

The third thought that in my view stands out is that the future of the SRM depends, above all, on the people who make it work: the dedicated professionals at the SRB and national authorities - including here, at the Banco de Portugal, which was called on to take resolution action even before the creation of the SRM and, also for that reason, has been especially dedicated to this mission.

It is the daily commitment of the people who serve within the Single Resolution Mechanism that gives credibility and substance to our framework.

As I have already mentioned before publicly, it is a pleasure for all the staff of the Banco de Portugal to see that two Portuguese banks are now in the top of the European resolvability rankings,  despite all the tremendous difficulties at the beginning of the journey.

The past decade has been a story of progress and of cooperation for the Banking Union - in contrast, I would say, to other areas of the European project, where integration and unity have not always kept pace with the demands of today's world.

Let us continue this journey together, knowing that the next ten years will be no less challenging but confident that they can be just as successful.

Robust crisis management has perhaps never been as important as it is likely to be in the years ahead.

In fact, we are and will carry on, navigating stormy waters: geopolitical uncertainty and aggravated tensions that will continue to increase global fragmentation and volatility; cyber-risk; increasing digitalisation and interconnectedness of the financial system; the expansion of financial frontiers through the emergence of digital assets and new market players; and the new risks associated with climate change. And we must have the humility to admit that some of the risks we face today may not have been sufficiently identified.

Readiness to act will therefore be the central driver for the SRM in its next chapter.

Not by coincidence, this is reflected in the strategic ambitions set out in the ""SRM Vision"" that was approved recently. This strategy marks a shift of focus from resolution planning to a more dedicated effort on operationalisation, resolution testing and crisis readiness, to ensure that each plan and preferred resolution strategy for each bank can be implemented and at short notice, making the mechanism even more crisis-ready.

This impetus on crisis readiness is as important in periods of market disturbance or stress as it is in periods of stability.

In one of their works on the global financial crisis and its lessons,  Ben Bernanke, Henry Paulson and Timothy Geithner warned that measures that seem necessary in the aftermath of a crisis will appear onerous and excessive as the memory of the crisis fades.

Let us not fall into that trap.

Simplification of rules and procedures is indeed necessary to make our framework more credible and efficient, but we must consider that weaker rules and regulations can have a much higher cost on society than the costs of excessive regulation.

The key, of course, lies in calibration: in striking the right balance between simplicity and resilience, between efficiency and prudence.

Finally, let me highlight that a robust crisis management arrangement is a powerful tool to create confidence: confidence that financial stability will be preserved even if banks fail; that depositors are protected; that financial markets can continue to function even under stress; and that shareholders and creditors can credibly absorb losses if a bank fails, without endangering financial stability.

All this is instrumental in building trust among economic agents and European citizens. And such trust, in turn, helps reduce volatility, mitigate moral hazard and strengthen market discipline - making markets more efficient, better equipped to finance innovation and ultimately better able to serve the European economy and its citizens.

Therefore, a strong and well-designed banking crisis management mechanism favours the competitiveness of the European Union.

To conclude, I want to extend my gratitude to all of you who were able to join us today distinguished speakers, panellists, colleagues and friends, who have contributed to the richness of our discussions and to the success of this Conference.

Thank you.",Luís Máximo dos Santos
https://www.bis.org/review/r251027b.htm,Christopher J Waller: Innovation at the speed of AI,"Speech by Mr Christopher J Waller, Member of the Board of Governors of the Federal Reserve System, at DC Fintech Week, Arlington, Virginia, 15 October 2025.",2025-10-15 00:00:00,"## Christopher J Waller: Innovation at the speed of AI

Speech by Mr Christopher J Waller, Member of the Board of Governors of the Federal Reserve System, at DC Fintech Week, Arlington, Virginia, 15 October 2025.

* * *

Thank you for the opportunity to speak to you today about artificial intelligence (AI). 1  AI is a powerful and rapidly advancing technology that has captured everyone's attention. If you've watched enough sci-fi, you know that major technological change is usually either dystopian or utopian-the robots either take over the world or improve it. These polarized views are also common among economists and technologists. On one side, there are the doomers-those convinced that new technologies will destroy jobs, widen inequality, and concentrate power. On the other, there are the techno-optimists-those convinced we're on the brink of an unprecedented leap in productivity, growth, and creativity if we let the technology proliferate. As usual, the truth about AI is probably somewhere in between. The job of an economic policymaker is to separate hype and hyperbole from hard data and sound analysis and understand what AI really means for growth, productivity, and the broader economy.

I will focus on three aspects of major technological change that ""repeat"" through history. First, technological change is a constant in our lives, and it is almost always disruptive. It upends the way we work and socialize. Second, it alters existing power relationships in unsettling ways. Finally, technological change reliably raises productivity and our standard of living while improving the quality of our lives. My intent is to describe how AI is likely to affect our lives along these lines and how it differs from past technological changes.

We have always had technological changes that dramatically transform the economy and our daily lives. In the 1880s, electricity was a curiosity reserved for a few wealthy urban people and some limited industrial uses. By 1920, half of homes had electricity, by 1940 nearly half had a refrigerator, and by 1945, 85 percent of homes were electrified. Automobile use also rose swiftly. Auto registrations rose from 140,000 in 1906 to 23 million in 1929, at a time when the total number of households was fewer than 30 million. These advances changed daily life in profound ways. Another aspect of technological change is the speed at which new technologies are being adopted. In the last 50 years, we've experienced adoption of new technologies twice as fast: Personal computers were widespread within 20 years-the internet in 12 years-and it only took 6 years for smartphones to be universal. And now AI is moving even more rapidly. I tend to believe that the transition for workers affected by AI will be accelerated also, but no one really knows. Such predictions are certainly beyond my powers as an economic policymaker, so I will limit myself to the here and now. The point of this discussion is that technological change is a constant in our lives-it is always happening and will continue to happen-and AI seems to be following the pattern of ever-faster adoption and change.

Although it is a constant in our lives, technology also disrupts our lives every time a new innovation appears. The way that we work and produce changes. Jobs disappear, and new ones appear. Our social lives are disrupted as well, often in good ways-but

sometimes not so good. We used to write letters and mail them to communicate with loved ones. This took time and was expensive. Now we text or use FaceTime or Zoom to communicate with friends and family members anytime. This makes it easier to maintain relationships across geography and time. But it can also undermine those social connections. When I walk into a party and see half of the people there staring at their screens, I can see that technology can lead to less social interaction, not more. Technological disruption, like anything else, has benefits and costs. But, as I will argue later, I believe that we need to let this disruption occur to recognize the benefits alongside the costs, to enable us to lead better lives.

My second point was that technological innovation can alter power relationships in profound ways. When Gutenberg invented the printing press, he took away the Catholic Church's power over the written word and democratized it. When personal computers appeared, power shifted from those who managed mainframes to individual users. When the internet arrived, the control of news, information, and opinion pieces shifted from major news outlets to anyone with a webpage. AI will do the same. It will take power from ""experts"" and shift it to ""nonexperts."" Much like Gutenberg's printing press, AI will likely democratize expertise. Tools that once required specialized training are already becoming accessible to a much wider range of people. We see this happening with software coding already. A nurse using an AI diagnostic tool or a technician relying on a generative model to troubleshoot complex equipment can perform higher-order tasks more efficiently. It will likely do the same for scientific discovery. Those who collected economic rents, or excess payments, from the control of power will lose those rents. But this will improve our lives in the process.

Whenever a new technology emerges, the first question economists get is about jobs: Will this replace people or make them more productive? The challenge is that, with innovation, there is often a time inconsistency between the costs and the benefits. The disruptions come first; the benefits take time. When a new technology appears, it's always easier to see the jobs that are likely to disappear, but it's much harder to see the ones that will be created. When automobiles came on the scene, it was easy to see that saddlemakers' jobs would disappear. But it wasn't obvious that the saddlemaker's skills could be used to make car seats and that higher-productivity auto production would create many more and much higher paying jobs. Ten years ago, if I had said something called TikTok would arrive soon, no one would likely have been able to imagine that, or that social media would create what is now an established occupation-influencer.

The pattern appears to be repeating-only faster. A recent study by Stanford economists found that employment has fallen about 13 percent in occupations most exposed to AI, relative to those less affected. 2   Those contractions have appeared mainly in support and administrative roles-fields that tend to be automated first. This early effect from AI is consistent with what I have been hearing from business contacts. Retailers in particular are cutting back on employment for call centers and IT-related occupations. So far, most say this is being handled through attrition, but a number of retailers say that there is the potential for downsizing next year. That is also a message from a New York Fed survey that finds very few businesses are reporting AI-induced layoffs; they are instead using the technology to retrain employees. 3   That said, AI is influencing recruiting for these firms, with some scaling back hiring because of AI and others

adding workers who are proficient in its use. Looking ahead, however, layoffs and reductions in hiring plans due to AI use are expected to increase, especially for workers with a college degree.

Returning to my final point, history has shown us that technology improves productivity and our standard of living. We initially always talk about how it will be a substitute for labor. This was the basic premise behind Marx's theory of capitalism-machines would replace humans in production, which would raise unemployment so high that social revolution would occur, leading to the end of capitalism and the rise of a socialist utopia. Yet this theory makes the fundamental mistake of failing to see that capital and labor are complements, not substitutes. More machines mean a firm can produce more output, but that also requires more labor as well. This is obvious just looking at economic data. The U.S. capital stock, measured in constant prices, is seven times larger than it was in 1950. Yet the unemployment rate in September 1950 was 4.4 percent, and it is 4.3 percent as of August 2025. This is why economists are typically techno-optimists-history has repeatedly shown that adopting new technologies leads to economic growth and greater employment, not less. Technological disruption is one form of a concept that economists have studied since Joseph Schumpeter named it in 1942: creative destruction. This topic has never been more relevant, and I note that just last week a share of the Nobel Prize in Economics was awarded to two economists who explored how productivity-enhancing disruption raises living standards. 4

There will surely be losers and winners from AI, but aside from questions about how AI's gains will be distributed, there is the more fundamental matter of how they will be measured, even at a macro level. Firms are using AI to increase productivity, which allows for greater output based on the same level of inputs. This gain is counted in gross domestic product (GDP) and its corollary, gross national income.

In America, one common feature of great technological innovations has been an onslaught of competition that has rapidly driven down costs and resulted in rapid and widespread adoption. If hardware and software innovation continue to drive down the cost of AI, then I see few barriers to its ongoing proliferation throughout the economy. That prospect, clearly, is driving the surge of AI investment we have seen. Will it continue? That will depend, in part, on whether AI delivers on the productivity increases that some believe it will bring.

Labor productivity measures output per hour of work. The data is volatile, but average growth over the past few years is slower than over the past decade or several decades. A crucial question is whether AI will contribute to a resurgence in productivity growth. Any sustained productivity growth above 2 percent will tend to support rising real incomes and living standards without inflation pressure. As a monetary policymaker, I'm hoping that AI delivers.

While we often focus on how technology enhances market activity and productivity, it also enhances the value of non-market-based activities. For example, Google Maps allows me to navigate foreign cities easier and faster when I am sightseeing. While this value is a not market-based activity and does not show up in GDP, it clearly makes my life better. Agentic AI has the potential to save me lots of leisure time that would have otherwise been spent planning vacations, paying bills, or making medical appointments. This increase in my well-being is not directly measured in GDP. But if these time-saving

AI activities free me up to do more market-based production, then GDP will increase. I have no doubt that AI will boost GDP and national income, but many of its benefits may be in improving our nonmarket activities.

Every technology that changes how we live and work brings both promise and risk. AI is no exception. Fraud, disinformation, bias, and cybersecurity threats are already emerging. Any tool powerful enough to improve lives can also be misused. The task for policymakers is to manage those risks without slowing the innovation that drives growth. History shows that adaptation, not avoidance, is what sustains progress. Each wave of technology has disrupted industries and employment, but over time it has also lifted productivity, raised real incomes, and improved living standards.

We see different approaches to managing the disruption that occurs with technological change. Europe has often chosen to regulate first-to contain potential harms before the technology fully develops. The United States is taking a different path, leaning on its tradition of experimentation and market dynamism. That openness has long been a competitive advantage. It allowed the United States to lead in earlier waves of technology-from the internet to advanced computing-and it can do the same with AI. Over time, that willingness to experiment has translated into faster productivity growth and stronger economic performance than many of our peers, including Europe.

Thirty years ago, the United States embraced a new and disruptive technology-the World Wide Web. Europe was more cautious, weighed down by regulations and legacy industries that sought to control this innovation. The result, of course, is that America led a global technological revolution that disrupted media and other industries but also delivered jobs and broadly shared prosperity that handily outpaced the European Union over those thirty years. Perhaps the most important legacy of the American-led innovation of networked communications and computing was the culture of entrepreneurship and innovation it fostered, one that, in fact, has greatly contributed to America's leadership in AI. The American tradition is to invent and make use of technology, not shrink from it. Where there are risks, we take reasonable steps to mitigate them, rather than seek to avoid them altogether. Risk-taking is at the heart of our market economy; it fuels innovation, and we must preserve it.

Much like the leaders in this audience, the Federal Reserve is also learning by doing. I have championed a System-wide approach to continually educate our teams and enable experimentation with the latest wave of innovations-from large language models and agentic AI to applications in coding and payments. That's why, on October 21, I'm convening industry leaders to discuss AI in Payments as part of our Payments Innovation Conference. These engagements, combined with our own hands-on technical research, allow us to apply these technologies within the Fed and to support innovation across the private sector.

To conclude, AI is moving faster than previous waves of innovation. That velocity means both the disruptions and the benefits will arrive sooner. The challenge is to keep pace-to help workers and firms adjust so the gains in efficiency translate into higher real wages and sustained growth across the economy. For policymakers, we must let the disruption occur and trust that the long-run benefits will exceed any short-run costs.

Thank you.

- 1  The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.
- 2  Erik Brynjolfsson, Bharat Chandar, and Ruyu Chen (2025), ""Canaries in the Coal Mine? Six Facts about the Recent Employment Effects of Artificial Intelligence (PDF),"" working paper, Stanford Digital Economy Lab, August.
- 3  Ben Hyman, Jaison R. Abel, Natalia Emanuel, Nick Montalbano, and Richard Deitz (2025), "" Are Businesses Scaling Back Hiring Due to AI?"" Federal Reserve Bank of New York, (blog), September 4. Liberty Street Economics
- 4  The other half of the prize was awarded to Joel Mokyr for work that emphasized the importance of society being open to new ideas and allowing change as an engine of economic development.",Christopher J Waller
https://www.bis.org/review/r251027g.htm,Philip R Lane: The transmission of monetary policy - financial conditions and credit dynamics,"Welcome address by Mr Philip R Lane, Member of the Executive Board of the European Central Bank, at the 5th WE_ARE_IN Macroeconomics and Finance Conference 2025, Frankfurt am Main, 21 October 2025.",2025-10-21 00:00:00,"SPEECH

## The transmission of monetary policy: financial conditions and credit dynamics

Welcome address by Philip R. Lane, Member of the Executive Board of the ECB, at the 5th WE\_ARE\_IN Macroeconomics and Finance Conference 2025

Frankfurt am Main, 21 October 2025

It is an honour to participate in the fifth edition of the WE\_ARE\_IN Macroeconomics and Finance Conference and | congratulate the organising committee for putting together an excellent programme.

Let me start this speech by outlining how the ECB makes monetary policy decisions."" As expressed in our monetary policy statement:2]

The Governing Council is determined to ensure that inflation stabilises at its 2% target in the medium term. It will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance. In particular, the Governing Council's interest rate decisions will be based on its assessment of the inflation outlook and the risks surrounding it, in light of the incoming economic and financial data, as well as the dynamics of underlying inflation and the strength of monetary policy transmission. The Governing Council is not pre-committing to a particular rate path.

My aim today is to review one dimension of this multi-pronged assessment: how we assess the strength of monetary policy transmission. In what follows, | describe some of the analysis that has underpinned this assessment in recent monetary policy meetings.

| will begin by outlining the contribution of monetary policy to financial conditions before reviewing aggregate credit dynamics. Next, | will move to three key factors in determining monetary transmission: first, heterogeneity across member countries; second, the implications of a high level of uncertainty for monetary transmission; and third, the transmission impact of external factors, namely trade tensions and the exchange rate.

## Monetary transmission and financial conditions

Between July 2022 and September 2023, the ECB raised interest rates from -50 basis points to 400 basis points.) After a nine-month holding phase, the monetary policy easing cycle started in June 2024. Between then and June 2025, we lowered our policy rates by a cumulative 200 basis points. Since June, our policy rates have remained unchanged.

In capturing the impact of changes in policy rates on the wider financial environment, it is useful to assess blended measures such as financial conditions indices (FCls), which synthesise the information from a variety of financial asset prices. As such, FCls extend the concept of the monetary policy stance to a wider set of financial markets and beyond the level of accommodation or restrictiveness that is under the central bank's direct control. Akin to a stance measure, loose or tight financial conditions tend to stimulate or dampen economic activity, thus representing an upside or downside force acting on inflation.

Typically, FCls combine — in a static manner that does not allow for feedback from the economy — a broad set of financial variables, including risk-free rates, sovereign and corporate spreads, equity valuations and exchange rates. It is a standard part of our assessment to study a range of FCI measures, including those developed at the ECB, international policy organisations and private-sector versions. Today, | will focus on a new addition to the family of FC] measures: a new ""Macro-Finance""

FCI that has been developed by ECB staff in order to overcome the ""lack of feedback"" problem./4]

The new methodology incorporates mutual feedback between macroeconomic and financial dynamics, such that the Macro-Financial FCI reflects the joint dynamics of macroeconomic variables and financial conditions. As can be seen from the left panel of Chart 1, the overnight rate (ESTR), which is closely tied to our policy rates, typically comoves with and sets the direction of the overall index. But there are also several phases in which financial conditions have moved even when the policy rate was stable (Chart 1, left panel).

The decomposition (Chart 1, middle panel) illustrates that, at the onset of the global financial crisis in 2008, plummeting risk asset prices (dark green area) turned from being a stimulative influence on the FCI to acting as a sudden and sharply tightening factor. The widening of sovereign bond spreads during the European debt crisis (light blue area) also provided extra restriction in the years around 2012. During the episode when policy rates were close to their lower bound, compressed long-term nominal rates and negative real interest rates were important sources of accommodation. As a result, the Macro-Finance FCI reached historically supportive levels in late 2021. It then climbed rapidly in the run-up to the first interest rate hike in July 2022, since the term structure of interest rates sequentially moved higher well ahead and in anticipation of our rate hikes and quantitative tightening.

## Chart 1

## Anew ""Macro-Finance Financial Conditions Index""



Source: Bletzinger T., Martorana, G. and Mistak, J. (forthcoming).

Notes: The left panel plots the Macro-Finance FCI alongside the €STR. The middle panel shows the index and its decomposition, with contributions estimated in a macro-finance model (Bletzinger, T. et al., forthcoming). The ""Short rate"" refers to the €STR, the ""Long rate"" to the ten-year nominal OIS rate, ""Real rates"" to the one-year real OIS rate in one year's time and the five-year real OIS rate, ""Sov. spreads"" to the twoand ten-year euro area GDPweighted sovereign bond spreads over OIS rates, ""Risk assets"" to investment-grade corporate bond spreads and the CAPE ratio, and ""Euro fx"" to the NEER of the euro. The right panel compares the joint fit of euro area HICP inflation and the composite PMI when substituting the index with other measures in the model. The fit of the MacroFinance FCI is normalised to 100, and the fit of the other models is expressed relative to that benchmark. The Goldman Sachs FCI refers to Stehn et al. (2019) and the weighted average FCI to Arrigoni et al. (2020). The principal component is the statistical factor that explains most of the variation among the financial market variables entering the Macro-Finance FCI.

The latest observations are for 17 October 2025.

In recent years, the Macro-Finance FCI peaked around the end of the 2022—23 monetary tightening cycle. The increase in the index during this period was primarily driven by rising risk-free rates, with adjustments in risk assets playing a more limited role. Since the peak of the tightening cycle, the index has indicated that financial conditions have become noticeably less restrictive, supported by lower short-term interest rates and higher valuations for risk assets, although this has been partly offset by a stronger euro.

Despite this easing, the level of the Macro-Finance FCI remains well above its historical sample average. In part, this can be attributed to a permanent component to the 2022 shift in the monetary policy stance: the re-anchoring of inflation expectations at the two per cent target means that markets do not expect a return to the ""low for long"" rate environment that had been expected before the pandemic to continue on an open-ended basis.

The new index outperforms other measures when it comes to describing the macroeconomic dynamics of the euro area (Chart 1, right panel). In this regard, it is key to understand that the financial prices and yields that are aggregated into the Macro-Finance FCI influence bank loan dynamics and loan pricing: this summary statistic of (mostly market-based) financial conditions can be interpreted as an important determinant of broader funding conditions, including those set by the banks, which can be collectively labelled as ""financing conditions"". In the next section, we turn to a review of credit dynamics.

## Monetary transmission and credit dynamics

Lending rates have been declining broadly in line with historical regularities (Chart 2). But there is a detectable difference between developments in the lending rates to households and to firms: the relatively muted decrease in long-term market rates has contained the decline in the cost of household loans, which tend to be priced off the longer end of the term structure of interest rates and have longer fixed-rate periods, relative to loans to enterprises. As outlined above, this is consistent with a permanent component in the 2022 upward shift in policy rates, with no return expected to the ""low for long"" zone.

Chart 2 Lending rates across hiking and easing cycles

(percentages per annum, series normalised at 0 in t, where t corresponds to the beginning of the policy hike)



Sources: ECB (MIR) and ECB calculations.

Notes: The ECB relevant policy rate is the lombard rate up to December 1998, the MRO up to May 2014 and the DFR thereafter. The chart reports differences with respect to June 1988, October 1999, November 2005, May 2022 in each of the two panels. Dates are selected as the first change in policy rates in a hiking cycle.

The latest observations are for August 2025.

In terms of credit volumes, household borrowing, primarily for home purchases, has increased steadily. According to the bank lending survey (BLS), the recovery in mortgage demand is supported by improved housing market prospects and lower interest rates (Chart 3, panel A). Corporate borrowing is also gradually recovering, though BLS responses suggest that corporate demand for credit remains subdued, also reflecting global uncertainty and trade tensions.

This evidence raises the question of how credit is evolving compared to past regularities, given macroeconomic conditions and considering the current phase of the policy cycle. The strength of credit dynamics relative to the broader economy can be gauged through a credit-to-GDP gap analysis, which captures the deviation of the credit-to-GDP ratio from historical benchmarks. This gap can be estimated using a range of methodologies, from simple univariate approaches to more sophisticated models that account for the broader state of the economy. Regardless of the method, the gap remains in negative territory (Chart 3, panel B). This may reflect both structural factors and cyclical conditions. However, using multivariate models to control for prevailing cyclical conditions does not change the inference: credit seems to be weak if assessed against past regularities.

Anumber of structural shifts have been cited to explain a diminished role of credit in advanced economies. For example, households spend less on durable goods and more on services, for which they do not typically need to borrow. Demographic trends can reinforce these trends and explain why mortgages might be in lower demand than in the past. Also, spending on intangible assets — including intellectual property, software and code — has surpassed tangible investments as a share of GDP in major economies since the global financial crisis. And intangibles tend to be financed using internal funds or equity, being harder to pledge as collateral for loans. Even the Al-related investment boom in physical infrastructure, including data centres, has been primarily financed by equity.

But such structural shifts matter less for the euro area than for other economies, which leaves the effects of the previous tightening cycle as an important candidate explanation for the persistent weakness in credit that we observe today.) That is, the current credit dynamics most likely reflect the cross-currents arising from the recent easing overlapping with the delayed effects of the past tightening, together with the fact that there is a permanent component to the rate tightening compared to the pre-pandemic levels. For instance, lending rates on new loans are still above those on outstanding loans, and BLS indicators show that the cumulative tightening has not yet been fully reversed.

## Chart 3

## Credit dynamics

## Changes in demand for loans to firms and households

## (net percentages of banks reporting an increase in demand)



## Credit-to-GDP gap across univariate filters and multivariate model-based approaches



Sources: Left panel: ECB (Bank Lending Survey). Right panel: BIS, ECB and ECB calculations.

Notes: Left panel: the indicators report net percentages for the questions on demand for loans, defined as the difference between the sum of the percentages of banks responding ""increased considerably"" and ""increased somewhat"" and the sum of the percentages of banks responding ""decreased somewhat"" and ""decreased considerably"". The indicator for households refers to loans for house purchases. Right panel: the shaded area reports the range of gap estimates across an ensemble of methods and definitions of total credit, using univariate filtering techniques and multivariate models.

The latest observations are the second quarter of 2025 (July 2025 BLS) for the left panel and the first quarter of 2025 for the right panel.

A range of other factors that are not unrelated to the cycle may also help explain why the credit gap indicators remain negative. Heightened risk perceptions and higher bank funding costs, combined with declining excess liquidity, have played a role. In addition, pressures from supervisory and regulatory requirements to maintain solid balance sheets amid rising uncertainties, alongside the goal of supporting financial stability, have kept credit standards tight through the cycle, even as monetary policy has been eased in recent quarters. At the same time, financing from non-bank lenders has remained contained since the start of the monetary policy tightening, despite their secular increasing role in funding the real economy.

Looking in more detail at the sources of external financing for firms other than borrowing from banks, corporate bond issuance has benefited from foreign inflows into euro area bond funds in recent quarters, amid a shift in investor cross-border funds in favour of the euro area. Non-listed equities have also increased recently, likely reflecting activities of private equity funds. One segment of non-bank financing that has been growing significantly in recent years is private credit. Private credit generally refers to non-bank corporate credit provided through bilateral agreements or small ""club deals"" involving lenders outside the realm of securities investors or commercial banks. Despite a clear expansion in the euro area over recent years, the lion's share of private credit is originated in the United States. Although numbers vary depending on the exact definition of private credit and source, the size of private credit in the United States is well above €1 trillion, while for the euro area numbers range from around €100 billion to around €300 billion.""2! Taken together, non-bank financing has not grown enough to counteract the weakness in bank lending. The dynamics of all the sources of external finance for euro area firms, including equity financing, but also trade credit and non-bank financing, remain contained by historical standards (Chart 4), hence overall measures of the credit gap, as shown in Chart 3, remain negative.

On net, the ongoing transmission of monetary policy easing to credit volumes has been more gradual than anticipated building on past regularities. Equally unusual has been the pronounced heterogeneity across sectors and across borrower characteristics, which | will discuss next.

## Chart 4

## Firms' external financing over

time



Sources: ECB (QSA, BSI, FVC), Eurostat and ECB calculations.

Notes: MFI loans are corrected for cash polling, loan sales and securitisation. Loans from non-MFls are corrected for securitisation and they comprise loans from insurance corporations and pension funds (ICPFs) and other financial intermediaries (OF Is). ""Other"" is the difference between the total and the instruments singled out in the chart; it includes loans from general government, inter-company loans, financial derivatives (net) and other accounts payable other than trade credits.

The latest observations are for the first quarter of 2025.

## Heterogeneity of transmission

Heterogeneity in the transmission of monetary policy can affect its overall macroeconomic impact. Differences in sectoral balance sheets and sectoral exposures to macroeconomic shocks can influence the responses of households, firms and banks to changes in financing conditions.

For instance, the growth rate of loans to the manufacturing sector, although recently supported by the surge in activity due to frontloading of euro area shipments to the United States, has been weaker than that of loans to the services sector (Chart 5, Panel A).221 As manufacturing is capital-intensive, this development connects to the anaemic growth in investment in recent years. Moreover, manufacturing is also working-capital intensive, and therefore especially affected by the cost channel of monetary policy. That a stronger recovery in the manufacturing sector has so far not materialised helps explain a weaker pass-through of monetary easing via the cost channel than would normally be expected. The underlying reasons could be related to the greater exposure of manufacturing to the external environment, a topic that | will get back to later. By contrast, credit dynamics in the services sector have

been driven largely by real estate and leasing activities, supported by recovering domestic demand for housing and durable goods in the euro area.

## Chart 5

Heterogeneous credit dynamics across sectors and type of firm



Sources: ECB (ECS, RIAD, BSI, AnaCredit) and ECB calculations.

Notes: Left panel: in the left-hand side chart, the super-sectors are identified from the following NACE sectors: Manufacturing (C), Services (G, H, |, J, L, M, N O, P, Q, R, S, T, U). The industry survey is sourced from ECS and represents the production trend observed in recent three months, while the services production is sourced from STS. The series for the loans to firms in the manufacturing sector and for the industry survey have been smoothed using a three-month moving average. The right-hand side chart represents the growth contribution of selected sectors for April 2025. Right panel: the left-hand side chart represents the index (January 2024 = 0) of the stock of loans by size. Company sizes are defined as small for 50 employees or less, medium for 51 to 250 employees, and large above 250 employees. In the right-hand side chart, loan growth by PD group has been rescaled to match BSI aggregates and purged from PD migrations. High (resp. low) risk firms are those with a PD above (resp. below) 1.6%, the third quartile of PD in lending flows.

The latest observations are for May 2025 for AnaCredit, July 2025 for ECS.

At the firm level, credit growth is increasingly concentrated among larger and less risky firms (Chart 5, panel B). Results from the survey on the access to finance of enterprises (SAFE) confirm that small firms have experienced a more muted decline in external financing costs than larger producers. This points to contained transmission via the balance sheet channel and the risk-taking channel of monetary policy. Smaller firms, being more vulnerable to current macroeconomic risks, have therefore suffered sharper balance sheet losses. At the same time, banks have been more reluctant to extend credit to riskier borrowers.) Since small firms also face greater obstacles in accessing alternative sources of funding, banks' reluctance to lend further tightens the financial constraints facing smaller and riskier firms and weighs on their ability to invest.U4]

## Chart 6

Heterogeneous monetary policy pass-through in mortgage and housing markets

## Growth momentum of bank loans to households by country

## Changes in new mortgage applications by households by income quintile



Sources: ECB (BSI, CES) and ECB calculations.

Notes: Left panel: momentum is defined by the difference between the (3m-o-3m annualised) and the annual growth rate. Right panel: The chart reports the percentage point change in the share of households that applied for mortgages relative to before the monetary policy tightening, broken down by income quintile. Income quintiles are computed over the weighted distributions of the variable at the country level and by wave.

The latest observations are for August 2025 for the left panel and July 2025 for the right panel.

Household loan dynamics have also shown dispersion across countries, highlighting the role of both the collateral and cash-flow channels in monetary transmission during the tightening and easing phases of the cycle (Chart 6, panel A). Differences in national mortgage markets are a key factor, reflecting institutional features such as the share of adjustable-rate mortgages (ARMs) and their maturities.“

Historical regularities show that the pass-through is stronger in mortgage markets with a higher share of adjustable-rate mortgages and shorter maturities, reflecting both the larger movements in short-term compared to long-term market rates and the faster repricing of the total stock of outstanding loans when fixation periods are shorter.9I Indeed, over the past two decades, floating-rate mortgages — which are more reactive to the policy rates — have become less popular in the major euro area economies. The shift in the types of mortgages means monetary policy takes longer to work its way into households' debt payments. This delay in transmission means that, despite recent rate cuts, average mortgage rates are expected to rise further and drag on consumption for a number of years to come as households remortgage on to higher rates after completing long-term fixed deals."" Moreover, through the collateral channel, recent interest rate cuts have pushed up asset values more in countries with high ARM shares, thereby boosting collateral values.

After a period of declining mortgage applications during the tightening period, mortgage applications have started to increase in recent quarters. Higher income households, however, have maintained lower mortgage applications compared to the pre-tightening period (Chart 6, panel B). Instead, mortgage application growth has come mostly from lower-income households, possibly reflecting the need to maintain consumption or housing purchase plans in spite of declining real wages and with less savings, especially if they spend a large share of their income on basic goods. Thus, we see a shift in the composition of mortgage demand.)

Summing up, the change in borrower composition and the muted risk appetite of banks point towards the risk-taking and balance sheet channels of monetary policy operating less strongly for lower-income households and smaller firms during the easing cycle. Since these groups typically have higher marginal propensities to consume and invest, this heterogeneity in transmission may reduce the effectiveness of recent interest rate cuts in stimulating aggregate demand in the current context of high global uncertainty.""

## Uncertainty and transmission

An important factor that may distort and at times suppress the transmission of monetary policy is uncertainty. Over the past year, economic policy uncertainty has risen sharply, reaching record levels in April, largely driven by trade tensions and geopolitical risks (Chart 7, left panel). Financial market volatility has, instead, remained subdued (Chart 7, right panel). While uncertainty has eased somewhat in recent months, it remains at historically high levels on both sides of the Atlantic according to newspaper-based measures, close to the peak seen during the COVID-19 pandemic.

Monitoring elevated uncertainty is crucial in analysing credit dynamics for two main reasons.

First, it directly lowers credit demand and credit supply. ECB staff finds that unexpected increases in economic policy uncertainty have a negative effect on bank lending in the euro area.2O When economic policy uncertainty spikes unexpectedly, households and businesses tend to delay their consumption and investment decisions, as the value of waiting for additional information increases. 24] As a result, the financing needs and loan demand of firms drop in synch, as shown in recent BLS replies. On the lender side, banks may adopt a more cautious stance as well, delaying the approval of new loans and thereby affecting the availability of credit within the economy, 22] These effects are amplified if financial market volatility spikes up.

Second, ECB staff also finds that elevated uncertainty diminishes the impact of monetary policy easing on firms' investment.23] Even when a central bank lowers rates to encourage banks to lend and firms and households to borrow, spend and invest, the impact may be weaker or slower during periods of heightened uncertainty.

On its own terms, if uncertainty weakens monetary transmission, this implies that a more powerful monetary intervention is required to deliver a given policy objective. At the same time, monetary policymakers must strike a balance between the incentives to act more powerfully and the incentives to wait and see whether an uncertainty spike self-corrects in a timely manner.24] As noted in our September monetary policy statement, uncertainty has declined compared to the peaks in the second quarter but remains elevated compared to historical norms.

## Chart 7

Measures of uncertainty



Sources: Baker, Bloom and Davis (2016), Bloomberg and ECB calculations.

Notes: The US EPU and EA EPU are estimated by Baker, Bloom and Davis (2016). The EA EPU is constructed as a GDP weighted average of country-level indices.

The latest observations are for August 2025.

## External factors and transmission

The strength of monetary policy transmission depends on the configuration of the macroeconomic shocks hitting the euro area. Two (interconnected) external shocks are currently shaping euro area macroeconomic dynamics. First, a large portion of the uncertainty highlighted above stems from outside the EU, reflecting unpredictable shifts in foreign economic policies and concerns about the future course of geopolitical tensions. Second, there has been a substantial appreciation of the euro.

The recent tariff agreement between the EU and the United States has eased trade policy uncertainty and overall economic policy uncertainty to some extent, yet important questions remain. A key source of risk is the ongoing tensions in US-China trade relations. If these tensions persist, Chinese exporters would have stronger incentives to redirect shipments toward non-US markets, heightening competition for European firms.25 Such increased competition would weigh on demand in export-intensive and import-competing European sectors, reducing corporate earnings and weakening the transmission of monetary easing through the cash flow and balance sheet channels. In addition to these demand-side effects, trade tensions may disrupt supply chains, amplifying the risk faced by banks in lending to firms participating in international trade and thus amplifying conditions of uncertainty,/2

Trade fragmentation is also heightening concerns about elevated risks to economic conditions. According to the BLS, perceived risks related to the economic outlook have been contributing to a tightening of credit standards since the last quarter of 2024 (Chart 8, panel A), despite the fact that policy rates have been reduced for much of this period.

Based on the sector-country allocation of bank credit to firms that trade with the United States, the greater risk lies with loans to exporters. This is due to the higher relative size of these exposures, and to the specifics of the July tariff agreement, which introduced a broad-based US tariff of 15 per cent for

EU goods, although with some exceptions and carveouts (Chart 8, panel B).!24 Looking ahead, it is crucial to keep an eye on the asset quality of lenders that have significant exposure to tariffs. While so far there are limited signs of deterioration in asset quality, banks' perception of lending to firms more affected by tariffs could impair the supply of credit, weakening the monetary policy easing impulse.

## Chart 8

Credit standards and US trade exposure: drivers of corporate

lending

## Changes in credit standards for loans to firms

## US trade exposure

(net percentages of banks reporting a tightening of credit standards and contributing factors)





Sources: Left panel: ECB (Bank Lending Survey) and ECB calculations; right panel: ECB (AnaCredit), European Commission and ECB calculations.

Notes: Left panel: ""Credit standards -actual"" are changes that have occurred, while ""Credit standards -expected"" are changes anticipated by banks. Net percentages are defined as the difference between the sum of the percentages of banks responding ""tightened considerably"" and ""tightened somewhat"" and the sum of the percentages of banks responding ""eased somewhat"" and ""eased considerably"". The net percentages for the ""other factors"" refer to further factors which were mentioned by banks as having contributed to changes in credit standards for loans. Right panel: trade exposure at the sector level is computed as import or export to the US over gross value added by sector. Trade exposure at the bank level is computed as a weighted average using AnaCredit. The chart represents a kernel density of exposures in December 2024.

The latest observations are for the second quarter of 2025 (July 2025 BLS) for the left panel and December 2024 for the right panel.

Households currently benefit from a strong labour market, a low and stable inflation outlook and favourable conditions in the housing markets. However, those working in certain sectors, in particular manufacturing, are increasingly worried about the negative effects of tariffs, expecting income declines and tighter credit access. As a result, they anticipate submitting fewer credit applications (Chart 9, panel A). At the same time, lower-income households are starting to report increasing difficulties in meeting mortgage payments (Chart 9, panel B). Higher financial distress rates of households pose a downside risk for the transmission of the recent interest rate cuts.25]

Chart 9 The effects of perceived higher tariff exposure for households' credit market expectations and increasing household financial difficulties.

## US tariffs and households' credit market expectations

## Households' difficulty meeting mortgage payments

(percentage points)

=

90%

confidence

40

5

|

5

-10

interval

|

Tighter credit

Difference-in-differences coefficient

a

:

Mortgage

Consumer loan

access



applications applications

Sources: ECB (CES) and ECB calculations.

Notes: Left panel: the chart shows coefficients from a difference-in-difference regression of expectations of credit market access and applications of households on an indicator for whether the household reported that its financial wellbeing would be negatively affected by US tariffs interacted with a dummy for the period April 2025 to July 2025. Right panel: the chart shows the share of CES respondents reporting difficulties meeting mortgage payments in the past 12 months, by income quintile. Income quintiles are computed over the weighted distribution of the variable at the country level and by wave.

The latest observations are for July 2025.

Turning to the impact of euro appreciation on monetary transmission, there are two broad channels. First, euro appreciation affects credit demand and credit supply through its impact on macroeconomic dynamics. Second, euro appreciation affects the balance sheets and funding conditions of banks.

In relation to the former channel, euro appreciation is typically associated with slower growth and lower inflation over a multi-year horizon. At the same time, the impact varies across euro area corporates, such that it is important to take into account the differences across bank-firm pairs. In one direction, the appreciation of the euro against the US dollar and other currencies lowers price competitiveness for European exporters and import competers. In the other direction, firms that do not have large USD-

«

denominated revenues but pay for intermediate input costs (e.g. energy) in foreign currencies (especially the dollar) benefit from a term-of-trade improvement from euro appreciation. 22] For credit supply, the net impact via the real economy depends on their client mix: institutions more exposed to tradable sectors may face tougher conditions, but banks with a high presence in the non-tradable economy may benefit from the stronger purchasing power of their customers (Chart 8, panel B). On the one hand, market analysts are already discounting exposures to the United States in their estimates of euro area banks' profitability prospects (Chart 10, panel A), despite the overall positive expectations for the sector.22] On the other hand, an appreciation of the euro improves the euro area's terms of trade by lowering import prices, supporting real incomes and potentially making borrowers' balance sheets stronger, eventually increasing banks' willingness to serve customer segments benefiting from cheaper imports.

Turning to the latter channel, the depreciation of the dollar has a direct impact on the effective quantity of USD-denominated liquidity. USD-denominated assets constitute an integral part of the liquidity management practices of banks, both for those with active business lines in the United States and for those that use liquid dollar assets as hedging devices.

During the tariff turmoil, the unusual combination of a sell-off in US Treasury securities and a weakening dollar made it more difficult for euro area banks to rely on their USD-denominated liquid assets — once considered safe havens offering downside protection — to cushion lending and funding pressures.) Banks with lower USD-denominated liquidity buffers saw their bond spreads widen more sharply. While the USD LCR is not mechanically affected by movements in the exchange rate and the liquidity regulation in the EU generally does not require banks to hold LCR levels in foreign currencies above 100 per cent, excessively low levels of USD LCR may become a source of fragility for banks during episodes of large exchange rate volatility. 22] Since the euro area banking system has made progress in increasing their USD LCRs in recent years (Chart 10, panel B), it did not experience sizeable liquidity strains even at the height of the exchange rate volatility in early April, though the episode may have altered the algebra of liquidity management for the remainder of the year, 33] Since euro appreciation reflects a global portfolio rebalancing that has triggered higher capital inflows into the euro, this may provide a windfall of funding opportunities for euro area banks while also creating the market conditions that have further contributed to the compression of bank bond spreads. Against this backdrop, bank bond issuance activity has rebounded since May, including a pickup in USD-denominated bonds.4] Moreover, globally active euro area banks, for which USD funding represents a non-negligible share of total liabilities, can pass through the easier funding conditions to other banks via interbank money market lending.5]

Euro appreciation also generates valuation losses on the asset side of euro area banks but also effective funding cost reductions on the liability side. The repercussions of these two countervailing effects on the intermediation capacity of banks and credit supply depends on the aggregate net exposure but also on whether exposures via assets and liabilities are unevenly distributed in the crosssection.

Exposures on the asset side can be sizeable. Total USD exposures represented almost 10 per cent of the assets of the euro area banking system in the second quarter of 2025.85) Among the banks with USD asset exposures, the interquartile range of the ratio of these exposures over total assets lies between 5 per cent and 25 per cent as at the second quarter of 2025, with around one half of the overall exposures accounted for by loans of banking groups active outside of the euro area (Chart 11, Panel A). In general, the valuation impact is relatively contained when cast against the capital buffers of the euro area banking system or previous episodes of valuation losses associated with, for instance, fluctuations in the value of sovereign holdings.

Moreover, euro area banks also have a substantial part of liabilities denominated in USD, with an interquartile range ranging between 7 per cent and 28 per cent as at the second quarter of 2025, and with a total amount similar to that of assets. A substantial share (43 per cent) of USD-denominated liabilities is provided by financial entities (Chart 11, panel B) and is therefore relatively volatile, especially during market turbulence. Overall, the net exposure in USD is rather stable over time: for banks with USD exposures, it is close to zero for the median bank and slightly negative in the aggregate at -2 per cent of banks' assets. Moreover, reflecting the asset-liability management practices and the business models of banks with significant USD activity, net exposures are typically relatively unreactive to fluctuations in the exchange rate, policy rates or the business cycle. At the same time, the combined presence of substantial USD-denominated off-balance sheet exposures and volatile funding means that sudden changes in these net exposures cannot be ruled out. An increased probability of such a risk event would then generate pressures on both sides of banks' balance sheets and potentially downward pressure on on-balance sheet exposures like loans to the real economy, 24] Moreover, the composition of USD liabilities, dominated by funding from financial customers and with a limited share of retail deposits, can exacerbate these pressures by making funding more flight-prone, thereby increasing vulnerability in a stress scenario.

## Chart 10

## Earnings outlook in the banking sector and US dollar exposure

## Bank ROE forecast revisions by exposure to US exporting borrowers

## USD Liquidity Coverage Ratio





Sources: Left panel: LSEG (I/B/E/S) and ECB calculations; Right panel: ECB Supervisory Reporting and ECB calculations.

Notes: Left panel: forecast revisions are calculated at the bank level for each end-year (fixed event), relative to the January 2025 forecast. Median forecast revisions for each group of banks are taken. High exposure banks are those in the upper quartile of exposure to sector-countries with a high share of exports to the US. Right panel: USD Liquidity Coverage Ratio for a balanced sample of banks.

The latest observations are for July 2025 for the left panel and the second quarter of 2025 for the right panel.

Chart 11

## USD assets and USD liabilities of euro area banks



Sources: Both panels: ECB Supervisory Reporting and ECB calculations.

Notes: Left panel: sum of USD assets, converted to EUR at the current exchange rate on each date, across a balance sample of banks that report in NSFR templates, divided by total assets of a balanced sample of banks that report in FINREP. ""Other assets"" include loans not classified as ""Loans to non-financial entities"" or as ""Loans to financial entities"", and include derivatives exposures and other residual assets, but not off-balance-sheet items. Right panel: Sum of USD liabilities, converted to EUR at the current exchange rate on each date, across a balanced sample of banks that report in NSFR templates, divided by total assets of a balanced sample of banks that report in FINREP. ""Other liabilities"" include capital instruments and other residual liabilities, as well as derivatives.

The latest observations are for the second quarter of 2025 for both panels.

## Conclusions

My aim in this speech has been to showcase some of the analysis that has underpinned our assessment of the strength of monetary transmission in recent monetary policy meetings. In overall terms, monetary policy transmission is progressing smoothly. Yet, within this overall favourable environment, the analysis reported above highlights that it is also important to take into account significant differences across different types of banks, firms and households, across different sectors and across countries.

More generally, the analysis shows that the strength of monetary transmission is time-varying and also depends on the configuration of domestic and external macroeconomic shocks hitting the euro area economy. Accordingly, it makes sense to maintain a meeting-by-meeting and data-dependent approach to assessing the strength of monetary transmission at any given point in time. In turn, this feeds into our overall monetary policy decision making, alongside our other assessment criteria: the inflation outlook and the risks surrounding it, together with the dynamics of underlying inflation.

1.

| would like to thank Paola Di Casola, Matias Lamas Rodriguez, Johannes Péschl, Tilman Bletzinger, Giulia Martorana, Jakub Mistak and Enrico Sette for their contributions to this speech.

2.

See the updated ECB monetary policy strategy statement.

3.

The tightening of monetary policy also includes the contraction of the Eurosystem balance sheet through the end of asset purchases under the APP and PEPP and the end of the TLTRO Ill programme.

4.

The new FCI is estimated within a single macro-finance vector autoregression (VAR) model. See Bletzinger, T., Martorana, G., Mistak, J. (forthcoming), ""Looser, Tighter, Clearer: a new Financial Conditions Index for the euro area"", mimeo.

5.

See the results of the latest bank lending survey. | delve more into the topic of uncertainty and external factors below.

6.

The most known measure of credit-to-GDP gap is the Basel credit-to-GDP gap, introduced under Basel Ill as a common reference point to guide decisions on banks' countercyclical capital buffers. The methodology for its calculation is defined in Borio, C. and Lowe, P. (2002), ""Asset prices, financial and monetary stability: exploring the nexus"", B/S Working Paper, No 114.

7.

The analysis relies on other univariate filtering techniques suggested by the literature, apart from the use suggested by BIS, and multivariate models, as well as different types of credit data.

8.

See the discussion in Kamps, C. et al. (2025), ""Report on monetary policy tools, strategy and communication"", Occasional Paper Series, No 372, ECB.

9.

See Avalos, F., Doerr, S. and Pinter, G. (2025), ""The global drivers of private credit,"" B/S Quarterly Review, March for one part of the range. What distinguishes private credit in Europe from the one in the

United States is the reliance on equity financing, rather than debt financing, and the competition with banks, rather than the reliance on bank financing. See Block, J., Jang, Y.S., Kaplan, S. and Schulze, A. (2024), ""A survey of private debt funds"", Review of Corporate Finance Studies, Vol. 13, No 2, pp. 33583 for a survey comparing the US and European market and Acharya, V., Cetorelli, N. and Tuckman, B. (2024), ""Where Do Banks End and NBFIs Begin?"", CEPR Discussion Paper, No 18939 for the analysis on the linkages between banks and non-banks in the United States. European banking supervision is monitoring risks coming from banks' exposure to non-bank financing, see Buch, C. (2025), ""Hidden leverage and blind spots: addressing banks' exposures to private market funds"", The Supervision Blog, 3 June.

10.

These estimates are based on market data sources, which might underestimate the real size of the private credit market, while aggregate unconsolidated statistics from national accounts do not disentangle private credit exactly from all non-bank financing.

11.

Here, will not discuss heterogeneity of monetary policy transmission relating to sovereign bond yields. | discussed those issues in Lane, P.R. (2024), ""The Analytics of the Monetary Policy Tightening Cycle"", speech at Stanford Graduate School of Business, 2 May, Stanford and Lane, P.R., (2024),

""Macroeconomics of Sovereign Debt"", speech at the Bank of Greece Conference on Public Debt: Past Lessons, Future 7 November.

| Challenges,

12.

See Meinen, P. (2019), ""The effects of tariff hikes in a world of global value chains"", Economic Bulletin, Issue 8, ECB.

13.

Altavilla, C., Girkaynak, R.S., and Quadvlieg, R. (2024), ""Macro and Micro of External Finance Premium and Monetary Policy Transmission', Journal of Monetary Economics, Vol. 147 show that the transmission of monetary policy to smaller firms in the euro area depends on the effect of monetary policy on the external finance premium. For other studies on the heterogeneous effect of euro area monetary policy on banks, see Altavilla, C., Boucinha, M., Holton, S., and Ongena, S. (2021), ""Credit Supply and Demand in Unconventional Times"", Journal of Money, Credit and Banking, Vol. 53, Issue 8 and Altavilla, C., Canova, F., and Ciccarelli, M. (2020), ""Mending the Broken Link: Heterogeneous Bank Lending Rates and Monetary Policy Pass-through"", Journal of Monetary Economics, Vol. 110.

14.

See Greenwald, D.L., Krainer, J., Pascal, P. (2025), ""The Credit Line Channel', The Journal of Finance, August.

15.

The role of financial structure in the transmission of a European monetary policy is, incidentally, a topic that is as old as the ECB, going back at least to the discussion of ""a number of issues for the newly constituted Board of the ECB"" by Dornbusch, R. et al. (1998). See Dornbusch, R., Favero, Carlo A., and Giavazzi, F. (1998), ""The Immediate Challenges for the European Central Bank"", NBER Working Paper, No 6396.

16.

Badarinza, C., Campbell, J.Y., and Ramadorai, T. (2018), ""What Calls to ARMs? International Evidence on Interest Rates and the Choice of Adjustable-Rate Mortgages, Management Science, Vol. 64, No 5 show that the share of adjustable-rate mortgages varies widely across countries, and systematically responds to changes in interest rates. Garriga, C., Kydland, F.E., and Sustek, R. (2017), ""Mortgages and Monetary Policy"", The Review of Financial Studies, Vol. 30, No 10 show the importance of interest rate fixation for monetary policy transmission. See also Corsetti, G., Duarte, J.B., and Mann, S. (2021), ""One Money, Many Markets"", Journal of the European Economic Association, Vol. 20, Issue 1.

17.

See Baptista, P., Dossche, M., Hannon, A., Henricot, D., Kouvavas, O., Malacrino, D., and Zimmermann, L. (2025), ""The transmission of monetary policy: from mortgage rates to consumption"", Economic Bulletin, |ssue 4, ECB, for an elaboration on this point.

18.

Of course, it is also important to take into account that the success rate for mortgage applications is lower for lower-income households.

19.

Crawley, E. and Kuchler, A. (2023), ""Consumption Heterogeneity: Micro Drivers and Macro Implications"", American Economic Journal: Macroeconomics, Vol. 15, No 1 show that households with low liquidity have higher MPCs.

20.

See Allayioti, A., Bozzelli, G., Di Casola, P., Mendicino, C., Skoblar, A. and Velasco, S. (2025), ""More uncertainty, less lending: how US policy affects firm financing\_in Europe"", The ECB Blog, 2 October. For evidence on the effect of uncertainty on monetary policy transmission to inflation and unemployment, see Falconio, A. and Schumacher, J. (2025), ""Economic uncertainty weakens monetary policy transmission"", The ECB Blog, 1 September.

21.

This response aligns with what the academic research has labelled the ""real option"" theory, which suggests that the incentive to postpone investment grows in times of heightened uncertainty. See Bernanke, B. (1983), ""Irreversibility, Uncertainty, and Cyclical Investment."" Quarterly Journal of

Economics, 98 (1): 85-106; and Rodrik, D. (1991), ""Policy Uncertainty and Investment in Developing Countries,"" Journal of Development Economics 36: 229-242.

22.

For recent studies of the reaction of euro area banks to uncertainty see e.g., Altavilla, C., Carboni, G., Lenza, H. and Uhlig, H. (2025), ""Interbank rate uncertainty and bank lending"", American Economic Journal: Macroeconomics (forthcoming) and Jasova, M., Mendicino, C. and Supera, D. (2021), ""Policy Uncertainty, Lender of Last Resort and the Real Economy"", Journal of Monetary Economics, Volume 118, pp. 381-398. For the impact of trade uncertainty on lending by US banks see also Correa, R., di Giovanni, J., Goldberg, L.S. and Minou, C. (2023), ""Trade Uncertainty and U.S. Bank Lending"", NBER Working Paper, No 31860.

23.

See Allayioti et al. (op. cit.). For similar evidence on US firms, see Lakdawala, A. and Moreland, T., (2024), ""Firm-Level Uncertainty and the Transmission of Monetary Policy"", Review of Economics and Statistics, pp. 1-28.

24.

For a discussion on how the ECB incorporates risk and uncertainty in its forecasting, in the preparation of monetary policy decisions and in communication, see Lane, P.R. (2024), ""Monetary policy under uncertainty"", speech delivered at the Bank of England Watchers' Conference 2024, King's College London, London, 25 November. See also the discussion in Lane, P.R. (2025), ""The conduct of monetary policy,"" ECB Annual Monetary Policy Conference, 6 October.

25.

See Gunella, V., Stamato, G. and Kobayashi, A. (2025), ""The implications of US-China trade tensions for the euro area — lessons from the tariffs imposed by the first Trump Administration"", Economic Bulletin, Issue 3, ECB.

26.

This is also supported by the July 2025 SAFE survey, where firms with supply chain issues report, after controlling for size, country and sector, an 8 per cent and a 9 per cent lower likelihood of expecting improvements in the availability of credit lines and bank loans, respectively, over the next three months compared with firms reporting no supply chain implications from tariffs

27.

For details, see this explainer from the European Commission: For a more comprehensive description of the agreement, see this joint statement on a United States-European Union Framework.

28.

Faccini, R., Lee, S., Luetticke, R., Ravn, M. O. and Renkin, T. (2025), ""Financial Frictions: Micro Vs Macro Volatility', American Economic Review, forthcoming, show that high household credit spreads reduce indebted households' consumption, making their marginal propensities to consume countercyclical.

29.

Lane, P. and L. Stracca, (2018), ""Can appreciation be expansionary? Evidence from the euro area,"" Economic Policy, Vol. 33, Issue 94, pp. 225-264

30.

On the impact of exchange rate movements on corporates via exposure to export markets, see, e.g., Beck, T., Bednarek, P., te Kaat, D. and von Westernhagen, N. (forthcoming), ""Real effects of exchange rate depreciation: The roles of bank loan supply and interbank markets"", Journal of Money, Credit and Banking. Initial financial constraints of firms might create an additional layer of interactions between exchange rate movements and the riskiness of banks' exposures, as highlighted by Desai, M. A., Foley, C. F. and Forbes, K. J. (2008), ""Financial Constraints and Growth: Multinational and Local Firm Responses to Currency Depreciations"", The Review of Financial Studies, Vol. 21, Issue 6, pp. 28572888. The general increase in uncertainty about economic policy in the United States may have also affected bank lending conditions in the euro area. See, for example, Allayioti et al. (op. cit.). For the impact of trade uncertainty on lending by US banks, see also Correa, R., Di Giovanni, J., Goldberg, L. S. and Minoiu, C. (2023), ""Trade Uncertainty and U.S. Bank Lending"", NBER Working Paper, Vol. 31860.

31.

The importance of currency mismatches has been highlighted by, for example, Abbassi, P. and Brauning, F. (2023), ""Exchange rate risk, banks' currency mismatches, and credit supply"", Journal of International Economics, Vol. 141, 103725.

32.

There may be some idiosyncratic currency-specific minimum quantitative requirements in isolated cases. Euro area banks are also required to report currency-specific exposures in currencies other than the reporting currency if they exceed 5 per cent of the institution or the single liquidity subgroup's total liabilities, excluding own funds and off-balance-sheet items.

33.

On how liquidity considerations are important for bank lending conditions and the transmission of monetary policy, see e.g. Altavilla, C., Boucinha, M., Burlon, L., Giannetti, M. and Schumacher, J. (2025), ""Central bank liquidity reallocation and bank lending: Evidence from the tiering system"", Journal of Financial Economics, Vol. 168, 104058, Burlon, L., Ferrari, A., Kho, S. and Tushteva, N. (2025) ""Why gradual and predictable? Bank lending during the sharpest quantitative tightening ever"", Working Paper, 3010, ECB, and Altavilla C., Rostagno M. and Schumacher J. (2025), ""When banks hold back: credit and liquidity provision"", Working Paper, 3009, ECB.

34.

However, net issuance — adjusting for maturing amounts — remains below levels seen in previous years, suggesting that banks are not frontloading borrowing despite increased demand for eurodenominated assets.

35.

See Klaus, B. and Mingarelli, L. (2024), ""Euro area banks as intermediators of US dollar liquidity via repo and FX swap markets"", Financial Stability Review, November. The relevance of dollar funding for European banks has been highlighted by, for example, lvashina, V., Scharfstein, D. S. and Stein, J. C. (2015), ""Dollar Funding and the Lending Behavior of Global Banks"", The Quarterly Journal of Economics, Volume 130, Issue 3, August, pp. 1241-1281.

36.

Including off-balance sheet exposures increases the exposure by around 3 percentage points of total assets.

37.

Similar dynamics developed during the global financial crisis and the pandemic, see Ippolito, F., Peydro', J.L., Polo, A. and Sette, E. (2016), ""Double Bank Runs and Liquidity Risk Management"", Journal of Financial Economics, 122, pp. 135-154, and Acharya, V. and Steffen, S. (2020), ""The Risk of Being a Fallen Angel and the Corporate Dash for Cash in the Midst of COVID', Review of Corporate Finance Studies, Volume 9, Issue 3, November, pp. 430-471.

CONTACT",Philip R Lane
https://www.bis.org/review/r251027d.htm,"Christine Lagarde: Opening remarks - Global economic outlook panel"" ","Opening remarks by Ms Christine Lagarde, President of the European Central Bank, at the panel on the ""Global economic outlook"" at the Group of Thirty's 40th International Banking Seminar 2025, Washington DC, 18 October 2025.",2025-10-18 00:00:00,"## Christine Lagarde: Opening remarks - Global economic outlook panel""

Opening remarks by Ms Christine Lagarde, President of the European Central Bank, at the panel on the ""Global economic outlook"" at the Group of Thirty's 40th International Banking Seminar 2025, Washington DC, 18 October 2025.

* * *

Global imbalances have once again moved to the forefront of international debate.

The discussion has largely centred on China and the United States. But Europe, too, is now in the spotlight - suspected of pursuing an ""unfair"" trade policy towards the United States.

There is no denying here that Europe is a major player in this debate.

Together, the euro area and China account for roughly half of the world's current account surplus - about one-quarter each - while the United States represents around three-quarters of the global deficit.

But we need to explore under the headline numbers, which do not fully reflect the underlying economic reality in Europe - nor do they capture the adjustment that is already under way.

## Europe's role in global imbalances

There are three points that need clarifying.

First, among the three major economies, Europe is not a key source of global imbalances - and its contribution has been steadily declining.

In a globalised trading system, bilateral balances never tell the whole story. But they do matter for the political economy of trade tensions.

It is therefore notable that the euro area's largest surpluses are with the United Kingdom, non-euro area EU countries in central and eastern Europe, and economies such as Australia, Canada, Hong Kong, Mexico, Brazil, Türkiye and South Korea.

Neither China nor the United States is a major counterpart.

The euro area runs a deficit of almost €150 billion with China, which has widened by around 10% this year. Trade with the United States is broadly balanced: a goods surplus is offset by a services deficit - and much of both is driven by US multinationals.

According to our estimates, around 30% of our bilateral goods surplus reflects exports by European affiliates of US multinationals. Conversely, those same firms account for roughly 90% of our services deficit, particularly in intellectual property products. 1

This is, for example, the case in the pharmaceutical sector, where European affiliates pay royalties for intellectual property originating in the United States while supplying finished products back to the US market.

Moreover, Europe's overall current account surplus has been declining. It reached almost 4% of GDP in 2018, but by the first half of this year it had halved to 2.1% 2   and is projected to remain around that level. 3

By contrast, trends in other major economies are going in the opposite direction.

China's current account surplus has risen from 0.2% of GDP in 2018 to 3.7% in the first half of this year, while the US current account deficit has widened from 2.1% to 6% of GDP over the same period. 4

Second, the historical drivers of Europe's surplus are already fading - unlike in other major economies.

Imbalances are not inherently negative. For instance, when imbalances are created by improved competitiveness driven by genuine productivity gains, they benefit everyone. But when they are sustained by distortionary policy choices rather than fundamentals, they risk becoming a zero-sum game.

Two main forces pushed Europe's current account into surplus during the 2010s: strong export performance in global markets - partly driven by real exchange rate compression - and fiscal consolidation at home. But since the pandemic, both forces have been reversing.

Euro area exports are now increasingly under pressure, particularly with competition from China intensifying. Since the start of 2022, the euro area has seen a real appreciation of around 32% against China, driven by prices rising faster in Europe as well as a stronger nominal exchange rate. 5

Fiscal policy will also play a more supportive role in the years ahead. This is especially true in countries such as Germany, where major military and infrastructure investments are under way. The average fiscal deficit in the euro area is expected to stand just over 3% of GDP over the next three years.

Policies in Europe are therefore contributing to rebalancing. This stands in sharp contrast to developments elsewhere.

In China, export growth has been strongest in sectors where domestic demand remains weak, suggesting that excess supply is being directed abroad rather than absorbed at home.

Meanwhile, the main driver of the global current account deficit is still the US fiscal position - and at present we are seeing little attempt to rein it in.

Third, what remains of Europe's surplus can largely be explained by demographics.

Even though our surplus is declining, we should not expect it to disappear entirely. Europe's ageing population is naturally leading to higher savings and lower investment.

According to IMF staff assessments, the current account gap - that is, the difference between the actual balance and the level justified by fundamentals such as demographics and appropriate policies - stood at around 1% of GDP in 2024. 6

In other words, only about 1 percentage point of the euro area's surplus could be considered ""excessive"" last year, and that surplus has since fallen further.

## Responses to an imbalanced world

With all this in mind, I will draw three main conclusions.

First, coercive trade measures against Europe will not help resolve the United States' external imbalances.

Tariffs do not sustainably reduce current account deficits, as they have complex effects on saving and investment decisions. 7   They can only be effective when used to encourage trading partners to remove distortionary policies that drive imbalances.

Europe is no longer a reasonable target for such a strategy. Insofar as distortionary policies once played a role, we have largely removed them. And the United States already faces very low tariffs when exporting to the EU.

Continuing to apply trade measures aggressively may even prove counterproductive. Europe is roughly twice as open to trade as the United States. 8   This means that constant trade policy volatility is more likely to raise uncertainty among European households and firms than among their US counterparts.

That uncertainty, in turn, could prompt higher precautionary savings, lower spending and therefore lower imports of US goods and services. The net effect could be to increase, rather than reduce, Europe's trade surplus.

Our Consumer Expectations Survey shows that, in response to recent tariff-related concerns, around a quarter of consumers report switching away from US products, and roughly 16% say they have cut their overall spending. 9

Second, the United States would gain more from pooling resources with its allies than trying to force activity back home.

The new Chinese restrictions on rare earths have fully revealed the threat of ""weaponised dependencies"". We must work with trusted partners to reduce our exposures and share risks.

That is why the United States should view Europe's strength in manufacturing as an asset.

The United States imports more than half a trillion dollars' worth of goods from Europe each year. Most of these products are highly differentiated and difficult to substitute domestically, especially with the economy already operating at full capacity.

Europe can provide much of the manufacturing capacity that the United States needs and no longer wishes to rely on China for. The United States, in turn, can provide Europe with frontier technologies, helping us to reduce risky dependencies as well.

This is not ""unfair trade""; it is free trade working as intended - the efficient use of our distinct industrial structures and comparative advantages, with no risk of exploitation if we remain true to our historical alliance.

The third conclusion I draw is that Europe should continue to pursue measures to strengthen domestic demand. This will make our economy more resilient and less exposed to external shocks.

The untapped potential of our Single Market offers a powerful margin of adjustment. ECB analysis indicates that an increase of just 2% in intra-euro area trade could fully offset the export losses to the United States that might result from current tariffs.

At the same time, with targeted policies such as preference schemes for European firms and close allies, our internal demand can serve as a lead market for developing those industries where greater strategic autonomy is needed.

## Conclusion

To sum up, it is inaccurate to characterise Europe's external surplus today as a key driver of global imbalances. It mainly reflects economic factors that are already reversing, and demographic realities that we cannot escape.

The world should view Europe as a stable and trusted partner - one that is ready to do its part to ensure that free trade remains a win-win proposition.

This applies above all to the United States, where our historic relationship enables both our economies to develop their areas of comparative advantage, while avoiding inefficient reshoring policies where they are not needed.

We should leverage this partnership and deepen it in new areas, such as rare earths, rather than eroding it through hostile actions or rhetoric.

But if the United States continues to see Europe as an adversary in trade, and China continues to pursue distortionary policies, we have strategies we can pursue to shield our economy.

Most importantly, we must unlock the potential of our continent-sized Single Market and turn it into a far more dynamic source of demand for European companies.

We have the will - and the means - to do so.

- 1  Emter, L., Fidora, M., Pastoris, F., Schmitz, M. and Schuler, T. (2025), ""US trade policies and the activity of US multinational enterprises in the euro area"", Economic , Issue 4, ECB. Bulletin
- 2  12-month moving sum.
- 3  European Central Bank (2025), ""ECB staff macroeconomic projections for the euro area, September 2025"".
- 4  Both the US deficit and the EU surplus would likely be smaller if the activities of US multinationals were measured differently.
- 5  Al-Haschimi, A., Emter, L., Gunnella, V., Ordoæez Martínez, I., Schuler, T. and Spital, T. (2024), "" "", , Why competition with China is getting tougher than ever The ECB Blog ECB, 3 September.
- 6  International Monetary Fund (2025), "" Global Imbalances in a Shifting World"", External Sector Report, July.

7  Ibid.

- 8  Measured by trade as a share of GDP.
- 9  Baumann, A., Caprari, L., Dossche, M., Kocharkov, G. and Kouvavas, O. (2025), "" Consumer expectations and actions during the recent trade tensions"", Economic Bulletin , Issue 6, ECB.",Christine Lagarde
https://www.bis.org/review/r251027c.htm,Joachim Nagel: Staying the course - how central bank independence guides us through uncertainty,"Speech by Dr Joachim Nagel, President of the Deutsche Bundesbank, at the Foreign Policy Association, New York City, 20 October 2025.",2025-10-20 00:00:00,"## Joachim Nagel: Staying the course - how central bank independence guides us through uncertainty

Speech by Dr Joachim Nagel, President of the Deutsche Bundesbank, at the Foreign Policy Association, New York City, 20 October 2025.

* * *

Check against delivery

## 1 Introduction

Ladies and gentlemen,

I feel deeply honored to receive this prestigious award, following in the footsteps of such distinguished recipients such as Timothy Geithner, the former President of the Federal Reserve Bank of New York and Secretary of the Treasury,  Jean-Claude Trichet , the former President of the European Central Bank, and François Villeroy de Galhau, my French counterpart. At a time when trans-Atlantic relationships involve significant challenges, I see the award as a recognition ofthe shared values  upheld by the Foreign Policy Association, the Bundesbank, and indeed all central banks.

Because what may at first seem like two distinct worlds-foreign policy and central banking-are, in fact, bound by a shared mission: the pursuit of stability and international cooperation.

In my speech today, I will reflect on three key principles  that guide the work of central banks and, in turn, underpin our mission. I am confident that the  Foreign Policy Association shares similar values, adapted to the unique challenges and responsibilities of foreign policy.

But before I start, let me quote President Franklin D. Roosevelt. Speaking during his 1944 radio address at the Foreign Policy Association here in New York, he said:  I am going to talk without rancor, without snap judgment. And I am going to talk without I believe that sets an for my losing my head or losing my temper. 1 excellent tone remarks today.

## 2 Independence

The first of the three key principles is central bank independence, which  matters for stability, trust and social cohesion.  As you know, most central banks are tasked with keeping inflation in check-making sure it's neither too high nor too low.  In the Eurosystem-which comprises the European Central Bank and 20 national central banks-our goal is to keep inflation at 2 percent over the medium term.

I've got to admit that it hasn't always  been easy in the past few years. But time and again, we've shown that we get the job done. To succeed in this mandate, decisions must be guided by thorough economic analysis, based on sound  economic data, and not by political convenience.  When that line is blurred, credibility in our work begins to

erode. And  credibility is the cornerstone for trust. Without trust, the foundations of stability start to crack.

History vividly shows us what can happen when central banks don't act independently: loss of public confidence, financial turmoil and runaway inflation are not uncommon.  I do not want to invoke the well-known German inflation trauma from the post-World War periods. Rather, let me recall more recent, less extreme episodes.

Take, for instance, the ""Great Inflation""  lasting from 1965 to 1982. In this challenging period with drastic movements in energy prices, the U.S. Federal Reserve faced political pressure  to prioritise employment over inflation control. Inflation soared to double digits, eroding purchasing power and triggering widespread economic uncertainty. This turbulent era serves as a powerful reminder  of the vital importance of independent monetary policy.

In recent decades, other regions  have faced similar episodes:  Turkey, for instance, saw inflation soar above 80% in 2022, driven by President Erdoan's insistence on low interest rates-which undermined the lira, eroded public trust, and fueled instability. Turkey's central bank later reversed course, sharply raising rates in 2023 and 2024. This helped lower inflation, though it remains high, at above 30%.

Given these historical lessons I cannot help but by recent , feel deeply concerned political criticism  directed at central banks. This criticism goes  beyond the usual and helpful public discussions and also differing views about the daily course of monetary It challenges the of an institution designed to serve the policy. integrity people's interests and the economy's long-term benefit.

## 3 Statistical Independence

This brings me to the second principle  that guides our work, closely tied to the first: Recently, this principle has come under , with independent, reliable statistics. scrutiny elected officials openly questioning  the reliability of key economic data that did not seem to fit the government's view. Such assertions carry significant  weight. Replacing people who report undesired data carries even more weight.

Reliable statistics are . They are of crucial-especially for central banks the backbone sound monetary policy. So, what makes good statistics? I don't want to bore you with too much detail, so let's focus on : three core ingredients   First, accuracy, ensuring data reflects reality. Second, transparency, allowing users to understand and trust the methods behind the numbers. And third, impartiality and independence.

Accuracy and transparency provide the foundation for impartiality and independence. They do come at a cost. Statistical offices need to push continuously to keep this cost low, also by generating a digital dividend. But well-designed reporting requirements are more than just red tape. They are a necessary precondition for good data.  Impartiality ensures that data serves as a neutral guide for decision-making. Independence  ensures that the methodologies, processes and decisions of statisticians and statistical agencies are not interfered with. Without this, even the most accurate and transparent statistics become undermined.

## 4 Focus on core mandate

Let's turn to the guiding central banks: . third principle A clear focus on our mandate This principle is becoming even more  important as uncertainty and political tensions rise. And signs of uncertainty abound:

Escalating U.S.-China tensions and Russia's war of aggression in Ukraine are  reshaping the global order.  Rising demands for government spending are adding pressure to budgets and fiscal policies.AI is advancing at a rapid pace, transforming industries and becoming a part of every aspect of our lives.

This is not  an easy environment to navigate-for central bankers or foreign policy alike. Yet, we must stand by our principles and speak up for them. As central bankers, we need to safeguard the purchasing power of households and protect prosperity. Our monetary policy decisions must be geared towards this goal and must not be diluted by other politically opportune purposes.

## 5 Conclusion

Ladies and gentlemen, President Roosevelt  once wrote to Major General Frank R. McCoy, then president of your FPA: The Foreign Policy Association is performing a high duty  in facilitating the lucid presentation of the facts of world problems and their impact upon the United States. 2

This to truth and transparency with my mission as a commitment resonates deeply central banker. Both  of our institutions-the FPA and the Bundesbank-are trusted to protect the foundations that help people-and the economy-prosper.

For central banks, this means maintaining price stability and fostering  trust in the financial system. For the it means with knowledge to FPA, empowering citizens understand complex global dynamics and their implications.

To say it with the words of Bob Dylan,  The times they are a-changin.  It is our responsibility to provide stability and trust.

1  Radio Address at a Dinner of the Foreign Policy Association. New York, N. Y. | The American Presidency Project.

2 President's Message-Foreign Policy Association.",Joachim Nagel
https://www.bis.org/review/r251014i.htm,Abdul Rasheed Ghaffour: Opening address - Global Islamic Finance Forum 2025,"Opening address by Mr Abdul Rasheed Ghaffour, Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the Global Islamic Finance Forum (GIFF) 2025 ""Bridging tradition and tomorrow - advancing business, empowering communities"", Kuala Lumpur, 13 October 2025.",2025-10-13 00:00:00,"## Abdul Rasheed Ghaffour: Opening address - Global Islamic Finance Forum 2025

Opening address by Mr Abdul Rasheed Ghaffour, Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the Global Islamic Finance Forum (GIFF) 2025 ""Bridging tradition and tomorrow - advancing business, empowering communities"", Kuala Lumpur, 13 October 2025.

* * *

Assalamualaikum and a very good afternoon.

It is a pleasure to be here today at this year's Global Islamic Finance Forum. Our theme --""Bridging Tradition and Tomorrow: Advancing Business, Empowering Communities"" is a reminder that the future is not merely a destination to be discovered, but a direction to be chosen. To choose wisely, one must take a moment, to look back at the values and systems that once made commerce a conduit for shared prosperity and finance for a force for human progress.

Over the past three decades, the world economy has been shaped by forces of globalisation. Between 1990 and 2020 - global trade in goods and services expanded more than fourfold, which has helped lift over a billion people out of extreme poverty . 1 Capital flowed more freely; and supply chains stretched across continents; and technological advances reduced barriers that once divided nations. What enabled global trade to flourish then - was not simply commerce, but - a connectedness common vision for integration that transcended borders and beliefs.

This recent decade, however, has witnessed a reversal or a redrawing of that map. Trade tensions have risen; strategic rivalry weighs on global supply chains; and geopolitical rifts have brought further pressure on global growth. The outlook remains uncertain, with the International Monetary Fund (IMF) projecting a global growth of approximately 3% - and this is below the pre-pandemic average. As we contemplate the reshaping of global trade in the 21 st   century, it is worth pausing to reflect on the earlier moments in history, when trade began to flourish across civilisations and become a central pillar of stability, prosperity and peace.

Long before the rise of modern financial systems, Muslim merchants pioneered financial tools that enabled long-distance trade with surprising sophistication. Instruments such as the - an early form of the modern cheque - as well as early sakk 2 trust-based money and credit transfer systems such as the allowed capital and hawala, funds to flow securely between markets and across countries. The principle of partnership - offered risk-sharing mechanisms that echo in venture capital and Islamic finance. The strength of these innovations lay rooted in the Quranic injunctions on fairness, trust, and mutual benefit.

History tells us that trade and finance are intricately linked. The arteries of commerce the movement of goods and services - are the same through which capital and confidence flow. When one clogs, the other cannot circulate freely. The fracturing of global trade creates friction, reduces liquidity and increases costs. Today's environment

makes the business of financial intermediation even harder, and risk management more complex. This is exactly why, the purpose and design of finance really matters.

A financial system that is anchored on long-term value creation - better serves the economy and society. These principles are not abstract precepts; they are embedded in the architecture of Islamic financial instruments - guiding how risk is shared; how wealth is circulated; and how transactions are anchored in productive economic activities. Several recent studies 3   have found that Islamic financial institutions demonstrated greater resilience during economic downturns due to their asset-backed and risksharing nature - a timely reminder that financial systems rooted in real economic activity and equitable risk distribution can ensure stability in turbulent times.

In today's quest for economic stability and inclusive growth, Islamic finance offers practical tools. Durable instruments such as zakat and waqf have long supported communities - strengthening the social fabric of society. Such instruments also provide counter-cyclical support to economy and financial systems. When economic conditions tighten, zakat also acts as a stabilising force. It channels financial support to the needy, supporting the underpinning of demand in the economy and providing a safety net for those at risk. Similarly, the beauty of waqf lies in its continuity and long-term impact. These endowments could be utilised to generate sustainable income streams - often funding education; healthcare; infrastructure; and social welfare.

As we envision the next phase of growth, allow me to share five developments that Malaysia is pursuing in advancing the Islamic financial ecosystem:

- First , we are . By expanding encouraging impactful re-engineering of finance the use of risk-sharing structures like and , Islamic Musharakah Mudarabah financial solutions can be more diverse than transactional debt, offering distinct risk-reward propositions. The roll-out of i-CITA last month, supported by RM100 million fund from the Government to encourage risk sharing innovation, aims to support more diverse application of Shariah contracts for viable projects that bring tangible benefits to Malaysia. To complement this initiative, we are actively reviewing the Shariah Contracts and the Investment Account policies to provide more conducive regulatory environment for investment intermediation. We hope the industry will fully optimise these initiatives to test innovative solutions.
- Second, we are . Through redefining what inclusive development looks like innovative integration of Islamic social finance with mainstream financial systems we seek to chart a new frontier in finance where social purpose and commercial viability does converge. The iTEKAD programme, powered by blended finance, is not just a pilot - it is a proof of concept. It shows how Islamic finance can be mobilised to uplift communities. Islamic banks, working hand-in-hand with state religious authorities and development partners, are delivering tangible outcomes such as increased employment and skillsets. I am encouraged to see the expansion of the iTEKAD programme for financial protection today, which is supported by the Government's matching grant of RM5 million for takaful contributions. The collaboration between banks and takaful operators further enriches this ecosystem. The challenge now is to scale it up. We must move from selected success to systemic transformation. The tools are in place. The partnerships are forming. The time to accelerate is now.

- Third , Malaysia is positioning Islamic finance as the vanguard of two global growth frontiers: first is the halal economy and second is the sustainable . These are not niche markets - they are trillion-dollar opportunities waiting finance to be unlocked. Through the MIFC Leadership Council, we have laid strategic groundwork for global connectivity. Stronger execution by industry is now paramount. That is why we are supportive of the formation of the MIFC Business Network or MBN as the next phase of MLC transition. MBN, as a coalition of industry champions -- will be pertinent in charting our way forward. They will be tasked with deepening sectoral collaboration - securing tangible business outcomes, and scaling impact in Malaysia and beyond. I am pleased to announce that nine (9) industry players comprising entities from banking, takaful, capital markets and ancillary services have committed to be the founding members of MBN. Invitation for wider participation from industry players will be announced soon. The Bank, alongside other regulators and key stakeholders, will remain committed to supporting the industry in advancing the MIFC agenda.
- Fourth , Bank Negara Malaysia plans to move forward with . a new benchmark Beginning 1 July 2027, Malaysian Islamic Overnight Rate, or we call it MYOR-i, will become the mandatory reference rate for Islamic financial products. This is not just a technical adjustment; it is a structural transformation. As the world's first transaction-based Islamic benchmark rate, MYOR-i brings transparency, consistency, and Shariah alignment to the heart of Islamic finance.
- The fifth and - and the final frontier in advancing Islamic finance is talent ideas and innovation that talent can unlock. Institutions like INCEIF University are evolving beyond education into engines of innovation, embedding the Maqasid into economic and policy frameworks. Regionally, IBFIM is scaling up Shariah capacity through the enhanced Associate Qualification in Islamic Finance (AQIF), now tailored for the ASEAN markets. With country-specific modules for Brunei, Indonesia, the Philippines, and Singapore, this programme is building a workforce that is not only technically proficient, but regionally attuned and innovation-ready. The need is clear, if we want Islamic finance to lead, we must invest to build and nurture talent that can imagine, design, and deliver its future.

Yang Amat Berhormat, Ladies and gentlemen,

In closing, the global Islamic finance industry is on course to surpass USD9.7 trillion by 2029 . But this journey cannot be defined by scale alone - it must be underpinned by 4 robust substance. This promising growth requires strong leadership and innovation with purpose. I hope this forum will serve as a bridge, honouring the wisdom of our values while boldly reimagining the future of Islamic finance.

Thank you.

1  World Trade Organization statistics.  https://www.wto.org/english/res\_e/statis\_e /trade\_evolution\_e/evolution\_trade\_wto\_e.htm

2 Islam, Z. (1984). Banking In The Abbasid Period A Special Study Of The Tenth Century A. D., 45, 780-789. http://www.jstor.org/stable/44140275

- 3 IFSB, Islamic Financial Services Industry Stability Report 2024; Butt, U.; Chamberlain, T. ""Performance of Islamic Banks During the COVID-19 Pandemic: An Empirical J. Risk Financial Manag. 2025, Analysis and Comparison with Conventional Banking"" 18 (6), 308.  https://www.mdpi.com/1911-8074/18/6/308
- 4 LSEG Islamic Finance Development Indicator (IFDI) Report 2025",Abdul Rasheed Ghaffour
https://www.bis.org/review/r251027k.htm,Agnès Bénassy-Quéré: Sustainable investing for public investors,"Speech by Ms Agnès Bénassy-Quéré, Second Deputy Governor of the Bank of France, at the workshop ""Sustainable investing for public investors"", co-organised with the World Bank, Paris, 21 October 2025.",2025-10-21 00:00:00,"## AgnŁs BØnassy-QuØrØ: Sustainable investing for public investors

Speech by Ms AgnŁs BØnassy-QuØrØ, Second Deputy Governor of the Bank of France, at the workshop ""Sustainable investing for public investors"", co-organised with the World Bank, Paris, 21 October 2025.

* * *

Ladies and Gentlemen, Dear Colleagues,

It is my great honor to you in Paris to the premises of the Banque de France welcome for this workshop on ""Sustainable Investing for Public Investors"" co-organized with the World Bank.

I must admit that it is somewhat of a to see such a high-level gathering on the relief theme of sustainable investment in the current environment. After a period of great enthusiasm and widespread commitment, the tide has turned against the climate agenda in several parts of the world, challenged by geopolitical tensions, economic pressures, and shifting priorities.

Of course, the of climate change and nature degradation will not change its reality course. The window of opportunity to limit global warming to 1.5°C by the end of the century is now closing:

- Current Nationally Determined Contributions (NDCs) would instead lead us toward a 2.6 to 2.8°C temperature increase, according to the UN environment programme. 1
- According to the Potsdam Institute for Climate Impact Research, the seventh (out of nine) planetary boundaries has now been breached, namely ocean acidification. 2

## The temptation is strong to fall into either denial or paralysis.

But as central banks and supervisors, we are guided by - our a clear compass mandate - and we are acting accordingly:

- We see climate change as a risk to price stability and financial stability;
- As investors ourselves, we try to protect our balancesheet and lead by example;
- We are also pushing in favor of credible standards and reporting practices for the financial sector at large, to protect it against systemic risks arising from climate change and from the transition.

Why should we - central banks and supervisors - care about climate change and nature? The answer is crystal clear: we must act to protect our core mandate of price and financial stability.

Almost 150 other central banks and supervisors around the globe - among whom many of you - share this concern and the willingness to better understand and assess climate and nature related risks.

These central banks and supervisors are the members ot the Network for Greening NGFS. We at Banque de France are very proud to support the the Financial System, NGFS by hosting its Secretariat here in Paris, and to have the World Bank as an Observer seating at its Steering Committee.

In the Spring, for the first time, the NGFS published a series of short-term scenarios describing the economic impact of very severe but still plausible climate events, for each region, successively; a combination of heatwaves, droughts and wildfires, followed by floods the next year. 3

In such event, could fall by about 4 to 5 percent in just one year in Europe or GDP North America, and as much as 12 percent in Africa, compared to a theoretical benchmark scenario with neither climate change nor mitigation policies.

Such severe hazards also affect . A recent study led by Banque de price stability France  shows that temporary shocks to major crops due to nature degradation could raise food inflation by over 2 pp, and headline inflation by 0.5 pp within a two-year horizon.

Logically, these effects translate into losses for with clear financial institutions, systemic risks arising. According to a recent study by the ECB 5 , 72% of companies in the euro area exhibit a high dependency on at least one service provided by natural ecosystems, and nearly 60% of loans in the euro area are exposed to companies facing unmet flood protection needs.

As public investors, central banks must walk the talk and lead the way towards responsible investment practices.

Let me take this opportunity to to, again, highlight the work of the who has NGFS published several reports on as well as Sustainable and Responsible Investment, 6 on climate-related disclosure 7  for central banks. These reports offer recommendations for including sustainability considerations in governance frameworks, and for measuring the exposure to sustainability risks.

At the Banque de France, we are taking our responsibility on this matter. Our latest Sustainability Report (published in June this year) reiterates our resolve to incorporate sustainability issues, including those relating to climate change and nature degradation in a cross-cutting approach, into our strategy, missions and operations. 8

Our efforts were recognized for the third time in a row as the Banque de France was ranked number 1 in the G20 Green Central Banking Scorecard.

We have implemented ""Paris aligned"" fossil-fuel exclusion thresholds for oil and gas and totally excluded coal and unconventional hydrocarbons from our portfolios.

Having already aligned our with a 1.5°C warming trajectory by the equity portfolios end of 2023, we have pledged to extend this temperature target to the corporate bond by end-2026. component

The scope of our sustainability strategy now extends to . nature and biodiversity

As an example, and thanks to a fruitful partnership with the Caisse des DØpôts, the Banque de France's asset management subsidiary now implements a thematic by incorporating biodiversity analyses. These are management strategy for equities not just words: we are closely monitoring the rise in the corresponding footprint in our portfolios.

We are also proud to be part of the Eurosystem's harmonised climate-related since its beginning in 2021, as it is a practical application of the disclosure exercise recommendations that have been made by the NGFS.

That said, while we're proud to stand strong on our principles and lead by example, central banks cannot navigate alone towards sustainable destination.

Just for , the European Commission estimates that a total green investment of Europe each year is needed to reach its 2030 target. It is easy to around €1.2 trillion understand that the contribution of central banks can only be a small part of the effort.

Sustainable finance has gained significant traction in recent years but needs to be further amplified through adequate disclosure.

Global issuance of green bonds has been multiplied by 30 in 10 years, increasing from 20 bn euros to around 600 bn euros between 2014 and 2024. 9

The cannot rely only on volunteers. It needs (1) an massification of green finance adequate carbon pricing strategy that will help markets to internalize climate risks (but is beyond the reach of central banks and supervisors); and (2) a credible, verifiable set of standards and reporting requirements. Confidence is key in sustainable finance, as it has always been the case in ""traditional"" finance.

In Europe, the includes welcome simplifications, but they recent Omnibus proposal must not alter the high ambition level for the sustainable reporting framework.

Criticisms have been made regarding the of the initial reporting rules, over-complexity and now a trend of simplification has started. However, simplification does not mean deregulation.

If we manage to simplify the reporting framework while ensuring the availability of robust and comparable data necessary for the transition, we will have a win-win situation: our framework will gain in both efficiency and ""acceptability.""

## CONCLUSION

To conclude, sustainable finance and more broadly climate-related topics are now facing at a time when they must still be amplified. This is why, now more than headwinds, ever, we need to cooperate, to discuss and to share best practices.

And this is exactly what this kind of is made for. seminar

I can only hope that in the run-up to the COP 30, we will see renewed commitment from all stakeholders to accelerate the transition towards a more and concrete actions sustainable and resilient future.

Once again, I am delighted to see you all here and I wish you a very fruitful seminar.

- 1 UN environment programme,  Emissions Gap Report 2024 - No more hot air ... please! , October 2024.
- 2  Potsdam Institute for Climate Impact Research,  Seven of nine planetary boundaries now breached - ocean acidification joins the danger zone, September 2025.
- , last updated 3 NGFS Short-term Climate Scenarios for central banks and supervisors 23rd July 2025.
- 4  Wegner et al.,  Seeds of Inflation: Macro Modelling of Nature-Related Risks through Agricultural Prices,  Banque de France, 29th July 2025.
- Ceglar, A., Marques, A., Boldrini, S. European banks face significant vulnerability 5 et al. to ecosystem degradation and climate change. 6, 750 (2025). Commun Earth Environ
- 6 NGFS publishes three reports on Sustainable and Responsible Investment for Central Banks,  May 2024.
- , June 7 NGFS Guide on climate-related disclosure for central banks, Second edition 2024.
- Banque de France and ACPR, June 2025. 8 2024 Sustainability Report
- 9  Bloomberg ICMA.",Agnès Benassy-Quere
https://www.bis.org/review/r251027a.htm,Christopher Kent: Australian financial conditions - how do we judge how tight or easy they are?,"Address by Mr Christopher Kent, Assistant Governor (Financial Markets) of the Reserve Bank of Australia, to the CFA Society Australia, Sydney, 16 October 2025.",2025-10-16 00:00:00,"

## Speech

## Australian Financial Conditions — How Do We Judge How Tight or Easy They Are?



Christopher Kent

|”!

Assistant Governor (Financial Markets)

Address to CFA Society Australia

Sydney — 16 October 2025

## Introduction

I would like to thank the CFA Society for the opportunity to speak here today.

A key part of the Monetary Policy Board's deliberations is to assess whether financial conditions are tight, easy or neutral in terms of their effect on aggregate demand. It then determines whether those conditions are appropriate to achieve its goals of full employment and low and stable inflation, and adjusts the cash rate target if needed.

Today, I'll speak about three key building blocks we use to assess financial conditions. While the cash rate target is a good starting point, it is not a reliable guide because it does not account for other factors affecting financial conditions, including structural changes in the economy. Hence, it is worthwhile to:

- » compare the cash rate with estimates of the neutral interest rate, although these estimates are highly uncertain
- » consider a broader set of financial indicators, which also help to track the transmission of monetary policy through the economy
- » examine the RBA's macroeconomic forecasts, which incorporate measures of financial and economic conditions.

These building blocks point to policy having been restrictive from around 2023. More recently, there are signs that restrictiveness has declined following cuts to the cash rate target and with funding readily available to a wide range of household and business borrowers.

## Cash rate target

A good starting point for my talk today is the cash rate target, which is a key focus for commentators assessing financial conditions (Graph 1), and rightly so. It has an important bearing on interest rates in the Australian economy and is the instrument the Board sets to influence financial conditions.

Graph 1 Australian Cash Rate Target



But it's hard to assess financial conditions by looking at the cash rate alone, as its past behaviour is not a reliable basis for comparison.

One reason is that how tight or easy a given cash rate is depends on expectations of both inflation and the cash rate itself (to which I'll return shortly). For example, the benefit of a high interest rate to a saver is reduced if inflation erodes what their money can buy over time. Similarly, the burden of a high interest rate on a loan is eased if nominal wages or profits are rising quickly. To address this, we can compare the cash rate to estimates of the nominal neutral rate, which adjusts for changes in inflation expectations over time.

The neutral interest rate is also a useful comparator because it can account for changes in global developments and Australia's economic and financial structures. These can influence how any given level of the cash rate will affect aggregate demand. The neutral cash rate is the rate that is neither expansionary nor contractionary over the long term — balancing investment and savings at levels consistent with full employment and stable inflation (once current shocks fade). Conceptually, at least, comparing the cash rate to the neutral rate helps gauge the restrictiveness of monetary policy.

## Neutral interest rate

The RBA estimates the neutral interest rate using several models. |! I'll focus on the average of the models' central estimates before turning to key differences between them (Graph 2). The average suggests the neutral cash rate has trended lower over recent decades — a pattern seen in other economies. This trend is likely to reflect structural shifts such as demographic change and slower productivity growth. These shifts can increase savings and reduce investment, in which case lower interest rates would be needed to balance the two.

So while the cash rate has been much lower in recent years than in previous decades, this does not imply a one-to-one easing in financial conditions because the neutral rate has also declined. Indeed, a cash rate of around 4 per cent in recent times may have been just as restrictive as 7 per cent was three decades ago if the neutral rate has fallen by around 3 percentage points since then.

Graph 2 Nominal Neutral Rate*



* Nominal neutral rates are defined using trend inflation expectations. Dashed lines show cash rate expectations implied by OIS as at 13 October 2025.

Sources: LSEG; RBA.

In recent years, central estimates of Australia's neutral rate have risen by about 1 percentage point on average. Factors contributing to this include rising global public debt, lower saving by retiring baby boomers, and increased public and private investment — including in the green energy transition. !!

This rise in the neutral rate implies that any given level of the cash rate is now less restrictive than it would have been otherwise.

So far I have compared the current cash rate with neutral estimates at that time, but we also need to consider cash rate expectations, as they influence longer term interest rates and affect current savings and investment decisions. A declining expected path for the cash rate as shown in Graph 2, for example, implies easier financial conditions than a flat or a rising one.

## Limitations of neutral rate estimates

There are limitations to using neutral rate estimates to assess whether financial conditions are tight or easy. The main limitation is that the estimates are imprecise. This has two aspects.

First, the estimates are very uncertain. The span of central estimates across models is wide, but we do not know which model best measures the neutral rate, and each central estimate is derived with uncertainty (Graph 3).

Graph 3

Nominal Neutral Rate*

Estimates from the full model suite



* Nominal neutral rates are defined using trend inflation expectations. Dashed lines show cash rate expectations implied by OIS as at 13 October 2025.

Sources: LSEG; RBA.

Even so, assuming our models cover the set of reasonable descriptions of the neutral rate, we can have some confidence that cash rates well above the range of central estimates would constrain aggregate demand (and vice versa for rates well below). But we can be less certain for rates closer to or within that range — as is currently the case.

A second limitation is that the models may not capture all the key aspects of financial conditions, or at least not in a timely manner. Indeed, four of our models rely on macroeconomic data, which are only available with some lag and reflect past financial conditions, making them slow to respond to new developments. These are the four models currently showing lower estimates. The three other models are forward looking. They extract estimates of future short rates from bond yields of various maturities and so they are potentially quite responsive to changes affecting the neutral rate; but again, they are estimated with considerable uncertainty.

Given these limitations, neutral rate estimates form only part of our assessment of financial conditions. We also consider a broader set of indicators of financial conditions.

## Additional indicators of financial conditions

Financial indicators can help us to track the transmission of monetary policy to the economy. They also can suggest whether financial conditions align with movements in the cash rate or behave in ways that are amplifying or dampening its usual effects. I'll focus on just a few indicators — though we refer to a broader set in our quarterly Statement on Monetary Policy (SMP). !?!

## Funding cost and interest rate spreads

Changes in the overnight cash rate influence other interest rates, including those affecting banks' funding costs and lending rates for households and businesses. Graph 4 shows the differences between funding costs and the cash rate, and between loan interest rates and the cash rate. These spreads reflect factors influencing the supply and demand for funding. The top panel shows that the spread between estimates of major banks' funding costs and the cash rate was very low before the global financial crisis, with depositors receiving low returns relative to the cash rate and bond holders requiring little compensation for a given level of risk. This spread rose sharply during the crisis as credit risk concerns grew and banks shifted from short-term wholesale debt and securitisation to more stable funding sources. During the pandemic, the funding cost spread fell in response to the RBA's unconventional policies, but it has stayed low since then, reflecting a higher share of at-call deposits and, more recently, low wholesale debt spreads. !!

Graph 4



- Funding cost and lending rates are spreads to the cash rate. *
- RBA estimates of major banks' hedged debt and deposit costs. **
- *** Breaks for introduction of Economic and Financial Statistics in 2019. Business rates are outstanding variable rates. Housing rates are new variable rates, sourced from Perpetual data prior to 2013; advertised package rates to July 2019; thereafter, data from the EFS collection.
- **** Seven-year BBB-rated spread to AGS, five-day moving average. Last observation is 09 October 2025.

Sources:

ABS; AFMA; APRA; ASX; Bloomberg; LSEG; major bank liaison; major banks' websites; Perpetual; RBA; Securitisation System; Tullett Prebon; US Federal Reserve.

Variations in banks' funding costs, and their willingness to take on credit risk and compete for borrowers, have underpinned movements in key lending rates to households and businesses, shown as spreads to the cash rate in the middle panel of Graph 4. These spreads have narrowed in recent years. The bottom panel shows the cost for larger businesses to raise funds via bond issuance, with spreads to Australian Government Securities yields currently at very low levels.

The sharp rise in banks' funding costs and lending spreads during the global financial crisis tightened financial conditions and was one reason the RBA cut the cash rate sharply at the time. However, current loan spreads suggest financial conditions are now less tight than a few years ago for a given level of the cash rate. This is consistent with the rise in neutral rate estimates I just mentioned.

## Household financial conditions

The cash flow and intertemporal channels influence household savings, consumption and housing investment. These are key channels for monetary policy transmission and the associated indicators are useful for assessing financial conditions.

## Mortgage payments

Mortgage payments data offer insight into how these channels operate. While required payments have declined this year as the lower cash rate has passed through to banks' lending rates, they remain elevated due to interest rates being above pre-pandemic averages (Graph 5).

Graph 5

## Housing Mortgage Payments



The bottom panel of Graph 5 shows that mortgagees typically pay more than the minimum required. In response to high mortgage rates, extra payments rose above the pre-pandemic average by the end of 2024 (as a share of household disposable income), consistent with the incentive to save more when interest rates were high. But extra mortgage payments have now declined, which is possibly an early response to the easing in interest rates. |°!

## Household credit

Lending rates can affect household credit growth by influencing housing prices, borrowers' ability and willingness to take on new debt, and the incentive to repay existing debt. This was evident as interest rates rose from 2022, with the subsequent decline in the ratio of household credit to household disposable incomes consistent with tight monetary policy (Graph 6).

Graph 6

## Household Credit*



Household credit growth picked up as interest rates declined this year and housing market conditions strengthened, which is consistent with an easing in financial conditions. However, the stock of household credit excluding offset balances is still falling relative to income and, by itself, doesn't suggest that financial conditions are easy.

## Business debt

The ready availability of funding at favourable spreads has supported the rise in business debt in recent years (Graph 7). Strong competition among banks and non-banks, healthy loan books and an improved economic outlook have underpinned the supply of credit to businesses. Large businesses have also benefited from low corporate bond spreads, with non-financial Australian corporations issuing bonds at record levels this year.

Graph 7

Business Debt* Per cent of annual GDP



* Seasonally adjusted and break-adjusted. Includes business credit, corporate bonds and other lending; excludes financial businesses from 2003 onwards. Data to June quarter 2025.

Sources: ABS; APRA; Bloomberg; LSEG; RBA.

Business investment has historically had a weak direct relationship with aggregate business debt, as that investment is mainly internally funded and influenced by factors like profitability and economic conditions. '°! Even so, strong business debt growth is consistent with a positive outlook by businesses and lenders. Credit growth also contributes to money supply growth, which can offer a timely — though imprecise — signal of trends in aggregate demand and inflation. |7!

The indicators I've discussed add context and, together with neutral rate estimates, help to assess how tight or easy financial conditions are. However, these two building blocks cannot determine if a policy stance is appropriate for achieving the Board's goals. This is because they do not account for all the factors that shape the economic outlook, including recent shocks and other cyclical influences. For that, we rely on the RBA's economic forecasts.

## Macroeconomic forecasts

When forecasting, we look at the current state of financial conditions and assume that the cash rate follows the path implied by market pricing. Our forecasts also incorporate a wide range of macroeconomic factors shaping the domestic outlook, such as conditions in major trading partners and Australian governments' fiscal policies. This approach helps us to assess whether financial conditions are such that the Board's inflation and employment objectives are likely to be met. If not, it implies that the Board might need to consider a different path for the cash rate than that implied by market pricing.

In addition to the market path for the cash rate, our forecasts assume the Australian dollar tradeweighted exchange rate remains at its current level. Several other financial variables also feed into the forecasts. For example, household consumption is influenced by housing lending rates, credit growth, and equity and housing prices (through wealth effects). The cost of capital, which incorporates business lending rates, feeds into models of non-mining business investment. Despite the inclusion of these measures, the models that form the starting point for our forecasts may not properly capture financial conditions, so judgement about this dimension is required — alongside judgement about macroeconomic factors.

For over a year, forecasts in the SMP have assumed the cash rate would gradually decline through 2025 and early 2026 before stabilising. The forecasts have implicitly reflected an assessment that financial conditions were restrictive and restraining demand. This was bringing demand and potential supply into better balance and easing labour market tightness. As a result, underlying inflation was expected to gradually return towards the midpoint of the 2—3 per cent target range. With the economy approaching balance, policy was expected to move towards a more neutral stance.

We can use model estimates to see how the outlook might change if the cash rate path were to deviate from the baseline. The red shaded area in Graph 8 shows projections for inflation and unemployment if the cash rate was 50 basis points higher or lower than the August SMP baseline. !! For instance, if the cash rate was 50 basis points higher (all else equal), inflation would be expected to fall below 2.5 per cent and be declining by late 2027, while unemployment would be expected to be around 4.5 per cent and rising. In summary, based on what we knew at the time, cash rate paths that deviated too far from the August SMP baseline would have been less likely to meet the Board's goals for inflation and full employment.

Graph 8

## Range of Economic Projections*



* The shaded area shows the range of projections generated by different policy paths in one of the Bank's main macroeconometric models, MARTIN. These policy paths vary by +50 basis points around the market-implied cash rate assumption underlying the August 2025 SMP forecasts.

Sources: ABS; RBA.

However, our macroeconomic forecasts carry significant uncertainty. This includes uncertainty about our assessment of how tight or easy overall financial conditions are, which has been — and will continue to be — closely scrutinised. Historical forecast errors, illustrated by fan charts, show that the range of potential outcomes for underlying inflation and unemployment is very wide out beyond the near term (Graph 9).

## Graph 9

## Economic Forecasts*



* — Forecasts are as at the August 2025 SMP; confidence intervals reflect RBA forecast errors since 1993, with the 70 per cent interval shown in dark blue and the 90 per cent interval shown in light blue.

Sources: ABS; RBA.

## Conclusion

It makes sense to use a number of different methods to assess financial conditions given the considerable uncertainty involved with each.

The first building block — the conceptual cornerstone if you like — is to compare the cash rate with estimates of the nominal neutral rate. Model-based estimates of the neutral rate suggest that financial conditions have been tight, working to restrain aggregate demand. Based on the market path, the cash rate is expected to sit within the wide range of central estimates of neutral over the coming period. However, even that range understates the uncertainty. And while neutral rate estimates are a useful cross-check, they are not a suitable guide to the near-term path of monetary policy.

Nevertheless, what neutral rate estimates suggest accords with a range of indicators of financial conditions. These indicators offer more timely evidence of monetary policy effects than measures like economic activity and inflation. Indeed, several indicators of financial conditions — including mortgage payments and housing credit growth — show early signs of responding to the easing in financial conditions this year.

Finally, the RBA's macroeconomic forecasts are based on a range of financial indicators, including the expected path of the cash rate implied by market pricing. Our forecasts imply that the tightness in financial conditions has eased, which will help to keep the economy in balance in the period ahead, with full employment and inflation moving toward the centre of the target range. However, this outlook is subject to considerable uncertainty, and we will continue to reassess it in light of what the incoming data mean for the economic outlook and evolving risks.

## Endnotes

- [*] I thank Indigo Adamson, Joel Findlay, Kristy Guo, Michaela Haderer, Sarah Jennison, Sophie Kelly, Sharon Lai, Patrick Manning, Hamish McLean, Emma Searle, Josh Spiller and Peter Wallis for their excellent assistance in helping me to prepare this speech.
- The RBA uses a suite of models to estimate the real neutral rate for Australia, including semi-structural models, vector autoregressions and financial market-based models. We can convert this to a nominal neutral rate by using a measure of trend inflation. Over the past year or so, we have updated our modelling approach to semi-structural models. This has involved working through how to deal with the COVID-19 pandemic period and how long we modify the models' usual dynamics. These updates have affected the overall model average of central estimates of the neutral rate.
- [2] See Kent C (2024), 'Restrictive Financial Conditions in Australia', Address to ABA Banking Conference, Melbourne, 26 June, and references therein.
- [3] I have focused here on debtors in the transmission of monetary policy, but savers also play an important role, not only through the effect of interest rates on their cash flows — which runs counter to the effect on debtors — but also through the intertemporal channel, whereby higher rates, for example, encourage more saving by savers and debtors alike. For a more comprehensive examination of the household cash-flow channel of monetary policy, see Jennison S and M Miller (2025), 'An Update on the Household Cash-flow Channel of Monetary Policy', RBA Bulletin, January.
- See Cole D, V De Zoysa and C Schwartz (2025), 'Bank Funding in 2024', RBA Bulletin, April.
- Also noteworthy in this graph is the sharp rises in extra payments during the pandemic and over the first half of the 2010s. This highlights the fact that these payments can be influenced by things other than interest rates. For example, during the pandemic, there were reduced opportunities for spending and yet incomes were not affected so much (including because of support provided by JobKeeper).
- [6] For a discussion of the uses of internal and external business funding in Australia, see Kent C (2017), 'The Availability of Business Finance', Address to 30th Australasian Finance and Banking Conference, Sydney, 13 December, and references therein.
- See Doherty E, B Jackman and E Perry (2018), 'Money in the Australian Economy', RBA Bulletin, September.
- [8] These alternative scenarios are generated using the RBA's MARTIN model. For an overview of MARTIN, see Ballantyne A, T Cusbert, R Evans, R Guttmann, J Hambur, A Hamilton, E Kendall, R McCririck, G Nodari and D Rees (2019), 'MARTIN Has Its Place: A Macroeconometric Model of the Australian Economy', RBA Research Discussion Paper No 2019-07.

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The Reserve Bank of Australia acknowledges the Aboriginal and Torres Strait Islander Peoples of Australia as the Traditional Custodians of this land, and recognises their continuing connection to country. We pay our respects to their Elders, past and present. Aboriginal and Torres Strait Islander peoples should be aware that this website may contain the names, images and voices of people who are now deceased.",Christopher Kent
https://www.bis.org/review/r251014g.htm,Michele Bullock: The evolving global payments landscape - challenges and opportunities for Australia and the broader Asia-Pacific region,"Speech by Ms Michele Bullock, Governor of the Reserve Bank of Australia, at a joint workshop organised by the Bank of International Settlements (BIS), Institute of International Finance (IIF) and RBA, Sydney, 3 October 2025. ",2025-10-03 00:00:00,"## Speech

## The Evolving Global Payments Landscape: Challenges and Opportunities for Australia and the Broader Asia-Pacific Region

Michele Bullock *

Governor

Bank of International Settlements (BIS), Institute of International

Finance (IIF) and RBA Joint Workshop Sydney - 3 October 2025

## Introduction

Good afternoon, and welcome to Sydney. It's a pleasure to host this important dialogue between the CPMI and industry leaders at a time of rapid change in the payments landscape. There is an everincreasing demand from end users to make payments safer, more efficient, seamless, and capable of integrating into other processes. Technological innovation provides significant opportunities to meet these needs. At the same time, fraud, scams, and cyber threats continue to evolve, giving rise to new challenges to the safety and stability of payment systems. There has never been a more important time to discuss these issues.

Today I would like to share some perspectives for the Asia-Pacific region on some of the key opportunities and challenges, particularly in relation to cross-border payments, the emergence of new forms of digital money, and the resilience of the payments system.

## Enhancing cross-border payments in the Asia-Pacific

Businesses and households need efficient, competitive and safe ways to send and receive money across borders. But despite rapid growth in international commerce, cross-border payments services remain expensive, slow and opaque relative to domestic payments. This is of course a global problem, but the strong financial relationships and vast flows of trade and people within the Asia-Pacific region mean that there are substantial gains to be unlocked by enhancing cross-border payments in our region.

Australia is committed to making cross-border payments cheaper, faster, more transparent and more accessible under the G20 Roadmap. We and other regulators have been working together with the Australian payments industry to improve cross-border payment outcomes through a few key initiatives to boost transparency and uplift domestic payments infrastructure.

Australia has made good progress on transparency in recent years through industry adherence to the Australian Competition &amp; Consumer Commission's (ACCC's) Best Practice Guidance on how international money transfer providers should display information to consumers. This, together with greater competition from non-bank providers, has helped to push down costs for international money transfers in recent years. In 2024 the ACCC published revised guidance which should help make it simpler for consumers to compare providers' price and speed offerings. 1 2

A priority for the RBA has been engaging with industry over the adoption of richer data and new capabilities for Australia's cross-border payments infrastructure. There are two key initiatives with the potential to shift the dial here.

The first is the adoption of the CPMI's internationally harmonised payments messaging requirements based on the ISO 20022 messaging standard. As you know, global use of richer harmonised messaging will reduce the need for manual intervention, which should in turn lower costs and speed up cross-border payments. The RBA has set an expectation that the relevant Australian payment systems adopt these requirements by the global timeline of end-2027. We are tracking the industry's progress towards this goal through regular surveys and ongoing engagements, and reporting this information to our Payments System Board.

The second, which is already in place, is the International Payments Service (IPS) on the New Payments Platform (NPP), Australia's fast payment system. This service allows the final Australian dollar leg of inbound cross-border payments to be processed on a near real-time 24/7 basis. It also enables more complete payer information to be sent with the payment for compliance screening purposes. The volume and average value of IPS payments has grown substantially over the past year, and importantly, many of these payments are being sent outside standard business hours (Graph 1). This is helping to speed up payments coming into Australia, benefitting financial institutions and their customers.

## Graph 1

## NPP International Payments Service

Volume of transactions, monthly



* Business hours are 9 am to 5 pm Monday to Friday.

Source: RBA.

Another way to leverage domestic fast payments systems to enable more seamless cross-border payments is to link those systems up. The RBA has collaborated with industry participants on an exploratory analytical study about the benefits, design considerations and challenges involved. We are also monitoring the advancement of interlinking initiatives closely. Some countries in the AsiaPacific region have established bilateral connections between their fast payment systems. And several ASEAN countries and India recently launched a multilateral scheme, Nexus Global Payments, to standardise the way that fast payment systems connect to each other. 3

Enabling access to cost-effective remittances for the South Pacific countries remains a high priority for Australia, as many families in the region rely on remittances as a key source of income. But remittances to our South Pacific neighbours tend to be slow and costly, in part due to a lack of transparency and competition between providers. To facilitate greater transparency, the Australian Government has supported the development of the Send Money Pacific website which allows people to compare providers' prices and the speed of services to send money to 11 countries in the region.

More broadly, South Pacific countries currently face considerable challenges maintaining access to correspondent banking relationships. A key concern for correspondent banks is the substantial costs involved in providing these services, including complying with regulatory requirements to detect and prevent financial crime. Australian authorities have been supporting Pacific countries in the region with a range of regulatory and banking initiatives, including working together with Australian banks to ensure the ongoing provision of retail banking services in South Pacific countries.

## Potential for new forms of digital currencies to boost efficiency of cross-border payments and financial markets

Technological advances are not only improving existing payment processes, they are also enabling the emergence of new forms of digital money.

Central banks across the world are at various stages of exploring the potential role of digital currencies, including central bank digital currencies (CBDCs), in the financial and payments system. The RBA and other Asian central banks have led or participated in cross-country initiatives involving the use of CBDCs. One such initiative was Project Dunbar, led by the BIS Innovation Hub, which explored using CBDCs from multiple countries to facilitate cross-border payments.

Many jurisdictions have also considered the potential use of CBDCs to support financial market transactions. The RBA, for example, is exploring the role of different forms of digital money in domestic wholesale tokenised asset markets through Project Acacia. The learnings will help the RBA to understand the role it can play in supporting the development of tokenised asset markets in Australia. For example, whether there is a role for wholesale CBDC to support settlement, or whether enhancements to existing payments infrastructure are required.

At the same time as CBDC research has been progressing, stablecoins are also gaining prominence. Globally, issuance has so far been dominated by US dollar-denominated coins, but stablecoins linked to Asia-Pacific currencies are also growing. While their origins lie in crypto-asset trading, their potential applications now extend well beyond that space. For example, there has been interest from retailers such as US Amazon for customer payments. And stablecoins are now being used in some jurisdictions for people to get exposure to US dollars without having to hold a US dollar bank account or physical currency. In other words, stablecoins are presenting opportunities in the payments and monetary system.

But stablecoins also present risks. If they are not fully backed by high-quality liquid assets, stablecoins can expose holders to losses. An example is the 2022 collapse of the TerraUSD stablecoin, which used an algorithm rather than high-quality liquid assets to maintain its value. Addressing the risk of fraud and financial crime is also challenging because of the speed, complexity, opacity and the global nature of the distributed ledger platforms used for stablecoins. Depending on how large the market becomes, there might also be implications for financial stability. The potential impacts on commercial banks and the markets for backing assets, particularly in times of stress, are complex issues that require careful consideration. For some jurisdictions, rising use of foreign currency denominated stablecoins may also raise concerns about the sovereignty of domestic currencies. Large scale currency substitution could be problematic because the interest rates over which a central bank has influence would become less relevant.

So how do we reap the benefits of stablecoins while managing these risks? It will require careful regulation that doesn't stifle innovation but addresses the risks. Some Asia-Pacific jurisdictions, such as Japan and Singapore, were among the first to develop, and in Japan's case implement, regulatory frameworks, providing clarity on the role of stablecoins in their financial and payments landscapes. Australia, like several other jurisdictions, is currently progressing its regulatory framework for stablecoins. As these new frameworks develop, there is an emerging question for us, as a global community, around how we drive consistency across regimes. Minimising opportunities for regulatory arbitrage will be important for managing risk and for promoting confidence in stablecoins as a monetary innovation.

## Heightened focus on resilience and safety in the payments system

In a recent speech the RBA's Assistant Governor Brad Jones spoke about the need to uplift resiliency in the payments system, while balancing and enhancing the capability to innovate. 4

In this rapidly evolving landscape, the resilience and safety of our payments system is critical. Both well-established and emerging payment systems depend on complex technology and infrastructure and, often, on a small number of third-party providers. This concentration risk, combined with heightened geopolitical tensions, underscores the need for robust contingency planning. The RBA is working with banks and payment providers to ensure essential transactions can continue even in the face of severe disruption. Interoperability between systems is critical - not only does it give consumers choice in normal times, but it provides fallback options when systems fail. Likewise, managing third-party risk is no longer optional; it is central to maintaining trust in the system. Our goal is to create a payments system that not only withstands disruptions but grows stronger because of them - learning from each challenge to implement measures that continuously enhance resilience.

At the same time, safety remains a top priority. Fraud and scams are a pressing concern around the world. Australians lost around $2 billion to scams last year, down from $2.7 billion in 2023 - a significant improvement, but still far too high. This progress reflects combined efforts of industry, government and the National Anti-Scam Centre, to boost community awareness, share scam data and disrupt specific scam types. Industry measures such as stronger customer alerts and putting higherrisk payments temporarily on hold are also having a positive effect. These steps introduce frictions to the system. But they help to protect consumers and maintain trust in digital payments, which is crucial to fully realise the benefits of our payment systems. Again, we need to balance benefits and costs of fast, efficient payment systems.

One area of promise is the rollout of 'Confirmation of Payee' functionality. This feature enables payers to verify that the name of the recipient matches their expectation before funds are transferred, which is important for preventing mistaken payments and reducing the incidence of scams. In Australia this functionality was already in place for NPP payments made using the PayID service, which allows payments to be addressed to an account alias such as a mobile phone number or email address. It is now also being extended to payments addressed to account numbers. At the international level, the Committee on Payments and Market Infrastructures has also prioritised this issue, recognising the complexities introduced by cross-border transactions.

Throughout all this, we must remain mindful of balance. Enhancing resilience and safety is essential, but we also need to support efficiency and innovation. Our objectives as regulators of payment systems are to promote safety, efficiency, and competition. These objectives are not mutually exclusive. By embedding resilience and safety into the design of our systems, we endeavour to achieve all three.

## Conclusion

The world of payments is changing rapidly, and the opportunities and challenges we're seeing in Australia and across the Asia-Pacific are not unique. They are mirrored around the world. Whether it's improving cross-border payments, exploring new forms of digital money, or strengthening system resilience, these are global conversations.

The Bank is committed to continuing to work closely with other central banks, regulators, and the industry to shape the future of money and payments. By working together, we can build payment systems that are safer, more efficient, and future ready.

Thank you.

## Endnotes

- I would like to thank Elizabeth Kandelas, Emma Bouvier, Trent Hardy and Shirley Huang for excellent assistance in preparing these remarks. *
- ACCC (2024), 'Transparency and competition in international money transfer services', 30 July. 1
- ACCC (2024), 'Best Practice Guidance: for foreign cash and international money transfer services', October. 2
- RBA (2024), 'Interlinking Fast Payment Systems for Cross-border Payments', April. 3
- Jones B (2025), 'Anti-fragility and the Financial System', Opening Remarks to FINSIA: The Regulators, 12 September. 4",Michele Bullock
https://www.bis.org/review/r251013b.htm,Michael S Barr: The economic outlook and monetary policy,"Speech by Mr Michael S Barr, Member of the Board of Governors of the Federal Reserve System, at the Economic Club of Minnesota Luncheon, Golden Valley, Minnesota, 9 October 2025.",2025-10-09 00:00:00,"## Michael S Barr: The economic outlook and monetary policy

Speech by Mr Michael S Barr, Member of the Board of Governors of the Federal Reserve System, at the Economic Club of Minnesota Luncheon, Golden Valley, Minnesota, 9 October 2025.

* * *

Thank you to the Economic Club of Minnesota for the opportunity to speak to you today.

- 1   I'm happy to be here for several reasons, one of which is that I have roots in Minnesota. My grandmother was born and raised in Eveleth, where her parents ran a small clothing store they opened in 1906 to serve the growing population that came here in the iron ore mining boom of that era. That generation's hard work and dreams of a better future helped build this great state as well as the prosperous economy that this club and the Federal Reserve are both dedicated to fostering.

We are midway between the last meeting of the Federal Open Market Committee (FOMC) and our next meeting at the end of this month. At our last meeting in September, we decided to reduce the policy rate by 25 basis points, a decision I supported. My FOMC colleagues and I also updated our projections for the economic outlook for the next couple of years and gave our assessments of the likely appropriate policy rate path as economic conditions evolve. In my remarks today, I will share my own thinking related to those decisions last month, and how incoming data and other developments have subsequently shaped my views as we head into the FOMC's next meeting in three weeks. That includes the economic implications of various developments in Washington including the federal government shutdown, which I imagine is on the minds of many of you today.

We are currently in a challenging position, because the risks to both sides of the FOMC's mandate-employment and inflation-are elevated. I agree with Chair Powell's succinct view that there is no risk-free path forward for monetary policy. While inflation has come down a great deal since 2021, it is still above our 2 percent target and is now rising. And although several data points indicate that the labor market may be roughly in balance, we also know there has been a sharp drop in job creation since May, which suggests risks to the labor market going forward. The most difficult circumstances for making monetary policy decisions are when both mandate variables are at risk.

Let me start with inflation. The latest data show that 12-month headline inflation based on personal consumption expenditures (PCE) rose again in August to 2.7 percent. Core PCE inflation, which has historically been a good guide to future inflation, was 2.9 percent. After falling from its high of 7.2 percent in mid-2022 to 2.3 percent in April of this year, PCE inflation has been rising since then.

That timing is no coincidence. Research by Federal Reserve staff and others indicates that the increase in inflation since April has likely owed largely to the sharp increase in tariffs that kicked in around then. There are various measures of the overall level of tariffs. For assessing how tariffs are affecting inflation, I find it helpful to look at tariff

collections relative to imports, which gives us a measure of the real effective tariff rate paid as goods come into the country. This rate has risen sharply this year, reaching about 11 percent in August, and is likely to rise further in the near term.

The tariff hikes have boosted core goods inflation, and at the same time progress on core services inflation has stalled. I expect that core PCE inflation will end the year over 3 percent.

The median FOMC participant estimates that headline PCE inflation will not return to our 2 percent target until the end of 2027, more than two years from today and six and a half years since inflation began rising in 2021. This would be the longest period of PCE inflation above 2 percent since a seven-year stretch that ended in 1993. I recognize that the economy and the American people have been hit by a series of unusual economic shocks in recent years-the COVID-19 pandemic and related shutdowns, disrupted supply chains for goods and labor shortages, higher energy costs from Russia's war on Ukraine, and the sudden increase in tariffs this year. Even so, after the high inflation Americans have endured, two more years would be a long time to wait for a return to our target, and that possibility weighs on my judgment for appropriate monetary policy.

I am also concerned about further upside risks to inflation and inflation expectations. While the immediate effects of tariffs on inflation have been smaller than most economic forecasters had expected, the inventories built up in anticipation of the tariffs may have had a role in easing the immediate impact, as have compressed profit margins. While that is good news for inflation, the corresponding bad news is that firms will eventually run down those inventories and will only be able to compress margins for a while. Many importers, and firms affected by imports, are reporting that they are waiting as long as possible to pass on the costs from tariffs to their customers, mostly by temporarily reducing profit margins. 2   Normalizing margins over time implies a gradual, but longer, upward trajectory for inflation, a pattern of price increases that I fear could convince many consumers that higher inflation is going to be more of a permanent phenomenon. This is important because expectations of future inflation affect spending decisions in the near term and can drive a cycle of escalating inflation, as we saw after prices began rising in 2021.

With that experience in mind, I am skeptical of assurances that we should fully ""look through"" higher inflation from import tariffs. While, in principle, tariffs are a one-time increase in prices and should not sustainably raise inflation, that may not be the case if prices keep rising month after month and affect expectations. There has been nothing ""one-time"" or predictable about these tariff increases, which have ratcheted upward this year on particular countries and particular sectors in a series of steps. At some point, businesses and consumers could start to make pricing, spending, and wage decisions based on their belief in higher future inflation, thereby driving a cycle of persistence. Measures of near-term inflation expectations are down from peaks in April when tariffs were announced, but they are still higher than last year.

As a result, I believe the Federal Reserve's price stability goal faces significant risks. That said, there are some factors that mitigate these risks. In particular, the softer labor market could help keep inflation in check by making it harder for workers to bargain for higher wages even if people expect their cost of living to increase, and by making it

harder for businesses to fully pass through price increases to consumers. In addition, the more gradual effect of tariffs on prices has not, to date, led to the type of supply chain dislocations that can have pronounced second-round effects on inflation. Also, longer-term inflation expectations remain well anchored.

So let's turn to the labor market. While we do not have the full complement of labor market data because the government shutdown has delayed the Bureau of Labor Statistics' employment report, we do know that the payroll services firm ADP found that private-sector employment shrank last month, in keeping with a slowdown in job creation since May. Part of the slowing surely reflects developments on the supply sidefrom both reduced net immigration and somewhat reduced labor force participation-but it is unclear exactly how much. As a result, it is challenging to gauge exactly how much labor demand has softened. Growth in labor supply has declined significantly, with perhaps as many as a million fewer people in the workforce than would have been expected based on the typical pattern of immigration that prevailed in the years prior to the pandemic. With a reduced supply of labor, what constitutes a healthy growth rate for employment would be smaller. One can see that slower labor supply growth has been an important factor in the weaker job creation, because over the period that job gains have slowed significantly, the unemployment rate has only edged up to 4.3 percent, a level typically associated with a sound labor market.

Other measures suggest that labor supply and demand remain in the same rough balance they have been in for more than a year. The ratio of job openings to the number of people looking for work is around 1, the level that has persisted since about the middle of 2024. Likewise, the rate of people losing their jobs is running at the same rate that it has for the past two and a half years, and there is no sign of an impending jump in the unemployment rate in the weekly reports of new claims for unemployment insurance. That said, even if the labor market is still roughly in balance, the fact that this balance is being achieved from simultaneous slowing in labor supply growth and in hiring suggests that the labor market is more vulnerable to negative shocks.

In addition, despite the low and relatively steady unemployment rate, household perceptions of the labor market have deteriorated and are below the level they reached in the strong labor market immediately before the pandemic. According to the New York Fed's survey of consumers, people's perceptions of their chance of finding a new job if they lost their current job fell sharply in August to the lowest reading since the survey started in June 2013. It rebounded somewhat in September, but remained at levels seen in 2013, when the labor market was weak. Also, components of the workforce that are usually an early indication of cyclical changes in the labor market have deteriorated. The unemployment rate for Black or African American workers, which reached a historic low in 2023, is back to its highest level since the pandemic. Unemployment rates for younger workers are also up.

One reason I take these signals seriously is that experience shows that when labor markets turn down, it can happen suddenly. With job growth near zero for the past several months, the labor market could decline precipitously if the economy is hit with another shock. Growth in gross domestic product (GDP) has slowed significantly this year; however, earlier concerns of a continued slowdown seem to be fading. After a negative reading in the first quarter, real GDP grew at a 3.8 percent rate in the second quarter-smoothing through to a rate of 1.6 percent for the first half of the year. Strong

spending and other data for the third quarter indicate that GDP remained strong last quarter. While I expect that tariffs and lower labor supply have weighed on growth and will continue to do so, I do not yet see significant risks in the growth data, though I remain attuned to risks from a variety of factors. It is hard to judge at this point whether the federal government shutdown will leave a noticeable imprint on economic growth, because we don't know how long it will last, and whether it may result in sustained changes in government spending. Based on past shutdowns, it is most likely that a shutdown would reduce GDP growth in the quarter in which it occurs and then boost growth in the subsequent quarter by the same amount.

As I said earlier, this economic outlook, and the associated uncertainties that underlie it, pose challenges for judging the correct stance of monetary policy as well as the appropriate path forward, given that the risks to achieving both components of our mandate are elevated.

With the easing in output growth and the likelihood of tariffs and labor supply weighing on the economy in the months ahead, we need to be prepared for the possibility that the softening in the labor market will become something worse, especially if there is a further adverse shock to demand.

At the same time, inflation, which made steady progress last year toward the FOMC's 2 percent goal, has moved up in 2025, especially after the sharp increase in tariffs, which keep rising. I have laid out my reasons for believing that the so far modest impact of tariffs on inflation probably means a much longer-lasting rachet upward, potentially affecting expectations in a way that makes the job of taming inflation harder.

In balancing and managing these risks to the FOMC's goals, I supported the Committee's decision on September 17 to lower the federal funds rate by 25 basis points. Monetary policy was and remains modestly restrictive, so it seemed to me appropriate to move the rate a bit closer toward neutral, pending more data and further developments on the economy, the forecast, and the balance of risks. Since that meeting, we have learned that consumer spending has been on a notably stronger trajectory than previously indicated, leading most observers to revise up estimates of spending and GDP growth for the rest of the year. We also got confirmation that PCE inflation moved up as expected, and that core inflation remains well above the FOMC's target. Another development was the announcement of new tariffs on imports of heavy trucks, medicine, and furniture.

There was, and remains, considerable uncertainty about the future course of the economy. It is possible that recent low payroll growth is a harbinger of worse to come, or that payroll growth eventually strengthens, consistent with the low unemployment rate and sound growth. It is possible that tariffs will have only a modest impact on the course of prices and that progress resumes toward 2 percent inflation next year, but it is also possible that both inflation and expectations of future inflation escalate.

Common sense would indicate that when there is a lot of uncertainty, one should move cautiously. This is validated by past monetary policymaking experience, and a particular research insight from nearly 60 years ago. The Brainard principle, developed by economist William Brainard, holds that when there is considerable uncertainty about the consequences of a policy action, the recommended course is to move more gradually

than would otherwise be the case. 3   I believe that principle applies now, and that the FOMC should be cautious about adjusting policy so that we can gather further data, update our forecasts, and better assess the balance of risks. If we see inflation moving further away from our target, then it may be necessary to keep policy at least modestly restrictive for longer. If we see heightened risks in the labor market, then we may need to move more quickly to ease policy. The FOMC can, and I believe would, act forcefully to stabilize the economy if necessary.

I think a cautious approach will help us to balance the risks to both sides of our mandate as we continue to assess the economic outlook.

Thank you.

- 1  The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.
- 2  There is little evidence that foreign producers are absorbing the cost of tariffs; see Robbie Minton and Mariano Somale (2025), ""Detecting Tariff Effects on Consumer Prices in Real Time,"" FEDS Notes (Washington: Board of Governors of the Federal Reserve System, May 9).
- 3  See William C. Brainard (1967), ""Uncertainty and the Effectiveness of Policy,"" , vol. 57 (May), pp. 411-25. American Economic Review, Papers and Proceedings",Michael S Barr
https://www.bis.org/review/r251014d.htm,Claudia Buch: Hearing of the Committee on Economic and Monetary Affairs of the European Parliament,"Introductory statement by Prof Claudia Buch, Chair of the Supervisory Board of the European Central Bank, at the Hearing of the Committee on Economic and Monetary Affairs of the European Parliament, Brussels, 13 October 2025.",2025-10-13 00:00:00,"SPEECH

## Hearing of the Committee on Economic and Monetary Affairs of the European Parliament

Introductory statement by Claudia Buch, Chair of the Supervisory Board of the ECB, at the Hearing of the Committee on Economic and Monetary Affairs of the European Parliament

Brussels, 13 October 2025

Thank you very much for the invitation to exchange views with you today. I would like to provide an update on the state of the European banking sector and on our supervisory priorities.

European banks are operating in a challenging environment. Maintaining their resilience and ability to support the real economy requires a strong institutional framework and forward-looking risk assessments. Stress tests are a key tool in this regard. The results of this year's exercise provide insights into European banking sector's resilience to an adverse macroeconomic shock. [ ]  They show higher losses, but a better ability to absorb these losses, compared with the previous stress test in 2023. 1

The adverse scenario assumes an aggravation of geopolitical tensions coupled with higher tariffs, resulting in higher uncertainty, lower market confidence and lower growth. In the adverse scenario, the non-performing loan (NPL) ratio would increase to 5.8%, reaching levels last seen in 2014. Currently, NPLs stand at around 2%. The aggregate losses would amount to €628 billion, which is €80 billion or 14% more than in the previous stress test. [ ] 2

Higher profits would allow banks to absorb part of these losses. The average Common Equity Tier 1 (CET1) ratio depletion would be 100 basis points lower than in the 2023 stress test. This would lower the system's capital ratio from currently 16 to 12% in the adverse scenario. The vast majority of banks would still meet regulatory capital requirements. But 24 out of a total of 96 banks would face dividend restrictions due to breaching their maximum distributable amount (MDA) trigger in the adverse scenario. [ ] 3

Our supervisory follow-up has qualitative and quantitative elements.

On the qualitative side, our focus is on ensuring that banks further improve their internal information systems. Timely access to reliable information is key for managing risks and taking well-informed decisions, which is particularly important in an environment of high uncertainty. Risk data aggregation and risk reporting capabilities have therefore been among our supervisory priorities since 2022, and an ECB guide on the matter was published in 2024. [ ]  Recently, we have assessed banks' preparedness to deal with financial stress of small and medium-sized enterprises. [ ]  Banks with advanced information systems and data collection tools - particularly for sectoral risks - were better able to manage stress episodes. 4 5

On the quantitative side, the key outcome of the stress test is guidance on the capital banks need to remain resilient under stress (Pillar 2 Guidance, or P2G). A higher capital depletion under the adverse scenario leads to a higher P2G - thereby improving banks' ability to provide services to the real economy even in times of stress. Aggregate P2G outcomes will be published with the Supervisory Review and Evaluation Process (SREP) press conference in November.

The data collected during the stress test exercise also provide information on the impact of the implementation of the Basel III rules which have applied in Europe since January 2025. [ ]  On aggregate, data for end-2024 show that the CET1 ratio of euro area banks would remain virtually unchanged. This reflects the gradual phase-in as banks have until 2032 to fully comply with the new rules. 6

The stress test is an important, forward-looking tool to assess banks' resilience under adverse conditions. Generally, rather than impairing banks' capability to lend, enhanced resilience is a competitive strength for banks, as has recently been stressed by the chair of the Basel Committee. [ ]  But in a highly uncertain environment, stress tests need to be complemented by additional risk management tools. 7

In next year's thematic stress test, we will ask which bank-specific geopolitical risk scenarios could severely affect banks' profitability, solvency, and liquidity. This reverse stress test complements this year's stress test, which assumes a common scenario. [ ]  In their financial and capital projections, banks currently anticipate only a slight decline in their profitability this year and in the coming years. However, higher tariffs could lead to a more marked economic slowdown than currently anticipated, and banks may experience changes in market valuations, weaker loan growth, higher loan loss provisions and lower profitability. [ ] 8 9

In our dialogue with banks, we stress the importance of prioritising investment in the long-term sustainability of business models over short-term objectives. Building broad resilience - both operationally and financially - is key to responding to emerging risks. The growing importance of stablecoins and nonbank financial intermediation is a prominent example. Moreover, banks need the capacity to analyse and respond to emerging risks, to invest in good information systems, and to strengthen operational resilience.

This is what's behind our objective to enhance the efficiency and effectiveness of European supervision while staying firmly focused on relevant risks. The reform of the SREP that I have presented here before is on track. [ ]  We now apply the objectives of this reform to our supervisory procedures more broadly, including on-site inspections. [ ] 10 11

Let me update you on the progress made.

First, SREP decisions have become more focused on relevant risk drivers and key supervisory expectations. [ ]  This risk focus ensures clearer communication and quicker SREP decisions. The number of new SREP measures has decreased significantly, with a stronger emphasis on addressing severe findings. SREP decisions are also being issued earlier. [ ]  In next year's SREP, we will also implement a revised and simplified methodology to calibrate the P2R requirement. [ ] 12 13 14

Second, we are using digital tools to better interact with banks, process information, and support decisionmaking. [ ]  For example, by using a digital tool to process fit and proper applications, we have reduced the time needed for assessments from 109 days in 2023 to 97 days in 2024, within the maximum period of 15

## four months. [ ] 16

Third, we are making supervisory approvals of capital-related decisions more risk-based. Decisions such as share buybacks and changes in Tier 1 and Tier 2 instruments have a direct impact on banks' capital adequacy. Taking these decisions in a more risk-based manner means: spending less time on procedural tasks and speeding up decisions for banks that are meeting relevant criteria. This allows focusing on critical decisions that have a relevant impact on resilience.

We are reforming European supervision to ensure that the banking system remains resilient, supporting growth and financial stability. A strong and integrated European regulatory framework is the foundation for our work.

The ECB therefore welcomes the political agreement reached on the crisis management and deposit insurance framework, which marks an important step towards completing the banking union. Using resolution tools for a broader range of banks and ensuring sufficient funding for banks in resolution will enhance financial stability, safeguard depositors and reduce reliance on public funds. Generally, a more credible crisis management framework makes potential crises less likely and less costly.

Now is the time to better prepare for future crises. Progress on the European deposit insurance scheme is a key element, building on previous work done by the European Parliament. A credible collective safety net would reduce the risk of destabilising deposit outflows in times of stress, weaken the sovereign-bank nexus and promote the integration of European banking markets.

The current challenges call for more Europe, not less. Harmonising national rules would significantly improve integration, strengthen competition, and enhance efficiency. Harmonisation is a key driver of simplification, and the capital markets union can be an important catalyst.

It is essential that EU stakeholders work together to maintain sound regulatory and supervisory standards. This positions Europe's banking sector as a globally trusted anchor and enabler of growth.

Weakening standards would have the opposite effect: it would put trust in European banks at risk and reduce their ability to respond to challenges. It would not make banks more competitive - but rather more vulnerable.

1.

ECB (2025), , August. 2025 stress test of euro area banks: final results

2.

This includes losses from deteriorating credit, market and operational risks.

3.

These 24 banks would be subject to dividend restrictions in at least one year of the projection horizon. The number of banks that would be concerned is lower than in the 2023 exercise, where 53 banks breached the MDA trigger in at least one year of the projection horizon in the adverse scenario.

4. ECB (2024), , May. Guide on effective risk data aggregation and risk reporting

5.

The results of the targeted review conducted in 2024-25 are summarised in McDonald, M.T. et al. (2025), ' ', Supervision Newsletter , ECB, 13 August. 6. Extinguishing sparks before the fire: credit crisis managed well

Generally, banks needed to take the revised CRR III rules into consideration during the 2025 stress test exercise. Regulatory changes related to the fundamental review of the trading book were not captured as they had been deferred at the time the 2025 stress test methodology was finalised.

7.

Thedéen, E. (2025), ' ', BIS, Keynote speech, 19 September. Resilience pays: the strategic value of regulation and supervision

8.

Buch, C. (2025), "" ', The Supervision Blog , ECB, 5 September. Stress tests in uncertain times: assessing banks' resilience to external shocks

9.

ECB (2025), , Chapter 3 and Special Feature B, May. Financial Stability Review

10.

Buch, C. (2024), ' Hearing of the Committee on Economic and Monetary Affairs of the European

', introductory statement, 18 November. For further information, see also ' ', ECB Banking Supervision, 11 July 2025. Parliament FAQ on the SREP of tomorrow

11.

For more details on making European supervision more efficient, effective and risk-focused, see the . ECB's Banking Supervision website

12. , 14

ECB (2025), ' ', Supervision Newsletter May. SREP reform: towards more efficient and effective supervision

This year banks were notified on 1 August, more than nine weeks earlier compared with the 2024 exercise. The hearing period has been extended from two to four weeks. The final decisions will be communicated by the end of October, six weeks earlier than in 2024.

14.

Buch, C. (2025), ' ', ECB, The Supervision Blog, 11 March 2025. Reviewing the Pillar 2 requirement methodology

15.

For an overview, see Hoppe, F. (2025), ' ', Supervision Newsletter , ECB, 14 May. This period of four months is set out in the joint ESMA and EBA Guidelines on the assessment of the suitability of members of the management body and key function holders. Benefits from advanced technology infrastructure in supervision

16.

The Heimdall tool uses machine reading and automatic translation to process fit and proper applications submitted by banks, ibid.

Reproduction is permitted provided that the source is acknowledged.

Media contacts",Claudia Buch
https://www.bis.org/review/r251016b.htm,Jerome H Powell: Understanding the Fed's balance sheet,"Speech by Mr Jerome H Powell, Chair of the Board of Governors of the Federal Reserve System, at the 67th Annual Meeting of the National Association for Business conomics, Philadelphia, Pennsylvania, 14 October 2025.",2025-10-14 00:00:00,"For release on delivery 12:20 p.m. EDT October 14, 2025

Understanding the Fed's Balance Sheet

Remarks by

Jerome H. Powell

Chair

Board of Governors of the Federal Reserve System at the

67th Annual Meeting of the National Association for Business Economics

Philadelphia, Pennsylvania

October 14, 2025

Thank you, Emily.  And thank you to the National Association for Business Economics for the Adam Smith Award.  It is an honor just to be mentioned alongside past recipients, including my predecessors Janet Yellen and Ben Bernanke.  Thank you for this recognition and for the opportunity to speak with you today.

Monetary policy is more effective when the public understands what the Federal Reserve does and why.  With that in mind, I hope to enhance understanding of one of the more arcane and technical aspects of monetary policy:  the Federal Reserve's balance sheet.  A colleague recently compared this topic to a trip to the dentist, but that comparison may be unfair-to dentists. 1

Today, I will discuss the essential role our balance sheet played during the pandemic, along with some lessons learned.  I will then review our ample reserves implementation framework and the progress we have made toward normalizing the size of our balance sheet.  I will conclude with some brief remarks on the economic outlook.

## Background on the Fed's Balance Sheet

One of the primary purposes of a central bank is to provide the monetary foundation for the financial system and the broader economy.  This foundation is made of central bank liabilities.  On the Fed's balance sheet, the liability side of the ledger totaled $6.5 trillion as of October 8, and three categories account for roughly 95 percent of that total. 2 First, Federal Reserve notes-that is, physical currency-totaled $2.4 trillion. Second, reserves-funds held by depository institutions at the Federal Reserve Banks-

1 See Christopher J. Waller (2025), 'Demystifying the Federal Reserve's Balance Sheet,' speech delivered at the Federal Reserve Bank of Dallas, Dallas, Texas, July 10,

https://www.federalreserve.gov/newsevents/speech/waller20250710a.htm.

2 For details discussed below, see Board of Governors of the Federal Reserve System (2025), Statistical Release H.4.1, 'Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks' (October 9), https://www.federalreserve.gov/releases/h41/20251009/h41.pdf.

totaled $3.0 trillion.  These deposits allow commercial banks to make and receive payments and meet regulatory requirements.  Reserves are the safest and most liquid asset in the financial system, and only the Fed can create them.  The adequate provision of reserves is essential to the safety and soundness of our banking system, the resilience and efficiency of our payments system, and ultimately the stability of our economy.

Third is the Treasury General Account (TGA), currently at about $800 billion, which essentially is the checking account for the federal government.  When the Treasury makes or receives payments, those flows affect dollar-for-dollar the supply of reserves or other liabilities in the system. 3

The asset side of our ledger consists almost entirely of securities, including $4.2 trillion of U.S. Treasury securities and $2.1 trillion of government-guaranteed agency mortgage-backed securities (MBS). 4 When we add reserves to the system, we generally do so by purchasing Treasury securities in the open market and crediting the reserve accounts of the banks involved in the transaction with the seller.  This process effectively transforms securities held by the public into reserves but does not change the total amount of government liabilities held by the public. 5

3 Other liabilities include reverse repurchase agreements and accounts held by designated financial market utilities, foreign central banks, and international financial institutions.

4

Within its securities portfolio, the Federal Reserves also holds $2.3 billion in government agency debt. 5 In 2021, the standing repo facility was established to serve as a backstop in money markets to support the effective implementation of monetary policy and smooth market functioning.  It is available to provide liquidity to primary dealers and eligible depository institutions through overnight repurchase agreements. The Federal Reserve also maintains U.S. dollar liquidity swap lines with several major central banks to prevent strains in global dollar funding markets from spilling over into domestic markets.  The Foreign and International Monetary Authorities Repo Facility also is a source of dollar liquidity for approved foreign central banks and international monetary authorities.  Beyond securities, the Fed maintains lending facilities that serve as crucial backstops for the banking system.  The loans we make through these facilities show up as assets on our balance sheet, with the corresponding liability typically being reserves.  Our discount window provides no-questions-asked liquidity to eligible depository institutions.  In unusual and exigent circumstances, we may establish emergency liquidity facilities, in consultation with the Secretary of the Treasury.  These facilities have demonstrated their critical importance in times of stress.

## The Balance Sheet Is an Important Tool

The Fed's balance sheet serves as a critical policy tool, especially when the policy rate is constrained by the effective lower bound (ELB).  When COVID-19 struck in March 2020, the economy came to a near standstill and financial markets seized up, threatening to transform a public health crisis into a severe, prolonged economic downturn.

In response, we established a number of emergency liquidity facilities.  Those programs, supported by Congress and the Administration, provided critical support to markets and were remarkably effective in restoring confidence and stability.  At their peak in July 2020, loans from these facilities totaled just over $200 billion.  Most of these loans were quickly unwound as conditions stabilized. 6

At the same time, the market for U.S. Treasury securities-normally the deepest, most liquid market in the world and the bedrock of the global financial system-was under extraordinary pressure and on the verge of collapse.  We used large-scale purchases of securities to restore functionality to the Treasury market.  Faced with unprecedented market dysfunction, the Fed purchased Treasury and agency securities at an extraordinary pace in March and April of 2020.  These purchases supported the flow of credit to households and businesses and fostered more accommodative financial conditions to

6 The combined peak in balances across these facilities occurred in July 2020 at just above $200 billion, including loans totaling $2.5 billion by the Primary Dealer Credit Facility, $20.6 billion by the Money Market Mutual Fund Liquidity Facility, $68.1 billion by the Paycheck Protection Program Liquidity Facility (PPPLF), $12.8 billion by the Commercial Paper Funding Facility, $41.4 billion by the Corporate Credit Facilities, $37.5 billion by the Main Street Lending Program (MSLP), $16.1 billion by the Municipal Liquidity Facility, and $8.8 billion by the Term Asset-Backed Securities Loan Facility; see Board of Governors of the Federal Reserve System (2020), Statistical Release H.4.1, 'Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks' (July 2), https://www.federalreserve.gov/releases/h41/20200702.  At present, the only remaining balances from the pandemic-era emergency lending facilities are $75 million in the PPPLF and $4.1 billion in the MSLP.  All other emergency lending facilities have already been fully repaid.

support the recovery of the economy when it ultimately came. 7 This source of policy accommodation was important as we had lowered the federal funds rate close to zero and expected it to remain there for some time.

By June 2020, we slowed our purchase pace to a still substantial $120 billion per month.  In December 2020, as the economic outlook remained highly uncertain, the FOMC said that we expected to maintain that pace of purchases 'until substantial further progress has been made toward the Committee's maximum employment and price stability goals.' 8 That guidance provided assurance that the Fed would not prematurely withdraw support while the economic recovery remained fragile amid unprecedented conditions.

We maintained that pace of asset purchases through October 2021.  By then, it had become apparent that elevated inflation was not likely to go away without a strong monetary response.  At our meeting in November 2021, we announced a phaseout of asset purchases.  At our next meeting in December, we doubled the pace of the taper and said that asset purchases would conclude by mid-March of 2022.  Over the entire period of purchases, our securities holdings increased by $4.6 trillion.

A number of observers have raised questions, fairly enough, about the size and composition of asset purchases during the pandemic recovery. 9 Throughout 2020 and

7 See Jerome H. Powell (2020), 'Transcript of Chair Powell's Press Conference' (Washington:  Board of Governors of the Federal Reserve System, April 29),

https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20200429.pdf.

8  See Board of Governors of the Federal Reserve System (2020), 'Federal Reserve Issues FOMC Statement,' press release, December 16, paragraph 4,

https://www.federalreserve.gov/newsevents/pressreleases/monetary20201216a.htm.

9 See, for example, Gauti B. Eggertsson and Donald Kohn (2023), 'The Inflation Surge of the 2020s:  The Role of Monetary Policy,' Hutchins Center Working Paper 87 (Washington:  Hutchins Center on Fiscal &amp; Monetary Policy, Brookings Institution, August), https://www.brookings.edu/articles/the-inflation-surgeof-the-2020s-the-role-of-monetary-policy; William B. English and Brian Sack (2024), 'Challenges around the Federal Reserve's Monetary Policy Framework and Its Implementation,' Brookings Papers on

2021, the economy continued to face significant challenges as successive waves of COVID caused widespread disruption and loss.  During that tumultuous period, we continued purchases in order to avoid a sharp, unwelcome tightening of financial conditions at a time when the economy still appeared to be highly vulnerable.  Our thinking was informed by recent episodes in which signals about reducing the balance sheet had triggered significant tightening in financial conditions.  We were thinking of events of December 2018, as well as the 2013 'taper tantrum.' 10

Regarding the composition of our purchases, some have questioned the inclusion of agency MBS purchases given the strong housing market during the pandemic recovery. 11 Outside of purchases aimed specifically at market functioning, MBS purchases are primarily intended, like our purchases of Treasury securities, to ease broader financial conditions when the policy rate is constrained at the ELB. 12 The extent to which these MBS purchases disproportionately affected housing market conditions during this period is challenging to determine.  Many factors affect the mortgage market,

Economic Activity, Fall, pp. 3-26, https://www.brookings.edu/wp-

content/uploads/2024/09/1.a\_EnglishSack.pdf; (2024), 'General Discussion,' Brookings Papers on Economic Activity, Fall, pp. 88-92, https://www.brookings.edu/wp-content/uploads/2024/09/17160BPEA-BPEA-FA24\_WEB\_Symposium\_GD.pdf; and Andrew T. Levin, Brian L. Lu, and William R. Nelson (2022), 'Quantifying the Costs and Benefits of Quantitative Easing,' Economics Working Paper 22128 (Stanford, Calif.:  Hoover Institution, December),

https://www.hoover.org/sites/default/files/research/docs/22128-Levin-Lu-Nelson.pdf..

10 In December 2018, financial markets experienced significant volatility and equity prices dropped notably.  While multiple factors were in play, many market participants pointed to the description of the Fed's quantitative tightening as being on 'autopilot' as exacerbating the turmoil.  The 'taper tantrum' was a sharp market selloff in 2013 when Chair Ben Bernanke suggested the Fed might soon reduce its asset purchases, causing Treasury yields to spike and triggering volatility in financial markets.

11 See, for example, Aaron Klein and Alan Cui (2025), 'Quantitative Easing and Housing Inflation PostCOVID,' Series on Financial Markets and Regulation, Brookings Center on Regulations and Markets, October 8, https://www.brookings.edu/articles/quantitative-easing-and-housing-inflation-post-covid.

12 See, for example, Chair Bernanke's description of the operation of balance sheet tools as part of his discussion of monetary policy in the post-Global Financial Crisis (GFC) environment:  Ben S. Bernanke (2012), 'Monetary Policy since the Onset of the Crisis,' speech delivered at a symposium sponsored by the Federal Reserve Bank of Kansas City, held in Jackson Hole, Wyo., August 31,

and many factors beyond the mortgage market affect supply and demand in the broader housing market. 13

With the clarity of hindsight, we could have-and perhaps should have-stopped asset purchases sooner.  Our real-time decisions were intended to serve as insurance against downside risks.  We knew that we could unwind purchases relatively quickly once we ended them, which is exactly what we did.  Research and experience tell us that asset purchases affect the economy through expectations regarding the future size and duration of our balance sheet. 14 When we announced our taper, market participants began pricing in its effects, pulling forward the tightening in financial conditions. 15 Stopping sooner could have made some difference, but not likely enough to fundamentally alter the trajectory of the economy.  Nonetheless, our experience since 2020 does suggest that we can be more nimble in our use of the balance sheet, and more confident that our communications will foster appropriate expectations among market participants given their growing experience with these tools.

13 Research indicates that house price increases during this time reflected factors well beyond mortgage rates.  For example, Mondragon and Wieland (2022) estimate that the shift to remote work explains approximately one-half of the rise in house prices during the pandemic; for more details, see John A. Mondragon and Johannes Wieland (2022), 'Housing Demand and Remote Work,' NBER Working Paper Series 30041 (Cambridge, Mass.:  National Bureau of Economic Research, May; revised May 2025), https://www.nber.org/system/files/working\_papers/w30041/w30041.pdf.

14 See, for example, Mark Carlson, Stefania D'Amico, Cristina Fuentes-Albero, Bernd Schlusche, and Paul Wood (2020), 'Issues in the Use of the Balance Sheet Tool,' Finance and Economics Discussion Series 2020-071 (Washington:  Board of Governors of the Federal Reserve System, August), https://doi.org/10.17016/FEDS.2020.071.

15 Even before the taper in purchases was completed in 2022, markets were anticipating the rapid decline in the size of the balance sheet that we subsequently delivered.  Those expectations were formed based on our communications, even though the anticipated pace was three times faster than our experience from 2017 to 2019.  For example, the median respondents to the Survey of Primary Dealers in June 2022 anticipated that the size of the System Open Market Account (SOMA) portfolio would ultimately fall by more than $2 trillion in less than three years, from its mid-2022 level of $8.5 trillion to $6.25 trillion by 2025:Q1.  See question 3b in the June 2022 dealer survey results:  Federal Reserve Bank of New York, Markets Group (2022), 'Responses to Survey of Primary Dealers,' June,

Some have also argued that we could have better explained the purpose of asset purchases in real time. 16 There is always room for improved communication.  But I believe our statements were reasonably clear about our objectives, which were to support and then sustain smooth market functioning and to help foster accommodative financial conditions.  Over time, the relative importance of those objectives evolved with economic conditions.  But the objectives were never in conflict, so at the time this issue appeared to be a distinction without much of a difference.  That is not always the case, of course.  For example, the March 2023 banking stress led to a sizable increase in our balance sheet through lending operations.  We clearly differentiated these financial stability operations from our monetary policy stance.  Indeed, we continued to raise the policy rate through that time.

## Our Ample Reserves Framework Works Well

Turning to my second topic, our ample reserves regime has proven highly effective, delivering good control of our policy rate across a wide range of challenging economic conditions, while promoting financial stability and supporting a resilient payments system. 17

16  See William B. English and Brian Sack (2024), 'Challenges around the Federal Reserve's Monetary Policy Framework and Its Implementation,' Brookings Papers on Economic Activity, Fall, pp. 3-26, https://www.brookings.edu/wp-content/uploads/2024/09/1.a\_EnglishSack.pdf, as well as Donald Kohn (2025), 'Fed Should Be Sure to Include Monetary Policy Tools in Forthcoming Framework Review,' Brookings Commentary, January 24, https://www.brookings.edu/articles/fed-should-be-sure-to-includemonetary-policy-tools-in-forthcoming-framework-review.

17 By contrast, before the GFC, the Fed implemented monetary policy through a fundamentally different approach, a scarce reserves regime.  This system relied on complicated reserve requirements to stabilize reserve demand, as the Fed did not have the authority to pay interests on reserves.  Because banks did not receive interest on reserves, they engaged in a variety of costly activities to minimize their reserve requirements.  To hit the federal funds rate target, the Fed had to conduct daily open market operations to fine-tune reserve supply.  That approach was operationally burdensome for both depository institutions and the Federal Reserve.  It minimized systemwide liquidity consistent with the federal funds target rate, thus making the banking system more vulnerable to shocks.  Unexpected swings in reserve demand at times led to excess volatility in short-term interest rates.  In this scarce regime, banks relied more heavily on

In this framework, an ample supply of reserves ensures adequate liquidity in the banking system, and control of our policy rate is achieved through the setting of our administered rates-interest on reserve balances and the overnight reverse repo rate. This approach allows us to maintain rate control independently of the size of our balance sheet.  That is important given large, unpredictable swings in liquidity demand from the private sector and significant fluctuations in autonomous factors affecting reserve supply, such as the Treasury General Account.

This framework has proven resilient whether the balance sheet is shrinking or growing.  Since June 2022, we have reduced the size of our balance sheet by $2.2 trillion-from 35 percent to just under 22 percent of GDP-while maintaining effective interest rate control. 18

Our long-stated plan is to stop balance sheet runoff when reserves are somewhat above the level we judge consistent with ample reserve conditions. 19   We may approach that point in coming months, and we are closely monitoring a wide range of indicators to inform this decision. 20 Some signs have begun to emerge that liquidity conditions are

unsecured borrowing from other financial institutions-funding that can rapidly evaporate in times of stress, as was evident in the GFC.

18 In January 2022, the FOMC released its 'Principles for Reducing the Size of the Federal Reserve's Balance Sheet,' followed in May by more detailed plans for doing so; see Board of Governors of the Federal Reserve System (2022), 'Principles for Reducing the Size of the Federal Reserve's Balance Sheet,' press release, January 26,

https://www.federalreserve.gov/newsevents/pressreleases/monetary20220126c.htm; and Board of Governors of the Federal Reserve System (2022), 'Plans for Reducing the Size of the Federal Reserve's Balance Sheet,' May 4, press release,

https://www.federalreserve.gov/newsevents/pressreleases/monetary20220504b.htm.

19 Once balance sheet runoff has ceased, reserve balances will continue to gradually decline as other Federal Reserve liabilities grow over time.  At some point, the Committee will determine that reserve balances have reached an appropriately ample level.  Thereafter, the Committee will manage securities holdings as needed to maintain ample reserves over time.

20 While reserves appear to remain abundant, they are declining and will continue to do so.  Since we began shrinking our balance sheet in 2022, the quantity of reserves has not changed much as the excess liquidity in the system was absorbed and then subsequently released by our overnight reverse repo facility.  Now, however, balances in that facility have declined to minimal levels, so further declines in our securities holdings will translate more directly into lower reserves.  Currently, reserve balances stand just below $3

gradually tightening, including a general firming of repo rates along with more noticeable but temporary pressures on selected dates.  The Committee's plans lay out a deliberately cautious approach to avoid the kind of money market strains experienced in September 2019.  Moreover, the tools of our implementation framework, including the standing repo facility and the discount window, will help contain funding pressures and keep the federal funds rate within our target range through this transition to lower reserve levels.

Normalizing the size of our balance sheet does not mean going back to the balance sheet we had before the pandemic. In the longer run, the size of our balance sheet is determined by the public's demand for our liabilities rather than our pandemic-related asset purchases. Non-reserve liabilities currently stand about $1.1 trillion higher than just prior to the pandemic, thus requiring that our securities holdings be equally higher.

Demand for reserves has risen as well, in part reflecting the growth of the banking system and the overall economy.

Regarding the composition of our securities portfolio, relative to the outstanding universe of Treasury securities, our portfolio is currently overweight longer-term securities and underweight shorter-term securities.  The longer-run composition will be a topic of Committee discussion.  Transition to our desired composition will occur gradually and predictably, giving market participants time to adjust and minimizing the risk of market disruption.  Consistent with our longstanding guidance, we aim for a portfolio consisting primarily of Treasury securities over the longer run. 21

trillion, or about 10 percent of GDP.  By comparison, reserves as a share of GDP stood near 8 percent of GDP in early 2019, prior to the acute funding pressures that emerged later that year.  Note that reserves as a share of GDP is merely indicative, not a measure of the ampleness of reserves.  Assessments of where reserves stand relative to ample levels depend on a wide range of market indicators.

21  As noted in the minutes of the May 2022 FOMC meeting, the Committee could, at some point, consider sales of agency MBS to accelerate progress toward a longer-run SOMA portfolio composed primarily of Treasury securities; see Federal Open Market Committee (2022), 'Minutes of the Federal Open Market

Some have questioned whether the interest we pay on reserves is costly to taxpayers.  In fact, that is not the case.  The Fed earns interest income from the Treasury securities that back reserves.  Most of the time, our interest earnings from Treasury holdings more than cover the interest paid on reserves, generating significant remittances to the Treasury.  By law, we remit all profits to the Treasury after covering expenses. Since 2008, even after accounting for the recent period of negative net income, our total remittances to Treasury have totaled more than $900 billion.  While our net interest income has temporarily been negative due to the rapid rise in policy rates to control inflation, this is highly unusual.  Our net income will soon turn positive again, as it typically has been throughout our history.  Of course, having negative net income has no bearing on our ability to conduct monetary policy or meet our financial obligations. 22

If our ability to pay interest on reserves and other liabilities were eliminated, the Fed would lose control over rates.  The stance of monetary policy would no longer be appropriately calibrated to economic conditions and would push the economy away from our employment and price stability goals.  To restore rate control, large sales of securities over a short period of time would be needed to shrink our balance sheet and the quantity of reserves in the system.  The volume and speed of these sales could strain Treasury market functioning and compromise financial stability.  Market participants would need to absorb the sales of Treasury securities and agency MBS, which would put upward

Committee' (Washington:  FOMC, May 3-4),

https://www.federalreserve.gov/monetarypolicy/files/fomcminutes20220504.pdf.

22  See, for example, Alyssa Anderson, Dave Na, Bernd Schlusche, and Zeynep Senyuz (2022), 'An Analysis of the Interest Rate Risk of the Federal Reserve's Balance Sheet, Part 1:  Background and Historical Perspective,' FEDS Notes (Washington:  Board of Governors of the Federal Reserve System, July 15), https://doi.org/10.17016/2380-7172.3173; and Alyssa Anderson, Philippa Marks, Dave Na, Bernd Schlusche, and Zeynep Senyuz (2022), 'An Analysis of the Interest Rate Risk of the Federal Reserve's Balance Sheet, Part 2:  Projections under Alternative Interest Rate Paths,' FEDS Notes (Washington: Board of Governors of the Federal Reserve System, July 15), https://doi.org/10.17016/2380-7172.3174.

pressure on the entire yield curve, raising borrowing costs for the Treasury and the private sector.  Even after that volatile and disruptive process, the banking system would be less resilient and more vulnerable to liquidity shocks.

The bottom line is that our ample reserves regime has proven remarkably effective for implementing monetary policy and supporting economic and financial stability.

## Current Economic Conditions and Monetary Policy Outlook

I will close with a brief discussion of the economy and the outlook for monetary policy.  Although some important government data have been delayed due to the shutdown, we routinely review a wide variety of public- and private-sector data that have remained available.  We also maintain a nationwide network of contacts through the Reserve Banks who provide valuable insights, which will be summarized in tomorrow's Beige Book.

Based on the data that we do have, it is fair to say that the outlook for employment and inflation does not appear to have changed much since our September meeting four weeks ago.  Data available prior to the shutdown, however, show that growth in economic activity may be on a somewhat firmer trajectory than expected.

While the unemployment rate remained low through August, payroll gains have slowed sharply, likely in part due to a decline in labor force growth due to lower immigration and labor force participation.  In this less dynamic and somewhat softer labor market, the downside risks to employment appear to have risen.  While official employment data for September are delayed, available evidence suggests that both

layoffs and hiring remain low, and that both households' perceptions of job availability and firms' perceptions of hiring difficulty continue their downward trajectories. 23

Meanwhile, 12-month core PCE inflation was 2.9 percent in August, up slightly from earlier this year, as rising core goods inflation has outpaced continued disinflation in housing services.  Available data and surveys continue to show that goods price increases primarily reflect tariffs rather than broader inflationary pressures.  Consistent with these effects, near-term inflation expectations have generally increased this year, while most longer-term expectation measures remain aligned with our 2 percent goal.

Rising downside risks to employment have shifted our assessment of the balance of risks.  As a result, we judged it appropriate to take another step toward a more neutral policy stance at our September meeting.  There is no risk-free path for policy as we navigate the tension between our employment and inflation goals.  This challenge was evident in the dispersion of Committee participants' projections at the September meeting.  I will stress again that these projections should be understood as representing a range of potential outcomes whose probabilities evolve as new information informs our meeting-by-meeting approach to policymaking.  We will set policy based on the evolution of the economic outlook and the balance of risks, rather than following a predetermined path.

Thank you again for this award and for inviting me to join you today.  I look forward to our conversation.

23  State-level data on unemployment insurance claims during September remain available, as do some nongovernmental statistics on job openings and hiring.  September results regarding perceptions of employment conditions by firms and households are also available from recurring surveys, such as the National Federation of Independent Business's Jobs Report and the Conference Board's Consumer Confidence Survey.",Jerome H Powell
https://www.bis.org/review/r251016a.htm,Sarah Hunter: Why productivity matters for central bankers,"Speech by Ms Sarah Hunter, Assistant Governor (Economic) of the Reserve Bank of Australia, at the Citi Australia & New Zealand Investment Conference 2025, Sydney, 15 October 2025.",2025-10-15 00:00:00,"

## Speech

## Why Productivity Matters for Central Bankers

Sarah Hunter

|“!

Assistant Governor (Economic)

## Citi Australia &amp; New Zealand Investment Conference 2025

Sydney — 15 October 2025

Before I begin, I would like to acknowledge the Gadigal people, the Traditional Custodians of the land on which we are meeting today. We are very lucky in Australia that our First Nations people protect our land and culture to hand down to future generations, and I would like to pay my respects to Elders past and present and to any First Nations people here with us today.

There has been lot of discussion about productivity growth over recent months, that it has slowed, and how we as a country can reverse this. This is an extremely important issue, given the fundamental role that productivity growth has as a driver of rising living standards for Australians.

While these discussions are critical for the country and are very important to me as a private individual, as a central banker my focus has to be on the implications of slower productivity growth for the economic outlook and monetary policy settings.

To achieve our mandate — that is, sustaining low and stable inflation and a labour market at full employment — we need to understand what the economy will likely look like when we're at this point. Some features are easy to identify. For instance, we would need to see inflation holding around the middle of our 2-3 per cent target band. But other features are not as obvious. Specifically, what trend pace of GDP growth would be consistent with sustaining inflation and an economy at full employment?

What influences this trend rate of growth? One of the key drivers is productivity growth, alongside population growth and decisions around participation in the labour market (i.e. how many people want a job and how many hours they want to work). !! So understanding productivity growth is crucial in understanding the sustainable rate of growth in the economy.

To cut to the chase, in our latest Statement of Monetary Policy (SMP), we published an in-depth chapter that outlined our reasons for downgrading our assumption for the pace of productivity growth. This means our assumption for the sustainable, trend pace of GDP growth is lower than we previously thought and is lower than it has been historically. This new assumption is a key input to how we interpret actual GDP outcomes.

## What is productivity and why does it matter for central banks?

Before we dive deeper, it's worth revisiting what economists mean by productivity, why it's important, and how it's been tracking in recent years. (2!

Put simply, productivity measures how much we produce with what we have, whether that's people, machinery, energy or other resources. When productivity increases, we can produce more goods or services, without requiring more inputs. Our economy becomes more productive when we find smarter ways to do things, whether by improving how we allocate resources, investing in new skills or machines, or creating and adopting new technologies. A great example of the latter is the computer — I can tell you it would have taken a lot longer if I had had to write this speech on a typewriter without the ability to easily 'delete', 'cut' and 'paste'!

So why is productivity growth so important? Most fundamentally, it is a key driver of improvements in our living standards over the medium term. As productivity rises it becomes cheaper to produce goods and services, and the economic pie grows as we can produce more with the scarce resources we have.

In the data that economists track, this improvement shows up as an increase in real incomes, which is a dollar value of the goods and services we can buy per hour worked, after stripping out inflation. For example, in 1901 it took 18 minutes on average to earn enough to buy a loaf of bread. Today that average is just 4 minutes. 3!

You can see the lift in real incomes per hour worked that comes from productivity growth in this chart (Graph 1). When productivity rises, we produce (and so earn) more. This allows all of us to either consume more, or work less and spend more time doing what we value most, or potentially both! In fact, Australians have used around one-quarter of the productivity gains since 1980 to work less and have more leisure, with the rest being banked as higher income and consumption. !*!

Graph 1 Productivity and Income

March quarter 2012 = 100



- Non-farm GDP per hour worked.
- Real GDP per hour adjusted for the purchasing power effects of changes to the terms of trade, depreciation of the capital stock and net income transfers to the rest of the world.

Sources: ABS; RBA.

Another reason why productivity growth is important from a monetary policy perspective is that it affects both demand and potential supply in the economy, and the balance between them is what ultimately determines inflation.

Productivity growth allows us to produce more than we could before, which means it expands the supply capacity of the economy. This is an important consideration for monetary policy, because it means the economy can sustain a faster pace of growth in demand before it hits capacity constraints and inflation starts to rise. In this way, productivity growth determines the rate of growth the economy can sustain on an ongoing basis.

But productivity growth also supports demand. When productivity and real incomes are growing strongly, households generally lift their spending, and businesses will have an incentive to invest to keep up with growing demand.

Growth in living standards is of course important to the RBA. We have a mandate to support the economic welfare of the Australian people. It's hard to argue that productivity growth is not a good outcome for the economy, given the role it plays in lifting living standards. But there is very little that central banks can do to directly influence productivity over the medium term, though this is an area of active research. |°!

Instead, our focus is on setting monetary policy to maintain price stability and achieve full employment, creating economic conditions that are conducive for investment and innovation to thrive. Understanding productivity dynamics in the economy is one important factor that we need to be across to be able to make sound monetary policy decisions.

## What has happened to productivity growth?

It's now well established that productivity growth has slowed across many advanced economies — including Australia — since the mid-2000s (Graph 2). This trend has persisted in the post-pandemic period, with the notable exception of the United States.

Graph 2

## Average Labour Productivity Growth



* Non-farm business sector.

- Business sector. 78

Sources: ABS; LSEG; RBA.

In Australia, some sector-specific — and likely temporary — factors have weighed on aggregate productivity over the past five or so years. These include strong growth in the non-market sector's share of the economy, where measured productivity is low, and sharp declines in productivity in the mining sector, possibly as some miners have tapped less-productive deposits.

But there are also broader factors at work. Productivity growth has slowed in almost all sectors over the long run as can be seen in this chart (Graph 3).

Graph 3

## Average Labour Productivity Growth



Sources: ABS; RBA.

So, what are the drivers of this broad-based slowdown? The jury is still out, but Australian economic research — including analysis by colleagues at the RBA — has pointed to some key structural trends behind the Australian slowdown:

- » Business and labour market dynamism has declined, which means it now takes longer for capital and labour to move to higher productivity firms. |°!
- » Technological diffusion has slowed, with Australian firms taking longer to catch up to the global technological frontier — something mirrored in some other advanced economies. |7!
- » Competition in the Australian economy appears to have declined, and indeed this is one factor that has contributed to declining dynamism and slowing technological diffusion. !*! In fact, joint work by staff at the RBA and Treasury suggests that returning to mid-2000's levels of competition could improve resource allocation and thereby raise productivity and the level of GDP by up to 3 per cent. |°!
- » Capital deepening, which measures the rate of increase in the amount of capital available to each worker, is happening more slowly. That said, this could be a symptom as well as a cause, as slower growth in total-factor productivity should, in theory, lead to slower capital deepening. 1°!

## What has this meant for the Australian economy?

So, how has slower productivity growth affected economic outcomes? The first point to note is that the supply capacity of the economy — which economists call 'potential output' — has grown more slowly than it would have had the previous pace of productivity growth been maintained.

Second, as productivity growth has slowed over the last two decades, Australian households and businesses have generally adjusted down their consumption and investment spending to match the lower sustainable pace of growth.

Similar patterns have been evident overseas. In many countries, the pace of productivity growth has slowed recently. And generally speaking, the pace of consumption per capita has matched productivity growth (captured on this chart as GDP per capita); this has been the case for both strong productivity and weak productivity growth outcomes (Graph 4).

## Graph 4

## Consumption Per Capita and Productivity""

December quarter 2019 = 100



* — Productivity presented as GDP per hour worked for New Zealand, and non-farm market sector GDP per hour worked for other economies.

Sources: ABS; CEIC Data; Department of Home Affairs; LSEG; RBA.

## What are the implications for the outlook for the economy?

That brings me to the outlook for our economy, and the recent downgrade to the productivity assumption that underpins the RBA's forecasts.

As we presented in our August SMP, for some time we had assumed that the weakness in productivity growth was temporary. This meant that we were effectively assuming that productivity growth was going to be higher than it ultimately turned out to be (Graph 5).

## Graph 5

## Productivity*



Sources: ABS; RBA.

Recognising this, and the evidence that at least part of the slowdown has reflected structural factors that are likely to persist, we downgraded our medium-term trend productivity growth assumption from 1.0 per cent per annum to 0.7 per cent in the August SMP.

It's worth emphasising that this is an assumption about productivity growth for the next two years or so. It says nothing about the outlook for productivity growth over the longer term which will be shaped by a broad range of developments, including the pace of diffusion of new technologies like AI. And consistent with this shorter time horizon, we will revisit the assumption regularly over time as the outlook for productivity changes.

## Implications for the outlook for economic activity

The downgrade to our productivity growth assumption has important implications for our assessment of the pace of growth that can be sustained without generating inflationary pressures. Specifically, our new assumption implies that over the medium term, potential output is expected to grow at around

2 per cent per year, rather than around 2% per cent. !11! This is slower than the pace seen in earlier decades, when both population and productivity growth were stronger (Graph 6).

Graph 6

## Potential Output Components

Annual average growth



* Using the average of the three models in the potential output model suite (SMOG-PPE, Joint-stars and Production Function model).
- Other contributions from population, participation and average hours growth. ak

Source: RBA.

The impact of our revised productivity assumption on the outlook for the supply side of the economy and medium-term growth is clear. What's less certain is how it could affect the balance between potential supply and demand and hence the outlook for economic activity and inflation in the near term. As outlined in the August SMP, it looks like households and businesses have already internalised the slower productivity and income growth that has occurred in recent years. Given this, we downgraded our forecast for year-ended GDP growth by 0.3 percentage points by the end of our forecast horizon, which was in line with the downgrade to our forecast for potential output growth. In doing so we revised all components of GDP downward by roughly the same amount. | 1!

So, what does all this mean for our assessment of the outlook for the balance of potential supply and demand and so inflation? In the wash-up, very little. The productivity downgrade has no effect on our assessment of the current balance of demand and supply, as this is based on recent and past data and so already captures slowing productivity growth. This revision also doesn't change our view on the future balance over our two-year forecast horizon. Our August SMP forecasts still had consumption and GDP growth picking up, but by a bit less than we previously expected. The gap between demand and supply still closed gradually, with inflation returning to the midpoint of the target range (Graph 7). 13!

Graph 7

## Model Estimates of Output Gap*

Per cent

of



potential output

Violet-shaded region shows illustrative range of central gap estimates from a selection of models encompassing different measures and definitions of the output gap; each estimate is subject to estimation uncertainty which is not shown in the graph, as well as revision due to data and model refinements.

Sources: ABS; OECD; RBA.

Where the revision does matter is for how we interpret the actual data we receive moving forward. In the past, when potential output was growing at 22 to 3 per cent per year, quarterly GDP growth of around 0.5 per cent (equivalent to an annual growth rate of around 2 per cent) would have been seen as subdued, or below trend. It would have suggested that growth in demand was slower than growth in supply capacity, in which case inflationary pressures would have been easing.

But with our new lower potential output assumption, that same rate of GDP growth would now signal demand and capacity growing largely in line with each other and inflationary pressures holding steady. I'll return to this later in the context of our current forecast for the economic outlook and the most recent national accounts data.

## Implications for the outlook for the labour market

One important dimension of the downgrade to our productivity growth assumption that I haven't touched on yet is its implications for the labour market. Lower productivity growth doesn't really affect our outlook for the balance of demand and supply capacity in the labour market — including our forecasts for things like employment growth and the unemployment rate.

But it does have implications for the outlook for wages growth. Ultimately, productivity growth is the determinant of sustainable real wages growth, as it allows nominal wages to increase without leading to a buildup in inflationary pressure. So, while real wages can grow more quickly than productivity for a period without necessarily driving up inflation, over time productivity growth underpins the rate of real wages growth.

It follows then that the long-run rate of annual nominal wages growth that is consistent with our dual mandate — which is to have both inflation at the target and the labour market at full employment — equals the midpoint of the inflation target range (2.5 per cent) plus the rate of productivity growth (now assumed to be 0.7 per cent).

So, the productivity downgrade lowers our assessment of this rate from around 3.5 per cent to around 3.2 per cent when wages are measured using Average Earnings in the National Accounts (AENA). Unfortunately, the 'productivity growth plus 2.5 per cent rule' does not work as neatly for the Wage Price Index (WPI) due to the way its constructed. The equivalent calculation for the WPI would suggest a rate slightly below 3 per cent, but this should be interpreted with a bit more caution. !14!

It's important to note that this does not suggest that wages growth that is above these levels for a period will necessarily drive up inflation, or preclude a period of real-wage 'catch-up' that allows workers to recoup previous declines in real wages — indeed the August SMP forecasts include a projection for wages growth that exceeds these rates in the near term, while inflation remained close to the midpoint of the target range. But the 'productivity growth plus 2.5 per cent' rule of thumb does provide a useful guide to what rate of nominal wages growth could be sustained in the long run, when the economy is sustainably and persistently at full employment. This again underscores the importance of productivity growth in driving ongoing improvements in living standards for Australians.

## Risks to the forecasts

From a monetary policy standpoint, our August SMP forecasts looked pretty good. We expected inflation to stay around the midpoint of the target band over the next two years and for labour market conditions to remain broadly stable, with employment growth tracking underlying population growth.

But of course — as always — there were material risks on both sides of that central projection, as we set out in the August SMP and as I have discussed in previous speeches. '*5! One such set of risks stems from the outlook for productivity.

Our revised assumption for productivity growth may still be too high. The revision implies that productivity growth picks back up to its 20-year average as some of the temporary drags wane — but this is no certainty. On the flipside, it's also possible that our new assumption is too low, particularly if the diffusion of technologies like AI occurs more quickly than many expect, or if some of the other longer term structural impediments unwind. If productivity growth — and therefore the economy's potential output — turns out to be different to our assumption in either direction, the effect on inflation would then hinge on the extent to which demand adjusts. In this sense, inflation outcomes can provide an important gauge on how these dynamics and risks are playing out.

## What have we learnt from the latest data and developments?

So how have recent data flows fit with our forecasts?

If anything, outcomes have been a little stronger than those expected in the August SMP.

In the most recent National Accounts, GDP growth picked up to be 1.8 per cent over the year to the June quarter, slightly above our forecasts. Historically this would have seemed slow. But given our nowlower assessment of medium-term potential GDP growth, the outcome was broadly consistent with demand and potential supply growing at a similar pace.

At the same time, the high frequency data suggests that underlying inflation in the September quarter is likely to be stronger than we anticipated. This may suggest that the labour market, and economic conditions more generally, remain a bit tighter than we had assessed — and we're actively analysing this question ahead of our next set of forecasts which will be released in November. At the same time, employment growth has slowed by slightly more than we previously expected, and uncertainty about the global outlook remains elevated.

Given these signs that private demand is recovering, and indications that inflation may be persistent in some areas, while labour market conditions have been stable, the Board decided that it was appropriate to maintain the cash rate at its current level at the September meeting. Looking forward, we will monitor outcomes and continually reassess our view on the outlook for the economy, and the Board will adjust policy as appropriate as new information comes to hand.

## Endnotes

- {*] I would like to thank Oscar Douglas and Jonathan Hambur who provided significant support during the drafting of this speech, and Michelle Bergmann, Natasha Cassidy, Georgia Face, Bowen Hao, Andrew Hauser, Chris Kent, Michele Bullock, Brad Jones, Kevin Lane, Claude Lopez, Michelle Van der Merwe, Tom Williams, Suzanne Houweling, Michelle Wright, Samuel Evangelinos and Ada Zhou for their helpful contributions and comments. Any remaining errors and omissions are my own.
- {1] This framework is often referred to as the 3Ps (productivity, population, participation) in the Australian economic and policy literature. See, for example, Treasury (2023), '2023 Intergenerational Report', Australian Government.
- {2] For longer and more detailed discussions of why productivity matters, and what has happened to it over recent years, see Plumb M (2025), 'Why Productivity Matters', Speech at the Australian Business Economists Annual Forecasting Conference, Sydney, 27 February; Duretto M, O Majeed and J Hambur (2022), 'Overview: Understanding Productivity in Australia and the Global Slowdown', Treasury Round Up, October; Productivity Commission (2025), 'Growth Mindset: How to Boost Australia's Productivity: 5 Productivity Inquiries', Australian Government; Productivity Commission (2025), 'Productivity Before and After COVID-19', Research paper, Australian Government.
- [3] Productivity Commission (2024), 'Higher Education and Productivity', Speech by Danielle Wood, Chair, at the National Conference on University Governance, Canberra, 23 October.
- {4| Das R (2025), 'All Work and No Play: Productivity and the Choice between Money and Leisure', Productivity Commission Quarterly Productivity Bulletin, June.
- [5] Some recent papers have argued that expansionary monetary policy can disproportionately support industry leaders, helping to entrench market power (e.g. Liu E, A Mian and A Sufi (2022), 'Low Interest Rates, Market Power and Productivity Growth', Econometrica, 90(1), pp 193-221). However, evidence for Australia does not support this finding (Nolan G, J Hambur and P Vermeulen (2023), 'Does Monetary Policy Affect Non-mining Business Investment in Australia', Evidence from BLADE', RBA Research Discussion Paper No 2023-09). Several recent papers have also argued that contractionary monetary policy can weigh on innovation, leading to medium-run declines in productivity (e.g. Moran P and A Queralto (2018), 'Innovation, Productivity and Monetary Policy', Journal of Monetary Economics, 93, pp 24-41). While there is some evidence of such a dynamic in Australia, it appears to be more short-lived and heterogenous, particularly once focusing on adoption of technologies not just innovation (O Majeed, J Hambur and R Breunig (2025), 'Does Monetary Policy Impact Innovation? Evidence from Australian Administrative Data', Journal of Macroeconomics, 86).
- [6] Andrews D and D Hansell (2021), 'Productivity-Enhancing Labour Reallocation in Australia', Economic Record, 97(317), pp 157-169; Hambur J and D Andrews (2023), 'Doing Less, with Less: Capital Misallocation, Investment and the Productivity Slowdown in Australia', RBA Research Discussion Paper No 2023-03.
- [7] Andrews D, J Hambur, D Hansell and A Wheeler (2022), 'Reaching for the Stars: Australian Firms and the Global Productivity Frontier', Treasury Working Paper No 2022-01; Andrews D, C Criscuolo and P Gal (2016), 'The Best versus the Rest: The Global Productivity Slowdown, Divergence across Firms and the Role of Public Policy', OECD Productivity Working Paper No 5.
- 8] Hambur J (2023), 'Product Market Competition and its Implications for the Australian Economy', Economic Record, 99(324), pp 32-57.
- 9) Hambur J and O Freestone 2025, 'How Costly are Mark-ups in Australia? The Effect of Declining Competition on Misallocation and Productivity', RBA Research Discussion Paper No 2025-05.
- 10] In a standard growth model with labour-augmenting technology, the ratio of capital to labour in the economy should grow at the same rate as technology. So if underlying technology and productivity growth is slower, the amount of capital deepening should also be slow. For an excellent treatment of this, see Acemoglu D (2011), '14.452 Economic Growth: Lectures 2 and 3 The Solow Growth Model', Lecture Slides, MIT, 1 and 3 November.
- [11] Productivity growth is not the only driver of potential output growth. The pace of population growth and structural shifts in the labour market also play a role; these underlying fundamentals are assumed to remain the same.
- [12] The revision to non-mining business investment was a bit larger, as predicted in many economic models; slower productivity growth leads to a lower investment-to-output ratio, as firms don't need to invest as much to ensure that the capital stock keeps up with growth in activity. For a discussion and application to explaining the investment to mining and non-mining output ratios in Australia, see respectively Jenner K, A Walker, C Close and T Saunders (2018), 'Mining Investment Beyond the Boom', RBA Bulletin, March; Hambur J and K Jenner, 'Can Structural Change Account for the Low Level of Non-mining Investment', RBA Bulletin, June.
- [13] There are a couple of other things to highlight in terms of the implications of the downgrade for the economic outlook. First, the lower productivity assumption has led us to downgrade our forecast for wages in the medium term, consistent with the discussion above. Second, there are no implications for our forecasts for employment and unemployment. In some senses this may seem surprising, given the activity downgrade. But ultimately this reflects the fact that each worker is now assumed to produce a little less, so we still need just as much labour in order to produce the lower level of GDP. Moreover, there are no implications for our assessment of the NAIRU, as this is estimated using past data on wages and unemployment, and should theoretically be driven by factors specific to the labour market, such as how efficiently the market matches workers and jobs.
- [14] Unlike AENA, which covers overall labour costs, WPI tracks wages growth for a fixed basket of jobs. Productivity growth can reflect increases in productivity within jobs, but can also reflect the reallocation of people from low to high wage and productivity jobs. As it tracks only wages growth within jobs, WPI abstracts from some of the wages growth that may be associated with increased productivity as people move to higher paying, more productive jobs. Simple rule-ofthumb estimates suggest that, on average, WPI captures around half of productivity growth, but this will vary over time.
- [15] Hunter S (2025), 'Joining the Dots: Exploring Australia's Economic Links with the World Economy', Speech to the Economic Society of Australia (Queensland) Business Lunch, Brisbane, 3 June.

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https://www.bis.org/review/r251106i.htm,Björk Sigurðardóttir: Enhanced transparency and simplification – financial supervision in Iceland,"Speech by Ms Björk Sigurgísladóttir, Deputy Governor for Financial Supervision of the Central Bank of Iceland, at the Financial Supervision Day, Reykjavik, 9 October 2025.",2025-10-09 00:00:00,"## Björk Sigurðardóttir: Enhanced transparency and simplification financial supervision in Iceland

Speech by M s Björk Sigurgísladóttir, Deputy Governor for Financial Supervision of the Central Bank of Iceland, at the Financial Supervision Day, Reykjavik, 9 October 2025.

* * *

## Honoured guests:

I am delighted to see so many of you here today and welcome you to our inaugural Financial Supervision Day. As the moderator mentioned, the idea of finding a new forum to take the place of the erstwhile Financial Supervisory Authority's annual meetings has been under discussion for some time. With this event, we have created that forum - Financial Supervision Day - which I hope will become an annual event on the Central Bank's calendar.

In planning this event, we discussed whether we should find a catchy name for it something that would pique the interest of a broad audience. But after considering a range of ideas, we decided that we couldn't come up with a better one than Financial Supervision Day, and that appears to have been good enough, given the number in attendance today.

In my address, I will discuss the changes that have taken place in the financial supervision architecture since the Central Bank and the Financial Supervisory Authority merged almost six years ago. I will also review our professional priorities and our execution of financial supervision and acquaint you with the work currently underway in the Central Bank as we seek out ways to simplify our supervisory activities - as regards execution, regulatory instruments under the auspices of the Central Bank, and reporting.

The merger of the Bank and the Financial Supervisory Authority was a massive undertaking, but also an important stage in the evolution of the Central Bank's activities. Four supervisory departments within the Financial Supervisory Authority were transferred unchanged to the Bank at the time of the merger. Three years later, those four departments were reorganised and condensed into two. Further changes were made earlier this year to the internal structure and distribution of tasks within the two departments. Among other things, liquidity monitoring was transferred from the Financial Stability Department to the Microprudential Supervision Department, and tasks relating to the drafting and implementation of rules were transferred from the General Secretariat to the Conduct Supervision Department. The On-Site Inspections Department was disbanded.

These changes, which were carried out in two phases, have now created a more or less final organisational structure for financial supervision within the Central Bank - for the time being, at least.

The key pillars of financial supervision are therefore within two departments - Conduct Supervision and Microprudential Supervision - which bear the main responsibility for ongoing supervision. Furthermore, the Bank's Financial Supervision Committee plays a

key role in larger decisions, including those relating to the imposition of administrative penalties and coercive measures. The Committee also has a policy-setting role. The Financial Supervision Committee has three external members: Erna Hjaltested, Gunnar Thór PØtursson, and Ragnheidur Elfa Thorsteinsdóttir. The internal members are Central Bank Governor `sgeir Jónsson, who also serves as chair; Tómas Brynjólfsson, Deputy Governor for Financial Stability; and myself.

Others involved in various tasks relating to financial supervision, in addition to the supervisory departments and the Financial Supervision Committee, include the Governor, the General Secretariat, and myself. The internal structure of the Central Bank supports cooperation, oversight, and harmonised decision-making in matters relating to financial supervision. In my opinion, the changes made to the Bank's supervisory departments have delivered very good results. With departmental mergers and modifications to project structures, the Bank has enhanced the professionalism and efficiency of its operations.

Harmonised execution of financial supervision has been one of our key objectives. By placing microprudential supervision of all supervised entities under the auspices of a single department, we ensure that no matter whether the entities concerned are banks, insurance companies, pension funds, or fund managers, we will use a consistent approach while giving due consideration to each entity's unique characteristics.

Teamwork has grown stronger with the merger. Financial supervision requires expert knowledge encompassing many areas and multiple risk factors, which can be challenging for a small supervisory institution in a small market. By merging departments and empowering our risk experts, we have reduced key person risk without incurring additional expense.

At the same time, the financial market has evolved so that multiple types of supervised entities now operate within the same conglomeration. The change in the Bank's supervisory architecture has given us a better overview of the connections between companies and the risks within them, and we are convinced that this has delivered more targeted and efficient supervision.

We have also placed increased emphasis on knowledge. Transferring tasks relating to the drafting and implementation of rules from the General Secretariat to Conduct Supervision has enabled us to make direct use of that knowledge in the supervision process, and vice versa. Furthermore, a separate investigatory unit was established within the Conduct Supervision Department with the aim of enhancing specialisation and efficiency in the handling of matters relating to penalties.

The Central Bank sets a Supervisory Strategy covering a three-year horizon and reviews it annually. In formulating our supervisory priorities, we consider developments and risks in the financial market, regulatory and statutory amendments, and the priorities of the European supervisory authorities - the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA), the European Insurance and Occupational Pensions Authority (EIOPA), and the Anti-Money Laundering Authority (AMLA).

This year, we also consulted supervised entities and asked for their assessment of current risks in the financial market. Over half of supervised entities participated in the survey, and it was gratifying to see the close alignment between their responses and those of Central Bank employees who were also invited to participate. Among other things, it emerged that resilience, cyber- and IT security, and governance practices were the topics that should be emphasised most strongly.

These priorities are reflected in the tasks included in the Bank's supervisory work schedule. We publish our supervisory priorities each year, and in 2025 we started using ""Dear CEO"" letters as a supervisory tool, where we outlined key priorities and tasks for the year.

Over the past five years, 155 regulatory instruments relating to the financial market have been incorporated into Icelandic law and a further 90 supervisory guidelines have taken effect, without repealing older instruments except to a limited extent. Naturally, this has added to the Central Bank's supervisory tasks. As a result, we have placed primary emphasis on raising awareness and providing information. We have added details about new legislation to the Bank's website, improved our FAQ page, and introduced regular seminars on new legislation.

To address the increased scope of our tasks, we have placed emphasis on greater efficiency in our work. We use a risk-based approach to all of our tasks and adhere to the principle of proportionality, thereby conducting our supervision with an eye to entities' size and scale insofar as is possible. We have also expanded our supervisory toolkit and categorised the tools we use based on their nature and use, so as to ensure that we apply them in a more targeted way.

We have recently stepped up our use of softer supervisory tools such as selfassessments, which have been well received. In addition, we have begun to use artificial intelligence to test new supervisory methods, and we can see that interesting opportunities lie in this area.

Simplification of financial supervision has been widely discussed. In Europe, the discussions have been linked to the continent's competitiveness. The Central Bank has participated actively in discussions of simplification through EBA, ESMA, and EIOPA and through Nordic cooperation. Last year, Nordic financial supervisory officials sent a joint letter to the chairpersons of the European supervisory authorities. The letter encouraged a move towards simpler and more risk-based rules while emphasising that simplification does not mean deregulation.

It is important to bear in mind that rules are adopted so as to ensure stability and trust, not to complicate operations. As European Central Bank Supervisory Board Chair Claudia Buch put it: ""Simplification means maintaining resilience with a more effective and efficient supervisory and regulatory framework; deregulation means weakening (Claudia Buch, 2025) regulation and supervision at the expense of resilience.""

A task force focused on simplifying the execution of financial supervision is currently working within the Central Bank. This group has placed emphasis on reporting, large supervisory tasks, and the regulatory framework for which the Bank is responsible. The

Bank conducted a survey among employees and supervised entities and received a large number of useful suggestions.

To follow up, the Bank will prepare an action plan based on the task force's recommendations. For example, the Bank has introduced discussions with the relevant banks at the final stage of the SREP, in order to enhance transparency and efficacy.

We have also simplified the processing of requests by assigning risk thresholds, thereby fostering quicker processing of smaller requests. A review of board members' fitness and proprietary assessments is underway, and we plan to expand our educational outreach to supervised entities' boards and hold annual seminars starting next spring.

As regards data collection, the Central Bank has been working on reforming its data administration and has developed a comprehensive data register that provides greater oversight and reduces the need for data requests. Several data-reports have ad hoc been discontinued, including loan portfolio reports (LPA), and a number of confirmational reports are set to be discontinued as well.

We are also reviewing our arrangements for data requests so as to clarify the ad hoc process and ensure better oversight within the Bank.

In addition, we have begun a review of all of the Bank's legacy supervisory guidelines. A large number will either be revoked or recast in a different and more appropriate form. The FAQ page on our website has been revised and updated and made more accessible.

And finally, I would like to mention that in an annex to the Government's fiscal budget proposal for 2026, it is stated that the Central Bank and the Ministry of Finance and Economic Affairs share responsibility for reviewing and amending the regulatory framework applying to financial institutions, with the aim of reducing complexity. We will continue to discuss our recommendations in this area with the Ministry.

Discourse about simplification is also linked to the concept of gold-plating, which Gudrœn Finnborg Thórdardóttir, the Central Bank's project manager for implementation, will discuss in a moment. It is important that we all have a shared understanding of the term and of where the scope for simplification actually exists.

Honoured guests: Those of us here today perform various roles, and we do not always agree on how to achieve our objective, but I think we do agree on what that objective is: to promote a sound and reliable financial market.

I hope that our priorities for financial supervision - predictability, transparency, and increased educational and informational efforts - will be useful to you in your work. I look forward to the talks to be given today and participating in round table discussions, and I encourage you all to ask questions, engage in the discussion, and continue this important dialogue.

Thank you very much.",Björk Sigurðardóttir
https://www.bis.org/review/r251106g.htm,Gabriel Cuadra: Monetary and exchange rate regimes in Mexico1925-2025,"Speech by Mr Gabriel Cuadra, Deputy Governor of the Bank of Mexico, at the colloquium ""Banco de México, 100 years since its foundation"", organised by the Instituto de Investigaciones Económicas, UNAM, Mexico City, 8 October 2025.",2025-10-08 00:00:00,"## Monetary and Exchange Rate Regimes in Mexico: 1925-2025 * †

Colloquium: Banco de México, 100 years since its foundation

Instituto de Investigaciones Económicas, UNAM

October 8, 2025

## Gabriel Cuadra

Deputy Governor of Banco de México

Good  morning,  everyone.  I  would  like  to  thank  Armando  Sánchez  Vargas, director  of  the  Institute  of  Economic  Research  at  the  Universidad  Nacional Autónoma  de  México,  for  inviting  me  to  participate  in  this  colloquium celebrating the 100 th anniversary of the founding of Banco de México.

The history of this institution can be explored from various perspectives. On this occasion, I will focus on the monetary and exchange rate regimes through which Banco de México has transitioned since its foundation up to the present day.  This  perspective  is  particularly  relevant  since  Mexico  is  a  small,  open economy  and,  as  such,  monetary  policy  is  closely  intertwined  with  the exchange rate regime.

During the early years of Banco de México, as in many other economies, the gold  standard  prevailed  in  our  country.  Later,  with  the  introduction  of  fiat money, a prolonged period followed in which predetermined exchange rate regimes were maintained. Within this framework, several modalities emerged, notably,  the  fixed  exchange  rate  regime  that  prevailed  until  the  1970s.  In addition, we had controlled exchange rate, crawling peg  and exchange rate band regimes. Finally, in the 1990s, a free-floating exchange rate regime was adopted.

* The ideas expressed herein are solely those of the author and do not necessarily reflect the institutional view of Banco de México.

† I  would like to thank Eduardo Turrent for our conversations, as well as Francisco Adame, Pablo Vázquez, Rodrigo Cortez, Edgar Hernández, Karla Salguero and Esperanza Zoreda for their collaboration.

## Gold standard

During Banco de México's early years, the gold standard prevailed worldwide. This regime involved a system of globally fixed exchange rates. In the face of accumulative external imbalances and insufficient downward price flexibility, the adjustment mechanism became extremely costly in terms of economic activity and employment. Under this regime, monetary policy was procyclical. In response to the Great Depression, central banks, including Banco de México, abandoned the gold standard.

The  Great  Depression,  which  originated  in  the  United  States,  had  adverse consequences on the Mexican economy. Lower external demand for Mexican products, a deterioration in the terms of trade, and the imposition of tariffs by US  authorities  significantly  affected  Mexican  exports  and,  consequently, economic activity and employment. In addition, procyclical macroeconomic policies were implemented, further deepening the economic contraction. As a result, in 1932, Gross Domestic Product declined 15 percent.

Lower exports resulted in an external deficit, which, in turn, led to an outflow of  gold  from  the  country.  This  had  an  impact  on  the  amount  of  money  in circulation. Although Mexico formally operated under a gold standard regime, in practice a bimetallic system prevailed, since both gold and silver coins were in use.

Given the decline in the relative price of silver, and to prevent a depreciation of the silver peso, the authorities reduced the minting of coins made from that metal. This further contracted the money supply, exacerbating the decline in economic  activity.  In  response  to  this  adverse  scenario,  the  authorities enacted  the  demonetization  of  gold  and,  years  later,  of  silver.  As  a  result, Mexico transitioned from a metallic standard to a fiat money system with a fixed exchange rate.

Amid  the  shortage  of  means  of  payment,  exacerbated  by  the  monetary contraction, the population eventually began to use the banknotes issued by Banco  de  México.  During  the  Mexican  Revolution,  different  revolutionary factions issued their own banknotes, which led to inflation and a loss of public confidence in paper money. As a result of the monetary disorder stemming from  the  Revolution,  the country's population  became  reluctant  to  accept banknotes.  In  the  early  years  of  Banco  de  México,  this  posed  significant challenges to the monetary regulation entrusted to this central bank. At that time, minting  metallic coins was  practically the  only  monetary  policy instrument available.

## Predetermined exchange rate

In the 1940s, the Bretton Woods agreements established a new international monetary system. Under this system, countries pegged their exchange rates to the US dollar, while the US government set a fixed parity for the dollar and gold. Thus, some of the countries participating in these agreements had fixed exchange rates. However, these could be adjusted in the event of an external imbalance deemed fundamental that justified an adjustment of the exchange rate parity.

Mexico was among the first nations to devalue its currency under the new regime.  This  occurred  in  1948  and  again  in  1954.  In  both  cases,  military conflicts,  first  World  War  II  and  later  the  Korean  War,  boosted  Mexican exports. International reserves increased and, with them, the money supply, which fueled a rebound in inflation. Under the fixed exchange rate regime, this resulted in an appreciation of the real exchange rate. Following the end of both military  conflicts,  exports  declined.  Combined  with  the  real  exchange  rate appreciation,  this  led  to  a  growing  current  account  deficit  and  a  fall  in international reserves. In this context, the authorities devalued the Mexican peso first in 1948 and, subsequently, in 1954.

In a context of fiscal and monetary discipline, a fixed exchange rate regime could  prove  credible  and,  therefore,  serve  as  a  nominal  anchor  for  the economy, guiding inflation expectations. This was the case in Mexico during the so-called ' stabilizing development period ' between 1954 and 1970, when inflation remained at moderate levels.

In 1971, the US authorities decoupled the dollar from gold and devalued it. Following the collapse of the Bretton Woods system, floating exchange rates were  established  among  advanced  economies.  However,  Mexico  chose  to keep its currency pegged to the US dollar. This meant that the Mexican peso was  devalued  against  the  currencies  of  other  advanced  economies.  In  the following years, several shocks, including increases in international oil prices, contributed  to  a  rebound  in  global  inflation.  This  international  context coincided  with  the  adoption  of  expansionary  macroeconomic  policies  in Mexico.

After maintaining moderate fiscal deficits throughout the stabilizing development period, Mexico implemented expansionary fiscal and monetary policies during the 1970s. Thus, the fixed exchange rate regime coexisted with both periods of fiscal discipline and expansionary policies.

The fiscal deficit was financed through monetary expansion and external debt. Although economic activity initially expanded, inflation began to rise. Under a fixed exchange rate regime, and with inflation in Mexico higher than in the United  States,  the  real  exchange  rate  appreciated.  Said  real  exchange  rate appreciation, together with excess absorption over output, led to an increasing current account deficit. This contributed to a decline in international reserves. The perception that the exchange rate parity was unsustainable accelerated the fall in international reserves through capital outflows.

Finally,  the  situation  became unsustainable. Faced with the impossibility of maintaining the parity of 12.50 pesos per US dollar, which had prevailed since 1954, the authorities were compelled to devalue the Mexican peso in 1976. These events serve as an example of a first-generation balance of payments crisis (Krugman, 1979).

Thereafter,  the  authorities  maintained  a  controlled  exchange  rate  regime indicating that they would intervene only in the event of abrupt fluctuations in the exchange rate parity. Although it was not formally a fixed exchange rate, the value of the Mexican peso remained stable. During this period, following the discovery of significant oil fields, the authorities once again implemented expansionary  fiscal  policies  financed  by  monetary  expansion  and  external borrowing. This was done under the expectation that oil prices would remain high.  In  this  environment,  macroeconomic  imbalances  accumulated  once more,  leading  to  higher  inflation,  a  real  exchange  rate  appreciation,  and  a widening external deficit.

In the early 1980s, international interest rates rose, the US economy entered a  recession,  and  oil  prices  dropped.  In  response  to  these  external  shocks, concerns about the sustainability of the current account deficit and the parity of the Mexican peso against the US dollar grew, which led to capital flights. As a result, in 1982 Mexico experienced a balance of payments crisis more severe than that registered in 1976.

The country's authorities, including Banco of México, faced major challenges. These included correcting the excess of domestic absorption over output and the current account deficit, as well as addressing the issue of external debt. The authorities implemented stabilization programs, including fiscal adjustments and monetary discipline. At this stage, a crawling peg exchange rate policy was adopted, aimed at achieving a real exchange rate depreciation that would contribute to an external surplus, which, in turn, would provide the foreign currency needed to service the foreign debt.

Although inflation initially decreased, it remained at high levels. In the mid1980s,  oil  prices  fell  again,  undermining  macroeconomic  stabilization.  The periodic adjustments in the nominal exchange rate also contributed to higher inflation.  Moreover,  inflation  became  more  inertial  due  to  price  and  wage indexation practices. In this context, inflation accelerated, reaching triple-digit levels. Given the inflationary inertia, traditional  fiscal and monetary restraint policies  were  complemented  by  price  and  wage  agreements  between  the public sector, businesses, and labor unions. This eventually led to a decline in inflation to single-digit levels in 1993.

In the early 1990s, external imbalances built up once again. This time mainly due to the behavior of the private sector. The renegotiation of the foreign debt and,  subsequently,  prospects  of  a  North  American  Free  Trade  Agreement generated optimism and capital inflows. The current account deficit widened due to higher private  spending,  primarily  on  consumption.  This  deficit  was financed through short-term capital inflows.

A system of exchange rate bands was adopted in 1991, featuring a crawling ceiling  that  adjusted  over  time.  In  1994,  in  the  face  of  rising  international interest rates and certain political events, the exchange rate was close to the ceiling of the band, while international reserves were declining. Finally, the band regime proved unsustainable and, by the end of 1994, the Mexican peso devaluated sharply  and  inflation  rose  significantly.  These  events  led  to  the forced adoption of a floating exchange rate system.

## Flexible exchange rate

The abandonment of predetermined exchange rate regimes and the adoption of a free-floating exchange rate resulted from an extreme event: the 19941995 financial crisis. In this regard, there is a parallel with the abandonment of the gold standard and the implementation of predetermined exchange rate regimes under fiat money, beginning in the 1930s. That transition  similarly stemmed from an extreme event: the Great Depression.

In  the  mid-1990s,  doubts  remained  about  the  desirability  of  a  flexible exchange rate regime for an emerging economy, such as Mexico. Guillermo Ortiz, Secretary of Finance during the transition to the flexible exchange rate, pointed out in 2013 that:

- '.. the decision to adopt a free -floating exchange rate regime was not a choice among  alternative  regimes,  but  a  necessity,  since  Banco  de  México  had exhausted its international reserves. At that time, we were not fully convinced of  the  convenience  of  adopting  a  flexible  exchange  rate  regime,  given  the structural fragility of the peso with respect to the US dollar.""

There  were  concerns  regarding  potential  adverse  effects  on  inflation  and financial stability. However, these concerns diminished as the new monetary regime,  namely  the  inflation  targeting  regime  that  prevails  today,  was consolidated.

As a precedent to the adoption of this regime, in 1993 the Mexican Congress approved a constitutional reform granting autonomy to Banco de México. The Congress also established the stability of the purchasing power of the national currency  as  Banco  de  México 's primary  mandate.  In  December  1994,  as mentioned earlier, a free-floating exchange rate regime was adopted.

In  1997,  Banco  de  México  began  publishing  the  expected  trajectory  of  the monetary base for the year, consistent with the annual inflation target. In this regard,  during  the  1970s  and  1980s,  several  central  banks  in  advanced economies  had  set  quantitative  targets  for  monetary  aggregates  as  an intermediate objective, with the goal of creating an environment conducive to low and stable inflation.

However, the instability in the demand for money led these central banks to abandon the monetary aggregates' targets and instead  adopt  a  short-term interest  rate  as  a  monetary  policy  instrument.  In  this  context, Mexico's experiment of setting targets for monetary aggregates  proved to be shortlived.

In 2000, multi-year inflation targets were announced, and in 2001 the formal adoption of the inflation targeting framework in Mexico was announced. In 2002, a permanent target of 3 percent was set for the National Consumer Price Index, with a 2-4 percent variability range. Likewise, a calendar for monetary policy decisions was introduced, and these decisions would be communicated through press releases explaining the rationale behind each decision.

An  inflation  targeting  framework  was  thus  established  in  Mexico,  with  the free-floating  exchange  rate  regime  as  a  fundamental  component  of  this system. Concerns regarding the adequacy of exchange rate flexibility for an emerging economy were mitigated by the results of the new framework.

As inflation decreased, the pass-through of the exchange rate to prices was also  significantly  reduced.  In  previous  decades,  the  correlation  between devaluations of the Mexican peso and inflation had been high. However, in an environment  of  price  stability,  exchange  rate  movements  no  longer  led  to generalized  price  increases,  but  rather  reflected  changes  in  relative  prices between tradable and non-tradable goods. In addition to the above, financial derivatives markets for the Mexican peso were developed, enabling economic agents to hedge against exchange rate risk.

Next,  I  will  make  some  remarks  on  two  of  the  main  benefits  attributed  to exchange rate flexibility. On the one hand, this regime acts as a mechanism to dampen adverse shocks, and, on the other hand, it allows for an independent monetary policy; that is, one that focuses on the domestic inflationary outlook. Since 1953, Milton Friedman had emphasized such attributes of the exchange rate flexibility regime. However, at that time, Friedman focused on advanced economies,  as  he  had  concerns  about  the  suitability  of  this  regime  for developing economies (Edwards, 2020).

## Flexible exchange rate as a shock absorber

The first rationale in favor of exchange rate flexibility is that an adjustment in the exchange rate serves as a shock absorber. Under a fixed exchange rate regime, adjustments are made through greater fluctuations in output, which implies high costs, as was the case under the gold standard.

In  turn,  under  a  free-floating  regime,  exchange  rate  adjustments  lead  to changes  in  the  relative  prices  of  domestic  and  foreign  goods,  which  helps absorb shocks. An example of this is the case of Mexico between 2014 and 2016.  During  those  years,  the  national  economy  faced  a  series  of  adverse shocks that led to a greater restriction of external funding.

Among these shocks, a relevant one was the deterioration in the terms of trade due to the decline in international oil prices starting in the second half of 2014. In addition, the downward trend in oil production became more pronounced in  2014. These shocks led to a sharp deterioration in the oil trade balance, which went from a surplus to a deficit in 2015.

The Mexican economy was also affected by uncertainty about the future of the trade  relations  with  the  United  States  and  Canada,  as  well  as  by  the normalization of the US Federal Reserve's monetary policy. In that environment, financial inflows from abroad fell significantly.

The adjustment of the economy implied reducing the current account deficit, in order to make it consistent with the lower availability of external financial funding. Given the difficulty of reversing the trend of the oil trade balance, an adjustment in the non-oil trade balance was needed, specifically, to move from a deficit to a surplus. In this regard, the economy's response to achieve this adjustment  was  through  a  depreciation  of  the  real  exchange  rate.  This depreciation modified the relative prices between tradable and non-tradable goods, helping the economy to adapt to the new environment. This episode illustrates how exchange rate flexibility functions as a mechanism to absorb real shocks.

Nevertheless, the economy is also subject to financial shocks. For example, episodes of global risk aversion can trigger excessive financial volatility and market  illiquidity, leading to disorderly dynamics  in financial  markets, including the foreign exchange market. In response to episodes of this type, central banks in emerging economies, including Banco de México, maintain international reserves to ensure they can provide liquidity in foreign currency if necessary, even under a free-floating exchange rate regime. Banco de México successfully implemented measures to stabilize domestic financial markets in light  of  the  shocks  of  the  global  financial  crisis  (Sidaoui,  Ramos-Francia,  &amp; Cuadra, 2010) and the COVID-19 pandemic (Alba, Cuadra, &amp; Ibarra, 2023).

## Flexible exchange rate and independent monetary policy

The  monetary  trilemma,  proposed  by  Mundell  (1963)  and  Fleming  (1962), sustains that policymakers face having to choose between three objectives: i) implementing an independent monetary policy focused on achieving domestic goals; ii) allowing the free movement of capital; and iii) maintaining a stable exchange rate. However, only two of these three objectives can be mutually consistent, and thus countries must decide which objective to forgo. In this regard, Mexico has opted to abandon fixed exchange rate schemes.

A second argument in favor of a flexible exchange rate regime is that, in an environment  of  free  capital  mobility,  it  enables  an  independent  monetary policy.  In  contrast,  under  a  fixed  exchange  rate  regime,  monetary  policy becomes  dependent  on  the  monetary  conditions  of  the  country  whose currency serves as the exchange rate anchor, historically, the United States. In this context, exchange rate flexibility is important, since Mexico may have to adjust its monetary policy stance independently, even if the United States does not need to make similar adjustments.

As a first approach to the independent implementation of monetary policy by Banco de México, we can analyze the actions of this institution during the monetary cycles of the Federal Reserve. In this regard, there have been periods in which Banco de México adjusted its reference rate in the same direction as the  Federal  Reserve,  although  not  necessarily  by  the  same  magnitude.  In principle, this does not mean that Banco de México has mechanically followed the Federal Reserve. It is possible that both economies have faced common shocks,  which  made  it  appropriate  for  both  central  banks  to  adjust  their reference rates in the same direction.

An example of the above is the inflationary episode associated with the shocks from the COVID-19 pandemic and the war in Ukraine. Disruptions in global production  and  distribution  chains  led  to  shortages  of  multiple  inputs  and serious  supply  chain  problems.  In  addition,  international  prices  of  various commodities increased significantly. In most countries, including Mexico and the United States, inflation reached levels unseen in a long time. In response, Banco  de  México  and  the  Federal  Reserve,  like  many  other  central  banks around the world, implemented a cycle of monetary tightening.

In addition to the above, the co-movement of interest rates may also be due to the transmission of shocks from the US economy to the Mexican economy. In this regard, Carrillo, Elizondo, and Hernández (2020) analyze the transmission of macroeconomic shocks from the United States to Mexico using structural autoregressive vector models. These authors find that, an increase in aggregate demand in the United States leads to higher economic activity, inflation, and interest rates. In turn, stronger economic activity in the United States raises demand for Mexican products, which boosts economic activity and exerts upward pressure on prices in Mexico. This prompts monetary policy in Mexico to respond by raising the reference rate.

An example of the above also occurred during the pandemic. The US economy experienced  a  dynamic  recovery,  driven  primarily  by  the  fiscal  stimulus implem ented in that country. Given the United States' weight in the global economy, these fiscal measures, such as transfers to households, contributed to an expansion of global demand for goods. Owing to the high degree of trade integration between Mexico and the United States, the Mexican manufacturing sector faced strong external demand.

Although  the  correlation  between  the  federal  funds  rate  and  Banco  de México's reference rate is positive, it is not perfect. For instance, during the inflationary episode triggered by the pandemic, Banco de México began its monetary tightening cycle in June 2021, whereas the Federal Reserve did so in March 2022.

On  this  point,  advanced  economies,  including  the  United  States,  unlike emerging  economies  such  as  Mexico,  had  maintained  inflation  levels  and inflation expectations below their targets for a prolonged period. This allowed their  monetary  authorities,  including  the  Federal  Reserve,  to  be  patient  in withdrawing  from  accommodative  stances.  In  contrast,  central  banks  in emerging  economies,  such  as  Banco  de  México,  with  a  more  limited  track record  of  price  stability,  had  to  act  swiftly.  Given  the  magnitude  and generalized nature of the inflationary shocks, timely action was essential to keep longer-term inflation expectations anchored.

In  view  of  the  progress  in  disinflation,  the  monetary  authorities  cut  their reference rates. During 2025, Banco de México cut its reference rate by 250 basis points, whereas the Federal Reserve left it unchanged from December 2024  to  September  2025.  In  this  regard,  economic  activity,  which  is  a determinant of inflation, and its outlook have been weaker in Mexico than in the United States. Mor eover, at the beginning of the year, Mexico's reference rate was at particularly high levels relative to its historical values. Considering their historical distributions, core inflation was at the 50 th percentile, while the ex-ante real rate was at the 100 th percentile. In view of this, Banco de México implemented a process of calibrating its monetary policy stance.

An  independent  monetary  policy  means  that  the  central  bank  sets  its reference rate based on domestic macroeconomic conditions. These conditions, in turn, can be influenced by external factors. However, the central bank, in assessing the appropriate monetary policy stance, does not respond directly to external factors. These are considered only insofar as they affect the domestic macroeconomic environment.

An independent monetary policy not only means that the central bank makes its  decisions  based  on  the  domestic  macroeconomic  outlook,  but  it  also requires  monetary  policy  actions  to  have  an  impact  on Mexico's financial conditions.  For  example,  during  a  rate  hiking  cycle,  domestic  financial conditions should indeed reflect a tightening of monetary policy.

The literature on the global financial cycle emphasizes the co-movement of financial asset prices, credit, and capital flows at the global level. Rey (2013) argues that the driving force behind this cycle is the monetary policy of the Federal Reserve, which influences the risk appetite of international investors. In this context, the author states that:

""The monetary policy trilemma is actually a dilemma, as open economies have no monetary autonomy from U.S. policy or the global financial cycle unless they impose capital controls.""

De Leo, Gopinath, and Kalemli-Ozcan (2022) find that in emerging economies there is a disconnect between the reference rate and short-term market rates due to fluctuations in global financial conditions. This is illustrated by the 2013 Taper  Tantrum.  The  anticipation  that  the  Federal  Reserve  would  begin  to normalize  its  monetary  policy  stance  led  to  a  tightening  of  international financial conditions and a deterioration in the global economic outlook. Given the weakening economic activity, several central banks in emerging economies lowered their reference rates. However, market interest rates, including shortterm ones, rose rather than declined, moving in line with the monetary policy rate. This was due to increased risk aversion at the global level. The authors argue that this disconnect between monetary policy rates and market rates is also observed during periods of low financial market volatility.

In  this  context,  it  is  important  to  assess  the  impact  of  monetary  policy  in Mexico on the country's financia l conditions. In this regard, the results of the analysis of the pass-through from the reference rate to government securities rates suggest that Banco de México, by adjusting its target rate, influences interest rates along the yield curve (Banxico, 2022). However, the degree of the pass-through decreases as maturities lengthen. For short-term rates, the pass-through is immediate and complete, which can be explained by financial arbitrage.  In  contrast,  for  longer-term  rates,  such  as  the  10-year  yield,  the impact of the reference rate remains positive, albeit of smaller magnitude.

In addition to the above, the analysis of the pass-through from the reference rate  to  bank  lending  rates  shows  that  it  is  also  positive  and  statistically significant (Banxico, 2024a). In the case of interest rates on loans issued by commercial  banks  to  businesses,  the  short-term  pass-through  is  partial. However, over time, the degree of the pass-through increases and, after one year, it is nearly complete. In contrast, for long-term housing loans, the passthrough is also positive but significantly lower.

In sum, when Banco de México adjusts its reference rate, other interest rates in the economy tend to move in the same direction. However, the effect is smaller for long-term rates. In a small open economy such as Mexico, longerterm interest rates can also be influenced by global factors. This is not unique to Mexico, as it is also observed in other emerging economies.

Regarding bank credit, recent studies such as those by Chinguil-Rojas, Esquivel, and Leal (2024), as well as Mena, Tobal, and Werner (2025), find that monetary policy in Mexico affects the growth rate of bank lending. Although policy rate decisions influence other interest rates and credit, their effect on aggregate demand through these channels is smaller in Mexico than in other economies. This is largely due to the low level of credit penetration in Mexico compared with  that  observed  in  other  countries,  including  other  Latin  American economies.

The exchange rate plays a key role in the transmission of monetary policy in Mexico.  One  common  approach  to  analyze monetary  policy's transmission mechanism  is  through  vector  autoregressive  models.  These  show  that  in

Mexico the impact of monetary policy is greater on core goods (merchandise) inflation  than  on  inflation  in  other  categories  (Banxico,  2024b).  This  is consistent with the idea that the most relevant transmission channel is the exchange rate. Merchandise refers to tradable goods, whose prices are more sensitive to international references and to fluctuations in the exchange rate.

In recent years, Banco de México's monetary policy actions have influenced the value of the Mexican peso. In particular, during 2023 and the first months of 2024, the reference rate and the interest rate spread with the United States remained  elevated  relative  to  their  historical  values.  At  the  time,  this contributed to a significant appreciation of the Mexican peso. Alongside the fading of global shocks, especially the normalization of supply chains, these factors supported the disinflation process.

Finally,  it  is  important  to  note  that  the  evolution  of  the  exchange  rate  is influenced not only by the central bank's monetary policy but also by a variety of other factors. In the second half of 2024, the Mexican peso depreciated due to a combination of external and idiosyncratic factors. In 2025, even though the interest rate differential with the United States narrowed, the national currency appreciated once again. This was driven by various factors, including the broad weakening of the US dollar. Hence, while monetary policy actions affect the exchange rate, they do not determine it, as it can be also influenced by other forces.

## Concluding remarks

Throughout its history, Banco de México has gone through different exchange rate regimes, which have shaped the way monetary policy is conducted in the country. The less flexible the exchange rate regime, the greater the constraints imposed on monetary policy.

Critical events, such as financial crises and economic contractions, prompted the abandonment of certain regimes and the adoption of others. By the end of the 20 th century, a flexible exchange rate regime was adopted in Mexico, which has served as a mechanism to absorb shocks.

Under this regime, Banco de México conducts a monetary policy that can be classified as independent. Decisions are based on domestic macroeconomic conditions, while external factors are relevant only insofar as they affect the domestic  inflation  outlook.  The central  bank's decisions  also  influence domestic financial conditions, although the impact across financial variables is heterogeneous.

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https://www.bis.org/review/r251031l.htm,Christine Lagarde: Remarks delivered at the Palazzo Vecchio on the occasion of the external Governing Council monetary policy meeting in Florence,"Speech by Ms Christine Lagarde, President of the European Central Bank, at the official dinner given by the Bank of Italy, Florence, 29 October 2025.",2025-10-29 00:00:00,"## Christine Lagarde: Remarks delivered at the Palazzo Vecchio on the occasion of the external Governing Council monetary policy meeting in Florence

Speech by Ms Christine Lagarde, President of the European Central Bank, at the official dinner given by the Bank of Italy, Florence, 29 October 2025.

* * *

It is a pleasure to be here in Florence.

It is always difficult to give remarks after Fabio, who is a very eloquent advocate. As monetary policymakers, we tend to have a comparative advantage with numbers rather than words.

But you, Fabio, are a rare breed who has a comparative advantage with both. And I would like to take this opportunity to thank you and the team at the Banca d'Italia for the extraordinary hospitality on display here in this beautiful city.

Florence boasts a rich history that few others can match. It gave us great works by Michelangelo and Leonardo da Vinci, fostered humanist scholarship, and spread printing and scientific learning across the continent.

But this evening I would like to single out one achievement in particular: Brunelleschi's dome, which crowns this city's cathedral. Not because the dome is beautiful and inspiring - it is undeniably both - but because its remarkable history offers inspiration for Europe today.

Florence began building its cathedral in the late 1200s. Yet, for more than a century, it remained unfinished. The challenge was to build a dome on such a scale that no one knew how to achieve it.

It did not help that, during this time, Florence was hit by shocks like the Black Death pandemic and wars, which understandably caused the city to delay in finishing what it had started. But Florence remained undeterred, and, in 1418, it launched a design competition to build the dome.

The architect Brunelleschi won that competition with a game-changing approach to architecture - breaking from tradition and rethinking how large structures could stand without external supports.

For instance, he used a to keep each layer stable as it rose, herringbone brick pattern avoiding the usual need for wooden scaffolding. He also embedded horizontal stone that acted as tension rings to contain the dome's outward thrust. and iron chains

Equally daring was his decision to build a - an inner shell to bear the double-shell dome immense weight, an outer one to protect it - and applying this idea on a scale never attempted.

During the sixteen years it took to build the dome, some contemporaries were convinced it would collapse during construction. After all, something like this had never been done before. But Brunelleschi defied them all, and thanks to that resolve we can still enjoy the fruits of his success.

The story of Florence's cathedral and its dome is the story of modern Europe, itself a cathedral of nations. There are three parallels worth drawing here.

First, we are part of a visionary project that many once thought impossible - and this country provided some of the master builders of that vision.

Think of Alcide De Gasperi, who helped lay the foundations; Altiero Spinelli, who imagined a federal architecture long before it seemed possible; and my predecessor, Mario Draghi, who, at a moment when Europe's future was in existential doubt, showed that resolve can be as important as design.

Second, like the dome, Europe has withstood storms that might well have brought it down.

In just the past five years, we have confronted the worst pandemic since the 1920s, the highest US tariffs since the 1930s, the deepest energy shock since the 1970s and the most devastating land war on European soil since the 1990s.

Each of these events could have exposed structural weaknesses. But Europe held because it had developed resilience - in its policies, its institutions and its commitment to act together.

And yet this leads to the third parallel: we have reached a point where the old ways cannot take us much further.

Europe is resilient, but it is also vulnerable. We have an open economic model that exposes us to global shocks. Yet we seem unable to reduce that vulnerability by fixing our internal market and strengthening our domestic growth.

Part of the reason is architectural: even when we can agree on what must be done, our governance often prevents us from doing it decisively enough. It has become too slow, too complex and too much of a hostage to individual Member States wielding vetoes.

The solution does not require revolutionary change. Brunelleschi did not invent new materials - he took the bricks, mortar and iron of his time, and combined them in ways that had never been imagined. Europe can do the same.

We can use the possibilities within the Treaties - such as the ""passarelle"" clauses - to make more decisions by qualified majority, rather than unanimity, when collective action is in our shared interest.

We can create ""28th regimes"", where common European rules apply without waiting for full convergence in national systems, allowing innovators to scale more quickly.

We can deepen cooperation among groups of countries willing to move faster - not as exclusive clubs, but as pioneers whose progress ultimately strengthens the whole.

The lesson of Brunelleschi is that vision alone is not enough. It must be paired with creativity to act within the constraints of the present.

That requires policymakers to be inventive. But here I recall the words of Florence's Dante - a man who, it is fair to say, had a comparative advantage with words rather than numbers. He once wrote, ""From a little spark may burst a flame.""

Brunelleschi grew up in a culture imbued with Dante's influence. He likely read those words, inspiring his own creativity and ambition. Now it is time for Europe to learn from them.",Christine Lagarde
https://www.bis.org/review/r251105d.htm,Fundi Tshazibana: Financial policy in the era of the climate crisis - an African perspective,"Address by Ms Fundi Tshazibana, Deputy Governor of the South African Reserve Bank, at the School of Oriental and African Studies, organised by the University of London, London, 15 October 2025.",2025-10-15 00:00:00,"

## Address by Fundi Tshazibana, at the School of Oriental and African Studies, University of London,

## Deputy Governor of the South African Reserve Bank, 15 October 2025

Financial policy in the era of the climate crisis:  An African perspective

## Good evening.

It is a great pleasure to be here at the School of Oriental and African Studies (SOAS). I would like to thank Vice-Chancellor Adam Habib and Provost Joanna Newman for their kind invitation.

Throughout its history, SOAS has nurtured leaders who are committed to tackling the systemic causes of social injustice and economic underdevelopment. This legacy is particularly visible in South Africa, where distinguished alumni include both our serving Minister of Finance and the Governor of the South African Reserve Bank (SARB).

Today, the call for such leadership is especially urgent as we confront the challenges of climate change.

While my main focus will be on the issues we face in South Africa, it is important to note that climate change creates similar challenges across other African countries. This year, under our Group of Twenty (G20) Presidency, we have prioritised scaling up  sustainable  finance  to  address  Africa's  key  development  challenges.  The Sustainable  Finance  Working  Group  is  actively  developing  recommendations  to strengthen the global financial architecture, boost financing for climate adaptation, and unlock the potential of carbon credit markets. This focus has also been mirrored in other G20 groups.

South Africa is leveraging its leadership role to forge the global partnerships necessary to dismantle financial barriers to climate action. In this regard, we have partnered with institutions  such  as  the  African  Development  Bank,  the  Network  for  Greening  the Financial System (NGFS), the International Association for Insurance Supervisors, the

World  Bank,  and  the  Organisation  for  Economic  Co-operation  and  Development, among others.

Climate  change  is  a  global  problem,  yet  the  ways  in  which  climate-related  risks materialise are diverse. The scenarios developed by the NGFS highlight that climaterelated risks are likely to be larger in many emerging market and developing countries. In the G20 work we did with the African Development Bank, it was clear that Africa is especially vulnerable, not only due to its geography and reliance on climate-sensitive sectors such as agriculture, but also due to historical underinvestment in resiliencebuilding and structural inequalities. Several systemic barriers, such as financial system vulnerability and the high cost of capital, amplify Africa's vulnerability to the impacts of climate  change.  One  might  argue  that,  while  there  may  be  homogenous  regional elements,  each  country  on  the  continent  has  its  own  unique  vulnerabilities  and different capacities to respond. This means that, to be effective, policy responses must be tailored to the specific circumstances of each nation. With that in mind, please note that many of the points I make today will be applicable to some countries, but not all. Much of my focus will be on highlighting Africa's diversity as a region.

At  the  SARB,  we  take  great  pride  in  our  steadfast  commitment  to  advancing  our country's green agenda. Many other central banks have taken similar positions, as demonstrated by the establishment of the Network for Greening the Financial System in 2017. 1

This  central  bank  focus  on  climate,  however,  raises  a  crucial  question:  Does  this expanded focus align with their primary mandate of maintaining price stability, as well as with their clearly defined legislative responsibilities?

After all, in recent times, central banks' objectives have given the greatest weight to controlling  inflation  and  financial  stability.  Their  widespread  adoption  of  inflationtargeting frameworks has led to significant successes -so why divert their focus from this  main  task?  There  have  also  been  arguments  that  the  current  inflationmanagement toolbox was not designed to address climate-related objectives,  and these new goals are likely to clash with anti-inflation measures or, at the very least, muddy the waters.

1  NGFS, ' Joint statement by the Founding Members of the Central Banks and Supervisors Network for Greening the Financial System', 12 December 2017, https://www.ngfs.net/en/press-release/joint-statement-foundingmembers-central-banks-and-supervisors-network-greening-financial-system

In this regard, while most central banks now implement climate-related strategies and actions, there are also informed voices 2,3  arguing that central banks should play little or no role in their countries' climate change strategies. 4,5

So, what is the right approach? More importantly, which side is right for central banks in Africa?

That is the question I will be looking at this evening, drawing on my experience as an African central banker.

Let  me  simplify  things  by  providing  my  conclusions  upfront.  Both  sides  are  right. Central banks have important roles to play in a country's climate strategy , but they are indirect roles aimed at strengthening the long-term financial resilience of the economy, instead of modifying central banks' direct short -term inflation targeting measures.

The logic is straightforward:

If  climate risks -both physical and transition risks -contribute to price and financial instability, they become the concern of central banks.

An economy with high inflation and financial instability cripples investment.

Historically, we have observed that these conditions drive up borrowing costs, halt long-term funding, and trigger capital flight -all of which affect structural foundations of any economy. A stable economy is the foundation of development finance. Yet as climate change and the responses to it change price formation, reshape markets and affect investor confidence, central banks have no choice but to address these risks -both to safeguard financial stability and steer the transition towards a more resilient economy.

Understanding the impact of climate-related risks on livelihoods, infrastructure and public policy is particularly crucial in an African context. In just these past three years, we have experienced on our continent how drought not only affects agricultural output and exports, but also has significant inflationary effects, impacts electricity production across  sectors,  and  undermines  the  soundness  of  financial  institutions  and  tax collection. All these issues, save one, are the business of central banks. Understanding these country-specific differences implies that, in policy application, we cannot have a copy-and-paste approach. Financial policies for climate resilience in Africa will fail if they simply copy models from advanced economies. Success requires

2  L P Hansen, ' Central banking challenges posed by uncertain climate change and natural disasters ' Journal of Monetary Economics , 125(C), 2022, pp 1 -15. DOI: 10.1016/j.jmoneco.2021.09.010

3

H Davies,

'Central Bankers' Green Lines'

,

Project Syndicate

, 19 January 2023, https://www.project-

syndicate.org/commentary/central-banks-increasingly-divided-over-climate-change-by-howard-davies-202301

4 Ibid

5 O Issing, 'Central banks aren't responsible for fighting climate change governments are ', World Economic Forum Stories, 5 December 2019, https://www.weforum.org/stories/2019/12/this-is-the-problem-withcentral-banks-fighting-climate-change/

simultaneously addressing the continent's broader barriers to finance and economic growth.

By positioning things in this way, I am not suggesting that central banks should take over the role of other public institutions in climate policy. Rather, I am saying they must be in a position to manage risks, as these risks will affect their mandates -both directly and indirectly.

To support these policy conclusions, let me set the context.

## Rising risks and the cost of inaction

The world is facing rapidly deteriorating climate and weather conditions. Global efforts to mitigate emissions are faltering, while the frequency and severity of extreme events are growing at an alarming rate. What is particularly concerning is that, every year estimates are made about the frequency and severity of extreme weather events over the next 30 years, only for us to realise a year later that the actual impacts have been underestimated.

Meanwhile, the cost of inaction is rising. Between 1997 and 2006, the average annual economic cost of global extreme weather events was US$45.1 billion. 6  In 2024, the economic cost of extreme climate events reached US$417 billion. 7

Less  mitigation  requires  more  adaptation,  yet  the  funding  gaps  for  adaptation measures such as flood prevention are extremely large. In its 2023 Adaptation Gap Report, UNEP  estimates  the  financing  needs  of developing countries to be US$387 billion  per  year  in  this  decade,  which  is  significantly  higher  than  earlier estimates. 8  Africa alone requires at least US$70 billion annually for climate adaptation, but currently, tracked financing covers less than a quarter of this need. 9

## Africa's disproportionate burden

Although Africa contributes only about 4% of global emissions, it  is experiencing a disproportionately  rapid  rise  in  temperatures  and  faster-than-average  sea  level increases. In 2024, 11 million people across the continent were impacted by abnormal

6 Pielke, Jr., R.A et al. 2007. Catastrophe losses in the context of demographics, climate, and policies. Conference paper: Managing the changing landscape of catastrophe risk. Available here: https://sciencepolicy.colorado.edu/admin/publication\_files/resource-2591-2008.06.pdf

7 Oxera 2004. The economic cost of extreme weather. Available here: https://iccwbo.org/wpcontent/uploads/sites/3/2024/11/2024-ICC-Oxera-The-economic-cost-of-extreme-weather-events.pdf

8 United Nations Environment Programme (UNEP), Adaptation Gap Report 2023, 2 November 2023, https://www.unep.org/resources/adaptation-gap-report-2023

9 Climate Policy Initiative (CPI) and Global Centre on Adaptation (GCA),  Technical brief: Adaptation Finance Flows to Africa -State and Future Trends, 2025, https://gca.org/wp-content/uploads/2025/09/CPI-ReportAdaptation-Finance-Flows-to-Africa.pdf

rainfall, 10   while  the  2023/24  Southern  African  drought  left  27  million  people  food insecure. 11

Without ambitious and coordinated action, such crises are likely to intensify.

There are several geographic, social and economic factors that contribute to Africa's heightened  vulnerability  to  climate  change. The continent's  h eavy  dependence on rain-fed agriculture makes food security and livelihoods highly susceptible to shifts in rainfall patterns.

Poverty, combined with a lack of access to financial services, makes it difficult for people to recover from climate-related shocks. When a flood destroys a home or a drought ruins a harvest, families often lack the savings or the insurance coverage to rebuild their homes and their livelihoods. At around 3%, Africa's insurance penetration is  far  below  global  averages,  leaving  households,  businesses  and  governments dangerously  exposed. 12   This  is  made  worse  by  governance  challenges  that  can prevent effective climate solutions before they even begin.

Finally, all of this is compounded by a low capacity to adapt, given that states often lack the technology, infrastructure, funding and skills to manage all these challenges.

In many African countries, the financial sector is underdeveloped, which makes the cost of finance high for climate-related investment projects. The average weighted cost of capital projections for energy infrastructure in Africa is 15.6%, whereas in developed regions such as Western Europe and the United States, the cost is approximately 5%. 13

With limited fiscal space, public finance alone cannot shoulder the climate financing burden. In this context, calls for central banks to promote climate-related financing are justified.

But should they? Or even, can they?

## Central bank direct measures

In this context, as is often the case when states are weak and resources are limited, we see proposals for central bank intervention.

10 Africa Center for Strategic Studies, ' Record Levels of Flooding in Africa Compounds Stress on Fragile Countries ' 10 December 2024, https://africacenter.org/spotlight/record-levels-of-flooding-in-africacompounds-stress-on-fragile-countries/

11  World Food Programme, 'Emergency: Southern Africa Drought ', 2025,

https://www.wfp.org/emergencies/southern-africa-drought

12  African Development Bank and OECD , ' Scaling finance and investment for climate adaptation: Input paper for the G20 Sustainable Finance Working Group ', 2025, https://g20sfwg.org/wp-

content/uploads/2025/07/Financing-climate-adaptation-ENG.PDFO\_.pdf

13 Ibid

One such proposal is to  modify  inflation  targeting  by  adding  climate  objectives  to central banks' rate -setting decisions. This would be expected to lower rates in the near term,  thereby  reducing  the  cost  of  finance  for  climate-related  investment.  Another proposal  is  to  implement 'Green  QE', which  essentially  involves  funding  climate projects directly off the central bank 's balance sheet and issuing own debt to do so.

In my experience, these proposals are non-starters. If you set rates too low, over time you get inflation.  If  you  do  not  deal  with  that  inflation,  people  begin  to  doubt  your commitment to inflation targets and they start to set prices with higher inflation in mind. If  you  tell  everyone  that  you  are  deliberately  setting  rates  low  to  finance  green interventions, that process of dismantling credibility just spirals faster. Ultimately, you end up levying an inflation tax to fund sustainability initiatives, and  that tax is both inefficient and regressive. It is pretty much the worst option in the toolkit.

Central bank credibility has been hard won and remains potentially fragile, even in my country where inflation targeting has been successful. In many other African countries, this fragility is even more pronounced. Compromising it by adding climate objectives to those of interest rate policy would effectively mean abandoning the main tool that African central banks have to fight inflation.

And  it  could  worsen,  rather  than  ease,  the  cost  of  finance  for  climate-related investments. How so? Because such investments are long term, and their cost of capital is affected by long-term interest rates, not short-term instruments of monetary policy. If a central bank keeps short-term rates too low to achieve climate goals, it risks losing its credibility in managing inflation expectations. This would prompt people to expect higher inflation in the future, causing an immediate rise in long-term interest rates as lenders demand compensation.

But this does not mean central banks must be bystanders. There are choices between the two extremes of radical, irresponsible action and turning a blind eye. Central banks are deeply embedded in financial markets, have more financial expertise than most parts of government, and have financial stability mandates. There is plenty of material here for an effective climate strategy, built around three core elements: developing capital  markets,  addressing  insurance  gaps,  and  increasing  the  resilience  of  the financial sector.

## Developing capital markets and carbon markets

Deep  and  liquid  capital  markets  are  essential for mobilising  climate  finance. Unfortunately, many African capital markets are still in their infancy. Two of the most important  drivers  of  capital  market  development  are  macroeconomic  stability  and effective regulation. Here, central banks can play a strong and critical role.

Often, the best financial sector policy is simply to get monetary and fiscal policy right. A stable price environment protects savings, drives investment, lowers interest rates, and enhances international competitiveness. It also provides the necessary flexibility for a central bank to counter financial and economic shocks, and ensures that capital markets can allocate funding to its most productive uses.

An equally important determinant of macroeconomic stability is fiscal sustainability, which ultimately means avoiding levels of sovereign borrowing that would lead to debt crises.

The International Monetary Fund classifies seven countries in Africa as being in debt distress  as  of  March  this  year. 14   A  couple  of  countries  have  also  applied  for  debt restructuring under the G20 Common Framework. If we want more developed capital markets in Africa, we need to improve fiscal policymaking. We also need faster debt restructuring  processes  that  enable  countries  to  rebuild  their  finances  and  their economies quickly if a debt crisis occurs. Despite significant progress being made over the past couple of years, the restructuring process remains slow. 15

Turning to the regulatory environment, we need clear and consistent rules for how companies report their climate risks and plans.

This  means  all  companies -financial  or  otherwise -must  disclose  their  climate vulnerabilities and their strategies to manage them using a standardised format. This will create comparable data, allowing investors to see which firms are truly prepared for climate change and to fund them accordingly.

Without reliable information, markets cannot price risk, regulators cannot anticipate vulnerabilities,  and  investors  cannot  channel  financing  towards  the  sectors  most critical  for  both  mitigating carbon emissions and adapting to the effects of physical risks.

In its recent input paper to the G20 Sustainable Finance Working Group, the Network for Greening the Financial System identifies the following five pillars  for integrating adaptation considerations into transition plans 16 :

1.  Setting  up  appropriate  governance  mechanisms  to  track  progress  against adaptation targets.
2.  Setting objectives and assessing physical risks and opportunities.
3.  Responding to the identified risks and opportunities by managing actions and adjusting business strategies.
4.  Developing appropriate engagement strategies.
5.  Developing appropriate measures and targets and continually improving them.

Central  banks  and  regulators  are  responsible  for  embedding  these  pillars  in  the decision-making and operational models of financial firms. However, these will only be

14  International Monetary Fund (IMF), ' List of LIC DSAs for PRGT-Eligible Countries as of March 31, 2025 ', https://www.imf.org/external/Pubs/ft/dsa/DSAlist.pdf

15  World Bank Group

, '

The Global Sovereign Debt Roundtable (GSDR)

', 14 February 2025, https://www.worldbank.org/en/topic/debt/brief/the-global-sovereign-debt-roundtable-gsdr

16  Network for Greening the Financial System , ' Integrating adaptation and resilience into transition plans ', July 2025, https://g20sfwg.org/wp-content/uploads/2025/07/SFWG-P2a\_Adaptation-and-Transition-Plans2.pdf

effective if governments ensure that non-financial firms also report on physical risks, again highlighting the importance of policy coordination.

## Carbon markets

Developing  carbon  markets  is  another  crucial  part  of  advancing  Africa's  capital markets. They markets offer significant value to a country's green agenda and can provide governments with new revenue through the regulated sale of carbon permits.

Carbon markets are being established worldwide. While the largest systems are in the European Union and China, we are also seeing the development of smaller regional markets. At present, the African continent accounts for just 16% of the global carbon market. 17

Developing effective carbon markets depends on international cooperation to ensure both  environmental  and  financial  integrity.  Global  bodies  such  as  the  International Organization  of  Securities  Commissions  are  supporting  this  by  establishing  best practices. Building on this momentum, through South Africa's G20 Presidency, we are leading  efforts  to  improve  carbon  credit  data -a  crucial  step  towards  building transparent and trustworthy markets.

For  Africa's  carbon  market  to  grow,  the  major  economies  must  allow  their  largest emitters to buy more carbon credits from the continent. This demand would not only build the market itself, but also generate crucial funding for development projects on the continent.

Given their central role in financial markets, central banks are well positioned to help develop carbon credit markets.

## Insurance markets

Another important focus area for financial sector policy should be improving insurance coverage in Africa. Insurance penetration rates on the continent are far below the global average, leaving the continent more exposed to climate risk losses. 18  Insurance is  also  important  for  investment,  as  lenders  often  make  insurance  coverage  a prerequisite for funding.

Unfortunately -and this is another priority area for our G20 Presidency -insurance gaps are widening.

It is becoming increasingly difficult globally to insure against natural disasters, with the problem being especially severe in developing markets. Rising risks make insurance

17  United Nations University Institute for Natural Resources in Africa (UNU INRA), Carbon Market Economics: Crafting a New Narrative of Opportunity and Sustainable Growth for Climate Action in Africa , 2024, https://collections.unu.edu/eserv/UNU:10036/Carbon\_Market\_Economies\_\_\_\_\_Nov\_2024\_\_Web\_.pdf

18  Deloitte Africa Insurance Outlook 2024/25. Available here:

https://www.deloitte.com/za/en/Industries/insurance/perspectives/africa-insurance-outlook-2024-2025.html

more  expensive,  which  further  widens  the  coverage  gap.  People  in  developing economies often do not buy insurance due to low incomes, limited access, a lack of risk  awareness, and mistrust  in financial products. Local insurance companies are often  held  back  by  underdeveloped markets, limited technical skills, and a lack of quality data needed to accurately price their products. 19

Yet, there are already practical examples of how insurance gaps can be addressed, despite these constraints. For instance, in Senegal, the government has established an agricultural insurance company that is 45% government owned and 55% privately owned.  This  insurance  company  offers  various  insurance  products  to  farmers, including parametric insurance against drought -a simple system that pays out when certain conditions are met, such as soil moisture levels being above or below a specific threshold. Policies taken by farmers through the insurance company are subsided by the government. This is a powerful example of how shared responsibility and policy coordination can strengthen resilience. 20  Of course, it relies on the fiscal strength I mentioned previously.

Just as with capital markets, developing new and affordable insurance products and markets depends on effective collaboration between a wide range of partners. These groups -including  the  public  sector,  insurers,  consumer  groups,  and  international development institutions -all have distinct but complementary roles. Their collaboration is crucial for assessing gaps in insurance coverage, improving the quality of risk data, building consumer confidence, and strengthening financial literacy and risk awareness.

## Increasing the resilience of the financial system to climate risks

Lastly, let me reflect on how we can increase the resilience of the financial system to climate risks. It will be impossible to develop capital markets and address insurance protection gaps unless the financial system is resilient to climate change shocks.

Although  I  have  mainly  highlighted  the  unique  challenges  Africa  faces,  building  a resilient financial system also requires us to adopt best practices from other central banks  and  financial  regulators.  This  includes  establishing  appropriate  disclosure requirements, carrying out stress tests, and integrating climate considerations into the operational and governance frameworks of financial institutions. But there are some caveats to consider.

19  African Development Bank and OECD , ' Scaling finance and investment for climate adaptation: Input paper for the G20 Sustainable Finance Working Group ' 2025, https://g20sfwg.org/wp- /uploads/2025/07/Financingclimate-adaptation-ENG.PDFO\_.pdf

20  Network for Greening the Financial System , ' Integrating adaptation and resilience into transition plans ', July 2025, https://g20sfwg.org/wp-content/uploads/2025/07/SFWG-P2a\_Adaptation-and-Transition-Plans-2.pdf

For example, African countries have unique constraints that must be addressed in the formulation  of  disclosure  policy.  Voluntary  disclosures  should  come  first  to  allow corporations to understand their data and capacity requirements and address these during the voluntary disclosure phase. Once data and capacity have been addressed, these  climate-related  disclosures  should  become  mandatory  and  form  part  of  our financial system 's resilience infrastructure.

A one-size-fits-all approach to climate stress testing will not work for Africa. Standard tests focus on corporate loans, but our banks' main risk is in the retail sector . These tests also fail to capture our unique vulnerabilities, including:

- greater physical risks -we are more exposed to events such as droughts and floods; and
- different transition risks: -we are often impacted by capital flight caused by policy shifts in advanced economies.

As supervisors, we must design stress tests that are tailored to the challenges we face.

An  area  that  is  often  not  associated  with  the  resilience  of  the  financial  system  is financial inclusion. It is however essential to how African countries manage climaterelated risks.  Access to finance and insurance, as well as financial sector access, assist  households  and  businesses  with  more  risk  management  tools  and  allows governments and donors to provide assistance in the face of catastrophic events.

Finally,  strengthening  financial  resilience  in  Africa  through  regional  coordination  is essential  to  mitigate  shared  vulnerabilities  and  amplify  collective  strengths.  By harmonising regulatory frameworks, pooling resources for climate and debt-related shocks, and enhancing cross-border financial surveillance, African countries can build a more robust and integrated financial system.

## Conclusion

So, should African central banks take on the challenges of climate change?

The answer is yes, but with limited and clearly defined parameters.

I  hope  I  have  persuaded  you  that  proposals  for  central  banks  to  finance  the  fight against climate change -by weakening their commitment to low inflation and setting rates  low  to  make  climate  finance  cheap -are  misguided and sure to fail in  their objective. That is a big no.

What we need is to improve our modelling to inform the calibration of monetary policy decisions.

There is also a compelling case for a strong affirmative when it comes to financial sector  stability  and  development.  We  can  help  develop  markets  to  better  finance

climate-related investment, facilitate carbon trading, and improve insurance coverage. And we can help protect overall financial stability from the climate shocks that are coming our way. None of this requires sacrificing core mandates or stepping outside our area of comparative advantage. Indeed, it is closely connected to our pre-existing work and mandates.

The  core  challenge  for  African  economies  is  managing  high  exposure  to  climaterelated risks while having limited resources. While central banks may not be at the forefront of the battle against climate change, our involvement remains essential.

If you take away one thing that I have said tonight, it is that we are not flying blind as central banks. We know that there is much we do not know, and we are committed to learning.  We  recognise  the  plausible  danger  of  mission  creep,  or  even  mission compromise. Where these efforts go awry and lead to inflation or financial losses, or the crowding out of other climate responders, they set central banks up for a blame game they cannot win.

Our  core  mandates  remain  clear  and  essential:  safeguarding  the  public  against inflation is paramount. Losing sight of this priority would not only harm our citizens, but also erode the effectiveness and independence of central banks. Therefore, we must avoid  diverging  from  this  focus.  At  the  same  time,  our  active  roles  in  promoting financial stability and fostering market development present meaningful opportunities for positive impact. It is in these areas -where our expertise is strongest -that we should concentrate our efforts.

## References

Africa  Center  for  Strategic  Studies.  2024. ' Record  Levels  of  Flooding  in  Africa Compounds  Stress  on  Fragile  Countries ' .  https://africacenter.org/spotlight/recordlevels-of-flooding-in-africa-compounds-stress-on-fragile-countries/

African  Development  Bank  and  OECD.  2025. ' Scaling  finance  and  investment  for climate  adaptation:  Input  paper  for  the  G20  Sustainable  Finance  Working  Group ' . https://g20sfwg.org/wp-content/uploads/2025/07/Financing-climate-adaptationENG.PDFO\_.pdf

Climate  Policy  Initiative  (CPI)  and  Global  Centre  on  Adaptation  (GCA).  2025. ' Technical  brief:  Adaptation  Finance  Flows  to  Africa -State  and  Future  Trends ' . https://gca.org/wp-content/uploads/2025/09/CPI-Report-Adaptation-Finance-Flowsto-Africa.pdf

Davies, H. 2023. 'Central Bankers' Green Lines'. Project Syndicate . https://www.project-syndicate.org/commentary/central-banks-increasingly-dividedover-climate-change-by-howard-davies-2023-01

Deloitte Africa Insurance Outlook 2024/25. Available here: https://www.deloitte.com/za/en/Industries/insurance/perspectives/africa-insuranceoutlook-2024-2025.html

Forster, P et al. 2025. ' Indicators of Global Climate Change 2024: Annual update of key indicators of the state of the climate system and human influence ' . Earth Syst. Sci. Data, 17: 2641 -2680, 2025. https://doi.org/10.5194/essd-17-2641-2025

Hansen, L P. 2022. ' Central banking challenges posed by uncertain climate change and natural disasters ' . Journal of Monetary Economics , 125(C): 1 -15. https://www.sciencedirect.com/science/article/pii/S0304393221001033

International  Association  of  Insurance  Supervisors  (IAIS)  and  World  Bank  Group. 2025. ' Identify  and  address  insurance protection gaps ' .  An  input  paper  to  the  G20 Sustainable Finance Working Group. https://g20sfwg.org/wpcontent/uploads/2025/07/SFWG-P2b\_Insurance-Protection-Gap.pdf

International  Monetary  Fund  (IMF).  2025. ' List  of  LIC  DSAs  for  PRGT-Eligible Countries as of March 31, 2025 ' .  https://www.imf.org/external/Pubs/ft/dsa/DSAlist.pdf

Issing, O. 2019. 'Central banks aren't responsible for fighting climate change governments are ' . World Economic Forum Stories. https://www.weforum.org/stories/2019/12/this-is-the-problem-with-central-banksfighting-climate-change/

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Network for Greening the Financial System (NGFS) 2025, ' Integrating adaptation and resilience  into  transition  plans ' .  An  input  paper  to  the  G20  Sustainable  Finance Working Group. https://g20sfwg.org/wp-content/uploads/2025/07/SFWG-P2a\_ Adaptation-and-Transition-Plans-2.pdf

NGFS 2017, Joint statement by the Founding Members of the Central Banks and Supervisors Network for Greening the Financial System'. Available at https://www.ngfs.net/en/press-release/joint-statement-founding-members-centralbanks-and-supervisors-network-greening-financial-system

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https://www.bis.org/review/r251030f.htm,Christopher J Waller: Embracing new technologies and players in payments,"Speech by Mr Christopher J Waller, Member of the Board of Governors of the Federal Reserve System, at the Payments Innovation Conference, Federal Reserve Board, Washington DC, 21 October 2025.",2025-10-21 00:00:00,"## Christopher J Waller: Embracing new technologies and players in payments

Speech by Mr Christopher J Waller, Member of the Board of Governors of the Federal Reserve System, at the Payments Innovation Conference, Federal Reserve Board, Washington DC, 21 October 2025.

* * *

Thank you, Susan, and good morning, everyone. It is my pleasure to welcome you to the Federal Reserve Board for our first Payments Innovation Conference. 1 My objective in creating this conference is twofold. First, I wanted to have a conference that focused on the new technologies that have come from the defi and crypto worlds and how they are entering the mainstream payments ecosystem. My goal is to have a vibrant discussion about payments between the traditional payment incumbents and the new entrants from the defi world. Second, I wanted to send a message that this is a new era for the Federal Reserve in payments-the defi industry is not viewed with suspicion or scorn. Rather, today, you are welcomed to the conversation on the future of payments in the United States and on our home field-something that would have been unimaginable a few years ago.

As you all know, we are well into a technology-driven revolution in payments, and I am here to say that the Federal Reserve intends to be an active part of that revolution.

A number of technological advances are transforming the payment system. Stablecoins and tokenized assets making use of distributed ledger technology. The rapid adoption of artificial intelligence (AI). And, increasingly, the convergence between these innovations and the traditional financial ecosystem. This includes the institutions and infrastructure that our economy has long depended on to operate a safe and efficient payment system. And, yes, this also includes the Federal Reserve. The revolution transforming payments is demanding change everywhere, and I will say more in a moment about some new ideas that the Federal Reserve is studying to support these innovations.

I have spoken before about what I see as the two broad models of payments innovation in our market economy. The first is private-sector-driven innovation. Most innovation 2 comes from the private sector, which is motivated and best positioned to allocate resources and take risks to explore new technologies. The second model is when public-sector entities such as the Fed build platforms and provide services that enable the private sector to more readily and rapidly expand new services to its customers. This should be done rarely and in limited circumstances where it addresses a specific market need. The posture of public institutions, including the Federal Reserve, should be to acknowledge and embrace private-sector innovation that can improve the payment system while preserving its safety and stability, which are as essential to the new generation of innovators as they are to legacy institutions.

Let me pull back a moment and remind everyone how we got here. Since nearly its founding, the Federal Reserve System has worked to facilitate payment and settlement system efficiency alongside the private sector. From the beginning, the clearing

services provided by Reserve Banks obviated the need for daily movements of cash in armored cars with heavily armed guards. Long before we started speaking of the ""payment rails"" that are facilitating the kind of innovation we will be discussing today, the Fed was running trains on steel rails to deliver and clear paper checks traveling across the country. Fedwire began conducting interbank transfers through telegraph wires in the early 20th century. Fast forward to today, where we have multiple infrastructures that settle interbank transfers in real time.

Today's conference will focus on private-sector-driven innovation. We have assembled 100 private-sector innovators who are leveraging cutting-edge technology to create new possibilities in the payments landscape. Our panelists are engaged in integrating traditional financial payment rails with distributed ledgers, developing new products and services in the digital asset ecosystem, and leveraging AI in the payments landscape.

It's worth noting that the firms engaged in these activities include banks, asset managers, retail payments firms, technology companies, as well as crypto-native fintechs. This is an acknowledgement that distributed ledgers and crypto-assets are no longer on the fringes but increasingly are woven into the fabric of the payment and financial systems.

Before we hear from these innovators, I would like to touch on the roles that the Federal Reserve plays to support the private sector. These include serving as a convener to solve coordination problems and operating core payment and settlement infrastructure. We are also looking ahead, conducting hands-on research on tokenization, smart contracts, and the intersection of AI and payments for use in our own payment systems. We do this to understand the innovation happening within the payment system as well as to evaluate whether these technologies could provide opportunities to upgrade our own payment infrastructures and to enable us to have deeper conversations with the industry on these new technologies.

While this is a good start, I believe we can and should do more to support those actively transforming the payment system. To that end, I have asked Federal Reserve staff to explore the idea of what I am calling a ""payment account."" Today, Federal Reserve Banks provide access to master accounts and financial services to legally eligible entities following our Guidelines for Evaluating Account and Services Requests. The payment account would be available to all institutions that are legally eligible for an account and could be beneficial for those focused primarily on payments innovations.

This payment account concept would be targeted to provide basic Federal Reserve payment services to legally eligible institutions that right now conduct payment services primarily through a third-party bank that has a full-fledged master account. There are many eligible firms engaged in substantial payments activities that may not want or need all the bells and whistles of a master account, or access to the full suite of Federal Reserve financial services, to successfully innovate and provide services to their customers. The idea is to tailor the services of these new accounts to the needs of these firms and the risks they present to the Federal Reserve Banks and the payment system. Accordingly, and importantly, these lower-risk payment accounts would have a streamlined timeline for review. Payments innovation moves fast, and the Federal Reserve needs to keep up.

To be more concrete, let me describe a possible prototype for this type of payment account or, as I sometimes call it, a ""skinny"" master account. The account would provide access to the Federal Reserve payment rails while controlling for various risks to the Federal Reserve and the payment system. To control the size of the accounts and associated impacts on the Fed's balance sheet, the Reserve Banks would not pay interest on balances in a payment account, and balance caps may be imposed. These accounts would not have daylight overdraft privileges-if the balance hits zero, payments will be rejected. They would not be eligible for discount window borrowing or have access to all Federal Reserve payment services for which the Reserve Banks cannot control the risk of daylight overdrafts. I want to be clear that this is just a prototype idea to provide some clarity on how things could change. The upshot is that, in my view, the payments landscape, as well as the types of providers, has evolved dramatically in recent years, and, accordingly, a new payments account could better reflect this new reality.

As Federal Reserve staff examine this idea, we will engage with all interested stakeholders to hear perspectives on the benefits and drawbacks to this approach. You will be hearing more about this shortly.

Let me wrap up here so we can get to the really exciting part of this conference, which is about innovation and the future of payments. Thank you to the panelists who took the time to participate, those in the audience who agreed to be here, and the many others watching online. And a special thanks to Fed staff, who moved very fast to get this together quickly to fit into a very busy fall at the Fed. On with the conference!

1  The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.

2  See Christopher J. Waller (2025),  ""Technological Advancements in Payments,"" speech delivered at the Wyoming Blockchain Symposium 2025, Teton Village, Wyoming, August 20.",Christopher J Waller
https://www.bis.org/review/r251031k.htm,Lesetja Kganyago: Advancing cross-border payments,"Keynote address by Mr Lesetja Kganyago, Governor of the South African Reserve Bank, at the Advancing Cross-Border Payments conference, Pretoria, 23 October 2025. ",2025-10-23 00:00:00,"## Lesetja Kganyago: Advancing cross-border payments

Keynote address by Mr Lesetja Kganyago, Governor of the South African Reserve Bank, at the Advancing Cross-Border Payments conference, Pretoria, 23  October 2025.

* * *

## Good morning.

It is my great pleasure to welcome you to the second day of this important conference. We are particularly pleased to welcome senior representatives from Group of Twenty (G20) members, African central banks and finance ministries and the private sector. Your participation underscores the importance of this area of work and the shared commitment to achieving the G20 Roadmap targets of faster, more affordable, more transparent and more inclusive cross-border payments by 2027. 1

Cross-border payments are the lifeblood of international trade, investment, capital and remittance flows and economic integration. Despite their critical role, cross-border transactions remain far too costly, slow and opaque, especially in emerging markets and developing economies. As part of South Africa's G20 Presidency, we have placed cross-border payments high on the Finance Track agenda. Our goal is to enrich the global conversation with regional insights and to foster collaboration that translates ambition into action and tangible outcomes.

We have worked closely with the Financial Stability Board (FSB), Bank for International Settlements Committee on Payments and Market Infrastructures and G20 members to advance the FSB's G20 Roadmap for addressing the cross-border payments challenges.

Since the launch of the Roadmap in 2020, we have seen meaningful progress. However, the journey is far from complete. In sub-Saharan Africa, fragmented infrastructure, limited interoperability and data gaps continue to hinder the efficiency and inclusivity of cross-border payments.

At the same time, the region is seeing innovations in fast payments and fintech that may well prove transformative. The world is moving fast in this area - and Africa will be left behind unless we catch up.

It is important that we lift the game and make sure that our own local payment systems are fit for purpose and interoperable with the rest of the continent and beyond.

This conference is a timely opportunity to reflect on these developments, guided by our key themes, which are: understanding user needs and regional dynamics; unlocking policy and infrastructure barriers; fostering trust and innovation; and measuring what matters.

The blend of academic rigour and policy relevance will help us identify actionable pathways to improve cross-border payment ecosystems across our region.

As policymakers, we have no choice but to understand the challenges and to act decisively. At a high level, this requires strengthening regional cooperation, modernising and aligning regulatory frameworks, and investing in interoperable infrastructure. We also need reliable and accessible data to guide our decisions and measure our progress. And we must ensure that our efforts are inclusive, serving the needs of all users - especially those who rely on remittances and small-value transfers as economic lifelines.

Together, we can ensure that cross-border payments serve as a catalyst for inclusive growth and regional integration in sub-Saharan Africa and beyond.

Thank you, and I wish you all a productive and engaging second day.

1  The G20 Roadmap to Enhance Cross-border Payments (2020) is accessible here: https://www.fsb.org/uploads/P211024-1.pdf",Lesetja Kganyago
https://www.bis.org/review/r251030l.htm,Michelle W Bowman: Welcome remarks - 2025 Federal Reserve Stress Testing Research conference,"Welcome remarks (via pre-recorded video) by Ms Michelle W Bowman, Vice Chair for Supervision of the Board of Governors of the Federal Reserve System, at the 2025 Federal Reserve Stress Testing Research conference, Boston, Massachusetts, 16 October 2025.",2025-10-16 00:00:00,"## Michelle W Bowman: Welcome remarks - 2025 Federal Reserve Stress Testing Research conference

Welcome remarks (via pre-recorded video)  by Ms Michelle W Bowman, Vice Chair for Supervision of the Board of Governors of the Federal Reserve System, at the 2025 Federal Reserve Stress Testing Research conference, Boston, Massachusetts, 16 October 2025.

* * *

Welcome to the 2025 Federal Reserve Stress Testing Research Conference. 1   Although I am not able to join you in person today, I would like to take a moment to acknowledge the important contributions this conference has made and continues to make in promoting research on the stress testing process and related issues.

I would like to start by thanking the organizing committee, our presenters, and all of the participants joining us at the Federal Reserve Bank of Boston at our Stress Test Research Conference. This event brings together academics, regulators, and industry experts, encouraging broad collaboration and rigorous discussion.

This conference marks a critical and necessary evolution in the Federal Reserve's stress test program. Stress testing is an important supervisory tool that was initially designed to maintain financial stability and establish binding capital requirements for the largest banks. As the role of stress testing must evolve, we have shifted our focus to enhance the reliability and credibility of both the process and its outcomes. Going forward, the Federal Reserve is committed to transparency and ensuring that public input and stakeholder comment enhance the program over time.

Stress testing remains an important element of the Board's capital framework and supervisory program for large banks. To promote public accountability and achieve robust outcomes, the Board plans to solicit public comment on various stress testing reforms later this month. This proposal seeks to ensure that any substantive changes are informed by public input prior to their adoption.

These actions are part of a broader set of capital-related measures designed to rightsize and recalibrate the regulatory framework to better balance safety and soundness with the role of the financial system in promoting economic growth. The Board intends to leverage public and industry perspectives to further improve the stress test.

The stress testing package will provide detailed model descriptions, including assumptions and limitations for each model, as well as the rationale behind key modeling choices. The proposal will invite public comment on the specific modeling changes that the Board plans to implement for the 2026 stress test, including proposed changes that address the sensitivity of pre-provision net revenue projections to recent bank performance, and to improve the design and related assumptions for certain models including credit losses, operational risk and securities.

The second aspect of the proposal seeks comment on scenario design for the stress test, particularly the guides governing the variables included in the severely adverse

macroeconomic scenario. The proposal would also include details on the macroeconomic model used to formulate the paths of the variables that are not determined by a guide for a given annual scenario. In addition, the proposal would cover disclosure of the global market shock framework, including the logic behind shock severity, liquidity horizons and the description of the models generating these shocks.

Third, the proposal would solicit public comment on the severely adverse scenario that the Board intends to use for the 2026 stress test.

While I have attempted to provide a high-level summary of the proposal, it is not possible to capture the depth and breadth of the changes. We look forward to working with all of our stakeholders to improve our stress test and reduce the year-over-year volatility in the stress testing results.

Before I conclude, I would like to recognize the dedication and professionalism of our stress testing staff at both the Board and Reserve Banks. The pending comprehensive stress testing package reflects countless hours of diligent work, perseverance, and collaboration. This robust and thorough proposal would not have been possible without the extraordinary commitment of all involved. I am grateful for your contributions and would like to formally acknowledge your essential role in this important work.

Thank you to our attendees for your continued partnership and dedication to research and collaboration in stress testing. Your engagement helps us build a safer and more resilient financial system.

1  The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.",Michelle W Bowman
https://www.bis.org/review/r251031i.htm,Olli Rehn: On Nordic influence in Europe,"Remarks by Mr Olli Rehn, Governor of the Bank of Finland, at the Trilateral Commission Nordic Seminar dinner, Helsinki, 23 October 2025.",2025-10-23 00:00:00,"## Olli Rehn: On Nordic influence in Europe

Remarks by Mr Olli Rehn, Governor of the Bank of Finland, at the Trilateral Commission Nordic Seminar dinner, Helsinki, 23 October 2025.

* * *

Dear Trilateral Colleagues, Dear Friends,

Bästa nordiska vänner,

Varmt välkomna till Finland och Finlands Bank!

May I first wish you a very warm welcome to the Bank of Finland! It is a pleasure  and an honour  to host this Nordic evening of the Trilateral Commission, which exists for one very simple reason: to help liberal democracies on three continents talk to each other.

Our theme tonight and tomorrow is as practical as it is ambitious: What can the Nordic My warmest thanks to our keynote speakers, our other countries do better together? participants, and the many helping hands  seen and unseen  who made this gathering possible.

As we Finns say, good planning means the job is half done already. This evening, the other half of the job is, I trust, an enjoyable dinner in good company.

Following my welcoming words, I give the floor to Dr. Iikka Korhonen, Head of BOFIT, The Bank of Finland Institute for Emerging Economies. He will provide us with a stateof-the-art analysis on ""Geopolitics, the Global Economy, China and Russia"", followed by a Q&amp;A.

Let me first set the table with a few historical details.

The Bank of Finland was founded in , which makes us the fourth oldest central 1811 bank in the world. We also think we have a certain claim the oldest central bank, the Riksbank, because when it started its operations in , Finland was still an integral 1668 part of Sweden.

The Bank of Finland, in the newly created Grand Duchy under Russian rule, from 1809 until 1917, was founded by Tsar Alexander I, who had two aims: to strengthen the Finnish economy and to loosen our monetary ties with Sweden.

The Russian rouble, however, was no model of stability. It was badly shaken by the Crimean War of 18531856. So, on the Bank of Finland's proposal, Finland introduced the , the Finnish mark, in , linking it to rather than the rouble. It was markka 1860 silver a polite way of saying: ""Thank you, but we'll do this our way.""

If you look across the street, you will see the , now just emerging House of the Estates from a long renovation. In , the Bank of Finland was placed under the authority of 1868 the Diet  following the Swedish parliamentary tradition  rather than under the Ministry of

Finance, as in Imperial Russia. Above the entrance are the years and : the 1734 1772 years in which Sweden's Civil Code and Constitution were written. In effect, even after our forced divorce from Sweden, much of the legal system stayed with us. Swedish law was . our law of the land

Fast-forward to the late 19th century, a time of economic liberalism and rapid growth. Finland adopted the in . That anchor held until the First World War. gold standard 1878 It gave us credibility, capital and access to markets. Many a railroad or factory was built on that foundation.

Much has happened since, of course. Today Finland is a confident  and, surveys . Households value price suggest, a fairly content  member of the Eurosystem transparency and easy travel. Businesses value cheaper, convenient trade across the euro area. And as geopolitical risks have risen, another benefit stands out: a large currency union provides insulation in turbulent times. The euro enhances a resilience quality this country does appreciate.

Indeed, one of the Eurosystem's core tasks is to provide secure, efficient and . We have made real progress: since , resilient payment and settlement systems 2008 has been enabling seamless euro transfers between bank accounts across SEPA Europe. Our platform has supported since . From , TIPS instant payments 2018 2024 both and have used TIPS as the base for their domestic instant Denmark Sweden payments. This is simple economics: payment systems are expensive to build and maintain; sharing the rails is cheaper  and smarter  especially when Nordic banks already operate across borders.

The bedrock of any currency is . Today, this is cash and reserves; central bank money tomorrow, cash will be not replaced by  a digital form of cash. complemented by

The will digitalise legal tender and offer a sovereign, pan-European way to digital euro pay. It will open fresh possibilities for the Nordics: if we already share the rails (TIPS), we can also share the reach  achieving a common user experience for people and businesses.

As to governance, in the ECB's members represent Governing Council the euro area , not their home capitals. Each has . The ECB's is as a whole one vote independence anchored in EU law. Membership of the euro brings influence in these structures and access to the Eurosystem's full resilience and contingency toolkit. In a world where shocks travel in the blink of an eye, this is not a theoretical advantage.

You can no doubt see where I am heading. already live in the Denmark and Sweden euro's neighbourhood; even keeps the firmly pegged to the euro. We Denmark krone are all members of NATO. Joining the euro would not mean giving up a seat at the table it would mean one, in the room where the decisions are actually made. gaining

This is, of course, a sovereign matter of the Danish and Swedish people and parliaments. I am merely underlining that for Nordic influence in Europe, it is a matter of undeniable relevance.

Let's face it, alone we are small players, but together we would punch above our weight in the Eurosystem, and in the wider EU.

I often say to my colleagues, Erik and Christian: ""I miss you guys! I miss you on the table at the ECB Governing Council.""

On that note, I shall finish. Enjoy the evening  and skål på den saken!",Olli Rehn
https://www.bis.org/review/r251030j.htm,Fabio Panetta: Money and trust - from the Renaissance to the digital age,"Speech by Mr Fabio Panetta, Governor of the Bank of Italy, on the occasion of the external Governing Council monetary policy meeting, official dinner given by the Bank of Italy, Florence, 29 October 2025.",2025-10-29 00:00:00,"

## Money and Trust: From the Renaissance to the Digital Age

Address by Fabio Panetta the Governor of Banca d'Italia

Governing Council of the European Central Bank Florence, Palazzo Vecchio, 29 October 2025

The palace that hosts us today - Palazzo Vecchio - is an extraordinary symbol of history and of the continuity of our institutions.

Today it houses the Municipality of Florence, but between 1865 and 1871 it was home to the national Parliament, when the city served as the capital of the young Kingdom of Italy.

Its roots, however, extend much further back in time. It was built more than seven centuries ago to house the Signoria of the Florentine Republic, the governing body that brought together  the  representatives  of  the  Guilds  of  Arts  and  Crafts  -  a de  facto Governing Council of its times, the expression of an autonomous, prosperous and dynamic city.

In those centuries, Florence experienced exceptionally rapid growth, establishing itself as the economic, cultural and financial capital of Europe. 1  Though much time has passed since  then,  that  legacy  continues  to  inspire  us  as  we  face  the  new  challenges  of  the present.

## The florin: a prestigious and stable international currency

Florence became Europe's foremost financial centre also thanks to the creation in 1252 of  its  own  coin:  the  florin.  This  was  the  first  sovereign  gold  coin  minted  in  the  West after the fall of the Roman Empire. 2 Its success rested on its stability: for three centuries its  weight and composition remained unchanged - 3.53 grams of pure 24-carat gold. That  stability  demonstrates  how  the  Signoria  resisted  the  temptation  to  finance  its

1 C.M.  Cipolla, Il fiorino e il quattrino.  La  politica  monetaria  a  Firenze  nel  1300 ,  Bologna, Il Mulino, 2013.

2 There is an ongoing dispute as to whether the fiorino or genovino can stake this claim - a question that academics have not yet fully resolved. See, for example, L.F. Signorini, ' 'Gold and Silver' - Dante and money: food for thought', speech delivered at the Prospettiva Dante Festival, Ravenna, 14 September 2023. Out of respect for our host city, today I find myself inclined to agree with those who support the primacy of the florin!

expenditure through inflation. 3 Such  discipline  contributed  to  the  fortune  of  Florence and of its currency.

The florin earned universal trust - a precondition for any solid currency - and became the preferred means of payment in European trade, 4  securing for Florence more than two centuries of economic supremacy. 5  Over time, it came to embody the city's strength, credibility and authority, helping to shape its identity.

Florence's prosperity, in turn, reinforced the international role of the florin, 6 in a virtuous cycle between the real economy and finance common to every global reserve currency from Caesar's aureus to the Carolingian pound, and from the pound sterling to the dollar.

Today the euro is for Europe what the florin once was for Florence: a symbol of stability, supporting economic development and drawing renewed strength from it. But it is also something more: a symbol of unity, supporting political cohesion among the member states.

The  European  Union  was  founded  'to  make  war  not  only  unthinkable  but  materially impossible,' 7   cementing  the  interests  and  aspirations  of  peoples  who  had  fought each  other  for  centuries.  From  this  perspective,  European  integration  has  been  an unprecedented success, granting us eighty years of peace.

But  in  a  rapidly  changing  world  -  marked  by  geopolitical  tensions  and  accelerating technological progress - Europe must consolidate and strengthen its role if it is to continue to reap the benefits of this success. It must complete its economic and financial union and implement, with determination and timeliness, the reforms needed to sustain growth.

The  prosperity  of  Florence  also  made  possible  an  unparalleled  cultural  renaissance. The  wealth  of  its  merchant  bankers  -  notably,  the  Medici  -  fostered  an  enlightened

3 In the days of metallic currencies, whenever a government wanted to increase the amount of money in circulation - and thereby generate inflation - it simply reduced the precious metal content. The stability of the florin was unmatched among contemporary currencies, many of which were regularly devalued.

4 Accepted from London to Constantinople, by the end of the fourteenth century the florin had already become the benchmark currency of the great international trade routes.

5 In  the  fifteenth  century,  Florence's  real  per  capita  GDP  was  significantly  higher  than  Spain's  and England's, and higher than that of the Netherlands; see J.L. van Zanden and E. Felice, 'Benchmarking the Middle Ages: fifteenth century Tuscany in European perspective', European Review of Economic History ,  26,  4,  2022,  pp.  535-554. The Florentine textile industry was a leader in Europe, employing 30,000 workers, with annual production and exports of woollen cloth three times that of other major European manufacturing centres; see J.H. Munro, 'I panni di lana', in F. Franceschi, R.A. Goldthwaite and R.C. Mueller (eds.), Il Rinascimento italiano e l'Europa. Volume IV. Commercio e cultura mercantile , Vicenza, Angelo Colla Editore, 2007.

6 In the first half of the fourteenth century, the volume of florin coinage in Florence averaged 250,000 pieces per year. Its predominance - both among the coins stored during the pontificate of John XXII (1316-1334) in the coffers of the Apostolic Chamber (the papal financial body) and in the private treasures discovered by  archaeologists  in  various  countries  -  confirms  the  extraordinary  prevalence  of  the  Florentine  coin's circulation in Western Europe; see C.M. Cipolla, 2013, op. cit. In the fourteenth and fifteenth centuries, the major  Florentine  banks  financed  sovereigns  and  states,  from  the  English  monarchy  to  the  papal  court, demonstrating how the florin was not only a currency of trade but also an instrument of international credit.

7 Excerpt from the celebrated declaration made by France's Foreign Minister, Robert Schuman, on 9 May 1950.

patronage that gave rise to an incomparable heritage of art and architecture. It also facilitated an extraordinary creative season, animated by such great figures as Brunelleschi, Donatello, Botticelli, Leonardo, Michelangelo, and many others besides.

The Florentine Renaissance, the heart of the Italian Renaissance, transformed material wealth into an artistic and cultural legacy, one of the greatest gifts Italy has given to Europe and to the world. 8

## Florence as a laboratory of financial innovation

The financial success of Florence rested not only on the stability of the florin but also on a remarkable capacity for innovation, creating institutions and instruments that would shape finance for centuries to come.

Florentine  merchant  bankers  started  out  as  family  companies.  Through  trade  and manufacturing they accumulated wealth, refined their accounting skills, mastered the use of multiple currencies and built solid international networks.

At first, they operated with their own capital. Soon, however, they began to collect money fuori corpo - that is, outside family wealth - in the form of deposits. With these they financed merchants and sovereigns, opening branches in the main economic centres of Europe and establishing themselves as the forerunners of modern banking.

Another  decisive  innovation  was  the  development  of  bills  of  exchange  ( lettere  di cambio ). These instruments emerged at international trading fairs to settle transactions without the risks of transporting gold and silver. 9  They rapidly became both a secure means of payment and, at the same time, a form of credit. 10  Florentine bankers were their main architects, spreading a model that would profoundly transform international trade and finance. 11

## Financial and institutional innovation in pre-modern Italy

In pre-modern Italy, financial innovation was not confined to Florence. From the twelfth century onwards, Venice, Genoa and Naples also experimented with instruments such as

8 R.A. Goldthwaite, L'economia della Firenze rinascimentale , Bologna, Il Mulino, 2013; L. Sebregondi and T. Parks (eds.), Denaro e bellezza. I banchieri, Botticelli e il rogo delle vanità , Florence, Giunti, 2011.

9 Lettere  di  cambio enabled  merchants  in  different  cities  to  transfer  money  without  the  risky transportation of coins. Merchants deposited money with a banker in their own city and in return received a bill of exchange that they then sent on by courier. In the destination city, the banker had a local correspondent bank: upon presenting the bill, the beneficiary obtained the sum in coins, often in  a  different  currency  from  the  original.  The  earliest lettere  di  cambio date  back  to  around  1150, although similar instruments were already in use in China and the Arab world. See R. De Bonis and M.I. Vangelisti, Moneta: dai buoi di Omero ai Bitcoin , Bologna, Il Mulino, 2019.

10 While the first bills of exchange were issued solely to transfer money to settle a commercial transaction, over time the practice of issuing them without requiring an initial deposit for the payment became widespread.

11 C.M. Cipolla, Viaggi e avventure della moneta. Una conversazione con Thomas J. Sargent e Robert M. Townsend , Bologna, Il Mulino, 2025.

deposits, loans and bills of exchange, progressively reducing the use of metallic money. Such developments required public institutions capable of guaranteeing trust and stability.

Italy became a crucible of innovation that, over time and with the contribution of other peoples, paved the way for modern financial systems and, ultimately, for central banks. 12 Let me recall a few significant examples.

In Venice, as early as the late thirteenth century, the State introduced the giro , 13  a payment system based on transfers from one deposit to another without the use of coins, 14  which was  then  widely  adopted  for  transactions  of  any  size. 15 In  the  sixteenth  century,  the Banco di Rialto was established: over time, it became a public bank, whose deposits were declared legal tender and made mandatory for large transactions. 16

Genoese bankers developed a network of fairs dedicated to the settlement of bills of exchange 17   -  an ante litteram clearing  system  supported  by  operators  with  functions comparable  to  those  of  today's  central  counterparties. 18 The  Banco  di  San  Giorgio, founded in 1407, became the most important public deposit bank in Europe: it collected deposits, transferred money, offered clearing services and granted overdrafts. Its deposits acquired the status of legal tender; the shares it issued - known as luoghi were traded in a primitive capital market, the precursor of modern stock exchanges.

The semi-public banks of Venice and Genoa served as models for similar institutions later  founded in Amsterdam and Hamburg. They strengthened the resilience of the payment system, spreading giro technology - the large-scale use of fiduciary money with legal tender status.

12 S. Ugolini, The Evolution of Central Banking: Theory and History ,  London, Palgrave Macmillan, 2017; U.  Bindseil, Central  banking  before  1800.  A  Rehabilitation ,  Oxford,  Oxford  University  Press,  2019; G. Toniolo, Storia della Banca d'Italia. Tomo I. Formazione ed evoluzione di una banca centrale, 1893-1943 , Bologna, Il Mulino, 2022.

13 In 1282 the Venetian State centralized most of its financial operations in the Camera del Frumento, a state agency that provided payment services and collected deposits, while also managing the issuance of the Republic's debt. See S. Ugolini, 2017, op. cit.

14 In Florence too, 'dematerialized' payments were widespread among interconnected firms,  but  the  balances  of  market  transactions  remained  anchored  to  physical  money.  See J.F. Padgett and P.D. McLean, 'Economic Credit in Renaissance Florence', Journal of Modern History , 83, 2011, pp.1-47.

15 R.C. Mueller, The Venetian Money Market: Banks, Panics and the Public Debt, 1200-1500 , Baltimore, Johns Hopkins University Press, 1997. In Venice, as in Amsterdam and Hamburg, the circulation of deteriorated foreign coins created uncertainty. The giro banks were created with the express purpose of guaranteeing safe  and  reliable  payments.  See  also,  S.  Ugolini,  'The  Historical  Evolution  of  Central  Banking',  in  S. Battilossi, Y. Cassis, K. Yago, Handbook of the History of Money and Currency , Springer Nature, 2018, and R.C. Mueller, 'The Role of Bank Money in Venice, 1300-1500', in Studi Veneziani , 3, 1979.

16 Large transactions were those above 50 ducats, equivalent to about 10,000 euros today. The Banco di Rialto was absorbed by the Banco di Giro, created in 1619 as a public bank by the government of Venice. See Bindseil, 2019, op. cit., and W. Roberds and F.R. Velde, Early Public Banks , Federal Reserve Bank of Chicago, Working Paper Series, 3, February 2014.

17 By the mid-1400s, Genoa had overtaken Florence as the leading financial centre thanks to its role in managing the finances of the Spanish Crown, bolstered at the time by the inflow of silver from the Americas.

18 R. De Bonis and M.I. Evangelisti, 2019, op. cit.

In  seventeenth-century  Naples,  the  public  banks  introduced  the fedi  di  credito : transferable  certificates  of  deposit,  payable  on  demand  and  backed  by  the  issuer's reputation, which circulated as instruments for daily payments. These instruments have often been likened to the banknotes convertible into precious metals 19  later issued by the first banks of issue - the precursors of central banks. 20

The history of the public and giro banks marked the beginning of the long process that would  ultimately  lead  to  the  creation  of  central  banks:  public  institutions  entrusted with the issuance of money, responsible for the stability of payments and, ultimately, for safeguarding collective trust in the currency.

In later centuries, Italy failed to build on the achievements of its Renaissance splendour. 21 It remained politically and economically fragmented, burdened by inadequate rules and by guilds that stifled innovation.

The lesson for today's Europe is clear: to preserve its economic weight and to have a voice in the world, it must overcome its institutional rigidities, invest in innovation and complete the single market.

## A glance toward the future

Today we are witnessing a wave of financial innovation no less profound than that which once transformed the Italian city-states - but much faster and truly global in scope. The digital revolution is challenging the very notion of money, 22  now far removed from its historical forms - from gold to the fedi di credito , to banknotes.

This  is  a  natural  process,  but  one  that  demands  both  understanding  and  vigilance. Some digital innovations risk,  paradoxically,  taking  us  backwards:  the  proliferation  of private digital pseudo-currencies, outside the remit of supervision, can generate financial instability, shift seigniorage to a few actors and facilitate illicit activities.

The role of central banks is crucial: they must ensure that technology drives us forward, towards a more integrated, efficient and secure monetary system - and not backwards,

19 The fedi  di  credito differed  from  banknotes  in  one  essential  respect:  they  were  registered  in the  name  of  the  holder,  whereas  banknotes  were  bearer  instruments.  It  is  therefore  more accurate  to  describe  them  as  a  kind  of  cashier's  check  issued  by  banks.  See  also  L.  Costabile and E. Nappi, 'The Public Banks of Naples between Financial Innovation and Crisis', in L. Costabile and L. Neal (eds.), Financial Innovation and Resilience , London, Palgrave Macmillan, 2018, pp. 17-53; F.R. Velde, 'The Neapolitan Banks in the Context of Early Modern Public Banks ' , Working Papers, 5, Federal Reserve Bank of Chicago.

20 The Sveriges Riksbank, founded in 1668, and the Bank of England, founded in 1694. The term 'central bank' did not come into use until the 1920s; see G. Toniolo, 2022, op.cit.

21 C.M. Cipolla, 'I decenni del declino (1620-80)', in Id., St oria facile dell'economia italiana dal Medioevo a oggi , Milan, Mondadori, 1995, pp. 69-73.

22 P. Cipollone,  'Shifting  payment  landscape:  what  a  digital  euro  will  bring',  speech  delivered  at  the Central Bank of Slovenia, Ljubljana, 10 July 2025.

towards a fragmented and fragile order. To achieve this, public authorities must take an active role in the technological evolution of finance and payments. 23

This is the purpose guiding the work of the ECB, Banca d'Italia and the other national central  banks:  to  ensure  that,  even  in  the  digital  era,  citizens  have  access  to  efficient and reliable financial services, centred on public money, for both retail and wholesale payments. This is the goal underpinning the projects on the digital euro and on the integration  of  the  TARGET  system  for  wholesale  payments  with  distributed  ledger technology (DLT). 24

## Conclusions

From Florence's golden florin to Europe's single currency, and now to the challenges of digital finance, the journey of money has spanned centuries of technical, institutional and cultural innovation.

Since the abandonment of gold as an anchor, fiduciary money has become the foundation of modern economies. Yet because it rests on trust, it requires institutions that are solid, credible and - above all - independent: the central banks.

In Europe today, the task of preserving that tradition and carrying it into the future falls to the Eurosystem. In a world shaken by technological revolutions, geopolitical tensions and new uncertainties, the ECB and the national central banks are called upon to guarantee monetary stability and sovereignty, and to safeguard collective trust.

In this age of great transformations, public money remains a public good - a cornerstone of economic democracy, a symbol of shared trust. It has been described as 'the most universal and most efficient system of mutual trust ever devised.' 25

Public money is not just an economic instrument: it is the bond of trust that holds every community together.

From Florence - the cradle of so many monetary and institutional innovations - we renew the Eurosystem's commitment to preserve, strengthen and pass on that trust, so that each generation may receive it intact and adapt it to the challenges of its own time.

23 C. Lagarde, 'Earning influence: lessons from the history of international currencies', speech delivered at the event on Europe in a Fragmented World, organized by the Centre Jacques Delors in the Hertie School, Berlin, 26 May 2025.

24 For further details, see ECB, 'ECB commits to distributed ledger technology settlement plans with dual-track strategy', press release, 1 July 2025, and the ECB's Pontes webpage.

25 Y.N. Harari, Sapiens: A Brief History of Humankind , London, Vintage, 2015, p. 201.

Printed on EU-Ecolabel certified paper (registration number FI/011/001)

The life-cycle environmental footprint of the paper used was offset by purchasing carbon credits and planting trees in Italy.",Fabio Panetta
https://www.bis.org/review/r251031h.htm,"Christina Papaconstantinou: Implementation status of key regulations – DORA, MiCAR, Basel IV, Genius Act and the AI Act – and what early enforcement reveals","Speech by Ms Christina Papaconstantinou, Deputy Governor of the Bank of Greece, at the World Banking Forum, Athens, 30 October 2025.",2025-10-30 00:00:00,"## Christina Papaconstantinou: Implementation status of key regulations - DORA, MiCAR, Basel IV, Genius Act and the AI Act and what early enforcement reveals

Speech by Ms Christina Papaconstantinou, Deputy Governor of the Bank of Greece, at the World Banking Forum, Athens, 30 October 2025.

* * *

## Good morning,

I would like to thank you for inviting me to the World Banking Forum to speak today about the implementation status of key regulatory texts and the lessons learnt from their enforcement so far.

This address comes at a moment when stakeholders, including policymakers, call strongly for ""simplification"" and the ""easing"" of regulatory burden. At the same time, ""deregulation"" is being brought up in this discussion more often now than, probably, ever before. In fact, what financial institutions really need the most, in this era of significant digital transformation, economic uncertainty and geopolitical tensions, is and stability . convergence

For this reason, regulatory texts - such as the ones I will talk about today - that bring legal certainty, ensure a level playing field across the EU and aim to manage risks while promoting innovation are of paramount importance.

I will first start with the Digital Operational Resilience Act or DORA:

## DORA

As finance becomes overwhelmingly digital, institutions that harness new technologies gain a competitive edge by providing consumers with round-the-clock access to their systems and instant transaction times. A significant number of financial institutions rely on technologies like cloud infrastructure, apply data-driven processes and utilise AI capabilities to deliver services faster and more effectively. What sets the current digital transformation apart from others that took place in the past is its with pervasiveness, dense interconnections and interdependencies across countries, firms, markets and third-party providers of ICT services. Yet, the same interdependence that enables competitiveness gains also , including amplifies operational and cyber risks concentration in critical ICT service providers and more complex incident cascades.

This is precisely why : for the first time, we have a single, technologyDORA matters neutral framework on digital operational resilience across the financial sector, aimed at safeguarding the transition from traditional models to the digital age. DORA consolidates and strengthens those ICT risk management requirements that up until now were spread over various financial services legislative texts, giving us a stable operational backbone on which financial digital innovation can thrive more safely.

But what does DORA actually change for financial institutions? Beyond consolidating familiar expectations on ICT risk, DORA introduces, among other things, three innovative solutions to major areas of concern. First, common major incident meaning single EU taxonomy, timelines and data standards for major ICT reporting, incidents and significant cyber threats, which enable their comparability, along with faster and more coordinated action to address them. Second, mandatory threat-led this means that, for selected entities and on a 3-year penetration testing (TLPT): cycle, control-checklists are replaced by intelligence-led, scenario-based tests that validate real-world operational resilience. Third, direct EU-level oversight of critical this recognises concentration and contagion risks ICT third-party providers (CTPPs): in shared infrastructures.

These innovations introduced by DORA, when combined with strategy, governance and testing obligations, shift operational resilience from being just an ""IT topic"" to an enterprise-wide capability, which requires clear understanding and sufficient support by senior management.

Ten months into the implementation of DORA in January 2025, we can safely discuss some early conclusions from its enforcement so far. Our first observation is divergence in the as expected, credit institutions are typically ahead, institutions' maturity levels: reflecting their adherence to earlier ICT-risk regulatory regimes. On the other hand, insurers, payments and e-money firms and the newly included in our supervisory perimeter IORPs [Institutions for Occupational Retirement Provision] are moving fast, but from a lower starting point compared to credit institutions, towards meeting DORA expectations.

Another observation Some financial entities still is uneven operational mapping. struggle to map critical or important functions against accountable owners, supporting processes, information assets and ICT services and, moreover, to keep those maps and asset inventories up to date as their systems and architectures evolve. Since DORA's perimeter is the entire organisation, from data lineage to customer-facing processes, rather than just networks and servers, it takes time and disciplined and documented steps to understand how to identify the critical or important functions and map them in relation to the rest of the digital ecosystem.

As expected, is currently the heaviest lift. In Greece, ICT third-party risk management our points of attention for financial entities are consistent with those in the rest of the EU: build a high-quality error-free Register of Information; institute a third-party management system that detects underachieving service level agreements and concentration risks; and adopt a durable contract-review methodology to include rights to audit and test, visible sub-outsourcing, meaningful exit strategies and data-portability clauses that can be applied at scale across hundreds of arrangements.

Furthermore, according to our data, still needs sharper major incident management reactions, clearer thresholds for what constitutes a ""major incident"", faster internal escalation, disciplined external notifications and better stakeholder communications when events are unfolding.

Resilience testing must also mature from ad-hoc penetration tests to risk-based annual programmes; this requires building up the internal coordination capacity (to scope, manage purple-team exercises and govern remediation) and securing credible threat-intelligence and testing partners.

Finally, also come to the fore with the requirement for a firmstrategy and governance wide This strategy, which should include digital operational resilience strategy. scenario testing, investment roadmaps and regular board engagement, should expose gaps in the management of ICT risk and be linked to a periodic review of the ICT riskmanagement framework.

Beyond our observations at local level, early feedback from DORA policy work at EU level Stakeholders asked for has underscored the need for stability and clarity. proportionality, streamlined incident criteria and consistent treatment of subcontracting and outsourcing. On paper, this has been achieved with the adoption of standards; however, consistent application among supervisory authorities remains the real and this is why in key areas is imperative. test further supervisory convergence

Turning now to MiCAR:

## MiCAR

In the EU, markets in crypto-assets are regulated by the provisions of the Regulation [(EU) 2023/1114] widely known as , which became fully applicable on 30 MiCAR December 2024. MiCAR is designed to protect investors and safeguard market integrity, while at the same time addressing systemic risks linked to crypto-assets that purport to maintain a stable value. These risks concern financial stability, payment systems, monetary policy transmission and monetary sovereignty. Importantly, MiCAR leverages the development of crypto-assets to support innovation in the sector. At EU level, supervisory convergence is fostered by the EBA and ESMA, in close collaboration with national supervisory authorities.

In , the 2025 Law [5193/2025] on the Enhancement of the Capital Market Greece establishes the national measures for the implementation of MiCAR, assigning respective competences and powers to the Hellenic Capital Market Commission and the Bank of Greece. The Bank of Greece has been entrusted with the prudential supervision of credit institutions, electronic money institutions and payment institutions that plan to issue e-money tokens (EMTs) and/or asset-referenced tokens (ARTs) or to operate as crypto-asset service providers (CASPs). It is also empowered to license these entities and to impose administrative measures or penalties for breaches of the Regulation.

Recent developments show that the stablecoin market has grown rapidly, increasing its linkages with the financial sector and thereby creating potential implications for euro area financial stability, banking sector soundness, payment systems and the international role of the euro. US dollar-denominated stablecoins dominate the global market, while euro-denominated stablecoins remain marginal. Nevertheless, growth in the latter has picked up since early 2025 following the regulatory clarity provided under MiCAR. Market concentration also appears to be high.

Two key have emerged in connection with the implementation of MiCAR. concerns The relates to , meaning fully fungible stablecoins issued first multi-issuance schemes jointly by EU and third-country entities. As noted recently by the ESRB, such schemes have built-in vulnerabilities and may operate under regulatory regimes which are much more lenient than those for financial conglomerates, raising the question of divergent prudential standards. relates to the The second concern interplay between MiCAR , particularly for e-money and the revised Payment Services Directive (or PSD2) tokens, where certain activities could trigger overlapping requirements under both regimes. This gives rise to a risk of double licensing and regulatory complexity, which supervisors and the EBA are seeking to address through transitional arrangements and future alignment of the two frameworks.

At the global level, the regulatory landscape remains fragmented, creating risks of regulatory arbitrage and cross-border contagion. In the United States, the Genius Act advances federal stablecoin legislation, but with a , narrower scope than MiCAR covering only payment stablecoins. Its provisions are generally more  favourable to the , including broader eligibility of reserve assets, development of stablecoins exemptions from certain capital requirements and the possibility for service providers to pay interest, which MiCAR prohibits. Such divergences may give US issuers a competitive edge, reinforcing the dominance of US dollar-denominated stablecoins.

To safeguard European interests, it will be essential to close interpretation gaps in MiCAR, promote euro-denominated alternatives, accelerate progress towards the digital euro and develop DLT-based settlement solutions. Identifying potential future adjustments to MiCAR will also be key to ensuring a level playing field with issuers in other jurisdictions while effectively managing risks.

Regarding the AI Act:

## AI Act

The Artificial Intelligence Act, enacted via an EU Regulation in 2024 [(Regulation (EU) 2024/1689)], establishes the world's first comprehensive regulatory framework for artificial intelligence. It will become fully applicable in August 2026, while certain obligations, such as prohibiting AI systems that are deemed to carry unacceptable risk, have already taken effect. The AI Act seeks to balance the protection of fundamental . The most important AI Act obligations rights with the promotion of innovation in AI relate to the management of potential risks before an AI tool is put into productive operation; transparency in order to ensure that natural persons are always aware if they are interacting with AI systems and that content generated or manipulated by AI systems is flagged as such; as well as safety and accuracy. Obligations are addressed to all entities in the value chain.

The AI Act applies a risk-based approach, distinguishing between:

- Prohibited AI practices, such as social scoring by public authorities.
- High-risk systems, subject to strict obligations relating to risk management, data governance, human oversight, transparency and post-market monitoring.

- Limited-risk systems, such as chatbots, subject to transparency obligations.

The AI Act has established to coordinate several bodies and fora at the EU level enforcement, ensure consistent implementation and address systemic risks arising from general-purpose AI models.

In Greece, implementation of the AI Act is coordinated by the Ministry of Digital Governance. Preparatory work is underway to identify the competent authorities and establish national governance structures.

Looking ahead, the success of the AI Act will rely on close cooperation among authorities, sufficient technical expertise and a balanced approach that fosters innovation while upholding trust and accountability in the use of AI across critical sectors.

Turning now to Basel IV:

## Basel IV

Basel IV standards represent a major evolution in global banking regulation. They are designed to strengthen the resilience and stability of financial institutions; enhance prudential oversight, governance and risk management across the EU banking sector; provide stronger tools for monitoring emerging risks; upgrade stress testing; and improve supervisory reviews.

The reform process related to the Basel standards culminated, after extensive negotiations, in the adoption in 2024 of Regulation [(EU) 2024/1623], commonly known as the Capital Requirements Regulation (or CRR III), and Directive [(EU) 2024/1619], also known as the Capital Requirements Directive (or CRD VI). CRR III has been directly applicable since 1 January 2025, while CRD VI shall be transposed into the Greek law by 10 January 2026.

The implementation of CRD VI will introduce new rules for both EU and non-EU . Notably, third-country credit institutions that provide core banks operating in Greece banking services in Greece will be required to apply for authorisation to establish a subsidiary. Moreover, EU banks must notify in advance the Bank of Greece of any mergers or divisions, material transfers of assets or liabilities, acquisitions of material holdings in other entities, and will be subject to periodic penalty payments, on top of administrative penalties and measures, under an enhanced sanctioning regime. These are some of the upcoming changes, under this harmonised set of rules, which, overall, brings more activities under direct supervisory oversight.

I will close my intervention today with a reference to the CMDI framework and the current work on simplification:

The EU Council and the European Parliament have recently reached an agreement on the . This will mark a Crisis Management and Deposit Insurance (CMDI) framework significant improvement in the EU framework for managing the failure of banks. The agreed provisions enhance especially the ability of authorities to deal with small and

medium-sized banks that could have implications for financial stability either at national or regional level. They will facilitate access to industry-funded safety nets to finance failing banks' resolution and eventual exit from the market. Banks with insufficient MREL (Minimum Requirement for Own Funds and Eligible Liabilities) capital can, as a last resort, rely on Deposit Guarantee Schemes or resolution funds (or on the Single Resolution Fund in the banking union) to finance their resolution without bailing-in their depositors. To safeguard financial stability and minimise moral hazard, this ""bridge the gap"" mechanism will be subject to strict safeguards, ensuring that MREL capital remains the primary line of defence.

Given the agreement reached on the CMDI framework and the enhanced resilience of the euro area banking system, it is time to press ahead with the establishment of the . The EDIS (or European Deposit Insurance Scheme) third pillar of the Banking Union would strengthen the resilience of the banking sector even further, as it could fully cover both liquidity needs and losses in resolution. A common scheme would ensure that the level of confidence in the safety of bank deposits is equally high across all Member States, thereby reducing the risk of bank runs and safeguarding financial stability. Keeping depositor protection at the national level maintains the bank-sovereign nexus, impedes the creation of a level playing field and weakens financial stability.

As my concluding remark, I would like to note that the EU is currently working on the of the EU regulatory framework. This started with the publication of the simplification Draghi Report, and before that the Letta Report, both of which singled out regulatory simplification as key for unlocking EU competitiveness. EU Institutions have initiated efforts to simplify supervisory rules and practices in order to remove unnecessary complexity, enhance coordination and achieve shorter implementation timeframes. , as perhaps you have heard before, does not mean . Simplification de-regulation Supervision and regulation form a framework that preserves financial stability, protects depositors and shields the real economy from the impact of bank failure. This safety net in any way. should not be compromised

The Bank of Greece fully supports this initiative, stands ready to take on the powers and responsibilities assigned by the regulatory framework and will continue working to maintain stability, facilitate progress and support economic growth.

Thank you.",Christina Papaconstantinou
https://www.bis.org/review/r251030n.htm,Michael S Barr: Exploring the possibilities and risks of new payment technologies,"Speech by Mr Michael S Barr, Vice Chair for Supervision of the Board of Governors of the Federal Reserve System, at the 2025 DC Fintech Week, Washington DC, 16 October 2025.",2025-10-16 00:00:00,"For release on delivery 9:00 a.m. EDT October 16, 2025

Exploring the Possibilities and Risks of New Payment Technologies

Remarks by

Michael S. Barr

Member

Board of Governors of the Federal Reserve System at

2025 D.C. Fintech Week

Washington, D.C.

October 16, 2025

Thank you for the opportunity to speak to you today.

Payments innovation is accelerating. 1 Stablecoins, artificial intelligence (AI), real-time payments, and richer payment metadata offer significant improvements to the cost, speed, and functionality of payments.  Better payments functionality can help financial institutions and businesses manage liquidity more efficiently at lower cost.  It can also mean that people receive their paychecks more promptly and manage their payments more effectively.  Payments innovation is especially important for lowerincome individuals who are often underserved by the financial system and lack financial slack.

For the bulk of my remarks today, I will focus on the benefits and risks of stablecoins.  Congress has recently passed legislation that provides some clarity to issuers of stablecoins about how they can fit into the regulatory and supervisory framework. While there is a lot of work to do on the part of the government to fill in the specifics during the rule-writing process, increased certainty could lead to more rapid development of stablecoins and related products and services for businesses and households.

## Potential Benefits of Stablecoins

I will start with some of the potential benefits of stablecoins.  The primary benefit comes from the ledger itself, which can operate globally and encode functionality and conditionality directly into assets and transactions.  This functionality unlocks a range of new financial use cases that were previously impractical when transactions required updating a series of ledgers spread across individual financial institutions.

1 The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board of the Federal Open Market Committee.

The global nature of stablecoins is fundamental to their usefulness in parts of the payment system that have high friction, such as cross-border payments.  Some of these frictions are necessary and important, such as those associated with complying with relevant laws and regulations on money laundering and terrorist financing.  But removing or mitigating other frictions may reduce costs and facilitate more efficient transactions.

While today stablecoins are mostly used to facilitate crypto-trading activities, and secondarily as a dollar-denominated store of value in some foreign jurisdictions, I want to provide some examples where stablecoins may be useful for additional functions in crossborder payments.

## Remittances

Stablecoins can be used to reduce the costs of remittances, since it tends to be more expensive to send remittances to jurisdictions with less-developed domestic payment systems. 2 As of a few years ago, stablecoins had only a limited ability to reduce costs because there were meaningful fees associated with on-ramping into stablecoins and off-ramping out to local currencies.  However, stablecoin acceptance networks have arisen in some corridors that help reduce these fees and offer the potential to reduce the cost and increase the speed of remittances for those least able to bear these costs.

## Trade finance

Stablecoins have the potential to also improve the speed of managing the paperwork and processes inherent in global trade and trade finance, perhaps with the use of smart contracts.  In these applications, a digitally native form of payment could

2  See Viktors Stebunovs (2025), 'Clean Money, High Costs?' International Finance Discussion Papers 1422 (Washington:  Board of Governors of the Federal Reserve System, September), https://doi.org/10.17016/IFDP.2025.1422.

potentially be used to streamline the tracking and validation process that occurs between financial institutions, shipping companies, and customs warehouses and the companies that engage in trade.  Small businesses might see lower costs and greater access. Multinational firms' cash management

And for larger firms that have entities across the globe, stablecoins may help with treasury management.  Stablecoins offer the promise of near-real-time global payments, helping multinational firms manage their cash efficiently between their related entities while still making payments through local internal entities in different countries, reducing costs and improving liquidity.

## Risks to Achieving the Benefits of New Payment Technologies

I have mentioned just a few of the potential ways in which stablecoins can provide benefits to households and business.  Continued investment in technology can also support compliance with important legal restrictions that prevent the use of the financial system for nefarious purposes.  This investment will be a key area necessary for supporting stablecoins in achieving their potential benefits.  Let me start with money laundering and terrorist financing.

The potential for technology to support anti-money-laundering compliance

One unique feature of stablecoins is their role as bearer instruments, similar to old-fashioned traveler's checks, but mostly operating on global permissionless networks that can include plenty of users with bad intentions.  That creates particular challenges for preventing money laundering and terrorist finance, since bad actors can purchase stablecoins in secondary markets that may not have customer identification requirements. The U.S. puts a heavy premium on ensuring that all financial institutions comply with

rules that seek to prevent criminals and terrorists from using our financial system. Financial companies, particularly banks, that take shortcuts on anti-money-laundering compliance sooner or later come to regret these shortcuts.

Compliance with Bank Secrecy Act and anti-money-laundering requirements can be very data intensive and costly, requiring significant staffing to identify and then address or resolve flagged issues.  Permissioned networks with only trusted nodes doing the know your customer work can reduce the risks.  Moreover, new technologies, used with care, can potentially reduce frictions on legitimate payments and speed up the identification of problem payments.  AI may be well suited to flag payments that are outliers relative to typical patterns, potentially reducing the volume of false positives and unnecessary filings. 3 There may also be ways to improve the explainability of payments if they travel through the payment cycle with more data elements, such as those in the ISO 20022 standards recently implemented on Fedwire.  There are also technologies that can aid with stablecoin compliance, such as trusted identity tokens in wallets that satisfy Customer Identification Program requirements and smart contracts that freeze stablecoins in problematic wallets.  This suite of tools can also be used for preventing other types of crime, such as fraud.

3 See Jeffrey S. Allen and Max S.S. Hatfield (2025), 'Can LLMs Improve Sanctions Screening in the Financial System?  Evidence from a Fuzzy Matching Assessment,' Finance and Economics Discussion Series 2025-092 (Washington:  Board of Governors of the Federal Reserve System, September), https://doi.org/10.17016/FEDS.2025.092; U.S. Department of the Treasury (2024), 'Treasury Announces Enhanced Fraud Detection Processes, Including Machine Learning AI, Prevented and Recovered Over $4 Billion in Fiscal Year 2024,' press release, October 17, https://home.treasury.gov/news/pressreleases/jy2650.

## A Rocky History of Private Money Creation

A second key area is financial stability.  Let me take a step back and explain why I am focused on the financial stability risk of stablecoins.  Caution is warranted because of the long and painful history of private money created with insufficient safeguards.

The fragility of private money is inherent in the way that it is created.  Financial institutions issue liquid liabilities to the public that are redeemable on demand and at par, but issuers risk being ultimately unable to liquidate their assets promptly at par when facing run dynamics and market stress.  Maturity and liquidity transformation can have social benefits by meeting the needs of the public for money-like assets and supporting the supply of credit to the real economy.  However, for this social benefit to be durable, maturity transformation necessarily requires safeguards that address run risk. 4

Looking at the long history of runs from private money is a helpful reminder of how these runs can happen and what's at stake when they do.  For example, in the 1800s, during the so-called Free Banking Era, the United States had competing forms of private money in the form of bank notes.  The value of these notes was tied to the creditworthiness, location, and credibility of the issuing bank, although some of the notes were backed by bonds issued by the state governments as well as other high-quality assets. 5 Despite these protections, the quality of the guarantees backing the bank notes

4 The need for joint capital and liquidity regulation to address excessive run risk at financial institutions is established in Anil Kashyap, Dimitrios P Tsomocos, and Alexandros P. Vardoulakis (2024), 'Optimal Bank Regulation in the Presence of Credit and Run Risk,' Journal of Political Economy, vol. 132 (March), pp. 772-823.  How the public provision of safe assets can suppress the demand for private money-like assets and, thus, reduce financial fragility is examined in Mark Carlson, Burcu Duygan-Bump, Fabio Natalucci, Bill Nelson, Marcelo Ochoa, Jeremy Stein, and Skander Van den Heuvel (2016), 'The Demand for Short-Term, Safe Assets and Financial Stability:  Some Evidence and Implications for Central Bank Policies,' International Journal of Central Banking , vol. 12 (December), pp. 307-33.

5  See, for example, Gary Gorton (1996), 'Reputation Formation in Early Bank Note Markets,' Journal of Political Economy, vol. 104 (April), pp. 346-97.

was not beyond question, and they often traded below par.  Concerns about the health of issuing banks, or of the states themselves in this era, resulted in regular bank runs and, in a number of instances, widespread financial panics.  This stability of the system was improved over time, such as through legal changes that effectively required bank notes to be backed only by U.S. government securities.  Nevertheless, regular episodes of runs continued to materialize until the Panic of 1907, which prominently featured a run on trust companies that offered deposit products backed by assets less liquid than the assets held by banks of the era.  This episode led to the creation of the Federal Reserve System.

The historical examples point out that issuing liquid liabilities redeemable at par but backed by assets, even high-quality ones, about which creditors might have questions makes private money vulnerable to run risk.  These same dynamics occurred even in much more modern times.  The most notable example is when the Reserve Primary Fund broke the buck on September 16, 2008, one day after the bankruptcy of Lehman Brothers, as the assets backing the fund came into question. 6 Pressures on money market funds also occurred during the onset of the COVID-19 outbreak in March 2020, when institutional prime funds suffered outflows of about 30 percent of their assets under management within a period of two weeks. 7

These experiences show the vulnerability of private money-like assets to runs, and how these runs can threaten not only the financial sector, but also the broader economy.

6  See, for example, Lawrence Schmidt, Allan Timmermann, and Russ Wermers (2016), 'Runs on Money Market Mutual Funds,' American Economic Review, vol. 106 (September), pp. 2625-57.

7 See, for example, Lei Li, Yi Li, Marco Macchiavelli, and Xing Zhou (2021), 'Liquidity Restrictions, Runs, and Central Bank Interventions:  Evidence from Money Market Funds,' Review of Financial Studies, vol. 34 (November), pp. 5402-37.

## Issues in the Unregulated Stablecoin Market

The mostly unregulated stablecoin market has also experienced run dynamics in recent times.  While people purchasing something called a 'stablecoin' might reasonably assume that they can rely on redemption at par on demand, unregulated stablecoins are currently backed by a range of non-cash reserve assets that can make them vulnerable, especially under stressed conditions. 8 Three key features-redemption on demand, at par, and backed by noncash assets-render stablecoins susceptible to runs similar to fragile banks or money market funds. 9

Because stablecoins are not backed by deposit insurance and stablecoin issuers do not have access to central bank liquidity, the quality and liquidity of their reserve assets is critical to their long-run viability.  At the same time, stablecoin issuers traditionally retain profits from investing reserve assets and therefore have a high incentive to maximize the return on their reserve assets by extending the risk spectrum as far out as possible.

Stretching the boundaries of permissible reserve assets can increase profits in good times but risks a crack in confidence during inevitable bouts of market stress.  The incentive to reach for yield can grow especially in lower-interest-rate environments.  Stablecoins will only be stable if they can be reliably and promptly redeemed at par in a range of conditions, including during stress in the market that can put pressure on the value of even otherwise liquid government debt, and during episodes of strain on the individual issuer or its related entities.

8  See Yuegi Yang, Muyao Shen, and Jason Leopold (2023), 'Biggest Crypto Stablecoin Tether Was Once Backed by Chinese Securities,' Bloomberg, June 16; [Scott Chipolina ] (2023), 'Crypto Group Circle Admits $3.3bn Exposure to Failed Silicon Valley Bank,' Financial Times, March 11.

9 See, for example, Gary B. Gorton, Elizabeth C. Klee, Chase P. Ross, Sharon Y. Ross, and Alexandros P. Vardoulakis (2025), 'Leverage and Stablecoin Pegs,' Journal of Financial and Quantitative Analysis .

## Permissible Stablecoin Reserves under the New Legal Framework

To address these vulnerabilities in the largely unregulated stablecoin market, Congress passed the bipartisan GENIUS Act.  The act's primary tool to mitigate the risk of runs is limiting permissible reserve assets to an itemized list of highly liquid assets. 10 This is a significant improvement in an area where reserve assets for stablecoins have been highly varied.  Tight control over reserve assets, coupled with supervision, capital and liquidity requirements, and other measures, could enhance the stability of stablecoins and make them a more viable payment instruments over the long term.

But success in accomplishing these goals will depend on the details of regulatory implementation.  The GENIUS Act provides a helpful statutory framework, but it will be up to both the federal banking agencies and the states to coordinate and develop a comprehensive set of rules that can fill in important gaps and ensure that there are robust guardrails to protect users of stablecoins and mitigate broader risks to the financial system.  Regulators have a lot of work to do to implement the act, and I will outline several areas that will require close attention.

For example, some of the enumerated reserve assets backing stablecoins are not immune to stress.  Permissible reserve assets include uninsured deposits, which were a key risk factor during the March 2023 banking stress. 11 While the GENIUS Act permits regulators to limit the concentration of reserve assets in uninsured deposits, it will matter how these rules are written. 12

10 See 12 U.S.C.§ 5903(a)(1)(A).

11 See 12 U.S.C. § 5903(a)(1)(A)(ii); Michael S. Barr (2023), 'The Importance of Effective Liquidity Risk

Management,' speech delivered at the ECB Forum on Banking Supervision, Frankfurt, Germany,

December 1, https://www.federalreserve.gov/newsevents/speech/barr20231201a.htm.

12 See 12 U.S.C. § 5903(a)(1)(A)(ii), (a)(4)(A)(iii).

Additionally, in connection with overnight repo, the act permits any medium of exchange authorized or adopted by a foreign government to be held as a reserve asset-a category that could include potentially volatile assets. 13 For example, until quite recently, El Salvador treated Bitcoin as legal tender, and it still specifically permits Bitcoin to be used for transactions on a voluntary basis.  As a result, an issuer could argue that Bitcoin repo could qualify as an eligible reserve asset for a stablecoin.  In a case of stress experienced by the issuer or counterparty, or if Bitcoin were to drop sharply in value, a stablecoin issuer could be stuck holding the Bitcoin that had declined in value, potentially compromising the one-to-one backing of the stablecoin liabilities.  To the extent possible, regulations should be put in place to eliminate or minimize such risks. 14

In addition to the potential vulnerabilities of some permitted reserves, other aspects of the GENIUS Act might permit risks to develop unless carefully regulated.  The act permits four federal agencies and agencies in each state and territory to serve as the primary regulator and supervisor of stablecoin issuers. 15 As a result, there might be a great deal of heterogeneity in the regulatory frameworks that apply to permitted issuers, despite controls in the act intended to provide that the frameworks are substantially similar.  The resulting array of charter choice options, unless carefully managed, may provide incentives for regulatory arbitrage.

For example, the act permits federal and state regulators to authorize stablecoin issuers to engage in a broad range of 'digital asset service provider' and 'incidental'

13 See 12 U.S.C. § 5903(a)(1)(A)(iv) (permitting 'money' received under repurchase agreements with an overnight maturity to be held as a reserve asset); 12 U.S.C. § 5901(18) (defining money to include 'a medium of exchange currently authorized or adopted by a domestic or foreign government').

14 See, for example, 12 U.S.C. § 5903(a)(4)(A)(iii).

15 See 12 U.S.C. § 5901(25) (defining 'primary Federal payment stablecoin regulator'); 12 U.S.C. § 5901(30) (defining 'State payment stablecoin regulator').

activities other than stablecoin issuance, including potentially acting as a crypto-asset exchange or broker-dealer. 16 Issuers are likely to seek to stretch these activities limitations.  In fact, issuers may argue that they are permitted under the act to perform the full range of activities conducted by FTX, provided they make the relevant representations and conduct appropriate accounting.  Unless state and federal agencies carefully coordinate, this could result in some state or federal regulators permitting a range of activities that might expose stablecoin issuers to increased risk.

The potentially broad set of permissible activities could raise heightened concerns in cases where stablecoin issuers are subsidiaries or affiliates of banks. 17 In such cases, the risks of expanded activities could affect the banking organization and the banking system more broadly.  These risks are especially elevated because the GENIUS Act carves stablecoin issuers that are part of banking organizations out of bank and bank holding company consolidated capital requirements-even if they conduct a broad range of activities that pose risks that are greater than and different from those associated with stablecoin issuance. 18 Stablecoin issuers are only subject to the capital requirements implemented under the act, which could end up being too narrow to cover the risks of

16 See 12 U.S.C. § 5903(a)(7)(B) (setting out a rule of construction permitting primary regulators to authorize stablecoin issuers to engage in digital asset service provider and 'incidental' activities); 12 U.S.C. § 5901(7)(A) (listing 'digital asset service provider' activities).

17 Among other things, an expanded scope of activities could create issues in the insolvency context.  While the GENIUS Act amends the Bankruptcy Code to segregate stablecoin reserve assets for the benefit of stablecoin holders, many issuers are likely to be subject to resolution by the federal or state regulators that charter such institutions.  Particularly where issuers are engaged in a broad range of activities, it is not clear how stablecoin reserves will be segregated from the issuer's other assets under those insolvency frameworks.  See 12 U.S.C. 5910(a)(1) (the only provision of the GENIUS Act's insolvency provisions that applies to insolvency frameworks other than the Bankruptcy Code).  Federal and state regulators administering resolution regimes could provide more clarity through rulemaking.

18

See 12 U.S.C. § 5903(a)(4)(B)(iii).

expanded activities. 19 Thus, appropriate capital requirements are another area where coordination among federal and state regulators is key-and it may be facilitated by the GENIUS Act's framework for assessing that state requirements are 'substantially similar' to federal requirements. 20

Relatedly, the act enables stablecoin issuers-including those that may conduct an expanded range of activities-to be chartered by regulators as uninsured national or statechartered trust banks. 21 This authorization and related decisions by regulators may result in trust banks that engage in a broader range of non-fiduciary, non-custodial, principal activities.  Let us not forget a lesson hard-learned in the Panic of 1907-a lighter-weight regulatory framework for trust-chartered entities conducting bank-like activities can create opportunities for regulatory arbitrage and vulnerabilities for the financial system. Overall, these and other gaps may have implications for the safety and soundness of stablecoin issuers.

## Consumer Protection Issues

The act also has gaps relating to consumer protection.  For example, it does not apply to all instruments that are commonly referred to as 'stablecoins,' and certain dollar-denominated, tokenized products can continue to be offered and sold without being subject to the regulatory framework under the act. 22 This risks creating confusion and could result in consumers relying on payment instruments that they believe are regulated,

19 See 12 U.S.C. § 5903(a)(4)(A)(i)(II) (providing, among other things, that capital requirements for stablecoin issuers shall 'not exceed requirements that are sufficient to ensure the ongoing operations' of the issuer).

20  See 12 U.S.C. § 5903(c).

21 See 12 U.S.C. § 5901(11)(B), (31)(A).

22 The act limits only the issuance, offer, and sale of 'payment stablecoins.'  See 12 U.S.C. § 5901(22) (defining 'payment stablecoin'); 12 U.S.C. § 5902(a)-(b) (prohibitions on issuing, offering, or selling 'payment stablecoins').  The act does not affect the issuance, offer, or sale of instruments that fall outside the 'payment stablecoin.'

but for which there are no prudential protections of any kind.  To mitigate this risk, federal and state regulators should work together to prevent misrepresentations, including through their authority to prohibit unfair and deceptive acts and practices. 23

The act also lacks sufficient protections to prevent the mixing of bank-like activities and commerce, which could lead to an increase of economic concentration and create competitive distortions-potentially to the detriment of consumers. 24 And, finally, the act does not provide consumers with the fraud protections applicable to traditional payment instruments-including protection for unauthorized transfers. Alternative adaptations of payment technologies: Tokenized deposits

I have talked extensively about how the potential benefits of stablecoins can only be achieved if stablecoins can be reliably redeemed at par under a wide range of conditions.  Importantly, the technology that supports stablecoins can also be used for other products-for example, tokenized deposits.

The benefits of tokenized deposits include that they are part of a regulatory framework that has been tested over time.  Banks face robust regulatory and supervisory regimes proportional to their size and complexity.  This supervision and regulation is paired with deposit insurance, providing confidence that deposits held in sizes relevant for most retail purposes will be available on demand at par.  The resolution regime is orderly, which provides additional confidence about the stability of the instruments in a wide range of circumstances and reduces contagion.  Moreover, banks have ready access

23 See, for example, 12 U.S.C. § 5903(e)(3), which makes it 'unlawful to market a product in the United States as a payment stablecoin unless the product is issued pursuant to the [act].'

24 See 12 U.S.C. § 5903(a)(12) (preventing only majority ownership of stablecoin issuers by a public , nonfinancial company, and providing for possible exceptions to that requirement); 12 U.S.C. § 5903(a)(8) (preventing tying only with respect to paid products and services offered by a payment stablecoin issuer and its subsidiaries, and not with respect to products and services offered by a payment stablecoin issuer's affiliates, including their parent companies).

to the discount window, where they can readily monetize assets on their balance sheets at a pre-specified interest rate under a range of market conditions, including the most dire.  I don't want to say this system is perfect-it definitely is not-but it is far more robust than what we have developed so far for stablecoins.  Thus, it may make sense for both market participants and regulators to consider how tokenized deposits will fit into this ecosystem.

As I said at the outset, stablecoins have the potential to improve the efficiency of the payment system, particularly in cross-border applications.  For stablecoins to reach their potential, additional work is needed to create guardrails that protect households and businesses, and the financial system as a whole.  While the GENIUS Act made important progress in creating a framework for stablecoins, a great deal will depend on how federal and state regulators implement it.  If the regulatory framework provides strong guardrails and consumer protections, both the innovation represented by stablecoins as payment instruments, and the resulting competition in the payments space, could help foster payments improvements that benefit households and businesses.

Thank you.",Michael S Barr
https://www.bis.org/review/r251031f.htm,"Ryozo Himino: Prophets, armed and unarmed - the roles of power and knowledge in international prudential standards","Speech by Mr Ryozo Himino, Deputy Governor of the Bank of Japan, at the GZERO Summit Japan, Tokyo, 21 October 2025.",2025-10-21 00:00:00,"## Ryozo Himino: Prophets, armed and unarmed - the roles of power and knowledge in international prudential standards

Speech by Mr Ryozo Himino, Deputy Governor of the Bank of Japan, at the GZERO Summit Japan, Tokyo, 21 October 2025.

* * *

## Introduction

Good afternoon.

More than a decade ago, in his book titled , Ian Bremmer argued Every Nation for Itself that the world was entering a G-Zero era, with no group of countries being able to lead on global public goods.

What I plan to do during the next 15 minutes is to test that idea in one specific area: international prudential standards, standards designed to safeguard global financial stability.

## 1. International Prudential Standards as Global Public Goods

Why should international prudential standards be considered global public goods?

Financial systems today are deeply interconnected, and crises spread quickly across borders. The 1997 crisis in Thailand spread to other parts of Asia and to Russia, and shook Wall Street through the failure of LTCM. In 2008, Lehman's collapse caused a global recession. In 2023, Silicon Valley Bank's failure spread stress first to U.S. regional banks and then to European markets, triggering the fall of Credit Suisse.

Each country makes its own financial system resilient for its own sake. But, just as we prefer our neighbors' houses to be fire-resistant, it is also in every country's interest for other financial systems to remain resilient. When high-quality regulations and supervision are applied around the world, the benefits are shared by all.

## 2. Agreement, Transposition, and Enforcement

Yet common interests do not automatically yield common rules. Because the authority to regulate rests with each jurisdiction, three steps are necessary for a standard to become effective: first, jurisdictions must agree on the standard; second, they must adopt it domestically; and third, it must be enforced on financial institutions. We need agreements, transposition, and enforcement.

## 3. Knowledge and Power

For these steps to succeed, both knowledge and power come into play.

Seen from the perspective of knowledge, the three steps could look as follows: Jurisdictions agree on an international standard and transpose it into their domestic

framework because the standard embodies the collective wisdom of global regulators and reflects lessons from mistakes made around the world. They also see benefits in a uniform standard as it cuts compliance costs, provides a level playing field, reduces arbitrage, and creates a shared language. Financial institutions would observe it 1 because it embodies best practices and helps them demonstrate their soundness.

That would indeed be a beautiful world. But if that were all it took, then a group of brilliant academics could simply draft good rules and the job would be done.

At the opposite end of the spectrum sits the perspective that emphasizes power.

In his book , Niccolò Machiavelli writes as follows: The Prince 2 It ought to be remembered that there is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things, because the innovator has for enemies all those who have done well under the old conditions, and lukewarm defenders in those who may do well under the new.

## He continues,

It is necessary, therefore, . . . to inquire . . . whether, to consummate their enterprise, have they to use prayers or can they use force? In the first instance they always succeed badly, and never compass anything; but when they can rely on themselves and use force, then they are rarely endangered.

Then there comes one of his famous quotes: All armed prophets have conquered, and the unarmed ones have been destroyed.

Machiavelli continues with another reason why reforms require power: The nature of the people is variable, and whilst it is easy to persuade them, it is difficult to fix them in that persuasion. And thus it is necessary to take such measures that, when they believe no longer, it may be possible to make them believe by force.

## 4. Markets, Network Externalities, and Government

In the case of international prudential standards, power takes two forms: nongovernmental and governmental.

Non-governmental power includes the power of markets and the power of network externalities. Markets punish banks that fail to meet standards and jurisdictions that do not adopt standards by selling their securities or cutting off transactions. Network externalities make it costly not to use the dominant standard once many others already use it.

There are cases where knowledge, markets, and network externalities have proven to be enough to drive the three steps.

For example, the International Swaps and Derivatives Association (ISDA) is a privatesector forum without government involvement, but its Master Agreement is used by almost everybody in the wholesale derivatives market, contributing to risk reduction and market stability.

However, in many other cases, governmental power has been involved to varying degrees. I would like to discuss this in light of the history of four standards with the word ""Basel"" in their names: Basel I, Basel Core Principles, Basel II, and Basel III. 3

## Basel I

Let us begin with Basel I, the world's first international capital adequacy standard for banks.

The agreement stage of Basel I began in 1984 among experts at the Basel Committee on Banking Supervision. Though they rapidly formed a common base of knowledge, they failed to overcome national differences and reached an impasse after about two years.

The U.S. authorities, however, could not leave the Basel experts' stalemate unresolved. Alarmed by the Latin American debt crisis, which posed a material threat to major U.S. banks and taxpayers, the U.S. Congress demanded stronger regulation on banks. But the U.S. banking industry fought back, arguing that they would be put at a competitive disadvantage against foreign banks. Thus, Congress required both stronger regulation and international coordination.

The United States chose to enter into a common front with the United Kingdom, and twisted the arms of Japan, Germany, and others with the threat that the two would proceed alone if others would not go along. The implicit message was that those banks failing to meet the standards to be set by the two might no longer be able to operate in New York and London. The next year, the Basel Committee reached an agreement.

The transposition step also proceeded swiftly. Basel I was eventually implemented in more than one hundred countries.

The United States led the enforcement step by example. In 1991, it introduced a domestic framework called Prompt Corrective Action (PCA), in which regulators impose varying degrees of corrective action, depending on how far a bank falls below the Basel I requirements. Similar frameworks came to be adopted by countries around the globe.

## Basel Core Principles

Let's move on to the Basel Core Principles.

The Basel Committee took up the project to list key features of effective banking supervision in 1996 at the request of the G7 leaders. The agreement stage was swiftly completed within a year, partly because the Committee could build on the guidance it had accumulated over the years, and partly because it had strong political backing.

The transposition and enforcement of the Core Principles is monitored by the IMF and the World Bank through the Financial Sector Assessment Program (FSAP), which was introduced in 1999 in response to the Asian Financial Crisis and at the request of G7 leaders. The results of the assessments are particularly consequential for countries that may have to rely on the IMF or the World Bank for support.

## Basel II

Compared to Basel I and the Basel Core Principles, Basel II was driven more by knowledge and less by power.

The Basel Committee started the process of establishing Basel II in 1998, to align Basel I with the rapid progress in financial engineering and credit risk management. Energized by the intellectual challenge of the project, experts produced a 500-page consultative draft full of new models and formulas in 2001.

Then the process stalled. Though the Committee succeeded in publishing final documents in 2004, domestic implementation in the United States was delayed and took effect only in April 2008. By that time, the securitization bubble had already reached its peak. One of the key features of Basel II was enhanced rules on securitization, but they were not implemented in time to help alleviate the Global Financial Crisis.

## Basel III

Let's now turn to Basel III.

Basel III proceeded in two phases: the original Basel III of 2010 and the Basel III endgame of 2017. The two have led contrasting lives.

## Original Basel III

The original Basel III was quickly agreed and was implemented largely as agreed.

The Global Financial Crisis in 2008 brought mainstream economists into the analysis of its causes and the formulation of proposals to prevent a recurrence. At the same time, the recession, the mass unemployment, the use of taxpayers' money, and the public anger around the world forced political leaders into decisive joint action.

In 2008, two months after the collapse of Lehman Brothers, the G20 leaders convened their first meeting. In 2009, they delivered a comprehensive plan for reforms. Responding to their request, the Basel Committee had already agreed on the first package of the new regulatory framework, Basel III, by 2010. Jurisdictions started domestic implementation largely in line with the agreed timeline.

## Basel III endgame

The process for the Basel III endgame, which finalized the subsequent series of reforms, has been more painful. The international agreement phase took much longer, and the Basel Committee finally reached a compromise almost a decade after the Global Financial Crisis.

The transposition stage proved even harder. G20 leaders repeatedly affirmed their commitment to full, timely, and consistent implementation, but implementation deadlines were extended time and again. Even today, eight years after the agreement, the transposition has not happened in the United States. U.S. regulators are said to be

working to repropose the domestic endgame rules by the end of 2025 or early 2026. The United Kingdom has not implemented it either, and the European Union has left a key element unimplemented.

The original Basel III was implemented in time for the Covid-19 shock and helped the global financial system survive it, but the Basel III endgame was not.

## 5. How Should We Proceed from Here?

How should we proceed from here?

Global financial regulators are not prophets, but they sometimes identify key vulnerabilities in the financial system and try to prevent them from causing the next crisis.

In the episodes of Basel II and Basel III endgame, the regulators somewhat resembled prophets unarmed. In other cases, they could have been compared to prophets armed. 1988 Basel I was backed by the power of G2 when the United States was the only superpower. The 1997 Basel Core Principles were directed by the G7, which was clearly dominant at the time. The original Basel III of 2010 was sponsored by the newborn G20, which was much more united than today.

The world today, however, is a different place.

Still, we need to continue to modernize international prudential standards to keep up with the new and emerging realities. Today, half of the assets in the global financial system are held by non-bank financial institutions, including money market funds, other open-ended funds, and hedge funds, all of which fall outside the remit of Basel III. Stablecoins might emerge as a key player in the global payment system, partially replacing the role of bank deposits. Regulators are doing a lot in these spheres, but much more needs to be done.

Then how can we effectively mobilize knowledge and power in the changing global landscape to continue to innovate international prudential standards?

I confess that I do not know the answer. Still, let me put forward three things which may be worth trying.

First, we might want to face more squarely the question of power. In some cases, we may be able to rely on the power of markets and network externalities. In other cases, key jurisdictions may be willing to take the lead. For example, American banks have by far the strongest dollar deposit bases, which gives them a significant competitive advantage in the international banking market. It could therefore be in the interest of the United States to take the lead in developing common standards, preventing market fragmentation and expanding the level playing field.

Second, when we set our schedule, we may want to take into account that political momentum has an expiration date. The original Basel III of 2010 was agreed upon right

after the crisis and was implemented quickly. By contrast, the 2017 Basel III endgame was published 10 years after the crisis and has not yet been implemented eight years after the agreement.

Third, we may want to maximize the power of knowledge and persuasion. In the international agreement stage, the quality of consensus matters as much as the quality of standards. Have members engaged enough with their domestic stakeholders before joining the international consensus? Do members have a sense of ownership in the agreement? The aim of the agreement stage should not be confined to putting documents on websites.

The same applies to the domestic transposition stage. National authorities should show why implementing the standards is in the best interest of the country, rather than shortcutting domestic persuasion by justification based solely on international commitments.

These three, however, may not be enough. Even in the past, there was no fixed formula that solved all problems. Today, there may be more need to tailor our approach to the demands of the task and the circumstances, and to be agile in seizing the opportunities that arise.

## Conclusion

Let me conclude. Power gives knowledge its effectiveness, and knowledge gives power its legitimacy. Knowledge and power should remain in tension, but they must also reinforce each other in our efforts to secure global public goods.

Lastly, I would like to emphasize that the views I expressed today are my own and not necessarily those of the Bank of Japan.

Thank you.

- 1  Ryozo Himino, ""Basel II-towards a new common language,"" , BIS Quarterly Review September 2004, https://papers.ssrn.com/sol3/Delivery.cfm?abstractid=1967506.
- 2  Translated by W. K. Marriott.
- 3  For the history of Basel I and the Basel Core Principles, see Charles Goodhart, The Basel Committee on Banking Supervision: A History of the Early Years 1974-1997, 2011. In Chapter 15, he discusses the roles of power and knowledge. For the history up to Basel II, see Ryozo Himino, Kenshou BIS Kisei to Nihon (The Basel Accord and 2005. Japan, a Review), second edition,",Ryozo Himino
https://www.bis.org/review/r251030i.htm,"Gabriel Makhlouf: Opening statement - joint Oireachtas Committee on Finance, Public Service Reform and Digitalisation, and Taoiseach","Opening statement by Mr Gabriel Makhlouf, Governor of the Central Bank of Ireland, before the Joint Oireachtas (National Parliament) Committee on Finance, Public Expenditure and Reform, and Taoiseach (Head of Parliament), Dublin, 22 October 2025.",2025-10-22 00:00:00,"## Gabriel Makhlouf: Opening statement - Joint Oireachtas Committee on Finance, Public Service Reform and Digitalisation, and Taoiseach

Opening statement by Mr Gabriel Makhlouf, Governor of the Central Bank of Ireland, before the Joint Oireachtas (National Parliament) Committee on Finance, Public Expenditure and Reform, and Taoiseach (Head of Parliament), Dublin, 22 October 2025.

* * *

Chair and Committee members, thank you for the invitation to join you today to discuss the issue of the Central Bank's role in the Israeli Bond Programme. I am joined by Mary Elizabeth McMunn, Deputy Governor, Financial Regulation, and Gerry Cross, Director of Capital Markets and Funds.

Since our first engagement with you on this issue over a year ago, we have endeavoured to support your examination of it to the fullest.

The Central Bank's role in this issue is governed by EU law. The EU Prospectus Regulation sets out harmonised EU laws with respect to securities which are the subject of that regulation. This is a part of the EU Capital Markets Union. Each Member State of the EU must appoint a competent authority in that jurisdiction. The Central Bank has been appointed as the competent authority in Ireland for the purposes of the EU Prospectus Regulation and must carry out its functions and duties as provided for under that Regulation.

At all times, we have been obliged to carry out the statutory tasks and functions which have been assigned to us. We have to work within the law and we have carefully and comprehensively discharged our obligations under the EU Prospectus Regulation.

As set out in my recent letter to the Committee, there are a number of important overarching points that I would like to highlight, specifically the Central Bank's role in the transfer of approval process, our professional secrecy obligations, and the framework of EU Regulations within which we operate.

First, Article 20(8) of the EU Prospectus Regulation provides for the transfer of the approval of a prospectus on the request of an issuer to the competent authority of another Member State. Any such transfer is subject to prior notification to ESMA and the agreement of the competent authority to whom the approval function is to be transferred.

In this process, the competent authority of the home Member State only approves the transfer to the competent authority of another Member State but does not approve the prospectus that is issued. The competent authority of the transferee Member State reviews and decides whether to approve the prospectus.

In this framework, the Central Bank's role was limited to transferring the role of approving the 2025 Prospectus to the Commission de Surveillance du Secteur Financier in Luxembourg (the CSSF). The Central Bank did not have any role in the review or approval of the 2025 Prospectus and did not receive any draft of that

document. It was a matter for the CSSF to independently carry out the review and approval process.

There are two distinct and separate steps in the transfer of approval process. The first is the transfer of approval of the prospectus to another competent authority. The second is the review and approval of the prospectus by that other authority. In carrying out its role of reviewing and approving the relevant prospectus, the CSSF is entirely independent of the Central Bank.

Second, the Central Bank is subject to confidentiality obligations pursuant to the EU Prospectus Regulation and Section 33AK of the Central Bank Act 1942. Those obligations restrict us from disclosing confidential information obtained in the performance of our functions. The correspondence between the Central Bank and the State of Israel and between the Central Bank and the CSSF also falls within confidentiality restrictions. Within our legal obligations, we have sought, to put as much information as possible with regard to this matter into the public domain.

Third, one of the functions that we are required to carry out under the Prospectus Regulation is to consider transfer of approval requests. When considering transfer of approval requests, we consider the connectivity of the prospectus with the jurisdiction from which and to which it is seeking a transfer.

In the case of the State of Israel transfer of approval request, the issuer decided that it would cease from 1 September 2025 making offers to the public under its prospectus in Ireland. The bonds to be issued under the 2025 Prospectus may only be offered to the public in Austria, France, Germany, Luxembourg and the Netherlands.

In circumstances where the State of Israel proposed to discontinue offers to the public under its prospectus in Ireland, the Central Bank approved the transfer of approval of the prospectus under the EU Prospectus Regulation.

Finally, the Central Bank reviewed the recommendations in the report issued by this Committee in the context of its functions and with regard to the prospectus it approved for the State of Israel on 2 September 2024 which expired on 1 September 2025. However we had no role in the review and approval of the 2025 prospectus.

We are happy to take your questions.",Gabriel Makhlouf
https://www.bis.org/review/r251031d.htm,Denny H Kalyalya: Opening remarks - Bank of Zambia Currency Directives of 2025,"Opening remarks by Dr Denny H Kalyalya, Governor of the Bank of Zambia, at the Consultative Stakeholder engagements on the draft Bank of Zambia currency directives through the public private dialogue forum, Lusaka, 9 October 2025. ",2025-10-09 00:00:00,"## Denny H Kalyalya: Opening remarks - Bank of Zambia Currency Directives of 2025

Opening remarks by Dr Denny H Kalyalya, Governor of the Bank of Zambia, at the Consultative Stakeholder engagements on the draft Bank of Zambia currency directives through the public private dialogue forum, Lusaka, 9 October 2025.

* * *

I warmly welcome you all to this final consultative meeting on the Bank of Zambia Currency Directives of 2025. Since the announcement of these upcoming directives in February 2024 we have made significant progress on this matter. As you may recall our very first in person engagement with you, the stakeholders, was in June 2024 in Lusaka at Mulungushi International Conference Centre (MICC) organised by the Public-Private Dialogue Forum (PPDF). Several other meetings have since been held with representatives from various sectors of the economy, including those conducted in this very auditorium, as well as others in Chipata, Livingstone, and Ndola, under the auspices of the Zambia Chamber of Commerce and Industry and PPDF. In August of this year, we initiated the final round of in person consultations, which included meeting under the PPDF platform in Ndola and multiple discussions with commercial banks and deposit taking financial institutions. Following the announcement by the Minister of Finance and National Planning in his 2026 Budget Speech that these directives will be effected by the end of 2025, this matter has been one of the discussion points in the Post-Budget symposia and discussions here in Lusaka and Kitwe and other fora. Today's meeting marks the conclusion of these consultative efforts.

Ladies and Gentlemen, I would like to emphasise that these directives are not being considered in isolation, rather, they are part of a comprehensive set of reforms the Bank has undertaken. These reforms comprise the Electronic Balance of Payments (e-BoP) monitoring system, introduced in 2019; the Export Proceeds Tracking Framework (EPTF), launched in January 2024; the Foreign Exchange Market Guidelines issued in May 2024; and the revised Interbank Foreign Exchange Market Rules, effected from June 2024. Currently, the Bank is also focused on introducing non-deliverable forwards in the foreign exchange market, aimed at broadening the range of hedging tools available and enabling market participants to manage exchange rate risks more effectively.

The initiatives highlighted above are aimed at fostering a strong and efficient domestic foreign exchange market that enhances the efficacy of monetary policy. In particular, the currency directives under discussion, which flow out of the Bank of Zambia Act, 2022, are designed to reinforce the Kwacha and Ngwee as the sole legal tender for all domestic transactions across the Republic of Zambia. The use of the Kwacha in domestic transactions is vital, as previously articulated. It supports the effective implementation of monetary and exchange rate policies, safeguards the economy against external shocks, and promotes overall financial stability.

Distinguished Guests, our consultative meetings have been underpinned by two primary objectives: first, to explain the rationale and background of the proposed currency directives; and second, to provide a constructive platform for stakeholders to

share their concerns and offer suggestions on how they can be best implemented. We are pleased to report that these consultations have yielded valuable feedback from a diverse range of you, the stakeholders, across various sectors, including agriculture, tourism, mining, real estate, manufacturing, insurance, and oil marketing.

The stakeholders have raised several significant concerns regarding the proposed Currency Directives, which are outlined below:

- There is a perception that the proposed Currency Directives serve as an indirect mechanism for introducing exchange controls.
- The timing of the introduction of these directives has been deemed inappropriate, given the adverse macroeconomic conditions characterised by high inflation, low liquidity, and high interest rates. In addition, the country is contending with challenges such as drought and electricity rationing.
- Stakeholders expressed concerns about the potential for increased exchange rate risk following the implementation of the directives. Commercial banks may face difficulties in providing affordable hedging solutions under the current high Kwacha interest rates.
- There are concerns that the directives could disrupt the supply chains.
- It is crucial to draw the lessons learned during the implementation and subsequent revocation of SI No. 33 to inform the development of the new directives.
- If there is a determination to proceed with the implementation of the directives, a phased approach is advisable. This would help mitigate potential economic shocks and provide businesses with sufficient time to adapt their operations and strategies.
- Consideration should be given to allowing transactions to be quoted in foreign currency, while ensuring that payments and settlements are conducted in local defined, leaning towards a principle-based framework rather than a rule-based.
- currency. The criteria for including activities on the exemption list must be clearly · The implementation of these currency directives may adversely impact foreign currency lending, as banks typically align their foreign currency loans with corresponding receivables. The new directives could lead to a mismatch in this regard. · Clarification of the roles of commercial banks in relation to the implementation of the
- currency directives is necessary to ensure compliance.

We have carefully listened to all concerns, and as a result, the current version of the Currency Directives has undergone significant changes from our initial proposals. However, I must say that we also had to balance several factors, including the needs of the macroeconomy, the maintenance of a well-functioning and stable foreign exchange market, and our inflation objectives. In this regard, the Currency Directives will be introduced in a simplified manner. This approach is intended not only to uphold investor and business confidence but also to enable enterprises manage the short-term adjustments required by the changing currency environment.

Esteemed Guests, in alignment with this approach, the considered position under these directives is that all settlements for domestic transactions must be conducted in Kwacha, except in cases where exemptions are applicable. Nonetheless, quoting and invoicing may be performed in currencies other than the domestic currency. In transactions involving the Government as a party, all quoting, invoicing, and settlement must be executed exclusively in Kwacha. Exemptions have been established for specific economic activities to mitigate potential economic disruptions.

We recognise that clarity is essential for ensuring adherence to these directives. For this reason, the directives will be accompanied by explanatory notes. During today's session, we will present the most recent version of the currency directives, and we warmly welcome your comments and insights. We look forward to a constructive and engaging discussion.

THANK YOU FOR YOUR ATTENTION. GOD BLESS.",Denny H Kalyalya
https://www.bis.org/review/r251106d.htm,Colm Kincaid: Modernising how we protect consumers in vulnerable circumstances,"Remarks by Mr Colm Kincaid, Deputy Governor of the Central Bank of Ireland, at the Central Bank of Ireland's Consumer Protection Code workshop ""Modernising how we protect consumers in vulnerable circumstances"", Dublin, 3 November 2025.",2025-11-03 00:00:00,"## Colm Kincaid: Modernising how we protect consumers in vulnerable circumstances

Remarks by Mr Colm Kincaid, Deputy Governor of the Central Bank of Ireland, at the Central Bank of Ireland's Consumer Protection Code workshop ""Modernising how we protect consumers in vulnerable circumstances"", Dublin, 3 November 2025.

* * *

I am delighted to welcome you to the Central Bank of Ireland today. It is great to have 1 such a broad range of stakeholders here from public service, civil society, charitable organisations and the financial services sector to discuss protecting consumers in vulnerable circumstances.

It is right to place a special focus on consumers in vulnerable circumstances, and that we reflect vulnerability in all its forms. If we are to have trust in financial services, we need to be confident our best interests will be secured when we are at our most vulnerable, when we are most likely to suffer financial detriment or harm.

Periods of vulnerability in our lives (from bereavement to illness to financial and other shocks) often carry with them a requirement to make financial decisions we don't regularly make, such as claiming on an insurance policy, encashing a financial product or deciding what to do with an inheritance. Major life events that make us vulnerable are also often accompanied by challenges to meet new expenses or other financial difficulties. We may also have to face the challenges presented by an ongoing vulnerability that affects how we need to receive services or advice if we are to be financial included like everyone else. We are all prone to vulnerability through gaps in our financial or digital literacy or lack of confidence in managing our money (or asserting our rights).

The geopolitical context is also relevant. In his recent remarks following the Annual Meeting of the International Monetary Fund, Governor Makhlouf spoke to the vulnerabilities in the global financial system itself on which we will need to keep a very close eye and which, on the face of it, look uncomfortably familiar. 2   Those of us here today know how rapidly and profoundly shocks to the global financial system can be felt in household finances, augmenting the impact of any vulnerability that household may already face. Or to frame this more constructively, we know how concrete steps to build the resilience of household finances can help our society as a whole to withstand such shocks and rebound from them.

In all these circumstances, financial services needs to play its role to support consumers' financial well-being, that is to say ""a state in which individuals are able to smoothly manage their financial needs and obligations, can cope with negative shocks, can pursue aspirations, goals and capture opportunities, and feel satisfied and confident about their financial lives, keeping in mind country specific circumstances"". 3

That is a challenging task, and a complex one, but not one any of us here today faces alone, since we all have a role to play.

Recognising the complexity of these issues, we have organised today's workshop in order that we may learn from one another. We want to hear about different approaches and best practices, practical steps and measures you have put in place to ensure that culture, policies and processes take account of the needs of consumers in vulnerable circumstances.

I also encourage the financial services sector to learn from other industries and public services who may have better approaches to consumers facing particular vulnerabilities. I would like it to be said in future that the financial services sector is amongst the best at supporting consumers in vulnerable circumstances. Would that be said today I wonder? In some respects it might, but in others I expect it would not.

## Our New Consumer Protection Code

The backdrop to today's event is the Central Bank of Ireland's new Consumer Protection Code. 4   It will come into force in March next year and contains modernised provisions on consumer vulnerability. The new Code builds on work done this past decade to strengthen the consumer protection framework in Ireland, both to align with global standards and in reaction to specific challenges and cases of misconduct we had to deal with. 5

The Consumer Protection Code is the cornerstone of our consumer protection framework for financial services, sitting within a wider framework of laws to protect consumers and investors. The recent review of the Code was a key strategic initiative of the Central Bank to ensure the Code remains fit for purpose and future-ready. We carried out the review in an open and engaged manner and I want to thank the more than 1,320 organisations and individuals who engaged with us through the process. In particular I thank those who responded to our public consultation. Our new Consumer Protection Code would not be what it is without your insights.

As we move to implement the new Code, we want to continue to get the benefit of your insights, just as we did in the Code Review itself. Today's event is an example of this approach, to take a modernised component of the new Code (vulnerability) and workshop with you what it should mean in practical terms. We will continue to arrange engagements such as this as we head towards the go-live date on 24 March 2026 and beyond. In doing so, we recognise the Code contains new provisions on which we need a shared understanding if we are to continue to improve financial services over time.

At the Central Bank of Ireland, we are committed to continuing to engage with you on these topics. We are also committed to sharing and disseminating information as our understanding of the Code and its impact evolves.

## New protections for consumers facing vulnerable circumstances

One of the new Code's key enhancements is to broaden the concept of ""vulnerability"" to which specific protections apply. In doing so, we are aligning ourselves with the more sophisticated articulation of vulnerability in the revised G20/OECD High Level Principles on Financial Consumer Protection. The OECD's recent review of our supervisory approach included specific recommendations to enhance our supervisory approach with

respect to vulnerable consumers. 6   We will factor what we hear today into our development of that approach under our new supervisory framework.

## Our implementation of the new Consumer Protection Code

I know you will also be keen to understand how the Central Bank is approaching implementation of the new Code in general.

There are four points I want to make:

1. We expect regulated firms to now be well advanced in their implementation of the new Code underpinned by clear plans, resources and senior level accountability. Your care and attention to implementing the Code is something we will take into account in future supervisory actions. Here, I want to commend those industry bodies who have been so proactive in playing their role to support member firms through dedicated workstreams and groups.
2. We recognise the Code introduces new requirements. We will work with firms and stakeholders across the system to build understanding of those requirements. We will be open and engaged on this, recognising the Central Bank does not always have the answer to what represents best practice in terms of operationalising a given provision of the Code. Today's workshop is an example of this - you will understand better than us what a good approach to supporting a consumer facing a given vulnerability will be.
3. We will weave the requirements of the Code throughout our supervisory work, consistent with our new integrated supervisory approach. As I outlined in recent remarks , in the immediate period ahead this will involve a particular focus on: 7
4. How firms operate and the consumer/investor experience : We expect firms to be well run, secure their customers' interests and effectively manage any conflicts of interest by placing consumers and investors at the heart of decision making.
5. Digitalisation : Digital innovation can support consumers and investors. However, it also comes with potential risks in terms of ensuring consumers are enabled to make the digital transition and given appropriate information and support when making transactions digitally. There is also a need to ensure operational resilience, recognising the significant impact service disruption has on consumers.
6. Financial crime : This should be a priority for all firms and agencies involved with financial services. We all need to actively safeguard the integrity of the financial system and consumer interests by combatting financial crime.

How firms have enhanced their supports for consumers facing vulnerable circumstances can be expected to feature in our supervisory engagements across each of these three themes.

4.  We will assess the effectiveness of the Code through the substantive outcomes firms achieve. This will include enhancing how we gather and consider insights from consumers through our research, new capabilities we are equipping our supervisors with to monitor online activity and how we use conduct of business returns. 8   Here I have a particular ask of regulated firms when it comes to implementing the Code: build

a better understanding of your customers' financial well-being, their needs and the challenges they face (including listening more closely to what their complaints are telling you about their experience of your firm). I have seen good examples of this being done already and I believe, if done well, it can support good outcomes for both consumers and the businesses involved.

## Keeping track of progress

When I say we need to assess the effectiveness of our regulatory frameworks through the substantive outcomes achieved for consumers, I generally see people nod in agreement. But I wonder do we know or agree what those outcomes should be?

Perhaps today's workshop will be an interesting insight into that.

In recent remarks I spoke about the need to support a better social conversation on financial well-being. I am committed to this conversation because I want us to be able to keep track of how we are delivering better outcomes for consumers in real terms. How are we to assess these outcomes if we don't have a shared concept of what 'financial well-being' means to begin with?

The Central Bank supports Ireland's Well-being Framework and we are working at OECD level to develop the conceptual framework for financial well-being specifically. To support this work and our social conversation here in Ireland, I am keen that we build more structured data on this topic, hence my encouragement to regulated firms to place a focus on this. For its part, the Central Bank will continue to put information into the public domain to inform this conversation. In addition to our ongoing research and statistical publications, we are putting in place a new Consumer Insights Model, to understand the position of Irish consumers via a nationally representative survey of 4,000 consumers of financial services across a range of topics relevant to financial wellbeing. We will collect, measure and analyse data on these consumers' behaviours and experience of different financial services. We will also measure their attitudes and sentiment across a range of consumer finance topics.  We will publish the outputs to inform policy as well as our own supervisory strategies.

The Consumer Insights Model will enhance our understanding of the financial products consumers and investors buy, their experiences of financial service providers, their financial situation and their attitudes towards current issues affecting financial services. It will also inform our risk analysis of sectors and markets and how we prioritise our work.

Events like today and our forthcoming Consumer Insights Model reflect the Central Bank's demeanour towards how we will implement the Code. We realise the reforms of the Code will take work to implement and that we must support that work going in the right direction.

We will also be monitoring closely the extent to which firms' implementation of the Code is leading to demonstrably better outcomes for consumers. I suggest regulated firms put increasing focus on doing so too, so that together we keep track of how regulation is contributing to creating the right conditions for financial services to support financial wellbeing.

Let me pause there and thank you for your attention and your participation in our workshop today.

1  Thanks Deirdre Mullally, Brendan Beere, Patrick Casey, Brenda Carron and James O'Sullivan for their help in preparing these remarks.

- 2 Governors Blog 2025 IMF Annual Meeting.
- 3 G20 Policy Note on Financial Well Being (PDF 2.21MB).
- 4 Central Bank of Ireland Consumer Protection Code.
- 5 G20/OECD High-Level Principles on Financial Consumer Protection (PDF 938.12KB).
- 6 OECD (2024), Financial Consumer Protection in Ireland: A Review of the Central Bank of Ireland's Supervisory Functions, OECD Publishing, Paris.
- 7 ""Towards Our Future Financial Wellbeing"" - Speech by Deputy Governor Colm Kincaid at Financial Services Ireland.  October 2025 .
- 8 For example, see recently published research related to Buy Now Pay Later (BNPL).  Following this research, the Central Bank issued a Dear CEO letter to firms in the sector highlighting the importance of the research findings and the forthcoming consumer code requirements in this area.",Colm Kincaid
https://www.bis.org/review/r251031a.htm,Swaminathan J: Inclusion is innovation's highest purpose - lessons from India,"Address by Mr Swaminathan J, Deputy Governor of the Reserve Bank of India, at the World Savings and Retail Banking Institute (WSBI) study visit to State Bank of India (SBI) under the theme ""Advancing financial inclusion through digital innovation"", Mumbai, 6 October 2025.",2025-10-06 00:00:00,"## Swaminathan J: Inclusion is innovation's highest purpose - lessons from India

Address by Mr Swaminathan J, Deputy Governor of the Reserve Bank of India, at the World Savings and Retail Banking Institute (WSBI) study visit to State Bank of India (SBI) under the theme ""Advancing financial inclusion through digital innovation"", Mumbai, 6 October 2025.

* * *

Shri C S Setty, Chairman, State Bank of India,

Mr Peter Simon, CEO and distinguished delegates of the WSBI,

Shri Vinay Tonse, Managing Director, SBI and WSBI Asia Regional President,

Friends, colleagues, ladies and gentlemen, good evening, everyone!

At the outset, congratulations to WSBI for completion of a century, in bringing together savings and retail banks, from over 70 countries, representing the interests of customers of approximately 6,400 banks across all continents. As a global organisation, WSBI promotes a sustainable, inclusive and balanced growth and job creation around the world, with a clear focus on individual consumers, households and MSMEs. The members are main street players that are rooted strongly within the communities they serve, and support the local economies, with the shared values of being Retail, Regional and Responsible. I fondly recall my own association with WSBI during my time in SBI and I am thankful to SBI and WSBI for this kind invitation.

It is indeed a pleasure to welcome the WSBI delegation to India. During this study visit, I hope you will see how financial inclusion and digital innovation have evolved here through the interplay of public policy, regulatory oversight, and institutional initiatives. Along with recognising the challenges in India's journey, I trust this visit will also provide space to reflect on how different approaches to inclusion and innovation can inform and enrich one another.

The idea I wish to underline today is that . In inclusion is innovation's highest purpose India, financial inclusion has been pursued not as a single policy objective but as an ongoing national mission. Over the past decade, the Government, the Reserve Bank, and the banking sector have worked together to expand access to millions of households. The real task, however, lies in deepening usage, improving quality, and building lasting trust.

To capture progress along this journey, the Reserve Bank has developed a Financial Inclusion Index that tracks three dimensions-access, usage, and quality. 1   Over the years, there has been considerable progress made under the index. Five iterations of FI Index have been published till date, with March 2025 value standing perceptibly improved at 67.0 vis-à-vis 43.4 for the period ending March 2017. 2   Having said that, it is

also an observation that, while access to financial services has improved significantly in recent years, the challenge now lies in promoting active usage and strengthening service quality.

Achieving this requires more than technology; it calls for products tailored to diverse needs and limitations, supported by human interfaces that build trust and confidence. ' ' is a crucial step in ensuring that financial Embedding empathy into service delivery inclusion is meaningful and effective.

Equally important are transparent grievance redressal systems and clear consumer protection measures. Defined turnaround times, limited liability protections, and visible compensation frameworks reassure customers that they are safe in using digital services. Together, these measures foster confidence and encourage meaningful engagement with the financial system.

## Digital Public Infrastructure and India Stack

India's strong digital public infrastructure underpins its financial inclusion efforts. At the centre of this architecture lies the -a set of interoperable, open, and scalable India Stack digital layers built as public goods. These include Aadhaar for digital identity, DigiLocker for secure digital storage and sharing of documents, and the Account Aggregator framework for consent-based data sharing. Together, they provide the rails on which a wide range of services can be delivered securely, at scale, and at an affordable cost.

Among these layers, the Unified Payments Interface (UPI) has emerged as the flagship success story. By integrating multiple accounts into a single mobile platform, UPI has revolutionised retail payments.

While UPI has rightly captured global attention, it represents only the most visible part of a much wider transformation. Behind it stands a comprehensive digital payments ecosystem that includes NEFT and RTGS for retail and high-value transfers, the Bharat Bill Payment System for interoperable bill payments, the Aadhaar Enabled Payment System for last-mile inclusion through micro-ATMs, and BharatQR for merchant acceptance. Together, these systems form a layered, resilient, and inclusive architecture. They ensure that digital transactions are not only fast and convenient but also secure, accessible, and trusted-cornerstones of India's transition from a predominantly cash economy to a thriving digital one.

Building on this success, India is now developing the Unified Lending Interface (ULI), which seeks to bring the same principles of openness and interoperability to credit markets. Just as UPI made payments universal, ULI has the potential to mark a turning point in how affordable credit is accessed and delivered at scale.

Digital innovation is also extending inclusion beyond payments. Micro-insurance and pension products are increasingly being delivered through digital platforms, helping lowincome households strengthen financial resilience. Cross-border UPI linkages are making remittances faster, cheaper, and more seamless, reinforcing trust in formal channels.

## RBI's Role in Responsible Innovation

At the Reserve Bank, we seek to foster an environment where innovation can flourish responsibly. Through initiatives such as regulatory sandboxes, the Innovation Hub, and enabling frameworks for digital financial services, we encourage the development of new solutions that are secure, sustainable, and customer-centric. At the same time, we place due emphasis on governance, risk management, and customer protection, so that technological progress is always matched by resilience and trust in the financial system.

The rapid rise of fintechs, digital platforms, and embedded finance models has expanded the boundaries of the financial system and created new types of risks. These are not simply traditional risks in digital form, but new frontiers arising from algorithmic decision-making, heavy dependence on data, concentration of services in a few platforms, and deep technological interconnections. Left unmanaged, such risks can quickly migrate from individual institutions to the broader system.

This is why we encourage financial institutions to move to a proactive resilience mindset, embedding digital risk awareness and safeguards into their governance frameworks. Innovation and safety are not opposing goals; when balanced well, they reinforce each other and build lasting trust.

## Closing Reflections

As we look ahead, there is growing recognition worldwide that digital innovation is the most powerful driver of financial inclusion. India's journey shows that access is only the first step-the true test lies in meaningful usage, in the quality of services, and in the trust that people place in the system. Innovations that do not embed responsibility can erode this trust, but when innovation and inclusion move together, they reinforce each other and create lasting transformation.

Allow me to return to the thought with which I began: inclusion is innovation's highest . As you reflect on India's experience during this study visit, I hope you will see purpose how collaboration between policy, regulation, and institutions can continue to widen the frontiers of inclusion. India's journey shows that when innovation meets inclusion, . I hope this exchange inspires fresh ideas, new transformation becomes inevitable partnerships, and renewed resolve to make finance truly universal.

Thank you.

1  The FI-Index has been conceptualised as a comprehensive index incorporating details of banking, investments, insurance, postal as well as the pension sector in consultation with Government and respective sectoral regulators. The index captures information on various aspects of financial inclusion in a single value ranging between 0 and 100, where 0 represents complete financial exclusion and 100 indicates full financial inclusion. The FI-Index comprises of three broad parameters (weights indicated in brackets) viz., Access (35%), Usage (45%), and Quality (20%) with each of these consisting of various dimensions, which are computed based on a number of indicators. It has been constructed without any 'base year' and as such it reflects cumulative efforts of all stakeholders over the years towards financial inclusion.

## 2  Reserve Bank of India introduces the Financial Inclusion Index",Shri Swaminathan J
https://www.bis.org/review/r251030o.htm,Luis de Guindos: From crisis to collective strength - a successful decade of the Single Resolution Mechanism and the road ahead,"Opening address by Mr Luis de Guindos, Vice-President of the European Central Bank, at the SRM 10th Anniversary Conference, Brussels, 15 October 2025.",2025-10-15 00:00:00,"## Luis de Guindos: From crisis to collective strength - a successful decade of the Single Resolution Mechanism and the road ahead

Opening address by Mr Luis de Guindos, Vice-President of the European Central Bank, at the SRM 10th Anniversary Conference, Brussels, 15 October 2025.

* * *

## Introduction

A decade ago, the SRM was established as a direct response to the global financial crisis and the European sovereign debt crisis. As the second institutional pillar of the banking union, it has the ambitious remit of improving how bank failures are managed while safeguarding the public interest and limiting recourse to taxpayer money. Together with the Single Supervisory Mechanism, it has played a pivotal role in protecting financial stability in the EU.

Ten years on, we once again find ourselves in a challenging environment, marked by significant uncertainty and geopolitical risk. The banking union remains incomplete, at a time when the EU needs to uphold its fundamental values and defend its interests. We cannot wait until the next crisis to move towards strengthening the EU project.

## Looking back: a decade of achievements

Looking back at the past decade, the banking union has been a major success for Europeans. The banking sector is now much more resilient than it was ten years ago. The pandemic and Russia's full-scale invasion of Ukraine affected many parts of our daily lives, yet the banking sector remained strong. The pandemic brought the economy to a virtual standstill, while Russia's invasion was followed by an unprecedented surge in inflation, which called for an equally unprecedented period of monetary policy tightening. The banking sector proved resilient to those two shocks, managing to restore profitability and adapt swiftly as we emerged from the low-interest rate environment.

Over the past ten years, the SRM has helped strengthen the banking sector and prevent systemic crises. It has brought about something that was once unthinkable: a European approach to bank resolution. Through the SRM, you have overseen the buildup of liabilities to absorb losses and recapitalise a bank in resolution. You also set up the €80 billion Single Resolution Fund for the orderly resolution of banks in more challenging scenarios.

The SRM has shown that decisive European action can ensure the continuity of banks' critical functions without causing severe economic disruption. A case in point is Banco Popular in 2017, one of the first instances of a bail-in and - despite the expected judicial disputes - one that was carried out on solid legal grounds. The SRM's smooth handling of resolution cases (which I witnessed first-hand as economy minister in Spain during the Banco Popular resolution) sends a powerful signal: Europe has the tools and determination to manage banking crises successfully.

Since 2015 we have invested significant effort in ensuring that the ECB and the Single Resolution Board (SRB) work together seamlessly at all levels, including through data sharing and the various dry-run exercises that are critical to advancing resolution preparedness.

## The road ahead: a need for further financial integration

However, we cannot rest on our laurels. The banking union is still incomplete, and much work lies ahead to ensure that banks can operate in a true Single Market and reap economies of scale.

For this, we must recapture the mindset that enabled us to create the banking union. This means recognising the magnitude of the challenges ahead and understanding that only by acting together as Europeans - rising above national interests - can we address them.

Let me start with the actions we need from legislators to ensure meaningful progress towards completing the banking union.

First, while the Single Resolution Fund is ready, its backstop - to be provided by the European Stability Mechanism (ESM) - is still missing. If we are to be prepared for bank crises, this gap must be closed by finalising the ratification of the reformed ESM Treaty.

Second, we need a European framework for liquidity in resolution. After resolution, the availability of liquidity support is often indispensable for restoring market confidence in a bank.

Third, a European deposit insurance scheme (EDIS) remains crucial for ensuring a costeffective and harmonised deposit protection system. EDIS would also help address the bank-sovereign nexus. We look forward to seeing renewed efforts by co-legislators to move forward on EDIS. This is urgently needed - let's get it done.

These issues have been on the table for a long time now. I am optimistic that we will see progress. First, because they are essential for the EU project and, second, because their ultimate goal is to protect the banking system, savings and access to finance in the EU. The recent agreement on the reform of the crisis management and deposit insurance framework is an important step forward, but it does not replace EDIS. I do, however, recognise the politically contentious nature of the topic and co-legislators' work in hammering out the necessary compromises to improve EU rules for bank crisis management.

More remains to be done. Mario Draghi's report setting out recommendations on how to boost European competitiveness was published over a year ago now. But the proposals put forward by Enrico Letta in his report on the future of the Single Market are no less important. The Single Market, one of the EU's greatest achievements, is a cornerstone of prosperity and resilience but it too remains incomplete in some respects. By removing the barriers to cross-border economic activity and fostering even deeper economic ties, we can lay the groundwork for financial market development and greater investment across national borders.

For the banking sector, completing the banking union - of which the resolution framework is an integral part - would lower barriers to cross-border business and promote the flow of financing to high-productivity firms in the EU. Improving the free flow of capital and liquidity and facilitating cross-border mergers within the banking union should be an urgent priority. The national ring-fencing we see at present severely limits what European banks can achieve.

More fundamentally, removing obstacles in tax, insolvency and corporate law are essential to fostering cross-border economic activity. At the same time, the costs associated with a lack of harmonisation in securities trading and post-trade services in Europe may also be stifling the growth of our capital markets. The average costs for settlement and safekeeping borne by market participants are higher in Europe than in the United States. Our regulatory, supervisory and market practices create barriers that make it difficult for markets to scale up. They also expose securities issuers, intermediaries and investors to uncertainties and high compliance costs. Harmonising aspects of the debt issuance process would address such frictions. This would make the EU capital market more attractive for investors and strengthen the international role of the euro.

But decisive action to advance the European project requires a European institutional framework that preserves stability and fosters greater integration.

More integrated supervision of EU capital markets will be key in this endeavour. European-level supervision provides the tools and the broader perspective necessary to safeguard financial stability, because systemic risks don't stop at national borders. EUlevel authorities should also be better equipped to foster integration across borders. This doesn't need to happen all at once: gradually introducing new powers for the European Securities and Markets Authority, taking into consideration the specific traits of each sector, will be crucial in building up its capacity while maintaining the central role and expertise of national authorities.

Finally, we should also critically assess how we can further improve and simplify our regulatory and supervisory framework. Many EU authorities, the ECB and the SRB included, are currently working intensively on simplification. We are strongly in favour of reducing undue complexity, administrative burden and overlaps, as long as resilience and compliance with international standards are preserved. As prudential and resolution requirements interact with one other, collaboration between authorities is key. Reporting overlaps may, to some extent, be unavoidable, but we can reduce the burden by establishing an integrated reporting system that will be accessible to the relevant EU authorities.

## Conclusion

Let me conclude. The SRM's mission ten years ago was clear: ensure that failing banks are resolved in an orderly manner, without resorting to taxpayer money and without increasing risks to financial stability. Born out of a crisis, the SRM has delivered. Over the past decade, it has helped to shield Europe from financial turmoil and, in the process, the SRB has become a trusted international partner in crisis response.

The next ten years will undoubtedly bring new challenges. At the ECB we look forward to continuing our work with you to make the SRM's next decade as successful as its first.

Let's not be complacent, let's strive for strong European solutions: completing the banking union and building a strong savings and investments union will contribute to an even more resilient banking sector that supports productivity and growth. This will benefit all Europeans.",Luis de Guindos
https://www.bis.org/review/r251030d.htm,Fabio Panetta: Statement - meeting of the Development Committee,"Statement by Mr Fabio Panetta, Governor of the Bank of Italy and Governor of the Constituency of Albania, Greece, Italy, Malta, Portugal, San Marino and Timor-Leste, at the 112th Meeting of the Development Committee (Joint Ministerial Committee of the Boards of Governors of the Bank and the Fund on the Transfer of Real Resources to Developing Countries), Washington DC, 16 October 2025.",2025-10-16 00:00:00,"## Fabio Panetta: Statement - meeting of the Development Committee

Statement by Mr Fabio Panetta, Governor of the Bank of Italy and Governor of the Constituency of Albania, Greece, Italy, Malta, Portugal, San Marino and Timor-Leste, at the 112th Meeting of the Development Committee (Joint Ministerial Committee of the Boards of Governors of the Bank and the Fund on the Transfer of Real Resources to Developing Countries), Washington DC, 16 October 2025.

* * *

Geopolitical tensions, worsening conflicts, mounting climate shocks and pervasive fragility continue to weigh heavily on people worldwide, often with dramatic consequences. These dynamics have heightened the demand for protection from global challenges and for better prospects at home.

As a central pillar of the multilateral system, the World Bank Group (WBG) is called to deliver concrete solutions where needs are greatest. By managing its resources efficiently and staying focused on its core mission - to end extreme poverty and foster shared prosperity on a livable planet - the WBG can effectively support countries in pursuing their development priorities and meeting their citizens' needs. The strategic use of resources, including funds unlocked through the Capital Adequacy Frameworks , will help sustain progress along countries' graduation paths, whose (CAF) review forthcoming reassessment is welcome.

Job creation is essential to reducing poverty, particularly in fragile contexts, while private sector development and social mobility are crucial to sustaining growth. Failing to generate employment and opportunity in developing countries risks exacerbating social tensions and driving migration pressures, with adverse cross-border repercussions.

Our Constituency welcomes the ongoing efforts to shape a comprehensive WBG Jobs Strategy. As underscored in the Development Committee Paper, reinforcing the foundations of growth and employment is essential to expanding opportunities and unlocking the potential of women and the many young people set to enter the labor force in the coming years.

The WBG should continue to help countries recognize the deep interdependence between the public and private sectors. A competitive and diversified private sector generates domestic revenues that are essential to financing public services and strengthening administrative capacity at both national and local levels. In turn, a skilled and adequately resourced public sector is vital to enabling private sector growth - by investing in education and health, designing sound reforms and regulations, fostering competition and quality in public procurement, and working with institutions such as the WBG to develop a strong pipeline of investment projects.

The Jobs Strategy should also underscore the urgent need to raise productivity - a fundamental engine of growth and prosperity - by enhancing the efficiency of existing jobs and firms and by reallocating capital and labor toward more productive uses. It

should further promote the transition from informal to formal employment, broadening social protection and strengthening job security. Clear and reliable indicators are essential to assess impact and track the strategy's progress.

The WBG has already launched a range of important initiatives to promote job creation. We support the initiative, in which Italy plays an active role by helping to Agriconnect develop coffee value chains in Africa. We further encourage closer collaboration with IFAD to draw on its expertise in linking smallholders and rural communities to regional value chains. Italy also contributes to the , which foster skills Global Skills Partnerships development and technical training, enabling workers to access better employment opportunities both at home and abroad.

The strengthened WBG Procurement Framework can play a significant role in advancing the Jobs Strategy by promoting local employment and stimulating productivity and innovation through competition focused on quality infrastructure and service delivery. This shift toward quality-based procurement should be accompanied by efforts to build capacity for efficient public resource management, enhance access to information, and encourage greater diversification through broad and fair participation of firms.

We welcome the WBG's pragmatic and inclusive approach to expanding access to energy - an essential driver of economic growth - while maintaining a clear commitment to its climate objectives. Exploring additional energy options, including nuclear, can help design tailored solutions that reflect country-specific circumstances and development priorities, in full consistency with their international commitments.

Africa lies at the heart of the global jobs challenge: by 2030, half of all new entrants to the world's labor force will come from Sub-Saharan Africa, and around 80 percent of the region's annual job needs will be concentrated in fragile, conflict-affected, and lowincome economies. In this context, we look forward to the implementation of IDA21 and to continued efforts to strengthen its long-term financial capacity, while preserving its triple-A rating.

Under the Mattei Plan, Italy is actively supporting WBG initiatives across Africa. A new co-financing framework and dedicated programs have been launched, as exemplified by the recent co-financing of the project in Mozambique - confirming Italy's ASCENT commitment to Mission300 - while several other projects are at an advanced stage of preparation. Together with the WBG, the African Development Bank, the Africa Finance Corporation and other partners, Italy reaffirmed its support for the Lobito Corridor at the Italy-EU Summit in June 2025. Through the Resilient and Inclusive Supply Chain (RISE) initiative, efforts are also under way to diversify and develop local Enhancement and regional value chains in critical minerals and clean energy products. The Africa (AGORA) conference, to be held in Growth and Opportunity: Research in Action Palermo from November 3 to 5, will seek to turn analytical insights into concrete operations and policies - focusing on energy and agribusiness - and to strengthen partnerships between policymakers, the private sector, and think tanks from Africa and Europe.

To help countries address their substantial financing needs - amid persistently high debt-servicing costs - and channel resources toward sustainable development, Italy has

launched a bilateral debt-for-development swap program that will convert €250 million of Italian official claims on low-income and fragile African countries into development investments over the next decade.

We also look forward to the new WBG Strategy for Fragility, Conflict, and Violence, which should promote tailored approaches to prevention, engagement during conflict, and post-conflict recovery. Alongside support for refugees and host communities, its core pillars should include institution building, local conflict resolution, decentralized justice systems, private sector development, and innovative partnerships.

The Banca d'Italia is supporting the national central banks of the Western Balkan countries in their efforts to modernize payment systems. This initiative encompasses the development of a Fast Payment System that meets international technical and regulatory standards and fosters regional financial integration. We wish to express our sincere gratitude to the WBG for its invaluable cooperation on this endeavor.

The WBG's focus on private capital mobilization and the implementation of the (IFC) 2030 present a historic opportunity for International Finance Corporation's Vision the WBG's public and private arms to combine their knowledge and expertise, ensuring that the development of domestic markets advances alongside stronger governance, institutional capacity, and access to essential services. The IFC's recent financial innovations have already mobilized record levels of private capital, and the first securitization transaction in September has further strengthened the originate-todistribute model. The steps outlined in IFC's Vision 2030 are ambitious, and as these initiatives advance, it will be crucial to continuously assess their impact on project quality, income generation, and long-term financial sustainability. At the same time, capital mobilization should continue to foster development additionality, market creation, and the inclusion of smaller clients in more challenging environments.

We express our firm support for the WBG's leadership in strengthening Ukraine's resilience, advancing reform, and facilitating reconstruction. These efforts are vital to mobilizing international assistance and private investment, ensuring a coordinated and effective response to the country's long-term recovery. At the recent Ukraine Recovery Conference in Rome, more than €10 billion was mobilized; alongside other initiatives, Italy pledged a €100 million grant to the IFC's Economic Resilience Action program to foster the development of a modern and efficient private sector.

To achieve these goals, we need a strong WBG - one that rests on a solid credit rating and steadfast donor support. We therefore remain committed to a strong IDA and to stable WBG governance, while further amplifying the voice of the poorest and most vulnerable members.",Fabio Panetta
https://www.bis.org/review/r251030k.htm,Adnan Zaylani Mohamad Zahid: Opening address - IFMC Roundtable at Global Islamic Finance Forum,"Opening address by Mr Adnan Zaylani Mohamad Zahid, Deputy Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the IFMC Roundtable at the Global Islamic Finance Forum (GIFF) 2025, Kuala Lumpur, 15 October 2025.",2025-10-15 00:00:00,"## Adnan Zaylani Mohamad Zahid: Opening address - IFMC Roundtable at Global Islamic Finance Forum

Opening address by Mr Adnan Zaylani Mohamad Zahid, Deputy Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the IFMC Roundtable at the Global Islamic Finance Forum (GIFF) 2025, Kuala Lumpur, 15 October 2025.

* * *

It is my great pleasure to be part of this Islamic Financial Market Committee Roundtable held in conjunction with the Global Islamic Finance Forum (GIFF) 2025. I welcome you all to this gathering that, in my view, offers an excellent platform to deepen our discussions and strengthen our collaboration and trust within our Islamic financial market community.

## Malaysia's commitment to a comprehensive financial market ecosystem

Ladies and gentlemen,

Islamic finance has progressed and evolved significantly in Malaysia over the past four decades. The establishment of the first Islamic bank in 1983, marked a pivotal point in our financial landscape. In the same year, the government issued its first sovereign sukuk in the form of Government Investment Certificate (GIC) to address the critical need for Shariah-compliant, high-quality liquidity instruments. These were later replaced by Malaysian Government Investment Issues (MGII), laying the foundation for the development of Islamic capital market.

As the number of players grew, in 1994, the Islamic Interbank Money Market (IIMM) was introduced to facilitate short-term investments based on Shariah principles, enabling participants to efficiently manage funding and liquidity risk. The IIMM is integral to the functioning of an efficient Islamic banking system: firstly, in providing the Islamic financial institutions with the facility for short-term funding and liquidity management, and secondly, serving as a key channel for monetary policy Beyond this, the IIMM serves a significant market clearing and intermediation function by enabling efficient deployment of funds, in particular surplus funds to be allocated and reallocated across the banking system. This effectively aggregates individual financing capacity to form a resilient, collective financial sector financing frontier of which, I believe, the total is greater than the sum of its parts.

Today, Islamic finance is the mainstream option in Malaysia's financial system. The Islamic capital market account for 63% of our financial system, making it a vital pillar of our capital market 1 . Islamic money market instruments maintain a significant share and have seamlessly expanded in tandem to support the growth of the Islamic banking industry - which now constitutes 2% of total financing. Malaysia is also home to the largest sukuk market globally, commanding 37% of total global sukuk outstanding . As 2 a testament, Malaysia was ranked first in the Islamic Finance Development Indicator (IFDI) 2024 for the 12 th  consecutive year, reinforcing its position as the most comprehensive market for Islamic finance.

## Future-Proofing the market - one step after another

Progress has been made, but Malaysia's journey is far from We continue to undertake efforts to build a forward-looking Islamic finance ecosystem with the following strategies

-

First, broadening the sukuk investors pool beyond traditional segments. Malaysia is committed to building a resilient, inclusive and globally connected Islamic financial A key priority is to broaden the investor base beyond traditional segments, particularly by enhancing the appeal of Islamic instruments to non-resident investors and institutional participants. This requires addressing structural limitations, diversifying sukuk structures and aligning with international Shariah interpretations to ensure greater tradability and market accessibility.

To further advance the development of Malaysia's Islamic financial market, the Government of Malaysia introduced the structure in 2024. wakalah bi al-khadamat Serving as an alternative to , sukuk structured under murabahah wakalah bi al-khadamat fulfil the criteria set by both domestic and international Shariah authorities for secondary market tradability, addressing concerns related to debt-based sukuk. The inaugural issuance of the structure is scheduled for 2026, and wakalah bi al-khadamat we look forward to broader international participation in this developmental journey. This marks a measured yet meaningful step towards Malaysia's commitment on innovation and inclusivity.

Looking ahead, the introduction of this structure is anticipated to narrow the market gap between the sovereign bond and sukuk market by improving secondary market trading and enhancing investor acceptance to Malaysia's sovereign instruments, especially among foreign players. This initiative is expected to further reinforce Malaysia's position as a global leader in Islamic finance, complementing its broader strategy to diversify offerings and respond to evolving market demands.

## Second, building a future-oriented market infrastructure, conducive for innovation.

Malaysia also has a bold vision for its Islamic finance - to establish a comprehensive Islamic financial market, anchored by a holistic, end-to-end Shariah-compliant ecosystem. A key component of this vision is the adoption of robust, transaction-based benchmark rates that reflect actual market activity, support product innovation and align with global standards. This infrastructure must also be sufficiently agile to embrace emerging technologies to enhance market access and efficiency.

To realise this vision, Malaysia has launched the Malaysia Islamic Overnight Rate (MYOR-i), the world's first transaction-based Islamic benchmark rate, aiming to spur the development of innovative Shariah compliant financial products. MYOR-i replaces the Kuala Lumpur Islamic Reference Rate (KLIRR), due to its lack of compliance with global standards for financial benchmarks. MYOR-i is designed based on International Organisation of Securities Commissions (IOSCO)'s Principles for Financial Benchmarks and is calculated based on the volume-weighted average rate of return on Shariahcompliant unsecured overnight interbank

Since its launch in 2022, MYOR-i has demonstrated its reliability and robustness as a financial benchmark with daily average volume of Islamic unsecured overnight interbank transactions increasing from RM 1.9 billion in 2023 to RM 2.8 billion in This transition to MYOR-i is not merely a technical shift, but a strategic leap forward to futureproof Malaysia's Islamic financial landscape. It is a journey that demands foresight, collaboration and steadfast commitment from all stakeholders, to actively prepare for the mandatory transition. Following industry-wide engagement, a comprehensive transition roadmap will be issued by the Bank later this quarter.

A successful transition to MYOR-i for Islamic financial products requires thorough preparation and coordinated action across several key areas: first, industry support and readiness, including system enhancements, product development, and operational alignment to ensure seamless integration of MYOR-i, second, market development: we need to enhance the diversity of market participants and promote a more dynamic interbank market by encouraging banks to manage liquidity via the interbank money market as opposed to relying heavily on central bank facilities; and third, enhance liquidity of Islamic hedging instruments, through wider adoption of the Tahawwut Master Agreement (TMA), enabling banks and corporates to effectively manage risks in a Shariah-compliant manner. Industry players must continue to build trust, establish credit lines and transact with each other. The improved liquidity of Islamic profit rate hedging instruments would pave the way for a wider adoption of MYOR-i.

And finally, advancing repo instruments to deepen the market. Malaysia remains steadfast in advancing Islamic finance by deepening the market to enhance dynamism and competitiveness. Efforts have been undertaken to improve operational efficiency and liquidity in the Islamic Interbank Money Market (IIMM).

In July this year, Malaysia's first-ever Sustainable SBBA transaction was brought to life through strategic industry collaboration. This innovative development incorporates the Sustainable Use of Proceeds Annex, which embeds a scalable mechanism for sustainability across all eligible SBBA The industry also enhanced the existing SBBA model, by incorporating best practices from the globally recognised Global Master Repurchase Agreement (GMRA) in conventional banking space. It integrates advanced features such as margining, asset substitution mechanisms and refined Shariah principles. The enhanced SBBA structure and the landmark sustainable transaction represent a strategic shift towards a more dynamic and future- ready Islamic financial ecosystem.

The enhanced SBBA structure, coupled with the issuance of the Islamic Collateralised Funding Policy Document in 2024, demonstrated its transformative Since its implementation, the standardisation of Islamic repo transactions has significantly improved the activity of the Islamic Interbank Money Market (IIMM), with secured interbank transaction volumes more than tripling from RM12.6 billion in 2023 to RM42.6 billion in 2024. This momentum has continued, with RM34.8 billion in trades recorded in the first half of 2025, underscoring strong market adoption and growing liquidity.

## Call to action: Innovate, or get left behind

Ladies and gentlemen,

As we gather here today, we must continue to ask ourselves - ""What's next?"" That is the spirit behind this roundtable-to design a market for the future. It is a call to challenge conventions, embrace new ideas and push the boundaries of what Islamic finance can achieve.

With emerging technologies and shifting market dynamics, the market must continue to drive innovation. Among the observable opportunities are tokenisation of assets, which seeks to broaden access to retail and global investors; green and Sustainable and Responsible Investment (SRI) finance, which is on the rise and rapidly expanding; and waqf-based instruments to mobilise philanthropic capital, reinforcing the ethical and social impact of Islamic finance. This includes the recently announced Cash Waqf Sukuk by the Government, allowing investors to endow either the principal or the periodic returns, transforming the funds into a lasting charitable endowment for the benefit of society.

A key highlight in our efforts to continue innovating is the signing ceremony which we will witness today, first the signing of a Memorandum of Understanding (MoU) between industry captains on the enhanced SBBA and the Tahawwut Master Agreement (TMA) and second the signing of a Cross Currency ESG SBBA between HSBC Amanah, RHB Islamic, Standard Chartered Saadiq and UOB.

These are commendable initiatives by the industry, reflecting shared commitment to standardisation, risk management, and the development of robust Islamic financial infrastructure while aligning with global sustainability This is what unfolds when we dare to ask ""What's next?""

Before I conclude, I would like to touch on a point for clarity that is important for the industry and practitioners to have as we move forward. I shared this perspective at the GIFF 2025 wrap-up session yesterday Frequently, and even during GIFF 2025, one call to action that we have often made for the industry has been to innovate and expand with risk-sharing instruments, i.e; equity type instruments. For clarity, it is not our intent to replace debt-based instruments. Debt has its place in the economy and in the Islamic economy and I mentioned yesterday, there is no Shariah issue with respect to debt in Islamic finance today. Neither we are saying or should say one is more Shariah compliant than another. Debt receives quite an extensive mention in the Quran and Sunnah but there are no prohibitions apart from the practice of and . When riba gharar one compares to for example, the prohibition of liquor or alcohol which is absolute, the late scholar Sheikh Yusuf al-Qaradawi, in one of his writings, rationalised this specific prohibition. While, according to some medical research, there is some benefit to its consumption, but the harm it can do overwhelms the benefits. If we extended this methodical rationalization to debt, and even in traditions there is recognition that there is some harm in incurring debt, one would have to conclude that the lack of explicit prohibition means that there are indeed many benefits as well. Look at today's Islamic banking system where almost all of the 47% share is debt-based instruments. One needs to ask the question, ""Would we have been able to advance as such without it?"" Indeed, most of our discussion today centres around debt-based instruments. To come back to our call to action on risk-sharing instruments, I should then emphasize that the call is to innovate and expand. Islamic finance can be versatile and the call to innovate and expand with risk-sharing instruments could further expand Islamic finance's financing frontier into new areas of growth, in particular areas where indeed some

equity participation could provide a more balanced approach to financing, bring in new partners and more. These growth areas in particular in high-end manufacturing and industry, sustainability or climate related projects and even infrastructure could do with these innovations.

## Conclusion

Malaysia's Islamic financial market has come a long way-built on decades of commitment and hard Progress of this scale cannot be achieved in isolation. It demands the collective effort of regulators, market participants, Shariah scholars, and international stakeholders. The steps we take today will shape its trajectory for decades to come. Together, we must continue to challenge conventions while upholding the Shariah principles in everything we do. Let us be guided by the timeless wisdom of the Quran:

""Cooperate with one another in goodness and righteousness, and do not cooperate in sin and transgression"" [Al-Maidah: 2].

With shared purpose and conviction, I am confident that together, we can continue to build a vibrant, inclusive, and future-ready Islamic financial ecosystem- one that not only meets the needs of today but also inspires trust and confidence for tomorrow. On this note, let the IFMC Roundtable Discussions begin - I wish you all a productive discourse ahead.

Thank you.

- 1  Securities Commission Malaysia, Statistics for Islamic Capital Market in Malaysia
- 2  IIFM Sukuk Report 2024",Encik Adnan Zaylani Mohamad Zahid
https://www.bis.org/review/r251027i.htm,Gabriel Makhlouf: The Trans-Atlantic economy - pathways and perceptions in an era of global fragmentation,"Speech by Mr Gabriel Makhlouf, Governor of the Central Bank of Ireland, at the Atlantic Council during the International Monetary Fund World Bank week, Washington DC, 14 October 2025. ",2025-10-14 00:00:00,"## Gabriel Makhlouf: The Trans-Atlantic economy - pathways and perceptions in an era of global fragmentation

Speech by Mr Gabriel Makhlouf, Governor of the Central Bank of Ireland, at the Atlantic Council during the International Monetary Fund World Bank week, Washington DC, 14 October 2025.

* * *

## Introduction

Good morning everyone and thank you for the invitation to speak to you today. 1

We find ourselves in interesting times.

The global economy has been fragmenting along geopolitical lines for nearly a decade, but this trend has accelerated, marking a swift transition with implications across the short, medium, and long term for economies big and small, alongside the other significant - and more familiar - economic transitions of ageing societies, a changing climate and an increasingly digitalised world. Recognising and understanding these transitions is fundamental if we are to shape policies that build economic resilience and enable households, businesses, and communities to navigate challenges and seize opportunities.

In my remarks today I will provide a perspective of a small, highly open, highly globalised economy to these global shifts, albeit one that is both part of the world's largest single market and which has particularly strong trans-Atlantic links with the US. I will conclude with some thoughts on the continuing need for a multilateral approach and taking the opportunity to create new paradigms.

## Finding opportunities in the face of headwinds

For Ireland, as one of those highly open and very well-connected economies, an environment of trade barriers, and policy uncertainty and unpredictability is unwelcome and entails economic costs.

In 2023, almost 17 per cent of Ireland's exports were to the US, with 36 and 12 per cent to the rest of the EU and the UK, respectively. Around a quarter of employment in Ireland is in US firms. 2   So, as well as the ramifications of the wider trend towards more fragmented global trade, understanding the implications of changes in US policy have been key areas of focus for us at the Central Bank of Ireland. Some of the key findings from our analysis offer lessons of broader relevance, particularly for small, open economies.

First, to understand the potential impact of US tariffs on Ireland, it is important to have a clear picture of the Irish economy. It comprises a small number of large, productive, globally oriented foreign-owned multinational enterprises (MNEs), alongside domestic Irish-owned firms that dominate employment. MNEs make up 3.2 per cent of active firms, but around of aggregate employment. one quarter

However, MNEs are not homogenous. We estimate that roughly half of MNE workers are employed in non-tradable sectors, largely serving the local economy, for example in the retail and accommodation sector. This type of 'horizontal' foreign direct investment (FDI) is relatively insensitive to tariffs. However, the most material risk to the Irish economy comes from the other half, who use Ireland as an export platform for their global sales, serving the rest of the EU, US, and broader international markets. These firms are concentrated in sectors such as pharmaceuticals ('pharma') and information technology, directly exposed to tariffs and other US industrial policy choices.

US-owned firms account for 70 per cent of employment in these export-oriented MNEs and over 80 per cent of capital investment. As I said earlier, Ireland's strong links with the US stand out in an EU context: we have the highest concentration of US MNE activity of any EU country, both in manufacturing and outside manufacturing.

Over the last number of months, we have looked at the potential effects of tariffs on this type of FDI, particularly in the pharmaceutical and medical devices sectors.

Our analysis suggests that 15 per cent tariffs - as per the recent agreement - will reduce exports to the US. But they are not prohibitive to trade. For one thing these firms have already made huge capital investments in setting up their production facilities in Ireland. Another is that US tariffs do not diminish Ireland's attractiveness as an export platform to the rest of the EU or other non-US destinations. 3

More than half of Ireland's pharma exports are destined for the rest of the EU or other non-US countries and so are not subject to any new tariffs. In addition, while we know that US tariffs can affect the of pharma products, our analysis also shows that pricing the sensitivity of Irish pharma export to tariffs is likely to be relatively low in the volumes short-run given the highly specialised nature of pharmaceuticals produced in Ireland.

## Irish-owned firms

While MNEs understandably get a lot of attention, given they are the primary source of Ireland's exposure to US tariffs, it is also important to examine the exposure of domestic, Irish-owned, firms.

Our analysis shows that, although they are not as export and import-intensive as foreign multinationals, over 80 per cent of workers in Irish-owned firms in manufacturing, wholesale and retail participate in international trade, whether exporting or importing goods.

The key difference between such exporters and MNEs is that the former are far more likely to export to our nearest neighbours geographically - the rest of the EU and the UK - rather than the US market. Only 12 per cent of Irish-owned firm exports are to the US, which is a lot smaller than the 30 percent we see in aggregate.

In total, 5 per cent of employees work in Irish-owned firms that export to the US. However, Irish firms that export to the US tend to be among the most productive and geographically diversified Irish exporters. Their exports to the US account for only a third of their total exports on average, and under a tenth of their total sales, some of

which are also directed to the domestic market. Taking this into account, we estimate that less than 1 per cent of workers in Irish firms are directly tied to US exporting activity.

A key question is whether such firms will be able to adapt to tariffs and potentially diversify to other markets. Of course, the extent to which they have to do that will partly depend on US importers and ultimately US consumers but recent survey evidence before the EU-US trade deal - suggests they will be able to do so. 4  It found that one third of manufacturing firms in the Irish market were already taking steps to diversify towards other markets. Notably, Irish firms exporting to the US had lower production, employment, and price expectations than other exporters, but this was entirely driven by those that were not diversifying.

One other notable result from this research is the two-sided nature of international trade within firms. Around 98 per cent of manufacturing exporters also import intermediate inputs. Irish firms exporting to the US import almost four times more from the US than other exporters. This highlights how interdependent global supply chains have become, and how difficult it can be to anticipate the ripple effects of tariffs and other similar policies.

## Projections for the Irish economy

What does this imply for our economic projections?

While the economic outlook for Ireland is not as favourable as it would have been had tariffs not been introduced, the effective tariff rates now in place covering EU-US trade are not prohibitive to trade. However, policy uncertainty remains elevated, even if it has fallen from its peak earlier in the year.

Overall, the domestic economy showed resilience in the first half of 2025, but headwinds persist. Continued expected growth in real disposable incomes, amid a stable labour market - labour force participation is high, and unemployment is low supports continued growth in consumer spending. But, some signs of easing momentum are emerging and supply-side constraints to sustainable growth in the domestic economy remain prominent.

Overall, our latest projections anticipate a slowdown from 2.9 per cent growth this year to just over 2 per cent in the coming years. 5

The new agreement between the EU and US, although yet to be fully implemented, is expected to reduce Irish growth in the medium-to-long run, driven by activity moderately in MNE-dominated sectors, particularly pharmaceuticals and chemicals. The current tariffs of 15 per cent lead to reduction of around 1 per cent in Irish economic output relative to a no-tariff scenario over the long-term. Diverted exports to markets outside the US partially offset the direct impact of the tariffs.

Consumption and particularly investment, on the other hand, both fall faster and further than GDP, as firms and households respond more rapidly to the new environment, settling close to 2.5 and 3.5 per cent respectively below the baseline. We also anticipate that tariffs will lead to a moderate structural shift, with reduced manufacturing activity and increased service sector growth as resources are reallocated in response to

these global shocks. This reallocation helps to mitigate the negative effects of tariffs on goods.

Longer-term, economic policymaking faces a less-integrated global economy. Geoeconomic fragmentation is one of a number of key structural changes - along with population ageing, a changing climate change, and the ongoing march of digital technologies - that the global economy will have to adapt to. In the case of Ireland, capital investment and productivity have historically accounted for around 80 percent of Irish economic growth. 6  So, in fact, the main risk for Irish economy from this fragmentation is lower investment flows.

A geopolitical shift towards 'friend-shoring' in the EU could potentially help compensate any reduction in future investment by US MNEs, although our research suggests that this regionalisation of economic linkages is likely to be inflationary and could weaken economic growth across the euro area. 7

## The Euro area

Geoeconomic fragmentation of course does not just impact Ireland. In the case of the euro area, it poses several risks to the inflation and growth outlook. As US tariffs are global in nature, there is the potential that trade diversion is stronger than the current (rather limited) effect assumed in the latest ECB staff projections. Scenario analysis suggests that this would have only a mild effect on the euro area, with increased exports to the US offset by weaker exports to China and the rest of the world. Apart from diverting to different markets, Chinese firms could also lower their export prices to offset the effect of US tariffs. In this scenario, an increase in (cheaper) Chinese imports has a large negative impact on inflation and growth. 8

And of course, there is the possibility that tariffs may induce bottlenecks as firms restructure their global supply chains. A scenario resembling pandemic-era disruption would see inflation rise considerably, when accounting for input-output linkages through production networks, but have a minimal effect on growth.

As for our current monetary policy, at our last meeting in September, my colleagues and I on the ECB's Governing Council decided to keep rates unchanged. We continue to be in a good place with the disinflationary process behind us, the European economy showing resilience and inflation where we want it to be.

Real euro area GDP growth is projected to average 1.2 per cent in 2025, 1 per cent in 2026 and 1.3 per cent in 2027. Surveys suggest the economy maintains positive underlying momentum. While the trade agreement with the US has reduced uncertainty somewhat, the overall impact of the change in the global policy environment will only become clear over time. Risks remain that renewed trade tensions could further dampen exports, investment, and consumption. By contrast, higher than expected defence and infrastructure spending and productivity-enhancing reforms would add to growth.

We are not pre-committing to a particular rate path and will continue to determine the appropriate monetary policy stance by following a data-dependent and meeting-by-

meeting approach. In particular, we will base our interest rate decisions on our assessment of the inflation outlook and the risks surrounding it, in light of the incoming economic and financial data, as well as the dynamics of underlying inflation and the strength of monetary policy transmission.

## Policy recommendations

Where does that leave us?

The Irish economy faces the current challenges from a position of relative strength, which policymakers can harness in supporting the economy to adapt over both the short and long run. Ireland has benefitted from decades of FDI-led growth, and its interconnections with the US economy and its membership of the EU have led to higher productivity, investment, and human capital. This, along with Ireland's open, flexible, and skilled labour force, creates strong conditions to adapt to geoeconomic shifts.

Nonetheless, a slowdown in inward investment flows would reduce Ireland's long-run growth potential. Global fragmentation could also affect other long-term goals, such as the transition to net zero, by restricting the supply of critical inputs for new technologies.

It also brings to the forefront the need for clear priorities in Irish and European economic policy. First and foremost, policy needs to focus on the fundamentals, managing the short term while planning for the medium term, ensuring our frameworks are fit-for-purpose and learning the lessons of the past while preparing for the future. Successful economies need stable and sustainable macroeconomic frameworks and sound fiscal and monetary policies, along with stable and well-regulated financial systems and well-functioning markets.

For Ireland, against a backdrop of strong economic and population growth, continuing to attract investment will require a particular focus on closing infrastructure gaps in water, energy, transport, and housing as the Government set out in its Budget last week. Of course, we shouldn't just stop at the border.

Ireland is part of the world's largest single market and there is untapped potential both in it integrating further into that market  as well as  in overall European economic activity.

9   One year on from Mario Draghi and Enrico Letta's reports on the future of the European economy, it remains essential that we make progress on their recommendations, if we want to tap - and indeed realise - that potential.  As the world's largest trade bloc - accounting for around 15.8 per cent of world trade 10   deepening the Single Market offers a hedge against broader global trade fragmentation, helping to reduce an over-reliance on external dependencies, fostering innovation, and promoting stable growth. That includes realising the potential of the EU's capital markets and unlocking the almost €12 trillion in savings and cash deposits held by Europeans. 11

## The need for collective solutions in the face of global challenges

At this point in the twenty first century, it is undoubtedly the case that the most significant headwinds we face today, be they from geoeconomic fragmentation or

managing the challenges of a changing climate or harnessing digitalisation and innovation, are global in nature and demand collective solutions.

This is precisely where organisations such as the Atlantic Council and in fact the IMF at the start of its Annual Meetings this week - have important roles to play.

The Council's mission - to promote constructive leadership and engagement in international affairs and provide a forum for navigating the economic and political changes defining our times - is precisely what we need today so that we help to shape policy choices and strategies that create a more free, secure, and prosperous world.

The IMF's convening power brings us all to the same table, offering a vital forum for dialogue and coordinated action among its members. It's not a theoretical exercise but the essential work of managing a more uncertain world, one that requires us to see past domestic concerns to the broader interconnected reality.

The IMF's role of promoting stability and cooperation for every single member and acting as an independent and trusted advisor is more critical now than ever, and I have long appreciated its dedication to providing candid assessments across the globe. st is earned through transparency, accountability, and a demonstrated credible commitment to act in, and serve, the best interest of society. I value this clear-eyed view and the stability it underpins.

## Conclusion

Small, open economies value engagement with global institutions to address shared challenges. Whether we are central bankers or government officials, we value the relationships - whether international financial institutions or trans-Atlantic councils that support our commitment to multilateralism and international cooperation, collaboration and understanding.

Diversity of experience and diversity of thought strengthens us both as institutions and as individuals.

We need to recognise that the world which we grew up with has changed and that, coupled with the ongoing transitions we face, more change is guaranteed.

I suggest that our energies should be tilted towards the challenge of creating the new world ahead of us rather than the comfort of preserving the old. The stage is now set for building new relationships, adopting new frameworks, and creating new paradigms for the world that our children and grandchildren will inhabit.

I know that Irish institutions are committed to international cooperation, and we will continue to advocate for - and play a key role in - developing the new multilateral order that our economies need and our communities want.

1  Thanks to Cian Ruane, Thomas Conefrey, Conor O'Shea, and Martin O'Brien for their help in preparing these remarks.

- 2 CSO Publication: Business in Ireland
- 3  Signed Article:  On the Fault Line? The Irish economy in a time of geoeconomic fragmentation - CBI (2025) (PDF 1.4MB)  - See Box C ""Multinational Expansion in the Era of Trade Conflicts"" based on the model in  Garetto, Oldenski, Ma and Ramondo (2025).
- 4  Survey data on exporter behaviour is sourced from a special module of the monthly European Commission's monthly Business and Consumer Surveys (BCS) sponsored by the Central Bank of Ireland. See figure 10 in Signed Article Q3 2025.
- 5 Quarterly Bulletin 3 2025
- 6  Conefrey et al., 2024.
- 7  Clancy, Smith and Valenta, 2024
- 8  Scenario analysis conducted as part of the  ECB staff macroeconomic projections for the euro area - September 2025
- 9  See President Lagarde's remarks at the Bank of Finland's 4 th   International Monetary Policy Conference.
- 10 The EU's role in global trade
- 11 Governor Makhlouf remarks at NABE",Gabriel Makhlouf
https://www.bis.org/review/r251030e.htm,Michele Bullock: Building bridges in the digital economy - modernising Australia's payments system ,"Speech by Ms Michele Bullock, Governor of the Reserve Bank of Australia, at The Daily Telegraph's Future Sydney: Bradfield Oration, Sydney Opera House, Sydney, 24 October 2025.",2025-10-24 00:00:00,"

## Speech

## Building Bridges in the Digital Economy: Modernising Australia's Payments System



Michele Bullock |

*!

Governor

The Daily Telegraph’s Future Sydney: Bradfield Oration, Sydney

Opera House

Sydney — 24 October 2025

## Introduction

I'd like to begin by acknowledging the Traditional Custodians of the land on which we meet and pay my respects to Elders past and present.

It is an honour to be here with you today at this year's Bradfield Oration.

Dr John Bradfield's name is etched into Australia's history as a visionary of transformative infrastructure. As the chief engineer behind the Sydney Harbour Bridge, Bradfield didn't merely build a crossing, he built a connection — one that shaped how Sydney functioned, moved and grew. His legacy reminds us that infrastructure doesn't just support a nation — it expands its possibilities.

While physical infrastructure like transport networks continue to shape our cities and economy today, it's increasingly digital infrastructure and growth in the digital economy that underpin how people live, work and transact. Innovations such as mobile phone apps and cloud software are now woven into the fabric of everyday life for most Australians.

Among the most frequently and widely used pieces of digital infrastructure in the country is our payments system. Whether you're buying a coffee, paying the salaries of your employees or receiving a government payment, the payments system is part of the daily experience. It matters not just to central bankers, economists or technologists, but to every Australian.

Given its importance to our lives, it is vital that the payments system provides its users — households, businesses and governments — with a range of valued and trusted payments services.

The RBA, through its Payments System Board, is the primary regulator of the payments system in Australia. The Board and the RBA work with participants in the payments system so that it meets the needs and expectations of the Australian public.

The RBA also performs other crucial roles in the payments system. For example, we operate the infrastructure that transfers money between financial institutions when individuals, businesses and governments make payments. We also issue Australia's banknotes, which are still a very important part of the way people pay in Australia.

Our role in the payments system complements our other responsibilities in the economy and financial system — setting monetary policy, safeguarding financial stability and providing banking services to the Australian government.

In the spirit of Bradfield, my speech today will focus on the importance of continuing to build a modern, innovative and robust payments system in Australia, and the roles that industry and the RBA can play in this process. In doing so I'll cover three aspects of our payments system: digital payments; the RBA's infrastructure underpinning the digital payments system; and cash.

Australia's digital payments system and the role of innovation

Australians rely on digital payment services such as cards and bank account transfers to support their day-to-day economic activities. These services have become more important over time: today, Australians make, on average, about 700 digital payments per year, up from around 100 per year at the turn of the century (Graph 1).

Graph 1

## Transactions per Capita

Rolling annual sum



Adjusted for a reporting change in May 2018, which decreased the number of direct credit and direct debit payments. *

Sources: ABS; Ipsos; RBA.

As users of the digital payments system, we expect the services for sending and receiving payments to have certain attributes (Figure 1).

Figure 1: Desirable Attributes of Payments Services



ja]

iS

Safe Money and data are protected







Reliable Always works when you need it

Low-cost Fair and affordable pricing

Easy to use Simple and convenient

Typically, we want these services to be:

- » Safe — we want to feel confident that our money and information won't be lost or stolen.
- » Reliable — we want to know that these services will work when we need them to, with payments successfully going through to the intended recipients.
- » Low-cost — we want prices for these services to be fair and affordable.
- » Easy to use — we want our payments services to be simple and convenient, so we don't have to spend a lot of time and effort using them.

In my view, Australia's digital payments system already does well in delivering these attributes and meeting users' expectations. Indeed, I often hear from people that come to Australia that they are impressed with the quality of our payments system.

Of course, this does not mean there is no scope for improvement. Later in this speech, I will outline several areas where we think there could be further progress in the digital payments system.

The RBA helps to achieve these key attributes through the Payments System Board's mandate to promote a safe, efficient and competitive payment system in the public interest. Sometimes that means working with industry to balance these attributes against each other to reach the best outcome for the Australian people overall. The RBA's current Review of Merchant Card Payment Costs and Surcharging is a good example of attempting to balance not only the desired attributes of the payments system but also the multiple views of providers and users. We are currently consulting on our preliminary views on potential regulatory changes that could be in the public interest, so I won't discuss these issues further in this speech except to say we are going to take the time to get these changes right.

There are a range of factors that can help deliver the desirable attributes of Australia's digital payments system. Today I want to focus on the key role of innovation.

Ongoing innovation by providers of digital payments services — banks, fintechs and payments infrastructure operators — is needed to keep the digital payments system fit for purpose. Because the external environment and people's needs and expectations evolve over time, the payments system must adapt to remain safe, reliable, low-cost and easy to use.

This is no different to other forms of infrastructure, which also require periodic investment. For example, transport infrastructure like buses and trains need upgrading from time to time to integrate new technologies, and make them safer and easier to use.

A key focus of innovation by the payments industry over the past decade has been the introduction of easier ways for Australians to make and receive payments. The development and adoption of new payment options in Australia has been, in some respects, world leading.

A good illustration of this is the widespread adoption of contactless card payments — often referred to as 'tap-and-go'. This happened much earlier in Australia than in many other countries (Graph 2).

## Contactless Card

Graph 2 Payments*



*

Observations are not directly comparable due to differing survey methods and inclusions across economies.

2024 Australian data estimated using partial data from the Retail Payments Statistics. 2K

Sources: BIS; RBA calculations based on data from Colmar Brunton, Ipsos and Roy Morgan Research.

The introduction of contactless card payments was made possible because of innovation and investment across card issuers, terminal providers and businesses. This didn't happen overnight though — we needed a critical mass of cards issued with chips and terminals accepting tap-and-go for it to get momentum. I recall Commonwealth Bank running a small-scale trial in the Sutherland Shire, but it didn't really seem to take off. Only once the supermarkets picked it up did it gain the momentum needed to effect a broad change in payment behaviour. This demonstrates that the benefits of innovation sometimes only become evident when it reaches a minimum scale.

Another example of innovation by the payments industry was the introduction of Australia's fast payments system — the New Payments Platform (NPP) — in 2018. It allows people to transfer money to another person's bank account in a matter of seconds, 24 hours a day, every day of the year. The use of PayIDs, which allow NPP payments to be addressed to someone's phone number or an email address, has made initiating payments between accounts easier and safer.

For payments innovations like tap-and-go and the NPP to be a success they require widespread adoption. This is commonly referred to by economists as a 'network effect', whereby the value of a service increases the more people use it.

We see network effects play out in other forms of infrastructure too — take electric vehicles (EVs) for example. For EVs to be a viable choice for most people, there needs to be a widespread and reliable network of charging stations. But it's not just about quantity, it's about standardisation. When charging points use common connectors, an EV can charge anywhere. As more charging stations are built, EVs become more attractive to consumers. And as more people adopt EVs, the incentive to invest in charging infrastructure grows. It's a virtuous cycle, and each new connection strengthens the network and increases its value for everyone.

It can sometimes be challenging to achieve a network effect in private card or account-based payments systems without wide payment industry and public sector support to facilitate a level of coordination.

While banks and other payment firms have strong commercial incentives to innovate in their own branded payments services, they're often less motivated to enhance the shared infrastructure those services rely on. At times, this has led to coordination and standardisation challenges that prevent progress on innovations that would benefit the broader public. It is in these situations that the RBA can step in and encourage the industry to collaborate to upgrade infrastructure or develop industry standards.

A clear example of this was the Strategic Review of Innovation in the Payments System that we undertook more than a decade ago, which identified key gaps in the system that needed to be addressed through cooperation. These included the lack of real-time payments, 24/7 availability, the ability to carry more information with a payment and simple addressing. This laid the groundwork for the development of the NPP that I noted earlier.

To be clear, developing the NPP wasn't a top-down directive — it came from identifying the problem, presenting the evidence and working with industry to find a solution. In my view, this was an example where the industry 'took the bit between its teeth and ran with it'. That spirit of collaboration — building consensus, rather than imposing regulation — is the way we've achieved many of the major enhancements in Australia's payments system.

Of course, progress hasn't always been smooth. After the successful launch of the NPP, adoption was slower than expected because of delays in the rolling out of key services by some providers. In response, the RBA wrote to the relevant major banks requesting that they deliver key NPP services by a certain date. We then monitored their progress in doing so. Use of the NPP has since picked up and it now processes an average of about 5 million transactions every day.

The RBA's involvement in the development of the NPP illustrates how we can be a catalyst for industry innovation in Australia's payments system. I'm confident that, without our actions, the fast payment capabilities that Australians now benefit from would have been much harder to achieve.

## Focus areas for further progress in the digital payments system

Despite the progress made to date, there are aspects of the digital payments system where further innovation is required, whether to build the capabilities needed to unlock future opportunities or strengthen the system against emerging threats. As Brad Jones, the RBA's Financial System Assistant Governor, noted in his recent speech, innovation and resilience are not opposing forces — they can, and should, reinforce one another. '1!

In each of these areas the RBA and other regulators are cooperating with industry and the Government to achieve outcomes that benefit the broader public.

## Modernising the account-to-account payment system

The first area of focus is modernising the account-to-account (A2A) payment system.

An important conversation is currently underway about the future of Australia's Bulk Electronic Clearing System (BECS) — the infrastructure that processes batches of individual payments like payroll and government support payments. While BECS continues to provide reliable and low-cost bulk payments, it is ageing and lacks features that are expected in a modern payments system and that support innovation. These include real-time, 24/7 processing and the ability to include detailed payments data, both of which are available via the NPP.

In late 2023, the payments industry decided to work towards winding down BECS by the end of this decade. The RBA's review of this decision concluded that there are a number of challenges that industry must address to ensure an effective and orderly transition of payments from BECS to alternative payment systems. '?! The most fundamental of these is the need to develop a vision for the future of the A2A payments system that benefits the Australian public. In essence, this means considering how to achieve safe, reliable, low-cost and easy to use payments between bank accounts into the future.

In response, the relevant industry bodies recently launched a public consultation on the future of A2A payments. Industry has also established an A2A Payments Roundtable involving the RBA and Treasury.

The Roundtable is using the feedback from the consultation to develop a shared vision by the end of this year, and a plan for achieving that vision by mid-2026. This work will involve considering potential trade-offs, such as those between payment cost and reliability, between innovative and legacy systems, and between customer needs and payment provider priorities. As with all payments systems, the interests of the various parties are not necessarily aligned.

Nonetheless, I would encourage all industry participants and the public sector to take this opportunity to work collaboratively to develop a system that delivers the attributes the public expect, and that supports innovation and resilience in our economy, well beyond 2030. Achieving this is in all of our interests.

## Enhancing cross-border payments

The second area where progress is required is enhancing cross-border payments.

Innovation matters not just for domestic payments, but also cross-border payments. Cross-border transactions, such as when people send money overseas, can be relatively costly and slow. In an increasingly interconnected world, it is crucial that cross-border payments benefit from the types of modern technologies that are underpinning improvements in domestic payments. This is a central theme of the international policy agenda to enhance cross-border payments.

Australian regulators and financial institutions are playing their part in this international effort. A priority for the RBA has been engaging with industry over the adoption of richer data and new capabilities in Australia's cross-border payments infrastructure. A good example of this is the recent introduction of the International Payments Service (IPS) on the NPP. The IPS allows incoming crossborder payments to be processed on a real-time, 24/7 basis, so that Australians can receive funds in their accounts faster. It is pleasing to see substantial growth in the number of IPS payments processed over the past year, including outside standard business hours.

A major challenge in cross-border payments is managing financial crime risk. Compliance processes at financial institutions are extensive and complex, which slows transactions down and increases their cost. To help address this challenge, the RBA has collaborated with central bank partners and the Bank for International Settlements Innovation Hub on Project Mandala. This project explored the use of digital technologies to automate compliance processes, reducing risk and the potential for failed transactions. The adoption of this kind of solution could ultimately make cross-border payments faster and cheaper for customers.

## Combatting fraud and scams

The third focus area is combatting fraud and scams in payments.

As anyone who has experienced a fraud or scam event would know, they can have a serious and lasting impact on people and organisations. Implementing effective measures to combat fraud and scams is therefore vital for ensuring our payments system is safe — protecting users and supporting confidence in digital payments. This is imperative for the government, regulators and the payments industry.

Innovation by payments providers can play a crucial role here. For instance, the new 'Confirmation of Payee' service that is being rolled out on the NPP represents an important industry collaboration to help to reduce certain types of scams. It enables people transferring funds to someone else to verify whether the account details, including the name, exactly or closely match what they expect before proceeding with the payment. This complements similar functionality already available through the PayID service. Individual banks are also implementing their own innovative measures, such as using artificial intelligence (AI) to detect high-risk transactions.

The fight against fraud and scams will no doubt require further innovation, adaptation and cooperation by the payments industry — we can be certain that fraudsters won't stand still in their efforts to steal people's data and money. One important example is the need to protect card users against advances in quantum computing, which is expected to result in current encryption standards being broken sometime in the future. This requires migrating card payments to the Advanced Encryption Standard (AES), a quantum-safe solution. '?!

## Strengthening operational resilience

The final area of focus is strengthening operational resilience in the payments system.

This objective is about ensuring our payments system is secure and reliable and will remain so in the future. Payments infrastructure is often compared with plumbing — people tend not to notice it until something goes wrong. And when it does, it must be fixed quickly.

Today's operating environment is increasingly complex, with many risks:

- » Cybersecurity threats are more frequent and sophisticated, complicated by growing geopolitical tensions.
- » Technology systems are growing in complexity, with some operators still reliant on legacy systems.
- » Third-party technology providers are increasingly performing critical functions — a failure in one could have ripple effects across the system.

To manage these risks, financial institutions, their technology providers and operators of critical payments infrastructure must strengthen their resilience across three fronts:

1. Prevention — strong cybersecurity, backup systems (like multiple data centres), and staff and user awareness to avoid things like clicking on malicious links or inadvertently sharing information.
2. Detection — having tools in place to monitor, identify and scan for threats and vulnerabilities.
3. Mitigation — having the capability to respond quickly when issues arise, minimise disruption and restore services promptly.

The RBA has a key role to play here as it oversees the governance and operation of payments and settlement systems. A key priority is ensuring these systems have a strong operational risk management culture and capabilities to manage risks effectively, including those faced when maintaining critical legacy systems or upgrading systems.

Beyond these oversight activities, the RBA is also researching system-wide risks as well as approaches that would help boost the overall resilience of the payments system. A current area of focus is understanding how interconnections between systems can amplify the impact of outages.

This work aims to help industry better prepare for potential operational problems across various parts of the system.

## Australia's infrastructure for settling payments

Alongside its policy role through the Payments System Board, the RBA operates Australia's interbank settlement system — the Reserve Bank Information and Transfer System (RITS). RITS enables banks and other approved institutions to settle interbank obligations using their accounts at the RBA. When you make a digital payment in Australia, the movement of those funds between financial institutions takes place using RITS.

RITS is critical to Australia's financial stability, ensuring payments are settled safely and efficiently without the build-up of payment obligations and settlement risk between financial institutions. RITS currently settles around $300 billion a day — which is equivalent to turning over Australia's annual GDP about every nine days.

When a critical system like RITS experiences a disruption, the impact can be widespread. Unfortunately, this was evident during a major outage to our systems in October 2022. Following that incident, the RBA commissioned an external review and has since launched initiatives to strengthen RITS's operating model, IT controls and governance. These initiatives are intended to ensure that RITS operates at the extremely high standard of availability and resilience required for such an important national system.

Over its 30-year history, RITS has evolved in line with payment innovations and the needs of the public. One of the most important milestones was the launch of real-time gross settlement in 1998. This change allowed banks to settle high-value payments in real-time, payment by payment, alleviating the risk involved with waiting until the following business day to settle these obligations.

Another notable change occurred in 2018, with the public launch of the Fast Settlement Service (FSS). The FSS enables real-time, 24/7 settlement of payments made via the NPP. While the FSS handles much smaller values than RITS (around $5 billion daily), it processes high volumes — about 4 million transactions per day — most in under a second. !*!

While RITS continues to work well and remains secure and efficient, we recognise that because it is the critical central settlement infrastructure for Australia, it needs to remain fit-for-purpose not just now but into the future. In 2026, we'll begin exploring options to modernise RITS, including assessing whether:

- » using modern data exchange methods can improve user experience
- » operating hours could be extended or made more flexible
- » settlement using central bank money could be made available for a wider range of transactions.

In parallel, we've been researching how new forms of digital money, such as central bank digital currencies and privately issued tokens, may be used to support wholesale payments and settlements. !°! This is providing valuable insights into how the RBA's settlement infrastructure may need to evolve in the future.

With payments and financial market transactions innovating rapidly, modernising RITS is essential to ensure Australia's payments infrastructure remains fit for purpose, supporting innovation, resilience and economic growth well into the future.

## The RBA's role in Australia's cash system

While most payments are now made using digital means, cash remains an essential part of our payments system.

Cash contributes to the resilience of the payments system because it is an important back-up payment method when digital payments are not available. This includes during system outages and natural disasters, such as the floods in Queensland earlier this year.

Cash also supports an inclusive payments system — 1.5 million Australians still rely on cash to make their everyday payments, including some older Australians and vulnerable members of society who may have fewer available payment options than others.

And cash is a store of value for people, including in times of uncertainty. During the COVID-19 pandemic period between 2020 and 2022, for example, we issued over $30 billion of banknotes, mostly $50 and $100 notes, which tend to be held for precautionary purposes rather than for day-today transactions.

For these reasons, the RBA and the Government are committed to ensuring that cash continues to be a viable payment method for as long as Australians need or want to use it. To this end, the infrastructure underlying the cash system needs to be as efficient, sustainable and resilient as possible.

The RBA plays an important role in the wholesale cash distribution system as the sole issuer of Australian banknotes. We issue bulk quantities of banknotes to the major banks, mostly from our main distribution, processing and storage site in Victoria. The banks then distribute these to the broader community. And we support the availability of high-quality banknotes around the country through various incentive arrangements.

Just as innovation has shaped digital payments, it has been important for meeting our objective to provide banknotes that are secure and trusted by the community. The RBA pioneered the use of polymer (or plastic) for banknotes in the late 1980s, introducing several groundbreaking security features, including a clear window with a hologram. The greater security and durability of the polymer banknotes introduced in the early to mid-1990s contributed to a sustained period of low levels of counterfeiting and longer circulation life, leading to over $1 billion in savings.

As technology evolved in the 2000s and 2010s, we saw counterfeiting again begin to rise and so in response the RBA further upgraded the security features of our banknotes between 2016 and 2020. A combination of these new banknotes, and effective law enforcement, helped to reduce counterfeiting once more to low levels — in 2025 you would have to handle, on average, over 165,000 banknotes before you received a counterfeit, compared with approximately 32,000 banknotes in 2015.

While the RBA plays a key role as the issuer of banknotes, the movement of cash around the country and into the hands of consumers and businesses relies on the banks, cash-in-transit companies and the broader cash industry.

The decline in the use of cash for transactions has put the cash distribution system under pressure. We are participating in discussions with the major banks, the broader industry and Government about how to evolve the operating model to support the future viability of cash. In July, the financial regulators issued a consultation paper on potential regulation to better manage risks in the cash distribution system. '°! In addition, the RBA has worked closely with government agencies and key participants in the cash distribution industry on business continuity arrangements, in the event of a disruption to the supply of cash services.

Work to support a more efficient, sustainable and resilient cash distribution system is ongoing, and will require cooperation and a shared commitment to meeting community expectations for continued access to cash services.

## Conclusion

Bradfield gave us the Sydney Harbour Bridge — a connection built to serve generations of people he would never meet. But he also dreamed of a different connection: a comprehensive underground rail system in Sydney that didn't come to life until decades after his death. His story is a reminder that visionary infrastructure often takes time to realise, but its impact can last for generations.

Like Bradfield we must think beyond the present. Our payments system must remain safe, reliable, low-cost and easy to use — but also innovative and future-ready. Any less would fall short of what Australians have come to expect and limit our economic potential.

Maintaining and evolving our payments system is therefore not optional. It is an economic imperative. Just as John Bradfield envisioned a nation connected through steel and stone, we must now envision a nation connected through trust, technology and innovation.

## Endnotes

- {*]| I would like to thank David Emery, Sorcha Ingram, Kasia Kopec and Grant Turner for excellent assistance in preparing this speech, as well as Duke Cole, Greg Dicinoski, Samuel Evangelinos, Chay Fisher, Kate Green, Andrew Hauser, Brad Jones, Kathryn Miegel, Chris Schwartz, Kylie Stewart, Chris Thompson and Faye Wang for their valuable input and comments.
- 1 Jones B (2025), 'Anti-fragility and the Financial System', Opening remarks to FINSIA: The Regulators, Sydney, 12 September.
- 2 See RBA (2025), 'Decommissioning of the Bulk Electronic Clearing System: RBA Risk Assessment [PDF]', March.
- 3 For further discussion, see Jones, n 1.
- 4 Readers might note the difference between the 5 million in daily average NPP transactions and 4 million in daily average FSS settlements. This difference arises because there is no need for settlement via the FSS when the payer and recipient use the same financial institution.
- [5] In Project Acacia — a joint experimental research project the RBA is undertaking with the Digital Finance Cooperative Research Centre — we have been exploring with industry partners the role that central bank and privately issued forms of digital money could play in the development of wholesale tokenised asset markets. For further details of this project, see RBA (2025), 'Project Acacia: RBA and DFCRC Announce Chosen Industry Participants and ASIC Provides Regulatory Relief for Tokenised Asset Settlement Research Project', Media Release No 2025-18, 10 July.
- [6] Council of Financial Regulators and the Australian Competition and Consumer Commission (2025), 'Regulating Cash Distribution in Australia [PDF\_J, Consultation Paper, July.",Michele Bullock
https://www.bis.org/review/r251030c.htm,Sarah Breeden: Not just token gestures,"Remarks by Ms Sarah Breeden, Deputy Governor for Financial Stability of the Bank of England, for the panel ""Real world assets tokenisation: what asset classes will work – and which won't"", at DC Fintech Week 2025, Washington DC, 15 October 2025.",2025-10-15 00:00:00,"Opens

Skip to main content

## Not just token gestures speech by Sarah Breeden

Based on remarks given on the 'Real World Assets Tokenisation: What Asset Classes Will Work - and Which Won't' panel at DC Fintech Week 2025

Opens

## Published on 15 October 2025

Sarah Breeden discusses the significant steps the Bank of England is taking to enable responsible innovation in finance in this period of profound technological change. She looks ahead to the Bank's forthcoming consultation on its stablecoin regime to deliver their greater use in 'real world' payments, and the importance of active engagement with and by industry to drive the innovation we seek.

## Speech

ItÕs a pleasure to be here at DC Fintech Week 2025 to speak about tokenisation and Distributed Ledger Technology (DLT), given their potential to transform real world retail and wholesale financial services.

This technology allows the creation of common shared ledgers that can be updated nearsimultaneously across all parties in a financial transaction, thereby eliminating the need for each party to maintain its own records.

It enables financial assets to be digitally represented (ÔtokenisedÕ) on such shared ledgers and settled near instantaneously.

And in this way, it can facilitate faster, cheaper processes in wholesale financial markets and cross-border payments - with fewer intermediaries, less operational risk, shorter settlement windows and smart contracts automating processes such as coupon payments on bonds.

In addition, these ledgers can increase the liquidity of a wider range of financial assets (for example private assets, units in investment funds, or real estate), enabling them to be held, traded or even used as collateral by a broader set of players. Assets can also be 'fractionalised' so that investors can hold a portion (eg of a property) if they can't afford the whole.

Applied to retail payments, these technologies can offer households and businesses new functionality Ð embedding payments more deeply, automatically and efficiently into our increasingly digital lives.

They could enhance online shopping by enabling a buyerÕs funds to be reserved at time of purchase and automatically released to the seller only once physical delivery of goods is confirmed. That could enable greater competition in online retail if consumers are more confident to shop online with a new merchant or platform.[1] footnote

Opens

Such functionality might also help to alleviate the perennial challenge of late payments to small businesses, as they could receive payments automatically upon delivery. Lower cost payments could also make micropayments (those for very small amounts) more economical, so that, for example, customers pay for the newspaper articles, book pages or songs that they consume as they do so, rather than some being putting off by having to pay flat subscriptions upfront.

In addition, as we start to see so-called ÔagenticÕ artificial intelligence (AI) being deployed in commerce[2] - where an AI-powered virtual ÔagentÕ learns a userÕs preferences, autonomously browses online stores, compares prices and makes purchases on a userÕs behalf Ð tokenisation and DLT could support this by enabling the AI agent to integrate more seamlessly with real-time, digitally native payments infrastructure than it can with traditional technology. footnote

## The Bank of England's approach to promoting responsible innovation in tokenisation

The Bank of England has today published its approach to promoting responsible innovation in DLT, AI and quantum computing Ð the three technologies we see as having the greatest potential today to shape financial services.

We donÕt forecast with perfect foresight, least of all when it comes to technological trends. Some benefits expected today will turn out not to materialise tomorrow, and other new technologies will no doubt emerge.

There are also challenges to overcome Ð for example in using DLT, we need to ensure that these ledgers when used in regulated infrastructure deliver the same levels of operational resilience, settlement finality and clearly accountable governance that we expect for regulated infrastructure using traditional technology, while still maintaining scalability for high transaction volumes.

But by seeking to get ahead of how these new technologies will impact our objectives for monetary and financial stability, we can ensure that we have the hard and soft infrastructure, and that we convene and coordinate the financial services industry, to enable their responsible adoption.

When it comes to tokenisation, weÕve already put in place soft infrastructure Ð the regulatory framework Ð to enable the private sector to set up trading venues and settlement systems for tokenised assets. This is the BankÕs so-called Digital Securities Sandbox launched last year jointly with the Financial Conduct Authority (FCA). ÔSandboxÕ is an understatement though.

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These wonÕt merely be prototypes or experiments; they will be real-world transactions in tokenised securities, and market participants will interact with these trading venues and settlement systems in the same way as they do in the conventional financial system.

WeÕve got 15 firms preparing with regulators to launch trading and settlement venues potentially as early as next year, with more in the pipeline Ð ranging from established financial firms (eg Euroclear, HSBC, JP Morgan and the London Stock Exchange Group) to new players, and across the full range of asset classes (eg equities, corporate and government bonds, and investment funds including real estate funds).

The sandbox will enable markets in these securities to grow up to a set size[3] over the next five years, during which time the Bank, FCA and HM Treasury intend to learn from firmsÕ activity and, subject to that, to determine the new, permanent regulatory regime for the trading and settlement of digital securities. footnote

Of course, financial markets are inherently global, and tokenised financial markets should be no different.

As tokenised asset markets emerge in different jurisdictions, we should avoid them operating in a such a way that they are incompatible with each other - or indeed with those parts of domestic financial systems using traditional technology. That would impede cross-border and cross-asset trading, and so fragment market liquidity. Interoperability and regulatory cooperation including across borders will be essential. That motivates our participation in the Monetary Authority of SingaporeÕs Global Layer 1 initiative, which is exploring common standards for DLT platforms. Given IÕm here in DC, I should also flag that weÕve had a lot of positive interest from US authorities in our Sandbox.[4] And I look forward to discussing opportunities for greater UK-US collaboration in tokenised markets in the new Transatlantic Taskforce[5] announced following the US PresidentÕs state visit to the UK in September, to be chaired by our respective finance ministries. footnote footnote

Given the inevitable coordination issues with deploying new technologies across financial markets, there is an important role for UK authorities in convening market participants and driving collective action. The UK government announced in July as part of its Wholesale Financial Markets Digital Strategy that it will appoint a Digital Markets Champion to join up the private sectorÕs work on these issues. And it is proceeding with issuing a digital gilt instrument (DIGIT) on a platform within our Sandbox, to help catalyse the development of UKbased DLT infrastructure and the adoption of DLT in UK financial markets.[6] Opens footnote

Now I know youÕd expect me to say this Ð I am a central banker and we are in the money business after all Ð but the most important enabler for the responsible adoption of tokenisation in finance is the availability of settlement assets with the requisite safety and functionality to play the role of money in tokenised transactions.

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I set out in a speech last month that my vision for the UK payments landscape is one of a Ômulti-moneyÕ mixed ecosystem Ð with a role for money issued by the central bank, money issued by commercial banks, and money issued by regulated non-banks (that is, stablecoin issuers); all freely and frictionlessly exchangeable at par, while providing users with choice and competition.

For central bank money, weÕve launched the BankÕs new wholesale payments infrastructure, RT2, this year. This has functionality already to support settlement of the cash leg of tokenised asset transactions using a tokenised representation of central bank money.[7] And a payment system of this kind is already live in the UK and in its initial stages of operations. footnote

Synchronisation functionality, which will allow central bank money to be fully integrated with wholesale tokenised transactions, will initially launch next year in our Synchronisation Lab, to enable testing of real-world use cases. And subject to that, it will be delivered into production.

WeÕre calling on industry to work with us on starting to deploy these new functionalities in RT2. Omnibus account functionality is live. And later this week, we will be issuing a call for participants for the Synchronisation Lab. So the tools are there for industry to use. I encourage you all to bring your creativity to bear in developing innovative use cases with them.

For our part, weÕre also experimenting with whether there is anything further that we can do, beyond omnibus accounts and synchronisation, such as the Bank itself tokenising central bank money for use in wholesale transactions (so-called Ôwholesale Central Bank Digital CurrencyÕ)[8] or for use in retail transactions (retail CBDC).[9] footnote footnote

For commercial bank money, we clarified to banks two years ago how deposit-taking entities issuing digital money can do so in the form of (tokenised) deposits and we continue to engage closely with banks to ensure that regulation is not a barrier.[10] Importantly also, a new institutional model for UK payments announced this summer will deliver the next generation of UK retail payments infrastructure, to enable the seamless exchange of tokenised money between banks and stablecoin issuers.[11] footnote footnote

## Stablecoins

I want to spend the remainder of my remarks today on stablecoins. ThereÕs obviously been a lot of focus on stablecoins this year, with the passage in July of the GENIUS Act in the US establishing the legislative basis for stablecoin regulation at a federal level.

Opens

With the flurry of activity in the US this year, I hear people say that the UK is behind in its work on stablecoins. I must say I donÕt recognise this. The FCA consulted on its detailed requirements for stablecoins in May this year. We will consult later this year on our requirements for sterling-denominated stablecoins used in systemic payment systems. That will put us in a position to finalise our regulatory regimes next year Ð as is the aim in the US. Opens

I should be clear that the BankÕs role as the regulator of stablecoins used in systemic payment systems means that we are concerned only with those stablecoins being widely used as money in retail and wholesale Ôreal worldÕ payments. The vast majority of stablecoin activity globally at the moment is instead used as the settlement asset for trading of unbacked cryptoassets.[12] While unbacked cryptoassets are growing in popularity, the BankÕs Financial Policy Committee continues to judge that their systemic risks to UK financial stability are limited Ð and so there is no need for stablecoins used in that market to be subject to the BankÕs stablecoin regime. footnote

Our stablecoin regime is instead motivated by their potential for use in retail and wholesale payments. We want to support such a role for stablecoins as part of a multi-money system (as I mentioned earlier). And while, to date, proposals for stablecoins to be used for these purposes are yet really to take off, we know from other areas of tech innovation how quickly new products can grow, particularly where (as in payments) network effects are large, and where they can harness large existing user bases. We also know from experience how difficult it can be retrospectively to regulate such networks.

Those network dynamics are why at the Bank we have been working hard to put in place a regulatory regime for stablecoins being widely used for payments ahead of their emergence, so that our regulatory framework for money is fit for the future.

We are well advanced in putting this in place. Such a regime will allow those stablecoin firms who want to innovate by providing better payment services to users to understand the risks that need to be managed as they develop those products Ð and ensure that innovation is not simply competing by taking higher financial, operational or conduct risks.

In that vein, for such stablecoins to have a role in our multi-money system, itÕs important that they meet the same levels of robustness as we expect from widely used money today Ð that issued by commercial banks.

That isnÕt to say they have to meet the exact rules we apply to banks. In our regime, stablecoins donÕt seek in their business models to make money from lending or maturity transformation, so lots of banking sector regulation need not apply. But we do need to ensure that in all states of the world, a pound issued by a regulated stablecoin issuer is worth the same as a pound issued by a commercial bank and a banknote issued by the Bank of England. This Ôsingleness of moneyÕ is the foundation on which monetary and financial

Opens stability and ultimately economic activity depend Ð just as we donÕt in our everyday lives expect today to question whether a pound in one bank is worth the same as a pound in another.

The Bank of England is clear that it is prepared to offer regulated stablecoins the means to achieve this.

In particular, we said in 2023 that we would provide accounts at the Bank of England for systemic stablecoin issuers, which they can use to back their coins and so ensure their value.[13] And, as my colleague Sasha Mills and I have set out in recent months, in response to feedback on those proposals, we will supplement that in our upcoming consultation by enabling systemic stablecoin issuers to receive some return on their backing assets by allowing a proportion of them to be invested in short-term UK government debt.[14] In addition, our consultation will set out that the Bank is considering putting in place a liquidity facility to help backstop solvent systemic stablecoin issuersÕ ability to monetise those assets if needed and so to support meeting redemption requests.[15] footnote footnote footnote

As a consequence, and in contrast to other jurisdictions where stablecoins have to rely in effect on their competitors (commercial banks) to provide them a bank account, in the UKÕs regime the Bank of England will play the role of banker to systemic issuers. That avoids the issues weÕre already starting to see overseas of a lack of availability of banking services for stablecoin issuers.

Holding deposits with the central bank also mitigates the financial stability risks that could otherwise arise from interconnectedness between commercial banks and systemic stablecoin issuers. It avoids the risk of rapid outflows from a stablecoin backed with commercial bank deposits creating funding challenges for the bank. And it avoids the risk of failure of a bank calling into question the solvency of a stablecoin issuer (as we saw, for example, in March 2023 when CircleÕs USDC stablecoin lost its peg to the dollar after the failure of one of its bankers).[16] And of course, the lower risk of holding cash at the central bank rather than in a commercial bank can be reflected in lower capital requirements for the stablecoin issuer. footnote

My final point touches on how we safely manage the transition from our current system of central bank and commercial bank money, to a more diverse and competitive multi-money system where regulated stablecoin issuers can also issue money.

Our focus here is on ensuring the real economyÕs continued access to credit, by ensuring the financial system has time gradually to adjust to new forms of digital money Ð a critically important issue in the UK given credit here relies more heavily on banks compared to, for example, the position in the US.[17] It is not on protecting banksÕ business models. footnote

Opens

To illustrate my point, letÕs consider a widespread and fast adoption of stablecoins. Significant and rapid outflows of bank deposits into such stablecoins could lead to a precipitous drop in credit for businesses and households if the banking system were unable to increase, at scale and at pace, its use of wholesale financing from non-banks (insurers, funds etc). Once adjusted, access to finance for the real economy would be stabilised.[18] But it is the financial stability risks in transition that we are concerned with. footnote

We are clear that this is the outcome we want to avoid, and are open to exploring how best to achieve it. We have considered different tools - limits on a customerÕs holdings of systemic stablecoins, aggregate limits on the overall size of the coin, and limits on transaction size. All of these are intended to be temporary to allow the structure of real-economy financing to adjust Ð and to enable the Bank to monitor adoption of stablecoins and assess the potential for rapid changes in the structure of the financial system. So let me be clear. We would expect to remove the limits once we see that the transition no longer threatens the provision of finance to the real economy.

Our starting point is that applying limits to a userÕs holdings of a given systemic stablecoin is the best way to avoid such a precipitous reduction in the availability of credit to UK borrowers. These would limit flows around the system, whilst still allowing for coins to be widely usable for retail payments. Our consultation later this year will seek feedback on the proposed levels for such limits[19] Ð businesses would have a higher holding limit than individuals, and there would likely be an exceptions regime so that the largest businesses in the country (eg supermarkets) could hold more if required, We also intend to seek feedback on implementing such limits in practice, as well as on other approaches to achieving our aims. footnote

When it comes to wholesale payments, my view is that central bank money must remain the settlement asset for systemically important asset markets even as we see greater tokenisation in those markets. That way, we donÕt introduce potentially precarious and unnecessary interconnections in the financial system and so create financial stability risks.

But, central bank money isnÕt needed for all settlement today, and it wonÕt be needed for all settlement in the future. ThatÕs why there will likely be an important role in tokenised markets for privately issued money: both tokenised deposits and regulated stablecoins.

We are therefore working to expand the range of settlement assets in the Digital Securities Sandbox to include not just tokenised deposits but also regulated stablecoins. The limits I mentioned on holdings of systemic stablecoins would not need to apply to stablecoins used as a settlement asset for transactions in the Sandbox Ð as individual trading and settlement venues in the Sandbox are already subject to limits on their overall issuance in a particular asset class.12 And so we will be able to observe use cases and risks as we consider what adjustments may be needed as we move towards a permanent regime, while still allowing innovation to take place in real-world transactions.

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## Conclusion

As I said, we will be consulting in coming weeks on the detail of our proposed regime for sterling stablecoins used in systemic payment systems, and weÕll be open to feedback as we finalise our rules.

Tokenisation holds much potential for retail and wholesale financial services. The Bank is committed to enabling such responsible innovation. These arenÕt token gestures that weÕre making. They are significant modernisations of our own infrastructure, regulation and convening role, as we seek to maintain monetary and financial stability at an exciting time of technological change.

We canÕt though do this alone. We need the industry - both incumbents and new entrants - to work with us to engage, to experiment, to develop the use cases, and to deploy this technology; and thereby harness it for the benefit of households, businesses and financial markets.

I would like to thank Michael Yoganayagam for his assistance in drafting these remarks, and to Kushal Balluck, Rachel Breitenbach, Emma Butterworth, Pavel Chichkanov, Amy Lee, Colm Manning, Magda Rutkowska and Natalja Sekhan for their helpful input. I would also like to thank Andrew Bailey, David Bailey, Victoria Cleland, Sasha Mills, Dave Ramsden, David Rule, Vicky Saporta, Ruth Smith, David Soanes and Carolyn Wilkins for their comments.

1. Project Rosalind: developing prototypes for an application programming interface to distribute retail CBDC Opens
2. Eg OpenAIÕs Instant Checkout in ChatGPT
3. Eg £8-13.1 billion for gilts, and £17-28 billion for GBP corporate bonds; Table D, Guidance on the operation of the Digital Securities Sandbox | Bank of England .
4. SEC.gov | Old Flames - Remarks by Commissioner Hester M. Peirce to the City of London Corporation, July 16, 2025 Opens
5. Boosting collaboration between UK and US financial systems to drive innovation and growth in global markets GOV.UK Opens
6. Digital Gilt Instrument (DIGIT) pilot update - GOV.UK Opens
7. Bank of England publishes policy for omnibus accounts in RTGS | Bank of England
8. Synchronisation and beyond: enabling the next wave of financial innovation - speech by Victoria Cleland | Bank of England
9. Digital Pound Lab | Bank of England
10. Letter from David Bailey, Nathanaël Benjamin and Vicky Saporta on 'Innovations in the use by deposit-takers of deposits, e-money and regulated stablecoins' | Bank of England

Opens

11. Payments Vision Delivery Committee Update | Bank of England
12. Citi Institute, Stablecoins 2030 Opens
13. Regulatory regime for systemic payment systems using stablecoins and related service providers | Bank of England
14. International payment rails: the value of a harmonised gauge - speech by Sarah Breeden | Bank of England ; Building tomorrow's markets: the digitalisation of finance - speech by Sasha Mills | Bank of England
15. We are also considering putting in place a separate liquidity facility for systemic stablecoin issuers in certain gone concern scenarios, and are working with HM Treasury to consider options for special administration and resolution regimes to ensure that, were a systemic stablecoin issuer to fail, there is continuity of service where needed and protection of coinholders through redemption at par.
16. Circle held $3.3 billion (around 9%) of its backing assets as deposits with Silicon Valley Bank (SVB) at the point of SVBÕs failure in March 2023. USDC returned to its peg once US authorities confirmed that SVB deposits would be made whole.
17. While not strictly comparable due to data sources, around 85% of outstanding credit to UK households (excluding student debt) is provided by banks, compared to 30-40% in the US (depending on how one accounts for the role of US government-sponsored enterprises in securitising loans originated by banks but ultimately held by non-banks).
18. Once the financial system has adjusted, some households and businesses may find it economical to obtain financing from non-banks, if the cost of financing by banks has increased (as a result of banks relying more than previously on more expensive wholesale funding rather than deposit funding).
19. As Sasha Mills said in July, ÒIf implemented, these limits would likely be in the region of £10-20k for individuals and £10mn for businesses. But to be clear, we are still engaging with industry and listening to feedback, so these proposals are not finalised. We will be consulting on the precise details of this and other parts of the BankÕs requirements later this year.Ó

## Sarah Breeden

Deputy Governor, Financial Stability",Sarah Breeden
https://www.bis.org/review/r251030h.htm,"Michael S Barr: Brief remarks – ""Crossing the credit barrier: advancing access and creating opportunities""","Speech (via pre-recorded video) by Mr Michael S Barr, Vice Chair for Supervision of the Board of Governors of the Federal Reserve System, at the conference ""Crossing the credit barrier: advancing access and creating opportunities"", St Louis, Missouri, 22 October 2025. ",2025-10-22 00:00:00,"## Michael S Barr: Brief remarks - ""Crossing the credit barrier: advancing access and creating opportunities""

Speech (via pre-recorded video) by Mr Michael S Barr, Vice Chair for Supervision of the Board of Governors of the Federal Reserve System, at the conference ""Crossing the credit barrier: advancing access and creating opportunities"", St Louis, Missouri, 22 October 2025.

* * *

Let me thank the Opportunity Finance Network for the invitation to be part of this gathering. 1  Unfortunately, I could not join you in person, but I'm pleased to be able to offer a few words to celebrate the legacy of Community Development Financial Institutions (CDFIs)-a legacy rooted in opportunity, innovation, and commitment to communities that have too often been overlooked.

I'm deeply grateful to so many of you who are carrying forward that mission-building on the work of pioneering leaders who saw finance not just as a set of markets, but as a means for broad-based economic inclusion.

I've had the privilege of being a part of the CDFI story myself. Early on, while at the Treasury Department, I worked with colleagues to help stand up the CDFI Fund, strengthen the Community Reinvestment Act, and launch the New Markets Tax Credit. When I returned to Treasury years later, I got a chance once again to work with the talented staff of the CDFI Fund, people whose dedication to expanding economic opportunity was truly inspiring. And over the last three decades, and now at the Federal Reserve, I've seen firsthand how CDFIs around the country help small businesses to thrive and communities to prosper.

CDFIs emerged as a creative solution to a fundamental challenge: how to get credit flowing into places where mainstream finance has not always reached. Through flexible underwriting, tailored lending, and deep community development relationships, CDFIs meet credit needs through good times and bad. CDFIs help fuel the revitalization of neighborhoods, small businesses, and local economies.

When I travel around the country as a Fed Governor, I often meet with local community leaders, including local CDFIs. I've seen CDFIs serving rural areas, such as the Mississippi Delta, where CDFIs have stepped in as traditional bank branches have closed. I've heard small businesses in urban areas such as Atlanta praise the work of CDFIs helping them get access to capital, skills development, and business opportunities that were otherwise unavailable. I've seen countless examples of CDFIs helping to build affordable housing, daycare centers, and revitalize neighborhoods, in communities from Hartford, Connecticut to Dallas, Texas.

CDFIs operate all over the nation, including in Indian Country. The Federal Reserve's Center for Indian Country Development has done remarkable work documenting the power of CDFIs in Native communities. Some of the solutions they've designed include seasonal payment structures for fishermen and loggers, accepting tribal distribution payments as collateral, or creating land buy-back loans. One Native CDFI leader

described their work as ""blending culture with finance""-and I think that captures beautifully what makes the CDFI model so powerful.

And when economic downturns come-as they inevitably do-CDFIs are often the first to step up. During the foreclosure crisis, they maintained lending and provided critical support to homeowners who otherwise could not or would not be served. When the COVID-19 pandemic hit, CDFIs once again acted as first responders, rapidly delivering relief to small businesses.

CDFIs have earned their strong track record through performance and results delivering impact in rural areas, urban neighborhoods, and tribal communities across the country. Demand for their services continues to grow.

The story of the CDFI movement is one of persistence, creativity, and partnershipqualities that will serve us well in the years ahead. Together, we can build on this strong foundation to ensure that opportunity reaches every community and that the legacy of inclusive finance continues for generations to come.

Thank you for your leadership, your commitment, and for the work you do every day to make that vision a reality.

1  The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.",Michael S Barr
https://www.bis.org/review/r251030b.htm,Chee Hong Tat: Speech - Institute of Banking and Finance Distinction Evening,"Speech by Mr Chee Hong Tat, Minister for National Development, and Deputy Chairman of the Monetary Authority of Singapore, at the Institute of Banking and Finance Distinction Evening, Singapore, 9 October 2025.",2025-10-09 00:00:00,"## Chee Hong Tat: Speech - Institute of Banking and Finance Distinction Evening

Speech by Mr Chee Hong Tat, Minister for National Development, and Deputy Chairman of the Monetary Authority of Singapore, at the Institute of Banking and Finance Distinction Evening, Singapore, 9 October 2025.

* * *

Chairman, Council Members and CEO of the Institute of Banking and Finance (IBF), Sisters and Brothers of the Labour Movement, Ladies and Gentlemen,

Good evening, I am happy to join you today to celebrate the contributions of IBF and our tripartite partners - financial institutions (FIs), unions and government agencies - in nurturing talent for our financial sector.

It is a changed world. The global operating environment is shifting.

- a. Strategic rivalries between major powers have intensified. Governments are placing greater emphasis on industrial policies to strengthen domestic capabilities and enhance supply chain resilience. Trade and financial flows are being reshaped.
- b. Technology - this is also changing and accelerating, including the use of AI.
- c. And climate change is intensifying the need to transition to a low-carbon future.

In August, the government launched the Economic Strategy Review to ensure that our businesses and workers can continue to access good opportunities amidst these shifts.

We will build on our existing strengths and identify new opportunities to chart our way forward. One such strength is our financial &amp; insurance services sector.

- a. It contributed about 14% of Singapore's GDP in 2024, and grew by 6.8% last year - more than double the previous year's growth. This growth has been broadbased, across banking, insurance, capital markets, asset management and wealth management.

Growth matters because we can only create good jobs for our workers and ensure them a higher pay and a better future when we have growth.

- a. Over the past decade, the financial services workforce grew by more than 40,000, with 9 out of 10 of the net jobs created going to locals. 1
- b. In the first half of this year, the financial services industry added over 2,000 net jobs for locals.
- c. Our FIs remain keen to hire more workers, particularly in wealth management, financial advisory and compliance roles.

- d. But I understand some fresh graduates may worry about job prospects, due to economic uncertainties and greater competition from more jobseekers entering the market. Together with our tripartite partners, the government will continue to monitor employment outcomes closely, and we stand ready to ramp up our support for our workers where necessary.

To have healthy job creation, we must have sustained economic growth. To achieve this outcome in the financial sector, we must respond to shifts in trade, technology, and climate.

This evening, I would like to focus on the technology shift given its wide-ranging implications for both businesses and our workforce.

I mentioned earlier that AI is one of the key drivers. It is reshaping how we live and work. Already, it is helping people to draft documents, analyse data, generate new ideas, respond to customer queries, and so on and so forth. It opens up possibilities for faster innovation, higher productivity, and stronger growth, which is especially important because we are also trying to grow, while facing an ageing workforce.

Over 70 countries have adopted national AI strategies and policies 2 - Singapore is one of them. While AI will become more mainstream over time, the countries that can harness its potential early will stand to reap the greatest benefits.

And our financial sector is one of the areas that can benefit significantly.

- a. McKinsey estimated that the adoption of GenAI could add up to S$550 billion in value annually to the global financial sector, which is up to about 5% per year.

To ensure Singapore's financial sector stays competitive and continues to create good jobs for Singaporeans, we must enable our FIs - both big and small - to adopt AI efficiently, effectively and responsibly. To do this, I believe we need to do two things well:

- a. The first is to continuously upgrade our AI ecosystem to promote knowledge exchange and encourage innovation. Amongst others, this encompasses updating our rules to be relevant in today's context.
- b. The second is to uplift and upskill our workforce to be AI-ready.

Please allow me to elaborate on how we will upgrade our AI ecosystem.

Today, over 30 FIs have AI functions in Singapore, with several serving as global incubators for AI solutions. I see this as a good vote of confidence for what we are able to offer in Singapore. But there are also FIs that are just beginning their AI adoption journey. And we see value in fostering knowledge exchange to help to uplift and upgrade the entire sector.

To drive this, MAS had launched the PathFin.ai programme, which now brings together over 80 FIs to share their AI implementation experiences.

To expand our efforts to facilitate peer learning and help Singapore FIs improve their AI implementation, I am pleased to announce the launch of the PathFin.ai knowledge hub that is developed under this programme.

The knowledge hub features an initial set of successful use cases, curated by industry participants in key areas like sales and marketing, customer operations, risk management, and engineering and tech. It also features learnings from pathfinder FIs that have successfully deployed AI in these areas.

MAS will collaborate with our industry partners to progressively enhance the knowledge hub with more peer-validated use cases, resources and solutions. This will help to deepen FIs' understanding of how AI can be applied and reduce the time taken by individual FIs when they implement AI solutions. So, all of us don't have to start from scratch; we can learn from one another to shorten the learning curve.

I would like to encourage all FIs to sign up to contribute, to learn, and to grow as a community.

Beyond peer learning, MAS will also enhance the clarity of our supervisory expectations on AI risk management, so that our FIs will have the confidence to experiment and innovate with AI.

Our journey started in 2018, where we first published the FEAT principles - Fairness, Ethics, Accountability and Transparency - to guide responsible use of AI in the financial sector. Last year, we published an information paper setting out good practices for AI model risk management. Building on this, we plan to consult the industry on a set of supervisory guidelines on AI risk management later this year. We hear feedback from FIs that clearer supervisory expectations would help to support your AI innovation, because as you look to embed AI use across more business functions, you want to be clear, you don't want to run afoul of the rules and regulations. This is a partnership that MAS would like to embark on together. We want to also help you improve your operational processes and to help manage risks in areas such as scams and moneylaundering. AI can help us - as tools - to become more effective and efficient in dealing with these risks.

In parallel, through Project MindForge, MAS is also working with the industry to develop an AI risk management handbook that is targeted to be published later this year as well. The handbook will guide FIs' implementation of the upcoming supervisory guidelines, by providing practitioners' perspectives on sound practices for deploying AI responsibly.

Beyond upgrading our AI ecosystem, the second important area that I mentioned earlier that is equally important, is to prepare our workforce for an AI-enabled future.

Over the past year, MAS and IBF, together with Workforce Singapore (WSG) and our industry partners, had worked with McKinsey on a Jobs Transformation Map, or JTM, to study how GenAI could potentially reshape jobs and skills in Singapore's financial sector.

To help our workforce seize these opportunities, MAS and IBF have partnered 10 pilot FIs to unpack what AI adoption means for specific job roles, and to testbed and refine

our approach to support the workforce. Rather than talk about it in general, we thought it is more useful if we can identify specific job roles, see how AI will affect these job roles, and what we can do, working with our tripartite partners, to help support our workers to transit on this journey.

- a. Tonight's IBF Inspire Award winners - DBS, HSBC, Manulife, OCBC and UOB, are among the pilot FIs - that have set the benchmark by proactively upskilling and reskilling their workforce alongside AI adoption.
- b. DBS is also the winner of the inaugural Workforce Transformation Award conferred by WSG and IBF, for championing continuous learning and career development.
- c. Congratulations to our award winners.

From these pilots, we have distilled two key learning points:

First, we must aim to uplift AI literacy for all. Not just for some, but for all.  We want to help all our workers become more familiar with AI. There will be a range of existing knowledge and skills amongst our workers. Some are already experts in AI. Some may know of it a little, tried it, but are not so familiar with it yet. And some could be newbies - totally new to AI. But it does not matter - what is important is that we bring everyone along and we leave no one behind. So, when we embark on this journey, our aim is not to just help some people become familiar with AI. We want to help everyone to be familiar, and to equip yourselves with the knowledge and skills on how to use this tool called AI.

- a. Foundational skills like prompt design, AI principles, governance and ethics will be needed across different roles.
- b. The JTM that I mentioned earlier also suggests tailoring foundational AI skills based on job role categories: business leader, business user, risk and compliance practitioner, and tech practitioner. Different roles will have their own specific skills, but there are also some generic ones that cut across different jobs.
- c. IBF is partnering pilot FIs to equip their workforce with these foundational skills. For a start, the three local banks have committed to uplifting the AI literacy of all their 35,000 employees in Singapore in the next 1 to 2 years, tapping on IBFaccredited programmes. To date, more than half have been trained, and we will continue with this journey.
- d. IBF is also working with external training partners to develop and contextualise AI courses with financial sector use cases. I think this is very important, because if you learn AI in a very general way, and you don't know how to apply it at work, you won't be able to extract maximum value from the courses. So, I think this is very useful. We also want to help develop accredited training programmes that are tailored to specific roles like compliance.
- e. I would like to encourage our union leaders who are present to encourage your members and assure them that the support will be there and that help will be given

to them to equip them with the skills. So, please encourage them to participate in the training programmes.

Second, we should upskill workers alongside role-specific AI adoption. As AI is integrated into a job role, financial sector workers will need to learn how to use rolespecific AI tools, and deepen their functional expertise so that they can perform highervalue work. I think this is another very important concept. The first important concept that I mentioned earlier is that we leave no one behind; we will make sure we uplift AI literacy for all. The second very important concept is that we are not thinking of AI to replace workers, but to augment our workers, and to help our workers do their jobs better - that is our aim.

- a. Routine tasks can be streamlined, to enhance our employees' capacity to take on other higher value-added work. This is something that we hope will be able to help improve the productivity and efficiency of our workers.
- b. We also want to encourage our workers in the process of looking at how you use AI, to be able to give feedback to management because sometimes when you use AI, you can see that work processes will need to change; it's not just business as usual. Then, you can give some feedback to your supervisors, your managers, to suggest how processes and the systems can also be improved. So, this is a twoway process. It's not just helping to equip our workers, to help them become more productive. In the process of doing that, our workers can be active contributors to helping companies become more productive.
- c. And MAS, as I mentioned earlier, will work closely with you. If there are certain rules and regulations that we need to change so as to enable you to do AI better, we are prepared to do so.
- d. Our relationship managers, at Bank of Singapore, for example - this is OCBC's private banking subsidiary - they have adopted an AI tool to help draft source of wealth reports for private banking clients. This has helped to cut down preparation time from 10 days to one hour, so it is not just an incremental improvement, it is quite a big improvement that they can achieve, and this also helps to improve client onboarding and free up our RMs to be able to serve more clients.
- e. In addition to being more efficient, employees can access enhanced career pathways.
- i. One good example is the underwriters at Manulife. By leveraging AI tools that enhance risk analysis and decision-making, alongside IBF's support on job redesign and training, underwriters are able to take on higher value and more complex cases. This is expected to drive revenue growth, and I hope in the process of doing that, accelerate their career progression.
- ii. As FIs step up on their use of AI, certain job roles may see increased demand, such as AI Governance. Prudential is partnering with IBF to train 11 employees - originally from compliance and technology security backgrounds - into expanded roles that now include AI governance. These employees will be supported through job redesign and structured training.

IBF will continue to work with our FIs to flesh out more of such upskilling pathways and I hope that FIs who have not yet embarked on this journey, you can take a look at these FIs as references, as you think about what you can do within your own organisation. Where these translate to changes in job roles, FIs will map out how these roles could evolve or be redesigned and then work with IBF to ensure reskilling support for employees to take on such job roles, or pivot to adjacent career pathways.

I want to assure our sisters and brothers who are from the unions, that as we embark on this journey, this is something that we want to do together with you. Because we believe that this adoption of AI will help our FIs to become more competitive, and in the process of doing so, I hope they can grow the size of their business and their operations here in Singapore, and then as a consequence, they will be able to provide more jobs for our workers, with better pay and better work prospects.

To support more FIs, the PathFin.ai knowledge hub will also feature resources on workforce planning and case studies of successful role redesign.

There are also resources on upskilling pathways that finance professionals can tap on. In the AI era, learning agility, adaptability and soft skills such as strategic thinking will be just as important as technical know-how.

Besides supporting the skills transformation of experienced finance professionals, IBF and FIs are also upskilling our young talent to be AI-ready. The aim is to provide them with meaningful exposure to AI use cases and projects early in their career, or even while they are still in school. Let me highlight two such initiatives.

- a. One, IBF is partnering our Institutes of Higher Learning and our FIs to develop internships and traineeships that provide practical exposure to how AI is applied in finance. FIs such as UBS have already started recruiting summer interns and graduate trainees for their AI functions. UBS' AI &amp; Transformation Factory in Singapore is its largest AI function globally to drive AI initiatives across the UBS Group. Interns and trainees will be able to participate in the development and scaling of cutting-edge AI solutions across markets that UBS operates in.
- b. The second example is IBF and IMDA are supporting our FIs to hire and train fresh graduates. UOB, for example, is targeting to hire 100 fresh graduates over three years into a two-year programme. The programme is developed in partnership with NUS, with funding support from IMDA and the financial sector development fund administered by MAS. Under the programme, fresh graduates will receive certifiable AI skilling, undergo specialised on-the-job training and be mentored by senior data practitioners.

So, we are trying to do this for both our existing workers, and also those who are going to join us, starting from school. As I mentioned earlier, we leave no one behind and we want to uplift all our workers.

Unions, you play a key role in this process.

- a. Last year, NTUC, IBF and industry associations signed an MOU to reinforce tripartite collaboration in upskilling and reskilling our financial sector workforce in emerging areas.
- b. One platform that we would like to encourage everybody to consider is the Company Training Committee or CTC.  NTUC has a CTC grant that can help support FIs and our FinTech firms to build AI capabilities while ensuring positive worker outcomes.
- c. IBF is also working closely with the unions to uplift AI literacy and upskill our workers. In particular,
- i. NTUC LearningHub will be launching an IBF-accredited GenAI course that is tailored specially for finance professionals.
- ii. The financial sector unions are also stepping up their outreach efforts in partnership with IBF, to build AI awareness and to encourage our workers to go for upskilling.

## Conclusion

Ladies and gentlemen, I want to end my speech by first thanking all of you for your strong support on this AI journey that we are embarking on. This is not something that we can achieve overnight. It takes time. There's a certain journey we need to go through. You need building blocks, you need an ecosystem, you need partnership. I do not believe that this is something that the government can achieve on our own, or our employers can achieve on their own, or workers can achieve on their own. Because if we just do it by ourselves, without the other two partners, there's no complete ecosystem. We need all the ecosystem partners to support this, to work together, and to ultimately have a win-win outcome that is both good for companies and good for our workers.

The age of AI brings immense opportunities for our financial sector. To fully realise its potential, we must continue to work together as a tripartite community - to innovate boldly, to regulate responsibly and to equip our people with the skills to thrive.

Let me close by once again congratulating our newly conferred IBF Fellows and Distinguished Fellows, and the IBF Inspire, Advance, and Workforce Transformation award winners. Your commitment to workforce development sets a strong example for the whole industry. And I hope that more companies will learn from you, will look up to you and use you as a good role model and then implement the best practices in their own organisation.

Thank you, and I wish everyone a wonderful evening ahead.

- 1  Excludes jobs in holding companies.

2  Based on Google's April 2025 Report on AI Pioneers: How Countries are Seizing the AI Opportunity.",Chee Hong Tat
https://www.bis.org/review/r251112d.htm,Michael S Barr: AI and central banking,"Speech by Mr Michael S Barr, Member of the Board of Governors of the Federal Reserve System, at the Singapore Fintech Festival, Singapore, 11 November 2025.",2025-11-11 00:00:00,"## Michael S Barr: AI and central banking

Speech by Mr Michael S Barr, Member of the Board of Governors of the Federal Reserve System, at the Singapore Fintech Festival, Singapore, 11 November 2025.

* * *

Thank you for the opportunity to speak to you today. 1   It is an honor and a pleasure to be here with you in Singapore, a crossroads for global trade and finance, to discuss the transformational nature of artificial intelligence (AI). Like other central banks around the world, including the Monetary Authority of Singapore, we at the Federal Reserve have been exploring the use of AI in our operations for quite some time as well as considering the implications of AI's adoption for the financial sector and the broader economy.

At the Fed, we've been interested in the effects of AI on the economy and its role in the financial system for decades. Remarkably, in 1997, Governor Susan Phillips delivered a speech noting the use of AI in consumer loan underwriting. 2   In the past year, no fewer than seven speeches by Fed Governors have had ""AI"" in the title.

Today I'll discuss the opportunities presented by AI relevant for central bankers as well as the risks it may pose that policymakers should consider. I will leave you with three main takeaways.

## The State of AI Innovation and Deployment

My first main point is that while AI is a big deal that will transform economies, there are a range of outcomes for how it could do so.

AI-algorithms that mimic human thought, communication, and choices-has been with us for decades, but AI entered a new era with the launch of ChatGPT in late 2022. Generative AI (GenAI) captured our imagination with convincing conversations in which it is possible to go deep on a wide range of topics. Earlier forms of AI were often the bailiwick of digitally native companies, but GenAI is spreading rapidly through the economy. As of 2024, three in four large companies were using GenAI, though some report it has yet to improve their bottom line. 3   Smaller companies have been slower to adopt GenAI, with adoption rates reported in the high single digits, albeit with a high degree of heterogeneity among sectors. Also, one could surmise, based on other surveys of individuals, that work-related use is more widespread among employees than their CEOs realize. 4

A recent survey by the Federal Reserve Bank of New York showed that firms plan to retrain their workforces to take advantage of AI to enhance productivity, with widespread layoffs limited. 5   But survey respondents also report that AI has led firms to scale back hiring, a development that may be contributing to the recent low levels of job creation in the U.S. economy, a concern for many workers and particularly for newer entrants to the job market.

Taking a step back, as I have noted in the past, I see two basic scenarios for how AI can transform the economy. 6   In the first scenario, there is incremental adoption of GenAI that augments existing tasks and jobs. In the second scenario, a revolution occurs. GenAI transforms the nature of work and leisure, boosting the efficiency of research and development, remaking industries, and creating firms with new-perhaps radically new-business models.

Right now, it is difficult to predict which scenario (or perhaps one or more intermediate scenarios) will come to pass.

We can already see incremental change as GenAI is increasingly integrated with standard workplace software. With its natural language interface, GenAI is inherently user friendly, so few workers need special skills or unusually onerous training to use it. At the same time, some start-ups have a more revolutionary flavor because they are centered on AI from the outset. One indicator of how the labor market is evolving toward deeper integration with AI is the skills mentioned in job postings. While overall the share of job listings that mention AI-related skills is small-about 5 percent-in the information sector, it is about 20 percent. The financial sector, where firms are always looking for a technological edge, is not far behind, with 1 in 10 job postings mentioning AI. 7   So we can see that the skills needed in some key sectors are already changing. The speed of that change is likely to increase. If the AI changes happen gradually, workers and firms will have time to adjust, but if they happen rapidly, there may be significant dislocations in the short term.

A massive wave of data center investment has begun, pointing to signs of confidence among leading AI companies that the use of AI at scale throughout the economy is just around the corner. If they're right and AI is useful enough to keep what is currently projected to be $3 trillion of new data center capacity utilized effectively, we can expect significant changes in economies. Investment in capital generally raises labor productivity and offers the potential for higher output growth without pressure on inflation over the longer term. As I have discussed in previous remarks, if these changes are significant, they can also affect the conduct of monetary policy. 8   Of course, it may be the case instead that investment exceeds short-term demand, in which case there may be losses and adjustments to the AI sector.

## AI and the Financial Sector

The second key point I would like to make is that the financial sector is adopting AI quickly, and while there are many benefits to this adoption, the risks will need to be managed carefully.

So far, AI adoption in the financial sector appears to be most concentrated in areas that can enhance operational efficiency, including applications that involve text analysis, classification, and information search inside the firm, as well as customer-facing functions. These incremental improvements to common business functions are a key reason to be hopeful about AI raising labor productivity in that sector.

At the same time, there is significant investment in experimentation with AI for core functions for financial services. Data-driven financial-sector-specific tasks, including

credit decision support, fraud detection, and trading are using AI-specific tools. Ensuring that AI is used appropriately for these functions faces appreciable challenges.

First, the amount of organizational change needed by financial services firms to utilize GenAI may be substantial. History suggests progress may be slow. Adoption of machine learning, an AI technology that preceded GenAI, was concentrated in firms that were highly digitized from their founding-and even in those cases, adoption was a long process. 9   Fintech firms organized to exploit AI from their founding can play a key role in driving efficiency forward in the sector, providing services to the incumbent firms. 10   But productivity may even decrease in the short term, as heavy investments in business-process improvements take time to play out to productivity gains.

A second challenge is the practical constraints of rushing into AI for core business activities in the financial sector, as firms need to ensure that the resulting processes and outcomes are consistent with relevant laws and appropriate risk management. Large institutions are exploring the use of GenAI, including agentic AI, in their financial models-but doing so requires care. To successfully leverage the potential of GenAI on a sustainable basis, decisions based on those models must be well controlled, numerically and legally precise, explainable, and replicable. AI developers still struggle to some extent with all of those criteria. We need to reduce the risk that AI reinforces biases in consumer lending. And we also need to guard against the risks that could result from the use of AI in financial markets. For example, profit maximization by AIpowered trading algorithms may result in tacit collusion, market manipulation, or trading strategies that result in significant market volatility or even systemic risk. 11

We will need innovation that is responsive to these risks to see additional advances in the use of AI for a broad array of core financial services functions.

## AI and Central Banking

A third and final point I would like to leave you with is that central banks, including the Fed, need to keep up with AI by increasing our speed of adoption for our own operations.

The nature of central banking work is inherently careful, considered, and measured when evaluating anything new. This is particularly true for any new technologies. 12   But it seems clear already that the many advantages offered by AI could assist central banks in at least some of their operations, and the speed at which this technology is moving makes it appropriate to proactively engage in using AI for our own operations. That is why the Federal Reserve is using AI, where appropriate, to increase staff efficiency and effectiveness. My view is that GenAI is a transformative technology that central banks need to remain engaged with to ensure an ability to execute as technology evolves.

As we push ahead on efficiency gains, it is important that we leverage the right tools for the task at hand, recognizing that GenAI is not always the best choice. Some of the challenges that we face can be addressed by robotic process automation or traditional AI methods. These are the same kinds of questions that every business and organization considering AI should be weighing.

At the Federal Reserve, we have focused on ensuring we can leverage AI capabilities by establishing an AI program and governance framework for the use of AI technologies.

- 13   We are taking an enterprise-wide approach of learning-by-doing and broadly adopting high-value uses of GenAI, such as writing, coding, and research activities. We have taken a ""hands on keys"" approach to having staff engage with it. We are identifying the business processes that can be improved and transformed with the technology.

One internal application of GenAI I am particularly excited about that helps us achieve all these goals is technology modernization. We are applying GenAI-enabled tools within clear guardrails to translate legacy code, generate unit tests, and accelerate cloud migration. So far, the result of this usage is faster delivery, improved quality, and enhanced developer experience. And it will likely mean better outcomes in support of the American people.

Given AI's current and prospective role in economic activity, we are devoting the necessary resources to understanding it, including by analyzing not only AI's economic and financial implications, but also exploring how AI can enhance our financial stability work, strengthen supervisory and regulatory capabilities, and ensure the smooth functioning of our payment systems.

These are just some of the ways that the Fed, like other organizations, is using AI to make us more productive and capable. These efforts may also help us understand the effect of AI on the economy, the banking system, and the payment system. That task will be a major job for central banks in the years ahead. AI has the potential to fundamentally change the economy and society. And as central bankers, we need to keep up.

Thank you.

1  The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.

- 2  See Susan M. Phillips (1997), "" Risk Management,"" speech delivered at the Asset /Liability and Treasury Management Conference of the Bank Administration Institute, Chicago, November 4.
- 3  See Aditya Challapally, Chris Pease, Ramesh Raskar, and Pradyumna Chari (2025), ""The GenAI Divide: State of AI in Business 2025,"" MIT NANDA Report, July, https://mlq. ai/media/quarterly\_decks/v0.1\_State\_of\_AI\_in\_Business\_2025\_Report.pdf. There are a range additional surveys with various results; see, for example, Richard Horton, Jan Michalski, Stacey Winters, Douglas Gunn, and Jennifer Holland (2025), ""AI ROI: The Paradox of Rising Investment and Elusive Returns,"" October 22, https://www.deloitte. com/uk/en/issues/generative-ai/ai-roi-the-paradox-of-rising-investment-and-elusivereturns.html.
- 4  On adoption by large firms, see McKinsey &amp; Company (2025), ""The State of AI: Agents, Innovation, and Transformation,"" November 5, https://www.mckinsey.com

/capabilities/quantumblack/our-insights/the-state-of-ai. On adoption by smaller firms, see the Business Trends and Outlook Survey from the U.S. Census Bureau, which is available on its website at https://www.census.gov/programs-surveys/btos.html. On adoption by individuals, see Alexander Bick, Adam Blandin, and David J. Deming (2024), "" The Rapid Adoption of Generative AI,"" Working Paper Series 32966 (Cambridge, Mass.: National Bureau of Economic Research, September; revised February 2025).

- 5  See Ben Hyman, Jaison R. Abel, Natalia Emanuel, Nick Montalbano, and Richard Deitz (2025), "" Are Businesses Scaling Back Hiring Due to AI?"" Federal Reserve Bank of New York, (blog), September 4. Other surveys have shown Liberty Street Economics similar results; see, for example, Jeremy Korst, Stefano Puntoni, and Prasanna Tambe (2025), "" Accountable Acceleration: Gen AI Fast-Tracks Into the Enterprise (PDF),"" 2025 Report, October 29.
- 6  See Michael S. Barr (2025), ""Artificial Intelligence: Hypothetical Scenarios for the Future,"" speech delivered at the Council on Foreign Relations, New York, February 18.
- 7  Job-posting statistics are based on the classification by Lightcast and are calculated using the methodology developed in Daron Acemoglu, David Autor, Jonathon Hazell, and Pascual Restrepo, ""Artificial Intelligence and Jobs: Evidence from Online Vacancies,"" vol. 40 (April), pp. S293-340. Data are Journal of Labor Economics, available by subscription from Lightcast at https://lightcast.io.
- 8 See Michael S. Barr (2025), ""Artificial Intelligence and the Labor Market: A ScenarioBased Approach,"" speech delivered at the Reykjavík Economic Conference 2025, Central Bank of Iceland, Reykjavík, Iceland, May 9.
- 9  See Timothy Bresnahan (2024), ""What Innovation Paths for AI to Become a GPT?"" vol. 33 (Summer), pp. 305-16. Journal of Economics &amp; Management Strategy,
- 10  See Michael S. Barr (2025), "" AI, Fintechs, and Banks,"" speech delivered at the Federal Reserve Bank of San Francisco, San Francisco, April 4.
- 11  The most recent is available on the Federal Reserve Financial Stability Report Board's website at  https://www.federalreserve.gov/publications/files/financial-stabilityreport-20251107.pdf.
- 12  A report from the Bank of International Settlements notes that central bankers have the prospect of improving data quality, enhancing operations, and improving decisionmaking with the use of AI and provides a framework for considering questions of governance and risk management when doing so; see Bank of International Settlements (2025), "" Governance of AI Adoption at Central Banks (PDF),"" January.
- 13  See the ""Board of Governors of the Federal Reserve System Compliance Plan for OMB Memorandum M-25-21,"" which is available on the Federal Reserve's website at https://www.federalreserve.gov/publications/compliance-plan-for-OMB-memorandum-m25-21.htm.",Michael S Barr
https://www.bis.org/review/r251112c.htm,"Swaminathan J: Where governance intent is strong, regulatory gaps and overlaps fade","Remarks by Mr Swaminathan J, Deputy Governor of the Reserve Bank of India, at the Gatekeepers of Governance Summit, Mumbai, 7 November 2025.",2025-11-07 00:00:00,"## Swaminathan J: Where governance intent is strong, regulatory gaps and overlaps fade

Remarks by Mr Swaminathan J, Deputy Governor of the Reserve Bank of India, at the Gatekeepers of Governance Summit, Mumbai, 7 November 2025.

* * *

Chair of the event, Shri M Damodaran; Chairman, IRDAI, Shri Ajay Seth; Chairman, PFRDA, Shri S Ramann; WTM, SEBI, Shri Kamlesh Varshney and other distinguished guests, colleagues, ladies, and gentlemen. A very good morning to all of you.

I am pleased to be here today for the 10th edition of the Gatekeepers of Governance , as conferences like these provide an invaluable platform for the stakeholders Summit to articulate and understand each other's perspectives. I thank the organisers for this opportunity.

Our theme today is simple to ask but hard to answer: ""Regulatory gaps and overlaps: I am inclined to agree that they do exist and I propose to address this in do they exist?"" two parts, viz. from the standpoint of organisations and thereafter as Regulators.

Most organisations often respond to governance questions by redrawing organisation charts, tweaking reporting lines, and updating committee charters. These fixes do help, but only to a point.

Business models, technology, and vendor chains change faster than boxes on a slide. As firms expand, digitise, outsource, and integrate, two patterns keep showing up: overlaps - two teams or two regulators asking for the same thing; and gaps - a new product, partner, or dataset sitting outside or at the perimeter of any policy.

If we keep editing diagrams without analysing the root cause, we treat symptoms and miss the cause. In my view, the reason, therefore, is ""intent"". When intent is strong and governance is lived in spirit, overlaps simplify and gaps close. When intent is weak, the reflex is to add more rules and procedures - multiplying work but losing sight of the real risk. The real question is how deeply good governance is internalised in everyday decisions and board oversight.

With that lens, let me focus on five practices that I feel matter most:

- i. Boards must own outcomes, not paperwork.
- ii. Independence should be in substance.
- iii. Look through the group, not just the entity.
- iv. Protect and empower the control functions.
- v. Governance gap analysis with real remediation.

Let me briefly elaborate on each of these five aspects

Firstly, boards must own outcomes, not paperwork. A diverse and independent board keeps an organisation on track by overseeing compliance, risk, culture, and ethics. Directors must exercise their duty of care and duty of loyalty, and they must own outcomes . Boards must set risk appetite and outcome goals, and require independent 1 assurance - risk, compliance, and internal audit - to test what matters and report findings, root causes, and their closure.

Secondly, independence is not a label; it is the ability to challenge. It is a posture backed by time, information, and courage. Independent directors should be able to challenge strategy, controls, financials, and risk, and to question the assumptions behind forecasts. Our anonymous 2024 survey amongst boards of banks revealed that many boards prefer consensus, and a meaningful minority of directors hesitate to voice dissent. The Chair's role, therefore, is to draw out quieter views and keep challenge safe.

Thirdly, in large conglomerates,  risk does not stop at the boundaries of individual entities . Boards should see the whole, not just the parts. Two steps help. First, ring-fence critical entities so a local problem does not become a group crisis. Second, enforce strict related-party policies. Such transactions can be legitimate, but they need transparency, fairness, and arm's-length terms. Sound rationale and good documentation are evidence of thought and a tool for future learning, not a bureaucratic burden.

Fourthly, the three lines of defence must be real. Business lines own risk. Risk management and compliance provide challenge and guardrails. Internal audit tests the system independently. The Heads of assurance functions (the Chief Risk Officer, Chief Compliance Officer, and Head of Internal Audit) must have access to the board and to any business line that can create material risk. They should have adequate budgets and full access to information. Decisions on their appointment and removal should rest with the board. Weak lines of defence are to be seen as a board failure, not a staffing glitch.

In an anonymous supervisory survey of assurance heads, most reported strong board backing, but almost half said resources do not match their bank's size and complexity. It is essential to give assurance heads independence, stature, and adequate resources. Otherwise, assurance stays ornamental.

Finally, markets move faster than rules and regulations. A  periodical governance gap analysis  helps organisations see where their policies and frameworks stand against industry best practices - spotting weaknesses, strengthening compliance, and improving risk management . 2

## A system-wide perspective

Modern business is not tidy. A listed company can be part of a conglomerate with banks, NBFCs, insurers, brokers, payment firms, tech subsidiaries, overseas arms, and associates. The regulatory map is equally rich: Company law and MCA, Securities regulation and listing rules, Sectoral regulators for banking, insurance, pension, competition law, insolvency, accounting and audit oversight, market conduct rules, data

and cyber requirements, and multiple enforcement agencies. Add international obligations, exchanges, depositories, SROs, and state-level authorities.

In such a world, some overlap is inevitable. That is not a bug. Overlaps can also act as layers of safety net, ensuring that if one control misses an issue, another may catch it. The real problem, may arise from conflicting rules, duplicated compliance, and uncoordinated enforcement which is avoidable. At the same time, new activities, new technologies, and new business models can fall between the cracks.

So yes, both gaps and overlaps exist. The task for regulators is to work together, minimising harmful overlaps and closing material gaps, without impeding innovation. In that spirit, let me offer three principles, may be aspirational in parts, for optimising overlaps and gaps.

Firstly, regulators must balance entity and activity-based regulation. Regulate the activity wherever it happens, and keep stronger rules for that hold public trust. If an entities app offers investment advice, the advisory guardrails should apply, even if the provider is not a traditional intermediary. If two activities create the  same risk, they should face the same rules -  regardless of the label or the provider.

The second principle is proportionality. Regulators should scale requirements to risk and complexity. A small, simple firm should not bear the same burden as a large, interconnected group; systemically important players should meet higher capital, liquidity, control, and disclosure standards. Proportionality keeps oversight credible and optimal.

The third is to strive towards outcome-based regulation, calibrated to market maturity. Where feasible, make and apply rules to protect outcomes - fair customer treatment, resilience, true and fair financials - rather than locking in processes or technologies. For instance, whether onboarding is on paper or biometric, the test is the same: was the customer identified correctly, and was consent captured? However, calibration matters. Outcomes-based rules work best where supervision and enforcement are strong and markets are mature.

## Conclusion

In conclusion, addressing regulatory gaps and overlaps is a journey of continuous improvement that demands constant reflection, adaptation, and courage to challenge the status quo. When intent is strong, the gaps bridge, overlaps simplify, and governance transcends mere compliance to become our shared conscience.

Thank you. Jai Hind.

- 1  Corporate Governance Principles for Banks, BCBS, BIS (https://www.bis.org/bcbs/publ /d328.pdf)
- 2  William, L. (2006). Governance Gap Analysis. DM Review, 16 (8): 30.",Shri Swaminathan J
https://www.bis.org/review/r251112b.htm,Zhu Hexin: Global economic and trade resilience and China's contribution ,"Keynote speech by Mr Zhu Hexin, Deputy Governor of the People's Bank of China and SAFE Administrator, at the Annual Conference of Financial Street Forum 2025, Beijing, 27 October 2025.",2025-10-27 00:00:00,"## Zhu Hexin: Global economic and trade resilience and China's contribution

Keynote speech by Mr Zhu Hexin, Deputy Governor of the People's Bank of China and SAFE Administrator, at the Annual Conference of Financial Street Forum 2025, Beijing, 27 October 2025.

* * *

Distinguished Vice Premier He Lifeng, Party Secretary Yin Li, Mayor Yin Yong, and dear guests,

Good afternoon! It's a great pleasure to join you at the Financial Street Forum. Just now, Vice Premier He Lifeng delivered an important speech, making arrangements for the financial system to implement the guidelines of the fourth plenary session of the 20th Communist Party of China (CPC) Central Committee. We will ensure its effective implementation. The fourth plenary session of the 20th CPC Central Committee has defined the guiding principles and main objectives for China's economic and social development during the 15th Five-Year Plan period. It has drawn a grand blueprint for the next five years, calling for greater high-standard opening-up to foster a new stage of win-win cooperation. The session emphasized that opening-up should serve as a driving force for reform and development, enabling China to share opportunities and pursue common progress with the rest of the world. To implement the guidelines of the session, I would like to share some thoughts on global economic and trade resilience and China's contribution from the perspective of advancing high-standard opening-up.

In recent years, despite multiple challenges such as the pandemic, geopolitical frictions, and the resurgence of unilateralism and protectionism, global economic and trade activities have demonstrated remarkable resilience. According to World Bank data, total global trade grew at an average annual rate of 5.4 percent between 2019 and 2024, 4.6 percentage points higher than that in the previous five years. Since the beginning of this year, global trade has continued to expand at a relatively fast pace despite a complex and volatile environment. According to the latest forecast by the United Nations, global trade will exceed USD33 trillion this year, reaching a new record high. Behind this resilience lie two key driving forces-technological innovation and open cooperation.

On the one hand, the new round of sci-tech revolution and industrial transformation has been further advanced, injecting fresh momentum into global economy and trade. Artificial intelligence is developing explosively, semiconductor trade is expanding rapidly, and the annual trade volume of integrated circuits has surpassed the USD1 trillion mark. Global green trade is rising swiftly. The annual trade volume of new energy products has grown from tens of billions of US dollars a decade ago to hundreds of billions in the past three years, marking an order-of-magnitude increase. The digital economy is flourishing, giving rise to new forms of trade such as cross-border e-commerce and fueling the rapid expansion of trade in services. In 2024, global exports of digital services doubled from a decade ago.

On the other hand, opening-up and win-win cooperation serve as the endogenous driving forces behind the steady growth of global economic and

trade activities. Practice has repeatedly proven that division of labor, cooperation and mutual benefit among nations are not only the sources of development, but also the foundation for risk resilience and an inherent feature of market economies. Although globalization has faced headwinds in recent years, multi-level economic and trade cooperation among countries and regions has become even closer. The entry into force of the RCEP, the full completion of Regional Comprehensive Economic Partnership negotiations on the Version 3.0 China-ASEAN Free Trade Area (CAFTA), and the official launch of the African Continental Free Trade Area (AfCFTA) are among the new milestones that continue to emerge, helping to uphold a diverse and stable international economic landscape and trading system.

As the world's second-largest economy and the largest trader in goods, China has shared its development opportunities with the rest of the world and made important contributions to enhancing the resilience of global trade and upholding global economic and trade rules.

First, China has played an important role in maintaining the stability of global industrial and supply chains. With the most comprehensive range of industrial sectors and the most complete supporting system in the world, China has offered strong support to the smooth functioning of the global economic cycle by providing highquality manufactured goods and reliable supplies as well as by strengthening international cooperation along industrial and supply chains.

Second, China has actively shared the opportunities presented by its super large market. By steadfastly deepening reform and expanding opening-up, China has provided not only stability on the supply side, but also vast demand on the consumption side. Over the past five years, China's annual imports of goods and services have averaged USD3 trillion, making the country one of the world's most important consumer markets.

Third, China has continued to cultivate new growth drivers for international cooperation in emerging sectors. By accelerating the development of new quality productive forces and advancing industrial transformation, China has been deepening international cooperation in areas such as the digital economy, artificial intelligence, and new energy. In 2024, the value added of China's core digital economy industries accounted for about 10 percent of GDP, while imports and exports of digitally deliverable services exceeded USD400 billion, underscoring China's vital role in supporting global digital trade.

Fourth, China has actively participated in global governance and promoted multilateral cooperation. China has put forward the Global Governance Initiative, firmly upheld the multilateral trading system with the World Trade Organization at its core, and advocated inclusive economic globalization. Through high-quality Belt and Road cooperation, China has provided strong support for developing countries to better integrate into global value chains and the international trading system.

At the same time, China has advanced deep-seated reforms and high-level opening-up in the foreign exchange sector, facilitated cross-border trade, investment and financing, and deepened the development of the foreign exchange market. These efforts have created favorable conditions for various market entities to efficiently allocate foreign

exchange resources, manage exchange rate risks, and better participate in global economic and trade cooperation. In 2024, the trading volume in China's foreign exchange market increased by 37 percent compared with 2020, while the scale of external receipts and payments rose by 64 percent over 2020. In the first three quarters of this year, China's external receipts and payments totaled USD11.6 trillion, reaching a record high for the same period. High-standard opening-up has become a strong driving force for China's economic development.

## Ladies and gentlemen,

General Secretary Xi Jinping has profoundly pointed out that economic globalization is an irreversible historical trend. The more challenging the times, the more we should stay true to our original aspiration for peaceful coexistence and strengthen our confidence in win-win cooperation. We will fully implement the arrangements made at the fourth plenary session of the 20th CPC Central Committee, coordinate development and security, continue to deepen reform and opening-up in the foreign exchange sector, and defend the bottom line whereby no systemic risks will occur. Our goal is to build a sound foreign exchange management system featuring ""greater convenience, expanded opening-up, enhanced security, and upgraded intelligence"".

First, we will improve the foreign exchange policy system that rewards greater integrity with greater convenience. We will enhance the quality and coverage of banks' foreign exchange operations reforms as well as reforms regarding trade and investment facilitation. The number of enterprises now able to handle transactions directly based on instructions has increased more than fivefold compared with the end of 2020. Focusing on trade facilitation, we will soon introduce nine new policy measures, which mainly aim to expand the scope of high-level opening-up pilot programs for cross-border trade and the range of netting settlement transactions, optimize foreign exchange fund settlement for entities in new forms of trade, and ease management of reimbursable expenses in trade in services-all designed to further promote innovation and high-quality development in trade.

Second, we will promote high-standard institutional opening-up in the foreign exchange sector. We will strengthen the overall planning of reforms, promote RMB internationalization and the high-quality opening-up of the capital account in a coordinated manner, and deepen the reform of foreign exchange management in key areas such as direct investment, cross-border financing, and securities investment. In September, we introduced a package of policy measures on cross-border investment and financing. In the near future, we will also roll out policies on integrated RMB and foreign currency cash pooling for multinational companies and on the management of funds raised from overseas listings by domestic enterprises. Meanwhile, we will implement integrated reform and innovation in foreign exchange management within pilot free trade zones to help open up new horizons for China's self-initiated opening-up.

Third, we will enhance our capacity for foreign exchange regulation and risk management in an open economy. We will strengthen the integrated regulation of the foreign exchange market from the perspectives of macro prudential management and micro regulation, leverage artificial intelligence, big data, and other digital tools to empower smart regulation, and reinforce monitoring and early warning of cross-border capital flows. We will also improve our effectiveness in combating illegal and irregular

activities, effectively guard against external shocks, and provide greater stability and certainty to support open cooperation and strengthen the resilience of global economic and trade activities.

## Ladies and gentlemen,

As the capital of China, Beijing serves as the nation's center for politics, culture, international exchanges, and sci-tech innovation. Over the past three years, Beijing's total goods trade has consistently exceeded RMB3.6 trillion, while its trade in services has grown at an average annual rate of nearly 10 percent. The State Administration of Foreign Exchange will continue to support Beijing in taking the lead in piloting more pioneering foreign exchange policies, further enhancing the quality and effectiveness of policies such as pilot programs of high-level opening-up of cross-border trade and investment, as well as the Research Funding Facilitation Policy. We will intensify our support for the development of Beijing as ""Four Centers"" and ""Two Zones"", and help the city play an even more important role in promoting stable and sustainable global economic and trade development.

Last but not least, I'd like to wish this year's Financial Street Forum a complete success. Thank you!",Zhu Hexin
https://www.bis.org/review/r251112a.htm,Chia Der Jiun: Unlocking opportunities in a changing risk landscape,"Official keynote address by Mr Chia Der Jiun, Managing Director of the Monetary Authority of Singapore, at the 21st Singapore International Reinsurance Conference 2025, Singapore, 3 November 2025.",2025-11-03 00:00:00,"## Chia Der Jiun: Unlocking opportunities in a changing risk landscape

Official keynote address by Mr Chia Der Jiun, Managing Director of the Monetary Authority of Singapore, at the 21st Singapore International Reinsurance Conference 2025, Singapore, 3 November 2025.

* * *

Mr Kenrick Law, Chair of the Singapore Reinsurers' Association

Distinguished guests,

Ladies and gentlemen,

A very good afternoon. A very warm welcome to Singapore, in climate and in spirit.

## Introduction

My congratulations to the Singapore Reinsurers' Association for bringing together reinsurers, insurers and brokers from around the world for this year's edition, the 21st Singapore International Reinsurance Conference (SIRC). The SIRC has become a key event in the international insurance conference calendar, and I understand there has been a particularly strong turnout this year of more than 3,800 participants.

Thank you for inviting me to join you at this important event. We have much to reflect on. Earlier in the year, we were faced with substantial uncertainty over the likely path of the global economy. As the year draws near to a close, it is clear that the global economy has demonstrated greater resilience than previously envisaged. We know the reasons. US reciprocal tariff rates have been lower than announced in April. The tariffs' implementation was delayed and a long period of front-loading of exports lifted global economic activity. AI-related investments, and generally accommodative financial conditions have also been supportive of economic activity.

Now, early signs of softness have begun to emerge. Labour markets in the advanced economies are beginning to weaken, while export growth in Asia is slowing following the implementation of tariffs since August.

Global GDP growth could moderate further in 2026 as the lagged impact of tariffs work through. There are also uncertainties ahead such as the potential for renewed trade conflicts and the risk of a correction in AI-driven investment.

Against a backdrop of global uncertainty, growth in Southeast Asia has been relatively resilient. The IMF expects our region to grow 4.3% next year, a similar pace to this year.

The opportunities for serving the protection needs in our region will continue to expand.

- From a large and growing middle class;
- From a growing physical capital stock as economies industrialize and urbanize;
- And from increasing climate stress.

Singapore's insurance market has grown with the region's protection needs.

- The industry saw robust growth over the past five years (2019-2024), employing a workforce of around 19,000 individuals. Over this period, total life, general insurance and reinsurance premiums grew at an average of over 8% annually, to reach about S$78 billion at the end of last year.
- Leading global players are anchoring high value adding capabilities and activities in Singapore.
- a) Insurers are growing their headquarters or regional functions in Singapore, driven by structural and strategic considerations.
- b) Specialty insurance lines and reinsurance capacity are growing, to cover large &amp; complex risks in the region.
- c) Global brokers are also anchoring capabilities in analytics and advisory, risk modelling and sustainability in Singapore.

MAS will continue to collaborate with the industry, to exchange views and co-develop new risk solutions for our region.

Today, I will touch on three specific areas of opportunity where we hope to further collaborate with the industry:

- Harnessing AI and Data;
- Infrastructure financing opportunities in the region; and
- Growing need for climate risk coverage.

## Harnessing AI and Data

First, on AI and Data. In today's digital and hyper-connected world, organisations that collect, organise and use data well, can unlock value and create a competitive advantage.

- Many companies in the insurance industry are applying AI to enhance and even transform their processes. Let me give two exciting examples.
- a) The Aon Impact Forecasting team, comprising members from Singapore and across its four other global offices, has developed an AI algorithm, to create stochastic event sets for tropical cyclones. This has been applied to the APAC region, including cyclone-prone countries such as Japan and Vietnam, and will enhance catastrophe modelling. This generates new insights and potentially more accurate pricing.
- b) A second example. Zurich Insurance, through its regional innovation hub in Singapore, has developed and deployed a commercial insurance agentic AI platform that supports underwriters in assessing risk in real time. A suite of AI agents has been built, with plans for more. The platform has been deployed as a pilot in their Singapore business unit. The firm also aims to double the number of quotes that they are able to process, increase renewals capacity and grow new business. This has the potential for significant productivity uplift.

MAS is partnering with the financial industry to support AI adoption and the anchoring of AI capabilities in Singapore.

- Over 30 FIs have established AI functions in Singapore, including insurers . A 1 number of these Singapore-based AI hubs also operate as their Global AI Competency Centres.
- For example, Prudential's global AI Lab is integrating AI capabilities to drive predictive analytics and hyper-personalised customer engagement in its operations, services and products.
- We look forward to partnering with more insurers to build up their AI capabilities and competency centres here in Singapore.
- At the same time, we are enabling broad AI adoption through the Pathfinder Programme - PathFin.ai.
- a) This Programme enables knowledge-sharing among participants. It creates a library of validated use-cases, proven solutions and implementation best practices. This reduces the time and effort for FIs to identify, select and effectively implement AI solutions.
- b) We recently launched the PathFin.ai Knowledge Hub in early October. The Hub helps FIs to discover how their peers are applying AI, and receive guidance on AI skills and workforce transformation.
- c) Among the insurance AI use-cases available in the Knowledge Hub, let me cite one example:
- A customer-facing adaptive AI agent that manages the client's entire claims journey - from processing the First Notice of Loss through to validation, decisioning, adjustment and follow-up;
- d) This Pathfinder collaborative initiative started with 20 FIs in the middle of this year, and has grown rapidly to over 100 participating FIs.
- As AI adoption scales, we are also addressing industry feedback about strengthening governance in this area.
- a) MAS is developing supervisory guidelines to establish clear expectations for AI risk management. This will cover oversight of AI risks, including risk management systems, policies and procedures, and AI life cycle controls.
- b) Through an industry consortium, Project Mindforge, MAS works with partner FIs, including some insurers, to develop an AI risk management handbook to guide responsible AI deployment.
- c) The handbook complements the supervisory guidelines. For example, the guidelines highlight key risk areas to consider in utilising third-party AI, while the handbook includes possible good practices such as information templates to obtain necessary information from third party providers.

MAS will continue to partner with and support the industry to adopt AI effectively and responsibly, while supporting the financial sector workforce to gain the skills to use AI to augment their jobs.

## Infrastructure financing opportunities in the region

The second opportunity is the growing demand for infrastructure investments in Asia. The needs in our region are vast and diverse, and span the range of renewable energy projects, grid upgrades, urban development, transportation networks and climateresilient infrastructure.

- The Asian Development Bank estimates that developing countries in Asia-Pacific will need to invest US$1.7trillion annually in infrastructure through 2030 to maintain growth, address poverty and mitigate climate change . 2

We see opportunities for insurers to invest and support the large infrastructure financing needs in the region. Insurers hold significant investment capacity and balance sheets, and the long duration of infrastructure investments match well with the longer-term liabilities of life insurers.

As such, we intend to partner the industry to further the region's infrastructure needs by firstly, providing for differentiated capital treatment for qualifying infrastructure investments; and secondly, by introducing a time-bound pilot to provide some capital relief even for certain non-qualifying infrastructure investments.

On the first initiative, MAS has recently published our finalised proposals on the differentiated capital treatment for qualifying infrastructure investments under the RBC 2 framework. These proposals support insurers to better manage risks through improved asset-liability matching, whilst expanding their capacity to support long-term infrastructure financing needs in a risk appropriate manner.

We note that there may be infrastructure equity and debt funds that do not fully meet the qualifying criteria specified under the finalised proposals.

- For example, sustainable infrastructure investments in carbon capture and renewable energy projects that are in the greenfield or construction phase. Such investments do not meet the criterion of being in the operational phase for a minimum number of years.
- Hence, MAS is introducing a second initiative. Through a time-bound pilot, insurers can participate in such non-qualifying sustainable infrastructure investments with some reduction in the capital charge.
- To qualify for the pilot, these infrastructure assets will need to meet internationally recognised sustainability principles, standards or guidance.
- The calibration of the capital charge will depend on the extent of risk mitigation offered by asset suppliers to address the unmet risk criteria.
- We are glad that asset managers such as BlackRock, Brookfield, Clifford Capital and Macquarie Asset Management have indicated interest to participate in this initiative.
- We welcome other asset managers and insurers in Singapore to partner us on this pilot and give us your feedback. The pilot will start in January next year. More details will be provided soon.

## Growing need for climate risk coverage

The third opportunity I would like to raise is climate risk. With the increase in frequency of high impact disaster events, there is an increasing need to ensure that we have the right capacity to meet protection needs.

- Between 2000 and 2023, natural disasters have led to annual average losses of almost US$50 billion across the APAC region. These losses are driven mainly by floods, earthquakes and cyclones . 3
- Asia, in particular, is disproportionately exposed to the rising frequency and severity of natural catastrophes. Just last month, following heavy rain from Typhoon Matmo, Vietnam recorded the highest flood levels on three northern rivers in nearly 40 years. This led to tens of thousands of people stranded or displaced and the loss of some lives.

Governments and businesses are increasingly sensitised to the need for protection against these risks. As a result, there is a growing need for risk coverage, including in climate events.

MAS continues to support the growth of the mainstream insurance market to service the region's needs. We support international insurers and reinsurers to scale capacity and deepen their operations and underwriting expertise here, undergirded by a robust regulatory framework that facilitates innovation.

At the same time, the alternative risk transfer (ART) market can play a complementary role. The alternative risk transfer market expands the overall capacity and strengthens resilience to large-scale shocks.

- Insurance-linked securities (ILS) are increasingly being used to allow capital market participants to share the risks of insurance perils.
- a) In the US, ILS has become an important source of risk capacity, particularly to help manage the financial impact of hurricanes.
- b) Comparatively, the ILS market in Asia remains nascent. The current ILS penetration in the region is modest, with limited issuance and adoption by insurers, reinsurers and investors.

Singapore's deep and diverse risk management ecosystem allows us to serve as the regional centre for risk financing and alternative capital. MAS has supported the issuance of 29 catastrophe bonds to date, covering perils such as storms, earthquakes and floods globally and in the region.

- As financial markets in the region continue to grow, the potential investor base for ILS is broadening. ILS provide attractive, stable returns that are typically uncorrelated with other asset classes. This makes it an attractive instrument for institutional investors seeking to diversify their portfolios in the region.
- ILS also provides a way to align investments with climate-resilient goals, making it an increasingly attractive investment in Asia's growing focus on green finance and sustainability.
- With climate risks growing globally, including in Asia, we expect continued momentum in the growth of ILS alongside reinsurance capacity in our region, as more countries and businesses seek greater protection from catastrophic risks.

Hence, to support the growing demand for risk transfer solutions, particularly in Asia, MAS has refreshed the ILS Grant Scheme to offset issuance costs. To encourage broader market participation and innovation, we will extend our support to cover nonAPAC risks and renewals, while continuing to prioritise support for issuances that directly address protection needs within APAC.

MAS will also work with the industry to attract and catalyse demand for ILS in Singapore. We welcome sponsors and asset managers and owners that are keen to establish ILS structuring or investment teams here to engage MAS directly.

## Conclusion

In closing, as we look ahead, while risks will continue to evolve, within these challenges lie significant opportunities. The insurance industry will continue to play a vital role, to meet the region's growing demand for protection across lives, wealth, and assets.

With that, I wish you a fruitful conference ahead.

Thank you.

1 Examples for insurance include Prudential, which has an AI COE in Singapore, whilst FWD, Great Eastern and Income have AI teams in Singapore.

- . ADB, 2017 2 Meeting Asia's Infrastructure Needs
- 3  Protection Gaps in Insurance for Natural Hazards and Retirement Savings in Asia, OECD (Jul 2025)",Chia Der Jiun
https://www.bis.org/review/r251112g.htm,Olaf Sleijpen: With great power comes great responsibility - the case for policy coordination,"Opening remarks by Mr Olaf Sleijpen, President of De Nederlandsche Bank, at the 8th Annual Research conference of De Nederlandsche Bank, Amsterdam, 11 November 2025.",2025-11-11 00:00:00,"## Olaf Sleijpen: With great power comes great responsibility - the case for policy coordination

Opening remarks by Mr Olaf Sleijpen, President of De Nederlandsche Bank, at the 8th Annual Research conference of De Nederlandsche Bank, Amsterdam, 11 November 2025.

* * *

Good morning, everyone.

So, apparently, one is either a fan of Superman, Batman, and Wonder Woman, or of Spiderman, Iron Man, and the X-Men. One either grows up in the DC universe or the Marvel universe. One is either a superhero fan or- a superhero fan, I guess.

Now, whether you like superhero movies or not, there are clear rules: superheroes from one universe can bicker amongst themselves, but not with superheroes from the other universe. Bruce Wayne and Peter Parker will never get to discuss bats and spiders.

Personally, I enjoy these movies. Even though the moral lesson - yes, there is always a moral lesson - is thinly veiled: working together is the only way to save the day.

Now, thinly veiled as these superheroes' lessons are, so too is my introduction this morning.

In our case, it is not whether you are a 'monetary policy Clark Kent', or a 'fiscal policy Tony Stark'. It is about how you work together, across policy domains, to ensure economic prosperity, even in times of stress.

Recent shocks have proven this point: they have shown how closely monetary and fiscal policy interact in response to economic stress. And the results were mixed.

During the European sovereign debt crisis, monetary and fiscal policy often moved in opposite directions - and this arguably reduced their effectiveness.

During the pandemic, they were more aligned, supporting economic recovery. Yet, misalignment reappeared amidst the recent episode of high inflation. Fiscal support persisted for too long while monetary policy tightened.

So, alignment is not a given. There is no invisible hand that orchestrates balance.

Of course, monetary and fiscal policymakers must be independent - each within their own mandate. But independence does not mean that interaction becomes irrelevant. On the contrary, it will - at least partly - shape the decisions we need to make for the future.

For instance, when we look at the stability of our monetary union.

Sharing a single currency brings vast economic opportunities. But how much we actually benefit from these opportunities depends significantly on the actions of our national fiscal authorities.

Today, we see many fiscal differences between member states. On their own, these differences are not a problem. But because our economies are so deeply interconnected, extreme disparities can weaken how monetary policy works across the EMU. Fiscal strains in one country can quickly spill over into others.

Looking ahead, we'll likely face more frequent supply shocks - for instance from extreme weather or geopolitical tensions. To address these shocks, we need a strong, less fragmented EMU.

On top of that, we are also facing increased political uncertainty. This could threaten financial stability and hinder the effectiveness of monetary policy.

So, even though we have a comprehensive set of tools to reduce market fragmentation and ensure smooth monetary policy transmission, we cannot afford to become complacent. Vigilance remains essential.

This brings me to some important questions: what kind of institutional framework can safeguard monetary policy transmission and preserve the fiscal space we need to absorb shocks - even in the face of significant imbalances? And should we reinforce domestic fiscal frameworks, or is it time to move toward stronger coordination at the supranational level?

If we now turn to the longer-term challenges facing fiscal authorities, it is clear that these will put even more pressure on already strained public finances.

Beyond the need for stabilisation, governments are facing increasing pressure on public finances. They must invest more in climate action, accelerate the digital transition, adapt to an ageing population, and strengthen defence capabilities.

When these investments are aimed at public goods, they can boost growth, reinforce our economies, and help us weather future shocks. They might even raise the natural interest rate, giving central banks more flexibility to act in downturns. But in the short term, such spending can also fuel inflation and increase deficits, pushing public debt higher.

So, we must ask: do these long-term fiscal plans help or hinder central banks in their pursuit of price stability? How can central banks keep inflation in check without holding back investments that drive growth? And could deeper European capital markets, or joint financing of public goods, help ease the pressure on national budgets?

With these questions in mind, let me conclude.

Monetary and fiscal policy have clear, distinct goals. And both have large, powerful tools at hand to achieve these goals. But as Spider-Man put it: with great power, comes great responsibility.

And so, since monetary and fiscal policy inevitably interact, our responsibility to coordinate them grows with every new challenge we face. And this task lies not with superheroes, but with people. Ordinary people with extra-ordinary jobs. People that look at academics and experts like you to help navigate their responsibility - to clarify how both policies interact, identify risks and opportunities, and offer evidence-based paths forward. What you will share over the next two days matters, because it will turn complex questions into actionable knowledge.

I look forward to the insights and debates ahead and I wish you a truly superheroic conference.

Thank you.",Olaf Sleijpen
https://www.bis.org/review/r251112f.htm,Denis Beau: A compass to guide us toward intelligent AI supervision,"Opening remarks by Mr Denis Beau, First Deputy Governor of the Bank of France and Designate Chairman of the ACPR, at the conference on ""Artificial intelligence and financial stability"", Lisbon, 27 October 2025.",2025-10-27 00:00:00,"## Denis Beau: A compass to guide us toward intelligent AI supervision

Opening remarks by Mr Denis Beau, First Deputy Governor of the Bank of France and Designate Chairman of the ACPR, at the c onference on ""Artificial intelligence and financial stability"", Lisbon, 27 October 2025.

* * *

Ladies and Gentlemen,

Let me begin by thanking the Banco de Portugal and its Governor, `lvaro Santos Pereira, for their invitation to this event, which I am delighted to attend.

Artificial Intelligence (AI) is increasingly transforming the financial sector. A recent conducted by the ACPR shows, for example, that survey nearly all banks and now operate AI systems. The stated objectives are to insurance companies in France enhance operational efficiency, improve customer service, and help better manage risks.

However, the growing adoption of AI in the financial sector also carries . First, for risks - consider the dependency of financial institutions on major AI model financial stability providers, which are also key cloud service providers. Second, for the solvency of , since a poorly managed use of complex systems can lead to individual institutions systemic losses. And finally, quite obviously, for . consumers

These risks contribute to explaining our for AI use in Europe, to regulatory framework ensure it is developed in a controlled manner. This framework includes, of course, the , but also - and this must be kept in mind - the , European AI Act sectoral regulation which applies to AI as it does to any other technology used by financial players.

In this context, we, financial supervisors, face today the complex question of the ""right"" way to oversee AI: how to apply the AI Act and sectoral rules to this rapidly evolving technology? Which systems should be examined? How, and to what extent?

In my initial remarks, I would like to share with you the that guides us at the compass ACPR, to help us answer these questions, namely simplicity and the pursuit of . In terms of rules to refer to, this compass can help us build a efficiency coherent (I). From a supervisory perspective, it can help us define high-level overall framework principles for of AI systems (II). effective and efficient oversight

I/ As regards applicable rules, one key issue still to be clarified as we speak is how the . requirements of the AI Act will integrate into the financial regulatory framework

To shed light on this, a major has been underway at the European mapping exercise level for nearly a year, . Its under the guidance of European supervisory authorities initial findings are , as . reassuring no major contradictions have been identified However, after identifying the various rules applicable to AI, we still need to explain and how they will be articulated in theory how they will be implemented in practice

.

The theoretical articulation of rules primarily falls to the , which European Commission will publish on this topic in the coming months. However, guidelines how financial - and the choices they make supervisors implement these standards will be in determining the actual impact of AI regulation on financial institutions. crucial

In this regard, I believe that we must and avoid a literal interpretation of the texts instead favour a convergent and constructive one, emphasising commonalities with the objective of identifying . what only needs to be verified or reported once

To illustrate my point, consider the , for which the AI Act risk management system itself stipulates that its requirements may be integrated into or combined with the relevant EU legal provisions. The constructive interpretation of this should lead us to ask financial institutions to , such as the include only the 'new elements' of the AI Act risks of discrimination or algorithmic opacity. , such as the Everything else requirements for internal governance arrangements, processes and mechanisms provided for in the CRR/CRD framework, or the cyber risks covered by the DORA framework, would be considered as meeting the AI Act requirements once the . It would then be up to the sectoral requirements are met various supervisors to , as there would be no question of share the relevant information with each other carrying out redundant checks.

Our ultimate goal should be to organise the oversight of AI systems in the financial in such a way as to limit risks not only from the perspective of the AI Act, but sector also in terms of our other missions: financial stability and consumer protection. To this end, we must make the most of the synergies with our existing supervisory , in line with the simplicity and efficiency that I mentioned earlier. activities

II/ This brings me to the second part of my remarks, on how to supervise effectively and efficiently AI systems in the financial sector. First, we must apply the principles of that underpin the AI Act. This does not mean continuously ""market surveillance"" monitoring all AI systems in the financial sector; rather, we must adopt a risk-based , that enables us to identify and focus on systems that pose significant risks. approach

Being selective in the systems we examine does not mean settling for minimal . . This selectivity should enable us, when necessary, to oversight Quite the opposite conduct - not just administrative checks, but in-depth reviews of AI systems ""underof algorithms to examine and discuss their technical the-hood"" inspections characteristics.

To conduct these selective yet potentially deep inspections, we will clearly need to . This should assess system develop an AI system assessment methodology governance, as well as characteristics such as performance, robustness, fairness, explainability, and cybersecurity. Some of these elements are in a relatively familiar sector where many processes have long relied on models. , Others are entirely new especially the challenges related to the of increasingly opaque AI explainability algorithms as technology advances.

And we need to work on this methodology without delay. It will have the advantage of enabling us to , gradually refine our expectations regarding financial institutions and thus to . In a shifting regulatory and technological support them more effectively landscape, we have a in helping institutions implement the crucial role to play ""right"" . risk management tools

This is certainly an ambitious programme. And it is an urgent one. It requires that supervisors across all AI-related topics. This involves recruiting build expertise , which is no small challenge. We will also need , specialised profiles external support particularly through partnerships with . Supervisors will specialised research institutes also face the , nationally, at the European level, and pressing need to cooperate beyond.

Finally, I believe we must aim to co-develop assessment methodologies with the , as supervisors and supervised entities share many challenges on financial sector these issues. At the ACPR, we have recently organised methodological workshops with volunteer institutions on complex topics such as algorithmic fairness and explainability. These help us move faster and more concretely toward what a could look like in the financial sector. ""trustworthy AI""

In conclusion, I would like to stress that AI surveillance, beyond its intrinsic importance, can serve as a , paving the way for new supervisory laboratory for our other missions methods that are not only risk-based, but also incorporate the ever-growing of financial processes. This naturally leads to another topic technological dimension we may explore further in our discussions: the deployment of new technologies for -. This is indeed essential to our internal use what we call the ""SupTech"" approach maintaining our effectiveness in the future.

Thank you for your attention.",Denis Beau
https://www.bis.org/review/r251110m.htm,T Rabi Sankar: Transformational technologies and banking - key issues,"Keynote address by Mr T Rabi Sankar, Deputy Governor of the Reserve Bank of India, at the 12th SBI Banking and Economics Conclave, Mumbai, 7 November 2025.",2025-11-07 00:00:00,"## T Rabi Sankar: Transformational technologies and banking - key issues

Keynote address by Mr T Rabi Sankar, Deputy Governor of the Reserve Bank of India, at the 12th SBI Banking and Economics Conclave, Mumbai, 7 November 2025.

* * *

Shri Setty, Chairman, SBI, Shri Amara, MD, SBI, distinguished leaders and members of the financial fraternity. It gives me immense pleasure to be a part of what feels like, and perhaps is, the nerve centre of the Indian financial system.

The theme of the Conclave 'India's Quest for Self-Reliance in a Fragmented World Order', makes this event particularly timely and critical. The comfortable assumptions of the post-Cold War era of globalisation are fading as we are seeing a re-emergence of protectionist tendencies and re-shoring of critical supply chains. Economies and societies are struggling to adjust not just to the rapid pace of change of technology, but also as the fundamental nature of technology itself is undergoing a paradigm shift. Technology has always been a catalyst for improving efficiency in delivering financial products, but now it has become the very foundation upon which the future of financial intermediation rests.

## Technology and Banks

Today I want to dwell on a theme that reverberates in the current era of disruptions and fast-paced changes, the . Every aspect of finance, from role of technology in banking payments and credit to savings, investments, regulation and supervision, is already being redefined through technology.

With powerful technologies like artificial intelligence (AI) and quantum computing already under way, our challenge is how to embrace them with wisdom and purpose, and ensure that technological evolution is secure, inclusive, resilient, and future-ready.

India's experience in digitisation shows that countries who harness technology with foresight and responsibility will not only adapt to change but shape it. Our uniquely successful model of leveraging Digital Public Infrastructures (DPIs) like Aadhaar or UPI has not only positioned India as a leading example of digitisation, but also it has set an example for other countries to follow. For transformational change, it is not enough that technology is ubiquitous, it should also be foundational.

## Lessons from India's Digital Journey

If we look back today, we can see that India's banking system has passed through twoand-a-half decades of innovations in payment technology - starting from ATM networking and moving through a gamut of retail and wholesale digital payment instruments like RTGS, NEFT and IMPS to the game-changing UPI and continuing on to experimenting with digital currency. The journey has been gradual yet, transformational. What are the main lessons that we can glean from this experience that has placed India as a leading example of payments innovation?

- a. The very first thing to note is that virtually all of these initiatives came from the public sector, whether it is the ATM Switch, or NEFT/RTGS or UPI or, moving slightly away from the financial sector, the Aadhaar. Even the initiatives to set up key institutions - IDRBT, NPCI, IFTAS, and more recently, RBIH - were all public sector initiatives.
- b. The second aspect is that all of these initiatives were by way of creating infrastructures, specifically digital public infrastructures. They were situated in what can be termed a public goods space; they were priced like public goods minimal charges or free; they were accessible by all, like public goods.
- c. Thirdly, these DPIs were made available as a foundational layer for technology firms to create innovation. This gave the Indian approach a uniquely public-private cooperation character, an approach that resulted in the best of both worlds - while the public sector focuses on what it does best - create public infrastructure, the private sector focuses on where it has clear competitive advantage - innovation.
- d. Fourthly, open access to DPIs led to a rise of new fintech players such as payment aggregators, PPI issuers, third-party app providers, etc, bringing agility, innovation, and particularly scale. DPI has thus contributed to the growth of the fintech sector itself.
- e. Finally, there is a general realisation that the new fintech players, mainly because they had no legacy systems that tied them down, were far more nimble and innovative than incumbent banks. While this did not undermine the role of banks as such, it exposed the Achilles heel of the banking system - that banks could be vulnerable to strong inertia in adapting to new technology. This leads me to the basic theme of my talk - the nature of the challenges new technology poses for banks.

## Banks and new Fintechs

Let me first explain the vulnerability by using the context of UPI. UPI is essentially a payment instrument that transfers funds from one bank account to another (it can also use wallets, but that is a negligible part of the volume, so we will ignore it for this purpose). All UPI transactions are therefore payment transactions made through banks. Yet when we talk of UPI, the first entity that comes to mind is not a bank but a non-bank UPI app. It is well recognized that these fintech entities have taken UPI to where it is today, and that but for them UPI would not have been able to reach the nooks and corners of the country. Acquisition of customers and their payments data, was enough of an incentive for these app providers to extend these services even in the absence of any revenue. It is also important to appreciate that these FinTechs had certain basic advantages -

- a. Technology edge - Fintechs are more agile as they have no legacy IT systems, enabling them to use technology that is more conducive to scale up, integrate and upgrade. Banks, with their core banking systems find it difficult to modernise and upgrade.

b.

- b. Data advantage - Fintechs can access wider, larger and more comprehensive data sources (for example across multiple banks and spending channels).
- c. Cost advantage - With asset light balance sheets, no physical branches and very little due diligence requirements (KYS, AML/CFT etc), these fintechs incur a lot less cost than banks.

These advantages were large, and it can be reasonably argued that banks were unfairly disadvantaged (higher regulatory burden, frictions of KYC process and AML checks). In a competitive market, banks would have recovered their higher costs from the fintechs, but then, adoption of new technology would probably have suffered. But even without these disadvantages, it would be reasonable to assume that banks just did not foresee the potential in UPI that the FinTechs did. Part of the explanation lies in the very nature of banks.

Banks are special entities, unlike any other business. They have an important socioeconomic role, that of creating money. Because of this role, banks are licensed and closely regulated and supervised. This arrangement works to the benefit of banks, because entry is not free and there is some degree of underwriting by the State. It also has a disadvantage that banks have to bear the cost of regulation, both financially and in terms of the obligation to follow prudential processes. One corollary of this somewhat protected environment within which banks operate is that their innovation edge is blunted. This is probably the reason banks did not fully appreciate the potential benefits of UPI, as keenly as the fintech players did.

If this indeed is true, it is time the banking system thought hard and deep about the challenges from the transformational technology changes we are living through. Technologies like artificial intelligence, blockchain, quantum and digital currencies, will shape the next decade of financial transformation. These technologies pose challenges that are fundamental to banks.

- a. Most money in modern economies is bank money. Creating money through extending credit is the most basic function of a bank. The advent of digital currencies is now providing an alternative. We can no longer assume that banks would always remain because who else would create money, that is the lifeblood of modern economies. The risks from private digital currencies to banks appears existential, yet not well understood or debated globally. Even with CBDCs, which become a necessary bulwark against private digital currencies, banking business is likely to change significantly, and these impacts need to be understood by banks. It is not just the responsibility of a central bank, the issuer.
- b. Banks are the core intermediaries in financial markets. Every financial transaction, whether or not it requires other types of intermediaries (e.g., brokers or marketmakers) would always require a bank to authenticate the payment leg. This is something only a bank could do. With the blockchain technology, this could well change. The basic function of a blockchain is to authenticate financial transactions

in the absence of a trusted intermediary. It is now possible that banks may not be required to authenticate payments, substantially impacting their role as intermediaries.

Apart from these fundamental challenges, new technology poses various other risks to the roles that banks traditionally play. For instance, digital currencies can provide a superior alternative to banks in cross-border payments. Quantum computing, though nascent, could one day revolutionise encryption, risk modelling, and portfolio optimisation. AI can interpret blockchain data; CBDC can embed smart contracts; IoT devices can trigger automated financial settlements. Together, they signal a shift from a system of intermediated finance to one of intelligent interconnections.

The risks emanating from these technological shifts need to be recognized and understood. True, at this stage these risks are more conceptual than actual, yet at the very least they can eat into the exclusive domain of banks. Banks, therefore need to be prepared well to meet these challenges and maintain their central role in monetary transmission and financial stability.

While by now banks have a fairly good understanding of how to approach technology adoption, I would only reiterate a few aspects that need to be kept in mind with respect to adopting the new transformational technologies.

- a. Banks have inherent strengths - credibility, balance sheet depth and customer base. Technology asymmetry tends to dilute these benefits. The ability to leverage these strengths would depend on the agility and speed with which banks modernize their systems and reimagine their business processes.
- b. The nature of technology change facing banks is different. Many technology changes are no longer incremental, they are re-architectural. Platform technologies effectively enable nonbanks to come into the banks' domain. Distributed ledgers undermine the traditional institutional guarantees that banks provided. Therefore, competitiveness may no longer depend as much on balance sheet strength but on data capability and technology flexibility.
- c. Since banks are structurally vulnerable because of their monolithic IT systems and high fixed costs arising from branch network and compliance costs, incremental digitisation is unlikely to be enough to keep them competitive.

In this context, what can be the strategic imperatives for banks to prepare for transformative technologies? Modernising core infrastructure to make it less monolithic and rigid is one such imperative if banks have to compete with the fintech ecosystem. Adopting a platform orientation and API based collaboration with fintechs is another. Perhaps the most important requirement is reengineering the culture of innovation within banks and creating incentives for learning and skill upgradation from within. Human expertise to innovate, govern, and responsibly deploy technology remains the differentiator in a digital world. Institutions must cultivate deep digital and data skills at all levels, ensuring teams are equipped to navigate complexity and seize opportunities.

Equally importantly, banks need to treat fintechs as partners in innovation and create a mutually beneficial or symbiotic strategic partnerships with them. The objective should be to benefit from the agility of fintechs without compromising prudential discipline.

## Concluding thoughts

As we reflect on the transformative absorption of technology in finance, one truth is unmistakable i.e., while technology is inevitable, its direction is intentional. The choices banks make today will shape not only the architecture of their IT systems but the experience, inclusion, and trust of millions of citizens tomorrow. As technology is rewriting the very DNA of finance, the preparedness of banks will determine whether they lead this transformation or are led by it. Institutions that adopt technology strategically, embed strong governance principles, develop human capital, and collaborate across the ecosystem will not only navigate change but will shape it.",T Rabi Sankar
https://www.bis.org/review/r251110k.htm,Philip N Jefferson: AI and the economy,"Speech by Mr Philip N Jefferson, Vice Chair of the Board of Governors of the Federal Reserve System, at the Euro20+, hosted by the Deutsche Bundesbank, Frankfurt am Main, Germany, 7 November 2025.",2025-11-07 00:00:00,"## Philip N Jefferson: AI and the economy

Speech by Mr Philip N Jefferson, Vice Chair of the Board of Governors of the Federal Reserve System, at the Euro20+, hosted by the Deutsche Bundesbank, Frankfurt am Main, Germany, 7 November 2025.

* * *

Thank you, President Nagel and the Bundesbank, for the opportunity to meet with you today. 1   I am excited to be here. I cherish opportunities to talk with groups of young people such as this. I spent most of my career as a professor and university administrator. I am glad to return to those roots a bit today. I will make sure I leave plenty of time for questions. But I would like to start by speaking with you about a topic that's been on my mind, and I bet it has been on many of yours: artificial intelligence (AI).

Often, when I gather with students, consumers, or businesspeople, the conversation quickly turns to AI. And it is easy to understand why-you do not even need to ask a chatbot! AI has the potential to transform how we work and how we live, and it could have a profound effect on the economy. Today, I will talk about AI's rapid growth and how I approach thinking about AI by examining it through the lens of the dual mandate given to the Federal Reserve by the U.S. Congress. That mandate instructs America's central bank to pursue maximum employment and price stability. I will describe the effects that AI may have on both sides of that mandate. Finally, I will briefly update you on my economic outlook before turning to your questions.

## AI's Rapid Growth

In a few short years, AI morphed from the realm of science fiction to a tool that high schoolers use to help them do their science homework! Seriously, it is amazing to see school children use AI to generate quizzes to prepare for exams, home chefs use it to create recipes for a wholesome dinner, and jobseekers use it to consider career tradeoffs, among many other purposes. Consumer use of AI has grown rapidly, and it is integrated into a multitude of existing products, including search engines, phones, and vehicles.

As of last month, ChatGPT, which is just one of a growing number of generative AI models, is used by more than 800 million people every week, an increase from 500 million a week at the end of March. 2   Enterprise use of AI has been growing too. A recently released study showed that the proportion of Americans using AI at their jobs has also been growing at a fast clip. Researchers found that workers' adoption of generative AI rose from 30.1 percent as of December 2024 to 45.9 percent as of June and July of this year. 3   And among survey respondents who had adopted AI tools, about a third said they use them daily. That same study found that AI is most used at jobs by younger, more highly educated, and higher-earning workers and that productivity for workers increased substantially when using AI tools.

There is strong evidence that AI can increase labor productivity in various industries and occupations. For example, a paper from Stanford economist, Erik Brynjolfsson, and

coauthors showed the effects of AI implementation among customer support agents. 4 They found that AI tools increased productivity-as measured by issues resolved per hour-14 percent, on average, and the improvement in productivity for novice and lowskilled employees was much larger.

AI is also advancing productivity in highly technical scientific research. Take protein folding, for example. Proteins are the building blocks of the human body and life itself. They assume an almost infinite variety of shapes. Predicting those shapes-which determine their function-is vital for understanding how cells and diseases work and for finding drugs to treat them. Just five years ago, scientists had a good understanding of the structures of just 17 percent of the roughly 20,000 proteins in the human body. 5   For each protein, that knowledge was earned through months or years of hard work and a potential cost of tens of thousands of dollars or more. Thanks to the development of the AlphaFold model, an AI system that predicts a protein's structure, scientists now know the structures of all the proteins in the human body-and some 200 million more. 6

More broadly, like many others, I see the promise for AI technology to be transformative, perhaps in ways as dramatic as past technological achievements, such as the printing press, steam engine, and the Internet, which are known as general purpose technologies for their wide-ranging effects.

## Labor Market and Prices

When I think about this technology, I consider how it will affect both sides of the Fed's dual mandate of promoting maximum employment and stable prices. As such, it is something that economists and policymakers must monitor.

AI can allow a worker to complete tasks in moments that previously took many minutes, if not hours. That has caused many to question whether AI will lead to notable job loss. This potential disruption of labor is a real risk. By automating certain tasks, it could lead to a reduction in some types of jobs. But increased productivity leads to economic growth, which may create new employment opportunities. AI is also expected to create new job categories and transform existing ones. There has been robust competition among high-tech firms for workers who possess the skills to develop this technology. 7

Many have legitimate concerns that AI will cause job loss. At least for certain firms and workers in certain occupations, this is likely to be true. There are many examples where transformative technologies, such as the personal computer, did cause some workers to lose their jobs, but we also saw new industries and occupations emerge because of the innovation. Indeed, some large employers have recently indicated they are lowering overall hiring plans in light of advances in AI and other forms of automation. 8   Some research has also suggested that AI is having a more detrimental effect on the job prospects of younger, less experienced workers, including recent graduates, relative to those further along in their careers. 9   The net effect on employment is highly uncertain and may show variation across industries and occupations over time. For the overall economy, one way to think about AI-related job losses-at least until it creates new jobsis that it can create economic slack. In a world where firms only deployed AI to replace existing workers, even at a lower level of overall employment, the productive capacity of the economy has increased (or stayed the same). Of course, if people seamlessly get

redeployed to more productive tasks, the economy produces more without any additional slack-more on this soon. Whether AI substitutes for labor or complements it is an important question that requires continued study.

On the other side of our dual mandate, price stability, AI could help the economy achieve higher growth through increased productivity while reducing inflationary pressures. Specifically, increased productivity could lower production costs and put downward pressure on prices. Not only could AI allow a specific worker to be more efficient in their day-to-day tasks, but it also has the potential to allow for better thinking around complex problems-for example, in logistics and transportation. More efficient allocation of resources as well as potential improvements in supply chains could reduce associated costs, leading to lower prices for various goods and services. Conversely, AI could put upward pressure on certain price categories as many firms push to scale up the technology. I mentioned the rising wages for certain workers with skills that complement AI. AI technology also requires data centers, which compete with other production processes for land, energy, and other inputs. So, I think that AI's effect on inflation is not solely downward pressure.

## Implications on monetary policy

So, what do these still-developing labor and price effects mean for monetary policy? The short answer is that it is likely still too soon to tell. As always, policymakers confront the challenge of sorting out changes in the economy that are due to cyclical factors from those resulting from structural change, which AI may well represent. Some of the recent changes in hiring patterns, productivity growth, and inflation are likely to represent AI-driven change, but it is difficult to know the degree.

Productivity gains from AI may affect the relationship between employment and inflation and hence the conduct of monetary policy. For example, a productivity-induced boost to the growth rate of potential output could imply that monetary policy will not need to react strongly to what would have previously been perceived as tightness in the labor market.

The uncertain implications of AI for employment and inflation could take some time to filter broadly through economy. Also, AI's effects will likely vary across different industries and regions of both the U.S. and the world. And monetary policy decisions need to be made with a broad view of what is happening in the economy, not just in one sector or technology. There is still much to learn. I counsel exercising humility about the challenges in predicting AI's effects on employment and inflation. Policymakers, businesses, and individuals should remain flexible and prepared to adapt as the effects of AI continue to unfold.

## Economic Outlook

Now having discussed the policy implications of AI, I would like to briefly update you about my current outlook for the U.S. economy. While federal statistical agencies are largely not producing data during the government shutdown, data available from other sources suggest that the overall economic picture in the U.S. has not changed much over the past few months. The economy has been growing at a moderate pace while labor market conditions appear to be consistent with a gradually cooling. Inflation is running at a rate similar to that of a year ago. The lack of progress on headline inflation

appears to be due to tariff effects, with signs that underlying inflation may be continuing to make progress to 2 percent. Market-based long-term inflation expectations continue to be well-anchored. I remain firmly committed to returning inflation to the Fed's 2 percent target.

I supported last week's decision to reduce our policy rate by a quarter percentage point. That step was appropriate because I see the balance of risks as having shifted in recent months as downside risks to employment have increased. The current policy stance is still somewhat restrictive, but we have moved it closer to its neutral level that neither restricts nor stimulates the economy. Given this, it makes sense to proceed slowly as we approach the neutral rate.

With respect to the path of the policy rate going forward, I will continue to determine policy based on the incoming data, the evolving outlook, and the balance of risks. I always take a meeting-by-meeting approach. This approach is especially prudent because it is unclear how much official data we will have before our December meeting.

Before I turn to your questions, let me conclude by saying that this is an exciting time. It feels like we are at the dawn of a new age-an age your generation will shape and see come to its full maturity. By the end of your careers, many of you will take on tasks and accomplish feats you cannot even imagine at this moment, and AI technology may well be part of that progress.

Thank you again for having me. It is an honor to be here. I am looking forward to our discussion.

- 1  The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.
- 2  Rebecca Bellan (2025), ""Sam Altman Says ChatGPT Has Hit 800m Weekly Active Users,"" , October 6, https://techcrunch.com/2025/10/06/sam-altman-saysTechCrunch chatgpt-has-hit-800m-weekly-active-users/.
- 3  Jonathan Hartley, Filip Jolevski, Vitor Melo, and Brendan Moore (2024), ""The Labor Market Effects of Generative Artificial Intelligence,"" unpublished paper, available at SSRN: http://dx.doi.org/10.2139/ssrn.5136877.
- 4  Erik Brynjolfsson, Danielle Li, and Lindsey R. Raymond (2023), ""Generative AI at Work ,"" NBER Working Paper Series 31161 (Cambridge, Mass.: National Bureau of Economic Research, April; revised November 2023).
- 5  Eduard Porta-Pardo, Victoria Ruiz-Serra, Samuel Valentini, and Alfonso Valencia (2022), ""The Structural Coverage of the Human Proteome Before and After AlphaFold,"" ., vol. 18 (1), January 24. PLoS Comput Biol
- 6  EMBL-EBI (2023), ""AlphaFold Protein Structure Database,"" webpage, https://alphafold.ebi.ac.uk/.

- 7  Meghan Bobrowsky, Berber Jin, and Ben Cohen (2025), ""Zuckerberg Leads AI Recruitment Blitz Armed With $100 Million Pay Packages,"" , June 22. Wall Street Journal
- 8  For example, see Tom Huddleston Jr. (2025), ""Walmart CEO: 'AI Is Literally Going to Change Every Job'-How The Best Employees Can Still Stand Out,"" CNBC, September 29; and Karen Weise (2025), ""Amazon Plans to Replace More Than Half a Million Jobs With Robots,"" , October 21. New York Times
- 9  J.P. Morgan (2025), ""AI's Impact on Job Growth,"" webpage, https://www.jpmorgan. com/insights/global-research/artificial-intelligence/ai-impact-job-growth.",Philip N Jefferson
https://www.bis.org/review/r251110j.htm,Andrew Hauser: On the rail or off to the races? The outlook for the Australian economy,"Speech by Mr Andrew Hauser, Deputy Governor of the Reserve Bank of Australia, at the UBS Australasia conference, Sydney, 10 November 2025.",2025-11-10 00:00:00,"

## Speech

## On the Rail or Off to the Races? The Outlook for the Australian Economy



Andrew Hauser

|*!

Deputy Governor

UBS Australasia Conference

Sydney — 10 November 2025

## Introduction

It's great to be here with you today, to speak with, and hear from, investors from Australia and around the world.

The timing of this conference is auspicious. That's true from a global perspective, of course, as we navigate an extraordinary inflexion point in world economic affairs. But it's true locally, too, because it's just a week after Australia's most famous horse race — the Melbourne Cup. For decades the RBA has made its November interest rate decision on Melbourne Cup Day. Not to spoil the mood — but simply because, long ago, both the Reserve Bank and the Victoria Racing Club laid claim to the first Tuesday in November — and neither has yielded since.

For a time in the 2000s, the tendency to raise interest rates on the day — and even close to the time — of the race gave newspaper editors a field day: 'rates gallop ahead as Cup Day looms', the 'double gamble', or a cartoon of the entire Reserve Bank Board of many years ago precariously perched on a single horse, one member cracking the whip while another pulls on the economic reins. +!

Over the longer sweep of history, however, increases have proved few and far between (Graph 1). Melbourne Cup Day has much more often seen rate holds or rate cuts — and some big ones at that (in 1991, 1996 and 2008). The RBA's Monetary Policy Board added another hold to that tally last week.

Graph 1



In my remarks today I want to put that decision in context, looking back at the economic events of the past year, before turning to the outlook.

Monetary policy in Australia faces an unusual challenge — the recovery in GDP growth began last year with a higher level of capacity utilisation than at the start of any other recovery in over 40 years. That's a real achievement, when it comes to making full use of the economy's available resources. But it also poses a big, and pressing, question. Could Australia find itself trapped on the economic rail like one of the riders in last week's Cup — boxed in by its own capacity constraints? Or will it find ways to break free, through higher productivity and more investment in new capacity? If it does, we could be off to the races.

## Looking back: The year in review

A year ago, GDP growth had bottomed out at just 0.1 per cent in the June quarter. With most other advanced economy central banks having already cut their policy rates several times earlier in the year, some felt we were behind the curve, anticipating that we would be forced into a sharp easing to make up lost ground. From the Board's perspective, that view underweighted three key points. First, we had explicitly adopted a different monetary policy strategy to others, in which, having not tightened as much as others, there was also less imperative to cut aggressively (Graph 2). Second, underlying inflation remained well above the 2-3 per cent range, something the Board judged required it to maintain a clearly restrictive stance until it could be confident that inflation would settle sustainably at target. '?! And, third, activity was already expected to pick up in the near term, supported by public demand and a gradual strengthening in household consumption, as real incomes were boosted by lower inflation and the Stage 3 tax cuts.

As 2024 turned towards 2025, another pessimistic lens for the Australian economic outlook emerged, in the form of a new US administration seemingly determined to use tariffs and other policy levers to reshape global trade relationships, particularly with China — Australia's biggest trading partner. |?! Some felt this added to the need for a sharp, perhaps even pre-emptive, easing in our policy settings.

Graph 2

## Advanced Economy Policy Rates



Sources: Central banks; RBA.

A year on, few of those worst fears have come to pass. '*! GDP growth did pick up from the September 2024 quarter, driven by the predicted recovery in private domestic demand (Graph 3). US tariffs have so far proved smaller and narrower in scope than feared in the wake of the 'liberation day' announcements; and the limited retaliation, widespread trade rerouting and targeted policy stimulus, including in China, have dampened, or in some cases even offset, the drag on global growth from tariffs. Commodity prices and financial markets have generally held up. And the feared impact of global policy uncertainty on Australian consumer and business confidence has so far failed to materialise.

## Graph 3

## GDP Growth*

## Year-ended with contributions



- Outliers during the COVID-19 pandemic have been truncated.
- Includes change in inventories and the statistical discrepancy. Kk

Sources: ABS; RBA.

Employment continued to grow strongly, supported by public demand in the market and non-market sectors. Indeed, normalised by population size, employment in Australia has remained higher and more stable than in any of the other advanced economies shown in Graph 4, compared to prepandemic levels. |°!

## Graph 4

## Employment-to-population Ratios*

2015-2019 average = 100



Outliers during the COVID-19 pandemic have been truncated.

Sources: LSEG; RBA.

Alongside these developments, the further decline in inflation through the end of 2024 and into 2025 gave us greater confidence that it would return sustainably to target over the medium term. That allowed us to begin reducing the degree of policy restrictiveness, cutting the cash rate target by 75 basis points between February and August 2025.

The normal lags in monetary transmission mean those cuts won't have had much impact on activity during the first half of 2025. But they will play an important role in supporting growth from late 2025 as the impulse from public demand and last year's tax cuts wanes. To bring that to life, Graph 5 shows an estimate of the counterfactual path of future GDP growth if the cash rate target had been held at 4.35 per cent.

Graph 5

## Effects of Policy Easing*

Year-ended GDP growth



- Difference in growth outcomes between November SMP forecast and a counterfactual scenario produced with MARTIN where interest rates are held steady at 4.35% from 2025:Q1 to the end of the forecast horizon; the impact of cash rate cuts is relative to a scenario where policy is restrictive and would have slowed the economy.
- Historical data also 'shocked'to estimate impact of rate cuts on growth. kK

Sources: ABS; RBA.

## Looking ahead

So macroeconomic outcomes over the past year were less severe than some feared. But monetary policy must be set not through the rearview mirror but in anticipation of where the economy is going in the future. For inflation, that depends on the balance of demand and supply — and here we find ourselves in an unusual place.

To see that, consider Graph 6. It shows that most recoveries in GDP growth over the past 40 years typically start with some margin of spare capacity — a negative 'output gap' — as the preceding slowdown pushes the level of aggregate demand below estimates of the potential output of the economy. As the economy recovers, that buffer typically provides room for a period of above-trend growth in activity and employment, as demand rises back towards potential output, without generating excessive inflationary pressures.

## Graph 6

## Non-farm Output Gap*



- Output gap estimated as an average of the RBA's model suite; estimates are subject to substantial uncertainty, as well as revision due to data and model refinements; growth cycle lows represent key turning points in the year-ended growth rate of real GDP.
- Dashed line represents forecast. kk

Sources: ABS; RBA.

But this time looks different. Our central estimate suggests that demand was slightly above potential output at the time GDP growth started to pick up last year — the tightest economic backdrop to a recovery since at least the early 1980s. As the November Statement on Monetary Policy sets out, that can still be consistent with bringing inflation back to target over the medium term. '°! But achieving that goal will require policy to be restrictive enough to keep shrinking the gap over that period. The path implied by those forecasts is shown in the dotted line on Graph 6.

The historical comparisons in the Graph are based on model-based estimates. So, although we try to control for model uncertainty by averaging across a range of alternative approaches, and also adjust for known disturbances to supply including the COVID-19 pandemic, the bands of uncertainty remain large. '""! Nevertheless, the ranking of this cycle relative to others does seem robust. To see that, Graph 7 repeats the same exercise using the NAB business survey, which asks companies directly about their capacity utilisation. No models, no equations — but the same result: capacity utilisation was higher at the start of the current recovery than in any similar situation in recent decades, and materially above the whole-period average.

Graph 7 Utilisation""

## Capacity



Growth cycle lows represent key turning points in the year-ended growth rate of real GDP.

Sources: NAB; RBA.

How did this come about? It's not because demand growth in the past year or so has been particularly strong — far from it. Instead, it's the cumulative effect of rapid demand growth in 2021-2022, the deliberately cautious monetary policy strategy of more recent years, and — importantly — weak growth in supply. To make that last point explicit, our estimate for potential output growth fell from 22 per cent a year in the decade before the pandemic to 11% per cent in 2020-2025; and we expect it to pick up only a little to around 2 per cent in each of the next two years (Graph 8). That reflects the downward revision we made in August to our near-term assumption for annual trend productivity growth, from 1 per cent per year to 0.7 per cent. |*!

## Graph 8

## Potential Output Components

Annual average growth



- Using the average of the three models in the potential output model suite (SMOG-PPE, Joint-stars and Production Function model).
- Other contributions from population, participation and average hours growth. **k

Source: RBA.

The absence of spare capacity is good news: it means busier companies and more jobs. Achieving sustainable full employment is a key part of the Monetary Policy Board's mandate. '°! But it does pose challenges for policy setting. Those challenges were highlighted by the latest data, which showed underlying inflation rising to 3 per cent in the year to September — 2 percentage point higher than expected in our August forecasts — at the same time as unemployment also rose to 4.5 per cent in September.

How will this play out? In the spirit of the Melbourne Cup, let me sketch three different tracks the race could take.

## Track A: Still ground to make up?

On one view, the pictures in Graphs 6 and 7 overstate the degree of inflationary pressure in the economy. Maybe there's more capacity today than the estimates suggest; |°! maybe the outlook for demand is weaker (opening up a larger future margin of spare capacity); or maybe capacity pressures have only a weak effect on inflation. !11! On this view, the Australian economy still has ground to make up — and further policy easing may be necessary at some horizon.

Someone taking this position might note that the pick-up in CPI inflation in the September quarter could prove entirely temporary, a function of volatile and one-off price increases with no persistent implications for inflation. The labour market may turn out to have greater capacity than currently thought, and hence may weaken further on current interest rate settings. Overall employment growth has fallen as slower growth in non-market sector jobs has outpaced the pick-up in the market sector; the unemployment rate has ticked up, and growth in the Wage Price Index has eased relative to last year. Activity may slow: consumer confidence, for example, remains substantially below historical averages. And global conditions could yet prove deflationary if tariffs and labour restrictions weigh on US demand, Chinese exporters offer bigger discounts, or stretched valuations in financial markets prove unsustainable (perhaps in a disorderly way).

## Track B: Boxed in on the rail?

A second view gives more credence to the picture in Graphs 6 and 7, fearing that the economy may find itself boxed in by its own capacity constraints, like a racehorse trapped against the course fence, unable to surge forward. On that view, there may be little scope for demand growth to rise further without adding to inflationary pressures, and hence there may be little room for further policy easing.

Observations consistent with that view might include the fact that the pick-up in inflation in the September quarter was broadly based across expenditure categories. Financial conditions may no longer be restrictive: credit spreads and equity risk premia are at or close to all-time lows; banks are competing to lend to businesses and households; and the cash rate is sitting below some estimates of neutral that place most weight on world long-term market interest rates. Private domestic demand growth has picked up a little more rapidly than previously forecast, and household income and wealth are increasingly supportive of stronger consumption. In the labour market, firms continue to report recruitment difficulties, unit labour costs are growing strongly and a range of models suggest the market may be tighter — not looser — than our central case. And finally, the world economy may yet confound everyone: with investment in AI and other technologies beating the tariff effect on the US economy, supported by accommodative policy settings; the commodity and product markets most relevant to Australia, including in China, remaining strong; and financial markets surging on, at least for now.

Track C:

Off to the races?

If we do find ourselves boxed in on the rail in this way, the only escape route is to grow the capacity of the economy.

To be clear — the RBA's projections already assume some pro-cyclical pick-up in labour productivity, as firms make fuller use of existing staff and mothballed capital, and paused investment projects are brought back online. !17! But this is still assumed to cap non-inflationary growth at around 2 per cent over the next two years (Graph 3) — a far from spectacular performance by historical standards.

Expanding productive capacity further will require time and investment — and here there is work to do. Real business investment has been flat over the past 18 months, and capital expenditure intentions suggest little or no growth over the 2025/26 financial year. And private investment, which also includes housing investment, remains well below its peak of the mining boom as a share of GDP (Graph 9).

Graph 9

## Investment*

Share of nominal GDP

Includes



net purchases

of second-hand

assets.

Sources: ABS; RBA.

So here is the opportunity for this audience today. An economy already operating near full capacity. With extraordinary minerals resources, old and new. World-leading universities and human capital. A plumb geographical position in the Asia Pacific. A huge domestic savings pool — the second largest median wealth per capita in the world according to UBS (Graph 10), and the fourth (in due course, second) largest pension system globally. One of the lowest public debt burdens in the G20. A strong banking system, proven political and economic institutions, and a long track record of welcoming foreign capital and labour. '1?!

Graph 10 Wealth per Adult*



* Based on UBS Global Wealth Report 2025. Source: UBS.

If that doesn't scream 'investment potential', I don't know what does. Seize that opportunity, and we really could be off to the races!

## Conclusion

Let me conclude.

The Australian economy is in a unique situation. One of the sharpest disinflations in decades has been achieved without a decline in GDP, and with the employment share at an all-time high. That is a great outcome — but it also means that the recovery in GDP growth began last year with the highest level of capacity utilisation in any recovery over the past 40 years.

As I've set out today, there is room to debate what that means for the precise stance of monetary policy in the near term. Our latest projections show inflation settling very slightly above the midpoint of the 2-3 per cent target range if the cash rate follows a market-derived path of one more 25 basis point cut (Graph 11).

Graph 11 Trimmed Mean Inflation Forecast*

Year-ended



* Dashed line shows previous SMP forecast; confidence intervals reflect RBA forecast errors since 1993, with the 70 per cent interval shown in dark blue and the 90 per cent interval shown in light blue.

Sources: ABS; RBA.

But the bigger picture challenge for the economy over the medium term, if we are to return to the sort of growth rates we have been used to, is how to create more supply capacity. If we fail to do so, we may find ourselves boxed in on the rail. If we succeed, we could be off to the races.

You may be aware that there is a racehorse in Australia called Reserve Bank. It's so far had five wins and one place off nine starts. It's four years old, and I'm told that racehorses typically peak at ages three to five, so there's still hope for a Melbourne Cup win — for the horse, and for the Australian economy!

I look forward to answering your questions today.

## Endnotes

- [*] I am grateful to Fred Hanmer and Chris Schwartz for their assistance with this speech, and to Alex Ballantyne, Meredith Beechey Osterholm, Sue Black, Michele Bullock, Natasha Cassidy, Anthony Dickman, Sarah Hunter, David Jacobs, Brad Jones, Chris Kent, Kevin Lane, Jeremy Lawson, Mike Major, David Norman, Penny Smith and Tom Williams for their comments and suggestions.
- Nicholson P (2012), 'Reserve Bank Board Usual Melbourne Cup Day Deliberation' [Cartoon].
- RBA (2024), 'Chapter 3: Outlook', Statement on Monetary Policy, August.
- I reviewed these arguments in my December 2024 speech: Hauser A (2024), 'The Ghost of Christmas Yet to Come', Speech at The Australian Business Economists' Annual Dinner, Sydney, 11 December. We also described a global trade war scenario in Section 4.1 of RBA (2025), 'Chapter 4: Outlook', Statement on Monetary Policy, May. So far, the impact on Australia looks much closer to the optimistic scenario sketched in the left-hand side of Table 3 of the December 2024 speech.
- For a more detailed assessment of the current economic conjuncture, including a self-assessment of the RBA's forecast performance over the past year, see RBA (2025), Statement on Monetary Policy, November.
- [5] Although other countries in the chart have experienced less favourable employment outcomes than Australia in the most recent period, all have been better than would have been expected given the scale of the required post-Covid disinflation: see, for example, Figure 1.3 in IMF (2024), 'Policy Pivot, Rising Threats', World Economic Outlook, October.
- RBA (2025), Statement on Monetary Policy, November.
- [7] The models used at the RBA are described in Bishop J, J Hua, S Omidi, X Zhou and A Ballantyne (2024), 'Assessing Potential Output and the Output Gap in Australia', RBA Bulletin, July.
- [8] For a more detailed discussion of this judgment, see Hunter S (2025), 'Why Productivity Matters for Central Bankers', Speech at Citi Australia &amp; New Zealand Investment Conference, Sydney, 15 October; RBA (2025), 'Chapter 4: In Depth — Drivers and Implications of Lower Productivity Growth', Statement on Monetary Policy, August; Plumb M (2025), 'Why Productivity Matters', Speech at the Australian Business Economists Annual Forecasting Conference, Sydney, 27 February.
- The Treasurer and the Monetary Policy Board (2025), Statement on the Conduct of Monetary Policy, 10 July.
- [10] For examples of views arguing that there is more spare capacity in the labour market, see Borland J (2025), 'Decline to Boom to Slowdown: Australia's Labour Market in the COVID-19 Era', Melbourne Institute of Applied Economic and Social Research Working Paper No 15/25; or Garnaut R and P Dawkins (2025), 'Reducing the NAIRU and Achieving Full Employment', The Australian Economic Review, 58(3), pp 246-250.
- The sharp pick-up in inflation following the Covid-19 pandemic has triggered an enormous international academic effort to re-examine the old question of whether the Phillips Curve is linear (inflation rises uniformly as capacity

utilisation rises) or non-linear (inflation rises more sharply at high levels of capacity utilisation). The consensus of this literature is that there probably is evidence of non-linearity — consistent with Bill Phillips' original insight, and longstanding RBA work on Australia, including Debelle G and J Vickery (1997), 'Is the Phillips Curve A Curve? Some Evidence and Implications for Australia', RBA Research Discussion Paper No 9706, and more recently Bishop J and E Greenland (2021), 'Is the Phillips Curve Still a Curve? Evidence from the Regions', RBA Research Discussion Paper No 2021-09. However, some recent papers argue that findings of non-linearity may reflect a failure to identify supply and demand shocks effectively, and that, properly specified, the Phillips Curve still remains quite flat. For examples of this view, see Beaudry P, C Hou and F Portier (2025), 'On the Fragility of the Nonlinear Phillips Curve View of Recent Inflation', NBER Working Paper No 33522; Mallick D (2024), 'The Phillips Curve in Australia in the Era of Inflation Targeting', The Australian Economic Review, 57(3), pp 272-282.

- [12] Labour supply may also rise, for example, if workers discouraged by a perceived lack of job prospects during the slowdown choose to re-enter the labour market.
- [13] The authoritative source on Australia's comparative advantages is McLean IW (2013), Why Australia Prospered: The Shifting Sources of Economic Growth, The Princeton Economic History of the Western World, Princeton University Press, Princeton. For some more recent reflections, see ABC Radio National (2025), 'Professor Justin Wolfers: Australia is Freaking Amazing', Boyer Lectures, 19 October; or Hauser A (2024), 'Strangers in Paradise', Speech at the Opening Dinner for the Citi A50 Australian Economic Forum, Sydney, 27 June.

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https://www.bis.org/review/r251110n.htm,Isabel Schnabel: Towards a new Eurosystem balance sheet,"Speech by Ms Isabel Schnabel, Member of the Executive Board of the European Central Bank, at the European Central Bank conference on Money Markets 2025, Frankfurt am Main, 6 November 2025.",2025-11-06 00:00:00,"## SPEECH

## Towards a new Eurosystem balance sheet

## Speech by Isabel Schnabel, Member of the Executive Board of the ECB, at the ECB Conference on Money Markets 2025

Frankfurt am Main, 6 November 2025

Key messages:

- &gt; Quantitative normalisation is proceeding smoothly, with strong liquidity positions of banks and abundant excess liquidity
- &gt; Fixed-rate full allotment in standard refinancing operations ensures that liquidity is always available when banks need it
- &gt; Operational framework suggests a sequence for how to supply reserves in the future, with a persistent take-up of standard refinancing operations to precede the launch of structural operations, starting with longer-term refinancing operations and followed by a structural securities portfolio
- &gt; Considerations about stance neutrality, policy space and financial soundness suggest tilting the new structural securities portfolio towards shorter-term securities

The Eurosystem balance sheet is a mirror of the shocks that have hit the euro area economy over the years. It tells a story of crisis and recovery, of inflation and disinflation.

After reaching a peak in 2022, the size of our balance sheet has now been declining for three years. Over this period, our holdings of monetary policy-related assets have fallen by 45%, steadily reducing our financial market footprint.

This process has been remarkably smooth. Banks' liquidity positions remain strong and the ten-year GDP-weighted sovereign bond yield for the euro area stands almost exactly where it was when we started the gradual run-down of our monetary policy bond portfolios in March 2023,

Although balance sheet normalisation still has a long way to go, it is worth reflecting on what the Eurosystem balance sheet should look like in the future.

This is what | would like to do today.

| will argue that our operational framework, which we published in March 2024, implies that the size of our balance sheet will become more responsive to banks' liquidity demand, and its composition more heavily shaped by collateralised lending operations.

| will then illustrate the sequence of instruments envisaged by our framework for supplying reserves in the future, before outlining some principles and trade-offs that could guide the choice of parameters for the new structural operations, including longer-term refinancing operations and a structural securities portfolio.

My remarks today reflect my own current thinking on the matter, which may evolve as the Governing Council reviews the key parameters of our operational framework — a process we will start in the course of 2026.

## Quantitative normalisation rather than quantitative tightening

Central banks are the monopoly supplier of base money, which consists of two main parts: banknotes and central bank reserves that commercial banks use to settle interbank payments.

Base money is the main liability of a central bank and determines the size of its balance sheet in normal times.)

The demand for base money can be met in different ways. In the euro area, prior to the global financial crisis, the Eurosystem primarily provided reserves through collateralised lending to banks, or repos.

At the end of 2006, these loans accounted for almost 40% of our assets (Slide 2, left-hand side).

This changed dramatically when the Eurosystem started to implement balance sheet policies to safeguard monetary policy transmission and stave off downside risks to price stability.

During this period, the asset side of our balance sheet became a policy instrument in its own right and, as a result, the main driver of the size of the balance sheet.

After the full repayment of the targeted longer-term refinancing operations (TLTROs) at the end of 2024, securities accounted for more than 70% of our assets, while loans to banks constituted less than 1% (Slide 2, right-hand side).

With the gradual unwinding of our monetary policy bond portfolios that began in March 2023, we entered a new phase in the evolution of our balance sheet (Slide 3, left-hand side).

This process is commonly referred to as quantitative tightening — a term that is, however, misleading.

When we raised our key policy rates, we made a distinction between monetary policy normalisation and tightening. Normalisation describes the process of bringing policy back to a broadly neutral setting, whereas tightening refers to raising interest rates above neutral territory to curb inflation.

This distinction is also relevant for balance sheet policies.

Today, ten-year sovereign bond yields in the euro area are estimated to be still some 60 basis points below the level that would have prevailed in the absence of quantitative easing (QE) (Slide 3, righthand side).

By running down our monetary policy bond portfolios, we contribute to a normalisation of our balance sheet and thus bond term premia.

In that sense, the term quantitative normalisation (QN) better captures the mechanics and intent of the current run-off of our policy portfolios, as we are gradually removing the residual monetary stimulus from the system.

QN, however, is more than balance sheet normalisation — it is a transformative moment that raises important questions. What role do central bank reserves play in the post-pandemic world? What mix of assets and liabilities best supports the effective implementation of monetary policy? And how will these choices affect market functioning?

These are not merely technical questions; they are strategic choices that will influence how monetary policy will operate in the decade ahead.

## The changing role of reserves and the new operational framework

In our operational framework review last year, we provided insights into our thinking on these questions and how we see the future destination of our balance sheet.{5]

At the heart of our framework is the recognition that central bank reserves play a different role in the financial than did before the financial crisis.

system today they global

Back then, banks hardly ever held more deposits with the central bank than needed to fulfil their reserve requirements. They relied heavily on government bonds and interbank markets to manage liquidity.

This was also the result of central bank choices.

Until 2008 in the euro area, for example, banks had to pay 100 basis points of interest to keep funds they had borrowed in our standard refinancing operations as overnight deposits with the ecB.4 High opportunity costs disincentivised banks from holding excess reserves.

QE has turned that system on its head. As liquidity has become abundant and effectively cost-free, the way banks are treating reserves has changed fundamentally.

Today, reserves are an important part of banks' efforts to comply with liquidity regulations. Moreover, the introduction of instant payments and digital banking services more broadly are likely to have prompted banks to hold larger precautionary reserve buffers.

Even if, in times of QE, the aggregate level of reserves was not a matter of choice for banks — making it hard to predict the level of reserves that banks will choose to hold in a more normal environment — surveys suggest that banks want to hold a substantial amount of reserves as part of their liquidity, also in the future.)

There are also normative reasons why scarce reserves may no longer be desirable from a social welfare perspective.

To understand why, we can look at how banks' liquidity holdings have evolved recently.

Over the past three years, the repayment of TLTROs and QN have reduced the overall supply of reserves in the system by more than €2 trillion (Slide 4, left-hand side).

As excess reserves count one-to-one towards the high-quality liquid assets (HQLA) that banks hold, the decline in reserves mechanically leads to a fall in their HQLA, unless banks choose to absorb the newly issued bonds replacing the maturing central bank holdings.

In a counterfactual scenario without such bond purchases, the liquidity coverage ratio (LCR) of significant institutions would already have fallen below 130% (Slide 4, right-hand side).

In reality, however, we have seen banks purchase sizeable amounts of government bonds, effectively transforming part of their reserve holdings into securities that qualify as HQLA.

As a result, the aggregate LCR of significant institutions in the euro area has fallen only marginally since 2022 and remains well above pre-pandemic levels."" In fact, banks' HQLA holdings have even marginally increased over this period (Slide 5, left-hand side).

In some countries, government bonds as a share of Common Equity Tier 1 capital are now at the upper end of the historical distribution (Slide 5, right-hand side).

To some extent, this shift in the mix of banks' HQLA simply reflects changes in relative returns. For the first time in years, it is more profitable to invest in government bonds than to hold excess reserves with the ECB, even if this entails duration risk (Slide 6, left-hand side).

But to the extent that current large HQLA holdings also reflect banks' liquidity preferences, their composition will ultimately also depend on central bank decisions.

In particular, excessively high opportunity costs for holding reserves incentivise banks to hold a larger part of their HQLA in government bonds. This may be undesirable as the liquidity position of banks would weaken if the value of government bonds were to fall (Slide 6, right-hand side).

Reserves, on the other hand, are risk-free. They don't fluctuate in value and can be immediately used for payments.

In other words, in today's world, where HQLA is a central tool of banks' liquidity management, it is not socially optimal for a central bank to make reserves scarce. We should hence not excessively discourage the holding of reserves.

A balanced approach, which considers central bank reserves as an integral component of banks' liquidity holdings, helps strengthen resilience, preserve market functioning and reduce systemic risk.

## Elastic reserve supply decouples the pace of QN from interest rate control

This fundamental insight is embedded in our operational framework.

Through our standard refinancing operations, we provide as many reserves as banks demand at a fixed rate against a broad set of collateral (fixed rate full allotment).

Supplying reserves elastically as balance sheet normalisation proceeds will go a long way towards allowing banks across the currency union to hold what they find to be an optimal level of reserves.)

A key advantage of a framework in which the marginal unit of liquidity is provided on demand, rather than through asset purchases, is that liquidity is always available when banks need it, but is never intentionally supplied in excess.

Another advantage is that it frees the central bank from having to estimate the uncertain volume of reserves necessary to steer short-term money market rates towards the key policy rate, as would be the case in a supply-driven framework.

If reserves are primarily supplied through asset purchases, as in the US Federal Reserve System's operational framework, the central bank needs to calibrate the pace of QN carefully, as money market rates could rise abruptly if liquidity becomes scarce (Slide 7, left-hand side).42]

By contrast, in a demand-driven framework, there is no direct link between the pace of QN and interest rate control. In the euro area, a rise in repo rates would therefore not lead to a slowdown in, or the end of, QN.UI

We expect that our monetary policy bond portfolios will be run down completely, unless monetary policy considerations were to require renewed asset purchases at some point in the future.

Rather, a persistent rise in money market rates to levels closer to the rate on the main refinancing operations would lead to more banks accessing our standard refinancing operations, thereby endogenously adding new liquidity to the system.

So far, we have not seen this happening.

Even if the number of banks participating in our operations has steadily increased over time, the overall volume of demand for reserves has remained limited so far, for two main reasons (Slide 7, right-hand side).

One is that excess liquidity remains abundant. While in other countries upward pressure on short-term interest rates has been rising as liquidity conditions have tightened, repo rates in the euro area have remained close to the deposit facility rate (Slide 8, left-hand side).

The other is that reserves, which are unevenly distributed across both banks and countries, are being redistributed effectively.

This is visible in the measurable increase in term repo transactions collateralised by non-HQLA over the past years, especially across borders (Slide 8, right-hand side). These transactions are largely driven by regulatory considerations, as they directly improve the LCR of the banks that receive cash.

A significant share of these trades reflects a redistribution of reserves from banks that are still comfortably above their liquidity targets to banks that are closer to their target.

## Operational readiness is key to ensuring the effectiveness of repo-led framework

In a demand-driven framework, interest rate control requires two elements.

One is to set the appropriate price for holding reserves — that is, the spread between what banks pay for borrowing reserves and what they receive when depositing them back with the ECB.

The famous Friedman rule suggests that, in a frictionless world, central banks should provide reserves at the marginal social cost, which is approximately zero.U4]

However, applying the Friedman rule in a world in which central bank balance sheet expansion is costly from a social welfare perspective implies that a marginal cost should be attached to reserve provision.

For example, providing reserves for free would risk disintermediating private markets. By contrast, a positive opportunity cost for holding reserves incentivises banks to trade reserves in the market.

Research also suggests that providing reserves for free could undermine sound liquidity management and lead to a ratcheting up of the central bank's balance sheet, with potentially negative consequences for financial stability.""

Against this backdrop, the Governing Council decided that a spread of 15 basis points between the main refinancing operations rate and the deposit facility rate appropriately balances this trade-off, also considering our broad collateral framework.

Such a narrow policy rate corridor effectively limits interest rate volatility and sets the right incentives for liquidity management./4]

The second element needed for interest rate control is to ensure that banks are ready to use the operations if and when they need liquidity.

In a demand-driven framework, the central bank's operations are not a liquidity backstop. They are there to be used by banks as part of their day-to-day liquidity management, which is also acknowledged by banking supervision.14

Our framework also relies on large dealer banks supporting financial intermediation. The more connected these banks are to our operations, and the more frequently they use them, the less likely it is that repo rates will spike, as dealer banks often act as liquidity hubs within countries and banking networks.

Ensuring a broader use of our operations may require these banks to set up appropriate governance processes to cater for liquidity needs arising not only from treasurers but also from bond and repo desks.

To make sure that banks are ready to use our operations, it is important to conduct coordinated testing exercises for banks across the Eurosystem.

## Diversifying liquidity provision: principles and sequencing

A natural outcome of our operational framework is that, over time and as excess liquidity declines, collateralised loans to banks are going to once again gradually become the main asset that the ECB holds on its balance sheet.

This does not mean, however, that we will return to the past, neither regarding the size nor the composition of our balance sheet.

In 2006 currency in circulation was in the order of €630 billion. Today, it is around €1.6 trillion, as the demand for banknotes has grown steadily over time.

Moreover, for reasons of precaution, heightened investor scrutiny and regulatory as well as technological changes, banks today may want to hold a significant buffer of excess reserves, depending on their liquidity preferences.

According to scenario analysis by ECB staff, demand for excess reserves could range from €600 billion (if banks held only 10% of total HQLA in reserves and allowed the aggregate LCR to drop from 158% today to 130%) all the way up to €2.2 trillion if reserves were to account for 30% of the HQLA and the LCR was allowed to decline only marginally from today's level (Slide 9).

Even if demand for reserves was ultimately at the lower end of this range, it would not be prudent for a central bank to rely exclusively on short-term refinancing operations.

Concentrating liquidity provision in just one instrument would give rise to operational risks and encumber a significant amount of collateral.

For these reasons, we clarified in our operational framework review that, in the future, we will also offer structural operations, including new longer-term refinancing operations and asset purchases under a new structural securities portfolio.

These operations are expected to make a substantial contribution to covering the banking sector's structural liquidity needs arising from autonomous factors and minimum reserve requirements.18] Importantly, they will provide liquidity for monetary policy implementation rather than steering the monetary policy stance.

While the date for launching these operations is uncertain and will depend on how fast excess liquidity declines and how banks react to this decline, our framework suggests the following sequence.

## Persistent take-up of standard refinancing operations to precede structural operations

First, before we launch structural operations, we need to see a persistent and broad-based rise in the take-up of our standard refinancing operations (Slide 10, blue area). These act as our marginal instrument to provide liquidity. The time, extent and pace of the take-up will provide us with valuable insights into banks' demand for reserves.

As QN proceeds, there will come a point when the level of outstanding reserves is no longer sufficient to meet the aggregate demand from the banking sector, meaning that it will not be possible to satisfy liquidity demands via the redistribution of reserves.

At that point, overnight and term repo rates could rise more meaningfully, and take-up of our operations will increase. However, this would not be a signal of looming stress but rather a sign of a functioning system that endogenously steers banks towards our refinancing operations.

## Terms of structural refinancing operations subject to trade-offs

Second, once the recourse to our standard refinancing operations reaches a level where banks constantly roll over a significant amount of short-term borrowing to meet their liquidity needs, we should consider offering structural operations.

Given the still large legacy bond holdings from earlier monetary policy operations, this naturally starts with structural longer-term refinancing operations.

One option would be to shift a fraction of the recurring demand from our standard operations into structural longer-term refinancing operations (LTROs) at regular intervals (Slide 10, green area).

Under this approach, the Eurosystem could, for instance, allot a fixed quantity of reserves in a variable rate tender, where the quantity to be allotted could be revised over time, just like we used to do before the global financial crisis.

In choosing the appropriate length of the operation, central banks face a trade-off.4

On the one hand, the longer the tenor, the lower the operational costs of rollover and the higher the regulatory benefits for banks. Any central bank borrowing with a residual maturity above six months counts not only towards the LCR but also towards the net stable funding ratio.

On the other hand, the longer the tenor, the less agile central banks are in adjusting their balance sheet to unanticipated shocks and the higher the risk of crowding out market-based funding solutions, which may conflict with regulatory objectives by making banks overly dependent on the central bank to meet regulatory requirements.

In the past, the ECB has varied the maturity of the loans it provided to banks. Only in exceptional circumstances, such as in response to the sovereign debt crisis or the pandemic, did the term of these operations exceed one year.

In any case, the structural LTROs have to be designed in a way that preserves the crucial feature of our operational framework, which is that the marginal unit of liquidity is provided via our standard refinancing operations.

## Structural and national securities portfolios contribute to meeting liquidity demand

Finally, sometime after the launch of the structural LTROs, we will start building up a new structural securities portfolio (Slide 10, purple area).

The size of this portfolio will depend on the decision by the Governing Council on the relative contribution that securities holdings should make to covering banks' structural liquidity needs arising from autonomous factors and minimum reserve requirements.

The timing of the launch of this portfolio is therefore closely linked to the run-off in our legacy monetary policy bond portfolios. In addition, national central banks also have non-monetary policy securities holdings, including euro-denominated asset portfolios (Slide 10, red area).

These non-monetary policy holdings fall under the agreement on net financial assets, which limits the amount of liquidity national central banks can create via non-monetary policy activities, referred to as the net financial asset position.22

During QE, for example, this position declined, thereby providing monetary policy space (Slide 11, lefthand side). More recently, it started to grow again, also reflecting efforts to rebuild financial buffers.

So, as was the case before the global financial crisis, these national portfolios will make a contribution to covering the euro area banking system's structural liquidity needs in the future, together with the new structural operations.

As a result, purchases under the new portfolio will only start once the liquidity injected through our legacy monetary policy bond portfolios and the net financial asset position falls short of covering the share of reserves the Governing Council decided to provide through securities holdings.

Passive balance sheet run-off implies that this point is still far away (Slide 11, right-hand side).

## How to choose the maturity structure of the structural securities portfolio

The final question that | would like to address this morning is the type of assets the ECB may choose to buy as part of its new structural securities portfolio.

In taking this decision, we must weigh up a range of factors.

For example, in our operational framework review in 2024 we announced that we will aim to incorporate climate change-related considerations into the structural monetary policy operations.24] While these issues are relevant, | will focus today on the considerations related to the maturity structure of a new portfolio. Three principles are relevant in this context.

One is policy stance neutrality. The goal of the operational framework is to implement the desired monetary policy stance and not interfere with it.

Outright purchases of long-term bonds transfer interest rate risk from the private sector to the public sector. This eases financing conditions and hence affects the monetary policy stance.

For example, before the 2008 global financial crisis, the Federal Reserve's Treasury holdings were tilted towards shorter-term securities, with a weighted average maturity of three to four years.

Overweighing purchases of shorter-term securities minimises duration extraction from asset purchases and is hence more stance neutral.

Asecond factor relates to maintaining policy space for future asset purchases. 22]

ECB staff estimate that there is still a non-negligible risk of again hitting the effective lower bound in the future.!23] Also, in a more fragmented and shock-prone world, risks to monetary policy transmission may become a concern again.

As a result, also in the future, there could be episodes in which the Eurosystem may be forced to purchase significant volumes of longer-dated bonds in its pursuit of maintaining price stability and monetary policy transmission./24]

In view of this, holding shorter-dated assets in the structural securities portfolio could preserve valuable policy space.

A third factor relates to the central bank's financial soundness.

While central banks are not profit-maximising institutions, preserving financial soundness helps maintain central bank credibility and independence.

One important risk to financial soundness stems from interest rate risk arising from central banks being exposed to a duration mismatch, which occurs when they hold significant amounts of long-term assets with fixed interest rates.

While the exposure to such interest rate risk may at times be necessary to preserve price stability, such as during the period of QE, it should remain limited in normal times.

For parts of our balance sheet, the design of our operational framework embeds a deliberate alignment of the duration of assets and liabilities. By providing reserves on demand through refinancing operations, the Eurosystem matches its floating rate liabilities — reserves remunerated at the deposit facility rate — with floating rate assets, namely variable rate repos.

By contrast, a framework that supplies reserves largely through fixed rate bonds tends to create more interest rate risk. As a result, when policy rates rise, interest expenses can exceed central bank income. This is what we have experienced in recent years.

Taken together, these three factors speak, in my opinion, in favour of tilting the structural securities portfolio, to the extent feasible, towards shorter maturities.

## Conclusion

To conclude, let me leave you with three central lessons that define the logic of our operational framework and the impact it can be expected to have on our balance sheet.

First, in a demand-driven framework, there is no direct connection between the run-down of our legacy monetary policy bond portfolios and interest rate control.

A narrow policy rate corridor and fixed rate full allotment of our standard refinancing operations can limit interest rate volatility and ensure that reserves remain sufficiently ample. We therefore encourage banks to use our operations if and when they need liquidity.

Second, there is a sequence embedded in the operational framework for how to supply reserves in the future.

Our standard refinancing operations are the marginal source of liquidity for banks. Once the Eurosystem balance sheet begins to grow durably again, we will start launching structural operations, starting with longer-term refinancing operations and followed later by the build-up of a structural securities portfolio.

The latter will be launched once the legacy monetary policy portfolios have run off sufficiently, also considering non-monetary policy securities holdings.

Finally, policy stance neutrality, the need to maintain policy space and considerations related to financial soundness are important factors that will guide the maturity of assets the ECB will buy under a new structural securities portfolio. These factors suggest tilting the structure towards shorter-dated assets.

Thank you.

## Annexes

6 November 2025

## Slides

1.

The gradual run-down of our balance sheet began in March 2023 when we started to only partially reinvest assets from our asset purchase programme. Full run-down did not start until January 2025. Balance sheet normalisation had started earlier with the early repayment and maturing of targeted longer-term refinancing operations in 2022.

2.

The introduction of the digital euro will create a third category of base money.

3.

This is broadly true for reserve currency central banks or economies with floating exchange rates.

4.

This is consistent with the set of ECB policy rates being our primary monetary policy instrument. See ECB (2025), The ECB's monetary policy strategy statement (2025).

5.

ECB (2024), ""Changes to the operational framework for implementing monetary policy"", statement by the Governing Council,13 March; Schnabel, |. (2024), ""The Eurosystem's operational framework"", speech at the Money Market Contact Group meeting, Frankfurt am Main, 14 March.

6.

Schnabel, |. (2023), ""Back to normal? Balance sheet size and interest rate control"", speech at an event organised by Columbia University and SGH Macro Advisors, New York, 27 March; Logan, L. (2025), ""Ample liquidity for a safe and efficient banking system"", remarks at the 'The Evolving Landscape of Bank Funding' conference at the Federal Reserve Bank of Dallas, October 31.

7.

The standard refinancing operations are the weekly main refinancing operation and the three-month longer-term refinancing operations, allotted once a month.

8.

Hartung, B. et al. (2025), ""The first year of the Eurosystem's new operational framework"", The ECB Blog, ECB, 25 April; Bank of England (2023), ""What do we know about the demand for Bank of England reserves?"", 22 February.

9.

The counterfactual LCR simulation assumes that banks' government bond holdings remain fixed at their Q3 2022 level, while all other LCR components follow their actually reported values.

10.

A broadly stable LCR also reflected the fact that the LCR denominator — the expected net liquidity outflows in a stress scenario — has remained broadly stable over the past three years.

11.

Liquidity provided through asset purchases often tends to be concentrated among a few larger financial institutions located in a few countries. Between November 2011 and May 2023, about 40% of banks, in terms of total assets, held the entire excess liquidity from asset purchases.

12.

See also, Williams, J. (2025), ""On the Optimal Supply of Reserves"", remarks at the New York Fed — Columbia SIPA Monetary Policy Implementation Workshop, Federal Reserve Bank of New York, New

York City, May 22.

13.

Nor would concerns about market functioning be a reason to change the pace of run-down. For these contingencies, we have a range of instruments at our disposal.

14.

Friedman, M. (1996), ""The Optimum Quantity of Money"", The Optimum Quantity of Money and Other Essays, Macmillan, London.

15.

An environment in which market participants become conditioned to operate with ample access to cheap funding fosters a liquidity dependence by banks that may diminish the system's capacity to absorb shocks. See Acharya, V.V. et al. (2023), ""Liquidity Dependence and the Waxing and Waning of Central Bank Balance Sheets"", NBER Working Paper, No 31050; Borio, C. (2023), ""Getting up from the floor', BIS Working Papers, No 1100.

16.

Schnabel, |. (2024), op.cit.

17.

March.

18.

ECB (2024), op.cit.

19.

The Bank of England, for example, offers liquidity for a six-month term, with the price depending on both the collateral pledged and overall demand.

20.

ECB (2024), ""What is ANFA?"", 13 September.

21.

ECB (2024), op.cit.

22.

See also Edge, R. M. and Li, D. (2025), ""Central bank preparedness for market-functioning asset purchases as a consideration for long-run balance sheet composition"", Finance and Economics Discussion Series (FEDS), Federal Reserve Board, Washington DC.

23.

Kamps, C. et al. (2025), ""Report on monetary policy tools, strategy and communication"", Occasional Paper Series, No 372, ECB, 30 June.

24.

Today, for example, the weighted average maturity of assets bought under the pandemic emergency purchase programme still slightly above seven years.

is 25.

Recently, an asset-liability management (ALM) approach has been proposed as a blueprint for central bank balance sheets. See Waller, C. (2025), ""Demystifying the Federal Reserve's Balance Sheet', speech at the Federal Reserve Bank of Dallas, Dallas, Texas, 10 July; Hammack, B.M. (2025), ""The Federal Reserve's Balance Sheet: Some Major League Questions"", speech at the Money Marketeers of New York University, Inc., New York, 23 April; De Vere, H., Ramaswamy, S. and Schulhofer-Wohl, S. (20 the Federal Reserve Balance Sheet"", Research De ve Bank of Dallas.",Isabel Schnabel
https://www.bis.org/review/r251110h.htm,François Villeroy de Galhau: Speech - Tracfin Forum ,"Speech by Mr François Villeroy de Galhau, Governor of the Bank of France and Chair of the Prudential Supervision and Resolution Authority (ACPR), at the 3rd TRACFIN Forum, Paris, 7 November 2025.",2025-11-07 00:00:00,"## François Villeroy de Galhau: Speech - Tracfin Forum

Speech by Mr François Villeroy de Galhau, Governor of the Bank of France and Chair of the Prudential Supervision and Resolution Authority (ACPR),  at the 3rd Tracfin Forum, Paris, 7 November 2025.

* * *

I am delighted to open this third forum - which coincides with Tracfin's 35th anniversary - and to do it here at Bercy, a place dear to both Antoine Magnant, who I am really happy to see here, and to myself, both of us former members of the French Tax Authority. This invitation is also a mark of recognition for the women and men of the ACPR and the Banque de France, two institutions committed to AML/CFT: the former as the supervisory authority for financial institutions, the latter as a central bank ""subject"" to the Monetary and Financial Code.

I do admit that I forbid the use of ""subject to"" at the ACPR, and we prefer 'supervised'. ""Subject to"" does not reflect what we really are: responsible partners, committed to a joint battle against one of the greatest scourges of our time. A total of 230,000  reporting i entities - 400 of which are gathered here today - form our first line of defence. In this war of movement that we are waging against increasingly inventive criminals, the cooperation between Tracfin and the ACPR takes on its full meaning. Allow me, therefore, to present an overview and then to set out two priorities.

## I.  Overview of cooperation between Tracfin and ACPR

Over 35 years, Tracfin has forged a and, above all, a unique place in our reputation institutional landscape: growing from a handful of employees at its foundation to 230 today, and from 40,000 suspicious transaction reports in 2015 to more than 215,000 at the end of 2024 - although numbers don't tell the whole story, but I will return to this point. Tracfin's teams are able to turn these reports into proper financial intelligence: in 2024, nearly EUR 3 billion worth of suspicious flows were detected in relation to tax fraud - on VAT, CPF (personal training accounts) or energy renovation - and more than EUR 800 million in employment fraud linked to undeclared employment.

Most of the suspicious flows detected come from suspicious transaction reports submitted by financial institutions. This commitment from the financial sector is also partly the result of close cooperation with the ACPR, which has recently had a number of concrete achievements: the revision of joint guidelines, the creation of a standardised bank statement, and a major training programme on crypto-assets, funded by the European Commission and partly hosted by the ACPR almost exactly one year ago.

Beyond these specific examples, Tracfin and the ACPR are united by long-standing cooperation. Both in terms of specific individuals and liaison officers, as well as our colleagues from Tracfin who have joined the ACPR (and vice versa). And by key moments: every year, Tracfin's memoranda enrich our control programme. On-site inspections are then prepared with Tracfin and covered in a shared report.

## II. Two fronts in the same battle: efficiency, anticipation and cooperation

I now come on to our two common priorities: first and foremost, strengthening operational efficiency, and then anticipating changing threats and cooperating to thwart them.

## Efficiency

Staying ahead in the fight against crime first means detecting how it changes over time, and focusing our efforts on what truly matters. With nearly 197,000 suspicious transaction reports (STRs) filed by the financial sector in 2024, we have achieved an unprecedented level of commitment. And the first quarter of 2025 would appear to have witnessed a further increase of 22.5% . However, such a volume of information also ii carries a , especially when risk of dispersion the quality of the flow of information is . Too many superficial, insufficiently substantiated suspicious transaction not perfect reports - sometimes without any real suspicion - saturate the system. I welcome the start of our joint work between the ACPR and Tracfin to establish a shared diagnosis of the of reporting flows. I also call for more quality support for reporting entities, in . Tracfin is already doing particular by publishing highly operational quality criteria a great deal. I am thinking here of the feedback that showcases the top STRs and ""highlights"" the ""flops"", the organisation of sectoral workshops and the appointment of correspondents for each sector. This progress is useful, but we need more structural changes. Several of our neighbours - Germany, Italy and Switzerland - can show us the way here. Italy has deployed tracking indicators. Switzerland publishes 'negative typologies', i.e. cases that are not worth reporting. Germany's guide to best practices would also be useful. We need to recognise that it is sometimes difficult to deploy processes that can be adapted to the various obligations, in particular those relating to the right to a bank account procedure, KYC and STRs. The German example is particularly instructive: thanks to the joint efforts of the German equivalent of Tracfin and the supervisor, BaFin, the volume of reports fell by nearly 20% between 2023 and 2024, facilitating a shift in focus to cases of greater interest.

This is not about sweeping problems under the carpet, but rather about getting back to what is most important: if we are truly effective in preventing criminals from using the financial system, we should eventually see fewer suspicious transactions in . Letting any transaction go through and just sending Tracfin a this domain standardised report on funds that have already vanished would simply play into the hands of criminals. The study published by the ACPR last July on ""pass-through accounts"" shows that institutions that engage in such practices are at least 100 times more likely to be used by criminals. Our message is clear: these practices are . An STR only removes civil, criminal and disciplinary liability if it is made unacceptable in good faith and under the conditions provided for by law.

The ACPR and Tracfin will use all the tools at their disposal to enforce the law. For example, Tracfin should be able - legally - to make broader use of the inadmissibility of STRs by incorporating the criterion of quality:  aside from purely technical or linguistic cases, an unusable report should be rejected. Such feedback would send a clear signal

to financial institutions. Tracfin's objective feedback will in turn help to guide the investigations the ACPR, which does not have access to STRs on an ongoing basis. I am convinced that the quality of a suspicious transaction report says a lot about . the robustness of the system that produces it

On the operational efficiency front, we must all make the most of the revolution in artificial intelligence and data. At the ACPR, for example, we have developed our own AI tool, LUCIA, to enhance the effectiveness of our on-site inspections.  For reporting entities dealing with large volumes of transactions, AI can also be an opportunity. This requires investing in enhanced monitoring tools and, undoubtedly, artificial intelligence, to analyse not only transactions but also richer KYC data. However, these tools will never replace human judgement, and their models must be both understandable and auditable.

Artificial intelligence is only one aspect of the ongoing revolution. It has become very easy to falsify supporting documents and we need to rely more on robust evidence, especially by facilitating access to public databases. It is now very quick and easy to open and use multiple bank accounts remotely throughout the EU. I am therefore delighted that the new European regulation provides an ambitious framework for - both private-private and public-private - information-pooling partnerships as well as the interconnection of European bank account registers, extended to crypto-assets by 2029 at the latest. Following the French Parliament's recent adoption of Deputy Labaronne's bill, the Banque de France will deploy a new interbank platform to quickly in 2026 identify fraudster bank accounts, thereby ""making life difficult for the bad guys"", to use one of Antoine Magnant's favourite expressions.

## Anticipation and cooperation

Since its foundation, Tracfin has played an essential role in anticipating changing . Its work is now rounded out by the national risk analysis developed under the threats aegis of France's AML/CTF Advisory Committee, and its sector-specific versions, including the one prepared by the ACPR. Just as all Committee members are preparing the third edition of these documents, I would like to commend the professionals who participate in our workshops, like that currently underway on the laundering of proceeds from illegal online gambling in liaison with the French National Gaming Authority and Tracfin.

No institution can tackle these changes alone, and that is the whole point of our partnership. At European level, AMLA, the new European agency responsible for combating money laundering, could be a major step forward, provided it does not fall into the trap of bureaucracy instead of adopting a risk-based approach. In terms of supervision, it will enable better control of 100% digital players, who often operate without any geographical base. From the perspective of financial intelligence units, it will provide the means of dealing with transnational suspicious transactions linked to complex criminal networks via pass-through accounts or shell companies. However, to succeed, AMLA will need to guarantee a genuine level playing field by standardising requirements and avoiding any levelling down in favour of the ""least demanding"" jurisdictions in regulatory terms.

Lastly, AMLA will also need to exert influence at level. To do this, it will international need to improve Member States' compliance with FATF standards - and prevent them from appearing on the grey list. It will also need to influence these standards through the quality and exemplary nature of its work. I already see one priority area: the finalisation and effective deployment of FATF Recommendation 16 on the transparency of international payments, which now applies to cryptoassets. This is a very positive step forward. The objective of this recommendation is clear: to ensure the traceability of cross-border flows so that crypto-asset transactions are as transparent as those that go through the traditional banking system. France has been particularly proactive in ensuring that all forms of transfers are treated in the same way, whether they involve crypto-assets, card payments or instant transfers. AMLA can make a concrete contribution by making this issue one of its first joint projects, particularly by applying the 'travel rule' to crypto-assets.

Beyond Europe's borders, international cooperation remains essential. However, certain recent signals from Washington could be a genuine cause for concern. I am referring here to the US administration's leniency vis-à-vis certain large crypto platforms, which are exposed to major money laundering risks. The end of the requirement for US companies to declare their beneficial owners is also a regrettable development. Lastly, certain measures, if confirmed, would ease the reporting requirements for US banks, which would no longer have to justify a failure to submit STRs.

That is why, as part of our G7 Presidency, France will make the fight against financial crime one of its priorities, following in Canada's footsteps.

I would like to finish with these words from Albert Einstein: ""The world will not be destroyed by those who do evil, but by those who watch and do nothing."" Inaction in the domain of AML-CFT has a cost.  Tax and social security fraud and drug trafficking cost our economy nearly EUR 50 billion every year. EUR 50 billion that undermine our social model and erodes confidence in our institutions. Combating the laundering of these criminal flows is therefore not just a matter of compliance but, above all, it is a matter of justice, trust, and a matter of restoring our public finances. This is the whole point of the work we are undertaking together, that you will continue this afternoon during the various round-table discussions. Thank you.

i Number of reporting entities registered by Tracfin across all sectors (financial and nonfinancial).

ii Between H1 2024 and H1 2025, suspicious transaction reports (STRs) received by Tracfin from the financial sector increased by 22.5%, and those from the non-financial sector by 34%, giving a total increase of approximately 24%.",François Villeroy de Galhau
https://www.bis.org/review/r251110i.htm,"Junko Nakagawa: Economic activity, prices, and monetary policy in Japan","Speech by Ms Junko Nakagawa, Member of the Policy Board of the Bank of Japan, at a meeting of the Okayama Club, Okayama,10 November 2025.",2025-11-10 00:00:00,"

Bank  of  Japan

November 10, 2025

## Economic Activity, Prices, and Monetary Policy in Japan

Speech at a Meeting of the Okayama Club

## NAKAGAWA Junko

Member of the Policy Board

## Introduction

It is my pleasure to have the opportunity to address the members of the Okayama Club today. I would like to begin by talking about the current situation of Japan's economic activity and prices and the outlook, and then talk about the Bank of Japan's conduct of monetary policy. Afterward, I look forward to hearing from you about the situation this region is currently facing, and I would also be grateful to hear your views on the Bank's policies and business operations.

## I. Current Situation of and Outlook for Economic Activity and Prices A. Current Economic Developments in Japan

The Bank judges that Japan's economy has recovered moderately, although some weakness has been seen in part.

1. Corporate sector

Let me start with corporate activity.

Please take a look at Chart 1. The Financial Statements Statistics of Corporations by Industry, Quarterly ,  for the April-June quarter of 2025 showed that current profits for all industries increased by 0.2 percent year on year, maintaining high levels at around the historical peak (left panel of Chart 1). While the current profits of manufacturers decreased by 11.5 percent year on year, those of nonmanufacturers increased by 6.6 percent, reaching high levels at around the historical peak. The decrease among manufacturers mainly reflects the fact that Japanese automakers have so far responded to U.S. tariff hikes by absorbing a large part of the impact through lowering export prices. Meanwhile, the increase in the current profits of nonmanufacturers reflects solid performance across a wide range of industries, owing to, for example, demand for services -- including inbound tourism -- and progress in passing on costs to selling prices.

A  similar  pattern  is  observed  in  business  sentiment  (right  panel  of  Chart  1). The  Bank's September 2025 Tankan (Short-Term Economic Survey of Enterprises in Japan) showed that the diffusion index (DI) for business conditions has been at a favorable level for all industries; the  DI  for  nonmanufacturing  in  particular  was  at  a  more  favorable  level.  The  DI  for

manufacturing remained on a par with the previous June survey. This is likely attributable to the fact that the agreement in the Japan-U.S. tariff negotiations reached in July has reduced uncertainties in the outlook, and that the additional tariff rates on Japanese exports were set at  levels  that  would  not  disadvantage  Japanese  exports  vis-à-vis  the  exports  of  other economies.

Please turn to Chart 2. Real exports have remained more or less flat as a trend (left panel of Chart 2). Since the beginning of 2025, however, they have seen a front-loading due to the tariff hikes and a subsequent reactionary decline. Data by region indicate that exports to the United  States decreased by 8.0 percent for  the  July-September  quarter from  the  previous quarter due  to, for  example, the  effects on  automobile  exports  from the  suspension  of production lines at some automakers (middle panel of Chart 2). On the other hand, exports to the NIEs and to ASEAN and some other Asian economies increased, reflecting solid global AI-related demand, in addition to moves firms have taken in view of the possible introduction of U.S. tariffs on semiconductors.

Firms have maintained their appetite for fixed investment, despite the impact of U.S. tariff policy on their business performance and uncertainties regarding the outlook (right panel of Chart 2). Business fixed investment plans in the September 2025 Tankan indicated that the year-on-year rate of increase in investment remained at a relatively high level of 10.3 percent for fiscal 2025 -- marking the same pace of growth as in the September 2024 survey. This reflects investment demand in digital areas -- including AI -- and for labor saving, as well as strong construction demand  related to, for example, logistics facilities and urban redevelopment.

## 2. Household sector

Next, I would like to focus on the household sector.

With regard to the employment and income situation, please look at Chart 3. In nominal terms, employee income -- the total amount of wages earned by all employees -- has continued to show a considerable increase (left panel of Chart 3). Moreover, in recent years, this has been driven more significantly by growth in nominal wages than in the number of employees. In

real  terms  based  on  the  consumer  price  index  (CPI), the  year-on-year  rate  of  change  in employee  income  has been  at  around  0  percent, reflecting CPI  inflation.  The  number  of employees has also increased, mainly in the information and communications industry and in the medical, healthcare, and welfare services industry, both of which have faced severe labor shortages. Wage growth has been driven both by the high wage growth rate agreed in the 2025 annual spring labor-management wage negotiations and by an increase in bonus payments on the back of favorable corporate profits.

Private  consumption  has  remained  resilient,  underpinned  by  the  improvement  in  the employment  and  income  situation  (right  panel  of  Chart  3). That  said,  consumption  of nondurable goods -- such as clothing -- has remained relatively weak, reflecting consumers' increased thriftiness amid a rise in food prices. Services consumption, which had continued on a moderate uptrend, has recently become more or less flat.

## B. Current Price Developments in Japan

Let me move on to price developments in Japan. Please refer to Chart 4.

Inflation indicators have continued to see high growth, mainly due to the effects of the rise in rice  and  other  food  prices,  in  a  situation  where  more  firms  have  revised  prices  to  reflect increases in, for example, wages and distribution costs (left panel of Chart 4).

Let us look at the breakdown of the year-on-year rate of change in the CPI excluding fresh food, energy, and the effects of government policies and other factors listed in the note for the right panel of Chart 4. The rate of increase in goods prices accelerated significantly after the COVID-19 pandemic, due mainly to higher commodity and import prices. The rate has once again accelerated since the second half of 2024; this time owing to the effects of the rise in  food  prices.  The  rate  of  increase  in  general  services  prices --which  remained  barely unchanged for a long time -- has also accelerated, led by recent rises in dining-out prices and mobile phone charges, reflecting the pass-through of utility costs, personnel expenses, and other costs. The rate of change in administered prices has also increased.

Under  these  circumstances,  mediumto long-term  inflation  expectations  have  risen moderately on the whole, toward 2 percent. The rise in such expectations over the past few years has been more pronounced than in the past.

## II. Outlook for and Risks to Economic Activity and Prices

## A. Outlook for Firms' and Households' Economic Activity

Let me now turn to the outlook for the economic activity of firms and households in Japan.

With regard to overseas economies, there is no change in the envisaged main scenario; that is, the economies are projected to experience a slowdown for a while, due to the impact of U.S.  tariff  hikes,  but then see  a  gradual  acceleration  in  their  growth  rate  and  return  to  a moderate growth path.

Corporate profits in Japan, while remaining at high levels, are likely to remain on a declining trend for the time being, mainly in manufacturing, reflecting the effects of a deterioration in export  profitability  due  to  U.S.  tariff  hikes  and  of  the  slowdown  in  overseas  economies. Corporate profits are subsequently expected to return to an improving trend, supported by a rise  in exports stemming from the recovery in overseas economies and by an increase in private consumption fueled by growth in real wages.

Although business fixed investment is likely to be supported by moves to clear order backlogs and by brisk labor-saving investment, its growth momentum is projected to slow temporarily against  the  background  of uncertainties  regarding trade  policies. Thereafter, however, the growth momentum is likely to increase. This is because, with reduced uncertainties regarding their earnings outlook, firms are expected to be able to actively undertake forward-looking investment, such as that for capacity expansion to respond to higher demand. Labor-saving investment, mainly to address labor shortages, will also likely support the growth momentum.

The pace of increase in nominal employee income is projected to decelerate somewhat due to the decline in corporate profits. However, with continuing tight labor market conditions, its  growth  momentum  is  likely  to  increase  to  some  extent  thereafter  in  tandem  with  the recovery in profits.

Private consumption is highly likely to remain more or less flat; although consumption is likely to be pushed down by elevated food prices and the slower growth in bonuses reflecting a decline in corporate profits, an increase in scheduled cash earnings -- owing to the results of the 2025 annual spring labor-management wage negotiations and hikes in minimum wages -- is expected to provide some support. Thereafter, private consumption is projected to return to  a  moderate  increasing  trend,  since  improvement  in  real  employee  income  is  likely  to become pronounced as the pace of price rises moderates.

As for the  outlook  for prices,  the  year-on-year  rate  of  increase  in  the  CPI  is  expected  to moderate, as the positive contribution stemming from the rise in rice and other food prices, which has significantly led CPI inflation, dissipates. The Bank deems that the price rises seen thus far can also be attributed to the shift in the behavior of firms more toward raising wages and prices. Careful attention is therefore warranted to how such behavior will develop going forward.

The  outlook  I  have  outlined  here  factors  in  the projections  that,  for  example,  labor productivity will increase by a certain degree due to labor-saving investment and that the terms  of  trade,  which  reflect  the  prices  of  crude  oil  and  other  goods,  will  head  toward improvement.

## B. Outlook for Economic Activity and Prices

Next, I would like to touch on the price forecasts of the majority of the Policy Board members, decided at the October 2025 Monetary Policy Meeting (MPM) (Chart 5).

In terms of the median of the Policy Board members' forecasts, the real GDP growth rate is projected to be 0.7 percent for fiscal 2025, 0.7 percent for fiscal 2026, and 1.0 percent for fiscal  2027.  Comparing  these with the  projections presented  in  the  previous Outlook  for Economic Activity and Prices (Outlook Report), the projected growth rates are more or less unchanged.

The year-on-year rate of change in the CPI for all items excluding fresh food is projected to be 2.7 percent for fiscal 2025, 1.8 percent for fiscal 2026, and 2.0 percent for fiscal 2027, also

in terms of the median of the forecasts. The projected rates of increase are likewise more or less unchanged from those presented in the previous report.

The high CPI growth for fiscal 2025 is due to the factors that I explained earlier (Chart 4). The year-on-year rate of increase in the CPI is likely to decelerate temporarily as inflationary pressures wane over time. However, it is likely that the mechanism by which wages and prices rise  moderately  in  interaction  with  each  other  will  be maintained. Thereafter,  the  rate  of increase in the CPI is expected to accelerate gradually, alongside the rise in medium- to longterm inflation expectations, since it is projected that a sense of labor shortage will grow more acute as the economic growth rate rises.

## C. Risks to Economic Activity and Prices

There remain high uncertainties regarding this outlook for economic activity and prices. I will describe three risks that I am paying attention to.

The first concerns the outlook for the U.S. economy. In recent years, U.S. economic growth has been driven by private consumption and business fixed investment by major IT firms, both of which were mainly supported by high stock prices (left panel of Chart 6). Factors such as corporate dynamism, or the increased entry and exit of firms, the shift of labor to higher-productivity sectors, and the rising number of immigrants have also contributed to economic growth. While consumer prices have shown a moderate rise recently, the impact of tariff hikes on these prices seems to be limited so far (middle panel of Chart 6). It is possible that this impact  will  become  more  pronounced  in  prices  and  economic  activity,  and  that significant  workforce  reductions  in  the  government  sector  as  well  as  a  decrease  in  labor supply due to immigration policy will exert downward pressure on economic growth (right panel  of  Chart  6).  Moreover,  attention  should  be  paid  to  the  possibility  of  considerable adjustments  in  asset  prices  and  a  significant  deceleration  in  the  U.S.  economy  if  growth expectations  for  AI-related  investment,  which  has  driven  economic  growth  to  date,  are adjusted.

The second risk concerns the impact of trade and other policies in each jurisdiction. The very recent U.S.-China summit, for example, is viewed as having made positive progress; as China

leverages its technological capabilities and competitiveness to expand exports to countries other than the United States, this could depress corporate profits in those countries, exert downward pressure on the global economy, and ultimately affect Japan's economy. On the other hand, if countries around the world implement expansionary fiscal policies in response to the outcome of tariff negotiations and tariff policies, global economic growth could turn out to be stronger than expected.

The third risk concerns the wage- and price-setting behavior of Japanese firms, as well as its impact on economic activity and prices in Japan. On the one hand, although Japanese firms are likely still in the process of revising prices in response to past price rises, their behavior has been shifting more toward raising wages and prices in the context of economic and price developments so far. With growing expectations that labor market conditions in Japan will remain tight, wage hikes and the pass-through of higher wages to selling prices could both become  stronger  than  projected. The  resultant  price  rises  could  then  affect  household sentiment and inflation expectations. On the other hand, if firms find it difficult to pass on costs to selling prices, mainly due to weakened demand, their profits could face downward pressure. In response, they might lean more strongly toward cost-cutting, which could, in turn, weaken moves to reflect price rises in wages.

## III. The Bank's Conduct of Monetary Policy

Thus far,  the  Bank  has  maintained  accommodative financial  conditions to firmly  support economic activity and has adjusted the policy interest rate with a view to achieving the price stability target of 2 percent in a sustainable and stable manner. At present, based on its outlook for Japan's economic activity and prices, the Bank is conducting money market operations in line with the guideline calling for it to encourage the uncollateralized overnight call rate -- its policy interest rate -- to remain at the target level of ""around 0.5 percent.""

The Bank has also proceeded with efforts to reduce the size of its balance sheet. Since summer 2024, it has been reducing its Japanese government bond (JGB) purchases gradually, so that it can improve the functioning of the JGB markets in a manner that supports stability in the JGB markets, based on the principle that long-term interest rates are to be formed in financial markets (Chart 7). At the June 2025 MPM, the Bank decided on a new plan for the reduction

of its monthly outright purchases of JGBs, so that the purchase amount will be about 2 trillion yen in the January-March quarter of 2027; the amount will be cut down, in principle, by about 400 billion yen each calendar quarter until the January-March quarter of 2026, and by about 200 billion yen each calendar quarter from the April-June quarter of 2026. The Bank also decided at this meeting to discuss a guideline for its JGB purchases from April 2027 at the June 2026 MPM and announce the results. At the September 2025 MPM, it decided to sell exchange-traded  funds  (ETFs)  and  Japan  real  estate  investment  trusts  (J-REITs),  at  a respective pace of about 330 billion yen and about 5 billion yen per year on a book value basis, in an effort to avoid inducing destabilizing effects on the financial markets as much as possible (Chart 8).

With regard to the future conduct of monetary policy, given the current level of real interest rates shown in Chart 9, if its outlook for economic activity and prices is realized, the Bank will continue to raise the policy interest rate  and adjust the  degree  of  monetary accommodation in response to improvement in economic and price developments.

Considering that high uncertainties remain regarding the impact of trade and other policies in each jurisdiction, the Bank will make monetary policy decisions as appropriate by continuing to carefully assess data and information that becomes available.

Thank you.



## Economic Activity, Prices, and Monetary Policy in Japan

Speech at a Meeting of the Okayama Club

November 10, 2025

NAKAGAWA Junko Member of the Policy Board Bank of Japan

## Corporate Sector

## Corporate Profits

s.a., tril. yen

## Business Conditions

s.a., tril. yen



Notes: 1. Figures are based on the

Financial Statements Statistics of Corporations by Industry,

2. Shaded areas denote recession  periods.

Quarterly

. Figures exclude the finance and insurance industries and pure holding companies.

Source: Ministry of Finance.

DI (""favorable"" - ""unfavorable""), % points

Notes: 1. Figures are based on the



data for December  2003 due to a change in the survey framework.

Tankan and are for all enterprises.  There is a discontinuity  in the

2. Shaded areas denote recession  periods.

Source: Bank of Japan.

Chart 1

## Real Exports

## Corporate Sector

Real Exports by Region

s.a., CY 2020=100



s.a., 2020/Q1=100



Note: Based on Bank staff calculations.  Figures in angle brackets show the share of each country or region in Japan's total exports  in 2024. Sources: Ministry of Finance; Bank of Japan.

## Planned and Actual Business Fixed Investment (Nominal)

y/y % chg.



Notes: 1. The Tankan figures include software investment  and research and development  (R&amp;D) investment  but exclude land purchasing expenses.  R&amp;D investment  is not included before the March 2017 survey. Figures are for all industries including financial institutions.

- Sources: Cabinet Office; Bank of Japan.
2. The figure for private nonresidential  investment  for fiscal 2025 is that for 2025/Q2.

## Household Sector

## Employee Income

y/y % chg.

Figures for 2025/Q3 are those for September.



2. Nominal employee income = Total cash earnings ( Monthly Labour Survey ) Number of employees  ( Labour Force Survey )
4. Figures for real employee  income are based on Bank staff calculations using the price indicators shown in parentheses.
3. Figures from 2016/Q1 onward are based on continuing  observations following  the sample revisions  of the Monthly Labour Survey .

Sources: Ministry of Health, Labour and Welfare; Ministry of Internal Affairs and Communications.

Chart 3

## Real Private Consumption

s.a., cumulative chg. from 2022/Q1, %



- Notes: 1. Based on Bank staff calculations. Figures for the Consumption  Activity  Index (CAI, travel balance adjusted) exclude inbound tourism consumption  and include outbound tourism consumption. Figures for 2025/Q3 are July-August averages.
3. Figures in angle brackets show the weights  in the CAI.
2. Nondurable goods include goods classified  as semi-durable  goods in the SNA.

Sources: Bank of Japan; etc.

## Inflation Indicators

## Inflation Indicators

## CPI (Less Fresh Food and Energy)

y/y % chg.

Notes: 1. Figures for the producer price index (PPI) are adjusted for the hike in electric power charges during the summer season. Figures for the services producer price index (SPPI) exclude international transportation.



y/y % chg.

Notes: 1. Administered  prices (less energy) consist  of public services  and water charges.

2. CPI figures are Bank staff estimates  and exclude the effects  of the consumption  tax hike,

2. Figures for ""food"" in the CPI exclude alcoholic beverages.

Source: Ministry of Internal Affairs and Communications.

free education policies,  and travel subsidy programs.

Sources: Ministry of Internal Affairs and Communications;  Bank of Japan.

Chart 5

## Outlook for Economic Activity and Prices (October 2025)

## Real GDP

## CPI (Less Fresh Food)

y/y % chg



y/y % chg.

Note: Forecasts  presented  are the medians of the Policy Board members'  forecasts. Sources: Cabinet Office; Ministry of Internal Affairs and Communications;  Bank of Japan.



12

10

8

6

4

2

0

-2

-4

-6

## Real GDP

s.a., ann., q/q % chg.

Government expenditures

Inventory investment

Net exports

Residential investment

Private consumption

Nonresidential investment

Real GDP

IMF projections

## Labor Market

s.a., m/m chg., 10 thous. persons

%

## U.S. Economy

## Consumer Prices

y/y % chg.

CPI (all items)

PCE deflator



22

23

24

25

26

CY

10

9

8

7

6

5

4

3

2

1

0

22

23

24

25

CY

Notes: 1. In the left panel, IMF projections  are those as of October 2025.

Sources: ADP; Bureau of Economic  Analysis;  BLS; IMF.

2. In the right panel, number of employees  refers to nonfarm payroll employment  figures from the Bureau of Labor Statistics  (BLS) and total nonfarm private payroll employment  figures from Automatic Data Processing,  Inc. (ADP).

Chart 7

## Plan for the Reduction of the Purchase Amount of JGBs (June 2025 MPM)

1. Long-term interest rates: to be formed in financial markets in principle

In principle, the Bank will reduce the planned amount of its monthly purchases of JGBs each calendar quarter as follows.

2. JGB purchases: appropriate for the Bank to reduce its purchase amount of JGBs in a predictable manner, while allowing enough flexibility to support stability in the JGB markets
2. 
3.  From April-June 2026 to January-March 2027: about 200 billion yen
4. Until January-March 2026
5. : about 400 billion yen (the reduction plan decided in July 2024 will be maintained)
6.  The Bank will gradually reduce its purchase amount so that it can improve the functioning of the JGB markets in a manner that supports stability in the markets.

## Reduction in a Predictable Manner





## Allowing Enough Flexibility

2. In the case of a rapid rise in long-term interest rates, the Bank will make nimble responses by, for example, increasing the amount of JGB purchases.
1. The Bank will conduct an interim assessment of the plan at the June 2026 MPM.
3. The Bank is prepared to amend the plan at the MPMs, if deemed necessary.

## Decisions on Disposal of ETFs and J-REITs (September 2025 MPM)

Fundamental principles for the disposal

The Bank should dispose of its holdings of ETFs and J-REITs for adequate prices, taking into account the condition of the financial markets.

Experience of the sales of the ""stocks purchased from financial institutions""

The Bank should avoid incurring losses as much as possible.

The Bank should avoid inducing destabilizing effects on the financial markets as much as possible.

The Bank completed in July 2025 the sales of the stocks purchased for financial stability purposes, while avoiding major market impact.

1. The Bank will sell its holdings of ETFs and J-REITs to the market at a scale generally equivalent to that of the sales of the ""stocks purchased from financial institutions.""
2. A framework supporting the stability in the financial markets will be provided.
* The Bank will sell each ETF and J-REIT at the amount approximately proportionate to the share of each asset in its holdings, with consideration to spreading out the timing of the sales.
4.  Under the pace of sales described above, the trustee may temporarily adjust the sales amount or suspend the sales, in response to changes in the condition of the financial markets.
5.  The pace of sales may be modified at future MPMs, based on the fundamental principles and the experience from the sales to be conducted.
3. The disposal will begin once necessary operational preparations are completed.

|                                   | Stocks (completed)                                                      | ETFs                                          | J-REITs                                     |
|-----------------------------------|-------------------------------------------------------------------------|-----------------------------------------------|---------------------------------------------|
| Pace of sales (amount per year) * | Book value (Market value) About 150 billion yen (About 620 billion yen) | About 330 billion yen (About 620 billion yen) | About 5 billion yen (About 5.5 billion yen) |
| Proportion to the trading value   | About 0.05%                                                             | About 0.05%                                   | About 0.05%                                 |

## Financial Conditions

## Real Interest Rates

%

1-Year

10-Year





%

Note: Figures for real interest  rates are calculated as government  bond yields for the corresponding  maturity minus the composite  index of inflation expectations  (Bank staff estimates). Sources: Bloomberg;  Consensus  Economics Inc., Consensus Forecasts ; QUICK ,  QUICK Monthly Market Survey &lt;Bonds&gt; ; Bank of Japan.

## Chart 9

## Lending Attitudes of Financial Institutions

DI (""accommodative"" - ""severe""), % points



Note: Figures are based on the Tankan and are for all industries.  There is a discontinuity  in the data for December 2003 due to a change in the survey framework.

Source: Bank of Japan.",Junko Nakagawa
https://www.bis.org/review/r251110g.htm,Stephen I Miran: A global stablecoin glut - implications for monetary policy,"Speech by Mr Stephen I Miran, Member of the Board of Governors of the Federal Reserve System, at the BCVC Summit 2025, Harvard Club of New York City, New York City, 7 November 2025.",2025-11-07 00:00:00,"## Stephen I Miran: A global stablecoin glut - implications for monetary policy

Speech by Mr Stephen I Miran, Member of the Board of Governors of the Federal Reserve System, at the BCVC Summit 2025, Harvard Club of New York City, New York City, 7 November 2025.

* * *

Thank you, I really appreciate the opportunity to speak to you today. 1

I am excited to be discussing stablecoins. This innovation has been unfairly treated as a pariah by some, but stablecoins are now an established and fast-growing part of the financial landscape. Putatively, stablecoins were originally intended to facilitate holding and trading cryptocurrency. But their proliferation has been aided by providing users with a stable store of value, a means of payment, and the ability to move capital quickly, irrespective of territorial borders.

Demand for dollars continues to be strong, so it's no surprise that a more efficient means of accessing dollars has become increasingly popular. With the passage this year of the GENIUS Act (Guiding and Establishing National Innovation for U.S. Stablecoins Act), there is now a clear regulatory pathway in the U.S. for stablecoin issuers to broaden their reach and solidify stablecoins as a core part of the payment system. I believe economic research has some catching up to do. Economists meticulously study demand for dollar assets and consider how monetary policy may be affected, and the rapid growth of stablecoins affects the supply of loanable funds in the U.S. economy. I am encouraged that the Federal Reserve is taking steps to recognize the importance of stablecoins for the payment system; greater transparency and rising adoption should help us consider their effect on monetary policy as well. 2

## Stablecoins and Dollars

Essentially all stablecoins are denominated in dollars, and their success is at least partly due to the U.S. dollar's enduring status as the world's preferred currency. 3 Stablecoins are also contributing to the dollar's dominance by allowing an ever-growing share of people around the globe to hold assets and conduct transactions in the most trusted currency.

My thesis is that stablecoins are already increasing demand for U.S. Treasury bills and other dollar-denominated liquid assets by purchasers outside the Unted States and that this demand will continue growing. All else equal, this new demand lowers borrowing costs for the U.S. government. However, as a central banker, my focus is on what I believe may be a substantial and long-term force putting downward pressure on a crucial guideline for monetary policymakers known as r*. The neutral rate, or r*, is the policy interest rate that neither stimulates nor restricts economic activity when the economy is operating at its potential once the transitory effects of cyclical economic shocks have abated. There are several open questions with respect to the impact of stablecoins on U.S. monetary policy: How many assets will be managed by stablecoin issuers? Will the funds come from domestic or foreign sources, and where might

substitution pull funds out of the banking system? What are the systemic risks related to runs on stablecoins? Since monetary policy must be forward looking, my colleagues and I would be best served exploring these topics now. In these remarks, I'll focus on the consequences for monetary policy if stablecoin growth follows industry expectations. In short, stablecoins may become a multitrillion dollar elephant in the room for central bankers.

## GENIUS Act

While I tend to view new regulations skeptically, I'm greatly encouraged by the GENIUS Act. This regulatory apparatus for stablecoins establishes a level of legitimacy and accountability congruent with holding traditional dollar assets. For the purposes of monetary policy, the most important aspect of the GENIUS Act is that it requires U.S.domiciled issuers to maintain reserves backed on at least a one-to-one basis in safe and liquid U.S. dollar-denominated assets. These reserves can be held in bank deposits, short-term Treasurys, overnight repurchase agreements (repos) or reverse repos backed by U.S. Treasurys, or government money market funds. Depending on the source of funds used to invest in stablecoins, it may constitute new loanable funds in the U.S. economy or the overall amount of money available for borrowing and lending.

Even stablecoins outside the ambit of the GENIUS Act are likely to boost demand for Treasurys and other dollar-denominated assets. Stablecoins that do not comply with the GENIUS Act can invest reserves in a much broader range of assets but, to be viewed as reliable stores of value, will likely end up still investing substantially in U.S. dollar securities with minimal credit risk.

The inter-quartile range of private-sector estimates compiled by Federal Reserve staff roughly projects stablecoin uptake reaching between $1 trillion and $3 trillion by the end of the decade. For reference, the Fed grew its holdings of U.S. Treasury securities by just over $3 trillion during the latest round of quantitative easing in response to the COVID-19 pandemic. In total, under $7 trillion in Treasury bills are outstanding today. If these forecasts prove accurate, the magnitude of additional demand from stablecoins will be too large to ignore.

## Potential for Broad Adoption

The innovation of public blockchains means that stablecoins can trade freely on rails that anyone in the world can use. This advancement represents potentially transformational change for consumers and businesses outside the U.S., particularly those in emerging market economies (EMEs) or even advanced foreign economies (AFEs) with burdensome restrictions on their payment systems. In many jurisdictions, low-friction payment rails are unavailable. Banking services to convert local currency or assets into dollars may be limited. Basic banking services themselves may be limited. And billions of people worldwide are subject to capital controls preventing convertibility and access to dollars. Globally, savers disproportionately favor dollar-denominated assets, and the ubiquity of capital controls is indicative of that revealed preference.

For stablecoins to enter widespread use, there must be a bridge from local fiat currencies into stablecoins. One can imagine many possible bridges, often already in use for existing dollar vehicles: Remittances from immigrants working in the U.S. might

take the form of stablecoins; exporters may receive portions of their payment in stablecoins, perhaps undeclared if domiciled in jurisdictions that proscribe stablecoin use; people might trade local currency for cryptocurrency and then use that cryptocurrency to buy a stablecoin; or they might trade physical cash or goods or services or other assets for stablecoins. Stablecoins merely make it easier to traverse some of these bridges and increase incentives for doing so because once stablecoins are in circulation in an economy, they can circulate more freely and cheaply behind capital controls than traditional forms of dollar payments. 4

These bridges will not be frictionless or have infinite capacity. For people who want to use dollars either as a store of value or a means of payment but are unable to do so, stablecoins make it incrementally easier. Stablecoins will not instantly obliterate barriers to dollar use, but they will perforate those barriers.

Reserve assets and currency provided by the U.S. are global public goods, but some jurisdictions prohibit their citizens' enjoyment of them. Stablecoins might establish an easier means for the financially repressed to enjoy these global public goods and evade draconian restrictions on their finances. For individuals and businesses in many nations, especially those in which dollars are used for large purchases like homes, this also leapfrogs the challenges of high and unstable inflation or volatile exchange rates.

To be fair, stablecoin growth may not live up to the forecasts I cited earlier. Potential limits on yield and reward arrangements could limit adoption, particularly in open economies. The presumption that the crypto industry will grow at the prodigious rates of recent years cannot be taken for granted. But even with these considerations, it seems likely to me that the growth in stablecoin usage outside the U.S. will continue at a high rate.

One important distinction is that if domestically purchased stablecoins are financed with bank deposits, or foreign purchases are financed with existing dollar-denominated holdings, then that doesn't affect the amount of loanable funds in the financial system. Further, there's some risk that a flow of deposits out of the U.S. banking system and into stablecoins could disintermediate banks, affecting the transmission of monetary policy and stunting the velocity of money.

However, because GENIUS Act payment stablecoins do not offer yield and are not backed by federal deposit insurance, I see little prospect of funds broadly fleeing the domestic banking system. The real opportunity in stablecoins is to satiate untapped foreign appetite for dollar assets from savers in jurisdictions where dollar access is limited; by contrast, users in the U.S. and AFEs like the euro zone already freely access Treasurys, dollars, and other instruments that offer yield or deposit insurance. I therefore expect most demand for stablecoins to come from locales unable to access dollar-denominated saving instruments, boosting demand for dollar assets.

## Implications for Monetary Policy

The supply-demand balance for loanable funds determines the neutral interest rate, or r*. As I discussed in a recent speech, I believe a range of different factors are putting downward pressure on r* and should be considered in formulating monetary policy. 5 Some researchers have tried to estimate how much stablecoin growth might lower

interest rates. In 2024, work by Marina Azzimonti and Vincenzo Quadrini estimated that if stablecoins are in widespread use and fully backed by U.S. securities, it could put as much as 40 basis points of downward pressure on interest rates. 6

In estimating the effect of the projected growth of stablecoin issuance on demand for Treasurys and other highly liquid dollar assets, it is helpful to make a comparison to what most researchers believe was a large factor during an era of declining interest rates that began around the turn of the millennium-what former Fed Chairman Ben Bernanke called the global saving glut. 7   In measuring the global saving glut, Bernanke reported that the annual U.S. current account deficit widened by 4 percentage points of U.S. gross domestic product (GDP) from 1996 to 2004. 8

As I mentioned earlier, projections indicate between $1 trillion to $3 trillion of growth in stablecoins over the next several years. Adoption depends on regulatory clarity, institutional integration, and factors emanating from outside the U.S.-for instance, growth in EMEs, foreign exchange fluctuations, foreign political stability, and so forth.

An additional $2 trillion of foreign demand for dollar assets by the end of the decade would, all else equal, increase the current account deficit by roughly 1.2 percentage points of GDP over this period. This increase would represent about 30 percent of the size of the original global saving glut. More bullish stablecoin-uptake forecasts on the order of $4 trillion would double the size of this effect, making it about 60 percent the size of the original global saving glut. These magnitudes would matter for monetary policy.

Demand could obviously differ in domestic versus foreign adoption or miss these estimates. My goal is not to pinpoint the most accurate forecast, but to highlight the potential power of this channel. You can fill in your own numbers using this same method-my crystal ball is no clearer than others'. Moreover, the asset mix purchased by the rest of the world 20 years ago differs from that purchased by stablecoin issuers. The effects of a lower neutral rate might therefore manifest in financial markets differently than they did last time.

Even relatively conservative estimates of stablecoin growth imply an increase in the net supply of loanable funds in the economy that pushes down r*. If r* is lower, policy rates should also be lower than they would otherwise be to support a healthy economy. A failure of the central bank to cut rates in response to a reduction in r* is contractionary.

If a global stablecoin glut looks like a global saving glut, some other consequences may be replicated, too. For instance, a lower r* increases the odds that the zero lower bound (ZLB) binds in the future, limiting the ability of short-term interest rates to move down to provide accommodation but not restraining their ability to move up to restrict activity. Markets may expect policy to spend more time at the ZLB because of that inability to provide accommodation and get away from zero. That may make the fed funds rate more volatile to the upside with respect to other financial conditions, even as downside volatility remains muted by the ZLB, simulating elements of former Chairman Alan Greenspan's ""conundrum."" 9

Moreover, if a global stablecoin glut is driven by flows out of foreign currencies and into the U.S. dollar, it will, all else equal, make the dollar stronger. Depending on the strength of this effect relative to other forces affecting the Fed's price-stability and maximum-employment mandates, that might be something that monetary policy reacts to.

Finally, incremental dollarization may reduce the benefits of floating exchange rates. Exchange rates often function as shock absorbers, adjusting rapidly to changes in relative conditions across countries so that nominal prices don't have to. If nominal prices are sticky and exchange rates are not, the cyclical distortions associated with those rigidities are less detrimental for the economy. Increased real price rigidity because exchange rates cannot adjust would intensify the volatility of global business cycles. And Fed policy will have a greater effect on foreign economic growth with greater dollarization, increasing business cycle synchronization. Whether this phenomenon would matter for the U.S. and not just for countries that dollarize a portion of their economies remains speculative. 10

America's capital markets are the world's deepest, helping to support economic growth, fund new ideas, and allocate capital efficiently. However, our financial infrastructure, not unlike our physical infrastructure, could use a reboot. Stablecoins may well lead the way on this front, facilitating dollar holdings and payments domestically and abroad. While there has been extensive research on the topic since the advent of stablecoins a decade ago, the scope for rapid increases in issuance makes it now even more imperative to consider what widespread adoption may mean for monetary policy, both in the U.S. and abroad.

1  The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.

- 2  See Board of Governors of the Federal Reserve System (2025), proceedings  of the Payments Innovation Conference, streamed live on October 21, YouTube (Washington: Board of Governors).
- 3  For the list of stablecoins circulating, see the DeFiLlama website at https://defillama. com/stablecoins; at the time of writing, 99.6 percent of stablecoins were denominated in dollars. For more on the enduring global preference for dollars, see Carol Bertaut, Bastian von Beschwitz, and Stephanie Curcuru (2025), ""The International Role of the U. S. Dollar - 2025 Edition,"" FEDS Notes, (Washington: Board of Governors of the Federal Reserve System, July 18).
- 4  Although many countries have existing black markets for dollars, these are likely to be less preferred to stablecoins because of the difficulty of verifying and saving currency. Relative to stablecoins, physical cash is riskier, and both more difficult and costlier to store or move in large volumes. Moreover, many black market dollars trade at a premium because the amount of dollars available is limited.

- 5 See Stephen I. Miran (2025), ""Nonmonetary Forces and Appropriate Monetary Policy ,"" speech delivered at the Economic Club of New York, New York, September 22.
- 6  See Marina Azzimonti and Vincenzo Quadrini (2024), ""Digital Assets and the "" vol. 114 (May), pp. Exorbitant Dollar Privilege (PDF) AEA Papers and Proceedings, 153-56. This paper and related work by the same authors-including the 2025 paper "" Digital Economy, Stablecoins and the Global Financial System,"" NBER Working Paper Series 34066 (Cambridge, Mass.: National Bureau of Economic Research, July)expand on some of these ideas but do so in a model in which stablecoin issuers can choose to hold much less-or even none-of their assets in Treasury securities. The prediction on the interest rate depends on the fraction of reserves held in Treasury securities by stablecoin issuers. With a low enough fraction, the stablecoin steady-state interest rate can actually also be higher. However, such a pattern does not match what we observe from issuers or the guidelines in the GENIUS Act, and I therefore prefer to assume a high value of the fraction of reserves held in Treasury securities. It follows that the stablecoin steady-state interest rate is lower than the steady-state interest rate in which stablecoins are absent.
- 7  In his 2005 speech that coined the term and launched a thousand papers, then-Fed Governor Ben Bernanke estimated that the global saving glut began around 2001. See Ben S. Bernanke (2005), ""The Global Saving Glut and the U.S. Current Account Deficit ,"" remarks delivered at the Sandridge Lecture, Virginia Association of Economists, Richmond, Virginia, March 10.
- 8  After peaking in 1995 at 7.91 percent, the 10-year yield fell to 4.92 percent in January 2001.
- 9  See Alan Greenspan (2005), testimony  before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, February 16, 109th Cong. (Washington: U.S. Government Printing Office), quoted text in paragraph 23.
- 10  Caballero, Fahri, and Gourinchas (2017) note that once the ZLB for global interest rates is reached, the world economy becomes increasingly interdependent as countries can no longer use monetary policy to insulate their economies from world capital flows; see Ricardo J. Caballero, Emmanuel Farhi, and Pierre-Olivier Gourinchas (2017), ""The ,"" vol. 31 Safe Assets Shortage Conundrum (PDF) Journal of Economic Perspectives, (Summer), pp. 29-46.",Stephen I Miran
https://www.bis.org/review/r251106k.htm,Abdulelah A Aldeheem: Keynote speech - Money20/20 Middle East,"Keynote speech by His Excellency Mr Abdulelah A Aldeheem, Assistant Governor for Executive Affairs of the Saudi Central Bank, at the Money20/20 Middle East, Riyadh, 16 September 2025.",2025-09-16 00:00:00,"## Abdulelah A Aldeheem: Keynote speech - Money20/20 Middle East

Keynote speech by His Excellency Mr Abdulelah A Aldeheem, Assistant Governor for Executive Affairs of the Saudi Central Bank, at the Money20/20 Middle East, Riyadh, 16 September 2025.

* * *

In the name of Allah, the Most Gracious, the Most Merciful

I would like to begin by extending my thanks to the organizers, partners and attendees of Money20/20 for convening in this flagship global event held in the Middle East for the first time.

We at SAMA, and in Saudi Arabia are honoured to host all of you here, and for those whose visiting from overseas, we extend a warm welcome.

I hope you can all see from the scale of this event and the range of speakers and exhibitors that are taking part over these three days, this is an exciting time to be talking about the development of the Saudi and regional payment and fintech sector.

I will commence my remarks by outlining SAMA's strategic goals, and how they have informed the transformation journey that we have embarked on, particularly in how they relate to our stewardship of the payments industry.

SAMA has recently completed a strategy review and refresh of our operating model. This has the objective of better equipping us to continue to deliver our mandate in a dynamically changing environment.

Through this process, we have identified strategic priorities across four pillars that drive our efforts - Resilience, Excellence, Influence, and Development.

In the areas of Currency and Payments, the focus is on delivering strategic initiatives related to development of our national payments infrastructure, whether that is physical or digital.

In the digital payments domain, SAMA has been a recognized leader, and has helped shape the international regulatory agenda. We championed global payment reform during Saudi Arabia's presidency of the G20 in 2020, working with our peer central banks and multilateral entities such as the FSB and BIS on creation of the Roadmap for Enhancing Cross-border Payments. This roadmap was endorsed by G20 leaders at the Riyadh Summit, it sets specific targets for making payments faster, cheaper and more accessible, as a necessary step to closing the digital divide. We continue to actively engage in G20 and BIS working groups, enabling collaboration with peers around the world on implementing this roadmap.

Within the Kingdom, we have commenced an extensive programme of initiatives to continue advancing infrastructure reliability, accessibility, and functionality; through

RTGS modernization, expansion of international acceptance in the Kingdom, and enhancing national payment systems to cater for more innovative use cases, while maintaining robust cybersecurity, enhanced data infrastructure, and adopting AI.

The resulting evolution of the payments landscape has been readily observable.

For those of you who live here in Saudi Arabia, or have been frequent visitors over the past few years, you will have seen the growth and innovation across digital payments over the past decade, alongside the wholesale transformation of the economy, made possible by Saudi Vision 2030.

This evolution of payments was largely made possible through the historical and landmark initiatives undertaken by SAMA, including the launch of SPAN and the development of the RTGS back in 90's which positioned the Kingdom among the first countries to adopt such technologies; and the launch of SADAD in the early 2000's, which was applauded as a revolution in the payments field.

These steps were leveraged and became the building blocks for what came next. Retail E-Payments rose dramatically from 18% in 2015, to 79% as of last year. Alongside, acceptance of international payment networks has also grown significantly from around 120 million transactions processed through the national payment system in 2019 to more than 800 million in 2024.

National payments systems operated by SAMA- such as mada, sarie (IPS), and SADAD have scaled dramatically, with processed payments reaching around 12.8 bn transactions during 2024.

And, Mobile and tokenized wallets, of which some were announced yesterday, have thrived, supported through the national scheme (mada) maintained by SAMA's standards.

In addition, several other initiatives, including SAMA's opening of the ecosystem to nonbank players, the expanding our national Instant Payment System, to include a greater range of payments; have widened the scope of digital solutions and delivered significant benefits for users and the wider economy.

Let me now turn to the key drivers of this transformation, which I would describe as being a result of a resolute focus on three core areas:

- Firstly, developing the underlying payment infrastructure - RTGS, sarie (IPS), mada and SADAD.
- Second, implementing regulatory reform - this has included the launch of the Regulatory Sandbox and the facilitation of a regulatory regime that encourages the entrance of new providers.
- And finally, fostering a culture of innovation - and a key step forward in this was the development of the national Fintech Strategy in 2022, which aims to deliver a diversified digital economy.

A key development within payments globally has been the rise of instant, real-time transactions.

Instant payments are a necessity for the future of the digital economy.

We have placed instant payments at the heart of our strategy to continue modernizing the Kingdom's financial ecosystem, and we also recognise they will directly support the delivery of Saudi Vision 2030 by driving financial inclusion, widening payment options, and fostering innovation across the sector.

We continue investing to maintain and develop the rails while enabling market participants to innovate and explore use cases.

In 2021, we launched the sarie instant payment system to provide 24/7 real-time fund transfers for individuals and businesses.

Through sarie, individuals can make seamless peer-to-peer payments using simple identifiers like a mobile number or email, while corporates benefit from immediate liquidity and better cash flow management.

The resulting increase in velocity of cash circulation, will naturally have a positive impact on economic growth.

Support for innovation must, of course, be carefully balanced with the need to ensure stability, and a number of challenges must be addressed in achieving such a balance.

SAMA aims to serve as a prudent yet enabling regulator - one of our mandates is to support financial stability, we deliver this by maintaining a resilient financial system while also providing a framework to promotes innovation.

We follow a principles-based regulatory approach, which combined with detailed technical, operational, and security standards gives clear pathways for banks and nonbanks to innovate safely.

We have also opened market access to non-banks, which include e-money issuers, acquirers, by developing robust and progressive licensing, certification, and onboarding frameworks.

Fintechs are able to work in partnership with existing providers, and licensed nonbanks fintech are able to integrate directly with national rails (mada, SADAD, sarie).

This means that Fintechs are able to combine services to deliver integrated propositions to their stakeholders and will be complementing traditional financial institutions to drive innovation, inclusion, and customer choice as they expand across the value chain.

We also want to make sure that new payments service providers meet the high standards of anti-fraud and cybersecurity controls currently deployed in the traditional banking sector.

It is important to further maintain the strength of rail resilience; including enhancing uptime and real-time risk controls.

This has allowed us to support the important role that fintechs and other new entrants are playing in shaping Saudi Arabia's payments industry, while preserving stability within the financial system.

Looking ahead, several avenues for further innovation are already underway.

These are being built around Saudi-first use cases (for example: Pay by Account, transit &amp; toll, and interoperable QR) and expanded sarie features.

We also aim to institutionalize collaboration via partnerships with banks, PSPs, international schemes and fintechs.

And, finally, we are seeking to drive inclusion with low-cost acceptance as well as continue the exploration of potential use cases for technologies such as tokenization, AI and enhanced data analytics.

I would conclude with the following highlights:

- SAMA has a long tradition of innovating in payments stretching over more than three decades, which has created a strong infrastructure foundation.
- The pace of innovation has accelerated in recent years with rapid digitalization of the economy made possible by Saudi Vision 2030.
- In this environment, the Saudi Central Bank remains focussed on being a prudent, yet enabling regulator.",Abdulelah A Aldeheem
https://www.bis.org/review/r251105m.htm,Christine Lagarde: ECB press conference - introductory statement,"Introductory statement by Ms Christine Lagarde, President of the European Central Bank, and Mr Luis de Guindos, Vice-President of the European Central Bank, Florence, 30 October 2025.",2025-10-30 00:00:00,"## Christine Lagarde: ECB press conference - introductory statement

Introductory statement by Ms Christine Lagarde, President of the European Central Bank, and Mr Luis de Guindos, Vice-President of the European Central Bank, Florence, 30 October 2025.

* * *

Good afternoon, the Vice-President and I welcome you to our press conference. I would like to thank Governor Panetta for his kind hospitality and express our special gratitude to his staff for the excellent organisation of today's meeting of the Governing Council.

The Governing Council today decided to keep the three key ECB interest rates unchanged. Inflation remains close to our two per cent medium-term target and our assessment of the inflation outlook is broadly unchanged. The economy has continued to grow despite the challenging global environment. The robust labour market, solid private sector balance sheets and our past interest rate cuts remain important sources of resilience. However, the outlook is still uncertain, owing particularly to ongoing global trade disputes and geopolitical tensions.

We are determined to ensure that inflation stabilises at our two per cent target in the medium term. We will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance. In particular, our interest rate decisions will be based on our assessment of the inflation outlook and the risks surrounding it, in light of the incoming economic and financial data, as well as the dynamics of underlying inflation and the strength of monetary policy transmission. We are not pre-committing to a particular rate path.

The decisions taken today are set out in a press release  available on our website.

I will now outline in more detail how we see the economy and inflation developing and will then explain our assessment of financial and monetary conditions.

## Economic activity

The economy grew by 0.2 per cent in the third quarter of the year, according to Eurostat's preliminary flash estimate published today. The services sector continued to grow, boosted by strong tourism and, especially, by a pick-up in digital services. According to surveys, the pick-up reflects the fact that many firms have stepped up efforts to modernise their IT infrastructures and integrate artificial intelligence into their operations. Meanwhile, manufacturing was held back by higher tariffs, still-heightened uncertainty and a stronger euro.

The divergence between domestic and external demand is likely to persist in the near term. The economy should benefit from consumers spending more as real incomes rise. Unemployment, at 6.3 per cent in September, remains close to its historical low, even though demand for labour has cooled. Households continue to save an unusually large

proportion of their incomes, which should give them greater margin to increase spending further. Substantial government expenditure on infrastructure and defence, as well as our past interest rate cuts, should underpin investment.

By contrast, the global environment is likely to remain a drag. Goods exports declined from March to August, reversing the earlier frontloading of international trade ahead of recent tariff increases. New export orders in manufacturing point to further declines. The full impact of higher tariffs on euro area exports and manufacturing investment will only become visible over time.

The Governing Council stresses the urgent need to strengthen the euro area and its economy in the present geopolitical environment, and we welcome EU leaders reaffirming this ambition at last week's Euro Summit. Fiscal and structural policies should boost productivity, competitiveness and resilience. It is essential to implement the European Commission's competitiveness roadmap swiftly. Governments should prioritise growth-enhancing structural reforms and strategic investment, while ensuring sustainable public finances. It is also vital to foster further capital market integration by completing the savings and investments union and the banking union to an ambitious timetable, and to rapidly adopt the regulation on the establishment of a digital euro.

The Governing Council is committed to making retail and wholesale central bank money fit for the digital age. In this vein, the Governing Council today decided to move to the next stage of the digital euro project. This will ensure technical readiness for potential issuance and support Europe's digital sovereignty once the legislation has been adopted. The details of this decision are available in a separate press release.

## Inflation

Annual inflation increased to 2.2 per cent in September, from 2.0 per cent in August. This was mainly because energy prices fell by less than before. Energy price inflation was -0.4 per cent in September, up from -2.0 per cent in August. Meanwhile, food price inflation eased to 3.0 per cent in September, from 3.2 per cent in August. Inflation excluding energy and food rose to 2.4 per cent, from 2.3 per cent in August, as services inflation ticked up from 3.1 per cent to 3.2 per cent, while goods inflation was again unchanged at 0.8 per cent.

Indicators of underlying inflation remain consistent with our two per cent medium-term target. While firms' profits are recovering, labour costs are set to moderate further owing to rising productivity and an easing in wage growth. Forward-looking indicators, such as the ECB's wage tracker and surveys on wage expectations, point to slower wage growth over the remainder of the year and the first half of 2026.

Most measures of longer-term inflation expectations continue to stand at around 2 per cent, supporting the stabilisation of inflation around our target.

## Risk assessment

The EU-US trade deal reached over the summer, the recently announced ceasefire in the Middle East and today's announcement of progress in the US-China trade negotiations have mitigated some of the downside risks to economic growth. At the

same time, the still volatile global trade environment could disrupt supply chains, further dampen exports, and weigh on consumption and investment. A deterioration in financial market sentiment could lead to tighter financing conditions, greater risk aversion and weaker growth. Geopolitical tensions, in particular Russia's unjustified war against Ukraine, remain a major source of uncertainty. By contrast, higher than expected defence and infrastructure spending, together with productivity-enhancing reforms, would add to growth. An improvement in business confidence could stimulate private investment. Sentiment could also be lifted and activity spurred if the remaining geopolitical tensions diminished, or if the remaining trade disputes were resolved faster than expected.

The outlook for inflation continues to be more uncertain than usual on account of the still volatile global trade policy environment. A stronger euro could bring inflation down further than expected. Moreover, inflation could turn out to be lower if higher tariffs lead to lower demand for euro area exports and induce countries with overcapacity to further increase their exports to the euro area. An increase in volatility and risk aversion in financial markets could weigh on domestic demand and thereby also lower inflation. By contrast, inflation could turn out to be higher if a fragmentation of global supply chains pushed up import prices, curtailed the supply of critical raw materials and added to capacity constraints in the domestic economy. A boost in defence and infrastructure spending could also raise inflation over the medium term. Extreme weather events, and the unfolding climate and nature crisis more broadly, could drive up food prices by more than expected.

## Financial and monetary conditions

Since our last meeting, market rates have remained broadly unchanged. Our past interest rate cuts have continued to reduce bank lending rates for firms, which averaged 3.5 per cent in August. Meanwhile, the cost of issuing market-based debt remained at 3.5 per cent in August, as the longer-term yields on which such debt is priced have been relatively stable.

The annual growth rate of bank lending to firms edged down to 2.9 per cent in September, from 3.0 per cent in August. At the same time, corporate bond issuance slowed to 3.3 per cent on a yearly basis. According to our latest bank lending survey for the euro area, credit standards for business loans tightened moderately in the third quarter, as banks became more concerned about the risks faced by their customers. Firms' demand for credit picked up slightly.

The average interest rate on new mortgages has barely changed since the start of the year and stood at 3.3 per cent in August. Growth in mortgage lending ticked up to 2.6 per cent in September, from 2.5 per cent in August, on the back of a further increase in demand and unchanged credit standards in the third quarter.

Growth in broad money - as measured by M3 - slowed to 2.8 per cent in September, down from 2.9 per cent in August and an average of 3.8 per cent over the first half of the year.

## Conclusion

The Governing Council today decided to keep the three key ECB interest rates unchanged. We are determined to ensure that inflation stabilises at our two per cent target in the medium term. We will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance. Our interest rate decisions will be based on our assessment of the inflation outlook and the risks surrounding it, in light of the incoming economic and financial data, as well as the dynamics of underlying inflation and the strength of monetary policy transmission. We are not pre-committing to a particular rate path.

In any case, we stand ready to adjust all of our instruments within our mandate to ensure that inflation stabilises sustainably at our medium-term target and to preserve the smooth functioning of monetary policy transmission.

We are now ready to take your questions.",Christine Lagarde
https://www.bis.org/review/r251105l.htm,Olli Rehn: Europe and the euro in a changing international monetary system,"Speech by Mr Olli Rehn, Governor of the Bank of Finland, at the Peterson Institute for International Economics, Washington DC, 17 October 2025.",2025-10-17 00:00:00,"## Olli Rehn: Europe and the euro in a changing international monetary system

Speech by Mr Olli Rehn, Governor of the Bank of Finland, at the Peterson Institute for International Economics, Washington DC, 17 October 2025.

* * *

Presentation accompanying the speech

Ladies and Gentlemen, Dear Colleagues and Friends,

It's a real pleasure to be back at the Peterson Institute, a place that for decades has helped shape how we think about the world economy: fact-based, open-minded, and not afraid to challenge conventional wisdom.

We meet at a moment when geopolitics and protectionism are reshaping the global economy. We have entered an era that is . less rules-based and more power-based The international monetary system is becoming more fragmented, more contested, and more strategic.

Now, amid this turbulence, Europe has proven its . resilience

The euro rests on firm foundations: the rule of law, macroeconomic stability, and the world's second-largest integrated economy.

Despite the war in Ukraine, the energy shock, and the sharpest inflation surge in decades, Europe has come through remarkably well. Inflation has returned to target. Growth has stayed positive. And employment - perhaps most impressively - has held up throughout.

## So yes - the European economy has shown remarkable resilience.

But - and this is the key ""but"" - resilience is as . Our growth is not the same dynamism steady, but rather modest.

In short, Europe's problem is not survival - it's . We can deal with shocks. momentum But can we ? generate sustained, self-confident growth

That's . And that leads to my main message today: the real test

A stronger international role for the euro requires a stronger, more dynamic Europe. Both in security and in the economy.

The euro's global weight ultimately depends on the vitality of the economy behind it. That is why the path forward rests on three key priorities: Defence, Dynamism, and Digital Sovereignty.

The first D is inevitably Defence - and security as an economic asset. Russia's war of aggression in Ukraine has reminded us, painfully, that security and economics are . inseparable

That's not just a military point. It's also an economic one.

Because defence spending, if done right, is also an investment in innovation, industry and resilience. It drives technological spillovers. And - crucially - it builds confidence in Europe's capacity to protect itself.

But this also brings a . financial opportunity

The need to fund common defence reinforces the case for common European - including joint bond issuance - that could pave the way to finally provide instruments the euro area with . a deep and liquid safe asset

That would help integrate our capital markets and give the euro a genuine benchmark comparable to US Treasuries.

Thus, reinforcing defence is not only about security. It's about creating the fiscal and financial backbone to make the euro more credible globally.

The second D is - the engine of Europe's prosperity and the foundation of Dynamism the euro's strength. The lesson is simple: a currency cannot be stronger than the economy it represents.

The Draghi report put it clearly: Europe must reignite growth through more investment, smarter regulation, and a renewed commitment to complete the Single Market especially in and . services capital

That is why - investing in productivity, completing the saving and economic dynamism investment union, and enabling innovation - is essential.

So let me underline this point:

The euro's international role and Europe's economic dynamism are inseparable. One cannot exist without the other.

The third D is - perhaps the most strategic frontier of all. In that Digital Sovereignty arena, Europe remains far too dependent on non-European platforms and payment systems.

At the same time, are spreading rapidly - aiming at US dollar-backed stablecoins extending dollar dominance into digital finance.

Europe is not ignoring this shift. That's why the is important. digital euro

It's not about hype or headlines. It's about ensuring that European citizens and firms have access to in the digital age secure, inclusive legal tender issued by the . central bank, backed by public trust

The digital euro will , not replace, cash. And it will ensure that money in complement Europe remains a , not a private monopoly. public good

In a world where ,. It's about ensuring payment systems are geopolitical instruments that Europe controls the backbone of its financial system. Today, sovereignty is digital . monetary sovereignty

Together, the three D's form a coherent strategy for a stronger Europe and a stronger . And all three support one another: requires a dynamic euro a credible defence economy to fund it; benefits from digital innovation; and economic dynamism digital , in turn, depends on both secure infrastructure and economic scale. sovereignty

Let me History shows that such conclude. periods of monetary system transition as the breakdowns of the gold standard and Bretton Woods  have provoked financial . In our time, the era of , instability and political disorder polycrisis we don't need that.

Dollar dominance is likely to persist for quite some time, but its unipolar hegemonic is being challenged by geopolitics and digitalization. supremacy

The next evolution of the international monetary system is probably going to be a . It calls for , to support a more multipolar one a strategic rethink of the euro's role sound rebalancing of the global monetary order.

Finally, let's recall that is inherently the future of the international monetary system . Despite the current headwinds, linked to the general fate of multilateral cooperation the European Union will continue to defend the foundations of international in the US, in the Global South, cooperation - preferably together with our partners and beyond.

Thank you for your attention.",Olli Rehn
https://www.bis.org/review/r251105k.htm,"Hajime Takata: Economic activity, prices and monetary policy in Japan - Japan as a leading asset management center","Speech by Mr Hajime Takata, Member of the Policy Board of the Bank of Japan, at a meeting of the Chugoku Economic Federation, Hiroshima, 20 October 2025.",2025-10-20 00:00:00,"

Bank  of  Japan

October 20,  2025

## Economic Activity, Prices, and Monetary Policy in Japan: Japan as a Leading Asset Management Center

Speech at a Meeting of the Chugoku Economic Federation Held in Hiroshima

## TAKATA Hajime

Member of the Policy Board

(English translation based on the Japanese original)

## Introduction

It is my pleasure to have the opportunity to address you today at the meeting of the Chugoku Economic Federation. I would like to take this chance to express my sincere gratitude for your support and cooperation with the activities of the Bank of Japan.

My remarks will focus on Japan's economic activity and prices, as well as the Bank's conduct of monetary policy.

## I. Economic Activity and Prices

I will begin with developments in economic activity and prices.

Overseas economies have grown moderately on the whole, although some weakness has been seen in part, reflecting trade and other policies in each jurisdiction. In the October 2025 World Economic  Outlook (WEO), the  International  Monetary  Fund  (IMF) revised  upward  its forecast for global growth from the April WEO, which had incorporated the significant impact of U.S. tariff policy, and from its subsequent July WEO Update (Chart 1). Let me take a look at developments in the U.S. economy, where the impact of tariff policy has been of concern. Although domestic demand in the United States was expected to decline due to price rises stemming from the impact of reciprocal tariffs imposed in April by the Trump administration, the actual  impact of  this has so  far been  limited. Specifically,  although there  has  been  a slowdown  in U.S.  employment,  corporate  profits  for  IT-related  firms  in  particular  have improved, and stock prices have risen to record high levels. Amid anxiety about the future, deep-rooted concerns over consumption and investment remain, but solid asset prices have continued  to  cause the  impact of  tariff  policy on consumer  sentiment to  be limited. The Federal Reserve kept its policy interest rate unchanged from the January 2025 Federal Open Market Committee (FOMC) meeting. In light of the slowdown in employment, however, it once again cut the policy rate at the September FOMC meeting (Chart 2). Meanwhile, wages and employee income have been robust, and AI investment has also remained at a high level. As for the outlook, I am of the view that a sharp economic slowdown triggered by credit contraction, which was common during past economic downturns in the United States, is unlikely, in light of factors such as stable financial conditions and the sound balance sheets of households, firms, and financial institutions. Since the start of 2025, what might be called

a ""north wind"" policy predominated in the United States -- i.e., a policy that, like the north wind in Aesop's fable, tends to favor pressure over persuasion, as represented by U.S. tariff policy in particular. Such a policy exerts a negative impact on economic growth. However, as seen in the passage of tax cut legislation in July, coupled with an expansion in investment spurred by deregulatory initiatives, the situation in the United States appears to be shifting to a ""sun"" policy, which prefers persuasion and exerts a positive impact on economic growth.

The theory of optimal tariffs suggests that the United States, which imposes tariffs worldwide, has thus far been containing the impact of an economic slowdown through improvements in its terms of trade that reflect its privileged position as an economic superpower. Under the United States' global imposition of tariffs, its trading partners -- by reducing the prices of exports to the United States -- end up shouldering themselves the burden of tariffs that would normally  have been borne  by the  United  States. Let  us  take  a  look  at Chart  3. This is  a textbook conceptual  diagram illustrating the  theory  of  optimal  tariffs. 1 The  following mechanism is at work for a large country like the United States that can exert an influence on the global economy: a fall in demand due to tariff impositions is followed by a drop in global prices from P 0 to P 2 as shown in the left panel. This results in tariff revenues (denoted by (2) in the left panel) outweighing welfare losses brought about by tariffs (denoted by (1) in the left panel), thereby generating positive gains (denoted by (2) minus (1) in the left panel). By contrast, with respect to a small country, as shown in the right panel of Chart 3, global prices remain unchanged even with the imposition of tariffs (marked by P 0 =P2 in the right panel), implying that the kind of improvement in the terms of trade that is the case with a large country cannot be expected. Put differently, although there are differences between industries and products, a large country like the United States generates an impact similar to levying taxes on the rest of the world by causing other countries to lower their export prices. With respect to those countries that bear the costs of tariffs, on the other hand, such costs essentially serve  as  a  factor  pushing  down economic  activity.  Yet, amid the  global  sense  of  risk

1 For details, see, for example, Elhanan Helpman and Paul R. Krugman, Trade Policy and Market Structure (Cambridge: The MIT Press, 1989) and Furusawa, T., ""Keizai kyoshitsu Beikoku no koeki jyoken wa kaizen mo"" [Economics class: Despite improvement in the U.S. terms of trade], Nikkei , September 24, 2025. Although the rate of passing on tariff increases to U.S. selling prices is almost 100 percent for small countries, the rate for large countries is low. U.S. selling prices are thus not necessarily under upward pressure, and the United States may enjoy the benefits of tariff impositions.

engendered by U.S. tariff impositions, Europe, the United States, China, and other emerging economies have all leaned toward accommodative policies on both the fiscal and monetary fronts.  This, in  turn,  has created an  extraordinary  environment  where the  same  policy direction has been adopted around the world. Chart 4 shows the stance of monetary policy worldwide. As can be seen, after some tightening in 2022 and 2023, the various countries and regions have gone through a phase of monetary easing in a synchronized manner over the past year or so. At the same time, fiscal expansion has also taken place in regions such as the United  States,  Europe,  and  China,  producing expansionary  effects  in  combination  with monetary accommodation. As a consequence, even though there were initial concerns about a global economic slowdown in the wake of the U.S. tariff policy, attention to the possibility of an unexpected uplift in economic activity and inflationary pressure is currently warranted, with monetary and fiscal policies all moving in the same direction. The present circumstance is  similar  to  the  period starting in  2020 when economic stimulus measures were adopted globally  during  the  COVID-19  pandemic. The  global rise in  stock  prices  since  this past summer may be owing to the contributions of accommodative monetary and fiscal policies employed around the world.

The impact of U.S. tariff policy was initially expected to push down Japan's economy through such channels as a slowdown in overseas economies, a decline in domestic corporate profits and the associated slowdown in wage increases, and a postponement of firms' and households' spending due to increased uncertainty. Japan's economic outlook from spring 2025 may be likened to a ""planned suspension"" of public transportation, in that the outlook was revised downward preemptively in anticipation of being hit by the ""typhoon"" of reciprocal tariffs beginning in April under the Trump administration (Chart 5). In reality, however, the Bank's Tankan (Short-Term  Economic  Survey  of  Enterprises  in  Japan) released  in  October and reports at the latest meeting of the general managers of the Bank's branches have revealed no marked slowdowns. In Japan's corporate sector, corporate profits for fiscal 2025 are projected to be at high levels, despite being sluggish. The final aggregate results of the 2025 annual spring  labor-management  wage  negotiations  compiled  by  the  Japanese  Trade  Union Confederation  (Rengo) also show  that the  negotiations  agreed  on high  levels  of  wage increases (Chart 6). In the household sector, private consumption has been resilient against the  background  of  an  improvement  in  employee income,  despite  weakness  in  consumer

sentiment due to the impact of price rises and other factors (Chart 7). These developments suggest that there  has  been  no  change  in  the  structure in  which an improvement  in  the employment  and  income  situation underpins private  consumption. The inflation  rate  has recently been above 2 percent due to the rise in rice and other food prices (Chart 8). Private consumption is expected to continue increasing moderately, however, with wage increases catching up with higher prices, reflecting the rise in wage growth.

Looking at medium- to long-term inflation expectations of various economic entities to assess underlying inflation, expectations have continued to rise steadily (Chart 9). Growth in the GDP deflator -- which indicates domestic inflationary pressure and had been mainly led by unit profits -- has increasingly been driven by a rise in unit labor costs since 2024, reflecting wage increases. As a result, the growth rates of unit profits and unit labor costs are coming into balance, and signs of homemade inflation have emerged, in that inflationary pressure is stemming not only from import price factors but from domestic factors as well. In this regard, the high levels of wage increases agreed in the 2025 annual spring labor-management wage negotiations suggest that  these  trends will continue. The  fact  that  the benchmark for the degree of increase in the minimum wage has been raised to 6 percent for fiscal 2026 -- up a percentage  point  from  fiscal  2025 --also suggests that  wage  increases  will continue. Moreover, as  prefectures  compete  to  raise  their  minimum  wage  levels to an extent that surpasses the national benchmark, the national weighted average of the minimum wage has risen by as high as 6.3 percent. This example symbolizes a change in the norm for prices, and is  likely  to influence inflation expectations. The government's stated intention to raise the hourly minimum wage to 1,500 yen by the end of the 2020s is also likely to serve as forward guidance for wages by demonstrating a commitment to the future wage level.

As firms face supply-side constraints due to labor shortages -- in other words, a shift to a ""labor shortage economy"" -- their wage- and price-setting behavior has been active. With wage hikes taking hold, inflationary pressure is increasingly being driven by domestic factors. Given this, overall prices have been rising even amid a fall in energy prices, and the year-onyear rate of increase in the consumer price index (CPI) for items excluding fresh food has remained at 2 percent and above for nearly three and a half years, since April 2022 (Chart 8). In fact, this rate is higher than in the United States and major European economies. Given

that there has already been a shift away from the deflationary norm, combined with a rise in inflation expectations, I believe that, as far as recent domestic developments suggest, Japan's economy is at a stage where the price stability target is almost achieved.

In  examining the  momentum  toward  achieving  the price stability target after the announcement of reciprocal tariffs in April, I have closely monitored whether or not U.S. tariff policy will dampen the scenario I have described. To this end, as well as examining the transmission channels to Japan's economy of the impact of U.S. tariff policy, I have so far paid attention to whether any adverse impact of tariff policy will materialize in terms of the following  four  points.  First,  whether  business  fixed  investment  will  weaken,  due  to heightened  uncertainty.  Second,  whether  exports  will  become  sluggish,  given  a  global economic slowdown caused by U.S. tariff policy. Third, whether a decline in corporate profits will restrain the momentum for wage increases in 2026, while also restraining selling prices. And fourth, whether the yen will appreciate, amid speculation over various policies of the U.S. administration, thereby pushing down corporate profits and import prices, for example.

Let me assess how these four points have played out up to this point, half a year since the imposition of U.S. reciprocal tariffs in April. With regard to the first point, no pronounced weakness in business fixed investment has been suggested by sources such as the Survey on Planned Capital Spending for fiscal 2025 released by the Development Bank of Japan (DBJ) or the Bank's October 2025 Tankan . What caught my attention in particular was the upward revision in the Tankan 's diffusion index (DI) for business conditions for large manufacturing enterprises, which are considered susceptible to the impact of reciprocal tariffs. In relation to the  second  point,  the  IMF  revised  upward  its  forecast  for  global economic growth in  its October 2025 WEO, following an upward revision in July, and the semiconductor cycle, for example, has also been on an uptrend. As for the third point, corporate profits for the AprilJune quarter of 2025 have seen a decline for the manufacturing industry in particular but, partly  reflecting  the impact  of  the  yen's  depreciation,  no  notable  developments  among exporting firms have been confirmed that were weaker than expected. With the subsequent agreement in tariff negotiations between Japan and the United States, the earnings revision index, which indicates the degree of revision to firms' earnings forecasts, has turned positive since August, while corporate profits for fiscal 2025 might also be revised upward in the

second  half  of  the  fiscal  year.  Thus,  a  restraint  on  momentum  for  wage  increases  seems unlikely. Moreover, the fact that the benchmark for the rate of increase in the minimum wage for 2025 has been set at 6 percent -- surpassing the rate for 2024 -- will also serve to drive wage increases in 2026. I have been concerned about the fourth point, namely, the possibility of significant market volatility, depending on the expectations for the U.S. administration's policies, but the U.S. economy has so far avoided deterioration. Although the Federal Reserve moved to cut the policy interest rate in September 2025, the yen saw no appreciation and has instead depreciated. In addition, the fact that both Japanese and U.S. stock prices have been at historically high levels has engendered favorable market sentiment. In sum, my assessment of the four points of concern suggests that, given the sustained positive developments among firms in  Japan,  overseas  trade  policies  potentially  constraining  such  developments  are unlikely  to  become  a  significant  downside  factor.  Consequently,  the  momentum  toward achieving the outlook for domestic prices will not be dampened by overseas factors. Given this  situation, my view is that the ""planned suspension"" I mentioned -- or the preemptive downward  revision  of  the  outlook  since  the  first  half  of  2025  ahead  of  the  ""typhoon"" approaching from overseas -- will be lifted. Discussions that assume achievement of the price stability target therefore need to take place.

## Comparison with Past Japan-U.S. Trade Friction

As I did in my previous speech, let me compare trade friction until the 1990s with the recent U.S. tariff policy. 2 The main cause of the U.S. current account deficit, which has continued for over half a century, is the trade deficit. From the 1980s to the 1990s, Japan accounted for the overwhelming proportion of the overall U.S trade deficit (Charts 10 and 11). At its peak in 1991, Japan's share of the U.S. trade deficit reached 53 percent, leading observers to frame the U.S. trade deficit issue as a Japan-U.S. trade issue. At the time, foreign exchange markets were expected to function as a venue to correct the current account deficit, and the yen came under increasing upward pressure.

As  Chart  11  showed,  Japan  had  an  overwhelming  presence  in  the  U.S.  trade  deficit.  In

2 For details, see Takata, H., ""Economic Activity, Prices, and Monetary Policy in Japan,"" speech at a meeting with local leaders in Mie, July 3, 2025, https://www.boj.or.jp/en/about/press/koen\_2025/ko250703a.htm.

addition to the yen's appreciation, this resulted in direct measures by the U.S. government, such  as  imposing  export  quotas  and  encouraging  voluntary  export  restraints  on  Japanese products. Although they were not the imposition of tariffs per se, these measures brought about an extraordinary situation in which Japan alone faced deterioration in its competitive environment. Japanese firms were hit hard as they tried to maintain competitiveness vis-à-vis other economies in the U.S. market by keeping their U.S. dollar-denominated selling prices unchanged despite the yen's appreciation, thereby avoiding a price pass-through. They dealt with the resultant burden by reducing costs through business restructuring, under which they held down wages, margins, domestic selling prices, and yen-denominated export prices.

Unlike the trade friction until the 1990s, recent U.S. tariff policy targets a wide range of countries and regions, so that Japan is not the only one affected. Of course, regarding the Japanese automobile industry, given its high degree of dependence on exports, the impact of U.S. tariffs  is  significant.  However,  the  proportion  of  automobiles  produced  by  Japanese automakers that are exported to the United States has declined from a peak of around 20 percent in 1988 to about 6 percent in 2024. I would also like to point out that improvement in the financial position of Japanese firms as a result of longstanding business restructuring has  made  them  more  resilient  to  global  shocks. As  shown  in  the  left  panel  of  Chart  12, corporate profits expanded almost tenfold in fiscal 2024 compared to the second half of the 1990s, reaching their highest level on record of around 90 trillion yen. The current situation, where corporate profits remain at high levels, differs from the economic recovery phase in the 2000s, and has led to an increase in the overall level of corporate value. Japanese firms have built up resilience against shocks by lowering their break-even points over more than three decades to withstand even the yen's appreciation in an adverse business environment brought about by trade friction.

The 15 percent U.S. reciprocal tariff rate, which was agreed in July 2025 and went into effect in September, is among the lowest out of countries with a trade surplus vis-à-vis the United States. The degree of Japanese exports' dependence on the United States is also significantly lower  than  in  the  past.  The  decline  in  profits  for  fiscal  2025  announced  by  Japanese automakers due to tariff increases is currently estimated to add up to around 2.5 trillion yen, but the decline could actually end up being more limited, in light of the fact that Japanese

firms'  profits  stand  at  nearly  100  trillion  yen  and  that  a  pass-through  of  tariffs  to  prices, including prices of related parts, is expected across the industry, on top of the benefits of a weaker  yen.  To  sum  up,  despite  the  impact  of  U.S.  tariff  policy,  corporate  behavior, particularly of exporting firms, has shown no signs of change so far, and I consider it unlikely that the kind of pressure to cut prices and suppress wages seen in the 1990s will re-emerge, or that the positive movement of Japanese firms will be disrupted.

## II. Recent Conduct of Monetary Policy

Let me now present my views on the Bank's future conduct of monetary policy.

The Bank decided to raise the policy interest rate to around 0.5 percent in January 2025, judging it appropriate to adjust the degree of monetary accommodation from the perspective of sustainable and stable achievement of the price stability target of 2 percent, as Japan's economic activity and prices had been developing generally in line with the Bank's outlook and the likelihood of realizing the outlook had been rising.

The price stability target is now close to being achieved, owing to overseas and domestic factors.  In  this  situation,  real  interest  rates,  particularly  the  short-term  rate,  have  been significantly  negative,  and  the  Bank  has  maintained  accommodative  financial  conditions (Chart 13). In cautiously examining the timing of another gear shift in monetary policy, I have paid attention to overseas factors, particularly those associated with tariff policy. However, as I mentioned earlier, I have reached the conclusion that the initial concerns over overseas factors  have  abated.  In  this  situation,  it  has  been  confirmed  that  positive  corporate behavior -- including solid business fixed investment, sustained wage hikes, and a continued price  pass-through  of  cost  increases --has  been  maintained.  Furthermore,  Japan  and  the United States agreed on a U.S. tariff rate of 15 percent in July 2025, which actually went into effect in September. Given these developments, my assessment is that Japan's economy is now at a stage where it can discontinue its mode of vigilance and lift its ""planned suspension"" approach in determining the outlook.

Still, given a possible deceleration in the U.S. economy owing to the impact of tariff policy, I consider it important, based on many years of history, to also carefully monitor the risk that

the divergence of monetary policy stances between Japan and abroad could bring about high volatility in financial markets, particularly foreign exchange markets. In fact, since Japan's shift to a floating exchange rate system in the 1970s, there have been repeated correlations between the monetary policies of Japan, the United States, and Europe. Looking back on the previous five cycles of policy interest rate hikes, excluding the most recent one, the Bank of Japan raised its rate during the Federal Reserve's rate hike cycle, and also moved to cut rates after the Federal Reserve cut its rate. Hence, the Federal Reserve's resumption of rate cuts may have hindered the flexibility of the Bank's monetary policy. Having said that, as the U.S. economy is currently unlikely to see a serious recession, the situation is different from the periods after the collapse of the dot-com bubble around 2000 and in the wake of the Global Financial Crisis in the late 2000s. When the Federal Reserve decided to cut its policy rate in September, Chair Powell stated at a press conference that the reason behind the decision was not a recession; rather, the decision was made in the context of risk management. Firmness in the U.S. economy has been maintained since then. As U.S. long-term interest rates have bottomed out and the yen's appreciation has been avoided even after the Federal Reserve's September rate cut, I believe that this rate cut, unlike cases seen repeatedly in the past, will not act to constrain rate hikes in Japan.

From  2022  to  2023, the  world  saw  upswings  in  prices  as  the  global  trend  of  economic recovery following the COVID-19 pandemic led to a rise in energy and food prices -- in other words, a ""big push."" 3 Japan, too, was engulfed by this wave of price upswings, and -- with the yen's depreciation also playing a part -- became subject to price rises, mainly of imported goods. Although the second-round effects of these price increases were limited in Japan, since the norm of restraining wage hikes was still functioning at the time, this big push originating from overseas helped to enable Japan to break free of this norm. On the other hand, the most recent price increases have a greater tendency to generate second-round effects, given the fact that the norm of prices not increasing easily has already been dispelled and that medium- to long-term inflation expectations are likely to rise. A rise in underlying inflation is also evident, not only from wage increases but also from the start of rises in housing and office rent, both

3 ""Big push"" is a term often used in development economics. It refers to a shift from one type of equilibrium to another, triggered by a major shock. The global trend of economic recovery starting in 2022 may have caused a historical shift away from the wage and price norm in Japan.

of  which  had  been  sticky  and  inherently  rigid. Moreover,  since  there  are  now  fewer constraints from overseas circumstances, it is necessary to bear in mind the risk that Japan might face greater-than-expected upswings in prices if factors that push up prices emerge. In light of expectations in 2026 for the fourth round of wage increases since 2023, mainly in the form of base pay increases, I believe that the Bank should make a further gear shift, and engage in communication that assumes that the price stability target has been almost achieved.

As long as the shrinking equilibrium and the norm of wages and prices not increasing easily remained in place, it was necessary that the Bank -- in terms of communicating with the markets -- patiently continue with monetary easing, on the basis that underlying inflation had not yet reached the price stability target, even if headline inflation exceeded 2 percent. As Japan's economy has now returned to normal with the norm being dispelled, I have come to believe that it is vital to address the situation focusing on the level of headline inflation, which has already remained at 2 percent and above for the past three and a half years. Considering that the once deeply entrenched norm has waned in Japan, that the price stability target has been almost achieved, and that the ""planned suspension"" approach can be lifted reflecting fewer concerns over overseas factors, I believe that now is a prime opportunity to raise the policy interest rate. Based on this assessment, I proposed raising the policy interest rate to 0.75 percent at the September 2025 Monetary Policy Meeting (MPM), in view of the need to make a further gear shift, that is, to adjust the degree of monetary accommodation.

## Reduction in Japanese Government Bond Purchases

With  respect  to  outright  purchases  of  Japanese  government  bonds  (JGBs),  the  Bank conducted an interim assessment of the plan for their reduction at the June 2025 MPM, taking into account opinions collected from market participants. Based on the assessment, the Bank decided to continue to cut down its monthly purchase amount by about 400 billion yen each calendar quarter until January-March 2026, maintaining the amount and pace of the reduction decided in July 2024 (Chart 14). Thereafter, the amount of purchases will be reduced by about 200 billion yen each calendar quarter, so that it will be about 2 trillion yen in January-March 2027. The Bank's plan for the reduction of its purchase amount of JGBs stipulates that, in principle, long-term interest rates are to be formed in financial markets, and that the Bank will  reduce its purchase amount of JGBs in a predictable manner, while allowing enough

flexibility  to  support  stability  in  the  JGB  market. Given  that the  price stability target  has already been almost achieved and that the norm of prices and wages not increasing has also been dispelled, I believe now is the time to head toward marketization and normalization, given that the longstanding yield curve control (YCC), in which the Bank controlled longterm interest rates, has fulfilled its historical role. Therefore, I believe the Bank needs to aim for a shift away from the deterioration in functioning in the JGB market caused by its largescale JGB purchases and move toward normalization by reducing its purchases. At the same time, considering the current size and composition of the Bank's balance sheet, I believe that -- with a view to adjusting the degree of monetary accommodation -- the Bank is at a phase where it should deliberate on managing the money stock and reducing the size of the balance sheet.

That said, from the perspective of maintaining smooth market functioning, I believe the Bank should take time and be prudent in reducing its JGB purchases. The reason for this is that its JGB purchases thus far had served to hold back the total amount of JGBs in the market by increasing the Bank's JGB holdings. Conversely, the reduction in the Bank's purchases will supply the market with some portion of the JGBs the Bank has purchased to date, in effect resulting in an increase in the amount of JGBs in the market. Taking this into consideration, it  can  be  said  that the market is in a  phase of having one of the largest supplies of JGBs compared to the past. Chart 15 shows historical developments in the net issuance of JGBs, representing the annual change in the outstanding amount of JGBs issued. By deducting the annual change in the Bank's JGB holdings -- which factors in the amount of its JGB purchases that year -- from the net JGB issuance, the annual change in the outstanding amount of JGBs in the market can be derived, which in effect represents the supply of JGBs to the market. The chart indicates the extent to which the reduction in the Bank's JGB purchases has led to an increase in the outstanding amount of JGBs in the market relative to the 1980s. I believe it is necessary  to  prudently  examine  whether  the  market  will  become  volatile,  as the  annual change in the outstanding amount of JGBs in the lead up to 2026 is estimated to reach a peak level  comparable  to  the  early  2000s. Needless  to  say,  the  reduction  in  the  Bank's  JGB purchases does not aim at giving consideration to the fiscal situation. That said, since the reduction in purchases in effect supplies the market with JGBs, I believe it is also necessary, in terms of the functioning of the market as a whole, to ensure stability while maintaining

close communication among authorities. Looking back over the past year, there have been some unexpected changes in the market structure, such as weakening investment demand for super-long-term JGBs. Given this, I believe it is necessary to carefully monitor the situation in view of the interim assessment of the JGB reduction plan at the June 2026 MPM.

## Disposal of Exchange-Traded Funds and Japan Real Estate Investment Trusts

At the September 2025 MPM, the Bank decided on the basic principles for its disposal of exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) it holds. This represents a shift toward an exit from quantitative easing, which was led mainly by the Bank's JGB purchases, and from qualitative easing, under which the Bank increased its purchases of ETFs and J-REITs. As shown in Chart 16, the Bank in July 2025 completed the disposal of the stocks it had purchased from financial institutions. Based on insights gained from this disposal, the Bank decided to sell its holdings of ETFs and J-REITs to the market at a scale generally equivalent to its disposal of the stocks. The intent of ETF purchases was to contain risk premiums in the stock market and improve the deflationary situation. As this purpose has been fulfilled, the Bank decided in March 2024 to discontinue its purchases. Now that Japan's economy  is  breaking  free  from  a  deflationary  environment,  the  Bank --with  a  view  to proceeding with policy normalization -- arrived at the decision in September 2025 to sell its ETFs and J-REITs. Although risk premiums in the stock market have been normalized, sales of ETFs and J-REITs should be carried out with caution to avoid inducing destabilizing effects on the financial markets. Considering that risk premiums remain high in the J-REIT market despite firm real estate market conditions, it is desirable to considerably moderate the pace of sales of these instruments, as was decided at the September MPM.

## III.  Japan's  Economy under  Initiatives  to  Promote  Japan  as  a  Leading  Asset Management Center

So far, I have discussed the historical shift in Japan mainly among firms as a shift to positive corporate behavior, but this shift also includes a change in households' stance toward financial assets. I would like to present my views on the investment behavior of households from a historical perspective, in light of a recent hot topic; namely, the concept of promoting Japan as  a  leading  asset  management  center,  which includes  a  shift  from  saving  to  investing. Japanese households are finally beginning to break free of the norm of holding cash and

deposits as their main financial assets. However, concerns have arisen over whether recent U.S. tariff policy will disrupt the momentum of this shift. In fact, in the midst of economic recovery around 2000 and in the mid-2000s, global demand shocks resulted in several ""false dawns,"" 4 or temporary economic recoveries, in the context of the behavior of Japanese firms and households. My expectation is that Japan will see a ""true dawn"" this time around; in other words, ""this time is different,"" and we will see a situation that transcends the norm. 5 This also implies that the flow of funds in Japan and financial intermediation by banks in particular will likely be significantly affected. Amid government efforts to promote Japan as a leading asset management center, the Japan Financial Literacy and Education Corporation (J-FLEC) was established in April 2024, as shown in Chart 17, with the Bank of Japan serving as one of the contributors of capital. This has created an opportunity to move ahead with full-fledged efforts to foster financial and economic education in this country. Later in this speech, I will talk about why such initiatives are necessary at this point in time.

## Why Japanese Households Hold So Much Cash and Deposits

My view is that the climax of the Japan-U.S. trade friction discussed earlier that intensified from the 1970s coincided with Japan's long-term stagnation following the collapse of the bubble economy, both of which took place around 1990. In other words, I believe that the post-bubble long-term stagnation was caused by two main factors: (1) asset deflation, and (2) a prolonged business environment in which it was difficult to depend on external demand due to,  for  example,  the  yen's  appreciation,  brought  about  mainly  by  trade  friction.  My understanding  is  that,  although Japanese  firms  weathered  past  trade  friction  and  cost competition  with  firms  overseas  stemming  from  the  yen's  appreciation  by  means  of restructuring, mainly in terms of wages, and of cost reduction, including involving affiliates, this had the side effect of creating the norm that wages and prices do not rise. In this context, it became common for Japanese households to hoard cash and deposits.

4 Shirakawa, M., ""Way Out of Economic and Financial Crisis: Lessons and Policy Actions,"" speech at the Japan Society in New York, April 23, 2009,

5 Nakaso, H., ""Japan's Way toward Strong, Sustainable, and Balanced Growth: Assessment of the potential of the Japanese economy suggests the sun also rises,"" speech at a meeting hosted by the Japan Society and the City of London Corporation in London, October 5, 2017,

https://www2.boj.or.jp/archive/en/announcements/press/koen\_2009/ko0904c.htm.

https://www.boj.or.jp/en/about/press/koen\_2017/ko171005a.htm.

Chart 18 shows the developments in the Nikkei 225 Stock Average and the U.S. dollar/yen exchange rate. After peaking in 1989, the Japanese stock market entered a downtrend, in complete isolation from the rest of the world. This is what I call Japan's ""frozen era,"" which lasted for more than two decades. On top of this came the impact of a strong yen, a double blow that for many years left Japan as if under a frozen spell. The environment in Japan was therefore  not  conducive  to  enjoying  much  success  from investing in  risky assets  such  as stocks or foreign currency-denominated products.

Cash and deposits account for a high proportion of individuals' financial assets in Japan, but this  was  completely  rational  given  the  situation  until  recently.  In  my  view,  it  is  not  that Japanese people are inherently unsuited to investing, but that there was no need for it. In other words, rather than lacking financial literacy, they likely never felt the need to manage their financial assets in the first place. My understanding is that Japanese households did not have to deal with the complex issues of finance and investment, and Japan as a whole has had a framework that eliminates the need for individuals to manage their financial assets. Under the lifetime employment system here, for decades it was good enough for individuals to simply save and deposit money, without the hassle of investing. Choices about household assets were guided by an environment in which lifetime employment was implicitly guaranteed in an ever-growing economy, with  salaries  increasing  as  firms  expanded.  In  effect,  households were tightly bound to firms, almost as if people were investing directly in the firms they worked for. Banks, in turn, fulfilled a special role by meeting firms' strong demand for funds through lending, while households provided the deposits that made this possible. This is no longer the case, however, and the new environment requires that Japanese people give thought to building up their own wealth.

As of the end of June 2025, Japanese household financial assets stood at approximately 2,200 trillion yen, a record high level. It is necessary to recall that household funds amount to nearly four times Japan's GDP. Chart 19 provides a comparison of household financial assets in Japan, the United States, and the euro area. It shows that cash and deposits account for around 50  percent  of  household  financial  assets  in  Japan,  a  striking  contrast  with  the other  two regions. This figure supports the common claim that Japan has not made progress in shifting

from saving to investing, and that its asset management industry trails nearly three decades behind the United States and Europe.

## Traumatic Norm That Persisted Even After the ""Frozen Era""

Following the collapse  of  the  bubble economy,  which peaked in 1989, Japan entered the prolonged ""frozen era"" characterized by asset deflation and a super-strong yen, as shown in Chart 18. In this situation, it was rational for Japanese citizens to hold their assets in yen, and notably  in  the  form  of  cash  and  deposits,  in  terms  of  safeguarding  wealth.  Subsequently, however, the unprecedented asset deflation and excessive appreciation of the yen reached a turning point around 2012. Since then, stock prices in Japan have continued to follow a rising trend and the yen has continued to depreciate. While it is natural to assume that this would have induced a shift among Japanese households toward investing in risk assets or foreign currency-denominated assets, in reality, it has taken a long time for these households to break away from the persistent norm of holding cash and deposits as their main financial assets. In examining the possibility that it might take longer than expected for a shift in the entrenched mindset to come about, I would like to present the following estimate -- as an example of Japan's negative experience, or hysteresis effects -- to illustrate the persistence of the norm of wages and prices not increasing, which took hold after the bubble's collapse.

Chart  20  shows  cumulative  returns  on  investment  by  age  of  investor,  assuming  that  an investor made a fixed monthly investment in the Nikkei 225 Stock Average starting from age 22, when many people are likely to begin working. With the ongoing rise in stock prices over the past decade or so, people in their 20s and 30s have experienced hardly any negative returns. In contrast, those in their 40s and 50s have experienced negative returns for nearly half of their working lives, due to prolonged post-bubble sluggishness in the stock market. While this is merely an estimate using stock prices, it shows that people in their 40s and 50s in particular, the generation that currently makes up the core of firms and other economic entities, have  suffered  a  long-term  negative  and  traumatic  experience. This  was  likely  one  of  the factors that led to the deeply-entrenched cautiousness in corporate behavior after the bubble's collapse. Similarly, in terms of personal asset management, the experience of such trauma could be the reason why the generation that holds the bulk of financial assets in Japan has been  inclined  to  build  up  wealth  primarily  in  the  form  of cash  and  deposits.  As  these

developments suggest, a shift in corporate and household behavior mired in such a traumatic norm could take longer than expected, perhaps the decade it takes to form the next generation. As inflation expectations formation in Japan has been adaptive in nature, 6 and given the long period of time during which the wage and price norm was entrenched, it can be inferred that the  shift  from  cautious  inflation  expectations  took  far  longer  than  initially  anticipated. However, more than a decade has now passed since the market reached a turning point in the 2010s, and signs of a change in people's mindsets are finally emerging, starting with the younger generation.

What is interesting in Chart 20 is the significant gap between the younger generation in their 20s and 30s and people in their 40s and 50s. The younger generation, which has had fewer negative  experiences,  has  served  as  a  driving  force  behind  the  growth  of  personal  asset management  in  recent  years,  taking  advantage  of  opportunities  like  the  new  Nippon Individual Savings  Account (NISA). The positive environment for personal asset management over the past decade or so has likely given rise to a generation with less trauma and a greater inclination to invest. At the same time, the younger generation may have also experienced less trauma  in terms  of  its  investment stance  toward  real  estate.  Conversely, despite holding a significant amount of financial assets, the generation aged 40 and above left with  lingering  trauma  remained  cautious  toward  investment.  Most  recently,  however, underpinned by institutional support from the government, there may have been a shift away from the traumatic norm for this generation as well.

## Shift from the ""Showa Model"" to the ""100-Year Life Model""

As Japan's society continues to age, the financial and economic environment that was taken as  a  given  ever  since  the  post-war  years  has  begun  to  change.  I  have  described  this transformation as a shift from a ""Showa model"" to a ""100-year life model."" Immediately after the  end  of World War  II,  which  represents  the  mid-Showa  era  in  Japan,  the  average  life expectancy for men was under 60, and the retirement age at many firms was 55. This meant that, back then, there was virtually no such life stage as ""post-retirement"" and thus little need for pensions, retirement savings, or medical care for the elderly. Chart 21 shows the evolution

6 For  details  regarding  the  adaptive  nature  of  inflation  expectations  formation  in  Japan,  see ""Assessment for Further Effective and Sustainable Monetary Easing,"" Bank of Japan, March 19, 2021.

of the average life expectancy in Japan since the post-war period. Average life expectancy for men now exceeds 80, with retirement lasting 10 to 20 years or more. Under the model that assumes a 100-year life, 7 there is a need to redesign pension systems as well as healthcare and welfare systems from a new perspective. At the same time, individuals need to make their own financial preparations for retirement, which entails a major change in the role of finance and a reshaping of the money flow premised on the post-war Showa model.

As  shown  in  Chart  22,  when  the  Showa  model  predominated,  the  role  of  banks  was  to intermediate funds to firms with strong funding demand anchored in high economic growth. Chart  23  shows  trends  in  Japan's  investment-savings  balance.  Until  the  1990s,  firms consistently  faced  financial  deficits,  while  households  constantly  ran  financial  surpluses. Banks fulfilled their financial intermediation function by collecting household surpluses in the  form  of  deposits  and  lending  these  to  firms  with  financial  deficits.  Thus,  depository financial institutions, primarily banks, functioned as the key infrastructure for money flow. After entering the 1990s, however, the corporate sector came to have financial surpluses. At the time, this was regarded as a temporary phenomenon following the collapse of the bubble economy but, in reality, Japanese firms have continued to run surpluses for over three decades now. The lack of significant growth in firms' funding demand is a phenomenon common to Europe  and  the  United  States,  whose  economies  are  at  a  mature  stage  of  development. Therefore, it is unlikely that Japan's corporate sector will once again experience financial deficits.

As a result of these changes in money flow, the role of financial institutions will no longer be simply  to  intermediate  funds  to  firms,  as  was  conventionally  expected.  Rather,  they  will increasingly contribute to intergenerational  finance,  such  as through pension  and  asset management services bridging the working and retired generations. Chart 24 indicates the shift  from  financial  services  mainly  targeting  the  working  generation  to  intergenerational finance;  specifically,  a  ""horizontal  shift""  in  focus,  from  money  flow  within  the  working

7 The ""100-year life model,"" which is comparable to the general concept of the era of the 100-year life, refers to a society in which the average life expectancy of the population extends and 100-year life  spans  become  standard,  which  marks  a  complete  turnaround  from  the  situation  immediately following World War II. The term was first advocated by British professor Lynda Gratton, and there have been ongoing government-driven revisions to the social system in Japan to address this situation.

generation, as seen in the Showa model, to money flow bridging generations. This indicates that the focus of financial intermediation is shifting from money flow based on the traditional commercial banking model -- whereby banks gather funds from households as deposits and lend them to firms -- to the fields of pensions and asset management.

Chart 25 shows trends in the amount outstanding of bank lending and the market size of pensions and asset management. While growth in bank lending has been sluggish since the bubble's  collapse,  the  amount  outstanding  of  pensions  and  invested  assets  has  expanded dramatically over the past two decades, more than fivefold. These developments quantitatively confirm the horizontal shift I mentioned. While the increase in the amount outstanding of pensions and invested assets indicates growth in Japan's asset management industry,  bank  lending  is  also  underpinned  by  loans  to  entities  associated  with  asset management, such as real estate funds, goods rental and leasing firms, and nonbanks, as shown in the right panel of Chart 25. As the growth in bank lending is mainly led by real estate loans, including mortgages, I think future developments in these loans warrant close monitoring.

Next,  Chart  26  presents  a  decade-by-decade  timeline  indicating  notable  developments affecting asset management in Japan and the United States. It reveals a nearly 30-year gap. In the United States, the legal infrastructure and tax system for personal investment -- such as  ERISA, 8 IRAs, 9 and  401(k)  plans, 10 all  of  which  focus  on  pensions --were  first established  in  the  1970s. At  the  same  time,  the  United  States  maintained  an  economic environment  that allowed  for  successful  investment  experiences.  This  combination  of institutional and environmental factors -- like two wheels of a cart -- helped to spark and increase  awareness  about  asset  management.  In  contrast,  Japan  trailed  behind  the  United States  by nearly  three  decades  in  launching  relevant  tax  systems  and  other  institutional arrangements. In addition, as Japan's economic environment was not conducive to enjoying

8 The Employee Retirement Income Security Act (ERISA), enacted in the United States in 1974, is a federal law that sets unified standards for establishing and operating employee pension and benefit plans, requiring pension funds to disclose information about performance and funding, as well as to establish clear procedures for beneficiary appeals, for the purpose of protecting beneficiaries.

10 The 401(k) is a defined contribution pension plan in the United States.

9 IRA stands for Individual Retirement Account.

much success from investment, there was less likelihood of a mindset geared toward personal investment developing. Today, however, Japan is finally equipped with the two wheels of the cart,  with  both  institutional  factors  and  economic conditions allowing  for  successful investment experiences. While there have repeatedly been expectations in the past about the full-fledged promotion of personal asset management, the momentum for this never lasted. This  time  around,  however,  I  believe  the  conditions  for  the  sustainable  advancement  of personal investment are being fulfilled for the first time.

Another shift financial institutions will have to make under the 100-year life model is the diversification  of  financial  services,  to  meet  increasingly  varied  individual  life  plans  and needs. Chart 27 illustrates such a shift, from a uniform model to a multi-pronged model -- in other  words,  a  ""vertical  shift""  comparable  to  the  aforementioned  horizontal  shift.  In  the uniform environment of the Showa model, financial institutions' single-track business model was based on individuals depositing their income as soon as they earned it. With today's diverse lifestyles, financial services are tailored to various needs, extending widely beyond not only bank lending but also insurance, asset management, and wealth management. As financial needs become more diversified and more widespread under the 100-year life model, financial services are expected to expand even further.

## Japan's Investment Trends: Shift to an Investment-Oriented Business Model

Chart 28 presents a conceptual diagram of how growth in corporate profits is spreading across the economy. While corporate profits have expanded significantly from a macroeconomic perspective, several challenges have arisen at the microeconomic level. Specifically, the use of corporate profits as a source for wage hikes and price pass-through to business partners has been limited, due to the norm that wages and prices do not rise, and domestic business fixed investment has also been limited. The government has taken policy actions to address this situation, including holding joint meetings on wage increases between representatives of the government, labor, and management, and implementing measures to promote price passthrough. Given these initiatives, the expectation now is that funds will be distributed equally to  households,  small  and  medium-sized  firms,  and  regional  firms,  thereby  achieving  a virtuous cycle. Furthermore, adding personal investment as a channel to transmit corporate profits to the public will also be crucial, as it will ensure that the ""investment chain"" flows

smoothly.  These  developments  are  also  reflected  in  a  change  in  the  risk  transformation function of banks, shown in the right panel of Chart 22. Specifically, financial intermediation has become increasingly multi-pronged, with increasing intermediation through investment funds  and  nonbanks.  Moreover,  financial  disintermediation  is  expected  to  expand,  both through  investment  in  financial  assets  via  entities  other  than  banks  and  in  financial instruments other than deposits.

The transformation of Japan's investment model can be observed at the national level as well. Chart  29  shows  developments  in  Japan's  current  account  balance.  It  is  clear  that  Japan's current account balance is no longer mainly driven by the trade balance, but instead by the primary income balance, which corresponds to the returns on overseas investments to date. Let us again consider Japan's money flow, shown in Chart 30. Until the first half of the 2000s, the inflow of funds to Japan consisted mainly of equities, while Japan's investment abroad consisted mainly of debt securities. Since equities generally yield higher returns than debt securities,  Japan's  financing  through  equities  and  investing  in  debt  securities  resulted  in negative returns. In contrast, since the second half of the 2000s, the pattern has shifted -Japan now raises funds through debt securities and its overseas investment primarily takes the form of direct investment. In other words, the macroeconomic business model of Japan as a whole has shifted to an investment model where funds are raised through debt securities and channeled into physical investment, thereby generating income particularly through the primary  balance. A  challenge  remains  in  that  a  large  portion  of  investment  returns  from overseas are reinvested abroad and therefore do not lead to domestic investment opportunities, but Japan as a whole is transitioning toward an investment-oriented business model.

A recent hot topic concerned the purchase of shares of Japanese general trading companies by  a  prominent  American  investor,  who  regarded  them  as  highly  attractive  investment opportunities. The shift on the part of these firms to an investment-oriented business model leveraging their traditional commercial networks seems to be gaining renewed appreciation from overseas investors as Japan's new business model.

These transitions  in  corporate  and  household  money  flow  mark  a  shift  away  from  bankcentered financial intermediation centered on deposits and loans to an investment-oriented

money flow that includes nonbank financial intermediation. In addition to these changes at the microeconomic level, Japan as a whole is also shifting from the trade-centered model outlined  earlier  to  an  investment-oriented  business  model.  Following  the  collapse  of  the bubble economy, both firms and households remained cautious in the face of a shrinking equilibrium. Having finally moved past that trauma, however, firms are now spending from an investment-oriented perspective, while households are taking their first steps toward asset management.

## A New World Brought about by the Transformation of Money Flow

The challenge today is whether the aforementioned developments can be sustained. Looking back at the history of financial and economic education, which serves as the infrastructure of asset management, the Central Council for Savings Promotion was established in 1952 in Japan during the post-war period. Its aim was to promote a broad public understanding of the importance of savings, and thereby build a foundation for people's living conditions and foster their independence and well-being, as well as to ensure price stability and the sustainable growth of Japan's economy. The organization changed its name to the Central Council for Savings  Information  in 1988  and  then  to  the  Central  Council  for  Financial  Services Information (CCFSI) in 2001. In 2024, the functions of the CCFSI were transferred to JFLEC as a successor organization, as shown in Chart 17. J-FLEC promotes a wide range of financial  and  economic  education,  supporting  individuals  not  only  with  financial  asset management  but  also  with  household  budgeting,  life  planning,  and  the  use  of  external knowledge.

Changes in money flow also affect the transmission channels of the Bank's monetary policy. For many years, the Bank's policy operated within a framework in which banks played the central role in financial intermediation. Today, as funding flows increasingly circulate through nonbank  institutions  and  overseas  channels,  the  Bank  needs  to  devise  new ways  to communicate its monetary policy messages broadly to the market. The Bank has indicated that, in addition to the traditional bank-centered intermediation channel through deposits and lending,  in  which  lower  interest  rates  improve  the  output  gap,  the financial  and  capital markets channels (stock prices and foreign exchange rates) have also come to play a major

role in the transmission of monetary policy. 11 This suggests that the Bank's monetary easing, by influencing the markets, is likely to have contributed to the shift away from asset deflation and the so-called six headwinds -- including the headwind of the yen's appreciation -- both of which had prompted changes in corporate behavior in the post-bubble economy. 12 I believe that  the  Bank's  patient continuation  of  monetary  easing  over  many  years  along  with  its influence on the financial and capital markets -- which contributed to an improvement in asset prices and to a reversal in the excessive appreciation of the yen -- laid the groundwork for reaching the inflection point of the norm shift, marking a historic change since the collapse of the bubble economy. In light of the groundwork mentioned earlier, it can be said that the big push that originated abroad acted as the final blow to dispel the norm in Japan. At the same time, this  big push is  also  bringing about changes  in household asset management, which is showing a shift away from holding cash and deposits toward investing.

In short, the changes taking place today represent a shift from the Showa model to the 100year life model. That is, having finally emerged from the long ""frozen era"" that followed the bubble's collapse, the changes now being seen are not simply a return to the pre-bubble Showa model. Instead, financial intermediation itself is also being transformed, from a bank-centered intermediation model  to a multi-pronged intermediation model.  These changes are summarized in Chart 31.

Under the Showa model, households supplied funds in the form of deposits to meet firms' robust demand for capital, and banks served as the financial infrastructure supporting this flow. Subsequently, during the ""frozen era"" following the bubble's collapse, banks curtailed credit by restricting lending, firms fell into a shrinking equilibrium, and households reverted to cash and deposits, resulting in a prolonged deflationary environment. Escaping this ""frozen era"" has not meant a return to the previous Showa model. Thirty years of structural changes

11 For more details, see ""Assessment for Further Effective and Sustainable Monetary Easing,"" Bank of Japan, March 19, 2021.

12 The  following  have  been pointed  out  as  the  six  headwinds  faced  by  Japanese  firms:  the  yen's appreciation;  delayed  negotiations on  economic  partnership  agreements;  high  corporate  tax  rates; rigidity in the labor market; environmental regulations; and high electricity costs. For details, see, for example,  Cabinet  Office, Annual  Report  on  the  Japanese  Economy  and  Public  Finance  2021 --Towards a resilient Japanese economy: Accelerating innovation towards an economic society with strength and flexibility, September 2021. This report is a summary of the Japanese original.

in the wake of the bubble's collapse have caused the emergence of the 100-year life model, in which multi-pronged financial intermediation -- in addition to intermediation by banks -has become something akin to a business investment model. In this new model, firms are adopting an investor-like stance and households are starting to hold financial instruments other than deposits.

For  many  years  since  the  2000s,  the  Bank  has  patiently  continued  monetary  easing, supporting the normalization of both corporate and household behavior, which had fallen into a shrinking equilibrium. As a result of this easing, firms are finally beginning to be more proactive  and  households  have  also  begun  investing.  The  expectation  is  that  increased corporate profits will lead to a greater pass-through of cost increases to selling prices and to wage increases, and that households will start to invest in a broader range of financial assets, which will help Japan break free from post-bubble norms.

As we saw, Chart 12 shows corporate profits and their distribution. In recent years, Japanese firms have increased profits substantially and have significantly raised dividends. At the same time, the labor share, as shown in the right panel of Chart 12, has declined, meaning that the extent to which higher profits have gone into domestic wages and investment has been limited. Given that distributions in the form of interest payments under bank-centered capital flows remain at low levels, households can only reap the benefits of higher corporate profits if they can receive such distributions directly from firms. From this perspective, as shown in Chart 28,  it  is  vital  for  households  to  take  a  personal  investment  approach  that  allows  them  to participate in the investment chain, thereby capturing dividends and increases in corporate value.

This type of multi-pronged financial intermediation, known as nonbank financial intermediation (NBFI), is playing an increasingly large role globally, and monitoring it has become a major regulatory issue in countries around the world. In Japan, the share of credit intermediation conducted through banks is comparatively high, so the relative role of NBFI remains smaller than in Europe and the United States. Nevertheless, as Japan moves toward the 100-year life era and shifts to multi-pronged financial intermediation, the importance of NBFI is expected to increase.

## Japan as a Forerunner in Addressing Trade Friction and an Aged Society

Japan is treating the imposition of U.S. reciprocal tariffs in April 2025 as a serious challenge for the country. That said, Japan is also a forerunner in addressing trade friction, in that the country for many years has withstood situations far more stressful than the one we face today. We need to understand that Japan is in a different situation from the past, in the context of the improvement in firms' financial positions and their global business expansion, among other factors.  On the other hand, given that it is facing a  nationwide shift to a  global investororiented business model, Japan also needs to respond to changes in economic and financial conditions abroad, including in terms of economic security. As the situation now stands, it is necessary to be aware that firms, financial institutions, and households are constantly under the influence of global markets.

At the same time, the 100-year life model for households in essence represents Japan's most pressing structural issue: an aging population. The shift to intergenerational finance and to a multi-pronged financial intermediation model is predicated on the aging of the population and, in this sense, Japan is a forerunner in addressing an aged society. The reason Japanese firms expanded their businesses on a global scale through direct investment was partly to overcome constraints posed by Japan's aging population and to deal with a situation in which they consequently could not rely solely on domestic demand. Given that it is unrealistic for Japanese people to move abroad en masse, much of the benefits they receive from firms in Japan are likely to derive from their personal asset management, via investment in these firms. In  other  words,  households,  too,  are  expected  to  engage  in  Japan's  marketization  and globalization by way of managing their financial assets. From this perspective, the activities of J-FLEC, which seeks to offer financial and economic education as an infrastructure for asset management, have given rise to high expectations as initiatives that can address the latest trends.

With respect to the conduct of monetary policy, my view is that the Bank is still in the process of gradually shifting gears, based on the recognition that the ""true dawn"" is now in sight. The background to this is not only the shift to positive corporate behavior, but also the change in households' financial behavior as they have transcended the existing norm. I also believe that it  is  necessary to  disseminate  knowledge  about  financial  and  economic  education  to  the

general public, mainly through the activities of J-FLEC, and to make nimble responses while paying close attention to the situation at home and abroad, particularly in view of progress in globalization,  the  shift  to  a  multi-pronged  financial  intermediation  model,  and  increasing correlation among markets worldwide -- all of which are emblematic of the 100-year life model.

## Conclusion

I would like to conclude by expressing my hope for the further development of the economy of the Chugoku region and the continued success of everyone who supports the regional economy. Thank you.



## Economic Activity, Prices, and Monetary Policy in Japan:

Speech at a Meeting of the Chugoku Economic Federation Held in Hiroshima

## Japan as a Leading Asset Management Center

October 20, 2025

TAKATA Hajime Member of the Policy Board Bank of Japan

## Developments in Overseas Economies (IMF's October 2025 WEO)

Chart 1



Growth Rates in Major Economies

Global Growth Rate

|                                          |   CY2023 |   CY2024 | CY2025 [Forecast]   | CY2026 [Forecast]   |
|------------------------------------------|----------|----------|---------------------|---------------------|
| World                                    |      3.5 |      3.3 | 3.2 (0.2)           | 3.1 (0.0)           |
| Advanced economies                       |      1.7 |      1.8 | 1.6 (0.1)           | 1.6 (0.0)           |
| United States                            |      2.9 |      2.8 | 2.0 (0.1)           | 2.1 (0.1)           |
| Euro area                                |      0.4 |      0.9 | 1.2 (0.2)           | 1.1 (-0.1)          |
| Emerging market and developing economies |      4.7 |      4.3 | 4.2 (0.1)           | 4.0 (0.0)           |
| China                                    |      5.4 |      5   | 4.8 (0.0)           | 4.2 (0.0)           |

y/y % chg., % points

Changes in Growth Projections for 2025



y/y % chg.

y/y % chg.

Note: In the table, figures in brackets are the differences from forecasts in the July 2025 World Economic Outlook (WEO) Update .

Stock Prices

## U.S. Economy

Policy Interest Rate

Employment and Prices pts



%

y/y % chg.

%

pts

Note: In the right panel, figures are medians of the target ranges for the federal funds rate. Figures for participants' projections are medians of all projections at FOMC meetings.

Sources: Bloomberg; BLS; FRB.

## Chart 3

## Optimal Tariff Theory

Large Countries

Small Countries

-Nearly 100% pass-through of tariffs to domestic prices -(Welfare loss exceeds tariff revenue)

-Limited pass-through of tariffs to domestic prices -(Positive gain from tariff revenue)

price





price

Note: The charts are based on Helpman, E. and Krugman, P., Trade Policy and Market Structure , (MIT press, 1989), etc.

## Monetary Policy Stances Across the World

Convergence toward easing

(Monetary policy stances have converged toward easing)



Sources: Overseas central banks.

Chart 5

## GDP and Outlook for Economic Activity and Prices

GDP

Outlook for Economic Activity and Prices (July 2025 Outlook Report)

s.a., ann., tril. yen

|                    | Real GDP   | CPI (less fresh food)   | CPI (less fresh food and energy)   |
|--------------------|------------|-------------------------|------------------------------------|
| Fiscal 2025        | ＋ 0.6     | ＋ 2.7                  | ＋ 2.8                             |
| As of April 2025   | ＋ 0.5     | ＋ 2.2                  | ＋ 2.3                             |
| As of January 2025 | ＋ 1.1     | ＋ 2.4                  | ＋ 2.1                             |
| Fiscal 2026        | ＋ 0.7     | ＋ 1.8                  | ＋ 1.9                             |
| As of April 2025   | ＋ 0.7     | ＋ 1.7                  | ＋ 1.8                             |
| As of January 2025 | ＋ 1.0     | ＋ 2.0                  | ＋ 2.1                             |
| Fiscal 2027        | ＋ 1.0     | ＋ 2.0                  | ＋ 2.0                             |
| As of April 2025   | ＋ 1.0     | ＋ 1.9                  | ＋ 2.0                             |

y/y % chg.



Note: In the right panel, figures indicate medians of Bank of Japan Policy Board members' forecasts (point estimates). Sources: Cabinet Office; Bank of Japan.

## Corporate Sector and Wage Growth

## Corporate Profits

(Corporate profits are at high levels and the wage growth rate is a 34-year high)

## Wage Growth Rate

s.a., tril. yen



y/y % chg.



s.a., tril. yen

Notes: 1. In the left panel, figures are based on the Financial Statements Statistics of Corporations by Industry, Quarterly and exclude the finance and insurance industries.

Sources: Central Labour Relations Commission; Japanese Trade Union Confederation (Rengo); Ministry of Finance.

2. In the right panel, figures from 1980 to 2014 are those published by the Central Labour Relations Commission, while those from 2015 to 2025 are figures released by Rengo. Figures for 2025 are based on Rengo's seventh (final) aggregate results.

## Private Consumption

Chart 7

(Employment and income situation has been resilient)



## Real Private Consumption

## Employee Income



CY2019 = 100

Notes: 1. In the left panel, Q1 = March-May, Q2 = June-August, Q3 = September-November, Q4 = December-February. Employee income = Total cash earnings ( Monthly Labour Survey ) Number of employees ( Labour Force Survey ). Figures for real employee income are based on Bank staff calculations using the CPI (less imputed rent). Figures from the Monthly Labour Survey are based on continuing observations following the sample revisions.

Sources: Ministry of Health, Labour and Welfare; Ministry of Internal Affairs and Communications; Bank of Japan.

2. In the right panel, figures for real private consumption are the real Consumption Activity Index (travel balance adjusted) based on Bank staff calculations, which exclude inbound tourism consumption and include outbound tourism consumption. Figures in angle brackets show the weights in the index. Figures for 2025/Q3 are July-August averages.

## CPI Inflation

(Inflation has remained at 2% and above for three and a half years)

y/y % chg.



Source: Ministry of Internal Affairs and Communications.

## Inflation Indicators

Composite Index of Inflation Expectations

Chart 9

(Moderate increase has continued)



GDP Deflator

2. In the right panel, unit labor costs = nominal compensation of employees / real GDP.

Sources: Bloomberg; Cabinet Office; Consensus Economics Inc., Consensus Forecasts ; QUICK, QUICK Monthly Market Survey &lt;Bonds&gt; ; Bank of Japan.

## U.S. Trade Balance by Country

(Japan accounted for over half of U.S. trade deficit around 1990)

ratio to nominal GDP, %



Sources: BEA; IMF.

Chart 11

1991

2024

## Largest Shares of U.S. Trade Deficit by Country/Region (China has replaced Japan)



## Rapid Expansion in Corporate Profits

## Corporate Profits



Labor Share

Chart 13

## Real Interest Rate

Real Short-Term Interest Rate (1-Year)

(Rate has remained negative)

Real Long-Term Interest Rate (10-Year)





Note: Figures for real interest rates are calculated by deducting inflation expectations from JGB yields for each maturity. Figures for inflation expectations are based on Bank staff calculations using the expectations of various economic entities (firms, households, and experts) at different horizons. Specifically, data used in the calculations are as follows: for firms, the Tankan ; for households, the Opinion Survey on the General Public's Views and Behavior ; for experts, the QUICK Survey , the Consensus Forecasts , and inflation swap rates.

Sources: Bloomberg; Consensus Economics Inc., Consensus Forecasts ; QUICK, QUICK Monthly Market Survey &lt;Bonds&gt; ; Bank of Japan.

## Plan for the Reduction of the Purchase Amount of JGBs

1. Long-term interest rates: to be formed in financial markets in principle

In principle, the Bank will reduce the planned amount of its monthly purchases of JGBs each calendar quarter as follows.

2. JGB purchases: appropriate for the Bank to reduce its purchase amount of JGBs in a predictable manner, while allowing enough flexibility to support stability in the JGB markets
2.  Until January-March 2026
3. : about 400 billion yen (the reduction plan decided in July 2024 will be maintained)
4.  The Bank will gradually reduce its purchase amount so that it can improve the functioning of the JGB markets in a manner that supports stability in the markets.
5.  From April-June 2026 to January-March 2027: about 200 billion yen

## Reduction in a Predictable Manner





## Allowing Enough Flexibility

2. In the case of a rapid rise in long-term interest rates, the Bank will make nimble responses by, for example, increasing the amount of JGB purchases.
1. The Bank will conduct an interim assessment of the plan at the June 2026 MPM.
3. The Bank is prepared to amend the plan at the MPMs, if deemed necessary.

## Historically Large Annual Change in the Outstanding Amount of JGBs in the Market

Chart 15

(JGB supply to the market surged to peak level due to reduction in the Bank's purchases)

y/y % chg., tril. yen



- Notes: 1. Figures are on a book value basis and exclude short-term government securities.
2. Figures for FY2025 are estimated using the Cabinet Office's Economic and Fiscal Projections for Medium to Long Term Analysis (January 2025) and the Bank's plan for the reduction of the purchase amount of JGBs.

## Decisions on Disposal of ETFs and J-REITs (September 2025 MPM)

## Fundamental principles for the disposal

The Bank should dispose of its holdings of ETFs and J-REITs for adequate prices, taking into account the condition of the financial markets.

The Bank should avoid incurring losses as much as possible.

The Bank should avoid inducing destabilizing effects on the financial markets as much as possible.

Experience of the sales of the ""stocks purchased from financial institutions""

The Bank completed in July 2025 the sales of the stocks purchased for financial stability purposes, while avoiding major market impact.

1. The Bank will sell its holdings of ETFs and J-REITs to the market at a scale generally equivalent to that of the sales of the ""stocks purchased from financial institutions.""
2. A framework supporting the stability in the financial markets will be provided.
* The Bank will sell each ETF and J-REIT at the amount approximately proportionate to the share of each asset in its holdings, with consideration to spreading out the timing of the sales.
4.  Under the pace of sales described above, the trustee may temporarily adjust the sales amount or suspend the sales, in response to changes in the condition of the financial markets.
5.  The pace of sales may be modified at future MPMs, based on the fundamental principles and the experience from the sales to be conducted.
3. The disposal will begin once necessary operational preparations are completed.

| Book                              | Stocks (completed)                            | ETFs                                          | J-REITs                                     |
|-----------------------------------|-----------------------------------------------|-----------------------------------------------|---------------------------------------------|
| Pace of sales (amount per year) * | About 150 billion yen (About 620 billion yen) | About 330 billion yen (About 620 billion yen) | About 5 billion yen (About 5.5 billion yen) |
| Proportion to the trading value   | About 0.05%                                   | About 0.05%                                   | About 0.05%                                 |

Chart 17

## Overview of Japan Financial Literacy and Education Corporation (J-FLEC)

## Name

Japan Financial Literacy and Education Corporation (J-FLEC)

## Legal basis

## Establishment

## Capital

Act on Provision of Financial Services and Improvement of User Environment (effective February 1, 2024)

April 5, 2024

Government: 50 million yen Bank of Japan: 25 million yen Japanese Bankers Association (JBA): 12.5 million yen Japan Securities Dealers Association (JSDA): 12.5 million yen

Promote teaching and guidance (financial education) in order to acquire financial and/or economic knowledge that contributes to the appropriate use of financial services, and to develop abilities to utilize such knowledge.

## Purpose

## Number of employees

* Excluding initial costs disbursed by the government

Approximately 70



Note: FSA and JITA stand for the Financial Services Agency and the Investment Trusts Association, Japan, respectively. Source: J-FLEC.

## Stock Prices and Exchange Rate

(Both have turned around from the ""frozen era"" since 2012)

end of month, yen



end of month, yen

Source: Bloomberg.

Chart 19

## International Comparison of Household Financial Assets

(Japan has a high proportion of cash and deposits)

composition, %



Note: Figures are as of end-March 2025.



Source: Bloomberg.

Chart 21

## Average Life Expectancy in Japan since the Post-War Period (Rose from 50s to 80s)

year



## Cumulative Returns from Investment in Japanese Stocks by Age of Investors

## Risk Transformation Function of Banks Supporting Japan's Economic Growth

(From commercial banking model to multi-pronged model)

## Showa Model (Commercial bank-centered model)

## Multi-Pronged Intermediation (Disintermediation)

Financial

Financial





Financial

Financial

Various financial instruments such as investment trusts

Chart 23

## Japan's Investment-Savings Balance

(Firms have come to hold financial surpluses)

tril. yen



## Shift from ""Showa Model"" to ""100-Year Life Model"" （ Horizontal shift: shift from money flow within the working generation

to intergenerational finance)

Chart 25



## Amount Outstanding of Loans, Pensions, and Invested Assets in Japan (Shift to increases in asset management and multi-pronged financial intermediation)

Amount Outstanding of Loans, Pensions, and Invested Assets

Loans by Sector tril. yen





tril. yen tril. yen

Note: Amount outstanding of pensions and invested assets is the sum of securities investment trusts and assets under management (including some overlaps). Loans are those of domestic banks.

Sources: Japan Investment Advisers Association; Bank of Japan.

## Developments Affecting Asset Management in Japan and the United States (Both economic environment and institutional conditions -- two wheels of a cart -are fulfilled in Japan for the first time)

Chart 27



## Shift from Uniform Life Model to Multi-Pronged Model (Vertical shift: diversification of financial needs)



## My View on Mechanism of Expanding Corporate Profits and Ensuing Challenges (Toward establishment of an investment chain) Improved competitive

Chart 29



## Developments in Japan's Current Account Balance

(Shift to an investment-driven balance mainly driven by primary income)

tril. yen



## Macro Money Flow in Japan

(Nationwide shift to an investment model)

30



tril. yen

Sources: Ministry of Finance; Bank of Japan.

Chart 31

## Transformation of Money Flow

(From ""Showa model"" to ""100-year life model"")

| Showa model                            | Frozen era                                                            | 100-year life model                                                                                                               |
|----------------------------------------|-----------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------|
| Firms faced financial deficits         | Firms fell into a shrinking equilibrium                               | Firms face financial surpluses                                                                                                    |
| Bank-centered financial intermediation | Credit crunch of banks                                                | Money flow to pensions and asset management, in addition to banks                                                                 |
| Deposit-centered household assets      | Cash and deposit-centered household assets to hedge against deflation | Diversified asset management other than holding deposits: disintermediation through investment in instruments other than deposits |
| Single-track deposits and loans        | Credit crunch under deflation                                         | Multi-pronged financial intermediation                                                                                            |",Hajime Takata
https://www.bis.org/review/r251106b.htm,"Tuomas Välimäki: From promise to practice - how AI is transforming the economy, the financial sector and financial supervision","Opening remarks by Mr Tuomas Välimäki, Board Member of the Bank of Finland, at the ""Impact of AI on economy, finance and supervision"" seminar, Helsinki, 5 November 2025. ",2025-11-05 00:00:00,"## Tuomas Välimäki: From promise to practice - how AI is transforming the economy, the financial sector and financial supervision

Opening remarks by Mr Tuomas Välimäki, Board Member of the Bank of Finland, at the "" Impact of AI on economy, finance and supervision"" seminar, Helsinki, 5 November 2025.

* * *

Good morning, ladies and gentlemen.

I am delighted to welcome you to this seminar, whether you are here in Helsinki or online. This is the second time we are organising this event under the title ' Impact of AI '. on the Economy, Finance and Supervision

The seminar is jointly organised by the Bank of Finland and the Finnish Financial Supervisory Authority as part of our shared , and in support of Data Economy initiative one of the Bank's strategic priorities, ' . Data and AI in the economy and workplace'

This year, we will focus especially on how artificial intelligence is being applied in the financial sector and in supervisory work. We will do our best to avoid the hype, and instead demonstrate, through practical examples, the real added value that AI brings, and can potentially bring, to us all. We will hear several examples not only from Finland but also from colleagues across Europe.

## Bank of Finland's experience

In these opening remarks, I would like to share a few examples of how we have applied AI at the Bank of Finland over the past few years.

One such example is our machine-learning ' , which has been working robot economist' hard at the Bank of Finland for several years now.

This robot forecasts Finnish GDP growth using the very latest data in a nowcasting model. It also independently publishes its forecasts on social media. Back in 2020, for instance, the robot tweeted its forecasts nearly one hundred  times.

As I represent the employer side, I'm happy to have an economist who never asks for a coffee break or a pay rise. But, on the other hand, when assessing the usefulness of having a robot economist working for us, I must also consider the time spent coding and updating it, and whether we really are better off with such frequent forecasts.

## Impact of AI on the economy

Let me turn to the first part of our title -. the impact of AI on the economy

At the Bank of Finland, we recently published a review  of the potential impact of artificial intelligence on growth and employment.

AI tools are driving a new kind of structural change in the Finnish labour market. Thanks to new technologies  notably large language models and generative AI  it is now possible to automate many kinds of work and tasks that previously were beyond automation, including services and expert roles.

At the same time, technological advances are creating demand for new kinds of skills. Companies and organisations must invest in new tools and systems, and in genuinely transforming their ways of working and building the competences of their employees.

This inevitably involves costs, but it is the only way to achieve the broad productivity gains and higher economic growth that AI makes possible in the longer term.

Looking at the bigger picture, it is essential that Europe keeps pace with AI development and does not become overly dependent on other jurisdictions. We need investment, education and innovation in Europe, and the European Commission has several initiatives supporting this. Moreover, Europe is a wealthy continent, with a vast number of highly educated, talented people. We therefore have all the ingredients needed to harnessing the benefits of AI. We just need to ensure we use these resources wisely and locally, within Europe. A stable and competitive Europe is our goal. Later today, we will hear more about this from the European Commission.

## Impact of AI on the financial sector

I shall now turn to the second part of our title, . the impact of AI on the financial sector

Central banks have been early adopters of machine learning. As highlighted by a  BIS Bulletin  last year, typical use cases include predictive modelling for monetary policy or financial stability, including GDP nowcasting and crisis prediction.

The Bank of Finland has also published some of this work, for example on the use of Bayesian VAR models for GDP nowcasting and neural networks for  predicting systemic financial crises.

Today, we will hear a presentation from the , on AI and Financial Stability Board financial stability, and from the on its approach to AI. We will also Bank of England have two presentations from academia and two from the banking sector, as well as a contribution from the . European Commission

In addition, the - the - will Finnish Financial Supervisory Authority FIN-FSA summarise the key findings of a recent survey  on the use of AI in the financial sector.

More broadly, AI can enhance operations, improve services and open new opportunities for data use and risk management. But we also need to understand how the AI models work and recognize when they hallucinate.

Unlike us humans, when AI hallucinates, it does so with great confidence, which can be both impressive and dangerous. Then again, you might feel that some humans hallucinate confidently and dangerously too - and judging by the news we see, you might be right.

Cybersecurity risks and dependence on third-party service providers are also key concerns. It's not enough to know which banks are systemically important. We must also identify the critical service providers behind our banking sector services, including the providers of AI models.

And we must understand how the demand for financial services is changing. How soon will we reach a world where customers no longer make their own spending or investment decisions, but instead rely on their personal AI agents to manage their finances autonomously?

## Quantum technology and AI

The pace of development is rapid, and it does not stop with AI.

At the Bank of Finland, we recently conducted a survey  in the financial sector on the prospects, benefits and risks of quantum technology.

What will be the impact of AI in combination with quantum computing and other emerging technologies? Their combined impact could bring a substantial transformation once the technologies mature.

The financial sector is closely monitoring developments regarding quantum technology, but few institutions have run practical tests or trials, given the early stage of the technology. Our survey found that opportunities are seen especially in risk management, information security and investment activities.

However, data protection concerns remain prominent. Four out of five respondents considered 'harvest now, decrypt later' attacks to be a relevant risk.

As quantum computing develops, it has the potential to revolutionise current IT solutions. Therefore, all financial sector institutions should follow developments closely and assess what quantum computing could mean for their own business, and how to prepare for it.

Cybersecure solutions and trust in financial services are foundational to modern society. A resilient economy and financial system are essential under all circumstances.

## Impact of AI on financial supervision

Finally, a few words about . AI in financial supervision

Artificial intelligence is increasingly being used in the work of public authorities, and we will hear several practical examples from across Europe.

Striking the right balance between trust and innovation is key. We are all in the business of trust, so trials and pilots must not undermine confidence in our work and services. But we are also learning by doing, and sometimes we learn best from mistakes. As someone wisely observed, "" artificial intelligence is still far behind natural "" - though it is catching up one pilot project at a time. stupidity

Not all ideas can be success stories, but we should not be discouraged if we try something and fail. If we never try at all, our AI journey will have failed before it even begins.

As part of the Bank of Finland and FIN-FSA's shared , our Data Economy initiative , or for short, plays a key role in developing our Analytics Center of Excellence ACE data science culture. Together with partners, ACE has built a cloud-native data science platform that enables advanced analysis of microdata.

The effort invested in our cloud transformation is already paying off: our first major initiative - the new granular personal credit register and cloud-based analytics platform - has already attracted a . Central Banking Award

Another example is our newly launched . It began earlier this Innovation Accelerator year with a contest for new ideas across our organisations. Three AI use cases were selected as the best proposals, and these have since been developed further in internal hackathons and workshops.

We are also active outside our own walls, for example as members of , a AI Finland nationwide AI network, and as partners in next week's , where Junction hackathon young experts will tackle challenges using the latest AI tools. The challenge we will bring to the hackathon is a look at the simplification of financial sector regulation and policies. And yes, I know  simplifying financial regulation sounds almost as ambitious as solving the AI alignment problem!

This seminar is a valuable opportunity not only to hear about the latest developments, but also to exchange ideas and learn about real-world experiences.

Tomorrow, we will dedicate the entire day to these practical examples with seven case studies from supervisors and central banks, each showing how AI is being applied in practice.

Thank you all for your time and engagement, and a very warm thank you in advance to all the speakers for your contributions.

I wish you all, both here in Helsinki and online, a very fruitful and inspiring seminar.",Tuomas Välimäki
https://www.bis.org/review/r251105j.htm,Gent Sejko: Albania's economic and financial developments in 2024,"Address by Mr Gent Sejko, Governor of the Bank of Albania, to the Assembly of the Republic of Albania presenting the Annual Report of the Bank of Albania for 2024, Tirana, 31 October 2025.",2025-10-31 00:00:00,"## Gent Sejko: Albania's economic and financial developments in 2024

Address by Mr Gent Sejko, Governor of the Bank of Albania, to the Assembly of the Republic of Albania presenting the Annual Report of the Bank of Albania for 2024, Tirana, 31 October 2025.

* * *

Honourable Speaker,

Honourable Members of the Parliament,

I would like to commence this public address by conveying my highest consideration for the process of annual institutional reporting to the Parliament of the Republic of Albania. Allow me to reaffirm that Bank of Albania considers this process a crucial component of its transparency and accountability.

Before proceeding further, I would like to highlight that the activity of the Bank of Albania has been, and continues to remain, firmly oriented toward fulfilling our legal responsibilities: safeguarding price stability, supporting financial stability, and promoting the development of financial markets and payment systems. At the same time, we have worked diligently to meeting our institutional commitments-particularly those related to the European integration process-and we have implemented all recommendations issued by the Parliament of Albania for the previous year.

## Honourable Members of the Parliament,

Throughout 2024, the Bank of Albania conducted its activity within a broadly positive context of economic developments.

According to INSTAT data, the volume economic activity grew by 4%, wages in private sector increased by 8.6%, while unemployment rate dropped to a historical low of 8.8%. The expansion in both household consumption and private sector investment, coupled with the growth in service exports-particularly through tourism revenues-underpinned the economic growth. On the other hand, strong domestic demand contributed to an increase in imports, while goods exports experienced a slowdown, and fiscal policy maintained a consolidating stance. From the sectoral perspective, the expansion of activity in the services and construction sectors mirrored the economic growth, while the industry and agricultural sectors experienced a decline.

In parallel with these developments, inflation came down, moving closer to our target, falling to an average of 2.2% in 2024 from 4.8% in 2023. The reduction in inflation has been driven by declining prices in international markets, the strengthening of the exchange rate, and the implementation of a proactive and balanced monetary policy.

The reduction in inflation was driven by falling prices in international markets, the strengthening of the exchange rate, and the implementation of a proactive and balanced monetary policy.

Finally, and equally important, the domestic and external balances of the economy have improved, while the country's capacity to withstand potential shocks has been strengthened. In this context, I would like to highlight three important developments:

- First, the external position of the economy has been consolidated, due to the further growth in exports, remittances, and foreign direct investments. In 2024, total exports reached EUR 9.1 billion, up by 11% compared with the previous year, driven by tourism revenues amounting to EUR 5 billion. Also, remittances amounted to EUR 1 billion, while foreign direct investment inflows to EUR 1.6 billion. Overall, the balance of trade and financial exchanges with abroad has shown improvement over the past three years, recording minimums in the current account deficit and being reflected in the strengthening trend of the exchange rate. In reflection of these dynamics, external debt fell to 40.6% of GDP, while the foreign exchange reserves of the Bank of Albania have reached close to EUR 7 billion, providing increased assurance for the country's financial stability.
- Second, fiscal position has further improved, as shown by the reduced budged deficit and public debt, to 0.7% and 53.8% of GDP, respectively, as at end of 2024.
- Third, banking system has strengthened the sustainability indicators, expanded its deposit base and considerably increased the credit portfolio. These developments have led to an enhanced capacity of the banking system to provide the economy with stable, low-cost funding, and have enabled a broader use of modern payment instruments.

Albania - in reflection of these developments - experienced an improvement in sovereign debt risk rating from international specialised agencies, which in turn contributes to lowering the financing costs of the Albanian economy in foreign markets.

This landscape reflects- among other things- also the contribution of our monetary and macroprudential policies, the diligent supervision and regulation of the banking system, as well as the measures we have taken to boost the development of the financial market and payment systems.

In what follows, I will briefly address each of these aspects, starting with monetary policy.

## Monetary Policy of the Bank of Albania

In line with the legal provisions that govern the activity of the Bank of Albania, our monetary policy is designed and implemented exclusively in pursuit of the objective of price stability. In this context, I would like to emphasise that the monetary policy we have implemented in recent years has enabled to maintain inflation contained, without undermining the positive trend of economic growth and the financial stability of Albania.

Following a normalization phase in 2022 and 2023, the monetary policy stance became more accommodative during the second half of 2024 and in 2025. This approach was dictated by the need to recalibrate monetary conditions in an environment of declining inflation. In this context, we undertook two reductions of the key interest rate, lowering it to 2.5% in July 2025, from 3.25% at the begining of 2024. In parallel, we intensified our foreign currency purchases in the domestic market, withdrawing almost EUR 914

million during 2024 and continuing at a similar pace during 2025. The intensified presence in the foreign exchange market aims to curb the pace of lek exchange rate appreciation, stabilize market activity, and minimize potential adverse effects on the country's monetary and financial stability-effects that could arise from the formation of speculative positions or heightened exchange rate volatility.

These measures have significantly improved the financing conditions for households and enterprises. Interest rates on lek-denominated loans have reduced, while lending has also benefited from a more positive approach of banks in this regard. As a result, credit to the private sector recorded an annual growth of 15.7% at the end of 2024 and 14% in the third quarter of the current year. This credit has supported the consumption and investment of the private sector, while maintaining a sound currency composition and good quality of credit portfolio.

## Honourable Members of Parliament,

The monetary policy pursued by the Bank of Albania during this period has aimed to, and successfully managed to, balance the fulfilment of its price stability objective with those of supporting economic growth and strengthening financial stability. As a result, Albania has experienced one of the lowest levels of both inflation and financing cost increases - in both the regional context and more broadly.

The current monetary policy framework, based on an inflation-targeting regime and a freely floating exchange rate, has proven to be both effective and successful in addressing the challenges we have faced. In particular, I find it important to emphasize that the free exchange rate regime provides several crucial advantages for the  sustainable and long-term development of Albania. This regime: (i) enables the implementation of an independent monetary policy focused on controlling inflation; (ii) provides an automatic stabiliser for withstanding potential domestic or external shocks; (iii) strengthens the financial stability of the country, as it allows the full exercise of the lender-of-last-resort function; and

(iv) enhances the flexibility and resilience of fiscal policy. For these reasons, this monetary policy framework-further developed and refined- will continue to guide our interventions in the monetary markets in the future.

[Allow me to shift your focus to the second pillar of the Bank of Albania's activity: banking supervision and financial stability.]

## Banking supervision and financial stability

The positive performance of economy and Albanian financial  markets was also reflected in the banking sector. This sector experienced increase of the activity and improvements of financial soundness indicators. As an example, the capitalization of the banking system remained high, at around 20.0%; liquidity indicators continued to be well above our regulatory requirements; and its financial profitability indicators remained satisfactory. Also, credit quality has continued to improve and non-performing loans ratio dropped close to 4.0%, recording the lowest rates since 2008. In parallel, our regular analyses suggest that systemic risk levels remain under control, while stress tests indicate that the banking system has a strong capacity to withstand potential macro-financial shocks.

In fulfilling its legal duties to ensure a sound and solid banking system, the work of the Bank of Albania during 2024 focused on three main areas: (i) ensuring an effective supervisory regulatory framework, aimed at the early identification and timely mitigation of risks in the activity of the institutions it licenses and supervises; (ii) designing and implementing an appropriate macro prudential policy to control and prevent systemic risks; and (iii) ensuring a functional framework for the recovery and resolution in banks.

I will address each of these areas more concretely, starting with our supervisory and regulatory activities.

- First, in order to strengthen consumer protection, over the past two years we have thoroughly revised the regulatory framework for non-bank financial institutions, particularly for micro credit institutions. Amendments consisted in introducing new criteria for the financial analysis of households by non-bank financial institutions, aiming to protect them from the insolvency risk. Furthermore, a series of regulatory amendments were introduced to strengthen consumer protection and enhance credit market efficiency. These measures lowered by nearly threefold the maximum permissible effective interest rate on consumer loans and established a cap on penalty charges applied by banks and non-bank financial institutions, set at 30% of the unpaid loan instalment or instalments.
- Second, within the framework of changes in financial reporting in accordance with the International Accounting Standards, we are thoroughly revising the credit risk management framework, adapting it to the new standards and the practices implemented by European institutions.
- Third, we approved the new regulation ""On the operational risk management by banks, payment institutions and electronic money institutions"", and the existing one for non-bank institutions and savings that of the associations was revised. Both regulations are based on the revised standards of Basel committee on operational risk management.
- Fourth , work continued throughout 2024 to complete the regulatory framework with the aim of aligning it with the EU Acquis, through the adoption of new acts or the revision of existing ones. Beyond the operational risk management, mentioned above, regulatory and methodological improvements have affected the activities of payment service providers and the licensing, supervisory, and risk management requirements in the operations of non-bank institutions.
- Fifth , during 2025, we enhanced the licensing and supervision requirements for foreign exchange bureaus, mainly regarding the good reputation and integrity of capital owners, including beneficial owners, in line with anti-money laundering and counter-terrorism financing legal requirements and international standards, aiming to meet the recommendations of Moneyval experts.
- Sixth, we have continued conducting examinations of banks, non-bank financial institutions, savings and loan associations, and foreign exchange bureaus. These examinations focused on risk management, in particular the credit risk, implementation of best governance practices, client transparency, and on the money laundering risks.

In the domain of macroprudential policy, the Bank of Albania has continued to work on monitoring systemic risks and implementing measures aimed at their mitigation and prevention. As of the end of 2024, all banks remain subject to the capital conservation

buffer at its maximum level of 2.5%. During the past year, for the first time, the Bank of Albania also implemented an increase in the countercyclical capital buffer. Developments in the real estate market and in lending for this sector have also been a focus of our work. Building on several years of preparatory work, in June 2025 we implemented concrete measures to standardize the management of risks undertaken by banks in the mortgage lending process. This standardisation introduces to the Albanian market a standard instrument employed by central banks in advanced economies, aimed to control potential risks to the banking sector arising from exposure to mortgage loans.

Lastly, in the capacity of the Resolution Authority, our work focused on enhancing resolution capabilities, ensuring banks meet the minimum requirements for capital instruments, strengthening the regulatory and methodological framework, and developing banks' capacities to implement resolution.

[Next, I will briefly address some other aspects of the activity of the Bank of Albania]

## Other activities

The year 2024 marked a historic milestone in the process of integrating the Albanian financial system into the European market. On 21 November 2024, Albania become part of the Single Euro Payments Area - SEPA. The inclusion in this area confirmed the high level of our legal alignment with that of the European Union in the areas of payments and financial supervision. All banks conducting their activity in Albania have been entered in the list of institutions that may operate under SEPA schemes. As of 7 October 2025, Albanian citizens and businesses may carry out cross-border transactions in euro with the 40 member countries of the SEPA area. Integration into SEPA, combined with the expansion of digital payments, is expected to generate savings of around EUR 20 million in the first year only, with progressive growth in the years to come. Also, the AIPS EURO system of the Bank of Albania, operational since January 2022,  has saved the domestic market around EUR 140 million.

In this context, I would like to emphasize that the Bank of Albania has continued to work to ensure the safe operation of payment systems, as well as to advance several strategic projects of particular importance for the future of the payment system in Albania.

- First, the instant payment system, which will allow electronic payments to be settled in real time, 24/7, throughout the year.
- Second, the TIPS Clone project, which aims to implement the European Central Bank's TIPS payment system, adapted to the specifics of Western Balkan countries.
- Third, at the beginning of 2025, the first transactions took place under the open banking system, facilitating exchanges between banks and third parties;
- Lastly, in 2025, regulatory measures were adopted to significantly reduce fees and commissions applied to payments, thereby encouraging their use and promoting the formalization of the economy.

These projects will translate into faster, cheaper, and safer services for Albanian households and enterprises, thereby supporting the digitalization of the economy, reducing informality, and deepening regional and European financial integration.

In parallel with the above activities which account for the basic functions of the Bank of Albania, I would like to underscore that an important part of our work has been focused on the active support to the European integration process. As the chair of two Inter institutional Working Groups on European Integration for two Acquis chapters, and as a key contributor to six other chapters, the Bank of Albania has played an active role regarding the preparation of negotiating positions and drafting strategic documents to support the alignment of national legislation and policies with the EU Acquis.

Also, throughout 2024, the Bank of Albania successfully carried out its institutional responsibilities and commitments in the fields of financial statistics, scientific research, and the management of foreign reserves. Furthermore, important steps have been taken to strengthen institutional governance, human resources, and IT infrastructure. Particular attention has been paid to cyber security, through the implementation of technical and procedural measures aligned with the best international standards. These measures aim to ensure the operational resilience of the Bank of Albania and the safe functioning of the financial system.

***

## Honourable Members of the Parliament,

In conclusion, I would like to assure you that the Bank of Albania will persist in its dedicated efforts to fulfil its core mission: safeguarding the monetary and financial stability of the country. In the same vein, I would like to reaffirm that this work is-and will continue to be-guided by the principles of professionalism, transparency, and accountability.

Thank you for your attention!",Gent Sejko
https://www.bis.org/review/r251106a.htm,Eddie Yue: Keynote address - Hong Kong FinTech Week 2025,"Keynote address by Mr Eddie Yue, Chief Executive of the Hong Kong Monetary Authority, at the Hong Kong FinTech Week 2025, Hong Kong, 3 November 2025.",2025-11-03 00:00:00,"## Eddie Yue: Keynote address - Hong Kong FinTech Week 2025

Keynote address by Mr Eddie Yue, Chief Executive of the Hong Kong Monetary Authority, at the Hong Kong FinTech Week 2025, Hong Kong, 3 November 2025.

* * *

Good morning everyone, and welcome to the 10 th  Hong Kong Fintech Week, a celebration of years of innovation, collaboration and progress in Hong Kong's fintech ecosystem.

The ""10 th  anniversary"" is always special - it's a time for fond memories, to pause and reflect on our journey so far, and inspires us to chart new territories as we explore what lies ahead.

Nine years ago, in 2016, some 2,500 curious minds gathered at the very first Hong Kong Fintech Week. We hosted the inaugural HKMA Fintech Day - and tickets were all gone in just two days.  Little did we know what a wave of innovation that gathering would lead to, shaping the fintech landscape we see in Hong Kong today.

Fast forward to now, the Hong Kong Fintech Week has become a flagship event, hosting over 37,000 participants, nearly 15 times as many as in 2016. Visionary thinkers, innovators, and leaders from around the globe all gather here to chart the future of fintech.

Over the years, we have weathered many storms; financial crises, a pandemic, and technological disruption. Yet Hong Kong's resilience and agility have kept us firmly among the world's leading fintech hubs.

A key factor in this success is our shared commitment to keeping Hong Kong futureready. Building on Fintech 1.0, which began with the launch of the seven Smart Banking initiatives, in 2021 I announced the ""Fintech 2025"" Strategy to mark the beginning of Fintech 2.0 journey.

This Fintech 2025 journey has been nothing short of extraordinary. Transforming Hong Kong into a global fintech hub was a challenging mission, but one that we embraced in a spirit of openness and innovation.

Four years on, I am proud to say that our efforts under the five focus areas of the Strategy, have nurtured a virtuous cycle within Hong Kong's fintech ecosystem. At the heart of this cycle are three key elements:

First, a secure and enabling environment for responsible innovation - one that strikes the right balance between innovation and regulation. To maintain this balance, we have adopted an interactive and iterative approach, through the use of purpose-built sandboxes.  From the supervisory sandboxes for GenA.I. and DLT to developmental sandboxes such as Ensemble, these platforms provide a controlled environment for our innovators to experiment, validate, and refine solutions while ensuring accountability.

Second, future-ready payment and tokenisation infrastructures. The launch of the Faster Payment System (FPS) in 2018 propelled Hong Kong beyond cash, cheques and bank transfers, with the number of registrations now more than double the city's population. Over the years, we have also expanded into cross-border payments with Payment Connect, while also bringing central bank digital currencies (CBDCs) and tokenisation from ambitious concepts to practical, real-world applications.

Third, an inclusive, interconnected, and efficient data ecosystem, where data flows securely and efficiently, fuels innovation, builds trust, and unlocks opportunities for both businesses and individuals. Our next-generation Commercial Data Interchange (CDI) data infrastructure has empowered SMEs to scale up and thrive with enhanced financing opportunities. We are also advancing trade finance digitalisation through Cargo x   to support SME traders in a complex global trade landscape.  Individual customers can now enjoy more personalised and secure services with the Interbank Account Data Sharing (IADS) platform and Credit Data Smart .

Driven by these three key elements, fintech is now embedded across the vast majority of the Hong Kong's banking sector - including all retail banks. The momentum behind this transformation is underscored by substantial technological investment, with total spending projected to reach HK$100 billion annually over the next three years.

This growing confidence speaks for itself. This self-reinforcing momentum is exactly what a thriving and healthy fintech ecosystem should possess, and it is happening right here in Hong Kong.  We are now number one in the world for fintech offerings , backed 1 by a world-class business environment and robust infrastructure that empower innovation.

That said, we are in quite a different context today than when we started.

Back then, our goal was to inject momentum and accelerate fintech adoption across the industry. Now, it's time to take the next step - to focus on advancing responsible innovation.  Innovation brings huge opportunity, but also risk.  And risk, as we know, has two sides. Because while adopting innovation carries risk, standing still carries an even greater one - the risk of falling behind.  In today's fast-moving world, slow adoption is hardly innovation at all.

For regulators, this calls for timely action, and the commitment to keep improving. With the solid foundation laid under Fintech 2025, we are now ready to enter the Fintech 3.0 era, where technology is embedded in daily life, powered by trust, transparency, and intelligence, driving real-world impact and lasting resilience.

With this in mind, I am delighted to share with you today our next chapter - Fintech 2030.

Focusing on four strategic pillars - "" ata"", "" rtificial Intelligence"", "" esilience"", and "" D A R T okenisation"" - which forms a ""DART"" for short, the Fintech 2030 aims to make Hong Kong a robust, resilient, and future-ready fintech hub, as we chart the course into the Fintech 3.0 era.

But having a vision is only half the story. The real question is: how do we lay the right foundations, so that our dart can reach its target efficiently and responsibly?  Over the next few minutes, I will briefly take you through each pillar - revealing what lies beneath and how they will propel Hong Kong into the next chapter of fintech.  Let's perhaps start with the most transformative pillar - A.I.:

Over the past few years, A.I. has evolved from an experimental frontier to a daily driver of innovation. Today, over three-quarters of Hong Kong's banks are already deploying or piloting A.I. solutions in use cases ranging from credit assessment and risk monitoring to customer engagement.

The question now is no longer whether A.I. will transform finance - but how we can ensure that transformation serves the public good, strengthens our economy, and is built on bedrock principles of security, transparency, and trust. In this spirit, our forthcoming A.I. Strategy will unite banks, tech innovators, and academia to embed A.I. deeply into the sector's infrastructure, in a way that is safe, scalable and future-proof.

A good example is our GenA.I. Sandbox, a space where banks, fintechs and innovators come together to experiment, validate, and co-create the next generation of A.I. solutions. Building on this foundation, we're expanding our efforts in three directions.

First, we're breaking down barriers.  Through the enhanced GenA.I. Sandbox++, we're uniting innovators across sectors and borders to pool expertise and advance highimpact A.I. use cases.

Second, we're laying the groundwork for the future.  We're collaborating with the industry to co-create a shared A.I. infrastructure for finance, a digital backbone with trusted computing, shared tools, and secure data environments. This will lower barriers, level the playing field, and drive innovation for the public good.

And third, we're strengthening trust.  Through a Responsible A.I. Toolkit, we aim to equip banks with a range of practical tools and guidance to drive responsible implementation. For example, in Project Noor, an initiative in collaboration with the BIS Innovation Hub, we're introducing an Explainable A.I. (XAI) tool for financial institutions and supervisors to enhance transparency in A.I. models.

Together, they'll take us from isolated experiments to large-scale deployment, turning responsible A.I. adoption into a core driver of competitiveness and trust for the financial sector.

The second pillar is Tokenisation. At last year's Fintech Week, I mentioned tokenisation as one of our key priorities, and that commitment remains strong.  Our role is to act as an enabler and facilitator.

We see tokenisation not just as a technological leap, but an important additional feature for our financial infrastructure, where bonds settle in seconds, trade finance moves with real-time data, and cross-border investments can flow seamlessly.

To make this happen, we need an interoperable and trusted network, which will lay the foundation for a vibrant tokenised asset market.

In parallel, money settlement must keep pace. That's why we will continue to advance our work on digital money, to support the seamless settlement of tokenised assets. Through Project Ensemble, we are expanding exploration into broader financial applications, connecting the local industry with global partners.  We are already setting interoperability standards, testing cross-border use cases, and building productionready infrastructure.

Today, I am proud to announce the next phase of the project: the Ensemble Pilot, which enables real-value transactions in tokenised deposits and digital assets.

Following a year of successful experimentation alongside industry partners and our fellow regulator, the SFC, we will now begin incubating mature real-value use cases where tokenised deposits can offer significant advantages, starting with tokenised money market funds.  Over time, we will pursue increasingly innovative applications of tokenisation, ensuring Hong Kong remains at the forefront of global digital finance.

Moving on to the third pillar - Data, the lifeblood of the digital economy. We are building the circulatory system that communicates and lets data flow and interact seamlessly for the greater good - reducing friction, enhancing risk management, and unlocking new opportunities in areas like SME financing, personalised financial products, and real-time compliance.

Simply put, we need to strengthen our economy's ability to share, verify, and use data securely and efficiently.

Through the CDI, now connected to the Government's ConsentedDataExchangeGateway, we're linking data islands and opening new lanes of opportunity, helping SMEs turn their transaction records into credit, and powering innovations like ProjectCargo , which brings trade and logistics data directly into X financing decisions. In the next few years, we will further expand the data sets available on CDI, including golden source data from the Government, and work with the industry to create more data analytics capability and practical use cases.

We are also extending our data highway beyond our borders, through Cross-Boundary Credit Referencing (CBCR) and the development of a Shenzhen-Hong Kong Data Validation Platform (DVP), creating the foundations for a connected, trusted crossboundary data ecosystem.

Now let's turn to the final pillar - Resilience. It is not just about withstanding shocks, but also about staying secure, adaptive, and future-ready, no matter what the next wave of innovation brings.  And that future is approaching faster than we think, with the quantum era emerging as the next frontier.

By building quantum-safe and computation-ready infrastructure today, we are futureproofing HongKong's financial core before these technologies reach the mainstream. We are collaborating with academia and international partners to advance postquantum cryptography and quantum-key distribution, while exploring how emerging high-performance computing can enhance financial modelling and real-time risk assessment.

At the same time, we are enhancing our resilience of our core financial market infrastructures -  the FPS, the Real-Time Gross Settlement (RTGS) system and the CentralMoneymarketsUnit (CMU).  These platforms will expand in reach and capability, forming a robust and scalable backbone for settlement in the next generation of finance.

""Data"", ""A.I."", ""Resilience"" and ""Tokenisation""- these are the four key pillars of Fintech 2030. We can't afford to throw darts at random and hope for success.  We must aim with purpose, to reimagine finance and make Hong Kong a future-ready fintech hub by 2030.

Before I conclude, I would like to express my heartfelt gratitude to all our global and local partners, industry pioneers who have walked alongside us on the Fintech 2025 journey. Thank you for your unwavering support to the HKMA, and your trust in the limitless potential of this city.

Together, we haven't just ridden the fintech wave. We have set the stage for even greater success on our path towards Fintech 2030.  This is the power of collaboration, across public and private sectors, and across borders. By joining hands, we can achieve true interoperability, strike the right balance between innovation and regulation, and solve real-world problems faster.

Ladies and gentlemen, this week is one filled with celebrations, fresh insights and new directions. Let's make this 10 th   Hong Kong Fintech Week not just a reflection of what we've achieved, but the opening of a new chapter, one that leads us to new horizons together. I invite all of you to join us on this exciting journey, and to keep pushing the boundaries toward an innovative and sustainable future of fintech.

Thank you, and I wish you an inspiring and insightful week ahead.

1 The Global Financial Centres Index 38 -  https://www.longfinance.net/publications/longfinance-reports/the-global-financial-centres-index-38/",Eddie Yue
https://www.bis.org/review/r251106h.htm,Ida Wolden Bache: Policy rate kept unchanged at 4 percent,"Introductory statement by Ms Ida Wolden Bache, Governor of Norges Bank (Central Bank of Norway), at the press conference following Norway's announcement of the policy rate, Oslo, 6 November 2025.",2025-11-06 00:00:00,"## Ida Wolden Bache: Policy rate kept unchanged at 4 percent

Introductory statement by Ms Ida Wolden Bache, Governor of Norges Bank (Central Bank of Norway), at the press conference following Norway's announcement of the policy rate, Oslo, 6 November 2025.

* * *

## Presentation accompanying the speech

The Monetary Policy and Financial Stability Committee has decided to keep the policy rate unchanged at 4 percent.

Norges Bank is tasked with keeping inflation low and stable. The operational target is inflation of close to 2 percent over time. We are also mandated to help keep employment as high as possible and to promote economic stability.

## Chart 2: We do not envisage a large decrease in the policy rate ahead

In response to the inflation surge in 2022, we raised the policy rate sharply and rapidly. The tightening of monetary policy has contributed to cooling down the Norwegian economy and to dampening inflation. In June, we began a cautious normalisation of monetary policy. The policy rate was also reduced at our previous monetary policy meeting in September, but we did not envisage a large decrease in the policy rate ahead. The forecast we presented was consistent with one rate cut per year in the coming three years.

The Committee's current assessment is that no new information has come in that indicates a material change to the outlook for the Norwegian economy since September. The Committee judges that a restrictive monetary policy is still needed. If the economy evolves broadly as currently envisaged, the policy rate will be reduced further in the course of the coming year.

## Chart 3: Domestic prices are still rising rapidly

Inflation is still too high. The latest data show that consumer price inflation is running at 3.6 percent. Excluding the volatile component energy prices, inflation has been close to 3 percent over the past year. Import price inflation is low for many goods, while high services inflation is contributing to a continued rapid rise in domestic prices. The sharp rise in business costs over the past years will likely restrain domestic disinflation ahead. At the same time, we expect lower wage growth to push down inflation further out.

## Chart 4: Registered unemployment is close to pre-pandemic levels

Unemployment has increased from its lowest level three years ago. According to last week's data, registered unemployment now stands at 2.2 percent. While registered unemployment is back at its pre-pandemic level, the Labour Force Survey indicates that unemployment has risen somewhat more. The employment ratio is nevertheless higher than in 2019. Since the previous monetary policy meeting, employment appears to have been somewhat lower than projected, while unemployment has been a little higher.

## Chart 5: Inflation down to target without a marked increase in unemployment

The job of tackling inflation has not been fully completed, and we are not in a hurry to reduce the policy rate. If the policy rate is lowered too quickly, inflation could remain above target for too long. On the other hand, an overly tight monetary policy stance could restrain the economy more than needed to bring inflation back to target. With the policy rate path we envisaged in September, the outlook suggests that inflation will return to target without a large increase in unemployment.

But the outlook is uncertain. The future path of the policy rate will depend on how the economy evolves. Our objectives stand firm. We will finish the job and ensure that inflation is brought all the way back to 2 percent.",Ida Wolden Bache
https://www.bis.org/review/r251105c.htm,Frank Elderson: Making supervision simpler - the role of supervisory guides,"Keynote speech by Mr Frank Elderson, Member of the Executive Board of the European Central Bank and Vice-Chair of the Supervisory Board of the European Central Bank, at the ECB and EUI (European University Institute) Banking Governance High-Level Seminar ""Board of the future"", Florence, 27 October 2025.",2025-10-27 00:00:00,"SPEECH

## Making supervision simpler: the role of supervisory guides

Keynote speech by Frank Elderson, Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB, at the ECB and EUI Banking Governance High-Level Seminar ""Board of the Future""

Florence, 27 October 2025

It is a great pleasure to be with you here in Florence.

| am sure that on your way to this venue many of you have spotted some of the breathtaking examples of Florentine Renaissance architecture: Brunelleschi's dome of the cathedral, Alberti's fagade of Santa Maria Novella or the Pazzi chapel in Santa Croce.

By overcoming the often convoluted Gothic ornaments in favour of classical principles, Florence transitioned from medieval complexity to the cradle of the Renaissance that we know today.

The Florentine Renaissance showed that progress isn't about adding additional layers of complexity, but about applying enduring principles such as clarity, proportion and structure.

In that sense the Renaissance was a conscious act of simplification, back from the ornaments and multiple layers to the solid foundational elements that truly matter.

This analogy couldn't be more timely today, as voices are growing louder that banking regulation and supervision have given rise to undue complexities and should be simplified.

In my remarks | will argue that simplification is indeed desirable and achievable and explain the steps the ECB is taking to make it a reality. But just as the Florentine architects achieved simplification by reverting to classical foundations, today's supervisors need to reduce overlaps, undue complexity and costs without damaging the solid foundations on which the European banking system is built: we need to simplify without compromising resilience.

## How can supervisory guides help?

In this context, let me first clarify the role of supervisory guides"") that have recently been subject to some debate.

The guides developed by the ECB over the last decade serve distinct purposes. Guides are issued to ensure consistency in our approach to the supervision of banks across the banking union, and to provide transparency on how the ECB interprets and applies the relevant provisions of Union law, as well as the processes it follows.

They may also set out supervisory expectations or disseminate good practices that we have observed in our interactions with banks such as in the example of our draft Guide on governance and risk culture that we published in July 202414]. The Guide sets out supervisory expectations in those areas, taking into account the diverse governance structures and corporate arrangements stemming from

different national laws across We received very valuable feedback from the industry and in order to ensure consistency, avoid overlaps and undue layers of complexity, we will also take into account the outcome of the European Banking Authority's (EBA) public consultation on the review of their own Guidelines on Internal Governance. We expect this will bring the publication of the final Guide well into 2026.

the Europe.

Having listened carefully to stakeholders and the industry, we understand that sometimes there are still doubts about the legal nature of our guides. In times where supervisors and banks alike attach great importance to reducing undue complexities, | would like to shed the clearest of lights on this very relevant issue. So, let's go one level deeper and unravel the different types of content that a supervisory guide may include in more detail. In doing so, | will distinguish between binding obligations, supervisory expectations and good practices.

## Binding obligations

First and foremost, legally binding requirements are only derived from directly applicable European regulations or directives as transposed into national law. When referring to binding requirements set out in legislation, the ECB supervisory guides use binding language. For example, when we state that banks ""must"", ""need to"", ""shall"", or ""are required to"" act in a certain way, it is because they are obliged to do so by directly applicable European or national law. In such cases we clearly refer to the specific legal provisions. As | said, these obligations are created by the legislator, not by us as a supervisor. We choose to include these obligations in our guides because it makes life simpler for the banks to have the relevant rules and our interpretation of them in one place.

Indeed, where binding obligations are broadly formulated, the ECB may offer its interpretation of the concepts used by the legislatorI. First of all, the ECB regards relevant case law from the Court of Justice that may be available, as the Court of Justice has the ultimate say on the correct interpretation of EU legislation. In the absence of relevant guidance from the Court, the ECB bases its interpretation on existing EBA Guidelines"", or, if they are not available, on its own view as the supervisory authority charged with ensuring the application of the prudential framework. When doing so, the ECB tries to help banks' compliance with the relevant legal provisions. This also promotes consistency in the ECB's supervisory approach and fosters transparency. Banks may, of course, disagree with the ECB's interpretation when applied in a specific case and challenge that particular ECB decision, either by submitting a request to the Administrative Board of Review, or by bringing a legal action against the ECB before the Court of Justice. And banks have not shied away from standing up for their interests by initiating legal proceedings against the EcB.

## Non-legally binding expectations

Second, some areas of the prudential framework are not or only partially covered by binding obligations set by the legislator. However, supervisors may still wish to steer banks' action in these areas in a particular direction to ensure appropriate risk management and coverage. This is where supervisory expectations may come into play.

Let me be crystal-clear: these supervisory expectations do not create new binding obligations on the banks. The ECB therefore communicates its supervisory expectations using non-binding language such as ""the ECB expects banks to..."" or ""banks should aim to"". The ECB publishes supervisory expectations to enhance transparency about its supervisory approach.

## Good practices

And third, there are good practices that represent desirable behaviours in light of the requirements of the legal framework or the ECB's expectations. In banking supervision, the ECB normally speaks of ""good practices"" or sometimes ""sound practices"" or ""observed practices"" to identify specific practices that in our judgment facilitate banks' compliance with legally binding requirements or alignment with supervisory expectations as regards proper coverage and management of prudential risks. The purpose of these statements is therefore not to present ""best practices"", because this would not do justice to the different types, business models and sizes of banks the ECB supervises. A bank can fully meet all regulatory requirements without following any of the examples listed. This is why we welcome feedback and alternative examples from banks where different practices have proven more effective, as they may in turn enrich our compendium of good practices.

Let me be clear again: the good practices we publish do not create new binding obligations on the banks. They are shared as illustrative examples of approaches that, in our experience, have worked well in certain contexts. Their purpose is to foster transparency and help banks reflect on possible ways to strengthen their own risk management and governance frameworks. Consequently, the ECB communicates good practices by using language such as ""the ECB recommends"", ""advises"", or

""considers good practice"".

## How does all of this work in practice?

The starting point of the interactions between supervisors and banks is obviously the regulatory framework. After all, as supervisors we are not rule makers — that's the role of the legislator. We do our job — ensuring banks' safety and soundness — as rule takers on the basis of the applicable regulatory framework as interpreted by the Court, or in light of the relevant EBA Guidelines, or following our own interpretation which may be contained in a guide, as the case might be. When we identify shortcomings in the way a given bank is meeting the regulatory requirements, we take action to bring it back to full compliance with the prudential framework. The specific type of measure is chosen having regard to the peculiarities of the case, the nature of the shortcoming, its severity and other relevant circumstances to ensure a proportionate supervisory reply.

Beyond compliance with binding requirements, we also discuss with banks the prudential risks they are or might be exposed to and their plans about how to manage and cover those risks. When assessing banks' plans in the context of our supervisory dialogue we may consider the expectations set out in our guides. This dialogue often ends positively, with the ECB finding that, having considered the bank's explanations and particular circumstances, the prudential risks it is, or might be, exposed to are sufficiently covered and adequately managed. It is only when this is not the case that the ECB

takes further supervisory steps, which -— following an escalated approach when appropriate — may end up with requiring the bank, for instance, to strengthen specific areas of its internal control framework or hold additional capital.

Does this mean that we are enforcing the ECB's expectations in those particular instances? Not at all. We only take supervisory measures if we are convinced that not all the relevant prudential risks to which the bank is exposed are adequately addressed. And those supervisory measures do not impose our expectations in a binding manner: these measures are designed and tailored to the specific circumstances of the given bank to ensure proper coverage and management of all its prudential risks.

Finally, good practices do not play any other role in our interactions with banks than providing them with a point of reference for designing their systems and operations in a manner that has proven sound for other banks. Obviously, they are never a ground for enforceable supervisory measures, as not every practice is relevant for every bank, and institutions may take different routes to achieve the same sound outcomes.

## Reducing complexity by making supervision more efficient, effective and risk-based

While it is obviously essential to communicate precisely on what is mandatory and what is not to facilitate compliance with the complex regulatory framework and proper coverage and management of relevant prudential risks, it is but one of the elements of our broader drive towards more efficient, effective and risk-based supervision.49 Let me mention a number of other elements as well.

At the heart of our cultural transformation is a comprehensive reform of the Supervisory Review and Evaluation Process (SREP) which we already set in motion back in 2022. We have embraced riskbased supervision through initiatives like the risk tolerance framework and a multi-year approach, which allow us to more effectively focus resources on the most relevant risks. By integrating supervisory activities more seamlessly, leveraging the full breadth of our supervisory toolkit, improving our communication to banks, and reducing unwarranted supervisory burden, we continue to enhance our ability to address challenges dynamically. Today, these reforms are already delivering results: the SREP is leaner and focuses on the most relevant risks, while supervisors communicate key findings to banks in a timelier manner.)

Another example of simplification is our drive to reduce the reporting costs by establishing an integrated reporting framework accessible to statistical, prudential and resolution authorities.

Moreover, we are also reducing undue complexities by streamlining our supervisory processes in our ""next-level supervision"" project.42] This covers areas such as capital-related decisions, on-site inspections and internal models. In the area of governance, with investment in technology we have increased efficiency in the field of fit and proper assessment. For example, we reduced the average processing time from 109 days in 2023 to 97 days in 2024 and for non-complex cases to as little as 61 days meaning that we can dedicate more time and resources to complex cases in line with our risk- based approach. 13]

Lastly, the ECB's Governing Council created the High-Level Task Force on Simplification to develop proposals for simplifying the European prudential regulatory, supervisory and reporting framework, while still maintaining our strong and resilient banking sector in Europe. The high-level task force plans to deliver its proposals for simplification to the Governing Council by the end of 2025, after which they will be presented to the European Commission.

## Conclusion

Let me conclude.

As we are addressing the unwarranted complexities in the European regulatory and supervisory framework, the insights from the Florentine Renaissance could not be more timely.

Simplification does not mean dismantling the foundations of resilience.

The Renaissance architects of Florence mastered the art of simplification by reverting to the solid classical foundations. In doing so they were striving to reduce undue complexities without, crucially, dismantling the very bedrock on which stable edifices are built.

In the same vein, let us tackle overlaps, unwarranted complexity and undue costs without compromising the foundations of resilience on which our stable European banking system lies.

Let us strive for simpler yet stronger rules that allow us to supervise in the most efficient and effective manner. To make sure that banks remain resilient so they can support the real economy in both good and bad times. Because strong and resilient banks are nothing less than the bedrock of long-term competitiveness.

Thank you for your attention.

1.

ECB supervisory guides consider and build on EBA recommendations and guidelines that are issued with a view to ensuring the common, uniform and consistent application of Union law.

2.

On the importance of risk culture see Elderson, F. (2023), ""Treading softly yet boldly: how culture drives risk in banks and what supervisors can do about it"", speech at the 10th Conference on the Banking Union organised by Freshfields Bruckhaus Deringer, the Institute for Law and Finance at Goethe University and the Center for Financial Studies, Frankfurt am Main, 19 September; Enria, A. (2025), Bank of England Governor Bailey &amp; Former Fed Vice Chair for Supervision Quarles to Discuss 'Supervisors on Supervision', 31 July.

3.

For why governance and risk culture are not peripheral issues but at the core of prudential supervision and hence remain a crucial focus for European banking supervision, see Elderson, F. (2025). ""What good supervision looks like"" keynote speech at the 24th Annual International Conference on Policy Challenges for the Financial Sector, Washington DC, 12 June.

4.

This for instance, is the case in the area of governance, where the applicable CRD provisions do not cover a fully specified range of obligations.

5.

Pursuant to Article 16(3) of the EBA Regulation, supervisors shall make every effort to comply with EBA Guidelines.

6.

Article 24(5) Council Regulation 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions.

7. Union.

Article 263 of the Treaty on the Functioning of the European

- 8.

Some 111 cases have been initiated by banks against the ECB since the inception of the Single Supervisory Mechanism. The Court has so far decided on 88 cases and has confirmed the ECB's stance in almost 80% of these.

9.

Good practices are sometimes set out in a publication named as such but can also be communicated as part of the ECB's supervisory guides. For example, in the 2022 thematic review entitled ""Good practices for climate related and environmental risk management"" the ECB shares good practices to help institutions make progress on managing climate-related and environmental risks. In ""Sound practices in counterparty credit risk governance and management"", the ECB presents sound practices in counterparty credit risk governance and management to encourage institutions to improve their risk management capabilities in this area. However, in the ""ECB Guide on outsourcing cloud services to cloud service providers"", in addition to providing transparency on its supervisory expectations, the ECB introduces some concrete examples of actions it has assessed as adequate with ""The ECB considers it good practice..."".

10.

Although the discussions on competitiveness have brought simplification into the limelight, taking continuous stock of the extent to which our processes are efficient and effective is nothing new. Consider that as early as back in 2018 we started to streamline our decision-making processes. One outcome was the delegation framework for routine ECB supervisory decisions. Over the years, we have made significant improvements to how we conduct fit and proper assessments, how we make decisions on banks' own funds and how we interact with banks via our IMAS portal. We have also enhanced transparency regarding our supervisory priorities and begun providing more detailed information about our planned supervisory activities, enabling banks to plan more effectively. All these initiatives have had a tangible impact on banks.

11.

For instance, SREP decisions have become more focused on relevant risks, which ensures clearer communication and quicker SREP decisions. The number of new SREP measures has decreased significantly, with a stronger emphasis on addressing severe findings. SREP decisions are also being issued earlier.!In next year's SREP, we will also implement a revised and simplified methodology to calibrate the Pillar 2 requirement. See ECB (2025), ""SREP reform: towards more efficient and effective supervision"", Supervision Newsletter, 14 May; Buch, C. (2025), ""Reviewing the Pillar 2 requirement methodology"", ECB, The Supervision Blog, 11 March.

12.

simple as possible, but not simpler"". ECB, The Supervision Blog, 8 September.

13.

In addition, while 70% of fit and proper decisions before 2023 had ancillary provisions (including recommendations), no more than 28% of cases had such provisions in 2024, showing that we are focusing specifically on the riskier issues identified. Deploying our digital tools such as Heimdall or the IMAS Portal will help us to further streamline our assessments, improve the level playing field and speed up response time to banks. For certain appointments, such as renewals of mandates, we will further streamline the assessment process.

CONTACT",Frank Elderson
https://www.bis.org/review/r251105b.htm,Claudia Buch: Incentives matter - what is different in banking and what role does supervision play?,"Speech by Prof Claudia Buch, Chair of the Supervisory Board of the European Central Bank, at the Frankfurt School of Finance and Management, Frankfurt am Main, 22 October 2025.",2025-10-22 00:00:00,"SPEECH

## Incentives matter: what is different in banking and what role does supervision play?

## Speech by Claudia Buch, Chair of the Supervisory Board of the ECB, lecture at the Frankfurt School of Finance &amp; Management

Frankfurt am Main, 22 October 2025

| am pleased to be speaking to you today at a university with a strong tradition in financial education and research. Many of you are preparing for careers in banking or other areas of finance. The themes | want to talk about are relevant to your future work in whatever form it will take, either inside or outside the financial sector, in various roles in banks. Your decisions may have many positive effects — but they can also influence the safety of individual institutions or even the resilience of the financial system.

Let me quickly recap where the European banking sector stands now, ten years after the launch of the Banking Union.

Over the past decade, the European banking sector has become more resilient, thanks to better regulation and supervision and to better risk management. Policy support to the real economy during the Covid pandemic and the energy crisis has also indirectly supported banks and helped to preserve resilience. Non-performing loans threatened the survival of many banks at the beginning of the Banking Union more than 10 years ago. Today, these have declined significantly. The capitalisation and liquidity positions of banks have improved.

Preserving resilience and trust in the banking sector is important because the environment in which banks operate remains challenging. Geopolitical risks, including cyber risks, are heightened. Climate and nature related risks are evolving. The digitalisation of financial services is rapidly reshaping the competitive landscape. All this requires banks to adopt long-term strategies and to remain resilient, both operationally and financially.

Trust is indeed a key asset for banks. Its value depends on the incentives banks have to act in the best interests of different stakeholders and to pursue sustainable, long-term business models.

Tilting incentives towards the long term also brings benefits from a market perspective. While markets may reward risky, short-term strategies, they have a long memory when banks fail.

Banking crises indeed leave lasting scars. Individuals who have lived through a banking crisis often develop persistent scepticism about banks."" An erosion in trust can last for a long time, as can people's memory of recessions. Individuals who experience economic downturns during their formative often remain risk-averse their lifetimes.

years financially throughout 2]

So today I'd like to talk about the safety and soundness of banks: why trust and incentives matter, what has been achieved so far and where more progress needs to be made. | would like to stress three points.

First, misaligned incentives in banking are costly for society. Banking crises have long lasting effects on growth, labour markets and public finances.

Second, aligning incentives is in the best interest of the public and actually banks themselves: sound governance strengthens trust, supports sustainable business models and reduces the likelihood of crises. Regulation plays a key role in ensuring that societal preferences are fully taken into account.

Third, progress has been made since the global financial crisis to improve governance and risk management. But in the current highly uncertain environment further strengthening and consolidating these efforts is needed to navigate banks safely through troubled waters.

## Costs of misaligned incentives in banking

Incentives matter in banking.) If incentives are well aligned, borrowers make sufficient efforts to repay loans, banks avoid excessive risk taking, managers and board members take decisions that support a bank's long-term franchise value and that reduce the risk of failure. This protects depositors and supports financial stability.

However, if incentives are not well aligned, risks may reach a level that depositors and society are unwilling to tolerate. Borrowers may exploit information asymmetries, and banks may take on excessive risk, ultimately threatening the bank's survival. Taxpayers may have to step in to protect depositors.

Limited liability as a defining feature of corporate finance plays a role here: shareholders gain when the bank performs well, but their potential losses are capped at the amount invested. The separation of personal and financial risk has benefits — it can encourage entrepreneurship, capital formation and innovation. Yet, in bad states of the world, part of the loss may be borne by others, such as creditors, depositors or ultimately taxpayers. Similarly, managers whose pay depends on short term results may share in the upside but not fully in the downside of risky strategies. Such asymmetric payoffs can lead to moral hazard when information asymmetries prevail, when monitoring and control systems are weak./4] Regulation and supervision thus play an essential role in realigning incentives and limiting excessive risk-taking.

Deposit insurance is relevant in this context: it plays a vital role in safeguarding financial stability by protecting depositors against losses and reducing the risk of bank runs. At the same time, because it lessens the need for depositors to monitor banks' behaviour directly, it can give rise to moral hazard. This is why supervision is essential -supervisors act as ""delegated monitors"" on behalf of depositors to ensure that risks are properly managed.

Aligning incentives requires digging deeper into the relationship between various stakeholders.

First, the objective function of banks and the broader interests of society may diverge. Banks may find it profitable to chase high-yield assets or expand into lucrative markets. But the risks that build up along the way may have to be borne by others.

Second, management and shareholders may have diverging incentives. The separation of ownership and control can prompt executives to prioritise short-term gains over the bank's long-term franchise value.

Third, units that generate revenue can have different incentives than risk management and control functions. If front-office staff focus on risky, short-term strategies, the effectiveness of control functions may be weakened.

Fourth, shareholders and banks' creditors may not always want the same thing. Shareholders benefit when banks take on more leverage because it amplifies potential returns, while their losses remain capped. Creditors and depositors, in contrast, value stability, and their returns are more protected by higher capital and thus lower leverage.

When banks take excessive risks and crises erupt, the costs for society are steep. Recessions following systemic banking crises are deeper and longer than normal recessions. Unemployment rises more sharply. Massive fiscal interventions were often needed in the past to support failing banks and avoid even greater damage. On average, governments spend around 6-7% of GDP in advanced economies or around 10% in emerging markets to support banks. a Following banking crises, public debt climbed by around 20% of GDP on average within just a few years. 8] These are high costs which are distributed unevenly across society and which constrain public finances in the longer term.

Two recent bank failures demonstrate that banking crises are certainly not a historical anomaly.

In March 2023, Credit Suisse was on the brink of collapse and was eventually taken over by UBS. The bank met formal capital and liquidity requirements, but it suffered from deficiencies in risk management and corporate governance.

Similarly, in the US-based Silicon Valley Bank, board and management failed to properly manage key risks, including interest rate and liquidity risks.4.0 Despite the relatively small size and regional orientation of the bank, contagion was a key concern.

In both cases, the immediate crisis symptoms were rapid deposit outflows and stressed liquidity positions. But the root cause was not a lack of liquidity or capital, it lay deeper: governance and risk-management failed in the banks, and supervisory intervention was often insufficient.)

When the fault lines were exposed, policy interventions reduced the risk of contagion and prevented the crises from spreading. Central banks provided liquidity assistance, fiscal guarantees were granted and, in the United States, deposit insurance coverage was widened under a systemic risk exception. [12]

Such banking crises show how misaligned incentives and poor governance can be costly for individual banks, but even more so for society.

So what can be done to align incentives? How can decision-makers in banks be incentivised to pursue sustainable, long-term business models?

Good governance and risk management are key to align incentives. Of course, the need to foster a culture where safety is everyone's responsibility is not unique to banks. In aviation, for instance, risk management has significantly improved, through both technical improvements and empowering employees to halt operations if they spot dangers.""

However, banking differs. Bank managers take decisions in highly uncertain and risky environments. Decisions which increase short-term profits may lead to losses only after a long period of time. Risks can evolve in complex ways within the financial system. Because banks transform short-term liabilities into long-term assets and manage risks that are often interconnected across markets and geographies, their true risk profile can be more difficult to observe than in most other industries. This opacity makes it harder to align incentives and achieve effective governance. 14] Strong regulatory standards and supervision are therefore essential to ensure that risks are managed well.

## Designing good governance and incentives systems within banks

Well-designed governance structures can align incentives within banks. These include clear accountability between boards and shareholders, balanced coordination between revenue-generating units and control functions, and a focus on long-term franchise value rather than short-term gains. Yet, when these mechanisms are weak or poorly implemented, incentives can become distorted, leading to excessive risk-taking or short-termism.

Sufficient capitalisation is a strong incentive device: with higher capital, owners have more ""skin in the game"" and lose money in case risky strategies fail. This is particularly important in banking, where institutions benefit from public safety nets such as deposit insurance and access to central bank liquidity.

Strong bank capitalisation has other positive effects too. Well capitalised banks also lend more and are more competitive. There is clear evidence that the better capitalisation of banks achieved since the crisis has not impaired their ability to serve corporates and households.)

Within banks, risk management and control functions ensure that risks are well managed and that governance mechanisms do not favour short-termism. Around 3% of banks' staff work directly in risk functions — more than in other industries. Unlike most non-financial firms, banks are required to have dedicated chief risk officers and integrated risk management frameworks, reflecting the complexity of their activities and the regulatory expectations they face 14

Pay structure matters. Clearly, pay structures differ across institutions and countries, shaped by cultural and legal differences. But, generally speaking, a high share of variable pay may incentivise decision-makers to focus on risky strategies that drive short-term profits. Data collected by the European Banking Authority (EBA) shows that high and variable pay is rather concentrated at the top. In retail banking, staff receives variable pay of about 16% of their fixed pay.) In investment banking, this ratio is about 47%. More than 2,300 bankers in Europe earn more than €1 million a year, representing less than 0.1% of the total workforce in banks. 18]

Because variable pay can encourage short-term risk-taking, EU rules require a large share of it to be deferred and paid in instruments whose value depends on the bank's long-term performance. In practice, around half or more of variable pay is deferred in banks and investment firms, helping to align individual rewards with sustainable outcomes.12]

Finally, hiring practices matter — particularly as regards key managerial and board functions. Attracting diverse profiles and fostering a culture of trust and responsibility within banks is essential. Formal governance mechanisms and financial incentives alone cannot shape behaviour. How risks are perceived, discussed and acted upon depends critically on the values and norms within an organisation. A strong risk culture reinforces prudent behaviour, accountability and open challenge. Weaknesses, by contrast, can create blind spots, excessive risk-taking and failures to escalate concerns. Risk culture is thus the channel through which incentives translate into tangible outcomes.

## The role of regulation and supervision

Internal mechanisms are important for aligning incentives within the bank. But in a sector as complex as banking, regulation and supervision are needed to ensure alignment of incentives with public interests.

It is sometimes argued that regulation and supervision come at too high a cost. However, a system without regulation or supervisory guidance, relying solely on industry self-regulation, would be even costlier.

Without common benchmarks, coordination would likely fail, and market trust in the industry's ability to uphold sound governance and risk management standards would be weaker.

So let's turn to the role of regulation and supervision. What are the objectives, which instruments are used to achieve them?

The 2007-08 global financial crisis revealed that bank capital and liquidity regulation alone was not sufficient to address fundamental governance issues in banks. 20]

To be very clear: capital and liquidity requirements were too lax prior to the crisis, leaving banks severely undercapitalised when the crisis struck. As a result, massive policy intervention was needed to recapitalise banks and cover losses using taxpayers' money. And that is even before considering the adverse long-term implications for the economy and society.

Capital and liquidity regulation was therefore tightened, making the system more resilient. In addition, new institutional mechanisms were designed and additional loss absorbing capital has been required to address the too-big-to-fail issue and make larger banks resolvable.

But there was a broader lesson to be learned: supervision and regulation needed to pay greater attention to what happens within banks, how decisions are taken, how the incentives of those taking decisions can increase the costs to others. 24]

Defining what ""good governance and risk management"" means is not easy. Aligning incentives is about how people are managed, how they behave and how motivated they are. This is highly dependent on the societal and legal environment. Hence there is no ""one-size-fits-all' strategy.

While recognising this, it is still possible to define good practices. In the aftermath of the global financial crisis, the international community set international standards for governance and risk management within the financial sector. The Financial Stability Board (FSB) issued principles for sound compensation practices and related implementation standards, 22] key principles for effective risk appetite frameworks!23] and a framework for assessing risk culture.!""4] The FSB's thematic review on risk governance underscored the importance of strong board oversight, an independent risk function and a robust risk culture.[25]

Similarly, the Basel Committee of Banking Supervision (BCBS) issued guidelines on corporate governance principles for banks, which emphasised the roles of boards, senior management and internal control functions. It set standards for banks' governance and the supervision of governance arrangements, 24] in the areas of remuneration risk alignment, 22] internal audit 22] and risk data aggregation and risk reporting.2

These international initiatives have addressed governance issues and deficiencies in risk management exposed during the financial crisis and established international standards and sound principles for bank governance and supervision.

In Europe, the Capital Requirements Directive (CRD) establishes principle-based requirements that need to be applied in national law.24 The European Banking Authority (EBA) promotes convergence in how supervisors apply these requirements, helping to ensure that banks have sound and robust governance arrangements in place.

Taking these guardrails into account, ECB Banking Supervision applies relevant European rules and their national implementation. Supervisors do not manage banks. Managers and boards are responsible for good governance and risk management frameworks. We make sure that these comply with the EU regulatory framework, and we ensure consistency in our approach across banks.

In our annual Supervisory Review and Evaluation Process (SREP), we assess banks' governance and risk management using a methodology based on the EBA's Guidelines.22] If we identify shortcomings, we issue decisions with requirements or recommendations for banks.

In addition to governance, the SREP focuses on the soundness of banks' capital, liquidity and business models. Arguably, capital and liquidity are easier to measure and quantify than governance. Judgement is needed to determine what a good governance structure looks like and how effectively it functions in practice. This is why the supervisory dialogue with banks and supervisory assessments rely on qualitative assessments and forward-looking judgements rather than on mechanical indicators.

## [33]

Banks have therefore asked us what we consider to be good practice and to be transparent about this. In response to these requests for clarity and transparency, last year the ECB published a draft guide on governance and risk culture for public consultation. The consultation attracted over 1,000 comments from around 30 stakeholders. We are now carefully reviewing the comments. The ECB is also taking into account the European Banking Authority's parallel review of its Guidelines on internal governance.

Fit and proper assessments of the members of banks' management bodies are another important supervisory tool. The ECB is responsible for these assessments in the banks it supervises directly. The purpose is to ensure that individuals, and a bank's management body collectively, are suitable and have the necessary experience, reputation, independence of mind and time to perform their roles effectively.

Finally, let me stress that supervisors, like banks, need sound incentives and strong governance frameworks. 24] European banking supervision is designed with checks and balances to ensure consistent, fair and independent decision-making. Clear supervisory frameworks guide our work. Regular rotation of supervisors helps maintain objectivity and fresh perspectives. A dedicated ""second line of defence"" — an independent horizontal function — benchmarks assessments and decisions across banks. The aim is to preserve the room for judgement in day-to-day supervision while achieving consistency through independent internal checks. In addition, accountability arrangements and internal administrative review mechanisms ensure that supervisory decisions are transparent and can be challenged.)

## There has been progress — but not enough

Having the right incentives in place is important for trust in banks. Yet, it is difficult to measure progress under the post-crisis reform agenda. Changes in incentives and behaviour cannot be quantified. But we do have indicators showing both the progress made and the areas that remain a concern.

So, what do these indicators tell us?

Since the global financial crisis, the focus of supervisors has shifted to governance and risk management. In these areas, there are typically many open findings and subsequent supervisory measures. 24]

ECB supervision is no exception. SREP scores for governance and risk management have been relatively stable over time. In 2024, 85% of banks were concentrated around a score of 3 (broadly unsatisfactory), reflecting weaknesses in the effectiveness of their management bodies and internal control functions.

Around one third of supervisory measures were aimed at improving management bodies. For example, banks need to ensure effective reporting from internal control functions to management bodies, allowing boards to better oversee emerging and compliance risks. Another example is asking Nomination Committees to assess the collective suitability of management bodies, and strengthen expertise through training and succession planning.

Moreover, improving risk data aggregation capabilities remains one of our supervisory priorities.24 These refer to a bank's ability to produce accurate, timely risk data and reliable reports for decisionmaking. Yet, many banks still fall short of sound risk data aggregation capabilities, not least because improvements require major investments in IT and data systems.

Last year, we conducted a benchmarking exercise on remuneration on a sample of 20 banks and identified some good practices, including:

- &gt; key performance indicators related to the remediation of supervisory findings as part of remuneration packages;
- &gt; regular group-wide reviews of remuneration policies;
- &gt; internal bodies advising on improvements in risk management.

But we also found room for improvement in terms of:

- &gt; unclear roles for internal stakeholders in remuneration processes;
- &gt; risk perspective being insufficiently reflected in remuneration and incentive frameworks, including an over-reliance on profitability indicators and insufficient reliance on banks' risk appetite frameworks;
- inadequate ex post risk adjustments of bonuses. |39]

Supervisors also engage with banks to ensure that the lessons from stress tests translate into concrete improvements in their risk management practices and internal controls. Stress testing was introduced after the global financial crisis to strengthen forward-looking risk management. But stress tests do not only assess capital resilience under adverse scenarios, they also help banks identify weaknesses in their risk data, modelling, and governance frameworks.

Fit and proper assessments provide additional evidence of how supervisory interventions can make a difference to governance.44 Linking supervisory approvals of candidates with binding ancillary provisions, if needed, can improve outcomes in terms of governance. Such provisions can be requirements for additional training or enhanced oversight.

Finally, the link between pay practices and risk-taking incentives has been analysed empirically. Evidence from European banks shows, for example, that the link between performance and pay is strongest in investment banking.41] In these areas, pay is rather sensitive to short-term performance. This can amplify incentives for risk-taking, especially when rewards are closely tied to immediate profits or shareholder returns. This underscores the importance of ensuring that pay structures reward sustainable performance rather than short-term gains.

## Summing up

Taking and allocating risks is the raison d'étre of financial markets. Financial markets indeed provide ample opportunity to increase short-term profits by taking on more risks.

Yet, there is a downside — distorted incentives in finance, short-termism and excessive risk-taking can have high social costs. That is why society cannot rely on self-regulation, why financial institutions are regulated and supervised — to ensure sound governance and effective risk management.

After the global financial crisis, supervisors have strengthened their focus on governance and risk management. The European banking sector has become better capitalized and more resilient. Its ability to serve its customers has not been impaired.

Despite the progress that has been made, key questions remain. Have reforms effectively changed behaviour? How does risk culture shape daily decision-making inside institutions? These are questions banks need to ask internally, supervisors need to focus on — and we also need more research to get answers.

Good governance is especially important today, in an environment of geopolitical uncertainty and pressure on traditional banking models from digitalisation. Banks need strong governance and sound risk management to remain both resilient and competitive. Chasing short-term objectives or trying to outperform the real economy by taking on higher risks may seem attractive, but it ultimately weakens banks in the long run. Instead, aligning incentives with the interests of banks' stakeholders and resisting short-termism strengthens banks' competitiveness and supports more sustainable business models.

And for those of you preparing to enter the world of finance, this responsibility will one day rest with you. The choices you make — how you weigh opportunity against risk, how you balance private gain with the public good — will help determine not only the resilience of your institutions, but also the trust on which our financial system depends.

1.

Kerola, E., Weill, L. and Fungaéova, Z. (2020), ""Experience of banking\_crises reduces trust in banks"", VoxEU, 28 March.

2.

Malmendier, U. and Nagel, S. (2011), ""Depression Babies: Do Macroeconomic Experiences Affect Risk Taking?"", The Quarterly Journal of Economics, Vol. 126, No 1, February, pp. 373-416.

3.

For a review of the microeconomics of banking, see Freixas, X. and Rochet, J.-C. (2023), Microeconomics of Banking, third edition, MIT Press, 22 August. The relevant empirical evidence is summarised in Degryse, H., Kim, M. and Ongena, S. (2009), Microeconometrics of Banking: Methods, Applications, and Results, Oxford University Press, 16 July. The role of banking supervision and regulation to reduce agency problems between banks and depositors in the presence of deposit insurance has been analysed by Dewatripont, M. and Tirole, J. (1994), The Prudential Regulation of Banks, MIT Press, 20 December.

- 4.

Jensen, Michael C., and William H. Meckling (1976). ""Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure."" Journal of Financial Economics, 3(4), 305-360.

5.

Diamond, D.W. and Dybvig, P.H. (1983), ""Bank Runs, Deposit Insurance, and Liquidity,"" Journal of Political Economy, 91(3), pp. 401-419.

6.

Reinhart, C.M. and Rogoff, K.S. (2014), ""Recovery from Financial Crises: Evidence from 100 Episodes"", American Economic Review, Vol. 104, No 5, May, pp. 50-55.

Laeven, L. and Valencia, F. (2018), ""Systemic Banking Crises Revisited"", IMF Working Papers, No 18/206, International Monetary Fund, 14 September. The authors study more than 150 episodes of banking crisis since the 1970s. They find that direct fiscal outlays to support banks typically amount to about 6—7% of GDP in advanced economies (around 10% in emerging markets), accruing mainly in the first few years after the crisis, while public debt rises by roughly 20% of GDP over the following four to five years.

8.

Laeven, L. and Valencia, F. (2012), ""Systemic Banking Crises Database: An Update"", IMF Working Papers, No 12/163, International Monetary Fund, 1 June.

9.

Swiss Financial Market Supervisory Authority (FINMA) (2023), Lessons Learned from the CS Crisis, report, Bern, 19 December.

10.

Board of Governors of the Federal Reserve System (2023), Review of the Federal Reserve's Supervision and Regulation of Silicon Valley Bank, 28 April

11.

See Board of Governors of the Federal Reserve System (2023), Review of the Federal Reserve's Supervision and Regulation of Silicon Valley Bank, 28 April; and Basel Committee on Banking Supervision (2023), Report on the 2023 banking turmoil, October, p. 26. FINMA (2023), op. cit. 12.

Joint statement by the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation and Department of the Treasury, 12 March 2023.

13.

See, for example, Khadivar, H., Fardnia, P. and Walker, T. (2025), ""Flying safe: The impact of corporate governance on aviation safety"", Journal of Air Transport Management, Vol. 124, April.

14.

Mehran, H., Morrison, A. and Shapiro, J. (2011), ""Corporate Governance and Banks: What Have We Learned from the Financial Crisis?"", staff report, No 502, Federal Reserve Bank of New York, June.

15.

For repositories of evaluation studies and frameworks, see Financial Stability Board, Evaluation Reports; Basel Committee on Banking Supervision, Current data collection exercises; and Organisation for Economic Co-operation and Development, Regulatory reform.

16.

Global Risk Institute (2019), Enterprise Risk Management Benchmarking Study: A Focus on Financial Institutions, 1 May.

17.

These numbers are for the years 2023. See EBA Report, Benchmarking of remuneration trends and practices and the gender pay gap, 2021-2023 data, EBA/Rep/2025/15

18.

These numbers refer to the change in 2022 for 27 EU Member States and the three additional European Economic Area member countries. See European Banking Authority (2024), EBA Report on High Earners — Data as of end 2022, April.

19.

EBA Report, Benchmarking\_of remuneration trends and practices and the gender pay gap,\_2021-2023 data, EBA/Rep/2025/15

20.

See Admati, A. and Hellwig, M. (2024), The Bankers' New Clothes: What's Wrong with Banking and What to Do about It, Princeton University Press, Princeton, for a clear explanation of how inadequate capital requirements and flawed governance contributed to the crisis; Johnson, S. and Kwak, J. (2010), 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown, Pantheon, New York, for a political economy perspective on regulatory capture and systemic risk; and Gorton, G.B. (2010), Slapped by the Invisible Hand: The Panic of 2007, Oxford University Press, Oxford, for an account of the role of short-term funding markets in triggering the crisis. For the European dimension, see PisaniFerry, J. (2014), The Euro Crisis and Its Aftermath, Oxford University Press, Oxford, which examine how structural weaknesses in the EU banking sector and institutional framework shaped the response to the crisis.

21.

De Nederlandsche Bank (2015), Supervision of behaviour and culture — Foundations, practice and future developments.

22.

Financial Stability Forum (2009), ESF Principles for Sound Compensation Practices, 2 April; Financial Stability Board (2009), /mplementation Standards for the FSB Principles for Sound Compensation Practices, 25 September.

23.

Financial Stability Board (2013), Principles for an Effective Risk Appetite Framework, 18 November.

24.

Financial Stability Board (2014), Guidance on Supervisory Interaction with Financial Institutions on Risk Culture: A Framework for Assessing\_Risk Culture, 7 April.

25.

Financial Stability Board (2013), Thematic Review on Risk Governance, 11 February.

26.

27.

Basel Committee on Banking Supervision (2012), Core Principles for effective banking\_supervision, 14 September; Basel Committee on Banking Supervision (2024), Core Principles for effective banking supervision, revised version, 25 April.

28.

Basel Committee on Banking Supervision (2011), Range of methodologies for risk and performance alignment of remuneration, 12 May.

29.

Basel Committee on Banking Supervision (2012), The internal audit function in banks, 28 June.

30.

Basel Committee on Banking Supervision (2013), Principles for effective risk data aggregation and risk reporting, January.

31.

More specifically, the CRD (Articles 74, 76, 88 and 92-95 on remuneration) sets principle-based requirements that need to be further transposed into national law by Member States. Many relevant rules on banks' governance and risk management are therefore defined in national legislation. The EBA issues guidelines explaining how legal requirements should be applied.

32.

See ""Element 2: Internal governance and risk management"" in ECB (2024), Supervisory methodology 2024..

33.

Enria, A. (2025) ""Moving the Dial: Fostering a Culture of Supervisory Effectiveness"", Forum on Financial Supervision, 9 October

34.

Elderson, F. (2023), ""Powers, ability and willingness to act — the mainstay of effective banking supervision"", speech at the House of the Euro, 7 December.

35.

See Administrative Board of Review, ECB Banking Supervision

36.

Enria, A. (2025) ""Moving the Dial: Fostering\_a Culture of Supervisory Effectiveness"", Forum on

Financial Supervision, 9 October

37.

See the section entitled ""Element 2: Internal governance and risk management"" in ECB (2024), Aggregated results of the 2024 SREP, 17 December.

38.

The sample of 20 banks was chosen to ensure diversity in terms of business models, size, risk profiles and geographical representation across participating countries.

39.

Ex post risk adjustments ensure that remuneration can be appropriately reduced in case of downturns in the bank's performance or when excessive risks materialise (as stated in paragraphs 290 and 295 of the EBA's Guidelines on sound remuneration policies under Directive 2013/36/EU), thus ensuring incentives are aligned with the bank's long-term interests and risks, in line with Article 94(1)(i) of the CRD.

40.

Van Breemen, V., Faella, F., Scheins, C. and Schwarz, C. (2025), ""The importance of the SSM's fitness and propriety work for banks' performance — evidence from 10 years of SSM work"", Working Paper Series, No 3115, ECB.

41.

Stieglitz, M. and Wagner, K. (2020), ""Marginal Returns to Talent for Material Risk Takers in Banking"" IWH Discussion Papers 20/2020, Halle Institute for Economic Research (IWH).

CONTACT",Claudia Buch
https://www.bis.org/review/r251105i.htm,Luigi Federico Signorini: Africa growth and opportunity - Research in Action conference,"Speech by Mr Luigi Federico Signorini, Senior Deputy Governor of the Bank of Italy, at the Research in Action conference, organised by the Bank of Italy, the Italian Ministry of Economy and Finance and the World Bank Group, Palermo, 3 November 2025.",2025-11-03 00:00:00,"## Luigi Federico Signorini: Africa growth and opportunity - Research in Action conference

Speech by Mr Luigi Federico Signorini, Senior Deputy Governor of the Bank of Italy, at the Research in Action conference, organised by the Bank of Italy, the Italian Ministry of Economy and Finance and the World Bank Group, Palermo, 3 November 2025.

* * *

Ladies and gentlemen,

It is a pleasure to open this conference, organised jointly by the Bank of Italy, the Italian Ministry of Economy and Finance and the World Bank Group, and devoted to discussing Africa's development and the role of international cooperation in fostering it.

By 2050, one person in four will be African. 1   By 2030, half of all new entrants to the world's labour force will come from Sub-Saharan Africa. 2   This demographic transformation is both an immense opportunity and a major responsibility. It can become a powerful engine of growth, if supported by education, infrastructure, and sound institutions. International cooperation remains an important part of the strategy needed to achieve this goal.

The effectiveness and impact of all available resources and investments should be maximised. Increasing budget pressure on official development assistance around the world makes this even more necessary. Action-oriented research, such as the Conference title suggests, is therefore important. Let me mention here that the Bank of Italy welcomed and supported the recent expansion of the World Bank Group's Rome Hub. Its enhanced mandate will cover research, capacity building and operations, with a special focus on Africa. Its success hinges on close collaboration with African authorities and cultural institutions. Today's conference will present the first, valuable results of this project, and discuss the way ahead.

In recent decades, several African countries have grown considerably, yet most economies remain well below the global average in terms of GDP per capita. 3   The potential for innovation and entrepreneurship in the continent is supported by rapid urbanisation, digital adoption, and a growing middle class; 4   at the same time, structural challenges persist. Challenges and opportunities need the interaction of farsighted policy action at the global and at the local level.

Let me focus on four aspects.

First, infrastructure. Africa needs investment in physical infrastructure for energy and transport, as well as in infrastructure supporting digital connectivity, human capital and finance. Good infrastructure improves productivity, fosters innovation, and supports trade, both within the continent and with other regions. Investing in people is also vital, as technological progress offers great opportunities, but only a well-educated and adaptable workforce can seize them.

Investment requires a flow of internal and external capital. Whatever their origin, capital flows are enhanced by a stable macroeconomic environment and by strong, transparent institutions that protect investors' rights and foster an efficient use of resources. This is necessary both for attracting international private capital and for mobilising domestic resources. Developing local financial markets should be a policy goal, wherever feasible. Domestic and international investment, if successful, will reinforce each other.

International cooperation, both bilateral and multilateral, remains critical for much infrastructural investment. It provides resources for growth-oriented investment in cases when private returns are too low or uncertain. It offers technical assistance where required. Less obviously, but no less importantly, it can mitigate the uncertainties and information asymmetries that often affect private investment in developing economies, making it scarcer, more costly and more volatile than it could otherwise be. By leading by example, disseminating information, promoting transparency and good governance, and showing concrete results on the field, multilateral development banks - first and foremost the World Bank Group - can make a difference. They also play a key role in enhancing human capital: the Bank of Italy is proud to be contributing to this line of action through our partnerships with the World Bank, the African Development Bank, and European education and research institutions.

My second point concerns trade. For decades, trade has been one of the strongest drivers of economic growth. It stimulates productivity and fosters innovation. Together with improved infrastructure, trade can contribute to diversifying Africa's economies and increase their role in high value-added segments of the global value chains. WTO Director-General Okonjo-Iweala will surely touch on these topics during the Mattei Lecture she is due to deliver to this audience tomorrow.

Prospects for global trade are today, regrettably, more uncertain than they have been for a long time. In the current context, marked by fragmentation and tensions, enhancing trade ties within Africa and between Africa and other regions is a priority. The African Continental Free Trade Area (AfCFTA) is a step toward continental integration. Italy and Europe are open. The EU's Global Gateway, as well as the G7 Partnership for global infrastructure and investment, will contribute to Africa's development strategies and to the continent's green and digital transformation.

Italy has devoted special attention to African countries, notably with the Mattei plan, now in its implementation stage; Minister Giorgetti has just taken the opportunity to explain the Italian government's actions and priorities in this field.

My third point is about debt. Rising debt-to-GDP ratios and a shrinking fiscal space are not just an African issue these days. In Africa, however several countries have reached a crippling level of external debt.

Addressing external debt vulnerabilities is urgently needed. It is not a question of who is to blame: whether investors' recklessness, exogenous global financial-market oscillations, or bad use of borrowed money. Whatever the reason, where debt is unsustainable, it must be restructured; as a market-economy principle, this is true of

countries no less than of companies. For countries, however, an unbearable debt burden not only constrains public investment and discourages private capital: it can undermine people's livelihoods and endanger social stability and peace.

The framework for sovereign debt restructuring, never straightforward, has become even more complex, also in connection to changing patterns in the international creditor community. Progress has recently been made, and most ongoing cases have by now moved toward completion; but the process remains too slow and uncertain.

In extreme cases, debt forgiveness is a moral obligation. More generally, however, debt restructuring is an unavoidable fact of economic life. The pain it inflicts on both debtors and creditors can be mitigated by a predictable and fair approach to debt resolution. Further improving debt restructuring processes, including under the G20 Common Framework, is needed; achieving it requires, in turn, earnest multilateral cooperation. An efficient arrangement should be crafted in a way that strives to prevent repeated defaults - through well-designed contracts and institutional arrangements - so that the resources released are used efficiently, and, looking ahead, capital can confidently flow to where it is needed, at a moderate price.

My final point concerns payments. This issue is part of central banks' own responsibilities, and it is crucially important for millions of households and small companies.

Remittances are a special concern for developing countries, and Africa in particular. Remittance flows to developing countries reached $700 billion in 2024, exceeding FDIs and official aid combined. 5   The flows of remittances from Africans working abroad are a major source of external finance for the continent. They provide stability to families and communities and support consumption and investment.

Remittances are also an important financial link between Italy and Africa: in 2024, recorded flows from migrant workers in Italy to their African families amounted to 2 billion euro. 6

People wishing to transfer money to and from developing countries often face high costs and long execution times. This happens mainly because of fragmented infrastructure, limited competition and lack of regulatory alignment. The cost of sending money to Africa remains the highest in the world, averaging around nine percent for Sub-Saharan Africa. It is particularly high for intra-African remittances, exceeding thirty percent for some corridors. 7

Improving cross-border payments, including through linking local fast payment systems, can make transfers faster, cheaper, and safer. The experience of the Bank of ItalyWorld Bank initiative in the Western Balkans, currently underway, is showing the value of cooperation in this area. Similar approaches could be extended to African partners. We stand ready to help.

Ladies and Gentlemen,

In the past few decades, globalisation and market-oriented reforms have lifted millions out of poverty in many areas of the world. Strong and open institutions, robust

partnerships, as well as enhanced flows of trade, finance and ideas, can offer enormous opportunities to improve the economic well-being of many more millions. Now it is Africa's turn. The continent's immense human, natural and entrepreneurial resources can and should be unlocked.

I have not discussed so far, but I feel compelled to mention before closing my remarks, that, in several African countries, civil wars and internal strife are still causing enormous human and social suffering. These conflicts remain a major source of economic stagnation, institutional fragility, and stalled reform processes, with severe negative spillovers on neighbouring countries. We can only hope - and work to ensure - that these conflicts soon find a peaceful resolution, while sustained economic and social progress may, in time, help make such tragedies less likely to occur again.

Despite all the difficulties, multilateral institutions remain a key factor. They need to reform and become more targeted, focused and efficient. At the same time, as global tensions, and - sadly - armed conflicts, have increased, well-designed international and regional partnerships hold significant promise for creating further effective channels for development. In developing countries, a stable macroeconomy, open and accountable institutions and the prevalence of the rule of law can help mobilise resources, from private investors, donors and official sources alike. The fact that many developing countries have weathered the latest financial storms much better than previous ones has proved that reforms pay.

For international cooperation to happen, mutual understanding - across geographical and cultural differences - is the starting point. Let me conclude by making a brief reference to the building where our meeting is taking place. The Palazzo dei Normanni was built more than a thousand years ago, over even older fortifications, as the residence of the rulers of the island of Sicily; it is, to this day, the seat of the legislative assembly of this autonomous region. In the first half of the 13th century, it was inhabited by Frederick II, King of Sicily as well as King of Germany, King of Italy and Holy Roman Emperor. He was known as , the wonder of the world, for his outstanding stupor mundi political and cultural achievements. He spoke many languages and was curious about many fields of knowledge. As King of Sicily, he took pride in being open to the many traditions he found in this melting pot of an island (Sicilian and Italian, German, Norman, Greek, Latin, Arab, Jewish). Largely thanks to his encouragement and openness, Sicily became a cradle for the rebirth of European culture after the Dark Ages.

Frederick II showed that mutual understanding between cultures - across faiths, languages and seas - is not a weakness but a strength. Eight centuries ago, he fostered dialogue between the northern and southern shores of the Mediterranean Sea - that is, between Europe and Africa -, proving that wisdom knows no borders.

- 1  African Union (2023). Continental Report: African Agenda 2063 and the Global Context - Final. Addis Ababa: African Union. Available at this link.
- 2  International Monetary Fund. Regional Economic Outlook: Sub-Saharan Africa - Jobs , DC: IMF, October 2024, p. 1. Available at this . Note. Washington link

- 3  World Bank. 21st-Century Africa: Governance and Growth.
- 4 https://www.ifc.org/en/insights-reports/2024/digital-opportunities-in-african-businesses.
- 5  World Bank, World Development Indicators; IMF, . Balance of Payments Statistics
- 6  Banca d'Italia, statistical data. Foreign workers' remittances
- 7  World Bank, database (data as of 2025 Q1). Remittance Prices Worldwide",Luigi Federico Signorini
https://www.bis.org/review/r251118j.htm,Gabriel Makhlouf: Publication of the Financial Stability Review 2025:2,"Opening remarks by Mr Gabriel Makhlouf, Governor of the Central Bank of Ireland, on the publication of the Financial Stability Review 2025:2, Dublin, 17 November 2025.",2025-11-17 00:00:00,"## Gabriel Makhlouf: Publication of the Financial Stability Review 2025:2

Opening remarks by Mr Gabriel Makhlouf, Governor of the Central Bank of Ireland,  on the publication of the Financial Stability Review 2025:2 , Dublin, 17 November 2025.

* * *

Welcome to the Central Bank for the release of the second Financial Stability Review of 2025.

Since the last Review in June, we have seen an easing in trade policy uncertainty, with more clarity on tariffs in the short-term. But uncertainty remains high; it will take time for the economic effects of new trading arrangements to become apparent, and the steady state of those relationships over the medium-term remains unclear. Still, near-term global growth forecasts have improved modestly since the last . By contrast, Review risks stemming from developments in global financial markets have increased.

Let me focus on three areas in particular.

First, there is a continued disconnect between elevated levels of economic uncertainty and stretched market valuations, as equity prices have reached record highs, while corporate bond spreads are compressed. High equity valuations are driven by US technology and artificial intelligence related stocks, supported by expectations of strong earnings growth. A negative development in the outlook for these companies could lead to a market correction. Given the significant exposure of global investors to US markets, this could in turn lead to a shift in broader risk sentiment and a repricing in other markets.

Second, recent high-profile bankruptcies in the US have raised questions about lending standards by non-banks in private credit markets, amid a scarcity of information around lending practices in these markets. More broadly, in light of elevated leverage or liquidity mismatches, certain segments of the NBFI sector have the potential to amplify adverse market shocks, given they provide funding for banks, hold sovereign debt and are significant investors in global equity markets.

Third, fiscal deficits are rising in many advanced economies leading to higher debt burdens. As well as increasing public debt ratios and placing pressure on government expenditure, this reduces the ability of fiscal policy to respond effectively and support the economy during a downturn. With markets charging low spreads on sovereign debt, a sudden shift in sentiment could lead to unplanned fiscal corrections and wider market disruption, given the centrality of government debt in the global financial system.

A broader backdrop to these global financial developments is an increased focus internationally on the efficiency of financial regulation. History tells us that there are clear political economy-driven cycles in financial regulation and supervision. At a global level, we seem to be at turning point, albeit with differences across jurisdictions. In that context, it is particularly important that burden reduction is not confused for an erosion of standards, which could eventually entail significant costs for society.

The Irish economy is exposed to international developments given our structural openness and reliance on US FDI. A small number of highly globalised sectors drive output, employment and corporate tax revenue, meaning that any weakening of FDI flows would affect Ireland's economic model. Given this concentration risk and at a time when growth in infrastructure investment is needed, public expenditure plans will continue to need careful management.

Credit growth to the domestic economy has picked up, driven by mortgage credit and particularly for first time buyers. Lending has grown broadly in line with rising incomes over a period of stable economic growth. The link between unsustainable lending practices and house prices - a strong feature of GFC-era property valuations - is not apparent. A more prominent driver of prices in the current environment is a shortage of housing supply. For commercial real estate, the domestic market shows signs of stabilisation and sentiment indicators point to a gradual recovery.

Despite significant exposures to global developments, Irish households, businesses and financial institutions currently have relatively healthy balance sheets. Given this starting position, even in an adverse scenario, featuring an escalation of geopolitical tensions, our analysis suggests that the number of firms in financial distress or households that would be unable to cover debt payments would be contained. As illustrated by recent stress tests, and broader analysis in our today, the Review domestic banking system has the capacity to absorb a severe economic shock and continue to support to the broader economy.

The Central Bank's macroprudential policies aim to promote resilience and are proportionate to the risks faced by the financial system. Given the backdrop of macrofinancial risks and how global uncertainty can interact with Ireland's open economy, we judge that maintaining a CCyB rate of 1.5 per cent remains appropriate. The O-SII buffer enhances resilience of those institutions which are systemically important. In this year's assessment the number of identified O-SIIs is unchanged, while there was a small reduction in the O-SII buffer rate for one institution.

The mortgage measures have now been in place for 10 years.  These measures aim to prevent the emergence of an unsustainable relationship between credit and house prices and support the resilience of borrowers, lenders and the broader economy. The benefits of the measures have been evident in recent years, and in an environment of heightened economic volatility they have contributed to lower flows into mortgage arrears and supported prudent lending standards.

In terms of the macroprudential framework for non-banks, Irish property funds are making progress towards meeting the macroprudential leverage limit ahead of the end of the implementation period in November 2027 and we expect to see continued progress in this regard. At an international level, the Central Bank supports the implementation of agreed reforms on non-bank leverage and on open-ended funds liquidity. Regarding the latter, we are working to understand better how price-based liquidity management tools are used by Irish-domiciled funds. Relatedly, we are analysing the financial stability risks from Irish hedge funds.

Thank you for joining us this morning. I will hand you over to Director of Financial Stability Mark Cassidy to take us through the report, before answering your questions.",Gabriel Makhlouf
https://www.bis.org/review/r251112h.htm,Lesetja Kganyago: Opening address - 2025 G20 TechSprint awards ceremony,"Opening address by Mr Lesetja Kganyago, Governor of the South African Reserve Bank, at the 2025 G20 TechSprint awards ceremony, Pretoria, 11 November 2025. ",2025-11-18 07:55:00,"## Lesetja Kganyago: Opening address - 2025 G20 TechSprint awards ceremony

Opening address by Mr Lesetja Kganyago, Governor of the South African Reserve Bank, at the 2025 G20 TechSprint awards ceremony, Pretoria, 11 November 2025.

* * *

## Good afternoon.

As you know, we are nearly at the end of our G20 Presidency. The Finance Track was handed over to the United States last month, and we have turned our attention to the Leaders' Summit in just over a week. This TechSprint meeting has the distinction of being our last landmark event as the Finance Track in 2025.

It is fitting that we are finishing our presidency with this subject of trust and integrity in finance. A core principle of our presidency was that we would not pack the agenda with more topics and more working groups. We wanted to avoid 'priority proliferation'. Instead, we aimed to be disciplined about the agenda and put the Finance Track spotlight on existing issues that were significantly important for us. A top issue was inclusivity and innovation in finance.

There is a lot of change in this space currently - some that works well, others not so much.

Domestically, and I take South Africa as an example, we remain excessively dependent on paper-based systems. That includes processes for verifying identity, from loan applications, to making payments. There is also the use of cash, which remains the most popular tool for transacting in South Africa - despite the existence of more sophisticated alternatives. The South African Reserve Bank (SARB) has embarked on a major initiative to address this, and deliver a more digital, inclusive future.

From a global perspective, cross-border finance remains cumbersome and expensive. This is nowhere more true than in Africa. Moving money from one country to another is an inefficient process, especially for poorer people. We still live in a world where it can make more sense for earners in South Africa to send money home to Zimbabwe by putting someone on a taxi with the cash. It is not quite the Stone Age - but it is close.

Technologically, of course, we have the ability to do much better. But, if the problem were that easy, it would have been solved already. Unfortunately, there are many challenges in this space that remain unsolved, and which are holding up transformative progress.

This G20 TechSprint is based on three of these problems.

- The first is digital identity: We need verifiable, privacy-preserving technologies to establish trust among financial institutions and enable broader financial participation.

- The second is credit data portability: We need secure, consumer-consented data exchange solutions so credit data can go to work and improve access to finance.
- The third is fraud and cyber risk mitigation: We need payment efficiencies that are matched with technologies to significantly reduce fraud and cyber risks.

Here at the SARB, we value innovation. At the same time, we appreciate that innovation is rarely driven by established institutions. Our comparative advantage is really about managing the macroeconomic and regulatory environments in which households and firms can thrive.

Innovation, by contrast, usually comes from different teams having the freedom to experiment. Often they are working in labs, or even garages, rather than towers in capital cities. 1

Innovation means taking risks, trying out different ideas and being open to imaginative concepts. 2

The Bank for International Settlements (BIS) has been convening these TechSprint competitions for five years now, and we are honoured to have been the co-host this year. Our two institutions both strongly believe in the philosophy of the techsprints: to take on major public policy issues, identify the problems that need solving and open them to innovators of all backgrounds.

For this G20 TechSprint, we had over 165 entries from 30 countries. Of these, we have 15 finalists.

I would like to congratulate the 15 finalists, who have made it here against intense competition. To the other entrants, my team has told me there were many wonderful ideas submitted, including some that did not match the criteria but that were nonetheless brilliant.

We ran a rigorous judging progress, with the BIS and sector experts, but there are many winning ideas in history that were not recognised straight away. Maybe there are some of those here today too.

To all the teams, thank you for entering. Thank you for innovating. As the Nobel committee reminded us this year, innovation is the fundamental driver of prosperity and it is people like you who lead it. 3  We are going to have a financial system in the future that is more open, inclusive and secure - and it may well be ideas in this room that get us there.

## Thank you.

1  On garage start-ups, see for instance this article: ""Starting in a garage is crucial to the origin story of many Silicon Valley entrepreneurs.""

- 2  For a larger discussion of this theme, see Carl Benedikt Frey. 2025. How Progress Ends.
- 3  The prize was awarded to Joel Mokyr, Philippe Aghion, and Peter Howitt, ""for having

explained innovation-driven economic growth"". See https://www.nobelprize.org/uploads /2025/10/press-economicsciences2025-1.pdf",Lesetja Kganyago
https://www.bis.org/review/r251112e.htm,Ida Wolden Bache: Monetary and fiscal policy in a dynamic world,"Speech by Ms Ida Wolden Bache, Governor of Norges Bank (Central Bank of Norway), at the 8th Annual Research Conference of De Nederlandsche Bank, Amsterdam, 11 November 2025.",2025-11-11 00:00:00,"## Ida Wolden Bache: Monetary and fiscal policy in a dynamic world

Speech by Ms Ida Wolden Bache, Governor of Norges Bank (Central Bank of Norway), at the 8th Annual Research Conference of De Nederlandsche Bank, Amsterdam, 11 November 2025.

* * *

Good afternoon and thank you very much for inviting me to this interesting and timely conference. It is a great pleasure to be here.

Norway and the Netherlands share a common experience: the discovery of major natural resources in the 1960s and 1970s. Such discoveries can be transformative, but they also carry risks, as the Netherlands experienced during the 1970s. An increase in natural resource revenues can erode the competitiveness of other industries through currency appreciation and can also fuel rapid growth in public spending. 1   Together, such effects can leave the economy more vulnerable once resources have been depleted.

To address these challenges, Norway set up the Government Pension Fund Global in the 1990s. The fund channels oil and gas revenues into financial assets abroad and is now one of the world's largest sovereign wealth funds. It is managed by Norges Bank under a framework set by the political authorities. While the fund does not play a direct role in monetary policy, it does provide fiscal space, as up to three percent of the value of the fund can be used in the national budget each year. The fund and the fiscal rule help shield the domestic economy from fluctuations in oil prices and ensure a gradual phasing-in of petroleum revenues.

In these brief remarks, I want to make two main points on the interaction between fiscal and monetary policy. First, the past few years have underlined the importance of independent central banks that focus firmly on their mandates. Second, policy mix matters: the optimal combination of fiscal and monetary policy depends on the shocks hitting the economy.

On the first point: the challenges facing central banks have shifted markedly in recent years. In the decade or so prior to the Covid-19 pandemic, inflation was stubbornly low in many countries. Policy rates hit zero or below, and instruments such as forward guidance and quantitative easing were used to compress long-term yields and risk premia. At the same time, policymakers allowed the time horizon for bringing inflation back to target to become more flexible. 2  The prospect of rapidly rising prices seemed remote.

That assumption proved wrong. The surge in prices in 2022 and 2023 forced a rapid tightening of monetary policy across the world. In hindsight, it is clear that both our models and our judgment were shaped by the long period of low inflation. We underestimated how strongly the combination of pandemic-related supply shocks and expansionary policies would fuel inflation.

These last few years monetary policy has gone back to basics: keeping inflation low and stable. This does not mean a return to strict inflation targeting; most central bank mandates also give weight to employment and the real economy. But it does mean that we should make sure that there is no doubt about our determination to bring inflation back to target. History shows that once confidence in price stability is lost, the cost of restoring it can be very high.

Three points follow from this. First, we should be realistic about what monetary policy can and cannot achieve. Monetary policy affects the economy broadly; it cannot be targeted toward specific sectors or groups. Some policy objectives require more targeted measures. For instance, during the Covid-19 pandemic, targeted fiscal support helped the sectors and workers most exposed to shutdowns and weak demand. Another example is climate change. While both the physical effects of climate change and the transition to a low-carbon economy have implications for the economy, and hence for monetary policy, the policy rate is not an effective tool for supporting that transition. Emission reductions are better achieved through targeted measures such as quotas and taxes.

Second, central banks must communicate clearly how we respond to shocks - what Philip Lane has called ""reaction function guidance"". 3   We should explain the reasoning behind our decisions and how they are affected by new information. In Norway, we publish a policy rate forecast that is consistent with our forecasts of other variables. We also describe how new information has affected the rate forecast. Importantly, the rate path is not a promise, and indeed it has been adjusted substantially in recent years as the outlook has changed. We nevertheless believe that it remains a useful communication tool that also makes it easier for the public to evaluate our performance.

Third, we must recognise the importance of maintaining broad public support for how we conduct policy. Over the past few years, many central banks have updated their monetary policy strategies to reflect new challenges. And in some countries, monetary policy mandates are reviewed regularly. Earlier this year, the government initiated such a process in Norway. Regular reviews provide an opportunity to take on board new insights and strengthen democratic support for independent monetary policy. While I will not pre-empt any conclusions of the government's review, let me just say that the mandate for monetary policy should be flexible enough to address different types of disturbances - not only those that have occurred in the recent past. But the mandate should also be sufficiently precise to allow others to hold us to account.

Now let me get to my second point on policy mix. While it is important to safeguard the independence of monetary policy, we should also recognise that fiscal and monetary policy play complementary roles in stabilising the economy in response to shocks. In many situations, they should pull in the same direction. For example, a positive demand shock would typically call for tighter monetary policy and a more restrictive fiscal stance. But there may also be situations when the two policy instruments should not pull in the same direction. Such situations may arise in small, open economies such as Norway, where monetary policy not only operates through the aggregate demand channel, but also influences inflation by affecting the exchange rate. Suppose for instance that the economy is hit by an inflation shock that simultaneously weakens output and employment. An expansionary fiscal policy could then help support employment while

tighter monetary policy could dampen imported inflation by strengthening the exchange rate. Under some conditions, this mix may deliver a better balance between stabilising inflation and output, particularly if fiscal measures are well targeted. 4

The broader lesson is simple: monetary policy remains the primary instrument for price stability, but the appropriate policy mix depends on the shock. Clear communication from central banks may help fiscal authorities take the monetary policy reaction function into account when formulating policy.

Let me end where I began: with institutions and vulnerabilities. Over time, Norway's oil revenues have generated large government surpluses. Fiscal dominance is not an immediate threat to monetary policy independence in Norway. But that does not mean that we do not face risks. First, as around one quarter of government spending is now financed by transfers from the sovereign wealth fund, a sharp and lasting fall in global equity markets could necessitate significant fiscal tightening. Second, while public debt is low, Norwegian are among the most indebted in the world - another thing households we have in common with the Netherlands. A rise in lending rates or a fall in house prices can prompt households to cut consumption sharply. That can weaken firms' earnings and debt-servicing capacity, and potentially amplify downturns through the banking system.

These are not imminent threats. But they do remind us that sound public finances do not make us immune to shocks. They also underline the importance of strong policy frameworks that enable us to respond effectively to shocks. A credible and transparent monetary policy is the first line of defense for securing price stability. That has always mattered. In a world of higher geopolitical risk, structural change and new kinds of shocks, it matters even more.

1  See for instance Harding, T., R. Stefanski and G. Toews (2020) ""Boom Goes the Price: Giant Resource Discoveries and Real Exchange Rate Appreciation"". The , 130 (630), pages 1715-1728 and Kazimov, K., K. Hamilton and R. Economic Journal Arezki (2011) ""Resource Windfalls, Macroeconomic Stability and Growth: The Role of "". 2011/142. Political Institutions IMF Working Paper

2  Borio, C. and M. Chavaz (2025) ""Moving targets? Inflation targeting frameworks, 1990-"". March 2025. Bank for International Settlements. 2025 BIS Quarterly Review

3  Lane, P. R (2025). The communication of monetary policy decisions: incorporating . Washington D.C., 16 May. European Central Bank. risks and uncertainty

4   Bergholt, D., Ø. Rłisland, T. Sveen and R. Torvik (2025) "" Should monetary and fiscal "". 8/2025. policy pull in the same direction? Norges Bank Working Paper",Ida Wolden Bache
https://www.bis.org/review/r251110f.htm,Joachim Nagel: Back to the roots - central banks and financial stability,"Welcome address by Dr Joachim Nagel, President of the Deutsche Bundesbank, at the event ""The Bundesbank's Financial Stability Review at 20: challenges of yesterday, today and tomorrow"", Frankfurt am Main, 6 November 2025.",2025-11-06 00:00:00,"## Joachim Nagel: Back to the roots - central banks and financial stability

Welcome address by Dr Joachim Nagel, President of the Deutsche Bundesbank, at the event ""The Bundesbank's Financial Stability Review at 20: challenges of yesterday, today and tomorrow"", Frankfurt am Main, 6 November 2025.

* * *

Check against delivery

## 1 Introduction

Mr Theurer, ladies and gentlemen, it is a great pleasure and honour to welcome you today on this very special occasion: the Bundesbank's Financial Stability Review is celebrating its 20th anniversary!

We have an exciting afternoon ahead of us, with two high-calibre discussion panels. A warm welcome, too, to all our participants. I am delighted that you are here today to join in with the discussions and celebrations.

Without giving too much away at this early stage, I'd like to sketch a brief outline of the two panels. Our first round table will be moderated by my fellow Executive Board member Michael Theurer. Together, we'll look back at 20 years of the Financial Stability Review.

The second round table will be led by Gaston Gelos, who joins us from the Bank for International Settlements  (BIS). He'll shift our focus forwards, exploring risks and challenges to financial stability now and in the years to come.

I would like to use my time at the podium to trace a broader arc, examining how financial stability's importance for central banks has evolved over time.

## 2 Central banks and  financial stability

Given that the Bundesbank's Financial Stability Review is ""only"" 20 years old, it might be tempting to think that the topic of financial stability has only recently become relevant to central banks. But the opposite is true: financial stability has been an important part of central banking from the outset, even if its significance has varied over the course of the years.

In the middle of the 19th century, the Bank of England began to use its rediscounting facility to provide the financial system with a limited amount of liquidity in crisis situations. 1  These interventions inspired the then editor-in-chief of ""The Economist"" Walter Bagehot to pen his famous work ""Lombard Street"".

In his book, Bagehot recommended that the central bank should systematically intervene in the event of bank runs and liquidity shortages so as to preserve trust in the financial system and prevent a collapse. These recommendations are now known as the lender-of-last-resort principle. 2

The  US Federal Reserve System was also founded, in 1913, as a direct response to repeated banking panics. 3  So we can see that the link between central banks and the objective of financial stability is a very long-standing one.

Midway through the 20th century, central banks began to increasingly pivot their focus towards safeguarding price stability and promoting growth and employment. 4  Financial stability receded further and further into the background-not least because bank runs became a rarity. 5  But this phase was not destined to last.

On the heels of deregulation and liberalisation of the financial system in the 1980s came the financial crises and turmoil of the 1990s and early 2000s. The Tequila Crisis in Mexico, the Asian crisis, the collapse of the Long-Term Capital Management hedge fund  (LTCM for short), and the implosion of the dot-com bubble were striking demonstrations of how vulnerable the international financial system had become. And how quickly financial stability can be forfeited again.

Partly in response to this, central banks around the world started paying more attention to analysing and monitoring risks to financial stability once more. The introduction of financial stability reviews was a significant milestone.

The Bank of England was an international pioneer, publishing its debut Financial Stability Review back in 1996. 6  The Bundesbank published its first Financial Stability Review in 2005. 7  Analyses on the topic had already featured in its Monthly Report in the two years running up to that.

One of my predecessors, Professor Axel Weber, did an excellent job of summing up just how important the matter of financial stability had become:  Financial stability is of crucial importance not only for monetary stability but also as a topic in its own right. Functional shortcomings in the financial system, especially owing to instabilities, can cause considerable economic costs.

For the first time, the Bundesbank set out exactly what it meant by financial stability, defining it as  the financial system's ability to perform its key macroeconomic functions well, including in stress situations and during periods of structural adjustment. 8  That definition, in a slightly tweaked form, stands to this day. 9  From then on, the Financial Stability Reviews served as an early warning system for the public and as a platform for analysing risks.

And at the international level, the Bank for International Settlements, too, was especially vocal, using its annual reports and academic studies to warn emphatically of the

dangers of excessive lending, the formation of bubbles and systemic risks. 10  However, amid market euphoria and confidence in the financial sector's ability to self-regulate, these warnings often went unheeded. 11

The consequences soon became apparent: the global financial crisis of 2007-08 confronted central banks and the international financial system with unexpected challenges. The speed and scale of the crisis went beyond anything that had been feared. The highly interconnected nature of financial markets triggered chain reactions that led to systemic failure of historic proportions.

In Germany, applications for stabilisation assistance totalled €231 billion, one institution was taken over by the Financial Market Stabilisation Fund  (SoFFin), and resolution agencies were set up. 12  Gross domestic product fell by almost 6% in 2009.

The global financial crisis becomes the catalyst for a fundamental re-anchoring of financial stability at the institutional level. In May 2009, the Bundesbank establishes a dedicated Directorate General Financial Stability. But, to start with, communicating information to the public through its Financial Stability Review, in the form of analyses and warnings, is the only device in the Bundesbank's toolkit.

That changes on 1 January 2013: the Financial Stability Act enters into force and, for the first time ever, bestows upon the Bundesbank-together with the Federal Financial Supervisory Authority  (BaFin) and the Federal Ministry of Finance-an official mandate for financial stability.

Since then, the three institutions have come together regularly in the shape of the German Financial Stability Committee  (FSC). The Bundesbank is charged, especially, with monitoring and analysing developments that have a bearing on financial stability. The  FSC can make recommendations for the introduction of macroprudential instruments and activation of macroprudential measures.

But it's not just in Germany that things have changed-the global financial crisis has led to far-reaching institutional adjustments at the international level, too. The Financial Stability Board was created in 2009 to strengthen international cooperation and the monitoring of systemic risks. The European Systemic Risk Board  (ESRB) set to work monitoring the European financial system and limiting systemic risk in 2010.

The new Basel III regulatory framework introduced higher and better-quality capital requirements for banks. Furthermore, macroprudential instruments were developed to make the financial system more resilient.

Nowadays, financial stability is an integral part of central banks' mandate. Macroprudential oversight, the analysis of systemic risks and policy consultation are now firmly anchored in the institutional framework.

The financial stability reviews produced by the Bundesbank and other central banks have become a well-established tool-for policymakers, the financial sector and the general public. Central banks have-in the best sense of the phrase-gone back to their roots.

## 3 Closing remarks

At the same time, it's important to remember that the work is never done. The challenges to financial stability are constantly changing. The latest reports coming out of the United States are a clear illustration of that.

September saw both a  US auto financing provider and a manufacturer of car parts file for bankruptcy protection. In October, two US regional banks ran into difficulties due to fraud. 13  We are following what's happening very closely-of that you can be sure!

New risks could also arise as a result of the structural change unfolding in the real economy and the financial system, the rapid development of artificial intelligence, and ongoing geopolitical developments. It is precisely these topics that we will be discussing in our second panel.

But, first, we want to take a closer look at how the Bundesbank's Financial Stability Review came to be and the challenges facing us today. I'll now hand over to my Executive Board colleague, Michael Theurer.

I look forward to some exciting debates and fresh ideas. Thank you very much for listening.

- 1 See Anson, M., D. Bholat, M. Kang and R. Thomas (2017), The Bank of England as lender of last resort: new historical evidence from daily transactional data, Bank of England Staff Working Paper No 691.
- 2  See Bordo, M. (1990), The Lender of Last Resort: Alternative Views and Historical Experience, Federal Reserve Bank of Richmond, Economic Review, January /February 1990.
- 3  See Johnson, R. (2010), Historical Beginnings... The Federal Reserve.
- 4  See Bordo, M. (2007), A Brief History of Central Banks, Federal Reserve Bank of Cleveland, Economic Commentary.
- 5  See Reinhart, C. and K. Rogoff (2008), This Time is Different: A Panoramic View of Eight Centuries of Financial Crises, NBER Working Paper No 13882 and Laeven, L. and F. Valencia (2013), Systemic Banking Crises Database, IMF Economic Review, Vol. 61(2), pp. 225-270.
- 6  Bank of England (1996), Financial Stability Review, Issue One, Autumn 1996.
- 7  Deutsche Bundesbank (2005), Financial Stability Review, November 2005, p. 6
- 8  See Deutsche Bundesbank (2005), op. cit.

- 9  As stated in this year's Financial Stability Review,  we understand financial stability as a state in which the financial system is able to perform its economic functions at all times . See Deutsche Bundesbank (2025), Financial Stability Review, November 2025.
- 10  See, for example, Bank for International Settlements (2007), 77th Annual Report 2006/07 and Borio, C. and W. White (2004), Whither monetary and financial stability? The implications of evolving policy regimes, BIS Working Papers No 147.
- 11  See Rajan, R. (2005), Has Financial Development Made the World Riskier?, NBER Working Paper No 11728.
- 12  See Deutsche Bundesbank (2010), Annual Report 2009, p. 91.
- 13  The auto lender Tricolor applied for bankruptcy protection on 10 September 2025, and the car parts manufacturer First Brands applied for bankruptcy protection on 29 September 2025. On 16 October 2025, US regional banks Western Alliance and Zions reported having been the victim of fraudulent borrowing.",Joachim Nagel
https://www.bis.org/review/r251112i.htm,"Signe Krogstrup: Revisiting global imbalances in the context of the ""AI hype""","Speech by Ms Signe Krogstrup, Governor of Danmarks Nationalbank, at the Aarhus Symposium: Revisiting global imbalances in the context of the ""AI hype"", Aarhus, 7 November 2025.",2025-11-07 00:00:00,"## SPEECH

Governor Signe Krogstrup's speech at Aarhus Symposium about Revisiting Global Imbalances in the Context of the ""Al hype""

## CHECK AGAINST DELIVERY

## 1. INTRODUCTION

Good afternoon. | am so happy to be joining you at this symposium with lots of interesting speakers and great opportunities to engage with all of you.

The topic of today's symposium is the ""Al hype"". And | say that with quotation marks because we don't know how much is hype or real transformation.

Clearly, this is not just a technology story about Al. It is also a complex story of investments in technology, productivity growth and financing differences between the EU, the US, China and other countries. Contributing to global imbalances and capital flows, notably from the rest of the world and into US technology investments.

My remarks today will focus on global imbalances in the context of the ""Al-hype"". ""Global imbalances"" is a description of how trade and financial imbalances are distributed across countries and regions. These imbalances cancel out at the level of the global economy. But some countries have had persistent deficits and surpluses over long time spans. In particular, the US has run a persistent trade deficit, while the China, Japan, the EU and oil exporting nations, among other countries, have tended to show surpluses.

## Global imbalances widened in the years before the Great Financial Crisis

(GFC). This gave rise to concerns about abrupt adjustments and financial risks. Imbalances are widening again today, although to a smaller extent.



7 November

2025

| will try to make sense of the complex macroeconomic and financial links with the ""Al hype"" and draw out some lessons for today, with a focus on the US and the EU.

Why revisit global imbalances? Two reasons, which | will clarify in my talk.

First, because the current US administration has put global imbalances at the centre of the global policy debate once again. The US persistent trade deficit is seen as unfair, driven by trading partners' policies. Something to be addressed through trade policies. But trade imbalances are not driven by trade and tariffs alone, as global imbalances also reflect diverging trends in savings and investments across the Atlantic. In this light, policies supporting investments in the US would tend to increase the trade deficit, which would be opposite to the effects of import tariffs, as | will explain.

Second, global imbalances also reflect capital flows. These were much debated before the GFC. Some viewed the imbalances as contributing to the build-up of the financial risks that preceded the crisis, while others saw them merely as a symptom. With renewed widening of imbalances and capital flows, it is relevant to revisit these issues today. | will clarify what similarities we see today, but also what the differences are.

Before | begin, | want to acknowledge that | am using the ""Al hype"" theme of this symposium as a pretext to talk about the very interesting topic of global imbalances, linking these to investment and technology. But high fiscal deficits and government debt issuance are perhaps even more important in driving global imbalances today. This will not be my focus, but | hereby suggest that you ask your professors to take up the role of fiscal policy and government debt developments in driving global imbalances.

## 2. DIVERGING ECONOMIC OUTLOOK, INVESTMENT AND TECH IN THE US AND THE EU

The current divergence in growth, productivity and tech investments between the US and the EU is the starting point of our story. The Draghi report made this contrast clear.+

1 See Mario Draghi, The future of European competitiveness, European Commission, 9 September 2024.

China and the rest of the world are important parts of the global picture too. But | will focus, where possible, on the US and the EU to try to simplify a complex story.

The US story: high productivity growth, low savings.

The US has had strong productivity growth, but there is uncertainty about current and future economic activity. The US has benefitted from a high business investment rate in technology. Growth has also been relatively high compared to the EU.? Despite tariffs and restrictive immigration policies, US growth seems to be holding up, supported notably by investments in Al and related infrastructure, flexible labour markets, and stimulating government budget deficits. There is high uncertainty, however. It is difficult to assess current labor market developments because the ongoing US government shutdown limits data. And tariffs and immigration policies may dampen growth and raise inflation in the coming months and quarters. Time will tell.

An Al investment surge and productivity. Despite this uncertainty, the US is currently seeing a surge in investment in Al, data centers and the energy infrastructure to support it. The investments make up an important share of current US growth.* Some see Al implementation as already supporting productivity growth in the US.

The financing of the ""Al hype"" is supported by easier financial conditions. Rising asset prices draw in financing, notably in the tech sector. Financing is also supported by a steady supply of financing and what we call high ""risk appetite"" in financial markets.

The EU story: Lower productivity growth, high savings.

Growth has been more subdued in the EU. The contrast to rising tech investments in the US is stark. Productivity growth in the EU has been lagging behind for many years.* Currently, overall investments are picking up slightly in the EU.

Ambition to ramp up investment and productivity growth. With recent geopolitical and geoeconomic developments, the ambition is to ramp up

2 See World Economic Outlook, /nternational Monetary Fund, October 2025.

See World Economic Outlook, international Monetary Fund, October 2025. See also data from Federal Reserve Bank of St. Louis.

See Malin Andersson, Valerie Jarvis and Michel Soudan, Business investment: why is the euro area lagging behind the United States?, ECB Economic Bulletin, Issue 2/2025.

investments in EU energy infrastructure, defence, security, resilience and digitalisation. This will also support productivity growth. But challenges abound. | will come back to these.

High savings and capital exports. There are ample savings to finance potential investments in the EU. Savings are high but invested cautiously, often through bank-based national financial systems, and to some extent abroad, notably in the US. A case in point is Denmark, where high pension savings boost overall saving, but a large share is invested abroad.&gt;

## 3. FROM THE ""Al HYPE"" TO GLOBAL IMBALANCES

What does all this have to do with global Imbalances?

Global imbalances predate the Al hype. Global imbalances have been a chronic feature of the world economy since the late 1990s.

Global imbalances are widening again. The IMF annually assesses global imbalances in its External Sector Report. This year, the IMF reported the largest increase in excess imbalances in a decade, driven by the major economies, the US, the euro area and China (2024 data).® The US external deficit increased, primarily reflecting investments and high government budget deficits in the US.

## Back to the textbook

## How is investment, and by extension the ""Al hype"", linked to these imbalances?

Bear with me as we go back to the textbook on national accounting. We know from national accounting that a country's income (or production) can be broadly divided between consumption, government spending, investment and net exports. What is left of income or production when we subtract consumption and government spending is -by definition -the savings of the economy.

Rearranging the national accounting identity shows that the external balance of a country is at the same time (i) a trade imbalance, (ii) an imbalance of savings over investment, and (iii) a cross-border net capital flow.

5 See Andersen, Risbjerg, Spange, and Wederkinck, The Danish savings surplus: Trends in firm and household savings, Danmarks Nationalbank, Economic Memo, no. 6, September 2024.

See External Sector Report, Global Imbalances in a Shifting World, International Monetary Fund, July 2025.

These three types of ""imbalances"" are different perspectives on the same macroeconomic imbalance.

Take the US persistent deficit as an example of low national saving. The US imports more than it exports. For example, it imports European vehicles and machinery or Chinese rare earths for data centres. This leads to a trade deficit, notably against China and the EU. But this high demand for imports also reflects that US residents and the US government are spending and investing more than is produced in the US. Or put in terms of savings and investment, US savings are relatively low. And in particular, the US government dissaves with its high budget deficit. These collective savings are not enough to finance what US residents -notably US tech companies -want to invest in the US. Hence financing from abroad is needed to pay for the part of investments that exceeds national saving. This leads to foreign capital coming into the US, reflecting the third perspective on the imbalance. For example, Danish pension funds are investing in the US, notably in tech equities and US treasury bonds.' This financing from abroad helps pay for the needed extra imports, bringing us full circle to the trade deficit in the balance of payments.

The EU's persistent surplus instead reflects high national savings. Similar narratives apply to China and Japan. The EU exports more than it imports, for example cars, steel or machinery. The trade surplus also reflects that EU residents save more than required to finance investments in the EU. Residents place their high savings with financial institutions, typically banks or pension funds, which in turn channel financing to investments, some of which are abroad, including in US tech companies.®

This accounting perspective should make it clear that trade, and hence trade policy, is not singularly driving external imbalances. For example, the US trade deficit also reflects high consumption and investment, in turn drawing in imports and foreign capital.

Back to the ""Al hype"" and the link to global imbalances: The current investment boom will, all other things being equal, increase the US trade deficit and capital inflows, unless savings are also increased in the US. At the same time, US tariff policy has as an objective to narrow the trade imbalance. Time will tell where the US external imbalance is heading. In any

7 See Sgndergaard, Hallarth, Madsen og Halsnees, The road to more risky assets in the Danish pension sector, Danmarks Nationalbank Analysis, Nr. 18, 3 September 2025. See also Madsen and Risbjerg, Denmark has record-high investments abroad, Danmarks Nationalbank, Statistics News, 7 October 2025.

An important share also flows into financing government budget deficits in both the EU and the US.

case, if current investments are raising productivity growth in the US, a resulting rise in the external deficit may be a good bargain.

This contrasts with the EU external surplus. The EU ambition to raise investments in the EU, notably to support productivity, could narrow the EU trade surplus and reduce capital outflows -including capital outflows to the US.

## Let's now close the textbook and have a look at global imbalances in the data.

Trends in current accounts point to global imbalances. The left-hand chart (slide 8) shows the geographical distribution of global current accounts, i.e. the sum of trade balances and income on foreign assets. The sum of all current accounts should in principle be zero, but it is not due to data discrepancies. This confirms what we already discussed. The US (red bars) has a persistent current account deficit. This is mirrored in persistent current account surpluses primarily in Germany (light green), China (light red) and Japan (gold).

Zooming in on the EU, the right-hand chart shows the geographical distribution of current accounts in the EU and other advanced European economies. Importantly, the sum of all European current accounts does not need to be zero, as these represent net surpluses or deficits against the rest of the world. As seen earlier, Germany has been the main force behind European current account surpluses, in part supported by other countries, for example the Netherlands and the Scandinavian countries. Of the Scandinavian current account surplus, Denmark accounted for roughly a third in 2024. In the years preceding the global financial crisis, southern European countries, (Italy, Portugal, Spain and Greece) ran large current account deficits.

## Current account imbalances reflect differences in domestic savings and

investments. As we talked about before, current account imbalances represent an imbalance between domestic savings and investments. As seen in the left-hand chart (slide 9), the US current account deficit has been primarily driven by dissaving by the US government (light red), with households (dark red) contributing to the deficit leading into the financial crisis. For the euro area (right-hand chart), the current account surplus has been primarily driven by a savings surplus by the private sector. A quick look at the surpluses in China and Denmark, respectively (slide 10) shows that the Chinese surplus (left) reflects excess savings by Chinese households. In Denmark, savings have exceeded investments since the

early 1990s. This was to a large extent driven by firms, but also sound public finances. Following the GFC, the savings surplus has been particularly high, reflecting higher household savings rates.°

## 4. FROM THE ""Al HYPE"" TO CAPITAL FLOWS AND FINANCIAL RISKS

Capital inflows into the US and investments in Al, data centres and energy (the ""Al hype"") may well increase productivity in the US and earnings in tech companies. But there is also a risk that ""blind"" financing of the ""Al hype"" is based on high expectations of future earnings that may not pan out.

In other words, there is a risk of misallocation of capital. Capital that would have led to more value, had it been invested elsewhere. We still do not know which is true. And maybe we will see some productivity growth from the ""Al hype"" but also a correction of asset prices -the ""good bubble"" that some argue is happening.

This debate is reminiscent of the discussions of the role that global imbalances played prior to the GFC.

In the years leading up to 2008, the US deficit widened substantially, more than is the case today, as we have seen. There are other similarities to the situation today, although there are also clear differences. Capital flowed from surplus countries into US assets, as is the case today. Back then, a lot of financing went into the now notorious securitised housing loans rather than to the arguably more productive technology assets of today. Financial conditions were easy and risk appetite high, which we also see indications of today. It was easy to finance a house, even for individuals with no income. This contributed to driving up housing prices in the US, which -when they fell and lead to losses on securitised housing loans -triggered the great financial crisis. Today, mainly Al-related equity prices are soaring, and these high prices may or may not be justified.

9 See Andersen, Risbjerg, Spange, and Wederkinck, The Danish savings surplus: Trends in firm and household savings, Danmarks Nationalbank, Economic Memo, no. 6, September 2024.

## Debate on imbalances before the GFC: Two views on causality

There were two competing views on the role of global imbalances in the build-up of financial imbalances and risk-taking prior to the GFC:

View 1: The global savings glut hypothesis (push): This view was notably put forth by Ben Bernanke, then chairman of the US central bank, the Federal Reserve.?° It suggests that an excess of global savings led to a flood of capital into the US in search of safe investments and good returns. According to this view, and with the risk of oversimplifying, the flows pushed down the cost of financing in the US, which made Americans borrow more and take more risk. This in turn pushed up asset prices, notably housing prices, which later collapsed. Foreign capital inflows also contributed to the widening trade deficit, as savings fell.

View 2: Domestic policy as a key driver (pull): This view argues that the primary cause of the 2008 crisis was domestic policy that stimulated risk taking and reduced saving in the US. These policies included large government deficit spending and financial deregulation that gave incentives to borrow."" House prices rose as borrowing to finance housing increased. And this created demand for foreign financing. According to this view, capital inflows were driven by US demand. Foreign capital was pulled into the US rather than pushed in.

Both mechanisms may have played a role. In global imbalances, it takes two to tango. The global supply of capital (the push) may interact with domestic policies (the pull) to create the environment of easy financing and risk taking.

Let's consider lessons for what we see today on Al/tech.

We have seen a surge of investments in Al infrastructure in the United States. There are more data centres in the United States than in all other major economies (slide 13). US tech firms have contributed to rising equity valuations and concentration in the equity market (slide 14). US stock valuations have climbed since April 2025, driven in particular by increasing valuations of the largest tech companies. The seven largest tech companies now make up an unprecedentedly large share of the stock

10

See Ben S. Bernanke, Global Economic Integration: What's New and What's Not?, speech at the Federal Reserve Bank of Kansas City's Thirtieth Annual Economic Symposium, Jackson Hole, Wyoming, 25 August 2006. See Maurice Obstfeld and Kenneth Rogoff, Global Imbalances and the Financial Crisis: Products of Common Causes, Paper prepared for the Federal Reserve Bank of San Francisco Asia Economic Policy Conference, October 18-20, 2009.

price index. Their price to earnings ratios suggest that expectations of future earnings are substantially higher than for other firms.

## Financial conditions have eased in both the US and the EU (slide 15).

Credit spreads are low relative to historical levels, while measures of broad financial conditions point to an easing.

Does this entail potential risks for financial stability or is ""this time different'?

There are some similarities to the situation before the GFC. We are seeing high asset valuations and high concentration of risks. The IMF continues to caution that some assets may be overvalued. Combined with the high degree of concentration, especially in tech companies, this entails a risk of a sudden price correction, which could cause significant volatility in financial markets and potentially have broader real economic consequences.' Furthermore, there has been a push towards deregulation in the US. A push to review the regulatory framework aims to address undue complexity and burdens.

But there are also clear differences. The flood of foreign capital is not comparable, as global imbalances have not widened to the extent seen before the GFC. The assets seeing price rises will most likely eventually support productivity growth in the US; it is just a question of how much and whether it is priced right. Banks and the financial system are arguably more robust, with strengthened capital and liquidity regulation and better resolution frameworks.

The million-dollar question: are we seeing (1) evidence of productive technological transformation or (2) indications of the next bubble?

| will not make a call. | will stick to being the two-handed economist. (1) One the hand, ""this time may be different"". Banks are generally more robust and resilient. Today's banking sector is better capitalised and better equipped to absorb shocks than prior to the 2007-08 crisis. Also, whether or not valuations are right, investments may lead to better energy and technology infrastructure. (2) On the other hand, Al equity valuations may turn out to be overvalued, leading to asset price declines that cause financial losses. Hence there may be opportunities, but it means that risk

12 See Shifting Ground Beneath the Calm: Stability Challenges amid Changes in Financial Markets, Global Financial Stability Report, International Monetary Fund, October 2025.

management and loss absorption capacity are key when investing in US tech.

## 5. EUROPE'S INVESTMENTS, PRODUCTIVITY AND EXTERNAL IMBALANCES

A final point about the EU's external surplus and ambition to raise investments and productivity growth. Note that if the EU succeeds in raising investments, this will also result in a narrowing of the external surplus and capital flows, all other things being equal. That would be a good thing, if it reflects a genuine rise in productive investments in the EU.

The challenge for the EU is structural: how to convert its vast pool of domestic savings into productivity-enhancing, high-growth domestic investment?

The European success story can be leveraged to a higher degree. The EU single market has been a major driver of growth and prosperity in Europe (and Denmark!). But the single market is incomplete and there are still many internal barriers. In some ways, the EU still functions more like 27 individual markets than one large market. There is lots of potential, and studies have shown that even small reductions in internal EU nontariff barriers can increase growth and income.

EU capital markets integration can also work better for financing start-up and scale-up of new tech companies. The EU's fragmented capital markets act as a barrier, preventing promising new start-ups from getting financing from EU savings. The Savings and Investment Union aims to remedy this. 14

## 6. CONCLUSION

To recap, we have moved from the current excitement of the Al boom, which is fundamentally an investment story, to how it interacts with

13 See Adilbish et al., Europe's productivity weakness, /MF Working Paper, no. 40, February. See also Bentsen, van Deurs, and Zhuang, Fewer barriers in the EU single market could increase Danish welfare, Danmarks Nationalbank Analysis, no. 17, August 2025.

See Savings and Investments Union, A Strategy to Foster Citizens' Wealth and Economic Competitiveness in the EU, European Commission, Communication from the Commission, March 2025.

savings, trade and capital flows, and in turn global imbalances. The ""Al hype"" is not just about technology, but also a story of these imbalances.

We have talked about the similarities and differences relative to the preGFC imbalances. The Al investment boom in the US entails both risks and opportunities. The ""Al hype"" may simply be the newest channel for financial imbalances. Or this time may be different, and it may presage a surge in productivity growth. Time will tell. Risk management is key.

Finally, further EU integration could boost investments and growth in the EU. The challenge ahead will be to strengthen conditions for boosting EU productive investments. This will improve conditions for productivity growth and at the same time possibly help narrow global imbalances.

Thank you.

DANMARKS NATIONALBANK

Revisiting global imbalances in the context of the ""Al hype' Ul

Governor Signe Krogstrup Aarhus Symposium, 7 November, 2025



Agenda

Diverging economic outlook, investment, and tech developments in the US and EU

From the ""Al hype"" to global imbalances

From the ""Al hype"" to capital flows and financial risks

Europe's investments, productivity, and external imbalances



Diverging economic outlook, investment, and tech developments in the US and EU



Diverging economic developments in the US and EU

|              | more subdued         |             | Capital exports.      |             |          |             |        |
|--------------|----------------------|-------------|-----------------------|-------------|----------|-------------|--------|
| The EU story | Productivity the EU. |             | up investment growth. |             |          |             |        |
|              | future               |             | * productivity        |             |          |             |        |
|              | but and              |             | Ambition to ramp      | financial   | imports. |             |        |
|              | growth               |             |                       |             |          |             |        |
|              |                      |             |                       | savings.    |          |             |        |
|              |                      | 7           |                       |             |          |             |        |
|              | ¢                    |             |                       | * High      |          |             |        |
|              |                      |             | financing             |             |          |             |        |
|              |                      |             | with                  |             |          |             |        |
|              | growth,              | current     |                       |             |          |             |        |
|              |                      |             |                       | easy        |          |             |        |
|              |                      |             |                       |             | Capital  |             |        |
|              |                      |             |                       |             | * Low    |             |        |
| The          |                      |             |                       |             |          |             |        |
|              |                      |             |                       |             | savings. |             |        |
| US           |                      |             |                       |             |          |             |        |
| story        |                      |             |                       |             |          |             |        |
|              | about                |             |                       |             |          |             |        |
|              | productivity         |             |                       |             |          |             |        |
|              |                      |             |                       |             |          | ¢           | surge, |
|              |                      |             |                       | by          |          |             |        |
|              |                      |             | investment            | supported   |          | An Al       |        |
|              |                      |             |                       | conditions. |          |             |        |
|              | Strong               |             |                       |             |          |             |        |
|              |                      | uncertainty |                       |             |          |             |        |
|              |                      |             |                       |             |          | conditions. |        |

ES. ""3:) DANMARKS '8: NATIONALBANK a



## Global imbalances

The US has run persistent current account deficits, while China, Germany, and Japan have had persistent surpluses.

Pct. of world GDP

2



2020

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m United States

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## |™Americas (ex. United States)

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Germany

Note: The chart shows global current account balances across regions and select countries. The sum of all depicted current accounts do not sum to zero due to data discrepancies. Source: IMF, the World Bank, and own calculations.

DANMARKS

“|

6

NATIONALBANK

|

Back to the textbook: Three perspectives on the same imbalance





Be DANMARKS "") NATIONALBANK Ba

## Global imbalances



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Danish net lending (+) / net borrowing (-) by sector

Chinese net lending (+) / net borrowing (-) by sector

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DANMARKS

“|

10

NATIONALBANK

|

From the ""Al hype"" to capital flows and financial risks



Debate on imbalances before the great financial crisis: two views on causality

| Domestic policy as a driver (pull) ¢ US fiscal expansion, loose monetary   |
|----------------------------------------------------------------------------|
| ""Global savings glut” (push)                                               |

ES. ""3:) DANMARKS :353-| NATIONALBANK a



## US tech firms have contributed to rising equity valuations and concentration in the equity market



14

... while measures of broad financial conditions point to an easing

Credit spreads are low relative to historical levels



EU.

and

US

the in

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of indices

Bloomberg shows

chart

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Note:

Note: The chart shows the average option-adjusted spread of high yield issuances.in the US and EU. Source: Bloomberg

Bloomberg

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DANMARKS

NATIONALBANK

Potential risks for financial stability or ""this time is different""?

Differences from pre-GFC

Similarities with pre-GFC

* More robust banks

* Productive investments

* High concentration of risks (in few US Al assets and firms)

imbalances global

pronounced

Less

*

¢ Push towards deregulation

¢ Abundant capital and appetite for risk-taking

## Risk management is key.

3. ""35;) DANMARKS '8: NATIONALBANK eA)

Europe's investments, productivity, and external imbalances



## Making Europe's savings work for European productivity and growth



* Leveraging the European success story: completing the single market

¢ Even small reductions in internal EU barriers can boost productivity

¢ EU capital markets can work better for Al and tech



2 DANMARKS 25, NATIONALBANK



",Signe Krogstrup
https://www.bis.org/review/r251118d.htm,"Petra Tschudin, Thomas Moser: Bank funding costs - latest developments from a monetary policy perspective","Speech by Ms Petra Tschudin, Member of the Governing Board of the Swiss National Bank, and Mr Thomas Moser, Alternate Member of the Governing Board of the Swiss National Bank, at the Money Market Event, Geneva, 13 November 2025.",2025-11-13 00:00:00,"Embargo 13 November 2025, 6.30 pm

Bank funding costs: latest developments from a monetary policy perspective Money Market Event

## Petra Tschudin and Thomas Moser *

Member of the Governing Board / Alternate Member of the Governing Board Swiss National Bank Geneva, 13 November 2025 © Swiss National Bank

*

The speakers would like to thank Dirk Faltin and Christian Myohl for their support in writing this speech. They also thank Romain Baeriswyl, Maja Ganarin, Sylvie Golay Markovich, Christoph Hirter, Kerstin Kehrle, Damien Klossner, Joséphine Molleyres, Reto Nyffeler, Nicole Rütti and Michael Schäfer for their valuable comments, Tim Gasser for his help in preparing the charts, as well as the SNB Language Services for their translations of the text.

## Ladies and gentlemen

My colleague Thomas Moser and I are delighted to welcome you to our traditional Money Market Event in Geneva. We are pleased that so many of you have accepted our invitation to attend. Our speech today and the panel discussion that follows will focus on bank funding costs in the Swiss financial market.

Since we last met here a year ago, the SNB has lowered its policy rate by 1 percentage point. The policy rate has thus been cut by a total of 1.75 percentage points since the beginning of 2024, and this has passed through to the relevant market interest rates. 1 Interest rates in the financial and credit markets have fallen accordingly, thereby also reducing interest costs for borrowers in Switzerland.

At the same time, however, we observe that the interest rates at which banks secure funding in the financial market have fallen less sharply than the general level of interest rates. This means that bank funding costs in the financial market have increased relatively speaking, which can affect the pricing and granting of loans. 2

As the credit markets are one of the channels via which our monetary policy takes effect, we will take a closer look at this phenomenon today. We will focus on two questions: First, what factors explain the higher funding costs? And second, what are the implications for bank lending and the effectiveness of our monetary policy?

## The role of funding in the financial markets

Before turning to these questions, let me briefly address the central role played by the funding of loans in the financial markets.

When a bank grants a loan, a claim on the borrower is created on the assets side of the bank's balance sheet. At the same time, it credits the corresponding amount to the borrower's account - on the liabilities side, a customer deposit thus appears as a liability of the bank (cf. chart 1a). As soon as the borrower uses this deposit to make a payment to a customer of another bank, the amount is debited from the borrower's account and credited to the payment recipient's account. This is settled between the banks involved using sight deposits at the SNB. The lending bank transfers liquidity in the form of SNB sight deposits to the payment recipient's bank (cf. chart 1b).

The lending bank must ensure that it has sufficient liquidity to cover all its liabilities - such as those arising from retail payments - at all times. Making sure that it has the liquidity needed to meet its financial obligations is therefore a key issue. To manage its liquidity, the bank must find solid financing for its loans, a process commonly referred to as securing 'funding'. Various sources of funding are available for this purpose:

1 Cf. Martin and Moser (2024) on the transmission of the policy rate to financial market interest rates.

2 In this speech, we consistently use the term 'funding costs' to mean a measure expressing the absolute funding rate in relation to the general interest rate level.

- -Customer deposits: Short-term sight or savings deposits are normally one of the cheapest sources of funding. Banks can expand their deposit base by adjusting their conditions, for example.
- -Money market: Short-term liquidity requirements can be met by borrowing money in the interbank market or from other financial market participants; this enables liquidity to be obtained flexibly and rapidly.
- -Capital market: Large volumes of liquidity can be raised for the long term by issuing Pfandbriefe (a type of covered bond) and bank bonds (cf. chart 1c). This enables a bank to manage its liquidity actively and on a long-term basis. 3

The bank will typically make use of all available sources of funding, seeking to achieve a balanced funding profile that is aligned as well as possible with its business model and prevailing market conditions. We will focus here on funding costs in the money and capital markets.

## Determining funding costs

When banks secure funding, they pay investors a specific rate of interest, known as the funding rate. This can be broken down conceptually into the following four components (cf. chart 2):

1. Expected short-term interest rates over the term of the funding.
2. A term premium to compensate for the uncertainty regarding future interest rate and inflation developments.
3. A credit premium for the bank's default risk. 4
4. A liquidity premium, which reflects both the tradability of the funding instrument and the funding costs of investors arising from balance sheet and investment restrictions, for instance. 5 This means, for example, that if a bank issues a bond and investors' buying capacity is limited, it will have to offer a higher liquidity premium and pay a correspondingly higher funding rate. 6

In order to determine a bank's funding costs, the bank and instrument-specific premia i.e. the spreads that the bank has to pay in excess of interest rate expectations and the term premium - are relevant. A common measure of interest rate expectations and the term premium is the swap rate, i.e. the fixed interest rate that derivatives market participants

3 Other sources of funding are also available, such as the sale of loans to investors (e.g. via securitisation).

4 The credit premium compensates for the expected default risk and the uncertainty surrounding default risk.

5 Institutional investors such as pension funds and insurers are subject to various balance sheet and investment restrictions, such as caps on

certain asset classes, diversification requirements, as well as credit rating and liquidity requirements.

6 Cf. Brunnermeier, M. K. and L. H. Pedersen (2009), pp. 2202-2203.

exchange for a variable money market rate such as SARON. As the principal is not exchanged in an interest rate swap, the swap rate does not include either credit or liquidity premia. 7

The difference between the funding rate and the swap rate thus isolates the instrumentspecific credit and liquidity premia. This difference, known as the swap spread, is a common measure of funding costs. The swap spread directly shows the additional funding costs that banks have to bear in excess of interest rate expectations and the term premium. It thus allows a comparison of funding costs over time, across different terms and between different funding instruments (e.g. Pfandbriefe or bank bonds).

How have funding costs developed in recent times? Between mid-2023 and end-2024, swap spreads increased significantly for a range of funding instruments (cf. chart 3). Yields on bonds such as Pfandbriefe thus fell less sharply than swap rates during this period. A similar increase was also observed in the bank bond market and the unsecured money market. Although spreads have recently declined somewhat, they remain elevated.

By way of example, the swap spread on ten-year Pfandbriefe reached more than 40 basis points in the secondary market in November 2024. The ten-year average was around 20 basis points. Latterly standing at around 30 basis points, it is still approximately 10 basis points above the ten-year average.

## Explanations for the increase in funding costs

What explains the rise in swap spreads, i.e. in bank funding costs? There are many possible reasons, the relevance of which varies depending on the bank and funding instrument in question. We would like to highlight three key explanations (cf. chart 4): First, the higher yields on foreign government bonds relative to the corresponding swap rates; second, the structural change in the Swiss banking market following the acquisition of Credit Suisse by UBS; and third, developments that have made banks' liquidity management more challenging.

These three factors have led to a higher liquidity premium on funding instruments. Given that the creditworthiness of the Swiss banks and mortgage bond institutions has remained stable, we can practically rule out the rise in the swap spread being attributable to higher credit risk and the associated widening of the credit premium.

## Explanation 1: Rise in government bond yields relative to swap rate

Since mid-2023, the swap spreads on foreign government bonds, i.e. their yields relative to the swap rates, have risen significantly (cf. chart 5, left-hand side). 8 This is mainly

7 Money market rates that are relevant for interest rate swaps (e.g. SARON) reflect average interbank credit risk. As SARON is secured by high-quality liquid assets, the credit risk associated with SARON swaps is negligible.

8 In the market, the swap spread on government bonds is calculated as the difference between the swap rate and the yield on a government bond with the same term (swap spread = swap rate minus government bond yield). However in this speech, as with the calculation of bank funding costs, we calculate the swap spread on government bonds as the government bond yield minus the swap spread.

attributable to two developments: First, in the context of quantitative tightening (QT), central banks became less active in government bond markets. As a result, important - and not especially price-sensitive - sources of demand were absent. They were replaced by more price-sensitive private investors who could only absorb the supply of government bonds at higher interest rates. Second, an expansion of sovereign debt considerably increased the supply of government bonds abroad, which weighed on prices and pushed up yields. 9

In Switzerland, the SNB did not sell any Swiss government bonds - and there was no expansion of fiscal deficits. 10 Global interest rate movements were nevertheless reflected in Swiss Confederation bond yields - particularly via interest arbitrage transactions and international portfolio allocations. If, for example, yields on German government bonds rise relative to corresponding Swiss securities, Swiss bonds become less attractive for investors. Demand therefore falls, putting prices under pressure and pushing up yields in the Swiss market. 11

The spillover effects described here are not limited to the impact of foreign yields on Swiss bonds; they are also felt within the same currency area (cf. chart 5, right-hand side). If the swap spread on government bonds rises, the swap spreads on other bonds - e.g. Pfandbriefe or bank bonds - typically also increase. As a result of this adjustment mechanism, a rise in the swap spreads on foreign government bonds widens the spreads on comparable Swiss francdenominated government bonds, increasing bank funding costs.

## Explanation 2: Structural change in Swiss banking centre

The acquisition of Credit Suisse by UBS in 2023 triggered a structural change, which has also been reflected in the Swiss credit market. Since then, the number of customers entering into new credit relationships with domestically focused banks has increased significantly. One important reason for this was the desire for diversification - many clients that previously did business with both UBS and Credit Suisse sought additional banking relationships to reduce their reliance on a single big bank. Equally, this development may also have occurred in response to more risk-based borrowing conditions for former Credit Suisse customers in the context of the integration process at UBS. 12

This structural change caused lending to shift towards domestically focused banks (chart 6, left-hand side). In our discussions, market participants emphasised that credit growth at some of these banks had significantly exceeded the rise in customer deposits, increasing their funding needs in the capital market. Unlike the former Credit Suisse, many of the

9 Cf. BIS (2024).

10 In order to tighten its monetary policy, the SNB reduced its foreign exchange reserves, which contributed to an increase in the supply of securities denominated in foreign currencies.

11 Cf. Federal Treasury (2025), p. 11.

12 Cf. SNB (2025), p. 16. SNB (2025a), p. 31.

domestically focused banks have little or no presence abroad, so their investor base is narrower. This has led to a corresponding rise in domestic funding needs.

Banks' additional funding needs in the Swiss capital market are reflected in the issuance volume of bank bonds and Pfandbriefe (cf. chart 6, right-hand side). This has risen continuously in recent years and is likely to have contributed to the increase in spreads on Pfandbriefe and bank bonds.

## Explanation 3: More challenging liquidity management

At the heart of banks' liquidity management is meeting the liquidity coverage ratio (LCR) requirement. 13 This stipulates that financial institutions must hold sufficient high-quality liquid assets (HQLA) to meet their short-term liabilities, even in times of stress. HQLA include banks' sight deposits at the central bank, as well as government bonds and other highquality liquid securities. In Switzerland, sight deposits make up a large proportion of HQLA.

In recent quarters, three developments have made banks' liquidity management more challenging and have - via a higher liquidity premium - contributed towards a rise in swap spreads.

First, the supply of available HQLA declined because the SNB sold foreign currency until the end of 2023 in the course of tightening monetary policy. 14 These transactions led to a decline in banks' sight deposits held at the SNB, and hence to a decrease in HQLA. 15 In addition, the SNB raised the minimum reserve requirement for banks as of 1 July. 16 Sight deposits to meet this minimum reserve requirement are to be held permanently, even under conditions of stress, and they therefore cannot be counted towards the LCR. As a result, the volume of eligible HQLA decreased.

Second, since January 2024, systemically important banks have been subject to stricter liquidity requirements. 17 These ensure that systemically important banks are more resilient to liquidity shocks, as stipulated by the Banking Act, and have increased their need for HQLA and long-term funding.

Third, the currently comparatively flat yield curve, in which long-term interest rates are barely higher than short-term interest rates, is leading to a situation in which the maturities on the

13 The Swiss Banking Act in conjunction with the Liquidity Ordinance requires Swiss banks to conduct professional liquidity management. In addition to the short-term liquidity coverage ratio (LCR), the net stable funding ratio (NSFR) must also be complied with. The NSFR limits dependence on short-term funds by requiring stable funding structures for banks' long-term loans.

14 At the same time - albeit on a smaller scale - the decline in banknotes in circulation, the interest payments by the SNB and the profit distributions to the Confederation and the cantons led to a rise in HQLA in the banking system. The disbursement of emergency liquidity assistance (ELA) also temporarily increased the HQLA. This interplay of factors thus had the opposite effect to foreign currency sales.

15 By international standards, the sight deposits made available by the SNB, or HQLA, remain very high, even after the SNB's balance sheet reduction. Swiss banks may also make use of options for alternative liquidity approaches (ALA) to meet the LCR requirement in Swiss francs - they may include foreign currency HQLA or additional HQLA in category 2a (Pfandbriefe). These options were specifically created for jurisdictions where, in the absence of the central bank's sight deposits, the supply of HQLA may not be sufficiently large.

16

Cf. SNB (2024): SNB raises minimum reserve requirement for banks.

17 Cf. Federal Council (2022): news.admin.ch/en/nsb?id=89132.

liabilities side of banks' balance sheets are tending to shorten. This is because, in such an interest rate environment, investors tend to avoid longer-term investments such as time deposits and bank bonds, preferring short-term sight deposits instead. This maturity shortening with respect to banks' liabilities causes their LCRs to deteriorate.

These developments have led banks to seek more HQLA and to strive for a longer-term funding structure - partly to ensure compliance with liquidity requirements. Furthermore, according to our discussions with market participants, in many cases financial institutions have not wanted to allow their liquidity surpluses to fall; in other words, they have sought to preserve their liquidity buffers. The HQLA surplus in the Swiss banking system is thus comparable to that of 2022 (cf. chart 7).

The increased competition for longer-term funding of HQLA has contributed to upward pressure on liquidity premia and hence also on swap spreads in the funding markets. The increased demand for long-term funding has also been felt in the unsecured money market, where spreads on terms of over 90 days have risen significantly since 2024 (cf. chart 8).

## Outlook for funding costs in the Swiss financial market

How do we expect things to develop in the future (cf. chart 9)? The international environment currently suggests that a rapid decline in funding costs is unlikely. It is true that QT by central banks - in other words, the pace at which they are selling securities - has slowed of late. 18 However, a reduction in the spread between government bond yields and the corresponding swap rates is counteracted by high government borrowing needs. 19

The structural change in the Swiss banking sector resulting from the acquisition of Credit Suisse by UBS is likely to persist for some time. There are signs that adjustment processes are already underway and that not only domestically focused banks but also other market participants, such as foreign banks, are filling the gaps left by Credit Suisse. We also see that many institutions are expanding their range of funding measures, including by raising funds abroad. However, these adjustment processes are demanding and time-consuming.

The SNB's foreign currency sales in 2022 and 2023, the increase in the minimum reserve requirement, as well as stricter liquidity requirements for systemically important banks have had a lasting impact on banks' liquidity management. Here, too, accessing additional sources of funding can help alleviate upward pressure on funding costs.

Indeed, we see that the situation has eased somewhat in recent months, with swap spreads falling in the unsecured money market and the market for Pfandbriefe. This indicates that the aforementioned adjustment processes - such as accessing new sources of funding - are progressing.

18 Cf., for example, Federal Reserve (2025), p. 5, and Federal Reserve (2025a), p. 37. In October, the Federal Reserve decided to end its QT altogether in December 2025.

19 In Switzerland, swap spreads on government bonds have declined noticeably this year. One possible reason for this is that investors have increasingly focused on Swiss franc investments as safe havens.

## Significance for credit supply and monetary policy

From the SNB's perspective, the key question is: What effects are higher funding costs having on the granting and pricing of bank loans, and will this development influence the impact of our monetary policy?

Let us start by looking at the granting and pricing of loans. For banks, the interest rate margin - the difference between the lending rate and the funding rate - is a significant source of income. An increase in funding costs, i.e. a situation in which the funding rate rises relative to the swap rate, reduces this margin. In order to stabilise it, banks can raise their lending rates in relation to the swap rate.

We have indeed observed a widening in the spread between various lending rates and the swap rates since 2024. The average swap spread for published mortgage rates has risen by around 20 basis points (cf. chart 10).

In addition to steering the interest rate margin, banks must ensure that they comply with regulatory liquidity metrics. They can do this by tightening lending - curbing credit growth in a targeted manner can reduce funding needs.

According to our observations, however, credit growth in Switzerland has remained robust overall. The volume of mortgage lending, which makes up over 85% of total credit volume, is currently growing at a rate of around 3%. This development is in line with our model forecasts. Based on the available data, there is no discernible 'credit crunch' - i.e. no nationwide undersupply of credit. 20

What does this mean for the SNB's monetary policy? Following our policy rate cuts, both funding and lending rates fell markedly (cf. chart 11, left-hand side), despite rising relative to swap rates. This shows that monetary policy transmission via the credit markets is working. 21 Credit growth has accelerated as a result (cf. chart 11, right-hand side). Our monetary policy easing is thus having the intended effect.

## Conclusion

In summary, bank funding costs, as measured by swap spreads, have risen noticeably in recent quarters. The key factors here have been the global increase in swap spreads on government bonds, the structural change in the Swiss banking centre, and various developments that have made banks' liquidity management more challenging.

Despite this rise in funding costs, credit growth in Switzerland remains robust and our monetary policy stimuli are taking effect via the credit markets. The easing of monetary policy since the beginning of 2024 has led to lower financial market and lending rates and a

20 There are some signs of restraint in complex loan segments and in the case of specific borrowers. Cf. Baeriswyl, Freitag and Ganarin (2025).

21 In addition to the credit channel, monetary policy takes effect via other channels, such as the exchange rate channel.

pick-up in lending, thereby helping to ensure price stability in Switzerland. Our monetary policy thus remains effective.

## References

Baeriswyl, Freitag and Ganarin (2025), Robust bank lending in a changing credit market environment, SNB Economic Note No. 13/2025.

BIS (2024), Negative interest rate swap spreads signal pressure in government debt absorption, BIS Quarterly Review, December 2024.

Brunnermeier and Pedersen (2009), Market Liquidity and Funding Liquidity , The Review of Financial Studies, Volume 22, Issue 6, June 2009, pp. 2201-2238.

Federal Council (2022), Systemically important banks: Federal Council adopts amendments to Liquidity Ordinance , press release of 3 June 2022.

Federal Reserve (2025), Federal Reserve Balance Sheet Developments , May 2025.

Federal Reserve (2025a), Monetary Policy Report, June 2025.

Federal Treasury (2025), Activity report 2024 , March 2025.

Martin and Moser (2024), The implementation and transmission of the SNB's monetary policy during the recent tightening cycle. SNB Money Market Event, 18 April 2024.

SNB (2024), SNB raises minimum reserve requirement for banks , press release of 22 April 2024.

SNB (2025), Financial Stability Report 2025.

SNB (2025a), Quarterly Bulletin 1/2025 , March 2025.",Petra Tschudin; Thomas Moser
https://www.bis.org/review/r251110l.htm,John C Williams: Theory and practice of monetary policy implementation,"Remarks by Mr John C Williams, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the European Central Bank conference on Money Markets 2025, Frankfurt am Main, Germany, 7 November 2025.",2025-11-07 00:00:00,"## FEDERAL RESERVE BANK of NEW YORK Serving the Second District and the Nation

## SPEECH

## Theory and Practice of Monetary Policy Implementation

November 07, 2025

John C. Williams, President and Chief Executive Officer

## Remarks at the ECB Conference on Money Markets 2025, European Central Bank, Frankfurt, Germany

As prepared for delivery

## Introduction

Good morning. It's wonderful to be with you here in Frankfurt. In our interconnected global economy, it's important to have opportunities like this to learn from the perspectives and experiences of others, whether we are academics, market participants, or practitioners of central banking.

The theme of my talk is the theory and practice of monetary policy implementation. Central banks differ in their objectives, strategies, and approaches to monetary policy implementation—all of which influence how they supply reserves, manage balance sheets, and control short-term interest rates.

But like Neapolitan and New York-style pizzas, central banks also share similarities. These were spotlighted in the ways they responded to the global financial crisis and the onset of the COVID-19 pandemic. Many central banks expanded their balance sheets through various quantitative easing programs funded in large part by increases in central bank reserves.

These experiences fundamentally changed the ways many central banks approach the provision of reserves while maintaining control of short-term interest rates. As a result, central banks have reviewed, and in some cases modified, their strategies for supplying reserves and controlling interest rates in ways that reflect the unique features of their jurisdictions. Although their approaches differ in specifics, they share common elements that reflect the fundamental factors that shape the supply and demand for reserves.""

Today I will talk about the monetary policy implementation frameworks that central banks use to manage the supply and demand for reserves, emphasizing the common features and mechanisms of these approaches. I'll also discuss in more detail the Federal Reserve's ample reserves framework.

Before I go any further, I must give the standard Fed disclaimer that the views I express today are mine alone and do not necessarily reflect those of the Federal Open Market Committee (FOMC) or others in the Federal Reserve System.

## Framing the Frameworks

Monetary policy implementation frameworks are critically important to the conduct of monetary policy. They encapsulate the mechanisms and tools used to steer operational targets in line with the desired policy stance and provide liquidity to the financial sector.""

In supplying reserves to the banking system, central banks have multiple goals that frequently involve trade-offs.3 First and foremost, they target a level of the policy interest rate and aim to minimize the variability of the policy rate around that target. In addition, they have objectives related to supporting financial stability and the smooth functioning of financial markets. For example, central banks may see advantages or disadvantages to interbank lending in money markets, as well as costs and benefits related to central bank lending into markets.

The core of any operational framework is the central bank's supply of reserves, which ranges from a low level, or ""scarce,"" to ""ample"" and ""abundant."" The ""price"" of reserves is the spread between the market interest rate and the rate earned for holding reserves at the central bank. When reserves are scarce, the slope of the demand curve for reserves is steep, as illustrated in Figure 1. Asmall change in the quantity of reserves results in a meaningful change in the spread. When reserves are ample, the slope of the demand curve flattens but still slopes downward, so that small changes in the quantity of reserves have modest effects on the spread. And when reserves are abundant, the demand curve is essentially flat.

A central bank has two sets of tools it can use to supply reserves. These are illustrated in Figure 2. First, it chooses an ex ante aggregate level of reserves to supply to the banking system, labeled ""X"" in the figure. Second, it may make available a lending facility to the banking system that offers loans to financial institutions at an interest rate determined by the central bank. This is labeled ""L"" in the figure. If the ex ante supply of reserves is sufficiently low, the additional demand at rate L will be met by the lending facility. Note that both tools are a means to supply reserves: In the first, the supply is set in advance, while with the latter, it adjusts endogenously to market conditions.

Central banks deploy various combinations of tools depending on the institutional and market structures in their jurisdictions as well as preferences over the trade-offs involved in their use.4 These choices represent different points among the set of options for using the two tools. Despite differences in tactics, each of the approaches can achieve the goals of strong interest rate control and



For example, lending facilities limit upward movements in interest rates on days of high demand, thereby reducing the ex ante supply of reserves needed to control short-term rates.&gt;

The European Central Bank, the Bank of England, and the Reserve Bank of Australia have chosen to operate with a relatively small amount of ex ante reserves supply and provide additional reserves as demanded at a rate near the policy target rate. Counterparties can then draw upon as much or as little as they choose based on their needs, subject to their ability to provide eligible collateral.° In this way, even with a smaller ex ante supply of reserves, tight interest rate control is maintained amid significant movements in the demand for reserves. In the case of the Bank of England, its weekly Short-Term Repo facility sees regular sizable use. In October of this year, it averaged around £85 billion.""

## Federal Reserve: Ample Reserves and Tools

Like that of other central banks, the Fed's operational framework has evolved over time, reflecting its experience with large balance sheets since the global financial crisis.8 In January 2019, when the decline in the Fed's asset holdings implied that the quantity of reserves would soon fall below an ""abundant"" level, the FOMC formally adopted an ample reserves strategy.?

The FOMC has defined this framework as one in which ""control over the level of the federal funds rate and other short-term interest rates is exercised primarily through the setting of the Federal Reserve's administered rates, and in which active management of the supply of reserves is not required.""!° Accordingly, the ex ante supply of reserves is chosen to be sufficiently large to meet the demand for reserves on most days.

One important tool the FOMC has established to ensure interest rate control is the overnight reverse repo facility (ON RRP), which, alongside the interest paid on reserve balances (IORB), helps set a floor for the federal funds rate. Through the ON RRP, eligible counterparties ""lend"" to the Federal Reserve at the rate set by the FOMC, currently at the bottom of the target range for the federal funds rate. Usage of the ON RRP adjusts automatically to market conditions, rising and falling with supply and demand, which is particularly important in a dynamic market.

The ON RRP has proven to be a very effective and flexible tool to support interest rate control to the downside. When Federal Reserve asset holdings push reserves above ample, the ON RRP relaxes the tight relationship between balance sheet size and reserves and acts as a safety valve in supporting smooth transmission of monetary policy to markets. As the size of the balance sheet falls, market rates rise above the rate offered at the ON RRP and, as a result, usage of the ON RRP declines to very low levels. This dynamic is seen in Figure 3, which shows average monthly usage of the ON RRP from 2016 through October of this year. The ON RRP was used extensively when it was economically sensible for the Fed's counterparties to do so. By contrast, it has very limited usage when repo rates are well above the ON RRP rate, as is the case today.

In 2021, the Federal Reserve introduced the Standing Repo Facility (SRF), which nicely complements the ON RRP by providing interest rate control to the upside."" The SRF rate is set at the top of the FOMC's target range for the federal funds rate. This combination of an ample supply of reserves and an SRF rate at the top of the target range reduces the day-to-day reliance on the facility except during periods of significant upward pressure on rates resulting from strong liquidity demand or market stress.

By ensuring that adequate liquidity will be available in a wide variety of circumstances, the SRF plays a critical role in capping temporary upward pressure on rates and assures markets of effective interest rate control and smooth market functioning. It is best thought of as a way of making sure that the overall market has adequate liquidity consistent with the FOMC's desired level of interest rates. In that regard, it differs from other lending facilities—such as the discount window—that aim to provide individual banks with liquidity when the need arises.

The SRF has been effective as reserves have moved from abundant toward ample. Over the past two months, SRF usage has risen from essentially zero to having greater frequency and higher volume of take-up, especially on days of temporary repo market pressures, as shown in Figure 4. Like the ON RRP facility, the SRF's effectiveness relies on market participants availing themselves of the SRF based on market conditions, free of worries about stigma or other impediments. I fully expect that the SRF will continue to be actively used in this way and contain upward pressures on money market rates.

## Federal Reserve: The Way Forward

At the onset of the pandemic, the Fed, along with central banks around the world, responded quickly to restore market functioning,'? causing reserves to rise well above ample, as they did in many jurisdictions.

In June of 2022, the Fed began the process of reducing the size of its balance sheet to transition toward an ample level of reserves.'3 The FOMC said it intended to stop balance sheet runoff when it deemed reserves were somewhat above ample, and then allow reserves to decline further as other liabilities, such as currency, grow.

The process has worked according to plan. The Fed's securities holdings have shrunk from a peak of about $8-1/2 trillion in 2022 to $6-1/4 trillion today. At its meeting last week, the FOMC decided it would conclude the reduction of its aggregate securities holdings on December 1.'4 This decision was based on clear market-based signs that we had met the test of reserves being somewhat above ample.'5 In particular, repo rates have increased relative to administered rates and have exhibited more volatility on certain days. Accordingly, we have been seeing more frequent use of the SRF. And the effective federal funds rate has increased somewhat relative to the IORB after years of that spread being at a stable level. These developments were expected as the supply of reserves closed in on ample.!©



liabilities grow and underlying demand for reserves increases over time. Such reserve management purchases will represent the natural next stage of the implementation of the FOMC's ample reserves strategy and in no way represent a change in the underlying stance of monetary policy.

Determining when we are at ample reserves is an inexact science. I am closely monitoring a variety of market indicators related to the fed funds market, repo market, and payments to help assess the state of reserve demand conditions. Based on recent sustained repo market pressures and other growing signs of reserves moving from abundant to ample, I expect that it will not be long before we reach ample reserves.

## Conclusion

The FOMC's implementation framework combines an ample supply of reserves with facilities to maintain strong interest rate control and flexibility regarding changes in the size of its balance sheet. This operational framework has proven to be highly effective—and it continues to work as designed.

Other central banks use different approaches that operate equally well. We all face common goals and issues. Like the delicious delicacies particular to individual countries, the similarities outweigh the differences.

## Figures por

1 John C. Williams, ""On the Optimal Supply of Reserves,"" remarks at the New York Fed — Columbia SIPA Monetary Policy Implementation Workshop, Federal Reserve Bank of New York, New York City, May 22, 2025.

2 See Cavallino, Paolo, Mathias Drehmann, Richard Finlay, and Julie Remache, 2025. ""Monetary policy operational frameworks -a new taxonomy,"" Bank for International Settlements, BIS Quarterly Review, September, pp. 49-65.

3 See Afonso, Gara, Gabriele La Spada, Thomas M. Mertens, and John C. Williams. 2023. ""The Optimal Supply of Central Bank Reserves under Uncertainty."" Federal Reserve Bank of New York Staff Reports, no. 1077, revised December, for discussion and references to the relevant literature.

- 4 See the policy implementation frameworks descriptions for the Bank of Canada, the Bank of England, the European Central Bank, Federal Reserve System, and the Reserve Bank of Australia.
- 5 Afonso, Gara, Gabriele La Spada, Thomas M. Mertens, and John C. Williams. 2023. ""The Optimal Supply of Central Bank Reserves under Uncertainty,"" Federal Reserve Bank of New York Staff Reports, no. 1077, revised December, for discussion and references to the relevant literature.

6 Roberto Perli, ""The Evolution of the Federal Reserve's Monetary Policy Implementation Framework,"" remarks at the New York Fed — Columbia SIPA Monetary Policy Implementation Workshop, Federal Reserve Bank of New York, New York City, May 22, 2025.

7 Bank of England, Bank of England Market Operations Guide: Our tools, as updated July 3, 2025.

8 For a history of FOMC operating tools, see Kevin Clark, Dina Marchioni, Julie Remache, and Will Riordan, ""Federal Reserve Repo and Reverse Repo Market Operations: Before the Global Financial Crisis to 2015,"" The Teller Window, July 16, 2025; and Kevin Clark, Dina Marchioni, Julie Remache, and Will Riordan, ""Federal Reserve Repo and Reverse Repo Market Operations: 2015 to Now,"" The Teller Window, July 17, 2025.

- ° Board of Governors of the Federal Reserve System, Statement Regarding Monetary Policy Implementation and Balance Sheet Normalization, January 30, 2019.

10 See Board of Governors, January 30, 2019, Statement. The FOMC's discussion of monetary policy implementation frameworks is summarized in the minutes of the November 2018, December 2018, and January 2019 FOMC meetings.

- 1 Board of Governors of the Federal Reserve System, Statement Regarding Repurchase Agreement Arrangements, July 28, 2021.

12 Board of Governors of the Federal Reserve System, Federal Reserve announces extensive new measures to support the economy, March 23, 2020.

13 Board of Governors of the Federal Reserve System, Plans for Reducing the Size of the Federal Reserve's Balance Sheet, May 4, 2022.

14 See Board of Governors of the Federal Reserve System, Federal Reserve issues FOMC statement, October 29, 2025.

15 See Chair Powell's prepared remarks in his October 29th FOMC press conference: Transcript of Chair Powell's Press Conference, October 29, 2025.

46 See Roberto Perli, ""Balance Sheet Reduction: Progress to Date and a Look Ahead,"" remarks at 2024 Annual Primary Dealer Meeting, Federal Reserve Bank of New York, New York City, May 8, 2024; and Gara Afonso, Kevin Clark, Brian Gowen, Gabriele La Spada, JC Martinez, Jason Miu, and Will Riordan, ""A New Set of Indicators of Reserve Ampleness,"" Federal Reserve Bank of New York Liberty Street Economics, August 14, 2024.

",John C Williams
https://www.bis.org/review/r251117c.htm,Cosmin Marinescu: Opening speech - Central and Eastern European Annual Payments Forum,"Opening speech by Mr Cosmin Marinescu, Deputy Governor of the National Bank of Romania, at the 4th Central and Eastern European Annual Payments Forum (CEE), Bucharest, 21 October 2025.",2025-10-21 00:00:00,"## Cosmin Marinescu: Opening speech - Central and Eastern European Annual Payments Forum

Opening speech by Mr Cosmin Marinescu, Deputy Governor of the National Bank of Romania, at the 4th Central and Eastern European Annual Payments Forum (CEE), Bucharest , 21 October  2025.

* * *

Ladies and Gentlemen, Distinguished Guests,

Good morning and welcome to the Fourth Central and Eastern European Annual Payments Forum, hosted by the National Bank of Romania.

It is a privilege to gather at our premises once again, alongside policymakers, innovators, and partners from across our region and beyond. It is already becoming a tradition for us, here, at the central bank to host this event and I would like to take this opportunity to thank the organizers and our international participants for joining us.

We meet at a time when central banks are navigating a profoundly changed landscape. Over the past few years, the world has faced overlapping crises - the pandemic, disruptions in international trade, geopolitical tensions brought especially by the war in Ukraine, and the resulting inflationary pressures and financial volatility.

Each crisis has tested the resilience of our economies and institutions, and let me say that our response has been strong and proportionate. For central banks, this means balancing multiple responsibilities: ensuring prices and financial stability, supporting sustainable economic growth, and guiding innovation in a safe and inclusive way, including in the payments area.

In this context, payments are not merely a technical issue, they are at the heart of economic life. An efficient and secure payments system fosters trust, supports business dynamism, SMEs and enhances competitiveness. It also serves as a bridge between innovation and inclusion, helping citizens and enterprises participate in a modern economy.

Romania has made significant progress in improving its payments infrastructure. Instant payments are increasingly part of daily life. Moreover, public-private cooperation, such as the RoPay project, has shown that we can deliver practical innovation that benefits users. But we also face enduring challenges: ensuring digital inclusion for all citizens, strengthening cybersecurity and resilience, and maintaining trust in an era of rapid change.

These are not uniquely Romanian challenges. Across Europe, we share the task of adapting our financial systems to a world shaped by uncertainty, technological transformation, and strategic competition. It is our duty to preserve stability while embracing innovation.

The National Bank of Romania's approach rests on several broad priorities.

First, maintaining financial stability. Payments modernization must go hand in hand with prudent supervision, robust cybersecurity, and crisis preparedness. Trust, once lost, is hard to regain.

Second, ensuring that payments remain safe, efficient, and accessible to all. Every citizen and business - including those in rural and underserved areas - should have confidence in the system's reliability and fairness.

Third, promoting innovation within sound regulation. Our Innovation Hub supports cooperation with fintechs and market participants to test new solutions responsibly. Regulation should not hinder innovation, but neither should innovation outpace stability.

Fourth, reinforcing regional and European integration. Romania is deeply committed to the European financial framework, whether we are talking about aligning with SEPA standards, strengthening interoperability, or contributing to new initiatives such as the digital euro or the new Security Action for Europe program (SAFE).

These projects are not abstract goals; they aim to enhance Europe's competitiveness and strategic autonomy. Such initiatives are part of a broader effort to also simplify financial regulation, but without deregulating, and ensure that our markets remain globally relevant and secure.

## Ladies and Gentlemen,

In Romania, over the last years, inflation, long-term interest rates and the budget deficit have been much above the reference values corresponding to the Maastricht criteria. These vulnerabilities remind us that financial stability cannot be taken for granted.

At the same time, they underline the necessity of decisive measures and reforms, which must be seen as investment in resilience and credibility, laying the foundation for stronger, more balanced economic growth over the long term.

Equally important, financial sustainability depends on addressing the twin deficits that burden our economy these years: the public deficit and the current account deficit.

These imbalances are not only sources of vulnerabilities but also a test of policy coherence. Correcting them requires decisive action, transparent dialogue, and a consistent alignment of fiscal, monetary, and structural policies, laying the foundation for macroeconomic stability and investors' confidence.

These efforts are consistent with broader European objectives: promoting sustainable growth, strengthening resilience, and creating a more predictable environment for citizens and businesses alike.

Looking forward, we must see competitiveness and sustainability not as opposing forces but as mutually reinforcing goals. The double transition, championed at the EU level, to a greener and more digital economy demands investment, innovation, and cooperation and, equally important, should leave no one behind.

Europe's financial system must channel capital towards sustainable projects, while ensuring that growth remains inclusive and benefits all regions - including those like ours, still catching up in convergence.

The global environment reminds us that resilience is not only about systems and technology - it is also about trust, cooperation, and adaptability. The same principles apply to how we manage payments, how we regulate financial markets, and support innovation. We must think ahead, anticipate shocks, and remain united and resilient in our European vision.

For the National Bank of Romania, our role is not only to regulate but to enable. We aim to be a constructive partner for banks, fintechs, and the broader economy, fostering innovation while preserving stability. The dialogue we are having today, at this forum, is part of that effort.

Distinguished Guests,

As former economic advisor of the President of Romania for ten years, I supported many projects of European and international cooperation, from business forums by Chambers of Commerce to financial, energy, or security initiatives. The most important idea I followed is that together we are stronger. In this regard, the best example is the EU itself. A peaceful and prosperous vision needs real and honest cooperation.

This gathering is an opportunity to learn from one another, to coordinate across borders, and to transform shared challenges into shared progress. I encourage all of us to use this forum to build new partnerships and to reaffirm our common European purpose - a financial system that is stable, competitive, inclusive, and forward-looking

Let us continue to work together to ensure that payments and the broader financial architecture they support, remain a foundation of prosperity - in Romania, in our region, and across Europe.

Thank you, and I wish you all an inspiring and productive conference.",Cosmin Marinescu
https://www.bis.org/review/r251112l.htm,Gent Sejko: Address - centennial conference of the Bank of Albania,"Address by Mr Gent Sejko, Governor of the Bank of Albania, at the centennial conference of the Bank of Albania, Tirana, 11 November 2025.",2025-11-11 00:00:00,"## Gent Sejko: Address - centennial conference of the Bank of Albania

Address by Mr Gent Sejko, Governor of the Bank of Albania, at the centennial conference of the Bank of Albania, Tirana, 11 November 2025.

* * *

Your Excellency Prime Minister,

Dear fellow Governors,

Dear representatives from international institutions,

Dear guests and friends,

It is my great pleasure to warmly welcome you to the 2025 Conference of the Bank of Albania.

This year's conference holds special significance for us, as it marks the centennial of the Bank of Albania - an institution that, since its founding, has served as the central bank of the Albanian state.

In my view, every jubilee carries a twofold purpose. It is, first and foremost, a moment to assess the work of the institution and to celebrate the dedication of all employees that have contributed to its progress. At the same time, a jubilee should also serve as a moment to take a critical look at what we have accomplished, on the factors that have enabled our success, as well as the challenges and opportunities that lie ahead.

The proceedings of this conference are, to a large extent, devoted to this second purpose. The active participation of our esteemed speakers and distinguished guests will greatly enrich this collective process of reflection and forward-looking dialogue.

Dear participants,

Before I proceed further, allow me to briefly share a few words about the past and present of the Bank of Albania.

The vision for creating a national bank was first voiced in 1899 by our great Renaissance thinker, Sami Frashºri, who stated that true sovereignty requires institutions - capable of safeguarding the economic independence of the nation. This noble idea was embraced and advanced by Ismail Qemali, the founder of the Albanian State. The initial efforts of his government were continued by the following governments, and culminated in the establishment of the National Bank of Albania in 1925. That bank became the country's first national bank. It established the Albania's first monetary system, based on the gold standard, and, in 1926, put into circulation our first national currency - the Gold Franc and its subdivision, the Lek.

With the end of the Second World War, the new political course of the communist state was accompanied by swift measures of nationalization. In January 1945, the concession of the National Bank of Albania was annulled, and the State Bank of

Albania was established. For nearly five decades that followed, this institution served the centralized economy as an instrument of control and economic administration. Yet, despite the political context of the time, the State Bank of Albania remained a valuable nucleus of economic and financial expertise.

The early 1990s marked the country's great transition - toward democracy, political pluralism, and an economic system founded on the principles of the free market. This transition brought profound changes to the banking system. In April 1992, the Bank of Albania was re-established as a central bank, mandated with the objectives of macrofinancial stability and with supervisory and regulatory functions. Over the three decades that followed, it has adopted a modern monetary policy framework, based on an inflation-targeting regime and a freely floating exchange rate. It has also achieved a high degree of convergence with the supervisory standards and regulatory practices of the European Union; contributed to the development of financial markets; built an efficient payment system; invested in financial education; and established an effective process of dialogue with domestic and international partners, as well as with the wider public.

In quantitative terms, the remarkable economic and financial progress our country has experienced over the past three decades is a direct testament to the Bank of Albania's achievements. Despite the fluctuations and numerous shocks we have experienced along the way, the Albanian economy has recorded an annual average growth rate of 4.3% over this period. Average income per capita has increased from EUR 670 to EUR 11,000, while inflation rate averaged at 3.1% - a figure very close to our 3% target. Over the same time horizon, the credit stock to the private sector has picked up more than a hundredfold, deposits stocks has edged up almost thirty-five times, reaching EUR 18 billion, while the Bank of Albania's foreign exchange reserves have grown to EUR 7 billion from EUR 380 million.

In qualitative terms, an equally meaningful testament to the Bank's success in fulfilling its mission is the fact that - apart from the political and social turmoil of 1997 - the Albanian economy has not experienced any genuine financial crises or balance-ofpayments crises. On the contrary, confidence among domestic and foreign investors in the Albanian financial system has been increasing. This is displayed by the growth in foreign investment, the enhancement of public confidence in our national currency and financial institutions, and the reduction of risk premia.

Finally, the broad partnership it enjoys with a wide range of international organizations, clearly mirrors the Bank of Albania's stage of progress. It is a full member of the Bretton Woods institutions - the International Monetary Fund and the World Bank - as well as of the Bank for International Settlements (BIS, Basel). In addition, the Bank of Albania maintains a structured process of dialogue with the European Commission, a broad framework of cooperation with the European Central Bank, particularly in the areas of banking supervision and payment systems, a series of twinning projects with central banks in the euro area, and an extensive network of cooperation agreements with regional counterpart institutions.

Distinguished guests,

Historical sources provide the foundation for analysing an institution's history, but the latter is ultimately the product of our shared, daily work and decisions. In this context, and with a forward-looking perspective, allow me to focus on the vision, mission, and policies that will guide the Bank of Albania's activities in the decade to come.

Our vision for the future is that of a modern central bank, which applies the best international practices, is capable of fulfilling its mission, and is worthy of being a member of the European System of Central Banks.

The realization of this vision requires a clear mandate focused on maintaining price stability. At the same time, without undermining this objective, the Bank of Albania should persist to work toward bolstering the overall financial stability of the country. Finally, the Bank of Albania must continue to contribute to the development of monetary markets in general, and payment systems in particular. The fulfilment of these objectives helps generate a calm, transparent, and efficient financial environment, supporting the long-term well-being of society.

In this regard, I find it appropriate to highlight that expanding the mandate of central banks with additional objectives-for which they lack the legitimacy, capacities, or proper instruments-tends to create conflicts in decision-making, undermine credibility, and be counterproductive.

Beyond their mandate, central banks must have a clear and consistent policy framework to achieve their objectives, as well as a broad gamma of instruments to implement these policies.

In this context, allow me to underscore two important points.

- First, regarding monetary policy, the Bank of Albania considers that its current framework-the inflation-targeting regime combined with a free exchange rateprovides an optimal strategy for maintaining price stability, stabilizing economic activity, and addressing shocks at minimal cost. On the one hand, the inflationtargeting regime offers the most direct and effective path for controlling inflation. On the other hand, the free exchange rate regime serves as an automatic stabilizer to withstand shocks, enhances the flexibility of monetary and fiscal policy, and enables the Bank of Albania to perform its role as lender of last resort, providing a strong guarantee for the country's financial stability.

This monetary policy regime has proven successful over the past three decades. Further developed and refined, it will continue to serve the Albanian economy in the process of accession and convergence with European Union standards in the years to come.

- Second, regarding the supervision and regulation of the banking sector, the Bank of Albania will continue to work toward the full adoption of the regulatory framework, supervisory practices, macroprudential resolution tools, and the safety nets of the European Union.

On this topic, I wish to emphasize that the banking sector has been and will remain the main pillar of our financial system. This sector performs an irreplaceable role: it provides secure savings instruments in the form of bank deposits, allocates funds to the most profitable sectors, branches, and businesses of the economy while assuming part of the risk, and creates safe and efficient payment instruments. For this reason, over the past decade, the Bank of Albania has devoted considerable attention to the comprehensive structural reform of this system. Among other measures, the management of the consolidation process, the implementation of the national strategy for reducing non-performing loans, and the continuous improvements to our regulatory framework have enabled a banking sector that is secure, reliable, and capable of providing the economy with the necessary funds to support the expansion of both consumption and investment.

## Dear participants,

Returning to the theme of this conference, I would like to focus the remaining part of my speech on some of the challenges and opportunities we face, which will shape the future activities of the Bank of Albania. Without attempting to present an exhaustive list, I would like to highlight the most significant of these challenges.

The first challenge is the growing geopolitical tensions in the global environment. The reconfiguration of global production chains and the rise of trade barriers have now become a new economic reality. This reality impacts developing economies in two ways. First, it hinders the effective allocation of resources on a global and regional scale, reducing the ability of developing countries to attract foreign investment and capital. Second, it increases volatility and uncertainty, which dampens long-term investments and forces developing nations to strengthen their safety nets - a phenomenon that, of course, carries its own costs.

The second challenge is the rapid pace of financial innovation. Over the past decade, we have witnessed a financial revolution with the potential to fundamentally transform the industry itself. The ongoing digitalization of payment systems, the rapid evolution and increasing use of blockchain technology, digital assets, and decentralized finance come with both benefits and risks. The benefits of innovation stem from cost reductions and expanded access to finance, which increase the efficiency of the financial industry and its contribution to national development. On the other hand, the potential risks arise from the negative impact this innovation may have on the business models and balance sheets of traditional financial intermediaries, as well as from the limited experience of regulators, the general public, and even the operators within this industry.

The third challenge relates to Albania's stage of development and the implications it has for its growth model in the future. As a middle-income country, Albania is already exposed to stronger competition for capital and labour within the European market. Moreover, the country must increasingly base its development model on productivity growth, innovation, and the identification and development of its comparative

advantages. This final challenge is further complicated by unfavourable demographic trends - in Albania, across the region, and beyond - which place a high premium on a skilled workforce.

Nonetheless, from our perspective, the risks arising from these challenges are outweighed, both in quality and quantity, by the opportunities offered through the process of European Union accession. These benefits come both directly, through increased access to the European Union's joint development programs, and indirectly, through the growth of foreign investment, resulting from an improved business climate and reduced perceived risk.

The Bank of Albania, together with the Albanian banking sector, has played and will continue to play a significant role in this process. As the chair of two Inter-Institutional Working Groups on European Integration for two chapters of the Acquis, and as a key contributor to six other chapters, the Bank of Albania is an integral part of the negotiation process. At the same time, the work we have undertaken on regulatory convergence and the integration of the Albanian financial system with the European framework - a process that recently reached a major milestone with Albania's membership in SEPA - has served as a strong promoter of broader financial integration.

## Dear guests,

In closing, I would like to share one final observation. A clear mandate is a necessary condition for central banks, but it is not sufficient on its own to ensure the successful fulfilment of their mission. It must be accompanied by well-defined attributes of independence, accountability, transparency, and institutional professionalism.

In this context, I am encouraged to see that the common thread connecting all generations of employees at the Bank of Albania is precisely their sustained commitment to duty and their steadily growing professionalism. This dedication and professionalism remain the best guarantee we can offer the public of fulfilling our responsibilities.

Let me once again thank you for your presence at this conference, and I encourage you to participate actively, engaging in an open and sincere exchange of views.

Now a very special moment. To mark the centennial of Albanian central banking, the Bank of Albania has issued the commemorative coin, with no legal tender status: ""100 Years of the Bank of Albania, 1925-2025"".

The coin symbolizes the importance of the Bank of Albania as a central institution and pays tribute to the key milestones that have shaped its evolution through years.

On the reverse, the left side depicts the portrait of a boy wearing the traditional costume of Central Albania, as depicted on the first banknote issued in 1926. On the right, the portrait of the poet and patriot Asdreni appears, inspired by the design of the 10,000 Lekº banknote - the most recent issue of the Bank of Albania.

On the obverse, the coin features the logo of the centennial of the Bank of Albania, surrounded by the historic dates that mark the evolution of central banking in Albania.

This creation honours the institution's enduring legacy and inspires confidence in the future.

Thank You!",Gent Sejko
https://www.bis.org/review/r251112m.htm,Yannis Stournaras: Lessons from the Greek sovereign debt crisis,"Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, in the context of his honorary recognition from the ""Istituto Bruno Leoni"" titled ""Lessons from the Greek sovereign debt crisis"", Athens, 7 November 2025.",2025-11-07 00:00:00,"## Yannis Stournaras: Lessons from the Greek sovereign debt crisis

Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, in the context of his honorary recognition from the ""Istituto Bruno Leoni"" titled ""Lessons from the Greek sovereign debt crisis"", Athens, 7 November 2025.

* * *

## Ladies and gentlemen,

It is a great honour to receive recognition from the Istituto Bruno Leoni for the efforts undertaken by my country, Greece, to overcome the debt crisis. In two public roles, as Finance Minister from mid-2012 to mid-2014 and Central Bank Governor since then, I have sought to actively support this national effort, deeply rooted in the determination and aspirations of the Greek people, while at the same time safeguarding the independence of the Bank of Greece and Greece's participation in the eurozone. In my remarks today, I will offer a concise overview of how Greece entered the debt crisis, how it got out despite the gloomy forecasts of many market analysts, policymakers and academics who predicted Grexit twice, in 2012 and 2015, and the key lessons to be drawn from that experience. I will then outline the substantial progress achieved in recent years and the outlook for the Greek economy, before concluding with the lasting legacy of the crisis and the challenges that still lie ahead - both for Greece and for the eurozone more broadly.

## 1. What led to the Greek crisis

Following a strong and sustained nominal convergence effort in the 1990s, during which nominal interest rates fell by more than 15 percentage points, Greece experienced strong economic growth, low inflation and falling unemployment from 2000 to 2007, largely driven by rapid credit expansion and cheap borrowing, particularly after entry into the eurozone in 2001. However, structural weaknesses remained. The Maastricht criteria for participation in the eurozone focused mainly on nominal convergence inflation, deficit, a falling debt ratio, interest rates and the exchange rate - but did not require deep and sustainable reforms in labour markets, product markets, the pension system and public administration to improve structural competitiveness and institutional capacity. As a result, while GDP per capita rose rapidly and approached the EU average, governance, productivity, pension system sustainability and structural competitiveness lagged behind, while the fiscal deficit remained almost twice as large as the reference value.

In fact, towards the end of the 2000s fiscal policy became overly expansionary, driven by the political cycle, while real wage growth exceeded productivity growth by a wide margin. The ensuing real exchange rate appreciation along with rapid economic growth led to a large current account deficit. The general government deficit in 2008 and 2009 jumped to 10% and 15% of GDP respectively, from 6% on average in the period 20002007. The public debt ratio rose to 128% of GDP in 2009 from 104% in 2007.

Hence, the Greek crisis did not start as a banking crisis as in other Member States, but as a fiscal crisis, which led to a current account crisis, a sovereign debt crisis and,

eventually, a banking crisis through government bond losses, withdrawal of deposits and an explosion of non-performing loans (NPLs).

Crucially, Greece failed to use the favourable pre-crisis period to address persistent vulnerabilities. Public administration continued to be inefficient, tax evasion was widespread, the pension system remained unsustainable and the public debt ratio stayed constant but high, around 105% of GDP, before it soared in 2008 and 2009 to unsustainable levels.

When the sovereign debt crisis hit in 2010, Greece rapidly lost market access. Credit ratings were downgraded, bond yields surged and both the government and the banking sector were cut off from international funding. Depositors withdrew cash, real estate collateral values slumped and liquidity conditions deteriorated sharply.

Greece attempted to address the large fiscal and external imbalances in its first economic adjustment programme through rapid fiscal consolidation and reforms to achieve the necessary improvement in competitiveness in the absence of an exchange rate devaluation. Fiscal consolidation relied more on tax increases rather than spending cuts and pro-growth reforms. With the benefit of hindsight, reforms were rather poorly sequenced under the insistence of the ""three institutions"" (IMF, European Commission, ECB), targeting labour markets first and then product markets. As a result, nominal wages declined faster than prices, leading to falling real wages and collapsing household consumption, further exacerbating the recession. Banking sector fragility was aggravated by soaring NPLs; EU-level weaknesses further worsened the crisis as early EMU architecture lacked tools for crisis management; debt relief was delayed; and the sovereign-bank doom loop amplified instability - until decisive ECB intervention in mid-2012 finally stabilised conditions .

## 2. What was the effect of the economic adjustment programmes

In response to the sovereign debt crisis, Greece implemented three consecutive economic adjustment programmes from 2010 onwards, supported by the ""three institutions"" and its European partners. These programmes aimed at fiscal consolidation, structural reforms and banking system stabilisation to restore macroeconomic balance and regain market confidence.

The programmes achieved their major stabilisation goals: the primary fiscal deficit of 10.1% of GDP in 2009 turned into a primary surplus exceeding 4% of GDP by 2018, while the current account deficit fell by roughly 12 percentage points between 2009 and 2018. Comprehensive structural reforms were implemented in pensions, healthcare, labour markets, tax administration and public administration, improving long-term competitiveness and fiscal sustainability. At the same time, Greece began rebalancing its growth model toward exports and tradable activities.

The banking sector underwent deep restructuring. Extensive mergers and liquidations reduced the system to four systemic banks, now controlling over 95% of the market. The Bank of Greece played a pivotal role by ensuring monetary and financial stability, maintaining liquidity, securing uninterrupted cash availability nationwide and coordinating closely with the ECB and European supervisory authorities. Thanks to mechanisms such as the Hellenic Financial Stability Fund (HFSF) and the Hellenic

Asset Protection Scheme (HAPS ""Hercules""), the NPL ratio was slashed from 49% in 2016 to 3.6% by mid-2025, while capital ratios, profitability and regulatory resilience all improved significantly. Capital controls were imposed in 2015-2019 to safeguard financial stability. In fact, not a single euro of deposits was lost, thus fully protecting financial stability, even during the difficult period when the majority of analysts, academics and certain policymakers predicted, or even recommended, Grexit.

However, the adjustment came at a substantial social and economic cost. The process relied more on tax increases rather than expenditure reforms or investment-friendly policies, and privatisation targets were largely unmet. The ""three institutions"" insisted on excessive and rapid fiscal adjustment and ignored its impact on growth, employment, social cohesion, tax revenue and the ""snowball effect"" (that is, the difference between the effective nominal interest rate on public debt and the nominal growth rate, a significant determinant of debt ratio dynamics). Between 2008 and 2016, Greece lost over one-quarter of its GDP, the unemployment rate surged by 16 percentage points, inequality and poverty indices soared, investment collapsed, and a massive brain drain occurred. Thus, while macroeconomic stabilisation and banking repair were ultimately successful, the cost in terms of lost output, social cohesion and long-term human and physical capital was immense.

## 3. Lessons learned from the Greek crisis

The Greek crisis offers several key lessons for economic policy, monetary union governance and crisis management.

First, political ownership and credibility matter. Populism, political polarisation and vested interests can hold back reforms and undermine economic recovery. Strong political leadership, institutional commitment and transparent policy frameworks enhance confidence among investors, households and international partners.

Second, fiscal and external imbalances must be addressed before they reach unsustainable levels. Reliance only on nominal convergence criteria, without structural reforms, can mask vulnerabilities and delay necessary adjustments. Countries joining a monetary union need to strengthen institutions, governance and structural competitiveness in parallel with fiscal convergence. Labour cost competitiveness is a necessary but not sufficient condition for structural competitiveness.

Third, the sequencing and design of structural reforms are crucial. Reforms that excessively depress wages or focus narrowly on one sector can exacerbate recessions. A balanced approach that combines fiscal consolidation with growth-enhancing structural measures and public investment is essential. Legislative and administrative capacity must be adequate to implement reforms efficiently and effectively.

Fourth, the banking sector requires careful oversight and timely interventions during crises. The failure to early manage NPLs prolonged the recession and weakened banks' capacity to finance the real economy. A systemic solution for distressed assets at the earliest possible stage, supported by an appropriate legal and institutional framework, is critical.

Fifth, the architecture of a monetary union matters for crisis resolution. The absence of effective risk-sharing mechanisms, crisis management tools and coordinated oversight within EMU amplified Greece's difficulties. Timely ECB intervention, the creation of the ESM, public debt restructuring and favourable refinancing conditions were essential to prevent a disorderly default and stabilise the system. Notably, Greece ultimately benefited from generous debt refinancing on very favourable terms, which created a favourable ""snowball effect"" by allowing the debt-to-GDP ratio to improve as the effective interest rate on public debt remained below GDP growth for extended periods. In addition, the ECB waiver ensured the smooth refinancing of the Greek banking system during the crisis years - a support that was no longer necessary once Greece regained investment-grade status.

Finally, crisis management requires both fiscal discipline and support for long-term growth. Greece's experience demonstrates that adjustment programmes can restore macroeconomic balance and improve competitiveness, but at a high social cost. Future policy programmes should balance fiscal targets with structural reforms and growthoriented policies to minimise social hardship and shorten recovery periods. Public investment should be exempted from expenditure cuts, while the effects on the public debt ratio from the improvement in the primary balance of general government induced by fiscal measures should be considered along with the ""snowball effect"".

In sum, Greece's crisis underscores the need for robust institutions, both at home and in the EU, effective governance, prudent fiscal policies and comprehensive structural reforms. The combination of domestic weaknesses, institutional gaps, delayed reforms and external shocks created one of the most severe economic crises in history. Yet, the response through the adjustment programmes has restored macroeconomic and financial stability, fiscal sustainability and competitiveness, offering valuable lessons for both Greece and other member countries of monetary unions. In addition, Greece can be seen as the midwife of history: due to the Greek crisis, the eurozone and Europe created new institutions and obtained experience and the necessary mentality and attitude for crisis management, which proved useful later during the Covid-19 pandemic. Hopefully, it will continue to prove useful in the years ahead.

## 4. Progress, current state and outlook of the Greek economy, and policy priorities ahead

Greece has undergone a profound economic transformation in recent years, emerging as one of the euro area's strongest performers after over a decade of crisis and structural adjustment. Since 2019, Greek GDP growth has consistently outpaced the euro area average, bringing the country back to a path of convergence towards European income levels following many years of divergence. In the first half of 2025, real GDP grew by approximately 2% year-on-year - significantly above the euro area average - and the Bank of Greece expects comparable growth rates to be sustained through at least 2027.

Most importantly, this trajectory is not underpinned by short-term stimulus, but rather by strong fundamentals: solid public finances; resilient household consumption; a powerful rebound in investment supported by the RRF (Recovery and Resilience Facility); and exceptional export performance - particularly in tourism, logistics, digital services and

innovation-intensive sectors. Meanwhile, the labour market has strengthened, with unemployment falling to single-digit levels for the first time since the beginning of the crisis and labour force participation rising, while export reach is extending beyond tourism towards high-value-added manufacturing goods. Rising disposable incomes and a marked decline in inequality, poverty and social exclusion indices between 2019 and 2023 demonstrate that the recovery is now translating into social welfare gains as well, rather than just macroeconomic ones.

Macroeconomic governance has been instrumental in rebuilding international confidence. Greece continues to deliver robust primary and overall budget surpluses without reverting to restrictive fiscal policy measures, but instead supported by disciplined public finances, improved tax administration and a forceful crackdown on tax evasion. Public debt is firmly declining as a percentage of GDP, driven by strong nominal GDP growth and favourable debt service conditions. Sound fiscal policies have created space for targeted tax relief, protection of vulnerable households and investment in digital, green and infrastructure priorities - all while remaining fully aligned with the EU fiscal rules. International rating agencies have responded with sovereign and banking upgrades, helping to attract renewed foreign capital into Greek assets.

However, the external environment remains fragile. Geopolitical instability, protectionist pressures, financial fragmentation, major climate disruption, and energy volatility are sources of considerable downside risks. At home, certain legacy issues from the crisis, such as private debt, lower capital stock and labour force, a persistent investment gap, as well as demographic pressures, low female and youth labour force participation, and delays in judicial and administrative reforms, remain unresolved, while housing costs continue to impose a growing burden on households.

Against this background, Greece has shifted its focus from recovery to ""strategic acceleration"". Its central economic objective is now to secure long-term real convergence with the euro area without recreating past macroeconomic imbalances. Achieving this requires closing the remaining investment gap and sustaining productivity gains by efficiently mobilising and allocating domestic resources, EU structural and RRF funds as well as foreign direct investment (FDI), especially in sectors producing internationally traded goods and services, in a world increasingly shaped by technological progress and geopolitical competition.

Macroeconomic, fiscal and financial stability must remain the linchpin. Strict adherence to EU rules and accelerated debt reduction, including early repayment of the Greek Loan Facility (GLF), will be essential to preserve credibility. But stability is not enough. Fiscal strategy needs to become intrinsically pro-growth, redirecting spending towards infrastructure, education, innovation and demographic support, while modernising the tax system to reinforce competitiveness and fairness.

The decisive battleground is investment mobilisation. RRF deployment must be fast and effective, but external funding alone is insufficient. Private capital must be aggressively attracted through faster licensing, capital market deepening and non-bank finance development - while private savings should be rebuilt through the enhancement of the third, fully funded, pillar of the pension system, the provision of incentives for closing the insurance gap for natural catastrophes and improvements in financial literacy.

Finally, Greece must view the green and digital transitions not as obligations but as strategic competitiveness opportunities. Accelerated investment in renewables, grid capacity, interconnections, AI readiness and circular economy innovation is essential as is a housing policy shift from subsidies to structural supply-side reform.

If policy consistency, institutional credibility and reform momentum are maintained, Greece is positioned not merely to sustain recovery but to graduate into a phase of permanently higher investment ratio, productivity growth and economic resilience.

## 5. Concluding remarks: The EU/EMU lessons from the Greek crisis

The Greek crisis showcased the vital need for fiscal discipline and debt sustainability in the euro area. It also highlighted that structural rigidities must be addressed to boost productivity and investment. Greece's experience underscores the importance of innovation, high-tech transition, efficient use of EU funds and FDI, deeper capital markets and secure, affordable energy to enhance long-term competitiveness and resilience.

However, while Greece and other Member States must remain fully committed to structural reforms, a purely national strategy is no longer sufficient. The global environment has shifted dramatically in just a few years, with rising geopolitical fragmentation, armed conflicts, trade tensions, tariffs and intensifying technological rivalry among major powers. Europe as a whole now confronts a broad set of challenges, not only economic but also technological, environmental, energy- and security-related. It is increasingly clear that a coherent European-wide strategy is required, in line with the strategic thinking reflected in recent high-level reports such as the Letta report on deepening the Single Market and eliminating the still large internal barriers to trade in goods and services, as well as the Draghi report on Europe's investment needs, productivity and competitiveness. Only through coordinated joint action can the EU hope to close productivity and innovation gaps, reinforce resilience and preserve its strategic autonomy.

In this regard, recent EU initiatives such as the ReArm Europe Plan and Readiness 2030, as well as the European Commission's Competitiveness Compass and Clean Industry Pact, signal a major policy shift towards a stronger, forward-looking industrial and strategic posture, which seek to incentivise investment in new technologies and innovation. These initiatives support deeper market integration and stimulate largescale investment in critical technologies and infrastructure, thereby increasing resilience to external shocks. Completing the banking union - especially through the establishment of a European deposit insurance scheme - and launching a true savings and investment union would significantly reduce financial fragmentation. Building on the success of NextGenerationEU, the issuance of a permanent common EU safe asset such as a Eurobond, could catalyse cross-border investment, strengthen the international role of the euro and decisively enhance Europe's long-term competitiveness.",Yannis Stournaras
https://www.bis.org/review/r251112p.htm,Dimitar Radev: Opening remarks - press conference with Christine Lagarde,"Opening remarks by Mr Dimitar Radev, Governor of the Bulgarian National Bank, at the joint Press Conference with Christine Lagarde, President of the European Central Bank, Sofia, 4 November 2025.",2025-11-04 00:00:00,"## Dimitar Radev: Opening remarks - press conference with Christine Lagarde

Opening remarks by Mr Dimitar Radev, Governor of the Bulgarian National Bank, at the joint Press Conference with Christine Lagarde, President of the European Central Bank, Sofia, 4 November 2025.

* * *

Madam President, dear Christine,

Thank you very much. This is a wonderful gift - and a truly weighty one, both literally and symbolically. It will have a special place in our museum, which tells the story of money through our ancient lands.

Ladies and gentlemen,

Thank you all for being here today. It is a great pleasure and an honour to welcome President Lagarde on her first visit to Bulgaria.

Dear Christine, we are truly delighted to have you with us. You are among friends who deeply appreciate your leadership and vision at the helm of the European Central Bank - especially in these times of profound economic and geopolitical uncertainty.

Your visit comes at a particularly meaningful moment for Bulgaria. Our country is approaching the final stage of its journey toward membership in the euro area - a goal that has guided our national and institutional efforts for many years.

This process has been driven by a clear strategic vision: to strengthen the foundations of stability, deepen European integration, and achieve lasting convergence with our European partners.

Bulgaria - and the banking sector more specifically - has already reached a high degree of alignment with the euro area framework.

Through our participation in ERM II and our close cooperation with the ECB since 2020, we have effectively prepared our institutions, markets, and policies for the next step formal entry into the euro area.

This achievement reflects a long and disciplined effort, supported by our partners across Europe and, in particular, by the ECB.

Dear Christine, we are deeply grateful for your continued support, and for the professionalism and dedication of our ECB colleagues throughout this process.

The forthcoming adoption of the euro will mark a truly historic milestone for Bulgaria. It will complete our economic and monetary integration with Europe, reinforce confidence in our financial system, and open new perspectives for growth and prosperity.

At the same time, it will bring new responsibilities - responsibilities we are ready to assume with the same prudence and discipline that have guided us so far.

Bulgaria's accession to the euro area is also an expression of our trust in, and contribution to, the European project - a project built on cooperation, solidarity, and shared responsibility.

We firmly believe that a stronger and more integrated Europe benefits all its members, and we are committed to playing our part within that common framework.

Your visit and today's discussions reaffirm our shared determination to complete this process in a way that strengthens both Bulgaria and the euro area as a whole.

Dear President Lagarde,

Thank you once again for being here today, and for the support and partnership of the institution you lead with such distinction.

Thank you.",Dimitar Radev
https://www.bis.org/review/r251117e.htm,Chia Der Jiun: Creating the future of finance - a journey of innovation and collaboration,"Remarks by Mr Chia Der Jiun, Managing Director of the Monetary Authority of Singapore, at the Singapore FinTech Festival 2025, Singapore, 13 November 2025. ",2025-11-13 00:00:00,"## Chia Der Jiun: Creating the future of finance - a journey of innovation and collaboration

Remarks by Mr Chia Der Jiun, Managing Director of the Monetary Authority of Singapore, at the Singapore FinTech Festival 2025, Singapore, 13 November 2025.

* * *

Good morning, and welcome to Day Two of the Singapore FinTech Festival (SFF).

This year we mark our 10th edition. In the first year, we had 11,000 participants and 70 exhibitors. This year, we have upwards of 65,000 participants and 600 exhibitors. The development of the SFF since 2016 parallels the growth in scale and scope of our FinTech ecosystem.

I want to acknowledge the contributions of colleagues, past and present, from MAS, GFTN, Constellar and ABS. Especially Ravi Menon who was there at the very start.

I also want to thank all of you here. FinTech innovators, forward-thinking FIs and global tech companies. You are at the heart of a dynamic FinTech ecosystem and the reason for the success of the SFF.

Over the past 10 years, MAS set out to build an ecosystem where innovation can flourish. We provided support to hundreds of innovation projects and centres. We established the regulatory sandbox and exercised regulatory flexibility to test innovative technology and business models. We recognised the benefits of technology and innovation, and not just the risks. We sought to apply regulation in the right proportion, at the right time, to the right risk. Today, we have a vibrant FinTech sector comprising more than 1,800 FinTech firms in a range of domains.

New business models have taken root in our ecosystem and reshaped financial services. Robo advisors have broadened access to wealth management to more retail investors at lower cost. Multi-currency mobile wallets reduced the complexity and costs of cross-border payments. Digital banks and FinTech firms are using data-driven underwriting to give SMEs access to small loans with flexible terms and tenor. And FinTech startups are enhancing efficiency through technology. They are developing AI solutions, from fraud detection to multi-lingual chatbots, that are being used across the financial services industry.

We have over 50 Innovation Centres set up by financial institutions (FIs). They drive transformation in user experiences and back-end processes. Our newest FI innovation centre will develop quantum-safe encryption solutions, and work with academia and industry partners to apply quantum technology to benefit financial services.

We have also made low-cost digital payments ubiquitous and accessible. Over 90% of businesses, including Singapore's heartland shops and hawker centres, have adopted PayNow or SGQR.

PayNow and QR can now be used outside Singapore - in Thailand, Malaysia, Indonesia and India. More will follow. I was in Bali and had used my Singapore bank app to scan Indonesia's QRIS QR code to make a payment at small shops. The exchange rate was displayed in my app and the payment was instant. In the next stage of development, we will further improve the customer journey and enhance functionalities.

Our expanding FinTech ecosystem has brought new solutions, lower cost, greater convenience and more choice to retail and corporate customers.

Now, if we look ahead to the next 10 years, two transformative themes commonly come up. They are AI and Tokenisation.

## Fostering responsible AI adoption

Let me first turn to the topic of AI.

We are seeing the momentum of AI adoption and experimentation build up across our financial sector. At a foundational level, FIs are using AI to empower and augment their workforce in general work processes - in information search, retrieval, summarisation, first draft generation, speech to text transcription and translation of multiple languages. AI co-pilots have also been piloted or deployed in a growing number of specialised functions, such as software development, marketing, customer service, client advisory, analysis of financial markets, credit underwriting and fraud detection. An emerging area of application is in the use of autonomous agents in more complex processes. For example, in processing credit applications from underwriting to approval, or administering standard insurance claims end-to-end. There are also projects to develop consumer agents, collecting information and executing transactions. But agentic autonomy must come with sufficient guardrails.

The growing adoption of AI portends significant transformation in financial services. Our aim is for our FIs to adopt AI productively and safely, and our workforce to have We are doing this on four fronts. the skills to use AI.

First, we are anchoring leading AI competencies in Singapore. More than thirty FIs have established AI competency centres in Singapore, working on solutions that serve not just our local market, but also their global operations. These AI solutions span front, middle- and back-office functions. We welcome more FIs to anchor AI competencies in Singapore.

To support FIs with leading AI capabilities take on more complex challenges, I am pleased to announce a new initiative - BuildFin.ai. We will bring together technology providers and research institutes to work with FIs on complex problems of common interest. The aim is to create shared resources and solutions that benefit the ecosystem.

AS and our FI partners have identified our first common problem statement. It turns out Singlish presents a level of complexity that existing LLMs are not fully ready to take on. A*STAR will partner FIs to develop a Voice-to-Text AI model for the financial

industry, to transcribe conversations in Singlish and a mix of our commonly spoken languages and dialects. By working together, they can pool their data, develop a better model, and serve customers better.

Second, we are supporting FIs which are earlier in their AI adoption journey, with shared resources to start and scale. PathFin.ai is a collaborative initiative with the industry. FIs and tech companies will share their AI adoption experience and successful use cases. The platform curates a library of industry-validated solutions and best practices. Using this shared resource, FIs can reduce time and effort, when they search for and implement effective AI solutions. Some examples of solutions on PathFin.ai include an AI solution to optimise multi-currency cash management for corporate treasuries, and an agentic AI solution for end-to-end insurance claims processing. When we launched the PathFin.ai platform in July this year, we had 20 participating FIs. This number has now grown to over 100. We welcome more participants to join this initiative.

Third, let me turn to governance and safety. As AI adoption in the financial industry grows, governance and safety are essential. In fact, one of the key factors determining the pace of AI use, and the extent of AI autonomy permitted in work processes, is the robustness of guardrails and controls over the AI life cycle. FIs have told us that they would like more regulatory clarity.

How has MAS responded? We did not run ahead of innovation with prescriptive regulation. More than two years ago, we started an industry consortium called Project MindForge, to create a shared appreciation with the industry on AI risks and governance. The first task was to co-develop an AI risk framework so that there is common understanding of the key risks around AI use. This was published in early 2024.

In July this year, I shared that MAS was developing a set of AI supervisory guidelines. Today, MAS will publish the set of Guidelines on AI Risk Management for The proposed Guidelines set expectations for FIs to identify AI risks and consultation. to implement controls across the entire AI life cycle, appropriate to the scale and risk of AI use. The Guidelines will be principles-based rather than prescriptive. It sets up flexible guardrails to enable responsible innovation in a fast-moving space.

In parallel, Project MindForge consortium will also be publishing today an AI Risk Management Executive Handbook. This Executive Handbook sets out the key components of good AI risk management. It will be followed with a detailed document containing actionable insights and industry good practices next year, which can serve as a companion guide for FIs implementing the MAS Guidelines.

The Guidelines and the Handbook will work together. For example, the Guidelines will require risk materiality assessments, while the Handbook will provide examples of how such assessments are done. These two initiatives constitute our approach towards safe and responsible AI adoption. The Guidelines set out a flexible regulatory framework, while the Handbook can be dynamically updated to stay up-to-date and industryrelevant.

## Our fourth plank is to support the upskilling of our financial workforce.

Fundamentally, it is people and talent that drive the success of organisations. We want our finance professionals to have the skills to make effective use of AI and manage the risks.

We have published a Gen AI Jobs Transformation Map for the financial sector. Here we have identified the impact of Gen AI on key job roles and the upskilling that is needed as these jobs are transformed and augmented by AI.

Guided by the Jobs Transformation Map, MAS and the Institute of Banking and Finance are partnering FIs to equip their employees with needed AI literacy and skills.

So this is our approach to AI across four fronts.

- Anchoring leading capabilities;
- Broadening adoption;
- Building strong AI governance; and
- Upskilling an AI-ready workforce.

## Building a tokenised future

Next, I will touch on tokenisation and stablecoins. Please allow me to call tokenised financial assets ""asset-backed tokens"".

Some market participants tell us that tokenisation may be on the cusp of a take-off, driven by greater regulatory clarity and substantial investment and innovation in this space.

MAS started our journey with asset-backed tokens when we launched Project Guardian in 2022. We collaborated with industry partners to test use cases in FX, funds, fixed income, and showed that tokenisation worked and delivered benefits. 24/7 near instant settlement; programmability enabling PvP and DvP; no settlement lags, fewer intermediaries, less pre-funding.

Are asset-backed tokens clearly out of the lab? Without a doubt. There have been many commercial products launched. Bonds have been issued natively and settled on chain. Money market funds have been tokenised. Major banks have offered tokenised cash management services to corporate treasuries. So tokenisation has lifted off the ground. But have asset-backed tokens achieved escape velocity? Not yet.

Optimists in the industry believe that we are headed for a future where most financial assets will be tokenised, traded and settled on chain. They see a number of benefits. Efficiencies and liquidity in transacting multiple assets on interconnected ledgers. Better optimisation of cash and collateral by corporates and market participants. Fractionalised ownership of financial assets benefiting more retail investors. Smart contracts enabling self-executing contractual processes, like trade finance. All with less time lag, lower cost and potentially lower risk.

But getting from now to that future requires significant progress on several fronts. First and foremost, market participants must bring use cases that demonstrate value and stability for their clients. They have to build participation and liquidity.

In addition, there are three critical developments that need to happen. First, assetbacked tokens need to be standardised, and networks interoperable. Second, there needs to be a deep pool of safe and reliable settlement assets. Third, institutional-grade networks are needed.

Let me start with discussing the need for standardisation and interoperability. For asset-backed tokens to be transacted on a network, they need to be embedded with standardised data and features that every participant on the network can recognise. Right now, banks and innovators are building their own networks and racing to scale. These different networks may have different technical specifications, so asset-backed tokens issued on one network may not be portable to another network, or not without friction. At best, the friction would limit the benefits of transacting on chain. Or worse, we could see a fragmented landscape of sub-scale walled gardens, or even a small number of monopolies posing concentration risks.

To avoid these sub-par outcomes, the industry needs to develop and adopt a model of ""co-opetition"". Where they cooperate to build a marketplace for asset-backed tokens, while competing to bring products, clients and liquidity to the market. This means that they need to agree on common standards for asset-backed tokens even as they compete to scale. So that a bond token or fund token on one network is understood and accepted by participants of another network. And they need to design their networks to be open and interoperable so that asset-backed tokens issued on one network can be transacted on another.

Standardisation and interoperability will mitigate liquidity fragmentation. This is why MAS has been working with a consortium of global policymakers and major FIs to develop standards for tokenisation under Project Guardian. We have published frameworks for funds, bonds and FX as global public goods, and we will do more.

Similarly, MAS is working with industry partners and policymakers to promote network interoperability. This is the Global Layer One initiative. We have developed and made available common principles, standards and templates that network builders can adopt for interoperability. We encourage network builders and market participants to work with us to drive standardisation and enable greater interoperability.

Second, there needs to be a deep pool of safe and reliable settlement assets. In the established financial system, everyday corporate and retail transactions are settled with commercial bank money. Holders of commercial bank money may convert to central bank money at par. Large value inter-bank transactions are settled with central bank money. This arrangement anchors the singleness of money, and finality of settlement.

In a tokenised environment, the concept of money is still at an early stage, and there are a few contenders for safe and reliable settlement assets. They include CBDCs, tokenised bank liabilities, and regulated stablecoins. If tokenised transactions are to

scale globally, then these settlement assets must be no less robust and safe. At the current stage, market participants are experimenting with different settlement assets for different use cases. Each will have to demonstrate value through utility and safety.

Tokenised bank liabilities benefit from current central bank and regulatory arrangements that underpin value stability and singleness of money. They have been used effectively within a bank's ecosystem, and now have to demonstrate the agility to be used across multiple banks, networks and applications.

There has been a lot of attention on stablecoins. They are offered as open platforms, able to work across many different applications and use cases. While agility is a strength, stability needs to be reinforced.

Unregulated stablecoins have a patchy record of keeping their peg. Recurrent depegging can erode confidence, and trigger runs on other stablecoins. We saw a similar dynamic in 2008 when money market funds that broke the buck triggered runs on other money market funds. Such unregulated stablecoins would not be suitable as safe settlement assets for large wholesale transactions.

Now, regulated stablecoins, while nascent, offer the prospect of value stability. Sound and robust regulation of stablecoins will be critical to underpin their stability. We have seen national regulations taking shape rapidly. This is an important start. But things can take a wrong turn if there is a proliferation of poorly regulated stablecoins, undermining confidence in others.

MAS recognises this, and has finalised the features of our stablecoin regulatory regime and will be preparing draft legislation. Under our regime, we have given importance to sound reserve backing and redemption reliability.

Over time, if some regulated stablecoins become systemic , regulatory frameworks will need to be strengthened further, cross-border regulatory cooperation enhanced, and access to central bank facilities considered.

Eventually, there may be a space for different private settlement assets, operating alongside each other, serving different market needs and use cases, with wholesale CBDCs anchoring the stability of the system.

MAS is working with industry partners to explore the use of all three settlement assets. MAS launched the BLOOM (Borderless, Liquid, Open, Online, Multi-currency) initiative to support industry's experimentation with tokenised bank liabilities and regulated stablecoins for settlement. We welcome FIs, as well as clearing and settlement network operators, to conduct trials under this initiative.

In the CBDC space, I am pleased to announce that the three Singapore banks - DBS, OCBC and UOB - have successfully conducted interbank overnight lending transactions, using the first live trial issuance of Singapore dollar wholesale CBDC for settlement. As the next bound, MAS will trial the issuance of tokenised MAS Bills to Primary Dealers and settled with CBDC. We will release more details on this next year.

Third, institutional-grade networks are needed. Wholesale token transactions need some foundational attributes from blockchain networks which are not readily available on public permissionless blockchains. Clear governance, secure and reliable performance, predictable and transparent fees, privacy optionality and settlement finality, and regulatory compliance.

FIs and innovators are developing solutions to make blockchain networks ""institutionalgrade"". Some network operators are developing purpose-built private blockchain networks with these features; others are building permissioned and compliance layers on public blockchains.

For market participants to gain greater confidence to put tokens and transactions at scale on these networks, they would like more clarity that these arrangements are compliant with regulatory standards. They would also like to see more industry standards develop around operational performance and functionalities, and the ability to verify alignment to core industry and regulatory standards.

While many regulators have adopted a technology neutral approach, and regulatory standards apply on the basis of legal and economic substance , there are specificities in tokenisation and blockchain networks that would benefit from more legal and regulatory clarity. Examples may include issues around investor rights, settlement finality and smart contract governance.

Taking a step towards providing more regulatory clarity, MAS will be publishing a Guide on the Tokenisation of Capital Markets Products later this week. This Guide will use case studies to provide more clarity about the regulatory treatment of tokenised capital markets products. It also sets out guidance on applicable disclosures. This guidance will be updated as tokenised activities develop.

MAS is also working with industry and international counterparts to address gaps or impediments to adoption of asset-backed tokens. One example is the collaboration between the Investment Association of the UK and the Investment Management Association of Singapore, with the support of UK Financial Conduct Authority and MAS. A joint report 1   was published yesterday. It provides actionable steps - in commercial, operational, legal and regulatory areas - for market participants and regulators to help adoption scale. We welcome more collaborations with market participants and regulators to further mature the tokenisation ecosystem and help bridge the adoption gap.

Another contribution has been the launch of the , GL1 Market Infrastructure Toolkit under the auspices of the Global Layer One initiative. Network operators and FIs can use this toolkit to assess whether a blockchain network is consistent with internationally recognised regulatory principles like the PFMI 2   and market practices like the DAS CP 3 developed by FMI operators. The toolkit comprise 108 controls derived from these principles. Such verification processes and tools will help build confidence to use compliant blockchain networks.

So these are the essential building blocks for asset-backed tokens to scale.

- Standardised tokens and interoperable networks;
- Safe and reliable settlement assets; and
- Institutional-grade networks.

## Conclusion

Let me conclude by showing you two maps. The first map is of the Mississippi river. It enabled western expansion of the early American settlers, and later enabled the flourishing of industry, agriculture and commerce in the interior of the United States. But it was essential for a system of levees and floodwalls to prevent the Mississippi from bringing flood damage and disruption.

AI too can bring benefits across the financial sector and to consumers and businesses. Like floods, uncontrolled AI use can also bring consumer harm and risks to financial stability. So there needs to be governance and guardrails for safe adoption, and training of the workforce to work with AI. This is what we have set out to do in collaboration with the financial industry.

The second map is of the Grand Canal in China. This was built to connect China's northern and southern regions. It is not a single Canal, but a set of canals that links various rivers and lakes into one connected system of waterways. This is like the tokenised future that we are building - an interconnected system of standardised assetbacked tokens and interoperable networks - so that liquidity can be pooled rather than fragmented, so that frictional costs are minimised, in cash and collateral management, in investments, and in cross border payments.

This tokenised future cannot be built by a single party. It will require collaboration between private and public sector, within and across jurisdictions.

Ladies and Gentlemen, the SFF and the Singapore FinTech ecosystem has been a journey of innovation and collaboration. As we build the future of finance with AI and tokenisation, we can only progress by walking this journey of innovation and collaboration together.

Thank you all, and I wish you many fruitful encounters and partnerships at SFF 2025.

- 1 A joint report titled ""Bridging the adoption gap: aligning digital asset offerings with buyside requirements"" by UK Investment Association and Investment Management Association of Singapore, with the support of MAS and the UK Financial Conduct Authority, was published on 12 November 2025.
- 2  Principles for Financial Market Infrastructures.
- 3  Digital Asset Securities Control Principles.",Chia Der Jiun
https://www.bis.org/review/r251119b.htm,Leonardo Villar-Gómez: Intervention - 20th Panel Discussion on Constitutional Jurisdiction,"Remarks by Mr Leonardo Villar-Gómez, Governor of the Central Bank of Colombia, at the 20th Panel Discussion on Constitutional Jurisdiction ""In Defense of the Constitutional Order and the Social and Democratic Rule of Law"", Cartagena, 4 September 2025.",2025-09-04 00:00:00,"## Leonardo Villar-Gómez: Intervention - 20th Panel Discussion on Constitutional Jurisdiction

Remarks by Mr Leonardo Villar-Gómez, Governor of the Central Bank of Colombia, at the 20th Panel Discussion on Constitutional Jurisdiction ""In Defense of the Constitutional Order and the Social and Democratic Rule of Law"", Cartagena, 4 September 2025.

* * *

To begin, I would like to congratulate the Constitutional Court and its President, Mr. Jorge Enrique IbÆæez Najar, on this Panel Discussion on Constitutional Jurisdiction, which will unfold over the next two days, thus continuing an important and wellestablished tradition. This panel discussion for reflection, debate, and dissemination of issues related to constitutional justice is particularly relevant in the current situation.

In my capacity as Governor of , it is not my responsibility to judge Banco de la Repœblica the advisability or inadvisability of reforms to the current constitutional framework. I also do not possess the in-depth legal training required for this type of discussion. I can only state that, as a citizen, I believe that the 1991 Constitution was the result of a major national agreement that is still valid to this day, without prejudice of the need for reforms that naturally arise over time. Such reforms have been properly processed over the past 34 years and may continue to be addressed in the future through the mechanisms established for that purpose in the Constitution itself.

As Mr. Jorge Enrique IbÆæez stated in his letter of invitation to this event, ""the constitutional order enables democracy both as an aspiration and as a limitation."" This constitutional order defines the possibilities available to the various public authorities that represent the citizens while also establishing the limitations and the counterweights they must face in the exercise of their functions.

The current institutional design of and its Board of Directors is Banco de la Repœblica an important element of the framework established in Articles 371 to 373 of the 1991 Constitution.

- The first of these articles defines the central banking functions carried out by , establishing that all of them shall be exercised in Banco de la Repœblica coordination with the general economic policy and requiring the Bank to report to the Legislature on the implementation of the policies under its responsibility as well as on any other matters requested to it.
- Article 372 assigns the Board of Directors of the Bank the role of monetary, foreign exchange, and credit authority, per the functions assigned by law, and makes it explicit that the members of the Board of Directors shall exclusively represent the interests of the Nation.
- Article 373, in turn, clearly provides that the State, through , Banco de la Repœblica shall ensure to maintain the purchasing power of the currency, and establishes that the Bank may not set credit lines nor grant guarantees in favor of individuals different from credit institutions. It also stipulates that financing transactions in favor of the State shall require unanimous approval by the Board of Directors,

unless they are open market operations. In this way, it not only imposes limits on what the Bank may do in terms of financing the Executive branch, but also explicitly provides that not even the legislator may order credit lines in favor of the State or individuals.

With these three articles of remarkable simplicity and clarity, the 1991 Constitution defined a radical and highly significant transformation of 's Banco de la Repœblica institutional framework, which was developed in Law 31 of 1992 and whose constitutionality was endorsed by the Court.

The implications of this new institutional framework have been positive for the country. It should be noted that for much of the two preceding decades, annual inflation had been close to or above 20%, and in 1991 it had reached more than 32%. Since Banco began operating under the new constitutional framework, monetary, de la Repœblica foreign exchange, and credit policies have been gradually adjusted to a strategy that is in line with international best practices, thus enabling it to reduce inflation to levels increasingly closer to the 3.0% annual target set by the Bank itself as a guideline consistent with the stability of the currency's purchasing power.

It should be acknowledged that we have experienced significant temporary deviations, with periods in which inflation has been above the established target. Among these periods, the last five years stand out, during which the Board of Directors of the Bank has responded with great caution, avoiding excessively contractionary monetary policies in response to phenomena or policies outside its scope of action, such as the major international trade bottlenecks that followed the strong recovery in global demand after the end of the pandemic in 2021 and 2022; the sharp increase in international food and agricultural input prices resulting from Russia's invasion of Ukraine; the climaterelated challenges experienced in Colombia in 2022 and 2023; and the multifaceted impact of the increase in public spending and the Colombian fiscal deficit that occurred during the pandemic and has reappeared in the most recent period.

Of course, an extremely contractionary monetary policy could have counteracted phenomena and policies like those I just mentioned in order to bring inflation more quickly toward the target. However, the Board of Directors has acted cautiously to prevent its policies from imposing excessive short-term costs on productive activity, thus complying with the Constitutional Court's ruling C-481 of 1999, which clearly states that ""the primary constitutional purpose of  Banco de la Repœblicais the protection of a sound currency; however, this authority must take into account in its decisions other economic objectives of State intervention, such as full employment, since its functions "" must be coordinated with the general economic policy. 1

In any case, I emphasize the importance that this ruling by the Constitutional Court places on the protection of a sound currency as a primary constitutional purpose of Banco de la Repœblica . This purpose is complementary and supportive of the policies of the national and territorial governments that promote long-term economic growth, equity, poverty reduction, and macroeconomic stability.

Certainly, in specific circumstances, there may be difficult choices between monetary policies needed to ensure that inflation converges toward levels consistent with the stability of the purchasing power of the currency versus more expansionary monetary

policies that can boost economic activity or employment in the short term. The 1991 Constitution was clear in granting the Board of Directors of Banco de la Repœblica autonomy from the governments in office and a sufficiently clear mandate to prioritize the long-term objective of a low and stable inflation compatible with growth sustainable (here I emphasize the word sustainable) of economic activity, employment, and equity.

The ensuing two days of this panel discussion on Constitutional Jurisdiction provide an opportunity to debate many issues including social market economy, defense of economic freedoms, and the guarantees of fundamental rights. I am confident that these deliberations will greatly benefit our society and its democratic and peaceful coexistence. I would like to finish my intervention by highlighting a fact that may seem anecdotal, but which, from my personal perspective, is of great relevance:

Thirty-four years ago, there was a young lawyer at who quickly Banco de la Repœblica stood out and came to work with the Governor at the time, Mr. Francisco Ortega, becoming a major support in the relationship he needed to establish with the 1991 Constituent Assembly and with those who, from here, promoted the transformation of Colombia's central bank into an independent and modern institution, more similar to the central banks that already existed in the developed world and those beginning to emerge in other Latin American countries.

That young lawyer was highly successful in his work alongside Mr. Ortega and continued to excel throughout his career, to the extent that he is now the newly appointed President of the Constitutional Court. Congratulations to Mr. Jorge Enrique IbÆæez for what he accomplished thirty-four years ago, and congratulations as well for his performance in his current functions, which are enormously important for, as the title of this panel discussion states, the ""defense of the Constitutional order and the Social and Democratic Rule of Law.""

Thank you very much, and I wish the best for the panel discussion that will take place over the next two days.

1 Cited in Gerardo HernÆndez, "" La jurisprudencia de la Corte Constitucional y la autonomía del   Banco de la Repœblica "", in JosØ Darío Uribe (ed.), Historia del Banco de la Repœblica, Cien Aæos, Chapter 8. Banco de la Repœblica . 2023.",Leonardo Villar-Gómez
https://www.bis.org/review/r251113a.htm,"Olli Rehn: Money and the monetary system - case Finland, 1811-2030","Lecture by Mr Olli Rehn, Governor of the Bank of Finland, at Tampere University, Tampere, 12 November 2025.",2025-11-12 00:00:00,"## Olli Rehn: Money and the monetary system - case Finland, 1811 - 2030

Lecture by Mr Olli Rehn, Governor of the Bank of Finland, at  Tampere University, Tampere, 12 November 2025.

* * *

## Presentation accompanying the speech

Let me begin by thanking for inviting me to give this lecture today. Tampere University It is truly a great pleasure and an honour, as your university conducts first-class , including economics. The Finnish Centre of research in the social sciences Excellence in Tax Systems Research is a well-known case in point. I can personally testify to the quality of the education here because my dear wife holds a Master of from the University of Tampere. Social Sciences degree

Besides, I myself took 'Introduction to Economics', here, during one Economics 101, hot summer, after completing my military service. That was before heading to the United States to study on an ASLA/ economics and international relations Fulbright . scholarship

So, if you have any about how the complaints or criticisms eurozone debt crisis was managed  or now about my input in you can simply ECB monetary policy blame ! the University of Tampere

Anyway, it really is wonderful to be back.

My lecture today is about money and the monetary system, and how these have . I will use Finland, and to evolved and transformed over the past two centuries some extent Europe too, as case studies.

This is more than economics proper, reflecting my own background economic history in . international political economy

## Slide 2. Overview of presentation

I will start by discussing money and the definition of money. Then I will move on to different currency arrangements in Finland through history, with a special focus on the 20 th   century and the Finnish markka, our long-standing national currency.

After that, we'll look at the euro and how it was introduced. How has life been for Finland as a member of the EMU?

Let's then consider the new challenges ahead for the international monetary system, related to geopolitics and technological change. And finally, some conclusions.

## Slide 3. What is money and how has it changed over two centuries?

Let's kick off with this question: What is money, and how has it changed over two centuries?

Money is a simple tool for a complex task. It does three jobs.

First, it is a . We use it to make payments. It spares us the medium of exchange trouble of barter. If I'm selling timber and want bread, I do not have to find a baker who needs timber. Money stands in the middle and makes trade possible. Related to that, money is also the legal means of payment of debts.

Second, it is a . It enables pricing of goods and services. It is used in unit of account contracts as a standard of debts and other obligations. Profits and losses are measured in it. When the unit of account is under pressure, the economy may falter. When the unit is steady, people can make plans for the future.

Third, it is a . It preserves purchasing power over time. The store should store of value not be taken for granted though. Inflation may eat away at it. Panics and scares can undermine it. But the point is simple: money ought to hold its worth well enough that people can save, investment can grow, and everyone can sleep soundly at night.

These three functions of money stand on one foundation: . Trust that the coin is trust true. Trust that the banknote will be honoured. Trust that the deposit can be redeemed.

Trust does not appear by magic. It is earned and guarded by institutions and through rules and regulations - mints, central banks, courts, laws, regulated practices and procedures. This we can call . And when we link the various a monetary system national or supranational monetary systems together, we get the international . monetary system

Over the past two centuries the form of money has changed, but its functions have . We moved from metal coins to paper banknotes, used as fiat currency (which is not legal tender and inconvertible to metal), and from banknotes to bank deposits, then to credit and debit cards, and from cards to electronic and instant payments.

As for the monetary system, over time we have seen hard pegs to gold and silver, we have seen fixed exchange rates, let currencies float, and we have built currency unions between countries.

And today, we see the terms tokenised deposits, stablecoins and central bank digital currencies.

Through all of this, one lesson is clear: the form can change, but the function . If trust is strong, the system works. If trust fails, nothing else will help. Let me remains next elaborate on this by focusing on Case Finland.

Slide 4. Finnish currency arrangements: 1811, 1860, 1865, 1878

Finland's monetary story begins, in modern form, in , when Tsar Alexander I of 1811 Russia established the central banking office that later became the Bank of Finland. This makes us the fourth oldest still existing central bank in the world.

Furthermore, we can also say that we have a claim for the world's oldest central bank, the Riksbank, because when that institution started its operations in , Finland was 1668 still an integral part of Sweden!

The creation of a central bank for Finland was discussed at , which the Diet of Porvoo was a gathering of the four estates of Finland convened in 1809 after Sweden lost Finland to Russia. Meeting in the town of Porvoo, the four estates swore an oath of allegiance to the Tsar, who in turn confirmed Finland's old laws, religion and privileges - including private property.

The Porvoo Diet proposed the setting up of a central bank under the supervision of the Diet, but this was not acceptable to the Tsar. The central bank was instead subordinated to the economic department of the newly created Grand Duchy of Finland - first in Turku, from 1811, and then from 1819 onwards in Helsinki.

The political purpose was clear. Following its crushing defeat in the War of Finland in 18081809, Sweden had ceded Finland to Russia in the Peace Treaty of Hamina in 1809. St Petersburg wanted a measure of monetary order in the new Grand Duchy  and to replace the Swedish currency in circulation with Russian roubles.

However, in the first decades after 1809, both Swedish and Russian paper riksdalers roubles circulated in Finland. Eventually, the dominated, but it was no model of rouble stability. In particular, it was badly shaken by the Crimean War of 18531856. In Finland, the need for a domestic anchor became plain. So, in , Finland introduced the 1860 as a national unit. markka

At first the markka was defined as … of the paper rouble. The key break came in , 1865 when the markka was and thus freed from the instability of the rouble. pegged to silver It was a polite way of saying: ""Thank you, but we'll do this ."" our way

There was a parallel plan in St. Petersburg to stabilize the rouble too, but that plan was derailed by the uprising in Poland and the ensuing costly war. Finland was unaffected, however, and so managed to establish a national monetary system of its own.

The pegging of the currency to a precious metal was not a passing fancy. It was a major signal: Finland wanted credibility, access to European capital, and a place in European trade. It was a means of integration: silver was the dominant monetary standard in Northern Europe at the time.

The late 19th century was a time of economic liberalism and rapid growth in Finland. The Finnish , enacted in (effective in 1880), abolished Law on Freedom of Trade 1879 the old guild restrictions and granted citizens the general right to engage in business. Though the priest and liberal policy entrepreneur had died decades Anders Chydenius earlier, his deeply 18th-century advocacy of economic liberty and free enterprise influenced the intellectual climate that made such reform possible. The law thus

realized, in practice, the Enlightenment ideals of economic freedom that Chydenius had articulated more than a century before.

The final currency step of this era came in , when Finland joined the European 1878 trend of the 1870's and , with the markka at parity with the adopted the gold standard French franc. By pegging to gold at the same gold content as the franc, Finland effectively became integrated with the as a kind of 'associate Latin Monetary Union member' at the time. 1

Again, there was a concurrent plan to take the rouble to the gold standard as well, but that had to be abandoned because of the Russo-Turkish war. As a result, Russia followed Finland to the gold standard only two decades later in 1897.

That anchor of gold held until the First World War. It gave us credibility, capital and access to international markets. Many a railway or factory was built on that foundation. The benefit was concrete: the country could raise funds in Frankfurt, Paris and elsewhere  for example, for railway routes like the important Savonian line in Eastern Finland.

A currency is not a mere symbol. It is a bridge to the world - and to the future.

## Slide 5. Currency regimes in the 20 th   century

Fast-forward into the 20th century and we see a collection - if not a cavalcade - of monetary architectures. And Finland experienced most of them up close.

1915-1926: Paper standard . The First World War brought a suspension of gold convertibility and rapid inflation. Money served the home front first - stability was compromised and came only later.

1926-1931: Return to the gold standard . After the First World War, Finland  like the United Kingdom and others  went back on gold. But the old world where the gold standard had worked, had gone. Democracy and strong trade unions, and the highly indebted agricultural sector, made deflation, once the tool of 'internal devaluation', both hard and harmful. Once the Great Depression started, the deflation required by gold proved politically and socially untenable, as Barry Eichengreen has demonstrated. 2

1931-1933: Floating exchange rate . The gold exchange standard had to be abandoned. Finland devalued its currency and floated, following the United Kingdom and the Scandinavian countries.

1933-1939: Pound peg ('the sterling area') . The markka, and the Scandinavian currencies, were pegged to the British pound. This fitted the trade patterns of the day: the UK was our main export market, above all for forest products. The economy grew briskly in the late 1930s.

1939-1949: Exchange controls . War and reconstruction required rationing of foreign exchange. The external constraints were tight. Controls were necessary, but they were costly in terms of lost efficiency. There was high inflation, and after the war there were several devaluations.

1949-1971/73: Bretton Woods par value system . Fixed  but adjustable  exchange rates anchored to the US dollar. Membership of the IMF (since 1948) and full currentaccount convertibility (from 1959) tied Finland into the post-war Western economic order. These were years of fast growth, industrialisation and the expansion of the welfare state.

Between , Finland moved from postwar exchange controls to full 1959 and 1961 participation in the Bretton Woods monetary system. In , the government ended 1959 foreign-exchange rationing and restored current-account convertibility, aligning with the broader European liberalization of payments. Over the next two years, the Bank of strengthened reserves in preparation for formal entry into the IMF's framework. Finland This transition culminated in , when Finland September 1961 declared a par value for and accepted the obligations of , marking the official the markka IMF Article VIII completion of its monetary liberalization and full integration into the postwar international financial order.

Yet the economy remained volatile. The markka was devalued roughly every ten years from the post-war period until 1992. The lesson from this is that fixed rates alone do not guarantee an equilibrium and stability if economic policy is loose and wages run ahead of productivity.

1971/73-1991: Currency basket . When the dollar was delinked from gold and the oil shocks occurred, Europe and the world were compelled to improvise. Finland pegged the markka to a that reflected trade shares. currency basket

In Western Europe the European Monetary System and the Exchange Rate Mechanism, the emerged under a de facto Deutsche mark anchor - the EMS/ERM, Bundesbank was the European leader in monetary policy.

1991: European Currency Unit peg . In June 1991, Finland shifted from the tradeweighted currency basket to a peg against the , a composite of EU currencies, ECU thereby tightening our link to Europe. It was as much a political as an economic decision, if not more.

The decision to peg the markka was taken after a serious stand-off between the new Government, led by Prime Minister Esko Aho, which would have preferred a 'final devaluation' of between 5% and 10% to correct cost competitiveness when pegging, and the Board of the Bank of Finland, which proposed pegging to the ECU with the then current exchange rates. The Board strengthened its stance by threatening to resign if the markka was devalued. The Government yielded at first.

But the tension did not disappear. On the contrary, Bank of Finland Governor Rolf Kullberg was forced to resign in April 1992, while the Government appointed Sirkka Hämäläinen as the new Governor. She later served on the first-ever European Central Bank Executive Board in 19982003.

1992-1996: Float . The early 1990s crisis  born of a failed financial liberalisation, free but excessive capital flows, a fixed exchange rate, lax fiscal policy and the collapse of Soviet trade  led to mass unemployment by 1992. In 1991, Finland's GDP fell by 7% and the number of people unemployed increased by 150,000.

The economic crisis and the parallel international currency crisis of September 1992 forced Finland to let the markka float. I, for one, thought of it as -the Last Devaluation the final drink before quitting the habit.

The markka fell sharply, at one point roughly 40% against the ECU. By spring 1993, exports had surged and the current account turned for the better. Interest rates, then a key measure of trust on the economy, started finally to decline. But the cost at home was heavy: bankruptcies and a long, painful shake-up of balance sheets. For a long time, job creation failed to counter the job destruction, which was largely structural, occurring in the wake of events within and outside Finland.

## Slides 6-8. Impossible Trinity

The period from roughly 1988 to 1992 is of particular importance from the standpoint of monetary policy and monetary regime choice. Finland in that period is a perfect case study in what is known as 'impossible trilemma' or 'trinity'.

The , also known as the ' , is a core impossible trinity Mundell-Fleming trilemma' concept in international macroeconomics. It states that a country cannot of the following policy goals: simultaneously have all three

1. Free capital mobility (no restrictions on capital flows - investors can move money in and out freely).
2. A fixed exchange rate (the domestic currency's value is pegged to another currency or a basket of currencies).
3. An independent monetary policy (the central bank can set interest rates to achieve domestic goals, like inflation or unemployment).

In other words, a country can of these three at the same time - the choose only two third must be sacrificed. In a nutshell, you cannot have a fixed exchange rate, free capital flows and an independent monetary policy all at once.

I must add that Professor HØlŁne Rey, has in her empirically grounded papers in 201315, suggested a significant revision of the Trinity. Her reformulation of the trilemma into a captures a deeper truth about the contemporary global monetary order: ""dilemma"" sovereignty in finance has become conditional. The global financial cycle - driven by the liquidity, leverage, and risk preferences of dollar-based markets - binds national

policy far more tightly than exchange-rate regimes once did. In this system, the U.S. , transmitting dollar functions as both a currency and a global infrastructure financial impulses across borders and shaping the rhythm of credit worldwide.

Rey's insight thus redefines monetary autonomy not as the freedom to set interest rates independently, but as the capacity to manage exposure to the global balance sheet through macroprudential, regulatory, and institutional means. The modern challenge is thus not to escape interdependence, but to govern it, or at least, manage it - a task that lies at the heart of the post-crisis debate over the future of global finance and the boundaries of economic sovereignty.

Anyway, for Finland, the 'impossible trinity' was a hard lesson in the late 1980s and early 1990s. According to the ex-post analysis of the Finnish economic crisis of the 1990s, the central causes behind the overheating of the late 1980s and the subsequent deep recession were financial market and monetary factors and monetary policy. This was also the conclusion of the three foreign economic experts commissioned by the Bank of Finland in 1993 to conduct an in-depth study. 3

It is worth noting that Dr. Sirkka Hämäläinen, Governor of the Bank of Finland from 1992 to 1998, asks in her memoirs whether it would have been possible to move already to a floating rate regime in the early 1980s. Some Bank of Finland economists had in fact analysed this matter earlier and even recommended opting for a floating exchange rate regime. But, as she notes, ""the Governor and the majority of the Board did not warm to such ideas"". 4

Hämäläinen also concludes that even if the Governor and the Board had been ready to pursue a regime change to floating rates, they would have faced formidable opposition not only from the politicians and policymakers, but also from the export industries. These, as well as the labour market partners, clearly saw the exchange rates as far too important to be left to the whims of the markets. The export industries, both the corporate leaders and the trade unions, were accustomed to the support of devaluations when the going got tough. 5

Dr. Pertti Kukkonen, one of the most perceptive and intellectually honest critics of central bank policy of the time, argued that a floating rate regime would have facilitated both a revaluation in 1988, which would have contained overheating, and an earlier devaluation in 1990, which would have relieved the downward spiral of production and employment. He regrets the collapse of the ""social contract"" (which was referred to then as 'Sorsa's contract') proposal in the autumn of 1991 and criticizes the trade unions and export industry for not accepting an internal devaluation, which would have been less costly for growth and jobs than the external one. 6

As Kukkonen writes: ""If the markka had been floating, monetary policy would have had a larger countercyclical impact, but floating did not yet fit in the realm of ideas in European economic policy in the 1980s."" 7

1996-1998: ERM link on the road to Economic and Monetary Union . Finland joined the EU in 1995. As its economy stabilised, Finland tied its exchange rate to the Exchange Rate Mechanism of the EU, thereby paving the way for becoming a founding member of the euro.

1999-today: The euro . First as a fixed euro conversion rate used only for accounting purposes and electronic payments; then the launch of euro coins and banknotes in 2002.

Over time the euro's institutions have moved from to the more robust EMU 1.0 EMU 2.0 , including a sturdier framework for European economic governance, a permanent crisis fund (the European Stability Mechanism, ESM), new legislation for banking regulation, supervision and resolution, as well as the creation of the euro area banking union under the auspices of the ECB.

In short, Finland has experienced floats and pegs, metals and paper, currency baskets and unions. Each move was a response to the conditions at the time. None was a magic solution. But, taken together, they represent our path from peripheral volatility to European stability.

## Slide 9. The euro and why it was introduced

The euro was not born of romance. It was born of hard problems.

After Bretton Woods collapsed, Europe faced recurring exchange-rate crises. The EMS /ERM worked  until it did not. In , currency pressures swept the system. German 1992 unification had shifted the centre of gravity. Capital was mobile. National politics clashed with monetary constraints. Competitive devaluations returned and sapped trust.

At the same time, in 1993, the European market was established. Goods, single services, labour, people and capital were to move freely. But a market without monetary stability is a table with one leg short. Prices, wages and interest rates cannot be compared if exchange rates fluctuate. Finance cannot be well integrated if currency risk dominates.

The euro promised three things. , to end the game of beggar-thy-neighbour First devaluations inside Europe. , to deliver price stability under a rules-based, Second independent central bank system. , to deepen the single market by stripping out Third exchange-rate costs and noise.

There were too. After the Cold War, Europe needed anchors. A political goals common currency, run by a supranational central bank and embedded in law, was seen as a strong anchor. France and Germany made the decisive bargain: in effect, Europeanising the anti-inflation credibility of the Bundesbank by embedding it in a new European Central Bank, and binding German power within shared institutions.

The design was not perfect. The original EMU was a monetary union without a full fiscal and financial union. That gap would matter later. But the purpose was clear and, for most EU countries, compelling.

## Slide 10. Finland in the euro

Why, specifically, did Finland join?

The 1990s had taught us a hard truth - actually this was already apparent in the 1970s and 1980s  as we were living then in a devaluation-inflation cycle, with periodic devaluations following high inflation and the erosion of the competitiveness gains of the previous devaluation. That is with free capital movements and a fixed exchange rate, a small country cannot run a patchwork of lax or inconsistent policies and expect mercy from the markets. We needed a that could not be kicked away in a credibility anchor storm. The euro offered that.

What has it brought?

Stability , first of all. Compared with the early 1990s, the euro years - since its creation in 1999 - have delivered low and predictable inflation, lower interest rates, and a more even cost of capital.

Trade and investment have benefited from the removal of currency risk within the euro area. have gained from price transparency and ease of payments. Households have gained from a deeper market for finance and customers. Businesses

## Slide 11. Responses to the financial crises

After almost a decade of the euro, came the litmus test - or the moment of truth.

The global financial crisis and the euro area sovereign debt crisis exposed the faults of . A single monetary policy alongside many nationally regulated banking EMU 1.0 systems and national fiscal policies can breed imbalances when credit flows too quickly in some parts of the network. When the tide went out, such imbalances left weak banks, fragile sovereign finances, and a dangerous feedback loop between the two.

Europe's answer, though slow, was real and resolute. It built a with banking union common supervision and resolution. It created a permanent crisis fund, the . The ECB acted as a central bank should in a European Stability Mechanism (ESM) crisis: lender of last resort to the system, guardian of the payments backbone, and, in exceptional times, buyer of last resort to prevent self-fulfilling panics.

The architecture moved towards . Not perfect, but stronger. EMU 2.0

It has provided resilience during the many crises of the 2020s, from the COVID-19 pandemic to the economic consequences of Russia's illegal war in Ukraine, including the subsequent energy crisis and inflationary surge.

But still the euro and EMU are very much work in progress.

For Finland the core lesson is not new. A country in a currency union must keep its aligned with productivity. It must keep its resilient, competitiveness public finances not just for today, but for the next shock and for the realities of an ageing society. Wage-

setting must be moderate enough to support employment in a small, open economy. Innovation and education must feed productivity - human capital matters. Finance must be well supervised and capitalized.

The euro does not do these jobs for us. But it makes success in these more likely if we do our own job well as a society.

## Slide 12. New challenges for the international monetary system

The next chapter in this story is being written on two fronts at once.

First, . The world is less rules-based and more power-based geopolitical confrontation than a decade ago. Tensions between the United States and China run through trade, technology and finance. Sanctions and export controls have become standard tools. Payment systems and reserve currencies are viewed and used as instruments of statecraft.

The remains . Market depth, ample liquidity US dollar the dominant reserve currency and the rule of law can keep it at the top. But the use of financial sanctions is encouraging some countries to seek partial workarounds: more trade invoicing in other currencies, regional payment systems, and local currency swaps.

Escalating geopolitical tensions, trade wars and volatile policy shifts are reshaping the rules of global finance. While the US dollar will likely remain dominant, its supremacy may become somewhat less hegemonic in the evolving more multipolar world economy.

As to the euro, it is a solid regional reserve currency, and globally distant second - for the euro to become , Europe will need to act a more broadly used global anchor strategically and reduce its dependencies.

Europe must not simply drift in this global environment. It must strengthen its economic base, reduce strategic dependencies and be able to stand on its own feet - while keeping alliances strong.

The second front is . Here the words are new, but the technological disruption questions are old: Who issues money? Who controls the payment rails? And who bears the risk?

- Crypto-assets without backing promise much but deliver little as money. They are volatile and speculative. They fail the tests of unit of account and stable store of value.
- Stablecoins are different in design. They promise a claim on safe assets  say, short-term government bills  wrapped in a token that moves fast on new rails. The EU now has a for crypto-assets and stablecoins. The US harmonised rulebook has moved to a more permissive model with strict reserve requirements for issuers. There is room for coordination between the EU and the US, but the politics have not yet reached this point.
- Tokenised deposits are the banking sector's answer. They keep money inside the regulated system, make it movable on new infrastructures, and allow programmability without breaking the link to insured deposits and central bank

settlement. If well designed, they can give us the with the speed of tokens safety . of banks

- A central bank digital currency in Europe, the will be for broad digital euro use by the general public. In October, in the ECB Governing Council, we decided to move to the next phase, ensuring technical readiness. A digital euro will be legal tender in digital form, the monetary anchor in the digital world, available to households and businesses, designed to be private by default for small payments and safe by design for all. It would . It would complement, not replace, cash ensure that in a digital age the basic unit of money remains a , not a public good private monopoly.

## Slide 13. A stronger international role for the euro

A stronger international role for the euro is increasingly seen as desirable. But it requires a stronger, more dynamic Europe. Both in terms of its security and its economy.

The euro's global weight ultimately depends on the vitality of the economy behind it. That is why the path forward rests on three key priorities: Defence, Dynamism and Digital Sovereignty.

The first D is Defence  and security as an economic asset. Russia's war of aggression in Ukraine has reminded us, painfully, that security and economics are . inseparable

The second D is the engine of Europe's prosperity and the foundation of Dynamism the euro's strength. The lesson is simple: a currency cannot be stronger than the economy it represents.

The third D is perhaps the most strategic frontier of all. In this Digital Sovereignty arena, Europe is far too dependent on non-European platforms and payment systems.

At the same time, are spreading rapidly, aiming at US dollar-backed stablecoins extending dollar dominance into digital finance.

Europe is not ignoring this shift. That's why the is important. digital euro

Together, the three Ds form a coherent strategy for a stronger Europe and a . And all three support one another: requires a stronger euro a credible defence dynamic economy to fund it; benefits from digital innovation; and economic dynamism , in turn, depends on both secure infrastructure and economic scale. digital sovereignty

Technology also changes power. If the rails of payments are controlled from afar, sovereignty is eroded. If key platforms are private and foreign, policy levers shrink. This is why, in the 2020s, means monetary sovereignty. Europe should digital sovereignty ensure the backbone of its payment infrastructure remains open, interoperable and resilient  but it must not be naïve about this.

One more hard fact, if I may. A global currency needs a behind deep, liquid safe asset it. The US has its Treasury securities. The EU has a patchwork. Its joint issuance has grown in recent years for specific common purposes, but a larger, permanent pool of

safe euro-denominated assets anchored in sound fiscal rules would help integrate capital markets and strengthen the euro's international role. Defence and security, if funded wisely together, could form both a shield and a financial mainstay.

## Slide 14. General conclusions

This brings us now to my conclusions. I will summarise five key lessons.

First , money is backed by the state and tested by the market. Its a social contract three jobs  exchange, account, store  are simple to state and hard to maintain.

Institutions and credibility do the heavy lifting. However, there is . no perfect regime Fixed exchange rates bring discipline but can become a straitjacket. Floating rates bring flexibility but can tempt drift and reduce credibility. A currency union brings stability of prices and payments, but it demands that members keep their own houses in order.

Second , Finland's path shows that , not fate. currency choice is the result of policy We moved from rouble instability to silver, from silver to gold, from pegs to floats, from baskets to the euro.

Each shift matched a need: to attract capital, to stabilise trade, to escape crisis, or to anchor expectations.

Today, with Finland in the euro, there is . We must keep work that only we can do competitiveness aligned with productivity. We must keep public finances resilient in an ageing society. We must invest in education, research and innovation. We must supervise the financial sector well. We must ensure that wage-setting supports employment in our small, open economy. These are not tasks for Brussels, or Frankfurt. They are ours.

Third , the euro is a . It brought to an end the European habit of stability project competitive devaluations. It delivered low inflation and deepened the single market. Its first design had gaps in it, but its second design is sturdier.

The task now for the EU is to finish the job. This means completing the banking union in practice, building a true capital markets union, and ensuring that fiscal rules are simple, credible and countercyclical.

Fourth, the international monetary system is entering a more contested and more . Dollar dominance will likely persist, but the edges are technologically advanced era fraying. Europe must reduce strategic dependencies, guard its digital and financial sovereignty, and act with partners where interests align.

Fifth, in money as in politics, . We should pragmatism beats ideology use what . This means regulating the new forms of private money so works and fix what fails that they do not undermine stability. It means building a digital euro that is useful, secure and privacy-preserving. It means considering how Europe can supply more of the safe assets that a strong currency requires. And it means sticking to the rule of law and open markets, because they are the true engines of trust.

## Slide 15. Case Finland, 18112030

The time span from 1811 to 2030 is long, but the thread is clear. A small, open economy can prosper when it marries with and . stability adaptation reform

Yesterday we sought credibility with silver and gold.

Today we hold it with the euro.

Tomorrow, whatever form money takes we will need the same plain virtues  sound institutions, honest accounts, careful risk-taking, steady reform, economic and entrepreneurial dynamism.

If we keep this compass, Finland will not be a passive participant in the next chapter of Europe's monetary story, but will help to write it.

- 1  Tarkka, Juha, Raha ja rahapolitiikka, Gaudeamus 1993, p. 76
- 2  Eichengreen, Barry, Golden Fetters. The Gold Standard and the Great Depression 1919-39. Oxford University Press 1992, pp. 4-12, 92-99.
- 3  Border, C., Currie, D. and Söderström, H.T. (1993), Three assessments of Finland's Economic Crisis and Economc Policy, series C:9, Bank of Finland.
- 4  Ahonen, Jukka and Jarkko Vesikansa, J. (2023), Pakko uskaltaa. Sirkka Hämäläisen ura ja elämä, Otava, pp. 211217.
- 5  Ibid., p. 217.
- 6  Kukkonen, Pertti (1997), Rahapolitiikka ja Suomen kriisi, PTT publications no. 16, pp. 24, 3362.
- 7  Ibid., pp. 2021.",Olli Rehn
https://www.bis.org/review/r251117d.htm,John C Williams: Next level unlocked,"Remarks by Mr John C Williams, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the 2025 US Treasury Market conference, organised by the Federal Reserve Bank of New York, New York City, 12 November 2025.",2025-11-12 00:00:00,"## John C Williams: Next level unlocked

Remarks by Mr John C Williams, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the 2025 US Treasury Market conference, organised by the Federal Reserve Bank of New York, New York City, 12 November 2025.

* * *

As prepared for delivery Figures accompanying the speech

## Introduction

On behalf of the New York Fed, let me welcome you all to this year's U.S. Treasury Market Conference. Many thanks to the distinguished speakers and panelists for joining us here, and to the event organizers for putting together today's outstanding agenda. I'm looking forward to a valuable and productive conversation.

This gathering is a recurring calendar item every fall. But the topics that we discuss each year do not stand alone. Think of it as leveling up in a video game-which is one of my favorite pastimes by the way, or dare I say, ""present times"". At each conference, we advance our understanding of the Treasury market to the next level. And in the genre of gaming, this game is multiplayer. It's remarkable to think about what we've accomplished in this decade-long enterprise of interagency collaboration. This work continues to be imperative, so we must keep playing. I mean that in the working sense, of course.

Before I keep going, I must give the standard Fed disclaimer that the views I express today are mine alone and do not necessarily reflect those of the Federal Open Market Committee (FOMC) or others in the Federal Reserve System.

## Three Levels of Play

The remarks that I've given at past conferences have focused on taking stock of the Treasury market and sharing updates on our collective efforts. 1   My comments today will be a retrospective into the events, developments, and lessons learned over the past seven years. I will then explain how all of that has shaped the FOMC's thinking around monetary policy implementation and the design of our ample reserves implementation framework. I'll also bring you up to speed with regard to where the Federal Reserve stands on its balance sheet strategy.

So, let's return to the video game analogy and start at level one-the episode of volatility known as the ""flash rally"" of 2014. That period of market stress served as a sharp reminder that financial markets are not static: they evolve in response to changes in technology, regulation, business models, and with the addition of new players and participants.

That initial level made it clear that safeguards and systems must evolve so that these markets can continue to function well in every circumstance and under any condition.

So, from there, we jumped to the next level. And that's the imperative of market resiliency. We learned the importance of creating a system that can better withstand the unforeseeable and the unpredictable. Because when the unforeseeable and unpredictable did happen, as we saw in the ""dash-for-cash"" in 2020, it resulted in significant stresses in the Treasury market and related markets that threatened to spread to broader financial conditions.

This leads me to level three. A resilient financial system is critically important for monetary policy. Because monetary policy influences the economy by affecting financial market conditions, its effectiveness relies on well-functioning markets, with the Treasury market at the heart of it all.

Good news-we've unlocked the next level of my remarks. And that is an explanation of the FOMC's approach to monetary policy implementation to support effective interest rate control and smooth functioning of these core markets.

## Framing the Frameworks

We've established that monetary policy implementation frameworks are critically important to the conduct of monetary policy. 2

In supplying reserves to the banking system, the Federal Reserve has multiple goals that frequently involve trade-offs. First and foremost, it targets a level of the policy 3 interest rate and aims to minimize the variability of the policy rate around that target. In addition, it has objectives related to supporting financial stability and the smooth functioning of financial markets.

The core of any operational framework is the supply of reserves, which can range from a low level, or ""scarce,"" to ""ample"" and ""abundant."" The ""price"" of reserves is the spread between the market interest rate and the rate earned for holding reserves at the central bank. When reserves are scarce, the slope of the demand curve for reserves is steep. A small change in the quantity of reserves results in a meaningful change in the spread. When reserves are ample, the demand curve flattens but still slopes downward, so that small changes in the quantity of reserves have modest effects on the spread. And when reserves are abundant, the demand curve is essentially flat.

A central bank has two sets of tools it can use to supply reserves. First, it chooses an ex ante aggregate level of reserves to supply to the banking system. Second, it may make available lending facilities to the banking system that offer loans to financial institutions at an interest rate determined by the central bank. If the ex ante supply of reserves is sufficiently low, the additional demand will be met by the lending facilities. Note that both tools are a means to supply reserves: In the first, the supply is set in advance, while with the latter, it adjusts endogenously to market conditions.

It is worth emphasizing that the two tools can be mutually reinforcing in achieving desired outcomes. For example, lending facilities limit upward movements in interest rates on days of high demand, thereby reducing the ex ante supply of reserves needed to control short-term rates. 4

## Federal Reserve: Ample Reserves and Tools

The Fed's operational framework has evolved over time, reflecting its experience with large balance sheets since the global financial crisis. 5   In January 2019, when the decline in the Fed's asset holdings implied that the quantity of reserves would soon fall below an ""abundant"" level, the FOMC formally adopted an ample reserves strategy. 6

The FOMC has defined this framework as one in which ""control over the level of the federal funds rate and other short-term interest rates is exercised primarily through the setting of the Federal Reserve's administered rates, and in which active management of the supply of reserves is not required."" 7   Accordingly, the ex ante supply of reserves is chosen to be sufficiently large to meet the demand for reserves on most days.

One important tool the FOMC has established to ensure interest rate control is the overnight reverse repo facility (ON RRP), which, alongside the interest paid on reserve balances (IORB), helps set a floor for the federal funds rate. Through the ON RRP, eligible counterparties ""lend"" to the Federal Reserve at the rate set by the FOMC, currently at the bottom of the target range for the federal funds rate. Usage of the ON RRP adjusts automatically to market conditions, rising and falling with supply and demand, which is particularly important in a dynamic market.

The ON RRP has proven to be a very effective and flexible tool to support interest rate control to the downside. When Federal Reserve asset holdings push reserves above ample, the ON RRP relaxes the tight relationship between balance sheet size and reserves and acts as a safety valve in supporting smooth transmission of monetary policy to markets. As the size of the balance sheet falls, market rates rise above the rate offered at the ON RRP and, as a result, usage of the ON RRP declines to very low levels. The dynamic usage of the ONRRP is seen in Figure 1, which shows average monthly usage of the ON RRP from 2016 through October of this year. The ON RRP was used extensively when it was economically sensible for the Fed's counterparties to do so. By contrast, it has very limited usage when repo rates are well above the ON RRP rate, as is the case today.

In 2021, the Federal Reserve introduced the Standing Repo Facility (SRF), which nicely complements the ON RRP by providing interest rate control to the upside. 8   The SRF rate is set at the top of the FOMC's target range for the federal funds rate. This combination of an ample supply of reserves and an SRF rate at the top of the target range reduces the day-to-day reliance on the facility except during periods of significant upward pressure on rates resulting from strong liquidity demand or market stress.

By ensuring that adequate liquidity will be available in a wide variety of circumstances, the SRF plays a critical role in capping temporary upward pressure on rates and assures markets of effective interest rate control and smooth market functioning. It is best thought of as a way of making sure that the overall market has adequate liquidity consistent with the FOMC's desired level of interest rates. In that regard, it differs from other lending facilities-such as the discount window-that aim to provide individual banks with liquidity when the need arises.

The SRF has been effective as reserves have moved from abundant toward ample. Over the past two months, SRF usage has risen from essentially zero to having greater frequency and higher volume of take-up, especially on days of temporary repo market pressures, as shown in Figure 2. Like the ON RRP facility, the SRF's effectiveness relies on market participants availing themselves of the SRF based on market conditions, free of worries about stigma or other impediments. I fully expect that the SRF will continue to be actively used in this way and contain upward pressures on money market rates.

## Federal Reserve: The Way Forward

At the onset of the pandemic, the Fed, along with central banks around the world, responded quickly to restore market functioning, 9   causing reserves to rise well above ample, as they did in many jurisdictions.

In June of 2022, the Fed began the process of reducing the size of its balance sheet to transition toward an ample level of reserves. 10   The FOMC said it intended to stop balance sheet runoff when it deemed reserves were somewhat above ample, and then allow reserves to decline further as other liabilities, such as currency, grow.

The process has worked according to plan. The Fed's securities holdings have shrunk from a peak of about $8-1/2 trillion in 2022 to $6-1/4 trillion today. At its meeting in October, the FOMC decided it would conclude the reduction of its aggregate securities holdings on December 1. 11   This decision was based on clear market-based signs that we had met the test of reserves being somewhat above ample. 12   In particular, repo rates have increased relative to administered rates and have exhibited more volatility on certain days. Accordingly, we have been seeing more frequent use of the SRF. And the effective federal funds rate has increased somewhat relative to the IORB after years of that spread being at a stable level. These developments were expected as the supply of reserves closed in on ample. 13

Looking forward, the next step in our balance sheet strategy will be to assess when the level of reserves has reached ample. It will then be time to begin the process of gradual purchases of assets that will maintain an ample level of reserves as the Fed's other liabilities grow and underlying demand for reserves increases over time. Such reserve management purchases will represent the natural next stage of the implementation of the FOMC's ample reserves strategy and in no way represent a change in the underlying stance of monetary policy.

Determining when we are at ample reserves is an inexact science. I am closely monitoring a variety of market indicators related to the fed funds market, repo market, and payments to help assess the state of reserve demand conditions. Based on recent sustained repo market pressures and other growing signs of reserves moving from abundant to ample, I expect that it will not be long before we reach ample reserves.

## Conclusion

With that, we've arrived at the endgame of my remarks. We've learned a lot over the past decade. The FOMC's monetary policy implementation framework is designed to support an adequate supply of liquidity under a wide range of circumstances. The combination of an ample supply of reserves and the Standing Repo Facility enables the Committee to maintain strong interest rate control and flexibility regarding changes in the size of its balance sheet. This operational framework has proven to be highly effective-and continues to work as designed.

- 1 John C. Williams, Ten Years Gone, remarks at the 2024 U.S. Treasury Market Conference, Federal Reserve Bank of New York, New York City, September 25, 2024; John C. Williams, Elementary, Dear Data, remarks at the 2023 U.S. Treasury Market Conference, Federal Reserve Bank of New York, New York City, November 16, 2023; John C. Williams, A Jack of All Trades Is a Master of None, remarks at the 2022 U.S. Treasury Market Conference, Federal Reserve Bank of New York, New York City, November 16, 2022; John C. Williams, Preparing for the Unknown, remarks at the 2021 U.S. Treasury Market Conference, Federal Reserve Bank of New York, New York City, November 17, 2021; and John C. Williams, A Solution to Every Puzzle, remarks at the 2020 U.S. Treasury Market Conference, Federal Reserve Bank of New York, New York City, September 29, 2020.
- 2 See Cavallino, Paolo, Mathias Drehmann, Richard Finlay, and Julie Remache, 2025. "" Monetary policy operational frameworks - a new taxonomy,"" Bank for International Settlements, , September, pp. 49-65. BIS Quarterly Review
- 3 See Afonso, Gara, Gabriele La Spada, Thomas M. Mertens, and John C. Williams. 2023. "" The Optimal Supply of Central Bank Reserves under Uncertainty."" Federal Reserve Bank of New York , no. 1077, revised December, for discussion Staff Reports and references to the relevant literature.
- 4 Afonso, La Spada, Mertens, and Williams 2023.
- 5 For a history of FOMC operating tools, see Kevin Clark, Dina Marchioni, Julie Remache, and Will Riordan, ""Federal Reserve Repo and Reverse Repo Market ,"" , July 16, Operations: Before the Global Financial Crisis to 2015 The Teller Window 2025; and Kevin Clark, Dina Marchioni, Julie Remache, and Will Riordan, ""Federal Reserve Repo and Reverse Repo Market Operations: 2015 to Now,"" The Teller Window , July 17, 2025.
- 6 Board of Governors of the Federal Reserve System,  Statement Regarding Monetary Policy Implementation and Balance Sheet Normalization, January 30, 2019.
- 7 See Board of Governors, January 30, 2019, Statement. The FOMC's discussion of monetary policy implementation frameworks is summarized in the minutes of the , , and FOMC meetings. November 2018   December 2018 January 2019

- 8 Board of Governors of the Federal Reserve System,  Statement Regarding Repurchase Agreement Arrangements, July 28, 2021.
- 9 Board of Governors of the Federal Reserve System,  Federal Reserve announces extensive new measures to support the economy, March 23, 2020.
- 10 Board of Governors of the Federal Reserve System,  Plans for Reducing the Size of the Federal Reserve's Balance Sheet, May 4, 2022.
- 11 See Board of Governors of the Federal Reserve System,  Federal Reserve issues FOMC statement, October 29, 2025.
- 12 See Chair Powell's prepared remarks in his October 29 FOMC press conference: Transcript of Chair Powell's Press Conference, October 29, 2025.
- 13 See Roberto Perli, Balance Sheet Reduction: Progress to Date and a Look Ahead, remarks at 2024 Annual Primary Dealer Meeting, Federal Reserve Bank of New York, New York City, May 8, 2024; and Gara Afonso, Kevin Clark, Brian Gowen, Gabriele La Spada, JC Martinez, Jason Miu, and Will Riordan, ""A New Set of Indicators of Reserve ,"" Federal Reserve Bank of New York , August 14, Ampleness Liberty Street Economics 2024.",John C Williams
https://www.bis.org/review/r251118e.htm,Shirish Chandra Murmu: Central bank accounting practices - the Reserve Bank of India and global approaches,"Keynote address by Mr Shirish Chandra Murmu, Deputy Governor of the Reserve Bank of India, at the first International Conference on Central Bank Accounting Practices, organised by the Reserve Bank of India jointly with the SEACEN Centre in Mumbai, Mumbai, 14 November 2025.",2025-11-14 00:00:00,"## Shirish Chandra Murmu: Central bank accounting practices - the Reserve Bank of India and global approaches

Keynote address by Mr Shirish Chandra Murmu, Deputy Governor of the Reserve Bank of India, at the first International Conference on Central Bank Accounting Practices, organised by the Reserve Bank of India jointly with the SEACEN Centre in Mumbai, Mumbai, 14 November 2025.

* * *

Distinguished guests and my colleagues, Namaste and a very good morning!

It gives me immense pleasure to address this august gathering of distinguished central bankers from diverse regions, expert speakers associated with renowned international institutions and my fellow colleagues from Reserve Bank of India (RBI) at this first organised by RBI jointly International Conference on Central Bank Accounting Practices with the SEACEN Centre.  I am glad that the topic of Accounting in Central Banks has 1 attracted interest amongst central bankers across the globe and more than 20 countries are participating in this event.

The purpose of this conference is to collaborate and understand the diverse accounting practices across central banks, learn from each other, deliberate on certain globally accepted best practices, and improve the transparency and consistency in accounting practices. In my remarks today, I would briefly speak about the unique role played by central banks, importance of their balance sheet and certain accounting practices that influence central banks' financial statements while sharing RBI's approach to these aspects. I would also touch upon some emerging areas of discussion in central bank accounting.

## Unique Role of Central Banks

Central banks are unique in two ways. First, they are public policy institutions that operate without any profit motive. Consequently, their balance sheets reflect the policy measures they undertake to address the prevailing economic conditions of the country during a given period. Second, since a central bank possesses the exclusive authority to create money, it cannot go bankrupt in the usual sense. In other words, even if its balance sheet shows losses or negative equity, it can still carry out its functions.

Central bank mandates vary widely across jurisdictions, reflecting their historical and institutional contexts. Despite the differences in mandates, functions or roles across countries, at the heart of every central bank is monetary policy and financial stability. Central banks aim to maintain adequate capital and reserves/ risk buffers to be able to perform these critical functions effectively. The Reserve Bank of India has one of the broadest mandates, functioning as a full-service 2   central bank that undertakes a wide range of responsibilities typically associated with a central bank.

When it comes to central bank capitalisation, I believe adequate capitalisation is absolutely crucial, particularly for central banks of emerging and developing economies. These central banks not only pursue domestic monetary stability but also play a vital

role in managing external sector stability amid volatile capital flows and the spill-over effects of monetary policy shifts in advanced economies. A well-capitalised central bank elevates a country's standing and supports the resilience of the financial sector.

In the absence of any internationally recognised risk capital framework for central banks, each central bank finds its own balance between the opportunity cost of central bank capital vis-à-vis the socio-economic cost and the negative consequences of undercapitalisation.

## Accounting Standards for Central Banks

As widely understood, there is no single globally accepted accounting standard designed specifically for central banks and hence, their accounting and disclosure practices vary considerably in format, depth, and emphasis. While some central banks have adopted the principles set out in International Financial Reporting Standards (IFRS), either in full or with modifications to suit their specific needs, others continue to apply their own national accounting standards or use hybrid frameworks tailored specifically for the central bank.

The accounting policies chosen by central banks play a crucial role in shaping their balance sheets. Major areas of accounting policy that have a significant impact on the capital position and income recognition frameworks of central banks include, (i) Revaluation frequency of investments (ii) Treatment of unrealised revaluation gains/ losses (iii) Provisioning methodology/ maintenance of risk buffers and (iv) Surplus distribution policy. A review of publicly available information indicates that central banks represented at this conference follow a wide spectrum of approaches across these key accounting dimensions. These variations reflect differences in statutory mandates, institutional objectives, risk management philosophies, and the broader economic context within which each central bank operates.

## Accounting Practices Followed by RBI

Let me now briefly talk about the accounting practices followed by the Reserve Bank of India. Just to give a context, the entire ownership of RBI remains vested with Government of India. The way RBI prepares its financial statements and sets its accounting policies is guided mainly by the RBI Act of 1934 and the RBI General Regulations of 1949. Over time, within this legal framework, these policies have evolved to keep up with changing needs and practices.

I am pleased to say that the Reserve Bank of India has a strong and resilient balance sheet, with adequate level of risk provisioning. Over the years, RBI has consistently worked to align its accounting practices with global best practices, while staying true to core principles of prudence and conservatism.

I would like to highlight a few key aspects of RBI's accounting policy across five crucial areas: - a) Legal Framework, b) Prudence in Accounting, c) Surplus Distribution Policy, d) Strength of Balance Sheet, and e) Disclosures.

## Legal Framework

The Reserve Bank of India Act of 1934 3   lays down two key principles that define how RBI operates from an accounting standpoint. First, it mandates that the issuance of banknotes be handled by a distinct Issue Department, entirely separate from the Banking Department, with its assets used solely to meet its own liabilities. In other words, the assets and liabilities of the Issue Department are kept entirely separate from those of the Bank's other operations. Secondly, the Act specifies how the Bank's surplus is to be managed. Once provisions have been made for bad and doubtful debts, depreciation, employee benefits, and other standard banking requirements, any remaining surplus must be transferred to the Government. Together, these provisions lay the foundation for how the RBI manages its balance sheet and upholds transparency in its financial operations.

## Prudence in Accounting

Prudence in accounting reflects in revaluation of the assets at fair/market value, conservatism in treatment of unrealised gains/ losses and a consistent application for recognition of the realised exchange gains/ losses. Over the years, RBI has built provisions as Contingency Fund (CF) and Asset Development Fund (ADF) from realised profits. The Revaluation Accounts viz., Investment Revaluation Accounts, and Currency and Gold Revaluation Account (CGRA), reflect the unrealised gains/ losses from revaluation of investments and translation of foreign currency assets to Indian Rupee.

RBI revalues the entire forex reserves portfolio on a daily basis and does not carve out any portion for amortised valuation. All foreign currency assets and Gold are translated to Indian Rupee daily at market exchange rates prevailing on the day, which gets reflected under the CGRA. Domestic securities are mark-to-market on a weekly basis and also at end of each month.

As a prudent accounting practice, RBI does not recognise unrealised revaluation and translation gains on securities and gold as income but reflects them as revaluation balances on the balance sheet. On the other hand, any unrealised losses on revaluation of domestic/foreign securities are charged to the Contingency Fund at the end of the year when accounts are finalised. There is no fungibility between the various heads under revaluation, implying RBI prudently provides for any revaluation loss on account of investments and does not offset it with a positive CGRA balance and viceversa.

International practices 4   on these aspects are quite interesting. Some central banks revalue a portion of their portfolio at fair value, while keeping the rest at amortised cost. In some countries, unrealised gains and losses are recorded in the income statement, reflecting their impact on financial performance. This conference would be a good forum to understand diverse perspectives, rationale, and methodology for these classifications from fellow central bankers.

## Surplus Distribution Policy

RBI has a transparent, publicly disclosed and rule-based surplus distribution policy under the Economic Capital Framework (ECF). This framework, introduced in 2018-19,

is based on recommendations of an independent Expert Committee . The ECF 5 recognises that realised equity should cover the monetary and financial stability risks, credit, and operational risks while the revaluation balances should cover the market risk. After making the required provisions, the remaining surplus is transferred to Government. Since the introduction of the Economic Capital Framework, Reserve Bank of India has consistently maintained its risk buffers at the prescribed levels, even in the face of unprecedented challenges such as the Covid-19 pandemic and the subsequent global monetary tightening. As we strive for continuous improvement and refinement, the ECF was recently reviewed internally , and risk assessment has been made more 6 granular.

## Strength of the Balance Sheet

The prudent accounting policies over the years have ensured that RBI has a strong and resilient balance sheet with risk provisions in form of Realised Equity and Revaluation Balances, currently at 7.5% and 17.4% of the balance sheet, respectively. Hence, with an economic capital of about 25% of balance sheet, RBI is in a formidable position to effectively fulfill its public policy mandates while ensuring monetary and financial stability.

## Disclosures

The central bank disclosures need to strike a fine balance between transparency and confidentiality. They need to be transparent enough to effectively communicate the central bank policy operations and their financial implications, while maintaining reasonable confidentiality of market sensitive information. RBI provides comprehensive and detailed information for each accounting head, along with significant accounting policies, in its Annual Report. Additionally, a weekly snapshot of RBI's balance sheet, foreign exchange reserves, liquidity operations, and variations in reserve money components and sources is also published. This regular flow of information ensures transparency in communication about our policy actions and the evolving trends in the economy.

## Emerging Areas in Central Bank Accounting and Disclosures

Before concluding, I would like to highlight a few emerging areas in central bank accounting and disclosures which are likely to gain more prominence in coming days. Let me begin with the recent sharp rise in gold prices which has garnered a lot of attention and discussions globally with respect to its impact on the central bank balance sheets. RBI conservatively revalues the gold holdings at 90% of the London Bullion Market Association (LBMA) gold price. However, gold revaluation practices vary across countries and the impact of high movement in gold prices on central bank balance sheets and income needs wider discussion.

The issue of potential impact of Central Bank Digital Currency (CBDC) on central bank balance sheets has also been attracting lot of international research and discussions. Some research papers 7   have tried to explore how the design choices for CBDCs adopted by central banks may shape people's behaviour with respect to adoption of CBDC and potential substitution of banknotes and/or bank deposits with CBDC. It is

also being discussed and debated globally whether and how this may impact central bank balance sheet structures and the need for liquidity operations.

These emerging aspects would require ongoing engagement and collaboration in future as central banks learn from their respective experiences. We should work closely in these areas and share our experiences and research with each other, which will help all of us in making better decisions.

## Conclusion

As I end my address, I must say that this conference is being organised at a very opportune time as central banks worldwide are navigating the VUCA world (Volatile, Uncertain, Complex and Ambiguous). The diverse and wide-ranging policy actions during the pandemic coupled with differing accounting practices have resulted in variations in reported incomes and balance sheets of central banks. Central bank disclosures have assumed an even more important role in being able to effectively communicate to the larger public the rationale of the policy actions and the accounting policies adopted. In such an environment, prudence and transparency in accounting are not just buzzwords but the pillars which central banks must safeguard.

The diversity in the accounting practices across jurisdictions presents enough scope for dialogue and knowledge sharing amongst the central banks on certain common accounting principles/practices which are prudent and can further enhance transparency. This may facilitate better disclosures across central banks within the legal framework of the respective countries. I am confident that this conference marks the beginning of a constructive and collaborative journey towards achieving prudent and consistent central bank accounting practices. Let this be the first step in fostering continued engagement and deeper cooperation among central banks in the years ahead.

Wish you all successful deliberations and fruitful outcomes during the conference.

Thank you.

1  Keynote Address delivered by Shri Shirish Chandra Murmu, Deputy Governor, Reserve Bank of India on November 14, 2025, at first International Conference on Central Bank Accounting Practices organised by Reserve Bank of India jointly with the SEACEN Centre in Mumbai. Inputs provided by Sangeeta Lalwani, Vyom Gupta and Akshay Vartak are gratefully acknowledged.

- 2  Monetary policy formulation, currency management, regulation and supervision of the financial system, payment and settlement systems, reserves management, banker to banks and the governments, debt manager of the governments, foreign exchange management, regulation and oversight of key segments of financial markets such as money markets, g-sec market and forex markets, developmental functions etc.
- 3  Section 33, 34 and 47 of the Reserve Bank of India Act, 1934

- 4  As observed from published annual reports of various central banks
- 5  Report of the Expert Committee to Review the Extant Economic Capital Framework of the RBI, August 2019
- 6  Economic Capital Framework of the RBI - Internal Review of the Framework, May 2025

7  IMF Working Paper: Central Bank Digital Currencies and Financial Stability: Balance Sheet Analysis and Policy Choices, October 11, 2024;  ECB Occasional Paper Series: The impact of central bank digital currency on central bank profitability, risk-taking and capital, November 14, 2024",Shirish Chandra Murmu
https://www.bis.org/review/r251118c.htm,Christopher J Waller: The case for continuing rate cuts,"Speech by Mr Christopher J Waller, Member of the Board of Governors of the Federal Reserve System, at the Society of Professional Economists Annual Dinner, London, United Kingdom, 17 November 2025.",2025-11-17 00:00:00,"## Christopher J Waller: The case for continuing rate cuts

Speech by Mr Christopher J Waller, Member of the Board of Governors of the Federal Reserve System, at the Society of Professional Economists Annual Dinner, London, United Kingdom, 17 November 2025.

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Thank you to the Society for the honor of addressing your annual meeting. 1   In doing a little research on the SPE's history, I noted that one goal cited by the business economists who founded this group was creating a forum to discuss the divergence between real-world challenges and economic theory. That task is pressing when business profits, losses, and the jobs of employees are on the line, and the stakes are also high for economic policymakers, who face those very challenges today.

Economies are confoundingly difficult to understand because, in a sense, they are the largest and most complex things ever created by humans. Economists try to make sense of this complicated world and explain in logical and clear terms how to understand it. We develop rigorous theories that yield testable hypotheses, and we test those hypotheses to see if they are supported or rejected by the data. Being both an economist and economic policymaker, my objective today is to follow in that tradition and use economic theory and various types of data to describe my outlook for the U.S. economy and my views on the appropriate course of monetary policy. It may seem odd to come all the way to London to speak about the U.S. economy, but I hope it will be of interest-and I did warn the organizers about what I would talk about. Monetary policymakers like to use forward guidance to avoid surprises.

Formulating my outlook has been complicated recently by the 43-day government shutdown, including the agencies that produce key economic data. As I will argue, I believe the challenge presented by this missing data has been overstated in many quarters. Policymakers and forecasters are not ""flying blind"" or ""in a fog."" While it is always nice to have more data, as economists, we are skilled at using whatever available data there is to formulate forecasts. Despite the government shutdown, we have a wealth of private and some public-sector data that provide an imperfect but perfectly actionable picture of the U.S. economy.

So, what is that data telling us? First, that the labor market is still weak and near stall speed. Second, that inflation through September continued to show relatively small effects from tariffs and support the hypothesis that tariffs are having a one-off effect raising price levels in the U.S. and are not a persistent source of inflation. Accounting for estimated tariff effects, underlying inflation is relatively close to the Federal Open Market Committee's (FOMC) 2 percent target. Third, despite realized inflation running close to 3 percent and above target for five years, medium- and longer-term inflation expectations remain well anchored. And, lastly, even excluding the temporary effects of the shutdown, growth in real gross domestic product (GDP) has likely slowed in the second half of 2025 from its fast pace in the second quarter.

This reading of the data leads me, at this moment, to support a cut in the FOMC's policy rate at our next meeting on December 9 and 10 as a matter of risk management.

As I will discuss in more detail, risk management, in fact, provides some practical guidance in dealing with two questions that seem to have flummoxed some people: Is the job-creation slowdown in the U.S. this year mostly supply or demand related, and how should monetary policy respond?

Before I delve into the outlook, I'd like to say a bit more about data availability. The official sources delayed by the U.S. government shutdown are important but by no means the only source of information for Fed policymakers about the economy. At any time, my colleagues and I rely on a range of data to form our views on economic conditions and the outlook. That can be ""hard"" data, such as official government statistics, or ""soft"" data, gleaned from surveys or conversations with a variety of people. Often, different sources of data are consistent with each other, but at critical times they can conflict. When that happens, it takes our skills as economists to reconcile this conflict.

Let me cite two examples of my own experience to illustrate this point. First, back in 2022, the Fed was combating rampant inflation, and this required large and rapid increases in our policy rate. Standard Phillips curve models predicted that this would cause a sharp slowdown in economic growth and high unemployment. However, I had more trust in the Beveridge curve, which relates the unemployment rate to the job vacancy rate, as my guide to thinking about how the labor market would respond to these large rate hikes. I argued that we were on the steep part of the Beveridge curve, which meant that we could tighten policy and that the brunt of the effect would be borne by a decline in job vacancies, and crucially, not by the higher unemployment many predicted. A critical assumption I made was that a spike in layoffs would not occur. This assumption was controversial, since previous hard data showed that this was not the typical outcome. But all of my business contacts at that time were telling me about their struggles to find and keep workers since the COVID-19 pandemic and that they had no intention of letting workers go if aggregate demand eased. This ""soft"" data helped convince me that my view of the labor market was correct, and subsequent ""hard"" data confirmed my theoretical prediction.

The second example of reconciling conflicting data is from this past summer. From late spring through June, the soft data, including anecdotes from business contacts, suggested the labor market was in a ""no hire, no fire"" equilibrium. Firms repeatedly said they were holding off on hiring for a variety of reasons. Yet the hard data at that time indicated a robust job market, with job creation rising from a monthly average of 110,000 in the first quarter to 150,000 in the second quarter. It was clear to me that, once again, something wasn't quite right with the labor market despite the official data. After the June FOMC meeting, I said that the labor market was more fragile than the hard data indicated and that the Committee needed to cut the policy rate to head off substantial weakening in the labor market. 2   This was clearly an out-of-consensus view that raised more than a few eyebrows. But when the July jobs report was released on August 1, the second-quarter jobs numbers were revised down dramatically-from an average of 150,000 per month to 64,000 a month, which vindicated my view. So, once again, the soft data gave a better signal of the state of the labor market than the hard data.

Now let me turn to the outlook, and I will start with U.S. economic activity. In my last speech, I discussed an apparent conflict between some forecasts of GDP growth in the

second half of 2025 and the story that the labor market is weakening. 3   In the absence of more official data but with additional private-sector forecasts and surveys, it now appears to me that economic activity is not accelerating and, therefore, is tracking more closely with the weak labor market data than appeared to be the case when I spoke on October 16. For example, private-sector forecasts, as seen by the median of respondents to the Blue Chip survey, are pointing to real GDP growth for the second half of this year that will be close to the modest first-half pace and a significant slowing from the pace of last year.

Of course, one factor lowering economic growth in the fourth quarter is the shutdown, which lasted longer than many expected. I continue to assume that any loss in real GDP growth in the fourth quarter will boost growth by roughly the same amount early next year. But besides that one-off boost from the shutdown, a possible warning about future economic activity is coming from a survey of consumer sentiment conducted by the University of Michigan. While over the decades this survey has not been closely correlated with near-term spending, large and persistent drops in consumer sentiment have occurred heading into recessions. In the United States, personal consumption expenditures are about 70 percent of GDP, so a slowdown in spending has dramatic implications for GDP growth. The Michigan survey is down significantly since July and fell unexpectedly sharply in October to near its record low reading. The dour view expressed by consumers, which may have been affected by the shutdown, lines up with what I am hearing from U.S. businesses, which report slackening demand from middleand lower-income consumers.

One interesting detail from that survey is that deteriorating consumer sentiment was widespread among different demographic groups, with the exception of those who own stocks. While the booming stock market is supporting spending by a narrow band of well-off consumers, it does not reflect financial conditions for most Americans, and that is a vulnerability for the economy. The rise in the stock market is substantially driven by artificial intelligence (AI)-related businesses that only account for a small share of employment. 4   Even while AI's share of stock market growth and corporate profits grew significantly from 2021 through 2024, employment in AI-related firms held steady at less than 3 percent of nonfarm employment. While I believe AI will create jobs in the medium term, the AI boom on Wall Street isn't doing so yet.

A factor that I believe will weigh on spending in the coming months is that most households are facing strains in purchasing large assets, such as housing and autos, in part because of the expense. While home price increases have slowed recently and even declined in some parts of the country, prices rose significantly in the past few years. That is especially true for lower-value homes, which is making it harder for firsttime buyers.

Although mortgage rates have declined a bit this year, they are still above 6 percent and much higher than the average for the decade or so before rates began rising in 2022. Housing affordability is near a record low. Since 2020, the income needed to afford a median priced home has risen by 50 percent, while median income through 2024 was up about 26 percent. 5   And while the growth of mortgage debt has slowed, that in part reflects how high mortgage rates are weighing on demand for mortgages.

Turning to auto loan growth, it has been relatively weak this year, likely reflecting a combination of weak demand from households and pressures in car affordability. To a greater extent than housing, the cost of purchasing an auto mostly reflects the price, but interest rates play a factor in the monthly payment. Auto loan rates continue to be elevated relative to their average in the years before the pandemic. For example, in 2019, the average five-year loan carried a 5.3 percent interest rate, whereas the average is now 7.6 percent. 6   Reflecting the combination of higher auto prices and interest rate expenses, the weeks of median income needed to purchase an average new vehicle remains elevated, rising from 32.8 weeks in November 2019 to 37.4 weeks in September this year. 7

To sum up, I consider the costs of housing and autos to be an ongoing challenge for consumers, especially lower- and middle-income consumers. This is likely weighing on spending growth and would become a more acute problem if the labor market continues to weaken.

Now let me turn to inflation, which, even with the delay in price data is the more straightforward side of the FOMC's dual mandate to discuss. Twelve-month consumer price index inflation through September was 3 percent, and estimates are that inflation based on personal consumption expenditures-the FOMC's targeted measure-was about 2.8 percent. Tariff effects have been smaller than many forecasters expected and the fraction borne by consumers will only modestly boost inflation-an effect that has been quite gradual so far because of the slow drawdown of inventories that was built up in anticipation of tariffs.

Despite inflation that has been above target for five years, inflation expectations are well anchored in the medium and longer run. To me, this shows that financial markets understand that they need to look through one-time price-level shocks and that they have confidence the FOMC will achieve its 2 percent target in the medium term. With the evidence of slower economic growth and the prospect of only modest wage increases from the weak labor market, I don't see any factors that would cause an acceleration of inflation.

Let me now focus on the side of the FOMC's economic mandate that has more of my attention-maximum employment. In the absence of federal data on the labor market, states have continued to report on initial and continuing unemployment insurance claims and private-sector sources have continued to publish their data as well. While there are methodological differences in these private data-some of it that is less than comprehensive and some that does not meet the strictest statistical standards-the private data do contain useful information.

According to the Labor Department, we know that job creation in the U.S. stalled from May through August, and with expected revisions that have been previewed and will become official next year, it is likely that employment actually fell over that period. A private-sector measure of job creation that has continued since August, produced by the payroll services firm ADP, mirrored the drop in official data from May through August, reporting a monthly average of 27,000 jobs created over that period, compared to the 143,000 a month that ADP counted for the six months up to May. While the ADP data are quite volatile and have some other shortcomings that make them less reliable

than government statistics, I do think these data are telling us something. And in September and October, ADP reported that businesses created a net total of only 6,500 jobs a month. And the latest weekly data are even weaker.

Slowing labor demand is also being echoed in surveys of employers and workers. There has been a steady decline this year in the Conference Board index of job availability reported by employers. Fewer small businesses are saying it is hard to fill jobs according to the National Federation of Independent Business. Meanwhile, job postings by Indeed continued to drift lower in October. A new survey of large employers found that these companies are predicting that 2026 will be the worst job market for new college graduates since the pandemic year of 2021, when the unemployment rate was around 6 percent at graduation time. 8

One series of government labor market data that we do have, continuing state-level claims for unemployment benefits, have risen, on net, in recent weeks and are running above levels in 2023 and 2024, although they are still fairly low by historical standards. This increase reflects the fact that it is taking unemployed individuals longer to find jobs than in the recent past. This is consistent with the well-known news lately about large corporate layoffs. Such announcements are anecdotes and may not be fully reflected, at least yet, in initial unemployment claims. But the numbers are eyepopping. The staffing firm Challenger, Gray &amp; Christmas reported announcements of 153,000 job cuts in September and around 1 million so far in 2025, which is up 65 percent from 2024. By all accounts, many businesses may be cutting jobs, or allowing levels to fall by attrition, in connection with actual or anticipated productivity gains from AI.

As you may know, there is a vigorous debate in the U.S. about whether the low jobcreation numbers are the result of declining labor supply or declining labor demand. Simply looking at job-creation numbers isn't sufficient to answer the question-one must look at other data that correspond to these changes.

To help sort things out, let's think about a standard supply and demand diagram. Consider a situation where there is a decline in labor supply that is greater than a decline in labor demand. This would shift the supply curve inward more than the demand curve. The result would be a reduction in employment, which is what we have seen. But it would also lead to upward pressure on wages due to labor shortages. We should also see an increase in job vacancies and a higher quits rate as workers chase higher-paying jobs. Furthermore, workers should be reporting that job availability is increasing, and firms should be saying that it's becoming more difficult to hire workers. Now consider the opposite situation: a contraction in labor demand that is greater than the decline in labor supply. Again, this would lead to a reduction in employment. But it would also correspond to downward pressure on wages from an excess supply of labor as well as declines in vacancies and quit rates; workers would be reporting that job availability is falling, and firms would be saying that hiring is getting easier.

So, which of these two situations are the data telling me we are in? It is clear to me that the data are saying that there has been a greater reduction in demand than supply. I'm not seeing or hearing stories of an acceleration in wage growth, an increase in job openings, or a rise in the quits rate. The overwhelming share of the data I have cited so far supports the weaker demand story. There is definitely a reduction in supply, but, to me, that is masking the extent of the reduction in demand that I am concerned about.

When outcomes are uncertain, policymakers must manage the risks, and the evidence is pointing toward a greater risk that low job creation is predominantly demand driven. This has implications for monetary policy.

So let's talk about the implications of this hard and soft data. With underlying inflation close to the FOMC's target and evidence of a weak labor market, I support cutting the Committee's policy rate by another 25 basis points at our December meeting. For reasons I have explained, I am not worried about inflation accelerating or inflation expectations rising significantly. My focus is on the labor market, and after months of weakening, it is unlikely that the September jobs report later this week or any other data in the next few weeks would change my view that another cut is in order. I worry that restrictive monetary policy is weighing on the economy, especially about how it is affecting lower-and middle-income consumers. A December cut will provide additional insurance against an acceleration in the weakening of the labor market and move policy toward a more neutral setting.

- 1  The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.
- 2  For a discussion of the tension in the hard and soft labor market data, see Christopher J. Waller (2025), ""The Case for Cutting Now,""  speech delivered at the Money Marketeers of New York University, New York, New York, July 17.
- 3  See Christopher J. Waller (2025),  ""Cutting Rates in the Face of Conflicting Data,"" speech delivered at the Council on Foreign Relations, New York, New York, October 16.
- 4  Between 2021 and 2024, the workforce of AI-related firms stayed at levels equivalent to less than 3 percent of the entire U.S. nonfarm labor employment-that is, a small number of firms are accounting for an increasingly larger share of corporate profits but are not growing their share of labor demand at a commensurate pace.
- 5  See https://www.bankrate.com/real-estate/home-affordability-in-current-housingmarket-study/#:~:text=See%20more-,Income%20needed%20to%20afford%20a% 20typical%20home%20verges%20on%20$117,000,2025,%20according%20to% 20Bankrate%20data. Also see  https://fred.stlouisfed.org/series/MEPAINUSA646N
- 6  See  ""Finance Rate on Consumer Installment Loans at Commercial Banks, New Autos 60 Month Loan,""  Federal Reserve Economic Data.
- 7  See Cox Automotive (2025), ""September Incentives Hit High, but Record Prices Keep New-Vehicle Affordability Tight,"" October 15, https://www.coxautoinc.com/insights-hub /sept-2025-vai.
- 8  See Lindsay Ellis (2025), ""Companies Predict 2026 Will Be the Worst College Grad Job Market in Five Years,"" November 13. Wall Street Journal,",Christopher J Waller
https://www.bis.org/review/r251118b.htm,Sabine Mauderer: Building bridges - dialogue in a changing world,"Speech by Dr Sabine Mauderer, First Deputy Governor of the Deutsche Bundesbank, at the 11th China Day, Frankfurt am Main, 17 November 2025.",2025-11-17 00:00:00,"## Sabine Mauderer: Building bridges - dialogue in a changing world

Speech by Dr Sabine Mauderer, First Deputy Governor of the Deutsche Bundesbank, at the 11th China Day, Frankfurt am Main, 17 November 2025.

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Check against delivery

## 1 Welcome

Ladies and gentlemen,

It is a great honour and a privilege to speak to you here today.

Since we met last year, the world has experienced developments that I would not have anticipated in that scale. We are all aware of the multiple challenges we are facing. Increasing uncertainty and tectonic shifts have reshaped the global landscape and are weighing on the economy worldwide.

Both China and Germany are facing significant economic challenges. China is experiencing moderate growth compared to its historically rapid economic expansion, while Germany is navigating a period of stagnation.

Amid these developments, I would like to highlight three key issues that our countries share and could address together:

- the geopolitical and geoeconomic dynamics,
- the urgent consequences of climate change,
- and the profound demographic shifts.

These are not isolated issues-they are global challenges that call for a collective response.

## 2 Geopolitical shifts-resilience through cooperation

The geopolitical environment is becoming increasingly complex and challenging. Uncertainty has grown to become a defining feature of our time, casting a shadow over the global economic landscape. The disruptions we have witnessed in recent years-whether in international relations, supply chains or energy markets-serve as reminders of how interconnected and, at the same time, how vulnerable we are.

Thus, the call for resilience has become a central theme of our time. For countries and regions, enhancing resilience is not just prudent-it is essential. Strengthening our ability to adapt to shocks and disruptions is a necessary step for safeguarding our economies and societies.

However, true resilience is not built in isolation. Therefore, what's equally important-if not more so-is the need to sustain an open and constructive dialogue. Such dialogue fosters mutual understanding, reduces tensions, and paves the way for collaborative solutions.

This spirit of collaboration is particularly vital when it comes to trade. Free trade is a key driver of economic growth and, as such, a cornerstone of global prosperity. Without free trade, all parties stand to lose. However, for trade to thrive, certain preconditions must be met.

First and foremost, we need open markets that enable the free flow of goods and services. The availability of input factors from abroad allows us to leverage the benefits of the international division of labour. Resilient supply chains, thereby reduce vulnerabilities and secure future growth.

One potential source of disruption lies in the imbalance between supply-side and demand-side dynamics. With integrated markets, domestic policies have spill-over effects on other countries and affect global outcomes.

Against this background, all countries have a responsibility as well as a natural interest to evaluate the impact of their policies on trade imbalances, and how policy adjustments foster a more prosperous global trade architecture.

Second, we have to ensure a level playing field-one that is characterised by rulesbased and fair competition. By jointly acting under this setting, we promote free trade in the most effective way, advancing comparative advantages. It is in our collective interest to build and to improve on our multilateral frameworks. They are essential to bring our economies to more sustainable paths-with the benefit for the global system.

## 3 Climate change-a shared responsibility

Let me turn to climate change, which is one of the most pressing challenges of our time.

Both China and Germany are determined to protect the climate. China has established itself as a global leader in clean tech, setting a strong example for innovation and sustainability. Germany is a leading innovator in net-zero technologies and a global player in its production. One example is hydrogen production equipment.

The effects of climate change are far-reaching, posing serious threats not only to economic prosperity but also to human lives and the ecosystems that sustain us. The evidence is all around us: Extreme weather events-such as floods, droughts, and wildfires-are becoming ever more costly. Managing climate risks is not merely an environmental issue-it is integral to building economic and financial resilience.

Disrupted supply chains, threatened food security, and the immense costs of recovery place a significant strain on both public and private resources.

To be clear: The economic cost of climate inaction is far too high. Climate change already represents a major source of tail risk to global growth in the near term. For example, GDP losses could reach 5% in Europe, 6% in Asia, and up to 12.5% in Africa

in the aftermath of extreme weather events. These are findings from recent short-term scenarios developed by the Network for Greening the Financial System, in short  NGFS. 1

The NGFS-which I have the honour to chair-is a prime example of effective collaboration. What began with just eight founding members-including the People's Bank of China and the Deutsche Bundesbank-has now grown to become a global coalition of 148 members, supported by 23 observers. This shows that the NGFS is a coalition of central banks and financial supervisors, demonstrating the power of cooperation.

## 4 Demographic challenges-shaping the future

The third key link between China and Germany is demography. Both countries are facing significant challenges related to ageing populations. The number of retirees is on the rise, while the working-age population is stagnating or even shrinking.

This demographic shift presents a wide range of economic and social challenges. These include rising pension claims, increasing healthcare costs and the need to adapt labour conditions to an ageing workforce.

The implications of these changes are profound. A rapidly ageing population negatively impacts productivity and economic growth. At the same time, it places increasing pressure on pension systems. Both of our countries face the challenge of making their pension systems future-proof, with state-funded pensions playing a central role in providing security for retirees.

In Germany, the pension system is primarily based on a pay-as-you-go model, where contributions from employers and current workers are directly used to pay pensions to retirees. However, with an increasing ratio of pension recipients to contributors, this system is coming under significant strain.

One approach is fostering capital market elements to complement the German statefunded system. The aim is to incentivise people to build long-term assets by taking advantage of the higher returns offered by capital market instruments compared to lowinterest savings accounts.

One initiative is the "" Frühstart-Rente"", or ""early start pension"". Under this programme, the German government plans to support private pension schemes for pupils aged 6 to 18 by contributing ten euros each month. Although the direct impact will be limited, measures like these foster early financial literacy and encourage long-term savings habits.

China, too, is taking steps to address demographic challenges. For instance, this year marked the beginning of efforts to raise the retirement age. Bundesbank also stresses the need to work longer.

Turning back to China, a pilot project on retirement-focused wealth management products is set to be expanded. The aim here is to build a more robust market for private retirement savings. By sharing experiences, China and Germany can develop more effective and future-proof approaches.

## 5 Conclusion

Ladies and gentlemen,

Let me conclude:

We live in a time of profound global challenges. The issues we are facing are complex, interconnected, and urgent. Not a single country can tackle these issues alone!

It is imperative that we maintain and strengthen an open and constructive dialogue. Everyone stands to lose if we fail to uphold the principles of cooperation, free trade, and mutual understanding.

But it is not just about preventing bad outcomes. Within these challenges lie opportunities:

- free trade remains a cornerstone of global prosperity,
- the fight against climate change is fostering innovations,
- and sound pension systems contribute to social cohesion.

China and Germany can set good examples!

Thank you.

1  NGFS Short-term Climate Scenarios for central banks and supervisors | Network for Greening the Financial System",Sabine Mauderer
https://www.bis.org/review/r251118i.htm,Luis de Guindos: Financial stability in the euro area,"Speech by Mr Luis de Guindos, Vice-President of the European Central Bank, at the Frankfurt Euro Finance Week, organised by the dfv Euro Finance Group, Frankfurt am Main, 17 November 2025.",2025-11-17 00:00:00,"## Luis de Guindos: Financial stability in the euro area

Speech by Mr Luis de Guindos, Vice-President of the European Central Bank, at the Frankfurt Euro Finance Week, organised by the Euro Finance Group, Frankfurt am dfv Main, 17 November 2025.

* * *

It is my great pleasure to join you once again at the Frankfurt Euro Finance Week, having taken part in every opening session since I joined the ECB. As always at this time of year, we are about to release our Financial Stability Review, so I will focus on our latest assessment of the risks to financial stability in the euro area.

## A volatile and uncertain macro-financial outlook

After double-digit inflation figures in 2022 and a succeeding ""bumpy road"", inflation is now close to 2% and we expect it to continue converging towards our medium-term target. As in my remarks last November, we remain concerned about low growth, although we have seen an improvement in the overall macroeconomic environment compared with a year ago. Over the past 12 months, however, major shifts in US economic policy and in the multilateral rules-based trading system have been the key factors shaping economic and financial conditions. We have seen escalating trade tensions, which triggered the short-lived market turmoil in April this year. Trade policy uncertainty has eased thanks to the subsequent trade agreements between the United States and several of its main trading partners, and markets have shifted their focus somewhat from the risk of an immediate escalation in geopolitical tensions to the longerterm economic and financial effects of tariffs and trade frictions. Although uncertainty has partially abated in the second half of the year, it is now a defining feature of our times. While the risk of a large-scale trade war has been averted, adverse spillovers beyond the trade sphere have again brought financial stability risks to the fore.

Global financial conditions - notably driven by developments in US markets - could pose challenges to euro area financial stability in the form of disorderly currency swings, the resulting adverse effects on trade competitiveness and fluctuations and spillovers in funding costs for sovereigns, firms and banks. Moreover, the potential for policy shocks to disrupt the international order poses significant risks of geoeconomic and regulatory fragmentation across the globe, while ongoing geopolitical tensions make more frequent and impactful adverse tail events increasingly likely.

Our report focuses on three main sources of risk and vulnerability for euro area financial stability.

## Key financial stability vulnerabilities

The first relates to financial markets, which remain vulnerable to sharp and correlated asset price adjustments. The renewed bullish sentiment since the rebound of global stock markets from their April lows has driven high valuations even higher. At the same time, market concentration among, and interconnection between, a handful of large USbased tech firms has risen further, leaving markets exposed to risks stemming from

potential shocks to their AI-related business models. In addition, the apparent disconnect between the prevailing economic policy uncertainty and benign market pricing leaves the way open for abrupt shifts in sentiment. Should any sudden market drawdowns occur, the balance sheets of euro area non-bank financial intermediaries could come under pressure. Persistent liquidity vulnerabilities in open-ended funds and pockets of high leverage in hedge funds increase the risk of fire sales, which could amplify market stress.

The second vulnerability relates to the fiscal challenges faced by some of the world's advanced economies. In the euro area, some countries are still burdened by elevated debt levels, with high budget deficits expected to persist in the coming years. Also, budgets have to contend with multiple medium to long-term challenges, not least the need to substantially increase much-needed defence spending in light of the new NATO target. Thus, fiscal slippage and non-compliance with the new EU fiscal framework could yet test investor confidence, particularly in countries with more fragile political landscapes. On a global scale, fiscal fragilities in major advanced economies, including the United States, could heighten sovereign debt sustainability concerns, trigger stress in global benchmark bond markets and prompt a broader reassessment of sovereign risk both globally and in the euro area.

The third vulnerability relates to the corporate sector. Although euro area banks have demonstrated resilience to recent shocks, they may face a deterioration in credit quality and an increase in provisioning needs as the effects of tariffs ripple through the real economy. Trade frictions and the recent appreciation of the euro have compounded the pressure on the corporate sector stemming from subdued demand and elevated debt service burdens. Tariff-sensitive and export-oriented sectors, such as manufacturing, account for a large share of total value added, credit and employment. Shocks affecting these sectors can have broader repercussions. While the resilience of euro area banks is underpinned by strong profitability and ample capital and liquidity buffers, growing interlinkages between banks and non-banks could expose bank funding vulnerabilities in stressed market conditions.

Within the non-bank financial sector, let me focus on the rapidly expanding private markets which provide an increasingly important alternative funding source for firms, possibly the only source for some, while offering diversification benefits for investors. In the euro area, private markets have grown strongly and now total over €700 billion in assets. They remain small relative to the euro area banking sector, which has around €30 trillion in assets, and are also substantially smaller than their counterparts in North America.

However, adverse economic shocks could lead to rising corporate defaults, valuation corrections and losses for private funds and their investors. There are at least three reasons for these concerns. First, shocks may be exacerbated by multiple layers of leverage - at company, fund and investor level - or by liquidity mismatches for some open-ended private funds. Second, by their nature, private markets are not transparent. Opaque valuation practices raise concerns about the possibility of mispricing and delayed recognition of losses. Currently, there appear to be challenges in executing exits from private equity markets which may suggest a disconnect between book and market values. This has potential implications for investor confidence and financial stability. And third, private market players have growing financing and partnership links

with banks and insurers, providing potential feedback channels to the broader financial system. For banks, risks could arise from direct or common lending exposures to these markets.

Given the still modest size of private markets in the euro area, the overall risks they present so far appear contained. However, let me recall a crucial lesson from the global financial crisis. Continued growth, coupled with the three elements just mentioned leverage, opacity and complex interlinkages with other parts of the financial system can be the key components in the mix that turns a localised shock into a systemic crisis.

## Conclusion

Let me conclude. Overall, financial stability vulnerabilities remain elevated in view of uncertainty over geoeconomic trends and the ultimate impact of tariffs in a volatile international environment. Vulnerabilities centre around high valuations and concentration in financial markets, credit risk exposures to tariff-sensitive firms and sovereign risk in some major advanced economies. Against this backdrop, maintaining the resilience of banks and the broader financial system is crucial. This implies upholding the macroprudential measures for banks implemented in recent years. But it also includes a closer monitoring and strengthening the macroprudential framework for the non-bank sector. Improving data availability is particularly important in private markets. Last but not least, to support growth in the EU and strengthen its role in the world economy, while safeguarding the stability of its financial system, it will be essential to advance the savings and investments union by deepening equity markets, mobilising retail and institutional savings and enhancing integrated supervision.

Thank you for your attention.",Luis de Guindos
https://www.bis.org/review/r251118a.htm,Philip N Jefferson: Economic outlook and monetary policy,"Speech by Mr Philip N Jefferson, Vice Chair of the Board of Governors of the Federal Reserve System, at the Federal Reserve Bank of Kansas City, Kansas City, Missouri, 17 November 2025.",2025-11-17 00:00:00,"## Philip N Jefferson: Economic outlook and monetary policy

Speech by Mr Philip N Jefferson, Vice Chair of the Board of Governors of the Federal Reserve System, at the Federal Reserve Bank of Kansas City, Kansas City, Missouri, 17 November 2025.

* * *

Thank you, President Schmid, for the kind introduction and for the invitation to speak here today. 1   It is an honor to be in Kansas City and in the beautiful 10th District. I welcome the opportunity to attend events like this one because I believe it is essential for Federal Reserve policymakers to share their views with the public and, just as important, to hear directly from business leaders, workers, and families about how they are experiencing the economy.

In many ways, the Kansas City region is a perfect place to make those connections. Sitting at the confluence of the Kansas and Missouri rivers, this area has been a place where people met and shared ideas long before the United States existed. And that tradition of making connections has continued to present day. The Pony Express was founded just north of here in St. Joseph, this is the greeting card capital, and, next year, this area will bring people together from around the globe for soccer's World Cup. I am happy to have the opportunity to continue the tradition of making connections in Kansas City with all of you.

Today I would like to share my economic outlook. I will discuss how I see recent economic activity and talk about developments pertaining to both sides of our dual mandate of maximum employment and price stability. I will then offer my current view of monetary policy including the Fed's balance sheet before turning to our discussion.

## Economic Outlook

In shaping my economic outlook, I consider a wide variety of government, administrative, and private-sector data, including data collected by the Kansas City Fed and fellow Reserve Banks across the country. Casting a wide net for information on the economy is especially important at this moment because the recent federal government shutdown has delayed the release of key economic indicators that I typically refer to in speeches like this one, including the monthly jobs report and the personal consumption expenditures price index. While I consider federal data to be the gold standard, other sources of information are also available for policymakers to do our jobs. And part of that information comes from meetings like this one and hearing from contacts around the country. For example, ahead of our next policy meeting, I look forward to reviewing the Beige Book, a report on economic conditions in each of the twelve Reserve Bank districts, which will be released next week.

## Economic Activity

Before the government shutdown, available data indicated that the U.S. economy was on a trajectory of moderate growth this year. The shutdown has likely curtailed economic activity this quarter, reflecting furloughed federal workers and the suspension of government purchases of goods and services, including payments to contractors.

There may also have been spillover effects to the private sector stemming from delays in federal payments, approvals, and other government activity. I see those effects as largely temporary and likely to reverse in the coming months. Thinking more broadly, I see the balance of risks in the economy as having shifted in recent months with increased downside risks to employment compared to the upside risks to inflation, which have likely declined somewhat recently.

## Labor market

In the labor market, information available in recent weeks appears to be consistent with a gradual cooling in both labor demand and labor supply. For instance, unemployment insurance claims received from states have largely moved sideways in recent weeks. Anecdotal reports about the state of the labor market have been mixed, with some firms announcing a slower pace of hiring or cutbacks and others indicating they are ready to move forward with previously delayed hiring and investment.

I expect that the unemployment rate is likely to inch up slightly by the end of the year from the relatively low 4.3 percent rate recorded in August. While still solid, I continue to view the risk to my employment forecast as skewed to the downside.

## Inflation

The latest available readings show that inflation is running at a rate similar to that of a year ago, a bit below 3 percent, indicating that progress toward our 2 percent target has stalled. This lack of progress appears to be due to tariff effects, with signs that inflation excluding the effects of tariffs may be continuing to make progress toward 2 percent. Some firms have indicated that they expect pass-through of pricing pressure from tariffs to pick up in the fourth quarter as the inventory of non-tariffed merchandise is depleted.

A reasonable base case is that tariffs result in a one-time shift in the price level, not an ongoing inflation problem. That view is reinforced by inflation expectations readings. Most measures of near-term inflation expectations have retraced their spring rise, and market-based long-term inflation expectations continue to be well anchored. Several factors will influence the size and persistence of the rise in inflation. Those include the final tariff rates that are implemented, the extent and timing of pass-through to consumer prices, the reaction of supply chains and domestic manufacturing, and overall economic conditions. I will continue to monitor these factors closely. I remain firmly committed to returning inflation to the Fed's 2 percent target.

## Monetary Policy

Given that outlook, I supported last month's decision to reduce our policy rate by 1/4 percentage point. That step was appropriate because I see the balance of risks as having shifted in recent months as downside risks to employment have increased. The current policy stance is still somewhat restrictive, but we have moved it closer to its neutral level that neither restricts nor stimulates the economy. The evolving balance of risks underscores the need to proceed slowly as we approach the neutral rate.

At our past Federal Open Market Committee meeting, I also supported the decision to conclude the reduction of our aggregate securities holdings as of December 1. Over the course of balance sheet runoff that started in June 2022, we shrank our securities holdings by about $2.2 trillion. The Committee's long-stated plan had been to stop

balance sheet runoff when reserves were somewhat above the level judged as consistent with ample reserve conditions. Signs emerged ahead of the October meeting indicating that such a standard had been reached. In money markets, repurchase agreement (repo) rates moved up persistently relative to the interest on reserve balances (IORB) rate. In addition, more notable pressures on repo rates started to emerge on tax payment dates and on Treasury issuance days along with more frequent use of our standing repo facility. With repo rates trending up, the effective federal funds rate also began to move up steadily relative to the IORB rate. Those developments were what was expected to be seen as the size of the balance sheet declined and led me to support the decision to end runoff.

Starting in December, we intend to hold the size of our balance sheet steady for a time as reserve balances continue to decline passively even as other non-reserve liabilities, such as currency, rise. We will continue to allow agency securities to run off our balance sheet and will reinvest these proceeds in Treasury bills, furthering progress toward a portfolio consisting primarily of Treasury securities. Over the coming years, this reinvestment strategy will help move the weighted average maturity of our portfolio closer to that of the outstanding stock of Treasury securities.

I will also note that, heading into our next meeting, it remains unclear how much official data we will see before then. With respect to the path of the policy rate going forward, I will continue to determine policy based on the incoming data, the evolving outlook, and the balance of risks. I always take a meeting-by-meeting approach. This is an especially prudent approach at this time.

Thank you again to the Kansas City Fed for hosting me today. I look forward to our discussion.

1  The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.",Philip N Jefferson
https://www.bis.org/review/r251118h.htm,Piero Cipollone: The digital euro - a collective step forward for Europe,"Introductory statement by Mr Piero Cipollone, Member of the Executive Board of the European Central Bank, at the Committee on Economic and Monetary Affairs of the European Parliament, Brussels, 17 November 2025.",2025-11-17 00:00:00,"SPEECH

## The digital euro: a collective step forward for Europe

## Introductory statement by Piero Cipollone, Member of the Executive Board of the ECB, at the Committee on Economic and Monetary Affairs of the European Parliament

Brussels, 17 November 2025

I am pleased to join you once again to provide an update on the digital euro. This is my seventh exchange of views with this Committee on the topic.

We are making progress on both legislative and technical preparations, bringing us closer to ensuring that central bank money can continue to serve Europe's citizens, businesses and economy in the digital era.

The EU Council aims to agree on its general approach to the draft legislation by the end of the year, [ ]  and you are working to define the European Parliament's position. 1

At the Euro Summit in October, euro area leaders reiterated the strategic importance of the digital euro.

They stressed the importance of swiftly completing legislative work and accelerating other preparatory steps. [ ] 2

To ensure technical readiness, the ECB's Governing Council recently decided to move to the next phase of the digital euro project. [ ] 3

As we continue to prepare for the potential issuance of a digital euro, I would like to address some recurring questions head-on. In the public debate, I frequently hear four questions in particular:

Why do we need another payment solution?

Are you not putting banks' business models at risk?

Would the digital euro replace cash?

Could it be used to control people and interfere with their privacy?

Let me address each of them in turn.

## Digital cash

First, why do we need a digital euro? The simple answer is: to extend the benefits of cash to digital payments.

Cash has multiple benefits: it is our sovereign money, issued by an EU institution, the European Central Bank. It is accepted throughout the euro area. It is easy to use, free of charge and inclusive, and it protects privacy. Research shows that consumers value these features. [ ] 4

But we cannot use cash - and enjoy its benefits - for digital payments. Online payments are a case in point. They now account for more than a third of our day-to-day purchases.

For consumers, the absence of cash for online transactions - and digital transactions more broadly reduces their options and thus their freedom in deciding how to pay.

For merchants, this means less negotiating power and higher costs for accepting digital payments, ultimately resulting in lower margins for them and higher prices for consumers.

The digital euro aims to address these issues by offering a digital form of cash. And there is demand for it. In a survey conducted by the Eurosystem, 66% of Europeans, after being introduced to the digital euro, expressed interest in trying it. [ ]  Merchants, meanwhile, have emphasised the potential of the digital euro 5

to make it easier and cheaper for them to accept digital payments. [ ] 6

But for Europe in particular, there is an additional, specific and critically important reason: not having a digital form of cash puts our strategic autonomy at risk.

25 years on from the launch of the euro, we still do not have a European payment solution that enables people to pay digitally throughout the euro area for all day-to-day payments. The fragmentation of the payments market means that the euro area depends on the 'kindness of strangers' for retail digital transactions. And we have hard data to demonstrate this.

15 out of 20 euro area countries do not currently have a domestic solution that is used significantly for digital payments in shops, and over half do not have a widely accepted domestic solution for e-commerce payments. [ ]  Even those domestic card schemes that provide a European alternative in some countries still rely on non-European card schemes for cross-border transactions within the euro area. Today, international card schemes settle two-thirds of card-based transactions in the euro area. 7

So, we have a clear problem, to which the digital euro offers a clear solution. The digital euro will provide a digital form of cash that will complement the banknotes and coins we are familiar with, thereby ensuring that we can keep payments - both physical and digital - working at all times, without depending on decisions made outside Europe.

The digital euro will be a European digital payment solution built on European infrastructure - all the providers we have selected are EU nationals controlled by EU nationals. [ ]  And it will ensure that the euro remains the single unit of account, protecting our monetary sovereignty even with the expansion of stablecoins - which are currently mostly denominated in foreign currencies - and unbacked crypto-assets. 8

Preserving banks' business models and enhancing the payment services they can offer

Let me now turn to the implications for banks. The digital euro will allow them to preserve their business models and enhance the payment services they can offer.

From the outset, we have envisaged that the digital euro would be distributed through banks. This is because they play a key role in financing the euro area economy and in the transmission of monetary policy.

We have designed the digital euro in a way that ensures that banks will not be disintermediated. Like cash, digital euro holdings will not be remunerated. They will also be capped to avoid any risk of excessive deposit outflows, while a link to commercial bank accounts will ensure that people can pay and be paid seamlessly with digital euro, even for large amounts. Our recent technical assessments confirm that introducing the digital euro would not undermine financial stability. [ ] 9

What about the costs and benefits for banks' payment business?

With international card schemes, banks lose fees. With big tech mobile payment solutions, they lose fees and data. And in the future, with stablecoins - which do not face holding limits - they would lose fees, data and stable retail deposits.

With the digital euro, however, the compensation model will ensure that banks benefit whenever a payment via one of these solutions is replaced by a digital euro transaction. This is because the Eurosystem will not charge scheme or settlement fees, creating savings that can be distributed among banks and merchants. Moreover, the digital euro will strengthen banks' bargaining power vis-à-vis international card schemes.

In addition, the digital euro will allow banks to enhance and scale up their payment services at a reduced cost. It will provide an open acceptance network and standards that private European initiatives, such as Wero and the European Payments Alliance, can leverage to increase their commercial appeal and achieve pan-European reach. [ ]  These providers will also be able to integrate the digital euro seamlessly into their existing payment solutions, for instance digital wallets, or co-badge it on physical cards. [ ] Let me reiterate: there is no competition between public and private solutions. Rather, we envisage a mutually beneficial cooperation that makes Europe's strategic autonomy in the retail payments market more achievable and credible. 10 11

On the cost side, we have found that the digital euro investment costs for banks are likely to be significantly lower than some external studies have suggested and correspond to approximately 3.4% of significant banks' annual IT upgrade budgets over a period of four years. The total investment costs are expected to be broadly comparable to those estimated for the revised Payment Services Directive (PSD2), and well below those for the Single Euro Payments Area (SEPA). [ ] 12

## Complementing physical cash, not replacing it

Turning to concerns about the future of cash, we have been very clear that the digital euro will complement cash, not replace it - so that everyone is free to choose how they pay.

In line with our Eurosystem cash strategy, we are working to ensure that physical cash continues to be available and accepted across the euro area as both a means of payment and a store of value.

Cash is central bank money - euro banknotes are issued by the ECB. So we have no interest in discontinuing the issuance of cash. On the contrary, it is at the heart of our mandate.

In fact, we are working on the third series of euro banknotes. The ongoing euro banknote redesign, which will bring improved security features, demonstrates that the ECB is committed to the future of cash.

We have also been vocal supporters of strengthening the legal tender status of cash, which is an essential part of the Single Currency Package proposed by the European Commission and will help preserve the benefits of cash that I have already mentioned. We want people to be able to continue using cash in both physical and digital form, as they prefer.

## Protecting privacy and freedom

The digital euro will also protect Europeans' privacy and freedom - concerns that it could be used as a surveillance tool are unfounded.

First, the offline functionality of the digital euro will offer cash-like privacy: when money moves from one wallet to another, the transaction details will be known only to the payer and the payee. No existing payment method offers comparable privacy levels, besides cash.

Second, for online payments, the Eurosystem will not be able to identify the payer or the payee. We will use state-of-the-art technology to pseudonymise and encrypt all data, so we will not see any personal information - just codes representing the payer, the payee and the transaction amount, which only their banks will be able to link with their respective identities. Even for these codes there will be very strict rules on who can access them for the purpose of running the system. And we will make sure this can be audited.

We will be supervised by independent data protection authorities to ensure that we comply with EU data protection law. We want them to see what we are doing, and we want to make sure that everybody knows we do as we say we will do. We will also remain open to exploring privacy-enhancing techniques in the future so that we can adopt more advanced technologies as soon as they are ready to be implemented - a necessity in a system that has to run one billion transactions every day.

Third, checks to prevent fraud, money laundering and the financing of terrorism will be performed by banks, as is already the case.

Fourth, the digital euro will never be programmable money: it will not be possible to restrict its use to predefined purposes. In other words, there will be no built-in limitations on where, when or for what it can be used.

Finally, nobody will be forced to use the digital euro - it will only offer an additional payment option. Those who still harbour concerns will be able to continue using physical cash or other means of payment.

The digital euro will be like physical cash, but in digital form. It will enhance Europeans' freedom to choose how they pay, offering an additional option for all digital payments throughout the euro area.

## Delivering on the digital euro

Delivering on the digital euro hinges on both legislative and technical readiness.

The legislation will play a central role in securing the digital euro's benefits. In particular, mandatory distribution and legal tender status are key to ensuring that the digital euro is accessible to everyone and accepted for any digital payment. Moreover, the digital euro's online and offline functionalities will complement one another, combining the convenience of digital payments with the resilience and accessibility of cash - allowing the digital euro to be used in any situation, from e-commerce platforms to remote areas without network coverage.

On our side, we are working on ensuring we are technically ready for the potential issuance of the digital euro. Building on the work we have done so far [ ] , the new phase of the digital euro project will be focused on developing the necessary technical capacity. The ECB Governing Council's final decision on whether to issue a digital euro will only be taken once the legislation has been adopted. Assuming that European co-legislators adopt the Regulation on the establishment of the digital euro in the course of next year, a pilot exercise and initial transactions could take place as of mid-2027, and the digital euro could be ready for first issuance in 2029. 13

## Conclusion

Let me conclude.

The introduction of the digital euro is not merely a technical undertaking - it is a vital, forward-looking step to ensure that central bank money continues to serve Europeans in an increasingly digital world.

The digital euro will complement euro banknotes and coins, extending the benefits of cash to digital payments. It will give the euro area a sovereign, universally accepted digital means of payment. And it will make it easier for private European solutions to expand their reach.

Consumers, merchants and banks all stand to benefit. And Europe's dependencies on non-European providers will be reduced, strengthening our resilience, autonomy and economic security. The longer we wait, the longer it will take for these benefits to materialise.

The ECB will continue to support the legislative deliberations with technical input and provide transparent updates on the progress of the digital euro project. To that end, we have published additional supporting material as an annex to my statement today.

Thank you for your attention.

## Annexes

17 November 2025

1.

See ' '. Eurogroup, 19 September 2025

2.

See ' ', 20 March 2025, and ' ', 23 October 2025. Statement of the Euro Summit, meeting in inclusive format Statement of the Euro Summit, meeting in inclusive format

3.

See ECB (2025), ' ', press release , 30 October. Eurosystem moving to next phase of digital euro project

4.

See ECB (2025), , 30 October. Progress on the preparation phase of a digital euro - Closing progress report

5.

ibid.

6.

See EuroCommerce (2024), ' ', Position paper , 8 July; and Ipsos (2025), , 30 October. EU businesses' competitiveness impacted by current cards payments landscape - a call for urgent action ECB digital euro user research

7.

See Table 1 in ECB (2025), , October. A domestic solution that is used significantly is defined as a solution with an estimated market share exceeding 10% within the respective use case, though other domestic options may also be technically present. In the absence of reliable data on the acceptance of domestic payment solutions by country and use case, the classification is based on the use of a domestic payment solution. Progress on the preparation phase of a digital euro - Closing progress report

8.

'EU national' means any legal entity with registered offices in an EU Member State or any natural person that has the nationality of an EU Member State. 'Control' means the ability to exercise a decisive influence on an undertaking, directly, or indirectly through one or more intermediate undertakings. Control can take any of the following forms: (i) the direct or indirect holding of more than 50% of the nominal value of the issued share capital in the legal entity concerned, or of a majority of the voting rights of the shareholders or associates of that entity; (ii) the direct or indirect holding, in fact or in law, of decision-making powers in the legal entity concerned. See ECB (2025), ' ', press release , 2 October. ECB selects digital euro service providers

9.

In response to requests by the co-legislators, the ECB has conducted a detailed assessment of the potential financial stability impact of various hypothetical holding limits. Our analysis confirms that the use of the digital euro for day-to-day payments would not undermine financial stability. Even under an extremely conservative and highly unlikely crisis scenario, the stability of the financial system would remain intact. See ECB (2025), ' ', October. Technical data on the financial stability impact of the digital euro

10.

See ECB (2025), , October. Fit of the digital euro in the payment ecosystem - Report on the dedicated Euro Retail Payments Board (ERPB) technical workstream

11.

In both instances, the digital euro could be the 'fall-back' that enables full pan-European reach while preserving the market share of domestic or regional schemes where and to the extent that they are accepted. In the voluntary co-branding scenario, the private sector schemes could be the preferred brand wherever they are accepted, and the digital euro would be the fall-back solution wherever the private sector scheme is not (yet) accepted. This would be a low-cost form of interoperability between domestic/regional solutions and the digital euro, ensuring that the user always pays with a European solution. It could reduce the dependency on international card schemes, essentially meaning they would be required only for non-EU payments. See the annexes to ECB (2025), , Report on the dedicated Euro Retail Payments Board (ERPB) technical workstream, 30 October. Fit of the digital euro in the payment ecosystem

12.

Based on our technical analysis, the total investment costs required by banks could range from €1 billion to €1.44 billion annually over a four-year period. This estimate is consistent with the European Commission's impact assessment, significantly below the costs incurred during the implementation of the SEPA, and five to six times lower than the figures presented in a study by PwC. See PwC (2025), , June. See also ECB (2025), , October. Digital Euro Cost Study A view on recent assessments of digital euro investment costs for the euro area banking sector

The marks an important milestone in the digital euro project. In the preparation phase we moved towards refining the practical design of the digital euro, building on the insights gained during the investigation phase conducted from 2020 to 2023. Key achievements include (i) the development of the draft , (ii) the for digital euro components and related services, (iii) the successful running of an for experimentation with market participants, as well as (iv) the by a technical workstream into the fit of the digital euro in the payment ecosystem. See ECB (2025), ' ', press release , 30 October. conclusion of the preparation phase digital euro scheme rulebook selection of providers innovation platform investigation Eurosystem moving to next phase of digital euro project",Piero Cipollone
https://www.bis.org/review/r251125d.htm,Ida Wolden Bache: Remarks at the Central Bank of Chile,"Opening remarks by Ms Ida Wolden Bache, Governor of Norges Bank (Central Bank of Norway), in the panel debate ""Monetary policy challenges in times of economic policy uncertainty"" at the conference ""Monetary policy, financial markets, and challenges ahead: celebrating the centennial of the Central Bank of Chile"", Santiago de Chile, 21 November 2025.  ",2025-11-21 00:00:00,"## Ida Wolden Bache: Remarks at the Central Bank of Chile

Opening remarks by Ms Ida Wolden Bache, Governor of Norges Bank (Central Bank of Norway), in the panel debate ""Monetary policy challenges in times of economic policy uncertainty"" at the conference ""Monetary policy, financial markets, and challenges ahead: celebrating the centennial of the Central Bank of Chile"", Santiago de Chile, 21 November 2025.

* * *

Good afternoon and thank you very much for the invitation. It is a great pleasure to be here and to take part in the celebration of the centennial of Banco Central de Chile.

Although Chile and Norway are far apart geographically, they are similar in many ways. Both countries are long and narrow, and close to polar regions. We are major fishing nations, and our economies have been shaped by abundant natural resources: copper in Chile, oil and gas in Norway. Revenues from these resources have been channelled into sovereign wealth funds, helping us smooth commodity cycles. As fortunate as we may be in this respect, we are both small, open economies with relatively limited production bases, leaving us exposed to global shocks and international developments.

And in recent years, we have certainly felt the impact of many shocks. In these brief remarks, I will reflect on how these shocks, and the ongoing broader global shifts, are reshaping the environment for monetary policy. Then, I will turn to what this means for us as policymakers.

On the first question: In the decade or so prior to the Covid-19 pandemic, inflation was stubbornly low in many advanced economies. Policy rates hit zero or below, and instruments such as forward guidance and quantitative easing were used to compress long-term yields and risk premia. The prospect of rapidly rising prices seemed remote.

That assumption proved wrong. In 2022 and 2023, inflation in many countries surged to the highest level in several decades. In hindsight, it is clear that both our models and our judgment were shaped by the long period of low inflation. We underestimated how strongly the combination of pandemic-related supply shocks and expansionary policies would fuel inflation. In Norway, like in many other small, open economies, a weaker currency pushed imported inflation further up. Central banks around the world had to tighten policy rapidly - some, like in Chile and other countries in Latin America, moved earlier and more forcefully than others.

Looking ahead, one thing we can be sure of is that the world will continue to surprise us. Forces such as climate change, geopolitical tensions and rapid advances in artificial intelligence are all contributing to uncertainty. One conjecture is that these forces will result in larger and more frequent supply-side disturbances. For instance, a global trade war could act as a major negative supply shock, pushing up prices at several stages of the global value chain while also lowering growth. And climate change could lead to more frequent extreme weather events that may have similar macroeconomic effects.

Three points follow from this. First, monetary policy should maintain focus on keeping inflation low and stable. That does not mean a return to strict inflation targeting, as most

central bank mandates also give weight to employment and the real economy. But while flexible inflation targeting allows us to look through temporary price movements, repeatedly accommodating a sequence of negative supply shocks could push average inflation above target, with the risk that inflation expectations become unanchored. History shows that once confidence in price stability is lost, the cost of restoring it can be very high.

Second, we should be realistic about what monetary policy can and cannot achieve. Monetary policy affects the economy broadly; it cannot be used to support specific sectors or groups. Some policy objectives require more targeted measures. For instance, during the Covid-19 pandemic, targeted fiscal support helped the sectors and workers most exposed to shutdowns and weak demand. Another example is climate change. While both the physical effects of climate change and the transition to a lowcarbon economy have implications for the economy, and hence for monetary policy, the policy rate is not an effective tool for supporting the transition to a low-carbon economy.

Third, we must recognise the importance of preserving public trust in our institutions. In an environment of heightened uncertainty it is even more  important to clarify the reasoning behind our actions and how they are affected by new information. In Norway, we publish a policy rate forecast that is consistent with our forecasts of other variables. We also describe how new information has affected the rate forecast. Importantly, the rate path is not a promise, and indeed it has been adjusted substantially in recent years as the outlook has changed. We nevertheless believe that it remains a useful communication tool. Many central banks are now increasing the use of scenarios in their communication. Well-designed scenarios could help markets and the public understand how policymakers might respond to shocks that have not yet occurred.

Regular reviews of the monetary policy framework also provide an opportunity to take on board new insights and strengthen the democratic support for independent monetary policy. Earlier this year, the Norwegian government initiated a review of our monetary policy mandate. While I will not pre-empt any conclusions of the review, let me just say that a good mandate for monetary policy should be flexible enough to address different types of disturbances - not only those that have occurred in the recent past. But the mandate should also be sufficiently precise to enable others to hold us to account.

Let me conclude. Uncertainty is nothing new. Central banks have always had to adapt to shifting conditions. Transparency and a commitment to price stability remain the foundation for navigating the challenges ahead.",Ida Wolden Bache
https://www.bis.org/review/r251125c.htm,Joachim Nagel: European productivity and standard of living - a long-term perspective,"Speech by Dr Joachim Nagel, President of the Deutsche Bundesbank, at the European Banking Congress, Frankfurt am Main, 21 November 2025.",2025-11-21 00:00:00,"## European productivity and standard of living: a long-term perspective

Speech at the European Banking Congress

21.11.2025 | Frankfurt am Main | Joachim Nagel

Check against delivery.

- 1 Introduction

- 2 Productivity growth: lagging behind

- 3 Standard of living: better than expected

- 4 Policy measures: room for improvement

- 4.1 Simplify and harmonise regulation

- 4.2 Improve access to equity market fi nancing

- 5 Conclusion

## 1 Introduction

Ladies and gentlemen, it is as always a pleasure to be at the European Banking Congress and speak to such a distinguished audience. This year ' s theme  investing in Europe -is especially timely given the major challenges our contin -ent is currently facing.

First, Europe ' s security is under increasing pressure. In response, Europe needs to spend much more on defence.

Second, the global trade environment has become much more challenging. As a result, external trade will no longer drive European growth as strongly as it did in previous decades.

Third, Europe is about to undergo a major demographic shift, as the baby boomer generation retires. This means that labour supply will be scarce for the foreseeable future.

Finally, Europe is transitioning to a carbon-neutral economy. This transition will require major investment.

Taken together, both labour and capital for productive investment will be in increasingly short supply. With limited resources, our only way forward is to become more productive. In my speech, I would like to take a long-term per -spective on Europe ' s productivity and -since productivity is a mean to an end and not an end itself -on its standard of living.

I will structure my remarks around two key questions: First, how have productiv -ity and the standard of living in Europe developed compared to the United States over the past thirty years? And second, what can Europe do to boost productivity?

## 2 Productivity growth: lagging behind

Let us begin by examining how productivity has evolved in Europe and the United States over the past thirty years. As my measure of productivity, I will use the ratio of real GDP (gross domestic product) to hours worked. I have chosen 1995 as the starting point for my comparison. Why 1995, you might ask?

The reason is simple: In the decades after World War II, productivity growth in Europe consistently outpaced that in the United States. However , this process of catching up ended in the mid-1990s. [1]

Between 1995 and 2024, labour productivity in the United States increased by almost 61 per cent. By contrast, in the European Union it only rose by a little more than 39 per cent. As a result, a productivity gap of around 21 percentage points opened up over these 30 years. [2]

When we look at such a long period, it might seem as if the gap just kept widen -ing steadily, year after year . But a closer look reveals that is not what actually happened.

Between 1995 and 2002, productivity growth was relatively lively in both eco -nomies, with the United States only slightly ahead. But starting in 2003, a gap began to open, with the United States pulling ahead of Europe. One important factor was that US (United States) fi rms bene fi ted much more from the e ffi ciency gains in information and communication technologies (ICT (information and communications technology)). [3]

The gap widened sharply in 2009, following the global fi nancial crisis: US (United States) productivity surged, while European productivity declined. This jump in US (United States) productivity has been linked to ' excess layo ff s ' -meaning  fi rms cut hours and jobs even more than output fell. [4]

From 2011 onwards, the productivity gap actually began to narrow again, as US (United States) growth slowed markedly. One reason for slower US (United States) productivity growth may have been a post-recession ' rehiring e ff ect ' : As fi rms brought back workers, the earlier productivity gains from excess layo ff s gradually faded. [5]

All in all, by 2019, US (United States) productivity was less than 12 percentage points higher than in Europe, compared to 1995. So, where did the current productivity gap of 21 per cent which I mentioned before come from? [6]

Enter the COVID (coronavirus disease)-19 pandemic and Russia ' s attack on Ukraine. In just fi ve years, the productivity gap widened by almost 10 percentage points.

Let that sink in for a moment. Almost half of the productivity gap that has opened up over the past thirty years stems from just the last fi ve years. [7]

Four main factors seem to have driven this recent divergence.

First, by 2019, the United States had likely returned to a structurally higher path of productivity growth. By contrast, structural impediments continued to weigh on European productivity.

Second, the fi rst year of the COVID (coronavirus disease)-19 pandemic brought with it another productivity boost in the United States, similar to what we saw during the global fi nancial crisis. [8]

Third, Russia ' s attack on Ukraine caused an adverse terms-of-trade shock for energy-dependent Europe. [9]

Fourth, US (United States) fi scal policy was much more expansionary than in Europe, giving a bigger boost to real GDP (gross domestic product) growth. To give you a sense of scale: Between 2020 and 2024, the average US (United States) fi scal de fi cit was 8.3 per cent of GDP (gross domestic product) -more than three times that of Europe. [10]

To sum up: While the European productivity gap has been growing for some time, it has widened signi fi cantly only in recent years. It is the outcome of a complex mix of persistent trends and recent shocks.

## 3 Standard of living: better than expected

Ultimately, productivity is just a means to an end -a higher standard of living. So, how has the standard of living in Europe relative to the United States evolved over the last thirty years? Given the modest productivity growth, one might expect Europe to have fallen noticeably behind.

Of course, I am well aware that individual well-being depends on more than just GDP (gross domestic product). Think of social security, health or equality. But even when looking at output alone, the reality is more nuanced.

If we look at growth in real GDP (gross domestic product) per capita instead of per hour worked, the gap between the United States and Europe is less than half the productivity gap. From 1995 to 2024, real GDP (gross domestic product) per capita increased by 58 per cent in the United States and by 50 per cent in Europe. This corresponds to annual growth rates of 1.6 per cent for the United States and 1.4 per cent for Europe. Until 2019, real GDP (gross domestic product) per capita grew by 45 per cent in the US (United States) and 44 per cent in Europe, remaining nearly on par . [11]

The reason for the divergence between productivity growth and per capita growth is quite simple: Europe successfully managed to activate previously untapped labour reserves. Accordingly, the lower growth in labour productivity was partly compensated for by an increase in labour input.

So far , I have focused on real GDP (gross domestic product) fi gures from national accounts. They show how much economies have grown, adjusted for changes in the respective price levels over time. But to compare the standard of living between the United States and Europe, we need to account for how price levels di ff er between regions.

A well-established method for adjusting GDP (gross domestic product) fi gures for price level di ff erences across countries is the use of purchasing power parit -ies. However, this approach comes with its own statistical challenges.

For example, purchasing power parity calculations have to rely on a common basket of goods and services. However, this common basket may not be fully representative for all of the countries under consideration. In addition, prices are collected less frequently than in national accounts. As a result, they have to be interpolated or extrapolated. Therefore, I will refrain from presenting exact numbers here, as di ff erent calculation methods yield di ff erent results.

But one thing we can say with great con fi dence: When price level di ff erences and their changes are taken into account, Europe ' s standard of living relative to the United States has developed less badly than suggested by the unadjusted fi gures.

Still, this is no reason to be complacent. If Europe wants to raise the standard of living for future generations, we need to boost productivity growth.

## 4 Policy measures: room for improvement

How can we make this happen? Some of the reasons for Europe ' s productivity gap can only be addressed over the long term. For example, our fi scal policy constraints due to high levels of public debt, or the lack of access to cheap energy.

Moreover, Europe is unlikely to fully catch up with the digital transformation of the 2000s. One priority should be to ensure that we reap the bene fi ts of the next IT (information technology) revolution, driven by arti fi cial intelligence. Furthermore, we can act immediately where it matters most: at the level of our fi rms, where innovation and growth actually happen.

When we compare the business landscape in the United States and Europe, some striking di ff erences stand out. In the US (United States), the business ecosystem thrives on a dynamic duality: On the one hand, there are many small, innovative start-ups that disrupt entire industries. On the other hand, there are large, productive corporations that dominate global markets and bene fi t from economies of scale. [12]

In Europe, the picture looks di ff erent. Here, our economies are usually domin -ated by small and medium-sized companies. On the one hand, quite a number of those fi rms are what we call hidden champions, which are market leaders for a speci fi c product. But on the other hand, many fi rms are neither small enough to be truly agile and highly innovative, nor large enough to fully bene fi t from economies of scale.

So, how can we encourage the emergence of innovative start-ups -and help pro -ductive incumbent fi rms continue to grow? Given the European focus of my speech, I will concentrate on what can be done at the level of the European Union. However, these measures need to be complemented by targeted reforms in the Member States.

## 4.1 Simplify and harmonise regulation

One important step to boost productivity growth is to make it easier to do busi -ness in Europe. This means simplifying and harmonising European regulation.

Right now, entrepreneurs and companies face a patchwork of rules and proced -ures that vary from country to country. To tackle this, the EU (European Union) has launched a major simpli fi cation initiative, including the OMNIBUS packages. These packages aim to cut unnecessary bureaucracy, streamline procedures, and remove outdated or overlapping rules. By making rules clearer and more consistent, they could reduce compliance costs.

One promising solution to harmonise regulation is the ' 28th Regime ' -  an optional EU (European Union)-wide legal framework that companies can choose, instead of navigating 27 di ff erent national systems. This would make crossborder operations easier, cut compliance costs even more, and help businesses scale up faster . In e ff ect, it would remove some of the remaining barriers across our internal market, which encompasses 450 million customers. And by helping small and medium-sized companies to expand across borders, we could turn hidden champions into global leaders.

## 4.2 Improve access to equity market fi nancing

But even the best ideas need the right kind of fi nancing in order to grow. Europe still lags behind when it comes to market-based equity fi nancing. This is why it is essential that we swiftly complete the Savings and Investments Union.

For start-ups, better access to venture capital is crucial. For one thing, Europe needs to build the necessary infrastructure to deepen and integrate its venture capital markets. For another , we need to encourage institutional investors to put more money into venture capital.

But also for medium-sized and large companies, we need deeper and more integrated capital markets. Right now, Europe ' s capital markets are still fragmen -ted and underdeveloped compared to those in the US (United States). This lack of integration means less depth and liquidity, making it harder for companies to raise the funds they need to grow.

Taken together, important European initiatives are already in motion. To realise their full potential, we must implement these European initiatives with speed and ambition  and reinforce them with targeted national policies.

## 5 Conclusion

Ladies and gentlemen, let me summarise and conclude. I began by highlighting Europe ' s signi fi cant productivity gap with the United States that opened up over the past three decades.

A closer look suggests that Europe ' s standard of living compared to the US (United States) has developed less badly than productivity fi gures alone would suggest. This indicates that Europe ' s starting position may not be as dire as it is often portrayed to be.

Nevertheless, Europe could and should do better. The policy measures discussed before could help Europe to boost productivity growth and restart its conver -gence process.

Ladies and gentlemen, Europe faces major challenges.

Let ' s turn them into something productive.

Thank you very much for your attention.

## Footnotes:

- See Bergeaud, A., G. Cette and R. Lecat (2016), Productivity Trends in Advanced Countries between 1890 and 2012, Review of Income and Wealth, Series 62, No. 3. 1.
2. Data source: European Commission, AMECO database, May 2025.
- See Deutsche Bundesbank (2023), The impact of digitalisation on labour pro -ductivity growth, Monthly Report, March 2023. 3.
- See Gordon, R. and H. Sayed (2024), New Interpretation of U.S. Productivity Growth Dynamics, 1950-2023, CEPR Discussion Papers, No. 19569. 4.
5. See Gordon, R. and H. Sayed (2024), op. cit.
- See Deutsche Bundesbank (2021), The slowdown in euro area productivity growth, Monthly Report, January, for a detailed account of developments in the euro area prior to the COVID-19 pandemic. 6.
- Up to 2019, the productivity gap increased by 11.8 percentage points, which is around 55 per cent of the increase of 22.1 percentage points up to 2024. 7.
- See John F., H. Li, B. Meisenbacher and A. Yalcin (2024), Productivity During and Since the Pandemic, FRBSF Economic Letter No. 31. 8.
- See Dias da Silva, A., P. Di Casola, R. Gomez-Salvador and M. Mohr (2024), Labour productivity growth in the euro area and the United States: short and long-term developments, ECB Economic Bulletin, Issue 6. 9.
- See Romer, C. (2022), Lessons from Fiscal Policy in the Pandemic: The ODE Distinguished Economist Award Lecture, The American Economist, 67(2), pp. 164-182 for an overview of the macroeconomic impact of the US fi scal policy response to the COVID-19 pandemic. 10.
- In the euro area, annual growth of real GDP per capita averaged 1.2 per cent per year, adding up to 40 per cent over the entire period from 1995 to 2024. 11.
- See IMF (2024), Europe ' s Declining Productivity Growth: Diagnoses and Remedies, Regional Economic Outlook Notes  Europe. 12.",Joachim Nagel
https://www.bis.org/review/r251118g.htm,"Claudia Buch: Global banking, global risks - how banks and supervisors can navigate a complex environment","Keynote speech by Prof Claudia Buch, Chair of the Supervisory Board of the European Central Bank, at the ECB Forum on Banking Supervision 2025, Frankfurt am Main, 13 November 2025.",2025-11-13 00:00:00,"SPEECH

## Global banking, global risks: how banks and supervisors can navigate a complex environment

## Keynote speech by Claudia Buch, Chair of the Supervisory Board of the ECB, ECB Forum on Banking Supervision

Frankfurt am Main, 13 November 2025

'Resilience in times of disruption' is the theme of this year's ECB Forum on Banking Supervision. [ ] Disruption has different aspects: heightened geopolitical risks; digital innovation re-drawing the competitive landscape in which banks operate; weaker growth making competitiveness take centre stage 1

- sometimes leading to calls for loosening the rules that were put into place after the global financial crisis.

Strong global guardrails are needed to avoid a race to the bottom in this complex and risky landscape. Yet, it is precisely the stability of the world order and the willingness and ability to cooperate that many are currently questioning: nearly two-thirds of experts surveyed by the World Economic Forum expect a more fragmented international order within the next decade. [ ] 2

In an adverse scenario, international cooperation may collapse, with the provision of global public goods such as financial stability suffering. [ ]  In a 'world of blocs', global markets would be fractured, raising operational complexity for banks. Only in a more optimistic scenario of 'multilateralism reinvented', collective frameworks would provide global public goods - from climate policies to financial stability. 3

How can banks and supervisors navigate this increasingly complex environment? Resilience is the key. It is not just about banks' ability to withstand shocks, but also about how supervisors, policymakers and societies adapt to a rapidly changing world.

The next two days will bring useful ideas to the table, and I very much look forward to these discussions. We particularly welcome the many international participants attending this conference as cross-border cooperation remains essential to maintaining financial stability.

Let me use this opportunity to provide input into the debate and explain how ECB Banking Supervision is responding to the new challenges.

First of all, we have a dedicated agenda on banks' risk management and governance arrangements to address geopolitical risks.

Geopolitical risk is not new - globally active banks often operate under challenging conditions. Currently, however, geopolitical risk is heightened and exposure to this risk is quite broad-based. Large banks are affected, but so are smaller ones that are not very active internationally. Out of the 113 banks we supervise directly, nearly all have outsourced critical functions. [ ]  Cyberattacks have become more frequent and severe. 4

Chart 1 Significant cyber incident reporting



Source: ECB significant cyber incident reporting

Notes: Significant cyber incidents as reported by significant institutions in line with the reporting requirements for significant cyber incidents issued in 2017.

Resilience against geopolitical risk needs to be equally broad-based. Being resilient to a range of possible scenarios does not require predicting the exact nature of the next crisis. But banks need to maintain strong capital and liquidity buffers, robust governance and operational flexibility to buffer a range of shocks. In short, they need to have robust business models.

Therefore, broad-based resilience does not come at the expense of long-term profitability.

Our second response to the new environment is to adapt our own work. While ECB Banking Supervision has progressed well over the past decade, we certainly cannot afford to stand still. [ ]  We are adapting our supervision to become more effective, more efficient and more risk-based. Our reforms reduce undue complexities and compliance costs, enabling banks - and us - to better address evolving risks. 5

I am convinced that strong supervision helps banks to navigate a risky and uncertain environment safely. It plays a key role in identifying good practices regarding risk management and ensuring that banks are financially and operationally resilient. In contrast, weakening supervision or regulation would weaken banks and their competitiveness.

## Geopolitical risks and exposures of European banks

Virtually all European banks are vulnerable to geopolitical risks:

- 40 banks directly supervised by the ECB - in particular the larger ones - have subsidiaries outside of the European Union. 
- Assets vis-à-vis third countries make up one-quarter of banks' total assets, with the United States being the largest destination, accounting for around 30% of these assets. [ ]  6
- Even though European banks intermediate a smaller share of cross-border financial flows than in the past, [ ]  they remain closely intertwined with non-bank financial intermediaries, with around 9% of their total assets and 15% of liabilities. [ ]  7 8
- Many banks use cloud services that are provided by a small number of non-EU third-party providers. Thanks to the Digital Operational Resilience Act (DORA), which has been in effect since the beginning of this year, information on these outsourcing arrangements and potential risks has significantly improved. [ ]  9
- Significant cyber incidents reported by European banks have doubled in recent years. [ ]  10

Addressing geopolitical risk has thus been a supervisory priority for ECB Banking Supervision for several macro-financial threats and severe geopolitical shocks. Last year we set out an analytical framework to years now. In the current 2025-27 cycle, our focus is on ensuring that institutions can withstand immediate better understand how geopolitical shocks are transmitted to the financial system and to banks. [ ] 11

Key to this framework is that geopolitical risk needs to be managed as a cross-cutting driver. Geopolitics can affect banks through multiple channels - financial markets, the real economy, and the safety and security of operations. The impact of geopolitical events cuts across credit, market, liquidity, business model, governance and operational risks.

So, one year after setting out this framework, where do we stand?

Measures of global economic policy uncertainty certainly remain elevated, and so risk sentiment can change abruptly. Take the events of March 2025: the announcements of new tariffs led to a rapid increase in market volatility across asset classes. Credit spreads widened temporarily while still appearing compressed relative to underlying risks. Prices for traditional safe-haven assets increased significantly, reflecting increased demand for protection against adverse shocks. [ ] 12

Trade policy is particularly heightened, and the ECB's May 2025 Financial Stability Review shows that this can have negative implications for banks and financial stability. [ ]  A potential repricing of equity market could have effects beyond the firms immediately affected through regional and sectoral linkages. For banks, this could lead to higher provisioning, lower profitability and reduced lending, and the effects would build up gradually over time. Higher capitalisation mitigates these effects. 13

Chart 2 Economic and trade policy uncertainty



Sources: ; Baker, S., Bloom, N. and Davis, S. (2016), 'Measuring Economic Policy Uncertainty', The Quarterly Journal of Economics , Vol. 131, No 4, November, pp. 1593-1636; and ECB calculations. Note: The indicators are mostly based on a normalised index of newspaper coverage of policy-related economic uncertainty and its trade policy uncertain sub-index, (set to have a mean of 100 prior to 2011); the higher the indicator, the higher the percentage of articles referring to economic policy uncertainty or trade policy uncertainty. www.policyuncertainty.com

Risks have certainly become more difficult to model. During the past decade, shocks have often been buffered by fiscal or monetary policy. Loan losses hardly increased even in times of recession such as during the COVID-19 pandemic. Traditional correlations linking macroeconomic shocks and credit risk may no longer hold.

All of this indicates that markets are underpricing geopolitical risks. The International Monetary Fund's (IMF) most recent Global Financial Stability Report observes that valuations of risk assets remain stretched, and that credit spreads and volatility appear compressed. [ ]  While short-term market reactions to tariff announcements have been contained, the IMF warns that longer-term effects on investment and growth could be more severe, especially if shocks are amplified through high leverage and interconnections in the global financial system. The report stresses that sufficient capital and liquidity remain essential to preserve resilience amid heightened uncertainty. 14

## Building broad-based resilience against geopolitical risks

European banks are closely interconnected with international flows of funds. They operate across borders, outsource key services and are strongly exposed to common global factors. [ ]  Disturbances originating in other parts of the world can propagate through the financial system and affect euro area banks. [ ] 15 16

Chart 3 International exposure of banks under European supervision



Source: BIS consolidated banking statistics, total claims.

## b) Regional structure of exposures (1999, 2024)



Source: BIS consolidated banking statistics.

Geopolitical risk cannot be avoided, but it needs to be managed well.

Geopolitical risk certainly differs from traditional risk drivers. Adverse geopolitical events are uncertain, less predictable, highly interdependent and difficult to model. [ ]  This may make them hard to assess for any individual bank. 17

Still, geopolitical events can have very concrete impacts on banks. Many geopolitical risks are 'known unknowns'. The disruption of an established trade route, a cyberattack or an energy outage are all concrete scenarios. We do not know when they may occur, but we can describe the scenarios quite well. These uncertainties must be managed at the level of the individual institution.

But, clearly, there is a systematic component to geopolitical risk. The global economy can be hit by large events that are difficult to anticipate. The COVID-19 pandemic is an example: although a global pandemic could have been anticipated as a potential tail risk, its specific impact was difficult to forecast.

In such cases, ex ante private insurance can be limited and fiscal and monetary policy often ends up providing insurance ex post. During the COVID-19 crisis, fiscal support in the euro area amounted to around 4% of GDP, approximately two-thirds of which consisted of direct support to firms and employees.

[ ]  In the following years, fiscal measures to shield against the energy price shock were in a similar range. 18

[ ]  This also protected the financial sector from significant losses. During the turmoil on banking markets in March 2023, public sector safety nets were expanded. [ ] 19 20

Yet, given increased levels of fiscal debt and high budgetary pressure, whether similar policy support will be forthcoming in a future crisis is a legitimate question to raise.

While the exact nature of future crises cannot be anticipated, institutions and authorities can still prepare by building broad-based resilience, which protects banks and the services they provide against a range of scenarios.

For banks, broad-based resilience means maintaining strong capital and liquidity positions, robust governance, operational flexibility, and robust IT systems.

Broad-based resilience is not about predicting the next crisis. But it ensures that banks and the financial system can continue functioning and adapt, even when facing events that fall outside conventional stress testing assumptions or historical experience.

Broad-based resilience does not come at the expense of banks' competitiveness. Resilience and competitiveness are, in fact, two sides of the same coin. Sufficient capital, diversification, redundancies in operational systems and strong governance are good for broad-based resilience. These are also key features of long-term, sustainable business models.

Banks need such long-term strategies. They need to respond to the growth of non-bank suppliers of financial services. [ ]  They need good risk management and information systems to monitor and address risks linked to private markets. And they need sound strategies to respond to the emergence of crypto assets and stablecoins. Sufficient investment in resilient IT systems is a key component of these long-term strategies. [ ]  Banks should therefore avoid prioritising short-term decisions that undermine their ability to invest adequately in their future competitiveness. 21 22

But bank-specific responses are not sufficient to capture the systemic nature of geopolitical risk events. Macroprudential policy must prepare the system for a potential deterioration of macro-financial conditions. In Europe, there are currently no signs of widespread losses or credit supply constraints arising from banks being capital-constrained. [ ]  Hence, maintaining sufficient capital buffer requirements remains important to preserve resilience. 23

## Supervisory frameworks for banks' management of geopolitical risks

Strong supervision helps banks to manage risks and to follow good practices. To play our role, we do not need new regulatory frameworks, but we do need a commitment from legislators not to weaken the frameworks we have.

Under the Capital Requirements Directive (CRD) and relevant national legislation, banks must have robust internal governance arrangements and effective risk management processes in place that are proportionate to the nature, scale and complexity of their activities. [ ]  And prudential supervisors, including the ECB, must carry out reviews to determine whether banks properly manage and cover risks. 24

[ ]  This includes the sound management of geopolitical risks. 25

On this basis, we include geopolitical considerations in our ongoing dialogue with banks on how they manage such risks as a cross-cutting driver within their established risk management frameworks.

Ongoing supervision pays particular attention to the following aspects.

First, banks' management bodies should have a comprehensive view of how geopolitical risks affect their institutions. Regular, timely information on these risks allows them to prepare for adverse scenarios and take decisions swiftly when shocks materialise. This requires robust internal reporting and data aggregation capabilities. [ ] 26

Second, banks need a set of 'what if' scenarios related to relevant geopolitical events. Managers and boards should regularly assess the impact of such scenarios on risks and take proactive measures where needed.

Third, stress testing and scenario analyses are powerful tools for assessing exposure to geopolitical risks. This year's stress test conducted by the European Banking Authority was based on an adverse common geopolitical risk scenario showing higher losses, but also a better ability on the part of European banks to absorb these losses, compared with the stress test two years ago. Next year, we will ask the banks to conduct a 'reverse' stress test to assess which firm-specific geopolitical risk scenarios could severely affect their solvency.

Fourth, cyber and operational resilience should become a key priority in banks' risk management frameworks. Last year's cyber resilience stress test confirmed that banks are generally well prepared for the recovery phase after a successful cyberattack. However, it also revealed areas where more work needs to be done. Exposure to external providers can become a vulnerability in an adverse geopolitical risk scenario. In July this year, we published a guide outlining good practices related to the management of outsourcing risks, [ ]  such as a comprehensive risk assessment before using cloud services and taking business continuity measures. 27

## Creating space to address evolving risks

Both banks and supervisors need space to analyse and address evolving risks. They need the time to explore different scenarios, discuss preventive measures and act accordingly.

This is one of the reasons why, after creating a solid European architecture over the past decade, we are now significantly reforming our supervision, with three main objectives: [ ] 28

- enhancing efficiency by streamlining supervisory and decision-making processes and by removing undue complexities in interactions with banks; 
- improving effectiveness by communicating clearly to banks any major deficiencies that we have identified and by escalating supervisory action as needed; 
- strengthening the focus on relevant risks by continuously tailoring supervisory activities to bankspecific vulnerabilities in a proportionate manner. 

We are carrying out four initiatives to achieve these objectives:

- In 2024, we decided on a reform of the Supervisory Review and Evaluation Process (SREP), which will be fully implemented by 2026. 
- With our 'next-level supervision' project, launched in 2025, we are streamlining key supervisory activities and decision-making procedures, including on-site inspections. 
- A dedicated supervisory culture initiative ensures that the reforms are rolled out across European banking supervision in an integrated manner. 
- Finally, we are assessing the effectiveness of our supervision. 

You can find details about each of these initiatives on a dedicated web page. [ ] 29

Let me give concrete examples of how this creates the necessary space to address geopolitical risks.

We are using a risk tolerance framework to target bank-specific vulnerabilities. While all banks are exposed to geopolitical risks, their specific vulnerabilities can be very different. This is why we have had a risk tolerance framework in place for several years now. Rather than assessing every risk for every bank with the same intensity each year, we redirect our supervisory resources to where they are most needed.

We are improving our approach to internal model approvals. Informative internal models are essential for sound risk management, but their reliability can be impaired in a period of rapid structural change and external shocks. In the past, we have spent most of our resources on model approvals requested by banks. What is more, approving models can be a lengthy process. This has given us little time to focus on model investigations that can, for example, assess the fitness of models in a changing risk landscape. By speeding up the process for internal model approvals, we are creating the necessary space. But our efforts need to be complemented by a streamlining of the model landscape within the banks themselves.

We are making stress tests more efficient and effective. Stress tests are a key forward-looking tool for addressing the evolving nature of geopolitical risks. We have already reduced the number of submission cycles in the EU-wide stress test, and we see scope for further improvement ahead of the 2027 exercise. In parallel, we are increasing our use of agile, top-down stress testing to detect vulnerabilities arising from emerging risks while limiting costs for banks. Next year's reverse stress test on geopolitical risks deliberately builds on banks' internal capabilities and is therefore much less intense than the regular EU-

## wide stress tests. [ ] 30

We are streamlining reporting requirements. Reliable data are the foundation of effective risk management and supervision, yet the current reporting landscape is highly fragmented. National and European frameworks coexist, and the information collected often overlaps. This can hinder the effective management of geopolitical risks, as relevant information may not be available in a consistent and timely manner. Within banks, inadequate risk data aggregation systems can lead to decisions being based on poor information. Streamlining reporting is therefore a key objective of our reforms.

Across all of these initiatives, we are using suptech tools to automate routine processes and data handling. This allows supervisors to spend more time on forward-looking analysis and supervisory engagement with banks that is both critical and constructive, addressing complex areas such as geopolitical and structural risks.

## Conclusion

Geopolitical risks are heightened, and virtually all European banks are exposed - whether through direct financial ties, market spillovers or reliance on cross-border services. Banks' risk management and strategic planning need to respond, just as banks need to respond to the digitalisation of financial services.

As supervisors, we focus on banks' need for broad-based resilience. Resilience is about strong financials, but equally so about operational resilience, sound governance and good risk management. Resilience does not impair competitiveness. Strong capital and liquidity positions, sound governance and operational flexibility enable banks to continue providing essential services even under stress. These are key ingredients of successful, long-term business models.

At the same time, we are adapting our supervision to the new environment. Supervision is about promoting good practices and identifying vulnerabilities early on. It is about ensuring that banks address any vulnerabilities decisively, and escalating supervisory measures if necessary. By making supervision more efficient, effective and risk-based, we are creating space to focus our attention on evolving risks.

To be successful, we need strong international cooperation and coordination. I look forward to discussing with you how, together, we can manage the current complex environment. A stable global financial system is crucial for growth. It depends on shared regulatory standards and coordination among supervisors.

These guardrails must hold as geopolitical tensions rise. Fragmentation or a watering down of standards would leave banks more vulnerable just when they need broad-based resilience the most.

1.

I am grateful to Sharon Donnery, Sébastien Perez Duarte, Imre Jona Grimm, Björn Hilberg, Michael Olsen, Iskra Pavlova, Mikulas Prokop, Markas Puidokas, and John Roche for their support and comments in preparing this speech. All errors and inaccuracies are my own.

2.

According to the World Economic Forum's Global Risks Perception Survey 2024-2025 , 64% of respondents expect the global political order over the next decade to be 'multipolar or fragmented,' with middle and great powers contesting and enforcing regional rules and norms. See World Economic Forum (2025), , 15 January. Global Risks Report 2025

Sapir, A., Kirkegaard, J.F. and Zettelmeyer, J. (2025), ' ', Bruegel Report , Issue 01/25, September. Geopolitical shifts and their economic impacts on Europe: short-term risks, medium-term scenarios and policy choices

4. ECB (2025), ' ', Supervision Newsletter , ECB, 19 February. Outsourcing trends in the banking sector

5.

Buch, C. (2024) '

',

European banking supervision at ten: building a strong institution for a resilient future

Speech at the event celebrating the tenth anniversary of the Single Supervisory Mechanism, 6 November

6.

This number refers to total cross-border assets at the end of 2024.

7.

ECB (2025), , May. Financial Stability Review

8.

Buch, C. (2025), ' ', The Supervision Blog, ECB, 3 June. Hidden leverage and blind spots: addressing banks' exposures to private market funds

9.

In February 2025, ECB Banking Supervision published the results of its annual analysis of banks' outsourcing registers; see ECB (2025), ' ', Supervision Newsletter , ECB, 19 February. Outsourcing trends in the banking sector

10.

See Tuominen, A. (2025), ' ', The Supervision Blog , ECB, 17 January 2025; the ECB's banking supervision website, ' ' ; and Montagner, P. (2025), ' ', speech at the Frankfurt Banking Summit, Frankfurt am Main, 2 July. Operational resilience in the digital age What is cyber resilience? Information and communications technology resilience and reliability

11.

See the ECB's banking supervision website, . Addressing the impact of geopolitical risk

12.

See Box 2, ' ', ECB (2025), Financial Stability Review , May. What does the record price of gold tell us about risk perceptions in financial markets?

13.

ECB (2025), , May. Financial Stability Review

14.

International Monetary Fund (2025), Global Financial Stability Report: October 2025 - Shifting Ground beneath the Calm October, Chapter 1.

15.

Miranda-Agrippino, S. and Rey, H. (2021), ' ', Handbook of International Economics , Vol. V. The Global Financial Cycle

16.

See di Giovanni, J., Kalemli-Ozcan, S., Ulu, M.F. and Baskaya, Y.S. (2017), ' ,' NBER Working Paper , No 23149. For an analysis of the role of internal capital markets for bank lending, see Imbierowicz, B., Nagengast, A., Prieto, E. and Vogel, U. (2025), ' ', Deutsche Bundesbank Discussion Paper , 05/2025, 19 March. For recent surveys of academic work on European banks' exposure to geopolitical risk, see See Beck, T., Carletti, E., Bruno, B. (2025) , European Parliament, Economic Governance Support Unit (EGOV). International Spillovers and Local Credit Cycles Bank lending and firm internal capital markets following a deglobalization shock The impact of geopolitical shocks on banks' financial soundness in the Banking Union

17.

See Buch, C. (2024), ' Global rifts and financial shifts: supervising banks in an era of geopolitical

', keynote speech at the eighth European Systemic Risk Board annual conference on 'New

Frontiers in Macroprudential Policy', 26 September. instability

18.

For details, see ECB (2021), ' ', Economic Bulletin , Issue 5. The role of government for the non-financial corporate sector during the COVID-19 crisis

19.

These measures corresponded to around 1.9% of euro area GDP in 2022 and 1.8% in 2023. See ECB (2023), ' ', Economic Bulletin , Issue 2. Update on euro area fiscal policy responses to the energy crisis and high inflation

20.

See The Economist (2025), War, geopolitics, energy crisis: how the economy evades every disaster , 15 July.

21.

Buch, C. (2025), ' ', Hidden leverage and blind spots: addressing banks' exposures to private market funds

The Supervision Blog , ECB, 3 June.

22.

Schaaf, J. (2025), ' ', The ECB Blog , ECB, 28 July. From hype to hazard: what stablecoins mean for Europe

23.

ECB (2025), , 7 July. Governing Council statement on macroprudential policies

24.

Article 74(1) of the CRD: 'Institutions shall have robust governance arrangements, which include a clear organisational structure with well-defined, transparent and consistent lines of responsibility, [and] effective processes to identify, manage, monitor and report the risks they are or might be exposed to […].' This also includes concentration risk (Article 81 of the CRD).

25.

Article 97(2) of the CRD and Article 4(1)(f) of the SSM Regulation.

26.

See also ECB (2024), , May. Guide on effective risk data aggregation and risk reportin g

27.

The ECB published a collection of observed good practices in its Guide on outsourcing cloud services based on experiences from its ongoing and on-site supervision as well as feedback from its ongoing dialogue with the industry. See ECB (2025), ' ', press release , 16 July. ECB finalises Guide on outsourcing cloud services

28.

Buch, C. (2025), ' ', speech at the Goldman Sachs European Financials Conference, Berlin, 11 June. 29. Simplification without deregulation: European supervision, regulation and reporting in a changing environment

See the ECB's banking supervision website, . Making European supervision more efficient, effective and risk-focused

30.

This reverse stress test will be conducted in the context of banks' internal capital adequacy assessment processes.",Claudia Buch
https://www.bis.org/review/r251118f.htm,Frank Elderson: Resilient banks through effective supervision - a pillar of Europe's competitiveness,"Keynote speech by Mr Frank Elderson, Member of the Executive Board of the European Central Bank and Vice-Chair of the Supervisory Board of the European Central Bank, at the ECB Forum on Banking Supervision 2025, Frankfurt am Main, 14 November 2025.",2025-11-14 00:00:00,"SPEECH

## Resilient banks through effective supervision: a pillar of Europe's competitiveness

Keynote speech by Frank Elderson, Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB, at the ECB Forum on Banking Supervision 2025

Frankfurt, 14 November 2025

It is a pleasure to deliver the last keynote speech of this year's banking supervision forum. Over the past two days, we have discussed what resilience means in times of challenge, complexity and disruption and why resilience should be broad based. [ ]  As the Chair mentioned yesterday morning, broad-based resilience is about strong financials, but equally about operational resilience, sound governance and good risk management. 1

During this period of profound change, a debate on European competitiveness has emerged with full force. Many are asking what the key impediments and main enablers might be for a more competitive European economy. How can we tackle the former and improve the latter? And what role does the banking sector play in shaping the competitiveness of the real economy?

The good news is that over the past decade, much has already been achieved to make banks more resilient, and this resilience remains the indispensable foundation to support the real economy throughout the economic cycle. I will therefore start by illustrating this very welcome healthy state of the banks under our supervision.

At the same time, discussions about the complexities that are having an impact on European banks' competitiveness have gained prominence. Today I would like to highlight how we are tackling undue complexities in the regulatory and supervisory framework in order to help banks operate efficiently within a predictable, proportionate and risk-based framework.

I will then illustrate how banks' competitiveness crucially hinges on structural and macroeconomic factors that will require a concerted effort from a wide range of stakeholders. In this way, Europe's banking system can be both innovative and strong, competitive and resilient. So, let me first start by looking at the resilience I mentioned at the start.

## Bank resilience is crucial to withstand shocks and support the economy at all times

Resilient banks are a vital precondition for a thriving real economy. Why is this so?

Well-capitalised and resilient banks are better placed to channel funds from savers to borrowers to enable businesses to innovate, households to buy homes and governments to finance public goods. Banks must therefore be well regulated and supervised. [ ] 2

European banking supervision was established in 2014 in response to the global financial crisis and subsequent European sovereign debt crisis. Now, almost to the day 11 years later, banks under our supervision are significantly stronger. Thanks to regulatory guardrails, rigorous supervision and continued improvements in banks' risk management, the banking sector is now in a much better position to fulfil its essential function of supporting the economy at all times.

Today's euro area banks have solid capitalisation levels, with a Common Equity Tier 1 (CET1) capital ratio of 16% compared with 12.7% a decade ago. [ ] 3

Chart 1 Capital adequacy



Source: ECB supervisory banking statistics.

Banks have robust liquidity positions well above regulatory requirements [ ]  and the asset quality problems that plagued many significant banks across Europe a decade ago have been successfully tackled. In fact today the non-performing loans ratio stands at 1.9%, less than a third of the level observed ten years ago. 4

[

5

]

## Chart 2

## Asset quality



Source: ECB supervisory banking statistics.

Moreover, euro area banks' profitability has improved, with their return on equity now standing at 10.1%.

Chart 3 Euro area banks' return on equity



Source: ECB supervisory banking statistics.

Encouragingly, stronger profitability is increasingly reflected in the higher valuations investors attribute to euro area banks, as shown by a price-to-book value of over 1.

Chart 4 Euro area median price-to-book ratio for publicly listed significant institutions (daily data)



Source: ECB calculations based on Bloomberg data

In addition to financial resilience, euro area banks have also improved their risk management and governance [ ] , and boosted their operational resilience [ ] . 6 7

Thanks to broad-based resilience banks have been an anchor of stability in undeniably challenging times. In the past five years alone, we have dealt with the worst pandemic since the 1920s, the most devastating war on European soil since the 1940s, and the biggest energy shock and rise in inflation since the 1970s. Moreover, we are now seeing tariff levels and 'beggar-thy-neighbour' trade policies reminiscent of the 1930s and a resurgence of great power rivalry similar to the Cold War of the 1950s, all while the climate and nature crises are getting worse.

Against this backdrop of change and complexity, the euro area banking system has fared well. Banks remained resilient and did not propagate shocks.. And this is no coincidence: well-capitalised and resilient banks do not excessively retreat in downturns, propagating adverse dynamics; instead, they continue to support the economy. [ ]  Think about what happened during the pandemic: banks continued to supply credit to struggling businesses and households, even in the direst of circumstances. Better capitalisation therefore makes the banking sector more resilient and better able to fund the real economy in good as well as bad times. [ ]  Fiscal and monetary support to households and firms clearly helped to shield the banks from higher credit losses. 8 9

So resilient banks yield a double dividend: not only are they safer and hence better able to withstand shocks, but they are also better able to continue playing their vital role of supporting the economy at all times. In that sense, resilient banks play an important role in contributing to competitiveness, especially in a bank-based economy like Europe.

Resilience must not, however, lead to complacency in an environment that continues to be complex and, in certain aspects, is becoming increasingly challenging. Geopolitical tensions are not expected to subside, ever more frequent and severe cyberattacks are here to stay, and the substantial growth of nonbank financial institutions, including their interconnectedness with the banking sector, demand our continued vigilance. [ ] 10

## Reducing undue complexities, overlaps and costs that may hinder competitiveness

At the same time we hear voices loud and clear about undue complexities in the regulatory and supervisory framework that may negatively impact banks' competitiveness.

Looking at how the regulatory and supervisory framework evolved since the start of the banking union there is undoubtedly an increase in size but also complexity which is shaped by several factors.

A root cause of this complexity lies in the persistent fragmentation of rules at national level. Many facets of the current prudential framework, for example, do not actually consist of a single European regulation but of a patchwork of nationally transposed directives that create complexity. In addition, foundational elements of the prudential framework, such as accounting standards, securities and insolvency laws, continue to differ across Member States, which also adds unnecessary complexity.

Another root cause of this increasing complexity is that regulation and supervision have developed in lockstep with the complexity of the external environment in which the banks under our supervision operate. For example, the framework has evolved to make sure banks are operationally resilient, for instance, to ever more frequent and severe cyberattacks and operational failures. [ ] And while this was very much warranted in light of a more complex external risk landscape, it has also led to regulation growing in size. 11

At the same time there is also a need to identify areas of unwarranted complexity, overlaps and unnecessarily prescriptive elements that may have built up over the past decade and which can and must be simplified.

Against this backdrop, we welcome the debate on simplification. The ECB's Governing Council has created a High-Level Task Force on Simplification to develop proposals to simplify the European prudential regulatory, supervisory and reporting framework, while still maintaining resilience. The Task Force plans to deliver its proposals for simplification to the Governing Council by the end of the year, after which they will be presented to the European Commission.

As far as European banking supervision is concerned, we have been taking action for quite a few years now. Let me outline some of the initiatives that are already in full swing to make supervision more efficient, more transparent and more risk-based, without sacrificing resilience. This makes sure that we keep banks resilient in an efficient and effective manner, thereby reducing cost factors that may hamper competitiveness. We are proving that simplification and resilience are not opposing forces - they can go very well hand in hand.

The comprehensive reform of the Supervisory Review and Evaluation Process (SREP) that we embarked upon in 2022 is at the heart of our simplification initiatives. We have embraced risk-based supervision through initiatives like the risk tolerance framework and a multi-year approach, which allow our supervisory teams to focus more effectively on the underlying risks that matter the most. Practically speaking, this means that we are not looking every year at every risk in every bank.

The SREP reform is already delivering results: SREP decisions have become shorter and more focused, with SREP measures decreasing from 700 in 2021 to below 400 in 2025, with a stronger emphasis on addressing severe findings. [ ]  Moreover, issuing decisions by the end of October rather than the end of December means that key findings can be communicated more promptly. We are also enhancing our supervisory planning by improving the alignment of different supervisory activities, which helps banks to avoid duplicating their efforts. 12

In addition, we are reducing undue complexities and prescriptiveness by streamlining our supervisory processes through our 'next-level supervision' project, which covers areas such as decision-making processes, internal models, stress testing, capital-related decisions, reporting and on-site inspections. [ ] One concrete example is fit and proper assessments, where, thanks to the help of machine learning and technology, we have reduced processing times so that banks receive faster responses. [ ] 13 14

Another example is a , which was tested in the first half of 2025. This new process will cut approval times from three months to just ten working days. new fast-track process for simple securitisations

An additional concrete simplification initiative is our drive to reduce reporting costs by establishing an integrated reporting framework that is accessible to statistical, prudential and resolution authorities.

We are also further embracing proportionality, which, although already embedded in the European regulatory and supervisory system, can be expanded further. Currently, , which are banks that meet clear criteria for size, simplicity and limited trading activity, already benefit from lighter reporting templates and simplified liquidity and market risk standards, as well as small and non-complex institutions (SNCIs)

streamlined recovery and resolution planning. [ ]  In practice, this means they are only required to report up to 30% of the data that large banks must report. They also benefit from less frequent on-site inspections. Therefore the SNCI regime seems the natural starting point to further enhance proportionality. For instance, one could consider a more systematic application of this regime, as well as an increased scope. These steps could be taken while maintaining the Single Rulebook, which ensures the risk-based nature of the prudential framework is retained for all banks. This is important, because proportionality should not be mistaken for simply reducing prudential standards for all smaller banks, irrespective of the risks this would generate. Instead, we should focus our attention on initiatives that reduce undue complexity, prescriptiveness and cost factors, without making banks less safe or causing them to lose track of the underlying risks. 15

In addition, while maintaining the current level of financial resilience among supervised banks, there is room to increase the predictability of how our supervisory assessments feed through to banks' capital requirements. This enhanced predictability would help banks' capital planning. Moreover, the risk-based capital stack in the EU is admittedly complex. With up to nine different layers of requirements and buffers, each serving a specific purpose that needs to be met with going and gone-concern funding instruments, the system can be difficult to navigate and, at times, create unintended interactions. [ ]  Thus there seems to be room to make the framework simpler and more transparent while maintaining resilience. 16

## Banking sector competitiveness is shaped by multiple factors

Reducing undue complexities in regulation, supervision and reporting that may hamper banks' competitiveness is essential. However the ability of euro area banks to compete with other actors especially their international peers - is primarily shaped by a broad range of other factors, many of which are structural as well as macroeconomic in nature.

This becomes particularly clear when looking more closely at the profitability gap between euro area and US banks. [ ]  European banks, for instance, have a smaller home market and lower IT investments. US banks are more concentrated, with the largest ones operating across the entire country, which allows them to exert more pricing power and reap the benefits of economies of scale. European banks, on the other hand, do not have access to the same benefits because the Single Market is still fragmented. 17

Moreover, business volumes and profitability crucially depend on a dynamic real economy. As the Draghi report [ ]  convincingly shows, real GDP growth in the EU has been subdued in comparison with US growth over the last decade. And the robust economic growth in the United States, partly fuelled by its more advanced capital markets, has provided substantial benefits to banks. Thus, improvements in 18

European banks' competitiveness crucially hinge on revitalising growth in the European economy. [ ] 19

Another factor shaping banks' competitiveness is operating efficiency. Although euro area banks' cost/income ratio has improved from 66% to 54% between 2020 and 2025, since 2021 this has been entirely driven by increasing revenues most notably net interest income, showing that there is still room for improvement when it comes to banks' cost base.

Chart 5

## Drivers of the change in euro area banks' cost/income ratio



Source: ECB supervisory reporting.

Notes: The data show the year-on-year changes in the cost/income ratio (operating expenses as a share of net total operating income), along with the individual contributions of the numerator ('cost effect') and denominator ('revenue effect') to these changes. Lower values indicate an improvement in cost efficiency.

## Boosting bank competitiveness by deepening integration and revitalising growth

Considering the myriad factors shaping European banks' competitiveness and the fact that many of these factors have structural and macroeconomic root causes, real progress requires a concerted effort by a wide range of stakeholders. Let me outline some of the potential avenues that can sustainably move the dial when it comes to banks' competitiveness.

One promising path for euro area banks to improve their operating efficiency is to enable them to reap the benefits of economies of scale by consolidating the highly fragmented sector. Larger, pan-European banks would also be better equipped to diversify risks, invest in digital transformation and compete in highermargin, fee-based business areas. Such developments would not only strengthen banks' competitiveness but also enable them to operate more effectively in the most profitable segments of the financial market, improve their profitability and optimise their liquidity management at the group level. From a supervisory perspective, we have repeatedly stressed that we see the benefits of cross-border mergers and have been crystal clear that we will not obstruct consolidation efforts, provided that the limitative set of regulatory criteria are met. These criteria essentially ensure that a merger results in the formation of a safe and sound bank.

At the same time, the ability of euro area banks to build pan-European business models and scale up their activity is additionally constrained by the fact that the banking union is incomplete. Completing it, including by establishing a European deposit insurance scheme, would help eliminate barriers that still hinder market integration and ensure that euro area banks can scale up and diversify geographically more easily.

Some financial instruments can also play a meaningful role in transferring risks away from credit institutions so that they are better positioned to meet additional lending demands from the real economy, while creating opportunities for financial market investors. As noted in the recently published , the proposed regulations are a step in the right direction to make further progress at EU level to achieve economies of scale in the development of securitisation products, facilitate the expansion of the market, and support the integration of EU markets, all of which would broadly support the savings and investments union. ECB opinion on the securitisation package

However, further integrating banking markets alone is no silver bullet for the competitiveness challenge banks are facing.

Looking at the real economy, the Draghi report shows that the widening GDP gap between the EU and the United States is primarily driven by weaker productivity growth in Europe. And when it comes to productivity, economists largely agree that one key reason for the gap is that Europe is adopting digital technologies more slowly and is unable to fully capture the efficiency gains of the digital transformation.

Many firms remain behind the technological frontier. [ ]  In order to catch up, these firms need access to risk capital and to investors with networks and experience - which is why finalising the savings and investments union is vitally important for more efficient and more integrated capital markets. 20

Beyond capital market integration, the broader lack of a true Single Market further amplifies Europe's competitiveness challenge. As I mentioned in a speech earlier this year [ ] ,internal barriers to the Single Market are, on average, equivalent to a tariff of 44% on goods and a staggering 110% on services. And soberingly, 60% of barriers to trade in services are still the same as they were 20 years ago. So in order to boost productivity, unlock competitiveness and promote simplification, a time-limited roadmap to complete the Single Market is more important than ever. In areas where full harmonisation is currently politically or technically unfeasible, alternative approaches, such as introducing a '28th regime', could provide a practical and effective interim step. 21

## Conclusion

Let me conclude.

Europe stands at an important crossroads: to become a bulwark against external threats, ensure our strategic autonomy, and remain masters of our own destiny with good living standards for all Europeans, our economic prosperity is more important than ever.

And to safeguard our prosperity, we must bolster our competitiveness to ensure Europe is a place where innovators, creators and doers seek opportunity in the world's second largest market. And if we are to succeed, a concerted effort from a wide range of stakeholders is essential.

Resilient banks have an important role to play. Banks that are innovative, strong and at the service of firms and citizens at all times, are an essential pillar of a competitive real economy.

And as supervisors, our single most important contribution is to make sure that banks continue to fulfil this role. Our job description is clear: maintain the public good that is financial stability. Because history has taught us - often in the hardest way during crises - that without financial stability, growth falters, progress fades, potential flounders, investment stalls, innovation slows and confidence slips away. But with the solid bedrock of financial stability, there is no ceiling to the innovation, progress and prosperity we can unleash. Thank you for your attention.

1.

Buch, C. (2025), , keynote speech at the ECB Forum on Banking Supervision, Frankfurt, 13 November. 2. 'Global banking, global risks: how banks and supervisors can navigate a complex environment''

The traditional microprudential regulation of banks operates on a well-established logic. Banks finance themselves with high leverage, partly through insured deposits, which play a crucial role in preventing destabilising bank runs (see Diamond, D. W., &amp; Dybvig, P. H. (1983). Bank runs, deposit insurance, and liquidity. Journal of political economy , 91 (3), 401-419)). However, high leverage and deposit insurance also creates moral hazard: it incentivises bank managers to take on excessive risks, knowing that potential losses would be absorbed by creditors and taxpayers rather than the bank itself. The primary objective of capital regulation is to counteract this moral hazard by compelling banks to internalise potential losses. Another convincing explanation of the rationale of prudential supervision was outlined in the seminal book by Dewatripont, M. and Tirole, J. (1994), The Prudential Regulation of Banks , which states that supervisors' task is to monitor banks to ensure they are safe and sound on behalf of depositors, as the latter are too small, dispersed and have neither the time nor the expertise required to understand the risks a bank is taking. That's why supervisory authorities are assigned the task of ensuring financial stability. Moreover, after the great financial crisis, a credible and effective resolution framework to resolve failing banks in an orderly manner has been a key innovation to increase trust, protect taxpayers' money and preserve financial stability.

3.

Data on European banks refer to significant institutions under the direct supervision of the ECB. Please see the latest as well as the latest available that refer to the list of supervised entities supervisory data second quarter of 2025.

4.

As of the second quarter of 2025, the liquidity coverage ratio stood at 157.8% and the net stable funding ratio at 126.7%.

- 5.

In the second quarter of 2015, the comparable number was 7.5%. These ratios include cash balances at central banks and other demand deposits. The NPL ratio excluding cash balances at central banks and other demand deposits stood at 2.2% as of the second quarter of 2025.

6.

Elderson, F. (2024), ' ', keynote speech at the '10 Years of SSM - Looking back and looking forward' conference organised by the European Banking Institute and the Hessisches Ministerium für Wissenschaft und Kunst, Frankfurt am Main, 4 November; Elderson, F. (2024), ' ', speech at the joint European Banking Authority and European Central Bank international conference on 'Addressing supervisory challenges through enhanced collaboration', Frankfurt am Main, 4 September; and Tuominen, A. (2025), ' ', The Supervision Blog , ECB, 17 January. The first decade of European supervision: taking stock and looking ahead The art of bending without breaking - banking on operational resilience Operational resilience in the digital age

7.

For why a broader view on resilience, including governance and risk culture, operational resilience and structural risk drivers are not peripheral issues but are at the core of prudential supervision, see Elderson, F. (2025), ' ', keynote speech at the 24th Annual International Conference on Policy Challenges for the Financial Sector, Washington DC, 12 June; and Elderson, F. (2025), , keynote speech at the Morgan Stanley European Financials Conference, London, 19 March. What good supervision looks like 'Resilience offers a competitive advantage, especially in uncertain times'

8. Boissey, F. et al. (2019), ' ', BIS Quarterly Review , 5 March; Budnik, K., Dimitrov, I., Gross, J., Lampe, M. and Volk, M. (2021), ' ', Macroprudential Bulletin , No 14, ECB, July. See also Siciliani, P., Eccles, P., Netto, F., Vitello, E., Sivanathan, V. and van Hasselt, I. (2023), , Bank of England Prudential Regulation Authority, 11 September. On the usability of buffers for bank lending, see Couaillier, C. et al. (2021), ' ', Financial Stability Impact of financial regulations: insights from an online repository of studies Macroeconomic impact of Basel III finalisation on the euro area Paper 2: The links between prudential regulation, competitiveness and growth Bank capital buffers and lending in the euro area during the pandemic

Review, November; and Couaillier, C. et al. (2022), ' ', Working Paper Series, No 2644, ECB, February. Caution: do not cross! Capital buffers and lending in Covid-19 times

9.

See Berg, J., Boivin, N. and Geeroms, H. (2025), ' ', Working Papers , Issue 4, Bruegel; and Behn, M. and Reghezza, A. (2025), ' ', Occasional Paper Series , No 376, ECB. The quickly fading memory of why and when bank capital is important Capital requirements: a pillar or a burden for bank competitiveness?

10.

In relation to the significant growth of non-bank financial institutions that now accounts for over half of financial sector assets in the euro area, see Buch, C. (2025): ' ', The Supervision Blog , ECB, 3 June; and Montagner, P. (2025), ' ', contribution for Eurofi Magazine, 17 September. Hidden leverage and blind spots: addressing banks' exposures to private market funds Non-bank financial institutions: understanding transmission channels and regulatory challenges

11.

For example, the number of significant cyber incidents reported to the ECB more than doubled between 2022 and 2024.

12.

Banks will be informed of their SREP outcome, key concerns and requirements/recommendations in a concise letter, with the main text expected to be around ten pages on average.

13.

Buch, C. (2025), ' ', speech at the Goldman Sachs European Financials Conference 2025, Berlin, 11 June; ECB, ' '; Donnery, S. (2025), ' ', The Supervision Blog , ECB, 8 September. Simplification without deregulation: European supervision, regulation and reporting in a changing environment Making European supervision more efficient, effective and risk-focused As simple as possible, but not simpler

14.

For example, we reduced the average processing time from 109 days in 2023 to 97 days in 2024, and to as little as 61 days for non-complex cases, meaning that we can dedicate more time and resources to complex cases in line with our risk-based approach. For certain appointments, such as renewals of mandates, we will streamline the assessment process further.

15.

Today, around 1,400 banks, or more than 70% of less significant institutions, are also SNCIs. 16.

Buch, C. (2025), ' ', speech at the Goldman Sachs European Financials Conference 2025, Berlin, 11 June. Simplification without deregulation: European supervision, regulation and reporting in a changing environment

17.

Di Vito, L., Martín Fuentes, N. and Matos Leite, J. (2023), ' ', Occasional Paper Series , No 327, ECB, August. Understanding the profitability gap between euro area and US global systemically important banks

18.

Draghi, M. (2024), , European Commission, September. The future of European competitiveness

19.

Donnery, S. (2025), ' ', speech at the SSM Senior Forum organised by A&amp;O Shearman, Königstein im Taunus, 25 June. Less regulation, more growth? It's not that simple

20.

Schnabel, I. (2024), ' ', inaugural lecture of the EMU Lab at the European University Institute, Florence, 16 February. From laggard to leader? Closing the euro area's technology gap

21.

Elderson, F. (2025), ' ' , keynote speech at the SRB Legal Conference 2025, Brussels, 18 June. Europe at a crossroads: it is high time to complete the Single Market",Frank Elderson
https://www.bis.org/review/r251113c.htm,Priscilla Muthoora Thakoor: Current economic conditions and outlook,"Statement by Dr Priscilla Muthoora Thakoor, Governor of the Bank of Mauritius, at the post Monetary Policy Committee (MPC) press conference, Port Louis, 12 November 2025.",2025-11-12 00:00:00,"## Priscilla Muthoora Thakoor: Current economic conditions and outlook

Statement by Dr Priscilla Muthoora Thakoor, Governor of the Bank of Mauritius, at  the post Monetary Policy Committee (MPC) press conference, Port Louis, 12 November 2025.

* * *

Ladies and gentlemen, members of the media, good afternoon and welcome to the Bank of Mauritius.

I am very pleased to address you in my first press conference to brief you about the meeting of Monetary Policy Committee (MPC) which took place earlier today.

I take this opportunity to reiterate my dedication to fulfilling the Bank's mandate of maintaining price stability and promoting balanced economic development. changing economic conditions. It will continue to be guided by comprehensive analysis

The Bank's monetary policy will remain proactive, data-driven, and adaptive to of both global and domestic economic and financial trends. It will also be grounded in principles of transparency and accountability.

At today's 76 th  MPC meeting, the Committee reviewed recent economic and financial developments and assessed their implications for the Mauritian economy. I shall now provide an overview of the key elements discussed during our policy deliberations.

## International Economic Developments, Outlook, and Risks

Let me start with the discussion on recent international economic developments, the outlook, and risks at the global level.

The global economy has so far shown signs of resilience. The anticipated disruptions from trade tariffs that clouded the outlook earlier this year have been mitigated as importers have built up their stock of goods ahead of expected tariff deadlines.

We also see a relative stabilisation in the global trade environment , reflecting a deescalation of the US-China stand-off and bilateral trade negotiations between the US and a number of countries.

Major international institutions, notably the IMF, WTO and OECD, have revised upwards their global growth projection for 2025. This upgrade reflects a combination of factors, including milder-than-expected impact of trade tensions, fiscal stimulus in major economies like Europe and China and a boom in AI-driven investment that has supported productivity and economic activity.

Inflation dynamics across main trading partners have been mixed. Some advanced economies continue to face inflationary pressures, driven by the persistence of services inflation and growing signs of pass-through from the tariff measures to

prices. Among emerging economies, China experienced deflation for the second successive month in September 2025 while inflation in India dropped to a low level on the back of sharp declines in food prices.

## Several central banks have paused or reduced the pace of their easing cycles.

They are instead adopting a prudent wait-and-see stance in light of the prevailing uncertain economic environment. Both the European Central Bank and the Bank of England have kept their policy rates unchanged at their respective meetings in October and November 2025. The US Fed, on its part, opted to lower its policy rate in October 2025. The Fed noted uncertainty regarding the economic outlook, acknowledging a weakening labour market. However, it underscored the recent rise in inflation and indicated that any future rate reductions would be contingent on new data, ongoing economic developments, and an assessment of prevailing risks.

Risks to the global growth outlook remain tilted to the downside. An increase in trade policy uncertainty could weigh on investment and dampen growth. On the labour market side, a negative supply shock from tighter immigration policies could reduce the potential output of economies that are highly dependent on specific skills. These downside risks to growth could be mitigated by a reduction in trade policy uncertainty and tariffs through bilateral agreements. Increased use of AI by businesses and reskilling of employees could boost output by increasing productivity growth.

Risks to inflation are skewed to the upside. A rise in bilateral tariff rates could feed into goods prices and cause disruptions in supply chains. An escalation in geopolitical tensions in oil-producing regions could threaten global energy supply, pushing up prices. A continued boom in the technological sector could raise demand pressures, leading to inflationary risks. On the other hand, a fall in crude oil prices resulting from increased production quota from the OPEC+ could help cushion inflationary pressures.

## Domestic Economic Developments, Outlook and Risks

Ladies and Gentlemen, I shall now turn to domestic economic developments and the outlook and risks to our economy.

The domestic economy grew by 3.6 per cent in 2025Q2. This performance was mainly driven three sectors, namely ', 'Financial and insurance activities and '. The 'Accommodation and food service activities' 'Agriculture, forestry and fishing tourism sector experienced a notable rebound in 2025Q2, reflecting a recovery in tourist arrivals following an exceptionally subdued first quarter. Economic activity was partly dragged down by contractions in the and 'Construction' 'Public administration and ' sectors. On the demand side, consumption expenditure remained the principal defence contributor to economic growth in 2025Q2.

Real GDP growth for 2025 is forecast at 3.1 per cent, reflecting the improved prospects for the sector. 'Accommodation and food service activities' Tourist arrivals are expected at around 1,425,000 for the year, with tourism earnings reaching record levels of around Rs100 billion compared to Rs93.6 billion in 2024. The overall economic expansion is likely to be constrained by lingering weaknesses in the and sectors. 'Construction' 'Manufacturing'

Goods exports face several challenges which contribute to a relatively large current account deficit . As a ratio to GDP, the current account deficit widened to 8.6 per cent in 2025Q2, from 6.1 per cent in 2024Q2. This was mainly due to higher deficits on the goods and secondary income accounts that offset a higher surplus in the services account.

The current account deficit is forecast to widen slightly from 6.4 per cent in 2024 to 6.5 per cent in 2025 . Tourism and financial services are expected to contribute positively to exports of services. However, the overall external performance is marred by the continuing high goods imports, as well as ongoing uncertainty in the manufacturing sector linked to the renewal of the AGOA, the impact of US tariffs on Mauritian products and potential repercussions from the political turmoil in Madagascar.

On a positive note, the Mauritius IFC is projected to continue to attract adequate financial flows in 2025 . Global cross-border investment activities remain resilient despite uncertainty surrounding the international trade landscape. An overall balance of payments surplus of Rs15.0 billion is forecast for 2025.

Looking ahead to 2026, growth is expected to remain stable at around 3 per cent , supported by the ' sector. Activity in Accommodation and food service activities' and 'Financial and insurance activities', 'Wholesale and retail trade' 'Information and are also expected to remain robust, continuing to provide impetus to communication' overall growth.

The growth outlook for Mauritius remains subject to downside risks. On the external front, persistent uncertainties regarding trade tariffs between the US and other major economies may undermine global economic growth and negatively affect the domestic export sector. Furthermore, political developments in some of our key economic and trading partners could restrict external demand and adversely influence overall growth. On the domestic front, structural weaknesses within the manufacturing sector, alongside subdued activity in construction, may continue to pose challenges to economic expansion.

Regarding inflation, we note that headline inflation maintained an upward trajectory in October 2025. This was largely driven by the division due to 'Transport' higher taxes on cars, followed by , and 'Insurance and financial services'  'Health' . However, year-on-year inflation eased, 'Restauration and accommodation services primarily due to government subsidies on essential food items. Additionally, core inflation measures picked up, driven mainly by rising services costs.

Barring no major supply shock, headline inflation for 2025 is forecast at around 3.7 per cent, slightly down from the previous projection of 4.0 per cent. This new forecast is supported by favourable global commodity prices, receding inflation in key trading partners and the recent decline in domestic petroleum prices. Looking ahead to 2026, inflation is expected to converge towards the mid-point of the Bank's target range, settling at around 3.6 per cent on the back of easing global inflation and declining international oil and food prices.

The inflation outlook for Mauritius remains exposed to upside risks, primarily originating from external sources. These include additional tariffs by the US and an

escalation of geopolitical tensions that could disrupt global supply chains and further exacerbate global inflationary pressures. Due to the nation's considerable reliance on imported goods, the potential for imported inflation continues to be a significant concern. Additionally, the increasing frequency of climate-related hazards introduces unpredictable supply-side shocks, which could drive up food prices.

## Money Market

I will now elaborate on the implementation of monetary policy.

Under the new flexible inflation targeting regime  adopted in 2023, the Bank continued to issue its own securities to mop up excess liquidity, mainly at the shorter end of the yield curve. Since the last MPC meeting in August 2025, the Bank issued BoM Bills for a total amount of Rs34 billion and redeemed an amount of Rs40.5 billion. The amount of outstanding BoM securities issued for liquidity management purposes stood at Rs65.2 billion as of 10 November 2025.

The overnight deposit facility is another monetary policy instrument and offers banks the necessary flexibility to manage their excess rupee liquidity. An average amount of Rs55 billion was placed on overnight deposit with the Bank at the rate of 3.00 per cent during the period 13 August to 10 November 2025.

Interbank market activity remained subdued, with the volume of overnight interbank transactions staying low, albeit a pick up noted as from mid-October. Between 13 August and 10 November 2025, the overnight interbank rate evolved within the interest rate corridor of 3.00 per cent to 6.00 per cent, albeit closer to the lower bound.

## Foreign Exchange Market

Flows within the domestic FX market continued to increase . Between 13 August and 10 November 2025, FX turnover stood at US$3.4 billion - of which FX inflows were US$1.6 billion and FX outflows were US$1.8 billion - representing an increase of US$296 million compared to the corresponding period of 2024. Most inflows originated from the financial and accommodation sectors while outflows were to the wholesale and retail trade sector.

Since the last MPC meeting, the Bank intervened to sell US$100 million on the market, specifically targeting importers of essential goods and SMEs . Total FX interventions by the Bank since the beginning of the year amounted to US$190 million, compared to US$335 million over the same period in 2024.

The rupee continues to reflect key economic fundamentals of demand and supply, as well as international currency movements. Between 13 August and 10 November 2025, the rupee exchange rate depreciated by 0.9 per cent against the US dollar but appreciated by 1.7 per cent against the Pound sterling and 0.1 per cent against the euro.

## Financial Stability and External Vulnerability

Let me say a few words about financial stability and external vulnerability.

Risks to financial stability remain moderate. Bank credit to the private sector grew at an annual rate of 11.6 per cent in September 2025, backed by household and corporate credit growth of 11.9 per cent and 11.3 per cent, respectively. Risks are well contained in the corporate sector, though vulnerabilities in the household sector edged up due to increasing leverage. Overall, banks have managed risks prudently and the latest stress tests indicate that the banking sector has robust capital and liquidity buffers to absorb plausible shocks going forward.

The Gross Official International Reserves (GOIR) of the country remain broadly adequate as a buffer against potential external shocks. Gross Official International Reserves declined marginally from Rs438.4 billion (US$9.6 billion) as at endSeptember 2025 to Rs437.3 billion (US$9.5 billion) as at end-October 2025. This represented 13.0 months of import cover (based on the import bill for calendar year 2024).

## MPC Decision

Ladies and Gentlemen, I will now announce the decision of the MPC.

The MPC deliberated that, in light of prevailing economic conditions, a cautious wait-and-see approach is appropriate. Incoming data show an easing of wage pressures and inflation stabilising near the medium-term target, allowing the current policy stance to be maintained.

This policy stance also takes into account the high level of uncertainty over All of these factors global growth, trade tensions and global commodity prices. exert a significant influence on domestic inflation and growth. By keeping rates unchanged, the Bank allows gradual adjustments, avoids sending mixed signals, and retains flexibility to respond to unforeseen shocks. This approach enhances policy credibility and supports the long-term goal of price stability.

As a result, the MPC unanimously decided to keep the Key Rate unchanged at 4.50 per cent per annum at its meeting today.

The MPC will continue to closely monitor economic development and stands ready to meet in between its regular meetings and take appropriate actions to achieve its dual mandate of maintaining price stability and of promoting orderly and balanced economic development.

The calendar of meetings for 2026 is set as follows: 11 February, 20 May, 12 August . and 11 November

Ladies and Gentlemen, I thank you for your attention. I also seize this opportunity to send you and your family my very best wishes for the New Year 2026.

I shall be happy to answer any question that you may have on monetary policy.",Dr Priscilla Muthoora Thakoor
https://www.bis.org/review/r251112k.htm,Gent Sejko: Welcome speech - SEE Economic Research Workshop,"Welcome speech by Mr Gent Sejko, Governor of the Bank of Albania, at the 19th South-Eastern European Economic Research Workshop, Tirana, 6 November 2025.",2025-11-06 00:00:00,"## Gent Sejko: Welcome speech - SEE Economic Research Workshop

Welcome speech by Mr Gent Sejko, Governor of the Bank of Albania, at the 19th SouthEastern European Economic Research Workshop, Tirana, 6 November 2025.

* * *

Distinguished guests,

Dear participants and colleagues,

It is a special pleasure to welcome you to the 19th South-Eastern European Economic Research Workshop, a forum that for years has served as an important discussion platform for sharing knowledge and experiences, as well as for fostering cooperation among experts and professionals from the central banks of the region and beyond.

Allow me first and foremost to express my sincere gratitude to the three keynote speakers of this event, Mr. Domenico Giannone (from Johns Hopkins University), Mr. Carlo Altavilla (from the European Central Bank) and Mr. Michele Modugno Danilo (from Board of Governors of the Federal Reserve System). Their presence and contribution provide valuable added insight to our discussions, helping us enhance and deepen our analytical perspective on economic and monetary developments. On behalf of the Bank of Albania, I express my warmest thanks and deepest appreciation to you.

I would also like to extend my gratitude to all speakers and participants, to our national and international partners, and to the colleagues at the Bank of Albania-particularly those in the Research Department-for their valuable contribution to promoting scientific research within our institution and beyond.

I am privileged to open this event dedicated to scientific research-a crucial pillar of our daily work that helps us understand macroeconomic and financial developments and address economic challenges at both the national and global levels.

We live in a time of increasingly rapid change, marked by numerous political and geostrategic uncertainties. The rapid technological innovation, accompanied by the wider use of artificial intelligence, is reshaping the way economies and financial markets function. On the other hand, unfavourable demographic trends and structural changes in the labour market are making the economic environment more complex. All these trends are triggering new challenges and complex innovations for financial systems, as well as for monetary and economic policies, which call for in-depth analysis, a better understanding of cross-sectoral interactions, and decision-making grounded in evidence and scientific rigor.

For these reasons, the Bank of Albania has invested in building a sustainable research ecosystem, where macroeconomic analyses support not only monetary and macroprudential policies, but also the development of strategies and the formulation of long-term policies. We believe that research is not a luxury but an indispensability. A policy can only be effective if it is built on trust, transparency, and knowledge-three pillars supported by high-quality and independent research.

I am pleased to note that the topics to be discussed in this workshop are diverse and address many of the challenges I mentioned earlier: from global risks and public debt, to the dynamics of inflation and exchange rates, the labour and housing markets, structural changes in the economy, digital currencies, as well as the effects of climate change and green finance. These are issues of strategic importance. No institution can face alone the complexity of studying and analysing them. Therefore, collaboration with universities, research institutions, international organisations and other central banks is crucial. In this context, organisation of such events like this workshop provides a valuable and indispensable platform to strengthen collaboration and share the knowhow effectively.

## Dear participants,

This year's meeting comes at a special moment for the Bank of Albania-its 100th anniversary. This milestone serves both to reflect on our institutional journey over the past century and to look forward-with vision and determination-to address the challenges of the future, strengthening price, financial, and macroeconomic stability, as well as broadening the scientific research that underpins institutional decision-making and supports our aspiration for integration into the European Union.

The macroeconomic data in the country indicate a positive trend of economic growth, accompanied by a favourable climate for long-term economic development, supported by monetary and financial stability. Consumer price inflation has remained at low and contained levels, monetary and financial conditions are adequate and banking systems' balance sheets are sound, serving as a key pillar for the macroeconomic stability and an active partner in achieving the country's objectives of progress.  However, as I mentioned at the beginning, the Albanian economy, as well as the global economy, are facing heightened uncertainties and a series of new challenges that require a strategic approach and flexibility in macroeconomic policies.

Global uncertainties arising from geopolitical tensions, disruptions in supply chains, and volatility in international energy and food prices continue to shape expectations across economic agents and affect the country's trade dynamics. At the same time, the transition toward a greener and more digital economy requires substantial public and private investments, higher productivity, and adaptation of the production structure. On the other hand, demographic developments - such as population ageing and continued labour force migration - are constraining the supply of human resources, thereby weighing on the economy's long-term growth potential.

In this new and increasingly unpredictable environment, sustainable economic growth and safeguarding macroeconomic stability represent challenges in themselves. Addressing them requires prudent monetary and fiscal policies, greater effectiveness of financial markets, and their further development. In this context, crucial transformative reforms are needed to boost productivity through innovation, investment, improvements in the business climate, enhanced competitiveness, the establishment of stronger digital infrastructures, and broader financial and economic inclusion.

The role of the Bank of Albania is, and will remain, essential in this journey toward ensuring macroeconomic and financial stability in Albania. Our vision is steadfast: to strengthen institutional capacities, deepen cooperation with national and international

partners, and contribute to building a more sustainable, inclusive, and resilient economy capable of withstanding external shocks.

In this framework, meetings such as this workshop are of particular importance, as they provide a valuable platform for reflection, exchange of views, and the formulation of better policies for the future.

I thank you for your attention and wish you a fruitful workshop, with substantive discussions and valuable ideas that will contribute to improving macroeconomic policies and fostering long-term, sustainable growth in the face of an increasingly challenging environment.

Thank you!",Gent Sejko
https://www.bis.org/review/r251112o.htm,Petar Chobanov: Speech - opening of the Euro Days at the University of National and World Economy,"Speech by Mr Petar Chobanov, Deputy Governor of the Bulgarian National Bank, at the opening of the Euro Days at the University of National and World Economy, organised by the Bulgarian National Bank and the UNWE, Sofia, 5 November 2025.",2025-11-05 00:00:00,"## Petar Chobanov: Speech - opening of the Euro Days at the University of National and World Economy

Speech by Mr Petar Chobanov, Deputy Governor of the Bulgarian National Bank, at the opening of the Euro Days at the University of National and World Economy, organised by the Bulgarian National Bank and the UNWE, Sofia, 5 November 2025.

* * *

Dear Prof. Dimitrov, Rector of the UNWE

Dear colleagues, students, professors and guests,

It is a special honour for me to welcome you today at my university, the University of National and World Economy; it is not only a centre of excellence, but also a place where the future leaders in the Bulgarian economy and finance are formed. We have gathered here at a historic moment - there are only about 50 days to go before Bulgaria joins the euro area. This is a step that will change both the financial architecture of our country and its place in Europe. It will change the financial architecture not so much because of new rules, but because the financial world is evolving. I expect that the financial ecosystem in Bulgaria will expand, and, along with the stable banking sector, other components of this system will evolve.

The road we've gone so far was not easy. In recent years, Bulgaria has made considerable efforts to meet the Maastricht criteria of price stability, sustainable public finances, a stable exchange rate, and long-term interest rates. We have joined the European Banking Union and the Exchange Rate Mechanism (ERM II), which was a key prerequisite for today's success. We have improved the supervision of the banking system, strengthened institutions and proved that we are able to maintain financial discipline even in the face of global crises.

The strategic importance of the euro is quite obvious. It is not just a currency, but a symbol of trust, stability and integration. Once it enters the euro area, Bulgaria will become part of the core of the European financial and economic architecture. This means:

- lower transaction costs for businesses and citizens;
- greater attractiveness to foreign investors;
- better access to financial markets;
- higher protection against external shocks.

The Bulgarian National Bank will play a key role. From being an observer and a participant in the preparations, the BNB will become a full member of the Eurosystem. This will enable us to take part in the decision-making process regarding the monetary policy of the euro area, to contribute with our expertise, and to protect the interests of the Bulgarian economy within the common European framework.

Indeed, the challenges are not lacking. The euro area faces a number of risks geopolitical instability, energy dependency, inflationary developments, and differences

in the economic structure across countries. For Bulgaria, the risks include the need to step up structural reforms, increase productivity and address demographic challenges. They should be tackled in order to ensure that our membership will be effective and meaningful.

However, Bulgaria also has its advantages.

- The currency board has proven for nearly three decades that our country can maintain financial discipline and stability. Expectations that we will compromise them should not come true and so far they have not come true.
- The low level of public debt allows us for flexibility and sustainability.
- Our membership in the EU and the integration of Bulgarian business into European production and supply chains are a natural basis for a smooth transition to the euro. This is the time to increase our role in these chains.
- A flexible and adaptable workforce, as well as our strategic geographic location, are factors that can make Bulgaria an even more attractive destination for investment and strategic partnerships, so that we can influence economic processes.

Our task from now on is to exploit these advantages, minimise risks and be an active, responsible and constructive member of the euro area. Our success will depend on how well we can reconcile our national interests with the common objectives of monetary union.

I am convinced that, with the joint efforts of institutions, businesses, academia and citizens, Bulgaria will establish itself as a strong actor in the decision-making process and can make the most of its membership of the euro area.

Let us together turn this historic moment into a sustainable development process.

Thank you for your attention.",Petar Chobanov
https://www.bis.org/review/r251113e.htm,Michael Atingi-Ego: The role of central banking in unlocking pension-led economic growth,"Speech by Mr Michael Atingi-Ego, Governor of the Bank of Uganda, at the All-Africa Pension Summit, Kigo, 7 November 2025.",2025-11-07 00:00:00,"## Michael Atingi-Ego: The role of central banking in unlocking pensionled economic growth

Speech by Mr Michael Atingi-Ego, Governor of the Bank of Uganda, at the All-Africa Pension Summit, Kigo, 7 November 2025.

* * *

Your Excellency, the President of the Republic of Uganda, the Right Honourable Prime Minister, Ministers and Members of Parliament present, Your Excellencies Ambassadors and High Commissioners, distinguished delegates, ladies and gentlemen, good morning.

First-stability.

The conversation around pension-led growth goes to the very heart of macroeconomic stewardship. For Uganda -and indeed for Africa -the success of pension mobilisation rests on three pillars: stability, confidence, and innovation.

Let me be direct: A nation's pension framework is one of its most powerful yet often untapped engines for development. When structured effectively, pension systems become immense pools of domestic capital, capable of mobilising national savings, deepening local capital markets, and financing the long-term investments essential for sustainable growth.

At the Bank of Uganda (BoU), our foremost duty is to preserve price stability and the long-term value of our currency. A stable shilling protects the purchasing power of pensioners and gives fund managers predictability when investing in long-term instruments. This is not technocratic rigidity-it is the bedrock of pension security.

Consider the corrosive power of inflation: when it runs high-as we have seen in years past-a pension contribution made today steadily loses its purchasing power over time. This is not abstract macroeconomics; it is the difference between dignity and destitution in retirement.

Our monetary policy-anchored in an inflation-targeting framework and implemented through the central bank rate-aims to maintain inflation around 5% over the medium term. It operates in concert with a disciplined fiscal environment to foster deep, credible, and attractive capital markets that can attract long-term investors, such as the National Social Security Fund. Indeed, NSSF's continued investment in government bonds and equities demonstrates how domestic pension capital can finance national priorities while providing savers with secure returns.

The evidence is clear: economies that sustain monetary discipline are those whose pension systems mature fastest. We remain committed to low and stable inflation, a credible exchange-rate regime, and a sound financial system that inspires long-term confidence.

Second-confidence through domestic capital formation.

Our fiscal space is narrowing, and external financing conditions are tightening, yet our ambitions for transformation remain high. This reality calls for a deliberate shift from external borrowing toward mobilising domestic savings.

Here lies a fundamental truth, starkly illuminated by recent evidence: The 2025 Absa Africa Financial Markets Index ranks Uganda 3rd overall among 29 African economies, with a score of 66. Yet in Pillar 4-pension fund development-we rank 11th with a score of just 26. This gap between our overall financial market sophistication and our pension sector development represents not failure, but untapped potential of extraordinary magnitude.

The numbers tell a compelling story. Pension fund assets per working-age person in Uganda stand at approximately $118. Compare this to Botswana at $6,289, Namibia at $5,746, or Eswatini at $5,067. These are not accidents of geography-they are the results of deliberate policy choices, sustained reforms, and institutional commitment.

More striking still: of Uganda's estimated labour force of 15.9 million, only 18% are covered under an existing retirement saving arrangement. Our National Financial Inclusion Strategy 2023-2028 sets a target of 25% coverage by 2028-ambitious, yet modest when measured against what pension-led growth could deliver.

The transition from Pay-As-You-Go models to funded pension schemes represents more than administrative reform-it is economic transformation. A PAYG system operates on intergenerational transfers, creating no new pool of capital. As dependency ratios rise-and rise they will across our continent- such systems become fiscally untenable.

But funded systems are capital accumulation vehicles. They compel what economists call ""involuntary private sector saving,"" creating vast, tangible pools of national capital. The economic logic is compelling: while PAYG offers returns equivalent to wage base growth, funded systems generate returns determined by market interest rates. Theory and evidence both suggest that, over the long run, real interest rates exceed economic growth rates-providing funded systems with a significant structural advantage.

Yet here is our challenge: Uganda's pension coverage of the elderly population stands at 3.9%. The median across Sub-Saharan Africa is 7.3%.

While these figures may seem discouraging, they point to a vast, untapped reservoir of potential capital that, if effectively mobilised, could transform our economy.

Through the Uganda Fixed Income Markets Committee-a multi-institutional platform chaired by the Bank of Uganda and established by the Ministry of Finance-we are advancing reforms to deepen the market, with a strong focus on the pension sector. This work sits within the governance architecture of our National Financial Inclusion Strategy, which is overseen by a Steering Committee and is driven by dedicated working groups.

Working closely with the Uganda Retirement Benefits Regulatory Authority, we recognise that pension reform is not only about retirement security but also about mobilising patient capital for long-term growth.

## Key priorities include:

Expanding informal sector inclusion through micro-pensions. With 88% of total employment in the informal sector, traditional contributory models leave most Ugandans uncovered. But we have proof of concept: in 2021, URBRA licensed the Mazima Voluntary Individual Retirement Benefits Scheme and the KACITA Uganda Provident Fund Scheme-both designed for low-income informal workers.

These schemes allow individuals to use mobile money services to make contributions, giving members autonomy to decide contribution amounts and timing. This is the model that must scale.

Redesigning private pension schemes to strengthen longevity protection, portability, and predictable taxation-removing barriers that discourage voluntary participation.

Implementing the Public Service Pension Act, 2025, under a contributory model to enhance sustainability and reduce the fiscal burden of unfunded liabilities.

Enhanced regulatory oversight, guided by revised International Organisation of Pension Supervisors principles, to improve governance and transparency across the sector.

These reforms are fully aligned with Uganda's Tenfold Growth Strategy and NDP IV, aiming to unlock domestic savings for high-impact investments in our priority sectors: Agro-industrialisation, Tourism Development, Mineral-based Industrialisation, and Science, Technology, and Innovation.

The symbiotic relationship is this: pension funds require deep markets to invest, and deep markets require the patient capital of pension funds to develop. Our Financial Markets Index, as reflected in the Absa AFMI, remains relatively low-signalling significant potential to deepen our markets and broaden the range of available financial products.

Through sound regulation and transparent market operations, the BoU - working in partnership with URBRA, the Capital Markets Authority, and the Ministry of Financeremains committed to ensuring that investment instruments are efficient, credible, and accessible.

Third-innovation and inclusion.

Coverage expansion is central to financial deepening. Every new saver strengthens our financial ecosystem. Technology is the bridge.

Our National Financial Inclusion Strategy documents this progress: Uganda's formal financial inclusion stands at 66%, with a target of 75% by 2028. Our Financial Inclusion Index stands at 75%, and our E-Payments Index has reached 46%. These achievements reflect deliberate policy interventions. Yet the pension sector has not kept pace-and herein lies both our challenge and our opportunity.

The infrastructure exists; the innovation is underway. Through the Bank of Uganda Innovation Sandbox, we continue to test and support digital finance solutions. We have

licensed 121 FinTechs operating across payments, insurance, credit, and investment management-13% focused on lending, 41% on payments. This ecosystem can deliver micro-pension products at scale.

Mobile money dominates Uganda's financial landscape: 54% of adults own mobile money accounts, with 82% of domestic money transfers conducted via this channel. Yet mobile money-enabled pension contributions remain nascent. This is the arbitrage opportunity-proven infrastructure, proven user behaviour, untapped pension potential.

The success of Kenya's Mbao Pension Plan and Haba Haba initiative demonstrates that technology-driven solutions can dramatically expand coverage, mobilising vast pools of domestic savings. Uganda's mobile money agent network-468,476 agents, or 2,297 per 100,000 adults-far exceeds our formal banking infrastructure of 703 branches. When prudently regulated, this network becomes the delivery channel through which millions secure their retirement.

But infrastructure alone is insufficient. Let me be candid about the preconditions for success, drawing lessons from international experience and our own diagnostic work.

Four non-negotiable foundations:

First, digital identity infrastructure. Currently, 70% of Uganda's eligible population has a National Identification Number-leaving 30% automatically excluded from formal financial services. Our NFIS prioritises accelerating national ID registration, upgrading NIRA's capacity, and expanding API access to financial service providers. The Bank of Uganda directive requiring National Identification Numbers for credit reporting from January 2023 creates urgency-but also highlights the gap that must be closed.

Second, minimum fixed-income market development. We have made progress: adoption of the Global Master Repurchase Agreement across commercial banks, a score of 90 in the AFMI's legal standards pillar reflecting enforceability of netting and collateral provisions, and approval of Uganda's first licensed domestic credit rating agency (ICRA Credit Rating Agency) in June 2025. But market depth remains the binding constraint-our modest standing on this pillar underscores how far we still have to go.

Third, affordable and accessible infrastructure. Our NFIS diagnostic reveals stark challenges: only 16% smartphone penetration (versus 30% Sub-Saharan Africa average), 29% internet penetration (versus 53% in Kenya), and persistent rural-urban divides. The National Payment Switch project-now under development-will be transformative, enabling interoperability that reduces transaction costs and expands access.

Fourth, governance that insulates pension capital from political interference. This is where institutional lessons become paramount. Chile's pension reform accelerated financial development by creating professionally managed funds with clear fiduciary duties. Poland's Open Pension Funds, with 82% of portfolios in domestic equities, became cornerstones of capital market development.

But cautionary tales abound. Namibia's initial Development Capital Portfolio failed due to governance challenges and political interference. The solution was institutional innovation: Regulation 29 mandated that development investments flow through professionally managed Special Purpose Vehicles, insulating decisions from political pressure and ensuring merit-based capital allocation.

These lessons crystallise a critical principle: the central bank's focus must remain on systemic risk, macroeconomic stability, and market development, while pension regulators remain independent and empowered, overseeing the prudential conduct of individual pension funds. This separation is not a bureaucratic nicety-it is the foundation of credibility.

Let me conclude by reaffirming our commitment to the spirit of this All-Africa Pension Summit-a continent financing its own development through disciplined savings, credible institutions, and innovative markets.

The BoU's contribution to pension-led growth, embedded in both our Strategic Plan 2022-2027 and the National Financial Inclusion Strategy 2023-2028, rests on four strategic pillars:

One: Maintaining macroeconomic stability. Our High Impact Goal of ensuring low and stable inflation-targeted at 5% plus or minus 3%-creates the predictable economic landscape that protects the real value of pension savings. A stable shilling, low inflation, and credible monetary policy are the bedrock upon which all pension promises rest. This is our contribution as a central bank, and we will not waver.

Two: Fostering capital market development. We target deepening capital markets and financial inclusion, with NFIS aiming to increase formal savings from 16% to 25% of adults by 2028. We will continue developing the government bond market to serve as a risk-free benchmark, establishing efficient trading and settlement systems through initiatives like the National Payment Switch and ISO 20022 migration, and supporting the emergence of diverse investment instruments, including green bonds and infrastructure financing vehicles.

Three: Upholding financial system soundness and resilience. Through our supervisory mandate and Strategic Objective to Enhance Financial System Soundness and Resilience, we ensure that the financial ecosystem can safely absorb and deploy pension capital. Our targets are precise: 100% compliance with capital adequacy requirements, a Systemic Risk Index mean of 11.7%, and continuous strengthening of risk management across all regulated financial service providers. A pension system is only as sound as the financial system that houses it.

Four: Driving innovation for inclusion. Our Strategic Plan commits us to exploring emerging technologies through the Innovation Sandbox, with 121 licensed FinTechs already operating. The NFIS details specific initiatives: mobile money-enabled micropensions, adult-supervised accounts for economically active youth aged 16-17 (within constitutional bounds), and linkages between Village Savings and Loan Associations and formal institutions. These are not aspirations-they are active projects with clear timelines and responsible institutions.

Whatever it takes-a phrase born in crisis elsewhere-applies equally to our developmental mission. But let me be candid: the central bank cannot unlock pensionled growth alone. This requires true partnership across the entire ecosystem.

To government: Pension reform must be a fiscal priority, not a fiscal afterthought. The amendments to pension legislation, the strengthening of URBRA's capacity and independence, and the expansion of coverage must be enacted and implemented with urgency. We must safeguard pension funds for their long-term purpose, not short-term spending needs. The fiscal transition costs are real-moving from PAYG to funded systems creates a ""double burden"" as current workers fund both current retirees and their own future. But these costs, if managed through credible fiscal adjustment rather than debt accumulation, yield long-term dividends.

To URBRA and our regulatory partners: You are stewards of this transformation. The regulatory frameworks you design-drawing on the revised IOPS principles referenced in our NFIS-the standards you enforce, and the capacity you build will determine whether Uganda's pension sector becomes a catalyst for development or remains untapped potential.

The governance structure matters: our National Financial Inclusion Steering Committee provides political backing. The Inter-Institutional Committee on Financial Inclusion, with representation across financial sector regulators, ensures coordination. The dedicated Working Group on Pension Fund Development provides technical focus. This architecture exists-it must now deliver.

To pension fund trustees: You bear fiduciary responsibility for workers' futures. This demands sophisticated investment capabilities, governance that puts beneficiaries first, and the courage to move beyond passive investment in government paper toward active asset allocation that balances security with return. The NFIS target of increasing pension coverage from 18% to 25% by 2028 means your client base will expand rapidlyparticularly among informal workers new to financial services. You must meet them where they are.

To the private sector: You should develop investment opportunities worthy of pension capital-transparently governed, properly structured, and genuinely productive. Pension funds need bankable projects in infrastructure, agribusiness, manufacturing, and services. The Agricultural Credit Facility's ""block allocation"" model provides a template: financing secured by alternative collateral-cash flows, banking history, character, chattel mortgages-rather than registered land alone. This same flexibility in structuring investments can unlock pension capital deployment. Create the pipeline of viable, longterm projects that pension funds can evaluate and finance.

To pension funds and insurance firms: You are stewards of workers' futures, but you should think beyond traditional approaches. Move beyond the comfort of government paper. The regulatory framework permits diversification-use it. Develop sophisticated analytical capacity to evaluate infrastructure projects, corporate bonds, real estate investment trusts, and private equity opportunities. The Agricultural Credit Facility demonstrates that alternative risk assessment works-cash flow-based analysis, operational track records, and structured guarantees can substitute for registered collateral. Apply this same innovative thinking to your investment mandates. The

partnership between pension capital and productive enterprise should be symbiotic, not extractive-you provide patient capital, you demand transparency and governance, you earn returns that serve your members.

To our development partners: The NFIS acknowledges your critical role as observers and technical assistance providers. The Financial Sector Deepening Uganda, UNCDF, World Bank, and others have supported the diagnostic work that informs our strategy. Sustaining this partnership-particularly in building capacity for micro-pension product development and gender-inclusive pension design-will accelerate implementation.

The demographic dividend is not a gift-it is an opportunity that demands action. Uganda's population profile is stark: 52.6% under age 18, 75% under 30, with the labour force projected to grow from 15.9 million today to well over 20 million by 2030. A 25-year-old entering Uganda's workforce today will retire around 2060. What pension will greet them?

That answer depends on choices we make now-the regulatory frameworks we establish, the investment culture we build, the financial literacy we instil (NFIS targets 70% financial literacy by 2028, up from 50%), the markets we deepen, the infrastructure we deploy.

If we act decisively, we create a virtuous cycle: pension funds deepen capital markets, deeper markets attract more pension investment, this investment finances infrastructure and enterprise, growth generates employment and wages, higher wages produce larger pension contributions, and the cycle strengthens. Our NFIS targets formal financial inclusion of 75% by 2028, savings at formal institutions reaching 25%, and insurance usage climbing to 15%, creating the ecosystem in which pensions thrive.

If we delay, we face the twin crisis witnessed elsewhere: an ageing population with inadequate retirement security and an economy starved of long-term investment capital.

The Absa Africa Financial Markets Index shows us where we stand relative to our peers. Our overall 3rd place ranking demonstrates financial market sophistication. Our 11th-place pension ranking shows unrealised potential. This 8-place gap is not a rebuke-it is a roadmap. It tells us precisely where the arbitrage opportunity lies.

By linking pension reform to broader market development-as articulated in our Strategic Plan 2022-2027, operationalised through the National Financial Inclusion Strategy 20232028, and governed through the multi-stakeholder architecture we have establishedUganda is positioning domestic savings as a key driver of transformation.

As these reforms take hold, they will provide a stable and predictable source of longterm financing to support sustainable growth. The governance is in place: Steering Committee for strategic direction, Inter-Institutional Committee for coordination, Working Groups for implementation, NFIS Secretariat for monitoring. The targets are clear: 25% pension coverage by 2028, 75% financial inclusion, and 25% using formal savings. The infrastructure is emerging: National Payment Switch, expanded mobile money agent networks, 121 licensed FinTechs, improved digital ID coverage.

What remains is execution-sustained, disciplined, measured execution. A stable shilling, an innovative financial system, and an inclusive regulatory approach remain our contribution to pension-led growth and Africa's shared prosperity.

The future we seek will not happen by accident. It will not emerge from incrementalism. It requires vision, courage, and action commensurate with our aspirations.

Our vision is captured in the NFIS statement: ""universal access and usage of a broad range of quality and affordable formal financial products and services, delivered in a responsible and sustainable manner."" Pensions sit at the heart of this vision-the ultimate long-term financial service, the ultimate test of whether our financial system serves citizens across their entire life cycle.

Let us begin that work today-together.

Thank you for listening to me. God bless!",Michael Atingi-Ego
https://www.bis.org/review/r251112j.htm,Jorgovanka Tabaković: Speech - IMF's presentation of the Regional Economic Outlook for Europe,"Speech by Dr Jorgovanka Tabaković, Governor of the National Bank of Serbia, at the IMF's presentation of the Regional Economic Outlook for Europe, Belgrade, 6 November 2025.",2025-11-06 00:00:00,"## Jorgovanka Tabakovi: Speech - IMF's presentation of the Regional Economic Outlook for Europe

Speech by Dr Jorgovanka Tabakovi, Governor of the National Bank of Serbia, at the IMF's presentation of the Regional Economic Outlook for Europe, Belgrade, 6 November 2025.

* * *

A warm welcome to you, Stefan. As for Lev, I can't really say ""welcome,"" since he is one of our own here - it's rather we who should feel welcomed at this presentation.

But before addressing you, I must say there's an old saying: ""Fortune favours the bold."" Isn't that right? Even the IMF deals with the question of whether good luck or good policies lie behind success in difficult circumstances. And I will say this - we are fortunate, but we have earned that fortune through courage - the courage to persevere in the most challenging times, supported by the IMF, represented in Serbia by Mr Lev Ratnovski and Ms Annette Kyobe, Head of Mission, with her team.

Had we chosen them ourselves, we could not have selected more dedicated, open and well-intentioned partners than the ones we have found in them.

It is with special pleasure that I first greet, of course, those who are always here - my colleagues and associates, our bankers, whose supervisors we are - though I always prefer to say , just as the IMF is our partner - and all others who have deemed partners it important to be here with us today.

Exactly eleven months ago, Mr Weber presented the findings of last year's IMF's Regional Economic Outlook for Europe at the National Bank of Serbia.

Today, I would like to extend a special welcome to Mr Stephan Danninger, Assistant Director of the European Department at the International Monetary Fund, to Serbia and the National Bank of Serbia. I would also like to greet and thank Mr Lev Ratnovski, who is once again serving as a moderator today, but whose much more important role for us is that of the Resident Representative of the International Monetary Fund in Serbia.

In this year's Report, the focus is on the challenges and growth prospects in Europe amid rising trade tensions, protectionism and increased government spending. In an environment marked by geopolitical tensions, fiscal risks, and unfavourable demographic trends, trade policies and structural reforms stand out as key instruments for accelerating recovery and fostering long-term growth.

The Reports also offers possible courses of action for policymakers, providing a response to the strategic question: how to find a sustainable policy mix that will curb inflation, preserve financial stability, and open new opportunities for international trade and development?

The good news is that analyses by the International Monetary Fund show that growth prospects in the European Union countries are favourable. HOWEVER, there are also

important preconditions that must be met in order to turn this potential into concrete results.

For these favourable prospects to be properly utilised, policymakers must be committed to a strategic approach based on at least three pillars - more efficient use of resources, deepening of the single market, and alignment of national and European reforms.

What is one of the recommendations for policymakers? The continuation of an open trade policy, accompanied by the strengthening of trade agreements and the deepening of the single market, along with support measures that should be temporary and targeted.

- In that sense, the IMF's analysis is important, as it shows that reducing internal trade barriers by 1.25 percentage points or external trade barriers by 3.5 percentage points could fully offset the effect of US tariffs on European Union exports.

One of the recommendations is also the necessity of creating fiscal and external buffers, thereby strengthening the resilience of economies. For that reason, I will refer to your findings presented in the October 2025 World Economic Outlook, in the chapter titled - Emerging Market Resilience: Good Luck or Good Policies? The conclusion is as expected. Good policies, strengthened monetary, fiscal and macroprudential frameworks in emerging markets have played a key role during periods of global shocks, contributing to higher growth and lower inflation. Compared to the period before the global financial crisis, progress in these areas has contributed on average to 0.5 percentage points higher economic growth and 0.6 percentage points lower inflation during recent global shocks.

The analysis also includes Serbia, for which the same assessment applies, as recently concluded by the IMF team for Serbia. I quote.

""Serbia's macroeconomic resilience positions the economy well for a rebound of growth once temporary shocks subside. The external and internal risks are cushioned by significant fiscal and external buffers, including high FX reserves and government deposits, a resilient banking sector, and moderate public debt. Monetary policy is appropriate and continues to support Serbia's macroeconomic stability."" I have nothing to add to that. In Serbia, FX reserves have been on an upward trajectory even since the pandemic period, while public debt has been on a downward path.

Likewise, one of the results of the IMF's analyses indicates that, without structural reforms, fiscal consolidation and sustainable growth, Europe faces a rising public debt which could, on average, approach 130% of GDP by 2040, and in some countries even significantly exceed that level. Therefore, in the next few minutes I will highlight the importance of fiscal consolidation and of coordination between fiscal and monetary policies, using Serbia as an example.

- The starting point for sound public finances and a sustainable level and trajectory of public debt was the fiscal consolidation carried out between 2015 and 2017 - a painful and unpopular, but necessary reform to address previously accumulated structural imbalances.

- Although it is uncommon for a country undergoing fiscal consolidation to record positive growth rates, Serbia achieved cumulative real GDP growth of 7% over that period, with positive growth rates in each year, which is not customary.
- Monetary policy made a significant contribution to that outcome, as we had previously resolved the issue of inherited volatile and high inflation and a high key policy rate, which in some months reached even 18%.
- Specifically, we reduced inflation in Serbia from 12.2% at the end of 2012 to 2.2% in October 2013 - in less than a year.
- While in the period 2009-2013 average inflation in Serbia was 4.9 pp higher than in Central European countries, since the end of 2013 average inflation in Serbia and Central Europe has been at almost the same level.
- Before the start of consolidation, we lowered the key policy rate by 325 bp, and during the consolidation period by a further 450 bp - a total reduction of 775 bp.
- We also ensured and maintained a relatively stable dinar-euro exchange rate, as well as record-high FX reserves. We significantly increased our gold holdings, which now account for around 20% of total FX reserves. The banking sector is stable and well-capitalised, with NPLs at a historic low.
- All of this enabled us to face the crisis caused by the COVID-19 pandemic in a much stronger macroeconomic position than during the previous global economic crisis of 2008. Within the region of Central and South-Eastern Europe, Serbia recorded one of the most favourable public debt trajectories, reducing it to below 43.2% of GDP. The structure of debt has improved significantly in all segments from currency composition and interest rate structure to more favourable financing conditions and the maturity structure of liabilities. Equally important is the mediumterm fiscal framework, which ensures the continued decline of the public debt-toGDP ratio, while allowing the government to maintain a relatively high level of capital investment that enhances the potential output of Serbia's economy.
- The domestic economy has demonstrated strong resilience, particularly in the sector connected with the automobile industry, while goods exports have grown thanks to production and geographical diversification and export-oriented investments. Alongside rising corporate profitability, the labour market has also improved.

## Ladies and gentlemen,

Whether certain events are truly coincidences - I do not know. But I do know that we have learned a difficult lesson: we have a duty to defend ourselves against all ""coincidences"" by building buffers and maintaining a long-term perspective.

Good policy coordination is a key pillar of sustainable results. Therefore, it is essential that we continue to assess our decisions through the lens of their impact on every segment of the economic ecosystem and mosaic, i.e. the impact on economic growth, employment, wages, inflation, and citizens' purchasing power.

Thank you for your attention, and I now give the floor to Mr Danninger.",Jorgovanka Tabaković
https://www.bis.org/review/r251110d.htm,Denny H Kalyalya: Opening speech - World Savings Day and Financial Literacy Awards,"Opening speech by Dr Denny H Kalyalya, Governor of the Bank of Zambia, at the World Savings Day and Financial Literacy Awards, Lusaka, 31 October 2025. ",2025-10-31 00:00:00,"## Denny H Kalyalya: Opening speech - World Savings Day and Financial Literacy Awards

Opening speech by Dr Denny H Kalyalya, Governor of the Bank of Zambia, at the World Savings Day and Financial Literacy Awards, Lusaka, 31 October 2025.

* * *

- Senior Government Officials
- Securities and Exchange Commission Chief Executive Officer, Mr. Phillip Chitalu
- Pensions and Insurance Authority Registrar, Mrs. Namakau Ntini
- Bankers Association of Zambia and Financial Literacy Working Group Chairperson, Ms. Lowani Chibesakunda
- Chief Executive Officers of Financial Services Providers
- Cooperating Partners
- Nominated Recipients of the Financial Literacy Awards
- Invited Guests
- Ladies and Gentlemen

## Good morning.

It is an honour for me to speak to you on this occasion of the commemoration of the 2025 World Savings Day. As per established practice, we will also use this occasion to present Financial Literacy Awards to deserving institutions.

From the outset, I wish to express my sincere gratitude to the organizers and various stakeholders for their continued partnership and support in commemorating World Savings Day.

The theme for this year's World Savings Day is: ""It's more than just your savings, it's your life."" The theme underscores an important message that saving is not merely about setting money aside by postponing current expenditure. The habit of saving in fact enables individuals to create pathways for them to invest and build a portfolio of financial and non-financial assets that support living fulfilled lives. Savings and investments play a critical role in enabling individuals to manage emergencies, plan for education and healthcare, and secure financial stability after retirement. A culture of saving and prudent investment empowers individuals to enhance their productive capacity, supports inclusive economic progress, and contributes to achievement of broader objectives of national development.

Therefore, it is important for financial service providers to design and develop appropriate savings and investment products that are of practical use to people as they seek to build financial resilience in their lives.

## Ladies and Gentlemen

While we acknowledge the commendable efforts financial sector supervisory authorities and financial service providers have made in promoting financial literacy and consumer protection across the country, reports of citizens falling victim to fraudulent schemes are

of great concern. Recently, several individuals lost their hard-earned savings to promoters of an online money circulation scheme, thereby jeopardizing their financial well-being. This development is deeply troubling.

In this regard, the Bank of Zambia and other financial supervisory authorities are working closely with law enforcement agencies to curb these illegal activities.

We believe that the most effective way to end such schemes is for individuals to be financially smart and stop participating in them altogether We all need to accept and appreciate that it generally takes time and consistent diligent effort to accumulate legitimate wealth. If some entity is promising to give you a return on investment that is too good to be true, that investment scheme is more likely to be fraudulent.

We urge that we should all take it as our personal and primary responsibility to protect ourselves from scammers and other unlicensed financial service providers. Let us not be quick to place our money into schemes whose licensing status we do not know. Much in the same way that at night we do not sleep with our windows and doors open, in the same way we should not expose ourselves to financial fraud. Financial sector supervisory authorities, the world over, do not have capacity to protect people who choose to engage with unlicensed financial service providers. These entities tend to operate on the fringes. Usually, by the time a supervisory authority comes to know about them, a lot of people will have already lost their money.

## Distinguished Guests

In addition to money circulation schemes, it recently came to our attention that some unlicensed online credit providers were engaged in predatory lending practices involving unfair, deceptive, or fraudulent loan practices that take advantage of borrowers by enticing them into obtaining unaffordable online loans. While the Bank of Zambia is working with other relevant competent authorities to bring the online unlicensed credit providers to account, members of the public are advised against engaging with any financial service provider that is not licensed. Consumers that engage with such entities expose themselves to avoidable financial and other risks because the consumer protection recourse mechanisms provided under the Banking and Financial Services Act are not available to them in the event of disputes. We therefore urge members of the public to exercise due diligence and verify the licensing status of financial service providers prior to engaging in any transactions with them, and to report suspicious entities to the authorities.

## Ladies and Gentlemen

As we commemorate the 2025 World Savings Day, we also have an opportunity to reflect on the remarkable progress Zambia has made in developing its financial sector, promoting stability, enhancing financial education, and expanding financial inclusion.

According to the FinScope 2020 Survey, financial inclusion increased to 69.4 percent from 59.3 percent in 2015. This progress was attributed to the successful implementation of initiatives under the National Strategy on Financial Education, the Rural Finance Policy and Strategy, and the National Financial Inclusion Strategy, particularly in Digital Financial Services (DFS).

Currently, the Bank of Zambia, in collaboration with the Zambia Statistics Agency and other financial sector regulators, is conducting the 2025 FinScope Survey to assess progress toward the targets set in the National Financial Inclusion Strategy II (20242028). Release of the FinScope Survey 2025 top-line findings report is scheduled for the end of the year.

The FinScope survey findings will further support the Government, regulators, and service providers in identifying gaps, and developing targeted interventions for improving access to quality and affordable financial services, foster participation in economic activities, help address poverty, and improve the well-being of Zambians.

## Distinguished Guests

I wish to commend the Pensions and Insurance Authority, the Insurance Association of Zambia, and the insurance companies for successfully commemorating Pensions Week and Insurers Week. I also extend tribute to the Securities and Exchange Commission and the Capital Markets Association of Zambia for organizing the World Investor Week.

Over the years the messages and activities from these events have contributed significantly to raising financial literacy and promoting the uptake of various insurance and investment products across the country.

Going forward, let us continue to explore more effective ways of communicating our messages to achieve a financially astute public.

## Ladies and Gentlemen

As I conclude my remarks, allow me to take this opportunity to recognize and appreciate the contributions of individuals and institutions that have advanced financial literacy in Zambia. In this connection, we will shortly be presenting Financial Literacy Awards to outstanding recipients for their dedication to promoting financial education in various categories.

I am delighted to join you in celebrating these achievements. I extend my warm congratulations to all nominees and award recipients.

## THANK YOU FOR YOUR ATTENTION AND GOD BLESS!",Denny H Kalyalya
https://www.bis.org/review/r251113d.htm,Abdul Rasheed Ghaffour: The future is now - tech-driven compliance in the fight against financial crime,"Opening remarks by Mr Abdul Rasheed Ghaffour, Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the 15th International Conference on Financial Crime and Terrorism Financing (IFCTF) ""The future is now - tech-driven compliance in the fight against financial crime"", Kuala Lumpur, 5 November 2025.",2025-11-05 00:00:00,"## Abdul Rasheed Ghaffour: The future is now - tech-driven compliance in the fight against financial crime

Opening remarks by Mr Abdul Rasheed Ghaffour, Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the 15th International Conference on Financial Crime and Terrorism Financing (IFCTF) ""The future is now - tech-driven compliance in the fight against financial crime"", Kuala Lumpur, 5 November 2025.

* * *

It is my honour to deliver the opening remarks at the 15th International Conference on Financial Crime and Terrorism Financing (IFCTF). Reaching the 15th edition of the IFCTF is a significant milestone. Congratulations to AICB, the Compliance Officer Networking Group and everyone involved in organising this conference.

Over the years, the IFCTF has been a key platform for leading practitioners to exchange insights on the latest developments in financial crimes prevention. IFCTF brings together representatives from both the private and public sectors on a common platform - a manifestation of Malaysia's whole-of-nation commitment in combatting financial crimes.

This year's conference is especially timely, following the recent conclusion of Malaysia's Mutual Evaluation (ME) 2025 by the Financial Action Task Force (FATF) about two weeks ago. Let me first congratulate everyone involved in the ME 2025. Since the last ME in 2015, our decade-long efforts to enhance our legal framework, supervisory approaches, understanding of risks and financial intelligence culminated in a stronger AML/CFT/CPF regime for the country. This progress was made possible with tireless collaboration across the private sector, as well as government agencies and ministries, spearheaded by the NCC (National Coordination Committee to Counter Money Laundering).

Apart from the ME, allow me to also highlight other significant milestones that we have achieved in the past few years, which contribute to a more secure financial sector. First, the amendments to AMLA (Anti-Money Laundering, Anti-Terrorism Financing, AntiRestricted Activity Financing and Proceeds of Unlawful Activities Act 2001), which were gazetted in May 2025, enhance the supervision and regulation of reporting institutions, as well as investigation and prosecution procedures. Second, the conclusion of several thematic reviews and risk assessments, such as the National Risk Assessment, has deepened our understanding of illicit financial activities and their related risks to our financial system and this will support us to undertake more targeted policy formulation, supervisory measures and enforcement actions.

It is important to note that illicit financial activities know no boundaries. As such, efforts to cement close cooperation among ASEAN countries in combatting transnational financial crimes are paramount to ensure the security, stability and safety of the region and the wellbeing of its people. As part of Malaysia's ASEAN Chairmanship, we have overseen the issuance of the ASEAN Plan of Action on Combatting Transnational Crime (2025-2036) and ASEAN's first Declaration on Combatting Money Laundering at the recent 47th ASEAN Summit.

## Ladies and gentlemen,

Turning back to this year's IFCTF and its theme, 'The Future is Now: Tech-Driven Compliance in the Fight Against Financial Crime'. As I noted during the recent MyFintech Week 2025, Malaysia has made strong progress in modernising our payment systems, ranking second globally in QR payment adoption, with DuitNow becoming a common feature of our daily life. While we have seen digital technology develop at an unprecedented pace and improve our lives, there has also been a sharp increase in cybercrime. Bad actors use these same technologies to evade detection and manipulate the system, including through propaganda, disinformation, fraud and cyber-attacks.

Businesses, including financial institutions, have also become targets of sophisticated scams involving AI-generated impersonation. Such incidents highlight the increasing risks posed by advanced technology and how anyone can fall prey. In the first quarter of 2025 alone, PDRM recorded 12,110 cases of online fraud throughout the country, involving losses of RM 573.7 million. 1

Over the years, Malaysia's financial industry has weathered numerous challenges some at times seemed unbeatable. Yet through resilience and collaboration, we have continued to move forward.  The financial industry must continue to address new challenges and safeguard the integrity of our financial ecosystem. In this regard, I call upon the industry to harness the principles of Collaboration, Creativity and Conduct.

## Principle 1: Collaboration

Ladies and gentlemen,

The evolving digital and financial landscape requires greater agility and collaboration to combat threats. Swift sharing of information and expertise is essential in our fight against financial crimes. Take, for example, the National Scam Response Centre (NSRC), established in October 2022, which serves as a collaborative platform for government agencies, financial institutions, and the communications industry. Arising from this collaborative effort, the NSRC now operates 24 hours a day to receive reports, trace, freeze, and recover scammed funds. As of the third quarter of 2025, it has received 263,683 calls. It has successfully seized RM12.91 million, and RM1.99 million of stolen funds have been returned to victims.

Collaboration is also essential in fighting emerging crimes. Nowadays, we are witnessing the rise of crimes facilitated by technology, particularly through social media and streaming platforms. These new crimes are fuelled by the advent of new technologies. Tackling these emerging crimes is not the sole responsibility of law enforcement agencies alone. Each and every one of us must remain vigilant in detecting and reporting such activities.

As fraud schemes become increasingly sophisticated, empowering consumers with knowledge becomes pertinent. In 95% of scams in Malaysia, victims knowingly transfer money to people who turn out to be scammers. 2   This demonstrates a critical gap in awareness and emphasises the importance of consumer education. Awareness among

financial consumers is the first line of defence. Educating them on new scam methods and equipping them with tools to protect themselves is our shared responsibility. The #JanganKenaScam campaign, which I had the honour of launching in October 2023 at the 13th IFCTF, has been instrumental in raising public awareness, with surveys revealing that nine in 10 respondents are now aware of scam alerts from banks. 3

Collaboration should not be confined to formal settings. It must become an ingrained mindset to effectively combat ever-evolving financial crimes. By fostering strong collaboration across all levels of stakeholders, we can develop a more comprehensive strategy - both defensive and offensive - to ensure we remain ahead of threats.

## Principle 2: Creativity

When it comes to tackling financial crimes, AML measures and infrastructure cannot remain stagnant. The financial industry must explore creative solutions and leverage on the latest technology. The FATF published a report 4   in July 2021 highlighting the benefits of digital solutions, including using AI to overcome money laundering threats, by improving real-time supervision by regulators and enhancing risk assessments and onboarding practices by the private sector.

Domestically, the National Fraud Portal (NFP) launched by BNM, PayNet and financial institutions back in August 2024, has enhanced our ability to adapt to evolving scam tactics. The NFP facilitates faster fund tracing, timely interventions by financial institutions, as well as integration of transactions and mule account data from multiple sources.

The utilisation of the NFP has strengthened financial institutions' prevention capabilities. Paired with other preventive and operational measures, the enhanced capabilities have successfully blocked fraudulent transactions totalling RM369 million between January and June 2025 and is on track to surpass the RM399 million of fraudulent transactions deterred in 2024. The NFP is also currently being enhanced to shorten tracing times, broaden data integration and elevate the use of predictive analytics for improved detection of fraud and mule accounts.

Complementing efforts to foster creativity, the recent MyFintech Week 2025 saw industry players, regulators and law enforcement agencies come together to discuss innovative approaches in countering financial crimes. There were valuable discussions on developing AI-powered knowledge bases and strategies to combat investment scams and cross-border financial fraud. BNM has also noted a growing interest in utilising the Financial Technology Regulatory Sandbox for developing and testing innovative e-KYC solutions.

I urge everyone to embrace creativity in developing innovative, transformative and actionable solutions. Every training, every forum and every sharing session must go beyond mere discussions. Together, let us turn these conversations into concrete actions to combat financial crimes more effectively.

## Principle 3: Conduct

Ladies and gentlemen,

As technology and AI reshape compliance and AML, we must remember that personal conduct and ethics are what ultimately sustain trust. No algorithm can replace the judgment, integrity and accountability expected of the financial industry. Cases of fraud and corruption within the industry remind us that we must continue to work on improving our conduct and send a clear message that unethical employees and bad actors must be penalised for misconduct.

The Fair Treatment of Financial Consumers principles - fairness, transparency and due care - must continue to guide how technology is designed, deployed and governed. Regulators, financial institutions and customers each play a role in protecting the integrity of our system, especially as we intensify the fight against fraud, scams, and mule accounts.

Conduct extends beyond compliance; it must be culture and conscience in action. One such example is equipping customer-facing staff with the discipline to address compliance and regulatory matters with confidence while ensuring a positive financial experience for the customers. On this note, allow me to acknowledge the contributions of customer service officers in the financial industry, whose vigilance allows the early detection and prevention of scams. As frontliners, your actions build customer trust and facilitate our efforts to educate and protect the public against financial crimes. It is conduct that preserves confidence and ultimately is what keeps the financial system safe and resilient.

## Conclusion

Esteemed guests,

Before I conclude, let me take a moment to reflect on the pivotal role each of us plays in shaping the future of financial crime prevention. The principles of Collaboration, Creativity and Conduct are not mere aspirations - they are guiding principles that inform our actions as we navigate the evolving landscape of the financial industry.

As Warren Buffett wisely said, 'someone's sitting in the shade today because someone planted a tree a long time ago.' With the theme 'The Future is Now,' this conference reminds us that tomorrow's challenges require today's solutions. Let us embrace this moment to build meaningful partnerships, foster innovation and lead with integrity recognising that the work we do today will shape the financial system of the future.

Thank you.

1 AI fuels scam surge: Over 12,000 online fraud cases in Q1 2025, losses near RM574m

- 2 Feature Article: Building a United Front Against Online Fraud Risk

- 3 Banking industry survey revealed high public awareness on scams, with 9 in 10 respondents saying that they read scam alerts from banks - The Association of Banks in Malaysia)
- 4 Opportunities and Challenges of New Technologies for AML/CFT  (July 2021)",Abdul Rasheed Ghaffour
https://www.bis.org/review/r251201t.htm,Joachim Nagel: Current economic policy challenges in Germany and Europe,"Special lecture by Dr Joachim Nagel, President of the Deutsche Bundesbank, at Yonsei University, Seoul, 1 December 2025.",2025-12-01 00:00:00,"## Current economic policy challenges in Germany and Europe

Special lecture at Yonsei University

01.12.2025 | Seoul | Joachim Nagel

Check against delivery.

- 1 Introduction
- 2 Current economic situation in Germany
- 3 Structural challenges for Germany
- 3.1 Business environment
- 3.2 Energy markets
- 3.3 Labour supply
- 4 Need for European reforms
- 4.1 Deepening European integration
- 4.2 Fostering European resilience
- 5 Euro area monetary policy
- 6 Concluding remarks

## 1 Introduction

Ladies and gentlemen, it is a great pleasure for me to speak to you today. Germany and the Republic of Korea are far apart on the map, but our economies have much in common.

For example, both are export -driven, with large manufacturing bases. Manufacturing made up about 18 per cent of GDP (gross domestic product) in Germany, and a striking 24 per cent in the Republic of Korea in 2023 -   far more than the 13 per cent across the

OECD (Organisation for Economic Co-operation and Development). As a result, both economies are deeply embedded in global value chains. This means that they are exposed to trade policy changes and geopolitical risks, especially involving the United States and China. [1]

Furthermore, both countries depend heavily on imported energy, making them vulnerable to global energy price shocks. In 2023, Germany met around 70 per cent of its energy needs through net imports. In the Republic of Korea, the share was even higher at 85 per cent. [2]

Finally, both Germany and the Republic of Korea have a rapidly ageing popula -tion and low birth rates. The fertility rate was about 1.4 in Germany and 0.7 in the Republic of Korea in 2023. Both rates are below 2.1, which is the level required to keep the population stable. This demographic shift will weigh on labour supply and public fi nances. [3]

In this speech, I will set out how we can address these challenges and seize the opportunities that come along with them. As you would expect, my focus is on Germany and Europe. Yet some of the lessons might be relevant to the Republic of Korea as well. I will organise my speech around three questions:

First, what is the current economic situation in Germany and what is the medium-term outlook?

Second, what policy measures could Germany enact at the national level to address the challenges ahead?

Third, what needs to be done at the European level to complement these national reforms?

I will close with a discussion on the outlook for euro area monetary policy.

## 2 Current economic situation in Germany

Let me start with Germany ' s economic backdrop. In the 2010s, Germany enjoyed solid growth, powered by earlier structural reforms and strong global demand. As late as 2017, Germany was still growing faster than the euro area as a whole. But towards the end of the twenty-tens, the German growth engine began to stutter .

One key reason was a loss of competitiveness for German fi rms in several inter -national markets. According to recent Bundesbank estimates, this loss of com -petitiveness accounts for around three-quarters of the decline in export market shares observed in recent years. [4]

Furthermore, many German  fi rms specialise in products that have been a ff ected by subdued global demand, such as cars. As a consequence, Germany ' s export goods mix   which, for decades, was a recipe for success -has also contributed to recent market share losses.

On top of these structural headwinds, a series of shocks has dampened eco -nomic growth. Germany ' s deep integration within global supply chains meant that the pandemic hit hard. Logistics bottlenecks and shortages of intermediate inputs a ff ected more  fi rms than in many other countries.

Furthermore, Germany ' s heavy reliance on Russian gas ampli fi ed the energy price surge after Russia ' s invasion of Ukraine. That shock is still felt across energy-intensive industries.

Against this backdrop, what is the outlook for the German economy? The latest Bundesbank forecast from June sees two opposing forces shaping 2025 and the following two years:

On the one hand, US (United States) tari ff s and policy uncertainty will weigh on growth this year and next. Recent US (United States) trade measures have pushed up average US (United States)-tari ff s on EU (European Union) goods from around 1.5 per cent to about 15 per cent. [5]

On the other hand, expansionary fi scal policy will help to drive a recovery from next year onwards. Higher defence and infrastructure spending will boost demand. This could support GDP (gross domestic product) growth by roughly three -quarters of a percentage point in cumulative terms over the next two years.

However, on its own, higher public spending will not change our long - term growth path. Our internal Bundesbank simulations show that the extra fi scal spending would only modestly raise potential output. To exploit the full potential of the fi scal package, it must be complemented by structural reforms.

## 3 Structural challenges for Germany

What might those reforms look like? I will focus on three main areas that could boost our growth potential: a better business environment, a more e ffi cient energy system and higher labour supply.

## 3.1 Business environment

The fi rst area that has to improve in Germany is the business environment.

To regain market shares in a turbulent global trading environment, fi rms need scope to invest and innovate. Bureaucracy is the most -cited investment con -straint in recent surveys. Compliance costs have risen -especially for manufac -turing fi rms. Let me illustrate this using two numbers. [6]

According to the ifo (economic research institution) Institute, excessive bureau -cracy costs nearly  € 150 billion in output each year -more than 3 per cent of GDP (gross domestic product). The Institute for Employment Research found that fi rms hired around 325,000 extra sta ff in recent years just to comply with new rules. That is scarce labour tied up in non -productive tasks. [7] [8]

But bureaucracy not only costs money and ties up scarce labour. It also sti fl es start -ups: bureaucratic hurdles and delays were the most frequently-cited barri -ers to starting a business. Accordingly, Germany should urgently cut unneces -sary red tape. [9]

## 3.2 Energy markets

The second area in need of reforms is the energy sector .

High energy prices have hit German industry hard. At the same time, Germany has legally committed itself to achieving carbon neutrality by 2045. This trans -ition will require substantial investment.

According to estimates in a recent study, Germany has to invest around € 390 billion annually from 2021 to 2030, or 11 percent of its GDP (gross domestic product). However, in many cases, these investments are typical replacement investments, as fossil-fuel-based technologies are simply being phased out in favour of climate-neutral alternatives. The additional net fi n ancing needs are thus much lower, amounting to around  € 120 billion or some three per cent of GDP (gross domestic product). [10]

Our goal should be to deliver the transition at the lowest possible cost. A single, standard carbon price across sectors is the most e ffi cient way to cut emissions. This directs e ff orts to areas where cuts are most cost-e ff ective and spurs innova -tion in green technologies. To avoid distorting price signals, subsidies for activit -ies that are harmful to the climate should be phased out.

Policy must also provide reliability, because the transition needs long - term investment. In addition, we must accelerate digitalisation in the energy system. By rapidly rolling out smart meters, smart grids and enabling bidirectional char -ging, we could make more e ffi cient use of renewables. This could signi fi cantly reduce the costs of the green transition.

All in all, I am convinced that keeping up the pace of renewables deployment will ultimately pay o ff . This is our best route to cutting our dependence on imports and staying on the path to climate neutrality.

## 3.3 Labour supply

The third area in need of reforms is labour supply.

The demographic trend is the main headwind. As baby boomers retire, the number of workers will fall -and potential growth with it. Accordingly, we must make work easier and more rewarding.

One lever is to help part -time workers increase their hours if they wish -especially women. Annual hours per worker in Germany are low based on stand -ards in the advanced economies. One reason stems from disincentives relating to taxes and social security contributions. Childcare and eldercare provision is another major constraint. Better care provision, longer opening hours and more fl exibility could increase labour supply.

Germany also needs labour market-oriented migration. The reformed Skilled Immigration Act creates opportunities in this area. But red tape is an issue here as well -procedures remain too slow and too complex. A  ' work and stay ' approach   involving faster digital processing, simpler recognition of quali fi ca tions and better integration -would help. Language training and residency rights for family members could improve worker retention. In the current setting, many intra -EU (European Union) migrants leave the country within two years.

Furthermore, Germany should tap the potential of older workers. It makes sense to link the earliest retirement age -and then the statutory retirement age after 2031   to life expectancy. Ending the option to retire early without deductions after 45 years of contributions would reduce the incentive to leave the workforce early.

Together, these steps would ease labour shortages, support growth and strengthen pension fi nancing.

## 4 Need for European reforms

National reforms are vital to meet Germany ' s challenges. But many decisive issues will be determined at the European level.

One example is trade. Germany   like the Republic of Korea -thrives in an open, rules -based global trading system. Rising protectionism makes that harder. In the face of this, Europe must stay committed to a rules -based global trade order.

As long as worldwide trade reform is not feasible, striking free trade agreements with like -minded partners is a promising way forward. Deepening ties with the members of the Comprehensive and Progressive Agreement for Trans-Paci fi c Partnership

(CPTPP (Comprehensive and Progressive Agreement for Trans-Paci fi c Partnership)) is one avenue. Strengthening trade and investment links between the EU (European Union) and Korea is another.

At the same time, Europe needs deeper integration and greater resilience.

## 4.1 Deepening European integration

Greater integration is necessary on three fronts: economics, fi nance and energy.

## 4.1.1 Economic integration

Let us start with economic integration.

The free movement of goods, services, capital and people is a cornerstone of the European Union. For goods and people, integration has advanced substantially. But fragmented national rules are still hampering trade in services to a signi -fi cantly larger extent. [11]

Removing barriers could boost competition and productivity. The digital revolu -tion might help here. For example, a uni fi ed digital single market would allow professionals to work and fi rms to sell services across borders with ease.

Another solution would be an optional  ' 28th regime ' . The idea here is to estab -lish an EU (European Union)-wide legal framework that companies can opt into instead of navigating 27 national rulebooks. This would make cross-border oper -ations easier .

## 4.1.2 Financial integration

The second area in which Europe needs deeper integration is fi nance.

The European Union aims to build a Savings and Investments Union. In short, the idea of this concept is to channel more of Europe ' s signi fi cant household savings into domestic investment. At present, households predominantly channel their savings into safe products like deposits. At the same time, startups have di ffi culty raising funds, while some larger fi rms leave Europe in order to scale up.

The key is to diversify fi rms '  funding towards more equity, market - based debt and venture capital. What should be done here?

First, fi rms need better access to equity. For small, innovative start-ups, that means better access to venture capital. For established fi rms looking to expand, that means deeper, more liquid capital markets.

Second, a deeper securitisation market would help banks to transfer risk from their balance sheets to fi nancial markets. In turn, that would free up banks '  addi -tional lending capacity.

Finally, households and institutional investors need encouragement to buy more of these assets. For households, better fi nancial literacy would empower them to make informed decisions and seize opportunities in the capital markets. For institutional investors, we should review whether some regulatory hurdles to capital markets investments could be eased.

Once completed, the Savings and Investments Union will help to mobilise capital for green projects, defence and innovation. It would also make Europe more attractive to global investors at a time when relative attractiveness is being reassessed.

## 4.1.3 Energy system integration

Finally, integrating European energy markets should be another priority.

The European Union aims to achieve carbon neutrality by 2050. The European Commission estimates that EU (European Union) countries will have to invest over  € 1.2 trillion annually from 2021 to 2030. [12]

Today, Europe ' s power systems are still mainly national. Better cross - border grids and market coupling would align supply and demand more e ffi ciently. That would cut reliance on costly reserve capacity and speed up the rollout of renew -ables. In e ff ect, energy integration would lower energy prices and further strengthen both climate policy and energy security.

## 4.2 Fostering European resilience

Alongside integration, Europe must increase its resilience.

## 4.2.1 Defence

First and foremost, Europe needs closer defence coordination on strategy, per -sonnel, procurement and production. We should also work with partners beyond the EU (European Union), such as the UK (United Kingdom) and Norway.

The European Commission ' s Readiness 2030 strategy is a step in the right direc -tion. Amongst other things, it aims to create a single market for defence goods. This would deliver scale, lower unit costs and save billions each year . [13]

Even so, defence spending will be structurally higher for years to come. That, inevitably, raises the question of fi nancing. In the European Union, debt fi nan cing is limited by fi scal rules. They safeguard sound, sustainable public fi nances   a precondition for monetary policy to deliver on its price stability mandate.

Given the urgency, temporary exceptions can help to mobilise resources quickly. But permanently higher outlays must be aligned with the European framework for sound public fi nances.

## 4.2.2 Payments

Payments is another area in which Europe has to build resilience. Europe cur -rently relies heavily on non -European payment providers.

At present, about two-thirds of all card payments in the euro area are processed by non-European providers such as Visa and Mastercard -and often on servers outside Europe. That creates dependencies and leaves us vulnerable to geopolit -ical risks. And if US (United States) dollar stablecoins were to become wide -spread in Europe, our reliance on American providers could become even greater.

A central bank digital currency (CBDC (central bank digital currency)) in the euro area would secure control over critical infrastructure and make us less depend -ent on non European providers. Where do we stand here?

In terms of the retail variant -the digital euro -the Eurosystem has just con -cluded its preparation phase. It will now start to build the necessary technical capacity ahead of a possible decision to issue the currency. What we still need is a legal basis for the digital euro. It is now up to the European Parliament and the Council to give the green light. I really hope that we will see swift progress here. [14]

For wholesale CBDC (central bank digital currency), the Eurosystem has recently tested three di ff erent solutions involving market participants. I am proud to say that the Bundesbank, through the Trigger Solution developed by our Payment and Settlement experts, has played a decisive role in this endeavour . Demand was strong and market participants showed clear interest in moving beyond the trials. Just recently, the Eurosystem started working on the Pontes project -a dis -tributed ledger technology (DLT (distributed ledger technology)) solution that links market DLT (distributed ledger technology) platforms and TARGET (Trans-European Automated Real-time Gross Settlement Express Transfer System)

Services to settle transactions in central bank money. [15]

Taken together, strengthening our defence capabilities and bringing the euro into the digital age would increase Europe ' s resilience.

## 5 Euro area monetary policy

Ladies and gentlemen, so far, I have spoken about broader economic policy issues. They matter for central bankers because they shape the medium - term outlook for in fl ation as well as growth. Let me close my speech by explaining how we conduct monetary policy in the euro area and discussing the current monetary policy outlook.

Unlike the Bank of Korea, the Deutsche Bundesbank does not set monetary policy on its own. Rather , Germany is part of a monetary union with 19 other European countries   the euro area. Together, the 20 national central banks and the European Central Bank (ECB (European Central Bank)) form the Eurosystem. As an aside, as of January there will be 21 member states, with Bulgaria set to join the Eurosystem.

Monetary policy decisions in the Eurosystem are taken by the ECB (European Central Bank) ' s Governing Council. It includes the 20 national central bank governors and the ECB (European Central Bank) ' s Executive Board, led by President Christine Lagarde. The Governing Council meets eight times per year to set monetary policy.

At every other policy meeting, Eurosystem or ECB (European Central Bank) sta ff present projections for in fl ation, growth and other key variables. These forecasts provide vital input to our monetary policy decisions. They are published four times a year -in March, June, September and December. So much for the institu -tional set-up.

Over the last couple of years, interest rates in the euro area have been on a rollercoaster ride. After a long period of negative interest rates, the Eurosystem reacted forcefully to the in fl ation surge that began in 2021 and reached its peak in 2022. Between July 2022 and September 2023, interest rates were hiked ten times, by a total of 450 basis points.

In June 2024, the Eurosystem began to lower rates again. By June this year , they had fallen by 200 basis points. At its July, September and October meetings, the ECB (European Central Bank) ' s Governing Council left interest rates unchanged.

The Eurosystem currently uses the deposit facility rate to implement its desired policy stance, since liquidity remains ample. At present, this rate stands at 2 per cent. So where does that leave us?

One way to judge whether rates are in the right place is the natural rate of interest. This is de fi ned as the interest rate that is consistent with growth at potential and stable prices. As we cannot observe it directly, we have to estimate it.

Our latest Bundesbank estimates for the third quarter of 2025, drawing on a broad range of models, point to values between 1.7 and 2.6 per cent in nominal terms. Eurosystem model-based calculations in spring 2025 put the nominal natural rate between 1.75 and 2.25 per cent. Accordingly, the current rate of 2 per cent sits more or less in the middle of those ranges. [16]

This suggests that Eurosystem monetary policy is broadly neutral right now. However, this assessment should be taken with a grain of salt, because estimates of the neutral rate are inherently uncertain.

Our in fl ation projections are a better guide for interest rate decisions. In the latest projections from September 2025, ECB (European Central Bank) sta ff expected in fl ation to average around 2 per cent over the next three years, including a slight dip in 2026. Euro area growth over the same period should average about 1.2 per cent. That is very close to the European Commission ' s estimate of potential growth of 1.1 per cent for 2026. [17] [18] [19]

Moreover, the projections have been quite stable for some time now. Taken together, our projections also suggest that interest rates are currently in a good place.

Right now, Eurosystem sta ff are fi nalising projections to be published in conjunc -tion with the ECB (European Central Bank) Governing Council ' s December meeting. They will include an initial projection for 2028. Based on these fore -casts, we will be able to determine whether we are still on track to meet our medium - term in fl ation target.

## 6 Concluding remarks

Ladies and gentlemen, let me conclude.

Germany and the Republic of Korea face similar challenges. I hope my remarks have given you a clear view of how Germany and Europe could tackle these challenges.

To increase its potential growth, Germany has to cut red tape, reduce energy costs and expand its labour supply. At the European level, we need to deepen the Single Market, fi nalise the Savings and Investments Union, integrate energy markets and boost Europe ' s resilience in defence and payments.

I truly appreciate being here in the Republic of Korea and learning from your experiences. By deepening ties between our two countries, we can learn from each other and make faster progress.

For now, I look forward to our discussion.

Thank you for your attention.

Footnotes:

1. See Manufacturing, value added (% of GDP) -   OECD members, Korea, Rep., Germany | Data [https://data.worldbank.org/indicator/NV.IND.MANF.ZS?locations=OE-KRDE&amp;most\_recent\_year\_desc=true]
2. See Energy imports, net (% of energy use) -Germany, Korea, Rep. | Data [https://data.worldbank.org/indicator/EG.IMP.CONS.ZS?locations=DE-KR]
3. See Fertility rate, total (births per woman) -Germany, Korea, Rep. | Data [https://data.worldbank.org/indicator/SP.DYN.TFRT.IN?locations=DE-KR]
4. See Deutsche Bundesbank (2025), What ' s behind the sustained decline in German export market shares?, Monthly Report, July 2025. 4.
5. See Deutsche Bundesbank (2025), Forecast for Germany: US (United States) tari ff s initially weigh on economic growth; fi scal policy provides impetus with a delay, Monthly Report, June 2025. 5.
6. See Deutsche Bundesbank (2025), Challenges Faced by Firms, Deutsche Bundesbank Survey of  fi rms (BOP (Bundesbank Online-Panel)-F), 30 October 2025. 6.
7. See ifo (Institut für Wirtschaftsforschung) Institute (2024), Bureaucracy in Germany Costs 146 Billion Euros a Year in Lost Economic Output, Press release, 14 November 2024. 7.
8. See Institute for Employment Research (2025), 325.000 Arbeitskräfte waren laut Betrieben in den letzten drei Jahren zusätzlich nötig, um die gewachsene Bürokratie zu bewältigen, Press release, 20 November 2025. The press release is only available in German. 8.
9. See KfW (Kreditanstalt für Wiederaufbau) (2024), Start-up activity lacks macro-economic impetus   self-employed people are becoming more import ant as multipliers, KfW (Kreditanstalt für Wiederaufbau) Entrepreneurship Monitor 2024. 9.
10. See Kemmler et al. (2024), Klimaschutzinvestitionen für die Transformation des Energiesystems, Prognose. This study is only available in German. 10.
11. See Nagengast, A., F. Rios-Avila and Y. Yotov (2025), The European single market and intra-EU (European Union) trade: An assessment with heterogen -eity-robust di ff erence-in-di ff erences methods, Bundesbank discussion paper 26/2025. 11.
12. See European Commission (2023), Investment needs assessment and funding availabilities to strengthen EU (European Union) ' s Net-Zero techno -logy manufacturing capacity, SWD (2023) 68 fi nal. 12.
13. See Centrone, M. and M. Fernandes (2024), Improving the quality of European defence spending   cost of non-Europe report, European Parliamentary Research Service. 13.
14. See Eurosystem (2025), Progress on the preparation phase of a digital euro -Closing progress report. 14.
15. See Brand, C., N. Lisack and F. Mazelis (2025), Natural rate estimates for the euro area: insights, uncertainties and shortcomings, ECB (European Central Bank) Economic Bulletin, 1/2025. 15.
16. See Nagel J. (2024), Dot plots for the Eurosystem? Speech at Harvard University, 22.10.2024, Cambridge. 16.
17. See ECB (European Central Bank) (2025), Eurosystem sta ff  macroeconomic projections for the euro area, September . 17.
18. See European Commission (2025), European Economic Forecast, Institutional Paper No. 318, May. 18.",Joachim Nagel
https://www.bis.org/review/r251201w.htm,Swaminathan J: Reading the pitch - banking strategies for a long innings,"Speech by Mr Swaminathan J, Deputy Governor of the Reserve Bank of India, at ""Success trough synergy"", an annual banking event, organised by Standard Chartered Bank, Mumbai, 28 November 2025.",2025-11-28 00:00:00,"## Swaminathan J: Reading the pitch - banking strategies for a long innings

Speech by Mr Swaminathan J, Deputy Governor of the Reserve Bank of India, at ""Success trough synergy"", an annual banking event, organised by Standard Chartered Bank, Mumbai, 28 November 2025.

* * *

The legendary cricketer, the Laxman ji; Shri P D Singh, CEO of Very ery pecial V S Standard Chartered Bank, India &amp; South Asia, distinguished leaders from across the banking, financial and capital markets ecosystem, colleagues, ladies and gentlemen.

It is a pleasure to be with you this evening at . This annual ""Success Through Synergy"" event is an invaluable platform for thoughtful conversations on where our industry is headed. I am grateful for the opportunity to share a few reflections.

I am also aware that I stand between you and a celebrity cricketer. So, I will keep my innings brief and brisk, rotate the strike between a few key themes, and then retire gracefully to the dugout quickly so that all of us can get to witness the legendary Laxman play his strokes!

We are meeting at a time when banking is being reshaped by powerful forces. Technology is changing how customers interact with financial services. Markets are more integrated, and shocks travel faster. Geopolitical developments, climate risks and cyber threats are adding new layers of complexity. At the same time, India's economic prospects, digital public infrastructure and entrepreneurial energy are creating huge opportunities.

In such an environment, success for any one institution cannot come in isolation. It depends on the strength of the entire ecosystem, and on the quality of collaboration among banks, non-banks, market participants, fintechs, regulators and customers. That is why the theme is so apt. ""Success Through Synergy""

Since there is a cricketer waiting in the room, let me borrow something from the game. Think of the next part of my speech as an over, with six deliveries. Each ball is one key idea that I believe will shape the future of banking in India. I promise there will be no googlies.

## Ball 1: New challenges in banking today

The first is about the nature of risk. The traditional risks we grew up with, such as credit, market and liquidity risk, have not gone away. In some ways, they have become more complex. Lending is more granular, markets are deeper, and interconnectedness has increased. At the same time, new categories of risk have come to the fore.

Technology has blurred the boundaries between banks, non-banks and big tech firms. Competition is no longer only from the bank across the street. It may be from an app that lives on your customer's phone. Reputation risk has become sharper in a world

where information, and misinformation, travel instantly. A single customer complaint, if not handled well, can become a public issue in a few hours.

Climate-related risks, physical as well as transition-related, are starting to make impact. Cyber risk is now a permanent feature of bank risk registers. The cost of one major incident can far exceed the loss from a traditional fraud.

In this setting, risk management and governance cannot be a back-office function. They are central to strategy. Senior management and Boards have to ask themselves not only ""What is our return on capital"" but also ""What risk culture are we building"".

## Ball 2: Drivers of customer service in a digital era

The second one is on customer service. Technology has given us powerful tools to reach customers, to simplify processes and to make payments and credit more convenient.

But the basic expectations of customers remain very human. They want to be treated fairly. They want products that are suitable for their needs, explained in simple terms. They want transparency in pricing and conditions. And when something goes wrong, they want someone to listen and resolve their problem promptly.

In a digital, high-speed world, the test of customer service is not only ""Did we respond?"" but ""Did we actually solve the issue fairly and quickly?""

Customer service is also about inclusion. The design of products and interfaces must be easy to access, not only to the tech-savvy, but also to those who may be less comfortable with digital interfaces.

## Ball 3: Innovation and collaboration with fintechs

The third point is about innovation and partnership. Fintechs have entered almost every segment of financial services, from payments and small ticket credit to wealth management and cross-border remittances. Many of them have brought fresh ideas, agility and a new way of looking at customer pain points.

Banks bring something equally important. They bring trust, balance sheet strength, experience in managing risk over cycles, and deep knowledge of regulation and compliance.

The question is not whether banks will ""win"" against fintechs or vice versa. The question is how we can structure partnerships where the strengths of each are combined in a safe and sustainable way.

In cricketing terms, it is like a good batting partnership where both players complement each other, respect the match conditions and run between the wickets with mutual understanding.

## Ball 4: Customer centricity, grievance redress and cyber frauds

The fourth point brings us to a very important issue. Customer centricity is not a slogan. It must show up most clearly when something has gone wrong. This is where robust internal grievance redress mechanisms are critical.

Cyber fraud and digital scams have increased, and they can cause real hardship to ordinary customers. Banks have invested in systems to detect suspicious transactions, to send alerts and to strengthen authentication. These efforts are welcome and must continue. But technology alone is not enough. Sharing of fraud typologies, coordinated efforts to take down mule accounts, and working with law enforcement agencies are all important.

From the customer's perspective, what matters is not who is legally liable under the fine print. What matters is whether they feel their bank stood by them in a moment of stress. In the long run, that perception affects trust more than any advertisement campaign.

This is where financial literacy and awareness also become part of our agenda. When banks invest in helping users navigate digital channels safely, they are building a more resilient customer base.

## Ball 5: Data, analytics and responsible use of ""the new oil""

The fifth idea is about data. It has often been said that data is the new oil. I would add that data is also like water. It can sustain life if used properly, but if it is polluted or misused, it can cause damage.

Banks sit on large volumes of customer data. With appropriate analytics, this data can generate insights into behavioural patterns. It can help improve underwriting, detect early signs of stress, and tailor products to suit different customer segments. It can help reduce costs and improve efficiency.

At the same time, responsible use of data is essential. Customers must have confidence that their data is being used with care, that privacy is respected, and that there is no misuse or unauthorised sharing.

Models and algorithms must be explainable to management and boards, and their outcomes need to be monitored for fairness and unintended exclusion. Both banks and supervisors may increasingly use advanced analytics, but these tools should support human judgment, not replace it.

## Ball 6: IT resilience and third-party dependencies

The sixth and last point is about resilience. As banks digitise more and more of their operations and move to cloud and outsourced solutions, their dependence on IT systems and third-party providers has increased significantly. Outages that earlier affected only a branch can now affect millions of customers. Even planned downtimes need to be communicated and managed carefully.

Banks cannot simply rely on the assurance of service providers. They must understand the technology, the control environment and the concentration risk arising from many institutions relying on the same provider.

The question is not whether an incident will ever happen. The question is how quickly and effectively the institution can detect, contain and recover from it.

## Bringing it all together

If you look back at these six balls in that over, a common thread runs through them. It is the central importance of governance, culture and people. Technology, data, regulation and processes are all important. But at the end of the day, decisions are made by people, and culture is shaped by the tone at the top.

Strong governance, an ethical culture, and a clear sense of purpose are what allow institutions to navigate cycles, absorb shocks and serve their customers and the economy over the long term.

As regulators, we see banks as partners. Our role is like that of the umpire: we set and interpret the rules, monitor the game and call out the occasional no-ball or wide when needed, so that the play remains fair and safe. The task of scoring runs, by serving customers well, managing risks prudently and supporting growth, rests with you.

Let me conclude with one final cricketing thought. In T20 cricket, it is tempting to go for big shots every ball. In Test cricket, patience, discipline, and respect for match conditions matter more. Our financial system must combine both mindsets. We need the innovation and energy of T20, but we must anchor it in the prudence and resilience of Test cricket. Only then can we build institutions that not only post quick scores, but also stay at the crease for decades.

I wish all of you continued success in your journey. May your partnerships be strong, your defences solid, your shots well timed, and your innings long. Jai Hind.",Shri Swaminathan J
https://www.bis.org/review/r251201l.htm,Suhaimi Ali: Strengthening financial resilience and driving sustainable growth,"Keynote presentation by Mr Suhaimi Ali, Assistant Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the Kuala Lumpur Islamic Finance Forum 2025 (KLIFF 2025), Kuala Lumpur, 18 November 2025. ",2025-11-18 00:00:00,"## Suhaimi Ali: Strengthening financial resilience and driving sustainable growth

Keynote presentation by Mr Suhaimi Ali, Assistant Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the Kuala Lumpur Islamic Finance Forum 2025 (KLIFF 2025), Kuala Lumpur, 18 November 2025.

* * *

## Presentation accompanying the speech

A very good morning, distinguished guests, industry leaders, and friends from near and far. It is a real privilege to be here with all of you at the Kuala Lumpur Islamic Finance Forum 2025.

Here's the thing: finance is often seen as charts, ratios, and balance sheets. But at its core, it is about people. It is about the dreams we nurture, the opportunities we create, and the futures we help shape. Think of a family setting aside a portion of their income each month so their child can one day walk into a university classroom. That simple act is more than a financial decision, it is a promise of hope. Think of an entrepreneur who walks into a bank with nothing but an idea and walks out with the capital to turn that idea into jobs, dignity, and impact. These are not transactions; they are transformations.

Now imagine an entire financial system built deliberately arou nd that spirit of care, responsibility, and shared progress. This is where Islamic finance stands apart. It is anchored in justice, compassion, and stewardship - values that have guided communities for centuries. Values that remind us that wealth is not just to be accumulated, but to be used meaningfully. Values that insist finance must serve humanity, not the other way around.

But what this really means is we carry a responsibility. It is not enough to preserve these principles; we have to renew them. We have to re-imagine how Islamic finance can remain relevant, courageous, and impactful in a world defined by rapid change, complex risks, and rising expectations. Malaysia's Islamic finance journey has shown what is possible with vision and commitment. Today, the real question is how we elevate that journey into its next chapter - one that is more innovative, more sustainable, and more inclusive.

Malaysia has long embraced a dual financial structure where Islamic finance operates in parallel with conventional finance. Over the years, this model has matured into a sophisticated, resilient ecosystem supported by strong institutions, diverse instruments, and a regulatory architecture that integrates Shariah considerations with global prudential standards. This balance allows Malaysia to innovate without compromising stability - a hallmark of our approach.

The strength of Islamic financial institutions has enabled the industry to support businesses and households through shifting economic cycles. Today, Islamic banking accounts for 47% of total financing, while takaful commands 25% of net contributions across family and general takaful. Malaysia continues to hold 36% of the world's

outstanding sukuk, a testament to depth, demand, and trust. And in 2024, SRI assets rose to RM11.9 billion, nine times larger than in 2017, signalling a powerful shift in investor preference toward Shariah-aligned sustainability.

These are not just milestones; they are markers of potential. The question is how we translate that potential into solutions for Malaysia's most pressing needs. Our country faces ambitious but necessary goals - from financing the RM1.2 to RM1.3 trillion required for the net-zero transition under NETR, to catalysing growth in strategic sectors like the halal economy, high-value industries, and MSMEs under RMK13. Islamic finance is uniquely placed to support this agenda, not only by mobilising capital, but by ensuring that capital creates real, long-term value.

Beyond our borders, the opportunities are just as compelling. Islamic finance can play a pivotal role in narrowing global development gaps. Member countries of the Islamic Development Bank require between USD700 billion and USD1 trillion annually to meet their SDG commitments, nearly 40% of the global financing gap. With Shariahcompliant instruments rooted in fairness and risk-sharing, Islamic finance is well positioned to become a bridge between values-driven capital and countries striving for inclusive, sustainable progress.

But for these possibilities to become reality, we must shift decisively from aspiration to action. This starts with deepening our commitment to value-based intermediation. For years, VBI has signalled our belief that profitability and societal good can reinforce each other. The next step is embedding this belief into measurable outcomes. That means developing stronger impact measurement tools to track how financing supports poverty alleviation, SME development, and environmental stewardship. It also means designing products, whether sukuk, investment funds, or trade financing, that carry clear sustainability objectives from the outset.

When VBI becomes part of how we assess risk, design products, and evaluate performance, we begin to see Islamic finance not as a niche offering, but as a complete system of value creation. This is where social finance can also play a transformative role. Through initiatives like myWakaf and iTEKAD, we are already seeing how zakat, waqf, and microfinance can be structured to support livelihoods and build resilience. Imagine waqf-funded solar installations powering rural schools, or blended instruments supporting farmers adapting to climate uncertainty. These are practical, scalable possibilities.

Innovation is the next frontier. The world is changing faster than traditional models can keep up with. Climate volatility, food insecurity, demographic shifts, and digital disruption demand fresh thinking. This is where Islamic finance must step forward boldly. Expanding the use of risk-sharing instruments such as mudarabah and musharakah will allow us to finance real economic activity more meaningfully. Through initiatives like i-CITA, we now have platforms to co-create new models that tackle national priorities, from food security to climate resilience.

At the same time, we must strengthen our role in the halal economy - a sector with enormous global potential. Islamic finance can fuel halal supply chains, support global

expansion of Malaysian firms, and anchor Malaysia as a leading hub for halal innovation and stewardship. This is an area where finance, values, and economic opportunity converge naturally.

Technology is the accelerator that ties all these ambitions together. In Islamic finance, digitalisation is more than convenience, it is a direct enabler of Maqasid Shariah. Blockchain can enhance trust and transparency in sukuk issuance and waqf governance. Big data can help us measure real impact: how many jobs were created, how many households gained resilience, how many SMEs grew sustainably. Artificial intelligence can strengthen Shariah compliance by screening contracts and detecting non-compliant activities in real time. Digital onboarding and e-KYC can dramatically expand access for rural and underserved communities. These tools allow us to scale the values we hold dear.

But tools alone are not enough. The next leap for Islamic finance depends on people which is our collective talent. We need professionals who not only understand the intricacies of Shariah and financial intermediation, but who also speak the language of sustainability, data, technology, and innovation. Building this talent pipeline requires deliberate investment: cross-disciplinary training, stronger industry-academia partnerships, ethical leadership development, and platforms that encourage creativity and problem-solving. With the right people, Islamic finance can lead not just in size, but in purpose and impact.

The good news is this: the foundation is strong. The ecosystem is ready. The opportunities are real. What we need now is collective will. As a central bank, we remain committed to supporting responsible innovation, enabling experimentation, and strengthening collaboration across industries, sectors, and borders. Risk-sharing frameworks, social blended protection models, and sustainability financing tools are early examples of what becomes possible when we work together with purpose.

If we look back 20 years, few could have predicted the scale Islamic finance has reached today. This progress did not happen by accident. It happened because the industry chose vision over comfort, partnership over silos, and courage over hesitation. The next chapter will demand the same spirit. The world is watching not only what Islamic finance can do, but what it can become.

Innovation is not just about ideas; it is about collective action that turns purpose into impact. And Islamic finance - with its values, its principles, and its people - is uniquely positioned to lead a future of resilience, shared prosperity, and sustainable growth.

On that note, I wish all of you a meaningful and inspiring KLIFF 2025. May our conversations today spark bold ideas, meaningful partnerships, and a renewed commitment to shaping a financial system that truly serves humanity. Thank you.",Suhaimi Ali
https://www.bis.org/review/r251201i.htm,Madelena Mohamed: Keynote address - JC3 SME Focus Group (SFG) Climate Conference for SMEs 2025,"Keynote address by Ms Madelena Mohamed, Assistant Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the JC3 SME Focus Group (SFG) Climate Conference for SMEs 2025, Kuala Lumpur, 17 November 2025.",2025-11-17 00:00:00,"## Madelena Mohamed: Keynote address - JC3 SME Focus Group (SFG) Climate Conference for SMEs 2025

Keynote address by Ms Madelena Mohamed, Assistant Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the JC3 SME Focus Group (SFG) Climate Conference for SMEs 2025, Kuala Lumpur, 17 November 2025.

* * *

## Empowering SMEs for Climate Resilience: From Awareness to Action

Some of you may have driven through Bukit Tunku to get here this morning. Along the winding road, you would have seen large, beautiful trees covering the hills. While you might have admired the greenery and feeling blessed, few of us would have been thinking about the roots of those trees. And so it is with SMEs, the roots beneath Malaysia's economic canopy.

Just like root networks in a forest, SMEs hold up Malaysia's growing economy. 97% of business establishments in Malaysia are SMEs. The SME sector supports 8 million jobs and contributes nearly 40% of Malaysia's GDP . The Thirteenth Malaysia Plan aims to 1 further grow the sector's contribution to 50% of GDP by 2030.

Climate action is costly. Yet climate inaction today is costlier - one which must be borne by our future generations. It is therefore my pleasure to be here this morning to speak on the responses to propel the decarbonisation agenda forward.

The theme for today's conference ' Building Climate Resilience: Practical Actions for ' is indeed timely to shape the actions needed now for a sustainable tomorrow. SMEs

We will spend the day going deeper into this. But before we begin, allow me to say a few words about (a) why climate resilience matters for SMEs, and (b) to highlight practical steps that SMEs can take to build climate resilience.

## Why climate resilience matters

Ladies and gentlemen,

Climate resilience, and sustainability in general, is ultimately about securing stability. In a world with increasing uncertainty, stability is precious for businesses.

With climate change, we must now deal with events like more frequent physical risk and severe floods, droughts and weather disruptions. These events affect business operations - businesses may face supply delays, damaged inventory and lost of revenue. There's also what we call - that is the risk of being left behind transition risk as business norms shift to address climate change.

As export markets and large corporates set net zero targets and seek to mitigate their own environmental footprint, SMEs are finding it increasingly important to navigate a of compliance regimes (No Deforestation, Peat or growing alphabet soup NDPE

Exploitation), (EU Deforestation Regulation), (Carbon Border Adjustment EUDR CBAM Mechanism), ; the list goes on. Even here at home, Belanjawan 2026 Scope 1, 2, 3 introduced a carbon tax targeting high emitting sectors such as iron, steel, and energy . 2 Even if SMEs are not taxed yet, compliance will matter for firms along the supply chain.

Climate resilience is not just about managing the physical and transition risks of climate change. There is in fact an element of opportunity for businesses. , climate action First creates . For instance, the National Energy Transition Roadmap (NETR), new demand which charts Malaysia's path to Net Zero by 2050, aims to mobilise RM1.2 trillion in investments and create over 300,000 green jobs . 3

These opportunities are not limited to the large corporations. SMEs in solar installation, EV maintenance, green building materials, and waste recycling for example stand to benefit directly.

Second , the current recalibration of global supply chains creates a unique window of . As the world adjusts to evolving geopolitics and new opportunity for Malaysia technologies, there is growing interest in ASEAN as a relatively neutral and reliable trading partner. Even within ASEAN, the current 23% intraregional trade has prospects to grow to at least 40%. With this, Malaysia has a historic opportunity to quickly move up the value chain and seize this potential. But this requires the ""root network"" of our SMEs to be ready to meet the requirements of global and regional demand, including in sustainability standards and disclosures.

Third , building climate resilience ultimately serves the . Many of the steps bottom line to transition also reduce everyday costs. Better cooling and ventilation lower electricity use and reduce machine breakdowns. Digital tools for inventory and maintenance cut wastage and prevent costly delays. These are practical upgrades that pay for themselves over time, often within a year or two.

Resilience also strengthens a firm's commercial position. Businesses that can continue operating during bad weather, or recover quickly after disruptions, deliver more reliably to customers.

## The financial sector has a key supporting role

## Ladies and gentlemen,

The financial sector has a key role in helping SMEs navigate the uncertainties posed by climate change and make the most of new opportunities - so that our economy can benefit from stable prosperity. As I alluded to earlier, . stronger roots, stronger forests

Organised under the leadership of the JC3 SME Focus Group (SFG), co-chaired by Bank Negara Malaysia and UOB Malaysia, along with 14 focus group members, this conference marks an important step forward in building a supportive ecosystem where knowledge, tools, and partnerships coalesce.

I would like to extend my gratitude to the SME Focus Group for their dedication and hard work in bringing together distinguished speakers and working closely with the SME

associations, key ministries and government agencies, as well as solution providers to make this event a reality.

As for the SMEs who are present in this auditorium - whether you are here because you are curious and want to learn, or you are here because you want the know how to go about embracing sustainability in your business operations, or you are here to share and spread your experience, I want to congratulate you for taking this important step.

## Practical actions for SMEs

So, what can you, the SMEs, start doing today? Building climate resilience may sound complex, but it starts with practical steps. three

The first is to . As I have mentioned, climate understand your risks and opportunities change brings both challenges and openings. Begin by assessing where your business is exposed and where it can grow. Today, you will have a chance to learn more about this from the experts lined up. You can also find out several tools available for this.

- The JC3 ESG Jumpstart Portal  is a good place to start. It offers practical guides, training programmes, as well as resources on relevant certifications and financing opportunities.
- The JC3 Climate Data Catalogue  links you to datasets to support risk assessments such as flood maps for site decisions and drought projections for crop planning.
- The SME Loss Prevention Framework, developed by Generali and UNDP, is a digital tool to identify vulnerabilities, especially from flood exposure, and receive tailored recommendations.

The second step is to . Increasingly, start measuring and reporting what matters global trade counterparts are demanding sustainability-related data, particularly on carbon emissions. Even if you are not selling directly to them, very often your local trade partners are part of a supply chain that ultimately sells to global markets which have these reporting requirements.

The Greening Value Chain programme introduced by the JC3 provides a structured mechanism for SMEs to understand and measure your own carbon footprint, identify aspects of your operations that can be more emission friendly, begin tracking and reporting your emission. You should call on your banker to find out more about this.

Later today you will learn about other measurement and disclosure tools and how these can open doors for your business to new supply chains. For instance:

- The Simplified ESG Disclosure Guide (SEDG), developed by Capital Markets Malaysia (CMM), makes reporting more accessible for SMEs.
- This guide includes a GHG Emissions Calculator  which helps measure Scope 1 and 2 emissions in line with global standards .

The third step is to . Making your business climate resilient is finance your transition an investment for stable, lasting growth. Lower operating costs, access to new markets,

and stronger brand trust await those who act early. Financing is available to support you in this investment. You will hear today how to access these opportunities.

- Bank Negara Malaysia has allocated such as RM3.8 billion in targeted facilities the Low Carbon Transition Facility (LCTF) and the High Tech &amp; Green Facility (HTG) to help SMEs take steps to build climate resilience and make most of the opportunities. Recently, we have also introduced the Relief and Adaptation Facility (RAFt) that helps SMEs improve resilience to floods - both through postflood relief and proactive adaptation steps.
- Credit Guarantee Corporation Malaysia (CGC), along with 18 partner banks, has committed to a RM1 billion portfolio guarantee scheme specifically to support Small and Medium Enterprises (SMEs) transition towards Environmental, Social, and Governance (ESG) principles.
- There are also several other programmes to support SMEs through a combination of public and private funding which reduce the risk profile of projects to make them more attractive for private investors. MyCIF, administered by the Securities Commission, supports SMEs in the agriculture and bio-economy via equity crowdfunding and peer-to-peer platforms. To date, this has mobilised RM6.9 billion for over 9,000 SMEs, including RM1.2 billion from government allocation . Similarly, 4 NIMP CoSIF, the National Industrial Master Plan 2030 Strategic Co-Investment Fund launched by the Securities Commission and MITI, facilitates fundraising in new growth areas including Electric Vehicles, Renewable Energy, and Carbon Capture, Utilisation and Storage (CCUS) . 5
- The Climate Finance Innovation Lab (CFIL), administered by Bank Pembangunan Malaysia which came into action recently is pioneering innovative financing structures and models for climate projects.

## Conclusion and call to action

Ladies and gentlemen,

Making the transition may feel daunting, but every big change starts with small first . steps

As SMEs gather here today to learn, share challenges, and explore climate-aligned opportunities, this is a crucial moment for financial institutions to demonstrate by providing the support SMEs and your clients need leadership and commitment be it capacity building, advisory, and access to finance.

We have lined up a programme to help SMEs size up your risks and opportunities, start measuring and reporting relevant data, and find financing for your transition.

Remember, you are not alone . There is an entire ecosystem ready to support you, including fellow entrepreneurs who are on a similar journey. With their help, I am confident that the SMEs in Malaysia can be a strong 'root network' that can support the canopy of Malaysia's economy to rise to greater, greener heights.

Thank you, and I look forward to an exciting conference ahead.

- 1 Source: Department of Statistics Malaysia (2025) MSME Performance 2024
- 2 Source: Belanjawan 2026
- 3 Source: National Energy Transition Roadmap
- 4 Source: Securities Commission Malaysia
- 5 Source: NIMP 2030 Strategic Co-Investment Fund (NIMP CoSIF)",Madelena Mohamed
https://www.bis.org/review/r251201h.htm,Sarah Hunter: Remarks - Australian Industry Group Executive Luncheon,"Remarks by Ms Sarah Hunter, Assistant Governor (Economic) of the Reserve Bank of Australia, at the Australian Industry Group Executive Luncheon, Sydney, 20 November 2025.",2025-11-20 00:00:00,"## Sarah Hunter: Remarks - Australian Industry Group Executive Luncheon

Remarks by Ms Sarah Hunter, Assistant Governor (Economic) of the Reserve Bank of Australia, at the Australian Industry Group Executive Luncheon, Sydney, 20 November 2025.

* * *

Before I begin, I would like to acknowledge the Gadigal people, the Traditional Custodians of the land on which we are meeting today. We are very lucky in Australia that our First Nations people protect our land and culture to hand down to future generations, and I would like to pay my respects to Elders past and present and extend that respect to any First Nations people here with us today.

One of the things I enjoy most in my job is interacting directly with all parts of the community in Australia; I always learn a lot and appreciate hearing a wide range of perspectives on what's happening in the economy, and how interest rate settings are affecting households and businesses across sectors and geographies.

While we are continuously assessing current economic conditions and the short-term outlook for the economy, we also undertake research and analysis on a wide range of structural shifts that shape the Australian economy over time.

This work deepens our understanding of current conditions and the outlook by how monetary policy transmits through the economy and how longer term forces may be changing the economy's fundamentals.

Therefore, today I thought I would highlight three key questions that we are currently researching and analysing. In all three cases, information and insights from the business community and our own liaison program can help shed some light on the answer. So, it's a pleasure to be here today, not just to share some of our work, but also to hear from you. I'm looking forward to our Q&amp;A conversation in a few minutes and the opportunity to gather some fresh insights.

There is always change happening somewhere in the economy: a new sector is being developed as technology and its uses advance; the composition and preferences of households continuously change; and we're exposed to shifting global winds from evolving geopolitical relationships, financial markets and trading patterns. It's not enough for us to focus only on what's happening in the here and now, we have to look ahead to make sure we make good policy decisions today and in the future.

The first topic I want to touch on is, perhaps unsurprisingly for a central bank, inflation dynamics. Forecasting inflation over the past few years has been challenging - indeed we were materially surprised by the latest data, which came through stronger than we were expecting.

A particular focus of our work on inflation dynamics is to understand whether businesses have changed the way they set prices since the pandemic. Do firms now

look to pass costs through more quickly, if they can, given the recent experience of high inflation? How do firms' profit margins vary as economic conditions change?

To get a handle on these questions, we are making use of microdata sets from the Australian Bureau of Statistics (ABS) that allow us to look at anonymised individual firms' pricing decisions. We're hopeful that this research will tell us more about how businesses respond as their costs and conditions change, which will ultimately add to our understanding of inflation.

A second topic we're currently focused on is the economy's supply capacity. As my colleague Deputy Governor Hauser recently discussed, 1   the Monetary Policy Board is focused on setting monetary policy to keep demand in the economy in line with potential supply. If we can sustain this over time and expectations remain anchored, inflation will be within our 2-3 per cent  target band and the labour market will be sitting at full employment.

Ideally, we would know what the economy's supply capacity is at any given point in time - it would be great if it were possible to measure this directly. Unfortunately, precisely measuring the economy's supply capacity is impossible - we can measure actual outcomes such as employment or economic output (GDP) but we can't, for example, measure full employment or the level of potential output.

We are particularly focused on ways to measure capacity in the labour market. 2   We think the labour market is currently a bit tight - in other words, it is operating slightly beyond what can be sustained with inflation at target, but this judgement is uncertain so we're actively investigating how close we are to full employment.

Within this line of enquiry, some of the questions we're currently investigating include:

- the extent of the upward trend in the number of women and older people in the workforce
- whether the easing in the cost-of-living squeeze (though we know it's still challenging) has resulted in some people choosing to dial back on work
- whether the match between the skills and expertise of those looking for work aligns with what firms are looking for (and if the speed of matching in the labour market is faster or slower now relative to the past).

As you can see, we have plenty of questions that we're actively digging into, and we'll have more to say on how we're thinking about full employment next year.

A third topic we're actively exploring is whether the transmission channels for monetary policy have changed in recent years, and if so how. As I've spoken about previously, 3 there are a number of channels through which policy impacts the economy, and the importance of each channel depends on a range of factors. For example, the impact of a change in rates on household disposable incomes is crucially dependent on how many households are borrowers and how many are savers, and this can change over time. We are currently expanding and extending our tools and frameworks that will let us explore shifts like this. 4

A key conjunctural question that relates to the transmission of monetary policy is how to think about the way the housing market has responded to the interest rate cuts that have already occurred. Thus far the response has been a little stronger than we anticipated, with activity in the established housing market picking up slightly more than expected in recent months. As outlined in the November Statement on Monetary Policy, we are actively watching how this unfolds from here, and what that might mean for our inflation and labour market objectives. 5

The three issues I've highlighted today are just a glimpse into the broader research agenda our economists are actively exploring at the moment. We are constantly curious about how the economy is shifting and changing beneath the surface, the drivers of these undercurrents, and what they collectively mean for policy settings.

Hearing from businesses, not-for-profit institutions and individuals across the country is a vital source of information for this research and analysis. That's why conversations like today's matter. Your insights - from the ground level - help bring our analysis to life. So, thank you for being part of that process. I'm looking forward to our discussion and hearing what's on your minds.

I am grateful to Michele Bullock, Andrew Hauser, Brad Jones, Tim Taylor, Michelle Wright, Jarkko Jaaskela and Suzanne Houweling for their comments and suggestions on earlier drafts. All remaining errors are my own.

1  See Hauser A (2025), 'On the Rail or Off to the Races? The Outlook for the Australian Economy', Speech to UBS Australasia Conference, Sydney, 10 November.

- 2  This work builds on earlier analysis that can be found in Ballantyne A, A Sharma and T Taylor (2024), ' Assessing Full Employment in Australia', RBA Bulletin, April, which is also discussed in S Hunter (2024), ' Understanding the Journey to Full Employment', Keynote Address to the Barrenjoey Economic Forum, Sydney, 11 September.
- 3  See Hunter S (2024), 'Monetary Policy: Forward Looking and Data Dependent in the Face of Uncertainty', Speech to the Australian Financial Review Banking Summit, Sydney, 18 March.
- 4  For some early work in this stream, see Chipeniuk K, G Nolan, M Nolan (2025), 'RDP 2025-04: HANK and the Transmission of Shocks to Demand and Supply', RBA Research Discussion Paper No 2025-04.
- 5  See RBA (2025), Statement on Monetary Policy, November.",Sarah Hunter
https://www.bis.org/review/r251201f.htm,Ida Wolden Bache: Monetary policy and the Norwegian economy,"Speech by Ms Ida Wolden Bache, Governor of Norges Bank (Central Bank of Norway), for the Board of the United Federation of Trade Unions (Fellesforbundet), Oslo, 26 November 2025.",2025-11-26 00:00:00,"## Ida Wolden Bache: Monetary policy and the Norwegian economy

Speech by Ms Ida Wolden Bache, Governor of Norges Bank (Central Bank of Norway), for the Board of the United Federation of Trade Unions (Fellesforbundet), Oslo, 26 November 2025.

* * *

## Presentation accompanying the speech

Good morning, and thank you very much for the invitation to the Board of Fellesforbundet.

## Chart: Agenda

My introduction today focuses on three themes:

- Norges Bank's role in economic policy.
- The relationship between wage growth, inflation and interest rates.
- How Norges Bank takes into consideration the objective of high and stable employment.

Let me start with the first one - Norges Bank's role.

Chart: The Monetary Policy and Financial Stability Committee

In this photograph you can see the members of Norges Bank's Monetary Policy and Financial Stability Committee. These are the five members who jointly make policy rate decisions. At the far end of each side are Deputy Governors Pål Longva and Øystein Błrsum. Next to them you see the two external members, professors Steinar Holden and Ingvild Almås.

Our job is to ensure low and stable inflation. This task has been delegated to us by the Storting and the government.

Price stability is a precondition for a well-functioning economy. When prices rise quickly and unexpectedly, it becomes hard to plan and make good decisions. High inflation makes it difficult, for example, to know whether the price of a good or service is reasonable, and wage increases that look generous when they are agreed may after a few months be eroded by high inflation. The lowest income groups are most affected by rapid and unexpected price increases.

Norges Bank is tasked with keeping inflation at close to 2 percent over time. At the same time, we are mandated to help keep employment high and to promote economic stability.

In recent years, this has been no small task. The economy has been hit by major shocks, and we at Norges Bank have had to navigate uncharted territory. Let's take a brief look back.

## Chart: We raised the policy rate sharply and rapidly

At the beginning of 2020, the Norwegian economy was close to what we might call a normal situation. In March, the picture changed dramatically when the pandemic compelled the government to introduce the most restrictive measures in Norway in peacetime. Unemployment rose from two to ten percent in the space of a couple of weeks. To dampen the downturn, we set the interest rate at zero. We were not worried about high inflation, but we feared that unemployment would become entrenched and kept the interest rate at this historically low level for more than a year.

In autumn 2021, we began to raise the policy rate gradually towards a more normal level. Then - after a few months - the Norwegian economy was hit by a global cost shock. The pandemic and Russia's invasion of Ukraine led to higher energy and metal prices, and freight rates. Inflation also surged in Norway, and we realised that the interest rate level was too low. Interest rates subsequently rose sharply among our trading partners, and the krone depreciated. We did not want to restrain the economy more than needed. At the same time, we had to prevent prices from continuing to rise rapidly. Over the course of two and a half years, we raised the policy rate from 0 to 4.5 percent, and it was not until June this year that we began to ease the monetary stance slightly.

The policy rate hikes could not affect inflation abroad. However, higher interest rates restrain the rise in prices for domestically produced goods and contribute to strengthening the krone. Had we not raised the policy rate, the krone exchange rate could have depreciated more, and inflation could have become even higher than it actually became.

Central banks in many of our trading partner countries have reduced their policy rates over the past year. Even though we have also eased monetary policy somewhat in Norway, the Committee judges that a restrictive monetary policy is still needed. At our previous monetary policy meeting three weeks ago, we kept the policy rate unchanged at 4 percent and did not envisage a large decrease in the policy rate ahead. Our most recent forecast, published in September, indicates one interest rate cut per year over the next three years. As such, we do not foresee a decrease in interest rates back to the levels seen in the decade prior to the pandemic.

## Chart: Domestic prices are still rising rapidly

The policy rate hikes have contributed to bringing down inflation, but inflation is still above target. The rise in import prices has come down, but domestic prices are still rising rapidly, which reflects, among other things, a sharp rise in business costs in recent years.

Chart: The relationship between wage growth, inflation and interest rates

This brings me to my second theme today.

Chart: Wage growth has been high in recent years

Wage growth last year was the highest seen in 16 years. This year, wage growth is expected to be lower, but still high compared with productivity growth.

Wage growth has not been high in relation to earnings in some business sectors. The principle of the Norwegian wage determination model is precisely that workers should receive their share of value creation in manufacturing. Thanks to high commodity prices and a weaker krone exchange rate, many export companies have benefited from higher earnings.

As you are well aware, the wage settlement in manufacturing sets the norm for subsequent wage settlements. When manufacturing is faring well, wage increases also become high in business sectors with lower profitability. Companies that are more sheltered from foreign competition will to a greater extent be able to pass on higher labour costs to prices.

However, the ability to pay wages in manufacturing is not the only factor influencing wage growth. Our analyses of wage developments over time show that inflation expectations, as estimated by the Norwegian Technical Calculation Committee for Wage Settlements, are also important. In addition, we see that wage growth is affected by labour market tightness. When unemployment is low and firms compete for skilled labour, wages tend to rise faster.

Norway's coordinated wage determination system, where the bargaining parties place emphasis on employment, reduces the risk of wage-price spirals. This means that there is less need for monetary policy tightening than would otherwise have been required when there are prospects of high inflation. Monetary policy must react - even when inflation is triggered by a global cost shock. When prices rise internationally, central banks in trading partner countries will often react by raising their policy rates. If we do not raise the policy rate in Norway, the krone could depreciate. A weaker krone means higher imported price inflation. It can also increase profitability in export industries, which can in turn contribute to higher wage growth.

Even though wage growth has been high in recent years, it has not resulted in a marked improvement in purchasing power. Wage growth was lower than inflation in both 2022 and 2023. When interest expenses increased at the same time, many people experienced a decline in their purchasing power.

Since then, inflation has come down, and purchasing power has increased. Wages are expected to rise faster than prices in the years ahead. Combined with lower interest rates, this will strengthen peoples' purchasing power.

Chart: How Norges Bank takes into consideration the objective of high and stable employment

Let me now turn to my final theme today.

At the same time as we are tasked with keeping inflation low and stable, we are also mandated to help keep employment high and to promote economic stability.

Over the long term, these objectives are not conflicting. In the long run, we cannot trade off higher employment for higher inflation. Quite the contrary. Low and stable inflation provides the best possible basis for high output and employment in the long term.

The level of employment will over time be determined by factors such as population composition, wage formation and labour market policies. The higher labour market inclusion and labour supply are, the higher employment can be over time.

In the short term, however, there may be a conflict between our objectives. Higher interest rates lead consumers and firms to tighten consumption and investment, so that demand for goods and services declines. This helps dampen inflation. But the need for labour also declines, and more people may be left without a job.

This is the trade-off we have faced in recent years. The aim of pushing down inflation has implied higher interest rates, while the aim of keeping employment high has pulled in the opposite direction.

In interest rate setting, we have sought to find the right balance between these goals. A precondition for striking appropriate trade-offs is that we closely monitor developments in the economy, and not least developments in the labour market.

## Chart: Unemployment has increased from a low level

In Norway, unemployment is measured by both the Norwegian Labour and Welfare Administration (Nav) and Statistics Norway. The unemployment figures from Statistics Norway's Labour Force Survey - LFS - are normally higher than the registered unemployment rate, partly because it captures people who want a job but have not registered as unemployed with Nav. Both measures show that unemployment has increased from its lowest level three years ago. According to the Nav measure, unemployment is now back at the same level as before the pandemic, while the LFS measure shows that unemployment has risen somewhat more. LFS unemployment has increased especially among youth aged below 25.

## Chart: More people employed than before the pandemic

Employment developments have also been weaker since we started raising the policy rate. Measured as a share of the population, the number of employed is slightly lower than a couple of years ago. The employment rate is nevertheless markedly higher now than it was in the period before the pandemic.

## Chart: Construction was hit hard by the interest rate increases

To gain the best possible understanding of the state of the Norwegian economy, we regularly talk to companies in various industries around the country. The companies describe what we can also read from official statistics - that there are large differences across industries. Developments have been particularly weak in industries that are most affected by interest rates. Over the past three years, the number of employed in construction has declined. The rate hikes have come on top of a sharp rise in construction costs after the pandemic.

Other industries have fared better. Strong investment activity in the North Sea has sustained employment in oil-related industries. Accommodation and food services, which were hit hard by the lockdowns during the pandemic, have seen solid job growth in recent years - probably helped by a weaker krone and more domestic and foreign tourism in Norway.

Norges Bank cannot fine-tune developments in individual sectors. Our key instrument is the policy rate, and it affects many parts of the economy at the same time. When we set the policy rate, we have to consider the overall state of the economy. The fact that we ensure low and stable inflation is of benefit to all.

Moreover, we place great emphasis on the aim of keeping employment high, as we have also done during the period of high inflation. We are therefore not attempting to bring inflation back to its target as quickly as possible. Had we focused only on inflation, we would have raised the policy rate more.

Chart: Inflation down to target without a large increase in unemployment

Our policy rate forecast shows the policy rate path that, in our judgement, will provide the best possible trade-off between inflation and employment.

With the policy rate path we envisaged in September, we expect inflation to decline and move down towards the target in the course of three years - and without a large increase in unemployment.

## Let me summarise.

- Our role in economic policy is to ensure that inflation in Norway is low and stable. This provides the best possible basis for high output and employment in the long term.
- Coordinated wage determination reduces the risk of wage-price spirals, with less need for monetary policy tightening than would otherwise have been required. But monetary policy must react when there are prospects of high inflation.
- Our eye is not focused on inflation alone. When we set the policy rate, we place great emphasis on the aim of keeping employment high. We do not want to restrain the economy more than needed to bring inflation back to target.

If developments turn out as we now envisage, Norwegian households' purchasing power will continue to improve in the years ahead, and private consumption will increase. We expect housing construction to pick up ahead, while oil investment will probably slacken.

The outlook is uncertain, however. If the economy takes a different path than currently envisaged, the policy rate path may also be adjusted. The climate transition and new technology can put existing jobs at risk but also provide growth opportunities and demand for labour in new areas. The world economy is marked by increased tensions between countries and trade policy changes. The implications of higher tariffs are uncertain, but the effects on the Norwegian economy appear to be limited so far.

Norway has a good starting point for meeting the challenges ahead. We have responsible social partners and a clear division of roles in economic policy. We have a tradition of cooperation in working life and across political divides, which is not a matter of course in all countries.

Now I look forward to answering your questions.",Ida Wolden Bache
https://www.bis.org/review/r251201r.htm,Olaf Sleijpen: Awakening Europe's inner animal - building a resilient and innovative economy,"Speech by Mr Olaf Sleijpen, President of De Nederlandsche Bank, at the Central Bank of Ireland Financial System Conference, Dublin, 25 November 2025.",2025-11-25 00:00:00,"## Olaf Sleijpen: Awakening Europe's inner animal - building a resilient and innovative economy

Speech by Mr Olaf Sleijpen, President of De Nederlandsche Bank, at the Central Bank of Ireland Financial System Conference, Dublin, 25 November 2025.

* * *

Sometimes, the trouble with an economy can be illustrated by an animal. Or rather, the absence of one. I mean, many countries have an animal as a national symbol. Ireland for example is often referred to as the Celtic tiger, symbolising its awakened economic power. The Dutch have the lion (no lack of self-confidence there). And the Americans the bald eagle. All impressive animals.

But what animal symbolises Europe? Some argue for the bull, and indeed I think it is displayed on all EU residence permits. But of course, there is a problem with that. Because as you know it refers to the story from Greek mythology, where the Phoenician princess Europa is abducted by Zeus, disguised as a bull. But in this story we are not the bull, we are the victim. And in a way that painfully illustrates how we Europeans sometimes fall into the role of a victim, when we could be taking matters into our own hands.

Now is the time to do exactly that: take matters in our own hands. And here perhaps we can take an example from Ireland. Two years ago, my predecessor was here in Dublin to give the Whitaker lecture. In his lecture he recalled how, back in 1958, Thomas Kenneth Whitaker initiated the Programme for Economic Expansion. This policy program opened up the Irish economy to foreign investment and industrial development. Ireland joined the EU, and ended its dependence on agriculture and tariffs. It was the start of a remarkable episode of economic development. The Celtic tiger had awakened.

Today, the European economy stands at a crossroads not unsimilar to the one your country faced almost 70 years ago. The European economy is not doing exactly badly, but we could and should do much better. Our productivity growth is too low. And that makes it particularly difficult to deal with the challenges of our time. As outlined in the Draghi report, the EU must unlock an estimated €800 billion in annual investments to meet its ambitions for climate, digitalisation, defence and innovation.

The root of the problem is threefold.

First of all, we still do not have one European economy. Substantial trade barriers between the EU member states persist. According to IMF research, productivity in the EU could increase substantially if trade barriers were to be reduced to the level observed among US states.

Second, our financial markets are highly fragmented and do not deliver sufficient risk capital for new innovative firms to grow. As we all know, European financial services are heavily bank-based. But banks are less well suited for financing innovation. In particular, there is a strong need for venture capital to enable innovative firms to grow

beyond the initial start-up phase. As recently shown by the ECB, the availability of venture capital in the US is three times higher than in Europe, with the gap widening over time.

Third, the EU budget is still focused on the economy of the past, and not so much on providing the public goods that are necessary for the economy of the future. Agricultural subsidies and cohesion funds together account for more than two thirds of the EU budget, while expenditures on research, climate, defence and cross-border infrastructure remain low.

That is where we stand today. If we want a modern, innovative and productive European economy that is ready for tomorrow's challenges, we need to change course. Like Ireland did in the 1960s.

Basically, we have to do three things.

First of all, we need to deepen the European Single Market, by addressing cross-border barriers, introducing more harmonised rules, and curbing national state aid policies that hinder innovation.

Addressing cross-border infrastructural barriers, both digital and physical, may require additional public investment, because this generally concerns public goods. Such investments may benefit from coordination at the EU level. I will come back to that in a minute.

To further harmonise rules, the EU needs to limit the possibility for 'gold plating' by Member States, by opting more for regulations rather than directives.

On state aid rules, there has been a progressive relaxation in response to recent crises. While national state aid was understandable and sometimes effective under the circumstances, it has also distorted the level playing field. Therefore, the European Commission should strictly enforce regulation of state aid at the national level. Instead, it should provide European state aid in a targeted way, and solely when it is clearly justified.

Capital markets are one area where deepening of the single market is particularly necessary. This is my second action point. Promoting the Savings and Investment Union is key here. We need to enlarge the pools of capital available for investment by stimulating households to invest more of their money rather than putting all of it in saving accounts. Pension reforms can also help here. Therefore I welcome the proposals by the European Commission, announced last week, to stimulate the build-up of supplementary pension provisions. And maybe Ireland and my own country can guide other partners in this respect. Furthermore, we need to make sure these pools of capital are invested more in equity, including venture capital, by taking down crossborder barriers. The SIU strategy recently presented by the European Commission is aimed at achieving precisely that.

Let me elaborate a bit on the issue of venture capital. Over the past years the EU has tried to stimulate venture capital. We can and should build further on that. We could streamline the registration process for the European venture capital label to encourage

more funds to participate. We could expand the European Innovation Council's equity co-financing model by introducing guarantees on investments. This could also be considered under other public programmes supporting venture capital investment, such as by the European Investment Fund, the European Investment Bank, as well as national initiatives. And we could reduce cross-border barriers in the field of tax procedures, insolvency proceedings and corporate governance. This could be combined with simplified reporting and compliance mechanisms.

I realise this is quite a list. Integrating our capital markets is a big task. But on the sunny side, the upward potential is also huge. If we manage to rise to the occasion, Europe could truly become an Innovation Union as well.

The third area where we can and must improve, is by spending taxpayers' money through the EU budget more strategically. The next Multiannual Financial Framework, due in 2027, should be modernised, with a redirection of funds towards the provision of European public goods catering for Europe's future. Those are goods and services that are more effectively provided by the government than the market, and that are more effectively provided at the EU level than at the national level.

There are several ways of doing this, for instance by redirecting current spending priorities. This is ultimately a political decision. Some argue in favour of the issuance of common EU debt to finance the EU's new priorities. However, if we do that, this should be accompanied by a reduction in national debt levels to ensure that total public debt remains sustainable. Because ultimately, the national and European taxpayer is one and the same person. Moreover, while acknowledging the diversity of the public finances at national level in the EU, the average debt-to-GDP ratio in the euro area is high, and should be reduced. It is of utmost importance from a monetary and financial stability point of view that public finances in the euro area remain sustainable.

So to sum it up for you: deepening the Single Market, building a true Savings and Investment Union, and modernising the EU budget. That is the way forward.

I am wrapping up. Sometimes we Europeans are too pessimistic about our future. Instead of acting like a victim, we should take ownership and start building on our own strengths. We have tremendous potential. The EU is the world's second largest economy. And in a world where everything seems uncertain and money seems to be able to buy anything, we have strong institutions governed by the rule of law. This is a strength not to be underestimated. We should build on this strength by making the European economy more integrated, more productive and more innovative.

This also calls for the selection of an animal to symbolise the European Union. And please, don't let it be some non-existent animal designed by a committee. My proposal: an octopus. First, octopuses are among the most intelligent animals on earth. Moreover, they are remarkably resilient, as they are able to regenerate, which aligns with Europe's repeated recoveries across history. Also, few animals are more adaptable. And finally, when it comes to creative intelligence and ingenuity, the octopus is nearly unmatched in the animal kingdom, reflecting the need for innovation. And if you are not convinced yet, watch the Oscar-winning documentary ""My Octopus Teacher"".

Indeed, intelligent policies we need, like the ones initiated by Ireland in the 1960s. And as we are now talking about 27 countries instead of one, we also need a renewed sense of European purpose and unity. Being only a simple central banker, I am somewhat reluctant to quote famous writers beyond my level of understanding. But I could not help thinking of the famous line by Oscar Wilde: ""Life imitates Art far more than Art imitates Life."" He wrote this to remind us that what we imagine together can become the world we wake up to. So let the art of our work, even that of central bankers, be something worth imitating. And the Europe we shape today will define the Europe we live in tomorrow.",Olaf Sleijpen
https://www.bis.org/review/r251203c.htm,François Villeroy de Galhau: Can our tax debate be rational?,"Speech by Mr François Villeroy de Galhau, Governor of the Bank of France, at a symposium marking the 20th anniversary of the Council of Mandatory Contributions (CPO), Paris, 27 November 2025. ",2025-11-27 00:00:00,"

## Speech



## ""Can our tax debate be rational?""

Published on the 27th of November 2025

Symposium marking the 20th anniversary of the CPO -Paris, 27 November 2025

Ladies and gentlemen,

It is a great pleasure for me to open today's symposium dedicated to the 20th anniversary of the Conseil des prélevements obligatoires (CPO) in our Jacques Delors amphitheater. | would like to pay tribute to the CPO, which since its creation in 2005 has embodied values that are precious — and increasingly rare — in the public debate: objectivity, expertise and independence. The Banque de France fully identifies with these values. | am familiar with the CPO's requirements, having produced a report for its predecessor, the Tax Council, in the 1980s, and then having served as Director General for Taxes.



Allow me to begin with a semantic observation: in English, the word ""fiscal"" [which appears in the French title of this symposium: « Notre débat fiscal peut-il étre rationnel ? »] means ""budgetary"", including spending; in France, it refers solely to taxes. This may be a sign of a distinctly French passion for taxation, even more so than among our neighbours. That said, can our tax debate be rational rather than passionate? Your twenty years of experience invite us to take a longterm view of taxes and social security contributions in France, with two perspectives — historical (1) and spatial (2) — and a praise of tax wisdom (3). | will then conclude with a few remarks on our current budget debate (4).

## 1. A historical perspective: a question of asymmetry

Since the CPO was created in 2005, the rate of taxes and social security contributions has risen from 42.7% of gross domestic product (GDP) to 42.8% in 2024. This apparent stability masks a certain volatility, with a significant increase from 2011 onwards and a peak of 45.3% in 2017. Two-thirds of French citizens consider this level to be too high, while less than one in three (30%) say they are satisfied with the quality of public services in relation to the amount of taxes they pay to finance them.!

- LE NON-PARALLELISME DES DEPENSES ET DES RECETTES PUBLIQUES ET L'EVOLUTION DES DEPENSES PAR SECTEUR ENTRE 2005 ET 2024



Le non-parallélisme des dépenses et des recettes publiques et l'évolution des dépenses par secteur entre 2005 et 2024

Consequently, our political debate has often focused on reducing taxes; over the past 20 years, there have been a large number of unfunded tax cuts aimed at households — on income tax or housing tax — and businesses. We must acknowledge that the political or economic benefits that were expected from these measures rarely materialised. However, our debate has concentrated much less frequently on controlling public spending, which amounted to 57.3% of GDP in 2024, compared with 54.3% in 2005. Our budgetary problem stems first and foremost from this increase, including the particularly noticeable ""ratchet effect"" in France after each crisis — in 2009 and then in 2020 with the Covid crisis.

We therefore need to focus most of our efforts on spending in order to achieve fiscal consolidation. Very often, the political debate centres on central government, which accounts for a large third of public spending, but local authorities, which account for 20% of the total and social spending, at 45% of the total, has grown significantly faster over the past 20 years. Since 2005, the rise in pension spending alone accounted for more than half of the increase in public spending.

This ""non-parallelism"" between expenditure and revenue has widened deficits and led to the continued growth of our public debt. [Slide 3] The latter has almost doubled as a share of GDP over the past twenty years, exceeding 113% of GDP at the end of 2024, and it will probably be close to 116% at the end of 2025.!i

## j LE DEFICIT PUBLIC CONDUIT A UNE AUGMENTATION DE L'ENDETTEMENT PUBLIC







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## 2. A spatial perspective

The gap between France and the euro area in terms of taxes and social security contributions is well known. In 2024, the rate of taxes and social security contributions was 42.8% of GDP in France, compared with 38.8% in the euro area excluding France, a difference of 4 percentage points of GDP.



Niveau des prélévements obligatoires et de la dépense publique, en France et en zone euro

But one gap can hide another, and in our French illness we too often confuse the symptom — high taxes — with the cause — spending. Our country displays the highest level of public spending in the euro area, along with Finland. The gap in public spending with the euro area (excluding France) is even greater, at around 9.6 percentage points of GDP in 2024, which represents EUR 280 billion. This differential reflects an ""efficiency gap"": we share roughly the same European social model as our neighbours, but it costs us more. In 2023, social protection spending accounted for two-thirds of this gap, while the remaining third was attributable to the higher weight of certain sectors (economic affairs, education).

Décomposition par poste de dépense en 2023

The cure lies in the quality and efficiency of public spending, which too often remains the blind spot in our budget debate. The goal is to move closer to the ""efficiency frontier"" of public spending, which represents the ratio between public spending in each area and one or more international performance indicators. V

Let's take a concrete example: in terms of education spending, the order of magnitude of spending per student is comparable in France and Finland, while performance — measured by several internationally recognised Y — is higher among Finnish students. In contrast, Portugal stands out with a lower level of spending per student than France, with comparable — even slightly higher — results and clear progress.

Efficience des dépenses publiques en zone euro : le cas des dépenses d'éducation

## 3. A praise of tax wisdom

We could debate at length about the ideal tax system, its economic incentives, and its redistributive effects. France has a particular talent for this kind of debate, with constant tax creativity, especially in autumn. | have always been very committed to tax fairness and to a fair contribution from the weathiest. However, | believe it is essential to remember that seeking the perfect, even magical, tax system is a pipe dream. Taxation cannot do everything, and genuine tax modesty must be characterised by three other virtues in addition to fairness:

- e Neutrality: a good tax is one that generates revenue without unnecessarily distorting economic behaviour — VAT, as designed by Maurice Lauré in 1954, is a good example. More generally, it is better to tax downstream activities and results than upstream activities and production factors themselves.
- e Simplicity: the proliferation of tax loopholes, exemptions, and derogations must be avoided. The best tax is, in principle, one that relies on a broad base and a moderate rate. As a simple illustration: the ""practical brochure"" on income tax for 2025 contained 85 pages on tax credits and reductions alone. The draft budget bill for 2026 listed 465 tax expenditures for an estimated amount of EUR 91.8 billion in 2025.
- e Stability and predictability: France changes its tax system far too often from one year to the next, and even during the course of a single year, with the risk of fostering uncertainty and undermining confidence. | suggest that taxation be adjusted only once per legislative term and per tax. A stable and predictable tax system is more widely accepted and easier to understand for both citizens and businesses, and is therefore more effective in delivering on the economic and social intentions of its designers.

## 4. What does this mean for the current situation?

Your president, Pierre Moscovici, called the ongoing parliamentary debate ""astonishing."" While | don't have his talent for adjectives, I'd say that so far, this debate has been worrying and divisive. It should lower uncertainty and bring us closer to a budget for 2026, but instead, it is just adding to the confusion. It should reduce deficits, aim for spending efficiency, and contribute to fiscal wisdom — which is what French citizens expect, according to both the barometer presented this morning and opinion polls — but the discussions have so far led to more spending, more taxes and more debt, with the all too easy illusion that ""others will pay"": the others being future generations, or hypothetical deep and painless pockets.

The Banque de France is not, of course, the budgetary authority, and it is not its place to comment on the details of the measures. But it is legitimate for it to be concerned about the overall economic balance and to shed light on the future of our country thanks to the complete independence of its assessment. France needs a budget, but not just any budget: the national interest imperatively calls for us to move beyond the current spectacle to find compromises and adopt a less short-term view. The persistent successes of our European neighbours show us the way. In this spirit, | would like to share three simple convictions:

1. Our country must and can reduce its deficits. We must be at a maximum of 3% of GDP by 2029, in four years' time, in order to meet our European commitments but above all to finally stabilise the debt burden. The credibility threshold for the next budget is to cover a quarter of this distance, and thus reduce the deficit to 4.8%.
2. Our country must and can aim to stabilise its total public spending in volume terms, after taking inflation into account. Looking at our European neighbours, we can see that this is possible without jeopardizing either our social model nor our growth. The French State must set an example, but it cannot do so alone: social and local spending must be part of an effort shared by all.
3. Our country must and can make taxation both fairer and more stable. There are obvious measures that can be taken to ensure fairness: those concerning asset-holding companies, certain tax loopholes, the tax advantage enjoyed by the wealthiest retirees. As long as the deficit has not fallen below 3%, targeted and exceptional measures can be justified, for example, on the profits of large companies. But for the rest, the wise thing to do is to stop playing with taxation. We don't have the money to lower taxes, and we don't have the leeway to raise them. Since fiscal stability is a necessity, let's also make it a virtue.

| will conclude with La Fontaine. At a conference organised by your partner institution the High Council of Public Finance, back in May 2022, | quoted a little-known fable, The Swallow and the Little Birds. ""To instincts not our own we give no credit, and till misfortune comes, we never dread it"". Having failed to sufficiently anticipate them, we are now experiencing fiscal woes, and they are severe. And the longer we think we can wait, the worse they will get. This is truly no longer the time for arguing; it must finally be the time for awakening.

iIFOP (2023). Le regard des Frangais sur les impéts au regard des services publics rendus -Ifop Group. 15 May.

- i According to the 2026 draft budget bill (Le rapport économique, social et financier (RESF) 2026 est publié | Direction générale du Trésor public) debt is expected to reach 115.9% of GDP by the end of 2025.

iE 2023, sur les 9,5 points de PIB d'écart entre France et ZE hors France, 6,3 points sont expliqués par les dépenses sociales (soit 67% de l'écart).

iVVilleroy de Galhau (F.) (2024). Overcoming current challenges in public services | Banque de France. 10 December.

'Indicators from PISA, TIMMS, Eurostat, the OECD, and surveys, among others. Calculations by the Banque de France.

## Download the full publication

",François Villeroy de Galhau
https://www.bis.org/review/r251201u.htm,"Joachim Nagel: Reducing complexity, preserving stability - outlook for European banking supervision","Speech by Dr Joachim Nagel, President of the Deutsche Bundesbank, at the Bavarian Banking Day (Bayerischer Bankentag), Munich, 28 November 2025.",2025-11-28 00:00:00,"## Joachim Nagel: Reducing complexity, preserving stability - outlook for European banking supervision

Speech by Dr Joachim Nagel, President of the Deutsche Bundesbank, at the Bavarian Banking Day (Bayerischer Bankentag), Munich, 28 November 2025.

* * *

Check against delivery

## 1 Introduction

Ladies and gentlemen,

It gives me great pleasure to speak here in Munich at the Bavarian Banking Day. The title of this year's event is ""Economic stability as a shared responsibility"". We live in times of geopolitical upheaval and great uncertainty. That makes it more important than ever to also safeguard economic stability. I would like to use my speech today to delve into one important aspect of economic stability: banking regulation and financial stability in the European Union.

Vilfredo Pareto was a Switzerland-based engineer, economist and sociologist of FrancoItalian descent. Legend has it that, while strolling through his garden, he made a small but interesting discovery: around 20% of the pea pods had produced around 80% of the peas. Pareto was also able to apply that observation more generally to a number of economic relationships. Writing in his neoclassical work Manuale di economia politica , he noted that around 20% of the population in Italy owned around 80% of the land. 1

A distribution based on probability theory-the ""Pareto distribution"" named after Pareto-is related to that observation as well. This is because the density of the Pareto distribution is highest at its smallest value. Based on this theory, small values occur quite frequently in Pareto-distributed variables whereas large values are rare. That kind of distribution is very well suited to describing unequal distributions of wealth.

Furthermore, these observations can be used to derive what is known as the Pareto principle, which is often used nowadays in project and time management. This principle states that 80% of outcomes can be achieved with 20% of the total effort. Pareto analysis, then, is used to prioritise tasks.

But what has this got to do with my topic today-European banking supervision? Financial supervision in Europe has clearly achieved its objective and ensured financial stability. However, the supervisory rules have become ever more complex over the years. This is a factor that is dragging on the productivity of European banks. For that reason, the prudential rules need to be made less complicated-simplification is the watchword here.

In my speech, I would like to give some examples of how we can simplify and prioritise some aspects of this highly complex regime as a way of lowering the cost of supervision for banks without jeopardising financial stability at the same time. Before

that, I will take stock of the banking supervisory rules in Europe as they currently stand. I will start, though, with the general setting: What role do the prudential rules play against a backdrop of geoeconomic fragmentation, and what do we mean by simplification, exactly?

## 2 Regulation needs to be reformed: simplify, don't deregulate

Nearly two decades ago, the global financial crisis gave us a striking display of how lax financial regulation can put economic growth at risk. As the head of the Bundesbank's financial crisis management team, I was able to share in many events and decisions at first hand. We have learned a lot from those experiences back then. One response to the financial crisis was to develop a new global regulatory framework for banks: Basel III. Capital requirements were raised significantly. In addition, multiple capital and liquidity buffers were introduced to cushion unexpected shocks. These efforts have been crowned with success. Just take the financial market turmoil surrounding Silicon Valley Bank in spring 2023 and later Credit Suisse as well, which did not impact in any notable way on the real economy.

This success was the payoff for the immense effort that preceded it. The new prudential rules were the outcome of arduous and complex negotiations that had to take numerous interests and objectives into account. The prudential framework has become much more complex over the years, above all in the European Union.

At the same time, we are seeing a pivot towards deglobalisation. Multilateralism is on the retreat, geopolitical conflicts and geoeconomic fragmentation are the order of the day. That is having a particular effect on the European Union, an open economic area that is strong in external trade. Reports by Enrico Letta and Mario Draghi call for regulations in the European Union to be simplified as a way of making the European economy more competitive. 2  The European Commission has already launched an initiative to simplify regulation and reduce the administrative burden. 3  Echoing this initiative, the Governing Council of the European Central Bank has created a HighLevel Task Force to push ahead with simplifying the prudential regulatory, supervisory and reporting framework. 4  I am a member of that Task Force.

In addressing this topic, we need to be clear about what simplification means and what it doesn't. Simplification, for us, means reducing unnecessary complexity in banking regulation. What we are not looking to achieve here, though, is deregulation, which would come with greater risks to financial stability.

But that is precisely the risk, given geoeconomic fragmentation and the tendency to shun multilateralism. Because, under these circumstances, countries will probably be inclined to secure what they regard as competitive advantages by deregulating the financial sector: in other words, regulatory arbitrage. The first signs of this are already in evidence: There are still no indications that the new US administration is fundamentally calling the finalisation of Basel III into question. Overall, though, the United States does appear to be moving towards loosening financial regulation. For example, the United States has made a regulatory pivot towards a far more pro-crypto stance. That shift also

includes a call by a working group set up by the US administration to revise global standards on limiting the risks of crypto-assets. Those standards are already partially applicable in the  EU.

In my view, it is crucial that we don't allow a global race to the bottom to happen in the financial regulation space. Because a race of that kind would undermine the stability of the financial system around the globe and end up leaving no economic area better off.

I have often also heard that overly strict banking regulation creates incentives for nonbank financial institutions to build up more risk. We are indeed seeing significant growth in some financial market segments outside the perimeters of banking regulation, such as private credit funds. As a consequence, however, we should not be looking to loosen in the area in which regulation has proven its worth. Instead, we need to close gaps and, if necessary, extend the regulatory perimeters to cover as yet unregulated areas.

## 3 European banking regulation: a stocktake

Let me now delve a little deeper into the simplification of European banking regulation, using own funds regulation as a case in point. It's an area where we can very clearly see the scale of the complexity that banks in Europe are currently faced with. Generally speaking, capital requirements are there to safeguard the stability of individual banks as well as the financial system as a whole. They ensure that banks have sufficient capital to meet their obligations to depositors and other creditors, even if they suffer financial losses.

These capital requirements can be subdivided into two main categories: the capital regime and the resolution regime. The capital regime applies in a going concern situation-that is to say, when we assume that a bank will remain operational. There are four capital requirements here, three of which are risk-weighted. What does riskweighted mean? It means that the individual balance sheet items are treated in accordance with their risk profile when the requirements are calculated. For example, a bank needs to set aside less capital for loans to reliable debtors than to risky ones. The situation is similar for collateral: more capital needs to be set aside for unsecured loans than for secured ones.

The risk-weighted capital requirements under the capital regime include requirements for common equity tier 1 capital, additional tier 1 capital and total own funds. Supervision focuses particularly on common equity tier 1 capital, as this type of capital absorbs losses best and does so directly. Common equity tier 1 capital instruments include, for example, issued shares or retained earnings.

Compared with common equity tier 1 capital, additional tier 1 instruments are subordinated. It must be possible, however, to convert them to common equity tier 1 capital. Contingent convertible bonds, or CoCo bonds, are one such instrument-these are automatically converted from debt to equity capital when certain criteria are met.

Furthermore, banks are required to comply with a leverage ratio. This is calculated as a ratio of tier 1 capital to total assets. The individual items included in the leverage ratio are not assigned individual risk weights. It thus ensures a minimum level of capital. The risk-based capital requirements tend to have a procyclical effect because they generally

curb lending when the economy is going through difficult times. Amongst other things, the leverage ratio-being a non-risk-based metric-is intended to counteract this effect.

Those are the capital requirements under the capital regime in a going concern situation. The resolution regime includes additional capital requirements. These requirements aim to ensure that a bank that finds itself in a gone concern situation-that is to say, it has become insolvent-can be resolved in an orderly manner. Orderly also means that financial stability is not at risk and that there is no cost to public finances.

Banks established in the European Union are subject to the minimum requirement for own funds and eligible liabilities-or MREL,  for short. The legal experts among you, in particular, will probably be familiar with acronyms like this, and supervisors and regulators-some of whom are themselves lawyers-use them happily and liberally. I've got one or two more acronyms lined up for you in just a few moments. The idea behind MREL is to ensure that banks have sufficient bail-inable capital in a resolution event-in other words, capital that can be used to absorb losses. Here again, a distinction is made between risk-weighted and non-risk-weighted capital requirements. In addition, banks can use certain debt capital instruments to meet the requirements under the resolution regime.

Global systemically important banks, known as G-SIBs,  are furthermore subject to the global TLAC standard-TLAC means total loss absorbing capacity. The initiative for the TLAC requirements came from the Unlike the TLAC requirements matter G20. MREL, for just a very small number of big banks in Europe.

All in all, credit institutions in the European Union have to comply with as many as nine different own funds requirements. But that's not the end of this account of regulatory complexity. Because the resolution regime is made up of multiple layers. And some own funds requirements themselves consist of multiple layers as well. As a case in point, all banks in Europe have to meet minimum requirements for their own funds. For common equity tier 1 capital, say, the minimum requirement is 4.5% of risk-weighted assets. The main idea behind the minimum requirements is to protect the creditors of a particular bank.

In addition, there are what are known as capital buffers. Capital buffers are largely macroprudential instruments. In other words, they serve to make the financial system more resilient overall. They include the capital conservation buffer, the countercyclical capital buffer, the capital buffer for global systemically important institutions, the capital buffer for other systemically important institutions and the systemic risk buffer. These buffers are add-ons to common equity tier 1 capital on top of the minimum capital ratios. In some cases, the capital buffers are the same for all banks, but they can also be bankspecific or country-specific. They can also vary over time.

There is also a third layer in the case of tier 1 capital: Pillar 2 guidance. This is bankspecific guidance. It indicates how much capital supervisors think banks should hold in addition to the binding capital requirements. Such guidance is based on the results of bank-specific stress tests. However, as the name suggests, Pillar 2 guidance is not legally binding.

If you are finding it difficult to follow, I can reassure you: you are not alone. Even many financial experts don't always find it easy to navigate this jungle of rules. In banking supervisory practice, this complexity can lead to inefficiencies. Individual rules can get in each other's way, with negative effects on financial stability. Let me highlight two specific problem areas.

First, the large number of supervisory rules means that banks, supervisors and other market participants often find it difficult to readily work out which requirement is binding in a given case. This is because it depends on numerous factors, such as the capital structure of the respective bank or the capital buffers imposed.

Second, the large number of capital requirements inevitably leads to side effects and interactions. Such effects can undermine the actual purpose of the supervisory measures. Several overlaps in capital requirements have been documented. 5  For example, common equity tier 1 capital can be counted in both the going concern and the gone concern case. If the bank recognises common equity tier 1 capital to meet both buffer requirements and resolution requirements, this can limit the usability of its capital buffers. If the supervisory authority releases a buffer, the bank will still not be able to use it in full without at the same time breaching the minimum requirement under the resolution regime.

Conflicts of objectives may also occur where crisis measures are triggered at different points in time. From a capital regime perspective, crisis measures should be initiated as late as possible. This is because doing so allows banks to use their buffers and maintain the supply of credit to the economy. However, this approach can leave too little capital for an orderly resolution, especially if own funds are counted both under the capital and resolution regimes. These examples show how the high level of complexity potentially undermines the actual supervisory objectives.

## 4 Examples of possible areas of action

How could the supervisory regime in Europe be simplified? In the following, I would like to use two examples to illustrate how the own funds requirements could be simplified.

## 4.1 Combine capital buffers

My first example is about capital buffers. We could combine several capital buffers. However, we should take into account the scope of the respective buffers and where the responsibility for determining them lies. For example, the level of the countercyclical capital buffer and systemic risk buffer is set by BaFin.  It is clearly only sensible to combine buffers within the existing areas of responsibility.

In this context, it would make sense to combine the countercyclical capital buffer and the systemic risk buffer into a single releasable buffer. The two buffers are the responsibility of national supervisors and apply to large groups of financial institutions. In periods of stress, national supervisory authorities could release the combined buffer flexibly. If supervisors release a buffer, the affected banks' own funds requirements fall. This also increases banks' scope for granting loans to enterprises and households.

## 4.2 Introduce a small bank regime

My second example concerns small banks. Own funds requirements for small banks could be simplified. The regulation of small banks in the European Union is actually already subject to the principle of proportionality. This means that supervisory requirements vary depending on a bank's size, business model, complexity and risk profile. This flexibility is intended to ensure that smaller and less complex institutions are not subject to the same extensive rules as large international banks.

However, the principle of proportionality does not yet apply in all areas of regulation. For example, small banks in Europe have to meet similarly complex capital requirements as large institutions. In the capital regime, in particular, there is an opportunity to simplify and, at the same time, strengthen the requirements for small banks. This is because the risk-based components of the regime pose administrative challenges for small institutions. In addition, the risk-based part of the regime contains a number of exceptions and special provisions.

For example, Germany's smallest savings bank employs around 50 people. The burden here is already very high if several highly qualified employees must deal with supervisory matters on a regular basis. Small banks can be very important for economic growth due to their proximity to customers and personal contacts on the ground.

Switzerland provides a good blueprint for the prudential treatment of small banks. In Switzerland, small, particularly liquid, and well-capitalised banks can apply for admission to a small banks regime that completely dispenses with risk-weighted requirements. 6  In my view, such a provision is also an option for small, less complex, and low-risk banks in the  EU. This would eliminate the time-consuming calculation and documentation of risk-weighted assets and corresponding reporting and disclosure requirements. In return, small banks would have to meet a significantly higher leverage ratio-that is to say, have more tier 1 capital relative to non-weighted assets. 7

The exact level of the leverage ratio for the small banks regime would still need to be determined. Such a regime would significantly simplify the own funds requirements for small banks in Europe, while not reducing their resilience. The examples I have outlined show how we could significantly reduce the complexity of the European regulatory framework without jeopardising the stability of the banking sector.

## 5 Conclusion

Let me briefly recap the two examples of simplification that I have talked about: First, we could combine two macroprudential capital buffers-the countercyclical capital buffer and the systemic risk buffer-into a single buffer. Second, a small bank regime without risk-weighted rules but with a higher leverage ratio would greatly contribute to simplifying banking regulation in the EU.  In the High-Level Task Force, we are also discussing other ways of simplifying banking regulation in Europe.

You may recall that I referred to the Pareto principle at the beginning of my speech. This principle states that 80% of outcomes can be achieved with 20% of the total effort. Are the measures to simplify the regulatory framework in keeping with the Pareto principle? Yes and no. Yes, because it can be assumed that individual requirements

often contribute unequally to financial stability. We should therefore only retain the effective rules in order to simplify the regulatory regime. And no because a reduction down to 20% of total effort would be going too far in my opinion. It's about simplification, not deregulation. Against this backdrop, I would not be satisfied with just 80% of the outcome.

However, I am convinced that we can strengthen the financial system by reducing unnecessary complexity. If we can achieve the same stability with fewer rules, much would be gained. We are only at the beginning of a long journey here. The next step will be to flesh out the proposed measures and to elaborate them in detail. Simplification should be well thought out and planned in such a way that implementation runs smoothly. This would make European banks more efficient and contribute to more dynamic growth in Europe.

- 1  Pareto, V. F. D. (1906), Manuale di economia politica con una introduzione alla scienza sociale, Milan, Società Editrice Libraria.
- 2  Draghi, M. (2024), The future of European competitiveness  and Letta, E. (2024), Much more than a market.
- 3  Simplification-European Commission
- 4  What is the ECB High-Level Task Force on Simplification?
- 5  SRB (2023), Measures of banks' capital buffer usability under prudential and , SRB Working Paper Series #2. resolution requirements in the banking union

## 6   Dossier on small banks | FINMA

- 7  Some authors even argue in favour of making the leverage ratio the only requirement in own funds regulation; see Admati, A. and M. Hellwig (2013), The Bankers' New Clothes. What's wrong with banking and what to do about it, Princeton University Press.",Joachim Nagel
https://www.bis.org/review/r251201s.htm,Kazuo Ueda: Japan's economy and monetary policy,"Speech by Mr Kazuo Ueda, Governor of the Bank of Japan, at a meeting with business leaders, Nagoya, 1 December 2025.",2025-12-01 00:00:00,"

December  1,  2025

Bank  of  Japan

## Japan's Economy and Monetary Policy

Speech at a Meeting with Business Leaders in Nagoya

## UEDA Kazuo

Governor of the Bank of Japan

(English translation based on the Japanese original)

## Introduction

It is my great pleasure to have the opportunity today to exchange views with a distinguished gathering of business leaders in the Tokai region. I would like to take this chance to express my sincerest gratitude for your cooperation with the various activities of the Bank of Japan's Nagoya Branch.

As  the  Tokai  region  is  one  of  Japan's  largest  exporting  bases,  we  at  the  Bank,  myself included, listen with great interest to the  report from the General Manager of the Nagoya Branch at the meeting of general managers of the Bank's branches held quarterly. I am glad to be able to hear your views directly today. Before hearing from you, I would like to talk about developments in economic activity and prices  at home and abroad  and explain the Bank's thinking on the conduct of monetary policy.

## I. Economic Activity and Prices

## A. Overseas Economies

I  would  like  to  begin  by  talking  about  developments  abroad.  Overseas  economies  have grown moderately on the whole, although some weakness has been seen in part, reflecting trade and other policies in each jurisdiction.

Please  take  a  look  at  Chart  1.  In  its World  Economic  Outlook (WEO),  the  International Monetary Fund (IMF) revised its projection for the global economy for 2025 downward to 2.8  percent  in  April  this  year,  taking  into  account  the  impact  of  U.S.  tariff  policies. Thereafter, however, the IMF continued to make upward revisions, projecting in its latest October WEO that the global economy will maintain growth above 3 percent in both 2025 and 2026. As described, the impact of tariff policies, which for a while was considered to be a factor that would significantly push down the global economy, has so far not materialized to a considerable degree. This can be attributed to three main developments. First, since last summer, many countries and regions have reached agreements in trade negotiations with the United  States,  and  this  has  led  to  reduced  uncertainty  over  the  outlook.  Second,  in  the United States, the pass-through of tariff costs to selling prices has remained only moderate, and private consumption there has not been pushed down as much as initially feared. I will elaborate  on  this  point  later.  Third,  factors  such  as  greater  investment  in  digital  areas

worldwide,  mainly  in  AI-related  areas,  as  well  as  a  rise  in  demand  for  replacing smartphones and personal computers, whose sales surged during the COVID-19 pandemic, have been supporting trade and production activity in many countries and regions.

Looking ahead, there is no change to the Bank's view that overseas economies will slow down temporarily under the impact of tariff policies. Thereafter, they are expected to return to  a  moderate  growth  path.  Developments  in  the  United  States,  which  leads  the  global economy, will be key to whether or not this outlook is realized.

Please take a look at Chart 2. Looking at business fixed investment in the United States in the  left  panel,  investment  by  major  high-tech  firms  has  recently  increased  significantly, against the background of expansion in AI-related demand. Please refer to the middle panel. As  I  mentioned  earlier,  the  pace  at  which  the  burden  arising  from  tariff  impositions  is passed on to consumers in the form of higher prices has remained only moderate so far. Coupled  with  the  wealth  effects  stemming  from  the  recent  high  stock  prices,  private consumption in the United States has been solid. That said, this implies that the corporate sector in the United States has been bearing a considerable portion of the  cost burden of tariffs, instead of passing it on to consumers. On this point, the right panel shows that the pace  of increase  in  the  number  of  employees  has  decelerated  recently.  While  the background  to  this  is  complex,  including  the  impact  of  strict  U.S.  immigration  policies, attention  is  warranted  on  the  effects  on  labor  market  developments  of  lower  corporate profits due to tariff policies.

There  are  other  factors  to  consider  with  regard  to  the  U.S.  economy,  such  as  the  future course of AI-related demand and developments in the private credit market. That said, in light  of  the  developments  to  date,  it  appears  that  downside  risks  to  the  economy  overall have decreased. The end of the federal government shutdown in mid-November will also lead to reduced uncertainty.

## B. Economic Activity and Prices in Japan

## Current Situation of and Outlook for Economic Activity

Next, I would like to discuss the current situation of and outlook for economic activity in Japan. The Bank assesses that Japan's economy has recovered moderately, although some weakness  has  been  seen  in  part.  Please  take  a  look  at  Chart  3.  Recently  released  GDP statistics  show  that  real  GDP  for  the  July-September  quarter  of  2025  recorded  negative growth  for  the  first  time  in  six  quarters.  However,  this  largely  reflects  the  impact  of  a reactionary decline following the front-loading of exports seen since early spring due to the increase in tariffs, and it is expected that the negative growth will be only temporary. To exclude  such  fluctuations,  when  comparing  real  GDP  in  the  April-September  period  this year with the preceding October-March period, the annualized growth rate is 0.9 percent -above the potential growth rate, which is estimated to be around 0.5 percent. Given this, the Bank  views  that  its  basic  assessment  that  Japan's  economy  has  recovered  moderately remains unchanged.

Please turn to Chart 4, which shows developments in exports. Automobile-related exports have  seen  large  fluctuations  since  early  spring  this  year,  reflecting  factors  such  as  the front-loading and subsequent reactionary decline. That said, exports overall have continued to be more or less flat at high levels, as exports of IT-related goods have been on an uptrend, mainly on the back of solid global AI-related demand. Please take a look at Chart 5.  As shown in the upper left-hand panel, corporate profits have remained at high levels on the whole,  although  downward  effects  due  to  tariffs  have  been  seen  in  some  manufacturing industries. The lower left-hand panel shows the financial results of firms listed on the Tokyo Stock Exchange Prime Market. As can be seen, profit projections for fiscal 2025 show a decline  for  manufacturing  firms  and  an  increase  for  nonmanufacturing  firms.  Compared with  previous  projections,  however,  the  projections  have  been  revised  upward  slightly, including for manufacturing firms, reflecting factors such as reduced uncertainty surrounding  tariff  policies.  In  this  situation,  business  fixed  investment,  shown  in  the right-hand  panel,  has  been  on  a  moderate  increasing  trend.  Looking  at  business  fixed investment  plans  for  fiscal  2025,  firms  have  maintained  an  active  investment  stance, centered on research and development (R&amp;D) in growth areas and on labor saving-related software.

Next,  turning  to the household  sector,  please  take  a  look  at  Chart  6.  Looking  at developments in private consumption in the left panel, consumption of nondurable goods has continued on a decreasing trend, reflecting consumers' increased thriftiness due to a rise in  food  prices  and  other  factors.  Overall  consumption  has  been  resilient,  against  the background  of  an  improvement  in  the  employment  and  income  situation  and  the  recent pick-up  in  consumer  sentiment  on  the  back  of  factors  such  as  an  increase  in  summer bonuses and a rise in stock prices. That said, the burden of price increases on households remains high, and due attention to the impact of price increases is therefore warranted.

Regarding the outlook for Japan's economy, it is expected that the negative growth seen in the  July-September  quarter  will  be  only  temporary,  as  mentioned  earlier,  and  that  the economy will  return  to  positive  growth.  For  the  time  being,  Japan's  economic  growth  is likely to be modest, as trade and other policies in each jurisdiction lead to a slowdown in overseas  economies.  Thereafter,  however,  Japan's  economic  growth  rate  is  likely  to  rise, with overseas economies returning to a moderate growth path.

In  terms  of  risks  to  this  baseline  scenario,  the  Bank's Outlook for Economic Activity and Prices (Outlook Report) released at the end of October pointed to various factors, such as developments in overseas economic activity and prices and fluctuations in import prices. That said, regarding tariff policies, which had been the most significant concern over the past  few  months,  the  adverse  effects  in  the  United  States  have  not  materialized  to  a considerable degree, as mentioned earlier. Moreover, with regard to Japan's economy, there is  a  growing  view  that  the  impact  of  tariff  policies  on  corporate  profits  will  be  limited. Considering  these  factors  among  others,  it  appears  that  the  uncertainty  surrounding  the outlook for Japan's economy is gradually diminishing.

## Current Situation of and Outlook for Prices

Next, I would like to turn to developments in prices. As shown in the left panel of Chart 7, the latest figure for the year-on-year rate of increase in the consumer price index (CPI) for all items excluding fresh food is around 3 percent. Looking at the breakdown, prices of rice and  other  food  products,  shown  in  the  blue  and  light  blue  bars,  have  continued  to  make significant  positive  contributions.  This  is  likely  to  be  largely  attributable  to  temporary

cost-push  factors.  Meanwhile,  amid  moderate  recovery  in  the  economy  and  tighter  labor market conditions, the pass-through of wage increases to selling prices has continued, and prices of not only food products but also goods and services have risen moderately. On this point,  looking  at  the  distribution  of  price  changes  by  item  in  the  right  panel,  the  latest distribution in October has been relatively fat on the right tail, reflecting the large number of items, particularly food products, that continue to see price increases at rates of 5 percent or more. That said, compared to the distribution in 2023, when there was a significant impact from higher import prices, the balance between items has clearly improved. As a result, the distribution is beginning to resemble the situation seen in the first half of the 1990s, when Japan's economy experienced an average annual inflation rate of around 2 percent before falling into deflation.

Looking ahead, the year-on-year rate of increase in the CPI for all items excluding fresh food is likely to decelerate temporarily to a level below 2 percent through the first half of fiscal 2026, with the waning of the effects of the rise in food prices, and partly due to the effects  of  government  measures  to  address  rising  prices,  such  as  abolishing  the  former provisional gasoline tax rate. Thereafter, since it is projected that a sense of labor shortage will  grow  as  the  economic  growth  rate  rises  and  that  medium-  to  long-term  inflation expectations  will  rise,  it  is  expected  that  underlying  CPI  inflation  --  that  is,  inflation excluding the effects of temporary factors -- and actual inflation will increase and, in the second  half  of  the  projection  period  of  the  Outlook  Report,  will  be  at  a  level  that  is generally consistent with the price stability target of 2 percent.

There are various uncertainties surrounding the outlook. Although food price developments are expected to gradually stabilize as mentioned earlier, if new temporary factors pushing up prices arise or if the pass-through of increased personnel expenses and distribution costs to selling prices strengthens, the rise in food prices could persist for longer than expected. Since consumers purchase food items on a frequent basis, if the price rises persist, the CPI could be pushed up through changes in inflation expectations. On the other hand, it is also possible that the CPI could be pushed down, as private consumption could decline through a deterioration in household sentiment. At this juncture, these developments do not appear to be gaining strength, but the Bank will continue to carefully examine various data.

Developments in import prices, including fluctuations in foreign exchange rates, as well as the extent to which such developments will spread to domestic prices may lead prices to deviate either upward or downward from the outlook. In this regard, it is necessary to pay attention to the fact that, with firms' behavior shifting more toward raising wages and prices recently, exchange rate developments are, compared to the past, more likely to affect prices. Attention  is  also  warranted  on  the  possibility  that  these  price  developments  could  affect underlying inflation through changes in inflation expectations.

## II. The Bank's Conduct of Monetary Policy

Next, I will talk about the Bank's conduct of monetary policy. If the outlook for economic activity and prices outlined so far is realized, the Bank, in accordance with improvement in economic activity and prices, will continue to raise the policy interest rate and adjust the degree of monetary accommodation. As a premise for this policy stance, looking at Chart 8, the Bank recognizes that real interest rates -- that is, the nominal policy interest rate minus the inflation rate -- are at significantly low levels, considerably below the real interest rate that is neutral to economic activity and prices, which is often referred to as the natural rate of  interest  in  economic  terms.  In  other  words,  even  if  the  policy  interest  rate  is  raised, accommodative  financial  conditions  will  be  maintained.  To  use  an  analogy,  raising  the policy interest rate under accommodative financial conditions is about a process of easing off  the  accelerator  as  appropriate  toward  achieving  stable  economic  growth  and  price developments, not about applying the brakes on economic activity.

With this in mind, given factors such as the recent decline in uncertainties surrounding the U.S.  economy  and  tariff  policies,  the  Bank  considers  that  the  likelihood  of  the  baseline scenario for economic activity and prices being realized is gradually increasing. The Bank is at  the  stage  where  it  should  examine  whether  firms'  active  wage-setting  behavior  will continue.  In  particular,  it  will  be  important  to  confirm  the  momentum  of  initial  moves toward next year's annual spring labor-management wage negotiations. Please take a look at Chart 9. First, looking at the conditions that underlie such moves, the diffusion index (DI) for employment conditions in the Tankan (Short-Term Economic Survey of Enterprises in Japan) in the left panel shows that labor shortages have remained acute on the whole, as seen, for example, in nonmanufacturing industries having seen a net ""insufficient"" of around

the same level as what was observed during the bubble period. The fact that the minimum wage for fiscal 2025 rose by more than 5 percent year on year -- the highest rate on record -- is also highly likely to encourage wage hikes among a wider range of firms.

Meanwhile, corporate profits, which are the source of wage hikes, are expected to remain at high levels on the whole, even after taking into account the impact of tariff policies, as I mentioned earlier. Against this backdrop, the Japanese Trade Union Confederation (Rengo) announced last week its basic policy for next year's annual spring labor-management wage negotiations, setting the target wage increase rate at 5 percent or more, which is the same as in the previous year. On the management side, the Japan Business Federation (Keidanren), for example, has expressed its firm stance toward promoting the further anchoring of wage increases.  Moreover,  in  a  survey  conducted  by  the  Japan  Association  of  Corporate Executives (Keizai Doyukai) for September, many respondents stated that they planned to raise wages in 2026 by a rate nearly equivalent to or greater than in 2025. At a joint meeting between  representatives  of  the  government,  labor,  and  management  held  last  week,  the government  stated  that  it  would  strive  to  develop  an  environment  for  wage  increases, including  among  small  and  medium-sized  firms.  In  view  of  the  next  Monetary  Policy Meeting  (MPM)  to  be  held  on  December  18  and  19,  the  Bank  is  actively  collecting information  regarding  firms'  stance  toward  raising  wages  through  its  Head  Office  and branches. At the MPM, the Bank will examine and discuss economic activity and prices at home and abroad as well as developments in financial and capital markets, including the point I just mentioned, based on various data and information, and will  consider the pros and cons of raising the policy interest rate and make decisions as appropriate.

Looking back, the aggressive macroeconomic policies adopted by the government and the Bank over the past decade have had a strong stimulative effect on Japan's economy. As a result,  the  mechanism in which both wages and prices rise moderately has been restored. This is the context in which the Bank has been gradually adjusting the degree of monetary accommodation to achieve the price stability target of 2 percent in a sustainable and stable manner. Adjusting the degree of accommodation appropriately -- without being too late or too early -- will be necessary to smoothly achieve the price stability target while ensuring stability  in  financial  and  capital  markets,  and  to  guide  Japan's  economy  onto  a long-term

growth  path,  which  will  ultimately  lead  to  the  success  of  the  efforts  undertaken  by  the government and the Bank thus far.

## Concluding Remarks

Before concluding my speech, I would like to touch on initiatives taken in the Tokai region.

First off, I would like to reiterate that generating and effectively leveraging innovation is crucial for an economy to achieve sustainable growth. Many firms in the Tokai region are strategically  investing  in  R&amp;D  and  other  areas  while  also  moving  ahead  with  reforms  to their business portfolios. There is also growing momentum to, for example, support startups with the potential to adopt new business models and cutting-edge technologies. Recently, an increasing  number  of  firms  are  also  actively  turning  to  open  innovation  in  an  effort  to capitalize on the knowledge of many people.

These  moves  are  emerging  not  only  in  the  automobile  industry,  which  is  said  to  be undergoing a once-in-a-century transformation, but in other manufacturing and non-manufacturing industries as well, which I find highly encouraging. People in the region have  accurately  gauged  the  needs  of  society,  generated  a  great  deal  of  innovation,  and overcome  numerous  adversities.  I  have  high  hopes  that  such  efforts,  in  a  region  that  is deeply imbued with an entrepreneurial spirit, will continue to drive sustainable growth in the  regional  economy  and,  ultimately,  in  Japan's  economy  as  a  whole.  The  Bank  will support these efforts by striving to ensure price stability and financial system stability so that firms here can realize their full potential.

I would like to close today by expressing my hope that the efforts of the Tokai region will bear fruit, and that its economy will continue to develop. Thank you very much for your attention.

## December 1, 2025

## UEDAKazuo

Governor of the Bank of Japan

## Japan's Economy and Monetary Policy

Speech at a Meeting with Business Leaders in Nagoya

## Introduction

- I. Economic Activity and Prices

- II. The Bank's Conduct of Monetary Policy

Concluding Remarks

## Overseas Economies

## Global Growth Rate (IMF Projections)



Source: IMF.

Ⅰ. Economic Activity and Prices

Major Economies' Growth Rates (IMF Projections)

|               | CY 2024 [Actual]   |                                    |                                    |                                    |                                    | y/y %chg.             |
|---------------|--------------------|------------------------------------|------------------------------------|------------------------------------|------------------------------------|-----------------------|
|               |                    | CY2025 [Projections at each point] | CY2025 [Projections at each point] | CY2025 [Projections at each point] | CY2025 [Projections at each point] | CY 2026 [Projections] |
|               |                    | Jan.                               | Apr.                               | July                               | Oct.                               |                       |
| World         | 3.3                | 3.3                                | 2.8                                | 3.0                                | 3.2                                | 3.1                   |
| United States | 2.8                | 2.7                                | 1.8                                | 1.9                                | 2.0                                | 2.1                   |
| Euro area     | 0.9                | 1.0                                | 0.8                                | 1.0                                | 1.2                                | 1.1                   |
| China         | 5.0                | 4.6                                | 4.0                                | 4.8                                | 4.8                                | 4.2                   |

1

Chart 2

U.S. Economy



Note: In the left-hand chart, figures are accounting information for firms included in the Russell 3000 at each point. Business fixed investment is the sum of capital spending and R&amp;D expenses. Figures show one-year backward moving averages.

Sources: Haver; Copyright © 2025 by S&amp;P Global Market Intelligence, a division of S&amp;P Global Inc. All rights reserved.

## Real GDP in Japan

Breakdown by Demand Component



Sources: Cabinet Office; Bank of Japan.

Ⅰ. Economic Activity and Prices

## Corporate Sector (1): Exports

Real Exports



Breakdown of Japan's

Real Exports



Real GDP



3

Chart 4

## Corporate Sector (2): Profits and Fixed Investment

## Corporate Profits



|                  | FY25 first-half results   | FY25 full-year projections   | FY25 full-year projections   |
|------------------|---------------------------|------------------------------|------------------------------|
|                  |                           |                              | Revision rate                |
| All industries   | -1.7                      | -2.4                         | 2.7                          |
| Manufacturing    | -9.4                      | -5.6                         | 2.1                          |
| Nonmanufacturing | 10.2                      | 2.6                          | 3.4                          |

## Business Fixed Investment



y/y % chg.

- Notes: 1. Figures in the upper left-hand chart are current profits based on the Financial Statements Statistics of Corporations by Industry, Quarterly , excluding ""finance and insurance"" and ""pure holding companies.""
2. Figures in the lower left-hand table are operating profits based on firms' financial results, excluding the finance and insurance industries. The figures are calculated from available data for firms listed on the Tokyo Stock Exchange Prime Market with fiscal years ending in March. Revision rates are changes from previous projections.
3. Figures for Tankan (actual) in the right-hand chart include software and R&amp;D investments and exclude land purchasing expenses. R&amp;D investment is not included before the March 2017 survey. The figures are for all industries including financial institutions.
- Sources: Ministry of Finance; Bank of Japan; Cabinet Office; LSEG Workspace; QUICK.

Ⅰ. Economic Activity and Prices

## Household Sector

## Private Consumption



## Consumer Sentiment

s.a.



Notes: 1. In the left-hand chart, figures for total real private consumption are the real Consumption Activity Index (travel balance adjusted) based on staff calculations, which exclude inbound tourism consumption and include outbound tourism consumption.

2. In the right-hand chart, figures for the Economy Watchers Survey are those for the current economic conditions DI.

Sources: Bank of Japan; Cabinet Office.

5

Chart 6

## Developments in Consumer Prices



2. In the right-hand chart, items subject to aggregation are those adopted in each base year. Figures indicate the CPI for all items excluding fresh food and energy. Figures are staff

- Notes:  1. In the middle chart, figures are the medians of the Policy Board members' forecasts in the October 2025 Outlook Report.

estimates and exclude the effects of policies concerning the provision of free education and the effects of travel subsidy programs.

Sources: Ministry of Internal Affairs and Communications; Bank of Japan.

Ⅱ. The Bank's Conduct of Monetary Policy

## Policy Interest Rates



Real Interest Rate in Japan



- Notes:  1. In the left-hand chart, figures for the United States are the effective federal funds rate. Figures for the euro area are the Euro Overnight Index Average (EONIA) prior to October 2019 and the euro short-term rate (€STR) thereafter.
2. In the right-hand chart, CPI indicates the year-on-year rate of increase in the CPI for all items excluding fresh food. Figures for the CPI exclude the effects of consumption tax hikes.

Sources: Bank of Japan; Ministry of Internal Affairs and Communications; Bloomberg.

7

Chart 8

Ⅱ. The Bank's Conduct of Monetary Policy

## Environment and Developments Surrounding Wages

## Employment Conditions DI



## Annual Spring Labor-Management Wage Negotiation Stance

Figures in parentheses indicate base pay increase rates

|         | Rengo Wage increase target   | Keidanren Positioning of wage increase   | Actual wage increase   |
|---------|------------------------------|------------------------------------------|------------------------|
| CY 2023 | Around 5% (Around 3%)        | Starting point                           | 3.58% (2.12%)          |
| CY 2024 | 5% or more (3% or more)      | Acceleration                             | 5.10% (3.56%)          |
| CY 2025 | 5% or more (3% or more)      | Anchoring                                | 5.25% (3.70%)          |
| CY 2026 | 5% or more (3% or more)      | Further anchoring                        | -                      |

- Notes: 1. In the left-hand chart, figures are based on the Tankan . There is a discontinuity in the data for December 2003 due to a change in the survey framework.
2. In the right-hand table, figures for actual wage increases are aggregate figures released by Rengo.
- Sources: Bank of Japan; Japanese Trade Union Confederation (Rengo); Japan Business Federation (Keidanren).

9",Kazuo Ueda
https://www.bis.org/review/r251201q.htm,Olaf Sleijpen: Strengthening Europe in a fragmented world - integration as the key to stability,"Speech by Mr Olaf Sleijpen, President of De Nederlandsche Bank, at the Euro Finance Week dinner, Deutsche Bundesbank, Frankfurt am Main, 19 November 2025.",2025-11-19 00:00:00,"## Olaf Sleijpen: Strengthening Europe in a fragmented world integration as the key to stability

Speech by Mr Olaf Sleijpen, President of De Nederlandsche Bank, at the Euro Finance Week dinner, Deutsche Bundesbank, Frankfurt am Main, 19 November 2025.

* * *

Vielen Dank. Es ist mir eine große Ehre hier sprechen zu dürfen. Die Euro Finance Week ist einer jener Treffpunkte, an denen gute Ideen für den Finanzsektor entstehen. Dieses traditionelle Diner ist ein wichtiger Bestandteil davon. Obwohl ich in Limburg nahe der deutschen Grenze aufgewachsen bin, ist mein Deutsch dennoch nicht ganz fließend. Daher gestatten Sie mir bitte, auch für die internationalen Gäste, im Englischen fortzufahren.

It is always risky to generalise of course, but I think overall the Dutch and the Germans have many things in common. And one of them is a sense of seriousness, of hard work, a sense that you need to use your short time on this world productively. Maybe that's why it has become a habit among some people to invite a central banker to spoil their dinner party with serious talk about risks and threats and the need for financial frugality.

Well, since I am always happy to help, let me indeed start with a quick sketch of how we at DNB view the outside world. To state it in dinner terms, I would say the risk outlook is not rare, not well done, but medium gloomy.

One of the main themes we look at is of course geopolitical developments, and the fragmentation in the world economy that comes with it. This impacts not only the real economy and inflation, but it also has implications for financial stability. A lot has been said about this topic already, and I will not dwell too long on it.

Perhaps the most important way in which fragmentation impacts financial stability is when we can no longer find each other anymore on a global level when faced with crucial cross-border challenges. That would be a serious problem, because the most serious challenges to financial stability that we currently face are precisely the crossborder issues that we can only solve if we work together. There are many such challenges. Crypto-assets and stablecoins come to mind, along with cyber threats, climate change, and the vulnerabilities in the non-bank financial industry, such as those related to private credit.

What does that mean for us, gathered here tonight? For the financial sector, for central banks, for regulators?

Well, first of all, it would be wise to acknowledge that the global economic order has shifted, and will not revert any time soon. The best thing we can do is to continue doing our jobs as best as we can and ensure financial stability in uncertain times. And stay committed to constructive international working relationships, so that the international financial system can continue to function as best as it can. Damage control, if you will.

Turning to Europe, there is something that we Europeans can and must do. We must strengthen the European economy through further integration. Because in an uncertain world, a strong European single market can serve as a buffer against global shocks. Let me limit myself here to the area that I know best, and that is financial markets. The key challenge here is to make European financial markets more efficient and better equipped to service the economy's needs, while ensuring they remain resilient. Let me explain.

Recently, we hosted Paul Krugman at our Amsterdam headquarters for a discussion on the US, Europe, and financial markets. He was fairly upbeat about the outlook for Europe, especially as compared to what's happening on his side of the Atlantic. But he was pretty clear about one thing in particular: Europe is lagging behind when it comes to the level of depth and integration of its financial markets. Our markets are fragmented, in all kinds of ways. And because of that, we are missing out on investment opportunities that benefit households. We are missing out on risk capital for businesses, particularly those who want to grow beyond the start-up phase. And we are missing out on innovation. And because of that, economic growth in Europe is lower than it could be. It's all in the Draghi report. But of course this is nothing new. We have known it for years.

Therefore I very much support the European Commission strategy on the Savings and Investment Union. Especially the initiatives aimed at enlarging the pools of capital available for investment by channeling household savings to capital market investments. And the proposals aimed at investing these pools of capital more in equity, including venture capital, and take down cross-border barriers that still exist within the EU.

At the same time, it is an illusion to think that we can have an integrated European capital market without an integrated market for cross-border banking. That means we also need to make progress on the Banking Union. The political agreement on the Crisis Management and Deposit Insurance framework is an important next step in this regard. Perhaps views differ on the outcome, but I think we must now move forward with an open mind and work constructively on completing the Banking Union. I look forward to further proposals from the European Commission towards that goal.

Apart from financial markets, we should also look into ways to raise competitiveness in the banking industry, by simplifying financial regulation where possible.

In the years after the financial crisis, we saw a strong and much-needed push for tighter regulation and supervision, especially in the banking sector. And it worked. Banks transformed from shock amplifiers into shock absorbers. Banks played an important role in cushioning the economic shock from the Covid pandemic by continuing to extend credit. Without it, the Covid crisis could have been much worse. So the post-Lehman regulatory reforms clearly paid off.

But to be honest, banking regulation and supervision have become overly complex. Over the past 15 years, a great deal of regulation has been introduced from various

angles - global, EU, national. Micro and macro. Resolution. New risks added, old ones rarely removed. There's overlap. There's friction. And yes, sometimes, there's a lack of proportionality for smaller institutions.

So we need to simplify the capital framework. We need to make supervision more efficient. And we need to streamline reporting requirements. Central banks are currently working on concrete proposals to that end. The Bundesbank and De Nederlandsche Bank are aligned on many priorities in this debate.

So simplification: yes. But deregulation? That's a different story. Deregulation means effectively lowering buffers by relaxing the rules. I am not in favour of that idea.

First of all because it won't help. There has been a lot of research into the impact of capital requirements on bank competitiveness and economic growth. And there is no evidence whatsoever that lowering capital requirements raises competitiveness and economic growth. If anything, it's exactly the other way round.

For a truly competitive financial sector where innovation can thrive, we need not only efficiency, but we also need trust. Trust is the bedrock of our financial system. And for trust, we need resilience, we need buffers. And for that we need robust rules and supervision. Relaxing the rules would reduce the resilience of the banking system, erode trust in it, and increase the likelihood of financial crises.

I am about to conclude my remarks, because even for me there are limits to how much you can spoil a dinner party.

To end on a positive note, let me again recall the discussion we had with Professor Krugman. It made me realise that sometimes we Europeans are too pessimistic about our future. We have tremendous potential. We are the world's third largest economy. And in a world where everything seems uncertain and money seems to be able to buy anything, we have strong institutions governed by the rule of law. This is a strength not to be underestimated. Because strong institutions and regulations ensure that new technologies and products are not a highway to the next crisis, but can be a true engine for sustainable growth. These are strengths that we Europeans can build on. And if we do so, we can truly tap into Europe's unfulfilled potential, and do even better than we are already doing now.

Thank you.",Olaf Sleijpen
https://www.bis.org/review/r251201x.htm,"Swaminathan J: Micro matters, macro momentum - microfinance for Viksit Bharat","Speech by Mr Swaminathan J, Deputy Governor of the Reserve Bank of India, at the Microfinance Industry Network (MFIN) event, Mumbai, 14 November 2025.",2025-11-14 00:00:00,"## Swaminathan J: Micro matters, macro momentum - microfinance for Viksit Bharat

Speech by Mr Swaminathan J, Deputy Governor of the Reserve Bank of India, at the Microfinance Industry Network (MFIN) event, Mumbai, 14 November 2025.

* * *

Shri Harsh Bhanwala and other distinguished members on the Board of MFIN; CEO, MFIN, Dr. Alok Misra; Director, Bankers Institute of Rural Development, Dr. Nirupam Mehrotra; esteemed industry leaders, distinguished guests, awardees of the ASCEND programme, ladies, and gentlemen. Good evening.

It is a pleasure to join you today at the launch of Micro Matters: Macro View - India Microfinance Review FY 2024 - 25 and the special session on ""Microfinance for Viksit Bharat."" My compliments to Dr. Alok Misra and the MFIN team for producing a timely mirror of the sector and a compass for the road ahead.

The theme of this year's review captures a powerful idea: when microfinance is delivered responsibly, it does not remain ""micro."" It becomes macro progress. It turns access into livelihoods, borrowers into business owners, and informal activity into measurable economic output. As we work toward Viksit Bharat 2047, the question is how microfinance can contribute most - how we scale its impact soundly, transparently and with accountability.

## Why Microfinance matters now?

Over the last decade, India has laid strong rails for inclusion. Jan Dhan has given households a basic account, Aadhaar has simplified verification, UPI has made small payments instant, and the Account Aggregator framework has the potential to unlock consented cash-flow data. On these public rails, microfinance can travel far beyond traditional branch footprints.

This progress shows up in the numbers. The Financial Inclusion Index has moved from 43.4 on March 31, 2017, to 67.0 on March 31, 2025. That is a meaningful shift in access and availability. However, the task now is depth and quality of use. In that context, let me share four reasons as to why microfinance matters.

First, it bridges asymmetry. Many low-income households have irregular incomes, thin documentation, and no collateral. Microfinance enables them to obtain small loans, where instalments are aligned to real cash cycles rather than to a salaried calendar.

Second, it creates productive capacity. Credit is deployed into inventory, livestock, tools, and working capital. Small assets start generating cash that can service the next, slightly larger loan which can eventually transform a person into a micro-entrepreneur.

Third, it serves as a platform for innovation. Assisted digital journeys, Aadhaar-based KYC, alternative credit scoring, etc. were first proven at the frontiers of microfinance. The sector often pilots what the rest of the system later scales.

Lastly and most importantly, it brings the benefits of formal finance to those otherwise excluded and help them create a transaction record. That record opens doors to larger formal credit over time and connects households to savings, insurance, and pensions.

In sum, microfinance can turn access into use, and use into progress on rails the country has already built. The agenda now should be to convert reach into inclusive growth through better underwriting, reasonable pricing and consistent customer protection. With that in view, let me outline five key ideas that can shape the next phase.

## Five ideas to shape the next phase

Serve the household, not just the applicant: Credit decisions work best when they read the full cash life cycle of the family. It is better to promote a savings habit, a basic insurance cover, and a short emergency line, as all these together can make credit quality predictable.

Tech-enabled underwriting with human judgment : Technology can help overcome thin files, but human expert judgment must stay. AI models must be explainable, so review exceptions by a human, and back-test results regularly. The aim is less friction, not less prudence.

From mono-product to micro-enterprise finance : Product design needs to match how small businesses actually grow. A single working-capital loan is often the first step; but it should progressively graduate into inventory finance, capital asset financing, and basic payments support.

Build climate resilience at the base of the pyramid : Climate is now a credit variable. Districts face heat spikes, floods, or erratic rainfall that strain household income and collections. Lenders have to respond with products that can keep customers and portfolios steady through weather shocks.

Responsible use of data : the rails and the data must work for the borrower. Customer data and its privacy is a responsibility. Consent should be clear and in local language, data used for the purpose stated, and storage kept secure. Used well, these rails prevent over-indebtedness and enable responsible personalisation rather than indiscriminate up-selling.

Taken together, the aim is to convert first access into regular use, regular use into stable income, and stable income into a clear route to formal credit. This is the quality of growth the sector should now aim for.

## Regulatory initiatives and supervisory expectations

In 2022, the Reserve Bank undertook a careful reset of the microfinance framework. After extensive stakeholder feedback, a revised framework was issued with the overarching intent to expand inclusion, place borrower welfare at the centre, and align rules across all regulated lenders offering microfinance. Along with clarifying what qualifies as microfinance, the framework also removed pricing caps, a long-standing demand of the industry.

Greater flexibility brings a higher bar for conduct. The Reserve Bank expects lenders to use the room provided by the 2022 framework in a way that strengthens borrower welfare and long-term portfolio quality. Let me therefore enumerate some of our expectations.

Pricing and transparency : Pricing should be reasonable, reflecting cost, risk, and efficiency improvements, and not taking undue advantage of the borrower's situation. Customers deserve a clear view, which means plain-language loan agreements /contracts that set out instalments, fees, and total cost; and staff who can explain these in local language. Where technology or funding reduces cost-to-serve, borrowers should also reap the benefit. Boards of entities are expected to review spreads against cost of funds and operating efficiency, and to question outliers.

Lending should not result in over-indebtedness : A proper assessment should consider all sources of income, recognise seasonal variability, and verify all current obligations to ensure that additional lending does not lead to unsustainable indebtedness.

Collections conduct and grievance redress : Outsourcing collections does not dilute accountability. Lenders remain responsible for how customers are treated, including by BCs and recovery agents. Grievances must be easy to file, acknowledged promptly, and resolved within published timeframes. Further, the quality of resolution matters as much as speed.

Model risk, analytics, and fairness : Digital adoption is welcome when it improves suitability and reduces friction. Analytics and models require strong governance. Inputs should be documented, and outcomes should be tested for accuracy and unwanted bias.

Accurate reporting: Bureau reporting needs to be timely and complete so good repayment behaviour travels with the borrower and lenders can see total obligations of a borrower. Inaccurate or late reporting hurts both households and institutions.

Operational resilience and partner hygiene : Resilience must reach the last mile. Cyber hygiene at branch, partner, and device level protects both customers and institutions. Partner due diligence for Business Correspondents and Direct Selling Agents should follow a common baseline that covers training, data handling, and conduct standards, with periodic spot checks.

Concentration risk and early warning : Concentration, whether geographic or segmental can magnify shocks. Early warning frameworks that track skip patterns, roll-rates, repeat top-ups, etc. allow timely course correction.

Governance, incentives, and culture : Incentives should reward responsible growth, accurate underwriting, and good conduct, not just volumes. Complaint analysis, collections exceptions, and pricing outliers deserve board time.

Eventually if industry standards remain high, regulatory or supervisory intervention can stay light. Flexibility and accountability travel together; the sector's longevity and health depends on that balance.

Let me end with a line 1   from Smt. Ela R. Bhatt, who founded SEWA and pioneered the concept of microfinance through women led SHGs in the 1970s.

""When we put the human being at the centre, we begin to get a more holistic and integrated view of development. We begin to co-relate our activities with its impact on our own self, on the society we live in, and on the universe we live in. And in this way we restore balance and harmony in the world.""

If we stay true to these basics, more first time loan customers will graduate to larger formal credit, and the quality of growth will rise across states and segments. That is how micro becomes macro progress, and how we advance the larger journey to Viksit Bharat 2047. My compliments and thanks to MFIN for this opportunity, to lenders and partners across the ecosystem, and to the field teams who carry this work to the last mile. Jai Hind.

1  Women's World Banking, Speech by Smt. Ela R. Bhatt at the Gandhi Lecture on Nonviolence at McMaster University on October 18, 2013.  https://www. womensworldbanking.org/insights/women-poverty-ela-bhatt-ghandi-lecture-nonviolencemcmaster-university.",Shri Swaminathan J
https://www.bis.org/review/r251202e.htm,Jorgovanka Tabaković: Payment services between the digital anvil and the regulatory hammer,"Speech by Dr Jorgovanka Tabaković, Governor of the National Bank of Serbia, at the Banking Law 2025 conference, organised by the Association for Banking Law, Belgrade, 17 November 2025.",2025-11-17 00:00:00,"## Jorgovanka Tabakovi: Payment services between the digital anvil and the regulatory hammer

Speech by Dr Jorgovanka Tabakovi, Governor of the National Bank of Serbia, at the Banking Law 2025 conference, organised by the Association for Banking Law, Belgrade, 17 November 2025.

* * *

Dear guest speakers and dear participants from the region, welcome to Belgrade and to Serbia.

Esteemed colleagues, ladies and gentlemen, welcome to the second international conference . Banking Law 2025

A little over a year and a half ago, in the amphitheatre of the National Bank of Serbia, the formal founding assembly of the Association for Banking Law was held. Several professionals and enthusiasts in this field - among them professors from the Faculty of Law, in-house lawyers from banks, attorneys, as well as legal experts from the National Bank of Serbia - gathered with the idea that this Association would serve as a platform for sharing knowledge and experience in this highly dynamic branch of law. Conferences like this one are precisely the way to exchange that knowledge and establish connections that will make this exchange lasting. The Association held its first one-day conference last year, and today I have the honour and pleasure to open together with you the second conference, featuring 13 eminent speakers from all parts of the world.

The theme of this year's conference, which the organisers have vividly formulated as , indeed Payment Services Between the Digital Anvil and the Regulatory Hammer seems to reflect the situation we currently face in the area of modern payment operations. On the one hand, there is constant progress in digital services, driven by the need for ever faster transfers and improved user experience, and on the other hand, there are risks that these services inherently carry, which is the main reason why they must be regulated and supervised.

Behind the narrative of user experience and efficiency lies a deeper economic dynamic - the transformation of data into a new form of economic value. Every transaction, every use of a digital wallet or payment app, generates data that become part of vast ""big data"" systems. With the emergence of artificial (generative) intelligence, this economic dynamic grows even more complex and brings risks and challenges that are difficult to foresee.

Within the payment system, this dynamic takes on particular significance. On one side, we have banks - institutions that safeguard citizens' deposits and form the foundation of a country's financial stability; on the other side, we have BigTech companies that increasingly intermediate payment transactions, setting their own rules for data access and use. Banks, although strictly regulated and under continuous supervision, increasingly find themselves in a position where they must adapt to the technological standards, interfaces and business models of the BigTech companies - often

depending on infrastructure they cannot control. And it is precisely at this point between innovation and sovereignty, between technological progress and regulatory responsibility - that the greatest challenge of our time lies.

In this context, the introduction of central bank digital currencies, as a public, regulated and supervised form of digital money that would allow citizens and states to retain sovereignty over the payment system and over the data generated within it, may indeed be one of the possible models for responding to this challenge.

In Serbia, thanks to the national Dina card scheme and the NBS Instant Payment System, we have managed to preserve that sovereignty in the domestic payment system to a significant extent - something that has proven to be extremely important in today's volatile and complex geopolitical environment.

The themes selected by the organisers and speakers for this conference address precisely these issues, and among the presenters we have representatives of all interested parties. Joining us are representatives of regulatory and supervisory authorities from the central banks of Brazil, Spain and Croatia, as well as from Japan's Financial Services Agency. On the other hand, we also welcome representatives of card schemes and AlyPay. In addition, again this year we are joined by lawyers from the United Kingdom, who can offer insight into how case law is adapting in this field. Conference participants will have the opportunity to hear what I am sure will be very engaging presentations, as well as take part in what I am certain will be an intense discussion during the panel titled: When Banks Meet Big Tech: Who Owns the Customer in the Digital Wallet Era?

And yet, there is much more to banking than payments. The protection of borrowers remains a challenge for regulators, and the greatest among those challenges is perhaps how to encourage consumers to act economically rationally - to compare and choose between offers, and to understand the financial consequences of borrowing. The conference will feature two very interesting presentations on this topic as well.

Finally, there is the always-relevant issue for prudential supervisors: corporate governance. Unlike the field of payment services, here there is no direct incursion of BigTech for now - unless, of course, members of the management board decide to delegate their governance to AI. However, the overall complexity of modern banking operations raises many new questions and keeps this topic consistently engaging and challenging. In addition to the lecture by our colleague from Armenia, at the end of the second day we will also have the opportunity to hear a panel whose participants will share their experiences and views on corporate governance in banks.

Dear conference participants, you have a great opportunity to attend and hear eminent and highly qualified speakers. Make the most of it - listen carefully, ask questions, exchange experiences.

I wish you successful and fruitful work, and a pleasant time together.",Jorgovanka Tabaković
https://www.bis.org/review/r251201c.htm,Christine Lagarde: The transformative power of AI - Europe's moment to act,"Speech by Ms Christine Lagarde, President of the European Central Bank, at the BratislavAI Forum on artificial intelligence and education as part of an OECD high-level event to mark the 25th anniversary of ""Better policies for better lives"", Bratislava, 24 November 2025.",2025-11-24 00:00:00,"SPEECH

## The transformative power of Al: Europe's moment to act

Speech by Christine Lagarde, President of the ECB, BratislavAl Forum on artificial intelligence and education as part of an OECD high-level event to mark the 25th anniversary of ""Better Policies for Better Lives"", Bratislava

Bratislava, 24 November 2025

It's a privilege to speak with you today about artificial intelligence.

In 1987 Robert Solow famously remarked that ""you can see the computer age everywhere but in the productivity statistics.""

The same observation could be made today. We see Al advancing at remarkable speed. Yet its aggregate impact is still barely visible in the data.

Over the past year global corporate investment in Al reached USD 252 billion, and private Al firms raised a record USD 100 billion."" Five leading US investors in terms of capital expenditure are now companies that focus heavily on Al. of these companies numbered among the top ten investors a decade ago.2]

Some view this surge as temporary exuberance running ahead of underlying fundamentals. But a debate framed only in terms of short-term ups and downs may miss the bigger picture.

take

History offers many examples of intense investment waves that — despite swings in the investment cycle — ultimately left behind transformative technologies that reshaped economies for decades./2] So the key question is not whether there are cycles — that is almost certain — but how long it will before the enduring productivity benefits become visible.

And there are reasons to believe Al could spread faster, and deliver tangible economic gains sooner, than previous technology waves.

If that is the path we are on — and | believe it may be — Europe needs to position itself accordingly. We need to remove all the obstacles that stop us from embracing this transformation. Otherwise we risk letting the wave of Al adoption pass us by and jeopardise Europe's future.

## History shows: disruptions first, benefits later

To understand what is at stake, it is useful to look at history.

Earlier general purpose technologies, such as electricity, computers or the internet, followed a recognisable trajectory. Disruption arrived early, with broad-based productivity gains only emerging slowly.41

For example, it took around thirty years before the impact of electricity showed up clearly across the economy. Power grids had to be built, factories redesigned and workers reallocated from legacy tasks to new ones.

Computers, too, required long-term investments in hardware, software, skills and new business models before they translated into measurable improvements.

If Europe's Al wave resembles the spread of electricity in the 1920s, annual productivity growth could be about 1.3 percentage points higher. But if it follows the US digital boom of the late 1990s, the boost would be closer to 0.8 points.) Even that lower bound would be significant for Europe, marking a clear step up from recent trend productivity.

## Could this time be different?

But Al has features that could compress this cycle and push forward even greater productivity gains. Two features — innovation and diffusion — point to a faster path.

The first is that frontier innovation may accelerate because of the recursive nature of Al.

ideas.

Al systems can use their own output to enhance their performance in a continuous loop. This can lower not only the cost of producing goods and services, but also the cost of generating new For instance, in fifty years, science resolved approximately 200,000 protein structures. Al achieved over 200 million protein structure predictions in about one year, vastly expanding the knowledge frontier.

This represents a significant change in the inputs to research and development. As the knowledge base expands almost overnight, downstream discovery can compound sooner, even before every lab or firm has fully reorganised.

By accelerating the production of ideas, Al can lift not just the /eve/ of productivity but potentially the growth rate itself.©] Some estimates suggest that such A/-augmented R&amp;D could double recent US productivity growth rates to between 1.6 and 2.4% annually — faster than previous technology waves. [9]

Second, the diffusion of Al technologies can be faster because much of the supporting infrastructure already exists.

It is true that there are bottlenecks. The current wave of investment in hyperscalers shows that compute capacity remains a constraint. Training and deploying larger models requires substantial investment in data centres and energy. In Europe we face particular challenges in this respect, given our higher energy costs and longer permitting delays.

But unlike past technologies, such as electricity or computers that required new physical networks or coding skills, Al runs on existing internet devices and communicates with users through human language.

Wide-scale use can therefore proceed even before the infrastructure build-out is complete. Many Al applications already deliver gains on existing hardware. So while a lack of computing capacity holds back the pace of model development, it does not necessarily block diffusion across the wider economy.4.4

Moreover, the infrastructure itself is advancing quickly. While Moore's Law forecasts a doubling in chip capacity every two years, Al model compute power has been doubling every six months — four times faster.

## What Europe stands to gain

What does this mean for Europe?

The stakes could be extraordinarily high.

With the United States and China ahead of the field, Europe has already missed the opportunity to be a first mover in Al. And we still bear the costs of having been slow adopters during the last digital revolution. We cannot afford to make the same mistake again.

Yet the story is far from over. Europe can still emerge as a strong second mover if it acts decisively. Our goal should not be to out-build the leading Al models, but rather to deploy Al across the board. By focusing on rapid adoption and smart use of existing Al technologies across our wide-ranging industries, Europe can turn a late start into a competitive edge.

Our economy is highly diversified. The top ten firms in the US stock market account for roughly 40% of the market across just four sectors, whereas the top ten in the EU account for no more than 18% across almost twice as many sectors.

And European firms are already adopting generative Al on a similar scale to those in the United States. What the ECB is hearing from large European companies confirms this trend: many are investing heavily in databases, cloud solutions and Al, with providers of these services reporting double-digit growth.""21

But to turn these benefits into a competitive advantage, we need to connect data across sectors. Thanks to industrial-scale data spaces, companies can share operational data and create training sets for Al models that no firm could assemble alone.""5]

single

Initiatives like Manufacturing-X and Catena-X in the automotive sector foster collaboration in data sharing, while the European Health Data Space enables interoperable health records, allowing us to leverage the broad anonymised patient datasets generated by our universal healthcare systems. 14]

But these efforts will not be enough on their own.

If our data spaces use technology stacks that are owned and governed outside Europe, we deepen — rather than reduce — our strategic dependencies. We must diversify critical parts of the Al supply chain and avoid single points of failure. In the foundational layers, such as compute capacity based on chips and data centres, we should maintain a minimum capacity.

In the application layer, Europe should leverage the power of the Single Market to enforce interoperability and open standards. This will encourage competition among large models and prevent the kind of ""lock-in"" that has occurred with technology platforms in the past.

Moreover, we must overcome a familiar set of old barriers that have prevented us from being first movers in the past.

If we allow our energy costs to stay high, if regulations remain fragmented, and if capital markets fail to integrate and channel long-term, risk-bearing funding at scale, Al will diffuse more slowly.

And this time, the consequences extend beyond losing the race in Al models. We would eventually face a further loss of competitiveness for many of our sectors and industries.

## Conclusion

Let me conclude.

""It'll be ten times bigger than the Industrial Revolution — and maybe ten times faster."" These words from Demis Hassabis — joint winner of the 2024 Nobel Prize in Chemistry for his Al research — capture the potential scale and speed of what may lie ahead.

So the question is no longer whether this new frontier will arrive, but how soon — and the pace of progress in recent years suggests it is likely to be sooner than our institutions and regulations are prepared for.

That means acting now to clear the obstacles that would slow Al diffusion and so delay prosperity for all Europeans in the decades ahead.

1.

Stanford Institute for Human-Centered Artificial Intelligence (2025), The 2025 Al Index Report, Chapter ""Economy"".

2.

Fox, J. (2025), ""The Al spending boom is massive but not unprecedented"", Bloomberg Opinion, 8 October.

3.

Turner, J.D. and Quinn, W. (2020), Boom and Bust: A Global History of Financial Bubbles.

4.

David, P. A. (1990), ""The Dynamo and the Computer: An Historical Perspective on the Modern Productivity Paradox"", American Economic Review, Vol. 80, No 2, pp. 355-361.

5.

Aghion, P. and Bunel, S. (2024), ""Al and Growth: Where Do We Stand?"", Federal Reserve Bank of San Francisco Working Paper, June.

6.

Aghion, P., Jones, B.F. and Jones, C.I. (2019), ""Artificial Intelligence and Economic Growth"", in Agrawal, A., Gans, J. and Goldfarb, A. (eds.), The Economics of Artificial Intelligence: An Agenda, University of Chicago Press, pp. 237-282.

- 7.

See AlphaFold Protein Structure Database developed by European Bioinformatics Institute (EMBLEBI) and Google DeepMind.

8. NBER

Aghion, P., Jones, B.F. and Jones, C.I. (2017), ""Artificial Intelligence and Economic Growth"", Working Paper, No 23928.

9.

Besiroglu, T., Emery-Xu, N. and Thompson, N. (2022), Economic impacts of Al-augmented R&amp;D.

10.

Duan, J., Zhang, S. and Wang, Z. et al. (2024), ""Efficient Training of Large Language Models on Distributed Infrastructures: A Survey"", arXiv preprint, July.

11.

Tony Blair Institute for Global Change (2025), Europe in the Age of Al: How Technology Leadership Can Boost Competitiveness and Security, 17 November.

12.

Kuik, F., Morris, R., Roma, M. and Slavik, M. (2025), ""Main findings from the ECB's recent contacts with non-financial companies"", Economic Bulletin, |lssue 7, ECB.

13.

Garicano, L. (2025), ""The smart second mover: A European strategy for Al"", Silicon Continent, 9 July.

14.

The Regulation aims to facilitate, through increased standardisation, easier access to new markets for electronic health record systems across different Member States and to increase the availability of anonymised and pseudonymised electronic health data for use in applied research and innovation.

CONTACT",Christine Lagarde
https://www.bis.org/review/r251201p.htm,Renato Dias De Brito Gomes: Innovation and competition - the strategic journey of the Central Bank of Brazil,"Speech by Mr Renato Dias De Brito Gomes, Deputy Governor of the Central Bank of Brazil, at the Central Banking Autumn Meetings 2025, Rio de Janeiro, 20 November 2025.",2025-11-20 00:00:00,"## Renato Dias De Brito Gomes: Innovation and competition - the strategic journey of the Central Bank of Brazil

Speech by Mr Renato Dias De Brito Gomes, Deputy Governor of the Central Bank of Brazil, at the Central Banking Autumn Meetings 2025, Rio de Janeiro, 20 November 2025.

* * *

Good morning, distinguished guests.

It is a privilege to participate in this prestigious forum.

I have long admired the work of Central Banking, and I am honored to share insights on the strategy pursued at the Central Bank of Brazil.

The crucial challenge lies in fulfilling our mandate of financial stability while simultaneously fostering and safely integrating innovation.

The strategy we have adopted stands on four foundational pillars.

## 1. Proportional Regulation Aligned with Risk

Our first pillar is a regulatory framework that is proportionate to the risk associated with the activities of each institution.

This approach enables the coexistence of diverse financial entities.

On one hand, we support traditional banking institutions capable of delivering credit and financial services efficiently.

On the other hand, we have created space for specialized entities that provide payments (narrow banking) or grant loans on their own capital.

As a result of more competition, financial inclusion was greatly advanced by payment institutions and fintech lenders with tailored prudential requirements.

These entities, operating digitally and with lower overhead, have successfully reached segments of the population previously excluded from the formal financial system.

## 2. Digital Public Infrastructures that Level the Playing Field

The second pillar is the development of Digital Public Infrastructures.

To ensure genuine competition, we must equalize access to critical infrastructures.

This led to the development of two transformative initiatives: Pix, our instant payments system, and Open Finance, our open data ecosystem.

Both are designed as public infrastructures, accessible to all regulated participants under uniform conditions.

Pix, for instance, was launched as an open scheme with mandated participation from major account providers, ensuring immediate nationwide interoperability.

Open Finance, meanwhile, empowers consumers to share their financial data across institutions, thereby reducing informational asymmetries and fostering competition based on service quality rather than incumbency.

## 3. Collaborative Governance and Market Engagement

The third pillar is intense collaboration with market participants.

The Central Bank has established inclusive governance structures such as the Pix Forum and the Open Finance governance model, which incorporate stakeholders from across the financial ecosystem.

These platforms facilitate transparent decision-making and mitigate the risk of regulatory capture.

Through these mechanisms, we act not merely as a regulator, but as a facilitator of responsible innovation.

Learning from market stakeholders is essential for effective regulation.

## 4. Security and Stability as Cornerstones

The fourth pillar is our unwavering commitment to security and financial stability.

Innovation must be accompanied by robust safeguards.

The proliferation of digital payments has introduced new vulnerabilities, including a rise in social engineering fraud and cyber threats.

In response, we have implemented a comprehensive suite of regulatory enhancements to Pix, including improved identity verification, enhanced refund mechanisms, transaction monitoring, and stricter oversight of payment institutions.

These measures are designed to preserve trust in the system and ensure its resilience.

## Pix: A Case Study in Inclusive Infrastructure

Pix exemplify our strategic approach. Conceived as public good, Pix offers instant, costfree payments to individuals and businesses, dramatically reducing reliance on cash and expanding financial inclusion.

Today, Pix is utilized by Brazilians from all socioeconomic backgrounds, from urban professionals splitting expenses via QR code, to street vendors and microentrepreneurs accepting digital payments without the need for point-of-sale devices, to families transferring funds in emergency situations.

Pix has effectively democratized digital payments. Operating continuously, 24 hours a day, seven days a week, it enables transactions to be settled within seconds and maintains exceptionally high standards of availability and security.

Its cost-free nature ensures that even the smallest transactions, including those in the most economically vulnerable regions, are accessible to users without financial barriers.

This has significantly reduced reliance on cash and integrated millions of previously unbanked or underbanked individuals into the formal financial system.

It is important to underscore that Pix's success is not solely attributable to its technical architecture.

The foundation laid by prior regulatory reforms, particularly the adoption of proportional regulation and streamlined licensing, was instrumental.

These measures facilitated the entry of numerous new institutions into the payments and digital banking sectors, many of which targeted underserved segments of the population.

Fintech firms and neo-banks, for example, introduced simplified digital accounts via mobile platforms, often positioning themselves as cost-effective alternatives to traditional banking services.

By the time Pix was launched in late 2020, these institutions had already onboarded a substantial number of Brazilians into the financial ecosystem.

Pix amplified their impact by providing a ubiquitous, low-cost mechanism for transactions, thereby enhancing the utility and reach of their services.

In essence, Pix complemented the evolving financial landscape, enabling innovations from fintechs, payment institutions, and digital banks to interconnect seamlessly.

Conversely, the presence of these innovative providers helped catalyze Pix's adoption, as they were well-positioned to leverage and promote the system as a competitive advantage.

## Open Finance: Empowering Financial Citizenship

Open Finance, our other flagship initiative, complements the broader strategic framework.

Implemented in progressive phases starting in 2021, Open Finance introduced structured data-sharing protocols across banking, credit, investment, insurance, and other financial domains.

By dismantling information monopolies, it has effectively leveled the informational playing field.

This means that, with the client's consent, a smaller fintech institution can assess a prospective customer's creditworthiness with the same depth and accuracy as a large incumbent bank.

Over time, this dynamic reduces the competitive advantage traditionally associated with institutional scale and legacy, shifting the focus toward service quality, pricing, and innovation.

Open Finance is already yielding tangible results: enhancing product offerings, increasing consumer mobility, and fostering market responsiveness.

To date, more than 100 million active data-sharing consents have been registered, and tens of millions of individuals have employed the system to secure better financial terms or consolidate their financial information.

This initiative is fundamentally advancing what may be termed financial citizenship: empowering individuals to assert control over their financial data and compelling institutions to compete based on merit, transparency, and consumer value.

## Addressing Emerging Risks

Not every aspect of our innovation journey has been without challenges.

As financial inclusion and digitalization have advanced, they have inevitably introduced new risks, requiring the Central Bank to continuously adapt its regulatory framework.

Among the most pressing concerns has been the rise in fraud, particularly schemes rooted in social engineering.

While such scams are not novel, the digital era has significantly amplified their reach and impact.

In the context of real-time payments such as Pix, a fraudster who successfully deceives a user into initiating a transfer can receive funds instantly, thereby complicating timely intervention and recovery.

Specifically for Pix, we implemented a series of security-focused regulatory enhancements, which we believe offer valuable lessons for any jurisdiction deploying fast payment systems.

Key measures include:

- Enhanced identity verification: Pix participants, including banks and fintechs, are now required to verify that the individual registering a Pix alias (such as a phone number or email) corresponds to the identity recorded in national tax databases (CPF/CNPJ).
- Improved refund mechanism (MED 2.0): We restructured Pix's Special Return Mechanism to facilitate the recovery of funds lost to fraud.

The updated protocol enables financial institutions to trace and block fraudulent transfers across multiple accounts.

Previously, if stolen funds were quickly moved through successive accounts, recovery was difficult.

The new mechanism allows for the freezing of assets even beyond the initial recipient, significantly impeding fraudsters' ability to ""cash out.""

- Standardized fraud alerts for users: A uniform ""Scam Alert"" message has been developed for use across all participating institutions.

If a transaction deviates from a user's typical behavior, such as a large transfer at an unusual time, the system will prompt a warning prior to authorization.

- Overhauled enforcement and penalties: The Pix Penalties Manual has been revised to strengthen enforcement.

Procedures for sanctioning non-compliant participants have been streamlined, maximum fines increased, and a new daily fine (""multa cominatória"") introduced.

- Objective fraud criteria: We are establishing clear, standardized definitions for ""founded suspicion of fraud"" and ""suspicion of fraud.""

Though technical in nature, these criteria are essential for harmonizing responses across institutions and minimizing the risk of legitimate transactions being erroneously blocked. This measure remains under development.

Each of these measures represents a significant advancement in safeguarding the integrity of Pix.

While the focus here has been on fraud prevention, it is equally important to address the broader domain of cybersecurity.

Unlike fraud, which typically targets individuals and transactions, cyber threats pose systemic risks to institutions and infrastructure.

As previously noted, we have encountered incidents involving sophisticated cyberattacks on Pix participants.

These events exposed vulnerabilities in institutional defenses and third-party vendor arrangements.

The Central Bank treated these occurrences as systemic threats and responded by issuing new regulatory requirements.

We now mandate more comprehensive cybersecurity standards for third-party technology providers, recognizing that many vulnerabilities may originate in outsourced systems.

## Drex and the Future of Tokenized Finance

Looking ahead, one of the most pressing questions facing central banks globally, including the Central Bank of Brazil, is how to effectively respond to the emergence of tokenized finance.

Technologies such as Distributed Ledger Technology (DLT), blockchain, and smart contracts are introducing new asset classes and novel transaction mechanisms, reshaping the financial landscape.

While discussions surrounding Central Bank Digital Currencies (CBDCs) and tokenized money have gained momentum internationally, many of these conversations remain theoretical and fragmented.

The practical challenge lies in determining how central banks can engage with these technologies in a manner that strengthens, rather than destabilizes, the financial system.

It is my firm belief that central banks must assume a proactive leadership role in this domain.

This does not imply that every central bank should immediately launch a digital currency or adopt a uniform technological framework.

Rather, it calls for central banks to guide the conversation, establishing foundational principles, and conducting structured experimentation.

This ensures that the evolution of financial infrastructure does not outpace regulatory oversight or fragment into incompatible systems.

Brazil's approach through the Drex initiative exemplifies this leadership posture.

In the first phase, conducted in 2023, we examined core technological trade-offs, particularly those involving privacy, scalability, and programmability.

Our findings confirmed that while high levels of privacy could be achieved, they came at the expense of transaction throughput, underscoring the inherent limitations of current DLT frameworks.

These are the types of nuanced realities that only emerge through rigorous, hands-on testing.

Building on these insights, we transitioned to the second phase of the Drex pilot, shifting our focus toward practical use cases.

The challenges identified in phase one, such as reconciling privacy with performance, persist and will not be resolved immediately.

Accordingly, we have adopted a two-pronged strategic approach. In the short term, we are pursuing a technology-agnostic path, prioritizing solutions that address existing market frictions using current infrastructure.

In the long term, we maintain a forward-looking posture. Should technological constraints be overcome - and we are confident that global research and development will continue to advance the frontier - we intend to be prepared to fully embrace it.

The central message is clear: central banks must serve as both innovators and standard-setters in the era of tokenization, ensuring that technological progress aligns with public interest and systemic stability.

## Conclusion

In conclusion, the Central Bank of Brazil positions itself not as a competitor to financial institutions, but as a neutral enabler of innovation, competition, and stability.

What gives me confidence about the future is the collaborative approach we have institutionalized: working together with the private sector, with other public authorities, and with international peers. This cooperation is vital.

Thank you for your attention. I extend my gratitude to the organizers for this opportunity and wish all participants a productive and insightful conference.",Renato Gomes
https://www.bis.org/review/r251127m.htm,"Asahi Noguchi: Economic activity, prices, and monetary policy in Japan","Speech by Mr Asahi Noguchi, Member of the Policy Board of the Bank of Japan, at a meeting with local leaders, Oita, 27 November 2025.",2025-11-27 00:00:00,"

November 27, 2025

Bank  of  Japan

## Economic Activity, Prices, and Monetary Policy in Japan

Speech at a Meeting with Local Leaders in Oita

## NOGUCHI Asahi

Member of the Policy Board

## I. Economic Activity and Prices

## A. Economic Developments at Home and Abroad

Please allow me first to express my deepest sympathy for the loss of life in the large-scale fire that occurred in Saganoseki, Oita City and to offer my sincere condolences to all those affected.

I will begin my speech by talking about recent economic developments at home and abroad. It can be said that Japan's economy is currently in a transitional period, where the economy is shifting from a deflationary or zero-inflation economy that lasted for several decades from the  collapse  of  the  bubble  economy  in  the  early  1990s until  the  onset  of  the  COVID-19 pandemic, to an economy that grows while both prices and wages continue to rise. In this context,  new  developments  that  have  not  been  seen  before  are  starting  to  emerge  in the economy, such as progress in wage hikes on the back of labor shortages owing to an expansion in employment, rising stock prices based on an increase in corporate profits, and growth in new businesses fueled by diversified business opportunities. On the other hand, high prices stemming from cost-push factors that emerged with the end of the pandemic have placed a heavy burden  on  households, thereby pushing  down private  consumption. Therefore, for Japan's economy to genuinely return to a growth path, it is essential that people's wages and income continue to grow in a way that exceeds price increases.

The pandemic that first broke out in 2020, and subsequent global inflation, posed a significant challenge for Japan. At the same time, they ultimately played a role in strongly pushing the country to exit from a zero-inflation economy. The greatest challenge Japan currently faces is the tariff policy of the second Trump administration in the United States. While the impact of that policy is not yet fully clear, it is first necessary for Japan's economy to weather this challenge so that it can return to a growth path.

The new tariff policy unveiled by the Trump administration starting in early spring 2025 caused great concern around the world. This was because it virtually overturned the long-held principle of free trade -- the idea that more open trade fosters greater prosperity for people. In  the  long  term,  tariffs impair the  international  division  of  labor based  on  comparative advantage, thereby reducing global production efficiency. In the short term, tariffs lead to a

contraction in trade, thereby pushing down the economy of many countries and regions. On top of this impact, in the case of the United States, higher imported goods prices due to tariffs, and  the  consequent  decline  in  consumption, would likely cause even  greater economic deterioration.

Following  the  announcement  of  the  new  U.S.  tariff  policy, international  organizations, including the International Monetary Fund (IMF), initially revised their growth projections for the global economy substantially downward, particularly for the United States. However, these organizations have gradually revised their subsequent projections upward (Chart 1). One reason behind these revisions is that, so far, the downward effects of tariffs on the U.S. economy have remained smaller than initially expected.

The main factor behind the lower-than-expected impact on the U.S. economy is the extremely slow pass-through of tariffs to selling prices. For example, many automakers have lowered their export prices to avoid an increase in selling prices in the United States -- meaning that the exporting side has absorbed the tariff costs. However, such cases have been mostly limited to automobiles, and for many other items, tariff costs have been borne by the United States, the importing side. Even in that case, a substantial portion of the costs has been borne by firms rather than households. 1 This is likely due to many U.S. firms intentionally passing on tariff costs  to selling prices  slowly, perhaps  to avoid  drawing  attention  to the burden  on consumers as much as possible. While it is expected that the pass-through of tariffs to selling prices will gradually progress, shifting the burden from firms to households, this process will likely take considerable time. This means that price rises due to tariffs will progress with a significant  time  lag in the United  States, and  consequently downward  pressure  on consumption will also occur later than initially expected.

Another factor that has supported the U.S. economy is a rise in growth expectations driven by the AI sector. This has likely contributed significantly to the continued rise in U.S. stock prices  despite  tariffs  exerting  downward  pressure  on  economic  conditions. While  private

1 At a press conference held on September 17, 2025, Federal Reserve Chair Powell stated that what seems to be happening is that tariffs are mostly not being paid by exporters but by the companies that sit between the exporter and the consumer.

consumption in the United States has indicated firmness even amid price rises due to tariffs, it is considered that high stock prices led by the AI sector have partly boosted consumption, particularly  among the  wealthy. In  fact, resilient AI-related  investment has played  an important role in underpinning U.S. economic growth.

As I have described, the U.S. economy has been firm despite developments in tariff policy, and the global economy has also shown no change on the whole. Japan's economy therefore has maintained stability. While weakness has been seen in domestic demand due to price rises, the  annualized  quarter-on-quarter  real  GDP  growth  rate  continued  to  grow  moderately through the April-June quarter of 2025. For the July-September quarter, however, it registered negative growth for the first time in six quarters, due to factors such as a drop in automobile exports from Japan to the United States as well as a decline in housing investment against the background of revisions to the Building Standards Act and the Energy Saving Act (Chart 2). It is necessary to carefully monitor to what extent these components recover.

## B. Price Developments

Turning to domestic price developments, the year-on-year rate of change in the consumer price index (CPI) has continued to exceed the target of 2 percent since spring 2022, following the global inflation that arose after the pandemic (Chart 3). That said, factors contributing to this inflation have varied somewhat, depending on the period. Initially, against the backdrop of a rapid rise in import prices, higher energy and food prices accounted for a particularly sizable contribution to the inflation (Chart 4). After that, the rate of increase in import prices became moderate, in line with subsiding global inflation, and the pace of increase in energy and food prices started to stabilize. As a result, the year-on-year rate of increase in the CPI declined to the range of 2.0-2.5 percent around the middle of 2024. However, the CPI inflation rate has since accelerated again, primarily due to the rise in food prices, especially rice prices. One of the causes of the higher inflation is the rise in the price of imported beverages and foods, mainly due to developments in international commodity prices for food. Another factor contributing  to  the  rise  in  CPI  inflation  is the price  hikes  of rice resulting  from  supply shortages that began in 2024 (Chart 5).

Such a rise in food prices can naturally be attributed to the increasing cost of imported food and other items. Although the direct trigger of the rise in rice prices is supply shortages, the underlying cause can also be considered to be an increase in production costs, due to a surge in the price of materials such as fertilizer, fuel, and agricultural machinery. The pass-through of these cost increases to prices is beginning to become increasingly evident in a number of areas. As I will discuss later, this may be understood as a trend to recover all at once the cost increases that have been accumulated to date, as the ""zero norm"" -- the widespread belief that prices do not rise -- dissipates.

## II. Monetary Policy

## A. Policy Interest Rate Adjustments

Next,  I  will  discuss  the  Bank  of  Japan's  policy  conduct.  Judging  that  the  probability  of achieving the price stability target of 2 percent in a sustainable and stable manner had become sufficiently high, the Bank decided, at the Monetary Policy Meeting (MPM) held in March 2024, to change its large-scale monetary easing framework and shift back to a conventional policy framework, in which the degree of monetary accommodation is adjusted by guiding the money market rate as the policy interest rate. Subsequently, the Bank raised the target level of the money market rate from 0.1 percent to 0.25 percent in July 2024, followed by a hike to 0.5 percent in January 2025.

After  the  January  2025  MPM,  and  through  to  the  most  recent  October  MPM,  the  Bank decided to maintain the guideline for money market operations. The main reason for this is that it was necessary for the Bank to carefully examine the effects of U.S. tariff policy, which had started to become clear in April. That said, as I mentioned earlier, the impact of U.S. tariffs has been limited so far. While there is a possibility that progress in the pass-through of tariffs to prices could result in stronger downward effects on the economy, the general view at this point is that these effects are unlikely to be very severe. This means that the Bank will return to its basic policy stance first presented in March 2024, that is, if economic activity and prices develop in line with the Bank's outlook, the Bank will gradually adjust the degree of monetary accommodation. I will elaborate on the specifics of how monetary policy should be conducted and the underlying rationale later.

## B. Balance-Sheet Adjustments

With a view to restoring the functioning of the Japanese government bond (JGB) market, which had declined under the large-scale monetary easing policy, the Bank decided at the July 2024 MPM on a plan for the reduction in its JGB purchases for the period until March 2026. Specifically, this plan involves reducing the planned amount of monthly purchases of JGBs by about 400 billion yen each calendar quarter, in principle. At the June 2025 MPM, the Bank conducted an interim assessment of the plan. It made a decision to maintain the plan and also decided on a new plan for the period from April 2026 until March 2027, to reduce the planned amount of its monthly purchases of JGBs by about 200 billion yen each calendar quarter, in principle (Chart 6). If the Bank reduces its purchases in line with these plans, the amount of monthly JGB purchases will decline to about 2.1 trillion yen in January 2027. Moreover, with JGB redemptions at maturity outpacing the Bank's purchases, the amount outstanding of its JGB holdings is projected to see a roughly 16-17 percent decrease in March 2027 compared to the amount in June 2024, before the start of the reduction in JGB purchases. At the June 2026 MPM, the Bank is scheduled to conduct another interim assessment of the reduction plan, covering the period until March 2027. It will also discuss a guideline for its JGB purchases from April 2027 and announce the results.

At the September 2025 MPM, the Bank decided on a guideline for selling its holdings of exchange-traded  funds  (ETFs)  and  Japan real  estate  investment  trusts  (J-REITs)  to  the respective markets. Specifically, the guideline sets out that the Bank will sell ETFs at a pace of about 330 billion yen per year and J-REITs at a pace of about 5 billion yen per year, both based on prices formed in the markets. As part of the large-scale monetary easing policy introduced in April 2013, the Bank had been conducting ETF and J-REIT purchases for the purpose  of  making  financial  conditions  even  more  accommodative  by  encouraging  a reduction in the risk premiums of asset prices. At the March 2024 MPM, the Bank decided to discontinue purchases of ETFs and J-REITs, as the achievement of its price stability target was in sight. That said, the details of the disposal of these assets were to be determined upon subsequent considerations by the Bank. The decisions made at the September MPM were based on the results of these considerations.

The decisions made at the MPMs since last year will likely bring about a gradual reduction of the Bank's balance sheet over a sufficient period of time toward the minimum level required to  ensure ample reserve balances, in the sense that the Bank is able to firmly control the money market rate, which is the policy interest rate. 2 Given that the current size of the Bank's balance sheet remains very large, it is only natural that it should be reduced. Fundamentally, a central bank is allowed to intervene in markets only to the extent that this is necessary for the fulfillment of its basic mandate of maintaining price and financial market stability. In this regard, it is desirable for a central bank to basically keep the size of its balance sheet close to the minimum required. On the other hand, given that the sale of central bank assets could also in some cases disrupt the markets, asset sales should be carried out through a method and on a scale that minimizes the risk of market disruptions as much as possible.

## III. Policy Conduct toward Achieving the 2 Percent Price Stability Target A. Prospects for Achieving the Price Stability Target

The Bank has continued with monetary easing in terms of maintaining sufficiently low real interest rates, aiming to achieve the price stability target of 2 percent in a sustainable and stable manner. Meanwhile, the year-on-year rate of change in Japan's CPI has continued to exceed the target of 2 percent since spring 2022. The Bank has continued with monetary easing  in  this  context  based  on  the  assessment  that  the  rise  in  inflation  is  largely  due  to exogenous  factors  and  is  not  necessarily  sustainable.  What  is  needed  for  inflation  to  be sufficiently  sustainable  and  stable  is  steady  expansion  in  demand  and  an  accompanying sustained increase in nominal wages.

The Bank released the latest Outlook for Economic Activity and Prices (Outlook Report) in October 2025. It shows that the median of the Policy Board members' forecasts for the yearon-year rate of increase in the CPI for all items excluding fresh food is 2.7 percent for fiscal 2025, 1.8 percent for fiscal 2026, and 2.0 percent for fiscal 2027 (Chart 7). In other words, many Policy Board members project that growth in the CPI will decline temporarily through

2 Ample reserve balances are necessary to firmly control the money market rate through the interest rate on reserve balances. On this point, see Noguchi, A., ""Transformation of the Global Economy and Developments in Monetary Policy,"" speech at a meeting held by the Sapporo Chamber of Commerce and Industry, September 29, 2025, Section C of Chapter III.

fiscal 2026 as cost-push factors subside, but will start to rise again toward the 2 percent target through fiscal 2027, partly as wage hikes become widespread.

I generally share this outlook. However, although growth in the CPI will likely decline overall, I believe that a chain reaction of price hikes could occur in certain areas, as has happened with food, including rice. This is because, if cost increases continue, prices will inevitably rise. As Japanese consumers' aversion to price hikes was extremely strong, it became common practice for many firms to avoid raising prices as much as possible, even when faced with a certain degree of higher costs, relying instead on measures such as wage restraints. This is what is referred to as the zero norm with regard to wages and prices. However, as is evident in the surge in the prices of some food items including rice -- which had barely risen for a long  time --once  tightness  in  supply  and  demand conditions begins  to  generate  upward momentum, it is not rare at all for prices to continue rising as firms compensate for previous delays in passing on costs. Such price hikes to make up for past cost increases may continue to occur in certain areas.

According  to  the  outlook  I  have  described,  even  if  there  are transitory  price  hikes,  CPI inflation  itself  will  decline  for  the  time  being. The question  is  whether  or  not  underlying inflation will continue to rise steadily toward the 2 percent target even in such a scenario. This  will  depend  entirely  on  whether  the  momentum  of  wage  increases  is  sustained  and whether this momentum spreads to small and medium-sized firms and regional economies.

Regarding wage developments, attention is warranted first to moves leading up to the 2026 annual spring labor-management wage negotiations. The basic stance on the labor union side has already been outlined in the policy of the Japanese Trade Union Confederation (Rengo) for the spring 2026 wage negotiations, released at the end of October 2025. As a norm for future wage hikes, the policy calls for raising wages by at least 3 percent through base pay increases, or by at least 5 percent if an increase in regular salaries is included -- in other words, real wage hikes of around 1 percent assuming 2 percent inflation. Indeed, if nominal wage growth stabilizes at around 3 percent, and as long as CPI inflation remains at around 2 percent, real wage hikes will be sustained at around 1 percent -- roughly equivalent to Japan's labor

productivity growth rate to date. This is likely to be the steady state Japan's economy will reach once it achieves the 2 percent price stability target.

I personally believe that, while it may be difficult to reach this point in the first half of the projection period of the October 2025 Outlook Report, the economy will probably do so in the second half of the projection period -- that is, from the second half of fiscal 2026 through fiscal 2027. However, this is based on the assumption that the downward effects of U.S. tariffs will not become significantly severe and that no new geopolitical or other risks emerge. If such risks were to materialize, realization of this outlook would probably be further delayed.

## B. Policy Adjustments until the Price Stability Target Is Achieved

If the assumption is that the price stability target will be achieved in the second half of the projection period of the October 2025 Outlook Report, the Bank should adjust the policy interest rate at an appropriate pace to align with that timeline. This means raising the policy interest rate at a pace that will make it possible to smoothly reach the neutral interest rate -in the sense that this is the rate at which the inflation rate will stabilize at close to the target level --when  the  target  is  achieved.  Problems  are  likely  to  arise  if  the  pace  of  policy adjustment is either too fast or too slow.

The problem that arises if the pace of policy adjustment is too fast is that there would be a significant  delay  in  achieving  the  price  stability  target  or,  in  the  worst-case  scenario, achievement of the target would become uncertain. Although the CPI has already exceeded the 2 percent target for more than three years, recent developments in particular have been heavily influenced by the contribution of the rise in food prices stemming from higher prices of rice and imported food. Furthermore, higher CPI inflation strongly reflects efforts by firms to make up for not being able to pass on higher costs to selling prices in the past. In other words,  these  are  essentially  transitory  price  hikes  driven  by  cost-push  factors. Therefore, although higher inflation has persisted longer than anticipated, it should subside once the cost pass-through has peaked out. On the other hand, with wage hikes becoming widespread, the mechanism of a rise in underlying inflation, in which wages and prices continue to rise in interaction with each other, is gradually strengthening. However, hastily raising the policy

interest rate carries the risk of robbing wage increases of their momentum and putting the 2 percent target further out of reach.

Another reason for the Bank to be cautious in making policy adjustments is the persistently strong zero-norm inertia resulting from a prolonged period of deflation and zero inflation in Japan, which will likely take a considerable amount of time to resolve. While a wide range of items in Japan's economy are currently experiencing the kind of price rises I referred to earlier, with firms making up for past cost increases, there are still some items such as housing rent that, on the whole, have barely risen (Chart 8). Once 2 percent inflation fully takes hold, the prices of these items, whose rate of change has tended to remain unchanged, as solid as bedrock near 0 percent, should also begin to rise by factoring in such rooted inflation. In fact, rents for both houses and offices have already started to climb in metropolitan areas, although it seems that this has not yet become a nationwide trend.

The impact of prolonged deflation and zero inflation in the past is most clearly evident in trends in inflation expectations. Throughout the inflationary phase following the pandemic, various indicators of inflation expectations in Japan have gradually risen (Chart 9). However, despite prices rising by more than 2 percent for more than three years, inflation expectations have  yet  to  reach  2  percent. This  suggests  that  the  effects  of  the past several decades of deflation or zero inflation prior to the pandemic remain in people's inflation expectations. Time is still needed for these effects to dissipate and for inflation expectations to be anchored at around 2 percent.

Conversely, the problem with the pace of policy adjustment being too slow is that it increases the risk of destabilizing economic activity and prices. If a central bank chooses not to conduct any policy interest rate  hikes  at  all  until  prices  reach  the  target  point,  inflation  would  be uncontrollable unless the central bank raised its policy interest rate all at once, from the lower bound to the neutral rate, when the target was achieved. In the real world, however, it is almost impossible to pinpoint the exact neutral rate that would stabilize inflation at each point in time. The most realistic approach to actual policy conduct is to set a certain benchmark as the range where the neutral interest rate is thought to lie, based on various estimations of the natural rate of interest, and then conduct policy interest rate hikes incrementally over time

while monitoring the impact this has on economic activity and prices. If, as a result, price stability is judged to be achieved at some point, this means that the policy interest rate has reached the neutral rate. This is what I consider to be the measured, step-by-step approach to policy adjustments that the Bank should pursue.

If the pace of a central bank's policy adjustment ends up being too slow and the real interest rate remains lower than the neutral level, this would cause the inflation rate to deviate from the target level. Indeed, in the United States and the United Kingdom, high inflation continued after the pandemic, fueled by wage hikes stemming from tightening labor market conditions (Chart 10). Since the central banks of these countries initially deemed this to be temporary inflation induced by cost-push factors, they were slow to make policy adjustments and, as a result, had to conduct sharper policy interest rate hikes afterward.

High inflation caused by high wage increases, as seen in the United States and the United Kingdom, is less likely to occur immediately in Japan, as the country's labor market structure differs significantly from that of these countries. That said, if the real interest rate remains too low for too long, the impact will likely be reflected in exchange rates and in asset prices, such as land prices and stock prices. Of course, the sole objective of monetary policy is to achieve price stability, and policy should not be directed toward stabilizing exchange rates or asset prices  per  se.  At  the  same  time,  exchange  rates  and  asset  prices  are  also  important transmission  channels  for  monetary  policy.  In  fact,  if  the  yen  depreciates,  this  exerts  an upward force on economic activity and prices through exports and imports. Moreover, higher asset prices, such as land prices and stock prices, also contribute to an upswing in economic activity and prices in terms of, for example, expanded consumption through the wealth effect and increased investment spurred by credit easing.

The important point is that whether or not the effects of these channels contribute to economic and  price  stability  varies  significantly  depending  on  economic  conditions  at  the  time. A typical example is the period around 2013, when the Bank introduced large-scale monetary easing: in  an  economic environment where a high unemployment rate and price declines persist, factors such as the yen's depreciation and rising stock prices can undoubtedly play a significant  role  in  restoring  employment  and  preventing  deflation.  However,  the  positive

effects on economic stability diminish as the economy approaches full employment and as the output gap narrows. Eventually, with an intensification of supply-side constraints at the macroeconomic level,  the  positive  effects  of  economic  growth  almost  disappear,  and  are replaced  by  negative  effects  that  merely  push inflation  higher  than  necessary. Naturally, therefore, it is necessary for the Bank, as a central bank, to carefully examine how various economic  channels  ultimately  affect  economic  activity  and  prices  and  to  use  the  policy interest rate as a tool to adjust the degree of monetary accommodation as appropriate.

## C. Japan's Economy in Transition

As I mentioned at the outset, Japan's economy is currently in a transitional period, shifting from a state in which growth in wages and prices remains flat to one in which both continue to rise moderately. In more general terms, it can be said that the economy is now in the midst of transitioning from one steady-state equilibrium to another. In the period of zero inflation leading up to the pandemic, it was widely believed that prices, wages, and interest rates do not rise, and firms and households constantly acted under that assumption. Now, however, there is growing recognition that it is natural, rather, for these to rise, and this is starting to bring about major changes,  mainly in  corporate  management  and  household  asset management.

The Bank's role at this juncture is to minimize as much as possible the friction and confusion that result from this economic transition by making appropriate policy adjustments, and to guide the economy onto a new growth path. That said, just as the riskiest moments of a flight are takeoff and landing, carrying out the necessary adjustments will likely entail various risks and challenges. Once these are overcome, however, I am convinced that Japan will see a new economic landscape.

Thank you.



## Economic Activity, Prices, and Monetary Policy in Japan

Speech at a Meeting with Local Leaders in Oita

November 27, 2025

## NOGUCHI Asahi

Member of the Policy Board Bank of Japan

## IMF Forecasts for Global Growth

## Global Growth Rate

y/y % chg.



Note: Figures are as of October 2025.

Source: IMF.

Major Economies' Growth Rates

Chart 1

y/y % chg.

|                                          |        | CY2025 [Forecast]   | CY2025 [Forecast]   | CY2025 [Forecast]   | CY2025 [Forecast]   | CY2026     |
|------------------------------------------|--------|---------------------|---------------------|---------------------|---------------------|------------|
|                                          | CY2024 | As of January       | As of April         | As of July          | As of October       | [Forecast] |
| World                                    | 3.3    | 3.3                 | 2.8                 | 3.0                 | 3.2                 | 3.1        |
| Advanced economies                       | 1.8    | 1.9                 | 1.4                 | 1.5                 | 1.6                 | 1.6        |
| United States                            | 2.8    | 2.7                 | 1.8                 | 1.9                 | 2.0                 | 2.1        |
| Euro area                                | 0.9    | 1.0                 | 0.8                 | 1.0                 | 1.2                 | 1.1        |
| United Kingdom                           | 1.1    | 1.6                 | 1.1                 | 1.2                 | 1.3                 | 1.3        |
| Japan                                    | 0.1    | 1.1                 | 0.6                 | 0.7                 | 1.1                 | 0.6        |
| Emerging market and developing economies | 4.3    | 4.2                 | 3.7                 | 4.1                 | 4.2                 | 4.0        |
| China                                    | 5.0    | 4.6                 | 4.0                 | 4.8                 | 4.8                 | 4.2        |
| India                                    | 6.5    | 6.5                 | 6.2                 | 6.4                 | 6.6                 | 6.2        |
| ASEAN-5                                  | 4.6    | 4.6                 | 4.0                 | 4.1                 | 4.2                 | 4.1        |

## Annualized Quarterly Growth Rate

s.a., ann., q/q % chg.



Source: Cabinet Office.

y/y % chg.

s.a., q/q % chg.

|                                | 2024      | 2024      | 2024      | 2024      | 2025      | 2025      | 2025      |
|--------------------------------|-----------|-----------|-----------|-----------|-----------|-----------|-----------|
|                                | Jan.-Mar. | Apr.-Jun. | Jul.-Sep. | Oct.-Dec. | Jan.-Mar. | Apr.-Jun. | Jul.-Sep. |
| GDP                            | -0.5      | 0.4       | 0.4       | 0.7       | 0.2       | 0.6       | -0.4      |
| Domestic demand                | -0.5      | 0.9       | 0.8       | -0.3      | 0.9       | 0.3       | -0.2      |
| Private demand                 | -0.7      | 0.7       | 1.1       | -0.3      | 1.3       | 0.5       | -0.4      |
| Private consumption            | -0.7      | 0.7       | 0.8       | 0.0       | 0.3       | 0.4       | 0.1       |
| Private residential investment | -3.2      | 1.5       | 0.8       | -0.1      | 1.3       | 0.3       | -9.4      |
| Private non-resi. investment   | -1.2      | 1.4       | -0.0      | 0.6       | 0.9       | 0.8       | 1.0       |
| Public demand                  | 0.0       | 1.3       | -0.1      | -0.0      | -0.1      | -0.1      | 0.5       |
| Exports of goods & services    | -4.1      | 0.7       | 2.0       | 2.0       | -0.4      | 2.3       | -1.2      |
| Imports of goods & services    | -3.9      | 2.7       | 3.3       | -2.2      | 2.5       | 1.3       | -0.1      |

## Consumer Prices

Chart 3



Source: Ministry of Internal Affairs and Communications.

Quarter-on-Quarter Changes

## International Commodity Prices and Import Prices

## International Commodity Prices

Import Price Index (Yen Basis)



Note: Figures for crude oil (Dubai) and copper are the monthly average. Figures for ""beverages &amp; foods and agriculture products for food"" exclude tobacco. Sources: Bloomberg; FAO; Nikkei Inc.; Bank of Japan.

## CPI

Food (Less Fresh Food and Rice)

y/y % chg.



Source: Ministry of Internal Affairs and Communications.

Chart 5

y/y % chg.

Rice



## Plan for the Reduction of the Purchase Amount of JGBs (June 2025 MPM)

2. JGB purchases: appropriate for the Bank to reduce its purchase amount of JGBs in a predictable manner, while allowing enough flexibility to support stability in the JGB markets
1. Long-term interest rates: to be formed in financial markets in principle

In principle, the Bank will reduce the planned amount of its monthly purchases of JGBs each calendar quarter as follows.

- 
-  From April-June 2026 to January-March 2027: about 200 billion yen
- Until January-March 2026                                : about 400 billion yen (the reduction plan decided in July 2024 will be maintained)
-  The Bank will gradually reduce its purchase amount so that it can improve the functioning of the JGB markets in a manner that supports stability in the markets.

## Amount of monthly JGB purchases

## Reduction in a Predictable Manner



## Allowing Enough Flexibility

2. In the case of a rapid rise in long-term interest rates, the Bank will make nimble responses by, for example, increasing the amount of JGB purchases.
1. The Bank will conduct an interim assessment of the plan at the June 2026 MPM.
3. The Bank is prepared to amend the plan at the MPMs, if deemed necessary.

Chart 7



## Forecasts of the Majority of the Policy Board Members (as of October 2025)

yly % chg.

|                             | ee          | i a      | es fresh food and energy)   |
|-----------------------------|-------------|----------|-----------------------------|
| Fiscal 2025                 | art ae      | ete -    | has ae                      |
| Forecasts made in July 2025 | aa          | on       | bas                         |
| Fiscal 2026                 | a 9 ne      | hy a     | +1 pee; e                   |
| Forecasts made in July 2025 | “laa?       | = ta     | ic pie                      |
| Fiscal 2027                 | beside Hy A | or . =   | ba _                        |
| Forecasts made in July 2025 | “a A, i     | ss pe ae | are                         |

Note: Figures in brackets indicate the medians of the Policy Board members' forecasts (point estimates).

## Housing Rent

## Housing Rent in the CPI (Nationwide)



## Inflation Expectations

Chart 9



Note: In the left panel, the BEI (break-even inflation) rate is the yield spread between fixed-rate coupon-bearing JGBs and inflation-indexed JGBs.

The dotted line represents the rate calculated based on inflation-indexed  JGBs issued before October 2013. Sources: Bloomberg; Consensus Economics Inc., Consensus Forecasts ; QUICK, QUICK Monthly Market Survey &lt;Bonds&gt; ; Bank of Japan.

## Rents (Tokyo)

%

## Prices, Nominal Wages, and Policy Interest Rates

## United States



## United Kingdom



%

Note: Figures for nominal wages for the United States are for hourly wages, and those for the United Kingdom are for weekly wages (excluding bonuses).

Sources: BLS; BOE; FRB; OECD; ONS.",Asahi Noguchi
https://www.bis.org/review/r251201b.htm,Christine Lagarde: Fiscal policy and growth in Europe,"Keynote speech by Ms Christine Lagarde, President of the European Central Bank, in the session ""Central banks in a changing world"" at the European Meeting of the Trilateral Commission in Vienna, Vienna, 22 November 2025.",2025-11-22 00:00:00,"## SPEECH

## Fiscal policy and growth in Europe

Keynote speech by Christine Lagarde, President of the ECB, in the session ""Central Banks in a Changing World"" at the European Meeting of the Trilateral Commission in Vienna, Austria

Vienna, 22 November 2025

It is a pleasure to be here in Vienna.

The relationship between central banks and governments has evolved substantially over the centuries.

Historically, central banks were often created to provide governments with financing."" But if monetary history teaches us one lesson, it is that central banks kept under the thumb of the state tend to generate inflation.

This insight emerged only gradually.

In the early 19th century, Napoleon Bonaparte — who founded the Banque de France — is said to have acknowledged that a central bank should serve the state, but not be excessively dominated by it.2] Well, that was a start at least.

Over time, however, and especially in the second half of the 20th century, recognition grew that the more operationally independent a central bank became, the lower and less volatile inflation outcomes were. This relationship is well established in the empirical literature.)

But there is always the concern that a short-sighted government may be tempted to try to force the hand of a central bank to finance its debt — despite the lessons of history.

This concern tends to surface when public debt is elevated, as it is today in a number of jurisdictions.

Indeed, this afternoon's session asks the question of whether central banks may someday face a regime of fiscal dominance — in which governments burdened with large current or future spending needs compel them to provide finance regardless of the inflationary consequences.

Today, | will begin by looking at Europe's experience with monetary—fiscal interactions in recent years. | will then turn to the fiscal challenges ahead and discuss the ways in which Europe can mobilise its flexibility and collective strength to support higher growth.

## The experience of monetary policy and fiscal policy in recent years

When we look at the policy actions taken in the euro area in recent years, the narrative of fiscal dominance does not hold.

During the pandemic, monetary policy and fiscal policy worked hand in hand to help lift the economy out of the state of emergency.

The ECB carried out large-scale bond purchases to safeguard price stability, while governments increased debt to finance furlough schemes and other support instruments.4

Together, these measures were successful in stabilising the economy and putting the conditions in place for a fast recovery. Real activity in the euro area returned to its pre-pandemic level within seven quarters, compared with 29 quarters after the global financial crisis.)

But they also left Europe with higher debt levels. At its peak in early 2021, public debt as a share euro area GDP had risen by around 15 percentage points relative to its pre-pandemic level.

of

Yet the ability of monetary policy to pursue its mandate in full independence has not been constrained by fiscal policy.

This was clearly demonstrated when, confronted with the largest inflation shock in a generation, we increased rates at a record pace — the sharpest tightening of monetary policy in our history. Inflation fell dramatically and, today, is close to our 2% target.

We also reduced the size of our balance sheet through quantitative tightening, reinforcing the stance of our monetary policy.) Our monetary policy securities portfolio has already declined by over €1.1 trillion from its peak.

At the same time, there has also been a significant improvement in primary balances.

After dropping sharply in 2020 owing to the pandemic, the euro area primary balance improved by more than 4 percentage points of GDP by 2024, albeit with considerable variation across Member States]

Perhaps most importantly, the ECB's independence is unchallenged. We have one of the strongest and most clearly defined forms of central bank independence in the world, firmly anchored in the EU Treaties.

## A different kind of fiscal challenge in the euro area

In fact, when | think about monetary-fiscal interactions, | see a different type of problem in Europe.

Public debt levels in the euro area remain elevated and need to come down. But the main challenge | see is not that governments widely fail to respect the fiscal rules.

Rather, it is that governments need to place greater emphasis on spending that supports potential growth and key strategic priorities while consolidating their budgets.

For example, the new EU fiscal rules give countries the opportunity to extend their fiscal adjustment period to as long as seven years if they commit to public investment and structural reforms that strengthen productivity and long-term growth.

But only seven out of 20 euro area countries have chosen this path.)

This can lead to a situation that has been called ""fiscal stagnation"", where the measures taken to consolidate public finances weaken growth potential, leading to still more need for consolidation, in what can become a vicious circle.!2]

All this matters for central banks — not because of fiscal dominance in the classical sense — but because it can trap the economy in a low-growth equilibrium. This can make the central bank's job harder in various ways.

A scenario of persistently low productivity growth, for instance, can put downward pressure on the natural rate of interest. That can limit how far central banks can cut rates, as we saw during the prepandemic era. At the same time, weak potential growth can also keep inflation higher than it would otherwise be.

By contrast, a scenario of stronger productivity growth can make the central bank's job easier. In ageing societies, for example, faster productivity growth may moreover be key to compensate for shrinking labour supply and avoid upward wage pressures.

Now, one of the main reasons that governments are deprioritising productive spending over current spending is the pressure to sustain Europe's social model and support ageing societies in the short run.

Yet it is precisely this productive spending that will enable Europe to generate the productivity gains needed to sustain its social model and its ageing population in the long run.

The goal should be to foster a virtuous circle in which productive spending raises productivity growth. Higher productivity, in turn, strengthens potential growth. That would put Europe's social model on a stronger and more sustainable economic footing.

## Mobilising Europe's flexibility and collective strength

| see three ways in which Europe can rise to the challenge of achieving this goal.

First, countries should use the flexibility that the fiscal rules allow.

For example, if Member States reallocated just 1% of GDP more of existing public spending to research and development and another 1% to education, the productivity and growth gains could be sizeable: one study finds that, together, these shifts could boost output by around 6% over the long

## run 3]

This should mean that, by the end of the seven-year adjustment period, government debt would be on a more sustainable path supported by higher potential growth, not higher taxes or cuts to productive expenditure.

Second, Europe should deploy its collective resources more efficiently.

Rather than each government reallocating existing national spending in isolation, we should explore ways to pool resources in high-multiplier areas where there are cross-border benefits and clear returns to scale can be achieved.

As it happens, these are often strategic areas where Europe must strengthen its capabilities anyway — such as research and development to drive innovation and defence to deter hostile actors.

We know what is possible when Europe puts its mind to it.

An example of this is the European Organization for Nuclear Research — CERN -established back in the 1950s.

By pooling national resources, European countries were able to pursue high-energy physics research at a scale and over time spans that individual countries could not have financed alone.U4]

This joint initiative has produced major breakthroughs, notably the creation of the World Wide Web, as well as technological advancements in medical imaging and autonomous driving with artificial intelligence.

More recently, in March this year, the European Commission launched Readiness 2030, an initiative that helps to pool defence procurement across EU countries.

Under the initiative, €150 billion will be mobilised for investments in pan-European capability domains — such as air and missile defence, artillery systems, and anti-drone systems.)

Third, there is strong potential to use EU budget instruments to mobilise private capital.

Europe faces unprecedented investment needs to finance the green, digital and defence transitions.

Together, these are estimated to require an additional €1.2 trillion of spending per year between now and

2031.4)

These vast amounts cannot be borne by the public sector alone, so private investment will need to contribute substantially. While deeper capital-market integration is essential to unlock this private investment, well-designed EU programmes can play an important complementary role.

For instance, ECB research finds that the European Structural and Investment (ESI) funds — de facto the EU's primary investment vehicle — generate significant crowding-in effects. Every euro of ESI funding has been matched by €1.10 of private investment.14

Further ECB analysis shows that ESI-funded firms steadily increased their capital stock and experienced long-lasting gains in productivity.48]

Leveraging the synergies between targeted public investment and private finance will likely prove critical if Europe is to meet its investment needs and boost potential growth.

If Member States and the EU make full use of these three opportunities, Europe could combine the best of both worlds: strengthening productivity growth while preserving its social model.

In parallel, it would also reduce the risk of fiscal dominance emerging in the future.

## Conclusion

Let me conclude.

The composer Johann Strauss II is said to have remarked ""If only | had more time; the ideas come faster than | can write them down.""

| have no doubt that the beauty of this city was a constant source of inspiration to this famously creative son of Vienna.

We all do what we can with the time given to us — and Strauss, it is fair to say, used his exceptionally well. | have used the time given to me this afternoon to offer several ideas on how Europe can best leverage its flexibility and collective strength to support higher growth.

Crucially, each idea is within the realm of possibility -as there are already important precedents that demonstrate what is possible. Just as Strauss transformed inspiration into enduring works, Europe too can turn these opportunities into the growth needed to sustain its social model.

Thank you.

1.

Goodhart, C. (1988), The evolution of central banks, MIT Press, Cambridge, Massachusetts; and Bordo, M. D. (2007), ""A Brief History of Central Banks"", Economic Commentary, Federal Reserve Bank of Cleveland, December.

2.

See, for instance, Villeroy de Galhau, F. (2025), ""Governing the Bank of France -two lessons from history for an uncertain world"", speech at the historical conference ""A mass of granite"", Paris, 20 March. Under Napoleon's rule, the franc germinal was also established. The legislation underpinning it unified the unit of account and the circulating coinage by issuing franc-denominated pieces with fixed metallic content. This ended the ancien régime practice of coins without face value whose worth was set by proclamation. It was a monetary reform that proved decisive in stamping out one endemic cause of inflation. See Redish, A. (1995), ""The Persistence of Bimetallism in Nineteenth-Century France"", The Economic History Review, Vol. 48, No 4, pp. 717-736.

3.

For a recent review, see Romelli, D. (2024), ""Trends in Central Bank Independence: A De-jure Perspective"", BAFFI CAREFIN Centre Research Paper Series, No 217, Universita Bocconi, February.

4.

The pandemic emergency purchase programme was designed with a dual role: it supported market functioning as well as the transmission of monetary policy and enabled a substantial easing of the monetary policy stance to counter the serious downside risks to price stability posed by the pandemic.

5.

Nickel, C. et al. (2025), ""A strategic view on the economic and inflation environment in the euro area"", Occasional Paper Series, No 371, ECB, Frankfurt am Main.

6.

Eurostat (2025), Quarterly government debt.

7.

During this period, the ECB also established the Transmission Protection Instrument in July 2022. See ECB (2022), ""The Transmission Protection Instrument"", press release, 21 July.

8.

Paper Series, No 372, ECB, Frankfurt am Main.

9.

Alongside quantitative tightening, the ECB also phased out its targeted longer-term refinancing operations (TLTROs), which to date has been the main driver of the decline in the ECB's balance sheet. At their peak, TLTROs amounted to € 2.2 trillion, but have since been fully repaid.

10.

The improvement of the primary balance, although still well below the pre-pandemic level, was mainly on account of discretionary revenue measures and the unwinding of most of the compensatory measures related to the pandemic and the energy crisis support.

11.

For a discussion of medium-term fiscal-structural plans, see Bouabdallah, O. et al. (2025), ""Mediumterm fiscal-structural plans under the revised Stability and Growth Pact"", Economic Bulletin, Issue 3, ECB.

12.

Fornaro, L. and Wolf, M. (2025), Fiscal Stagnation, April.

13.

The findings are specific to advanced economies. See IMF (2025), Fiscal Monitor: Spending Smarter: How Efficient and Well-Allocated Public Spending\_Can Boost Economic Growth, October, p. 14.

14.

and recommendations, September.

15.

European Commission (2025), White Paper for European Defence — Readiness 2030; see also von der Leyen, U. (2025), ""Press statement by President von der Leyen on the defence package"", statement, 4 March.

16.

Bouabdallah, O. et al. (2025), ""Time to be strategic: how public money could power Europe's green, digital and defence transitions"", The ECB Blog, ECB, 25 July.

17.

De Sanctis, A. et al. (2025), ""Unlocking private investment and boosting productivity with EU programmes"", The ECB Blog, ECB, 20 November. See also De Santis, R.A. and Vinci, F.

(2025),

""Private investment, R&amp;D and European Structural and Investment Funds: crowding-in or crowding- out?"", Working Paper Series, No 3098, ECB, Frankfurt am Main, August.

18.

De Sanctis, A. et al. (2025), “Unlocking Growth? EU investment programmes and firm performance”, Working Paper Series, No 3099, ECB, Frankfurt am Main, August.

CONTACT

Copyright 2025, European Central Bank",Christine Lagarde
https://www.bis.org/review/r251201m.htm,Claudia Buch: The evidence is in - resilient banks build Europe's growth on solid ground,"Keynote speech by Prof Claudia Buch, Chair of the Supervisory Board of the European Central Bank, at the 2025 European Banking Authority Policy Research Workshop ""Bridging capital and growth – the role of financial structures and intermediaries"", Paris, 19 November 2025.",2025-11-19 00:00:00,"SPEECH

## The evidence is in: resilient banks build Europe's growth on solid ground

Keynote speech by Claudia Buch, Chair of the Supervisory Board of the ECB, at the 2025 EBA Policy Research Workshop on ""Bridging capital and growth — the role of financial structures and intermediaries""

Paris, 19 November 2025

Thank you for the opportunity to speak today about the evolution of the European capital regulation framework — how it has changed since the global financial crisis, what we know about its effects and how we can further improve the way we evaluate its impact.4]

The global financial crisis painfully revealed the need to strengthen global capital rules. Through the Basel Committee for Banking Supervision, policymakers from across the globe worked together to provide a coordinated response. The result, the Basel III standards, was designed with a straightforward purpose: to rebuild confidence by ensuring banks maintain capital and liquidity commensurate with their risks, to limit leverage and to make crises less frequent and less costly.2] These objectives remain as valid today as they were 15 years ago.

Yet, discussions about capital regulation are once again moving to the foreground. Some argue that the framework has become overly complex or too demanding, while others question whether it strikes the right balance between fostering resilience and supporting growth. Another perspective points to the heightened risks and uncertainties in the financial system, advocating for stronger safeguards and larger capital buffers. It is vital that these debates are grounded in good evidence.

Today, | would like to make four points.

First, the Basel reforms were the right response to the vulnerabilities that had built up in the global banking system before the financial crisis and were then laid bare by the crisis in 2007-08.

Second, the new standards are now being implemented across jurisdictions, including in Europe. This strengthens banks' resilience against future shocks and makes them better equipped to address the vulnerabilities that are building up today.

Third, evaluations of the post-crisis reforms show that these measures have increased resilience without constraining economic growth or stifling lending to households and firms.

And lastly, as new risks are emerging, we can further improve our evaluation framework to ensure that policy debates remain firmly grounded in the best evidence.

The evolution of capital regulation since the global financial crisis

The global financial crisis of 2008 exposed fundamental weaknesses in regulatory and supervisory frameworks in place at that time. Pre-crisis global capital rules — Basel Il —-were a key contributor to the vulnerabilities within the system. Banks entered the crisis with too little capital, excessive leverage and insufficient liquidity. The system was overly reliant on external credit ratings, while supervisory tools were limited and often fragmented. Additionally, the perception that some banks were ""too big to fail"" encouraged excessive risk-taking and unchecked balance sheet expansion.

When confidence in the system evaporated, its fragility and deep interconnectedness became apparent. Shocks spread quickly throughout the financial system and became amplified. Negative externalities were huge. The repercussions of the crisis went far beyond the banking sector. Public finances came under strain, growth weakened, inequality worsened and unemployment surged — leaving long-lasting scars in many countries.

The response that followed was equally far-reaching. Policymakers introduced a comprehensive overhaul of the prudential framework, which included requirements for higher and better-quality capital, new liquidity requirements, a sophisticated architecture of useable buffers and new resolution frameworks. Together, these measures marked a decisive shift towards a more resilient and bettercapitalised banking system. The reforms realigned incentives, enabling banks to be better placed to take risks and absorb losses. This supports economic growth and overall welfare.

## Higher and better-quality capital

The first and most visible post-crisis change was an increase in the quality of capital. These reforms were agreed in 2010, when the Basel Committee and the Group of Governors and Heads of Supervision endorsed the Basel IIl package tightening capital definitions.

Before the crisis, many instruments were classified as capital even though they would not be able to absorb losses during a going concern scenario. The Basel III reforms addressed this by tightening the definition of Common Equity Tier 1 (CET1) capital to ensure it truly represents loss-absorbing capital. Deductions from capital related to goodwill, deferred tax assets or minority interests became less generous. As a result, CET1 capital now consists of the highest-quality equity and retained earnings.

At the same time, the crisis revealed weaknesses in the risk-weighting framework. Banks using internal models could assign very low risk weights to certain exposures, which made reported capital ratios look strong even for highly leveraged banks. While capital requirements need to take risks into account, this created scope for an understatement of risks and inconsistency across banks.

But the reforms went further. Basel III introduced a microprudential capital conservation buffer, which requires banks to maintain an additional 2.5% of risk-weighted assets in CET1 capital above the minimum requirement. If a bank falls below this level, its ability to distribute dividends or bonuses is automatically constrained. This incentivises the conservation of capital in good times and provides a cushion to absorb shocks in times of stress.

Asecond macroprudential buffer — the countercyclical capital buffer — gives authorities the flexibility to mandate the accumulation of additional capital during periods of economic expansion and to release it when the financial cycle turns. Unlike microprudential buffers, which address risks at the individual bank level, the countercyclical capital buffer addresses vulnerabilities across the broader banking system. It helps mitigate the effects of boom-and-bust cycles and makes capital requirements procyclical!

less

These were the first steps towards a more dynamic and risk-sensitive framework — one that recognises that capital adequacy is not a static concept. Capital needs to be available and useable when a crisis hits. The reforms thus address the ""paradox"" of banking regulation, wherein static buffers — if they cannot be drawn down in a crisis — may force the bank to deleverage or compel the supervisor to intervene when capital requirements are breached.

Today, the euro area banking sector remains well-capitalised (Chart 1): the average CET1 ratio stands at around 16% and is thus 3.4 percentage points higher than at the beginning of the banking union in 2014.

## Chart 1

Developments in overall capital requirements and Pillar 2 guidance for significant institutions



Sources: ECB supervisory banking statistics and SREP database.

Notes: The sample selection follows the approach outlined in the methodological note for the publication of aggregated supervisory banking statistics. For 2018, the first quarter sample is based on 109 euro area entities, for 2019 on 114 entities, for 2020 on 112 entities, for 2021 on 114 entities, for 2022 on 112 entities, for 2023 on 111 entities, for 2024 on 110 entities and for 2025 on 113 entities. For 2026, the sample is based on 109 entities. The Pillar 2 requirements are applicable from January 2026.

## The leverage ratio — a backstop to models

The second pillar of the post-crisis reforms was the introduction of a non-risk-based leverage ratio. Before the crisis, many banks had expanded their balance sheets significantly while maintaining only minimal equity capital. Although their reported risk-weighted capital ratios appeared robust, overall leverage in the financial system had risen to unsustainable levels.

High leverage leaves banks highly vulnerable to even minor losses: a bank with a leverage ratio of 2% — meaning €2 of capital for every €100 of assets — would lose half of its capital if the value of its assets fell by just 1%. To restore its capital ratio, it would need to sell nearly 50% of its assets. Such fire sales can lead to falling prices and force other banks to deleverage, deepening an economic downturn. These dynamics were observed in 2008, when small losses quickly eroded capital and forced large-scale balance sheet contraction across the global banking system.

To mitigate the effects of high leverage, the Basel Committee introduced a minimum leverage ratio of 3%, calculated on total exposures without risk weights. 2] It serves as a backstop — a floor below which capital cannot fall, irrespective of modelled risk weights.

In Europe, the leverage ratio has been fully integrated into the Capital Requirements Regulation. Today, the actual leverage ratio of euro area banks is around 6% (Chart 2). This means that if asset values were to decline by 2%, a bank would lose about one-third of its capital. To restore its capital position, it would need to shrink its balance sheet by around 15-20%, instead of nearly 50%, as was the case pre-crisis. The system is therefore less fragile — but it remains quite leveraged,"" implying that even modest shocks could still have relatively significant effects on banks' balance sheets.

This is one reason why supervision in Europe not only focuses on banks' compliance with key prudential ratios but also takes a comprehensive perspective to assess their risk management, governance and business models and address potential deficiencies.

Chart 2 CET1 ratio and ratio of institutions

leverage significant



Source: ECB supervisory banking statistics.

Liquidity and funding standards

The financial crisis revealed that insufficient solvency is not the sole reason banks fail during periods of distress. Many institutions have failed in the past not because they were insolvent, but because they were illiquid. To address this, Basel III introduced two new global standards.

The liquidity coverage ratio (LCR) requires banks to hold sufficient high-quality liquid assets to withstand a 30-day period of market stress. It ensures that banks can absorb short-term liquidity shocks without resorting to fire sales or emergency support from the central bank.)

The net stable funding ratio (NSFR) complements the LCR, imposing a more structural requirement: it mandates banks to fund illiquid assets with stable sources of funding, such as long-term debt and retail deposits.

Together, the LCR and NSFR have shifted business models away from excessive reliance on shortterm wholesale funding. Today, liquidity positions remain comfortable, with the average LCR standing at around 158% and the NSFR at approximately 127% (Chart 3). Favourable financing conditions are reflected in relatively tight bank bond spreads. However, banks' growing reliance on market-based funding could pose risks in times of stress.

## Chart 3

Liquidity significant

ratios of institutions



Source: ECB supervisory banking statistics.

## Addressing ""too big to fail""

A further lesson of the financial crisis was that some institutions were too big or too interconnected to be allowed to fail. During the crisis, distress spread rapidly through the system, amplifying losses and turning stress in individual banks into a global financial crisis. Yet, consistent frameworks for dealing with failing banks were lacking, requiring ad hoc interventions by fiscal authorities to stabilise the system. The rescue of large institutions came at significant fiscal cost, ultimately placing the burden on taxpayers.

The post-crisis regulatory framework therefore seeks to address these externalities through additional safeguards for systemically important banks, including capital surcharges and measures to improve their resolvability.

Global systemically important banks are now subject to additional capital surcharges calibrated based on their systemic importance.42] Moreover, they must meet minimum levels of total loss-absorbing capacity (TLAC), which consists of instruments that can be written down or converted into equity during resolution.) In the European Union, this is mirrored in the minimum requirement for own funds and eligible liabilities (MREL).4]

Together, these measures make resolution more credible and protect public finances. Moving from a ""bail-out"" to a ""bail-in"" approach reduces banks' incentives to take excessive risks — thus better aligning banks' interests with those of society.

## Mitigating model risk and the ""finalisation"" of Basel Ill

Around ten years after the global financial crisis, attention turned to another weakness in the regulatory framework — the wide variation in risk-weighted assets reported by banks with similar portfolios. The concern was that internal models, while designed to be risk-sensitive, were producing results that were neither sufficiently consistent nor comparable across institutions. Additionally, internal models often failed to adequately account for structural breaks and systemic effects.

The Basel Committee responded with a comprehensive set of revisions, finalised in December 2017. These included:

strengthening the standardised approaches for credit, market and operational risk;l15]

restricting the use of internal models, including prohibiting advanced approaches for certain lowdefault portfolios;

implementing an output floor that requires model-based risk-weighted assets to remain below 72.5% of the amount calculated under the standardised approaches;

overhauling the market risk framework through the fundamental review of the trading book.[16]

This package of revisions, sometimes referred to as ""Basel III finalisation"", marked the conclusion of the post-crisis capital reforms, around a decade after the crisis began.

## Implementation in the European Union

Designing and calibrating the reforms was only the first step; their subsequent implementation has taken some time. In the EU, the Basel standards have been translated into law through successive iterations of the Capital Requirements Regulation (CRR) and Capital Requirements Directive (CRD).

The latest updates — CRR III and CRD VI — complete this process, with provisions taking effect from 1 January 2025. The European Banking Authority (EBA) has been tasked with calibrating the technical details of Basel III implementation.

The full phase-in period for Basel III will end in 2032 — nearly 25 years after the global financial crisis. This extended timeline gives banks ample opportunity to adjust their balance sheets in an orderly manner. For comparison, newly issued residential mortgages in Europe typically have an average initial maturity of 20-25 years, 18] Corporate bank loans, meanwhile, are typically short to mediumterm, with the majority maturing within 1-5 years. The extended phase-in period thus provides time for banks to reprice their loans, if needed, and roll over most of their loan portfolios before the new framework is fully effective.

Co-legislators in the EU have introduced transitional provisions and adjustments tailored to the specific structural features of the European banking system, including granting more favourable capital requirements for limited time periods.

One example of such transitional provisions is the output floor. It will be fully phased in only in 2030, and banks in the EU will be able to use lower risk-weights than a full implementation of the output floor would allow on specific exposures until 2032.

An example of adjustments is the SME supporting factor, which lowers the capital charge on exposures to small and medium-sized enterprises (SMEs). This deviation from the Basel standards aims to offset potential adverse effects of higher capital requirements on SME lending.

Finally, the implementation of a new market risk framework — the fundamental review of the trading book — has recently been postponed. However, banks are still required to compute and report the relevant regulatory figures to ensure operational readiness and data quality ahead of its full application.22]

Collectively, these and other similar measures are designed to safeguard the flow of credit to the real economy and allow banks sufficient time to adapt. From a supervisory perspective, it is important that such deviations do not create undue risks or weaken banks' resilience.

In principle, the Basel III standards apply only to internationally active banks. In practice, European policymakers have chosen to extend the framework to all credit institutions, regardless of size or business model. This is consistent with the Single Market. It ensures a high and consistent level of prudence, but it also means that the framework must cater to a diverse banking landscape.

To address differences across banks, the Basel standards and the EU's implementation of them embed the principle of proportionality. This means more sophisticated approaches are available for banks with more complex risk profiles, while smaller or less complex institutions may use simpler, standardised methods. Within the EU, small and non-complex institutions (SNCIs) enjoy simplified reporting, disclosure and liquidity requirements under the CRR, reflecting their limited cross-border activity and lower systemic relevance. For example, banks that qualify as an SNCI report only 30% of the data required by the standard reporting requirements.24)

To address differences across national banking systems, the CRR applies directly and equally across all Member States. The CRD, by contrast, must be transposed into national law — a process that can lead to divergences in the resulting rules through national options and discretions.

This is the architecture that now underpins the prudential framework for European banks. It is more robust, more data-driven and more targeted to relevant risks than what was in place before the crisis. But the key question is: does it work as intended?

## What have evaluations and impact assessments shown?

Let me now turn to the evidence on the expected and actual effects of the Basel Ill package.

It is useful here to distinguish between ex ante impact assessments and ex post evaluations. Impact assessments are carried out during the design phase of new regulatory requirements to estimate their likely quantitative effects — for example on capital ratios, lending capacity or profitability. These include the quantitative impact studies conducted by the Basel Committee and the EBA. The ECB also carries out similar studies.

Evaluations, by contrast, are conducted after regulatory requirements have been implemented. They assess whether the rules have achieved their intended objectives and look for any unintended consequences. Analysing relevant indicators is a good starting point. But controlling for external factors and accounting for effects that go beyond the individual institution and affect market structures more broadly also require the right analytical tools. 24] Many evaluations have been performed by public authorities, but there is also extensive evidence from academic research.

## Impact on capital

As regards the impact on capital, most of the studies summarised here focus on the ex ante phase — they quantify the potential effects of the final Basel III reforms and their implementation in the EU through CRR III and CRD VI.

The studies share a common methodological feature: they assume static balance sheets. This means that it is assumed that banks do not adjust their portfolios in response to the new rules. As a result, these studies may overstate the actual capital impact. In reality, banks respond to regulatory changes well in advance — by retaining earnings, raising capital and adjusting their loan portfolios. Over the long phase-in periods built into Basel III and its implementation in Europe, such adjustments mitigate the initially expected effects on capital ratios and lending.

Overall, the data confirm that the final Basel III reforms strengthen resilience while maintaining European banks' capacity to support the economy. The evidence is broadly consistent across the different studies. 23]

Basel Ill finalisation leads to a moderate, manageable increase in capital needs, concentrated in the largest banks.

The estimated impact in the EU is lower than under full Basel implementation, reflecting jurisdiction-specific adjustments and the gradual phase-in of certain elements.

The aggregate capital shortfall is negligible, and capital ratios remain well above regulatory requirements.

The EBA's impact assessment, which is based on 2023 data, finds the average increase in Tier 1 requirements resulting from the European implementation of the Basel package to be below 4% until 2030 and below 8% in 2033, when transitional provisions are lifted.24] This relatively moderate impact is still likely to overstate the actual impact because banks continue to adjust their exposures dynamically.

EBA impact assessments using earlier data provide supporting evidence here.!25] These assessments tend to find higher capital impacts for the end of the phase-in period in 2033 than studies using more recent vintages of data. This suggests that, over time, banks adjust their balance sheets to reduce the capital impact of the reforms. This can be considered an intended effect of the reforms if risk management becomes more prudent and better aligns risks and risk controls.

ECB Banking Supervision has conducted similar analyses based on the same underlying data as the quantitative impact studies but using more granular supervisory information and forward-looking assumptions. These exercises yield comparable findings — a moderate overall capital impact concentrated among large, model-intensive banks. On aggregate, the gap between banks' available capital and their minimum regulatory requirements would be small.

Data collected by the ECB in the context of the 2025 stress test confirm this: the average impact of the reform in the first year (2025) would be close to zero.25 Capital requirements even declined for some banks.

All in all, the results of these exercises confirm that European banks remain well-positioned to meet the final Basel III requirements. Therefore, capital requirements should not constrain banks' capacity to lend.

While impact assessments estimate the expected effects of new rules, broader ex post evaluations examine whether the reforms have achieved their objectives and whether there have been any unintended effects. The post-crisis capital framework was designed to strengthen resilience, but it is equally important to evaluate how it has affected the provision of financial services, incentives and behaviour, as well as financial stability.

## Impact on lending and cost of finance

The Financial Stability Board (FSB) and the Basel Committee have carried out comprehensive evaluations of the post-crisis reforms.

The Basel Committee's evaluation of the Basel III rules finds that the framework has significantly increased banks' resilience without broadly or persistently reducing credit supply.24 Banks that were not well-capitalised or had less liquidity to begin with have shown greater improvements in solvency and liquidity.

Generally, better-capitalised banks are in a better position to take risks and lend to the real economy. Yet, introducing higher capital requirements could lead to an initial contraction of credit if banks start with insufficient levels of capital. Banks that were weak or even undercapitalised after the crisis tended to respond to higher capital requirements by reducing lending. However, the aggregate supply of credit has not suffered overall because stronger banks and non-bank providers of credit have increased their market share. 28]

From a macroeconomic perspective, model simulations by the ECB have confirmed that the long-term effects of the reforms on GDP growth are positive. 29] In the short-term, growth could be somewhat slower than a no-reform baseline, as banks need time to adjust. In the longer term, however, the positive effect of a less procyclical banking system would dominate.

The FSB has carried out a dedicated evaluation of the impact of the new rules on lending to SMEs and found no negative effects in general, 20] Results differ somewhat across jurisdictions, potentially related to other policies and macroeconomic conditions affecting SME lending. There were some negative temporary effects on SME lending for banks with weaker capital positions before the reforms.

## Impact on banks' costs and efficiency

Theoretically, the impact of higher capital requirements on banks' funding costs is ambiguous. Ceteris paribus, higher capital lowers banks' return on equity, which may appear to fall below banks' cost of capital. But the cost of capital is not exogenous: stronger capital positions also reduce the likelihood of distress, thus reducing risk premia. Another factor that could drive up the costs of debt finance is the withdrawal of implicit funding cost advantages owing to the strengthening of bail-in tools.

dominate.

Empirically, the effect of stronger balance sheets and improved market confidence seems to An ECB study found that higher capital requirements under the Basel III finalisation initially reduced CET1 ratios slightly, but banks were then able to rebuild them over time.E4 The analysis also shows that higher capitalisation ultimately lowers funding costs and improves banks' long-term profitability.

Recent ECB research examined whether stricter capital requirements could constrain banks' competitiveness, with banks' profit efficiency serving as a proxy, 2] Using supervisory data for euro area banks, the study found no evidence that the current capital requirements constrain profit efficiency. Microprudential and macroprudential buffer requirements were statistically insignificant in explaining variations in profit efficiency.

But there is a relevant non-linear relationship: up to a certain point, profit efficiency improves as capital ratios rise, with marginal gains tapering off at a CET1 ratio of around 18% and starting to decline beyond that level. This number is higher than the median capitalisation of banks in the sample (around 16%) and substantially higher than the median capital requirements (around 11%), supporting the conclusion that the current requirements are not constraining efficiency. Higher capital is associated with lower interest rate expenses and lower earnings volatility, consistent with stronger balance sheets reducing funding premia and smoothing profits.

## Impact of the too-big-to-fail reforms

The FSB's evaluation of the too-big-to-fail reforms found that larger banks are now more resilient and resolvable, and that the reforms have delivered net benefits to society, 23]

The evaluation emphasised that it is not sufficient to look at indicators in isolation. Withdrawing implicit fiscal funding subsidies through resolution reforms, for example, could lead to increased funding costs for affected banks. This would be an intentional effect of the reforms: banks that might have leveraged up before the reforms because they enjoyed implicit government guarantees would now better internalise the costs of failure. Market-based indicators do indeed show a reduction in implicit funding advantages and systemic risk.

The report also identified areas for further progress, namely ensuring full implementation of resolution regimes, improving transparency around loss-absorbing capacity and continuing to monitor potential spillovers to smaller or domestically important banks.

## Impact on risks outside of the banking sector

The FSB's holistic review of the March 2020 market turmoil and subsequent work on non-bank financial intermediation highlight a structural shift of risk outside the banking system.24! As banks have become safer, activity has increasingly migrated to investment funds and private credit markets, where leverage and liquidity mismatches can build up.

The FSB's 2024 Global Monitoring Report on non-bank financial intermediation notes that the sector continues to expand faster than the banking system, underscoring the need for better data and targeted policy responses. 25] The FSB's peer review of money market fund reforms finds that implementation of the reforms remains uneven and that structural vulnerabilities persist in certain segments of short-term funding markets. 24

Taken together, these evaluations confirm that the post-crisis reforms have strengthened the core of the financial system. Banks are better capitalised, funding is more stable and the broader economy is more resilient. There is no consistent evidence that suggests any unintended side effects on lending, profitability or competitiveness. On the contrary: well-capitalised and stronger banks are better able to support their customers in good times and in bad.

## Looking ahead

The Basel reforms were the response to the devastating effects of the global financial crisis. In today's financial system, new fault lines have emerged and new vulnerabilities have been building up. Recent reports on financial stability have stressed the threats posed by overvalued asset prices, potentially unsustainable levels of fiscal debt, high leverage and potential liquidity mismatches.24

At the same time, debates about competitiveness and the costs of regulation are once again shaping the policy agenda. Some argue that capital and liquidity requirements constrain bank lending and weigh on Europe's ability to finance growth. Yet these concerns must be judged against the evidence.

More than a decade of analysis shows that the post-crisis reforms have delivered what they set out to achieve: a stronger, more resilient banking system that better supports the economy. Short-term costs of higher capital and liquidity requirements, if any, were modest and mitigated by long phase-in periods. The long-term benefits — in terms of financial stability and sustained lending to the economy — clearly outweigh the short-term adjustment costs.

The new framework has delivered. In strengthening the banking sector through higher and betterquality capital, the Basel reforms continue to be the right response to the vulnerabilities exposed during the global financial crisis. The best way forward is not to reopen the core prudential architecture, but to continue evaluating its effects, broaden its perimeter to address newly emerging risks, and ensure that regulation and supervision remain grounded in the best evidence.

A sound framework for prudential policymaking should be circular — not linear. We need to define objectives, assess likely effects in advance, implement measures and then evaluate after the fact whether those objectives have been achieved. This policy cycle is the essence of evidence-based supervision and financial sector policies. But the infrastructure for policy evaluation has not always kept pace with the speed of change in finance and technology.

The international community, including the FSB, the Basel Committee and the Bank for International Settlements, has already made important progress. 28]

But more work is needed, and three priorities stand out.

First, systematic learning. Evaluations should not be one-off exercises, but a continuous process built into a policy cycle. This means clearer baselines, better documented objectives and agreed indicators to monitor whether objectives have been achieved.

Second, stronger data infrastructure. High-quality, consistent and shareable data are essential. Ongoing efforts in Europe to harmonise and digitalise supervisory data — for example through the

EBA's Integrated Reporting Framework and related ECB initiatives®9I — are important steps forward.

Third, collaboration and open communication. Supervisors, central banks and academics should work more closely together to pool expertise and ensure that decisions are informed by empirical evidence. Structured exchanges and repositories that aggregate and compare studies can help build cumulative knowledge rather than isolated results.

Awell-designed regulatory framework provides the predictability that investors and banks need to plan and innovate. It ensures that European banks remain resilient and well-positioned to support growth in the real economy in challenging times.

1.

| am grateful to Skirmantas Dzezulskis, Korbinian Ibel, Massimo Libertucci, Massimiliano Rimarchi and John Roche for their comments and support in preparing this speech. All errors and inaccuracies are my own.

2.

Basel Committee on Banking Supervision (2011), Basel /I//: A global regulatory framework for more resilient banks and banking \_systems, Bank for International Settlements, June.

3.

Hellwig, M. (2009), ""Systemic risk in the financial sector: an analysis of the subprime mortgage financial crisis"", De Economist, Vol. 157, July, pp. 129-207.

Financial Stability Board (2011), Key Attributes of Effective Resolution Regimes for Financial Institutions, October.

5.

BCBS (2010) ""Group of Governors and Heads of Supervision announces higher global minimum capital standards"", 12 September 6.

Basel Committee on Banking Supervision (2010), Guidance for national authorities operating the countercyclical capital buffer, Bank for International Settlements, December.

7.

Hellwig, M. (2010), ""Capital Regulation after the Crisis: Business as Usual?"", Preprints of the Max Planck Institute for Research on Collective Goods, No 2010/31, Bonn, July, p.9.

8.

Hellwig, M. (2021) ""Twelve Years after the Financial Crisis—Too-big-to-fail is still with us"", Journal of Financial Regulation, Vol. 7, |lssue 1, March, pp. 175-187.

9.

Basel Committee on Banking Supervision (2014), Basel /// leverage ratio framework and disclosure requirements, Bank for International Settlements, 12 January.

10.

Erik Thedéen (2024), ""Charting the course: prudential regulation and supervision for smooth sailing"", keynote speech at the Institute of International Finance Annual Membership Meeting, Washington DC, 23 October.

11.

Commission Delegated Regulation (EU) 2015/61 of 10 October 2014 to supplement Regulation (EU) No 575/2013 of the European Parliament and the Council with regard to liquidity coverage requirement for Credit Institutions (OJ L 11, 17.1.2015, pp. 1-36).

12.

Basel Committee on Banking Supervision (2013), Global systemically important banks: updated assessment methodology and the higher loss absorbency requirement, Bank for International Settlements, July.

13.

Financial Stability Board (2015), Principles on Loss-absorbing\_and Recapitalisation Capacity of G-S/Bs in Resolution, 9 November.

While both TLAC and MREL aim to ensure that banks have sufficient liabilities to absorb losses and support resolution, they are not identical. TLAC is a global standard set by the Financial Stability Board and applies only to global systemically important banks. MREL, by contrast, is an EU requirement under the Bank Recovery and Resolution Directive and applies to all EU banks. 15.

Basel Committee on Banking Supervision (2017), Basel II/: Finalising post-crisis reforms, Bank for International Settlements, December.

16.

Basel Committee on Banking Supervision (2019), Minimum capital requirements for market risk, Bank for International Settlements, January.

17.

Regulation (EU) No 575/2013 as regards requirements for credit risk, credit valuation adjustment risk, operational risk, market risk and the output floor (OJ L, 2024/1623, 19.6.2024) and Directive (EU) 2024/1619 of the European Parliament and of the Council of 31 May 2024 amending Directive 2013/36/EU as regards supervisory powers, sanctions, third-country branches, and environmental, social and governance risks (OJ L, 2024/1619, 19.6.2024) (adopted June 2024).

18.

European Mortgage Federation (2025), Quarterly Review of European Mortgage Markets for the first quarter of 2025, Table 3, ""Average maturity of new residential mortgage loans in Europe'.

- 19.

Loans to non-financial corporations show the bulk of new lending with original maturities between one and five years. See ECB Data Portal, Bank interest rate statistics — new business.

20.

The European Commission has postponed the application of the new market risk framework (FRTB) by an additional year, from 1 January 2026 to 1 January 2027, under a new Delegated Act adopted following a targeted public consultation. This decision was taken under the CRR empowerment to preserve the international level playing field, given that several major jurisdictions have not yet finalised or announced timelines for implementing the FRTB standards. While the binding Pillar | requirements are deferred, banks must continue to compute and report FRTB metrics for reporting and output-floor purposes, ensuring operational readiness ahead of full implementation. See European Commission (2025), Questions and Answers: Postponing\_market risk requirements to preserve the international level playing\_field, 12 June.

(EBA/REP/2025/26), October.

22.

Financial Stability Board, (2017), Framework for Post-lmplementation Evaluation of the Effects of the G20 Financial Regulatory Reforms, July.

23.

EBA (2024) ""Basel Ill monitoring exercise results based on data as of 31 December 2023"", EBA/REP/2024/22; BCBS (2024) ""Basel ||| monitoring report, October 2024"". Results for the BCBS Basel Committee, EBA and ECB exercises are drawn from reports using data for the fourth quarter of 2023the 202304 vintage of data. This ensures full comparability across sources, as all three assessments refer to the same reference date and underlying sample. The BCBS Basel Committee has since published monitoring exercises using more recent data, but; however, the data for the fourth quarter of 2023 202304 vintage provides the most consistent basis for comparison of crossjurisdictional results in this context.

24.

EBA (2024), Basel I/! monitoring exercise results based on data as of 31 December 2023 EBA/REP/2024/22, October.

25.

See Table 5 in EBA (2024), Basel /// monitoring exercise results based on data as of 31 December 2023 EBA/REP/2024/22, October.

26.

ECB (2025), 2025 stress test of euro area banks — Final results, August.

27.

Basel Committee on Banking Supervision (2022), Evaluation of the impact and efficacy of the Basel Ill, Bank for International Settlements, December.

28.

Financial Stability Board (2021), Evaluation of the Effects of Too-Big-To-Fail Reforms, April.

29.

Budnik, K., Dimitrov, |., Gross, J., Lampe, M. and Volk, M. (2021), ""Macroeconomic impact of Basel III finalisation on the euro area"", Macroprudential Bulletin, No 14, European Central Bank, July.

30.

See Financial Stability Board (2019), ""ESB publishes final SME financing evaluation report"", press release, 29 November.

Budnik, K., Dimitrov, |., Giglio, C., Grof, J., Lampe, M., Sarychev, A., Tarbé, M., Vagliano, G. and Volk, euro area"", Occasional Paper Series, No 254, ECB, July. 32.

Profit efficiency is defined as the ratio between observed and potential profits given input prices and outputs. See Behn, M. and Reghezza, A. (2025), ""Capital requirements: a pillar or a burden for bank competitiveness?"", Occasional Paper Series, No 376, ECB, October.

33.

Financial Stability Board (2021), Evaluation of the effects of too-big-to-fail reforms, March.

34.

Financial Stability Board (2020), Holistic Review of the March Market Turmoil, November.

35.

Financial Stability Board (2024), Global Monitoring Report on Non-Bank Financial Intermediation 2024, December.

36.

Financial Stability Board (2023), Thematic Review on Money Market Fund Reforms, 2024.

37.

See ECB (2025), Financial Stability Review, May and IMF (2025), Global Financial Stability Report — Shifting Ground beneath the Calm, October.

38.

Buch, C. (2025), ""Financial stability, supervision and regulation: building a 21st century infrastructure for better, evidence-based policymaking"", keynote speech at the BIS Innovation Summit, 10 September; Financial Stability Board (2017), Framework for Post-lmplementation Evaluation of the International Settlements, Financial Regulation Assessment: Meta Exercise.

39.

See Section 5.2 of ECB (2025), ECB Annual Report on Supervisory Activities 2024.",Claudia Buch
https://www.bis.org/review/r251125e.htm,"Philip N Jefferson: AI, the economy, and financial stability","Speech by Mr Philip N Jefferson, Vice Chair of the Board of Governors of the Federal Reserve System, at the 2025 Federal Reserve Bank of Cleveland Financial Stability Conference, Cleveland, Ohio, 21 November 2025.",2025-11-21 00:00:00,"For release on delivery 8:45 a.m. EST November 21, 2025

AI, the Economy, and Financial Stability

Remarks by

Philip N. Jefferson

Vice Chair

Board of Governors of the Federal Reserve System at the

2025 Federal Reserve Bank of Cleveland Financial Stability Conference

Cleveland, Ohio

November 21, 2025

Thank you, Director Knotek, for the kind introduction.  It is a pleasure to be with you today and to be back in Cleveland and the beautiful Fourth district. 1   It is always a pleasure to visit the Federal Reserve Bank of Cleveland-and all the Reserve Banks.  The hard work and dedication of Reserve Bank staff, leadership, and directors help ensure the economic well-being of communities across the country, including in Ohio, Pennsylvania, West Virginia, and Kentucky.  One of the many important roles the Reserve Banks have is to be the connection between policymakers and families, workers, and businesses in every corner of the country.  That allows us to be well-informed and to make the best decisions for the benefit of all Americans.  I thank everyone here at the Cleveland Fed for their service.

As we are gathered to discuss financial stability in an era of rapid economic and technological transformation, I would like to turn our attention to what many see as a significant catalyst of change: artificial intelligence (AI).  Today, I will talk about how I approach thinking about AI.  First, I will build on remarks I gave earlier this month and discuss how I see AI affecting the economy through the lens of the dual mandate given to the Federal Reserve by Congress to pursue maximum employment and price stability. 2 Next, I will discuss AI in the context of financial stability because a stable and resilient financial system is, of course, critical to achieve that dual mandate.  I will do so by highlighting some of the findings in our recently released Financial Stability Report (FSR).  And finally, I will discuss how the current period compares with another recent

1 The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.

2 See Philip N. Jefferson (2025), 'AI and the Economy,' speech delivered at Euro20+, Deutsche Bundesbank, Frankfurt, Germany, November 7,

https://www.federalreserve.gov/newsevents/speech/jefferson20251107a.htm.

period of notable technological change-the late 1990s.  Afterwards, I would be happy to answer your questions.

AI technology has been advancing at an extraordinary pace in recent years. 3 Hundreds of millions of people now regularly use AI to write and translate documents, obtain practical guidance on a variety of topics, and search for information. 4   A recent report from the St. Louis Fed showed that in August almost 55 percent of working-age adults said they used generative AI for personal or work use, up notably from a year earlier. 5   Businesses are increasingly adopting AI, with use cases clearly moving from the experimentation phase to operations.  In the financial industry, AI adoption rates are even higher. 6   And while it may take some time before we see its full effects, many believe that AI has the potential to generate substantial change across the economy and to be a valuable tool for people all around the world. 7

## AI and the Dual Mandate

I see, as many others do, the promise for AI technology to be transformative, perhaps in ways as dramatic as past technological achievements, such as the printing

3 See Microsoft (2025), 'AI Diffusion Report:  Where AI Is Most Used, Developed, and Built,' AI Economy Institute, November, https://www.microsoft.com/en-us/research/group/aiei/ai-diffusion/.

4 See Aaron Chatterji, Thomas Cunningham, David J. Deming, Zoe Hitzig, Christopher Ong, Carl Yan Shan, and Kevin Wadman (2025), 'How People Use ChatGPT,' NBER Working Paper Series 34255 (Cambridge, Mass.:  National Bureau of Economic Research, September), https://www.nber.org/papers/w34255.

5 See Alexander Bick, Adam Blandin, and David Deming (2025), 'The State of Generative AI Adoption in 2025,' Federal Reserve Bank of St. Louis, On the Economy Blog, November 13, https://www.stlouisfed.org/on-the-economy/2025/nov/state-generative-ai-adoption-2025.

6 This assessment is based on Federal Reserve staff analysis of data from the U.S. Census Bureau's Business Trends and Outlook Survey, which is available on its website at https://www.census.gov/programs-surveys/btos.html.

7 See Erik Brynjolfsson, Danielle Li, and Lindsey R. Raymond (2023), 'Generative AI at Work,' NBER Working Paper Series 31161 (Cambridge, Mass.:  National Bureau of Economic Research, April; revised November 2023), https://www.nber.org/papers/w31161.

press, steam engine, and the internet.  When I think about the macroeconomic consequences of AI, I consider how it will affect both sides of our dual mandate.

AI can enable a worker to complete in seconds or a few minutes tasks that previously took many minutes, if not hours.  Already, it is boosting worker productivity in a wide range of industries and occupations, including customer service, logistics, computer programming, and medical research.  Increased productivity leads to economic growth, which may also create new employment opportunities.  There is already robust competition among high-tech firms for workers who possess the skills to develop and effectively deploy this technology.

At the same time, many people have legitimate concerns that AI will cause job loss.  At least for certain firms and workers in certain occupations, this is likely to be true. Indeed, some large employers have recently indicated they are lowering overall hiring plans in light of advances in AI and other forms of automation. 8   Some research has also suggested that AI is having a more detrimental effect on the job prospects of younger, less-experienced workers, including recent graduates, compared with those further along in their careers. 9

The net effect on employment is highly uncertain and may show variation across industries and occupations over time.  For the overall economy, one way to think about AI-related job losses-at least until it creates new jobs-is that AI can create economic slack.  In a world where firms only deployed AI to replace existing workers, even at a

8 For example, see Tom Huddleston Jr. (2025), 'Walmart CEO:  'AI Is Literally Going to Change Every Job'-How the Best Employees Can Still Stand Out,' CNBC, September 29; also, see Karen Weise (2025), 'Amazon Plans to Replace More than Half a Million Jobs with Robots,' New York Times, October 21. 9 See J.P. Morgan (2025), 'AI's Impact on Job Growth,' webpage,

https://www.jpmorgan.com/insights/global-research/artificial-intelligence/ai-impact-job-growth.

lower level of overall employment, the productive capacity of the economy has increased (or stayed the same).  Of course, if people get redeployed to more productive tasks, the economy produces more without any additional slack.  Whether AI substitutes for labor or complements it is an important question that requires continued study.

On the other side of our dual mandate-price stability-AI could help the economy achieve higher growth through increased productivity while reducing inflationary pressures.  Specifically, increased productivity could lower production costs and put downward pressure on prices.  Not only could AI allow a specific worker to be more efficient in their day-to-day tasks, but it also has the potential to allow for better thinking around complex problems.  More efficient allocation of resources as well as potential improvements in supply chains could reduce associated costs, leading to lower prices for various goods and services.  Conversely, AI could put upward pressure on certain price categories as many firms push to scale up the technology.  I mentioned the rising wages for certain workers with skills that complement AI.  AI technology also requires data centers, which compete with other production processes for land, energy, and other inputs.  As with the labor market, the timing and degree of AI's effect on prices are uncertain and should be monitored.

In terms of AI's implications for monetary policy, it is likely still too soon to tell. Policymakers must sort out changes in the economy that are due to cyclical factors from those resulting from structural change, which AI may well represent.  Productivity gains from AI may affect the relationship between employment and inflation and, hence, the conduct of monetary policy.  Monetary policy decisions, of course, need to be made with a broad view of what is happening in the economy, not just in one sector or technology.

There is still much to learn.  I counsel exercising humility about the challenges in predicting AI's effects on employment and inflation.

## AI and Financial Stability

Now, I will turn to discussing AI through the lens of financial stability.  But first I would like to step back and briefly offer my overall assessment.  The financial system remains sound and resilient, with high levels of risk appetite and leverage at hedge funds balanced by strong household and business balance sheets and high levels of capital in the banking system.  Because the continued resilience of the financial system is so important to achieving our dual-mandate goals, policymakers monitor a range of indicators associated with vulnerabilities, as is discussed in our semiannual FSR.  The latest version of that report was published a few weeks ago. 10

As part of our financial stability monitoring work at the Fed, we routinely survey market contacts regarding potential risks to the U.S. financial system.  A finding in the most recent survey is likely of particular interest to a conference exploring financial stability in a time of technological change-30 percent of contacts surveyed cited a turn in the prevailing sentiment toward AI as a salient risk to the U.S. financial system and the global economy.  That was up from 9 percent in the spring survey.  Participants noted that if such an unwinding were to occur, it could tighten financial conditions and restrain economic activity more broadly.  It is not my intention to make a judgement on the likelihood of those, or other scenarios offered in the FSR.  Rather, I want to reiterate that I am monitoring the scenarios.

10 The most recent FSR is available on the Federal Reserve Board's website at

https://www.federalreserve.gov/publications/files/financial-stability-report-20251107.pdf.

Some observers have asked about comparisons with the late 1990s, which was another period when promising new technological advances were closely tied to strong stock market performance. 11   They have asked, are we experiencing 'dot-com boom 2.0?'  So, in the rest of my talk, I will address this question.  I will argue that there are important differences between the recent period and the stock market experience during the dot-com boom of the late 1990s.  Of course, much has changed over the past quartercentury, so history can only be a useful reference and not a predictor of future outcomes.

## How Current Conditions Compare with the Dot-Com Era

I see clear differences across the two periods.  Before I discuss three notable differences, let me first refresh our memory and mention a dimension along which the dot-com era and the AI era are similar-the particularly rapid stock price appreciation of firms that encapsulate the promise of transformational technologies. 12   Indeed, the stock prices of dot-com firms increased more than 200 percent during their boom between 1996 and 1999, a little faster than the increase we have seen so far in the stock prices of AIrelated firms since 2022. 13

A closer inspection of the firms driving the stock price increases, however, reveals the first critical difference in the stock market dynamics across the two periods. In the late 1990s and early 2000s, many, albeit not all, dot-com firms typically had little to no realized earnings and only speculative revenue prospects even as they obtained

11 For example, AI technology and its effect on financial markets is the focus of the 10th Foundation for Advancement of Research in Financial Economics (FARFE) Conference. Information about the conference is available on FARFE's website at https://farfe.org/Conference-2025.html.

12 See Alexander Ljungqvist and William J. Wilhem Jr. (2003), 'IPO Pricing in the Dot-Com Bubble,' Journal of Finance, vol.  58  (April), pp. 723-52; also, see Tim Loughran and Jay R. Ritter (2002), 'Why Don't Issuers Get Upset about Leaving Money on the Table in IPOs?' Review of Financial Studies, vol. 15 (January), pp. 413-44. Dot-com firms are identified following the approach in Ljungqvist and Wilhelm Jr. (2003) and Loughran and Ritter (2002) by using a specific set of SIC codes.

13 Similarly, t he NASDAQ stock price index increased about 215 percent between 1996 and 1999.

external funding and were listed on public exchanges with relative ease amid pronounced investor enthusiasm.  In contrast, the firms most closely identified with AI technologies in today's market generally have well-established and growing earnings streams.

The second difference is that because of their solid earnings base, the price-toearnings ratios of AI-related firms have thus far remained well below the peak ratios of dot-com firms in the late 1990s and early 2000s.  During the dot-com episode, investors were apparently far more willing to bet on the promise of the internet, with dot-com stocks commanding far larger premiums than AI stocks do today.

The third difference is that the proliferation of dot-com firms in the late 1990s and early 2000s suggests a less discriminating enthusiasm than what we are observing in today's market.  At the peak in the late 1990s, more than 1,000 firms were publicly listed as dot-com companies, with many having minimal revenue and highly speculative business models.  Indeed, researchers have shown that the mere addition of 'dot-com' to a company name was sufficient to boost the stock price of the firm. 14   By contrast, in the current environment, by one measure about 50 publicly traded firms are considered to be AI-focused enterprises, in the sense that they are expected to derive revenue from other firms using AI technologies, as opposed to the broad-based speculation that we saw in the late 1990s.  15   However, it is important to acknowledge that the rapid growth of private capital markets-which are not publicly traded-in recent years may obscure the extent

14 See Michael J. Cooper, Orlin Dimitrov, and P. Raghavendra Rau (2001), 'A Rose.com by Any Other Name,' Journal of Finance, vol. 56 (December), pp. 2371-88.

15 This assessment is based on the iShares Future AI &amp; Tech ETF, which focuses on 'companies that provide products and services that are expected to contribute to AI technologies in areas including generative AI, AI data and infrastructure, AI software, and AI services.'  Obviously, the number of firms that use AI technology is much larger.

of investor enthusiasm for financing AI firms, as a growing number of private firms reportedly now identify as AI-focused or AI-native enterprises.

Finally, with respect to financial leverage, both dot-com previously and AI firms recently exhibited limited reliance on debt financing for the most part.  This more limited use of leverage may reduce the extent to which a shift in sentiment toward AI could transmit to the broader economy through credit markets.  That said, recent market reports suggest that AI firms may be increasing their use of debt, from both public and private credit markets, to fund substantial investments in computing infrastructure and talent acquisition.  Just a few weeks ago, large volumes of corporate bonds were issued to support AI infrastructure buildout by key players in the industry.  Some analysts estimate that future investments in AI infrastructure will require a lot more debt. 16   If that turns out to be the case, leverage in the AI sector could increase-and so could the losses if sentiment toward AI shifts.  I will watch this developing trend closely.

In sum, looking at these dimensions, as of now, the differences between the current market and the dot-com era make it less likely that we are witnessing a replay of the late 1990s.  Most notably, in contrast with the dot-com era, the current AI-related stock market activity appears more concentrated among established firms with actual earnings.  Additionally, these developments are occurring against the backdrop of a financial system that is sound and resilient.

## Conclusion

To conclude, it is important to acknowledge that assessing the implications of rapidly developing technology for financial stability is subject to a great deal of

16 See Morgan Stanley (2025), 'Bridging a $1.5tr Data Center Financing Gap,' July.

uncertainty.  The ultimate implications of AI for both the macroeconomy and financial stability may take a long time to crystallize.  Technology, the financial system, and the broader economy are always evolving.  The potential transition to our new world could be bumpy, and it is too early to tell what trajectory will ultimately play out.  Our research is continually enriched by the insights provided by market participants in regular outreach, keeping us abreast of the latest developments in AI and their economic implications, and by an ever-expanding analytical toolkit, including AI.  Ensuring that the AI revolution unfolds within the context of a stable financial system is not just desirable-it is also imperative for achieving our dual-mandate objectives of maximum employment and price stability.

Thank you.



2025 Financial Stability Conference

Federal Reserve Bank of Cleveland, Cleveland, Ohio November 21, 2025

## AI, the Economy, and Financial Stability

Philip N. Jefferson Vice Chair, Federal Reserve Board Board of Governors of the

Federal Reserve System

The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.



- AI and the dual mandate
- AI and financial stability
- Comparing recent trends with the late 1990s
- Discussion



## AI Adoption in the Economy



Source: Federal Reserve Bank of St. Louis, Real-Time Population Survey; author's calculations.



## Survey of Salient Risks to Financial Stability



Source: Federal Reserve Board, November 2025 Financial Stability Report .



## Contrasts with the Late 1990s

## Currently...

- Firms identified with AI generally have wellestablished and growing earnings streams
- Price-to-earnings ratios of AI-related firms are below peak 1990s ratios
- Relative to the number of dot-com firms in the late 1990s, fewer publicly traded firms are considered AI-focused enterprises



'Ensuring that the AI revolution unfolds within the context of a stable financial system is not just desirable-it is also imperative for achieving our dualmandate objectives.'



2025 Financial Stability Conference

Federal Reserve Bank of Cleveland, Cleveland, OH November 21, 2025

## AI, the Economy, and Financial Stability

Philip N. Jefferson Vice Chair, Federal Reserve Board Board of Governors of the

Federal Reserve System

The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.",Philip N Jefferson
https://www.bis.org/review/r251201e.htm,Anna Seim: Driving forces behind the development of the krona,"Speech by Ms Anna Seim, Deputy Governor of the Sveriges Riksbank, in a seminar on the development of the krona, organised by the Sveriges Riksbank, Stockholm, 14 November 2025.",2025-11-14 00:00:00,"SPEECH

DATE:

14 November 2025 Deputy Governor Anna Seim The Riksbank

SPEAKER:

VENUE:

## Driving forces behind the development of the krona *

The Swedish krona has just turned 150 years old. It replaced the riksdaler as a unit of payment in 1873 and in 1874 the first Swedish krona banknote was printed. Since then, the value of the krona has been managed in a variety of exchange rate regimes: the Scandinavian Monetary Union, the Bretton Woods system and pegs to various trade-weighted currency baskets. As of November 1992, the krona has been allowed to float freely, which, together with the inflation target set in 1993 but formally introduced in 1995, constitutes Sweden's monetary policy regime.

The exchange rate plays a central role in macroeconomic developments in a small, open economy like ours. Its evolution is important for a central bank with an inflation target, even if the exchange rate is allowed to float freely, as it affects various measures of inflation and the business cycle.

The aim of this speech is to describe, in a structured manner, what affects the Swedish krona over different time horizons and to comment on developments in recent years. In preparing the speech, I have discussed with my colleagues whether we should paraphrase the writers Carver and Murakami and name the speech ""what I talk about when I talk about the krona"", because that is exactly what this is: what I would answer if someone asked me to try to explain the nominal exchange rate. One of the main messages of the speech is that it is possible to understand the evolution of the krona . It varies over time and is very

*  I would especially like to thank Anders Vredin for help in writing the speech and José Camacho, Mika Lindgren and Gustav Rosén for excellent data analysis. I am grateful to Aino Bunge, Charlotta Edler, Erik Eldhagen, Peter Gustafsson, Marie Hesselman, Per Jansson, Stefan Laséen, Johan Linder, Carl Mitchell, Marianne Nessén, Carl Nordahl, Åsa Olli Segendorf, Maria Sjödin, Ulf Söderström and Erik Thedéen for their valuable comments. I would also like to thank Caroline Jungner for the plain language review, Elizabeth Nilsson for the translation into English and Emelie Nordeman for organising the seminar.

Telephone: +46-(0)8-787 00 00, Website: riksbank.se



difficult to predict, but a backward-looking analysis can provide convincing arguments as to why it has strengthened or weakened.

I will focus on the nominal exchange rate, i.e. how many kronor we have to pay to receive a unit of foreign currency. Many analyses, including the Riksbank's, deal with various measures of the real exchange rate that measure aggregate relative prices between different countries expressed in the same currency. As the real exchange rate has proved somewhat easier to model and is therefore often used in forecasting work, I will briefly comment on this as well. But the purpose of this speech is to discuss the nominal exchange rate and what affects it over different time horizons. 1

The exchange rate is a relative price determined by supply and demand for different currencies. These in turn reflect the supply and demand for goods, services and financial assets, which are priced in different currencies. In the past, conditions in goods markets and trade flows determined the demand for kronor to a greater extent, but as financial flows have grown in size and now dominate the value of trade in goods and services, financial markets have become increasingly central to exchange rate developments. 2 As someone who wants to buy financial assets in Sweden will need Swedish kronor to do so, the krona exchange rate is affected by changes in supply and demand for them.

According to economic theory, the goods market and international trade flows are more important for the exchange rate in the long term, while cross-border capital flows dominate in the short term. 3 In reality, of course, there is no clear distinction between the short and long term, but there are educational gains to this division. In my view, it is generally wise to discuss long-term developments before considering the short term. One can then form a view of where the economy is heading and allow adjustments to this long-term equilibrium to become part of the short-term assessment.

1  Throughout, I will define the nominal exchange rate in terms of domestic currency per unit of foreign currency. For example, the Swedish exchange rate relative to the US dollar using this definition is currently SEK 9.49 per USD. Using this method of calculation, a higher exchange rate means a weakening of the Swedish krona against the dollar, i.e. a depreciation, while a lower exchange rate means a strengthening, i.e. an appreciation.

2 See the article in the Monetary Policy Report September 2023, 'The krona will strengthen in the medium term'.

3  See, for example, Krugman, Obstfeld and Melitz (2023) and Itskhoki and Mukhin (2021).

## Conditions in goods markets important in the longer term

Theories on the exchange rate being determined by conditions in the goods market are often based on what is known as the law of one price. According to this theory, in the absence of trade barriers and transport costs, a good traded in two different economies should be sold for the same price in the two countries when the price is expressed in the same currency. 4 According to the law of one price, the nominal exchange rate should reflect the relationship between the price of the same good in domestic currency and in foreign currency.

A well-known application of the law of one price is the Economist's Big Mac index. This uses the price of a Big Mac in the United States in dollars and the price of the same product in other countries to calculate what the exchange rate should be according to this theory. This hypothetical exchange rate is compared with the actual one and can indicate whether a currency is overvalued or undervalued. At the time of writing, this exercise suggests that the krona would be overvalued by about 20 per cent against the dollar. 5 Such an analysis is interesting, but at the same time very simplistic and can therefore be misleading.

To begin with, the exchange rate should not be linked to the price developments of any individual product. Assuming that the law of one price applies not only to individual products but also at the aggregate level, we obtain the theory of exchange rates known as absolute purchasing power parity (PPP). This involves studying aggregate price levels and examining whether it is true that the nominal exchange rate between, for example, the krona and the dollar reflects the relationship between price levels in Sweden and the United States. 6 According to relative PPP, which has stronger empirical support than absolute PPP, changes in the exchange rate reflect differences in inflation rates across countries. According to the theory of relative PPP, the fact that Swedish CPI inflation has been lower than the US rate for several years indicates that the krona has been undervalued against the dollar in the years prior to the latest krona appreciation.

However, there are good reasons to question how much these theories tell us about reality. Tariffs and transport costs imply that goods are not sold at the same price in different countries and many products, especially services, are not traded

4 For a certain good 𝑖 it is thus the case that, at time 𝑡 , 𝑃𝑖,𝑡 = 𝐸𝑡𝑃 𝑖,𝑡 ∗ , where 𝑃𝑖,𝑡 is the price of that good in Sweden, 𝑃 𝑖,𝑡 ∗ ∗ is the price of the corresponding good in foreign currency abroad, and 𝐸 is the nominal exchange rate.

5  https://www.economist.com/interactive/big-mac-index.

6 According to PPP, it is the case that 𝑃𝑡 = 𝐸𝑡𝑃 𝑡 ∗ , where 𝑃𝑡 is the aggregate price level (for example, the CPI) in Sweden, and 𝑃𝑡 ∗ is the aggregate price level abroad. This can be written as 𝐸𝑡 = 𝑃 𝑡 /𝑃 𝑡 ∗ .

internationally. This means that the exchange rate may very well deviate from the level implied by the theory of purchasing power parity.

If PPP holds, the real exchange rate is constant. 7 However, as PPP is generally not fulfilled, the real exchange rate may fluctuate over time. Among other things, it has been found to be correlated with productivity in different countries. 8 If one assumes that the real exchange rate is driven by real factors in the long term, while price levels in inflation-targeting countries are driven by monetary policy in the long term, then these factors together could explain the behaviour of the nominal exchange rate. 9 Forecasters therefore often use estimates of the longterm level of the real exchange rate to make predictions about the nominal exchange rate. This has also been the approach used by the Riksbank for a long time and is one reason for the conclusion that the Swedish krona has been expected to appreciate. 10 However, as shown in Figure 1, the Riksbank's forecasts for the exchange rate have often been wrong. This brings me to the question of what forces, beyond those in the goods market, might influence the exchange rate.

7  The real exchange rate is defined as 𝑄𝑡 = 𝐸𝑡𝑃 𝑡 ∗ /𝑃𝑡 .

8  For example, higher productivity often leads to higher price levels in rich countries, which means that the real exchange rate is stronger there than in poor economies. For analyses of Sweden's real exchange rate and more references to the literature, see, for example, Lane (2007), Lagerwall and Nessén (2009), Bacchetta and Chikhani (2021) and Belfrage et al. (2025).

9  The fact that a central bank with an inflation target controls long-term inflation does not mean that it also controls the price level. This requires that it has, and manages to maintain, a price level target. In many countries, including Sweden, temporary deviations from the inflation target can have permanent effects on the price level and on the nominal exchange rate; see Benigno and Benigno (2008) and Engel and Wu (2023).

10  The Riksbank's approach coincides with what is proposed in international research by Ca' Zorzi et al. (2017). See Belfrage et al. (2025) for more recent studies.

Figure 1. The Riksbank's forecasts for the development of the Swedish krona Index, 1992-11-18 = 100



Note. The KIX (krona index) is a weighted average of the currencies in 32 countries that are important for Sweden's international trade. Since 28 March 2022, the index has been calculated against 31 countries following the exclusion of the Russian rouble. The solid line represents outcomes and the dashed line represents the Riksbank's forecast from the September Monetary Policy Report. The grey lines are from previous rounds of forecasts.

Source: The Riksbank.

## Financial drivers have come to dominate over time

As I described in the introduction, cross-border capital flows have over time become crucial for supply and demand in the foreign exchange market and thus for exchange rates. 11

To understand what drives these flows, it is helpful to think of an international investor considering two possible investments, for example one in Sweden and one in the United States. In general, we say that what investors consider in their choices are expected returns, liquidity and risk. If we consider the government bond market for simplicity's sake, the return is the government bond yield over a given maturity. Liquidity captures how quickly the asset could be turned over in the market, and since it is roughly the same in developed countries, we ignore it here. In a stylised approach, an investor is indifferent between two investments with the same maturity if uncovered interest rate parity (UIP) applies. 12 If we

11  The foreign exchange market is not really a single market but several, see Nordström (2022) for a description.

𝑒

12  The condition for uncovered interest rate parity can be written 𝑖 𝑆𝑉𝐸,𝑡 = 𝑖𝑈𝑆,𝑡 + 𝐸𝑡+1 -𝐸𝑡 𝐸𝑡 +𝜌𝑡 , where 𝑖𝑆𝑉𝐸 and 𝑖𝑈𝑆 are the nominal returns (interest rate) on an investment in Sweden and the United States, respectively, 𝐸 as before is the nominal exchange rate expressed in Swedish kronor per dollar and 𝐸 𝑒 is the expected future exchange rate. 𝜌 is a risk premium that is zero if the interest rate parity condition holds

consider two investments that are deemed equally liquid and equally risky, the theory of interest rate parity states that if interest rates are lower in Sweden than in the United States, an investor must expect an appreciation of the krona to be indifferent to the choice of investing in a Swedish or in a US asset. The reason is that when the investor cashes out his invested money at the end of the period, the appreciation of the krona has compensated for the lower return on the Swedish asset. In addition, if the Swedish investment is perceived as riskier, the investor will demand a higher expected return, i.e. a risk premium, for holding the Swedish asset.

The interest rate parity condition is not entirely intuitive as it states that a higher interest rate in Sweden is consistent with an expected depreciation of the krona. This goes against the widely held view that if interest rates rise more in Sweden than in the United States, for example, demand for kronor increases and leads to an appreciation against the dollar. But the key to understanding interest rate parity is to recognise that it is an equilibrium condition. A higher interest rate typically causes the krona to appreciate, but it then becomes stronger than the equilibrium exchange rate that is consistent with the interest parity condition. In the long run, the krona will therefore have to weaken if parity is to be restored.

The arguments above are very simplified. The relationship between interest rates and the exchange rate is in fact complex. In reality, expectations about the future exchange rate have a large impact on the current exchange rate, making relationships difficult to model and estimate empirically. But even in richer and more realistic models, risk perception and preferences for risk will affect the demand for financial assets in Sweden and thus the krona exchange rate.

Thus, if we want to understand in depth what drives the development of the krona, we need to try to understand what drives returns and risk, and also liquidity, in financial markets.

## Financial flows are driven by expected returns, risk and liquidity

Thus, based on international experiences and research, there are good reasons to believe that the exchange rate is largely driven by cross-border capital flows that affect the supply and demand for different currencies. Capital flows reflect investors' preferences for different assets and thus expected returns, risk and

exactly, but positive if it is perceived as riskier to invest in Sweden than in the United States. If the reverse is true, the risk premium is negative.

liquidity. Therefore, it is essentially the economic conditions behind these factors that determine to a large degree how the krona develops.

For example, strong productivity growth in Sweden implies higher future profits and a strong stock market, long-term stable government finances make government bonds an attractive asset and a healthy housing market can increase demand for covered bonds. All of this can increase the demand for Swedish kronor. Many institutional investors endeavour to hold certain proportions of domestic and foreign securities in their portfolios, as well as certain proportions of low and high-risk securities.

As I mentioned earlier, cross-border financial flows have increased significantly in recent decades. This also applies to financial flows from Sweden. Since the crisis of the 1990s, Sweden has had a financial savings surplus in relation to the rest of the world, which has been reflected in our current account surpluses averaging around 5 per cent of GDP over the past twenty years, see Figure 2.

The current account surplus is mainly due to high savings in the household sector. Collective pension savings constitute a large part of this. Household saving results in substantial investment abroad, although this is mainly channelled through investment funds and insurance and pension companies, rather than through direct investment by households themselves. Inflows to these sectors (including social security funds) have averaged just over SEK 200 billion per year over the past twenty years, equivalent to around 5 per cent of GDP, see Figure 3. Figure 4 shows total financial flows abroad from investment funds, insurance corporations, pension funds and social security funds over time. These have averaged around 3 per cent of GDP over the past twenty years. In 2024, they averaged around 6 per cent of GDP. This year, they were approximately equal to Sweden's net financial savings abroad, i.e. the current account surplus. The high level of saving in Sweden has thus led to a Swedish demand for foreign assets, a continuous capital outflow and thus a high supply of kronor. This has probably contributed to the depreciation of the krona, both in the short and long term. 13

13  High saving and current account surpluses can also lead to a depreciation of the real exchange rate. This so-called transfer effect was discussed by Bertil Ohlin and John Maynard Keynes after the First World War. See Lane (2007) for a more recent application.

## Figure 2. Current account and financial savings by sector

Per cent of GDP



Note. Quarterly data.

Sources: Statistics Sweden and the Riksbank.

## Figure 3. Household financial investment in selected sectors

Per cent of GDP



Note. Annual average. The figure shows households' net investments in financial instruments (fund shares, pension entitlements and private insurance savings) in each sector by year. Note that some companies were reclassified from insurance corporations to pension funds in 2009.

Sources: Statistics Sweden and the Riksbank.

## Figure 4. Investments abroad from different sectors

Per cent of GDP



Note. Annual average. Transactions from Sweden to abroad show social security funds, Swedish investment funds, insurance companies and pension funds' net purchases (purchases minus sales) of foreign i) debt securities, ii) shares (both listed and unlisted), and iii) fund shares during the current year as a percentage of GDP (quarterly net purchases in relation to quarterly GDP).

Sources: Statistics Sweden and the Riksbank.

## The development of the krona in recent years

The value of the Swedish krona has fluctuated widely since the transition to a floating exchange rate in 1992. Figure 5 shows the development of the krona relative to the euro and the US dollar, but also in terms of the KIX index which we often use for comparison. One advantage of the KIX index is that it is tradeweighted and thus recognises that our dependence on other countries can change over time. The Figure shows that when the fixed exchange rate was abandoned in the autumn of 1992, the krona immediately depreciated by around 12 per cent relative to the KIX, but also that the average value of the krona at the beginning of 1993 was about the same as today. In this respect, therefore, it is not possible to speak of either a long-term weakening or long-term strengthening of the krona during the floating exchange rate regime.

At the same time, we see a long-term weakening of the krona against the euro, while the value of the krona against the US dollar shows no clear trend over the period as a whole. In other words, it is difficult to summarise succinctly how the krona has developed in a world of floating exchange rates and occasionally large movements between the major currencies.

In times of great uncertainty, the krona has sometimes depreciated, as financial capital then tends to seek out what are known as ""safe havens"". 14 One such currency is the Swiss franc, which, in addition to a trend appreciation over time, has often appreciated particularly sharply in times of crisis. 15 However, the bestknown safe haven is the US dollar, which normally strengthens in times of crisis. One important reason for this is the unique role of the dollar in terms of liquidity. The US dollar is widely used as the unit of account and means of payment in international transactions, even in transactions where US actors are not counterparties. US government securities are also used as collateral in many transactions. The US dollar thus has a special status as the world's reserve currency. 16

Figure 5 shows that the krona has been markedly volatile over the past 30 years. In line with the safe haven argument, we see that the krona was at its weakest in early 2009 and in 2023, i.e. during the global financial crisis and after the global inflation upswing. The krona peaked in 2012 at the beginning of the euro area crisis and then weakened on trend until autumn 2023. This year, the krona has appreciated by around 14 per cent against the dollar and around 5 per cent against the euro.

14  However, it is not generally the case that the krona always depreciates in times of increased global uncertainty, see Flam and Persson (2024).

15  The Swiss National Bank has intervened several times to prevent the franc from appreciating too rapidly, see Martin and Moser (2024) and Rathke and Straumann (2024). There are several theories as to why the franc is perceived as risk-free. Well-managed public finances and a strong and competitive economy are one explanation; a large banking sector that repatriates capital in turbulent times is another. There is also likely to be some persistence in expectations: the fact that Switzerland has been established as a safe harbour creates a belief that it will remain so in the future.

16  See, for example, Nelson and Weiss (2022), Bertaut et al. (2025) and ECB (2025).

Figure 5. Nominal exchange rate against KIX, as well as the EUR and USD

Index, 1992-11-18 = 100



Note. The KIX (krona index) is a weighted average of the currencies in 32 countries that are important for Sweden's international trade. Since 28 March 2022, the index has been calculated against 31 countries following the exclusion of the Russian rouble.

Sources: Macrobond Financial AB and the Riksbank.

Focusing only on the last ten years up to 2024, Figure 5 shows that the krona has weakened against the euro, the US dollar and in terms of the KIX. I believe this trend is understandable and depends on a number of interacting factors. Here are a few that I think have had an impact.

As we have already noted, the extensive saving in the household sector, as illustrated in Figure 3, has resulted in a capital outflow that has probably been behind part of the trend depreciation of the krona against, for example, the dollar over the past ten years. In connection with the euro crisis, the Riksbank also changed monetary policy in a more expansionary direction. The policy rate was then cut and a period of asset purchases was initiated to push down longer-term interest rates. This probably also contributed to a weaker krona. In addition, the Riksbank communicated in 2016-2019 that it was prepared to intervene if the krona became too strong, which may have contributed to a higher premium for holding krona assets and thus a slightly weaker exchange rate. 17 The Riksbank's bond purchases may also have affected the krona by impacting the functioning of the financial markets. When a large agent buys up sufficiently large volumes of government securities and the outstanding volumes become smaller, this can lead

17  For a detailed review of the development of Swedish monetary policy 1973-2022, see Bylund et al. (2024).

to poorer liquidity and make Swedish government bonds less attractive for institutional investors, for example. 18

Two other factors that may have affected the development of the krona in the short term are related to the Riksbank's management of the foreign exchange reserves. In January 2021, the Riksbank decided to transition to self-financed foreign exchange reserves instead of relying on borrowing via the Swedish National Debt Office, as previously. The Riksbank therefore purchased foreign currency in 2021 and 2022. The Riksbank then announced in June 2023 that it would investigate the possibility of hedging part of the foreign exchange reserve, which it also implemented later in September. At that time, the Riksbank conducted a series of transactions in which it sold dollars and euros forward. 19 Figures 6 and 7, taken from a preliminary research report by Artta et al. (2025), show the development of the Swedish krona against the USD and EUR compared with the development of the Norwegian krone against the same currencies. The figures suggest that following these changes, the two currencies, which had previously followed similar trends, moved in markedly different directions.

18  In the Riksbank's Financial Market Surveys, which are published twice a year, criticism of this nature was levelled at the Riksbank's purchases of government bonds. See also Åkerman (2023).

19  The scope of the Riksbank's foreign exchange market operations totalled around 3.5 per cent of GDP in 2021-22 and 1.7 per cent of GDP in 2023-24. It can be added that from 2015 (and with a break in 20202022) the Swedish National Debt Office sold Swedish kronor against foreign currency in the same order of magnitude as the Riksbank's operations in 2021-2022.

Figure 6. Development of SEK and NOK against EUR and USD during the period of the Riksbank's transition to self-financed foreign exchange reserves

Index, 2021-02-01 = 100



Note. The vertical dashed line at 1 February 2021 refers to when the Riksbank started buying foreign currency. The vertical dashed line at 3 February 2022 refers to when the Riksbank increased the pace of foreign exchange purchases.

Sources: Macrobond Financial AB and the Riksbank.

Figure 7. Development of SEK and NOK against EUR and USD during the period of the Riksbank's transition to self-financed foreign exchange reserves

Index, 2023-09-25 = 100



Note. The vertical dashed line at 25 September 2023 refers to when the Riksbank started selling foreign currency.

Sources: Macrobond Financial AB and the Riksbank.

The research report analyses the foreign exchange transactions using modern econometric methods. The results are preliminary and should be interpreted with caution, but they suggest that the Riksbank's operations have had effects on the

krona exchange rate in some cases. The magnitude of the effects is uncertain but broadly in line with previous research literature in this area. 20

That these reserve-related changes may have had some impact on the exchange rate is not surprising and in line with international research. At the same time, I would like to point out that the Riksbank maintains a gold and foreign exchange reserve primarily for the sake of preparedness and to be able to safeguard financial stability, not to influence the exchange rate. We review our strategic allocation annually. In the spring of 2025, we decided to maintain the current hedging ratio, which means that around a quarter of the foreign exchange reserves will continue to be hedged. My assessment is that this is well balanced.

## Very difficult to forecast the development of the krona

The nominal exchange rate is linked to developments in the real exchange rate and aggregate price levels, while cross-border capital movements driven by preferences for financial investments are crucial in the short term. All this contributes to movements in nominal exchange rates being very difficult to predict. While it may be possible to explain why the nominal exchange rate has developed the way it has in retrospect, it is very difficult to explain its future development. As I noted earlier, this is evident in Figure 1 of the Riksbank's forecasts of the krona.

In terms of backward-looking explanations, Engel and Wu (2024) use both macro and financial data to understand the evolution of the US dollar over the years 1999-2023 against a number of currencies, including the Swedish krona.  Rosén and Vredin (2025) investigate what the Engel-Wu model says about the development of the dollar since August 2023 and also apply the model to some bilateral exchange rates against the Swedish krona. The results show that inflation, interest rates and the trade balance, among other factors, affect the recent behaviour of exchange rates, in line with Engel and Wu (2024) and the arguments I have reviewed today.

20  See, for example, Itskhoki and Mukhin (2021), Sizova et al. (2025) and Artta et al. (2025), who also provide several references to research literature in this area.

Figure 8. Nominal exchange rate of SEK per USD and the calculated rate according to the Engel-Wu model

Average monthly change



Sources: Macrobond Financial AB and the Riksbank's own calculations.

However, the Engel-Wu model does not capture the krona's appreciation against the dollar at the end of 2023 and the beginning of 2025, see Figure 8. In both late 2023 and early 2025, the dollar also weakened against other currencies, implying that the appreciation of the krona against the dollar is not only due to Swedish conditions. But, as discussed above, the Riksbank's currency hedging of part of the foreign exchange reserve in 2023 may have played a role. In 2025, the dollar depreciation is likely to be related to financial flows out of dollar exposures due to uncertainty about US economic policy. This breaks the historical pattern of the dollar as a safe harbour. However, the krona has also strengthened against other currencies. What both episodes have in common is that there have been changes in demand and supply in the foreign exchange market that are not captured by macro variables traditionally used to explain nominal exchange rate developments.

As I mentioned above, the real exchange rate is somewhat easier to model and forecast than the nominal exchange rate. The Riksbank's long-term forecasts have therefore been largely based on the assumption that the deviation of the real exchange rate from an assessment of its long-term trend provides guidance on where the nominal exchange rate is heading in the long term. Once the real exchange rate has been estimated, the nominal exchange rate can be estimated by considering the current relative price level. However, it should be recognised that as the relative price level changes over time, so does the nominal exchange rate. Moreover, real and nominal exchange rates interact in a complex way.

In the short term, it is difficult to find a better forecasting model for the nominal exchange rate than a so-called random walk - a stochastic, or random, process in

which today's value depends on yesterday's value and a random term with an expected value of zero. The best prediction for tomorrow's exchange rate is then that it will be the same as today's. The classic reference in this area is a paper by Meese and Rogoff (1983), but Askestad et al. (2019), for example, draw the same conclusion with regard to the krona. This does not mean that changes in exchange rates are completely random. As shown in Figure 5, the krona has strengthened and weakened in waves. But while such waves can be explained to some extent in hindsight, as Engel and Wu (2024) show, financial markets are so complex, and the shocks to them and to the macroeconomy so large and frequent, that predictions about the future rarely materialise.

One conclusion is thus that the real exchange rate provides some information on how the nominal exchange rate is likely to develop in the future. But to understand the development of the krona, traditional macro data need to be complemented by careful analyses of financial flows.

## The development of the krona is understandable

The Swedish krona engages and concerns. When it weakens, it usually leads to discontent about foreign goods becoming more expensive. This affects manufacturers who rely on imported inputs in their production, and a weaker krona penalises consumers who get less value for money in other countries. However, a weak krona favours Swedish exporters, whose goods become cheaper abroad and thus more competitive. So, at least in the short term, there are both winners and losers from a weak or strong exchange rate.

A weak krona is usually seen as a problem because it makes us poorer. Compared with other countries, this is true there and then, but as Figure 5 shows, the krona has fluctuated widely over time, both weakening and strengthening. The research literature clearly shows that what matters for a country's long-term prosperity are strong institutions and an environment that creates incentives for education, innovation and development. Persistent differences in real income between countries are determined by such structural conditions, not by nominal exchange rate developments.

As I mentioned at the outset, the development of the krona is important for our prospects of achieving the inflation target, as it has direct and indirect effects on inflation and economic activity. The Riksbank monitors the development of the krona very closely and constantly conducts analytical work to better understand its driving forces. In this speech, I have highlighted how the exchange rate is affected by macroeconomic conditions as well as preferences and changes in financial markets. I have argued that the krona is very difficult to forecast but that it is certainly understandable.

## References

Artta, Katja, Marianne Nessén, Ettore Savoia and Anders Vredin (2025), 'Financial Flows and Exchange Rate Dynamics: Evidence from Sweden', Working paper no. 456, Sveriges Riksbank.

Askestad, Emil, Ana Maria Ceh, Paola di Casola and Annukka Ristiniemi (2019). 'Forecasting the krona', Economic Commentary, no. 12, Sveriges Riksbank.

Bacchetta, Phillippe and Pauline Chikhani (2021), 'On the Weakness of the Swedish Krona', Economic Review , no. 1, Sveriges Riksbank.

Belfrage, CarlJohan, Peter Gustafsson and Rachatar Nilavongse (2025), 'The trend development of the real exchange rate', Staff memo, Sveriges Riksbank.

Benigno, Gianluca and Pierpaolo Benigno (2008), 'Exchange rate determination under interest rate rules', Journal of International Money and Finance 27, 971993.

Bertaut, Carol, Bastian von Beschwitz and Stephanie Curcuru (2025), 'The International Role of the Dollar 2025 Edition', FEDS Notes, July 18.

Bylund, Emma, Jens Iversen and Anders Vredin (2024), 'Monetary Policy in Sweden After the End of Bretton Woods', Comparative Economic Studies, Volume 66, 535 -590.

Ca' Zorzi, Michele, Marcin Kolasa and Michał Rubaszeka (2017), 'Exchange rate forecasting with DSGE models', Journal of International Economics , 107, pp.127146.

ECB (2025), The international role of the euro , June 2025.

Engel, Charles and Steve Pak Yeung Wu (2023), ""Liquidity and Exchange Rates: An Empirical Investigation"", Review of Economic Studies 90 (5), 2395-2438.

Engel, Charles and Steve Pak Yeung Wu, (2024), ""Exchange Rate Models are Better than You Think, and Why They Didn't Work in the Old Days"", NBER Working Paper No. 32808, National Bureau of Economic Research.

Flam, Harry and Mats Persson (2024), Krona on the right track? An ESO report on the development of the Swedish currency 1993-2024 , Report to the Expert Group for Studies in Public Economics 2024:4. Ministry of Finance. In Swedish only.

Itskhoki, Oleg and Dmitry Mukhin (2021), 'Exchange Rate Disconnect in General Equilibrium', Journal of Political Economy Vol. 129, No. 8, 2183 -2232.

Krugman, Paul, Maurice Obstfeld and Marc J. Melitz (2023), International Economics: Theory and Policy , 12th Global Edition, Pearson.

Lagerwall, Björn and Marianne Nessén (2009), 'The long -term development of the krona', Economic Commentary No. 6, Sveriges Riksbank.

Lane, Philip R. (2007), 'The Swedish external position and the krona', International Economics and Economic Policy , 4(3), 263 -279.

Martin, Antoine and Thomas Moser (2024), 'The implementation and transmission of the SNB's monetary policy during the recent tightening cycle', 18 April 2024, Swiss National Bank.

Meese, Richard A. and Kenneth Rogoff (1983), 'Empirical Exchange Rate Models of the Seventies: Do They Fit Out of Sample?', Journal of International Economics 14.1-2, 3-24.

Nelson, Rebecca M. and Martin A. Weiss (2022), 'The U.S. Dollar as the World's Dominant Reserve Currency', IF11707.4.pdf.

Nordström, Amanda (2022), 'Understanding the foreign exchange market', Economic Review , no. 1, Sveriges Riksbank.

Rathke, Alexander and Tobias Straumann (2024), 'Made in Frankfurt? The Monetary Policy of the Swiss National Bank Since 1973', Comparative Economic Studies, Volume 66, 591-619.

Rosén, Gustav and Anders Vredin (2025), ""Is it possible to understand exchange rate developments with a new model?', Staff memo, Sveriges Riksbank.

Sizova, Elizaveta, Olav Syrstad and Ingebjørg Hansen Sævareid (2025), 'Rebalancing of Currency Hedging and the Impact on Exchange Rates'. Available at SSRN: https://ssrn.com/abstract=5143899.

Sveriges Riksbank (2023), 'The krona will strengthen in the medium term', article in Monetary Policy Report, September 2023.

Åkerman, Anders (2023), ""Strong government finances may have created our weak krona"", DN debatt, 28 September 2023. Only in Swedish.",Anna Seim
https://www.bis.org/review/r251127c.htm,"Michael S Barr: The case for strong, effective banking supervision","Speech by Mr Michael S Barr, Member of the Board of Governors of the Federal Reserve System, at the Alan Meltzer Speaker Series, Kogod School of Business, American University, Washington DC, 18 November 2025.",2025-11-18 00:00:00,"For release on delivery 10:30 a.m. EST November 18, 2025

The Case for Strong, Effective Banking Supervision

Remarks by

Michael S. Barr

Member

Board of Governors of the Federal Reserve System

at

Alan Meltzer Speaker Series Kogod School of Business American University

Washington, D.C.

I am pleased to be here today to discuss a core part of the Federal Reserve's mission: banking supervision. 1   Much of what the Fed does to conduct monetary policy, promote a stable financial system, provide a safe and efficient payments system, and support consumers and community development depends on a healthy banking system. Lending fuels entrepreneurship, helps families buy homes, and enables communities to thrive-all critical aspects of a healthy economy.  Ensuring banks operate in a safe and sound manner is essential because the banking system sits at the center of the economy. That is why banks' risk-taking must always be guided by clear guardrails, underpinned by effective banking supervision.

We need these guardrails because experience shows that market discipline alone does not prevent excessive risk-taking by banks. 2   As I've noted before, time and again, periods of relative financial calm have led to efforts to weaken regulation and supervision. 3   This has often had dire consequences, as we saw prominently during the Global Financial Crisis.

In the midst of that crisis, I saw first-hand in my own community in Michigan what weak regulation and supervision could mean: foreclosed homes, shuttered businesses, and lost jobs.  According to the Federal Reserve Bank of Chicago,

Michigan's unemployment rate was 14.9 percent in 2009, meaning one in seven workers

1 The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.

2 For example, in 2008 Alan Greenspan testified before Congress that he had 'found a flaw' in his ideology of trusting markets to self-correct.  Alan Greenspan, 'The Financial Crisis and the Role of Federal Regulations: Hearing before the Committee on Oversight and Government Reform,' testimony delivered to the 110th Congress 55-764, Washington, DC, October 23, 2008,

https://www.govinfo.gov/content/pkg/CHRG-110hhrg55764/html/CHRG-110hhrg55764.htm.

3 Michael S. Barr, 'Booms and Busts and the Regulatory Cycle' speech delivered at The Brookings Institution, Washington, DC, July 16, 2025,

https://www.federalreserve.gov/newsevents/speech/barr20250716a.htm.

were out of jobs. 4   Nationwide, the consequences were immense: nearly 9 million jobs lost, 8 million homes foreclosed upon, and a $17 trillion loss in household wealth. 5

We are now, I believe, at a moment of inflection in the regulatory and supervisory approaches that help keep banks healthy.  There are growing pressures to weaken supervision-to scale back examiner coverage, to dilute ratings systems, and to redefine 'unsafe and unsound'-in ways that will make it harder for examiners to act before it is too late to prevent a build-up of excessive risk.  These pressures present real dangers to the American people.

## The Mission of Banking Supervision

Let me begin with the mission of bank supervision, which is to promote a safe, sound, and efficient banking system that supports a strong economy. 6   Our banking system relies on trust.  That trust is earned when banks behave responsibly and when supervisors effectively perform their statutory duties.  These duties include verifying that banks are operating soundly and identifying and addressing weaknesses before they threaten the solvency of particular banks and possibly spread through the financial system.  Supervision also ensures compliance with laws and regulations that safeguard the integrity of the banking system.  This reduces the risk of misconduct or malfeasance, including real-world consequences of fraud, consumer abuse, cyberattacks, money

4 Martin Lavelle, 'How Tight Is Michigan's Labor Market?' Federal Reserve Bank of Chicago (Michigan Economy Blog), October 11, 2016, https://www.chicagofed.org/publications/blogs/michiganeconomy/2016/how-tight-is-michigans-labor-

market#:~:text=Michigan's%20labor%20market%20continues%20to,shorter%20and%20milder%202001% 20recession.

5 Christopher J. Goodman and Steven M. Mance, 'Employment Loss and the 2007-09 Recession: An Overview,' Monthly Labor Review (2011), https://www.bls.gov/opub/mlr/2011/04/art1full.pdf. See also https://www.stlouisfed.org/publications/regional-economist/july-2012/household-financial-stability--whosuffered-the-most-from-the-crisis and https://www.newyorkfed.org/newsevents/speeches/2017/dud171106.

6 See 'About the Fed,' https://www.federalreserve.gov/aboutthefed.htm.

laundering, and terrorist financing.  Trust in the banking system relies on strong supervision.

## Benefits of Supervision

Supervision delivers clear benefits not only for individual banks but also for the stability of the financial system as a whole.  Enforcement actions are associated with lower systemic risk, and research shows that banks subject to more oversight are safer and just as profitable as their peers. 7   While supervision does impose costs, it is most effective when calibrated to the risks each institution poses.  More closely supervised banks tend to experience steadier income and fewer loan losses, making them more resilient during times of stress, when contagion risks are greatest. 8

Supervision is critical to the Federal Reserve's mission to promote the stability of the financial system and contain systemic risk.  A macroprudential perspective-where we look across the entire banking system for correlated risks-complements traditional microprudential oversight where we examine individual banks.  This is done by focusing on risks that threaten financial stability and the banking system's core functions: credit, payments, and intermediation.  Our economy depends on a strong and stable financial system, which makes banking supervision essential for every household and business.

## The Foundations of Effective Supervision

Effective supervision begins with appropriate regulation as a foundation. Regulation provides the rules of the road that establish minimum capital levels, liquidity requirements, and define permissible activities.  But regulation alone is not enough.

7 Beverly Hirtle, Anna Kovner, and Matt Plosser, 'The Impact of Supervision on Bank Performance,' Journal of Finance 75, no. 5 (2020): 2,765-2,808, https://doi.org/10.1111/jofi.12964.

8 Hirtle, Kovner, and Plosser, 'The Impact of Supervision on Bank Performance,' 2798-99.

Supervision is necessary to ensure banks stay on the road and comply with the rules, especially as conditions shift and new risks emerge.

Effective supervision depends on its human capital.  The knowledge necessary to be an effective examiner comes from both formal training and through an accumulation of on-the-ground practical exposure.  Supervisory staff carry responsibility for risk identification and analysis and execution of examinations to assess whether a firm truly understands its risks, whether its governance and controls are effective, and whether its capital and liquidity are sufficient for its business model.  Institutional knowledge and experience-based judgment are critical for supervisors' ability to manage these responsibilities.  They take time to develop and cannot be easily replicated.

Effective supervision also requires moving with speed, force, and agility appropriate to the risks posed.  This requires institutional commitment to act swiftly as risks emerge, using supervisory tools decisively, and adapting to shifts in markets or the economy. 9

## Effective Supervision Under Pressure

Beyond these foundations, effective supervision is based on numerous other factors.  Today I will outline key components of strong, effective supervision that are at risk of being seriously weakened in the current environment.

A credible ratings framework. First, effective supervision requires a credible rating system. 10   A credible rating system incentivizes firms to promptly remediate

9 Michael S. Barr, 'Supervision with Speed, Force, and Agility,' speech delivered at the Annual Columbia Law School Banking Conference, New York, NY, February 16, 2024, https://www.federalreserve.gov/newsevents/speech/barr20240216a.htm.

10 Banks receive ratings that quantify their safety and soundness based on supervisory exams.  Ratings evaluate banks' performance on key risks, including their capital and liquidity positions and management quality.

weaknesses by translating supervisory assessments into objective outcomes that matter for management and boards of directors.  It ensures consistency across institutions, supports transparency in how risks are evaluated, and anchors supervisory discipline.

Crucially, a credible rating system looks beyond immediate financial metrics to the quality of a firm's governance, internal controls, and risk management practices. 11 Weak management rarely shows up first as a capital or liquidity problem.  Rather, it becomes evident through inconsistent processes, inadequate escalation of supervisory concerns, unclear lines of accountability, and organizational blind spots that, over time, allow risks to accumulate.  These weaknesses can prevent management from seeing and effectively acting on emerging risks.  A ratings system that captures only past actions that have resulted in observable financial harm is inherently backward-looking.  It will miss the risks of what may come.

Unfortunately, the framework for supervisory ratings is currently being modified in ways that diminish its strength and credibility.  For example, earlier this month, the Federal Reserve Board issued its final rule making changes to the Large Financial Institution (LFI) rating system. 12   Poor performance is being deemphasized, which is tantamount to grade inflation, a problem this academic audience understands.  As I noted in my dissent, I believe these changes reduce incentives for large banks to fix serious

11 See, for example, key findings that the Management component of CAMELS ratings has significant predictive power for future bank risk/performance.  Lewis Gaul and Jonathan Jones, 'CAMELS Ratings and Their Information Content,' OCC Working Paper WP-2021-01 (Office of the Comptroller of the Currency, January 2021), https://www.occ.treas.gov/publications-and-

resources/publications/economics/working-papers-banking-perf-reg/economic-working-camelsratings.html.

12 Board of Governors of the Federal Reserve System, 'Federal Reserve Board Finalizes Changes to Its Supervisory Rating Framework for Large Bank Holding Companies,' press release, November 5, 2025, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20251105a.htm.

management problems. 13   They will also allow firms with significant governance weaknesses to expand or acquire other enterprises, raising the chance and cost of future failure.  Changes to the LFI rating system also reduce supervisory attention on compliance matters for the largest banks.  As such, bank holding companies could have, for example, seriously deficient consumer compliance programs but still be considered well managed.  Further, the revisions remove the presumption that large firms with significant deficiencies must face an enforcement action-a move that could significantly weaken accountability for poor practices.  And in taking this action, the Board ignored a more moderate reform option that would have established a composite rating for large bank holding companies.

In addition, I understand that efforts are currently underway to modify the CAMELS rating system, the interagency framework used by supervisors to assess banks' overall condition. 14   Some have proposed changes that would effectively diminish the weight assigned to the management component.  I believe that such a move would be misguided and shortsighted.  The 'Management' rating is not simply one item among six; it is the element that ties the others together.  It measures the quality of governance, risk identification, internal controls, and the institution's ability to respond to emerging threats. 15   Strong management can compensate for unexpected stress, whereas weak

13 'Statement on Large Financial Institution Rating Framework by Governor Michael S. Barr,' press release, November 5, 2025, https://www.federalreserve.gov/newsevents/pressreleases/barr-statement20251105.htm.

14 CAMELS evaluates six components:  Capital Adequacy, Asset Quality, Management, Earnings, Liquidity, and Sensitivity to Market Risk.  Each component is rated on a scale from 1 to 5, and together they form the institution's composite rating, which supervisors rely on to evaluate safety and soundness. See Board of Governors of the Federal Reserve System, 'Uniform Financial Institutions Rating System,' SR letter 96-38 (December 27, 1996), https://www.federalreserve.gov/boarddocs/srletters/1996/sr9638.htm.

15 See Gaul and Jones, 'CAMELS Ratings and Their Information Content' (finding that Management rating is most strongly correlated with composite rating of all CAMELS components and has significant predictive power for future bank performance and risk measures).

management can magnify even modest vulnerabilities.  Deemphasizing the rating system's focus on management could lead to significant increases in risk, even in institutions that look good on paper.

Furthermore, in October, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) proposed a rule that would limit the issuance of enforcement actions for 'unsafe or unsound practices.' 16   This would have the effect of making it harder for supervisors to issue an enforcement action and compel a bank to fix its flaws.  This effectively ties examiners hands.  The proposed rule would also limit the issuance of matters requiring attention, or MRAs, which are supervisory findings used to prompt a bank to act quickly to fix problems before they become enforcement actions.  The new standards for issuing enforcement actions and MRAs would center on a narrow definition of ' material financial risk' and exclude material nonfinancial risks except in limited circumstances, such as violations of law.

To put this into context, under the standard established by this proposed rule, a bank with woefully deficient controls to prevent money laundering or discrimination would not necessarily receive an MRA requiring the bank to correct the situation unless the bank had actually violated the law or supervisors were able to identify a material financial harm that had already occurred due to the lapse in controls or that could be shown to likely cause such harm.  Waiting to act until the bank, its customers, or potentially the financial system have been harmed is not a responsible approach to risk

16 Unsafe and unsound practices would be defined under Section 8 of the FDIA as any act, practice, or failure to act that deviates from generally accepted standards of prudent banking and either causes material harm to an institution's financial condition or, if continued, would be likely to do so or pose a material risk to the Deposit Insurance Fund.  See https://www.federalregister.gov/documents/2025/10/30/202519711/unsafe-or-unsound-practices-matters-requiring-attention.

management or supervision.  Bottom line-under this proposal, examiners will issue fewer MRAs, even where financial and operational risks have been identified.  This will also lead the agencies to issue fewer enforcement actions.  I fear that the Fed may head down a similar, or even worse, path, further tying supervisors' hands.

Furthermore, I am concerned about an initiative that will allow the banks themselves to decide whether a supervisory finding or requirement imposed by an enforcement action should be lifted.  Under this approach, if a bank had a satisfactorilyrated internal audit function, that internal audit function would have the ability to decide if the bank had appropriately remediated a deficiency identified in the supervisory finding or enforcement action.  A bank's internal audit function would essentially displace validation by Federal Reserve examiners. Examiners would not independently determine whether the terms of the supervisory findings or enforcement action provisions had been met, or whether the bank's changes were sustainable.  A parallel approach was tried at the Federal Housing Finance Agency (FHFA), where the internal audit function of Fannie Mae and Freddie Mac was permitted to 'validate' remediation of MRAs, and FHFA's supervisory division sometimes accepted that validation in closure determinations without independent validation.  In 2018, the FHFA's inspector general found this problematic, and warned that allowing such discretion 'without a predicate supervisory conclusion … creates the risk that … assessments … will be impaired.' 17

17 Federal Housing Finance Agency: Office of Inspector General, FHFA Requires the Enterprises' Internal Audit Functions to Validate Remediation of Serious Deficiencies but Provides No Guidance and Imposes No Preconditions on Examiners' Use of That Validation Work (FHFA: OIG, March 2018), https://www.fhfaoig.gov/Content/Files/EVL-2018-002\_Redacted.pdf.

This is a bad idea for bank prudential supervision, and to be clear, will not be implemented in the consumer compliance function.

Forward-looking supervision. A second component of effective supervision is that it must be forward-looking. 18   The purpose of supervision is to prevent risks from becoming problems that harm banks and the public.  By anticipating vulnerabilities and prompting early action, supervisors use tools such as stress testing and scenario analysis to prevent problems from escalating.  In contrast, backward-looking supervision often detects weaknesses only after they become serious problems.  Forward-looking approaches, grounded in judgment and horizontal comparisons, are more effective in promoting the safety and soundness of individual banks and safeguarding financial stability.  In short, supervision needs to see and point out how weak risk management can lead a bank to be vulnerable to unanticipated shocks.

Stress tests illustrate this principle clearly: they are supposed to provide a rigorous way to assess resilience under severe but plausible conditions that may occur in the future.  Supervisory stress tests are structured exercises conducted by supervisors to evaluate how a bank's capital and earnings would perform under adverse macroeconomic scenarios-such as a sharp rise in unemployment, a collapse in asset prices, or a severe market disruption.  They are designed to test the soundness of a bank's balance sheet and to ensure that it could continue to operate and support the economy even in times of stress.  These tests help to uncover vulnerabilities at individual banks and across the financial system.

18 Tobias Adrian, Marina Moretti, Ana Carvalho, Hee Kyong Chon, Fabiana Melo, Katharine Seal, &amp; and Jay Surti, 'Good Supervision: Lessons from the Field,' IMF Working Paper WP/No. 23/181 (International Monetary Fund, September 2023): 18-20, https://doi.org/10.5089/9798400253782.001.

In October, the Federal Reserve proposed several changes to our heretoforesuccessful stress testing program. 19   I noted then that the proposed changes risk turning the stress test into a rigid exercise that offers false confidence by producing overly optimistic results driven by less conservative modeling and opportunities for banks to game the process. 20   The proposed changes would weaken capital requirements and erode incentives for strong independent risk management.  Weaker stress tests mean worse supervision.

Another valuable forward-looking tool that has been criticized lately is the use of horizontal reviews, supervisory examinations focused on a specific topic across multiple banks simultaneously.  This technique allows supervisors to spot emerging risks, helping supervisory frameworks remain proactive rather than reactive.  Because financial risks develop and change at a faster pace than regulation, horizontal reviews are valuable to compare practices and outcomes across banks, identifying patterns of systemic or interfirm amplification that might otherwise go undetected. 21   Just as importantly, horizontal reviews promote consistency and fairness in supervisory judgments.  They are not meant to impose rigid benchmarks or uniform expectations, but rather to shed light on emerging vulnerabilities, highlight sound practices, and ensure that judgments are grounded in comparable evidence.  Severely limiting their use would constrain supervisory insight and weaken the ability of supervisors to address emerging problems.

19 See https://www.federalreserve.gov/aboutthefed/boardmeetings/enhanced-transparency-and-publicaccountability-proposal-frn.pdf.

20 'Statement on Proposals to Enhance the Transparency and Public Accountability Of the Board's Stress Testing Framework By Governor Michael S. Barr,' press release, October 24, 2025, https://www.federalreserve.gov/newsevents/pressreleases/barr-statement-20251024.htm.

21 'Horizontal reviews and benchmarking provide a cross-sectoral perspective of risks, enable a deeper review of certain topics and promote consistency in the exercise of expert judgment...Horizontal reviews that focus on a specific issue across banks are increasingly used for a proactive, forward-looking supervisory approach.'  See https://www.bis.org/bcbs/publ/wp45.pdf at 2.

A strong supervisory staff. Finally, effective supervision requires skilled supervisory staff.  The strength of a supervisory system depends not only on its policies and tools, but also on the expertise, capacity, and judgment of the people who implement them.  Adequate staffing-measured both by headcount and experience-ensures that supervisors can conduct thorough examinations, identify emerging risks early, and respond swiftly to signs of instability.  It also supports the institutional memory and continuity needed to assess complex financial institutions over time.  Having sufficient and experienced staff is crucial.

Staff at both the Federal Reserve Board and the Reserve Banks play distinct but complementary roles in safeguarding the banking system.  Board staff in Washington, D.C., focus on risk identification, oversight, consistent policy, horizontal reviews, and coordination across the entire banking system.  Most Board supervisory staff who focus on day-to-day supervision of banks work on banks with assets exceeding $10 billion rather than community banks.  Reserve Bank examiners conduct most day-to-day supervision of individual banks and holding companies.  Together, these efforts form an integrated supervisory framework. 22

Recently announced plans to reduce staffing in the Board's Supervision and Regulation division by 30 percent by the end of 2026 will impair supervisors' ability to act with the speed, force, and agility appropriate to the risks facing individual banks and the financial system.  Such a drastically reduced staff will slow response time for the public and the banks themselves, limit supervisory findings and enforcement actions, and

22 'Understanding Federal Reserve Supervision,' Board of Governors of the Federal Reserve System, last modified April 27, 2023, https://www.federalreserve.gov/supervisionreg/understanding-federal-reservesupervision.htm.

erode supervisors' ability to be forward-looking.  Losing experienced supervisory staff with institutional knowledge also means the system will have diminished capacity to manage crises when they arise.  Among other things, the financial crisis showed that the Fed's bank supervision had failed to keep up with the growth in the size and complexity of the banking system, and it took nearly a decade afterward to build up this capacity. Now it is being gutted, practically overnight.

The impact of these staffing cuts is compounded by reductions at other supervisory agencies.  Deep reductions in force are also underway at the FDIC, the OCC, and the Consumer Financial Protection Bureau (CFPB), with the CFPB recently announcing that it would not seek any funding for the foreseeable future. 23   It is difficult to argue, as some have, that the Federal Reserve can rely solely on the work of other agencies in its holding company evaluations when those agencies are also experiencing significant contraction.

## Cumulative Effect of Weakened Supervision

Let me close by emphasizing that I support the healthy evolution of banking supervision.  It is both natural and appropriate to regularly assess supervisory approaches and tools over time.  After periods of crisis, regulators logically strengthen oversight to prevent a recurrence.  After periods of relative stability, there is often pressure to lower the guardrails put in place.  Adjustments can be constructive, but they must be made with foresight and care to preserve the hard-won resilience of the financial system.

23 Katanga Johnson and Weihua Li, 'Trump Cuts Thousands of Wall Street Cops While Markets Swing,' Bloomberg ,  May 7, 2025, https://www.bloomberg.com/news/articles/2025-05-07/trump-s-layoffs-cut-morethan-2-300-from-us-bank-and-markets-regulators?sref=zNmRQ0gk.

Today I have outlined several essential components of robust banking supervision that, I believe, are being altered without sufficient appreciation for the consequences of these actions.  Weakening any one of these elements diminishes supervisory effectiveness; taken together, the cumulative impact could be profoundly damaging to banks and destabilizing for the financial system.

History reminds us that we have seen this pattern before, including in the financial crisis. 24   Periods of weakened supervision have often preceded episodes of financial excess and instability.  The erosion of supervisory resources, the diminished focus on governance and controls, the weakening of forward-looking tools, and the constraints placed on supervisory action all undermine supervisors' ability to adequately protect against excessive risk taking.  When coupled with broader deregulatory momentum, these trends create a dangerous environment for both institutions and the economy at large.

The vulnerabilities that weaker supervision and regulation create may not be visible in the short term.  They rarely are.  But experience tells us that the bill always comes due.  The only question is when, and how high the cost will be.

24 Michael S. Barr (2025), 'Booms and Busts and the Regulatory Cycle.'",Michael S Barr
https://www.bis.org/review/r251127k.htm,"Gabriel Makhlouf: Better rules, better outcomes - the next evolution in financial regulation","Remarks by Mr Gabriel Makhlouf, Governor of the Central Bank of Ireland, at the Financial System Conference 2025, Dublin, 25 November 2025.",2025-11-25 00:00:00,"## Gabriel Makhlouf: Better rules, better outcomes - the next evolution in financial regulation

Remarks by Mr Gabriel Makhlouf, Governor of the Central Bank of Ireland, at the Financial System Conference 2025, Dublin, 25 November 2025.

* * *

Good morning, welcome to Dublin, and welcome to our 4th Financial System Conference.

Last month, at the IMF Annual Meeting and the G20 gathering of Finance Ministers and Central Bank Governors, the mood was clear: we are navigating a world that is more fragmented and more contested than at any point in recent decades, presenting clear challenges to the highly interconnected global economy and financial system.  Amidst those challenges, we've seen resilience, but beneath the surface lie familiar vulnerabilities - stretched valuations, rising sovereign debt burdens, and an increasingly important non-bank financial sector - all interacting with rapid advances in technology.

In the context of such a world, I firmly believe the work of central banks and regulators matters now more than ever, delivering on our important mission of maintaining monetary and financial stability, while ensuring the financial system is operating in the best interests of consumers and the wider economy.

Effective and efficient regulation and supervision are among the most important contributions we can make to stability, to resilience, and to confidence in the financial system, ensuring that consumers and investors are protected and that they have trust in a sector that plays such an important role in their daily lives.

When I joined the Central Bank six years ago, we were on the cusp of this rapidly uncertain, challenging and changing world. I spoke then about the importance of building a stronger institution, one that was more forward-looking, more connected to those it serves, and confident in its purpose.

We set out to transform the Central Bank, not only in what we do, but in how we think, how we engage, and how we make decisions. Over that time, we have sought to operate more effectively, to engage with stakeholders more regularly, and to regulate with a focus on delivering for the people of Ireland, Europe, and around the world, given the global nature of the Irish financial services sector.

That commitment was captured in our 2021 strategy.

It was built around the goals of being more future-focused, more open and engaged, and transformational in the way we deliver our key safeguarding functions.

It was about delivering better outcomes.

The years that followed have tested every institution in Ireland, the EU and around the world.  Yet through challenge and change, through the shifts and the shocks - whether

from technology, geopolitics, economic fragmentation, or the changing nature of society and the financial system - the Central Bank has continued to evolve.

We have strengthened our frameworks, improved transparency, and made meaningful progress in how we engage with firms, the public, and our European partners.

And, as I will outline today, we will continue to do so, continuing to strengthen and continuing to evolve.

The experience of the past few years has reinforced my view that a strong regulatory system does not depend on the number of rules, but on the quality of those rules, the effectiveness of their application, and the confidence they inspire.

At our inaugural Financial System Conference, three years ago, I outlined the Central Bank of Ireland's regulatory philosophy. In my remarks, I set out what we expect of ourselves and of the firms we supervise. It was not a treatise about rules but a speech about behaviour, culture, and intent.

Our regulatory philosophy is built on six principles:

- First, we are forward-looking in identifying risks;
- Second, we are connected to those we serve;
- Third, we are proportionate in balancing costs and benefits;
- Fourth, we are predictable in our expectations;
- Fifth, we are transparent in our explanations; and
- Sixth, we are agile in adapting to changing environments.

That philosophy remains our compass.

These principles guide how we work, how we regulate, and, importantly, how we renew. They ensure that our frameworks remain effective, proportionate, and trusted even as the financial system, the regulatory system and the global order continues to evolve.

This year the world of financial regulation has been buzzing with phrases such as deregulation, de-supervision, modernisation and simplification. My preference is on continuing to focus on being forward-looking, connected, proportionate, predictable, transparent and agile, or, to put it another way, regulating and supervising well.

The challenge ahead is to apply our principles with discipline.

This will require the same openness and engagement we have tried to build over recent years, and the same agility that defines our philosophy.

For me, regulating well is not about loosening standards or dismantling the architecture that protects consumers and ensures financial stability. It is about making sure that what we do is clear, consistent, and coherent, so that rules are understood, applied predictably, and achieve their purpose without unnecessary burden or complexity.

To be clear: our mandate has not changed. The outcomes we seek have not changed. But in line with our strategy, in keeping with our philosophy, and in response to a

changing world, we are changing so we can continue to deliver on our mandate and our outcomes into the future. This was why one of our strategic goals in 2021 was to transform how we regulate and supervise to be more effective and more efficient while continuing to deliver the proportionality, predictability and transparency we are committed to.

So, what are we doing? And how will we continue to evolve?

## Regulating well: The Next Evolution

Over recent years, we have streamlined and, as a result, strengthened our supervision, authorisation, and engagement processes.

We have introduced a more efficient and effective supervisory approach, which remains, risk-based and outcomes focussed but is - importantly - more integrated across all our safeguarding outcomes, namely financial stability, consumer and investor protection, safety and soundness and the integrity of the system. Integration means firms and sectors hear one voice from us as well as more streamlined engagement and demands.

We have improved our external-facing processes including authorisations making them more transparent, more consistent, and more predictable. And we have heard positive feedback from firms going through the gate in terms of clarity and responsiveness as well as quicker turnaround times, which we do, importantly, without compromising on our robust standards. This is also reflected in better engagement and clarity in terms of our Fitness and Probity assessments.

Building on this work, we are going to continue to make authorisations more effective and efficient, including by further centralising these 'gatekeeping' functions. This should bring further consistency, further transparency and further effectiveness to what is an integral part of our regulatory framework.

The outcomes we achieved in our first Sandbox Programme represent a new model for innovation engagement, where collaboration accelerates safe innovation. The results we have seen validate our conviction that effective regulation requires open engagement with the innovation ecosystem, and when that ecosystem works together with a clear purpose, meaningful progress follows.

The way we make policy has also evolved.

The mortgage measures are a good example of regulation that learns in practice. Introduced in 2015, and evaluated annually, we reviewed them comprehensively in 2022 and decided to make some changes following an assessment that the balance of the benefits and costs had changed since they were first introduced. This shows how we evaluate and refine frameworks over time, drawing on data, evidence, and experience to maintain both resilience and access to sustainable lending.

Each initiative applies a test: is this necessary, proportionate, and effective?

We want to continue to evolve, and we will do so building on this same foundation.

While we have been focused on improving regulation and supervision, we certainly haven't done so in a vacuum. As part of our efforts to be more connected, we have been listening to you. Thank you for your submissions. While we probably won't agree on every point, I am heartened that our strategic aims of making the framework more straightforward without compromising on resilience and protections appear aligned.

And we haven't just listened, we have heard, and we are responding.

First, much of financial services policy, legislation and regulation comes from Europe. Therefore, at a European level, we are working actively with colleagues in other authorities on what is a wide-ranging agenda. I am confident it will result in tangible changes.

But our work does not stop in Europe.

High-quality regulation depends on coherence between domestic and European frameworks. As the European Union refines its single-market rulebook, Ireland's domestic requirements must evolve in step, ensuring that rules remain effective, proportionate, and complementary. In a highly digitalised and global marketplace, it also depends on clear, effective standards at the global level, which is why the Central Bank of Ireland will continue to be an active participant in international standard-setting across the full breadth of our mandate.

Across sectors, we are reviewing frameworks to ensure alignment with evolving EU law, coherence across domestic regimes, and proportionality in application. This includes work on funds, insurance, banking, governance, outsourcing, AML, and data reporting, all guided by our aim to make regulation clearer, easier to navigate and more straightforward, without weakening the protections it provides to consumers and investors or standards of prudence.

Let me give some examples.

In the insurance sector, the forthcoming reform of Solvency II provides an opportunity to recalibrate Ireland's insurance rulebook. The Bank will conduct a compatibility review of more than 50 domestic instruments to identify overlap, underlap, and opportunities for consolidation.

The establishment of the EU Anti-Money Laundering Authority and the directly applicable EU AML Regulation will replace a significant portion of Ireland's existing national AML framework. To ensure consistency, the Bank will retire or revise domestic guidance, including the 2021 sectoral guidelines, once the EU Regulation enters into force.

As we have brought in new regulations domestically, we are also reviewing our existing ones.

The introduction of the Individual Accountability Framework (IAF) and Senior Executive Accountability Regime (SEAR) are allowing us to review the Pre-Approval Controlled Function (PCF) framework to reduce administrative load while maintaining clarity of responsibility. Today we are publishing finalised proposals making it simpler to appoint

people to PCF roles on a temporary basis where needed and to consolidate our guidance to make it easier to follow. And as we had committed to, we will be conducting our review of SEAR in 2027.

We are going to review the corporate governance requirements in 2026 to remove duplication, improve alignment across sectors, and embed proportionality and clarity into governance design.

These are just some examples of what we are doing. In the coming weeks, we will communicate a list of our ongoing initiatives, a concise summary of the programmes we are delivering domestically. It will provide additional details on how each initiative will make our domestic regulatory framework more straightforward.

And while the individual projects may matter to some of you, what matters to me most is the discipline behind them: to review what we have built, to align with best practice while meeting domestic needs, and to ensure that rules continue to serve their purpose, while we remain focused on doing our job.

At its heart, regulating well is about mindset; creating the conditions where people inside and outside the Bank can engage openly, question intelligently, and contribute constructively. That discipline, the discipline of continuous learning, is what turns good intentions into better outcomes.

## Trade-offs and the discipline of good policy-making

Modern, high-quality regulation also requires humility.

Every decision involves trade-offs: between simplicity and precision, between flexibility and certainty, between speed and due process.

We must be honest about those choices.

A financial system as large and interconnected as Ireland's cannot be governed through one-page rules.

There will always be complexity as the sectors that we regulate can be complex, and the rules must be sufficient to manage that risk. Firms could certainly help themselves and their customers if they were more straightforward in the design, delivery and explanation of their products and services.

But if complexity must exist, it must at the very least be purposeful. When detail adds resilience, clarity, or fairness, it is justified. When it merely adds friction or confusion, it is not.

That is the essence of good policymaking, one which applies equally when we make new regulations or when we improve existing frameworks. Perfection is not the goal. The financial system is dynamic and regulation must evolve with it.

I accept that simple deregulation might deliver some benefits to some people but I prefer better and more efficient regulation that delivers positive outcomes to most people.

But I want to be crystal clear.

You would be wrong to confuse our efforts to make better policy and to improve our processes with a weakening of our approach to regulation and supervision. The standards we expect of regulated firms won't be lowered. We will not dial back our supervision. We will continue to take enforcement action where necessary.  And if changes to the risk landscape mean we have to introduce new rules or requirements, we will do so.

But we are committed to being more effective and efficient, removing unnecessary complexity and burdens, while maintaining the resilience and protections necessary for us to deliver on our mandate. Being straightforward in our actions and explanations will be a watchword for us.

## The road ahead

While we will set out some initiatives in the coming weeks, this is a journey, not an event.

We will consult on a new Regulatory Impact Assessment Framework next year, which will further embed evidence-based policymaking into our processes and support us to ensure the orderly and proper functioning of financial markets.

And we will continue to engage actively with others on how to streamline the European rulebook in a way that strengthens, rather than fragments, the Single Market.

But as I said, a commitment to regulating well and being more straightforward does not mean a commitment to no new regulation; rather, it means ensuring that each new measure is well-designed, well-justified, and well-understood.

This will make us better at what we do: identifying risks, allocating resources, and explaining our choices.

## Conclusion

Our preference for simplicity cannot be blind to the complexity that defines modern life.

The financial system does not stand apart from society; it reflects it.

And the complexity we have to manage reflects the complexity of our societies: interconnected, fast-moving, technology-driven, and global.

Our task is to manage that complexity responsibly, not by seeking to make everything simple, but by ensuring that what we do is proportionate and understandable.

That is what regulating well and supervising well ultimately mean for me: ensuring clarity of purpose, coherence of process, and consistency of principle.

As the financial system continues to evolve, through digitalisation, artificial intelligence, and new forms of intermediation, the need for clear, trusted, and agile regulation will only grow. The Central Bank's role is to anticipate these changes, to respond to them with purpose, and to ensure that Ireland's financial system remains resilient, and delivers in the best interest of our citizens and economy.

Robust, efficient and effective regulation and supervision is not a luxury; it is a necessity and one of the most important ways we can contribute to resilience at home and confidence abroad.

When we regulate well, we strengthen the foundations of confidence: firms can understand the rules; consumers can trust the system and exercise their rights effectively within it; and society can see that regulation is working in its interest.

If we keep faith with that approach - if we continue to challenge ourselves, to be humble about the value of learning continuously, and to evolve our frameworks in a disciplined way - then I am confident that the financial system will continue to work well, whatever the external environment throws at us.

I started my remarks today by reminding us of the six principles we apply to our work. Let me finish by also reminding us of the helpful clarity provided by our founding legislation, and which guides us in our work: that the constant and predominant aim of the Central Bank of Ireland shall be the welfare of the people as a whole.

I hope you enjoy the conference.",Gabriel Makhlouf
https://www.bis.org/review/r251127j.htm,François Villeroy de Galhau: The competitiveness of the banking sector - a few insights into a major challenge for France and Europe,"Speech by Mr François Villeroy de Galhau, Governor of the Bank of France and Chairman of the Autorité de contrôle prudentiel et de resolution (ACPR), at the ACPR conference, Paris, 25 November 2025. ",2025-11-25 00:00:00,"

## Speech



## The competitiveness of the banking sector: a few insights into a major challenge for France and Europe

Published on the 25th of November 2025

ACPR Conference

Paris, 25 November 2025

Ladies and Gentlemen,

I am delighted to welcome you to this year's ACPR Conference focusing on the resilience of the financial sector and, on this fifteenth anniversary, the ACPR itself is a fine example of resilience. I would like to kick off this morning with an essential component, namely the competitiveness of the French and European banking sector. Granted, from a legal perspective, this is not part of the ACPR's mandate, but there is no need for any change in legislation for this subject to be of long-standing importance for us too: it relates to the strength and innovative capacity of our financial system. It lies at the heart of our economic sovereignty and needs to be treated seriously as well as with clarity. First, let us consider the facts: French banks are financially sound aside from a temporary lag in profitability due to the predominance of fixed-rate loans, however the real challenge is at the transatlantic level (I). Next, let us analyse certain explanations that are often put forward - regulation and payments - with discernment (II). Lastly, let us broaden the outlook around two decisive drivers, i.e. the size of financial institutions and public support (III).

## I. The facts: structural soundness and a transatlantic challenge

## 1.1 A temporary lag, reflecting a protective fixed-rate model

Let us begin with a lucid but nuanced overview. Yes, French banks are currently lagging behind their European counterparts in terms of their profitability ratios. Since interest rates began to rise in 2022, a difference has appeared in the asset yields between French and European banks.

image ImageThématique Banques Catégorie Discours

## LES ACTIFS ET LES CAPITAUX PROPRES DES BANQUES FRANCAISES SONT MOINS RENTABLES QUE CEUX DES BANQUES EUROPEENNES COMPARABLES





ACPR Conference 2025

Return on equity is also lower, averaging 6.7% over the same period for French banks, compared with 11.2% for comparable SSM banks. This lag is real, but it should be temporary. It is mainly due to the predominance of fixed-rate loans, limiting the growth in interest income when interest rates rise (inertia of previously low rates). Conversely, during periods of extremely low rates, French banks' interest income, although lower, declined less sharply than that of comparable Spanish or Italian banks. This French model has a short-term cost for institutions, but it protects borrowers and limits the cost of risk.

However, we need to look at the bigger picture. French banks remain among Europe's strongest, with high average capitalisation levels higher than their European counterparts - rigorous risk management, and a proven ability to adapt.



ACPR Conference 2025

They are also among the most diversified, with the share of income related to commissions and market activities nearly twice as high as their euro area peers, and universal business models that afford them valuable resilience.

## 1.2 The real challenge: bridging the transatlantic gap

The gap in competitiveness is most pronounced - and most worrying between European and American banks.



ACPR Conference 2025

European banks as a whole struggle to compete with large American institutions, which benefit from a dynamic domestic market with high margins, particularly in investment banking. The figures speak for themselves: US investment banking revenues are around three times higher than those of European banks.

## II. Examining with discernment two traditional explanations put forward by the sector: regulation and payments

2.1 Regulation: simplifying without deregulating

Financial regulation is frequently mentioned to explain the difference in competitiveness between European and American banks. Yes, the European regulatory framework is dense - sometimes overly - but no, the solution cannot lie in deregulation. Financial stability is a common good that aims to prevent the immeasurable costs of banking and financial crises. Let's not be too quick to forget 2008, especially when financial stability appears to be fragile, across equity, cryptocurrencies, and private credit markets. It is not a question of choosing between robustness and efficiency, but of reconciling the two. We need to aim for ambitious simplification: there is room for improvement in Europe for making things less complex without making them less secure. A year ago, right here, I put forward proposals to this effect. i

In this same spirit, we now need to review the simplification initiative launched at European level. Progress has been made in several areas, especially in supervision and reporting. The SSM has taken the first tangible steps in relation to the Next Level Supervision initiative: greater efficiency and focus on risk through digitalisation, standardised and faster processes, and fewer unnecessary charges. In early October, the European Banking Authority proposed 21 simplification measures to ease the reporting burden, which will be implemented in the very near future for the entities within its remit. These are a step in the right direction and we support their expansion and their effective rapid implementation.

On regulation itself, we have participated in the ECB's High-Level Task Force, and in December it will submit its proposals to the Commission to contribute to the overall 'review' next year. There are ways to simplify without deregulating, but this cannot involve imposing additional requirements on European banks: the results of the latest very stringent stress tests published on 1 August 2025 show that these banks are sufficiently capitalised, both collectively and individually. I am specifically referring to the removal of thresholds that trigger the maximum distributable amount related to MREL and leverage frameworks. I am also referring to the streamlining of the resolution framework by achieving a better fit with the TLAC international standard. We also need to rethink certain overly complex aspects of European regulation, such as the systemic risk buffer (SyRB), which does not exist anywhere else. There is scope for merging or even eliminating certain buffers.

Let's face it: there is also room for simplification at the national level. To cite just one example, the Banque de France and the ACPR remain more committed than any other institution to the fight against climate change, however, the reporting requirements in place for four years under Article 29 of the Energy and Climate Act (LEC29) specific to France are of very little use and fit very poorly with the related European provisions. Moreover, AI could help us to 'streamline' a lot of existing legislation in the future. ii

## 2.2 Digital euro and tokenisation: we must not fight the wrong battle

A second factor that is sometimes mentioned is payments, particularly with regards to digital currencies. And here again, erroneous debates must be avoided. The issue is not public versus private. It is rather Europe versus the United States. It is transatlantic, not intra-European.

We are indeed confronted with a twofold challenge to sovereignty : image ImageThématique Banques Catégorie Discours

-    Regarding payments: every day we use the services provided by two major US 'schemes' that account for 69% of all card transactions in the euro area (in the second half of 2024); although, fortunately, this rate is less than 30% in France thanks to the strength of the GIE Cartes Bancaires infrastructure.
-    Regarding currency: the US administration is promoting the surge in stablecoins, 99% of which are backed by the US dollar, raising the risk of 'privatisation' and 'dollarisation' of our currency. iii

Firstly, we actively and urgently support the development of a wholesale central bank digital currency, which will allow banks to benefit from settlement in a central bank money in a tokenised environment. It represents a decisive step forward in the modernisation of financial infrastructures and in European monetary sovereignty. And there is general consensus here, but it must go hand-in-hand with the development of a tokenised private currency, in euro, which could take the form of tokenised bank deposits or euro-based stablecoins issued by banks. Europe could have both, but it would be a terrible mistake to have neither.

As for retail payments, the digital euro is one of the keys to the solution. Let us move beyond the sometimes surprising excess of emotion and passion surrounding this issue. The Eurosystem is designing the digital euro in a logic of 'public-private partnership' with banks, which will play a central role in its distribution. It will not threaten European private payment solutions, but rather it will be a catalyst: we are fully behind Wero, which recently joined forces with other national mobile payment solutions (such as Bizum in Spain) within the EuroPA consortium. The digital euro will assist these solutions by facilitating the development of open and harmonised acceptance standards throughout the euro area. This partnership will thus strengthen the competitiveness of European banks; on the contrary, if we do not develop it, European dependence on US technology and financial giants will deepen.

## III. Broadening the outlook around two key drivers - size and public

## support

## 3.1 Size: a structural handicap

European banks are too fragmented; too small on a global scale. 45% of US bank assets are owned by the five largest banks, whereas in Europe, this ratio is only about 33%. Moreover, US banking group subsidiaries play a significant and increasing role in market activities and investment banking: they account for over 55% of investment banking commissions in Europe.

The size of European banks limits their ability to invest heavily in the technologies of tomorrow - artificial intelligence, quantum computing and cybersecurity - as these investments entail high fixed costs, which larger institutions can better absorb.

We must therefore remove the political and regulatory obstacles that hinder the creation of cross-border European champions - by reinvigorating the Banking Union. The Savings and Investment Union - it has not been stressed often enough - draws together the Banking Union and the Capital Markets Union, uniting them rather than pitting them against each other. We have more than a decade of effective SSM supervision behind us; it is high time that we learn from this experience so that liquidity and capital can flow more freely within banking groups and their subsidiaries in the Banking Union. We must revisit the criteria, which today are too strict, for granting waivers allowing for the consolidated management of liquidity requirements within European groups. And we must go further by removing Pillar 2 requirements for subsidiaries within the SSM and by introducing the possibility of waivers that favour the management of capital that is itself consolidated in Europe.

As for the deposit guarantee, rather than always chasing the dream of a complete system, of a 'fully-fledged EDIS', a decisive step would be to create a European liquidity support scheme, between national guarantee schemes, which would act as a safety net. I have already suggested it, as has my German colleague, Joachim Nagel. iv

## 3.2 The need for a public strategy

The banking and financial sector is a strategic strength for France and for Europe. And for France in Europe, since our country possesses the largest financial industry in Europe. It cannot be solely perceived as a source of risk or tax revenues. It must be recognised as a vector of sovereignty and competitiveness. This is certainly true in retail banking which often attracts more political attention - and is no less true in investment banking, which is crucial both for financing our three major transformations - digital technology and AI, decarbonised energy, and defence - and for boosting companies' equity capital in order to close our innovation gap.

The United States grasped this a long time ago. Its support for its financial institutions is strategic, even if excessive deregulation would be dangerous. And this is a lesson we have to learn. Over 25 years ago, Europe won its monetary sovereignty with the tremendous success of the euro. Today, faced with the current US administration's offensive, the Draghi   and Letta reports set out a clear path for a new 'leap in sovereignty'. But there will be no economic sovereignty without financial sovereignty. And that means consistent tax policies, moderating regulatory temptations, including at the national level, and a shared European ambition. v vi

**

The competitiveness of the French and European banking sector is a major strategic issue. It is not simply a matter of ratios or rankings. It affects our ability to finance our economy, support transitions and defend our model. We have the means: robust banks, committed regulators, a common and well-recognised currency. But we must remove the obstacles: complex regulations, market fragmentation, a lack of strategic vision. This is the ambition that we are committed to, working together, for a stronger European banking sector. Thank you.

Villeroy de Galhau (F.) (2024), 'Towards a realistic simplification: untying some of the knots in European banking regulations' , speech to the ACPR conference, 27 November. i ii

Loi n°2019-1147 du 8 novembre 2019 relative à l'énergie et au climat

- Villeroy de Galhau (F.) (2025), ' L'Europe a les moyens de la bonne réponse stratégique à la révolution de la monnaie ', interview with the journal Le Grand Continent, 25 September. iii

iv

Villeroy de Galhau (F.) (2025),

Financial services: The European

, speech at the Bruegel Annual Meetings, Brussels, 4

mysterious gap

September.

- Draghi (M.) (2024), The future of European competitiveness , September. v
- Letta (E.) (2024), Much more than a market , April. vi

## Download the full publication



The competitiveness of the banking sector: a few insights into a major... (PDF - 626.74 KB)

Updated on the 27th of November 2025

",François Villeroy de Galhau
https://www.bis.org/review/r251127i.htm,Eddie Yue: Opening remarks - 4th ASEAN+3 Economic Cooperation and Financial Stability Forum ,"Opening remarks by Mr Eddie Yue, Chief Executive of the Hong Kong Monetary Authority, at the 4th ASEAN+3 Economic Cooperation and Financial Stability Forum ""Fragmentation to resilience: macro-financial stability and regional Integration in ASEAN+3"", Hong Kong, 25 November 2025.",2025-11-25 00:00:00,"## Eddie Yue: Opening remarks - 4th ASEAN+3 Economic Cooperation and Financial Stability Forum

Opening remarks by Mr Eddie Yue, Chief Executive of the Hong Kong Monetary Authority, at the 4th ASEAN+3 Economic Cooperation and Financial Stability Forum ""Fragmentation to resilience: macro-financial stability and regional Integration in ASEAN+3"", Hong Kong, 25 November 2025.

* * *

Good morning, Watanabe-san, Tao, distinguished guests, colleagues, ladies and gentlemen.

This is the first time Hong Kong is hosting the forum. A warm welcome to you all including those that are here in Hong Kong in person and those joining us virtually from across the globe-to the 4th ASEAN+3 Economic Cooperation and Financial Stability Forum.

The theme of this year's Forum - ""Fragmentation to Resilience: Macro-financial Stability and Regional Integration in ASEAN+3"" - speaks directly to the defining challenges of our time, including rising geoeconomic fragmentation, disrupted supply chains and emerging financial vulnerabilities.

Yet, even as the external environment becomes more challenging, ASEAN+3 members have demonstrated a remarkable capacity to withstand shocks. Our region's economic growth has remained resilient despite the tariff shocks. Our financial markets have remained stable during recent episodes of global market volatility, and our currencies have been stable for most of the time.

This is a testament to the progress we have made over the past decades, including enhanced economic fundamentals, deeper local currency debt markets, and sound macro-financial policy. Importantly, progress in domestic reform and policy development is complemented by achievements in regional collaboration and integration.  For example, the effort to develop local currency debt market is supported by coordinated efforts such as the ABMI (ASEAN+3 Asian Bond Markets Initiative) and the EMEAP ABF (Asian Bond Fund) initiative. The vast majority of bonds issued in the region are now denominated in local currencies, making us much less vulnerable to external spillovers. More generally, according to the BIS, EM Asia is more integrated than any other EME region, which will act as buffers against global fragmentation.

But we cannot afford to be complacent. While tariff-related uncertainties have stabilised somewhat, the broader risks from the real economy and financial markets persist. The region also faces structural changes such as population aging, digitalisation and rise of AI, which present both opportunities and challenges.

To handle these challenges, domestic policies and reforms are of course important, but deepening regional cooperation also plays a key role, in at least three key areas:

First, deepen regional economic integration. A low hanging fruit is trade digitalisation, which can significantly streamline trade processes and empower SMEs to participate more fully in regional value chains. In Hong Kong, we have launched a number of initiatives to make trade finance more efficient and also accessible, including improving digital trade finance through the use of cargo data under Project Cargo , and leveraging x innovative technology to tokenise trade documents under Project Ensemble. Benefits from these initiatives can grow exponentially when more jurisdictions come onboard, and we hope that jurisdictions that are here today will be able to join hands and work on those initiatives together.

Second, expand the use of local currencies. While progress has been made, local currencies still play a relatively small role in the region's cross-border transactions and external financing, and the bulk of our trade invoicing remains denominated in foreign currencies. We need to continue to enhance regional payments integration and local currency settlement to boost cross-border efficiency and strengthening economic resilience. This requires continued investments in deepening local capital markets, developing hedging instruments, and ensuring financial infrastructures are interoperable across borders. At the HKMA, we have connected our Faster Payment System (FPS) with its counterparts in Thailand and Chinese Mainland in recent years, and have developed a cross-border wholesale CBDC platform jointly with other central banks. Again, these are initiatives that we hope to take forward with our ASEAN+3 colleagues.

Third, strengthen our regional financial safety net. The Chiang Mai Initiative Multilateralisation (CMIM) is a cornerstone of regional liquidity backstop. Ongoing effort to further strengthen and broaden the CMIM would further complement the safety net, and enhance the mechanism's readiness and financial credibility to respond very quickly to potential liquidity pressures in the region.

In all these endeavours, both AMRO and the BIS Asian Office play indispensable roles. AMRO's timely and high-quality macroeconomic surveillance enhances policy coordination among ASEAN+3 members and preparedness for external shocks. The BIS Asian Office serves as a regional hub that facilitates dialogue and cooperation among central banks in the region. The HKMA remains committed to strengthening our collaboration with both, to advance regional financial integration and resilience.

Today's Forum is a good example of that collaboration. I am confident that the discussions today-on macroeconomic risks, on the shifting global financial landscape, and also on the priorities for cooperation-will generate valuable insights that will guide our collective efforts in the years to come.

I wish you all a very productive and engaging Forum. Thank you.",Eddie Yue
https://www.bis.org/review/r251203d.htm,Christine Lagarde: Hearing of the Committee on Economic and Monetary Affairs of the European Parliament,"Speech by Ms Christine Lagarde, President of the European Central Bank, at the Hearing of the Committee on Economic and Monetary Affairs of the European Parliament, Brussels, 3 December 2025.",2025-12-03 00:00:00,"## Christine Lagarde: Hearing of the Committee on Economic and Monetary Affairs of the European Parliament

Speech by Ms Christine Lagarde, President of the European Central Bank, at the Hearing of the Committee on Economic and Monetary Affairs of the European Parliament, Brussels, 3 December 2025.

* * *

## Charts accompanying the speech

It is a pleasure to address this Committee for the fourth time this year.

Recent years have witnessed profound technological, geopolitical, and structural changes which continue to redefine our economic landscape. These shifts underscore not just the importance of improving Europe's resilience and competitiveness, but also the imperative to build lasting internal economic strength. 1

In our previous hearings, we examined this shifting global environment and its implications for the European economy. Today, I will focus my remarks on the instruments in our toolkit, in line with the topic you have selected for this hearing.

Before turning to these tools, let me first outline our assessment of the euro area economy and our current monetary policy stance.

## Outlook for the euro area and the ECB's monetary policy

The economy grew by 0.2% in the third quarter of the year, supported by robust domestic demand. The services sector continued to expand, boosted by tourism and a pick-up in digital services, as many firms stepped up efforts to modernise their IT infrastructures and integrate artificial intelligence into their operations. By contrast, manufacturing and exports were held back by higher tariffs, still-heightened uncertainty and a stronger euro.

Looking ahead, growth in economic activity should benefit from increased household spending and a resilient and more inclusive labour market - with the highest labour force participation rate since the start of the euro. Substantial infrastructure and defence spending are also expected to support economic activity. The global environment is likely to remain a headwind, as the impact of higher tariffs on euro area exports and manufacturing investment continues to unfold.

Risks to the outlook have become more balanced thanks to the EU-US trade deal reached over the summer, the ceasefire in the Middle East and progress in the USChina trade negotiations. At the same time, the outlook remains uncertain - owing to a still volatile global trade environment, a potential deterioration in financial market sentiment and geopolitical tensions.

Inflation remains close to our 2% medium-term target. According to Eurostat's flash estimate, inflation edged up slightly to 2.2% in November, mainly due to higher services

and energy inflation. Core inflation - excluding energy and food - was constant at 2.4%. Indicators of underlying inflation remain consistent with our 2% medium-term target.

The reduction in inflation towards our medium-term target has been supported by a gradual moderation in wage growth from its peak of 5.7% in the second quarter of 2023 to 3.9% in the same quarter of this year. Forward-looking indicators, such as the ECB's wage tracker and surveys on wage expectations, point to slower wage growth over the remainder of the year and the first half of 2026.

We expect inflation to stay around our 2% target in the coming months. Risks to the outlook continue to be two-sided, while uncertainty remains higher than usual owing to volatile global trade policies. The next Eurosystem staff projections, to be published on 18 December, will shed further light on the outlook for growth and inflation.

As our assessment of the inflation outlook was broadly unchanged, we decided at our October monetary policy meeting to keep the key ECB interest rates unchanged. We continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance. In particular, our interest rate decisions will be based on our assessment of the inflation outlook and the risks surrounding it, as well as the dynamics of underlying inflation and the strength of monetary policy transmission. We are not pre-committing to a particular rate path.

## The instruments in the ECB's toolkit

Let me now turn to the ECB's instruments.

As reconfirmed in our recent strategy assessment, we are committed to setting monetary policy such that inflation stabilises at our 2% target in the medium term. 2  Our primary monetary policy instrument is the set of three key ECB interest rates. However, we may also employ other instruments, as appropriate, to preserve the smooth functioning of monetary policy transmission and provide additional accommodation when interest rates approach their lower bound.

Effective transmission of our monetary policy stance across the euro area is critical for delivering on our price stability mandate. We must therefore remain attentive to situations in which cross-country differences in the impact of our policy on key economic variables become excessive or signal that the transmission mechanism is impaired. To address such concerns, we have developed tools to safeguard the smooth transmission of our monetary policy.

I will now briefly outline three key instruments in our monetary policy toolkit: Outright Monetary Transactions (OMTs), the technical features of which were announced in August and September 2012; 3   the Transmission Protection Instrument (TPI) announced in July 2022; 4   and the pandemic emergency purchase programme (PEPP) announced in March 2020. 5

Outright Monetary Transactions are designed to safeguard the transmission of monetary policy in all euro area countries. OMTs enable us to address severe

distortions in government bond markets which originate from, in particular, unfounded fears among investors of the reversibility of the euro. A necessary condition for OMTs is strict and effective conditionality attached to an appropriate European Stability Mechanism programme. 6

The Transmission Protection Instrument can be activated to counter unwarranted, disorderly dynamics in the market for securities issued in countries experiencing a deterioration in financing conditions not warranted by country-specific fundamentals. The Governing Council will consider a cumulative list of criteria to assess whether the countries in which the Eurosystem may conduct purchases under TPI are pursuing sound and sustainable fiscal and macroeconomic policies. The criteria include, among others, compliance with the EU's fiscal framework and an absence of severe macroeconomic imbalances.

The pandemic emergency purchase programme was launched and used in response to the COVID-19 shock, which affected all euro area countries, but to different degrees. The programme was designed with a dual role: on the one hand, it supported market functioning as well as the transmission of monetary policy; on the other hand, it enabled a substantial easing of the monetary policy stance to counter the serious downside risks to price stability posed by the pandemic.

In the face of the extraordinary economic and financial shock, the programme's flexibility - which allowed the pace and composition of purchases to be adjusted proved critical in stabilising markets, addressing impediments to transmission, supporting the economic recovery and safeguarding price stability. 7   As circumstances evolved, the size and pace of the PEPP were recalibrated, and reinvestments of maturing bonds were fully discontinued as of December 2024, contributing to the normalisation of our balance sheet. 8

Together, these tools demonstrate that the ECB's toolkit is adaptable to unprecedented challenges while remaining clearly within the scope of our monetary policy competence. Consistent with our commitment to transparency and accountability, we have engaged extensively with this Committee to explain our assessments and answer questions on these tools. This ongoing dialogue underscores our dedication to ensuring that our actions are thoroughly scrutinised and clearly understood by the public.

## Conclusion

To conclude - as also highlighted in our monetary policy strategy statement, the Governing Council will continue to respond flexibly to new challenges as they arise and will consider, as needed, new policy instruments in the pursuit of its price stability objective.

It is essential that other policies take the lead in strengthening Europe's prospects and reducing vulnerability to future shocks. This means creating the right conditions for Europe's sources of economic strength to reach their full potential - most notably by making the Single Market truly single.

In this context, I warmly welcome the European Commission's forthcoming package on capital market integration and supervision. These proposals are key for overcoming fragmentation, enhancing the efficiency of capital markets, and fostering innovation.

There are clear solutions at hand - now is the time to implement them.

- 1  Lagarde, C. (2025), ""From resilience to strength: unleashing Europe's domestic market "", speech at the 35th Frankfurt European Banking Congress, 21 November.
- 2  ECB (2025), The ECB's monetary policy strategy statement (2025).
- 3  ECB (2012), Introductory statement to the press conference  following the monetary policy meeting of the Governing Council on 2 August; ECB (2012),  Introductory statement to the press conference  following the monetary policy meeting of the Governing Council on 6 September; ECB (2012), ""Technical features of Outright "", , 6 September. Monetary Transactions press release
- 4  ECB (2022), "" "", , 21 July. The Transmission Protection Instrument press release
- 5  ECB (2020), ""ECB announces €750 billion Pandemic Emergency Purchase "", , 18 March. Programme (PEPP) press release
- 6  ECB (2012), "" Technical features of Outright Monetary Transactions"", op. cit.
- 7  Böninghausen, B. et al. (2022), ""The pandemic emergency purchase programme - an "", , Issue 8, ECB. initial review Economic Bulletin
- 8  For a detailed overview of holdings and expected redemption amounts, see the pandemic emergency purchase programme  page on the ECB's website.",Christine Lagarde
https://www.bis.org/review/r251203a.htm,Erik Thedéen: Independence must be earned every day,"Speech by Mr Erik Thedéen, Governor of the Sveriges Riksbank, at a seminar on central banking issues, hosted by the Sveriges Riksbank, Stockholm, 1 December 2025.",2025-12-01 00:00:00,"## Erik ThedØen: Independence must be earned every day

Speech by Mr Erik ThedØen, Governor of the Sveriges Riksbank, at a seminar on central banking issues, hosted by the Sveriges Riksbank, Stockholm, 1 December 2025.

* * *

Good afternoon everyone! It is good to see that there is so much interest in these seminars on central banking issues and I would like to take this opportunity to thank SNS for excellent cooperation. This is the second year in a row that we have done this and there is a saying that twice is a habit. As far as I'm concerned, we can happily go for three times. Then we can call it a tradition.

By way of introduction, I would like to make a few points that I think are important when discussing central bank independence. To begin with, I understand that there may be scepticism about elected representatives in a democracy handing over responsibility for important economic policy decisions to civil servants. It is a natural gut feeling. In fact, it is not unusual for public authorities to be given a large degree of autonomy in their dayto-day operations. But central bank independence generally goes further and there are good arguments in favour of it.

The question of central bank independence has a long history. You could say that it was already there at the start in 1668 when the Riksbank, the world's oldest central bank, was founded. The Riksbank has belonged to the Riksdag from the start, partly because the Estates in the Realm within the Riksdag wanted to restrict the royal power's ability to use the Riksbank's funds.

Views on independence have varied, but over the last three decades it has been recognised as particularly important. This is due to the problems of economic policy in the 1970s and 1980s. At the time, many countries were trying to control stubbornly high inflation, which also varied widely from year to year, causing major problems for households and businesses when making economic decisions. It also meant an ""arbitrary rearrangement of riches"", to use John Maynard Keynes' expression - that is, an unpredictable redistribution of wealth between different groups, for example, depending on whether you saved or borrowed.

Despite assurances that inflation would be combated, economic policy generally became too expansionary. Economic research showed that one of the fundamental problems was a lack of credibility - there needed to be a way for the political sphere to commit to bring inflation down. The solution was to delegate responsibility to a central bank and ensure that it focussed on achieving price stability, without regard to and interference from day-to-day politics.

New Zealand was the first country to introduce an inflation target combined with operational independence for the central bank in 1989. After that, a growing number of countries followed suit. The Riksbank was one of the first inflation-targeting central banks and acted in practice independently, although it was not until 1999 that its independence became more formalised. At around the same time, inflation slowed to a

low and stable level in many countries. We experienced a period of much more stable macroeconomic performance. There are several reasons for this positive development, but the independence of central banks was an important one.

A second point I would like to make concerns the very concept of an independent central bank. This can give the impression that we are talking about something binary -  either central banks are independent or they are not. And in the debate, arguments sometimes emerge that assume that central banks are separate from the rest of government and free to do what they want. This, of course, is not the case. Elected politicians have delegated responsibility to the central banks to carry out tasks independently and they decide what mandate to give to the central banks. No central bank is therefore fully independent - there is a principal who defines both the mission and the limits of independence.

It is also worth noting that independence in practice has several dimensions. How autonomously a central bank can actually carry out its tasks depends on a number of factors: how it is funded, how its governors are appointed and dismissed, how free they are to make decisions with the tools they have been delegated, and so on.

Delegation means that civil servants are given the responsibility to take important economic policy decisions. That, as I said, is the whole point. Politicians then scrutinise how the civil servants fulfil their mandates and hold them to account, and the public can form an opinion through media reporting. My third point is that scrutiny is fundamental to the democratic anchoring of independence and trust in the central bank. Therefore, the review needs to be well prepared and prioritised - by both sides. Policy makers must have sufficient resources and expert support when needed. At the same time, the central bank needs to be generous with information about its activities and open and clear about what decisions it makes and why. This is one of the main reasons why transparency has been a watchword at the Riksbank for a long time.

Nor can trust and support for independence be taken for granted. This is something the central bank has to earn every day by carrying out the tasks entrusted to it in a transparent, respectful and determined manner. Earning trust does not mean keeping the central bank popular with politicians or the public. A central bank does not always have to be liked for citizens to trust it. In fact, confidence can increase if the central bank takes decisions that are unpopular but necessary and responsible. Putting away the candy bowl is rarely popular, although everyone recognises that it can be a wise decision.

My final point concerns the link between independence and the central bank's mandate and the challenges that may be involved. At the heart of independence is monetary policy, which has a mandate based on a target for price stability. However, central banks usually have more tasks than monetary policy, such as promoting financial stability. Within these tasks, too, there are often reasons to allow the central bank to make independent decisions, but they also require more cooperation with the government and other authorities. This difference needs to be reflected in the central bank's mandate. In Sweden, the Sveriges Riksbank Act is therefore explicit about the tasks and powers of the Riksbank in various areas.

There is also a risk that independence may start to be questioned if the central bank focuses on, or is perceived to focus on, issues that are outside its mandate. This phenomenon is often referred to as 'mission creep' or 'mandate creep'. In short, this means that the central bank gradually expands its tasks or responsibilities beyond its original mandate, and without formal legislative support.

As a central bank, it is important to be vigilant and take this risk seriously, because it is easy to get carried away when new economic policy issues rise to the top of the agenda. Does this mean that the central bank should stay away from issues such as climate change, tariffs and fiscal policy initiatives? No, it does not. It all depends on the context. Climate change can be taken as an example here. Higher risks of extreme weather events imply, among other things, higher risks of recurrent supply disruptions and higher risks in the financial system. From this perspective, there are clear links to monetary policy and financial stability that are relevant for the Riksbank to discuss. However, the Riksbank should not interfere in the question of whether Sweden should invest in nuclear power or wind power, or in the size of the reduction obligation.

It is therefore important that there is a natural link to the central bank's mandate. Independence requires that the central bank stays within a well-formulated and welldefined mandate. And while an independent central bank may seem odd from a democratic perspective, it is a solution that creates good conditions for price stability and favourable economic development in the long term.",Erik Thedéen
https://www.bis.org/review/r251211d.htm,Tiff Macklem: Monetary Policy Decision,"Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada and Ms Carolyn Rogers, Senior Deputy Governor of the Bank of Canada, at the press conference following the monetary policy decision, Ottawa, Ontario, 10 December 2025.",2025-12-10 00:00:00,"## Tiff Macklem: Monetary Policy Decision

Opening statement by Mr Tiff Macklem, Governor of the Bank of Canada and Ms Carolyn Rogers, Senior Deputy Governor of the Bank of Canada, at the press conference following the monetary policy decision, Ottawa, Ontario, 10 December 2025.

* * *

Good morning. I'm pleased to be here with Senior Deputy Governor Carolyn Rogers to discuss today's monetary policy decision.

Today, Governing Council maintained the policy interest rate at 2.25%.

We have three main messages.

First, steep US tariffs on steel, aluminum, autos and lumber have hit these sectors hard, and uncertainty about US trade policy is weighing on business investment more broadly. But so far, the economy is proving resilient overall.

Second, inflationary pressures continue to be contained despite added costs related to the reconfiguration of trade. Total CPI inflation has been close to the 2% target for more than a year now, and we expect it to remain near the target.

Third, in the current situation, Governing Council sees the current policy rate at about the right level to keep inflation close to 2% while helping the economy through this period of structural adjustment. Nevertheless, uncertainty remains high and the range of possible outcomes is wider than usual. If the outlook changes, we are prepared to respond.

Let me expand on how we're interpreting the new information we received since we published our October . Monetary Policy Report

In November, Statistics Canada published broad revisions to Canada's economic growth numbers for 2022, 2023 and 2024. The revisions suggest the Canadian economy was healthier than we previously thought before we were hit by the US trade conflict. In particular, they suggest both demand and economic capacity were higher coming into this year. This may explain some of the resilience we're seeing in more recent data.

After falling 1.8% in the second quarter due to sharply lower exports, Canadian GDP grew 2.6% in the third quarter. This was much stronger than we expected, but largely reflected volatility in trade. Final domestic demand was flat in the quarter. We expect growth in final domestic demand to resume, but with an anticipated decline in net exports, GDP growth is likely to be weak in the fourth quarter before picking up in 2026.

The labour market is showing some signs of improvement. After declining through the summer, employment has posted solid gains for the past three months and the unemployment rate has declined to 6.5% in November. Since the start of the year, there have been significant job losses in trade-sensitive sectors. But in recent months,

employment in these sectors has been more stable, so gains in other sectorsparticularly services-have boosted overall employment. Looking ahead, however, we're seeing muted hiring intentions across the economy.

Inflation has evolved largely as expected. CPI inflation was 2.2% in October, and measures of core inflation remained in the range of 2‰% to 3%. In the months ahead, we will see some choppiness in headline inflation, reflecting the temporary GST/HST holiday on some goods and services a year ago. This is likely to push inflation temporarily higher in the near term. Seeing through this choppiness, we expect ongoing economic slack to roughly offset cost pressures associated with the reconfiguration of trade, keeping CPI inflation close to the 2% target.

The recent federal budget includes increases in government spending, particularly in defence, and measures to increase public and private sector investment. It will take some time for the impact of these measures to be fully realized, and we expect they will contribute to growth in both demand and supply in the economy. As usual, we will incorporate updated fiscal measures from federal and provincial budgets in our next economic projection in January.

Taking all these developments into consideration, Governing Council assessed the stance of monetary policy. After cutting the policy interest rate in September and October, Governing Council had indicated that if inflation and economic activity were to evolve broadly in line with the October projection, the policy rate would be about right. While information since the last decision has affected the near-term dynamics of GDP growth, it has not changed our view that GDP will expand at a moderate pace in 2026 and inflation will remain close to target. Governing Council therefore decided to hold the policy rate unchanged. We agreed that a policy rate at the lower end of the neutral range was appropriate to provide some support for the economy as it works through this structural transition while keeping inflationary pressures contained.

Finally, Governing Council acknowledged that uncertainty remains elevated. This includes the unpredictability of US trade policy. In particular, the upcoming review of the Canada-United States-Mexico Agreement is creating uncertainty for many businesses. There is also uncertainty about how the Canadian economy will adjust to higher tariffs. The volatility we're seeing in trade and quarterly GDP make it more difficult to assess the underlying momentum of the economy.

We will be assessing incoming data relative to our outlook. If a new shock or an accumulation of evidence materially change the outlook, we are prepared to respond.

Increased trade friction with the United States means our economy works less efficiently, with higher costs and less income. This is more than a cyclical downturn-it's a structural transition. Monetary policy cannot restore lost supply. But it can help the economy adjust as long as inflation is well controlled. The Bank of Canada is focused on ensuring Canadians continue to have confidence in price stability through this period of global upheaval.

With that, the Senior Deputy Governor and I would be pleased to take your questions.",Tiff Macklem
https://www.bis.org/review/r251210e.htm,Gabriel Makhlouf: Remarks – Climate Risk and Sustainable Finance Forum,"Remarks by Mr Gabriel Makhlouf, Governor of the Central Bank of Ireland, at the Climate Risk and Sustainable Finance Forum, Dublin, 8 December 2025.",2025-12-08 00:00:00,"## Gabriel Makhlouf: Remarks - Climate Risk and Sustainable Finance Forum

Remarks by Mr Gabriel Makhlouf, Governor of the Central Bank of Ireland, at the Climate Risk and Sustainable Finance Forum, Dublin, 8 December 2025.

* * *

Good morning and welcome everyone. I am delighted to address the eighth meeting of this Forum.

When the Forum was established three years ago, the goal was to bring together participants from across Ireland to build a shared approach to understanding and managing the systemic risks that climate change poses, while supporting the orderly transition of households and businesses to the net zero objective that we're all familiar with.

The Forum has come a long way in those three years. We have established crosssectoral working groups across risk management, capability building and, most recently, data and disclosures. The groups have produced a number of reports and facilitated sharing of knowledge and best practice.

In Ireland emissions have fallen by 10 per cent since the Forum first met while emissions from energy are down 28 per cent. Change is happening - and in some areas it is happening at pace - but we are told that the country is not on track to meet its 2030 targets. The task of achieving the fundamental and deep-rooted transformation of our economy is still very much in front of us, and I haven't mentioned the proposed EU targets for 2040 which is 15 years away, less time than the first iPhone is behind us.

The availability of financing for this transition will be a very important determinant for success.

In recent years, legal frameworks have been developed to support the transition. However, these frameworks are complex and financial flows to sustainable activities are estimated to be approximately a quarter of what they need to be by 2030. 1

Financial firms have taken steps to manage climate and environmental sustainability risks. But maturity varies across firms and more is needed to embed risk management in strategic decisions, and to identify opportunities and take action.

My remarks today will focus on four areas. I will:

- Provide my perspective on climate risk and sustainable finance in Ireland and the EU, and the progress that has been made to date
- Highlight the need to ensure climate action remains a priority for the financial sector, and emphasise the Central Bank's focus on climate risk and sustainable finance
- Explain the need for a focus on tangible outcomes that support the transition and adaptation

- Encourage this Forum to continue to promote a collaborative approach to how the financial sector supports the transition and adaptation

## Progress to date

First, to progress. There has been some progress although the focus and momentum that built around sustainable finance in recent years is slowing as resources are diverted to other topics and priorities perceived to be more urgent, newer, more profitable or more likely to curry favour or less displeasure.

Through participation in the G20 this year, I have seen first-hand how changing political priorities have diverted efforts away from addressing climate change.

This would not be a problem if we had just discovered that what Nick Stern told us around 20 years ago, and other scientists before and after him, was wrong. But we haven't, he wasn't and they weren't.

We should recognise that the science hasn't been ignored completely. We have seen tangible outcomes from worldwide action. Global greenhouse gas emissions are now projected to be around 12 per cent below 2019 levels in 2035. This compares to a projected increase in emissions of between 20-48 per cent, before the adoption of the Paris Agreement.

We are no longer on a trajectory towards the very worst-case scenarios that were once feared.

Between 2021 and 2024, assets in sustainable funds 2   in Europe have increased from €3.7tn to €9.1tn and have increased as a percentage from 25 per cent to 52 per cent of total fund assets. Green mortgages now make up 40 per cent 3   of new lending in the Irish market, and since the launch of Irish Sovereign Green Bonds in 2018, a total of €11.5bn has been allocated to green projects . 4

However, since this period of expansion we have seen some headwinds to sustainable finance, partly from political pushback but also because some sustainability products appear not to deliver on their claims. For example, research indicated that one third of sustainable funds studied had exposure to fossil fuel companies, amounting to an investment of €123bn. The incentive for greenwashing remains, which is a somewhat polite way of saying that we need to watch out for snake oil salesmen . 5

Of course I recognise that the complexity of implementing sustainable finance, such as embedding complex new regulations, processes and systems, and collecting data to understand the risks, has also hampered progress.

Sustainable finance needs to move onto a new, mature phase where it is less about statements of commitment and more about action and outcomes.

So how do we get there?

First, to state the obvious, we need to build trust in sustainable finance: we need to ensure that products deliver on their promises and finance goes to where it is needed. This will broaden the transition into market segments that have yet to make significant progress.

And second, we need to maintain a focus on the management of climate risk, as well as increasing the focus on climate change mitigation and adaptation.

## Maintaining momentum

In other words, we need to maintain momentum. The global macroeconomic costs of climate change are material. Under a scenario consistent with current nationallydetermined contributions, the level of global GDP would be 13 per cent lower by 2050.

The macroeconomic costs of taking action to reduce greenhouse emissions are much smaller than the costs associated with inaction. Ongoing analysis within the Bank on options for recycling revenue from carbon taxes also indicates that there are policy choices that can reduce the costs, and enhance the benefits, of that transition.

We are already seeing the impacts of more frequent extreme weather events around the world and here at home. Such events are much more likely as a result of climate change.

The world is getting closer to - and in some reports, even crossing - climate tipping points where parts of the Earth's systems could be pushed into abrupt or irreversible change . 6

Ultimately, it is because climate change poses risks to these systems - which provide us with food, water, energy and raw materials - that addressing these risks remains a strategic priority for the Bank.

With this in mind we recently updated our climate and sustainable finance strategy. We're focusing our work programme on three key aspects:

- Building financial resilience, both at microprudential and macroprudential level
- Consistent with our economic advice mandate, informing national climate policy through data, research and even greater collaboration on the macro-financial aspects of climate change and the transition to net zero; and
- Enabling the financial system to play its role in transition.

In relation to building financial resilience, we are continuing to embed climate risk management and supervision of sustainable finance into all aspects of our supervisory work.

As I hope many of you will be aware, I wrote to the chairs and CEOs of all regulated firms in November 2021 setting out the Central Bank's supervisory expectations in relation to climate issues. Those expectations haven't changed. Firms are expected to:

- Demonstrate clear ownership of climate risks affecting the firm, and promote a culture that places emphasis on climate and other ESG issues
- Understand the impact of climate change on their risk profile, and embed it in risk management frameworks
- Undertake scenario analysis to understand the potential impacts of climate change
- Determine the impact of climate risk (and opportunities) on their risk profile, business strategy and long-term sustainability, which should inform strategic planning
- Be transparent about what they are doing, including not engaging in greenwashing.

We have seen meaningful progress against many of these topics.

Financial institutions have enhanced board oversight, gradually incorporating climate factors into their strategies and risk frameworks, and developed scenario analyses and transition plans.

However, progress has been uneven, and we have seen that maturity varies across sectors and across firms. Many institutions remain at early stages of quantitative assessment, have limited data availability, or lack the analytical capabilities needed to quantify exposures and model forward-looking climate impacts. There continues to be gaps in data availability, scenario modelling capabilities, and the systematic incorporation of climate change risks.

I expect firms to build on the progress they have made. Regulated firms should continue to build capacity, both in terms of knowledge and data, in order to better understand and manage the risks that climate change poses to their business. In particular, firms should deepen their understanding of the potential impacts on the long term sustainability of their business model. And regulated firms should continue to deliver sustainable products in a clear and transparent way that meets the needs of investors and consumers.

## Real world outcomes

So while progress has been made, there is still more work to be done, not least to have a sharper focus on achieving tangible outcomes that support the real economy's transition away from unsustainable activities. And in such a transition, it is inevitable that business models will need to change.

Transition planning will require long-term thinking through the current cycle.

I should also add that I fully support the current efforts in the EU to remove unnecessary complexity from the sustainable finance regulatory framework. The current framework is complex and presents challenges for financial market participants who want to support the transition. We do not want to compromise the resilience of the financial sector or reduce important consumer protections but we do need to make a step change here. I hope that the review of the Sustainable Finance Disclosure Regulation will deliver something that is less complex and more user-friendly for investors.

## Continuing to collaborate

Finally, the importance of collaboration.

One topic where there is a clear need for collaboration domestically is in relation to the flood insurance protection gap. The report we published last year pointed out that 1 in 20 households in Ireland had difficulty in accessing flood insurance. This number is only going to increase as flood events become more frequent and severe. Not only will it affect the ability of these households to recover after a flood event, it will also have an effect on the wider economy, not least on the availability of mortgages and the wider housing market.

There is a lot of work to be done but I am encouraged by initial discussions with the Department of Finance and the insurance industry on this topic.

Finally, I hope that we can build on the contributions that this Forum has made in the last three years. No doubt the Forum will evolve in response to the evolution of external events but in my view it will continue to have the potential to play an important role, particularly as the focus shifts to the practicalities of implementation and delivery of outcomes. By fostering dialogue, sharing knowledge and driving action, the Forum can help ensure that Ireland's financial system is prepared to meet the challenges and opportunities of the climate transition.

## Conclusion

The path to net-zero is not linear but its necessity is clear: the costs associated with taking action to tackle climate change are much smaller than the costs associated with inaction.

We must recognise that the journey to net-zero is, at its core, a real economy transition. The financial sector's task is not just to manage the risks on its balance sheets, but to provide the incentives and the funding to ensure that households and businesses make the low-emission choices required to secure our collective future.

My call to you is that we commit to staying the course together. This Forum has the potential to be a catalyst for the transition: sharing best practice, identifying data gaps, and taking action to support the wider Irish economy to deliver the real-world outcomes we need.

1 Climate Policy Initiative (PDF 8.18MB)

- 2  Assets in Article 8 or Article 9 funds
- 3  Central Bank of Ireland Climate Observatory
- 4  The National Treasury Management Agency (NTMA) announces the publication of the Irish Sovereign Green Bond (ISGB) Allocation Report for 2024 and the Impact Report for 2023

- 5 New NGO research uncovers massive greenwashing in European ESG funds

- 6  The Planetary health check 2025"" report, published by the Potsdam Institute for Climate Impact Research, shows that seven of the nine planetary boundaries have been exceeded.",Gabriel Makhlouf
https://www.bis.org/review/r251210d.htm,"Claudia Buch: Evidence-based supervision - addressing evolving risks, maintaining resilience","Keynote speech by Prof Claudia Buch, Chair of the Supervisory Board of the European Central Bank, at the Banking Supervision Research Conference 2025 ""Technological innovations in financial markets – risks and opportunities in banking and regulation"", Frankfurt am Main, 9 December 2025.",2025-12-09 00:00:00,"SPEECH

## Evidence-based supervision: addressing evolving risks, maintaining resilience

Keynote speech by Claudia Buch, Chair of the Supervisory Board of the ECB, at the Banking Supervision Research Conference 2025 on 'Technological innovations in financial markets - Risks and opportunities in banking and regulation'

Frankfurt am Main, 9 December 2025

Welcome to this year's Banking Supervision Research Conference. [ ]  Last summer, when I spoke to this group, I talked about the 'risk assessment paradox'. Many analytical tools rely on past data. So at the precise moment when forward-looking risk assessments are needed to cut through uncertainty and identify emerging vulnerabilities, these tools may become less useful. This does not mean that we should stop doing analytical work. Quite the contrary: this is the time when we need to use a range of analytical approaches, compare results provided by different models, and apply judgement to draw lessons from the outcomes. 1

These considerations have, if anything, become more relevant over the past year, as some of the trends I described last summer have since intensified.

Some geopolitical risk scenarios that were fairly abstract last year have materialised in the meantime. Trade policy uncertainty has significantly increased with, so far, a relatively limited impact on credit losses and provisioning needs. However, the longer-term effects on banks may only unfold over time. [ ] Cyberattacks have increased in intensity and severity over the past few years, and these are a key concern for the risk management of many banks. Therefore, in September last year, we published a framework that can be used to analyse the impact of geopolitical risks on banks. [ ] 2 3

Competitive pressure through non-bank financial intermediaries and issuers of crypto-assets such as stablecoins has increased. Some lending activity has shifted to providers of private credit - often outside of the regulatory perimeter, but with significant links to banks and with limited visibility for banks' risk management and supervisors. [ ]  Generally, the changing patterns of competition and developments in the provision of financial services can have positive welfare effects. Nevertheless, regulators and supervisors need to remain vigilant to emerging financial stability risks, liquidity mismatches and pockets of heightened leverage. [ ]  Banks need to monitor associated risks well and invest in the resilience of their IT infrastructures. 4 5

How to promote growth and competitiveness is certainly a discussion that has become more prominent. Some argue that relaxing banking regulation or supervision could unleash productivity and growth. I am strongly convinced that deregulation and 'de-supervision' are not the right paths to take. It would only weaken resilience at a time when it is needed the most. Resilience and growth are two sides of the same coin.

We are responding to these developments in two ways.

First, we have supervisory priorities that focus on banks' resilience (Figure 1). [ ]  We have a dedicated work programme centred on banks' resilience to geopolitical risks and macro-financial uncertainties. We will, for example, gather evidence on banks' underwriting standards as one way to assess future credit risks. The work programme also focuses on banks' operational and IT resilience, with a specific emphasis on improving banks' risk data aggregation capabilities. These capabilities are key to informed decisionmaking in an uncertain environment. 6

Figure 1: The ECB's supervisory priorities for 2026-28



| Priority 1: Strengthening banks’ resilience to geopolitical risks and macro-financial uncertainties                                         | Priority 1: Strengthening banks’ resilience to geopolitical risks and macro-financial uncertainties   |
|---------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------|
| Ensure prudent risk-taking and sound credit standards                                                                                       | tt) Credit risk                                                                                       |
| Ensure adequate capitalisation and consistent implementation of CRR Ill                                                                     | © Multiple risk categories                                                                            |
| Ensure prudent management of climate and nature-related risks                                                                               | © Multiple risk categories                                                                            |
| Priority 2: Strengthening banks’ operational resilience and fostering robust ICT capabil                                                    | Priority 2: Strengthening banks’ operational resilience and fostering robust ICT capabil              |
| Implement robust and resilient operational risk management frameworks                                                                       | (ra) Operational risk                                                                                 |
| Remedy deficiencies in risk reporting capabilities and related information systems                                                          | ® Governance                                                                                          |
| Medium to long-term priority strategy focusing on banks’ digital and, in particular, Al- related strategies, governance and risk management | © Multiple risk categories                                                                            |

Source: ECB.

Second, we are improving the way we conduct supervision (Figure 2). Evolving risks, structural changes in the financial system and potential risk spillovers from less well-regulated parts of the financial system can have adverse implications for the banks we supervise. But to understand those implications, we cannot simply monitor standard financial indicators or extrapolate trends from the past. We need to create space to analyse the changes, and we are creating this space by becoming more efficient, effective and riskbased.

Figure 2: The ECB's agenda for more efficient, effective and risk-based European banking supervision



Source: ECB.

When setting priorities and carrying out these reforms, we follow an evidence-based agenda. Starting from our objectives, we collect key indicators, we track their evolution over time, we monitor changes in our efficiency as we track the evolution of risks and resilience, and we assess our effectiveness. All of this is far from easy. It requires an infrastructure that supports evidence-based supervision and policy, and it requires good analytical frameworks.

In short, there is a large spectrum of projects in which supervisors and academics can benefit from an exchange of views. So let me go into more detail about what we do to stimulate discussions and encourage new ideas.

## Forward-looking risk assessment amid high geopolitical uncertainty

Geopolitical risks and macro-financial uncertainties are undoubtedly heightened. Global trade tensions escalated sharply following the announcement of new tariffs in early 2025, triggering a rapid repricing in bond markets. The episode underscored how sensitive markets have become to geopolitical signals and how abruptly risk assessments and liquidity conditions can shift.

The impact on European banks has been benign so far. However, there are good reasons to believe that the full effect of higher tariffs and uncertainty has not yet materialised. The 'risk assessment paradox' is very real. We must use different analytical tools to cut through the uncertainty and shed light on potential future developments.

This year's stress test conducted by the European Banking Authority (EBA) has provided one important piece of information. [ ]  The adverse scenario was based on a macroeconomic scenario of escalating trade tensions, market disruptions and weaker growth. The results are encouraging in the sense that Common Equity Tier 1 (CET1) capital depletion in the adverse scenario would be lower than in the 2023 stress test. 7

But this largely reflects higher profitability rather than lower underlying risk. Losses would in fact be higher than in the stress test two years ago, and the increase in non-performing loans would be greater. Hence, geopolitical risks are certainly not 'benign' - they leave their mark on banks' balance sheets. Higher profits cushion the impact of the losses, which explains why the capital depletion would be lower.

Moreover, the results differ across individual banks. A total of 24 banks would be subject to dividend restrictions automatically imposed by regulation in at least one year of the three-year projection horizon, as they would breach the maximum distributable amount trigger point in the adverse scenario. [ ]  Recent research drawing on the published 2025 stress test data shows that the impact of geopolitical tensions is higher for smaller and less diversified banks. [ ] 8 9

Understanding such differences across banks is important from a supervisory perspective: the stress test results inform our bank-specific supervisory follow-up in terms of setting Pillar 2 capital guidance and deciding on qualitative measures, such as any improvements needed in banks' risk management systems.

The EBA stress test applies a common adverse scenario to all banks, which then leads to different capital impacts across banks. This ensures comparability. But it also means that the scenario may be more severe for some banks than for others, so that the results may not reflect the most severe risk scenario individual banks need to prepare for.

Therefore, next year, we will take a complementary perspective. [ ]  We will 'reverse' the assumptions: instead of using a common scenario , we will ask banks to conduct a stress test that leads to a common capital depletion . We will not impose restrictions on the geopolitical risk scenarios that can lead to such a depletion. Banks will use their internal tools for capital and liquidity planning, [ ]  and common data reporting requirements will be much leaner than for standard stress tests. At the same time, the reverse stress test will provide relevant information about banks' preparedness to face geopolitical risks, their internal stress-testing capabilities and the scenarios that lead to large losses. 10 11

Apart from stress testing, banks have to address evolving risks through IFRS 9 overlays - adjustments to expected credit loss models to reflect risks not captured by historical data. Progress has been made, particularly on climate and environmental risks, but practices remain diverse. [ ]  Some banks still rely on 12

generic 'umbrella overlays' that do not differentiate between sectors, or they use standard, aggregate macroeconomic forecasts that they adjust for their purposes. Such approaches may underestimate the specific vulnerabilities of certain borrowers. Sound risk management requires more granular analysis and appropriate changes in the classification of loans when risks increase, rather than a general overlay. Nevertheless, when there is substantial uncertainty that is hard to model, ex post model overlays - if applied correctly - can be a good mitigant.

Geopolitical risk management is not the only challenge banks are currently facing. They also need a strategic response to the increasing presence of non-banks in the market for the provision of traditional banking services, including private credit and stablecoin issuance.

We need better visibility of the risks and vulnerabilities that are building up in this space, as traditional reporting does not capture some of the new developments. But, for the time being, we need to find our way using the patchy and incomplete map that we have until a global consensus on minimum reporting and transparency requirements has been reached and the relevant reporting standards have been implemented. [ ] 13

Navigating unknown territory with an unreliable map requires innovative ideas - and academic work can partly fill the gap. We need conceptual and applied theoretical work to make sense of changing patterns in market structures, the drivers of entry and exit, the drivers of competitive advantage and the potential implications for risk-taking incentives and vulnerabilities. Academia has certainly made great strides in terms of rigorous empirical work, but at a time of deep structural change, empirical work naturally reaches its limit. This is why we need continuous interaction between building hypotheses, analysing incoming evidence and updating our priors.

## Adapting supervision to the new environment: more efficient, effective and risk-based

Banks need strategic responses to the changing environment, as do supervisors. So let me quickly recap where we have come from and what the new challenges are.

The Single Supervisory Mechanism - a key pillar of the European banking union - celebrated its tenth anniversary last year. In the first years of European supervision, the priority was to build common processes and ensure consistency across jurisdictions. This was a necessary 'start-up phase'.

In terms of risks and resilience, the task was relatively straightforward: reducing exposures to nonperforming loans and building resilience. The global financial crisis and the European sovereign debt crisis had left deep scars on the balance sheets of many banks. In 2010, euro area banks' median CET1 capital ratio was around 10%. [ ]  In 2015, the non-performing loan ratio was still around 10%, on average, but in some countries it was as high as 50%. [ ] 14 15

So the task was to reduce banks' exposures to non-performing loans and strengthen financial resilience.

Today, the CET1 capital ratio is around 16%, while the non-performing loan ratio has fallen to around 2%.

Better resilience has come about thanks to strengthened regulation and supervision and better risk management by banks. But there is a third key factor that matters: policy support for households and firms. Even during the recent recessions caused by the COVID-19 pandemic and the energy crisis, loan losses did not increase, thanks to resilience in the real economy and substantial monetary and fiscal support.

Today, the challenges for banks are different. Banks need to identify potential future sources of risk in a highly uncertain environment. They need to ensure robust operational resilience, sound IT systems and effective protection against cyber risks. Scenario planning, stress testing and good governance have moved to the forefront.

Supervisors are facing a familiar challenge: how to remain forward-looking and create space to analyse and react to new developments. In recent years, European banking supervision has launched a reform agenda with three main objectives.

Enhancing efficiency. Supervisors need to assess the impact of the new environment on banks' risks and risk controls while operating within fixed resource envelopes. Some procedures that served us well in a more stable environment may prevent us from focusing on key risks and vulnerabilities. Moreover, good supervision requires close interaction between Joint Supervisory Teams, which are the key contact point for banks, and on-site inspectors and horizontal functions analysing common trends across banks. This requires an integrated planning process, not least to avoid overlapping information requests.

Ensuring effectiveness. Effective supervision means identifying the root causes of banks' weaknesses, communicating expectations clearly and escalating measures where banks' remediation falls short.

Focusing on the risks that matter. Not every risk requires the same amount of supervisory attention. We have thus developed a risk tolerance framework and a multi-year approach that guides Joint Supervisory Teams in allocating resources based on banks' risk profiles and business models.

These reforms have tangible benefits for all stakeholders by reducing compliance costs, strengthening our ability to deliver on our mandate while enhancing transparency and accountability, and improving our data infrastructures.

More specifically, the objectives of the reforms guide four concrete initiatives.

The first is the overhaul of the annual Supervisory Review and Evaluation Process (SREP), in which we assess banks' risks and risk controls. [ ]  In 2023 we received recommendations from an independent expert group we had commissioned. In 2024 we decided on a reform agenda which is now well advanced and will be fully implemented next year. It is about taking a multi-year perspective during risk assessments, streamlining coordination across supervisory activities, strengthening the use of the full supervisory toolkit, delivering decisions earlier and communicating clearly with banks, stabilising methodologies, and making better use of IT systems and analytics. 16

The second initiative, 'Next-level supervision', was launched in 2025. This project applies the reform objectives to all major supervisory tasks, including authorisations, approvals of internal models, stress testing, reporting and on-site inspections. Across these reform elements, we use digital and suptech tools to focus resources and to create capacity to address evolving risks.

The third element is a supervisory culture initiative, which makes sure that the spirit of the reforms is embedded into everyday decision-making, both within the ECB and across the national competent authorities.

The fourth element of the reform agenda is about assessing the effectiveness of supervision and enhancing evidence-based supervision. This is where input from academia is most valuable. How can we measure supervisory effectiveness? What are the trade-offs between efficiency and resilience when streamlining processes? How can we assess whether our supervisory culture has evolved? And what are the implications for the banks - in terms of both the risks they face and their resilience? All these questions merit analytical answers and we would appreciate your ideas.

## Improving the infrastructure for evidence-based supervision

Evidence-based supervision is, in my view, essential to maintaining a resilient financial system. But it is also essential to containing the forces pushing for deregulation and a loosening of standards with the supposed benefit of generating growth and promoting productivity.

Let me explain what I mean by 'evidence-based supervision'. The legislator, and therefore the public, has given us a clear mandate - keeping banks safe and sound. This must be our starting point and the objective of our work.

We must, of course, deliver on our mandate in the most efficient and effective way, and we must ensure that banks are resilient, given the risks they take.

Selecting indicators - for capital, liquidity, business-model viability and the quality of governance - is thus the second step in our evidence-based supervisory cycle. We are also tracking progress made with the reforms I have described above - how quickly we issue decisions, how focused our supervision is, or how much data and information we request from banks.

The third step is to design and implement supervisory measures - from moral suasion to legally binding decisions, including enforcement measures, which are designed to compel banks to restore compliance with prudential requirements.

And finally, we need to evaluate outcomes - both intended and unintended - and feed the lessons back into the next round of supervisory measures and priority-setting. This process facilitates systematic learning.

This is, of course, a highly stylised supervisory cycle. We cannot conduct comprehensive evaluations for all the activities we perform, and we cannot exactly 'measure' all relevant aspects of banks' safety and soundness, which is why qualitative supervisory judgement remains indispensable. There are many qualitative factors shaping banks' performance that cannot be precisely quantified; observable outcomes at bank level are shaped by many factors other than supervision.

This supervisory cycle structures our work and enhances transparency and accountability. It requires a sound infrastructure consisting of five elements.

Evaluation frameworks. Over the past decade, the Financial Stability Board and the Basel Committee have developed frameworks to evaluate the post-crisis financial sector reforms. [ ]  These frameworks combine quantitative indicators with qualitative assessments and enable potential unintended effects to be identified. Within European banking supervision, we are building on this work and integrating assessments of supervisory effectiveness into our reform agenda, making use of a 'second line of defence' function that benchmarks supervisory actions across banks. 17

Repositories. There is a plethora of information and analytical work on supervision, regulation, and the impact on banks and the economy. However, this evidence is not easily accessible. Repositories and meta analyses pool this widely dispersed evidence into cumulative knowledge. The Bank for International Settlements' Financial Regulation Assessment: Meta Exercise (FRAME) classifies empirical studies on the effects of capital and liquidity regulation and on the too-big-to-fail reforms. [ ]  The results of this work are encouraging: the benefits of the post-crisis reforms clearly outweigh their costs, and better-capitalised banks support credit provision over the long run. [ ] 18 19

Extending FRAME to other key policy issues would be the natural next step. There are many studies on bank efficiency and competitiveness, as well as their drivers, but, again, this evidence is patchy and often not easily accessible for policy work.

Certainly, building and maintaining repositories can be resource-intensive, but artificial intelligence offers new opportunities. Natural language processing can automate the identification and classification of studies. Within ECB Banking Supervision, we are developing 'Athena', an AI-enabled tool that supports textual analysis and translation, allowing us to process large volumes of documents. Alongside this, we are setting up a virtual lab to consolidate methodologies and facilitate code sharing.

Data centres.

Good policy analysis requires consistent and well-documented data. The ECB has launched a pilot project to grant external researchers access to anonymised bank-level data. [ ]  Access to these data is organised in close cooperation with national central banks and statistical offices. This pilot can pave the way towards a permanent research infrastructure. Within ECB Banking Supervision, the single data lake - Agora - integrates large volumes of structured data into one system, improving efficiency and consistency. Clear governance of access rights and data protection is essential, of course. 20

Innovation. Innovation in modelling can help overcome data constraints and support the analysis of evolving risks. Within the ECB, we are using different suptech tools, such as network analysis software ('Navi') to map institutional interlinkages or stress-testing platforms ('Gabi'), to optimise models at scale. In practice, Gabi can generate and refine large numbers of regression models simultaneously. Navi produces network diagrams that visualise complex ownership structures and interdependencies, combining information from multiple sources to give a clearer overview of relationships within banking groups. Tools of this kind support more structured analysis and help us test the robustness of our assessments, while also facilitating cooperation with academics and other authorities.

Dialogue. Dialogue between researchers and policymakers is crucial. Policymakers are often faced with urgent issues but lack the time and data to conduct detailed analyses. Researchers have the analytical tools and methods to provide evidence, but incentive structures in academia may not reward work on policy-relevant questions or the replication of earlier studies - both of which are so crucial for policy work. To facilitate dialogue, we need conferences like this one as well as structured network building. Our participation in initiatives such as the is one element of this. ECB Banking Supervision's involvement includes hosting six doctoral candidates for 12 months. These researchers will work with our suptech team on various research topics related to digital finance. Marie Skłodowska-Curie Industrial Doctoral Network on Digital Finance

Together, these five pillars form the foundation for evidence-based supervision. They embed rigour and accountability into the policy process itself. And they provide the analytical basis for our reform agenda.

## The role of evidence in safeguarding resilience

Evidence-based supervision is a safeguard against complacency. Periods of calm can create pressure to simplify or relax rules in ways that erode resilience over time. Following a clear policy and supervisory cycle allows us to identify effects and potential unintended side effects of regulation and supervision. Decisions to modify rules should be based on sound empirical evidence rather than anecdotal evidence. They need to take confounding factors and general equilibrium effects into account.

Of course, analytically sound evaluations take time. But we do have that time. Empirical evidence to date shows that stronger capital and liquidity requirements have not constrained lending in the long run but have rather supported sustainable credit growth and resilience. This strengthens the case for maintaining robust regulatory and supervisory standards while improving implementation and addressing evolving risks.

Looking ahead, our focus is on turning this agenda into day-to-day practice. Next year, reforms of European banking supervision will be fully implemented, and we will report on the progress achieved in the annual reports on the ECB's supervisory activities. We will further develop the infrastructure for evaluating supervision and regulation. This includes expanding repositories, strengthening evaluation frameworks, improving data access and availability, and deepening cooperation with academia and other authorities.

Without that, there is a clear risk that efforts to 'simplify' regulation and supervision in the end lead to deregulation and de-supervision. Together, we can mitigate this risk. The resilience built over the past decade is a public good. It should be protected, not traded for short-term convenience.

1.

I am grateful to Korbinian Ibel, Thomas Jorgensen, and John Roche for their comments and support in preparing this speech. All errors and inaccuracies are my own.

Avril, P., Bochmann, P., Fahr, S., Horan, A., Pancaro, C. and Pizzeghello, R. (2025), ' ', Financial Stability Review, ECB, May. Risks to euro area financial stability from trade tensions

3.

See the ECB's banking supervision website, ' '. Addressing the impact of geopolitical risk

4.

Buch, C. (2025), ' ', The Supervision Blog , ECB, 3 June. Hidden leverage and blind spots: addressing banks' exposures to private market funds

5.

ECB (2025), , November. Financial Stability Review

6.

See the ECB's banking supervision website, ' '. ECB Supervisory Priorities 2026-28

7.

ECB (2025), ' ', press release , 1 August; ECB (2025), , August. Stress test shows that euro area banking sector is resilient against severe economic downturn scenario 2025 stress test of euro area banks - Final results

8.

Under Article 141 of the Capital Requirements Directive (CRD), institutions that fall below their combined buffer requirement breach the 'MDA trigger point'. Once this trigger is breached, automatic restrictions on distributions apply - covering dividends, variable remuneration and AT1 coupons - with the MDA determining the ceiling on such distributions.

9.

Haselmann, R., Heider, F., Kaiser, L.E., Schlegel, J. and Tröger, T. (2025), ' ', In-depth analysis requested by the ECON Committee , European Parliament, November. The Impact of Geopolitical Risks on the Resilience of Banks in the Banking Union

10.

Buch, C. (2025), ' ', The Supervision Blog , ECB, 5 September. Stress tests in uncertain times: assessing banks' resilience to external shocks

11.

More specifically, they can draw on their internal capital adequacy assessment process (ICAAP)

12.

ECB (2024), , July. IFRS 9 overlays and model improvements for novel risks - Identifying best practices for capturing novel risks in loan loss provisions

13.

European Systemic Risk Board (2024), , November; Financial Stability Board (2025), , 9 July. A system-wide approach to macroprudential policy - ESRB response to the European Commission's consultation assessing the adequacy of macroprudential policies for nonbank financial intermediation Leverage in Nonbank Financial Intermediation: Final report

14.

See Chart 28 in ECB (2025), ' ', Financial integration and structure in the euro area - Statistical annex , November. Financial integration indicators

15.

See Chart 23 in ECB (2025), ' ', Financial integration and structure in the euro area - Statistical annex , November. Financial integration indicators

16.

Buch, C. (2024), ' ', The Supervision Blog , ECB, 28 May. Reforming the SREP: an important milestone towards more efficient and effective supervision in a new risk environment

17.

Thedéen, E. (2025), ' ', speech at the Eurofi Financial Forum, Copenhagen, 19 September; Financial Stability Board (2017), , 3 July; Basel Committee on Banking Supervision (2022), , 14 December. Resilience pays: the strategic value of regulation and supervision Framework for Post-Implementation Evaluation of the Effects of the G20 Financial Regulatory Reforms - Technical Appendix Evaluation of the impact and efficacy of the Basel III reforms

18.

Bank for International Settlements, . Financial Regulation Assessment: Meta Exercise

19.

Boissay, F., Cantú, C., Claessens, S. and Villegas, A. (2019), ' ', BIS Quarterly Review , March. Impact of financial regulations: insights from an online repository of studies

20.

ECB, ' '. Pilot project for research access to confidential statistical data",Claudia Buch
https://www.bis.org/review/r251210c.htm,Rashad Cassim: Opening remarks - Market Practitioners Group conference 2025,"Opening remarks by Mr Rashad Cassim, Deputy Governor of the South African Reserve Bank, at the Market Practitioners Group conference, Sandton, Johannesburg, 3 December 2025.",2025-12-03 00:00:00,"## Rashad Cassim: Opening remarks - Market Practitioners Group conference 2025

Opening remarks by Mr Rashad Cassim, Deputy Governor of the South African Reserve Bank, at the Market Practitioners Group conference, Sandton, Johannesburg, 3 December 2025.

* * *

## Good morning.

As you may recall, this Market Practitioners Group (MPG) was established primarily to develop new reference rates for South Africa. It is often said that creating new benchmark rates for financial markets is like building a new foundation under a house you're already living in.  For those who have experienced a major renovation, you know 1 it can put a lot of strain on a family. That is why I see it as a good sign that the end is now in sight; we can still come together amicably and no one is asking for a divorce.

It has taken eight years to reach this point, starting with the SARB's consultation paper on alternative interest rate benchmarks.

Four years ago, the MPG and the South African Reserve Bank (SARB) agreed to phase out Jibar by the end of 2026.

About seven months ago, we launched the ZARONIA First initiative. Since then, we have noted a significant increase in the adoption of ZARONIA, from R6.4 billion to over R200 billion in the initial months. Of course, Jibar exposures remain much larger. 2

Earlier this year, the MPG officially adopted methods for determining credit adjustment spreads and recommended Jibar fallback rates based on compounded ZARONIA rates.

As we approach the Jibar cessation date, there are three issues of concern to the SARB and the MPG as a whole.

The first is what we call the 'No new Jibar' event. We are already encouraging market participants to use ZARONIA instead of Jibar in contracts, but around the second quarter of next year, we plan - along with the Financial Sector Conduct Authority (FSCA) - to issue regulations limiting new Jibar exposures. Our aim is to stop increasing the stock of contracts that will need to be transitioned off Jibar. 3

After that, we will reach the major milestone of Jibar cessation.

Jibar will be discontinued from 31 December 2026.

All Jibar tenors will cease to be provided or be representative immediately after this date.

This timing should come as no surprise. We have consistently communicated that Jibar cessation would happen at the end of 2026, giving everyone time to prepare for the transition. 4

Of course, December 2026 once felt comfortably distant. Now, it is barely a year away.

We are aware that the pre-cessation announcement will trigger certain contractual provisions for the calculation and future application of fallbacks. 5  We expect credit adjustment spread calculations to crystalise today. However, these spreads will not be applied until after 31 December 2026, as the Jibar rates are expected to remain representative until that point.

I often ask MPG members what Jibar transition risks should keep us awake. Almost always they highlight the challenge posed by legacy contracts that cannot easily be changed before Jibar is discontinued.

To address these, the SARB and FSCA have proposed amendments to the Financial Sector Regulation Act (FSR Act).  These amendments will give the SARB powers to 6 designate replacement benchmarks for discontinued rates and determine adjustment spreads for moving contracts from one benchmark to another. We may need a synthetic Jibar, similar to synthetic Libor - the London Interbank Offered Rate - for dealing with some tough legacy contracts, but overall, we want to put Jibar behind us. In the UK, authorities used synthetic Libor to reduce disruptions in markets where converting certain outstanding legacy contracts to alternative reference rates was not feasible. However, this was a temporary solution.

The SARB will consult on the use of the proposed powers, after the draft amendments to the FSR Act are published.

The third issue is the forward-looking term measure of ZARONIA.

We still believe that risk-free rates compounded in arrears are appropriate and operationally achievable for most cash market segments. We are doing this by developing relevant market conventions and infrastructure.

We are working to find a benchmark administrator that will calculate and publish forward-looking term ZARONIA rates by April 2026. We also encourage market participants not to just wait for term ZARONIA, but to start building liquidity in ZARONIAlinked products now.

To conclude, we have travelled a long way together, and we are now close to a milestone event where Jibar falls away and ZARONIA takes over. We are committed to a smooth transition and over the coming year, it will take a team effort to achieve that.

We all take pride in this country's sophisticated financial sector, but that pride should reflect not only what we have already, but also what we can build, together. Operationalising new benchmark rates will be a major achievement and I hope you will view the work ahead not just as a burden but as an opportunity to develop something good that lasts.

## Thank you.

- 1  See last year's MPG keynote, p. 4
- 2  As of mid-2025, domestic Jibar exposures were estimated at R43 trillion, while offshore exposures were over R107 trillion.
- 3  The SARB and FSCA will, however, need to consider the exceptions to incorporate in the prohibition notice to ensure that it does not hinder the ability of firms to manage risk effectively or have unintended consequences on market segments that genuinely cannot adopt alternative reference rates.
- 4  See for instance the 'Interest rate benchmark reform journey' infographic on the MPG webpage on the SARB website.
- 5  As observed during the Libor transition. Refer to FCA announcement on future cessation and loss of representativeness of ..., https://www.fca.org.uk/publication /documents/future-cessation-loss-representativeness-libor-benchmarks.pdf.
- 6  Act No. 9 of 2017",Rashad Cassim
https://www.bis.org/review/r251209e.htm,Joachim Nagel: AI and the future of central banking,"Welcome address by Dr Joachim Nagel, President of the Deutsche Bundesbank, at the conference ""Artificial Intelligence and the future of central banking"", jointly hosted by SUERF ( The European Money and Finance Forum ) and the Deutsche Bundesbank, Frankfurt am Main, 9 December 2025.",2025-12-09 00:00:00,"## Joachim Nagel: AI and the future of central banking

Welcome address by Dr Joachim Nagel, President of the Deutsche Bundesbank, at the conference ""Artificial Intelligence and the future of central banking"", jointly hosted by SUERF (The European Money and Finance Forum) and the Deutsche Bundesbank, Frankfurt am Main, 9 December 2025.

* * *

Check against delivery

## 1 Introduction

Ladiesandgentlemen, dear colleagues,

It is a pleasure and an honour to welcome you today to the conference on ""Artificial Intelligence and the Future of Central Banking"", jointly hosted by  SUERF-The European Money and Finance Forum-and the  Deutsche Bundesbank.

I am pleased to see so many people here in the room with us in Frankfurt today. And it is wonderful that there are so many participants joining us virtually, too. This conference gives us the chance to discuss the importance of artificial intelligence  (AI) for central banking and the wider economy. I would therefore especially like to thank the organisers of this conference, the speakers, and the participants in the policy panel. Thank you for making this gathering possible and for drawing up such an exciting agenda.

The subject of today's conference is both topical and important. We are all aware that we are living and working in a period of change. We as central bankers are committed to fulfilling our mandate and performing our tasks in this challenging environment. Artificial intelligence offers us great opportunities, but it poses challenges, too. I therefore welcome today's event with open arms, as it will allow us to exchange ideas and perspectives on both.

At the  Bundesbank, we develop and use different  AI applications that support employees in a wide range of tasks. For example, we have released a platform enabling staff throughout our institution to configure text-based intelligent assistants (which we call  TIAs) for their daily work. These  TIAs can even be used to process confidential data. A second Bundesbank  platform uses natural language processing (NLP), allowing large volumes of documents to be pre-processed and analysed.

Yet another example is  MILA the Monetary-Intelligent Language Agent model, which we set up to analyse central bank communication with the help of generative  AI. 1  When given my remarks to analyse, this model concluded that the brief speech I am giving today exhibits something you will surely also notice for yourselves: optimism about how we can use the transformative potential of  AI. I have both optimism and confidence: confidence that we will also master the challenges posed by the transformative power

of  AI for central banks and the economy in general. I would therefore like to use the next few minutes to shed light on both the opportunities afforded by  AI and the challenges it presents.

## 2 The transformative potential of  AI

The transformative potential of  AI arises from different dimensions and promises of this technology. We expect artificial intelligence to improve our business processes. It also represents an extension of our analytical toolkit. I would now like to focus on two of the aspects we will be taking a closer look at in today's conference.

The first of these is the use of  AI for enhanced forecasting and structural analysis:  AI offers tools to process vast datasets. These can help, amongst other things, to detect previously unseen patterns. But they can also improve predictive accuracy. For example, machine learning may help to anticipate inflationary pressures, shifts in labour markets, or structural breaks in the economy more swiftly than traditional models allow.

Applications based on machine learning at the  Bundesbank are, inter alia, used to model inflation, interest rates and fiscal expenditures as well as loan and trade volumes. Our experience shows that machine learning approaches are not always superior to traditional ones. Hence, I would like to emphasise that  AI complements the work of our employees as an additional tool. It does not replace expert knowledge.

The second aspect I would like to mention is the following:  AI is not only a means to better understand the macroeconomy. It is itself becoming a driver of macroeconomic dynamics. It can, amongst other things, affect productivity, labour markets, and capital formation. For example, it will impact on the diffusion of innovation and may thus affect potential growth.

The Bundesbank  Survey of firms  (BOP-F) for the second quarter of 2025 reflected the impact of generative  AI on the world of work. 2  A majority of firms that already employ generative  AI expected that its use would improve their profitability, customer satisfaction and employee satisfaction. For the year 2024, around one-half of the firms AI AI that had already employed by that time reported that the use of generative increased their productivity.

However, expert opinions on the magnitude of AI's impact on productivity vary greatly. Understanding such forces and dynamics is crucial for central banks, as they assess the medium-term economic outlook, structural change, and the transmission of monetary policy.

## 3 Challenges of AI from a central banking perspective

Colleagues at the Bank for International Settlements have been looking more closely at the use of  AI applications in central banking. 3  Their findings show that central banks have been early adopters of  AI and machine learning techniques for important tasks. 4 At the same time, the great potential of  AI poses several challenges for central banks. Let me explain this again using the two aspects I focused on before.

First, it is of crucial importance that models are reliable and that they can be interpreted properly. Advanced  AI methods are sometimes regarded as ""black boxes"". This is because it can be more difficult to fully understand how they achieve their output compared to traditional approaches. However, for central banks, transparency and credibility are key. Both are crucial in terms of how central banks work and how they communicate with markets and the public. It is therefore important to invest in explainable  AI methods-some of which we will see in today's presentations.

The second issue concerns the challenges presented by the economic implications of AI. The transformative power of  AI might foster structural changes. Thus, monitoring the impact of  AI in its multiple dimensions and from different perspectives is crucial. This is challenging because  AI is progressing swiftly, and its macroeconomic impact might change rapidly.

At the current juncture, we are seeing many firms in the euro area still using  AI on a limited or experimental basis. 5  Moreover, in many occupations,  AI is currently mainly supporting employees in various tasks, rather than fully taking over their jobs. However, as we have seen, the capabilities of  AI are expanding quickly. And so are its potential implications for labour markets and monetary policy transmission.

We must proceed with caution and take care to continually update our evaluation of the impact of  AI. To do so, we require, inter alia, information on the use of AI that is representative and comparable across countries. Such data are scarce, however. In view of this, the Bundesbank, Banca d'Italia and Banco d'Espaæa are working together on harmonising questions on  AI in their representative firm surveys.

To sum up, I hope I have given you some insight into how we at the Bundesbank are open to new technologies, how we try to leverage their potential and how we discuss their advantages and disadvantages.

## 4 What this conference aims to achieve

Today gives us the opportunity to share advanced research and central banking practices with regard to  AI, machine learning, non-traditional data and macroeconomic dynamics. There will be room for thoughtful dialogue on how the work of central banks needs to evolve in light of the advent of  AI. And there will be room for building networks. Over the next few hours, you will probably challenge assumptions, perhaps confront blind spots and-as I very much hope-lay the basis for future collaboration.

## 5 Conclusion

Let me close with a few personal reflections. Being open to innovation is not just about technology-it's also about mindset and the exchange of information and ideas. I am proud to be part of a central bank community that embraces both innovation and an open exchange about how to apply it best. This conference provides a forum for all of the above, so let's take full advantage of the opportunity!

While we discuss AI's technical and economic dimensions, though, let us not forget the broader societal dimension: technology should ultimately serve people. The same holds for us as central banks: We should use  AI to serve the public interest by fulfilling our mandate. This goal and our commitment to it remain as important as ever.

Thank you very much for your attention.

1  Deutsche Bundesbank (2025),  Monetary policy communication according to artificial intelligence, Monthly Report, March 2025.

- 2  Deutsche Bundesbank (2025), Survey of firms (BOP-F),  Q2 2025: Impact of generative AI on the world of work.
- 3  Bank for International Settlements (2025),  The use of artificial intelligence for policy purposes, Report submitted to the G20 Finance Ministers and Central Bank Governors, October 2025.
- 4  Araujo, D., S. Doerr, L. Gambacorta and B. Tissot (2024),  Artificial intelligence in , BIS Bulletin, No 84, 23 January 2024. central banking
- 5  Deutsche Bundesbank (2025), Use of artificial intelligence-a European comparison, Monthly Report, May 2025.",Joachim Nagel
https://www.bis.org/review/r251210b.htm,"Junko Koeda: Economic activity, prices, and monetary policy in Japan","Speech by Mr Junko Koeda, Member of the Policy Board of the Bank of Japan, at a meeting with local leaders, Niigata, 20 November 2025.",2025-11-20 00:00:00,"

Bank of J a p a n

November 20, 2025

## Economic Activity, Prices, and Monetary Policy in Japan

Speech at a Meeting with Local Leaders in Niigata

## KOEDA Junko

Member of the Policy Board

(English translation based on the Japanese original)

## I. Current Situation and Outlook for Economic Activity and Prices

There is now just over a month left in the year. Looking back on this year, the kanji character for ""rice"" -- also used in the Japanese word for ""United States"" -- often caught my attention in news coverage. First of all, extremely high uncertainties emerged over U.S. trade policy this  spring.  If trade policy,  among  other  factors, exerts  downward  pressure  on  overseas economies, Japan's external demand will likewise be undermined. If the profits of exporting firms and their fixed investment decline, this could also exert downward pressure on  the economy. Meanwhile, the price of rice, a staple food in Japan, began to surge in the second half  of  last  year. Amid  high  inflation against  the  background  of increases  in the  price  of various food items, the attention given to rice prices may have had an impact on consumers' perceived inflation.

Today, I would like to talk about the current situation and outlook for economic activity and prices, keeping in mind the impact of U.S. trade policy and rice prices, and the magnitude of the impact.

## Economic Developments Abroad

Let me begin with developments in overseas economies. Please take a look at the left panel of Chart 1. Here, overseas economies are represented by the average real GDP growth rate of Japan's trading partners, weighted by their share in Japan's exports. Looking back over the past three decades, the GDP growth rate of overseas economies fell sharply due to the global financial crisis (GFC) and the COVID-19 pandemic, but on average, these economies have seen an annual growth rate in the range of 3.5-4.0 percent. Regarding the outlook for overseas economies, no significant slowdown is expected, based on the projections released by the International Monetary Fund (IMF) in October 2025. Japan's total goods exports account for approximately one-sixth of its GDP, with roughly half of these exports destined for Asia. Exports to the United States make up around 20 percent of Japan's total exports. Since the future course of the global economy may depend on developments in the U.S. economy, it is crucial to monitor these developments, alongside those in other regions, when considering developments in external demand for Japan's economy. While U.S. domestic demand has been resilient recently, I believe that future developments in the economy may depend not

only on the current trade policy but also on changes in investment cycles and the employment situation, among other factors.

## Economic Developments in Japan

Next, I would like to turn to Japan's economy. Please see the breakdown of the real GDP growth rate in the right panel of Chart 1. The economic growth rate in Japan has remained relatively low compared with that of overseas economies. Also, when major negative external shocks occurred, such as the GFC and the COVID-19 pandemic, domestic demand dropped sharply. Exports also dropped significantly at the time, and the economic growth rate fell into deeply negative territory. U.S. tariff policy launched this year may not have as significant an impact as previous major external shocks, but given the high degree of uncertainty, the need has arisen to ascertain the extent of the shock's impact.

Please take a look at the right panel of Chart 2, which illustrates real exports by type of goods. Exports  have  been  somewhat  weak  recently  in  the  steel  and  aluminum  industries;  these industries are classified under ""motor vehicles and related goods"" and ""intermediate goods,"" both of which are subject to sectoral tariffs introduced by the U.S. administration. On the other hand, exports of semiconductors, which are classified under ""IT-related goods,"" have been increasing, likely reflecting demand from the IT industry. Turning to the left panel of Chart 2, while exports to the United States have been weak recently, exports to the NIEs and ASEAN economies have been increasing, driven by semiconductor exports. All in all, I would not go so far as to say that exports have deviated downward from the trend.

Business fixed investment has also been firm recently (left panel of Chart 3). According to business fixed investment plans in the Tankan (Short-Term Economic Survey of Enterprises in Japan), the rate of increase in planned investment has been relatively high, similar to the level of last year (right panel of Chart 3). Reports from the latest meeting of the general managers of the Bank of Japan's branches also suggest that firms have solid demand for fixed investment to address labor shortages. Although uncertainties surrounding U.S. tariff policy remain, they have subsided recently. In the meantime, stock prices in Japan have reached record highs, backed by the global trend of uptick in stock prices. I believe that these factors have also acted as a driver to stimulate investment.

Corporate profits have been at elevated levels even for manufacturing, which faces concerns over the impact of tariffs (left panel of Chart 4). Business conditions have also been at a high level in terms of the diffusion index in the Tankan , against the backdrop of the continued high stock prices (right panel of Chart 4). However, some exporting firms affected by tariffs have not fully passed on the associated costs to U.S. selling prices; instead, they have absorbed part  of  the  increased  burden  from tariffs  by  lowering yen-based export prices. As such, I consider it necessary to monitor how this will affect profits of exporting firms, including their affiliated firms. Such monitoring is also crucial to assess future developments in wage hikes.

In this profit environment, nominal wages have continued to rise steadily, supported in part by a rise in scheduled cash earnings, which exclude bonuses and overtime pay. That said, real disposable income -- which takes into account the burden of social security contributions and taxes -- has remained flat, in part because of higher prices (left panel of Chart 5). Scheduled cash earnings per full-time employee have increased by around 2-3 percent year on year, supported by base pay hikes, and hourly scheduled cash earnings per part-time employee have also  increased  steadily  (right  panel  of  Chart  5).  As  working-style  reforms  advance  and working hours decline, I believe ""hourly wages per employee"" provides useful information, even when monitoring wages for full-time employees.

Regarding wage hikes, while annual wage revisions in the spring labor-management wage negotiations are important, there are also other wage developments that need to be monitored. For example, it would be useful to examine (1) the extent to which the minimum wage is raised,  (2)  how  far  winter  bonuses  reflect  corporate  profits,  and  (3)  the  degree  to  which switching jobs improves wages.

Turning to household spending, real consumption of nondurable goods, including food, has been weak, as indicated by the Consumption Activity Index (CAI, real), in light of higher prices,  mainly  of  food,  and  other  factors (left  panel  of  Chart  6).  Nonetheless,  services consumption has been robust, and overall consumption seems to remain resilient, as indicated by the System of National Accounts (SNA), which is compiled using data on both the demand and supply sides (right panel of Chart 6).

Based on a comprehensive assessment of the aforementioned economic developments, my view is that Japan's recent economic indicators have been solid overall. The Bank's view in the  October  2025 Outlook for Economic Activity and Prices (Outlook Report) is that the economy ""has recovered moderately, although some weakness has been seen in part."" I will discuss the outlook for economic activity and the risk balance later.

## Price Developments in Japan

Next, I would like to discuss prices. While the consumer price index (CPI) relates closely to people's daily lives, it reflects the price of final goods, or business-to-consumer (B2C) prices. Hence, before addressing the CPI, I would like to discuss business-to-business (B2B) prices --in  other  words,  price  pass-through  between  firms.  To  examine  B2B  prices,  I  think developments in import prices are a crucial factor. Please refer to the left panel of Chart 7. Since 2021, import prices have risen significantly, affected by higher crude oil prices and the yen's  depreciation,  among  other  factors.  However,  import  prices  have  recently  declined slightly, on a year-on-year basis.

The  right  panel  of  Chart  7  suggests  that  the  producer  price  index  (PPI)  is  influenced  by developments  in  import  prices. The  breakdown  of  contribution  indicates  that  the recent increase in the PPI is driven by the effects of surging food prices. This may reflect factors such as increases in personnel expenses and distribution costs, as well as developments in import prices, but it can also be assumed that food prices globally have been subject to greater volatility, affected by climate change and other factors. I believe that it is necessary to monitor closely whether food prices continue to trend upward.

Moving on to the CPI, food accounts for around one-fourth of the index. Please refer to Chart 8. The recent rise in the CPI has indeed been driven by the increase in food prices. In particular, the contribution of rice prices has increased over the past year. Here, ""rice"" refers to branded rice covered by the CPI, and its impact on other rice-related food, such as rice balls and sushi (box lunch), is reflected in ""food (less rice).""

Please take a look at the left panel of Chart 9. The CPI for rice has surged since last year. It has doubled since then, pushing up the overall CPI by around 0.6 percentage points. The year-

on-year rate of increase in rice prices has recently decelerated, but the price level has more than doubled compared with the first half of last year.

Turning to the right panel of Chart 9, the Corporate Goods Price Index (CGPI) by commodity suggests that the surge in rice prices since the second half of last year has been driven by brown rice. The price of polished rice has also been increasing in line with that of brown rice. While simple supply and demand curves alone may not fully explain the price formation mechanism of the rice market, generally speaking, if an item has relatively few substitutes and  low  price  elasticity  of  demand,  its  price  is  more  likely  to  be  influenced  by  supply conditions.

The results of the Bank's September 2025 Opinion Survey on the General Public's Views and Behavior showed  that  around  70  percent  of  respondents  feel  that  prices  have  gone  up significantly compared with a year ago. The share of such respondents decreased slightly from the previous June survey, which may reflect, for example, the effects of the government's release of stockpiled rice. That said, given that rice is a staple food in Japan, even if the yearon-year rate of increase in price decelerates, if the price level itself remains high, this could elevate perceived inflation and, consequently, inflation expectations. 1

An increase in the price of a wide range of items, not just rice, is also reflected in the uptrend in the diffusion index of price changes, in terms of the share of price-increasing items minus the share of price-decreasing items (left panel of Chart 10). It has been pointed out that in Japan, in contrast to the United States, the CPI for goods, rather than services, showed strong momentum immediately after the pandemic. Nonetheless, according to the final demandintermediate demand (FD-ID) price indexes, services prices have been increasing at all stages of the production process, from upstream to downstream. Of these indexes, the year-on-year rate of increase in the price of services demanded at the final stage of economic activity has been stable at slightly over 2 percent for about the past year (right panel of Chart 10). My

1 See, Olivier Coibion and Yuriy Gorodnichenko, ""Inflation, Expectations and Monetary Policy: What Have We Learned and to What End?"" NBER Working Paper , no. 33858, 2025. Mainly based on U.S. data, the authors suggest that the price of daily necessities, such as gasoline, which is easily observed and homogeneous, influences households' inflation expectations.

view is that it is quite  possible  that  these  developments will  be  reflected in  the  CPI in  a sustained manner.

Based on a comprehensive assessment of the aforementioned price developments, my view is that prices in Japan have, on the whole, been relatively strong recently. The Bank's view in the October 2025 Outlook Report is that ""with moves to pass on wage increases to selling prices continuing, the year-on-year rate of increase in the CPI (all items less fresh food) has been at around 3 percent recently, due to the effects of the rise in food prices, such as rice prices, and other factors."" I will discuss the outlook and the risk balance for prices in the following.

## Outlook for Economic Activity and Prices

The Bank's  nine  Policy  Board  members  indicate  their  respective  forecasts  for  Japan's economic activity and prices at the Monetary Policy Meetings (MPMs) held in the month in which the Outlook Report is released. Chart 11 shows their forecasts for real GDP and the CPI for all items excluding fresh food (core CPI) for each fiscal year. In the latest October 2025 Outlook Report, Japan's economic growth is projected to be modest temporarily and then to accelerate. As for prices, the effects of the rise in food prices, such as rice prices, are expected to wane through the first half of the next fiscal year.

Please take a look at the box in Chart 11. The Bank takes into account factors such as the following  as  risks  to  economic  activity:  developments  in  overseas  economic  activity  and prices  under the  impact  of  trade  and  other  policies  in  each  jurisdiction;  developments  in import prices; and the impact of changes in the economic environment on medium- to longterm growth expectations and on Japan's potential growth rate. As for risks to prices, the Bank considers the following: firms' wage- and price-setting behavior, and developments in foreign exchange rates and import prices. The risk balances assessed by each Policy Board member are shown by the shapes of the markers. A comprehensive look at the members' latest forecasts as of October indicates that risks to economic activity are balanced for fiscal 2025 and skewed to the downside for fiscal 2026, and that risks to prices are balanced.

Let me elaborate on the risks related to the United States and to rice, both of which in Japanese, as I mentioned, can be represented by the same character. I consider U.S. tariffs to pose a downside risk to economic activity, while also  posing both upside and  downside  risks to prices. Weaker external demand is a downside risk to prices, whereas stronger supply-side constraints, for example, pose an upside risk to import prices. Regarding rice, if its price level significantly heightens consumers' perception of rising prices, this would create an upside risk to prices through a rise in inflation expectations, while potentially posing a downside risk to economic activity, given the impact on consumption. That said, the overall risk balances for economic activity and prices depend not only on those two factors but also on various others.  Of  particular  importance  is  financial  conditions,  which  I  will  discuss  in  the  next section, on the conduct of monetary policy.

## II. Conduct of Monetary Policy

## Financial Conditions and the Degree of Monetary Accommodation

Japan's financial conditions have remained accommodative. Please take a look at Chart 12. Real interest rates have been negative and have been at clearly low levels relative to other economies. Even if the negative range of the real interest rate narrows slightly, I believe that it  is  highly  likely  that  financial  conditions  will  continue  to  be  accommodative,  thereby continuing to stimulate consumption and investment.

In assessing the degree of monetary accommodation, one perspective is to examine how much real interest rates fall below the natural rate of interest, which represents the rate of interest at which the economy is in equilibrium. While estimates of the natural rate vary widely (right panel of Chart 13), it may be reasonable to assume that, in the long term, developments in the natural rate will be similar to those in the potential growth rate (left panel of Chart 13). I believe it is necessary to pay attention to how the natural rate and the potential growth rate evolve amid changes in the structure of the economy and society, such as demographic trends.

Given that real interest rates are currently at significantly low levels, I believe that the Bank needs to proceed with interest rate normalization -- that is, to return real interest rates to a state of equilibrium -- so as to avoid creating unintended distortions in the future. Recent developments in indicators of supply and demand conditions show that the output gap has

been at around 0 percent (left panel of Chart 14), while labor market conditions have been tight amid a growing sense of labor shortage (right panel of Chart 14). In this situation, I believe it is necessary that the Bank continue to raise the policy interest rate and adjust the degree of monetary accommodation in accordance with improvement in economic activity and prices, as described in the Outlook Report.

While both the real interest rate and the natural rate of interest are real values, the comparison of their corresponding nominal rates -- specifically, the policy interest rate, currently at 0.5 percent, and the neutral interest rate -- has been a topic of discussion in monetary policy. I understand that this topic has also attracted significant attention among market participants.

## Underlying Inflation

When considering monetary policy conduct, I believe underlying inflation is an important concept  for  the  Bank's  mandate  of  achieving  the  price  stability  target  of  2  percent  in  a sustainable and stable manner.

There are various measures of underlying inflation. Some of those based on hard data play a certain role due to their well-defined calculation methodologies. The left panel of Chart 15 shows quarterly averages of traditional CPI measures. Among them, the year-on-year rate of increase in the CPI for all items excluding fresh food -- for which the Bank releases forecasts in  the  Outlook  Report,  as  mentioned  earlier --has  been  at  around  3  percent  recently. Meanwhile, the rate of increase in the CPI for all items excluding food and energy, which is a typical  core  inflation  measure  and  widely  used  overseas,  was  1.5  percent for  the  latest quarter.

The right panel of Chart 15 also shows measures of underlying inflation, calculated using hard  data  and  statistical  values  such  as  the  mean  and  median  of  item-level  prices. These measures are not directly affected by extreme price increases in individual CPI items, such as the recent surge in rice prices. A surge in such a staple food price may, however, influence the prices of related items and could also raise consumers' inflation expectations regarding overall food prices. This, in turn, may prompt firms to change their price-setting behavior for other

food items and possibly beyond. Therefore, I believe that rising rice prices could have secondround effects on overall prices.

A surge in food prices could therefore possibly affect inflation expectations. For inflation expectations, please refer to Chart 16. The left panel of this chart shows inflation expectations calculated with certain assumptions based on the results of the Bank's Opinion Survey, which I touched on earlier. The right panel of the chart shows indicators of inflation expectations based on surveys of firms and experts and on market data. All of these indicators suggest that inflation expectations have been on a solid uptrend over the past few years.

While  there are many  measures  of  underlying  inflation, taking into account their measurement errors and estimation uncertainty, overall, I believe that underlying inflation is about 2 percent. Still, I believe, in order to achieve the price stability target, it is important to examine the extent to which underlying inflation has remained stable or been anchored. To this end, I will continue to monitor, for example, whether the long-term inflation expectations, as well as the intercept of the Phillips curve -- which presents the relationship between prices and the unemployment rate -- is stable. In addition, I believe that it is necessary to conduct a comprehensive  assessment  by  monitoring  factors  that  affect  prices,  such  as  whether  the economy is resilient, and whether supply and demand conditions are tight.

Prices in Japan have recently been rising faster than the rate of underlying inflation. It is necessary to closely monitor whether the contribution of temporary supply-side factors to the increase in the CPI will diminish as expected. It is also necessary to monitor, for example, whether the rise in the price of food and other items could persist for longer than expected and to what extent such developments may influence inflation expectations.

In conducting monetary policy, the Bank needs to remain aware of the short- and long-term impact of its policies, while taking into account developments in economic activity and prices, as well as those in financial markets and the financial system. The Bank should make policy judgements based on data and information available at each point in time.

## Normalization of the Bank's Balance Sheet

While the primary focus of its monetary policy conduct is to control the policy interest rate, the Bank is currently normalizing its balance sheet, which grew substantially under the long period of unconventional monetary policy. The largest item on the asset side of the Bank's balance sheet is Japanese government bonds (JGBs). Please take a look at Chart 17, which shows the plan for the reduction of the Bank's purchase amount of JGBs. Under the plan implemented since July 2024, the amount of JGB purchases has been cut down by about 400 billion yen each calendar quarter. Meanwhile, at the June 2025 MPM, the Bank decided to continue with that pace of reduction until March 2026, and, from April 2026, to cut down the amount of purchases by about 200 billion yen each calendar quarter, in principle, so that it can strike a balance between improving market functioning and maintaining stability in the JGB markets. The amount of the Bank's holdings of JGBs will decline moderately each year on a stock basis, as the amount of bonds redeemed exceeds the amount purchased. The Bank will conduct an interim assessment of the reduction plan at the June 2026 MPM.

Please turn to Chart 18. At the September 2025 MPM, the Bank also decided on the principles for  the  disposal  of  its  holdings  of  exchange-traded  funds  (ETFs)  and  Japan  real  estate investment  trusts  (J-REITs).  Specifically,  it  will  dispose  of  these  assets,  with  the  sales amounts accounting for about 0.05 percent of the  trading  values in  the markets to  avoid inducing destabilizing effects on the financial markets as much as possible. In addition, under this pace of sales, the Bank ensures flexibility to support stability in the financial markets by, for example, enabling a temporary adjustment in the sales amount or a suspension of sales, in response to changes in financial market conditions.

My view is that the Bank should proceed steadily with normalizing its balance sheet in a predictable manner, and at the same time, it should discuss what would be the optimal size and structure of the balance sheet, from both the asset and liability sides.

Thank you.



## Economic Activity, Prices, and Monetary Policy in Japan

Speech at a Meeting with Local Leaders in Niigata

November 20, 2025

KOEDA Junko Member of the Policy Board Bank of Japan

## Overseas and Domestic Economies

Overseas Economies

Japan's Economy



Notes: 1. In the left panel, figures are the weighted averages of real GDP growth rates using countries' share in Japan's exports as weights. The real GDP growth rates are compiled by the IMF, and the rates from 2025 onward are its projections in the October 2025 World Economic Outlook (WEO). Figures for advanced economies are those for the United States, the euro area, and the United Kingdom. Figures for emerging and commodity-exporting economies are those for the rest of the world.

2. In the right panel, figures for 2025 are January-September averages.

Sources: Cabinet Office; IMF; Ministry of Finance.

Chart 1

By Region

By Type of Goods



Note: Based on Bank staff calculations. Figures in angular brackets show the share of each country or region (left panel) and of each type of goods (right panel) in Japan's total exports in 2024. In the left panel, figures for the EU exclude those for the United Kingdom for the entire period.

Sources: Ministry of Finance; Bank of Japan.

## Business Fixed Investment

Coincident Indicators



## Planned and Actual Investment



Notes: 1. In the left panel, figures for private construction completed are based on Bank staff calculations using the construction cost deflators, and that for 2025/Q3 is the July-August average.

2. In the right panel, the Tankan figures include software and R&amp;D investments and exclude land purchasing expenses. R&amp;D investment is not included before the March 2017 survey. The figures are for all industries including financial institutions. The figure for private nonresidential investment for fiscal 2025 is the 2025/Q2-Q3 average.

Sources: Cabinet Office; Ministry of Economy, Trade and Industry; Ministry of Land, Infrastructure, Transport and Tourism; Bank of Japan.

## Real Exports

Chart 3

## Operating Profits

Sources: Ministry of Finance; Bank of Japan.

## Wage and Income Situation



## Scheduled Cash Earnings



Notes: 1. In the left panel, ""disposable income, etc."" consists of disposable income and adjustment for the change in pension entitlements. Real values are based on Bank staff calculations using the deflator of consumption of households.

2. In the right panel, ""hourly scheduled cash earnings"" = scheduled cash earnings / scheduled hours worked. Figures are based on continuing observations following the sample revisions of the Monthly Labour Survey . Figures for 2025/Q3 are July-August averages. Figures for hourly scheduled cash earnings are seasonally adjusted. Shaded areas denote the periods of the state of emergency during the COVID-19 pandemic.

Sources: Cabinet Office; Ministry of Health, Labour, and Welfare.

## Corporate Sector

Chart 5



## Business Conditions

## Household Spending

Consumption Activity Index (CAI, Real)



120

115

110

105

100

95

90

85

80

CY

15

16

Consumption of Households s.a., CY 2015=100

Consumption of households (real)

Consumption of households (nominal)

17

18

19

20

21

22

23

24

25

Notes: 1. In the left panel, figures are based on Bank staff calculations. Figures for the CAI (travel balance adjusted) exclude inbound tourism consumption and include outbound tourism consumption. Nondurable goods include goods classified as semi-durable goods in the SNA. Figures in angular brackets show the weights in the CAI.

2. In the right panel, figures exclude imputed rent.

Sources: Cabinet Office; Bank of Japan; etc.

## Environment Surrounding Prices

## Import Prices (Yen Basis)



Producer Price Index



Notes: 1. In the left panel, the contribution of changes in commodity prices, etc. is calculated using changes in the import price index on a contract currency basis. The contribution of changes in exchange rates is calculated using the difference between the import price index on a yen basis and that on a contract currency basis.

2. In the right panel, figures exclude the effects of the consumption tax hike. Figures for ""beverages and foods, etc."" include agriculture, forestry and fishery products.

Chart 7

## Consumer Price Index (CPI)



Source: Ministry of Internal Affairs and Communications.

## Rice Prices

CPI (Rice)

CGPI by Commodity



Sources: Ministry of Internal Affairs and Communications; Bank of Japan.

Chart 9

## Price Pass-Through

## Diffusion Index of Price Changes



FD-ID (Services)



Notes: 1. In the left panel, the diffusion index is defined as the share of increasing items minus the share of decreasing items. The share of increasing/decreasing items is the share of items for which price indices increased/decreased from a year earlier. Based on Bank staff calculations using the CPI (less fresh food) excluding the effects of the consumption tax hikes, policies concerning the provision of free education, and travel subsidy programs. The CPI figures from April 2020 onward are Bank staff estimates and exclude the effects of measures such as free higher education.

2. In the right panel, figures show the year-on-year rate of change in services prices at each demand stage. Stages 1 to 4 represent the four stages of intermediate demand, from upstream to downstream.

Sources: Ministry of Internal Affairs and Communications; Bank of Japan.

## Outlook for Economic Activity and Prices

## Risks to economic activity

- Developments in overseas economic activity and prices and in import prices
- Impact of changes in the economic environment on growth expectations and Japan's potential growth rate

## Risk balance

Risks to economic activity are skewed to the downside for fiscal 2026. Risks to prices are generally balanced.

## Policy Board Members' Forecasts and Risk Assessments

chg,



## Real GDP



- Notes: 1. The solid lines show actual figures, while the dotted lines show the medians of the Policy Board members' forecasts (point estimates). 2. The locations of     , △ , and ▼ in the charts indicate the figures for each Policy Board member's forecasts to which they attach the highest probability. The risk balance assessed by each Policy Board member is shown by the following shapes: indicates that a member assesses ""upside and downside risks as being generally balanced,"" △ indicates that a member assesses ""risks are skewed to the upside,"" and ▼ indicates that a member assesses ""risks are skewed to the downside.""

Source: Bank of Japan.

## Risks to prices

- Firms' wage- and price-setting behavior
- Developments in foreign exchange rates and import prices

Chart 11

## Real Interest Rates by Maturity



Note: Figures for real interest rates for each maturity are calculated as government bond yields minus the composite index of inflation expectations (Bank staff estimates) for the corresponding maturity.

Sources: Bloomberg; Consensus Economics Inc., Consensus Forecasts ; QUICK, QUICK Monthly Market Survey &lt;Bonds&gt; ; Bank of Japan.

Chart 13

## Potential Growth Rate and Natural Rate of Interest



- Notes: 1. In the left panel, figures are Bank staff estimates. Figures for the first half of fiscal 2025 are those for 2025/Q2.
2. In the right panel, the estimates are based on Bank staff calculations using the models proposed in the respective papers.
- Sources: Bloomberg; Cabinet Office; Consensus Economics Inc., Consensus Forecasts ; Ministry of Finance; Ministry of Health, Labour and Welfare; Ministry of Internal Affairs and Communications; Bank of Japan.

## Indicators of Supply and Demand Conditions

Output Gap

## Measures of Labor Market Conditions



Notes: 1. In the left panel, figures for the output gap are Bank staff estimates. The Tankan factor utilization index is calculated as the weighted average of the production capacity DI and the employment conditions DI for all industries and enterprises. The capital and labor shares are used as weights. There is a discontinuity in the data for December 2003 due to a change in the survey framework. Shaded areas denote recession periods.

2. In the right panel, figures for the employment conditions DI are for all industries and enterprises. Figures for the DI for enterprises' employment conditions (full-time employees, etc.) are seasonally adjusted.

Sources: Ministry of Health, Labour and Welfare; Bank of Japan.

## Underlying CPI Inflation (1)

CPI Indicators

|                            | yly % chg.   | yly % chg.   | yly % chg.   | yly % chg.   |
|----------------------------|--------------|--------------|--------------|--------------|
|                            | 24/Q4        | 25/Q1        | 25/Q2        | 25/Q3        |
| Consumer Price Index (CPI) |              |              |              |              |
| Less fresh food            | 26           | 3.1          | 35           | 29           |
| Less fresh food and energy | 23|          | 24           | 32           | 32           |
| Less food and energy       | we           | 5            | 26           | £5           |

CPI: Trimmed Mean, etc.



- Notes: 1. In the left panel, figures are on a quarterly basis. Figures for ""less food and energy"" include alcoholic beverages.
2. In the right panel, figures are on a monthly basis, and are based on Bank staff calculations using the CPI excluding the effects of the consumption tax hikes, policies concerning the provision of free education, and travel subsidy programs. The CPI figures from April 2020 onward are Bank staff estimates and exclude the effects of measures such as free higher education.

Sources: Ministry of Internal Affairs and Communications; Bank of Japan.

Chart 15

## Underlying CPI Inflation (2)

## Inflation Expectations (Households)



Inflation Expectations (Firms and Market Participants)



- Notes: 1. In the left panel, figures are from the Opinion Survey on the General Public's Views and Behavior . Figures for ""qualitative"" are estimated using the modified Carlson-Parkin method for a 5-choice question. Figures for ""quantitative"" are estimated, with answers above 5% replaced by 5%, and answers below -5% replaced by -5%.
2. In the right panel, figures for ""firms"" show the inflation outlook of enterprises for general prices (all industries and enterprises, average) in the Tankan . The BEI (break-even inflation) rate is the yield spread between fixed-rate coupon-bearing JGBs and inflationindexed JGBs. The dotted line represents the rate calculated based on inflation-indexed JGBs issued before October 2013.

Sources: Bloomberg; QUICK, QUICK Monthly Market Survey &lt;Bonds&gt; ; Bank of Japan.

Chart 17

## Plan for the Reduction of the Purchase Amount of JGBs (June 2025 MPM)

1. Long-term interest rates: to be formed in financial markets in principle
2. JGB purchases: appropriate for the Bank to reduce its purchase amount of JGBs in a predictable manner, while allowing enough flexibility to support stability in the JGB markets

In principle, the Bank will reduce the planned amount of its monthly purchases of JGBs each calendar quarter as follows.

- 
- Until January-March 2026                                 : about 400 billion yen (the reduction plan decided in July 2024 will be maintained)
-  From April-June 2026 to January-March 2027 : about 200 billion yen
-  The Bank will gradually reduce its purchase amount so that it can improve the functioning of the JGB markets in a manner that supports stability in the markets.

## Reduction in a Predictable Manner



## Allowing Enough Flexibility

1. The Bank will conduct an interim assessment of the plan at the June 2026 MPM.
2. In the case of a rapid rise in long-term interest rates, the Bank will make nimble responses by, for example, increasing the amount of JGB purchases.
3. The Bank is prepared to amend the plan at the MPMs, if deemed necessary.



## Decisions on Disposal of ETFs and J-REITs (September 2025 MPM)

## Fundamental principles for the disposal

The Bank should dispose of its holdings of ETFs and J-REITs for adequate prices, taking into account the condition of the financial markets.

The Bank should avoid incurring losses as much as possible.

The Bank should avoid inducing destabilizing effects on the financial markets as much as possible.

Experience of the sales of the ""stocks purchased from financial institutions""

The Bank completed in July 2025 the sales of the stocks purchased for financial stability purposes, while avoiding major market impact.

1. The Bank will sell its holdings of ETFs and J-REITs to the market at a scale generally equivalent to that of the sales of the ""stocks purchased from financial institutions.""
* The Bank will sell each ETF and J-REIT at the amount approximately proportionate to the share of each asset in its holdings, with consideration to spreading out the timing of the sales.
2. A framework supporting the stability in the financial markets will be provided.
4.  Under the pace of sales described above, the trustee may temporarily adjust the sales amount or suspend the sales, in response to changes in the condition of the financial markets.
5.  The pace of sales may be modified at future MPMs, based on the fundamental principles and the experience from the sales to be conducted.
3. The disposal will begin once necessary operational preparations are completed.

|                                   | Stocks (completed)                            | ETFs                                          | J-REITs                                     | J-REITs                                     | J-REITs                                     | J-REITs                                     | J-REITs                                     | J-REITs                                     | J-REITs                                     | J-REITs                                     | J-REITs                                     | J-REITs                                     | J-REITs                                     | J-REITs                                     | J-REITs                                     | J-REITs                                     | J-REITs                                     |
|-----------------------------------|-----------------------------------------------|-----------------------------------------------|---------------------------------------------|---------------------------------------------|---------------------------------------------|---------------------------------------------|---------------------------------------------|---------------------------------------------|---------------------------------------------|---------------------------------------------|---------------------------------------------|---------------------------------------------|---------------------------------------------|---------------------------------------------|---------------------------------------------|---------------------------------------------|---------------------------------------------|
| Pace of sales (amount per year) * | About 150 billion yen (About 620 billion yen) | About 330 billion yen (About 620 billion yen) | About 5 billion yen (About 5.5 billion yen) | About 5 billion yen (About 5.5 billion yen) | About 5 billion yen (About 5.5 billion yen) | About 5 billion yen (About 5.5 billion yen) | About 5 billion yen (About 5.5 billion yen) | About 5 billion yen (About 5.5 billion yen) | About 5 billion yen (About 5.5 billion yen) | About 5 billion yen (About 5.5 billion yen) | About 5 billion yen (About 5.5 billion yen) | About 5 billion yen (About 5.5 billion yen) | About 5 billion yen (About 5.5 billion yen) | About 5 billion yen (About 5.5 billion yen) | About 5 billion yen (About 5.5 billion yen) | About 5 billion yen (About 5.5 billion yen) | About 5 billion yen (About 5.5 billion yen) |
| Proportion to the trading value   | About 0.05%                                   | About                                         | About 0.05%                                 | About 0.05%                                 | About 0.05%                                 | About 0.05%                                 | About 0.05%                                 | About 0.05%                                 | About 0.05%                                 | About 0.05%                                 | About 0.05%                                 | About 0.05%                                 | About 0.05%                                 | About 0.05%                                 | About 0.05%                                 | About 0.05%                                 | About 0.05%                                 |
|                                   |                                               | 0.05%                                         |                                             |                                             |                                             |                                             |                                             |                                             |                                             |                                             |                                             |                                             |                                             |                                             |                                             |                                             |                                             |",Junko Koeda
https://www.bis.org/review/r251210a.htm,"Richard Doornbosch: Building resilience through unity - Caribbean collaboration on climate, cyber, and cross-border payments","Keynote address by Mr Richard Doornbosch, President of the Central Bank of Curaçao and Sint Maarten, at the Central Banking Autumn Meetings, Rio de Janeiro, 19 November 2025.",2025-11-19 00:00:00,"## Richard Doornbosch: Building resilience through unity - Caribbean collaboration on climate, cyber, and cross-border payments

Keynote address by Mr Richard Doornbosch, President of the Central Bank of Curaçao and Sint Maarten, at the Central Banking Autumn Meetings, Rio de Janeiro, 19 November 2025.

* * *

Good morning, fellow central bankers, distinguished guests, colleagues, it is an honor to open this conference, it is also an honor to be sharing the stage with Mr. Tombini a friend and close colleague when we were both working at the IMF. I would also like to congratulate central banking and the global director Michelle Godwin for organizing this timely conference here in Rio de Janeiro.

As Rio de Janeiro is a city known for cultural diversity, innovation, and resilience. These are all qualities that resonate with the theme of this year's meetings: international collaboration in a new era of global shocks and innovation.

In recent years, global challenges have tested our ability to adapt, from geopolitical tensions and supply-chain disruptions to cyber incidents and the growing costs of climate change. These shocks have demonstrated that resilience implies readiness. How prepared are we to adapt, and transform in the face of uncertainty. The global economy and financial markets have - for now - hold up remarkably well in the face of uncertainty. It is for this reason that the title of our Financial Stability Report (FSR) this year was stability amid global uncertainty. But it is clear we should brace for more impact. The IMFs global financial stability report marks that the ground is shifting beneath the seemingly tranquil surface. Valuations of risk assets appear stretched and concentration risks in certain segments have reached historic highs.

As President of the Centrale Bank van Curaçao en Sint Maarten (CBCS), and this year's chair of the CARICOM Governors' Group, I speak from the perspective of small, open, and interdependent economies that are inherently vulnerable to shocks. For the Caribbean, resilience is more than a policy objective. It is existential and a crucial element in any strategy on sustainable development.

## Resilience as a strategy

Across the Caribbean, the past decade has shown that sound macroeconomic management is the first line of defense. Jamaica stands out as an example. It's high public debt level of over 140% GDP has been brought back to around 65% by the combination of a strong fiscal framework and an independent central bank targeting inflation. However overall debt levels are still high for the roughly 15 million people in Caricom member countries. Although debt has come down to pre-pandemic levels as economic growth has bounced back. In several instances debt to gdp is still around 80% or more.

In Curaçao and Sint Maarten fiscal positions are stable, debt-to-GDP ratios are trending downward since COVID, and external reserves are covering nearly five months of

imports. Inflation is moderating and financial soundness indicators remain solid. These are the fruits of a prudent fiscal framework and a fixed exchange rate regime with an independent central bank.

Yet as the global landscape evolves, resilience must go beyond strong policy fundamentals. It must rest on what I call the A-B-C of resilience:

- Agility: the capacity to respond quickly and redirect policy in times of disruption.
- Buffers: the financial strength to absorb shocks.
- Capability or operational resilience: having the systems, governance, and human capital that ensure operational continuity under stress.

Buffers and agility have improved markedly across the Caribbean. Banking systems are well-capitalized and liquid, with an average capital adequacy ratio (CAR) above 20% and asset quality improving. Non-performing loans (NPLs) are contained below 5 percent, and the banking sector has the ability to manage credit risk effectively. However, there is significant heterogeneity in the region that mask vulnerabilities in specific sectors and countries.

Central banks in the region have strengthened agility, enhancing crisis-management frameworks, expanding stress-testing capabilities, and improving coordination between monetary and fiscal authorities to respond more swiftly and decisively to shocks.

As central banks our core mandate is to ensure our financial system can withstand shocks. For financial stability we must continuously invest in the monitoring of systemic risk, apply our macroprudential policy toolkit appropriately and have strong crisis management frameworks in place.

Agility and buffers require our continuous attention and vigilance, however as a central bank in a small open economy I feel the third component, capability, keeps me up at night as often. For central banks in the Caribbean, operational preparedness of the financial system increasingly revolves around three priorities: Climate, Connectivity, and Cybersecurity, which you could call the three Cs of Caribbean operational resilience.

## C1: Climate resilience

Last month, Hurricane Melissa made landfall in Jamaica causing catastrophic damage on the western part of the country. Its rapid intensification, fueled by abnormally warm waters, caused severe flooding and coastal damage. Even islands far from the storm's path, experienced unusually high waves and strong swells. This serves as a reminder that our vulnerabilities are shared.

In Curaçao, water scarcity and coral bleaching already affect tourism and fisheries which are two vital economic sectors. In Sint Maarten, the memory of Hurricane Irma (2017) remains vivid, reminding us how quickly progress can be undone and how long it takes for small island economies to recover.

Fortunately, we see across the Caribbean remarkable examples of leadership in climate resilience:

- Dominica's determination to become the world's first climate-resilient nation after Hurricane Maria.
- Barbados' leadership on debt-for-climate swaps.
- Jamaica's pioneering use of catastrophe bonds and disaster-risk financing.
- Saint Lucia's sustained investment in renewable energy.

Since the Paris Agreement, the central banking community has invested heavily in understanding and managing climate-related financial risks. Central banks have developed climate-scenario analyses, stress tests, and disclosure frameworks, and assessed transition risks linked to the shift toward net zero. Our task is to translate this knowledge into action.

The objective is to ensure that balance sheets of financial institutions become less vulnerable to climate risk. Accounting for climate risk - both physical and transition risk - should gear investments towards projects, capital goods and activities that are more climate resilient.

Central bank governors from the CARICOM took an important step to advance green finance - or investments to reduce climate risks - at the beginning of the year when they signed a cooperation agreement with the Worldbank/IFC to work on a green taxonomy for the CARICOM countries. The taxonomy will help companies and financial institutions in the Caribbean to design bankable climate projects by standardization of definitions and by exploring sectors and investment opportunities with a high potential for reducing emissions and - more importantly - increasing resilience.

The Caribbean Economic Research Team (CERT) has produced reports on climate risk analysis and strategies to strengthen regional climate risk assessments. While at the CBCS, we aim to integrate climate risk assessments into our financial stability framework, in particular via climate stress testing. Climate resilience in Curacao and Sint Maarten - and in the wider Caribbean - is not about environmental policy perse but about sound financial management. Financial institutions that account for climate resilience are stronger and more creditworthy.

The high climate vulnerability of Caribbean countries makes it unlike that private investment alone can ensure adequate resilience. That's why the Bridgetown initiative of prime minister Mia Mottley to reform the global financial architecture is so important. Emergency access to finance and liquidity through Catastrophe bonds and private insurance might well become prohibitively expensive for climate vulnerable countries. Institutions such as the International Monetary Fund (IMF) and the World Bank must therefore be made ready to scale up their liquidity support in case of natural disasters in climate vulnerable countries. The COP-30 that is being held at this very moment in Belem, Brazil, will hopefully agree on concrete steps to scale up climate finance.

But climate resilience is only one of the factors threatening our capability to absorb shocks and ensure financial stability. A resilient economy must also remain connected domestically, regionally, and globally.

## C2: Connectivity resilience

Connectivity is the basis for modern, inclusive, and resilient economies. Larger economies might take this for granted. For small and open economies like those in the Caribbean this is top-of-mind and a constant fight. As smaller countries have more ""foreign land"". Imports in the US being closer to 10-15%, whereas imports in Curacao are more than 90% of GDP.

Connectivity is a key consideration for the payment system where correspondent banks are quick to de-risk institutions, countries or even the region as a whole. Every day, thousands of transactions link our islands to the wider Caribbean, South America, North America, and Europe. Yet cross-border payments remain too often fragmented, costly, and slow. Threatening our operational resilience.

The future we seek is one where across our region sending money is as seamless as sending a WhatsApp message. That future is approaching when instant-payment systems in individual jurisdictions become connected, reducing dependence on large international card networks while preserving global interoperability.

A key step toward this vision was taken last week in Curacao when four CARICOM countries agreed to move the CARICOM Payments and Settlement System (CAPSS), beyond the design and proof-of-concept phase toward pilot implementation. CAPSS is designed to facilitate real-time payments in local currencies, reduce transaction costs, enhance payment efficiency, and support deeper regional financial integration.

At the same time, innovation brings new challenges. Stablecoins and tokenized payments more broadly have the potential to enhance speed and inclusion of cross border payments, but if unregulated, they may undermine financial stability and the integrity of fixed exchange rate regimes.

Just as regular e-money and money market funds, stable coin providers must ensure funds are safe and transactions are monitored to prevent money laundering or terrorism financing. The lesson is clear: innovation must advance in step with sound regulation and trust. In reality the stable coin market has grown rapidly to over $300 in recent years while regulation is lagging. Major banks are preparing to issue stable coins increasing risk of fragmentation and rising transaction costs. In Caribbean countries they may increase unofficial dollarization undermining foreign exchange controls.

Ultimately, the goal should be a connected payment ecosystem, that is interoperable, inclusive, and secure. A payment system that empowers entrepreneurs and households, boosts regional trade, and reduces reliance on costly intermediaries.

We must think beyond the Caribbean. Deeper Latin American and Caribbean cooperation can accelerate progress. Engaging with regional and global initiatives, such as those by the BIS Innovation Hub and the IMF Roadmap for Enhancing Cross-Border Payments, we might be able to position our region not merely as an adopter but as a partner in shaping the future of global payment systems. A truly connected Latin American and Caribbean payments area, anchored in trust, inclusion, and shared standards, would transform how our citizens, businesses, and governments transact. This will make our region more connected and therefore more competitive and resilient.

Yet connectivity without security is a vulnerability, which brings me to our third pillar to worry about.

## C3: Cyber resilience

Today, central banks and financial institutions rely on digital systems for payments, oversight, and supervision. This digitalization drives efficiency and innovation, but it also introduces vulnerability. A single cyber incident can disrupt operations, freeze transactions, erode trust, and threaten financial stability.

In short, cybersecurity is a core pillar of financial stability and trust. As financial systems become more digital and interconnected, cyber threats are growing more sophisticated, global, and rapidly evolving. Artificial intelligence, deep fakes and quantum computing further exacerbate the challenge. For small, open economies like Curaçao and Sint Maarten, a single cyberattack can have disproportionate consequences, particularly if it happens during a crisis or recovery period. Imagine a regional payment processor being successfully targeted in the aftermath of a hurricane: relief funds could stall, communications could fail, and confidence could evaporate.

The question is not whether incidents will occur, but when. And when it happens, we must be able to recover and restore swiftly. It's about surviving what's gets through. Globally, cyber risk ranks among the leading threats to financial stability. The financial sector is now one of the three most-attacked industries worldwide. The Latin American and Caribbean region has recorded the fastest growth in reported cyber incidents by no less than a 25 percent annual increase over the past decade, according to the World Bank (2024). Financial institutions are under a cyber siege. Despite this surge, the region remains among the least protected, scoring only 10.2 out of 20 on the World Bank's cybersecurity-preparedness index.

The ongoing digital transformation of finance presents opportunities and challenges in equal measure. Greater reliance on third-party providers, cloud services, and emerging technologies such as Artificial Intelligence (AI) has expanded the attack surface. Technological advances have amplified these risks, while the costs of building cyber resilience have increased, adding operational pressure on financial institutions.

Recognizing these realities, the 65th CARICOM Governors meeting spend half a day last week on a cybersecurity masterclass, learning and discussing experiences and lessons learned. As cybersecurity is no longer an IT problem, it is a board room imperative. Whereas cyber security is often dealt with on an institutional level, failure has ramifications on a national level when payment systems are compromised or even on a regional level with cross border systemic risks.

The CBCS is reinforcing its digital infrastructure, strengthening regulatory oversight, and guiding supervised institutions in managing cyber risks.

In 2024, the CBCS adopted its IT Security Strategy 2025-2027, a roadmap for sound governance and management of IT environments within financial institutions, ensuring secure operations and resilience. The CBCS has also provided hands-on training based

on the Critical Security Controls of the Center for Internet Security (CIS) and the U.S. National Institute of Standards and Technology (NIST), focusing on business-continuity management and recovery from cyber incidents through real-life simulations.

This approach strikes a balanced path that encourages institutions to embrace the potential of AI and digital innovation while recognizing and mitigating their risks. It emphasizes collaboration, information sharing, and collective learning across jurisdictions and sectors, as cyber risk cannot be managed in isolation. While we are critically aware of these interdependencies, effective collaboration across institutions remains difficult in practice.

We know that even the most advanced systems are only as strong as the people who operate them. That is why capacity-building and human capital remains central. We should invest in a new generation of Caribbean cyber specialists, data analysts, and digital-policy professionals who can defend, innovate, and lead.

## Resilience through unity

Cybersecurity, Climate, and Connectivity are critical pillars of a resilience framework in the Caribbean. They are interconnected. A climate disaster can knock out power, communications, and payments. A cyber attack can paralyze relief efforts or compromise critical data. A resilient, connected payment system can accelerate disaster response, even when offline capabilities are utilized in the event of connectivity failure. Operational preparedness means ensuring that these systems reinforce one another, protecting our citizens, our economies, and the trust that underpins financial stability.

Resilience is not only about bouncing back, it is about moving forward stronger, smarter, and together. Financial stability is more than ever about operational resilience or capability - in the Caribbean. We should continue to focus on monitoring traditional systemic risk and utilizing our macro-prudential toolkit to ensure adequate capital and liquidity buffers. However, cybersecurity, climate and connectivity should receive as much attention as potential systemic risks to financial stability.

As small central banks it is crucial to cooperate on these issues. The central banks of the CARICOM countries have a structure in place to guide and deepen that cooperation. That is also the objective of Central Banking and this conference. To share experiences, encourage mutual learning and true collaboration. I believe this is extremely valuable and I hope this conference will create further momentum to work together among central banks and turn our shared vulnerabilities into shared opportunities, or perhaps even better, shared strengths.

Thank you.

## References

Bank for International Settlements. (2023). Project Atlas: Mapping the world of decentralised finance. BIS Innovation Hub. https://www.bis.org/publ/othp76.htm

Caribbean Community Climate Change Centre. (2021). Climate Resilience and Recovery Plan 2020-2030: Commonwealth of Dominica. https://faolex.fao.org/docs/pdf /dmi208028.pdf

Centrale Bank van Aruba. (2025). Resilience through transformation: Adlith Brown Memorial Lecture (Jeanette R. Semeleer). CBA.

Central Bank of Curaçao and Sint Maarten. (2025a). Economic bulletin - September 2025. CBCS. https://www.centralbank.cw/publications/economic-bulletins/2025

Central Bank of Curaçao and Sint Maarten. (2025b). Financial stability report 2025. CBCS. https://cdn.centralbank.cw/media/financial\_stability /20250515\_2025\_financial\_stability\_report\_cbcs.pdf

Center for Internet Security. (2023). CIS Critical Security Controls version 8. https://www.cisecurity.org/controls/cis-controls-list

Eastern Caribbean Central Bank. (n.d.). DCash - The digital version of the EC dollar. https://www.eccb-centralbank.org/d-cash

Eastern Caribbean Central Bank. (2025). DCash: Towards a digitally inclusive future. https://www.eccb-centralbank.org/blogs/dcash-towards-a-digitally-inclusive-future

International Monetary Fund. (2023). IMF and World Bank approach to cross-border payments technical assistance (Policy Paper No. 2023/062). https://www.imf.org/en/Publications/Policy-Papers/Issues/2023/12/22/IMF-and-WorldBank-Approach-to-Cross-Border-Payments-Technical-Assistance-542886

International Monetary Fund. (2024). Global Financial Stability Report: Cyber risk as a threat to financial stability.

https://www.elibrary.imf.org/display/book/9798400257704/9798400257704.xml National Institute of Standards and Technology. (2024). The NIST Cybersecurity Framework 2.0. U.S. Department of Commerce.

https://www.nist.gov/cyberframework

Organisation for Economic Co-operation and Development, Corporación Andina de Fomento, &amp; European Union. (2024). Latin American Economic Outlook 2024: Financing sustainable development in challenging times. OECD Publishing. https://doi.org/10.1787/c437947f-en

Organisation of Eastern Caribbean States. (2025). Payment system integration and the CARICOM Payments and Settlement System (CAPSS). https://www.eccb-centralbank.org/blogs/payment-system-integration

Rosenblatt, D. (2023). Caribbean Economics Quarterly: Volume 12, Issue 3 - Dealing with debt in the Caribbean. Inter-American Development Bank. https://publications.iadb.org/en/caribbean-economics-quarterly-volume-12-issue-3dealing-debt-caribbean

World Bank. (2021). Saint Lucia - Renewable Energy Sector Development Project (Project paper).

https://documents1.worldbank.org/curated/en/987131627783229934/pdf/Saint-LuciaRenewable-Energy-Sector-Development-Project.pdf

World Bank. (2021). World Bank catastrophe bond provides Jamaica US$185 million in storm protection [Press release].

https://www.worldbank.org/en/news/press-release/2021/07/19/world-bank-catastrophebond-provides-jamaica-185-million-in-storm-protection

World Bank. (2024). From fiction to reality: How Latin America became the world's most critical cyber battleground.

https://blogs.worldbank.org/en/latinamerica/seguridad-cibernetica-en-america-latina-yel-caribe

World Bank. (2025). Hurricane Melissa triggers 100% payout of US$150 million World Bank catastrophe bond for Jamaica [Press release].

https://www.worldbank.org/en/news/press-release/2025/11/07/hurricane-melissatriggers-100-payout-of-150-million-world-bank-catastrophe-bond-for-jamaica ECD Publishing. https://doi.org/10.1787/c437947f-en",Richard Doornbosch
https://www.bis.org/review/r251209d.htm,"François Villeroy de Galhau: About our monetary policy - a good position but not a comfortable, nor a fixed one","Speech by Mr François Villeroy de Galhau, Governor of the Bank of France, at the CEPR (Centre for Economic Policy Research) Paris Symposium, Paris, 5 December 2025.",2025-12-05 00:00:00,"

## Speech



## About our monetary policy: A good position but not a comfortable, nor a fixed one

Published on the 5th of December 2025

CEPR Paris Symposium 2025 Speech of François Villeroy de Galhau, Governor of the Banque de France, Paris, 5 December 2025

## Ladies and Gentlemen,

I am delighted to welcome you today to the Banque de France for the fourth edition of the annual CEPR symposium, a great opportunity for academics and policymakers to share knowledge. We've just heard Philippe Aghion, Nobel laureate 2025, challenge us with bold ideas on innovation and growth. Now, let me lay the necessary foundation which is trust and price stability: how does monetary policy navigate today's uncertainties?

Three years after reaching its peak, inflation is currently at 2.2% in the euro area and has been very close to target since May 2025.   Thanks to the credibility and effective action of the European Central Bank, this disinflation was achieved without triggering a recession, an outcome many observers had considered unlikely. We are, as President Christine Lagarde has observed, 'in a good place'. But a good position is not a comfortable one nor a fixed one, as I will discuss today. i

## I. Not a comfortable position: dealing with uncertainty

Claiming to be in a comfortable position in such an uncomfortable world would obviously be excessive. Uncertainty has eased but remains high: AI valuations, fiscal and political instability, trade shifts, geopolitical tensions, and doubts over the US dollar's global role keep CEOs and policymakers awake. Many of these uncertainties are 'Knightian', for which there is no well-defined set of probabilities over different outcomes. As inflation and economic conditions become less predictable, there are diverging assessments on the state of the economy and risks across agents. And when investors hold diverging views, markets are less likely to stabilize. Consider recent developments in bond markets on the one hand and in equity markets, on the other hand. With rising market perceptions of fiscal risks, we see tensions at the very long end of yield curve. At the same time, the stock market has been outperforming, with high price-to-earnings ratio and compressed credit spreads. Overall, this suggests some optimism in the short-tomedium-term but concerns on the longer term.

A well-known tendency when faced by uncertainty is cautious action, invoking Brainard' principle in monetary policy. Yet Banque de France research shows this can be counterproductive if agents expect systematic under-reaction to inflation shocks. In Bernanke's words: 'Brainard's attenuation principle may not always hold […] stronger action by the central bank may be warranted to prevent particularly costly outcomes.' ii iii

A risk-management approach to uncertainty: Agile pragmatism, forwardlooking with scenario analysis.

Hence, our repeated commitment to a 'data-dependent, meeting-bymeeting approach': it's more than a mantra; it's my favourite notion of 'agile pragmatism"". Data-dependency means pragmatism: our reaction is state-contingent - where the state includes not only current economic conditions but also the outlook and the balance of risks.

And meeting-by-meeting means agility. But meeting-by-meeting doesn't mean ignoring the future. Transmission lags make forward-looking analysis essential, which is why our projections play a crucial role in the decision-making process. But we also have to think about how robust our decisions are to plausible and policy-relevant future shocks that may occur during those lags. This is where scenario analysis becomes valuable.

Banque de France staff research is developing an example of monetary policy risk-management framework informed by a range of scenarios. Let me illustrate: last June, ECB staff provided two different risk scenarios around the baseline, shown in Chart 1.a. iv image ImageThématique Governor Monetary policy Catégorie Speech

OPTIMAL MONETARY POLICY ACROSS SCENARIOS

Chart 1: Alternative Scenarios and Probabilities





Source:

ECB

SDW,

MPE

June

2025.

Note:

OP

=

Optimal

Policy

Mild scenario: elimination of bilateral tariffs between the United States and the EU, trade policy uncertainty to pre-2018. Severe scenario: broad-based increase in US tariffs, symmetric retaliation from the EU, prolonged period of elevated trade policy uncertainty.

CEPR SYMPOSIUM § DECEMBER 2025

BdF

calculations.





Optimal monetary policy across scenarios

Each scenario implies a different optimal policy path, as shown in Chart 1.b. Our framework then allows assigning weights not only to alternative scenarios but also to the baseline, as reported in Chart 2.a.

image ImageThématique Governor Monetary policy Catégorie Speech

## OPTIMAL MONETARY POLICY ACROSS SCENARIOS

Chart 2: Alternative Scenarios and Optimal Policy

Scenario a)

weights

(based on

SPF)



Source:

BdF

calculations.

Note:

Bayesian weights

(Adrian et

al.2025)



Mild scenario: elimination of bilateral tariffs between the United States and the EU, trade policy uncertainty to pre-2018. Severe scenario: broad-based increase in US tariffs, symmetric retaliation from the EU, prolonged period of elevated trade policy uncertainty. The analysis also incorporates an additional scenario (""Others') designed to address potential incompleteness of the ECB scenario set. The weighted scenario of Chart 2.b is the probability weighted combination of the baseline, mild and severe SCENATIOS,.. . woosiun5 ECEMBER 2028

Optimal monetary policy across scenarios





These weights are assigned based on their relevance according to the Survey of Professional Forecasters (SPF). Accordingly, we can design a 'synthetic' scenario as the weighted average of the baseline and the two alternative risk scenarios. Chart 2.b. shows the resulting synthesis. Despite different optimal paths under the scenarios, the synthetic path aligns very closely with the optimal path under the baseline. This is due to the low probability assigned to the more extreme scenario. In short, while an extreme tariff shock would justify looser policy, its low plausibility means little need for extra insurance now.

That said, many questions remain open on scenarios. Who selects and prepares them? And beyond that, how should we use them? Two main options exist to derive a single policy decision from a range of scenarios: one is to synthetise scenario results using techniques like Bayesian synthesis - as illustrated above - and model averaging; and the other is to select the policy path that avoids the worst outcome across scenarios following a robust control approach. Both have pros and cons. Broadly speaking, I would say that scenario synthesis should be the preferred option, while robust control remains valuable when facing extreme risks whose plausibility is difficult to gauge. In that case the policy maker might be more concerned with taking out insurance against the 'bad state' of the world.

Such 'what if?' exercises also help illustrate how the central bank might respond to shocks, allowing agents to learn about the policy rule from plausible - not just observed - decisions. Of course, such descriptions must remain indicative, and not committing.

In its November 2025 Monetary Policy Report, the Bank of England has interestingly integrated scenarios into monetary policy council discussions and communications. Minutes, reports, and press releases use scenarios to highlight risks around key policy judgments and to explain alternative policy paths assuming each scenario occurs. Board members use scenarios to explain their decision within the monetary council.    As you know, we in the Eurosystem prefer that decisions are communicated without attributing individual views to encourage completely open discussions and preserve collegiality. But we could use v

## scenarios more.

## Communication under uncertainty

The academic literature has found that monetary policy uncertainty heightens market interest rate sensitivity to macroeconomic surprises . We cannot, of course, reduce the fundamental economic and geopolitical uncertainty. But central banks can reduce monetary uncertainty about their future decisions through efficient communication, by enhancing economic agents' perceptions of the policy framework. vi

In a context of high uncertainty, we need to combine a hard commitment to the 2% symmetric inflation target and a soft guidance on the interest rate path. Soft guidance is not the kind of almost unconditional and 'long horizon' forward guidance we have used at the ELB. Nor should soft guidance be interpreted as static. After our June and July meetings, markets had the wrong perception of the ECB having necessarily reached the terminal rate. This has contributed to a somewhat undesired tightening of FCI (Chart 3.a) and, since last June, the sensitivity of expected rates to expected inflation has diminished (Chart 3.b).

image ImageThématique Governor Monetary policy Catégorie Speech

## EXPECTATIONS AND PERCEPTION OF THE REACTION FUNCTION

Chart 3: Expectations and perception of the reaction function

## a) Euro Area Financial Condition Index



Source: Bloomberg. BdF calculations.

b) Change in sensitivity of OIS rates after June 25



Source:

Bloomberg.

BdF

calculations.

Notes: ""*"", ""**"", ""***"" indicate that the change in sensitivity of the OIS rate is statistically significant at the 90%, 95%, 99% level.

CEPR

SYMPOSIUM

Expectations and perception of the reaction function

§

DECEMBER

2025





Soft signaling is our everyday life business, in which we influence market expectations of future near-term policy but keep optionality.

Furthermore, I am convinced that we must openly address all other sources of economic uncertainty with a broader and bolder communication beyond monetary policy . Today, uncertainty stems primarily from deteriorating public finances, and missed opportunities for structural reforms. If we don't advocate a full implementation of the Draghi and Letta reports by the 1/1/28, including 'a 28 regime for 2028', who will? A remarkable move in this direction is Christine Lagarde's recent speech in Frankfurt: 'Another six years of inaction - and lost growth - would not just be disappointing. It would be irresponsible."" vii th viii

## II. Nor a fixed position: navigating the road ahead

At the current juncture, our good position is not either a fixed one. Let me first dispel three main misconceptions I sometimes hear about our reaction function.

1.    Three misconceptions about our reaction function

## The ECB would have gone back to 'below but close to 2%'

The first misconception is about an alleged asymmetry of our reaction function. Some believe we would tolerate inflation to go below but close to 2% for a prolonged period of time. In our strategy review since 2021, as reaffirmed in 2025, we strongly stated that our inflation target is fully symmetric. Positive and negative deviations from 2%, if lasting, are equally undesirable. Let me be clear: we are not 'keeping our powder dry' to create a buffer with the effective lower bound.

## The bar for changing rates would have increased

Second, some might think that we should react only to large deviations from the target and ignore small ones. But as I already stressed , what matters is not the size of the deviation, it is whether it is temporary or persistent. Even small but lasting deviations can affect the anchoring of inflation expectations. This is why we need to analyse thoroughly the effect of each shock, to decide whether to look through or act preemptively. Agility is not excessive policy activism, but it is not stickiness either. ix

## The ECB could not decouple from the Fed

Finally, considering the Fed's recent easing, and with an opposite mistaken view, some recommend that the ECB follow suit, but wrongly so. Remember Spring 2024, there was a symmetric debate about whether the ECB could truly cut its policy rates before the Fed. And the ECB did it (Chart 4.a).

image ImageThématique Governor Monetary policy Catégorie Speech

## ECB INDEPENDENCE AND DECOUPLING

Chart 4: Different path for the US and the EA



s

Deposit

Facility

Source: ECB, FRED.

ture

Source: ECB, Fed.

Figure a): Fed Fund Rate (monthly frequency, lower limit). PCE inflation (monthly frequency, all items, year-on-year pct change). ECB Deposit Facility Rate (monthly frequency). HICP inflation (monthly frequency, all items, year-on-year pct change). Figure b): Fed total assets as a percentage of GDP, last point on Q2 2025. ECB total assets, last point on Q3 2025.

ECB independence and decoupling

Despite this decoupling, the exchange rate market absorbed this without turbulence, as it happened on several other occasions over the past decade.

Moreover, let me remind the obvious: we are already significantly more accommodative than the US. Our deposit facility rate is at 2%, close to estimates of the natural rate, our balance sheet size is 38% of GDP [Q3 2025], whereas it is 22% of GDP in the US [Q2 2025] (Chart 4.b). The 10year OIS stands at about 2.5% in the euro area, compared to about 3.5% in the US.

## 2.    Some thoughts on Quantitative Normalisation

There have also been mistaken suggestions that because the Fed has concluded the reduction of its aggregate securities holdings, we should do the same. Nevertheless, this raises a more serious question about the right size of our balance sheet. I agree with my colleague Isabel Schnabel that the word 'Quantitative tightening' is misleading about the present process: we should speak of 'Quantitative normalisation' (QN)   . But until when and to what size? We will discuss next year about the implementation of our operational framework introduced in September 2024, but let me share two considerations: x



Rate

—=Dollar

Euro

Exchange

Rate ares

Rate

Fed

Fund

United

Sates





-    We should maintain ample liquidity in the European banking system. At present, it is still abundant, with our excess liquidity of about EUR 2,500 bn. It is to be compared with the necessary level of liquidity to have money market rates anchored to the floor policy rates, namely FREL (Floor Required Excess Liquidity) which is estimated on average at about EUR 1,500 bn, with however a wide confidence interval around this average (Chart 5.b).

image ImageThématique Governor Monetary policy Catégorie Speech

## BALANCE SHEET NORMALISATION

Chart 5: The normalisation of repo programs and liquidity



Balance sheet normalisation

But if we were to come to a situation of scarcer liquidity in the euro area, or perceived as such by banks, it would risk provoking an undue credit tightening, as well as an unlevel playing field with international banks.

-    Liquidity, as we all know, can be provided 'on demand', through short-term refinancing operations, and/or through structural operations of the Eurosystem, including longer term refinancing operations and a structural portfolio. Short-term refinancing will regain part of its pre-GFC importance, but we also need to build a structural portfolio for at least two reasons: refinancing operations could still be associated for banks with a stigma effect; there is a need for the central bank to remain present on the bonds market, even above the ELB, for several reasons (transmission of monetary policy, climate change, etc.).



coe

|





## 3.    The name of the game is full optionality

Euro area annual inflation reached 2.2% in November, according to the flash estimate released on Tuesday. This remains a good position, for the seventh month in a row. This average hides nevertheless two paradoxes.

This stability encompasses inflation dispersion across countries

There is significant heterogeneity between countries, between low inflation in France (0.8%) or Italy (1.1%) and still elevated inflation in Germany (2.6%) and Spain (3.1%). This heterogeneity is mainly driven by the price of services: countries with low inflation in services are those with the lowest total inflation rates (Chart. 6.a).

image ImageThématique Governor Monetary policy Catégorie Speech

## INFLATION DISPERSION IN EUROPE

Chart 6: Inflation dispersion across countries

## a) Total and Services Inflation in the EA

Services



Inflation in

2025

Source: Eurostat, total and service inflation is YoY, last point: October 2025.

Inflation dispersion in Europe

Differences in service inflation are themselves largely due to wage dynamics (Chart 6.b). In Germany, with infrequent wage negotiations, wages are late in catching up with past inflation, compared to France, with annual negotiations and an indexed minimum wage. Once the catching-up is over in each country, we can hope we will see an evolution towards lower inflation rates in the services sector in the euro area.

b) Wage and Services inflation in the EA



growth

(%)

in

2025

Q2

Source: Eurostat, service inflation and compensation (per head) growth is YoY, last point: 2025 Q2.





These apparently stable inflation data are surrounded by significant risks on the inflation outlook.

This is the present paradox: stable data, but significant risks. There are upside risks on inflation, such as global value chain fragmentation, and public spending in defence and infrastructure in Germany. There are downside risks as well: a greater deceleration of wage growth, a stronger euro, and cheaper imports from China. Over the latest six months this year compared to the same period last year (May-toOctober 2025 vs 2024), Chinese imports in the euro area increased by 11% in volume, and their price decreased by 9%. To give an order of magnitude, the last two phenomena could reduce inflation by about 0.2 percentage point in 2027 according to Banque de France estimates. The postponement of ETS2 to 2028, voted by the European Parliament, will also post-pone its inflationary impact of around a 1/4 of percentage point from 2027 to 2028. To these 'traditional' downside risks, we should add a systemic 'Knightian' one with financial instability due to global equity market valuations, private credit and high government debts. Furthermore, this financial instability could be triggered by the attacks to the credibility and independence of the Fed.

Bottom line: (i) the downside risks on the inflation outlook remain at least as significant as the upside risks, and we would not tolerate a lasting undershooting of our inflation target; (ii) the name of the game for our future meetings remains full optionality. The only fixed figure is our 2% inflation target; it is not any terminal interest rate, and we don't exclude any policy action.

In the battle to reach the inflation target, we have finally taken the lead, and this is no small achievement. But being ahead doesn't give us permission to relax.  As the French tennis champion René Lacoste used to say: 'If you're on the cusp of winning, remember that there is no opponent who plays better than an opponent who is about to lose'. As in a tennis match, it's not the last shot that matters, it is the next one. We must not stay fixed on the court and should anticipate how the game could evolve. In other words, agility is at the crossroads of two other virtues: extreme clarity about our determination to deliver the 2% inflation target; pragmatic humility and optionality about our next shots to that end.

In October 2022 the year-on-year HICP Inflation rate reached the peak level of 10.6% in the Euro Area. In May 2025, inflation was 1.9% and never went below 1.9% or above 2.2% since. i

Brainard (W.C.) (1967), ' Uncertainty and the Effectiveness of Policy ', The American Economic Review, Vol. 57 Issue 2, Papers and Proceedings of the Seventy-Ninth Annual Meeting of the AER, 411-425, May Bernanke (B.S.) (2007), ' Monetary Policy under Uncertainty ', speech at the 32nd Annual Economic Policy conference, Federal Reserve Bank of Saint Louis, 19 October; Bauer (M.) et al. (2025), ' Accounting for Uncertainty and Risks in Monetary Policy ', Finance and Economics Discussion Series 2025-073, Board of Governors of the Federal Reserve System. ii iii

- Lhuissier (S.) (2026), forthcoming. iv
- Pill (H.) (2025), ' Evolving UK monetary policy in an evolving world ', speech at the Institute of Chartered Accountants of England and Wales annual conference, London, 17 October v
- Bauer (M.D.), Pflueger (C.E.), Sunderam (A.) (2024), ' Perceptions about Monetary Policy ', The Quarterly Journal of Economics, Vol. 139, Issue 4, 4 November, Swanson (E.T.), Williams (J.C.) (2014), ' Measuring the Effect of the Zero Lower Bound on Medium and Longer-Term Interest Rates ', The American Economic Review, Vol. 104, No. 10, pp. 3154-85, October. vi
- vii
- Villeroy de Galhau (F.) (2024), ' Monetary Policy in Perspective (II) : Three landmarks for a future of 'Great Volatility' ', speech at the London School of Economics, London, 30 October

viii

Lagarde (C.) (2025), '

From resilience to strength : unleashing Europe's

', speech at the 35th Frankfurt European Banking domestic market

Congress, Frankfurt am Main, 21 November

- Villeroy de Galhau (F.) (2024), ' Monetary Policy in Perspective (II) : Three landmarks for a future of 'Great Volatility' ', speech at the London School of Economics, London, 30 October ix
- Schnabel (I.) (2025), ' Towards a new Eurosystem balance sheet ', speech at the ECB Conference on Money Markets 2025, Frankfurt am Main, 6 November x",François Villeroy de Galhau
https://www.bis.org/review/r251209c.htm,Piero Cipollone: The transformation of money - technological disruption and the future of financial services,"Guest lecture by Mr Piero Cipollone, Member of the Executive Board of the European Central Bank, at the Frankfurt School of Finance & Management, Frankfurt am Main, 8 December 2025.",2025-12-08 00:00:00,"SPEECH

## The transformation of money: technological disruption and the future of financial services

## Guest lecture by Piero Cipollone, Member of the Executive Board of the ECB, at the Frankfurt School of Finance &amp; Management

Frankfurt am Main, 8 December 2025

Money is at the heart of what central banks do. [ ]  Ever since central banks have existed, their fundamental role has been to issue money and protect its value. This role has been the same for centuries, and I don't expect it to change. But what is changing is the environment in which central banks must deliver on this mandate. There are obviously many sides to this, but today I will focus on technology. 1

Digital payments are the new normal. And new technologies have emerged that are disrupting financial services, leading us to rethink their future. We are facing no less than a paradigm shift. Financial institutions have become technological entities. At the same time, tech firms have entered the realms of payments and finance. In fact, financial institutions and tech firms have all become fintechs. What was once a niche has become the norm. Harnessing technology to provide better financial services is now the name of the game.

Central banks are no exception. If they are to retain their role in issuing money that is fit for purpose, they have to embrace technology and shape the transformation of money. Adapting to new technologies is not an option, it is an existential must. If central banks don't issue digital money, they will lose their central role in money issuance and fail to provide an anchor of stability to the entire financial system. Central banks are increasingly becoming tech organisations; they must evolve with technology, or risk falling behind.

Today, I will argue that in the European context, the central bank needs to not just follow but take a leading role in this transformation. If it doesn't, Europe risks failing to leverage its collective strength. This is because financial integration is key to achieving the network effects and economies of scale required to enable our economy and financial sector to reap the benefits of these new technologies while mitigating their risks. This is particularly vital for the European Central Bank, which operates in a monetary union, where the singleness of money across the union is necessary for the smooth functioning of payments and the effective transmission of monetary policy. Looking ahead, we also need to ensure the singleness of digital money. Doing so will provide a Europe-wide ecosystem in which the private sector can compete by offering, and scaling up, innovative new services.

We can build on strong foundations. Over the past 25 years, the euro has become the currency of 20 member countries, with Bulgaria set to become the 21st euro area member next month. The euro has established itself firmly as the world's second most important currency. The Eurosystem - that is, the ECB

and the national central banks of euro area countries - implements a single monetary policy that safeguards the value of the euro and sustains the trust Europeans place in their money.

We have built robust market infrastructures that underpin the euro. T2 (for large-value payments), T2S (for securities) and TIPS (for instant payments) make it possible to settle in central bank money, a risk-free asset. Together with ECMS (for collateral management), these public payment rails allow money, securities and collateral to move freely, safely and efficiently across the euro area. Seen from where we were 25 years ago, the degree of integration achieved in just over two decades is remarkable.

However, we still face three key challenges.

First, fragmentation persists for retail payments. While the Single Euro Payments Area (SEPA) has provided a pan-European solution for credit transfers and direct debits, we have not achieved the same result at the point of interaction. [ ]  Despite infrastructures like TIPS enabling instant payments across the euro area and the encouragement of the Eurosystem, we still lack a European solution that can be used to pay digitally throughout the euro area for all use cases. This has resulted in an excessive dependency on non-European providers for critical retail payment services like cards and digital wallets. This raises fundamental questions about our strategic autonomy, as this dependency could potentially be used against us as an instrument of economic coercion. 2

Second, the very nature of money and payments is changing in ways that could undermine the balance that has underpinned monetary stability in Europe. The emergence of new technologies, such as tokenisation and distributed ledger technology (DLT) [ ] , has the potential to enhance efficiency in capital markets. But in the absence of tokenised central bank money, the new ecosystem would not have a common risk-free settlement asset at its core. The lack of the latter could undo the progress achieved in wholesale payments between financial institutions by reintroducing fragmentation and credit risk, while creating new dependencies. Moreover, the expansion of alternative settlement assets denominated in foreign currencies would go against the objectives of the savings and investments union and undermine monetary sovereignty. This would also challenge the balance between public and private money that has served us well so far, with public money providing an anchor of stability into which all private assets can be converted. 3

Third, cross-border payments have been a lingering challenge. Because they remain slow and expensive, the race is on to make them more efficient. While this is a possible use case for stablecoins, the latter create a number of risks for domestic currencies and financial systems. They could also threaten the international role of the euro if no strong European alternative emerges to challenge the currently dominant dollar-denominated stablecoins.

In this context, inaction is not the best choice for Europe. Doing nothing could lead to central bank money becoming increasingly marginalised, which could end up challenging the resilience of our payments system and undermining the stability of our financial system, our monetary sovereignty, our strategic autonomy and our economic security. Over time, this could also weaken the competitive position of European financial institutions and infrastructures, which, given their importance for the financing of the economy, could in turn weigh on European productivity. And it could diminish the role of the euro on the global stage.

Our mandate does not allow us to take these risks lightly. When the foundations of money and payments are shifting along with technology, the central bank cannot stand still. We must modernise our payments offering so that it evolves alongside technological progress and supports the development of an integrated European market for digital payments and digital assets. Our goal is not to replace private innovation but to provide a solid public foundation that will enable the private sector to innovate at scale while avoiding excessive dependencies.

This requires a reinvigorated public-private partnership across three payment dimensions: retail, wholesale and cross-border. In my remarks today, I will outline our overall approach and then explain our strategy for retail payments (with the issuance of a digital equivalent of cash, the digital euro), wholesale payments (by making it possible to settle DLT-based transactions in central bank money) and cross-border payments (with the interlinking of fast payment systems).

## A public-private partnership anchored in central bank money The complementarity of public and private money

The Eurosystem's starting point is its core responsibility as an issuer of money and guardian of the smooth functioning of payment systems. In practice, this means offering means of payment for retail and wholesale transactions, while ensuring that payment systems remain safe and resilient.

This has several implications.

First, central bank money is a key pillar of our financial system, and we have a duty to keep it fit for purpose as technologies and preferences evolve. [ ]  It cannot be merely a niche solution for specific use cases or a dispensable add-on; it must respond to the evolving needs of people, businesses and market participants. 4

Second, we want to see a strong European payments ecosystem, where the private sector can provide robust, efficient and innovative solutions that can be scaled up.

These two objectives are not contradictory. In fact, they have strong synergies.

Central bank money solutions are based on pan-European infrastructures and standards that the private sector can leverage. This not only reduces the risk of fragmentation and ensures interoperability, but also avoids the need for the private sector to duplicate investments, and reduces costs for the system as a whole. This is particularly important in a sector characterised by network effects, where technological dominance and proprietary standards can otherwise restrict the ability of others to compete, innovate and scale up, as is currently the case in digital retail payments.

Another complementarity stems from the characteristic of central bank money as a settlement asset free of credit and liquidity risk, issued by an institution that can deliver finality and stability, even under stress. Some fear that this may create the perception that private money is unsafe. I think the opposite is true. It is the very existence of central bank money as a safe asset and the convertibility of private money at par at all times that gives people confidence when using private money. That is what makes a euro a euro across instruments, institutions and technologies. On the rare occasions when this relationship was broken - in the Free Banking Era in the United States [ ] , for example - financial instability ensued. Experimenting without central bank money for retail or wholesale payments would be unwise. 5

In fact, in the wholesale space, this is a key reason why the private sector has explicitly told us that the absence of central bank money as a settlement asset is a major impediment to the growth of the digital assets ecosystem. Today, wholesale settlement in the euro area is already digital and in central bank money. But innovation is moving into new environments: tokenised securities, DLT-based trading and settlement, and smart contract automation. If we want these innovations to be scaled up safely in Europe, central bank money has clear advantages in terms of safety, scalability and liquidity management compared with private settlement assets constrained by reserves backing and market risk. [ ] 6

In other words, central bank money guarantees the availability of a European settlement solution covering the euro area as a whole, ensuring the singleness of money and strengthening resilience. At the same time, it provides common rails that create a level playing field and a safe basis for the private sector to compete and innovate on functionality, user experience, value-added services and business models.

## A collaborative approach

To leverage public-private synergies, our approach is explicitly collaborative. We actively engage with all stakeholders, for instance in the context of the Euro Retail Payments Board and our advisory groups on market infrastructures. [ ]  We also conduct tests in conjunction with the market rather than building solutions in isolation. Let me give you two examples. 7

First, in the retail space, we set up a digital euro innovation platform to explore innovations and applications that the digital euro could enable. The first round involved almost 70 participants - including merchants, fintech companies, start-ups, academia, banks and other payment service providers. [ ]  Market participants identified conditional payments, i.e. payments that are triggered automatically when predefined conditions are met, as a key driver of innovation. Using the digital euro's standards and its reservation of funds functionality - which would allow money to be set aside while a payment is in progress - payment service providers could offer conditional payments throughout the euro area that go far beyond what is available today. In online shopping transactions, for example, funds could be released to the seller only after the buyer confirms delivery. Reimbursements could be automated and, in the case of delayed services, refunds could be streamlined. Payment service providers would also be able to automate business-to-business payment flows in a standardised way, helping to speed up payments, reduce paperwork and cut costs. 8

Second, in wholesale markets, the Eurosystem conducted extensive exploratory work in 2024 on settling

DLT-based transactions in central bank money. Some 64 participants were involved in real and mock transactions covering a wide range of securities and payments use cases. [ ]  With a total of €1.6 billion 9

settled over a six-month period, this was the largest and most comprehensive exploratory work on wholesale DLT settlement in the world to date.

## Technology neutrality

In adapting our offering of central bank money and supporting the digital transformation of financial services, we are technology neutral. We are not picking winners.

In retail, offering cash in both physical and digital form is in itself an example - and even a condition - of technology neutrality. It avoids limiting the choice of paying in central bank money to the payment format. This supports consumers' freedom of choice. Discriminating against central bank money in digital payments would, on the contrary, reduce this freedom.

Another example of technology neutrality is that we are designing the digital euro to remain open to new technologies. Take privacy, for instance. The digital euro is designed to make privacy a priority, not least by offering an offline functionality that will offer cash-like privacy. And for online payments, the Eurosystem will only see encrypted codes for the payer and the payee. We will not see any personal information.

Moreover, we are committed to keep using the most advanced privacy-enhancing technologies suitable for a system that must reliably and instantaneously process a considerable number of transactions every day.

In wholesale markets, we may see a future where DLT is used in some segments, traditional databases in others, with hybrid architectures in many cases. Our objective is not to oblige market participants to use a particular technological stack, but to ensure that whichever technology they adopt, the system remains safe, integrated and resilient by being connected to central bank money. This is why we will offer central bank money settlement for both DLT-based and traditional transactions. We are also neutral towards private business models and actors, provided they operate within a robust regulatory perimeter. Market participants should be able to innovate, but they must respect prudential and conduct requirements and meet expectations for anti-money laundering and countering the financing of terrorism.

## The digital euro: establishing a European solution and a single market for everyday retail payments

Having presented the key pillars of our approach, namely complementarity between public and private money, public-private collaboration and technology neutrality, let me now discuss in more detail what this approach entails for retail, wholesale and cross-border payments.

In retail payments, the digital euro will ensure all Europeans can use a European solution to pay throughout the euro area, in shops, in ecommerce and from person to person. At the same time, the digital euro will establish a single market for everyday retail payments by making it much easier for providers to scale up private European solutions.

## A digital equivalent of cash

For decades, cash has provided a universal means of payment that everyone could use for most payments, thanks to its legal tender status. But as commerce becomes increasingly digital - with online payments, for instance, now accounting for one-third of day-to-day transactions - the use of cash is declining.

In the absence of an equivalent public option in the digital sphere, the gap has been filled by a few mostly non-European solutions. International card schemes account for two-thirds of card transactions in the euro area. Out of 20 euro area countries, 13 do not even have a domestic card payment solution.

This situation cannot be solved through the interoperability of existing domestic solutions. While such interoperability can help address some challenges, it does not create domestic solutions where they do not exist, nor does it allow existing domestic solutions to expand to use cases they do not currently cover. Interoperability requires each participant to develop functionalities in parallel. This increases costs and complexity, hindering scalability.

The digital euro would be fundamentally new in the European context. It would provide a European digital means of payment in central bank money that would have legal tender status and would thus be accepted throughout the euro area wherever one can pay digitally. For consumers, it would extend the benefits of cash to the digital sphere. And for merchants, it would reduce costs compared with the dominant international payment solutions, both directly and indirectly by increasing merchants' negotiating power.

## Preserving the role of banks in financing the economy

The digital euro has been designed to preserve the role of banks in the financing of the economy. In the euro area, banks assume a key role in this regard and thus in the transmission of monetary policy. We have no intention of disrupting this role. In fact, the digital euro will protect it.

Banks will be at the centre of the digital euro distribution; they will keep the customer relationship and manage the digital euro accounts. This will allow them to retain data that are crucial for assessing the creditworthiness of their clients and thus for their role in financing the economy. And we will prepare with banks so that they are ready to distribute the digital euro. In 2027 we plan to launch a pilot offering banks an opportunity to gain first-hand experience in a simulated digital euro ecosystem. This pilot will not only provide the Eurosystem with valuable insights, but will also allow banks to provide feedback. [ ] 10

Moreover, the digital euro will allow banks to be compensated (they will continue receiving fees), while no longer having to pay the fees charged by international card schemes (as the Eurosystem will cover scheme and settlement costs).

And by offering a convenient payment solution, the digital euro will reduce the risk that the banks' customers turn to alternatives. This will reduce the risk of deposit outflows to stablecoins, which could soon represent an alternative to banks as the source of funds for payments with cards and mobile solutions.

Several safeguards have been included in the design of the digital euro to ensure it does not disintermediate banks. First, the digital euro will not be remunerated. Second, a link to their commercial bank account will allow consumers to pay amounts that exceed their digital euro holdings, thereby reducing their incentive to keep high digital euro holdings in the first place. And third, digital euro holding limits will avoid any destabilising deposit outflows. [ ] 11

## A springboard for European private solutions to expand

Moreover, the digital euro is a major opportunity for European payment service providers, including banks. First, co-badging with digital euro would allow existing European payment solutions to expand their reach, without losing transactions for which they are already accepted. [ ]  This applies to both physical cards and digital wallets. 12

Second, the digital euro would provide a single standard across Europe with unparalleled coverage given the digital euro's legal tender status. Using this standard would significantly reduce the cost of expanding the acceptance network of European payment solutions. We have been working on this standard with market participants as part of the Rulebook Development Group. [ ]  This standard could be made available shortly after the legislation is adopted and merchants would start to use it even before the digital euro's launch, as they seek to be 'digital euro-ready' when updating their payment terminals. 13

Third, the digital euro would allow banks to offer new, innovative payment services at scale, for instance using the reservation of funds functionality as I explained earlier.

Overall, this could make it much easier for current European private initiatives to achieve their objectives, whether they are based on cross-border integration like Wero or interoperability like EuroPA. I believe there is no dichotomy between the digital euro and European private initiatives, but instead complementarities and synergies.

To reap these synergies, it is crucial that the digital euro and European private initiatives progress in parallel. By aligning on digital euro standards, while making maximum use of existing standards and building on established infrastructures as much as possible, costs will be minimised and the digital euro will create a single market for digital retail payments.

## Tokenised central bank money: powering an integrated European market for digital assets

Let me now turn to wholesale payments.

Besides seeking to offer central bank money to settle DLT-based digital asset transactions, we aim to fundamentally upgrade the infrastructure of our capital markets. If we want a future-proof savings and investments union, and if we want Europe to remain competitive, then we must collectively modernise the way financial assets are issued, traded, settled and serviced.

Europe needs to develop a market for digital assets that is based on European infrastructure, eurodenominated settlement assets and EU-wide regulation. This will also protect our strategic autonomy, monetary sovereignty and financial stability.

## Safely unleashing the innovation potential of tokenisation

A key promise of DLT and tokenisation is to bring the full lifecycle of a financial transaction - issuance, trading, settlement and custody - to a single digital environment. By design, this can reduce reconciliation processes, shorten settlement chains and lower operational risk. It can also enable atomic deliveryversus-payment and support trading and settlement on a 24/7 basis, 365 days a year, rather than being constrained by the opening hours of legacy systems. [ ]  Furthermore, smart contracts can automate corporate actions and cash flows that today require multiple intermediaries and manual checks. 14

This explains the significant interest for this technology in the European market. A large share of EU banks are experimenting with DLT applications, while a significant portion have already begun deploying them. [ ] 15

But a key risk is fragmentation. If tokenised payments and finance rest on fragmented pools of private settlement assets, liquidity can splinter and assets cannot be traded across platforms. Market participants may need to hold multiple stablecoins just to pay different counterparties. And in stress situations, the promise of one-to-one convertibility may be tested precisely when it matters most.

Central bank money, by contrast, is not constrained by the business model limits of private tokens. If made usable on DLT platforms, it can support the system in times of stress by elastically providing the ultimate liquidity. This matters not only for safety, but for the practical ability of a tokenised market to function smoothly at high volumes.

## Establishing an integrated European market for digital assets

However, structural problems cannot be fixed by technology alone.

Europe's post-trade landscape remains fragmented. Simply look at the number of central securities depositories across the EU, which is far higher than in other major jurisdictions. In itself, this would not be a problem, provided infrastructures were seamlessly interoperable and operated under comparable rules. But Europe still has too many operational frictions, legal discrepancies and national practices that make cross-border activity costly and complex.

A recent industry study finds that post-trade fees in Europe remain materially higher than in North America, and that fee schedules are often complex and hard to compare. Fragmentation ultimately shows up in the cost of capital and the attractiveness of European markets. [ ] 16

Tokenisation creates a rare opportunity to design a European market for digital assets that is integrated from the outset, in other words, a digital capital markets union. We must prevent the risk of creating platforms and standards that are incompatible and recreate the market segmentation we are trying to overcome.

We need an enabling framework that reduces legal uncertainty for tokenised securities and supports EUwide scalability. I therefore welcome the legislative proposals published last week by the European

Commission. [ ]  They extend, enhance and expand the DLT Pilot Regime. And, in this respect, the idea of 17

a dedicated EU legal framework for tokenised assets - sometimes described as a '28th regime' captures the direction of travel.

## Supporting Europe's strategic autonomy in digital finance

Another reason to provide tokenised central bank money is to ensure a digital asset ecosystem can grow in Europe without depending on non-European settlement assets. This is key to avoiding the creation of a similar dependency in wholesale payments to what we have now in retail payments.

If we do not provide a euro-anchored wholesale solution and a European infrastructure for the settlement of digital assets, Europe could find itself importing technology, standards, governance choices and ultimately strategic dependencies. Or worse: the digital assets market could simply fail to achieve scale in Europe and could end up growing elsewhere, which would weaken the international role of the euro and our strategic autonomy. In contrast, offering tokenised central bank money will help European innovation to scale up without outsourcing the monetary anchor.

So how are we implementing this strategy in practice? In July, the ECB's Governing Council approved a dual-track approach to settle DLT-based wholesale transactions in central bank money. [ ] 18

## Pontes: bridging today and tomorrow

The first track, also known as Project Pontes, will deliver a regular service for settling DLT transactions in central bank money as early as the third quarter of 2026. [ ] 19

Pontes is designed as a bridge between DLT platforms and our existing TARGET services. This bridge will enable tokenised asset transactions recorded on market DLT platforms to settle in central bank money. It will build on existing TARGET services, so it will maintain the Eurosystem's standards for safety, resilience and efficiency, while being cost-efficient. It will combine the features of the three solutions we used in our exploratory work, which will enable delivery-versus-payment and support automation.

We aim to gradually enhance Pontes with new functionalities following its launch, for instance by offering 24/7 operation and settlement, or by enabling the market to deploy automated smart contracts directly on the Eurosystem DLT.

In a nutshell, Pontes is about ensuring that, whichever DLT market platforms develop, safe euro settlement in central bank money will be available.

## Appia: the future ecosystem

The second track, Project Appia, will lay the groundwork for an integrated European digital asset ecosystem. [ ]  A launch paper to explain our vision will be published in early 2026. We want to explore how a future European digital financial market could operate if central bank money, commercial bank money and assets are able to interact efficiently in a tokenised environment. 20

Appia will explore two approaches, with the potential to combine them if needed. First, a European shared ledger that brings together central bank money, commercial bank money and other assets on a single platform where market stakeholders provide services. Second, a European network of interoperable platforms that reduces current frictions in the market.

This is also where the public-private partnership becomes tangible. Our role is to foster trust, develop European standards and ensure that the settlement anchor remains solid. The private sector's role is to build the services, liquidity, business models and possibly platforms that make tokenised markets valuable.

If we get this right, Europe can achieve something that is both technologically advanced and economically decisive: a tokenised market that operates at continental scale, with European rules and the euro at its core.

## Cross-border payments: openness with autonomy

Finally, we must look beyond our own borders.

Too often, cross-border payments still feel like they belong to a different era. They can be slow, expensive and opaque. According to the G20 monitoring framework, the cost of sending a USD 200 remittance averages around 6.5% of the transaction value globally, while the cost of business-to-business crossborder payments averages 1.6% of the transaction value and close to one-third of cross-border retail payments took more than one business day to be settled in 2024. [ ] 21

Structural factors are a significant cause of these issues. Much of the world still relies on correspondent banking chains. This model is inherently complex, as it multiplies intermediaries, compliance checks and points of failure, and it can require multiple currency conversions.

Against this backdrop, our objective is to build up European capability by combining openness and improving our payment connections with partners.

## Stablecoin limits

One possible trajectory is a world in which cross-border payments increasingly depend on one or a handful of global, US-dollar-backed stablecoins distributed through dominant platforms. There are three fundamental concerns with such an outcome.

The first is concentration and operational fragility. If global payments depend on a small number of issuers and technology stacks, operational incidents, governance failures or runs become systemic issues rather than firm-level problems. Stablecoins may promise frictionless transfer but they can also create vulnerabilities in payments.

The second concern is external rule-setting via infrastructure. If the main settlement asset and rails are anchored outside Europe, then Europe's payment outcomes are shaped elsewhere. In a world where payment networks can be weaponised, this is a risk to our economic security.

And third, there are currency substitution risks if the stablecoin ecosystem remains overwhelmingly dollarbased. If these instruments achieve scale via global platforms, they can amplify digital dollarisation dynamics - especially in regions with weaker currencies, but also by shifting the unit of account and settlement conventions in digital markets. We should avoid Europe's cross-border payments being structurally dependent on private settlement assets denominated in another currency.

## Enhancing cross-border payments

Against this backdrop, the Eurosystem has explored alternative ways to enhance cross-border payments.

TIPS already acts as a hub for instant payments within the euro area. [ ]  And it is open to currencies of European countries outside the euro area, with Sweden and Denmark already using TIPS as a platform to run fast payments in their own currencies, and Norway soon to join. Since October, TIPS also provides the option to make cross-currency payments between the euro area, Sweden and Denmark. 22

In the near future, TIPS could evolve into a global hub for instant cross-border payments by interlinking with other fast payment systems. The Eurosystem is making progress with its work to connect TIPS with India's Unified Payments Interface - which has one of the largest instant payment transaction volumes in the world - and with Nexus Global Payments, which will connect the fast payments systems of Malaysia, the Philippines, Singapore, Thailand and India. [ ]  We also announced in September that we will start exploring the interlinking of TIPS with Switzerland's fast payments systems, and we are in discussions with other possible partners. The Eurosystem, through Banca d'Italia, is also supporting the central banks of Albania, Bosnia and Herzegovina, Kosovo, Montenegro and North Macedonia in their efforts to develop an instant, multi-currency payments system modelled on TIPS. This 'TIPS clone' is due to become operational in July 2026, after which it will be technically possible to link it up with TIPS. 23

This strategy will facilitate cross-border payments, making them cheaper, faster and more transparent.

Interlinking can reduce the number of intermediaries, shorten transaction chains and lower costs, as it allows payment service providers to transact without routing payments through a long chain of correspondents.

However, the settlement leg of cross-border payments, by which money moves from the payer's to the payee's account, is also crucial. This is why we are also exploring how tokenised settlement assets could complement interlinking. We can build on the foundation of the BIS Innovation Hub's Project Rialto, which aims to improve instant cross-border payments using central bank money settlement. Other solutions based on tokenised forms of private money can also be explored.

Looking to the future, the digital euro could also act as a connector. It is first and foremost intended for domestic use. But it is also being designed with international use in mind, based on an approach that respects the sovereignty of other countries and mitigates potential risks. [ ] 24

When visiting the euro area temporarily, non-euro area residents would have access to the digital euro through a European payment service provider. Merchants outside the euro area may also be allowed to accept digital euro payments from euro area residents. Moreover, users outside the euro area could be granted permanent access to the digital euro, subject to an agreement between the EU and non-EU countries, and complemented by an arrangement between the ECB and the respective central banks. Appropriate safeguards would be put in place to avoid stoking currency substitution in those countries.

Finally, like TIPS, the digital euro's design includes multi-currency enabling features that would allow noneuro area countries to use the digital euro infrastructure to offer their own digital currencies and facilitate transactions across these currencies.

## Conclusion

Let me conclude.

In a rapidly digitalising economy where new technologies are emerging, we need to ensure central bank money remains fit for purpose. This is key for innovation, integration and independence in digital payments and digital finance.

This is of particular importance in the European context. As Mario Draghi has underlined, Europe's problem is that innovation is often blocked by fragmented markets at the scale-up stage, pushing successful firms to seek scale elsewhere. Digital payments are a case in point and we need to avoid digital finance following the same path.

This is highly relevant for Europe's competitiveness. Digital payments and finance stand at the interface between technology and the financial system, which together explain most of the productivity gap between Europe and the United States. [ ] 25

In this context, our strategy is neither state-centric nor hands-off, rather it is built around three principles.

First, central bank money must remain available and usable, also in digital form, to provide stability and trust.

Second, our approach is based on public-private partnership. The Eurosystem provides settlement in central bank money and common standards, while private intermediaries compete and innovate on top of this, delivering services that are innovative and scalable.

Third, we do not decide which technology or business models should prevail. This is up to market participants. The public sector's role is to ensure that our payment systems and our financial system remain robust in the face of technological disruption and that markets for money and assets remain fully integrated.

In retail payments, the digital euro is about ensuring that people in Europe can continue to use public money by complementing cash with its digital equivalent. This keeps pace with the shift of commerce towards digital payments. Its infrastructure, acceptance network and standards will also make it easier for European private solutions to scale up.

In wholesale payments, Pontes in the short term and Appia in the longer term will make it possible to settle digital asset transactions in central bank money. This will provide a safe basis for tokenisation to scale in Europe.

In cross-border payments, we can increase speed and reduce costs by interlinking fast payment systems and exploring innovative settlement arrangements.

The choice, ultimately, is about whether Europe wants to sit on the sidelines watching the next wave of innovative payment solutions, or be a co-architect of an innovative, integrated and resilient digital financial system that has the euro at its core.

By acting now, as part of a public-private partnership, we can play a leading role in the transformation of money and we can embrace innovation. This will support Europe's competitiveness, resilience and sovereignty, while delivering tangible benefits for European people and businesses.

Thank you for your attention.

1.

I would like to thank Cyril Max Neumann and Jean-Francois Jamet for their help in preparing this speech, as well as Thomas Vlassopoulos and Alessandro Giovannini for their comments.

2.

Cipollone, P. (2024), ' ', speech at the ECB conference on 'An innovative and integrated European retail payments market', 24 April. Innovation, integration and independence: taking the Single Euro Payments Area to the next level

3.

Decentralised ledger technology allows information to be shared and kept synchronised across a network. Tokenisation is the process of converting or issuing assets as programmable tokens. Tokenisation allows programmable tokens to carry two sets of information at the same time: information about the asset itself (what it is, who issued it, who holds it, etc.) and the rules about how this token can be used (who can hold it, how it can change ownership, as well as more complex rules compiled into smart contracts).

4.

Cipollone, P. (2025), ' Preparing the future of payments and money: the role of research and innovation', keynote speech at the conference 'The future of payments: CBDC, digital assets and digital capital

', hosted by Bocconi University, the Centre for Economic Policy Research and the European

Central Bank, 26 September. markets

5.

Rolnick, A.J. and Weber, W.E. (1983), ' ', American Economic Review , Vol. 73, No 5, pp. 1080-1091. For more about state banknotes, see Rockoff, H. (1974), ' ', Journal of Money, Credit and Banking, Vol. 6, No 2, May, pp. 141-167. New evidence on the free banking era The Free Banking Era: A Reexamination

6.

Cipollone, P. (2025), ' ', presentation at the Central Bank of Ireland's Financial System Conference 2025, 25 November. Tokenisation and the future of finance: the role of central bank money

7.

For more details on market contact groups, see the ECB's dedicated . web page

8.

ECB (2025), , September. Digital euro innovation platform - Outcome report: pioneers and visionaries workstreams

9.

ECB (2025), ' ', 1 July. The Eurosystem's exploratory work on new technologies for wholesale central bank money settlement

10.

ECB (2025), ' ', 28 November. Eurosystem to invite payment service providers to participate in digital euro pilot

11.

See ECB (2025), , October. Technical data on the financial stability impact of the digital euro

12.

Co-badging domestic private schemes and the digital euro would mean that domestic schemes would be the preferred brand wherever they were accepted, and the digital euro would be the fall-back solution wherever they were not accepted. See ECB (2025), , October. Fit of the digital euro in the payment ecosystem Report on the dedicated Euro Retail Payments Board (ERPB) technical workstream

13.

See ECB (2025), , 30 October. Update on the work of the digital euro scheme's Rulebook Development Group

14.

Vlassopoulos, T. (2025), ' ', speech at the House of the euro, 7 November. Making wholesale central bank money fit for the digital age - Delivering innovation, integration and independence to Europe's wholesale financial markets

15.

European Banking Authority (2024), ' ', fact sheet , April. At the time, over 60% of EU banks surveyed were actively exploring, experimenting with or using DLT solutions, while 22% had already started using DLT applications. Uses of DLT in the EU banking and payments sector: EBA innovation monitoring and convergence work

Association for Financial Markets in Europe (2025),' ', 1 October. The study finds that settlement fees in Europe are on average 65% higher than in North America, and safekeeping charges can be up to 650% more expensive. Complex, non-standardised and opaque fee schedules, ranging from 38 to 242 line items, make costs difficult to compare across CSDs. Analysis of CSD Fees in Major European Markets

17.

European Commission (2025), , 4 December. Market integration package

18.

ECB (2025), ' press release , 1 July. ECB commits to distributed ledger technology settlement plans with dual-track strategy

19.

See the . ECB's webpage on Project Pontes

20.

See the . ECB's webpage on Project Appia

21.

Financial Stability Board (2025), ' ', 9 October. G20 Roadmap for Enhancing Cross-border Payments - Consolidated progress report for 2025

22.

TIPS ensures instant payments are available throughout the euro area, as all payment service providers offering instant payments can access a TIPS liquidity account that uses central bank money, and all automated clearing houses offering instant payment services have technical accounts in TIPS. Since October 2025, all euro area payment service providers are mandated by the Instant Payments Regulation to have the option of receiving and sending instant payments.

23.

ECB (2025), ' ', MIP News , 20 November. Eurosystem moves forward on work to connect TIPS with India's Unified Payments Interface and with Nexus Global Payments

24.

Cipollone, P. (2025), ' ', speech by Piero Cipollone at the Regional Governors' Meeting, 1 April. Enhancing cross-border payments in Europe and beyond

25.

Draghi, M. (2024), , September, in particular the box entitled 'A closer look at the role of the ICT sector in the EU-US labour productivity gap' on page 27. The future of European competitiveness

',",Piero Cipollone
https://www.bis.org/review/r251209b.htm,"Fritzi Köhler-Geib: Exploring the future of finance - digital euro, crypto assets, and the quest for digital sovereignty ","Keynote speech by Dr Fritzi Köhler-Geib, Member of the Executive Board of the Deutsche Bundesbank, at the Official Monetary and Financial Institutions Forum (OMFIF) ""Future of payments forum"", Frankfurt am Main, 4 December 2025.",2025-12-04 00:00:00,"## Exploring the future of fi nance: Digital euro, crypto assets, and the quest for digital sovereignty

Keynote speech at the OMFIF ' Future of payments forum '

04.12.2025 | Frankfurt/Main | Fritzi Köhler-Geib

Check against delivery.

- 1 Introduction
- 2 Geopolitical and economic environment
- 3 Changing  fi nancial market architecture and instruments
- 4 The Bundesbank's approach to the future of fi nance
- 5 Conclusion

## 1 Introduction

Ladies and gentlemen,

Crypto assets have been a major talking point ever since Donald Trump ran for o ffi ce as the ' crypto president ' . But I was very interested in this topic even before that.

You see, in my previous role as Lead Economist and Programme Leader for Central America at the World Bank, my remit also covered El Salvador at the time of the then new President Nayib Bukele's inauguration. That ' s why I followed El Salvador ' s ' Bitcoin experiment ' in 2021 with great interest -it had decided to become the  fi rst country in the world to introduce Bitcoin as legal tender .

Just three years later , in 2024, El Salvador bowed to pressure from the IMF (International Monetary Fund) and responded to the weak demand by abol -ishing the obligation for merchants to accept Bitcoin as a means of payment. Just 1.3 % of money transfers between September 2021 and June 2024 were made in crypto assets. [1]

Today, as a central banker , I ' m revisiting this topic from a di ff erent vantage point. Current geopolitical fragmentation and technological progress are impact -ing the fi nancial architecture, markets, and instruments. This a ff ects how we, as a central bank, are able to ful fi ll our mandate. That is why, with the ' future of fi nance, ' we are establishing a new research focus, which also looks at the impact of stablecoins and digital currencies.

I would like to explore this topic with you based on the following three key questions:

- What kind of geopolitical and economic environment are we operating in and what role does digitalisation play? ·
- How are these developments a ff ecting fi nancial market structures, architec -ture and instruments? ·
- What is our response as a central bank? ·

## 2 Geopolitical and economic environment

Since the election of the new US (United States) administration, we have observed a high level of uncertainty. This is re fl ected in uncertainty indices as well as in market fl uctuations.

Looking at trade fl ows, indications of fragmentation are fairly abundant. For instance, a Bundesbank study shows that rising geopolitical risks in trade partner countries dampen imports of goods, make them more expensive and impair supply chains. In addition, they are likely to be conducive to a fragmenta -tion of global trade. [2] [3]

Compared to trade, evidence that fi nancial  fl ows have become more fragmented along geopolitical lines is less pronounced. But this could have far-reaching con -sequences as well.

In particular , recent fi ndings from Bundesbank research indicate that geopolit -ical shocks like Russia ' s invasion of Ukraine in February 2022 or the Hamas attack in October 2023 decrease lending, increase risk aversion, widen credit spreads, and raise volatility and interest rates. [4]

Another recent Bundesbank paper takes the Brexit referendum as an example of a fragmentation shock. Amongst other things, it fi nds that international fi nancial frictions following deglobalisation shocks can imply negative real e ff ects. In par -ticular , German banks reduced lending to UK (United Kingdom) fi rms following the shock owing to increased uncertainty about future losses. [5]

I was recently on a panel with Hélène Rey, who presented a fascinating way to re fl ect on the current situation in conceptual terms. Hélène drew interesting par -allels to the 1930s, when the United Kingdom relinquished its role as the fore -most economic power, but the United States was not yet ready to step up and take over -a phenomenon known as the  ' Kindleberger Trap ' . That was a period of high volatility in the markets. Whether we are currently in such a phase still remains to be seen. From a risk control perspective, however , it is also our responsibility to consider various scenarios. In any case, one thing is clear: Of Europe strengthens its fi nancial and political sovereignty, for example through the creation of a uni fi ed capital market and of digital central bank money, the euro could become more attractive as an international investment currency.

When we look at the role of digitalisation and technology, many ask whether a tech bubble is looming.

A look at history shows that groundbreaking innovations have often attracted signi fi cant capital in fl ows. Examples include the railroad boom in the United States in the 19th century or the second Industrial Revolution (1890s-1920s).

Research indicates that such episodes were characterised by major uncertainty about how new technologies would spread and which companies would ulti -mately emerge as winners. [6]

Research also shows that markets struggle to assess the value of new technolo -gies, which can lead to abrupt price corrections. The risk lies less in the innova -tion itself and more in its fi nancing.

Therefore, it is crucial to closely monitor the debt levels and risk concentration of banks and non-banks. Bundesbank President Joachim Nagel recently reminded us (in an interview) that Europe had learned the lessons from the 2008 fi nancial crisis. Together , Europe weathered the fi nancial turmoil in 2023 rather well. With e ff ective regulation for banks.

The key to addressing all these challenges is to strengthen Europe. Which brings me to my next point.

Europe has long embraced international cooperation and global trade. This has created international dependencies. Europe currently imports more than 80 % of its digital infrastructure and technologies.

Three US (United States) companies -Amazon, Microsoft, and Google  -  dominate nearly 70 % of the European cloud computing market (IaaS), compared to only 2 % for the largest European providers (SAP and Telekom, around 2 % each). [7]

To reduce these dependencies and promote technological sovereignty, invest -ment needs to be made in European IT (information technology) providers.

At the Bundesbank, we have systematically examined our IT (information technology) stack. We must now consciously decide where to reduce dependencies and where to deliberately maintain and actively manage them.

To answer the fi rst question: Geopolitical developments have led to major eco -nomic policy uncertainty. Recent research indicates growing fragmentation in trade and fi nancial fl ows. There are high technological dependencies in Germany and Europe. The key to addressing all these challenges is to strengthen Europe; integrating its fi nancial markets and managing our digital dependencies strategically.

## 3 Changing  fi nancial market architecture and instruments

Current geopolitical fragmentation and technological progress are impacting fi n ancial architecture, markets, and instruments. This a ff ects how we, as a central bank, are able to ful fi ll our mandate.

Let me illustrate this using the example of crypto assets.

Crypto assets can in fl uence  fi nancial stability and monetary policy transmission. Currently, we consider systemic risks to be limited, as crypto markets remain rel -atively small and are not deeply intertwined with the conventional fi nancial system. For instance, the market capitalisation of the crypto sector accounts for less than 1 % relative to global net fi nancial assets.

However, stablecoins, in particular , could gain further relevance against the back -drop of a growing global market and increasing legal clarity. Stablecoins are crypto assets that aim to maintain a stable value relative to a speci fi ed asset, typ -ically a central bank currency. Often, they hold reserve assets to create trust in their ability to meet redemption claims. As a result, they exhibit a more stable value compared to Bitcoin and have the potential to be used outside the crypto system  for cross-border payments, say.

The reserve assets of stablecoins -such as bank deposits or government bonds  already create a link between the crypto system and the traditional fi nancial system. If doubts arise about the adequacy or availability of these reserve assets, it could lead to a run. Consequently, this could trigger fi re sales in securit -ies markets and sudden withdrawals of stablecoin reserves from banks, posing contagion risks to the traditional fi nancial system. A signi fi cant portion of global stablecoin reserves is currently invested in short-term US (United States) govern -ment bonds, making certain issuers increasingly important players in this market.

The use of stablecoins for applications outside the crypto system is still limited but could grow. At present, stablecoins are primarily used within the crypto system for trading crypto assets like Bitcoin and in decentralised fi nance (DeFi (decentralised fi nance)) applications. Nevertheless, adjusted transaction volumes for 2025 are already estimated to reach nearly US (United States) $10 trillion by the end of November -a historic high and an increase of 70 % compared to 2024. During the same period, the global market capitalisation of stablecoins has risen to over US (United States)$300 billion, representing growth of nearly 50 % since the beginning of the year . [8] [9]

Continued rapid growth in global crypto markets and increasing ties with the tra -ditional fi nancial system could put fi nancial stability at greater risk in Germany as well -especially if this coincides with continued global fragmentation in the regulation of crypto assets. In order to eliminate risks from cross-border regulat -ory arbitrage, the timely implementation of internationally agreed global stand -ards for the regulation of crypto assets is key.

I ' d now like to say a few words about monetary policy transmission. The wide -spread use of assets as a means of transaction other than the domestic currency could undermine the central bank ' s ability to e ff ectively conduct monetary policy and maintain price stability.

Ikeda (2020) shows that the impact of a domestic monetary policy shock dimin -ishes as the unit of account is increasingly substituted by foreign currency. This means that the impact of a change in interest rates declines as prices and wages are increasingly set in units of a foreign currency. Conversely, the impact of foreign monetary policy on the domestic economy increases accordingly. [10]

Benigno, Schilling and Uhlig (2022) explore the e ff ects of using crypto asset as a global medium of exchange. They demonstrate that monetary policy independ -ence declines. In other words, they fi nd that the scope for setting interest rates that are distinct from foreign countries narrows if foreign forms of money or crypto assets are widely used as a means of payment. [11]

To sum up: The increased use of crypto assets and stablecoins is an example of how  fi nancial market structures, instruments and architecture are evolving. Even though the crypto market is still relatively small at present, it is growing rapidly. As a central bank, we are particularly focused on examining the implications for fi nancial stability and monetary policy.

This brings me to my last question: What is our response as a central bank?

## 4 The Bundesbank's approach to the future of fi nance

In response to the evolving fi nancial market architecture, instruments and struc -ture and their implications for fi nancial stability and monetary policy transmis -sion, we are intensifying our research on the future of fi nance. This includes not only the impact of crypto assets, but also areas such as the growing role of nonbank  fi nancial intermediaries (NBFIs (non-bank fi nancial intermediaries)) and the in fl uence of arti fi cial intelligence (AI (arti fi cial intelligence)) on fi nancial markets and the real economy. Through this research, we aim to support the calibration of monetary policy instruments.

To give you one example: Overall, the fi ndings in the literature on how NBFIs (non-bank fi nancial intermediaries) in fl uence monetary policy transmis -sion remain inconsistent. So far , there is no evidence that monetary policy has become less e ff ective. However, the relative importance of di ff erent transmis -sion channels could shift, particularly from the banking channel to asset prices. More research is needed in this area. Therefore, we will continue to expand our research in this fi eld. Possible questions are: What are the drivers of NBFI (non-bank fi nancial intermediaries) growth -regulatory arbitrage, increas -ing savings in an aging society, or the low-interest-rate environment and the search for yield? How do US (United States) monetary policy and fl uctuations in the dollar exchange rate a ff ect in fl ows and out fl ows in funds? What impact does this have on portfolio allocation? And what role does the insurance sector play in absorbing liquidity risks and transmitting monetary policy shocks? [12]

As central banks, we are also actively shaping the future of fi nance. In the Eurosystem, we are currently working on a central bank digital currency (CBDC (central bank digital currency)). From our point of view, CBDC (central bank digital currency) o ff ers many strategic advantages and o ff ers a solution to many of the challenges I mentioned before.

First, a retail CBDC (central bank digital currency) would make the euro and the euro area more resilient to emerging forms of money. Second, it would make European payments more e ffi cient. Despite a number of initiatives over the years, Europe still does not have a European digital solution for retail payments that can be used throughout the entire euro area. A third strategic bene fi t addresses concerns regarding sovereignty and security: The trend towards digital payments is leading to an ever-growing reliance on non-European card schemes and payment solutions provided by non-European bigtechs. A digital euro o ff ers a European alternative. Technically, it would run on European infra -structure and would make us less dependent on non-European providers.

The digital euro is intended to be a digital form of central bank money that is accepted all over the euro area and complements conventional central bank money  i.e. banknotes and coins -in a meaningful way. But before a digital euro can be introduced, the necessary legal foundations fi rst need to be staked out by EU (European Union) legislators.

This often reminds me of a visit I once took with my family to the US (United States) Mint in Philadelphia. It provides a powerful illustration of how the Founding Fathers of the United States decided to stop using the British pound sterling and instead introduce their own currency, the dollar , as they viewed it as a key element of sovereignty.

Additional bene fi ts, such as a higher degree of automation and 24/7 availability, could also be leveraged through the introduction of a wholesale CBDC (central bank digital currency) solution. It would also enable us to make complex capital market transactions more e ffi cient. In other words, it would be cheaper, quicker , more transparent and require less coordination.

That ' s why we at the Bundesbank are also exploring wholesale CBDC (central bank digital currency) for interbank trading, settling large-value transactions, and boosting e ffi ciency and security levels in the fi nancial system. One key characteristic is smart contract-enabled payments, which will be an innovative element. So it is more than the account balance that commercial banks currently hold with the central bank.

At the Bundesbank, we have developed our own technical ' trigger solution ' , which makes it possible to connect market DLT (distributed ledger technology) platforms with the Eurosystem ' s traditional payment system. This met with con -siderable interest among market participants during an exploratory phase last year. Our aim is to make tokenised central bank money available to the market as part of a future joint Eurosystem solution.

To achieve this, the Eurosystem is expanding its initiative to settle DLT (distributed ledger technology)-based transactions in central bank money. The initiative will follow a two-track approach. First, in the Eurosystem, we are developing an interoperability solution with TARGET (Trans-European Automated Real-time Gross Settlement Express Transfer System)

Services. Second, we are exploring a long-term integrated solution, including the settlement of cross-border transactions.

We thus wish to seize upon the current momentum and ensure that Europe con -tinues to be a pioneer in developing a tokenised fi nancial market infrastructure. This represents the fi rst step towards a more digital ecosystem that we will build in close cooperation with market participants in the years ahead.

To answer the third question: To meet the public's and banks' demand for digital payments using secure public money, we are working within the Eurosystem on the development of CBDC (central bank digital currency) -in a wholesale and in a retail variant. Additionally, we are expanding our research on the future of fi nance.

## 5 Conclusion

Ladies and gentlemen, that concludes my speech -thank you very much for your attention. The Bundesbank will continue to closely monitor developments in this space as they unfold, and we will play an active role in shaping the future of fi nance in compliance with our price stability mandate.

## Footnotes:

- Heise (2025), 1. El Salvador scha ff t Bitcoin als Währung wieder ab | heise online [https://www.heise.de/news/El-Salvador-schafft-Bitcoin-als-Waehrung-wieder-ab10268264.html]
- , Warum sich El Salvador wieder vom Bitcoin abwendet
- [https://www.zdfheute.de/politik/ausland/bitcoin-el-salvador-abschied-100.html]
- See for example Gopinath, G. et al. (2024), 2. Changing Global Linkages: A New Cold War
- [https://www.imf.org/en/Publications/WP/Issues/2024/04/05/Changing-GlobalLinkages-A-New-Cold-War-547357]
- , IMF (International Monetary Fund) Working Paper, No. 76.
- Khalil, M., D. Osten and F. Strobel (2025), 3. Trade dynamics under geopolitical risk | Deutsche Bundesbank
- [https://www.bundesbank.de/en/publications/research/discussion-papers/tradedynamics-under-geopolitical-risk-949866]
- , Discussion paper 03/2025. See also Bundesbank (2025), Geopolitical risks are weighing on euro area and US foreign trade | Bundesbank publications [https://publikationen.bundesbank.de/publikationen-en/research/researchbrief/2025-74-geopolitical-risks-953806]
- , Research Brief 74 edition March 2025. th
- Metiu, N. (2025), Global fi nancial transmission of geopolitical risk shocks, mimeo. 4.
5. Imbierowicz, B., A. Nagengast, E. Prieto and U. Vogel (2025), Bank lending and  fi rm internal capital markets following a deglobalization shock

[https://www.bundesbank.de/en/publications/research/discussion-papers/banklending-and-firm-internal-capital-markets-following-a-deglobalization-shock925548]

- , Bundesbank Discussion Paper 05/2025.
6.  Pastor &amp; Veronesi (2009), Technological Revolutions and Stock Prices.
7. Bertelsmann-Stiftung (2025), bertelsmannstiftung.de/ fi leadmin/ fi les/user\_upload/EuroStack\_\_2025\_ fi nal\_\_1\_.pdf [https://www.bertelsmannstiftung.de/fileadmin/files/user\_upload/EuroStack\_\_2025\_final\_\_1\_.pdf]
- Transactions | Visa Onchain Analytics Dashboard. Adjusted transactions exclude those executed by internal smart contracts, intra-exchange transac -tions, or bots, as well as transactions originating from entities generating excessive amounts or volumes. 8.
- Stablecoins Circulating -De fi Llama 9.
10. Ikeda (2020), Digital Money as a Unit of Account and Monetary Policy in Open Economies by Daisuke Ikeda: SSRN [https://papers.ssrn.com/sol3/papers.cfm?abstract\_id=4326086]
11. Benigno, Schilling and Uhlig (2022), Cryptocurrencies, currency competition, and the impossible trinity -ScienceDirect [https://www.sciencedirect.com/science/article/pii/S0022199622000332]
- ECB (European Central Bank) Strategy Review 2021, 2025; 12.
- ECB (European Central Bank) Occasional Paper Non-bank  fi nancial intermedi -ation in the euro area: implications for monetary policy transmission and key vulnerabilities

. [https://www.ecb.europa.eu/pub/pdf/scpops/ecb.op270~36f79cd6ca.en.pdf]",Dr Fritzi Köhler-Geib
https://www.bis.org/review/r251209a.htm,Sabine Mauderer: Beyond Belém – from negotiation to implementation ,"Keynote speech by Dr Sabine Mauderer, First Deputy Governor of the Deutsche Bundesbank, at the CEPR (Centre for Economic Policy Research) Paris Symposium, Paris, 5 December 2025.",2025-12-05 00:00:00,"## Beyond Belém  -  from Negotiation to Implementation

## Keynote CEPR Paris Symposium

05.12.2025 | Paris | Sabine Mauderer

Check against delivery.

1. Introduction
2. 1.1 The Road Past Belém
2. Main Part
4. 2.1 Market Forces Shifting Towards Low Emissions
5. 2.2 Additional Financing Needs for the Transition
6. 2.3 Getting Businesses on Board
7. 2.4 Tackling Climate and Nature Together
3. Closing remarks

## 1. Introduction

## 1.1 The Road Past Belém

Thank you for the opportunity to kick o ff this important session on ' Global Action without Global Governance ' . Being here in beautiful Paris reminds me that this month marks ten years since the Paris Climate Accord. The Accord stands out as a truly shining moment in our shared history and, equally, in our shared future.

However, it also serves as a stark reminder of the ongoing challenges in addressing climate change. Many of us returned from COP30 (30th Conference of the Parties) in Belém with a mix of hope and concern. [1]

Concern, because the political landscape complicates consensus-building -as exempli fi ed by the U.S. federal government ' s announced withdrawal from the Paris Agreement. [2]

Hope, because COP30 (30th Conference of the Parties) showed that action is possible amongst a coalition of the willing, not letting ambition be dictated by the slowest mover .

One promising initiative -led by Brazil -is the Tropical Forest Forever Facility (TFFF), which brings together a diverse group of stakeholders. Another example of progress: After experiencing limited progress at the COP, Colombia and the Netherlands are moving forward by organizing an international conference of willing partners.

In this spirit, it is paramount that we move from negotiation to implementation, prioritizing practical solutions. Engaging the real economy is key -manufacturing companies, agricultural businesses and the construction sector, among others. Ultimately, they are the ones who drive innovation, invest, and implement the changes needed to achieve our climate goals.

In the next few minutes, I ' d like to cover three key points.

First, I ' ll highlight how market shifts are already underway, particularly in Cleantech.

Second, I ' ll explain why it ' s crucial to have business involved in fi nancing the transition.

And third, I ' ll discuss why we need to address climate change and nature loss together.

## 2. Main Part

## 2.1 Market Forces Shifting Towards Low Emissions

Business investments are already starting to move in the right direction, as companies recognize economic potential. Innovative clean technologies are an apt example. In my home country, Germany, this sector represents a welcome fresh breeze. The German Greentech sector has grown by nearly 5 % annually since 2013, more than any other key sector. [3] [4]

And Germany ' s export share in the global green tech market is 13 %  -signi fi cantly higher than our general export share of 7   %. Most of these exports go to the United States, where investments in clean technologies have grown at double-digit rates every year this decade. [5] [6]

Importantly, this slow but profound shift in business investment towards green technology is happening globally. Global clean energy investment is already beating investment into fossil fuels 2:1. The International Energy Agency projects that over 2025, around 2.2 trillion US (United States) dollars in investments will have fl owed collectively into ' clean energy ' , com pared to just 1.1 trillion US (United States) dollars into fossil fuels. [7]

While this trend is driven by the EU (European Union), the US (United States) and China, its impact is being felt worldwide. In China, although coal still dominates, investment in low-emission electricity has more than doubled in the past decade, to nearly 377 billion dollars last year . [8]

It is heartening to see that the growing fl ow of investment into clean energy has been broadening beyond the EU (European Union), the US (United States) and China. In some emerging economies, investments in clean energy -renewables, grids and storage -are now equal to or even greater than investments in fossil fuel. [9]

I would also like to point out that green electricity generation isn ' t the only sector that is accelerating. ' Clean ' investment in the steel industry is speeding up, too. Realized low-emission production more than doubled annually over the fi rst half of this decade. And based on the investments already announced, the sector is projected to maintain double-digit production growth throughout the second half of the decade. [10]

To strengthen these truly encouraging developments, additional investments are needed globally, which brings me to my second point.

## 2.2 Additional Financing Needs for the Transition

The most recent data from the Climate Policy Initiative -which tracks fi nancial fl ows  indicate that over 7 trillion US (United States) dollars will be needed every year until 2030 to fi nance the climate transition alone. It ' s important to remember that the  fi gure I ' ve just mentioned refers to gross investments. The net investment -the amount that is truly new or additional -will be much smaller. [11]

While global fi gures for additional investments are hard to come by, I would like to give you a fl avor from Germany, where annual climate investments for net-zero are pegged at just above 10 % of GDP (gross domestic product). If replacement investment, which equates to roughly 7 % of GDP (gross domestic product), were fully climate-friendly, additional climate investments would be just above 3 % of GDP (gross domestic product). [12]

To ensure that these essential additional investments fl ow, we need credible strategies to mobilize fi nancing  domestically, but especially in emerging and developing economies.

I agree that mitigation e ff orts in those emerging markets that o ff er signi fi cant economic potential present a major oppor -tunity. When investments are directed toward concrete projects, these regions can o ff er lower costs for emissions reduc -tion. However, it is important to consider practical realities as well, especially given the constraints of tight government budgets worldwide. In a world of rising debt levels, further transfers from advanced economies to emerging markets are di ffi cult to implement, but not impossible.

## 2.3 Getting Businesses on Board

According to the International Monetary Fund, public debt in advanced economies stands at 110 % of GDP (gross domestic product), compared to 71 % at the eve of the fi nancial crisis. At the same time, many emerging and developing economies are shouldering high debt service payments which limit the space available for transition spending. [13] [14]

Given these constraints, we need to get better at leveraging private capital to accelerate the transition to a net-zero economy. Blended  fi nance can be a strategic tool in this regard.

The Tropical Forest Forever Facility, TFFF, which I mentioned at the beginning of my speech, is -in essence -  a blended fi nance instrument. Brazil aims to raise 25 billion US (United States) dollars from public actors and philanthropists looking to make a di ff erence. This will serve as a base to attract an additional 100 billion US (United States) dollars from private bond investors -blending public and private fi nance.

France and Germany are already backing this initiative with sizable amounts. France has pledged 500 million euros, and Germany double this amount. Although initiatives like these are important, we must also get better at leveraging existing resources  funds that have already been committed.

Let me give you an example: The Vertical Climate and Environmental Funds, or VCEFs, consist of four public funds that together total an impressive 80 billion US (United States) dollars. They have a joint annual commitment capacity of 4 to 5 billion US (United States) dollars.

However, the actual amount they disburse each year is only around 1.4 billion US (United States) dollars. This indicates that there is room for improvement in procedure and access. International investors often fi nd practical hurdles constrain -ing investment in emerging markets. These include small project sizes, missing local fi nancial intermediaries, lack of investable projects, poor credit ratings from international rating agencies, legal uncertainties, and foreign exchange risks. [15]

## 2.4 Tackling Climate and Nature Together

These are all obstacles to climate fi nance. We ' ve talked a lot about climate change. However, it ' s important to reiterate that the resilience of our economies relies on a healthy planet overall.

Consider the destruction caused by forest fi res, which have become more frequent and severe due to climate change. These fi res not only release carbon dioxide but also reduce the planet's capacity to absorb carbon emissions. This reinforces climate change and undermines the ecosystem services provided by healthy forests, such as water fi ltration -  something, many industries rely on.

A forthcoming Bundesbank study  fi nds that in 2024 more than half of bank loans to nonfi nancial businesses in Germany were highly dependent on at least one water-reliant ecosystem service. [16]

The pharmaceutical industry is just one example of ecosystem dependency. Over 50 % of essential medicines -such as anti -biotics and painkillers -depend on plants and other natural sources. This shows that there can be no healthy economy without a healthy planet. [17]

Life, as we know it, depends on nature. The Network for Greening the Financial System (NGFS (Network for Greening the Financial System)), which I have the honor of chairing, actively supports its members to consider nature-related risks in their decision-making. We are currently developing a guide for the supervision of naturerelated fi nancial risks, set for publication early next year . It will include best practices for supervisors on how to understand these risks and suggestions for integrating this knowledge into their supervisory action.

Climate change and nature loss have to be tackled together, if countries want to achieve a path to net-zero emissions.

## 3. Closing remarks

To wrap up, I would like to repeat my call: Despite global challenges it is essential to move from negotiation to implementa -tion. And I see several reasons for optimism:

First, there is growing recognition that our best way forward is to collaborate -across sectors and borders. Our host, the Centre for Economic and Policy Research (CEPR (Centre for Economic Policy Research)), stands as a beacon of e ff ective cooperation. The CEPR (Centre for Economic Policy Research) community exempli fi es how dialogue and research can bridge gaps between policymakers, economists and business leaders, fostering innovative solutions.

Second, the coalition of the willing stands fi rm. After all, 194 countries chose to remain committed to the Paris Agreement. In a similar vein, the NGFS (Network for Greening the Financial System) has gained several new members, even after the Federal Reserve withdrew its membership in January this year. No one else left. [18]

And I am seeing a high level of commitment from local and regional stakeholders. In the United States, for instance, 10 states and 368 local governments have formed a coalition dedicated to upholding the principles of the Paris Accord. [19]

Finally, market forces are already moving towards low emissions, irrespective of global negotiations. Let ' s build on this momentum and drive real progress  together.

## Footnotes:

- COP30 (30th Conference of the Parties): Conference of the Parties to the Rio Convention, commonly known as the World Climate Conference. 1.
- The withdrawal will take e ff ect in January 2026. 2.
- The GreenTech sector encompasses various economic activities that provide a direct or indirect environmental bene fi t, contribute to climate adaptation, or ful fi ll an important provisioning function. 3.
4. GreenTech made in Germany 2025 [https://www.umweltbundesamt.de/sites/default/files/medien/479/publikationen/uba\_greentech\_atlas\_2025\_deutsch\_barrierefrei.pdf]
- , Umweltbundesamt.
5. Studie von KfW Research und Deloitte zur Weltklimakonferenz COP 30 [https://www.kfw.de/%C3%9Cber-die-KfW/Newsroom/Aktuelles/Pressemitteilungen-Details\_867584.html]
- Clean Investment Monitor: Q3 2025 Update by Rhodium &amp; MIT (Massachusetts Institute of Technology); Bundesbank own calculations. 6.
7. World Energy Investment 2025  10th Edition
- , p. 12. [https://iea.blob.core.windows.net/assets/1c136349-1c31-4201-9ed7-1a7d532e4306/WorldEnergyInvestment2025.pdf]
- . 8. China  World Energy Investment 2025  Analysis -  IEA [https://www.iea.org/reports/world-energy-investment-2025/china]
- , p. 13. Clean investment in India exceeds fossil fuel investment, Africa and Southeast Asia are close to parity. 9. World Energy Investment 2025  10th Edition [https://iea.blob.core.windows.net/assets/1c136349-1c31-4201-9ed7-1a7d532e4306/WorldEnergyInvestment2025.pdf]
10. Bloomberg New Energy Finance, Industry Decarbonization Market Outlook 2H 2025, November 2025.
- . 11. Top-down Climate Finance Needs  -  CPI [https://www.climatepolicyinitiative.org/publication/top-down-climate-finance-needs/]
- Prognos (2024), , and Bundesbank ' s own calculation. 12. Klimaschutzinvestitionen für die Transformation des Energiesystems nach Sektoren und Anwendungen [https://www.prognos.com/en/project/climate-protection-investments-transformation-energy-system]
- . 13. World Economic Outlook (October 2025)  -  General government gross debt [https://www.imf.org/external/datamapper/GGXWDG\_NGDP@WEO/ADVEC]
- . 14. Debt Vulnerabilities And Financing Challenges In Emerging Markets And Developing Economies - An Overview Of Key Data; IMF policy paper , Feb 2025 [https://www.imf.org/en/-/media/files/publications/pp/2025/english/ppea2025002.pdf]
- . 15. Accelerating Sustainable Finance for Emerging Markets and Developing Economies, Independent High-Level Expert Group Review of the Vertical Climate and Environmental Funds, October 2024 [https://g20sfwg.org/wp-content/uploads/2024/10/G20-IHLEG-VCEF-Review.pdf]
16. Forthcoming Bundesbank Monthly Report January 2026.
17. World Health Organization: Fact Sheet Biodiversity, 18 February 2025.
- 18.
- . Zehn Jahre Pariser Klimaabkommen | Klimawandel [https://www.bpb.de/themen/klimawandel/dossier-klimawandel/572803/zehn-jahre-pariser-klimaabkommen/]
- . 19. Who's in [https://www.americaisallin.com/whos-in]",Sabine Mauderer
https://www.bis.org/review/r251211a.htm,Jameel Ahmad: Speech - Pakistan Women Entrepreneurship Day,"Speech by Mr Jameel Ahmad, Governor of the State Bank of Pakistan, at the Pakistan Women Entrepreneurship Day, Karachi, 3 December 2025.",2025-12-03 00:00:00,"## Jameel Ahmad: Speech - Pakistan Women Entrepreneurship Day

Speech by Mr Jameel Ahmad, Governor of the State Bank of Pakistan, at the Pakistan Women Entrepreneurship Day, Karachi, 3 December 2025.

* * *

Honorable Women Entrepreneurs, Corporate and banks executives, My fellow colleagues from the State Bank of Pakistan, Distinguished guests, Ladies &amp; Gentlemen Assalam-o-Alaikum and a very good evening;

It is my pleasure to welcome you all to the State Bank of Pakistan, where we are celebrating the Pakistan Women Entrepreneurship Day 2025. It is a continuation of our ""Empower Her campaign"" initiative, that we launched last year under the banner of Pakistan Women Entrepreneurship Day. What began as an awareness push has now become a national network - including representation from banks, business chambers, entrepreneurs, and civil society members.

I am delighted to note that all of us are taking the campaign forward this year, with a sharper focus on actionable proposals, including dedicated financing programs, mentorship, digital onboarding, and capacity-building initiatives - all of which are geared to increase the participation of our female population in the formal economy.

## Ladies and gentlemen,

There is now widespread understanding that no nation can grow when half of its population is excluded from the financial system. Research by the World Economic Forum, OECD, and McKinsey suggest that including women fully in the workforce - as well as in leadership positions - is not only a matter of fairness, but also a powerful driver of economic growth and resilience.

In Pakistan, despite the multiple challenges, as well as the cultural and structural barriers, I am pleased to note that our women entrepreneurs have shown remarkable determination and courage. Their contributions extend across diverse sectors, including agriculture, manufacturing, technology, retail, communication, and other services. And we need to take this momentum forward, to ensure that our female population have access to the supportive environment where they can flourish and contribute more effectively to our economy.

## Ladies and gentlemen,

Over the past decade, the State Bank of Pakistan has pursued deliberate, multipronged strategy to expand women's financial inclusion, with much-valued support from our multilateral partners and the corporate sector. As a result of our collective efforts, women's financial inclusion has risen from 4 percent to 52 percent, and we have succeeded in narrowing the gender gap from 47 percent in 2018 to 30 percent in 2025. More than 17.6 million new women-owned bank accounts have been added since 2021, reflecting active engagement in the financial system.

Going forward, as part of the third edition of the National Financial Inclusion Strategy 2024-28, we now aim to push financial inclusion to 75 percent by 2028, and reduce the gender gap to 25 percent. To help us achieve these targets, I am glad to note the support from the ADB's Women Inclusive Finance Program, as well as the innovative Challenge Fund facilities, which are financing women-led business ideas and helping with market access.

At the same time, let me emphasize that increase in financial inclusion for our female population would not be possible without support from our banking industry. In this regard, I will acknowledge the ongoing institutional shift within our banks. Over 14,600 women have joined the banking workforce in the last three years, raising the overall ratio of female employees from 13 to 17 percent. Banks now have women on their boards, and also have diversity and inclusion councils, dedicated women finance teams, and frontline women champions in most branches. This structural shift and greater female representation across our banking sector hierarchy is important, as it will have a ripple effect and encourage more women to become part of the formal economy. Moreover, having greater female representation in leadership positions would ensure that we have innovative products that are tailor-made for female borrowers and entrepreneurs.

At the State Bank, we recently hired a batch of young female graduates under our Emerging Women Leaders Initiative. And now we also have a female member on the SBP's Board. At the national level, Pakistan became a global signatory to the Women Entrepreneurs Finance Code in February 2025, becoming the 19th member worldwide. SBP, along with 22 banks, have pledged to share data, introduce new actions, and appoint leadership to improve women's access to finance. Furthermore, Pakistan's banking industry is continuing to play a crucial role in turning policy into action. This year, with the support of our banking industry and partner institutions, we conducted more than 300 awareness and mentorship programs across 55 districts, engaging over 45,000 women across the country. This puts Pakistan on the global map in terms of turning inclusion commitments into measureable accountability.

## Ladies &amp; Gentlemen;

I am pleased to note that financing to women entrepreneurs set a new benchmark of 230 billion Rupees, with 974,000 loans disbursed between November 2024 and October 2025 - a testament to expanding outreach and growing trust. Yet, the portfolio breakdown indicates that meaningful scale-up is still ahead of us. Nearly 93 percent of these loans amounting to 113 billion Rupees, fall under microfinance, indicating that most women remain clustered in micro and entry-level segments. At the upper end, 611 women-led corporate and commercial enterprises accessed financing of 58 billion Rupees, representing just 1 percent of all loans disbursed by commercial banks - a clear indication of the structural barriers that still persist.

Let me also emphasize that we perhaps also need to look beyond just numbers, and focus on the bigger picture. Our over-arching focus needs to be on providing an enabling environment that can foster greater female participation in the formal economy on a sustainable basis. While a lot of progress has been made, a lot more needs to be done, especially with regards to addressing the structural gaps that still inhibit greater

female participation in the labor force. Transportation services; flexible timings; and daycare facilities are just some of the basic yet crucial services that many women count on today, so that they do not have to choose between their professional careers and their families. Once we are able to provide this supportive environment, I am confident that our targets would be well within our reach.

In conclusion, I want to reiterate that to sustain the progress made so far, we must continue building the ecosystem, where women-led businesses can access finance, markets, and mentorship. Let us renew our commitment to a future where every woman with a vision has the means to achieve it.

With that, I congratulate the award winners and participants, whose achievements symbolize the creativity and resilience of our women entrepreneurs.

I thank you for your time.",Jameel Ahmad
https://www.bis.org/review/r251211b.htm,Jameel Ahmad: Strengthening and modernising Pakistan's domestic payments ecosystem ,"Speech by Mr Jameel Ahmad, Governor of the State Bank of Pakistan, at the MasterCard and PayPak co-badged card ceremony, organised by Faysal Bank, Karachi, 2 December 2025.",2025-12-02 00:00:00,"## Jameel Ahmad: Strengthening and modernising Pakistan's domestic payments ecosystem

Speech by Mr Jameel Ahmad, Governor of the State Bank of Pakistan, at the MasterCard and PayPak co-badged card ceremony, organised by Faysal Bank, Karachi, 2 December 2025.

* * *

Mr. Yousaf Husain, President &amp; CEO. Faysal Bank Limited, 1Link and Master Card management, SBP, FBL, PayPak and Master Card Teams, Distinguished guests,

Ladies and Gentlemen,

Assalam-o-Alaikum and a very good morning;

It is a pleasure to be here today at the card co-badging ceremony of Faysal Bank, MasterCard, and our national payment scheme, PayPak. This event marks another important step in our collective journey towards strengthening and modernizing our domestic payments ecosystem. At the same time, it represents another tangible step that we have taken as part of one of our Strategic Goals to implement a secure, efficient, and self-reliant payments landscape in our country. I would like to congratulate Faysal Bank, Master Card, 1 Link and our PayPak team on the achievement of this important milestone.

The co-badging product is a reflection of a financial product that is a win-win for all stakeholders. It will allow Pakistani customers to make international as well as ecommerce payments, while ensuring local settlement of domestic transactions. It will also provide 1Link an important avenue to enrich the profile of our domestic payment scheme, besides offering Master Card an opportunity to expand its footprint in Pakistan's rapidly growing domestic electronic payments market.

I am also delighted to note that this trend of co-badging is picking up momentum, where our domestic payment scheme, instead of operating in isolation, is partnering with global giants to offer a truly innovative payment avenue to our consumers. Today's launch is the 2nd major co-badged card within a month, after the issuance of a PayPak and Union Pay co-badged card last month. Given the strong value proposition of cobadging for all the stakeholders, I am sure that more banks will opt for it.

## Ladies and gentlemen!

Let me briefly recall the history of PayPak, which was launched in 2016 with the objective of creating a cost-effective, secure, and attractive domestic payment scheme. The underlying idea was simple: Pakistan, as a growing digital economy, must develop a domestic alternative that would enhance financial inclusion, rationalize the cost of digital payments for merchants and consumers; and offer our consumers the opportunity to enjoy the cost and scale advantage of our domestic payment scheme.

While I am encouraged to note the expansion of PayPak in our domestic market, I would also like to say that this is just the beginning, in terms of the evolution of our domestic payment scheme. As you may know, PayPak currently accounts for more than 25% of the total 53 million debit cards in circulation in the country. However, its share in usage is only 6%. We are also aware of some of the inhibiting factors behind this suboptimal usage, especially the non-acceptance of PayPak on e-commerce and international platforms; and limited marketing campaigns and incentives for banks, merchants and cardholders. The branding of PayPak has also been as a low value budget card, which contributed in the low usage of PayPak.

Overcoming these bottlenecks is imperative for us to make our national payment scheme operate on a sustainable footing. The recent launch of marketing and advertisement campaign by 1Link, initiation of co-badging arrangements with international payment schemes, and integration with e-commerce gateways, are steps in the right direction, We are confident that these efforts are expected to significantly improve the value proposition of PayPak over time.

At the same time, I hope that 1Link will be able to develop a long-term strategy to promote PayPak as an attractive payment scheme, by providing cost effective value added services to its customers. The strategy should be backed up by the needed investments in improving the technological infrastructure, risk management, including fraud detection and cybersecurity, as well as in dispute resolution and merchant and consumer incentivization.

## Ladies and Gentlemen!

Let me reiterate that development of a robust, reliable, secure, and cost effective digital payments ecosystem is a key strategic objective of the SBP. Ensuring a conducive and enabling regulatory environment that promotes investment in the digital payments infrastructure and consumer protection is an important component of our digital payments' strategy. The framework allows variety of institutions in the digital space including commercial banks, Digital Banks, EMIs, PSO/PSPs, Fintechs, and national and international payment schemes - to serve the digital payments and financial services needs of the economy and our population.

Let me also emphasize here that the SBP would continue to ensure a level playing field for all the payment system players, including the international payment schemes. The future of our payments system lies in a strong, interoperable, secure and self-sustaining digital payments infrastructure that supports financial inclusion and facilitates sustainable and inclusive economic growth.

Today's co-badging initiative is a step forward towards developing mutually beneficial partnerships between international and domestic payments schemes that can create better value for all stakeholders. I once again congratulate Faysal Bank, Mastercard, and 1Link on taking this initiative. I also look forward to other banks and financial institutions developing similar partnerships, that support innovation, expand access, and accelerate the adoption of digital payments across Pakistan. Together, we can build a payments ecosystem that truly reflects the aspirations of a modern, dynamic, and digitally empowered nation.

I thank you all for your time.",Jameel Ahmad
https://www.bis.org/review/r251209g.htm,Perry Warjiyo: Strong and self-reliant – synergy to foster higher and resilient economic growth,"Remarks by Mr Perry Warjiyo, Governor of Bank Indonesia, at Bank Indonesia's Annual Meeting 2025, Jakarta, 28 November 2025.",2025-11-28 00:00:00,",



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## TABLE OF CONTENTS

| I.   | Global Economic Performance and Outlook: Slowing Growth, High Uncertainty                                         |   6 |
|------|-------------------------------------------------------------------------------------------------------------------|-----|
| II.  | National Economic Performance and Outlook: Maintained Stability, Rising Growth                                    |  16 |
| III. | Bank Indonesia Policy Mix 2025: Fostering Growth, Maintaining Stability                                           |  30 |
| •    | Bank Indonesia's Policy Mix Conception                                                                            |  30 |
| •    | Monetary Policy                                                                                                   |  33 |
| •    | Macroprudential Policy                                                                                            |  37 |
| •    | Payment Sytem Policy                                                                                              |  41 |
| •    | Money Market and Foreign Exchange Market Deepening                                                                |  46 |
| •    | Economic Inclusion, Financial Inclusion, and Sustainable Finance, and Sharia Economic and Finance                 |  54 |
| •    | International Policy                                                                                              |  58 |
| •    | Bank Indonesia Transformation                                                                                     |  60 |
| IV.  | Policy Mix for National Economic Transformation: Synergy to Foster Higher and Resilient Growth                    |  64 |
| •    | Synergy to Strengthen Macroeconomic and Financial System Stability                                                |  67 |
| •    | Synergy to Foster Higher and Resilient Growth                                                                     |  72 |
| •    | Synergy to Enhance Economic Financing                                                                             |  77 |
| •    | Synergy to Accelerate National Economic and Financial Digitalization                                              |  79 |
| •    | Synergy in International Trade and Investment Cooperation                                                         |  80 |
| •    | Indonesia's Medium-Term Economic Outlook                                                                          |  81 |
| V.   | Direction of Bank Indonesia Policy Mix in 2026: Fostering Growth, Maintaining Stability                           |  83 |
| •    | Direction of Monetary Policy                                                                                      |  84 |
| •    | Direction of Macroprudential Policy                                                                               |  88 |
| •    | Direction of Payment System Policy                                                                                |  93 |
| •    | Money Market and Foreign Exchange Market Deepening Policy                                                         | 100 |
| •    | Economic Inclusion, Financial Inclusion, and Sustainable Finance Policy, and Sharia Economic and Financial Policy | 105 |
| •    | International Policy                                                                                              | 106 |
| VI.  | Moving Forward: Synergy Toward Golden Indonesia ( Indonesia Emas )                                                | 109 |

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## STRONG AND SELF-RELIANT: SYNERGY TO FOSTER HIGHER AND RESILIENT ECONOMIC GROWTH

## Remarks of the Governor of Bank Indonesia BANK INDONESIA ANNUAL MEETING Jakarta, 28 th November 2025

## We are honored to welcome,

The President of the Republic of Indonesia, Gen (Ret.) Prabowo Subianto

## Distinguished	Guests,

- Leaders and Members of MPR, DPR, DPD RI,
- Leaders of State Institutions,
- Excellencies Ambassadors and Representatives of friendly countries,
- Ministers of the Red and White Cabinet,
- Our esteemed predecessors as Governors and fellow Members of the Board of Governors of Bank Indonesia,
- Chairperson and Members of the Board of Commissioners of the Financial Services Authority (OJK) and the Deposit Insurance Corporation (LPS),
- Governors, Mayors, and Regents from across Indonesia,
- Leaders of Banking Institutions, Corporations, and National Media,
- Honored Guests.



Assalamu'alaikum Warahmatullahi Wabarakaatuh, Peace be upon us all, Shalom, Om Swastyastu, Namo Buddhaya, Greetings	of	Virtue .

First and foremost, let us offer our praise and gratitude to Allah Subhanahu wa Ta'ala (SWT), the Almighty God, for His blessings and grace that enable us to gather today at the	Bank	Indonesia	Annual	Meeting	2025 . With utmost humility, we extend our	sincere	appreciation	to	the	President for graciously attending this event along with all distinguished guests, and for providing guidance to strengthen the synergy of national economic policies in driving higher and more resilient growth going forward.

We also convey our congratulations to the 47 recipients of the Bank Indonesia Award 2025 from the banking sector, corporations, and individuals across 5 areas and 19 categories, covering monetary stability management, macroprudential policy, payment systems, MSME and sharia economy development, as well as support for Bank Indonesia's policies. This year, Bank Indonesia also presents 3 Special Awards as a tribute to Strategic Partners for their role in safeguarding nationalism and the sovereignty of the Republic of Indonesia, and for supporting the spirit of Asta Cita throughout the nation. The Bank Indonesia Award, held annually in conjunction with the Bank Indonesia Annual Meeting, represents both appreciation and national recognition for stakeholders who have supported the implementation of Bank Indonesia's mandates.

On this auspicious occasion, allow us to present an evaluation of economic performance in 2025, as well as the outlook and policy direction of Bank Indonesia for 2026. This presentation is summarized under the theme: 'Strong and Self-Reliant: Synergy to Foster Higher and Resilient Economic Growth.'

Overall, we are grateful that Indonesia's economy in 2025 has performed well amid heightened global volatility	and	uncertainty. Economic growth has remained relatively high with stability preserved. The strong synergy of the national economic policy mix between the Government and Bank Indonesia has been a key factor in achieving this performance. This synergy must continue to be reinforced to drive higher and more resilient growth toward Golden Indonesia ( Indonesia Emas ) going forward.

In	detail,	our	presentation	will	cover	five	parts. First , evaluation of global economic performance and outlook amid dynamics, risks, and uncertainties. Second , evaluation of national economic performance and outlook, highlighting resilience and stronger growth. Third , report and evaluation of Bank Indonesia's policy mix throughout 2025 to maintain stability and support sustainable growth. Fourth , synergy of national economic policy mix between the Government and Bank Indonesia to drive higher and more resilient growth going forward. Fifth, Bank Indonesia's policy mix direction for 2026 to strengthen stability and promote sustainable economic growth. This	explanation	also	serves	to	fulfill	Bank	Indonesia's	accountability	and	transparency mandate	as	stipulated	in	the	Bank	Indonesia	Act.

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## I. Global Economic Performance and Outlook: Slowing Growth, High Uncertainty

The	global	economy	continues	to	face	heightened turbulence amid persistent uncertainty. Geopolitical tensions remain elevated, with the conflict between Russia and Ukraine in Europe yet to be resolved and escalating tensions in the Middle East in line with intensified Israeli attacks on Palestine. In the economic sphere, the United States (US) President Donald Trump initiated a trade war on 2 April 2025 through the imposition of a universal import tariff of 10% on all goods entering the US, accompanied by substantially high reciprocal tariffs on 57 trading partners, including China, Canada, Mexico, and the European Union.

The	unilateral	imposition	of	import	tariffs	by Trump,	referred	to	domestically	as	'Liberation	Day', was	intended	to	protect	domestic	industries	and address	the	US	trade	balance	deficit	arising	from its	perceived	lack	of	competitiveness	in	multilateral trade. China was subjected to effective import tariffs of up to 54%, while Canada and Mexico faced rates of up to 25%. Smaller countries were also hit with high tariffs, including Cambodia (49%), Vietnam (46%), and Myanmar (44%) in Asia, as well as Lesotho (50%) and Madagascar (47%) in Africa.

## Graph	1.a.	US	Effective	Tariff	Rates:	China, Mexico, Japan, Indonesia, Total



Source: Bank Indonesia, adapted from various sources

In response to the unilateral US tariff policy, several major countries, including Canada, China, and the European Union, announced retaliatory tariffs, thereby intensifying the global trade war. Meanwhile, other countries entered negotiations to secure lower tariffs, often by committing to increase imports from the US. Nevertheless, US tariff measures remained elevated, particularly against China, although not as severe as initially threatened by President Trump (Graph 1.a). Furthermore, the escalating trade war and geopolitical tensions have heightened global financial market uncertainty, adversely affecting business sentiment and investor confidence across countries (Graph 1.b).

The	unilateral	US	tariff	policy	and	escalating geopolitical	tensions	have	weighed	on	global	economic performance,	contributing	to	slower	growth	amid widening	fragmentation	among	countries. The tariff measures reduced the volume and value of global trade and intensified the impact of global supply chain disruptions that had already emerged since 2024 due to persistent geopolitical tensions. Import growth in North America, for instance, fell sharply from 22.1% in Q1-2025 to 0.7% and 1.7% in Q2 and Q3-2025, respectively. Export growth in Asia and Europe, which had increased in Q2-2025 in anticipation of the US tariff hikes, began to moderate in Q3-2025. The adverse impact on real sector activity was more apparent in the deteriorating consumer and producer

Graph 1.b. Global Financial Market Uncertainty Index



Note: Data as of 3 November 2025

Source: Bank Indonesia, adapted from various sources

Table 1. Global Economic Growth: Advanced Economies and Emerging Economies (%, yoy)

|                    |   2023 |   2024 |   2025* |   2026* |   2027* |
|--------------------|--------|--------|---------|---------|---------|
| World              |    3.5 |    3.3 |     3.1 |     3   |     3.1 |
| Advanced Economies |    1.7 |    1.8 |     1.7 |     1.6 |     1.8 |
| United States      |    2.9 |    2.8 |     2   |     2   |     2.1 |
| Euro Area          |    0.4 |    0.9 |     1.3 |     1.3 |     1.4 |
| Japan              |    1.2 |    0.1 |     1   |     0.5 |     0.5 |
| Emerging Economies |    4.7 |    4.3 |     4.1 |     3.9 |     4   |
| China              |    5.4 |    5   |     4.8 |     4.2 |     4   |
| India              |    8.7 |    6.5 |     6.6 |     6.4 |     6.7 |
| ASEAN-5            |    4.1 |    4.6 |     4.4 |     4.3 |     4.5 |
| Latin America      |    2.4 |    2.4 |     1.9 |     2.2 |     2.6 |

Source: WEO-IMF, Bank Indonesia

sentiment, reflecting heightened uncertainty surrounding income prospects and business conditions worldwide. Overall, global economic growth slowed from 3.3% in 2024 to 3.1% in 2025 and 3.0% in 2026, before edging up to 3.1% in 2027 (Table 1). Growth divergence across country persisted. Advanced economies decelerated from 1.8% in 2024 to 1.7% in 2025 and 1.6% in 2026, before recovering to 1.8% in 2027. Meanwhile, emerging economies fell to 4.1% and 3.9% in 2025 and 2026, before improving to 4.0% in 2027. The tariff measures also pushed gold prices sharply higher, alongside rising prices of

Graph	2.	Global	Inflation:	Advanced Economies and Emerging Economies



Source: Bank Indonesia, adapted from various sources

Note: *Bank Indonesia's Projection

several food commodities and services, compounding the inflationary impact of higher wages following immigration policy adjustments in the US and other advanced economies. Consequently, global disinflation progressed more slowly than the previous projection, with inflation projected at 4.3% and 4.1% in 2025 and 2026. Over the same period, inflation in advanced economies is projected to remain around 2.4%, while inflation in emerging economies is estimated at 5.5% and 5.1% (Graph 2).

## In advanced economies, the US economy has begun

to	moderate,	while	the	Euro	Area	continues	to recover. US economic growth is projected to slow from 2.8% in 2024 to 2.0% in both 2025 and 2026, before edging up slightly to 2.1% in 2027, assuming no additional tariff increases. The unilateral tariff policy has succeeded in reducing US imports but has not generated an increase in exports, thereby exerting downward pressure on growth through the external sector (Graph 3.a). Meanwhile, weak competitiveness in US industries, excluding digital technology and defense, has weighed on investment, limiting the contribution of domestic demand amid softening consumption linked to labor market moderation and high inflation (Graph 3.b). Fiscal policy space has also narrowed, given the high fiscal deficit and mounting government debt, compounded by the temporary government shutdown triggered by unresolved

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## BANK INDONESIA ANNUAL MEETING 2025

## Graph 3.a. United States Economic Growth



Note: *) Nowcasting for Q3 2025 as of 14 November 2025

Source: Bank Indonesia, adapted from various sources political negotiations. The tariff policy has also slowed disinflation process, with inflation projected at 2.9% in 2025 and 3.0% in 2026, thereby constraining the extent of Federal Funds Rate (FFR) reductions from 4.5% in 2024 to 4.0% currently. The Federal Reserve is expected to hold off on further FFR cuts for the remainder of 2025 and resume rate cuts only in 2026. Meanwhile, the Euro Area recovery continues, with growth projected to rise from 0.9% in 2024 to 1.3% in 2025 and 2026, and further to 1.4% in 2027, supported by improving private consumption in line with monetary policy easing, fiscal stimulus, and frontloading of exports in anticipation of trade agreements with the US. Inflation in the Euro Area continues to decline from 2.4% in 2024 to 2.0% and 1.9% in 2025 and 2026, enabling the European Central Bank (ECB) to make more aggressive and earlier policy rate cut than the FFR, from 3.0% in 2024 to 2.0% in 2025. In Japan, economic growth is projected to strengthen to 1.0% in 2025, supported by sustained wage improvements, before moderating to 0.5% in 2026 and 2027 due to structural challenges from an aging population, persistently high inflation, and weaker exports as a result of US tariff policy.

In Emerging Market Economies (EMEs), the impact of	US	tariff	policy	on	economic	slowdown	has	been most	pronounced	in	China	and	Latin	America,	while economic performance in India and ASEAN-5 has

Graph	3.b.	United	States	Inflation



Source: Bank Indonesia, adapted from various sources Note: Producer Price Index (PPI), Personal Consumption Expenditure (PCE)

remained	relatively	resilient . China's economic growth slowed from 5.0% in 2024 to 4.8% in 2025 and is projected to fall further to 4.2% and 4.0% in 2026 and 2027. Elevated US tariffs have weighed on China's export growth, except for technologybased commodities, supported by strong adoption of technology and Artificial Intelligence (AI) as well as government stimulus measures (Graph 4.a). To date, there are no indications of significant trade diversion from China to other countries, including those in ASEAN. Domestic consumption in China also remains subdued and is expected to remain weak going forward, despite sizeable fiscal stimulus and accommodative monetary policy (Graph 4.b). Meanwhile, India's economy has demonstrated strong resilience, with growth reaching 6.6% in 2025 and remaining robust at around 6.4% and 6.7% in 2026 and 2027. India's growth outlook is underpinned by sustained improvements in domestic consumption and continued expansion in manufacturing, supported by fiscal spending despite a downward trend in line with fiscal consolidation efforts by the government. Economic performance in ASEAN-5 (Singapore, Malaysia, Thailand, Indonesia, and the Philippines) also reflects resilience, with growth projected to ease slightly from 4.6% in 2024 to 4.4% and 4.3% in 2025 and 2026 before rebounding to 4.5% in 2027. Inflation across ASEAN-5 remains contained at around 2.7% during 2025-2027.

Graph	4.a.	China:	Exports	by	Commodity	Group



Source: Bank Indonesia, adapted from various sources

US	tariff	policy	and	global	geopolitical	tensions,	along with	their	impact	on	fragmentation	and	delayed disinflation,	have	placed	central	banks	in	a	more challenging	position	in	setting	monetary	policy,	even though	the	overall	stance	remains	accommodative throughout 2025 . Global economic uncertainty has prompted central banks to adopt a more cautious approach in determining the pace and timing of policy rate reductions (Table 2). The Federal Reserve (Fed), for instance, which began lowering the FFR to 4.50% in September 2024, opted to delay further cuts until September 2025 to 4.25% and October 2025 to

Graph	4.b.	China:	Domestic	Demand	Indicators



Source: Bank Indonesia, adapted from various sources

4.00%. In contrast, the European Central Bank (ECB) continued reducing its policy rate from 3.00% in December 2024 to 2.50% in Q1-2025 and 2.00% in Q2-2025. Differences in the magnitude and timing of policy rate cuts have also been emerged among Emerging Economies, including China, India, South Korea, Malaysia, the Philippines, and Indonesia. In general, central banks in Emerging Economies must weigh the adverse effects of global uncertainty on achieving inflation targets against the need to stimulate domestic economic growth. This challenge has become more pronounced given the delayed

Table 2. Monetary Policy Rates: Advanced Economies and Emerging Economies (%)

|                                   | 2024   | 2025   | 2025   | 2025   |
|-----------------------------------|--------|--------|--------|--------|
|                                   |        | Q1     | Q2     | Q3     |
| Advanced Economies                |        |        |        |        |
| Federal Reserve (FED)             | 4.50   | 4.50   | 4.50   | 4.25   |
| European Central Bank (ECB)       | 3.00   | 2.50   | 2.00   | 2.00   |
| Bank of England (BOE)             | 4.75   | 4.50   | 4.25   | 4.00   |
| Bank of Japan (BOJ)               | 0.25   | 0.50   | 0.50   | 0.50   |
| Emerging Economies                |        |        |        |        |
| People's Bank of China (PBOC)     | 1.50   | 1.50   | 1.40   | 1.30   |
| Bank of Korea (BOK)               | 3.00   | 2.75   | 2.50   | 2.50   |
| Reserve Bank of India (RBI)       | 6.50   | 6.25   | 5.50   | 5.50   |
| Bangko Sentral ng Pilipinas (BSP) | 5.75   | 5.75   | 5.25   | 5.00   |

Source: Bank Indonesia, adapted from various sources

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## BANK INDONESIA ANNUAL MEETING 2025

Graph 5. FFR vs 2- and 10-years US Treasury Yield



Source: Bank Indonesia, adapted from various sources

FFR reductions and the sizeable US fiscal deficit and government debt, both of which have exerted significant influence on capital flows and exchange rate dynamics in Emerging Economies. As of October 2025, the US fiscal deficit and government debt were estimated at around 6.25% of GDP and USD38.3 trillion, among the highest globally. Consequently, although the yield on 2-year US Treasuries declined to 3.58% on 18 November 2025 following the FFR cut, the yield on 10-year US Treasuries remained elevated at around 4.12%, reflecting the persistently high fiscal deficit and government debt (Graph 5).

## Graph	6.a.	Foreign	Capital	Flows	to	Emerging Economies: Bond, Equity, Money Market



Note: *) Excluding China

Source: Bank Indonesia, adapted from various sources

Global	financial	market	uncertainty	has	also increased	significantly,	accompanied	by	capital outflows	from	Emerging	Markets	toward	safe-haven assets,	particularly	US	Treasuries	and	gold . Policy rate reductions by central banks, including the FFR cut, should have supported global financial market stability. However, US tariff measures and persistent geopolitical tensions have risen risk premia in global financial markets, prompting investors to reallocate portfolios to perceived safe assets. Consequently, substantial foreign portfolio outflows from EMEs occurred in Q2-2025, particularly in bonds and money market instruments (Graph 6.a). With progress in tariff negotiations and greater clarity regarding FFR reductions, portfolio inflows resumed in Q3-2025, primarily to EMEs offering attractive yields relative to the US and maintaining sound macroeconomic and financial system stability. In the foreign exchange market, the US dollar tended to weaken against major global currencies such as the Euro and Pound sterling, yet remained highly volatile against Asian currencies (Graph 6.b). This reflects persistent yield differentials across countries in line with the monetary policy rate adjustments described above. Overall, elevated volatility in capital flows and exchange rates continues to pose challenges for EMEs in mitigating the adverse spillover effects and strengthening external resilience to support domestic economic growth.

## Graph	6.b.	USD	Index	vs	Advanced	Economies and Asian Countries



Note: Trade-Weighted Index (TWI)

Source: Bank Indonesia, adapted from various sources

Looking ahead, the global economy is expected to remain characterized by ongoing trade wars and geopolitical	tensions	among	countries,	amid	highly dynamic	and	challenging	conditions . Although the tariffs ultimately imposed by the US were not as high as President Trump's initial threat on 2 April 2025, bilateral tariff negotiations between the US and China, as well as other countries, are likely to continue until the US Government considers its trade balance objectives sufficiently addressed. The new administrations resulting from the 2024-2025 general elections also tend to adopt more populist policy stances, including expansive fiscal spending and high level public debt, as well as other policies aimed at maintaining popularity. The increasing use of transactions and derivative products linked to public debt in advanced economies by NonBank Financial Institutions (NBFIs), which remain subject to limited regulation and supervision, is expected to create significant risks and volatility in global financial markets. At the same time, the rapid pace of the digital technology revolution, including the use of Artificial Intelligence (AI) in finance, such as cryptocurrency trading, stablecoins, and other digital asset products by private entities, will further heighten risks and volatility in global financial markets and challenge the ability of national authorities, including central banks, to maintain effective oversight and control.

The following factors, either individually or collectively,	could	have	a	significant	impact	on	the outlook	and	risks	of	further	deterioration	in	the global economy going forward . At least five (5) key trends warrant close attention.

- i. First , the persistence of trade wars and polarization	of	trade	and	investment	among countries in addressing global trade imbalances. Unilateral tariff policy is not the first measure taken by the US Government to tackle its large trade balance deficit caused by weak economic competitiveness (Graph 7.a). Even before World War II, high tariffs were imposed during 1919-1923 under the Fordney-McCumber Tariff Act to protect US agriculture and industry.

In 1934, the US Government introduced reciprocal tariff policies with varying rates for trading partners through the Most Favored Nations (MFN) concept. After World War II, tariffs declined sharply with the establishment of GATT to liberalize global trade. However, the ballooning trade deficit in the 1980s reignited US protectionist policies, including tariffs on steel imports under the Bush Administration in 2002-2003. In 2018, the Trump Administration imposed new tariffs on commodities such as steel and aluminum, which triggered retaliation from China. With Trump's return to office in 2025, reciprocal tariff policies were reinstated at the highest level since 1934 to address the widening trade deficit since 2020 (Graph 7.b). This historical pattern indicates that trade wars initiated by the US Government will persist as a political and economic strategy against trading partners with large trade surpluses, despite opposition in multilateral cooperation. In other words, trade polarization will intensify going forward, prompting countries to prioritize bilateral and regional cooperation over multilateral arrangements under the World Trade Organization (WTO).

- ii. Second , global economic growth is expected to	slow	amid	widening	fragmentation	among countries. Considering the long history of US protectionist policies to address its large trade balance deficit, it is not an exaggeration to expect that high tariffs and bilateral negotiations will persist going forward. China is projected to face elevated tariffs from the US until its trade surplus with the US declines, in addition to political considerations stemming from rivalry between major global powers (Graph 8.a). Supply chain disruptions will continue, with global trade volume expected to fall from around 3.6% in 2025 to 2.3% in 2026. Consequently, global economic growth is projected to stagnate at around 3%, with downside risks if the US-led trade war persists (Graph 8.b). The US economy is expected to stagnate with growth around 2%, while recession risks increase due to weak

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## BANK INDONESIA ANNUAL MEETING 2025

## Graph	7.a.	A	Brief	History	of	US	Protectionism: From	Politic	to	Economic



Source: SUERF Policy Brief No. 1260, September 2025

industrial competitiveness and household consumption, exacerbated by immigration policy impacts on labor markets and persistent inflationary pressures from import tariffs. China's economy, most affected by high tariffs, is projected to decline further to around 3.7%, although the pace of trade diversion from China to other countries outside the US could provide some growth impetus. India's economy is expected to maintain strong growth of around 6%, supported by robust domestic demand from household consumption. Meanwhile, global inflationary pressures and inflation in many

## Graph	8.a.	US	Reciprocal	Tariff	Policy	Continues Impost on China and Other Countries



Source: Bank Indonesia's Projection

## Graph 7.b. US Economy and World Trade Imbalances



Source: CEIC

countries are expected to remain elevated due to persistently high non-oil commodity prices as a result of high import tariffs and ongoing global supply chain disruptions. These conditions will constrain the room for further monetary policy rate cuts in many countries starting in 2026 to stimulate domestic economic growth. Therefore, future growth momentum will largely depend on the implementation of structural and industrial reform policies to drive the real sector, supported by expanded bilateral and regional trade and investment cooperation.

## Graph 8.b. Global Economic Growth Projections	and	Cross-Country	Fragmentation



Source: Bank Indonesia's Projection

## iii. Third , the surge in global public debt has imposed an increasingly heavy burden on both advanced economies and Emerging

Economies. Total global government debt has now reached USD110.9 trillion (94.6% of GDP), with two-thirds, approximately USD74.8 trillion, concentrated in advanced economies (Graph 9.a). This staggering figure reflects how expansionary fiscal policies and economic stimulus over the past decade have resulted in significant fiscal strain across many countries. The United States and China are the two largest debtor, accounting for more than half of global debt combined. US government debt totals USD38.3 trillion (125% of GDP), representing more than one-third of global debt, while China ranks second with USD18.7 trillion (96% of GDP). Japan is third with USD9.8 trillion (230% of GDP), followed by the United Kingdom (USD4.1 trillion, 103% of GDP) and France (USD3.9 trillion, 117% of GDP). Elevated government debt levels have been driven by long-term social spending, rising defense budgets, and mounting demographic costs associated with aging populations. The challenge is that ballooning public debt has pushed global interest rates higher, creating a burden not only for advanced economies but also for Emerging Markets and developing countries. Yields on 10-year government bonds

Graph 9.a. Global Public Debt: Advanced Economies and Emerging and Developing Economies



Source: UNCTAD, A World of Debt, Report 2025

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in four major advanced economies (US, UK, Euro Area, and Japan), for example, have risen from around 0% during the COVID-19 period to approximately 4%, with the 30-year yield spread widening to nearly 80 basis points today (Graph 9.b). Consequently, government bond yields in EMEs have surged from around 5% in 2020 to approximately 8% currently. This implies that EMEs must achieve nominal economic growth of around 8% to service their government debt obligations. The impact is even more severe for developing countries, particularly in Africa, where debt servicing costs exceed budget allocations for education and health programs, thereby exacerbating poverty.

## iv. Fourth ,	global	financial	markets	harbor	significant vulnerabilities	and	risks,	particularly	stemming from	Non-Bank	Financial	Institutions	(NBFIs) .

The global financial crisis underscored the dangers of derivative products linked to housing debt by NBFIs, known as the subprime mortgage crisis, which subsequently triggered a systemic global crisis. Since then, substantial progress has been made in strengthening regulation and supervision of the banking sector, including higher capital requirements, improved risk management, and enhanced cross-border cooperation under the Financial Stability Board (FSB) and the Bank for

Graph 9.b. Public Debt Interest Rates: Advanced Economies and Emerging Economies



Source: IMF, Global Financial Stability Report, October 2025

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## BANK INDONESIA ANNUAL MEETING 2025

International Settlements (BIS). However, global initiatives to strengthen regulation and oversight of NBFIs still in progress and have yet to reach a global consensus, compounded by challenges in monitoring transaction data and institutional structures. Meanwhile, the development of derivative products and transactions by NBFIs has surged rapidly, this time leveraging the massive public debt of advanced economies as underlying transactions. For example, NBFIs in the US are currently estimated to hold around USD5 trillion in bonds as underlying assets for their derivative products, one-third of which comprises US government debt (Graph 10.a). These derivative products include a wide range of instruments such as repurchase agreements (repos), interest rate swaps, options, and others, which remain unregulated in terms of margin requirements, leverage ratios relative to the underlying bond value, or mandatory capital increases commensurate with transaction size for NBFIs. Furthermore, these derivative products are often combined with hedging instruments against US dollar exchange rate risk, such as foreign exchange swaps, forwards, and options. This explains why the US dollar continues to appreciate despite interest rate differentials between the US and other advanced economies (Graph 10.b). Consequently, the layering of

## Graph 10.a. Bond Holdings by Non-Bank Financial	Institutions	(NBFIs)	in	the	US

Source: IMF, Global Financial Stability Report, October 2025



derivative transactions by NBFIs poses significant vulnerabilities and risks in the event of a market reversal, which could trigger large-scale fire sales due to panic among market participants, a scenario reminiscent of the global financial crisis in 2008.

- v. Fifth ,	vulnerabilities	and	risks	in	global financial	markets	are	increasing	in	line	with the	proliferation	of	privately	issued	and	traded digital currencies and assets . As is widely known, cryptocurrencies are digital currencies issued and circulated by private entities through computer networks, independent of any central authority, whether government or central bank. The first cryptocurrency trade involved Bitcoin in 2009, and by June 2023, more than 25,000 cryptocurrencies had emerged in the market, with around 40 of them having a market capitalization exceeding USD1 billion. As of April 2025, global cryptocurrency market capitalization is estimated at USD2.70 trillion. In 2014, stablecoins emerged as a type of cryptocurrency designed to maintain value stability against a specific asset or a basket of assets, which may include currencies, bonds, commodities, or other cryptocurrencies. Nevertheless, the value of stablecoins is not always stable, as it depends on the stabilization mechanism, which may involve computer algorithms and/or the value of underlying

## Graph 10.b. USD Index vs Interest Rate Differentials	with	Advanced	Economies



Source: IMF, Global Financial Stability Report, October 2025

assets. By June 2025, the market capitalization of stablecoin trading is estimated to exceed USD255 billion, most of which is linked to the US dollar (USDC) and/or US government bonds (USDT), as shown in Graph 11.a. Furthermore, global financial markets have witnessed the trading of tokenized assets, enabling ownership and buy-sell transactions. Stablecoins are not limited to tokenized digital assets but also include tokenization of tangible and intangible assets. For example, trading in tokenized US government bond funds has grown rapidly and is estimated to reach around USD7.4 billion (Graph 11.b). The increasing issuance and trading of cryptocurrencies, stablecoins, and tokenized assets by private entities on digital platforms have amplified vulnerabilities and risks in global financial markets. Unlike Central Bank Digital Currency (CBDC), which is formally issued by central banks, these various forms of cryptobased currencies and financial assets are issued and traded by private entities. To date, there is no clear regulation or supervision equivalent to that applied to other financial institutions under the principle of 'same activities, same risks, same regulations.' Moreover, the circulation of these digital currencies and assets is suspected to facilitate money laundering, in addition to raising concerns about consumer protection.

## Graph	11.a.	Stablecoin	Market	Capitalization

Source: IMF, Global Financial Stability Report, October 2025



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The	dynamics,	outlook,	and	risks	of	a	highly	volatile and	challenging	global	economy	have	significant implications	for	Emerging	Market	Economies	(EMEs), including	Indonesia,	and	therefore	require	an	optimal response	through	a	well-calibrated	national	economic policy mix . One critical lesson in navigating a global economy marked by geopolitical turmoil, protectionist policies, and financial market volatility is: STRONG AND SELF-RELIANT . Strong by strengthening external stability to withstand the adverse impact of global shocks. Self-reliant by continuously fostering domestic sources of economic growth.

At	least	five	(5)	critical	aspects	must	be	considered to	ensure	the	national	economy	becomes	strong	and self-reliant while achieving higher and more resilient growth.

- i. First , the importance of maintaining macroeconomic and financial system stability through a stable exchange rate, low inflation, a manageable fiscal deficit, a strong banking system, and deep financial markets. Close coordination between government fiscal policy and central bank monetary policy is essential, as is coordination to safeguard financial system stability. It must be recognized that most crises experienced by countries, including Indonesia in the past, originated from economic instability, particularly exchange rate volatility.

## Graph 11.b. Tokenized US Treasury Funds



Source: IMF, Global Financial Stability Report, October 2025

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- ii. Second , the need to accelerate real sector transformation through industrial and structural policies to strengthen domestic sources of growth. In addition to continuously promoting domestic consumption and investment, it is crucial to reinforce food and energy security as key pillars of national economic resilience and self-reliance. Industrial policy should aim to enhance productivity and value-added in priority economic sectors to drive higher growth, while structural policy should focus on creating an investment climate conducive to stimulating robust capital formation and trade both domestically and internationally.
- iii. Third , the need to continuously develop financing sources to support real sector transformation programs. Fiscal deficit financing must remain sustainable to avoid excessive dependence on public debt, which could ultimately burden the state and society. Therefore, private financing, through banking, other financial institutions, and domestic and foreign investment, must be strengthened. Financial market deepening is critical to support national economic financing by improving liquidity, ensuring competitive interest rates, and providing hedging instruments for interest rate and exchange rate risks.
- iv. Fourth , accelerating the digitalization of the national economy and financial system to achieve higher and more resilient growth. Rapid digitalization of payment systems and retail economic-financial transactions is essential to facilitate fast, easy, and low-cost daily transactions, thereby expanding inclusive economic and financial access for the public. Similarly, the development of wholesale payment systems must continue, including experimentation with Central Bank Digital Currency (CBDC) issuance and digital financial assets (asset tokenization). Cross-border cooperation in digital payment systems, including connectivity for retail and wholesale payment infrastructures, must be strengthened and expanded.
- v. Fifth , enhancing the effectiveness of trade and investment cooperation with key partner countries. In a world marked by US protectionist policies and economic polarization, trade and investment cooperation should focus on the most beneficial bilateral and regional partnerships, while continuing to advocate multilateral cooperation. This includes collaboration to expand the use of local currencies (Local Currency Transactions, LCT), deepen financial markets, and strengthen cross-border digital payment systems to facilitate bilateral and regional trade and investment.

## II.	 National	Economic	Performance	and Outlook: Maintained Stability, Rising Growth

Indonesia's	economy	has	continued	to	perform well and remain resilient amid elevated global volatility	and	uncertainty. First , Indonesia's economic resilience has remained strong, underpinned by preserved macroeconomic stability and sustained high growth. The recovery from the COVID-19 pandemic has continued and strengthened further. Second , robust and prudent policy coordination, particularly between the Government's fiscal policy and Bank Indonesia's monetary policy, has successfully supported domestic demand while maintaining a balance between stability and growth. Third , Indonesia has consistently reinforced its commitment to economic transformation through improvements in the investment climate, accelerated infrastructure development, and downstreaming of natural resources to enhance domestic value addition. Structural improvements across economic sectors have continued, strengthening the supply side to support high economic growth. Fourth , Indonesia has demonstrated strong leadership in various international fora, including through active participation in global and regional cooperation. The success of Indonesia's G20 Presidency in 2022 was internationally recognized for advancing critical agendas, such as strengthening global fiscal-monetary policy coordination, health cooperation, debt

resolution for low-income countries, and cross-border payment system digitalization. In the ASEAN region, Indonesia's ASEAN Chairmanship in 2023 reaffirmed its active role in strengthening regional stability and integration.

Over the past six years, Indonesia's economy has recorded strong performance, ranking among the best in emerging market economies (EMEs). Since 2019, economic growth has consistently remained above 5%, except during the COVID-19 pandemic (Table 3). Even then, the economic contraction was among the mildest compared to other countries. Macroeconomic and financial system stability has been well maintained. Inflation remained low and contained, averaging below 3% during 2019-2024, while Rupiah exchange rate remained stable, supported by Bank Indonesia's strong monetary policy commitment. The fiscal deficit also remained low at below 3% of GDP, except during the peak of the COVID-19 in 2020-2021, after which it rapidly reverted to a prudent path through the Government's fiscal consolidation efforts. External resilience also remained solid, with the current account deficit staying low and even recording a surplus in 2021 and 2022, supported by stronger export performance in line with the progress of natural-resource downstreaming. Similarly, financial system stability has been maintained, with the banking industry's Capital Adequacy Ratio (CAR) remaining high at above 20%.

Table	3.	Indonesia's	Economic	Performance:	2019-2024

| Indicator            | Unit              | 2019   | 2020   | 2021   | 2022   | 2023   | 2024   |
|----------------------|-------------------|--------|--------|--------|--------|--------|--------|
| Economic Growth      | %yoy              | 5.02   | -2.07  | 3.70   | 5.31   | 5.05*  | 5.03** |
| Current Account      | %GDP              | -2.71  | -0.42  | 0.30   | 1.00   | -0.15  | -0.62* |
| Fiscal Deficit       | %GDP              | -2.20  | -6.14  | -4.57  | -2.35  | -1.61  | -2.30  |
| CPI Inflation        | %yoy              | 2.72   | 1.68   | 1.87   | 5.51   | 2.61   | 1.57   |
| Rupiah Exchange Rate | IDR/USD (average) | 14,139 | 14,525 | 14,296 | 14,873 | 15,247 | 15,841 |
| BI-Rate              | %                 | 5.00   | 3.75   | 3.50   | 5.50   | 6.00   | 6.00   |
| Bank Lending         | %yoy              | 6.08   | -2.41  | 5.24   | 11.35  | 10.38  | 10.39  |
| Bank Capital (CAR)   | %                 | 23.31  | 23.81  | 25.67  | 25.63  | 27.66  | 26.65  |

Source: BPS, Bank Indonesia

Solid credit growth has also supported financing for productive sectors and reinforced economic growth momentum. Indonesia's positive economic performance has likewise been accompanied by rapid acceleration of payment system digitalization, which has continued to expand and has become an important driver of inclusive economic growth.

## The	strong	synergy	of	the	national	economic	policy mix between the Government and Bank Indonesia

has supported Indonesia's resilient economic performance. The Government's fiscal policy has remained prudent, maintaining the deficit below 3% of GDP, while supporting economic growth through capital expenditure to stimulate investment and social protection programs to sustain household consumption. Meanwhile, Bank Indonesia has optimally implemented its policy mix to maintain stability and foster growth, comprising monetary policy for inflation control and Rupiah exchange rate stability, macroprudential policy to encourage bank lending and financing, and payment system policy to accelerate inclusive and efficient digitalization of the national economy and finance. Structural transformation policies have also been continuously strengthened. Infrastructure development has progressed through National Strategic Projects (PSN) across various sectors, including transportation, water resources, housing, and telecommunications. Institutional and regulatory reforms have been

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pursued through the enactment of Law Number 6 of 2023 on Job Creation to improve the investment climate, and Law Number 4 of 2023 on Financial Sector Development and Strengthening (P2SK Act) to enhance resilience, expand financial services, and improve efficiency in the national financial system. Moving forward, synergy of the national economic policy mix between the Government and Bank Indonesia must be further strengthened and broadened to drive higher and more resilient economic growth.

Indonesia's	positive	economic	performance continues	in	2025	and	is	projected	to	strengthen further	in	2026	and	2027. Economic growth in the second and third quarters of 2025 exceeded expectations, reaching 5.12% (yoy) and 5.04% (yoy), respectively, compared to 4.87% (yoy) in the first quarter of 2025 (Table 4). Non-oil and gas export performance improved, driven by front-loading exports to the United States in anticipation of tariff adjustments, alongside higher exports of agricultural and manufactured products, particularly crude palm oil (CPO) to India following import duty reductions. Economic growth was also supported by robust domestic demand, particularly private investment and the realization of several Government priority programs, including the development of Special Economic Zones (SEZs) across various regions. Household consumption remained solid in line with high mobility, although it requires further reinforcement amid declining consumer expectations, especially among lower-income groups, and limited job availability. Looking ahead, Indonesia's economy is expected to continue improving. Overall, economic growth in 2025 will range between 4.7-5.5%, rising further to 4.9-5.7% in 2026 and 5.1-5.9% in 2027. Synergy of the national economic policy mix between the Government and Bank Indonesia must be continuously strengthened to drive higher growth from both the demand and supply sides while safeguarding economic stability. On the fiscal side, the realization of Government spending under the State Budget must be accelerated to stimulate domestic demand, including the implementation of social programs such as Free Nutritious Meals (MBG), People's Schools, Public Housing, and the Red and White Village Cooperatives ( Koperasi Desa Merah Putih , KDMP), as well as priority projects related to food security, energy, defense and security, and the Government's 2025 Economic Policy Package. On the supply side, the implementation of natural resource downstreaming and structural reforms must be expedited to promote economic sectors with high growth potential and job creation. Bank Indonesia will continue strengthening its policy mix, monetary, macroprudential, and payment system, to support economic growth through interest rate reductions, liquidity easing, enhanced macroprudential incentives, and accelerated digitalization of the economy and finance.

Table	4.	Indonesia's	Economic	Growth	by	Expenditure	(%,	yoy)

|                          |       | 2024**   | 2025***   | 2025***   | 2025***   | 2025 P   | 2026 P   | 2027 P   |
|--------------------------|-------|----------|-----------|-----------|-----------|----------|----------|----------|
| Component                | 2023* |          | I         | II        | III       |          |          |          |
| Economic Growth          | 5.05  | 5.03     | 4.87      | 5.12      | 5.04      | 4.7-5.5  | 4.9-5.7  | 5.1-5.9  |
| - Private Consumption    | 4.94  | 5.11     | 4.91      | 5.04      | 4.87      | 4.6-5.4  | 4.9-5.7  | 4.9-5.7  |
| - Government Consumption | 3.02  | 6.61     | -1.37     | -0.33     | 5.49      | 2.0-2.8  | 7.2-8.0  | 5.9-6.7  |
| - Investment             | 3.76  | 4.61     | 2.12      | 6.99      | 5.04      | 4.8-5.6  | 5.6-6.4  | 6.4-7.2  |
| - Exports                | 1.34  | 6.51     | 6.44      | 10.95     | 9.91      | 7.7-8.5  | 4.9-5.7  | 5.3-6.1  |
| - Imports                | -1.60 | 7.95     | 4.00      | 11.48     | 1.18      | 6.5-7.3  | 5.0-5.8  | 5.8-6.6  |

Source: BPS, Bank Indonesia

Note: *Preliminary Figure; **Very Preliminary Figure; ***Very Very Preliminary Figure; P Bank Indonesia's Projection

From	a	production	side,	economic	growth	has primarily been supported by capital-intensive sectors,	while	labor-intensive	sectors	still	require further	stimulus	to	enhance	their	contribution	to the economy. Positive performance is particularly evident in export-oriented sectors and those linked to natural resource downstreaming, such as the manufacturing industry, which recorded relatively high growth in line with increased production capacity and domestic value addition (Table 5). Sectors related to infrastructure development and improved connectivity, such as construction and transportation and warehousing, have also contributed to national economic growth. In addition, sectors related to rising household consumption and accelerated digitalization, such as wholesale and retail trade, accommodation and food services, and information and communication, have posted stronger growth. Various service sectors, including financial and insurance services, corporate services, as well as health and social activities, have also continued to strengthen. These developments across sectors illustrate Indonesia's increasingly robust postpandemic economic recovery. The initial recovery

Table 5. Indonesia's Economic Growth by Sectors (%, yoy)

| Sector                                                          | 2023*   | 2024**   | 2025***   | 2025***   | 2025***   | 2025 P   | 2026 P    | 2027 P    |
|-----------------------------------------------------------------|---------|----------|-----------|-----------|-----------|----------|-----------|-----------|
| Sector                                                          | 2023*   | 2024**   | I         | II        | III       | 2025 P   | 2026 P    | 2027 P    |
| Economic Growth                                                 | 5.05    | 5.03     | 4.9       | 5.1       | 5.0       | 4.7-5.5  | 4.9-5.7   | 5.1-5.9   |
| Agriculture, Forestry, and Fisheries                            | 1.31    | 0.67     | 10.5      | 1.7       | 4.9       | 4.4-5.2  | 5.2-6.0   | 5.4-6.2   |
| Mining and Quarrying                                            | 6.12    | 4.90     | -1.2      | 2.0       | -2.0      | 1.0-1.8  | 2.8-3.6   | 4.0-4.8   |
| Manufacturing Industry                                          | 4.64    | 4.43     | 4.5       | 5.7       | 5.5       | 5.1-5.9  | 5.0-5.8   | 4.9-5.7   |
| Electricity and Gas                                             | 4.91    | 4.77     | 5.1       | 0.9       | 2.9       | 3.0-3.8  | 4.5-5.3   | 4.1-4.9   |
| Water Supply, Waste Management, Waste and Recycling Management  | 4.90    | 1.56     | 0.2       | 0.8       | 3.3       | 2.2-3.0  | 4.3-5.1   | 4.6-5.4   |
| Construction                                                    | 4.91    | 7.02     | 2.2       | 5.0       | 4.2       | 4.7-5.5  | 7.5-8.3   | 7.1-7.9   |
| Wholesale and Retail Trade, Motor Vehicle and Motorcycle Repair | 4.85    | 4.86     | 5.0       | 5.4       | 5.5       | 5.0-5.8  | 5.3-6.1   | 5.1-5.9   |
| Transportation and Warehousing                                  | 13.96   | 8.69     | 9.0       | 8.5       | 8.6       | 8.1-8.9  | 10.8-11.6 | 10.4-11.2 |
| Accommodation and Food Services                                 | 10.00   | 8.56     | 5.8       | 8.0       | 8.4       | 7.4-8.2  | 6.4-7.2   | 6.2-7.0   |
| Information and Communication                                   | 7.59    | 7.57     | 7.7       | 7.9       | 9.7       | 7.5-8.3  | 8.0-8.8   | 9.5-10.3  |
| Financial and Insurance Services                                | 4.77    | 4.74     | 4.0       | 3.2       | 0.8       | 4.9-5.7  | 7.6-8.4   | 7.5-8.3   |
| Real Estate                                                     | 1.43    | 2.50     | 2.9       | 3.7       | 4.0       | 3.5-4.3  | 3.0-3.8   | 2.8-3.6   |
| Business Services                                               | 8.24    | 8.38     | 9.3       | 9.3       | 9.9       | 8.3-9.1  | 6.1-6.9   | 5.9-6.7   |
| Public Administration, Defense, and Mandatory Social Security   | 1.51    | 6.40     | 4.8       | 4.7       | 4.3       | 3.9-4.7  | 5.2-6.0   | 4.6-5.4   |
| Education Services                                              | 1.77    | 3.75     | 5.0       | 1.4       | 10.6      | 4.1-4.9  | 6.4-7.2   | 7.1-7.9   |
| Health Services and Social Activities                           | 4.67    | 8.11     | 5.8       | 3.8       | 6.8       | 5.3-6.1  | 4.0-4.8   | 3.9-4.7   |
| Other Services                                                  | 10.52   | 9.80     | 9.8       | 11.3      | 9.9       | 8.7-9.5  | 7.0-7.8   | 6.7-7.5   |

Source: BPS, Bank Indonesia

Note: *Preliminary Figure; **Very Preliminary Figure; ***Very Very Preliminary Figure; P Bank Indonesia's Projection

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occurred in sectors directly affected by the scarring effect during 2021-2022, followed by export-oriented sectors during 2022-2024, and is now shifting toward sectors driving stronger domestic demand. Looking ahead, sectors such as agriculture, retail trade, accommodation and food services, information and communication, particularly those related to digitalization, as well as other service sectors must continue to be strengthened. These sectors play a critical role not only in supporting higher economic growth but also in creating broader employment opportunities. Achieving a balanced growth pattern between capital-intensive and labor-intensive sectors is essential to reinforce Indonesia's economic strength and self-reliant, while fostering higher and more resilient growth.

## Indonesia's solid economic growth has been

supported	by	positive	performance	across	nearly all regions. In the third quarter of 2025, the highest growth was recorded in Java at 5.17% (yoy), followed by Sulawesi, Maluku, and Papua (Sulampua) at 4.96% (yoy), Sumatra at 4.90% (yoy), Bali and Nusa Tenggara

(Balinusra) at 4.71% (yoy), and Kalimantan at 4.70% (yoy). From a sectoral perspective, stronger growth in Java was driven by increased industrial capacity and higher agricultural production. In Eastern Indonesia, mineral downstreaming, particularly nickel, bauxite, and copper, supported industrial growth in the region. From an expenditure perspective, amid household consumption that remain below 5% in most regions, investment has been the main driver, particularly industrial investment in Investment Zones (KI) and Special Economic Zones (SEZs) in Java (Batang, Kendal, Gresik) and Sulampua (nickel downstreaming). Export performance was supported by metal commodities in Java, crude palm oil (CPO) from Sumatra, and steel exports from Sulampua, while coal exports from Kalimantan were affected by weaker external demand. Given these developments, overall regional economic growth in 2025 is projected as follows: Sumatra at 4.8-5.2%, Java at 4.7-5.5%, Kalimantan at 4.3-5.1%, Balinusra at 4.2-5.0%, and Sulampua at 4.2-4.8%. In 2026, growth in these regions is expected to increase to 4.9-5.3%, 4.7-5.5%, 4.6-5.4%, 5.5-6.3%, and 5.6-6.4%, respectively (Figure 1).

## Figure 1. Indonesia's Regional Economic Growth in Quarter III 2025 (%, yoy)



Source: BPS

Indonesia's external economic resilience has remained	robust	despite	global	volatility, supported by a healthy Balance of Payments (BOP). Current account performance through the third quarter of 2025 performed relatively well, underpinned by a large trade surplus amounting to USD40 billion. Despite the global economic slowdown, Indonesia's non-oil and gas exports, including manufacturing, agriculture, and mining, continued to grow strongly, in line with exporters' anticipation of reciprocal US tariffs (Graph 12.a). Mining exports of downstream natural resource commodities also recorded significant gains, particularly nickel and copper (Graph 12.b). For the full year 2025, the current account is projected to record a smaller deficit than the previous year, ranging from a surplus of 0.1% to a deficit of 0.7% of GDP. Meanwhile, heightened global volatility adversely affected the capital and financial account, resulting in net portfolio investment outflows, despite continued positive inflows of foreign direct investment. Up to the third quarter of 2025, portfolio investment recorded net outflows of USD14 billion, prompting Bank Indonesia to intervene in the market to stabilize the Rupiah exchange rate. Indonesia's reserve assets at the end of October 2025 remained strong at USD149.9 billion, down from USD155.7 billion at the end of 2024. This level is equivalent to 6.2

## Graph 12.a. Indonesian Non-oil and Gas Exports



Source: Directorate General of Customs and Excise months of imports or 6.0 months of imports and servicing government external debt, well above the international adequacy standard of around 3 months of imports (Table 6). In 2026, the BOP is projected to return to a surplus, supported by higher reserve assets. The current account deficit is expected to remain low, within the range of 1.0% to 0.2% of GDP, underpinned by solid export performance, including from downstreaming activities. The capital and financial account is forecasted to record a surplus, driven by foreign direct investment and renewed portfolio inflows in line with Indonesia's positive economic outlook.

## Indonesia's	external	resilience	is	also	reflected in the maintained stability of the Rupiah amid deteriorating	global	conditions,	supported by Bank Indonesia's strong commitment.

As previously noted, the imposition of high unilateral tariffs by President Trump triggered foreign portfolio outflows and depreciation of emerging market currencies, including Indonesia. The Rupiah came under significant pressure in offshore Non-Deliverable Forward (NDF) markets following the US tariff announcement in early April 2025. To reinforce Rupiah stabilization, Bank Indonesia intensified and sustained interventions in offshore NDF markets across Asia, Europe, and the United States. These interventions

## Graph 12.b. Exports of Downstream Mineral and Coal Mining Products



Note: *Data as of September 2025 (Cumulative) Source: Directorate General of Customs and Excise

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Table	6.	Indonesia's	Balance	of	Payments	(USD	Billion)

|                                                  |        |        | 2023   | 2024*   | 2024*   | 2024*   | 2024*   | 2024*   | 2025   | 2025   | 2025   |
|--------------------------------------------------|--------|--------|--------|---------|---------|---------|---------|---------|--------|--------|--------|
| Component                                        | 2021   | 2022   |        | I       | II      | III     | IV      | Total   | l*     | II*    | III**  |
| Current Account                                  | 3.5    | 13.2   | -2.0   | -2.4    | -3.0    | -2.0    | -1.3    | -8.7    | -0.2   | -2.7   | 4.0    |
| A. Goods                                         | 43.8   | 62.7   | 46.3   | 9.3     | 10.0    | 9.2     | 11.3    | 39.8    | 13.0   | 10.6   | 16.1   |
| - Exports, fob                                   | 232.8  | 292.5  | 257.7  | 61.9    | 62.3    | 67.5    | 71.3    | 263.1   | 65.9   | 68.0   | 73.9   |
| - Imports, fob                                   | -189.0 | -229.9 | -211.4 | -52.6   | -52.3   | -58.3   | -60.0   | -223.3  | -52.9  | -57.4  | -57.8  |
| a. Non-oil and Gas                               | 57.8   | 89.8   | 67.8   | 15.1    | 15.2    | 14.7    | 17.8    | 62.8    | 18.8   | 15.7   | 20.9   |
| b. Oil and Gas                                   | -13.0  | -24.8  | -19.9  | -5.5    | -4.6    | -4.4    | -5.1    | -19.6   | -4.7   | -4.2   | -4.8   |
| B. Services                                      | -14.6  | -20.0  | -17.7  | -4.2    | -5.0    | -4.2    | -5.2    | -18.6   | -5.4   | -5.2   | -4.3   |
| C. Primary Income                                | -32.0  | -35.3  | -36.0  | -8.8    | -9.4    | -8.5    | -9.0    | -35.9   | -9.4   | -9.8   | -9.4   |
| D. Secondary Income                              | 6.3    | 5.8    | 5.4    | 1.3     | 1.4     | 1.5     | 1.6     | 5.9     | 1.6    | 1.7    | 1.7    |
| Capital and Financial Account                    | 12.6   | -8.7   | 9.9    | -2.4    | 2.6     | 8.1     | 9.7     | 17.9    | -0.4   | -3.5   | -8,1   |
| 1. Direct Investment                             | 17.3   | 18.1   | 14.4   | 4.8     | 2.3     | 5.1     | 3.6     | 15.9    | 2.6    | 3.5    | 2.5    |
| 2. Portfolio Investment                          | 5.1    | -11.6  | 2.2    | -2.1    | 3.2     | 9.8     | -2.5    | 8.3     | 1.0    | -8.1   | -7.1   |
| 3. Other Investment                              | -10.2  | -15.6  | -6.9   | -4.7    | -3.4    | -7.2    | 8.4     | -6.9    | -4.2   | 1.0    | -3.4   |
| Overall Balance                                  | 13.5   | 4.0    | 6.3    | -6.0    | -0.6    | 5.9     | 7.9     | 7.2     | -0.8   | -6.7   | -6.4   |
| Memorandum:                                      |        |        |        |         |         |         |         |         |        |        |        |
| - Reserve Assets                                 | 144.9  | 137.2  | 146.4  | 140.4   | 140.2   | 149.9   | 155.7   | 155.7   | 157.1  | 152.6  | 148.7  |
| In Months of Imports and Official Debt Repayment | 7.8    | 5.9    | 6.5    | 6.2     | 6.1     | 6.4     | 6.5     | 6.5     | 6.5    | 6.1    | 6.0    |
| - Current Account (% GDP)                        | 0.3    | 1.0    | -0.1   | -0.7    | -0.9    | -0.6    | -0.4    | -0.6    | 0.0    | -0.8   | 1.1    |

Source: Bank Indonesia

complemented domestic stabilization measures through the triple intervention strategy in spot transactions, Domestic Non-Deliverable Forward (DNDF) markets, and secondary market purchases of government securities (SBN). All monetary instruments were optimized, including Bank Indonesia Rupiah Securities (SRBI), Bank Indonesia Forex Securities (SVBI), and Bank Indonesia Forex Sukuk (SUVBI), to support Rupiah stability. As a result of Bank Indonesia's strong commitment, the Rupiah appreciated to around Rp16,300 per US dollar by August 2025, compared to Rp16,865 per US dollar on April 8, 2025, following the US tariff announcement (Graph 13.a). However, renewed pressures emerged from late August 2025 due

Note: *Preliminary Figure. **Very Preliminary Figure

to global factors, such as smaller-than-expected Federal Funds Rate (FFR) cuts and a US government shutdown, as well as domestic factors, including social unrest and market concerns over a widening fiscal deficit. As of November 18, 2025, the Rupiah stood at Rp16,735 per US dollar, weakening by 4.01% from end-December 2024, with an average of Rp16,430 per US dollar throughout 2025. Overall, Rupiah movements remained relatively stable compared to other emerging market currencies and were stronger than most advanced economy currencies, excluding the US dollar (Graph 13.b). In addition to consistent stabilization policies, Rupiah stability was supported by increased foreign exchange conversion to Rupiah by exporters

Graph 13.a. Rupiah and US Dollar Exchange Rates



Source: Reuters and Bloomberg

following the strengthened policy on Foreign Exchange Proceeds from Natural Resource Exports (DHE SDA). Looking ahead, the Rupiah is expected to remain stable, supported by Bank Indonesia's firm commitment to exchange rate stability, attractive yields, low inflation, and Indonesia's positive economic growth outlook.

Price	stability	has	been	preserved,	with	inflation remaining low within the 2.5±1% target range, thereby	supporting	overall	economic	stability. Consumer Price Index (CPI) inflation in October 2025

was recorded at a low level of 2.86% (yoy) (Graph

## Graph	14.	CPI,	Core,	Volatile	Food	(VF)	and Administered	Prices	(AP)	Inflation



Source: BPS

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## Graph 13.b. Rupiah Exchange Rate Indexes vs Group of EMEs Currencies and Group of other AE Currencies



Note: Data as of 18 Nov'25 Source: Reuters and Bloomberg

14). Core inflation remained subdued at 2.36% (yoy), influenced by economic growth still below potential capacity and supported by Bank Indonesia's consistent monetary policy stance in anchoring inflation expectations within the target range, as well as low imported inflation. Administered prices (AP) inflation also remained low at 1.45% (yoy), in line with declining transportation and fuel tariffs amid higher retail cigarette prices. Meanwhile, volatile food (VF) inflation was contained at 6.59% (yoy), supported by adequate supply of key food commodities and strong coordination in inflation control by the Central and Regional Inflation Control Teams (TPIP/TPID) through the National Movement for Food Inflation Control (GNPIP). Through its Head Office and 46 representative offices, Bank Indonesia actively supports GNPIP implementation via flagship programs to boost productivity, strengthen food security, promote interregional cooperation, facilitate food distribution, organize subsidized discount markets, digitalize data, and enhance coordination and communication with central and regional governments. By year-end 2025, CPI inflation is projected to remain low within the 2.5±1% target range. Similarly, for 2026 and 2027, Bank Indonesia is confident that inflation will remain well-controlled within the 2.5±1% target range, supported by consistent monetary policy and close coordination with the Government in managing inflation at both central and regional levels.

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## BANK INDONESIA ANNUAL MEETING 2025

Graph 15.a. BI-Rate and INDONIA



Source: Bank Indonesia

Monetary	and	financial	market	stability	has	been maintained	alongside	a	continued	process	of interest	rate	reductions	in	line	with	Bank	Indonesia's monetary policy easing. Consistent with low inflation and the need to support economic growth, following a 25 bps cut in September 2024, Bank Indonesia reduced the BI-Rate five times during 2025, in January, May, July, August, and September, each by 25 bps. Consequently, the BI-Rate was lowered by a cumulative 150 bps to 4.75% in November 2025, marking its lowest level since 2022. In tandem with BI-Rate reductions and Bank Indonesia's liquidity expansion, money market rates (INDONIA) declined by 203 bps from 6.03% at the beginning of 2025 to 4.00% as of 18 November 2025 (Graph 15.a). SRBI yields for 6-, 9-, and 12-month tenors also fell by 254 bps, 256 bps, and 257 bps, respectively, to 4.62%, 4.65%, and 4.69% as of 14 November 2025, supporting an accommodative monetary stance. Government bond (SBN) yields for 2-year tenors decreased by 226 bps from 6.96% at the start of 2025 to 4.70% on 18 November 2025, while 10year tenors fell by 113 bps from a peak of 7.26% in mid-January 2025 to 6.13% on 18 November 2025. Nevertheless, the decline in bank interest rates has been relatively slow and requires acceleration. Compared to the 125 bps reduction in the BI-Rate during 2025, 1-month deposit rates fell by only 56 bps from 4.81% at the start of 2025 to 4.25% in October 2025, mainly due to special rates offered

Graph 15.b. Bank Interest Rates



Source: Bank Indonesia to large depositors, which account for 27% of total third-party funds (DPK). Lending rates declined even more gradually, by just 20 bps from 9.20% at the start of 2025 to 9.00% in October 2025 (Graph 15.b). Bank Indonesia is working closely with the Financial System Stability Committee (KSSK) to accelerate reductions in both deposit and lending rates to stimulate credit and financing for higher economic growth.

Monetary stability has also been reinforced through Bank	Indonesia's	expanded	monetary	operations to	enhance	the	effectiveness	of	interest	rate transmission, increase liquidity, and accelerate money market and foreign exchange (FX) market deepening. In this regard, Bank Indonesia lowered the interest rate structure of monetary instruments and FX swaps to support liquidity expansion and expedite the transmission of lower deposit and lending rates in the banking industry. Liquidity expansion was further pursued through reductions in Bank Indonesia Rupiah Securities (SRBI) and purchases of government securities (SBN) in the secondary market. The outstanding position of SRBI declined by Rp217.66 trillion, from Rp916.97 trillion at the beginning of 2025 to Rp699.30 trillion as of 17 November 2025 (Graph 16.a). In addition, Bank Indonesia purchased SBN as part of close synergy between monetary and fiscal policies, amounting to Rp289.91 trillion as of 18 November

Graph	16.a.	SRBI	Position: Banks, Nonresidents and Nonbank Residents



Source: Bank Indonesia

2025, including secondary market purchases and debt-switching programs with the Government totaling Rp212.6 trillion. To foster money market deepening, Bank Indonesia continued implementing the Money Market Development Blueprint (BPPU) in collaboration with the Indonesian Money Market and Foreign Exchange Market Association (APUVINDO), focusing on product development, pricing, participants, and infrastructure. The results have been remarkable, with average daily transactions in the money market increasing from just Rp10.12 trillion in 2020 to Rp54.43 trillion in 2025 (up to October), and FX market transactions rising from USD4.8 billion to USD10.15 billion over the same period. The implementation of the Primary Dealer system since May 2024 has also boosted SRBI transactions in the secondary market and repo transactions among market participants. The share of Primary Dealers in SRBI secondary market transactions increased from an average of 73% in 2024 to 84% in 2025 (up to October) (Graph 16.b).

The	accommodative	monetary	policy	pursued	by Bank	Indonesia	through	interest	rate	reductions	and monetary expansion increased the money supply and	contributed	to	loose	liquidity	conditions	in	the banking industry. Adjusted Reserve Money (M0), which accounts for the impact of the lower Reserve Requirement resulting from the macroprudential

## Graph	16.b.	Role	of	Primary	Dealers	in	SRBI Secondary	Market	Transactions



Source: Bank Indonesia liquidity incentive (KLM), grew by 14.38% (yoy) in October 2025, higher than the growth of unadjusted M0, which stood at 7.75% (yoy). From its affecting factors, the increase in Adjusted M0 was driven by Bank Indonesia's monetary liquidity expansion and the Government's financial expansion, reflected in Net Claims on Central Government (NCG). The monetary policy easing also contributed to higher growth of broad money (M2), which rose from 5.46% (yoy) in January 2025 to 7.96% (yoy) in September 2025 (Graph 17.a). By components, the increase in M2 growth was influenced by the rise in narrow money (M1), which increased from 7.25% (yoy) in January 2025 to 10.72% (yoy) in September 2025, in line with the growth of currency in circulation, which rose from 10.30% (yoy) in January 2025 to 14.5% (yoy) in September 2025. From the affecting factors, the increase in M2 was primarily driven by higher Net Foreign Assets (NFA). Going forward, the money supply is expected to increase in line with the Government's fiscal expansion. Meanwhile, banking liquidity remained ample, as reflected in the high Liquid Assets to Third-Party Funds (LA/TPF) ratio. Adequate banking liquidity was also evident from the Loan-to-Deposit Ratio (LDR), which indicates the accumulation of funds that have not yet been channeled into credit. As of October 2025, the LA/ TPF and LDR ratios stood at 29.47% and 84.26%,

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## BANK INDONESIA ANNUAL MEETING 2025

## Graph 17.a. Economic Liquidity



Source: Bank Indonesia respectively, thus indicating overall loose liquidity conditions in the banking industry (Graph 17.b).

Amid	Bank	Indonesia's	interest	rate	reductions and	liquidity	expansion,	bank	credit/financing disbursements	still	need	to	be	further	strengthened to support economic growth . Credit growth stood at 7.36% (yoy) in October 2025. By type of use, working capital credit and consumer credit growth moderated to 2.39% (yoy) and 7.03% (yoy), respectively, while investment credit growth increased to 15.72% (yoy) (Graph 18.a). By segment, corporate credit continued to posted solid growth

## Graph 18.a. Credit Growth by Usage Type: Investment, Working Capital and Consumer Loans



Source: Bank Indonesia

## Graph 17.b. Banking Liquidity



Source: Bank Indonesia at 12.24% (yoy), while commercial, consumer, and MSME credit growth declined to 4.32% (yoy), 7.03% (yoy), and -0.11% (yoy), respectively (Graph 18.b). By economic sector, credit growth was supported by export-oriented sectors, such as mining (14.49%), as well as by domestically oriented sectors, such as social services (23.11%), electricity, gas, and water (25.16%), and transportation (15.38%). Credit growth in the manufacturing sector (7.53%), agriculture (3.54%), trade (0.93%), and several other sectors needs to be strengthened to support higher economic growth (Table 7). Credit/financing disbursement was influenced by banks' prudential

## Graph 18.b. Credit Growth by Segment: Consumption,	Commercial,	Corporate	and	MSME



Source: Bank Indonesia

Table 7. Credit by Economic Sector

| Economic                  | Growth (%, yoy)   | Growth (%, yoy)   | Growth (%, yoy)   | Growth (%, yoy)   | Contribution (%, yoy)   | Contribution (%, yoy)   | Contribution (%, yoy)   | Contribution (%, yoy)   |
|---------------------------|-------------------|-------------------|-------------------|-------------------|-------------------------|-------------------------|-------------------------|-------------------------|
| Sector                    | Oct-22            | Oct-23            | Oct-24            | Oct-25            | Oct-22                  | Oct-23                  | Oct-24                  | Oct-25                  |
| Labor Intensive Sectors   |                   |                   |                   |                   |                         |                         |                         |                         |
| Social Services           | 15.33             | 33.79             | 19.27             | 23.11             | 0.46                    | 1.06                    | 0.74                    | 0.95                    |
| Construction              | 5.94              | (0.68)            | (0.06)            | 0.19              | 0.39                    | (0.04)                  | (0.00)                  | 0.01                    |
| Trade                     | 8.40              | 5.55              | 8.17              | 0.93              | 1.61                    | 1.03                    | 1.47                    | 0.16                    |
| Agriculture               | 9.59              | 8.49              | 7.21              | 3.54              | 0.72                    | 0.63                    | 0.53                    | 0.25                    |
| Capital Intensive Sectors |                   |                   |                   |                   |                         |                         |                         |                         |
| Manufacturing             | 15.44             | 4.16              | 7.53              | 7.53              | 2.50                    | 0.70                    | 1.20                    | 1.17                    |
| Corporate Service         | 24.19             | 18.19             | 14.99             | 6.69              | 2.01                    | 1.68                    | 1.50                    | 0.69                    |
| Transportation            | 5.50              | 14.30             | 16.11             | 15.38             | 0.29                    | 0.71                    | 0.84                    | 0.84                    |
| Mining                    | 67.17             | 15.23             | 25.69             | 14.49             | 1.73                    | 0.59                    | 1.04                    | 0.67                    |
| Gas and Water Supply      | (7.54)            | 4.36              | 23.77             | 25.16             | (0.23)                  | 0.11                    | 0.58                    | 0.68                    |
| Other                     |                   |                   |                   |                   |                         |                         |                         |                         |
| Other                     | 8.70              | 9.28              | 11.01             | 7.03              | 2.45                    | 2.54                    | 3.02                    | 1.93                    |
|                           | 11.95             | 8.99              | 10.92             | 7.36              | 11.95                   | 8.99                    | 10.92                   | 7.36                    |

Source: Bank Indonesia

stance and the still-moderate credit demand. On the supply side, banks' willingness to extend credit generally remained adequate, as reflected in relatively loose lending requirements, except for consumer and MSME credit segments in line with banks' prudential stance amid elevated credit risks in these segments. Banks maintained ample financing capacity, supported by Third-Party Funds (TPF) growth of 11.48% (yoy) in October 2025, driven by Government financial expansion, including Government fund placements in several large banks, as well as Bank Indonesia's liquidity-easing measures and macroprudential policy incentives. On the demand side, the still-weak credit demand was affected by businesses' wait-and-see attitude, continued corporate internal financing optimization, and relatively high lending rates. The undisbursed loan facilities reflect the current condition, which remained sizeable at Rp2,450.7 trillion, or 22.97% of total available credit limits as of October 2025, mainly in the corporate segment, with significant contributions from the manufacturing, business services, construction, and mining sectors, particularly for working capital loans. Bank Indonesia projects credit growth in 2025 to be at the lower end of the 8-11% range and to increase further in 2026. In the future, Bank Indonesia will continue to strengthen coordination with the Government and the Financial System Stability Committee (KSSK) to enhance bank credit/financing growth and improve the interest rate structure.

Financial system stability remained well-maintained, supported by strong capital adequacy and low credit risk . The banking Capital Adequacy Ratio (CAR) stood at 26.15% in September 2025, indicating robust capacity to absorb risks and support credit growth (Graph 19.a). Meanwhile, the banking Non-Performing Loan (NPL) ratio remained low at 2.24% (gross) and 0.87% (net) in September 2025. The contained credit risk was also reflected in the continued decline of the Loan at Risk (LAR) ratio.

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## BANK INDONESIA ANNUAL MEETING 2025

Graph 19.a. CAR and NPL in Banking Industry



Source: OJK and Bank Indonesia

Banks have generally maintained substantial Allowance for Impairment Losses to cover potential credit risks. Stress test results indicated strong resilience of Indonesia's banking industry, as reflected in the CAR remaining above 25% across various scenarios. Corporates' sound debtservicing capacity also supported banking capital and liquidity resilience, reflected in the Interest Coverage Ratio (ICR), and solid profitability (Graph 19.b). Going forward, financial system stability is expected to remain well preserved in line with improving national economic performance. Bank Indonesia will continue to strengthen policy synergy with the Financial System Stability Committee (KSSK) to safeguard financial system stability.

Digital	economic	and	financial	transactions continued	to	perform	strongly,	supported	by	a secure, seamless, and reliable payment system. On the wholesale side, BI-RTGS transactions in October 2025 increased by 35.02% (yoy) to reach Rp22,524.6 trillion. On the retail side, BI-FAST transaction volume grew by 31.96% (yoy) to 446.8 million transactions. Digital payment transactions were recorded at 4.45 billion, growing by 31.20% (yoy). QRIS transactions continued to surge, posting growth of 139.45% (yoy), with the number of users reaching 58.30 million and merchants totaling 41.19 million. Meanwhile, Rupiah currency

Graph	19.b.	Interest	Coverage	Ratio	(ICR)



Note: **Bank Indonesia's Projection

Source: Bank Indonesia management recorded growth in Currency in Circulation (CiC) of 13.37% (yoy) to Rp1,213.76 trillion (Table 8). Payment system stability remained intact, supported by resilient infrastructure and an improving industry structure. From an infrastructure perspective, the reliability and smooth operation of Bank Indonesia's Payment System (SPBI) were well maintained. From an industry structure perspective, interconnection of payment systems and expansion of the Digital Economy and Finance ecosystem continued to progress. Payment transactions based on the National Open API Payment Standard (SNAP) also increased in line with broader adoption. In parallel with non-cash transactions, Bank Indonesia remains committed to ensuring the availability of Rupiah currency in sufficient quantity, appropriate denominations, and fit-for-circulation quality across all regions of the Republic of Indonesia, including the frontmost, the outermost, and the remote (3T) areas. This reflects Bank Indonesia's unwavering commitment to safeguarding national sovereignty and supporting a secure, seamless, and reliable payment system.

The	positive	performance	of	Indonesia's	domestic economy	reflects	close	policy	coordination between the Government and Bank Indonesia to drive economic growth while maintaining stability. To safeguard macroeconomic stability,

Table	8.	Indonesia	Payment	System	Projections	2025-2027

|                    |                       | Growth (%)   | Growth (%)   | Growth (%)   | Growth (%)   | Nominal/Volume   | Nominal/Volume   | Nominal/Volume   | Nominal/Volume   |
|--------------------|-----------------------|--------------|--------------|--------------|--------------|------------------|------------------|------------------|------------------|
| Transaction        | Transaction           | 2024         | 2025*        | 2026*        | 2027*        | 2024             | 2025*            | 2026*            | 2027*            |
| I. Cashless        |                       |              |              |              |              |                  |                  |                  |                  |
| 1. Digital Payment | Nominal (Rp Trillion) | 19.3         | 10.8         | 12.4         | 14.8         | 70,890.4         | 78,563.1         | 88,310.7         | 101,410.3        |
|                    | Volume (Million)      | 40.7         | 34.1         | 30.0         | 23.9         | 36,659.2         | 49,167.8         | 63,925.9         | 79,206.7         |
| 2. QRIS            | Nominal (Rp Trillion) | 191.6        | 125.3        | 109.2        | 82.4         | 659.9            | 1,486.80         | 3,110.6          | 5,674.3          |
| 2. QRIS            | Volume (Million)      | 191.7        | 146.4        | 10.6         | 10.6         | 6,239.7          | 15,374.2         | 17,000.0         | 18,797.7         |
| 3. BI-FAST         | Nominal (Rp Trillion) | 54.7         | 36.6         | 26.7         | 20.3         | 8,913.8          | 12,176.2         | 15,429.5         | 18,568.7         |
| 3. BI-FAST         | Volume (Million)      | 62.4         | 45.2         | 29.8         | 25.2         | 3,430.0          | 4,862.6          | 6,312.5          | 7,902.9          |
| 4. BI-RTGS System  | Nominal (Rp Trillion) | 12.8         | 19.1         | 11.2         | 9.0          | 178,920.3        | 149,344.0        | 166,015.0        | 180,967.0        |
| 4. BI-RTGS System  | Volume (Million)      | 3.2          | 0.9          | 0.3          | 0.1          | 10.2             | 10.3             | 10.3             | 10.3             |
| II. Cash           |                       |              |              |              |              |                  |                  |                  |                  |
|                    | Nominal (Rp Trillion) | 9.3          | 8.1          | 7.2          | 7.3          | 1,204.5          | 1,273.2          | 1,301.9          | 1,497.2          |

Source: Bank Indonesia

the Government's fiscal policy remained prudent, with the fiscal deficit in 2025 projected at around 2.75% of GDP, indicating continued progress in fiscal consolidation. Bank Indonesia's monetary policy remained focused on maintaining Rupiah exchange rate stability and inflation within the 2.5±1% target range. Inflation control synergy between Bank Indonesia and the Government, both central and regional, continued to be strengthened through the Central and Regional Inflation Control Teams (TPIP/TPID) and implementation of the National Movement for Food Inflation Control (GNPIP) across various regions. Fiscal and monetary policy synergy was also directed toward supporting economic growth. On the fiscal side, stimulus was provided through social protection programs to sustain household purchasing power and accelerated realization of ministry/government agency spending. In addition, the Government implemented various Asta Cita programs in line

Note: *Bank Indonesia's Projection

with national priority projects focused on food security, energy, defense and security, as well as the Government's 2025 Economic Policy Package. On the monetary side, Bank Indonesia disbursed macroprudential liquidity incentives (KLM) totaling Rp404.6 trillion as of the first week of November 2025 to banks, aimed at stimulating credit and financing to priority sectors, including mineral and food downstreaming, MSMEs, automotive, trade, electricity-gas-water (LGA), tourism, and the creative economy. Policy synergy was further strengthened in the development of the national digital economy and finance, including through electronification of social assistance disbursements and government financial transactions at both central and regional levels. Coordination within the Financial System Stability Committee (KSSK) was also pursued to maintain financial system stability and support the role of the financial sector in financing the economy for sustainable and inclusive growth.

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## III. Bank Indonesia Policy Mix 2025: Fostering Growth, Maintaining Stability

Bank	Indonesia's	policy	mix	in	2025	will	continue to be strengthened and directed toward fostering economic growth while maintaining stability, in close	synergy	with	national	economic	policy. In terms of monetary policy, with inflation remaining low and within the target range, Bank Indonesia reduce interest rate and expand monetary operations to stimulate economic growth, while safeguarding Rupiah exchange rate stability. In terms of macroprudential policy, liquidity incentives are provided to the banking industry to encourage credit and financing to priority sectors under the Government's Asta Cita program. In terms of payment system policy, digitalization is accelerated to promote economic and financial inclusion, particularly in the real sector and among MSMEs. These three core components of Bank Indonesia's policy mix is supported by measures to deepen the money market and foreign exchange market, develop MSMEs and the sharia economy and finance, as well as strengthen international policy.

## Figure 2. Bank Indonesia Policy Mix 2025



Source: Bank Indonesia

## Bank	Indonesia's	Policy	Mix	Conception

In accordance with the Bank Indonesia Act, as amended most recently by the Financial Sector Development and Strengthening Act (UU P2SK), the	objective	of	Bank	Indonesia	as	the	central bank of the Republic of Indonesia is to achieve Rupiah stability, maintain payment system stability,	and	contribute	to	preserving	financial system stability (SSK) in support of sustainable economic growth. Rupiah stability is measured by achieving the inflation target set by the Government and maintaining Rupiah exchange rate stability, supported by adequate foreign exchange reserves (Figure 2). Payment system stability is reflected in the velocity of money circulation, comprising banknotes, account-based money, and digital money, that aligns with the needs of the economy, a healthy and efficient national payment system industry structure, and the provision of secure and reliable payment system infrastructure. Meanwhile, financial system stability is reflected in optimal credit/financing growth, mitigated financial system risks, and the expansion of economic and financial

inclusion. In this regard, Bank Indonesia contributes to maintaining SSK through macroprudential policy in the banking sector from a macro-financial linkage perspective, considering that SSK is a shared responsibility among the Ministry of Finance, Bank Indonesia, the Financial Services Authority (OJK), and the Deposit Insurance Corporation (LPS) under the Financial System Stability Committee (KSSK). These three stability objectives of Bank Indonesia are critical and, therefore, oriented toward supporting sustainable economic growth.

To	achieve	its	objectives,	Bank	Indonesia performs	three	main	functions:	monetary	policy, macroprudential	policy,	and	payment	system policy. Accordingly, Bank Indonesia's support for sustainable economic growth is pursued through these three functions, which can be elaborated as follows. First, through monetary policy, achieving the inflation target and Rupiah exchange rate stability is essential for the development of various economic and financial activities by the Government, the financial sector, businesses, and the public. Low inflation strengthens purchasing power and enhances certainty for businesses. Similarly, Rupiah exchange rate stability is vital for controlling inflation, maintaining financial system stability, ensuring stability in the Government Securities (SBN) market and fiscal financing, and providing certainty for businesses. Second, through payment system policy, innovation in payment instruments, smooth transactions, a healthy industry structure, and stable payment system infrastructure determine the velocity, efficiency, and productivity of various economic and financial activities, both account-based and digital. Likewise, the circulation of banknotes in sufficient quantity and quality is necessary for the public, including in the frontmost, the outermost, and the remote (3T) regions. Third, through macroprudential policy, optimal growth in bank lending/financing, supported by maintained banking system stability and close synergy within the KSSK, plays an important role in promoting sustainable economic growth. To support the implementation of these three functions, Bank Indonesia is also vested with authority in money market deepening and international policy, in addition to participating in MSME development and the sharia economy and finance.

In	carrying	out	its	three	core	functions,	Bank Indonesia	adopts	an	optimal	policy	mix	to	strike a balance between maintaining stability and supporting	national	economic	growth,	while also considering the impact of global economic developments. The policy mix is based on Bank Indonesia's assessments, projections, and simulations of movements in the national economic and financial cycles going forward. In this regard, an accommodative policy mix stance is applied when the cycle is contracting and below potential economic capacity (stagnation or recession), whereas a tighter policy stance is adopted when the cycle is expanding beyond potential capacity (boom or overheating). For example, at present, Indonesia's economic and financial cycles are trending upward yet remain below potential economic capacity (Graph 20). This is reflected, among others, in low core inflation, a narrow current account deficit, and economic growth that has not yet become broadbased across most sectors. Conceptually, therefore, Bank Indonesia's policy mix stance, comprising monetary, macroprudential, and payment system policies, tends to be accommodative to balance the achievement of stability and sustainable economic

Graph 20. Indonesia's Economic and Financial Cycles



Source: Bank Indonesia, Consensus Indonesia

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growth. Nevertheless, as an open economy, the spillover effects of global turmoil influence national economic stability and resilience. As previously explained, US tariff policies and global geopolitical tensions have exerted pressure on Rupiah exchange rate stability and triggered foreign portfolio investment outflows. These considerations underpin the current policy mix stance, whereby monetary policy is oriented toward 'pro-growth and stability,' while payment system and macroprudential policies remain 'pro-growth,' supported by measures to deepen the money market and programs to foster economic and financial inclusion.

Based on the stance of Bank Indonesia's policy mix, the following outlines the key policy instruments implemented in 2025.

- i. Bank Indonesia's monetary policy is implemented	through	reductions	in	the BI-Rate,	Rupiah	exchange	rate	stabilization, and liquidity expansion. These measures aim to optimize the monetary policy trilemma, namely maintaining price stability, exchange rate stability, and adequate foreign exchange reserves. The BI-Rate has been lowered six times, totaling 150 basis points since September 2024, to 4.75%, the lowest level since 2022. Rupiah stabilization measures have been reinforced through interventions in the offshore market via Non-Deliverable Forward (NDF) transactions and interventions in the domestic market through spot transactions, Domestic Non-Deliverable Forward (DNDF), and purchases of Government Securities (SBN) in the secondary market. Rupiah liquidity expansion has also been pursued through reductions in Bank Indonesia Rupiah Securities (SRBI) positions and purchases of SBN, including secondary market purchases and debt-switching programs, as part of close synergy between Bank Indonesia's monetary policy and the Government's fiscal policy. Monetary policy is further supported by

macroprudential liquidity incentives (KLM) and accelerated payment system digitalization to stimulate economic growth.

- ii. In	the	area	of	macroprudential	policy, liquidity	incentives	were	strengthened,	and	all macroprudential	instruments	were	eased	to encourage	bank	credit/financing	growth	and support	the	maintenance	of	financial	system stability. In this regard, the three objectives of the macroprudential policy trilemma, optimal credit, financial system stability, and financial inclusion, moved in the same direction and were further reinforced. The KLM policy was strengthened to promote bank credit disbursement to priority sectors aligned with the Government's priority programs under the Asta Cita framework. The Bank Foreign Funding Ratio (RPLN) instrument was eased to broaden banks' alternative funding sources from abroad. The Macroprudential Liquidity Buffer (PLM) was also relaxed to provide additional liquidity by reducing the required securities holdings relative to Third-Party Funds (TPF). Other macroprudential policy instruments remained accommodative to support credit expansion, namely the Countercyclical Capital Buffer (CCyB), the Macroprudential Intermediation Ratio (RIM), the Loan-to-Value/Financing-toValue (LTV/FTV) ratios for property credit/ financing, and down payment requirements for motor vehicle credit/financing. Macroprudential and money market surveillance of the banking system were also strengthened to help safeguard financial system stability, supported by close coordination within the Financial System Stability Committee (KSSK).
- iii. Acceleration	of	payment	system	digitalization and	ensuring	adequate	currency	circulation continue	to	be	pursued	to	support	smooth, efficient,	and	productive	economic	and	financial transactions. Digitalization is implemented through innovation in payment instruments and expansion of digital payment services,

strengthening the industry structure and payment system infrastructure stability, and integrating the national digital economy and finance ecosystem. Implementation of the Indonesia Payment System Blueprint (IPSB) 2025 has successfully achieved various strategic transformations in payment systems, including broader acceptance of QRIS, implementation of BI-FAST, and the National Open API Payment Standard (SNAP), which have increased payment velocity and retail transaction efficiency. Digital payment system transformation continues under IPSB 2030, focusing on strengthening payment system resilience and expanding interconnection and interoperability domestically and internationally. In 2025, Bank Indonesia continues to broaden digital acceptance through QRIS pricing schemes that are more affordable for Public Service Agency (BLU) and Public Service Obligation (PSO) merchants. In terms of innovation, QRIS features have been expanded with the launch of QRIS Tap, based on Near Field Communication (NFC) technology. The payment system industry structure is reinforced to ensure interconnection and interoperability among payment service providers through expanded SNAP implementation and strengthened industry governance via enhanced surveillance and risk management, including measures against illegal transactions and cyber threats. Payment system infrastructure stability is maintained through optimization of BI-FAST Phase I Stage 2 features, which include bulk transfers, request for payment, and direct debit transfers. In line with public financial digitalization, Bank Indonesia strengthens the digitalization of government financial transactions through the Regional Digitalization Acceleration and Expansion Program (P2DD) and increased acceptance of the Indonesia Credit Card (KKI) to improve transparency, efficiency, and fiscal governance. Furthermore, international synergy is expanded through the implementation of Regional Payment Connectivity (RPC) within ASEAN and the establishment of a new QRIS cross-border payment corridor between Indonesia and Japan to strengthen cross-border connectivity and support regional digital economic integration. Meanwhile, to ensure smooth, efficient, and productive economic and financial transactions across Indonesia, particularly in areas with limited digital acceptance and infrastructure, Bank Indonesia continues to ensure the adequacy and quality of Rupiah currency and strengthens collaboration with various stakeholders to guarantee the availability of high-quality, reliable, and easily accessible Rupiah currency for all segments of society.

## Monetary Policy

Interest rate policy in 2025 is determined at each monthly	Board	of	Governors	Meeting	(RDG)	in	a forward-looking	and	pre-emptive	manner	to	steer inflation	forecasts	for	the	next	two	years	within the target range set by the Government, namely 2.5±1%	in	2025	and	2026. As previously explained, Bank Indonesia reduced the BI-Rate six times by a total of 150 basis points, from 6.25% in September 2024 to 4.75% in September 2025, marking the lowest level since 2022 (Graph 21.a). The BI-Rate reductions were decided by Bank Indonesia in September 2024 and, during 2025, in January, May, July, August, and September, each by 25 basis points. At the monthly RDG held on 18-19 November 2025, Bank Indonesia also decided to maintain the BI-Rate at 4.75%, the Deposit Facility rate at 3.75%, and the Lending Facility rate at 5.50% to continue encouraging banks to utilize liquidity easing for the real sector. This decision aligns with the Government's efforts to stimulate economic growth while keeping inflation in 2025 and 2026 within the 2.5±1% target range (Graph 21.b) and maintaining Rupiah exchange rate stability in line with its fundamentals. Moving forward, Bank Indonesia will continue to monitor economic growth and inflation prospects to leverage room for further BI-Rate reductions while considering Rupiah exchange rate stability.

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## BANK INDONESIA ANNUAL MEETING 2025

## Graph 21.a. BI-Rate and INDONIA



Source: Bank Indonesia

Rupiah	exchange	rate	stabilization	policy	is implemented to safeguard the external resilience of the	national	economy	against	the	impact	of	global turmoil. Strengthening the Rupiah stabilization strategy in line with fundamentals was pursued through interventions in the domestic market via spot and Domestic Non-Deliverable Forward (DNDF) transactions, as well as offshore market interventions through Non-Deliverable Forward (NDF) transactions. This strategy was complemented by purchases of Government Securities (SBN) in the secondary market to enhance liquidity and maintain financial market stability. The Rupiah exchange rate, which had reached around Rp17,000 per US dollar in early April 2025, has since appreciated and stabilized at around Rp16,300-16,700 per US dollar. Bank Indonesia remains firmly committed to maintaining Rupiah exchange rate stability as an integral part of economic stability and the stability of the Republic of Indonesia.

Liquidity expansion was implemented through a promarket	monetary	operations	strategy	to	strengthen the	effectiveness	of	interest	rate	transmission, increase liquidity, and accelerate money market and foreign exchange market deepening. This strategy comprised three measures. First, increasing liquidity in the money market and banking sector by reducing SRBI positions from Rp916.97 trillion at the beginning of 2025 to Rp699.30 trillion

Graph	21.b.	Inflation	Expectations



,

Source: Consensus Forecast

as of 17 November 2025 (Graph 22.a). Second, lowering the interest rate structure of monetary instruments and foreign exchange swaps in line with liquidity expansion to accelerate the effectiveness of reductions in deposit and lending rates. SRBI yields for tenors of 6, 9, and 12 months declined by 254 bps, 256 bps, and 257 bps, respectively, since the beginning of 2025 to 4.62%, 4.65%, and 4.69% as of 14 November 2025 (Graph 22.b). Third, strengthening the role of primary dealers to increase SRBI transactions in the secondary market and repurchase agreement (repo) transactions among market participants. Furthermore, to reinforce the effectiveness of liquidity expansion, as mentioned earlier, at the RDG on 18-19 November 2025, Bank Indonesia maintained the Deposit Facility rate at 3.75% to encourage banks to channel excess liquidity into credit for the real sector, thereby supporting higher economic growth.

Bank	Indonesia	continue	to	optimize	various	promarket	instrument	innovations. Since November 2025, Bank Indonesia has expanded the underlying assets for repos in its monetary operations to include other high-quality securities issued by financial institutions established or owned by the Government to support Government programs aimed at public welfare. To support the Money Market Development Blueprint (BPPU) 2030, Bank Indonesia also introduced BI-FRN (Floating Rate

Graph	22.a.	SRBI	Position



Source: Bank Indonesia

Notes) and developed Overnight Index Swaps (OIS) for tenors beyond overnight to establish an interest rate structure based on money market transactions. In support of the Islamic money market, Bank Indonesia expanded the investor base for Sukuk Bank Indonesia (SUKBI) to include banks and nonbank institutions, as well as non-residents.

Purchases of SBN from the secondary market were	conducted	in	line	with	the	accommodative monetary	policy	stance	through	BI-Rate	reductions and liquidity expansion. As of 18 November 2025, Bank Indonesia had purchased Rp289.91 trillion since January 2025, including Rp212.60 trillion through secondary market purchases and debt-switching programs with the Government. SBN purchases in the secondary market were carried out based on market mechanisms, in a measured, transparent manner, and consistent with monetary policy objectives to maintain economic stability and preserve monetary policy credibility. Furthermore, these purchases represent close synergy between Bank Indonesia's monetary policy and the Government's fiscal policy to jointly maintain macroeconomic stability and stimulate economic growth. In this regard, part of the SBN purchased was utilized by the Government to finance peopleoriented economic programs, such as Public Housing and the Red and White Village Cooperatives (KDMP) initiative.

## Graph 22.b. SRBI Rate



Source: Bank Indonesia

The	three	monetary	instruments	mentioned	above,

BI-Rate	policy,	Rupiah	exchange	rate	stabilization, and liquidity expansion, are supported by adequate foreign exchange reserves and foreign exchange flow	management. Bank Indonesia consistently ensures reserve adequacy in accordance with international standards to support the Government's external debt servicing and Rupiah stabilization policy. At the end of October 2025, the position of foreign exchange reserves stood at USD149.9 billion, equivalent to 6.2 months of imports or 6.0 months of imports and Government external debt servicing, well above the international adequacy standard of approximately 3 months of imports. Bank Indonesia assesses that this level of reserves is sufficient to support external sector resilience and maintain macroeconomic and financial system stability. Furthermore, to support Rupiah exchange rate stability, Bank Indonesia also facilitates the implementation of the mandatory retention policy for Foreign Exchange Export Proceeds from Natural Resources (DHE SDA) in the domestic financial system in accordance with Government Regulation (PP) No. 8 of 2025. The instruments for placement and utilization of DHE SDA have been expanded to include, among others, placement in foreign currency Term Deposit (TD) instruments for tenors of up to 12 months (Graph 23.a), and placement in Bank Indonesia Foreign Exchange Securities

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## BANK INDONESIA ANNUAL MEETING 2025

Graph	23.a.	Foreign	Currency	TD	DHE	Position



Source: Bank Indonesia

(SVBI) and Bank Indonesia Foreign Exchange Sukuk (SUVBI) instruments for tenors of up to 12 months (Graph 23.b). In addition to foreign currency placement instruments, the flexibility provided under Government Regulation No. 8 of 2025 also encourages greater conversion of foreign currency into Rupiah. This has resulted in an increase in foreign currency supply from corporations, which in turn has contributed to higher Rupiah third-party funds (DPK) in the corporate sector.

Bank	Indonesia	continues	to	strengthen coordination	with	the	Government,	both	central and	regional,	in	controlling	inflation	and	supporting national	economic	growth. With respect to inflation control, particularly food prices (volatile food), synergy with the Government, both Central and Regional, through the Inflation Control Teams (TPIP/ TPID) under the National Movement for Food Inflation Control (GNPIP) has been continuously enhanced with full support from Bank Indonesia, involving both the Head Office and the 46 representative offices across Indonesia. Food inflation control adheres to the 4K Strategy, namely price affordability, supply availability, smooth distribution, and effective communication. Bank Indonesia's support for GNPIP includes various programs, namely Productivity Enhancement, Food Security, Interregional Cooperation, Food

Graph	23.b.	SVBI	Position

Juta Dolar AS



1b

3b

6b

9b

12b

Source: Bank Indonesia

Distribution Facilitation, Subsidized Discount Market, Data Digitalization, and Coordination and Public Communication, as shown in Table 9. Furthermore, Bank Indonesia consistently supports various Government initiatives to stabilize prices, including the Stabilization of Food Supply and Prices (SPHP) program, particularly for rice, and the intensive monitoring of food prices through periodic coordination meetings at the TPID and TPIP levels, as well as inspections at both market and producer levels. These actions are not limited to stabilizing short-term food prices, but are also directed toward building a resilient and adaptive food security ecosystem in which supply chain efficiency, regional empowerment, and inter-agency coordination form the core foundation for maintaining price stability. In addition to price stabilization efforts, Bank Indonesia continues to support the Government, particularly at the regional level, in accelerating regional economic growth. This includes strengthening economic policy advisory to optimize potential sectors in each region, empowering MSMEs, promoting regional investment and trade through the Regional Investor Relation Unit (RIRU), and actively participating in the Regional Economic Growth Acceleration Team (TP2ED). It is expected that such synergy will foster high, inclusive, and sustainable regional economic growth, thereby supporting the national economic growth vision.

Table	9.	Bank	Indonesia's	Support	in	GNPIP	for	Inflation	Control	in	2025

|                                                      |        |             | Unit           | Implementation (% to Target)   | Implementation (% to Target)   | Implementation (% to Target)   | Implementation (% to Target)   | Implementation (% to Target)   | Implementation (% to Target)   |
|------------------------------------------------------|--------|-------------|----------------|--------------------------------|--------------------------------|--------------------------------|--------------------------------|--------------------------------|--------------------------------|
| GNPIP Flagship Program                               | Target | Achievement |                | National                       | Sumatra                        | Java                           | Balinusra                      | Kalimantan                     | Sulampua                       |
| Productivity Enhancement                             |        |             |                |                                |                                |                                |                                |                                |                                |
| a. Optimization of Good Agricultural Practices (GAP) | 125    | 345         | Program        | 276.00                         | 277.14                         | 190.24                         | 250.00                         | 343.75                         | 380.00                         |
| b. Food Cluster Institution                          | 75     | 171         | Program        | 228.00                         | 121.05                         | 82.14                          | 160.00                         | 1030.00                        | 107.69                         |
| Food Security                                        |        |             |                |                                |                                |                                |                                |                                |                                |
| a. Replication of Best Practices                     | 127    | 80          | Program        | 62.99                          | 45.71                          | 62.50                          | 100.00                         | 80.00                          | 65.52                          |
| b. Food Downstreaming                                | 115    | 67          | Program        | 58.26                          | 50.00                          | 34.21                          | 85.71                          | 114.29                         | 68.18                          |
| c. Offtaker Partnership Facilitation                 | 46     | 65          | Program        | 141.30                         | 123.08                         | 78.57                          | 400.00                         | 250.00                         | 110.00                         |
| Interregional Cooperation                            | 132    | 199         | MoU            | 150.76                         | 192.11                         | 160.47                         | 188.89                         | 117.65                         | 80.00                          |
| Food Distribution Facilitation                       | 226    | 854         | Program        | 377.88                         | 362.30                         | 632.05                         | 142.86                         | 182.76                         | 152.27                         |
| Subsidized Discount Market                           | 13,800 | 14,368      | Implementation | 104.12                         | 104.60                         | 105.98                         | 108.88                         | 93.67                          | 105.96                         |
| Data Digitalization                                  | 66     | 69          | Program        | 104.55                         | 70.00                          | 90.91                          | 240.00                         | 150.00                         | 100.00                         |
| Coordination and Public Communication                |        |             |                |                                |                                |                                |                                |                                |                                |
| a. Institutional Coordination                        | 626    | 582         | Activities     | 92.97                          | 68.18                          | 97.57                          | 100.00                         | 95.12                          | 116.94                         |
| b. TPID Capacity Building                            | 136    | 154         | Program        | 113.24                         | 105.56                         | 102.13                         | 111.11                         | 168.75                         | 110.71                         |
| c. Managing Inflation Expectation                    | 472    | 818         | Program        | 173.31                         | 97.71                          | 126.14                         | 218.52                         | 203.13                         | 317.53                         |
| d. Food Diversification and Processing               | 175    | 123         | Program        | 70.29                          | 34.04                          | 72.41                          | 120.00                         | 109.09                         | 76.32                          |
| e. Utilization of KLM Incentives                     | 73     | 74          | Program        | 101.37                         | 61.90                          | 75.00                          | 140.00                         | 66.67                          | 214.29                         |

Source: PowerApps GNPIP

## Macroprudential	Policy

To	further	encourage	bank	credit/financing	to priority sectors and support the Government's Asta Cita program, Bank Indonesia strengthened the	implementation	of	the	Macroprudential Liquidity	Incentive	Policy	(KLM). This innovative macroprudential easing policy has been in place since its initial implementation in March 2022 as part of Bank Indonesia's policy mix to support sustainable economic growth. Liquidity incentives were provided to banks in the form of a reduction in Minimum Reserve Requirement (GWM) obligations to stimulate credit/financing growth for businesses. Bank Indonesia viewed the reduction of GWM through KLM liquidity incentives as more productive for the economy than lowering GWM obligations for all banks, which could otherwise have been used for currency speculation or for purposes unrelated to credit/financing for businesses. Based on this

Data as of 14 November 2025

consideration, Bank Indonesia periodically reviews the implementation of KLM and, from time to time, strengthens its effectiveness in encouraging banks to channel credit/financing, both in terms of sector coverage and incentive size (Graph 24). From the perspective of priority sector coverage, KLM initially targeted sectors recovering from the scarring effects of the COVID-19 pandemic and later expanded to sectors with high leverage for economic growth. In 2025, priority sector coverage was further strengthened to support job absorption capacity and the Government's Asta Cita program, with increasing incentive amounts. The size of KLM liquidity incentives was increased from 4% to 5% of third-party funds, effective April 1, 2025. The strengthening of KLM aimed to boost bank credit/ financing primarily to priority sectors, namely Agriculture, Trade, and Manufacturing sectors, Real Estate, Public Housing, and Construction sectors, Transportation, Warehousing, Tourism, and Creative

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## Graph	24.	Evolution	of	Macroprudential	Liquidity	Incentive	(KLM)	Policy



Source: Bank Indonesia

Economy sectors, MSMEs and ultra-micro businesses sectors, environmentally sustainable financing sectors, which contributed to economic growth through job creation (labor-intensive) and supported the Government's Asta Cita program.

The	use	of	KLM	liquidity	incentives	by	banks continues	to	increase,	in	line	with	credit/financing growth, to support sustainable economic growth. As of the first week of November 2025, total KLM incentives reached Rp404.6 trillion, distributed to State-Owned Banks (BUMN) at Rp179.4 trillion, National Private Commercial Banks (BUSN) at Rp179.9 trillion, Regional Development Banks (BPD) at Rp39.3 trillion, and Foreign Bank Branch Offices (KCBA) at Rp6 trillion. In total, 124 banks had received significant KLM liquidity incentives, with 49 banks receiving 5% of TFP and 42 banks receiving between 4-5% of TFP (Graph 25.a). From the perspective of priority sectors (Graph 25.b), the largest KLM incentives were allocated to credit/ financing in Agriculture, Trade, and manufacturing sectors (Rp133.15 trillion), followed by the Housing sector (Rp107.84 trillion) and inclusive MSME financing (Rp81.19 trillion), the Green Economy

Sector (Rp36.38 trillion), Transportation and Storage, Tourism and Creative Economy (Rp23.90 trillion), and inclusive Ultra-Micro financing (Rp22.11 trillion). Thus, the provision of KLM liquidity incentives was considered effective in encouraging banks to channel credit/financing to support sustainable economic growth. Going forward, Bank Indonesia plans to periodically assess the coverage of these priority sectors to ensure alignment with Government programs, including sectors that create job opportunities.

Bank Indonesia strengthens the Bank Foreign Funding	Ratio	(RPLN)	instrument	to	enhance	bank funding	capacity	in	support	of	optimal	liquidity management and bank lending. The RPLN policy is an innovative countercyclical macroprudential instrument designed to strengthen banks' short-term foreign funding in line with economic needs. RPLN regulates the maximum limit of short-term bank liabilities relative to capital. Short-term liabilities considered in RPLN included short-term foreign debt of banks, short-term Domestic Foreign Currency Bonds, and/or short-term Risk Participation Transactions. RPLN has two policy features: a

## Graph 25.a. Number of Banks Receiving KLM

Incentives



Source: Bank Indonesia

countercyclical and a risk-based approach. The RPLN limit is dynamic, determined by countercyclical parameters that consider macroeconomic and financial cycles, as well as the banking industry's foreign debt cycle, which is evaluated periodically. Using a risk-based approach, the application of countercyclical parameters in RPLN considers external risks and macro-financial risks, including prudential principles covering capital capacity, credit risk, and market risk. Effective 1 June 2025, Bank Indonesia set the countercyclical parameter at 5%, thereby increasing the maximum RPLN limit from 30% to 35% 1 . The implementation of this countercyclical parameter strengthens banks' liquidity capacity in line with national economic needs while maintaining prudential principles.

Bank	Indonesia	continues	to	maintain	adequate banking	liquidity,	including	flexibility	in	the Macroprudential	Liquidity	Buffer	(PLM)	ratio,	to strengthen	credit/financing	while	safeguarding financial	system	stability. As explained previously, ample banking liquidity conditions was reflected in the LA/TPF and LDR ratios, which stood at 29.47% and 84.26% in October 2025. To enhance flexibility in liquidity management, Bank Indonesia relaxed the PLM ratio, which requires banks to hold a portion of liquid assets in high-quality securities such as

1 Regulation of Member of Board of Governors Number 12 of 2025 on The Amendment to Regulation of Member of Board of Governors Number 7 of 2024 on the Implementing Regulation of the Bank's Foreign Funding Ratio

## Graph 25.b. KLM Disbursements by Priority Sector



Source: Bank Indonesia

government bonds (SBN). Effective 1 June 2025, Bank Indonesia reduced the PLM ratio from 5% to 4% for Conventional Commercial Banks (BUK) and Sharia PLM ratio from 3.5% to 2.5% for Islamic Commercial Banks/Islamic Business Units (BUS/ UUS) 2 (Graph 26.a). In addition to lowering the PLM ratio, Bank Indonesia also adjusted the repo flexibility feature in PLM/Sharia PLM policies. The repo flexibility for fulfilling the PLM requirement for BUK was reduced to 4% from the previous 5%, while the repo flexibility for sharia-compliant securities to meet the Sharia PLM requirement for BUS was reduced to 2.5% from 3.5%. These adjustments provide banks with greater room to manage liquidity through repo transactions on securities they hold to meet PLM/PLM Sharia obligations. As of October 2025, all banks had PLM ratios above 5% of TFP, with 73 banks above 20% and 31 banks between 10-20% (Graph 26.b). Almost all securities for PLM compliance were held by banks, with only a small portion being transacted through repos to Bank Indonesia. This development indicated ample liquidity in the banking system, thereby supporting credit/financing for the economy. As outlined in the previous chapter, banks tended to place excess liquidity in securities as an alternative use of funds amid still-weak credit demand from

2 Regulation of Member of Board of Governors Number 11 of 2025 on the Eighth Amendment to Regulation of Member of Board of Governors Number 21/22/ PADG/2019 on Macroprudential Intermediation Ratio and Macroprudential Liquidity Buffers for Conventional Commercial Banks, Sharia Commercial Banks, and Sharia Business Units

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Graph	26.a.	Macroprudential	Liquidity	Buffer (PLM)



Source: Bank Indonesia eligible businesses. Going forward, as Indonesia's economic recovery continues to strengthen, bank lending/financing is expected to grow further.

In	addition	to	expanding	the	coverage	of	priority sectors	and	increasing	KLM	liquidity	incentives, strengthening	the	RPLN,	and	flexibility	in the	PLM	ratio,	other	macroprudential	policy instruments	remains	accommodative	to safeguard	financial	system	stability	and	support sustainable economic growth. In this regard, Bank Indonesia continues the various accommodative macroprudential instruments that had previously been implemented. The Loan-to-Value/Financingto-Value (LTV/FTV) ratio is maintained at 100% for all property types (including public housing), and the relaxation of 0% down payment requirements for motor vehicle credit/financing was upheld. Likewise, Bank Indonesia continued to maintain a 0% Countercyclical Capital Buffer (CCyB) and a Macroprudential Intermediation Ratio (RIM) of 84-94% (with the RIM realization at 85.21% at the end of October 2025) to support liquidity flexibility and bank lending, the Macroprudential Inclusive Financing Ratio (RPIM) for promoting inclusive economic and financial development, especially for MSMEs, and the Prime Lending Rate (SBDK) transparency policy for supporting the effectiveness of interest rate and macroprudential policy transmission.

## Graph	26.b.	Distribution	of	Macroprudential Liquidity	Buffer	(PLM)



Source: Bank Indonesia

Bank	Indonesia	continues	to	strengthen macroprudential	and	money	market	surveillance of	the	banking	system	to	maintain	financial	system stability. Macroprudential surveillance focuses on the macroeconomic-financial linkages of large banks, which play an essential role in lending/financing and financial system stability. The surveillance assesses liquidity risk, market risk (interest rate and exchange rate risk), and credit risk arising from domestic and global macroeconomic dynamics. Risk assessment is conducted for individual large banks and its interlinkages within the banking system, both in the short term (cross-section) and dynamically over the next two years (forward-looking). Stress tests on these three risk aspects were based on projections of Indonesia's macroeconomic outlook and the impact of global economic dynamics. Meanwhile, market surveillance focuses on assessing the three risks arising from transaction activities and the interconnectedness of large banks in the money and foreign exchange markets. In addition to risk assessments, macroprudential and market surveillance also focus on human resources capabilities, risk management, and technology used in large banks. Both forms of surveillance are mandated by the Financial Sector Development and Strengthening Act (P2SK Act), which enhances Bank Indonesia's mandate on macroprudential policy and deepens the money and foreign exchange

markets. The results of macroprudential and market surveillance are essential considerations in formulating Bank Indonesia's policy mix and are an integral part of bilateral supervisory coordination with the OJK, as well as broader coordination to maintain financial system stability within the KSSK.

Bank Indonesia strengthens policy synergy with the	Financial	System	Stability	Committee	(KSSK) and	various	authorities	in	maintaining	financial system stability. Throughout 2025, KSSK held regular quarterly meetings and additional sessions when necessary. Coordination with KSSK aims to conduct joint assessments of financial system conditions and coordinate policy responses to safeguard financial system stability. Overall, the financial system remained sound and resilient, withstanding pressures from global and domestic conditions. Bank Indonesia contributed to preserving financial system stability through exchange rate stability, optimal credit/financing growth, surveillance on major banks, particularly with respect to liquidity and market risks, and payment system stability. Stress testing on financial system stability was conducted jointly, along with simulations of coordination for the prevention and management of potential crisis. KSSK also coordinated in preparing follow-up actions on regulations required for implementing the P2SK Act. In this regard, Bank Indonesia has issued 16 out of 17 Bank Indonesia Regulations (PBI), with the remaining regulation to be completed within the prescribed timeline. Bank Indonesia further strengthened collaboration with various authorities and international forums in the areas of macroprudential policy and financial system stability, as part of efforts to reinforce domestic financial system resilience and contribute to global financial stability. This commitment is reflected in Bank Indonesia's active role in strategic international forums such as the Financial Stability Board (FSB) and the Basel Committee on Banking Supervision (BCBS). Bank Indonesia also reinforced its leadership role in the Asia-Pacific region by serving as Chair of the Working Group on Banking

Supervision (WGBS) under the Executives' Meeting of East Asia-Pacific Central Banks (EMEAP) for the 2024-2026 term. In this capacity, Bank Indonesia actively promoted discussions on strategic issues such as strengthening financial sector supervision, banking digitalization, and climate risk assessment, which are increasingly relevant to financial system stability. As a result of these efforts and active engagement, Bank Indonesia received the Best Systemic and Prudential Regulator in Asia Pacific Award 2025 from The Asian Banker.

## Payment System Policy

Bank	Indonesia	has	continued	to	accelerate payment	system	digitalization	through	innovation in instruments and the expansion of digital payment	services	to	strengthen	integration	of	the national	digital	economy-financial	ecosystem. The use of Quick Response Code Indonesia Standard (QRIS), as the only national QR standard for digital economic-financial transactions in Indonesia, has been expanded continuously through a broad acceptance campaign, coupled with innovative ease and convenience features for the public. In 2025, a wide-ranging campaign to expand QRIS acceptance will be implemented nationally and in various regions through the 46 representative offices of Bank Indonesia. Bank Indonesia has further innovated QRIS features in collaboration with the Indonesia Payment System Association (ASPI) through the development of national standards for QRIS Tap (QRIS TAP), particularly to support digital public services and retail transactions. To further increase digital payment transactions for the people's economy, Bank Indonesia in 2025 continue providing incentives in the form of broadened digital acceptance as a commitment to supporting the provision of general public services by the Government through the QRIS pricing scheme for Public Service Agency (BLU) and Public Service Obligation (PSO) merchants, reduced from 0.4% to 0%. As of October 2025, QRIS users totaled 58.30 million, surpassing the target of 58.0 million, with 41.19 million merchants, most of which are

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## Graph 27.a. Number of QRIS Users per Region



Source: Bank Indonesia

MSMEs. Spatially (Graph 27.a), most QRIS users are in the Java region, totaling 40.0 million, followed by Sumatra (10.2 million), Sulawesi, Maluku and Papua (3.3 million), Kalimantan (2.9 million) and Bali-Nusa Tenggara (1.9 million). The acceleration in QRIS transaction also continued, with transaction volume increase of 139.45% (yoy) and transaction nominal increase of 102.0% (yoy) (Graph 27.b). The rising popularity of QRIS among the public indicates the growing benefits of digital payment system acceleration by Bank Indonesia to support inclusive and sustainable economic growth.

The broadening of acceptance and stability of BI-FAST has been enhanced as the retail payment system infrastructure increasingly popular among the public. As is known, BI-FAST began implementation in 2022 as nationally driven retail payment system infrastructure to meet the rapidly growing needs of retail transactions, equipped with real-time features and 24/7 nonstop operation. Bank Indonesia also provides various benefits, including open participation, options for independent or shared infrastructure, a maximum transaction limit of Rp250 million per transaction, and a BI-FAST pricing scheme of up to Rp2,500 per transaction for customers, with a fee of Rp19 per transaction paid by participants to Bank Indonesia. The introduction of BI-FAST Phase I Stage 2 features has also been optimized to include bulk transfer services, request-

## Graph 27.b. QRIS Performance: Transaction	Volume	and	Value



Source: Bank Indonesia

for-payment, and direct debit transactions to support digital economic and financial services. As of October 2025, the volume of retail payment transactions below Rp250 million processed through BI-FAST reached 446.77 million transactions, accounting for 83.2% of total retail payment transaction volume (Graph 28.a). The BI-FAST transaction value is generally retail under Rp500,000 per transaction, representing around 60.0% of all transaction segments (Graph 28.b). These developments indicate that BI-FAST is increasingly capable of providing inclusive digital payment services to the public and nurturing cooperation in payment services. As public acceptance continues to grow, Bank Indonesia is strengthening BI-FAST service stability end-to-end, from the stability of payment system infrastructure at Bank Indonesia to the technology and risk management of Payment Service Providers (PSPs), as well as the services provided by PSPs to the public. Consumer protection, prevention against illegal transactions, and the reliability of cyber-security technology remain key priorities in Bank Indonesia's policy and supervisory framework.

Digital	payment	system	services	offered	by	the banking industry and nonbank PSPs have increased rapidly	in	line	with	the	growing	interconnection between industry players. Digital payments in 2025 are projected to reach 49.2 billion transactions, with a value of approximately Rp78.4 trillion (Graph

Graph	28.a.	BI-FAST	Transaction	Volume	vs Other Retail Payments



Source: Bank Indonesia

29.a). This rapid development reflects the increasing public acceptance and preference for digital payment services, which provide convenience in conducting various economic and financial transactions quickly, easily, and at low cost. In this regard, to further facilitate digital payment transactions for the public while simultaneously strengthening the structure of the payment system industry, the implementation of the National Open API Payment Standard (SNAP) continues to be expanded to support interconnection of digital banking services between banks and fintech. Following SNAP implementation for first movers and second movers in 2022 and

## Graph	29.a.	Digital	Payment	Transaction	Volume



Source: Bank Indonesia Note: *Projection

## Graph	28.b.	BI-FAST	Transaction	Volume	by Transaction	Value	Bracket



Source: Bank Indonesia

2023, Bank Indonesia, in collaboration with ASPI, has optimized efforts in 2025 to expand SNAP integration and adoption in the MSME and nonprofit segments. SNAP adoption in the interconnection of payment services by the payment system industry has also demonstrated significant progress, accounting for approximately 96% of total payment transaction volume (Graph 29.b). To strengthen a healthy, efficient, and stable PSP industry structure, Bank Indonesia continues to enhance payment system surveillance, including human resource competency, risk management practices, and the reliability of technology infrastructure. The results of

## Graph	29.b.	Composition	of	Transaction	Volume among	SNAP	Participants



Source: Bank Indonesia

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such surveillance serve as the basis for determining the health and classification of PSPs in their participation in BI-FAST, licensing processes, and the development of payment services to the public.

Bank	Indonesia	continues	strengthening policy synergy with the Central and Regional Governments	in	the	digitalization	of	social assistance	distribution	and	government	financial transactions. The smooth delivery of NonCash Social Assistance (BSNT) to Beneficiary Families (KPM) is maintained through coordination, facilitation, and education, as well as monitoring activities involving all Bank Indonesia representative offices. The implementation and acceptance of the Government segment of the Indonesia Credit Card (KKI) continue to be expanded to support efficiency in government financial transactions and promote financial inclusion. Launched in August 2022, the Government segment of KKI is a national credit card scheme for domestic use, starting with government transactions and later extending to retail transactions. After successfully integrating QRIS into the Government segment of KKI, Bank Indonesia in 2025 focuses on promoting the use of the KKI Government segment to further expand its acceptance. With these various benefits, and supported by consistent efforts from Bank Indonesia and the Indonesia Payment System Association (ASPI) to strengthen implementation and acceptance, the number of participating Regional Governments continues to increase. Likewise, KKI transactions continue to grow in both volume and value, dominated by transactions from Regional Governments using the QRIS feature. KKI transactions are most common in the transportation and hotel sectors. The implementation of Regional Government Transaction Digitalization (ETPD) is also being expanded in collaboration with the Regional Digitalization Acceleration and Expansion Task Force (P2DD) through the establishment of P2DD catalyst forums. In addition, synergy with ministries, institutions, and other authorities continues through the organization of the Indonesia Digital

Economy and Finance Festival (FEKDI) in October 2025.

Bank	Indonesia	continued	expanding	cross-border payment	cooperation	through	implementation	of	the Regional	Payment	Connectivity	(RPC)	initiative	in ASEAN and with several other important economic partner countries of Indonesia. Cross-border QR-based payment cooperation has now been implemented between Bank Indonesia and the Bank of Thailand (BoT), Bank Negara Malaysia (BNM), the Monetary Authority of Singapore (MAS), and Japan's Ministry of Economy, Trade and Industry (METI). These developments indicate that an increasing number of residents in both countries are using QR to facilitate transactions, particularly retail transactions for tourism. For example, QR cooperation between Bank Indonesia and BNM is currently facilitated by 8 PSPs in Malaysia and 57 PSPs in Indonesia, with usage in Indonesia totaling around 650 thousand transactions, valued at approximately Rp151.72 billion (Graph 30.a). In 2025, the establishment of a new cross-border QRIS corridor between Indonesia and Japan has been carried out to further strengthen cross-border connectivity. Cross-border QRIS cooperation will continue to be expanded with other partner countries, including the initiation of cooperation extensions with China, South Korea, India, and Saudi Arabia, to promote faster, cheaper, more transparent, and more inclusive cross-border payments, particularly for micro, small, and medium enterprises. This initiative is expected to foster economic activity, including the tourism sector, as well as encourage the use of local currencies for bilateral transactions within the Local Currency Transaction (LCT) framework. As of October 2025, LCT usage had reached equivalent of USD20.2 billion, or an average of USD2.0 billion per month, increased by 58.8% from an average of USD1.4 billion per month in 2024. Most local currency transactions were between Indonesia and China, followed by transactions with Japan, Malaysia, Thailand, South Korea, and the United Arab Emirates (Graph 30.b).

Bank	Indonesia	also	continues	to	develop	the Digital Rupiah through 'Project Garuda' to ensure that the Rupiah remains the sole legal tender in

## Graph	30.a.	Cross-Border	QRIS	Transactions between Indonesia and Malaysia



Source: Bank Indonesia

Indonesia in the digital era. This initiative is likewise a manifestation of the mandate stipulated in Act Number 4 of 2023 concerning Financial Sector Development and Strengthening (P2SK Act), which designates Bank Indonesia as the only institution authorized to issue Rupiah currency in Indonesia. After receiving various inputs from the industry and associations, ministries and government agencies, academics, and the public, Bank Indonesia is currently in the process of experimenting with technology through proof of concept (POC), focusing on the issuance and circulation of Digital Rupiah. At present, Bank Indonesia is testing alternative technological solutions, weighing options between centralized and decentralized approaches, and balancing the trade-off between speed and security for the future issuance of Digital Rupiah. The output of this POC will serve as the foundation for subsequent stages, namely sandboxing, piloting, and prototyping in the development of the first stage (immediate phase), which will focus on the circulation of Digital Rupiah from Bank Indonesia to designated banks acting as wholesalers. This stage will also form the starting point for the next stage (intermediate phase), which will involve the use of Digital Rupiah for digital financial securities (digital financial assets).

In the area of Rupiah currency management, Bank Indonesia	continues	to	advance	the	transformation of Rupiah currency management based on the

## Graph	30.b.	Local	Currency	Transaction	(LCT)



Source: Bank Indonesia

Blueprint Pengelolaan Uang Rupiah (BPPUR) 2030,	with	the	themes	of	modern,	collaborative, and sustainable. The implementation of this transformation covers various aspects, including Rupiah currency availability, Rupiah currency distribution, and Rupiah currency management infrastructure. Strengthening the aspect of Rupiah currency availability is carried out through enhancing the accuracy of estimating Rupiah currency demand, optimizing Rupiah currency inventory management, as well as improving the quality of Rupiah currency materials and design to ensure the circulation of higher-quality and more sustainable currency. In the area of Rupiah currency distribution, efficiency improvements in the distribution system are pursued through the optimization of distribution routes by leveraging better infrastructure and interregional connectivity, as well as through the implementation of business process reengineering in Rupiah currency distribution. These efforts are aimed at enhancing the effectiveness of the Rupiah currency distribution process, resulting in more efficient resource utilization. Synergy and collaboration with strategic partners are also continuously strengthened to expand service coverage, ensure timeliness, and maintain the security of Rupiah currency distribution across all regions of the Republic of Indonesia. Optimization of Rupiah currency distribution is also carried out through the development of

Partner Cash Centers ( Sentra Kas Mitra ) and Service

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Partners ( Mitra Layanan ). The infrastructure of modern Rupiah currency management continues to be strengthened through the development of Digital Smart Cash Management as part of the integrated digitalization of the currency management ecosystem. This innovation is intended to enable planning, monitoring, supervision, and decisionmaking processes that are faster, more accurate, and based on robust data.

Bank	Indonesia	continues	to	expand	its	services to	the	public	in	an	effort	to	meet	the	demand	for high-quality Rupiah currency across Indonesia. As part of its efforts to broaden services that meet the public's need for Rupiah currency, Bank Indonesia consistently conducts mobile cash services (kas keliling) in various regions, including in the frontmost, the outermost, and the remote (3T) areas). The implementation of mobile cash services in 3T regions is carried out through the Ekspedisi Rupiah Berdaulat (ERB) program, which this year has reached 90 islands in 18 provinces. These efforts reflect Bank Indonesia's commitment to strengthening its mission to ensure the availability of high-quality, evenly distributed, and accessible Rupiah currency for all segments of society across the country, as part of efforts to uphold national sovereignty. In addition to ERB, Bank Indonesia also organized the 2025 Semarak Rupiah Ramadan dan Berkah Idulfitri (SERAMBI) program. This program represents Bank Indonesia's concrete commitment to ensuring the availability of Rupiah currency in fit-for-circulation condition, in adequate quantities and appropriate denominations, and distributed evenly throughout Indonesia. The realized SERAMBI 2025 outflow amounted to Rp161.3 trillion. SERAMBI 2025 was implemented through various exchange service channels. Nationally, a total of 6,897 service points were provided, consisting of 4,141 banking service points and 2,756 direct service points operated by Bank Indonesia.

Bank	Indonesia	also	promotes	the	implementation of sustainable Rupiah currency management . Bank Indonesia's commitment to sustainability principles (green commitment) is manifested

through the Sustainable Rupiah Currency Management program, which covers the entire currency management cycle, from printing and circulation to the destruction of Rupiah currency. In the printing aspect, Bank Indonesia strengthens the application of sustainability principles through enhancements to the Rupiah currency life cycle. This effort is realized through the use of durable paper in the design and printing process, aimed at improving physical durability and extending the circulation life of the currency. In the circulation aspect, the green commitment is reflected in the implementation of environmentally friendly vehicles, including Euro 4 and Euro 5-compliant vehicles as well as hybrid vehicles, to support efficient and low-emission currency distribution. Meanwhile, in the destruction aspect, Bank Indonesia applies the circular economy concept through two main initiatives, waste to energy and waste to product, as a form of environmental responsibility in each stage of currency management. The utilization of Rupiah currency waste for energy is carried out by processing waste briquettes from shredded banknotes as co-firing material in several power plants. This initiative generates approximately 1.15 million kWh of electricity per year, equivalent to the electricity needs of around 72.3 thousand households, using approximately 5,517 tons of Rupiah currency waste annually. In addition, the utilization of Rupiah currency waste is also developed through the waste-to-product program, including processing waste into soil composters and value-added craft products, thereby providing economic benefits while supporting sustainable environmental management. With a spirit of transformation and digitalization, Bank Indonesia continues to advance the development of modern, collaborative, and sustainable Rupiah currency management.

## Money Market and Foreign Exchange Market Deepening

Bank	Indonesia	continues	to	accelerate	the deepening of modern, advanced, and integrated money market and foreign exchange market in

synergy	with	a	pro-market	Monetary	Operations strategy	to	strengthen	the	effectiveness	of	monetary policy	transmission,	financial	system	stability, and	national	economic	financing. Building on the achievements and positive momentum established through the implementation of the Money Market Development Blueprint (BPPU) 2025, Bank Indonesia has set the Money Market and Foreign Exchange Market Deepening Blueprint 2030 (BPPU 2030) as the strategic direction and foundation for money market and foreign exchange market development in Indonesia. The issuance of BPPU 2030 also represents the implementation of the Financial Sector Development and Strengthening Act (P2SK Act), which mandates Bank Indonesia to regulate, develop, and supervise money market and foreign exchange market. The P2SK Act further expands this mandate by designating Bank Indonesia as the authority responsible for regulating, developing, and supervising money market and foreign exchange market derivatives, which were previously under the jurisdiction of the Commodity Futures Trading Regulatory Agency (Bappebti). BPPU 2030 is designed with strategic objectives focused on four key areas: products, pricing, participants, and financial market infrastructure, referred to as 3P+I. The transformation under BPPU 2030 strengthens the BPPU 2025, particularly in terms of integration with the promarket monetary operation strategy, the strategic targets for 3P+I, the development of money market and foreign exchange market infrastructure based on the 3i principles (interconnection, interoperability, and integration) supported by data digitalization, as well as the reinforcement of regulation and supervision of money market and foreign exchange market. The strategic objectives of BPPU 2030 will be achieved through three main strategies: (1) developing diverse and liquid products with credible and transparent pricing; (2) fostering active and competent market participants and building financial market infrastructure that meets the 3i principles; (3) strengthening synergy and coordination to support the effectiveness of monetary policy. Bank Indonesia views that modern and advanced money market and foreign exchange market is a critical foundation for enhancing the effectiveness of monetary operations and policy transmission, maintaining financial system stability, supporting fiscal financing by the Government, and expanding access to financing for businesses and the economy.

Since	the	implementation	of	BPPU	2030, transactions	in	Indonesia's	money	market	and foreign	exchange	market	have	continued	to record	positive	developments. In terms of product development in the money market, data as of October 2025 show that the average daily value of repo transactions in 2025 reached Rp17.7 trillion, an increase of 17.9% from Rp15 trillion in 2024 and up 62.7% from Rp10.9 trillion in 2023 (Graph 31). Meanwhile, Overnight Index Swap (OIS) transactions also increased, with the average daily value reaching Rp66.5 billion as of October 2025, up 35.71% from Rp49 billion in 2024. These positive developments were driven by several initiatives in 2025, namely: (1) the implementation of the Primary Dealers (PD) obligation in money market and foreign exchange market to increase repo transaction counterparties and expand the signing of the Global Master Repurchase Agreement (GMRA); (2) the expansion of repo underlying in monetary operations, initiating broader use of repo underlying among market participants; (3) the issuance of BIFRN (Floating Rate Note) as a marketable security instrument with a floating coupon. Specifically, the

Graph	31.	Daily	Average	Repo	Transactions



Source: Bank Indonesia

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## BANK INDONESIA ANNUAL MEETING 2025

first initiative, mandating Primary Dealers in money market and foreign exchange market to enhance repo transaction counterparties and expanding GMRA adoption has contributed to strengthening interconnections among repo market participants. Consequently, this initiative is expected to boost transaction volume and efficiency, broaden the market participant base, and bolster investor confidence both domestically and internationally. The second initiative, expanding repo underlying in Bank Indonesia's monetary operations with other high-quality securities such as corporate bonds and corporate sukuk issued by financial services institutions (FSIs) established or designated by the Government to support government programs for public welfare and prosperity (special mission vehicles) has initiated broader use of repo underlying among market participants. The third initiative, the issuance of BI-FRN as a marketable security instrument with a floating coupon will increase participants' exposure to interest rate risk, thereby expected to stimulate growth in OIS transactions as an interest rate hedging instrument. Higher OIS transaction volume will support price formation in the money market and complement the money market term structure. In line with these initiatives, efforts to enhance liquidity in the OIS market also included developing the role of brokerage firms to facilitate OIS matchmaking in November 2025.

Graph	32.a.	SRBI	Transactions	in	the	Secondary Market by Tenor



Source: Bank Indonesia

In particular, the positive development of repo transactions reflects the strengthening role of repo as an instrument that enables market participants to manage banking liquidity using marketable securities (particularly SBN and SRBI). This progress has also had a positive impact on the government securities (SBN) market. SBN liquidity has improved and yields have declined, thereby contributing positively to reducing the Government's fiscal financing burden.

Money market and foreign exchange market deepening has also been reinforced through Bank Indonesia's	pro-market	monetary	operations strategy. This strategy includes the provision of money market instruments, namely SRBI, SUKBI, SVBI, SUVBI, and BI-FRN, to stimulate secondary market transactions in these instruments, thereby strengthening the market's role as a source of price discovery. Developments in secondary market transactions of money market instruments in 2025 have shown positive results, driven by the upward trend in SRBI transactions. In the first half of 2024, the average daily volume of SRBI transactions in the secondary market was approximately Rp6.3 trillion. Following the implementation of money market and foreign exchange market Primary Dealers in May 2024, the average daily volume of SRBI transactions in the secondary market continued to increase, reaching Rp10.8 trillion in the first half of 2025 (Graph

Graph	32.b.	SRBI	Transactions	between	Primary Dealers and Non-Primary Dealers



Source: Bank Indonesia

32.a). In line with this progress, interconnections among market participants also improved, as reflected in the average daily SRBI transactions between Primary Dealers, which rose from Rp3.83 trillion in the second half of 2024 to Rp4.02 trillion in the first half of 2025, and between Primary Dealers and Non-Primary Dealers, which increased from Rp7.08 trillion to Rp8.17 trillion over the same period (Graph 32.b). These positive developments were supported by Bank Indonesia's policy to restructure market participants through the selection of Primary Dealers to enhance transactions and interconnections within money market and foreign exchange market. This achievement also demonstrates the growing capacity and capability of banks and other market participants in managing liquidity and investment portfolios, which previously relied heavily on Bank Indonesia's monetary operations.

In line with these developments, foreign exchange (FX)	market	transactions	have	also	recorded	positive performance. As of October 2025, the average daily FX transaction value stood at USD10.15 billion, an increase of 10% from USD9.23 billion in 2024 and 30% from USD7.79 billion in 2023 (Graph 33). Although transactions remain dominated by spot trades, the share of FX derivative transactions continued to rise, reaching 43% compared to 42% in 2024 and 40% in 2023. Consistent with the

## Graph 33. Daily Average Foreign Exchange Transactions



Source: Bank Indonesia

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Foreign exchange (FX) product development initiatives	have	primarily	been	directed	at	enhancing liquidity in the FX market. First, the implementation of FX Primary Dealers in early second semester of 2025 contributed to the growth of DNDF transactions, both in terms of volume and interconnections among participants. Second, coordination with the market association, APUVINDO, covering DNDF development evaluation and dissemination of hedging implementation, supported the expansion of FX market participants. Bank Indonesia has fulfilled its G20 commitment on Over-the-Counter (OTC) Derivatives Market Reform through the implementation of standardized DNDF transactions cleared via the Central Counterparty (CCP). Third, the enforcement of provisions on Non-Centrally Cleared Derivatives (NCCD) or Margin Requirements for Derivative Transactions not cleared through CCP, effective 1 September 2025, also reinforced Bank Indonesia's efforts to further develop DNDF cleared through CCP. Accordingly, in 2025 Bank Indonesia introduced the expansion of standardized margin contracts, beginning with the signing of commitments by market participants. These strategic measures are expected to strengthen DNDF as a hedging instrument for banks, market participants, and the corporate sector.

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Positive	developments	in	the	money	and	foreign exchange markets have also been supported by the receipt	of	netting	opinion	from	the	International Swaps	and	Derivatives	Association	(ISDA)	in April 2025 and collateral opinion in August 2025, thereby	facilitating	the	implementation	of	close-out netting. Following the attainment of netting opinion status, Bank Indonesia will focus on expanding the adoption of standardized money market and foreign exchange market contracts, including GMRA, ISDA, PIDI, and Margin Requirement Contracts. These efforts are consistent with Bank Indonesia's strategic plan to continue developing money market and foreign exchange market products by deepening repo and DNDF transactions and expanding to other instruments such as Interest Rate Swaps (IRS) and cross-currency swaps. Regulatory reform in the money market and foreign exchange market continues to be strengthened through the issuance of implementing provisions governing money market transactions and transaction facilities. The continuation of these regulatory reforms remains directed toward the objective of deepening the money and foreign exchange markets to enhance the effectiveness of monetary policy transmission, safeguard financial system stability, and support sustainable growth in national economic financing.

From	a	pricing	perspective,	initiatives	have	been directed	toward	establishing	an	efficient	money market term structure for tenors ranging from two weeks to twelve months. In the money market, Bank Indonesia has set INDONIA as the reference rate for overnight tenor and Compounded INDONIA for tenors of 30, 90, 180, and 360 days, which are backward-looking. Furthermore, as part of benchmark reform, Bank Indonesia issued BI-FRN (Floating Rate Note) to encourage the development of Overnight Index Swap (OIS) transactions. Prices formed through OIS transactions will support the establishment of a forward-looking interest rate structure in the money market, particularly for tenors of two weeks to twelve months. These developments are expected to facilitate the formation of a credible money market curve, thereby strengthening the price discovery function in the money market.

In the foreign exchange market, JISDOR and NonUSD/IDR reference rates have been developed as daily exchange rate benchmarks in line with prevailing	international	best	practices. The Non-USD/ IDR reference rates were expanded to 17 currency pairs in 2025, from 14 currency pairs in 2024, with the addition of AED/IDR, PHP/IDR, and INR/IDR. In line with initiatives in the money market, the development of FX Swap and FX Forward transactions for longer tenors will be directed toward establishing an FX Forward Curve as a benchmark for derivative transactions in the foreign exchange market. The formation of a credible money market curve and FX Forward Curve that accurately reflects actual market conditions indicates a deep and efficient money and foreign exchange market, thereby strengthening the overall effectiveness of monetary policy transmission.

Bank Indonesia consistently develops money market and	foreign	exchange	market	participants	to	become more	active,	competent,	and	professional,	while strengthening	the	role	of	associations	in	accelerating money market and foreign exchange market deepening. As part of restructuring money market and foreign exchange market participants to create active players, Bank Indonesia implemented money market and foreign exchange market Primary Dealers in 2024. As of October 2025, Bank Indonesia has designated 20 banks as money market and foreign exchange market Primary Dealers, which have made a significant contribution to accelerating money market and oreign exchange market development. This is reflected in the share of average daily transactions by money market and foreign exchange market Primary Dealers, which reached 59% in the money market (Graph 34.a) and 69% in the foreign exchange market (Graph 34.b). This achievement was supported by the implementation of money market and foreign exchange market Primary Dealers policies, including: (1) the strengthening money market and foreign exchange market Primary Dealers obligations, encompassing their role as market makers, active participation in monetary operations, and active engagement in money market and foreign exchange market transactions; (2) the enhancement of money market and foreign exchange market Primary Dealers capacity through increased repo counterparty

Graph	34.a.	Primary	Dealers	Transactions	in	the Money Market



Source: Bank Indonesia

lines and provision of DNDF facilities specifically for money market and foreign exchange market Primary Dealers; (3) regular performance evaluations to ensure compliance with money market and foreign exchange market Primary Dealer criteria. In greater detail, under the first initiative, money market and foreign exchange market Primary Dealers play a key role in supporting strategic money market and foreign exchange market deepening initiatives in line with BPPU 2030 implementation, including executing repo transactions alongside expanding repo underlying assets with high-quality securities and contributing to OIS price formation through quotation provision. Under the second initiative, capacity strengthening was accelerated through the implementation of repo counterparty line obligations in April 2025 and the provision of DNDF facilities for money market and foreign exchange market Primary Dealers starting in the second semester of 2025 to boost liquidity and efficiency in the domestic repo and FX derivative markets. Furthermore, Bank Indonesia conducts regular evaluations of money market and foreign exchange market Primary Dealer performance based on established criteria to ensure the effectiveness of achieving the objectives of money market and foreign exchange market Primary Dealer implementation.

In terms of quality, money market and foreign exchange	market	participants	have	demonstrated significant	improvement	in	competency,	as	reflected

## Graph	34.b.	Primary	Dealers	Transactions	in	the Foreign Exchange Market



Source: Bank Indonesia

by	the	treasury	certification	ownership	rate,	which reached 95% of total treasury dealers in 2025. This achievement indicates enhanced professionalism and capacity among money market and foreign exchange market participants. Such progress is inseparable from the joint efforts of Bank Indonesia and stakeholders to continuously refine the Indonesian National Work Competency Standards (SKKNI) for Treasury to ensure relevance with market dynamics and the latest financial industry requirements. The refinement aims to strengthen the credibility of treasury professional certification as a national competency benchmark while ensuring that market participants possess technical expertise, integrity, and professionalism in accordance with global standards. In the process of enhancing money market and foreign exchange market participant quality, the Indonesian Money Market and Foreign Exchange Market Association (APUVINDO) continues to play an active role as Bank Indonesia's strategic partner, including in the administration of treasury certification and the implementation of the Market Code of Conduct.

The	acceleration	of	money	market	and	foreign exchange market development has been carried out by engaging APUVINDO as Bank Indonesia's strategic partner across all aspects of 3P+I to deepen the money and foreign exchange markets. Several concrete collaborative measures by

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APUVINDO in market development include: (1) drafting accounting guidelines for money market and foreign exchange market transactions cleared through the CCP, prepared by APUVINDO in collaboration with KPEI, the Indonesian Institute of Accountants (IAI), and CCP members; (2) conducting sharing sessions for all banks on the implementation and benefits of various money market and foreign exchange market development initiatives, such as money market and foreign exchange market products and CCP; and (3) evaluating money market and foreign exchange market development initiatives. Through close coordination with Bank Indonesia, APUVINDO work programs are consistently aligned with the policy direction of BPPU 2030 and the mandate of Bank Indonesia Regulation No. 6 of 2024 concerning the money market and foreign exchange market, with the aim of strengthening governance, efficiency, and competitiveness of the national financial market.

In terms of money market and foreign exchange market infrastructure, strengthening and development have been carried out comprehensively across three layers: front-end, middle-end, and back-end. The first infrastructure enhancement, namely the front-end, is aimed at supporting the integration strategy of money market and foreign exchange market with pro-market monetary operations to accelerate liquidity in money market and foreign exchange market transactions, maintain financial system stability, and promote efficient price formation. Front-end enhancement on the Bank Indonesia Electronic Trading Platform (BI-ETP) has been implemented through feature upgrades to accommodate: (1) the issuance of BI-FRN (Floating Rate Note); (2) the expansion of Bank Indonesia repo underlying to include other high-quality securities issued by financial institutions in the form of public entities with special assignments; (3) the adjustment of participant platform through collateral search feature enhancement. The capability of transaction facilities continues to be strengthened to support the implementation of the pro-market monetary operations strategy, aimed at encouraging market participants to manage liquidity primarily through transactions between participants rather than transactions with Bank Indonesia. The enhancement of front-end infrastructure for participant-to-participant transaction facilities includes: (1) the issuance of regulations governing transaction facilities; (2) the development of interconnection between market participants' transaction systems and the Central Counterparty (CCP); (3) the strengthening of the role of brokerage firms as operators for interbank OIS matchmaking.

Second, infrastructure strengthening at the middleend focuses on enhancing the CCP for the money market and foreign exchange market. Since its launch on 30 September 2024, the volume of DNDF transactions cleared through CCP money market and foreign exchange market has continued to increase, reaching USD1.3 billion, with the average daily volume rising to USD9.3 million in October 2025 compared to USD4 million in the initial implementation month (September 2024) (Graph 35). Utilization of CCP money market and foreign exchange market by market participants further improves money market and foreign exchange market transaction efficiency through novation, multilateral netting, and strengthened risk management, particularly counterparty risk. CCP money market and foreign exchange market

## Graph	35.	Daily	Average	DNDF	Transactions through Central Counterparty



Source: Bank Indonesia

enhancements throughout 2025 include: (1) the upgrading of CCP money market and foreign exchange market features to clear various tenor variations; (2) the strengthening of the CCP money market and foreign exchange market rulebook to accommodate feature and capability improvements; (3) the issuance of accounting guidelines for money market and foreign exchange market transactions cleared through CCP by APUVINDO. Further CCP strengthening measures include: (1) organizing CCP workshops and national seminars, as well as conducting CCP awareness programs in collaboration with APUVINDO; (2) expanding CCP money market and foreign exchange market participants; (3) initiatives to obtain recognized CCP status from regulators in the European Union (European Commission and European Securities and Markets Authority) and the United Kingdom (His Majesty's Treasury and Bank of England).

The enhancement of CCP money market and foreign	exchange	market	capabilities	has	also been	implemented	through	the	addition	of	TriParty Agent Repo (TPA Repo) services, which

Figure 3. Tri-Party Agent (TPA) Repo Business Process



Source: Bank Indonesia

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## commenced	operations	on	29	September	2025.

The expansion of CCP's role as TPA Repo provider enables banks to delegate collateral management, transaction administration and settlement, as well as repo transaction reporting from their back office to TPA Repo. Through TPA Repo, market participants can reduce operational risk while promoting more efficient, transparent, and standardized repo transactions, thereby supporting the acceleration of repo market development. Furthermore, the expansion of CCP services as a Tri-Party Repo Agent reflects the implementation of Financial Market Infrastructure (FMI) aligned with the 3i principles, supported by end-to-end operational integration with settlement systems for both securities and funds, namely BI-SSSS and BI-RTGS (Figure 3). At the initial stage, eight banks participated as piloting members of TPA Repo, namely Bank Mandiri, BNI, BRI, Bank Permata, Bank Danamon, Bank CIMB Niaga, Maybank, and BPD Jawa Timur. Within one month of TPA Repo implementation (as of 31 October 2025), the volume of interbank repo transactions via TPA Repo reached IDR194 billion, with tenors distributed across overnight (O/N), one week, and two weeks.

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Third, back-end infrastructure strengthening focuses on	the	Bank	Indonesia	Scripless	Securities	Settlement System (BI-SSSS). The capability of back-end infrastructure to settle various types and variations of money market and foreign exchange market transactions plays a crucial role in supporting the success of product development initiatives aimed at increasing money market and foreign exchange market diversity and liquidity. Enhancements to BI-SSSS have been implemented through system development to support: (1) the issuance of BI-FRN, including settlement of Bank Indonesia repo auctions with BIFRN as underlying, settlement of BI-FRN transactions in the secondary market among participants, and BI-FRN coupon payments; (2) the expansion of Bank Indonesia Sukuk investors from banks to include nonbank investors; (3) the extension of Bank Indonesia repo underlying to other high-quality securities issued by financial institutions in the form of public entities with special assignments. In addition to upgrading the current system, Bank Indonesia has initiated the development of BI-SSSS Generation III by preparing business requirements with active involvement and input from market participants represented by industry associations.

Bank	Indonesia	continues	to	strengthen	synergy with	other	financial	sector	authorities,	the	Ministry of Finance, the Financial Services Authority (OJK), and	the	Deposit	Insurance	Corporation	(LPS), both	for	financial	market	development	through education	and	literacy	as	well	as	for	mobilizing sources	of	economic	financing. This synergy is reinforced through the Financial Sector Development Coordination Forum (FK-PSK), comprising the four financial sector authorities Bank Indonesia (BI), OJK, the Ministry of Finance (MoF), and LPS on an ongoing basis in accordance with the mandate of the Financial Sector Development and Strengthening Act (P2SK Act). Synergy within FK-PSK is also directed toward expanding the retail investor base through the Leading Indonesian Financial Literacy Campaign (LIKE IT). Throughout 2025, seven LIKE IT events were held in various cities across Indonesia, targeting the younger generation. Through LIKE IT, young people are encouraged to increase their participation in financial market investment as part of financial planning education, while simultaneously fostering investment that will play an important role in increasing savings and financing for the national economy. Investment in financial markets has become increasingly accessible, supported by accelerated payment system digitalization and continuous innovation in retail investment products offered by banks and securities companies. In addition, synergy and strengthening efforts have been pursued to harmonize tax regulations for the money market and banking regulations to support the development of financial instruments as sources of financing for national economic development, as well as to enhance inter-market infrastructure for greater efficiency, reliability, and security of financial market infrastructure. Furthermore, Bank Indonesia actively participates in developing a sustainable financial sector (environmental, social, and governance, ESG). Synergy and harmonization efforts have also been undertaken to support money market and foreign exchange market development as part of providing financing sources for national economic development.

## Economic Inclusion, Financial Inclusion, Sustainable Finance, and Sharia Economic and Finance

Bank	Indonesia	continues	to	strengthen	synergy and	collaboration	to	accelerate	Economic	Inclusion, Financial Inclusion, and Sustainable Finance (IEKB) as	part	of	efforts	to	support	resilient	and	sustainable national	economic	growth . The implementation of IEKB is carried out through: (i) the development of an integrated and competitive inclusive and sustainable economic ecosystem, (ii) the optimization of inclusive and sustainable financing, and (iii) the expansion of inclusive and sustainable economic-financial literacy and synergy.

More specifically, ecosystem development focuses on empowering inclusive enterprises to enhance the competitiveness of MSMEs and subsistence groups,

end-to-end from upstream to downstream. This is pursued through various strategic initiatives, such as ECO-RISE (Empowering Community &amp; MSMEs toward Resilient, Inclusive, and Sustainable Economy) and comprehensive capacity-building and mentoring programs. These initiatives are further strengthened by expanding market access through Karya Kreatif Indonesia (KKI) as a flagship program for domestic MSME market development, the DIGDAYA UMKM program (Digitalization for Enhancing MSME Competitiveness) to broaden digital market access, as well as curated trade promotion efforts both domestically and internationally.

On another front, infrastructure development and digitalization are directed at creating an efficient and adaptive business ecosystem through the development of replicable business models, enhancements to the Indonesia SME Export Hub, and the strengthening of data systems, monitoring, and program evaluation. On the financing aspect, Bank Indonesia promotes inclusive and sustainable financing, including through the development of inclusive and sustainable financing infrastructure. This is achieved, among others, through the use of SIAPIK (Financial Information Recording Application System), BI-SAID (Database of Potentially Bankable MSME Profiles), and a green calculator designed to support business transition toward a green economy. Financing facilitation continues to be expanded through program innovations that promote financial access, equitable development, and longterm growth. Meanwhile, in the area of literacy and economic-financial synergy, Bank Indonesia enhances public understanding of the potential and risks of inclusive and sustainable finance through the implementation of KLIK (Core Competencies for Financial Literacy and Inclusion), standardized educational modules, and continuous education and mentoring initiatives across regions. Synergy strengthening is also pursued through BERSATU UMKM (Collaborate, Unite, and Advance MSMEs), an initiative aimed at increasing financial inclusion through collaboration with relevant ministries and government agencies.

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To accelerate inclusive and sustainable economic and	financial	development,	Bank	Indonesia continues	to	strengthen	collaboration	and	synergy with various ministries, government agencies, and strategic	partners	at	the	national	level. Through the active role of its regional and overseas offices, Bank Indonesia consistently implements a range of initiatives, including financing and export business matching activities, MSME onboarding, as well as capacity-building programs aimed at enhancing the competitiveness of MSME actors. One concrete form of this collaboration is reflected in the implementation of Karya Kreatif Indonesia (KKI) 2025, which carries the theme 'Synergy and Innovation: Strengthening the Role of MSMEs as the Engine of Sustainable Economic Growth', featuring East Nusa Tenggara (NTT) as the focus region and the hashtag #KalalaMareda, meaning 'creativity in unity' derived from the Sumbanese language. In collaboration with more than 24 ministries/government agencies and 31 associations, industries, and academic institutions, KKI 2025 achieved remarkable results. The event involved more than 1,400 MSMEs and attracted over 150,000 visitors both online and onsite. It recorded significant increases in MSME revenue, export business matching outcomes that grew by 64% to reach IDR 636 billion, and financing and green MSME business matching that rose by 70% (yoy) to reach IDR 320 billion (Figure 4). Beyond these accomplishments, KKI 2025 also stands as concrete evidence of Bank Indonesia's commitment to advancing sustainable economic and financial practices. Through the KKI BIJAK initiative (KKI as Bank Indonesia's Commitment to Environmental Sustainability), all carbon emissions generated during the event were offset through the purchase of 150 tons of CO₂ carbon credits and the planting of more than 20,000 trees, representing tangible steps toward environmentally friendly event management. These achievements demonstrate the effectiveness of crosssector synergy in building a resilient, competitive, and environmentally conscious MSME ecosystem. They also encourage business actors to continue innovating, strengthening digital capabilities, and expanding into global markets in support of inclusive and sustainable national economic growth.

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## Figure	4.	Karya	Kreatif	Indonesia	(KKI)	2025	Achievements



Source: Bank Indonesia

Bank	Indonesia	continues	to	promote	the development	of	national	sharia	economy	and finance	that	is	independent	and	inclusive. This development is pursued through three strategic pillars, namely: (i) the development of an integrated and competitive Halal Value Chain (HVC) ecosystem; (ii) the optimization of sharia financing; and (iii) the strengthening of sharia economy literacy and inclusion. These three main strategies are further elaborated into six strategic initiatives (six pillars) to accelerate the national sharia economy, namely: (i) GERBANG SANTRI (Pesantren Development and Halal Value Chain Movement); (ii) JAWARA Ekspor (Sharia Entrepreneur Network Driving Exports); (iii) GEMA HALAL (Collective Movement for Halal Acceleration); (iv) SAPA SYARIAH (Sharia Trade and Financing Synergy); (v) KANAL ZISWAF (National Collaboration for ZISWAF Development); and (vi) LENTERA EMAS (Sharia Economic and Financial Literacy and Inclusion toward Golden Indonesia). Subsequently, these six initiatives are focused on supporting the three main strategies above. First, strengthening the Halal Value Chain ecosystem through the strategic initiatives GERBANG SANTRI, JAWARA Ekspor, and GEMA HALAL. Second,

strengthening sharia financing through the strategic initiatives SAPA SYARIAH and KANAL ZISWAF. Third, strengthening sharia economy literacy and inclusion through the strategic initiative LENTERA EMAS.

All	of	the	above	initiatives	are	directed	to	contribute to the targets of the Sharia Economy Priority Program (PP)	in	the	National	Medium-Term	Development Plan	(RPJMN)	2025-2029,	the	National	Long-Term Development	Plan	(RPJPN)	2025-2045,	Asta	Cita toward Golden Indonesia ( Indonesia Emas ), as well as	to	strengthen	synergy	and	collaboration	across programs of all stakeholders. Throughout 2025, the strengthening of the Halal Value Chain ecosystem was carried out through: 'Pesantren' (Islamic boarding schools) business empowerment programs, which have been implemented in more than 1,000 pesantren business units across 34 provinces with diverse business sectors; programs to promote the growth of Indonesia's halal product exports, through the selection and curation of potential exporters and products, mentoring, and promotion; and programs to increase domestic production of halal raw materials, accelerate upstream halal certification, strengthen halal centers, and enhance halal information systems

for consumer protection and product traceability. The strengthening of sharia finance was undertaken through the reinforcement of policies, regulations, and innovations, including KLM and the Sharia Restricted Investment Account (SRIA); the development of Sharia money market and foreign exchange market, covering product, pricing, participants, and infrastructure (3P+I); facilitation programs for financing and trade access, including Sharia Financing Month; the development of the Sharia Economic Development Fund (SEDF) business model; and the establishment of the Integrated Center (PINTER) for ZISWAF data, which serves as a unified system to manage ZISWAF data in Indonesia. For the strengthening of sharia economy literacy and inclusion, Bank Indonesia conducted sharia economy literacy and inclusion surveys, standardized literacy content, and enhanced the quality of sharia economy human resources. In addition, collaboration and digitalization were reinforced, including through a series of activities such as the Sharia Economy Festival (FESyar) in three regions, the National Sharia Economy Forum, and the 12th Indonesia Sharia Economic Festival (ISEF) in Jakarta in 2025.

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The close synergy among all stakeholders in the development of the sharia economy successfully supported	the	flagship	programs	FESyar	and	ISEF 2025. The increasingly solid collaboration between Bank Indonesia and the National Committee for Sharia Economy and Finance (KNEKS), relevant ministries/ government agencies, and other strategic partners, including international institutions such as the Islamic Development Bank (IsDB), International Islamic Financial Market (IIFM), International Islamic Liquidity Management (IILM), and the Islamic Financial Services Board (IFSB), once again ensured the successful implementation of a series of sharia economy activities in Indonesia. In 2025, the National Sharia Economy and Finance Forum ( Sarasehan Nasional Ekonomi Keuangan Syariah ) was organized in collaboration with the Indonesian Ulema Council, aimed at strengthening synergy in the development of the sharia economy in Indonesia. This activity involved various parties to achieve the targets of the RPJMN 2025-2029, which include increasing the contribution of Sharia GDP and strengthening Indonesia's position in the State of Global Islamic Economy (SGIE) Report. Furthermore, ISEF 2025 hosted 100 series of activities in

Figure 5. Achievements of the 12 th Indonesia	Sharia	Economic	Festival	(ISEF)	2025



Source: Bank Indonesia

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collaboration with 34 ministries/government agencies, 30 international partners, and more than 700 MSMEs and industries. The value of business matching in financing and trade during the five-day ISEF reached Rp2.7 trillion, consisting of Rp2.5 trillion in financing commitments and realizations, and Rp231 billion in trade commitments and realizations. Combined with the achievements during FESyar as the road to ISEF, the total value of business matching reached Rp3.1 trillion. This figure increased by more than 50% compared with last year's value of Rp2 trillion (Figure 5). The organization of ISEF has become one of the activities that demonstrates Indonesia's leadership in the sharia economy and finance sector, as reflected among others in Indonesia maintaining its position as a global top 3 in the State of Global Islamic Economy (SGIE) Report 2024/2025.

## International	Policy

Bank	Indonesia	continued	to	strengthen	international policies to support resilience and macroeconomic stability . Cooperation with international partners through the global financial safety net (GFSN) is being further reinforced to mitigate the spillover effects of global uncertainty. In 2025, Bank Indonesia and the People's Bank of China (PBoC) agreed to renew the Bilateral Currency Swap Arrangement (BCSA) for a five-year period. This cooperation enables the exchange of local currencies between the two central banks up to CNY400 billion (equivalent to USD55 billion) with an equivalent amount in Rupiah. In addition, Bank Indonesia strengthened BCSA cooperation with the Reserve Bank of Australia valued at AUD10 billion (equivalent to USD6.2 billion) for a five-year period. These agreements underscore the important role of international cooperation as part of Bank Indonesia's policy mix in supporting Asta Cita, particularly in maintaining external sector resilience. At the ASEAN+3 regional level, Bank Indonesia actively reinforced the GFSN and participated in discussions on the New Financing Structure of the Chiang Mai Initiative Multilateralization (CMIM). These collaborations have further strengthened Indonesia's external resilience buffer, that was previously developed through cooperation with the Federal Reserve and Bank for International Settlements (BIS). Bank Indonesia highlights three important aspects at various international forums as follows: (i) the active involvement of international organizations, particularly the IMF, is required to emphasize the importance of open international trade policies to promote economic growth; (ii) an integrated policy mix and macroprudential policy innovations are necessary to maintain exchange rate and inflation stability while promoting green and inclusive financing; and (iii) commitment to an open, inclusive, and rule-based multilateral trading system.

Bank	Indonesia	continued	its	efforts	to	increase transactions	in	local	currency	through	strengthening cooperation	and	encouraging	its	implementation. Since the initiative was launched in 2018, Bank Indonesia has established LCT cooperation with eight central banks, namely Bank Negara Malaysia (BNM), Bank of Thailand (BoT), Japan Ministry of Finance (JMOF), PBoC, Monetary Authority of Singapore (MAS), Bank of Korea (BoK), Central Bank of the United Arab Emirates (CBUAE), and Reserve Bank of India (RBI). In 2025, the Local Currency Transaction (LCT) cooperation with PBoC, BNM, and BoT was renewed to promote the use of local currencies in bilateral transactions. The renewal of the cooperation expanded the LCT framework, now include current account transactions, capital transactions, and financial transactions which was previously limited to trade and direct investment. The LCT cooperation with CBUAE has been implemented since early 2025. With these developments, businesses have options to settle cross-border payment transactions using direct exchange rate quotations provided by Appointed Cross Currency Dealer (ACCD) banks. Cooperation has also been strengthened with BNM and BoT, synergizing with cross-border payment system initiatives. In addition, synergy initiatives have been conducted with Japan and China through High Level LCT Campaign and Cross-Border QR activities between Indonesia-Japan and Indonesia-China. To increase the utilization of LCT in Indonesia, a National Task Force on LCT has been established since 2023, comprising parties from across ministries/government agencies

Bank	Indonesia	actively	enhanced	bilateral	central banking	cooperation	to	strengthen	institutional capacity	and	promote	cooperation	in	the	payment systems. Structured Bilateral Cooperation (SBC) with central bank partners continues to be implemented by focusing on various central banking duties (monetary, macroprudential, and payment systems) and other specific areas, such as Islamic economics and finance, green economy, Anti-Money Laundering (AML), Countering the Financing of Terrorism (CFT), and Countering Proliferation Financing (CPF). In 2025, Bank Indonesia successfully established bilateral partnerships with Banque de France (BdF) and the State Bank of Vietnam (SBV). With these additions, since its initiation in 2015, Bank Indonesia has established bilateral cooperation with 15 partner central banks, including the Federal Reserve (The Fed), Bank of England (BoE), and the People's Bank of China (PBoC). These collaborations strengthened Bank Indonesia's institutional capacity, expanded opportunities for financial cooperation, and reflect its leadership role among regional central bank.

Cooperation	in	the	field	of	payment	system	has been	continuously	strengthened	to	enhance	crossborder	payment	connectivity. Cross-border payment cooperation using QR codes has been implemented with the BoT, BNM, MAS, and Japan's Ministry of Economy, Trade and Industry (METI). At the ASEAN regional level, Regional Payment Connectivity (RPC) cooperation was also expanded. RPC was initially signed in November 2022 by the ASEAN-5 central banks (Bank Indonesia, BNM, MAS, BoT, and Bangko Sentral ng Pilipinas (BSP)). RPC members now total nine countries after the National Bank of Cambodia (NBC) joined the initiative in April 2025. Cross-border payment connectivity must be nurtured to encourage faster, cheaper, transparent, and inclusive crossborder payments.

Bank Indonesia has consistently strengthened synergy	and	coordination	with	ministries/ government	agencies	to	manage	positive	stakeholder perception	toward	the Indonesian economy, as well as to promote investment and trade . Synergy has been achieved through intensive engagement

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&lt;a and communication with international rating agencies and stakeholders. As the secretariat of the national Investor Relations Unit (IRU), Bank Indonesia manage positive perceptions of the Indonesian economy to maintain Indonesia's sovereign rating remains one level above investment grade with a stable outlook from Moody's (Baa2), Standard &amp; Poor's (BBB), and Fitch (BBB). Indonesia has even obtained two levels above investment grade (BBB+) with a stable outlook from the Japan's rating agency R&amp;I. Maintaining stakeholder perceptions is important for increasing foreign capital inflows into portfolio instruments and direct investment. Bank Indonesia's effort to facilitate investment and trade promotion through IRU (at national level), Regional IRU (RIRU, at sub-national level), and Global IRU (GIRU, at global level), continue to be strengthened by synergized, targeted, and outcome-oriented strategies.

Bank	Indonesia's	international	reputation	grew stronger,	as	reflected	by	its	active	participation	in various	international	cooperation	forums . Throughout 2025, Bank Indonesia chaired the ASEAN Senior Level Committee on Financial Integration (SLC). The meeting discussed measures to strengthen policy coordination to maintain macroeconomic stability and promote sustainable economic growth, as well as agreed the strategic direction of the ASEAN Economic Community Sectoral Plan for Financial Cooperation 2026-2030. Bank Indonesia also chaired the EMEAP Working Group on Banking Supervision (WGBS) that addressed developments in banking regulation and supervision across the Asia-Pacific region. When leading the SEACEN Board of Governors (BOG) Meeting 2025, Bank Indonesia emphasized the need to enhance regional economic resilience through closer collaboration amid global uncertainty, digital transformation, and the transition toward a sustainable economy. Beyond the regional level, Bank Indonesia actively participated in international cooperation forums such as the IMF, G20, and Bank for International Settlements (BIS), including Islamic international forums such as the International Islamic Liquidity Management (IILM) and the Islamic Financial Services Board (IFSB). In line with Indonesia's BRICS membership since January 2025, Bank Indonesia actively participate in financial track discussions. These forums emphasize

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the importance of policy coordination, strengthening multilateralism, reforming global governance, and collaborating to address climate-related risks.

Bank	Indonesia	received	several	international	awards in 2025 . The Central Banking Award presented Bank Indonesia with the Reserve Manager of the Year 2025 award in recognition for its transformation of the reserve management framework, which was considered to enhance agility and flexibility in managing foreign exchange reserves amid global uncertainty. Bank Indonesia also received the Best Systemic and Prudential Regulator in Asia Pacific 2025 award from The Asian Banker. This recognition reflected the successful implementation of accommodative and well-targeted macroprudential policies to maintain financial system stability and manage the digital financial ecosystem. Bank Indonesia's role in developing Islamic economics and finance earned international recognition. Bank Indonesia received the Best Central Banker of the Year 2025 and Best Central Bank for Facilitation &amp; Support in Islamic Economy and Finance awards at the annual Global Islamic Finance Award (GIFA) 2025. The Contact Centre 'BICARA' received international recognition by winning Best Employee Engagement, Best Employee Wellness, Best Self-Service Technology, and Best Customer Service awards at the Contact Centre World Global Asia Pacific Top-Ranking Performers Awards 2025. These achievements demonstrate Bank Indonesia's commitment to delivering excellent public services and promoting information transparency. In the field of human resource management, Bank Indonesia earned silver and bronze at the Asia Pacific Stevie Award 2025. The throve of international awards received have strengthened Bank Indonesia's reputation as the best central bank among emerging markets.

## Bank	Indonesia	Transformation

Bank	Indonesia	continued	to	strengthen	the transformation,	which	began	in	2018,	to	reinforce	its policy	and	institutional	framework	in	responding	to the evolving strategic environment . Bank Indonesia consistently monitored global and national economic dynamics, as well as various changes in the strategic environment, including demographic shifts among employees, which were increasingly dominated by millennials and Generation Z. In responding to these strategic developments and in building a credible, professional, well-governed, accountable, and transparent central bank, Bank Indonesia sharpened several transformation agendas and implemented them gradually.

Bank	Indonesia	continued	to	strengthen	the regulation	of	the	Bank	Indonesia	Policy	Mix,	which integrated	monetary,	macroprudential,	and	payment system	policies,	underpinned	by	supporting	policies to	achieve	the	objectives	mandated	by	law . This was accompanied by Business Process Re-engineering (BPR) and was implemented across various policy functions, including the development of blueprint frameworks, instruments, and infrastructure. In the monetary sector, improvements were made through monetary regulatory reforms by refining regulations aligned with Bank Indonesia Policy Mix and developing digitalization of statistical business processes. In the macroprudential sector, Bank Indonesia reformed macroprudential regulations by strengthening the regulations related to liquidity management in banking and the economy. Bank Indonesia also continued to enhance macroprudential policy formulation, among others through the advancement of macroprudential framework. In the payment system sector, regulatory reforms were carried out through the issuance of relevant provisions to support stability, efficiency, and integration of the national payment system. Bank Indonesia also continuously transformed the payment system in line with IPSB 2025-2030, which included infrastructure development, particularly data infrastructure, to support the digital economic and financial ecosystem, strengthen industry competitiveness, foster innovation and expand acceptance, develop cross-border payment system connectivity, and advance the Digital Rupiah.

Bank	Indonesia	continues	to	implement comprehensive	institutional	transformation	to build a credible, professional, well-governed, and

transparent central bank . The transformation of policy mix, institutional governance, organizational structure and work processes, human resources, and digitalization, which had been initiated since 2018, is continuously strengthened and refined. This effort is specifically aimed to enhance the execution of Bank Indonesia's duties and authorities in the digital era, as well as to ensure stronger capacity to safeguard the national economy against global shocks and to implement the mandate of the Bank Indonesia Act, which had been amended several times, most recently through P2SK Act. The institutional transformation focuses on three main agendas. First, strengthening the central bank policy governance and institutional governance systems based on the principles of independence, consistency, coordination, accountability, and transparency (IKKAT). Second , digitalizing policy and institutional work processes toward the vision of becoming a leading digital central bank. Third, reinforcing Bank Indonesia's professional leadership with high competence (book-smart), strong experience (streetsmart), and noble character (spiritual-smart) through the work culture program 'Aku Bangga BI Bermakna' (AB3). Bank Indonesia also continued to strengthen institutional accountability to the Indonesian House of Representatives (DPR-RI), maintain an unqualified opinion (WTP) on its financial statements from the Indonesian Supreme Audit Agency (BPK-RI), and enhance public transparency.

First,	Bank	Indonesia	consistently	prioritizes good and professional governance principles in accordance with the mandate of the law through central	bank	policies	and	institutional	governance system based on Independence, Consistency, Coordination,	Accountability,	and	Transparency (IKKAT) principles . As part of the Republic of Indonesia, Bank Indonesia is granted independence by law in carrying out its duties and authorities as a central bank in the areas of monetary policy, payment systems, and macroprudential policy. This authority is applied consistently in the policy formulation process through well-governed monthly Board of Governors Meetings (RDG) and is regularly evaluated in weekly Board of Governors

Meetings . Furthermore, in line with the principle of coordination, Bank Indonesia maintains a strong commitment to synergy and coordination with the Government to achieve national economic stability and growth. Bank Indonesia also uphold accountability principles, including through the submission of the Institutional Report to the President and DPR-RI, as well as transparency principles by holding monthly press conferences regarding the policies determined by Bank Indonesia during the monthly RDG and publishing reports on the implementation of its duties and authorities.

The	balance	of	these	five	principles	is	implemented through	formulation	strategies,	execution	strategies, and control strategies for both main policies and institutional	policies . The application of strategies for policy governance is reflected in the framework of the main policy mix, which integrated monetary policy, payment systems, and macroprudential policy, strengthened by supporting policies to optimally achieve Bank Indonesia's objectives in accordance with the mandate of the Bank Indonesia Act. Meanwhile, the application of strategies in institutional governance is reflected in the institutional policy mix framework, which integrated strategic plans and work programs as well as Bank Indonesia's business processes and organizational structure to ensure optimal implementation with good and professional governance, supported by measured resource utilization. The strengthening of the institutional policy mix framework iscarried out as a strategic step to ensure that all institutional elements of Bank Indonesia were able to support the achievement of the institution's objectives effectively, efficiently, and in line with the compliance principles. Bank Indonesia also complements various provisions in the areas of policy and institutional governance required for the implementation of these strategies.

To implement strategies in key policy and institutional	areas	(Figure	6),	Bank	Indonesia	applies a medium-term and annual strategic planning system . Strategic planning is formulated based on the objectives and mandates stated in the Bank

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## BANK INDONESIA ANNUAL MEETING 2025

Indonesia Act, the vision and mission of Bank Indonesia, as well as collective strategic foresight from the Board of Governors. The medium-term strategic plan is outlined in the Strategic Business Plan (RBS) for a five-year period. The RBS serves as the foundation for preparing Bank Indonesia's annual work plan, which is developed based on the Annual Strategic Direction of Bank Indonesia Governor (ATGBI). The results of Bank Indonesia's strategic planning are subsequently communicated to all work units through internal communication forums.

Furthermore, to realize good and professional governance	in	the	formulation	and	implementation of	policies,	Bank	Indonesia	refines	the	provisions on the decision-making system in line with prevailing	laws	and	regulations . Based on the Board of Governors Regulation (PDG) No. 3 of 2025 concerning the Decision-Making System at Bank Indonesia and the Role of Members of the Board of Governors, which is an improvement of PDG No. 24/5/PDG/2022 on Decision-Making at Bank Indonesia in the Digital Era, Bank Indonesia's policies consist of central bank main policies and institutional policies. Decisions at Bank Indonesia are classified

Figure	6.	Bank	Indonesia	Strategic	Planning	System



Source: Bank Indonesia into three types, namely Principal and Strategic Policies, Implementation of Principal and Strategic Policies, and Policies Not Classified as Principal and Strategic. The decision-making process is carried out adaptively and in a streamlined manner through the application of the 3S principles (Simplification, Standardization, and Systemization). In addition, the respective provision regulates the roles of the Board of Governors Members, which include (i) in Board of Governors Meetings, (ii) in Committees, (iii) as directors of strategic programs and transformation programs, and (iv) as coordinators for the operational execution of Work Units.

The Board of Governors and its members commitment to leading Bank Indonesia's performance in maintaining economic	stability	and	supporting	sustainable economic	growth	is	realized	through	the	formulation and	determination	of	strategic	policies	during	the Board	of	Governors	Meeting	(RDG) . In accordance with the Bank Indonesia Act, the RDG serves as the highest decision-making forum for determining principal and strategic policies. To strengthen governance and policy quality, the formulation process is carried out in stages, emphasizing checks and balances through initiation, verification, recommendation, and approval

phases. The initiation and verification stages are conducted by the Work Unit, either by the Head of the Work Unit or through the Work Unit Directors Meeting. Furthermore, the recommendation stage is carried out by Committees through Committee Meetings, while the approval stage takes place in the RDG. Decision-making in the RDG is based on deliberation to reach consensus, applying the principle of collective collegiality.

Second, Bank Indonesia accelerates the digitalization	of	policy	and	institutional	work processes,	prioritizing	governance,	streamlined processes,	and	collaborative	work,	supported by	the	development	of	data	center	and	Artificial Intelligence	(AI)	capabilities . Bank Indonesia consistently promotes digital transformation through the development of a digital business platform, data center and AI, as well as strengthening technology capabilities and endto-end security. The development of the digital business platform, which serves as the main foundation for modernizing policy and institutional business processes, focuses on the digitalization of payment systems and strategic decision-making processes, which are continuously reinforced throughout 2025. The digitalization of payment systems is realized through the expansion of BIFAST features to become more inclusive and through the exploration of Digital Rupiah innovation under the Garuda Project as a response to global digital financial system dynamics. In line with this, transformation is also carried out in governance and the effectiveness of decision-making processes through the development of the Digital Workplace (DWP) platform as a supporting medium for RDG implementation. This platform is implemented gradually to strengthen information integration, accelerate analysis processes, and improve the quality of policy formulation. Digitalization of work processes continueslybeing reinforced while maintaining governance and collaboration among work units in line with the principles of one input, one process, and multi purposes.

Bank	Indonesia	continues	to	advance	the development of its Data Center as part of digital innovation	to	support	the	digital	economy	as	well as	institutional	and	policy	business	processes .

The Data Center serves as the epicentrum of change for Bank Indonesia's digital transformation, through tangible actions aimed at realizing a DataDriven Institution capable of leveraging AI and Machine Learning (ML) in decision-making. This development encompasses two major dimensions, namely serving as a catalyst for business processes and strengthening data center capabilities. These initiatives are implemented through an end-to-end approach, starting with data democratization using metadata, automation of data flow and processing (data factory), data innovation experimentation, and exploration of data technologies, including the development of ML/AI models (data innovation) and the development of the Omnidata Intelligence Platform.

Bank Indonesia consistently promotes the enhancement of technology infrastructure capabilities	to	strengthen	its	information	systems	in support of increasingly complex tasks . These efforts includes reinforcing cyber resilience and security through the adoption of advanced technologies, implementation of certifications, and optimization of monitoring for existing infrastructure. The application of new technological innovations as well as the renewal of existing infrastructure is carried out continuously to ensure the quality, stability, and availability of information system services remained reliable and adaptive to the dynamic needs of the organization. In addition, Bank Indonesia also strengthenes its governance aspects through the formulation of regulations on information system security and cyber resilience applicable to all payment system operators, money market participants, foreign exchange market participants, and other entities under Bank Indonesia's supervision, as a strategic measure to build a secure and robust digital financial ecosystem.

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Third, Bank Indonesia strengthenes professional leadership with high competence, extensive experience, and noble character through the work culture program 'Aku Bangga BI Bermakna' (AB3) . Bank Indonesia continuously fosters human capital with strong performance and integrity to realize its vision of becoming a leading digital central bank. Human resource management is also directed toward creating future leaders of Bank Indonesia who were professional and embodied the 3-Smart aspects, namely high competence ( book smart ), strong experience ( street smart ), and noble character ( spiritual smart ) through nine programs across three pillars, specifically leadership, family, and well-being. In addition, Bank Indonesia continues to develop a modern office atmosphere, relationships, and work facilities that better supported digitalization and aligned with the behavioural traits of millennial employees.

Amid changes in the strategic environment and	the	increasing	composition	of	employees from	Gen	Y	and	Z,	Bank	Indonesia	continues to promote the development of employee capabilities	as	the	engine	of	organizational change . These efforts are carried out through strategies for fulfilling and maintaining human resources, as well as strengthening the Employee Value Proposition 3.0 (EVP 3.0) becomes one of the priorities in transforming human resource policies, aimed at increasing employee engagement at Bank Indonesia. This includes competitive remuneration programs, health care with focus on physical wellness, and peaceful retirement with focus on the Pensiun Berkah program.

The	development	of	digital	capabilities	for human	resources	is	an	essential	part	of	the transformation	of	HR	and	work	culture	at	Bank Indonesia . These capabilities are required to support the digitalization of work processes and improve adaptation to technological changes. To achieve this, Bank Indonesia designes and implements learning modules based on the concept of the Digital Central Bank curriculum.

In addition, the strengthening of HR competencies is emphasized in areas such as data science, data analytics, and the utilization of Artificial Intelligence (AI) in carrying out central bank functions, as well as expanding knowledge of green economy and finance as part of Bank Indonesia's strategic role in the era of digital transformation and sustainability. Learning infrastructure is reinforced through the development of a Learning Management System (LMS) and a Digital/Cyber Library, which are continuously improved, including by enriching e-learning modules from both internal sources and external partners. Furthermore, Bank Indonesia continues to encourage research to support policy formulation, including through the management of international journals.

## IV.	Policy	Mix	for	National	Economic Transformation:	Synergy	to	Foster Higher and Resilient Growth

The	strong	performance	and	robust	national economic policy mix achieved thus far provide a solid	foundation	for	advancing	toward	higher	and more resilient growth. As highlighted in previous sections, Indonesia's economy has demonstrated strong resilience with relatively high growth. Macroeconomic and financial system stability has been maintained despite successive waves of global turmoil. Indonesia's economic growth ranks among the best in Emerging Market Economies (EMEs), in line with expansionary economic and financial cycles. The strength of the national economic policy mix, through close synergy between the Government's fiscal policy and Bank Indonesia's policy, complemented by coordination within the Financial System Stability Committee (KSSK), has been internationally recognized. Real sector transformation also continues through industrial policies, including downstreaming of natural resources, and structural reforms to improve the investment climate and accelerate infrastructure development, supported by social protection programs for low-income households. This strong synergy within the national economic policy mix must be further reinforced moving forward.

Looking	ahead,	several	global	and	domestic challenges	must	be	anticipated	to	strengthen synergy and achieve higher and more resilient national	economic	growth. From a global perspective, as outlined in Section I, at least five challenges warrant close attention. First, persistent protectionist policies in the United States and ongoing geopolitical tensions, which are widening trade and investment fragmentation, shifting patterns toward bilateral and regional arrangements rather than multilateral cooperation. Second, slowing global economic growth accompanied by spatial shifts in growth patterns, including from the US and China toward the European Union, India, and several other EMEs. Third, high public debt and elevated interest rates in advanced economies, which cause a heavy burden on Emerging Markets and Developing Economies (EMDEs) in terms of fiscal and monetary policy space to maintain stability and stimulate growth, even for financing social programs. Fourth, heightened vulnerabilities and systemic risks in global financial markets, stemming from leveraged transactions in derivative products linked to sovereign debt, particularly by Non-Bank Financial Institutions (NBFIs) under weak regulatory and supervisory frameworks. Fifth, proliferation of cryptocurrency issuance and trading, as well as digital financial assets (stablecoins and tokenized assets) globally by private entities without adequate regulation or oversight by competent authorities, including risks related to illegal transactions, consumer protection, and cybersecurity.

From	domestic	perspective,	synergy	within the	national	economic	policy	mix	needs	to	be strengthened to achieve higher and more resilient economic growth going forward, including to mitigate	the	impact	of	global	dynamics . This policy mix synergy must respond to at least five key challenges (Figure 7).

- i. First, macroeconomic and financial system stability must remain a priority. Indonesia is internationally recognized for its ability to maintain national economic stability. Going forward, this stability will become even more

essential to support growth from the aggregate demand side, while strengthening national economic resilience amid rapidly changing and highly uncertain global economic and financial conditions. Rupiah exchange rate stability as well as low and stable inflation must continue to be preserved. The fiscal deficit must be maintained at no more than 3% of GDP. Banking system resilience and stability must continue to be reinforced. Accordingly, coordination between the Government's fiscal policy and Bank Indonesia's monetary policy, as well as coordination within the Financial System Stability Committee (KSSK), must continue to be strengthened.

- ii. Second, real sector transformation needs to be accelerated to enhance sources for higher domestic economic growth. This also aims to strengthen food and energy security as key pillars of national economic resilience and self-reliant. Industrial policies emphasizing downstreaming and industrialization of natural resources must be prioritized for strategic national industries, including minerals, plantation commodities, agriculture, and fisheries. Indonesia is richly endowed with natural resources, yet they have not been fully optimized, and some have even been exploited illegally. Downstreaming and industrialization must focus on increasing value-added through derivative products, such as in palm oil processing and lithium battery production. Developing commercially viable business models is crucial to attract investment from both the Government (including through Danantara) and private investors domestically and internationally. To this end, structural reforms to improve the investment climate, connectivity infrastructure, and research capacity must continue to be advanced to raise competitiveness and productivity, in the area of capital, labor, and innovation as well as efficiency.
- iii. Third, sources of financing must continue to be developed to support real sector

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transformation, particularly downstreaming and natural resource industrialization. Achieving high economic growth requires substantial capital and investment, which cannot be financed solely by the State Budget (APBN). A clear national financing strategy is needed. The APBN should be optimized for financing social and people-centered economic programs, with the fiscal deficit maintained below 3% of GDP, such as Free Nutritious Meals (MBG), People's Schools, Public Housing, Red and White Village Cooperatives (KDMP), and Fishermen Villages. Meanwhile, the significant capital and investment needs for downstreaming and natural resource industrialization projects can be financed through Danantara, the banking sector and other financial institutions, as well as private domestic and international investors. Financing instruments may take the form of equity investment, bank credit, and the issuance of bonds and other securities. Financial market deepening is crucial to support the financing of the national economy, by increasing liquidity, ensuring competitive interest rates, and providing hedging instruments for interest rate and exchange rate risks. Bank Indonesia will maintain close coordination within the KSSK to advance such financial market deepening.

- iv. Fourth, national economic and financial digitalization must continue to be accelerated to achieve high and resilient economic growth. Indonesia is among the fastest-growing countries in digitalization, particularly in payment system digitalization and retail digital economicfinancial transactions. QRIS, Mobile Banking, E-Commerce, and BI-FAST are increasingly favored by the public and MSMEs because they enable fast, practical, and affordable economic and financial transactions, thereby expanding inclusive economic and financial access. Likewise, digitalization of Government financial transactions continues to advance and has strengthen revenue collection and improve expenditure efficiency at both the central and regional levels. Going forward, national payment system and digital economic-financial digitalization must continue to be accelerated.

## Figure	7.	Five	Agendas	of	the	National	Economic	Transformation	Mix



Source: Bank Indonesia

The expansion of digital service businesses across economic segments must also continue to boost national economic growth. Payment system digitalization, both retail and wholesale, must be further developed, including the issuance and development of Digital Rupiah and Digital Financial Assets by Bank Indonesia in accordance with its statutory mandate. Cross-border cooperation in digital payments that has been pursued thus far must also be expanded, including QRIS connectivity, BI-FAST connectivity, and the use of local currencies (Local Currency Transactions, LCT) for trade, investment, and financial transactions.

- v. Fifth, the effectiveness of trade and investment cooperation with major partner countries must continue to be enhanced. As noted earlier, US protectionist policies and global economic polarization across countries will persist. Therefore, Indonesia's trade and investment cooperation must focus on key bilateral and regional partners that provide the greatest strategic benefits, including ASEAN+3 (China, Japan, South Korea), India, the Middle East, and the European Union, while still advocating multilateral cooperation. Such bilateral and regional cooperation is also important in supporting Indonesia's interests in trade and investment related to natural resource downstreaming programs and their financing needs. This cooperation also includes expanding the use of local currencies (Local Currency Transactions, LCT), advancing financial market deepening, and strengthening cross-border digital payment cooperation to facilitate bilateral and regional trade and investment.

## Synergy to Strengthen Macroeconomic and Financial System Stability

The	macroeconomic	and	financial	system	policy	mix needs	to	continue	to	be	strengthened	going	forward to maintain stability and support higher, more resilient economic growth . As noted above, risks to national economic stability and resilience stemming from adverse global spillovers are expected to increase. Elevated US Treasury yields and interest rates in advanced economies, along with heightened volatility and risk premia in global financial markets, may trigger foreign portfolio outflows and exert pressure on the Rupiah exchange rate. Indonesia's external resilience may also be compromised by the limited surplus in the capital and financial account of the Balance of Payments, as well as declining foreign exchange reserves due to the need for Rupiah stabilization. Rising SBN yields and the limited inflows of foreign portfolio investment into Indonesia may likewise disrupt fiscal deficit financing. On the internal stability side, inflationary pressures may intensify amid higher domestic food and global commodity prices, as domestic demand strengthens. Similarly, adverse global spillovers may increase market risks (exchange rate and interest rate risks), liquidity risks, and credit risks on Indonesia's banking system and financial markets.

Policy	coordination	among	the	Government,	Bank Indonesia, and the Financial System Stability Committee	(KSSK),	which	has	thus	far	been	closely maintained, needs to be further strengthened to formulate and implement the macroeconomic and financial	system	policy	mix	going	forward	amid persistent	global	volatility . Coordination between the Government's fiscal policy and Bank Indonesia's monetary and macroprudential policies must continue to be directed toward maintaining a balance between safeguarding macroeconomic stability and supporting domestic demand-driven growth, both consumption and investment. Coordination between the Government and Bank Indonesia begins with the formulation of macroeconomic assumptions in the annual preparation of the State Budget (APBN), particularly economic growth, inflation, the exchange rate, and Government Securities (SBN) interest rates. Regular coordination is undertaken to assess and forecast economic developments and to harmonize the Government's fiscal policy responses with Bank Indonesia's monetary policy responses. Coordination is also conducted in the planning of SBN issuances, both annually and periodically, in global and domestic markets to finance the fiscal deficit

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with competitive interest rates, while maintaining monetary and financial market stability. Meanwhile, coordination to maintain financial system stability and, at the same time, encourage financing from the financial sector to support economic growth is carried out through the KSSK, which convenes quarterly meetings. In addition to assessments, projections, and policy responses of each institution, KSSK meetings also discuss vulnerabilities and risks arising from global or domestic developments, as well as coordinated policy measures to be taken jointly. The results of the quarterly KSSK meetings are communicated to the public.

The	Government's	fiscal	policy	for	2026	is directed	toward	promoting	economic	growth while maintaining Indonesia's macroeconomic stability . In line with this objective, fiscal policy is formulated as a countercyclical policy to respond to global economic turbulence and uncertainty risks, as well as to safeguard the domestic economy and public welfare. The macroeconomic assumptions underpinning the 2026 State Budget (APBN) include economic growth of 5.4%, inflation within the 2.5±1% target range, an average 10-year

Table	10.	State	Budget	(APBN)	in	2026



Source: Ministry of Finance

Government Securities (SBN) yield of 6.9%, and an average exchange rate of Rp16,500 per US dollar. The fiscal deficit in the 2026 APBN is maintained at a prudent level of 2.68% of GDP to preserve fiscal sustainability and Indonesia's international credibility (Table 10). State revenue is projected to increase by 4.9% from 2025 to Rp3,153.6 trillion, driven mainly by higher tax revenues. Central Government expenditure is set to rise by 16.6% to Rp3,149.7 trillion, while transfers to regions and village funds are set to decline to Rp693.0 trillion, or 75.3% of the 2025 APBN. The significant increase in Central Government spending is primarily allocated to goods and capital expenditures to support economic growth, particularly through production and investment. In addition, fiscal stimulus is also directed toward supporting household consumption, including increased allocations for social assistance and other non-energy-compensation spending. It should be noted that the increase in other non-energy-compensation spending reflects the allocation for financing Asta Cita programs implemented by the Central Government through regional channels, such as Free Nutritious Meals (MBG), Red and White Village Cooperatives (KDMP),

and others, which were previously part of transferto-regions allocations. Overall, the expenditure composition in the 2026 APBN represents a fiscal policy stance that balances the need to maintain macroeconomic stability with stimulus to promote economic growth and public welfare. Fiscal deficit, amounting to Rp689.1 trillion, will be financed through the optimization of program loans and the issuance of Government Securities (SBN) in both domestic and global financial markets.

Under the Government's Asta Cita vision, President Prabowo Subianto has outlined eight priority programs aimed at improving public welfare, creating	jobs,	and	fostering	high	economic	growth . A portion of the funding for these eight priority programs have been allocated into the 2026 State Budget (APBN) (Figure 8). First , the food security program, with a total budget allocation of Rp164.4 trillion, covers food barn and reserves, fertilizer subsidies, and support for Bulog. Second , the energy security program, with a total budget of Rp402.4 trillion, includes energy subsidies, development of New and Renewable Energy (NRE), and rural electrification. Third , the Free Nutritious Meals

(MBG) program, with an allocation of Rp335 trillion for 82.9 million students, pregnant women, and toddlers, supported by the establishment of the Nutrition Provision Service Units (SPPG) involving farmers, fishers, livestock breeders, and MSMEs. Fourth , the education program, with a total allocation of Rp769.1 trillion, includes the Smart Indonesia Program (PIP) for 21.1 million students, the Smart Indonesia Card (KIP) for 1.2 million university students, improvements to teacher salaries and competencies, and LPDP scholarships for 4,000 students. The Government will also build Sekolah Rakyat, allocating Rp24.9 trillion annually. Fifth , the health program, with a total budget of Rp244 trillion, includes insurance premium assistance for 96.8 million beneficiaries. Sixth , the village, cooperatives, and MSME development program, including the establishment of 80,000 Red and White Village Cooperatives (KDMP), supported by fund placements in SOE banks for low-interest lending. In 2026, 27,700 KDMP are planned to be established with loans amounting to around Rp83 trillion, increasing to 80,000 KDMP with total loans reaching around Rp240 trillion by 2029. Seventh , the universal defense program, including modernization

## Figure 8. Eight Priority Programs of President Prabowo Subianto



Source: Ministry of Finance

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of primary defense systems, strengthening of reserve components, technological mastery, and the development of domestic strategic industries. Eighth , the acceleration of investment, trade, and housing. For housing, the Government plans to build 3 million housing units through the Housing Financing Liquidity Facility (FLPP) and Housing Financing Liquidity Facility (BSPS) in villages, urban areas, and coastal regions, totaling Rp54.3 trillion in 2026, increasing to Rp111.9 trillion starting in 2027. The Government will also provide VAT (PPN) borne by the Government (DTP) incentives for 770,000 commercial housing units. For investment, the Government will accelerate US$38 billion in downstreaming projects, financed partly by the State Budget (APBN) and partly by Danantara, as well as domestic and foreign private investors.

With strong synergy between the Government fiscal	policy	and	Bank	Indonesia's	monetary	policy, Bank	Indonesia's	monetary	policy	in	2026	will be	directed	toward	supporting	higher	economic growth	while	still	achieving	the	inflation	target	and maintaining the Rupiah exchange rate stability .

This will be carried out primarily through three key instruments: interest rate policy, Rupiah exchange rate stabilization, and secondary market purchases of Government Securities (SBN). First , with inflation projected to remain contained within the 2.5±1% target range in 2025 and 2026, Bank Indonesia will assess the room for further interest rate reductions to help boost economic growth to 5.40% in 2026. As previously explained, since September 2024, Bank Indonesia has reduced the BI-Rate six times by a total of 150 bps to 4.75% as of October 2025. In synergy with the Government's fiscal policy and the Financial System Stability Committee (KSSK), Bank Indonesia also continues to encourage banks to lower their lending rates and expand credit/ financing to support stronger economic growth. Second , Rupiah exchange rate stability will continue to be safeguarded as a key factor in maintaining macroeconomic and financial system stability, supporting business activity, and sustaining national economic growth. This will be undertaken through Bank Indonesia's foreign exchange interventions in both offshore markets (offshore NDF) and domestic markets (spot and DNDF). Third , Bank Indonesia will conduct secondary market purchases of SBN as part of monetary operations to stabilize the Rupiah exchange rate and maintain adequate liquidity in the money market and banking system. As previously noted, up to 18 November, Bank Indonesia has purchased SBN amounting to Rp289.91 trillion since January 2025, including secondary market purchases and a debt-switching program with the Government totaling Rp212.60 trillion. Bank Indonesia and the Ministry of Finance have also agreed that part of the fund from these SBN purchases will be allocated to finance public housing programs and the KDMP program under the Government's Asta Cita agenda at low interest rates. In addition to these three instruments, monetary policy coordination between Bank Indonesia and the Government is also very close in inflation control, particularly for administered prices and volatile food, through the Inflation Control Teams (TPI) at both the central and regional levels.

Synergy	between	the	Government's	fiscal	policy and	Bank	Indonesia's	macroprudential	policy	is	also being strengthened to support high-growth sectors and	those	with	significant	job-creation	potential. In this regard, through the Macroprudential Liquidity Incentive (KLM) policy, Bank Indonesia provides additional liquidity incentives to banks that channel credit/financing to the Government's priority sectors to promote economic growth and job creation. Aligned with the Government's Asta Cita programs, these priority economic sectors include: (i) the agriculture, manufacturing, and natural resource downstreaming sectors; (ii) the services sector, including the creative economy; (iii) the construction, real estate, and housing sectors, including public housing; and (iv) the MSME, cooperatives, inclusion, and sustainability sectors. As previously explained, up to the first week of November 2025, total KLM incentives reached Rp404.6 trillion, which were allocated to priority sectors, namely agriculture, trade and manufacturing, real estate, public housing and construction, transportation, warehousing, tourism and the creative economy, as well as MSMEs, ultramicro enterprises, and green sectors. Meanwhile, the Government supports these priority sectors

through fiscal incentives and necessary regulatory facilitation. In the case of KUR disbursement, for example, the Government determines eligible sectors, requirements, loan amounts, and fiscal incentives in the form of interest subsidies. For the public housing program, the Government provides fiscal incentives in the form of interest subsidies and administrative cost assistance, with amounts adjusted to the type of housing being financed. This synergy between Bank Indonesia's macroprudential policy and the Government's fiscal policy strengthens bank credit/ financing growth while simultaneously supporting higher economic growth and greater job creation.

Synergy	in	the	Financial	System	Stability	Committee (KSSK)	is	directed	toward	strengthening	financial system stability and becomes more resilient to global	spillovers,	while	also	supporting	economic financing,	including	inclusive	and	green	finance . KSSK meetings, comprising the Ministry of Finance, Bank Indonesia, the OJK, and the LPS, are held quarterly to assess financial system stability (SSK) conditions and determine the required coordinated policy measures. Policy coordination focuses on six key aspects: (i) assessing the current condition and

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status of financial system stability and coordinating the necessary policy responses; (ii) coordinating efforts to promote credit and financial sector financing for the economy; (iii) coordinating financial market development (including financial education and literacy); (iv) coordinating macroprudential and microprudential supervision (including oversight of operational and cyber risks); (v) coordinating the handling and resolution of financial institution problems; and (vi) coordinating the strengthening of regulations and requirements, including the followup implementation of the P2SK Act (Figure 9). In this regard, as previously discussed, synergy between Bank Indonesia's monetary policy and the Government's fiscal policy to maintain financial system stability is directed toward ensuring contained inflation, Rupiah exchange rate stability, interest rate, and the issuance of SBN for fiscal financing amid global pressures. To safeguard banking system stability, close coordination is carried out between Bank Indonesia's macroprudential supervision, focusing on macro-financial linkages of large banks, and the OJK's microprudential supervision to maintain the soundness of individual banks. The OJK also

Figure	9.	Policy	Coordination	within	the	KSSK	Maintains	Financial	System	Stability

## FINANCIAL SYSTEM STABILITY COMMITTEE (KSSK) POLICY COORDINATION



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strengthens the supervision of non-bank financial institutions, capital markets, fintech companies, and consumer protection in financial services. The LPS continues to strengthen deposit insurance and bank resolution, implemented in close coordination with the OJK and Bank Indonesia, in accordance with their respective mandates. Readiness simulations for coordinated responses, both among the four KSSK institutions collectively and bilaterally, on handling financial sector issues are continuously enhanced. Beyond this, KSSK coordination continues to be strengthened to finalize all regulations and provisions required for the implementation of the P2SK Act. Overall, the implementation of the P2SK Act further reinforces the development and strengthening of the financial sector, supporting financial system stability and economic financing for sustainable growth going forward.

Policy	coordination	between	the	Government and	Bank	Indonesia	must	also	continue	to	be strengthened	to	manage	foreign	exchange	flows, safeguard	national	economic	resilience,	and	support higher economic growth . The Government has issued Government Regulation No. 8 of 2025 on Export Proceeds from Natural Resources (PP DHE SDA) as a reinforcement of Government Regulation No. 36 of 2023 to optimize the management and utilization of DHE SDA for public welfare and the national economy, through financing economic development, increasing domestic liquidity circulation, strengthening foreign exchange reserves, and maintaining Rupiah exchange rate stability. The regulation requires 100% of DHE SDA valued greater than or equal to USD250,000 to be placed within the Indonesian financial system (in Special Accounts), with strengthened provisions for nonoil and gas natural resources, namely increasing the retention requirement from 30% for 3 months to 100% (after exemptions for Rupiah conversion, imports, loan payments, dividends, and foreign exchange taxes) for 12 months. The monitoring of the implementation of Government Regulation No. 8 of 2025 shows that DHE SDA placements in Special Accounts amount to around USD11-12 billion per month, equivalent to 87-89% of total SDA exports, which are around USD13-15 billion per month. Exporter compliance in placing and depositing DHE SDA, meaning DHE is placed within three months after the export date, has been substantial, reaching 94% for non-oil and gas and 100% for oil and gas. Government Regulation No. 8 of 2025 has also been effective in increasing foreign exchange supply to the domestic market, supported by the flexibility policy for conversion into Rupiah. This has subsequently increased the corporates' deposits denominated in IDR in the banking system and expanded foreign exchange supply in the domestic FX market. Several measures can be pursued to enhance further the utilization of DHE SDA for the national economy. From Bank Indonesia's side, policy strengthening may include optimizing the placement of DHE SDA at Bank Indonesia, both by expanding DHE placement instruments and by improving returns (pricing). Similar measures may also be undertaken by the Government, including issuing Foreign Currency SBN in the domestic market, particularly in nonUSD currencies (such as the Yen and Renminbi), which could simultaneously expand the use of Local Currency Transactions (LCT) in cross-border trade and investment cooperation.

## Synergy to Foster Higher and Resilient Growth

The	synergy	of	real	sector	transformation	policies is crucial to strengthening the capacity of the national	economy	in	achieving	higher	and	more resilient growth. As previously highlighted, synergy between Government fiscal policy, Bank Indonesia's monetary and macroprudential policies, as well as policy coordination in the Financial System Stability Committee (KSSK), must be continuously reinforced to drive growth from the aggregate demand side (household consumption, investment, and net exports) while maintaining macroeconomic and financial system stability. To achieve higher and more resilient economic growth, efforts to enhance the capacity of the economy from the aggregate supply side through increased value-added production across economic sectors must be consistently pursued. In this regard, the synergy of real sector

transformation policies is essential to continuously strengthen capital, labor, and productivity in order to raise value-added production in those sectors. Real sector transformation policies should be implemented through both structural reform policies and industrial policies. Structural policies are directed at improving the investment climate, fostering healthy business competition, enhancing infrastructure connectivity (both physical and digital), as well as advancing trade and investment policies (domestic and international), all of which will positively impact production across economic sectors. Meanwhile, industrial policies are directed at increasing value-added production in specific economic sectors that constitute national priorities to support higher economic growth and largescale job creation, including downstreaming and industrialization, particularly those based on natural resources. Through the synergy of macroeconomic policies to stimulate aggregate demand and real sector transformation policies to strengthen aggregate supply, higher and more resilient economic growth can be achieved while safeguarding macroeconomic and financial system stability.

Since 2009, an increasing number of countries have adopted industrial policies to strengthen economic	resilience,	particularly	in	energy	and food,	while	also	promoting	higher	economic

## Graph	36.a.	Industrial	Policy:	Economic Considerations



Source: IMF, World Economic Outlook, October 2025

growth. This trend has been most pronounced in advanced economies, including the United States, the European Union, and Canada, as well as in several emerging market economies (EMEs) such as China. A significant acceleration occurred following the COVID-19 pandemic, which underscored the importance of energy and food resilience for national economies. In general, industrial policy is defined as a policy undertaken by a country to transform its domestic economic structure through various instruments, including subsidies and specific regulatory facilities in the fields of investment, market access, and finance, targeting sectors or commodities designated as national priorities. Economic considerations may be based on the need to correct market failures, such as protecting infant industries that are newly established domestically and not yet able to compete globally. Considerations to strengthen strategic competitiveness are widely observed in both advanced economies and EMDEs, while climate mitigation considerations are more prevalent in advanced economies (Graph 36.a). Meanwhile, priority sectors targeted by industrial policies in advanced economies are predominantly high-technology manufacturing, commodities, energy and food, as well as services (Graph 36.b). In EMDEs, the sectors targeted by industrial policies vary, ranging from manufacturing to commodities, energy, and services, depending on technological

## Graph	36.b.	Industrial	Policy:	Target	Economic Sectors

Targeted Sectors (Percent implemented globally, 2009-22)



Source: IMF, World Economic Outlook, October 2025

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## BANK INDONESIA ANNUAL MEETING 2025

readiness and the availability of natural resources. These developments demonstrate that industrial policy can be pursued by a country to strengthen its domestic economic structure in support of higher and more resilient economic growth. Such industrial policies must be carefully formulated in terms of sector selection, business model development, investment and financing policies, while taking into account the fiscal constraints of the Government. Furthermore, industrial policy must be accompanied by structural reform policies to improve the investment climate, enhance infrastructure connectivity governance, and advance financial market development.

In Indonesia, to achieve higher and more resilient economic growth, the Government has launched real	sector	transformation	policies	focusing	on downstreaming	and	industrialization	as	well as	job	creation. In line with the fifth National Priority under the Asta Cita Vision, downstreaming and industrialization are directed at enhancing value-added and competitiveness, increasing the domestic component level ( Tingkat Komponen

Dalam Negeri , TKDN), strengthening financing and investment, and developing supporting infrastructure. Meanwhile, job creation is directed at developing local human resources, facilitating technology transfer, and promoting economic equity (Figure 10). Accordingly, the policy direction encompasses the following aspects: (i) accelerating downstreaming of industries based on primary natural resources, alongside strengthening laborintensive industries with skilled workers, innovationdriven technology, and export orientation; as well as (ii) promoting industrial agglomeration through increased investment in priority special economic zones as new growth centers to support downstreaming acceleration. The objectives are: (i) to increase value-added, productivity, and competitiveness of the manufacturing industry, with the target of raising the share of Manufacturing in GDP from 18.67% in 2023 to 21.90% in 2029; and (ii) to strengthen domestic and global economic integration, with the ratio of Gross Fixed Capital Formation (GFCF) rising from 29.3% to 29.9% of GDP, and exports of goods and services increasing from 21.7% to 22.6% of GDP over the same period.

Figure	10.	Real	Sector	Transformation	Policies	in	the	Asta	Cita:	Promoting	Higher	and	More	Resilient	Growth

## ASTA CITA VISION



Source: RPJMN (Bappenas)

From	the	perspective	of	industrial	policy,	real	sector transformation	will	be	focused	on	downstreaming of	primary	natural	resource	commodities	and strengthening priority manufacturing industries. In the National Medium-Term Development Plan (RPJMN), downstreaming and the development of resource-based industries will be continued to increase domestic value-added (Figure 11.a). Downstreaming of natural resources will be concentrated on primary commodities, namely nickel, copper, bauxite, tin, palm oil, coconut, and seaweed. Innovation-driven technology-intensive industries will be focused on the development of the semiconductor industry and the aerospace industry, while basic industries will be directed at strengthening basic metals, iron and steel, as well as developing the chemical industry. Meanwhile, strengthening priority manufacturing sector will be pursued through two main strategies, namely medium-high technology industries and lowtechnology, labor-intensive industries (Figure 11.b). The medium-high technology industry strategy will focus on automobiles, electric batteries, petrochemicals, and semiconductors. The supporting low-technology industry strategy will focus on resource-based products such as nickel, bauxite, copper, tin, crude palm oil (CPO), and processed rubber for industrial use. The labor-

## Figure 11.a. Priority Natural Resource Downstreaming	Commodities	in	the	RPJMN



Source: RPJMN (Bappenas)

intensive industry strategy and regional flagship products will focus on garments, sports shoes, as well as selected plantation, agricultural, and fishery products. The choice of strategy is based on several factors, including technological adoption capacity, the establishment of downstreaming and industrialization value chains, and the availability of exploration of the relevant natural resource commodities.

Danantara plays an important role both in	the	implementation	of	business	models and in investment into downstreaming and industrialization	projects	of	natural	resources. In determining priorities, Danantara considers three main factors: the ability to generate impact on the national economy, the magnitude of sustainable investment returns, and the feasibility of realizing investment opportunities. Based on these three considerations, Danantara has identified eight priority sectors, namely: (i) minerals, focusing on nickel and bauxite commodities; (ii) renewable energy, particularly advanced oil and gas products; (iii) digital infrastructure, focusing on data centers; (iv) health, through the development of plasma fractionation facilities and hospital supply chains; (v) financial services, through asset securitization and credit; (vi) facilities and infrastructure, particularly

## Figure 11.b. Strengthening of Priority Manufacturing Industries in the RPJMN



Source: Bank Indonesia

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Figure 12. Danantara's Investment in 8 Priority Sectors

## Danantara will carry out investments in 8 priority sectors



Source: Danantara waste processing and mining infrastructure; (vii) development of industrial estates; and (viii) food and agriculture (Figure 12). As previously highlighted, the development of commercially viable business models in downstreaming and industrialization across these priority sectors is essential to attract investment, both from the Government through Danantara and from private investors, domestic and foreign alike.

Structural	reform	policies	are	critically	important to the success of industrial policies involving downstreaming	and	industrialization	of	primary natural	resources	and	other	national	priority sectors. Well-designed industrial policies targeted at addressing market failures on the production side can improve performance both in prioritized sectors and at the aggregate level. The experience of South Korea illustrates that well-directed subsidies with clear objectives, implemented under sound institutional governance, can drive structural transformation in sectors such as electronics and automotive. Nevertheless, it must be acknowledged that the effectiveness of industrial policy depends heavily on technological adoption capacity, institutional capability and governance, as well as the structure of market competition in the respective country. This is why the success of industrial policy requires, and indeed depends upon, structural policies aimed at improving the investment climate, fostering healthy business competition, enhancing infrastructure connectivity (both physical and digital), and advancing trade and investment policies (domestic and international) pursued by the country concerned. Similar to industrial policy, structural policy is undertaken to overcome barriers to growth and productivity. The difference lies in the scope, where structural policy generates positive impacts across all economic sectors, whereas industrial policy is more narrowly directed at priority sectors. The challenge, however, is that structural policy is more difficult to implement due to reliance on government bureaucracy at both central and regional levels. Accordingly, a combination of structural reform policies and industrial policies can be an effective option. This approach can be pursued by implementing industrial policies to boost productivity, value-added, and competitiveness of

priority sectors within special economic zones as growth centers, while simultaneously undertaking structural reforms to improve the investment climate, infrastructure connectivity, institutional governance and bureaucracy, as well as innovation and research development to accelerate technology adoption. In this context, the development of several Special Economic Zones (SEZs), such as Batang, Sei Mangke, and Weda Bay, as growth centers for downstreaming and industrialization of natural resources and other priority sectors, represents an appropriate policy step in combining industrial and structural policies.

## Synergy to Enhance Economic Financing

Synergy	in	enhancing	financing	is	critically	important to support higher and more resilient economic growth. As previously highlighted, the capital and investment needed for real sector transformation programs, particularly downstreaming and industrialization of natural resources and other priority sectors, are substantial and cannot be met solely through the State Budget (APBN). Therefore, a clear national financing strategy is required. In this regard, total investment needs during 2025-2031 are estimated to reach Rp62.54 thousand trillion, rising from Rp6.88 thousand trillion in 2025 to Rp11.63 thousand trillion in 2031 (Graph 37.a). Of this amount, with budget allocations focused

Graph 37.a. Projected Total Investment and Sources of Finance: 2025-2031



Source: Bank Indonesia on social programs and the fiscal deficit capped at no more than 3% of GDP, investment financing from the APBN during 2025-2031 is estimated at Rp3.15 thousand trillion (around 5.0%). Meanwhile, investment financing from Danantara is estimated to reach Rp5.84 thousand trillion (around 9.3%) over the same period. The largest contribution to meeting the investment financing needs is expected to come from the private sector, amounting to Rp53.56 thousand trillion (around 85.6%) during 2025-2031 (Graph 37.b). This represents the greatest challenge to the successful implementation of real sector transformation policies aimed at fostering higher and more resilient economic growth. Addressing this challenge requires the formulation of clear business models, strong institutional governance, and robust technological adoption capacity within downstreaming and industrialization programs, thereby ensuring commercial viability to attract private investment from both domestic and foreign investors.

Policy synergy among the Government, Danantara, the	Financial	System	Stability	Committee	(KSSK), and Bank Indonesia must be strenghtned to explore	private	financing	sources	in	order	to	meet the	substantial	investment	needs	going	forward. In this context, consistent with the established financing patterns for business investment,

Graph	37.b.	Projected	Composition	of	Sources	of Investment Financing: 2025-2031



Source: Bank Indonesia

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around 59.25% of total private investment needs (equivalent to approximately Rp37.1 thousand trillion during 2025-2031) generally originate from internal funds, including retained earnings and other financing sources (Graph 37.b). The next sources of financing are foreign financing, either in the form of foreign direct investment (FDI) or external loans, accounting for around 10.37% (Rp6.5 thousand trillion during 2025-2031), additional bank credit/financing at around 12.02% (Rp7.52 thousand trillion during 2025-2031), with the remainder sourced from capital markets and nonbank financial institutions. For new projects where internal financing contributions are more limited, the share of investment needs met through bank credit/financing and foreign financing will naturally be larger. Accordingly, policy synergy to mobilize financing from these four main sources, internal funds, banking, FDI, and Government budget, must be optimized to achieve high growth in the next five years. The focus of synergy should be directed at four key aspects, namely optimal project financing structures, appropriate financing sources, liquidity and hedging needs, and financial education and literacy. The feasibility of investment projects will

Figure 13. Economic Financing Business Model



Source: Bank Indonesia determine the optimal financing structure. The greater a project's commercial viability, the more its financing structure can rely on private channels, such as bank credit/financing, bond or other securities issuance in the domestic capital market, or loans from foreign investors. Certain projects generate commercial returns, enabling private investment needs to be largely met by private sources, including internal funds, bank credit, and foreign loans and investment. However, other projects still require partial financing and fiscal incentives from the Government to strengthen their commercial viability. Such fiscal incentives and/or other Government policies include tax rates, interest subsidies, and policy certainty, particularly during the grace period from the construction phase to the initial operational stage. Once again, this underscores the critical importance of improving the investment climate, advancing bureaucratic reform, and conducting thorough feasibility studies (Figure 13).

Furthermore, synergy among the Ministry of Finance, the Financial Services Authority (OJK), the	Deposit	Insurance	Corporation	(LPS),	and Bank	Indonesia	is	essential	for	coordination	in

mobilizing	financing	sources	from	the	financial sector. Financing may take the form of investment, credit, or issuance of bonds and other securities. Deepening the financial market is critically important to support financing of the national economy, including enhancing liquidity, ensuring competitive interest rates, and providing hedging instruments for interest rate and exchange rate risks.In this regard, Bank Indonesia will continue to implement the Money Market Deepening Blueprint (BPPU) 20252030, encompassing product development, pricing, market participants, and infrastructure. As explained in the previous chapter, during the implementation of BPPU 2020-2025, average daily transaction values in the money market reached more than Rp54 trillion, while in the foreign exchange market they exceeded USD10 billion per day. In addition, Bank Indonesia continues to strengthen synergy with the three institutions within the Financial System Stability Committee (KSSK) to formulate joint measures in meeting required financing sources. As previously highlighted, Bank Indonesia will continue to optimize liquidity incentives (KLM) to encourage bank credit/financing to priority sectors that support growth and job creation. Beyond macroprudential policy coordination with microprudential supervision to ensure credit optimization and safeguard banking system risks, Bank Indonesia's synergy with OJK also encompasses harmonization of regulations governing bond issuance and transactions as well as Commercial Papers, and harmonization of licensing for financial markets, including intermarket infrastructure and supporting professions in the financial sector. In addition to fiscal policy coordination with monetary and macroprudential policies as previously described, Bank Indonesia's synergy with the Ministry of Finance also extends to deepening the government bond market and harmonizing taxation of financial transactions in both the capital market and the money and foreign exchange market. Financial market development synergy within the KSSK and with ministries/ government agencies, authorities, and market participants continues to be pursued to foster innovation in economic financing instruments and hedging, including debt instruments, interest rate and exchange rate swaps, and optimization of local currency transactions (LCT).

## Synergy	to	Accelerate	National	Economic and	Financial	Digitalization

Indonesia's	digital	economy	has	enormous	potential to serve as a key driver of high economic growth, both	through	investment	and	productivity	gains . In line with the National Digital Economy Strategy 2030, Indonesia is focusing on developing digital infrastructure, transforming the trade sector (including MSMEs), adopting technologies such as artificial intelligence (AI), and providing efficient digital government services. The overarching objective is to significantly increase the value of Indonesia's digital economy by 2030 and strengthen national competitiveness through digital innovation and collaboration. First , the digital infrastructure strategy is being pursued through the development of physical infrastructure such as fiber optic networks, Base Transceiver Station (BTS) towers, and satellites, including Satria and low-earth-orbit satellites, to ensure coverage across all regions of Indonesia, including the 3T (the frontmost, the outermost, and the remote) areas. Second , digital transformation across sectors, particularly trade, is being promoted by supporting MSMEs to upgrade and integrate into a broader digital ecosystem. Third , the adoption of innovative technologies such as AI, cloud computing, and fintech is being accelerated to enhance efficiency and productivity. Fourth , the digital government strategy focuses on modernizing public services to make them more accessible and efficient, while leveraging data for improved decision-making. Fifth , the cybersecurity and regulatory strategy aims to build a regulatory framework that supports digital innovation while safeguarding consumers and national interests, and to strengthen cybersecurity to create a secure digital ecosystem. With the implementation of the national digital economy strategy, Indonesia's digital economy is projected to surge from USD90 billion in 2024 to as high as USD360 billion by 2030. Digital economy growth is expected to contribute significantly to Indonesia's GDP in 2030. The advanced

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implementation of AI is projected to further boost overall digital economy growth.

Bank	Indonesia	will	continue	to	accelerate	the digitalization	of	the	payment	system	to	support the	national	Digital	Economy	and	Finance	and promote high and inclusive economic growth . This will be achieved through the IPSB 2030 programs, including the development of payment infrastructure (retail, wholesale, and data), industry restructuring, innovation development, international cooperation, and the development of Digital Rupiah. Bank Indonesia continues to promote the payment system and financial sector digitalization as a leverage point to enhance the productivity of payment and financial services for the economy. The growing adoption of QRIS and BI-FAST in serving the payment needs of people across all segments demonstrates their significant contribution to inclusive economic growth. Likewise, digital banking services, through online and mobile banking, continue to expand rapidly. Bank Indonesia will also establish the Indonesia Digital Innovation Center (PIDI) to strengthen public digital literacy and acceptance. The digitalization of the social programs distribution and Government financial transactions will continue to expand. Bank Indonesia is also enhancing synergy in Anti-Money Laundering, Countering the Financing of Terrorism, and Countering the Financing of Proliferation of Weapons of Mass Destruction (APU PPT PPPSPM) with the PPATK, the OJK, relevant ministries/government agencies, the payment system and banking industries, as well as international forums, to ensure the integrity and resilience of the national payment ecosystem. Furthermore, bilateral and international cooperation in cross-border payment systems will continue to be expanded, not only with ASEAN-5 countries but also with Japan, China, South Korea, Saudi Arabia, and India.

## Synergy	in	International	Trade	and Investment	Cooperation

Strengthening	the	effectiveness	of	trade	and investment	cooperation	with	major	partner countries	is	essential	to	support	the	success	of real-sector	transformation	policies . Indonesia has established economic cooperation at the bilateral, regional, and multilateral levels to enhance trade, investment, and economic growth. At the regional level, Indonesia actively participates in the ASEAN Free Trade Area (AFTA) to strengthen economic cooperation within the region. Bilaterally, Indonesia maintains free trade agreements with key trading partners. With China, Indonesia has signed a strategic memorandum of understanding for investment in manufacturing, renewable energy, and logistics. This cooperation aims to attract investment, create jobs, and integrate MSMEs into global supply chains. Cooperation with Japan includes investments in industrial sectors such as port development and vehicle manufacturing, as well as student exchanges in technology-related fields. With South Korea, Indonesia has established a special strategic partnership focused on defense and trade, as well as the Indonesia-Korea Comprehensive Economic Partnership Agreement (IK-CEPA). Indonesia also maintains cooperation with Australia in free trade agreements and business partnerships across various sectors such as infrastructure, agriculture, and natural resources. Cooperation with Switzerland covers trade, investment, tourism, and development, with Switzerland being one of Indonesia's significant investors. Indonesia's regional and multilateral cooperation also extends to the European Union, the International Monetary Fund (IMF), the G20, and the World Trade Organization (WTO). As discussed earlier, US protectionist policies and global economic polarization across countries are expected to persist. Therefore, Indonesia's trade and investment cooperation should focus on major bilateral and regional partners that offer the most significant strategic benefits, while continuing to advocate multilateral cooperation. Moreover, such bilateral and regional cooperation is essential to support Indonesia's interests in trade and investment related to natural resource downstreaming programs and their financing needs. This includes cooperation to expand the use of local currencies (Local Currency Transactions, LCT), advance financial market deepening, and strengthen cross-border digital payment cooperation to facilitate bilateral and regional trade and investment.

## Indonesia's Medium-Term Economic Outlook

Overall,	the	five	national	economic	policy	mix strategies described above can foster higher and more resilient economic growth. The positive impact on economic growth may derive both from demand-side stimulus (aggregate demand) as well as from strengthening national supply capacity (aggregate supply). In particular, significant growth gains in terms of capital, labor, and productivity may result from the implementation of national strategic projects, including 79 projects on connectivity and regional development, 90 projects on housing, water resources, energy and food, 52 projetcs on business enhancement, downstreaming and industrialization, and 7 projects on human resource development (Figure 14). The extent of growth improvement that can be achieved will depend on the speed, accuracy, and effectiveness of implementation. In this regard, three scenarios can be simulated. First, the 'Baseline' scenario, involving implementation of carry-over projects, ongoing projects, and those already groundbreaking. Second, the 'Optimistic' scenario, which refers to the Baseline scenario

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plus the implementation of new projects that have not yet commenced or reached groundbreaking, characterized by relatively low costs and potential for faster financing, including funding from the State Budget (APBN). Third, the 'Super Optimistic' scenario, which builds on the Optimistic scenario by adding projects that have not yet commenced or reached groundbreaking, but characterized by relatively higher costs and longer financing timelines, largely funded through private investment from both domestic and foreign sources. The scenario levels also reflect the intensity of structural reform policy implementation, which is stronger in each successive scenario. Structural policies are reflected in: (i) enhancing Productivity through accelerated infrastructure development, strengthened research and development capacity, technology adoption, and improved market efficiency; (ii) strengthening Capital through improvements in the investment climate, increased foreign direct investment (FDI) and domestic investment, and support for capitalintensive sectors; and (iii) improving Labor quality through better access to and quality of education, higher labor force participation, and creation of formal employment opportunities.

## Figure	14.	Impact	of	National	Strategic	Projects	on	the	Enhancement	of	National	Economic	Capacity



Source: Bank Indonesia, Government Work Plan, processed

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## BANK INDONESIA ANNUAL MEETING 2025

The three scenarios described above can foster higher economic growth going forward, albeit with different	levels	of	achievement. The key lies in the speed and effectiveness of implementing various Government and private sector's programs and projects that can promote growth from the demand side through consumption and investment, as well as from the improvement in national economic capacity. The five agendas of national economic transformation policies are interrelated and mutually reinforcing in terms of increasing investment and capital, absorbing labor and raising household income, as well as improving productivity and economic efficiency. This will be reflected in rising productivity growth (Total Factor Productivity/TFP), with the largest increase occurring under the Super Optimistic scenario compared with the other two scenarios (Graph 38.a). In other words, with the same level of capital investment and labor absorption, economic growth outcomes will be higher. To achieve high economic growth, a balance must be maintained between capital-intensive sectors, which enhance economic capacity (aggregate supply side), and labor-intensive sectors, which increase income and consumption (aggregate demand side). Likewise, the Incremental Capital-Output Ratio (ICOR) will decline, with the largest reduction under the Super Optimistic scenario compared with the other two scenarios (Graph 38.b). A lower ICOR

Graph	38.a.	Projected	Productivity	Growth: 2025-2031



Source: Bank Indonesia indicates greater efficiency in the national economy, as achieving high growth requires a smaller amount of investment.

The	increase	in	Total	Factor	Productivity	(TFP) and the decline in the Incremental Capital-Output Ratio	(ICOR)	resulting	from	the	implementation	of the	national	economic	transformation	policy	mix will jointly enhance the achievement of high and resilient growth while maintaining macroeconomic stability. The economic growth, which is projected at around 4.7-5.5%, in 2025, is expected to increase to 4.9-5.7% in 2026 and 5.1-5.9% in 2027 (Table 11). With the implementation of the national economic transformation policy mix, economic growth in 2031 under the 'Baseline' scenario, estimated at 5.6-6.4%, is projected to rise to 6.1-6.9% under the 'Optimistic' scenario and even higher to 6.9-7.7% under the 'Super Optimistic' scenario. Price stability will be maintained, with inflation remaining under control within the range of 2.5±1%, while the current account balance will remain low, at around a deficit of 0.4% to a surplus of 0.4% of GDP in 2031. Indonesia's internal and external economic stability can be achieved through the strengthening of aggregate supply capacity, which will meet the rising demand under the national economic transformation policy mix. Bank credit/financing is expected to grow optimally at around 12-16% per year. Fiscal deficits will also

Graph 38.b. Projected ICOR Decline: 2025-2031



Source: Bank Indonesia

Table	11.	Indonesia's	Economic	Projections	2025-2031

|                 |        |             |              |              | 2031        | 2031        | 2031             |
|-----------------|--------|-------------|--------------|--------------|-------------|-------------|------------------|
| Indicator       | Unit   | 2025        | 2026         | 2027         | Baseline    | Optimistic  | Super Optimistic |
| Economic Growth | %, yoy | 4.7-5.5     | 4.9-5.7      | 5.1-5.9      | 5.6-6.4     | 6.1-6.9     | 6.9-7.7          |
| CPI Inflation   | %, yoy | 2.5 ± 1     | 2.5 ± 1      | 2.5 ± 1      | 2.5 ± 1     | 2.5 ± 1     | 2.5 ± 1          |
| Current Account | %PDB   | 0.1 to -0.7 | -0.2 to -1.0 | -0.4 to -1.2 | 0.2 to -0.6 | 0.3 to -0.5 | 0.4 to -0.4      |
| Credit Growth   | %, yoy | 8-11        | 8-12         | 9-13         | 10-14       | 11-15       | 12-16            |

Source: Bank Indonesia's Projection

remain contained at below 3% of GDP, consistent with Indonesia's established credibility.

As	a	note,	the	simulation	of	economic	performance outcomes	resulting	from	the	implementation of	the	national	economic	transformation	policy mix	must	be	continuously	evaluated	in	line	with evolving dynamics and the necessary policy mix responses. Several assumptions underpin this simulation. First, global economic growth is assumed to slow from 3.1% in 2025 to 3.0% in 2030, with the US monetary policy rate declining from 4.0% to 3.5%. This assumption may change with the continuation of tariff policies by the US Government under President Trump. The rapidly changing geopolitical and global economic dynamics could affect Indonesia's economic stability and growth outcomes. Second, in addition to the Government's strategic programs under Asta Cita, the role of the private sector, including large corporations, MSMEs, the creative economy, services, digital financial economy, and tourism, is critically important as drivers of economic growth and job creation. In this regard, improving the investment climate, developing infrastructure, and ensuring business certainty are key to fostering economic growth and employment. Equally important is the preservation of macroeconomic and financial system stability, which has established credibility for Indonesia's economic performance recognized internationally. In this context, close coordination among Government policies, Bank Indonesia policies, and Financial System Stability

Committee (KSSK) policies in responding to rapidly changing geopolitical and global economic dynamics is a prerequisite and foundation for the success of the national economic transformation policy mix in achieving high and sustainable economic growth toward Golden Indonesia 2045 ( Indonesia Emas 2045).

## V.	 Direction	of	Bank	Indonesia	Policy Mix	in	2026:	Fostering	Growth, Maintaining Stability

Bank	Indonesia's	policy	mix	in	2026	will	remain directed	toward	supporting	economic	growth	while maintaining stability. This policy stance is based on the assessment that Indonesia's economic and financial cycles are still below potential and expected to approach optimal levels around 2027-2028. From an economic cycle perspective, this is reflected in inflation projections that remain controlled within the 2.5±1% target range in 2026 and 2027, alongside economic growth that is still below national output capacity, estimated at 4.9-5.7% and 5.1-5.9% during the same period, as previously outlined. From a financial cycle perspective, this is indicated by strong financial system stability and credit growth that remains below optimal levels, projected at 8-12% in 2026 and 9-13% in 2027. Synergy between Bank Indonesia's policy mix, Government policies, and coordination within the Financial System Stability Committee (KSSK) will continue to be strengthened to drive higher and more resilient economic growth while safeguarding macroeconomic and financial system stability toward Golden Indonesia ( Indonesia Emas ).

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This	policy	direction	underpins	Bank	Indonesia's monetary,	macroprudential,	and	payment	system policies	in	2026,	in	line	with	its	mandate	under	the Bank Indonesia Act. With inflation projected to remain low in 2026 and 2027, monetary policy in 2026 will be directed on optimizing room to support economic growth ( pro-growth ) while maintaining Rupiah exchange rate stability ( pro-stability ), particularly amid the prolonged global uncertainty (Figure 15). Macroprudential and payment system policies will remain focused on fostering higher economic growth ( pro-growth ). Macroprudential policy will remain accommodative to encourage bank lending and financing, particularly to priority sectors that drive economic growth and job creation in line with the Government's Asta Cita program, including MSMEs, economic inclusion, and green finance. Payment system digitalization will continue to be accelerated in accordance with the Indonesia Payment System Blueprint (IPSB) 2030, focusing on strengthening infrastructure (retail, wholesale, and data), industry consolidation, innovation and acceptance, international cooperation, and development of the Digital Rupiah. The monetary, macroprudential, and payment system policy mix will be supported by accelerated money market and foreign exchange market deepening under the Money Market Development Blueprint (BPPU) 2030 to enhance monetary policy transmission, develop a modern secondary market aligned with international standards, and expand instruments for economic financing. Programs to promote inclusive economic and financial development, including MSMEs and the sharia economy and finance, will also be expanded. Bank Indonesia will continuously calibrate its monetary, macroprudential, and payment system policy mix in response to evolving global and domestic economic dynamics.

## Direction	of	Monetary	Policy

Bank	Indonesia's	monetary	policy	in	2026	will be	directed	toward	achieving	the	inflation	target and maintaining Rupiah exchange rate stability, while	optimizing	policy	space	to	support	higher economic growth. As explained above, with inflation projected to remain within the target and growth remaining below potential, there is still room for

Figure	15.	Direction	of	Bank	Indonesia	Policy	Mix	in	2026



Source: Bank Indonesia

further monetary policy easing beyond the measures implemented in 2025 to bolster economic growth. Nevertheless, as discussed in Chapter I, elevated global economic uncertainty is expected to persist in 2026. This will be driven by the impact of US tariff policies and global geopolitical developments, the slowing and broadening of global economic fragmentation, high debt and interest rates in advanced economies, heightened vulnerabilities and risks in global financial markets, as well as the increasing prevalence of private-sector issuance and trading of cryptocurrencies and digital financial assets. This high level of global uncertainty must continue to be closely monitored and addressed with appropriate policies to safeguard Indonesia's external resilience and mitigate its potential adverse impacts on domestic economic stability and growth. Volatility in foreign capital flows and pressures on the exchange rate are expected to continue in 2026, requiring Bank Indonesia to maintain its monetary policy focus on Rupiah exchange rate stabilization to mitigate their negative impact on national economic stability. To maintain Rupiah exchange rate stability, monetary policy in 2026 will continue

to be implemented in a consistent, prudent, and well-calibrated manner, in line with evolving global and domestic economic dynamics, to achieve the inflation target while utilizing available space to support higher economic growth in 2026 and 2027.

The	direction	of	Bank	Indonesia's	monetary	policy in	2026	for	stability	and	economic	growth	will	be implemented through four core instruments (Figure 16). First, an interest rate policy that is forwardlooking and pre-emptive to achieve the inflation target set by the Government, while optimizing policy space to support higher economic growth. Second, monetary liquidity expansion through a pro-market monetary operations strategy to strengthen the effectiveness of policy transmission from the BI-Rate reduction to bank lending rates and to accelerate the deepening of the money and foreign exchange markets. Third, Rupiah exchange rate stabilization to safeguard Indonesia's external stability from the spillover effects of global uncertainty. Fourth, maintaining adequate foreign exchange reserves to support Rupiah exchange rate stabilization and the Government's external debt

## Figure	16.	Direction	of	Bank	Indonesia	Monetary	Policy	in	2026



Source: Bank Indonesia

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payments, supported by the management of foreign exchange flows in line with international standards. Bank Indonesia will continue to strengthen monetary and fiscal policy coordination with the Government to achieve the inflation target, maintain macroeconomic stability, and drive higher and more resilient growth.

First, Bank Indonesia's interest rate policy will continue	to	be	directed	in	a	forward-looking, preemptive	manner	to	achieve	the	inflation	target set	by	the	Government,	2.5±1%	in	2026	and	2027, while	optimizing	space	for	further	monetary	policy easing to support higher economic growth . As explained in Chapter III, in line with low inflation and the need to support stronger economic growth, Bank Indonesia reduced the BI-Rate six times by a total of 150 bps, from 6.25% in September 2024 to 4.75% in September 2025, the lowest level since 2022. In addition, during the Board of Governors Meeting (RDG) on 16-17 September 2025, Bank Indonesia also decided to lower the Deposit Facility rate by a larger magnitude, namely by 50 bps to 3.75%, to further encourage banks to utilize liquidity easing to support the real sector. Going forward, considering the continued low inflation projections for 2026 and 2027 within the 2.5±1% target range, and in line with the collective efforts to promote higher economic growth, Bank Indonesia views that there remains room for further BI-Rate reductions. The utilization of this additional room for BI-Rate reductions will be based on assessments of evolving data and conditions (data-dependent), particularly considering the need to maintain Rupiah exchange rate stability amid the prolonged global uncertainty. Bank Indonesia will also continue to take measures to strengthen the transmission effectiveness of BI-Rate reductions, particularly in lowering bank lending rates. As explained in Chapter III, the BIRate cuts have been followed by significant declines in INDONIA rates in the money market and yields on Government Securities (SBN) across all tenors, thereby increasing transactions, efficiency, and the depth of domestic financial markets. However, the decline in bank deposit rates remains slow due to the still-high large depositor special rates. Similarly, the decline in lending rates has been limited, partly due to elevated risk premia and overhead costs in bank lending. In addition to reducing the BI-Rate and continuing monetary liquidity expansion, Bank Indonesia is also maintaining close coordination with the Financial System Stability Committee (KSSK) to strengthen the transmission effectiveness of lower bank interest rates in order to promote higher credit growth and stronger economic growth.

Second, monetary liquidity expansion through a pro-market	monetary	operations	strategy	will	be further	strengthened	to	enhance	the	effectiveness of interest rate transmission and accelerate the deepening of the money and foreign exchange markets . Liquidity expansion through the monetary program is directed to ensure that liquidity conditions align with the optimal requirements of the money market and the broader economy. Its magnitude is determined based on projections of Reserve Money (M0) and broad money (M1 and M2), consistent with forecasts of relevant economic indicators, while taking into account influencing factors such as developments in foreign capital flows (Net Foreign Assets, NFA) and the Government's financial operations (Net Claims on Government, NCG). Based on this monetary program, Bank Indonesia conducts monetary liquidity expansion through monetary operations by optimizing the interest rate structure and volume of all available instruments, including SRBI, SUKBI, SVBI, and SUVBI. In 2025, for example, monetary liquidity expansion up to November 2025 was reflected in a decline in SRBI volume of Rp217.67 trillion, accompanied by a decrease in the SRBI interest rate for the 6-month tenor by 254 bps to 4.62%. Under the same monetary program, Bank Indonesia also expanded monetary liquidity through secondary market purchases of Government Securities (SBN). In 2025, as previously noted, Bank Indonesia purchased SBN amounting to Rp289.91 trillion up to 18 November 2025, with yields on 2-year and 10-year SBN declining by 226 bps and 113 bps to 4.70% and 6.13%, respectively, thereby helping reduce the Government's SBN interest burden in the State Budget (APBN). Going forward, Bank Indonesia

will continue to expand monetary liquidity in line with the 2026 monetary program, both through all available monetary instruments and through secondary market purchases of SBN, supported by close policy coordination with the Government's fiscal authorities.

Bank Indonesia will also continue to optimize its pro-market monetary operations strategy to strengthen further the effectiveness of BI-Rate transmission to the financial sector, as well as to maintain overall market and financial system stability. The strengthening of the pro-market monetary operations strategy will be carried out through four key measures. First, optimizing repo and DNDF transactions by involving banks that utilize the Central Counterparty (CCP) to strengthen transaction risk mitigation and enhance market efficiency. Second, developing the Overnight Index Swap (OIS) market through the issuance of Floating Rate Notes (BI-FRN) and OIS matchmaking for tenors beyond overnight to establish an interest rate structure based on actual money market transactions. The development of the OIS market is necessary as the use of JIBOR as a reference rate will be discontinued in 2026. This forms part of efforts to improve domestic money market pricing. Third, expanding the underlying repo instruments in Bank Indonesia's monetary operations to include other high-quality securities issued by Governmentestablished financial institutions to support Government programs for public welfare. Fourth, broadening the investor base for Bank Indonesia Sukuk (SUKBI) to allow ownership by banks and non-banks, including residents and non-residents, to strengthen the monetary instrument and attract capital inflows. These measures are intended to strengthen the effectiveness of monetary policy transmission and accelerate financial market deepening.

Third,	the	Rupiah	exchange	rate	stabilization	policy will	continue	to	be	implemented	to	safeguard Indonesia's external resilience from the impact of global	volatility,	thereby	contributing	positively to sustainable economic stability and growth.

Fundamentally, the Rupiah should strengthen and move stably, consistent with low inflation, attractive yields on domestic financial assets, and relatively strong economic growth. Nevertheless, as explained in Chapter I, elevated uncertainty in the global economy and financial markets has increased the risk of portfolio outflows from EMEs and exerted pressure on various global currencies, including the Rupiah. Consequently, Rupiah exchange rate stability must continue to be maintained to protect Indonesia's external resilience from these global shocks. Rupiah stability is essential for maintaining controlled inflation, particularly imported inflation, and for ensuring business certainty to support economic growth. Rupiah stability is also crucial for preserving the Government's fiscal performance, particularly in maintaining the attractiveness of SBN yields for State Budget (APBN) financing needs. In addition, Rupiah stability is critical for safeguarding the financial system stability, particularly against exchange rate risks that affect the balance sheets of both banks and corporates, while also supporting confidence among businesses and the public. To this end, the Rupiah stabilization measures implemented by Bank Indonesia thus far will be continued in 2026. Exchange rate stabilization will be conducted through foreign exchange interventions in both offshore markets (offshore NDF) and the domestic market (spot, DNDF, and secondary market transactions in Government Securities/SBN). The offshore NDF interventions conducted since early April 2025 to mitigate the negative impact of US tariff policies, executed continuously across Asian, European, and US markets through Bank Indonesia's overseas representative offices, have proven effective and will therefore continue to be implemented to stabilize the Rupiah exchange rate. In addition to the significant influence of offshore Rupiah movements on onshore markets, NDF interventions are more efficient because they require relatively minor volumes and do not involve actual fund transfers, thus exerting minimal impact on foreign exchange reserves.

Fourth, the adequacy of foreign exchange reserves will be maintained to support Rupiah exchange

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rate	stabilization	and	the	Government's	external debt payments, and strengthened through the management	of	foreign	exchange	flows	in	line	with international	standards . Foreign exchange reserve adequacy will continue to be enhanced through Balance of Payments surpluses, foreign exchange monetary operations, and optimization of reserve management. In this regard, the optimization of foreign exchange reserve management will continue to be reinforced through the implementation of Strategic Asset Allocation (SAA) to achieve optimal investment returns while meeting liquidity needs for the Government's external debt payments and Rupiah exchange rate stabilization policy. In addition to placing reserves in high-quality financial assets with low exchange rate risk, gold purchases will also be conducted in a safe, gradual, and well-calibrated manner. Bank Indonesia will also continue to optimize the expansion of foreign exchange placement instruments for Natural Resource (SDA) Export Proceeds (DHE) to support the implementation of Government Regulation No. 8 of 2025. Bilateral cooperation with several central banks, including Malaysia, India, and China, has been established to utilize swap arrangements and bilateral purchases of Government Securities (SBN) in reserve management. International cooperation is likewise being strengthened, including multilateral collaboration with the BIS for foreign reserve management, bilateral swap arrangements with several central banks including the United States, Japan, China, and ASEAN, as well as regional cooperation under ASEAN+3 (Japan and South Korea) within the Chiang Mai Initiative Multilateralism (CMIM) framework to enhance the Regional Financial Arrangement (RFA) in Asia. As a follow-up to the P2SK Act, Bank Indonesia has also issued a Bank Indonesia Regulation governing foreign exchange flow management to strengthen Indonesia's external resilience, consistent with the open foreign exchange system and international standards in line with IMF guidelines. The regulation covers the management of foreign exchange flows under normal conditions, under pressure, and in crisis conditions, as well as the coordination mechanism among Bank Indonesia, the Government, and the

KSSK to safeguard macroeconomic and financial system stability.

Policy	coordination	between	Bank	Indonesia's monetary	policy	and	the	Government's	fiscal policy	continues	to	be	strengthened	to	reinforce external resilience against global shocks, control inflation,	and	promote	sustainable	economic growth. Coordination to safeguard external resilience against global spillovers is carried out by aligning Bank Indonesia's monetary operations for Rupiah exchange rate stabilization with the Government's issuance of Government Securities (SBN) for fiscal financing in both domestic and global markets, from the annual planning stage through ongoing implementation. Coordination for inflation control, particularly volatile food and administered prices, with the Central and Regional Governments is strengthened through the Central and Regional Inflation Control Teams (TPIP and TPID), supported by the National Food Security Front ( Gerakan Nasional Pengendalian Inflasi Pangan , GNPIP), which mobilizes all 46 Bank Indonesia regional offices across the country. Meanwhile, coordination to support economic growth from the domestic demand side, particularly consumption and investment, is carried out by synchronizing Bank Indonesia's interest rate reductions and monetary liquidity expansion via the banking system with the Government's fiscal stimulus to boost the real sector at both the central and regional levels. In addition, Bank Indonesia provides recommendations on national economic policies, including those based on the Regional Economic and Financial Assessment (KEKDA) conducted by Bank Indonesia's representative offices throughout Indonesia.

## Direction	of	Macroprudential	Policy

Bank	Indonesia	will	continue	to	strengthen accommodative	macroprudential	policies	in	2026 to	stimulate	bank	lending/financing	in	support of higher economic growth, while maintaining financial	system	stability. The direction of this accommodative macroprudential policy is based on three key considerations. First , Indonesia's

financial cycle in 2026 and 2027 remains below optimal financing capacity and is expected to start increasing by the end of 2027, reaching its peak in 2029 (Graph 39.a). This aligns with the economic cycle, which remains below national output capacity, primarily due to sluggish consumption and investment amid slowing exports driven by global economic conditions. Therefore, accommodative macroprudential policies are needed to strengthen banking capacity in providing credit/financing, particularly for sectors that drive growth and job creation. Second , in line with the Asta Cita Vision, the Government has designed several National Priority Programs to stimulate growth and employment, requiring substantial financing support. As outlined in Chapter IV, these strategic programs include downstreaming of natural resources, strengthening the manufacturing industry, food security, supported by infrastructure and housing development, including public housing. Social and people-centered economic programs such as MBG, KDMP, MSMEs, and the creative economy will also continue. Therefore, synergy between Bank Indonesia's macroprudential policies and the Government's fiscal and industrial policies is crucial to address demand constraints that have kept bank credit/financing low (Graph 39.b). Such synergy is a key component in meeting the substantial financing needs of these national strategic programs. Third , the accommodative

Graph 39.a. Indonesia's Financial Cycle



macroprudential policy is consistent with the soundness of financial system stability, reflected in high capital adequacy ratio, ample liquidity, and low non-performing loans. Nevertheless, several vulnerabilities may arise from both global and domestic economic dynamics, which could affect the sustainability of financial system stability going forward. Therefore, close synergy is required between accommodative macroprudential policies to stimulate credit/financing and strengthened banking system surveillance by Bank Indonesia, along with microprudential supervision by the Financial Services Authority (OJK). Coordination within the Financial System Stability Committee (KSSK) also needs to be reinforced, not only to safeguard financial system stability but also to promote lending/financing by banks and other financial institutions in meeting the substantial financing needs of the national economy, while simultaneously supporting the implementation of financial sector reforms mandated by the Financial Sector Development and Strengthening Act (P2SK Act).

All	macroprudential	policy	instruments	will	remain accommodative	to	achieve	banking	credit/financing growth	of	around	8-12%	in	2026	while	maintaining financial	system	stability. Discussions in Chapters II and III indicate that the low credit/financing growth is mainly due to the slow adjustment in bank

Graph 39.b. Credit Demand Constraints



Source: Bank Indonesia

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interest rates and weak credit demand from the real sector. Meanwhile, several risks to financial system stability must continue to be monitored, arising both from global market volatility and operational risks, particularly cybersecurity. Therefore, the direction of macroprudential policy in 2026 will be pursued through the following three steps (Figure 17). First , strengthening the effectiveness of the Macroprudential Liquidity Incentive Policy (KLM) forward-looking lending channel to encourage banks to increase credit/financing to priority sectors, including adjustments to sectors and the size of incentives provided, as well as synergy with the Government, KSSK, and related parties, including Danantara, to stimulate credit demand from the real sector. Second , accelerating the reduction of deposit and lending interest rates through the effectiveness of the KLM forward-looking interest channel and necessary responses, including KSSK coordination to lower special rates for large depositors and reduce lending interest margins. Third , strengthening systemic surveillance to maintain banking resilience against global shocks and operational risks, including through the enhancement of the Integrated Crisis Management Protoco. Policy coordination with

Figure	17.	Direction	of	Macroprudential	Policy	in	2026



Source: Bank Indonesia the Government and KSSK will also continue to be strengthened to boost credit/financing to priority real sectors, enhance financial system stability resilience, and ensure the sustainability of financial sector reforms as mandated by the Financial Sector Development and Strengthening Act (P2SK Act).

First,	the	strengthening	of	the	effectiveness	of	the KLM	forward-looking	lending	channel	incentive	to increase	bank	credit/financing	to	priority	sectors	for growth and employment . As explained in Chapter III, as a strong commitment by Bank Indonesia to support economic growth, starting December 2025, KLM incentives will be performance-based and forward-looking through the lending channel and interest rate channel (Table 12). The total KLM incentive will be increased to 5.5% of third-party funds (DPK). Banks will receive incentives based on their commitment to channel credit/financing to specific sectors (lending channel) and reduce lending/financing interest rates in line with Bank Indonesia's policy rate direction (interest rate channel). Banks can receive KLM lending channel incentives through a reduction in the minimum reserve requirement (GWM) of up to 5% of DPK and

Table	12.	KLM	Incentive	Allocation:	Lending	Channel	and	Interest	Rate	Channel

## Lending Channel

| Sectoral Scope                           | Credit/Financing Growth Tier (% yoy)   | KLM (%) Credit/Financing Share (%)   | KLM (%) Credit/Financing Share (%)   |
|------------------------------------------|----------------------------------------|--------------------------------------|--------------------------------------|
|                                          |                                        | Below of At Threshold                | Above Threshold                      |
|                                          |                                        | ≤10%                                 | >10%                                 |
| Manufacturing, and Downstreaming Sectors | >0-3%                                  | 1.3%                                 | 1.4%                                 |
|                                          | >3-7%                                  | 1.4%                                 | 1.5%                                 |
| >7%                                      |                                        | 1.5%                                 | 1.5%+                                |
| ≤0%                                      |                                        | ≤2%                                  | >2%                                  |
|                                          |                                        | -                                    | 0.4%                                 |
| including Creative Economy               | >0-6%                                  | 0.4%                                 | 0.5%                                 |
|                                          | >6-12%                                 | 0.5%                                 | 0.6%                                 |
| >12%                                     |                                        | 0.6%                                 | 0.6%+                                |
|                                          |                                        | ≤2%                                  | >2%                                  |
|                                          | ≤0%                                    | -                                    | 1.2%                                 |
|                                          | >0-3%                                  | 1.2%                                 | 1.3%                                 |
| >3-7%                                    |                                        | 1.3%                                 | 1.4%                                 |
| >7%                                      |                                        | 1.4%                                 | 1.4%+                                |
|                                          |                                        | ≤2%                                  | >2%                                  |
| Inclusion, and Sustainability Sectors    | ≤0%                                    | -                                    | 1.4%                                 |
|                                          | >0-4%                                  | 1.4%                                 | 1.5%                                 |
| >4%                                      |                                        | 1.5%                                 | 1.5%+                                |

## Interest Rate Channel

| Elasticity of NewLoan Interest Rates to the BI-Rate   | KLM Incentive (%) Conventional Commercial Banks / Islamic Commercial Banks / Islamic Business Units   |
|-------------------------------------------------------|-------------------------------------------------------------------------------------------------------|
| <0.3                                                  | -                                                                                                     |
| ≥0.3 s.d <0.6                                         | 0.4%                                                                                                  |
| ≥0.6                                                  | 0.5%                                                                                                  |

Source: Bank Indonesia

KLM interest rate channel incentives of up to 0.5% of DPK. The sectors eligible for KLM lending channel incentives include: (i) agriculture, manufacturing, and downstreaming sectors; (ii) services sectors, including creative economy; (iii) construction, real estate, and housing sectors; and/or (iv) MSMEs, cooperatives, inclusion, and sustainability sectors, which are also priority sectors for the Government in supporting economic growth. The size of the incentive given to banks under the lending channel also considers adjustments based on the realization of credit/financing growth compared to previous commitments. Meanwhile, the provision of KLM incentives through the interest rate channel is based on the speed at which banks adjust new lending/financing rates to Bank Indonesia's policy rate. Bank Indonesia will continuously assess the effectiveness of these KLM liquidity incentives to further encourage bank credit/financing to these priority sectors. In addition to policy measures, Bank Indonesia will actively strengthen synergy and coordination with the Government, KSSK, Danantara, banks, and businesses to stimulate credit demand. Synergy can be achieved through discussions, communication, and seminars to find joint solutions to overcome various obstacles in credit distribution, both in specific sectors and in aggregate, while reinforcing confidence and optimism about future economic growth prospects.

Second,	the	efforts	to	expedite	faster	reduction of	interest	rates	to	increase	credit/financing	for higher economic growth . As mentioned earlier, the slow decline in bank interest rates has become one of the main obstacles to the effectiveness of Bank Indonesia's policy transmission in boosting credit

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growth. The cause is the phenomenon of special deposit rates demanded by large depositors, which accounted for Rp2,656.79 trillion (27% of total thirdparty funds) in October 2025, with deposit rates reaching 5.21% (Table 13). In addition, government depositors (both SOEs and non-SOEs) amounted to Rp817.16 trillion with deposit rates around 5.10%. This phenomenon indicates a distortion in market mechanisms due to the stronger bargaining power of large depositors against banks, amid a weak banking industry structure caused by the excessive number of banks. As a result, inefficiencies occur in both the banking industry and the economy because of high funding costs. This is reflected in the large spread between special deposit rates and the maximum deposit insurance rate set by the Deposit Insurance Corporation (LPS), with a median of around 1.17% since 2012, rising to 1.71% in October 2025 (Graph 40). Inefficiency in the banking industry is also evident from the high spread between lending rates and deposit rates, due to both credit risk premiums and significant overhead costs, compared to other countries. This issue prompted Bank Indonesia to introduce KLM incentives, which are linked to the speed of lending rate reductions compared to BI Rate cuts, as explained earlier. In other words, banks that are slow to reduce their lending rates will be required to maintain higher reserve requirements at Bank Indonesia, while KLM incentives will be given

Table 13. Special Rate for Large Depositors



|                    |   Nominal (Rp Trillion) |   Nominal (Rp Trillion) | Nominal (Rp Trillion)   | Nominal (Rp Trillion)   | Share of Total Third- Party Funds   |   Special Rates (%) - IDR |   Special Rates (%) - IDR | Special Rates (%) - IDR   | Special Rates (%) - IDR   |
|--------------------|-------------------------|-------------------------|-------------------------|-------------------------|-------------------------------------|---------------------------|---------------------------|---------------------------|---------------------------|
|                    |                 2023    |                 2024    | Sep- 25                 | Oct- 25                 | (%)                                 |                   2023    |                   2024    | Sep- 25                   | Oct- 25                   |
| Non- Residents     |                    3.87 |                    5.67 | 6.07                    | 7.07                    | 6.80                                |                      5.14 |                      5.34 | 5.22                      | 5.17                      |
| Goverment          |                  447.02 |                  468.56 | 705.10                  | 817.16                  | 52.88                               |                      6.77 |                      6.66 | 5.53                      | 5.10                      |
| Government - SOE   |                  255.33 |                  272.34 | 309.02                  | 331.15                  | 51.28                               |                      6.84 |                      6.6  | 5.97                      | 5.58                      |
| Government non-SOE |                  191.69 |                  196.22 | 396.08                  | 486.01                  | 54.02                               |                      6.69 |                      6.74 | 5.19                      | 4.78                      |
| Individuals        |                  462.42 |                  402.29 | 417.66                  | 415.68                  | 10.47                               |                      5.87 |                      5.97 | 5.73                      | 5.50                      |
| Private NBFI       |                  165.78 |                  218.31 | 242.87                  | 262.48                  | 52.13                               |                      6.4  |                      6.36 | 5.86                      | 5.40                      |
| Private Non NBFI   |                  761.01 |                  975.31 | 1178.12                 | 1154.40                 | 31.78                               |                      5.85 |                      6.02 | 5.39                      | 5.13                      |
| Total              |                 1840.1  |                 2070.14 | 2549.83                 | 2656.79                 | 27.23                               |                      6.13 |                      6.19 | 5.53                      | 5.21                      |

Source: Bank Indonesia to banks that reduce their rates more quickly. Bank Indonesia will continue to evaluate the effectiveness of this forward-looking interest channel KLM in accelerating the decline in bank interest rates and formulate necessary strengthening measures. Bank Indonesia will also maintain coordination within KSSK to take joint steps to accelerate the reduction of special deposit rates and lending rate margins.

Third, strengthening systemic surveillance to maintain banking resilience against global shocks and	operational	risks,	including	through	the enhancement of the Integrated Crisis Management

Protocol . Bank Indonesia's systemic surveillance, as part of macroprudential supervision, focuses on large banks which due to their macroeconomicfinancial sector linkages are considered to have a significant impact on credit/financing distribution and overall financial system stability. Key aspects of Bank Indonesia's systemic surveillance include credit/financing performance, resilience to liquidity risk, market risk (exchange rate and government bond yields), credit risk, operational risk, and interconnections in funding, money markets, and payment systems. In this context, as previously mentioned, global spillover effects can exert excessive pressure on the Rupiah exchange rate, cause sharp increases in government bond yields,

Graph	40.	Special	Rate	-	LPS	Rate	Spread



Source: Bank Indonesia

tighten liquidity due to capital outflows, and reduce business activity. Operational risk, including mitigation of cyberattacks, will also be a major concern. This is due to the rapid digitalization in banking and payment systems, which can create not only operational risks from technological disruptions but also cyberattacks on one bank that can quickly spread to others. These considerations drive Bank Indonesia to strengthen the Integrated Crisis Management Protocol, which integrates monitoring vulnerabilities and preventing risks to financial system stability, whether from liquidity, market, and credit risks, with institutional risks arising from operational risks, including cyberattacks. In its implementation, Bank Indonesia coordinates closely with KSSK to jointly maintain financial system stability and bilaterally with OJK for microprudential supervision. Therefore, Bank Indonesia will reinforce synergy between macroprudential surveillance of the banking system and OJK's microprudential supervision under the well-established coordination mechanism. This coordination is crucial to mitigate market risk (exchange rate and interest rate), liquidity risk, credit risk, and operational risk, thereby preserving financial system stability.

Close coordination within KSSK also needs to be strengthened to maintain financial system stability while supporting the implementation of financial sector reforms mandated by the Financial Sector Development and Strengthening Act (P2SK Act).

## Direction	of	Payment	System	Policy

Through the roadmap of Indonesia Payment System Blueprint (IPSB) 2030, Bank Indonesia will continue	accelerating	the	national	digital	economy and	finance	for	the	next	generation. IPSB 2030 is designed to establish a payment system that supports the integration of the national digital economy and finance, thereby ensuring the effective role of central bank functions in currency circulation, monetary policy, and financial system stability. The vision of IPSB 2030 will be achieved through five key initiatives, namely Infrastructure, Industry, Innovation, International, and Digital Rupiah (4I-RD), which serve as the main strategic direction (Figure 18). First, strengthening and modernizing payment system infrastructure, covering retail, wholesale, and payment system data. Second, consolidating and restructuring the payment system industry.

Figure	18.	Five	Initiatives	of	Indonesia	Payment	System	Blueprint	(IPSB)	2025-2030

## INDONESIA PAYMENT SYSTEM BLUEPRINT 2030



## 3S PRINCIPLE (STANDARDIZATION, SIMPLIFICATION AND SYSTEMIZATION)

ONE HOMELAND, ONE NATION, ONE LANGUAGE

Source: Bank Indonesia

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Third, expanding digital innovation and acceptance. Fourth, enhancing international interconnection and cooperation. Fifth, developing the Digital Rupiah. These five strategic pillars have been further elaborated into main programs with clear development stages and timelines for completion.

increase from 10.28 million transactions valued at Rp149,344.0 trillion in 2025 to 10.32 million transactions (0.3%) valued at Rp166,015.0 trillion (9.0%) in 2026.

## The	direction	of	payment	system	policy	in	2026	will

The	direction	of	payment	system	policy	in	2026 reflects	Bank	Indonesia's	commitment	to	advancing the strategic programs under IPSB 2030, aimed at	further	accelerating	digitalization	to	support sustainable economic growth. As shown in Table 8 from the previous section, the objective is to increase digital payment transactions from 49.2 billion transactions valued at Rp78,563.1 trillion in 2025 to 63 billion transactions (30.0%) valued at Rp88,310.7 trillion (12.4%) in 2026. QRIS transactions are projected to increase from 15.4 billion transactions in 2025 to 17.0 billion transactions (10.6%) in 2026, with the number of users expected to reach 60 million and merchants 45 million, the majority of which are MSMEs. BIFAST transactions are expected to rise from 4.8 billion transactions in 2025 to 6.3 billion transactions (29.8%) in 2026, while BI-RTGS transactions will be	implemented	through	five	key	measures. First , in terms of payment system infrastructure, Bank Indonesia will develop the New BI-FAST and support the industry fast-payment, modernize BI-RTGS, and strengthen interoperable, interconnected, and integrated (3i) payment data infrastructure to support policymaking, industry business development, and the public interest (Figure 19). Second , in terms of industry consolidation, Bank Indonesia will reinforce payment system digitalization within the banking sector as the primary institution, promote interlinkage between banks and fintech, and advance regulatory reform to consolidate the payment system industry and restructure the Nonbank Money Changer industry to further strengthen payment integrity. Third, in terms of innovation and digital acceptance, Bank Indonesia will collaborate with the Indonesia Payment System Association (ASPI) to promote innovation and balanced digital payment acceptance alongside

## Figure	19.	Direction	of	Bank	Indonesia	Payment	System	Policy	in	2026



Source: Bank Indonesia

consumer protection through the Indonesia Digital Innovation Center/PIDI (including the development of Indonesia's digital talent), public campaigns, and education-literacy programs. Fourth , in terms of internationalization of payments, Bank Indonesia will expand bilateral and multilateral cooperation in retail payment systems, including through the development of NEXUS. Fifth , in terms of Digital Rupiah development, Bank Indonesia will proceed with the next phase of experimentation, focusing on the development of the Securities Ledger.

First, the development of retail and wholesale payment infrastucture, as well as data infrastructure will	be	oriented	toward	the	interconnection, interoperability,	and	integration	(3i)	of	payment transaction	digitalization,	industry	consolidation, innovation	and	acceptance,	as	well	as	the internationalization	of	the	national	digital	economy and	finance. In terms of retail payment systems, Bank Indonesia will develop the New BI-FAST in synergy with the industry's fast-payment infrastructure to facilitate future digital transaction needs, both in terms of stability and scalability, through the development of modular system architecture within the application for payment enquiry, clearing, and settlement (Figure 20). This modular architecture is considered more capable of responding to the evolution of service features in line with public and business needs. For wholesale payment system infrastructure, the modernization of BI-RTGS will be designed to integrate with the development of money market and foreign exchange market infrastructure through the adoption of the ISO 20022 messaging standard, the development of multicurrency features, and other features that reinforce 3i principles across financial market infrastructure end-to-end. The multicurrency feature will enhance settlement efficiency for both domestic and cross-border transactions. The adoption of ISO 20022 aims to make Rupiah and foreign currency transactions more efficient through greater seamlessness and higher granularity. Risk management will also be strengthened through enhancements to the Liquidity Saving Mechanism (LSM) as well as strengthened fraud-management and end-point security features. Bank Indonesia will also initiate the development of data centers to ensure end-to-end payment system data flows, from consumers to merchants, banking and nonbank

Figure	20.	Direction	of	Retail	and	Wholesale	Payment	System	Infrastructure	and	Data	Development	in	IPSB	2030



Source: Bank Indonesia

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industries, through to final settlement within Bank Indonesia's payment system infrastructure. This is crucial to optimize the central bank functions in maintaining price stability, financial system stability, and payment system stability. Payment system data infrastructure will be developed to strengthen transaction integrity and policymaking through the development of Payment ID, BI-Payment Info, and BI-Payment Clear. Payment ID will function as a unique identifier for each payment service user, enabling the system to acquire and process granular digital data for policymaking purposes, industry business development, and public services. The processed data will be uploaded to the BI-Payment Info platform as public infrastructure provided by Bank Indonesia to distribute digital payment system data for the national benefit. In this context, BIPayment Clear will be able to access suspicioustransaction data from BI-Payment Info Platform to safeguard payment transactions against fraud by strengthening industry capacity in risk management. With BI-Payment Clear linked to the fast-payment infrastructure, online retail transactions can undergo pre-transaction integrity checks, including validity and security screening. Industry players may flag and refuse suspicious or suspected fraudulent transactions.

Second , the payment system industry policy will be directed toward strengthening a healthy, competitive	industry	that	ensures	the	central	bank's currency	circulation	function. Industry structuring focuses on reinforcing the role of the banking sector as the core of the money supply process within the monetary and financial system (Figure 21). Therefore, Bank Indonesia has formulated criteria to assess industry players' size and risk capability, comprising Transactions, Interconnection, Competency, Risk Management, and Information Technology (TIKMI). Assessment of a participant's TIKMI rating will be conducted periodically and will serve as a basis for licensing requirements, activity and product development, business partnerships, access to payment system infrastructure, and Bank Indonesia's supervisory tools. Bank Indonesia is also committed in supporting the development of human resources competency in the payment system sector through certification programs in collaboration with the Indonesia Payment System Association (ASPI). In addition, Bank Indonesia is also strengthening

Figure	21.	Direction	of	Payment	System	Industry	Consolidation	in	IPSB	2030



Source: Bank Indonesia

the regulatory framework for nonbank money changer to enhance the integrity of foreign exchange transactions. This effort is undertaken to prevent nonbank money changer from being used as a mean for money laundering or unreported transactions. The structuring aims to reinforce KYC practices, reporting, and supervision to ensure better monitoring of foreign exchange inflows and outflows.

Third ,	Bank	Indonesia,	in	collaboration	with	the industry,	will	continue	promoting	innovation	and digital payment acceptance that is balanced with consumer	protection,	integrity,	stability,	and	fair business	competition. Payment service innovation will be encouraged within a healthy competitive environment that ensures the end-to-end integration of the national digital economy and finance. Standardization of payment methods, both on instruments and payment channels, will be directed toward innovations with strong potential for mass adoption, based on the principle of 'one language.' Beside preventing risks of unfair competition, this standardization is also intended to ensure the continuity of digital economy and finance end-to-end integration, which represents the ultimate objective of IPSB 2030. Effective collaboration processes with industry participants will be optimized through the strengthening of the Indonesia Digital Innovation Center (PIDI) (Figure 22). PIDI will be developed through three functional pillars: (1) In-depth sandboxing, providing an effective testing environment for innovation; (2) Market intelligence, enabling continuous monitoring of industry developments; and (3) Design thinking, an iterative process that includes joint research and assessments with industry and, where relevant, expert involvement. In addition, PIDI will support the development of globally competitive digital innovations as well as the strengthening of digital talent to enhance future employment rate. The execution of these functions will incorporate efforts to ensure consumer protection, stability, including risk management, integrity and compliance, as well as healthy competition. Meanwhile, digital payment acceptance, which has progressed effectively in recent years, will continue to be strengthened through education and public campaign programs to accelerate adoption in line with sound risk management and consumer protection, particularly on the user side. Similarly, consumer protection

Figure	22.	Direction	of	Innovation	and	Digital	Payment	System	Acceptance



Source: Bank Indonesia

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will be reinforced through enhancements of the regulatory framework and the mechanisms designed to facilitate the interest of all stakeholders (the public, businesses, and payment system industry players). Public awareness of rights and obligations as users of payment services will also be strengthened through these digital literacy programs.

Fourth ,	Bank	Indonesia	will	expand	international cooperation	to	strengthen	cross-border	payment connectivity	in	support	of	regional	economic integration,	particularly	within	ASEAN. Crossborder payment connectivity is essential to facilitate seamless economic and financial transactions across countries, safeguard stability, and build a sustainable economy while prioritizing national interests (Figure 23). This initiative will be implemented through two key programs: (1) Expanding the coverage of crossborder QRIS cooperation, and (2) Preparing national payment system infrastructure for cross-border interoperability. Cross-border QRIS cooperation between Indonesia and Malaysia, Thailand, Singapore, and Japan will be extended to South Korea, Saudi Arabia, and India. Cross-border payment connectivity will also be strengthened through the interconnection of payment system infrastructures, both bilaterally and multilaterally. On the retail side, Bank Indonesia is advancing multilateral interconnection of fast payment through Project Nexus, together with Malaysia, Thailand, Singapore, Philippines, and India, in collaboration with the Bank for International Settlements (BIS). Bank Indonesia is actively involved in the development of Project Nexus Phase III, which produces a roadmap for multilateral interconnection among five ASEAN countries and India for the remittance use case. For wholesale payment system connectivity, the modernization of BI-RTGS, as previously outlined, will be prepared from the outset to anticipate and meet future cross-border interconnection demands. RTGS interconnection has also become a G20 agenda under the enhancing cross-border payments initiative, which must be anticipated early on given Indonesia's position as a G20 member.

Fifth ,	Bank	Indonesia	will	continue	advancing	the development of the Digital Rupiah through the next phase	of	experimentation,	focusing	on	replicating wholesale	market	functions	and	deepening	the financial	market. The exploratory initiative for

Figure	23.	Direction	of	International	Payment	System	Connectivity	in	IPSB	2030



Source: Bank Indonesia

Indonesia's Central Bank Digital Currency (CBDC), or the 'Digital Rupiah,' is carried out under Project Garuda, with the objectives to: (i) safeguard the sovereignty of the Rupiah in accordance with the Currency Act and the P2SK Act; (ii) strengthen its role in the international arena; and (iii) accelerate the integration of the national digital economy and finance (Figure 24). The implementation of Project Garuda is structured into three phases. In the first phase (immediate), development began with the w-Digital Rupiah, covering the use cases of issuance, redemption, and inter-party fund transfers, which have been completed. In 2026, the experimentation phase will focus on testing the use of digital securities through tokenization, including use cases for monetary operations and other financial transactions. In the final phase (end state), the concept of an integrated end-to-end w-Digital Rupiah to r-Digital Rupiah framework will be piloted.

In	addition	to	the	five	key	programs	outlined above,	Bank	Indonesia	will	continue	strengthening synergy	and	coordination	with	both	the	Central and Regional Governments as well as with the payment system industry. Coordination with the Government (both central and regional) will primarily focus on expanding the electronification of regional government financial transactions by reinforcing the Regional Digitalization Acceleration and Expansion Task Force (TP2DD), promoting the disbursement of social assistance, and expanding the use of the Government segment of the Indonesia Credit Card (KKI). The digitalization of MSMEs and the tourism sector will also be further intensified through the National Movement Proud of Indonesian Products (BBI) and Proud to Travel in Indonesia (BBWI) across various regions. Synergy and coordination between Bank Indonesia and the Financial Services Authority (OJK) in regulating and supervising digital payment system development and financial institution digitalization will be strengthened in accordance with the mandate of the P2SK Act, including areas related to crypto assets and the Financial Technology Industry (ITSK), digital financial literacy and consumer protection, as well as cybersecurity. Synergy with the banking sector, the payment system association, fintech associations, and other industry associations will continue to be reinforced both in expanding existing

Figure	24.	Direction	of	Digital	Rupiah	Development	in	IPSB	2030



Source: Bank Indonesia

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digital payment programs, such as QRIS, SNAP, and BI-FAST, and in broadening public access to these services. It remains a guiding principle of Bank Indonesia that payment system policies, regulations, and supervision are formulated and implemented collaboratively with the industry (industry-friendly policy).

## Money Market and Foreign Exchange Market Deepening Policy

The deepening of the money market and foreign exchange	market	plays	a	vital	role	in	supporting the	effectiveness	of	Bank	Indonesia's	policy transmission,	financial	system	stability,	as	well	as fiscal	and	economic	financing. Since its launched in 2024, the Money Market and Foreign Exchange Market Deepening Blueprint (BPPU) 2030, building on the Money Market Development Blueprint 2025 has consistently driven various strategic achievements in money market and foreign exchange market deepening across all aspects of product, pricing, participant, and infrastructure (3P+I). The comprehensive money market and foreign exchange market deepening in these 3P+I aspects serves as a fundamental basis for strengthening the effectiveness of Bank Indonesia's policy transmission, particularly in interest rate, exchange rate, and pro-market monetary operations aimed at ensuring financial system stability and supporting economic growth. Liquidity management and asset portfolio by banking industry and investors will, in turn, become more efficient and flexible, thereby reinforcing financial system stability. In line with this, the development of the government securities (SBN) market also plays an important role in facilitating fiscal financing for the Government. Accordingly, a deep and efficient money market and foreign exchange market enables smoother liquidity management and provides credible hedging instruments for mitigating interest rate and exchange rate risks, ultimately bolstering business resilience and supporting the national economic financing.

The Money Market and Foreign Exchange Market Deepening Blueprint (BPPU) 2030 has been formulated as a strategic roadmap toward modern and advanced money market and foreign exchange market deepening to enchance monetary policy	transmission,	financial	system	stability, and	strengthen	national	economic	financing, fully aligned with Bank Indonesia's mandate and authority under the Financial Sector Development and Strengthening Act (P2SK Act) . The direction of money market and foreign exchange market transformation under BPPU 2030 strengthens the initiatives of BPPU 2025, particularly in terms of integration with the pro-market monetary operations strategy, the establishment of more measurable strategic targets across the 3P+I dimensions, the development of money market and foreign exchange market infrastructure based on the 3i principles and integrated with Payment System and money market and foreign exchange market data infrastructure, as well as reinforced regulation and supervision in accordance with international standards and best practices. Product development will prioritize increasing repo and DNDF transactions, with average daily targets of Rp30 trillion and USD1 billion, respectively, by 2030, supported by the expansion of Bank Indonesia repo underlying and the issuance of BI-FRN. These strategic initiatives will further catalyze the development of derivative instruments, particularly interest rate products such as Overnight Index Swaps (OIS) and foreign exchange products such as FX Swaps. Pricing initiatives is oriented on establishing an efficient term structure for money market and foreign exchange market products across tenors from two weeks to twelve months through the formation of a Money Market Curve and FX Forward Curve, interconnecting larger and more active transaction between money market and foreign exchange market Primary Dealers and other market participants, supported by CCP money market and foreign exchange market infrastructure built on the 3i principles and integrated with Electronic Trading Platforms (ETP) in the market, ETP and BI-SSSS in Bank Indonesia, as well as BI-FAST and BI-RTGS payment system infrastructure, in line with the initiative to integrate Payment System and money market and foreign exchange market data infrastructure.

Money market and foreign exchange market deepening	policy	for	2026	will	remain	pro-growth through the development of a modern money market and foreign exchange market based on international	standards,	while	strengthening the	effectiveness	of	Bank	Indonesia's	policy mix	transmission	and	supporting	financing	for sustainable economic growth. In this regard, the 2026 Money Market and Foreign Exchange Market deepening policy will focus on five main programs (Figure 25). First, developing repo products in line with efforts to increase the transaction volume and liquidity in the secondary market for SRBI, SUKBI, and Bank Indonesia Foreign Exchange Securities (SVBI)/Bank Indonesia Foreign Exchange Sukuk (SUVBI), while supporting the formation of Overnight Index Swap (OIS) as well as Foreign Exchange Swap (FX Swap) markets to enhance monetary transmission effectiveness, Rupiah stability, hedging, and short-term liquidity management. Second, strengthening efficient market mechanisms for forming interest rate structures (INDONIA, OIS, and repo), exchange rates (DNDF), and hedging instruments (IRS and FX Swap). Third, reinforcing market participant consolidation through strengthening money market and foreign exchange market Primary Dealers and enhancing the role of the Indonesian Money Market and Foreign Exchange Market Association (APUVINDO) as Bank Indonesia's strategic partner in implementing monetary operations strategies and money market and foreign exchange market development, including enhancing participant quality and enforcing the Market Code of Conduct. Fourth, developing integrated (3i) infrastructure for the money market and foreign exchange market, monetary operations, and payment systems through the implementation of Payment System and money market and foreign exchange market data infrastructure, which will also serve as the foundation for supporting the issuance of Digital Rupiah, including digital assets. Fifth, strengthening synergy and coordination in economic financing to ensure the creation of well-governed money market and foreign exchange market.

First, product and pricing development will be directed	toward	accelerating	liquidity	deepening, fostering	product	innovation,	and	strengthening efficient	and	credible	price	formation. In the money market, product development will focus

## Figure	25.	Direction	of	Money	Market	and	Foreign	Exchange	Market	Deepening	Policy	in	2026



Source: Bank Indonesia

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## BANK INDONESIA ANNUAL MEETING 2025

on increasing transaction volume and liquidity, particularly in repo transactions through initiatives such as expanding Bank Indonesia repo underlying to include corporate bonds and corporate sukuk, as well as issuing BI-FRN as a floating rate instrument to support the development of the Overnight Index Swap (OIS) market (Figure 26). These efforts are aligned with the development of efficient and credible pricing based on the INDONIA reference rate and the establishment of an interest rate term structure for tenors ranging from two weeks to twelve months. In the foreign exchange market, product development will focus on increasing transaction volume to enhance liquidity in DNDF and FX Swap, supported by efforts to expand standardized margin contracts. On the pricing aspect, strengthening JISDOR and non-USD/IDR reference rates as efficient and credible exchange rate benchmarks continues, supported by the formation of an exchange rate term structure for tenors from two weeks to twelve months. Product and pricing development in money market and foreign exchange market will be aligned with the pro-market monetary operations strategy to increase liquidity in floating instruments based on INDONIA, supporting the formation of the Money Market Curve, and FX Swap and FX Forward transactions to support the formation of the FX Forward Curve as a market pricing benchmark. Liquidity improvements in repo and DNDF within money market and foreign exchange market will also be driven by infrastructure development, including ETP, monetary operations, and CCP, as well as strengthening the role of Primary Dealers as market makers in the money and foreign exchange markets, diversifying features and standardizing products, and expanding the participant base in coordination with authorities and APUVINDO.

Second, the development of competent and professional money market and foreign exchange market	participants	with	integrity,	accompanied by	strengthening	financial	market	infrastructure integrated with Payment System and money market and foreign exchange market data infrastructure to ensure stability and reliability in compliance with	the	3i	principles	and	international	standards. Through collaboration with APUVINDO, Bank Indonesia continues to advance money market and foreign exchange market development, including

Figure	26.	Direction	of	Product	and	Pricing	Development	in	BPPU	2030



Source: Bank Indonesia

## Figure	27.	Direction	of	Market	Participant	in	BPPU	2030



Source: Bank Indonesia enhancing the quality of market participants (Figure 27). Competency enhancement is pursued through the refinement and standardization of treasury professional certification. The strengthening of market ethics has been initiated through the enhancement of the Market Code of Conduct (MCoC) and the Islamic Financial Market Code of Conduct (ICoC) as ethical guidelines for money market and foreign exchange market participants, mandated by Bank Indonesia in alignment with international best practices and current market developments.

Meanwhile, strengthening money market and foreign exchange market infrastructure encompasses three aspects: front-end, middle-end, and back-end (Figure 28). First, front-end will be strenghtened through enhancement of trading venues, consisting of BI-ETP and Market Operators (MO), particularly to support the pro-market monetary operations strategy and boost repo, DNDF, and OIS transactions. Second, middle-end enhancement will focus on strengthening and developing CCP money market and foreign exchange market, including (1) initiating the process to obtain recognized CCP status, (2) interconnecting

CCP with other transaction facilities, and (3) developing CCP Repo. Third, back-end enhancements include strategies to strengthen SSS/CSD through BI-SSSS development to support pro-market monetary operations, the development of BI-SSSS Generation III, and integration with the payment system through BI-RTGS development as outlined in BSPI 2030. Money market and foreign exchange market infrastructure development will also adopt international messaging standards such as ISO 20022 for (1) BI-RTGS Generation III; (2) BISSSS Generation III; (3) Trade Repository; and (4) Central Counterparty to improve efficiency, transparency, and security in transactions, while preparing for money market and foreign exchange market digitalization in the future. Money market and foreign exchange market infrastructure strengthening will also be integrated with Payment System and money market and foreign exchange market data infrastructure, including the development of (1) BI-Payment Clear, (2) BI-Payment Info, (3) data capturing and data analytics infrastructure up to its utilization for various use cases, (4)

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## Figure	28.	Direction	of	Infrastructure	Development	in	BPPU	2030



Source: Bank Indonesia

integration of Payment ID with Investor ID, and (5) trade repository. These initiatives aim to create interconnected, interoperable, and integrated market infrastructure to establish a modern and advanced money market and foreign exchange market with high volume and liquidity, diverse participant segments, and a stable and efficient market.

Third,	synergy	and	coordination	in	economic	financing are	directed	toward	supporting	the	creation	of	money market and foreign exchange market with good governance. Synergy with the pro-market monetary operations strategy and macroprudential surveillance is design to accelerate liquidity and transactions increases in the money market and foreign exchange market, ensure market and infrastructure stability, and foster efficient price formation in line with market conduct. The strategy encompasses product and pricing development, participant and infrastructure enhancement, as well as regulatory harmonization between monetary operations, money market and foreign exchange market deepening, and monetarymarket surveillance with macroprudential measures to maintain financial system stability. Synergy in safeguarding financial system stability and economic financing is implemented through regulation and supervision in accordance with international standards under bilateral coordination between Bank Indonesia and OJK. Meanwhile, collaboration within the Financial Sector Development Coordination Forum (FK-PSK), as mandated by Article 11 of the P2SK Act, involves the Ministry of Finance in developing the government bond market for development financing, Bank Indonesia in money market and foreign exchange market deepening, OJK in capital market development, and LPS in deposit insurance. Synergy within the Sustainable Finance Committee (KKB), as mandated by Article 224 of the P2SK Act, is pursued to coordinate sustainable finance development for the green economy and the achievement of Sustainable Development Goals (SDGs). This includes the Ministry of Finance in financing government projects and programs, Bank Indonesia in formulating macroprudential policies and money market and foreign exchange market development, and OJK in financing through banking and capital markets. The formation of FK-PSK has strengthened and streamlined financial sector development synergy, enabling end-to-end coverage of financing needs across the economy.

## Economic Inclusion, Financial Inclusion, and Sustainable Finance Policy, and Sharia Economic and Financial Policy

Bank	Indonesia	continues	to	expand	and	strengthen its	role	in	accelerating	Economic	Inclusion,	Financial Inclusion, and Sustainable Finance (IEKB) as part of efforts	to	support	resilient	and	sustainable	national economic growth. These efforts focus on developing an integrated and competitive inclusive and sustainable economic ecosystem. In addition, Bank Indonesia places emphasis on optimizing financing, literacy, and synergy in the field of inclusive and sustainable economic and financial development. First, to enhance competitiveness, Bank Indonesia will continue strengthening business models, guidelines, and various facilitation schemes, including the implementation of pilot projects that encompass capacity-building and expanded market access, including supply chain development. These initiatives are carried out end-to-end, targeting exportoriented MSMEs, tourism-supporting MSMEs, food clusters, subsistence groups, and primary commodities such as coffee, corn, and other regional flagship products. As a concrete manifestation of its commitment to sustainability, Bank Indonesia will also develop circular MSME guidelines, such as those based on the utilization of plastic waste, pineapple leaves, and organic waste, and implement sustainable MSME pilot projects. Competitiveness enhancement further includes the development of more comprehensive green MSME business models. This initiative is supported by the development of the Green Calculator version 2 to measure business sustainability performance. Second, to broaden MSME financing access, financing business matching will continue to be strengthened through synergy with various ministries/government agencies, financial institutions, and Bank Indonesia Regional Offices nationwide. These efforts not only focus on conventional financing but also aim to increase access to green financing, including the preparation of facilitation plans for green financing support infrastructure (including sustainability reporting). The expansion of financing access is supported by the BI-SAID platform (Database of Potentially Bankable

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MSME Profiles), which enables financial institutions to directly access data on eligible MSMEs. In addition, the Financial Information Recording Application System (SIAPIK) continues to be developed to support MSMEs in conducting digital financial bookkeeping. Third, literacy and synergy will continue to be expanded through the implementation of KLIK (Core Competencies for Financial Literacy and Inclusion), standardized educational modules, and ongoing education and mentoring programs across regions. Program synergy will continue to be strengthened, including through the flagship Karya Kreatif Indonesia (KKI) program as a platform for cross-stakeholder collaboration in enhancing MSME capacity and competitiveness. Synergy is further reinforced through strategic commitments between Bank Indonesia and various ministries/government agencies, formalized through Memoranda of Understanding that serve as a strong foundation for cooperation and as concrete steps to advance economic inclusion, financial inclusion, and sustainable finance. Beyond the domestic scope, Bank Indonesia will continue to actively strengthen Indonesia's position in various international cooperation forums, including the G20SFWG, Blue Finance Advisory Committee, ASEAN WC-FINC, and APRACA, to broaden collaboration, strengthen national representation, and promote the adoption of green and inclusive economic practices aligned with the Sustainable Development Goals (SDGs).

Bank	Indonesia	continues	to	strengthen	its	role	in accelerating	the	comprehensive	development	of	the sharia	economic	and	financial	ecosystem	as	part	of efforts	to	establish	sharia	economy	as	a	new	source of inclusive and sustainable growth. The development of the Halal Value Chain (HVC) ecosystem will remain focused on priority sectors, namely halal food, modest fashion, and Muslim-friendly tourism. In the short term (2027), strengthening the HVC ecosystem will be carried out through piloting sharia economic independence business models including pesantren, piloting halal trading houses, expanding halal centers, and facilitating market access for the hajj and umrah ecosystem. In the medium term (2028-2031), strengthening the HVC ecosystem will be pursued

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through a series of market access facilitation measures for priority sharia economy sectors and the expansion of halal certification. In addition, HVC ecosystem development will be extended to the pharmaceutical sector as one of the strategic sectors that plays an important role in strengthening the sharia economy ecosystem in Indonesia.

These efforts are expected to foster economic independence of the community while expanding the reach and competitiveness of national halal products. From the perspective of commercial sharia finance, policies to deepen the sharia money market in support of sharia financing in the short term (2027) are implemented through the development of financing business models that support priority sharia economy sectors as well as the Values-Based Economy, the implementation of Sharia Financing Month, strengthening macroprudential policies that support priority sharia economy sectors, and policies related to sharia Primary Dealers. In the medium term (2028-2031), this will be pursued through innovations in Sharia Finance supporting the ValuesBased Economy in line with industry developments (including blended finance), strengthening and expanding the implementation of Sharia Financing Month, and the implementation of sharia Primary Dealers. These adjustments are accompanied by strengthening the growth trajectory and projections of sharia banking financing to remain aligned with national economic dynamics and financing needs of priority sectors. Furthermore, the expansion of sharia economy literacy and inclusion will continue in synergy with stakeholders. In the short term (2027), the focus is directed at strengthening the foundation through the utilization of integrated ZISWAF data, the implementation of the National Strategy for Sharia Economic and Financial Literacy and Inclusion in Indonesia (SNLIEKSI) as the national policy umbrella, and encouraging innovation in the establishment of supporting institutions for inclusion to expand alternative sharia financing. At the same time, sharia economy literacy and inclusion surveys to measure achievements, as well as program synergies across ministries/government agencies and between central and regional governments, continue to be strengthened, including integrated national sharia economy campaigns. In the medium term (2028-2031), policies will focus on accelerating and expanding impact, among others through strengthening the implementation of SNLIEKSI, developing business models for the real sector and sharia finance, as well as utilizing digitalization and big data analytics to reinforce sustainable literacy and inclusion strategies that deliver tangible benefits for public welfare. At the global level, Bank Indonesia will also coordinate with various stakeholders to support the strengthening of Bank Indonesia's leadership in international sharia fora through active involvement in supporting the formulation of global sharia financial standards together with the Islamic Financial Services Board (IFSB) and the development of sharia financial liquidity together with the International Islamic Liquidity Management (IILM).

## International	Policy

Bank	Indonesia	will	continue	collaborating	in close synergy with the Government to strengthen Indonesia's	position	in	bilateral	relations,	within the Asian region, as well as globally. International policy aims to support the national interest by strengthening economic resilience against global impacts and expanding cooperation to supports sustainable economic growth. Bank Indonesia's international policy encompasses the central bank and national economic policy mix, Local Currency Transactions (LCT), and promoting trade and investment in close synergy with the Government and the KSSK. In 2026, international policy will focus on three main aspects. First, strengthening and expanding bilateral cooperation with key partner central banks in the areas of central banking, payment systems, LCT, and international financial cooperation, including Bilateral Swap Arrangements (BSA). Second, expanding regional cooperation, particularly ASEAN Financial Integration, ASEAN Payment Connectivity (APC), and strengthening the Chiang Mai Initiative Multilateralization (CMIM) as a form of regional financial cooperation among ASEAN+3 countries. Third , active participation in championing the national interests within economic, monetary, and international financial agendas. Bank

Indonesia plays an active role in various international cooperation forums, including the G20, IMF, Financial Stability Board (FSB), Bank for International Settlements (BIS), as well as Islamic finance forums such as IFSB and IILM. Furthermore, Bank Indonesia will continue improving to maintain positive perceptions among investors and rating agencies, while promoting trade and investment through the Bank Indonesia's Investor Relations Units, nationally (IRU), regionally (RIRU), and globally (GIRU), by empowering and leveraging the network of Bank Indonesia offices in various regions and abroad. Bank Indonesia will also strengthen institutional leadership by chairing international cooperation forums and gaining global recognition in areas such as policy mix, research, innovation, institutional development, leadership, and the digitalization of payment systems and currency circulation.

Bank	Indonesia	will	continue	strengthening cooperation	with	main	partner	central	banks	in formulating	monetary	and	macroprudential	policy, as	well	as	payment	systems,	LCT,	and	international financial	cooperation . Existing bilateral cooperation with central bank in Malaysia, Thailand, Singapore, Japan, China, South Korea, United States, United Kingdom, France, and India will be expanded to other countries. Payment system cooperation through QR interoperability and FAST Payments with Malaysia, Thailand, Singapore, and Japan will be expanded to South Korea, China, India, and Saudi Arabia. The bilateral use of local currencies through LCT with Malaysia, Thailand, Japan, South Korea, UAE, China, Singapore, and India will also continue to expand. The expansion will cover new partner countries and broader scope of transactions to cover trade and investment, portfolio investment and payment transactions, as well as increase the number of appointed participating banks. In order to support LCT implementation, Bank Indonesia is conducting bilateral swap arrangements in local currency with Bank Negara Malaysia (MYR24 billion or Rp82 trillion), Bank of Korea (KRW10.7 trillion or Rp115 trillion), People's Bank of China (CNY400 billion or Rp878 trillion), Monetary Authority of Singapore

(SGD9.5 billion or Rp100 trillion), and Reserve Bank of Australia (AUD10 billion or Rp100 trillion). In addition, Bank Indonesia will maintain bilateral cooperation to strengthen foreign exchange reserve capacity against global shocks, including Bilateral Swap Arrangement (BSA) with the Bank of Japan (USD22.76 billion) and a Bilateral Repo Line (BRL) with the Monetary Authority of Singapore (USD3 billion).

## Institutional	Transformation	Policy

Bank	Indonesia	will	continue	to	implement institutional	transformation	programs	by consistently	prioritizing	good	and	professional governance principles. Institutional transformation will be further strengthened and refined, particularly in implementing the mandate of the Bank Indonesia Act, which has undergone several amendments, most recently through the P2SK Act. Going forward, institutional transformation will remain focused on three main areas. First, strengthening organizational functions and work processes that are integrated, aligned, and comprehensive. Second, enhancing the digitalization of policy and institutional work processes through the refinement of digital-based business process re-engineering that emphasizes collaborative work and is supported by the utilization of Artificial Intelligence. Third, strengthening human resources through leadership development, the cultivation of new capabilities, and reinforcement of the Employee Value Proposition. Furthermore, Bank Indonesia will consistently strengthen policy and institutional governance to build a credible, professional, well-governed, and transparent central bank.

First,	Bank	Indonesia	continues	to	strengthen organizational	functions	to	support	the	effective, efficient,	and	compliant	implementation	of	its duties	and	the	achievement	of	its	objectives.

Organizational strengthening and refinement are consistently strategy-driven, taking into account the framework in each area while ensuring continuity between organizational structures and

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## BANK INDONESIA ANNUAL MEETING 2025

business processes. These efforts also include the application of best practices and the adaptive use of infrastructure and technology according to needs. All organizational strengthening and refinement initiatives are underpinned by the 3S principles, which are Simplification, Standardization, and Systematization. Going forward, organizational strengthening will focus, among other things, on assessing the organizational functions of Bank Indonesia's Domestic Representative Offices, in line with the implementation of the refined framework for regional economic and financial policies. The refinement of organizational functions is expected to support the achievement of regional economic and financial policy objectives, namely low and stable regional inflation, expanded access to financing, as well as fast, easy, and affordable velocity supported by a sound payment system industry structure and the availability of high-quality and reliable Rupiah currency. This is consistent with Bank Indonesia's mandate to maintain Rupiah stability, safeguard payment system stability, and contribute to financial system stability in support of sustainable economic growth.

Second,	Bank	Indonesia	will	continue	to pursue	digital	transformation	to	support	the implementation	of	policy	and	institutional transformation	in	order	to	realize	its	vision	of becoming a leading digital central bank. Bank Indonesia continues to develop integrated decision-making processes and business process re-engineering in policy formulation and implementation, institutional management, and human resource management within the Integrated Digital Central Bank (IDCB) framework (Figure 29). The development of IDCB has been supported by governance and effective decision-making processes through the development of the Digital Workplace (DWP) platform. The development of DWP applications is currently underway to cover policy formulation in the context of Monthly Board of Governors Meetings and policy implementation in the context of Weekly Board of Governors Meetings, and will be implemented gradually to strengthen Bank Indonesia's policy formulation processes. IDCB development also leverages data and Artificial Intelligence as catalysts in business process transformation. Going forward, Bank Indonesia will

Figure	29.	Direction	of	Integrated	Digital	Central	Bank	(IDCB)	Development



Source: Bank Indonesia

continue to expand AI/ML-based data innovations in the monetary, macroprudential, and payment system sectors. AI and ML development is conducted in accordance with the VITAL principles (Visualizing the outcomes, Theory understood, Algorithm fitted, and Learn the meaning) to ensure optimal integration into business processes. Building on the development of digitalized decision-making and work processes in policy area, Bank Indonesia will also continue to strengthen the digitalization of work processes, particularly in institutional areas. The strengthening of digitalization in the institutional area will focus on leveraging digitalization to support performance monitoring and evaluation processes, including the reinforcement of the DWP application to support decision-making within the institutional area. IDCB development will continue to be supported by readiness in process, people, and technology to realize 'one input, one process, multi-purposes,' along with strong governance and secure, end-to-end information systems in supporting the execution of Bank Indonesia's duties.

Third,	Bank	Indonesia	remains	committed	to strengthening human resources to ensure professional leadership, high performance, and noble character. Human resource development at Bank Indonesia will continue to focus on enhancing visionary leadership characterized by 'strategic spiritual leadership,' combining high competence (book-smart), strong experience (street-smart), and noble character (spiritual-smart). In addition, Bank Indonesia continues to strengthen strategies for fulfilling and maintaining human resources through reinforcement of the Employee Value Proposition (EVP). This is one of the priorities of human resource policy transformation aimed at enhancing employee engagement at Bank Indonesia, encompassing competitive remuneration programs, health care focusing on physical wellness, and peaceful retirement focusing on the Pensiun Berkah program. In line with the vision of becoming a leading digital central bank, Bank Indonesia will also continue to strengthen human resource competencies to support the implementation of central bank duties, particularly in fostering digital mindsets and technical capabilities, such as the utilization of Artificial Intelligence. These human resource transformation efforts will continue to ensure the availability of human capital who are adaptive, strong in leadership, and able to work optimally in facing the challenges of digitalization.

## VI. Moving Forward: Synergy Toward Golden Indonesia ( Indonesia Emas )

Synergy is the key for Indonesia's economy to become STRONG and SELF-RELIANT in facing global turbulence, while achieving higher and resilient	growth	in	2026	and	beyond. Bank Indonesia is committed to maintaining close synergy with the Government (central and regional) and the Financial System Stability Committee (KSSK) to safeguard stability and foster sustainable economic growth. Bank Indonesia also continues to strengthen well-established collaboration with the House of Representatives (DPR-RI), particularly Commission XI, the banking industry, the corporate sector, academia, media, and other stakeholders. Innovation in the policy mix, encompassing monetary, macroprudential, and payment system policies, supported by money market deepening, international policy, and inclusive and green economy programs, will continue to be developed.

In closing, let us continue to move forward in synergy toward Golden Indonesia ( Indonesia Emas ). May Allah SWT, God Almighty, always grant guidance, ease, perfection, and blessings to the nation and people of Indonesia, and to all of us.

Thank you,

Wassalamualaikum warahmatullahi wabarakatuh, Jakarta, 28 th November 2025

## Perry Warjiyo

Governor of Bank Indonesia

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110",Perry Warjiyo
https://www.bis.org/review/r251203e.htm,Philip R Lane: Inflation deviations and monetary policy,"Keynote speech by Mr Philip R Lane, Member of the Executive Board of the European Central Bank, at the 15th workshop on exchange rates, co-organised by the Bank of Slovenia with the Bank of Italy, the Bank for International Settlements, the European Central Bank and the National Bank of Belgium, Ljubljana, 3 December 2025.",2025-12-03 00:00:00,"SPEECH

## Inflation deviations and monetary policy

Keynote speech by Philip R. Lane, Member of the Executive Board of the ECB, at the 15th workshop on exchange rates, co-organised by Banka Slovenije with the Banca d'Italia, the Bank for International Settlements, the European Central Bank and the Nationale Bank van Belgié/Banque Nationale de Belgique

Ljubljana, 3 December 2025

It is an honour to participate in this excellent workshop on exchange rates and to visit Bank of Slovenia.

This speech has two parts. In the first part, | will discuss the appropriate monetary policy response to deviations of inflation from the ECB's symmetric two per cent medium-term target. In the second part, | will turn to the topic of this conference and outline some analytical perspectives on the interplay between the exchange rate and monetary policy.!2!

## Inflation deviations and monetary policy

The ECB has a clear orientation for the conduct of monetary policy: a symmetric two per cent inflation target over the medium term. This is articulated in our monetary policy strategy statement as follows:

""The Governing Council considers that price stability is best maintained by aiming for two per cent inflation over the medium term. The Governing Council's commitment to this target is symmetric. Symmetry means that the Governing Council considers negative and positive deviations from this target as equally undesirable. The two per cent inflation target provides a clear anchor for inflation expectations, which is essential for maintaining price stability.""

In pursuing the symmetric two per cent target, a working definition of the medium term is required. Our monetary policy strategy statement provides a nuanced description:

""The flexibility of the medium-term orientation takes into account that the appropriate monetary policy response to a deviation of inflation from the target is context-specific and depends on the origin, magnitude and persistence of the deviation. Subject to maintaining anchored inflation expectations, it also allows the Governing Council in its monetary policy decisions to cater for other considerations relevant to the pursuit of price stability.""

How should such high-level strategic guidelines be implemented in practice? Let me make a few comments.

It is straightforward that small inflation deviations that are not expected to persist do not call fora monetary policy response. Most obviously, lags in the transmission of monetary policy mean that it would be counterproductive to seek to respond to near-term deviations that are solidly expected to be transitory. Moreover, a small and transitory deviation is unlikely to trigger the adjustment dynamics that can turn temporary deviations into longer-lasting deviations.

At the other extreme, it should also be clear that a sufficiently large and persistent deviation from the target requires a monetary policy response, regardless of its origin.

First, through the cost-of-living channel, the current inflation rate may influence subsequent price and wage-setting, as firms and workers respond to lower cost pressures in relation to negative deviations and higher cost pressures in relation to positive deviations.

Second, the real interest rate channel can reinforce an inflation shock that is expected to display some persistence: if a drop in inflation today is associated with ongoing low inflation for, say, the next year or two, this translates into a higher real interest rate (nominal rate minus expected inflation) over the relevant horizon. In turn, this puts downward pressure on consumption and investment, adding to the disinflationary impulse. Symmetrically, above-target inflation that is expected to persist for some time maps into a lower real interest rate and amplifies inflationary pressures.

Third, a persistent shift in the inflation rate can influence the formation of inflation expectations if people put some weight on simple extrapolation in forming expectations. Under such extrapolative behaviour, if inflation runs below target for a year or two, there is some risk that people might revise down their beliefs about the de facto medium-term inflation target. Symmetrically, if inflation runs above target for a year or two, there is some risk that people might revise up their beliefs about the de facto medium-term inflation target.

Fourth, a material inflation deviation that does not trigger a monetary policy response poses a communication risk, since markets, firms and households may find it difficult to understand the reaction function if there is no reaction. In turn, greater uncertainty about the reaction function can give rise to higher volatility in expectations about inflation and the policy rate path.

Given these mechanisms, a material deviation of inflation from the target calls for a monetary policy response. Since the cost-of-living, real interest rate, expectations-deanchoring and communication channels operate in a plausibly non-linear manner (individually and collectively), the appropriate monetary policy is also non-linear, with an incremental adjustment to mid-sized deviations but a more forceful or persistent adjustment to large deviations.

This non-linearity is recognised in our monetary policy strategy statement, which highlights that: ""To maintain the symmetry of its inflation target, the Governing Council recognises the importance of appropriately forceful or persistent monetary policy action in response to large, sustained deviations of inflation from the target in either direction, to avoid deviations becoming entrenched through deanchored inflation expectations.""

How should monetary policy respond to material deviations that fit neither the ""small, transitory"" category that can clearly be ignored, nor the ""large, sustained"" category that clearly triggers a nonlinear response that is appropriately forceful or persistent? For this intermediate category of ""mid-sized, somewhat persistent"" deviations, the origin of the inflation deviation should play an important role in determining the appropriate monetary policy reaction.""

In particular, an intermediate-category broad-based inflation deviation likely calls for an incremental adjustment in the monetary stance. In essence, this is the standard prescription of monetary policy feedback rules (such as the ""family"" of Taylor rules). However, if the origin of the inflation deviation is a supply-driven relative price level shock, the case for an active monetary policy response is more nuanced!

In particular, a supply shock to the relative price level of energy does not pose the same risk to medium-term inflation as a shock to domestic demand.

While an intermediate-category shock to the relative price level of energy may visibly alter headline inflation for a substantial fraction of the projection horizon (energy comprises about 10 per cent of the overall Harmonised Index of Consumer Prices (HICP)), it might not materially alter the broader underlying inflation dynamics that are most important in determining the medium-term inflation trend. In particular, an intermediate-category supply-driven relative energy price level shock might not be sufficiently large or persistent to generate a broader wave of price changes, with energy-using sectors choosing to absorb the cost shock in margins rather than passing it through to the consumer.

The impact of a supply-driven relative price level shock on overall inflation also tends to have an inbuilt, self-correcting element. For instance, a decrease in the relative price level of energy will boost activity levels in energy-using sectors, with less slack in the economy putting upward pressure on inflation over the medium term. More broadly, since energy has a high import content, a decrease in the relative price level of energy typically constitutes an improvement in the terms of trade, boosting the real incomes and consumption levels of euro area households and thereby further adding to medium-term inflation pressures. In the opposite direction, symmetric mechanisms apply in relation to a positive shock to the relative price of energy.

These considerations mean that, within the intermediate category, a supply-driven inflation deviation that is primarily sectoral in origin does not pose the same risk to the medium-term inflation target as a broad-based inflation deviation. This means that it is essential in determining the appropriate monetary policy stance to carefully analyse the realised and projected dynamics of supplementary inflation measures, such as non-energy inflation (the sum of all categories excluding energy) and core inflation

(further excluding the food category).'©]

Clearly, it is a judgement call to determine how to respond to intermediate-category inflation deviations. Such judgement calls are best made on a meeting-by-meeting, data-dependent basis that draws on a comprehensive and rigorous analytical framework to take account of the unfolding evidence in relation to the shocks driving inflation deviations, and whether there are incipient signs that relative price shocks are transforming into broader inflation dynamics. This meeting-by-meeting, data-dependent approach is especially helpful under conditions of elevated uncertainty.

This analytical framework necessarily involves inspecting and modelling the current and projected behaviour of wages, profit margins, the suites of underlying inflation indicators and indicators of inflation expectations to assess whether a moderate inflation deviation might turn into a larger or longer deviation. It also involves a wide-ranging risk assessment. Amongst other dimensions, an important set of risk scenarios relates to possible amplification shocks, by which an inflation deviation might grow larger or become more persistent. This means that upside inflation shocks are especially salient if the baseline exhibits a positive inflation deviation. Symmetrically, downside inflation shocks are especially salient if the baseline exhibits a negative inflation deviation.

In summary, this discussion has emphasised that the appropriate monetary policy response to an inflation deviation from the target is context specific and requires a careful analysis of a broad set of considerations. Of course, the capacity to consider ""looking through"" some types of inflation deviations depends on a strong institutional commitment to delivering the symmetric inflation target over the medium term, underpinning firmly-anchored medium-term inflation expectations.

## The interplay between the exchange rate and monetary policy

Let me now switch gears and turn to the interplay between the exchange rate and monetary policy. Chart 1 shows the nominal and the real effective exchange rates of the euro against 18 major trading partners, indexed against their values in 1999. While there have been prolonged and substantial currency swings over the lifetime of the euro, there has been no clear overall trend with currency shifts tending to reverse over time.

## Chart 1

Nominal effective exchange rate and real effective exchange rate of the euro



Sources: ECB and ECB staff calculations.

Notes: Nominal effective exchange rate and real consumer price index (CPI)-deflated effective exchange rate, denominated in euro, for 18 trading partners.

The latest observations are for October 2025.

Chart 2 zooms in on the last decade and shows the euro exchange rate against the US dollar, the Chinese renminbi and a basket of selected Asian currencies since 2014. Since the start of the hiking cycle in Summer 2022, there has been marked appreciation of the euro against these major trading partners. For the renminbi in particular, this appreciation has been even stronger in real terms than in nominal terms, reflecting the much larger cumulative inflation in the euro area relative to China during this period.

Chart 2

The euro against the US dollar, Chinese renminbi and Asian currencies

## Nominal and real USD/EUR

## Nominal and real CNY/EUR





Sources: Bloomberg, ECB and ECB staff calculations.

Notes: Panel a): The real USD/EUR refers to the CPl-deflated bilateral exchange rate (right-hand scale). An increase denotes an appreciation of the euro. Panel b): The real CNY/EUR refers to the CPl-deflated bilateral exchange rate (right-hand scale). An increase denotes an appreciation of the euro. Panel c): Nominal effective exchange rate and real (CPI-deflated) effective exchange rate, denominated in euro, for selected Asian trading partners (Japan, South Korea, Indonesia, India, Malaysia, Philippines, Taiwan and Thailand). Corresponding trade weights are normalised to one. EUR NEER refers to the nominal effective exchange rate of the euro and EUR REER refers to the real effective exchange rate of the euro, The latest observations are for October 2025.

Chart 3 zooms in further by examining the evolution of the dollar-euro exchange rate over the last year (Q4 2024 through Q3 2025) in the context of a BVAR model maintained by ECB staff. A striking feature of this analysis is the contribution of risk sentiment to euro appreciation in Q2 2025, reflecting some mix of a decline in risk sentiment towards the dollar and an improvement in risk sentiment towards the euro.

Effective exchange rates for the euro against selected Asian currencies



Chart 3 BVAR historical of the drivers behind the USD/EUR

## decomposition exchange rate



Sources: Haver and ECB staff calculations.

Notes: The model extends the Bayesian Vector Autoregression (BVAR) of Farrant and Peersman (2006) to include seven endogenous variables: USD/EUR, relative GDP, relative CPI, relative two-year yields (euro area-United States), euro area GDP, euro area CPI and euro area two-year yields. Quarterly data (from the first quarter of 1999 to the third quarter of 2025) are entered in first differences. It includes four lags and a constant, estimated via Bayesian methods following Korobilis (2022). A tightening euro area (US) monetary policy shock is assumed to increase euro area (US) interest rates more than in the United States (euro area), reduce euro area (US) GDP growth and inflation more than in the United States (euro area), while causing the euro to appreciate (depreciate) against the dollar. A risk sentiment shock assumes that stronger investor sentiment towards the euro causes the euro to appreciate, weighing on inflation and growth, which lowers euro area yields (more than US yields). Latest missing GDP observations are projected; shocks are identified via sign restrictions. The latest observations are for the third quarter of 2025.

## Transmission of the exchange-rate: model-based impact

Model-based analysis allows for a broader analysis of the transmission of exchange rate changes on the key macroeconomic variable. Simulations based on the ECB's semi-structural multi-country model indicate that a 10 per cent appreciation in the euro plays out over several years, with inflation markedly lower for about three years and a peak disinflation impulse of 0.6 percentage points after about a year.

[81 The level of GDP declines throughout this adjustment period, with a cumulative loss of about one per cent of GDP after three years. In relation to trade dynamics, the euro appreciation reduces export volumes by about 3 per cent over this horizon and import volumes by about 1.5 per cent.

In the model, the transmission of the exchange rate shock operates primarily through the effects on trade deflators, which in turn influence export and import volumes. The appreciation makes euro area exports more expensive on international markets, reducing export volumes. At the same time, the appreciation also lowers the price of imports, dampening domestic inflationary pressures. Overall, imports decline despite the reduction in import prices as the demand drag dominates, with both private consumption and investment decreasing: consumption falls as economic activity contracts and labour demand slows. Investment declines as higher real interest rates and the appreciation's disinflationary effects take hold. The resulting drop in the relative price of investment goods further suppresses investment, especially in externally exposed sectors.

Chart 4

Impulse responses to a 10 per cent euro appreciation in the ECB Multi-Country Model



| HICP inflation                                                           | Real GDP                                 | Real exports                                               | Real imports                                       |
|--------------------------------------------------------------------------|------------------------------------------|------------------------------------------------------------|----------------------------------------------------|
| (percentage point deviation from steady- state year-on-year growth rate) | (percentage deviation from steady state) | (percentage deviation from steady state)                   | (percentage deviation from steady state)           |
| 00 04 02 03 04 05 06 1234567 89101112 Quarters                           | 00 : 04 ae : 123456789 101112 Quarters   | 0 —TTTTTT) r 1.0 AS 2.0 25 30 35 1234567 89101112 Quarters | 0.0 r 1.0 A 2.0 25 30 35 1234567 89101112 Quarters |

Sources: ECB staff calculations based on ECB-MC model simulations; see Angelini, E. et al. (2025), ""The ECBMulti Country Model: A semi-structural model for forecasting and policy analysis for the largest euro area countries"", Working Paper Series, No 3119, ECB, Frankfurt am Main.

## Transmission of the exchange-rate: financial conditions

It is important to analyse the impact of currency movements using a range of different approaches. In addition to standard macroeconomic models, it is also helpful to study the impact of the exchange rate on financial conditions. In particular, currency movements operate via financial channels in addition to trade channels by altering the relative wealth of domestic investors versus foreign investors and affecting home and foreign asset prices.

Chart 5 shows the contribution of the exchange rate to the ""Macro-Finance' financial conditions index (MF-FCl) that has been developed by ECB staff. 2 While the exchange rate only accounts for a relatively minor proportion of the total variation in the MF-FCI, it still adds significant explanatory power on top of the contributions of nominal and real interest rates and risk asset prices 10]

In the run-up to the global financial crisis, euro appreciation added to the tightening of financial conditions in the euro area. During the European debt crisis and in its aftermath, the weaker euro reinforced the generally accommodative monetary policy by contributing to the loosening of financial conditions. Since 2017, the regained strength of the euro has tightened financial conditions to varying degrees. Most recently in 2025, the euro has recorded its strongest tightening impulse on the MF-FCI , partly explained by the relative weakening of the US dollar.

## Chart 5

Euro exchange rates in the Macro-Finance FCl



Source: Bletzinger T., Martorana, G. and Mistak, J. (forthcoming).

Notes: The chart shows the estimated weight of the euro nominal effective exchange rate (NEER) in the baseline specification of the Macro-Finance Financial Conditions Index (hollow bar) and its relative weight among the nine asset prices included (hollow diamond). The filled bars and diamonds refer to the estimates of an alternative specification in which the nominal effective exchange rate is replaced with five bilateral euro exchange rates.

In the baseline version of the MF-FCIl, the coefficient of the euro NEER is positive, in line with the notion that an appreciation in the euro tends to tighten financial conditions in the euro area (Chart 5, hollow bar). A benefit of the methodology underlying the new index is its flexibility in estimating other specifications. The coefficients in the baseline do not only resemble average effects over the estimation sample from 2007 until 2025, but possibly also across underlying variables. In the case of the NEER, a meaningful model extension substitutes the NEER with euro exchange rates (Chart 5, filled bars). The positive average coefficient of the NEER is primarily driven by the EUR/USD, pointing to the importance of the US dollar for global financial markets and the relevance of a stronger euro relative to the US dollar as a dampener of the euro area economy. By contrast, a stronger euro relative to the Chinese renminbi indicates a loosening of financial conditions. Finally, a stronger euro relative to the Swiss Franc is also associated with a loosening of financial conditions, which is consistent with the special status of the Swiss France as a safe haven currency that weakens during ""risk on"" phases.

## Model-based impulse responses to a surprise monetary policy expansion

Finally, it is also important to understand how the exchange rate responds to monetary policy decisions. In what follows, | show model-based simulations of a surprise monetary policy easing carried out by ECB staff. The simulations use the ECB-BASE and New Area-Wide Model (NAWM) models, which treat the euro area as a small, open economy, as well as a two-region model calibrated on the euro area and the rest of the world (GMGS henceforth).""4) alll three models account for changes in trade and asset flows across regions following changes in euro area monetary policy.

The impulse responses show the effect of a surprise 100-basis point monetary policy easing (in annualised terms; see Chart 6, panel a). The shock lowers domestic interest rates relative to foreign interest rates, triggering asset outflows that result in a nominal and real exchange rate depreciation (Chart 6, panels b and d). In the ECB-BASE model, the reaction is less frontloaded, as it is linked to long-term yields, which react more sluggishly. In the GMGS model, the real depreciation is less pronounced than in the NAW\M, as in the latter inflation responds more sluggishly due to partial backward indexation and stickiness also affecting importers.

The depreciation makes domestic goods cheaper relative to foreign goods, improving price competitiveness in international markets. As the domestic currency depreciates, foreign demand for domestically produced goods increases, leading to an increase in real exports (Chart 6, panel e). The increase is more sluggish in the ECB-BASE model, reflecting the slower adjustment of the real exchange rate and a shock transmission mechanism with backward-looking expectations.

On the import side, two opposing forces come into operation following the monetary policy easing, as both import prices and domestic demand increase. On the one hand, the weaker exchange rate raises the domestic currency price of foreign goods, which tends to reduce imports. On the other hand, monetary easing stimulates overall domestic demand, including for imported goods. In the GMGS and the NAWM models, the demand effect slightly outweighs the price effect, leading to an increase in real imports, which is more limited than the increase in exports (Chart 6, panel f). Therefore, there is an improvement in the trade balance (Chart 6, panel g). By contrast, the domestic demand effect is stronger in the ECB-BASE model, as — which has a high import content — increases in response to the shock, leading to a deterioration in the trade balance. In the longer term, the trade balance also deteriorates in the GMGS and NAWM models: as higher prices feed through to export prices, the initial boost to exports fades. By contrast, domestic demand remains stronger more persistently, keeping imports higher for longer.

## Chart 6

## Model-based impulse responses to a surprise monetary policy expansion

Panels a), c) and g): percentage point deviations from steady state.Panels b), d), e), f) and h): percentage deviations from steady state.



ECB-BASE

NAWM

GMGS

















Sources: ECB staff calculations based on the ECB-BASE model (Angelini et al., 2019), NAWM II model (Coenen et al., 2018) and the GMGS model (Gnocato, Montes-Galdon and Stamato, 2025).

Notes: In panels b) and d), a negative value indicates domestic currency depreciation.

Overall, the results align with the empirical evidence shown in the context of my keynote speech at the CEPR International Macroeconomics and Finance Programme Meeting in 2019.21 Empirically, a monetary policy easing shock weakens the euro and stimulates both euro area exports and imports. In net terms, the trade balance improves as the response of exports is stronger than the increase in imports.

In order to obtain a better understanding of the importance of the role of the exchange rate in the transmission of monetary policy, it is helpful to ""switch off' this channel in an alternative simulation exercise. The model simulations in Chart 7 examine the same policy trajectory as those in Chart 6, but with the nominal exchange rate held constant.""5] Under this counterfactual scenario, exports would remain largely stable as they would no longer benefit from improved terms of trade (Chart 7, panel e), while imports would grow more significantly due to the absence of currency depreciation, which would prevent foreign goods from becoming more expensive (Chart 7, panel f).

As a result, the trade balance would worsen (Chart 7, panel g), leading to a somewhat smaller increase in GDP (Chart 7, panel h). In addition, the rise in inflation would be smaller (Chart 7, panel c), as the absence of currency depreciation would prevent imports from becoming more expensive. In summary, in response to an easing impulse, the depreciation in the exchange rate strengthens the impact of monetary policy on output and inflation.

Wrapping up, the aim of this part of the speech has been to explain some of the analytical approaches used by the ECB staff to understand the macroeconomic role of the exchange rate. Of course, the exchange rate is just one variable among many in determining euro area macroeconomic dynamics and our overall evaluation of economic and financial developments is based on an integrated assessment of all relevant factors.

## Chart 7

Model-based impulse responses to a surprise monetary policy expansion, shutting down the exchange rate channel

Panels a), c) and g): percentage point deviations from steady state.

™

=

ECB-BASE

NAWM



Sources: ECB staff calculations based on the ECB-BASE model (Angelini et al., 2019), NAWM II model (Coenen et al., 2018) and the GMGS model (Gnocato, Montes-Galdon and Stamato, 2025)

Notes: In panel b) and d) a negative value indicates domestic currency depreciation.

1.

The views expressed in this speech are personal and should not be interpreted as representing the collective view of the Governing Council of the ECB.

2.

| am grateful to Tilman Bletzinger, Lea Demuth, Luca Fosso, Nicold Gnocato, Antoine Kornprobst, AnaSimona Manu, Giulia Martorana, Eve Samani, Viktoria Vidahazy and Srecko Zimic for their contributions on this topic.

3.

Bauer, M., Pflueger, C. and Sunderam, A. (2024), ""Perceptions about Monetary Policy"", Quarterly Journal of Economics, 139(4), pp. 2227-2278.

4.

The origin of the inflation deviation also matters for the calibration of the monetary policy response in the case of ""large, sustained"" deviations. Although inflation peaked above 10 per cent in late 2022, the ECB's monetary policy took into account the characteristics of the inflation shock (with a heavy supply shock contribution) and eventually judged that a peak policy rate of 4 per cent would be sufficient to return inflation to target.

5.

In what follows, | focus on supply-driven energy price shocks. Shifts in global demand can also generate fluctuations in the relative price of energy but have a wider impact on global inflation dynamics. During the pandemic, there were supply bottlenecks initially in the goods sector (as the global trading system struggled with a surge in demand for goods at the same time as supply capacity was interrupted) and subsequently in the services sector (as the economy reopened).

6.

While food inflation exhibits relatively higher short-term volatility than core inflation, food inflation has become increasingly persistent over time, such that persistence indicators for non-energy inflation are broadly similar to those for core inflation. Since the food category makes up about 20 per cent of the HICP, the greater breadth of the non-energy inflation indicator is an important advantage over core inflation. It is also important to take into account inflation measures at different frequencies. For instance, a surge in energy inflation in the first quarter of 2025 that was quickly reversed means that there will be a substantial negative base effect in annual measures of energy inflation in early 2026, even though the energy price level has been broadly flat since the spring of 2025.

- 7.

See also Nakamura, E., Riblier, V. and Steinsson, J. (2025), ""Beyond the Taylor rule,"" NBER Working Paper, No. 34200.

8.

For details of the model, see Angelini, E., Bokan, N., Ciccarelli, M., Lalik, M. and Zimic, S. (2025), ""The euro area countries"", Working Paper Series, No 3119, ECB.

9.

For more details on the Macro-Finance FCI, see Lane, P.R. (2025), ""The transmission of monetary policy: financial conditions and credit dynamics"", welcome address at the 5th WE\_ARE\_IN Macroeconomics and Finance Conference, 21 October, and Bletzinger, T., Martorana, G. and Mistak, J.

(forthcoming), ""Looser, Tighter, Clearer: a new Financial Conditions Index for the euro area', mimeo. Related slides are also available; see Bletzinger, T., Martorana, G. and Mistak, J. (2025), ""Looser, Tighter, Clearer: a new Financial Conditions Index for the euro area"", slides presented at the IMFS conference on ""Monetary and Financial Stability and Macro-Financial Modelling"", 7 November. 10.

The reduced-form nature of FCI exercises mean that it is not possible to disentangle the financial and trade channels of currency movements.

11.

For details, see Gnocato, N., Montes-Galdén, C. and Stamato, G. (2025), ""Tariffs across the supply chain"", Working Paper Series, No 3081, ECB, Frankfurt am Main.

12.

Lane, P.R. (2019), ""The international transmission of monetary policy', keynote speech at the CEPR International Macroeconomics and Finance Programme Meeting, 14 November.

13.

This is achieved by means of a concomitant sequence of shocks to the risk premium on foreign asset holdings.

## CONTACT

E

Directorate General Communications",Philip R Lane
https://www.bis.org/review/r251202f.htm,Jorgovanka Tabaković: Overview of recent monetary and macroeconomic trends in Serbia,"Introductory speech by Dr Jorgovanka Tabaković, Governor of the National Bank of Serbia, at the presentation of the November Inflation Report, Belgrade, 19 November 2025.",2025-11-19 00:00:00,"

## Introductory speech at the presentation of the Inflation Report -November 2025

Dr Jorgovanka Tabaković, Governor

## Ladies and gentlemen, esteemed members of the press, dear colleagues,

Welcome to the presentation of the November Inflation Report where we will give you a summary of our views of the current macroeconomic movements, new macroeconomic projections and monetary policy decisions made in the period since the previous Report .

Before I move on to the specific numbers and projections, allow me to briefly reflect on the  developments  in  the  international  environment  that  have  left  their  mark  on  the period  since  our  last  meeting  in  August.  Here  I  primarily  mean  the  growing protectionism  and  trade  policies  of  leading  world  economies,  which  have  been  the major source of global uncertainty for almost a year, as well as the still pronounced geopolitical tensions that have repercussions on Serbia too.

Though  it  may  seem  that  the  world  economy  has  so  far  demonstrated  admirable resilience  to  the  shocks  it  has  been  exposed  to,  there  are  still  fears  that  the consequences of increased tariffs for the global economy could be much more serious in  the  coming  period  than  expected,  causing  halts  in  global  supply  chains  and dampening investment and consumer confidence. In addition, prolonged conflict in the Middle East and Ukraine, as well as the tight situation in the Caribbean Sea, are further fuelling  the  volatility  of  prices  of  primary  commodities  globally,  limiting  trade  and investments among countries. Pronounced geopolitical tensions are also taking their toll on Serbia, evident in the enforcement of sanctions against NIS due to its majority Russian ownership. An additional challenge comes from announcements that in order to protect its output, the European Union could cut quotas for importing steel from other countries, including Serbia. Still, even in such complex circumstances, I am hopeful



that our responsible conduct of economic policy, strengthened fundamentals and builtup reserves will help us maintain favourable growth prospects and show a high level of resilience to external risks, as has been the case so far.

***

Having trended around the upper bound of the target tolerance band over the previous months, y-o-y inflation slowed significantly in September, to 2.9%, and then in October to 2.8%. Inflation mostly decelerated under the impact of the effects of the Decree on Special Conditions for Trade in Certain Types of Goods, which capped trade margins on  food  items  and  certain  household  cleaning  products  at  20%  for  a  period  of  six months,  starting  from  September.  Of  167  items  making  up  the  food  component  of inflation, 147 items recorded a monthly price decrease in September, therefore y-o-y growth of prices of food and non-alcoholic beverages dropped to 1.7%, from 7.8% in August. More details about the effects of the Decree are available in one of our text boxes in the Report . Another text box elaborated on the degree of cost pass-through to prices along the industrial food products chain, concluding that in general, the effect on prices was stronger when the costs increased, compared to when they weakened.

However, we estimate that inflation would have slowed even without the adoption of the Decree. This view is substantiated by core inflation (calculated excluding the prices of food, energy, alcohol and cigarettes), which slowed to 3.9% in September, and then to  3.8%  in  October,  because  of  both  decelerating  prices  of  industrial  products  and slower growth in services prices.





According to our new central projection, while the Decree is in force, i.e. until end-2025 and in early 2026, y-o-y inflation will move below or around the central midpoint. In the remaining part of 2026 and over the medium term, y-o-y inflation should continue to

move within the bounds of the target tolerance band of 3±1.5%, with low base from September 2025 resulting in inflation measuring around 4% at end-2026. In addition to the effects of this Decree and the establishment of an appropriate legal framework to enhance  market  regulation  and  prevent  the  emergence  of  unfair  trading  practices aimed at preserving price stability, the continued easing of cost-push pressures from the  international  environment  will  also  influence  inflation  to  move  within  the  target boundaries. Also, the arrival of the new agricultural season, assuming that it turns out better than this year's, should have a disinflationary effect, leading to lower fruit and vegetable  prices.  Increase  in  wages  and,  by  extension,  disposable  income  for consumption, should act in the opposite direction, though we do not anticipate major inflationary pressures on this account as wage growth will be accompanied by growth in productivity to a significant extent.



***

In Q3, economic activity upheld the 2% y-o-y growth dynamic from the first half of the year,  whereas  our  August  projection  expected  it  to  pick-up  significantly.  Although growth in production and exports in the automotive industry continued as expected, the services sector did not recover to the extent we had anticipated, and activity in the construction sector continued to decline. Furthermore, data from the Serbian Statistical Office on the production of certain autumn crops indicate that this year's agricultural production was at a similar level to last year's or slightly lower, whereas in August we had estimated a slight increase. Taking all of this into account, the GDP growth in the

third quarter was lower than expected, therefore we now estimate that annual growth will measure 2.1%.

Prolonged  global  uncertainty,  rising  protectionism,  and  pronounced  geopolitical tensions,  coupled  with  socio-political  tensions  within  the  country,  are  resulting  in  a weaker carry-over effect of trends from this year into the next. Consequently, our GDP projection for 2026 is now 3.5%. This growth will be driven by domestic demand, with both consumption and fixed investments making positive contributions. Consumption growth will be supported by higher disposable income resulting from increased wages and  pensions,  as  well as more  favourable  credit conditions.  Meanwhile,  the implementation of infrastructure projects planned under the  'Leap into the Future Serbia  Expo  2027'  programme  will  contribute  to  investment  growth.  Due  to  faster projected  growth  in  imports  compared  to  exports,  in  an  environment  of  still  weak external  demand,  coupled  with  growth  in  investments  and  disposable  income,  we expect a negative contribution from net exports. Furthermore, potential limitations in the production and export of oil and base metals, alongside stronger effects of trade and  geopolitical  tensions  on  consumer  and  investment  confidence,  could  result  in growth lower than projected, potentially closer to 3%. You can read about this in more detail in one of our text boxes, where, as usual, we analyse alternative scenarios for our  projections.  In  2027,  we  project  GDP  growth  to  measure  around  5%,  with  the acceleration in its momentum compared to 2026 being driven by increased service exports due to the hosting of the specialised international exhibition 'Expo 2027.'





Despite somewhat weaker economic growth prospects this year than initially expected, both the fiscal and external positions have been preserved. This, along with the built-

up reserves, indicates the resilience of our economy to external challenges. The fiscal deficit in the first nine months of this year stood at 0.8% of GDP, with an equivalent primary budget surplus. Although the medium-term fiscal framework projected a fiscal deficit  of  3%  of  GDP  by  end-2027,  we  believe  this  will  not  disrupt  the  declining trajectory of the public debt-to-GDP ratio, which fell to 43.4% at the end of September. Furthermore, within the new framework, capital expenditures maintain a relatively high share, in the range of 6-7% of GDP, which contributes to the growth of output potential.

The 2025 current account deficit will most probably be lower than projected in August and will measure around 5% of GDP. Goods exports gained 9.5% y-o-y in the nine months of the year, guided by increased exports of the manufacturing industry, where 19 out of 23 branches posted growth and branches associated with the automotive industry  -  production  of  motor  vehicles,  and  of  rubber  and  plastic  -  provided  the strongest impulse. Goods imports increased somewhat more slowly, at a y-o-y rate of 8.0%, on the back of imports of intermediate and consumer goods. The narrowing of the surplus on trade in services reflected primarily higher net imports of tourist services, with exports of information-communication services continuing to rise at double-digit rates. The largest inflow on the financial account came from FDIs, measuring EUR 2.5 bn in the nine months of the year. Residents stepped up their investment abroad, which resulted in a net inflow of EUR 1.5 bn on this account. FDI inflows declined from a year earlier in other countries of the region as well, as global uncertainty surged amid tighter trade policies and marked geopolitical tensions. In Serbia, FDI inflows were also lower due to one-off inflows from last year and the social and political tensions which led to the deferral of some investments.



Source: Ministry of Finance.

2025



Source: Public Debt Administration.

2025

Chart 11 Current account and FDI projection (in % of GDP)



Chart 12 FX reserves and relevant adequacy indicators



Appreciation pressures prevailed in Q3 as well. In order to preserve the relative stability of the dinar exchange rate against the euro, the NBS mostly acted as a net FX buyer in the FX market. In October, however, heightened FX demand of domestic corporates gave rise to occasional depreciation pressures. Since the start of the year until endOctober, net FX purchases by the NBS equalled EUR 355 mn. Together with a higher price of gold, this pushed the country's FX reserves past their record-high end-2024 level, to EUR 29.4 bn at end-October. Being well above reserve adequacy metrics, FX reserves are an important pillar of defence against external risks. The share of gold holdings in FX reserves reached around 20% and the quantity of gold - over 52 tonnes, these being the highest levels on record.

***

In the period since the previous Report, we have kept the key policy rate on hold - at 5.75% since September 2024. Our decision to keep the key policy rate unchanged was guided by current and projected inflation, but primarily by the still present geopolitical and  trade  tensions  among  major  global  economies,  which  could  affect  primary commodity  prices,  supply  chains  and  capital  flows.  Moreover,  in  the  conditions  of achieved price and financial stability, our measures and activities have continued to support economic growth also through maintaining the relative stability of the exchange rate and more favourable credit financing conditions. This has resulted in double-digit y-o-y growth in lending to the corporate and household sectors, which reached 12.8% in September.



Source: NBS.

In connection to this, I would like to remind you that, following the systemic regulation of interest rate caps on household borrowing through amendments to the Law on the Protection of Financial Service Consumers, the NBS facilitated a further reduction in interest  rates  on  cash  and  consumer  loans  for  lower-income  employees  and pensioners, effective from September, which has led to a lowering of the weighted average interest rate on dinar household loans to 8.8%. The NBS also enabled the implementation of the Youth Housing Loan Programme with terms more favourable than market conditions, and the reduction of interest rates for first-time homebuyers by up to 0.5 pp. Alongside the effects of past monetary policy easing, these measures helped accelerate y-o-y growth in household lending to 16.1% in September. One of the text boxes in this Inflation Report details the effects of these measures. Still, from the standpoint of safeguarding price and financial stability, it should be emphasised that  all  measures  were  designed  to  prevent  excessive  household  indebtedness, including by capping the maximum cash and consumer loan amount eligible for more favourable terms at RSD 1 mn. Lending to the corporate sector also grew faster in Q3, reaching 9.0% y-o-y in September, driven primarily by working capital and investment loans. The expansion of lending, combined with the preservation of bank asset quality, led to the NPL share in total loans declining to a new low of 2.2%.



Source: NBS.

In the savings month, it is important to note that our household savings have been on a  steady  rise.  In  the  past  thirteen  years,  dinar  savings  have  increased  almost twelvefold, to over RSD 206 bn at end-October, while FX savings doubled to close to EUR 16 bn. This is an indicator of confidence in the domestic financial sector and of healthy sources of future lending growth.

None of this would have been possible without the committed work of the people in our institution. We have been very successful in fulfilling all our legal mandates, but we also made sure to resolve all issues important for our citizens. Most of all, I am referring to our mandate in the area of monetary policy and financial stability which we have fulfilled to the maximum extent, in the face of difficult global circumstances such as slower world growth, pronounced trade tensions and stubborn inflationary pressures. It  is  precisely  these  facts  that  were  taken  into  account  by  the  Global  Finance international magazine at the time of  grading the work of governors worldwide and ranking me, the Governor of the National Bank of Serbia, among central bankers with the highest grade for 2025. Of the European governors, the highest grades (A+, A or A-) were awarded only to the governors of the central banks of Denmark (A+), Czech Republic (A-), European Central Bank (A-) and Serbia (A-). This recognition confirms that, as is often highlighted in the press releases issued by the IMF and credit rating agencies,  we  are  pursuing  an  appropriate  and  responsible  monetary  policy,  in circumstances which have probably never been  as complex and challenging. I am proud of this recognition, which is not only intended for me as the governor, but for my entire  team  and  the  people  in  the  National  Bank  of  Serbia  who  share  the  same

commitment, the same values and the same goal - to live and work in a stable, reliable and prosperous Serbia.

***

## Ladies and gentlemen, dear colleagues,

We will continue to work along the same lines in order to keep inflation stable and as low  as  possible,  and  to  safeguard  the  interests  of  our  citizens,  but  also  of  our corporates, as this is the only way that we can speed up our economic growth. We have demonstrated that, even in challenging times, we have been able to develop the right  mix  of  economic  measures  and  policies  and  to  produce  results,  and  we  will continue to do so in the future.

In the remainder of the conference, my colleagues from the Economic Research and Statistics Department will present our projections in more detail. After that, we will be happy to answer any questions you may have.

## Central Banker Report Cards 2025

## Europe

| Country              | Banker                   | 2025 Grade   | 2024 Grade   |
|----------------------|--------------------------|--------------|--------------|
| Albania              | Gent Sejko               | B            | N/A          |
| Armenia              | Martin Galstyan          | B            | N/A          |
| Belarus              | Roman Golovchenko        | TETS         | N/A          |
| Bosnia & Herzegovina | Jasmina Selimović        | B            | TETS         |
| Bulgaria             | Dimitar Radev            | B+           | B            |
| Czech Republic       | Aleš Michl               | A-           | B+           |
| Denmark              | Christian Kettel Thomsen | A+           | A+           |
| European Union       | Christine Lagarde        | A-           | A-           |
| Georgia              | Natia Turnava            | C            | D            |
| Hungary              | Mihály Varga             | TETS         | N/A          |
| Iceland              | Ásgeir Jónsson           | B-           | B            |
| Norway               | Ida Wolden Bache         | B+           | A-           |
| Poland               | AdamGlapiński            | B            | C            |
| Romania              | Mugur Isarescu           | B-           | B+           |
| Russia               | Elvira Nabiullina        | N/A          | N/A          |
| Serbia               | Jorgovanka Tabaković     | A-           | N/A          |
| Sweden               | Erik Thedéen             | B            | A-           |
| Switzerland          | Martin Schlegel          | TETS         | N/A          |
| Turkey               | Fatih Karahan            | B            | TETS         |
| Ukraine              | Andriy Pyshnyy           | N/A          | N/A          |
| United Kingdom       | Andrew Bailey            | B-           | B+           |

* TETS (To Early To Say).

Source: Global Finance.",Jorgovanka Tabaković
https://www.bis.org/review/r251202d.htm,Colm Kincaid: Ní Neart Go Cur Le Chéile - strengthening consumer protection and supervision in an increasingly digitalised world,"Remarks by Mr Colm Kincaid, Deputy Governor of the Central Bank of Ireland, at the joint FinCoNet and Central Bank of Ireland international seminar, Dublin, 28 November 2025.",2025-11-28 00:00:00,"## Colm Kincaid: Ní Neart Go Cur Le ChØile - strengthening consumer protection and supervision in an increasingly digitalised world

Remarks by Mr Colm Kincaid, Deputy Governor of the Central Bank of Ireland, at the joint FinCoNet and Central Bank of Ireland international seminar, Dublin, 28 November 2025.

* * *

Good morning,

On behalf of the Central Bank of Ireland, it is a pleasure to welcome you all to this joint FinCoNet and Central Bank of Ireland international seminar. 1

A particular welcome to the FinCoNet delegates from 42 different jurisdictions and representatives from the OECD and World Bank who we have been delighted to host over the course of this week for the 2025 Annual General Meeting of FinCoNet. And congratulations to FinCoNet Chair, Juliana Mozachi-Sandri (Central Bank of Brazil) and Vice Chair, Frank Lofranco (Financial Consumer Agency of Canada) as well as the OECD Secretariat (and Central Bank staff) for such a successful Annual General Meeting.

At this morning's event we welcome a diverse range of stakeholders, international regulators, civil society groups, consumer advocates, industry representatives, trade associations, as well as colleagues from the Department of Finance and other public sector bodies. I am delighted to welcome the Chair of the Central Bank's Consumer Advisory Group, Isolde Goggin, the Chair of Ireland's Competition and Consumer Protection Commission, Brian McHugh, and Ireland's Financial Services and Pensions Ombudsman, Liam Sloyan.

There is an Irish expression that seems appropriate for today's event: ""Ní neart go cur le chØile"". It means ""There is no strength without unity"".

This is perhaps never more important than today in the field of financial consumer protection, as we work to solve problems that are increasingly complex, interconnected and transcend national borders. A whole-of-system, unified, and internationally coordinated approach is required if we are to be successful in supporting better consumer outcomes.

FinCoNet is admirably placed to play an important role in this global context.

I remember FinCoNet's founding meeting in 2013, chaired by a former Central Bank of Ireland colleague, Bernard Sheridan and attended by others I see here today. Those founding members established FinCoNet with the mission to promote sound market conduct and strong consumer protection through effective supervisory standards and sharing of best practices among supervisors around the world. Since that founding meeting, FinCoNet has grown from strength to strength. Today, FinCoNet member regulators supervise financial services provided to just over half the people on the planet.

As a founding member of FinCoNet, the Central Bank of Ireland is therefore especially proud to host this year's Annual General Meeting. This has involved 3 days of events with over 86 delegates from 42 different jurisdictions attending in person. Reflecting the digital age in which we live, we have had strong participation virtually. In total this week, we have hosted over 450 delegates and domestic stakeholders from financial services firms, consumer and industry bodies, academia and public life, both onsite and online.

Over the course of the week discussions have included digitalisation and oversight of AI, conduct supervision in retail credit, cost-of-living and the fair treatment of consumers, as well as an industry workshop on Buy Now Pay Later. My thanks to Banking and Payments Federation Ireland and the regulated firms involved for taking part in that workshop.

Thanks also to Juliana Mozachi-Sandri and to Magda Bianco (Banc d'Italia) for their participation in our Financial System Conference earlier this week, bringing the benefit of their international experience to our discussions.

I also congratulate FinCoNet on the theme they have chosen for today's event: Strengthening Financial Consumer Protection and Supervision in an Increasingly Digitalised World.

Digital innovation is supporting how consumers engage and access financial services, and it brings many benefits. It also brings new risks.

International standards, such as the G20/OECD High Level Principles on Financial Consumer Protection have an important role to play here. They offer a roadmap for countries to improve existing approaches and develop new ones in the face of digital transformation. Here in Ireland, the Central Bank is implementing the welcome recommendations from the OECD's 2024 review of our supervisory functions. The implementation of these recommendations is supporting the modernisation of our supervisory approach. Next week, the Central Bank of Ireland will host a virtual event for FinCoNet members to share our experience of the more integrated supervisory approach we have adopted, into which we are incorporating these important OECD findings.

In Europe, such international standards are implemented and supported by a mix of European and national initiatives, including the EU digital finance package. This includes the Markets in Crypto Assets Regulation (MiCAR), the Digital Operational Resilience Act (DORA) and the AI Act. These frameworks aim to ensure effective responses to emerging innovations and risks while supporting benefits to consumers.

At domestic level, the Central Bank of Ireland will bring a modernised Consumer Protection Code into force in March 2026. It includes provisions to require regulated financial service providers to ensure technology they use is designed and implemented with a customer focus and not in a way that seeks to unfairly exploit or take advantage of consumers to their detriment.

I believe that, in the period ahead, regulatory regimes such as these will be key to maintaining consumer trust and confidence in digital financial services. FinCoNet is making an important contribution in this endeavour, since in the end of the day, our regulatory frameworks will only be as good as how we supervise and enforce them.

As digitalisation transforms financial services across the world, it also brings into sharper relief the need to have a shared view of what we expect financial services to deliver for its users, what 'good looks like' in terms of substantive consumer outcomes. I welcome therefore the working definition of 'financial well-being' published in the 2024 G20 Policy Note and we support the work of the OECD Working Party on Financial Consumer Protection, Education and Inclusion to further develop and measure this concept. In 2026, this will include a joint meeting of that Working Party and FinCoNet to further advance our thinking on this and other aspects of financial consumer protection, education and inclusion.

Let me conclude there. I wish you all the best in your discussions today. Your expertise and insights will be crucial if we are to be successful in our collective endeavour of ensuring a financial system where innovation thrives in an environment that secures consumers' best interests.

I also look forward to FinCoNet continuing to go from to strength.

Thank you.

1  My thanks to Mark Kavanagh, Verona Hanlon and Bairbre Keogh for their assistance in preparing these remarks.",Colm Kincaid
https://www.bis.org/review/r251202b.htm,Rath Sovannorak: Opening remarks - National Bank of Cambodia Global Financial Market Forum,"Opening remarks by Her Excellency Mr Rath Sovannorak, Deputy Governor of the National Bank of Cambodia, at the NBC Global Financial Market Forum, Phnom Penh, 12 November 2025.",2025-11-12 00:00:00,"

## KINGDOM OF CAMBODIA

## NATION RELIGION KING

## Opening Remarks

## H.E. Rath Sovannorak

## Deputy Governor, National Bank of Cambodia

## At the NBC Global Financial Market Forum

Shangri-la Hotel, Phnom Penh, 12 November 2025

- -His Excellency Huot Pum, Member of the Board of Director of the National Bank of Cambodia, Secretary of State at the Office of the Council of Ministers, and Advisor to the Prime Minister
- -His Excellency Thy Khemra, Advisor to the Prime Minister, Deputy Head of Advisory Group on Economic and Social Affair
- -Mr. Reinhold Felber, Head of Reserve Management, Banque Central De Luxembourg Excellencies, Distinguished Guests, Ladies and Gentlemen,

Good morning. It is my great pleasure to welcome you to the inaugural Global Financial Market Forum here in Phnom Penh. This event marks an important milestone for the National Bank of Cambodia, as it is the first time we convene a broad community of policymakers, financial-sector leaders, and global asset managers to find actionable answers to pressing global risks and market outlook.

Allow me to begin by briefly outlining Cambodia's domestic context as a small and open economy, and why vigilance toward the changing global financial landscape is critical. The Cambodian economy is projected to expand at a more moderate pace in 2025, reflecting headwinds from U.S. trade tariffs and regional border tensions. The garment and tourism sectors are expected to moderate

following strong growth in the first half of the year, while construction and agriculture continue to demonstrate resilience. Despite this moderation, overall growth remains relatively robust at around 5 percent, underpinned by manufacturing diversification and a strong agricultural base. Inflation and the exchange rate remain stable, providing a sound macroeconomic foundation for future recovery as external conditions become more favorable.

Nevertheless, Cambodia remains exposed to external risks, as its growing integration into the global economy makes it more sensitive to international financial developments. A nuanced understanding of global market dynamics— capital flows, interest rate shifts, and investor sentiment—is\_ therefore indispensable for informed policymaking, financial sector stability, and longterm sustainable growth.

While we continue to strengthen our domestic financial markets, lessons from global developments—particularly monetary policy adjustments, capital market trends, and safe-haven asset behavior—offer critical guidance for managing external shocks and fostering economic resilience.

The video presentation we have just viewed offered a compelling overview of the complex crosscurrents shaping the global financial environment. The so-called ""triple squeeze""—the fading stimulus, lingering tariff effects, and the delicate balance of policy normalization—captures the immense challenges we face. The central question posed—'""'How do we navigate the transition from temporary resilience to a more uncertain global reality?""—lies at the heart of today's discussions. To help address this, we are privileged to welcome leading international experts who will share their perspectives on current financial trends and global outlooks.

At the National Bank of Cambodia, our research and reserve management teams continuously monitor global financial developments. Over the years, this engagement has enabled us to cultivate strong relationships with distinguished economists and financial experts worldwide—telationships that have served as valuable sources of analysis and insight. The primary objective of this morning's forum is therefore straightforward: to share these insights directly with Cambodia's key stakeholders in policymaking, finance, and the private sector. We hope that the timely updates and perspectives presented today will assist participants in making more informed and strategic decisions in their respective fields.

In this inaugural session, we are honored to host the Banque Centrale du Luxembourg, a valued partner of the National Bank of Cambodia for over two decades. Through this partnership, many of our young professionals—graduates of the University of Luxembourg's School of Finance—have benefited from practical training and mentorship with the Bank's experienced investment specialists. This collaboration has provided the NBC with a strong foundation of well-trained financial experts, enhancing our capacity to navigate the complexities of the global financial system. I would like to express my sincere appreciation to Mr. Reinhold Felber for his personal commitment to these capacity-building initiatives and for graciously accepting our invitation to speak today.

We are also privileged to have with us representatives from BlackRock and Amundi Asset Management—two of the world's largest and most respected investment institutions. Their scale and expertise reflect the highest standards of global asset management. This morning, we are fortunate to hear from Ms. Yii Hui Wong, Portfolio Manager for Asia Fixed Income at BlackRock, and Mr. Florian Neto, Head of Investment for Asia at Amundi—both distinguished practitioners in their fields. Their participation underscores the caliber of expertise gathered at this forum.

We trust that today's discussions will yield valuable, practical insights to enhance the financial management practices of Cambodia's financial institutions and contribute meaningfully to the development of our domestic financial markets.

This forum marks the beginning of what we envision as a regular annual platform for knowledge exchange and policy dialogue. I therefore look forward to your continued engagement in the years ahead.

On this note, I wish all distinguished guests, speakers, and participants good health, success, and a most productive day of discussion.

Thank you.",Rath Sovannorak
https://www.bis.org/review/r251127o.htm,José Luis Escrivá: Regulatory and supervisory simplification - towards a more competitive and resilient European financial system ,"Speech by Mr José Luis Escrivá, Governor of the Bank of Spain, at the VIII Banking Forum, organised by elEconomista.es, Madrid, 25 November 2025.",2025-11-25 00:00:00,"## JosØ Luis EscrivÆ: Regulatory and supervisory simplification towards a more competitive and resilient European financial system

Speech by Mr JosØ Luis EscrivÆ, Governor of the Bank of Spain, at the VIII Banking Forum, organised by elEconomista.es, Madrid, 25 November 2025.

* * *

## Good morning.

It is now almost 20 years since the great financial crisis, but the lessons are still very much with us. The crisis served as a harsh reminder of the high cost that a vulnerable financial system can pose for society.

The experience prompted unprecedented regulatory and supervisory change at the international level, with the Basel III reform and the new resolution framework of the Financial Stability Board (FSB). In the European Union, the regulatory framework underwent radical change and new European supervisory and resolution structures were created, although the European deposit guarantee scheme is still pending.

Thanks to these reforms, today our banking system is more robust, with more capital, more liquidity and greater loss-absorbing capacity. It is, in short, more resilient to macroeconomic and financial shocks. Indeed, it has proved its strength in times of stress: during the pandemic, in the face of rising geopolitical tensions and even after the 2023 banking crises. What is more, the banking sector has continued to support households and businesses and to contribute to economic growth. That is a strength we must preserve and reinforce.

However, hand in hand with this progress, the regulatory and supervisory framework has become increasingly dense and complex. The accumulation of rules and processes may affect the industry's competitiveness and ultimately limit its ability to finance the economy. This is especially important in an environment of high uncertainty and major strategic challenges for Europe.

Moreover, an equally complex institutional architecture, with three overlapping levels global, European and national - adds to this problem.

At the global level, the Basel-based FSB coordinates the work of the various bodies that issue financial sector standards to strengthen financial stability worldwide. These regulatory bodies - such as the Basel Committee and the International Organization of Securities Commissions (IOSCO) - set capital standards for banks and transparency standards for markets. They do not enact legislation, but their standards are adopted by countries and become international benchmarks.

In Europe, the list of institutions is also extensive: the European Central Bank (ECB), the Single Supervisory Mechanism (SSM), the Single Resolution Board and other authorities in the fields of banking, insurance, pensions, securities markets, systemic risks or the fight against money laundering.

In Spain we need to reflect on our own institutional model. Some countries have opted for more compact structures, and these examples call into question whether our model needs to be more streamlined in some areas.

The coexistence of so many different institutions increases the number of interlocutors and the risk of overlaps. It can also make it difficult to see the full risk picture.

As key players in this framework, we supervisors and regulators have a clear responsibility: to identify, with critical and constructive vision, those aspects that drive greater efficiency and effectiveness. This debate is already taking place at the highest level in the main European fora, both in the ECB and the European Banking Authority (EBA), as JosØ Manuel Campa - who will speak later at this event - can attest, as well as in the European Commission, the European Parliament and the European Council. Initiatives such as the Digital Omnibus proposal and the European Commission's forthcoming competitiveness report point in the same direction.

In my view, with so many institutions involved and areas of debate, delivering concrete results demands a clear, top-down strategic drive, one that puts simplification first. This calls for leadership and determination to ensure decisive progress towards improving European competitiveness.

At the Banco de Espaæa we are fully committed to this goal. Simplification without undermining resilience is key to boosting competitiveness and, in turn, strengthening the financial system's role within the European economy, with positive effects for society as a whole.

Let me be clear: simplification does not mean deregulating or weakening the sector. On the contrary, it is about building a simpler, more stable and predictable framework, capable of reinforcing the banking system's ability to support economic growth, without compromising confidence in its robustness.

We believe in leading by example. To this end, we initiated an internal reflection through a cross-departmental working group involving multiple areas of our institution. This has enabled us to formulate concrete proposals and actively participate in fora on simplification. At the same time, we have made progress towards streamlining our own financial reporting requirements as the national supervisor.

Allow me to share with you the main proposals and measures that we are working towards. We have identified five key areas for regulatory and supervisory improvement.

First, supervisory procedures. The SSM has taken significant steps in this direction. Eleven years after its launch, it has announced several initiatives aimed at driving efficiency and effectiveness. These are important advances, but there is still scope for significantly greater ambition.

We need a more cohesive vision and a determined effort across all areas. The ultimate goal is to achieve more predictable supervisory methodologies, greater procedural stability and more effective risk detection.

There are three priority instruments here:

First, the supervisory review and evaluation process (SREP) - essentially a full medical check-up that European supervisors perform for each bank. The SREP analyses their financial health, their business model, the quality of their governance and their risk exposures.

To date, these check-ups have focused too heavily on determining the amount of capital defences that each bank needs. Yet we know that not all problems can be cured with more capital. We must therefore shift towards a more risk-oriented approach, incorporating qualitative metrics capable of capturing management issues, business model weaknesses and emerging risks such as technological threats. In short, we need a simpler, clearer and more stable approach that truly helps us stay ahead of risks.

Second, supervisory guidance and expectations. These have played a crucial role by providing clarity and a common framework, especially in the SSM's early years. However, their sheer number and, at times, excessive detail and prescriptiveness can be counterproductive. At the same time, we need mechanisms to ensure that supervisory expectations do not turn into further binding requirements, adding an additional layer of complexity to the framework. Here too a critical review is required, one that preserves the framework's consistency but enhances transparency while providing banks with greater clarity and security.

Third, the Joint Supervisory Teams, whose role must be reinforced in order to optimise supervisory processes. Their work is key in conveying a single, consistent message to banks, within a more integrated and truly risk-based framework.

The second area of improvement is linked directly to Europe's institutional complexity and the proliferation of delegated acts. When achieving consensus about primary legislation (the ""level 1"" rules, i.e. the regulations and directives approved by European legislators) proves difficult, the details of the contentious aspects are frequently addressed in more technical rules. By this, I mean the level 2 and 3 rules, such as the technical standards and guidelines that are drawn up by regulators and supervisors. However, this growing body of rules and guidelines takes up significant resources, both at banks and at supervisors themselves, and does not necessarily yield any effective improvement in regulatory quality. Not only does this entail high costs for institutions, it can even erode supervisory effectiveness.

To address this, we have undertaken an in-depth analysis of the capital and resolutionrelated mandates assigned to the EBA. On the basis of this work, we propose ""deprioritising"" and simplifying more than half of the pending mandates. Specifically, we are considering reducing around 35% of the mandates in the new prudential package and simplifying a further 15%, in addition to reviewing costly resolution processes. In addition to these measures are structural improvements, such as efforts to drive the EBA's Pillar 3 data hub project. Thanks to this data hub, the EBA will be able to use information already reported by institutions, to compile and disseminate, via a centralised platform, banks' disclosures to the market.

Crucially, the EBA must continue its work to simplify compliance, through initiatives such as reviewing the stock of Level 2 and Level 3 regulatory products, improving proportionality and reducing the operational burden, especially for smaller institutions.

The third area where we need to make improvements is Europe's solvency capital requirements and resolution framework. And here I want to reiterate: simplifying does not mean making our institutions less resilient.

Allow me to illustrate this point, with the example of solvency requirements. Today, the structure of banks' capital requirements is overly complex. Even the EBA has said that Europe's requirements go beyond those of other jurisdictions. This means we have some scope for reducing complexity while simultaneously enhancing transparency and predictability, without compromising the robustness of the banking sector.

Specifically, it would be desirable to move towards a more simple design that is underpinned by two well-defined pillars:

- A single microprudential capital buffer, incorporating the current capital conservation buffer and Pillar 2 requirements and guidance. This would simultaneously pave the way for a discussion on the role of the SREP and the stress testing exercise in determining this buffer.
- A single macroprudential buffer, combining the current systemic and countercyclical capital buffers.

This would help avoid overlaps, enhance transparency and remove the unnecessary complications that are unique to the European framework. Such an approach would be fully Basel-aligned and is already applied in other jurisdictions, which have simpler structures without undermining resilience.

There is also scope for undertaking an ambitious streamlining of resolution requirements. This could be best achieved by replacing the current requirements with just one, which could be a fixed percentage of total assets in the form of equity and subordinated debt and aligned with access to the European resolution fund. This would greatly simplify the current resolution framework, while retaining its fundamentals and increasing operability. If the scope agreed were less ambitious, progress could be made towards extending the Financial Stability Board's total loss-absorbing capacity (TLAC) requirements - which are currently applicable to global systemically important banks to all resolution entities.

Another area for improvement identified relates to the obligations imposed on small and non-complex institutions, to which the proportionality principle should be applied. Not all institutions are of the same size and complexity, nor do they have the same risk profile. Imposing the same obligations on small and non-complex institutions may lead to unnecessary burdens, without enhancing system stability.

We aim to use a framework that continues to be sensitive to risk, while significantly simplifying obligations and adapting them to the reality of these institutions.

With regard to capital, for example, the calculation of market risk may be simplified for small institutions that have barely any exposure to this type of risk. There is also room to reduce the liquidity requirements for low-risk institutions with a stable depositor base.

Supervisory processes could also be better adapted to the size and risk profile of these institutions. The periodicity of certain reviews could be extended to five years in the case of low-risk institutions with simpler recovery plans.

The last area for improvement that I wish to mention is financial reporting requirements. Over the last five years such obligations have increased by 50%. At the end of 2024, banks were required to submit more than 740 statements, with over 116,000 data points per institution and date. Two-thirds of these data have to comply with common European criteria (FINREP and COREP). On top of this are ad hoc information requests, repeatedly made to meet specific needs not covered by official reports.

This set of obligations, that has built up over the years, is highly costly for institutions. And these costs will continue to increase with new requirements in areas such as operational resilience, environmental, social and governance criteria, and crypto-assets. It is therefore time to reassess the usefulness of current reporting and, on the basis of a sound cost-benefit analysis, identify information that could be dispensed with, on account of its duplication or minor relevance for supervision.

In our view, there is scope for simplification at scale. A significant portion of domestic requirements could be dispensed with, either because they overlap with international requirements, or because we already obtain the data through other channels. Vital here is an assessment not only of the amount but also of the usefulness and quality of the data received. Less information, but of higher quality, would mean more efficient supervision and a lower burden for institutions.

This work has already begun to bear fruit. Once it has been approved, the amendment to Circular 4/2017 will dispense with seven financial statements, representing 34% of the financial data required domestically. Moreover, we believe that it is possible to eliminate another 16% of such data. And we are not stopping there: we continue to analyse options for further cuts, whether by using information from other statements or limiting reporting obligations to those institutions for which the information is truly relevant, thereby making progress in terms of the proportionality principle that I mentioned earlier.

We have also eliminated various habitual ad hoc information requests. And, even more importantly, we have strengthened the internal governance procedure for future requests, so that any new demand is fully justified in terms of necessity and expediency.

All these proposals are examples of the Banco de Espaæa's commitment to the simplification agenda, to improve European competitiveness, without undermining financial sector resilience.

This debate requires leadership and coordination at the highest levels, but also the active involvement of all actors. The banking sector has a fundamental role to play: its practical experience and day-to-day expertise are indispensable for assessing the impact of the measures and helping with the cost-benefit analysis.

That's why I would like to invite the institutions here today to be heavily involved in these efforts, without reducing the sector's strength. Only through an open, constructive

dialogue between supervisor and banks will we be able to move towards a simpler, more efficient regulatory framework, adapted to the reality of our financial system.

We have a solid banking sector, capable of continuing to finance the economy, even in times of crisis. The challenge now is to go one step further: to build a financial system that, while remaining just as sound, is more efficient and competitive, and better prepared for the transformation of the European economy in the coming years.",Jose Luis Escrivá
https://www.bis.org/review/r251127n.htm,Sanjay Malhotra: Regulation by Reserve Bank of India - some reflections,"Text of the Second V K R V Rao Memorial Lecture by Mr Sanjay Malhotra, Governor of the Reserve Bank of India, Delhi School of Economics, New Delhi, 20 November 2025.",2025-11-20 00:00:00,"## Sanjay Malhotra: Regulation by Reserve Bank of India - some reflections

Text of the Second V K R V Rao Memorial Lecture by Mr Sanjay Malhotra, Governor of the Reserve Bank of India, Delhi School of Economics, New Delhi, 20 November 2025.

* * *

Prof. Ram Singh, Director, Delhi School of Economics, Prof. Pami Dua, distinguished faculty of the Delhi School of Economics, assembled dignitaries and dear students. Good afternoon.

I am pleased to be here at the Delhi School of Economics (DSE) to deliver the Second V.K.R.V. Rao Memorial lecture. The late Professor Rao was not only a distinguished scholar - being one of the first three Ph.Ds in Economics from Cambridge University and winning the prestigious Adam Smith Prize in 1935 - but also an eminent institution builder. He served as member of the Planning Commission and Union Education Minister. For his outstanding contribution to public policy and economic research, Professor Rao was awarded the Padma Vibhushan in 1974. It is an honour to deliver a lecture in the memory of such a distinguished personality.

DSE is an august institution that has made stellar contributions in the economic development of our country. The people who have studied, researched, or taught here have had profound influence in shaping economic policy in India over the years. We, at the Reserve Bank of India too have benefited immensely given that many students have joined the Bank. Many of them have risen to the upper echelons of the Bank's management over the years. I thank Prof. Ram Singh and DSE for giving me this opportunity to address you all at this prestigious institution.

You all have been in my thoughts for the last few days. You are all very bright and intelligent, having got admission to this prestigious institution, through a rigorous selection process. I have been thinking about you because you are the future leaders of our country. I have been pondering about what I should speak to you bright men and women. India looks up to you to shape and influence public policy and economic research in our country, as many of your predecessors have done.

Considering the erudite audience, I have chosen to speak on regulation making, because regulations are pervasive. They represent an invisible fabric that enables markets to function, protects consumers, and maintains the delicate balance between innovation and stability. I have structured my speech into five parts - (i) the role of regulation in public policy, (ii) how financial regulation is different and critical, (iii) RBI's objectives of regulation, (iv) RBI's key principles of regulation, and finally (v) some challenges in regulation making. I hope this will trigger some interest for research in this area among the students and faculty.

## I. Role of Regulation in Public Policy

You are all aware that while markets are powerful engines of growth and efficiency, they can fail and when they do, the consequences can be severe. Regulations attempt

to address market failures caused due to a variety of reasons: information asymmetry, externalities, natural monopolies, systemic risks, and consumer protection, to name a few. Regulation is a pragmatic response to the inherent limitations of unregulated markets in specific contexts.

## II. Financial Regulation: A Different Paradigm

Financial regulation operates in a fundamentally different framework compared to other sectoral regulations. This difference stems from three unique characteristics of financial markets.

First, financial institutions are interconnected in ways that non-financial entities rarely are. If a bank fails, it has a cascading effect - depositors lose savings, inter-bank markets freeze, credit supply contracts, and payment systems falter. This impacts the entire economy, which can feed into a systemic crisis. The 2008 global financial crisis in the Advanced Economies (AEs) demonstrated this with devastating clarity.

Second, financial institutions are inherently fragile due to maturity and liquidity transformation. Banks accept short-term deposits and make long-term loans. This transformation is economically valuable but creates vulnerability. A loss of confidence can trigger bank runs, converting liquidity problems into solvency crises within days. Unlike a manufacturing unit that can be shut down temporarily, a bank facing a run must be resolved immediately, or contagion spreads.

Third, financial markets are prone to procyclicality and herd behaviour. During booms, risk is under-priced, lending standards deteriorate, and asset bubbles form. During busts, credit vanishes precisely when it is most needed. This amplification of business cycles distinguishes financial markets from most other sectors. The procyclical behaviour and its amplification effects on economic volatility are well recognised.

These characteristics explain why financial regulation is more complex, and more consequential than regulation in other sectors. It is not merely about protecting individual consumers and promoting efficiency - though these are of paramount importance - but also about safeguarding systemic stability and, by extension, the entire economy.

## III. RBI's Objectives of Regulation

I will now spell out RBI's main objectives of regulations.

The foremost priority and key objective is to ensure financial stability in the system. Financial Stability is defined as a ""condition in which the financial system - comprising of financial intermediaries, markets and market infrastructure - is capable of withstanding shocks and the unravelling of financial imbalances, thereby mitigating the likelihood of disruptions in the financial intermediation process which are severe enough to significantly impair the allocation of savings to profitable investment opportunities"" . 1

For us in the Reserve Bank, financial stability remains the north star, because we realise that short term growth achieved at the cost of financial stability can have bigger consequences for long-term growth. Research shows that financial instability may not

only more than offset the gains of higher short-term growth, but also make recovery more distressful and longer.

Although financial stability remains the bedrock, there are other objectives, occasionally overlapping, yet distinct. These, inter alia, include:

- a. Prudential aspects, for example liquidity and capital requirements, to ensure safety and soundness of financial operations in the interest of all stakeholders, especially, depositors;
- b. Conduct related measures for consumer protection;
- c. Assistance in law enforcement, e.g., prevention of money laundering; and
- d. Broad socio-economic objectives, e.g., lending to priority sectors.

## IV. RBI's Key Principles of Financial Regulation

As I mentioned in one of my past speeches , there are five key principles of our 2 regulation making: preference for principle-based formulation; proportionality; consultation; evidence and data-based; and lastly, regular review. Let me briefly touch upon these principles to elaborate their importance.

## Preference for Principle-based Regulation vis-a-vis Rule-based Regulation

First is the idea of principle-based regulation. Principle-based regulation focuses on outcomes. It uses high-level general statements or principles. These principles are designed to be applicable across a wide range of circumstances. It often contains explanations of the intent behind the principle and qualitative rather than quantitative terms.

In contrast, rule-based regulation uses specific statements to define requirements that entities must meet. These necessarily focus on specific areas and tend to use quantitative terms. If one was to draw an analogy with parenting, the explicit to-do list made by parents in early formative age is akin to ""rule-based regulation"" and the broad guidance given as the child grows older is akin to ""principle-based regulation"".

The global discourse on regulatory simplification, argues for principle-based regulations over rule-based approaches, for simplicity over exhaustive specification., The logic is compelling: complex rules create compliance cultures rather than risk management cultures. They invite gaming and arbitrage. Moreover, they become outdated as markets evolve.

Principle-based regulation reduces the potential for 'creative compliance', avoids the 'tick-box approach', and obviates the need for frequent updations. However, principlebased regulation, while simple, is subject to interpretation risk. Principles without clear standards can lead to inconsistent application and regulatory capture. This may also significantly increase cost of compliance for regulated entities due to the requirement to form their own policies with detailed rationale.

We often face a question as to which approach is better. There is no straight-forward answer to this, even though we prefer principle-based regulation. And that's why you would observe that while we are moving towards a principle-based regulatory regime, most of our regulations are hybrid - a combination of rules and principles. The proposed expected credit loss (ECL) framework for provisioning norms, announced in October this year 3 , is a good example of this evolution. The framework combines principles for provisioning with rule-based prudential floors to avoid misuse and misinterpretation.

The challenge for us is to achieve ""optimal simplicity"" - regulation that is as simple as possible but no simpler, to paraphrase Einstein.

## Proportionality

Coming to the second principle, proportionality, it is an emerging feature of more rationalised regulatory frameworks across the world. Indian financial system comprises a diverse set of financial institutions and banks with varying scales of operation, levels of complexity and extent of risks. It is therefore natural that our regulations are proportionate in measure. The principle of proportionality is like a customised set of risksensitive regulations, balancing the costs and benefits based on the risk implication of the institutions concerned.

This fundamental principle reflects duly in our policy formulation across and within groups of entities. For example, the idea of proportionality has been embedded in the regulatory architecture for NBFCs in the form of scale-based regulations; tier-based structure for cooperative banks; and higher capital requirements for domestic systematically important banks (D-SIBs). Similarly, proportionality is also reflected in differential treatment of banks as compared to the NBFCs on several parameters including granularity of exposure, liquidity and capital requirements. Proportionality is kept in mind even for differential risks perceived by similar entities, for example, different capital requirements are prescribed for different types of loans and other exposures keeping in view their differential risks. All of these buttresses the point I mentioned earlier that proportionality is a ""customised set of risk-sensitive regulation"".

## Consultation

The third principle is consultation. We realise that triangulation is a must. We appreciate that we do not have the monopoly for knowledge. Consultation has been an integral part of our decision making. It explicitly embeds accountability and transparency, which are important to us as a public authority. It bridges information asymmetry. It enables us to look at things through the eyes of others and see many more dimensions. Consultation improves our regulation making. At the Reserve Bank, we have institutionalised this requirement in our framework 4 . Every major regulation is proposed in draft form for public consultation.

## Evidence-based Approach

The fourth element is to make regulations evidence-based, as far as possible. Evidencebased policymaking refers to the method of policy development that prefers facts and credible, relevant evidence, over opinion, intuition, anecdotes and common sense to take decisions.

While we may not have at our disposal the rigorous approach of randomised controlled trials, the principle is certainly inspired by it. We try to look for evidence on what works and what not. This may sometimes be difficult and challenging because of nonavailability of local data. In such cases, we use international standards, which are customised to our context and conditions. Let me give a few examples of evidencebased regulation making.

One, the revised guidelines on project finance, emerged from a careful study of default rates, recovery rates, and the cash flow characteristics of such lending by banks. Two, the increase in the run-off factors for digital deposits under the refined liquidity coverage ratio (LCR) requirements for banks demonstrates another example of evidence-based regulation. Three, we increased the risk weights on bank credit to NBFCs in view of certain emerging risks in this segment post-covid; these were subsequently restored to original weights, once the evidence suggested so.

## Regular Review

The fifth element is regular review. Regulations need to change when the context changes. However, there is a stickiness to regulation because of regulators' proclivity to adhere to status quo. A variety of well-recognized behavioural phenomena aid in explaining such a bias: common cognitive biases and risk aversion tend to advantage the status quo. In laboratory experiments, for instance, psychologists find that framing specific options as the status quo result in those options being selected far more frequently than when there is a neutral framing of the options. Banking regulators' behaviour is no different. Claudio Borio, former senior official of Bank for International Settlements, observed that, ""The fear of going against the manifest view of markets can have a powerful inhibiting effect."" The International Monetary Fund in discussing regulators' implementation of macroprudential policy tools, also notes ""biases in favour of inaction.""

Roberta Romano of Yale Law School contends that there is an Iron Law of Financial Regulation: following financial crises, Congress enacts legislation that increases financial regulation. She terms them as a regulatory ratchet. You are all aware that the ratchet effect describes a process or an economic phenomenon that, once set in motion, is difficult to reverse, similar to how a mechanical ratchet moves in one direction only. Similarly, Romano contends that new statutes are layered atop existing laws and new regulations are grafted onto existing ones, creating an increasingly complex and opaque regime.

This calls for a periodic review of regulations. The FSDC under the chairpersonship of the Finance Minister has decided that all financial regulators conduct a review of all regulations every 5-7 years. We too have started the process.

A number of measures 5   that we announced in October, this year are a result of the review of the regulations. Some of these regulations were framed to meet the twin balance-sheet problem post the Global Financial Crisis, in the wake of aggressive fiscal and monetary stimulus. The regulatory and supervisory frameworks have been

strengthened since then. The performance and health of the banking sector is much improved. As a result, these regulations needed to be reviewed and accordingly they were reviewed and finetuned.

## V. Challenges in Regulation Making and Enforcement

Having covered the main principles of regulation making, I will now describe the challenges that we face in this regard. Creating effective regulation is an exercise in navigating multiple tensions. Let me highlight five of them.

## Balancing Cost-benefit Trade-offs

The first challenge is to balance the cost-benefit trade-off. While regulations do offer benefits in terms of stability, consumer interest, etc, they come with a cost. Economic interest warrants increasing efficiency, and promoting innovation. We recognise that just like there are no free lunches, regulation too is not devoid of costs. There are tradeoffs between the benefits and efficiency.

We keep this trade-off in mind while formulating regulations. We attempt to strike the right balance, keeping in view the benefits and costs of each and every regulation. This has been embedded in our regulation making framework, which we formalised in May this year.

Before releasing draft or final guidelines, we thus try to estimate direct and indirect impact of our proposed regulations. Where exact calculations are difficult, we tend to rely on estimates. This helps us finetune the measures to ensure that cost of regulation is not weighing down the benefits disproportionately.

## The Boundary Problem: What Should Be Regulated?

A subset of the cost-benefit trade-off is whether to regulate or not. Financial innovation continuously creates entities and activities at the regulatory perimeter. Stablecoins, cryptos, buy-now-pay-later schemes, etc. challenge traditional regulatory categories. Should they be banned, tolerated, or brought within regulatory frameworks?

This is a deep question, which needs judgment about the balance between potential benefits and risks. The rapid pace of innovation means that this judgement needs to be made continuously so that regulatory approaches evolve and keep pace with the needs of the times. The RBI has not only kept pace with the development but has been proactive in this regard, adopting a balanced and prudent approach. It adopted a cautious approach to cryptocurrencies contrasts while taking an enabling stance towards regulated digital innovations like UPI or digital lending.

## The Innovation-Stability Trade-Off

A related dilemma is how much innovation to permit when its risks are not fully understood. Excessive caution stifles beneficial innovation and can drive activities underground. Excessive permissiveness can allow risks to accumulate and even threaten financial stability.

The RBI's regulatory sandbox approach represents an attempt to balance the trade-off creating controlled environments where innovations can be tested under regulatory oversight before being scaled. However, questions remain about the optimal design of such sandboxes, the criteria for graduation, and the balance between experimentation and protection.

## Procyclicality in Regulation

Fourth, sometimes regulations themselves can amplify business cycles. Emerging markets face particularly acute procyclicality challenges because capital flows amplify domestic cycles. Mark-to-market accounting forces institutions to recognize losses during downturns, potentially triggering fire sales. Capital requirements, if not designed carefully, can force deleveraging precisely when credit is most needed. Provisioning norms that respond to current conditions rather than expected losses create procyclical dynamics.

The Basel III framework attempts to address this through countercyclical capital buffers - requiring banks to build capital during booms that can be released during stress. The RBI has implemented these provisions, but there are questions about their calibration from time to time.

## Regulatory Forbearance vs. Strict Enforcement

The fifth challenge every regulator faces is with regard to implementation when strict enforcement of standards seems to threaten broader stability. The temptation towards forbearance - temporarily relaxing requirements - is understandable but dangerous. It can allow problems to fester, create moral hazard, and undermine regulatory credibility.

India has grappled with this dilemma. Repeated restructuring schemes for stressed assets and loan waivers, while providing short-term relief, delayed recognition of fundamental problems. The RBI's shift towards tighter enforcement, including the Insolvency and Bankruptcy Code's prompt resolution provisions, reflects this approach. Yet, the COVID-19 pandemic prompted temporary regulatory relief measures, as is the case with trade-related regulatory measures taken recently. These illustrate that context matters.

Our approach towards forbearance is clear: forbearance should be exceptional, timebound, and transparent. It should not become a substitute for addressing underlying problems.

## VI. Conclusion: Regulation as an Evolving Discipline

Let me now conclude. The intent of my detailed treatment of this topic today was to expose you to a relatively diverse set of issues, igniting your interest in the area of regulation making.

As you advance in your academic and professional journeys, I encourage you to view regulation not as a static set of rules but as an evolving discipline that responds to

changing markets, technologies, and risks. Effective regulation certainly requires technical expertise, but also judgment, humility about what regulators can and cannot achieve, and constant learning.

The Reserve Bank of India is trying to continuously adapt. We are vigilant and alert to emerging risks and evolving conditions. We are encouraging innovation while being mindful of our regulatory objective of safeguarding systemic stability. We are trying to simplify regulations where possible while maintaining necessary safeguards. We are strengthening coordination with other regulators while respecting jurisdictional boundaries. We are trying to enforce rules consistently while recognizing that circumstances sometimes warrant flexibility.

These tensions cannot be permanently resolved - they must be continuously managed. Managing this requires not just regulators but informed citizens, responsible financial institutions, engaged scholars, and yes, bright students like yourselves who will shape the future of Indian financial system. Achieving good regulatory outcomes is almost always a collaborative effort: by the government, amongst regulators, the regulated, and the broader community.

I wish all of you a great success in all your endeavours.

Thank you. Namaskar. Jai Hind.

- 1 Financial Stability Review, ECB (December 2006)
- 2 Inaugural Address by Shri Sanjay Malhotra, Governor, Reserve Bank of India at the FIBAC 2025 Conference, Mumbai, August 25, 2025
- 3 Draft ""Reserve Bank of India (Scheduled Commercial Banks-Asset Classification, Provisioning and Income Recognition) Directions (Oct 2025)
- 4 Framework for Formulation of Regulations (May 2025)
- 5 Statement on Developmental and Regulatory Policies, RBI (Oct 2025)

## References:

Stiglitz, J. E. (2009). ""Regulation and Failure,"" in New Perspectives on Regulation, ed. David Moss and John Cisternino, Cambridge: The Tobin Project.

Diamond, D. W., &amp; Dybvig, P. H. (1983). ""Bank runs, deposit insurance, and liquidity,"" Journal of Political Economy, 91(3), 401-419.

Haldane, A. G., &amp; Madouros, V. (2012). ""The dog and the frisbee,"" Speech at the Federal Reserve Bank of Kansas City's Economic Policy Symposium, Jackson Hole, Wyoming.

Regulatory complexity and the quest for robust regulation (June 2019), Reports of the Advisory Scientific Committee No. 8, European Systemic Risk Board.

2010, The Ultimate Quotable Einstein, Edited by Alice Calaprice. ""It can scarcely be denied that the supreme goal of all theory is to make the irreducible basic elements as simple and as few as possible without having to surrender the adequate representation of a single datum of experience.""

Status quo bias in decision making, Samuelson and Zeckhauser 1988

Claudio Borio: ""Implementing the macroprudential approach to financial regulation and supervision"" (2009)

Staff Guidance Note on Macroprudential Policy, IMF (2014); Macroprudential Policy: An Organizing Framework (2011)

Are There Empirical Foundations for the Iron Law of Financial Regulation? Roberta Romano Yale Law School, NBER and ECGI, Revised February 4, 2024

IMF Policy Paper (2022). ""Review of The Institutional View on The Liberalization and Management of Capital Flows""

OECD (2014), The Governance of Regulators, OECD Best Practice Principles for Regulatory Policy, OECD Publishing",Sanjay Malhotra
https://www.bis.org/review/r251127l.htm,Vasileios Madouros: The macrofinancial effects of climate change in Ireland - what have we learned?,"Speech by Mr Vasileios Madouros, Deputy Governor of the Central Bank of Ireland, at the Climate Finance week, Dublin, 25 November 2025.",2025-11-25 00:00:00,"

Filter News

The Macrofinancial effects of climate change in Ireland: What have we learned? -Speech by Deputy Governor Vasileios Madouros

25November 2025

Speech

Good morning everyone.

lam delighted to join you here today for this year's Climate Finance week.

""The scientific evidence that climate change is a serious and urgent issue is [...] compelling.""

""The benefits of strong, early action on climate change outweigh the costs.'

And ""the choices made in the next 10-20 years [...] will affect greenhouse gas emissions for the next half-century.""

These are not my words. And they are not recent words.

They are key conclusions from the Stern Review on the ""Economics of Climate Change""?

That was published almost two decades ago now.

Fast-forward to today, and we know that greenhouse gas emissions globally have not followed the path advocated for at the time.

As aresult, the planetary, societal and macrofinancial risks from climate change have intensified over the past two decades.

Central banks and regulators globally -including ourselves -have made a concerted effort in recent years to strengthen our understanding of the macrofinancial effects of climate change.

This is an essential building block to allow us to take the appropriate actions needed to deliver our mandate.

So, in my remarks today, | will focus on those macrofinancial effects.

## Progress towards decarbonisation has been slower than intended by the Paris Agreement

The starting point for that, of course, is the scientific evidence on humaninduced climate change.

Today's event marks a decade since the Paris Agreement in 2015, a landmark moment in the global fight against climate change.

It is important to recognise that we have seen tangible outcomes from countries' collective actions since then, illustrating what can be achieved when nations come together.

Global greenhouse gas emissions are now projected to be around 12 per cent below 2019 levels in 2035. This compares to a projected increase in emissions of between 20-48 per cent, before the adoption of the Paris Agreement.?

Put differently, we are no longer ona trajectory towards the very worst-case scenarios that were once feared.

| emphasize that because -in Dr. Jane Goodall's words -""without hope, we fall into apathy, and do nothing"".*

However, it is also clear that we have not done enough.

Global warming projections over this century, based on the full implementation of countries' Nationally Determined Contributions (NDCs), exceed 2°C (Chart 1).5

## Chart 1: Projected global temperature change under . . different scenarios

Source: NGFS Phase 5 Scenario Explorer



Rising temperatures, more frequent and severe weather events, and disruptions to communities, economies and financial systems remain pressing concerns.

In Ireland, we have also made progress in reducing carbon emissions, which are down around 12% since 2018 (Chart 2).6

## Chart 2: Ireland's greenhouse gas emissions and carbon budgets

Read text above to help explain chart

Source: EPA.

Over the same period, our population has grown by around 10% and the size of the domestic economy by around 30% in real terms.

So we have seen a very positive decoupling between economic activity and emissions.

However, the Climate Change Advisory Council's latest assessment is clear that Ireland is not on track to meet its EU and national emissions reduction targets by 2030.""

And that we will exceed the carbon budget allocation for 2021-2025.

Progress across sectors has been uneven, with transport and agriculture, which collectively account for approximately 55% of Irish emissions, having seen smaller emission reductions (Chart 3).

## Chart 3: Sectoral changes in emissions in Ireland, 2018-2024



Source: EPA

## The macroeconomic costs of climat change outweigh those of the transition to net zero

Let me now turn to our understanding of the macrofinancial effects of climate change and the transition to a climate-neutral economy.

The Network for Greening the Financial System (NGFS) -a coalition of central banks from around the world, including ourselves — has been instrumental in the journey of deepening our understanding of the macroeconomic effects of climate change.

The NGFS has developed a set of macroeconomic scenarios that assess the potential economic impacts of climate-related physical and transition risks.

Let me draw out three key insights from this work.

First, the global macroeconomic costs of climate change are material.

Under a scenario consistent with current nationally-determined contributions, the level of global GDP would be 13% lower by 2050 (Chart 4).8

## Chart 4: Global GDP impact of different decarbonisation scenarios



Source: NGFS Scenarios (Phase V).

The crystallisation of physical risks would be the main factor depressing economic activity in this scenario.

Economic losses deepen with time, as higher temperatures caused by a lack of mitigation efforts result in higher chronic physical risk.

Second, these estimates represent a stark increase from earlier assessments (Chart 5).

## Chart 5: The estimated impact of climate change on economic activity has increased



Source: NGFS Scenarios.

This is due to updated estimates of the economic damage of climate change, especially on the persistent effects of rising temperatures and precipitation on the economy.

To be clear, there is uncertainty and debate around those estimates, as climate physical risk remains a highly complex field, but major improvements have been made recently.

Third, the macroeconomic costs of taking action to reduce greenhouse emissions are much smaller than the costs associated with inaction.

The NGFS has also provided a scenario consistent with an orderly and gradual transition to net zero by 2050 (Chart 4).

This still entails economic losses, because climate change still occurs under that scenario. And transition-related losses are also somewhat higher than under the NDC scenario (Chart 6).

## Chart 6: The main impact on economic activity stems from physical risks



Source: NGFS Scenarios (Phase V).

But overall economic losses are smaller under an orderly and gradual transition. And the gap between overall economic losses in the two scenarios increases over time.

Put differently, the main conclusion around the relative costs of action versus inaction remains the same as in the Stern Review two decades ago, only starker.

Of course, there will be macroeconomic costs during the transition.

For Ireland, estimates suggest that additional investment of over €50bn is likely to be needed until 2050 to meet decarbonisation targets, most of it incurred over the next decade (Chart 7).?

## Chart 7: The transition to climate neutrality will require additional investment



Source: Central Bank of Ireland, based on TIM model.

Work we have done with the Climate Change Advisory Council suggests that -in an economy with little spare capacity -undertaking those investments will require redirecting some scarce resources away from the tradeable sector of the economy.!°

This would entail some macroeconomic costs throughout the course of the transition, although these are estimated to be relatively modest.

And, in the longer-run, especially given Ireland's heavy dependence on imported fossil fuels, a transition to a climate-neutral economy will also entail long-term economic savings.

Ongoing analysis on options for recycling revenue from carbon taxes also indicates that there are policy choices that can reduce the costs, and enhance the benefits, of that transition.

This work forms the foundation for the economic advice we provide to the government around the macroeconomic trade-offs associated with lreland's transition to climate neutrality.

## The exposure to rising physical risks requires adaptation investment

In addition to a macroeconomic lens, we have made progress in evaluating sectoral exposures to climate-related financial risks.

There are many different potential sources of physical risks for Ireland, but by far the main one stems from an increased likelihood of flooding, severe storms and rising sea levels.

So let me focus on that to illustrate the point.

As we have already seen, flooding can cause significant damage to property and infrastructure, leading to economic losses for households and businesses, as well as the financial system.

Climate science provides us with a quantification of the future risk of floods in Ireland.

The Office of Public Works' (OPW) extensive nationwide analysis considers different future flood risk scenarios, with different combinations of rising sea levels and increases in rainfall.

But assessing financial risks requires translating these climate-related insights into potential economic losses.

To do that, my colleagues at the Central Bank have been working with the OPW to create a national dataset mapping every property in Ireland to current and future flood risks.

That can be used to estimate future damage costs and link properties to exposures of the financial sector.

This analysis helps us quantify the rising financial risks stemming from climate change.

For example, we estimate that the share of the value of loans to businesses at risk of flooding would more than double under the OPW's high-end scenario (Chart 8).12

## Chart 8: The share of loans to companies at risk of flooding is estimated to more than double under the OPW's high end scenario



Source: Ahangarkolaee et al (2025) 'Measuring flood risk in business lending', Behind the Data.

There are compounding factors to these direct effects.

First, the closer we get to that world, the higher the risk of underinsurance.

Separate work by the Central Bank on the flood protection gap has shown that approximately 1 in 20 buildings already face difficulties accessing flood insurance.!2

And close to 90% of the economic cost of flooding relates to higher-risk buildings that have limited or no insurance access.

That's where we are now. But, in the future, as flood risk worsens, so does the potential risk of uninsured losses.

Indeed, we estimate that the value of losses for those with limited access to insurance would increase by almost 50% under the OPW's high-end scenario.

Second, our work on flood risk has also revealed how physical risks are already impacting credit conditions.

Forthcoming research suggests that loans to borrowers in flood-prone areas face higher interest rates and are more likely to be asked to post collateral for borrowing.

Third, there is evidence of a flood risk premium in the property market, suggesting that a higher risk of flooding would also affect asset valuations.!3

Putting this all together -higher risk of damage, higher risk of underinsurance, impacts on credit conditions and impacts on valuations -it is clear that rising flood incidence due to climate change can increase the risk of economic losses for households and business.

Amongst others, these insights also speak to the importance of adaptation efforts.

Because the unfortunate reality is that the climate is changing, and will continue to change going forward, even if we were to accelerate mitigation efforts.

Surveys show that many Irish companies are concerned about the physical manifestations of climate change.!4

But they themselves acknowledge they have not sufficiently invested in efforts to adapt to a changing climate.

Adaptation investment needs to increase, globally and in Ireland. Here too, the evidence suggests that early action is likely to be most effective in minimising long-run economic costs.1&gt;

The costs of inaction outweighing the costs of action is a recurring theme, including in the context of adaptation.

The Central Bank recently partnered with the Climate Change Advisory Council to understand the barriers to greater investment in adaptation in Ireland.

That work also considered a range of concrete actions that could increase adaptation investment, including strengthening awareness of local and sectorspecific risks and improving estimates of the costs of adaptation nationally.

## Management of climaterelated risks by the financial sector has improved, but there is more to do

Precisely because of the macrofinancial effects of climate change | have described above, climate change also entails risks for the financial system.

In that context, a key supervisory priority of the Central Bank in recent years has been to strengthen the financial sector's capabilities to manage climaterelated financial risks.

And, over the past few years, we have seen meaningful progress in this area.

For example, we have seen improvements in governance around climate change and sustainable finance, in the approach to monitoring of climaterelated risks, and in the deployment of scenario and stress testing analysis by regulated financial institutions.

That said, there is still more work to do to ensure that climate-related risks are integrated fully in risk management practices across the financial system.

For example, we still see inconsistencies across firms and sectors, data continues to be a challenge, and risk management practices are not applied consistently across all relevant portfolios and exposures.

So the effective management of climate-related financial risks across the financial system remains one of our key supervisory priorities, as outlined in our Supervisory and Risk Outlook report earlier this year. +6

We also recognise that climate change is a shared challenge and that collaboration can be a key enabler if we are to succeed collectively.

In that context, the Central Bank's Climate Risk and Sustainable Finance Forum has provided a platform for stakeholders to work together to drive meaningful progress.

In recent years, for example, the Forum has helped bring together stakeholders from a range of sectors to share perspectives on best practices for the management of climate-related financial risks as well as on capacity building within regulated firms.27

More recently, the Forum has established a working group focusing on data and disclosures, a common challenge facing regulated firms across the financial system.

## The Central Bank is 'staying the course'

Let me conclude with some reflections on the Central Bank's own journey around climate change.

| hope it is clear from the above why we have been increasingly focused on climate change in recent years.

Ultimately, it is because climate change poses risks to the economy and the financial system. And because the financial system has a key role to play in financing the transition to net zero.

So, understanding the macrofinancial effects of climate change and the transition to net zero is essential to allow us to take the appropriate actions needed to deliver our mandate.

Whether that is maintaining price and financial stability, providing economic policy advice to the Government, safeguarding the safety and soundness of individual firms, or protecting the interests of investors, including from the risk of greenwashing.

lam very conscious that shifting policy priorities globally are leading toa weakening of commitments to climate change mitigation in some parts of the world.

Sometimes | get asked whether that shifting geopolitical environment means we are reducing our own focus on climate change.

The simple answer to that is no. We are staying the course.

Our focus is -and has always been -on delivering our mandate, and we have been approaching climate change through that lens.

If anything, further delays in climate change mitigation would mean that the macrofinancial risks from climate change would become more pressing.

Thank you for listening.

[1] | am very grateful to James Carroll, Patrick Haran, Niall McInerney and Rory McElligott for their advice in preparing these remarks.

[2] Stern (2006) 'The Economics of Climate Change'

[3] See 'Message to Parties and Observers', United Nations Climate Change Secretariat, 10 November 2025 (PDF 294.34KB)

[4] Dr. Jane Goodall's 2025 Earth Day Message.

[5] 'Emission Gap Report 2025', United Nations Environment Programme, November 2025.

[6] 'Ireland's Provisional Greenhouse Gas Emission', Environmental Protection Agency, July 2025.

[7] 'Cross-sectoral Review: Annual Review 2025', Climate Change Advisory Council, November 2025.

[8] NGFS Scenarios Portal https://www.ngfs.net/ngfs-scenarios-portal.

[9] See Conefrey et al (2024), 'Fiscal Priorities in the Short and Medium Term', Central Bank of Ireland, Quarterly Bulletin, 2024 Q2.

[10] See, McInerney and Fitzerland (2024) 'Assessing the macroeconomic impact of carbon budgets' (PDF 360.71KB)

[11] See Ahangarkolaee et al (2025) 'Measuring flood risk in business lending', Behind the Data,

[12] See Central Bank of Ireland (2024) 'The flood protection gap' (PDF 1.13MB)

[13] For Irish evidence and the housing market, see Gillespie et at (2025) 'Estimating the flood risk premium: evidence from a once-off informational shock', Environmental and Resource Economics, Vol. 88. For UK evidence, see Skouralis et al (2024) 'Does flood risk affect property prices? Evidence from a property-level flood score', Journal of Housing Economics, Vol. 66.

[14] See Disch and McElligott (2025) 'Beliefs and barriers: Climate change and Irish firms' access to finance', Central Bank of Ireland Behind the Data,

[15] See the joint report by the Climate Change Advisory Council and the Central Bank of Ireland on 'Funding climate adaptation in Ireland', (PDF 1.08MB)

[16] See Central Bank of Ireland (2025), 'Regulatory and Supervisory Outlook (PDF 2.15MB)

[17] The Risk Management Working Group report and the Capacity Building Working Group report",Vasileios Madouros
https://www.bis.org/review/r251201o.htm,Chee Hong Tat: Remarks - Equities Market Review Group media conference,"Remarks by Mr Chee Hong Tat, Minister for National Development, and Deputy Chairman of the Monetary Authority of Singapore, at the Equities Market Review Group media conference, Singapore, 19 November 2025.",2025-11-19 00:00:00,"## Chee Hong Tat: Remarks - Equities Market Review Group media conference

Remarks by Mr Chee Hong Tat, Minister for National Development, and Deputy Chairman of the Monetary Authority of Singapore, at the Equities Market Review Group media conference, Singapore, 19 November 2025.

* * *

## A Well-Functioning Equities Market

Good evening. Thank you for attending today's media conference. I am joined here today by our Equities Market Review Group and Workstream members, who have contributed to the review process which started in August last year.

Over the past year, our shared goal has been to strengthen Singapore's equities market as a well-functioning, trusted, and vibrant platform for enterprises and investors.

To build a stronger equities market, we know it cannot be achieved by any single organisation, and there is no single silver bullet to tackle this set of challenges. It takes an entire ecosystem - the regulator, exchange, intermediaries, investors, and listed companies themselves.

Hence, the Review Group consulted widely and considered different views from various stakeholders, to strengthen our equity market holistically.

## Early signs of momentum

There have been some encouraging developments since the beginning of the review.

- a. Singapore's equities market has performed well. We have seen increased trading activity supported by both institutional and retail participation, and underpinned by increased activity in small- and mid-cap stocks.
- b. The average daily turnover in the third quarter of this year rose by 16% year-onyear to more than S$1.5 billion, which is the highest since the first quarter of 2021.
- c. This year, the number of IPOs picked up significantly, with total funds raised increasing from a low base in the previous year to more than S$2 billion.
- d. SGX has also shared a healthy pipeline of companies that are planning to list, and is actively engaging with more firms to consider Singapore as a venue to raise capital. The Review Group's measures will complement these efforts.

## Further Measures to Strengthen Singapore's Equities Market

Earlier in February this year, we introduced the first set of measures addressing demand, supply, regulatory, and connectivity, with a progress update in July. The Review Group has now completed our work, and the new measures we are announcing today will build on earlier progress.

Allow me, on behalf of the Review Group, to share on four key developments.

- a. First, against the current global backdrop, we need to build more bridges. We will continue to strengthen cross-border partnerships to advance market connectivity.
- i. As part of our work, the Review Group has encouraged and facilitated the proposal by SGX and Nasdaq to launch a new that dual listing bridge connects Singapore and the United States (U.S.). This is an innovative collaboration between two major financial ecosystems, and as the name suggests - it is a bridge which will enable issuers and investors alike to access liquidity simultaneously across both markets.
- ii. This is aimed at meeting the needs of growth companies with market capitalisation of S$2 billion and above, with an Asian nexus in terms of their operations and global ambitions in terms of their growth plans, to raise capital efficiently from investors in both markets. These companies, we hope, will be able to benefit from increased brand recognition among Asian investors while accessing the deep capital pool in the US. Various measures that have been introduced so far, including the Equity Market Development Programme (EQDP) and Anchor Fund, will also provide support for their fundraising efforts on this new Board.
- iii. To support dual listings under this arrangement, the regulatory obligations for prospective issuers that list on this platform will be streamlined, allowing issuers to use a single set of offering documents and undergo a simplified review process.
- iv. With the draw of both US and Singapore liquidity pools, the new Board will support efforts to attract more Asian issuers into the Singapore ecosystem, including from sectors that are less represented in our market today.
- v. This expanded sector coverage, such as the tech sector, will draw new investor segments to Singapore, which would support efforts to rejuvenate our equity, trading, research and related professional services ecosystem.
- vi. The new Board is envisaged to go live around mid-2026. SGX and Nasdaq will share more on this initiative separately in their joint press release.
- b. Second, as I shared at the SID Directors' Conference in September, companies must take proactive steps to unlock and demonstrate their value.
- i. To facilitate this - MAS, through the Financial Sector Development Fund (FSDF), will allocate to S$30 million to a ""Value Unlock"" Programme support listed companies in strengthening shareholder engagement and

developing strategies for longer-term value creation.

- ii. : Our ""Value Unlock"" Programme will build on three reinforcing pillars
1. First, MAS will provide grants to support companies' investment in building in the areas of corporate strategy, capital optimisation, and investor capabilities relations, enabling them to articulate compelling value propositions.
2. Second, MAS will work with SGX to help companies amplify their and market presence, through investor outreach events, media communications features and enhanced research coverage. This will give investors clearer insights into the company's business fundamentals and growth prospects.
3. Third, we will work with ecosystem partners to foster for communities collaboration, peer learning and to drive a positive momentum of value creation across the market.
- iii. Together, I hope these efforts will foster a market culture where companies view listing not as an end point, but as a continuing journey and partnership with investors focused on sustainable growth.
- c. Third, MAS will place a combined sum of S$2.85 billion under EQDP Phase II . with six asset managers
- i. In February this year, MAS launched the EQDP to develop our local fund management industry and to increase investor participation in Singapore equities. In July, we announced the first batch of managers with a total of S$1.1 billion allocation.
- ii. The appointment of this second batch will bring total allocations under both phases to S$3.95 billion, out of the S$5 billion set aside for the programme.
- iii. Taken together, this diverse mix of local, regional, and global managers were appointed to tap their complementary expertise and distribution networks. We believe this will help attract a broader investor base to Singapore's equities market. For these managers, they will also be crowding in private capital, in addition to MAS' capital. This approach supports the growth of our local fund management industry and enhances local market liquidity.
- iv. MAS continues to review submissions, with the next phase of selection expected by the second quarter of 2026.
- d. Finally, we will improve , through three key trading and custody efficiency measures.
- i. First, MAS and SGX will introduce incentives to improve for market making newly listed IPOs and a targeted set of next-tier small- and mid-cap stocks outside the STI - companies that can benefit from greater institutional interest. A stronger market-making ecosystem will translate into tighter trading spreads, and better execution quality. For investors, this translates into lower costs,

more efficient price discovery, and greater confidence in our market. For issuers, it will mean better liquidity. These are some of the benefits that will come together with the measure. We will share further details in the first quarter of 2026.

- ii. Next, SGX will modernise the Central Depository (CDP)'s post-trade to facilitate wider investor adoption of broker custody custody model accounts. This will enable the broader offering of value-added services for SGX securities to Singapore investors like portfolio management and fractional trading. The model also aligns with the practice in major markets and makes it easier for international asset managers to invest in Singapore's equities market. Retail investors will have the option of choosing these broker custody accounts or, if they prefer, keep their CDP direct accounts if they wish to do so. We are giving them the option to decide.

iii. Third, SGX will for securities priced above S$10 reduce the board lot size from 100 units to 10 units. This lowers the minimum investment amount for such shares, making the market more accessible to all investors.

## Public-private collaboration to co-create measures

Ladies and gentlemen, this review has been a collaboration between the government and our industry partners. I want to stress that we wouldn't have been able to do this alone. The Review Group and the two workstreams conducted numerous engagements with a wide range of market participants. This included fund managers, brokers, market practitioners, business leaders from listed companies, founders of pre-IPO companies who are looking to list over the medium term, and different industry groupings and associations. I want to thank them for their contributions - this has been an important source of feedback and ideas.

The global environment remains uncertain. But through this exercise, we have gained valuable experience, forged stronger partnerships, and made meaningful progress. This spirit of consultation and collaboration between the private and public sectors, is one we must carry forward. Doing so will better position us to continue finding new growth areas in a more turbulent world.

But we must also be prepared to take some calculated risks to enhance the competitiveness of our ecosystem. We want to increase our chances of implementing transformative changes. We may not always succeed when we try, there is a possibility that some of the ideas may not work. But if we don't try, our chance of success is zero. Like what our former Deputy Prime Minister Dr Goh Keng Swee said many decades ago - the only way to avoid making mistakes is not to do anything. And that, in the final analysis, will be the ultimate mistake.

It is in this context that I would like to extend my sincere appreciation to all Review Group and Workstream members. We spent many hours having thoughtful and at times intense discussions. I would also like to thank the many industry stakeholders as well as members of public with capital market experience, whom the Review Group engaged over the past months to solicit ideas and test our proposals.

## Driving continuous progress, implementation underway

Even as the Review Group completes its review today, our efforts do not end here. Building a strong and vibrant equities market is a journey that will continue over the medium term. Markets are cyclical, and there will certainly be ups and downs, but we must continue to build on this momentum of strengthening our ecosystem competitiveness.

We will remain focused on effective and timely implementation to establish our markets on a more competitive and attractive footing.

- a. We will build on what we have done so far. I am pleased to announce that MAS will establish an , co-chaired by MAS Equity Market Implementation Committee Managing Director Mr Chia Der Jiun and SGX CEO Mr Loh Boon Chye. The Committee will oversee implementation and identify additional measures to enhance effectiveness as market conditions evolve.

These efforts form important foundations for the journey ahead. In every challenge lies opportunity, and amidst times of turbulence and uncertainty, we will continue to build on Singapore's value proposition as a trusted financial centre.

Thank you everyone, and now - let me share some brief remarks in mandarin.",Chee Hong Tat
https://www.bis.org/review/r251201n.htm,Erik Thedéen: Inflation targeting in Sweden - lessons and challenges,"Speech by Mr Erik Thedéen, Governor of the Sveriges Riksbank, at an online workshop of the National Bank of Ukraine ""Monetary policy in emerging markets"", 27 November 2025.",2025-11-27 00:00:00,"SPEECH

DATE:

27 November 2025

SPEAKER:

Erik Thedéen

VENUE:

Monetary Policy in Emerging Markets - Online Workshop of the National Bank of Ukraine

DOCUMENT CLASSIFICATION:

R B   P U B L I C

## Inflation targeting in Sweden: lessons and challenges

I would like to begin by thanking you for the invitation to speak here today. The Riksbank and the National Bank of Ukraine (NBU) have had an important and close cooperation for many years, which has only deepened and spread to an increasing number of areas since Russia's full-scale invasion. Last year I had the opportunity to invite Governor Pyshnyy to Sweden to follow our monetary policy process and share some of NBU's experience s of financial and civil preparedness, and I am pleased to have the opportunity today to discuss the Riksbank's long experience of inflation targeting. We look forward to more opportunities like this to share experiences and further deepen our close relationship.

Wednesday 16 September 1992 was a dramatic day in the Riksbank's long history. In an attempt to defend the krona's fixed exchange rate against the ECU, the Riksbank decided to raise its policy rate to 500 per cent. But this extreme rate hike was not enough, and just a few weeks later the exchange rate target was abandoned and the krona started to float freely. The Riksbank suddenly found itself without a clear strategy for conducting monetary policy, but soon settled on a new target: to keep inflation around 2 per cent a year.

In the thirty years since then, the new monetary policy strategy has remained largely unchanged and has made an important contribution to macroeconomic stability in Sweden. At the same time, it has often encountered new challenges that have taught us important lessons and encouraged us to adapt. Today I will briefly describe various periods during which Swedish monetary policy has faced such challenges. I would also like to highlight a number of challenges that we are still grappling with, and to which there is not necessarily a clear-cut answer. Monetary policy can never run on auto-pilot; central banks must make a number of choices and dare to change their minds when conditions change.



## The background to inflation targeting

However, I will start by explaining why the inflation target was introduced in Sweden. 1 After the collapse of the Bretton Woods system, Swedish monetary policy still had an exchange rate target in relation to the currencies of our trading partners. But economic policies were not designed to be consistent with the exchange rate target. The stabilisation policy agenda was set by fiscal policy, which aimed to keep unemployment low. The tools used to achieve this goal contributed to recurrent budget deficits that fuelled demand, inflation and wages. Inflation was often higher than in the rest of the world and repeated devaluations became necessary in the 1970s and 1980s.

During the 1980s, it became increasingly clear that the trend was not sustainable. Inflation reached 15 per cent, the current account was mostly in deficit and the government debt-to-GDP ratio had tripled in ten years. Several Swedish economists began to highlight the need for a new stabilisation policy regime with a focus on price stability. 2 Some steps in this direction were actually taken, but the process was affected by the outbreak of a banking and currency crisis in the early 1990s. 3 The price level had once again been rising faster in Sweden than in the rest of the world, and the krona was considered overvalued and became subjected to speculative attacks. The Riksbank was forced to try to defend the exchange rate with an increasingly high interest rate, which exacerbated the banking crisis and contributed to further devaluation speculation. 4 Eventually, the Riksbank was forced to abandon the exchange rate target and formulate a new target.

As price stability had already begun to be increasingly emphasised, the Riksbank and the Riksdag soon decided that an inflation target should replace the exchange rate target. 5 After the crisis, several other reforms were also launched in the Swedish economy that were crucial to achieving the new target. The social partners agreed on a new wage formation structure that reduced the risk of price and wage spirals, and Parliament agreed on a fiscal framework to strengthen public finances. The budget process adopted a top-down perspective, government expenditure was regulated and a surplus target was introduced for net lending. 6 The main objective of the reforms was not to achieve the inflation target, but to

1  For a detailed review of the development of Swedish monetary policy 1973-2022, see Bylund et al (2024).

2  For example, Lars Jonung, Johan Myhrman and other members of the SNS Economic Council.

3  Direct political influence over the Riksbank was reduced in 1988. In 1991, the government declared that low inflation was the objective of stabilisation policy and Sweden applied for EU membership. Sweden's membership in the EU means that the Riksbank is a part of the European central banking system (ECBS), for which the main target is to maintain price stability.

4  For detailed descriptions of the Swedish banking crisis in the early 1990s, see Englund (1999, 2015).

5  Inspiration was drawn from New Zealand and Canada, which began inflation targeting in 1990 and 1991.

6  Over time, a municipal budget balance requirement and a debt anchor were also added. For a general comparison of fiscal policy rules in Sweden and some other countries, see Lindgren and Nilsson (2025).

create stability in wage formation and to counteract the tendencies towards increasing public debt. However, the changes economic policy more coherent than under the previous regime, putting inflation targeting in a better position.

## The implementation of inflation targeting

The inflation target was thus born out of a crisis in the Swedish economy where inflation had reached double figures, and monetary policy was therefore initially characterised by the challenge of creating credibility for the target. The Riksbank gradually developed three important tools in this work. First, clear communication became a way of signalling that the Riksbank intended to meet the target. The Executive Board therefore placed great emphasis on inflation in its rhetoric and little or no emphasis on stabilising the economy. Second, new analytical and forecasting methods became important for the Riksbank to fulfil and instil confidence in the target, not least because an inflation target placed higher demands on the ability to be forward-looking. Finally, the Riksbank also endeavoured to increase its transparency . This was needed, among other things, to explain how the Riksbank would reach the target, which in turn would help to maintain confidence even if the target was missed. 7 I will return later to the tools we use today to be transparent.

Until the end of the 2000s, inflation targeting, other reforms in the Swedish economy and a calmer global economy (""the Great Moderation"") then contributed to a generally greater macroeconomic stability in Sweden. Inflation and inflation expectations declined and stabilised, real growth picked up significantly and government debt fell from its peak of around 70 per cent of GDP to only 37 per cent in 2008. 8 The positive developments, particularly in inflation expectations, enabled the Riksbank to conduct a more flexible monetary policy that also took the business cycle into account. 9

The period of macroeconomic stability then came to an abrupt end with the global financial crisis. For the first time since the inflation target was introduced, the Riksbank was forced to make a rapid and substantial shift in monetary policy, but the real challenge was that the Bank's tools for achieving the target were insufficient. Until now, the Riksbank had only used the policy rate to stabilise inflation and output. However, due to financial instability, the normal channels of monetary policy (the so-called transmission mechanism) no longer functioned as

7  For a description of how the Riksbank's communication developed, see Apel and Vredin (2007).

8  On the other hand, unemployment remained at a consistently higher level after the 1990s crisis.

9  Lars E O Svensson made a major contribution to the analytical foundations of inflation targeting, see, for example, Svensson (1998). When the Riksbank's strategy became officially more flexible, this was first communicated by Heikensten (1999).

required for the monetary policy strategy to work. The Riksbank therefore chose to dramatically increase its lending to banks to stabilise the economy again.

After the global financial crisis, the next big challenge for inflation targeting -not only in Sweden -was that inflation consistently fell below target. This was not expected when inflation targets were introduced after a couple of decades of high inflation. The fact that inflation was lower than target could in some ways be perceived as something of a luxury problem in a historical perspective. On the other hand, the problem of below-target inflation persisted despite the steady reduction in policy rates, which eventually approached zero. Confidence in the inflation target thus became a cause for concern again. The Riksbank, as well as many other central banks, then started to take so-called ""unconventional measures"" by introducing negative interest rates and asset purchases. The Riksbank used both tools between 2015 and 2019 while inflation slowly returned to target, and continued with extensive asset purchases during the pandemic. 10

These unconventional measures have become a subject of discussion in Sweden and in many other countries. This is perhaps particularly true of the securities purchases. Criticism of them was also later intensified by the fact that the Riksbank, like many other central banks, made large losses on the purchases when interest rates rose sharply after the pandemic. My assessment is that asset purchases are primarily effective in countering financial crises. When financial markets are functioning normally, the effects of these purchases are more uncertain, and they also risk disrupting the functioning of the markets. This applies in particular to the purchase of private securities. Large-scale purchases of securities to safeguard the inflation target may be justified, but the threshold should be high and the Riksbank should then primarily buy government securities. Another important lesson is that the Riksbank should report the costs, financial risks and side effects of the purchases more clearly if they become relevant again.

The Riksbank's most recent challenging phase has been fighting high inflation after the pandemic. It is the first time that inflation targeting has seriously been tested on the upside, and so there are many lessons to be learnt from this period. I think a particularly important observation is that the rise in inflation could be reversed relatively quickly, and inflation targeting is an important part of the reason why. Inflation expectations in Sweden remained stable and the social partners have avoided entering into a price and wage spiral, which is good news for the regime and a big difference from when geopolitical factors created inflationary shocks in the 1970s.

10  For discussions of the Riksbank's experience of purchasing securities, see, for example, Andersson et al. (2022), Kolasa et al. (2025) and Riksbank (2025).

## Challenges for inflation targeting

However, the fact that the recent rise in inflation could be reversed relatively quickly does not mean that we should take low and stable inflation for granted. Inflation targeting is constantly exposed to new challenges that can result in either higher or lower inflation and that the central bank must address. There are also many challenges for monetary policy that central banks have to face on a regular basis. I would like to highlight three of these that I have experienced myself and often think about. 11

## 1. What consideration should monetary policy give to financial stability?

- Of course, monetary policy has a direct impact on financial stability that is impossible to ignore in policy-making. In addition, the Riksbank and many other central banks are required by law to contribute to financial stability, although in the Riksbank's case it is the inflation target that guides monetary policy. 12 However, since financial imbalances constitute a threat to price stability, situations can arise where it is reasonable that monetary policy should attempt to counteract these within the bounds of the inflation target. The central bank may then be forced to make a trade-off between attempting to achieve the inflation target in the nearer term or the longer term. For example, the Riksbank faced such a trade-off in the years between the financial crisis and the pandemic, when low inflation required an increasingly expansionary monetary policy in a situation where private debt was already at a high level. The Riksbank initially chose not to cut the policy rate further, but later changed its strategy when inflation became too low and confidence in the inflation target was considered to be under threat. But it is not clear how we should act if a similar situation were to arise again. 13 The first and most important line of defence against financial instability is effective macroprudential regulations, and other authorities have the main responsibility for these measures in Sweden. However, having followed the financial crises in Sweden closely, I personally do not dare to rule out that monetary policy may also need to counteract the risks in the future.
2. What consideration should monetary policy give to exchange rates? When you have an inflation target, the exchange rate should be allowed to float freely. In practice, however, it is so important to firms and households

11  For previous reviews of challenges linked to the Riksbank's experience, see, for example, Ingves (2022), Laséen et al. (2025) and Jonsson and Vredin (2025).

12  For theoretical discussions on whether monetary policy should take financial stability into account, see, for example, Rajan (2005), Woodford (2012) and Svensson (2012). Smets (2013) provides an overview of the literature at the time.

13  Some argue that central banks should have countered the risks to financial stability before the global financial crisis, see Borio and Lowe (2002) and Rajan (2005).

## Speech

that central banks often find it hard to ignore. 14 The Riksbank also sometimes chooses to comment on the development of the krona, usually in connection with its effects on inflation, but also occasionally when its value has clearly deviated from what we consider to be a reasonable level in the slightly longer term. Sometimes, however, inflation-targeting central banks go further, for example by intervening in foreign exchange markets to counteract substantial changes in the exchange rate in the short term. The Riksbank also did this in 2001. My position is that such measures may be justified in exceptional circumstances. But in normal times, central banks should try not to worry too much about short-term fluctuations, partly because they are notoriously difficult to understand and forecast. That said, however, we must endeavour to understand these developments as far as possible to be able to understand whether and how they should be taken into account in monetary policy.

## 3. Central bank independence cannot be taken for granted

Central bank independence is an important part of inflation targeting. Delegating responsibility for monetary policy to independent officials makes it easier to take unpopular but necessary decisions, and ultimately increases confidence in the inflation target. But of course, independence does not mean that the central bank is disconnected from politics and free to do what it wants. Monetary policy must be democratically anchored, so it is up to elected politicians to decide on the degree of independence of the central bank, what its mandate should be, who should lead it, how it should be financed and much, much more. It also means that independence cannot be taken for granted, but must be constantly earned. The central bank must consistently demonstrate that it has done what it could to fulfil its mandate. It must also not begin taking actions beyond its mandate (so-called ""mission creep' ), which is perhaps especially likely to happen when new economic and political issues turn up in the public debate. Of course, in many cases it is reasonable that the central bank should pay some attention to these issues. But it is important that the central bank does not reflexively engage in all parts of them, but carefully consider which aspects are connected to the mandate and in what way.

Personally, I think the Swedish experience suggests that transparency is a necessary condition for credibility, which in turn is necessary for independence. I am therefore proud that the Riksbank has been recognised as one of the most transparent central banks in the world on several occasions. 15 We publish Monetary Policy Reports with detailed forecast information,

14 Se Ilzetzki et al. (2019).

15  See, for example, Dincer et al (2022), where the Riksbank is named the most transparent central bank in terms of monetary policy.

## Speech

including forecasts for the policy rate, we publish minutes of monetary policy meetings, hold press briefings on our decisions, report annually on monetary policy to the Riksdag, and are also called to account during parliamentary hearings. We are regularly evaluated by independent experts and give over one hundred presentations a year to stakeholders around the country. 16 The work on transparency can of course be demanding, but it has served us well by maintaining strong support for our independence and for our inflation targeting policy as a whole. However, it is only natural -and important -that the forms of our communication and transparency change over time. In this endeavour, central banks have much to learn from one another's experiences.

16  Unlike most other central banks, the Riksbank is not an authority under the Government but under the Riksdag, the Swedish Parliament. See Wetterberg (2009) for a historical description.

## References

Andersson, Björn, Meredith Beechey Österholm and Peter Gustafsson (2022), 'The Riksbank's asset purchases 2015-2022', Riksbank Study, no. 2 2022.

Apel, Mikael and Anders Vredin (2007), 'Monetary Policy Communication: The Experience of the Swedish Riksbank', Czech Journal of Economics and Finance, 57, no. 11-12, 499 -519.

Borio, Claudio and Philip W. Lowe (2002), 'Financial and monetary stability: Exploring the nexus', Working paper no. 114, Bank for International Settlements.

Bylund, Emma, Jens Iversen and Anders Vredin (2024), 'Monetary policy in Sweden after the end of Bretton Woods', Comparative Economic Studies, vol. 66, pp. 535 -590.

Dincer, Nergiz, Barry Eichengreen and Petra Geraats (2022), 'Trends in monetary policy transparency: further updates', International Journal of Central Banking, vol. 18.

Englund, Peter (1999), 'The Swedish banking crisis: roots and consequences', Oxford Bulletin of Economic Policy, vol. 15, no. 3, 80 -97.

Englund, Peter (2015), 'The Swedish 1990s banking crisis. A revisit in the light of recent experience', presented at the Riksbank Macroprudential Conference, Stockholm 23 -24 June, 2015.

Heikensten, Lars, (1999), ""The Riksbank's inflation target clarifications and evaluation, Sveriges Riksbank Quarterly Review, no. 1, 1999, Sveriges Riksbank, pp. 5 -17.

Ilzetzki, Ethan, Carmen M. Reinhart and Kenneth S. Rogoff (2019), 'Exchange rate arrangements entering the twentyfirst century: Which anchor will hold?', Quarterly Journal of Economics, vol. 134, pp. 599 -646.

Ingves, Stefan (2022), 'Inflation targeting for nearly 30 years a robust framework for all times?' speech at the Swedish Economic Association, 31 May 2022.

Jonsson, Magnus and Anders Vredin (2025), '30 years of inflation targeting: from simple to complex', Sveriges Riksbank Economic Review, no. 1, 2025, Sveriges Riksbank, pp. 41 -71.

Kolasa, Marcin, Stefan Laséen and Jesper Lindé (2025), 'Unconventional monetary policy in small open economies', Working Paper no. 450, Sveriges Riksbank.

## Speech

Laséen, Stefan, Marianne Nessén and Ulf Söderström (2025), ""The pursuit of nominal stability: lessons from three decades of inflation targeting"", Sveriges Riksbank Economic Review, no. 1, 2025, Sveriges Riksbank, 5 -21.

Lindgren, Mika and Charlie Nilsson (2025), ""Fiscal rules and debt in the 2000s: a brief overview"", Sveriges Riksbank Economic Review, no. 2, 2025, Sveriges Riksbank, 55 -92.

Rajan, Raghuram G. (2005), 'Has financial development made the world riskier?', in The Greenspan Era: Lessons for the Future, Proceedings from the Jackson Hole Economic Policy Symposium, Federal Reserve Bank of Kansas City, pp. 313-369.

Riksbank (2025), 'The Riksbank's response to the Swedish National Audit Office's audit of the Riksbank's asset purchases'.

Smets, Frank (2013), 'Financial stability and monetary policy: How Closely Interlinked?', Economic Review No. 3 2013, Sveriges Riksbank pp. 121160. Also available in the International Journal of Central Banking, Vol. 35, pp. 263 -300.

Svensson, Lars E.O. (1998), 'Inflation targeting in an open economy: Strict or flexible inflation targeting?', Victoria Economic Commentaries 151, March 1998.

Svensson, Lars E.O. Woodford, Michael (2012), 'Inflation targeting and financial stability', Economic Review, 1, 2012, Sveriges Riksbank, pp. 3339.

Wetterberg, Gunnar (2009), Money and power m Sveriges Riksbank and Atlantis.

Woodford, Michael (2012), 'Inflation targeting and financial stability', Economic Review, no 1, 2012, Sveriges Riksbank, pp. 7 -32.",Erik Thedéen
https://www.bis.org/review/r251201k.htm,Tuomas Välimäki: Central bank liquidity and balance sheet - navigating the shallows after the high tide of liquidity,"Speech by Mr Tuomas Välimäki, Board Member of the Bank of Finland, at the Danske Bank Markets Conference ""Navigating tomorrow"", Copenhagen, 26 November 2025.",2025-11-26 00:00:00,"## Tuomas Välimäki: Central bank liquidity and balance sheet navigating the shallows after the high tide of liquidity

Speech by Mr Tuomas Välimäki, Board Member of the Bank of Finland, at the Danske Bank Markets Conference ""Navigating tomorrow"", Copenhagen, 26 November 2025.

* * *

Presentation accompanying the speech

It's a real pleasure to be back in Copenhagen, for the third time this year.

Many thanks to Danske Bank for organizing such a timely and topical event. I must say, I'm delighted to see that Scandinavian banks are becoming ever more ambitious with these seminars, while maintaining excellent taste in their choice of keynote speakers. I'm truly honored to be here with you.

The theme of this seminar, , couldn't be more fitting - especially Navigating Tomorrow here in Denmark, a country with a long tradition of maritime navigation, trade and occasionally loosing fleets in storms. Central bankers, too, are very fond of maritime analogies. Perhaps because in the past 15 years we have so often had to navigate uncharted waters.

As you saw from my title, today I'll talk about liquidity and the Central Bank balance sheet. It's a story of expansion, abundance, and a gradual return to a new normality. You Danes know this pattern well. It's basically the lifecycle of Smłrrebrłd: first abundance, then immediate regret, and then well, Ozempic.

Back to liquidity. If you listen carefully, today's talk will help you navigate the money markets not only tomorrow, but for the next few years.

The high tide of central bank liquidity is receding. But don't worry, we are not sailing straight into the shallows at full speed.

Let me start with the Eurosystem's balance sheet.

During the financial crisis and again during the pandemic, central bank balance sheets became, if not a topic at the family dinner table, at least something the financially literate public started paying attention to. These were years when central banks globally, including the ECB, launched measures at unprecedented scale.

These crisis measures have lapsed, but they are still visible in our oversized balance sheet. In many ways, the Eurosystem remains suspended between two liquidity worlds: the crisis world and the new normal.

Let me stress: I'm not here to speak about monetary policy . I'll leave that to my stance colleague, Governor Boris Vuji. I'm sure he'll offer a well-thought and up-to-date policy outlook later today.

Instead, I want to talk about the ""plumbing"": the art, science and practice of actually steering the market rates to the policy target.

I will highlight what's happening right now, and more interestingly, where I think we should go next.

And here comes the usual disclaimer: these are my views, not necessarily those of the Eurosystem - although, hopefully, they will be, so ignore me at your own risk. For additional reading, I recommend Isabel Schnabel's excellent speech  on this topic - and of course double-checking what I say today on the Bank of Finland's website.

I will also touch lightly on payments and digital currencies, since - as you heard in the previous presentation - these topics are increasingly intertwined.

With that, let's lift anchor and move to the first topic.

## Monetary Policy Implementation since launch of the euro

At the euro's launch in 1999, our framework was elegant in its simplicity. The banking sector operated at a liquidity deficit, and we provided exactly the liquidity needed through our weekly Main Refinancing Operations (MRO). No more, no less. Interbank markets redistributed liquidity efficiently, and the short-term market rates followed the MRO-rate closely.

And they did. Hardly anyone outside a central bank noticed. This is the perfect monetary policy implementation outcome: . success is when no one notices you exist

But by the end of the 2000s, the framework had to be adjusted again and again as we faced crisis after crisis. Unconventional measures became not only part of the toolkit, at times they were part of the euro's survival strategy.

The idea of providing specific amounts of liquidity was no longer feasible when interbank markets stopped functioning as before. Under these circumstances, we introduced fixed-rate full allotment (FRFA): banks could obtain essentially unlimited liquidity at a fixed rate, provided they had eligible collateral. This served us well.

And although unconventional measures may now feel like water under the bridge, it was only in March 2024 that we formalized the key lessons in our operational framework review . 1

## We confirmed:

- the deposit facility rate, the lower bound of the interest rate corridor, as our main instrument to steer short-term money market rates;
- FRFA as the permanent procedure to be applied in our short-term credit operations also in the future;
- A mix of other liquidity-providing instruments, including structural bond portfolios and longer-term credit operations;

And yes, we let the crisis-era portfolios continue to run off.

Let's look at what this means.

## Balance Sheet remains above pre-crisis levels

The Eurosystem's balance sheet expanded from around 1 trillion euros in 2007 to almost €9 trillion in 2022. It has since declined to around €6 trillion.

With inflation at 2%, inflation outlook around 2%, and the nominal policy rate at 2%, one may say our monetary policy is about as neutral as it can get - assuming the natural real rate is close to 0%.

The balance sheet, however, is not neutral. Even after unconventional credit operations matured and asset purchases continue to run off, our balance sheet remains far above pre-crisis levels and above the new normal.

What is the ""normal"" size of a central bank balance sheet? Unlike interest rates, we do not have a century-long chart to consult. Here, I find the concept of natural balance as useful. sheet size

For a global reserve currency issuer like the ECB, the natural size is liability driven. It originates from the demand for banknotes and reserve requirements. The more people hold cash - or why not digital euros in the future - the larger the liquidity deficit and the larger the natural balance sheet.

This deficit is filled with monetary policy assets. When the marginal unit of liquidity comes from short-term credit operations, their rate sets the focal point for monetary policy and the starting point of the yield curve.

Central banks may also choose to exceed the natural level to fulfill their mandates especially during crisis. After hitting the effective lower bound, we had to move further along the yield curve and increase monetary policy accommodation with large scale asset purchases. The optimal balance sheet grew beyond the natural level. The asset side began to dominate, and the deposit rate became the focal point for monetary policy. We ended up with a floor system.

In normal times before the 15-year long string of crises, optimal and natural sizes aligned. Hence, the natural balance sheet gives a direction for balance sheet normalization.

## Floor Required Excess Liquidity (FREL) maintains rates close to the Deposit Facility Rate (DFR)

However, in today's post-crisis world, a new concept matters: FREL - floor-required . This is the amount of liquidity i.e. central bank reserves needed to excess liquidity keep short-term money market rates close to the policy rate under a floor system.

Estimating FREL today is a bit like estimating how many pastries will be left at the end of a Danish breakfast buffet: thanks to the regulatory changes, changes in payments

and banks having learned a lesson from crises, history is no longer a reliable guide. Over Eurosystem's almost 30-year history, estimates have over time ranged from €8 billion to €2 200 billion. So, we need caution.

## Structural demand for liquidity i.e. central bank reserves has increased

Here surveys become handy. According to banks, they maintain liquidity buffers for settlement purposes, precautionary, regulatory and signaling reasons - all difficult to quantify individually, let alone combined and across all banks.

Given uncertainty, we monitor multiple indicators: money market activity, participation in our operations, portfolio run-off and investor absorption capacity to meet raising debt supply.

Most estimates suggest the FREL won't be reached for 1-3 years. While time stamps catch the headlines, note that FREL is an uncertain and a moving target. For example, declining demand for banknotes reduces the structural liquidity need, and hence increases the level of excess liquidity we have in the system. Similarly, if the euro area National Central Banks were to increase their financial asset holdings closer to level they had before the global financial crisis, the portfolio reductions needed in our legacy monetary policy portfolios will grow substantially. So, we shouldn't obsess over one number or a date.

The key point: short-term euro rates will follow the ECB's deposit rate closely for some time.

Compare this briefly with the Fed: it decided, as of December, to re-invest all proceeds from maturing bonds. In plain terms, they've halted their balance sheet decline as liquidity conditions have tightened. The Eurosystem is close to that point, and our not framework behaves differently even once FREL is reached.

Let me clarify.

Even if we are still in a supply-driven environment, our framework contains a strong element. The narrow 15-basis-points spread between the MRO and the demand-driven deposit facility rate incentivizes participation in weekly operations. Once FREL is reached, and rates drift up, banks turn to MROs, which adds liquidity and stabilizes rates.

If the FREL-level was clearly bypassed and banking sector returned to a liquidity deficit, i.e. closer to the natural balance sheet, the MRO-rate again would become the de facto policy rate. A situation we know well.

But it's trickier when liquidity sits between FREL and deficit: enough excess liquidity to prevent a full switch to the demand-driven world, but not enough to anchor overnight rate to the floor. Volatility may emerge.

In the operational framework review last year, the ECB explained that it is ready to accept some volatility in this transition. But if it became excessive, there would be

several ways to address it. First, overnight volatility could be reduced by cutting the spread between the policy rates further. Secondly, if needed, structural operations can be used to push aggregate liquidity to one of the steady equilibriums - for example with minimum reserve requirement or by adding liquidity with structural operations.

The latter is the approach chosen by the Fed. They have a similar instrument to our MROs, the standing repo facility (SRF). Recent upward pressure on US repo rates has increased SRF usage - but the Fed sees persistent usage as a signal to to buy assets maintain ample reserves.

In short: we allow the framework to shift toward demand-driven operations like the MRO. The Fed, by contrast, expands supply.

Looking ahead: as our portfolios keep shrinking, weekly operations cannot expand indefinitely. At some point, we need . structural liquidity providing operations

The March 2024 operational framework review did not specify the division between instruments. That is why the review expected to start next year may be important in facilitating our readiness. And it's not just us central bankers. Banks must also be ready to use the tools as intended.

This takes us to the next part, liquidity provision with different operations.

## Future Balance Sheet will have new elements

Every time a central bank buys an asset, extends a loan, takes a deposit, or allows a debt security to mature from its balance sheet, it affects central bank liquidity, i.e. reserves in the banking system. As always, size matters, but so does how you do it.

Theory and evidence show that short-term operations are best for balancing liquidity in banking system once the system again operates in deficit. And when the demand for liquidity is uncertain, fixed-rate full allotment (FRFA) has proven to be the optimal procedure to control market rates.

Even if this is our operating mode already, we can improve our framework.  Currently, collateral eligibility is the same across all operations. I believe there is a strong case for introducing a tiered collateral system in the future, when the policy is once again set by liquidity provision instead of taking deposits.

One can make the case that in the liquidity providing key policy operations only highquality liquid assets (HQLA) should be accepted. This would limit the central bank footprint in the markets by ensuring that, for banks, these operations are purely liquidity management rather than a way to make liquidity transformation or regulatory arbitrage.

If and when the demand in these policy setting operations becomes substantial, we will introduce structural long-term operations (SLTROs). Eventually these operations could inject bulk of the standard central bank liquidity provision.

In contrast to the short-term credit operations, where central bank acts as a rate setter, competitive auctions would make more sense for the structural credit operations.

Setting only the volume, and not the rate, would reduce distortions, price liquidity transformation in a more market-oriented way, and reveal more information on reserve demand. With competitive pricing, the maturity of the structural long-term credit operations could extend even beyond a year. And accepting a broad set of non-HQLA collateral in these operations, like credit claims, would also make sense.

Indexing SLTRO rates to the fixed-rate of policy operations makes sense: the spread determined in a market-based manner at auctions would be added to the average policy rate over the SLTRO maturity. This avoids any unintended signaling about the future stance. In addition, this would also lift interest rate risk away from us.

A demand-driven framework relies on banks participating without stigma. Stigma arises when participation signals weakness - especially when central bank lending is more expensive than market funding.

There are several ways to prevent stigmatization of the central bank operations. First, we never publish the names of the institutions that come to our window. Second, if the collateral set eligible to central bank operations was closer to general collateral repo market, the smaller should the issue with pricing be. This element would be enhanced if the collateral sets were differentiated between the rate setting operations on one hand, and the structural operations and marginal lending facility on the other hand. The higher price in the latter operations would reflect maturity and liquidity transformation rather than the weakness of participating institutions.

We naturally welcome all participation in our credit operations as they are integral part of our framework, and we consider banks' participation as business as usual. We also strongly encourage banks to regularly test the credit operations regardless of their actual liquidity needs.

Another source of liquidity supply is structural asset purchases. Once structural liquidity needs grow sufficiently, it becomes logical to establish a structural securities portfolio alongside SLTROs.

Regarding the modalities of such a structural portfolio, the weighted duration of holdings should most likely be considerably shorter than the duration of the market. This way we reduce market footprint, our interest rate risk and - preserve more fire power for times of crisis.

Now, let me finish with a closely related topic: expected changes in payments landscape.

## Central Bank and Digital Payments of the future

Shorter settlement cycles and increased need for continuous real time settlement have lately been major trends with payments. This has an impact on banks' liquidity management and the demand for liquidity. Thus, the Eurosystem is looking into whether our main payment system, T2, could operate longer hours, maybe eventually even on 24/7/365 basis. 2

Second, TIPS already offers broader operating hours. It allows instant payments at any time, but this means banks need to keep a separate prefunded pot of liquidity when T2 is closed. In an ideal world, banks would earn the deposit rate on all central bank balances, without daily reshuffling between TIPS and T2 and the deposit facility.

Third, the digital euro. Think of it as a digital banknote - a public good for everyday payments with central bank money. Something you might use to buy smłrrebrłd, glłgg, or anything else highly likely to stain your gloves in December.

At present, no such public digital instrument exists for citizens: only banks and a few other institutions can have accounts in a Eurosystem NCB. Actually, we don't have any pan-euro area payment method that would function for all use cases that retail customers have. And those closest to being ones are not governed by European authorities - a situation that we cannot stand forever.

For banks' liquidity management the digital euro would create similar challenges as I mentioned with TIPS. The impact of this depends on the digital euro's popularity and payment volatility.

At the same time, and I want to be clear on this, banks will remain as the core element of the euro area financial system. Digital euro is not questioning or challenging that. In fact, all necessary design choices for the digital euro will be made with financial stability firmly in mind.

Fourth, as distributed ledger technology (DLT) may transform securities markets by increasing efficiency, reducing settlement risk and enabling 24/7 trading - the Eurosystem is also exploring wholesale DLT-settlement to ensure central bank money always remains the safest and most scalable mean of settlement in any possible future architecture. 3

## Concluding remarks

Let me conclude with a summary of my key points.

The ECB's balance sheet needs to decline further before we expect the automatic stabilizers activating themselves.

But with the safeguards we have in place, narrow spread between MRO and DFR rates, and FRFA in place, we don't need to hurry with new  structural operations.  In the meantime, we still need to give some thought about how structural credit operations best serve policy transmission and financial stability, and how bond purchases best meet their policy goals.

In other words, and other things being equal, the existing legacy monetary policy portfolios need to reduce considerably more before one should expect new kinds of policy holdings.

Meanwhile, the payments landscape is evolving rapidly - instant payments, digital euro, and DLT all have implications for liquidity and monetary policy implementation.

Thank you for your attention, and I wish you an enjoyable and inspiring afternoon!

- 1 The decisions on the monetary policy implementation framework taken in March 2024
- 2 The ECB plans to publish a summary and analysis of the responses received to the consultation  in the first quarter of 2026.
- 3 For a more thorough explanation of D€, Pontes and Appia see  speech by Thomas Vlassopoulus on 7 November.",Tuomas Välimäki
https://www.bis.org/review/r251201j.htm,Poonam Gupta: Timely and topical statistics for agile policy making,"Speech by Dr Poonam Gupta, Deputy Governor of the Reserve Bank of India, at the Pre-release Consultative Workshop on ""Base Revision of Consumer Price Index (CPI), Gross Domestic Product (GDP) and Index of Industrial Production (IIP)"", Mumbai, 26 November 2025.",2025-11-26 00:00:00,"## Timely and Topical Statistics for Agile Policy Making 1

## Dr. Poonam Gupta, Deputy Governor, RBI

Good morning, Dr. Mahendra Dev, Chairman, EAC-PM, Dr. Saurabh Garg, Secretary, Ministry of Statistics and Programme Implementation (MoSPI), officers from MoSPI, fellow economists, and fellow policymakers. It is my privilege to be a part of this prerelease consultative workshop.

I  would like to recognise the leadership of Dr. Saurabh Garg in bringing credibility, ownership, and, may I say, excitement, to the process of base revision of the key macroeconomic data series of India. I would also like to acknowledge the invaluable contributions of the experts, academics, and officials, many of whom are present here today, in this exercise. The data and statistics are public goods. In helping create the revised series, you all are performing an important public service.

Our  statistical  system  has  a  long  tradition  of  professionalism,  transparency,  and methodological rigour. Gross Domestic Product (GDP), Consumer Price Index (CPI), and Index of Industrial Production (IIP) are among the most widely used indicators for decision-making by governments, businesses, financial institutions, and households. Therefore, the base revision of these series is not merely a technical exercise, it is of foundational importance for the wider community. With the economy becoming more diversified and digital, with rising prosperity, demographic shifts, evolving consumer preferences, and deeper financial inclusion, our consumption and production baskets are changing rapidly. But that is not all.

Alongside, the ways in which we produce, market, distribute, and finance consumption and investment are evolving too. Global and domestic supply chains are realigning. Savings  and  investment  habits  of  households  are  changing,  as  are  the  modes  of financial intermediation. All of these have a bearing on what we construct and how we construct our key macro data series.

1   Speech delivered at the Pre-release Consultative Workshop on Base Revision of Consumer Price Index  (CPI),  Gross  Domestic  Product  (GDP)  and  Index  of  Industrial  Production  (IIP),  Mumbai,  on November 26, 2025. Assistance received from Anand Shankar, Somnath Sharma, Dhirendra Gajbhiye, GV Nadhanael, John V Guria, Pallavi Chavan and Tushar B Das, and comments received from AR Joshi, Indranil Bhattacharya and Sangita Misra, are gratefully acknowledged.

In my remarks, I will briefly outline some of the initiatives we are taking at the Reserve Bank of India (RBI) in order to enhance our own data and statistical offerings, in view of these underlying shifts.

RBI's data offerings can be grouped into three categories.

First,  as  you  know,  the  RBI  curates,  compiles  and  disseminates  a  vast  amount  of economic and financial data, at frequencies ranging from daily to annual. It is not just an important source, but at times the only source for comprehensive data on banking, the balance of payments, non-banking financial companies, state finances, municipal finances, and the finances of the Panchayati Raj institutions.

RBI disseminates these data promptly through press releases, its flagship publications, as well as through timely updates on its data portal, the Database on Indian Economy (DBIE).

Second, in addition to such 'hard data', the RBI conducts eight forward-looking surveys (four at quarterly and four at bi-monthly frequency) of households, corporates, banks, and professional forecasters, covering areas such as inflation expectations, consumer confidence, and sectoral outlooks. 2  These surveys provide early signals of shifts in economic activity and sentiments. They serve as inputs in the policy deliberations as well  as  meet  the  needs  of  the  wider  community,  even  before  the  'hard'  statistics become available.

Finally, as a part of its mandate to conduct monetary policy, which under the flexible inflation targeting regime (FIT), is forward-looking, RBI prepares and releases inflation and growth forecasts in its bi-monthly monetary policy announcements. 3

Let me briefly describe some of our recent initiatives in each one of these offerings.

2  These include i. Bank Lending Survey; ii. Industrial Outlook Survey of the Manufacturing Sector; iii. Inflation Expectations Survey of Households; iv. OBICUS on Manufacturing Sector; v. Rural Consumer Confidence  Survey;  vi.  Services  and  Infrastructure  Outlook  Survey;  vii.  Survey  of  Professional Forecasters on Macroeconomic Indicators; and viii. Urban Consumer Confidence Survey.

3   The Reserve Bank also conducts a bi-monthly Survey of Professional Forecasters to capture the assessments and expectations of economists and industry experts on major economic parameters such as GDP growth, inflation, and external-sector developments including exports and imports.

## Recent Initiatives Pertaining to the 'Hard' Data published by the RBI

- (i) The RBI compiles a large body of administrative and regulatory-reporting data that  it  receives  directly  from  regulated  and  other  entities .  These  include information ranging from Basic Statistical Returns, supervisory returns, liquidity and capital adequacy metrics, non-performing assets (NPAs), to high-frequency payments data such as UPI, NEFT, and RTGS transactions. In recent years, as the demand for timely,  granular,  and  user-friendly  data  has  increased,  the  RBI  has  intensified  its efforts to modernise its data dissemination systems, expand coverage, and enhance the user experience through the adoption of advanced technologies.

The Database on Indian Economy, was launched in 2004 as the RBI's unified data dissemination platform. Over time, the DBIE has undergone continuous enhancements in coverage, functionality, and accessibility. It now hosts more than 2,000 statistical tables, which contain over 20,000 individual data series spanning the real sector, financial markets, public finance, the external sector, banking statistics, surveys,  and  corporate  performance.  Since  2009,  it  has  provided  near-real-time updates  of  the Handbook  of  Statistics  on  the  Indian  Economy through  the  DBIE, ensuring that users receive the most current information. 4

The efforts to make it savvier, user friendly and extensive are continuing on an ongoing basis. Planned enhancements include a redesign of the underlying data architecture, development  of  Application  Programming  Interfaces  (APIs)  for  automatic  retrieval, improved search and visualisation tools, and harmonised user experience across the portal, mobile app and future digital channels.

- (ii) Data on Flow of Financial Resources and Outstanding Credit to Commercial Sector  in  India  The  Indian  financial  system  has  traditionally  been  largely  bankdominated. Therefore, quite reasonably, bank credit growth has thus far been viewed as a key parameter to assess the flow of financial resources to the commercial sector and its implications for the growth outlook of the economy.

4 The  interface  has  been  progressively  refined.  In  addition,  RBIDATA,  a  mobile  application,  was launched in February 2025.

However, given the increasing role of non-bank sources of finance, an assessment of the  broader  spectrum  of  flow  of  financial  resources  to  the  commercial  sector  from banks and non-bank sources (including domestic and foreign) has become essential.

Against this backdrop, we have started to compile data on the total flow of financial resources  to  the  commercial  sector.  The  non-bank  sources  include  issuances  of equity, commercial paper, and corporate bonds by non-financial entities directly in the money  and  capital  markets  as  well  as  credit  to  these  entities  from  non-banking financial institutions. External commercial borrowings and foreign direct investments are additional sources of resources to the commercial sector. In fact, during 2024-25, just a little less than half (48.7 per cent) of total resources to the commercial sector were mobilised from non-bank sources.

Given the primacy of this information in assessing overall resource flow to economic activity, starting this month, we have started disseminating two tables, namely , 'Flow of  Financial  Resources  to  Commercial  Sector  in  India',  and  'Outstanding  Credit  to Commercial  Sector  in  India'  in  the  RBI  Bulletin. 5 These  data  will  be  updated  and released in the RBI Bulletin on a monthly frequency from now on.

(iii) More timely and frequent Balance of Payments Data Further, to facilitate the timely and more frequent availability of India's balance of payments (BoP) statistics, the time lag in the release of the quarterly BoP statistics has been brought down from 90  days  to  around  60  days  beginning  from  Q1:2025-26. 6   This  was  achieved  by optimising the data reporting timelines and streamlining the internal processes.

Going ahead, we will endeavour to prepare and release the monthly BoP statistics ( albeit at a slightly more aggregate-level and at a lag of approximately 40 days). To achieve  this,  the  data  processing  timelines  of  various  reporting  entities  are  being expedited and streamlined, and further internal cohesion is being established.

5  An article titled 'Flow of Financial Resources to Commercial Sector in India during 2024-25', including outstanding credit to the commercial sector in India for three financial years, viz. , 2022-23, 2023-24 and 2024-25, was published in the September 2025 issue of the RBI Bulletin. Annual data on 'Flow of Financial Resources to Commercial Sector in India' for the period 2019-20 to 2024-25 (as per revised format) was published in the Handbook of Statistics on the Indian Economy 2024-25.

6   This  has  been  done  without  compromising  the  data  coverage.  The  data  are  released  at  a disaggregated level as per the IMF's guidelines. Additionally, the IMF has revised the BoP compilation manual with  the  release  of  its  7 th edition  of  the  Integrated  Balance  of  Payments  and  International Investment Position Manual (BPM7) [from its earlier BPM6] in March 2025. With these updates/developments, countries are encouraged to publish their BoP and national account statistics in line with the BPM7 framework.

## Recent Initiatives in the RBI's Surveys

Furthermore, the RBI is upgrading its enterprise and household surveys. Enterprise surveys, such as Order Books, Inventories and Capacity Utilisation Survey (OBICUS), and the Industrial and Services Outlook surveys are being comprehensively reviewed, as their methodologies have remained largely unchanged for nearly a decade. We are planning  for  periodic  updates  to  expand  coverage,  incorporate  emerging  sectors, refine methodologies, and enhance data quality.

Household surveys on inflation  expectations  and  consumer  confidence  have  been expanded  progressively  to  more  cities  and  rural  areas  over  the  last  two  years. However,  their  broad  methodology  has  remained  unchanged  since  2018.  These surveys are undergoing a fresh evaluation to address the gap between perceived and realised inflation, improve  questionnaire  design,  and  explore  the inclusion of household panels. 7

## Recent Initiatives in our Inflation and Growth Forecasts

Under the FIT framework, our mandate is to maintain price stability while keeping in mind the objective of growth. Because monetary policy operates with well-recognised lags in  transmission, decisions  taken today affect output and inflation over several quarters.

For  the  Monetary  Policy  Committee  (MPC)  to  fulfil  its  mandate  effectively,  it  must therefore form a view not just of current conditions, but also of where the economy is likely  to  be  in  the  near-term.  Therefore,  the  bi-monthly  MPC  resolution  provides forecasts of inflation and growth up to four quarters ahead. 8

Any forecasting exercise, by its very nature, has the risk of incurring forecast errors. Such errors are a common feature around the world. These are generally larger when there are unpredictable shocks or events and are larger when one is predicting far

7 The  expected  outcomes  of  enterprise  surveys  include  (i)  enhancing  the  coverage  of  surveys  (ii) inclusion  of  emerging  industry-groups  like  semiconductors,  electric  vehicles,  Production  Linked Incentive industry-groups in the sampling frame (iii) revising the methodology for aggregation of survey indicators  (iv)  modifying  the  survey  questionnaires,  (v)  adopting  more  rigorous  data  quality  checks among others. The expected outcomes for Household surveys include augmenting, rewording, and refining the semantics of the survey questionnaire, and possibility of inclusion of panel of households as part of survey design (based on several rounds of pilot survey) to better capture inflation expectations and economic sentiments of the households.

8  Except in February MPC resolution where 5 quarter ahead projection for inflation is provided along with the annual inflation projection for the next financial year. Additionally, the Reserve Bank of India Act and Monetary Policy Committee and Monetary Policy Process Regulations (2016) requires the RBI to present the projections of inflation and growth and the balance of risks, and an assessment of our projection performance in the Monetary Policy Report, released bi-annually in April and October.

ahead into the future. 9  Research has shown that variance across forecasters tends to increase during periods of uncertainty. 10  Inflation forecasting is equally challenging in India, if not more so, given the high and outdated weight of food in the CPI basket and the volatile nature of food prices.

Therefore, we take a multifaceted approach in forecasting inflation. This includes (i) using a suite of structural and time-series models, each providing a different lens on the  economy;  (ii)  examining  historical  patterns  in  data  to  identify  the  underlying momentum  in  prices,  and  assess  the  base  effects,  which  often  shape  near-term inflation dynamics; (iii) drawing upon a wide range of high-frequency indicators and surveys to capture real-time movements in demand, supply, and their implications on prices;  (iv)  seeking  expert  views  to  interpret  turning  points,  structural  breaks,  and emerging risks that models alone may not be able to fully capture.

We are committed to using the state-of-the-art models and approaches to improve our forecast accuracy continuously. Thus, we have been assessing the appropriate time length that we should consider in our models, ensuring that we use more recent and relevant information than the distant past. We have also extended the scope of our stakeholder consultations, wherein besides, a detailed schedule of existing consultations, we have added a day-long workshop with a rotating set of professional forecasters so that we can learn from each other.

Besides minimising the forecast errors, what is equally important is to ensure that there is no systematic bias in the forecasts. As far as the inflation forecasts used in the MPC resolution are concerned, they are unbiased. The recently released Discussion Paper on Review of the Monetary Policy Framework shows that, the deviation of inflation and growth  forecasts  of  the  Monetary  Policy  Committee  in  India  during  the  inflationtargeting  regime  does  not  have  any  systematic  directional  bias  from  the  realised inflation and growth. 11

9  Inflation Forecast Accuracy Under High Volatility: Cross-Country Evidence. Box I.1 in the Monetary Policy Report, April 2023, RBI.

10   Uncertainty  and  Disagreement  among  Professional  Macroeconomic  Forecasters,  RBI  Bulletin, November 2021.

11 Annex  4:  Inflation  and  Growth  Projection  Analysis.  Review  of  Monetary  Policy  Framework  -  A Discussion Paper, RBI, August 2025.

Just as the inflation forecasts, the RBI uses a varied set of approaches to generate its growth projections. RBI relies on a balanced synthesis of robust econometric analysis, contemporary  economic  conditions,  and  forward-looking  sectoral  perspectives  in preparing its projections. Among the technical models, projections are derived from a suite  of  approaches,  rather  than  any  single  model.  These  include  the  benchmark indicator approach, a dynamic factor model, and various time series models for shortterm growth projections. 12

Before  each  Monetary  Policy  meeting,  we  hold  nearly  a  dozen  discussions  with stakeholders  from  the  real  sector,  financial  markets,  banks,  NBFCs,  analysts,  and economists. These interactions provide us with valuable insights into their perspectives, outlooks, and forecasts, which inform our assessments. Our periodic interactions  with  the  NSO  are  noteworthy,  as  they  help  in  improving  the  RBI's methods.

## Closing Remarks

The  Indian  economy  has  been  a  high  growth  economy  that  has  exhibited  both resilience and agility. Our statistical offerings, data and techniques must keep pace with an economy that is growing and evolving rapidly. Regularly updating and revising the  existing  data  series,  as  well  as  constructing  new  ones,  is  essential  to  capture ongoing  transformations.  We  all  are  looking  forward  to  the  revised  series  being prepared by MoSPI. I once again congratulate MoSPI for launching this consultative process and wish the workshop every success.

12 The  use  of  multiple  methods  imparts  robustness  to  RBI's  projections.  The  Benchmark  Indicator Approach, which relates to deriving sectoral contributions to GDP as recommended by the NSO, is used to nowcast GDP growth. The dynamic factor model relating to deriving condensed factors from a wide range of high frequency indicators  is  also  used  for  nowcasting  GDP  growth.  The  time  series models  include  ARIMAX  model  (ARIMA  model  including  exogenous  variables),  and  VARX  model (vector  autoregressive  model  including  both  endogenous  and  exogenous  variables).  ARIMAX  and VARX models complement each other as the former focuses on a single target variable (GDP growth), while the latter jointly models multiple variables with mutual interactions.",Poonam Gupta
https://www.bis.org/review/r251203b.htm,Olli Rehn: Europe and Finland – resilience under the shadow of power politics,"Speech by Mr Olli Rehn, Governor of the Bank of Finland, at The Bank of Finland's biannual lunch for EU Heads of Mission, Helsinki, 28 November 2025.",2025-11-28 00:00:00,"## Olli Rehn: Europe and Finland - resilience under the shadow of power politics

Speech by Mr Olli Rehn, Governor of the Bank of Finland, at The Bank of Finland's biannual lunch for EU Heads of Mission, Helsinki, 28 November 2025.

* * *

## Presentation accompanying the speech

Your Excellencies, Dear Friends,

Hello and a very warm welcome to the Bank of Finland. This lunch seminar at the start of the holiday season is definitely one of the highlights of our calendar. I am delighted to see you here today, and I look forward to the lively discussion that is always an essential part of this gathering.

## Slide 2: Power politics is overshadowing the world economy

Not long ago geopolitics was primarily the business of diplomats, international organisations and academia while for central bankers it remained background noise. That era has ended. Geopolitics now dominates every dimension of the economy and international cooperation. Both long-term megatrends and short-term twists and turns in world politics are currently reshaping growth prospects and inflation projections, monetary policy transmission and financial stability.

I shall first discuss geopolitics and trade wars, and their ramifications on Europe and its economy. I will then turn to the outlook for the Finnish economy. While our recovery has been slower than expected, there are some promising developments as well. So, this time at least, I will resist the traditional Finnish saying that ""a pessimist is never disappointed"".

The brutal realities of power politics are felt most painfully in Ukraine, though of course these realities have ramifications more broadly in Europe. The EU was caught off guard and was forced on to the defensive. Ukraine is fighting not only for its own freedom, but for the security of Europe and the future of liberal democracy and civil liberties.

I trust Europe does not back away when faced with mounting pressure or immense challenges. We really have to get our act together. Together, we must stand with Ukraine until a just and lasting peace is achieved.

## Slide 3: Russian economy experiencing stagnation except for warrelated industries

Russia's economy, while remaining sluggish, is still able to finance the Kremlin's war. The country's GDP growth has slowed to 1% this year due to worsening economic imbalances. Sanctions are limiting Russia's financing opportunities and technological possibilities.

According to the recent forecast on the Russian economy by the Bank of Finland Institute for Emerging Economies, BOFIT, economic growth has been largely dependent on war-related industries.

Sanctions have constrained Russia's access to critical goods and components for its military industry. Nevertheless, countries like China continue to export goods to Russia that have been sanctioned by Europe.

However, here it pays to dig a little deeper. A recent research paper from BOFIT shows that China is now charging Russian customers more, sometimes much more, for the sanctioned goods.

The median price increase between 2021 and 2024 for sanctioned goods bought by Russia is almost 90%. For many critical goods, such as ball bearings and piston engines, unit prices have more than doubled between 2021 and 2024. This is one way that sanctions are retarding Russia's capabilities, though not in the manner originally intended.

## Slide 4:  Despite increased export barriers, China's goods exports have grown exceptionally well and boosted GDP growth

China's exports have proven very resilient despite rising trade barriers. Even Russia has imposed restrictions on certain imports from China, such as cars. Yet China's exports continue to expand. So why is this?

Producer prices have declined due to extensive capacity increases fuelled by subsidies, and the yuan has weakened, boosting competitiveness. As a result, net exports have supported growth at historically strong levels, with the current account surplus reaching almost USD 500 billion in January-September, more than any full-year surplus in China's history. It would be a considerable understatement to just call this a macroeconomic imbalance.

## Slide 5: European economy has demonstrated resilience despite higher US tariffs

The current global situation creates a very challenging operating environment for both Europe and Finland. Against this global backdrop, the euro area economy has shown notable resilience.

Growth has stayed positive and exceeded expectations this year, including in the third quarter. Rising real incomes, strong employment and increased defence spending have all provided support.

In the ECB's September forecast, euro area growth was projected to be about 1% in both 2026 and 2027.

## Slide 6.  Euro area inflation currently at around the ECB's 2% target

The good news is that euro area inflation has this year stabilized at around the ECB's 2% target.

At last month's meeting of the ECB Governing Council, we decided to keep the monetary policy rate unchanged at 2%. Our next rate decision will take place just before Christmas, on 18 December.

When estimating the future path of GDP growth and inflation, there are now so many uncertainties and unknowns that it's a very tough task indeed. This can be summed up neatly with a phrase coined by our ski jumper legend and wordsmith Matti Nykänen: ""It's really how it will turn out"". In other words, there are both downward and sixty-fifty upward risks to growth and inflation, and the balance of these could go either way.

Given this situation, it is reasonable for the Governing Council to wait for our comprehensive economic outlook in December.

I should like to add here that in the current environment of uncertainty, it is essential that we do not lose sight of two things: firstly, the need for empirical evidence, taking a data dependent approach; and secondly, maintaining the commitment to our monetary policy strategy. If there are major deviations from our target over the medium term, then our strategy guides us to react - and the critical thing is to monitor if inflation expectations have stayed well anchored or not.

In any case, we will continue to make our decisions meeting by meeting, without committing to any interest rate path, thus maintaining full freedom of action in our decision-making. Under the current clouds of uncertainty, monetary policy-making is often as much art as it is science.

## Slide 7: AI boom is fuelling market valuations

Beyond the confines of monetary policy, the ECB also supports stable and sustainable economic development in Europe.

As First Vice-Chair of the European Systemic Risk Board, I share the concerns about elevated stock market valuations driven by the AI boom in the United States. Alongside the IMF we have stated that the possible overheating of the stock market and its rapid correction could be a considerable risk. Market valuations now are quite high compared to the pace of growth in the real economy and corporate earnings.

## Slide 8: Capital buffers are critical for financial system resilience

All investors should naturally be cautious, but in the mitigation of systemic risks, strong capital buffers are crucial. Stress tests confirm that European banks - not least Nordic banks - are resilient even in severe scenarios. Meanwhile, the EU's Savings and Investment Union initiative aims to mobilise Europe's substantial savings for productive investment and to diversify financing beyond the banking sector.

Some diversification is already taking place - in the form of an expansion and diversification of the non-bank financial system. Regulators are now paying more attention to this non-bank spectrum than before. It includes investment and pension funds, insurance and finance companies, and companies specialising in securities trading. New players in the crypto markets also belong to this group.

In Europe, the importance of non-bank entities in lending to businesses and households will continue to grow and it is indeed part and parcel of the Savings and Investment Union. At the same time, banks are increasingly providing financing to non-bank entities, which increases the financial markets' interconnectedness with the everyday regulated banking system.

## Slide 9: ECB preparing proposals to simplify regulation - High-Level Task Force on Simplification

One of Mario Draghi's key recommendations for improving competitiveness relates to the simplification of regulation. In line with this, the ECB established earlier this year a High-Level Task Force on Simplification, in which I'm serving as a member.

I am confident that our group's proposals will help simplify regulation where there is an undeniable need - how to simplify the overly burdensome regulatory load on banks, lighten reporting requirements and streamline banking supervision.

At the same time, it is essential not to throw the baby out with the bathwater. Banks' crisis and risk resilience must not be jeopardized.

But no more on that now, as we have agreed to communicate only once the report is finalized, which is before Christmas anyway.

## Slide 10:  IMF: The recovery of the Finnish economy has been slow but is expected to accelerate next year

Turning now to Finland, recovery has lagged behind the euro area, slowed by weak employment and fiscal consolidation. However, recent data show signs of improvement, especially in industrial production.

Many recent investments in Finland are linked either to critical technologies or infrastructure. A month ago, Nokia announced that NVIDIA will invest one billion dollars in Nokia to accelerate next generation AI innovation and to lead the transition from 5G to 6G. The number of new data centres  and data centre investment projects in Finland has grown considerably, benefitting from relatively low energy prices - and with low emissions in the production of that energy.

Finland has been building Arctic expertise for decades. This 'snow-how' is now coming to the forefront. The icebreaker deal between Finland, the US and Canada is estimated to be worth over 5 billion euros. Finland also possesses other critical expertise for Arctic regions: satellites, weather observation technology and energy technology, in addition to the 5G and 6G network expertise.

A breath of fresh air - or appropriately slashy snow - was brought to Helsinki last week when the city hosted one of the world's largest growth company and technology events, Slush. Creativity, innovation and new business opportunities all wrapped up in one great event.

Last month I invited members of the Finnish Startup Community to the Bank of Finland and we had a very useful and interesting discussion. Entrepreneurs and investors have

reported that growth has accelerated and new startups are being founded, especially in the technology and software sectors. According to recent statistics, investments in Finnish growth companies have begun to rise again after the 2023 dip and are now close to the record level of 2022 (EUR 1.66 billion). Domestic venture capital investments are important not only in the early stages of companies but also later during scaling up and internationalisation.

## Slide 11:  A parliamentary pact on fiscal rules was reached

Finland's public finances have been under severe strain recently. This year the debt-toGDP ratio is expected to rise to 85%, and to over 90% by 2027. It is likely that Finland will end up in the EDP.

Meanwhile it is encouraging that Parliament, following the Swedish model, has identified a common ambition to strengthen debt sustainability. This demonstrates that even in difficult circumstances, Finland can make responsible, forward-looking decisions together.

## Slide 12: Europe's triple test

Going forward, Europe is facing major economic challenges . In a nutshell, triple test strategic investment in can revitalise defence, decarbonisation and dynamism Europe's economic future.

Russia's war in Ukraine and the US foreign policy shift have made it clear that Europe must take greater responsibility for its own defence. In the short term, the best way to strengthen European security is to support Ukraine. At the same time, national and common European projects must be launched to strengthen the EU's own common defence capability.

The green transition is not a luxury - it is Europe's only viable energy strategy. Unlike the US, we lack (cheap) domestic fossil fuels. The path to energy security lies in renewables, clean tech and efficiency.

We are reaching the inflection point in green transition. Decarbonisation is a chance for Europe to lead in clean tech and secure low-cost energy.

It is not putting the brakes on growth: experience shows we can reduce emissions and grow at the same time. Developments over recent decades show that the green transition and GDP growth are not mutually exclusive goals.

Long-term productivity gains are real: more efficient systems, new markets and stronger energy independence. For the EU, a net importer of fossil fuels, this is a win-win. It is a strategic imperative.

Moreover, investment in common defence and in the green and digital transitions offers Europe a chance to revitalise productivity growth - but only if we do the right things.

Unlike the US, Europe lacks deep capital markets and a unified innovation system. Defence spending won't drive growth unless it supports R&amp;D and leverages private sector capacity.

Europe is also underperforming as to channelling savings into investment. There are currently up to EUR 10 trillion in bank accounts, which represents a vast potential to be mobilised more productively for equity investment, offering higher return for European investors.

The momentum for the Savings and Investment Union initiative is increasing and should now be accelerated by setting a clear, ambitious timeline for its completion, such as 1 January 2028.

Above all, Europe must rediscover its traditional strength: talented people. We have top universities, skilled workers and a history of academic freedom. The US has relied heavily on imported talent. If that inflow is weakening, Europe must grasp this opportunity to lead again.

But talent won't come here by accident. We need sound immigration policy, investment in education, and a culture that values research and risk-taking. Human capital is the foundation of long-term growth.

## Slide 13: Europe under pressure, Europe united

In short: if Europe invests smartly in defence, decarbonisation and human capital, it can reignite its economic dynamism.

Let me end with this: Europe's resilience comes not just from policies or institutions, but from how it works. The EU has always advanced by tackling real problems together, step by step.

From coal and steel, to the single market, to the euro - and now to defence, the green transition and deeper capital markets - Europe has moved forward not through grand visions alone, but through concrete actions, steady commitment and shared solutions.

That logic matters just as much today. When we strengthen Europe's common defence, push the green transition and invest in industrial competitiveness, we're not solving isolated issues. We are thus reinforcing the fabric of Europe itself.

Before opening the floor for questions - I almost forgot one thing: Following the encouragement of friends and colleagues from various corners of Europe, and the support of the Finnish Government, I am standing as a candidate for Vice-President of the European Central Bank.

Europe is, for me, a rational passion - a commitment shaped by experience and necessity. In an increasingly unpredictable world, small states have only one viable path: unity. The Union is our strategic shield and democratic anchor. By standing together, we protect our security, uphold our values, and secure a future welfare of our citizens.

Thank you very much for your attention! I look forward to your questions and comments.",Olli Rehn
https://www.bis.org/review/r251216k.htm,Martin Schlegel: The path to the monetary policy decision at the Swiss National Bank,"Keynote speech by Mr Martin Schlegel, Chairman of the Governing Board of the Swiss National Bank, at the conference ""The SNB and its watchers"", Zurich, 21 November 2025.",2025-11-21 00:00:00,"## Martin Schlegel: The path to the monetary policy decision at the Swiss National Bank

Keynote speech by Mr Martin Schlegel, Chairman of the Governing Board of the Swiss National Bank, at the conference ""The SNB and its watchers"", Zurich, 21 November 2025.

* * *

## Presentation accompanying the speech

At its monetary policy assessment in September 2025, the Swiss National Bank decided to leave its policy rate at 0%. The SNB also indicated that it remains willing to be active in the foreign exchange market as necessary.

The SNB makes monetary policy decisions, such as that taken in September, at its monetary policy assessments. These take place in March, June, September and December.

Every decision is based on the SNB's mandate, which is to ensure price stability while taking due account of economic developments. The monetary policy strategy provides the framework for monetary policy decision-making. In it the SNB sets out its definition of price stability, namely an inflation rate of between 0% and 2%. The SNB seeks to keep inflation within the range consistent with price stability over the medium term.

The monetary policy decision-making process is divided into two phases: the preparation phase and the monetary policy assessment phase. Shortly after the completion of a monetary policy assessment, the preparation phase for the next decision, during which economic developments are monitored and analysed, begins. Around the middle of the quarter, an interim assessment takes place. Economists from the Economic Affairs division report to the Governing Board on economic developments since the last monetary policy assessment and on whether the forecasts made at the last monetary policy assessment are still valid.

The preparation for the monetary policy decision involves numerous staff members from across the SNB. The economists from the Economic Affairs division play a key role. They analyse data using statistical methods and develop forecasting models. In addition, each quarter, structured talks are held with around 250 Swiss companies whose economic situation is surveyed.

Around two weeks before the monetary policy assessment the economists from the Economic Affairs division hold intensive discussions with the Chairman of the Governing Board and his deputies. Economic developments abroad and in Switzerland, as well as monetary indicators such as interest rates, exchange rates, monetary aggregates and loans, are also closely scrutinised. The economists then prepare the documentation for the monetary policy assessment. The Money Market and Foreign Exchange as well as the Financial Stability divisions also prepare assessments of the current environment for the Governing Board. This concludes the preparation phase.

The monetary policy decision-making process is the same every quarter, irrespective of the prevailing economic environment. This structured and systematic approach facilitates the identification of changes as well as the need for monetary policy action. However, the process is by no means rigid or mechanical; rather, it allows the SNB to react flexibly to new developments. If the environment changes rapidly or unexpected developments occur, further analyses are carried out or scenarios simulated. The Governing Board can always decide to adjust monetary policy between quarterly monetary policy assessments.

The second phase on the path to the monetary policy decision is the monetary policy assessment. The key question addressed is whether the current monetary policy stance is still appropriate to ensure price stability over the medium term. Are monetary conditions - a product of the level of interest rates and of the Swiss franc exchange rate - still suitable or should they be adjusted? When making its monetary policy decision the SNB sets the SNB policy rate. Changes to the policy rate affect the level of interest rates and the Swiss franc exchange rate. If necessary, the SNB can also use other measures, such as interventions in the foreign exchange market, to ensure price stability.

On the first day of the monetary policy assessment, in addition to the Members and Alternate Members of the Governing Board, representatives from the divisions Economic Affairs, Money Market and Foreign Exchange, Financial Stability, International Monetary Cooperation and the Secretariat General, as well as from Communications, are present. If necessary, they answer specific questions from the Members and Alternate Members of the Governing Board.

During the first day, the following topics are discussed:

- The Money Market and Foreign Exchange division starts by reporting on financial markets. These assessments may provide up-to-date information on monetary conditions and global risk sentiment, as well as on the implementation of monetary policy.
- Analyses of monetary conditions are carried out by the Economic Affairs division. The focus is on interest rate developments in Switzerland and the Swiss franc exchange rate. Growth in monetary aggregates and in loans is also carefully analysed.
- The Economic Affairs division then presents its analyses of global economic developments. These include economic activity abroad and forecasts for the global economy. Besides the growth outlook, further developments in inflation and in monetary policy abroad are also discussed. The baseline scenario for the global economy prepared by the Economic Affairs division is the basis for the forecasts for Switzerland.
- And finally, the Economic Affairs division explains the current economic situation in Switzerland as well as the latest growth and inflation forecasts. An important part of this is the approximately 250 talks that the SNB's delegates hold with Swiss companies every quarter.
- Topical issues from the Financial Stability division, such as developments on the real estate market and in lending, are also discussed.

The presentations provide a comprehensive picture of the current environment. However, as some uncertainty always persists, it is essential to think in terms of scenarios. Prevailing risks are also analysed in detail.

The second day of the monetary policy assessment is the day of the decision. In addition to the Members and Alternate Members of the Governing Board, the heads of the divisions Economic Affairs, Money Market and Foreign Exchange, Financial Stability, International Monetary Cooperation and the Secretariat General are present, as well as the heads of the Monetary Policy Analysis, Forecast and Analysis Switzerland, Regional Economic Relations, Forecast and Analysis International, Economic Data Science, and Communications units.

First, the Economic Affairs division summarises the background situation for the monetary policy decision. The final discussion about the monetary policy decision can then begin. Here, the Governing Board consults on whether current monetary policy is appropriate, or whether it should be tightened or eased, to ensure price stability over the medium term.

When making a monetary policy decision, the Governing Board takes a broad perspective. It considers the prevailing risks and performs a comprehensive cost/benefit analysis of various options. In doing so the SNB pursues a risk management approach, which allows for the fact that the decision is being taken under uncertainty about future developments. The aim of the risk management approach is to reach a monetary policy decision that is appropriate for a number of probable scenarios. Here, the Governing Board does not simply rely on forecasts for various scenarios, but it also uses its own judgement.

Once it has made its decision, it signs off the communications material setting out and explaining the interest rate decision. A key element of the communications is the conditional inflation forecast. This shows how the SNB expects consumer prices to develop, assuming the given interest rate remains unchanged for the next three years.

At 9.30 am on the Thursday at the end of the monetary policy assessment, a press release on the monetary policy decision, including a conditional inflation forecast, is published on the SNB website. From 10.00 am, a news conference takes place, which is broadcast live on the SNB website. At the news conference, the Governing Board first explains its decision in introductory remarks. Journalists then have the opportunity to ask the Governing Board questions. One week after the monetary policy assessment, the monetary policy report is published in the Quarterly Bulletin. Starting at the September 2025 assessment, a summary of the monetary policy assessment discussion is published four weeks after each monetary policy decision.

This marks the end of the process and a new cycle begins.",Martin Schlegel
https://www.bis.org/review/r251216j.htm,Stephen I Miran: The inflation outlook,"Speech by Mr Stephen I Miran, Member of the Board of Governors of the Federal Reserve System, at the School of International and Public Affairs, Columbia University, New York City, 15 December 2025.",2025-12-15 00:00:00,"For release on delivery 9:30 a.m. EST December 15, 2025

The Inflation Outlook

Remarks by

Stephen I. Miran

Member

Board of Governors of the Federal Reserve System

at

The School of International and Public Affairs, Columbia University

New York, New York

December 15, 2025

Thank you, Mr. Secretary.  I appreciate the opportunity to speak here today. 1 When I offered my assessment of policy in my first speech as a Federal Reserve Governor in September, I assumed inflation for core goods and nonhousing core services would continue to run at current rates. 2   While that was a useful working assumption at the time, today I will break down my inflation outlook in more detail.  Specifically, I'll share my interpretation of inflation's components and how this influences my perception of progress toward our 2 percent target.

## Shelter Inflation

Shelter costs are top of mind for households, and a large component of inflation indices.  But calculating shelter inflation is far from simple.  For instance, the personal consumption expenditures (PCE) price index that the Fed targets includes housing costs for all households in the economy.  That seems appropriate for capturing prices associated with all consumer spending but not ideal as a measure of current supply and demand pressures.  Figure 1 makes that clear:  As the economy emerged from the pandemic, demand for housing outstripped supply, and market rents for new tenants jumped.  But the PCE shelter index for all households lagged, as rents only reset when people move or renew their leases.  PCE will always lag market rents.

As recently as last year, the PCE shelter index still had catching up to do, creating uncertainty as to how long measured shelter inflation would remain elevated.  This is no longer the case.  Indeed, a separate all-tenant rent index-drawn from the same microdata

1 The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee.

2 Miran, Stephen I. (2025), 'Nonmonetary Forces and Appropriate Monetary Policy,' speech delivered at the Economic Club of New York, New York, N.Y., September 22,

https://www.federalreserve.gov/newsevents/speech/miran20250922a.htm.

as PCE shelter-caught up to new-tenant rents, while PCE shelter has actually overshot new rents. 3   Based on this catchup being complete, I expect a faster fall in PCE shelter inflation.

The current elevated readings for shelter inflation are an after-echo of previous, rather than current, supply-demand imbalances in the economy.  For the past two years, we've seen extremely low increases in new-tenant rents.  Measures by Cotality and Apartment List show that's persisted in recent quarters.  I therefore expect a faster decline in PCE shelter inflation.  Two factors give me additional confidence: first, the negative population shock resulting from a reversal in net migration, and second, an elevated ratio of nominal shelter services consumption relative to overall consumption, which has historically been mean-reverting.

## Core Nonhousing Services Inflation

Another important part of household budgets is the cost of services besides housing, food, and energy.  These services are about half of household spending and include childcare, education, entertainment, and medical expenses.  Core nonhousing services inflation has moved sideways this year, somewhat above the average level observed from 2002 to 2007, a useful reference period when core PCE inflation averaged 2 percent.  However, I am not worried about nonhousing services.

Wages are the primary driver of service inflation.  Many service prices are driven by labor costs; for instance, labor compensation is about 60 percent of value added in

3 The main differences are a set of sample restrictions; for example, PCE shelter imputes many missing observations that are dropped from the other two indices. A comparison of the different indices is available from the Bureau of Labor Statistics (CPI rents flow into PCE rents) at https://www.bls.gov/cpi/researchseries/r-cpi-ntr.htm

leisure and hospitality and 83 percent in education and health services.  Over the medium term, nonhousing services will follow labor market pressures.

Unemployment has trended higher for over two years, and wage growth lower. Additional measures of labor market tightness-such as job openings, consumer surveys about the difficulty of finding jobs, long-term layoffs, and the duration of unemployment-have suggested a loosening labor market for several years, tilting nominal wage growth risks toward the downside.

A notable aspect of core services inflation is that not all components are measured from directly observed transactions.  Many services components in the index are imputed in various ways and do not capture information about supply-demand imbalances that are relevant for monetary policy.  A prime example is portfolio management services, which have contributed a quarter-point to core PCE inflation in the last year, well above their long-run average.

The Bureau of Economic Analysis measures portfolio management costs based on overall revenues generated by asset managers.  If the stock market goes up and boosts assets under management, revenues move in tandem since they are typically a fixed percentage fee of assets.  What ought to be recorded as an increased quantity of services consumed is instead recorded as increased prices.  There may, for national accounting purposes, be a good reason for doing it this way.  But, for monetary policy purposes, there is none, and it would be foolish of us to chase statistical quirks rather than focus on actual consumer prices.

Remarkably, long-term trends in the asset management industry point toward fee compression, indicating trend deflation .  Morningstar found the average expense ratio

paid by investors fell nearly 6 percent in 2024. 4   By contrast, PCE recorded a roughly 20 percent increase in portfolio management fees in this period, contributing about 30 basis points to core PCE.  If PCE had instead matched industry data with a 6 percent decline, core PCE would have been about 40 basis points lower than officially reported.

Fees have consistently fallen each year for the past two decades, now less than half of what they were in 2005, as seen in figure 2. 5   The PCE portfolio management measure contains no signal regarding tightness in the asset management industry, let alone the economy.  It contains no signal for the inflation forecast going forward.  It should not be used to frame underlying inflation.  Yet here we are, keeping interest rates too high because of the phantom inflation of portfolio advisory fees. 6

For these reasons, I do not take much signal from nonmarket-based components. When looking at market-based services, inflation in this category has come down dramatically from its peak and moved sideways since mid-2024, at around 3 percent. That is about 10 basis points below its average from 2002 to 2007, which, again, was a period in which PCE inflation was broadly at target.  Core nonhousing services inflation only remains elevated compared with this period because of nonmarket components.

## Core Goods Inflation

Turning to goods prices, they have been relatively less likely to rise than other index components since the turn of the century.  That trend was abruptly disrupted in the aftermath of the pandemic.  After that, core goods inflation fell into negative territory for

4 Morningstar Manager Research (2024), 'How Fund Fees are Evolving in the US,' July 16 Insights (blog), (updated October 8), https://www.morningstar.com/business/insights/blog/funds/us-fund-fee-study.

5 Ibid.

6 Monetary policy should not mechanically respond to asset prices vis-à-vis the  inflation channel.  Financi al markets reflect a host of factors-including technology, tax and regulatory policy, population, trade, and many other things-which may have separate or joint implications for neutral rates, the output gap and inflation but which require nuanced analysis and interpretation.

a brief period of around one year.  Over the past 12 months, core goods inflation has picked up.  The dominant narrative explaining this pattern blames U.S. tariff policy.  I am not convinced.

Consider the timing, as shown in figure 3.  In core goods PCE, it appears that the increase coincides with the imposition of tariffs during this year.  However, in the consumer price index, the upturn began in the middle of 2024.  We don't target CPI, but it contains useful information.  The evidence that tariff policy neatly coincides with the increase in core goods prices is conflicted.

When thinking through the effect of tariffs on prices, we must remind ourselves that the larger share of incidence or burden of any economic policy-tax, subsidy, or tariff-falls on the more inelastic or inflexible party.  This is because the more elastic or flexible party can change its behavior to avoid the burden of the tax.  As an importer, the U.S. is relatively more elastic, since we can substitute demand across borders or manufacture goods at home.  But producers' factories are installed capital that is stuck in place, and their labor is generally immobile and not easily substitutable across tradable and nontradable sectors.  As the largest trade deficit country, there are few substitutes, if any, for American demand, but many substitutes for potential supply.

Product-level estimates of demand and supply elasticities from Anson Soderbery can be used to examine goods-level incidence. 7 Figure 4 draws predicted isoincidence lines.  The 45-degree line characterizes goods which have equal supply and demand elasticities, meaning incidence is evenly split between exporter and importer.  The overwhelming majority of goods lie below the 45-degree line, meaning importers bear

7 Anson Soderberry (2018), 'Trade Elasticities, Heterogeneity, and Optimal Tariffs,' Journal of International Economics , vol. 114 (September), pp. 44-62.

less burden.  Figure 5 shows the cumulative distribution of import value based on the incidence absorbed by exporters.  These elasticities imply that, for about 70 percent of import goods value, the exporter bears at least 70 percent of the incidence, and for about half of goods value, the exporter bears at least 80 percent of the incidence. 8

Of course, there are goods for which importers bear material incidence, and that will mean relative price changes-but whether they prove to be relevant for aggregate prices depends on other considerations.  Given the Soderbery (2018) elasticities and a split of the domestic incidence between wholesale importers and consumers, it is

8 The weighted mean incidence drawn from the Soderbery (2018) elasticities is 70 percent borne by the exporter.  This number is not far from what would be implied by using an aggregate demand elasticity of negative 3, in line with the trade literature, and a supply elasticity of 1.  Unfortunately, much of the literature question begs large supply elasticities as a result of Dixit-Stiglitz style production characterized by constant markups, constant marginal cost, and free entry.

Papers that move away from these assumptions find lower supply elasticities or pass-through of marginal cost shocks into prices; for instance, see Amiti, Itskhoki, and Konings (2019) without constant markups (Mary Amiti, Oleg Itskhoki, and Jozef Konings (2019), 'International Shock, Variable Markups, and Domestic Prices,' The Review of Economic Studies ,  vol.  86  (6),  pp.  2356-402); Bergstrand, Cray and Gervais (2023) without constant marginal costs (Jeffrey H. Bergstrand, Stephen R. Cray, and Antoine Gervais (2023) 'Increasing Marginal Costs, Firm Heterogeneity, and the Gains from 'Deep' International Trade Agreements,' Journal of International Economics ,  vol.  144 (September)); or Alessandria, Choi and Ruhl (2021) without free entry (George Alessandria, Horag Choi, and Kim J. Ruhl (2021), 'Trade Adjustment Dynamics and the Welfare Gains from Trade,' Journal of International Economics , vol. 131 (July)).Therefore, I prefer to use the Soderbery (2018) estimates, which don't require these assumptions. Subsequent work by Soderbery, with Farid Farrokhi, employs some of these micro-founding assumptions on production, which, like in other papers, lead to large elasticities of supply.  See Farid Farrokhi and Anson Soderbery (2024), 'Trade Elasticities in General Equilibrium:  Demand, Supply, and Aggregation,' The Review of Economics and Statistics .

Working outside the trade general equilibrium literature, Horioka and Ford (2025) model capital mobility without comparative advantage, and if factor shares in this model are adjusted to reflect higher capital shares in surplus countries than deficit countries, incidence largely falls on the tariffed nation.  See Charles Yuji Horioka and Nicholas Ford (2025), 'A New Modeling Approach to Help Address the Trump Tariffs,' Discussion Paper Series DP2025-31 (Japan: Kobe University, December), https://www.iser.osakau.ac.jp/static/resources/docs/dp/DP1300.pdf

Moreover, installed capital is usually the least elastic factor of production, and, with imperfect substitutability between tradable and nontradable labor, there is a real sense in which labor in those factories is similarly installed; welders do not easily become hairdressers. It is exceedingly strange that much of the literature on trade and tariff incidence neglects to study not only capital altogether but installed capital in particular, which, in many public finance settings, can serve as an incidence sink.

plausible that the ultimate effect of tariffs on consumer price levels will be in the neighborhood of two-tenths of a percent-noise. 9

By contrast, many analyses for what tariffs would do to inflation were based on empirical studies of the U.S.-China trade conflict before the pandemic.  However, these studies suffer from bias from trade rerouting and de minimis exemptions.  If a Chinese exporter can avoid bearing incidence by costly transshipment or exploitation of the de minimis loophole, the incentive to do so will be highly correlated with the incidence absorbed.  In other words, goods for which China would have to absorb a greater share of the tariff cost drop from the sample, while goods for which China could push through tariff costs to importers remain in the sample, violating identification restrictions. Jackson Mejia has studied this bias in pass-through estimates and finds evidence that up to 40 percent of product categories exposed to tariffs are affected by transshipment, with trade volumes approaching 25 percent for intermediate and capital goods. 10   The de minimis exemption poses similar identification problems, meaning the transshipment effects are lower bounds on the identification problem in this literature. 11   Additionally, these studies are short term in nature, and incidence analyses are usually long term; a difference in short-run and long-run elasticities is not controversial.

9 The calculation is the product of a 12.3 percent change in tariffs, a 30 percent domestic share of incidence, a 50 percent split between wholesale importers and consumers, and a roughly 10% import share of overall PCE.  If wholesale importers take all the tariff incidence on margin, the effect on consumer prices will be zero.  If they take none of it on margin, and are able to pass through the entirety of the incidence to consumers, the effect will be about 0.4 percent.  Two-tenths is the midpoint.  Moreover, standard incidence calculations require competitive markets.  To account for potential imperfect competition, a broader set of parameters may be necessary, as in Weyl and Fabinger (2013), but identification would tax an already burdened empirical trade literature beyond what I fear it might bear.  E. Glen Weyl and Michal Fabinger (2013), 'Pass-Through as an Economic Tool:  Principles of Incidence under Imperfect Competition,' Journal of Political Economy , vol. 121 (June), pp.437-641.

10 Jackson Mejia (2025), 'Selection into Tariff Avoidance and the Measured Welfare Cost of Tariffs,' working paper, Massachusetts Institute of Technology, October, available at http://dx.doi.org/10.2139/ssrn.5653130.

11 Though the exemption was eliminated in 2025, the bias will infect studies drawn from earlier data.

Moreover, any claim that tariffs are a current driver of inflation must be accompanied by a clear description of the counterfactual.  Several analyses use the two decades before the pandemic as the relevant counterfactual; I do not find these periods to be reasonable given large concurrent shocks that pollute the analysis.  Attributing all excess inflation over the pre-trend to tariffs is something that could be done for many recent policies or shocks, such as an emphasis on supply chain resilience after the pandemic unrelated to tariffs.

One counterfactual I think makes sense to use compares import-intensive core goods versus overall core goods, as shown in figure 6. 12   If tariffs were the driver of recent inflation, then one would expect import-intensive core goods to see substantially more inflation.  In fact, total core goods prices have risen at approximately the same rate as import-intensive goods since the end of last year.

I also compare the level of inflation in the U.S. to that of other industrialized countries, displayed in figure 7.  If U.S. tariff policy were a material driver of domestic inflation, then U.S. goods inflation would visibly stick out from major trading partners. Yet U.S. inflation is comparable to that in Canada and the U.K., slightly above that in the European Union, and below that in Mexico; the U.S. doesn't stand out in any direction. Neither counterfactual suggests tariffs are the primary driver of core goods inflation.

12 Federal Reserve Board staff replicated and extended a methodology described in The Council of Economic Advisers (2025), Imported Goods Have Been Getting Cheaper Relative to Domestically Produced Goods (Washington:  Council of Economic Advisers), https://www.whitehouse.gov/wpcontent/uploads/2025/03/Imported-Goods-Have-Been-Getting-Cheaper-Relative-to-DomesticallyProduced-Goods.pdf.   On Figure 6, the blue import content measure uses import content data from 2019 and the red import content measure is more disaggregated and comes from recently released 2023 data.  I included both aggregations to preserve comparability with the earlier CEA study which was produced when only the 2019 aggregation was available.

Even if one believes that tariffs are driving goods inflation, the standard practice is for central bankers is to 'look through' a transient shock, as a one-time increase in the price level differs from a persistent shift to inflation.  This mirrors how value-added taxes are treated by central banks.  Monetary policy achieves stable prices through balancing aggregate supply and demand; changes in prices stemming from relative tax adjustments-incidence aside-are not indicative of supply-demand imbalances.

While the burden from tariffs will ultimately be borne by the exporters, this analysis is drawn from long-term elasticities.  In the short run, it may take time for threats of moving supply chains to become credible, creating a lag before exporters reduce selling prices.  Although I do not yet see meaningful tariff-driven inflation, it may materialize.  But over time, short-run elasticities would converge with long-run elasticities.  Not only would the increase in inflation be transitory, but likely so would the increase in the price level, meaning subsequent offsetting deflation . 13

If tariffs are not the likely cause of the recent rise in goods inflation, then what is? One possibility is that the rise in prices is noise in a volatile series, though this is not a satisfying answer.  A second possibility is that the U.S. and other advanced foreign economies are still following post-pandemic bullwhips of gradual oscillation around a lower mean level of core goods inflation.  Under that scenario, last year's core goods inflation was 'too low' and now it is 'too high'; perhaps next year it will be 'too low' again.

13 For an example of recent research that uses dynamic elasticities to show that real wages can first decline and then go up (similar to inflation going up then down), albeit through a different channel than I'm describing, see Alessandria, George A., Jiaxiaomei Ding, Shafaat Y. Khan, and Carter B. Mix (2025), 'The Tariff Tax Cut: Tariffs as Revenue,' NBER Working Paper Series 33784 (Cambridge, Mass.:  National Bureau of Economic Research, May), https://www.nber.org/papers/w33784.

A third, unsavory, possibility is that goods inflation is settling in at a higher level than prevailed immediately pre-pandemic.  After all, there were previous regimes with stable but higher core goods inflation.  Higher global goods inflation could result from a longer-term trend of trade restructuring that encompasses much more than tariffs, including a reduced willingness to rely on unfettered access to exports in favor of national security and geoeconomic concerns.  Attention to supply chain security and resilience-which predates this year's tariffs-may mean higher core goods inflation for a longer period, though perhaps not this high.

I accept I don't know what's driving higher goods inflation currently.  As former Bank of England Governor, Mervyn King, and economist, John Kay, urged in Radical Uncertainty , pretending we have more knowledge than possible will stymie our understanding of reality. 14   Shedding that hubris will help us reach a clearer understanding of the dynamics and make better decisions.

I do see reasons to be optimistic about goods inflation.  One is that the rapid deregulatory push to expand supply will, all else equal, decrease prices.  Another is that work by Bloomberg Economics using AI to analyze thousands of public company earnings calls indicates price pressures in measured goods inflation will begin to decline within two quarters. 15

## Policy

The lack of a clear downward forecast for core goods prices might suggest keeping interest rates elevated.  However, I expect more than enough disinflation from

14 John Kay and Mervyn King (2020), Radical Uncertainty (New York:  W. W. Norton &amp; Company)

15

Anna Wong, Joshua Danial, and Alex Tanzi (2025), '17,500 Earning Calls Greenlight Big Fed Cuts in

December 12

2026,' Bloomberg Economics,

housing services to counterbalance that possibility.  Core goods represents just 25 percent of the core PCE index.  Indeed, my earlier forecasts were conditioned on core goods inflation staying at this rate for longer.  The risks to my forecast are if shelter inflation picks up again, or if core goods inflation remains well above 2 percent.  I judge those cases to be unlikely.  If I am right about shelter but wrong about tariffs, we will undershoot our inflation target.

To summarize, we must be thoughtful in considering genuine underlying inflationary pressures.  Excess measured inflation is unreflective of current supplydemand dynamics.  Shelter inflation is indicative of a supply-demand imbalance that occurred as much as two to four years ago, not today.  Given monetary policy lags, we need to make policy for 2027, not 2022.

A better measure of underlying inflation would account for distortions from shelter and imputed prices.  Removing imputed phantom inflation like portfolio management, market-based core inflation is running below 2.6 percent, as seen in figure 8.  If we further remove housing and look at market-based core ex shelter, underlying inflation is running below 2.3 percent, within noise of our target.  Once shelter inflation has normalized from the anomalous post-pandemic experience, ordinary market-based core may be more appropriate.

Some might accuse me of cherry-picking a preferred measure, but my gauge of underlying inflation excludes less of the index than some other measures.  It is also easy to understand and has a straightforward rationale for discarding certain slices of the index.  Market-based core includes 75 percent of overall PCE, and market-based core ex housing includes 60 percent; core services ex housing is only 51 percent of PCE and

discards goods, which are salient.  Moreover, James Stock and Mark Watson find that market-based prices are more tightly related to cyclical measures of the economy than poorly measured components like imputed prices. 16

Keeping policy unnecessarily tight because of an imbalance from 2022, or because of artifacts of the statistical measurement process, will lead to job losses.  There was a large bout of inflation that resulted in an increase in prices after the pandemic. While American families are still rightly distraught with that experience and unhappy with affordability, prices are now once again stable, albeit at higher levels.  Policy should reflect that.

Fortunately, the shelter outlook appears relatively clear-because market rents lead measured inflation-and powerful enough to overwhelm even the possibility of sustained higher goods inflation.  Underlying inflation is near, and further approaching, our target.

On the other side of our mandate, experience suggests that labor market deterioration can occur quickly and nonlinearly and be difficult to reverse.  In part because monetary policy lags several quarters, a quicker pace of easing policy-as I have advocated-would appropriately move us closer to a neutral stance.

Recessions are an inevitable part of the business cycle, and at some point, we will suffer one.  We should strive to ensure that point is as far in the future and as shallow as possible by appropriately calibrating monetary policy.

16 See James H. Stock and Mark W. Watson (2019), 'Slack and Cyclically Sensitive Inflation,' NBER Working Paper Series 25987 (Cambridge, Mass.:  National Bureau of Economic Research, June), https://www.nber.org/papers/w25987.  See also the related work of the San Francisco Federal Reserve Bank of San Francisco on cyclical inflation, available at https://www.frbsf.org/research-and-insights/dataand-indicators/cyclical-and-acyclical-core-pce-inflation/.



## The Inflation Outlook

Stephen I. Miran

Member

Board of Governors of the Federal Reserve System

The School of International and Public Affairs, Columbia University, New York, New York

December 15, 2025



## Figure 1: Housing inflation



Note: The gray shaded bar indicates a period of business recession as defined by the National Bureau of Economic Research: February 2020 to April 2020. In the right panel, data are monthly, except for BLS new tenant and all tenant indices, which is quarterly. PCE is personal consumption expenditures.

Source: Bureau of Labor Statistics via Haver Analytics; Bureau of Economic Analysis via Haver Analytics; Cotality; Apartment List via Haver Analytics.



## Figure 2: Portfolio management prices: Morningstar vs. PCE



Source: Morningstar Direct; U.S. Bureau of Economic Analysis via Haver Analytics



## Figure 3: Core goods prices



Note: The gray shaded bar indicates a period of business recession as defined by the National Bureau of Economic Research: February 2020 to April 2020. CPI is consumer price index; PCE is personal consumption expenditures index.

Source: Bureau of Labor Statistics via Haver Analytics;  Bureau of Economic Analysis via Haver Analytics



## Figure 4: Tariff isoincidence lines by product



Note: U.S. product-level elasticities from Soderbery (2018), aggregated from country-HS4 by 2024 import weight to the HS4 level. Data points are scaled by relative 2024 import volume.  Dots represent groups of goods. The dashed 45-degree line represents a 50% exporter burden . Isoincidence lines give the combinations of demand and supply elasticities that predict a given incidence split.

Source: U.S. Census Bureau; Anson Soderbery (2018), 'Trade Elasticities, Heterogeneity, and Optimal Tariffs,' Journal of International Economics , vol. 114 (September), pp. 44-62; author calculations.



## Figure 5: Exporter share of tariff burden by product



Note: Cumulative share of 2024 country-HS4 imports by value, up through a given exporter burden as implied by Soderbery (2018) elasticities.

Source: U.S. Census Bureau; Anson Soderbery (2018), 'Trade Elasticities, Heterogeneity, and Optimal Tariffs,' Journal of International Economics , vol. 114 (September), pp. 44-62; author calculations.



## Figure 6: Overall and imported core goods



Note: The figure shows cumulative percent changes in core goods prices under different weights for aggregating the individual core goods categories.  Aggregation using personal consumption expenditures (PCE) weights yields the standard core goods price index, and aggregation using PCE times import content upweights goods categories that are more imported. The blue import content measure uses import content data from 2019. The red import content measure is more disaggregated and comes from recently released 2023 data.  Both aggregations are presented, to preserve comparability with a previous Council of Economic Advisers study put out earlier this year when only the 2019 data were available.

Source: Federal Reserve Board staff calculations; U.S. Bureau of Economic Analysis via Haver Analytics.



## Figure 7: International CPI inflation



Note: The gray shaded bar indicates a period of business recession as defined by the National Bureau of Economic Research: February 2020 to April 2020. CPI is consumer price index.

Source: Official national statistics via Haver Analytics.



## Figure 8: Underlying inflation



Note: The gray shaded bar indicates a period of business recession as defined by the National Bureau of Economic Research: February 2020 to April 2020. PCE is personal consumption expenditures.

Source: Bureau of Economic Analysis via Haver Analytics.



## The Inflation Outlook

Stephen I. Miran

Member

Board of Governors of the Federal Reserve System

The School of International and Public Affairs, Columbia University, New York, New York

December 15, 2025",Stephen I Miran
https://www.bis.org/review/r251216i.htm,T Rabi Sankar: Stablecoins - do they have a role in the financial system ,"Keynote address by Mr T Rabi Sankar, Deputy Governor of the Reserve Bank of India, at the Mint Annual BFSI (Banking, financial services and insurance) Conclave 2025, Mumbai, 1 December 2025.",2025-12-01 00:00:00,"## T Rabi Sankar: Stablecoins - do they have a role in the financial system

Keynote address by Mr T Rabi Sankar, Deputy Governor of the Reserve Bank of India, at the Mint Annual BFSI (Banking, financial services and insurance) Conclave 2025, Mumbai, 1 December 2025.

* * *

## I. Introduction

Distinguished industry leaders, colleagues and guests.

It is a privilege to be able to stand here and talk to such a learned gathering and I am thankful to Mint for inviting me.

Money, as we know it, has been a central pillar of human society for centuries, enabling trade, facilitating economic activity, and underpinning the very notion of trust in social and financial interactions. Over time, the form of money has evolved with technology from commodities to metal to paper to balances in deposit accounts to now, digital tokens. While the forms of money have evolved with technology, the fundamental character of money - what it represents, or what gives it credibility - has always been that it represents value that has users' trust. That value is either intrinsic (metal money) or derived from a promise to pay (paper money or deposit money) by a trusted person. Theoretically, money can be issued by any person as long as he has the trust of the users. The more stable forms of money in history have, however, always been issued by sovereigns, not by private issuers. Examples of private money (money issued by non-sovereigns) can be found in history but they have not been stable arrangements. In practice, therefore, money has credibility because its value is promised by the sovereign.

This fundamental character of money is under challenge from cryptocurrencies. Not in terms of technology, as money in the form of digital tokens can exist without changing the nature of money itself. But the fundamental challenge of cryptocurrencies is that they claim to change the very nature of money - because cryptocurrencies do not represent value either in terms of intrinsic worth or in terms of promise to pay. In my talk today, I propose to explore what the nature of such challenge is, and what are the implications of cryptocurrencies for the financial system as we know it.

To be able to understand the nature or character of money, we need to look a little deeper.

## II. Attributes of Money

In a modern economy, there are two types of money viz., currency and bank deposits currency (physical) is issued directly by the State (through its central bank) while deposits (digital) are issued under license by commercial banks. All money is issued

either directly by the central bank or indirectly through banks authorised by it. Thus, all money in modern economies is effectively FIAT in nature. It is this fiat or sovereign aspect of modern money which creates 'trust' in money and provides it stability.

A second defining feature of modern money is ""Singleness"", the property that different forms of money in an economy viz., cash, deposits, are denominated in a single unit and interchangeable at par. This 'Singleness' also arises from the fact that settlement of all transactions take place in central bank money. 'Singleness' of money ensures that trade and commerce are smooth without any concern for the value of different types of money. Ultimately, in modern economies, the fact that all ""money"" is fiat also ensures that money is SINGLE.

Let us now sum up our understanding of what money has evolved into - that money represents VALUE trusted by users, that money is FIAT and, that money is SINGLE.

Let us now see how a cryptocurrency measures up to these attributes of money.

## III. Attributes of Cryptocurrency

The historical evolution of Cryptocurrency is the outcome of decades of search for a cyber solution for total anonymity of transactions outside of state control. The creation of Bitcoin in 2008 was the result of that search. Bitcoin, or rather, the Blockchain, the technology underpinning the Bitcoin, demonstrated that a digital token can be transferred between unknown counterparts without the need for an intermediary. The technology was revolutionary. But the Bitcoin itself was just a tool to demonstrate the technology, it had no value, either intrinsic or as a promise to pay. It was not money. The price of Bitcoin today does not represent value in the sense money has value. This value is purely speculative like the price of a tulip during the tulip mania of the seventeenth century.

To summarise, cryptocurrencies have no intrinsic value. They are not backed by a promise to pay, that is, they have no issuer. Since they do not meet the basic attributes of money, they are not money. In fact, since they do not have any underlying cash flow, they are not financial assets as well, or, for that matter, any asset at all.

How about Stablecoins, which are cryptocurrencies against which the ""issuer"" holds reserves to maintain a stable value. Since they are pegged to a fiat currency, they can perform the functions of a currency. Also, as they are backed by financial or other assets, they do represent value. Therefore, they have some of the basic attributes of a money. However, we need to keep in mind two factors.

- a. Is there a promise to pay? For stablecoins to be money the issuer needs to promise to pay par value to the holder. It is not clear whether Stablecoins are the liability of their issuers. It would appear that neither of the two major cryptocurrencies in use today make such unconditional promise.
- b. Assuming such a liability is legally established, the next point to keep in mind is that stablecoin is private money. Thus, stablecoins fail to satisfy the two defining

b.

features of modern money, viz., (i) money as fiat and (ii) singleness of money. It is possible that in a stablecoin system, there would be hundreds, or more, of currencies in an economy making any such system inherently unstable.

Since we can reasonably establish that unbacked cryptocurrencies are not assets and merely speculative bets, akin to betting on a gambling event, we would focus, in the rest of this talk, on Stablecoins, which are close enough to money to pose a significant challenge to the financial system. First, let us look at the benefits of stablecoins that their proponents claim they have.

## IV. Benefits of Stablecoins

Proponents of stablecoins present a range of claims, the more important of which are, improved cross-border payment efficiency, greater financial inclusion, and the ability to drive digital financial innovation.

## Efficient cross-border payments

An oft cited benefit is that stablecoins can make payments, particularly cross-border payments faster, cheaper and more efficient. In the domestic space, real-time fast payment systems such as UPI already enable fast, low-cost, and reliable payments, and there is no reason to believe that stablecoins would be superior from the point of view of cost or speed or reliability. In the cross-border space, stablecoins can potentially enable faster and perhaps cheaper payments than what the current corresponding banking system provides, mainly because stablecoins do not face settlement risks. On the other hand, it is not certain that stablecoin issuers would have the same degree of acceptability as international banks that are closely regulated and backstopped by central banks. Also, the purported efficiency is doubtful when there are a large number of stablecoins in the ecosystem.

## Improve financial inclusion

Another claim often made is that stablecoins enhance financial inclusion by providing access to digital money for those outside of traditional banking systems. Financial inclusion requires solutions that are accessible, affordable and safe. Many countries have made substantial progress in financial inclusion through digital public infrastructure and simplified account opening frameworks without the need to create parallel private forms of money. The inherent instability of stablecoins means they are clearly inferior alternative to fiat money as tools of financial inclusion. As stablecoins remain dependent on smartphones and digital wallets, internet connectivity and technical know-how, they may not be available to those segments of the population that are most in need of financial services.

## Bridge to the real economy

Finally, supporters of stablecoins often argue that they can act as a bridge for the crypto ecosystem to the real economy. Yet the evidence today indicates that stablecoins remain primarily used as instruments to facilitate trading and leverage within the crypto market itself. Their role as meaningful transactional currency in everyday economic activity remains limited.

To sum up, many of these benefits are neither unique to stablecoins nor have stablecoins yet established any of the benefits their proponents claim. By their very nature, they are in many ways inferior to available forms of money in achieving those benefits. On the other hand the risks they introduce to financial stability, and broader macro-financial stability are extremely serious. We will now take a closer look at these risks in detail before considering how India should approach stablecoins.

## V. Risks of Stablecoins

Beyond the facilitation of illicit payments and circumvention of control measures, stablecoins raise significant concerns for monetary stability, fiscal policy, banking intermediation, and systemic resilience.

## Risk of Currency Substitution

A core risk of stablecoins is currency substitution. Their design as currency-like instruments introduces the potential for currency substitution, particularly in emerging markets, where they could compete with domestic fiat money. Stablecoins, whether denominated in domestic currency or foreign currency, would reduce demand for the local currency and raise the risk of dollarisation.

## Risk to Monetary Policy

Widespread adoption of stablecoins would undermine central banks' ability to control money supply and interest rates. ' If both an official currency and a crypto asset are used for pricing goods and services, domestic prices could become highly unstable due ' (IMF-FSB 2023). If residents increasingly to the inherent volatility of the crypto asset. hold or transact stablecoins, changes in domestic policy rates may have limited influence on economic decisions, weakening the effectiveness of monetary policy.

## Weakening Capital Account Management

Stablecoins pose challenges for capital flow management (CFM) as domestic households diversify their balance sheets by including foreign-currency denominated stablecoins. This trend would make it difficult for authorities to implement capital controls, which are a critical instrument for financial stability in many emerging markets, including India. The pseudonymous nature of blockchain transactions compounds these risks as it creates channels for unmonitored inflows and outflows, diluting the effectiveness of CFMs and complicating both macroeconomic management and external sector oversight.

## Bank and Credit Intermediation

Banks are the primary entities that intermediate between savers and investors in an economy. This ability derives from banks' role in credit creation. To the extent stablecoins replace bank deposits, banks would lose their role in financial intermediation. This would result either in a rise in cost of credit as banks lose access to

low-cost deposits, or banks having to depend on the central bank to provide the liquidity required to fund credit. A financial system that has to increasingly depend on central bank liquidity to fund commercial credit would not sustain.

## Systemic Risks

The combination of weakened banks, reduced monetary policy effectiveness, and limited capital account management amplifies systemic vulnerabilities. Large-scale stablecoin adoption could expose domestic economies to external shocks and crossborder volatility, leaving traditional policy instruments less effective in managing financial stress.

## Loss of Seigniorage

When a central bank issues currency, it receives equal value that is invested in assets like Government securities which are used to back the currency issued. These assets earn a return, which is significantly higher, than the cost of printing and issuing money. This difference - higher returns against lower cost of issue - is seigniorage income, which is transferred to the Government. Since currency issue is a social function, seigniorage income rightfully belongs to the Government, as the representative of the people. There is no case for seigniorage to accrue to private profit-making entities. Yet, this is exactly what Stablecoin issuers earn as income. Seigniorage, which is inherently a sovereign revenue arising from the issuance of fiat money by the central bank, is thus diverted to private operators, often located outside the home jurisdiction, if stablecoins are dominated in a foreign currency. It is likely that most countries will see a leakage of seigniorage income to private issuers of Dollar linked stablecoins. This loss of Government revenue does not receive the serious focus it deserves, not even from central bankers.

## Domestic-Currency Stablecoins Are Not Risk-Free

Some argue that permitting domestic currency denominated stablecoins would not involve these risks. While such instruments may reduce risks to capital account concerns, the fundamental vulnerabilities such as currency substitution, bank disintermediation, reduced monetary-policy control, singleness and loss of seigniorage income remain. This is the reason why advanced economies are not immune to the risks posed by stablecoins.

Stablecoins introduce real and severe risks ranging from monetary and fiscal disruption to banking disintermediation, to systemic instability. The risks are significantly higher for EMDEs, but they are also major risks for AEs. Understanding these vulnerabilities is critical before considering regulatory frameworks or policy adoption. It is not surprising then that global policy bodies and standard-setting organisations continue to highlight the risks of stablecoins.

## VI. Global Policy Responses

Financial Stability Board (FSB) attempted to create a baseline for the regulation of global stablecoin arrangements through its High-level Recommendations 1   issued in 2023. But even these recommendations explicitly admit that they do not address

virtually any of the major risks associated with Stablecoins - risks that particularly matter most to jurisdictions like ours. The IMF and FSB joint Synthesis Paper of 2023 2 also recognised that EMDEs face a distinct and amplified set of vulnerabilities. In its 2025 Annual Economic Report, the BIS points out that stablecoins fail the basic tests of singleness, elasticity, and integrity that any form of money must meet and are hence structurally unsuitable to anchor a monetary system.

The asymmetrical risks to EMDEs often does not receive the importance it merits. Stablecoins are borderless instruments operating in a world of borders. If one jurisdiction with a liberal capital account allows unrestricted use of stablecoins, and they circulate widely in a neighbouring country with capital controls, the financial stability of the latter can be fundamentally undermined. Issues critical to the stability of EMDEs are often acknowledged but not prioritised.

So, what does all this mean for a country like India? How should we deal with stablecoins and safeguard financial stability and monetary sovereignty? These questions naturally lead us to consider the domestic policy imperatives that must guide India's approach in this evolving global environment.

## VII. Policy Approach for India - Promote CBDCs - Harness Innovation and Protect Stability

For India, the approach to stablecoins must be guided by caution and an appreciation of domestic imperatives. Stablecoins can undermine trust in the currency and finance system. India already benefits from a payments landscape that is highly efficient, reliable, and robust. Systems such as UPI, RTGS, and NEFT provide fast, low-cost, and secure payment capabilities to millions of users. This leaves little justification for their integration into the financial system, even before considering the broader risks they pose. India's policy on stablecoins must be driven by domestic priorities.

At the same time, India must acknowledge the promise of innovation that technologies such as blockchain and tokenisation bring. A central pillar of this strategy is the adoption and cross-border readiness of Central Bank Digital Currencies (CBDCs). CBDCs are digital tokens like stablecoins yet they are inherently superior since they satisfy all the attributes that money should have - fiat, single, trusted and representing value - and do not pose many of the risks associated with stablecoins. They can perform all the functions stablecoins claim to offer such as programmability, atomic settlement, lower cross-border frictions, while being fully anchored within the existing financial system. Encouraging CBDC use domestically is essential and can be done by making CBDC functionally similar to physical cash, especially with respect to tiered anonymity. For example, ensuring anonymity for small-value CBDC transactions, much like cash, would provide users comfort and trust while preserving safeguards for highvalue flows. Such an approach also avoids disintermediation risks for the banking system.

The cross-border dimension is even more critical. Much of the appeal of stablecoins lies in their promise of cheaper, faster international transfers. But the same efficiency can be achieved through bilateral or multilateral CBDC corridors. This is an area where India can play a shaping role, by helping build the case for interoperable CBDC arrangements among emerging markets and beyond.

A third pillar of India's approach should be the interlinking of fast payment systems (FPS). Interlinking domestic FPS directly contributes to the G20 objectives of faster, cheaper, more accessible and transparent cross-border payments. The recent linkages between UPI and several partner jurisdictions are important steps forward, increasingly reducing the need for any private digital alternatives for remittances.

Finally, as we weigh policy choices, we must also address a central argument often made by proponents of stablecoins who claim that the associated risks can be managed through regulation. Regulation can indeed mitigate some risks, but the larger question remains: Can we afford to experiment with the foundations of global monetary and financial stability that have been carefully built over the years for instruments that lack the safety features of money, that are inherently risky and that remain untested at scale? As highlighted in the BIS Annual Economic Report 2025 , society faces a clear 3 choice which is either to strengthen the monetary system using proven foundations of trust and advanced, programmable technologies, or to risk repeating the hard lessons of history by relying on unsound private digital currencies with real societal costs.

## VIII. Conclusion

We have seen that stablecoins lack the basic attributes of money, their advantages are neither unique nor unambiguous and their risks are all too real. It may be noted we have not referred to the risks associated with the assets that back a stablecoin. That is because it does not matter, for either the benefits or the risks of stablecoins to materialise.

In fact, the bigger threat is a stablecoin that works well. India stands at a decisive policy crossroads. Despite India having good macroeconomic conditions and sound policies, the domestic factors and compulsions must be considered when evaluating policy options for stablecoins. The choices made today will impact the future of our monetary system and financial sector integrity. India's strategy must be clear and coherent, anchored in four key principles:

- a. Preserve trust in the national currency, monetary and payment system
- b. Safeguard monetary sovereignty and macro-financial stability
- c. Encourage responsible innovation through CBDCs and interoperable payment systems, and
- d. Ensure that innovation strengthens, rather than bypasses, the regulated financial system.

I will end with my response to the question posed in the title of this speech. Do stablecoins serve a purpose? It seems to me that they do not; at any rate, they do not serve a purpose that cannot be served better by fiat money.

Thank you.

- 1 High-level Recommendations for the Regulation, Supervision and Oversight of Global Stablecoin Arrangements, July 17, 2023  https://www.fsb.org/uploads/P170723-3.pdf
- 2 https://www.fsb.org/2023/09/imf-fsb-synthesis-paper-policies-for-crypto-assets/
- 3 (BIS 2025).  https://www.bis.org/publ/arpdf/ar2025e3.htm",T Rabi Sankar
https://www.bis.org/review/r251216h.htm,John C Williams: Resilience,"Remarks by Mr John C Williams, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the New Jersey Bankers Association, Jersey City, New Jersey, 15 December 2025.",2025-12-15 00:00:00,"## John C Williams: Resilience

Remarks by Mr John C Williams, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the New Jersey Bankers Association, Jersey City, New Jersey, 15 December 2025.

* * *

## As prepared for delivery

## Introduction

Good morning, everyone. It's great to be here at the Liberty Science Center, home of the largest planetarium in the Western Hemisphere. Typically, this would be the perfect opportunity for me to discuss the star variables in economics. Alas, I'll save that for the Q&amp;A.

Instead, I'm going to talk to you today about the U.S. economy and how the Federal Reserve is working to achieve its dual mandate of maximum employment and price stability. I'll also discuss recent actions by the Federal Open Market Committee (FOMC), and I'll give my economic outlook.

Before I go further, I must give the standard Fed disclaimer that the views I express today are mine alone and do not necessarily reflect those of the FOMC or others in the Federal Reserve System.

## Turning the Corner

One of the important parts of my job is to travel throughout the Federal Reserve's Second District. It gives me the opportunity to meet with business, community, and government leaders and get a firsthand and in-depth look at the challenges and opportunities facing our region.

In recent years, North Jersey has largely followed the trajectory of the broader U.S. economy: It was hit hard by the pandemic, rebounded quickly, grappled with inflation, and then, over the past year, faced heightened uncertainty stemming from geopolitical events and changes in trade policy.

In fact, if I had to choose one word to describe 2025, it is uncertainty. What's striking is that despite all the uncertainty, the U.S. economy has shown considerable resilience and looks poised to pick up steam next year.

In other words, after navigating through the challenges of 2025, we now appear to be turning the corner. Of course, there's always uncertainty about the road ahead-or, as we say in Jersey, about what's coming down the Turnpike. But over the past year, our local, national, and even global economies have proven to be resilient. Here, that resilience is called ""Jersey Strong.""

## Temporarily Stalled

Before I talk about what I expect for the economy, I want to take a few minutes to tell you more about its current state. I'll focus on the two sides of the Fed's dual mandate: maximum employment and price stability.

I'll start with price stability, which the FOMC defines as 2 percent inflation 1   over the longer run. In monetary policy, we rely on the totality of the data-and there is a lot of data. While we haven't had the normal flow of official data in recent months due to the government shutdown, we are able to use a wide array of indicators to monitor how the economy is doing.

What the data tell me is that the effects of trade policies have boosted inflation this year, but these effects have been more muted and drawn out than I originally anticipated. As a result of the tariffs, progress toward the FOMC's 2 percent longer-run inflation goal has temporarily stalled, with the most recent inflation reading of about 2-3 /4 percent roughly unchanged from a year ago. While it is not possible to precisely measure the effects of trade policy actions, my estimate is that they have contributed around one half of a percentage point to the current inflation rate.

I do not see any signs of tariffs contributing to second-round or other spillover effects on inflation. In particular, no broad-based supply chain bottlenecks have emerged, shelter inflation has declined steadily, and measures of wage growth point to a continued gradual slowing. This is consistent with reports from around the Second District, where several of my business contacts have noted that, while tariffs continue to drive up their input costs, the pace of price increases has eased slightly.

Most importantly, inflation expectations remain well anchored. The New York Fed's Survey of Consumer Expectations (SCE) continues to show that inflation expectations remain well within their pre-Covid ranges. 2   This is something I watch closely, because well-anchored expectations are critical to ensuring low and stable inflation.

## Gradual Cooling

Turning to the employment side of our mandate, the data show that the labor market has continued to cool, with labor demand softening more than supply. Job growth has been anemic, and the unemployment rate has moved up steadily in recent months. These trends are also occurring in North Jersey, where we've seen slight declines in employment since January, and where many of our regional contacts, including those responding to our business surveys, are reporting job losses.

In addition, survey-based measures of the balance between demand and supply show increasing slack in the labor market. In the Conference Board's consumer confidence survey, a measure of the difference between the share of respondents who think jobs are plentiful and the share of those who think jobs are hard to get has declined throughout 2025. We have seen a similar pattern with the National Federation of Independent Business's survey measure of the difficulty in filling jobs. And the SCE's ""job security gap"" measure-defined as respondents' job-finding expectations minus their job-loss expectations-has fallen considerably this year.

Many labor market indicators are now at levels we saw prior to the pandemic, a time when the market was not overheated. And although the labor market is clearly cooling, I should emphasize that this has been an ongoing, gradual process, without signs of a sharp rise in layoffs or other indications of rapid deterioration.

## Monetary Policy and the Road Ahead

Looking ahead, it is imperative that we restore inflation to our 2 percent longer-run goal on a sustained basis. It is equally important to do so without creating undue risks to our maximum employment goal. My assessment is that in recent months, the downside risks to employment have increased as the labor market has cooled, while the upside risks to inflation have lessened somewhat.

Monetary policy is very focused on bringing these risks into balance. To that end, the FOMC has moved the modestly restrictive stance of monetary policy toward neutral. At its meeting last week, the FOMC decided to lower the target range for the federal funds rate by 1/4 percentage point to 3-1/2 to 3-3/4 percent. The accompanying FOMC statement said that ""in considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks."" 3   With these actions, monetary policy is well positioned as we head into 2026.

Looking ahead, I expect tariffs will have a largely one-off price level effect that will be fully realized in 2026. I anticipate inflation to decline to just under 2-1/2 percent next year before reaching the FOMC's longer-run 2 percent goal in 2027.

I expect real GDP growth to be about 2-1/4 percent in 2026, well above my forecast for this year's pace of around 1-1/2 percent. This pickup is in part due to the effects of the government shutdown, but it's also fueled by tailwinds from fiscal policy, favorable financial conditions, and increased investments in artificial intelligence.

And I expect the unemployment rate to rise to around 4-1/2 percent at the end of this year, reflecting some additional effects from the government shutdown. With my forecast of above-trend GDP growth, I expect the unemployment rate to gradually come down over the next few years.

## Balance Sheet

Before I conclude, I'd like to briefly comment on the Fed's balance sheet. On December 1, the FOMC stopped reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities. 4   With the level of bank reserves now deemed to be ample, the FOMC decided to initiate reserve management purchases to maintain an ample level of reserves. This is the natural next step in the implementation of our ample reserves framework to ensure effective interest rate control. 5

With the steady decline in the level of reserves, we have observed upward pressure on repo rates at times in recent months. 6   When this occurs, the Fed's standing repo operations can act as a shock absorber by capping pressures on money market rates

resulting from strong liquidity demand or market stress. 7   I fully expect that standing repo operations will continue to be actively used in this way.

## Conclusion

So, after a year of uncertainty, we will be starting 2026 from a place of resilience. The economy is poised to return to solid growth and price stability.

But, as 2025 has shown, the road may shift in unpredictable ways. In assessing the future path of monetary policy, my views, as always, will be based on the evolution of the totality of the data, the economic outlook, and the balance of risks to the achievement of our maximum employment and price stability goals. We must be ready to adjust our route as needed to reach our destination.

- 1 As measured by the Personal Consumption Expenditures (PCE) Price Index  (Bureau of Economic Analysis).
- 2 Federal Reserve Bank of New York, Survey of Consumer Expectations (November 2025).
- 3 Board of Governors of the Federal Reserve System,  Federal Reserve issues FOMC statement, December 10, 2025.
- 4 Board of Governors of the Federal Reserve System,  Federal Reserve issues FOMC statement, October 29, 2025.
- 5 Board of Governors of the Federal Reserve System, Statement Regarding Monetary Policy Implementation and Balance Sheet Normalization, January 30, 2019;  Principles for Reducing the Size of the Federal Reserve's Balance Sheet, January 26, 2022; and Plans for Reducing the Size of the Federal Reserve's Balance Sheet, May 4, 2022.
- 6 Roberto Perli, Money Market Conditions and the Federal Reserve's Balance Sheet, Remarks at 2025 U.S. Treasury Market Conference, Federal Reserve Bank of New York, New York City, November 12, 2025.
- 7 John C. Williams, Theory and Practice of Monetary Policy Implementation, Remarks at the ECB Conference on Money Markets 2025, European Central Bank, Frankfurt, Germany, November 7, 2025.",John C Williams
https://www.bis.org/review/r251216g.htm,Elizabeth Genia: Navigating economic resilience in a changing climate - insights for Fiji and the Pacific,"Keynote speech by Ms Elizabeth Genia, Governor of the Bank of Papua New Guinea, at for 4th Reserve Bank of Fiji and Asia-Pacific Applied Economics Association Joint Researcher Workshop ""Navigating economic resilience in a changing climate - insights for Fiji and the Pacific"", Port Moresby, 10 November 2025.",2025-11-10 00:00:00,"## Elizabeth Genia: Navigating economic resilience in a changing climate - insights for Fiji and the Pacific

Keynote speech by Ms Elizabeth Genia, Governor of the Bank of Papua New Guinea, at for 4th Reserve Bank of Fiji and Asia-Pacific Applied Economics Association Joint Researcher Workshop ""Navigating economic resilience in a changing climate - insights for Fiji and the Pacific"", Port Moresby, 10 November 2025.

* * *

## Good morning and Bula Vinaka

Firstly, let me acknowledge the traditional owners of the land, their elders past, present and emerging. Governor Ariff Ali, APAEA representatives, distinguished researchers, colleagues from central banks, development partners, and friends of the Pacific.

It is an honour to join you all at this important workshop, where academia and policy intersect to shape our region's future.

I extend my sincere appreciation to the Reserve Bank of Fiji and APAEA for convening this dialogue. We meet at a crucial time for the Pacific, when climate change has moved from an environmental concern to a defining economic reality.

For small island and developing economies like ours, climate change is not a distant threat. It is a lived experience that is reshaping our financial systems, livelihoods, and infrastructure every day.

My home Papua New Guinea faces increasingly frequent flooding, landslides and extreme weather. And here in Fiji, the force of mother nature is experienced at her most extreme. The Pacific is, without question, is on the frontlines of the climate crisis.

And yet, we in the Pacific are also on the frontlines of innovation and resilience.Our economic resilience is now inseparable from our climate resilience. The challenge before us is how to finance that transition. How do we design policies, institutions, and financial instruments that transform climate vulnerability into climate opportunity? And then, how do we translate opportunity into action?

In Papua New Guinea, our journey began with a realization. Sustainable growth requires aligning our financial sector with climate objectives.

Guided by this vision, the Bank of Papua New Guinea established our Green Finance Centre. The GFC is a dedicated department within the Bank intended to lead the country's transition towards a climate-resilient financial system.

The Centre serves as a technical arm of the Bank, coordinating climate finance reforms, guiding financial institutions, and integrating environmental and social risk management into our supervisory frameworks. It represents our commitment to ensure that every kina invested in Papua New Guinea supports not only economic growth, but also environmental integrity and social inclusion.

Early in our work, we developed a guiding document with our Inclusive Green Finance Policy. It was endorsed at the highest levels to ensure buy in - first by our Board and then across government. This policy sets the foundation for green lending, green deposits, and sustainable financial products. In turn, the policy enables our commercial banks, microfinance institutions, and investors to participate in climate-aligned growth.

We are now progressing with the next version of PNG's Green Taxonomy, incorporating Technical Screening Criteria for three sectors out of the eleven near finalization. This will define what qualifies as a 'green investment' at a national level. These nationally recognized frameworks are critical for ensuring credibility, transparency, and consistency in how green finance is measured and mobilized.

At the same time, BPNG, through the Green Finance Centre, is working with partners at the IMF, World Bank, IFC, AFD, ADB, AFI and GGGI to mobilise funding into climate finance instruments. Our first instruments are a Green Refinancing Facility to support lending for sustainable energy and agriculture projects, and a Green Guarantee Facility to de-risk private investments in green sectors.

Recently, we have begun to explore a Renewable Energy Facility. With Papua New Guinea's low electrification rates across our remote communities, renewable energy presents a compelling and resilient solution. We are also developing thematic bond guidelines for PNG and exploring a Sovereign Thematic Bond aligned to our Green Taxonomy. This would mark a historic milestone for the Pacific. Such instruments are not just financial tools; they are commitments to mobilize private capital for public good.

None of these achievements would be possible without collaboration.

At the national level, we work closely with Government partners and domestic financial institutions to align monetary and fiscal efforts with our climate goals.

Internationally, development partners have been instrumental in providing technical expertise and capacity building. These collaborations are strengthening our institutional readiness to manage climate risks, and delivering access to international climate finance.

As we continue on this journey, we are conscious that the lessons we learn in Papua New Guinea can benefit our neighbours across the Pacific. We are committed members of the Pacific Islands Regional Initiative, or PIRI. PIRI is coordinated by the Alliance for Financial Inclusion and includes 6 central banks from the Pacific; Fiji, Tonga, Vanuatu, Solomon Islands and Samoa. Collectively, all 6 central banks are building momentum in Inclusive Green Finance.

BPNG is committed to sharing our experience and frameworks with PIRI members through platforms like the Greening the Pacific Financial Systems Program, funded by the French Development Bank with GGGI as the delivery partner.

We believe that by working together the Pacific can speak with one strong voice in the global climate finance dialogue. We must work together to harmonise our taxonomies, share data, and co-develop green financial products. By working together, we can be more than the sum of our parts.

In conclusion, we see resilience as not just about surviving the next storm, but about redesigning our economies for a sustainable future.

To our academic colleagues here today, your research provides the crucial evidence base we need to make sound policy choices.

To my fellow central bankers, our leadership is shaping how the Pacific redefines stability in the era of climate change.

And to our development partners, your continued collaboration ensures that our ambitions are matched with the means to achieve them.

Together, let us continue to build a Pacific that is resilient, inclusive, and climate-ready.

Thank you, and I wish you all a productive and inspiring workshop.",Elizabeth Genia
https://www.bis.org/review/r251211f.htm,P Nandalal Weerasinghe: Safeguarding stability in a world of shocks,"Speech by Dr P Nandalal Weerasinghe, Governor of the Central Bank of Sri Lanka, at the Inauguration of the Central Bank of Sri Lanka's 14th International Research Conference, Colombo, 8 December 2025.",2025-12-08 00:00:00,"## P Nandalal Weerasinghe: Safeguarding stability in a world of shocks

Speech by Dr P Nandalal Weerasinghe, Governor of the Central Bank of Sri Lanka, at the Inauguration of the Central Bank of Sri Lanka's 14th International Research Conference, Colombo, 8 December 2025.

* * *

First of all, let me extend a warm welcome to all of you gathered here for the 14th International Research Conference of the Central Bank of Sri Lanka. This annual forum has long served as an important platform for academics, researchers, central bankers, policymakers, and our international partners to engage in rigorous dialogue and exchange of ideas on policy research. While this international research conference promotes the Central Bank's research culture, which is essential for the formulation of theoretically sound and evidence-based macroeconomic policies, it also strengthens our valuable collaborations with the global research community.

This conference is the first in a series of three events comprising the International Research Symposium for this year, organised to mark the Central Bank's 75th Anniversary, as you know we have several events during the year. Over the next two days, we will also host the SAARCFINANCE Database Seminar 2025 and the CBSLADB-APAEA Joint Workshop, further fostering regional and international engagement in research and policy dialogue,all three of these events together to celebrate our 75th Anniversary.

Today, we are deeply honoured to welcome Dr. Michael Patra, a veteran Central Banker, who was at the Fund, at the same office constituency and a strong support to Sri Lanka all the time, a pioneer member of the Monetary Policy Committee established in India for the same purpose, an eminent economist and former Deputy Governor of the Reserve Bank of India, whose presence adds significant value to this year's conference. Dr. Patra's distinguished career and extensive policy expertise are invaluable to our deliberations, and we are pleased to have him with us today, to share his insights and experience.

We are hosting this conference at a particularly challenging time for Sri Lanka. The Cyclone Ditwah and resultant devastating floods and landslides have caused a tragic loss of life and widespread displacement of families across the country. We extend our heartfelt condolences to all those affected, and we recognise the extraordinary humanitarian efforts unfolding to support our communities in distress. This tragedy is not only a profound human catastrophe; it is also a powerful reminder of how climaterelated shocks can threaten economic and financial stability. Just as Sri Lanka was beginning to regain stability after the economic crisis and cautiously steer itself back onto a growth trajectory, this disaster has underscored how fragile stability can be. But Sri Lanka as a country has demonstrated how it could overcome the multiple crises that it encountered in recent history in an astonishingly resilient manner. We are confident that this time too Sri Lanka will overcome this massive natural calamity as it did over the years. Building resilience, therefore, is not optional; it is necessary and essential.

As we look ahead, it is increasingly evident that uncertainty has become the defining feature of the global economy. During the 2025 Annual Meetings, Ms. Kristalina

Georgieva, Managing Director of the IMF, emphasised that ""uncertainty is the new normal, and it is here to stay."" This underscores that the world is now navigating a landscape shaped by overlapping and multiple shocks from escalating geopolitical tensions, rising protectionism, leading to geoeconomic fragmentation and rapidly evolving patterns of trade and finance. These multidimensional risks amplify vulnerabilities, particularly for small open economies, and necessitate far stronger resilience. For central bankers, navigating this environment has become especially challenging: inflation forecasting is increasingly complicated by recurrent supply-side shocks, while climate-related risks must now be integrated into macroeconomic modelling, monetary policy formulation, and financial sector oversight. In such a world, the task of stabilisation requires not only sound judgement, but also agile policy frameworks, innovative analytical tools, and institutions capable of responding swiftly to shocks that are more frequent, more interconnected, and far less predictable than in the past.

The theme of this year's conference, ""Stability for Prosperity,"" is both timely and compelling, as the challenging global and domestic economic landscape reminds us that enduring prosperity is built on the foundation of overall macroeconomic and financial stability. Stable macroeconomic conditions provide clarity and predictability that households, businesses, and investors need to make long-term decisions with confidence. Stability lays the foundation for investment, job creation, and innovation, while enabling economies to better withstand economic, financial, or climate-related shocks without derailing growth. In a world where disruptions are frequent and increasingly interconnected, stability is not merely desirable, it is indispensable. Without a stable macroeconomic environment, the pursuit of shared prosperity becomes increasingly difficult, particularly for economies that remain highly vulnerable to shocks.

Central banks play a pivotal role in safeguarding this stability. While maintaining price stability and ensuring financial system stability remains at the core of our mandates, the scope of our responsibilities has expanded considerably. The task before us is no longer merely to respond when crises arise, but to anticipate emerging vulnerabilities and build the buffers that reinforce stability well before shocks materialise. By doing so, central banks enhance the resilience of economies and uphold the conditions necessary for durable and broad-based prosperity.

In this context, building strong buffers is an essential element in safeguarding stability. Recent experiences, such as recovering from a severe economic crisis and then facing the devastation caused by a cyclone, underscore why preparedness matters. Global or domestic shocks, whether from trade disruptions, shifts in global tariffs, or unforeseen crises such as pandemics or natural disasters, are beyond our control. What is within our control, however, is preparing for these shocks. That is why we need to place strong emphasis on building resilience through multiple shocks and multiple buffers that can be mobilised when needed by building external reserves, restoring fiscal space through sustained revenue-based consolidation and comprehensive state-owned enterprise reforms, strengthening the financial system through sound and wellcapitalised institutions, and developing effective disaster-response mechanisms. It is pertinent to mention that, unlike in the recent economic crisis, Sri Lanka has since built reasonably strong buffers on the fiscal, monetary, financial and external fronts providing ample policy space to face and respond to a natural catastrophe of this scale. Ultimately, preparedness is the strongest defence against both economic and climate-

related shocks, enabling us to absorb disruptions without derailing long-term stability and growth.

In this backdrop, the value of strong data, rigorous research, and evidence-based policymaking becomes even more significant. Preparedness is strengthened not only by buffers but also by the ability to anticipate emerging vulnerabilities through timely, highfrequency, and granular data. Well-grounded research enhances forecasting accuracy, informs the calibration of monetary and macroprudential tools, and supports policy decisions that are both proactive and resilient. In a world where shocks are increasingly frequent, interconnected, and complex, cultivating a robust research culture is indispensable for modern central banking. At the same time, new technologies, including artificial intelligence, offer significant opportunities to deepen analytical capabilities, while also introducing challenges that must be carefully managed.

In an environment where shocks transcend borders, collaboration has become more essential than ever. Platforms such as this International Research Conference not only showcase high-quality research but also strengthen partnerships with the global research community, enabling policymakers to integrate cutting-edge insights into their policy frameworks. Enhanced cooperation among central banks, governments, academia, development partners, and international institutions is vital for sharing knowledge, best practices, and innovation.

Hosting this conference at this moment, despite recent national challenges, reflects our continued commitment to research, dialogue, and global engagement. It is a testament to our resilience and to the value we place on academic and policy collaboration as we work together to shape policies that safeguard stability and promote inclusive prosperity.

Finally, I take this opportunity to congratulate the researchers whose papers were competitively selected for presentation at today's conference. I wish you a very productive conference with interesting discussions and exchange of knowledge. Thank you.",P Nandalal Weerasinghe
https://www.bis.org/review/r251211e.htm,"Timothy N J Antoine: Navigating the intelligent age - financial innovation, resilience and inclusion in the Eastern Caribbean Currency Union (ECCU)","Opening remarks by Mr Timothy N J Antoine, Governor of the Eastern Caribbean Central Bank, at the 7th Annual Conference with licensed financial institutions ""Navigating the intelligent age - financial innovation, resilience and inclusion in the Eastern Caribbean Central Bank"", Saint Christopher (St Kitts) and Nevis, 6 November 2025.",2025-11-06 00:00:00,"

## Eastern Caribbean Central Bank

P. O. Box 89, Basseterre, St Kitts, West Indies

## Opening Remarks

## TIMOTHY N. J. ANTOINE

## GOVERNOR OF THE EASTERN CARIBBEAN CENTRAL BANK

## Delivered at the

## 7 th  Annual Conference with Licensed Financial Institutions

## Theme:

## 'Navigating the Intelligent Age:

Financial Innovation, Resilience and Inclusion in the ECCU'

## Sir Cecil Jacobs Auditorium, ECCB Headquarters Saint Christopher (St Kitts) and Nevis 6 November 2025

## Salutations:

## Introduction

Ladies and gentlemen, as you approached our Campus this morning, you may have noticed our entrance offers a welcoming embrace that reflects the spirit and solidarity of the ECCB and the Eastern Caribbean Currency Union. (Slide 2) .

I am delighted to welcome each of you to the ECCB Campus and to our 7 th  Annual Conference with Licensed Financial Institutions.

We are your central bank. We work for you.

Could I see an indication of those who are joining us for the first time? I bid a special welcome to you. I also extend a warm welcome to those of you who have joined us via the livestream.

To our specially invited guest speakers Professor Lloyd G . Waller from the University of  the  West  Indies  (Mona)  and Mr George Thomas ,  CEO  of  Sagicor  Bank  (Barbados) Limited: I extend a warm welcome!  We eagerly anticipate your insights.

Before  I  proceed  any  further,  I  wish  to  thank  my  colleagues  who  have  planned  and  are executing  this  event.  The  effort  has  been  led  by Dr  Shernnel  Thompson,  Deputy Director  in the Research,  Statistics  and  Data  Analytics  Department , with invaluable support from the Corporate Relations Department , Corporate



## Eastern Caribbean Central Bank

P. O. Box 89, Basseterre, St Kitts, West Indies

Governance  Unit and other departments  including Management  Information Systems and Support Services .

Our  theme  this  year  is: 'Navigating  the  Intelligent  Age:  Financial  Innovation, Resilience and Inclusion in the ECCU' (Slide 3).

Ladies and gentlemen, we are living through an unprecedented time when digital tools and AI are transforming how we move money, manage risk, and meet the needs of our customers. We are witnessing machines write, drive, create and even 'think' in ways we once believed were  uniquely  human -and  in  doing  so,  they  are  redefining  what's  possible  in  finance. Together, human ingenuity and artificial intelligence are reshaping how we understand risk, opportunity, and value creation.

In this Intelligent Age, data has become the currency of choice, algorithms our advisers, and insights, the quiet power that outpaces information and propels innovation.  Yet, even in a world driven by intelligence, trust remains the gold standard, and customer satisfaction continues to be our north star. And that will never change.  AI can do many things, but it should never replace critical thinking, human judgement and genuine customer care.  As bankers and regulators, we are custodians of confidence and trust-and in a digital world of viral videos, tweets, and endless fake news. That responsibility is ours to uphold, every day, in every decision, in every interaction.

In our daily work, we engage with numbers-interest rates, spreadsheets, balance sheets and dashboards on key compliance metrics.  They are necessary, but they alone are not sufficient. For as important as the numbers are, we do not serve numbers; we serve people . Because at the end of the day, technology may transform what we do, but it can never replace who we are.  And who we are is defined by our integrity, our diligence, and our unwavering commitment to those we serve.

It is this commitment that gives every financial transaction its true meaning-behind each transaction is a real human story:

-  A small business owner with a great idea but limited collateral, capital, and capacity;
-  A single mother working tirelessly to secure a better future for her children; or
-  A family rebuilding after losing everything to a hurricane.

At this  juncture,  we  extend  our  sympathy  and  solidarity  with  our  brothers  and  sisters  in Jamaica, Cuba, Haiti and The Bahamas whose lives and livelihoods have been disrupted by the passage of Hurricane Melissa.



## Eastern Caribbean Central Bank

P. O. Box 89, Basseterre, St Kitts, West Indies

Ladies and gentlemen, as if the unprecedented pace of innovation were not enough, we are operating in what can only be described as a VUCAA world (Slide 4) -one marked by Volatility,  Uncertainty,  Complexity,  Ambiguity and,  increasingly, Anxiety .    The original VUCA concept, introduced by the US Army War College in the early 1990s, contained only one 'A.'  I have added the second 'A' for Anxiety to capture both the moment and the mood. The  evolving  global  reality,  shaped  by  geopolitical  and  geoeconomic shifts,  carries  profound  socio-economic implications for our region of Small States.

In  the  words  of  the  late  Jack  Welch  (1935-2020),  the  legendary  former  CEO  of  General Electric, we must ' embrace reality as it is, not as we would like it to be '             ( Slide 5 ).  Moreover,  as  Professor  Carol  Dweck  of  Stanford  University  has  taught  us,  we  should navigate the Intelligent Age-and a VUCAA world-with a growth mindset .

As we do, I wish to proffer three key messages that should guide our enterprise (Slide 6) .

-  People First: Our financial system exists to serve people.  Every protocol, policy, and initiative should prioritise improving lives, promoting dignity, and enabling opportunity. Customer satisfaction-anchored in service excellence-must remain our north star, which is why I issue a clarion call to elevate service delivery across all our institutions.
-  Integrity, Inclusion, and Innovation: We must build a financial system that is safe,  responsive,  inclusive, innovative, and resilient. Let us lead with integrity, strengthen trust-the gold standard of our industry, and ensure our actions reflect these values every day.
-  Collective Action: Our greatest prospects lie in working together and sharing select services.  Moreover,  we  must  be  relentless  in  pursuing  the  ' Big Push ',  leveraging collaboration to deliver better outcomes for all.

As we put people first ; lead with integrity, inclusion, and innovation ; and pursue our goals  through collective  action ,  we  must  take  stock  of  the broader  economic environment in which we operate .    It  is  against  this  backdrop  that  we  measure  our progress and assess the opportunities and challenges that lie ahead.

## Macroeconomic Context

(Slide  7) Despite  global  challenges,  our  region  has  demonstrated  remarkable  resilience. Growth in the ECCU is slightly above 3.0 per cent. This performance is reasonably good, but not yet sufficient to achieve our Big Push target of 7.0 per cent.



## Eastern Caribbean Central Bank

P. O. Box 89, Basseterre, St Kitts, West Indies

(Slide 8) Our financial foundations remain strong.  As of October 31, 2025, the backing ratio of our EC dollar stood at 99.6 per cent, well above the statutory minimum of 60.0 per cent.  Reserves are growing, now at EC$5.6 billion, up from EC$5.3 billion a year ago,  and  excess  liquidity  is  around  EC$1.3  billion,  signaling  ample  space  for  responsible lending and investment.

(Slide  9) Inflation  continues  its  downward  trend,  currently  2.1  per  cent  year  on  year, providing a stable environment that supports growth, investment, and the well-being of our people.

(Slide 10) Turning to financial stability , the banking system remains resilient.  Capital adequacy  appears  sufficient  following  the  implementation  of  the  Treatment  of  Impaired Asset Standard, while the non-performing loans ratio is declining, now at 8.0 per cent, down from 11.2 per cent two years ago.  These trends underscore the strength and stability of our financial institutions, even as we navigate global and regional challenges.

These indicators of stability and resilience are not just numbers-they are the foundation upon which we can dream bigger and act bolder.

## The Big Push

For our region, the ' Big Push ' means doubling the size of our economy, with shared prosperity for all .  For individuals, it means doubling our net worth. But what is does it mean for your institutions?

(Slide 11 ) As you survey the theatres of transformation for the Big Push , I invite you to reflect on two questions:

-  What is my institution doing to advance the Big Push ?
-  What more can I do?

The Big Push demands an inclusive financial system , where every policy, innovation, and collaborative effort contributes to growth, opportunity, and shared success.

Achieving the Big Push is  not just about numbers or macroeconomic targets-it is about building a financial system that works for everyone except bad actors.  This system must empower opportunity, foster innovation, and support sustainable growth, while remaining safe and resilient.

Building a Financial System for All-Except Illicit Actors (Slide 11)

I firmly believe that the financial system should work for all, except illicit actors.



## Eastern Caribbean Central Bank

P. O. Box 89, Basseterre, St Kitts, West Indies

Our  joint  initiative  of  the  Basic  Bank  Account,  now  branded  as  the ECCU  First  Step Savings Account, is an important step in realising this vision. I wish to thank the ECCU Bankers Association and the Basic Account Working Group for partnering with the ECCB to make this initiative a reality for our people.

The Big Push also requires greater access to credit for micro, small and medium enterprises (MSMEs), including start-ups, which are the engines of employment and innovation. The Eastern Caribbean Partial Credit Guarantee Corporation (ECPCGC) was launched five  years  ago  for  this  purpose.  As  at  October  31,  2025,  the  programme  has  issued  281 guarantees with a total loan value of EC$27.7 million and a guarantee amount of EC$21.2 million (Slide 12) .

The Credit Bureau , launched last year, also aims to enhance credit while improving credit underwriting and credit risk management.  Global experience shows that wherever credit bureaus have been introduced, access to credit has increased.

Many of you are familiar with our Regional Government Securities Market (RGSM) , which has served our region well since its establishment in 2002.  Through this platform, our member Governments have raised more than EC$20.0 billion , delivering steady returns to investors while meeting vital government financing needs.   To broaden participation, ECCU governments are now piloting a Retail Bond Programme , enabling citizens to invest with as  little  as  EC$500,  and  encouraging  a  shift  from  savers  to  financial  investors  while supporting regional growth and development.

Other key strategic initiatives to which we are committed include the establishment of the Office  of  Financial  Conduct  and  Inclusion  (OFCI) and  the Eastern  Caribbean Financial Standards Board (ECFSB) .

Over the past year, at the request of the five countries with Citizenship by Investment Programmes (CBI/CIP) , we have led the work to establish a regional regulator for these Programmes-aimed at promoting transparency, integrity and long-term sustainability.   I am pleased to note that, having signed the Agreement to establish the Eastern Caribbean Citizenship  by  Investment  Regulatory  Authority ,  the  enabling  law  has  now  been passed in all member countries (in the case of Grenada, in the Lower House).

As your regulator, we take our responsibility seriously.  Our goal is clear: a financial system that  works  for  everyoneour  governments,  economic entities,  and  our  people -everyone except illicit actors .



## Eastern Caribbean Central Bank

P. O. Box 89, Basseterre, St Kitts, West Indies

(Slide 13) Our work in developing resilient infrastructure, such as the Resilient Renewable Energy Infrastructure Investment Facility (RREIIF) in collaboration with the World Bank , demonstrates our focus on sustainable, long-term solutions. RREIIF, the first of its kind in Small States, fosters collaboration on renewable energy projects critical for our region's future.

US$115.0 million in World Bank financing mobilized for Phase I is now  under implementation in Grenada, Saint Lucia, and Saint Vincent and the Grenadines. With a focus on renewable generation and modernization of power grid infrastructure, this financing package is enabling 63MW of renewable energy power generation, 20MW of battery  storage,  80km  of  grid  investments  across  the  three  countries  and  is expected to crowd in an additional US120.0million in private capital to finance a priority pipeline of projects .

RREIIF was named the winner of the 2025 Caribbean Infrastructure Forum's (CARIF's) Best/Most Innovative Financing Award. This award is one of 11 prestigious awards that the ECCB has won over the past eight years.  Let me be clear: our motivation is not recognition. We do this work to transform lives and create opportunities.

As we implement these initiatives-expanding access to credit, fostering inclusive financial markets, strengthening regulatory frameworks, and investing in resilient infrastructure-we see  a  common thread: every action we take  is designed to  empower our people, support sustainable growth, and reinforce trust in our financial system.

## Conclusion

As bankers and regulators, we are custodians of confidence  in our financial system. This immense responsibility does not shrink in the Intelligent Age; on the contrary, it grows.

Let us then lead with Integrity, Intelligence, and Imagination -and take Collective Action :

-  Integrity to safeguard the financial system and always do what is right;
-  Intelligence to harness what is possible;
-  Imagination to shape our future; and
-  Collection  Action to  move  from  what  could  and  should  be  to  a  new  and  better reality.

This, truly, is the essence of our mission.



## Eastern Caribbean Central Bank

P. O. Box 89, Basseterre, St Kitts, West Indies

(Slide 14) I conclude with an anthem rooted in strong conviction:

'As  a  region,  we  cannot  change  our  history,  and  we  cannot  change  our geography,  but  we  can  accelerate  and  elevate  our  development  trajectory through innovation and collective action .'

Let us look forward to an engaging and stimulating Conference.

I thank you.

## References:

World Economic Forum. (2018, January). Advancing financial inclusion metrics: Shifting from access to economic empowerment (White paper). Retrieved from https://www3.weforum.org/docs/WEF\_White\_Paper\_Advancing\_Financial\_Inclusion\_M etrics.pdf



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## Timothy N.J. Antoine

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People First: Our financial system exists to serve people. Every protocol, policy, and initiative should prioritise improving lives, promoting dignity and enabling opportunity.

Integrity, Inclusion and Innovation: Our focus ought to be on building a financial system that is safe, responsive, inclusive, innovative and resilient. We must lead with integrity and strengthen trust.

Collective Action: Our best prospect lies in working together and sharing selected services. Furthermore, we must be relentless in our pursuit of the ""Big Push"".

## GDP Growth Remains Positive



## Monetary Stability

EC dollar strong and stable with growing reserves



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## Eastern Caribbean Partial Credit Guarantee Corporation

| a           | ae   | 2           |                 |       |
|-------------|------|-------------|-----------------|-------|
|             |      | $3,490,187  | $2,710,604      |       |
|             |      | $1,179,000  | $880,280        |       |
|             |      | $94,000     | $75,200         |       |
|             |      | $1,273,000  | $955,480        |       |
|             |      | $278.0 000  | $220.4 400      |       |
|             |      | $6,690,833  | $5,082,215      |       |
|             |      | $8,906,033  | $6,843,875      |       |
|             |      | $377,000    | $301,600        |       |
|             |      | $295,000    | $232,000        |       |
|             |      | $672,000    | $533,600        |       |
| BOSL        | 36   | $6,537,353  | $4,972,210      |       |
| SLDB        | 8    | $1,274,100  | $964,500        |       |
| [FNBO       |      | $139,000    | $111,200]       | 80% | |
|             |      | an 453      | $6,047,910 Sean |       |
| BOSVG       | 63   | ———         | a               |       |
|             | 63   | $5,449,200  | $4,136,135      |       |
|             | 281  |             |                 | 77%   |
| Grand Total |      | $27,740,873 | $21,227,604     |       |

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""As a region, we cannot change our history and we cannot change our geography, but we can accelerate and elevate our development trajectory through innovation and collective action.""

- -Timothy N. J. Antoine



## 7th Annual Conference with Licensed Financial Institutions

Theme -Navigating the Intelligent Age: Financial Innovation, Resilience and Inclusion in the ECCU

## Timothy N.J. Antoine

6 November 2025 | Eastern Caribbean Central Bank

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## Take this with you. Revisit anytime.

Missed something? Want to explore further? Scan or click below to open this presentation. Anytime, anywhere.

",Timothy N J Antoine
https://www.bis.org/review/r251211c.htm,Fabio Panetta: The struggle to reshape the international monetary system - slow- and fast-moving processes,"Text of the 2025 Whitaker Lecture by Mr Fabio Panetta, Governor of the Bank of Italy, at the Central Bank of Ireland, Dublin, 9 December 2025.",2025-12-09 00:00:00,"

## The struggle to reshape the international monetary system: slow- and fast-moving processes

Speech by Fabio Panetta* 2 Governor of Banca d'Italia

Central Bank of Ireland, 2025 Whitaker Lecture Dublin, 9 December 2025

## Introduction

I  wish to thank the Central Bank of Ireland and Governor Makhlouf for the invitation. It is a privilege to be here, in an institution that still carries the intellectual imprint of Thomas K.  Whitaker.  His  conviction  that  economic  policy  must  be  adaptable,  pragmatic  and forward-looking remains a powerful guide - even more so today, as we navigate a global environment marked by uncertainty, fragmentation and rapid change.

The topic I  will  address  today  -  the  transformation  of  the  international  monetary  system (IMS)  -  has  taken  on  renewed  relevance.  On  April  2,  the  United  States  announced the  steepest  tariff  increase  since  the  Great  Depression.  Markets  sold  off  worldwide and - unusually for a risk-off episode - the dollar weakened. This event was a signal that the dollar-centered order might be subject to closer scrutiny going forward.

As Daniel Kahneman taught us, 1 3 some processes move slowly, others suddenly and fast - and today's monetary order is being shaped by both.

Slow-moving processes - the rise of major emerging economies, the United States' twin-debt dynamics, and the rebalancing of economic and political weight - are resetting the structure of the global economy.

Fast-moving processes - above all, technology - are transforming how value moves across borders.  Innovations  such  as  distributed-ledger  technologies  and  the  tokenization  of

* I  would  like  to  thank  Piergiorgio  Alessandri,  Alessio  Anzuini,  Patrizio  Pagano,  Roberto  Piazza and Massimo Sbracia for their help in writing this speech; Matteo Maggiori, Arnaud Mehl and George Tavlas for their comments; Valentina Memoli for editorial support.

1 In Thinking, Fast and Slow , Kahneman uses the contrast between fast and slow thinking to describe internal mental processes; see Kahneman (2011). Here the analogy is applied to the forces shaping the international monetary system.

financial instruments are reshaping money and payments, bringing greater efficiency but also novel risks.

After earlier episodes in which change failed to materialize, signs are emerging that the IMS may evolve towards a more multipolar configuration. Even so, any such shift is likely to  be  gradual,  not  least  because  credible  alternatives  to  US  financial  markets  remain limited. And once a currency attains prominent status, inertia and network effects tend to entrench it.

The implications are complex. The challenge for policymakers will be to ensure that this gradual rebalancing strengthens, rather than undermines, global financial stability - an outcome that will depend on international cooperation, even when political consensus is hard to achieve.

The rise of digital finance will boost efficiency and speed but will also increase the system's exposure to new forms of operational failures, cyber risks and financial instability - including sudden, digitally amplified runs. Geopolitics, too, will increasingly shape the IMS, raising the risk of fragmentation.

Before analyzing these themes, let me recall the basic economics of global reserve currencies: their functions, the forces that drive their evolution and the margins where policy can act most effectively.

## 1. The nature and evolution of a global reserve currency

Global  reserve  currencies  perform  the  functions  of  money  at  the  international  level. They  serve  as  a  unit  of  account  for  invoicing  trade  and  financial  contracts  and  defining exchange-rate parities; as a medium of exchange for settling cross-border transactions; and as a store of value, held by governments, central banks, and private investors as reserves and safe assets. 2

These three functions are mutually reinforcing. When oil prices are quoted in dollars, contracts for oil deliveries are likewise invoiced and settled in dollars. Producers and importers, in turn, tend to issue debt and hold assets in dollars to align their financial positions with their revenues and costs.

Such  complementarities  give  rise  to  two  defining  features  of  the  IMS.  First,  they  create  a centripetal force, favoring the emergence of one - or at most a few - global reserve currencies.

2 For brevity, this list of functions is not exhaustive. More comprehensive definitions of global reserve currencies can be found in many studies in the literature, including Cohen (1971), Mundell (1971), Eichengreen (2011) and International Monetary Fund (2015).

Second, once a currency reaches that position, its international use becomes self-reinforcing: past adoption shapes future adoption, making incumbency hard to dislodge. 3

But  how  does  a  currency  attain  reserve  status?  The  literature  points  to  three prerequisites. 4  First, size: a large economy that engages in substantial trade and has the fiscal capacity to back its liabilities. Second, financial markets depth: large, liquid and accessible markets allow international investors to hold and transact efficiently. Third,  confidence:  sound  macroeconomic  frameworks and institutions  that  deliver low inflation, fiscal sustainability and a resilient financial system. 5

These  three  prerequisites  are  necessary  but  not  sufficient.  Becoming  a  reserve currency  requires  deliberate  policy  choices.  The  United  States  is  a  clear  example: although it had been the world's largest economy since the late 19th century, the dollar still lagged behind several European currencies. It was only between the two world wars, when the Federal Reserve began actively promoting US trade and finance abroad, that the dollar gained global traction. 6

Geopolitics has always played a decisive role. Reserve currency status has historically gone  hand  in  hand  with  global  power  projection.  The  dollar's  ascendancy  after 1945  was  cemented  at  Bretton  Woods,  as  the  United  States  emerged  from  WWII as the pre-eminent global power and security provider. 7  American military strength underpinned the post-war order and reassured allies in Europe and Asia, making the dollar the natural anchor of the international system. 8

3 The self-reinforcing nature of a reserve currency status is enhanced by network and scale effects. Concerning  network  effects,  Kindleberger  (1967)  drew  a  famous  analogy  between  money  and language, observing that both rely on widespread acceptance and shared conventions: people use a particular currency or a particular language simply because others do. Scale effects imply that a large volume of exchanges in dollar helps to keep transaction costs to lower levels than those of any other currency (see Krugman, 1980).

4 See Frankel (2012).

5 These three conditions tend to coexist, raising a 'chicken-and-egg' problem: does trade dominance create  global  demand  for  a  currency,  or  do  deep  financial  markets  attract  global  invoicing  and settlement? The evidence is mixed. Gopinath and Stein (2021) argue that trade dominance comes first. Coppola et al. (2023) show cases where finance leads - recalling how the 17th-century Dutch florin became dominant thanks to the Bank of Amsterdam's superior liquidity supply. Hassan et al. (2025) emphasize economic size: in the absence of trade barriers, the largest country issues the safest currency. Farhi and Maggiori (2018) highlight fiscal capacity as the key determinant, with trade and financial liquidity as complementary factors.

6 See Eichengreen (2011) and Eichengreen and Flandreau (2011). On the role of policy in building and  preserving  the  reserve  status  of  a  currency;  see  also  Clayton  et  al.  (2024a)  and  Maggiori (2017).

7 The military dimension of US power underpinned the 1974 petrodollar agreement, under which Saudi Arabia agreed to price oil in dollars in exchange for enhanced US security cooperation. In return for military assistance and US oil purchases, Saudi Arabia reinvested a large share of its oil revenues in US Treasury securities (Bluestein, 2025). On the importance of geopolitical factors, including military strength, see Iancu et al. (2020) and Rogoff (2025).

8 See Obstfeld (2025).

Issuing  a  reserve  currency  has  both  costs  and  benefits.  One  key  benefit  is  the  so-called 'exorbitant privilege': strong foreign demand for domestic assets, which allows the issuing country to finance itself cheaply and to earn a convenience yield on its liabilities. 9

The  main  cost  stems  from  the  potential  conflict  between  domestic  and  international objectives  -  the  Triffin  dilemma:  in  order  to  supply  the  world  with  safe  assets,  a reserve-currency issuer may need to run fiscal and external deficits that, over time, could undermine confidence. 10 However, a reserve currency issuer is not condemned to instability provided  it  manages  its  balance  sheet  prudently,  using  public  borrowing  to  finance productive investment, and maintains credible policy anchors. 11

## 2. The slow-moving processes

Looking ahead, the evolution of the IMS will depend on slow-moving forces such as the weakening of some of the dollar's traditional pillars, China's rise and Europe's progress toward deeper integration.

## 2.1 The dollar's structural foundations and emerging weaknesses

The dollar remains at the centre of global money and finance (Figure 1). It accounts for 60 per cent of global foreign-exchange reserves and international banking liabilities, and 40 per cent of global trade invoicing. It dominates international bond issuance, commodity pricing, foreign-exchange trading and derivatives markets. 12  US Treasury securities - still the world's most liquid safe assets - anchor this system.

Yet the foundations of this dominance are gradually weakening.

The  share  of  the  US  economy  over  global  output  has  halved  over  the  past  75  years: measured at purchasing power parity, China surpassed the United States about a decade ago (Figure 2.a). At market exchange rates - a metric more relevant for investors and debt capacity - the United States remains larger, but by a shrinking margin. In export value, the US now ranks third, behind China and Europe (Figure 2.b). 13

9 The expression 'exorbitant privilege' was coined in 1965 by Valéry Giscard d'Estaing.  Gourinchas and Rey (2022) estimate this privilege as an annual excess return of 2-3 percentage points on US assets over liabilities - a margin that may have narrowed in in recent years; see Bernanke (2017) and Jiang et al. (2025). They also identify an 'exorbitant duty': during global downturns, the United States provides insurance transfers to the rest of the world by absorbing valuation losses on its riskier foreign assets while issuing safe liabilities. During the 2007-09 crisis, such transfers amounted to 20 per cent of US GDP, and the dollar appreciated by 8 per cent in real terms. For the evolution of the US net foreign asset position since 2007, see Milesi-Ferretti (2024) and Atkeson et al. (2025).

10 The dilemma was named after Triffin (1960). For a modern interpretation, see Maggiori and Fahri (2017).

11 Among early critics of the Triffin dilemma, see Despres et al. (1966).

12 See Boz et al. (2025), European Central Bank (2025), and Bank for International Settlements (2025b).

13 Lagarde (2025) emphasizes that the importance of euro area trade - with exports that have been the highest in the world since its inception - is a crucial driver of the euro's international role.

A key source of vulnerability is the 'twin debt problem', which could gradually weaken confidence in the United States' economy.

First,  US  gross federal debt has climbed above 120 per cent of GDP (Figure 3) and is projected to reach 170 per cent by 2055 - well above any historical precedent. 14 Such trajectories may raise doubts about fiscal discipline, pushing up sovereign yields and complicating the task of the Federal Reserve to deliver on its inflation mandate.

Second, the US net foreign asset position is deeply negative (Figure 4), at -70 per cent of GDP. Persistent trade deficits since the 1970s explain much of this imbalance. Since 2007, valuation effects have also contributed: rising US equity prices - which count as liabilities when held by foreign investors - and, to a lesser extent, dollar appreciation have worsened the US external position. 15

Against this backdrop, the tariff announcements in April 2025 triggered an unusual market reaction:  as noted earlier, both the dollar and Treasury securities depreciated - and this pattern persisted even after equity markets had stabilized (Figure 5).

The trade measures mark a departure from decades of US support for an open, rulesbased  international  order  -  an  order  that  historically  reinforced  the  dollar's  centrality. They could prompt a reconfiguration of global value chains and a regionalization of trade: developments that could strengthen the appeal of 'regional' currencies such as the euro and the renminbi.

Finally, in today's geopolitical landscape, US security guarantees appear less assured than in the past, casting uncertainty over an anchor that has long underpinned the global political and monetary order.

## 2.2 China's constraints and Europe's unfinished integration

China and Europe show that major economies can have some ingredients of a global currency yet still fall short of full reserve-currency status.

China has scale, but may still lack the confidence underpinning a fully international currency. Its  economy  is  the  world's  second  largest  and  its  footprint  is  global,  yet  the  renminbi's international  role  remains  limited.  Capital  controls  still  restrict  access  to  Chinese  assets; investors  face  uncertainty  over  policy  prospects  and  legal  protections.  Domestic  financial markets, though very large in some segments, are neither as liquid nor as accessible as those of  advanced economies. For these reasons, the renminbi accounts for just 2 per cent of

14 See Congressional Budget Office (2025). According to Chen et al. (2025), sterling began to lose ground when public debt approached 200 per cent of GDP in the 19th   century, and it fell after exceeding that level following World War II.

15 Milesi-Ferretti (2024) examines the impact of these valuation effects and Atkeson et al. (2025) argue that they can be attributed to an increased mark-up ('factorless income') that US corporations now enjoy.

official foreign exchange reserves. To make it a more attractive reserve currency, China would need to continue opening up its capital account and developing its institutional anchors. 16

Europe presents a different configuration. It meets all three conditions. The euro is the world's second leading international currency, underpinned by a large, open, advanced economy and a well-developed financial system. Its constraint is the incompleteness of  its  financial,  political  and  fiscal  architecture.  Fragmented  capital  markets  and  the slow pace of institutional integration prevent the euro from achieving the scale and coherence of the US system.

Overall, China and Europe both have the potential to have a more global currency, yet neither is currently in a position to match the dollar. Their future roles in the IMS will hinge on policy choices whose ambition and timing remain uncertain.

## 2.3 Financial markets: the scarcity of alternatives

The April announcements have changed the perceived riskiness of dollar-denominated assets. Investors have reacted accordingly.

In the US, beyond the rise in yields and the dollar depreciation, interest rate volatility has increased, the term premium on long-dated Treasuries has widened (Figure 6) and portfolios have shifted towards shorter durations to limit exposure to interest rate and policy risk.

Hedging demand against a dollar depreciation has risen sharply (Figure 7); 17  in economic terms, this amounts to a partial divestment from US assets - a way of reducing exposure without exiting the asset class.

These  developments  may  have  revealed  something  deeper.  Investors  might  have preferred  to  diversify  away  from  US  assets  -  but  could  not:  as  measures  of  size  and liquidity show, no other currency currently offers a platform capable of absorbing large global flows with the scale, liquidity and safety of US markets (Figure 8).

But this is a picture of today, though not necessarily of tomorrow. Slow-moving processes could progressively open the way to a more multipolar IMS, where the dollar remains a major anchor but other currencies gain importance.

Whether such  a  system  would  prove  more  stable  or  more  fragile  remains  uncertain. Multipolarity  could  increase  diversification,  spreading  the  burden  of  global  liquidity

16 The internationalization of the renminbi does not necessarily require China to accumulate negative current accounts. It could take place if China encouraged two-way capital flows, with foreigners buying domestic assets, and locals buying more assets abroad. See Clayton et al. (2025) for evidence on how China is selectively opening its bond market to foreign investors.

17 See Shin et al. (2025).

provision and reducing global dependence on the US policy cycle. 18  But it could also amplify volatility and contagion risks: competition among reserve currencies may trigger sudden reallocations as relative yields or confidence shift, increasing exchange rate and asset price fluctuations. 19

In  such  an  environment,  international  policy  coordination  becomes  more  difficult, even though it would be most needed. Such emerging multipolar order would likely be fragmented along geopolitical lines, raising transaction costs and weakening global safety nets.

## 3. The fast-moving processes

The slow-moving processes discussed so far will shape the long arc of the international monetary system. But other forces are moving at far greater speed. They stem from technology, magnified by geopolitics, and are transforming money and payments.

For  decades,  payment  systems  were  seen  as  technical  infrastructure  -  essential  for transacting but peripheral to monetary power. That view is no longer tenable. The future of international money is being written not only by trade flows and fiscal positions, but also by the design and governance of digital payments - by code, networks and data integrity.

## 3.1 How technology is reshaping money and payments

As in the 19th century, when firms like Wells Fargo prospered by moving value faster and more safely, 20  the decisive factor in payments today remains the quality of the rails on which money travels - only now those rails are digital, borderless and programmable. 21

Payments  increasingly  rely  on  digital  ledgers,  with  instructions  transmitted  through computer networks rather than physical channels. Efficiency depends on shared technical standards,  while  sound  governance  is  needed  to  prevent  dominant  operators  from exploiting their position.

Two innovations are particularly important: tokenization and distributed-ledger technology (DLT).

18 See Eichengreen (2011).

19 This point is raised, among others, by Nurkse (1944), Matsuyama et al. (1993), and Farhi and Maggiori (2018).

20 Jackson (1972).

21 Programmability  means  that  payment  instructions  can  embed  conditional  logic  -  for  example, triggering a transfer only when predefined conditions are met (such as delivery of goods, verification of  identity,  or  a  specific  date).  This  allows  transactions  to  be  automated,  synchronised  with  other digital processes, and executed without manual intervention.

Tokenization allows money and assets to be represented in digital form in programmable infrastructures, integrating messaging, clearing and settlement within a single architecture and sharply reducing the need for reconciliation. 22

DLT  provides  the  shared  infrastructure  in  which  tokenized  instruments  circulate:  a synchronized digital record held across many nodes, where trust stems from collective validation rather than from any single intermediary. 23

The notion of safety is changing. Operational resilience now hinges on secure software, robust cryptography and protection against increasingly sophisticated cyber threats. Even in so-called 'trustless' architectures, financial safety still depends on credible backing and clear rules. And it depends crucially on an anchor in public money.

Payments are also increasingly reshaped by geopolitics. The exclusion of Russia from SWIFT showed how control over infrastructures determines who can transact and on what terms. Several emerging economies are developing alternative infrastructures to reduce  reliance  on  foreign  systems. 24 The  result  could  be  a  more  fragmented  global landscape, with competing payment blocs and limited interoperability. 25

## 3.2 Cross-border payments: the new frontier of competition

Cross-border payments are the most critical segment of the IMS - and the area where innovation is both most needed and most complex. In 2024, they amounted to over

22 Reconciliation is the process of matching and verifying the debits recorded on the payer's side with the credits recorded on the payee's side to ensure that a payment was correctly executed. Both public and private initiatives are ongoing for the use of tokenization in payment systems. Examples of public projects  are  the  BIS  project  Agorà,  the  Eurosystem  Pontes  initiatives  and  the  digital  euro.  Private sector initiatives include J.P. Morgan's Kinexys Digital Payments project to tokenize bank deposits. Stablecoins are also private sector tokens used for payments.

23 A DLT is a decentralized database where identical copies of data are shared and synchronized across multiple participants or nodes. By removing reliance on a central authority, it enables 'trustless' operations - meaning participants rely on the system's cryptographic and consensus rules rather than on any single trusted intermediary. DLTs can be permissioned or permissionless. Permissioned DLTs restrict participation and embed governance and compliance rules, making them suitable for financial infrastructures where identity, accountability and regulation matter. Permissionless DLTs, by contrast, are open networks where anyone can participate - allowing the holding and exchanging of assets via unhosted wallets that provide a degree of anonymity (more precisely, transactions occur under pseudonyms).

24 Some  examples  are  China's  Cross-Border  Interbank  Payment  System,  India's  Structured  Financial Messaging  System  and  Iran's  SEPAM.  Countries  in  the  ASEAN  and  BRICS  groups  are  developing regional projects to link their fast-payment systems and reduce reliance on foreign intermediaries. Such diversification could weaken US leverage, since - as shown by Clayton et al. (2024b) - economic power  depends  on  near-monopoly  control  over  critical  systems  and  is  highly  nonlinear:  as  long as substitutes are scarce, dependence remains strong, but once credible alternatives emerge, that dependence - and thus the hegemon's power - declines sharply.

25 Ferrari Minesso et al. (2025) find that the decline in the likelihood of interconnecting payment systems is up to twice as pronounced between geopolitically distant countries as it is between geographically distant countries.

$190 trillion. 26  Yet for many years their governance received little attention. That is now changing rapidly. 27

Domestic  payment  systems  have  modernized  profoundly  over  the  last  thirty  years. Many jurisdictions now operate fast, secure infrastructures for both retail and wholesale payments, 28  where public platforms and private solutions coexist and settle transactions in commercial bank money and ultimately in central bank reserves. 29

Cross-border  payments,  by  contrast,  remain  highly  inefficient.  They  still  rely  on cumbersome correspondent-banking chains hampered by complex and divergent legal regimes  and  regulatory  requirements  -  including  data  protection  and  anti-moneylaundering rules - and uneven technological standards. 30  This complexity breeds delays, raises costs and creates operational vulnerabilities.

As  a  result,  international  transfers  often  take  longer,  cost  more  and  provide  weaker protections  than  domestic  payments. 31   This  is  especially  evident  in  emerging  and developing  economies,  where  fees  remain  persistently  high:  sending  remittances  to Sub-Saharan Africa still costs about 9 per cent on average. 32  These weaknesses create fertile ground for private initiatives. 33

## 3.3 The emergence of stablecoins

Stablecoins  have  emerged  as  potential  challengers  to  traditional  arrangements  in  crossborder payments. 34 They are privately issued digital tokens that circulate on distributed ledger infrastructures. They are backed by reserve assets, such as cash and short-term government securities, and aim to maintain parity with their reference fiat currencies.

26 See Ingham et al. (2025).

27 The  G20  and  other  international  bodies  launched  a  Roadmap  to  make  cross-border  payments faster, cheaper, more transparent and more inclusive, with quantitative targets for wholesale, retail, and remittance markets. Since 2023, work has focused on three priorities: system interoperability, regulatory and supervisory frameworks, and data and messaging standards; see Financial Stability Board (2025a) and Panetta (2025).

28 Wholesale  payments  are  transactions  conducted  between  banks  and  other  financial  institutions, typically processed through high-value interbank settlement systems. Retail payments are transactions made by consumers and businesses for goods, services, and personal transfers.

29 For  example,  in  the  euro  area,  public  systems  such  as  TIPS  for  retail  payments  and  TARGET2  for wholesale  transactions  coexist  with  retail  and  wholesale  platforms  operated  by  the  private  sector (such as those provided by EBA Clearing).

30 See Rice et al. (2020).

31 Financial Stability Board (2025a).

32 World Bank (2025).

33 Facebook's 2019 announcement of the Libra project was a wake-up call: it showed how quickly a digital platform of global scale could, in principle, enter payments and potentially reshape the monetary landscape.

34 In this speech, I will set aside so-called unbacked crypto-assets such as Bitcoin, which are speculative assets rather than money or payment instruments.

Their growth has been rapid. Outstanding volumes already exceed $300 billion, and some estimates place them above $3 trillion by the end of the decade. 35  Their appeal is clear: by  circulating  on  DLT  platforms,  stablecoins  can  sidestep  the  correspondent-banking chain and deliver more efficient cross-border payments - especially along corridors where remittance costs remain very high. In countries with weak currencies, chronic inflation or capital controls, they can serve as a store of value outside fragile domestic systems - even if, in practice, this may mean circumventing regulation.

The projected size of stablecoins is not large when compared with global monetary aggregates (Figure 9). But it is large enough to carry significant implications for the IMS.  Because  major  stablecoins  are  dollar-denominated, 36   their  expansion  would effectively boost dollarization, strengthening the network effects that underpin the global demand for the US currency. Estimates indicate that such additional demand could materially lower T-bill yields, amplifying the dollar's 'exorbitant privilege'. 37

Yet stablecoins suffer from two 'original sins'.

First,  they  violate  the  singleness  of  money. 38 In  today's  two-tier  system  -  where public money (central bank money) and private money (mainly bank deposits) are fully interchangeable at par a euro is a euro , regardless of who issues it. Stablecoins break this parity: their value often deviates from one, and even stablecoins pegged to the same currency can trade at different prices. If such instruments were to scale globally, these deviations - even small ones - would in effect create exchange rates between competing private monies. The result would be a fragmented monetary environment that complicates transactions and undermines the smooth functioning of payments.

Second,  they  are  inherently  vulnerable  to  runs.  Deviations  from  par  can  become severe when doubts arise about the quality, liquidity or transparency of their backing assets, or when governance and operational safeguards fall short (Figure 10). 39  In a stress episode, large redemption demands could force stablecoin issuers into abrupt assets sales; if many holders act at once, this could trigger fire sales. With instant

35 According to Standard Chartered, the value of stablecoins could rise to $2 trillion by 2028. Citi indicates a base-case scenario of $1.5 trillion by 2030. J.P. Morgan forecasts about $500 billion by 2028. The US Treasury projected $2 trillion by 2028 in its April 2025 assessment. On June 18, US Treasury Secretary Scott Bessent indicated on social media $3.7 trillion by the end of the decade.

36 See Waller (2025).

37 See Azzimonti and Quadrini (2024) and Ahmed and Aldasoro (2025).

38 Bank for International Settlements (2025b).

39 Citing these concerns, in November 2025 S&amp;P Global Ratings downgraded Tether - the world's largest stablecoin, with $184 billion in assets - to its lowest score (5, weak) for its ability to maintain its dollar peg. The agency highlighted limited transparency over reserve management and risk appetite, as well as the absence of asset segregation to protect users in the event of issuer insolvency ( Financial Times , 27 November 2025, p. 10). More broadly, the risk of runs could become acute in a low interest rate environment, where issuers' interest-based business model would come under strain, or when the prices of risky reserve assets - such as Bitcoin, which some stablecoins hold - fall.

settlement, global access and coordination amplified by social media, these dynamics could unfold far faster than in traditional finance.

There  is  no  easy  redemption  from  these  two  original  sins.  Existing  regulation mitigates them, but cannot eliminate them.

Some jurisdictions have adopted dedicated regimes, most notably Europe's MiCAR and the United States' Genius Act. These frameworks strengthen requirements on disclosure,  governance  and  reserve  assets,  reducing  the  likelihood  of  instability. But  they  lack  the  prudential  scaffolding  that  safeguards  the  convertibility  of commercial-bank money. 40

Moreover, regulatory approaches remain heterogeneous, 41  allowing room for arbitrage, 42 in particular when issuers operate cross-border or locate in more permissive jurisdictions. And because the industry has not yet been tested under severe stress, supervisory frameworks remain largely unproven.

Stablecoins raise additional issues beyond their original sins.

First, they pose financial-integrity risks. AML/CFT rules can be enforced when transactions pass through supervised intermediaries. 43  But stablecoins can also be exchanged directly between private users via so-called un-hosted (or self-custodial) wallets, on blockchains that operate under conditions of pseudo-anonymity. Such opaque, peer-to-peer circulation severely limits authorities' ability to trace transactions and block illicit flows. 44

Second, their true cost efficiency remains uncertain. Providers frequently advertise transfer fees of around 1 per cent, but this figure excludes 'last-mile' charges, foreign-exchange spreads and on/off-ramp costs.

Finally, stablecoins face specific operational vulnerabilities. Loss of private keys, coding bugs, cyberattacks, governance failures or outages in the underlying DLT infrastructure can lead to an irreversible loss of funds - a risk with no equivalent in traditional payment systems anchored in public money.

40 Under MiCAR, stablecoins issued by non-banks lack the key safeguards that ensure the convertibility of bank deposits - such as guarantee schemes, capital requirements and access to lender-of-lastresort facilities.  Moreover, MiCAR does not establish bank-style resolution mechanisms; instead, it requires issuers to maintain recovery and redemption plans based on predefined actions, including suspending redemptions or applying reimbursement fees. Stablecoins issued by banks also do not benefit from these protections though they may indirectly rely on some - but not all - of them through the issuing bank; importantly, they are not covered by deposit guarantee schemes.

41 For an analysis of the differences between MiCAR and the Genius Act and their potential impact on financial stability, see Banca d'Italia (2025).

42 See Financial Stability Board (2025b).

43 Such as banks or, in Europe, the new Crypto-Asset Service Providers (CASPs) recently introduced by MiCAR.

44 See Angelini (2025).

One  fundamental  question  remains  unresolved.  Who  safeguards  privacy,  limits  profiling, enforces accountability and prevents abuses in automated decision-making when payments occur on a borderless public ledger with no clear jurisdictional anchor? 45

## 3.4 Trust, technology and the future architecture of money

The previous discussion shows that competition between the dollar, the euro and the renminbi will  depend  not  only  on  macroeconomic fundamentals, but increasingly on the efficiency, security and integrity of the digital infrastructures that support them. Today, as in the past, technology is a key factor of currency competition. 46

But trust  will  remain  the  foundation  of  national  and  international  monetary  systems.  Technology can enhance how money works, yet it cannot substitute for the authority of the State and the credibility of an independent central bank, on which monetary trust ultimately rests. 47

Even in a fully digital environment, the monetary system will continue to rely on a two-tier architecture of public and private money 48 - and without this anchor, digital assets would not be stable at all.

What will change is the technological form of this architecture. Retail and wholesale central bank digital currencies, tokenized bank deposits and modernized settlement infrastructures will allow it to evolve while preserving its core principles.

Stablecoins will play a role - possibly a meaningful one - in cross-border payments involving countries  with  weak  currencies. 49 But  in  a  world  where  money  and  financial  instruments become fully digitalized, tokenized and programmable, their long-term place in the system remains uncertain: over time, they may simply be outcompeted by digital incarnations of the two-tier system.

During the transition to a digital monetary order, their growing use could add a layer of volatility - or even instability - to an already uncertain international environment. Managing these  risks  will  require  clear  rules,  credible  public  anchors  and  sustained  international cooperation.

45 See Duffie et al. (2025).

46 See Rey (2025).

47 See Panetta (2021) and G30 Working Group on the Future of Money (2025).

48 See Brunnermeier and Payne (2025).

49 Stephen Miran, member of the Federal Reserve Board of Governors, has argued that the most likely markets for stablecoins are jurisdictions - particularly in emerging economies - where investors lack direct access to dollar instruments; see Tett (2025). A similar point was made by Tether's CEO, Paolo Ardoino, in an interview on the Tio website: Tether, parla Paolo Ardoino: 'Lugano contesto ideale per l'innovazione' .

## 4. Europe and the euro

Let me share a few thoughts on the euro area - something my role invites me to do.

As discussed earlier, Europe has the potential to play a greater part in the IMS. Its strong fundamentals - a highly skilled workforce, one of the world's largest markets, and institutions rooted in the rule of law - already make the euro the second most important international currency. But turning these strengths into real global weight requires progress on three fronts, shaped by the slow- and fast-moving processes.

First, Europe must revitalize its economic engine. The policies needed to revive growth are well known 50  and must now be pursued with urgency: higher investment, stronger innovation  capacity,  further  liberalization  and  full  integration  of  national  markets. These are the foundations of Europe's competitiveness and strategic autonomy.

Second,  Europe  needs  deeper  and  more  liquid  capital  markets.  Advancing  towards  a genuine Capital Markets Union requires greater harmonization of corporate, bankruptcy and tax legislation, as well as more standardized disclosure and accounting standards. It also demands stronger centralized supervision. One step would be particularly transformative: the creation of a common European safe asset. A larger supply of euro-denominated risk-free securities  would attract global investors and foreign central banks seeking diversification. It  would  give  the  euro  the  financial  backbone  that  other  major  currencies  already  enjoy.

Third, Europe must complete the digitalization of its financial infrastructure. The Eurosystem has already taken meaningful steps. The digital euro aims to preserve the role of public money in retail payments as cash use declines. In wholesale markets, the Pontes and Appia projects will allow settlement in central bank money to migrate safely to distributed-ledger platforms. 51  At the same time, commercial banks are testing tokenized deposits to ensure that the two-tier monetary system adapts coherently and securely in the digital era.

Internationally,  the  Eurosystem  is  expanding  the  euro's  global  reach  by  improving cross-border payments, strengthening its liquidity backstops, and interlinking its realtime payment system, TIPS, with fast-payment platforms worldwide.

By combining economic dynamism, financial depth and technological innovation, Europe can  reinforce  its  strategic  autonomy  and  allow  the  euro  to  play  a  more  prominent global role - remaining a pillar of stability and a symbol of shared sovereignty in a more uncertain world.

50 See Panetta (2024), Letta (2024), and Draghi (2024).

51 The Pontes project, which has a short- to medium-term horizon and a trial planned by the end of 2026, aims to connect DLT platforms to TARGET2, the wholesale payment infrastructure currently used in the euro area. In parallel, the Appia project takes a longer-term view, developing an ecosystem based entirely on DLT technology for settling wholesale transactions in central bank money, including cross-border transactions. For more details, see the press release 'ECB commits to distributed ledger technology settlement plans with dual-track strategy', 1 July 2025, and the ECB's Pontes webpage.

## Conclusions

The international monetary system stands at a delicate juncture. When structural forces move inch by inch, while technology advances in leaps and bounds, the outcome is not just linear change or fresh opportunities; it may also turn turbulent.

The core principles remain unchanged.

The foundations of monetary stability remain trust, sound public institutions and the two-tier monetary architecture. These anchors have endured every technological wave because they rest on two elements no digital code can reproduce: the authority of the State and the credibility of an independent central bank.

But they must be adapted to a landscape that is shifting far more rapidly than in the past.

Technology  is  reshaping  money  and  payments  at  a  pace  that  outstrips  that  of  legal frameworks and market conventions alike. It promises efficiency, but also a system that transmits shocks more quickly - and is therefore more sensitive to them.

The  dollar  remains  the  dominant  global  currency.  Looking  ahead,  however,  the  international monetary system may gradually drift towards a more multipolar configuration. That shift could bring greater diversification, or amplify volatility and contagion risk if coordination falters. Whether multipolarity becomes a source of resilience or fragility will depend on how well it is governed.

Many questions remain open. Will the transition towards multipolarity be smooth or bumpy?  Will  digital  settlement  deliver  stability,  or  introduce  new  vulnerabilities  operational, cyber, or both? Will stablecoins live up to their name - or become misnamed catalysts  of  instability?  And  how  can  societies  safeguard  fundamental  rights  such  as privacy  as  payments  migrate  onto  borderless,  digital  and  increasingly  decentralized platforms?

One thing is already clear: trust in money is a global public good. Preserving it in a digital, interconnected world requires deeper - not shallower - forms of cooperation: among central  banks;  between  public  authorities  and  private  innovators;  among  countries whose political alignment may differ, yet whose economies and financial systems are inseparably linked.

We  are  entering  uncharted  waters,  where  currents  move  at  different  speeds  and sometimes in opposite directions. Navigating them will require a shared compass - one that ensures that the transformation of money strengthens stability, supports inclusion and drives global prosperity for the decades to come.

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## Figures



Sources: BIS (2025a) and ECB (2025).

(1) The latest data on foreign exchange reserves, international debt, international loans and international deposits are for the fourth quarter of 2024. Foreign exchange turnover data are as of April 2025. - (2) Since transactions in foreign exchange markets always involve two currencies, foreign exchange turnover shares add up to 200 per cent.

Figure 2



Source: IMF DataMapper.

## United States: public debt (1)



Sources: CBO (2025) and White House (Historical Tables, 2025).

(1) Gross federal debt consists of debt held by the public and debt held by government accounts.



Source: G.M. Milesi-Ferretti, 'Research External Wealth of Nations complete update, 2023' , Brookings, 2025.

(1) Countries with the largest positive and negative net international investment positions in 2023.

## Response of US government bond yields and of the dollar to episodes of financial stress (1)



Source: Based on LSEG data.

(1)  Episodes  of  financial  stress  include:  the  subprime  mortgage  crisis  (2007),  the  collapse  of  Lehman  Brothers (2008), the Greek crisis (2011), the euro area sovereign debt crisis (2011), the Greek elections (2012), the Chinese stock market crash (2016), Brexit (2016) and the Silicon Valley Bank failure (2023). The red line indicates the response following 2 April 2025; the blue area represents the range between the minimum and maximum responses observed during past crises; see A. Foschi, 'Safety switches: the macroeconomic consequences of time-varying asset safety' , Banca d'Italia, Temi di discussione (Working Papers), forthcoming. - (2) An increase in the indicator corresponds to an appreciation of the dollar.

Figure 6



Source: Bloomberg.

(1) The 10-year term premium is calculated using the model developed by T. Adrian, R.K. Crump and E. Moench, 'Pricing the term structure with linear regressions' , Journal of Financial Economics , 110, 1, 2013, pp. 110-138.

## Investment fund hedging positions against the dollar exchange rate

(euros per dollar and thousands of futures contracts)



Sources: Based on Commodity Futures Trading Commission (CFTC) and London Stock Exchange Group (LSEG) data. (1) Right-hand scale. Net hedging positions of investment funds, expressed in thousands of futures contracts, are calculated as the difference between long positions on euro-dollar futures (which profit from a depreciation of the dollar) and short positions (which profit from an appreciation).

Figure 8

## Size and liquidity of markets: comparison between the United States and other advanced economies



Sources: ECB (Centralized Securities Database), Bloomberg and World Federation of Exchanges. (1)  Holdings  on  31  December  2024.  Foreign  currency  values  are  converted  into  euros  using  the  year-end  exchange rate. Public-sector and corporate debt securities are expressed at nominal value, equities at market value. Geographical classification is based on the issuer's residence. - (2) Bonds issued by non-financial corporations. - (3) Includes Australia, Canada, Denmark, Japan, Norway, New Zealand, Sweden, Switzerland and the United Kingdom. - (4) Ratio of trading volumes to market capitalization.

## Narrow and broad monetary aggregates by country groups and potential USD stablecoins stock (1)

(trillions of US dollars)



Source: Based on Müller et al. (2025)

(1) Monetary aggregates range from M1 to M3 and are obtained, where available, from Müller et al. (2025). The green bar indicates a potential stablecoin stock of $3 trillion. - (2) The group includes 25 non-European countries that, between 1995 and 2024, experienced at least one 'sovereign external debt crisis' or one 'inflation crisis' according to the classification in the Behavioral Finance &amp; Financial Stability database maintained by Harvard Business School.

Figure 10

## Prices of MiCAR-compliant euro-pegged stablecoins during a flash crash (1)

(euros)



Source: Elaborations on CoinMarketCap data.

(1) Daily lowest price in euros for selected tokens over the period 1-20 October 2025.

Printed on EU-Ecolabel certified paper (registration number FI/011/001)

The life-cycle environmental footprint of the paper used was offset by purchasing carbon credits and planting trees in Italy.

Designed and printed by the Printing and Publishing Division of Banca d'Italia",Fabio Panetta
https://www.bis.org/review/r251211g.htm,Gabriel Makhlouf: Economic resilience - what next? ,"Speech by Mr Gabriel Makhlouf, Governor of the Central Bank of Ireland, at The Royal Irish Academy, Dublin, 10 December 2025.",2025-12-10 00:00:00,"## Gabriel Makhlouf: Economic resilience - what next?

Speech by Mr Gabriel Makhlouf, Governor of the Central Bank of Ireland, at The Royal Irish Academy, Dublin, 10 December 2025.

* * *

Good evening. Thank you for the invitation to join you today.

This evening I want to talk about economic resilience, what it is and whether we have enough of it. I spoke about economic resilience in my first speech as Governor - 6 years ago - and wrote to the Minister for Finance about it in early February this year. After everything that's happened since February, it feels timely to take stock of where we are. My conclusion is that we need to give it greater focus.

Let me start by setting out three propositions.

First, successful economies need a stable and sustainable macroeconomic framework, sound monetary policy that delivers stable and predictable prices, a prudent fiscal policy and debt that's under control. Successful economies are also characterised by wellregulated financial systems and well-functioning markets.

Second, change is a constant and economic resilience is, in essence, the ability of an economy to manage change, whether it is to withstand or recover from the effects of shocks, or the more gradual evolution to a different state.

Third, resilience is built, not granted, and requires constant investment in economic capital which consists of physical, human, social and natural capital. Those four components generate flows of tangible and intangible benefits that build resilience. Ultimately, the growth and distribution of our economic capital - and the ensuing resilience - support societies to prosper and generate longer-term or intergenerational wellbeing.

A snapshot of Ireland's economy today paints a positive picture. The last set of Central Bank projections back in September - the next set are due next week - described an economy growing steadily with employment up 2.3 per cent in the year to Q3 2025 and with unemployment remaining low. The State's books are in good order: the Government's Budget forecast a headline surplus of 3 per cent with debt at 62 per cent of modified national income (GNI*). The latest Exchequer returns point to continued strong growth in tax receipts, fuelled in particular by corporation tax.

In fact, has just ranked Ireland as one of the world's best performing The Economist economies this year.

But of course a snapshot is just that. What matters is the bigger picture, and the horizon. That is somewhat cloudy, and somewhat worrying.

Major global policy shifts this year have added to the economic uncertainty which came from Russia's war in Ukraine, geopolitical tensions more generally and the slow but growing fragmentation of the global economy over the past decade. And closer to

home, you won't be surprised to hear me say that Ireland is over-reliant on corporation tax - and from a small number of firms - which this year is set to account for one third of overall Exchequer revenue.

Uncertainty is not a new phenomenon, and history teaches us that periods of change are the norm, not the exception.

For example, from a technological perspective, take the last 250 years and the advent of the steam engine and the Industrial Revolution itself. We saw productivity enhanced as well as the upending of the global economic way of doing business. Centuries-old industries were extinguished in a matter of years, social dynamics evolved rapidly with wealth and income inequality growing at a rapid pace alongside the redrawing of political and financial institutions to cope with the rapid urbanisation and mechanisation of society.

From a geopolitical perspective, the Napoleonic Wars and the subsequent Congress of Vienna reshaped trade and political maps for over a century in Europe. The Great Depression and the two World Wars on either side of it altered trading relationships and fragmented previously-strong geopolitical relationships which ultimately led to the creation of global institutions such as the UN, IMF and World Bank to restore stability and trust. And of course, perhaps most of all, the creation of what is now the European Union, a peace project like no other and which has brought economic benefits to millions of people across the continent.

These relatively modern historical precedents - I am resisting the temptation to go back further in history - act as a reminder that today's challenges - from economic crashes, geopolitical tensions and the fragmentation of economic relationships - are simply new iterations of an enduring message. As someone once said, ""there is nothing more certain and unchanging than uncertainty and change"". 1

As we face into a period of further uncertainty, both from geopolitical transitions and the more familiar transitions of an ageing society, a changing climate and rapid technological innovation, the importance of economic resilience stands out. Economies must be resilient and robust enough to withstand the 'Knightian uncertainty' - when it is difficult to assign probabilities to imaginable outcomes - that frequently impact on our lived reality.  Instead of allowing ourselves ""fall into the role of a victim"" of circumstance, we can and should take matters into our own hands. 2

## Current inflationary outlook

But back to my first proposition.  Successful economies need stable and predictable prices.

A year ago, inflationary pressures had eased somewhat, and it was becoming clearer that there would be a gradual convergence of inflation to our 2 per cent target during 2025. The latest projections - from September - and the incoming data that I have seen so far lead me to feel confident that inflation will be at target over the medium term, in line with our price stability objective (although, again, there will be a new set of projections next week incorporating the latest data and information).

## Economic resilience priorities

My second and third propositions were about the constancy of change and the need to build resilience - specifically by investing in economic capital - to help manage the effect of shocks or the gradual transition of an economy to a different state.

I want to talk about three areas that deserve focus and attention if we are to strengthen our resilience: addressing our infrastructure needs, realising Europe's potential and building a new rules-based order.

## Ireland's infrastructure

On infrastructure, I suspect that everything that needs to be said about the country's needs has already been said, by me, by people in this room, by business, by the community in general and by Government. I welcome the Government's focus on infrastructure, the resources it has committed to it and the emphasis it has placed on speed.

But I want to add one thing.  As we address the country's housing, transport, telecommunications, energy and water needs, we also need to plan for the shocks that could be created by bad actors. Security considerations need to feature increasingly in our planning for economic resilience, something that we have already started by our focus on the operational resilience of the financial system.

## Europe's potential

Again, you might think that everything that needs to be said on realising the benefits of Europe's Single Market has also already been said. But I am not so sure. At this very moment, the European economy stands at a crossroads. If we want to have a modern, innovative, integrated and productive European economy that realises its potential, that is prepared for tomorrow's challenges, and that is delivering for its citizens, then we need to choose a different path than the one we appear to be on. Mario Draghi's and Enrico Letta's reports make that clear.  The IMF has explained the impact that the 3 barriers within the Single Market are having. They estimate that the internal barriers within the Single Market are equivalent to a 45 per cent tariff on goods. And a 110 per cent tariff on services.

Addressing these issues will also enable a step change to leveraging the potential in Europe's capital markets and mobilising the vast savings potential across the Union, unlocking the €11.5 trillion held by Europeans in deposits and cash and channelling it to drive European innovation, while maintaining our resilience in the face of future potential shocks.

## Multilateralism and embracing a new rules-based order

Unlike Irish infrastructure and Europe's Single Market, not everything that needs to be said about the third area I want to talk about today has been said.

But the evidence is reasonably clear.

The rules-based international order that has been a feature of the last 80 years is now facing unprecedented strain. Arguably it has already stopped working in the way we expected it to. Policy-induced geoeconomic fragmentation has moved from being a risk to becoming a reality, affecting trade and foreign direct investment flows. The journey to greater fragmentation has accelerated this year with the return to tariff levels not seen for a century. Familiar and comfortable paradigms have been turned on their heads.

As a small, open economy, Ireland finds itself at the crossroads of these geopolitical headwinds, deeply exposed to the challenges and complexities.

I am not going to suggest that the old framework was perfect. But I'm happy to argue that open markets, free trade and an integrated global economy have delivered the biggest increase in living standards in human history.

My experience at the G20 this year has reinforced my belief that many countries recognise the benefits of global trade and the value of an international order that is based on transparent rules rather than on economic and military power. The process that took us to the General Agreement on Tariffs and Trade and then on to the World Trade Organization needs to be revived and renewed.

We should not resign ourselves to ""suffer the slings and arrows"" of events but instead look ""to take arms against a sea of troubles"" 4   and develop a new set of multilateral rules that deliver the certainty, stability and prosperity that our businesses and our communities want. Keep existing frameworks where they are working well but be ready to create new ones if need be. Put your energies towards building new relationships; resist the temptation to ""rage, rage against the dying of the light"" 5   especially if a new light is waiting to be turned on.

## Conclusion

Let me conclude. We need to build economic resilience if we are to support communities through economic transitions, and if we are to manage the radical uncertainties that characterise our age. Ireland and our partners in Europe are undergoing significant economic transitions in climate, in demography, in technology and in the way we work with our global partners. These transitions are having and will have an impact on our societies. Building resilience to meet the challenge they pose is a process that involves individuals, households, businesses and policymakers adapting to - and shaping - the context in which they live and operate.

The more resilient our economic capital, the greater the opportunities and capabilities citizens have to live the lives they have reason to value. We should focus our energies towards the challenge of shaping the world ahead of us, rather than seeking to preserve an old order. The stage is now set for building new relationships, adopting new frameworks, and creating new paradigms for the world that our children and grandchildren will inhabit.

Or as I remember from a poem, ""The art of walking upright here is the art of using both feet. One is for holding on. One is for letting go."" 6

- 1  John F. Kennedy
- 2 Olaf Sleijpen, DNB President, remarks at the Financial System Conference 2025
- 3  Draghi &amp; Letta Reports
- 4  To paraphrase Shakespeare
- 5  Dylan Thomas
- 6  Glenn Colquhoun, The trick of standing upright here",Gabriel Makhlouf
https://www.bis.org/review/r251202a.htm,Primož Dolenc: Statement - release of IMF findings,"Statement by Mr Primož Dolenc, Acting Governor of Bank of Slovenia, at the release of the IMF findings, Split, 18 November 2025.",2025-11-18 00:00:00,"## Primož Dolenc: Statement - release of IMF findings

Statement by Mr Primož Dolenc, Acting Governor of Bank of Slovenia, at the release of the IMF findings, Split, 18 November 2025.

* * *

First I would like to express our thanks to the IMF mission, who during their visit on this occasion drew up (i) an assessment of the current situation, (ii) economic forecasts, and (iii) economic policy recommendations.

To begin, we should say that the IMF's findings generally support our own current analysis and recommendations.

For example we share the assessment that current economic activity is being affected by the complexities of the trade and geopolitical situation, and faces huge uncertainty.

Economic growth has slowed this year, which the IMF also finds, but is expected to gradually recover in 2026 and 2027. Banka Slovenije will as usual unveil its latest projections at the end of the year. The current indicators point to a gradual recovery in economic growth, although the difficulties seen at the halfway point of the year mean that it will remain sluggish in 2025, but positive.

Inflation will remain slightly elevated this year, albeit temporary, as a result of a rise in energy prices driven by rising prices of heat and fuels, and in reflection of the waning of a negative base effect in electricity prices. Food price inflation will also remain elevated as cost pressures persist along the food supply chain. Our baseline scenario nevertheless envisages that inflation will gradually slow next year to approach its medium-term target rate of 2%.

We also share the IMF's assessment with regard to the structural challenges facing the Slovenian economy. Here a key factor is the slowdown in labour productivity growth, which calls the long-term viability of economic growth into question. Similarly to today's findings by the IMF, our analysis shows investment to be one of the main factors that could drive a rise in productivity. We find investment activity in Slovenia to be weak, but expect it to increase slightly as the economy strengthens in 2026 and 2027. The most notable of the structural factors that are reducing growth in productivity and potential GDP are the changing structure of the economy, and adverse demographic trends related to the tightness of the labour market.

How Slovenia's economic progress fares in the coming years, and thus its quality of life, will therefore depend on the ability to address the aforementioned challenges.

The IMF assesses the current state of the Slovenian banking system to be good, which was also Banka Slovenije's recent assessment in its Financial Stability Review. The banks have good capital adequacy, liquidity and solvency are high, and profitability is also in good shape. Household lending remains strong, with existing loans largely proving to be adequate. Growth in lending to non-financial corporations by contrast remains low. The NPL ratio is still low, although a slight increase is discernible. The IMF recommends that bank exposure to more sensitive sectors of the economy be

monitored amid the trade risks, particularly in manufacturing. Banka Slovenije has been diligent in monitoring this so far, and will remain so.

The general level of systemic risks to the banking system has not changed significantly over the last six months in our opinion, and we still assess the majority of risks other than cyber risk as low to moderate.

Banka Slovenije is also playing its part in the banking system's successful handling of the shocks from the environment, through its macroprudential policy measures and microprudential supervision. These are preventive and balanced, and focus on strengthening the resilience of the banking system and limiting systemic risks, while we also ensure high credit standards through existing measures. In today's findings the IMF judges our approach to be appropriate.

To conclude I would like to highlight Banka Slovenije's work in the area of financial literacy, which was recognised by the IMF, whose recommendations call for this work to be continued. We have strengthened projects in this area enormously in recent years. This year alone more than 10,000 people have taken part in our projects, and we are planning additional activities over the coming years. We know that a financially literate public who are aware of financial risks and of the growing risk of abuse from the environment help to build financial stability and to create a more stable economic environment.",Primož Dolenc
https://www.bis.org/review/r251216c.htm,"Martin Schlegel, Antoine Martin, Petra Tschudin: Introductory remarks by the Governing Board, Swiss National Bank news conference","Introductory remarks by Mr Martin Schlegel, Chairman of the Governing Board of the SNB, Mr Antoine Martin, Vice Chairman of the Governing Board of the SNB, and Ms Petra Tschudin, Member of the Governing Board of the SNB, at the Media News Conference of the Swiss National Bank, Berne, 11 December 2025.",2025-12-11 00:00:00,"## News conference

Embargo 11 December 2025,

10.00 am

## Introductory remarks by the Governing Board

## Martin Schlegel, Antoine Martin and Petra Tschudin

Chairman of the Governing Board / Vice Chairman of the Governing Board / Member of the Governing Board Swiss National Bank Berne, 11 December 2025 © Swiss National Bank

## Ladies and gentlemen

On behalf of the Governing Board, it is my pleasure as Chairman to welcome you to the SNB's news conference. After our introductory remarks, we will as usual be pleased to take any questions you may have.

## Monetary policy decision

I will begin with our monetary policy decision. We have decided to leave the SNB policy rate unchanged at 0%. Banks' sight deposits held at the SNB will be remunerated at the SNB policy rate up to a certain threshold. The discount for sight deposits above this threshold still stands at 0.25 percentage points. We remain willing to be active in the foreign exchange market as necessary.

Inflation in recent months has been slightly lower than expected. In the medium term, however, inflationary pressure is virtually unchanged compared to the last monetary policy assessment. Our monetary policy helps to keep inflation within the range consistent with price stability and supports economic development. We will continue to monitor the situation and adjust our monetary policy if necessary, in order to ensure price stability.

## Inflation forecast

Let me now turn to the development of inflation. Inflation has declined slightly since the last monetary policy assessment. It decreased from 0.2% in August to 0.0% in November. Lower inflation in the hotel industry, as well as for rents and clothing, contributed in particular to this decline.

Inflationary pressure in the medium term is virtually unchanged compared to the previous quarter. Although our conditional inflation forecast is somewhat lower in the short term than in September, there is only little change in the medium term. The forecast is within the range of price stability over the entire forecast horizon (cf. chart). It puts average annual inflation at 0.2% for 2025, 0.3% for 2026 and 0.6% for 2027 (cf. table). Our forecast is based on the assumption that the SNB policy rate is 0% over the entire forecast horizon.

I will now hand over to Antoine Martin, who will address the global economic outlook.

## Global economic outlook

Global economic growth was stronger than expected in the third quarter. Although US tariffs and trade policy uncertainty weighed on the global economy, economic development in many countries has thus far remained more resilient than had been assumed. Global trade in goods continued to increase. Investment was also higher than expected, this being due, among other things, to strong spending on artificial intelligence. Inflation remained elevated in the US. However, since the downside risks to employment have increased, monetary policy there has nonetheless been eased further. In the euro area, inflation was close to target and key interest rates were left unchanged.

In our baseline scenario, we anticipate that growth in the global economy will be moderate over the coming quarters. Among the factors supporting this are the further monetary policy easing over the course of 2025, as well as more expansionary fiscal policy in some countries. Inflation in the US is likely to remain elevated for some time. In the euro area, on the other hand, inflation is expected to stay close to target.

Uncertainty has decreased somewhat compared to the last monetary policy assessment. That said, our baseline scenario for the global economy is still subject to significant risks. For example, US tariffs and trade policy uncertainty could yet weigh more heavily on global economic momentum than observed thus far. It is also possible that trade barriers may be raised again. At the same time, however, it cannot be ruled out that the global economy will continue to develop better than expected in the coming quarters.

This brings us to the situation in Switzerland, which Petra Tschudin will present.

## Swiss economic outlook

Swiss GDP contracted in the third quarter. The decline was due in particular to the pharmaceuticals industry. Value added there had risen strongly in the first quarter because deliveries to the US had been brought forward in anticipation of possible tariffs. There was a countermovement in the second quarter, which continued in the third quarter. Value added rose slightly in the other manufacturing industries and in services. Owing to this subdued economic development overall, unemployment has risen further in recent months.

The economic outlook for Switzerland has improved slightly due to the lower US tariffs and somewhat better development globally. For 2025 as a whole, we expect GDP growth of just under 1.5%. For 2026, we expect growth of around 1%. In this environment, unemployment is likely to continue to rise somewhat.

The main risk to the economic outlook for Switzerland is the development of the global economy.

I will now hand back to Martin Schlegel.

## Monetary policy outlook

Ladies and gentlemen, allow me to return to our monetary policy.

There has been hardly any change in inflationary pressure compared to the previous quarter. Our conditional inflation forecast is thus virtually unchanged in the medium term compared to the previous quarter, and is within the range of price stability over the entire forecast horizon.

We have decided to leave the SNB policy rate unchanged. Our monetary policy continues to have an expansionary effect. The low level of interest rates in Switzerland is having an effect via the exchange rate. Furthermore, the expansionary effect of our monetary policy is evident in credit growth. Our monetary policy is helping to ensure that inflation is likely to rise slowly in the coming quarters. At the same time, it is supporting economic development.

We will continue to monitor the situation and adjust our monetary policy if necessary, to ensure price stability over the medium term. We remain willing to be active in the foreign exchange market as necessary.

Ladies and gentlemen, thank you for your attention. We will now be pleased to take your questions.

## CONDITIONAL INFLATION FORECAST OF DECEMBER 2025

Year-on-year change in Swiss consumer price index in percent



Source(s): SFSO, SNB

## OBSERVED INFLATION IN DECEMBER 2025

|           | 2022   | 2022   | 2022   | 2022   | 2023   | 2023   | 2023   | 2023   | 2024   | 2024   | 2024   | 2024   | 2025   | 2025   | 2025   | 2025   | 2022|2023|2024   | 2022|2023|2024   | 2022|2023|2024   |
|-----------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|------------------|------------------|------------------|
|           | a1     | |o2    | |e     | |4     | a1     | \e2    | |e     | |>4    | at     | |-2    | [28    | |      | a1     | |2     | |23    | |o     |                  |                  |                  |
| Inflation | 21     | 30     | 34     | 29     | 32     | 21     | 16     | 16     | 12     | 14     | 11     | 07     | 04     | 00     | 02     |        | 28               | 2.1              | 1.1              |

Source(s): SFSO

## CONDITIONAL INFLATION FORECAST OF DECEMBER 2025

|                                               | 2025   | 2025   | 12026   | 12026   | 12026   | 2027    | 2027   | 2027   | 2027   | 2028    | 2028   | 2028   |     |         |     | 2025|2026|2027   | 2025|2026|2027   |
|-----------------------------------------------|--------|--------|---------|---------|---------|---------|--------|--------|--------|---------|--------|--------|-----|---------|-----|------------------|------------------|
|                                               | ell    | |es    | [4      | a1      | |2      | \23 |>4 | a1     |        | \2     | |23 |o4 | (ell   |        | |o2 | [es |o4 |     |                  |                  |
| Forecast September 2025, SNB policy rate 0.0% |        | 02     | 04      | 05      | 05      | 06      | 06     | 06     | 07     | 07      | 07     | 07     | 08  |         | 02  | 05               | 07               |
| Forecast December 2025, SNB policy rate 0.0%  |        | 01     | #01     |         | 02      | 03      | 05     | 05     | 06 06  | 07      |        | 07     | 07  | 08      | 0.2 | 03               | 06               |

Source(s): SNB",Martin Schlegel; Antoine Martin; Petra Tschudin
https://www.bis.org/review/r251216b.htm,"Denis Beau: The Negotiable Debt Securities Market - a French success, a European ambition","Speech by Mr Denis Beau, First Deputy Governor of the Bank of France, at the 40th anniversary of the Negotiable Debt Securities Market, Paris, 27 November 2025.",2025-11-27 00:00:00,"## Denis Beau: The Negotiable Debt Securities Market - a French success, a European ambition

Speech by Mr Denis Beau, First Deputy Governor of the Bank of France, at the 40th anniversary of the Negotiable Debt Securities Market, Paris, 27 November 2025.

* * *

Cher Christophe,

Mesdames et messieurs les reprØsentants des associations professionnelles, Mesdames et messieurs,

C'est un grand plaisir de vous accueillir ce soir dans la Galerie DorØe de la Banque de France, pour cØlØbrer avec vous les 40 ans du marchØ des titres de crØances nØgociables (TCN), marchØ que nous appelons marchØ NEU CP (pour Negotiable EUropean Commercial Paper) depuis 2016.

Allow me to switch to English, as a courtesy to the issuers and investors who have honored us by traveling from abroad.

Tonight, we bring together the rich ecosystem that sustains and energizes the shortterm funding market: banks, corporates, public entities, lawyers, rating agencies, investors-particularly money market funds-and the central securities depository Euroclear.

I have structured my remarks about the NEU CP market tonight around three topics. First, the position and importance it has acquired (I). Second, the foundations of its success and   benchmark role (II). Third, our ambition for this market in a European Savings and Investments Union (III).

## I. The NEU CP Market: A Leading Position in the European Union

Short-term funding markets are a vital instrument for diversifying and adapting the resources borrowed by economic actors to their financing needs for their activities. By complementing bank-intermediated funding, The NEU CP as a funding market offers issuers the flexibility to tailor their financing strategies to evolving needs and market conditions in terms of maturities, interest rate structures, and issuance currencies.

Within the European Union (EU), according to ECB statistics, outstanding short-term securities issued by EU residents totalled approximately €2,000 billion as of October 2025. The issuance of these instruments is sprinkled  across financial corporations (€1,124 billion), public entities (€795 billion), and non-financial corporations (€103 billion). A significant share of these instruments takes the form of commercial paper (CP) or certificates of deposit (CD), underscoring their centrality in short-term financing strategies.

Against this backdrop, the NEU CP market stands out as a success story and a benchmark for all stakeholders. With outstanding amounts of around €310 billion at end-October 2025 (€350 billion including NEU Medium Term Notes), it is a market of prime importance: (i) NEU CP leads in euro-denominated issuance across all issuer

categories; (ii) it leads in non-financial corporate issuance across all currencies; and (iii) euro-denominated NEU CP accounts for roughly half of STEP-labeled euro issuance. For non-financial corporations, outstanding NEU CP securities currently amount to approximately €64 billion for entities established in France alone, representing just under 10% of the total debt they raise on the markets.

Moreover, from a monetary policy perspective, thanks to its sound functioning, the NEU CP market fully plays its role in transmitting changes in the ECB's key interest rates. For non-financial corporations, a comparison with bank lending rates reveals significantly stronger transmission in the NEU CP market over a one-month horizon: resorting to the NEU CP market therefore offers companies advantages in financing conditions, not only structurally in terms of levels but also during phases of monetary easing, owing to the faster transmission.

However, we must also recognize that CP market -including the NEUCP market-  has also shown its vulnerability to severe stress episodes, as seen in March 2020 . In response to exceptional liquidity shortages, the Eurosystem intervened under the CSPP by purchasing short-term securities issued by non-financial corporations. It will be important going forward to strengthen further the resilience of this market segment with systemic risk mitigation measures advocated by the Financial Stability Board in 2024   such as improving market microstructures (for instance through i an increased digitalisation) and enhancing data transparency for both market participants and public authorities.  NEU CP is ""best in class"" in this regard but can nevertheless further progress.

## II. The Foundations of Success: NEU CP as a ""Model Market""

I now come to the second topic of my remark, the foundations of this success. I would like here to highlight three of them.

1/ First and foremost, the market benefits from a regulatory framework, modernised by the authorities over time, which provides participants with security and transparency. This framework defines the legal nature of the instruments, specifies the range of eligible issuers, and sets the conditions for issuance. Overall it tends to reduce issuers' legal access costs, while evolving over time towards greater simplicity.

With hindsight, it is striking to note that some of the market's most structural parameters, as we know them today, date almost from its inception, i.e. the oversight role of Banque de France and market transparency.

The role we play in verifying issuance conditions, combined with a clear legal . It framework secures investors and reduces access costs for issuers complements the mechanism for reducing information asymmetries via making mandatory at least one programme rating, provided by ESMA-approved agencies and accepted on the market.

The very high level of transparency in the NEU CP market is perhaps its most This transparency offers distinctive feature and greatest strength vs peer markets.

benefits, on which we have leveraged to promote ESG-labelled programmes and issuances.

2/ The market  benefits also from the robustness and efficiency of its post-trade infrastructure . Euroclear France's infrastructure is connected to the Eurosystem T2S platform, enabling settlement in central bank money.

3/ Finally, a third foundation, intrinsically linked to the first two ones I highlighted, is its long-standing acceptance by the ECB within its collateral policy Eurosystem: safety, transparency, and accessibility. Eligibility is a key dimension for

- . This acceptance is reassessed annually against three key principles for the investors and an additional advantage in terms of liquidity.

## III. Advancing NEU CP within the European Savings and Investment Union

I will end my remarks tonight with referring to the European Savings and Investments Union (SIU) project, and the ambitions we hold for the NEU CP market within this context.

Across the European Union as a whole, short-term debt markets retain significant potential for development, particularly with regard to non-financial corporate issuance . However, they remain highly fragmented in terms of legal frameworks, disclosure requirements, post-trade infrastructures, and investor bases. This has been very recently illustrated in a report by the ICMA 2   .

At the national level we are working, with the French Treasury and the financial community, to make the NEU CP market more open and attractive to EU participants . A new regulatory reform will be introduced in 2026. The project is nearing completion and should enable to reduce entry barriers for French and European issuers. It intends to:

- (i) allow all issuing and paying agents established within the EU;
- (ii) broaden the range of accepted legal forms for non-financial companies;
- (iii) relax conditions for programme guarantors; and
- (iv) introduce simplification measures, such as removing the requirement for programme rating if the issuer is already rated itself, and harmonising the minimum issuance amount with that of the STEP label, at €100,000.

From a legal and regulatory perspective, we are probably reaching the limits of what can be achieved at national level . To further strengthen the integration of shortterm securities markets, ambitious action is also needed at the Union level.

More Europe means that  we must improve the ability of commercial paper programmes to ""circulate"" within the EU. A single European passport for commercial paper issuers, modelled on the existing Prospectus Directive for bonds would reduce costs and constraints for issuers and broaden the investment universe for subscribers. This ""circulation"" of programmes can only be envisaged within a strongly harmonised framework. This ambition could build on the NEU CP market, for all the reasons I have outlined this evening, as well as on the STEP label.

Finally, technological innovation can also contribute to further strengthen the integration of short-term securities markets.

This is why on 10 October, we launched Project Pythagore with Euroclear: an ambitious initiative aimed at gradually migrating the NEU CP market to a DLTbased infrastructure, provided by Euroclear . This is not about conducting isolated experiments; it is a medium-term approach aimed at a profound modernisation of posttrade processes for all participants by increasing automation, standardization, and transaction speed. By fostering operational efficiency, costs reduction, transparency, tokenization should serve the SIU. On top of that, Pythagore will also make the NEU CP an early - in fall 2026 - adopter of settlement in wholesale central bank digital currency (CBDC). Alignment with the agenda of PONTES, the Euroystem Wholesale CBDC project, is fully consistent with the current functioning of the NEU CP market: NEU CP securities are currently settled in central bank money.

In conclusion, the NEU CP market exemplifies what can be achieved when the commitment of authorities and that of the industry converge to promote a transparent, robust, and innovative market. Our collective challenge is now to build on this foundation, leveraging technology and the momentum on the SIU to contribute to a truly integrated European market for short-term debt instruments.

Thank you for your attention.

1  See FSB(2024):   Enhancing the Functioning and Resilience of Commercial Paper and Negotiable Certificates of Deposit Markets

2 ICMA-paper-Creating-the-conditions-to-scale-up-the-European-commercial-papermarket-November-2025.pdf",Denis Beau
https://www.bis.org/review/r251216a.htm,"Eli M Remolona: Financial learning that connects, transforms, and sustains","Speech by Mr Eli M Remolona, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 2025 Financial Education Stakeholders' Congress ""Financial learning that connects, transforms, and sustains"", Manila, 17 November 2025.",2025-11-17 00:00:00,"## Eli M Remolona: Financial learning that connects, transforms, and sustains

Speech by Mr Eli M Remolona, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 2025 Financial Education Stakeholders' Congress ""Financial learning that connects, transforms, and sustains"", Manila, 17 November 2025.

* * *

DICT (Department of Information and  Communications Technology) Secretary Henry Aguda, TransUnion Philippines President [and Chief Executive Officer] Peter Faulhaber, Credit Card Association of the Philippines Chairman Rolando Ebreo, ladies and gentlemen, magandang hapon sa inyong lahat .

What a pleasure to join you today for this year's Financial Education Stakeholders' Congress.

Our theme, ""Financial Learning that Connects, Transforms, and Sustains,"" captures the very spirit of what we aim to achieve together.

Financial education is not just about saving, investment, or budgeting. It is about helping people make financial choices for their future. Sabi nga namin sa BSP, ""Ang matalinong Pilipino hindi lang marunong mag-ipon, marunong ding mag-desisyon.""

At the macro level, these individual choices matter. When more Filipinos save, we borrow less abroad and reduce the risk of a balance of payments crisis.

We also deepen our capital markets and build a more robust financial system. In other words, the strength of our financial system does not start in boardrooms or trading rooms. It starts with the everyday choices Filipinos make at home.

Each year, this Congress gathers people who care deeply about that mission, and each year we move the needle.

Last year, we successfully leveraged digital tech to promote financial education. We teamed up with TESDA (Technical Education and Skills Development Authority) and the BDO Foundation to roll out free financial  modules for about four million technology and vocational earners. We also launched the BSP e-learning Academy or BELA so Filipinos can build financial skills anytime, anywhere.

Today, we will launch new initiatives that will build on our momentum. These efforts will bring financial learning and financial health closer to every Filipino.

So, let us keep working together so every Filipino can make smart choices that foster not just individual prosperity but also a resilient financial system that fosters growth for our country.

Let us make every choice count. Maraming salamat po.",Eli M Remolona
https://www.bis.org/review/r251216d.htm,Andriy Pyshnyy: National Bank of Ukraine press briefing - monetary policy decisions,"Speech by Mr Andriy Pyshnyy, Governor of the National Bank of Ukraine, at a press briefing on monetary policy decisions, Kyiv, 11 December 2025.",2025-12-11 00:00:00,"## Andriy Pyshnyy: National Bank of Ukraine press briefing - monetary policy decisions

Speech by Mr Andriy Pyshnyy, Governor of the National Bank of Ukraine, at a press briefing on monetary policy decisions, Kyiv, 11 December 2025.

* * *

Dear colleagues,

The Board of the National Bank of Ukraine has decided to keep its key policy rate at 15.5% per annum.

Given the persisting inflationary risks, in particular those related to future international financing, such decision is necessary to support attractiveness of hryvnia instruments, sustainability of the FX market, and controllability of expectations in order to bring inflation to the 5% target over the policy horizon.

The NBU will respond flexibly to further changes in the distribution of risks to the price dynamics.

Inflation is declining somewhat faster than the NBU forecast, but inflation expectations remain high.

In November, both consumer and core inflation slowed to 9.3% yoy. Both indicators were slightly below the NBU forecast trajectory. Such price dynamics were primarily driven by an increase in food supply on the back of the arrival of new harvests.

Despite the sustained disinflation, which has been continuing since June, inflation expectations of economic agents remained high. Web search data also pointed to a further increase in households' attention to the topic of inflation.

Inflation is expected to slow gradually in the coming months.

Effects from the arrival of new harvests will contribute to a further decrease in growth rates of food prices. At the same time, the NBU's actions to maintain interest in hryvniadenominated assets and sustainability of the FX market will restrain the underlying pressure on prices.

As a result, consumer inflation is expected to keep decelerating, though at a slower pace than in previous periods, taking into account the fading of base effects.

International assistance is currently sufficient to maintain an adequate level of international reserves and abstain from monetary financing of the budget deficit, but its future parameters remain uncertain.

Ukraine has received USD 45.8 billion in official financing since the start of the year. By the end of the year, another USD 5 billion is expected to arrive.

External financing allows maintaining an adequate level of international reserves, which reinforces the NBU's capacity to ensure sustainability of the FX market.

International support and domestic borrowing are enabling the government to finance all critical budget expenditures in full.

At the same time, the parameters of external financing for 2026-2027 remain uncertain. Negotiations are ongoing.

The course of the war continues to be the key risk to inflation dynamics and economic development.

The war is grinding on and continues to pose threats to price stability and economic activity.

Furthermore, risks related to the irregularity and/or insufficiency of external financing persist.

The following risks are also relevant:

- the emergence of additional budgetary spending on defense capabilities and reconstruction
- further destruction of energy infrastructure, which could put pressure on business costs and limit businesses' production potential
- a deepening of adverse migration trends and a widening of labor shortages on the domestic labor market.

Meanwhile, some positive scenarios are also likely to materialize. These are primarily related to the potential increase in military and financial support from partners and the international community's efforts to ensure peace for Ukraine.

The NBU has decided to keep the key policy rate at 15.5% to ensure the attractiveness of hryvnia instruments and the sustainability of the FX market, keep expectations in check, and bring inflation to its 5% target over the policy horizon.

Maintaining the key policy rate at its current level in October prevented a decrease in interest rates on hryvnia instruments. This supported their attractiveness and contributed to the further increase in household investments in hryvnia term deposits and domestic government debt securities.

Sustained interest in hryvnia instruments curbed demand for FX and was a significant factor in maintaining a stable situation in the FX market. The hryvnia exchange rate fluctuated in both directions, while exchange rate expectations remained contained.

At the same time, the relatively tight monetary policy did not hinder the further development of lending, which is growing at an annual rate exceeding 30%.

The NBU's decision to keep the key policy rate unchanged in December will support these trends, while also contributing to the further decline in inflation to its 5% target over the policy horizon.

The NBU will respond flexibly to further changes in the distribution of risks to the price dynamics.

If inflationary risks persist or intensify, particularly due to uncertainty regarding external financing, the NBU will be ready to refrain from easing its interest rate policy, and take additional measures if necessary.

Conversely, the weakening of inflationary risks will allow the NBU to start an interest rate easing cycle in line with the baseline scenario of the October macroeconomic forecast.

Thank you for your attention!",Andriy Pyshnyy
https://www.bis.org/review/r251223e.htm,Aino Bunge: Stablecoins and digital euro driven by digitalisation and geopolitics,"Speech by Ms Aino Bunge, First Deputy Governor of the Sveriges Riksbank, at SNS (Center for Business and Policy Studies), Stockholm, 4 December 2025.",2025-12-04 00:00:00,"SPEECH

DATE:

04 December 2025 First Deputy Governor Aino Bunge SNS (Center for Business and Policy Studies)

SPEAKER:

VENUE:

## The payments market in times of change and uncertainty 1

## Digitalisation and geopolitics are shaping the international payments market

My speech today will focus on two trends that characterise the international payments market and what they mean for us in Sweden and Europe. The first trend is that the payments market is still undergoing considerable change through digitalisation. This leads to reduced distances, global businesses and an expectation by all of us that t goods and services from the rest of the world should be a tap of a keyboard or a mobile phone screen away. The second trend is that the world is experiencing increased geopolitical tensions, polarisation and fragmentation, which may have major implications for the payments market as well. Digitalisation and our dependence on international technology services make us vulnerable to developments in the world around us, and we should worry about what happens if we suddenly lack connectivity or access to electricity.

Given the global nature of these trends, all central banks are essentially facing the same questions about how best to meet the challenges and harness the potential of digitalisation. Firstly, there is the question of how we view the money we issue -what form should it take, who should have access to it and how should it be used? Secondly, there is the question of the role that we as central banks should play in relation to private initiatives -who does what in the future?

But I'll start here and now by focusing on Sweden and the Riksbank. The fact that times are changing does not change the fact that we at the Riksbank have a

1  I would like to thank Jens Arnoldsson and Gabriel Söderberg for their help in writing the speech and Claire Ingram Bogusz, Rebecka Hallerby, Per Jansson, Reimo Juks, Petra Lennartsdotter, Pierre Liljefeldt, Markus Morian, Anna Olsson Broszek, Elin Ritola, Björn Segendorf, Anna Seim, Erik Thedéen, Helena Tummings, Mats Wallinder and Christina Wejshammar for their valuable comments. I would also like to thank Caroline Jungner for her plain language review and Elizabeth Nilsson for the translation into English.



responsibility for the payments market. We are committed to making payments safe, efficient and accessible -now and in the future, in everyday life and in times of uncertainty. But to ensure that we can do this, we need to respond to changes, including digitalisation and the changing geopolitical situation. We therefore need to make strategic decisions on how to move forward and ask ourselves whether new tools are needed to fulfil our social mission and that of the Swedish state.

I will first discuss these two trends separately and then move on to how we at the Riksbank are acting to address them and balance the different perspectives.

## Tokenisation, money and payments in a digital world

Let me begin with digitalisation. It is one of the most important megatrends of our time and has had a huge impact on the payments market. Through digitalisation, we have achieved major efficiency gains. We do not need to spend as much time and resources on managing payments and most of us feel that digital payments have made our daily lives much easier. 2

Digitalisation has also made the payments market more international. In this way, network effects and economies of scale can be realised globally and not only at national level. 3 A clear example of this is that most of us use debit and credit cards linked to US card networks on a daily basis, and we increasingly use cards linked to services like Apple Pay or Google Pay. 4

When it comes to the processes behind a payment, the biggest efficiency gains have been made for domestic payments. Across borders, the process is more expensive and complex. Some progress has been made within the EU, but there is a lack of cross-currency instant payment services between countries. When we make a payment outside the EU, chains of banks and other intermediaries in different countries are often needed for a payment to reach the recipient. 5 The payment will then be more expensive and slower than we would wish.

More recently, the emergence of DLT, which stands for distributed ledger technology, has opened up new possibilities. Blockchain technology is the best

2  Sveriges Riksbank, 2025, Are payments in Sweden efficient?: https://www.riksbank.se/en-gb/payments-cash/payments-in-sweden/payments-report-2025/safety-efficiency-and-accessibility/are-payments-insweden-efficient/.

3  Network effects are attained when the benefits of a product or service increase with the number of users. For example, a payment service is usually more attractive the more sellers that accept payments through the service. Economies of scale mean that the average cost decreases as production increases. They usually arise when production is associated with high fixed costs, as is often the case for payment services.

4  Sveriges Riksbank, 2025, The Swedish payments market is almost entirely digital:

https://www.riksbank.se/en-gb/payments--cash/payments-in-sweden/payments-report-2025/trends-onthe-payments-market/the-swedish-payments-market-is-almost-entirely-digital/

5  However, there are continuous efforts to improve cross-border payments, see for example Swift, 2025, Swift GPI: https://www.swift.com/products/swift-gpi Swift GPI | Swift.

known form of DLT. Unlike the traditional financial system, the basic idea of DLT is to enable financial transactions without intermediaries.

DLT also forms the basis for what is known as decentralised finance, or DeFi, where traditional and new assets are represented and traded on decentralised platforms. The assets are moved to a decentralised platform by converting them into tokens -so-called 'tokenisation'. A token can be a digital representation of anything from money, stocks and bonds to art, housing and gold.

Decentralised platforms could also streamline financial transactions by enabling the programming of ""smart contracts"", i.e. self-executing programs that automatically execute and secure transactions once certain conditions are met. 6 There are now a number of experiments around the world where securities transactions are handled in this way. 7 But it could ultimately also be applied to other types of assets. For example, a car sale can be programmed so that the payment is made and the ownership registration is changed in the same transaction.  This reduces risks for both sellers and buyers. If part of the transaction fails, the whole transaction fails. In this way, there are fewer counterparty risks.

The shortcomings of today's cross-border payments and the emergence of DLT also bring me to the currently highly publicised area of stablecoins.

Stablecoins are a crypto-asset issued by private actors in the form of so-called tokens. They are similar to digital coins which, unlike speculative crypto-assets (such as bitcoins), are meant to have a stable value over time. Usually they can do so by tracking the price of an official currency, so far mainly the US dollar. 8

To back up their value, the issuance of stablecoins is based on the existence of a holding of assets that are considered safe and liquid in the same currency -for example, government debt securities and commercial paper. The more stablecoins that are issued, the more assets must be reserved to secure them.

In the past five years, the total value of stablecoins in the world has grown from USD 4 billion to the current USD 273 billion. By far the most common use of stablecoins is as a means of payment in trading other more volatile crypto-assets

6 See for instance BIS Innovation Hub, 2025, 'Project Pine: central bank open market operations with smart contracts'.

7  Swiss National Bank, 2025, ' Project Helvetia ': https://www.snb.ch/en/the-snb/mandates-goals/paymenttransactions/projekt\_helvetia

8  A more detailed review of stablecoins can be found in the Riksbank's Staff Memo ""Stablecoins can provide better payments, but risks remain"": https://www.riksbank.se/globalassets/media/rapporter/staffmemo/engelska/2025/stablecoins-could-lead-to-better-payments-but-risks-remain2.pdf.

and investments. But stablecoins also have the potential to be used more widely for cross-border payments and trading in tokenised assets. 9

However, the increasingly widespread use of stablecoins brings risks. If many people want to redeem their stablecoins, the underlying assets have to be sold, which can quickly bring down their prices. This can affect, for example, companies and individuals who own a lot of one or a few types of assets. In addition, Sweden and Europe could become more dependent on non-European payment services if the stablecoins used are not issued here. Moreover, the infrastructure used to trade stablecoins is decentralised, making it more difficult to know who is holding stablecoins and what transactions are being made. This also makes it more difficult to detect and intervene against criminal activities. We at the Riksbank have described this in our latest Financial Stability Report. 10

Another risk with stablecoins is that although they are pegged to the same currency, such as the US dollar, they are issued by different actors. Is a stablecoin backed by US dollars from a small start-up as trustworthy as one from a major bank? The difference may mean that a stablecoin from one issuer will not be worth as much as a stablecoin from another, even though they are pegged to the same currency. In practice, they can also be worth different amounts depending on how easy it is to redeem them. This could undermine what we call singleness of money, that is., that a krona is worth the same amount regardless of whether it is a coin or deposited in a bank account or some other form of money used in society. This may seem trivial today, but it is not a given. In Sweden, we have historically had periods where there have been different forms of money that have been worth different amounts. 11 Similar episodes have also occurred around the world. In the United States in the 19th century, there were more than 1,500 private banks that issued banknotes that had different values, depending, among other things, on the issuing bank's risk profile. 12 In short, these conditions caused many problems and we do not want to go back there.

In conclusion, there are risks associated with stablecoins. But there are also potential benefits. So the solution is not to prevent their development or try to ban them. On the contrary, we need to ensure that their development takes place in a way that minimises risks.

9  The Riksbank,2022,, An overview of fintech and crypto-assets https://www.riksbank.se/globalassets/media/rapporter/staff-memo/webbrapport---pdfdokument/2022/an-overview-of-fintech-and-cryptoassets.pdf.

10  Sveriges Riksbank, 2025,Financial Stability Report 2025:2 https://www.riksbank.se/en-gb/financialstability/financial-stability-report/2025/financial-stability-report-20252/.

11  Edvinsson, Rodney, Jacobsson, Tor och Daniel Waldenström,2010, Exchange rates, prices, and wages, 1277 -2008 , Stockholm, Ekerlids förlag.

12  Söderberg, Gabriel, 2018, Why did the Riksbank get a monopoly on bank notes?, Sveriges Riskbank Economic Review 2018:3

So far, stablecoins are not a major issue for the Swedish market, but they are something that we at the Riksbank are monitoring to be prepared if developments accelerate.

## New geopolitical climate changes conditions

Let me now turn to the second trend: increasing geopolitical tensions. What does this have to do with payments?

Well, in the geopolitically charged world we now live in, there is a risk that our payment systems could also be used as a weapon. For example, following Russia's illegal invasion of Ukraine, measures were taken to disconnect Russia and its banking system from the Swift global messaging system. 13 Such sanctions are necessary tools against countries that wage war of aggression. But the measures against Russia also showed that we can be vulnerable if we use foreign payment infrastructure.

So dependencies, concentrations and vulnerabilities are real problems that we need to analyse. But at the same time, there is a risk that such considerations around the world could lead to increased fragmentation of the international payment system as countries and regions develop parallel payment systems to reduce their dependence on those of other countries. 14 At worst, it leads to deeper economic fragmentation, with trade and investment intensifying within certain regions, while interconnections between regions diminish. We have then entered a vicious circle where the fragmentation of payment systems contributes to increased fragmentation of the world economy. 15 This is not a positive development for the world economy and especially not for a small, open economy like Sweden.

The geopolitical situation also means that we must take into account direct threats to Sweden's security. The digitalised payment system is dependent on electricity and data communication, including internet connection. This makes our infrastructure vulnerable to cyber-attacks and even physical attacks. 16  We therefore need to review and increase our resilience.

13 Swift, 2022, 'An update to our message for the Swift Community': https://www.swift.com/newsevents/news/message-swift-community

14  Sveriges Riksbank, 2025, Polarisation and fragmentation in the global payments infrastructure: https://www.riksbank.se/en-gb/payments--cash/payments-in-sweden/payments-report-2025/trends-onthe-payments-market/global-trends-in-the-payments-market-/polarisation-and-fragmentation-in-theglobal-payments-infrastructure/ .

15  Aiya, Sheker et al, 2023, Geoeconomic Fragmentation and the Future of Multilateralism, IMF Staff Discussion Notes.

16  See, for example Ström, Gabriella, 2025, Distributed denial-of-service attacks can affect access to financial services, Sveriges Riksbank, Economic Commentaries no 10.

Hostile state actors may also seek to influence and destabilise democratic institutions or weaken critical infrastructure in other countries. They do so through activities commonly associated with organised crime, such as evading sanctions, financing terrorism and traffic of influence, and they often act through proxies. These actors also use cyber-attacks to fulfil various national interests. This means that payment industry participants need to be vigilant, have a good understanding of the situation and work closely with the relevant authorities and one another to identify and manage threats.

## How should we respond to these trends?

What do we need to do to harness the potential of the new technologies, address the geopolitical risks and continue to fulfil our objectives of safe, efficient and accessible payments? The answers to this question are less certain. There are different ways to go. But what is clear to me is that it will require active decisions and a strategic approach to technology, and geopolitics and how these aspects interact.

We need to develop our payments system so that it can continue to serve consumers and businesses in Sweden in an efficient and secure way. At the same time, we need to create the right conditions for the new technologies. This places demands not only on us as a central bank, but also on policymakers and the private sector.

Let me start by explaining what the Riksbank has done and what we see ahead.

## Riksbank develops its payment system together with Europe

A major choice we have already made is to seek closer cooperation with Europe for our core payment systems.

We are already using the European platform TIPS to make one-off instant payments, such as those via Swish. In cooperation with the ECB and Danmarks Nationalbank, we have recently developed a service in TIPS -TIPS Cross-Currency -which enables instant payments between the currencies connected to the platform, which are currently the Swedish krona, the Danish krone and the euro. This will enable instant payments between Sweden and other countries in Europe. Next year, we will update our terms and conditions and start offering the service to the market.

The ECB is also working globally to enable instant payments outside Europe by linking TIPS to instant payment systems there. A recent decision has been taken to go further and link TIPS to the Indian equivalent, the Unified Payment Interface

(UPI). The ECB will also continue to explore the possibility of linking TIPS to Nexus Global Payments, an ongoing effort to connect instant payments in Southeast Asia. 17

We have also decided to move the parts of our RIX system that process largevalue payments to the Eurosystem's T2 and to share their platform. 18 Those contract negotiations are currently ongoing. The Riksbank has also taken a policy decision to move securities transactions toT2S. 19 RIX is the hub of our payment system and is needed for payment service providers to be able to offer secure and efficient services in Swedish kronor.

Ensuring that RIX is secure, stable and modern is one of our most important tasks, and you could say that we are working on two fronts: on the one hand, managing and developing existing services within RIX, and on the other hand, thinking about what services we need to offer in the future. We believe that sharing a platform with the Eurosystem is the best way to achieve these objectives. This allows us to share resources for operations, further development and cyber defence with other countries in Europe. In a world of heightened geopolitical tensions, these are key issues.

We aim to complete the move to T2 in 2030. In 2026, we will also start preparing the transitione to T2S. This will happen after the move to T2, as both the Riksbank and the market consider it inappropriate to move both settlement services at the same time.

We are also continuously upgrading RIX. During the year, we have implemented the ISO 20022 international message format in RIX. 20 We have also opened up RIXINST to instant payments other than Swish and enabled payment institutions and e-money institutions to participate in RIX. 21

At the same time, we are following developments around the tokenisation of traditional money and assets. Tokenisation is currently a small market globally, but there are banks and other players trying to create new innovative services based on tokenisation. Central banks have a potentially important role to play in

17  ECB, 2025, Eurosystem moves forward on work to connect TIPS with India's Unified Payments Interface and with Nexus Global Payments:

https://www.ecb.europa.eu/press/intro/news/html/ecb.mipnews251120.en.html

18  ECB, 2025, TARGET Services: https://www.ecb.europa.eu/paym/target/html/index.en.html

19 Sveriges Riksbank, 2025, Investigation into the Riksbank's future settlement services :

https://www.riksbank.se/en-gb/payments--cash/the-payment-system---rix/ongoing-studies-andprojects/study-of-the-riksbanks-future-settlement-service/

20  The transition to ISO 20022 means that a payment can contain more information than before, improving traceability and making it easier to detect errors. The format is also used internationally, and will therefore open up for faster and more efficient processing of payments between countries and currencies.

21  Sveriges Riksbank, 2024, More payments than Swish can not reach recipients instantly:

https://www.riksbank.se/en-gb/press-and-published/notices-and-press-releases/press-

releases/2024/more-payments-than-swish-can-now-reach-recipients-instantly/

supporting these developments and ensuring that they take place in a safe and efficient manner. If and when money and other financial assets are tokenised to a large extent, central banks will also need to review and be prepared to modernise their services.

Some countries have, however, made more progress than others. Following extensive experiments with market participants last year, the ECB is now running several tokenisation projects. The projects explore how to create central bank money in tokenised form so that central bank money is compatible with the tokenised money and assets of private actors. By being connected to the TARGET systems, we can benefit from the developments taking place there, should we see a need for such services in Sweden in the future.

## The digital euro reopens the question of an e-krona

The ECB is now working hard to develop a digital euro, which will serve as digital central bank money for the public. It is intended, among other things, to facilitate cross-border payments within the euro area and reduce dependence on foreign payment systems. The ECB also intends to make it possible to make offline payments with the digital euro. The project has just entered a new phase aimed at ensuring that the technical conditions are in place for the launch of the digital euro, should the go-ahead be given. 22 At the political level, negotiations are ongoing within the European Council and the European Parliament, which can be expected to lead to a regulatory framework for a digital euro next year. If the digital euro materialises, which could be in 2029 23 at the earliest, it would provide a pan-European payment solution that can operate independently of foreign technology and payment services.

Here in Sweden, we have mainly worked on the issue of central bank digital money in the e-krona project launched in 2017. The issue was also addressed in a public inquiry, which concluded that there was not a strong enough societal need to issue an e-krona, but that this could change if we had a digital euro. 24 At the Riksbank, we are therefore following developments closely and are involved in dialogues with the ECB on both the regulatory framework and the technical design for a digital euro. An important aspect for the Riksbank is that the platform should be able to be used for different currencies and payments between them.

22  ECB, 2025, Eurosystem moving to next phase of digital euro project:

https://www.ecb.europa.eu/press/pr/date/2025/html/ecb.pr251030~8c5b5beef0.en.html .

23  ECB, 2025,Progress on the digital euro:

https://www.ecb.europa.eu/euro/digital\_euro/progress/html/index.en.html .

24  Staten och betalningarna, SOU 2023:16:  https://www.regeringen.se/rattsliga-dokument/statensoffentliga-utredningar/2023/03/sou-202316

This would allow us to build a possible e-krona with the same infrastructure as the digital euro, should political decisions be taken in that direction.

One way to view the ECB's digital euro development activities is that many countries -and many countries' central banks -are coming together to build a common system. This reduces both costs and risks for each individual country. Sweden could benefit from it in the same way as we have already done with the TARGET systems. We will therefore explore the opportunities and possible challenges of sharing the digital euro platform with a potential Swedish e-krona in the future.

But developing an e-krona would take time. If and when the ECB after political approval takes the decision to develop and issue a digital euro, we as a country should know what we want and be ready to make suggestions on how to proceed. 25 We should therefore likely already next year start discussing how to approach the issue of an e-krona if the digital euro is introduced.

## We are strengthening our preparedness and continuity

The new situation also means that we cannot talk about payments without talking about preparedness for crisis and war. Payments are such a fundamental part of a functioning society that they are an obvious target for those who wish us harm -if you disrupt payments, you disrupt the whole of society and break down its resilience.

When the new Sveriges Riksbank Act was introduced, the Riksbank was given a new responsibility to ensure that Swedes can pay in times of crisis and war. 26  We have therefore issued regulations and identified a number of companies that we consider to be particularly important for payments to work. Together with these companies, the Riksbank is now leading the work on strengthening the resilience of the payment system, which involves planning for the worst-case scenario of war in Sweden or in our vicinity. We have also worked on our own depots and provided suggestions on how to strengthen the cash infrastructure. 27

25  The new Sveriges Riksbank Act adopted by Parliament in 2023 made it clear that the issuance of an ekrona requires parliamentary approval. But beyond this, a number of adjustments to Swedish legislation are likely to be required.

26  Under the Sveriges Riksbank Act, the Riksbank has a responsibility to ensure that the public is able to make payments both in crisis situations that occur during peacetime and in a situation of heightened alert. The Riksbank Act gives the Riksbank responsibilities, tasks and mandates that shall contribute to a gradual strengthening of the overall capacity to enable the public to continue to make payments during peace-time crisis situations and times of heightened alert. In practice, the responsibility means that the Riksbank has the role of coordinator, requirement specifier and supervisor.

27  Sveriges Riksbank, 2024, Measures to maintain the cash chain:

https://www.riksbank.se/globalassets/media/nyheter--pressmeddelanden/nyheter/2024/240903-nyhetkontanthantering/skrivelse-atgarder-for-att-uppratthalla-kontantkedjan.pdf (only in Swedish)

The Riksbank has also created a collaborative structure where we work together with companies to strengthen Sweden's resilience: Civil Preparedness for Payments (CBB). 28 In the CBB, we have different types of capacity-building activities, courses and exercises. In addition, the Riksbank has led work together with a broad circle of market participants to ensure that physical payment cards can also be used offline if data communication is not available. The Riksbank and these actors have jointly agreed that by 1 July 2026, it will be possible to pay by card offline for essential goods such as food, fuel and medicines. This shall be possible in the case of disturbances lasting up to seven days. 29

We also cooperate with other central banks on crisis preparedness and civil defence issues. For example, we have deepened our cooperation with Norges Bank in contingency planning, exercises and crisis management.

## International cooperation for the safe development of digital assets

But as I mentioned at the beginning, the trends we are now discussing are global. Ultimately, we will only be able to tackle them if we cooperate internationally. And at the same time, as I have also mentioned several times, there are polarising and fragmenting forces in the world. We therefore now need to particularly emphasise and reward work to achieve international consensus and cooperation.

Let me return here to the example of stablecoins. Given their international nature, it is desirable that we have an international consensus on the regulatory framework for their issuance and the financial services based on them. Through the MiCA Regulation, a regulatory framework is now in place for the issuance of stablecoins in the EU. At the same time, the United States has decided to introduce the Genius Act which will be implemented and which in several places differs significantly from MiCA. Such regulatory differences could potentially lead to, for example, unequal competition between issuers of stablecoins in the United States and the EU and to stability risks.

We are therefore working -and need to continue working -towards a common international consensus on the regulation of stablecoins, even if it sometimes feels difficult to attain in the new geopolitical winds that are blowing. At the same time, we must be ready to further develop our own regulatory framework if such

28  Sveriges Riksbank, 2025, Redogörelse om Riksbankens verksamhet inom krisberedskap och civilt försvar: https://www.riksbank.se/globalassets/media/tal/svenska/thedeen/2025/redogorelse-om-riksbankensverksamhet-inom-krisberedskap-och-civilt-forsvar.pdf

29  Sveriges Riksbank, 2025, Offline card payments should be possible no later than 1 July 2026: https://www.riksbank.se/en-gb/press-and-published/notices-and-press-releases/pressreleases/2025/offline-card-payments-should-be-possible-no-later-than-1-july-2026/

a consensus cannot be reached at this time. Much of this work is done through negotiations in the EU because we have harmonised legislation. 30

But of course, the development of digital assets is about more than just stablecoins, and it is important to collaborate widely within international groups and with international actors. I am thinking in particular of the committees and working groups we participate in within the Bank for International Settlements (BIS). Through BIS we are part of and work with several committees with significant influence on the payments market of the future and its connections to financial stability: The Basel Committee on Banking Supervision (BCBS), Committee Global Financial Stability (CGFS), and the Committee on Payments and Market Infrastructure (CPMI). The BIS provides us with both important information and the opportunity to contribute to the discussion on international developments.

## Private sector has a major responsibility and creates opportunities

So far, I have talked about what we do at the Riksbank. However, as I mentioned earlier, market participants have a huge responsibility for the payments market. After all, it is ultimately at banks and other payment service providers that users access payment services. As the vast majority of consumers and businesses are customers of one of the major banks in Sweden, they have a special responsibility. And I'm pleased to say that market players are also taking a big responsibility. In particular, I would like to highlight the good cooperation so far in strengthening financial sector preparedness.

More measures will be needed to ensure that the payments market remains safe in the future. The fact that the Riksbank and the private sector are unanimous that this needs to be prioritised bodes well for us being able to tackle this task together.

There is also a lot of modernisation work going on in the privately owned part of the payments infrastructure. Here I am thinking, among other things, of the work on developing Bankgirot. The Nordic banks, through the Nordic Payment Council, have also done a lot of work to harmonise Nordic messaging standards with their European counterparts. This is a good example of how regional private cooperation facilitates competition and creates the conditions for more efficient payments, not least between countries.

30  European Systemic Risk Board, 2025,ESRB publishes report on systemic risks from crypto-assets and issues recommendation on stablecoins:

https://www.esrb.europa.eu/news/pr/date/2025/html/esrb.pr251020~84e90ccc73.en.html

But competition in the payments market is increasingly global, and our assessment is that there are areas where progress should be faster. If innovation in Sweden is lagging behind, it means that innovation may come from elsewhere.

By improving our infrastructure, the Riksbank has opened up new opportunities. However, the improvements will not benefit the public unless the market also develops payment services based on that infrastructure. For example, none of the major banks currently offer instant payments other than via Swish. This hinders the development of new, fast payment services. For example, a study conducted by the Riksbank together with our Nordic central bank colleagues shows that the majority of bank customers in Denmark, Finland, Iceland and Norway have access to instant payments in their online banks. In Sweden, only a minority has it. 31

I would also like to invite banks and other payment service providers to get involved in our project to streamline payments between European currencies -TIPS Cross-Currency. Payment service providers will be able to connect to the service next year and could use it as a basis for offering Swish-like services between the Swedish krona, euro and Danish krona. This is an opportunity that Swedish actors should seize in order to develop competitive alternatives for crossborder payments -no one for instance should feel compelled to use stablecoins for the sole reason that there are no other options to pay internationally.

## Concluding remarks

To summarise, the payments market is undergoing major changes. We are seeing what could be called a new wave of digitalisation through decentralised platforms where money and other assets are taking on new forms. In parallel, geopolitics is changing, and payments can no longer be regarded as a neutral technology in the financial system. We therefore need to look strategically at how to develop our payments system.

And to go back to my initial question, I would like to answer how I see our role in this development.

Firstly, central bank money should be relevant in the future -even when new money and assets are introduced. It is one of our most fundamental tasks and helps ensure that we continue to have a stable and unified monetary system with low risks. For example, if a stablecoin were to grow to a systemically important level, the money moving in and out of it should go through central bank systems. And if the market tokenises and moves its assets to decentralised platforms, we central banks must also be prepared to adapt our service offering and ensure that

31  See forthcoming joint Nordic report, Payments in the Nordics, 2025.

trading there can take place in central bank money. Here we can benefit from the TARGET systems and the experimental activities taking place there.

Secondly, I believe that a debate is needed now on the implications for Sweden if a digital euro is introduced in the euro area. Then we would need to revisit the issue of an e-krona -the lead times are long when it comes to initiating a process to make a decision -yes or no -and even longer when it comes to actually implementing a Swedish e-krona in case the answer is yes. We therefore need to get started now. When the train leaves, we need to know whether we want to get on and, if so, what it takes to do so.

Thirdly, resilient payments are crucial for the future. Payments should act as a chain that keeps the different functions of society together, even during challenging times and external threats. We must continue to strengthen our preparedness and recognise resilience as a natural part of building the payments market of the future.

Finally, I believe that the private sector will play a central role in this development and Swedish actors need to keep up. Thanks to strong innovation, we have long been at the forefront of the international payments market -something we will continue to strive for. We can best do this by working together on issues of common interest, not least our preparedness and infrastructure, and continuing to open up to competition and innovation.

We are living in times of change and uncertainty. The future is uncertain, but by taking the helm and making active decisions, we can control the direction we take. We are many actors contributing to this and in different ways. Right here today I have talked about how the Riksbank can contribute to this by ensuring a safe, efficient and accessible payments market for the future. But we cannot do all this alone, we need support and help from other actors both nationally and internationally.",Aino Bunge
https://www.bis.org/review/r251223b.htm,Gabriel Makhlouf: Remarks - Economics Winter Workshop 2025,"Remarks by Mr Gabriel Makhlouf, Governor of the Central Bank of Ireland, at Economics Winter Workshop 2025, Dublin, 19 December 2025.",2025-12-19 00:00:00,"## Gabriel Makhlouf: Remarks - Economics Winter Workshop 2025

Remarks by Mr Gabriel Makhlouf, Governor of the Central Bank of Ireland, at Economics Winter Workshop 2025, Dublin, 19 December 2025.

* * *

Good morning and welcome to the Central Bank of Ireland.  Thank you for joining us for our annual festive gathering of the Irish economics community.  It is a pleasure to have you with us and to take stock of the year that has passed.

Indeed, as I reflect on the year behind us - and as I set out in a blog  I'm publishing this morning - my report card for the Irish and euro area economies might read as follows: a good year, in the face of significant geopolitical and geoeconomic upheaval, and, for now, performing around potential.

Of course, in classic report card fashion, that only tells part of the story, and it certainly underplays what feels like a tumultuous year for the global economy as old paradigms disappear and new challenges emerge.

Changes in the global distribution of power, of military strength and of strategic influence have been upending the world that we have become familiar with, a world founded on principles of openness, cooperation and integration that have underpinned the international order for the last 35 - if not 80 - years.  The upending did not start this year but 2025 feels like a step-change.

Geoeconomic fragmentation is not only a financial development with deep implications for a small open economy such as Ireland but also the economic manifestation of a profound political current that resists interdependence, that privileges national over collective reasoning, and that often substitutes conviction for evidence.

Social media, with its adeptness at triggering emotions, is accelerating that political current.  In many parts of the world, we see the rise of political movements that question the value of economic expertise, and the legitimacy of science itself as a guide for policymaking.

For central banks as well as for policymakers, and for institutions of knowledge, this tide is a profound challenge.

It reminds us that economic policymaking does not exist in isolation: it is embedded in societies, in their political narratives, and in their trust in expertise.

And when that trust erodes, the ability to design and implement coherent, long-term policy weakens in turn.

In this environment, the contribution of independent analytical institutions serves both as a stabilising force in the public debate and as a channel to enable good judgment, to allow for decision without ideology or, indeed, emotion.

That is why I am extremely proud of the contribution made by the Central Bank's people to both in-house research but also in collaboration with colleagues outside of the Bank, and as reflected in the Research Bulletin (PDF 618.04KB) we published yesterday.

As the global landscape evolves, it will be essential to sustain our ability to allow and promote deep and diverse analysis and thinking, as well as dialogue across disciplines, sectors, and borders.

## Today's workshop

Today's programme promises a fascinating array of presentations and discussions, addressing some of the most pressing issues at the forefront of our work here in the Central Bank.

Let me first turn to how our research enables us to respond to the challenges of the day, in such a complex and fast-moving environment.

We see research, both in its output but more importantly in the capacity that it builds within our people and our teams, as an essential component of our work. It ensures that our policy decisions and advice, whether that be on domestic macroprudential measures, in contribution to the ECB's monetary policy decisions, or on the growth prospects and resilience of the Irish economy, are made using a timely, relevant and credible evidence base.

Let me take a moment to briefly highlight some of our major research achievements, first in informing our own policy decisions, and second in informing our economic policy advice.

The importance of research for our policy positions has been especially visible in 2025 in the body of extensive work published on the mortgage measures. These pieces, ranging from in-depth to accessible, descriptive pieces in Research Technical Papers, our series, have provided rich perspectives on the way in which our Staff Insights recalibration of the mortgage measures - in operation since the start of 2023 - is impacting borrowers, credit standards, and housing transactions. This research agenda is also helping us understand the relative weight of the costs and benefits of our policy actions, as well as potential spillover channels and unintended consequences.

Our commitment to devoting significant analytical resources to understanding the impact of our policy actions remains steadfast; we see the evaluation of policy impact as a requirement for good policymaking, and something that must be refreshed and enhanced regularly.

To serve our major stakeholders, the Irish public, faithfully, we must ensure that the full range of impact channels, particularly of major interventions such as the mortgage measures, are well understood, and well communicated. Vas Madouros' address to the Dublin Economics Workshop in September, reflecting on ten years' experience with the mortgage measures, is an example of this commitment in operation.

Our research also underpins our economic policy advice.  My annual pre-Budget letter to the Minister for Finance, published in June this year and outlining our views on the trajectory of fiscal policy, is supported by a wealth of fiscal and macroeconomic modelling and projection exercises. It is also closely informed by our ongoing work on long-term growth prospects for the Irish economy, which has seen our teams conducting deep dives on demographic issues and continues with work on Artificial Intelligence and the labour market, among others.

One of our headline policy contributions this year was our published in Signed Article September by our Firms and Productivity Working Group, on the exposure of the Irish economy to the ongoing threat of geoeconomic fragmentation and US tariff policy.

This was a textbook example of how rigorous, technically complex research can be synthesised to serve the needs of a policymaking institution. The article drew insights from macroeconomic models, micro analysis of administrative data, and featured analysis done in collaboration with one of our Visiting Scholars. Bringing together these diverse methods, our work drew holistic conclusions on the likely impact, and major sources of impact, across the Irish economy both in the short-run and long-run. The work has formed the foundation of a number of key interventions by myself and my colleagues in the public policy debate in recent months, highlighting the important finding that, despite some sectoral challenges, the economy is well-positioned to absorb tariffs as currently implemented by the US administration.

Our contributions to the euro area monetary policy agenda remain of course a key priority. This year alone, our researchers have published working papers on trend inflation, the natural rate of interest, the effect of monetary policy across the wealth distribution, house price expectation formation, the role of loan contract features in determining interest rates pass-through, the differential pass-through of policy rates to loan rates by non-bank lenders, and capital misallocation in Europe. This work, and more, informs our interventions on the major policy issues facing the Governing Council.

## Looking Ahead

Looking ahead to 2026, our research and economic policy advice will continue to be influenced by the external environment, helping us to inform the debate on matters of major public policy importance.

In particular, we plan to deepen our understanding of the evolving payments landscape, utilising our research capabilities to contribute to debates on central bank digital currencies such as the Digital Euro, as well as the future of privately-issued money.  A key focus will remain on the ongoing fragmentation of the multilateral rules-based order and threats posed by tariffs, as well as the macroeconomics of growing defence spending in Europe. We will continue to focus on the European system of financial intermediation of savings to investments, understanding cross-border capital flows, the role of non-bank intermediaries, and the scope for productive savings to be deployed more productively within the European economy.

## Conclusion

In closing, I want to extend my thanks to everyone who has contributed to organising this event, as well as to all of you for attending, particularly our speakers.

This workshop is an invaluable opportunity to connect economists and policymakers from diverse backgrounds, fostering both enduring friendships and new, fruitful, collaborations that sustain the value of shared inquiry and the flourishing of fact-based research and analysis.

I wish you a productive and enjoyable conference and, for those visiting from abroad, a memorable stay in Dublin.",Gabriel Makhlouf
https://www.bis.org/review/r251223a.htm,Piero Cipollone: The future of money - a central bank perspective,"Contribution by Mr Piero Cipollone, Member of the Executive Board of the European Central Bank, to a roundtable at Aspen Institute Italia, Rome, 19 December 2025.",2025-12-19 00:00:00,"SPEECH

## The future of money: a central bank perspective

## Contribution by Piero Cipollone, Member of the Executive Board of the ECB, to a roundtable at Aspen Institute Italia

Rome, 19 December 2025

Money is at the heart of what central banks do. Ever since central banks have existed, their core role has been to issue money and protect its value. That mandate will not change — but the technological environment in which we deliver it is changing, and it is changing radically.

Digital payments are now the norm, and new technologies are disrupting financial services. Financial institutions have become technological entities, and tech firms have entered the spheres of payments and finance.

Central banks are no exception. If they want money to remain stable, trusted and usable in a digital world, they must help shape that world and modernise central bank money. If they fail to do so, central banks may no longer be able to provide an anchor of stability to the financial system.

In the euro area context, there are good reasons for the central bank to not just follow but take the lead in the transformation of money. As a monetary union, we share a single currency and a single monetary policy. For that to work, we must ensure the singleness of money across the euro area: one euro must always be worth one euro, no matter its form and no matter where in the euro area.

The Eurosystem — that is, the ECB and the national central banks of euro area countries — has played a key role in this respect. In just 25 years the euro has become the currency of 20 countries (soon to be 21) and the world's second most important currency. The Eurosystem issues euro banknotes, which have become the tangible symbol of Europe's economic unity. And we have built robust infrastructures — T2 for large-value payments, T2S for securities, TIPS for instant payments and ECMS for collateral — which allow money and assets to move safely and efficiently across the euro area.

We now need to take the next steps. Today, | will discuss the challenges we face, how public and private money can complement each other and what this means for retail, wholesale and cross-border payments. Our strategy is three-fold. First, we are getting ready for the potential issuance of a digital equivalent of cash: the digital euro. Second, starting next year, we will make it possible to settle transactions based on distributed ledger technology (DLT) in central bank money. And third, we are working on interlinking our fast payment system with those of other countries to enhance cross-border payments.

## Three problems in search of a solution

But let me start with the challenge we face.

It has sometimes been suggested that digital central bank money is a solution in search of a problem. But it is increasingly acknowledged, even by those that dispute the solution, that we face a real issue in the euro area context. To paraphrase the title of Pirandello's famous play), | see three problems in search of a solution.

First, retail payments in Europe are still fragmented. The Single Euro Payments Area (SEPA) has integrated credit transfers and direct debits, but we still lack a European solution for everyday payments at the point of sale and in ecommerce that works throughout the euro area.) As a result, we rely heavily on a few non-European card and wallet providers. This dependence puts our strategic autonomy at risk.

Second, the nature of money and payments is changing. Tokenisation and DLT promise more efficient capital markets.4! Yet without tokenised central bank money at their core, these new ecosystems would rely on fragmented pools of private settlement assets, reintroducing credit risk and fragmentation. We would be more exposed to the expansion of settlement assets denominated in foreign currencies or issued elsewhere, which would undermine our monetary sovereignty. And public money would no longer provide the anchor of stability into which all private assets can be converted.

Third, cross-border payments remain too slow, too costly and too opaque. Stablecoins offer an alternative. But stablecoins come with a number of risks for domestic currencies and financial systems. And if dollar-based stablecoins were to expand and continue dominating the market, they could erode the international role of the euro.

In this context, doing nothing is not a sound option. If central bank money were to become marginal in a digital world, we would risk having a less resilient payment system, a less stable financial system, weaker monetary sovereignty and reduced strategic autonomy. European financial institutions and infrastructures would be at a competitive disadvantage, and the euro's role could diminish.

## Building on the complementarity of public and private money

Our mandate does not allow us to ignore these risks. When the foundations of money and payments are shifting, the central bank must evolve as well. Our goal is not to crowd out private innovation, but to provide a solid public foundation on which innovation can flourish safely and at scale.

This requires a renewed public-private partnership across all payment dimensions — retail, wholesale and cross-border. Our strategy rests on three pillars: the complementarity of public and private money, a collaborative approach with market participants and strict technology neutrality.

Central bank money and private money are not rivals, they complement each other. Central bank money provides the ultimate settlement asset, free of credit and liquidity risk, and the reference that makes one euro equal to one euro across banks, instruments and technologies. The convertibility of private money into central bank money gives people confidence that a euro is a euro, whatever form it takes.

This gives private intermediaries a solid basis on which to provide trusted and innovative services. Moreover, our infrastructures and standards provide common rails that the private sector can use across Europe. This reduces fragmentation, ensures interoperability and lowers costs in a network industry where scale and common standards matter.

We already offer digital central bank money and the associated rails for wholesale payments. And the digital euro would extend the same approach to retail payments, complementing cash with its digital equivalent and offering pan-European rails that private European providers can use to innovate and scale up their solutions. But we cannot stand still in wholesale payments either as the market explores the opportunities associated with tokenised securities, DLT-based trading and settlement, and smart contract automation. For these innovations to be scaled up safely in Europe, central bank money has clear advantages in terms of safety, scalability and liquidity management compared with private settlement assets constrained by the reserves backing them and market risk. In fact, the private sector has been clear: the absence of central bank money as a settlement asset is a major obstacle to the growth of the digital asset ecosystem.

Our approach is explicitly collaborative. We engage with all stakeholders. We test solutions with the market rather than designing them in isolation. This is what we did in 2024 when we conducted the most extensive exploratory work on wholesale DLT settlement in central bank money in the world to date. And we are following the same approach in preparing for the possible issuance of the digital euro. For instance, we collaborated with market participants to explore the digital euro's innovative potential.{©! And we will launch a pilot exercise that will offer banks an opportunity to gain first-hand experience in a simulated digital euro ecosystem.

In supporting this digital transformation, we remain technology neutral. While being open to new technologies, we do not pick winners. Instead, we focus on setting the conditions for a safe, integrated system that is fit for the digital age and supports innovation.

## Shaping the future of money

So, in practice, what are we doing to help shape the future of money?

## The digital euro

In the retail space, we are working on the potential issuance of a digital euro. Assuming that European co-legislators adopt the Regulation on the establishment of the digital euro in the course of next year, a pilot exercise and initial transactions could take place as of mid-2027, and the digital euro could be ready for first issuance in 2029.

The digital euro would be a digital form of cash. It would offer a public solution that is legal tender and can thus be used to pay wherever merchants accept digital payments, throughout the euro area, in both physical and online shops.

The digital euro would extend the benefits of physical cash to the digital sphere. At a time when the role of cash in day-to-day payments is declining, it would ensure that consumers always have a European option to pay digitally. This would increase consumers' freedom of choice and Europe's strategic autonomy. The digital euro would be available both online and offline, supporting resilience and privacy. And by avoiding excessive reliance on a few dominant players, it would reduce costs for merchants and ultimately prices for consumers.

The digital euro is also being designed to preserve the role of banks in financing the economy. Banks will distribute the digital euro, maintain customer relationships and manage digital euro accounts or wallets. They will be remunerated for these services. Moreover, we have included safeguards to preserve banks' role in credit intermediation and monetary transmission: the digital euro will not bear interest, holding limits will prevent destabilising outflows and links to existing bank accounts will allow consumers to seamlessly pay amounts that exceed their digital euro holdings.

For payment service providers, including banks, the digital euro is an opportunity. A single European standard, backed by legal tender status and an unparalleled acceptance network, will make it easier to scale up European cards, wallets and value-added services. Co-badging existing solutions with the digital euro] and building on common standards will lower the cost of expanding acceptance and make it easier for European initiatives to expand across the euro area.

## Tokenised central bank money

In wholesale payments and capital markets, we aim to make tokenised central bank money available to support an integrated European market for digital assets.

Tokenisation can reduce reconciliation, shorten settlement chains, enable atomic delivery-versuspayment and allow near-continuous trading and settlement.""2] But without a common, risk-free settlement asset, liquidity can splinter, assets may not be traded across platforms and the landscape could fragment along national or private lines.

Tokenisation also offers us the opportunity to design an integrated European market for digital assets — in other words, a digital capital markets union — from the outset. Providing tokenised central bank money is essential for this digital asset ecosystem to grow in Europe and not elsewhere. This will also ensure it is built on European infrastructures, euro settlement and EU-wide rules.

To this end, the ECB is pursuing a dual-track approach.13]

Project Pontes will connect market DLT platforms to our existing TARGET services, so that tokenised asset transactions can be settled in central bank money.""

Project Appia will explore two possible approaches for an integrated digital asset ecosystem, which could potentially be combined.""4] First, a European shared ledger that brings together central bank money, commercial bank money and other assets on a single platform where market stakeholders provide services. Second, a European network of interoperable platforms that reduces current frictions in the market.

## Interlinking fast payment systems

In cross-border payments, our objective is openness with autonomy.

Today, many cross-border transactions still pass through long correspondent banking chains, making them slow, costly and opaque. One possible future would see global, dollar-based stablecoins and their platforms dominate cross-border payments, creating risks of new dependencies and currency substitution.

We want a different path.

Within Europe, TIPS already provides instant settlement in central bank money and is being extended across currencies. In the near future, TIPS could evolve into a global hub for instant cross-border payments. By interlinking TIPS with the fast payment systems of other countries, starting with India and other partners worldwide, we can cut intermediaries, shorten transaction chains and lower costs.

The digital euro, too, is being designed with potential international use in mind, in a way that respects other countries' sovereignty and avoids unwanted currency substitution. It could in time act as a connector, adding another safe option for cross-border payments. Moreover, like TIPS, the digital euro's design includes multi-currency enabling features that would allow non-euro area countries to use the digital euro infrastructure to offer their own digital currencies and facilitate transactions across these currencies.

## Conclusion

Let me conclude.

Technological disruption is transforming money and finance. For Europe, this is both a risk and an opportunity. If we simply rely on foreign private solutions, we will import technologies, standards and dependencies and risk fragmentation and instability. If we act together, we can build an innovative, integrated and resilient digital financial system that has the euro at its core but remains open and respectful of the sovereignty of our partners.

Our strategy is clear. Central bank money must remain available and usable, also in digital form, as the anchor of trust. Public and private sectors must work together. The Eurosystem provides settlement in central bank money and common standards, thereby giving private intermediaries a sound basis for competing and innovating. And markets, not the central bank, will decide which technologies and business models succeed, within a framework that keeps money and payment systems safe and integrated.

In retail payments, the digital euro will complement cash and support a truly European market for everyday digital payments.

In wholesale markets, tokenised central bank money through projects such as Pontes and Appia will make it possible to settle digital asset transactions safely in central bank money.

In cross-border payments, interlinking fast payment systems and exploring tokenised settlement will make payments cheaper, faster and more transparent while preserving our monetary sovereignty.

The choice before us is simple: watch the future of money being shaped elsewhere, or help design it ourselves. By acting now, in partnership with the private sector, Europe can lead in the transformation of money, support its competitiveness and resilience, and deliver tangible benefits for citizens and businesses.

1.

This contribution is an abridged version of Cipollone, P. (2025), ""The transformation of money:

technological disruption and the future of financial services"", guest lecture at the Frankfurt School of

Pirandello, L. Six Characters in Search of an Author.

Finance &amp; Management, 8 December. 2. (1921), 3.

Cipollone, P. (2024), ""Innovation, integration and independence: taking the Single Euro Payments Area to the next level"", speech at the ECB conference on ""An innovative and integrated European retail payments market"", 24 April.

4.

Decentralised ledger technology allows information to be shared and kept synchronised across a network. Tokenisation is the process of converting or issuing assets as programmable tokens.

Tokenisation allows programmable tokens to carry two sets of information at the same time: information about the asset itself (what it is, who issued it, who holds it, etc.) and the rules about how this token can be used (who can hold it, how it can change ownership, as well as more complex rules compiled into smart contracts).

5.

See Cipollone, P. (2025), ""Stablecoins and monetary sovereignty"", presentation at the Euro50 Group Meeting, 18 October.

November.

6. Cipollone, P. (2025), ""Tokenisation and the future of finance: the role of central bank money"", presentation at the Central Bank of Ireland's Financial System Conference 2025, 25

7.

ECB (2025), Bridging innovation and stability: the Eurosystem's exploratory work on new technologies for wholesale central bank money settlement, June.

8.

See ECB (2025), Digital euro innovation platform — Outcome report: pioneers and visionaries digital assets and digital capital markets"", hosted by Bocconi University, the Centre for Economic

Policy Research and the European Central Bank, 26 September.

9.

ECB (2025), ""Eurosystem to invite payment service providers to participate in digital euro pilot"", MIP News, 28 November.

10.

See ECB (2025), Technical data on the financial stability impact of the digital euro, October.

11.

Co-badging domestic private schemes and the digital euro would mean that domestic schemes would be the preferred brand wherever they were accepted, and the digital euro would be the fall-back solution wherever they were not accepted. See ECB (2025), Fit of the digital euro in the payment ecosystem — Report on the dedicated Euro Retail Payments Board (ERPB) technical workstream, October.

12.

innovation, integration and independence to Europe's wholesale financial markets"", speech at the House of the euro, 7 November.

13.

ECB (2025), ""ECB commits to distributed ledger technology settlement plans with dual-track strategy"", press release, 1 July.

14.

See the ECB's webpage on Project Pontes.

15.",Piero Cipollone
https://www.bis.org/review/r251222c.htm,Phil Mnisi: Remarks - National Fintech Strategy Launch,"Remarks by Mr Phil Mnisi, Governor of the Central Bank of Eswatini, at the National Fintech Strategy Launch, Ezulwini, 4 December 2025.",2025-12-04 00:00:00,"## Phil Mnisi: Remarks - National Fintech Strategy Launch

Remarks by Mr Phil Mnisi, Governor of the Central Bank of Eswatini, at the National Fintech Strategy Launch, Ezulwini, 4 December 2025.

* * *

Honourable Minister of Finance, Senior Government officials, CEO of the Financial Services Regulatory Authority, Members of the Eswatini FinTech Working Group, Industry leaders and financial sector partners, Development partners, Members of the media, Ladies and gentlemen, Good Morning!

## Introduction

It is a pleasure to join you today for this important moment in our country's journey towards innovation and digital transformation in financial services.

We are gathered here to witness the launch of the National FinTech Strategy of the Kingdom of Eswatini, a roadmap that speaks not only to where we are, but to where we want to go as a nation. It is not long ago when we gathered in this very same hotel to kick-off the development of the strategy. The speed of the review and renewed strategy is statement of the consistent changes in this space.

This Strategy is a shared commitment to build a digital financial ecosystem that serves all Emaswati. Whether it is the farmer in Siphofaneni, the young entrepreneur in Mbabane, or the small trader in Siteki, this strategy aims to make financial services more accessible, more affordable, and more relevant to their needs.

Today marks the start of a new phase for Eswatini, one that looks to innovation as a driver of growth, resilience, and inclusion. It is also a phase that recognises FinTech as an ecosystem, built through shared effort, clear roles, and active participation from everyone involved.

## A collaborative achievement

Honourable Minister, a strategy of this scale does not come together by chance. It is the result of extensive collaboration across government, regulators, industry, academia, and our development partners.

Distinguished guests, allow me to acknowledge the Ministry of Finance for its leadership, the Ministry of ICT, the FSRA, ESCCOM, RSTP, ERS, UNESWA, CBE and the industry leaders for bringing technical expertise and practical insight into the process.

We are also grateful to the Alliance for Financial Inclusion, UNDP and Olayinka DavidWest Consulting for the support they provided in the drafting of this Strategy, keeping us anchored in international best practice while remaining focused on our local realities.

Every organization and individual involved in this strategy should see themselves represented within it. This document embodies our shared vision, and the strength of our collective spirit inspires confidence in our drive toward success.

## Why FinTech matters?

Globally, technology is reshaping how people pay, save, borrow, and invest. Eswatini has made progress. Our financial inclusion rate stands at 87%, driven by mobile money. Yet, cash still dominates transactions, infrastructure gaps persist, and many lack access to the full range of financial products.

These challenges are opportunities. FinTech can help us reduce reliance on cash, expand credit for MSMEs, bring savings and insurance closer to underserved communities, and create new jobs for our youth. Most importantly, it allows us to leapfrog, adopting digital solutions without being constrained by legacy systems.

## The Central Bank's commitment

Ladies and gentlemen, the Central Bank is proud to have been part of this work. Since establishing our FinTech Unit in 2018, we have prioritised responsible innovation. The regulatory sandbox; our role in the FinTech Working Group; and our efforts to modernise payment systems, all reflect our commitment to shaping a future-ready financial sector.

As we move into implementation, we will continue balancing innovation with our mandate of financial stability, consumer protection, and market integrity. Our role is not to slow innovation, but to ensure it develops in a safe, secure, and sustainable way.

We are ready to build the supervisory tools, the institutional capacity, and the partnerships needed to support this next phase.

## A call to collective action

Distinguished guests, launching the Strategy is only the beginning. What matters now is execution. This will require leadership, intentionality, resources, and close coordination across public and private sectors.

Government will be in the forefront in steering implementation. Regulators must remain agile. Financial institutions should embrace innovation. Entrepreneurs must build solutions that respond to real needs. Academia must cultivate the skills for a digital economy. Development partners must continue supporting our journey. Together, we can turn this vision into reality. The best of good times lies ahead.

I thank you ALL!",Phil Mnisi
https://www.bis.org/review/r251222a.htm,Denis Beau: Euro payment systems - a challenge for monetary and financial stability and sovereignty in France and Europe,"Speech by Mr Denis Beau, First Deputy Governor of the Bank of France, at the ""Assises des Technologies Financières"", Paris, 11 December 2025.",2025-12-11 00:00:00,"## Denis Beau: Euro payment systems - a challenge for monetary and financial stability and sovereignty in France and Europe

Speech by Mr Denis Beau, First Deputy Governor of the Bank of France, at the ""Assises des Technologies FinanciŁres"", Paris, 11 December 2025.

* * *

Ladies and Gentlemen,

The worsening of the geopolitical landscape, the acceleration of payment digitalisation, and the emergence of a new tokenised financial ecosystem have, in recent years, shed fresh light on the important role played in Europe by non-European players and technologies in our payment systems. These transformations and this role are increasing the risk of a loss of stability and strategic autonomy. For the Banque de France, in charge of maintaining financial and monetary stability within the Eurosystem, this growing risk justifies mobilising its resources to support the transformations underway while ensuring that stability and autonomy are preserved. We are now fully committed to this endeavour, and I would like to briefly outline its priorities and main aspects, after sharing a few observations and thoughts on the opportunities for transforming our euro payment systems and the resulting consequences.

## 1. Opportunities for transforming our payment systems

Among the ongoing transformations in the payments landscape, I would highlight three that are of particular interest to the Banque de France, in respect of its mandate to maintain monetary and financial stability:

1. The gradual decline in the use of cash for transaction purposes to the benefit of digital payment solutions, which are currently dominated by cards in France and underpinned by the growth of e-commerce. This growing use of electronic payment solutions has contributed to simpler, faster, more practical and more secure payments, but it has two consequences that are likely to have a negative impact on the efficiency and security of our payment system:
- a. (particularly American It increases our dependence on non-European players ones) who already benefit from significant network effects and hold certain widely used proprietary standards (Visa, Mastercard). This dependence raises concerns Contrasting regarding competition, strategic autonomy and data protection. with these international players, European payment solutions appear highly fragmented and their market share has been gradually eroding. 1
- b. , thereby creating challenges amplified by It increases exposure to cyber risk the wider use of AI, in terms of maintaining a high level of payment security, especially given the growing complexity of fraud schemes, which in particular involve manipulating payers and circumventing the strong authentication mechanisms put in place to ensure the security of digital payments in Europe.

2. The extension of digitalisation to financial assets, as part of a phenomenon known as ""tokenisation"". Tokenisation helps to improve the functioning of our monetary and financial system in terms of transparency and efficiency in the execution of transactions, as well as reducing transaction costs and times. Nevertheless, it does pose challenges, particularly in terms of settlement assets that can be used in this new tokenised financial ecosystem. The only settlement assets currently available are stablecoins. However, they are almost exclusively dollar-backed and are mainly issued by non-bank, lightly regulated non-European players, as is the case with the largest of them, Tether. This situation therefore poses a significant challenge in terms of monetary sovereignty, as the growing use of such assets in the euro area carries the risk of a form of ""digital dollarisation"".
3. An increase in competition, due to the development of tokenisation, in the area of infrastructures and related technologies. There has been a proliferation of initiatives from non-European players, with Google, 2   for example, entering the payments market. By increasing the number of competing infrastructures, these developments are contributing to the fragmentation of the post-trade landscape and are therefore a potential source of inefficiency.

These transformations therefore harbour progress but also carry risks for the stability and strategic autonomy of our euro payment system. Indeed, these risks warrant particular attention as they have recently increased due to the active role played by the new US administration in promoting companies, technologies and stablecoins in order to maintain and strengthen the international role of the dollar.

## 2. The actions of Banque de France to help preserve the stability and strategic autonomy of the euro payment system.

To reduce these risks, strong and concerted action between European public and private players is needed. The Banque de France is contributing to this by developing its actions to strengthen three important lines of defence, namely the regulatory framework, central bank money payment services, and the supply of public and private settlement assets in euro.

1. As regards the regulatory framework, the Banque de France strongly advocated the adoption of regulations that ensure effective consumer protection and the development of cryptoassets within a framework of trust. With PSD2 now in place and PSD3, soon to follow, we now have an advanced regulatory framework to reduce Nevertheless, as regards crypto-assets, MiCA risks and protect users. only partially addresses the risks posed by changes in the sector, particularly in the event of Against this widespread adoption of stablecoins issued by non-European players. backdrop, we are pressing for a , particularly to restrict the use strengthening of MiCA of stablecoins for everyday payments and to address the risks arising from multi-issuer models.
2. As regards central bank money payment services , for several years now the Banque de France has been working actively to adapt the services offered by the Eurosystem in central bank money to developments in the digitalisation of payments

and tokenised finance. This adaptation is essential to maintain the anchor role It played by central bank money in ensuring the stability of our payment system. aims not only to in which central bank money is made available for change the form everyday payments (known as ""retail"" payments) and payments between intermediaries in the financial system (known as ""wholesale"" payments), but also to use new , which are adapted to the development of the infrastructures to make it available tokenised circulation of financial assets that are issued, transferred and stored using decentralised infrastructures such as blockchains.

To this end, the Eurosystem has launched three strategic and complementary projects:

- The digital euro. Its aim is to ensure that a means of payment in central bank money in the form of a ""digital banknote"" with the main attributes of a ""paper"" banknote remains available in the range of pan-European payments for digitalised transactions. It should thus facilitate the development of the digitalisation of payments in Europe, by preserving the freedom of choice we enjoy between public and private monies for our everyday payments and by promoting synergies with private European payment solutions, with a This project is shared aim of strengthening our strategic autonomy. progressing at a sustained pace and has just entered a new phase to prepare technically for the possible issuance of the digital euro, once a regulation has set out the conditions under which it can be used. The ECB will only be able to take a decision on issuing the digital euro once this regulation has been approved by the Council and the European Parliament, which is expected in the middle of next year.
- The Pontes project. This project aims to provide participants in the tokenised financial asset ecosystem, particularly intermediaries, with a suitable central bank currency that is also tokenised and available on a blockchain. The objective is to ensure that central bank money, which is the safest settlement asset, remains the preferred settlement asset for financial asset An initial transactions, which present the most sensitive systemic stakes. version of this ""wholesale"" central bank digital currency will be available to banking institutions by the end of 2026.
- The Appia project. The aim of this project is to explore the potential of distributed ledger technologies (DLT) with a view to designing, in the medium term, a new generation of critical infrastructure for the European post-trade market, It is dedicated and adapted to the development of tokenised finance. currently very hard to predict how widespread tokenised finance will become compared to traditional dematerialised finance, which currently dominates our financial system. Market needs and forces will determine their respective shares in the medium term and long-term, but it is very important that Europe prepares itself today to establish a benchmark post-market infrastructure adapted to tokenised finance, which is efficient and therefore . This infrastructure could be well integrated, and under European governance based on a European Shared Ledger, enabling the exchange of tokenised assets and payments in CBDC and private bank money that is also tokenised.

3. Lastly, with regard to the supply of public and private settlement assets in euro , we at the Banque de France consider that, while the provision of an appropriate CBDC is essential, central bank money is not intended to meet all the settlement asset needs of the European real and digital economies. Alongside this, it is necessary to have a significant and effective supply of private money, particularly for everyday payments, which can be exchanged reliably at par with central bank money, foremost among which are naturally the major players provided by regulated players, in the provision of payment services, namely banks. The challenge today is therefore to consolidate and extend the benefits of the sound, stable and flexible monetary system we have for the euro, in order to ensure, with the necessary strategic autonomy, the settlement of trade within our economy and thus support its development.

In this respect, the discussions and initiatives currently being developed by European financial intermediaries, such as those conducted by the European Payments Initiative (EPI) consortium, or those aimed at developing a range of tokenised deposits and stablecoins in euro, particularly to meet the cross-border transaction and cash management needs of international companies, are very , and we are ready to play a facilitating role in the important and welcome development of these products wherever necessary.

## Conclusion

It will be clear from my remarks that at the Banque de France, we are fully committed to monitoring, understanding and supporting the major transformations underway in the payments landscape. This commitment leads me to conclude with an observation and a conviction:

The observation is that the ongoing transformations in the payments landscape are bringing progress, but they also carry the risk of a loss of stability and strategic autonomy for our euro payment system.

The conviction is that in order to respond to this risk in an appropriate and adequate manner we need to This involves, in mobilise all the relevant European players. particular, developing secure, efficient, pan-European public and private payment solutions based, for settlement assets, on the coexistence, complementarity and substitutability at par between public money issued by the central bank and private money issued by European financial intermediaries regulated to that effect.

Thank you for your attention

1  See, for example, the recent ECB publication on the subject:  Report on card schemes and processors

- 2  Project to create a Google Cloud Universal Ledger (GCUL)",Denis Beau
https://www.bis.org/review/r251218e.htm,Ida Wolden Bache: Policy rate kept unchanged at 4 percent,"Introductory statement by Ms Ida Wolden Bache, Governor of Norges Bank (Central Bank of Norway), at the press conference following Norway's announcement of the policy rate, Oslo, 18 December 2025.",2025-12-18 00:00:00,"## Ida Wolden Bache: Policy rate kept unchanged at 4 percent

Introductory statement by Ms Ida Wolden Bache, Governor of Norges Bank (Central Bank of Norway), at the press conference following Norway's announcement of the policy rate, Oslo, 18 December 2025.

* * *

Presentation accompanying the speech

Chart 1: Policy rate kept unchanged at 4 percent

The Monetary Policy and Financial Stability Committee has decided to keep the policy rate unchanged at 4 percent. If the economy evolves broadly as currently envisaged, the policy rate will be reduced further in the course of the coming year.

Norges Bank is tasked with keeping inflation low and stable. The operational target is inflation of close to 2 percent over time. We are also mandated to help keep employment as high as possible and to promote economic stability.

In response to the inflation surge in 2022, we raised the policy rate sharply and rapidly, and the tightening of monetary policy has contributed to cooling down the Norwegian economy and to dampening inflation in recent years. In June, we began a cautious normalisation of monetary policy, and the policy rate has been reduced from 4.5 percent to 4 percent.

The job of tackling high inflation has been fully completed, and we judge that restrictive monetary policy is still needed. If the policy rate is lowered too quickly, inflation could remain above target for too long. On the other hand, we do not want to restrain the economy more than needed.

## Chart 2:  We do not expect a large decrease in the policy rate

We are not in a hurry to reduce the policy rate. The forecast we are presenting today is consistent with 1-2 rate cuts next year and a further reduction to somewhat above 3 percent towards the end of 2028. As such, we do not envisage a large reduction in the policy rate ahead. The average residential mortgage rate is expected to decline to just above 4.5 percent in 2028. The interest rate outlook is little changed since September, when we last presented forecasts.

Let me say a few more words about the background for the decision and the Committee's assessments.

Chart 3: Inflation has not declined further over the past year

Inflation is still too high. After falling markedly in 2023 and 2024, inflation has changed little over the past year. Figures published last week showed that inflation was 3 percent in November.

The post-pandemic surge in inflation was triggered by an import price shock. While imported inflation is now low, the rise in prices for domestically produced goods and services remains high. The rapid growth in wages in recent years has raised firms' costs, which will likely restrain disinflation ahead. Wage growth will probably be high this year too, but lower than last year. We expect a continued moderation in wage growth in the next years. The krone has depreciated and is weaker than assumed in the previous Report. A weaker krone means higher imported goods inflation, which contributes to raising inflation prospects somewhat going forward.

## Chart 4: Growth in the Norwegian economy has picked up this year

Growth in the Norwegian economy was low through 2023 and 2024. Developments have been especially weak in the most interest rate sensitive sectors of the Norwegian economy. Unemployment has increased, and registered unemployment is now at about the same level as before the pandemic.

Growth in the mainland economy has picked up this year, but several indicators point to slightly weaker developments in the economy since the previous Report. Employment growth has been a little lower and registered unemployment a little higher than expected. At the same time, Norges Bank's Regional Network contacts report that it has become slightly easier to recruit labour. Our assessment is that there is now slightly more spare capacity in the Norwegian economy than we assumed in September.

## Chart 5: Inflation down to target without a marked increase in unemployment

With the current policy rate path, the number of unemployed is expected to increase a little over the next couple of years. A gradual decline in wage growth ahead will contribute to pushing down inflation to close to 2 percent in 2028.

The moderate upturn in economic activity is projected to continue ahead, but growth will probably be somewhat lower than this year. Wages are expected to rise faster than prices, and combined with somewhat lower interest rates, this means that most people will likely see an improvement in their purchasing power and consumption will continue to grow. Housing construction is expected to pick up over the next years, but the level of housing investment will likely be markedly lower in 2028 than before it started to fall in 2022.

If the economy takes a different path than currently envisaged, the policy rate path may also differ from that implied by the forecast. Unpredictable conditions for international cooperation and trade are creating uncertainty about the outlook for inflation and growth both internationally and in Norway.

If labour market conditions weaken more than expected or the outlook indicates that inflation will return to target faster, the policy rate may be lowered faster. On the other hand, if growth in business costs remains elevated for longer, or the krone proves weaker than projected, inflation could remain elevated for longer than currently projected. A higher policy rate than currently envisaged may then be required.

But our objectives stand firm. We will finish the job and ensure that inflation is brought all the way back to 2 percent.",Ida Wolden Bache
https://www.bis.org/review/r251218c.htm,"Gent Sejko: Address - International Conference on Economy, Business, Innovation, and Technology ","Address by Mr Gent Sejko, Governor of the Bank of Albania, at the International Conference on Economy, Business, Innovation, and Technology (ICEBIT 2025), Tirana, 5 December 2025.",2025-12-05 00:00:00,"## Gent Sejko: Address - International Conference on Economy, Business, Innovation, and Technology

Address by Mr Gent Sejko, Governor of the Bank of Albania, at the International Conference on Economy, Business, Innovation, and Technology (ICEBIT 2025), Tirana, 5 December 2025.

* * *

Dear Rector Hoxha,

Dear Professors, Students, and Participants,

It is a special pleasure to be with you today at this remarkable international conferencea gathering that bridges academic research and economic practice. It focuses on one of the greatest challenges of our time: how to build intelligent and resilient economies that are guided by the principles of smart specialization.

Today, as technological transformation advances at an unprecedented pace, countries face an urgent need for new development strategies-strategies that weave together knowledge, innovation, and technology with forward-looking public policies and the cultivation of human capital.

Digital transformation is no longer an option-it is the very foundation on which the economies of the future will be built. Artificial intelligence and automation are opening new doors for growth, efficiency, and competitiveness. For developing countries like Albania, technology provides the potential to overcome structural barriers, reduce transaction costs, enhance transparency, and reach new markets faster than ever before. This transformation requires more than investments in digital infrastructure. It demands strong commitments to education, research, and innovation-so that technology becomes not just a tool, but a driver of economic transformation.

At the Bank of Albania, digital transformation has become a strategic objective, directly affecting the way the financial system operates in Albania. One of the most important milestones achieved recently is Albania's integration into SEPA, which came into effect on 7 October 2025. As we have emphasised before, for citizens and businesses, it means faster payments across Europe, lower costs, higher security standards and greater opportunities for trade, investments, and digital services.

In parallel, we are working with our international partners to modernise the national payment systems enabling instant and secure payments 24/7, expanding the use of electronic payments, reducing reliance on cash, and strengthening both competition and innovation in the financial market.

But innovation goes far beyond the digitalisation of payments or new financial products; it affects the way monetary policy is designed and implemented and how financial stability is monitored. At the Bank of Albania, we are applying advanced models to

forecast inflation, employing data analytics to assess risks in the financial system, digitalising the way of gathering statistics and collecting data, and strengthening transparency through new tools of public communication.

Bank of Albania supports the idea that innovation and investment in knowledge may build an economy that is both more competitive and more resilient. The academic community has an irreplaceable role to play in this process.

The University of Tirana - and particularly the Faculty of Economy- stands as one of the most important centres of economic though and expertise in Albania. Scientific research, international partnerships, and the promotion of start-ups and innovation labs are bridges that connect theory with practice and academia with market. Preparing new generations who understand the digital economy, modern finances, the role of data and the challenge of green transition is a multi-dimensional investment for the society.

Dear guests and participants,

Public institutions-such as the Bank of Albania- and universities share a vast space of collaboration: from exchanging data and engaging students and researchers in real research projects, to developing new analytical models, professional programmes practical training, and capacity-building in areas such as financial stability, monetary policy, payment systems and financial education.  In an economy that aspires to be smart and integrated, these partnerships are not a luxury- they are an absolute necessary. Our shared challenge is to make sure these partnerships translate into sustainable growth, higher productivity, greater opportunities for young people and an economy that is more open, more resilient, and more inclusive.

Conferences like this one are the ideal spaces where innovative ideas take shape, where challenges are discussed openly and where meaningful partnerships are built. I am confident that your discussions will contribute not only to academic though, but also to the development of polices and best practices for small economies. I wish you success in the proceedings of the conference, and I thank you for the invitation and the opportunity to share our vision with you today.

Thank You!",Gent Sejko
https://www.bis.org/review/r251218b.htm,Tiff Macklem: Good money and your central bank,"Remarks by Mr Tiff Macklem, Governor of the Bank of Canada, at the Chamber of Commerce of Metropolitan Montreal, Montreal, Quebec, 16 December 2025.",2025-12-16 00:00:00,"## Tiff Macklem: Good money and your central bank

Remarks by Mr Tiff Macklem, Governor of the Bank of Canada, at the Chamber of Commerce of Metropolitan Montreal, Montreal, Quebec, 16 December 2025.

* * *

## Introduction

Good afternoon. It's a pleasure to be back home in MontrØal, especially at this time of year. And it is wonderful to see so many of you again.

My final speech of the year is always an opportunity to reflect on the year that was and to look ahead to the year to come. This year, 2025, was marked by the US swerve to protectionism and the resulting upheaval in global trade. It's a story about uncertainty, and about the loss of trust in our trade relationship with our biggest and best partner.

As I look to the year ahead, trust and stability will be critical themes.

At its core, the role of the Bank of Canda is to maintain trust in our monetary system. Trust that the bank notes we issue are secure. Trust that our financial system is stable and efficient, so you can be confident that your money is safely stored and easy to use. And trust that the purchasing power of your money will be stable.

The other theme for the year ahead is innovation.

Stability does not mean standing still. We want to support innovations in money and payments that serve Canadians. That's why, starting this year, we are overseeing retail payments. And next year, the Bank will add two more responsibilities: regulating stablecoins and implementing consumer-driven banking. With our role as the provider of cash and the supervisor of payments systems, and our mandate to control inflation, these new responsibilities make the Bank a one-stop shop for money you can trust.

That's what I will talk about today-money. Good money. Money that is safe, money that trades at par in all its forms, and money that has stable purchasing power. The Bank must ensure trust and stability of money in all its forms-now, and in the future.

We've got a lot of ground to cover, so let's get going.

## The essence of money

So, what is money? Economists typically define money by its functions: a unit of account, a store of value, and a way to trade and transact with trust. 1   Simply put, money is what money does. That's why I think of money as both the medium-physical bank notes or digital money-and the infrastructure it travels on. Money isn't much good if you can't move it around. But when it moves safely and efficiently on trusted infrastructure, money provides vital services to us all.

There are two kinds of money: central bank money and private sector money.

Central bank money includes bank notes-the cash in your wallet-and settlement balances, which are deposits at the Bank of Canada by members of the payments system. Central bank money is the foundation of the financial system because the central bank stands behind it. Think of a $50 bill. On its own, it's just a piece of red polymer with an image of an icebreaker in the Arctic. It's worth $50 only because everyone agrees it's worth the amount written on it-now and in the future-and everyone trusts that the central bank will back it. Maybe this seems a bit archaic, but my signature is on the money to certify we stand behind every note.

Then there's private sector money. Part of that is banking: the digital money that includes deposits at financial institutions. And part of it is payments: the infrastructure that moves money easily and safely. Private sector money also includes innovations in money, like stablecoins, which I'll get to in a minute. Central banks play a role in private sector money, too: together with bank regulators and deposit insurance providers, we're the stewards for the infrastructure that allows money to be stored and moved securely and efficiently.

It's critically important to the Bank that Canadian money is good money. That it's trustworthy and secure. That it can be converted to cash, dollar for dollar, no matter its form. That it trades hands with minimum transaction fees and holds its value with low inflation.

Good money ensures an efficient and inclusive financial system. It's what economists call a ""public good""-something everybody can use and benefit from. Without confidence in money, it's hard to be confident about our economic system.

## The future of bank notes

Now let's get more concrete, starting with the simplest form of money-cash.

Cash has undeniable benefits. It's simple, widely accepted, inexpensive to use and reliable. It works during power failures and internet outages and is not vulnerable to cyber attack. About 80% of Canadians-perhaps surprisingly, both old and young-and 96% of small- and medium-sized businesses use cash.

While the use of cash for daily transactions has declined, cash remains important to many Canadians. It accounts for one in five transactions at the point of sale, and the demand for cash continues to grow with the economy.

To be good money, the bank notes we issue have to be easy to authenticate and hard to counterfeit. We issued our first series of notes in 1935, shortly after the Bank was founded. That first series of notes had raised ink and small green dots scattered in the paper, which made the notes hard to counterfeit at the time. But threats have evolved.

Our newest bank note will be issued in early 2027. The new vertical $20 will showcase an innovation in anti-counterfeiting security. We've used 3-D features before, and we've used features that shift when the note is moved. Our $20 note will combine these two technologies for the first time. I wish I could tell you more, but you'll have to wait for the unveiling next year.

What I can tell you is that the new $20 note will feature King Charles III on the front and the Canadian National Vimy Memorial on the back. A new $5 note will follow soon after, picturing Terry Fox. And work has begun to develop larger denominations-the $50 and the $100-to build on the security features of this new series of notes.

To be good money, cash also needs to be accessible. And I want to assure you that even as other forms of payment are growing faster than cash, we are committed to ensuring Canadians continue to have access to cash.

## Developments in digital money

Digital money is less tangible than a $50 bill, but it's everywhere-sitting in bank accounts or moving through payment and settlement systems, across international borders and between your phone and e-commerce websites. There are about three billion Canadian bank notes in circulation, representing about $120 billion in value. By comparison, the money in Canadian chequing accounts is about $1.6 trillion.

That digital money has to be good money too-just as secure as bank notes. There are two fronts to protect: banking and payments.

On the banking front, Canada has strong regulators-the Office of the Superintendent of Financial Institutions and its provincial counterparts-that monitor banks and credit unions to ensure their operations are sound. And money in Canadian bank accounts is insured by the Canada Deposit Insurance Corporation or its provincial counterparts.

The second front is payments-money in motion. Advancements in technology mean Canadians are using digital payments more often. Ideally, you don't think much about the plumbing of Canada's payment systems. You tap, and you trust that your money will get from one place to another.

The Bank supervises the infrastructure that moves these digital payments. For some 30 years, we've overseen Canada's large-value payments system as well as the clearing and settlement systems critically important to the financial system. About 10 years ago, our oversight was expanded to include other prominent payment systems, including Interac e-Transferfi and the largest credit card networks.

This year, the Bank began overseeing retail payments. Since this is a new function, let me explain how it works.

When money is moving, it's facilitated by payment service providers (PSPs). In Canada, there are all kinds of PSPs that help people store or move their money electronically: they offer digital wallets, provide point-of-sale terminals or facilitate cross-border money transfers. The Bank now supervises PSPs to ensure they manage operational risks and safeguard funds held on behalf of Canadian households and businesses, with close to 1,600 PSPs either already registered with the Bank or in the pipeline. This brings PSPs into the regulatory sphere so that Canadians can safely access cheaper payment options and a broader array of services.

Now let's look to the future of digital money and our new responsibilities.

## Real-Time Rail will speed up payments

First, the Bank is working with Payments Canada to modernize Canada's national payments infrastructure through a project called Real-Time Rail. This will allow payments to clear and settle instantly, 24-7, 365 days a year-making payments here much more efficient. In time it will also allow Canada to link our system to those in other countries so that money can move across borders more quickly. Real-Time Rail will also give PSPs direct access to the payments system, increasing competition and adding efficiency.

## Stablecoins may bring payment innovation

Next is the frontier of digital money: stablecoins-a type of cryptocurrency that is designed to be money.

The biggest cryptocurrency by value is Bitcoin. Bitcoin has some features of money-it did create a new unit of account-but it's not really money. Its price is very volatile, making it a lousy store of value, and it's difficult to use in everyday transactions. It's more of an investment, albeit a speculative one.

Stablecoins are different. They're designed with the intention to always be convertible to a currency at par. So they overcome the price volatility of other cryptocurrencies while taking advantage of the same technology. The biggest stablecoins in circulation right now are Tether and Circle's USDC, both pegged to the US dollar. Other stablecoins have been issued in euros, and there are proposals for stablecoins pegged to the Canadian dollar.

The stability of stablecoins means they hold more promise as a form of payment, although it's hard to know how much of a role they'll play in the future of money. The US created a legislative framework for stablecoins and opened the door to GENIUS Act their broader use in global payments. And the industry is keen to deliver. Other countries are also looking at how to bring the benefits of stablecoins to businesses and consumers while minimizing the risks of fraud or instability.

It is important for Canada to have its own regulatory framework for stablecoins. In the federal budget last month, the government announced it will do just that, with the Bank of Canada as the regulator. The draft legislation lays out the core elements of the framework. The proposed Stablecoins Act will regulate stablecoin issuers, and the retail payments legislation will be amended so that it also applies to stablecoin payments. The goal is to ensure Canadians can leverage the innovation of stablecoins and do so safely.

We want stablecoins to be good money, like bank notes or money on deposit at banks. That requires a few critical elements. A stablecoin must be pegged at a one-to-one ratio to a central bank currency and be backed by high-quality liquid assets so that it can always be converted to cash at par. The conditions for redeeming stablecoins must be fully disclosed, including the timing and any fees that need to be paid. Stablecoins made available for purchase by individuals and businesses in Canada should be assured of these protections. And issuers of stablecoins must have enough operational resilience to make stablecoins reliable.

We will work closely with the Department of Finance Canada to support the drafting of regulations next year so Canadians can use stablecoins with confidence.

## Open banking gives Canadians more control

The Bank's other new responsibility is part of the push for consumer-driven banking, also known as open banking. For money to work for Canadians, Canadians must be confident the banking system is working for them. Open banking will give you more control over your financial data, so you can do more with your money. It will make it easier to compare banks and switch providers or share data with third parties such as budgeting apps, investment tools or credit applications. It will make the system more efficient and more competitive, and it should drive innovation.

As with Real-Time Rail and stablecoins, we need to ensure supervision of participants and high standards for technology in open banking to safeguard customer data and minimize the risk of fraud. Open banking is a bit different from our other responsibilities, but the overlap with the other parts of our supervisory mandate is clear: the Bank has experience keeping money and payments secure so you can use your money safely and easily. Open banking extends this to storing and moving financial information safely and easily.

The regimes for stablecoins and open banking must be built thoughtfully. The technology is evolving rapidly, and the regulatory framework will need to evolve to keep pace with the changing landscape. It is important that Canadians can benefit from new technology and new services-safely and securely.

## Preserving the value of money

That brings me to the final component of good money: it needs to hold its value. All the forms of money I've mentioned, from bank notes to stablecoins, must have stable purchasing power. In Canada, as in most other major countries, we have defined that as 2% inflation. When inflation is around 2%, the value of our money is relatively stable and the economy works well.

We don't have to go back far in time to remember how painful it can be if we don't preserve the value of our money. Canada's economy overheated in 2022 when the postpandemic surge in demand ran up against still-impaired supply chains. Combined with Russia's unprovoked invasion of Ukraine, this pushed inflation just above 8%. The cost of both goods and services rose too fast. The money people had was buying fewer goods and services. People felt ripped off.

When inflation gets out of control, we lose price stability-and we risk losing trust. If elevated inflation persists, it becomes entrenched in people's expectations, making it more difficult to bring inflation back to target. That's why we responded forcefully, raising interest rates at a historically rapid pace. It worked. Longer-term inflation expectations remained well anchored, and we were able to restore 2% inflation without a recession.

But high inflation has had a lasting impact. Inflation has been back around 2% for more than a year, but price levels are a lot higher than they were before the pandemic. That's why it's so important that inflation stay low and stable, so incomes can catch up.

The pandemic experience reminds us that trust cannot be taken for granted-it has to be earned and maintained. In Canada, we review and renew our monetary policy framework with the federal government every five years. It's one way we preserve Canadians' trust. With the renewal coming up in 2026, we're taking a fresh look at whether our inflation-targeting framework is still fit for purpose.

As we review, we recognize that structural shifts-the rise of artificial intelligence, climate change, trade disruptions and geopolitical instability-make global economies increasingly vulnerable to shocks and uncertainty. We want to be sure the way we use our flexible inflation-targeting framework gives us the best chance of keeping inflation low and stable in a more shock-prone world. We want to provide the best information to Canadians about how we're doing that. And we want to better understand the link between inflation and housing affordability.

One thing we're not reviewing is whether 2% inflation is the best target. We're confident it is. Flexible inflation targeting has proven to be more successful and more durable than anything that came before. In the 25 years leading up to the pandemic, inflation in Canada averaged very close to the 2% target and was inside the 1% to 3% band about 80% of the time. And yes, the pandemic tested our framework like never before, but as difficult as that was, the framework guided our actions to restore low inflation.

Faced with a more shock-prone world, the anchor provided by the 2% target looks more important than ever. But we need to look at how we conduct monetary policy to hit the 2% target. The economic landscape is shifting. Protectionist US trade policy and high tariffs are adding costs and creating economic volatility. More generally, ongoing structural changes are turning into headwinds that have the potential to disrupt supply and add inflationary pressures.

The renewal of our monetary policy framework in 2026 is the opportunity to ensure we are ready for a more shock-prone world. Good money in all its forms is only as good as its purchasing power.

## Conclusion

It's time for me to wrap up.

This has been a pivotal year for the global economy. The reconfiguration of global trade and the restructuring of Canada's economy will likely continue to dominate the economic landscape in 2026.

Last week, Governing Council maintained the Bank's policy interest rate at 2…%.

US tariffs on steel, aluminum, autos and lumber have hit these sectors hard, and uncertainty is weighing on business investment. But so far, the economy is proving resilient overall.

Inflationary pressures continue to be contained despite added costs related to the reconfiguration of trade. Total CPI inflation has been close to the 2% target for more than a year now, and we expect it to remain near the target.

In the current situation, Governing Council sees the policy rate at about the right level to keep inflation close to 2% while helping the economy through this period of structural adjustment. Uncertainty is of course still very high. If the outlook changes, we are prepared to respond.

At the Bank of Canada, we are focused on managing the present and preparing for the future. We will support the economy through this period of transition while keeping inflation well controlled. And we will safeguard the essential features of good moneysecurity, convertibility and price stability-while ensuring Canadians can benefit from innovations in money and financial services. We can and must be both a source of stability and an engine of progress.

As money changes with innovation and our economy faces new challenges, the Bank of Canada will be there for Canadians. You can count on us to maintain the trust and stability of your money.

Thank you.

I would like to thank Melanie Achtemichuk, Theodoros Garanzotis, Oleksiy Kryvtsov, Francisco Rivadeneyra and Jing Yang for their help in preparing this speech.

1  Like so many before and after my time at university, I learned about the functions of money in my economics courses. When I was a graduate student at Western University, this took on more rigour in the study of what economists call the microfoundations of money-essentially modelling the services that money provides to people. With a model you can begin to assess the features of good money and the benefits to the economy. I was fortunate to learn about the microfoundations of money from Professor Peter Howitt, whose early academic work focused on modelling the transactions services of money. This year Peter Howitt shared the Nobel Prize in Economics for his work with Philippe Aghion on the microfoundations of innovation and the process of creative destruction. But Peter Howitt's early work on the microfoundations of money is also important, and it was my good luck to be in his graduate Monetary Economics class.",Tiff Macklem
https://www.bis.org/review/r251209f.htm,Dimitar Radev: Statement - Banker's Day,"Statement by Mr Dimitar Radev, Governor of the Bulgarian National Bank, on the occasion of the Banker's Day at the Association of Banks in Bulgaria (ABB), Sofia, 4 December 2025.",2025-12-04 00:00:00,"## Dimitar Radev: Statement - Banker's Day

Statement by Mr Dimitar Radev, Governor of the Bulgarian National Bank, on the occasion of the Banker's Day at the Association of Banks in Bulgaria (ABB), Sofia, 4 December 2025.

* * *

Dear vice president Iotova,

Dear colleagues,

Let me start with a sincere gratitude to the Association of Banks in Bulgaria and all colleagues from the banking sector for the good cooperation and the results achieved. The most important of these is Bulgaria's accession to the euro area, a historic act of significance that will become clearer and more tangible over time.

Today is a good time to highlight the key role of the banking sector in achieving this strategic goal. The events of recent days put the topic of the euro area in a slightly different context. This context is expressed in the question: how effectively can our political system, riven by opposition and confrontation, capitalise on this historic success.

Joining the euro area is a strategic asset with enormous potential to accelerate the modernisation of the economy, support investment and strengthen the country's resilience in the face of global risks and geopolitical uncertainty. To harness this potential, we need a predictable political environment and a disciplined economic and fiscal policy.

Bulgaria's economy has shown resilient performance amid domestic political and social turbulences and external shocks that we are witnessing. Economic growth is above the EU average, while inflation - despite all the turmoil - is normalising and moving closer to levels in the euro area, an area of low and sustained inflation. Employment is close to its historical maximum.

In such an environment, the banking sector remains stable, with strong liquidity, high capitalisation and sustained profitability. This is an important signal to both society and investors. We must remember, and I think we should emphasise repeatedly, that the good performance of the economy is largely due to Bulgarian businesses and the private sector adapting to a difficult environment and creating value despite the challenges.

I have always seen the banking sector as a strong partner for the most active and productive part of the economy, a partner that not only provides financing but also supports growth through expertise, technological innovation and high quality management. The current results of the economy and the banking sector, despite the difficulties, are solid evidence of this interaction.

The primary task at hand is to successfully complete the process of introducing the euro on 1 January. All the details in this process are important, although the heaviest part of

the work has already been done. To ensure a seamless and frictionless transition, we need to maintain full mobilisation until the beginning of next year.

Over the past few days we have seen a strong demand for the Bulgarian euro coins, a demand that far exceeded the pre-orders. In some places, especially in the post office system and in smaller towns, the feeling of 'not enough' was created, even though there was no real shortage. This episode shows that we need to maintain close coordination and be ready to react quickly.

The principle we follow at the Bulgarian National Bank is that we bear full responsibility for everything relating to the changeover process, even when specific difficulties arise from counterparties whose actions we cannot directly influence.

In a broader perspective and in the context of 2026, our key task will be to continue supporting economic activity while keeping our role as a source of stability and confidence.

The year 2026 will be the first year in which Bulgaria will be fully and actively involved not only in the formation, but also in the implementation of the euro area monetary policy. The main responsibility in this process lies with the Bulgarian National Bank, but a key factor for success will be the continued close interaction between the central bank and commercial banks which play a crucial role in the transmission of monetary policy to the real economy.

## Dear colleagues,

Allow me to wrap up by extending my heartfelt thanks to you once again for the professionalism, partnership and efforts you have put in over the past year, and not only over the past year, and which have made it possible for the country to make one of its most important national priorities a reality.

With these words, I congratulate you on Banker's Day and wish you good health and success, both personally and professionally.",Dimitar Radev
https://www.bis.org/review/r251222d.htm,Dimitar Radev: Bulgaria's accession to the euro area,"Speech by Mr Dimitar Radev, Governor of the Bulgarian National Bank, at the annual dinner of the European Stability Mechanism, Brussels, 11 December 2025.",2025-12-11 00:00:00,"## Dimitar Radev: Bulgaria's accession to the euro area

Speech by Mr Dimitar Radev, Governor of the Bulgarian National Bank, at the annual dinner of the European Stability Mechanism, Brussels, 11 December 2025.

* * *

Dear Pierre , 1

Ladies and gentlemen,

Colleagues and friends,

Thank you for the generous introduction, and thank you to the European Stability Mechanism for hosting this evening's event. It is a pleasure to join so many distinguished representatives of financial community.

The ESM has become an essential pillar of the euro area's financial architecture-a demonstration of Europe's capacity to act with discipline, responsibility, and solidarity. As Jacques Delors once reminded us, ""Europe is a journey requiring both vision and persistence.""

Tonight, Bulgaria stands at the threshold of an important step in that journey: joining the euro area.

## A Natural Completion of Bulgaria's European Path

Bulgaria's readiness to adopt the euro is not the result of a single moment. It reflects more than two decades of consistent economic orientation and institutional alignment.

Our currency board-anchored first to the Deutsche Mark and then to the euro-has provided the foundation of macroeconomic stability for over 25 years. The euro has long been our de facto monetary anchor, shaping expectations and encouraging discipline across households, firms, and the public sector.

Since 2020, we have been part of the Single Supervisory Mechanism, applying the same supervisory standards as euro-area banks. Under ERM II, our authorities have worked systematically to meet every legal, operational, and institutional requirement for the changeover.

In this sense, euro adoption is not a new beginning. It is the formal completion of a trajectory that has defined Bulgaria's economic model for a generation.

## A Strong Anchor in an Uncertain World

We meet at a time of elevated geopolitical tensions, tighter financial conditions, and accelerated structural change. In such circumstances, the value of a credible monetary anchor becomes even clearer.

Euro-area membership brings Bulgaria three important advantages.

First, it strengthens confidence. Participation in the Eurosystem's monetary policy framework offers predictability and reinforces trust among investors, banks, and households.

Second, it deepens integration with European financial markets-improving financing conditions, reducing transaction costs, and supporting long-term investment.

Third, it enhances resilience through access to the euro area's stability instrumentstools designed not only to manage crises but also to prevent them.

These benefits support Bulgaria's convergence path and reinforce its capacity to navigate uncertainty.

## Public Confidence and Clear Communication

We understand that citizens have concerns, particularly around prices. These concerns are not unique to Bulgaria-they accompany every changeover.

But decades of experience across the euro area show that these effects are temporary and limited, especially when addressed through strong oversight, dual pricing, and transparent communication.

Our message is simple: the institutional safeguards are strong, and they protect consumers.

## Institutional Readiness-Thorough and Complete

The Bulgarian National Bank has prepared extensively for the changeover through a comprehensive set of decisions covering legislation, payment systems, cash operations, logistics, and IT security.

Our banks are liquid, well-capitalised, and technically prepared for operations in euro from day one. These preparations reflect close cooperation with the ECB, the European Commission, national institutions, and the ESM.

## Political Continuity-A Nuanced but Real Consensus

Euro adoption requires political responsibility and societal confidence, not only technical readiness.

Bulgaria is currently experiencing political tensions and surges of public pressure. These dynamics are part of democratic life, and they have generated intense debate. But throughout these changes, the strategic direction toward the euro has been maintained.

Support for euro adoption extends across the political spectrum and is reflected in a constitutional majority. This is not a consensus of unanimity; it is a consensus of continuity-anchored in the recognition that Bulgaria's long-term security and prosperity are strengthened through deeper European integration.

This continuity gives credibility to the accession process.

## Looking Ahead-Europe's Stability Architecture and the Challenges Before Us

As we look forward, we must recognise that Europe is operating at an inflection point. The global economy is becoming more fragmented; geopolitical tensions have become structural; Europe's competitive position is under pressure; and the green and digital transitions demand substantial and sustained investment.

These developments will test our institutions and policy frameworks. They require Europe to reinforce its capacity to act, to strengthen its economic governance, and to safeguard the credibility of the frameworks that anchor stability-monetary, fiscal, and financial.

It is in this context that Europe's strengthened stability architecture becomes especially important. The reform of the ESM Treaty-once fully in force-will allow the ESM to provide the common backstop to the Single Resolution Fund, reinforcing the credibility of the Banking Union and strengthening Europe's ability to respond to crises with confidence and coherence.

For Bulgaria, joining the euro area at this moment means assuming a share of these responsibilities from the very beginning.

As a member of the ECB's Governing Council, I will seek to contribute with independence and professionalism to the formulation of the single monetary policyguided by the mandate of price stability and aware that the decisions we take in the coming years will shape Europe's resilience for decades to come.

Bulgaria brings relevant experience: that of a small, open economy long accustomed to operating under strict monetary constraints, maintaining fiscal discipline, and adapting to external shocks. This experience will inform our contribution to the Eurosystem and support our collective effort to navigate an increasingly complex European and global landscape.

## Conclusion

Allow me to conclude with the words of Tommaso Padoa-Schioppa, one of the founding architects of the euro: ""The euro is a community of stability and trust.""

For Bulgaria, joining this community marks the beginning of a more advanced stage of our European journey- one that strengthens our institutions, supports our citizens, and deepens our engagement with Europe's future.

Behind every technical preparation lies a simple truth: the euro is about people- their savings, their security, and their opportunities.

Thank you for your attention.

I invite you to join me in a toast - to Bulgaria, to Europe, and to the euro-our shared foundation for stability and prosperity.

- 1  Pierre Gramegna, Managing Director of the European Stability Mechanism",Dimitar Radev
https://www.bis.org/review/r251230e.htm,Khaled Al-Dhaher: Closing remarks - SAMA-BIS Innovation Summit,"Closing remarks by His Excellency Dr Khaled Al-Dhaher, Vice Governor for Supervision and Technology of the Saudi Central Bank, at the SAMA-BIS Innovation Summit, Riyadh, 20 November 2025.",2025-11-20 00:00:00,"## Khaled Al-Dhaher: Closing remarks - SAMA-BIS Innovation Summit

Closing remarks by His Excellency Dr Khaled Al-Dhaher, Vice Governor for Supervision and Technology of the Saudi Central Bank, at the SAMA-BIS Innovation Summit, Riyadh, 20 November 2025.

* * *

Honorable Governors, dear colleagues, and distinguished guests.

I would like to start by thanking you for joining us in this summit and for your valuable active participation. This summit went beyond discussing a shared vision for financial transformation in our region - it helps shape it to achieve a digital future that is inclusive, resilient, and grounded in trust.

Our dialogue and experience sharing are what make this summit a success.

As we conclude the SAMA-BIS Innovation Summit here in Riyadh, I am honored to have the opportunity to highlight some of the insights that have surfaced over the last two days.

We gathered here with a common objective, which is to understand how innovation can serve our people, strengthen financial integrity, and empower our region to lead responsibly. Innovation in finance is a collective endeavor shaped by regulators, technologists, academics, and industry leaders working side by side, and it is significant when it solves real-world problems and adds real value to the stakeholders. Therefore, it is critical to listen to the market, clients, corporate, retail, and SMEs, and understand needs and challenges, while working towards addressing these needs in a safe and stable financial environment.

Across sessions, a unifying theme emerged: The need to build an ecosystem that is open, interoperable, and resilient. This new financial architecture must be built on 'trust by design,' and this trust should not be considered a byproduct of innovation; it should serve as its foundation. The implication is that our systems must be secure, explainable, and inclusive - whether in tokenizing money, developing and deploying AI, or preparing for the Quantum disruption.

## Day One: Cross-Border Payments

Our summit began yesterday with a focus on the role of central banks in fostering innovation and cross-border collaboration.

Keynote addresses by His Excellency SAMA Governor Mr. Ayman M. Al-Sayari and Mr. Pablo HernÆndez de Cos reminded us that innovation must preserve and enhance stability, resilience, and trust. Leaders from regional central banks and beyond then reflected on the G20 roadmap, highlighting the urgency of building payment systems that are faster, cheaper, transparent, and inclusive. The message was clear: regional leadership is essential to global progress.

In the BIS Innovation Hub's Agora Project, we saw a fascinating showcase of how tokenization and smart contracts can reshape wholesale cross-border settlements.

We then transitioned to a discussion about the design principles of tokenized money and payments to ensure that digital value transfer is secure.

The Machine-Readable Rulebook project, presented by SAMA's Innovation Hub, was a demonstration of how AI models can be used to annotate obligations according to a predefined taxonomy and transform them into a machine-readable format. This enables benefits such as systematically comparing similar regulatory obligations across jurisdictions and identifying areas of potential over- or under-regulation.

As we wrapped up the first day, we explored how AI can enhance cross-border payments by making them faster, cheaper, more transparent, and more inclusive.

We also examined practical safeguards that can be implemented to ensure that AIgenerated payment decisions are sound while minimizing potential errors and biases.

## Day Two: Mitigating Emerging Technology Risks

Today, discussions shifted from possibilities to responsibilities when Dr. Rashad Cassim's keynote reminded us of the risks that accompany innovation, and that cybersecurity, misinformation, and divergent systems are central to the future of finance.

We heard from the South African Reserve Bank and the BIS Innovation Hub in Hong Kong, highlighting how challenge-based collaboration can unlock scalable solutions.

Whether through digital identity or data portability, the emphasis continues to be on building systems that are inclusive by design.

The critical need for standards and interoperability was stressed in a fireside chat, noting that without a common language, even the most advanced systems risk becoming silos and limiting their potential. The vital need for interoperability resurfaced in discussions around ""Scaling Tokenization Safely"", in addition to the importance of legal frameworks and operational resilience.

We were reminded that the most dangerous risks are often the quietest ones, including AI drift, hallucination, and subtle inaccuracies. These challenges demand continuous monitoring and prudent design. This guided us into discussions about ""Governance by Design"", and the need to embed accountability and transparency within AI from the beginning. This is a moral imperative, not a technical one.

Mr. Wolfgang Engel, Mr. Azam Alameddin, and I spoke about a subject of particular interest to me, regarding the evolving role of central banks in facilitating innovation, and recognizing that their roles require more proactive 'seeding' as opposed to a more traditional approach of reactive oversight. In this context, we shared the example of SAMA's internal Fintech Application Assessment Tool.

While the shift from closed proprietary architecture towards modular systems in the financial system is lauded for its many benefits, we heard about the new risks that this approach gives rise to and how risk management needs to evolve in response.

Last but not least, we discussed the potential threat from Quantum computing, and the transformative power and risks of which may not be as distant as some believe.

Our colleagues discussed the strategic role of central banks in anticipating risks, and how a clear strategy for developing Quantum-safe cryptography and cross-sector collaboration is needed.

I recognize that this summit has given us all a lot to digest. Therefore, I would like to highlight three notable takeaway points:

## Institutionalizing Innovation:

- Central banks must embed innovation into their structures, from dedicated innovation hubs and sandbox programs to clear, structured approaches, and international collaboration and partnership.

## Strengthening Regional Interoperability:

- Repeatedly, expert speakers and practitioners have stressed the importance of regional coordination.
- Projects such as Agora and future tokenization pilots can lay the foundations for a truly interoperable financial network across our region. However, we must do our part to connect across jurisdictions to join the dots.

## Building Resilience on a Forward-Looking Basis:

- AI drift, cyber vulnerabilities, and quantum disruption are risks that demand proactive governance.
- We must invest in forward-looking approaches to testing, experimentation, and shared frameworks.

I firmly believe that the collaboration between SAMA and the BIS Innovation Hub provides a model approach that we hope even more of our peers will choose to adopt.

Before I conclude my remarks, I would like to extend our gratitude to:

1. His Excellency SAMA Governor, Mr. Ayman M. Al-Sayari, for his visionary leadership, and to Mr. Pablo HernÆndez de Cos for cross-collaboration throughout BIS.
2. The governors, deputy governors, and heads of innovation centers for their deep insights and valuable contributions.
3. The Moderators and speakers for their thought-provoking comments and dialogues.
4. The BIS Innovation Hub for their enthusiastic support and leadership at this Summit and in our many bilateral engagements.

5.

5.  All the staff and team members who work behind the scenes, backstage, and at the registration desks for all your hard work. Thank you.

Thank you to all the participants and delegates for your time, energy, and commitment to our shared goals. On behalf of the Saudi Central Bank, and in partnership with the Bank for International Settlements, I thank you all for your active participation. We look forward to welcoming you again to Saudi Arabia in the near future. Thank you, and wish you a wonderful experience for the rest of your stay in Riyadh and a safe trip back home.",H E Dr Khaled Al-Dhaher
https://www.bis.org/review/r251223f.htm,Ayman M Al-Sayari: Opening remarks - SAMA-BIS Innovation Summit,"Keynote speech by His Excellency Mr Ayman Al-Sayari, Governor of the Saudi Central Bank, at the opening ceremony of the SAMA-BIS Innovation Summit, Riyadh, 19 November 2025.",2025-11-19 00:00:00,"## Ayman M Al-Sayari: Opening remarks - SAMA-BIS Innovation Summit

Keynote speech by His Excellency Mr Ayman Al-Sayari, Governor of the Saudi Central Bank, at the opening ceremony of the SAMA-BIS Innovation Summit, Riyadh, 19 November 2025.

* * *

Good afternoon. It is with great pleasure that I welcome you all to the first SAMA-BIS Regional Innovation Summit here in Riyadh - a city that has emerged as a hub for market-leading innovation in financial services.

Hosting this summit, in partnership with the Bank for International Settlements, is a testament to our growing role in helping shape the future of financial innovation - not only within our region but also on the global stage. This summit demonstrates our commitment to collective learning, pioneering, and collaboration in an era of rapid technological evolution.

Over the course of this summit, you will hear from global thought leaders about emerging technologies that are facilitating, disrupting, and reshaping our world. You will also hear from regulators about how we strive to maintain stability, foster collaboration, and manage the impact of novel technologies in order to counter uncertainty and ambiguity.

This year's summit focuses on two themes: the first is cross-border payments, where we shed light on the wide array of innovation opportunities it offers. The second theme centers on the risks and mitigants of emerging technologies that are rapidly reshaping entire segments of the economy, including Artificial Intelligence (AI), Distributed Ledger Technology (DLT), and Quantum computing.

## Context: A Rare Opportunity

Allow me to frame these conversations in the context of the rare opportunity that I believe we are presented with at this juncture. It is the opportunity to lay the foundations for a future financial infrastructure that is truly transformative in speed, resilience, and inclusivity. As was the case with the infrastructure we have inherited, the new foundations we lay today will be the building blocks for future development and innovation.

However, seizing this opportunity will require concerted efforts to facilitate innovation and effective collaboration to create favorable circumstances for long-term success.

Innovation plays a key role in how we deliver our mandate. To remain effective in the face of technological change, we must fully understand these innovations in order to leverage their benefits while also proactively identifying and mitigating associated risks. Innovation empowers us to anticipate, respond with agility, and build a more resilient and robust financial ecosystem.

Innovation is also a shared responsibility - driven by collaboration, openness, and a commitment to public value. It thrives through collective effort and thoughtful engagement.

Prudent approaches to innovation balance ambition with accountability. When guided by purpose, it has the power to shape systems that are smarter, more inclusive, and built to endure.

## The Regional Advantage

As we explore the future of financial innovation, it is essential to recognize that the journey toward digital transformation will be shaped by the distinct challenges faced in each market, which might differ from those faced elsewhere.

Across the Middle East and Africa region, new technology frameworks are advancing, yet their adoption is often constrained by structural, regulatory, and geopolitical complexities. To truly harness these technologies, we must build resilient ecosystems that reflect our region's unique context. This means investing in human capital, developing regulatory agility, and promoting cross-border collaboration.

Our regional economies have a rare window of opportunity to accelerate growth and innovation over the coming years, supported by high digital adoption rates, strong investment in payments infrastructure, and young tech-savvy populations. Financial systems in the region also carry less legacy infrastructure and less fragmentation, at both system and individual firm levels, compared to other economies, offering a further advantage.

## The Unique Strengths of Saudi Arabia

Our own efforts in Saudi Arabia are guided by the objectives of Saudi Vision 2030, outlining an ambitious journey of economic transformation.

A key pillar of Saudi Vision 2030 is to develop a thriving and innovative financial services sector in the Kingdom by strengthening existing financial institutions, driving greater innovation, and ultimately cementing Saudi Arabia's position as a leader in financial innovation, whilst maintaining the stability of the financial sector.

This ongoing transformation has been enabled by robust digital infrastructure, progressive regulation, and strong collaboration between SAMA and the market, with the objective of achieving global competitiveness and establishing Saudi Arabia as a fintech hub where technology-based innovation in financial services can serve as the foundation for enhancing economic empowerment.

At SAMA, we facilitate this transformation through a number of initiatives that are derived from our institutional strategy, including the prudent adoption of new technologies tested in our Regulatory Sandbox, such as digital financing, savings, open banking, and peer-to-peer lending.

Our dedicated Innovation Hub conducts a range of technology exploration, development, and prototyping relevant to the role and operations of a central bank and financial markets. These efforts have helped explore how emerging technologies can support and enhance our core functions in Monetary Policy, Financial Stability, and Supervision.

Through our Hub, we have delivered proofs of concept that demonstrate real-world utility and strategic value, often working closely with the private sector. Examples include:

- The Collateral Asset Management Project, which successfully leveraged blockchain technology to automate the pledging of collateral.
- The Tokenized Deposits Project, which tested both account-based and tokenbased models of tokenized commercial bank money on a live, multi-party blockchain network.
- Several AI-based tools and prototypes, including an automation tool to support our FinTech team in streamlining the end-to-end analysis and processing of applications, which shrunk application processing times by over 95%.
- A prototype machine-readable rulebook based on SAMA's regulations, which employed AI-based annotation and processing of various jurisdictions' regulatory text, thus enabling SAMA Supervision teams to review and analyze specific regulatory content across jurisdictions.

In addition to these in-house efforts, our Innovation Hub also spearheads our global outreach in innovation through joint projects with other central banks, standard-setting bodies, and think tanks. This includes our collaboration with the BIS Innovation Hub on several projects, including Project Rio, Pyxtrial, Promissa, and Insight.

## Way Forward

As central banks, we must strive to work more closely across borders; coordinate and align our approaches towards adopting new technologies, infrastructure, and explore harmonized standards. Innovation will thrive if the road we pave across borders is free of barriers.

We must strive to share knowledge, understanding the unique challenges faced in our region and across jurisdictions, and together explore the solutions that show the most promise.

When we look beyond our individual priorities and consider the region as a whole, we will innovate at scale. I expect that this will surface fascinating challenges to resolve. However, I believe, and fully anticipate, that the solutions borne out of cross-border efforts at a regional scale will trump any that we can formulate in isolation, and the benefits will be more sustainable.

In the absence of consistent frameworks and shared standards, global progress risks becoming fragmented and uneven across markets, or even perhaps coming undone in the face of cross-jurisdictional frictions and operational vulnerabilities if markets engage in regulatory arbitrage.

Through collaboration and armed with policy expertise, capital, and talent, we can instead seize this opportunity to leapfrog legacy constraints and build the infrastructure of the future.

Central banks and regulators in the region, far from being mere gatekeepers, can thus become catalysts and stewards of innovation for the collective benefit of our economies.

I will conclude my remarks by encouraging you all to actively participate in these proceedings, get to know your fellow delegates, and both contribute to and challenge our collective thinking as we forge the path ahead.

Thank you.",Ayman M Al-Sayari
https://www.bis.org/review/r251230c.htm,Richard Byles: Update and outlook for the Jamaican economy,"Monetary Policy Press Statement by Mr Richard Byles, Governor of the Bank of Jamaica, at the Quarterly Monetary Policy Report press conference, Kingston, 22 December 2025.",2025-12-22 00:00:00,"## Richard Byles: Update and outlook for the Jamaican economy

Monetary Policy Press Statement by Mr Richard Byles, Governor of the Bank of Jamaica, at the Quarterly Monetary Policy Report press conference, Kingston, 22 December 2025.

* * *

## Introduction

Good morning, ladies and gentlemen and welcome to another Bank of Jamaica Quarterly Monetary Policy Report press conference.

The Jamaican society and economy have been severely impacted by Hurricane Melissa. Latest estimates indicate that the damage to critical infrastructure - including roads, houses, factories, schools, other buildings, the electricity grid and other public and private assets - amounts to approximately US$8.8 billion, or more than 40 per cent of GDP. This is a significant upward revision from the previous initial estimate of 30 per cent.

The agriculture sector has been particularly devasted, with damage estimated at approximately US$389 million. Given agriculture's central role in food supply and livelihoods, this loss has far-reaching implications for prices, incomes and overall economic activity.

The Tourism sector, particularly properties in western parishes, also sustained significant damage, with 43 per cent of room stock closed immediately after the storm. While some less-affected properties have since reopened and resumed bookings, widespread cancellations and delayed reopening by major hotel chains will reduce tourism earnings in the near term. Already, we have received reports indicating worker lay-offs.

Importantly, the upward revision of the damage estimate creates a greater risk that higher inflation could be prolonged. Beyond the immediate impact on agricultural food and electricity prices, the later effect of this inflation shock on the prices of other goods and services, is likely to be stronger and more persistent than initially anticipated. As a result, the upside risk of the disaster on the inflation outlook is greater, meaning that inflation could be higher than forecast.

## Monetary Policy Decision

It is in this context and given the Bank's primary mandate of managing inflation that the MPC decided unanimously to:

- (i) continue holding the policy rate at 5.75 per cent per annum; and
- (ii) remain proactive in preserving relative stability in the foreign exchange market.
- The decision to continue holding the policy rate at this time is largely based on four main factors:

First, annual headline inflation will rise sharply over the next few months from the 4.4 per cent recorded in November 2025, and will exceed the Bank's inflation target range of 4.0 to 6.0 per cent by early 2026. This rise primarily reflects the hurricane's impact on the major food-producing parishes and disruptions to supply chains, particularly in energy and agriculture. These supply-side shocks lie outside the direct influence of monetary policy and therefore cannot be addressed through interest rate actions, but will have a knock-on effect on other prices.

- The second factor concerns core Inflation. Core inflation (which excludes the prices of agricultural food items and fuel from the consumer price index (CPI)) will also rise over the next 12 months breaching the inflation target range in early 2026. This will reflect another wave of price increases for other goods and services such as home repairs, meals sold at restaurants and personal care items. The higher core inflation will arise in the context of the anticipated surge in overall spending and economic activities related to recovery and the rebuilding efforts, supported largely by flows of external financing to the private and public sectors. The central bank is therefore positioning monetary policy to minimise such second-round effects and to constrain the inflation expectations of businesses and consumers.
- The third factor that figured prominently in the decision to hold the policy rate unchanged at this time, is the path for the fiscal or government accounts. In the aftermath of the hurricane, the government suspended the fiscal rule for an initial period of one year. This will facilitate the public sector's ability to increase spending for the recovery and relief effort. For the central government, in particular, larger fiscal deficits are projected over the next three fiscal years, compared with previous projections. While the additional government spending is absolutely essential to rebuild the foundations of the economy following such a catastrophic event as Hurricane Melissa, the Bank has to position its policy to temper any possible inflationary impulses from this increased spending.
- The fourth factor which the MPC considered is that the risks to the inflation outlook are skewed strongly to the upside. This means that there is a greater likelihood of inflation exceeding projections. Higher inflation could result from higher-than-expected demand to support the reconstruction efforts. Inflation expectations could also rise, as households and firms anticipate higher prices and adjust their behaviour in ways that make higher inflation self-fulfilling. A more protracted recovery in the agriculture sector and more prolonged disruptions to its supply chains could also worsen food price increases. There could also be longterm damage in specific industries, which could slow the improvement in the production and availability of supplies.

In our previous press release in November, we noted that special pre-emptive measures would be taken to preserve relative stability in the foreign exchange market. These measures took into consideration the need for additional foreign exchange to finance increased imports made necessary by the rehabilitation and reconstruction efforts. Consequently, since the passage of the hurricane, Bank of Jamaica has sold US$250 million into the market. We have also directly supplied the foreign exchange needs of selected players in the energy sector to take large lumpy purchases out of the market, as well as re-introduced scheduled advanced notices of intervention sales in order to assure the market of adequate foreign currency liquidity. With these actions, the exchange rate has remained stable over the period 01 November to 16 December 2025 compared to end-October 2025.

Cumulatively, BOJ sold US$1.1 billion via its B-FXITT facility over the 12 months to endNovember 2025, largely in line with the amount sold over the 12 months to endNovember 2024. Net foreign exchange purchases have amounted to approximately US$1.0 billion over the 12 months to end-November 2025. Going forward, the Bank will continue to proactively take steps to maintain orderly conditions in the foreign exchange market as instability in this market can fuel higher prices throughout the economy.

I will now briefly highlight some recent economic developments, starting with the most recent inflation data.

## Recent Economic Developments

On the 15th of December, the Statistical Institute of Jamaica (STATIN) reported that headline inflation at November 2025 was 4.4 per cent, which was above the Bank's projections and higher than the 2.9 per cent recorded at October 2025. The higher inflation compared with October was due mainly to higher food price increases, reflecting early signs of the impact of the hurricane on raw food prices. Core inflation was 4.3 per cent at November 2025, which was above the 3.7 per cent recorded at October 2025.

Inflation is projected to rise above the Bank's target range over the next four quarters, peaking in the June 2026 quarter and, as supply conditions improve along with the appropriate monetary policy response, will moderate back to the target range in early 2027.

The near-term macroeconomic outlook for the Jamaican economy has been adversely affected by Hurricane Melissa. The PIOJ estimates that the economy will contract in the range of 11 to 13 per cent in the December 2025 quarter.

While economic activity will contract in the immediate aftermath of the hurricane, the Bank projects that the funding inflows from multilateral and private sources will support spending in the economy over the next three years, to the extent that the capacity exists to execute planned projects. For the Financial Year 2025/26, the Bank anticipates a decline in real GDP in the range of minus four (-4.0) to minus six (-6.0) per cent, largely due to the extensive damage to infrastructure and disruption to productive activity. For Financial Year 2026/27, real GDP growth is projected in the range of minus one (-1.0) to one (1.0) per cent, reflecting the start of recovery efforts, which will pick up pace in ensuing years.

Jamaica's external accounts are also expected to deteriorate over the near-term. The current account is expected to worsen to a deficit, a major change from the surpluses recorded over the three prior fiscal years. The projected deficit will result primarily from a worsening in the trade deficit, and lower tourism inflows, partly offset by higher remittances. In particular, exports are projected to be lower on average primarily due to the projected falloff in Manufacturing, Mining and Quarrying, Agriculture and Reexports. Imports, on the other hand, are projected to be higher on average, underpinned by higher consumer goods as well as greater demand for raw materials, transport equipment and capital goods imports. The increase in the importation of transport equipment and capital goods is related to the ongoing relief efforts and to support reconstruction thereafter.

Notwithstanding the worsened external position, Jamaica's international reserves remain robust, standing at a historically high level of US$6.3 billion at 16 December 2025, representing about 151 per cent of the measure considered adequate. These reserves will be buoyed by the various disaster risk financing, multilateral funding and grant flows, including the receipt of the proceeds related to the Caribbean Catastrophe Risk Insurance Facility and the Catastrophe Bond.

## Concluding Statement

Ladies and gentlemen, the extensive damage from Hurricane Melissa, particularly in Western Jamaica, is expected to adversely impact the country's key macroeconomic indicators for quite some time. Against this stark backdrop, BOJ's Monetary Policy Committee reaffirms its view that preserving a stable macroeconomic environment is essential to the country's recovery and reconstruction efforts. The Bank remains firmly committed to managing the inflationary effects of the hurricane, recognizing that if inflation is not tamed, every sector of the Jamaican society will be adversely impacted especially the poor and most vulnerable. Accordingly, the MPC will continue to keenly monitor the future impact of higher food prices on the level of overall inflation, and stands ready to adjust monetary policy if the risks highlighted earlier threaten the projected return of inflation to the 4 to 6 per cent target range in the shortest possible timeframe.

Thank you. I will now take questions.",Richard Byles
https://www.bis.org/review/r251230b.htm,"José Luis Escrivá: SME financing in Spain - current mechanisms, securitisation and diversification","Speech by Mr José Luis Escrivá, Governor of the Bank of Spain, at the Bank of Spain seminar ""SME financing: new outlooks for securitisations"", Madrid, 31 October 2025.",2025-10-31 00:00:00,"## JosØ Luis EscrivÆ: SME financing in Spain - current mechanisms, securitisation and diversification

Speech by Mr JosØ Luis EscrivÆ, Governor of the Bank of Spain, at the Bank of Spain seminar ""SME financing: new outlooks for securitisations"", Madrid, 31 October 2025.

* * *

## Good morning,

I would like to begin by expressing my thanks for the attendance of the Minister for Economy, Trade and Business and of the Vice-Chair of the CNMV, as well as of the representatives of the business associations with us here today.

This event is taking place as part of a shared reflection on how to improve our SMEs' access to financing, an objective that we at the Banco de Espaæa view as a priority.

SMEs are the lifeblood of our economy. They constitute more than 99% of all firms and account for about two-thirds of employment and gross value added. These figures higher than the European average - reflect SMEs' profound importance as a driver of economic activity in our country.

In recent years, Spanish companies have strengthened their balance sheets. They have lowered their debt, increased their equity and bolstered their financial resilience, reducing their vulnerability to future shocks.

This may, however, also pose a dilemma: less debt means less vulnerability, but it may also limit investment capacity, adversely affecting businesses' growth and productivity. Consequently, moderate leveraging may be beneficial for promoting expansion projects. The challenge is therefore to find the right level of indebtedness so as to combine financial soundness with economic efficiency.

Bank lending continues to be the main external source of interest-bearing financing for SMEs, although it has decreased considerably relative to gross value added since the financial crisis. For their part, microenterprises resort even less to bank credit and more to self-financing.

Importantly, this reduction in borrowing does not result from a supply-side problem. According to the ECB survey on the access to finance, since 2024 credit availability has improved significantly, while demand remains at historically low levels.

Still, some segments face greater difficulties in gaining access to bank lending, especially firms without prior bank debt and microenterprises. In many cases, insufficient financial information or the administrative costs associated with small loans may discourage such lending. And in contexts of uncertainty, these barriers tend to be more evident.

To continue to improve, we must work to reduce these information asymmetries and find ways to facilitate these firms' access to bank financing.

Of the instruments that can boost this access, two are particularly relevant.

The first are independent ratings.

At the Banco de Espaæa we are working to address this issue, broadening the use of independent ratings through the in-house credit assessment system, or ICAS. This tool makes it possible to assess firms' creditworthiness with consistent and transparent criteria.

Having this type of rating can open up new opportunities, by improving the negotiating position with banks, facilitating access to public financing programmes, increasing visibility to investors and narrowing the information gap that often penalises the smallest firms.

The second instrument with a great deal of potential is loan securitisation. This is an effective tool for transforming credit portfolios into liquidity, transferring risk and freeing up capital that can be used for new loans.

Nevertheless, its role in Spain remains limited. The volume of securitisations is below the EU average, and far below the level seen in the United States. Moreover, SMEs account for merely 7.3% of all loan securitisations in Spain, compared with 15.9% in the euro area, even though SMEs represent a much higher share of our economy.

These figures underscore that there is much room for growth.

The European Commission's recent proposal to revise the regulatory framework for securitisations is a step in the right direction, but it will be necessary to accompany it with complementary initiatives that spur the growth of a truly pan-European product that is attractive to investors and accessible to a larger number of institutions.

Hence, the minister's proposal to explore, within the framework of the European Competitiveness Lab, a European platform for securitisations may be a decisive step forward.

Beyond bank credit, SMEs need to diversify their sources of financing. Not only for efficiency, but also for resilience to possible credit constraints and adaptation to the different stages of development of credit.

For instance, venture capital is key for companies with high growth potential, such as startups and scaleups, that require flexible resources to scale up their projects. We know that there is a direct relationship between venture capital and investment in R&amp;D, which underscores its role as a driver of innovation and productivity. The evidence shows that enterprises that are financed with venture capital have significantly higher job growth than those that are not.

Nevertheless, not only should this boost come from venture capital; it should also be backed by bank lending, which can complement it. Recent Banco de Espaæa studies show that when a company receives a venture capital investment, its access to bank credit also improves, because the information asymmetry is narrowed.

Nevertheless, the volume of this type of transactions in Spain remains low - 0.14% of GDP, versus 0.22% in the euro area and 0.74% in the United States - highlighting the opportunities that still exist in this area.

In sum, SMEs with the most growth potential need a varied, stable and flexible financial ecosystem in which bank and non-bank financing are complementary.

It is for this reason that I am pleased to announce today that we are creating a HighLevel Task Force on SME Financing and fostering a European securitisation platform, jointly promoted by the Ministry of Economy, Trade and Business, the Banco de Espaæa and the CNMV, with the participation of public institutions, business associations and representatives of the financial system.

This task force will prepare an updated assessment of SMEs' access to financing and draw up specific proposals to promote the growth of such financing. The task force will, inter alia, draft a proposal spelling out the configuration of a European securitisation platform, which will be framed as a contribution as part of the work of the European Competitiveness Lab.

Spain has an active role to play in this process. Our financial system has demonstrated its soundness and adaptability, and we have a significant savings base and an innovative business fabric which, under the right conditions, is positioned to take full advantage of the growth opportunities offered by new financing channels.

It is my hope that today's remarks and discussions will help enrich this reflection and define specific steps in an agenda that concerns all of us.

Thank you.",Jose Luis Escrivá
https://www.bis.org/review/r251230a.htm,Kazuo Ueda: Toward the achievement of the price stability target accompanied by wage increases,"Speech by Mr Kazuo Ueda, Governor of the Bank of Japan, at the Meeting of Councillors of Keidanren (Japan Business Federation), Tokyo, 25 December 2025.",2025-12-25 00:00:00,"

December 25, 2025

Bank  of  Japan

## Toward the Achievement of the Price Stability Target Accompanied by Wage Increases

Speech at the Meeting of Councillors of Keidanren (Japan Business Federation) in Tokyo

## UEDA Kazuo

Governor of the Bank of Japan

(English translation based on the Japanese original)

## Introduction

It  is  a  great  honor  to  have  this  opportunity  to  address  such  a  distinguished  gathering  of business leaders in Japan today.

2026 is now just a week away. Looking back over the past twelve months, Japan's economy has shown resilience, having continued to recover moderately despite downward pressure on corporate profits stemming from the impact of U.S. tariff policies. Against this backdrop, at the Monetary Policy Meeting (MPM) held last week, the Bank of Japan decided to raise the policy interest rate for the first time since January this year. In this regard, I would like to  begin  my  speech  today  by  briefly  explaining  the  background  to  the  policy  change.  I would then like to share with you an outline of the state of the economy the Bank is aiming for and, on that basis, set out my hopes for business leaders in Japan.

## I. Recent Conduct of Monetary Policy: Raising the Policy Interest Rate

Let me start by talking about recent developments in economic activity and prices and the Bank's conduct of monetary policy. In March 2024, the Bank judged it was within sight that the price stability target of 2 percent would be achieved in a sustainable and stable manner, and changed its large-scale monetary easing framework, which had lasted for over a decade. The Bank thereby shifted its monetary policy to guiding the short-term interest rate as a primary  policy  tool.  Against  this  backdrop,  the  Bank  gradually  adjusted  the  degree  of monetary accommodation by raising the policy interest rate to around 0.25 percent in July 2024 and to around 0.5 percent in January 2025.

Thereafter, with uncertainties regarding U.S. tariff policies remaining high, the Bank kept the  policy  interest  rate  unchanged.  At  last  week's  MPM,  however,  it  decided  to  raise  the policy interest rate from around 0.5 percent to around 0.75 percent. In making this decision, the key factors were developments in the U.S. economy and the impact of tariff policies as well as moves to raise wages in light of next year's annual spring labor-management wage negotiations.

First, as for the U.S. economy and the impact of tariff policies, the Bank judged that, while uncertainties  remained,  they  had  declined.  Looking  at  the  U.S.  economy,  with  the

pass-through of tariff costs to selling prices remaining only moderate, private consumption has been solid. Moreover, business fixed investment has increased, reflecting an expansion in AI-related demand. In light of these developments, while there are still factors to consider, such  as  developments  in  the  labor  market,  it  appears  that  downside  risks  to  the  U.S. economy  overall  have  decreased.  With  regard  to  the  impact  of  tariff  policies  on  Japan's economy,  although  there  has  been  downward  pressure  on  corporate  profits,  mainly  in manufacturing, there are no signs that the effects have spread to the economy as a whole, including business fixed investment and employment and wage developments. Please take a look at Chart 1. The Tankan (Short-Term Economic Survey of Enterprises in Japan) released last week indicates that business sentiment, shown in the left panel, has been at a favorable level. Regarding corporate profits shown in the right panel, profit projections for fiscal 2025 have been revised upward slightly from the projections in the previous survey released three months  ago,  including  in  manufacturing,  suggesting  that  the  uncertainty  surrounding  the outlook is gradually diminishing.

Looking at the background conditions of wage developments, labor market conditions have continued  to  be  tight,  and  corporate  profits  are  expected  to  remain  at  high  levels  on  the whole, even after taking into account the impact of tariff policies, as I mentioned earlier. In this  situation,  considering  factors  such  as  the  stances  of  labor  and  management  on  the annual  spring  labor-management  wage  negotiations  and  anecdotal  information  gathered through the Bank's Head Office and branches, as shown in Chart 2, it is highly likely that firms will continue to raise wages steadily next year, following the solid wage increases this year, and the risk of firms' active wage-setting behavior being interrupted is expected to be low.  On  the  price  front,  underlying  CPI  inflation  has  continued  to  rise  moderately,  with moves to pass on wage increases to selling prices continuing.

Based on these recent data and anecdotal information, it is highly likely that the mechanism in which both wages and prices rise moderately will be maintained next year and beyond. As a result, it appears that the likelihood of realizing the Bank's baseline scenario has been rising -- that is, underlying CPI inflation will be at a level that is generally consistent with the  price  stability  target  of  2  percent  in  the  second  half  of  the  projection  period  of  the October 2025 Outlook for Economic Activity and Prices (Outlook Report), which extends

from the second half of fiscal 2026 through fiscal 2027. In view of these developments in economic activity and prices, the Bank, at the MPM held last week, judged it appropriate to raise  the  policy  interest  rate  and  adjust  the  degree  of  monetary  accommodation  from  the perspective of sustainable and stable achievement of the price stability target of 2 percent.

As  for  the  future  conduct  of  monetary  policy,  given  that  real  interest  rates  are  at significantly low levels, if the baseline scenario presented in the October Outlook Report is realized, the Bank, in accordance with improvement in economic activity and prices, will continue to raise the policy interest rate and adjust the degree of monetary accommodation. The Bank believes that adjusting the degree of monetary accommodation as appropriate will lead to smoothly achieving the price stability target and to long-term growth that can serve as a foundation for firms to conduct business with confidence. In what follows, I will talk about the state of the economy the Bank is aiming to achieve from a somewhat long-term perspective.

## II. An Economy in Which Both Wages and Prices Rise Moderately

## A. The State of the Economy the Bank Is Aiming For

In  line  with  the  Bank  of  Japan  Act,  the  Bank  conducts  monetary  policy  based  on  the principle that the policy should be ""aimed at achieving price stability, thereby contributing to the sound development of the national economy."" More specifically, at the January 2013 MPM,  the  Bank  set  a  price  stability  target  of  2  percent  and,  under  this  target,  aims  to achieve an economy in which both wages and prices rise moderately.

Chart 3 is  a  simple  illustration  of  this  mechanism.  Let  me  explain  this  chart  considering profits in the corporate sector as a starting point. If corporate profits increase as economic activity gains momentum, business fixed investment and wages are expected to rise. Higher wages,  in  turn,  boost  private  consumption  by  way  of  raising  household  income.  This increase in demand leads to moderate price rises and, on the side of firms, to a rise in selling prices and further improvement in corporate profits, which are then expected to once again spur  growth  in  business  fixed  investment  and  wages.  For  the  economy  to  continue expanding  not  only  in  nominal  terms  but  also  in  real  terms  --  excluding  the  effects  of

inflation -- it is important that labor productivity increase through, for example, proactive investment by firms, and that such productivity gains be reflected in higher real wages.

The  Bank  projects  that  this  mechanism,  in  which  the  cycle  between  wages  and  prices operates, will function steadily; in other words, rather than a temporary rise in prices driven mainly by cost-push factors, the Bank expects that a situation in which people engage in economic activities on the assumption that moderate inflation will continue going forward, resulting  in  the  sustainable  and  stable  achievement  of  the  2  percent  price  stability  target. This is the essential foundation for Japan's economy to continue to grow in the long term, and we believe this is nothing other than the principle for the Bank's conduct of monetary policy,  namely  that  the  policy  should  be  ""aimed  at  achieving  price  stability,  thereby contributing to the sound development of the national economy.""

## B. Taking Stock of Where Japan's Economy Stands

Next, I would like to take stock of where Japan's economy stands in relation to the state of the economy the Bank is aiming to achieve. Please take a look at Chart 4. Over the past decade,  corporate  profits  have  approximately  doubled.  In  the  labor  market,  with  the working-age population continuing to decline and the room for the additional labor supply of  seniors  and  women  diminishing,  labor  market  conditions  have  further  tightened. 1 Against this background, as shown in Chart 5, wages -- which had been stagnant for many years -- have come under upward pressure, resulting in high wage growth in recent years. Reflecting these developments, together with the impact of post-COVID-19 global inflation and the yen's depreciation, consumer prices have also continued to register positive growth.

Given  that  structural  changes  in  Japan's  labor  market  --  including  the  decline  in  the working-age population -- are irreversible, barring a major negative shock to the economy, it  is  expected  that  labor  market  conditions  will  remain tight  and  that  upward  pressure  on wages  will  continue.  Moreover,  with  the  inflation  rate  remaining  positive  and  inflation expectations among households and firms continuing to rise, moves to pass on increases in

1   For a discussion on the structural changes in Japan's labor market, see Ueda, K., ""Japan's Labor Market  under  Demographic  Decline:  Evolving  Dynamics  and  Macroeconomic  Implications,"" remarks at the panel on ""The Policy Implications of Labor Market Transition"" at the Jackson Hole Economic Policy Symposium hosted by the Federal Reserve Bank of Kansas City, August 23, 2025.

wages  and  input  prices  to  selling  prices  have  steadily  become  widespread.  Taking  these developments into account, the likelihood of Japan's economy returning to a so-called zero norm state, in which wages and prices hardly change, seems to have decreased considerably.

Please  turn  to  Chart  6.  Looking  at  recent  price  developments,  the  year-on-year  rate  of increase in the consumer price index (CPI) for all items excluding fresh food has been at around 3 percent. While this is largely a reflection of the effects of food prices, including the price of rice, being pushed  up  by  temporary  cost-push  factors,  the  continued pass-through  of  wage  increases  to  selling  prices,  which  I  mentioned  earlier,  has  led  to  a moderate rise not only in food prices but also in the prices of goods and services. Chart 7 shows indicators related to underlying inflation, which excludes temporary factors. There is no  single  indicator  that  pins  down  developments  in  underlying  inflation.  That  said,  the indicators presented in Chart 7 together with factors that underlie price developments, such as the output gap and labor market conditions, suggest that Japan's underlying inflation has followed a moderate uptrend on the whole and is steadily approaching 2 percent.

When examining developments in profits and expenditures in the corporate sector, while taking into account the current state of wages and prices in Japan, which I have mentioned earlier, several challenges that need to be addressed to realize the state of the economy the Bank envisions become evident. As shown in the left panel of Chart 8, looking back, since the second half of the 1990s, when Japan's economy fell into deflation, firms put priority on maintaining  employment,  while  restraining  wage  hikes  and  business  fixed  investment. Under the severe business environment firms were facing, such actions not only had the effect of curbing the rise in the unemployment rate -- they were also necessary to improve firms'  financial  positions.  Having  overcome  this  situation,  firms'  personnel  expenses  and business fixed investment have started to rise moderately. Nevertheless, it has been pointed out  that  growth  in  such  expenses  and  investment  has  remained  moderate  relative  to  the substantial increase in corporate profits. As a result, the labor share, which is the ratio of personnel  expenses  to  the  total  value  added  generated  by  firms,  has  continued  on  a moderate declining trend, as shown in the right panel.

## C. Further Changes to Be Anticipated

Given these developments, Japan is entering a phase in which it is more necessary than ever, for  long-term economic growth to be realized, to invest in people and carry out business fixed  investment  with  an  eye  to  the  future.  In  any  era,  the  driving  force  of  a  country's economic growth is proactive action on the part of firms. In what follows, I would like to elaborate on this point, setting out my hopes for firms.

First, regarding investment in people, high wage growth has been achieved in recent years, as mentioned earlier. Moreover, the wage hikes have been observed across a broader range of  firm  sizes  and  regions.  Looking  ahead  to  next  year's  annual  spring  labor-management wage  negotiations,  Keidanren  has  expressed  a  stance  of  aiming  at  further  anchoring  the momentum for wage increases, which is very encouraging. The Bank expects that, as such proactive developments continue in Japan, the mechanism through which wage expectations are formed will change. For example, in past spring wage negotiations, labor unions often demanded that price increases in the preceding fiscal year be reflected in wages (base pay increases); however, in a state where the cycle between wages and prices operates steadily and the 2 percent price stability target is achieved in a sustainable and stable manner, unions may shift to a negotiation approach of requiring wage increases in a more forward-looking manner,  grounded in  the  assumption  that  prices  will  continue  to  rise  by  2  percent  in  the future.  In  fact,  a  report  released  by  the  Japanese  Trade  Union  Confederation  (Rengo)  in September this year proposes to reflect the outlook for prices in the level of wage demands to  stabilize  people's  expectations  about  future  wages. 2 My  understanding  is  that  firms' managements make decisions regarding wage hikes in light of  various  factors,  including corporate profits, labor market conditions, and price developments. If firms' managements begin to take into consideration the assumption that prices will continue to rise at a rate of 2 percent, the mechanism in which both wages and prices rise moderately can be expected to become more robust and more sustainable throughout Japan.

The second point focuses on firms' efforts with regard to business fixed investment. The prolonged  period  of  deflation  in  Japan  likely  created  incentives  for  firms  to  put  off

2   See the report on wage negotiations aimed at creating the future released by Rengo's evaluation committee on September 19, 2025 (available only in Japanese).

investment and accumulate cash and deposits to prepare for future uncertainties. However, if  the  economy moves into a state where moderate price rises continue, the real value of cash and deposits will tend to decrease, while investments with an eye to the future will be increasingly  important.  Moreover,  given  the  expectation  that  labor  shortages  will  persist, there seems to be ample room to step up labor-saving investment, including through the use of  AI.  In  fact,  such  moves  are  already  becoming  more  widespread.  The  business  fixed investment  plans  for  fiscal  2025  in  the  Bank's Tankan released  last  week  show  a  solid year-on-year  increase  of  around  10  percent  in  investment.  This  confirms  that  firms  have maintained an active investment stance, centered on research and development (R&amp;D) in growth  areas,  such  as  AI,  and  on  labor  saving-related  software.  What  is  important  is  to overcome  the  supply-side  constraint  of  labor  shortages  and  achieve  improvements  in corporate profitability and labor productivity through such forward-looking business fixed investment. In the process, to enhance the returns from business fixed investment, simply making investment is not enough -- to make use of such investment in business, it is also crucial to secure personnel capable of capitalizing on AI and software by means of human resource  development,  including  reskilling.  The  expectation  is  that,  by  simultaneously moving ahead with investments in both people and growth areas, the cycle between wages and prices will further gain strength in a way that is accompanied by improvements in labor productivity.

Efforts  on  the  part  of  firms,  which  I  have  described  thus  far,  are  likely  to  gain  greater traction  when  backed  up  appropriately  by  policies  of  the  government  and  the  Bank.  The government has recently formulated an economic policy package in this regard, called the ""Comprehensive Economic Measures to Build a 'Strong Japanese Economy.'"" The various benefit measures included in the package are expected to alleviate the burden on households and firms, while at the same time developing the environment for wage increases at firms and promoting growth investment. The Bank intends to firmly support such forward-looking behavior by firms from the financial side through the achievement of the 2 percent price stability target in a sustainable and stable manner.

## Concluding Remarks

The  time  for  my  speech  is  running  out.  Today,  I  shared  my  views  on  the  state  of  the economy the Bank is aiming to achieve and expressed my hopes for firms. Amid tightening labor market conditions, firms' wage- and price-setting behavior has changed significantly in recent years, and the achievement of the 2 percent price stability target, accompanied by wage increases, is steadily approaching. I would like to close today by expressing my hope that  Japan  will  further  approach  the  state  of  the  economy  the  Bank  is  aiming  for  in  the coming year.

Thank you very much for your attention.

## Introduction

- I. Recent Conduct of Monetary Policy
- II. An Economy in Which Both Wages and Prices Rise Moderately

Concluding Remarks



## Toward the Achievement of the Price Stability Target Accompanied by Wage Increases

Speech at the Meeting of Councillors of Keidanren (Japan Business Federation) in Tokyo

December 25, 2025

## UEDA Kazuo

Governor of the Bank of Japan

I. Recent Conduct of Monetary Policy

## Results of the December Tankan

## Business Conditions DI



y/y % chg.

## Corporate Profits

|                      | FY 2024      | FY 2025    | FY 2025       |
|----------------------|--------------|------------|---------------|
|                      | Actual value | Projection | Revision rate |
| All industries       | 5.6          | -2.7       | 2.3           |
| Manufa- cturing      | 5.8          | -6.7       | 1.6           |
| Non- manufa- cturing | 5.5          | 0.4        | 2.8           |

Note: Based on the Tankan . In the left-hand chart, there is a discontinuity in the data for December 2003 due to a change in the survey framework. In the right-hand table, figures are current profits. The revision rate for FY 2025 is calculated relative to the September 2025 survey. Source: Bank of Japan.

I. Recent Conduct of Monetary Policy

## Moves toward Wage Increases Next Year

Annual Spring Labor-Management Wage Negotiation Stance

Figures in parentheses indicate base pay increase rates

|         | Rengo Wage increase target   | Keidanren Positioning of wage increase   | Actual wage increase   |
|---------|------------------------------|------------------------------------------|------------------------|
| CY 2023 | Around 5% (Around 3%)        | Starting point                           | 3.58% (2.12%)          |
| CY 2024 | 5% or more (3% or more)      | Acceleration                             | 5.10% (3.56%)          |
| CY 2025 | 5% or more (3% or more)      | Anchoring                                | 5.25% (3.70%)          |
| CY 2026 | 5% or more (3% or more)      | Further anchoring                        | -                      |

Firms' Stance on Wage Growth for Fiscal 2026 (Anecdotal Information Collected by the Bank's Head Office and 32 Branches)



- Notes: 1. In the left-hand table, figures for actual wage increases are aggregate figures released by Rengo.
2. In the right-hand chart, figures are based on information collected by the Bank's Head Office and 32 branches on firms' stance on wage growth for fiscal 2026 (released on December 15, 2025).

1

Chart 2

## Cycle between Wages and Prices



II. An Economy in Which Both Wages and Prices Rise Moderately

## Corporate Profits and the Labor Market

## Corporate Profits

## Labor Market Conditions

## Employment Conditions DI



- Notes: 1. In the left-hand chart, figures are operating profits based on the Financial Statements Statistics of Corporations by Industry, Quarterly. Figures exclude ""finance and insurance"" and those for 2009/Q2 onward also exclude ""pure holding companies."" Figures are 4-quarter backward moving averages. Large enterprises are enterprises with a capitalization of 1 billion yen or more, while small enterprises are enterprises with a capitalization of 10 million yen or more but less than 100 million yen.
2. In the middle chart, the projection for the working-age population is by the National Institute of Population and Social Security Research. The projection for the number of employed persons is calculated based on projections by the Japan Institute for Labour Policy and Training.
3. In the right-hand chart, figures are based on the Tankan . There is a discontinuity in the data for December 2003 due to a change in the survey framework.
- Sources: Ministry of Finance; Ministry of Internal Affairs and Communications; National Institute of Population and Social Security Research; Japan Institute for Labour Policy and Training; Bank of Japan.

3

## Chart 4

## Developments in Wages and Prices



- Notes: 1. The CPI figures exclude the effects of consumption tax hikes etc. The figure for 2025 is the January-November average.

2. Figures for base pay increases from 1991 to 2013 are those published by the Central Labour Relations Commission, while those from 2014 to 2025 are figures released by Rengo.

- Sources: Ministry of Internal Affairs and Communications; Japanese Trade Union Confederation (Rengo); Central Labour Relations Commission.

II. An Economy in Which Both Wages and Prices Rise Moderately

## Consumer Prices



5

Chart 6

## Indicators Related to Underlying Inflation



II. An Economy in Which Both Wages and Prices Rise Moderately

## Corporate Sector

## Corporate Profits and Spending Behavior

## Labor Share



- Notes: 1. Figures are based on the Financial Statements Statistics of Corporations by Industry, Quarterly . Figures exclude ""finance and insurance"" and those for 2009/Q2 onward also exclude ""pure holding companies."" Figures are 4-quarter backward moving averages.
2. In the right-hand chart, large enterprises are enterprises with a capitalization of 1 billion yen or more, while small enterprises are enterprises with a capitalization of 10 million

yen or more but less than 100 million yen. Labor share = Personnel expenses / Value-added, and Value-added = Operating profits + Personnel expenses + Depreciation expenses.

Source: Ministry of Finance.

## Chart 8",Kazuo Ueda
